Collins v. Securities & Exchange Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 24, 2013 Decided November 26, 2013

No. 12-1241

MATTHEW J. COLLINS,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of Order of

the Securities & Exchange Commission

Robert G. Heim argued the cause for the petitioner. With

him on the briefs was Erik S. Jaffe.

Paul G. Alvarez, Attorney, Securities and Exchange

Commission, argued the cause for respondent. With him on

the brief were Michael A. Conley, Deputy General Counsel,

Jacob H. Stillman, Solicitor, and Mark Pennington, Assistant

General Counsel.

Before: KAVANAUGH, Circuit Judge, and WILLIAMS and

SENTELLE, Senior Circuit Judges.

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Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: The Securities and

Exchange Commission found that Matthew J. Collins failed to

supervise a subordinate who violated various securities laws.

The SEC imposed a civil penalty of $310,000 under

§ 15(b)(4)(E) of the Exchange Act, among other sanctions.

Collins petitioned for review, arguing that the civil penalty

was arbitrary and capricious and violated the Excessive Fines

Clause of the Eighth Amendment. We uphold the

Commission’s decision.

* * *

Collins does not challenge the factual findings in the

Commission’s decision, and we draw our account of his

behavior in substance from that decision or from supporting

testimony. He started work at Prime Capital Services, an

SEC-registered broker-dealer, in 2001, and in due course was

assigned to be the supervisor for Eric Brown, who sold

financial products, including variable annuities. Collins

received training relevant to his role as a supervisor, and

signed declarations that he understood his supervisory

responsibilities under firm policy, as well as state and federal

law. Among his supervisory responsibilities, Collins was

expected to review and approve Brown’s transactions, and to

complete a monthly report on Brown’s activities.

The financial product in question, the variable annuity, is

a hybrid, containing elements of an ordinary long-term

investment in a security, an annuity, and life insurance. The

contract owner, typically the annuitant, selects an investment,

such as a mutual fund, for the purpose of growth. As with an

ordinary mutual fund, the value of the investment depends on

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the performance of the asset. However, as in an annuity, but

unlike an ordinary mutual fund investment, a variable annuity

begins to make periodic payments to the annuitant at a

contractually set date. Moreover, taking a cue from a life

insurance policy, if the annuitant dies before the payments

begin, the variable annuity allows a beneficiary to receive the

value of the original investment, less withdrawals, and the

insurance company bears any losses in the underlying assets.

See SEC, Variable Annuities: What You Should Know,

available at http://www.sec.gov/investor/pubs/sec-guide-to-

variable-annuities.pdf.

Signs of lapses in Collins’s supervisory responsibilities

first appeared in August 2003, when the Florida Department

of Financial Services filed an administrative complaint against

Brown. The complaint alleged, among other violations, that

Brown had guaranteed certain customers a six-to-eight percent

return on their investments. Brown failed to respond to the

complaint and, on December 4, 2003, Florida revoked his

insurance license. Brown lied to Collins about the nature of

the administrative sanction, suggesting that it related to a

“mishap with the state of Massachusetts,” and that it was “no

big deal.” In the Matter of Eric J. Brown, et al., 2012 SEC

LEXIS 636, Admin. Proc. File No. 3-13532, at *11 (Feb. 27,

2012) (“SEC Opinion”). Collins did not investigate; in fact he

allowed Brown to continue marketing variable annuities, even

after he learned in February 2004 that Florida had revoked

Brown’s license.

After Brown appealed the license revocation, the state

reinstated his license in April 2004, pending appeal, on the

condition that he “not market annuities to individuals over the

age of 65 years, who are not currently his clients.” Id. at *12.

Despite the Florida restriction, Brown continued to market

annuities to such individuals, and Collins tried to conceal

Brown’s violations by falsely listing himself as the

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representative on the sales. Although Collins claimed that the

clients were his, not Brown’s, the Administrative Law Judge

rejected this claim, pointing out that Brown’s handwriting

appeared throughout the customer accounts’ documentation.

And customers themselves testified that they had little or no

interaction with Collins. An internal review by Prime Capital

characterized Collins’s conduct as a “complete lack of

supervision,” an assessment with which Collins agreed at the

hearing. Id. at *14.

The Commission found, in particular, that Brown sold

variable annuities to five elderly customers during the period

of his restricted license. One of the five later withdrew from

the investment without penalty or other expense. Two

evidently suffered no financial loss other than the cost of

commissions collected by Collins. But two suffered

substantial losses, first because of withdrawal penalties

resulting from Brown’s unauthorized transfers of funds from

their pre-existing investments (over $60,000 between the

two), and second in the form of lost value increases in those

prior investments (allegedly totaling $459,000). These two

later filed a complaint with the National Association of

Securities Dealers (“NASD”), which led to an investigation by

the state of Florida. Collins settled the state’s administrative

case by paying a $5,000 fine and by accepting a one-year

probation on his insurance license. Prime Capital settled the

NASD complaint with a payment of $125,000, towards which

Collins contributed $25,000.

In June 2009, the SEC instituted proceedings against

Brown, Collins and other employees of Prime Capital

pursuant to the body of antifraud provisions in the Securities

Act of 1933, the Securities Exchange Act of 1934 (“Exchange

Act”), and the Investment Advisers Act of 1940. There

followed decisions by an ALJ and by the Commission, in

which, ironically, the Commission absolved Collins of one

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charge of which the ALJ had found him liable, and lowered

the “tier” of punishment, yet imposed a much heavier civil

penalty. The ALJ found him liable as a primary violator of

the antifraud provisions, but the Commission reversed that

finding. On the substantive charge of failing “reasonably to

supervise” Brown under Exchange Act §§ 15(b)(4)(E) and

15(b)(6)(A), the ALJ and the Commission agreed. Those

sections create liability for a supervisor when his inadequate

supervision is coupled with a violation by his supervisee. 15

U.S.C. §§ 78o(b)(4)(E), (b)(6)(A).

The ALJ and the Commission imposed (among other

sanctions) a civil penalty under § 21B(a)(1) of the Exchange

Act. Id. § 78u-2(a)(1). That provision authorizes a civil

penalty in proceedings instituted pursuant to §§ 78o(b)(4) or

78o(b)(6) where the penalty is in the “public interest.”

Besides setting out six factors that the Commission “may

consider,” which we address shortly, the Act establishes three

tiers of maximum penalties “for each act or omission” that

violates the relevant securities laws, id. § 78u-2(b); two of the

tiers are relevant in this case. Second-tier penalties may be

imposed when the act or omission “involved fraud, deceit,

manipulation, or deliberate or reckless disregard of a

regulatory requirement.” Id. § 78u-2(b)(2). Third-tier

penalties may be imposed when, in addition, the act or

omission “directly or indirectly resulted in substantial losses

or created a significant risk of substantial losses to other

persons or resulted in substantial pecuniary gain to the person

who” violated securities laws. Id. § 78u-2(b)(3).

The ALJ found that Collins’s acts satisfied the third-tier

criteria, and imposed a single such penalty of $130,000. The

Commission found that Collins was properly subject only to

second-tier penalties. But it treated each of the five relevant

sales as “distinct and separate” acts or omissions, resulting in

five penalties aggregating $310,000. SEC Opinion at *60. It

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also ordered him to disgorge $2,915, the total commissions on

sales to two customers; it excused any disgorgement of the

commissions (slightly exceeding $2000) paid by the two

customers whose NASD claim Prime Capital had settled for

$125,000, including $25,000 from Collins.

* * *

Collins challenges the Commission’s order on the

grounds that (1) the Commission abused its discretion when it

imposed a civil penalty of $310,000 without adequate

explanation, see 5 U.S.C. § 706(2)(A); Motor Vehicle Mfrs.

Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43

(1983), and (2) the civil penalty violates the Excessive Fines

Clause of the Eighth Amendment. We consider these

challenges in turn.

The statute requires that for a second-tier penalty the

offense must have involved “fraud, deceit, manipulation, or

deliberate or reckless disregard of a regulatory requirement,”

15 U.S.C. § 78u-2(b)(2); Collins concedes satisfaction of this

requirement. He also concedes that the Commission could

lawfully treat each unlawful transaction with a customer as a

particular “act or omission.” As for the “public interest,”

Congress guides the Commission’s discretion by pointing to

six factors: (1) “fraud,” etc., i.e., the feature required to be

present for a second-tier penalty; (2) the harm to other

persons; (3) the extent of unjust enrichment (taking into

account restitution paid); (4) previous SEC findings of the

violations by the offender; (5) the need to deter the offender

“and other persons”; and (6) a catch-all, “such other matters as

justice may require.” 15 U.S.C. § 78u-2(c).

The most serious strand of Collins’s argument that the

civil penalty was arbitrary or capricious is his characterization

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of it as an unexplained departure from the Commission’s

practice of linking the penalty more closely with the

disgorgement amount. Here, the civil penalty is over 100

times that amount ($2,915).

In his original brief Collins invoked a set of federal court

cases with fairly close approximation between penalty and

disgorgement amount. E.g., SEC v. Yuen, 272 Fed. Appx.

615, 618 (9th Cir. 2008) (district court “well within its

discretion in setting the civil penalty equal to the

disgorgement amount”); SEC v. CMKM Diamonds, Inc., 635

F. Supp. 2d 1185, 1193-94 (D. Nev. 2009) (setting penalty

equal to disgorgement amount). The Commission argues in

its response that the cases in this set were governed by a

different statutory cap on civil penalties, § 21(d)(3) of the

Exchange Act, 15 U.S.C. § 78u(d)(3), which imposes ceilings

(in various tiers) as the higher of a specified dollar amount

(the same ceilings as under our statute) or the defendant’s

pecuniary gains (a figure that disgorgement is likely to track).

The SEC’s attempted distinction is unpersuasive: It is hard to

see why, with the same numerical ceilings as those to which

Collins was subject, the statute’s permission to break out

above the numerical ceiling in order to match the perpetrator’s

ill-gotten gains should result in a lower penalty-to-

disgorgement ratio than would the statute covering Collins.

Nonetheless, Collins’s use of the district court cases fails

to show any discrepancy in his treatment as he makes no

effort to hold constant the many other factors relevant to

determining civil penalties, which are discussed below.

Indeed, Collins’s reply brief recognizes that the disgorgement

amount is not the whole story, reframing his argument in far

more general terms—as a contention that “there must be some

sense of proportionality between the gain or injury and the

penalties exacted.” Reply Br. at 19.

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In any event, in administrative proceedings before the

SEC, procedurally akin to the present matter, we seem to

observe civil penalties ranging from roughly one-half of the

disgorgement amount, In the Matter of Guy P. Riordan, 2009

SEC LEXIS 4166, Admin. Proc. File No. 3-12829 (Dec. 11,

2009) (ordering disgorgement of $938,353.78 and civil

penalty of $500,000), to about 25 times the disgorgement

amount, In the Matter of Maria T. Giesige, Admin. Proc. File

No. 3-12747, 2009 SEC LEXIS 1756 (May 29, 2009)

(ordering disgorgement of $21,105.03 and civil penalty of

$500,000). Thus, if we focus solely on the disgorgement

amount, the civil penalty here looks high relative to SEC

precedents.

The SEC tries a very broad defense of its action, citing

statements in our cases to the effect that it need not follow a

“‘mechanical formula’” when crafting sanctions, PAZ Secs.,

Inc. v. SEC, 566 F.3d 1172, 1175 (D.C. Cir. 2009) (quoting

Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1113 (D.C.

Cir. 1988)), and that it is “not obligated to make its sanctions

uniform,” Geiger v. SEC, 363 F.3d 481, 488 (D.C. Cir. 2004).

But for a court not to require uniformity or “mechanical

formulae” is not the same as for it to be oblivious to history

and precedent. Review for whether an agency’s sanction is

“arbitrary or capricious” requires consideration of whether the

sanction is out of line with the agency’s decisions in other

cases. Friedman v. Sebelius, 686 F.3d 813, 827-28 (D.C. Cir.

2012).

Recognizing this, we nonetheless find that the penalty’s

relation to disgorgement does not render it arbitrary or

capricious. First, the $2,915 disgorgement imposed directly

on Collins understates his full disgorgement responsibility, as

he was excused disgorgement of slightly more than $2000 in

commissions because of the $25,000 he had contributed to

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settlement of the NASD complaint brought by the customers

involved.

Second, disgorgement obviously doesn’t fully capture the

“harm” side of the proportionality test that Collins’s reply

brief invites us to consider—“proportionality between the gain

or injury and the penalties exacted.” Full indicia of the injury

inflicted by Collins and Brown, for example, include the

entire $125,000 paid to settle the NASD complaint, of which

Collins paid only $25,000.

Third, the statute seems to demand that the Commission

look beyond harm to victims or gains enjoyed by perpetrators.

It lists harm to other persons as only one of five specific

factors (plus the catch-all reference to “such other matters as

justice may require”). In that context, the relation between the

civil penalty and disgorgement (and other measures of injury)

is informative, particularly in comparison with other cases,

but hardly decisive.

Looking more broadly, the Commission noted in its

opinion, for instance, that Collins’s violation was “egregious,”

and that he “displayed a blatant failure to deal fairly with

elderly, unsophisticated customers and exhibited a clear

disregard for . . . customers’ interests.” SEC Opinion at *59-

60. This conclusion rested, in part, on the fact that Collins

falsified documents and otherwise failed completely to

supervise Brown, “creat[ing] an environment where Brown

could defraud his clients with impunity.” Id. at *42. And the

Commission quite properly invoked the statutory interest in

deterrence.

Collins mentions a number of additional factors that he

believes militate in favor of a lesser penalty, such as his clean

disciplinary record and his separate fine paid to the state of

Florida. Each of these to some degree weighs in favor of

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leniency, but neither separately or together do they take us

across the border to where we might properly find that the

SEC abused its discretion or acted arbitrarily or capriciously.

We further note that, under Commission Rule 630(a), a party

may present evidence of an inability to pay in “any

proceeding” potentially requiring penalties. 17 C.F.R.

§ 201.630(a). Collins appears to have presented no such

evidence.

* * *

“Excessive bail shall not be required, nor excessive fines

imposed, nor cruel and unusual punishments inflicted.” U.S.

Const. amend. VIII. A civil penalty violates the Excessive

Fines Clause if it “is grossly disproportional to the gravity of”

the offense. United States v. Bajakajian, 524 U.S. 321, 334

(1998). The Second Circuit has elaborated Bajakajian’s

proportionality standard into four factors: (1) the essence of

the crime and its relation to other criminal activity; (2)

whether the defendant fit into the class of persons for whom

the statute was principally designed; (3) the maximum

sentence and fine that could have been imposed; and (4) the

nature of the harm caused by the defendant's conduct. See

United States v. Collado, 348 F.3d 323, 328 (2d Cir. 2003)

(per curiam), citing Bajakajian, 524 U.S. at 337-39; see also

United States v. Malewicka, 664 F.3d 1099, 1104 (7th Cir.

2011). The SEC invokes these four factors, and Collins does

not appear to object. We also note the Court’s admonition

that, though this is a constitutional inquiry, “judgments about

the appropriate punishment for an offense belong in the first

instance to the legislature,” Bajakajian, 524 U.S. at 336.

Our rejection of Collins’s claim that the Commission’s

decision was arbitrary and capricious goes most of the way to

compelling rejection of the constitutional claim. A penalty

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that is not far out of line with similar penalties imposed on

others and that generally meets the statutory objectives seems

highly unlikely to qualify as excessive in constitutional terms.

Although the four factors derived from Bajakajian hardly

establish a discrete analytic process, we review them briefly to

see if there are danger signals. There are not. First, for the

reasons set forth above, Collins’s violations of securities laws

were grave, involving deceit to enable the fraudulent actions

of Brown. Second, Collins fits within the class of persons for

whom the statute was designed—an individual supervising

persons subject to securities laws. Third, though Collins’s

penalty was at the upper end of the second-tier penalties, we

cannot say that this is inappropriate. This factor mattered in

Bajakajian. There, the defendant faced a maximum

Sentencing Guidelines fine of $5,000 and six months in

prison, which was well below the statutory maximum of

$250,000 and five years in prison, suggesting that the

forfeiture of $357,144 was excessive. Bajakajian, 524 U.S. at

339 n.14. Here, by contrast, we have indications that Collins

may have been eligible for an even larger penalty, as

suggested by the ALJ’s application of a third-tier penalty.

Fourth, Collins’s actions enabled Brown’s fraudulent actions,

which targeted elderly customers considering complex

financial products, with harm including withdrawal penalties

of over $60,000 incurred by two of the victims. And the

failures of supervision created a more general risk of

wrongdoing in the office subject to Collins’s supervision.

Thus, consideration of the four factors does not really help

Collins’s cause.

We note that Collins cites only two cases in which courts

have set aside a fine for violating the Eighth Amendment,

both featuring extremely large penalties contrasted with

minimal harm. Bajakajian, 524 U.S. at 339 (1998) (holding

invalid forfeiture of $357,000 for failing to report exported

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currency, “affect[ing] only . . . the Government, and in a

relatively minor way”); United States ex rel. Bunk v. Birkart

Globistics GmbH & Co., 2012 WL 488256, at *5 (E.D. Va.

Feb. 14, 2012) (invalidating penalty of $50 million for False

Claims Act violations when no showing of resulting economic

harm). The Commission’s penalty here does not belong in

that small club.

* * *

The order of the Commission is therefore

Affirmed.