# Initial Decision Release No. 1398

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Add138a5f37030adf

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Initial Decision Release No. 1398
Administrative Proceeding
File No. 3-17184
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

In the Matter of
Christopher M. Gibson

Appearances:

Initial Decision
March 24, 2020

Nicholas C. Margida, Gregory R. Bockin, George J.
Bagnall, and Paul J. Bohr for the Division of Enforcement,
Securities and Exchange Commission
Thomas A. Ferrigno, Stephen J. Crimmins, and Elizabeth
L. Davis, Murphy & McGonigle PC, and David E. Hudson,
Hull Barrett PC, for Respondent

Before:

James E. Grimes, Administrative Law Judge

Summary
Christopher M. Gibson was an investment adviser to Geier International
Strategies Fund, LLC (the Fund), that had invested virtually all its assets in
a single security, the common stock of Tanzanian Royalty Exploration
Corporation (TRX). The Division of Enforcement alleges that Gibson engaged
in three courses of conduct that breached his fiduciary duties to his client fund
and created undisclosed conflicts of interest, in violation of the antifraud
provisions of the Investment Advisers Act of 1940, the Securities Exchange Act
of 1934, and rules under those Acts.
First, Gibson engaged in a practice known as front running. The day
before he executed a large block sale of the Fund’s position in TRX, he sold all
the TRX shares in his personal brokerage account and two other accounts he
controlled. Gibson did this while actively seeking to sell the Fund’s position in
TRX.

Second, Gibson caused the Fund to buy a large block of additional TRX
shares from the Fund’s majority owner in a private transaction. He later sold
those shares with the Fund’s remaining shares in a market transaction. Gibson
operated under a conflict of interest when he executed this transaction; the
investor effectively paid Gibson’s salary, and Gibson owed him a substantial
debt at the time.
Third, Gibson engaged in another instance of front running. He bought
put options in TRX for himself and his then-girlfriend, and he advised his
father to do the same, while knowing that the fund sought to sell its remaining
TRX shares. He then sold the Fund’s remaining TRX shares before the
expiration date of the personal put contracts. This sale caused a drop in TRX’s
share price. Gibson, his girlfriend, and his father exercised their put options
the same day.
The evidence establishes that Gibson recklessly breached his fiduciary
duties and failed to either eliminate or disclose conflicts of interest. I therefore
find that Gibson violated Advisers Act Section 206(1), (2), and (4) and Rule
206(4)-8, and Exchange Act Section 10(b) and Rule 10b-5(a) and (c).1
For sanctions, I order Gibson to cease and desist from further violations
of the securities laws he violated; prohibit Gibson from the activities listed in
Section 9(b) of the Investment Company Act of 1940 and bar him from the
securities industry under Advisers Act Section 203(f), with the right to reapply
for reentry after three years for both sanctions; order disgorgement of
$82,088.81 plus prejudgment interest; and impose second-tier civil penalties
totaling $102,000.
Procedural Background
The Commission initiated this proceeding in March 2016 with an order
instituting proceedings (OIP) under Exchange Act Section 21C, Advisers Act
Section 203(f) and (k), and Investment Company Act Section 9(b).2 The OIP
alleges that Gibson committed securities fraud through the three instances of
conduct summarized above.

1

15 U.S.C. §§ 78j(b), 80b-6(1), (2), (4); 17 C.F.R. §§ 240.10b-5, 275.206(4)-8.

2

15 U.S.C. §§ 78u-3, 80a-9(b), 80b-3(f), (k).

2

An administrative law judge held a hearing in 2016 and issued an initial
decision in 2017.3 In August 2018, following the Supreme Court’s decision in
Lucia v. SEC, the Commission remanded this proceeding, ordered that it be
reassigned to an administrative law judge who had not previously participated
in the matter, and directed that Gibson be given the opportunity for a new
hearing.4
I held a one-week hearing in July and August 2019. Post-hearing briefing
concluded in October 2019.
The parties stipulated that nine affirmative defenses raised by Gibson
alleging constitutional infirmities in this proceeding are preserved for
Commission review.5 I briefly discuss aspects of these constitutional claims at
the end of the decision to put matters in context.
In conducting this proceeding, I gave no weight to the opinions, orders, or
rulings of the administrative law judge who presided over this proceeding
before the Commission’s remand.6
Motions to Strike
I previously reserved ruling on two motions to strike, one filed by the
Division and the other by Gibson. I now DENY both.
The Division asks me to strike all portions of Gibson’s proposed findings
of fact and conclusions of law containing argument, citing my post-hearing
order indicating that I would do so.7 In this instance, there is no point in
removing improper arguments from the record that I can simply ignore or
decline to adopt. Similar to a federal bench trial, concerns about confusion or
Christopher M. Gibson, Initial Decision Release No. 1106, 2017 WL
371868 (ALJ Jan. 25, 2017).
3

Pending Admin. Proc., Securities Act of 1933 Release No. 10536, 2018 WL
4003609, at *1, *4 (Aug. 22, 2018); see also Lucia v. SEC, 138 S. Ct. 2044 (2018).
4

Gibson, Admin. Proc. Rulings Release No. 6668, 2019 SEC LEXIS 2319
(ALJ Aug. 29, 2019).
5

6

See Pending Admin. Proc., 2018 WL 4003609, at *1.

Div. Reply at 2; Div. Resps. to Resp’t’s Proposed Findings of Fact &
Conclusions of Law at 2 (Oct. 4, 2019); see Gibson, Admin. Proc. Rulings
Release No. 6648, 2019 SEC LEXIS 1937, at *3 (ALJ Aug. 5, 2019) (“I will
strike findings or conclusions that contain argument.”).
7

3

undue prejudice from improper argument or evidence do not apply in this
proceeding.8 Instead of striking portions of Gibson’s findings and conclusions
that contain improper argument, I have simply not relied on those points.
Invoking Rule of Practice 152(f), Gibson asks me to strike what he
considers “scandalous or impertinent matter” in the hearing record and in the
Division’s post-hearing brief concerning Gibson’s current financial activities as
reflected in his recent tax filings.9 In particular, Gibson wants any insinuation
that he has been committing tax fraud excised from the record. The Division
opposes the motion, arguing that the portions of testimony and argument
objected to by Gibson are not scandalous and are relevant to Gibson’s claim of
inability to pay and to his credibility.10
Rule 152(f) is mirrored, in part, by Rule 12(f) of the Federal Rules of Civil
Procedure.11 In the federal court context, scandalous material “unnecessarily
reflects on the moral character of an individual,” such as a party or other
person, or contains “repulsive language that detracts from the dignity of the
court.”12 Impertinent matter “consists of statements that do not pertain, and
are not necessary, to the issues in question.”13

See Harris v. Rivera, 454 U.S. 339, 346 (1981) (“In bench trials, judges
routinely hear inadmissible evidence that they are presumed to ignore when
making decisions.”); City of Anaheim, Exchange Act Release No. 42140, 1999
WL 1034489, at *2 (Nov. 16, 1999) (“Administrative agencies such as the
Commission are more expert fact-finders, less prone to undue prejudice, and
better able to weigh complex and potentially misleading evidence than are
juries.”).
8

Resp’t’s Mot. Pursuant to Rule 152(f) for an Order Striking Scandalous &
Impertinent Matter at 1 (Sept. 26, 2019); see 17 C.F.R. § 201.152(f).
9

10

Div. Opp’n to Resp’t’s Mot. to Strike at 2–3 (Oct. 2, 2019).

Compare 17 C.F.R. § 201.152(f) (“Any scandalous or impertinent matter
contained in any brief or pleading or in connection with any oral presentation
in a proceeding may be stricken on order of the Commission or the hearing
officer.”), with Fed. R. Civ. P. 12(f) (“The court may strike from a pleading …
impertinent, or scandalous matter.”)
11

Pigford v. Veneman, 215 F.R.D. 2, 4 (D.D.C. 2003); see Collura v. City of
Philadelphia, 590 F. App’x 180, 185 (3d Cir. 2014).
12

Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993), rev’d on other
grounds, 510 U.S. 517 (1994).
13

4

The only portion of the hearing transcript objected to by Gibson that might
qualify as scandalous or impertinent is Division counsel’s remark that he could
prove tax fraud if he wanted to, but was not going to try.14 I already stated that
I would disregard that remark, so I need not strike it.15 The sentence in the
Division’s brief suggesting that Gibson’s current financial activities are further
reason to bar him from the securities industry is not scandalous or
impertinent.16 It is argument, it cites the record, and it has a modicum of
relevance. I will not strike it.
Findings of Fact
I base the following factual findings and legal conclusions on the entire
record before me and the demeanor of the witnesses who testified at the
hearing, applying preponderance of the evidence as the standard of proof.17 All
arguments that are inconsistent with this decision are rejected.
1. Gibson and Hull set up the Fund in 2009 and 2010.
The relevant facts in this case are largely undisputed. But because the
implication of the facts is vigorously disputed, I consider in detail what
happened and the overall context. Although Gibson is the respondent in this
matter, James Hull, the majority owner of the Fund, played a significant part
in many of Gibson’s actions. I therefore detail Hull’s role below as well.
Gibson, now in his mid-thirties, was in his mid and late twenties during
the relevant period.18 He graduated from Williams College in 2006, and
immediately started working at Deutsche Bank Securities in New York in the
securitized products group.19 In that position, he worked on auto and mortgage
loan securitizations.20 Gibson left Deutsche Bank in early 2009, took and

14

Tr. 1516.

15

Tr. 1516–17.

16

Div. Br. 39.

See Rita J. McConville, Exchange Act Release No. 51950, 2005 WL
1560276, at *14 (June 30, 2005), pet. denied, 465 F.3d 780 (7th Cir. 2006).
17

18

Div. Ex. 216 (joint stipulations) ¶ 1.

19

Tr. 76–77.

20

Tr. 76.

5

passed the series 65 investment adviser exam, and returned to Augusta,
Georgia—where he had grown up and where his parents lived.21
At that time, Gibson’s father, John Gibson, was one of Hull’s business
partners.22 John Gibson suggested that Gibson speak to Hull for career
advice.23 Hull founded a real estate development business, then called Hull
Land Company, in 1977.24 By 2010, the firm was called Hull Storey Gibson (as
in Gibson’s father, John Gibson).25 Hull’s company bought and ran shopping
malls around the United States.26 By all accounts, the various iterations of
Hull’s companies have been successful. According to one witness, Hull and his
partners “made a lot of money” by “cut[ting] … costs to the bone,” in part by
cutting the number people involved in running the malls.27 Hull is also quite
involved in his community. In 2018, he was chair of the board of regents of the
26-institution university system of Georgia, and he sits on the board of the
Augusta University health system and a number of other civic entities.28
From an office at Hull Storey Gibson, Gibson initially provided Hull with
personal investment advice and helped with Hull’s real estate business.29 Hull
and Gibson often discussed investing and Hull became quite interested in
Gibson’s investment ideas.30 So he took roughly $20 million he held in accounts
Tr. 77–79, 1083, 1105. Gibson had previously passed the series 7 and 63
exams. Tr. 78–79.
21

22

Tr. 79, 670.

23

Tr. 1096–97.

24

Tr. 79, 520.

25

Tr. 79–80, 520–21.

26

Tr. 79.

27

Tr. 1257.

Tr. 668, 679. Additionally, Hull is a member of Augusta National Golf
Club, annual host of the Masters Tournament, and home of one of the most
famous golf courses in the world. See Tr. 143. He was also instrumental in
securing government funding for the $100 million Hull McKnight Georgia
Cyber Center. Tr. 679; see https://georgia.gov/agencies/hull-mcknight-georgiacyber-center-innovation-and-training.
28

29

Tr. 86, 1097–98; Div. Ex. 10.

30

Tr. 1098–99, 1257.

6

with two firms and had Gibson manage it.31 Gibson soon formed the Hull Fund
and the Gibson Fund, investment partnerships that principally invested in
physical gold and silver.32 It is apparent that Hull gave Gibson the opportunity
to manage his investments in large part because of Hull’s business relationship
with John Gibson.33
Gibson and Hull then began working together to set up the Fund as an
investment hedge fund.34 Before setting up the Fund as a Delaware company
in December 2009, Gibson formed Geier Group, LLC, in April 2009, and
registered it as a Georgia investment advisory firm.35 It initially served as the
Fund’s investment manager.36 In June 2009, he formed Geier Capital, LLC,
also a Georgia company, and it was the Fund’s managing member for a time.37
Geier Group and Geier Capital were each owned 50% by Gibson, 35% by Hull,
and 15% by John Gibson.38
In January 2010, the Hull Fund and the Gibson Fund rolled into the
Fund.39 Starting in that month, Gibson distributed the Fund’s confidential
private offering memorandum, operating agreement, and subscription
agreement to potential investors.40 Each person who invested signed the
operating and subscription agreements.41 Gibson signed the operating
agreement as the managing director of the Fund’s managing member—Geier
Capital—and as the managing director of Geier Group—the investment

31

Tr. 1257; see Div. Ex. 10.

32

Tr. 86–87.

33

Tr. 1255.

34

See Tr. 140; Div. Ex. 10; Div. Ex. 31 at 2.

35

Div. Exs. 11, 12; Div. Ex. 21 at 1; Div. Ex. 216 ¶¶ 3, 10.

36

Div. Ex. 21 at 3; see Div. Ex. 64 (certificate of termination of Geier Group).

Div. Ex. 21 at 1; Div. Ex. 216 ¶ 5; see Div. Ex. 63 (certificate of termination
of the Georgia Geier Capital).
37

38

Div. Ex. 216 ¶¶ 4, 9.

39

Tr. 87.

40

See Tr. 115–16; see Div. Ex. 24.

41

Tr. 116; see, e.g., Resp’t Exs. 9–16.

7

manager.42 The offering memorandum informed investors that “The success of
the Company is significantly dependent upon the expertise and efforts of Chris
Gibson.”43
Despite this information, and the fact that Hull is not mentioned in the
offering memorandum or operating agreement, no one actually thought that
Gibson was making major investment decisions for the Fund without Hull’s
involvement.44 Gibson knew Hull was in control45 and even Gibson’s father
believed the Fund was ultimately being run by Hull.46 Hull, who approved the
Fund’s structure, believed he exercised approval authority over any “major
decision.”47 And many investors who knew Hull invested not so much because
of Gibson’s involvement, as described in Fund documents, but because Hull
was involved in the Fund.48
In 2011, the Fund had 21 members total.49 Hull owned over 80% of the
Fund valued at about $26 million.50 Gibson, Gibson’s parents, and Giovanni
Marzullo, the father of Gibson’s girlfriend, Francesca Marzullo, held another
10% of the Fund.51 With the exception of one investor connected to Gibson,

42

Div. Ex. 22 at 12; Div. Ex. 23 at 12.

43

Div. Ex. 24 at 17.

44

Tr. 1308–10, 1332.

See Tr. 1366–67, 1509–10; see also 1386 (discussing process of getting
Hull’s approval for possible transactions), 1393 (same), 1411–12 (same).
45

46

Tr. 1258, 1287.

47

Tr. 570–71, 672–73.

See Tr. 1332; see also Tr. 754 (investor affirming that he did not read the
operating agreement), 771–75 (investor affirming that he invested because his
father, who invested and vacationed with Hull, wanted him to invest), 835–36
(investor confirming he only “scanned over” certain Fund documents).
48

49

Div. Ex. 216 ¶ 11.

50

Tr. 529, 588, 669–70; Resp’t Ex. 206.

51

Tr. 561; Div. Ex. 33; Resp’t Ex. 206.

8

every remaining investor was one of Hull’s business associates or life-long
friends or both.52
2. The Fund’s offering documents disclosed features of the investment, and
Hull required an “alignment of interest” between Gibson and the Fund.
Gibson and Hull spoke with nearly every investor before they invested. 53
In these conversations, Hull made clear that the Fund was a “high-risk type
venture.”54 The offering memorandum likewise stated that the Fund was “a
highly speculative investment” that was “designed only for sophisticated”
investors.55 The offering memorandum further affirmed that the Fund, like
many such funds, “generally will not disclose all of its positions to Members on
an ongoing basis,” suggesting that it could remain secretive about its positions
and strategies.56
The operating agreement and offering memorandum both warned
investors that affiliates of the Fund, such as Gibson, may conduct business “in
competition with the” Fund.57 The offering memorandum further warned that
affiliated parties, like Gibson, might serve as investment advisers to others,
and might invest in the same securities as the Fund in separate accounts. 58
Gibson in fact did both: he served as a personal adviser to Hull without further
disclosing that relationship to the Fund, and he invested in TRX in his personal
account.59

52

Tr. 134, 142–43, 529, 541, 675–80; Resp’t Ex. 206.

53

Tr. 680, 1337–38.

Tr. 681. But cf. Tr. 836 (testimony that investor did not remember whether
he was told the investment was “risky”).
54

55

Div. Ex. 24 at 1, 7, 10.

Id. at 17; see Goldstein v. SEC, 451 F.3d 873, 875 (D.C. Cir. 2006) (“[Hedge
funds typically remain secretive about their positions and strategies, even to
their own investors.”).
56

57

Div. Ex. 21 at 2; Div. Ex. 24 at 19.

58

Div. Ex. 24 at 19.

Tr. 145, 254, 763, 827; Div. Ex. 86 at 1, 3 (statement from Gibson’s
personal Schwab account); Div. Ex. 216 ¶ 23.
59

9

The offering memorandum also made clear that Gibson was to invest “the
majority of his liquid net worth” in the Fund.60 This was because Hull wanted
Gibson to have “total focus” on the Fund he was managing.61 In fact, Gibson,
Hull, and John Gibson each mentioned Hull’s desire to establish an “alignment
of interest” between Gibson on one side and Hull and the Fund on the other.62
Hull wanted both Gibson and his father “to have skin in the game and to be
totally focused on this fund being successful.”63 When asked if he wanted
“Gibson to be aligned with” him or with the Fund, Hull responded “I would
view them one and the same.”64
Gibson was thus required to borrow close to $650,000 from Hull, invest
virtually all of his money in the Fund, and invest outside the Fund in what the
Fund invested in.65 And Hull loaned money to John Gibson to invest as well.66
John Gibson agreed to this arrangement because of his “loyalty” to Hull and
because he “had complete confidence in” him.67 By design, if the Fund lost
money, Gibson would lose more than other investors, and his family and
“individuals close to” him would be “exposed.”68 Indeed, when Gibson paid off
his note to Hull in 2011, after receiving his bonus for 2010, Hull became “visibly
upset,” and required Gibson to re-borrow the same amount.69 And the
approximately $650,000 that would otherwise have gone to pay off the note
went back into the Fund, not into Gibson’s pocket.70 Although the Fund’s
offering documents disclosed Gibson’s investment in the Fund—and in fact
60

Div. Ex. 24 at 1, 7.

Tr. 561–62. Both Gibson and his father testified that Hull wanted a
“severe alignment of interest” between himself and the other investors in the
Fund. Tr. 1112, 1472.
61

62

Tr. 562, 674, 736, 1112, 1259, 1340.

63

Tr. 674.

64

Tr. 736.

65

Tr. 1340, 1358–59; Resp’t Ex. 117 at 5.

66

Tr. 1359; see Tr. 1259.

67

Tr. 1259.

68

Tr. 1358.

69

Tr. 1360–61.

70

Tr. 1361–62.

10

required it—the documents did not disclose the loan from Hull, and Gibson did
not otherwise reveal it to investors.71
3. Gibson managed the Fund and received compensation for doing so.
As noted, Hull had great success in his real estate business by “cut[ting]
… costs to the bone.”72 Hull decided to apply this idea to managing the Fund.73
And this meant that Gibson, at about 26 years of age, was managing a $32
million fund with little experience and without “a full staff” or an experienced
investment adviser to give him guidance or advice.74 Gibson was thus alone in
managing the Fund’s day-to-day operations and performing investment
advisory services for it.75 He also negotiated securities transactions on its
behalf, tracked market conditions and the performance of the Fund’s portfolio,
sent status reports about the Fund to investors, communicated with brokers
and counterparties, spoke with the management of TRX, and submitted filings
to the Commission.76 Major decisions about the Fund’s investment strategy,
such as which stocks to invest in and when to hold or sell, were approved by
Hull in close consultation with Gibson.77
Gibson was compensated for his services to the Fund. From 2010 until
early 2013, he received a salary from Hull’s real estate business.78 These
payments were for his advisory services to the Fund.79 Through 2010, Geier
71

Tr. 765–66, 828.

72

Tr. 1257.

73

Tr. 1257.

74

Tr. 1257.

Tr. 129, 186, 567. The offering memorandum stated that Gibson was the
managing member of Geier Group, and that Geier Group was “responsible for
certain administrative and investment advisory matters” for the Fund. Div.
Ex. 24 at 1. Gibson told investors that he was Geier Group’s investment
adviser. Tr. 109–110; Div. Ex. 16 at 24407.
75

76

Tr. 185–87; see, e.g., Tr. 242–44, 279–80, 320–21; Div. Exs. 31, 39, 70, 71.

77

Tr. 569–71, 673; see, e.g., Div. Exs. 80, 91; Resp’t Exs. 59, 102.

78

Tr. 246–52; Div. Exs. 43, 128, 147, 156.

Tr. 247–49, 251–52; Div. Ex. 188 at 472–74 (Gibson’s investigative
testimony).
79

11

Group repaid Gibson’s salary to Hull’s company; effectively, Gibson’s salary
was paid by Geier Group while the entity existed.80 Under the Fund’s operating
agreement and offering memorandum, Geier Group was also entitled to an
annual investment management fee equal to 1% of each member’s capital
account.81 The agreements also entitled Geier Capital to a 10% “incentive
allocation” if the Fund met certain benchmarks.82 Both the management fees
and incentive allocation were compensation for Gibson’s advisory services to
the Fund.83 The Fund paid investment management fees in 2010 and 2011.84
As a 50% owner of Geier Group and Geier Capital, Gibson was entitled to half
this amount, which was around $250,000 for 2010 and 2011 combined.85 He
reinvested the money in the Fund.86 In 2010, the Fund also paid Geier Capital
an incentive allocation of around $3 million.87 Gibson was entitled to half of
this amount, which he reinvested in the Fund.88
4. Geier Group is dissolved and Gibson substitutes Geier Capital for
another entity of the same name.
At the end of December 2010, Gibson allowed Geier Group’s registration
as a Georgia investment adviser to lapse.89 He did not tell the Fund’s investors,
and in fact, solicited two new investors using offering documents stating that
Geier Group was a registered investment adviser even though it was no longer
registered.90 Geier Group was dissolved in April 2011; nonetheless, Gibson
Tr. 248–54. The salary was distributed through Hull’s company and its
payroll services to avoid the need to set up a separate payroll for Gibson’s
advisory services to the Fund. Tr. 248.
80

81

Tr. 121; Div. Ex. 21 at 4; Div. Ex. 24 at 8; Div. Ex. 216 ¶ 12.

82

Tr. 123; Div. Ex. 21 at 5; Div. Ex. 24 at 8–9.

83

Div. Ex. 188 at 407, 461.

84

Id. at 402, 457, 461.

85

Id. at 403, 461; Div. Ex. 216 ¶ 13.

86

Div. Ex. 188 at 363–64, 461–62.

87

Div. Ex. 42 at 4; Div. Ex. 216 ¶ 14.

88

Tr. 123, 125–27; Div. Ex. 216 ¶ 13.

89

Div. Ex. 167; Tr. 149–51.

90

Tr. 151–52, 176–77; Div. Exs. 54, 56.

12

falsely indicated in Commission filings that it still existed.91 Despite Geier
Group’s dissolution, Gibson continued to advise the Fund in 2011 just as he
had in 2010.92 Gibson created a new Geier Capital entity in Delaware in
December 2010 with the same ownership structure as the old one.93 He
dissolved the Georgia Geier Capital in March 2011.94 Gibson neither disclosed
to investors the dissolution of Geier Group nor the substitution of the Delaware
Geier Capital for the Georgia entity, and he failed to amend the Fund’s offering
documents to reflect these changes.95 The Fund’s operating agreement,
however, stated that the managing member had the “sole discretion” to retain
a different entity than Geier Group “to serve as the [c]ompany’s investment
manager.”96
5. The Fund invests all its money in TRX, but as 2011 progresses, the
stock’s value declines.
Initially, the Fund invested in gold and other commodities.97 During 2010,
the Fund was “up 110 percent.”98 But Hull became “irritated” in late 2010 on
learning that the Fund’s successful commodities trading resulted in a large tax
bill.99 To deal with this “unfavorable tax” situation, and to generate fees, he
decided to increase the Fund’s equity investments instead.100 Although Gibson
thought the Fund should add additional employees to “cover a number” of
potential investments, Hull favored a leaner operation.101 Based on his real

91

Div. Exs. 60, 64; Tr. 159–60, 177–82.

92

Tr. 184, 187.

93

Tr. 182–83; Div. Ex. 40; Div. Ex. 216 ¶¶ 7, 9.

94

Div. Ex. 216 ¶ 6; Div. Exs. 49, 63.

95

Tr. 162, 184.

96

Div. Ex. 21 at 3.

Tr. 539–40, 1350; see Tr. 1363–64 (the Fund was trading in commodities
in 2010).
97

98

Tr. 1362.

99

Tr. 540, 575, 672, 1364–66.

100

Tr. 540, 575, 672, 1366.

101

Tr. 1257, 1366.

13

estate experience, Hull favored having one employee—Gibson—and “owning a
single stock.”102
Gibson knew that investing all of the Fund’s assets in one stock was
risky.103 But he deferred to Hull’s experience and identified TRX as a suitable
investment for the Fund.104 According to Gibson, TRX is a “junior” gold mining
company that explores for gold resources in Africa.105 He testified that it had
46 mining properties in Tanzania.106 The Fund began investing in TRX in late
2010 and early 2011.107 By the end of April 2011, the Fund’s assets were
invested solely in TRX, and the Fund owned approximately 9.7 million shares
of TRX stock (worth approximately $70 million), which was around 10.3% of
all outstanding TRX shares.108
The Fund’s fortunes began to change soon after it concentrated its
investments in TRX. In June 2011, TRX peaked at $7.46 a share, and then
slowly declined the rest of the summer.109 Given that TRX was a gold-mining
company and the price of gold was high, Gibson had difficulty understanding
why TRX’s share price was declining.110 And Hull was concerned that TRX’s
president and CEO, Jim Sinclair, was not doing the exploration necessary for
TRX to succeed.111 On August 5, Hull communicated his concerns to Gibson,
102

Tr. 1257, 1366.

103

Tr. 1366–67.

Tr. 575, 1367 (“I … had … supreme respect for Mr. Hull’s judgment. Who
am I? You know, I haven’t had nearly the success he has and I believed it would
-- and I certainly also believed it was an achievable objective.”).
104

Tr. 189. Gibson testified that a junior gold mining company “is one that is
entire[ly] or generally exploratory in nature, less capitalized, typically does not
have the resources to fully develop the asset and is more dependent upon
access to the capital markets and typically has a greater leverage to the gold
price.” Tr. 1350.
105

106

Tr. 1351.

107

Tr. 1345; Div. Ex. 53 at 1.

108

Tr. 188; Div. Ex. 216 ¶¶ 15, 16.

109

Tr. 1347; Joint Ex. 1 at 3–4.

110

Tr. 1373.

111

Tr. 582.

14

noting that the Fund had lost most of its gains and “incurred a huge income
tax obligation.”112 Hull also pointed out that “none of” his and Gibson’s
“reasoning/predictions have come to [bear].”113 Gibson felt the pressure.
6. Gibson berates TRX’s president and considers a potential sale.
On August 10, when TRX was trading a little below six dollars a share,
Gibson e-mailed Sinclair, saying that he was “physically ill over our
performance,” it would “[v]ery soon … make sense to exit our positions,” and
“[t]here is no time left.”114 In a separate e-mail, Gibson berated Sinclair,
complaining about statements made by TRX’s chief geologist that contradicted
both Sinclair and TRX press releases and that Gibson worried would be
publicly reported.115 Gibson demanded, “What is the answer,” and told TRX’s
CEO to “make sure [the geologist] is on the same page.”116
Sinclair replied and tried to reassure Gibson that he was doing what he
could to move the company forward.117 Gibson quickly responded asking
whether certain things Sinclair had previously said were no longer accurate.118
Receiving no immediate response, Gibson e-mailed Sinclair again (in all caps),
asserting that “everything you say is always inaccurate,” “this is the last
straw,” and Gibson was in danger of losing credibility with his investors
because of Sinclair’s lapses.119 Sinclair responded that he “totally disagree[d]”

112

Div. Ex. 75 at 71133.

113

Id.

Div. Ex. 76; Joint Ex. 1 at 4. Although all the e-mails discussed in this
paragraph appear to have been sent on August 10, 2011, the time stamps are
confused, and it is unclear whether this e-mail was sent before or during a
separate exchange shown in Division Exhibit 77.
114

115

Div. Ex. 77 at 71655; see Tr. 1348 (identifying chief geologist).

116

Div. Ex. 77 at 71655.

117

Id. at 71654–55.

118

Id. at 71654.

Id. (“I TOLD MY INVESTORS YOU SAID THIS AND NOW IT IS NOT
TRUE? HOW DO YOU EXPECT THEM TO STAND BY ME WHEN THIS
HAPPENS OVER AND OVER AND OVER?”).
119

15

and did “not intend to continue” the conversation.120 A few hours later, Gibson
told Sinclair that “our share price is a disaster” and “[w]hatever we are doing
is failing.”121 Gibson then instructed that “We need to be all hands on deck. We
need to be mapping out a calendar or announcements for the next six weeks.
We need to be planning a roadshow. We need to be PRODUCING the gravels
and tailings. We need to be announcing that.”122
On August 15, Gibson and Sinclair traded e-mails again about planning a
roadshow to attract additional investors. Gibson felt that “[t]his is a priority
whose significance I cannot sufficiently emphasize” and added that this was a
“do or die moment” and if “we do not move by [September 2011], we are
toast.”123 Sinclair assured Gibson that he was “working as hard and fast as
possible.”124
In context, it is clear that although Gibson was worried about TRX’s share
price, perhaps thought TRX’s management was not doing enough to raise that
share price, and was trying to “[i]nstill a sense of urgency in Mr. Sinclair,” he
still believed that TRX had substantial value as a company.125 For one thing,
he did not immediately sell his own TRX shares. And he told the Fund’s
investors in a letter on August 22, that although his “performance year to date
ha[d] been an exceptional failure,” the Fund was “positioned exceedingly well”
and investors should “sit tight.”126
Gibson was, however, starting to consider selling the Fund’s interest in
TRX. On the same day he communicated with Fund investors, he reached out
Id. The parties presented little evidence about the nature of Gibson’s
relationship with Sinclair. The record reveals, however, that at this point,
Gibson was about 27 years old and Sinclair, who was approaching 70 years of
age, see Div. Ex. 183A at 5, was TRX’s president and CEO.
120

121

Div. Ex. 77 at 71654.

122

Id.

123

Div. Ex. 78 at 73888.

124

Id.

Tr. 1380–82. According to Hull, the hyperbolic language Gibson used with
Sinclair was typical of his “personality.” Tr. 583. Gibson would “run very hot
and cold” and “go unhinged on them” but then be “nice.” Tr. 583. Gibson would
sometimes “rant and rave about … Jim Sinclair in a negative way.” Tr. 584.
125

126

Resp’t Ex. 51 at 2; see Tr. 1382.

16

to Richard Sands, a banker at Casimir Capital, and told Sands that he would
be willing to sell the Fund’s entire position, but wanted $6.25 per share, which
would have been a premium above the then-current market price of $5.85.127
Sands did not think the price Gibson sought was “doable,” but looked into it,
and came back with a buyer who was willing to buy at market price. 128 Hull
and Gibson “seriously” considered the offer, but rejected it because they “did
not [think it] reflect[ed] the value of [the Fund’s] position.”129 Hull and Gibson
were therefore still sufficiently bullish in late August about TRX’s value that
they would only have sold for a premium.
7. Gibson suspends management fees for the Fund in light of its poor
performance.
But TRX’s share price continued to decline. On September 22, it tumbled
from around $5.50 to around $4.50.130 Gibson again expressed displeasure to
Sinclair, but in a more measured tone than in August.131 Meanwhile, Hull
asked Gibson whether Hull should increase his personal investment in TRX
because the stock had gone so low.132 Gibson told him that although he
remained “bullish” on TRX, and expected the share price to recover over time,
he did not recommend buying more shares.133 Later that evening, however,
Gibson opined that the Fund should buy more TRX shares.134 Gibson also told
Hull that although he would personally hold “TRX until its share price has the
opportunity to better reflect its underlying value,” he had “failed to fulfill the
expectations our partners and I have had for its performance” and would cease
taking management fees for his work on behalf of the Fund.135
127

Resp’t Ex. 177 at 1–4.

128

Id. at 1; Tr. 1384–86.

Tr. 1386; see Resp’t Ex. 62 at 6 (e-mail from Sands noting in late
September that Gibson had backed away from previous sale).
129

130

Joint Ex. 1 at 4.

131

Div. Ex. 79.

132

Tr. 1389; see Resp’t Ex. 52.

133

Resp’t Ex. 52 at 1; Tr. 1389–90; see Resp’t Ex. 54.

Resp’t Ex. 53 at 1 (“I think it is extremely compelling to do so. I would not
buy anything else.”).
134

135

Id.

17

The following day, Gibson backed off his advice to Hull to buy TRX shares
and instead urged caution.136 Gibson also told investors that the Fund was
down “to only slightly above original principal investments last year,” and that
at the end of the month, he would stop assessing management fees until the
Fund’s performance returned to “acceptable levels.”137 He nonetheless
reiterated his faith in TRX’s “underlying value” and wrote, “Personally, I will
not redeem my interest in Geier and TRX until the bull market matures over
the coming years at what I strongly believe will be significantly higher
levels.”138 Two investors responded to Gibson’s email stating that they
remained supportive of his efforts.139
TRX’s share price dropped again on Friday, September 23, to $4.07.140
Around the end of the trading day, Gibson sold 78,000 of the Fund’s TRX shares
for $4.04 per share.141 An investor urged Hull that day to consider diversifying
the Fund’s portfolio in the near future, but Hull rejected the proposal.142
8. Hull and Gibson decide to sell the Fund’s investment in TRX.
Over the following weekend, however, Hull had a change of heart about
holding TRX. He told Gibson that he was not sure “he had a tolerance for more
losses,” which Gibson took to mean that he (Gibson) should “consider a sale”
and “solicit a bid” for the Fund.143 Hull’s general guidance was to get out at

136

Resp’t Ex. 54.

137

Resp’t Ex. 56 at 1.

Id.; Div. Ex. 81 at 1 (same letter). Context shows that when Gibson said
he would not redeem his “interest in Geier and TRX,” he was talking about his
personal investment in the Fund, and not about any investment he had in TRX
outside the Fund.
138

139

Resp’t Exs. 57, 58.

140

Joint Ex. 1 at 4.

141

Resp’t Ex. 17 at 4; Tr. 1391; Div. Ex. 216 ¶ 22.

Resp’t Ex. 59 at 1 (“[C]oncentration into one stock provides equal benefits
(you can truly understand one company) and a thinly traded company has
benefits as well.”).
142

143

Tr. 1392–93.

18

good prices.144 Gibson never informed the Fund’s investors of Hull’s change in
strategy.145
Over the next month and a half, Gibson tried to sell the Fund’s TRX shares
at good prices. Although there were times during this period when Hull and
Gibson were content to briefly hold and wait for better offers,146 the evidence
shows—as will be detailed below—that Gibson regularly reached out to
brokers and counterparties from September 25 until November 10 to try to
liquidate the Fund’s holdings in TRX on favorable terms.
9. Gibson sells personal shares ahead of the Fund’s sale of a third of its
TRX investment.
On Sunday evening, September 25, Gibson wrote to Sands at Casimir
asking if there was a buyer for up to the Fund’s entire position in TRX. 147
Gibson offered 10,250,000 shares, which was the total held by the Fund,
combined with a block of around 680,000 shares held separately by Hull.148
Sometime on September 26, Sands informed Gibson that he thought he had a
buyer for about three to five million shares.149 Gibson told Sands to “maximize
the number of shares” and “price and book the sale” on September 27.150
As noted above, Gibson held TRX shares in his personal account outside
of the Fund.151 Sometime on September 26, he sold 2,000 TRX shares from his
personal Schwab brokerage account.152 He also sold 1,000 TRX shares from
Geier Group’s Schwab account.153 Finally, he sold 18,900 TRX shares from the

144

Tr. 219–20, 605; Div. Ex. 187 at 77–78 (Gibson’s investigative testimony).

145

Tr. 220.

146

Resp’t Exs. 89, 101; Div. Ex. 91.

147

Resp’t Ex. 62 at 6, 8.

148

Tr. 1404–05.

149

Resp’t Ex. 62 at 4–5.

150

Id. at 4.

151

Div. Ex. 216 ¶ 23.

152

Id. ¶ 26; Div. Ex. 86 at 3; Tr. 226, 1394.

153

Div. Ex. 88 at 7; Div. Ex. 216 ¶¶ 25, 28; Tr. 231–32, 1394.

19

account of his girlfriend, Francesca Marzullo.154 Ms. Marzullo was not invested
in the Fund.155 Her account “was conceived by” and funded solely by her
father.156 Gibson was “exclusively responsible for the trades in [Ms. Marzullo’s]
account,” and he “reported those trades and discussed them daily with Mr.
Marzullo.”157 He did not, however, speak with Mr. Marzullo before selling Ms.
Marzullo’s shares on September 26.158
Gibson obtained an average share price of $4.04 to $4.05 for sales from the
three accounts.159 No TRX shares remained in these accounts after the sales.160
Gibson never disclosed these transactions to Fund investors.161 In light of
Gibson’s investment in the Fund and its concentration in TRX, Gibson’s sale of
his personal shares amounted to a “little under 1 percent” of his total exposure
to TRX through the Fund.162 So he remained “significantly long” in TRX.163 As
Gibson testified, because of their relatively small size, there is no evidence that
his September 26 sales materially affected TRX’s share price.164
Gibson testified that he sold his personal TRX shares because he had no
liquid assets and management fees from the Fund had just been suspended.165
But given that Francesca Marzullo’s shares were funded by her father,
Div. Ex. 87 at 2–3; Div. Ex. 216 ¶¶ 24, 27; Tr. 230. As noted, Ms. Marzullo
was the daughter of Giovanni Marzullo, an investor in the Fund. Tr. 135, 227,
1336.
154

155

Tr. 143.

Tr. 1395–97. Ms. Marzullo was an unemployed graduate student at the
time. Tr. 1397.
156

157

Tr. 1396–97.

158

Tr. 1471.

159

Div. Ex. 86 at 3; Div. Ex. 87 at 2–3; Div. Ex. 88 at 7.

160

Tr. 226, 230, 232.

Div. Ex. 188 at 662–63, 665–66, 669–71; Tr. 760, 823–24 (two investors
testified that they were unaware of Gibson’s personal sales of TRX).
161

162

Tr. 1395.

163

Tr. 1398.

164

Tr. 1424.

165

Tr. 1394, 1472–73.

20

Gibson’s testimony regarding a need for liquidity does not explain why he sold
her shares.166 Most importantly, Gibson’s explanation does not sufficiently
address the timing of the sale. On the morning of Monday, September 26,
Gibson was actively working to sell the Fund’s entire position.167 Gibson
understood that Sands likely would have a buyer for a block sale and urged
Sands “to price and book the sale” on Tuesday, September 27.168 Although
Gibson did not know exactly when the Fund’s block sale would take place, and
any sale was still dependent on Hull’s approval,169 he was in the midst of a
negotiation that he hoped would lead to a sale. The timing of the sale in the
three accounts outside the Fund suggests that at the very least, Gibson was
attempting to avoid potential losses by selling personal shares ahead of the
Fund’s impending block sale.
TRX closed at $4.11 on Monday, September 26, and opened at $4.24 on
Tuesday, September 27.170 Following Sands’s instructions, Gibson transferred
all of the Fund’s TRX shares to an account at Casimir.171 The volume of trading
in TRX was heavy all day, with the share price rising to $4.34 and then
dropping to $3.70 around 3 p.m.172 Around that time, Sands phoned Gibson
with an offer of $3.50 a share for around 3.5 million of the Fund’s TRX
shares.173 Gibson and Hull decided “in one minute to accept it.”174 The Fund

166

See Tr. 1395–97, 1473.

167

Resp’t Ex. 62 at 6–7.

168

Id. at 4–5.

169

Tr. 1415–16, 1421–23.

170

Joint Ex. 1 at 4.

Resp’t Ex. 62 at 1–3; Resp’t Ex. 66; Div. Ex. 90 at 3. Sands told Gibson
that Gibson needed to place all the Fund’s shares in its Casimir account in
order to reassure the buyer because “no buyer will buy that quantity if they
know another 5mm is being sold behind it.” Resp’t Ex. 62 at 1.
171

Joint Ex. 1 at 4; Tr. 1007–08; Div. Ex. 184 at Exhibits p. 4 (Dr. Taveras
Expert Report – TRX intraday trading for September 27); see Tr. 1679
(reflecting Gibson’s counsel’s concession that Division expert Dr. Carmen A.
Taveras’s calculations, as opposed to her conclusions, are not in dispute).
172

173

Tr. 1422; Div. Ex. 82 at 6711.

174

Tr. 1422–23.

21

sold 3,734,395 TRX shares for around $3.50 a share.175 TRX closed at $3.54 on
a volume of over six million shares traded that day.176 If Gibson had sold his
personal TRX shares immediately after the Fund sold its shares and obtained
the same price as the Fund, he would have received around 54 cents less per
share than he did.177
10. Gibson considers other offers for the Fund in late 2011.
Gibson attempted to sell the remainder of the Fund’s TRX position
throughout the end of September and in October. At the end of September,
Gibson reached an agreement with Luis Sequiera, a principal at Roheryn
Investments S.A., to buy the rest of the Fund’s TRX position, plus the
additional block of shares held separately by Hull, at $3.50 a share.178 In early
October, however, the sale fell through.179 When he told Hull the deal fell
through, Gibson said that “[w]e’re going to very likely be best served holding
our position” and “I would assume we are where we are for the next several
months.”180 Hull wanted Gibson to keep trying to find a different buyer or work
with Sequiera to make a deal.181 Negotiations with Sequiera picked up again
when Sequiera offered to buy about 200,000 of the Fund’s shares a day, but
Gibson rejected the offer in mid-October.182 Gibson told Hull on October 14, “I
am contemplating our options but waiting for at least a few weeks.” 183
Nonetheless, on October 16, Gibson e-mailed a broker at GarWood Securities
and said that the Fund “will be closing [its] TRX position in the next few weeks
with a pre-arranged buyer beginning” the next day.184 Indeed, Gibson testified
that at this time, “[o]n a near-daily basis, we had a belief that we were

175

Div. Ex. 82 at 6710; Div. Ex. 90 at 3.

176

Joint Ex. 1 at 4.

177

Tr. 234–35.

178

Resp’t Ex. 92 at 3; Resp’t Ex. 93; Tr. 1427–30.

179

Resp’t Ex. 101; Tr. 611–12, 1430–31.

180

Resp’t Ex. 101.

181

Resp’t Ex. 102.

182

Resp’t Ex. 104; Tr. 1433–34.

183

Resp’t Ex. 104 at 1.

184

Resp’t Ex. 108; Div. Exs. 92, 93.

22

imminently close to the consummation of that full sale.”185 But the planned
transaction that was to begin on October 17—and which may again have been
a deal with Sequiera—also fell through.186 The Fund, however, did sell 364,495
TRX shares at an average price of $3.42 per share on October 17.187
11. The Fund purchases a block of TRX shares separately held by Hull.
The Fund’s offering memorandum provided that “purchase and sale
transactions” between the Fund and “other entities or accounts” could take
place subject to the following guidelines: (1) the sale had to be “for cash” at the
“current market price” of the securities; and (2) “no extraordinary brokerage
commissions or fees (i.e., except for customary transfer fees or commissions) or
other remuneration shall be paid in connection with any such transaction.”188
On October 18, Gibson caused the Fund to buy the block of 680,636 TRX
shares owned by Hull at the closing price that day, $3.60 a share.189 The
purchase price was about $2.45 million.190 Given Hull’s over 80% interest in
the Fund, the cost borne by other investors for this transaction was about
$470,000.191 Neither the Fund nor Hull paid a commission on the
transaction.192 Gibson provided investment advisory services to both Hull and
the Fund on this transaction.193
Gibson testified that he proposed this sale to Hull.194 Hull first suggested
that Gibson proposed the idea before conceding that he was unsure who
proposed the sale.195 But both agreed that they were trying “to achieve a block
185

Tr. 1434; see Tr. 260.

186

Tr. 260, 1434–35; see Resp’t Exs. 107, 109.

187

Tr. 1475.

188

Div. Ex. 24 at 19.

189

Div. Ex. 95; Joint Ex. 1 at 5; Tr. 260–61.

190

Div. Ex. 95. The exact figure was $2,450,589.60. Id.

191

In October 2011, Hull owned 80.702% of the Fund. Resp’t Ex. 206.

192

Tr. 262, 629–30.

193

Tr. 261.

194

Tr. 1438–39.

195

Tr. 706, 737.

23

sale” of all shares held by the Fund and its affiliates, consistent with Sequiera’s
previous request.196
The Division’s expert, Dr. Gary Gibbons, opined that since the market
volume for TRX on October 18 was just under 500,000 shares traded, if Hull
had sold 680,000 shares into the market on that day, it would have depressed
TRX’s share price.197 One potential implication of Dr. Gibbons’s observation is
that the Fund should have received a block discount.198 In other words, the
Fund should have purchased Hull’s shares for less than the closing price,
because if those shares had been sold on the market, Hull would not have been
able to obtain $3.60 for each share.199 The Fund, however, did not receive a
block discount.200
Gibson’s expert, Daniel R. Bystrom, disagreed with Dr. Gibbons and the
Division.201 He testified that it is hard to know whether TRX prices would have
been depressed if Hull sold his shares on the market.202 He admitted that a
block discount could be appropriate when a private transaction avoids the
price-depressing impact of a sale into the market, but noted that “[t]hose

196

Tr. 705–06, 1435, 1438–39.

Div. Ex. 185 at 23; Joint Ex. 1 at 5; see Tr. 1484–85. Dr. Gibbons is a
professor of finance and entrepreneurship at the Thunderbird School of Global
Management, which is an independent college at Arizona State University. Tr.
346–47. His work focuses on securities valuation, and he is a registered
investment adviser. Tr. 347–48.
197

See Tr. 630, 1628. Dr. Gibbons did not say in his report or testimony that
the Fund should have received a block discount in this transaction; he testified
only that, because the shares were not sold in the market, the transaction did
not occur at the current market price, even though the shares were sold at the
closing market price on the day the Fund purchased them. See Tr. 945–46,
950–52.
198

199

See Tr. 945–46, 1628.

200

Tr. 262.

Bystrom currently oversees risk management at a New York-based
investment adviser. Tr. 1552. He has worked in the financial sector since 1992,
and has been a portfolio manager at hedge funds. Tr. 1553. He is not a
registered investment adviser. Tr. 1590.
201

202

Tr. 1628–31.

24

situations are really case by case” and that a motivated buyer “may be willing
to pay at market price or even above market price.”203
When the Fund eventually liquidated its TRX holdings on November 10,
which is discussed below, it paid a commission on that sale.204 Although the
parties dispute whether the Fund’s purchase from Hull caused it to pay $1,360
or $6,866 in extra commissions, because the Division is not asking for
disgorgement of this extra commission, I need not decide who is correct.205 In
any event, because Hull owned over 80% of the Fund, only about 19.3% of the
extra commission was borne by investors other than Hull.206

Tr. 1628, 1630. Dr. Gibbons proved to be a difficult witness on crossexamination. He sometimes refused to answer simple yes-or-no questions with
a yes or no, Tr. 408–09, 494–96, 501–03, 892–94, and fought counsel’s
hypothetical premises because the premises did not match his view of the facts,
e.g. Tr. 501, 503, 927–28. On occasion, I had to ask Dr. Gibbons to simply
answer the question asked. Tr. 495–96, 883–84. A particularly frustrating
exchange occurred when Gibson’s counsel asked Dr. Gibbons about a treatise
on options. Counsel twice walked Dr. Gibbons through a point in the treatise
and concluded by asking whether Dr. Gibbons agreed with the point only to
have Dr. Gibbons ask, “In what context?” Tr. 915, 917.
203

Dr. Gibbons’s demeanor diminished his credibility. These sorts of
problems generally did not mar Bystrom’s testimony, however.
204

Tr. 1440–41.

Gibson testified that the Fund paid a commission of .2 cents per share
when it liquidated its TRX assets. Tr. 1441. Multiplied by 680,636 shares, the
total commission to sell Hull’s former shares would come to $1,361. Relying on
the GarWood account statements detailing the sales, the Division notes that a
mathematical comparison of the amounts sold with the proceeds received
demonstrates that the commission was approximately one cent per share. Div.
Ex. 122 at 14–24. The second to last row on page 24 of Division Exhibit 122
indicates 100,000 shares were sold for $2.106 a share with proceeds of
$209,594. Multiplying 100,000 by 2.106 equals 210,600. Subtracting 209,594
from that amount yields 1,006. And dividing that by 100,000 shares yields
approximately 1 cent per share. According to the Division’s calculation, which
is based on more concrete evidence than Gibson’s, the total extra commission
paid was $6,866. See Div. Proposed Findings of Fact ¶ 143.
205

Tr. 1441. Gibson, his parents, and Giovanni Marzullo, together owned
10.278% of the Fund. Resp’t Ex. 206. Subtracting this percentage and Hull’s
206

25

Dr. Gibbons opined that the Fund’s purchase of Hull’s shares was
“counterproductive to the goals of” the Fund because “the decision to liquidate”
the Fund’s TRX holdings had already been made.207 Dr. Gibbons therefore
believed that the trade was made to benefit Hull at the expense of the Fund.208
But both Gibson and Hull testified that the purchase was in the Fund’s
interest. According to Hull, the Fund purchased his shares in order to
consolidate a larger block of shares available for sale, which could “entice the
buyer” and could garner a “substantially increased price.”209 Gibson testified,
“We wanted to be in a position to sell the full shares of the fund and its affiliates
in a single transaction.”210 Bystrom confirmed based on his industry experience
that consolidating the shares “greatly simplifies the process of entering into a
block transaction” because a “buyer would want to know that he’s seeing the
whole piece for sale” and that there are no additional shares left behind.211
The evidence lends some support Gibson’s contention that there were
reasons to sell Hull’s shares in a block with the Fund’s shares.212 Both Sands
on September 26 and Sequiera on October 1 wanted confirmation from Gibson
that the Fund’s entire position would be available to sell, and that no shares
would be left behind.213 When Gibson communicated with them, he included
percentage from the total means that 9.01% of the extra commission was borne
by the remaining Fund investors. And 9.01% of $6,866 is $618.63.
207

Div. Ex. 185 at 23.

208

Id.

209

Tr. 624, 627, 639.

Tr. 1435; see Tr. 1438–39. Elsewhere, however, Gibson was somewhat
vague as to his reasons for the Fund’s purchase of Hull’s shares. On October
17, he told Hull that the consolidation would “help me for regulatory and other
reasons.” Div. Ex. 94. The same day, he told a banker involved with Hull’s
account that it would be “easier to manage this position in one place.” Resp’t
Ex. 110.
210

211

Tr. 1567; Resp’t Ex. 228 at 6 (Bystrom expert report).

Tr. 1435 (Gibson testified that the Hull transaction was consistent with
Sequiera’s request that all shares of the Fund and its affiliates needed to be
sold together).
212

Resp’t Ex. 62 at 7 (Sands said, “whatever we do needs to be a clean up”);
Resp’t Ex. 93 at 1–2 (Sequiera wanted to make sure the Fund has no other
shares to sell).
213

26

Hull’s 680,000 shares in the total amount he had available to sell in an effort
to identify other large blocks as they had requested.214 And Sands asked
Gibson to move all of the Fund’s shares to an account at Casimir for this very
reason; even though he was only brokering the sale of three to five million
shares, he wanted everything in one account because “no buyer will buy that
quantity if they know another 5 [million] is being sold behind it.” 215 But the
evidence also shows that the Fund did not need to purchase Hull’s shares for
all of the shares to be sold at once.216
Gibson never disclosed the purchase of Hull’s stock to the Fund’s
investors.217
12. Gibson buys puts for himself, his girlfriend, and recommends puts to
his father.
After arranging the purchase of Hull’s shares on October 18, Gibson
continued to search for a buyer for the Fund’s remaining TRX position. On
October 24, he told one Fund investor that he was planning to liquidate the
Fund but, “to ensure we can achieve good execution on the sale,” had not
disclosed his intent to investors.218
On October 26, Hull’s executive assistant, Laurie Underwood, e-mailed
Gibson a “sixteenth amended and restated demand promissory note,”
evidencing that he owed Hull $636,921 with an 8% interest rate. 219 Ms.
Underwood, who included accounting figures for the note, asked Gibson to

214

Tr. 1404–05, 1429–30.

215

Resp’t Ex. 62 at 1.

See Tr. 1429–30, 1621–22; Resp’t Ex. 92 at 3–4. It is true that Gibson did
not consolidate Hull’s shares before the September 27 sale or as part of the
failed deal with Roheryn. See Resp’t Ex. 92. But the September 27 sale was
anticipated to be for three to five million shares, or less than all of the Fund’s
shares. Resp’t Ex. 62 at 4–5.
216

217

Tr. 261–62.

218

Div. Ex. 98 at 10236; Tr. 635.

219

Resp’t Ex. 117 at 1, 5.

27

execute the amended note and return it to her.220 Gibson realized at that point
that a 50-cent drop in TRX’s share price would render him “insolvent.”221
The next day, Gibson began purchasing $4 TRX put option contracts with
an expiration date of November 19 for his personal account and for Francesca
Marzullo’s account.222 A put option gives the purchaser of the put the right, but
not the obligation, to sell a security at a specified “strike price” (in this case $4)
by a specified date.223 If the price of the underlying security declines below the
strike price, the put is “in the money” and the put’s purchaser can sell it for a
profit. Conversely, if the prices rises above the strike price, the put will expire
worthless and the purchaser will only have lost the cost of the put.
On October 27 and 28, Gibson bought a total of 1,604 $4 TRX put contracts
in Ms. Marzullo’s account, paying approximately $50,000.224 On October 28,
November 2, and November 8, Gibson bought a total of 565 $4 TRX put
contracts for his own account, paying approximately $20,000.225 Each put
contract covered 100 TRX shares and cost between 30 and 45 cents a share.226
Gibson did not disclose his put purchases to the Fund or any of its investors,
including Hull.227
Gibson testified that he purchased protective puts, fearing he might
become insolvent, to hedge against a potential loss should TRX decline in

220

Id. at 1; see Tr. 1445–46.

221

Tr. 312–13, 1446–47.

222

Tr. 300–01, 1446–47; e.g. Div. Ex. 102 at 2.

223

Div. Ex. 184 at 20–22.

224

Div. Ex. 216 ¶ 31; see Div. Ex. 102 at 2–3; Tr. 308.

Div. Ex. 216 ¶ 30; Div. Ex. 99 at 3; Div. Ex. 124 at 3. Gibson also bought
some $2 TRX puts on November 10, which he was able to sell later that day for
a profit of about $2,500. Div. Ex. 124 at 3. Although it may be that he timed
his purchase and sale of these puts based on knowledge about the Fund’s
activity, see Div. Ex. 184 at 23, Exhibits p. 18; see also Div. Ex. 187 at 103, the
Division does not press this point or seek disgorgement of the resulting profit,
see Div. Br. 41.
225

226

Tr. 1443; Div. Ex. 99 at 3; Div. Ex. 102 at 2–3; Div. Ex. 124 at 3.

227

Div. Ex. 187 at 120, 215–16.

28

value.228 As Bystrom explained, a protective put acts like an insurance
policy.229 If one is long in a stock, then purchasing puts to cover a percentage
of that exposure can “mitigate your loss below the strike price of the option”
should the value of the stock decline.230 Purchasing protective puts could allow
an investor “to maintain long exposure, particularly through bouts of
volatility.”231 A naked put, on the other hand, is the purchase of a put option
by an investor who does not have a long position in the underlying security.232
For example, if an investor who does not own a stock buys a put contract for
that stock and exercises the put when the stock drops, the investor has made
money even though the share price has fallen. If the same investor has a long
position in the underlying stock even after purchasing puts, the best the
investor will do by exercising the puts when the share price falls is mitigate a
portion of the overall loss suffered.233
When Gibson bought the puts in his personal account, his interest in the
Fund equated to over 100,000 shares of TRX.234 The puts covered 56,500
shares.235 According to Bystrom, because Gibson was still long in TRX after
purchasing the puts, his puts were protective.236 The Division’s experts, Dr.

228

Tr. 312–13, 1445–46.

Tr. 1577; see Robert J. Aalberts & Percy S. Poon, Derivatives and the
Modern Prudent Investor Rule: Too Risky or Too Necessary?, 67 Ohio St. L.J.
525, 566 & n.262 (2006).
229

230

Tr. 1633.

231

Tr. 1574.

232

Tr. 1576–77.

233

See Tr. 1633.

Tr. 1444. Gibson’s counsel asserted that Gibson held around 220,000
shares of TRX through his interest in the Fund. See, e.g., Tr. 1063–64. But
Gibson stated that although he originally held over 230,000 shares, he only
held about “half of those shares” when he purchased the puts. Tr. 1444. Indeed,
when Gibson bought puts at the end of October and the beginning of November,
the Fund had already liquidated half of its TRX position.
234

235

Div. Ex. 216 ¶ 30.

236

Tr. 1580.

29

Gibbons and Dr. Taveras,237 agreed in substance with the definition of a
protective put, and acknowledged that Gibson’s puts could be characterized as
protective puts because of Gibson’s long exposure to TRX through the Fund.238
Although Gibson bought as many puts as he could, he felt in hindsight
that he “wildly underhedged [his] risk” because he still lost a lot of money when
the Fund liquidated its TRX holdings.239 Gibson further testified that he
bought puts for Francesca Marzullo’s account to hedge her father Giovanni
Marzullo’s exposure to TRX through the Fund.240 Gibson said he considered
Francesca Marzullo’s parents as advisory clients of his, and he purchased puts
to hedge their TRX exposure because “[t]hey were elderly[,] … living on a fixed
income[,]” and “had all of their liquid assets in the Fund.”241 Although the puts
were really for Ms. Marzullo’s parents, Gibson testified that he bought them in
Ms. Marzullo’s account because he had access to her account.242 But after
Gibson received the proceeds from the sale of Ms. Marzullo’s puts on November
10, he continued to trade in her account and lost all of the proceeds from the
put sales on other options trades.243 I therefore doubt that Gibson’s actions
Dr. Taveras is a financial economist at the Commission. Tr. 963. Her
report concerns the profits made by Gibson and others on the transactions at
issue in this proceeding. Tr. 964–66.
237

Tr. 918–19, 928–30 (Dr. Gibbons acknowledged that although Gibson did
not have any TRX stock in his personal account when he purchased the puts,
he intended to hedge his exposure to TRX through the Fund); Tr. 1043, 1060–
62 (Dr. Taveras agreed with Gibson’s counsel that because Gibson was long in
TRX through his exposure to the Fund, his puts could be characterized “as a
hedge”).
238

Tr. 312–13, 1447; see Div. Ex. 187 at 130–31. The Division emphasizes
that in his investigative testimony, Gibson called his put purchases “a short
bet” against TRX. Div. Ex. 187 at 118–19; Tr. 301–03. But because Gibson was
net long in TRX through his exposure to the Fund’s investment, his puts are
better characterized as protective. See Div. Ex. 187 at 118–20 (agreeing that
while in his personal account, he “had a short bet against TRX,” he was overall
through the Fund “exceptionally long and far longer than anyone else in the
Fund”).
239

240

Tr. 1447–48.

241

Tr. 1448.

242

Div. Ex. 187 at 113.

243

Tr. 331, 1507.

30

were motivated solely out of concern for the Marzullos as an elderly couple on
a fixed income.
When asked the obvious question, Gibson testified that he did not buy puts
to hedge the Fund’s position because he believed buying puts would not have
been a responsible investment for the Fund.244 The puts cost money, and
Gibson said he “expected them to expire worthless.”245 The Fund had already
sold about half of its interest in TRX, and given that the Fund was no longer
one of the largest owners of the stock, Gibson said that he did not expect the
impending sale of the remainder of the Fund’s shares to push TRX’s stock price
down enough to render the puts valuable.246
In addition to his own put purchases, Gibson advised his father on
November 8 to buy $4 TRX puts, sell the TRX shares he held in a personal IRA
account, and then sell the puts.247 John Gibson was one of his son’s advisory
clients.248 After speaking to his son, John Gibson phoned his broker, which did
not execute the sale of his TRX stock or the purchase of the puts until the next
day.249 When Gibson told his father to execute these transactions, he knew the
Fund was planning imminently to sell the remainder of its TRX holdings.250
Gibson testified that he told his father to buy puts as “a hedge for execution

Tr. 1450–51. Gibson purchased some $2 and $3 puts for the Fund on the
day that the Fund sold the balance of its TRX shares. Div. Ex. 187 at 103;
Resp’t Ex. 204. But neither party has raised any issue about those puts.
244

245

Tr. 1450.

246

Tr. 1450–51.

Tr. 322–23, 1107–08, 1114, 1243–44, 1253; Resp’t Ex. 207; see Tr. 1277–
79. On November 8, John Gibson spoke with Hull, who reported that “we’re
going to do something here in Geier.” Tr. 1108. John Gibson asked what Hull
meant and Hull told John Gibson to “just call Christopher and whatever he
tells you to do, you do that.” Tr. 1108. So John Gibson called his son who, in a
brief conversation, said “get a pen, buy a put, sell the stock, sell the put, do it
immediately.” Tr. 1108.
247

248

Tr. 145.

249

Tr. 1108, 1114–18; Resp’t Ex. 191 at 2–3; Resp’t Ex. 192 at 1; see Tr. 1277–

79.
250

Tr. 322–25.

31

risk.”251 In other words, he wanted his father to sell his personal TRX shares
as soon as possible but was afraid the sale transaction would not be executed
immediately.252 Gibson, therefore, told his father to buy puts so he would not
lose out if TRX’s share price dropped in the interim.253
13. The Fund sells the rest of its TRX stock into the market at great loss.
At the beginning of November, the Fund continued to incrementally sell
its shares on the market or in negotiated transactions at around market
price.254
Then, on November 7 or 8, Sands from Casimir contacted Gibson and told
him “he had an offer that would make us very pleased.”255 On November 9,
after the market had closed for the day, Gibson met with Sands and Platinum
Partners’s CFO, David Levy.256 In prior meetings with Levy, Gibson had tried
to negotiate a sale of the Fund’s TRX shares to Platinum.257 But during the
November 9 meeting, Levy instead told Gibson that Platinum would pay the
Fund $10,000 a month not to sell any TRX shares for six months.258 Gibson
was “shocked and disappointed,” and he told Hull, who was concerned that
Platinum was trying to lock up the Fund’s shares so it could sell its TRX
holdings before the Fund could sell.259 Hull and Gibson decided to sell the
remainder of the Fund’s TRX position the next day into the market.260 Hull
and Gibson were hoping that if they sold the Fund’s shares, other large TRX
investors like Platinum would be forced to buy TRX to prevent the share price

251

Tr. 1449.

252

Tr. 1449.

253

Tr. 322–24, 1449.

Tr. 879–81, 885, 1455–56; Resp’t Ex. 121 (November 8 sale to Sequiera);
Resp’t Ex. 153 at 1 (summary chart of the Fund’s sales).
254

255

Tr. 1456.

256

Tr. 323–24, 1456.

257

Tr. 319–21.

258

Tr. 321, 1457.

259

Tr. 1457–58.

260

Tr. 1458–59.

32

from dropping and to protect their own positions.261 Gibson and Hull hoped
that as other investors rushed in to buy the stock, the Fund would lose less
money on the shares it sold as the day progressed. 262 But Gibson was aware
that his strategy was risky.263
On the morning of November 10, Gibson emailed his broker at GarWood
and told him to sell, noting, “We are going to potentially tank this stock.”264
Gibson explained that he told this to his broker to signal that there was no
need to sell slowly and get best execution prices.265 Rather, Gibson wanted to
sell aggressively to force the other large shareholders to buy the Fund’s shares
as he had discussed with Hull.266
Gibson was half right. His strategy did not work but he did tank the stock.
As the Fund sold its remaining 4.9 million shares of TRX into the market, other
big investors sold too, and the stock price declined dramatically.267 TRX fell so
fast that the New York Stock Exchange twice briefly halted trading in it.268
Around 10:00 a.m., when TRX’s share price had fallen to approximately $2.00,
Gibson sold all of the $4 puts in his account and in Francesca Marzullo’s
account.269 The $4 puts from John Gibson’s account were also sold that day.270
The Fund liquidated its TRX holdings for average prices ranging from $3.15 to
$1.65 per share.271 TRX’s share price, which had opened at $3.41, went as low
as $1.56 and closed at $2.29 on a volume of over 17 million shares traded. 272
261

Tr. 1458.

262

Tr. 658–59, 1458–59.

263

Div. Ex. 105 at 11858; see Tr. 659.

264

Div. Ex. 105 at 11585; Tr. 1459–60.

265

Tr. 1461–62.

266

Tr. 1461–62.

267

Tr. 324–25, 659, 1462–63; Div. Ex. 216 ¶ 32.

268

Tr. 325; Div. Ex. 184 at Exhibits p. 12.

269

Div. Ex. 123 at 14; Div. Ex. 124 at 3; Div. Ex. 184 at 23, Exhibits p. 18.

270

Div. Ex. 114 at 46; Div. Ex. 184 at 23; see Tr. 1119–20.

271

Tr. 1051; Div. Ex. 184 at Exhibits p. 11.

272

Joint Ex. 1 at 5.

33

Gibson made $81,930 ($81,008.81 after commissions) on the sale of his $4
puts. The puts in Francesca Marzullo’s account generated a profit of $254,380
($251,879.81 after commissions). John Gibson made $43,240 ($41,823.06 after
commissions).273 Even with his profit from the puts, Gibson lost $724,660 in
the Fund.274 Giovanni Marzullo lost $965,318, and Gibson’s parents lost
$1,399,053.275
At some point, possibly as early as mid-February 2012, Gibson spoke with
Sequiera by phone.276 During the call, Gibson used profane and often
hyperbolic language to express his anger toward Sinclair.277 Relevant to this
proceeding, Gibson said that Sinclair “lied to [Gibson] for a year,” had “taken
everything from” Gibson, was “a complete crook,” and “screws everyone he
deals with.”278
According to the Division, Gibson’s assertion that Sinclair had been lying
for a year shows that Gibson knew Sinclair was dishonest in August 2011,
when he berated Sinclair but gave investors a more positive view of TRX.279
But Gibson did not sell his personal shares in August 2011; rather, he
remained sufficiently bullish about TRX to decline a liquidation sale at $5.85
per share, advised Hull in September 2011 that he remained “bullish” on TRX,
and before September 23, told Hull the Fund should consider buying more
shares. So the record does not show that before November 2011, Gibson
thought Sinclair might be lying.280

273

Tr. 330–31; Div. Ex. 185 at 47; see Resp’t Ex. 205.

274

Resp’t Ex. 205.

275

Id.; Tr. 1143.

276

See Div. Exs. 183, 183A; see Tr. 845–46, 1487.

277

Div. Ex. 183A; see Tr. 847.

278

Div. Ex. 183A at 3–4, 6.

279

Tr. 848.

In a sarcastic e-mail sent November 4, 2011, Gibson asked Sinclair
whether he’d done a number of things Gibson said Sinclair had promised to do.
Div. Ex. 103. Gibson added that if Sinclair did not “fix what you’ve broken, it
will be my life's goal to ensure your children will know you were a crook and
the pain you caused so many people all in an effort at self glorification.” Id.
280

34

In context, therefore, Gibson’s phone conversation supports Hull’s
observation—relevant to Gibson’s August 2011 berating e-mails to Sinclair—
that Gibson tended to “rant and rave about different things,” and sometimes
would “rant and rave about … Sinclair in a negative way.”281 The phone call
otherwise has little relevance.
14. The Fund shuts down in April 2013.
Gibson continued to manage the Fund until April 2013, when he closed it
and returned money to its 13 remaining investors.282 In his wind-up letter to
investors, Gibson admitted that the Fund’s performance had been “disastrous”
and he accepted full responsibility for its failure.283 In his testimony, Gibson
explained that he and Hull had made bad decisions, such as not accepting the
buyout offer for its TRX stock at $5.85 a share in August 2011 and flooding the
market with shares on November 10.284
Gibson currently lives in Montevideo, Uruguay, where he works for East
Century Capital, Ltd., a Hong Kong consulting firm that advises companies in
Africa.285

281

Tr. 584.

282

Tr. 334–35; Div. Ex. 154.

283

E.g., Div. Ex. 154 at 2149.

284

Tr. 1464–66.

285

Tr. 1492, 1498, 1502.

35

Discussion and Conclusions of Law
The Division alleges that Gibson willfully violated Advisers Act Section
206(1) and (2) by engaging in a transaction that favored Hull over the interests
of his advisory client, the Fund, and by engaging in front running transactions
that benefited him and persons close to him.286 I will first consider the
allegations under these provisions and then consider whether, as the Division
further alleges, Gibson also willfully violated Exchange Act Section 10(b) and
Rule 10b-5(a) and (c), and Advisers Act Section 206(4) and Rule 206(4)-8,
through the same conduct.287
1. The antifraud provisions of Advisers Act Section 206(1) and (2) impose
federal fiduciary standards on investment advisers and require
elimination or disclosure of even potential conflicts of interest.
Advisers Act Section 206 makes it:
unlawful for any investment adviser, by use of the mails
or any means or instrumentality of interstate commerce,
directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud
any client or prospective client; [or]
(2) to engage in any transaction, practice, or course of
business which operates as a fraud or deceit upon any
client or prospective client.288
Section 206 “establishes ‘federal fiduciary standards’ to govern the
conduct of investment advisers.”289 As a result, investment advisers “owe their
clients ‘an affirmative duty of utmost good faith, and full and fair disclosure of
all material facts, as well as an affirmative obligation to employ reasonable
care to avoid misleading [their] clients.’”290 To this end, the Act “reflects a

286

OIP ¶¶ 2, 55, 56.

287

Id. ¶¶ 54, 57.

288

15 U.S.C. § 80b-6(1), (2).

Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979)
(quoting Santa Fe Indus. v. Green, 430 U.S. 462, 471 n.11 (1977)).
289

Montford & Co., Advisers Act Release No. 3829, 2014 WL 1744130, at *13
(May 2, 2014) (alteration in original) (quoting SEC v. Capital Gains Research
290

36

congressional recognition ‘of the delicate fiduciary nature of an investment
advisory relationship,’ as well as a congressional intent to eliminate, or at least
to expose, all conflicts of interest which might incline as investment adviser—
consciously or unconsciously—to render advice which was not disinterested.”291
An adviser must therefore “disclose information that would expose any” actual
or potential conflicts of interest with a client.292 The Commission “has long held
that ‘[f]ailure by an investment adviser to disclose potential conflicts of interest
to its clients constitutes fraud within the meaning of Section[] 206(1) and
(2).’”293 “It is indisputable that potential conflicts of interest are ‘material’ facts
with respect to clients and the Commission.”294
To establish liability under Section 206(1), the Division must show that a
respondent acted with scienter.295 A showing of negligence, however, is
sufficient to establish a violation of Section 206(2).296 Scienter may be shown
by evidence of recklessness.297 In this context, recklessness is “an extreme
departure from the standards of ordinary care … present[ing] a danger of
Bureau, Inc., 375 U.S. 180, 194 (1963)), pet. denied, 793 F.3d 76 (D.C. Cir.
2015).
Capital Gains, 375 U.S. at 191–92 (quoting Louis Loss, Securities
Regulation 1412 (2d ed. 1961)).
291

Montford, 2014 WL 1744130, at *13 (quoting Kingsley, Jennison, McNulty
& Morse, Inc., Advisers Act Release No. 1396, 1993 WL 538935, at *3 (Dec. 23,
1993)).
292

Robare Grp. v. SEC, 922 F.3d 468, 472 (D.C. Cir. 2019) (first alteration in
original) (quoting Fundamental Portfolio Advisors, Inc., Securities Act Release
No. 8251, 2003 WL 21658248, at *15 & n.54 (July 15, 2003), pet. denied sub
nom. Brofman v. SEC, 167 F. App’x 836 (2d Cir. 2006)).
293

Vernazza v. SEC, 327 F.3d 851, 859 (9th Cir. 2003). A misstatement is
material if there is a substantial likelihood that a reasonable investor would
view “disclosure of the omitted fact … as having significantly altered the ‘total
mix’ of information made available.” Matrixx Initiatives, Inc. v. Siracusano,
563 U.S. 27, 38 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32
(1988)).
294

Montford, 2014 WL 1744130, at *14; see SEC v. Steadman, 967 F.2d 636,
641 & n.3 (D.C. Cir. 1992).
295

296

Montford, 2014 WL 1744130, at *14.

297

Id. at *14 n.108.

37

misleading [clients] that is either known to the [actor] or is so obvious that the
actor must have been aware of it.”298 “Negligence is the failure to exercise
reasonable care.”299
2. Gibson was an investment adviser to
instrumentalities of interstate commerce.

the

Fund

and

used

Section 206 only applies to investment advisers.300 An investment adviser
is “any person who, for compensation, engages in the business of advising
others … as to the advisability of investing in, purchasing, or selling
securities.”301
Gibson was the managing director of both the Fund’s managing member,
Geier Capital, and the Fund’s investment manager, Geier Group, while those
entities existed.302 He acknowledged that he provided investment advisory
services to the Fund.303 He devised the strategy of investing in TRX,304
negotiated purchases and sales with brokers and counterparties,305
communicated with Fund investors regarding the Fund’s future
performance,306 and held himself out as an adviser to regulators.307 For these
services, he was paid a salary through April 2013 and, through Geier Group,
Id. (final alteration in original) (quoting David Henry Disraeli, Securities
Act Release No. 8880, 2007 WL 4481515, at *5 (Dec. 21, 2007), pet. denied, 334
F. App’x 334 (D.C. Cir. 2009)).
298

IFG Network Sec., Inc., Exchange Act Release No. 54127, 2006 WL
1976001, at *11 (July 11, 2006).
299

300

15 U.S.C. § 80b-6.

15 U.S.C. § 80b-2(a)(11); see Abrahamson v. Fleschner, 568 F.2d 862, 871
(2d Cir. 1977) (holding that advice can take the form of “exercising control over
what purchases and sales are made with their clients’ funds”).
301

302

Div. Ex. 22 at 1, 12; Div. Ex. 23 at 1, 12; Div. Ex. 24 at 1.

Tr. 184, 186, 187, 335 (admitting provision of advisory services both before
and after dissolution of Geier Group); see Tr. 570 (Hull agreeing).
303

304

Tr. 575, 1367.

305

See, e.g., Resp’t Exs. 62, 92.

306

See, e.g., Resp’t Ex. 51.

307

See, e.g., Div. Exs. 31, 39, 70, 71.

38

was entitled to annual management fees and incentive allocations even if he
did not receive them once the Fund started to fail.308 For these reasons, Gibson
meets the statutory definition of an investment adviser to the Fund.309
Liability under Section 206 requires that the adviser make “use of the
mails or any means or instrumentality of interstate commerce.”310 This
element is satisfied because when Gibson engaged in the problematic trading
activities and the transaction with Hull, he used the telephone, e-mail, and the
internet.311
3. Elimination or disclosure of conflicts where the client is a hedge fund.
Investment advisers owe their clients a duty of full disclosure.312 But
Gibson’s advisory client was the Fund, not its individual investors.313 Indeed,
308

Tr. 246–52, 334–35; Div. Exs. 43, 128, 147, 156; Div. Ex. 24 at 2.

See SEC v. Fife, 311 F.3d 1, 11 (1st Cir. 2002) (finding that an investment
adviser received compensation when “he understood that he would be
compensated for his efforts by a commission based on a percentage of the
profits from the investments, if successful”); SEC v. Ahmed, 308 F. Supp. 3d
628, 652–53 (D. Conn. 2018) (finding a similar involvement in recommending
investment opportunities and in negotiating the terms of transactions to be
sufficient to establish that the defendant was an investment adviser); Timothy
S. Dembski, Advisers Act Release No. 4671, 2017 WL 1103685, at *10 n.33
(Mar. 24, 2017), pet. denied, 726 F. App’x 841 (2d Cir. 2018).
309

310

15 U.S.C. § 80b-6.

Larry C. Grossman, Securities Act Release No. 10227, 2016 WL 5571616,
at *4 n.11 (Sept. 30, 2016), vacated as to certain sanctions, 2019 WL 2870969
(July 3, 2019).
311

312

Montford, 2014 WL 1744130, at *13.

See Goldstein, 451 F.3d at 881 (a hedge fund “adviser owes fiduciary duties
only to the fund, not to the fund’s investors,” because “[i]f the [individual]
investors are owed a fiduciary duty and the entity is also owed a fiduciary duty,
then the adviser will inevitably face conflicts of interest”). To be clear, Gibson
had separate advisory relationships with his parents and the Marzullos, but
those relationships had nothing to do with any investment in the Fund those
individuals might have had. See Tr. 804; Inv. Adviser Advertisements; Comp.
for Solicitations, 84 Fed. Reg. 67,518, 67,527 & n.66 (Dec. 10, 2019) (noting
that an “adviser’s ‘clients’ … are the pooled investment vehicles themselves”
and explaining that “[t]here are circumstances under which an investor in a
pooled investment vehicle is also a client of the investment adviser” such as
313

39

the Division conceded that although the Fund was Gibson’s advisory client, the
Fund’s investors were not Gibson’s advisory clients simply by virtue of their
investment in the Fund.314 The Fund, however, was a mere legal entity with
no independent decision-makers. Gibson was therefore essentially “in the
perverse position” of disclosing conflicts or potential conflicts to himself as the
client’s agent.315 This sort of disclosure to himself, which would have amounted
to no disclosure at all, could not have been sufficient.316
Because this is the case, the question is to whom Gibson should have made
disclosures once conflicts of interest arose. Arguably, disclosure to investors in
the Fund would not have been sufficient, and could have even been harmful.
The interests of individual investors could have easily been drawn into conflict
with the Fund’s interests.317 Moreover, individual investors had no decision“when the investor has its own investment advisory agreement with the
investment adviser”). In this regard, Goldstein, “did not hold that no hedge
fund adviser could create a client relationship with an investor,” United States
v. Lay, 612 F.3d 440, 446–47 (6th Cir. 2010), and the OIP could be read as
alleging that Gibson breached duties as to other clients as well as the Fund,
see, e.g., OIP ¶ 2. The Division, however, has focused on the allegation that
Gibson breached his fiduciary duties to the Fund. See, e.g., Div. Br. 1–2, 12; Tr.
804.
314

Tr. 804.

J. Tyler Kirk, A Federal Fiduciary Standard Under the Investment
Advisers Act of 1940: A Refinement for the Protection of Private Funds, 7 Harv.
Bus. L. Rev. Online 19, 20 (2016).
315

See id. Gibson has not argued that disclosure to himself as an agent of the
Fund would have been sufficient to remedy any conflict that arose, nor is such
an argument viable. See id. at 28–31 & n.77 (arguing that an agent’s
knowledge should not be imputed to the principal when the principal is the
agent’s intended victim); Kirschner v. KPMG LLP, 938 N.E.2d 941, 952 (N.Y.
2010) (“[T]he presumption that an agent will communicate all material
information to the principal operates except in the narrow circumstance where
the corporation is actually the victim of a scheme undertaken by the agent to
benefit himself.”); see also Div. Ex. 185 at 20 (Dr. Gibbons opined that “it was
not adequate that the intended misconduct of Gibson as adviser was known to
Gibson as managing member. Gibson’s own knowledge of his plans to engage
in improper conduct cannot be attributed to the Fund or its investors.”).
316

See Goldstein, 451 F.3d at 881. For example, a disclosure that Gibson
intended to sell his personal shares of TRX due to a potential conflict with the
Fund’s impending block sale could have caused other investors to attempt to
317

40

making authority for the Fund, and no meaningful recourse had they known
of Gibson’s intended actions. The operating memorandum limited their ability
to even withdraw money and permitted Geier Capital to suspend their right to
withdrawal under certain conditions.318
For these reasons, because the transactions Gibson intended to effectuate
posed conflicts or potential conflicts of interest, he should have refrained from
engaging in those transactions or, failing that, established an appropriate
disclosure mechanism through which a disinterested committee or person
could have independently evaluated those conflicts and transactions on behalf
of the Fund.319 Thus, in Gibson’s circumstances, a failure to obtain independent
advice or abstain from a transaction in the event of even a potential conflict
would constitute a violation of the Advisers Act.320

sell their personal shares, which in turn could have adversely affected TRX’s
share price or limited the Fund’s ability to later sell its shares.
318

Div. Ex. 24 at 3, 16, 20–22.

Independent disclosure mechanisms may involve, for example, disclosure
to an independent conflicts committee or an independent person in
management to evaluate the conflict and render a decision for the Fund. See
SEC v. DiBella, 587 F.3d 553, 568 (2d Cir. 2009); Asset Managers’ Committee,
Best Practices For The Hedge Fund Industry 42, 48–49 (2008),
https://www.treasury.gov/press-center/press-releases/Documents
/amcreportapril152008.pdf; Div. Ex. 185 at 20. As “[c]onflicts are inherent in
the asset management business as in many other financial services
businesses,” a fund “[m]anager should adopt policies and procedures to identify
and address potential conflicts of interest that may arise in its specific
businesses” and “establish a Conflicts Committee.” Best Practices at 47–48.
Typically, a fiduciary must seek independent, disinterested advice when he or
she has divided loyalties or lacks the ability to make the decision at hand.
Accord Leigh v. Engle, 727 F.2d 113, 132 (7th Cir. 1984) (addressing ERISA
fiduciaries with divided loyalties).
319

See Capital Gains, 375 U.S. at 191 (an adviser must “eliminate, or at least
… expose” all potential conflicts of interest).
320

41

4. Front running in the investment adviser context.
The Division argues that Gibson is liable for front running.321
“Frontrunning may be generally defined as involving trading a stock, option,
or future while in possession of non-public information regarding an imminent
block transaction that is likely to affect the price of the stock, option, or
future.”322 As is the case with insider trading, there is no specific statute or
regulation prohibiting front running. But unlike insider trading, which courts
have long addressed under the federal securities laws, there is little case law
addressing front running under the antifraud provisions of federal securities
law.323

321

Div. Posthearing Br. at 4–7, 16–20, 26–27.

Memorandum Prepared by the Division of Market Regulation in Response
to the Questions Contained in the Letter of March 4, 1988, from the Honorable
John D. Dingell and the Honorable Edward J. Markey Regarding Short Selling
and Frontrunning 11 (May 13, 1988), http://www.sechistorical.org/museum
/papers/1980/page-14.php (scroll to May 13); see Lewis D. Lowenfels & Alan R.
Bromberg, Securities Market Manipulations: An Examination and Analysis of
Domination and Control, Frontrunning, and Parking, 55 Alb. L. Rev. 293, 313
(1991); see also John R. D’Alessio, Exchange Act Release No. 47627, 2003 WL
1787291, at *2 (Apr. 3, 2003) (stating that a broker who times “the purchase or
sale of shares of a security for his own account so as to benefit from the price
movement that follows execution of large customer orders, [engages in] a
practice commonly known as trading ahead or frontrunning”), pet. denied, 380
F.3d 112 (2d Cir. 2004).
322

See Thomas A. Russo & Marlisa Vinciguerra, Financial Innovation and
Uncertain Regulation: Selected Issues Regarding New Product Development, 69
Tex. L. Rev. 1431, 1527–28 (1991); Lowenfels & Bromberg, 55 Alb. L. Rev. at
313–21, 337; see, e.g., SEC v. Yang, 795 F.3d 674, 680 (7th Cir. 2015) (declining
to reach defendant’s argument that front running should never be considered
fraudulent conduct under Section 10(b) and Rule 10b-5 because he had failed
to preserve the issue). The Commission has largely left it to self-regulatory
organizations—most recently the Financial Industry Regulatory Authority,
Inc. (FINRA)—to regulate front running. See, e.g., Self-Regulatory
Organizations; FINRA; Order Approving Proposed Rule Change, as Modified
by Amendment No. 1, To Adopt Existing NASD IM-2110-3 as New FINRA Rule
5270 (Front Running of Block Transactions) With Changes in the Consolidated
FINRA Rulebook, 77 Fed. Reg. 55,519, 55,522 (Sept. 10, 2012) (approving
adoption of FINRA Rule 5270); D’Alessio, 2003 WL 1787291, at *3, *7–9
(affirming a violation of NYSE Rule 92 prohibiting front running); E.F. Hutton
& Co., Exchange Act Release No. 25887, 1988 WL 901859, at *1, *4 (July 6,
323

42

In Capital Gains, the Supreme Court found that scalping, a manipulative
technique related to front running, violated the Advisers Act.324 An investment
adviser purchased shares of a stock for his own account, recommended the
security to his clients, and then immediately sold his personal shares at a profit
upon the stock’s gain due to his buy recommendation.325 The Court held that
one who
secretly trades on the market effect of his own
recommendation may be motivated—consciously or
unconsciously—to recommend a given security not
because of its potential for long-run price increase (which
would profit the client), but because of its potential for
short-run price increase in response to anticipated
activity from the recommendation (which would profit the
adviser).326
The Advisers Act required the “adviser to make full and frank disclosure of his
practice of trading on the effect of his recommendations,” and his failure to do
so was fraud.327
The conflict of interest in Capital Gains between the adviser and his
clients is clear. As one commentator has noted: “Scalpers seek to move the
market price of a security by triggering client investment action and to profit
by taking action opposite to the clients immediately after the movement.”328 In
1988) (affirming a violation of NASD rules); Smith, Barney, Harris Upham &
Co., Exchange Act Release No. 21242, 1984 WL 472586, at *3–4 (Aug. 15, 1984)
(affirming a finding by AMEX). Private firms often also have codes of ethics
prohibiting front running. See, e.g., Div. Ex. 185 at 22 n.41 (Dr. Gibbons noted
in his report that Deutsche Bank, Gibson’s former employer, explicitly
prohibited front running).
Capital Gains, 375 U.S. at 181, 196–97; see David M. Bovi, Rule 10b-5
Liability for Front-Running: Adding A New Dimension to the “Money Game”, 7
St. Thomas L. Rev. 103, 106–07 (1994) (noting that scalping is sometimes
confused with front running, but that the two practices are different).
324

325

Capital Gains, 375 U.S. at 181.

326

Id. at 196.

327

Id. at 196–97.

Harvey E. Bines & Steve Thiel, Investment Management Law and
Regulation 807 (2d ed. 2004).
328

43

a sense, “Scalping is little more than price manipulation as an end in itself.”329
Front running “is less blatant a breach of the duty of loyalty than scalping,”
but is still a “deliberate subordination of the client’s interest.”330
Cases have usually analyzed front running as a violation of a broker’s duty
of best execution, since the price obtained for the customer’s order may not be
as favorable as it would have been had the customer’s order been executed
first.331 Whether or not the price obtained for a client order would have been
the best price but for the investment adviser’s front running is, however, not a
dispositive consideration. Under the Advisers Act, it is immaterial whether the
conduct actually harmed the client or whether the adviser intended to harm
the client.332 Investment advisers are fiduciaries “governed by the highest
standards of conduct.”333 An investment adviser has not only a duty of best
execution,334 but also a duty of undivided loyalty335 and an affirmative duty of

329

Id.

330

Id.

See, e.g., United States v. Dial, 757 F.2d 163, 168–69 (7th Cir. 1985)
(analyzing a broker’s practice of trading ahead of client under mail and wire
fraud statutes); D’Alessio, 2003 WL 1787291, at *3–4 (analyzing a broker’s
practice of trading ahead of a client under NYSE Rules).
331

332

See Capital Gains, 375 U.S. at 192.

Fundamental Portfolio Advisors, 2003 WL 21658248, at *15 (quoting
Victor Teicher & Co., Exchange Act Release No. 40010, 1998 WL 251823 (May
20, 1998), pet. granted in part on other grounds, 177 F.3d 1016 (D.C. Cir.
1999)); see also Montford, 2014 WL 1744130, at *13 (“The ‘fundamental
purpose of [the Advisers Act is] to substitute a philosophy of full disclosure for
the philosophy of caveat emptor and thus … achieve a high standard of
business ethics in the securities industry.’” (quoting Capital Gains, 375 U.S. at
186) (alterations in original)).
333

See Clarke T. Blizzard, Advisers Act Release No. 2253, 2004 WL 1416184,
at *2 (June 23, 2004).
334

See IMS/CPAs & Assocs., Securities Act Release No. 8031, 2001 WL
1359521, at *8 (Nov. 5, 2001), pet. denied sub nom. Vernazza v. SEC, 327 F.3d
851 (9th Cir. 2003).
335

44

utmost good faith and must eliminate or expose even potential conflicts of
interest.336
The exact contours of front running need not be defined to capture or
contemplate every form of misconduct. Here, it suffices to say that there is a
potential conflict of interest when an investment adviser’s personal trading or
recommendation to close friends or relatives coincides with the adviser’s
possession of confidential information about a client’s forthcoming trading
plans in the same security. An adviser is “not entitled to benefit from the
fiduciary relationship except to the extent provided for by fees and
compensation the client expressly consents to pay.”337
Absent the client’s consent, it is a breach of an adviser’s fiduciary duties
to use confidential client information to benefit himself or others—whether to
avoid losses or realize gains.338 Moreover, front running can potentially
See Capital Gains, 375 U.S. at 194; Montford, 2014 WL 1744130, at *13;
Fundamental Portfolio Advisors, 2003 WL 21658248, at *15. “One activity
specifically mentioned and condemned by investment advisers” leading up to
the passage of the Advisers Act “was trading by investment [advisers] for their
own account in securities in which their clients were interested.” Capital
Gains, 375 U.S. at 189. Although the Supreme Court did not go as far as to say
that all such personal trading is prohibited, there is little doubt that it could
lead to conflicts of interest. See id. at 196.
336

Feeley & Willcox Asset Mgmt. Corp., Securities Act Release No. 8249, 2003
WL 22680907, at *12 (July 10, 2003).
337

See Thomas W. Heath, III, Exchange Act Release No. 59223, 2009 WL
56755, at *4 (Jan. 9, 2009) (observing that the duty to maintain confidentiality
of client information, which “is grounded in fundamental fiduciary principles,”
is “one of the most fundamental ethical standards in the securities industry”),
pet. denied, 586 F.3d 122 (2d Cir. 2009); Restatement (Third) of Agency § 8.01
(2006) (“Unless the principal consents, the general fiduciary principle …
requires that an agent refrain from using the agent’s position or the principal’s
property to benefit the agent or a third party.”); id. § 8.05 (setting forth an
agent’s duty “not to use or communicate confidential information of the
principal for the agent’s own purposes or those of a third party,” and stating
that “it is a breach of an agent’s duty to use confidential information of the
principal for the purpose of effecting trades in securities although the agent
does not reveal the information in the course of trading”). The same principle
is expressed in case law on insider trading. See United States v. O’Hagan, 521
U.S. 642, 652 (1997) (“[A] fiduciary’s undisclosed, self-serving use of a
principal’s information to purchase or sell securities, in breach of a duty of
loyalty and confidentiality, defrauds the principal of the exclusive use of that
338

45

undermine the client’s interests or involve conflicting motivations that cannot
be adequately judged in hindsight. For example, the adviser might usurp a
trading opportunity that otherwise should have gone to the client. Or the
adviser’s front running, even in small quantities, could cause unexpected price
movements in a thinly traded stock. The adviser could also be motivated, even
in part, to execute a client’s block trade so that he or someone close to him can
realize gains before the expiration date of previously purchased put option
contracts in the same security. None of these scenarios need be proven or
realized, however. The point is that front running poses the potential for the
adviser’s outside interests to conflict with those of the client. This makes the
practice especially problematic.339
Given the potential conflict in this context, the client must be permitted
to evaluate the adviser’s “overlapping motivations” and “decid[e] whether an
adviser is serving ‘two masters’ or only one.”340 And if the client does not
consent, then the adviser must abstain from his outside trading or
recommendations to others. Requiring anything less—or subjecting the client’s
interests to hindsight analysis—would undermine the Advisers Act’s manifest
purpose.
5. Gibson’s trading ahead of the Fund violated fiduciary duties and posed
potential conflicts of interest.
Gibson’s sale of personal shares on September 26, 2011, constituted a
fraud in violation of the Advisers Act. When he sold, he was actively
information.”); Dirks v. SEC, 463 U.S. 646, 662 (1983) (“[A] purpose of the
securities laws was to eliminate ‘use of inside information for personal
advantage.’” (quoting Cady, Roberts & Co., Exchange Act Release No. 6668,
1961 WL 60638, at *4 n.15 (Nov. 8, 1961))).
In discussing conflicts in the investment-adviser context, the Supreme
Court relying on precedent on the problems that flow from contingent-fee
arrangements for obtaining government contracts, noted that a person “who
occupies confidential and fiduciary relations toward another” should remove
“any temptation” to violate those trust relations. Capital Gains, 375 U.S. at
196 n.50 (quoting United States v. Miss. Valley Generating Co., 364 U.S. 520,
550 n.14 (1961)). The Court further posited: “The objection rests in their
tendency, not in what was done in the particular case. The court will not
inquire what was done. If that should be improper it probably would be hidden,
and would not appear.” Id. (ellipses omitted) (quoting Miss. Valley Generating,
364 U.S. at 550 n.14).
339

340

Id. at 196.

46

negotiating a block sale of millions of shares of the Fund’s TRX position. The
particulars of that impending sale was not known to anyone but Gibson, his
broker Sands, and maybe Hull, rendering the information non-public.341
Gibson testified that he sold his personal shares and those of his girlfriend to
earn some liquidity, but the timing of the sale suggests that he was attempting
to avoid potential losses by selling the shares ahead of the Fund’s impending
block sale. Perhaps he was concerned that the Fund’s block sale, even though
it was negotiated in the upstairs market, could lower TRX’s share price.342 But
whatever the reason, he should not have engaged in outside trading while
negotiating his client’s trades in the same security. As discussed earlier, the
Fund lacked any independent disclosure mechanism to evaluate Gibson’s
outside activities. He failed to fully consider—and lacked the independence to
consider—the impact that his personal trading may have had on the Fund. In
trading when he did, Gibson breached his fiduciary duties to his client and
created a potential conflict of interest. Whether or not, in hindsight, his actions
actually harmed the Fund is irrelevant.
Gibson’s purchase of put options for himself and in Francesca Marzullo’s
account, and his recommendation to his father to purchase puts also
constituted a fraud. When he purchased the puts, he used the Fund’s
confidential information that it was in the process of liquidating its TRX
holdings for his own potential advantage and the advantage of those close to
him. The Fund never waived the use of its information for its adviser’s personal
advantage. Moreover, by all appearances, when Gibson bought $4 puts for
himself and others but not for the Fund, he was favoring his own position over
his client’s. He explained at the hearing why he did this: puts are not free, and
he had assessed that the Fund should not take on the additional financial
burden because the puts might have expired worthless.343 Still, he lacked the
independence necessary to evaluate the conflict between the position he was
taking for himself and those close to him versus the one appropriate for the

Although market participants knew that the Fund was willing to consider
offers for its TRX shares because Gibson previously sought to sell the Fund’s
TRX shares at the end of August, this fact does not change the confidential
nature of the block sale on September 27, 2011. See Resp’t Br. 21. No one aside
from Gibson and his broker knew exactly what the Fund intended to do or
when, even if some knew that the Fund was willing to negotiate a transaction.
341

See Tr. 1022; cf. Div. Ex. 187 at 108 (Gibson acknowledged that large sales
of a stock—at least ones into the market—generally lowered its share price).
342

343

Tr. 1450–51.

47

Fund.344 Finally, at the same time as he was negotiating the Fund’s sale,
Gibson was seeking to mitigate losses through a hedging strategy of buying
put options. He thus lacked the independence to decide the appropriate timing
of the Fund’s liquidation of its TRX position, as that decision could significantly
affect the value of those puts.
On each occasion, Gibson’s misconduct demonstrated scienter. Even
though he never intended to harm the Fund, he was a licensed securities
professional who was well aware of his fiduciary responsibilities.345 And he
knew that front running was a problematic practice.346 In this context, Gibson’s
decision to use the Fund’s non-public information to protect his and others’
investments was “an extreme departure from the standards of ordinary care”
which created conflicts with his duties “so obvious” that he “must have been
aware of” them.347
Contrary to Gibson’s argument, the disclosures in the offering documents
were insufficient to alert investors to the potential conflicts created by Gibson’s
front running.348 The offering memorandum allowed Gibson to invest in the
same securities as the Fund, advise his other clients in ways that differed from
his advice to the Fund, and conduct business in competition with the Fund.349
It noted that Gibson might have conflicts of interest when effecting
transactions for the Fund and when transacting in other entities in which he
See Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, 84 Fed. Reg. 33,669, 33,677 (July 12, 2019) (“When
allocating investment opportunities among eligible clients, an adviser may face
conflicts of interest either between its own interests and those of a client or
among different clients. If so, the adviser must eliminate or at least expose
through full and fair disclosure the conflicts associated with its allocation
policies, including how the adviser will allocate investment opportunities, such
that a client can provide informed consent.”); see also Montford, 2014 WL
1744130, at *16 (“The soundness of [an adviser’s] investment advice is
irrelevant to their obligation to be truthful with clients and to disclose a conflict
of interest”).
344

345

Tr. 77–78.

346

See Div. Ex. 68; Tr. 235–36, 1426–27.

Montford, 2014 WL 1744130, at *14 n.108 (quoting Disraeli, 2007 WL
4481515, at *5).
347

348

Resp’t Br. at 19–20.

349

Div. Ex. 24 at 19.

48

had a financial interest.350 But “for disclosure to be full and fair, it should be
sufficiently specific so that a client is able to understand the material fact or
conflict of interest and make an informed decision whether to provide
consent.”351 The offering memorandum speaks in generalities. It was not
specific enough to disclose that Gibson might front run the Fund for his own
personal advantage and the advantage of those close to him. The Fund did not
consent to Gibson’s behavior nor were there any conflict resolution
mechanisms in place.352
As a result of his front running, Gibson violated Advisers Act Section
206(1) and 206(2).
6. Gibson violated fiduciary duties when he arranged the Fund’s purchase
of Hull’s shares.
On October 18, 2011, during the period when Gibson and Hull were trying
to sell the Fund’s entire position in TRX, Gibson had the Fund purchase
680,636 TRX shares from Hull for the closing market price that day. Hull was
not charged a commission, but the Fund paid a commission when it later sold
Hull’s shares together with its remaining TRX shares in a market transaction.
The Division argues that Gibson had a conflict of interest that he recklessly
failed to disclose when he executed the Hull transaction.353
The Division claims that Gibson burdened the Fund with additional TRX
shares at a time when he was trying to sell the Fund’s position in TRX, and
that the only plausible explanation was that Gibson intended to benefit Hull
at the Fund’s expense.354 The evidence, however, shows that Gibson suggested
consolidating Hull’s TRX shares with the Fund’s because he believed that it

350

Id.

351

Commission Interpretation, 84 Fed. Reg. at 33,676.

Investors essentially gave Gibson control over how conflicts would be
managed, as the offering documents lean on his expertise and provide no
mechanism for conflict disclosure or remediation should one arise. See Div. Ex.
24 at 17. If anything, this makes Gibson’s decision to breach the investors’ trust
and front run the Fund even more problematic.
352

353

Div. Br. 20–26.

354

Id. at 20–21, 24–25.

49

might put the Fund in a better position to liquidate its TRX position.355 As
noted earlier, Bystrom opined that consolidating shares made block
transactions easier because buyers would then know that no shares were being
left behind.356 Gibson’s experiences with Sequiera and Sands provided
examples of this, although those experiences also show that the Fund did not
necessarily need to purchase Hull’s shares for them to be sold as a block.357 In
short, it is true, as the Division maintains, that Hull’s shares did not
necessarily need to be consolidated with the Fund’s in one account to facilitate
their sale,358 but because Gibson was the one to suggest the consolidation, the
Division has not established that he lacked a good-faith belief that it would be
helpful to the Fund. I cannot retrospectively critique Gibson’s judgment on the
current record.
But this does not mean that the transaction was free of conflicts of
interest. As the Division argues, when Gibson arranged the trade with Hull on
the Fund’s behalf, Gibson owed Hull over $600,000 and Hull was paying
Gibson’s salary for advising the Fund.359 Gibson had a clear and obvious
conflict of interest. His impartiality in arranging any purchase from Hull for
the Fund would thus be questionable, regardless of the transaction’s merit. In
fact, Gibson testified that he was acting as an adviser to both Hull and the
Fund on this transaction.360 This is the kind of situation where an advisory
client must “be permitted to evaluate such overlapping motivations, through
appropriate disclosure, in deciding whether an adviser is serving ‘two masters’
or only one.”361

355

See Div. Ex. 94.

356

Tr. 1567; Resp’t Ex. 228 at 6.

357

Resp’t Ex. 62 at 1; Resp’t Ex. 93 at 1–2; Tr. 1404–05.

358

Div. Reply at 9–10.

359

Div. Br. 23–24; Div. Reply at 9.

360

Tr. 261.

Capital Gains, 375 U.S. at 196; cf. Frey v. Fraser Yachts, 29 F.3d 1153,
1156 (7th Cir. 1994) (a broker and fiduciary “cannot act as the representative
for both buyer and seller in the same transaction unless both parties are fully
aware of such dual representation and consent to it” and must “disclose to each
all facts which he knows or should know would reasonably affect the judgment
of each in permitting such dual agency” (quoting Quest v. Barge, 41 So.2d 158,
160 (Fla. 1949))); UBS AG, Stamford Branch v. HealthSouth Corp., 645 F.
361

50

As mentioned earlier, the Fund lacked any independent disclosure
mechanism. It is not possible to say how disclosure by Gibson would have
played out. It’s also not possible to say on the current record that the Fund’s
purchase of Hull’s shares harmed the Fund or that it lacked a legitimate
purpose. The problem is not that Gibson caused the Fund to buy Hull’s shares
but rather that he did so while operating under a serious, undisclosed conflict
of interest.362 It thus suffices to say that Gibson’s conduct failed to account for
the potential conflict of interest and he failed to take measures to remedy or
eliminate the conflict before executing the transaction.
Gibson’s conduct was reckless. He knew of his fiduciary responsibilities.
It should have been obvious to him that a transaction with Hull, to whom he
owed so much money and on whose salary payments he depended, conflicted
with his duties to the Fund. Again, it does not matter whether Gibson believed
the transaction would promote the Fund’s interest. There were still obvious
conflicts that Gibson recklessly disregarded in carrying out the Hull
transaction.
I reject, however, the Division’s arguments that the Hull transaction
violated the terms of the Fund’s offering memorandum. The Division asserts
that the sale was not done “at the current market price” as required.363 But
TRX closed at $3.60 that day and the Fund purchased at $3.60 per share. The
transaction was thus in accordance with the plain meaning of words “current
market price.”
The Division also contends that the transaction contravened the offering
memorandum because the Fund paid an extra commission to sell Hull’s shares
when it liquidated its holdings on November 10.364 But the offering
memorandum proscribed only “extraordinary brokerage commissions … in
connection with … [a] transaction,” and not “customary transfer fees or

Supp. 2d 135, 144 (S.D.N.Y. 2008) (explaining that under New York law, a
fiduciary violates his duty if he “omits to disclose any interest which would
naturally influence his conduct”).
It is true that Hull sold without giving a block discount or paying a
commission. But, as explained below, it’s not clear that the lack of a block
discount was problematic, and the failure to charge a commission was
marginal compared to the conflict of interest.
362

363

Div. Ex. 24 at 19; Div. Br. 21–22.

364

Div. Br. 22–23.

51

commissions.”365 Even if the commission paid on November 10 can be
considered “in connection with” the purchase of Hull’s shares on October 18—
an issue I do not decide—there is no evidence that it was not a “customary”
commission usually charged for such transactions, let alone evidence that it
was “extraordinary.”
The Division argues that notwithstanding the offering memorandum,
$3.60 per share was not the appropriate price for this transaction.366 As noted
above, if Hull had sold his shares into the market instead of to the Fund, then
given the stock’s trading volume, it would likely have depressed TRX’s share
price and he would not have been able to sell for $3.60 per share.367 But Hull
did not sell his shares into the market, and the Division has not shown that a
block discount is always appropriate in upstairs-market transactions like this
one.368 Even if some discount was warranted, it is not apparent what price
would have been more appropriate. Dr. Gibbons opined that Gibson could have
hired a valuation expert to determine fair market value, but presumably such
experts charge for their services.369 I cannot determine on this record whether
it would have been more cost effective for the Fund to hire an expert to value
the shares at a discount or just to pay the market price of $3.60 a share. Maybe,
as Dr. Gibbons opined, the Fund could have bought Hull’s stock slowly over
time in the market, and then each transaction would have been at market
price.370 But nothing required the Fund to structure the transaction in this

365

Div. Ex. 24 at 19.

366

Div. Br. 21–22; Div. Reply at 10–11.

367

See supra at 24–25.

The Division tried to show that on several occasions when the Fund sold
its shares in the upstairs market, it had to give a block discount, but Gibson
demonstrated that this was untrue. Tr. 265–78. Even though Dr. Gibbons
opined that the Fund did not purchase Hull’s shares at the current market
price—because the sale did not occur in the market—he did not specifically say
that Gibson should have obtained a block discount for the Fund in the Hull
transaction. See Tr. 945–46, 950–52. And Bystrom said that the
appropriateness of a block discount depends on the situation, and sometimes
buyers pay a premium to buy a stock. Tr. 1628, 1630.
368

369

Tr. 951.

370

See Tr. 950–51.

52

manner. In any event, whether or not the Fund charged Hull the wrong price,
Gibson was reckless in ignoring the conflicts inherent in the transaction.
Finally, the Division argues that because the Fund charged Hull no
commission, the transaction allowed Hull to avoid paying a commission when
the Fund ultimately sold his shares along with its own, and this needlessly
favored Hull.371 The Division is right about this. Even though Gibson concluded
that it was in the Fund’s best interest to purchase Hull’s shares, he should
have conducted the sale in a manner that did not favor Hull in any manner.
Because it was likely that the Fund would pay a commission when it sold its
shares into the market, Gibson should have recouped those costs for the Fund
by charging Hull a commission when purchasing his shares or disclosed what
he was doing.372 Yet, the Fund paid at most $6,866 extra to sell Hull’s shares,
of which Hull effectively paid more than 80% because of his ownership stake
in the Fund.373 Gibson’s failure to disclose this aspect of the transaction only
marginally adds to his reckless behavior surrounding this transaction.
Accordingly, Gibson violated Advisers Act Section 206(1) and (2) for his
conduct related to the Hull transaction.
7. Gibson violated Exchange Act Section 10(b) and Rule 10b-5.
The Division also alleges that Gibson’s front running and the Hull
transaction violated Exchange Act Section 10(b) and Rule 10b-5(a) and (c).374
Section 10(b) prohibits any person, using any means or instrumentality of
interstate commerce or the mails, “[t]o use or employ, in connection with the
purchase or sale of any security … any manipulative or deceptive device or
contrivance” that contravenes Commission rules promulgated under this
section.375 Rule 10b-5(a) and (c) prohibit any person, directly or indirectly, from
“employ[ing] any device, scheme, or artifice to defraud,” and from “engag[ing]
in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person.”376 The terms used in Rule 10b-5(a) and (c)
371

Div. Br. 22–23; Div. Reply 11.

Indeed it seems that the offering memorandum would have permitted the
Fund to charge Hull a “customary” commission. See Div. Ex. 24 at 19.
372

373

See supra at 25; see also supra nn. 205–06.

374

OIP ¶ 54; Div. Br. 34–36.

375

15 U.S.C. § 78j(b).

376

17 C.F.R. § 240.10b-5(a), (c) (emphasis added).

53

“‘provide a broad linguistic frame within which a large number of practices
may fit’” and “connote a broad proscription against conduct that deceives or
misleads another.”377 The Division must demonstrate scienter to establish any
violation of Section 10(b) and Rule 10b-5.378
Gibson’s conduct involved interstate commerce and the purchase and sale
of TRX stock. As to whether his actions were a fraudulent scheme or practice,
“for the purpose of rule 10(b)-5, an investment adviser is a fiduciary and
therefore has an affirmative duty of utmost good faith to avoid misleading
clients. This duty includes disclosure of all material facts and all possible
conflicts of interest.”379 And “nondisclosure in violation of a fiduciary duty
involves ‘feigning fidelity’ to the person to whom the duty is owed and is
therefore deceptive.”380 Gibson breached his duty to the Fund because he
recklessly failed to disclose or otherwise remediate his conflicts of interest. 381
This deceptive and fraudulent conduct violated Exchange Act Section 10(b) and
Rule 10b-5(a) and (c).
8. Gibson violated Advisers Act Section 206(4) and Rule 206(4)-8.
The Division also alleges that Gibson’s conduct violated Advisers Act
Section 206(4) and Rule 206(4)-8.382 Advisers Act Section 206(4) prohibits an
investment adviser from engaging “in any act, practice, or course of business
which is fraudulent, deceptive, or manipulative” as further prescribed by
Commission rule.383 Rule 206(4)-8 makes it prohibited under Section 206(4)
for any investment adviser to a pooled investment vehicle
to:

Dennis J. Malouf, Securities Act Release No. 10115, 2016 WL 4035575, at
*7 (July 27, 2016) (quoting SEC v. Clark, 915 F.2d 439, 448 (9th Cir. 1990)),
pet. denied, 933 F.3d 1248 (10th Cir. 2019).
377

378

Aaron v. SEC, 446 U.S. 680, 701–02 (1980).

379

Laird v. Integrated Res., Inc., 897 F.2d 826, 835 (5th Cir. 1990).

380

Malouf, 2016 WL 4035575, at *8 (quoting O’Hagan, 521 U.S. at 655).

Vernazza, 327 F.3d at 859 (“It is indisputable that potential conflicts of
interest are ‘material’ facts with respect to clients and the Commission.”).
381

382

OIP ¶ 57; Div. Br. 30–34.

383

15 U.S.C. § 80b-6(4).

54

(1) Make any untrue statement of a material fact or to
omit to state a material fact necessary to make the
statements made, in the light of the circumstances under
which they were made, not misleading, to any investor or
prospective investor in the pooled investment vehicle; or
(2) Otherwise engage in an act, practice, or course of
business that is fraudulent, deceptive, or manipulative
with respect to any investor or prospective investor in the
pooled investment vehicle.384
The Division need not prove scienter to establish a violation of Section 206(4);
a showing of negligence is sufficient.385
Gibson violated Section 206(4) and Rule 206(4)-8 for the conduct discussed
above. The rule applies because the Fund was a type of pooled investment
vehicle.386 And Gibson’s potential conflicts with the Fund would have been
material information to investors.387 Since, for the reasons discussed earlier,
Gibson’s actions constituted a fraud within the meaning of the securities laws,
he also deceived investors.
Gibson argues that he could not have violated this rule because he owed a
duty exclusively to the Fund and not to its investors.388 But Gibson misreads
the rule. It is true that because he breached no fiduciary duty to investors, he
did not directly defraud them under Section 206(2) through his lack of
disclosure.389 By its terms, however, Rule 206(4)-8 applies even when there is
no fiduciary duty to the investors.390 Conduct that operates as a fraud against
384

17 C.F.R. § 275.206(4)-8.

385

Steadman, 967 F.2d at 647.

See 17 C.F.R. § 275.206(4)-8(b); see also 15 U.S.C. § 80a-3(a)(1);
Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, 72
Fed. Reg. 44,756, 44,758 (Aug. 9, 2007); Tr. 140; Div. Ex. 31 at 2.
386

387

Vernazza, 327 F.3d at 859.

388

Resp’t Br. 26–27 (citing Goldstein, 451 F.3d at 881).

See Prohibition of Fraud, 72 Fed. Reg. at 44,760 (“Rule 206(4)-8 does not
create under the Advisers Act a fiduciary duty to investors or prospective
investors in a pooled investment vehicle not otherwise imposed by law.”).
389

See 17 C.F.R. § 275.206(4)-8; Inv. Adviser Advertisements, 84 Fed. Reg. at
67,527; SEC v. Quan, No. 11-cv-723, 2013 WL 5566252, at *16 n.10 (D. Minn.
390

55

the Fund can also by extension be materially misleading as to investors under
Rule 206(4)-8. The investors were deceived by Gibson’s failure to disclose his
front running and the Hull transaction or abstain from those transactions,
which brings his conduct within the ambit of Section 206(4) and Rule 206(4)-8.
In fact, this is exactly the type of misconduct the rule was designed to
capture.391
9. Gibson is not charged with making false statements to investors
regarding Geier Group and Geier Capital, and, in any event, such
misstatements appear immaterial.
Gibson contends that two additional allegations should not be grounds for
liability under Rule 206(4)-8: (1) his failure to disclose the dissolution of Geier
Group and the Georgia Geier Capital; and (2) his solicitation of two investors
for the Fund using offering documents falsely stating that Geier Group was a
registered investment adviser at the time.392 I agree. Although the OIP
mentions these facts—and they were proven at the hearing—the OIP
specifically predicates liability on the front running and the Hull
transaction.393 Furthermore, the Division, which does not contend in its
opening brief that these failures or false statements give rise to liability, failed
to preserve this argument.394 The OIP appears to mention these matters for a

Oct. 8, 2013) (“the existence of a fiduciary d

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Add138a5f37030adf. Public record. Not legal advice.