Bernard G. McGee v. Securities and Exchange Commission ( 2018 )

17-1240-ag
Bernard G. McGee v. Securities and Exchange Commission
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC
DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A
COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals
for the Second Circuit, held at the Thurgood Marshall
United States Courthouse, 40 Foley Square, in the City of
New York, on the 9th day of May, two thousand eighteen.
PRESENT: JOHN M. WALKER, JR.
DENNIS JACOBS,
Circuit Judges,
KATHERINE B. FORREST,*
District Judge.
- - - - - - - - - - - - - - - - - - - -X
Bernard G. McGee,
Petitioner,
-v.- 17-1240-ag
United States Securities and Exchange
Commission,
Respondent.
- - - - - - - - - - - - - - - - - - - -X
FOR PETITIONER: Megan K. Thomas, Sugarman Law
Firm, LLP, Syracuse, New York.
* Judge Katherine B. Forrest of the United States District
Court for the Southern District of New York, sitting by
designation.
1
FOR RESPONDENT: Robert B. Stebbins, General
Counsel for the Securities and
Exchange Commission (John W.
Avery, Deputy Solicitor,
Theodore J. Weiman, Senior
Litigation Counsel, and Benjamin
Vetter, Senior Counsel, on the
brief), Washington, D.C.
Petition for Review of an Order of the Securities and
Exchange Commission.
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
AND DECREED that the petition for review is DENIED.
Bernard McGee appeals the final order of the Securities
and Exchange Commission, Bernard G. McGee, Exchange Act
Rel. No. 80314 (Mar. 27, 2017), sustaining disciplinary
action by the Financial Industry Regulatory Authority, Inc.
(“FINRA”) against McGee for inducing a transaction and
conducting business activities in violation of Section
10(b) of the Securities Exchange Act (“Exchange Act”) and
FINRA rules. See 15 U.S.C. § 78j. We assume the parties’
familiarity with the underlying facts, the procedural
history, and the issues presented for review.
Bernard McGee was registered as a general securities
representative and principal with the FINRA member firm
Cadaret, Grant, & Co., Inc. (“Cadaret”). According to
FINRA’s findings, starting around 2010 McGee developed a
business relationship with James Griffin, the founder and
CEO of a company called 54Freedom that offered charitable
gift annuities (“CGAs”). McGee allegedly advised a client
(known as “CF”) to liquidate variable annuities valued at
approximately $492,000 (about half of her divorce
settlement), and to invest the proceeds in 54Freedom’s
CGAs. 54Freedom paid McGee a 10% commission ($49,264) for
facilitating CF’s investment. McGee failed to disclose the
commission payment to CF or Cadaret, and did not inform his
firm about his business relationship with 54Freedom.
54Freedom turned out to be a sham, and Griffin a fraud. CF
lost about $200,000 of her investment, and an investigation
prompted by CF’s attorney led to McGee’s resignation from
Cadaret.
2
FINRA subsequently charged McGee with: (1) inducing CF
to cash in variable annuities for a CGA, and failing to
disclose the fee he would receive in connection with that
transaction, in willful violation of Section 10(b) of the
Exchange Act and FINRA Rules 2020 and 2010; (2) making an
unsuitable recommendation to CF in violation of NASD Rule
2310 and FINRA Rule 2010; (3) failing to disclose his
relationship with 54Freedom to his employment member firm,
in violation of FINRA Rules 3270 and 2010; (4) failing to
timely update his Form U4 to reflect his new office
address, in violation of FINRA Rules 1122 and 2010; and (5)
making misrepresentations on member-firm compliance
questionnaires. The FINRA Hearing Panel found that FINRA
proved the charged violations and ordered McGee to pay CF
$237,643.25 in restitution, plus interest. It also barred
McGee permanently from associating with any FINRA member
firm.
The SEC sustained FINRA’s findings and upheld the
sanctions. We “affirm the SEC’s findings of fact if
supported by substantial evidence.” VanCook v. SEC, 653
F.3d 130, 137 (2d Cir. 2011); 15 U.S.C. § 77i. “[W]e will
set aside the SEC’s actions, findings, or conclusions of
law only if they are ‘arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with the law.’”
Mathis v. SEC, 671 F.3d 210, 216 (2d Cir. 2012) (quoting
5 U.S.C. § 706(2)(a)).
McGee first challenges the Commission’s factual finding
that he even made the recommendation to CF to liquidate her
variable annuities and pursue 54Freedom CGAs. Relying on
Griffin’s exposure as a criminal and snippets of CF’s
testimony, McGee urges that it was Griffin who convinced CF
to part with her variable annuities and invest in CGAs, and
that in executing the transactions McGee was merely
following his client’s instructions.
Even if McGee’s narrative were a “plausible alternative
interpretation of the evidence,” the question is whether
substantial evidence supports the SEC’s finding that McGee
made the recommendation. Cablevision Sys. Corp. v. FCC,
570 F.3d 83, 92-93 (2d Cir. 2009); see Ill. Cent. R.R. Co.
v. Norfolk & W. Ry. Co., 385 U.S. 57, 69 (1966) (“[T]he
3
possibility of drawing two inconsistent conclusions from
the evidence” does not mean that the agency’s findings are
not supported by substantial evidence.) (internal quotation
marks omitted).
The SEC’s finding has sufficient support in the record.
McGee relocated his offices to 54Freedom’s premises in
December 2010 in anticipation of a budding partnership.
His assistant testified that around that time, McGee
discussed how he had identified a client as a test case for
54Freedom’s investment product; and McGee later
acknowledged that he had “suggested” the 54Freedom CGA to
CF as a way for her to accrue tax benefits. J. App’x at
140-44, 670-75. McGee proceeded to share 54Freedom’s
marketing materials with CF in January and February 2011.
And in March 2011, McGee executed every step of the
transaction by assisting CF with the surrender of her
variable annuities and the delivery of her check to
54Freedom. The SEC could reasonably infer from this
undisputed timeline that McGee made the recommendation.
See Richardson v. Perales, 402 U.S. 389, 401 (1971); Ill.
Cent. R.R. Co., 385 U.S. at 69 (we leave undisturbed the
SEC’s “conclusions that are reasonably drawn from the
evidence and findings in the case”).
McGee argues that even if this Court sustains the
finding that he made the CGA recommendation, the
transaction did not violate Section 10(b) of the Exchange
Act (or equivalent FINRA Rules) as a matter of law. He
contends that the Exchange Act and FINRA rules are not
implicated because CGAs are insurance products under New
York law.2 An individual violates Section 10(b) and Rule
10b-5 when he or she, “in connection with the purchase or
sale of a security ... ma[kes] a material representation
(or a material omission if the defendant had a duty to
speak) or used a fraudulent device.” VanCook, 653 F.3d at
138; see 17 C.F.R. § 240.10b-5 (2000); 15 U.S.C. § 78j.
2 McGee characterizes his challenge to FINRA’s ruling as
“jurisdictional.” Pet. Br. at 8, 10. But FINRA and the
SEC have jurisdiction stemming from their statutory
authority to “appropriately discipline[] their members.”
Fiero v. Fin. Indus. Regulatory Auth., Inc., 660 F.3d 569,
574 (2d Cir. 2011) (internal quotation marks omitted).
4
The omission or representation need only “coincide” with
the purchase or sale of a security to satisfy the “in
connection with” requirement. SEC v. Zandford, 535 U.S.
813, 819 (2002).
McGee failed to disclose a substantial payment from the
issuer of the CGAs (the 10% fee) made in exchange for
facilitating the liquidation-to-purchase scheme. A non-
disclosure of this nature related to economic self-interest
and made in the course of an investment recommendation is a
material omission under the securities laws. See Press v.
Chemical Investment Servs. Corp., 166 F.3d 529, 534 (2d
Cir. 1999) (defining the duty of a broker under Rule 10b-5
to disclose material information to a client in making an
investment recommendation); In re Time Warner Inc. Secs.
Litig., 9 F.3d 259, 264 (2d Cir. 1993) (same); see also
Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d
Cir. 1970); United States v. Nouri, 711 F.3d 129, 142-43
(2d Cir. 2013).
Even if we accept McGee’s contention that the 54Freedom
CGAs were insurance products and not securities, the
material omission of the commission payment occurred “in
connection with” the sale of a security: CF’s variable
annuities. See Lander v. Hartford Life & Annuity Ins. Co.,
251 F.3d 101, 109 (2d Cir. 2001) (noting variable annuities
of the kind surrendered here are securities products).
True, the material omission related to one stage of a
multifaceted transaction and not the other. But McGee does
not escape the reach of Section 10(b) and FINRA rules.
While surrendering CF’s variable annuities may have been
“perfectly lawful” on its own, in this case it was integral
to the reinvestment of the proceeds in a fraudulent manner.
Zandford, 535 U.S. at 819-20.
Substantial evidence also supports the SEC’s findings
that McGee violated FINRA’s reporting requirements, failed
to report his outside business activities, and made false
statements on compliance questionnaires. With respect to
reporting requirements, a FINRA member must update the Form
U4 within 30 days of a change in office location. FINRA
Rule 1122. McGee testified on numerous occasions that he
moved into the 54Freedom premises in early 2011. See J.
App’x at 313-18. And it is undisputed that McGee did not
5
update his Form U4 to reflect a new office location until
December 2011. It was reasonable for the agency to credit
this testimony and find that more than a month had passed
between McGee’s relocation and the completion of the
required form. McGee later offered different testimony
about his business plan, but contradictory evidence does
not foreclose the agency’s conclusion. See Ill. Cent. R.R.
Co., 385 U.S. at 69; Cablevision Sys. Corp., 570 F.3d at
92-93.
FINRA Rule 3270 requires that any registered person
“provide[] prior written notice” to the member firm before
becoming a partner or contractor of another person or being
“compensated” or “hav[ing] the reasonable expectation or
compensation” as a result of any outside business activity.
FINRA Rule 3270. It is undisputed that McGee failed to
provide written notice of his activities with 54Freedom to
Cadaret, despite contemplating a joint venture with
54Freedom, opening an office on its premises, and receiving
$59,264 from 54Freedom in outside commissions. Further,
substantial evidence in the form of direct testimony from
McGee and his assistant supported the SEC’s conclusion that
McGee used an email address to conduct securities business
that he did not disclose in Cadaret’s annual questionnaire.
J. App’x at 160-161, 327-33, 557-61.
Lastly, McGee challenges FINRA’s sanctions as excessive
and oppressive. See 15 U.S.C. § 78s(e)(2). We “will not
disturb the SEC’s choice of sanction unless it is
‘unwarranted in law or without justification in fact.’”
Mathis, 671 F.3d at 216 (quoting VanCook, 653 F.3d at 137).
The sanctions here are easily justified on this record.
The SEC found that McGee’s actions caused a substantial
loss to his client. McGee so acted without regard to FINRA
guidelines, and when the fraud was discovered, he attempted
to conceal his conduct from his employer’s investigation.
That Griffin is responsible for additional, distinct
fraudulent conduct does not absolve McGee of his own
responsibility for these transactions. FINRA’s award of
restitution and imposition of a trading ban were not
excessive or oppressive in light of the character of
McGee’s violations. See McCarthy v. SEC, 406 F.3d 179, 190
(2d Cir. 2005).
6
For the foregoing reasons, and finding no merit in
McGee’s other arguments, we hereby DENY the petition for
review.
FOR THE COURT:
CATHERINE O’HAGAN WOLFE, CLERK
7