SEC v. JW Barclay Co ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
4-5-2006
SEC v. JW Barclay Co
Precedential or Non-Precedential: Precedential
Docket No. 04-3536
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PRECEDENTIAL
IN THE UNITED STATES COURT
OF APPEALS
FOR THE THIRD CIRCUIT
________________
Case No: 04-3536
SECURITIES AND EXCHANGE COMMISSION
v.
J.W. BARCLAY & CO., INC.;
JOHN A. BRUNO
John A. Bruno,
Appellant
________________
On Appeal from the United States
District Court
for the District of New Jersey
(Civ No. 02-3164)
District Judge: William H. Walls
________________
Argued December 14, 2005
Before: SMITH, BECKER, and GREENBERG, Circuit Judges
(Filed: April 5, 2006 )
________________
John A. Bruno
P.O. Box 3175
Sea Bright, NJ 07760
Appellant, pro se
Edward M. Posner (Argued)
Drinker, Biddle & Reath
18th & Cherry Streets
One Logan Square
Philadelphia, PA 19103
Amicus curiae
Mark R. Pennington (Argued)
Angel Yang
Securities and Exchange
Commission
100 F Street, N.E.
Washington, DC 20549
Counsel for appellee
_________________
OPINION OF THE COURT
_________________
SMITH, Circuit Judge.
This appeal arises out of a defunct broker-dealer’s unpaid
penalty for a securities law violation. The Securities and Exchange
Commission (“SEC”) filed an application with the District Court
seeking an order directing the broker-dealer to pay the penalty. In
addition, the SEC also sought a judgment that the former president of
2
the company was jointly and severally liable for this unpaid penalty
and an order directing him to pay the penalty. Following discovery,
the District Court granted the SEC’s unopposed motion for summary
judgment and ordered the former president to pay the penalty.
Because we hold (1) that the Securities Exchange Act of 1934
(“Exchange Act”) provides for a control person’s joint and several
liability to the SEC for a debt in the amount of an unpaid SEC penalty
when that control person induced and was a culpable participant in
the controlled person’s failure to pay the penalty and (2) that the
District Court had jurisdiction in this case to grant an order directing
such a control person to fulfill this obligation, we will affirm the
judgment of the District Court.
I.
J.W. Barclay & Co., Inc. (“Barclay”) was a securities broker-
dealer. Appellant John Bruno (“Bruno”) was one of the founders of
Barclay. Bruno owned 68 percent of Barclay, and he acted as
Barclay’s President from July of 1991 through at least February of
2003.
On October 20, 1998, the SEC instituted administrative
proceedings against Barclay, alleging violations of § 17(a) of the
Exchange Act1 and Rule 17-a-52 due to Barclay’s failure to timely file
1
Section 17(a) provides in relevant part:
a) Rules and regulations
(1) Every national securities exchange, member
thereof, broker or dealer who transacts a business
in securities through the medium of any such
3
a Form BD-Y2K. Form BD-Y2K required a broker-dealer to supply
information about the broker-dealer’s Year 2000 preparedness.3
In February of 1999, an Administrative Law Judge (“ALJ”)
held a hearing on this matter. On August 2, 1999, the ALJ found that
Barclay had willfully violated § 17(a) and Rule 17a-5 and ordered
Barclay to pay a $50,000 civil penalty. Barclay appealed the ALJ’s
decision and the SEC heard oral argument on July 18, 2001. On
October 15, 2001, the SEC affirmed the ALJ’s finding that Barclay
had willfully violated § 17(a) and Rule 17a-5, but it reduced Barclay’s
civil penalty to $25,000 and directed Barclay to make payment on the
member, registered securities association,
registered broker or dealer, registered municipal
securities dealer, registered securities information
processor, registered transfer agent, and registered
clearing agency and the Municipal Securities
Rulemaking Board shall make and keep for
prescribed periods such records, furnish such
copies thereof, and make and disseminate such
reports as the Commission, by rule, prescribes as
necessary or appropriate in the public interest, for
the protection of investors, or otherwise in
furtherance of the purposes of this chapter. . . .
15 U.S.C. § 78q(a).
2
Rule 17-a-5 provides for the nature and form of reports
required by the SEC from broker-dealers. See 17 C.F.R. §
240.17a-5.
3
See 17 C.F.R. § 240.17a-5(e)(5).
4
penalty within thirty days (“Order”).
The SEC sent copies of the Order to Barclay’s attorney of
record, and Barclay’s outside counsel notified Bruno that Barclay
owed payment of the $25,000 penalty to the SEC. Barclay did not
appeal the Order, but the company also did not pay the penalty within
thirty days, or at any time thereafter.
In the meantime, Barclay had ceased operation as a broker-
dealer on December 27, 2000, because it was in violation of the
SEC’s net capital requirements. At the end of 2000, Barclay’s
liabilities were greater than its assets.4 During 2001, while the ALJ’s
decision was on appeal to the SEC, Bruno caused Barclay to
concentrate its remaining assets, a total of more than $145,000, into
Barclay’s bank account. Bruno then caused Barclay to issue a check
to himself in the amount of $90,000 and a check to another employee
for $43,700. Bruno then continued to cause Barclay to place its
deposits into this account and to issue checks from this account,
primarily to pay legal fees. Even after the SEC issued the Order
directing Barclay to pay the $25,000 penalty within thirty days, Bruno
did not cause Barclay to use any of its funds to pay any part of the
$25,000 penalty.
On July 1, 2002, the SEC filed an application with the District
Court pursuant to § 21(e) of the Exchange Act, 15 U.S.C. § 78u(e)
4
Barclay was not, however, formally dissolved or placed into
bankruptcy.
5
(“Application”).5 In Count I of the Application, the SEC alleged that
Barclay had not paid its civil penalty as ordered by the SEC and
requested an order commanding Barclay to pay the penalty. In Count
II of the Application, the SEC alleged that Bruno had “knowingly
failed to cause Barclay to comply with the Commission’s Order,”
argued that Bruno was jointly and severally liable for Barclay’s
5
Section 21(e) provides:
Upon application of the Commission the district
courts of the United States and the United States
courts of any territory or other place subject to the
jurisdiction of the United States shall have
jurisdiction to issue writs of mandamus,
injunctions, and orders commanding (1) any
person to comply with the provisions of this
chapter, the rules, regulations, and orders
thereunder, the rules of a national securities
exchange or registered securities association of
which such person is a member or person
associated with a member, the rules of a
registered clearing agency in which such person is
a participant, the rules of the Public Company
Accounting Oversight Board, of which such
person is a registered public accounting firm or a
person associated with such a firm, the rules of
the Municipal Securities Rulemaking Board, or
any undertaking contained in a registration
statement as provided in subsection (d) of section
78o of this title . . . .
15 U.S.C. § 78u(e).
6
unpaid penalty “by virtue of his status as a control person under
Section 20(a) of the Exchange Act,”6 and requested an order
commanding Bruno to pay the penalty.
Barclay did not make an appearance before the District Court
and final judgment by default was entered against Barclay. On
September 9, 2002, Bruno filed a pro se answer and motion to
dismiss, arguing that there was “no basis for bringing this action”
against him because the Order was not issued against him, he was not
named in the Order, and he was not a party in the proceeding before
the SEC in which the Order was issued. The SEC moved to strike
Bruno’s answer and Bruno filed a response to this motion, which the
District Court treated as an amended answer and motion to dismiss
under Rule 12(b)(6).
In his Second Defense within his response to the SEC’s
motion to strike, Bruno argued that he was “not liable for a debt
incurred by Barclay” and that to obtain an order against him the SEC
“would have to bring a separate action or proceeding against him.”
In his Fourth Defense, Bruno argued that the SEC could not assert
control person liability against him under § 20(a) “and hold him
6
Section 20(a) provides:
(a) Joint and several liability; good faith
defenseEvery person who, directly or indirectly,
controls any person liable under any provision of
this chapter or of any rule or regulation thereunder
shall also be liable jointly and severally with and
to the same extent as such controlled person to
any person to whom such controlled person is
liable, unless the controlling person acted in good
faith and did not directly or indirectly induce the
act or acts constituting the violation or cause of
action.
15 U.S.C. § 78t(a).
7
responsible for the civil penalty against Barclay” because Bruno was
not a party to the proceedings before the SEC and no order was issued
against him.
The District Court then denied the SEC’s motion to strike.
The District Court also held that the Application stated a claim
against Bruno under § 20(a) and denied his motion to dismiss.
After the completion of discovery, the SEC filed a motion for
summary judgment which included a statement of undisputed facts.
Bruno did not oppose this motion for summary judgment and it was
decided without oral argument.
On July 28, 2004, the District Court granted the SEC’s motion
for summary judgment. The District Court held that “[t]he facts set
forth by the SEC in this unopposed motion for summary judgment
establish each of the elements required for the SEC to prevail on its
Section 20(a) action against Bruno.” Specifically, the District Court
declared that the undisputed facts established that: (1) Barclay was
subject to an SEC order requiring it to pay a $25,000 civil penalty; (2)
Barclay had failed to pay this penalty; (3) Bruno had the authority and
power to direct the payment of this penalty; and (4) Bruno caused
Barclay to pay himself and another employee funds from Barclay’s
bank accounts in 2001, which in turn caused Barclay’s failure to
comply with the Order because it was left with insufficient funds.
Applying § 20(a) to these undisputed facts, the District Court held
that “Bruno both induced and culpably participated in Barclay’s
failure to pay the civil penalty. Accordingly, Bruno, as a control
person, is jointly and severally liable for Barclay’s failure to pay the
civil penalty ordered by the SEC.”
Bruno’s pro se appeal of the District Court’s order granting
the SEC’s motion for summary judgment followed. On June 30,
2005, we appointed Edward M. Posner of the law firm Drinker,
8
Biddle & Reath as amicus curiae.7 We asked the amicus to address
the question of “whether the SEC has standing to bring a claim
against a control person under Section 20(a) of the Exchange Act, 15
U.S.C. § 78t, in an enforcement action filed pursuant to Section 21(e)
of the Exchange Act, 15 U.S.C. § 78u(e),” citing the circuit split on
this issue in SEC v. Coffey, 493 F.2d 1304 (6th Cir. 1974), and SEC
v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996). The amicus
identified a third case addressing this issue, SEC v. Stringer, No. Civ.
02-1341-ST, 2003 WL 23538011 (D. Or. Sept. 3, 2003).
II.
A.
The District Court claimed original jurisdiction over the
SEC’s count against Bruno pursuant to 15 U.S.C. § 78u(e). We have
jurisdiction over the final judgment of the District Court pursuant to
28 U.S.C. § 1291. We review the District Court’s grant of summary
judgment de novo. See, e.g., A.M. v. Luzerne County Juvenile Det.
Ctr., 372 F.3d 572, 578 (3d Cir. 2004). Summary judgment is
appropriate if “the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.” Fed. R. Civ. Pro.
56(c). Once the moving party meets this initial burden, the adverse
party “may not rest upon the mere allegations or denials of the
adverse party’s pleading, but the adverse party’s response, by
affidavits or as otherwise provided in this rule, must set forth specific
facts showing that there is a genuine issue for trial.” Fed. R. Civ. Pro.
56(e). “If the adverse party does not so respond, summary judgment,
7
We thank Mr. Posner for composing an illuminating brief
and appearing before us to argue this matter. We further
commend Mr. Posner for the excellent manner in which he
conducted these services for the Court.
9
if appropriate, shall be entered against the adverse party.” Id.
B.
The Supreme Court has explained that the federal securities
laws should be “construed ‘not technically and restrictively, but
flexibly to effectuate its remedial purposes.’” E.g., SEC v. Zanford,
535 U.S. 813, 819 (2002) (citing Affiliated Ute Citizens of Utah v.
United States, 406 U.S. 128, 151 (1972) (quoting SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963))).
Nonetheless, “[t]he broad remedial goals of the [securities laws] are
insufficient justification for interpreting a specific provision ‘more
broadly than its language and the statutory scheme reasonably
permit.’” Pinter v. Dahl, 486 U.S. 622, 653 (1988) (citing Touche
Ross & Co. v. Redington, 442 U.S. 560, 578 (1979) (quoting SEC v.
Sloan, 436 U.S. 103, 116 (1978))); see also Aaron v. SEC, 446 U.S.
680, 695 (1980); Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d
682, 690 n.11 (3d Cir. 1991).
Accordingly, citing the remedial purposes of the Exchange
Act, the Supreme Court has found implied private causes of action
arising under § 14(a) of the 1934 Act, see J.I. Case Co. v. Borak, 377
U.S. 426, 429-34 (1964), and § 10(b) of the 1934 Act, see
Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9
(1971). The Court in Touche Ross, however, declined to find a
general implied private right of action for violations of the Act arising
out of § 27 of the 1934 Act, which grants to the federal district courts
exclusive jurisdiction over violations of the Act and suits to enforce
any liability or duty created by the Act or rules thereunder. See 442
U.S. at 576-78. The Court reasoned that “[t]he source of plaintiffs’
rights must be found, if at all, in the substantive provisions of the
1934 Act which they seek to enforce, not in the jurisdictional
provision.” Id. at 577.
The Court also has held that “the scope of liability created by
10
a particular section of the [securities laws] must rest primarily on the
language of that section.” Pinter, 486 U.S. at 653; see also Central
Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511
U.S. 164, 173-78 (1994) (holding that a private plaintiff could not
bring an aiding and abetting suit under § 10(b) because the text of §
10(b) did not reach aiding and abetting); Ballay, 925 F.2d at 687-89
(holding that the text of § 12(2) of the 1933 Act did not create a cause
of action for an oral misrepresentation in the secondary market).
Similarly, the Court has looked primarily to the specific language of
the relevant provisions when deriving the scienter requirements for
actions arising under those provisions. See Aaron, 446 U.S. at 689-97
(construing § 17(a)(1), § 17(a)(2), and § 17(a)(3) of the 1933 Act and
§ 10(b) of the 1934 Act); Ernst & Ernst v. Hochfelder, 425 U.S. 185,
197-201 (1976) (construing § 10(b)). Nonetheless, the Court has also
cited the remedial purposes of the securities laws when defining
specific terms. See generally Landreth Timber Co. v. Landreth, 471
U.S. 681 (1985) (construing the term “security” under the 1933 and
1934 Acts); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 444-49
(1976) (construing the term “material fact” under Rule 14a-9).
Finally, citing the remedial purposes of the securities laws, the
Court has held that the existence of an express private action under
one provision of the securities laws does not preclude the existence
of an overlapping implied private cause of action under another
provision where the two provisions address “different types of
wrongdoing.” See Herman & MacLean v. Huddleston, 459 U.S. 375,
381-87 (1983) (holding that an express remedy under § 11 of the
1933 Act for misleading registration statements did not preclude an
overlapping implied private cause of action for fraudulent
misrepresentation under § 10(b) of the 1934 Act). The Court in
Huddleston reasoned that this “cumulative construction of the
securities laws . . . furthers their broad remedial purposes.” Id. at
386. The Court also noted that if defrauded purchasers of securities
could rely only on § 11, they would have no recourse against certain
individuals who could not be reached under § 11, “even if the
11
excluded parties engaged in fraudulent conduct while participating in
the registration statement.” Id. at 386 n.22. Accordingly, the Court
observed that without a cumulative construction of § 10(b), “[t]he
exempted individuals would be immune from federal liability for
fraudulent conduct even though Section 10(b) extends to ‘any person’
who engages in fraud in connection with a purchase or sale of
securities.” See id.
III.
The plain language of § 20(a) supports our holding that the
SEC had a claim for payment from Bruno under § 20(a) because
Bruno was jointly and severally liable to the SEC for a debt in the
amount of Barclay’s unpaid penalty. In order for Bruno to be jointly
and severally liable to the SEC under § 20(a): (1) the SEC has to be
a person; (2) to whom the controlled person, Barclay, was liable; (3)
as a result of some act or acts constituting a violation or cause of
action under any provision of the Exchange Act or any rule or
regulation thereunder. See 15 U.S.C. § 78t(a).8
8
In addition, Bruno must have controlled Barclay within the
meaning of § 20(a). See 15 U.S.C. § 78t(a). Further, Bruno
must have directly or indirectly induced the act or acts
constituting the violation or cause of action giving rise to the
controlled person’s liability. See id. Finally, Bruno must have
been a “culpable participant” in the “act or acts constituting the
violation or cause of action.” See Rochez Bros. v. Rhoades, 527
F.2d 880, 889-90 (3d Cir. 1975). These issues are not before us
on this appeal, but we note that the undisputed facts set forth by
the SEC in its unopposed motion for summary judgment
established that Bruno had the authority and ability to direct
Barclay to pay the penalty. Accordingly, the District Court
correctly held that Bruno controlled Barclay within the meaning
of § 20(a). Similarly, the undisputed facts established that
Bruno’s transfer of Barclay’s assets to himself and another
12
A.
We join the Second Circuit and hold that the SEC is a
“person” within the meaning of § 20(a). See First Jersey, 101 F.3d
at 1472. We therefore decline to join the Sixth Circuit’s contrary
holding that the SEC is not a “person” under § 20(a). See Coffey, 493
F.2d at 1318.
The Sixth Circuit in Coffey reasoned that because § 20(b) of
the Exchange Act9 “sets forth the standard of lawfulness to which a
controlling person must conform, on penalty of liability in injunction
to the SEC or criminal prosecution,” § 20(a) was meant only “to
specify the liability of controlling persons to private persons suing to
vindicate their interests.” Id. Accordingly, the Sixth Circuit held that
the SEC was “not a person under section 20(a)” and that the SEC
could not rely on § 20(a) when seeking personal injunctions against
corporate officials for a corporation’s alleged violations of the
securities laws. Id.
employee caused Barclay’s inability and subsequent failure to
pay the penalty, and therefore the District Court correctly held
that Bruno both induced and was a culpable participant in
Barclay’s failure to pay the penalty.
9
Section 20(b) provides:
(b) Unlawful activity through or by means of any
other person
It shall be unlawful for any person, directly or
indirectly, to do any act or thing which it would
be unlawful for such person to do under the
provisions of this chapter or any rule or regulation
thereunder through or by means of any other
person.
15 U.S.C. § 78t(b).
13
Regardless of the merits of this reasoning in 1974, the Sixth
Circuit’s conclusion that the SEC is not a person under § 20(a) was
severely undermined in 1975, when an amendment to the Exchange
Act modified the Exchange Act’s definition of “person.” See 15
U.S.C. § 78c(a)(9) (1975 Amendments). As of 1974, the Exchange
Act had defined a “person” as “an individual, a corporation, a
partnership, an association, a joint stock company, a business trust, or
an unincorporated organization.” The 1975 amendment, however,
explicitly expanded the scope of the Exchange Act’s definition of a
“person” so as to include governments and government agencies,
changing it to “a natural person, company, government, or political
subdivision, agency, or instrumentality of a government.” Id.
Accordingly, while the Sixth Circuit’s limitation of § 20(a)
claims to “private persons” may have been supported by the
Exchange Act’s statutory definition of “person” as of 1974, the
Exchange Act’s current statutory definition of “person” explicitly
includes government agencies such as the SEC.10 Consequently, we
10
Subsequent legislative history confirms our construction of
§20(a) in light of the Exchange Act’s statutory definition of
“person.” In the Insider Trading Sanction Act of 1984, 98 Stat.
1264, Congress authorized the SEC to collect civil penalties for
insider-trading violations, but also specifically exempted this
new provision from the operation of § 20(a). See id. (“Section
20(a) of this title . . . shall not apply to an action brought under
this paragraph.”). The House Report stated that this legislation
nonetheless “would not change existing law with respect to
other Commission remedies that may be used against these
classes of law violators. . . . Under current law, the Commission
could impose liability on a controlling person under Section
20(a) of the Exchange Act. . . . The bill does not alter this
situation in any way.” 1983 House Report, H.R. Rep. No. 98-
355, 98 Cong. 1st Sess. 10 (Sept. 15, 1983), reprinted in 1984
U.S.C.C.A.N. 2274. Accordingly, although this legislative
14
agree with the Second Circuit that the plain language of 15 U.S.C.
78c(a)(9), as amended in 1975, requires our holding that the SEC is
a “person” who may bring a claim under § 20(a). See First Jersey,
101 F.3d at 1472.11
B.
We further hold that in the circumstances of this case, Barclay
was liable to the SEC for a debt in the amount of the unpaid penalty
within the meaning of § 20(a). We begin with the observation that §
20(a) explicitly provides for a control person’s joint and several
liability. “A liability is joint and several when ‘the creditor may sue
one or more of the parties to such liability separately, or all of them
together, at his [or her] option.’” United States v. Gregg, 226 F.3d
253, 260 (3d Cir. 2000) (citation omitted). Accordingly, “an assertion
of joint and several liability is an assertion that each defendant is
liable for the entire amount, although the plaintiff only recovers the
entire amount once.” Golden v. Golden, 382 F.3d 348, 355 n.5 (3d
Cir. 2005) (emphasis in original). Joint and several liability can arise
in many different contexts. See, e.g., id. (various torts); Gregg, 226
F.3d at 260 (statutory damages for violations of the Freedom of
history does not describe in detail how the SEC could make use
of § 20(a), the 1984 Congress apparently construed § 20(a) as
potentially providing standing to the SEC in civil penalty cases
such that Congress deemed it necessary to specifically exempt
this new penalty provision from the operation of § 20(a).
11
The Exchange Act provides that its statutory definitions are
to be used “unless the context otherwise requires.” See 15
U.S.C. § 78c(a). As discussed in Part III.D, infra, our
construction of § 20(a) serves the remedial purposes of the
Exchange Act, and so we hold that the context supplied by §
20(a) does not require us to use a more limited definition of
“person.”
15
Access to Clinic Entrances Act); Janney Montgomery Scott, Inc. v.
Shepard Niles, Inc., 11 F.3d 399, 406 (3d Cir. 1993) (co-obligors
under a contract).
In this case, the relevant liability of the controlled person for
the purpose of defining the control person’s joint and several liability
under § 20(a) is the controlled person’s obligation to pay some
amount to a creditor when that claim for payment arises under the
securities laws.12 Given the uncontested facts of this case, we hold
that Barclay was liable to the SEC within the meaning of § 20(a) for
a debt in the amount of the unpaid penalty. On this issue, we take
note of the definitions of “debt” and “debtor” in the Federal Debt
Collection Procedures Act, 28 U.S.C. § 3001 et seq. That Act defines
a “debt” to the United States in part as “an amount that is owing to
the United States on account of a . . . penalty . . . .” 28 U.S.C. §
3002(3)(B). A “debtor” in turn is a “person who is liable for a debt
or against whom there is a claim for a debt.” 28 U.S.C. § 3002(4).
Although these definitions do not appear in the Exchange Act,
we find them instructive on the general relationship between unpaid
penalties and the liability of persons to the United States and its
agencies. In accordance with these definitions, we hold that when
Barclay failed to pay its penalty within thirty days after the SEC
issued its Order and the administrative proceedings concluded,
Barclay became a debtor to the SEC.13 Barclay thus was liable for a
12
For the purposes of § 20(a), the financial obligation of the
controlled person to the creditor must arise under the Exchange
Act or any rule or regulation thereunder. See 15 U.S.C. § 78t(a).
13
The SEC conceded in its briefs that: (1) Barclay was not
liable to the SEC for the unpaid penalty until Barclay failed to
pay the penalty order; (2) Barclay’s failure to pay the penalty
order did not occur until thirty days after the administrative
proceedings concluded; and (3) Bruno’s joint and several
16
debt to the SEC in the amount of this unpaid penalty as of that date.14
liability under § 20(a) for the amount of the unpaid penalty did
not arise until that date. Consequently, we also hold that
Bruno’s joint and several liability for this debt under § 20(a) did
not arise until that time.
14
Because of the limited nature of the SEC’s claim in this
case, we need not reach the issue of whether the SEC could have
used § 20(a) to impose joint and several liability on Bruno
insofar as he may have induced and been a culpable participant
in Barclay’s violations of § 17(a) and Rule 17-a-5, rather than
insofar as he induced and was a culpable participant in Barclay’s
failure to pay the penalty. Nonetheless, we note that such a
claim would have sought to impose derivative legal liability on
Bruno for Barclay’s violations of the Exchange Act, and we
agree with the Sixth Circuit in Coffey that § 20(b), not § 20(a),
defines the general “standard of lawfulness to which a
controlling person must conform.” See 493 F.2d at 1318. We
also agree with the United States District Court for the District
of Oregon, which reasoned that while a control person could be
held liable in an SEC enforcement action under § 20(b) for
certain violations committed by a controlled person, in such a
case the SEC itself would not be an “injured party,” and the
defendants in such an enforcement action would not be “liable
to the SEC the way that [they] would be liable to a private
plaintiff.” Stringer, WL 23538011 at *6. In our case, however,
the SEC is not claiming that Barclay is liable to the SEC for its
violations of § 17(a) and Rule 17-a-5, but rather that Barclay is
liable to the SEC for a debt in the amount of its unpaid penalty.
Barclay in that sense is liable to the SEC for this debt just as any
debtor would be liable to a private creditor because of the
debtor’s unpaid financial obligation to the claimant. Similarly,
Bruno is individually liable to the SEC for this debt just as any
jointly and severally liable party would be individually liable to
17
C.
Finally, we hold that Barclay’s failure to pay the penalty was
an act constituting a cause of action under a provision of the
Exchange Act, specifically § 21(e).15 We have noted that a “cause of
action” has been defined as “the fact or facts which give a person a
right to judicial relief . . . [or] to institute judicial proceedings.” In re
Remington Rand Corp., 836 F.2d 825, 830 n.5 (3d Cir. 1988)
(quoting Black’s Law Dictionary 201 (5th ed. 1979)). In this case,
the relevant facts arose when Barclay failed to pay its penalty within
thirty days as provided by the Order. At that point, the SEC had a
cause of action against Barclay arising under a provision of the
Exchange Act because § 21(e) provides in part that the district courts
a private creditor because of the debtor’s unpaid financial
obligation to that creditor.
15
We note again that the relevant act was not Barclay’s
original violation of § 17(a) and Rule 17-a-5, and that the SEC
has not sought to impose control person liability on Bruno for
that act. Rather, the only relevant act was Barclay’s failure to
comply with the Order by failing to pay its penalty within thirty
days. The control person, however, need not have induced a
violation of the Exchange Act in order to have joint and several
liability under § 20(a). The plain language of § 20(a) provides
that the control person must have induced “the act or acts
constituting the violation or cause of action.” See 15 U.S.C. §
78t(a) (emphasis added). The disjunctive “or” in this clause
implies that joint and several liability for control persons can
arise under § 20(a) where the control person has induced acts
which constitute a cause of action arising under the Exchange
Act, even if the control person did not induce acts which
constitute a violation under the Exchange Act.
18
of the United States, upon application by the SEC, shall have
jurisdiction to issue orders commanding any person to comply with
the SEC’s orders. See 15 U.S.C § 78u(e). Accordingly, the SEC was
entitled to obtain judicial relief against Barclay in the District Court
when Barclay violated the Order by failing to pay its penalty within
thirty days. Barclay’s failure to pay the penalty thus was an act giving
rise to a cause of action under the Exchange Act.16
16
The amicus, relying on a Ninth Circuit case, SEC v.
McCarthy, 322 F.3d 650 (9th Cir. 2003), argues that an SEC
application pursuant to § 21(e) does not commence an “action,”
and therefore that Barclay’s failure to pay the penalty did not
constitute a “cause of action.” Relying on the definition of
“application” in Black’s Law Dictionary, the Ninth Circuit in
McCarthy distinguished “applications” from “actions” for the
purpose of determining whether SEC applications brought under
§ 21(e) require a formal complaint and full formal proceedings
pursuant to the Federal Rules of Civil Procedure. See id. at
656-57. Regardless of the merits of that distinction in the
context of that case, we do not find that distinction applicable to
the issue of whether the failure to comply with an SEC order
constitutes a “cause of action” under § 21(e). In fact, Black’s
Law Dictionary defines an “action” as any “civil or criminal
judicial proceeding,” and this broad definition is supported by
the following reasoning:
An action has been defined to be an ordinary
proceeding in a court of justice, by which one
party prosecutes another party for the enforcement
or protection of a right, the redress or prevention
of a wrong, or the punishment of a public offense.
But in some sense this definition is equally
applicable to special proceedings. More
accurately, it is defined to be any judicial
proceeding, which, if conducted to a
determination, will result in a judgment or decree.
19
D.
In sum, the plain language of § 20(a) requires our holding that
the SEC had a claim for payment from Bruno under § 20(a) because
Bruno was jointly and severally liable to the SEC for a debt in the
amount of Barclay’s unpaid penalty. The SEC was a person to whom
Barclay was liable as the result of an act constituting a cause of action
under the Exchange Act. Bruno, who controlled Barclay, induced and
was a culpable participant in the act constituting this cause of action,
and therefore he was jointly and severally liable for this debt in the
amount of the unpaid penalty.
We further note that our construction of § 20(a) serves the
remedial purposes of the Exchange Act.17 With a more narrow
The action is said to terminate at judgment.
Black’s Law Dictionary 31 (8th ed. 2004) (quoting 1 Morris M.
Estee, Estee’s Pleadings, Practice, and Forms § 3, at 1 (Carter P.
Pomeroy ed., 3d ed. 1885)). The “special proceedings” in a
district court following an SEC application brought under §
21(e) fit this general definition of an “action”–even if they are
not conducted as full civil actions governed by the Federal Rules
of Civil Procedure–because they are judicial proceedings which
terminate in a judgment or decree. Consequently, the Ninth
Circuit’s holding in McCarthy that applications under § 21(e)
are not full civil actions within the meaning of the Federal Rules
of Civil Procedure is not inconsistent with our holding that a
party’s failure to comply with an SEC order is a “cause of
action” under § 21(e).
17
Because the plain language of § 20(a)–including the
Exchange Act’s statutory definition of “person”–supports our
construction of § 20(a), this is not a case in which we are using
the general remedial purposes of the securities laws to justify a
departure from the language of § 20(a). Cf. Pinter, 486 U.S. at
20
construction of § 20(a), the deterrent effects of civil penalties arising
under the Exchange Act would be diluted in cases such as this one
where a closely-held firm is subject to a penalty, and the persons
controlling the firm transfer the firm’s assets to themselves, causing
the firm to be unable to pay its penalty. Although § 20(b) may
provide an overlapping remedy in some such cases, control persons
who induce the transfers of the firm’s assets to themselves may not
have participated in the underlying violations. In that sense, our
cumulative construction of § 20(b) and § 20(a) targets different forms
of wrongdoing, and thus § 20(a), given our construction, could reach
wrongdoers who might otherwise escape liability under § 20(b).
Consequently, our construction of § 20(a) is also supported by the
remedial purposes of the Exchange Act. Cf. Huddleston, 459 U.S. at
381-87.
IV.
Our holding that the SEC had a claim for payment from Bruno
under § 20(a) because of his joint and several liability for a debt in the
amount of the unpaid penalty does not itself imply that the SEC could
assert this claim in its Application under § 21(e). Bruno has argued
that because he was not a party to the Order, he could not be ordered
to pay the penalty on Barclay’s behalf. The amicus also has reasoned
653. Similarly, because § 20(a) is a substantive liability
provision, we are not implying that the SEC has a claim against
Bruno merely on the basis of a jurisdictional provision. Cf.
Touche Ross, 442 U.S. at 577. Finally, as we did in Rochez
Bros., 527 F.2d at 889-90, we are looking to the language of §
20(a) to define the scienter requirements for control persons
under § 20(a). Cf. Aaron, 446 U.S. at 689-97. Accordingly, it
is appropriate for us to consider the remedial purposes of the
securities laws as we construe § 20(a).
21
that § 21(e) is merely an enforcement mechanism for existing SEC
orders and that the District Court did not have jurisdiction to issue
this judgment and order against Bruno.18 We hold, however, that the
plain language of § 21(e), interpreted in light of the broad remedial
purposes of the Exchange Act, grants jurisdiction to the district courts
to order control persons who are jointly and severally liable under §
18
The amicus cites SEC v. Cherif, 933 F.2d 403, 413 (7th Cir.
1991), for the proposition that § 21(e) cannot be used to impose
individual liability on a party not named in the administrative
proceedings and not alleged to have violated the Exchange Act.
In Cherif, the party accused of violating the securities laws had
allegedly been using the non-party’s brokerage account to make
trades. Id. at 406-07. In a § 21(e) application, the SEC sought
a preliminary injunction freezing the assets in the non-party’s
account, but the SEC did not claim that the account holder
himself had violated the securities laws. Id. at 413. The
Seventh Circuit held that “[n]othing in the statute or case law
suggests that [§ 21(e)] authorizes a court to freeze the assets of
a non-party, one against whom no wrongdoing is alleged.” Id.
at 413-14 (emphasis added). Accordingly, Cherif is
distinguishable from our case because here the SEC alleged in
its application that Bruno “knowingly failed to cause Barclay to
comply with the Commission’s order,” and we hold that this was
an allegation of wrongdoing for the purpose of finding Bruno
jointly and severally liable for a debt in the amount of the unpaid
penalty under § 21(a). Indeed, the Seventh Circuit’s
wrongdoing requirement for new claims brought under § 21(e),
as stated in Cherif, will automatically be satisfied when the new
claims are properly stated against a control person under § 20(a)
in a § 21(e) application. That is because one element of control
person liability under § 20(a) is that the control person was a
“culpable participant” in the controlled person’s act or acts
constituting the violation or cause of action. See Rochez Bros.,
527 F.2d at 889-90.
22
20(a) to fulfill their individual financial obligations to the relevant
claimant, even where those control persons are not subject to an
existing SEC order.
We begin again with the text of the relevant provision. By its
plain terms, the grant of jurisdiction to the district courts in § 21(e) is
not limited to ordering persons subject to existing SEC orders to
comply with those orders. Rather, the broad language of § 21(e)
empowers the district courts “to issue writs of mandamus,
injunctions, and orders commanding [] any person to comply with the
provisions of [the Act], the rules, regulations, and orders thereunder
. . . .” See 15 U.S.C. § 78u(e).
In this case, we hold that the District Court’s order directing
Bruno to pay Barclay’s unpaid penalty was an order commanding
Bruno to comply with his obligations under § 20(a). As discussed in
Part III.B, supra, when a party is jointly and severally liable for a
financial obligation, that party is individually responsible for paying
the entire amount of the obligation to the creditor. Accordingly,
insofar as Bruno was jointly and severally liable for Barclay’s debt to
the SEC under § 20(a), § 20(a) created a duty on Bruno’s behalf to
pay the entire amount of this obligation to the SEC. In that sense, the
District Court simply commanded Bruno to comply with his duties as
defined by § 20(a), and therefore the District Court had jurisdiction
to issue this order under § 21(e).
We note again that while our construction of § 21(e) is based
primarily on the plain language of the provision, it is further
supported by the broad remedial purposes of the Exchange Act. In
this case, as the SEC conceded, Bruno’s joint and several liability
under § 20(a) did not arise until Bruno induced and culpably
participated in Barclay’s failure to pay the penalty within thirty days
as required by the Order. Accordingly, the SEC could not have
ordered Bruno to comply with his duties under § 20(a) in the original
23
Order because Bruno did not yet have any such duties.19 In contrast,
when Barclay failed to pay the penalty within thirty days, the SEC’s
cause of action against Barclay under § 21(e) arose. Consequently,
our construction of § 21(e) serves the remedial purposes of the
Exchange Act because it allows the SEC to seek court orders
directing payment for an unpaid penalty from all of the parties who
are jointly and severally liable for such a penalty, and to do so in a
single proceeding and at the first possible opportunity.20
19
Bruno argues that the SEC should be required to institute a
new administrative proceeding, naming him as a party, if it
wishes to impose a civil penalty on him through § 20(a). As
Bruno rightly points out, however, the SEC can assess monetary
penalties in administrative proceedings only if the party has
willfully participated in a violation of the securities laws. See
15 U.S.C. 78u-2(a). The SEC has not claimed that Bruno
participated in Barclay’s violations of § 17(a) and Rule 17-a-5,
nor has the SEC claimed that Bruno has “violated” § 20(a).
Rather, the SEC is merely seeking payment of a financial
obligation for which Bruno is jointly and severally liable under
§ 20(a). Accordingly, the SEC could not seek to impose a
monetary penalty on Bruno through an administrative
proceeding on the basis of its § 20(a) claim, and for that reason
the remedial purposes of the Exchange Act are served by our
holding that the SEC can assert such a claim in a § 21(e)
application instead.
20
The amicus suggests that rather than claiming a right to
payment from Bruno arising under § 20(a) in a § 21(e)
application, the SEC could have asserted a right to payment
from Bruno arising under some other state or federal statute in
a separate civil action. Because we hold that the plain language
of § 20(a) made Bruno individually liable to the SEC for a debt
in the amount of the unpaid penalty, and that the plain language
of § 21(e) granted the District Court jurisdiction to order Bruno
24
V.
Following discovery and the SEC’s unopposed motion for
summary judgment, the District Court correctly held that the
undisputed facts of this case established that Bruno was jointly and
severally liable under § 20(a) for Barclay’s unpaid penalty. Further,
the District Court properly concluded that it had jurisdiction under §
21(e) to order Bruno to comply with his obligations under § 20(a).
While we base both of these holdings primarily on the plain language
of the relevant provisions, we also note that this construction of §
20(a) and § 21(e) serves the remedial purposes of the Exchange Act.
In short, this construction of the relevant provisions facilitates the
collection of SEC penalties in cases where people who control a
person subject to an SEC penalty culpably attempt to transfer the
assets of the controlled person to themselves rather than directing the
controlled person to pay its penalty. Facilitating the collection of
SEC penalties in such cases helps to give those penalties their full
intended deterrent effect, which in turn serves the remedial purposes
of the Exchange Act. Accordingly, we will affirm the judgment of
the District Court.
to comply with his duties under § 20(a), we need not consider
the availability of other remedies.