Gregory Bartko v. SEC , 845 F.3d 1217 ( 2017 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 17, 2016 Decided January 17, 2017
No. 14-1070
GREGORY BARTKO,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order of
the Securities and Exchange Commission
Brian R. Matsui, appointed by the court, argued the cause
as the amicus curiae in support of the appellant. Bryan J.
Leitch and Deanne E. Maynard were with him on brief.
Gregory Bartko, pro se, filed the briefs for the appellant.
Daniel Matro, Attorney, United States Securities and
Exchange Commission, argued the cause for the respondent.
John W. Avery, Deputy Solicitor, Dominick V. Freda, and
Stephen G. Yoder, Senior Litigation Counsel were with him on
brief.
Before: HENDERSON and GRIFFITH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
2
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: Between
2004 and 2005, Gregory Bartko masterminded a wide-ranging
scheme that sought to defraud investors through the sale of
securities. Five years later, Bartko was convicted of
conspiracy, selling unregistered securities and mail fraud.
Shortly thereafter, the United States Securities and Exchange
Commission (SEC or Commission) instituted a follow-on
administrative proceeding against him. In that proceeding, the
Commission, inter alia, permanently barred Bartko from
associating with six classes of securities market participants.1
Bartko’s petition for review raises multiple challenges to
the Commission’s order. We have accorded each of Bartko’s
arguments “full consideration after careful examination of the
record, but address in detail only those arguments that warrant
further discussion.” See, e.g., Ozburn-Hessey Logistics, LLC v.
NLRB, 833 F.3d 210, 213 (D.C. Cir. 2016); United States v.
Garcia, 757 F.3d 315, 321 (D.C. Cir. 2014) (“We have given
full consideration to the various additional arguments that
[appellant] raises, but find none convincing or worthy of
discussion.”). Although we agree with the Commission’s
findings and conclusions, we believe it applied the bar
regarding five of the six classes in an impermissibly retroactive
manner. For the reasons that follow, we grant the petition in
part and deny it in part.
1
In its order, the Commission barred Bartko from the
broker-dealer, investment adviser, municipal securities dealer,
transfer agent, municipal advisor and nationally recognized
statistical ratings organization (NRSRO) classes. But see infra at 12
n.6.
3
I. BACKGROUND
A. Statutory Landscape
With the enactment of section 203(f) of the Investment
Advisers Act of 1940, see 15 U.S.C. § 80b-3, and sections
15(b), 15B(c) and 17A(c) of the Securities Exchange Act of
1934, see id. §§ 78o(b), 78o-4(c), 78q-1(c), the Congress
authorized the SEC to oversee the registration and licensing of
four different classes of participants in the securities markets:
brokers and dealers, municipal securities dealers, transfer
agents and investment advisers. See id. §§ 78o, 78o-4, 78q-1,
80b-3 (2000) (respectively, broker-dealers, municipal
securities dealers, transfer agents and investment advisers). As
relevant here, these statutory provisions also authorized the
Commission to suspend or bar a participant from specific
classes if certain conditions were met. See id. §§ 78o(b)(6)(A),
78o-4(c)(4), 78q-1(c)(4)(C), 80b-3(f). Generally, to impose
such a sanction, the Commission had to first demonstrate that
the penalty was in the public interest. See id. Second, the
Commission had to show that the participant was, inter alia,
convicted of a specified offense within the last ten years or had
been enjoined by the SEC from working in the industry. See id.
Finally, the Commission had to show that the participant was
associated with—or seeking to become associated with—one
of the four classes either at the time of the alleged misconduct
or at the time of registration. See id.
Originally, the Commission read these provisions as
authorizing a “collateral bar.” E.g., Meyer Blinder, Exchange
Act Release No. 39180, 1997 WL 603788, at *3-5. (Oct. 1,
1997). A collateral bar is a tool by which the SEC can ban a
market participant from associating with all classes based on
misconduct regarding only one class. See id. at *5-6. Thus,
through the imposition of a collateral bar, the Commission
4
could not only bar an investment adviser from associating with
the investment adviser class but also from the broker-dealer,
municipal securities dealer and transfer agent classes—even if
he had no association with those classes. See id.
This Court, however, rejected the Commission’s notion
that section 203(f) of the Advisers Act and sections 15(b),
15B(c) and 17A(c) of the Exchange Act sanctioned a collateral
bar. See Teicher v. SEC, 177 F.3d 1016, 1019-20 (D.C. Cir.
1999). In Teicher, we noted that both statutes set forth “an
almost identically worded threshold nexus requirement” that
“underscore[d] a congressional determination to create
separate sets of sanctions . . . .” Id. at 1020. Because each
statute required a market participant to be, at a minimum,
“seeking to become associated” with a class before he could be
barred from it, see 15 U.S.C. §§ 78o(b)(6)(A), 78o-4(c)(4),
78q-1(c)(4)(C), 80b-3(f) (2000), we held that the Commission
could not bar an individual from a class that he had no
association—no “nexus”—with, see Teicher, 177 F.3d at
1020-21. An investment adviser could be immediately barred
from associating with the investment adviser class; a
broker-dealer could be barred from associating with the
broker-dealer class—but because a collateral bar was not
statutorily authorized, the SEC could not bar him from other
classes unless and until he sought to associate with those
classes. See id.
In 2010, the enactment of Dodd-Frank changed the
landscape. See Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank), Pub. L. No. 111–203, 124 Stat.
1376 (2010). Perhaps in response to the Commission’s
lobbying,2 the Congress empowered it to impose a collateral
2
The legislative history reveals in part that, in 2009, then-SEC
Chairman Mary L. Schapiro asked the Congress to give “the SEC the
authority to bar a regulated person who violates the securities laws in
5
bar. See Pub. L. No. 111-203, 124 Stat. 1376, 1850-51 (July 21,
2010). In addition, Dodd-Frank expanded the Commission’s
reach, adding two new classes to its purview: municipal
advisors and nationally recognized statistical rating
organizations (“NRSROs”). See 15 U.S.C. §§ 78o(b)(6)(A),
78o-4(c)(4), 78q-1(c)(4)(C), 80b-3(f) (2012). Under
Dodd-Frank, then, the Commission is now able to bar a
securities market participant from the six listed
classes—broker-dealers, investment advisers, municipal
securities dealers, transfers agents, municipal advisors and
NRSROs—based on misconduct in only one class. See id. In
effect, Dodd-Frank removed the industry-specific “nexus”
central to the Teicher holding, making available an
industry-wide ban for class-specific misconduct. See id.
B. Factual Background
From 1999 to 2011, Bartko, a securities lawyer, served as
the chief executive officer and chief compliance officer of
Capstone Partners, L.C., a registered broker-dealer under
section 15 of the Exchange Act, 15 U.S.C. § 78o. Between
2004 and 2005, Bartko also oversaw two private equity funds:
the Caledonian Fund and the Capstone Fund (Funds). These
one part of the industry, for example a broker-dealer who
misappropriates customers funds, from access to customer funds in
another part of the securities industry (such as an investment
adviser).” Hearing Before the H. Comm. on Fin. Servs., 111th Cong.,
65-66 (2009). She also noted that, by authorizing the SEC to “impose
collateral bars,” the Congress would enable it “to more effectively”
regulate the various classes. Id.
6
two Funds were at the center of Bartko’s subsequent criminal
prosecution.3
Bartko’s troubles began in early 2004, when, after creating
the two Funds, he began to recruit investors. Rather than
undertaking the search for capital himself, Bartko joined John
Colvin and Scott Hollenbeck, who took on that task for him.
There was a significant problem with this arrangement,
however: Colvin and Hollenbeck had a history of using
questionable sales tactics. Both had previously been accused of
fraudulent sales practices and Hollenbeck was the subject of a
cease and desist order regarding securities sales in North
Carolina. Despite having access to his two partners’ history,
see Joint Appendix 54-57, Bartko made no effort to distance
himself from them. Instead, he entered into agreements under
which Colvin and Hollenbeck were to raise millions of dollars
for the two Funds.
Over the next two years, both Funds’ coffers were filled by
way of fraud and deception. For example, Hollenbeck held
numerous seminars across the country, inducing investors to
give him their money with false claims that their investments
were fully insured and had a guaranteed return. His tactics
achieved their purpose, as approximately two hundred
investors poured hundreds of thousands of dollars into the two
Funds.
The actions of Bartko’s partners did not go unnoticed. In
March 2005, an SEC lawyer warned Bartko of Hollenbeck’s
questionable fund-raising techniques. Bartko insisted that
Hollenbeck was merely a “finder” for the Funds and further
claimed that Hollenbeck only “forward[ed] the names of
3
The facts herein set forth are only those relevant to the
petition before us. The complete details of Bartko’s crimes are set
forth in United States v. Bartko, 728 F.3d 327 (4th Cir. 2013).
7
interested and qualified investors” to him. Joint Appendix 79.
In the months that followed, Bartko attempted to work with the
Commission. He offered Capstone Fund materials for SEC
inspection, allowed the Commission to undertake
unannounced “spot” examinations of Bartko’s business and
voluntarily disclosed many confidential financial documents,
all—Bartko alleges—in reliance on the Commission’s
assurances that the information was confidential and to be used
to investigate Hollenbeck’s actions only. Additionally, Bartko
filed an interpleader action on behalf of the Capstone Fund in
the Middle District of North Carolina in a purported attempt to
return funds to investors. Investors in the two Funds ultimately
lost a total of $885,946.89.
C. Procedural History
In January 2010, Bartko was indicted in the Eastern
District of North Carolina on one count of conspiracy, one
count of selling unregistered securities and four counts of mail
fraud. After a thirteen-day trial, a jury convicted Bartko on all
six counts. Bartko sought a new trial, claiming that the
prosecution failed to disclose material exculpatory evidence as
required by Brady v. Maryland, 373 U.S. 83 (1963), and that it
knowingly allowed government witnesses to testify falsely in
violation of Napue v. Illinois, 360 U.S. 264 (1959). The district
court denied Bartko’s motion, emphasizing that “Bartko’s case
was not a close one” as “overwhelming evidence of Bartko’s
guilt” had been presented at trial. United States v. Bartko, No.
5:09-CR-00321-D, at 116-18 (E.D.N.C. Jan. 17, 2012). The
Fourth Circuit affirmed Bartko’s conviction and sentence.
United States v. Bartko, 728 F.3d 327, 347 (4th Cir. 2013).
Although it recognized that “serious errors” by the government
8
had infected Bartko’s prosecution, 4 see id. at 343, it found
those errors insufficient to overturn his conviction, id. at 342
(“[O]ur confidence in the jury’s conviction of Bartko was not
undermined by the government’s misconduct in this case.”).
On January 18, 2011, the Commission issued an Order
Instituting Administrative Proceedings Pursuant to Section
15(b) of the Exchange Act and Section 203(f) of the Advisers
Act to further sanction Bartko for his misconduct. In his
response, Bartko argued that the government had “unclean
hands” based on its misconduct during his criminal trial and on
improper collusion between the governmental authorities.
Accordingly, Bartko argued that the Commission “should be
barred or estopped” from using his tainted conviction as the
basis of follow-on action. Joint Appendix 4. An ALJ
recommended against Bartko, however, rejecting Bartko’s
discovery request related to his unclean hands defense and
applying Dodd-Frank’s enhanced penalties to bar him from
associating with not only the broker-dealer class but also the
investment adviser, municipal securities dealer and transfer
agent classes.
4
The Fourth Circuit first noted that the prosecution made
specific promises to Hollenbeck (who testified against Bartko) that
information he provided would not later be used against Hollenbeck.
Bartko, 728 F.3d at 335-37. At trial, however, it failed to “correct
Hollenbeck’s answers when he testified falsely that [the
government] had not made any promises” to him. Id. at 337. The
Fourth Circuit also found that government acted improperly when it
failed to disclose proffer agreements with Hollenbeck and his wife.
Id. at 338-39. “If Bartko had had the . . . agreements, he could have
used them in an attempt to attack Scott Hollenbeck’s credibility.” Id.
at 338. Finally, the government improperly failed to disclose a
tolling agreement that, according to Bartko, would have been useful
to his defense as impeachment material. Id. at 339-40.
 9
Bartko then petitioned the Commission for review of the
ALJ order. The Commission iterated barring Bartko from
acting as a broker-dealer, investment adviser, municipal
securities dealer and transfer agent was in the public
interest—Bartko demonstrated “a fundamental lack of
commitment to investor protection principles,” thereby
creating a “risk that he would engage in similar conduct if
presented with future opportunities.” Id. at 372. The
Commission also rejected Bartko’s unclean hands defense,
noting that the defense “is not generally available in a
Commission action.” Id. at 382. But the Commission did not
stop there. Instead, it extended Bartko’s bar to exclude him
from the municipal advisor and NRSRO classes as well. The
Commission reasoned that imposing Dodd-Frank’s collateral
bar on Bartko (whose misconduct, again, occurred before the
enactment of Dodd-Frank) did not constitute an impermissibly
retroactive penalty because “[s]uch collateral bars . . . are
appropriately applied as ‘prospective remedies whose purpose
is to protect the investing public from future harm.’” Id. at
376-77.
Bartko timely petitioned for review. Our jurisdiction is
based on 15 U.S.C. §§ 78y(a), 80b-13(a).
II. ANALYSIS
A. Retroactive Application of Dodd-Frank
Bartko first argues that the Commission’s imposition of
Dodd-Frank’s collateral ban constitutes an impermissibly
retroactive penalty because it is premised on pre-Dodd-Frank
misconduct. We agree.
The United States Supreme Court has recognized a
“deeply rooted presumption against retroactive legislation,”
10
requiring that “courts read laws as prospective in application
unless Congress has unambiguously instructed retroactivity.”
See Vartelas v. Holder, 566 U.S. __, 132 S. Ct. 1479, 1483,
1486 (2012) (citing Landgraf v. USI Film Prods., 511 U.S.
244, 263 (1994)). The presumption against retroactive
legislation is embedded in several provisions of the
Constitution, “among them, the Ex Post Facto Clause, the
Contract Clause, and the Fifth Amendment’s Due Process
Clause.” Id. at 1486; accord Ralis v. RFE/RL, Inc., 770 F.2d
1121, 1127-29 (D.C. Cir. 1985) (warning against retroactive
application of law given “the inherent repugnance of ex post
facto imposition of civil liabilities”).
To determine if a statute runs afoul of the retroactivity
prohibition, we ask whether its provisions attach new legal
consequences to events completed before its enactment.
Landgraf, 511 U.S. at 269-70. That is, we look to see if the law
“impair[s] rights a party possessed when he acted, increase[s] a
party’s liability for past conduct, or impose[s] new duties with
respect to transactions already completed.” Nat’l Mining Ass’n
v. Dep’t of Labor, 292 F.3d 849, 859 (D.C. Cir. 2002)
(alterations in original) (internal quotation marks omitted). In
looking for new legal consequences, material adjustments to
the “extent of a party’s liability” may suffice. Landgraf, 511
U.S. at 283-84. Not all retroactive application is out of bounds,
however—Landgraf recognized that procedural rules “regulate
secondary rather than primary conduct” and therefore raise no
retroactivity concern. Id. at 275. Consequently, “[t]he critical
question is whether a challenged rule establishes an
interpretation that changes the legal landscape.” Nat’l Mining
Ass’n, 292 F.3d at 859 (internal quotation marks omitted).
We recently applied these principles in a case similar to
the instant case. See Koch v. SEC, 793 F.3d 147 (D.C. Cir.
2015). In Koch, an investment adviser petitioned our Court for
11
review of Commission penalties. Id. at 149-50. The
Commission had sanctioned him for pre-Dodd-Frank trading
violations by, inter alia, barring him from associating with the
municipal advisor and NRSRO classes. Id. at 149-51. As noted
earlier, however, see supra at 4-5, the Commission assumed
the authority to ban a market participant from those two new
classes only after the enactment of Dodd-Frank. See Koch, 793
F.3d at 157-58. Thus, the Koch Court considered a specific
question: was “the Commission’s order barring [the petitioner]
from associating with municipal advisors or rating
organizations . . . impermissibly retroactive[?]” Id. at 152.
We held that the bar was impermissibly retroactive. Id. at
157-58. In so holding, we stated that “by including additional
associations from which one could be barred, the Act enhanced
the penalties for a violation of the securities laws.” Id. at 158
(emphasis in original). Following Landgraf, we found that
“[a]pplying [Dodd-Frank] to [the petitioner] ‘attache[d] new
legal consequences’ to his conduct by adding to the industries
with which [the petitioner] may not associate.” Id. (fourth
alteration in original). Because the Congress did not expressly
authorize retrospective application of Dodd-Frank, see id. at
157-58, we vacated the portion of the Commission order that
applied Dodd-Frank’s broader sanctions to Koch’s
pre-Dodd-Frank misconduct, see id.
Here, Bartko had no cognizable association with the
investment adviser, municipal securities dealer or transfer
agent classes when his misconduct occurred.5 Nonetheless, the
Commission has again attempted to retroactively apply
5
The Commission originally charged Bartko as an investment
adviser as well as a broker-dealer but it later determined that the
“public record [did] not indicate that Bartko was associated with a
registered investment adviser during the relevant period.”
12
Dodd-Frank to bar Bartko from the investment adviser,
municipal securities dealer and transfer agent classes. Thus, as
we did in Koch, we conclude that the Commission’s use of
Dodd-Frank’s collateral bar against Bartko constitutes an
impermissibly retroactive penalty. The application of
post-Dodd-Frank penalties to pre-Dodd-Frank misconduct
constitutes a quintessential example of “attach[ing] new legal
consequences to events completed before [Dodd-Frank’s]
enactment.” Vartelas, 132 S. Ct. at 1491 (internal quotation
marks omitted).
The Commission’s attempt to avoid this conclusion is
unpersuasive. It primarily rests on its claim that Koch already
decided the issue before us. Resp’t’s Br. 29-33. According to
the Commission’s reading, Koch implicitly allowed the
retroactive application of a collateral bar on the broker-dealer,
investment adviser, municipal securities dealer and transfer
agent classes notwithstanding the fact that, at the same time, it
explicitly prohibited the Commission from extending that bar
to the newly regulated municipal advisor and NRSRO classes.6
See id. To support its reading, the Commission believes Koch
held that the “limited” collateral bar—that is, the
broker-dealer, investment adviser, municipal securities dealer
and transfer agent prohibitions—constituted a mere procedural
change and therefore did not run afoul of the retroactivity
prohibition. Id. at 29. The Commission misreads Koch.
Koch addressed only one issue related to this case:
whether the Commission order barring Koch from associating
“with municipal advisors or rating organizations” was
impermissibly retroactive. Koch, 793 F.3d at 152 (emphasis
6
After Koch issued, the Commission acknowledged that the
bar on the municipal advisor and NRSRO classes should be vacated.
See Commission’s Rule 28(j) Letter at 1-2 (Sept. 2, 2015).
13
added). We held that it was and went no further. See id. at
157-58. In fact, we expressly stated that our holding did “not
apply to the other securities industries with which Koch may
not associate,” id. at 158—that broader issue was neither
before nor considered by the Court.7
7
Based on an over-reading of Koch’s reply brief, the
Commission claims that Koch timely made the argument that Bartko
now makes. Resp’t’s Br. 32. But Koch’s opening brief failed to
expressly raise the issue, referencing the retroactivity issue in only
the most general terms. Corrected Brief for Petitioner at 53, Koch v.
SEC, 793 F.3d 147 (D.C. Cir. 2015) (No. 14-1134) (“The SEC’s
determination . . . to retroactively apply a collateral bar, which
Congress added to the securities laws in 2010, to conduct that
occurred in 2009 is impermissible as a matter of law. It is beyond
dispute that sanctions cannot be applied retroactively.”). It contained
no discussion of the six market participant classes, no discussion of
Teicher’s class-specific nexus and no discussion of the procedural
and substantive effects of a retroactive application of Dodd-Frank.
Id. at 53-54. It failed to clarify whether Koch was attempting to
challenge the Commission’s imposition of multiple bars in a single,
omnibus proceeding, its debarment of Koch from classes with which
he had not tried to associate or its debarment of Koch from the two
classes it could not regulate before Dodd-Frank (i.e., the municipal
advisor and NRSRO classes). See id. “It is not enough merely to
mention a possible argument in the most skeletal way, leaving the
court to do counsel’s work.” Bryant v. Gates, 532 F.3d 888, 898
(D.C. Cir. 2008). Although Koch’s reply brief came closer to raising
the point Bartko raises, see Reply Brief for Petitioner at 25, Koch v.
SEC, 793 F.3d 147 (D.C. Cir. 2015) (No. 14-1134) (“Previously, the
SEC could not just bring proceeding after proceeding to impose
multiple bars until they added up to the collateral bar it seeks to
impose on Mr. Koch. Rather, the SEC could only bring another
action seeking an additional bar as a remedy after ‘the violator
attempted to associate in a different capacity.’”), an argument first
made in a reply brief is forfeited, see Am. Wildlands v. Kempthorne,
530 F.3d 991, 1001 (D.C. Cir. 2008).
14
Footnote three of the Koch decision—on which the
Commission heavily relies—is not inconsistent with this
analysis. Id. at 157 n.3. Footnote three reads in full:
Koch also argues that applying the Dodd-Frank
Act to him is impermissibly retroactive because
it changed the Commission’s procedures for
imposing sanctions. It is true that under the Act,
the SEC may bar Koch from associating with all
industries in the securities market in one
proceeding, whereas before the Act the
Commission had to initiate “follow-on
proceeding[s]” for separate industries in the
securities market. This change in procedure,
however, does not give rise to retroactivity
concerns.
Id. (alteration in original) (internal citations omitted). Plainly,
footnote three focuses on “the Commission’s procedures for
imposing sanctions,” adding that under Dodd-Frank, “the SEC
may bar [a participant] from associating with all industries in
the securities market in one proceeding, whereas before the
Act the Commission had to initiate follow-on proceeding[s].”
Id. (emphases added). Stated differently, to the extent the
Commission was required pre-Dodd-Frank to bring separate
follow-on proceedings to bar a market participant from each
class he was associated with, Dodd-Frank changed that
procedure, instead allowing for one omnibus proceeding at the
end of which the Commission could ban a participant from all
classes he was associated with. Consolidating separate
proceedings into one omnibus proceeding, however, is a
procedural change that raises no retroactivity concern. See
Landgraf, 511 U.S. at 275 (“Because rules of procedure
regulate secondary rather than primary conduct, the fact that a
new procedural rule was instituted after the conduct giving rise
15
to the suit does not make application of the rule at trial
retroactive.”).
To repeat, Koch does not go further. Although Koch
permits consolidation of pending proceedings, it says nothing
about endorsing a collateral bar aimed at classes a market
participant is neither associated with nor has sought to become
so. Whereas the former is a procedural—and therefore
permissibly retroactive—change, the latter has undeniable
impermissibly retroactive ramifications. See Martin v. Hadix,
527 U.S. 343, 357-58 (1999) (outlining Supreme Court’s
“commonsense” and “functional” approach to retroactivity).
For example, the imposition of a collateral bar significantly
diminishes the possibility that a market participant will be able
to associate with new classes regardless of the extent of his
subsequent rehabilitation. Before Dodd-Frank, the
Commission had to establish that a ban on each class was in the
public interest, a task it often accomplished by considering the
Steadman factors.8 See Steadman v. SEC, 603 F.2d 1126, 1140
(5th Cir. 1979), aff’d, 450 U.S. 91 (1981). In addition, the
Commission had to show that the market participant had been,
inter alia, convicted of a specified offense within the last ten
years or enjoined from working in the industry and that the
market participant was associated with—or seeking to become
associated with—each class from which debarment was
sought. 15 U.S.C. §§ 78o, 78o-4, 78q-1, 80b-3 (2000).
Although the Commission could ban a market participant
from, for example, the broker-dealer class at “T0,” it had to wait
8
The Steadman factors include “the egregiousness of the
defendant’s actions, the isolated or recurrent nature of the infraction,
the degree of scienter involved, the sincerity of the defendant’s
assurances against future violations, the defendant’s recognition of
the wrongful nature of his conduct, and the likelihood that the
defendant’s occupation will present opportunities for future
violations.” Steadman, 603 F.2d at 1140.
16
until “T1”—the point at which the market participant sought to
associate with a new class—before imposing a ban covering
that class. See Teicher, 177 F.3d at 1016. Moreover, even at T1,
the burden remained on the Commission to show that the
broader ban was also in the public interest. See 15 U.S.C. §§
78o(b)(6)(A), 78o-4(c)(4), 78q-1(c)(4)(C), 80b-3(f) (2000). If
a market participant was sufficiently rehabilitated by T1 that
applying the Steadman factors made the broader ban contrary
to the public interest, the Commission could not prevent him
from associating with that second class.
Dodd-Frank changed this landscape. Now, the
Commission may impose a collateral bar covering each class
during an omnibus proceeding at T0. See 124 Stat. at 1850-51.
In effect, then, Dodd-Frank changed when the Commission
must apply a Steadman analysis to determine whether it is in
the public interest to bar a market participant from classes that
he was not associated with at T0—whereas before Dodd-Frank,
the Commission was required to wait until T1 before making
that determination (a delay that required the Commission to
take into account any intervening rehabilitation that may have
occurred since T0), the Commission may now use its T0 public
interest analysis to bar the participant from those additional
classes in the first proceeding. This frontloading deprives the
participant of the ability to avoid a broader ban at T1 by
undergoing “Steadman rehabilitation” after T0. Moreover,
Dodd-Frank’s enactment also switches the burden of
persuasion. After Dodd-Frank, it is the responsibility of the
market participant (not the Commission) to show at T1 that
reinstatement to (rather than debarment from) a given class
“would be consistent with the public interest,” 17 C.F.R. §
201.193, a burden that even a wholly rehabilitated offender
might struggle to establish. Collectively, these changes
constitute a “new legal consequence[]” that cannot fairly be
characterized as procedural. See Lindh v. Murphy, 521 U.S.
17
320, 327 (1997) (“[C]hange [to] standards of proof and
persuasion . . . goes beyond ‘mere’ procedure to affect
substantive entitlement to relief.”); Landgraf, 511 U.S. at 270,
275.
Accordingly, we conclude that the Commission abused its
discretion in barring Bartko from associating with the
investment adviser, municipal securities dealer and transfer
agent classes because those bars are impermissibly retroactive.
See 5 U.S.C. § 706(2)(a); Kickapoo Tribe of Indians of
Kickapoo Reservation in Kan. v. Babbitt, 43 F.3d 1491, 1497
(D.C. Cir. 1995) (decision-maker “abuses its discretion if it did
not apply the correct legal standard” or “if it misapprehended
the underlying substantive law”(internal quotation marks
omitted)).
B. Unclean Hands
Bartko also claims that the Commission erred in failing to
consider, or allow discovery regarding, his unclean hands
defense. In light of government misconduct affecting both the
Commission investigation of Bartko 9 and his subsequent
criminal prosecution, Bartko suggests that equitable principles
should estop the Commission from using his conviction as the
basis for a follow-on proceeding. See Pet’r Br. 48. That is,
Bartko argues that unclean hands is a “viable defense” to the
follow-on proceeding. Id. We disagree.
Generally speaking, the unclean hands doctrine requires
that a party seeking equitable relief “show that his or her
conduct has been fair, equitable, and honest as to the particular
controversy in issue.” 27A AM. JUR. 2d Equity § 98 (Nov.
9
As noted earlier, see supra at 6-7, Bartko insisted that he
provided information to Commission investigators only to aid their
investigation of Hollenbeck. Joint Appendix 5-7, 211-16.
18
2016). If a plaintiff does not act “fairly and without fraud or
deceit,” the unclean hands doctrine affords a defendant a
complete defense. See Precision Instrument Mfg. Co. v. Auto.
Maint. Mach. Co., 324 U.S. 806, 814-15 (1945). Ultimately,
the unclean hands doctrine rests on the principle that “he who
comes into equity must come with clean hands.” Shondel v.
McDermott, 775 F.2d 859, 867-68 (7th Cir. 1985).
The application of the unclean hands doctrine to the
government, however, is far from categorical. Although the
Supreme Court has left open the question of whether there
exists a “flat rule that [unclean hands] may not in any
circumstances run against the Government,” it has nonetheless
recognized that “the Government may not be estopped on the
same terms as any other litigant.” Heckler v. Cmty. Health
Servs., 467 U.S. 51, 60 (1984). The government receives this
special treatment based on the notion that “[w]hen the
Government is unable to enforce the law because the conduct
of its agents has given rise to an estoppel, the interest of the
citizenry as a whole in obedience to the rule of law is
undermined.” Id.; accord SEC v. Gulf & W. Indus., 502 F.
Supp. 343, 348 (D.D.C. 1980) (denying unclean hands defense
“because it may not be invoked against a governmental agency
which is attempting to enforce a congressional mandate in the
public interest”). Nevertheless, Heckler suggests that the
unclean hands doctrine may apply where “the public interest in
ensuring that the Government can enforce the law free from
estoppel [is] outweighed by the countervailing interest of
citizens in some minimum standard of decency, honor, and
reliability in their dealings with their Government.” Heckler,
467 U.S. at 60–61. “Where courts have permitted equitable
defenses to be raised against the government, they have
required that the agency’s misconduct be egregious and the
resulting prejudice to the defendant rise to a constitutional
19
level.” SEC v. Elecs. Warehouse, Inc., 689 F. Supp. 53, 73 (D.
Conn. 1988), aff’d, 891 F.2d 457 (2d Cir. 1989).
Bartko’s case does not fit within the narrow window
outlined in Heckler and Electronics Warehouse. The Fourth
Circuit expressly held that any prejudice stemming from the
government’s misconduct during Bartko’s investigation and
prosecution failed to rise to a constitutional level. Bartko, 728
F.3d at 331-32, 342 (“[O]ur the jury’s conviction of Bartko was
not undermined by the government’s misconduct in this
case.”). Nothing in the record casts doubt on that conclusion.
Moreover, underscoring Bartko’s failure to meet Heckler’s and
Electronics Warehouse’s threshold requirement is the
Commission’s finding that Bartko demonstrated “a
fundamental lack of commitment to investor protection
principles” and that there existed a “risk that he would engage
in similar conduct if presented with future opportunities.” Joint
Appendix 371-72. Here, then, “the public interest in ensuring
that the Government can enforce the law free from estoppel” is
significant. See Heckler, 467 U.S. at 60–61.
For the foregoing reasons, the portion of Bartko’s petition
that challenges the investment adviser, municipal securities
dealer and transfer agent bar is granted.10 The remainder of
Bartko’s petition is denied.
So ordered.
10
In accordance with the SEC’s concession, see supra at 12 n.6,
the portion of Bartko’s petition challenging the municipal advisor
and NRSRO bars is also granted.