Gonnella v. Securities and Exchange Commission

Summary

The Second Circuit affirmed the SEC's order finding that a bond trader violated Securities Act § 17(a)(1), Exchange Act § 10(b), and Rules 10b-5(a) and (c) by engaging in a scheme to park securities with another trader to avoid internal aged-inventory charges, and that he aided and abetted his employer's books and records violations. The court held that the trader forfeited his Appointments Clause challenge to the SEC ALJ by failing to raise it during the administrative proceedings, and that the SEC's use of a cooperating witness did not violate due process or require APA notice-and-comment rulemaking. The court further held that any error by the ALJ in considering law review articles was cured by the Commission's de novo review, and that substantial evidence supported the findings of scienter and fraud. Finally, the court upheld the Commission's imposition of heightened sanctions (a lifetime bar with right to reapply in five years) on de novo review, finding it warranted in law and justified in fact.

Holdings

1. A litigant who does not object to the constitutionality of an ALJ at any point during the SEC proceedings forfeits that challenge.
2. The SEC's enforcement guidance under 17 C.F.R. § 202.12 is a policy statement not subject to APA notice and comment, and the use of cooperators does not violate due process.
3. Any error by the ALJ was cured by the Commission's de novo review, which explicitly stated it did not rely on the articles.
4. Substantial evidence supported the Commission's finding that Gonnella intentionally engaged in deceitful behavior with scienter, violating Securities Act §17(a)(1), Exchange Act §10(b), and Rules 10b-5(a) and (c).
5. Substantial evidence supported the finding that Gonnella aided and abetted Barclays' violation of Exchange Act §17(a) and Rule 17a-3(a)(2) by documenting trades without indicating the repurchase agreement, making the books inaccurate.
6. The Commission did not violate due process because its review is de novo and the ALJ's decision is not final; the Commission has authority to impose any sanction warranted by law and justified in fact.

Questions Presented

1. Whether the SEC's designation of an Administrative Law Judge who was not appointed pursuant to the Appointments Clause violated the Constitution's separation of powers.
2. Whether the SEC's use of a cooperating witness violated 5 U.S.C. § 553 and Gonnella's right to due process.
3. Whether the ALJ impermissibly engaged in independent fact-finding.
4. Whether the Commission violated due process when it increased the monetary sanctions imposed by the ALJ.
5. Whether there was sufficient evidence to support the Commission's findings of primary violations and aiding and abetting.

Disposition

affirmed