Buyer's Remorse Over Industry Bar Prompts Epic SEC Appeal

C. Graham be, and hereby is barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock; with the right to apply for reentry after three years to the appropriate self-regulatory organization, or if there is none, to the Commission;

a. provided however, that Graham may, for a period of one year from the entry of this Order, continue to be employed by Vertical solely for the purpose of assisting Vertical in the sale, or transfer to independent managers, of securities and positions held by any funds or accounts managed by Vertical, as of the date of the entry of this Order. During the one-year carve-out period, all sales by Graham shall be subject to review and approval by Vertical prior to execution. During this one-year period of limited employment at Vertical, Graham may not carry out his employment activities on the premises of Vertical, and he must be located offsite from Vertical. Notwithstanding this limited employment role, the following restrictions will be placed upon Graham as of the date of the entry of this Order: (i) Graham may not serve on Vertical's Board of Directors, or in any officer, executive, or management role at Vertical; (ii) Other than for the limited purpose of selling securities and positions held by any funds or accounts managed by Vertical, as of the date of the entry of this Order, Graham may not have any role, input, authority, duties, or discussions as to the management of Vertical, any entity affiliated with Vertical, or any of Vertical's clients; (iii) Graham may not have any role in formulating, summarizing, discussing, or memorializing Vertical's marketing or management strategy; (iv) Graham may not have any authority to hire or fire employees of Vertical, or to negotiate or bind Vertical in any contracts; (v) Graham may not have any contact with current or prospective investors in any funds or accounts managed by Vertical regarding anything concerning Vertical or VCAP (other than current and former employees of Vertical who are also Vertical investors); (vi) Graham may not solicit capital on behalf of Vertical; (vii) Graham may not participate, consult, or assist with any purchase of securities; and (viii) Graham may not participate, consult, or assist with any sales of assets or positions that were purchased or acquired after the date of entry of this Order. Nothing herein shall prevent Graham from communicating with Vertical partners and counsel regarding any outstanding legal actions in which Vertical is a party.

E. Any reapplication for association by Graham will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against Graham, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order

In reviewing requests to lift or modify bar orders, we consider whether, "under all the facts and circumstances presented, it is consistent with the public interest and investor protection to permit the petitioner to function in the industry without the safeguards provided by the bar." The factors that guide the Commission's "public interest/investor protection inquiry" are:

[1] the nature of the misconduct at issue in the underlying matter; [2] the time that has passed since issuance of the administrative bar; [3] the compliance record of the petitioner since issuance of the administrative bar; [4] the age and securities industry experience of the petitioner, and the extent to which the Commission has granted prior relief from the administrative bar; [5] whether the petitioner has identified verifiable, unanticipated consequences of the bar; [6] the position and persuasiveness of the Division of Enforcement's response to the petition for relief; and [7] whether there exists any other circumstance that would cause the requested relief from the administrative bar to be inconsistent with the public interest or the protection of investors. 

Relief is appropriate only in "compelling circumstances," and in the usual case the bar will remain in place. Maintaining a bar serves the public interest and investor protection by ensuring that the Commission "retains its continuing control over [a] barred individual['s] activities." Nonetheless, the Commission will act in response to those situations in which the equitable need for relief warrants vacating or modifying the bar order. As explained below, Graham fails to establish the compelling circumstances necessary to vacate or modify his bar order. 

Despite his admission, Graham also asserts in support of his motion that his misconduct was isolated, unintentional, and immaterial; hurt no one; and did not benefit him. Although Graham presents affidavits that he contends provide "irrefutable facts" supporting his version of events, the Order's findings that Graham committed securities fraud that benefitted Vertical funds and directly injured at least one investor through an ongoing scheme contradict his contentions. Because he settled, Graham forfeited his opportunity to adduce his evidence, and waived the right to "complain that the record is inaccurate or incomplete." Graham "elected to forgo further proceedings"; "‘[h]is choice was a risk, but calculated and deliberate and such as follows a free choice'"; and he "‘cannot be relieved of such a choice now.'" We will not consider Graham's collateral attack on the Commission's findings. 

[G]raham asserts that this factor favors him because he complied with the Order "under hardship conditions during the allowed ‘carve-out' period" in the Order. In light of his serious and extensive misconduct, we barred Graham, but allowed him extremely limited, supervised participation in the sale of Vertical's assets under carefully tailored restrictions. Because "we expect financial industry professionals to comply with our orders," Graham's claimed compliance does not weigh in favor of overturning the Order. Graham's conduct during the one-year carve-out period also does not support his request to associate without restriction given that, among other things, he was not permitted to work from Vertical's facilities, contact unaffiliated investors, or have any role in Vertical's management, strategy, or purchase of securities. This factor does not weigh in his favor.

"We generally first grant incremental relief in our cases vacating bars." Rule of Practice 193 provides a process for barred individuals to apply for consent to associate notwithstanding the bar, and the Order (to which Graham agreed) specifically contemplated that he would be permitted to apply for reentry after three years. As part of this process, an individual seeking reentry to the securities industry must provide detailed information regarding expected supervision. FINRA also provides a process for a member firm to seek consent to associate with a barred individual notwithstanding the bar. A firm and the barred individual it seeks to employ will fail to meet "their burden ‘to show that . . . continued employment in the securities industry would be in the public interest'" if they fail "to establish heightened supervisory plans" for barred individuals. These processes allow a barred individual to "establish a satisfactory compliance record" while under heightened supervision "before moving to vacate the bar." Graham has not yet obtained consent to associate notwithstanding his bar, and now seeks to avoid this process entirely. To allow this "would permit [Graham] to engage in activities restricted by [his] bars without a prior period of demonstrated compliance." As a result, this factor weighs heavily against Graham.

Graham claims that the attorney who represented him (and others) at the time he agreed to the Order incorrectly told him that he could not review his partner's testimony and failed to adequately represent him in settlement negotiations. According to Graham, if he had reviewed his partner's testimony he would have responded to it by emphasizing her role in the relevant events and might have been able to negotiate a settlement with the Division that imposed lesser sanctions on him. This argument fails because ineffective assistance of counsel is not a defense in civil proceedings, and it does not provide a basis for a collateral attack on the Order. 

[H]e does not specify a proposed employer, only broad categories of unidentified industry participants (such as "an existing broker-dealer") that he "potentially" could join. Moreover, other than proposing certain voluntary undertakings, he does not identify the terms and conditions under which he would work and be supervised, or the disciplinary history of the employer and the individuals who would supervise him. By not providing any information concerning what he would be doing or what interactions he would have with investors or other market participants, his application fails to demonstrate that the proposed association is reasonably designed to prevent a recurrence of the conduct that led to imposition of the bar and thus fails to demonstrate that the requested relief would be consistent with the public interest. We recently denied a similar application for open-ended consent to associate "with any registered or un-registered broker-dealer, investment adviser, or other entity that participates in the securities industry." See Eric David Wanger, Exchange Act Release No. 81111, 2017 WL 2953369, at *1 (July 10, 2017), petition for review dismissed, Wanger v. SEC, 720 Fed. App'x. 792 (7th Cir. 2018). In denying the application, we explained that: 

[Wanger] does not identify a proposed employer, the terms and conditions of his planned employment, or the supervision, if any, that would be exercised over him in his new position. He does not say what he would be doing, for whom (if anyone) he would be doing it, or how he would be interacting with clients, investors, or other market participants. . . . Wanger's application offers no evidence that his unidentified future activities would be conducted in a manner designed to "prevent a recurrence of the conduct that led to the imposition of the bar" in the first place, and provides us with no basis on which to conclude that granting his request would be "consistent with the public interest." 

Wanger's request is functionally equivalent to asking us to vacate the bar entirely and free him from any restrictions or oversight on his future activities. But that is extraordinary relief that we grant only under the most "compelling circumstances," and Wanger's application fails to present any such circumstances. 

Graham contends that finding a sponsoring employer "is simply not possible in the real world while such a restrictive Order is in place." However, in denying the application in Wanger, we rejected a similar argument, noting that "difficulty finding suitable employment is ‘among . . . the natural and foreseeable consequences that flow from a ban on employment in the securities industry.'" We explained that difficulty finding suitable employment "is not a ‘compelling circumstance' that would justify wholly vacating a remedial sanction designed to prevent recurrence of misconduct and protect investors and the integrity of markets." Contrary to Graham's claim, while the Rule 193 standard is difficult, it is not impossible to meet, as our reentry decisions make clear.

[I]n Wanger, we rejected a similar challenge to settlement terms noting, "[w]e have a strong interest in the finality of our orders and we have consistently applied the principle set out in Rule 193 to reject collateral attacks that seek to undo the underlying proceeding, the findings in our order, or the terms of settlement." Graham offers no persuasive reason to deviate from the Rule and our precedent here. 

Absent his decision to offer settlement, under the Rules of Practice and the federal securities laws, Graham would have had the right to present evidence at a hearing, to submit proposed findings of fact and law, to receive an initial decision, to obtain de novo review by the Commission, and to obtain judicial review in the United States Court of Appeals. He chose to waive these rights in his Offer of Settlement and accept the settlement terms. According, Graham has forfeited his opportunity to challenge the underlying findings and settlement in his matter.  

• SEC
• Graham
• VCAP
• Bar
• Pennystock
• Public Interest
• Reapplication
• Rule of Practice 193
• Wanger
• BrokeAndBroker
• Bill Singer