Thursday, November 17, 2005
In a market manipulation case, the D.C. Circuit held that the SEC had not established that a series of matched trades by the defendants were conducted with the requisite scienter for a Section 10(b)/Rule 10b-5 finding of market manipulation, and that the substantial monetary penalties imposed on the defendants for other disclosure violations were unsupported. In Rockies Fund Inc. v. SEC (here), the court of appeals reviewed a Commission order finding violations by three directors of The Rockies Fund, a business development company, for sales of securities of a company in the Fund's portfolio. The SEC imposed civil money penalties of $160,000 each on two directors and $500,000 on one director. In rejecting the substantial penalites, the D.C. Circuit stated:
The monetary sanctions imposed by the SEC amount to the harshest available—third-tier sanctions. To impose third-tier sanctions, the SEC must show that the violations "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" and "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in substantial pecuniary gain to the person who committed the" violations. 15 U.S.C. § 80a-9(d)(2)(c). The SEC found that this standard applied but did not even cursorily explain either element. One could say the entire opinion, charitably read, provides the analysis for the first prong. As to the second prong, however, the SEC gives no explanation of how petitioners’ conduct either resulted in or created a significant risk of substantial loss to others. Neither does it give support for a finding of pecuniary gain. In sum, the SEC’s analysis was not just superficial; it was nonexistent. Accordingly, because the SEC did not explain its reasoning, we hold that the SEC arbitrarily and capriciously imposed third-tier sanctions on the petitioners.