16-3433 Gonnella v. Securities and Exchange Commission

In the United States Court of Appeals For the Second Circuit ______________

AUGUST TERM 2019

(Argued: September 9, 2019 Decided: April 2, 2020)

Docket No. 16-3433

______________

THOMAS C. GONNELLA,

Petitioner,

v.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION,

Respondent.

Before: WESLEY, CHIN, SULLIVAN, Circuit Judges

______________ Petitioner Thomas C. Gonnella challenges a decision of the Securities and Exchange Commission (the “Commission”) finding that he violated section 17(a)(1) of the Securities Act of 1933, section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5(a) and (c) promulgated thereunder, and that he aided and abetted his employer’s violations of its books and records requirements under the Exchange Act and associated regulations. Gonnella argues that the Commission committed a number of constitutional and statutory violations, and that the evidence was insufficient to support the Commission’s findings. We disagree. Accordingly, we AFFIRM. ______________

ANDREW J. FRISCH (Jason D. Wright on the brief), The Law Offices of Andrew J. Frisch, New York, NY, for Petitioner.

JOSHUA M. SALZMAN (Mark B. Stern, Mark R. Freeman, Melissa N. Patterson, Megan Barbero, Daniel Aguilar, Tyce R. Walters, on the brief), for William P. Barr, Attorney General, U.S. Department of Justice, Washington, DC, for Respondent.

PAUL G. ALVAREZ, Senior Counsel (Dominick V. Freda on the brief), for Michael A. Conley, Solicitor, Securities and Exchange Commission, Washington, DC, for Respondent.

______________

RICHARD J. SULLIVAN, Circuit Judge:

Petitioner Thomas C. Gonnella challenges an Opinion and Order of the

Securities and Exchange Commission (the “SEC” or “Commission”) finding that

he violated section 17(a)(1) of the Securities Act of 1933 (the “Securities Act”),

2 section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and

Exchange Act Rules 10b-5(a) and (c), and that he aided and abetted his employer’s

violations of its books and records requirements under Exchange Act section 17(a)

and Rule 17a-3(a)(2). Specifically, Gonnella argues that (1) the SEC’s designation

of an Administrative Law Judge (“ALJ”) who was not appointed pursuant to the

Appointments Clause violated the Constitution’s separation of powers; (2) the

Commission’s use of a cooperating witness violated

and Gonnella’s

right to due process; (3) the ALJ impermissibly engaged in independent fact-

finding; and (4) the Commission violated due process when it increased the

monetary sanctions imposed by the ALJ. Gonnella further argues that there was

insufficient evidence to support the Commission’s findings. Because, as explained

below, we find that the Commission’s actions were proper and the evidence was

sufficient to support the Commission’s findings, we deny the petition for review

and affirm the SEC’s order in its entirety.

I. BACKGROUND Gonnella was a bond trader who specialized in proprietary trading of

esoteric asset-backed securities at Barclays, a multinational investment bank and

financial services company, from October 2008 until his termination in November

3 2011. 1 In this role, Gonnella received an annual base salary ranging from $85,000

to $105,000 and annual bonuses of as much as $900,000. Barclays entrusted

Gonnella to invest almost $300 million, and he earned the firm profits of about $17

million.

This case stems from a series of trades that Gonnella executed to avoid

Barclays’s “aged[-]inventory policy” – a policy designed to “help optimize balance

sheet usage through timely turnover of inventory.” App’x 437. Pursuant to that

policy, traders were penalized for holding securities for more than ninety days. In

particular, the firm charged a fee to traders’ books of 0.5% of the market value of

these securities. If the trader then sold these securities within seven months, the

firm refunded this fee; but after seven months, the fee became final. The policy

served as a risk-management tool to help ensure that the securities in traders’

books accurately reflected the market price, and to make sure that traders did not

engage in strategies that were inconsistent with the firm’s objectives or applicable

regulations.

1 The Exchange Act defines asset-backed securities as “a fixed-income or other security collateralized by any type of self-

liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset.” 15 U.S.C. § 78c(a)(79)(A). Esoteric asset-backed securities are complex securities with a small market of buyers, which are usually backed by unusual assets such as timeshare rentals, shipping containers, and entertainment royalties. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), banking entities like Barclays are now prohibited from engaging in proprietary trading.

,

, 1620–31 (2010);

(implementing Section 619 of the Dodd-Frank Act).

4 Gonnella testified that he was aware of Barclays’s policies, including the

aged-inventory policy, and that each month he received and reviewed an email

that contained information regarding the age of the securities he held as well as

any penalties he might face based on the age of these securities. Gonnella further

testified that he was aware that Barclays prohibited “parking,” defined as

“[h]olding or hiding securities in a trading account, customer account, a fictious

account[,] or another firm,” App’x 456, for “the purpose of concealing the true

ownership of the securities, particularly at the end of the reporting period,” App’x

678. Gonnella understood that executing “[t]rades that lack[ed] a real shift in

ownership risk or benefit” was prohibited. App’x 678. Under Barclays’s aged-

inventory policy, any pre-arranged trades had to “be completely documented at

the time of the initial transaction,” and Barclays’s considered each such transaction

to be “presumptively improper.” App’x 444.

Gonnella arranged twelve trades with Ryan King, a trader at the now-

defunct broker-dealer firm Gleacher, which were designed to avoid the aged-

inventory charges. King had little experience with trading securities like this, and

the record reflects that Gonnella largely set the terms of the trades. Although

Gonnella disputes that he agreed to repurchase the securities after the reporting

5 period, King testified that he was “[i]ncredibly sure” and “didn’t have a doubt”

that Gonnella would repurchase these securities at a higher price just days after

selling them to him. App’x 104-06. King testified that Gonnella used “coded”

language to communicate some of the details of their trades because the trades

violated certain financial rules. E.g., App’x 102–03, 119. The record is clear that

Gonnella did in fact repurchase these securities from King soon after the deadline

for the aged-inventory charges had passed.

Barclays’s trade monitoring system flagged as suspicious four of the five

trades Gonnella made with King at the end of August 2011. For each, Gonnella

sold securities on August 31 and then repurchased them on September 2, 2011.

When an individual from the firm’s compliance department questioned Gonnella,

he did not disclose that he traded the securities to avoid the charges. Instead,

Gonnella stated that he sold the securities in order to “get more individuals

involved in the bonds,” which he endeavored to do through Gleacher’s contacts.

S. App’x 66–67; see also App’x 393. Gonnella further stated that he repurchased

them – at a higher price than he sold them – because he believed he could

repackage them and resell them for a higher profit.

6 King and Gonnella subsequently executed a number of additional trades,

even as Gonnella faced increased scrutiny from his supervisor, Matthew Miller.

King and Gonnella exchanged numerous messages through Bloomberg terminals

about the trades, and later exchanged text messages and phone calls in violation

of Barclays’s policy banning the use of personal communication devices to conduct

business. When Miller questioned Gonnella about these trades, Gonnella again

did not disclose any agreement with King, and instead stated that he thought he

could resell the securities at a higher price. Miller warned Gonnella that he would

be scrutinizing his trades.

In late 2011, Miller and Gonnella attended Barclays’s annual compliance

training, at which the rule against parking was specifically discussed. Soon

thereafter, Miller became increasingly suspicious of Gonnella’s trades, and

informed Gonnella that he planned to mention them to management. After

learning this, Gonnella reported the trades to the compliance department himself,

but again did not disclose any agreement with King to repurchase the securities.

Barclays subsequently terminated Gonnella, and disclosed the matter to the SEC.

In this disclosure, Barclays stated that it did not believe Gonnella violated any

7 securities laws but said that he was not “forthright” during his interview. App'x

690–91.

The Commission initiated administrative proceedings against Gonnella and

ordered an ALJ to conduct a hearing. The ALJ found Gonnella violated section

17(a)(1) of the Securities Act, section 10(b) of the Exchange Act, and Exchange Act

Rules 10b-5(a) and (c). The ALJ also concluded that Gonnella had aided and

abetted Barclays’s violations of the books and records requirements of the

Exchange Act and the rules promulgated thereunder. The ALJ then imposed a

cease and desist order, a civil penalty of $82,500, and a twelve-month collateral

and penny-stock suspension.

Both Gonnella and the SEC’s Enforcement Division petitioned the

Commission for review of the ALJ’s decision. In a decision dated August 10, 2016,

the Commission concluded, after reviewing the facts and law de novo, that

Gonnella violated each of the provisions at issue. The Commission then reassessed

the appropriate penalties. Like the ALJ, the Commission ordered a civil penalty

of $82,500. Unlike the ALJ, however, it barred Gonnella from working in the

securities industry for life, though it permitted him to reapply in five years.

8 Gonnella appealed to this Court for review on October 11, 2016. Because

Gonnella challenged the constitutionality of the ALJ mechanism, this case was

stayed pending the Supreme Court’s resolution of Lucia v. SEC,

(2018).

II. STANDARD OF REVIEW “The findings of the Commission as to the facts, if supported by substantial

evidence, are conclusive.” 15 U.S.C. § 78y(a)(4); Mathis v. SEC,

, 215−16

(2d Cir. 2012). “Under the Administrative Procedure Act, we will set aside the

SEC’s actions, findings, or conclusions of law only if they are ‘arbitrary, capricious,

an abuse of discretion, or otherwise not in accordance with law.’” Mathis,

(quoting

(2)(A)). “We will not disturb the SEC’s choice of

sanction unless it is unwarranted in law or without justification in fact.”

(internal quotation marks omitted).

III. DISCUSSION Gonnella raises a number of points in his petition: (1) the Commission

violated the Appointments Clause by delegating the matter to an ALJ; (2) the

Enforcement Division’s cooperator policy violated the Administrative Procedure

Act (“APA”) and due process; (3) the ALJ committed improper fact-finding; (4) the

9 Commission’s decision rested on insufficient evidence; and (5) the Commission

improperly increased Gonnella’s sanctions. We address each point in turn below.

A. Gonnella Forfeited His Constitutional Challenge by Not Raising It During the Administrative Proceedings Gonnella first challenges the Commission’s order on the ground that the

Commission violated the Appointments Clause of Article II of the Constitution

when it designated the case to an ALJ. In June 2018, while this appeal was

pending, the Supreme Court confirmed that ALJs employed by the SEC are

inferior officers who must be appointed in accordance with the Appointments

Clause. Lucia, 138 S. Ct. 2053–54. Today, we are asked to decide whether a litigant

may challenge the constitutionality of the ALJ’s appointment for the first time on

appeal.

“[O]rderly procedure and good administration require that objections to the

proceedings of an administrative agency be made while [the agency] has

opportunity for correction in order to raise issues reviewable by the courts.”

United States v. L.A. Tucker Truck Lines, Inc.,

, 36−37 (1952).

Constitutional claims are no different. See Freytag v. Comm’r,

(1991) (Scalia, J., concurring in part and concurring in the judgment)

(“Appointments Clause claims, and other structural constitutional claims, have no

10 special entitlement to review.”). “No procedural principle is more familiar to this

Court than that a constitutional right may be forfeited . . . by the failure to make

timely assertion of the right before a tribunal having jurisdiction to determine it.”

Yakus v. United States,

(1944). While the Supreme Court in Freytag

recognized there may be “rare cases” in which a petitioner may raise an objection

on appeal that was not raised to the administrative body, Freytag,

,

it “neither accept[ed] nor reject[ed]” the petitioners’ proposal to “adopt[] a general

rule that ‘structural’ constitutional rights as a class simply cannot be forfeited,”

(Scalia, J., concurring in part and concurring in the judgment). 2

Four years after Freytag, the Supreme Court indicated that an Appointments

Clause challenge must generally be “timely” to be considered on appeal. See Ryder

v. United States,

, 182–83 (1995). The Supreme Court recently

emphasized this again in Lucia, stating that “‘one who makes a timely challenge to

the constitutional validity of the appointment of an officer who adjudicates his

case’ is entitled to relief.”

(emphasis added) (quoting Ryder, 515

2 Samuels, Kramer & Co. v. Commissioner,

(2d Cir. 1991), cited by Gonnella during oral argument, is not to the contrary. There, we held that “[a]lthough . . . [a] Company affirmatively elected to proceed in the Tax Court, this choice of forum in itself cannot be equated with a waiver of constitutional safeguards,” especially where that company “challenged the assignment of its cases to a special trial judge from the outset.”

. We thus examined not whether the failure to object constituted forfeiture of a claim, but whether a petitioner who did object could be deemed to have subsequently waived its claim “through silence or mere submission to the jurisdiction of the forum.”

; see also United States v. Spruill,

(2d Cir. 2015) (“Waiver is different from forfeiture. Whereas forfeiture is the failure to make the timely assertion of a right, waiver is the ‘intentional relinquishment or abandonment of a known right.’” (Pooler, J., dissenting) (quoting United States v. Olano,

(1993))).

11 U.S. at 182–83). There are compelling policy reasons behind such a rule. As Justice

Scalia recognized, forfeiture is “not . . . mere[ly] [a] technicality,” but rather “is

essential to the orderly administration of justice.” Freytag, 501 U.S. at 894–95

(Scalia, J., concurring in part and concurring in the judgment) (quoting 9 C. Wright

& A. Miller, Federal Practice and Procedure § 2472, p. 455 (1971)). At bottom,

“[a]ny other rule would create a disincentive to raise Appointments Clause

challenges with respect to questionable judicial appointments.” Ryder,

.

Gonnella has not shown this is one of those “rare cases” that would excuse

his failure to object. We therefore hold – as have at least two other circuit courts

that have considered the question – that a litigant who does not object to the

constitutionality of an ALJ at any point during the SEC proceedings forfeits that

challenge. See Cooper v. SEC,

, 474–75 (9th Cir. 2019) (“The only

issue [petitioner] raises in the opening brief is whether the ALJ was properly

appointed under the Appointments Clause. However, because [petitioner] did not

timely raise this issue before the Commission, he may not raise the issue on

appeal.”); Malouf v. SEC,

(10th Cir. 2019) (“[Petitioner] forfeited

[his Appointments Clause challenge] by failing to present it in the SEC

12 proceedings.”); Kabani & Co. v. SEC,

, 919 (9th Cir. 2018)

(“[P]etitioners forfeited their Appointments Clause claim by failing to raise it in

their briefs or before the agency.”), cert. denied sub nom.,

(2019); see

also David Stanley Consultants v. Dir., Office of Workers’ Comp. Programs, No. 18-3406,

, at *3 (3d Cir. Jan. 31, 2020) (relying on Lucia for the proposition

that, in a Black Lung Benefits Act case, a petitioner who does not make a “timely”

Appointments Clause challenge to the Benefits Review Board forfeits such a

claim); NLRB v. RELCO Locomotives, Inc.,

(8th Cir. 2013) (holding

that a challenge to the composition of the National Labor Relations Board under

the Recess Appointments Clause was not jurisdictional and could be forfeited if

not raised to the Board).

Congress may, of course, excuse the failure to object in certain

circumstances. In securities cases, Congress has generally provided that a failure

to object under the Exchange Act or Investment Advisers Act (the "Advisers Act")

may be excused in the event that there are “reasonable grounds” to do so, 15 U.S.C.

§§ 78y(c)(1), 80b-13(a), although it has not created such an exception in the

Securities Act, see id. § 77i(a). In any event, Gonnella points to no reasonable

grounds that would excuse his failure to raise the objection below beyond the fact

13 that Lucia had not yet been decided. Gonnella does not deny that other litigants

were raising Appointments Clause challenges to ALJs around the time he was

litigating his case before the SEC. For example, Raymond Lucia, whose case would

form the basis of the Supreme Court’s Lucia decision, submitted his briefing to the

Commission in 2014 and submitted supplemental briefing to the Commission on

the Appointments Clause issue in July 2015. See Respondent’s Supplemental

Briefing in Support of Appeal, In the Matter of Raymond J. Lucia Cos., et al., Admin

Proc. File No. 3-15006 (2015) (Doc. No. 81). The Commission decided that case in

September 2015 – almost a year prior to deciding Gonnella’s case. In the Matter of

Raymond J. Lucia Cos., et al., Release No. 4190,

(Sept. 3, 2015). In

fact, in June 2016, while Gonnella’s case was pending before the SEC, this Court

explicitly recognized the growing trend of raising claims regarding the

constitutionality of ALJs. See Tilton v. SEC,

, 279–80 (2d Cir. 2016)

(“During the past year or so, several respondents in ongoing SEC administrative

proceedings have asserted that Article II of the United States Constitution bars the

agency’s ALJs from acting as hearing officers . . . [because they] were not

appointed in accordance with the Appointments Clause.”). Despite having

constructive notice of the argument and relevant Supreme Court precedent –

14 which was ultimately heavily relied upon by the Supreme Court in Lucia –

Gonnella failed to raise such a claim. See Malouf,

(“In the SEC

proceedings, Mr. Malouf could have invoked Freytag, just as the petitioners

in Bandimere and Lucia had done.”); see also Island Creek Coal Co. v. Wilkerson,

(6th Cir. 2018) (highlighting that Lucia stated that Freytag established

“everything necessary to decide this case,” and ultimately finding forfeiture

because appellants failed to raise the argument in their opening briefs

(quoting Lucia,

)).

Gonnella nevertheless argues that it would have been futile to raise the

argument to the Commission given the SEC’s long history of using ALJs and its

previously articulated position on the legality of that practice. Oral Argument at

1:26–2:03, Gonnella v. SEC, 16-3433 (2019), http://www.ca2.uscourts

.gov/oral_arguments.html. But a pessimistic view of the Commission’s likelihood

of granting the motion is not enough to overcome the traditional rule mandating

litigants to lodge their objections during the administrative proceedings. Indeed,

Gonnella’s futility argument is in tension with our decision in Tilton, in which we

assessed the subject matter jurisdiction of a district court to consider an

Appointments Clause challenge to the SEC’s ALJs, and held that, “[b]y enacting

15 the SEC’s comprehensive scheme of administrative and judicial review, Congress

implicitly precluded federal district court jurisdiction over [an] appellant[‘s]

constitutional [Appointments Clause] challenge” prior to review by an ALJ and

the Commission.

. We emphasized that “appellants will have

access to meaningful judicial review of their Appointments Clause claim through

administrative channels.”

. Although we made this assessment in the

context of jurisdiction, the logic extends to forfeiture – the SEC had jurisdiction to

hear the claim, and was in a position to provide meaningful review. It would thus

not have been futile for Gonnella to raise the claim before the Commission.

In sum, Gonnella has not shown that this is “one of those rare cases” under

Freytag that merits excusing forfeiture, and he has not shown reasonable grounds

that would excuse his failure to object under the statutory scheme. Since Gonnella

did not raise a constitutional argument to the ALJ or to the Commission, either in

his initial briefs or via supplemental briefing prior to the Commission’s final

decision, he may not raise this objection now.

B. The SEC’s Cooperation Agreement with King Did Not Violate Gonnella’s Right to Due Process Gonnella next raises two challenges regarding the Enforcement Division’s

cooperation agreement with King. First, he insists that because the program

16 guidance under which the Enforcement Division signed up King as a cooperating

witness did not go through the Notice and Comment procedures of the APA, his

administrative hearing was tainted. Second, Gonnella contends that the

Commission acted unconstitutionally as both the “prosecutorial and sentencing

power” in implementing the program. Petitioner’s Br. at 48. Neither argument is

persuasive.

1.

: Enforcement Guidance Gonnella argues – for the first time on appeal – that the SEC’s enforcement

program constituted a rule change that should have gone through the APA’s

Notice and Comment process. As an initial matter, Gonnella forfeited this

challenge. “No objection to an order or rule of the Commission, for which review

is sought under this section, may be considered by the court unless it was urged

before the Commission or there was reasonable ground for failure to do so.” 15

U.S.C. § 78y(c)(1); see MFS Sec. Corp. v. SEC,

, 620–21 (2d Cir. 2004).

Although Gonnella originally challenged the constitutionality of the enforcement

program, discussed in further detail below, he never mounted a challenge to the

legitimacy of

for failing to comply with the APA.

But even assuming that Gonnella has not forfeited this argument, we find

that

is a policy statement, not a rule, and thus is not subject to

17 the Notice and Comment requirements of the APA. The APA’s requirement that

“[g]eneral notice of proposed rule making shall be published in the Federal

Register” does not apply to “interpretative rules, general statements of policy, or

rules of agency organization, procedure, or practice.”

(b)(A). As we

have previously explained, policy statements generally impact agency behavior

rather than change the “existing rights” of others outside the agency. Noel v.

Chapman,

(2d Cir. 1975) (internal quotation marks omitted).

“The central question is essentially whether an agency is exercising its rule-making

power to clarify an existing statute or regulation, or to create new law, rights, or

duties in what amounts to a legislative act.” White v. Shalala,

(2d

Cir. 1993). Such “legislative rules,” which must go through Notice and Comment

procedures, have “legal effect.” Sweet v. Sheahan,

(2d Cir. 2000). To

determine if a rule has “legal effect,” we look to:

(1) whether in the absence of the rule there would not be an adequate legislative basis for enforcement action or other agency action to confer benefits or ensure the performance of duties, (2) whether the agency has published the rule in the Code of Federal Regulations, (3) whether the agency has explicitly invoked its general legislative authority, or (4) whether the rule effectively amends a prior legislative rule.

(quoting Am. Mining Cong. v. Mine Safety & Health Admin.,

, 1112

(D.C. Cir. 1993)).

18 Here, the first Sheahan factor is not even applicable, since the guidance

contains no new rules for enforcement action. Moreover, although the

Commission’s enforcement guidance was published in the Code of Federal

Regulations, it does not amount to an exercise of the agency’s legislative authority

since it merely promulgated a “policy statement” setting forth “the analytical

framework employed by the Commission and its staff [to] . . . ensure[] that

potential cooperation arrangements maximize the Commission’s law enforcement

interests.”

. The policy emphasizes that “the evaluation of

cooperation requires a case-by-case analysis of the specific circumstances

presented.”

It is highly discretionary, non-binding, and does not impose any

legal requirements on cooperating parties or the Commission. The document is a

quintessential policy document that serves to increase transparency regarding the

SEC’s approach to cooperation. We therefore hold that the policy need not have

gone through the Notice and Comment procedures of the APA.

2. The Commission as a “Prosecutorial Witness” Gonnella further argues that the SEC’s use of cooperators violated his right

to due process because the cooperator’s “sentence” is not imposed by a

representative of the judiciary. He further argues that the agreement “incentivized

19 Mr. King to stretch the truth to please the same prosecutorial and sentencing

power.” Petitioner’s Br. at 48.

But the cooperation agreement, entered into with the Enforcement Division,

did nothing more than outline broad standards that the Commission may consider

when looking at cooperation. The agreement itself stated it was entered “freely

and voluntarily.” App’x 991. It clearly stated that the Division “cannot, and does

not, make any promise or representation as to whether or how the Commission

may act on enforcement recommendations.”

It further clarified that it was not

binding, and the Commission could reject any recommendations it received. The

use of cooperators does not violate due process simply because it takes place

within the confines of the administrative state. We have never seriously

questioned the premise that the SEC may use evidence and testimony garnered

from a cooperating witness, and see no reason to do so now. See, e.g., In re

Steinhardt Partners, L.P.,

(2d Cir. 1993) (noting the benefits of

cooperating with the SEC).

As to Gonnella’s claim regarding King’s bias, there is no evidence to suggest

that the agreement coerced King to testify any more than a cooperation agreement

in any criminal case coerces a cooperating witness into testifying. Petitioner’s

20 reliance on United States v. Waterman,

(8th Cir. 1984), is unpersuasive.

Unlike in Waterman, Gonnella was not offered favorable treatment contingent

upon the success of the prosecution.

. Moreover, during the public

hearing Gonnella was able to cross-examine King to explore any biases he might

have had. In light of the clear language of the agreement and the lack of any

concrete evidence of bias, Gonnella’s argument simply does not carry weight.

C. The ALJ Did Not Engage in Impermissible Fact-Finding Gonnella next argues that the Commission violated his right to due process

by permitting the ALJ to create independent evidence and conduct independent

fact-finding after the close of the evidence without providing Gonnella notice and

an opportunity to be heard. In particular, Gonnella objects to the ALJs

consideration of “obscure” law review articles in reaching its findings following

the hearing. Petitioner’s Br. at 37. But any error – and we are not convinced there

was any – that may have occurred during the ALJ’s adjudication was cured during

the proceeding before the Commission. Not only did the Commission conduct de

novo review of the facts and law, as statutorily required, but it explicitly stated that

it did not rely on any of the articles to which Gonnella now objects.

21 D. There Was Sufficient Evidence Supporting the Commission’s Findings Finally, Gonnella makes two arguments regarding the sufficiency of the

evidence at his disciplinary hearing. First, he argues that there was insufficient

evidence to prove that he committed a primary violation of the securities laws.

Second, Gonnella asserts that there was insufficient evidence to establish that he

aided and abetted Barclays in a books and records violation. We disagree.

1. Primary Violation

Under Securities Act section 17(a), it is “unlawful for any person in the offer

or sale of any securities,” with scienter, “to employ any device, scheme, or artifice

to defraud.” 15 U.S.C. § 77q(a)(1). Under Exchange Act section 10(b) and

Exchange Act Rule 10b-5, it is unlawful for “any person, directly or indirectly,”

with scienter, “[t]o use or employ, in connection with the purchase or sale of any

security . . . any manipulative or deceptive device or contrivance in contravention

of” Commission rules. Id. § 78j(b);

.10b-5. In this context, severely

“reckless conduct” is sufficient to constitute scienter. Rolf v. Blyth, Eastman Dillon

& Co.,

(2d Cir. 1978).

Even a cursory review of the record reveals substantial evidence that

Gonnella intentionally engaged in deceitful behavior contrary to Barclays’s policy

in order to gain a personal benefit. Specifically, Gonnella acknowledged that he

22 was aware of Barclays’s policy prohibiting trade parking, and admitted that he

engaged in the trades to avoid the charges that would have been assessed to his

book pursuant to Barclays’s aged-inventory policy. The record is clear that

Gonnella took steps to conceal his actions: he used vague, coded language in

Bloomberg messages and did not disclose his agreement to repurchase the

securities to either the compliance department or his direct supervisor, despite

their growing suspicions. In addition, he did not properly record the trades in his

trading book. Finally, there can be no doubt that Gonnella derived a personal

benefit from his misconduct. Although he claims his actions did not impact his

compensation, the record makes clear that as much as $950,000 of his annual

compensation was from his bonus, and Gonnella himself admitted that he

understood that having higher profits would increase the chances he would get a

larger bonus. And while Gonnella ultimately reported the violation himself, the

evidence established that he did so only when he knew that his supervisor was

about to report him.

Although Gonnella makes much of the fact that Barclays represented that

Gonnella did not violate the securities statutes when it reported his conduct to the

SEC, Barclays’s views on the law do not bind the Commission or this Court. Put

23 simply, Barclays concluded that Gonnella structured trades to avoid the aged-

inventory policy and the charges that would have been assessed against his trade

book. He then bought the securities back from King – at a higher price than he

had previously sold them – at Barclays’s expense. That is exactly what the

Commission found, and the Commission determined that this behavior violated

the securities laws. Taken together, the evidence was more than sufficient to show

Gonnella’s scienter.

Gonnella next argues that there was insufficient evidence to show that he

actually committed fraud. As outlined above, claims under section 17(a) require

proof of a “scheme . . . to defraud.” 15 U.S.C. § 77q(a)(1). Similarly, claims under

section 10(b) and Rule 10b-5 require proof of a “manipulative or deceptive device

. . . in contravention of” Commission rules. Id. § 78j(b);

.10b-5. In

line with this, the Commission accurately found that Gonnella “acted deceptively

by conveying a false appearance of compliance with Barclays’s aged[-]inventory

policy, thereby misleading Barclays about how long he had held a position in the

relevant bonds and the degree of risk to the firm as a result of those trading

positions.” App’x 1066.

24 Here, the Commission found sufficient evidence that Gonnella sold

securities to King for a temporary period of time, after which Gonnella

repurchased those securities at a higher price. He did this to avoid $726,000 in

irreversible aged-inventory charges, which would have negatively impacted his

bonus. In doing so, Gonnella caused Barclays to pay $111,000 more to repurchase

the securities at issue. In essence, he deceived Barclays into “paying a premium”

for these securities. App’x 1067. In addition to costing Barclays money, Gonnella

also increased the risk that Barclays faced in holding inaccurately valued

securities. The aged-inventory policy was put in place to make sure that the

trader’s “valuation for a security reflected the prevailing market price at which he

could buy and sell the security;” violating this policy “exposed Barclays to the risk

of holding securities that [were] overvalued or undervalued.” App’x 1067.

In the face of this clear evidence, Gonnella responds that (1) roundtrip trades

were common in this marketplace, (2) he only violated an internal policy, and (3)

there was no agreement to repurchase the securities. None of these arguments is

compelling or constitutes a defense to his securities violations. As to his first point,

the fact that behavior is common does not mean it is not fraud. Newton v. Merrill,

Lynch, Pierce, Fenner & Smith, Inc.,

(3d Cir. 1998) (en banc) (“Even

25 a universal industry practice may still be fraudulent.”); Chasins v. Smith, Barney &

Co.,

(2d Cir. 1970). As to his second point, committing fraud

and violating internal policy are not mutually exclusive. See United States v.

Naftalin,

(1979) (federal securities laws “prohibit[] frauds against

brokers as well as investors”). Finally, as to his third point, there was more than

sufficient evidence to demonstrate Gonnella’s intent to repurchase the securities.

As explained in greater detail above, Gonnella organized the transactions with

King, who had no experience with this type of trade, and led King to believe he

would buy them back, which he in fact did, at a premium. In short, the

Commission was completely justified in concluding that Gonnella intentionally

violated the securities laws.

2. Aiding and Abetting Gonnella similarly argues that the Commission’s findings were insufficient

to establish that he aided and abetted his employer’s violations of the books and

records provisions of section 17(a) and Rule 17a-3(a)(2), the latter of which requires

that registered broker-dealers “make and keep current . . . [l]edgers (or other

records) reflecting all assets and liabilities, income and expense and capital

accounts.”

.17a-3(a)(2). “In order for a defendant to be liable as an

aider and abettor in a civil enforcement action, the SEC must prove: (1) the

26 existence of a securities law violation by the primary (as opposed to the aiding and

abetting) party; (2) knowledge of this violation on the part of the aider and abettor;

and (3) substantial assistance by the aider and abettor in the achievement of the

primary violation.” SEC v. Apuzzo,

(2d Cir. 2012) (internal

quotation marks omitted).

As the Commission found, Barclays violated Exchange Act section 17(a) and

Rule 17a3(a)(2) by “maintain[ing] books and records that did not reflect Gonnella’s

agreement with King.” App’x 1071. Gonnella documented his trades without

indicating that there was an agreement to repurchase the bonds, and thus made

the books inaccurate. Gonnella’s only defense is that he did not engage in stock-

parking or prearranged trades. But, as stated above, there was more than enough

circumstantial evidence for the Commission to find that Gonnella did just that.

This argument, like the others, therefore fails.

E. The Commission Did Not Improperly Sanction Gonnella Finally, Gonnella argues that the Commission violated due process when it

imposed higher sanctions than the ALJ had originally imposed. The securities

regulations make clear that if a party files a timely petition for review “or if the

Commission on its own initiative orders review of a decision . . . the initial decision

shall not become final as to that party or person.”

(d)(1).

27 Moreover, the Commission “may affirm, reverse, modify, set aside or remand for

further proceedings, in whole or in part, an initial decision by a hearing officer and

may make any findings or conclusions that in its judgment are proper and on the

basis of the record.”

§ 201.411(a); see also Checkosky v. SEC,

(D.C.

Cir. 1994) (“Since the Commission (not the ALJ) is charged with the responsibility

to suspend petitioners, the initial decision of the ALJ is of limited consequence.”).

Under Exchange Act section 15(b)(6) and Advisers Act section 203(f), the

Commission can suspend a defendant for up to 12 months or can bar him “from

being associated with a broker, dealer, investment adviser, municipal securities

dealer, municipal advisor, transfer agent, or nationally recognized statistical rating

organization” if the Commission determines the defendant’s acts were willful

violations of the securities laws and such a bar would serve the public interest. 15

U.S.C. §§ 78o(b)(6)(A), 80b-3(f). Further, the Investment Company Act allows the

Commission to “prohibit, conditionally or unconditionally, either permanently or

for such period of time as it in its discretion shall deem appropriate in the public

interest,” any person from serving in certain capacities with respect to an

investment company so long as the securities violation was willful, and the ban is

in the public interest. Id. § 80a-9(b).

28 Here, both Gonnella and the Enforcement Division petitioned the

Commission for review. In its petition for review, the Enforcement Division

argued that the length of time that the ALJ imposed as a penalty was “inadequate

in light of the [administrative] law judge’s findings concerning the extent of

Gonnella’s misconduct.” App’x 1035. The Division requested that the

Commission “impose permanent collateral and penny-stock bars on Gonnella or,

in the alternative, impose bars of sufficient length to effectuate their remedial

purpose and protect the public interest.” App’x 1037.

As the Commission noted, its review, including review of sanctions, is de

novo. App’x 1076 (citing In re Gary M. Kornman, Exchange Act Release No. 2840,

, at *9 n.44 (Feb. 13, 2009)). And while the Enforcement Division

did not specifically request that the Commission bar Gonnella from serving in

certain positions under the Investment Company Act, the Commission

nonetheless found such sanctions were warranted. The Commission noted that

the order instituting proceedings against Gonnella specifically sought relief under

the Investment Company Act section 9(b), 15 U.S.C. § 80a-9(b), which authorizes

a lifetime ban. App’x 1073 n.52; App’x 3. Moreover, the Commission found that

Gonnella’s fraud was “egregious[],” S. App’x 82, and that because Gonnella still

29 did not grasp the seriousness of his actions, he was likely to commit additional

offenses. Over the dissent of Commissioner Piwowar, the majority of the

Commissioners found a life ban with the possibility of reapplication in five years

to be appropriate.

The SEC’s ability to increase penalties flows logically from the statutory

scheme – its review is de novo, and the ALJ’s decision is not final. Despite

Gonnella’s claims that the punishment is “draconian,” see Petitioner’s Reply Br. at

49–50, the Court must “not disturb the SEC’s choice of sanction unless it is

unwarranted in law or without justification in fact,” Mathis,

(internal quotation marks omitted). Here, we have no reason to doubt that the

sanctions imposed by the Commission were both warranted by law and justified

in fact. Accordingly, we find no basis for disturbing the Commission’s order.

CONCLUSION For the reasons stated above, the petition for review is DENIED and the

decision of the Commission is AFFIRMED in its entirety.

30