Malouf v. Sec. & Exch. Comm'n

933 F.3d 1248 (2019) United States Court of Appeals for the Tenth Circuit 2019-08-13

SEC administrative enforcement; substantial-evidence review of agency findings; sanctions affirmed (result: claimant-won)

Facts

  1. 4 Fraudulent scheme or deceptive course of business satisfied proved
    In 2007, Raymond James became concerned about the conflict of interest between (1) Mr. Malouf's role at its branch office and (2) his role at UASNM. These concerns led Raymond James to ask Mr. Malouf to choose between the two roles. Mr. Malouf opted to remain at UASNM and sold his Raymond James branch to Mr. Maurice Lamonde for roughly $1.1 million, to be paid in installments based on the Raymond James branch's collection of securities-related fees.
  2. 4 Fraudulent scheme or deceptive course of business satisfied proved
    To facilitate the installment payments, Mr. Malouf routed bond trades on behalf of his UASNM clients through the Raymond James branch. This way, Mr. Lamonde would receive enough in commissions to allow him to pay what he owed Mr. Malouf.
  3. 4 Fraudulent scheme or deceptive course of business satisfied proved
    Mr. Malouf later acknowledged that his financial arrangement with Mr. Lamonde had created a conflict of interest that should have been disclosed. But Mr. Malouf did not disclose that arrangement to UASNM's chief compliance officer or the outside consultant. Because these individuals did not know the details of the Malouf-Lamonde arrangement, UASNM not only failed to disclose Mr. Malouf's conflict of interest but also boasted that (1) UASNM's employees were not receiving any commissions or fees from the Raymond James branch and (2) UASNM was providing impartial advice untainted by any conflicts of interest.
  4. 4 Fraudulent scheme or deceptive course of business satisfied proved
    While UASNM was boasting of its impartiality, Mr. Malouf was participating in deciding what UASNM would disclose. He acknowledged that he had reviewed some of the Forms ADV for what to disclose and had at least some familiarity with the contents of the website. But he took no steps to remedy UASNM's misstatements or to disclose his own conflict of interest.
  5. 4 Fraudulent scheme or deceptive course of business satisfied proved
    The Court expressly held that a person could incur liability under these provisions when the conduct involves another person's false or misleading statement.
  6. 4 Fraudulent scheme or deceptive course of business satisfied proved
    Given these definitions, we conclude that the SEC did not err in finding a fraudulent device, scheme, or artifice to defraud.
  7. 6 Intent to deceive, manipulate, or defraud satisfied proved
    Conduct is extremely reckless when the petitioner knows or must have known that the conduct created a danger of misleading investors.
  8. 6 Intent to deceive, manipulate, or defraud satisfied proved
    Mr. Malouf and Mr. Lamonde had a financial arrangement that resulted in payments to Mr. Malouf from bond trades that he had routed through the Raymond James branch. This arrangement gave an incentive to Mr. Malouf to route his clients' bond trades through the Raymond James branch, compromising the independence of UASNM and Mr. Malouf as investment advisers. The SEC reasonably concluded that Mr. Malouf was aware of the conflict and tried to exploit it, for UASNM's outside consultant testified that Mr. Malouf had lied and resisted disclosure of the financial arrangement with Mr. Lamonde.
  9. 6 Intent to deceive, manipulate, or defraud satisfied proved
    For three reasons, we reject Mr. Malouf's arguments and conclude that substantial evidence supports the SEC's finding of scienter.
  10. 6 Intent to deceive, manipulate, or defraud satisfied proved
    Second, the evidence allowed the SEC to reasonably find that Mr. Malouf was familiar with the contents of UASNM's Forms ADV and its website. For example, Mr. Malouf admitted that he had periodically reviewed the Forms ADV and the website. Yet for several years, Mr. Malouf took no action to correct material misstatements on the forms or the website.
  11. 6 Intent to deceive, manipulate, or defraud satisfied proved
    Third, the evidence suggests that Mr. Malouf dragged his feet even after being directed to disclose the conflict. This directive stemmed from the outside consultant's discovery that Mr. Malouf had been receiving installment payments from the buyer of the Raymond James branch. Upon this discovery, the consultant told Mr. Malouf and UASNM that the arrangement had created a conflict of interest that needed to be disclosed. But about nine months passed before UASNM disclosed the conflict. Mr. Malouf's contribution to that delay reasonably supports a finding of scienter.