Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
J.W. BARCLAY & CO., INC.
|INITIAL DECISION AS TO|
July 23, 2003
|APPEARANCES:|| Joy M. Boddie, Charles J. Kerstetter, and Kathryn A. Pyszka for the Division of Enforcement, Securities and Exchange Commission.
Mayer Dallal, pro se.
|BEFORE:||James T. Kelly, Administrative Law Judge.|
The Securities and Exchange Commission (Commission or SEC) instituted this proceeding against Mayer Dallal (Dallal) and others on April 24, 2002, pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Exchange Act). Dallal filed a timely answer. I held four days of hearings during March and April 2003 in New York City.1
At a telephonic prehearing conference on March 19, 2003, the Commission's Division of Enforcement (Division) and Dallal announced that they had narrowed the issues that remained to be resolved at the hearing.
I held another telephonic prehearing conference on March 20, 2003, with the Division and Dallal. The Division moved for partial summary disposition against Dallal on all of the liability issues in the Order Instituting Proceedings (OIP) and on two of the four potential sanctions sought in the OIP. See Rule 250(a) of the Commission's Rules of Practice, 17 C.F.R. § 201.250(a). During this prehearing conference, I reviewed with Dallal the consequences of stipulating to the facts alleged in the OIP and of consenting to the relief sought by the Division. I was satisfied that Dallal's decision not to oppose the Division's motion was knowing, intelligent, and voluntary. Accordingly, I granted the Division's motion for partial summary disposition. See Order of March 21, 2003.
Matters Resolved By Dallal's Consent
To The Relief Sought By The Division's
Motion For Partial Summary Disposition
I find that there are no genuine issues of material fact and that the following allegations in the OIP are true as to Dallal:2
Dallal, age 30, became a registered representative in October 1993. Between June 1997 and October 1998, Dallal was associated with J.W. Barclay & Co., Inc. (Barclay). At the relevant time, Barclay was a registered broker and dealer and a member of the National Association of Securities Dealers.
Between June 1997 and October 1998, Dallal engaged in unauthorized trading, unsuitable trading, and churning in the accounts of three customers. Dallal's acts and omissions involved scienter.
By his misconduct, Dallal willfully violated Section 17(a) of the Securities Act in that he, in the offer or sale of securities, by the use of the means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly: employed devices, schemes, or artifices to defraud; obtained money or property by means of untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and engaged in transactions, practices, or courses of business which would or did operate as a fraud or deceit upon purchasers of such securities.
By his misconduct, Dallal also willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that he, in connection with the purchase or sale of securities, by use of the means or instrumentalities of interstate commerce, or by use of the mails or of the facilities of any national securities exchange, directly or indirectly: employed devices, schemes, or artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and engaged in acts, practices, or courses of business which would or did operate as a fraud or deceit upon any person.
To protect the public interest, the Division seeks a cease-and-desist order against Dallal, an order barring Dallal from association with any broker or dealer, and an order imposing a civil penalty of $110,000. The Division also seeks an order requiring Dallal to disgorge $93,119, plus prejudgment interest, computed at the rate set forth in Rule 600 of the Commission's Rules of Practice, 17 C.F.R. § 201.600. At the prehearing conference of March 20, 2003, Dallal stated that he would not oppose a cease-and-desist order or an order barring him from association with any broker or dealer. He also waived the opportunity to argue that a civil penalty of $110,000 is not warranted under Sections 21B(b)-(c) of the Exchange Act, and to argue that $93,119 does not represent a reasonable approximation of the profits accruing to him as a result of his violations.
Matters Remaining To Be Determined
As To Dallal After Hearing
Dallal opposed the imposition of any financial sanctions (i.e., disgorgement, interest, and a civil monetary penalty) on the grounds that he lacks the ability to pay. See Section 21B(d) of the Exchange Act; Rule 630 of the Commission's Rules of Practice, 17 C.F.R. § 201.630. As required by my Orders of October 22, 2002, and February 19, 2003, Dallal provided the Division with a sworn financial disclosure statement and other evidence in support of this defense. At the hearing, Dallal testified about his financial circumstances for approximately two hours (Transcript pages 294 through 377). I admitted four financial exhibits as to Dallal: Division Exhibits 156, 157, 158, and 163.3 In calculating prejudgment interest on the sum to be disgorged, I have also considered the report of the Division's expert witness and the documents the expert witness offered in support of that report (DX 37, DX 37A, and DX 37B). Dallal received these materials two months before the hearing and he did not challenge them.
It Is Appropriate To Decide Dallal's
Case Before Deciding Alacan's Case
When multiple parties are involved in a civil action, a federal district court may direct the entry of a final judgment as to fewer than all parties upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment. See Fed. R. Civ. P. 54(b). District courts have broad discretion under Rule 54(b), but they typically exercise it sparingly. As long as the trial court provides an informative explanation of its reasoning, a court of appeals will overturn the trial court's decision to grant a Rule 54(b) certification only if the trial court's action was "clearly unreasonable." See Curtiss-Wright Corp. v. Gen. Elec. Co., 446 U.S. 1, 7-13 (1980); L.B. Foster Co. v. Am. Piles, Inc., 138 F.3d 81, 86-88 (2d Cir. 1998).
While the Commission's Rules of Practice do not explicitly authorize Administrative Law Judges to issue initial decisions as to fewer than all respondents in a multi-respondent proceeding, the Commission has never forbidden the practice and, in fact, has permitted it in a variety of circumstances. For example, Administrative Proceeding No. 3-8511, Sharon M. Graham, Stephen C. Voss, and James J. Pasztor, involved two hearings, two initial decisions, and two Commission opinions. In Administrative Proceeding No. 3-9144, Michael Lapp and William Lucas, an Administrative Law Judge issued an initial decision resolving the issues as to Respondent Lucas on August 31, 2000. The Commission then declared that initial decision final on October 12, 2000. The Commission did not accept the settlement offer of Respondent Lapp-an offer that prompted the Administrative Law Judge to resolve the issues as to Respondent Lucas separately-until October 15, 2001. In Administrative Proceeding No. 3-9863, Barry C. Scutillo, CPA, and Mark F. Jensen, CPA, an Administrative Law Judge issued an initial decision resolving the issues as to Respondent Scutillo on May 3, 2001. The Commission subsequently accepted the settlement offer of Respondent Jensen on May 4, 2001.
I expressly determine that there is no just reason for delay in entering final judgment as to Dallal, and I direct the entry of judgment as to Dallal at this time. Cf. Fed. R. Civ. P. 54(b). First, because the Division's motion for partial summary disposition is unopposed, the factual issues as to Dallal are narrower and less complex than the factual issues as to Alacan, and they are able to be resolved sooner. No public interest would be served by withholding the resolution of Dallal's case until the issues as to Alacan can also be resolved. Second, no prejudice to the Division, Alacan, or Dallal will result from separate initial decisions. The amount of disgorgement and prejudgment interest the Division seeks from Alacan is only one-tenth of the amount it seeks from Dallal. Unlike Dallal, Alacan has not raised an inability-to-pay defense. Alacan's posthearing brief has little to say about financial sanctions. Third, if the Division and/or Dallal are dissatisfied with my resolution of any issues in this initial decision, the aggrieved party or parties can petition the Commission for review of this initial decision in a way that permits the uncontested sanctions-the cease-and-desist order and the bar on association with brokers and dealers-to take effect promptly.4 Fourth, if the parties believe that separate initial decisions will lead to inefficient piecemeal appeals, they may petition the Commission under Rule 360(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.360(b), to enlarge the time for seeking review of this initial decision until after issuance of the initial decision as to Alacan.
DISCUSSION AND CONCLUSIONS
The Division seeks an order requiring Dallal to pay disgorgement of $93,119, prejudgment interest of $46,598.84 (through May 31, 2003), and a civil penalty of $110,000. It argues that Dallal's claimed inability to pay does not warrant any reduction of these financial sanctions (Div. Br. at 36-39 and Exhibit B; Div. Reply Br. at 2, 31-33). Dallal argues that the Division has failed to explain the basis for its calculation of interest. Dallal also disputes the Division's claim that he could enhance his ability to pay by relocating to his employer's main office, thereby eliminating many of his current business expenses. Finally, Dallal contends that no effective deterrence is to be found in financial sanctions that are uncollectable (Dallal Br. at 1-3). Neither party addresses the issue of postjudgment interest.
Disgorgement seeks to deprive the wrongdoer of his ill-gotten gains. See SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-32 (D.C. Cir. 1989). It returns the violator to where he would have been absent the violative activity. Once the Division shows that its disgorgement figure reasonably approximates the amount of unjust enrichment, the burden of going forward shifts to the respondent to demonstrate clearly that the Division's disgorgement figure is not a reasonable approximation. See SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996); SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995). Any risk of uncertainty as to the disgorgement amount falls on the wrongdoer whose illegal conduct created that uncertainty. See First City, 890 F.2d at 1232. Dallal will be ordered to disgorge $93,119. Both parties agree that this sum represents a reasonable approximation of the commission income accruing to him as a result of his violations.
Section 8A(e) of the Securities Act and Sections 21B(e) and 21C(e) of the Exchange Act provide that the Commission may order disgorgement, "including reasonable interest," in any administrative proceeding in which a cease-and-desist order is sought or a civil monetary penalty could be imposed. These statutory provisions also authorize the Commission to adopt rules and regulations and issue orders concerning rates of interest and periods of accrual. The Commission promulgated Rule 600 of its Rules of Practice, Interest On Sums Disgorged, in 1995.
It is a tautology that the prejudgment interest period can end no later than the entry of judgment. "Prejudgment interest is, by definition, interest that accrues until judgment is rendered." Bel-Bel Int'l Corp. v. Cmty. Bank of Homestead, 162 F.3d 1101, 1110 (11th Cir. 1998). Prejudgment interest accrues "to the date of payment or to the date judgment is entered, whichever first occurs." Bangert Bros. Constr. Co. v. Kiewit W. Co., 310 F.3d 1278, 1297 (10th Cir. 2002) (citing Colorado law). In this proceeding, the Division acknowledges the point when it requests disgorgement "with prejudgment interest continuing to run through the date of judgment" (Div. Prehear. Br. at 38).
When the Commission wins the remedy of disgorgement in the federal court system, an award of prejudgment interest is discretionary. "The decision whether to grant prejudgment interest and the rate used if such interest is granted are matters confided to the district court's broad discretion, and will not be overturned on appeal absent an abuse of that discretion." SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1476 (2d Cir. 1996). "[N]o case hold[s] that an award of disgorgement must always be accompanied by an award of prejudgment interest . . . ." SEC v. Sargent, 329 F.3d 34, 41 n.1 (1st Cir. 2003). In contrast, when the Division wins the remedy of disgorgement in an administrative proceeding, there is no discretion whatsoever. Prejudgment interest "shall" be due on any sum required to be paid pursuant to an order of disgorgement. See Rule 600(a) of the Commission's Rules of Practice. In addition, interest on the sum to be disgorged "shall" be computed at the underpayment rate of interest established by the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), and "shall" be compounded quarterly. See Rule 600(b) of the Commission's Rules of Practice.
Prior Commission opinions have often used boilerplate language to order prejudgment interest on the sum to be disgorged. Those opinions and orders typically did not discuss the methodologies to be used for selecting the precise rate (or rates) of interest, for deciding when the prejudgment period begins, for determining what to do with fractional periods at the beginning or the end of a quarterly compounding period, or for distinguishing between prejudgment and postjudgment interest. Rather, such opinions and orders stated summarily: "Respondent shall pay prejudgment interest, computed at the rate set forth in Rule 600 of the Commission's Rules of Practice, from [the date the violation occurred] to the date of this order," or words to that effect. Presumably, someone other than the Commissioners and the presiding Administrative Law Judge actually exercised the responsibility for "filling-in-the-blanks" at a later date.5
That hands-off approach to ordering interest on disgorgement is now at least questionable in view of the recent opinion in SEC v. Bosque Puerto Carrillo, 325 F.3d 1268 (11th Cir. 2003). In Bosque Puerto Carrillo, a district court ordered the defendant to pay disgorgement plus prejudgment interest to the Commission. However, the district court's disgorgement order did not specify either the interest rate or the date from which interest accrued. The Eleventh Circuit therefore dismissed the appeal for lack of jurisdiction, holding that the district court's order was not a final judgment. In doing so, the Eleventh Circuit rejected the Commission's argument that the district court's failure to calculate the amount of prejudgment interest should not affect the finality of the judgment because the calculation of prejudgment interest was only a ministerial task:
The ministerial task of calculating prejudgment interest can be accomplished if the judgment amount, the prejudgment interest rate, and the date from which the prejudgment interest accrues have been established. If these three components have been established, the court's failure to calculate the precise amount of prejudgment interest does not prevent the court's order from constituting a final judgment under [28 U.S.C.] § 1291. However, if the judgment amount, the prejudgment interest rate, or the date from which prejudgment interest accrues is unclear, the calculation of prejudgment interest is no longer a ministerial act and the court's order is not final. . . .
In an attempt to persuade this court that the district court's order is nonetheless an appealable final decision, the parties contend that the order implicitly adopts the calculation method proposed by the SEC. We reject this argument because we decline to hold that the court's silence regarding the method of calculation is tantamount to its adoption of the SEC's proposed method.
Bosque Puerto Carrillo, 325 F.3d at 1272-73 (citations omitted). The Commission has not yet embraced the Eleventh Circuit's admonition when issuing disgorgement orders in administrative proceedings.6 Here, however, Dallal has joined the issue by arguing that the Division's brief provided "no explanation" for the computation of interest. The Division's initial explanation of prejudgment interest was somewhat cryptic, but its reply brief has filled those gaps. To avoid the possibility of a Bosque Puerto Carrillo-type remand, I address each of the variables involved in the calculation of pre- and postjudgment interest on the $93,119 to be disgorged by Dallal.
When should Dallal's multiple violations be "deemed to have occurred"? In adopting Rule 600 of its Rules of Practice, the Commission explained the rationale for requiring prejudgment interest on all disgorgement awards: it did not want a wrongdoer to benefit unjustly by having the equivalent of an interest-free loan from the victims of his wrongdoing. "In order to fulfill the remedial purposes of disgorgement, a respondent should never be allowed free use of funds wrongfully obtained from others." Rules of Practice, 59 SEC Docket 1546, 1596 (June 23, 1995) (emphasis added). As a result, Rule 600(a) of the Rules of Practice requires that a "disgorgement order shall specify each violation that forms the basis for the disgorgement ordered [and] the date [when] . . . each such violation was deemed to have occurred." Prejudgment interest begins to run "from the first day of the month following each such violation."
Of course, if all the misconduct producing ill-gotten gains took place on a single, identifiable date, the process of "deeming" when the violations occurred is not complex. Difficulty arises only if the misconduct requiring disgorgement continued over a period of months or years. The Commission's opinions requiring disgorgement have not provided much guidance for determining when such ongoing violations should be "deemed to have occurred." Often, in cases involving ongoing misconduct, the violations have not been deemed to occur, and prejudgment interest on disgorgement has not started to accrue, until the wrongdoing has stopped. See, e.g., Kenneth R. Ward, 79 SEC Docket 3035, 3064 (Mar. 19, 2003), appeal pending, No. 03-60437 (5th Cir.) (finding that the respondent earned illicit commission income from fraudulent conduct over several dates in 1992, 1993, and 1994, but ordering prejudgment interest on the disgorgement of those commissions should run only from March 31, 1994, "the date of the last transaction at issue in this matter"); Al Rizek, 70 SEC Docket 927, 939-40 & n.26 (Aug. 11, 1999), aff'd on other grounds, 215 F.3d 157 (1st Cir. 2000) (finding churning violations from January through November 1993, but ordering prejudgment interest to run only from April 1, 1994).7 It is respectfully submitted that such results (i.e., no interest accruing while the misconduct was ongoing) are at some tension with the admonition that a respondent should never be allowed an interest-free loan of ill-gotten gains.
In the present case, I order Dallal to disgorge $93,119. That sum represents the commissions Dallal earned between July 1997 and February 1998 on a series of unauthorized trades, unsuitable trades, and churning in the accounts of two customers (DX 37, DX 37A, DX 37B). The Division has grouped together the commissions Dallal charged these two customers during the third quarter of 1997 ($19,950 from July through September 1997), the fourth quarter of 1997 ($68,012.50 from October through December 1997), and the first quarter of 1998 ($5,156.50 from January through March 1998) (Div. Br. at Exhibit B). The Division asks me to deem that all of Dallal's violations during a given quarter occurred at the end of the quarter. Consistent with Rule 600(a), the Division then requests that prejudgment interest begin to accrue on each quarter's violations as of the first day of the next quarter, i.e., as of October 1, 1997, January 1, 1998, and April 1, 1998, respectively. The Division's approach to deeming when Dallal's violations occurred is one of several reasonable alternatives it could have recommended. It achieves "rough justice" and is preferable to the approach followed in Kenny, Ward, and Rizek. I adopt the Division's recommendation as my own for purposes of this case. Apportioning an award of prejudgment interest from the actual dates the customers paid commissions to Dallal on each unlawful transaction would be even more accurate, but it would also be too complicated and burdensome to administer.
Computing prejudgment interest: fixed interest rate or variable interest rates? Rule 600(b) of the Commission's Rules of Practice provides that interest on the sum to be disgorged shall be computed at the underpayment rate of interest established by the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), and shall be compounded quarterly. Neither Rule 600 nor the Commission's opinions provide guidance on whether an Administrative Law Judge should effectuate the quarterly compounding by applying a fixed rate of interest or variable rates of interest. The Commission has offered conflicting signals on the issue: on the one hand, the plain language of the text of Rule 600(b) refers to "the underpayment rate," not to fluctuating underpayment rates, thus suggesting a single, fixed rate is appropriate. Cf. Kaiser Alum. & Chem. Corp. v. Bonjorno, 494 U.S. 827, 838-39 (1990). On the other hand, the preamble to the Rules of Practice twice describes the Internal Revenue Code's underpayment rate as a "floating rate." See Rules of Practice, 59 SEC Docket at 1596.
The choice between a fixed interest rate and fluctuating interest rates cannot be brushed off as an academic exercise. In this proceeding, interest on $93,119 must be compounded quarterly over more than five years. The Internal Revenue Code underpayment rate for the fourth quarter of 1997 and the first quarter of 1998, when prejudgment interest started to accrue against Dallal, was 9%. See Rev. Ruls. 97-40, 97-53. The Internal Revenue Code underpayment rate for the second and third quarters of 2003 is 5%. See Rev. Ruls. 2003-30, 2003-63. The difference between the calculation of prejudgment interest at a flat rate of 5%, on the one hand, and the calculation of prejudgment interest at rates varying between 9% and 5%, on the other hand, is of considerable significance, not only to Dallal, but also to the customers who may benefit from the distribution of any disgorgement collected.
The obvious advantage of using a fixed rate is that the prejudgment interest calculation is easier. "The cost of such [an approach], however, is loss of accuracy: sometimes too much interest and sometimes too little interest will be awarded." Michael S. Knoll, A Primer On Prejudgment Interest, 75 Tex. L. Rev. 293, 316 (Dec. 1996). In Professor Knoll's view (id. at 319):
The problem with using a fixed interest rate is that it interferes with the incentive to settle. When interest rates rise, the defendant, who is borrowing from the plaintiff at below-market rates, has an incentive to delay. Similarly, when rates fall, the plaintiff, who is receiving an above-market rate from the defendant, has an incentive to delay. In contrast, when prejudgment interest is calculated using a floating-rate measure, neither party has an incentive to delay.
Awards of prejudgment interest at variable rates of interest are not unreasonable per se and are not an abuse of discretion, because the result normally will approximate an acceptable "average" for the prejudgment period. See Pimentel v. Jacobsen Fishing Co., 102 F.3d 638, 640 (1st Cir. 1996) (collecting cases). The Division has persuaded some federal district courts to exercise their discretion to order prejudgment interest on disgorgement awards at the fluctuating Internal Revenue Code underpayment rate. See SEC v. Rosenfeld, Fed. Sec. L. Rep. (CCH) ¶ 91,300 at 95,701 (Magistrate Judge) (S.D.N.Y. Jan. 9, 2001); SEC v. Antar, Fed. Sec. L. Rep. (CCH) ¶ 90,959 at 94,194-95 (D.N.J. Apr. 27, 2000); SEC v. Federated Alliance Group, Inc., 1997 U.S. Dist. LEXIS 9075 at *4-5 (W.D.N.Y. June 25, 1997).
In this case, the Division urges me to order the accrual of prejudgment interest at Internal Revenue Code underpayment rates that have fluctuated downward from 9% in 1997 to 5% at the present (Div. Br. at Exhibit B). I agree with that approach.
Fractional Periods. Rarely will the beginning or the end of the prejudgment period coincide precisely with the beginning or the end of Rule 600(b)'s quarterly compounding periods. Thus, to calculate interest for the prejudgment period, it may be necessary to calculate interest for fractional periods at the beginning or the end of the prejudgment period. The academic literature on this subject finds it permissible to use simple interest within each compounding period. See Knoll, 75 Tex. L. Rev. at 334. I have followed that approach here.
Calculation. The Division calculates Dallal's prejudgment interest at $46,598.84 through May 31, 2003 (Div. Br. at 36, Exhibit B). As discussed above, I approve of the Division's approach to identifying the dates on which Dallal's violations should be deemed to have occurred. I also agree with the Division's recommendation to use fluctuating interest rates throughout the prejudgment interest period. I accept the Division's calculation of prejudgment interest through the first quarter of 2003. However, I cannot accept the Division's calculation of prejudgment interest for April and May 2003 (Div. Br. at Exhibit B). The Division has shifted to monthly compounding for that fractional period, when Rule 600(b) only authorizes quarterly compounding.
I have recalculated the prejudgment interest Dallal owes for the second quarter of 2003 at $1,731.77. I have also calculated prejudgment interest for the fractional period of the third quarter of 2003 at issue here. The appropriate rate of interest for the third quarter of 2003 is 5%. See Rev. Rul. 2003-63. Interest for the entire third quarter of 2003 (92 days) would be $1,753.42. That equates to $19.06 per day, or $438.38 from July 1, 2003, through the date of this initial decision.
I thus compute the amount of prejudgment interest owed by Dallal as of the date of this initial decision at $47,592.75. When the sum to be disgorged ($93,119) is added to the accrued prejudgment interest ($47,592.75), the total amount owed by Dallal for disgorgement and prejudgment interest is $140,711.75.
Civil Monetary Penalty
An order of disgorgement (even with prejudgment interest) merely requires the return of wrongfully obtained profits. Disgorgement does not result in any actual economic penalty or act as a financial disincentive to engage in securities fraud. See SEC v. Moran, 944 F. Supp. 286, 296 (S.D.N.Y. 1996) (citing legislative history of the Remedies Act). The Division therefore argues that a substantial monetary penalty, in addition to the disgorgement of illicit profits, is necessary to punish Dallal and deter others from engaging in securities law violations that otherwise may provide significant financial returns to the violator. Dallal has waived the opportunity to argue that a third-tier civil penalty of $110,000 is unwarranted under Sections 21B(b)-(c) of the Exchange Act.
Dallal's Ability To Pay
Under Section 21B(d) of the Exchange Act, in any case in which the Commission may impose a civil penalty, a respondent may present evidence of his ability to pay the penalty. The Commission may, in its discretion, consider such evidence in determining whether a civil penalty is in the public interest. Such evidence may relate to the extent of the respondent's ability to continue in business and the collectability of the penalty, taking into account any other claims of the United States or third parties upon the respondent's assets and the amount of the respondent's assets.
Although no statutory requirement addresses inability to pay disgorgement or interest, the Commission also considers evidence of ability to pay as a factor in determining whether a respondent should be required to pay disgorgement and interest. See Rules of Practice, 59 SEC Docket at 1600; Rule 630(a) of the Commission's Rules of Practice.
Dictum in a recent Commission opinion suggests that the gravity of a respondent's violations may occasionally trump even undisputed evidence about the respondent's inability to pay. See Brian A. Schmidt, 76 SEC Docket 2255, 2273-76 (Jan. 24, 2002). Dallal's customers did not testify at the hearing. There is no basis for characterizing Dallal's violations as any more egregious, or any less egregious, than those of the four settling Respondents in this proceeding. The Commission has already taken into account the financial circumstances of those four Respondents, and it has reduced or eliminated their civil penalties from the levels the Division sought in its prehearing brief. There is no sound reason to treat Dallal any more harshly.8
Dallal's assets and the claims on them. Dallal's sworn financial statement shows assets of $63,000, liabilities of $52,800, and a net worth of $10,200 (Tr. 329-30; DX 156). Cross-examination of Dallal by the Division uncovered only one additional asset: a Rolex watch, valued at $5,000 to $7,000 (Tr. 327-28). Dallal has owned the watch since 1995 (Tr. 328). While the watch cannot fairly be described as the fruit of Dallal's ill-gotten gains, it could be sold for cash, and thus should be considered as an asset.
Cross-examination persuaded me that Dallal's claimed liabilities, in the form of credit card debt, are genuine (Tr. 331-33, 355-56). Dallal, his wife, and their infant son live rent-free in a house owned by Dallal's grandmother (Tr. 308-09). Before his marriage, Dallal lived rent-free with his parents (Tr. 310-11). In other words, Dallal's assets do not include any equity in real estate. I find Dallal's testimony about his assets, liabilities, and net worth to be credible. The Division has not suggested that Dallal transferred assets to offshore accounts. Dallal was very forthcoming when the Division asked him to provide additional data in support of his inability-to-pay claim (Tr. 294, 354-55, 357, 375; DX 157, DX 163).
Dallal's ability to continue in business. Dallal attended Hofstra University for three years (DX 156). He earned $201,836 in 1997 and $70,273 in 1998, while employed by Barclay (Tr. 353-54; DX 156). After leaving Barclay, Dallal became a self-employed day-trader. He opened a day-trading account with a $50,000 gift from his grandparents, and later deposited an additional $5,000 to $10,000 of his own funds into that account (Tr. 316-17). At first, Dallal was quite successful in day trading, but he eventually lost everything (Tr. 317). He declared net trading losses of $263,122 in 2000 (Tr. 351-52; DX 156). He carried these losses back to 1998 and forward to 2002 for tax purposes (Tr. 347-49, 351-53, 375-77; DX 156, DX 163). Dallal earned approximately $50,000 to $100,000 from trading during 2001 (Tr. 349). That amount does not appear as income on Dallal's 2001 tax return because he carried forward his trading losses from 2000 (Tr. 348).
Dallal worked for a start-up employment agency owned by his father between May 2000 and August 2002, but he did not receive any salary (Tr. 345, 355; DX 156). From August 2002 to the present, Dallal has been a mortgage loan officer with Lend America, Inc. (Lend America), a real estate financing firm with a main office in Melville, New York (Tr. 295). Through telemarketing, Dallal contacts clients who may be interested in obtaining or refinancing residential mortgage loans (Tr. 336-37, 369). Between August and December 2002, Dallal earned $111,402 from his work at Lend America (DX 163).9
Dallal does not oppose the Division's request to bar him from association with any broker or dealer. As a result of that sanction, his ability to conduct business as a securities industry professional will end.
Dallal does not oppose the entry of findings and conclusions that he committed fraud in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. See supra note 8. Such findings and conclusions may well have adverse collateral consequences for Dallal's career as a mortgage loan officer.10 If so, his ability to continue in that business also would be in jeopardy.
Finally, Dallal has been indicted on criminal charges of securities fraud and conspiracy to commit securities fraud (Div. Prehear. Br. at 42 n.14). See United States v. Dallal, Cr. No. 2:01-252 (LDW) (E.D.N.Y.). The criminal charges are not related to the customers or the securities at issue in this proceeding. They are nonetheless relevant here because they could result in Dallal's incarceration and/or the loss of his New York State mortgage broker's license. Either result would impair or eliminate Dallal's ability to continue in business.
The Director of the Commission's Division of Enforcement recently explained to Congress how associational bars and incarceration often limit a respondent's ability to pay disgorgement and civil penalties:
In many cases, some of the Commission's most effective investor protection remedies may contribute to defendants' or respondents' inability to pay amounts owed. For example, to help prevent future violations, the Commission can obtain orders barring wrongdoers from the securities industry . . . . Such bars, however, limit an individual's employment opportunities, and thus may reduce defendants' [or respondents'] ability to pay. Furthermore, state or federal criminal authorities may also prosecute securities law violators. As a result, these individuals may be incarcerated and unable to earn money with which to pay their disgorgement or penalty orders.
Testimony Concerning Returning Funds To Defrauded Investors, by Stephen M. Cutler, Director, Division of Enforcement, before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Committee on Financial Services, U.S. House of Representatives, Feb. 26, 2003, at 5 (Cutler Testimony), available at http://www.sec.gov/news/testimony.shtml.
Collectability. Under Section 21B(d) of the Exchange Act, the Commission may also consider collectability as a factor in deciding whether a civil monetary penalty should be imposed in the public interest.
The Division cites two recent district court opinions as authority for the proposition that, when the Commission imposes a civil monetary penalty, the goal of deterrence should be paramount, and concerns about collectability should be deferred until an indeterminate time in the future (Div. Br. at 37-38). See SEC v. Kane, 2003 U.S. Dist. LEXIS 5043 at *13-14 (S.D.N.Y. Apr. 1, 2003) (rejecting a defendant's inability-to-pay argument because of the "possibility" that the defendant's fortunes might improve and that "one day" the Commission would be able to collect on even a severe penalty); SEC v. Inorganic Recycling Corp., Fed. Sec. L. Rep. (CCH) ¶ 92,269 at 91,607; 2002 U.S. Dist. LEXIS 15817 at *12-14 (S.D.N.Y. Aug. 23, 2002) (stating that "the future will tell whether the SEC can find assets to levy upon" and rejecting the defendant's inability-to-pay argument with the observation that "if the SEC proves unable to collect the award, so be it."). In essence, the Division seeks to shift the responsibility for considering collectability in the administrative forum from decision makers (at the time of decision) to itself (as the Commission's post-adjudication collection agent). This is not what Exchange Act Section 21B(d) envisions.
I decline to follow Kane and Inorganic Recycling for several reasons. First, Section 21(d)(3)(B) of the Exchange Act, under which the federal courts impose civil monetary penalties, is silent as to the consideration of collectability. The courts in Kane and Inorganic Recycling addressed the issue as a part of their review of the overall facts and circumstances, although they were not statutorily obliged to do so. In contrast, Section 21B(d) of the Exchange Act specifically identifies collectability as a factor the Commission may consider in deciding whether to impose a penalty in the public interest. In any event, the substance of Kane and Inorganic Recycling offers only limited support for the rhetoric of those opinions.11
Second, the Commission's own precedent on the issue of collectability requires a much more rigorous approach than the Division has been willing to admit in its brief. In First Secs. Transfer Sys., Inc., 52 S.E.C. 392, 397 (1995), the Commission wrote:
We are cognizant of the inadvisability of assessing penalties so heavy that the persons against whom they are assessed are unable to pay them. Such a situation results in the expenditure of agency resources in unsuccessful attempts to collect the penalties. Moreover, the imposition of a sanction that cannot be enforced may ultimately render the deterrent message intended to be communicated by the sanction less meaningful.
The General Accounting Office has made the same point when advising Congress about the Commission's record of turning assessed penalties into cash:
Levying fines is an important mechanism that regulators use to sanction those who violate securities . . . industry rules. However, for fines to be an effective means of ensuring adherence with the rules, regulators must collect them.
Report to the Ranking Minority Member, Committee on Energy and Commerce, House of Representatives, SEC and CFTC: Most Fines Collected, But Improvements Needed In The Use Of Treasury's Collection Service 1 (GAO-01-900) (General Accounting Office, July 2001).
Third, if a respondent is unable to pay a civil penalty immediately, in whole or in part, the Commission looks to the respondent's ability to pay "within a reasonable period of time," in whole or in part. Cf. 17 C.F.R. § 202.9(a)(3) (small entities). As the Commission recognized in Comment (a) to Rule 601 of its Rules of Practice, 17 C.F.R. § 201.601, "collection of disgorgement, interest, and penalties becomes increasingly more difficult the longer it is delayed."
If the Division had reason to believe that Dallal is concealing assets or that he is likely to acquire significant assets at some future time, that information would have come out during cross-examination. On the one hand, I do not expect positive proof of immediate collectability. On the other hand, I cannot realistically assume that every respondent might eventually receive a windfall inheritance. While time might produce money in a particular case, Comment (a) to Rule 601 of the Commission's Rules of Practice persuades me that collection of disgorgement, interest, and civil penalties generally becomes less likely over time, not more likely. The notion that a good faith consideration of collectability could be satisfied by the blithe observation that "one day" the respondent's fortunes might change finds no support in the Commission's jurisprudence.12
Finally, as the Division is well aware, the practice of writing off uncollectable civil penalties and disgorgement awards has been a repeated source of embarrassment for the agency. See Otis Bilodeau, "For SEC, The Pursuit Is Easier Than the Catch," Legal Times, May 19, 2003, at 1 ("Obtaining disgorgement orders and collecting the cash turn out to be very different things: Of the $1.3 billion in orders in 2002, the agency has actually gathered only $57 million so far, according to an SEC spokesman. In fact, the SEC's handling of disgorgement cases has been the subject of considerable criticism from congressional investigators over the past decade."); see also Report to the Chairman, Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives, Securities Enforcement: Improvements Needed In SEC Controls Over Disgorgement Cases 4 (GAO/GGD-94-188) (General Accounting Office, August 1994) ("[A]bout 50 percent of the $2 billion in disgorgement imposed by the courts [from 1987 to April 1994] was actually collected. According to SEC enforcement attorneys, the uncollected amounts do not indicate poor collection efforts. Instead, they said the unpaid amounts usually reflect default and other judgments against defendants that, despite collection efforts, remain unpaid because defendants have either no assets or insufficient assets to satisfy the judgment.").
When a respondent properly invokes Section 21B(d) of the Exchange Act, two principles emerge from the Commission's First Secs. opinion: (1) civil monetary penalties should be imposed with due regard for collectability, so as to avoid to the extent possible the imposition of penalties that are likely to be uncollectable; and (2) the collection of civil monetary penalties is as much, if not more, of a deterrent to misconduct as the imposition of showplace penalties. Consideration of collectability should not lead down a path to the assessment of a monetary penalty that is so low that it lacks any meaningful deterrent value. On the other hand, consideration of deterrence should not lead down a path to the assessment of a monetary penalty that is so high that it lacks any meaningful prospect of being turned into cash.
Conclusion. Dallal argues that his current financial situation is bleak and that he lacks the present ability to pay a substantial amount in disgorgement, interest, and civil penalty. The Division asks me to give less weight to Dallal's current circumstances, and to focus instead on Dallal's future ability to earn a substantial income.
Both sides are partially correct. I agree with Dallal that he cannot now pay substantial financial sanctions. However, I am concerned that Dallal may have understated his monthly salary/wages at Lend America. I also agree with the Division that certain of Dallal's claimed business expenses at Floral Park have not been well explained (Tr. 338, 340-45, 357-66, 370; DX 156, DX 157; Div. Prop. Find. ## 9-11). Nonetheless, Dallal could not pay a quarter of a million dollars in financial sanctions even if he pawned his eight-year old watch, broke his automobile lease, and started commuting to Melville by bus. The long-range assumptions the Division asks me to make about Dallal's future earning capacity are unrealistic. The Division ignores the impact that loss of a mortgage banker's license and/or incarceration may have on Dallal's ability to continue in business.
Before imposing the appropriate financial sanctions in a particular case, the Commission typically examines a respondent's ability to pay disgorgement first; if the respondent has the ability to pay a penalty after paying disgorgement, the Commission will also demand an appropriate penalty amount, based on the respondent's ability to pay. See Report Pursuant to Section 308(c) of the Sarbanes-Oxley Act of 2002 at 17 (Jan. 24, 2003); cf. Penalty-Reduction Policy for Small Entities, 64 SEC Docket 447, 450 (Mar. 27, 1997).
After weighing the conflicting evidence, I conclude that Dallal should pay the full amount of the disgorgement award ($93,119) and the full amount of the accrued prejudgment interest ($47,592.75). However, when the disgorgement award and prejudgment interest are added to the pre-existing claims of third parties on Dallal's assets, and then considered in light of realistic assumptions about Dallal's ability to continue in business, a reduction in the requested civil penalty is plainly warranted in the public interest. Dallal will be unable to pay a civil penalty of $110,000 within a reasonable period of time. This is not a case, like the dictum in Schmidt envisions, where the "egregiousness" of the violation ought to trump "ability to pay." I thus conclude that Dallal's civil penalty should be reduced from $110,000 to $30,000. The Division has not requested interest on Dallal's civil penalty, and none will be imposed.
"The purpose of postjudgment interest is to compensate the successful plaintiff for being deprived of compensation for the loss from the time between the ascertainment of the damage and the payment by the defendant." Bonjorno, 494 U.S. at 835-36 (citation omitted). Postjudgment interest properly starts to run from the date of the entry of judgment. Id. at 835.
When the Commission wins the remedy of disgorgement in the federal court system, an award of postjudgment interest pursuant to 28 U.S.C. § 1961(a) is mandatory and the rate of interest is fixed as of the date of judgment.13 As explained in Bosque Puerto Carrillo, 325 F.3d at 1271:
[T]he SEC is statutorily entitled to postjudgment interest under 28 U.S.C. § 1961. The district court does not have any discretion to deny or modify the terms upon which the SEC may receive postjudgment interest under § 1961; section 1961(a) establishes the applicable interest rate and instructs that interest shall be calculated from the date of the entry of the judgment.
When the Division wins an order of disgorgement in an administrative proceeding, however, the rate of postjudgment interest presents an unsettled issue. Rule 600(a) of the Commission's Rules of Practice does not specifically address postjudgment interest, although it does require a disgorgement order to state that "interest shall continue to accrue on all funds owed until they are paid." The Commission's orders in settled proceedings go in two different directions. The Commission sometimes orders postjudgment interest on disgorgement awards pursuant to 28 U.S.C. § 1961.14 At other times, it orders postjudgment interest on disgorgement awards pursuant to 26 U.S.C. § 6621(a)(2), or by reference to "the rate of interest set forth in Rule 600(b)."15 Nothing in the text of Rule 600 and nothing in the Commission's opinions compels the conclusion that there is only one way to calculate postjudgment interest on disgorgement in an administrative proceeding.16
There are significant differences between 28 U.S.C. § 1961 and 26 U.S.C. § 6621(a)(2). The current rate under 28 U.S.C. § 1961(a) is 1.10%; under 26 U.S.C. § 6621(a)(2), it is 5%. Annual compounding is required under 28 U.S.C. § 1961(b), while daily compounding is required under 26 U.S.C. § 6621(a)(2). See 26 U.S.C. § 6622(a). Finally, the rate under 28 U.S.C. § 1961(a) remains fixed, while the rate under 26 U.S.C. § 6621(a)(2) fluctuates quarterly. See 26 U.S.C. § 6621(b)(2)(A).
The third sentence of Rule 600(a) of the Commission's Rules of Practice states: "Prejudgment interest shall be due from the first day of the month following [the] violation through the last day of the month preceding the month in which payment of disgorgement is made" (emphasis added). That statement could be true in either of two ways. First, it could be true if a respondent voluntarily pays disgorgement and interest before the entry of judgment or, in the words of Rule 600(a), before an Administrative Law Judge or the Commission has issued a disgorgement order. Cf. Bangert, 310 F.3d at 1297. In that instance, however, there would be no remaining case or controversy, and the decision maker would not need to enter a disgorgement order.17 Second, the statement could be true if it means that the prejudgment interest that has accrued as of the date of judgment, like the sum to be disgorged (the disgorgement principal), does not become self-extinguishing over time, i.e., it will remain owing until it is paid.18 The third sentence of Rule 600(a) cannot possibly mean that prejudgment interest continues to accrue after judgment is entered. That is illogical, because it confuses prejudgment interest with postjudgment interest. Cf. Atchison, Topeka and Santa Fe Ry. Co. v. Pena, 44 F.3d 437, 445 (7th Cir. 1994) (Easterbrook, J., concurring) (en banc), aff'd, 516 U.S. 152 (1996) (noting that the use of "one word" for distinct concepts "breeds confusion," and positing that "vocabulary affects analysis").
Rules 600(a) and 600(b) of the Rules of Practice draw a distinction between interest on "the sum to be disgorged" and interest on "all funds owed." "The sum to be disgorged" refers only to the principal amount of disgorgement, which in this case is $93,119. Cf. Federated Alliance Group, 1997 U.S. Dist. LEXIS 9075 at *3 ("the sum to be disgorged should reasonably approximate the ill-gotten gains"). "All funds owed" refers to the principal amount of disgorgement plus the prejudgment interest accrued as of the date of judgment, which in this case is $140,711.75. As to the rate of prejudgment interest on "the sum to be disgorged," 26 U.S.C. § 6621(a)(2) clearly applies. See Rules of Practice, 59 SEC Docket at 1596 ("Rule 600 prescribes the payment of prejudgment interest at the Internal Revenue Code underpayment rate.") (emphasis added). As to the rate of postjudgment interest on "all funds owed," Rule 600 is silent. Regulations, like statutes, should be construed, where possible, so that no part is rendered superfluous. See United States v. Hassanzedeh, 271 F.3d 574, 582 (4th Cir. 2001).
Consistent with the Commission's orders in Monski, Weissman, Gilbert, and Freeman, see supra note 14, I order Dallal to pay postjudgment interest on all funds owed ($140,711.75) pursuant to 28 U.S.C. § 1961(a) at the fixed interest rate of 1.10%.19
The Date Of Judgment
The "date of judgment" marks the ending point for the computation of prejudgment interest on a disgorgement award and the beginning point for the computation of postjudgment interest. In civil litigation in the federal courts, "judgment" occurs when a district court enters "any order from which an appeal lies." Fed. R. Civ. P. 54(a). If a money judgment in a civil case is affirmed on appeal, interest is payable from the date when the district court's judgment was entered unless the law provides otherwise. Fed. R. App. P. 37(a). If a court of appeals modifies or reverses a district court's money judgment, then the mandate of the court of appeals "must contain instructions about the allowance of interest." Fed. R. App. P. 37(b).
The "date of judgment" in an SEC administrative proceeding is an open question. There are three possible choices: the "date of judgment" could be the date an Administrative Law Judge issues an initial decision ordering disgorgement; the date the Commission declares the initial decision to be final; or (if the parties seek review or the Commission reviews on its own motion) the date the Commission issues its opinion and order. Four Commission opinions have treated that the date of the Commission's opinion and order as controlling, but each involved a modification to the award of disgorgement in the underlying initial decision.20 No Commission opinion has yet addressed the issue in a context where the parties agree about "the total sum to be disgorged," or where the Commission and the Administrative Law Judge reach an identical result.
Obviously, the "date of judgment" in an administrative proceeding would not matter if the methodology for computing interest remains the same after judgment as before judgment. In contrast, identifying the "date of judgment" is important if the disgorgement order marks a break point: the end of prejudgment interest, calculated at variable rates and compounded quarterly pursuant to 26 U.S.C. § 6621(a)(2) and Rule 600(b), and the beginning of postjudgment interest, calculated at a fixed rate pursuant to 28 U.S.C. § 1961(a) and either compounded annually pursuant to 28 U.S.C. § 1961(b) or calculated as simple interest pursuant to 31 U.S.C. § 3717(c)(2) and 31 C.F.R. § 901.9(b)(3). See infra.
Applying Fed. R. Civ. P. 54(a) and Fed. R. App. P. 37(a) and (b) by analogy to the Commission's administrative proceedings, I conclude that the "date of judgment" should ordinarily be the date an Administrative Law Judge issues an initial decision ordering disgorgement. The date of the Commission's opinion and order would become the "date of judgment" if the Commission modified or reversed the disgorgement award in an initial decision. Under this approach, the date of the initial decision would remain the "date of judgment" if the Commission affirmed the disgorgement award in an initial decision.
External Constraints On Compounding
Postjudgment Interest And On
Shifting Rates Of Postjudgment Interest
There is one final matter. Whether the benchmark rate for postjudgment interest is 28 U.S.C. § 1961(a) or 26 U.S.C. § 6621(a)(2) or something else, statutes and regulations beyond the federal securities laws may constrain the Commission's ability to assess compound postjudgment interest and to allow the rate of postjudgment interest to shift over time. See Amax Land Co. v. Quarterman, 181 F.3d 1356, 1367-69 (D.C. Cir. 1999) (holding that the Debt Collection Act of 1982, as codified at 31 U.S.C. § 3717(c)(2), and the Federal Claims Collection Standards, 31 C.F.R. § 901.9(b)(3), place external constraints on a Department of the Interior regulation assessing compound interest and employing shifting rates for postjudgment interest on debt). The Commission has not yet addressed this issue.
Disgorgement is "debt" for some purposes, but not for others. See SEC v. Bilzerian, 153 F.3d 1278, 1281-83 (11th Cir. 1998); SEC v. AMX, Int'l, Inc., 7 F.3d 71, 74 (5th Cir. 1993); SEC v. Huffman, 996 F.2d 800, 803 (5th Cir. 1993). The Commission wrote its Rules Relating to Debt Collection, 17 C.F.R. Part 204, to comply with the Debt Collection Act of 1982 and the Federal Claims Collection Standards. Thus, disgorgement is "debt" for purposes of the Commission's administrative wage garnishment program, 17 C.F.R. §§ 204.60-.65. See Report on Section 308(c) of the Sarbanes-Oxley Act at 25 ("To pursue judgments for disgorgement. . . the Commission can utilize its administrative wage garnishment process"); Cutler Testimony at 3-4 (same). I conclude that the reasoning of Amax applies to administrative proceedings awarding postjudgment interest on disgorgement, and that simple interest, rather than annually compounded interest, is appropriate here. See Rule 103(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.103(b) ("In any particular proceeding, to the extent that there is a conflict between [Rule 600] and a procedural requirement contained in any statute, or any rule or form adopted thereunder, the latter shall control.").
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on May 28, 2003.
Based on the findings and conclusions set forth above:
IT IS ORDERED THAT, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Mayer Dallal shall cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
IT IS FURTHER ORDERED THAT, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, Mayer Dallal is barred from association with any broker or dealer.
IT IS FURTHER ORDERED THAT, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Mayer Dallal shall disgorge $93,119, plus prejudgment interest of $47,592.75, computed as set forth in Rule 600 of the Commission's Rules of Practice, as interpreted herein. Prejudgment interest shall run on $19,950 from October 1, 1997, on an additional $68,012.50 from January 1, 1998, and on an additional $5,156.50 from April 1, 1998, as explained herein, through the date of this initial decision.
IT IS FURTHER ORDERED THAT Mayer Dallal shall pay postjudgment interest on all funds owed ($140,711.75). Postjudgment interest shall be computed at 1.10%, the rate set forth in 28 U.S.C. § 1961(a). Postjudgment interest shall start to accrue as of the date of this initial decision. Postjudgment interest shall be computed as simple interest, consistent with 31 U.S.C. § 3717(c)(2) and 31 C.F.R. § 901.9(b)(3), and shall continue to accrue on all funds owed until they are paid.
IT IS FURTHER ORDERED THAT, pursuant to Section 21B of the Securities Exchange Act of 1934, Mayer Dallal shall pay a civil penalty of $30,000.
Payment of the disgorgement, interest, and civil penalty shall be made on the first day following the day this initial decision becomes final. Payment shall be made by certified check, United States Postal money order, bank cashier's check, or bank money order, payable to the Securities and Exchange Commission. The payment, and a cover letter identifying the Respondent and the proceeding designation, should be delivered to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission's Division of Enforcement, directed to the attention of counsel of record.
This initial decision shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the initial decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the Initial Decision upon that party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to that party. If a party timely files a petition for review, or the Commission acts to review on its own motion, the initial decision shall not become final as to that party.
In the event that the Commission reviews this initial decision, the pro se Respondent is reminded of the need to update his sworn financial disclosure statement. See Rule 410(c) of the Commission's Rules of Practice, 17 C.F.R. § 201.410(c) ("Any person who files a petition for review of an initial decision that asserts that person's inability to pay either disgorgement, interest or a penalty shall file with the opening brief a sworn financial disclosure statement containing the information specified in Rule 630(b).").
James T. Kelly
Administrative Law Judge
|1||I amended the OIP on March 19, 2003, to correct a minor typographical error. By the end of the hearing, four Respondents had settled and three had defaulted. The proceeding is ongoing only as to Edgar B. Alacan (Alacan) and Dallal.|
|2||The findings in this initial decision are not binding on any other persons in this proceeding or on persons in any other proceeding.|
|3||The hearing transcript, as amended by my Order of April 18, 2003, will be cited as "Tr. ___." The Division's hearing exhibits will be cited as "DX ___." The Division's Prehearing Brief, filed on March 10, 2003, will be cited as "Div. Prehear. Br. ___." The Division's Proposed Findings of Fact and its Proposed Conclusions of Law and Post Trial Brief, filed on May 23, 2003, will be cited as "Div. Prop. Find. ___" and "Div. Br. ___," respectively. Dallal's three-page letter brief, filed on July 1, 2003, will be cited as "Dallal Br. ___." The Division's Post Trial Reply Brief, filed on July 17, 2003, will be cited as "Div. Reply Br. ___."|
|4||See Del Mar Fin. Servs., Inc., 76 SEC Docket 2500 (Feb. 7, 2002) (declaring most of the sanctions imposed in an initial decision to be final, while the Division's appeal from the initial decision's award of disgorgement was still pending).|
|5||The Office of the Secretary maintains a system of records entitled "Disgorgement and Penalties Tracking System." That system of records assists the Commission's staff in its efforts to track the payment of disgorgement and penalties imposed on entities and individuals who have been determined to be violators of the federal securities laws in Commission-initiated civil actions and administrative proceedings. See Privacy Act of 1974: Establishment of Two Systems of Records, 69 SEC Docket 1739 (Apr. 14, 1999). The Commission has not delegated its authority to compute interest on disgorgement awards. See 17 C.F.R. §§ 200.30-1 to 200.30-18. As shown below, interest computations involve a range of policy choices and unsettled legal issues, and cannot fairly be considered "ministerial."|
|6||See John J. Kenny, 80 SEC Docket 564, 596 n.61, 603 (May 14, 2003), appeal pending, No. 03-2327 (8th Cir.) (ordering disgorgement of over $1.3 million in ill-gotten gains received between September 1994 and February 1995, without identifying the date the violations were deemed to have occurred or the applicable rate(s) of interest).|
|7||See also Laurie Jones Canady, 69 SEC Docket 1468, 1496 (Apr. 5, 1999) (finding violations during 1988 and 1989, but ordering that prejudgment interest on the disgorgement of illicit commissions should start to accrue only on February 20, 1990, "the date on which Canady terminated her employment with Merrill Lynch"); Joseph J. Barbato, 69 SEC Docket 178, 202 (Feb. 10, 1999) (finding violations between 1986 and 1990, but deeming the violations to have occurred only in September 1990); Donald A. Roche, 64 SEC Docket 2042, 2053 (June 17, 1997) (finding that Roche committed violations between March 1988 and June 1990, but deeming the violations to have occurred as of May 8, 1990). Canady, Barbato, and Roche were docketed before the Commission adopted Rule 600 of its Rules of Practice in 1995. Those proceedings also involved misconduct that occurred before passage of the Securities Enforce-ment Remedies and Penny Stock Reform Act of 1990 (Remedies Act).|
|8||Ordinarily, a respondent who puts the Division to its proof at a hearing cannot expect the leniency offered to those who save the government time and money by settling before the hearing. That reasoning does not apply here. Dallal's hearing testimony took no longer than the financial depositions the Division routinely requires of settling respondents who claim an inability to pay. Moreover, Dallal has admitted to findings of violations, while the four settling respondents in this proceeding neither admitted nor denied the facts.|
|9|| Dallal estimates his average monthly salary/wages at Lend America as $15,000 (Tr. 336-37; DX 156). "Average" is an ambiguous word; it could represent the mean, the median, or the mode. Unfortunately, the hearing did not clarify the ambiguity. My own calculation of Dallal's mean monthly income, based on his reported wages of $111,402 between August and December 2002, is $22,280 (i.e., $111,402 divided by 5). Dallal pays office expenses from his wages, and he estimates these expenses at $10,000 to $12,969 per month (DX 157). As a result of these expenses, Dallal maintains that he is barely breaking even.
The Division challenges the legitimacy of these expenses. It theorizes that Dallal could eliminate them by working at Lend America's Melville office, instead of heading his own satellite office in Floral Park, New York. Dallal responds that, if he were to move to Lend America's main office at Melville, his net earnings would likely decrease. I find Dallal's testimony about his monthly earnings and business expenses at Lend America to be less reliable than his testimony about his personal assets, liabilities, and net worth.
On the issue of cash flow, the Division also draws attention to the fact that Dallal leases a BMW Model 530 automobile for $573 per month (Tr. 313-14; DX 156). Various internet sites show that a 2003 BMW Model 530 sedan has an invoice price of $37,560, and a manufacturer's suggested retail price of $41,100 (official notice).
|10|| The Superintendent of Banks, New York State Department of Banking, licenses mortgage bankers in New York, and any person engaged in the business of making five or more mortgage loans per year must obtain a license. See New York State Consolidated Laws, Banking Article 12-D, § 590. Dallal closes seven to ten mortgage loans per month (Tr. 368). I therefore infer that Dallal is subject to the State of New York's licensing requirement.
The Superintendent of Banks may suspend or revoke a license, after notice and a hearing, if the licensee has engaged in a course of conduct that violated any federal laws, rules, or regulations, or if final judgment has been entered against the licensee in any civil action on the grounds of fraud, misrepresentation, or deceit. See New York State Consolidated Laws, Banking Article 12-D, § 595. Conviction of a crime involving fraudulent or dishonest dealing is also a basis for suspension or revocation of a license. Id.
|11||In Kane, the district court imposed a penalty of "only" $200,000, citing "the unlikelihood of any recovery." 2003 U.S. Dist. LEXIS 5043 at *16. In Inorganic Resources, the district court imposed a penalty of "only" $100,000, citing "the size of the other financial components of the judgment, and the unlikelihood of any recovery." 2002 U.S. Dist. LEXIS 15817 at *12. Both cases involved truly outrageous misconduct, lasting over several years, and Dallal's violations are not comparable.|
|12||If a certified public accountant devoted no more than the level of scrutiny endorsed by the Division when auditing the collectability of receivables on a public company's financial statements, the Commission would not hesitate to charge the accountant with improper professional conduct in violation of Rule 102(e) of the Commission's Rules of Practice, 17 C.F.R. § 201.102(e). See, e.g., William D. Tetsworth, Jr., CPA, 67 SEC Docket 296, 300 (May 4, 1998) (Opinion and Order in settled proceeding).|
|13||Under 28 U.S.C. § 1961(a), the postjudgment interest rate is the weekly average one-year constant maturity Treasury yield for the calendar week preceding the date of entry of judgment. That rate remains fixed for all time at the rate in effect on the date of judgment. The rate for the week ending July 18, 2003, is 1.10% (official notice).|
|14||See, e.g., Robert J. Monski, 74 SEC Docket 2277, 2280 (May 3, 2001); Jeffrey Weissman, 62 SEC Docket 2272, 2285 (Sept. 9, 1996); Robert Gilbert, 62 SEC Docket 2286, 2297-99 (Sept. 9, 1996); Freeman Secs. Co., 51 S.E.C. 1182, 1185 (1994). As settled proceedings, Monski, Weissman, Gilbert, and Freeman have limited precedential value. However, I am not aware of any contested proceedings in which the Commission has addressed this issue.|
|15||See, e.g., Rodona Garst, 79 SEC Docket 323, 325 (Dec. 11, 2002) (ordering postjudgment interest on disgorgement "at the rate of interest set forth in Rule 600(b) of the Commission's Rules of Practice"); William Lowe, 69 SEC Docket 1742, 1746 (Apr. 19, 1999) (ordering postjudgment interest on disgorgement at the Internal Revenue Code underpayment rate). As settled proceedings, Garst and Lowe also have limited precedential value.|
|16||Even when an agency's policy with respect to postjudgment interest is clear, that is no guarantee that the courts will defer to the agency's policy. Cf. Dep't of Energy Stripper Well Exemption Litig., 821 F. Supp. 1432, 1434-37 (D. Kan. 1993) (concluding that 28 U.S.C. §§ 1961(a) and (b) should govern the rate of postjudgment interest and the method of compounding, notwithstanding a Department of Energy policy statement that called for a higher rate of interest and more frequent compounding).|
|17||As a practical matter, a respondent in a contested case, as here, is not likely to pay disgorgement or prejudgment interest until after the entry of judgment. Thus, a disgorgement order in a contested administrative proceeding must provide for both an award of prejudgment interest and an award of postjudgment interest.|
|18||Under various state laws, a judgment may expire by lapse of time. It may be refreshed by a writ of scire facias, which requires the person against whom it is issued to reappear and show cause why the dormant judgment against that person should not be revived. See Black's Law Dictionary 1347 (7th Ed. 1999). In the federal court system, a judgment creditor may file a motion to renew the judgment. See Fed. R. Civ. P. 81(b).|
|19|| I have considered 28 U.S.C. § 1961(c)(1), which provides that the postjudgment interest rate specified in § 1961(a) shall not apply "with respect to any internal revenue tax case." Section 1961(c)(1) requires that the rate established under 26 U.S.C. § 2261 shall be allowed instead in such cases.
An administrative proceeding before the Commission is not an "internal revenue tax case." The Commission adopted the Internal Revenue Code underpayment rate, 26 U.S.C. § 6621(a)(2), in Rule 600(b) of the Rules of Practice because it viewed that rate as "a reasonable proxy for an unsecured loan rate" to a respondent. See Rules of Practice, 59 SEC Docket at 1596. In litigation over a debtor's failure to repay an unsecured loan to a creditor, postjudgment interest would accrue in accordance with 28 U.S.C. § 1961(a), not 26 U.S.C. § 6621(a)(2). I therefore conclude that 28 U.S.C. § 1961(c)(1) has no role to play in disgorgement orders issued under the Commission's Rules of Practice.
|20||In Ward, an Administrative Law Judge dismissed the proceeding, without sanctions. On appeal, the Commission ordered Ward to disgorge $249,711, plus prejudgment interest from the date the violations had been deemed to occur "to the date of this order." 79 SEC Docket at 3064. In Canady, the Commission reduced an ALJ's award of disgorgement from $136,382 to $23,624. The Commission also ordered Canady to pay prejudgment interest from the date it deemed the violations had occurred through the date of its opinion and order. 69 SEC Docket at 1496. In Barbato, the Commission reduced an ALJ's award of disgorgement from $623,020 to $45,142. The Commission also ordered prejudgment interest from the date it deemed the violations to have occurred through the date of its opinion and order. 69 SEC Docket at 202. In Roche, the Commission agreed with the ALJ about the sum to be disgorged ($102,182), but it disagreed with the ALJ about the date from which prejudgment interest should start to run. Compare Roche, 64 SEC Docket at 2053 (Commission Order) (deeming Roche's violations to have occurred on May 8, 1990), with Robert A. Magnan, 59 SEC Docket 2276, 2315 n.38 (Jul. 5, 1995) (Initial Decision) (using October 1, 1990, as the starting date for the calculation of prejudgment interest as to Roche). Each of these four opinions is consistent with the approach of Fed. R. App. P. 37(b). None necessarily conflicts with Fed. R. App. P. 37(a), which governs if the amount of disgorgement as awarded by a district court remains undisturbed after review by a court of appeals.|
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