Commission Lowers Penalties From Third to Second Tier

Eric J. Brown, Matthew J. Collins, Kevin J. Walsh, Mark W. Wells, Exchange Act Rel. 66469, February 27, 2012

The Commission upheld sanctions against three respondents in connection with sales or supervision of sales of variable annuities. It dismissed the case against one individual.

The Commission concluded that Brown fraudulently sold variable annuities after having lost his state license to sell insurance products and to have effected unauthorized transactions in customer accounts. In doing so he aided and abetted violations of the books and records provisions by falsifying customer account forms. He was barred from broker, dealer or adviser association and ordered to: cease and desist, pay disgorgement, and a penalty of $560,000.

Collins was found to have failed to supervise Brown and aided and abetted books and records violations by falsifying customer account forms. He was barred from broker, dealer, or adviser association with a right to reapply after two years and ordered to: cease and desist, pay disgorgement, and a penalty of $310,000.

Walsh was found to have committed fraud in connection with variable annuity sales. He too was barred from broker, dealer, or adviser association and ordered to: cease and desist; pay disgorgement, and a penalty of $255,000.

Respondent Wells was successful in his appeal. Although the ALJ found that Wells had engaged in fraudulent variable annuity sales the Commission disagreed and dismissed the case against him.

The ALJ's initial decision is here.

The discussion of penalties in this decision is of interest. First, the penalties were applied on a per customer basis rather than for each individual misrepresentation. Second, no penalties were imposed for conduct that occurred before the five year statute of limitations. The Commission rejected the Division of Enforcement's argument that such sales were part of a continuing course of conduct. Third, the Commission lowered the penalties from third to second tier as the actual customer losses were relatively small. This last matter is of great significance as it appears that the the Commission now will impose third tier penalties only when customers actually suffer significant economic loss. The statute of course authorizes third tier penalties when there are substantial investor losses or "significant risk of substantial losses." The Commission seems to base its conclusion on the fact that there were no substantial investor losses here and simply conflates that with significant risk of loss. The opinion never explains why there was no risk of greater loss by the customers - it simply concludes that this was so without any meaningful discussion of the issue.

Read more commentary on SEC administrative opinions at SEC Tea Party, a blog by Robert Fusfeld.

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