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Can a defendant plead guilty to criminal securities
fraud, get a presentence report with a sentencing guideline recommendation of
121-151 months and avoid prison? Bryan Behrens tried. He failed, although his
sentence was considerably less than the guideline calculation. U.S. v.
Behrens, No. 11-3482 (8th Cir. Filed April 25, 2013).
Bryan Behrens pleaded guilty to one count of securities
fraud in violation of Exchange Act Section 10(b). Previously he owned and
operated 21st Century Financial Group, Inc. It was a life insurance
agency and financial investment advisory business which he expanded into
National Investments. Inc. That business sold investors promissory notes with a
fixed rate of interest ranging from 7% to 9%. Investors were told their money
would be invested in real estate. It was not. Mr. Behrens invested in himself,
operating a Ponzi scheme.
Following an investigation by the Commission, a federal
grand jury returned a twenty-one count indictment in April 2009. Mr. Behrens
entered into a plea agreement. The agreement permitted him to plead guilty to
one count of securities fraud. No agreement was reached on sentencing. Mr.
Behrens argued that he was ineligible for prison under the "no knowledge"
defense of Exchange Act Section 32(a). The District Court rejected this
argument, ordering a sentence of five years in prison, three years of
supervised release and restitution of about $6.8 million. The Court of Appeals
Section 32(a) provides in pertinent part that "no person
shall be subject to imprisonment under this Section [regarding penalties] for
the violation of any rule or regulation if he proves that he had no knowledge
of such a rule or regulation." The government argued that this provision
requires that the person demonstrate he or she had a complete absence of
knowledge of the particular regulation - that it did not exist. While this
approach has "some initial appeal" the Court noted, it is not in accord with U.S.
v. O'Hagan, 521 U.S. 642 (1997). There the Court characterized this defense
as one of two "sturdy safeguards Congress has provided regarding scienter" for
criminal securities cases. This conclusion demonstrates that the defense is
more meaningful than the limited version suggested by the government, the Court
The Court also rejected Mr. Behrens interpretation of the
provision. He argued it means the person has no knowledge that his or her
conduct actually violated the particular SEC rule. Yet Section 32(a) provides
for conviction by those who engage in "willful violation," suggesting that
ignorance of the law is not a defense. If Congress had intended the meaning
advanced by the defendant it should have said so. The fact that it did not
undercuts Mr. Behren's contention.
The better reading of the provision, the Court concluded,
is that "the no-knowledge provision is to allow individuals to avoid a sentence
of imprisonment if they can establish that they did not know the substance of
the SEC rule or regulation they allegedly violated, regardless of whether they
understood its particular application to their conduct." Under this
interpretation a defendant meets the required burden of proof by demonstrating
that he or she was unfamiliar with the import of the rule, that is, its
substance. It is not met by establishing that the person did not understand
that their specific conduct did not fall within the prohibitions of the rule.
This is in accord with rulings by a majority of the circuits which have
considered the question the Court noted, citing decisions from the Ninth and
Here the defendant failed to meet the required burden of
proof. At his sentencing Mr. Behrens, a broker, admitted he knew it was
fraudulent to take money from investors in connection with the purchase or sale
of a security, to make misstatements and omissions and to engage in a course of
conduct which acted as a fraud as it related to securities. Based on these
admissions the District Court concluded that Mr. Behrens had knowledge of the
substance of the rule. The fact that he claimed not to understand that the
promissory notes sold were securities is of no moment. The sentence was
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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