SEC v. Fowler

SEC v. Fowler

Opinion

 [*257]  LOHIER, Circuit Judge:

The principal questions presented on appeal are (1) whether 28 U.S.C. § 2462, which imposes a five-year statute of limitations on Securities and Exchange Commission (SEC) enforcement actions for civil penalties, is jurisdictional and not subject to tolling by the parties; (2) whether excessive trading in customer accounts constitutes a violation of customer suitability requirements as well as churning;³ and  [*258]  (3) whether civil penalties were properly imposed based on the number of defrauded customers in this case. ] We hold that the five-year statute of limitations in § 2462 is not jurisdictional and may be tolled by the parties. We also conclude that the SEC's suitability claim and the civil penalties imposed in this case were proper and that the other challenges on appeal are without merit. After modifying the judgment to correct one error in the amount of disgorgement, we affirm.

BACKGROUND

Donald Fowler, a financial broker, challenges a February 28, 2020 judgment of the United [**3]  States District Court for the Southern District of New York (Woods, J.) entered after a jury trial. The jury found that Fowler lied to his investors, recommended a high frequency trading strategy that was not suitable for any customer, and made a series of unauthorized trades in customer accounts, in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated under Section 10(b) of the Exchange Act, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933. After trial, the District Court ordered Fowler to disgorge $132,076.40, with prejudgment interest, and to pay civil penalties in the amount of $1,950,000 based largely on the number of defrauded customers who were the focus at trial. It also permanently enjoined Fowler from further violations of the securities laws.

Fowler was a registered representative (a broker) for J.D. Nicholas & Associates, Inc. from January 2007 to November 2014. By 2011 Fowler and another J.D. Nicholas broker, Gregory Dean, began pursuing an "event-driven" investment strategy on behalf of several J.D. Nicholas customers.⁴ The event-driven strategy was uncomplicated. Fowler reviewed the financial news and found "events" that he believed the stock price of particular companies [**4]  had yet to fully absorb. He then traded based on his assessment of whether those events would lower or increase the price of a stock. The frequency of Fowler's trades in customer accounts and the average turnover rate of customer accounts—that is, the number of times that assets in the account were replaced—was very high. While J.D. Nicholas considered a turnover rate of just four times per year to be high for an account with conservative objectives, Fowler's customer accounts examined at trial experienced a turnover rate of 116 times per year.

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