READ This SEC Background:
The securities at issue in this matter were all variable annuities. A variable annuity is a hybrid security and life insurance product. It is a contract between an investor and an insurance company in which the investor agrees to make a lump-sum payment or a series of payments in exchange for a regular stream of payments or a lump-sum payment in the future. Variable annuities generally offer investors a range of investment options (typically mutual funds that invest in stocks, bonds, and money market instruments), and the value of variable annuities depends on the performance of the underlying investments. Income and investment gains from variable annuities are generally tax-deferred and, when withdrawn, are taxed at ordinary income tax rates.Variable annuities generally offer a "death benefit," which provides that, if the investor dies before receiving payments from the insurance company, the investor's stated beneficiaries are guaranteed to receive a specified amount (typically at least the amount of the investor's payments to the insurance company less accumulated withdrawals). Variable annuities also generally assess surrender charges if the investor withdraws money during the early years of the investment, although contracts will often allow an investor to withdraw a certain amount of his or her account without paying a surrender charge. Variable annuities also generally contain a "freelook" period of ten or more days after the initial investment, during which investors can terminate the contract without incurring a surrender charge.Variable annuities generally contain a "mortality and expense risk" charge to compensate the insurance company for the insurance risk that the company assumes under the annuity contract. In addition, investors in variable annuities can often obtain certain optional features (such as a stepped-up death benefit, guaranteed minimum income benefit, long-term care insurance, and up-front bonus credits) at specified charges.Insurance companies pay broker-dealers a commission for selling variable annuities. The amount of the commission depends on the insurance company, the relationship between the broker-dealer and the insurance company, the type of annuity sold, and how much money the customer invested. Commissions can be paid in full at the time of sale, over the life of the contract, or for another defined period.
SIDE BAR: Hmmmm . . . so the December 2003 revocation is lifted in April 2004 pending Brown's appeal. Which sort of suggests that Florida wasn't so troubled by Brown's alleged misconduct and gave him some benefit of the doubt. Should Collins' supervision of Brown have taken that factor into account? Keep in mind that Collins was unaware of the December 2003 revocation until February 2004. However, by that later date, he was finally on notice of the state's concerns and actions.
[I]ronically, the Commission absolved Collins of one charge of which the ALJ had found him liable, and lowered the "tier" of punishment, yet imposed a much heavier civil penalty. The ALJ found him liable as a primary violator of the antifraud provisions, but the Commission reversed that finding. On the substantive charge of failing "reasonably to supervise" Brown under Exchange Act §§ 15(b)(4)(E) and 15(b)(6)(A), the ALJ and the Commission agreed. Those sections create liability for a supervisor when his inadequate supervision is coupled with a violation by his supervisee. . .. . .The ALJ found that Collins's acts satisfied the third-tier criteria, and imposed a single such penalty of $130,000. The Commission found that Collins was properly subject only to second-tier penalties. But it treated each of the five relevant sales as "distinct and separate" acts or omissions, resulting in five penalties aggregating $310,000. SEC Opinion at *60. It also ordered him to disgorge $2,915, the total commissions on sales to two customers; it excused any disgorgement of the commissions (slightly exceeding $2000) paid by the two customers whose NASD claim Prime Capital had settled for $125,000, including $25,000 from Collins.
Collins was responsible for supervising only one person: Brown. In fact, Collins and Brown were, for a time, the only two employees in the Delray office. Yet, as Prime Capital's own review of Collins accurately concluded, "there was [a] complete lack of supervision . . . by Matt Collins" over Brown. The Firm's records, for example, showed that customer documents, and in some cases entire files, were missing (which Collins acknowledged made an adequate review of Brown's sales impossible), and the Firm's branch reviews found "no evidence" of any supervisory review over certain of Brown's transactions.Even more egregiously, when Brown told Collins of a "mishap" with his Massachusetts insurance license, Collins did nothing, accepting Brown's claim that it "was no big deal." When Collins later learned that, in fact, Florida had suspended Brown's license for making material misstatements and executing an unauthorized transaction, Collins still did nothing. And when Collins learned that Florida reinstated Brown's license with restrictions, he again did nothing. Collins not only allowed Brown to continue selling variable annuities to new customers in violation of Florida's prohibition, he also actively facilitated Brown's continued sales by falsely stating on customer account forms that he, and not Brown, was the customers' registered representative. Collins also continued to defer to Brown, relying entirely on Brown's word, for instance, that Bogan's son had signed a document authorizing a transfer in Bogan's son's account.27As a result, Collins's supervision of Brown was not just inadequate, but entirely absent. Collins himself admitted that his supervision of Brown was deficient and that he lacked the training and documents to review Brown adequately. We thus find that Collins failed to exercise reasonable supervision with a view to preventing Brown's antifraud violations.
[N]ot to require uniformity or "mechanical formulae" is not the same as for it to be oblivious to history and precedent. Review for whether an agency's sanction is "arbitrary or capricious" requires consideration of whether the sanction is out of line with the agency's decisions in other cases. Friedman v. Sebelius, 686 F.3d 813, 827-28 (D.C. Cir. 2012).Recognizing this, we nonetheless find that the penalty's relation to disgorgement does not render it arbitrary or capricious. First, the $2,915 disgorgement imposed directly on Collins understates his full disgorgement responsibility, as he was excused disgorgement of slightly more than $2000 in commissions because of the $25,000 he had contributed to settlement of the NASD complaint brought by the customers involved.Second, disgorgement obviously doesn't fully capture the "harm" side of the proportionality test that Collins's reply brief invites us to consider-"proportionality between the gain or injury and the penalties exacted." Full indicia of the injury inflicted by Collins and Brown, for example, include the entire $125,000 paid to settle the NASD complaint, of which Collins paid only $25,000.Third, the statute seems to demand that the Commission look beyond harm to victims or gains enjoyed by perpetrators. It lists harm to other persons as only one of five specific factors (plus the catch-all reference to "such other matters as justice may require"). In that context, the relation between the civil penalty and disgorgement (and other measures of injury) is informative, particularly in comparison with other cases,but hardly decisive.Looking more broadly, the Commission noted in its opinion, for instance, that Collins's violation was "egregious," and that he "displayed a blatant failure to deal fairly with elderly, unsophisticated customers and exhibited a clear disregard for . . . customers' interests." SEC Opinion at *59-60. This conclusion rested, in part, on the fact that Collins falsified documents and otherwise failed completely to supervise Brown, "creat[ing] an environment where Brown could defraud his clients with impunity." Id. at *42. And the Commission quite properly invoked the statutory interest in deterrence.