SIDE BAR: The title is as much of a Spoiler Alert as there is: "Federal Appeals Court's Dramatic Antifraud Interpretation Eviscerates SEC's Goble Victory" (BrokeAndBroker.com, May 30, 2012). In that May 2012 analysis, we explained that:Following a five-day bench trial, Defendant Goble was found liable for committing fraud and aiding and abetting his clearing firm's violations of the Customer Protection Rule and books and records provisions of the Securities Exchange Act of 1934 . The District Court found that Goble and North American's executives made a substantial effort to conceal the firm's financial profits by, among other acts, Goble's direction of a so-called sham transaction by which North American falsely recorded a $5 million money market purchase, which artificially lowered the firm's reserve requirement under the Customer Protection Rule and allowed North American to improperly withdraw more than $3 million from its EBOC Account.The District Court permanently enjoined Goble from violating Sections 10(b), 15(c)(3), and 17(a) of the Exchange Act and Rules 10b-5, 15c3-3, and 17a-3 thereunder. On its own initiative, the District Court enjoined Goble from attempting to secure any securities licenses or otherwise attempting to engage in the securities business. Goble was ordered to pay a reduced civil penalty amount of $7,500 based, in part, upon consideration that North American had been liquidated in a Securities Investor Protection Corporation bankruptcy proceeding.. . .In the Matter of the Securities and Exchange Commission v. Richard L. Goble (US Ct App 11th Cir, No. 11-12059, May 29, 2012), on appeal from the District Court for the Middle District of Florida, the 11th Circuit Court:
- affirmed the District Court's judgment that Goble aided and abetted North American's violations of the Customer Protection Rule and books and records requirements of the Exchange Act;
- reversed the District Court's conclusion that Goble committed securities fraud in violation of § 10(b);
- vacated portions of the District Court's court's injunction that:
- bar Goble from procuring a securities license, engaging in the securities business, or violating § 10(b) or Rule 10b-5, and
- address compliance with §§ 15(c)(3) and 17(a) of the Exchange Act because these paragraphs simply cross-reference the statutes and regulations; and
- remanded to the District Court for consideration in the first instance whether Goble's violations of the Customer Protection Rule and books and records requirements warrant the lifetime bar from the securities business. (The lower court was instructed to afford Goble an opportunity to be heard on the propriety of this relief; and the court should draft an injunction addressing compliance with §§ 15(c)(3) and 17(a) that allows Goble to understand his obligations under the injunction
NACI was consistently profitable. The company earned $4,477,513 in revenue in 2006, although advance expenses accrued early for tax reasons resulted in a slight, artificial loss of $339,274.8 By 2007, NACI's revenue had increased to $5,340,493, and its net income improved to a positive $399,951.9In 2008, NACI only operated from January through May but appeared poised for its most profitable year. The firm earned $1,858,782.55 in total income and $382,095.39 in net income for the five-month operating period in 2008.10 Based on these figures, NACI hardly appears to have been on its last legs. The firm's profitability was increasing year-to-year.Goble was the person in charge of NACI, although he had no official title other than as a member of NACI's board of directors.11 He made all important hiring decisions. Bruce Blatman, NACI's last president, reported directly to Goble.12Goble worked tirelessly to help NACI succeed focusing on marketing, technology, and generating business for the firm. He routinely attended conferences around the country to promote NACI's services. Goble was the salesman for the company and relied on others to insure that NACI complied with securities regulations and properly accounted for customer funds.13 According to Blatman, Goble "ran" NACI.14
Here, the Two Year Transfers fall into two categories-business expenses ($255,282.06) and personal expenses ($245,777.72). The business expenses include charges for these types of expenditures:• Travel expenses for Goble and other employees to attend business meetings and tradeconferences;• Real estate taxes and property related expenses on NACI's offices;• Advertising expenses;• Business cell phone costs;• Stockbroker test preparation materials;• Employee search firm services;• Computer equipment;• Business lunches for NACI employees and others;• Office supplies;• Company gatherings and other outings for employees;• FINRA charges;• Corporate filing expenses;• Software licensing expenses; and• Conference call services.38After trial, the Court reviewed these expenses at some length and honestly is shocked that the Trustee would challenge these expenses. Trustee put forth absolutely NO proof to show that NACI failed to receive reasonably equivalent value from these charges. Many of the credit card charges are clearly business related, such as amounts paid to FINRA, employee search firm services, corporate filing expenses, and conference call services. To argue that NACI received no value from these obviously business-related Transfers defies logic. . .
Here, the Trustee tried to establish this element by showing that the Debtor "was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital."53 This prong is known as "unreasonably small capital" or "under capitalization,"54 is rarely argued, and is difficult to establish. Indeed, the vast majority of the six days of trial time was devoted to this portion of the Trustee's complicated factual argument. . .
The Trustee here provided no meaningful analysis of the Debtor's financial condition in conjunction with the Transfers. The Trustee's case hinged instead on questionable legal presuppositions and untested hypotheses involving NACI's use of customer funds in its operations. In simple terms, the Trustee argues that NACI improperly used customer cash to fund daily operating expenses and, therefore, must have been operating with unreasonably small capital when the Transfers occurred. . .
The Court rejects the Trustee's argument of actual fraud. Although Goble, as sole indirect owner of NACI and member of its board of directors is an insider of NACI, the company was paying its bills on time, was not undercapitalized, received reasonably equivalent value for the Transfers, and did not improperly use, conceal, or remove assets, including customer monies. The Court specifically finds that the Transfers largely pre-dated FINRA's complaint against NACI lodged in Fall 2007. The Transfers were an established pattern of payment by NACI to Goble and were not in response or even remotely connected to the FINRA complaint. No other badges of fraud exist. 93 The Trustee did not prove actual fraud. . .