Federal Appeals Court Sustains Bar in SEC v. Siris

December 3, 2014

This epic battle by a defendant/respondent against the Securities and Exchange Commission ("SEC") ends as many of these combats do -- with the SEC triumphant and, more to the point, apparently with good reason to take a victory lap. For those Wall Street professionals who seek to learn lessons from these cases, however, there is an interesting lesson (in the form of a not-so obvious warning) that is buried among the many bodies left on the field.

Case In Point

Today's BrokeAndBroker.com Blog presents the saga of Peter Siris, who was an author on many things involving investing, including one title: "Guerilla Investing: Winning Strategies for Beating the Wall Street Professionals." In addition to his writing credits, Siris was an investment adviser, who by the end of 2010 had assets under management of some $160 million. 

SDNY Complaint

Alas, Siris seems to have popped up on the SEC's radar. In Securities and Exchange Commission, Plaintiff, v. Peter Siris, Guerrilla Capital Management, LLC, and Hua Mei 21st Century LLC, Defendants (SDNY, Complaint, 12-CV-5810, July 30, 2012), alleged that Siris had engaged in illegal insider trading, material misrepresentations and omissions, and improper short-selling. The gist of the case is set forth in the SEC's Complaint:

3. Siris and his firm Hua Mei acted as paid consultants to numerous Chinese companies in which his funds invested, including China Yingxia International, Inc. ("China Yingxia" or the "Company"), a purported nutritional foods company and one of the many Chinese companies in recent years that have gained access to the U.S. capital markets via reverse merger. Hua Mei received both cash and shares - including shares received through a person directly or indirectly controlled by the issuer, in a transaction that operated as an end-run around registration provisions of the federal securities laws, and which Siris sold for illicit proceeds of approximately $24,600 - for performing due diligence on China Yingxia; raising over $2 million for an $8.7 million China Yingxia "PIPE" transaction, in which Siris acted as an unregistered broker and received payment of $107,500 in transaction-based compensation; and reviewing and advising on Commission filings, press releases, and hiring decisions, among other things.

4. During the time Siris worked and had a relationship of trust and confidence with China Yingxia, he received and traded on material, non-public information concerning the Company. Specifically, on or around February 19, 2009, Siris learned of problems at China Yingxia directly from the Company's chief executive officer, including that she had engaged in companies, Hua Mei, for repeated violations of the federal securities laws. Defendants Siris, Guerrilla Capital, and/or Hua Mei - who are significant investors and consultants in the Chinese reverse merger investment space - engaged in wide-ranging misconduct from 2007 to 2010, including improper sales of unregistered illegal fundraising activities in China, and that a Company factory had shut down. In response, Siris began selling hundreds of thousands of shares of China Yingxia stock prior to any public disclosure by China Yingxia concerning these issues that threatened to, and indeed later did, shutter the Company. Siris learned additional material, non-public information during the late afternoon of March 3, 2009, when he received a draft press release and notice that China Yingxia planned to publicly disclose the problems. Siris increased his orders to sell over the next couple of days before China Yingxia issued its press release publicly disclosing the problems on March 6, 2009. In all, Siris, through his funds, sold 1,143,660 China Yingxia shares in a matter of weeks, for ill-gotten gains (profits and/or losses avoided) of approximately $172,000.

5. China Yingxia's stock price plummeted on the first trading day after it issued the press release of March 6, 2009. The Company's directors resigned that same day and, within roughly a month, the chief financial officer also resigned, effectively ending China Yingxia's operations. Reports indicate that Chinese officials have sentenced the Company's CEO to death for illegal fundraising activities, similar to a Ponzi scheme, involving Chinese citizens. . .

Settlement

Without admitting or denying the allegations of the complaint, on July 30, 2012, the defendants settled the SEC's charges. On September 18, 2012, a final judgment was entered by consent against the defendants, and pursuant to the relief granted, Siris was permanently enjoined from future violations of various federal securities laws, rules, and regulations. In addition to Siris being personally ordered to pay a $464,011.93 civil penalty, all defendants were ordered to pay:
  • $592,942.39 in disgorgement, and
  • $70,488.83 in pre- and post-judgment interest.
SEC OIP

In view of the allegations made in the settled Complaint, the SEC deemed it necessary and appropriate in the public interest to institute public administrative proceedings to determine, among other issues, what, if any, remedial action was necessary against Siris. In the Matter of Peter Siris (Order Instituting Administrative Proceedings, 1934 Rel. No. 67949; 1940 IA Rel. No. 3481. Admin. Proc. File No. 3-15057 / September 28, 2012). As more fully set forth in the OIP:

3. The Commission's complaint alleged that, from at least 2007 until 2010, Siris violated numerous federal securities laws in connection with his dealings with Chinese reverse merger companies. It alleged that, relating to China Yingxia, a company with which Siris maintained a consulting relationship, Siris engaged in illegal insider trading in its securities shortly before the company collapsed; acted as an unregistered securities broker by raising over $2 million for China Yingxia in exchange for transaction-based compensation; sold unregistered securities of China Yingxia that one of his firms received through an end-run around registration provisions of the federal securities laws; and made material misrepresentations and omissions to investors in his funds concerning his dealings with China Yingxia. Specifically, Siris wrote to his investors after the company collapsed and placed blame on others he claimed were responsible for the company's Commission filings and key hiring decisions, among other things, and against whom he wanted to initiate legal action. Siris omitted from disclosure, however, his significant role in those very same tasks, depriving his investors of information concerning his role with the failed company. The complaint further alleged that in advance of ten confidential securities offerings, after agreeing to go "over-the-wall," Siris engaged in repeated insider trading in breach of his duty to keep certain information confidential and not trade on such information; committed fraud in a securities purchase agreement by falsely representing that his funds had not engaged in any trading after being contacted about a deal, when in fact his funds had effected short sales in that issuer's securities; and violated Rule 105 of Regulation M by participating in two offerings of equity securities after directing short sales in those issuers' securities.

ALJ Bar

The Administrative Law Judge hearing the matter noted the following background in her Initial Decision:

Siris has been in the in the financial industry for over forty years, with over thirty-eight
years of experience in China. Answer at 8-9. For twelve years, until 2011, Siris wrote a column for the New York Daily News covering financial and economic news. Answer at 5. His record was unblemished until SEC v. Siris. Answer at 2. Siris lives frugally. Answer at Aff. at 3. Virtually all of his family's money is in Guerrilla Partners, LP, and Hua-Mei 21st Century Partners, L.P., (the Funds) so that his interests and the outside investors' interests are aligned. Answer at Aff. at 4. Siris has acknowledged and learned from his mistakes. Answer at 1, Answer at Aff. at 1-2, 23.Siris has taken corrective action: as of eighteen months ago, he discontinued investing in PIPEs and registered direct offerings; as of two years ago, he discontinued all consulting services of Hua-Mei 21st Century Partners, L.L.C.; he established compliance protocols, appointed a chief compliance officer, and set up safeguards, including maintaining a restricted list; and he established an email back-up system to ensure the maintenance of records of all communications. Answer at Aff. at 2-3; Opposition at 1-2. Siris wants the opportunity to wind down the Funds in an orderly fashion; he reduced the Funds' assets from approximately $101 million as of January 1, 2012, to approximately $70 million, of which nearly $46 million is cash, as of September 30, 2012. Answer at Aff. at 2.

SIDE BAR: For an extensive listing of Siris's NY Daily News columns pertaining to China, READ

Ultimately, the ALJ determined that Siris's conduct required the imposition of a Bar from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in an offering of penny stock. In the Matter of Peter Siris (Initial Decision, Release No. 477; Admin. Proc. File No. 3-15057 / December 31, 2012).

SEC Opinion

Following the ALJ's Initial Decision, the SEC upheld the Bar. In the Matter of Peter Siris (Opinion of the SEC, 1934 Rel. No. 71068; 1940 IA Rel. No. 3736. Admin. Proc. File No. 3-15057 / December 12, 2013). The SEC reiterated that Section 15(b)(6) of the Exchange Act authorized the imposition of a Bar upon an individual who had been enjoined from any conduct or practice in connection with the purchase or sale of a security; and, similarly, the 1940 Advisers Act authorized an industry-wide Bar under similar circumstances. In sustaining the ALJ's imposition of a Bar, the SEC offered further guidance in the Opinion:

Siris's conduct was egregious and recurrent and amply justifies his being barred from the industry. He was enjoined based on alleged conduct that included numerous instances of insider
trading over the course of almost two years and that resulted in ill-gotten gains of over half-a-million
dollars. In addition to recurrent insider trading, the Complaint further alleged that Siris
committed securities fraud through material misrepresentations in connection with a securities
purchase agreement and misrepresentations and omissions to investors in his funds.35
We have
repeatedly held that "'conduct that violates the antifraud provisions of the securities laws is
especially serious and subject to the severest of sanctions under the securities laws.'"36

Siris's conduct involved scienter. The multiple, repeated instances of insider trading alleged in the Complaint support the conclusion that Siris acted intentionally, or at a minimum,
with severe recklessness.
37
This is particularly true given Siris's long experience in the industry
and admitted knowledge that he could not trade while in possession of material, non-public
information. Moreover, in addition to fraud-based claims, the Complaint alleged deceptive
conduct in connection with a violation of Section 5 of the Securities Act. The sale of China
Yingxia stock that forms the basis of the Section 5 charge was facilitated by Siris's making a
knowingly false representation that the stock he received was for services rendered to the
shareholder and not the company.
38
According to the Complaint, despite knowing of its falsity,
Siris made this representation to evade the registration requirements of Section 5 so he could
freely trade China Yingxia stock.39
Giving "considerable weight to the injunctive allegations" of
the Complaint,40 we find based on our review of the entire record that Siris's conduct involved
scienter, which supports a bar.41

Siris insists that he has taken "corrective efforts" to avoid future misconduct, such as ceasing to participate in offerings, eliminating consulting services, establishing trading compliance protocols, appointing a chief compliance officer, maintaining a restricted list, and
establishing an e-mail backup system.42
While we acknowledge the steps Siris has taken, we
find that such voluntary measures do not ensure, as he suggests, that "there is no realistic
prospect for future violations." 43 And accepting the sincerity of Siris's assurances against future
misconduct does not mean that "there can be no risk of future misconduct warranting a bar."44
As we have held "such assurances are not an absolute guarantee against misconduct in the
future"; we weigh them against the other Steadman factors in assessing the public interest.
45.

. . .

We also find that Siris has not meaningfully recognized the wrongful nature of his
conduct. Although Siris insists that he has "acknowledged his conduct" and "accepted
responsibility for it," he continues to maintain, as discussed more fully below, that his conduct
did not in fact amount to violations of the securities laws as alleged in the Complaint. Denying
that there is a factual basis for most of the securities law violations in the Complaint (something
Siris agreed not to do) does not amount to a meaningful recognition of his misconduct.48

Indeed, although Siris agreed that he would not contest the factual allegations of the Complaint in this proceeding, he has failed to abide by this agreement and has repeatedly disputed the Complaint's factual allegations.
49
The flagrant manner in which Siris has violated
the terms of his consent also gives us pause about relying upon his assurances against future
misconduct, even accepting them as sincere. Weighing the relevant factors, we conclude that,
"notwithstanding the sincerity of his present assurances that he will not commit such misconduct
again, the risk that he would not be able to fulfill his commitment is sufficiently great that
permanent associational bars are required to protect the public interest."

Circuit Court Appeal

Unfortunately, Siris may have convinced himself that he would present a compelling case towards mitigating his role in the underlying fraud and would convince the SEC to impose something less than a Bar. Frankly, many litigants in Siris's position figure that they are entitled to what is often referred to as a "settlement premium."Unhappy with the imposition of a Bar by the SEC, Siris appealed to the United States Court of Appeals for the District of Columbia Circuit ("DCCir") In Peter Siris, Petitioner, v. Securities and Exchange Commission, Respondent (United States Court of Appeals for the District of Columbia Circuit, 14-1018, December 2, 2014).

As is the circumstance of many such folks who have settled a case and are unhappy with the sanctions imposed upon them, Siris had one hell of a case of buyer's remorse. The thing is, however, that he found himself painted in a very tight corner. Having consented to the entry of judgment by SDNY pursuant to a "voluntary" settlement in which Siris had previously agreed not to contest the allegations in the SEC's Complaint, he found little room to maneuver. In considering Siris's appeal, the DCCir noted the following factors, among others:

[T]he Commission explained that Siris' conduct "included numerous instances of insider trading over the course of almost two years" and "securities fraud through material misrepresentations," and "resulted in ill-gotten gains of over half-a-million dollars." In re Peter Siris, 2013 WL 6528874, at *6. Moreover, in light of Siris' multiple insider trading violations and the fact that he knew he could not trade while in possession of material, nonpublic information, Siris' misconduct was undertaken with scienter.

The Commission acknowledged the steps Siris had taken to avoid future misconduct, such as ceasing to participate in offerings, establishing trading compliance protocols, appointing a chief compliance officer, and maintaining a list of restricted securities. Id. But the Commission concluded that such voluntary measures would not adequately guard against future violations, and that "accepting the sincerity of Siris's assurances against future misconduct does not mean," as he suggested, "that 'there [was] no risk of future misconduct warranting a bar.'" Id. The Commission likewise rejected Siris' proposal that he be subjected to sanctions short of industry-wide debarment - namely, that he continue to refrain from participating in offerings, accepting consulting assignments, or acting in certain capacities - noting "the practical difficulties in enforcing compliance with such a proposal," id. at *6 n.43 internal quotation marks omitted), and emphasizing "the nature of [Siris'] misconduct and the opportunity that continued participation in the industry would present for future violations," id. In particular, Siris' agreeing not to serve as a portfolio manager or investment adviser to a managed account "does not ensure the protection of investors, because the allegations supporting the injunction involve a broad array of misconduct not unique to service [in those positions]." Id. at *7 (internal quotation marks omitted). The Commission also highlighted "[t]he flagrant manner in which Siris . . . violated the terms of his consent [judgment]," which gave the Commission "pause about relying upon his assurances against future misconduct, even accepting them as sincere." Id. In addition, the Commission made clear its view that, given Siris' continued argument that his conduct did not in fact amount to violations of the securities laws, Siris had not meaningfully recognized the wrongful nature of his conduct. Id. Siris petitions for review. . .

. . .

Granting due deference to the Commission's choice of sanction, we conclude that the Commission did not abuse its discretion in imposing on Siris a lifetime bar. The Commission justifiably rebuffed Siris' proffered evidence contradicting the allegations of the complaint, which he voluntarily agreed not to contest. The Commission gave sufficient attention to any mitigating evidence. Siris has not shown that the Commission's imposition of a lifetime bar was unwarranted as a matter of law or unjustified in fact. . .

Bill Singer's Comment

I urge you to read the source documents cited at the end of this column. The facts in this case are quite complex and complicated, and a fuller reading of the Complaint and various decisions will be helpful. Compliments to the SEC, the ALJ, and the Circuit Court for rendering compelling materials in a manner that superbly presents the issues and explains the rationale.

The lesson from this case is, first and foremost, don't do what Siris did in terms of the underlying violations. The other lesson, which is a bit more subtle, is carefully consider the tightrope that you walk out upon when you enter into any settlement that binds you to a future in which you are unable to deny the allegations. Sure . . . the language of many settlements often includes that catch-phrase "without admitting or denying . . ." What too many defendants often gloss over is that you won the right to NOT admit to any wrongdoing, however, that came with the concomitant obligation to NOT deny any of the alleged wrongdoing.

As the DCCir rightfully highlighted, Siris voluntarily entered into the settlement, and, consequently, he should have made himself aware of the potential for the imposition of a Bar. After consultation with his lawyer, Siris should have understood the odds of being barred and, thereafter, come to peace with a decision to roll the dice. In the end, he had the option of going the distance and demanding a trial. Yes, I understand that the costs of taking on the SEC may be beyond many defendant/respondent's means; however, that is a fact of life on Wall Street and, as such, another data-point in the calculation about whether to settle or not.

In Siris, the SEC and the DCCir have once again made it clear that notwithstanding the sincerest of apologies and the most ironclad assurances of future compliance, if the federal regulator senses that there is an absence of a meaningful recognition of the wrongful nature of the conduct at issue, then the SEC may exercise its discretion and, in essence, go for the jugular in the discharge of its mandate to protect the public.

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