Ignorance Of The Law Defense Fails In Rule 10b-5 Case

April 26, 2013

Bryan Behrens owned and operated 21st Century Financial Group, Inc., a life insurance agency and financial investment advising business; and he subsequently became the sole owner and operator of National Investments, Inc. ("NII"). After promoting NII as a safe and lucrative investment opportunity to his clients, Behrens issued promissory notes offering 7% to 9% fixed returns. Turns out that the investors' money never quite made its way to its purported destination and Behrens used the funds to prop up his businesses and for his personal use - another Ponzi scheme, at its worst.

Following a Securities and Exchange Commission ("SEC") investigation, in April 2009, a federal grand jury returned a 21-count indictment. Thereafter, Behrens entered into a plea agreement whose terms did not specifically address final sentencing. The pre-sentence investigation report calculated the advisory guidelines imprisonment range as 121-151 months. 

I Know Nuthin'

At his sentencing hearing, Behrens asserted the "No Knowledge" defense and argued he was ineligible for imprisonment because Section 78ff(a) imposes criminal liability for "[w]illful violations" of securities laws or SEC rules or regulations but allows defendants who prove they had "no knowledge" of the rule or regulation they violated to avoid imprisonment,

Round One

The District Court found that the "no knowledge" defense applies only to those convicted of violating SEC rules, rather than securities statutes, and because Behrens had pled guilty to violating the latter (§ 78j(b)), he accordingly could not take advantage of the "no knowledge" provision. The District Court sentenced Behrens to five years' imprisonment, three years of supervised release, and $6,841,921.90 restitution.

On appeal, the 8th Circuit vacated the district court's imposition of sixty months' imprisonment, holding that individuals who are charged with violating both § 78j(b) and Rule 10b-5 are still entitled to assert the no knowledge defense. United States v. Behrens, 644 F.3d 754, 757 (8th Cir. 2011). 

Round Two

On remand,  after finding that Behrens had failed to meet his burden of proving no knowledge and that he "was aware of the verbatim provisions of Rule 10b-5 and that they proscribed illegal conduct," the District Court imposed the same sentence as in its first decision.

8th Circuit Appeal

Back on appeal to the 8th Circuit, Behrens argued that even if he was aware of the provisions of Rule 10b-5 as they relate to "securities," his sales involved "promissory notes," which he did not know constituted securities within the scope of Rule 10b-5. In response to that assertion, the Government urged that the proper statutory interpretation is that Behrens may only avoid prison if he proves by a preponderance of the evidence his ignorance of the existence of Rule 10b-5. USA v. Behrens (8th Circuit, April 25, 2013).


Initially, the 8th Circuit rejected the government's proposed finding because the Court found that:
"no knowledge" cannot be limited as the Government urges, to no knowledge of the existence of the pertinent SEC rule or regulation."

Ultimately, the 8fth Circuit determined that:

[T]he better reading of 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. . .

This rule protects from imprisonment individuals who truly are unaware of the substance of an SEC rule or regulation, but it does not go so far as to completely vitiate the principle that ignorance of the law is no defense . . .

Having reduced the task before it to a determination of whether Behrens carried the burden of proof as to his lack of knowledge of "the substance of Rule 10b-5," the 8th Circuit noted this exchange at the sentencing hearing between the questioning government and the answering Behrens:

Q [Government]. Right. In any event, based on your experience,
you knew that it was illegal to fraudulently take money from investors
in connection with the purchase or sale of a security, didn't you?
A [Behrens]. Yes.
Q. You knew that it was illegal to make a misrepresentation of a
material fact or an omission of a material fact related to the sale or
purchase of a security, didn't you?
A. As it relates to a security, yes
Q. You know that it was illegal to engage in a course of conduct
which operates as a fraud or deceit upon a person relating to the
purchase or sale of a security, didn't you?
A. As it relates to securities, yes.
Q. And you know that-do you know what I've just read to you
is Rule 10b-5?
A. As it relates to securities.

The 8th Circuit seems to have found that Behrens' responses compelled a conclusion that he had sufficient knowledge of the substance of Rule 10b-5 and, as such, the District Court's sentence of imprisonment was sustained.

SEC v. Behrens et al. (DNE, 8:08-CV-13, January 8, 2010)

SEC v. Behrens (SEC, OIP/Settlement, August 14, 2008)