Pro Se Inmate Stuns SEC Division of Enforcement

December 19, 2016

The Blog has exhausted itself and its readers with its ongoing coverage of  the Securities and Exchange Commission's ("SEC's") In the Matter of Gary L. McDuff. Readers unfamiliar with SEC v. McDuff should reference these recent installments:

Brief Synopsis

By way of a brief, and I mean really, really brief, synopsis, in 2013, a federal criminal jury took only six minutes to convict McDuff of conspiring to defraud investors out of over $11 million in connection with an investment fraud scheme and, further, of laundering the proceeds. In 2014, Defendant McDuff was sentenced to 300 months in federal prison and ordered to pay $6.5 million in restitution. Inmate McDuff is presently incarcerated at a low-security, federal correctional institution in Beaumont, Texas ("FCI Beaumont").

Sometime around February 2014, the SEC began its effort to conduct a fairly perfunctory hearing to determine if it were in the public interest to bar McDuff from the securities industry. In trying to conduct the public-interest hearing, SEC Administrative Law Judge ("ALJ") Cameron Elliott encountered all sorts of Federal Bureau of Prisons ("BOP") rules, regulations, policies, and practices. As detailed more fully in previous Blog installments, ALJ Elliott wasn't getting even a modicum of cooperation from BOP -- what he was getting was a runaround by small-minded and petty BOP bureaucrats who were more concerned about marking their turf and protecting their territory than seeing that the interests of justice were furthered. ALJ Elliott has been forced to deal with all sorts of dubious BOP objections about the proper transmission of and labeling of mail, arranging for telephone calls, and securing a room at FCI Beaumont for the conduct of the hearing.

On December 16, 2016, ALJ Elliott stunned the regulatory community and investing public when he issued an Initial Decision dismissing the SEC's case.

December 2016 ALJ Initial Decision

In the Matter of Gary L. McDuff (Initial Decision, Initial Decision Rel. No. 1090; Admin. Proc. File No. 3-15764 / December 16, 2016), we are forced to confront a stunning outcome in what largely comes off as a regulatory farce. As noted in the preliminary synopsis of the ALJ's Initial Decision: 

Respondent Gary L. McDuff is a recidivist money launderer currently serving a 300- month prison sentence. Despite otherwise impressive efforts to meet its burden of proof, including putting on its case inside a federal prison, the Division of Enforcement did not prove that McDuff was acting as a broker at the time he engaged in the misconduct underlying this follow-on proceeding. I therefore find that McDuff does not meet the statutory prerequisite for sanctions under Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) and order this proceeding dismissed.
Not Believable

The ALJ's Initial Decision is a stunning blow the the SEC's Division of Enforcement. Notwithstanding the ALJ's findings, which must still be reviewed by the full Commission, it is imperative that we respect the integrity of the process and must ultimately applaud the ALJ for rendering what is clearly a discomforting and troubling decision. To underscore the angst with which ALJ Elliott likely wrestled, consider this:

[A]lthough McDuff's demeanor was generally unremarkable, and I credit his testimony not inconsistent with other witnesses or with the Division's exhibits, much of McDuff's testimony and many of his exhibits were not believable. Indeed, the record is replete with reasons for doubting McDuff's testimony and questioning the truth and authenticity of his allegedly exculpatory exhibits:

- McDuff was convicted in 1993 of engaging in monetary transactions in criminally derived property, in violation of 18 U.S.C. § 1957, and was convicted in 2013 of money laundering and conspiracy to commit wire fraud. Tr. 391-93, 482-83; DX 33, 74.

- McDuff nonetheless maintains that both convictions were wrongful. See Tr. 482-83; see also RX 17.

- McDuff defrauded his own parents. See DX 11 at 6 (of 8 pdf pages); DX 13 at 66; RX 42-43. Indeed, he was ordered to pay $16,747 in restitution to his mother, Vivian McDuff. DX 35 at 6. 

- McDuff laundered the proceeds of his fraud through a complex series of transactions using multiple companies, at least one of which was domiciled outside the United States. See Tr. 213, 299-303; DX 65 at 2. 

- In his Answer, McDuff asserted that he "had been unaware of the activities of [codefendants in McDuff] [Robert] Reese and [Gary] Lancaster, which caused the Commission Division of Enforcement to file the Complaint." Answer at 6. He continued to make similar claims throughout this proceeding. E.g., Tr. 454. In fact, McDuff was associated with Lancaster and Reese no later than 2001. See DX 12 at 12-14 (of 29 pdf pages); DX 15 at 1-2; DX 16 at 1-2; DX 36 at 13.

- McDuff filed multiple fraudulent documents in this proceeding and related proceedings. E.g., Tr. 485-86; DX 13 at 75-76 (McDuff forged signature of U.S. Attorney General Eric Holder on court document); DX 18 (forged document in question); DX 75-77; see generally Answer, Ex. 1 (collecting various illegitimate documents, including Notice of Filing Foreign Judgment, multiple liens, and false Form 1099-A).

- Some documents filed by McDuff and purporting to be affidavits or declarations are inconsistent with conclusively proven facts, which suggests that they are unreliable or inauthentic. For instance, McDuff offered in evidence a "Robert T. Reese Statement," dated November 1, 2005, in which Reese essentially disclaimed any participation in the Lancorp Fund fraud or association with McDuff; in fact, Reese pled guilty in 2009. Compare DX 15, with RX 31. McDuff also offered in evidence multiple declarations that provide historical accounts inconsistent with the findings of the criminal jury, two of which were from persons now serving prison sentences. See RX 32-35; Tr. 480. 

Additionally, a considerable portion of McDuff's evidence is either irrelevant or constitutes a challenge to the underlying judgments. E.g., Tr. 401-80. Therefore, except where otherwise noted, I do not credit either McDuff's testimony or his exhibits to the extent they are inconsistent with the Division's evidence.

Pages 3 - 4 of the Initial Decision

Failed Burden of Proof

In pertinent part, the Initial Decision offers this substantive rationale:

On balance, the evidence of McDuff's brokering is not established by a preponderance of the evidence. Certainly the evidence as to Benyo and Biles is concrete and specific. But selling securities to two investors is not especially powerful evidence of brokering because it only weakly shows that McDuff was "engaged in the business" of brokering. 15 U.S.C. § 78c(a)(4)(A). The other evidence is unpersuasive, largely because there are so many unknowns: the unknown number of investors he personally solicited, the unknown number of the transactions for which he was responsible, the unknown dollar amount of the transactions for which he was responsible, and the unknown number of other salespersons he supervised or recruited. Most significantly, McDuff's lack of transaction-based compensation even as to Benyo and Biles, although not dispositive, is particularly weighty because such compensation is "one of the hallmarks of being a broker-dealer." Kramer, 778 F. Supp. 2d at 1334 (internal citations and quotation marks omitted). McDuff stole other people's money, but he did not 17 receive compensation for engaging in the business of effecting securities transactions, which strongly suggests that he was not, in fact, so engaged.

Further comparison with Frederick W. Wall illustrates the shortcomings of the Division's evidence. See Div. Br. at 28-29. In Wall, the respondent pleaded guilty to one count of conspiracy to commit securities fraud, mail fraud, and wire fraud. See 58 S.E.C. at 759. In addition to receiving a percentage of commissions paid to unregistered brokers as noted above, 58 S.E.C. at 761, Wall admitted that: he ran the company used in the scheme; he helped a coconspirator set up a salesforce and the operations of one of the issuers, a purported broker-dealer; he attempted to acquire a broker-dealer; he helped establish a series of boiler rooms and recruited unregistered salespersons to staff them; and he made fraudulent representations and omissions to induce prospective investors to purchase securities in sham private placement offerings. See id. at 760-61 & n.4, 767. Wall also admitted at his plea allocution that he initiated efforts to register a company as a broker-dealer and filed its incorporation papers, and that the salespersons he helped recruit sold securities illegally. See id. at 761. The evidence was specific enough that the district court was able to set a restitution amount ($500,000) based on the customer losses caused by the three salespersons recruited by Wall. See id. at 759, 761 n.5. Here, by contrast, McDuff has admitted virtually nothing, and it is not clear how many persons sold Lancorp Fund shares, what fraction of Lancorp Fund investments was attributable to each seller, or much else about McDuff's sales efforts, other than as to Benyo and Biles. 

I therefore conclude that the Division has not proven by a preponderance of the evidence that McDuff acted as a broker at the time of his misconduct. This proceeding must be dismissed. See 15 U.S.C. § 78o(b)(4), (b)(6)(A)

Pages 16 - 17 of the Initial Decision

Bill Singer's Comment

As Blog readers are likely aware, I am disgusted by this outcome not because it resulted in a dismissal but because it wasted valuable SEC regulatory resources that could have been better allocated to more pressing matters than going after a criminal who is presently serving a 300 month sentence in federal prison. Which is not to say that the SEC had any discretion in initiating its proceedings against McDuff because, in fact, the federal regulator is statutorily compelled to undertake the proceedings at issue. What this case and its outcome does say, however, is that we need to question the wisdom of wasting resources and we must conserve Wall Street's regulators' limited budget and staffing. As I previously noted in The Most Terrible Crime A Human Being Can Commit 
( Blog, November 8, 2016):

Hopefully, we are nearing the end of this long SEC hearing process. ALJ Elliott should be getting combat pay for enduring this seemingly endless war of attrition. Perhaps in the not-too-distant future, McDuff will hear ALJ Elliot echo the words of President-Elect Trump to his adversary Hillary Clinton: "I want to thank you very much, you were a great competitor." 

I'm sure that inmate McDuff is having a grand old time jerking around the SEC. He may even be the toast of the town in his cellblock. Yes, McDuff strikes me as a resourceful and clever fellow -- in fact, he may even be very intelligent and probably had a life before him that could have yielded tremendous rewards. In the end, after exerting all his energy and intellect, he wound up getting caught in a droll fraud and sentenced to 300 months in federal prison. 

Great con artists don't get caught. Fact is, we never even know that they pulled off a fraud. The truly subtle sting ends without anyone knowing that they have been defrauded. Things just didn't work out like we had hoped. 

As such, inmate McDuff shouldn't think himself too much of a hero because he's not. Fact is, he hardly rises to the stature of an anti-hero. When he looks around, he's not on an exclusive beach surrounded by servants. He's not a guest at some remote, expensive, exotic resort dining on gold plates with sterling silver flatware. He's in a federal prison waiting for 300 months to pass. It's all fairly summed up in that wonderful film "Papillon"