SEC Collateral Bars Set Aside In Dramatic Bartko Victory

January 18, 2017

In 2010, Gregory Bartko was convicted in federal court of conspiracy, mail fraud, and unregistered securities sales. Following on that conviction, in 2012, the United States Securities and Exchange Commission ("SEC") instituted  administrative proceedings to permanently bar Bartko from associating with six classes of securities market participants, but an SEC Administrative Law Judge ("ALJ") only recommended the imposition of four classes of bars. Following Bartko's appeal to the full SEC, that body imposed the full complement of six bars. In the Matter of Gregory Bartko (Opinion, '34 Act. Rel. No. 71666; Admin. Proc. File No. 3-14700; March 7, 2014). The Opinion is characterized as by the Commission (Chair White and Commissioners Aguilar and Stein); Commissioners Gallagher and Piwowar, concurring in part and dissenting with respect to the bar from association with municipal advisors and nationally recognized statistical rating organizations.[Ed: Footnotes omitted]: 

Gregory Bartko was chief executive officer and chief compliance officer of Capstone Partners, L.C., a registered broker-dealer. On November 18, 2010, the United States District Court for the Eastern District of North Carolina (Western Division) entered a judgment of conviction against Bartko for conspiracy, mail fraud, and unregistered securities sales. On January 18, 2012, the Commission instituted a follow-on administrative proceeding to determine whether Bartko's conviction was a statutory basis for an administrative remedy and, if so, the appropriate remedial response. 

On August 21, 2012, the administrative law judge found that the case presented no genuine issue as to any material fact and that the Division of Enforcement was entitled to summary disposition as a matter of law. He barred Bartko from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, but declined to bar him from association with a municipal advisor or nationally recognized statistical rating organization (NRSRO). The law judge noted that those two forms of relief were authorized by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act, and that Bartko engaged in the relevant misconduct before Dodd-Frank was enacted in 2010. The law judge found that, at that time, Bartko had a right to associate with a municipal advisor or NRSRO "approximating an 'immediate fixed right of present or future enjoyment'" and that such bars would be impermissibly retroactive.

This appeal followed. We base our findings on an independent review of the record, except for those law judge findings that are not challenged in this appeal.

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DCCir Opinion

Bartko appealed the SEC's 2014 Opinion to the United States Court of Appeals for the District of Columbia Circuit ("DCCir"). 
Gregory Bartko, Petitioner, v. Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the District of Columbia Circuit, 14-1070, January 17, 2017). As preliminarily noted in the DCCir Opinion:

Between 2004 and 2005, Gregory Bartko masterminded a wide-ranging scheme that sought to defraud investors through the sale of securities. Five years later, Bartko was convicted of conspiracy, selling unregistered securities and mail fraud. Shortly thereafter, the United States Securities and Exchange Commission (SEC or Commission) instituted a follow-on administrative proceeding against him. In that proceeding, the Commission, inter alia, permanently barred Bartko from associating with six classes of securities market participants.1 

Bartko's petition for review raises multiple challenges to the Commission's order. We have accorded each of Bartko's arguments "full consideration after careful examination of the record, but address in detail only those arguments that warrant further discussion." See, e.g., Ozburn-Hessey Logistics, LLC v. NLRB, 833 F.3d 210, 213 (D.C. Cir. 2016); United States v. Garcia, 757 F.3d 315, 321 (D.C. Cir. 2014) ("We have given full consideration to the various additional arguments that [appellant] raises, but find none convincing or worthy of discussion."). Although we agree with the Commission's findings and conclusions, we believe it applied the bar regarding five of the six classes in an impermissibly retroactive manner. For the reasons that follow, we grant the petition in part and deny it in part. 

Footnote 1: In its order, the Commission barred Bartko from the broker-dealer, investment adviser, municipal securities dealer, transfer agent, municipal advisor and nationally recognized statistical ratings organization (NRSRO) classes. But see infra at 12 n.6.

Page 2 of the DCCir Opinion

The DCCir Opinion offers this road map of Bartko's legal trials and tribulations: 

C. Procedural History

In January 2010, Bartko was indicted in the Eastern District of North Carolina on one count of conspiracy, one count of selling unregistered securities and four counts of mail fraud. After a thirteen-day trial, a jury convicted Bartko on all six counts. Bartko sought a new trial, claiming that the prosecution failed to disclose material exculpatory evidence as required by Brady v. Maryland, 373 U.S. 83 (1963), and that it knowingly allowed government witnesses to testify falsely in violation of Napue v. Illinois, 360 U.S. 264 (1959). The district court denied Bartko's motion, emphasizing that "Bartko's case was not a close one" as "overwhelming evidence of Bartko's guilt" had been presented at trial. United States v. Bartko, No. 5:09-CR-00321-D, at 116-18 (E.D.N.C. Jan. 17, 2012). The Fourth Circuit affirmed Bartko's conviction and sentence. United States v. Bartko, 728 F.3d 327, 347 (4th Cir. 2013). Although it recognized that "serious errors" by the government had infected Bartko's prosecution,4 see id. at 343, it found those errors insufficient to overturn his conviction, id. at 342 ("[O]ur confidence in the jury's conviction of Bartko was not undermined by the government's misconduct in this case."). 

On January 18, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the Advisers Act to further sanction Bartko for his misconduct. In his response, Bartko argued that the government had "unclean hands" based on its misconduct during his criminal trial and on improper collusion between the governmental authorities. Accordingly, Bartko argued that the Commission "should be barred or estopped" from using his tainted conviction as the basis of follow-on action. Joint Appendix 4. An ALJ recommended against Bartko, however, rejecting Bartko's discovery request related to his unclean hands defense and applying Dodd-Frank's enhanced penalties to bar him from associating with not only the broker-dealer class but also the investment adviser, municipal securities dealer and transfer agent classes.

Bartko then petitioned the Commission for review of the ALJ order. The Commission iterated barring Bartko from acting as a broker-dealer, investment adviser, municipal securities dealer and transfer agent was in the public interest-Bartko demonstrated "a fundamental lack of commitment to investor protection principles," thereby creating a "risk that he would engage in similar conduct if presented with future opportunities." Id. at 372. The Commission also rejected Bartko's unclean hands defense, noting that the defense "is not generally available in a Commission action." Id. at 382. But the Commission did not stop there. Instead, it extended Bartko's bar to exclude him from the municipal advisor and NRSRO classes as well. The Commission reasoned that imposing Dodd-Frank's collateral bar on Bartko (whose misconduct, again, occurred before the enactment of Dodd-Frank) did not constitute an impermissibly retroactive penalty because "[s]uch collateral bars . . . are appropriately applied as ‘prospective remedies whose purpose is to protect the investing public from future harm.'" Id. at 376-77. 

Footnote 4: The Fourth Circuit first noted that the prosecution made specific promises to Hollenbeck (who testified against Bartko) that information he provided would not later be used against Hollenbeck. Bartko, 728 F.3d at 335-37. At trial, however, it failed to "correct Hollenbeck's answers when he testified falsely that [the government] had not made any promises" to him. Id. at 337. The Fourth Circuit also found that government acted improperly when it failed to disclose proffer agreements with Hollenbeck and his wife. Id. at 338-39. "If Bartko had had the . . . agreements, he could have used them in an attempt to attack Scott Hollenbeck's credibility." Id. at 338. Finally, the government improperly failed to disclose a tolling agreement that, according to Bartko, would have been useful to his defense as impeachment material. Id. at 339-40.

Pages 7 - 9 of the DCCir Opinion

Retroactive Penalty

In considering Bartko's argument that the SEC imposed the Dodd-Frank collateral bars in the form of an impermissible, retroactive penatly, the DCCir Opinion offered, in part, this analysis:

Here, Bartko had no cognizable association with the investment adviser, municipal securities dealer or transfer agent classes when his misconduct occurred.5 Nonetheless, the Commission has again attempted to retroactively apply Dodd-Frank to bar Bartko from the investment adviser, municipal securities dealer and transfer agent classes. Thus, as we did in Koch, we conclude that the Commission's use of Dodd-Frank's collateral bar against Bartko constitutes an impermissibly retroactive penalty. The application of post-Dodd-Frank penalties to pre-Dodd-Frank misconduct constitutes a quintessential example of "attach[ing] new legal consequences to events completed before [Dodd-Frank's] enactment." Vartelas, 132 S. Ct. at 1491 (internal quotation marks omitted). 

The Commission's attempt to avoid this conclusion is unpersuasive. It primarily rests on its claim that Koch already decided the issue before us. Resp't's Br. 29-33. According to the Commission's reading, Koch implicitly allowed the retroactive application of a collateral bar on the broker-dealer, investment adviser, municipal securities dealer and transfer agent classes notwithstanding the fact that, at the same time, it explicitly prohibited the Commission from extending that bar to the newly regulated municipal advisor and NRSRO classes. 6 See id. To support its reading, the Commission believes Koch held that the "limited" collateral bar-that is, the broker-dealer, investment adviser, municipal securities dealer and transfer agent prohibitions-constituted a mere procedural change and therefore did not run afoul of the retroactivity prohibition. Id. at 29. The Commission misreads Koch. 

Footnote 5: The Commission originally charged Bartko as an investment adviser as well as a broker-dealer but it later determined that the "public record [did] not indicate that Bartko was associated with a registered investment adviser during the relevant period."
Footnote 6: After Koch issued, the Commission acknowledged that the bar on the municipal advisor and NRSRO classes should be vacated. See Commission's Rule 28(j) Letter at 1-2 (Sept. 2, 2015).

Pages 11 - 12 of the DCCir Opinion

In conclusion, DCCir granted Bartko's Petition of the Bars in investment adviser, municipal securities dealer and transfer agent  capacities and denied his other requested relief. Further, in consideration of the SEC's Footnote 6 concession, the Petition was also granted as to the Bars in municipal advisor and NRSRO capacities.