SEC Will Not Appeal Bartko And Posts Online Form For Reversing Collateral Bars

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.

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.

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.

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).

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. 

As a result of Bartko and DCCir's repudiation of the SEC's errant interpretation of Koch, the SEC has received a number of petitions to vacate collateral bars that were imposed on the basis of conduct that predated Dodd-Frank; for example:

• Everett C. Miller (Release No. IA-4636; File No. 3-15896)
• Russell K. Cannon (Release No. IA-4635; File No. 3-15314)
• Jon Harvey Deal (Release No. IA-4634; File No. 3-15380)
• Walter V. Gerasimowicz (Release Nos. 33-10300, 34-79925, IA-4637, IC-32466; File No. 3-15024)
• Eric David Wanger (Release Nos. 33-10299, 34-79926, IC-32465; File No. 3-14676)
• Edward T. Borg (Release Nos. 33-10298, 34-79918, IC-32462; File No. 3-16875)

On [DATE], the Commission issued an order making findings and imposing remedial sanctions (the "Order") against [RESPONDENT]. The Order, among other things, barred [RESPONDENT] from association with any nationally recognized statistical rating organization ("NRSRO") or municipal advisor. Subsequent to the Order, the Commission issued a statement regarding Koch v. SEC  -where the court vacated NRSRO and municipal advisor bars because the conduct that served as the basis for the bars predated the enactment of the Dodd Frank Wall Street Reform and Consumer Protection Act on July 21, 2010-and invited persons who had been barred from such associations to request that the bars be vacated if "all of the conduct relevant to such bar(s) occurred before July 22, 2010."

On [DATE], [RESPONDENT] filed a request to vacate the NRSRO and municipal advisor bars entered against him. The Order appears, however, to contain allegations of misconduct supporting the bars that extends beyond July 21, 2010. As a result, the Commission's consideration of [RESPONDENT's] request to vacate would be assisted by briefing on the question of whether relevant misconduct continued past July 21, 2010 and, if it did, whether the bars should be vacated notwithstanding such post Dodd-Frank misconduct.

Accordingly, it is ORDERED that [RESPONDENT] and the Division of Enforcement are requested, by March 1, 2017 each to file a brief, not to exceed 5000 words, addressing the question of whether conduct supporting imposition of NRSRO and municipal advisor bars occurred on or after July 22, 2010 and, if so, whether [RESPONDENT]'s request to vacate such bars should be granted. Each party shall also be permitted to file, by March 31, 2017, an opposition brief, not to exceed 2500 words . . .

In its January 17, 2017 decision in Bartko v. SEC (No. 14-1070), the United States Court of Appeals for the D.C. Circuit granted in part a petition for review of a Commission order imposing sanctions for violations of the securities laws.  The court vacated the portion of the order imposing collateral bars against Bartko, who was associated only with a broker-dealer at the time of his securities law violations, from association with investment advisers, municipal securities dealers, transfer agents, municipal advisors, and nationally recognized statistical ratings organizations.  The court held that the order's imposition of those collateral bars was an impermissibly retroactive application of the Dodd-Frank Act, which first authorized the Commission to impose such collateral bars.  Because all of Bartko's violative conduct pre-dated the Dodd-Frank Act's July 22, 2010, effective date, the court held that applying those provisions to such conduct would be impermissibly retroactive.  The Commission has determined not to seek further review of that decision.

If you are the subject of a Commission order imposing a collateral bar from associating in any capacity in the securities industry (broker-dealer, investment adviser, municipal securities dealer, transfer agent, municipal advisor, or nationally recognized statistical ratings organization) and you believe that the Bartko decision affects the bar(s) in your case because all of the conduct relevant to such bar(s) occurred before July 22, 2010, the Dodd-Frank Act's effective date, you may request that the Commission issue an order vacating the bar(s) by completing the form available at this link: https://www.sec.gov/Article/collateral-bars-form.pdf and submitting the form to the Commission as the form directs.  This process applies only to collateral bars, which are bars that prohibit you from associating in a capacity in the securities industry with which you were not associated or were not attempting to associate at the time of your securities law violations.  If the Commission grants you relief, any other bars or suspension from association that were imposed will remain in force.  In addition, if you attempt to associate in a new capacity in the securities industry in the future, the Commission may bring a separate follow-on proceeding to determine whether to impose any remedial sanctions under existing law.

This statement does not constitute a decision by the Commission on any particular case or request.

• Bartko
• DCCir
• SEC
• Conspiracy
• Mail Fraud
• ALJ
• NRSRO
• Municipal Advisor
• Collateral Bar
• Bar
• Dodd Frank
• Retroactive Bar
• Retroactive
• BrokeAndBroker
• Bill Singer