ALJ Weighs Dilemma of Sanctions Versus Punishment For Transfer Agent

May 3, 2017

Next time you walk by a courthouse, take a look at the statue of Justice that likely stands somewhere outside the building or atop it. Note that Justice is typically depicted as blind, as holding a set of scales, and as gripping a sword. Too often, we fail to take inventory of that sword. It's there for a purpose. When the blind weighing is done, we tend to forget that the balancing act is a preamble to wielding that executioner's sword. No . . . Justice isn't leaning on her blade as an ornamental prop; it's there to render a swift and effective sentence. Perhaps Justice also needs a mop and bucket? A recent Securities and Exchange Commission ALJ's Initial Decision offers a fascinating glimpse into how all the weighing and the resort to the long blade come into play when deciding what sanctions to impose against two respondents.

Case In Point

A Securities and Exchange Commission ("SEC")
Order Instituting Administrative and Cease-And-Desist Proceedings (the "OIP") painted this unflattering portrait of Bay City Transfer Agency and Registrar, Inc. ("BCT"):

1. BCT has been unable or unwilling to comply with the Commission's transfer agent rules since at least 2007. Since 2008, the Commission's Office of Compliance Inspections and Examinations ("OCIE") has conducted three examinations of BCT and issued three deficiency letters notifying BCT of what OCIE staff believed were multiple deficiencies and weaknesses and the steps that OCIE staff believed necessary to correct them. Nonetheless, BCT has failed to address many of these apparent deficiencies and weaknesses or take the action necessary to ensure future compliance with transfer agent rules, including the rules providing for the safeguarding of client funds and the rules governing Forms TA-1 and TA-2.  

2. BCT has been unable or unwilling to comply with the requirements set out in the transfer agent rules. Its failure to meet these requirements raises a risk of harm to investors because these requirements are designed to, among other things, safeguard funds and securities and maintain accurate shareholder records.

In the Matter of Bay City Transfer Agency and Registrar, Inc. and Nitin M. Amersey, Respondents (OIP, '34 Act Rel. No. 78608; Admin. Proc. File No. 3-17405 / August 18, 2016). The OIP alleged that BCT had willfully violated and that the firm's control person Respondent Amersey had willfully aided and abetted and caused BCT's violations of 17(a)(3) and 17A(d)(1) of the Exchange Act and Rules 17Ac2-1, 17Ac2-2, 17Ad-4, 17Ad-12, and 17Ad-17 thereunder.

Prehearing Conference

In response to the OIP, Respondent Amersey appeared pro se at a September 28, 2016, prehearing conference and stated that he would not contest the OIP's allegations. The SEC's Division of Enforcement stated that it would seek a revocation of Respondent Bay City's transfer registration, a Bar for Amersey, a Cease-And-Desist Order, and civil money penalties. In response to the Division's positions, Amersey stated that he had: 

[P]laced Bay City's five clients with other transfer agents, and that he is in severe financial difficulties, which caused the loss of his home and orders from banks and state taxing authorities. Amersey only takes issue with the Division's penalty recommendation, contending that Respondents are unable to pay a penalty.

In the Matter of Bay City Transfer Agency and Registrar, Inc. and Nitin M. Amersey (Order Following Prehearing Conference, Admin. Proc. Rulings Rel. No. 4208; Admin. Proc. File No. 3-17405 / September 29, 2016). SEC Chief Administrative Law Judge Brenda P. Murray asked the Division to file a Motion for Summary Disposition and for Respondents to submit a financial disclosure statement in support of their inability-to-pay defense.

The Public Interest

The only contested issue before ALJ Murray was whether it was in the public interest to order Respondents to pay a joint and several tier-two $50,000 civil money penalty.  In arguing for the imposition of the money penalty, the Division asserted that Respondents' failure to file a financial disclosure statement and other supports constituted a failure to establish an inability to pay. Further, the Division argued that:

[R]espondents ignored three deficiency letters describing multiple deficiencies, including violations of at least eleven different rules over an extended period. Motion at 8-10. The Division believes that Respondents' conduct shows a deliberate and reckless disregard for the regulatory requirements on transfer agents. Id. at 10. As one glaring example, the Division points to the transfer of funds from the Trust Account to one of Amersey's unrelated companies after Respondents received a deficiency letter noting Bay City's failure to safeguard client assets. Id. at 4-5, 10. The Division also notes that Amersey represented that he intended to withdraw Bay City's transfer registration and that Bay City would be shut down by the first week in October 2016; however, on the date the Motion was filed, October 31, 2016, Bay City had not filed a withdrawal application. Id. at 3-4.

At Page 7 of
In the Matter of Bay City Transfer Agency and Registrar, Inc. and Nitin M. Amersey (Initial Decision, Init. Dec. Rel. No. 1125; Admin. Proc. File No. 3-17405 / April 20, 2017).

23 Cents

In response to the Division's allegations, the Respondents contended that the [Ed: footnotes omitted]: 

[C]omingling of funds cited by the Division resulted from an agreement it had with the only company from which it ever received funds and the eventual result was that it overpaid the company by twenty-three cents. Opposition at 1. Respondents insist that a $50,000 fine "is egregious and out of all proportion to the underlying facts." Id. Respondents maintain that there is no allegation or evidence of any loss of client funds either from: (1) comingled funds in connection with a single client offering; (2) keeping improper logs; or (3) errors (clerical and otherwise) in filing Forms TA-1 and TA-2. Id. Respondents reiterate their intent to request Bay City's clients to move to another transfer agent and to terminate service by January 20, 2017. 8 Id

Pages 7 - 8 of the Initial Decision

The ALJ's Dilemma

ALJ Murray offers the following thoughtful rationale for her disposition of the contested money penalty issue:

This situation presents a dilemma. The violations were not egregious in that they did not involve fraud, deceit, or manipulation and did not cause harm to other persons or unjust enrichment to respondents. At the prehearing conference, Amersey demonstrated that he is knowledgeable and articulate. He understood and accepted that he had committed wrongdoing. I take from Amersey's acquiescence to revocation of Bay City's registration, a cease-and-desist order, and imposition of a bar, an assurance not to commit any further violations and lack of an opportunity to do so. Amersey has no disciplinary history.

On the negative side, the violations were recurrent, stretching over roughly a decade despite several warnings from Commission staff. Amersey's consistent refusal to obey rules and regulations applicable to transfer agents could be considered deliberate or reckless conduct. Moreover, the Division provided Amersey with: (1) information on what was required to show an inability to pay a civil money penalty and even obtained bank records for him; and (2) information on filing to withdraw a transfer registration. The necessity of an inability to pay filing was discussed at the prehearing conference, and I granted Amersey's request for more time to oppose the Motion. Tr. 13-14 23, 28, 30-31; Motion Ex. 2. Still Amersey did not submit the required inability to pay form. Tr. 14, 32. In addition, Amersey represented several times that he was going to shut down Bay City and withdraw its transfer registration.Tr. 8-9, 12-13. There is no evidence that he has done either.

In this situation, I am relying on the case law that holds the Commission should impose the remedial sanctions necessary to protect the public and should not unduly sanction a respondent. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976) (sanction too severe where it is unnecessary to prevent persons from again doing what they did); Leo Glassman, 46 S.E.C. 209, 211-12 (Dec. 16, 1975) (noting that the purpose of remedial sanctions is to protect the public from future harm, it is not to punish); see Ross Mandell, 2014 SEC LEXIS 849, at *9 (finding that an initial decision must articulate how sanctions "protect the trading public from further harm"). In my judgment, revocation of Bay City's transfer registration, a cease-and desist order, and a collateral bar will end Amersey's participation in the industry and eliminate the prospect of future violations. The remedial measures being ordered are sufficient to protect the public interest and should act to deter others from similar conduct. See, e.g., Steadman, 603 F.2d at 1142 (noting the deterrent power of "[p]ermanent debarment"). On these facts, a civil money penalty is not required and would, in view of the other sanctions ordered, amount to an unjustified punishment.

Page 9 - 10 of the Initial Decision 

Accordingly, ALJ Murray ordered that Respondents cease and desist from further securities laws violations; revoked Bay' City's transfer agent registration; and permanently barred Amersey from being associated with any transfer agent, broker, dealer, investment adviser, municipal securities dealer, municipal advisor, or nationally recognized statistical rating organization.

Bill Singer's Comment

ALJ Murray was confronted with an interesting challenge when Respondents essentially threw in the towel, accepted the allegations as true, and resorted to arguing against only the imposition of a $50,000 fine as unnecessary punishment given all the facts presented.

In parsing through the competing interests before her, ALJ Murray focused on one overarching issue that seems particularly pertinent for the case before her. As she makes clear in her deliberations, "I am relying on the case law that holds the Commission should impose the remedial sanctions necessary to protect the public and should not unduly sanction a respondent." 

All of which returns us to the scales of Justice. We literally see ALJ Murray placing the incremental weights of a transfer registration revocation, a C&D, and a Bar of Amersey. Up to that point in the weighing, the scales remain balanced. It is only when the ALJ adds the final weight of a $50,000 penalty that she perceives imbalance. On the one hand, in discharging its public-interest mandate, the SEC may impose remedial sanctions in contradistinction to punitive sanctions. The goal of investor protection is not necessarily found in punishing the malefactor but is generally furthered by providing redress for harm that the public has sustained and may be exposed to in the future. In redressing harm, miscreants may, in fact, be punished by the imposition of sanctions but that result should generally be a byproduct of sanctions and not the goal. The threshold between justified sanctions and punishment has been characterized by ALJ Murray as "undue sanctions." 

It remains to be seen whether the SEC commissioners will affirm or reverse the Initial Decision; moreover, you may personally disagree with what you see as the ALJ's unwarranted leniency. Blog readers know that I am no fan of the SEC's ALJ system. This case does nothing to change my perspective or bias. The SEC must align its ALJ system with the Appointments Clause and implement clear guidelines as to which cases go to federal court and which cases go to ALJs. That being said, I refuse to be a hypocrite. ALJ Murray drafted a compelling and thoughtful Initial Decision. I applaud her work.

See: SEC ALJ Says Bandimere Notwithstanding. And So It Goes. And So It Goes ( Blog, January 16, 2017)