Buyer's Remorse Over Industry Bar Prompts Epic SEC Appeal

November 7, 2018

On Wall Street, many folks enter into regulatory settlements under duress. They don't think that they can afford the legal fees to fight the charges. They've been threatened by regulators with a Bar but offered a one-year-suspension as the so-called "settlement premium." They don't think that they're guilty but, you know, sure, I did make that one mistake and, okay, maybe I should just settle and move on. Regardless of what brings you to the dotted line, you're pretty much signing in blood and with very, very few exceptions, what you've agreed to will be an ironclad undertaking. That being said, buyer's remorse often crops up. Sometimes it's the next day when your simmering anger at being railroaded makes you wish that you could rip up the settlement agreement and fight it out at a hearing. Sometimes, it's an epiphany years in the making. In other situations, the allegations against you are online and causing consequences that you never anticipated. Consequently, before you sign that settlement agreement,  think it over carefully. Before you agree to wording that you don't think is quite right or fair. Before you commit to paying dollars that you may not have. Before you head for the penalty box for months or years. Before you agree to the dreaded Bar. In today's Broke And Broker, we come across an individual who had buyer's remorse, hurdled the ropes around the ring, and found himself on the mat going toe-to-toe with the Securities and Exchange Commission.

The 2015 OIP

Brett Thomas Graham was the Chief Executive Officer and of VCAP Securities, LL, which he indirectly owned about 99%. Graham held Series 7, 24, and 63 registrations. Without admitting or denying the findings, and in anticipation of the institution of SEC proceedings, VCAP and Graham submitted Offers of Settlement, which the SEC accepted. In the Matter of VCAP Securities, LLC, and Brett Thomas Graham, Respondents.
(Order Instituting Administrative and Cease-And-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order; '34 Act Rel. No. 74305; Invest. Adv. Act Rel No. 4026; Invest. Comp.. Act Rel No. 31459; Admin. Proc. File No. 3-16389 / February 19, 2015) (the "2015 OIP").
The 2015 OIP found that Graham willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with a scheme to acquire certain securities from auctions of collateralized debt obligations ("CDOs") run by Graham in his capacity as CEO of VCAP. Allegedly, Graham: 
  1. arranged for a broker-dealer to place bids in auctions on behalf of VCAP's affiliated investment adviser (Vertical Capital, LLC) notwithstanding that VCAP and its affiliates were not permitted to bid under the terms of the relevant engagement agreements; 
  2. took advantage of his access to confidential bidding information from the auctions to ensure that Vertical acquired 23 securities in 5 different CDO liquidations conducted by VCAP; and
  3. made material misrepresentations to the trustees of the various CDOs for which VCAP served as liquidation agent by falsely representing that VCAP and its affiliates would not bid and would not misuse confidential and/or bidding information.
Pursuant to the OIP, Graham was subject to a Cease-and-Desist, and he consented to pay $118,284 disgorgement, $9,449 interest, and a $200,000 civil monetary penalty. Additionally, Graham consented to a collateral bar, investment company prohibition, and a penny stock bar, with the right to apply for reentry after three years. As set forth in pertinent part in the OIP:

C. Graham be, and hereby is barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock; with the right to apply for reentry after three years to the appropriate self-regulatory organization, or if there is none, to the Commission;

a. provided however, that Graham may, for a period of one year from the entry of this Order, continue to be employed by Vertical solely for the purpose of assisting Vertical in the sale, or transfer to independent managers, of securities and positions held by any funds or accounts managed by Vertical, as of the date of the entry of this Order. During the one-year carve-out period, all sales by Graham shall be subject to review and approval by Vertical prior to execution. During this one-year period of limited employment at Vertical, Graham may not carry out his employment activities on the premises of Vertical, and he must be located offsite from Vertical. Notwithstanding this limited employment role, the following restrictions will be placed upon Graham as of the date of the entry of this Order: (i) Graham may not serve on Vertical's Board of Directors, or in any officer, executive, or management role at Vertical; (ii) Other than for the limited purpose of selling securities and positions held by any funds or accounts managed by Vertical, as of the date of the entry of this Order, Graham may not have any role, input, authority, duties, or discussions as to the management of Vertical, any entity affiliated with Vertical, or any of Vertical's clients; (iii) Graham may not have any role in formulating, summarizing, discussing, or memorializing Vertical's marketing or management strategy; (iv) Graham may not have any authority to hire or fire employees of Vertical, or to negotiate or bind Vertical in any contracts; (v) Graham may not have any contact with current or prospective investors in any funds or accounts managed by Vertical regarding anything concerning Vertical or VCAP (other than current and former employees of Vertical who are also Vertical investors); (vi) Graham may not solicit capital on behalf of Vertical; (vii) Graham may not participate, consult, or assist with any purchase of securities; and (viii) Graham may not participate, consult, or assist with any sales of assets or positions that were purchased or acquired after the date of entry of this Order. Nothing herein shall prevent Graham from communicating with Vertical partners and counsel regarding any outstanding legal actions in which Vertical is a party.

Pages 9 - 10 of the 2015 OIP

E. Any reapplication for association by Graham will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against Graham, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order

Pages 10 - 11 of the 2015 OIP 

2018 Order Denying Modification

On January 12, 2017, Graham requested that the SEC modify its 2015 sanctions by removing his Bar from being associated with: an investment adviser; a securities broker or dealer in a non-supervisory capacity; and serving or acting as an officer, director or employee of a company which issues securities, including, but not limited to penny stocks. Further, Graham sought to amend the 2015 OIP  by adding a provision that would not preclude any issuer with which he is associated as an officer, director, employee or investment adviser, from relying upon the exemption under Rule 506.Respondent Brett Graham's Notice of Motion to Modify Order and Affidavit  (January 12, 2017) The SEC Division of Enforcement opposed the request. In the Matter of Brett Thomas Graham (Order Denying Request to Modify Settlement Offer; '34 Act Rel. No. 84106; Invest. Adv. Act Rel No. 5005; Invest. Comp. Act Rel. No. 33225; Admin. Proc. File No. 3-16389 / September 12, 2018) (the "Order Denying Modification")

In denying Graham's petition, the SEC explained that its deliberations were guided by the following [Ed: footnotes omitted]:

In reviewing requests to lift or modify bar orders, we consider whether, "under all the facts and circumstances presented, it is consistent with the public interest and investor protection to permit the petitioner to function in the industry without the safeguards provided by the bar." The factors that guide the Commission's "public interest/investor protection inquiry" are:

[1] the nature of the misconduct at issue in the underlying matter; [2] the time that has passed since issuance of the administrative bar; [3] the compliance record of the petitioner since issuance of the administrative bar; [4] the age and securities industry experience of the petitioner, and the extent to which the Commission has granted prior relief from the administrative bar; [5] whether the petitioner has identified verifiable, unanticipated consequences of the bar; [6] the position and persuasiveness of the Division of Enforcement's response to the petition for relief; and [7] whether there exists any other circumstance that would cause the requested relief from the administrative bar to be inconsistent with the public interest or the protection of investors. 

Relief is appropriate only in "compelling circumstances," and in the usual case the bar will remain in place. Maintaining a bar serves the public interest and investor protection by ensuring that the Commission "retains its continuing control over [a] barred individual['s] activities." Nonetheless, the Commission will act in response to those situations in which the equitable need for relief warrants vacating or modifying the bar order. As explained below, Graham fails to establish the compelling circumstances necessary to vacate or modify his bar order. 

Page 4 of the Order Denying Modification

In determining that Graham's petition for modification was not in the public interest, the SEC presents a thorough and compelling analysis of each of the seven factors noted above and I urge all serious industry legal and compliance professionals to familiarize themselves with the exercise. Among the findings that stand on in the SEC's analysis are, in part, the following [Ed: footnotes omitted]:

Despite his admission, Graham also asserts in support of his motion that his misconduct was isolated, unintentional, and immaterial; hurt no one; and did not benefit him. Although Graham presents affidavits that he contends provide "irrefutable facts" supporting his version of events, the Order's findings that Graham committed securities fraud that benefitted Vertical funds and directly injured at least one investor through an ongoing scheme contradict his contentions. Because he settled, Graham forfeited his opportunity to adduce his evidence, and waived the right to "complain that the record is inaccurate or incomplete." Graham "elected to forgo further proceedings"; "‘[h]is choice was a risk, but calculated and deliberate and such as follows a free choice'"; and he "‘cannot be relieved of such a choice now.'" We will not consider Graham's collateral attack on the Commission's findings. 

Page 5 of the Order Denying Modification

[G]raham asserts that this factor favors him because he complied with the Order "under hardship conditions during the allowed ‘carve-out' period" in the Order. In light of his serious and extensive misconduct, we barred Graham, but allowed him extremely limited, supervised participation in the sale of Vertical's assets under carefully tailored restrictions. Because "we expect financial industry professionals to comply with our orders," Graham's claimed compliance does not weigh in favor of overturning the Order. Graham's conduct during the one-year carve-out period also does not support his request to associate without restriction given that, among other things, he was not permitted to work from Vertical's facilities, contact unaffiliated investors, or have any role in Vertical's management, strategy, or purchase of securities. This factor does not weigh in his favor.

Page 6 of the Order Denying Modification

"We generally first grant incremental relief in our cases vacating bars." Rule of Practice 193 provides a process for barred individuals to apply for consent to associate notwithstanding the bar, and the Order (to which Graham agreed) specifically contemplated that he would be permitted to apply for reentry after three years. As part of this process, an individual seeking reentry to the securities industry must provide detailed information regarding expected supervision. FINRA also provides a process for a member firm to seek consent to associate with a barred individual notwithstanding the bar. A firm and the barred individual it seeks to employ will fail to meet "their burden ‘to show that . . . continued employment in the securities industry would be in the public interest'" if they fail "to establish heightened supervisory plans" for barred individuals. These processes allow a barred individual to "establish a satisfactory compliance record" while under heightened supervision "before moving to vacate the bar." Graham has not yet obtained consent to associate notwithstanding his bar, and now seeks to avoid this process entirely. To allow this "would permit [Graham] to engage in activities restricted by [his] bars without a prior period of demonstrated compliance." As a result, this factor weighs heavily against Graham.

Pages 7 - 8 of the Order Denying Modification

Graham claims that the attorney who represented him (and others) at the time he agreed to the Order incorrectly told him that he could not review his partner's testimony and failed to adequately represent him in settlement negotiations. According to Graham, if he had reviewed his partner's testimony he would have responded to it by emphasizing her role in the relevant events and might have been able to negotiate a settlement with the Division that imposed lesser sanctions on him. This argument fails because ineffective assistance of counsel is not a defense in civil proceedings, and it does not provide a basis for a collateral attack on the Order. 
Page 11 of the Order Denying Modification

2018 Order Denying Association

On April 9, 2018, Graham filed an application with the SEC for consent to: 
  1. associate with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; 
  2. serve or act as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, and 
  3. participate in any offering of a penny stock. He submits this application under Rule 193 of the Commission's Rules of Practice.
In the Matter of Brett Thomas Graham (Order Denying Application for Consent to Associate; '34 Act Rel. No. 84526; Invest. Adv. Act Rel No. 5060; Admin. Proc. File No. 3-16389) (the "Order Denying Association"  Finding that Graham had  failed to show that the proposed terms of reentry would be consistent with the public interest. the SEC denied his application.  In rejecting Graham's petition, the SEC initially highlights a key infirmity in the application [Ed: footnotes omitted]:

[H]e does not specify a proposed employer, only broad categories of unidentified industry participants (such as "an existing broker-dealer") that he "potentially" could join. Moreover, other than proposing certain voluntary undertakings, he does not identify the terms and conditions under which he would work and be supervised, or the disciplinary history of the employer and the individuals who would supervise him. By not providing any information concerning what he would be doing or what interactions he would have with investors or other market participants, his application fails to demonstrate that the proposed association is reasonably designed to prevent a recurrence of the conduct that led to imposition of the bar and thus fails to demonstrate that the requested relief would be consistent with the public interest. We recently denied a similar application for open-ended consent to associate "with any registered or un-registered broker-dealer, investment adviser, or other entity that participates in the securities industry." See Eric David Wanger, Exchange Act Release No. 81111, 2017 WL 2953369, at *1 (July 10, 2017), petition for review dismissed, Wanger v. SEC, 720 Fed. App'x. 792 (7th Cir. 2018). In denying the application, we explained that: 

[Wanger] does not identify a proposed employer, the terms and conditions of his planned employment, or the supervision, if any, that would be exercised over him in his new position. He does not say what he would be doing, for whom (if anyone) he would be doing it, or how he would be interacting with clients, investors, or other market participants. . . . Wanger's application offers no evidence that his unidentified future activities would be conducted in a manner designed to "prevent a recurrence of the conduct that led to the imposition of the bar" in the first place, and provides us with no basis on which to conclude that granting his request would be "consistent with the public interest." 

Wanger's request is functionally equivalent to asking us to vacate the bar entirely and free him from any restrictions or oversight on his future activities. But that is extraordinary relief that we grant only under the most "compelling circumstances," and Wanger's application fails to present any such circumstances. 

Graham contends that finding a sponsoring employer "is simply not possible in the real world while such a restrictive Order is in place." However, in denying the application in Wanger, we rejected a similar argument, noting that "difficulty finding suitable employment is ‘among . . . the natural and foreseeable consequences that flow from a ban on employment in the securities industry.'" We explained that difficulty finding suitable employment "is not a ‘compelling circumstance' that would justify wholly vacating a remedial sanction designed to prevent recurrence of misconduct and protect investors and the integrity of markets." Contrary to Graham's claim, while the Rule 193 standard is difficult, it is not impossible to meet, as our reentry decisions make clear.

Pages 4 - 5  of the Order Denying Association

READ: "UPDATE: SEC Denies Wanger Re-Entry Into Industry" ( Blog,  July 12, 2017)

Finally, the SEC rejects Graham's attempts to challenge the fairness of the settlement and the adequacy of his legal representation:

[I]n Wanger, we rejected a similar challenge to settlement terms noting, "[w]e have a strong interest in the finality of our orders and we have consistently applied the principle set out in Rule 193 to reject collateral attacks that seek to undo the underlying proceeding, the findings in our order, or the terms of settlement." Graham offers no persuasive reason to deviate from the Rule and our precedent here. 

Absent his decision to offer settlement, under the Rules of Practice and the federal securities laws, Graham would have had the right to present evidence at a hearing, to submit proposed findings of fact and law, to receive an initial decision, to obtain de novo review by the Commission, and to obtain judicial review in the United States Court of Appeals. He chose to waive these rights in his Offer of Settlement and accept the settlement terms. According, Graham has forfeited his opportunity to challenge the underlying findings and settlement in his matter.  

Pages 7 - 8  of the Order Denying Association

Bill Singer's Comment

Notwithstanding the facts in Graham, for over twenty years I have called for filing of Forms U4 by registered reps directly with CRD (with full copies to the employing BD). Pointedly, I would end the present protocol of indirect filing through the FINRA member firm. I believe that RRs should have the ability to directly file and access their registration, and that this would be an important step towards ensuring that such individuals are viewed as professionals rather than mere salespersons. 

Direct registration is the same process afforded to lawyers and doctors, who do not maintain their licenses or registrations solely through the grace of an employer. Put another way, imagine if you could only submit an application for a driver's license through your employer; and then imagine that your license automatically expired when you quit or were fired from a job -- and the only way to renew your license was through another employer. As silly as that make-believe licensing process seems, that's about how it works for the industry's registered representatives.  

In the case of Graham, direct registration would not have altered the impact on the regulatory review of his application for registration. It is perfectly appropriate for an industry regulator to predicate its approval of a barred individual's re-entry into the industry upon a consideration of a proposed employer's background and its supervisory staffing, and upon additional consideration of "proposed" rather than "potential" terms of employment and supervision. Nonetheless, for thousands of men and women who are registered on Wall Street and who do not have any negative regulatory matters, it is unprofessional and inappropriate to silence their "voice" and insist that they only be spoken for by a FINRA member firm. Moreover, the concept of indirect registration exacerbates the ongoing disenfranchisement of industry associated persons who have no vote whatsoever for any elective office or on any rule proposal at FINRA.

Stripped down to its basics, my position is about dignity and professionalism. As a lawyer, after I pass the Bar exam, I am subjected to a Character and Fitness review before I am admitted. Thereafter, I must complete continuing education credits every two years and I pay for that out of my own pocket. If I do "wrong" as set down by law, my license can be suspended or revoked. I can be disbarred. If I decide to take a few months leave from the daily grind, however, I remain licensed. If I am asked to do wrong by a law firm partner and threatened with consequences unless I agree, I can walk out the door but my license goes with me. I can take a hike from one law firm at 10 a.m., walk across the street to another law firm at 10:01 a.m., and if they'll have me, I can join that firm without any break in the effectiveness of my license. Yes, I do have to notify the courts of the change of employer and address. 

The freedom to quit rather than acquiesce in wrongdoing is a powerful right of every professional. Nonetheless, there are immoral lawyer and doctors. There are misguided professionals who will do wrong. Regardless, we should never burden any profession by forging regulatory chains between those employed in that profession and those who do the employing, and then giving only the employer the key to that lock. The inclination to do right should not be a second thought.

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