Springsteen-Abbott is an associated person of a FINRA member broker-dealer, Commonwealth Capital Securities Corp. ("Commonwealth" or ''Broker-Dealer"), and serves as its Chief Executive Officer ("CEO"), Chairman, and Chief Compliance Officer ("CCO"). Commonwealth is owned (through a holding company) by Commonwealth Capital Corp. ("Parent Company"), which Springsteen-Abbott controls. The Parent Company is the sponsor of private and public investment funds ("Funds"). Another Commonwealth affiliate controlled by Springsteen-Abbott, Commonwealth Income and Growth Fund, Inc., is the General Partner of the Funds ("Funds' General Partner"). Springsteen-Abbott's Broker-Dealer wholesales the Funds to other broker-dealers who sell them to investors.The Funds invest in equipment leases. Springsteen-Abbott's husband, Hank Abbott, runs the leasing operation.Springsteen-Abbott, as a control person of the Funds' General Partner, had authority to allocate to the Fund's expenses incurred in operating the Funds' business. The documents creating the Funds expressly limited the expenses that the Funds would bear to expenses incurred in conducting and administering the Funds' business.Springsteen-Abbott abused her authority by improperly allocating to the Funds two types of expenses that were not related to the Funds' business: personal expenses and Broker-Dealer expenses.The practice of charging personal expenses to the Funds was a way of life for Springsteen-Abbott and her husband, Hank Abbott. They regularly charged thousands of dollars of personal expenses on the same American Express credit card that they used for business expenses, and then, when she received the monthly American Express bills, Springsteen-Abbott allocated to the Funds many of those personal expenses. The personal expenses improperly charged to the Funds included expenses related to a birthday cruise to Alaska, a Mother's Day meal at Longwood Gardens, a Disney family vacation, a Thanksgiving dinner, a post-Christmas family dinner on a trip to New York, and, on a regular basis, more modest family meals. Springsteen-Abbott also improperly allocated to the Funds expenses for holiday decorations for her home, car rentals for cars that her husband used for personal purposes, clothes, accessories, and pharmacy and grocery expenses.Springsteen-Abbott provided business justifications to FINRA staff for some of the expenses allocated to the Funds. Many of these business justifications were not credible; others were demonstrably false.When confronted with evidence that a particular expense was personal and not a business expense, Springsteen-Abbott might concede that it had been improperly allocated to the Funds, but she might not. For the most part, she maintained that the expenses at issue were properly allocated to the Funds, even in the face of evidence inconsistent with her position. She argued that she and her husband worked nearly all the time, and that what appeared to be personal meals were actually business activities because she and her husband routinely carried work with them and discussed it. She also argued that, in any event, investors were not harmed by the misallocation of expenses because she had benefited the Funds voluntarily in other ways.As for the improperly allocated Broker-Dealer expenses, Springsteen-Abbott acknowledged at the hearing that they should not have been allocated to the Funds. However, she only realized that in the course of the investigation and disciplinary proceeding. Over the three-year period at issue, Springsteen-Abbott did not recognize that even if the Broker-Dealer expenses were business expenses, they did not relate to the Funds' business and therefore should not have been allocated to the Funds. It is impossible to view this error as inadvertent, particularly when long-standing FINRA guidance requires that there be a written agreement if Broker-Dealer expenses are shifted to another entity, and the Broker-Dealer had no such written agreement with the Funds.The improper allocation to the Funds of expenses that were unrelated to the Funds' business was unethical and falls well within the proscription of FINRA Rule 2010. It was a misuse of money belonging to investors in the Funds.For purposes of the sanctions analysis, the Extended Hearing Panel considered a number aggravating factors, including, among others, the following: Springsteen-Abbott's lack of candor at the hearing; her submission of many false and misleading business justifications to FINRA staff; her lack of remorse, even when she was forced to admit that she had improperly allocated particular personal expenses to the Funds; the repeated pattern of misconduct; and the length of time the misconduct continued.Furthermore, the investigation uncovered other similar misconduct. Springsteen-Abbott allocated to the Funds expenses that, even if they had been related to the Funds' business, should never have been allocated to the Funds-control person expenses. The documents creating the Funds prohibited the allocation of control person expenses to the Funds. Accordingly, because Springsteen-Abbott was a control person, her expenses were never chargeable to the Funds. Nor were her husband's expenses after he became a control person in 2010.For the misconduct proven at the hearing, and in light of aggravating factors, the Extended Hearing Panel bars Springsteen-Abbott from association with any FINRA member firm in any capacity, orders disgorgement in the amount of $208,953.75 (along with prejudgment interest), fines her $100,000, and requires her to pay costs.
[I]t is impossible on this record to determine which Fund should receive how much of any restitution that could be ordered. The Funds bore different portions of the expenses, and the calculation for apportioning expenses changed, sometimes as frequently as each quarter. Although it is plain that the Funds as a group suffered a loss due to Springsteen-Abbott's misconduct, the loss suffered by each identified Fund cannot be calculated and quantified.The Extended Hearing Panel also declines to decrease the amount of disgorgement to the figure calculated by Enforcement for restitution. The Extended Hearing Panel believes that the full amount of improperly allocated expenses on the Expense Schedule should be disgorged. That figure is more appropriately remedial in the circumstances of this case.
The primary purpose of disgorgement is to deprive the wrongdoer of her ill-gotten gain. Disgorgement is not a punitive measure. It is intended to prevent unjust enrichment. It also serves to deter others from similar misconduct. "Disgorgement need not be exact, instead, courts need only find that the amount sought is a reasonable approximation of gains that are causally connected to a violation."Because disgorgement is intended to prevent a wrongdoer from profiting from the wrongdoing, it does not require precise exactitude. It is important to make sure that the wrongdoing is not profitable for the wrongdoer. "[Tlhe risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty." In this case, the risk of uncertainty should fall on Springsteen-Abbott for an additional reason. She exacerbated the difficulty of calculating a precise amount by her refusal to disclose which particular expenses she has identified as having been erroneously charged to the Funds.Once Enforcement presented evidence reasonably approximating the amount of a defendant's ill-gotten gains, the burden shifted to Respondent to prove that amount was not reasonable. Springsteen-Abbott failed to carry that burden. . . .
It is well established that FINRA Rule 2010 governs any business-related conduct that is inconsistent with just and equitable principles of trade. As an associated person, Springsteen-Abbott was required to observe "just and equitable principles of trade" in all of her business or commercial dealings and not just those involving securities or a securities transaction. "[M]isuse of customer funds is 'patently antithetical to the high standards of commercial honor and just and equitable principles of trade that [FINRA] seeks to promote."' Blair Alexander West, Exchange Act Release No. 74030,2015 SEC LEXIS 102, at *21 (Jan. 9, 2015), affd, 2016 U.S. App. LEXIS 1702 (2d Cir. Feb. 2, 2016). FINRA's disciplinary authority is not limited to securities related conduct or Firm activities, but covers all unethical business-related conduct that "reflects negatively on [one's] ability to comply with regulatory requirements fundamental to the securities industry." Geoffey Ortirz, Exchange Act Release No. 58416,2008 SEC LEXIS 2401, at *22 (Aug. 22,2008); see also Shvarts, 2000 NASD Discip. LEXIS 6, at * 16.Springsteen-Abbott's misconduct was undoubtedly business-related. "An associated person's 'business' includes his business relationship with his employers and his commercial relationship with [investors]." Steven Robert Tomlinson, Exchange Act Release No. 73825,2014 SEC LEXIS 4982, at *19 (Dec. 11, 2014). Springsteen-Abbott disclosed her position with Commonwealth as an outside business activity in the Central Registration Depository(?) system and was the de facto manager of the Commonwealth Funds. As the chairman and chief executive officer of the General Partner, she possessed a fiduciary duty to safeguard Fund assets in accordance with the Funds' terms of operation. Even while servicing the Funds, Springsteen-Abbott cannot escape her ethical duty under FINRA Rule 2010 to observe high standards of commercial honor and not commit unethical acts and practices. See Wiley, 2015 SEC LEXIS 4952, at * 15 (holding that FINRA Rule 2010 prohibits misconduct that "reflects on the associated person's ability to comply with the regulatory requirements of the securities business and to fulfill his fiduciary duties in handling other people's money"). Her misconduct harmed the Commonwealth Funds and the investors in those funds, even though the Commonwealth Funds were not "customers" of the Firm. FINRA Rule 2010 applies to this misconduct. See Grivas, 2016 SEC LEXIS 1173, at *17; Ialeggio, 52 S.E.C. at 1089.
[W]e find several aggravating factors in this case. The evidence shows a pattern of misconduct. Springsteen-Abbott's charging of personal expenses on the company American Express credit card became a way of life that the Commonwealth Funds subsidized for an extended period of time. Her misconduct was pervasive, impacting the assets of multiple Funds at an unidentifiable dollar amount and size. Her actions were deliberate and intentional and would have continued if not for whistleblowers who alerted FINRA of her misconduct. She attempted to conceal her misconduct by supplying FINRA staff with business justifications on tick sheets and other documentation that were either inconsistent with the charge at issue or blatantly false. Equally aggravating was Springsteen-Abbott's attempt to blame others for her regulatory obligations rather than accepting full responsibility for her misconduct. Enforcement referred to the SEC's cease-and-desist order against Springsteen-Abbott as relevant disciplinary history and argued before the Extended Hearing Panel that Springsteen-Abbott was a recidivist, which would justify increased sanctions. We affirm the Hearing Panel's decision to not treat Springsteen-Abbott as a recidivist for purposes of imposing increased sanctions.We find that Springsteen-Abbott's egregious misconduct warrants a bar from associating with a FINRA member firm in all capacities and a $100,000 fine. In addition, disgorgement of her unjust enrichment is in order here. . .
In this case, we are unable to discharge our review function because the NAC's decision is unclear regarding what conduct it found to violate FINRA Rule 2010. Although the NAC stated that it was affirming the Hearing Panel's findings of violation, it misstated those findings. The NAC stated that the entire itemized list of the 1,840 charges at issue was presented and accepted into evidence and that it was affirming the Hearing Panel's "findings of violation against Springsteen-Abbott to include all of the 1,840 improperly allocated charges identified in the Expense Schedule." The Hearing Panel, however, based its finding of violation on the specific expenses it discussed that showed a "pattern and practice" of misconduct over the span of three years. It did not find that all 1,840 charges identified in the Expense Schedule were improperly allocated, that the Expense Schedule itself established a pattern or practice of misconduct, or that no evidence other than the Expense Schedule needed to be considered. A remand is therefore necessary so that the NAC can clarify the basis on which it is upholding liability and explain how its findings of violation inform the sanctions imposed.On remand, the NAC may determine that the evidence warrants affirming the Hearing Panel's finding that a specific subset of expenses in the Amended Complaint established a pattern and practice of misconduct in violation of Rule 2010. The Hearing Panel recognized that "[a]lthough Enforcement did not individually prove at the hearing that every single one of [the 1,840] expenses was improperly allocated to the Funds, it did prove that Springsteen-Abbott engaged in a purposeful pattern and practice of improperly allocating expenses to the Funds," and detailed specific expenses in that pattern and explained why they were improper. The NAC may also choose to premise a finding of a pattern or practice of misconduct on other expenses, so long as it states specific reasons and supporting evidence as to why those expenses are violative. The NAC may also find that all 1,840 expenses were improperly allocated in violation of Rule 2010 as long as it offers "clarification and further explanation" as to how that finding is established by the evidence. Of course, the NAC may also determine that the evidence does not support any finding of liability.Regardless of what the NAC does on remand, if it finds violations it will have to consider how those findings affect, among other sanctions, the appropriate amount of disgorgement. Here, having found that the Hearing Panel determined all 1,840 charges to be violative, the NAC found that Springsteen-Abbott's unjust enrichment was the total amount of the 1,840 violative charges. The NAC thus did not specifically address the Hearing Panel's finding that it was "fair and reasonable to view all of the alleged improper charges as unjust enrichment" based on "the improper expense allocations individually proven, the categories of improper charges that also were proven, the pattern of misuse, and other circumstances indicating Springsteen-Abbott's lack of candor and fundamental failure to comply with her ethical obligations." In other words, the Hearing Panel appears to have found that the total dollar amount of the 1,840 allegedly improper charges was a reasonable approximation of Springsteen-Abbott's unjust enrichment because it found that the total dollar amount was causally connected to her pattern and practice of misallocating expenses in violation of Rule 2010, and Springsteen-Abbott had not rebutted any portions of that showing.On remand, the NAC should explain the relationship between any violations found and any disgorgement ordered and whether such disgorgement is a reasonable approximation of unjust enrichment. "[D]isgorgement primarily serves to prevent unjust enrichment[.]" The amount of disgorgement must be a "reasonable approximation of profits causally connected to the violation."The disgorgement calculation does not need to be exact, but only after the NAC finds that Enforcement has satisfied its burden of approximating unjust enrichment from the specific misconduct proven does the burden shift to the respondent to rebut the calculation of disgorgement. Once a reasonable approximation has been established, any risk of uncertainty in the amount of disgorgement should be borne by the wrongdoer.To the extent the NAC finds violations, it will also need to clarify the significance of other factors mentioned by the Hearing Panel in its unjust enrichment analysis. For instance, the Hearing Panel justified its decision to disgorge all 1,840 charges from the Amended Complaint, despite the fact that not all had been proven violative, in part because they included controlling person expenses and because there was "reason to distrust" some of Springsteen-Abbott's explanations that led Enforcement to drop some 400 expenses from the original Complaint. While disgorgement need only be a reasonable approximation of unjust enrichment, it must be related to misconduct that was actually charged and found to be violative.If the NAC chooses to order disgorgement, it should also address the $35,000 in charges that Springsteen-Abbott claimed to have reallocated. Springsteen-Abbott did not produce evidence substantiating this claim at the hearing apparently because Enforcement's calculation of restitution did not include the amounts she claimed to have reallocated. Because the amount of disgorgement that may be ordered is limited to a reasonable approximation of unjust enrichment at the time of the order, a reasonable approximation of disgorgement necessarily accounts for evidence of amounts already returned. "[T]o the extent [the defendant] pays or has paid restitution . . . such payments will offset his disgorgement obligation." Otherwise, disgorgement would be improperly punitive.
Springsteen-Abbott argued on appeal to the NAC that the Hearing Panel had punished her when it ordered disgorgement in excess of what Enforcement had recommended. In ordering disgorgement in the full amount of $208,953.75, the Hearing Panel reasoned that it was fair and reasonable to view all 1,840 of the alleged improper charges as unjust enrichment based on (1) the improper expense allocations and categories of expenses individually proven, (2) her pattern of misuse, and (3) "other circumstances indicating Springsteen-Abbott's lack of candor and fundamental failure to comply with her ethical obligations." None of these reasons, however, support the Hearing Panel's disgorgement amount. Accordingly, we modify the Hearing Panel's order.An order of disgorgement must be limited to a reasonable approximation of ill-gotten gains or unjust enrichment. And such gain or financial benefit must be causally connected to the violation. See SEC v. Randall Kent Hanson, 2017 U.S. Dist. LEXIS 50392, at *22 (S.D.N.Y. Mar. 31, 2017) (explaining that in calculating the disgorgement amount, adjudicators must focus on the extent to which the respondent has profited from the misconduct). We therefore reduce Springsteen-Abbott's disgorgement to $36,225.85, which represents a reasonable approximation of Springsteen-Abbott's unjust enrichment caused by her wrongful conduct and reflects the personal and broker-dealer expenses that remained improperly allocated to the Funds.
We find that Springsteen-Abbott engaged in the misconduct FINRA found. Over three years, Springsteen-Abbott engaged in a pattern and practice of using money from the Funds to pay for multiple charges that were not related to legitimate Fund business. FINRA's findings of specific improper allocations of expenses to the Funds over an extended period of time support FINRA's finding of a pattern and practice of misconduct.
pattern and practice of misusing the Funds' monies fits within the broad range of conduct that Rule 2010 proscribes. Springsteen-Abbott was entrusted with investor money, and the Fund offering documents specified expenses that the money could be used for, yet she violated this trust over a three-year period by routinely misallocating personal expenses, control person expenses, and expenses of other businesses to the Funds. These were not isolated oversights. And Springsteen-Abbott's use of the CCC American Express card for personal charges and charges for the various related corporate entities comingled expenses and allowed her to conceal her misconduct from oversight for years. Springsteen-Abbott demonstrated the extent of her bad faith when she provided false business justifications for numerous expenses to both Enforcement and the Hearing Panel despite documentary evidence that contradicted her explanations.Springsteen-Abbott's behavior undermined her duty to her investors. Her actions do not adhere to the "high standards of commercial honor and just and equitable principles of trade" that Rule 2010 requires. Rule 2010 is designed to "protect investors and the securities industry from dishonest practices that are unfair to investors," and we have previously found similar conduct to violate Rule 2010. Accordingly, we agree that Springsteen-Abbott violated Rule 2010. None of Springsteen-Abbott's arguments challenging a finding of liability is convincing.
We agree with FINRA that Springsteen-Abbott's misconduct was egregious and justifies the bar and disgorgement, but we eliminate the fine imposed because we find it to be excessive in light of the other sanctions. We also reject Springsteen-Abbott's argument that the Supreme Court's recent decision in Kokesh v. SEC renders the bar and disgorgement punitive (and thus beyond FINRA's power to impose) and instead find them to be remedial sanctions
Although the NAC properly characterized the case as involving the improper use of funds and applied the correct Guideline when considering sanctions generally and the amount of the fine specifically, the NAC did not address the correct provision of the Guidelines when describing the basis for imposing the fine. Instead, the NAC cited to a part of the Guidelines that says adjudicators "generally should impose a fine and require payment of restitution and disgorgement even if an individual is barred in all sales practice cases if the case involves widespread, significant, and identifiable customer harm or the respondent has retained substantial ill-gotten gains." This Guideline does not apply to cases involving the improper use of funds. The NAC failed to otherwise explain why the fine was necessary.The provision of the Guidelines stating that all three sanctions generally should not be imposed in cases involving the improper use of funds, and the absence of an explanation as to why it was necessary to fine Springsteen-Abbott in addition to barring her and ordering that she pay disgorgement, indicates that a fine is excessive in these circumstances.Our holding is not that the amount of the fine - - $50,000 - - is excessive. We also do not hold that the NAC could not have provided an explanation that would have justified imposing a bar, disgorgement, and fine. Rather, under these particular facts and circumstances, where the NAC did not include such an explanation and instead invoked a guideline that was inapplicable, we find that imposing all three sanctions would be excessive and therefore set aside the fine.
Page 24 - 25 of the 2020 SEC Opinion[K]okesh held that disgorgement constitutes a penalty for the purpose of the statute of limitations in 28 U.S.C. § 2462 applicable to civil actions seeking a "fine, penalty, or forfeiture." Saad remanded that proceeding to the Commission to address, "in the first instance, the relevance - - if any" of Kokesh to the bar that FINRA imposed on Saad. In our opinion on remand, we rejected the argument that Kokesh rendered FINRA bars "categorically impermissible." Rather, we did "not read Kokesh as limiting FINRA's or the Commission's efforts to guard against harm to the public by imposing bars justified by the need to protect investors and others dealing with financial professionals." As in Saad, we are cognizant that from Springsteen-Abbott's perspective the bar may feel punitive and that it may have important consequences for her. But the inquiry into whether a remedy constitutes punishment is and must be objective. As discussed above, Springsteen-Abbott's continued association with a FINRA member firm would present a risk to the integrity of the markets and to investors, and preventing her from continuing to associate in the industry inhibits her from harming additional investors in the future. For the reasons articulated in our decision on remand in Saad, we reject Springsteen-Abbott's argument that Kokesh means her bar is punitive and so cannot be imposed at all.Springsteen-Abbott's allegation that the NAC "is silent on whether Appellant's bar is intended to be remedial, punitive, or serve another purpose" is inaccurate. The NAC began its discussion of a bar by citing our statement in Blair Alexander West that the "misuse of customer funds constitutes a serious violation of the securities laws, involving a betrayal of the most basic and fundamental trust owed to a customer." The NAC explained further that the improper use of funds "undermines the integrity of the securities industry" and supported the bar by citing cases where respondents were barred because their behavior "demonstrated a fundamental unfitness for the securities industry" (internal quotation marks and citations omitted). The NAC also recognized that a bar was necessary because "Springsteen-Abbott harmed the Funds and Fund investors when she failed to protect the Funds' assets entrusted to her from misuse." We find, as in West, that the bar imposed on Springsteen-Abbott is remedial and not punitive because it will prevent Springsteen-Abbott "from harming additional customers."
[N]othing in Kokesh, which involved whether a civil action for disgorgement could be brought after a certain period of time, overturns these holdings that disgorgement may be imposed in a FINRA disciplinary action. Kokesh's holding that disgorgement is a penalty for purposes of the statute of limitations in Section 2462 does not mean that it may never be a fitting sanction in a FINRA disciplinary action where the disgorgement ordered is a reasonable approximation of the violator's ill-gotten gains causally connected to the violations.
[F]irst, starting from the (contested) premise that FINRA is a state actor, Springsteen-Abbott asserts its adjudication violated the Appointments Clause as well as the Constitution's Due Process guarantee. Second, Petitioner argues that her lifetime bar is impermissibly punitive. Then, Petitioner argues that the disgorgement of continuing education expenses for her employees was erroneous.
But this argument is precluded by our opinion in Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015). There, we confronted the question of whether the Petitioner was required to urge a constitutional non-delegation challenge to the statutory scheme before the Commission. Applying § 78y(c)(1), we recognized that "adjudication of the constitutionality of congressional enactments has generally been thought beyond the jurisdiction of administrative agencies." Id. at 18 (quoting Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 215 (1994)). Nevertheless, we explained that, under § 78y(c)(1), "so long as a court can eventually pass upon the challenge, limits on an agency's own ability to make definitive pronouncements about a statute's constitutionality do not preclude requiring the challenge to go through the administrative route." Id. (quoting Elgin v. Dep't of Treasury, 567 U.S. 1, 17-18 (2012)). Thus, Springsteen-Abbott was required to exhaust her constitutional claims before the Commission. She has, moreover, not provided any reasonable grounds that would excuse her failure to do so. A constitutional argument does not categorically qualify as a "reasonable ground." See Stoiber v. SEC, 161 F.3d 745, 754 (D.C. Cir. 1998). Nor has there been an intervening change in law that might have excused her failure to press these contentions below. Id.
Our opinion in Saad v. SEC, 980 F.3d 103 (D.C. Cir. 2020) ("Saad III")-issued after briefing but before oral argument in this case-decides the question of whether the Petitioner's lifetime bar is impermissibly punitive. FINRA is generally prohibited from imposing "excessive or oppressive" penalties, which we have held limits FINRA to remedial sanctions. 15 U.S.C. § 78s(e)(2); see, e.g., Siegel v. SEC, 592 F.3d 147, 157 (D.C. Cir. 2010). And in Saad III, we held that, if imposed to "protect the public," an industry bar is "remedial." 980 F.3d at 107-08. The Petitioner's argument- focused on the applicability of Kokesh v. SEC, 137 S. Ct. 1635 (2017) - - was squarely rejected in Saad III. The SEC's remedial justification, previously described, finds adequate support in the record.
It's rather puzzling that so many cases of alleged forfeiture of constitutional arguments before an agency have arisen recently all across the country. See, e.g., Gonnella v. SEC, 954 F.3d 536, 543-46 (2d Cir. 2020); Malouf v. SEC, 933 F.3d 1248, 1255-58 (10th Cir. 2019). These cases cause needless disputes at the threshold of judicial review of agency action. The "specialized bar" should take care to either stay up to date on broad appellate legal trends or consult those who do. See Laurence H. Silberman, From the Bench: Plain Talk on Appellate Advocacy, 20 LITIGATION 3 (Spring 1994).
Securities And Exchange Commission, Plaintiff, V. Charles R. Kokesh, Defendant (Complaint, DNM, 09-CV-1021 / October 27, 2009)