Securities And Exchange Commission v. Fowler

6 F.4th 255 (2nd Cir. 2021)

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Nature of the Case

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Facts

D was a registered representative for J.D. Nicholas & Associates. In 2011 D and another broker, Gregory Dean, began pursuing an 'event-driven' investment strategy on behalf of several customers. D reviewed the financial news and found 'events' that he believed the stock price of particular companies had yet to fully absorb. He then traded based on his assessment of whether those events would lower or increase the price of a stock. The frequency of D's trades was very high. J.D. Nicholas considered a turnover rate of just four times per year to be high. D's customer accounts examined at trial experienced a turnover rate of 116 times per year. Customers were charged $65 (later $49.95) per trade. D had the discretion to charge an extra 3.5 percent fee on any purchase or sale. Fowler received portions of both of those fees as compensation. D also recommended margin trading to several of his customers, permitting him to borrow money (for which his customers were on the hook) to buy even more stock and thereby increase his commissions. The average account for D's customers needed to generate a 142.6 percent rate of return to cover the costs charged and to break even. J.D. Nicholas warned its brokers that a cost-to-equity ratio of 'greater than 10% is often considered high for many clients because a 10% return is needed for the client to break even.' For more than half the trades that are at issue, D also failed to get his customers' approval before making them. Thirteen customers suffered a combined loss of $467,627. Complaints prompted J.D. Nicholas to put D on special supervision in 2012, but he nevertheless continued to use the same investment strategy that had landed him in trouble with his customers. In 2016 the SEC (P) and D executed two agreements that tolled the five-year statute of limitations for one year, from March 1, 2016, to February 28, 2017. P filed this action on January 9, 2017. By the time the complaint was filed, J.D. Nicholas had gone out of business. P proceeded with six causes of action under Section 10(b) of the Exchange Act, Rule 10b-5, and Sections 17(a)(1), (2), and (3) of the Securities Act. The jury rendered a verdict against D. The District Court ordered D to disgorge $132,076.40 and pay a civil penalty in the amount of $1,950,000. It also permanently enjoined him from future violations of the securities laws.D appealed.