On Appeal from the United States District Court for the District of New Jersey (Civ No. 02-3164) District Judge: William H. Walls.
The opinion of the court was delivered by: Smith, Circuit Judge.
Before: SMITH, BECKER, and GREENBERG, Circuit Judges
This appeal arises out of a defunct broker-dealer's unpaid penalty for a securities law violation. The Securities and Exchange Commission ("SEC") filed an application with the District Court seeking an order directing the broker-dealer to pay the penalty. In addition, the SEC also sought a judgment that the former president of the company was jointly and severally liable for this unpaid penalty and an order directing him to pay the penalty. Following discovery, the District Court granted the SEC's unopposed motion for summary judgment and ordered the former president to pay the penalty. Because we hold (1) that the Securities Exchange Act of 1934 ("Exchange Act") provides for a control person's joint and several liability to the SEC for a debt in the amount of an unpaid SEC penalty when that control person induced and was a culpable participant in the controlled person's failure to pay the penalty and (2) that the District Court had jurisdiction in this case to grant an order directing such a control person to fulfill this obligation, we will affirm the judgment of the District Court.
J.W. Barclay & Co., Inc. ("Barclay") was a securities broker-dealer. Appellant John Bruno ("Bruno") was one of the founders of Barclay. Bruno owned 68 percent of Barclay, and he acted as Barclay's President from July of 1991 through at least February of 2003.
On October 20, 1998, the SEC instituted administrative proceedings against Barclay, alleging violations of § 17(a) of the Exchange Act*fn1 and Rule 17-a-5*fn2 due to Barclay's failure to timely file a Form BD-Y2K. Form BD-Y2K required a broker-dealer to supply information about the broker-dealer's Year 2000 preparedness.*fn3
In February of 1999, an Administrative Law Judge ("ALJ") held a hearing on this matter. On August 2, 1999, the ALJ found that Barclay had willfully violated § 17(a) and Rule 17a-5 and ordered Barclay to pay a $50,000 civil penalty. Barclay appealed the ALJ's decision and the SEC heard oral argument on July 18, 2001. On October 15, 2001, the SEC affirmed the ALJ's finding that Barclay had willfully violated § 17(a) and Rule 17a-5, but it reduced Barclay's civil penalty to $25,000 and directed Barclay to make payment on the penalty within thirty days ("Order").
The SEC sent copies of the Order to Barclay's attorney of record, and Barclay's outside counsel notified Bruno that Barclay owed payment of the $25,000 penalty to the SEC. Barclay did not appeal the Order, but the company also did not pay the penalty within thirty days, or at any time thereafter.
In the meantime, Barclay had ceased operation as a broker-dealer on December 27, 2000, because it was in violation of the SEC's net capital requirements. At the end of 2000, Barclay's liabilities were greater than its assets.*fn4 During 2001, while the ALJ's decision was on appeal to the SEC, Bruno caused Barclay to concentrate its remaining assets, a total of more than $145,000, into Barclay's bank account. Bruno then caused Barclay to issue a check to himself in the amount of $90,000 and a check to another employee for $43,700. Bruno then continued to cause Barclay to place its deposits into this account and to issue checks from this account, primarily to pay legal fees. Even after the SEC issued the Order directing Barclay to pay the $25,000 penalty within thirty days, Bruno did not cause Barclay to use any of its funds to pay any part of the $25,000 penalty.
On July 1, 2002, the SEC filed an application with the District Court pursuant to § 21(e) of the Exchange Act, 15 U.S.C. § 78u(e) ("Application").*fn5 In Count I of the Application, the SEC alleged that Barclay had not paid its civil penalty as ordered by the SEC and requested an order commanding Barclay to pay the penalty. In Count II of the Application, the SEC alleged that Bruno had "knowingly failed to cause Barclay to comply with the Commission's Order," argued that Bruno was jointly and severally liable for Barclay's unpaid penalty "by virtue of his status as a control person under Section 20(a) of the Exchange Act,"*fn6 and requested an order commanding Bruno to pay the penalty.
Barclay did not make an appearance before the District Court and final judgment by default was entered against Barclay. On September 9, 2002, Bruno filed a pro se answer and motion to dismiss, arguing that there was "no basis for bringing this action" against him because the Order was not issued against him, he was not named in the Order, and he was not a party in the proceeding before the SEC in which the Order was issued. The SEC moved to strike Bruno's answer and Bruno filed a response to this motion, which the District Court treated as an amended answer and motion to dismiss under Rule 12(b)(6).
In his Second Defense within his response to the SEC's motion to strike, Bruno argued that he was "not liable for a debt incurred by Barclay" and that to obtain an order against him the SEC "would have to bring a separate action or proceeding against him." In his Fourth Defense, Bruno argued that the SEC could not assert control person liability against him under § 20(a) "and hold him responsible for the civil penalty against ...