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Seghers v. Securities and Exchange Commission

November 21, 2008

CONRAD P. SEGHERS, PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION, RESPONDENT



On Petition for Review of an Order of the Securities and Exchange Commission.

The opinion of the court was delivered by: Karen Lecraft Henderson, Circuit Judge

Argued October 6, 2008

Before: SENTELLE, Chief Judge, and HENDERSON and GARLAND, Circuit Judges.

Conrad Seghers petitions for review of the order of the Securities and Exchange Commission (SEC or Commission) barring him from future association with any investment adviser based on his violation of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, and section 206(1) and (2) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6(1) & 80b-6(2) (collectively the anti-fraud provisions). Seghers challenges the order primarily on the ground that summary disposition was inappropriate because genuine issues of material fact existed. He also claims the SEC abused its discretion in imposing the permanent bar sanction. For the reasons set forth below, we deny the petition for review.

I.

On June 16, 2004, the SEC brought a civil enforcement action against Seghers in the United States District Court for the Northern District of Texas, alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisors Act of 1940. Complaint, SEC v. Seghers, No. 3:04-CV-1320-K (N.D. Tex. Sept. 14, 2006). A jury returned a verdict against Seghers on the SEC's claims that he had violated the anti-fraud provisions. SEC v. Seghers, No. 3:04-CV-1320-K, slip op. at 1 (N.D. Tex. Sept. 14, 2006) (Memorandum Opinion). Seghers then filed a motion for judgment as a matter of law. Id.

The district court found that the following facts supported the jury's verdict and denied Seghers's motion. Id. Seghers participated in the offer and sale of limited partnership interests in three hedge funds. Id. at 2. The parties stipulated that Seghers was acting as an investment advisor during the offer and sale. Id. The assets in the hedge funds were invested at Morgan Stanley Dean Witter (Morgan Stanley). Id. Olympia Capital Associates, L.P. (Olympia) acted as administrator of the hedge funds and sent periodic statements to investors. Id. Seghers reported the values of the hedge funds to Olympia. Id. at 5. Olympia relied on the values reported by Seghers in its periodic statements to investors. Id. On June 6, 2001, Morgan Stanley sent Seghers a letter stating that the hedge funds values it reported to Seghers had been incorrect since February 2001 and had "not accurately reflected the actual value of the accounts during any of these periods." Id. at 8. Even following receipt of the letter, Seghers overstated the values of the hedge funds to Olympia by approximately $29.5 million in June, $23.1 million in July, $26.3 million in August and $27 million in September. Id. at 5. Olympia relied on the overstated values in statements issued to investors on June 30, July 31, August 31 and September 30, 2001. Id. On July 13, 2001, Seghers sent a letter to investors reporting "positive developments" and stating that "amidst the volatility in the markets we have continued to post respectable returns," but on August 1, 2001, Seghers told his lawyer that the hedge funds were "in the toilet." Id. at 7, 9.

The district court permanently enjoined Seghers from violating the anti-fraud provisions based on its finding that "there is a reasonable likelihood that Seghers will violate the securities laws in the future." Id. at 10; Amended Final Judgment, SEC v. Seghers, No. 3:04-CV-1320-K (N.D. Tex. Sept. 14, 2006) (Amended Final Judgment). The district court ordered Seghers to pay a civil penalty but denied the SEC's request for disgorgement because Seghers had lost over $900,000 of his own money in the hedge funds. Memorandum Opinion at 11; Amended Final Judgment at 4-5. Seghers and the SEC appealed the district court's judgment.*fn1

On September 26, 2006, the SEC's Division of Enforcement (Division) instituted administrative proceedings against Seghers pursuant to section 203(f) of the Investment Advisors Act of 1940, 15 U.S.C. § 80b-3(f). The SEC assigned the case to administrative law judge (ALJ) Lillian McEwen. On October 31, 2006, ALJ McEwen denied the Division's request for leave to move for summary disposition. She also scheduled a hearing to commence on December 13, 2006. On November 29, 2006, the SEC reassigned the case to ALJ Robert Mahony because of ALJ McEwen's imminent retirement. ALJ Mahony held a telephonic pre-hearing conference with counsel for the parties on December 6, 2006. Following the conference, the ALJ vacated the hearing date "with the agreement of the parties" and granted leave to the Division to move for summary disposition. Seghers responded with his own motion for summary disposition along with supporting affidavits and accompanying exhibits. On February 5, 2007, the ALJ granted the Division's motion for summary disposition, permanently barring Seghers from associating with any investment advisor and the SEC thereafter upheld the ALJ's action. Conrad Seghers, S.E.C. Release No. 2656 (Sept. 26, 2007) (SEC Opinion). Seghers now petitions for review.

II.

We uphold the SEC's legal conclusions unless they are "'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,' 5 U.S.C. § 706(2)(A)." Canady v. SEC, 230 F.3d 362, 364 (D.C. Cir. 2000) (quoting Wonsover v. SEC, 205 F.3d 408, 412 (D.C. Cir. 2000)). Its factual findings are conclusive if supported by substantial evidence. 15 U.S.C. § 80b-13.

A.

We first note that Seghers has waived the argument that he has a general constitutional and a statutory right to a hearing before being permanently barred from associating with any investment advisor. Section 203(f) of the Investment Advisers Act provides:

The Commission, by order, shall censure or place limitations on the activities of any person associated . . . with an investment advisor, or suspend for a period not exceeding twelve months or bar any such person from being associated with an investment advisor, if the Commission finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or bar is in the public interest and that such person . ...


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