Securities and Exchange Commission v. Dean

Background

The Securities and Exchange Commission sued Donald J. Fowler and Gregory Dean over trading in customer accounts at J.D. Nicolas. The SEC alleged that they recommended a high-cost trading strategy, made material misrepresentations or omissions, and made unauthorized trades. The claims arose under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and Rule 10b-5.

The parties filed cross-motions for summary judgment, but the court denied both motions. On the morning of trial, Dean settled with the SEC and consented to a judgment that included a permanent injunction, disgorgement of $253,881.98, and a $253,881.98 civil penalty. The trial then proceeded against Fowler alone.

Jury findings

The jury found Fowler liable on all six causes of action. It found that he acted with scienter, meaning that he acted knowingly or recklessly, when he used a trading strategy that had no reasonable basis and was unsuitable for any customer. The jury also found that he made unauthorized trades in 12 of the 13 customer accounts examined at trial.

The 13 customers suffered aggregate losses of $467,627 during the relevant period. Fowler personally received commissions and postage fees generated by the accounts. The court also considered evidence that Fowler had received customer complaints, had been placed under special supervision, and continued using the same strategy.

Disgorgement

Disgorgement requires a wrongdoer to give up money obtained through unlawful conduct. The court found that Fowler personally received $104,568.40 in commissions and $27,498 in postage fees from the 13 customers whose accounts were the focus of the trial. It ordered him to disgorge $132,076.40, plus prejudgment interest calculated at the Internal Revenue Service underpayment rate under 26 U.S.C. § 6621.

The SEC also sought disgorgement based on commissions from Dean’s customers. The court declined to award those amounts because the trial evidence did not sufficiently connect each account to Dean’s admitted misconduct, and Fowler had not had an opportunity to challenge that evidence as a basis for disgorgement.

Civil penalties

The court determined that Tier III civil penalties were appropriate because Fowler’s conduct involved fraud, scienter, and substantial losses or risks of substantial losses to customers. It imposed a $150,000 penalty for each of the 13 customers whose accounts were examined at trial, for a total of $1,950,000.

The court treated each customer as a separate violation rather than treating all of the conduct as one scheme. It declined to impose a separate penalty for every trade because the trades in each customer’s account could be viewed as part of a single scheme involving that customer, and a trade-by-trade award would have been extraordinarily large.

Permanent injunction

The court permanently enjoined Fowler from further violations of the securities laws. It found a substantial likelihood of future violations based on the jury’s findings, Fowler’s scienter, the repeated nature of the misconduct, his continued work in the securities industry, and his testimony indicating that he continued to regard his trading practices as proper despite customer complaints and unfavorable financial metrics.

Disposition

The court granted the SEC’s motion. Fowler was ordered to pay $132,076.40 in disgorgement plus prejudgment interest, $1,950,000 in civil penalties, and was permanently enjoined from future securities-law violations. The SEC was directed to submit a proposed injunction and judgment and its interest calculations within 14 days. The clerk was directed to terminate the motion pending at docket number 189.