United States Securities and Exchange Commission v. Paulsen

Background

The Securities and Exchange Commission (SEC) brought a civil enforcement action against John A. Paulsen for aiding and abetting securities-law violations by Deborah Kelley and Navnoor Kang. The SEC alleged that Paulsen aided Kelley’s violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5. The SEC brought parallel claims concerning Kang.

Kelley was a sales representative at Sterne Agee, and Paulsen was a managing director and research analyst there. Kang managed fixed-income assets for the New York State Common Retirement Fund. The Fund’s rules prohibited Kang from accepting gifts and entertainment connected to Fund transactions. Paulsen knew about that restriction, and he knew that Sterne Agee executed trades for the Fund.

The court focused on entertainment Kelley provided to Kang, including a Paul McCartney concert trip and a February 2015 ski trip to Park City, Utah. Kelley paid for or arranged transportation, lodging, meals, ski rentals, and lessons for Kang and his girlfriend. Paulsen participated in the Park City trip, paid for some meals, and later submitted an expense report that falsely identified attendees and omitted Kang and others. The court also found that Paulsen and Kelley agreed to conceal the trip and to give false accounts to outside investigators.

The SEC presented evidence that Sterne Agee’s commissions from Fund trading increased substantially after the ski trip. Kelley and Kang had pleaded guilty in a related criminal prosecution, and their plea statements acknowledged an exchange of gifts or benefits for Fund business. The court rejected Kang’s contrary trial testimony as not credible and found that Kelley’s trial testimony denying the exchange was also not credible.

Legal standard

To establish aiding-and-abetting liability, the SEC had to prove: (1) a primary securities-law violation by another person; (2) Paulsen’s knowledge of that violation; and (3) Paulsen’s substantial assistance in carrying it out. For the underlying scheme-liability claims, the SEC had to prove a deceptive or manipulative act, carried out to further a scheme to defraud, with the required wrongful intent.

The court held that an explicit promise was not necessary to establish the unlawful exchange. A tacit understanding—that is, an understood arrangement shown by the parties’ conduct—could establish the exchange of benefits for trading business.

Court’s findings

The court found by a preponderance of the evidence that Kelley and Kang committed primary securities-law violations through an unlawful exchange in which Kelley provided gifts and entertainment and Kang directed Fund business to Sterne Agee.

The court found that Paulsen knew about the primary violations. His knowledge was shown by his awareness of Kang’s restrictions, his participation in the Park City trip, his association of the trip with later trading business, his concealment of Kang’s presence in expense records, his instructions that others remain silent, and his repeated lies to outside counsel. The court concluded that Paulsen understood the arrangement was illegal and that his own involvement put him at risk.

The court also found that Paulsen substantially assisted the violations. It identified four principal forms of assistance: paying for Kang and his girlfriend’s meal during the trip; agreeing with Kelley to submit false expense reports and submitting one; agreeing to keep the trip quiet and instructing others not to discuss it; and agreeing with Kelley to lie to investigators and then repeatedly lying during his interview.

Disposition

The court found Paulsen liable on all four counts:

The court directed the clerk to terminate the pending motions in limine. It also ordered Paulsen to submit, by November 9, 2020, a brief addressing the SEC’s arguments concerning an appropriate civil monetary penalty. The opinion itself did not impose the penalty.