Filed: May 14, 2013
Latest Update: Feb. 12, 2020
Summary: 12-2943-cv SEC v. Bankosky U NITED S TATES C OURT OF A PPEALS FOR THE S ECOND C IRCUIT August Term 2012 (Argued: April 9, 2013 Decided: May 14, 2013) Docket No. 12-2943-cv S ECURITIES AND E XCHANGE C OMMISSION , Plaintiff-Appellee, v. B RENT C. B ANKOSKY , Defendant-Appellant, Before: W ALKER AND C HIN , Circuit Judges, AND R ESTANI , Judge. * Appeal from a post-judgment order of the United States District Court for the Southern District of New York (Baer, J.), barring defendant-appellant from a
Summary: 12-2943-cv SEC v. Bankosky U NITED S TATES C OURT OF A PPEALS FOR THE S ECOND C IRCUIT August Term 2012 (Argued: April 9, 2013 Decided: May 14, 2013) Docket No. 12-2943-cv S ECURITIES AND E XCHANGE C OMMISSION , Plaintiff-Appellee, v. B RENT C. B ANKOSKY , Defendant-Appellant, Before: W ALKER AND C HIN , Circuit Judges, AND R ESTANI , Judge. * Appeal from a post-judgment order of the United States District Court for the Southern District of New York (Baer, J.), barring defendant-appellant from ac..
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12-2943-cv
SEC v. Bankosky
U NITED S TATES C OURT OF A PPEALS
FOR THE S ECOND C IRCUIT
August Term 2012
(Argued: April 9, 2013 Decided: May 14, 2013)
Docket No. 12-2943-cv
S ECURITIES AND E XCHANGE C OMMISSION ,
Plaintiff-Appellee,
v.
B RENT C. B ANKOSKY ,
Defendant-Appellant,
Before:
W ALKER AND C HIN , Circuit Judges,
AND R ESTANI , Judge. *
Appeal from a post-judgment order of the United
States District Court for the Southern District of New York
(Baer, J.), barring defendant-appellant from acting as an
*
The Honorable Jane A. Restani, of the United States Court
of International Trade, sitting by designation.
officer or director of a public company for ten years,
pursuant to section 21(d)(2) of the Securities Exchange Act
of 1934, 15 U.S.C. § 78u(d)(2).
A FFIRMED .
A LLAN A. C APUTE , Special Counsel to the
Solicitor, for Michael A. Conley,
Deputy General Counsel and Jacob H.
Stillman, Solicitor, Securities and
Exchange Commission, Washington,
D.C., for Plaintiff-Appellee.
R OBERT G. H EIM , Meyers & Heim LLP, New
York, New York, for Defendant-
Appellant.
P ER C URIAM :
In this case, the Securities and Exchange Commission
(the "SEC") accused defendant-appellant Brent C. Bankosky of
engaging in insider trading, in violation of sections 10(b)
and 14(e) of the Securities Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C. §§ 78j(b), 78n(e), and SEC Rules
10b-5 and 14e-3. After the entry of a consent judgment, in
which Bankosky neither admitted nor denied the allegations
in the complaint, the SEC moved for an officer and director
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bar pursuant to section 21(d)(2) of the Exchange Act, 15
U.S.C. § 78u(d)(2). Relying on the factors in SEC v.
Patel, 61 F.3d 137 (2d Cir. 1995), the district court found
Bankosky "unfit" to serve as an officer or director of a
public company and barred him from acting as one for ten
years. Bankosky appeals from the post-judgment opinion and
order, arguing that the district court erred in balancing
the Patel factors. We affirm.
BACKGROUND
The parties stipulated in the consent judgment
that the following factual allegations in the complaint are
to be deemed as true solely for the purpose of deciding the
SEC's motion for an officer and director bar:
From January 2008 until his resignation in May
2011, Bankosky worked for the pharmaceutical company Takeda
Pharmaceuticals International, Inc. ("Takeda"), first as a
director of Global Licensing and Business Development and
then as a senior director. In these positions, Bankosky
had access to, and did obtain, material non-public
information regarding Takeda's discussions with outside
companies about strategic alliances, mergers, and product
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acquisitions. Despite a company policy prohibiting trading
on such inside information, from 2008 to 2011 Bankosky
bought call options in the shares of four companies in
advance of anticipated deal announcements between these
companies and Takeda. After deals with two of the
companies were publicly announced, Bankosky sold the
options in those companies and realized profits of $63,000.
His option investments in the other two companies netted no
gain.
On February 9, 2012, the SEC filed this action
below. The consent judgment was entered March 15, 2012,
imposing a permanent injunction against further violations,
ordering disgorgement of $63,000 plus pre -judgment
interest, and imposing a civil penalty of $63,000.
On March 30, 2012, the SEC moved for the district
court to bar Bankosky permanently from serving as an
officer or director of any company whose shares are
registered under the Exchange Act. In support of its
motion, the SEC attached excerpts of Bankosky's sworn
testimony before the SEC and emails that Bankosky sent
while working at Takeda. In the testimony, Bankosky denied
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having any knowledge about Takeda's entry into a strategic
global alliance with Cell Genesys before the public
announcement. But emails referenced in the complaint and
attached as exhibits to the SEC's motion demonstrate that
Bankosky was aware of the confidential negotiations with
Cell Genesys and even worked on the project before it went
public.
In a May 21, 2012 opinion and order, the district
court evaluated Bankosky's fitness to serve as an officer
or director, applying the six factors set out in SEC v.
Patel, 61 F.3d 137 (2d Cir. 1995). See SEC v. Bankosky,
No. 12 Civ. 1012,
2012 WL 1849000, at *1-3 (S.D.N.Y. May
21, 2012). In Bankosky's favor, the district court noted
that his conduct, though "undeniably serious and not
isolated," was not the sort typically considered egregious
and the fact that he was not a repeat offender was
"particularly relevant."
Id. at *2. On the other hand,
the court made the following findings against him:
Bankosky, though not an officer or director, was "acting in
a corporate or fiduciary capacity . . . where he and his
colleagues were involved in the due diligence and
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negotiations for deals with other pharmaceutical
companies"; he knowingly engaged in insider trading; his
misleading SEC testimony was particularly troubling; he had
a personal economic stake in the trades; and, given his
continued effort to contest the wrongfulness of his
actions, there were no "assurances against future
misconduct." Id. at *2-3 (quotation omitted). Balancing
all of these factors, the court prohibited Bankosky from
acting as an officer or director of any public company for
ten years.
Id. at *4.
This appeal followed.
DISCUSSION
A. Applicable Law
The district court has "substantial discretion in
deciding whether to impose a bar to employment in a public
company." Patel, 61 F.3d at 141. Accordingly, we review
the district court's issuance of an officer and director
bar for abuse of discretion. See SEC v. Posner,
16 F.3d
520, 521 (2d Cir. 1994). Under this standard, "we will
reverse only if we have 'a definite and firm conviction
that the court below committed a clear error of judgment in
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the conclusion that it reached upon a weighing of the
relevant factors.'" Anderson v. Beland (In re Am. Express
Fin. Advisors Sec. Litig.), 672 F.3d 113, 129 (2d Cir.
2011) (quoting Silivanch v. Celebrity Cruises, Inc.,
333
F.3d 355, 362 (2d Cir. 2003)).
Section 21(d)(2) of the Exchange Act provides
that:
the court may prohibit,
conditionally or unconditionally,
and permanently or for such period
of time as it shall determine, any
person who violated section [10(b)]
of this title or the rules or
regulations thereunder from acting
as an officer or director of any
issuer that has a class of
securities registered pursuant to
section [12] of this title or that
is required to file reports pursuant
to section [15(d)] of this title if
the person's conduct demonstrates
unfitness to serve as an officer or
director of any such issuer.
15 U.S.C. § 78u(d)(2). In SEC v. Patel, we identified six
non-exclusive factors that were "useful in making the
unfitness assessment":
(1) the egregiousness of the
underlying securities law violation;
(2) the defendant's repeat offender
status; (3) the defendant's role or
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position when he engaged in the
fraud; (4) the defendant's degree of
scienter; (5) the defendant's
economic stake in the violation; and
(6) the likelihood that misconduct
will recur.
Patel, 61 F.3d at 141 (quotation omitted) (citing Jayne W.
Barnard, When Is a Corporate Executive "Substantially Unfit to
Serve"?,
70 N.C. L. Rev. 1489, 1492-93 (1992)). We clarified,
however, that these are not "the only factors that may be
taken into account" and that it was not "necessary to apply
all these factors in every case."
Id.
Patel interpreted an earlier version of section
21(d)(2), which permitted a ban only "'if the person's
conduct demonstrates substantial unfitness to serve as an
officer or director.'"
Id. at 140-41 (emphasis added)
(quoting 15 U.S.C. § 78u(d)(2) (1990)). In 2002, Congress
replaced "substantial unfitness" with simply "unfitness."
See Sarbanes-Oxley Act of 2002 § 305(a), Pub. L. No. 107 -
204, 116 Stat. 745, 778-79 (2002) (amending 15 U.S.C.
§ 78u(d)(2)). Although textually this change is ambiguous,
the legislative history demonstrates that Congress's intent
was to lower the threshold of misconduct for which courts
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may impose director and officer bans. See S. Rep. No. 107-
205, at 27 (2002), available at 2002 WL 1443523 (explaining
that standard was changed to "unfitness" because
"'substantial unfitness' standard . . . [was] inordinately
high, causing courts to refrain from imposing bars even in
cases of egregious misconduct"); see also SEC v. Levine,
517 F. Supp. 2d 121, 144-45 (D.D.C. 2007), aff'd on other
grounds,
279 F. App'x 6 (D.C. Cir. 2008); Jayne W. Barnard,
Rule 10b-5 and the "Unfitness" Question,
47 Ariz. L. Rev.
9, 20 (2005); Jon Carlson, Note, Securities Fraud, Officer
and Director Bars, and the "Unfitness" Inquiry After
Sarbanes-Oxley, 14 Fordham J. Corp. & Fin. L. 679, 693-94
(2009). On appeal, although it argues for affirming the
ten-year ban, the SEC contends that the Patel factors are
"no longer applicable" because of the change in the
statute.
B. Application
We hold that the district court did not err in
relying on the six Patel factors in this case. The 2002
Amendment, by lowering the threshold of misconduct required
to impose the officer and director bar, did not undermine
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the usefulness of the Patel factors, which indicate where
evidence of unfitness might be found in a defendant's
misconduct. Whatever the contours of the new standard,
"unfitness" is clearly a lower hurdle than "substantial
unfitness." See S. Rep. No. 107-205, at 27 (2002). It
necessarily follows that a person who is "substantially
unfit" under the Patel analysis is also "unfit" under the
revised statute. Thus, the Patel factors are just as
relevant to determining "unfitness" as they were to
determining "substantial unfitness." See SEC v.
iShopNoMarkup.com, Inc., No. 04-cv-4057, 2012 WL 716928, at
*3 n.2 (E.D.N.Y. Mar. 3, 2012); SEC v. Miller,
744 F. Supp.
2d 1325, 1347 (N.D. Ga. 2010); SEC v. DiBella, No. 3:04-cv-
1342,
2008 WL 6965807, at *9 n.12 (D. Conn. Mar. 13, 2008).
Moreover, the Patel factors are neither mandatory nor
exclusive; a district court may determine that some of
those factors are inapplicable in a particular case and it
may take other relevant factors into account as it
exercises its "substantial discretion" in deciding whether
to impose the bar and, if so, the duration, so long as any
bar imposed is accompanied with some indication of the
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factual support for each factor that is relied upon.
Patel, 61 F.3d at 141.
The six Patel factors were derived from a law review
article by Professor Jayne W. Barnard, who, subsequent to the
2002 Amendment, proposed a new set of nine, non-exhaustive
factors to guide the determination of "unfitness":
(1) the nature and complexity of the
scheme; (2) the defendant's role in the
scheme; (3) the use of corporate
resources in executing the scheme;
(4) the defendant's financial gain (or
loss avoidance) from the scheme;
(5) the loss to investors and others as
a result of the scheme; (6) whether the
scheme represents an isolated
occurrence or a pattern of misconduct;
(7) the defendant's use of stealth and
concealment; (8) the defendant's
history of business and related
misconduct; and (9) the defendant's
acknowledgement of wrongdoing and the
credibility of his contrition.
Barnard, Rule 10b-5 and the "Unfitness" Question, 47 Ariz. L.
Rev. at 46; see also
Patel, 61 F.3d at 141 (citing Barnard, When
Is a Corporate Executive "Substantially Unfit to Serve"?,
70
N.C. L. Rev. at 1492-93). These nine factors have been
considered in a handful of cases in conjunction with the six
Patel factors. See, e.g., Miller,
744 F. Supp. 2d at 1347-48;
Levine, 517 F. Supp. 2d at 145. For the most part, however,
district courts in this and other circuits have continued to
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rely on the Patel factors for guidance. See, e.g., SEC v.
Wilde, No. SACV 11-0315, 2012 WL 6621747, at *17 (C.D. Cal. Dec.
17, 2012); SEC v. Metcalf, No. 11 Civ. 493,
2012 WL 5519358, at
*4 (S.D.N.Y. Nov. 13, 2012).
The SEC, in its brief, opposed the adoption of
Professor Barnard's nine-factor test and, at oral argument,
indicated its preference for the set of factors cited in
Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979), which are used
to decide the propriety of injunctive relief in light of a
defendant's past violations of the securities laws:
[1] the egregiousness of the
defendant's actions, [2] the isolated
or recurrent nature of the infraction,
[3] the degree of scienter involved,
[4] the sincerity of the defendant's
assurances against future violations,
[5] the defendant's recognition of the
wrongful nature of his conduct, and [6]
the likelihood that the defendant's
occupation will present opportunities
for future violations.
Steadman, 603 F.2d at 1140 (citing SEC v. Blatt,
583 F.2d
1325, 1334 n.29 (5th Cir. 1978)). But we also read the
Steadman factors, which closely resemble the Patel factors,
as suggestive and non-exclusive indicators of unfitness to
serve as a fiduciary.
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Ultimately, we find no "clear error of judgment in
the conclusion that [the district court] reached upon a
weighing of the relevant factors." In re Am. Express Fin.
Advisors Sec. Litig., 672 F.3d at 129 (quotation omitted).
Apart from the district court's findings, we are also
troubled by the fact that Bankosky was buying call options
in shares of Millennium Pharmaceuticals, Inc., a company
that his employer was in negotiations to acquire. The call
option purchases could have increased trading demand for
the target company's shares and share price, making the
acquisition bid more costly or even pricing a deal beyond
reach. This conduct betrays an impulse to place self -
interest ahead of his employer's and its shareholders'
interests and further demonstrates unfitness to serve as a
corporate fiduciary. Cf. McCrae Assoc., LLC v. Universal
Capital Mgmt., Inc.,
746 F. Supp. 2d 389, 400 (D. Conn.
2010) ("The duty of loyalty mandates that the best interest
of the corporation and its shareholders takes precedence
over any interest possessed by a director, officer or
controlling shareholder and not shared by the stockholders
generally.") (quotation and alteration omitted). In light
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of the circumstances presented, the district court
reasonably determined that a ten-year ban was warranted.
Hence, it did not abuse its discretion.
CONCLUSION
For the foregoing reasons, the order of the
district court is AFFIRMED.
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