(CN) - A finance executive did commit securities fraud by recording a sham transaction to float his struggling company through a cash-flow problem, the 11th Circuit ruled.
Richard Goble founded the North American Clearing, a securities and clearing brokerage firm, in 1995.
When the firm faced shortfalls in 2008, Goble instructed an employee to record a $5 million money-market purchase in the company's books, though no purchase had actually been made, so that the firm could withdraw cash from a reserve account that safeguarded customer assets.
After regulators detected the discrepancy, the firm returned the reserve money and closed shop because it could not meet its financial obligations. The Securities and Exchange Commission brought a civil suit soon thereafter against Goble, North American, and the firm's president and financial adviser.
After a five-day bench trial, the court found Goble liable for committing securities fraud in violation of Section 10(b) of the Securities and Exchange Act. He was also found guilty of aiding and abetting violations.
Concluding that Goble had directed an employee to record a fake purchase of a money-market fund, the court permanently restrained Goble from seeking a securities license or engaging in the securities business. The other defendants settled.
On appeal, Goble said the facts did not support securities fraud liability, and thus the other charges fail as well
The Atlanta-based federal appeals court partly agreed last week, vacating the securities fraud count, but affirming the aiding and abetting finding.
"The SEC had to demonstrate a connection between Goble's misrepresentation and the purchase or sale of securities, not investor reliance," Judge Emmett Ripley Cox wrote for a three-judge panel.
But Section 10(b) of the Exchange Act does not contemplate the May 13 sham transaction, according to the court.
"The SEC has labeled Goble's plan to make an improper withdrawal from the Reserve Account as § 10(b) fraud," Cox wrote. "But, the securities regulations directly implicated by this conduct are the Customer Protection Rule and books and records requirements of the Exchange Act, not § 10(b). Section 10(b) was not intended to protect investors from a broker-dealer's inaccurate records or an inadequate reserve fund."
"In light of all this, we do not consider the May 13th sham transaction to be a purchase within the meaning of § 10(b)," Cox added. "Therefore, we hold that Goble's misrepresentation was not made in connection with the purchase or sale of securities. Accordingly, the District Court's judgment on the securities fraud claim must be reversed both because Goble's misrepresentation was not material and because it was not made in connection with the purchase or sale of securities."
But the aiding and abetting violations still stand.
"There is no question that primary violations of the Customer Protection Rule and the books and records requirements occurred at North American," Cox wrote. "And, the testimony offered at trial supports the district court's finding that Goble had knowledge of and assisted these primary violations. ... These facts clearly show that Goble knew his actions surrounding the May 13th sham money market transaction would violate the books and records requirements and the Customer Protection Rule and that he substantially assisted in the violation of these regulations."
Elimination of the securities fraud decision requires further removal of the injunction penalties, the panel found. But the trial court can consider on remand whether the aiding and abetting violations still support a lifetime bar from securities business.
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