Transcript:
Oral Argument in the Matter of vFinance Investments, Inc. and Richard Campanella
March 30, 2010
Chairman Mary Schapiro:
Good afternoon. This is an oral argument on the petition of vFinance investments Inc. and Richard Campanella for review of the initial decision of an administrative law judge. A total of 40 minutes has been allowed for the argument, divided equally between respondents and the Division of Enforcement. Respondents will argue first and reserve part of the time for rebuttal.
Mr. Schoeppl, do you wish to reserve time for rebuttal?
Carl Schoeppl:
Yes, Chairman. I’d like to reserve five minutes for rebuttal.
Chairman Mary Schapiro:
Okay, thank you very much. You may proceed.
Carl Schoeppl:
Thank you.
Good afternoon Chairman Schapiro, Commissioners. My name is Karl Schoeppl, and I represent “Respondents,” vFinance Investments Inc. and Richard Campanella, today in this oral argument.
The first thing I would like to present to the Commission is two unique issues of law that need to be decided on this appeal. The first issue that we presented is the appropriate standard for secondary liability of an aider and abettor. In our briefs in this case, we have asserted the appropriate standard for a scienter should be actual knowledge, not recklessness, and the third element for aiding and abetting, which is a substantial assistance prong, requires more than mere inaction; it requires deliberate act on the part of the alleged aider and abettor to cause the primary violation in this case. In this case, as everyone is aware, 1995, the public litigation — Securities Litigation Reform Act was passed, and Section 20E was enacted. That particular provision codified the aiding and abetting standard. And in that case — and that statute — it actually set forth three elements that have to be proven in an aiding and abetting case. The first is there has to be the existence of a primary violation. The second, the alleged aider and abettor has to have knowledge — actual knowledge — of the primary violation. And the third, the alleged aider and abettor has to substantially assist in the commission of that primary violation.
We contend that Richard Campanella did not have actual knowledge of any alleged primary violation in this case. Therefore, he could not have properly been found to be liable for aiding and abetting by the administrative law judge in this case. The SEC has attempted, in this case through the Division of Enforcement, to assert that recklessness should be the standard in an administrative proceeding because it's a different proceeding than a civil injunctive action in court. We contend that in order to have certainty and predictability in the law, that the standard for liability should be the same, regardless of the forum, regardless of the nature of the proceeding.
In this case, if an Exchange Act violation of the recordkeeping violations is sought by the Division of Enforcement under an aiding and abetting theory, then the same standard should apply for any violation of exchange act regardless of what forum it's brought in. In this case, the post-1995 Reform Act case law has been pretty clear that actual knowledge is what is required under the second element for aiding and abetting. We believe that the Commission should adopt that standard in administrative proceedings. This should not be a relaxed standard in an administrative proceeding. The Division of Enforcement contends there should be a relaxed standard because the administrative proceeding requires a willful aiding and abetting, and they seem to replace the willful requirement for the scienter and the substantial assistance requirements for aiding and abetting. We contend that those are mutually exclusive, meaning that they are separate elements, both which have to be proven in this case. And we contend that neither was supported by the evidence, and the administrative law judge applied the wrong legal standard. Specifically, willfulness, which is a separate element apart from the aiding and abetting standard, is not just committing an act; it's more than that.
In the Raymond James case, which is one of the decisions we principally rely upon in our briefs and also below with Judge Mahony, in that case the chief administrative law judge Brenda Murray did not find Raymond James to have willfully violated the recordkeeping provisions in that that case because it didn't find it acted in bad faith and that it had actually done things to try to commit the violation, the primary violation. Similarly, in this case, vFinance also did not willfully violate the recordkeeping provisions. The evidence in this case shows that Mr. Campanella, who at the time of the alleged violations was the president of vFinance — he also was the chief compliance officer during the portion of that time — acted reasonably under the circumstances. This is a broker-dealer that had approximately 25 branch offices at the time, about 125 brokers nationwide.
Mr. Campanella was located in the Boca Raton home office for vFinance. The branch in question was located in Flemington, New Jersey. And Mr. Campanella replied upon reasonable procedures to try to detect and prevent different violations of the Federal Securities Laws and also to make sure that the recordkeeping provisions were complied with. One of those provisions was to have annual surprise audits and also announced audits. In this case — the Flemington, New Jersey branch — Mr. Campanella commissioned Patrick Hayes, who was a person that was commissioned with the sole job to do examinations of the 25 branch offices of vFinance. He did, in fact, do examinations of the Flemington, New Jersey branch in 2003, in 2004 and in 2005. The examinations that were conducted in 2004 and 2005 were conducted on a surprise basis. This was to meet some of the task force memorandum initiatives that had been set forth by the SEC about firms doing exams on an unannounced basis to try to detect violations of the Federal Securities Laws.
In doing these examinations, Mr. Hayes conducted a questionnaire of Mr. — in this case, Mr. Thompson. Nicholas Thompson is the person alleged to have been the primary violator here. He wasn't just a broker. He was a Series 24 branch manager of the Flemington, New Jersey branch, so he was somebody that was vested with some responsibility here, not just a front-level broker but, actually, a supervisor, too. And in this case, Mr. Hayes went and did a questionnaire. One of the questions that he had to find answers to is whether or not the emails being used by that branch office were only the vFinance-approved email for business purposes, which was the requirement of the policies and procedures of vFinance at the time and, also, the FINRA rules at that time as well. And he received “yes” answers from Mr. Thompson in all three of the years that he did the various examinations. He also received written, signed acknowledgements from Mr. Thompson, acknowledging that he only used approved vFinance email for business purposes. He also did an independent examination of the computers. Mr. Hayes testified that he went on the computers of Mr. Thompson when he did the exams. And he determined that there wasn't any use of non-vFinance email for business purposes during each of the years that he went there. And, in this case, one of the allegations that the Division of Enforcement has made was that Mr. Campanella could have done more. He could have flown out to the Flemington, New Jersey branch to procure this computer that the staff claims was erased. Well, what occurred was the initiation of the staff request started in or about July of 2005, vFinance had protocols to deal with requests from the SEC concerning informational requests. And Mr. Campanella delegated that to different members of the staff to get the various documents, produce them to the SEC, which was done.
One of the issues that had arisen was whether or not a personal computer, meaning a computer that was the personal property of Mr. Thompson, could be accessed by the staff. With respect to that personal computer, Mr. Thompson retained his own individual counsel, lawyer Robert Stevens, to represent him. Mr. Stevens took the position this was the personal property of Mr. Thompson and would not allow vFinance to access that particular computer. So, at that point, negotiations for the access of that personal computer took place between Mr. Stevens and the SEC staff. And there are numerous exhibits that were admitted into evidence at the trial in this case showing those communications. And the staff of the Division of Enforcement actually entered an agreement in writing, which the — Mr. Thompson, through his counsel, agreed to turn over and allow the SEC Division of Enforcement staff to take an image — two images, actually — of his personal computer. And one of the concerns that Mr. Thompson's lawyer had was the fact that there may be privileged material on the personal computer and he wanted to do a privilege review, a taint review, before the staff could access that information. Now, all of this was done. The computer was turned over to the staff. The imaging was permitted. It was all done through counsel for Mr. Thompson.
Now, one of the positions that the staff has taken was this is something that vFinance should have gone to take. Well, if somebody doesn't voluntarily allow you to do it, there's really no way that somebody can do it without force or going to court to do that. In this case, at all times Mr. Campanella was informed by Mr. Thompson that he was complying with the staff's requests until January of 2006. At that time, there was the first time that the staff had informed Mr. Campanella that they weren't getting prompt responses on this issue with the computer. And at that point, Mr. Campanella immediately sent an email to Mr. Thompson, also called him, and told him that “you need to comply immediately and if you fail to do that, you're going to be fired and we're going to mark you on Form U5.” And that is not inaction; that's action. That’s taking action to try to make sure that these requests are being adhered to by Mr. Thompson.
And I'm going to go through a few of the — highlight a few of the exhibits that I have in a few moments, but I want to hit this other point. One of the other issues with this that's so important is the fact that Mr. Thompson's own attorney communicated with the SEC staff and represented in writing that Mr. Thompson had produced all records that had been requested by the staff, had provided them with all emails, provided them with the computer they asked for, the image, and that's what Mr. Thompson represented to Mr. Campanella. So, at all times, when Mr. Campanella was interacting with Mr. Thompson, he was led to believe by Mr. Thompson's own lawyer, by Mr. Thompson, by his compliance examiner, that everything was being taken care of properly, that everything was being handled correctly and that the staff was getting what they needed in terms of these records. And, in fact, whatever records the home office of vFinance were produced, and there's no issue regarding that. The issue was what was on the computer, this personally owned computer of Mr. Thompson, and that was something that vFinance did not have access to at the time the request was made, but provisions were made — reasonable provisions were made through Mr. Thompson's personal counsel to do that.
Chairman Mary Schapiro:
Can I just interrupt you for a second to ask why vFinance didn't have access?
Carl Schoeppl:
Because Mr. Thompson's lawyer refused to provide access because he claimed they were privileged information on the computer and personal information that needed to be reviewed. And that position was memorialized in a letter in November of 2005 to the SEC Division of Enforcement. We notified them of that fact, and the SEC's Division of Enforcement staff had been negotiating, beginning around August of 2005, directly with Robert Stevens, Mr. Thompson's lawyer, to procure that same information. So, from our perspective, we thought that the SEC was having reasonable alternative measures to get the information directly, with that.
So, there are a few documents that we've marked as exhibits that were admitted into evidence. One of them is going to be found at Tab Number 1 in the demonstrative that we have. And there's an email that’s up on the screen right now; this is an email that Mr. Campanella sent to Mr. Thompson telling him to stop using this email. And this shows that Mr. Campanella was actually doing something. He wasn't burying his head in the sand. He actually was taking affirmative action. If we take a look at Tab 2, we have another email that's also being sent, and in this email, this email recounts that Mr. Campanella had spoken to Mr. Thompson regarding “stop using this particular email.” And, with respect to this, this shows that he's going to hit him with a fine if he continues to use it. Now, if you’ll note the dates on this, this is well prior; this is 2004. This wasn't occurring during the time period that the staff had made its informational request in 2005. This was well prior to that.
The next email is 3. And, in this email, this email indicates that Mr. Thompson's representing to Mr. Campanella that he had stopped using this particular account. And, by the way, there's no evidence from any of the emails that vFinance had regarding this personal email account that Mr. Thompson was using it for business purposes. And the internal policies and procedures in the FINRA rule only prohibits the use of personal email for business purposes. So, in this case, and some of the particular emails that were used here, some of them were sent on Saturday or Sunday, on the weekend, so it wasn't something that there was anything that Mr. Campanella was told that Mr. Thompson was communicating with members of the public, which is the issue that would show no awareness on the part of Mr. Campanella that Mr. Thompson was potentially doing that.
Chairman Mary Schapiro:
To be sure — I'm sorry. Just to be sure I understand, the computer was a vFinance computer or his personal computer?
Carl Schoeppl:
It was not a vFinance computer. It was a personal computer owned by Mr. Thompson who was an independent contractor with vFinance. He was not an employee.
Chairman Mary Schapiro:
But it was in the vFinance premises?
Carl Schoeppl:
It apparently was. And Mr. — I know my time is almost up — Mr. Hayes did review all the computers on site when he did the exams in 2003, 2004 and 2005. So, he did actually conduct a review on those computers to determine whether or not there was inappropriate use of email or other inappropriate use on the computer that would violate firm policy or rules and regulations, and he reported none. The only issue that had been reported back was the use of instant messaging that was used by Mr. Thompson because he was a market maker, and he was communicating with the head trader. And those IMs were only used to the trading desk, not to members of the public, so it did not violate any of vFinance's internal policies or any FINRA or SEC rules or regulations.
Chairman Mary Schapiro:
But would you agree that the fact that he was an independent contractor doesn't really make a difference with respect to his obligation?
Carl Schoeppl:
No, I think both — he still has an obligation — Mr. Thompson does — to provide access. And the issue is when a financial advisor or broker doesn’t do that, and they have a lawyer, and they're telling you that you can't get access. And that's what happened. And vFinance reported that to the Division of Enforcement, and the Division of Enforcement dealt directly with the lawyer for Mr. Thompson and entered an agreement with Mr. Thompson, which is one of the exhibits that we attached as well that shows that they actually undertook to do that. And they never included vFinance in any of those discussions. They took that upon themselves to do that, and also the staff never told any member of vFinance that they, in fact, did not get the computer; they actually did get it. If I don't have any other question, I think — Mr. Aguilar, do you have a question?
Commissioner Luis Aguilar:
I do. Just following the three exhibits you mentioned, and one’s 1/20/04, says “stop using…,” one’s 2/3/04 — it says, “I’ll hit you with a fine.” And then, one that’s, you know, 9/18/05, you know, about a year and a half later that says, “I’m just now shutting it down at the end of the month.” Did Mr. Campanella try to figure out what happened in that intervening 18 months?
Because this seems to indicate this email account was being used for 18 months after he’s told him to stop using it or he was going to fine him.
Carl Schoeppl:
Right. What Mr. Campanella recounted during his testimony was that these are the only occasions that he became aware of the use of this particular email account — three times. And one of them, I believe, was on the weekend, the last time that had occurred, which didn't really raise any red flags or issues for him because it was something that, you know, if it's on the weekend, you're not in the office, and somebody does that to communicate with somebody at vFinance, he didn't view that to be a communication with the public. It didn't deal with any sales or trading activities, but he wanted to make sure the policy was enforced. And Mr. Thompson explained that he was going to stop using this email and the account was going to be closed. And Mr. Campanella accepted that having no other information to indicate to him that there had been any communications with members of the public with this personal email account. And also, another factor was the fact that Mr. Thompson was a branch manager. You know, he was not just a front-level employee; he was a supervisor that was well aware of what the rules were with this.
Chairman Mary Schapiro:
But it was interesting to me that he didn't ask somebody to start capturing emails from that domain, for, as Commissioner Aguilar points out, 18 months past his second warning.
Carl Schoeppl:
He did. There were instructions given to different personnel at vFinance to start capturing any emails that would have come from that personal email address. The evidence that was presented at the hearing in front of the administrative law judge was that there was only a handful of these particular emails found. All those that were found by vFinance were produced to the staff.
Chairman Mary Schapiro:
So, when Mr. Campanella asked him — I guess it's Mark Russell — to get together with Nick and start capturing his emails from this domain on September 18th, they were already being captured?
Carl Schoeppl:
All the ones that had been sent had been sent and provided to the Division of Enforcement staff; that's what Mr. Campanella testified to.
Chairman Mary Schapiro:
So, do you know why he then asked him to capture them again?
Carl Schoeppl:
In the going forward, in the future, but he closed the account. Mr. Thompson closed the account, the blast.net account, in September, so there was nothing in the future for Mr. Russell to capture thereafter. That's what he wanted to do. He wanted to set up a procedure where Mark Russell could capture the blast.net emails going forward. But Mr. Thompson said he closed the account and, apparently, Mr. Russell verified that because that’s what was reported to Mr. Campanella. Thank you.
Chairman Mary Schapiro:
Thank you very much.
Mr. Yun?
John Yun:
Good afternoon, Commissioners. I'm John Yun, representing the Division of Enforcement. With me is Mr. Steven Buchholz, the staff attorney on this case. I will respond to Mr. Schoeppl’s points, but first I wanted to give a general context for how the Division of Enforcement sees this matter. After a full evidentiary hearing, Administrative Law Judge Robert Mahony determined that vFinance violated its duties under Section 17a-1 of the Exchange Act and Rule 17a-4 to retain and reduce its brokerage records and that Mr. Campanella was both a cause and an aider and abettor of those violations. Exchange Act Rule 17a-4(b)(4) obligated vFinance to preserve its brokerage records for at least three years, but Judge Mahony found on the record before him that vFinance did not preserve important client communications. Rule 17a-4(j) required vFinance to produce brokerage records promptly to the Commission staff, but Judge Mahony, again, on the record before him, found that vFinance failed over the course of nearly two years to produce records.
This is an important case. Respondents’ failure to retain and produce brokerage records was neither innocent nor harmless. Respondents consciously failed for over one and a half years to collect and produce records that the staff requested for its investigation into a possible “pump and dump” scheme. Respondents’ delay impeded the staff's ability to conduct a prompt investigation into potential market manipulation. Respondents’ delay allowed a vFinance branch manager to delete his electronic files and to deprive the staff of relevant materials for its investigation. This proceeding therefore involves the staff's ability to obtain the records it needs to regulate the brokerage industry.
It's important to look at a general timeline here. During the first half of 2004, vFinance branch manager Nicholas Thompson was a market maker for Lexington Resources, which was the penny stock company that the Division of Enforcement was looking into. Mr. Thompson handled nearly 70 percent of the total trading volume for Lexington stock. While Thompson was placing trades for his clients, the share price of Lexington Resources doubled in just four months despite the company's lack of revenues. Thompson's trading supervisor at vFinance, William Groeneveld, found the stock price increases to be suspicious and ordered Thompson in June 2004 to stop accepting client bids to purchase Lexington shares at prices above the current market price. After Thompson stopped taking bid orders, Lexington’s share price collapsed within days, and Campanella — Groeneveld told Campanella, in August 2004, that these developments were, quote, “a red flag,” close quotes, of potential market manipulation.
In July 2005, the Commission staff requested all vFinance documents relating to Lexington Resources, but Campanella did not have anyone conduct a search of Thompson's branch office for responsive records until March 2007, even though Campanella knew that Thompson was the vFinance person who handled Lexington Resources and that Thompson's branch office was the only place where certain records would be located. This extraordinary 20-month time gap between receiving the staff's information request in July 2005 and searching Thompson's branch office in March 2007 cannot be explained or justified by Campanella or vFinance. And that is basically what Administrative Law Judge Robert Mahony found in making his determination of violations in this case.
During that period, that 20-month period, Thompson erased a computer hard drive containing respondents’ electronic records. Respondents dispute the deliberate character of their violations even today. Let me say, with respect to the standard for liability in this case — I will go into it later, but with respect to the standard for liability, it does not matter whether the Commission adopts the knowing standard that is used in district court proceedings or the recklessness standard that we believe correctly applied in this administrative proceeding — and I'll get into the details of the language a little later — it does not apply if you use knowing or reckless standard, we believe that the evidence establishes a violation under either standard. And, for that reason, let me go into the multiple red flags and repeated correspondence from the staff that leads us to argue that Mr. Campanella's violations and conduct was knowing or reckless. The standard does not matter.
We're looking at two general categories of records in this case. First, there are the emails and instant messages that Thompson sent. Second, there are the electronic records that were only on the computer hard drive in Thompson's branch office. We believe that the most obvious violation involves the failure to produce Thompson's emails. vFinance provided Thompson with an account on the vFinance.com email system for both his internal and external communications relating to vFinance activities. As demonstrated in the division's expert report, even after vFinance claimed in February 2007 to have produced all of Thompson's vFinance emails, many of Thompson’s outgoing emails prior to June 2005, which is when vFinance adopt a new email service system, but many of Thompson's outgoing emails prior to that time were missing. This absence of outgoing emails demonstrates that, for the critical period of 2004, which is what the Division of Enforcement was investigating, those emails could only be retrieved from Thompson's office.
Just as importantly, vFinance's policies required Thompson to use only his vFinance email account for brokerage activities and prohibited Thompson from using other email accounts for vFinance business. Despite that prohibition, Thompson used an email account at blast.net for his vFinance activities, and that is demonstrated in the record, both in terms of emails you have just seen between Mr. Thompson and Mr. Campanella, but if you look at the Division's expert report, which is Exhibit 97A, Opinion 7, it talks about through the forensic analysis we were able to recover other emails that Thompson was using with external persons for Lexington Resources. As a matter of fact, we found that there was remnants of a file containing 1,000 — at one time — 1,000 emails and instant messages; that file was deleted. Beginning in January 2004, Thompson sent emails to Campanella from his blast.net email account regarding his vFinance activities. In mid-September 2005, as your prior questioning has noted, Campanella wrote back to Thompson that vFinance would have to start capturing copies of Thompson's blast.net emails. So they understand that they have a duty to preserve these emails. They understand that they are not preserving these emails. The clear indication that, September 2005, that “we should be capturing these emails and now we're going to start,” indicates that there is something very wrong at vFinance, and Mr. Campanella knows it, about the blast.net email accounts. They understand that they have a duty to collect this. They understand that they are in violation of their duty because they have not done it and they're only going to start now, in September 2005, once again, a full year after the period we are looking at.
Now, there were blast.net emails produced. Those were produced by vFinance only if the blast.net emails were sent to a vFinance.com address; meaning if he sent the blast.net email to someone at vFinance, those were saved. Fewer than 250 of Thompson's blast.net emails to persons outside the company were ever produced to the staff. And that production came from Thompson's attorney, not vFinance. Significantly, those 250 blast.net emails only contain a few from the “pump and dump” period of the first half of 2004; once again, clear evidence that he's using this for communications outside the company. vFinance was not able to produce them. Thompson, at one time, had these on his computer hard drive. vFinance did not produce them. That is a violation.
Campanella aided and abetted vFinance's failure to retain and produce Thompson's blast.net emails. In January 2004, Campanella — it is undisputed — received an email from that blast.net account. He tells Thompson to stop using the email, but, in disobedience of that instruction, Mr. Campanella receives other emails in February, March and August 2004. Once again, he receives another email in September 2005 and, for the very first time, says, “We have to capture these emails.”
I might also add there has been a discussion here about relying upon Mr. Hayes' audits of the branch office, and it is undisputed that Mr. Hayes’ audit reports say in 2003 and 2004, that Thompson has represented that he is only using vFinance.com emails. But if Mr. Campanella, as we have seen here, is receiving blast.net emails from Mr. Thompson in 2004 and 2005, he knows that either Mr. Hayes doesn't understand what he's being told, or that Thompson is lying to Hayes about not using any other private email. He knows that from these emails. His ability to rely upon the Hayes audit reports falls apart like a house of cards because he knows that Hayes is telling him Thompson is not using any personal emails, and he knows he is getting personal emails from Mr. Thompson. He cannot explain his way out of that obvious contradiction and what he's being told and what he is seeing. So I think it is time for respondents to take the Hayes audit reports off the table as providing any sort of defense in this proceeding.
Now, there was also some instant messaging that’s in the record. Campanella and vFinance knew that Thompson had been using instant messaging to communicate about his vFinance activities since 2003. The audit reports indicated that hard copies were not being preserved. This tells them that if they need to get the electronic copies, they have to go to Mr. Thompson's office. In February of 2007, again, 21 months after our first request, vFinance made its first and only production of Thompson instant messages. And that only covered one month: August of 2005. So, even though they have known during this entire period that instant messages are being used, they obviously didn't retain them because they certainly did not produce them, even after 21 months of requests from the staff.
So, to sum up, vFinancing and Campanella knew that Thompson was using his blast.net email account and instant messages for his vFinance activities, but there was never a meaningful production of those emails and instant messages. Respondents’ failure to independently retain Thompson emails and instant messages is particularly troubling because it enabled Thompson to unilaterally destroy many of his external communications by destroying the electronic records on his computer hard drive. After the staff sent the information request in July 2005, Thompson destroyed his computer files in two stages. He reformatted his hard drive on November 7, 2005, three months after the staff's first information request. And then, between November 2005 and mid-February 2006, seven months after the staff's information request, Thompson used a disc-wiping program to render the deleted information unrecoverable. And what enabled Thompson to destroy his vFinance electronic records can be characterized as a decision by the farmer to hire the fox to guard the hen house.
In the August 2004 emails to Campanella, Groeneveld clearly describes the activities with respect to Lexington Resources as being a, quote, “red flag,” close quotes, of market manipulation. So, when Campanella and vFinance received the staff's request for information, regarding Lexington Resources, respondents necessarily knew that the staff was looking at Thompson's market making in connection with potentially illegal conduct. Despite that knowledge, Campanella delegated to Thompson, and Thompson alone, the task of retrieving all responsive records at his branch office. This delegation continued even after Thompson sent Campanella an email in July 2005 with a non-credible claim that, quote, “I don't have anything to send you,” close quotes. This delegation continued after the staff asked Campanella in mid-August 2005 to take a forensic image of Thompson's hard drive. Indeed, the improper delegation to Thompson continued even after the staff repeated its request to Campanella in November 2005 to take a forensic image of Thompson's hard drive, and wrote to Campanella that all communications between vFinance and the clients had not been produced. Campanella refused, however, to react to Thompson's clear incentive to conceal responsive documents and to the staff's complaints that Thompson's electronic communications were missing. Campanella knew that vFinance had to take action to ensure that the brokerage records at Thompson office were located and preserved, but Campanella did not send anyone to that office until March 2007 or take any other steps to protect vFinance's records.
Let me deal now with the issue of the recklessness standard. The recklessness standard — there are two different types of language involved here. There is 20e of the Exchange Act, which deals with district court proceedings. That language does include the word, “knowingly.” However, the Commission authorized this proceeding and the seeking of various types of relief in terms of penalties and sanctions under Section 15b-4(e) of the Exchange Act. Section b-4 applies to activities related to a broker-dealer or any person associated with a broker-dealer. That's the entering language of Section b-4. Subpart large capital E of that section begins with the words, in terms of seeking appropriate types of sanctions, “has willfully aided, abetted, counsel, commanded.” So, the language “aided and abetted” specifically appears in section 15b-4(e). The word “knowingly” does not appear there. What is different between these two types of proceedings is not only that one is in district court and that one is before the Commission in this administrative proceeding, but who the potential defendants are. In a district court injunctive action, we can bring a proceeding against anyone who has sufficient minimum contacts with the United States and acts in interstate commerce to commit any sort of violation of the Exchange Act, or aids and abets any violation of the Exchange Act. Therefore, in a district court proceeding, we may seek a permanent injunction against that broad category of persons, and we may also seek certain levels of monetary fines against that level, any one of those persons.
This proceeding is a much narrower proceeding. We can only bring this type of aiding and abetting proceeding in an administrative action against a registered broker-dealer or an associated person of a registered broker-dealer, which is precisely the type of businesses and individuals that this Commission has, for over 60 years, had the traditional responsibility to regulate. That is who the potential class of respondents here for aiding and abetting liability of the type alleged in this case 15b-4(e). There is some logic, then, assuming that you wanted to sit down and parse through why there is different language, but there is some logic then that the Commission should have a broader power to deal with people with whom it has the traditional responsibility of regulating in this case.
So, again, it is our position you don't need to decide if a recklessness standard applies here or a knowing standard. We believe we satisfy the scienter requirements under this set of facts, but in terms of responding to respondents’ argument about the standard that does apply, that is our point; you have to look at the statutory language, and you have to look at two provisions in terms of who are potential defendants. With respect to Mr. Thompson's computer, it needs to be pointed out that it was vFinance in August of 2005 that recommends that Mr. Thompson get his own attorney with respect to his computer hard drive. The fact is that under the contract, vFinance had the right to get any brokerage records and it agrees with anything on his computer, that as their records, they have a right to access to. They can tell Mr. Thompson to get his own attorney; I mean, that's up to them, but they are still responsible for making sure that the documents are preserved and produced. They don't get to delegate that to Mr. Thompson's attorney. They are responsible under the Section 17 of the Exchange Act for producing those documents. They don't get to delegate that. They don't get to tell the Division of Enforcement to go play a shell game and try to figure that out. The ability to regulate the market, to get these documents, to proceed quickly with investigations, depends upon the requirement that these companies and these individuals produce documents completely and promptly. And that is the message that needs to be sent with this case. We believe Judge Mahony sent that message. And we would ask the Commission to endorse that message here today.
Commissioner Luis Aguilar:
I actually have a question. You mentioned during — that there was a 20-month delay in producing the records. Given the requirements of broker-dealers to produce records promptly, how much time do you — does the Division think that it would be reasonable for firms to take and comply with our requests?
John Yun:
I think it depends on the situation. We, I think, would say in a situation like this where you have one market maker, one branch office, and the company, that there really is no reason why, at least within the first 30 days, someone should not be able to tell the staff, whoever is asking for these, whether it’s us or, you know, Office of Compliance Inspections and Examinations, whoever, that we have figured out who is involved, and we know where the records are and the records are being preserved. I think that's reasonable. How long it takes after that to get everything together is another story.
What is troubling here is that there was no effort to preserve these during this time period. That is what's particularly troubling. If these had been preserved, and what we were discussing here was how long it took them to get them copied, it would be a very different case than the case we have here today where they're not preserved and they are erased.
Commissioner Luis Aguilar:
Given your thoughts that 30 days would have been reasonable and, therefore, there was 19 months of additional delay in the production of the documents they did produce, do you think increased sanctions are appropriate?
John Yun:
Excuse me?
Commissioner Luis Aguilar:
Do you think an increase in the sanctions that the administrative law judge imposed is appropriate given the delay in the production of documents?
John Yun:
It would have been appropriate in the sense that if Judge Mahony had decided to impose greater sanctions because he felt the need to send a stronger message, he could have written an opinion that would have done that and that we could be asking you to uphold. He imposed the sanctions we requested, and, you know, so that's the extent to which he went. But, yes, if he had imposed stronger sanctions — we did ask for a suspension. He chose not to impose a suspension. You know, and I guess he made whatever balancing he felt appropriate, but, yes, this could have gone up certainly in terms of sanctions given the amount of — given what's involved here, particularly with respect to the company. This is a serious matter when somebody goes and erases your hard drive under your nose. I mean, this is their hard drive, in a sense, that it's at their branch office, you know.
Chairman Mary Schapiro:
Thank you, Mr. Yun. Mr. Schoeppl?
John Yun:
Thank you.
Carl Schoeppl:
Chairman Schapiro and Commissioners, first, let me address the delay issue. There was never a 20-month delay. There was no delay. One of the exhibits that we use is Tab Number 9. Tab Number 9 illustrates, by email, that Mr. Campanella describes on January 5, 2006, that he was just informed by the SEC Division of Enforcement that they weren't getting what they need needed in terms of this computer. That was the first time that the staff informed Mr. Campanella there was a problem. And what did Mr. Campanella do? In the email, he states that, “as per our conversation, the SEC just advised” him of this problem, and he immediately tells him, “you must comply immediately. If you fail to do that, I'm going to fire you and I'm going to mark you on your Form U5.”
Now, this issue with the 30 days — that's exactly what happened here, Commissioner Aguilar. In this particular case, there was an agreement that had been reached on February 10, 2006, which is Tab 11. And this agreement is a letter agreement between counsel for Mr. Thompson — Robert Stevens — Mr. Thompson and the staff of the Division of Enforcement. And the imaging of the computer took place in February 2006, approximately 30 days after Mr. Campanella was first informed by the Division of Enforcement that there was a problem in getting this computer from Mr. Thompson. It was done, ladies and gentlemen. There was no 20-month delay as the staff is suggesting. That is an absolute distortion of the record and a distortion of the evidence in this case. In fact, that's one of the reasons why the sanctions are inappropriate, and the sanctions that were imposed in this case were excessive. vFinance did what it could do. It immediately gave the biggest threat that it could do at the time, which was to threaten the termination of Mr. Thompson. And guess what happened? Compliance resulted, meaning that the imaging of that computer took place.
Now, what the staff seems to gloss over in presenting its argument here is the fact that they must show that Mr. Campanella had an awareness of the primary violation by Mr. Thompson. Mr. Campanella never had any knowledge that Mr. Thompson had intentionally destroyed data on the hard drive of his computer. There's no evidence in the record to support that. There's no red flag to support that. There’s no evidence at all as to the destruction of any information by Mr. Thompson that Mr. Campanella knew at any time prior to the trial in this case. In fact, Mr. Cruise [spelled phonetically], who is the forensic computer expert the staff called to the trial in this case testified it would have been impossible to have recovered the data due to the data wiping software that Mr. Thompson had used. So, even if Mr. Campanella, who is not a computer expert, who was the president of vFinance at the time, he himself could not have recovered the data, even if he would have gone there in person. Now, I think that's significant because, in this case, Mr. Cruise, who’s a forensic, trained computer specialist, he couldn't recover the data. And all the data that the staff claims they recovered to support the existence of an alleged primary violation is by circumstantial evidence here. There's no emails that they even recovered. All they recovered were cryptic to and from and subject tag lines in the evidence in this case.
So, even if he could have gotten access, Mr. Campanella wasn't trained in forensics, and I don't believe that the rules require the president of a firm with 125 brokers and 25 branch offices to personally go to the branch to do it. He has to delegate that responsibility and he delegated that to Mr. Hayes. And Mr. Hayes did, in fact, look at the computers. He reported that in his various reports in '03, '04 and '05. And I think it's reasonable for a firm to rely upon somebody they send from their firm to go to that branch to be their eyes and ears for them. What the firm can't police against is somebody who does what Mr. Thompson did. He intentionally committed a crime. But there isn't — this isn't a case of aiding and abetting market manipulation; this is a case of aiding and abetting a recordkeeping violation. And when the staff overstates the case and says there's a 20-month delay and they're still taking that position, when you have written evidence to show they got the files within approximately 30 days of first being told they didn't get this access to the computers, really is not fair, it’s not equitable, and it certainly isn't something that supports the findings here in this case by the administrative law judge.
I also want to touch a few other points raised by the staff. Substantial assistance — mere inaction is not enough. The staff's entire argument is based on Mr. Campanella not going to the Flemington, New Jersey branch himself to personally retrieve this personal computer. Well, even if he could have gone there, which he couldn't have because the lawyer for Mr. Thompson denied him access, but also he was told that they complied, in this case, what's very significant is that in order to establish that third element, he has to have deliberately, consciously attempted to assist the primary violation. In order to get there, there has to be proof that Mr. Campanella had knowledge that Mr. Thompson was destroying these records, and he had none. So we suggest to the Commission that the facts do not support a finding of aiding and abetting in this case. They do not support a finding of willfulness for purposes of establishing primary liability with vFinance, and ask that they reverse the findings that were found in this administrative law opinion. Thank you.
Chairman Mary Schapiro:
Thank you very much, Mr. Schoeppl. Thank you to everybody. The Commission will take the matter under advisement.
http://www.sec.gov/news/openmeetings/2010/033010openmeeting-transcript.htm
