Brief Fact Summary. A district court order prohibited the defendant, Patel, from future securities law violations, demanding his disgorgement of illegal profits, and enforcing a lifetime prohibition on serving as an officer or director of any public corporation, and Patel appealed.
Synopsis of Rule of Law. The court should consider the adequacy of a conditional bar or a bar that is limited in duration, especially in the nonexistence of previous wrongdoing, prior to them banning an individual for life from serving as a director or officer of a public company.
In determining whether to order the bar, a court may consider: (1) the egregiousness of the underlying securities law violation; (2) the defendant's repeat offender status; (3) the defendant's role or 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.View Full Point of Law
Issue. Should the court should consider the adequacy of a conditional bar or a bar that is limited in duration, especially in the nonexistence of previous wrongdoing, prior to them banning an individual for life from serving as a director or officer of a public company?
Held. (Miner, J.) Yes. The court should consider the adequacy of a conditional bar or a bar that is limited in duration, especially in the nonexistence of a criminal record, prior to them banning an individual for life from serving as a director or officer of a public company.Antifraud provisions of securities laws allow the court to prohibit an individual who showcases significant unfitnessfrom acting as an officeror director of a public company, conditionally or unconditionally, for a particular period of time. When deciding an individual’s fitness, the court may consider many factors, inclusive of but not limited to the following:
(1) how severe the violation is, (2) the defendant’s prior criminal history, (3) the status of the defendant at the time the fraud was perpetrated,Â (4) the amount of scienter confirmed, (5) involvement of the defendant financially to the fraud, and (6) the probability of the defendant committing violations in the future. Here, in applying the aforementioned factors, the district court determined that the participation of Patel in the forging of the Maxide application warranted a lifetime ban from future service as an officer or director of any public entity. In determining the scope of an injunction, the district court should be afforded broad discretion but the severity of a lifetime prohibition from participation in a public corporation necessitates a more significant showing that future misconduct is likely. In respect to the prohibition of securities violations and the order of disgorgement the judgment is affirmed.
Discussion. Providing for the implementation of three kinds of new remedies by the courts was the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Included in one of the provisions was the power to place lifetime bans on individuals from serving as officers or directors of public entities upon a discovery of significant unfitness. The legislative intent supportive of this severe consequence is that individuals who demonstrate anobvious disrespect for securities laws should not be permitted in a position of public trust. The court here developsthe severity of the lifetime ban by adding extra factors to consider, inclusive of a very including a more demanding requirement of scienter, factual foundation for the probability that such violations would reoccur, and any previous punishments enforced.