Gregory Bartko v. SEC
D.C. Circuit Oral Argument
D.C. Circuit Oral Argument
Brian Matsui argued in front of the U.S. Court of Appeals for the D.C. Circuit, where he successfully argued and obtained precedential ruling that the Securities and Exchange Commission could not retroactively apply Dodd-Frank’s industry-wide sanctions on securities professionals for certain securities violations. Brian's argument begins at 0:53.
Unofficial transcript for users of mofo.com
Speaker 1 (00:01):
Case number 14-1070. Gregory Bartko, petitioner, versus Securities and Exchange Commission. Mr. Matsui for the amicus curiae. Mr. Matro for the respondent.
Speaker 2 (00:40):
Let’s wait until the courtroom is clear. All right, Mr. Matsui, good morning.
Brian Matsui (00:53):
May it please the court. Brian Matsui, on behalf of the court-appointed amicus. The Commission’s sanction order should be vacated for two reasons. First, the Commission impermissibly applied Dodd‑Frank’s new penalties retroactively to Mr. Bartko.
It sanctioned Mr. Bartko in a way that it could not have done at the time of the misconduct, and it did so based solely on past misconduct. Second, contrary to the SEC’s position here, the Commission is not immune from basic fundamental principles of equity. It cannot, as it did here, simply say that unclean hands does not apply. The Commission order should be vacated so Mr. Bartko has the ability to try to prove his unclean hands defense in the first instance. Now, as to retroactivity, the SEC now acknowledges that its sanction order must be vacated, at least with respect to municipal advisors and rating organizations because those penalties did not exist at the time the misconduct occurred. They’re entirely new under Dodd-Frank. But more of the order also should be vacated. At the time the misconduct occurred, Dodd-Frank only allowed, in a broker-dealer sanction, to bar Mr. Bartko from the Association of Broker-Dealers. It did not—
Speaker 4 (02:19):
Can you spell out for us exactly how Mr. Bartko is harmed by the collapsed proceeding?
Brian Matsui (02:31):
Yes, Your Honor. Well, under this court’s prior decision in Teicher, there was required to be an industry‑specific nexus in order to—
Speaker 4 (02:40):
What do you understand that nexus to consist of?
Brian Matsui (02:43):
In order to be barred, for example, with respect to investment advisors, Mr. Bartko needed to be associated with an investment advisor at the time of the misconduct.
Speaker 4 (02:53):
And that’s all? That’s the only additional factual predicate beyond what went into the conviction?
Brian Matsui (03:02):
Yes, Your Honor, that’s an additional element that was required, which Dodd-Frank removed.
Speaker 4 (03:05):
Okay.
Brian Matsui (03:08):
And so—
Speaker 4 (03:08):
So, is it correct to say that the effect of Dodd-Frank here is that people barred from a certain set of financial firms now cannot go under the radar and associate with a different type because the Commission can bar him from association with the different type even before he starts to associate?
Brian Matsui (03:42):
That’s correct, Your Honor.
Speaker 4 (03:43):
So, what he’s deprived of is an opportunity, like, to sneak under the radar. There’s no additional fact other than that, that has to be shown, right?
Brian Matsui (03:59):
Yes, Your Honor. But that’s a critical element of the sanction, that you need to have that association, and that’s why this court—
Speaker 4 (04:06):
You say it’s critical, but what interest of his is protected by that—an interest in being associated with a set of firms with which he knows, and the SEC knows, that as soon as they notice it, he can be stopped from associating with them.
Brian Matsui (04:27):
Well, first of all, Your Honor, if we could just take a step back on this. This court has recognized that these types of sanctions in the securities industry are the equivalent of capital punishment. And so this is not just simply—
Speaker 4 (04:40):
Well, this, it’s capital punishment for a many-headed beast.
Brian Matsui (04:45):
Yes, Your Honor. And under the pre-Dodd-Frank world, Mr. Bartko could have only been prevented from associating with broker-dealers. But now to answer your point more specifically, it does make a very big difference in this case. Currently, Mr. Bartko cannot seek any association with any other sort of area in the industry field. He cannot seek association with investment advisors. It would be unlawful for him to do so given the existence of the order. Before Dodd-Frank, he could actually seek associations, and it would not be unlawful. And—
Speaker 4 (05:22):
It would not be unlawful. But as soon as the SEC noticed, it could give notice to him, there’d be no new factual predicates to be established, then bar it.
Brian Matsui (05:34):
I would disagree with that, Your Honor, in one respect. Well, at least one respect, your Honor. If Mr. Bartko, two years from now under the pre-Dodd-Frank world, decided to associate with investment advisors, he could do so and that would not be a violation of the sanction order. So it would not be unlawful. It would not subject him to monetary fines, pre-Dodd-Frank. It will post-Dodd-Frank. In addition, the SEC would have to conduct a public interest analysis at that point to determine whether or not he should be sanctioned. That’s a different analysis, perhaps two years from now, as it is today. And in that case, it’s like the St. Cyr case, where what was removed was the ability to have a discretion to prevent removability.
Speaker 5 (06:20):
Let me make sure I understand. Is your point that, under the old regime, even though the Commission could move against him, he would have perhaps a defense, whereas under the new regime, he doesn’t? He has no avail. I mean, he might win. Might he win against the—if the Commission moves against him under the old regime, might he have a defense and prevail, whereas under the new regime, he doesn’t get an opportunity to contest that, or am I not understanding?
Brian Matsui (06:47):
That’s correct, Your Honor. Under the—if we just take a look at this—under the old regime, the SEC tried to sanction him under the Advisor’s Act, which would’ve been capable of barring him from investment advisors. The ALJ determined that was sufficient, but the Commission reversed it, it found a failure of proof. But now post-Dodd-Frank, just because—
Speaker 5 (07:07):
They don’t need to make any evidentiary showing, they can just bar him totally, right?
Brian Matsui (07:11):
Exactly, Your Honor. So they have the categorical right to bar him across the entire industry. And under decisions like Landgraf, that’s an additional disability that’s being imposed upon an individual after post‑Dodd-Frank.
Speaker 4 (07:25):
So what does the public interest analysis entail, and on whom is the burden of proof?
Brian Matsui (07:31):
The burden—
Speaker 5 (07:32):
And does that check?
Brian Matsui (07:33):
The burden would be on the SEC to show that it’s in the public interest to bar him. Under the post‑Dodd-Frank world, if Mr. Bartko was trying to get the sanction removed, the burden would be on him to try to show that he should be allowed admission. So that’s another situation in which there is an additional burden placed upon Mr. Bartko, based upon the retroactive application of Dodd-Frank. So—
Speaker 6 (08:01):
Well, isn’t there another factor? And that is prosecutorial discretion. I mean, if Mr. Bartko—and he’s in prison for quite a while, isn’t he?
Brian Matsui (08:13):
Yes, your Honor.
Speaker 6 (08:14):
All right. And let’s say he’s rehabilitated, and in 10 years, he wants to get back into the field. He shows the SEC that he has been rehabilitated, and he has learned his lesson. If we allow this, the Dodd-Frank elimination of the associated with statutory requirement to apply pre-Dodd-Frank, he can’t do anything. He’s out completely.
Brian Matsui (08:47):
I’m sorry, Your Honor. Yeah. If the post—
Speaker 6 (08:49):
I mean, if it’s not retroactive.
Brian Matsui (08:51):
Right, if it’s not retroactive and he’s released from prison at some point and can show that he rehabilitated himself, then he would be allowed to seek association with an investment advisor, for example. And the SEC, if it decided to, could try to bring a sanction against him, and the public interest determination would occur. And at that point, the SEC may or may not decide that he should be barred, and that would be subject to—
Speaker 4 (09:18):
In this scenario, the SEC would confront the burden of showing that the public interest requires his being barred?
Brian Matsui (09:25):
Yes, Your Honor. In the pre-Dodd-Frank world, the SEC would have the burden in that proceeding. Post‑Dodd-Frank, it’s just a categorical bar.
Speaker 4 (09:36):
Which he could, by carrying the burden of convincing them that he’s reformed, get them to lift.
Brian Matsui (09:44):
Yes, Your Honor. But the burden would be upon him to do that, which under retroactivity principles should be impermissible.
Speaker 6 (09:52):
What does he have to show to have the bar removed? I mean, even the bar that is not, doesn’t have a retroactive problem?
Brian Matsui (10:01):
I mean, I think that—I believe he would have to show that it’s in the public interest to remove the bar.
Speaker 6 (10:05):
Well, I mean, is it in the statute? Is it in the regs? Do we know?
Brian Matsui (10:11):
I’m not entirely certain of what all the factors would be. I know what the factors—
Speaker 6 (10:14):
Is it possible? I mean, have bars been lifted, I guess is what I’m saying.
Brian Matsui (10:17):
Yes, Your Honor. I believe the bars have been lifted in the past.
Speaker 6 (10:20):
Okay, okay.
Brian Matsui (10:22):
Unless there are further questions, Your Honor, I’d like to reserve the balance of my time for rebuttal.
Speaker 6 (10:26):
All right, thank you. Mr. Matro? Good morning.
Daniel Matro (10:40):
May it please the court. Daniel Matro for the Securities and Exchange Commission. I’ll begin with the retroactivity issue. We believe that this court’s decision in Koch essentially forecloses the argument presented by amicus. In Koch, the petitioner there challenged the entire collateral bar. But the court vacated only the two new bars, the two post-Dodd-Frank bars.
Speaker 5 (11:07):
But the petitioner there only raised this specific issue in the reply brief, and that wasn’t before the court then.
Daniel Matro (11:18):
It’s true, Your Honor, that the issue was clarified in the reply brief, that the opening brief challenged the entire bar on retroactivity grounds. The petitioner then—
Speaker 5 (11:28):
But it didn’t parse it the way we are now, in the opening brief. It wasn’t that carefully argued.
Daniel Matro (11:33):
Perhaps not in the opening brief, but the Commission’s brief talked about the two ways in which—the two effects that Dodd-Frank had, the addition of the two new bars and the fact that the Commission with respect to the remaining bars, no longer had to wait until someone associated with those industries in order to impose a bar. And then the petitioner clarified in the reply brief, rejected the characterization that he was simply objecting to a [inaudible] change from multiple to single proceedings and said “no”—what the problem he objected to was that, before Dodd-Frank, there would be a new hearing with new findings. Exactly the argument that the petitioner presents here, and the court didn’t find that persuasive. The court in a footnote upheld the rest of the bar, no other basis for how that could be, other than that it found that that change was a change in procedure that regulated secondary crime.
Speaker 6 (12:29):
Do you have Koch in front of you?
Daniel Matro (12:30):
Pardon?
Speaker 6 (12:31):
Do you have Koch in front of you?
Daniel Matro (12:33):
I have it, Your Honor.
Speaker 6 (12:47):
Could you turn to 158, next to last paragraph. “This holding does not apply to the other securities industries with which Koch may not associate.” Now, I suppose it’s possible to read that, that it’s upholding the application to all four of the others. But how is it possible to read that, give it that reading, when on 152, we specifically say that his third argument is that he contends the Commission’s order, barring him only from associating with, in other words, the two new ones—the municipal advisors or rating organizations—nothing about the two fields with which he’s not associated but that he is still barred from.
Daniel Matro (13:48):
I think if I understand the question, the—
Speaker 6 (13:54):
Well, I guess my bottom line is—I don’t see how you can read this as reaching the two fields, not the two new ones that we did vacate the bar, but the two fields that he was not either in or seeking to be associated with.
Daniel Matro (14:13):
Well, I think it’s because he’s—
Speaker 6 (14:15):
And he may have raised it. He, you know, but we have to look at what we said.
Daniel Matro (14:18):
Yeah, and I think if you look at footnote three, he specifically raised the issue, and the court in footnotes—
Speaker 6 (14:24):
Footnote three talks about the procedure of going from separate proceedings to an omnibus proceeding.
Daniel Matro (14:30):
Yes. And the reason he objected to that, Your Honor, I think was because he no longer had access to a new hearing, new findings when that would occur, when he chose to associate with those other industries. And this court said that that change in procedure doesn’t give rise to any retroactivity concerns. And it upheld the remaining bar. Mr. Koch was not a transfer agent. He was not a municipal securities dealer. He was not a—he was not a broker-dealer. And yet the court didn’t vacate those bars. And I think the reasoning whether or not that it expressly applies, and I think it does, is clear—that even before Dodd-Frank, the Commission would’ve had authority to bar Mr. Bartko as soon as he tried to associate with any area of the securities industry. Dodd-Frank simply allows the Commission now to bar him from all of them without having to wait until he tries to associate. And I think that’s correct. Koch correctly held that that’s a procedural change that regulates secondary conduct because as a common sense functional matter—which is how the Supreme Court says we’re supposed to look at the retroactivity analysis—Mr. Bartko could not reasonably expect upon his conviction to be able to freely associate in the securities industry without triggering a proceeding that would look basically the same as the one—
Speaker 4 (16:09):
Well, and that’s, I guess, the critical question—how similar it would lie, and the extent that the burden of proof has shifted, if that’s the case. Do you contest that?
Daniel Matro (16:21):
I think the question at any point would be what’s in the public interest.
Speaker 4 (16:26):
Yeah, but that’s rather vague, and where the burden lies is very important.
Daniel Matro (16:32):
But so before Dodd-Frank, there’s no reason to believe that the public interest analysis would’ve changed in any material respect while Mr. Bartko is serving his 23-year sentence. So there’s no reason to think that Bartko was harmed by the fact that he no longer has that second hearing, that the process is moved to the outset.
Speaker 4 (16:55):
That’s [inaudible] familiarity of this case, but I don’t, I mean, unless you’re making a standing argument, I don’t think that gets us anywhere.
Daniel Matro (17:08):
I mean, I think—
Speaker 4 (17:10):
We’re talking about the principle of the difference between [inaudible] and these two things seem to be [inaudible]. They both relate to the association with this different class of financial firm, right? Which is not a prerequisite pre-Dodd-Frank. And then, arguably—I’m not sure if you’re contesting it—arguably whether the burden is on the SEC to show that it’s in the public interest to bar him or whether the burden is on him to show that he ought not to be barred.
Daniel Matro (17:55):
Well, I think post-Dodd-Frank, if he feels like the public interest analysis has changed due to the passage of time, or when he is released from prison, he does have the ability to request that the Commission lift the bar, and the Commission—
Speaker 4 (18:09):
So are you saying you are agreeing with me on the burden of proof—agree with, perhaps, my question? I honestly don’t know.
Daniel Matro (18:14):
I mean, the Commission has lifted bars, and the analysis they go through is whether the public interest warrants lifting the bar, and admittedly, it’s a high—
Speaker 4 (18:28):
Are there any clues in their decisions [inaudible] burden [inaudible]?
Daniel Matro (18:29):
Well, I think it is a compelling—it requires some compelling evidence of that, the public interest analysis has changed, that it—the Commission doesn’t regularly lift bars because we’re talking about the public interest here. And I think the same—ultimately the same situation would be in place before Dodd-Frank.
Speaker 4 (19:02):
Is it fair to say the post-Dodd-Frank world, as seen by the Commission, assumes you have misbehavior with respect to one class of financial firms, the whole nine yards follow?
Daniel Matro (19:21):
I think with respect to a conviction like this and, yes, that someone who is in Mr. Bartko’s position could not expect a different result while he’s, you know, serving his prison sentence or due to the passage of time, or anything that the Commission would likely—there would’ve been before Dodd-Frank, a new proceeding. But the only question really would’ve been the question of association with a new industry. But all of the strong public interest factors that the Commission considered here would still be in place. And Mr. Bartko hasn’t, and amicus haven’t, given any sort of reason to think that the analysis would change based on the type of industry he’s seeking to associate with or the passage of time.
Speaker 6 (20:10):
But what might change is what’s happened to him, or let’s say he’s seeking to be in one of the fields as under tight control as an assistant. Just like if a lawyer’s disbarred and he says, “Well, can I be a paralegal? Can I work in a lawyer’s office?” You don’t allow for that possibility.
Daniel Matro (20:33):
Well, I think even now, if—he can come back to the Commission and ask the Commission to take that into account. But I think in practice, the Commission is likely to consider, you know, long periods of compliance in a regulated industry and—
Speaker 6 (20:55):
Fine. But, I mean, at least he has a chance. He has no chance now.
Daniel Matro (21:00):
Well, he—
Speaker 6 (21:01):
And he did before. I mean, that’s what we’re talking about is retroactivity—something that he had before, he no longer has. If we find this, if we uphold—
Daniel Matro (21:10):
I think he still has a chance to ask if the Commission lift the bar and argue that the public interest analysis has changed. Before, I think he also would’ve had a very difficult time arguing that he was entitled to participate in any other area of the industry. The effect on him was, essentially, as a functional matter, was simply to change when the formal bar came down. But he, you know, it was not as if he was free before Dodd-Frank to participate in these areas of the industry, given his conviction and the public interest considerations.
Speaker 4 (21:50):
I ask you this case, in the now consolidated type of imposition of broad bars, does the, in imposing the bar on with respect to the class of financial firms that there’s been no association with, does the Commission perceive itself as having to establish anything besides what it established with regard to the misbehavior in the firms that he was associated with? Is there really any, under the—in the post‑Dodd‑Frank world, is there really any mental process that goes on in creating a broad bar as opposed to a narrow bar?
Daniel Matro (22:36):
Well, I think, you know, all of the same public interest considerations would be taken into it. That would’ve been taken—
Speaker 4 (22:42):
Once the Commissioners arrived at it, were the class of firms that are clearly covered—would’ve been covered pre-Dodd-Frank. Does it do anything, exercise any thought, about the others? Just check a box?
Daniel Matro (22:58):
I don’t think it just checks the box. But even before Dodd-Frank, many of the same considerations that went into whether the public interest required a broker-dealer bar would’ve gone into whether the public interest required an advisor’s bar, municipal securities dealer bar. And when you have a case like this where Bartko was found guilty with overwhelming evidence of orchestrating—
Speaker 4 (23:24):
We’re dealing with an issue of law. It doesn’t really depend upon the particular degree of guilt in his case.
Daniel Matro (23:31):
Well, I guess I’m just using it to illustrate the—using his example to illustrate the point that the same considerations that bear on one bar will bear on another bar. And the Commission has to determine whether someone who has displayed the kind of conduct, misconduct that the person has, is a risk in different capacities of the securities industry. In this case, that wasn’t a difficult call. In other cases, depending on the facts and circumstances, it might be a more difficult call or a closer case.
Speaker 6 (24:08):
What’s the benefit to the SEC in this omnibus proceeding other than efficiency?
Daniel Matro (24:16):
Well, I think, so efficiency is certainly one benefit. Another is what something that Judge Williams alluded to, which is that it’s in a way a prophylactic measure that, you know, that makes it so that the Commission doesn’t have to wait until someone has potentially caused harm before it’s detected their attempts to associate. And the fact that Dodd-Frank was enacted to increase efficiency and as a prophylactic measure in that respect doesn’t make it retroactive, doesn’t mean that it necessarily has retroactive effect. But those are benefits that it does.
Speaker 6 (25:05):
All right. Any more questions? All right, thank you. Does Mr. Matsui have any time left? [inaudible] Why don’t you take two minutes.
Brian Matsui (25:21):
Thank you, Your Honor, I’ll just be very quick unless the court has any additional questions. Before Dodd-Frank, the SEC—as the SEC has acknowledged—had to prove and show that it was in the public interest to keep Mr. Bartko out. And now, after Dodd-Frank, Mr. Bartko with this collateral bar must prove that it’s in the public interest affirmatively to let him back in. And that’s a significant difference. This case is like Landgraf, where there are additional penalties that are being applied to past misconduct, which is the epitome of retroactivity. Unless there are any further questions.
Speaker 6 (25:56):
All right. Mr. Matsui, you were also appointed by the court to represent Mr. Bartko, and thank you for your assistance.
Brian Matsui (26:02):
Thank you, Your Honor.
Practices