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Securities & Exchange Commission v. Hold Brothers On-Line Investment Services LLC
Citations: 216 F. Supp. 3d 422; 2016 U.S. Dist. LEXIS 146929; 2016 WL 6208260Docket: 14-07286 (KSH) (CLW)
Court: District Court, D. New Jersey; October 24, 2016; Federal District Court
On November 11, 2014, the SEC filed an application to enforce a consent order against Hold Brothers On-Line Investment Services, LLC (HBOLIS) for over $2.5 million in disgorgement, civil penalties, and interest. The SEC seeks to hold Gregory and Steven Hold jointly and severally liable under Section 20(a) of the Securities Exchange Act of 1934 for approximately $2 million that remains unpaid. An amended application was filed on December 10, 2015, and respondents raised an 'unclean hands' defense, which the SEC has moved to strike. The SEC contends that such a defense cannot be asserted against a government agency acting in the public interest, citing the Third Circuit’s ruling in S.E.C. v. J.W. Barclay, Co., which established that the SEC qualifies as a 'person' under Section 20(a) and can pursue claims against control persons for unpaid obligations, regardless of existing SEC orders. The SEC argues that the infrequency of such claims does not alter the legal standard, asserting that an 'unclean hands' defense is not valid when the SEC acts in the public interest. However, the Court emphasizes that its authority to order disgorgement is rooted in the Exchange Act and highlights the potential for a legitimate 'unclean hands' defense, contradicting the SEC's position. The Court's decision will be based on the submitted documents. Barclay distinguishes between control person liability under Section 20(a) of the Exchange Act and the district court's jurisdiction to issue enforcement orders under Section 21(e). The SEC's claim for payment from Bruno under Section 20(a) arises from his established joint and several liability for an unpaid penalty, but this does not automatically grant the SEC the ability to enforce that claim under Section 21(e). The district court's finding that Bruno culpably induced non-payment establishes his obligation to pay the civil penalty; however, the SEC must prove that the Hold brothers are also control persons of HBOLIS who induced and participated in HBOLIS’s non-payment to hold them jointly and severally liable. As the SEC has yet to meet this burden of proof, the court lacks authority under Section 21(e) to issue an enforcement order regarding the Hold brothers, leading to the denial of the SEC's motion. The document concludes by denying the SEC's motion to strike the respondents' affirmative defense. Sections 20(a) and 21(e) outline the liabilities of controlling persons and the jurisdiction of district courts to issue compliance orders, respectively, emphasizing the importance of these provisions in enforcing SEC penalties effectively.