In 2003, I sold $105,000 in stock in my own small investment advisory firm to people I had served from ten to twenty years — one since prior to my birth. In each case, the amount invested was minuscule as a percentage of their net worth. I offered every one of them a full refund. Not one wanted it.
I should have known that a registered investment adviser cannot intermingle his own business ownership with his clients. My recordkeeping wasn't where it needed to be, and I didn't document the loan the way I should have.
I own that.
What I did not do: defraud anyone.
The SEC had no interest in me until the Texas State Securities Board — with whom I had an entirely separate history — notified them repeatedly. That story is told elsewhere on this site. What matters here is what happened next.
I fought the SEC's enforcement action alone — no attorney — through an administrative hearing before an SEC-appointed judge, an appeal to the full Commission, and then to the United States Court of Appeals for the D.C. Circuit. My clients signed affidavits saying the conduct wasn't material to them. The SEC said their opinion didn't count. The standard is objective, not subjective — meaning what a hypothetical "reasonable investor" might think matters more than what the actual investors said under oath.
When the D.C. Circuit affirmed without meaningful explanation, I petitioned the Supreme Court of the United States, arguing that the SEC had imposed its harshest sanction — a permanent industry bar — without the justification its own precedent required, that the D.C. Circuit had rewritten the Supreme Court's materiality standard, and that the punishment was arbitrary and capricious.
Certiorari was denied in 2010. The odds are less than two percent.
Fourteen years later, in SEC v. Jarkesy (2024), the Supreme Court ruled that the SEC's use of in-house administrative courts to impose civil penalties violated the Seventh Amendment right to a jury trial. The constitutional arguments I raised as a layperson in 2009 were vindicated by the highest court in the land — just not in time for me.
— David H. DisraeliThe petition is published here exactly as filed.
Pro Se · Supreme Court of the United States · No. 09-941 · 2009
The complete petition is reproduced below in full for accessibility and indexing. The original PDF is available for download above.
The Supreme Court of the United States
On Petition for a Writ of Certiorari to the United States Court of Appeals for the D.C. Circuit
David H. Disraeli, Pro Se
v.
The United States Securities and Exchange Commission
Statement of Jurisdiction · Statutes and Regulations · Statement of the Case · Argument · Materiality · Prayer
This Court has jurisdiction because this petition involves a final decision of a United States Court of Appeals. The Appeals Court for the D.C. Circuit issued a final decision in this case on June 19, 2009 and denied rehearing En Banc on August 31, 2009. The underlying case is a final decision by the United States Securities and Exchange Commission entered on December 21, 2007. Jurisdiction is provided by 28 U.S.C. §1254(1).
This case involves Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5, Section 206 of the Investment Advisers Act of 1940 and Advisers Act Rule 206(4)-4(a)(1), codified as: 15 U.S.C. §§ 77q(a), 78j(b), 80b-6; 17 C.F.R. §§ 240.10b-5, 275.206(4)-4(a)(1).
This case was a review of a decision by the Court of Appeals for the D.C. Circuit regarding its review of a final decision and order issued by the U.S. Securities and Exchange Commission (hereafter "the SEC"). The Court of first instance is any U.S. Court of Appeals for review of orders in relation to violations of 15 USC § 80b-13(a), 15 USC §77i(a), and 15 USC §78y(a). The D.C. Court of Appeals affirmed the decision of the SEC but provided no explanation for their decision. This case centered around securities fraud, misappropriation of funds, and willfully making false statements to the SEC in the filing of form ADV. The Commission found that there was an offering of securities and the use of offering proceeds did not comport with the offering document, and that various other defects in the offering document amount to fraud.
This case is extremely important because if left to stand, the Appeals Court for the DC Circuit has lowered the bar for what is required to rob one of his livelihood and bar him from the securities industry. The issue of a permanent bar has been addressed by this Court and other Appeals Courts. This case is also important because, if left to stand, it allows the DC Circuit to overlook the SEC's decision to rewrite the law regarding the "Reasonable Investor Standard." The Reasonable Investor standard lies at the heart of every securities fraud case and many other types of securities litigation. The SEC also abused its discretion by ordering the securities industry's "Death Penalty."
Petitioner filed his appeal to challenge the Commission's finding of fraud which is not supported by the substantial evidence, and the severity of the sanctions imposed, which Petitioner submits are arbitrary and capricious. The Appeals Court ruling does not address the standard test for materiality in securities fraud cases set forth by the U.S. Supreme Court, nor its own and sister circuits' precedent requiring the SEC to fully explain its choice of sanction in lieu of other sanctions in its arsenal.
The 5th Circuit opined in Steadman v. SEC, 603 F.2d 1126, 1137:
"When the Commission chooses to order the most drastic remedies at its disposal, it has a greater burden to show with particularity the facts and policies that support those sanctions and why less severe action would not serve to protect investors."
And went on to say:
"In our view, however, permanent exclusion from the industry is 'without justification in fact' unless the Commission specifically articulates compelling reasons for such a sanction. For example, the facts of a case might indicate a reasonable likelihood that a particular violator cannot ever operate in compliance with the law, or might be so egregious that even if further violations of the law are unlikely, the nature of the conduct mandates permanent debarment as a deterrent to others in the industry."
The SEC decision fails to articulate any compelling reasons for the issuance of the death penalty, but more specifically why no other sanction would suffice. In his brief before the D.C. Circuit, Petitioner strongly asserted the fact that the SEC decision failed to address why it chose the particular sanction it chose and why no other sanction would suffice (the DC court sent the Paz case back for this very reason). The SEC opted not to counter in their reply briefs.
This very Appeals Court opined in Paz Sec. v. SEC as recently as 2007:
"We do not suggest the Commission must make an on-the-record finding that a sanction is remedial, but it must explain why imposing the most severe, and therefore apparently punitive sanction is, in fact, remedial, particularly in light of the mitigating factors brought to its attention." (Paz Sec. v. SEC, 494 F.3d 1059, 1065)
Although the SEC was formally put on notice that their opinion was void of any discussion of alternative sanctions, they chose not to address them. Petitioner submits that the SEC had no meaningful way to explain their actions because they were arbitrary. Therefore, the DC Circuit ruling conflicts with its opinion in Paz and the 5th Circuit's opinion in Steadman.
In order to prevail in an administrative context in a 10b-5 securities fraud case, the SEC must show, based on a preponderance of the evidence, that there was a material fact misrepresented or omitted. 15 U.S.C. §77q(a) states:
(a) Use of interstate commerce for purpose of fraud or deceit — It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly — (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
The Appeals Courts and the Supreme Court have traveled this road many times, yet the DC Circuit would re-write prevailing law if their decision stands.
SEC v. MacDonald, 699 F.2d 47 (1st Cir. 1983):
"The proper standard for determining whether an omitted fact was material in a Rule 10b-5 case is the same as that formulated by the Supreme Court in TSC Industries, Inc. v. Northway, Inc., 1976, 426 U.S. 438, a proxy-dispute case, namely, whether there is 'a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder.' Id. at 449 . . . the Court in TSC Industries stressed that materiality depends upon what a reasonable shareholder would, not might, consider important." (SEC v. MacDonald, 699 F.2d 47, 49)
SEC v. Mayhew, 121 F.3d 44 (2nd Cir. 1997):
"The materiality of information is a mixed question of law and fact. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1466 (2d Cir. 1996). 'The legal component depends on whether the information is relevant to a given question in light of the controlling substantive law. The factual component requires an inference as to whether the information would likely be given weight by a person considering that question.' Id. at 1466-67. To be material, the information need not be such that a reasonable investor would necessarily change his investment decision based on the information, as long as a reasonable investor would have viewed it as significantly altering the 'total mix' of information available. TSC Indus., 426 U.S. at 449; Flynn v. Bass Bros. Enters., 744 F.2d 978, 985 (3d Cir. 1984). Material facts include those 'which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company's securities.' SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968). They include any fact 'which in reasonable and objective contemplation might affect the value of the corporation's stock or securities.' Id. at 849." (SEC v. Mayhew, 121 F.3d 44, 51-52)
The gravamen of Petitioner's position is as follows: He sold $105,000 of stock in his own investment advisory firm to friends and family, mostly through oral communication but also through a written offering document. The SEC found that $84,500 found its way into Petitioner's personal bank account through a loan. Although Petitioner admits this loan was not disclosed to the investors, he submits that it was immaterial. The SEC refused to analyze its own admitted exhibits to determine where these funds ultimately went. These jointly admitted exhibits show that the vast majority of the funds wound up in the business, as well as Petitioner's own funds. Poor bookkeeping is not fraud.
The SEC also ignored sworn statements from all but one shareholder stating that the departure, if it occurred, was not material to them. The SEC largely ignored these affidavits. The SEC also ignored $70,000 in dividends paid through management fee offsets — $70,000 of cash that the shareholders would have otherwise had to pay for management fees — as well as cash payments Petitioner made against the loan.
The most offensive departure from prevailing law was the SEC's failure to consider the "total mix of facts" when determining the materiality of a particular fact. For example, in his offering document, Joint Exhibit JDA 72, Petitioner disclosed a number of highly negative facts that could have resulted in the total failure of the enterprise:
The "total mix of facts" certainly should encompass disclosures that included many risks that could have rendered Lifeplan Associates defunct. Again, these issues were brought to the attention of both the SEC and the Appeals Court. At the end of their opinion, the Appeals Court even ruled that Petitioner could offset his disgorgement obligation if he could show that monies were repaid to the operating entity — something the SEC refused to do. Therefore, there are serious questions as to how much, if any, ill-gotten gains exist, left unresolved by the DC Circuit.
"All the circumstances" (TSC Industries, Inc.) also should have included the ten to twenty year relationship that Petitioner had with each of his shareholders — one since prior to Petitioner's own birth — and the fact that Petitioner did after all accomplish the main objectives of the business plan.
Petitioner prays that this Petition for Certiorari be granted to resolve the conflicts between the DC Circuit and the Supreme Court, the DC Circuit and the 5th Circuit, and the DC Circuit and itself.
Respectfully Submitted,
David H. Disraeli, Pro Se
Cedar Park, Texas