By Robert Fusfeld 

(Robert Fusfeld is on the faculty of the Institute for Public Policy Studies at the University of Denver where he teaches graduate and undergraduate courses.  From 1975 until his retirement in 2006 he was an SEC enforcement attorney and managed the SEC's Denver office trial unit for 15 years. He publishes a blog commenting on SEC administrative proceeding decisions at www.secteaparty.blogspot.com). 

The SEC issued its first substantive administrative proceeding decision in a contested matter this calendar quarter on Sept. 21.  So the SEC's administratively based enforcement program - while apparently on life support is still hanging on, if only barely. 

This now apparently rare administrative case involved a Rule 102(e) proceeding against a CPA who had previously been enjoined in federal court from violating internal accounting controls and books and records provisions of the law when he was the controller of a public company from 2000 to 2005.  See, Matter of Pattison,  Release No. 67900, Release No. 34-67900, Release No. AE - 3407, 2012 WL 4320146 (Sec., Sept. 20, 2012). 

As is standard practice in such matters based on injunctive actions, the administrative law judge ruled on motions for summary disposition — there was no trial. Pattison was found after a jury trial to have committed his violations in connection with backdating of stock options in September 2010.  He was enjoined and ordered to disgorge $74,000 and pay a civil penalty of $50,000. His appeal to the 9th Circuit is pending. 

The district court found that Pattison: 

•  Systematically backdated stock option grants on a regular basis,  

•  Misrepresented the dates of actual approval by the company's CEO,  

•  Failed to affirmatively disclose the practice to the Board and auditors,  

Failed to insure that an accounting expense was taken for the in-the-money option grants he facilitated 

•  In doing so he circumvented internal  controls against backdated options. 

As the District Court noted, the "jury found that [he] acted knowingly when he falsified records and/or circumvented internal controls to make it appear that no stock option grants were backdated and below fair market value." 

The Commission's opinion reiterates its long held policy of using administrative rule 102(e) against : 

 [P]rofessionals who do not possess the requisite qualifications to represent others, lack character or integrity, engage in unethical or improper professional conduct, have violated or have been enjoined from violating or aiding and abetting the violation of the federal securities laws, have had their license to practice revoked or suspended, or have been convicted of a felony or misdemeanor involving moral turpitude. 

Given the injunctive order and findings of the district court, the Commission noted that the only substantive issue in the case was whether Pattison could show that he should not be sanctioned, and if not, what sanction is appropriate. 

Pattison's primary argument was that it was improper for the Commission to base its proceeding solely on the injunction under Rule 102(e)(3) without any showing of mens rea as required under Rule 102(e)(1) and (2).  The Commission rejected this argument.  It noted that "a finding by a court of competent jurisdiction that a respondent has violated securities laws, or that an injunction against future violations is warranted, is a sufficient standard of unfitness for practice before the Commission that we 'will afford a hearing only to consider mitigating or other factors why neither censure nor temporary or permanent disqualification should be imposed.'" 

Last, the Commission found that Pattison acted with a high degree of scienter and therefore barred him from appearing or practicing before the Commission. 

This opinion is useful not so much for the entirely expected conclusion it reached, but for its comprehensive summary of Commission Rule 102(e) decisions.