DENNIS J. MALOUF, Petitioner,
SECURITIES AND EXCHANGE COMMISSION, Respondent.
Petition for Review from an Order of the Securities &
Exchange Commission (SEC No. 3-15918)
Kenneth F. Berg, Ulmer & Berne LLP, Chicago, Illinois
(Alan M. Wolper and Heidi E. VonderHeide with him on the
briefs), for Petitioner.
Aguilar, Attorney, Appellate Staff, Civil Division, United
States Department of Justice, Washington, D.C. and Lisa
Helvin, Senior Counsel, Securities and Exchange Commission,
Washington, D.C. (Chad A. Readler, Acting Assistant Attorney
General, Mark R. Freeman, Attorney, and Joshua A. Salzman,
Attorney, Appellate Staff, Civil Division, United States
Department of Justice, Washington, D.C.; Michael A. Conley,
Solicitor, and Dominick V. Freda, Assistant General Counsel,
Securities and Exchange Commission, Washington, D.C., with
them on the briefs), for Respondent.
BRISCOE, HARTZ, and BACHARACH, Circuit Judges.
BACHARACH, CIRCUIT JUDGE.
Dennis Malouf occupied key roles at two firms. One of the
firms (UASNM, Inc.) offered investment advice; the other firm
(a branch of Raymond James Financial Services) served as a
broker-dealer. Raymond James viewed those dual roles as a
conflict, so Mr. Malouf sold the Raymond James branch. But
the structure of the sale perpetuated the conflict. Because
Mr. Malouf did not disclose perpetuation of the conflict,
administrative officials sought sanctions against him for
violating the federal securities laws.
administrative law judge found that Mr. Malouf had violated
the Securities Exchange Act of 1934, the Securities Act of
1933, the Investment Advisers Act of 1940, Rule 10b-5, and
Rule 206(4)-1. Given these findings, the judge imposed
sanctions. The SEC affirmed these findings and imposed
additional sanctions, including disgorgement of profits.
Malouf appeals the SEC's decision, and we affirm.
Mr. Malouf sells the Raymond James branch and uses that
branch to execute trades for UASNM's clients.
2007, Raymond James became concerned about the conflict of
interest between (1) Mr. Malouf's role at its branch
office and (2) his role at UASNM. These concerns led Raymond
James to ask Mr. Malouf to choose between the two roles. Mr.
Malouf opted to remain at UASNM and sold his Raymond James
branch to Mr. Maurice Lamonde for roughly $1.1 million, to be
paid in installments based on the Raymond James branch's
collection of securities-related fees.
facilitate the installment payments, Mr. Malouf routed bond
trades on behalf of his UASNM clients through the Raymond
James branch. This way, Mr. Lamonde would receive enough in
commissions to allow him to pay what he owed Mr.
Mr. Malouf was routing bond trades to the Raymond James
branch, he regularly failed to seek competing bids for the
trades. Mr. Malouf conceded that he should have sought
competing bids: UASNM's compliance procedures required
firm personnel to solicit bids from three different
broker-dealers before placing a trade, and Mr. Malouf
admitted that he probably could have received better prices
for his clients through competing bids.
UASNM makes misstatements concerning Mr. Malouf's
conflict of interest, and he does not correct these
Malouf bore responsibility for preparing UASNM's forms to
be filed with the SEC (referred to as "Forms
ADV") and ensuring the accuracy of the UASNM
website. But UASNM delegated compliance with these
responsibilities to a chief compliance officer and hired an
outside consultant to review UASNM's compliance
procedures and Forms ADV.
Malouf later acknowledged that his financial arrangement with
Mr. Lamonde had created a conflict of interest that should
have been disclosed. But Mr. Malouf did not disclose that
arrangement to UASNM's chief compliance officer or the
outside consultant. Because these individuals did not know
the details of the Malouf-Lamonde arrangement, UASNM not only
failed to disclose Mr. Malouf's conflict of interest but
also boasted that (1) UASNM's employees were not
receiving any commissions or fees from the Raymond James
branch and (2) UASNM was providing impartial advice untainted
by any conflicts of interest.
UASNM was boasting of its impartiality, Mr. Malouf was
participating in deciding what UASNM would disclose. He
acknowledged that he had reviewed some of the Forms ADV for
what to disclose and had at least some familiarity with the
contents of the website. But he took no steps to remedy
UASNM's misstatements or to disclose his own conflict of
UASNM discloses Mr. Malouf's conflict of
2010, UASNM's outside consultant learned that Mr. Malouf
had been receiving ongoing payments from Mr. Lamonde. With
this information, the consultant told Mr. Malouf and UASNM
that the payments had created a conflict of interest that
needed to be disclosed. UASNM disclosed the conflict roughly
nine months later.
The SEC finds that Mr. Malouf violated the federal securities
then brought an enforcement proceeding against Mr. Malouf.
Based on the evidence introduced in that proceeding, an
administrative law judge found that Mr. Malouf had (1) aided
and abetted UASNM's violations of the federal securities
laws and (2) committed violations of his own. In the
administrative appeal, the SEC agreed, finding that Mr.
Malouf had violated
• § 10(b) of the Securities Exchange Act of 1934
and Rules 10b-5(a) and (c),
• §§ 17(a)(1) and 17(a)(3) of the Securities
Act of 1933, and
• §§ 206(1) and 206(2) of the Investment
Advisers Act of 1940.
also found that Mr. Malouf had aided and abetted UASNM's
violations of §§ 206(4) and 207 of the Investment
Advisers Act and Rule 206(4)-1(a)(5).
The SEC imposed four sanctions on Mr. Malouf:
1. a lifetime bar from the securities industry,
2. an order to cease and desist violations of federal
3. an order to disgorge $562, 001.26 plus prejudgment
4. an order to pay a $75, 000 civil penalty.
On appeal, Mr. Malouf makes four arguments:
1. The appointment of his administrative law judge violated
the Constitution's Appointments Clause.
2. The SEC misinterpreted the securities laws.
3. The SEC's findings lack substantial evidence.
4. The sanctions should be vacated.
considering these appellate arguments, we credit the
SEC's factual findings if they are supported by
substantial evidence. Geman v. SEC, 334 F.3d 1183,
1188 (10th Cir. 2003). Substantial evidence is "such
relevant evidence as a reasonable mind might accept as
adequate to support a conclusion." C.E. Carlson,
Inc. v. SEC, 859 F.2d 1429, 1433 (10th Cir. 1988)
(quoting Consol. Edison Co. of New York v. NLRB, 305
U.S. 197, 229 (1938)).
Mr. Malouf forfeited his challenge under the Appointments
Malouf contends that the administrative law judge was not
validly appointed under the Constitution's Appointments
Clause. But Mr. Malouf forfeited this contention by failing
to present it in the SEC proceedings. Given the forfeiture, we
decline to reach the merits of this challenge.
Exhaustion of administrative remedies is mandatory under the
Constitution's Appointments Clause authorizes Congress to
delegate the appointment of "inferior officers" to
the President, courts, and department heads. U.S. Const. art.
II § 2, cl. 2. Mr. Malouf contends that his
administrative law judge was an "inferior officer"
who had not been appointed by the President, a court, or a
department head. See Lucia v. SEC, 138 S.Ct. 2044
(2018). For this contention, the threshold issue involves
exhaustion of administrative remedies.
underlying securities laws expressly require administrative
exhaustion. See 15 U.S.C. §§ 77i(a)
(Securities Act), 78y(c) (Securities Exchange Act), 80b-13(a)
(Investment Advisers Act). Given the statutory requirement, courts
lack discretion to excuse the failure to exhaust
administrative remedies. Ross v. Blake, 136 S.Ct.
1850, 1856-57 (2016). Failure to comply with a mandatory
exhaustion requirement prevents judicial review of the issue.
United States v. L.A. Tucker Truck Lines, Inc., 344
U.S. 33, 37 (1952).
Mr. Malouf lacks reasonable grounds to excuse his failure to
Malouf concedes that his administrative filings did not
address the Appointments Clause. We thus must decide whether
Mr. Malouf satisfies an exception to the exhaustion
Securities Act does not contain an express exception to the
exhaustion requirement, so we cannot excuse a failure to
satisfy the Securities Act's exhaustion requirement. 15
U.S.C. § 77i(a); see Ross, 136 S.Ct. at
1856-57. But the other two securities statutes (the
Securities Exchange Act and Investment Advisers Act) provide
an exception, allowing the claimant to avoid the exhaustion
requirement upon a showing of reasonable grounds. 15 U.S.C.
§§ 78y(c)(1), 80b-13(a).
Malouf argues that he had two reasonable grounds to skip the
1. It would have been futile to raise this challenge in the
2. The law changed after the SEC had ruled.
reject both arguments.
Raising the challenge would not have been futile.
Malouf argues that exhausting this challenge would have been
futile because the SEC would undoubtedly have denied relief.
We reject this argument.
failure to pursue administrative remedies may be excused when
exhaustion would have been futile. Gilmore v.
Weatherford, 694 F.3d 1160, 1169 (10th Cir. 2012). But
the futility exception is available only when the
administrative process would have been "clearly
useless." Id. (quoting McGraw v. Prudential
Ins. Co. of Am., 137 F.3d 1253, 1264 (10th Cir. 1998)).
Malouf has not shown that exhaustion of this challenge would
have been clearly useless. Indeed, when he filed his brief in
the SEC (on September 2, 2015), the SEC had not yet addressed
the applicability of the Appointments Clause to
administrative law judges.
the absence of any prior SEC decisions on the issue, Mr.
Malouf insists that the SEC would have rejected this
challenge. He points out that attorneys for the SEC had
previously argued that its administrative law judges were not
inferior officers subject to the Appointments Clause. But the
prior arguments by SEC attorneys do not mean that exhaustion
would have been futile. See Gilmore v. Weatherford,
694 F.3d 1160, 1169 (10th Cir. 2012) (rejecting an argument
that the agency's position had been
"predetermined" based on the agency's position
in three earlier cases); C.E. Carlson, Inc. v. SEC,
859 F.2d 1429, 1439 (10th Cir. 1988) ("[A]lthough
petitioners contend that raising [the] argument below would
have been futile given the SEC's past response, that
alone is not a sufficient ground for presuming
Malouf points out that after he began his administrative
appeal, the SEC frequently rejected challenges under the
Appointments Clause. But these decisions do not mean that the
SEC necessarily would have rejected a challenge by Mr.
Malouf. See Gilmore, 694 F.3d at 1169
("Requiring exhaustion of [claims asserted against
agency precedent or an agency's litigation position]
allows agencies to take into account the specific facts of
each matter, and to change course if appropriate."
(internal citation omitted)). Had Mr. Malouf exhausted
available administrative remedies, the SEC might have changed
its position on the Appointments Clause issue; and "if
it did not, the [SEC] would at least be put on notice of the
accumulating risk of wholesale reversals being incurred by
its persistence." United States v. L.A. Tucker Truck
Lines, Inc., 344 U.S. 33, 37 (1952).
Mr. Malouf has not shown that presentation of this challenge
to the SEC would have been clearly useless, we do not regard
exhaustion as futile.
No intervening change of law took place.
reject Mr. Malouf's reliance on an intervening change in
sake of argument, we can assume that an intervening change in
the law might constitute a reasonable ground to excuse the
failure to exhaust. But the law did not change.
Malouf bases his argument largely on Bandimere v.
SEC, 844 F.3d 1168 (10th Cir. 2016), and Lucia v.
SEC, 138 S.Ct. 2044 (2018). In these cases, our court
and the Supreme Court held that SEC administrative law judges
are inferior officers subject to the Appointments Clause.
See Bandimere, 844 F.3d at 1170; Lucia, 138
S.Ct. at 2049. The Courts decided these cases after the SEC
had ruled in Mr. Malouf's case, preventing him from
relying on either opinion during his administrative appeal.
But neither Bandimere nor Lucia changed the
law: In both cases, the Courts merely applied the Supreme
Court's 1991 opinion in Freytag v. Commissioner of
Internal Revenue, 501 U.S. 868 (1991).
Freytag, the Supreme Court held that special trial
judges for the Tax Court were inferior officers subject to
the Appointments Clause. 501 U.S. at 881. The Supreme
Court's decision hinged on the extensive powers granted
to special trial judges, which were significant enough to
characterize these judges as inferior officers. See
id. at 881-82 (noting that special trial judges
"take testimony, conduct trials, rule on the
admissibility of evidence, and have the power to enforce
compliance with discovery orders"). SEC administrative
law judges are "near-carbon copies" of the Tax
Court's special trial judges. Lucia, 138 S.Ct.
at 2052. So in Bandimere and Lucia, our
court and the Supreme Court regarded Freytag as
dispositive on the status of the SEC's administrative law
judges. Bandimere, 844 F.3d at 1174 ("In our
view, Freytag controls the result of this
case."); Lucia, 138 S.Ct. at 2052 (concluding
that Freytag's analysis "necessarily
decides this case").
SEC proceedings, Mr. Malouf could have invoked
Freytag, just as the petitioners in
Bandimere and Lucia had done. See
Island Creek Coal Co. v. Wilkerson, 910 F.3d 254, 257
(6th Cir. 2018) (stating that no precedent would have
prevented a party from bringing an Appointments Clause
challenge before Lucia, which itself "noted
that existing case law 'sa[id] everything necessary to
decide this case'" (quoting Lucia v. SEC,
138 S.Ct. 2044, 2053 (2018))). Thus, Mr. Malouf cannot avoid the
exhaustion requirement based on an intervening change in the
law. See Saffle v. Parks, 494 U.S. 484, 488 (1993)
(stating that a rule is not new if the court "would have
felt compelled by existing precedent" to conclude that
the rule being urged "was required by the
Malouf failed to administratively exhaust his challenge under
the Appointments Clause. We thus conclude that Mr. Malouf
forfeited this challenge.
The SEC reasonably found that Mr. Malouf had violated Rule
10b-5  and § 17(a) of the
Securities Act of 1933.
found that Mr. Malouf had failed to correct material
. Rule 10b-5(a) and (c) and
. the Securities Act of 1933 § 17(a)(1)
purposes of this appeal, Mr. Malouf does not deny that he
failed to correct UASNM's misstatements. But he argues
that a failure to correct UASNM's misstatements does not
constitute a separate violation of the securities laws. We
Rule 10b-5(a) and (c) and § 17(a)(1) and (3) of the
Securities Act of 1933 encompass the failure to correct
UASNM's false or misleading statements.
relevant provisions ban two broad categories of conduct. The
first category involves the making of a materially untrue or
misleading statement. The second category involves employment
of a fraudulent or deceptive scheme. Addressing the second
category, the SEC found that Mr. Malouf had failed to correct
UASNM's false or ...