United States District Court, S.D. New York
MEMORANDUM AND ORDER
P. KEVIN CASTEL, District Judge.
The United States Securities and Exchange Commission ("SEC") and defendant James T. Crane have reached a proposed settlement to resolve the SEC's action for twelve violations of the Securities and Exchange Act of 1934 ("Exchange Act"), rules promulgated thereunder, and the Sarbanes-Oxley Act of2002 ("Sarbanes-Oxley"). The settlement contemplates the entry of permanent injunctions against Mr. Crane, the imposition of a $150, 000 penalty, and the entry of an order barring Crane from serving as a director or officer of a public company. The parties have submitted to the Court for decision the length of the officer and director bar. For the purposes of the determination, the SEC and the defendant agree that the Court should accept the allegations of the SEC's complaint to be true. (Consent¶ 5, Dkt. No. 39-1) The SEC seeks a lifetime ban. Crane seeks a ban of five years starting from the date of his resignation as CFO of Subaye in March 2011. For the reasons set forth below, the Comt will impose a lifetime ban against Crane and approve the proposed consent decree.
Section 21(d)(2) of the Exchange Act provides that in a civil enforcement action brought by the SEC:
the court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 78j(b) of this title or the rules or regulations thereunder from acting as an officer or director of any issuer that has a class of securities registered pursuant to section 78 l of this title or that is required to file reports pursuant to section 78 o (d) of this title if the person's conduct demonstrates unfitness to serve as an officer or director of any such issuer.
15 U.S.C. § 78u(d)(2). In SEC v. Patel , 61 F.3d 137, 141 (2d Cir. 1995), the Second Circuit identified six non-exclusive factors that were "useful in making the unfitness assessment":
(1) the egregiousness of the underlying securities law violation; (2) the defendant's repeat offender status; (3) the defendant's role or position when he engaged in the fraud; (4) the defendant's degree of scienter; (5) the defendant's economic stake in the violation; and (6) the likelihood that misconduct will recur.
Id. (citing Jayne W. Barnard, When Is a Corporate Executive "Substantially Unfit to Serve"?, 70 N.C. L. Rev. 1489, 1492-93 (1992)).
In SEC v. Bankosky , 716 F.3d 45, 48 (2d Cir. 2014) the Second Circuit confirmed that the Patel factors remained applicable after Congress's 2002 amendment of section 21(d)(2), which replaced the phrase "substantial unfitness" with the word "unfitness." The court reasoned that the amendment, "by lowering the threshold of misconduct required to impose the director and officer bar, did not undermine the usefulness of the Patel factors, which indicate where evidence of unfitness might be found in a defendant's misconduct." Id . The court further explained that "the Patel factors are neither mandatory nor exclusive; a district court may determine that some of those factors are inapplicable in a particular case and it may take other relevant factors into account as it exercises its substantial discretion' in deciding whether to impose the bar and, if so, the duration, so long as any bar imposed is accompanied with some indication of the factual support for each factor that is relied upon." Id. at 48-49 (citing Patel at 141).
Because a lifetime bar constitutes a "loss of livelihood and the stigma attached to permanent exclusion from the corporate suite, " the Second Circuit has cautioned that a district court imposing such a ban must either recognize past violations or "articulate the factual basis for a finding of the likelihood of recurrence." Patel , 61 F.3d at 142.
A. A Lifetime Ban Under Section 21(d)(2) Is Appropriate
The parties stipulated in the consent judgment that, solely for the purposes of the parties' request for this Court's determination of the length of an order barring Crane from serving as an officer or director of a public company, the allegations of the complaint shall be accepted as true by the Court. (Consent ¶ 5, Dkt. No. 39-1)
Applying the Patel factors to the facts of this case, this Court concludes that a lifetime bar is appropriate. First, Crane's misconduct was egregious. He drafted and signed numerous SEC filings that contained substantial misrepresentations of Subaye's business and financial condition, reporting a robust cloud computing business, substantial assets, millions of dollars of revenues, thousands of customers, and over 1, 400 employees. In reality, the company had little to no technological infrastructure, $200, 000 in cash, no verifiable revenues or customers, and no employees. Second, Crane's role in the fraud was substantial: as the CFO of the company, Crane was primarily responsible for ensuring the accuracy of the SEC filings he drafted and signed, and for coordinating audits of the company. With respect to Crane's economic stake in the violation, this factor is neutral: the SEC's ...