The U.S. Court of Appeals for the Second Circuit declined Wednesday to review a decision by the U.S. Securities and Exchange Commission to uphold the lifetime barring of former broker Talman Harris from the financial industry.
The panel, composed of Judges Dennis Jacobs, Jose Cabranes and Raymond Lohier Jr., denied Harris’ petition for review of a March 31, 2016, SEC decision that sustained the findings of the Financial Industry Regulatory Authority Inc.’s adjudication council. The industry oversight group found Harris and a business partner broke federal securities law, as well as FINRA rules, when they recommended customers purchase shares in a home appliance company, without disclosing that they had received a $350,000 “advisory fee” from the same company two months before.
This and “aggravating factors” lead to FINRA’s permanent bar of the two from associating with any of the thousands of FINRA member firms.
On appeal, Harris argued that the payment was not a violation of his Exchange Act duties to disclose unless a “transactional nexus” was present. That is, only if the $350,000 was dependent on the sale of the company’s securities, and the securities were purchased by customers to whom such a purchase was suggested.
The panel appeared disinclined to take on Harris’ view, noting that he offered no precedent for a “transactional nexus” requirement.
“A broker who chooses which stocks to recommend to clients is required to disclose all material information that could affect his client’s purchase decision,” the panel stated.
Harris went on to challenge the scienter requisite in the security violation charge, as he was acting in a gray area of the law. However, the SEC’s decision was supported by “substantial evidence,” the panel said, adding that Harris was a “seasoned broker who should have known he had a duty to disclose this information.”
Harris’ arguments that FINRA’s permanent bar, and the SEC’s upholding of that bar, were excessive and oppressive fared little better. The panel found that the SEC did properly consider mitigating factors under FINRA’s sanction guidelines, as well as provide an adequate explanation for why the bar was needed and remedial.
Stradley Ronon Stevens & Young securities, litigation and enforcement practice co-chair Paula Shaffner led the firm’s representation of Harris on appeal. She did not respond to a request for comment.
SEC senior counsel Benjamin Vetter represented the government. A spokesman for the commission did not return a request for comment.