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Securities and Exchange Commission v. Yu

September 25, 2002

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
DAVID CHEN YU AND QUEST CAPITAL STRATEGIES, INC., DEFENDANTS.



The opinion of the court was delivered by: Paul L. Friedman United States District Judge

MEMORANDUM OPINION

This case came before the Court for a hearing on plaintiff's motion for a preliminary injunction on September 17, 2002. Based upon plaintiff's motion, memorandum of law and exhibits, defendants' opposition and exhibits, and plaintiff's reply, as well as the arguments presented in Court, the Court has determined that plaintiff is entitled to a preliminary injunction.

I. BACKGROUND

The Securities and Exchange Commission brings this action pursuant to the Securities Exchange Act of 1933, 15 U.S.C. § 77a, et seq., which authorizes the Commission to seek a preliminary injunction "[w]henever it shall appear to the Commission that any person is engaged or is about to engage in acts or practices constituting a violation of any provision of this chapter, the rules or regulations thereunder . . . ." 15 U.S.C. § 78u(d)(1). Under the law of this Circuit, the SEC is entitled to a preliminary injunction if "the evidence establishes a strong prima facie case of previous violations and a reasonable likelihood that the wrong will be repeated." SEC v. Int'l Loan Network, Inc., 770 F. Supp. 678, 688 (D.D.C. 1991); aff'd, 968 F.2d 1304 (D.C. Cir. 1992). See also SEC v. First City Financial Corp., 890 F.2d 1215, 1228 (D.C. Cir. 1989) (applying "reasonable likelihood" standard); SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1168 (D.C. Cir.1978) (same). "[U]nlike a private litigant, the SEC is not required to show irreparable injury or a balance of equities in its favor." SEC v. Life Partners, Inc., 898 F. Supp. 14, 18 (D.D.C. 1995); rev'd and remanded on other grounds, 87 F.3d 536 (D.C. Cir. 1996).

In this action, the SEC seeks to enjoin David Chen Yu and Quest Capital Strategies, Inc. on the grounds that (1) Yu has violated and is likely to continue to violate an October 15, 2001 Order of the Commission barring him from associating with any broker-dealer in a supervisory capacity, and (2) both Yu and Quest have violated and are likely to continue to violate Section 15(b)(6)(B) of the Securities Act, which makes it unlawful to act in contravention of such a supervisory bar. See 15 U.S.C. § 78o(6)(B); SEC Motion for Preliminary Injunction at 4, 8 ("SEC Motion"); SEC Motion, Appendix A, In the matter of Quest Capital Strategies, Inc. and Yu, 2001 SEC LEXIS 2147 at *30 (October 15, 2001) ("the Order"). Based on these alleged violations, the SEC seeks to enjoin Yu from violating the Commission's Order and to enjoin Yu and Quest from violating Section 15(b)(6)(B) of the Securities Act. See SEC Motion at 1.

II. ANALYSIS

The Court finds that the SEC has made out a "strong prima facie case" that defendants have violated the Commission Order and/or the Securities Act and that there is a "reasonable likelihood" of future violations by both defendants. The SEC therefore is entitled to the requested preliminary injunction. See SEC v. Int'l Loan Network, Inc., 770 F. Supp. at 688.

A. Evidence of Violations

By Order of October 15, 2001, the Securities and Exchange Commission barred Yu from "association with any broker-dealer or investment adviser in a supervisory capacity." In the matter of Quest and Yu, 2001 SEC LEXIS 2147 at *31. While there is no precise definition of "supervisory capacity" in the Securities Act, the Commission has long taken the position that a person's classification as a "supervisor" turns on "whether, under the facts and circumstances of a particular case, that person has a requisite degree of responsibility, ability or authority to affect the conduct of" employees. In the Matter of Gutfreund, Exchange Act Release No. 31554, 1992 WL 362753 at *15 (1992). Plaintiff argues that defendant Yu has violated this Order by retaining responsibilities at Quest that constitute "association with [a] broker-dealer . . . in a supervisory capacity," In the matter of Quest and Yu, 2001 SEC LEXIS 2147 at *31, and that Quest has violated Section 15(b)(6)(B) of the Securities Act by allowing Yu to retain a supervisory role. Defendant Yu responds that he has complied with the Commission Order by delegating all supervisory responsibilities at Quest to other personnel and by no longer making any supervisory decisions or decisions pertaining to investment of client money. See Defendants David Chen Yu and Quest Capital Strategies, Inc.'s Memorandum of Law in Opposition to Plaintiff's Motion for a Preliminary Injunction at 2.

Although the precise contours of Yu's authority at Quest remain unclear, the Court finds that the SEC has presented strong evidence that Yu retains a significant degree of supervisory control in violation of the Commission's Order. For instance, on April 18, 2002, many months after the Commission's Order, Yu stated in a letter to the SEC that "we" will consider terminating some registered representatives and that only the day before, Yu had personally interviewed a candidate for the position of Inspector at Quest, a key position that is central to Quest's plan for compliance with the Commission Order, according to Yu. See SEC Motion, Exhibit G, Letter from David Chen Yu to SEC, April 18, 2002 at 5-6 ("April 18, 2002 Letter"). Such involvement in the hiring and potential termination of key personnel indicates that Yu has retained supervisory power at Quest to "affect the conduct of the employee[s] whose behavior is at issue" in compliance with the Commission's Order. See In the Matter of Gutfreund, 1992 WL 362753 at *15.

In addition, Yu's former attorney stated in a May 17 letter to the SEC that Yu's "secondary responsibilities" include "[a]dvising on compliance issues, making decisions on borderline registered representative applicants and supervising compliance personnel." SEC Motion, Exhibit H, Letter from D.W. Duke to Leslie Kazon, SEC Division of Enforcement, May 17, 2002 at 2. Despite the assertion that "Mr. Yu has complied with [the Commission's] Order by delegating all responsibility for supervising brokers to Quest's compliance officer Steve Skytte," id., Yu's ongoing responsibilities, as detailed by himself and his counsel, reveal his continued exercise of supervisory control over brokers and other key employees at Quest. At the September 17, 2002 hearing on plaintiff's motion for preliminary injunction, counsel for defendant Yu confirmed that Yu has consulted on issues including the termination of registered representatives, the supervision of compliance personnel and the hiring of a compliance Inspector. Counsel stated that even he is not sure whether Yu continues to have the "final word" on these issues. Even if characterized as "secondary," these responsibilities render Yu a supervisor in violation of the Commission's Order.

It is also worth noting that the individual to whom Yu purportedly delegated supervisory responsibility, Steve Skytte, left Quest on May 31, 2002. See Reply Declaration of Sandeep Savla in Support of Plaintiff's Motion for Preliminary Injunction and Other Equitable Relief at ¶ 2. Whatever the reason, the departure of Mr. Skytte undermines defendants' argument that Yu has fully delegated supervisory responsibility. Given the fact that neither Yu nor Quest has submitted reliable evidence of supervisory control by another individual, Yu cannot be said to have delegated fully his powers of supervision in compliance with the Commission's Order. See In the matter of Universal Heritage Investments Corp., SEC Release No. 19308, 1982 SEC LEXIS 210 at *14 (1982) ("The president of a broker-dealer is responsible for compliance . . . unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person's performance is deficient."

The Court also finds that Quest has violated Section 15(b)(6)(B) of the Securities Act by permitting Yu to continue to act as a supervisor at Quest. It is undisputed that both Yu and Quest are and consistently have been aware of the Commission's Order barring Yu from a supervisory role at Quest. Thus, by allowing Yu to retain his supervisory responsibilities, as discussed above, Quest has violated Section 15(b)(6)(B)(ii) of the Securities Act, which provides that it shall be unlawful for a broker or dealer knowingly to permit a person to remain ...


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