United States Court of Appeals
For the First Circuit
SECURITIES & EXCHANGE COMMISSION,
JUSTIN F. FICKEN,
MARTIN J. DRUFFNER, SKIFTER AJRO, JOHN S. PEFFER,
MARC J. BILOTTI, AND ROBERT E. SHANNON,
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Boudin and Dyk,* Circuit Judges,
and DomÃnguez,** District Judge.
Dominick v. Freda, with whom Jacob H. Stillman and John
W. Avery were on brief, for plaintiff-appellee.
Gary G. Pelletier, for defendant-appellant.
October 20, 2008
Of the Federal Circuit, sitting by designation.
Of the District of Puerto Rico, sitting by designation.
DYK, Circuit Judge. The Securities and E xchange
Commission ("SEC") filed a civil complaint against defendant-
appellant Justin F. Ficken ("Ficken") and others in the United
States District Court for the District of Massachusetts, alleging
violations of 15 U.S.C. § 77q(a), 15 U.S.C. § 78j(b), and 17 C.F.R.
§ 240.10b-5. The SEC alleged that Ficken intentionally concealed
his identity and the identities of his clients while trading shares
of mutual funds, in order to mislead mutual fund companies into
processing trades that they otherwise would not have allowed. The
district court granted the SEC's motion for summary judgment
against Ficken, finding no genuine issue of material fact as to any
relevant issue, including scienter. SEC v. Druffner, 517 F. Supp.
2d 502 (D. Mass. 2007). We affirm.
The federal securities laws ban fraud and other deceptive
practices in connection with the purchase and sale of securities.
See Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a) (prohibiting
fraud and material misrepresentations or omissions in the offer or
sale of securities); Securities Exchange Act of 1934 § 10(b), 15
U.S.C. § 78j(b) (prohibiting manipulative or deceptive practices in
violation of SEC regulations in the purchase or sale of
securities); SEC Rule 10b-5, 17 C.F.R. 240.10b-5 (prohibiting fraud
and material misrepresentations or omissions in the purchase or
sale of securities). A misrepresentation is material if there is
[End Page 2]
a substantial likelihood that the misrepresentation would affect
the behavior of a reasonable investor. See Basic Inc. v. Levinson,
485 U.S. 224
, 231-32 (1988). Proof of scienter is required to
establish violations of § 17(a)(1), § 10(b), or Rule 10b-5, while
negligence is sufficient to establish liability under § 17(a)(2) or
§ 17(a)(3). See Aaron v. SEC, 446 U.S. 680
, 694-97 (1980); SEC v.
Fife, 311 F.3d 1
, 9-10 (1st Cir. 2002).
Scienter is an intention "to deceive, manipulate, or
defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185
, 194, and n.12
(1976). In this circuit, proving scienter requires "a showing of
either conscious intent to defraud or "˜a high degree of
recklessness.'" ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46
58 (1st Cir. 2008) (quoting Aldridge v. A.T. Cross Corp., 284 F.3d 72
, 82 (1st Cir. 2002)). "Recklessness is "˜a highly unreasonable
omission, involving not merely simple, or even inexcusable
negligence, but an extreme departure from the standards of ordinary
care, and which presents a danger of misleading buyers or sellers
that is either known to the defendant or is so obvious the actor
must have been aware of it.'" SEC v. Fife, 311 F.3d at 9-10
(quoting Greebel v. FTP Software, 194 F.3d 185
, 198 (1st Cir.
The question here is whether defendant Ficken's conduct
as a broker violated the securities laws. Ficken worked as a
broker in a Boston branch office of Prudential Securities, Inc.
[End Page 3]
("PSI"), from October 1999 to September 2003. He purchased and
sold mutual fund shares on behalf of customers. In doing so he
engaged in market timing. "Market timing" is a mutual fund share
trading strategy that "exploit[s] brief discrepancies between the
stock prices used to calculate the shares' value once a day, and
the prices at which those stocks are actually trading in the
interim." Kircher v. Putnam Funds Trust, 547 U.S. 633
, 637 n.4
(2006). The price of mutual fund shares is calculated at the close
of U.S. trading, but in the case of a foreign stock exchange listed
company, the share price calculation uses the latest foreign market
closing prices. Because of time zone differences between the daily
closings of the foreign and U.S. markets on which a mutual fund's
portfolio of securities trades, someone engaging in market timing
can buy or sell mutual fund shares based on the foreign markets'
closing prices but utilizing information that becomes known after
the foreign markets closed (information that will not be reflected
in the foreign market closing prices until the next day).
Although market timing is not illegal, mutual fund
companies often prohibit market timing in order to protect long-
term shareholders from dilution and other adverse effects caused by
rapid and repeated short-term market timing transactions.1 When a
See Staff Report to the United States Securities and
Exchange Commission, Exemptive Rule Amendments of 2004: The
Independent Chair Condition (April 2005), at 32, available at
[End Page 4]
mutual fund company that prohibits market timing detects market
timing, the mutual fund company often blocks future trades
utilizing that broker's so-called financial advisor ("FA") number
and/or the customer account number used in the market timing trade.
Ficken and other brokers at PSI were assigned FA numbers.
These FA numbers allowed brokers to open customer accounts, execute
trades, and track commissions. Each customer account had an
individual number assigned to it, and each customer account number
had an individual FA number assigned to it. Brokers used a
customer's account number to submit mutual fund transactions on
behalf of the customer. Ficken had at least seven FA numbers
registered under his name alone or jointly with one or more of the
brokers in his group at PSI, and his group eventually opened over
170 customer accounts for only five customers. Ficken and the
brokers in his group at PSI used these FA numbers and customer
account numbers in trading with over 50 mutual fund companies in
amounts exceeding $1 billion.
While Ficken worked at PSI, several mutual fund companies
suspected PSI brokers of market timing and consequently blocked
trading under some of Ficken's FA numbers, customer account
numbers, or both. It is undisputed that after mutual fund
companies blocked Ficken's FA numbers or customer account numbers,
Ficken then used new FA or customer account numbers, or both, to
trade the companies' mutual funds.
[End Page 5]
The SEC's theory was that Ficken violated federal
securities laws by utilizing new FA numbers and customer account
numbers to evade mutual fund companies' restrictions on trading
using existing FA and customer account numbers. Ficken's defense
was that his use of new customer account numbers and FA numbers was
not intended to mislead mutual fund companies or inaccurately
identify customers and brokers, but was instead done for legitimate
Ficken resigned from PSI in 2003 following allegations
that his group of brokers at PSI was involved in improper market
timing activities. On October 1, 2003, he testified in a
proceeding conducted by the SEC as part of its investigation of
PSI. Ficken did not assert his Fifth Amendment privilege against
self-incrimination in the proceeding. On December 17, 2003, Ficken
testified in an investigation proceeding conducted by the National
Association of Securities Dealers ("NASD"). The NASD (now
succeeded by the Financial Industry Regulatory Authority) was a
private self-regulatory organization with regulation and
enforcement authority over securities firms under 15 U.S.C. § 78o-
-3. In the NASD proceeding, Ficken also testified but invoked his
Fifth Amendment privilege against self-incrimination as to certain
questions. In both the SEC and NASD proceedings Ficken sought to
justify his practices as being legitimate, at least under some
circumstances. For example, he testified that he used new FA
[End Page 6]
numbers with the permission of the mutual fund companies and that
he used new FA numbers to facilitate the splitting of commissions
with other brokers or to accommodate clients' "technology" needs.
The SEC filed a civil complaint against Ficken and his
co-defendants in November 2003. The SEC alleged in its amended
complaint that Ficken attempted to evade market timing detection by
using multiple FA numbers and multiple customer account numbers in
order to "conceal [his] own identit[y] and the identities of [his]
clients" and thus to "mislead the fund companies to process
transactions they would otherwise have rejected." Pl. Am. Compl.
Â¶ 3. The SEC also alleged that Ficken "made false statements to
the mutual fund companies by using fictitious names on the customer
accounts" and "made omissions of material fact by failing to
disclose to the fund companies that the numerous accounts" and FA
numbers Ficken used in trading mutual fund shares belonged to the
same brokers and customers whose trading activities "had previously
been blocked" by the mutual fund companies. Id. at Â¶ 18. When the
SEC sought to depose Ficken as part of the present proceeding,
Ficken asserted his Fifth Amendment rights and refused to be
The SEC moved for summary judgment. The SEC's motion for
summary judgment pointed out that Ficken was well aware of the
[End Page 7]
funds' policies.2 The SEC also relied on Ficken's e-mail
communications with customers, which discussed his market timing
and his blocked FA numbers and customer account numbers, to
demonstrate Ficken's intent to mislead mutual fund companies into
processing trades that he knew would violate the mutual fund
companies' market timing and excessive trading restrictions. For
instance, on October 30, 2001, Ficken sent an e-mail to one of his
clients stating, "when using Seligman, it is crucial to implement
some sort of fund rotation. They look carefully at accounts hitting
the same funds over and over again." On February 4, 2002, Ficken
sent an e-mail to the same client stating, "As I look for space
within the Zurich Accounts, I am a bit weary as to which funds have
been previously traded and stopped." On February 5, 2002, the
client responded by sending Ficken a list of its accounts that had
For instance, on August 9, 2001, Hartford Mutual Funds
sent Ficken a letter stating,
We have sent you warnings that your
trading behavior violates the policies and
procedures established by The Hartford Mutual
Funds, and we have terminated your exchange
privileges on more than one occasion. Despite
the warnings and terminations, you simply
close one account and open another account.
And, you continue to violate our prohibitions
on market timing.
Therefore, The Hartford Mutual Funds
will, as of September 10th, 2001, no longer
open new accounts with you as broker of record
and will not allow you to effect any trades on
any accounts, new or old, as of that date.
[End Page 8]
been blocked since January 2000. Similarly, on April 12, 2002,
Ficken sent an e-mail to another client recommending a trading
strategy and stating,
[A]ll that I can ask is that it avoid
doing back to back trades on consecutive days.
Often times . . . trading consecutive days
creates log jam, causing the trades to be
manually processed and scrutinised [sic] by
people not to [sic] fond of our trading. . . .
I suggest you do not hit the same fund within
each account. Meaning, try not to trade the
same BlackRock fund within all your accounts
on the same day.
(alternation in original). On April 2, 2003, Ficken sent an e-mail
to another client stating,
[Y]ou need to be somewhat flexible with
regards to how we gain access to the various
Fund Families. Some are far more vigilant than
others - buying the shortest duration Bond
Fund in a large quantity is a dead give-away
as far as market timing. I always try to place
the money in respective Fund Families with the
intent on avoiding losses in Bond positions.
However, sometimes it happens.
(alteration in original). On May 7, 2003, Ficken sent an e-mail to
another client explaining that Ficken was going to sell shares in
a certain account because "American [Funds] finally clipped my last
rep id [FA number]."
In his opposition to the SEC's motion for summary
judgment, Ficken did not dispute that the SEC had produced
substantial evidence supporting a finding of scienter. Instead,
Ficken argued that testimony he presented in the prior NASD
proceedings raised a genuine issue of material fact regarding his
[End Page 9]
scienter. In the NASD proceeding, Ficken testified that he used
multiple FA numbers in order to split commissions with different
brokers and to accommodate his clients' technology needs, such as
their need to gain access to their accounts or to receive
commission discounts.3 Ficken also claimed that mutual fund
companies that previously had blocked one or more of his FA numbers
later encouraged him to acquire a new FA number to conduct
legitimate trades, and that he relied on this encouragement in good
faith when obtaining a new FA number. This encouragement was
conditioned in part on Ficken's promise to abide by the mutual fund
companies' market timing policies. Ficken's opposition also
argued that the SEC did not need to depose Ficken in this
proceeding, because it could "utilize the answers that Ficken
provided in his [prior NASD and SEC] depositions" and that "[t]hese
Q. Okay. Other than compensation break-outs as the
reason for all these FA numbers would you have any
other reason to use these - to have as many FA
A. Well, again the ALSO number [a type of FA number]
was - was required for the technology purposes. You
know, I - it's not a number that I ever thought I'd
need other than the fact the CIBC [a bank providing
leverage to some of Ficken's clients] told me they
needed some sort of technology.
Q. Okay. Other than the ALSO number would you have any
other reason other than compensation to have so
many rep ID numbers [FA numbers]?
A. I don't think so.
Ficken NASD testimony, p. 46, l. 19 - p. 47, l. 6.
[End Page 10]
depositions provide ample basis for cross-examination at trial."
Mem. Opp'n Pl.'s Summ. J. Mot. 6.
The district court granted summary judgment for the SEC,
first concluding that the e-mails and other evidence presented by
the SEC showed that Ficken made material misrepresentations with
scienter by using multiple FA numbers and multiple customer account
numbers to deceive mutual fund companies into allowing trades they
otherwise would have rejected. SEC v. Druffner, 517 F. Supp. 2d at
508-09. The district court then concluded that Ficken's opposition
did not raise a genuine issue as to scienter (1) because the NASD
testimony relied on in the opposition did not address his use of
multiple customer account numbers, and (2) because Ficken's
"failure to submit to subsequent interrogation" (by claiming his
Fifth Amendment privilege) justified an adverse inference on the
issue of scienter. Id. at 510-11.
The district court ordered Ficken to disgorge the
commissions he obtained from his fraudulent mutual fund trades,
plus pre-judgment interest, in order to prevent unjust enrichment.
Id. at 511-12. The district court later fixed these amounts at
$494,975 of commissions and $94,879 of pre-judgment interest. The
district court also enjoined Ficken from further violations of the
securities laws because his "violations were flagrant, deliberate
and part of a pattern," but declined to award civil penalties
because Ficken did not have the means to pay them. Id. at 513.
[End Page 11]
Ficken timely appealed. We have jurisdiction pursuant to 28 U.S.C.
We review the district court's grant of summary judgment
de novo. Vesprini v. Shaw Contract Flooring Servs., Inc., 315 F.3d 37
, 39 n. 1 (1st Cir. 2002). Summary judgment is, of course,
appropriate only where "there is no genuine issue as to any
material fact." Fed. R. Civ. P. 56(c). A genuine issue of
material fact was recently defined in Enica v. Principi, __ F.3d
__, 2008 WL 4457541, at *5 (1st Cir. 2008). "In the summary
judgment context, "˜genuine' has been construed to mean "˜that the
evidence about the fact is such that a reasonable jury could
resolve the point in favor of the nonmoving party.'" Id. (quoting
United States v. One Parcel of Real Prop., 960 F.2d 200
, 204 (1st
Cir. 1992)). "Similarly, a fact is "˜material' if it is "˜one that
might affect the outcome of the suit under the governing law.'"
Enica at *5 (quoting Morris v. Gov't Dev. Bank of P.R., 27 F.3d 746
, 748 (1st Cir. 1994).
Although it is unusual to grant summary judgment on
scienter, summary judgment on this issue is sometimes appropriate.
"Even in cases where elusive concepts such as motive or intent are
at issue, summary judgment may be appropriate if the nonmoving
party rests merely upon conclusory allegations, improbable
inferences, and unsupported speculation." Medina-Munoz v. R.J.
[End Page 12]
Reynolds Tobacco Co., 896 F.2d 5
, 8 (1st Cir. 1990). See also
Vives v. Fajardo, 472 F.3d 19
, 21 (1st Cir. 2007) (citing Benoit v.
Tech. Mfg. Corp., 331 F.3d 166
, 173 (1st Cir. 2003)); Ayala-Gerena
v. Bristol Myers-Squibb Co., 95 F.3d 86
, 95 (1st Cir. 1996).
Ficken does not dispute that the SEC produced substantial
evidence of Ficken's scienter. As noted earlier, the SEC presented
e-mail communications between Ficken and his clients indicating
that Ficken fraudulently used duplicative FA numbers and
duplicative customer account numbers to misrepresent his identity
and that of his clients in order to deceive mutual fund companies
into allowing trades that they otherwise would have blocked. This
meets the scienter requirement of § 17(a)(1), § 10(b), and Rule
10b-5, and more than meets the negligence requirement of § 17(a)(2)
and § 17(a)(3).
Ficken argues that testimony he presented in the prior
SEC and NASD proceedings raised a genuine issue of material fact
regarding his scienter. In neither the prior SEC proceeding nor
the NASD proceeding did Ficken provide any legitimate explanation
for the use of duplicative client account numbers. Thus Ficken has
raised no genuine issue of material fact regarding his use of
multiple client account numbers, and the SEC's evidence of Ficken's
scienter in this respect is undisputed.4 However, the parties
Ficken claims that his SEC testimony raised the issue
whether he knew his practices were contrary to PSI's own policies
on market timing, since PSI did not prohibit market timing in non-
[End Page 13]
disagree whether the district court's judgment can be sustained
based only on the undisputed proof of Ficken's scienter with
respect to his use of the customer account numbers. Ficken argues,
for example, that if his use of the FA numbers were determined to
be legitimate, this would affect the amount of disgorgement. Even
assuming that the measure of disgorgement would be affected, thus
making it necessary to address the FA numbers, Ficken has still
failed to raise a genuine issue as to whether his use of duplicate
FA numbers was legitimate.
To be sure, Ficken's testimony in the SEC proceeding
might raise a genuine issue as to scienter with respect to the FA
numbers. But Ficken cannot now rely on that testimony. Under both
federal Rule 56(e) and local Rule 56.1, a party opposing summary
judgment must refer to specific parts of the record to raise a
genuine issue of material fact. In opposing the SEC's motion for
summary judgment in the present proceeding, Ficken did not refer to
specific testimony from the SEC proceeding in order to raise a
genuine issue of material fact. He instead relied on his SEC
testimony only to explain why he did not need to submit to a
deposition by the SEC in the present case.5 Thus, Ficken's
proprietary mutual funds until January 2003. However, as the SEC
points out, the mutual funds themselves had policies against market
timing, and PSI prohibited market timing in proprietary mutual
funds before January 2003.
Because Ficken did not rely on his testimony in the SEC
proceeding in opposing the SEC's summary judgment motion, we have
[End Page 14]
testimony in the SEC proceeding does not raise a genuine issue of
Ficken also cannot rely on his NASD testimony to raise a
genuine issue as to the FA numbers. In the NASD proceeding, Ficken
invoked the Fifth Amendment or otherwise refused to answer
questions about blocked account numbers, a topic pertinent to
scienter. Ficken's refusal to answer pertinent questions in the
NASD proceeding bars his reliance on that testimony in opposing
Federal Rule of Civil Procedure 56(e)(1) states that in
opposing summary judgment, an "affidavit must . . . set out facts
that would be admissible in evidence." "Hearsay evidence,
inadmissible at trial, cannot be considered on a motion for summary
judgment." Garside v. Osco Drug, Inc., 895 F.2d 46
, 50 (1st Cir.
1990) (finding that "absent a showing of admissibility" an
no occasion to determine whether Ficken's invocation of the Fifth
Amendment privilege in this proceeding barred his reliance on his
SEC testimony. This approach appears to turn on whether the SEC
proceeding was a "separate proceeding." See United States v.
Johnson, 488 F.2d 1206
, 1210 (1st Cir. 1973) (holding that a former
co-defendant's guilty plea in a Rule 11 hearing did not waive his
Fifth Amendment privilege as a witness in defendant's later separate trial); see also United States v. Parcels of Land, 903 F.2d 36
, 43 (1st Cir. 1990) (noting that if the defendant had
testified in one proceeding and then invoked his Fifth Amendment
privilege during a deposition in a separate proceeding, "neither
would have affected the treatment of the other").
[End Page 15]
appellant could not rely on a third party's description of an
expert's possible testimony to oppose summary judgment).6
Ficken's NASD testimony is hearsay and thus would not be
admissible unless it met one of the hearsay exceptions. See Fed.
R. Evid. 801, 802. Federal Rule of Evidence 804(b)(1) provides
that the testimony of an unavailable witness is admissible.
Ficken's apparent assumption is that his invocation of his Fifth
Amendment privilege in this case made him unavailable for purposes
of Rule 804. This assumption is dubious at best. Although this
circuit has held that a witness invoking his Fifth Amendment
privilege is unavailable under Rule 804, United States v. Zurosky,
614 F.2d 779
, 792 (1st Cir. 1979), this likely does not extend to
defendants who create their own unavailability. Other circuits
have specifically held that a defendant does not become unavailable
simply because he asserts his Fifth Amendment privilege.7
See generally 30 Wright & Graham, Federal Practice and
Procedure: Evidence § 6334 (1997) ("if [prior] testimony contains
inadmissible hearsay, that hearsay cannot be relied upon in
deciding the motion").
See United States v. Bollin, 264 F.3d 391, 413 (4th Cir.
2001), cert. denied, 534 U.S. 935
(2001), and cert. denied, 535 U.S. 989
(2002); United States v. Peterson, 100 F.3d 7
, 13-14 (2d
Cir. 1996) (noting that "when a defendant invokes his Fifth
Amendment privilege, he has made himself unavailable to any other
party, but he is not unavailable to himself" and thus that it was
within the district court's discretion to exclude the defendant's
prior grand jury testimony when the defendant asserted the
privilege at trial); United States v. Kimball, 15 F.3d 54
(5th Cir. 1994), cert. denied, 513 U.S. 999
(1994), (holding that
a defendant cannot create his own unavailability by asserting his
Fifth Amendment privilege and then use this unavailability to
[End Page 16]
Even if Ficken were considered unavailable, the former
testimony of an unavailable witness is not admissible unless "the
party against whom the testimony is now offered, or, in a civil
action or proceeding, a predecessor in interest, had an opportunity
and similar motive to develop the testimony by direct, cross, or
redirect examination." Fed. R. Evid. 804(b)(1). For example,
refusal to answer pertinent questions on cross-examination bars the
use of direct testimony. See United States v. Bartelho, 129 F.3d 663
, 673 (1st Cir. 1997), cert. denied 525 U.S. 905
trial judge may strike a witness's direct testimony if he flatly
refuses to answer cross-examination questions related to the
details of his direct testimony." (internal quotations omitted)).
Here the NASD proceeding did not involve direct examination by
Ficken's lawyer followed by cross-examination. Rather, all of
Ficken's testimony was given in response to NASD questioning. But
this difference is irrelevant. The fact is that the government
(and its predecessor the NASD) did not have the opportunity to
develop Ficken's initial testimony because he asserted his Fifth
Amendment privilege or otherwise refused to answer questions
regarding blocked customer account numbers, an issue closely
related to Ficken's use of FA numbers.8
introduce his own former testimony).
1 The following exchange occurred:
2 Q. I'm going to ask him again to address the question,
[End Page 17]
The Fifth Amendment does not authorize a witness to rely
on his testimony while shielding himself from further examination
by utilizing his Fifth Amendment privilege. As the Supreme Court
held in Brown v. United States, "a witness has the choice, after
weighing the advantage of the privilege against self-incrimination
against the advantage of putting forward his version of the facts
and his reliability as a witness, not to testify at all," and "[h]e
cannot reasonably claim that the Fifth Amendment gives him not only
this choice but, if he elects to testify, an immunity from
cross-examination on the matters he has himself put in dispute."
356 U.S. 148
, 155-56 (1958). See also United States v. Alosa, 14 F.3d 693
, 695-96 (1st Cir. 1994) (criminal defendant not entitled
to testify on one charge but not another). Ficken's testimony
would not be admissible because his assertion of his Fifth
Amendment privilege or his refusal to answer questions prevented
development of his testimony on closely related issues. For these
2 A. [Ficken:] I "" I can't answer that question.
3 . . .
4 Q. Will you allow him to answer any questions
5 regarding blocks at this time?
6 A. [Ficken's counsel:] No.
7 . . .
8 A. [Ficken's counsel:] Thank you. And my "no" to that
9 question was based on the phraseology of "at this
11 Ficken NASD testimony, p. 156, l. 1-4; p. 186, l. 8-10, 19-21. The
12 parties appear to assume that the refusal to answer was based on
13 the Fifth Amendment. Whether or not it was based on the Fifth
14 Amendment, Ficken still refused to answer.
[End Page 18]
reasons Ficken cannot rely on his NASD testimony to raise a genuine
issue for summary judgment.
Ficken thus has failed to raise a genuine issue of
material fact with respect to either customer account numbers or FA
numbers, and the district court properly granted summary judgment
in favor of the SEC.
For the foregoing reasons, the judgment of the district
court is affirmed.
[End Page 19]