Court Says Bankrupt Ex-Broker Must Still Pay Back Cheated Clients
When stockbrokers commit fraud, their affected clients and the U.S. Securities and Exchange Commission can recover damages through the courts. But what happens when the broker files for bankruptcy in an effort to get around such civil judgments? A recent decision by a Philadelphia appeals court offers one answer.
SEC v. Bocchino
Steven Bocchino was a stockbroker. In 1996, he sold his clients investments in two companies, Traderz Associates Holding, Inc., and Fargo Holdings, Inc. Based on statements from colleagues, Bocchino believed both companies were about to go public, and his clients could make money by purchasing private subscriptions prior to the initial public offering. Bocchino took his colleagues “tips” at face value and performed no due diligence of his own before selling the private subscriptions to his clients. Bocchino ultimately earned about $55,000 in fees and commissions from the sales of Traderz and Fargo subscriptions.
As it turned out, neither Traderz and Fargo were legitimate ventures. Neither company ever held a public offering and their principals were later convicted of criminal securities fraud. According to a 1998 civil complaint filed by the SEC regarding Traderz, Bocchino and other brokers “told investors that Traderz stock was a risk-free investment and that investors would earn a return of several times their investment when the company conducted an IPO in the near future.” There was absolutely no factual basis for these claims, the SEC said.
The SEC subsequently obtained two default judgments against Bocchino, ordering him to pay nearly $180,000. This represented disgorgement of his ill-gotten commissions, together with additional civil penalties and prejudgment interest.
In 2009, Bocchino filed a petition seeking bankruptcy protection under Chapter 13. In a Chapter 13 bankruptcy, the debtor negotiates a repayment plan for some debts, and the bankruptcy court discharges the rest. A Chapter 13 discharge actually covers many debts that would not be dischargeable under a Chapter 7 (liquidation) bankruptcy. Of note here, a debtor cannot discharge a debt arising from “the violation of any of the federal securities laws” under Chapter 7, but he may under Chapter 13.
That said, even a Chapter 13 debtor cannot discharge a “debt for money…obtained by false pretenses, a false representation, or actual fraud.” Based on this provision, the SEC filed a complaint with the bankruptcy court, seeking to declare its two default judgments non-dischargeable. In 2013, a bankruptcy court awarded the SEC a partial victory: It held Bocchino was still liable for about $69,000 of the two judgments, representing disgorgement and interest, but not for the civil penalties to the SEC.
Bocchino appealed. On July 23 of this year, the U.S. Third Circuit Court of Appeals affirmed the bankruptcy court’s decision. The appeals court rejected Bocchino’s claim he never intentionally misled his clients—i.e., he really believed Traderz and and Fargo were good investments. As the bankruptcy court explained, Bocchino exhibited “gross recklessness” in failing to perform any due diligence on either company before recommending them to his clients: “As an experienced stockbroker, he knew, or should have known, that an independent investigation into the quality of the product he was selling was imperative.”
Don’t Let a Crooked Stockbroker Off the Hook
Bankruptcy is designed to offer honest debtors a fresh start. As the decision in this case shows, it should not be abused by unscrupulous stockbrokers who cheat clients out of their hard-earned money. If you need help recovering funds lost through a stockbroker scam, contact Florida securities fraud attorney Gregory Tendrich right away.