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Media Alerts - In re: Steven S. Bocchino; U.S. Securities and Exchange Commission v. Steven S. Bocchino - Third Circuit
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August 17, 2015
  In re: Steven S. Bocchino; U.S. Securities and Exchange Commission v. Steven S. Bocchino - Third Circuit
Headline: Gross Recklessness satisfies scienter requirement for non-dischargeability in bankruptcy.

Area of Law: Bankruptcy

Issues Presented: Is gross recklessness, as opposed to intent to defraud, enough to uphold a Bankruptcy Court's nondischargeability order?

Brief Summary:

Bocchino worked as a stockbroker and made two private placement investments with little or no information. Both of those investments turned out to be fraudulent and the principals were criminally convicted. The SEC then obtained civil judgments against Bocchino for improperly inducing the investors. In 2009, Bocchino filed for Chapter 13 bankruptcy. The Bankruptcy Court issued an order of nondischargeability for the SEC judgments which the District Court affirmed. Bocchino appealed, insisting that the standard for dischargeability was intent to defraud and that his actions were not a proximate cause. The Third Circuit held that the standard for nondischargeability is gross recklessness and that Bocchino's actions were undoubtedly a proximate cause of the failed investments.

Extended Summary:

Steven S. Bocchino appealed the final decision of the District Court that affirmed the Bankruptcy Court's order of nondischargeability of civil judgment debts. The nondischargeability order at issue related to civil judgments against Bocchino for two private placement investments he solicited in 1996 while affiliated with a brokerage firm. Bocchino worked as a stockbroker. The first investment involved an entity known as Traderz. Bocchino learned that Traderz "might go public" and that it might be supported by a popular fashion model. On these facts alone, Bocchino sought investments from clients and received over $40,000 in commissions from Traderz sales. The second private placement involved Fargo and the source of Bocchino's information was unclear. Bocchino only obtained cursory documentation about Fargo before soliciting sales. Bocchino, again, did no independent investigation into the quality of the investment. He received $14,000 in commissions for stock purchases in Fargo. Both Traderz and Fargo turned out to be fraudulent and the principals were criminally convicted.

The SEC brought two civil enforcement actions against those who sold investments in the entities and obtained a judgment ordering Bocchino to pay for disgorgement, prejudgment interest, and civil penalties for inducing investors through high pressure sales tactics and material misrepresentations. In total, Bocchino was liable for $178,967. Bocchino filed for Chapter 13 bankruptcy protection in 2009 and the SEC petitioned the Bankruptcy Court for a determination that the previous judgments were nondischargeable. The SEC contended that the funds were obtained by false pretenses, false representations, or actual fraud. The Bankruptcy Court ordered the civil penalties discharged, but retained the remaining $68,877 as nondischargeable. The Bankruptcy Court acknowledged that Bocchino believed his statements were true but determined that the scienter requirement may be satisfied by grossly reckless behavior. The Bankruptcy Court described Bocchino's actions as egregious and grossly reckless because, 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. The District Court affirmed.

On appeal, the Third Circuit noted that the Bankruptcy Code limits the opportunity of insolvency to those who are "honest but unfortunate." Bocchino did not fall into this category due to his gross recklessness, which satisified the knowledge and intent requirements of the nondischargeability provision, section 523(a)(2)(A) of the Bankruptcy Code. The Third Circuit looked to precedent which acknowledged that the provision does not explicitly require reliance, materiality or intentionality. The Third Circuit also examined the Restatement (Second) of Torts to determine that gross recklessness satisfies the common law scienter requirement. Finally, the Court looked to the Supreme Court's analysis of a related bankruptcy provision which determined that liability should be imposed for willful blindness. Therefore, the Third Circuit affirmed the District Court's holding that Bocchino's gross recklessness satisfied the scienter requirement.

The Third Circuit also held that proximate cause had been established because Bocchino's grossly reckless misrepresentations were a substantial factor in causing the investors' harm. It affirmed the District Court's judgment that the actions of Traderz and Fargo were not superseding causes.

Find the full opinion at:

Panel: Chagares, Krause, and Van Antwerpen, Circuit Judges

Argument Date: Submitted Pursuant to Third Circuit LAR 34.1(a)

Date of Issued Opinion: July 23, 2015

Docket Number: No. 14-4299

Decided: Affirmed

Case Alert Author: Jessica Wood


J. Zac Christman, Esq. Counsel for Appellant
Tracey Hardin, Esq., Josephine T. Morse, Esq., Patricia H. Schrage, Esq. Counsel for Appellee

Author of Opinion: Van Antwerpen, Circuit Judge

Circuit: Third Circuit

Case Alert Supervisor: Prof. Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 08/17/2015 02:17 PM     3rd Circuit  

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