United States v. Bryan Behrens
2013 U.S. App. LEXIS 8376, 713 F.3d 926, 2013 WL 1760325 (2013)
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Rule of Law:
The 'no knowledge' defense to imprisonment under § 78ff(a) of the Securities Exchange Act requires a defendant to prove by a preponderance of the evidence that they were unaware of the substance of the SEC rule they violated. A defendant's claim that they did not know their specific conduct fell under the rule is insufficient to meet this burden if they understood the rule's general prohibitions.
Facts:
- Bryan Behrens owned and operated 21st Century Financial Group, Inc., a financial advising business, and later National Investments, Inc. (NII).
- Behrens promoted NII to his clients as a safe investment, promising a seven to nine percent fixed rate of return.
- In exchange for loans to NII, Behrens issued promissory notes to his clients.
- Instead of investing the funds in real estate as promised, Behrens used new investor funds to pay earlier investors in a Ponzi scheme.
- Behrens also used investor funds to support his other businesses and for personal spending.
- Behrens held four securities licenses (Series 6, 26, 63, and 65).
Procedural Posture:
- A federal grand jury returned a twenty-one-count indictment against Bryan Behrens.
- Behrens pled guilty to one count of securities fraud in the U.S. District Court for the District of Nebraska (trial court).
- The district court sentenced Behrens to five years’ imprisonment, finding the 'no knowledge' defense inapplicable.
- Behrens (appellant) appealed to the U.S. Court of Appeals for the Eighth Circuit, which vacated the sentence and remanded for the district court to consider the 'no knowledge' defense.
- On remand, the district court again imposed a five-year sentence after finding Behrens failed to prove he had no knowledge of Rule 10b-5.
- Behrens (appellant) appealed that sentencing decision to the U.S. Court of Appeals for the Eighth Circuit.
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Issue:
Does a defendant prove they had 'no knowledge' of an SEC rule under § 78ff(a), thereby avoiding imprisonment, by showing they were unaware their specific conduct constituted a violation, even if they were aware of the rule's general substance prohibiting securities fraud?
Opinions:
Majority - Gruender, Circuit Judge.
No. A defendant does not establish the 'no knowledge' defense under § 78ff(a) by proving they were unaware their specific actions violated an SEC rule if they understood the substance of that rule. The court rejected both the Government's narrow interpretation (that a defendant must be ignorant of the rule's very existence) and Behrens's broad interpretation (that a defendant must know their specific conduct is illegal). Instead, the court adopted a middle-ground approach, holding that the defense applies only if the defendant can prove they had no knowledge of the 'substance' of the rule. In this case, Behrens admitted during questioning that he knew it was illegal to make misrepresentations or engage in fraudulent conduct in connection with the sale of a security. This admission demonstrated he knew the substance of Rule 10b-5. His argument that he did not know the promissory notes were 'securities' is a claim of ignorance about the rule's specific application, not its substance, and is therefore insufficient to invoke the 'no knowledge' defense.
Analysis:
This decision clarifies the scope of the 'no knowledge' defense in § 78ff(a) by establishing a 'substance of the rule' standard. It creates a middle path between requiring complete ignorance of a rule's existence and requiring proof that the defendant specifically knew their conduct was illegal. This holding limits the defense for sophisticated actors, such as licensed professionals like Behrens, who understand the general prohibitions of securities law but might argue about a rule's application to novel instruments. The precedent makes it more difficult for defendants in securities fraud cases to avoid imprisonment by claiming a technical misunderstanding of the law.
