This post was written by Amy J. Greer.

In a recent appeal before the United States Court of Appeals for the 11th Circuit, there is little doubt that the SEC thought its case was something of an easy win. The story is not pretty. Richard L. Goble, the remaining defendant in the matter – everyone else had settled out – founder of the trading firm North American Clearing, in serious financial distress, had directed the firm’s CFO and FINOP to enter a phony $5 million book entry to make the firm’s reserve account appear flush, when, in fact, the account was below the amounts required under the Customer Protection Rule, section 15(c)(3) of the Exchange Act of 1934 and Rule 15c3-3, thereunder. Since the FINRA staff happened to be examining North American at the time (!), the sham transaction was caught, and when it was reversed, instead of being $3.4 million in the black, the reserve account needed $1.8 million in order to stay in business.

The SEC promptly sued North American, Goble, the CEO and CFO, charging the company with violations of the Customer Protection Rule, as noted above, as well as books and records violations under Exchange Act Section 17(a) and Rule 17a-3, charging the individuals with aiding and abetting those violations, and charging all of the defendants with securities fraud under section 10(b) of the Exchange Act and Rule 10b-5. Given the facts, I suppose it’s not terribly surprising that the company, the CEO and CFO all settled. Goble went to a non-jury trial and was found liable on all counts, getting himself permanently enjoined from future violations of all of the noted statutes and rules. The court also, on its own volition, barred Goble from seeking any securities license or engaging in the securities industry.

Goble appealed, asserting, among other issues, that making a false book entry cannot be securities fraud; that the court abused its discretion by barring him from seeking a securities license or working in the securities industry; and that the SEC’s standard injunction is an unenforceable “obey-the-law” command. On these issues, Goble won. And I’m guessing that was pretty unexpected. But should it have been?

The 11th Circuit’s opinion held that absent a material misrepresentation or omission in connection with the purchase or sale of a security, one cannot have a securities fraud, and reversed. I cannot help but wonder how it is that this sham transaction could ever have been found, by the SEC in making its charging decision or by the district court, to have been “in connection with” the purchase or sale of a security? There was no purchase or sale; it was a book entry and it was a fake. The SEC has conditioned itself to presume that every fraud must fall within the broad contours of section 10(b), but the section and its companion rules do have limits. Something about when you only have a hammer, everything looks like a nail?

Because the district court based the securities bar on the reversed securities fraud counts, the sua sponte bar was tossed, as well as the related injunction. I suppose the good news here for the SEC is that the 11th Circuit panel did not find anything amiss in the court adding a sanction not actually sought by the SEC staff.

However, the opinion takes a shot squarely at the centerpiece of all civil actions filed by the SEC, that is, the injunctive relief sought against future conduct. The court vacated the injunction against Goble on the securities fraud counts for substantive reasons, but it also vacated the injunction against him on the other counts. The 11th Circuit panel agreed that such injunctions violate Rule 65(d) of the Federal Rules of Civil Procedure as “obey-the-law” commands, since they merely track the statutory language, thus failing to afford a defendant any real guidance as to how to avoid violating the injunction, and remanded to the district court for a re-drafting session, to see whether an injunction could be written that complied with Rule 65(d). I suppose we’ll see. This is a pretty big blow to the SEC’s usual form injunction language. And leaves one to wonder whether that form language isn’t the real reason why you never see a contempt proceeding for violations of those injunctions. Perhaps there is more of an understanding within the SEC of the lack of enforceability of those many, many injunctions than the agency might be willing to admit.