                           In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 03-3073
MONETTA FINANCIAL SERVICES, INC.
and ROBERT S. BACARELLA,
                                                      Petitioners,
                               v.

SECURITIES AND EXCHANGE COMMISSION,
                                                      Respondent.

                        ____________
              On Petition for Review of an Order of
              the Securities Exchange Commission.
                            No. 3-9546
                        ____________
  ARGUED FEBRUARY 17, 2004—DECIDED NOVEMBER 30, 2004
                        ____________




  Before RIPPLE, KANNE, and WILLIAMS, Circuit Judges.
   WILLIAMS, Circuit Judge. Monetta Financial Services, Inc.
(“MFS”), a registered investment adviser, and its president,
Robert Bacarella, seek review of a Securities and Exchange
Commission (“SEC or Commission”) order finding that MFS
violated Section 206(2) of the Investment Advisers Act by
failing to disclose that it allocated shares of Initial Public
Offerings (“IPOs”) to certain directors of its mutual fund
clients and that Bacarella aided and abetted in the violation.
2                                                 No. 03-3073

While we agree with the SEC that MFS violated Section
206(2), we find that there is insufficient evidence to support
a finding that Bacarella aided and abetted the violation.
Likewise, we find that the sanctions the SEC imposed
against MFS were excessive.


                     I. BACKGROUND
   Robert Bacarella is president and founder of Monetta
Financial Services, Inc., a relatively small investment ad-
viser registered with the SEC. MFS advises both mutual
fund and individual clients. Its fund clients include Monetta
Fund and Monetta Trust, both registered investment com-
panies organized by Bacarella. Among MFS’s individual
clients were Richard Russo, William Valiant, and Paul Henry
(collectively, director-clients), who, during the times rele-
vant to this appeal, served as either directors or trustees of
the aforementioned fund clients. Monetta Fund and
Monetta Trust each had other directors and trustees who
were not MFS clients.
  From February 1993 to September 1993, MFS, who had
been offered shares of IPOs from various broker-dealers, al-
located shares in IPOs among its advisory clients, including
the director-clients and their respective funds. The director-
clients earned a total of approximately $50,000 from the
IPOs. There is no indication that MFS allocated the shares
inequitably or that MFS or Bacarella benefitted from the al-
locations to the director-clients; however, MFS did not disclose
the fact that it allocated shares to the director-clients to the
non-client directors or trustees of the funds. After reading a
National Association of Securities Dealers (“NASD”) interpre-
tive document, Bacarella began to question the propriety of
allocating shares of IPOs to “interested directors” and thus,
in July 1993, MFS stopped allocating IPO shares to direc-
No. 03-3073                                                      3

tors Valiant and Henry.1 In September 1993, MFS also
stopped allocating shares to Russo when Bacarella started
to question the appropriateness of IPO allocations to
directors generally.
   Several months after MFS halted the allocations, the SEC
conducted a routine examination of MFS and, years later,
in February 1998, issued an Order Instituting Public
Administrative Cease-And-Desist Proceedings (“OIP”). The
OIP alleged violations by MFS, Bacarella, and the director-
clients of Section 17(a) of the Securities Act of 1933 (“Secu-
rities Act”), 15 U.S.C. § 77q(a), Section 10(b) of the Securi-
ties Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §
78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, thereunder. It
further alleged that MFS violated and Bacarella aided and
abetted MFS’s violations of Sections 206(1) and (2) of the
Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C.
§ 80b-6(1) and (2), by failing to disclose the fact that
Monetta allocated IPO shares to director-clients. In December
2000, an Administrative Law Judge (“ALJ”) issued a deci-
sion finding that MFS and Bacarella had violated these
provisions.2 MFS and Bacarella appealed the decision to the
SEC.
  In June 2003, the SEC issued an order dismissing all
charges against MFS and Bacarella except the Section 206(2)
Advisers Act charge. Despite the dismissal of the majority
of the charges, the SEC imposed the same sanctions as the
ALJ. The sanctions include: (1) a cease and desist order
against both MFS and Bacarella; (2) a censure of MFS; (3)


1
  Both Henry and Valiant were interested directors as defined by
Section 2(a)(19) of the Investment Company Act of 1940. 15 U.S.C.
§ 80a-2(a)(19).
2
   The ALJ also found that the director-clients, with the exception
of Valiant, had violated the securities laws, but the director-
clients are not before this court.
4                                                  No. 03-3073

a 90-day suspension of Bacarella; and (3) civil money pen-
alties of $200,000 against MFS and $100,000 against
Bacarella. MFS and Bacarella petition this court for review
of the SEC’s decision pursuant to Section 213(a) of the
Advisers Act.3


                        II. ANALYSIS
A. Standard of Review
  We review deferentially the SEC’s findings of fact, rec-
ognizing that such findings are conclusive if supported by
substantial evidence. Otto v. SEC, 253 F.3d 960, 964 (7th
Cir. 2001). Substantial evidence includes “ ‘such evidence as
a reasonable mind might accept as adequate to support a
conclusion.’ ” Johnson v. NTSB, 979 F.2d 618, 620 (7th Cir.
1992) (citation omitted).


B. Section 206(2) Violation
  MFS challenges the SEC’s conclusion that its failure to
disclose IPO allocations to director-clients violated Section
206(2) of the Advisers Act, which prohibits any investment
adviser from “engag[ing] in any transaction, practice, or
course of business which operates as a fraud or deceit upon
any client or prospective client.” 15 U.S.C. § 80b-6(2). MFS
argues that given the absence of a rule explicitly requiring
such disclosure and the fact there is no evidence that it al-
located the shares inequitably, its failure to disclose the


3
  Section 213(a) of the Advisers Act provides, in pertinent part,
that “[a]ny person . . . aggrieved by an order issued by the
Commission under [Section 206(2)] may obtain a review of such
order in the United States court of appeals within any circuit
wherein such person resides or has his principal place of busi-
ness . . . .” 15 U.S.C. § 80b-13(a).
No. 03-3073                                                    5

allocations to the director-clients did not rise to the level of
“fraud or deceit” under Section 206(2). We disagree.
   In SEC v. Capital Gains Research Bureau, Inc., 375 U.S.
180 (1963), the Supreme Court recognized that an investment
adviser’s failure to disclose material information constitutes
“fraud or deceit” under the Investment Advisers Act. Id. at
200 (“Failure to disclose material facts must be deemed
fraud or deceit within its intended meaning. . . .”). The
investment adviser in Capital Gains engaged in the practice
of “scalping,” i.e., purchasing securities before recommend-
ing them to clients and thereafter selling the securities to take
advantage of the increase in price that would follow the
recommendation. Id. at 181. The Court held that this prac-
tice amounted to “fraud or deceit” under the Advisers Act and
upheld the SEC’s imposition of an injunction requiring
disclosure to the adviser’s clients of his dealings in recom-
mended securities. Id. at 181-82. In so holding, the Court
proclaimed that as a fiduciary, an investment adviser has
“an affirmative duty of ‘utmost good faith, and full and fair
disclosure of all material facts.’ ” Id. at 194 (internal
quotations omitted).
  Here, the allocation of IPO shares to director-clients was
a material fact that MFS should have disclosed. Opportuni-
ties to invest in IPO shares are rare and therefore valuable
to investors. See Inv. Adviser Codes of Ethics, Rel. No. IA-
2256, 2004 WL 1488752, at *6 (July 2, 2004) (noting that
“[m]ost individuals rarely have the opportunity to invest in
[IPOs or private placements]”). Thus, when MFS allocated
some shares of the IPOs to its director-clients, it did so at
the expense of the fund clients, as the funds were thereby
allocated a smaller number of shares. In effect, MFS’s
allocation to both director-clients and fund clients placed
the parties in competition for the same shares. As the SEC
reasoned, this is particularly troublesome since MFS had an
incentive to favor the director-clients over the fund clients
when allocating the shares, given the directors’ duty to
6                                                 No. 03-3073

monitor and police the fund’s relationship with its invest-
ment adviser. See 15 U.S.C. § 80a-15(c) (outlining directors’
duty to approve contracts with investment advisers); see also
Burks v. Lasker, 441 U.S. 471, 483 (1979) (noting the
directors’ role of reviewing and approving contracts between
mutual funds and their investment advisers).
  That MFS did not, in fact, favor the director-clients over
the funds is of no consequence because the potential for
abuse nonetheless existed. See Capital Gains, 375 U.S. at
191-92 (noting that the Advisers Act evinced a “congressio-
nal intent to eliminate, or at least to expose, all conflicts of
interest which might incline as [sic] investment ad-
viser—consciously or unconsciously—to render advice which
was not disinterested”). Capital Gains made clear that a
violation of the Advisers Act requires neither injury nor
intent to injure. Id. at 192. After all, the Advisers Act was
“directed not only at dishonor, but also at conduct that
tempts dishonor.” Id. at 200 (internal quotations omitted).
Furthermore, “[t]o impose upon the [SEC] the burden of
showing deliberate dishonesty as a condition precedent to
protecting investors through the prophylaxis of disclosure
would effectively nullify the protective purposes of the
statute.” Id.
  Attempting to avoid the conclusion that its failure to
disclose the IPO allocations violated Section 206(2), MFS
points to rules the SEC promulgated in 2001 that only re-
quire directors to disclose IPO allocations when accompa-
nied by special treatment. See Role of Indep. Dirs. of Inv.
Cos., Rel. No. IC-24816, 66 Fed. Reg. 3734, 3744 (Jan. 16,
2001). Because there is no evidence of special treatment
here, MFS argues that these rules suggest that it had no
duty to disclose the allocations. But these rules are of little
import, as they relate to directors’ responsibilities, rather
than the duties of an investment adviser such as MFS.
 MFS also asserts that it acted in a manner consistent
with industry practice. Undoubtedly, allocations of IPO
No. 03-3073                                                  7

shares to mutual fund directors were commonplace, but MFS
has not pointed to any evidence suggesting that investment
advisers’ non-disclosure of the allocations was also industry
practice. In any event, the mere presence of an industry
practice is insufficient to overcome the conclusion that MFS
violated Section 206(2). See SEC v. Dain Rauscher, 254 F.3d
852, 857 (9th Cir. 2001) (“The industry standard is a
relevant factor, but the controlling standard remains one of
reasonable prudence.”).
  In the end, we agree with the SEC that MFS had a duty
to disclose the fact that it allocated IPO shares to the
director-clients. Its failure to do so constituted fraud or
deceit within the meaning of Section 206(2).


C. Aiding and Abetting
  We now consider Bacarella’s argument that the SEC
erred by finding that he aided and abetted MFS’s violation
of Section 206(2) of the Advisers Act. The SEC will find one
liable for aiding and abetting where: (1) there is “a primary
violation; (2) the aider and abettor generally was aware or
knew that his or her actions were part of an overall course
of conduct that was improper or illegal; and (3) the aider
and abettor substantially assisted the primary violation.” In
the Matter of Monetta Fin. Servs. Inc., AP File No. 3-9546,
Rel. No. IA-2136, 2003 WL 21310330, at *4; see also SEC v.
Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992) (applying the
same factors).
  While we do not quarrel with the SEC’s conclusion that
Bacarella substantially assisted in MFS’s primary violation,
we agree with Bacarella that the SEC has not satisfied the
awareness requirement. The SEC has not provided any evi-
dence suggesting that he was, in fact, aware that disclosure of
the IPO allocations was required. Even if, as the SEC con-
tends and several courts have held, the awareness require-
ment can be satisfied by a finding of recklessness, see, e.g.,
8                                                No. 03-3073

Geman v. SEC, 334 F.3d 1183, 1195 (10th Cir. 2003); Graham
v. SEC, 222 F.3d 994, 1004 (D.C. Cir. 2000), it remains
difficult to see how this prerequisite has been met here. No
rules expressly required disclosure of the IPO allocations.
Moreover, the SEC did not find that MFS allocated the
shares inequitably—the presence of inequitable allocations
surely should have alerted Bacarella to the fact that dis-
closure, at the very least, was required. See Graham, 222
F.3d at 1006 (noting as significant the absence of red flags
in assessing one’s liability as an aider and abetter); see also
Howard v. SEC, 376 F.3d 1136, 1143 (D.C. Cir. 2004) (same).
Therefore, we cannot say that the SEC’s finding that
Bacarella was aware that disclosure was required and liable
for aiding and abetting MFS’s Section 206(2) violation is
supported by substantial evidence. Thus, we vacate the
portion of the SEC’s order finding Bacarella liable for aiding
and abetting.


D. Sanctions
   Finally, we turn to MFS’s argument that the sanctions
the SEC imposed were excessive. This court will reverse a
SEC order prescribing sanctions upon a finding that the
SEC abused its discretion. Mister Disc. Stockbrokers v. SEC,
768 F.2d 875, 879 (7th Cir. 1985); see also WHX Corp. v. SEC,
362 F.3d 854, 859 (D.C. Cir. 2004) (noting that sanctions
orders should be reversed if “arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law”).
Further, “[t]he fashioning of an appropriate and reasonable
remedy is for the Commission, not this court, and the
Commission’s choice of a sanction may be overturned only
if ‘it is found unwarranted in law . . . or without justifica-
tion in fact.’ ” Steadman v. SEC, 603 F.2d 1126, 1140 (5th
Cir. 1979) (quoting Am. Power & Light Co. v. SEC, 329 U.S.
90, 112-13 (1946)); see also Vernazza v. SEC, 327 F.3d 851,
862 (9th Cir. 2003).
No. 03-3073                                                     9

  In assessing the appropriate sanctions, the Commision often
considers “the egregiousness of a respondent’s actions, the
isolated or recurrent nature of the violation, the degree of
scienter, the sincerity of a respondent’s assurances against
future violations, the respondent’s recognition that the
conduct was wrongful, and the likelihood of recurring
violations.” Monetta, 2003 WL 21310330, at *9.
  Although the SEC’s opinion references these factors, the
opinion does not reflect that the SEC meaningfully considered
these factors when it imposed the sanctions.4 In fact, many
of the aforementioned factors suggest that the sanctions are
excessive. To begin with, the conduct was not particularly
egregious: there was little indication that the allocations
were inequitable and no rules expressly required disclosure.
See WHX Corp., 362 F.3d at 860 (vacating sanction order
where no rule or formal Commission precedent prohibited
the behavior at issue). Second, the allocations took place a
decade ago, for an eight-month period, making it a fairly
isolated occurrence and suggesting that the likelihood of a
future violation is slight. See id. at 861 (noting the isolated
nature of the violation before finding the sanction excessive);
see also Johnson v. SEC, 87 F.3d 484, 490 n.9 (D.C. Cir.
1996) (commenting that five-year delay in instituting pro-


4
  In imposing sanctions against MFS and Bacarella, the SEC
noted: “MFS, through Bacarella, ignored its fiduciary duty to
disclose material information to those entitled to its utmost
loyalty and good faith. Bacarella acted with scienter. Bacarella
made no effort to disclose these transactions to the remaining
directors and trustees and was not candid with the Commission’s
examiners. Bacarella’s actions and his testimony at the hearing
evince a lack of understanding of his fiduciary obligations. MFS’
and Bacarella’s insistence that, since no actual conflict existed,
they had no duty to disclose the information to the Fund Clients’
boards shows a lack of appreciation for MFS’ obligations as an
adviser to an investment company.” Monetta, 2003 WL 21310330,
at *9.
10                                                No. 03-3073

ceedings was not indicative of concern about future violations).
Third, MFS voluntarily ceased the allocations and MFS no
longer has individual clients, also making the possibility of
a future violation more remote. Finally, without explana-
tion, the SEC imposed the same sanctions as the ALJ despite
the SEC’s dismissal of the majority of the charges. Taken
together, these factors suggest that the Commission abused
its discretion in sanctioning MFS.
  We, therefore, vacate the SEC’s order imposing sanctions
and the portion of the SEC’s opinion which reasons that
sanctions are appropriate, and we remand to the Commis-
sion for reconsideration in a manner consistent with this
opinion of the sanctions imposed against MFS.


                    III. CONCLUSION
 For the foregoing reasons, the petition for review is
GRANTED in part and DENIED in part.


A true Copy:
       Teste:

                         ________________________________
                         Clerk of the United States Court of
                           Appeals for the Seventh Circuit




                    USCA-02-C-0072—11-30-04
