UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ____________

No. 18-3549 ____________

UNITED STATES OF AMERICA

v.

STEVEN FISHOFF, Appellant

On Appeal from the United States District Court for the District of New Jersey (D. C. Criminal No. 3-15-cr-00586-001) District Judge: Honorable Michael A. Shipp

Submitted under Third Circuit LAR 34.1(a) on July 8, 2019

Before: MCKEE, ROTH and RENDELL, Circuit Judges

(Opinion filed: January 30, 2020) Daniel T. Brown Murphy & McGonigle 1001 G Street, NW Seventh Floor Washington, DC 20001

Counsel for Appellant

Mark E. Coyne John F. Romano Office of United States Attorney 970 Broad Street Room 700 Newark, NJ 07102

Counsel for Appellee

O P I N I ON

ROTH, Circuit Judge:

Under Section 32 of the Securities Exchange Act, a defendant who violates a Security and Exchange Commission (SEC) rule or regulation but proves that he “had no knowledge of such rule or regulation” is not subject to imprisonment. 1 The rule is intended to protect laypersons

1 15 U.S.C. § 78ff(a).

2 who commit technical violations. 2 This case requires us to determine the precise burden on a defendant who wishes to use the so-called “non-imprisonment defense.” We hold that a defendant can establish lack of knowledge and avoid imprisonment if he demonstrates, by a preponderance of the evidence, that he did not know the substance of the rule or regulation that he violated. Because appellant Steven Fishoff did not establish a lack of knowledge of the rule that he pled guilty to violating and because his other procedural arguments fail, we will affirm the judgment of the District Court.

I

Fishoff began trading securities in the early 1990s. He was a skilled trader and eventually quit his job in the clothing manufacturing sector to trade full-time. He initially traded in partnership with a “backer,” i.e., an investor who provided the capital for his trading activity. By 2009, he had earned enough money to set up his own firm, Featherwood Capital, Inc. At Featherwood, he had one full-time employee and also worked with several independent contractors. He controlled accounts that yielded profits between $2 and $5 million per year. Despite his successes, Fishoff neither had any formal training in nor took any courses on the securities markets, regulations, or compliance. Nor did he ever hold a securities or other professional license. He operated Featherwood without any expert legal or regulatory advice. 2 See United States v. Lilley, 291F. Supp.989, 992 (S.D. Tex. 1968) (citing Report of the Joint Conference Committee, 78 Cong. Rec. 10263 (1934)); see also 78 Cong. Rec. 8295-96 (1934) (statement of Sen. Steiwer).

3 One of Fishoff’s practices was short-selling a company’s stock in anticipation of the company making a secondary offering. Short-selling is the sale of a security that the seller has borrowed with the belief that the price of the security will drop. This enables the seller to make a profit by buying back the stock at a lower price before returning it. Secondary offerings, i.e., when a public company issues and sells new shares to raise money, can cause the company’s share price to decrease because the new shares dilute the value of existing shares. Not surprisingly, many traders and market researchers try to predict when a company will make a secondary offering by, for example, forecasting when a company will need an influx of cash. In order to make such a forecast, a trader will use public financial disclosures or watch for updated shelf registration statements. 3