law student at the university of southern california and there we were called upon to express cases into state cases and i had a professor howard miller who would stop us always at the beginning and say who suing who and for what and that's where i'd like to start here we have a question of who suing who and for want we have the securities exchange commission in an administrator proceeding is suing my client on broomfield and john mark and that much is certain what is the what the problem with this case is that the case and the record and the opinions are littered with a lot of discussion of issues that have nothing to do with the charges that are in this case the case for example are no rules that say that that have been violated that have to do specifically with penny stocks the case is not about market manipulation there are no charges of market manipulation that my clients were involved with the case is not about fraud in the sale of securities there are no charges under ten b five or any fraud statutes of the kurdish law there are two charges and those charges a set forth in the order instituting proceedings are number one on the my clients violated the registration provisions of the securities jack specifically section five a and five c there  the commission introduced that at the time of the sale of the securities in the public markets that there was no registration statement in fact now there are two billion shares sold every single day in this country in virtually every single case there is no registration statement in effect and the reason that there's no registration statement in effect is because none is required to be in effect absent an issue or absent an underwriter a deal or in certain circumstances there is no requirement for a registration statement and so we have objected throughout in the briefs that there is no evidence has been presented of a violation of the responsibility of the petitioners to go and but the problem is is that the what the you cited in favor of that proposition involving the district where the d c circuit said that this has to do with the section four for exception if the broker after a reasonable inquiry is not aware of circumstances indicating that the person registration statement there have to be evidence of the violation we have to find an issue or an underwriter an unregistered distribution of securities and it's simply not there in this case he was the anti money laundering officer he made the determination that no suspicious activity report ought to be submitted back in new york and we don't have any specific findings that would support or necessity of filing a suspicious activity report but more to the point here is this is an aiding and abetting charge and it's blackletter all of that in order to support aiding and abetting charge there has to be site enter there has to be a finding in the way this court has described it is then that aiding and abetting determination the term recklessness  known to the defended or so obvious that the actor must have been aware of it that's the standard and yet there's no reason to believe that we have brokers located three thousand miles requirements i think the court this whole issue is squarely controlled by the court's decision in the world trade financial matter and the way the registration requirements work is you start out with section five of the securities act and that's the it's a broad that there needs to be a registration statement on file or in effect if the securities off work are sold and then to allow ordinary a soon as the commission makes out a prime aphasia case by showing what by showing that there is no registration statement in effect for a particular sale and there was a sale and there was a sale as there w millions of wealth there were many sales millions of shares traded then the burden shifts to the party claiming the exemption to support the exemption now the exemption that is commonly used for ordinary trading is contained in section four eight one of the securities and but the problem here is that what was happening was the antithesis of ordinary trading this isn't a situation where a customer buys one hundred shares of microsoft on the open market and then sells it the next day we had large blocks of obscure thinly traded securities being deposited into the broker that's that's that's the whole case yes and in those circumstances if petitioners going to want to do things if they want to prove up the for a one exemption which is for ordinary trading they can do that or they can try to do that and they can say look the customers that i'm selling for they're not an issue or an underwriter they're not affiliated with the company in any sort of way so but it's their burden and world trade financial is one hundred percent clear on this because the argument that was made in that case is the same exact argument that was made here the commission found that there were red flags of an unlawful distribution but didn't say that there actually was one and the petitioners came to this court and they said what wait a minute if the commission wants to show that there's not an underwriter  it's its burden to do that and this court flat out rejected that the other point that i really want to emphasize and does that answer your honor's question yes and then also the florey one exemption can proven by other circumstantial evidence such as the period of time the the stock has been in the account without trading it's a facts and circumstances determination but the reason it doesn't present a chilling effect on the market us petitioners are saying the court should be concerned about is because it's because it's really designed for ordinary trading and as your honor said you know a customer buys shares on the open market reselling them that's what the exemption is designed to do the other point that i really want to stress about this is these registration requirements this isn't a technical requirement this is the method that congress deemed essential for investors to make an informed decisions and the necessity of the requirement is particularly urgent in a case like this where it's issuers trading millions of shares of stock and the commission has for a very long time said that if a broker wants to rely on the section a four exemption it's up to the broker to prove it up and to make a reasonable inquiry into the circumstances under which the issuer acquired the shares so that the broker can be sure it's not participating in an unlawful distribution and that's very important this to martin tells us that millions and billions of shares are treated every day that i don't register that's right well   be happy to the way that the ordinary trading occurs is it's exempt from registration requirement so the registration requirement it's concerned with the movement with the distribution of stock from an issue or or you know insiders persons closely affiliated with it into the hands of the investing public what happens in ordinary trading is it's that's that's not what happens with ordinary trading right if i go online and i buy one hundred shares of microsoft stock i'm not affiliated in any way with microsoft and so that and then if i choose to sell it later on that's why there's no registration and microsoft is a registered security right right so initially there needs to be a billions of shares of registered securities get traded every day without having all brokers in whose go there's a registration statement that's filed for a distribution but once the shares come to rest in the hands of the investing public then that ordinary trading after the distribution doesn't need to be exempt or is exempt from registration there's no there's a registration sticker on file for the initial for the distribution yes but here we are wasn't can i ask you a public policy question are you suggesting then the broker is someone of the gate keeper here since they're in the best position so to speak to to figure these things out if there is no registration statement or what is the policy underlined this approach that's exactly right there the gatekeeper the commission has said since at least one nine hundred sixty two this court affirmed in the world trade financial decision that a broker is not a me or order taker a broker is stands between people who may wish to access the capital markets and investors and they're in a unique position to protect investors and that's why they're required to act accordingly if there are no further questions with respect to this the registration requirements i'd like to move to the reporting violations i heard mr martin say basically number one he talked about that leave the broker was not a party to the proceeding that's that's not required and an aiding and ab case the second point is goes to scienter and the the showing of the petitions acted knowingly or at the very least recklessly is supported by i think two basic sets of facts in the record number one they knew and they can see this at page twenty of their brief that they had an obligation to comply with these reporting requirements or that lea and second petitioners did absolutely nothing about it even though there were ample red flags and people all around them were waving these red flags so the conduct that we're talking about occurred after petitioners were asked to leave their previous employer for engaging in the very same type of activity with the very same customers then they continued to engage in that activity again and again and again even though the commission other regulators the clearing firms that petitioners dealt with and even the chief compliance officer at their firm expressed serious concerns about their conduct and yet they point the court to a couple of places in the record if you look at supplemental excerpts of record four hundred one mr martin said that he never considered recommending the filing of a suspicious suspicious activity report mr bloomfield testifies that excerpts of record one hundred thirty nine that you know if you spec that's something he would have filed a report or he would have had one filed and they decided to do nothing about it so this is the very well they argue that that's not quite correct your honor the commission did pursue the actual the awful turns and there was a settlement with them where they agreed for some of the conduct involved in this case that petitioners did not alert federal authorities to and as part of the settlement the sultan's agreed to pay back i think it was about two point eight million dollars and discoursed meant they agreed to pay a one million dollar civil penalty as well the other point that i would make on this is this is an important prophylactic requirement this reporting requirement is designed to get information into the hands of law enforcement in so to allow law enforcement to help detect fraud to stop it as early stages the commission talked about in its opinion how this has been useful to the commission  one of the reasons it's so useful in fact is because it comes from professionals in the field and you know oftentimes we get reports from you know disgruntled persons who are concerned about something but the key when a broker or someone in the field makes a report it's very specific and it can really be used by law enforcement to  react practically and so that's why it's important in and of itself quite apart from whether you know the commission ultimately food the customers or not the council for the government sites the world trade financial cooperation case factors cited eighteen times in their brief and it's useful to take a look at that case because that case involved a case where in fact evidence that there was an unregistered offering of securities was presented and was found by both the commission and by the court what happened in that case is the brokers fell back on the four four exemption by saying that they didn't know that and that's where the question of reasonable inquiry came up because the rule of four four says that there has to be a reasonable inquiry but the purpose of a reasonable inquiry is to find out something and what what they have found out the court makes clear if the commission opinion is examined it will trade financial corp you'll find that it was under spewed it i can read this from it from december twentieth two thousand and four to  storage or from an issue or from my control person of the company the record shows that had brickell done so he would have learned that the customers obtained their shares in the twelve and a half percent sure holders whose ownership interest and i talks about red flags this case got a lot of discussion of red flags but what a replica red flag is supposed to draw your attention to something and what is missing in this case is what the red flag showed did the red flags showing hunters register distribution of stock at a show sales by a control person did it show sales by twelve and a half percent shareholders as in world trade and the answer is no that evidence was never introduced we're talking about the posits that are not bought by the broker and the broker sells them i'm sorry your honor i'm having difficulty hearing you it's not in a vacuum where the account receives millions of shares that's what the original inquiry is about and i dressed that in a brief your honor in fact they get asked them where they got the shares the point is is that the commission ever produced evidence that those shares were part of any unregistered distribution of stock well they've got to prove that they're not underwriters no other words that there are not the conduits for from the issuer to the market and there was no proof that they were anything but underwriters to address well that's what i was asking the question of the original inquiry the question of original inquiry is what would it have found out and was a distribution by and i sure was in a distribution by a control person g court thanks council for their presentations and the case of bloomfield was a c c is submitted for decision