Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-00-01480/USCOURTS-caDC-00-01480-0/pdf.json

Parties Involved:
Michael J. Markowski
Petitioner
Joseph F. Riccio
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 6, 2001 Decided December 21, 2001

No. 00-1480

Michael J. Markowski and

Joseph F. Riccio,

Petitioners

v.

Securities and Exchange Commission,

Respondent

Petition for Review of Orders of the

Securities and Exchange Commission

William VanDercreek argued the cause and filed the briefs

for petitioners.

Susan S. McDonald, Senior Litigation Counsel, Securities

& Exchange Commission, argued the cause for respondent.

With her on the brief were David M. Becker, General Counsel, Meyer Eisenberg, Deputy General Counsel, Jacob H.

Stillman, Solicitor, and Susan K. Straus, Attorney.

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Before: Randolph and Garland, Circuit Judges, and

Williams, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

Williams.

Williams, Senior Circuit Judge: Petitioners Michael J.

Markowski and Joseph F. Riccio seek review of a Securities

and Exchange Commission order sustaining a disciplinary

action taken by the National Association of Securities Dealers

("NASD"). The order imposed liability under Rule 10b-5 for

manipulating the stock market and under certain NASD

Conduct Rules for causing the publication of "non-bona fide"

bid quotations. The SEC also found against Markowski but

not Riccio for violations of a restriction agreement governing

his firm's inventory holdings and for failure to cooperate with

an NASD investigation. In re Markowski, Exchange Act

Release No. 43,259 (SEC Decision Sept. 7, 2000) ("SEC

Decision"). We affirm the Commission's order.

* * *

Markowski was the chairman, CEO, and majority shareholder of Global America, Inc., then an NASD-member firm

that specialized in emerging growth companies. Riccio was

Global's trader. In June 1990 Global underwrote an initial

public offering of Mountaintop Corporation, an Alaskan vodka

producer. The Mountaintop securities included common

stock, warrants and "units" (each of which could be exchanged for two shares of common stock and two warrants).

Because the SEC does not rest its conclusions on data as to

quantities involved, the relationships among these securities

need not detain us. In "aftermarket" trading (i.e., after the

IPO), Global dominated the market for Mountaintop securities, accounting for an overwhelming majority of both purchase and sale volume.

From the IPO in June 1990 until Global's closing in January 1991, Global supported the price of Mountaintop securities. The SEC said that this support took two forms: Global

(1) maintained high bid prices for Mountaintop securities, and

(2) absorbed all unwanted securities into inventory, thereby

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preventing sales from depressing market prices. In re Markowski, Exchange Act Release No. 43,503, at 2 (SEC Decision

Nov. 1, 2000) ("SEC Denial of Reconsideration"). In the end

these efforts proved unsustainable. Global closed its doors in

January 1991, and Mountaintop's price dropped precipitously--about 75% in one day. Id.

In July 1998 the NASD's National Adjudicatory Council

("NAC") held Markowski and Riccio in violation of s 10(b) of

the Securities Exchange Act of 1934, 15 U.S.C. s 78j(b), Rule

10b-5 thereunder, 17 C.F.R. s 240.10b-5, and NASD Conduct Rules 2110, 2120, 3310 for their activities in Mountaintop. Specifically, the NAC found that Markowski and Riccio

had engaged in manipulative, deceptive, and fraudulent conduct, and had published non-bona fide quotations. The NAC

also found that Markowski had violated the terms of Global's

Restriction Agreement and had refused to submit to an

NASD investigative interview.

By way of remedy, the NAC ordered that Markowski and

Riccio be censured and barred in all capacities from association with any member of the NASD, and that they be fined

$300,000 and $250,000, respectively. See Final Order of the

National Adjudicatory Council, NASD Regulation, Inc., No.

CMS920091, at 1-2 (July 13, 1998).

On appeal, the SEC sustained the NAC's findings and

sanctions. SEC Decision at 1. The SEC later denied petitioners' motion for reconsideration. SEC Denial of Reconsideration at 3. Markowski and Riccio now seek review.

* * *

We note at the outset that the charge of publishing nonbona fide quotations flowed fairly ineluctably from the finding

of manipulation: Rule 3310 bars publishing, or causing to be

published, reports of a transaction as a purchase or sale of

securities unless the NASD member believes that "such

transaction was a bona fide purchase or sale"; an interpretation of Rule 3310 by the NASD Board of Governors, IM-3310,

reads the rule as embracing the case of a member who causes

a quotation to be published "without having reasonable cause

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to believe that such quotation ... is not published for any

fraudulent, deceptive or manipulative purpose." If the finding of manipulation is supportable, then the second violation

follows handily.

Petitioners first seem to argue that because Global's bids

and trades in this case were "real"--they involved real customers, real transactions, and real money--the trades cannot

be classified as an unlawful manipulation. Indeed, Global's

activities were unlike classic schemes using fraudulent devices

such as "wash sales" or "matched sales" in which the targeted

securities are "traded" back to the sellers themselves or

among known parties to give a false appearance of sales and

market interest. See, e.g., SEC v. U.S. Environmental, Inc.,

155 F.3d 107, 109 (2d Cir. 1998); see also Louis Loss & Joel

Seligman, Fundamentals of Securities Regulation 1045-46

(4th ed. 2001) (describing the typical manipulative scheme).

On the basis of this distinction, petitioners argue--rather

summarily--that their conduct must have been lawful.

Liability for manipulation wholly independent of fictitious

transactions in fact raises interesting questions. Without

such transactions, the core of the offense can be obscure. It

may be hard to separate a "manipulative" investor from one

who is simply overenthusiastic, a true believer in the object of

investment. Both may amass huge inventories and place

high bids, even though there are scant objective data supporting the implicit estimate of the stock's value. Legality would

thus depend entirely on whether the investor's intent was "an

investment purpose" or "solely to affect the price of [the]

security." United States v. Mulheren, 938 F.2d 364, 368 (2d

Cir. 1991). Given the typical ambiguity of intent, commentators have suggested that imposing liability may chill investors

from transactions that actually contribute to the efficiency of

securities markets. Daniel R. Fischel & David J. Ross,

"Should the Law Prohibit 'Manipulation' in Financial Markets?," 105 Harv. L. Rev. 503, 523 (1991) (expressing concerns

about the manipulation doctrine's overdeterrence effects); see

also Mulheren, 938 F.2d at 368 (expressing misgivings about

basing 10b-5 violations purely on whether or not a "transaction is effected for an investment purpose").

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Commentators have also suggested that where manipulative behavior is solely defined in terms of the actor's

purpose, it may well be self-deterring as a general matter, so

that any need for an external sanction is slight. Purely

"trade-based" manipulation schemes, in which the manipulator simply buys a security in order to induce higher prices

and then sells to take advantage of the price change, are

likely to fail. First, it is difficult unilaterally to cause price to

rise. Second, it is even more difficult to sell subsequently at

a price high enough to cover both purchase costs and transaction costs. For one thing, if the actor's purchases are such as

to give the market a material upward thrust, his later sales

may equivalently drive it down. See Fischel & Ross, supra,

at 512-19. But see Steve Thel, "$850,000 in Six Minutes--

The Mechanics of Securities Manipulation," 79 Cornell L.

Rev. 219 (1994) (suggesting that manipulators may profit

from very small, short-lived price changes).

These arguments, however, are of little use to Markowski

and Riccio. Whatever the practical concerns, we cannot find

the Commission's interpretation to be unreasonable in light of

what appears to be Congress's determination that "manipulation" can be illegal solely because of the actor's purpose.

See Chevron U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837, 843-44 (1984). Section 9(a)(2) of

the Securities Exchange Act, 15 U.S.C. s 78i(a)(2), manifests

this idea by declaring it unlawful

[t]o effect ... a series of transactions in any security

registered on a national securities exchange creating

actual or apparent active trading in such security or

raising or depressing the price of such security, for the

purpose of inducing the purchase or sale of such security

by others.

Id.1 This provision is quite separate from the subsections of

s 9 prohibiting manipulation through fraudulent devices such

as wash sales, 15 U.S.C. s 78i(a)(1)(A), matched sales, id. at

__________

1 15 U.S.C. s 78i has been slightly altered since Global's closure

in 1991, but those amendments are irrelevant in this proceeding.

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s 78i(a)(1)(B)-(C), and false statements, id. at s 78i(a)(4).

Given Congress's clear endorsement for sanctions against this

sort of manipulation, the Commission's inclusion of it within

the phrase "manipulative ... device" in s 10(b), id. at

s 78j(b), cannot have been unreasonable.

The Commission's interpretation is also consistent with its

rules governing an issuer's purchases of its own securities.

See Securities Exchange Act of 1934, Rule 10b-18, 17 C.F.R.

s 240.10b-18. Issuer repurchases are perfectly real transactions. But the Commission has created a safe harbor measured in terms of timing, volume, and price; purchases

outside the safe harbor are subject to possible enforcement

action as manipulations. See Purchases of Certain Equity

Securities by the Issuer and Others; Adoption of Safe Harbor, 47 Fed. Reg. 53,333 (1982).

Further, to the extent that the case against liability for

"trade-based" manipulation depends on its inherently selfdeterring character, petitioners' situation may be distinguishable. The activity in Mountaintop furthered an external

purpose. At least in the short term, Global supported Mountaintop's price not to profit from later sales of Mountaintop,

but to maintain customer interest in Global generally and to

sustain confidence in its other securities. As James Shanley,

Global's chief operating officer, testified, petitioner Riccio

explained his refusal to lower his bid price: "If we do that on

one stock, they [presumably, holders of Global's stocks] will

hit us on all the stocks." Thus, the prospects of losing some

money on Mountaintop in the short run would not deter

Global from manipulating--if that cost was worth the benefit

of keeping its customers and preserving confidence in its

other stocks.

Apart from their conceptual attack on liability for manipulation where the trades are "real," petitioners argue that

Global's $1,400,000 net loss on Mountaintop precludes any

finding of scienter. In the alternative, they say that these

losses in Mountaintop at least cut against a finding of manipulation. Neither variation is persuasive. Just because a manipulator loses money doesn't mean he wasn't trying. InUSCA Case #00-1480 Document #646975 Filed: 12/21/2001 Page 6 of 8
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deed, as suggested above, attempts to support a price for an

ulterior purpose seem unlikely to prevail if success will take a

long time--protracted struggle against market fundamentals

will exhaust the manipulator's resources.

Petitioners' third claim asserts that some of the evidence

before the Commission was so defective that the Commission's findings lack substantial evidence. They point to possible infirmities in the NASD's Chronological Transaction Analysis ("CTA"), which the NASD used to support its findings

that Global's bid prices were higher than needed to acquire

the stock, and that its inventories of Mountaintop securities

were larger than could be explained by a genuine investment

intent. However compelling the criticisms may be, they are

inapposite. The Commission made clear that its findings of

manipulation rested not on the CTA, but on the statements

from the firm's own personnel. SEC Denial of Reconsideration at 2. That testimony, which the Commission was entitled

to credit, substantially supports the Commission's key finding: that the firm bought Mountaintop securities in order to

maintain their apparent market price.

For example, Shanley testified that Mountaintop securities

opened "too high" and remained at high levels only because

Global was "always supporting the stock." He further recounted conversations with Markowski in which he argued

that supporting a stock against the market was impossible--

as the event seemed to prove. And Gary Boccio, Global's

compliance officer, testified that Markowski explained his

refusal to reduce Global's inventory by saying that "he didn't

want to show we had any weakness in the stocks." Indeed,

Riccio himself admitted that although there was no demand in

the open market, Global made the sole high bid for days, even

months, on end. (Global evidently was able to offload much

of the Mountaintop stock that it acquired on special "clients"

of Markowski, whose role--victims? coconspirators? some

other class?--neither side in this litigation has seen fit to

explain.) Riccio said that he maintained Global's bids because he feared a drop in price and the customer complaints

it would generate.

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Finally, Markowski challenges the SEC's findings that he

violated Global's restriction agreement by maintaining inventory positions exceeding 200% of Global's excess net capital,

and that he refused to submit to an NASD investigative

interview. Markowski acknowledges the ancillary character

of these issues, however, and asks for relief regarding them

only if we find no basis for the principal manipulation charge.

Since we find that sufficient grounds support the manipulation charge, we need not reach these issues.

In any event, the arguments are unconvincing. Substantial

evidence, including testimony from Shanley and a memorandum from Boccio, support the SEC's finding that Markowski

knew about Global's continuing violations of the restriction

agreement. See, e.g., Patrick v. SEC, 19 F.3d 66, 69 (2d Cir.

1994). Similarly, the SEC reasonably found that Markowski's eventual acquiescence in an NASD request for an interview two months after his scheduled interview and four

months after NASD's initial request neither qualified as "full

and prompt cooperation" nor was sufficient to cancel his prior

recalcitrance. In re Borth, 51 S.E.C. 178, 180-81 (1992)

(discussing the importance of timely cooperation with NASD

investigations); In re Williams, 50 S.E.C. 1070, 1072 (1992)

(holding that litigation concerns did not excuse delays in

cooperation).

* * *

The order of the SEC is

Affirmed.

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