Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-08-01379/USCOURTS-caDC-08-01379-0/pdf.json

Parties Involved:
Securities and Exchange Commission
Respondent
Michael Frederick Siegel
Petitioner

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 14, 2009 Decided January 12, 2010

No. 08-1379

MICHAEL FREDERICK SIEGEL,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order 

of the Securities & Exchange Commission

George C. Freeman, III argued the cause for petitioner.

With him on the briefs was Meredith A. Cunningham.

Rada Lynn Potts, Senior Litigation Counsel, Securities and

Exchange Commission, argued the cause for respondent. With

her on the brief were David M. Becker, General Counsel, and

Jacob H. Stillman, Solicitor.

Before: GARLAND, Circuit Judge, and EDWARDS and

RANDOLPH, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge

EDWARDS.

EDWARDS, Senior Circuit Judge: This case involves a

disciplinary action brought by the National Association of

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*

 NASD was a national association of securities broker-dealers registered

with the Securities and Exchange Commission (“SEC”) under § 15A of the

Exchange Act, 15 U.S.C. § 78o-3. In 2007, NASD changed its name to

Financial Industry Regulatory Authority, Inc. (“FINRA”). See Securities

Exchange Act Release No. 56,146 (July 26, 2007), 2007 SEC LEXIS 1641,

at *9; see also In re Michael Frederick Siegel, Exchange Act Release No.

58,737 (Oct. 6, 2008), 2008 SEC LEXIS 2459, at *2 n.1, reprinted in 2 Joint

Appendix (“J.A.”) 678 n.1. Because the disciplinary action against Siegel

was initiated in 2002, this opinion refers to “NASD,” not “FINRA.” 

Securities Dealers (“NASD”)* against Michael Frederick Siegel

(“Siegel”). From October 1997 to June 1999, Siegel worked as

a registered, general securities representative with Rauscher

Pierce Refsnes, Inc. (“Rauscher”), a NASD member firm. In

2002, NASD’s Department of Enforcement filed a complaint

with NASD’s Office of Hearing Officers (“OHO”) charging

that, during his tenure with Rauscher, Siegel violated NASD

Conduct Rules when four of his clients – Linda and Huntington

Downer (“the Downers”) and Dorothy and Barry Landry (“the

Landrys”) – invested in World Environmental Technologies,

Inc. (“World ET”), a speculative, start-up company in search of

financing. World ET eventually failed and the Downers and

Landrys lost their investments. In its complaint, the Department

of Enforcement alleged that Siegel violated NASD Conduct

Rules 3040 and 2110 when he “sold away,” i.e., engaged in

private securities transactions on behalf of his clients without

providing prior written notice to Rauscher, and NASD Conduct

Rules 2310 and 2110 when he recommended World ET to his

clients without having any reasonable grounds for believing that

his recommendations were suitable. 

After a hearing, an OHO panel found that Siegel had

engaged in the violations alleged. The panel imposed a

six-month suspension and a $20,000 fine for the Rules

3040/2110 violations, and a six-month suspension and a $10,000

fine for the Rules 2310/2110 violations. The panel declined to

impose restitution and the suspensions were to be served

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concurrently. See Dep’t of Enforcement v. Michael Frederick

Siegel, No. C05020055 (Apr. 19, 2004) (“Initial OHO

Decision”), reprinted in 2 J.A. 463-79. The matter was appealed

to NASD’s National Adjudicatory Council (“NAC”). Following

a remand to the OHO panel, see In re Michael Frederick Siegel,

No. C05020055 (July 26, 2005) (“Initial NAC Decision”),

reprinted in 2 J.A. 482-87, NAC affirmed the panel’s initial

findings, with two modifications. NAC ordered Siegel to serve

his suspensions consecutively and ordered Siegel to pay

restitution in the amounts of $300,300 to the Downers and

$100,000 to the Landrys. See In re Michael Frederick Siegel,

No. C05020055 (May 11, 2007) (“Second NAC Decision”),

reprinted in 2 J.A. 497-521; In re Michael Frederick Siegel, No.

C05020055 (Dec. 4, 2007) (“NAC Supplemental Decision”),

reprinted in 2 J.A. 642-58. Siegel appealed to the SEC, which

affirmed NAC’s decision on all counts. In re Michael

Frederick Siegel, Exchange Act Release No. 58,737 (Oct. 6,

2008) (“SEC Decision”), 2008 SEC LEXIS 2459, at *1-*58,

reprinted in 2 J.A. 677-701.

In his petition for review to this court, Siegel’s principal

argument is that, because the SEC failed to properly assess the

“cause” of the losses suffered by the Landrys and Downers, the

agency’s decision to uphold NASD’s awards of restitution was

an abuse of discretion. We agree. NASD General Principle No.

5, which the SEC purported to apply in this case, describes

restitution as a “traditional remedy used to restore the status quo

ante where a victim otherwise would unjustly suffer loss”; and

it states that restitution may be ordered when a party “has

suffered a quantifiable loss as a result of a respondent’s

misconduct.” General Principle No. 5, FINRA Sanction

Guidelines at 4 (“Principle 5”). The SEC completely failed to

articulate any meaningful standards governing the level of

causation required under Principle 5. 

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This case involves wealthy and sophisticated customers

who were under no press of time to decide whether to invest;

customers who invested specifically in furtherance of a desire to

speculate; and a broker who did not profit from his wrongdoing

and who has been fined and suspended for his violations. There

is nothing in the SEC’s decision to indicate why, in these

circumstances, awards of restitution are appropriate under

Principle 5. Indeed, the SEC’s decision is incomprehensible

insofar as it attempts to amplify any meaningful causal

connection between Siegel’s putative bad acts and the Downers’

and Landrys’ losses. And the SEC has cited no precedent, and

we have found none, supporting restitution in a case of this sort.

The SEC’s judgment is fatally flawed for two reasons: First, the

SEC’s judgment is not supported by reasoned decisionmaking.

Second, the SEC cites to no controlling precedent that includes

reasoned decisionmaking supporting restitution under Principle

5 in a case of this sort. We therefore vacate the restitution order.

We reject Siegel’s remaining challenges. Substantial

evidence supports the SEC’s findings that Siegel violated

NASD’s rules barring selling away and unsuitable

recommendations. And the SEC did not abuse its discretion in

imposing fines and consecutive six-month suspensions for

Siegel’s separate violations of Rules 3040/2110 and Rules

2310/2110. 

I. BACKGROUND

A. Siegel’s Involvement in World ET

Siegel has worked as a registered general securities

representative since 1981. From October 24, 1997 to June 16,

1999, he was associated with Rauscher, a NASD member firm.

In early 1997, before Siegel joined Rauscher, he had several

conversations with representatives of World ET, where he

learned of the company’s burgeoning efforts to offer

antibacterial services to the poultry and swine industries. World

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ET representatives advised Siegel that the company was seeking

to acquire the formula for a product called “Nok-Out” that could

kill 99% of bacteria, fungi, and viruses on contact. In December

1997, World ET purchased the formula via a promissory note.

 Siegel subsequently agreed to join World ET’s board, to

serve as a consultant to the company, and to help it raise the

capital necessary to go public. On November 24, 1997, Siegel

submitted a written request to Rauscher’s compliance

department for approval to sit on World ET’s board. The

department approved Siegel’s request, but noted that Siegel

would “not be able to effect transactions in securities of [World

ET]” if the company went public. Inter-Office Memorandum

from Jill Ivancevich, Compliance Department, Rauscher Pierce

Refsnes, Inc., to Michael Siegel (Nov. 24, 1997), reprinted in 1

J.A. 283.

B. Siegel’s Involvement with the Downers and the Landrys

Siegel began managing investments for Huntington and

Linda Downer in 1993. Huntington Downer was a prominent

state legislator and former law firm partner, with experience in

state budget and finance matters. Huntington Downer also had

previously invested in speculative oil and gas ventures. The

combined net worth of the Downers was between $1.5 million

and $2 million. When Siegel joined Rauscher, the Downers

transferred their holdings to a Rauscher account. Over time, the

couple afforded Siegel significant discretion over their funds,

providing him “complete authority” to do “what he wanted.” Tr.

of Hearing (Oct. 8-10, 2003), reprinted in 1 J.A. 49-50. The

Downers acknowledged that they were “happy” with Siegel’s

representation. Id. at 50.

Siegel visited the Downers at their home in early 1997. The

purpose of the meeting, according to Siegel, was to “bring them

up to date” on the state of their investments. Id. at 188. The

parties discussed personal matters, including Huntington

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Downer’s interest in running for governor and Siegel’s new

radio show on investing. They also discussed World ET,

Siegel’s application to serve on the company’s board, and the

Nok-Out product. Siegel gave the Downers a Nok-Out sample

to use on their cat’s litter box. At some point during this

meeting, Huntington Downer expressed an interest in investing

with World ET. Siegel advised the Downers that they could not

invest until the company went public, but Huntington Downer

pressed Siegel to contact the company and inquire about

investment opportunities. Siegel subsequently spoke with

World ET representatives, who informed him that the Downers

could invest $300,000 in World IEQ Technologies, Inc. (“World

IEQ”), a purported subsidiary of World ET. Siegel relayed this

information to the Downers, who asked Siegel to obtain the

documentation necessary for them to invest.

On November 24, 1997, Siegel visited the Downers again,

this time bringing documents related to the proposed World IEQ

investment. The paperwork included a “Subscription

Agreement” and a “Subscriber Prospective Offeree

Questionnaire.” Siegel did not review these documents prior to

delivering them. As he later testified, had he done so, he would

have seen that the offering documents were deficient. Both

documents referenced an investment in a debenture, which is an

unsecured bond. Neither document, however, included any

information on interest rates or repayment terms. Moreover, the

two documents were inconsistent in the limited investment

information they provided. Huntington Downer promptly

signed and returned the documents, but Siegel still declined to

review the paperwork. He did, however, fax the documents to

World ET. Later, on December 1, 1997, Siegel transferred

$300,300 from the Downers’ Rauscher account to a World IEQ

bank account after receiving written authorization from the

Downers to do so. 

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Within two weeks, World ET contacted Siegel to notify him

that the World IEQ investment was no longer viable and that the

Downers could receive a refund of their initial investment or

transfer it to World ET. When Siegel relayed this information

to his clients, Huntington Downer sought Siegel’s advice on

how to proceed. In response to this inquiry, Siegel told Downer:

“I would rather be in the mother company if I had a choice.” Id.

at 251. The Downers subsequently opted to invest in World ET.

They never received or signed any new documentation

concerning the investment.

* * * 

In November 1997, Dorothy and Barry Landry opened an

account with Siegel at Rauscher. The Landrys had recently sold

Ms. Landry’s business and were looking to invest. They

provided Siegel with $1 million in funds and afforded him

significant independent investment discretion. In late 1997,

Siegel met with the Landrys to complete the paperwork

necessary to open their Rauscher account. At that meeting,

Siegel raised the possibility of investing in World ET as

“something [the Landrys] might be interested in” and that they

should “take a look at.” Id. at 123. The Landrys expressed

interest, which Siegel relayed to World ET. Officials at World

ET then sent along documentation for the Landrys to sign.

Siegel delivered the offering documents to the Landrys, but he

did not review them. As with the Downers, the documentation

was deficient. The papers included a subscription agreement

that described the purchase of one debenture “unit” at $100,000,

but contained no maturity date for the debenture and no interest

rate. World Environmental Technologies, Inc., Subscription

Agreement, reprinted in 1 J.A. 313-15.

On Siegel’s advice, the Landrys held onto the documents to

review them over the next few months before making a final

investment decision. On February 5, 1998, the Landrys directed

Siegel to transfer $100,000 from their Rauscher account to their

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joint bank account. Six days later, the Landrys gave the signed

documents and a $100,000 check to Siegel, who sent both to

World ET. World ET negotiated the check, but the Landrys

never received any documentation confirming their investment.

World ET was never approved to be publicly traded. The

company made its last payment on the Nok-Out promissory note

in October 1998. On August 28, 2002, World ET lost its rights

to Nok-Out. On February 13, 2004, the Texas Secretary of State

revoked World ET’s corporate charter. 

Siegel’s direct involvement with World ET included signing

a resolution authorizing its acquisition of Nok-Out; loaning the

company $22,000 on January 14, 1998; entering into an

employment agreement on January 27, 1998 to raise a minimum

of $15 million for World ET in exchange for cash and company

shares; and making an additional loan to the company of

$20,166.01 on March 6, 1998. Neither Siegel, the Downers, nor

the Landrys ever received any payment from World ET.

C. Disciplinary Proceedings Against Siegel

Broker-dealers who trade in securities are subject to the

regulations covering national securities associations. During the

events relevant to this case, NASD was a registered national

securities association and acted pursuant to quasi-governmental

authority to oversee the activities of its members and associated

persons. As we explained in National Ass’n of Securities

Dealers, Inc. v. SEC, 431 F.3d 803 (D.C. Cir. 2005): 

Two provisions of the Exchange Act define NASD’s

quasi-governmental authority to adjudicate actions against

members who are accused of unethical or illegal securities

practices and the Commission’s oversight of that authority.

These are §§ 15A and 19. Section 15A, 15 U.S.C. § 78o-3,

lays out the specific duties of a registered national securities

association. It sets out disciplinary functions which NASD,

as a registered national securities association, must

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perform. . . . 15 U.S.C. § 78o-3(b)(6). Where NASD

members have allegedly violated either association rules or

federal securities law, NASD has the authority to consider

disciplinary action in the first instance. See 15 U.S.C.

§ 78o-3(b)(7). If NASD proceeds against a member, it

must provide a minimum level of process, including notice

of the specific charges and an opportunity to be heard, as

well as a statement of subsequent findings. See 15 U.S.C.

§ 78o-3(h). Fair disciplinary procedures are a prerequisite

for registration of a national securities association. 15

U.S.C. § 78o-3(b)(8).

Given the statutory requirements of § 15A, NASD . . .

established an elaborate adjudicative arm to address

disciplinary actions. . . . Where a complaint has been filed

against members for violations of federal securities laws,

the adjudication may take place before a NASD Hearing

Panel [in NASD’s Office of Hearing Officers]. . . . As

noted above, Hearing Panel [i.e., OHO panel] decisions

may be appealed to NAC, or they may be reviewed by NAC

on its own initiative. . . . 

Section 19, 15 U.S.C. § 78s, sets out the Commission’s

supervisory duties over all “self-regulatory organizations.”

NASD is a “self-regulatory organization” by virtue of the

fact that it is a “registered securities association” under

§ 15A. See 15 U.S.C. § 78c(a)(26) (definition of

“self-regulatory organization”). With respect to

adjudications, the Commission’s oversight begins with the

obligation of self-regulatory organizations to notify the

Commission of any final disciplinary sanction imposed on

a member or associated person. 15 U.S.C. § 78s(d)(1). The

statute also provides the Commission with plenary review

powers. 15 U.S.C. § 78s(e). Once notified, the

Commission may, on its own motion or on the application

of any person aggrieved by the association’s action, review

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NASD’s disciplinary action. 15 U.S.C. § 78s(d)(2). . . .

Section 19(e) authorizes the Commission to make an

independent determination as to whether the violations

found by the association occurred, and to change NASD’s

sanctions in whatever ways it deems appropriate. See 15

U.S.C. § 78s(e). The Commission may base its

determination on the record compiled by the association,

but it is not limited to that record and may adduce

additional evidence.

Id. at 805-06.

On November 26, 2002, NASD’s Department of

Enforcement filed a complaint with NASD’s OHO. The

complaint alleged that Siegel violated NASD Conduct Rules

3040 and 2110 when he “sold away,” i.e., engaged in private

securities transactions on behalf of his clients without providing

prior written notice to Rauscher, and NASD Conduct Rules

2310 and 2110 when he recommended World ET to his clients

without having any reasonable grounds for believing that his

recommendations were suitable. Complaint ¶¶ 1-31, In re

Michael Frederick Siegel, No. C05020055 (Nov. 25, 2002),

reprinted in 1 J.A. 20-27. 

Rule 3040 states:

Prior to participating in any private securities transaction, an

associated person shall provide written notice to the member

with which he is associated describing in detail the proposed

transaction and the person’s proposed role therein and

stating whether he has received or may receive selling

compensation in connection with the transaction . . . .

NASD Conduct Rule 3040, NASD Manual 3040(b). A

“[p]rivate securities transaction” is defined as “any securities

transaction outside the regular course or scope of an associated

person’s employment with a member.” Id. 3040(e)(1). 

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Rule 2310 states:

In recommending to a customer the purchase, sale or

exchange of any security, a member shall have reasonable

grounds for believing that the recommendation is suitable

for such customer upon the basis of the facts, if any,

disclosed by such customer as to his other security holdings

and as to his financial situation and needs.

NASD Conduct Rule 2310, NASD Manual 2310(a). As noted

above, Siegel acknowledged that he did not review the offering

documents before conveying the materials to the Downers and

the Landrys. 

Rule 2110 states: 

A member, in the conduct of his business, shall observe high

standards of commercial honor and just and equitable

principles of trade. 

NASD Conduct Rule 2110, NASD Manual 2110. “It is well

settled that a violation of a . . . NASD rule or regulation also

constitutes a violation of Conduct Rule 2110.” SEC Decision,

2008 SEC LEXIS 2459, at *20 n.13, 2 J.A. 685 (citing In re

Stephen J. Gluckman, Exchange Act Release No. 41,628 (July

20, 1999), 1999 SEC LEXIS 1395, at *22-*23). 

After an initial hearing, the OHO panel found that Siegel

violated Rule 2310, Rule 3040, and Rule 2110. Initial OHO

Decision, 2 J.A. 463-79. The panel imposed sanctions, including

a $20,000 fine with a six-month suspension for “selling away”

(Rules 3040 and 2110), and a $10,000 fine with a separate sixmonth suspension for making unsuitable recommendations to the

Downers and Landrys (Rules 2310 and 2110). Id. at J.A. 479.

The panel allowed Siegel to serve his two suspensions

concurrently and did not order him to pay restitution to the

customers. Justifying the latter decision, the panel noted that the

Downers and the Landrys were “relatively sophisticated persons,

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who voluntarily chose to invest in a risky enterprise”; that

“Siegel earned nothing from the transactions and lost his own

money”; and that the customers were separately pursuing

arbitration to recoup their losses. Id. at 478.

Siegel appealed to NAC. After initially remanding the case

to the OHO panel to make certain credibility determinations and

factual findings, see Initial NAC Decision, 2 J.A. 482-87, NAC

affirmed the panel’s initial findings with two modifications. See

Second NAC Decision, 2 J.A. 497-521. First, NAC ordered

Siegel to serve his suspensions consecutively rather than

concurrently. Id. at 516-17. Second, NAC ordered Siegel to pay

restitution in the amounts of $300,300 to the Downers and

$100,000 to the Landrys, less any value the customers received

from selling their securities, any residual value in the securities

that the customers had not sold, and any restitution that the

customers had recovered through other avenues. Id. at 519-20.

The case was then referred to a NAC subcommittee to determine

whether the restitution amounts should be reduced. See id. After

receiving a recommendation from the subcommittee, NAC

concluded that no offsets were required and ordered Siegel to

pay 100% restitution to the victims – $300,300 to the Downers

and $100,000 to the Landrys. See NAC Supplemental Decision,

2 J.A. 642-58. 

Siegel appealed to the SEC, which affirmed NAC’s liability

and sanction determinations. SEC Decision, 2008 SEC LEXIS

2459, at *1-*58. On the Rule 2310 violation, the SEC grounded

its analysis on the view that “‘a broker may violate the suitability

rule if he fails so fundamentally to comprehend the consequences

of his own recommendation that such recommendation is

unsuitable for any investor, regardless of’” individual

characteristics. Id. at *28, 2 J.A. 689 (quoting In re F.J.

Kaufman & Co., Exchange Act Release No. 27,535 (Dec. 13,

1989), 1989 SEC LEXIS 2376, at *11). As noted above, Siegel

acknowledged that he did not review the offering documents that

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he conveyed to the Downers and the Landrys. The Commission

focused on the flaws in those documents and on Siegel’s

concession that the deficiencies in the documents rendered an

investment in World IEQ and World ET unsuitable for any

investor. Id. at *31, 2 J.A. 690. The Commission rested on these

grounds, explicitly declining to address “whether World ET was

suitable for the Downers and the Landrys based upon their

personal situations.” Id. at *31 n.26, 2 J.A. 690. 

On appeal to this court, Siegel contests his liability for

having made a “recommendation” to the Downers, as well as

each of the sanctions imposed by the SEC. 

II. ANALYSIS

A. Standard of Review

The question of whether Siegel “recommended” an

investment to the Downers under Rule 2310 is a “facts and

circumstances” inquiry. SEC Decision, 2008 SEC LEXIS 2459,

at *21, 2 J.A. 686 (internal quotation marks and citation

omitted). The SEC’s findings of fact are reviewed under the

“very deferential” substantial evidence standard, see Dolphin &

Bradbury, Inc. v. SEC, 512 F.3d 634, 639 (D.C. Cir. 2008)

(internal quotation marks and citation omitted), and are

conclusive if “a reasonable mind might accept [the] evidentiary

record as adequate” to support the agency’s conclusions. Id.

(internal quotation marks and citation omitted); see also 15

U.S.C. § 78y(a)(4). Under this standard, the reviewing court

must consider all relevant evidence; however, the court “‘may

not find substantial evidence merely on the basis of evidence

which in and of itself justified [the agency’s decision], without

taking into account contradictory evidence or evidence from

which conflicting inferences could be drawn.’” Morall v. DEA,

412 F.3d 165, 177 (D.C. Cir. 2005) (quoting Lakeland Bus Lines,

Inc. v. NLRB, 347 F.3d 955, 962 (D.C. Cir. 2003) (internal

quotation marks and citation omitted)). The reviewing court may

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not substitute its own judgment for the agency’s “choice between

two fairly conflicting views,” even if that court “would

justifiably have made a different choice had the matter been

before it de novo.” See Universal Camera Corp. v. NLRB, 340

U.S. 474, 488 (1951).

 The SEC reviews sanctions imposed by the NASD to

determine whether they “impose[] any burden on competition not

necessary or appropriate” or are “excessive or oppressive.” 15

U.S.C. § 78s(e)(2); see also PAZ Sec., Inc. v. SEC, 494 F.3d

1059, 1065-66 (D.C. Cir. 2007) (“PAZ I”). This court reviews

the SEC’s conclusions regarding sanctions to determine whether

those conclusions are arbitrary, capricious, or an abuse of

discretion. See PAZ Sec., Inc. v. SEC, 566 F.3d 1172, 1174

(D.C. Cir. 2009) (“PAZ II”). “The agency’s choice of remedy is

‘peculiarly a matter for administrative competence,’ and we will

reverse it ‘only if the remedy chosen is unwarranted in law or is

without justification in fact.’” Id. (quoting Am. Power & Light

Co. v. SEC, 329 U.S. 90, 112-13 (1946)).

B. Siegel’s Liability for Violating Rule 2310 with Respect to

the Downers

In conducting its inquiry into whether Siegel recommended

World ET investments to the Downers within the meaning of

Conduct Rule 2310, the SEC properly considered the “‘content,

context, and presentation’” of Siegel’s communications, and

whether, as an objective matter, Siegel’s communication

“‘reasonably could have been viewed as a call to action’ and

‘reasonably would influence an investor to trade a particular

security or group of securities.’” SEC Decision, 2008 SEC

LEXIS 2459, at *21, 2 J.A. 686 (quoting NASD Notice to

Members, 01-23 (Apr. 2001), 2001 NASD LEXIS 28, at *8-*9,

*19). In concluding that Siegel “recommended” World ET to the

Downers, the SEC focused on a number of “main factors.” Id.

at *22, 2 J.A. 686. These factors included the close relationship

between the Downers and Siegel, the Downers’ reliance on

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Siegel for investment advice, the nature of the specific

conversations between the Downers and Siegel regarding

investments in World ET, and Siegel’s initiation of conversations

concerning World ET with the Downers. Id. at *21-*22, 2 J.A.

686-87. On the basis of this evidence, the SEC concluded that

Siegel’s “conduct constitute[d] a recommendation because it was

a ‘call to action’ that reasonably influenced the Downers . . . to

invest in World ET.” Id. at *24, 2 J.A. 687.

We have little doubt that the SEC’s conclusion is supported

by substantial evidence. Siegel contends that he specifically

discouraged the Downers from investing and only acted as an

intermediary with World ET at Huntington Downer’s insistence.

Pet. Br. at 49-50. The SEC noted, however, that “Siegel

admit[ted] that he could have refused” this request. SEC

Decision, 2008 SEC LEXIS 2459, at *23, 2 J.A. 686. Siegel also

contends that he declined to review the offering documents that

he gave to the Downers in an attempt to avoid violating Rule

3040’s prohibition against engaging in a private securities

transaction without providing written notice to Rauscher, and

Rule 2310’s prohibition against unsuitable recommendations,

and communicated as much to the Downers. See Pet. Br. at 51-

52. But this explanation does not speak to the question of

whether Siegel’s communications with the Downers could be

perceived by a reasonable person in the Downers’ position as a

“suggestion to invest” in World ET and, thus, raise the specter of

a violation of Rule 2310.

More importantly, as the SEC found, following his initial

conversations with the Downers, Siegel “encourag[ed the

Downers] to invest in World ET after learning they could not

invest” in the subsidiary company, World IEQ. SEC Decision,

2008 SEC LEXIS 2459, at *25, 2 J.A. 687. As the agency notes,

“[a]fter Siegel informed the Downers that it was no longer

possible to invest in World IEQ, he advised them to invest in

World ET rather than receive a refund on their World IEQ

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investment, stating that he ‘would rather be in the mother

company if [he] had a choice.’” Id. at *23, 2 J.A. 686. Siegel

provides no explanation for how this statement can be interpreted

as anything other than a suggestion to invest in World ET. This

interaction alone is sufficient to sustain the SEC’s finding that

Siegel recommended an investment.

C. Mitigating Factors

Siegel contends that the SEC failed to appropriately consider

certain mitigating factors prior to imposing sanctions. His

arguments are unpersuasive and warrant little attention here. The

Government’s brief on behalf of the SEC more than ably

addresses this issue:

Siegel argues that NASD’s sanctions are

“inappropriate” in light of allegedly mitigating factors “the

SEC largely brushed aside.” . . . [T]he Commission properly

found that a number of Siegel’s claims of mitigation were

not supported in the record. The remaining claims fall into

two categories: (1) those that could not be mitigating – even

if they were present in the record; and (2) those that,

although mitigating and present in the record, are

outweighed by aggravating factors. . . . 

In the first category of claims are those that the

Commission refused to credit because doing so would turn

ignorance of regulatory requirements into excuses for

misconduct or reward [for] simply complying with such

requirements. Thus, for example, the Commission refused

to excuse Siegel’s Rule 3040 violations based on his

purported “misunderstanding” of the rule. As the

Commission held, that claim is “especially not mitigating

because of [Siegel’s] seventeen years of experience as an

associated person . . . and the fact that he has been active as

a registered investment advisor, authored a book on

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investment advice, and served as a local media expert on

financial topics.” 

In addition, the Commission refused to consider

mitigating Siegel’s assertions that he: had no disciplinary

history; cooperated in NASD’s investigation; never

performed any act pursuant to the World ET employment

agreement; did not attempt to create the impression that

Rauscher sanctioned his activities; and did not recruit other

registered individuals to sell World ET securities. Siegel

also asserts as mitigating that World ET securities have not

been found to involve a violation of the securities laws or

rules. While these are factors listed in the guidelines as

either general considerations applicable to all sanction

determinations . . . or violation-specific considerations . . .

not every consideration listed in the guidelines has the

potential to be mitigating . . . .

Thus, as the Commission explained, the presence of any

of the factors listed above could justify an increase in

sanctions, but their absence is not mitigating “because an

associated person should not be rewarded for acting in

compliance with the securities laws and with his duties as a

securities professional.” . . .

Finally, Siegel does point to a number of factors that the

Commission concluded had some mitigating impact: that

his acts of misconduct were neither numerous nor made over

an extended period of time; that a small number of

customers were involved; that those customers were

sophisticated; and that he disclosed that he was seeking an

appointment to World ET’s board. The Commission

concluded, however, that the mitigating impact of these

factors was outweighed by aggravating factors, particularly

Siegel’s reckless failure to take any steps to inform himself

about the securities he recommended to his clients.

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Gov’t Br. at 35-37 (internal citations omitted).

The Government’s discussion of this issue needs no

amplification. It is sufficient to say that, on the record here, the

SEC reasonably addressed mitigating and aggravating

circumstances in considering sanctions. We reject Siegel’s

arguments to the contrary.

D. Concurrent Versus Consecutive Suspensions

This case represents the first time that the SEC has

“addressed whether the imposition of consecutive – as opposed

to concurrent – suspensions is excessive or oppressive.” SEC

Decision, 2008 SEC LEXIS 2459, at *46, 2 J.A. 696. As an

initial matter, it is important to remember that the agency “may

impose sanctions for a remedial purpose, but not for

punishment.” McCurdy v. SEC, 396 F.3d 1258, 1264 (D.C. Cir.

2005). Thus, the SEC must “review the sanction imposed by the

NASD with ‘due regard for the public interest and the protection

of investors,’” PAZ I, 494 F.3d at 1065 (quoting 15 U.S.C.

§ 78s(e)(2)), and ensure that it “serve[s] a remedial purpose, as

required by” the Exchange Act. Id. at 1061; see also 15 U.S.C.

§ 78s(e)(2). To justify a sanction as remedial, the agency “‘must

do more than say, in effect, petitioners are bad and must be

punished.’” PAZ I, 494 F.3d at 1064 (quoting Blinder, Robinson

& Co. v. SEC, 837 F.2d 1099, 1113 (D.C. Cir. 1988)). The

agency must, “at the least[,] . . . give ‘[s]ome explanation

addressing the nature of the violation and the mitigating factors

presented in the record.’” Id. at 1064-65 (quoting McCarthy v.

SEC, 406 F.3d 179, 189-90 (2d Cir. 2005)). However, beyond

“mak[ing] the necessary ‘findings regarding the protective

interests to be served’ by expulsion,” the agency need not “state

why a lesser sanction would be insufficient.” PAZ II, 566 F.3d

at 1175-76 (quoting McCarthy, 406 F.3d at 189). 

As the SEC noted, NASD’s NAC concluded that “because

. . . selling away and suitability violations involve different kinds

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of misconduct and raise separate and serious regulatory

concerns,” consecutive suspensions would “specifically

discourage all types of additional misconduct at issue.” See SEC

Decision, 2008 SEC LEXIS 2459, at *44-*45, 2 J.A. 695-96

(internal quotation marks and citation omitted). The SEC

“agree[d] with NASD that Siegel’s violations are different in

nature and raise separate public interest concerns.” Id. at *46, 2

J.A. 696. Thus, the SEC imposed consecutive suspensions not

to punish Siegel, but rather to protect the public from two

fundamentally different types of harms. 

As the agency noted, “[t]he purpose of NASD Conduct Rule

3040 is to protect ‘investors from unsupervised sales and

securities firms from exposure to loss and litigation from

transactions by associated persons outside the scope of their

employment.’” Id. (quoting In re Chris Dinh Hartley, Exchange

Act Release No. 50,031 (July 16, 2004), 2004 SEC LEXIS 1507,

at *13 n.17). The SEC thus found that Siegel’s suspension for

the Rule 3040 violation “will protect the public interest by

discouraging Siegel and others from selling away and from

undermining the protections in place at firms.” Id. The purpose

of NASD Rule 2310, on the other hand, is “to protect customers

from potentially abusive sales practices by ensuring that a

registered representative has reasonable grounds for believing

that his recommendation is suitable.” Id. The SEC accordingly

found that the separate suspension for the Rule 2310 violations

“will protect the public interest by encouraging Siegel and others

to take the steps necessary to determine that recommendations

that they make to their customers are suitable while also

deterring them from putting their own interests ahead of those of

their customers.” Id. at *46-*47, 2 J.A. 696-97. Given the

deference due to the SEC, we cannot say that the agency abused

its discretion in finding that consecutive, six-month suspensions

were not excessive or oppressive. 

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Siegel contends that the SEC erred in focusing on his prior

bad acts instead of on the current threat he poses to the investing

public. Some cases have suggested that undue focus on past

actions may raise doubts about the propriety of a sanction. See,

e.g., Johnson v. SEC, 87 F.3d 484, 490 (D.C. Cir. 1996). There

is no rigid rule on this, however, because “[i]t is difficult to

imagine how any suspension, remedial or not, could be based on

anything but past actions.” McCurdy, 396 F.3d at 1264. 

Siegel also argues that, in imposing consecutive

suspensions, the agency improperly relied on general deterrence,

which is “essentially a rationale for punishment, not for

remediation.” PAZ I, 494 F.3d at 1066. We do not agree that the

SEC erred in this way. This is not a case in which the SEC

offered “no other rationale whatsoever” beyond general

deterrence. Id. Furthermore, “‘general deterrence . . . may be

considered as part of the overall remedial inquiry.’” Id. (quoting

McCarthy, 406 F.3d at 189); see also McCarthy, 406 F.3d at 189

(“[T]he SEC has expressly adopted deterrence, both specific and

general, as a component in analyzing the remedial efficacy of

sanctions.”).

Finally, Siegel contends that his lack of a disciplinary record

subsequent to the events of this case undermines the remedial

efficacy of the suspensions. This argument was not raised before

the agency, so we decline to consider it here. See 15 U.S.C.

§ 78y(c)(1).

In sum, we hold that the SEC did not abuse its discretion in

upholding the consecutive suspensions imposed by NAC. 

E. Restitution

As noted above, Siegel’s principal argument to this court is

that, because the SEC failed to properly assess the “cause” of the

losses suffered by the Landrys and Downers, the agency’s

decision to uphold NASD’s awards of restitution was an abuse

of discretion. There is merit to this claim.

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In ordering Siegel to pay restitution in excess of $400,000,

in addition to paying fines and serving consecutive suspensions,

both the NASD’s NAC and the SEC relied on Principle 5 in

NASD’s Sanction Guidelines. See Second NAC Decision, 2 J.A.

518-19; SEC Decision, 2008 SEC LEXIS 2459, at *48-*52, 2

J.A. 697-99. Principle 5 states, in relevant part: 

Where appropriate to remediate misconduct, Adjudicators

should order restitution and/or rescission. Restitution is a

traditional remedy used to restore the status quo ante where

a victim otherwise would unjustly suffer loss. Adjudicators

may determine that restitution is an appropriate sanction

where necessary to remediate misconduct. Adjudicators

may order restitution when an identifiable person, member

firm[,] or other party has suffered a quantifiable loss as a

result of a respondent’s misconduct, particularly where a

respondent has benefitted from the misconduct.

Adjudicators should calculate orders of restitution based on

the actual amount of the loss sustained by a person . . . as

demonstrated by the evidence. Orders of restitution may

exceed the amount of the respondent’s ill-gotten gain.

Restitution orders must include a description of the

Adjudicator’s method of calculation.

Principle 5, at 4 (emphasis added).

Counsel for both parties before this court agreed that, under

Principle 5, the SEC must demonstrate a causal connection

between a broker’s misconduct and any loss at issue. In other

words, Siegel cannot be made to pay restitution to the Downers

or the Landrys unless the SEC shows that Siegel’s misdeeds

caused their investment losses. What is unclear, however, is the

level of causation that is required before the agency may impose

restitution.

There are several ways in which to construe the causation

requirement of Principle 5. One possibility would be to find that

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Principle 5 requires nothing more than loose, “but for” causation.

Under this standard, the agency would be required to determine

whether a loss would not have occurred but for the broker’s

misconduct. As we noted in Kilburn v. Socialist People’s Libyan

Arab Jamahiriya, 376 F.3d 1123 (D.C. Cir. 2004), “but for”

causation is an unwieldy concept: 

“But for” causation may be restrictive in some

circumstances . . . . SeePROSSER &KEETON ON THE LAW OF

TORTS 66-67 (5th ed. 1984). Often, however, it is viewed as

an expansive theory. See, e.g., Pryor v. American President

Lines, 520 F.2d 974, 978 n.4 (4th Cir. 1975) (describing

“but for” causation as a potentially “limitless” standard

under which “Eve’s trespass caused all our woe” (citing 2

HARPER & JAMES, THE LAW OF TORTS 1108 (1956))); see

generally PROSSER & KEETON, at 266 (noting that the

breadth of “but for” causation may depend on whether it is

employed as a rule of inclusion or exclusion).

Id. at 1127 n.2. Recognizing that “but for” causation may indeed

be “limitless” in assessing whether restitution is due for brokerdealer violations, the SEC’s counsel conceded at oral argument

that Principle 5 requires more than a showing of “but for”

causation in order to justify restitution.

Another possibility is “proximate causation,” which is

normally understood to require a direct relation between conduct

alleged and injury asserted. See, e.g., Holmes v. Sec. Investor

Prot. Corp., 503 U.S. 258, 268-69 (1992). It is noteworthy that,

in its decision ordering Siegel to pay restitution, NAC appears to

assume the applicability of “proximate cause” as the test required

by Principle 5. See Second NAC Decision, 2 J.A. 519 (inquiring

whether “Siegel’s violative conduct ever ceased to be the

proximate cause of the customers’ losses”).

Yet another possibility is a “substantial factor” test of

causation. This test is sometimes applied when a contested loss

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has “been brought about by two or more concurrent causes.”

Daniels v. Hadley Mem’l Hosp., 566 F.2d 749, 757 (D.C. Cir.

1977). Under such a test, the agency would be required to show

that a broker’s violation of NASD rules was a “‘substantial

factor’ in bringing about the harm” to his clients. Id.

Last but not least is “loss causation,” best exemplified by the

court’s decision in Bastian v. Petren Resources Corp., 892 F.2d

680 (7th Cir. 1990). In Bastian, the plaintiffs invested $600,000

in oil and gas limited partnerships promoted by the defendants.

The plaintiffs, who were fully intent on investing in oil and gas

companies, alleged that without the defendants’

misrepresentations and misleading omissions, they would not

have made these particular investments, which were “worthless”

by 1984 because the entire oil and gas market collapsed in the

early 1980s. Id. at 682, 684-85. The court noted:

The plaintiffs alleged that they invested in the

defendants’ limited partnerships because of the defendants’

misrepresentations, and that their investment was wiped out.

But they suggest no reason why the investment was wiped

out. They have alleged the cause of their entering into the

transaction in which they lost money but not the cause of the

transaction’s turning out to be a losing one. . . .

. . . . 

If the plaintiffs would have lost their investment

regardless of the fraud, any award of damages to them

would be a windfall. . . .

Id. at 684-85. The court in Bastian held that plaintiffs had not

sufficiently pled loss causation because they “were not told that

oil and gas partnerships are risk-free. They knew they were

assuming a risk that oil prices might drop unexpectedly. . . . [and

were] unwilling to try to prove that anything beyond the

materializing of that risk caused their loss.” Id. at 686. 

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Siegel argued to the SEC and to this court that “loss

causation” is the level of causation that is required before the

agency may impose restitution pursuant to Principle 5. Siegel

points out that the Downers and the Landrys purposefully

intended to pursue speculative investments in World ET.

According to Siegel, the customers lost their investments

because of World ET’s failure, not because of Siegel’s failure to

review the deficient offering documents. In response to Siegel’s

insistence that principles of “loss causation” should be followed

in this case, the SEC rejected the reasoning of Bastian as

inapposite, because that case involved “a private action for

damages under the antifraud provisions of the federal securities

laws where ‘loss causation’ was an element of the claim.” SEC

Decision, 2008 SEC LEXIS 2459, at *49, 2 J.A. 697.

We do not mean to suggest that the foregoing tests of

causation are always clear or mutually exclusive. They are not.

Nor do we mean to suggest that we have exhausted all possible

tests of causation in pondering the meaning of Principle 5. And

we certainly do not mean to suggest that we know which test of

causation offers that best construction of Principle 5. We do not.

What we do mean to show, however, is that – apart from strict

liability and limitless notions of “but for” causation – there are

a number of ways in which Principle 5 might be construed. This

responsibility belongs to the SEC, not this court. Unfortunately,

the SEC has offered virtually nothing to explain the applicable

test of causation under Principle 5.

As noted above, Principle 5 sets forth a causation

requirement in the following terms: “Adjudicators may order

restitution when an identifiable person, member firm[,] or other

party has suffered a quantifiable loss as a result of a

respondent’s misconduct . . . .” Principle 5, at 4 (emphasis

added). In footnote 55 of its opinion, the SEC offered the

following explanation of this causation requirement:

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In requiring that a loss be a result rather than the result of a

respondent’s misconduct, we acknowledge that other factors

may bear upon the loss and that any determination as to the

propriety of restitution will be based on an analysis of all the

relevant facts and circumstances.

SEC Decision, 2008 SEC LEXIS 2459, at *51 n.55, 2 J.A. 698

(underscoring in original). “[T]his explanation is nonsense, and

the two [phrases] together are not even compatibly nonsensical.”

Allentown Mack Sales & Serv., Inc. v. NLRB, 522 U.S. 359, 376

(1998). Whether a loss is the sole result or one of many results

of a broker’s misconduct is irrelevant to the causation issue

raised by Siegel. Moreover, the second part of footnote 55 does

not even reflect an acknowledgment by the Commission that

Principle 5 requires some meaningful causal connection between

a broker’s misconduct and the losses suffered by his clients.

Rather, in footnote 55, the Commission does no more than assert

that it will decide whether to impose restitution on the basis of

“an analysis of all the relevant facts and circumstances.” SEC

Decision, 2008 SEC LEXIS 2459, at *51 n.55, 2 J.A. 698. This

explanation tells neither the reviewing court nor the regulated

parties anything about (1) the degree of causal connection that

the Commission will require between proven misconduct and a

loss before imposing 100% restitution, or (2) how the

Commission intends to measure the substantiality of that

connection. This is entirely unacceptable. As the Court noted in

Allentown Mack, “[n]ot only must an agency’s decreed result be

within the scope of its lawful authority, but the process by which

it reaches that result must be logical and rational.” 522 U.S. at

374.

The SEC based its decision on the proposition that “as

between Siegel’s customers, who were placed in unsuitable

investments and Siegel, who recommended them, equity requires

Siegel, as the person responsible for the losses, to bear the

burden and to return the customers to the position occupied prior

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to the unsuitable recommendations.” SEC Decision, 2008 SEC

LEXIS 2459, at *50, 2 J.A. 698. The agency’s own analysis,

however, makes clear that the unsuitability of the

recommendations stemmed not from a level of risk associated

with the investments that the customers were otherwise unwilling

to bear, but rather from the terms of the investment offering

documents, which were deficient. Tellingly, there is nothing in

the SEC decision demonstrating that the customers’ losses came

“as a result of” these document deficiencies. Indeed, had the

investment paperwork that Siegel provided to his clients not been

deficient, the Downers and the Landrys still would have suffered

the same losses once World ET failed. Moreover, in resting its

analysis on the deficient offering documents, the SEC declined

to address “whether World ET was suitable for the Downers and

the Landrys based upon their personal situations.” Id. at *31

n.26, 2 J.A. 690. 

In failing to articulate a comprehensible principle governing

the level of causation required by Principle 5, the SEC decision

borders on whimsical or rests on notions of strict liability. In

either event, the decision offers no reasonable construction of

the causation requirement under Principle 5. This is far short of

reasoned decisionmaking. As the Supreme Court has explained,

the “evil of a decision” of this sort is that it “prevent[s] both

consistent application of the law by subordinate agency

personnel . . . and effective review of the law by the courts.”

Allentown Mack, 522 U.S. at 375. The SEC’s decision in this

case clearly fails for want of reasoned decisionmaking.

* * * 

Although not supported by reasoned decisionmaking, the

SEC’s judgment on restitution arguably might survive review if

supported by controlling precedent that included reasoned

decisionmaking. However, the SEC has cited no such

precedent, and we have found none, supporting restitution under

Principle 5 in a case of this sort. 

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As noted above, this case involves wealthy and

sophisticated customers who were not pressed to decide whether

to invest; customers who invested in furtherance of their specific

desires to speculate in a high risk venture; and a broker who did

not profit from his wrongdoing and who has been fined and

suspended for his violations. The SEC has never ordered

restitution in a situation such as this. Indeed, all of the cases

cited by the SEC indicate that restitution has been ordered only

in situations in which causation is clear, i.e., there has been proof

that the amount charged in restitution is closely and inextricably

tied to the amount lost as a result of the broker’s wrongdoing. 

During oral argument, SEC counsel was asked to cite the

case that best supports the SEC position in this case. Counsel

cited In re Dane S. Faber, Exchange Act Release No. 49,216

(Feb. 10, 2004), 2004 SEC LEXIS 277, a decision not relied

upon by the SEC. The case involved restitution sanctions in a

situation in which the agency found fraudulent and unsuitable

recommendations in violation of SEC Rule 10b-5 and NASD

rules. The agency found that the broker-dealer had

“recommended that a financially inexperienced customer of

modest means preparing for retirement invest nearly all of her

portfolio (which constituted more than two-thirds of her total

liquid assets) in a single speculative security despite her

instructions that she wanted conservative investments.” Id. at

*28 (emphasis added). Faber obviously gives no support to the

SEC’s judgment in this case.

The SEC decision cites to three cases: In re Toney L. Reed,

Exchange Act Release No. 33,676 (Feb. 24, 1994), 1994 SEC

LEXIS 507 (“Reed I”); In re Toney L. Reed, Exchange Act

Release No. 34-37,572 (Aug. 14, 1996), 1996 SEC LEXIS 2208

(“Reed II”); and In re David J. Dambro, Exchange Act Release

No. 32,487 (June 18, 1993), 1993 SEC LEXIS 1521. These

cases do not support the SEC’s judgment in this case.

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The Reed cases involved a broker-dealer whose company

charged excessive markups to his customers when selling

securities. The NASD ordered Reed, the president and general

securities principal of a securities firm, to pay restitution to

customers to cover the value of the excessive markups in the sale

of securities. Reed contested restitution on the grounds that he

could not be ordered to “disgorge” profits that NASD had not

proved he actually possessed, an argument the agency rejected.

The SEC’s decision in the Reed cases surely does not support its

decision in this case. Reed compares restitution with

disgorgement, but it does not speak to the causation part of the

restitution inquiry. While Reed clarifies that “an order for

restitution can seek to restore the customer’s position by

returning the amount by which the customer was deprived,” the

SEC also makes it clear that restitution is appropriate only

insofar as “equity would demand that the wrongdoer, rather than

the customer, bear the loss.” Reed I, 1994 SEC LEXIS 507, at

*13. The losses suffered by Reed’s clients were attributable

solely to Reed’s impermissible price markups. As the SEC

noted, “it is equitable to require [Reed] to compensate those he

injured by his pricing determinations” because Reed was the

president and a significant owner of the firm and was also “the

individual who was involved actively in both the purchase of the

stock for the Firm and the resale of that stock to the Firm’s

customers at excessive prices.” Reed II, 1996 SEC LEXIS 2208,

at *4. The agency also noted that Reed had notice of this

potential outcome, because the NASD Guidelines specify that in

a markup case, “consideration should be given to requiring

restitution to customers of the excess amount of the markup.” Id.

The SEC’s decision in Dambro is similarly inapposite. In

that case, a broker-dealer used an aggressive, “cold call”

approach to contact an elderly retiree, and in that single call

recommended the purchase of 670,000 shares of a highly

speculative stock. The retiree had a net worth of about $400,000

and an annual income of around $50,000. The SEC noted that,

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“[d]espite the high level of risk to which [the retiree’s] $10,000

would be subject, Dambro made only a cursory inquiry into

whether such an undertaking accorded with [the retiree’s]

objectives.” Dambro, 1993 SEC LEXIS 1521, at *7. The

agency also agreed with NASD that “the sale of a highly

speculative security which had exhibited little evidence of profit

potential to a person of advanced age is inherently suspect.” Id.

at *11 (internal quotation marks and citation omitted). 

The situation faced by the Downers and the Landrys bears

little resemblance to the scenarios in these cases. In the Reed

cases, the customers’ losses were the direct result of

impermissible markups, and restitution was imposed against the

president and general securities principal of the firm. In Dambro

and Faber, the losses resulted from speculative, high-risk

investments that were pressed on customers for whom such

investments obviously were inappropriate. In this case, the

losses resulted when World ET – a high risk, start-up company

– failed. But the unsuitability of Siegel’s recommendations

stemmed from inadequate documentation, not the nature of the

company itself. The SEC did not find that World ET was

unsuitable for the Downers and the Landrys based upon their

personal situations. 

Moreover, the Downers and the Landrys themselves bear

little resemblance to the victims in the cases cited by the SEC.

There is no evidence that the customers in the Reed cases

knowingly put themselves in a position to be swindled by a

broker who charged excessive markups. In Dambro, the

customer lost money in a highly speculative investment that was

pressed upon him by an aggressive broker who made no

assessment of the customer’s risk tolerance. In Faber, the

speculative investment was recommended despite the customer’s

explicit aversion to risk. By comparison, the Downers were

looking to speculate and obviously understood they could lose

their money if World ET failed. Indeed, Huntington Downer

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indicated that he was aware of the speculative nature of his

investment; and he conceded that he had “not heard of

investments paying” at the rate suggested by Siegel for the

World ET and World IEQ investments “unless all of the sudden

you hit it lucky.” NASD Arbitration Tr. (Apr. 14, 2004),

reprinted in 2 J.A. 600. The Landrys testified that Siegel “did

not pressure them to invest.” SEC Decision, 2008 SEC LEXIS

2459, at *12, 2 J.A. 682. And Dorothy Landry acknowledged

that, in her mind, the World ET investment “was just as much of

a gamble as if I had taken it to the gulf coast and put it down on

a slot machine”; she added that, “if I was to take 10 percent of

my money and go to the casino, I would have just as much

chance of bringing some home as I’m going to have as I give it

to this thing.” NASD Arbitration Tr. (Apr. 13, 2004), reprinted

in 2 J.A 603. In response to these damning admissions, the SEC

merely says, “[e]ven where a customer seeks to engage in a

highly speculative investment, a registered representative has a

duty to refrain from making unsuitable recommendations.” SEC

Decision, 2008 SEC LEXIS 2459, at *53, 2 J.A. 699. While that

may be true, it speaks only to the question of liability; it does not

relieve the agency of its obligation to show a meaningful causal

relationship between the amount ordered to be paid in

“restitution” (as distinguished from fines) and sanctionable

wrongdoing.

In this case, sophisticated investors willingly sought to

invest their money in a highly speculative venture involving a

start-up company that eventually failed. The SEC has cited no

controlling precedent that includes reasoned decisionmaking

supporting restitution under Principle 5 in a case of this sort. We

therefore vacate the restitution order. The SEC’s failure to

coherently analyze the extent to which the losses were truly a

result of Siegel’s misconduct is an abuse of discretion. 

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III. CONCLUSION

The petition for review is denied in part and granted in part.

We deny Siegel’s challenges to the SEC’s finding that he

violated Rule 2310 with respect to his dealings with the

Downers. We also deny Siegel’s challenges to the fines and

consecutive suspensions imposed by NAC and upheld by the

SEC in connection with his violations of Rules 3040, 2310, and

2110. We grant Siegel’s petition for review challenging the SEC

order upholding NAC’s imposition of restitution. For the

reasons given in this opinion, we find that the SEC’s judgment

awarding full restitution was neither adequately explained in its

decision nor supported by agency precedent. We therefore

vacate the restitution order. The case is remanded to the agency

for a prompt disposition of this matter consistent with this

opinion.

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