1 NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

_____________ No. 0 9

- 1550

_____________ SCOTT EPSTEIN,

Petitioner

v. SECURITIES EXCHANGE COMMISSION, Respondent

____________ __ APPEAL FROM THE SECURITIES EXCHANGE COMMISSION

( Admin. Proc. File No. 3

- 12933 ) Secretary Elizabeth M. Murphy

______________ Submitted Under Third Circuit LAR 34.1(a)

October 20, 2010

______________ Before: HARDIMAN, GREENAWAY, JR., and NYGAARD, Circu it Judges

(Opinion Filed: November 23, 2010 )

______________ OPINION GREENAWAY, JR., Circuit Judge Scott Epstein (―Epstein‖) appeals the Securities Exchange Commission‘s ( the

― Commission ‖) affirmation of the Department of Enforcement‘s (―DOE‖) permanent b ar of Epstein from the securities industry for violating the Financial Industry Regulatory2

Authority (―FINRA‖) 1 Conduct Suitability Rules. Epstein contends that the Commission abused its discretion because his sanction is grossly disproportionate to his v iolation and FINRA‘s hearing lacked procedural fairness. We disagree. For the following reasons,

we will affirm the Commission ‘s decision to u phold Epstein‘s permanent bar from the securities industry.
I. BACKGROUND Epstein , a registered gene ral securities representative, worked at Merrill Ly nch‘s Financial Advisory Center (―FAC‖) after graduating college, from 2000 to 2002 as an
I nvestment Services Advisor (―ISA ‖). He was twenty

- three years old at the time he left Merrill Lynch . The FAC i s an office withi n Merrill Lynch , which handled accounts with assets of $100,000 or less. The FAC contained approximately 300 ISA s , who were permitted to make mutual fund recommendations, but did not make individual stock or bond recommendations. ISA s work ed with customers , either through cold calling, or random routing when the customer called Merrill Lynch. Epstein received a base salary of $35,000 and ―variable compensation ‖ based, in part, on production credits earned when his customers made mutual fun d switches

. F rom October 1, 2001 until March 2, 2002, the period at issue in FINRA‘s complaint against Epstein, he received $26,443 in variable compensation.

1 T he National Association of Securities Dealers ( ― NASD ‖ ) changed its name to FINRA in 2007. The two names are used interchangeably in this opinion.3

A mutual fund switch occurs whe n the shares of one mutual fund are liquidated and those proc eeds are used to purchase shares in another mutu al fund. Various families of mutual funds exist and each family of a mutual fund may have different classes . The costs to the customer vary depend ing on which class the customer purchases and whether the cu stomer swi tches from one class to another or from one family to another. Switching from one family to another typically results in a higher cost to the custome r than switching from one class to anothe r. Generally, Epstein earned production credits when c ustomers switch ed from one family to another family

. Merrill Lynch‘s Compliance Outline for Private Client Financial Consultant s , which Epstein signed , explained that representatives must discuss investment objectives, strategies, and risks with the cus tomer. Additionally, a ―Mutual Fund Share Class Script‖
advised ISA s to explain to customers the benefits of each class option, taking into account the length of time shares are held and the amount of money invested. Merrill Lynch w arned ISA s of risks sp ecific to elderly customers. T he culture at FAC placed a great deal of pressure on ISA s to recommend mutual fund switches to their customers

. Epstein ‘s violations are based on unsuitable recommendations to twelve

customers

. Rose Roberts (―Roberts‖) , a n unsophisticated investor , made a call to Merrill Lynch to withdraw $300 and with no intention to buy or sell from her accounts

. During a twenty minute conversation, Epstein recommended , and ultimately made , the following switches: he liquidated her Eato n Vance Virginia Municipal Fund and switched to a fund in a different fund family (which triggered higher expenses) , and moved money from her4

IRA account into government bonds. Roberts stated during the call that she was confused about the recommendations , but Eps tein neglected to inform her of the n ames of the new funds or of the fees and expenses associated with the switches. Meanwhile, Epstein gained over $1,240 in production credits from these transactions. In addition to Roberts, Epstein engaged i n a similar pattern with eleven other customers. Epstein recommended costly switches to the customers without properly advising them of the risks and expenses, and he gained production credit s for each of the switches. T he majority of Epstein‘s customers ranged in age from 71 to 93 years old and

were widowed, retired, and earned low annual incomes.
F INRA‘s investigation of Epstein began when Roberts wrote a letter to the NASD on August 30, 2002. On December 3, 2002, Merrill Lynch‘s General Counsel, Jo seph Reynolds, responded to a letter from Roberts , stating that, ―[w]hile we regret any dissatisfaction you may have with your Merrill Lynch accounts . . . [w]e believe Mr. Epstein properly serviced your accounts and you made properly informed investment d ecisions.‖ (App. 661.)
O n May 7, 2004, the DOE served Epstein with a ―Wells Notice , ‖ putting him on notice that the DOE was investigating him for potential violations and charges for violating the FINRA suitability rules and the anti

- fraud provisions o f the Securities Exchan ge Act of 1934. FINRA had also begu n a separate investigation of Merrill Lynch‘s securities violations regarding the FAC. Epstein wrote a letter to the NASD on August 20, 2004 complaining about the pervasive environment at Merrill Lynch5

pressuring ISAs to recommend mutual fund switches

. U ltimately , Merrill Lynch settled with the NASD for $5 million. On November 11, 2004, FINRA filed a Disciplinary Complaint against Epstein for the above

- mentioned potential violations. Epstein wr ote a letter to the Hearing Offi ce in January 2005 to inform the office that he had not rece ived documentation, such as

— exculpatory documents relating to his Section 10 b and Rule 10b

- 5 violations, documents implicating senior management at Merrill Lynch an d the FAC, Wells Notices against senior executives with respect to the FAC violations, and documents relating to Epstein‘s customer accounts. According to Epstein, he never received this documentation. A hearing wa s held on July 11 and 12, 2005. FINRA‘s staff offered into evidence testimony of the FINRA compliance specialist who investigated the mutu al fund switch recommendations and tape recordings and transcripts of Epstein‘s conversations with customers. Epstein failed to appear at the hearing and di d not testify . Epstein‘s counsel left the hearing before it had ended , wit hout introducing any evidence on Epstein‘s behalf. The hearing continued without Epstein or his attorney.
O n October 31, 2005 , FINRA issued a decision concluding that Epstein ha d violated FINRA Conduct Rules 2310, 2110, and IM 2310

- 2 and Section 10b and Rule 10b

- 5 of the Securities Exchange Act . More important, FINRA permanently barred Epstein from the securities industry

. The FINRA Conduct Rules that Epstein viola ted generally require brokers to determine the suitability of an investment for a particular customer prior to making recommendations. For unsuitable recommendations, the6

FINRA sanction guidelines recommend a monetary sanction between $2,500 and $75,000 and a suspensi on of ten business days to one year. In egregious cases, the suspension may be one to two years or a bar from the industry. Epstein appealed this decision to the National Adjudicatory Council (―NAC‖), which dismissed the Section 10b and Rule 10b

5 charge s, but affirmed Epstein‘s FINRA conduct violati ons and his permanent bar from the securities industry. On January 30, 2009, the Commission sustained FINRA‘s findings of Epstein‘s violation and sanction s . The Commission found that FINRA‘s proceedings we re not procedurally deficient and that FINRA did not act with any misconduct. F INRA provided Epstein with all documents re levant to his investigation. Documents related to FINRA‘s other investigations were irrelevant to his proceedings and the Commission found that FINRA did not act with misconduct in not providing them . Moreover, the Commission noted Epstein‘s failure to testify o r conduct any due diligence by interviewing his customers, other ISA s or Merrill Lynch employees

. Epstein did not submit his required exhibit and witness list. With respect to the sanction permanently barr ing Epstein from the securities industry, the Commission concluded that Epstein‘s case was egregious because he violated the suitability rule with numerous elderly, unsophi sticated , and retired

customers , and because his involvement was ―more than a mere mistake in judgment.‖ (App. 34.) The Commission rejected Epstein‘s youth, inexperience, and lack of supervisory contr ol in the FAC as mitigating factors because shifting r esponsibility for7

compliance was impermissible. Rather, the Commission found that Epstein‘s ―insouciance and indifference towards his responsibilities under NASD rules poses a serious risk to the investing public . . . [and] taking advantage of investors for  ̳pecuniary benefit‘ . . .  ̳necessitate[s] exclusion from the securities business for protection of public investors.‘‖ (App. 35.) Epstein petitions for review of the order of the Commission

.

II. JURISDICTION AND STANDARD OF REVIEW The Commissio n had jurisdiction to review disciplinary action taken by FINRA against Epstein under Section 19(d)(2) of the Securities Exchange Act of 1934, 15 U.S.C. § 78s(d)(2). We have jurisdiction to review a final order of the Commission under Section 25(a) of the Securities Exchange Act, 15 U.S.C. § 78y(a)(1). We review the agency‘s decision to uphold sanctions for abuse of discretion and overturn the sanction only if ―unwarranted in law or . . . without justification in fact . . . .‖ Butz v. Glover Livesto ck Comm‘n Co., Inc. , 411 U.S. 182, 185

– 86 (1973) (citation omitted) (internal quotation marks omitted); see 5 U.S.C. §§ 702, 706(2)(A) (―The reviewing court shall . . . hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law . . . .‖). Moreover, the c ourt has authority to review SEC penalty determinations and limit such sanctions when appropriate. McCarthy v. SEC , 406 F.3d 179, 188 (2d Cir . 2005)

. We must affirm the Commission‘s findings of fact that are supported by substantial evidence. D‘Alessio v. SEC , 380 F.3d 112, 120 (2d Cir. 2004).8 III. ANALYSIS
A. Sanctions An abuse of discretion occurs where (1) a sanction is ―palpably dispr oportionate to the violation ,‖ or (2) the Commission ― fail [s] to support the sanction chosen with a meaningful statement of findings and conclusions, and the reasons or basis therefor, on all the material issues of fact, law, or discretion presented on the record.‖ McCarthy , 406 F.3d at 188 (citation omitted) (internal quotation marks omitted). For permanent disbarment, the ―most potent weapon in the Commission‘s  ̳arsenal
of flexi ble enforcement powers,‘‖ the Commission has a greater burden of justifica tion. Steadman v. SEC , 603 F.2d 1126, 1139 (5th Cir. 1979), aff‘d , 450 U.S. 91 (1981) (quoting Ernst & Ernst v. Hochfelder , 425 U.S. 185, 195 (1976)). Specifically, the Commission ―has an obligation to explain why a less drastic remedy would not suffice. ‖ Id. Permanent debarment may be justified where the Commission artic u l at es a reasonable likelihood that ―a particular violator cannot ever operate in compliance with the law, or might be so egregious that even if further violations of the law are unlike ly, the nature of the conduct mandates permanent debarment as a deterrent to others in the industry. ‖ Id. at 1140 (citations omitted). Still, t he Commission is not required to apply a ―mechanical formula‖ in justifying sanctions

. Paz Sec., Inc. v. SEC , 566 F.3d 1172, 1775 (D.C. Cir. 2009) (citation omitted). The Commission, not the court, is responsible for ― [ t ] he fashioning of an appropriate and reasonable remedy.‖ Butz , 411 U.S. at 188

- 89 ; see also id. ( ―We will not9

lightly disturb the findings of an agency in its area of expertise

. . . . [T]he Commission is better equipped to judge [the significance of certain violations] than this Court.‖ (citation omitted) (i nternal quotation marks omitted) )

. Epstein argues that the Commission abused its discretio n in affirming sanctions because it did not consider mitigating factors. The Commission found Epstein‘s violations particularly egregious beca use of the multiple u nsuitable recommendations he made to elderly, unsophisticated customers that amounted to ―mo re than a mere mistake in judgment.‖ (App. at 34.) With respect to mitigating factors, the Commission disagreed with Epstein that his age, inexperience, working environment, and a lack of
supe rvision sh ould lower his sanction

. Rather, Epstein‘s continuo us attempt to shift blame to Merrill Lynch‘s working environment was deemed a fail ure to accept responsibility. Epstein‘s signifi cant risk to the securities market motivated the Commission to permanently bar him from the industry. In particular , the Comm ission found that Epstein‘s ―insouciance and indifference towards his responsibilities under NASD rules poses a serious risk to the investing public . . . [and] taking advantage of investors for  ̳pecuniary benefit‘. . .  ̳necessitate[s] exclusion from the s ecurities business for protection of public investors.‘‖ ( Id. at 35.) The Commission was not required to apply a mechanical formula in its discussion of Epstein‘s mitigating factors and the Commission adequately supported its affirmance of sanctions by d iscussing the egregiousness of Epstein‘s violations and the future harm he woul d pose to the public. Thus, the Commission did not abuse its discretion. See Paz ,10

566 F.3d at 1175

- 76 (holding that the Commission made the necessary findings by explainin g th e harm to the public and a clear risk of future misconduct). Eps tein contends that the gross disparity between his sanct ions and those of the other ISA s merits reducing his sanction. While ―gross disparities in sanctions for similar
behavior would at le ast suggest underlying bias,‖ D‘Alessio , 380 F.3d at 125, Epstein provides no evidence to demonstrate a disparity

. He contends that Merrill Lynch was ―meaninglessly sanctioned‖ and ―only a few ISAs were disciplined for approximately 3

- 6 months and the oth er hundreds of ISAs similarly situated to Epstein were not charged or disciplined.‖ (Appellant‘s Br. 41.) Yet, his assertion regarding the ISA s is based on his ―in formation and belief

‖ (Appellant‘s Reply Br. 8); thus, we have no evidence in the

recor d to determine to what extent disparities ex ist between the ISAs

. And, even so, ―dissimilar facts result[ing] in dissimilar sanction s does not . . . show that the sanction imposed was impermissibly disproportionate.‖ D‘Alessio , 380 F.3d at 125.
Furt hermore, h is reliance on Lipper v. SEC , 547 F.2d 171 (2d Cir. 1976) , and Blinder , Robinson & Co. v. SEC , 837 F.2d 1099 (D.C. Cir. 1988) , to argue that his allegedly disproportionate sanctions should be reduced is unfounded

. In Lipper , a permanent bar from the industry was reduced to a tw elve month bar , in part , because of the disparity of the sanctions between Lipper and two other brokers

. But, t he decision to reduce sanctions in Lipper focused heavily on the uncertainty of whether customer

directed give

- ups, the violation at issue, were even illegal

. Moreover, customer

- directed11

give

- ups were later abolished, thus the Commission could not have found it necessary to protect petitioner s from posing a future threat. The court in Blinder, Robinson vacated a nd remanded a s anction of a permanent bar. The decision was not based on ―mere disparities, but rather an asserted systematic pattern of disparate treatment ‖ of sma ller firms. 837 F. 2d at 1112 (citation omitted)

. Epstein does not assert that an unclear regulatory environment of the FINRA suitability rules or a systematic patter n of disparate treatment exists . Thus, Lipper and Blinder, Robinson do not support his position.
B. Procedural Deficiencies Epstein next claims he was denied due process bec ause of procedural d eficiencies in his FINRA hearing. He complains generally that : ( 1) he was den ied documentation, evidence, and the right to fully present his claim, ( 2) he was the target of selective prosecution because of the letters he wrote to the N ASD about the conditions at Merrill Lynch, and ( 3) that his hearing officer was biased. Epstein cannot bring a constitutional due process claim against the NASD, because ― [t]he NASD is a private actor, not a state actor.‖ Desiderio v. NASD , 191 F.3 d 198, 206 (2d Cir. 1999). Still, the Exchange Act requires self

- regulating organizations (―SRO‖) , such as the NASD , to provide fair procedures in disciplinary actions , including an impartial decision

- maker

. 15 U.S.C. § 78f(b)(7); see D‘Alessio , 380 F.3d at 121 (―[W]e think that provision of  ̳a fair procedure‘ in SRO disciplinary proceedings give s rise to a due

- process - like requirement that the decision

- maker be impartial.‖).12

We agree with the Commission that t he procedural deficiencies that Epstein claims are largely a result of his own inaction. First, the Commission found that FINRA provided Epstein with all the documents relevant to his investigation. As for Epstein‘s assertion that he was denied evidence from other FINRA investigations, the Com mission noted that NASD Rule 9251 only requires that FINRA provide relevant documentation to Epstein. Second, Epstein took no steps to develop the record himself. He had the ability

to call his own witnesses and testify himself to his knowledge of Merril l Lynch‘s working environment, and he failed to do so. Nor did he request evidence from customers, ISAs, or Merrill Lynch. And, while Epstein complains about the Hearing Officer‘s denial of his evidence, Epstein neglected to file a witness and exhibit li st , as required by the Prehearing Order. Essentially, Epstein took no steps to develop the record and cannot now claim procedural unfairness

. See Rutherford v. SEC , 842 F.2d 214, 216 (9th Cir. 1987) (rejecting the claim of procedural unfairness because R utherford made no timely discovery requests and the Commission did not abuse its discretion in later denying an overbroad and vague request). Epstein‘s assertion that FINRA prosecuted him as a result of l etters he wrote to the
NASD is also meritless. To succeed on a selective prosecution claim, Epstein must show that that the prosecution was motivat ed by a discriminatory purpose

— race, religion, or another constitutionally protected classification. See United States v. Armstrong , 517 U.S. 456, 464 (1 996). Epstein does not contend that he was prosecuted on any constitutionally protected ground. Additionally, Epstein‘s argument that he was singled

-13

out because of his letters to the NASD about the FAC is without support. Epstein did not write to the NA SD about the FAC until August 2004. Yet, Roberts had already written a letter to the NASD in August 2002 about Epstein‘s recommendations and FINRA had already issued Epstein‘s Wells Notice in May 2004

. Likewise, we reject Epstein‘s
contentions that the a lleged disparity in his sanctions demonstrate bias or selective prosecution. See D‘Alessio , 380 F.3d at 112 (noting ―that those dissimilar facts resulted in dissimilar sanctions, does not, of course, tend to establish bias or selective prosecution‖). Finally, Epstein argues that his hearing was procedurally unfair because the Hearing Officer was biased against Epstein. In particular, he points to the Hearing
O fficer‘s decision to refuse to rule in his favor for discovery requests or grant Epstein a one year extension for the hearing. These allegations do not rise to a bias of the Hearing Officer. See id. at 122 (finding no bias because ―[t]hey have adduced no evidence tending to show that the interests of the hearing officer himself were directly adverse to the petitioners or amounted to a personal stake in the outcome of the civil suit‖). As the Commission noted, the Hearing Officer ―gave Epstein‘s counsel wide latitude to plead his case.‖ (App. 30.) See NLRB v. Lewisburg Chair & Furniture Co. , 230 F.2d 155, 156 (3d Cir. 1956) (― The feeling that the trier of the fact, . . . [the] hearing officer, is biased is not uncommon for one against whom decision has gone.).
IV. CONCLUSION For the reasons discussed above, we deny Epstein‘s petition for re view of the14

order of the Commission

.