1District Judge of the Western District of Louisiana,

sitting by designation. 

 

2Brennan Ross is now defunct. 

 

3Barclays was a highly speculative penny stock. 

1

United States Court of Appeals,

Fifth Circuit.

No. 93-4381.

Robert A. AMATO, Petitioner,

v.

SECURITIES AND EXCHANGE COMMISSION, Respondent.

April 20, 1994.

Petition for Review of an Order of the Securities and Exchange

Commission.

Before HIGGINBOTHAM and DUHÉ, Circuit Judges, and STAGG,1 District

Judge.

STAGG, District Judge.

Petitioner Amato seeks review of an order of the Securities

and Exchange Commission ("SEC") affirming disciplinary action taken

against him by the National Association of Securities Dealers, Inc.

("NASD"). Both the SEC and the NASD found that Amato had violated

Article III, Sections 1 and 4 of the NASD's Rules of Fair Practice.

Finding no error, we affirm.

FACTS.

Robert Amato was a retail salesman and the branch manager of

the New Orleans office of Brennan Ross Securities, Inc.2 Brennan

Ross had sold the majority of the initial public offering of the

stock in Barclays West, Inc. ("Barclays"),3 which closed around the
2

beginning of August 1989. During the three-month period following

August of 1989, Brennan Ross handled more than ninety percent of

all purchases and sales of Barclays stock. Ninety-five percent of

the New Orleans office's business consisted of transactions in

Barclays stock. The New Orleans office consisted of Amato and

three other salesmen.

For each sale, the salesman was given a "wholesale," or

"strike" quotation and an "offer" quotation by Brennan Ross'

trading department. The salesman was given the discretion to sell

the stock for any price between those two numbers, and his

commission consisted of the difference between the wholesale price

and the retail price. The salesman's salary was computed based on

a percentage of his gross commissions.

During this three-month period, Amato purchased 445,650 shares

from retail customers in seven transactions on behalf of Brennan

Ross. He sold 1,052,550 shares to his retail customers in

ninety-nine transactions. Almost eighty percent of his sales

transactions were at markups which exceeded twenty percent, and

more than sixty percent of the transactions were at markups that

exceeded forty percent. Amato's transactions in Barclays yielded

gross commissions of $93,999 over the three-month period following

August, 1989, producing $65,799 in compensation for him.

NASD filed a complaint against Amato for selling the Barclays

stock at an excessive markup, and the District Business Conduct

Committee found that he had violated Sections 1 and 4 of the NASD's

Rules of Fair Practice. Section 1 requires the observance of "high
3

standards of commercial honor and just and equitable principles of

trade." Section 4 requires that prices charged in over-the-counter

principal transactions with customers be "fair, taking into

consideration all relevant circumstances...." Amato was fined

$20,000 and suspended from trading for four weeks. NASD's National

Business Conduct Committee affirmed the District Committee, and

imposed an additional requirement that Amato requalify as a

registered representative by examination after completion of his

suspension. The Securities and Exchange Commission upheld this

decision.

APPELLANT'S ARGUMENTS.

Amato appeals this decision based on three arguments: 1) The

SEC erred in applying Sections 1 and 4 of the NASD Rules of Fair

Practice to impose liability on a salesman; 2) The SEC erred in

applying an ex post facto interpretation to a rule of conduct; and

3) Amato's due process rights were violated because the punishment

he received was excessive, and because he was the target of

selective prosecution. This court will address each argument in

turn.

A. Do Sections 1 and 4 of the NASD Rules of Fair Practice impose

liability on Amato?

Amato argues that sections 1 and 4 of the Rules of Fair

Practice promulgated by the NASD do not authorize a finding of

liability for a salesman for excessive markups of stock. He argues

that Sections 1 and 4 of the Rules of Fair Practice can not be

interpreted to impose liability; rather, they are to be construed

as aspirational guidelines. As mentioned earlier, Section 1 of
4

Article III of the Rules provides:

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

standards of commercial honor and just and equitable

principles of trade.

NASD Manual, ¶ 2151. Section 4 of Article III provides:

In "over-the-counter" transactions ... if a member buys for

his own account from his customer, or sells for his own

account to his customer, he shall buy or sell at a price which

is fair, taking into consideration all relevant

circumstances....

NASD Manual, ¶ 2154.

Amato further argues that under the Rules of Fair Practice of

the NASD Manual, it is the responsibility of the "member" of the

NASD, i.e. Brennan Ross, rather than the salesman, to ensure

compliance with applicable securities regulations. The NASD rules

indeed discuss compliance in terms of the "member's" actions, and

require the member to formulate written supervisory procedures in

order to ensure compliance with securities regulations. Amato

argues that his compliance with Brennan Ross' written procedures

exempts him from any liability. He also cites an excerpt from an

interpretation by the Board of Governors, in support of his

argument that Sections 1 and 4 of the Rules of Fair Practice are

merely aspirational:

The Board stated that it would be impractical and unwise, if

not impossible, to define specifically what constitutes a fair

spread on each and every transaction because the fairness of

a markup can be determined only after considering all of the

relevant factors. Under certain conditions a markup in excess

of 5 per cent may be justified, but on the other hand, 5 per

cent or even a lower rate is by no means always justified.

NASD Manual—Rules of Fair Practice, Article III, ¶ 2154, Sec. 4, p.

2055 (1990), Interpretations of the Board of Governors. Amato
 

4SEC opinion at p. 4. 

 

5SEC opinion at p. 4. 

5

suggests that the markup rule is a philosophy of business conduct

subject to interpretation. He argues that the rule imposed by his

case is untenable, because it would require stockbrokers in

satellite offices to question their home office regarding sales

prices before each transaction.

However, the ruling of the Commission in Amato's case was not

based solely on the wording of Sections 1 and 4. Rather, the

Commission found that Amato's "insider" position, in conjunction

with his violation of the rule, rendered him liable. The SEC

specifically noted that Amato "was intimately involved in the

pricing of these securities within parameters set by Brennan Ross'

trading department."4 Further, Amato "had to be aware" that his

commissions were a "suspiciously high percentage of the prices paid

by customers."5 The Commission found that Amato's role in this

incident was "especially troubling" because of the knowledge he

possessed. Because Amato was purchasing the stock from his

customers and selling it to them, he was in a position to know the

cost to Brennan Ross. The majority of stock brokers are not in a

position to have enough information and knowledge to be accountable

for excessive commissions. See generally In re Langley-Howard,

Inc., 43 S.E.C. 155, 1966 WL 3140, 1966 SEC LEXIS 186 (1966).

However, due to Amato's position as both buyer and seller of the

Barclays stock, he was in possession of such knowledge. The

Commission also found that Amato should, "at a minimum, have
 

6SEC opinion at p. 6. 

 

7NASD Manual, Article I, Section 5(a), PP2005 at 2011

(1993). 

6

questioned the large markup between the Firm's "wholesale' quotes

and the prices they were permitted to charge the public."6

Moreover, the NASD Manual specifically provides that "persons

associated with a member shall have the same duties and obligations

as a member under these Rules of Fair Practice."

7 Amato's

arguments to the contrary are unpersuasive, and we affirm the

Commission's ruling on this issue.

B. Whether the Commission's conclusion that Article III imposed

liability of Amato was an impermissible ex post facto

application of the regulation?

In its opinion affirming Amato's sanctions, rendered on March

10, 1993, the SEC cited its own opinion in In re Willis H. Brewer,

Jr., Security Exchange Release No. 34-31964, 1993 WL 71024, 1993

SEC LEXIS 499 (Mar. 9, 1993). The Willis Brewer opinion found a

registered representative liable for excessive markups in

connection with the sale of stock. Amato argues that the use of

this case as precedent is an impermissible ex post facto

application of law. He maintains that a registered representative

in 1989 can not be expected to anticipate a change of the law in

1993.

This argument is completely without merit. While there are no

cases before Willis Brewer holding a registered representative

liable, none of the SEC cases preclude this possibility. Amato

argues that In re Langley-Howard, Inc., 43 S.E.C. 155, 1966 WL
7

3140, 1966 SEC LEXIS 186 (1966) stands for the proposition that

salesmen are not liable for excessive markups. However, the

reasoning in that case was based on the fact that it was unclear

whether the salesmen involved were put on notice that the markups

they were charging were unfair. In re Langley-Howard, Inc., 43

S.E.C. at 162, 1966 WL 3140, 1966 SEC LEXIS at 15. Implicit in the

court's holding is that a registered representative could incur

liability if he was on notice that the markup he was charging was

excessive.

Secondly, the NASD Rules of Fair Practice were in force in

1989. Therefore, Amato was charged with knowledge of Article I,

Section 5(a), which provided that "[p]ersons associated with a

member shall have the same duties and obligations as a member under

the Rules of Fair Practice." As a registered representative, he

was obligated to comply with Sections 1 and 4 of the Rules of Fair

Practice.

C. Was Amato denied due process by the fact and extent of his

punishment?

Amato argues that the sanction imposed on him was excessive,

and that he was the victim of selective prosecution by the SEC.

Essentially, Amato's argument is that the SEC abused its discretion

in imposing sanctions on him which were more severe than the

sanctions received by the other members of his firm. Brennan Ross'

head trader received a two-week suspension for his role in the

incident, and he shared a joint fine of $15,000 with Brennan Ross'

president. Amato argues that his punishment was clearly excessive

in light of the punishment imposed on these two individuals.
8

We review the Commission's decision to impose this particular

sanction on Amato for a gross abuse of discretion. See Whiteside

& Co., Inc. v. SEC, 883 F.2d 7, 10 (5th Cir.1989); Kane v. SEC,

842 F.2d 194, 201 (8th Cir.1988); Tager v. SEC, 344 F.2d 5, 9 (2d

Cir.1965). We can not say that the Commission's decision to fine

Amato $20,000, suspend him for four weeks, and require him to

requalify as a registered representative was a gross abuse of

discretion. Furthermore, both Brennan Ross' head trader and its

president settled the claims against them with the SEC. The

Commission has stated that it will reward such decisions to settle

when determining the sanctions to be imposed. In re Blinder

Robinson & Co., 48 S.E.C. 624, 636 n. 36 (1986), vacated on other

grounds, 837 F.2d 1099 (D.C.Cir.1988). We conclude that the SEC

was well within its discretion in imposing the sanctions on Amato.

 Amato also argues that he was singled out to be punished by

the SEC in this situation. He states that he received unfair

treatment from the local NASD office from the beginning, and

subsequently began to complain through letters, initially directed

at the local NASD office. After not receiving a response to his

inquiries, he ultimately contacted the chairman of the NASD and the

acting director of the SEC. Amato provided copies of these letters

to Brennan Ross' compliance department. He never received a

response to any of his inquiries. The local security regulators

voiced displeasure that Mr. Amato had written such letters.

Brennan Ross assured the regulators that Mr. Amato would stop

writing these letters. Amato was subsequently informed by Brennan
 

8Record at p. 1338. 

9

Ross that if he wrote another letter of complaint to the regulatory

authority, his employment with Brennan Ross would be terminated.

Amato contends that he indeed stopped writing the letters, and was

consequently punished by the NASD.

In order to establish that he was unfairly prosecuted, Amato

must establish that he was singled out for prosecution while others

similarly situated were not, and that the action against him was

motivated by an arbitrary or unjustifiable consideration, such as

race, religion, or the desire to prevent the exercise of a

constitutionally-protected right, such as freedom of speech. See

United States v. Collins, 972 F.2d 1385, 1397 (5th Cir.1992), cert.

denied, --- U.S. ----, 113 S.Ct. 1812, 123 L.Ed.2d 444 (1993);

United States v. Huff, 959 F.2d 731, 735 (8th Cir.), cert. denied,

--- U.S. ----, 113 S.Ct. 162, 121 L.Ed.2d 110 (1992); C.E.

Carlson, Inc. v. SEC, 859 F.2d 1429, 1437 (10th Cir.1988). Amato

has introduced no evidence which comes close to meeting his burden

on this issue. Moreover, the Commission submitted a Memorandum

which evidences that the NASD had no objection to Mr. Amato's

letter-writing practices, as long as they did not interfere with

the NASD's conducting its branch office examinations.8 This

evidence falls far below Mr. Amato's burden, and we find his claim

to be without merit.

For the foregoing reasons, the judgment of the district court

is AFFIRMED.