Source: http://openjurist.org/454/f3d/619/avello-v-securities-and-exchange-commission
Timestamp: 2013-05-22 13:43:20
Document Index: 638138369

Matched Legal Cases: ['§ 78', '§ 240', '§ 240', '§ 240', 'Art. 1', '§ 240', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', 'Art. 1']

454 F3d 619 Avello v. Securities and Exchange Commission | OpenJurist
454 F. 3d 619 - Avello v. Securities and Exchange Commission	Home454 f3d 619 avello v. securities and exchange commission
454 F3d 619 Avello v. Securities and Exchange Commission 454 F.3d 619
Nicholas T. AVELLO, Petitioner,v.SECURITIES AND EXCHANGE COMMISSION, Respondent.
No. 05-2850.
Submitted May 26, 2006.
Published July 21, 2006.*
Rehearing and Suggestion for Rehearing En Banc Denied July 26, 2006.
Nicholas T. Avello, Addison, IL, pro se.
We briefly sketch the regulatory scheme that led the NASD to focus on Avello. The NASD, a self-regulated agency registered with the Commission as a national securities association under the Securities and Exchange Act of 1934, see 15 U.S.C. § 78o-3(a), adopts rules governing the conduct of its members and enforces compliance with federal securities laws and Commission rules and regulations. Otto v. SEC, 253 F.3d 960, 964 (7th Cir.2001). One Commission regulation, known as the net capital rule, requires brokers and dealers to maintain a specified level of net worth to protect their customers from the firm's potential insolvency. See 17 C.F.R. § 240.15c3-1. A firm's net worth is determined from books, records, and reports that the NASD and Commission require members to keep and submit. See 17 C.F.R. §§ 240.17a-3, 240.17a-5. Depending on whether the broker or dealer carries or clears transactions or customer accounts, it is required to submit either monthly or quarterly reports known as the Financial and Operational Combined Uniform Single, or FOCUS reports. 17 C.F.R. § 240.17a-5(a)(2). Under NASD rules, the title of persons responsible for the accuracy of these reports is "Limited Principal — Financial and Operations," otherwise known as a FINOP. NASD MANUAL, Membership and Registration Rule 1022(b)(2). A FINOP is "associated with a member," and must be a natural person who is registered with the NASD and has passed a qualifying examination. Id., Rule 1022(b)(1); NASD MANUAL, Bylaws of the NASD, Art. 1(dd). A FINOP's duties include:
NASD MANUAL, Rule 1022(b)(2).
Avello contracted to work as a FINOP for Hudson Knight Securities, Inc. (HKS) and remained in that position from 1995 until 1997. During that period the NASD became aware that HKS was experiencing difficulty meeting its required level of net capital and began monitoring HKS. Eventually the NASD determined that the firm had improperly accounted for certain items in its FOCUS reports which, if properly accounted for, would have shown that the firm had conducted business while below its required level of net capital. When the NASD or its Department of Enforcement believes that an associated person has violated rules, regulations, or securities laws, it may request authorization from the Office of Disciplinary Affairs to file a complaint. Id., Procedural Rule 9211. If alleged to have violated a statute or certain NASD rules, a respondent may propose that the NASD's Chief Hearing Officer select a Market Regulation Committee Panelist for a Hearing Panel. Id., Procedural Rule 9221(a)(3). And that's what happened here. In 1998 the Department filed a complaint against Jonathan Webb, the Chairman and half-owner of HKS, and Avello (but did not name the firm itself) that was later vetted before a Hearing Panel.
The complaint alleged ten causes, only three of which implicated Avello. The charges against Webb alone included allegations that HKS, acting through him, effected securities transactions on days when it failed to maintain the minimum required net capital; failed to maintain the level of net capital Webb agreed to with the Commission; violated rules and regulations requiring the accurate maintenance and submission of books, records, and reports; and conducted business without employing properly qualified principals required by NASD rules. The causes involving Avello concerned only the financial reporting obligations; the complaint alleged that HKS, acting through both Webb and Avello, had failed to maintain its required level of net capital, had kept inaccurate books and records, and had filed inaccurate FOCUS reports. Those causes were based on the firm's violation of five rules: Exchange Act Rules 15c3-1, 17a-3, and 17a-5, and NASD Conduct Rules 2110 and 3110. Exchange Act Rule 15c3-1 is the net capital rule. Rule 17a-3 requires brokers and dealers to keep various books and records current, while Rule 17a-5 requires them to file the FOCUS reports. See 17 C.F.R. §§ 240.15c3-1, 240.17a-3, 240.17a-5. NASD Rule 2110 requires members to "observe high standards of commercial honor and just and equitable principals of trade," while Rule 3110 is the NASD counterpart to the Exchange Act rule regarding the proper keeping of books and records. The complaint did not charge Avello with violating NASD Membership and Registration Rule 1022(b)(2) — the NASD provision specific to FINOPs.
A party dissatisfied with a decision of the Hearing Panel may initiate what becomes a three-step process of appeal. The first step is an appeal to the National Adjudicatory Council (NAC). NASD MANUAL, Procedural Rule 9311. The next is a petition for review by the Commission, 15 U.S.C. § 78s(d)(2), and then, if requested, we will review the final decision of the Commission, 15 U.S.C. § 78y(a)(1).
This case has now made its way back to us. Our review is limited to the Commission's decision sustaining the NASD's sanctions and we treat the findings of fact as conclusive "if supported by substantial evidence." 15 U.S.C. § 78y(a)(4); see Otto, 253 F.3d at 964. Avello's brief lists some ten issues, but we think he makes two principal arguments.
But Avello could violate Exchange Act rules indirectly through NASD Membership Rule 1022(b). That rule, akin to an accomplice-liability statute, incorporates violations of other provisions. If Avello, as the FINOP, caused HKS to violate an Exchange Act rule by maintaining inaccurate records or submitting inaccurate reports, then he is responsible for the Exchange Act violation. Thus, because HKS violated Exchange Act recordkeeping and reporting rules, Avello was responsible for the violations under Rule 1022(b)(2).
Avello counters that he was never charged with violating Rule 1022(b) and so to hold him liable for violating it contravenes the procedural safeguards prescribed by 15 U.S.C. § 78o-3(h)(1). True, the underlying complaint does not reference Rule 1022(b), but Avello has not explained how that omission has prejudiced him. See Rehman v. Gonzales, 441 F.3d 506, 509 (7th Cir.2006) (explaining in immigration context that reviewing court will not set aside agency decision on basis of claimed procedural error unless mistake or error caused prejudice). Nor do we see how it could have; the Hearing Panel first put him on notice of the application of Rule 1022(b)(2) in 1999, yet Avello waited to argue that he lacked notice of that rule until five years and four rounds of review later. Anyway, the language of the complaint, alleging that HKS violated the rules through Avello, was enough to alert him to the NASD's theory of liability.
We turn then to his second main argument. Avello argues that even if Rule 1022(b)(2) applies to him, he was held to too high a standard under that rule. He asserts that he has effectively been held to a standard of "strict liability" for guaranteeing the accuracy of the firm's reports when he was simply "the hired hand used to perform the Firm's net capital calculations." He suggests that a reasonableness standard should govern and that his conduct should be compared to what reasonable accountants (though we suspect he means bookkeepers) — not auditors — do. The Commission does not articulate a precise standard; in its brief the Commission emphasizes the plain language of Rule 1022(b)(2) making a FINOP responsible both for the accuracy of the firm's FOCUS reports and for supervising the persons who generate the records underlying the reports, but the Commission does not argue that Avello could have been sanctioned for inaccuracies about which he did not know and could not have known. Indeed, the Commission points out that Avello was disciplined because he booked information that he either knew to be incorrect or with reasonable inquiry would have discovered to be incorrect.
Avello's other arguments merit little discussion. He argues that he could not have violated NASD Conduct Rule 2110 because the Commission did not find that he acted in bad faith. (As with the Exchange Act rules, Avello is liable for the firm's violation of Rule 2110 only through Rule 1022 because Rule 2110 applies to "members," which Avello was not.) But the Commission does not require a finding of bad faith when the predicate for violating Rule 2110 is the violation of another NASD or Exchange Act rule, see In re Chris Dinh Hartley, Exchange Act Release No. 50031, 2004 WL 1593848, 2004 SEC LEXIS 1507, at *10 n. 13 (July 16, 2004); Gerhauser, 53 S.E.C. at 942, and we have already explained that substantial evidence supports that Avello was responsible for other violations. Avello's arguments that the Commission was required to find that he "controlled" a person who committed a violation under 15 U.S.C. § 78t(a) or that he acted "willfully" under 15 U.S.C. § 78o(b)(4) were not presented until his return to the Commission after remand and are accordingly waived. See United States v. Parker, 101 F.3d 527, 528 (7th Cir.1996) ("A party cannot use the accident of a remand to raise in a second appeal an issue that he could just as well have raised in the first appeal because the remand did not affect it."); W. Va. v. EPA, 362 F.3d 861, 871 (D.C.Cir.2004) (refusing to consider arguments raised for first time after remand that were not raised in agency rulemaking proceedings conducted prior to remand). His argument that he is not responsible for HKS's reports because they were submitted by his corporation and not signed by him is frivolous because a FINOP, as a "person associated with a member" is, by definition, a natural person. See NASD MANUAL, Bylaws of the NASD, Art. 1(dd).
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