Opinion ID: 368201
Heading Depth: 2
Heading Rank: 4

Heading: Sartain's Personal Responsibility.

Text: 35 The NASD complaint charged that Securities, acting in its capacity as underwriter for (Real Estate) and directed in such capacity by respondents James D. Lang, Jr., Michael G. Tanzer, and Thomas A. Sartain engaged in a course of conduct which included the three violations ultimately sustained by the Commission. Sartain correctly argues that under those pleadings the Commission had to show that Sartain shared in the responsibility for the overall pattern of Securities abuses, and not just that some of the transactions that Sartain himself executed as a registered representative violated the NASD rules. Sartain argues that the Commission failed to make any express finding that Sartain did have any kind of directional control over Securities, and that even if the Commission had made such a finding, it would not be supported by substantial evidence. 36 The Commission's own Rules of Practice provide that initial decisions shall include: Findings and conclusions, with the reasons or bases therefor, upon all the material issues of fact, law or discretion presented on the record. . . . 17 CFR § 201.16(a). While that provision may not be technically applicable to this proceeding in that the Commission here directly reviewed a decision of the NASD Board of Governors rather than an initial decision by a Commission hearing examiner, it is important that the Commission make its necessary findings explicit. Such written findings help the Commission by assuring that it in fact considers all of the subsidiary questions necessary to a decision, and help the appellate courts by providing insights into the Commission's bases for its decisions. 37 We are concerned that the Commission's decision in this case did not explicitly state that Sartain shared responsibility for the overall pattern of Securities misconduct. Nevertheless, we decline to reverse on this ground because we find this premise implicit in the written decisions of the Commission and the NASD Board of Governors. Both rely upon the District Conduct Committee's statement that in its assessment of penalty that Committee had taken note of the dominant role of Thomas A. Sartain with regard to the activities (of Securities) described in this cause of action. (R. 351.) The Commission's otherwise thorough discussion of Sartain's contentions helps convince us that the failure to make the finding explicit does not suggest that the Commission might have failed to focus specifically upon the gravamen of the complaint. 38 Reaching the merits, we note that Sartain concedes that Securities did not disclose the interrelationships we have held amounted to common control, did not disclose the cross trading, and failed to comply with the Section 12 notification requirement. We conclude that substantial evidence supports the Commission's finding that Sartain played a sufficiently important role in the affairs of Planning Associates, Securities, and Real Estate to warrant holding him personally responsible for the Securities pattern of NASD rule violations. Sartain emphasizes that his only Formal connection with Securities was as one of Securities' 52 registered representatives working below 15 registered principals. This argument overlooks the fact that, as a principal shareholder, director, and president of Securities' parent company, Sartain had influence quite different from that of a registered representative hired off the street. 39 In addition, as a registered representative for Securities, Sartain himself handled numerous transactions in which, following the Securities practice, he did not disclose common control, did not disclose cross trading, and did not comply with the Section 12 confirmation requirements. Sartain's personal involvement proves his actual knowledge of the factual basis of the violations. 40 Direct evidence also suggests that Sartain had a role in the development of Securities' procedures. In late 1972, a California Department of Corporations inspection of those procedures turned up deficiencies which included failures to confirm transactions and a failure to provide adequate guidelines for the activities of the staff. When attorneys for Securities sent a letter to the Corporations Department's examiners proposing to adopt certain changes in response to the inspection, the attorneys sent Sartain a copy of that letter. (R. 73.) This correspondence suggests that Sartain actually involved himself in the establishment of Securities procedures or at least that he could have put an end to the failures to disclose, had he wished to.IV. The Sanctions. 41 The Commission concedes that the sanction imposed amounts to a lifetime expulsion of Sartain from the industry. He contends his penalty amounts to an arbitrary and capricious abuse of Commission discretion. He points out that the District Conduct Committee which originally imposed that penalty had found him responsible not only for the three violations ultimately sustained by the Commission but also responsible for willful fraud under NASD Section 18 and for an allegedly improper short term transaction designed to secure a dividend for a favored customer. He argues that, because the NASD Board of Governors set aside the willful fraud finding and the Commission set aside the findings of violation in connection with the favored customer transaction, the NASD Board of Governors and the Commission were each obliged to reduce the original penalty. This does not follow. 42 We uphold the sanctions because, in light of the seriousness of the violations ultimately sustained, neither the NASD Board of Governors nor the Commission abused the discretion inherent in their respective standards of review. Within the NASD disciplinary process, Section 16(b) of the NASD's Code of Procedures for Handling Trade Practice Complaints provides that 43 if the Board of Governors . . . finds that any disciplinary action taken by such District Conduct Committee against any member is inadequate, excessive, or oppressive, the Board of Governors shall, in writing, increase, reduce, modify or cancel such disciplinary action. 44 CCH NASD Manual P 3015. 45 Because the Board has the power to increase the sanctions imposed for a given violation, it certainly has the power to leave a sanction undisputed when it sets aside only one of several findings of violation. Here, the NASD Board of Governors specifically answered Sartain's argument when it stated: 46 We believe that a sufficient basis exists to affirm the penalties previously imposed upon the respondents because of the serious nature of the remaining violations of the Association's rules. 47 In reviewing the penalty imposed by the NASD Board of Governors the Commission's role was to decide whether the penalty was excessive or oppressive, having due regard to the public interest. Section 15A(h) of the Securities Exchange Act of 1934, 15 U.S.C. § 78O -3(h)(2), now § 19(e), 15 U.S.C. 78s(e). The Commission specifically answered Sartain's argument when it stated: 48 We are unable to conclude that the sanctions imposed by the NASD are excessive or oppressive. It is true that we have set aside certain of the NASD's findings of violation. But, in light of applicants' remaining misconduct, we do not consider that any reduction in penalties is warranted. Here the disclosure made by applicants to purchasers of NREF securities was seriously deficient. Customers were not told that the selling broker-dealer and the issuer were under common control, that customers were not getting original issue shares with proceeds going to the issuer, and that, in some cases, they were buying the stock of insiders, including applicants who were disposing of their shares. Under the circumstances, we are not inclined to be lenient. 49 On this record we can hardly say that the Commission abused its discretion in that its remedy is unwarranted in law or is without justification in fact (so that) a court (should) attempt to intervene in the matter. American Power & Light Co. v. Securities and Exchange Commission, 1946, 329 U.S. 90, 112-13, 67 S.Ct. 133, 146, 91 L.Ed. 103. Accord, Butz v. Glover Livestock Commission Co., Inc., 1973, 411 U.S. 182, 185-86, 187, 188, 93 S.Ct. 1455, 36 L.Ed.2d 142. See also, General Securities Corp. v. Securities and Exchange Commission, 9 Cir., 1978, 583 F.2d 1108, 1110. 50 Sartain also argues that his penalty is invalid because the Commission imposed more severe sanctions on him than on his business associates and/or because the Commission failed to make specific findings to justify the disparity. 3 This contention is without merit. The Commission's opinion fully describes how Sartain was deeply involved in the affairs of all three companies. His associates were not. In any event, absent discrimination based upon an invidious classification or in retaliation for a petitioner's assertion of his federal rights, 51 The employment of a sanction within the authority of an administrative agency is . . . not rendered invalid in a particular case because it is more severe than sanctions imposed in other cases. 52 Butz v. Glover Livestock, supra, 411 U.S. at 187, 188, 93 S.Ct. at 1459, and cases cited therein. Accord, General Securities Corp. v. Securities and Exchange Commission, 9 Cir., 1978, 583 F.2d 1108, 1110. 53