Opinion ID: 184730
Heading Depth: 2
Heading Rank: 2

Heading: Whether the SEC Erred in Affirming the NASD's Sanctions

Text: 42 Having determined that the notes are securities to which NASD's Section 40 applied, we consider the appropriateness of the sanctions. Stoiber objects to the suspension, the restitution requirement, and the fine. We review an SEC decision affirming sanctions imposed by the NASD against a broker for an abuse of discretion. See Svalberg v. SEC, 876 F.2d 181, 184 (D.C.Cir.1989) (per curiam); Seaton v. SEC, 670 F.2d 309, 311 (D.C.Cir.1982) (per curiam). 43 In affirming Stoiber's sanctions, the SEC explained that they fell within the NASD's recommended range for serious conduct that deprived public investors of protection and improperly exposed Stoiber's employer to risk. We note that the SEC has indeed treated this kind of violation seriously on numerous prior occasions. See, e.g., In re Gilbert M. Hair & Vladimir Chorny, 51 S.E.C. 374, 378 & n. 10 (1993). Stoiber nonetheless counters with numerous reasons why he should have been accorded less severe sanctions, i.e., whether the notes are securities is a close call, he did not act willfully, he did not try to conceal the notes, he gave his firm oral notice of the loans, the customers were not injured, the customers and his firm did not seek disciplinary action, he has a spotless disciplinary record, and the customers declined rescission. 44 In Seaton, this court affirmed a one year suspension in a similar situation. The broker there sold securities to customers three times without his employer's knowledge and also answered questions falsely on an application to work with another firm. See Seaton, 670 F.2d at 310. At that time the NASD Rules of Fair Practice did not include Section 40, but Section 1 had been interpreted to include the written notification requirement for brokers participating in private securities transactions. See id.; In re William Louis Morgan, 51 S.E.C. 622, 625 n. 12 (1993). The case did not involve fraud or harm to any investors. See Seaton, 670 F.2d at 311. We stated that: 45 We will not lightly disturb the findings of an agency in its area of expertise. In this case there is an undisputed pattern of repeated violations, the significance of which the Commission is better equipped to judge than this Court. There is no indication that the Commission has abused its discretion in affirming the sanctions. 46 Id. In another similar case, the SEC described violations as willful and entered permanent suspensions, even though the brokers involved apparently acted on advice of counsel. See O'Leary v. SEC, 424 F.2d 908, 909, 912 (D.C.Cir.1970). The brokers were evidently first offenders and investors did not suffer any injury. See id. at 912. We upheld the suspensions, noting that while the mitigating factors  'might have warranted a lighter sanction, they did not require one.'  Id. (quoting Tager v. SEC, 344 F.2d 5, 8 (2d Cir.1965)). Additionally, the NASD Sanction Guidelines call for consideration of a suspension of up to two years or, in egregious cases, a permanent bar. See NASD Regulation, Inc., NASD Sanction Guidelines 15 (1998) (Guidelines). In light of Seaton, O'Leary, and the Guidelines, we cannot say that the six month suspension of Stoiber was an abuse of discretion. 47 Stoiber contends that the restitution requirement is unjustifiable in light of the uniformly rejected rescission offers he made under his agreement with the state of Illinois. The SEC's concerns are not identical to those of Illinois, however, and Illinois never found Stoiber in violation of state laws or regulations, whereas the SEC found violations of the NASD Rules. A stiffer response from the SEC is thus not surprising. As the notes were at the core of Stoiber's violations, it was not an abuse of discretion for the SEC to require Stoiber to disgorge what he had obtained improperly. See Hateley v. SEC, 8 F.3d 653, 656-57 (9th Cir.1993) (ordering disgorgement in amount equal to ill-gotten gain); see also Guidelines at 7 n.2 (restitution is an appropriate method of depriving a respondent of his or her ill-gotten gain). 48 The SEC makes a convincing case that the size of the fine, $450,000 less restitution made within sixty days, is appropriate under the NASD Guidelines. The Guidelines call for a fine of $5,000 to $50,000 for violation of the written notification requirement. The SEC correctly asserts that it is entitled to treat Stoiber's actions as thirteen separate violations, one for each note. See Svalberg, 876 F.2d at 185. At a maximum $50,000 per violation, the ceiling goes up to$650,000. 10 The SEC also argues that the Guidelines allow the fine to be increased by the amount of money received from the note holders. While the Guidelines do allow adjudicators to add[ ] the amount of a respondent's financial benefit, Guidelines at 15 n.2, the benefit to Stoiber here was only the temporary use of the money, not the amount of the notes in full. The SEC does not need this extra fillip since the $5,000 to $50,000 Guidelines range for each violation is sufficient to demonstrate that the fine was not excessive. We also note that three of the four principal considerations listed in the Guidelines with respect to this kind of violation militate in favor of a severe fine: Stoiber was affiliated with the issuer (he was the issuer), he sold the notes to customers of the firm, and he did not provide the firm with verbal notice of all relevant factors. 11 Guidelines at 15. Additionally, although Stoiber argues that the note holders have not suffered any injury, the Guidelines state that [a]djudicators should not consider whether the investment or enterprise was successful. Id. at 15 n. 1. We conclude then that the SEC did not abuse its discretion in affirming the fine imposed by the NASD. 49