Opinion ID: 675852
Heading Depth: 2
Heading Rank: 3

Heading: the sec proceedings

Text: 17 The SEC conducted a de novo review of the record and found that: 1) the markups on 201 sales of Ortech stock listed on Schedule A were excessive; 2) Orkin was liable for the markup violations; 3) the markup policy was not an illegal restraint of trade or otherwise illegal, unconstitutional, or unfair; and 4) the sanctions imposed against Orkin were appropriate. The SEC found that the record evidence established a higher prevailing market price for Ortech stock than that found by the NASD. The SEC used the price paid by Brownstone for Ortech stock it purchased from other dealers as the best evidence of the prevailing market price because Brownstone dominated and controlled the Ortech market during the relevant period. The prevailing market price as determined by the SEC resulted in smaller, but still excessive, markups for the sales listed on Schedule A. 18 In concluding that Tri-Bradley sold Ortech stock to retail customers at prices that greatly exceeded the prevailing market price, the SEC began with the long-standing premise that a firm's markups on a security must be reasonably related to its prevailing market price. See, e.g., In re Alstead, Dempsey & Co., Inc., Securities Exchange Act Release No. 20,825 (April 5, 1984), 30 S.E.C. Docket 208, 1984 WL 50800,  1 (S.E.C.). The general rule is that when a dealer is not a market maker with respect to a security, absent countervailing evidence, the best evidence of the prevailing market price is the dealer's contemporaneous cost in acquiring the security. E.g., Id. 19 The NASD set the prevailing market price for Ortech stock at Tri-Bradley's cost of purchasing and exercising its warrants because it determined that Orkin failed to present countervailing evidence sufficient to establish a different prevailing market price and to prevent application of the general rule. The SEC, however, determined that countervailing evidence on the record supported a higher prevailing market price. 20 In addition to Tri-Bradley's retail sales, Schedule A identifies eight inter-dealer trades in Ortech stock, all involving Brownstone: seven purchases and one sale. In the seven sales, Brownstone paid no more than $.03 per share for Ortech stock. 7 Prices paid by a dominating and controlling market maker constitute evidence of prevailing market price. In re Meyer Blinder, Securities Exchange Act Release No. 31,095 (August 26, 1992), 52 S.E.C. Docket 1435, 1992 WL 216702,  2 (S.E.C.). The SEC thus concluded that the prevailing market price for Ortech stock was at most $.03 per share in the uncompetitive, thinly traded market. Accordingly, using a prevailing market price of $.03, the SEC computed retail markups ranging from 16.67% to 100% in 201 trades listed on Schedule A. 8 These markups still clearly exceed the 5% markup generally permitted under the NASD Rules. 21 The SEC held Orkin liable for the excessive markups because he played a significant role in pricing and was at least grossly negligent in aiding Tri-Bradley in effecting retail sales of Ortech at excessive prices because he had reason to believe that Ortech stock prices had not risen to the level charged his customers. 9 The SEC found that Orkin breached his fiduciary duty to ensure that his customers were charged a fair price. 22 The SEC cited a number of facts indicating that Orkin knew or should have known the retail prices were excessive. Orkin was a NASD registered general securities principal and a Tri-Bradley branch manager who was familiar with the 5% markup policy and had to have an understanding of securities pricing. He had assisted Tri-Bradley in obtaining the Ortech warrants and therefore knew the cost Tri-Bradley would incur to fill his retail orders. Because he was involved in Ortech's initial public offering, Orkin also was in a position to know that Ortech stock was not actively traded and that Brownstone dominated and controlled the market. Moreover, Orkin suggested the prices his customers should offer. 23 The SEC opined that these facts, along with the fact that Orkin was entitled to a commission calculated on the basis of the retail price, rendered him more than a mere salesman or order taker with respect to the Ortech stock sales. The SEC thus refused to permit Orkin to abdicate his responsibility to his customers by hiding behind a formalistic employment agreement that gave the final authority to approve the price and execute the trade to the home office and deemed him responsible for the excessive markups. 24 The SEC dismissed Orkin's challenge to the NASD's markup policy as illegal, unconstitutionally vague, and unfair, pointing out that no SEC or court decision has so found. On the contrary, the SEC and federal court decisions have rejected such challenges. The SEC relied on its decision in In re Meyer Blinder, Securities Exchange Act Release No. 31,095 (August 26, 1992), 52 S.E.C. Docket 1435, 1992 WL 216702,  3,  6- 8 (S.E.C.), finding that the NASD markup policy does not violate the purpose of the amended Exchange Act nor the requirement that NASD Rules be approved by the SEC, and is not an illegal restraint of trade or unconstitutionally vague. See also, e.g., Handley Inv. Co. v. SEC, 354 F.2d 64, 66 (10th Cir.1965) (The statement of the 5% Policy establishes sufficient guidelines [to withstand a due process challenge].); Ross Sec., Inc., 40 S.E.C. 1064 (1962), Securities Exchange Act Release No. 3,628 (March 28, 1962); 1962 WL 3628,  2 (S.E.C.)). In addition, the SEC noted that the markup policy does not conflict with antitrust laws; rather, a repeal of the federal antitrust laws has been inferred where necessary to promote the purposes of the securities laws. See, e.g., United States v. NASD, 422 U.S. 694, 729-30, 734, 95 S.Ct. 2427, 2447-48, 2450, 45 L.Ed.2d 486 (1975). 25 Orkin also attempted to convince the SEC that because of the unique factual situation presented, the markup policy did not give sufficient notice that the markups at issue would be considered excessive, precluding fair application of the markup policy to his case. Orkin claimed that no reported cases discuss application of the markup policy where a dealer exercises warrants in order to fill retail orders or where evidence of another dealer's domination and control provides the basis for calculating the prevailing market price. The SEC found, however, that the NASD proceedings were conducted fairly and that the markup policy was fairly applied on the facts of the case. 26 The SEC specifically concluded that the evidence of Brownstone's domination and control of the Ortech market was properly considered as a factor in evaluating the fairness of Tri-Bradley's retail prices. With respect to a firm that is not a market maker in a security, the NASD markup policy creates a presumption that a dealer's contemporaneous cost is the best evidence of the prevailing market price, in the absence of countervailing evidence. Tri-Bradley's cost was its purchase and exercise price of Ortech warrants. Before the NASD, Orkin asserted that the unpublished phone quotations obtained by Mernah were countervailing evidence of Ortech stock's prevailing market price. He also pointed to the single inter-dealer sale by Brownstone listed on Schedule A, as well as to the three other inter-dealer trades outside the relevant period, to support the reliability of the oral quotations. 27 The SEC observed that the NASD countered Orkin's position by asserting that the oral quotations were unreliable because the Ortech market was not active and independent; it was dominated and controlled by Brownstone during the period. The inter-dealer trades listed on Schedule A, all involving Brownstone, evidence its domination and control. Brownstone's domination and control was asserted by an NASD investigator at the DBCC hearing. Orkin had ample opportunity to rebut that evidence before the NASD and SEC. The SEC considered Brownstone's domination and control a factor necessarily and appropriately taken into consideration in establishing the prevailing market price for Ortech stock under SEC precedent. As a result, the SEC concluded that the NASD erred to the extent that it ignored such evidence and relied solely on Tri-Bradley's cost to establish the prevailing market price. 28 The SEC further opined that the sanctions assessed against Orkin by the NBCC were not excessive, even when compared with those imposed against Mernah. The SEC noted that the sanctions against Mernah were imposed in the context of settlement and that merely because Orkin's sanctions were more severe does not render them excessive. See Butz v. Glover Livestock Commission Co., 411 U.S. 182, 185-87, 93 S.Ct. 1455, 1457-59, 36 L.Ed.2d 142 (1973) (sanctions imposed within the authority of an administrative agency are not rendered invalid because they are more severe than those imposed in similar cases). 29 Moreover, the SEC found that Orkin's conduct merited the sanctions imposed. The SEC observed that Orkin was in possession of all the key information, perhaps more information than Mernah, to determine whether Tri-Bradley's pricing was fair and that he participated in the pricing with respect to the Ortech stock sales. The SEC affirmed the NBCC sanctions of censure, $15,000 fine, costs, and 90 day suspension based upon Orkin's serious disregard for the NASD's pricing policy. Orkin then filed this petition for review.