Husky Trading LLC, Eugene O'Brien, Michael Inemer, Stephen Floirendo, Exchange Act Rel. 60180, June 26, 2009
Time since appeal filed – 11 months 2 days
Time since last brief – 8 months 5 days
Pages – 14
Footnotes – 33
The Philadelphia stock exchange found that Husky (an exchange member), O'Brien (president of Husky and a floor broker), Inemer and Floirendo (Husky floor brokers) executed options transactions that either traded through the best bid and offer or were traded ahead of customer orders in violation of exchange rules. "Trading through" is the practice of executing an order at a price that is inferior to the highest available bid or the lowest available offer. "Trading ahead" is the practice of executing trades other than the earliest entered receiving precedence. The exchange ordered various fines against the respondents and suspended the individuals from association for various times.
The Commission overturned the PHLX sanctions.
The trades involved were complex stock-tied option orders. As the Commission explained, these are a kind of contingent trade that involve a multi-component trade involving orders for a security and a related derivative that are executed at or near the same time. The ratio of options to stocks depends on the number of shares necessary to offset the option position. The ratio is specified at the time of the order and remains fixed regardless of the price of the instruments.
At the time PHLX had no rules specifically addressing the execution of such orders. It did have rules relating to "synthetic options" trades that involved an options trade that offset options with one-on-one stock trades.
The Commission rejected respondents' arguments that their trading did not violate PHLX rules. However, in a remarkably brief (one paragraph) conclusion the Commission found that "some level of uncertainty may have existed" concerning the "correct interpretation" of PHLX rules. Thus, the Commission concluded the "circumstances raise a question" about whether the respondents "were properly on notice that their conduct was violative."
Comment
The Commission's conclusion here is quite remarkable. I would suggest that the standard the Commission appears to adopt is vague and unworkable. Exactly what constitutes "some" level of uncertainty? When is "some" enough and when not enough? Is it sufficient that merely "a question" be raised about the application of the rules? Do such questions of applicability need to be reasonable? Do the rules of exchanges not apply when uncertainty "may" exist? Does that uncertainty need to be reasonable? Does this interpretive mush apply to all aspects of the securities laws? I think the point has been made so I won't continue to belabor the obvious.
One has to wonder why the Commission couldn't simply state its conclusion in plain english. If it was a fact that the rules were unclear and their application to the trades unclear why not just say so? If the respondents were thus not properly on notice of the application of the rules to their conduct why not just say so? But to rest a decision on "some" uncertainty that "may" have existed that raises "questions" – is to say the least unserious and frivolous. The use of a purported test that involves mere "questions" of applicability and "some" uncertainty obviously opens the door to endless future litigation of what will undoubtably prove to be an unworkable formulation.The Commission can do better than this. Indeed one would expect better from a first year law student.
Bon Mots
Disgorgement and Penalties Upheld – Will Be Inevitable Where There Is Egregious Fraud Regardless Of Inability To Pay
Maria T. Giesige, Exchange Act Rel. 60000, May 29, 2009
Time since appeal filed – 6 months 30 days
Time since last brief filed – 4 months 24 days
Pages – 13
Footnotes – 27
This is an important decision. Although the Commission could have imposed the monetary sanctions because the evidence was not introduced at trial it ruled that due to the egregious nature of the fraud penalties and disgorgement would have been imposed in any event.
The Commission ruled that disgorgement is appropriate, regardless of respondent's inability to pay because she "received this money as compensation for the very transactions that constituted the violations . . . ." It also upheld third tier penalties of $500,000 noting that inability to pay is "but one factor" to be considered. "Where the egregiousness of [the] conduct outweighs any consideration of . . . inability to pay . . . the public interest requires that the civil penalty be imposed."
This appears to be a significant tightening of the Commission's position. This case means that inability to pay will not automatically result in the Commission deciding not to impose disgorgement or penalties and that when there is significant fraud disgorgement and penalties are all but inevitable.
Giesige was associated with a broker-dealer and later registered as an investment adviser. The ALJ found that she made material misstatements and omitted material facts in selling securities of Carolina Development Co., sold unregistered securities, and also acted as an unregistered broker-dealer because because she sold away by not notifying her employer of her sales. The ALJ entered a cease and desist order, barred from association with a broker, dealer, or investment adviser, ordered disgorgement of $21,000 and ordered her to pay a $500,000 penalty.
The Commission upheld the ALJ's findings and sanctions. Giesige did not challenge the findings of violations on appeal. Nor did she challenge the cease and desist order or the bars. She asked that the disgorgement and penalty amounts be removed due to her inability to pay.
Discussion
Giesige was a rep from 1986 until 2007. In 2005 and 2006 on her recommendation fifty of her clients bought $1.49 million of Carolina Development securities. Giesige and her husband personally invested $29,000 in Carolina. Carolina purported to be in the real estate development business and touted the prospect of an impending public offering of its stock. It never registered its securities with the SEC and it took no steps to consummate an IPO. Its securities traded on the OTC bulletin board. In late 2005 the Commission sued Carolina and obtained a preliminary injunction and the appointment of a receiver. The receiver found that Carolina had no business revenues. Its only source of money was new investors from whom it had raised $52 million. Its only assets were real estate and it had no financial books and records. The receiver liquidated the company for $8 million.
Giesige gave offering materials to customers that she admitted she did not understand. She made no effort to verify any of the information. Although the company claimed its financial statements were audited she never obtained a copy of the audited financials. Some of her customers testified that in recommending Carolina securities she gave the impression she had done substantial due diligence. Giesige received $21,000 in commissions and 13,900 shares of Carolina stock in sales commissions. She also claimed that an IPO at $9 per share was imminent despite knowing that the stock was quoted in the pink sheets for $.30 per share. She also made price projections – claiming that the price of the stock would rise from $3 to $9 per share in a few months. Most of her customers were unsophisticated and had limited income and savings. Many borrowed against their IRAs to fund their investments. She did not notify her broker-dealer employer of her sales of Carolina stock.
Despite being represented by counsel Giesige offered no evidence at the trial of her inability to pay disgorgement or penalties. She tried to introduce evidence of her financial condition in her post-trial brief. The ALJ refused to allow this evidence as untimely. The Commission specifically upheld this ruling by the ALJ based on Commission Rule 340(b) that requires post-trial submissions to cite to evidence in the trial record. Inability to pay must be introduced at trial in order to allow the Division of Enforcement to contest it.
Finally, the Commission found that Giesige's conduct was so egregious that it would not waive disgorgement or penalties in any event. It found her fraud knowing or extremely reckless.
Comment
The Commission announces that it will not waive disgorgement or penalties based on inability to pay where the fraudulent conduct was knowing or extremely reckless. Practitioners should also note that the Commission will not consider inability to pay evidence that is not introduced at trial. Attempting to introduce such evidence in post–trial briefs will not be countenanced.
Time since appeal filed – 6 months 30 days
Time since last brief filed – 4 months 24 days
Pages – 13
Footnotes – 27
This is an important decision. Although the Commission could have imposed the monetary sanctions because the evidence was not introduced at trial it ruled that due to the egregious nature of the fraud penalties and disgorgement would have been imposed in any event.
The Commission ruled that disgorgement is appropriate, regardless of respondent's inability to pay because she "received this money as compensation for the very transactions that constituted the violations . . . ." It also upheld third tier penalties of $500,000 noting that inability to pay is "but one factor" to be considered. "Where the egregiousness of [the] conduct outweighs any consideration of . . . inability to pay . . . the public interest requires that the civil penalty be imposed."
This appears to be a significant tightening of the Commission's position. This case means that inability to pay will not automatically result in the Commission deciding not to impose disgorgement or penalties and that when there is significant fraud disgorgement and penalties are all but inevitable.
Giesige was associated with a broker-dealer and later registered as an investment adviser. The ALJ found that she made material misstatements and omitted material facts in selling securities of Carolina Development Co., sold unregistered securities, and also acted as an unregistered broker-dealer because because she sold away by not notifying her employer of her sales. The ALJ entered a cease and desist order, barred from association with a broker, dealer, or investment adviser, ordered disgorgement of $21,000 and ordered her to pay a $500,000 penalty.
The Commission upheld the ALJ's findings and sanctions. Giesige did not challenge the findings of violations on appeal. Nor did she challenge the cease and desist order or the bars. She asked that the disgorgement and penalty amounts be removed due to her inability to pay.
Discussion
Giesige was a rep from 1986 until 2007. In 2005 and 2006 on her recommendation fifty of her clients bought $1.49 million of Carolina Development securities. Giesige and her husband personally invested $29,000 in Carolina. Carolina purported to be in the real estate development business and touted the prospect of an impending public offering of its stock. It never registered its securities with the SEC and it took no steps to consummate an IPO. Its securities traded on the OTC bulletin board. In late 2005 the Commission sued Carolina and obtained a preliminary injunction and the appointment of a receiver. The receiver found that Carolina had no business revenues. Its only source of money was new investors from whom it had raised $52 million. Its only assets were real estate and it had no financial books and records. The receiver liquidated the company for $8 million.
Giesige gave offering materials to customers that she admitted she did not understand. She made no effort to verify any of the information. Although the company claimed its financial statements were audited she never obtained a copy of the audited financials. Some of her customers testified that in recommending Carolina securities she gave the impression she had done substantial due diligence. Giesige received $21,000 in commissions and 13,900 shares of Carolina stock in sales commissions. She also claimed that an IPO at $9 per share was imminent despite knowing that the stock was quoted in the pink sheets for $.30 per share. She also made price projections – claiming that the price of the stock would rise from $3 to $9 per share in a few months. Most of her customers were unsophisticated and had limited income and savings. Many borrowed against their IRAs to fund their investments. She did not notify her broker-dealer employer of her sales of Carolina stock.
Despite being represented by counsel Giesige offered no evidence at the trial of her inability to pay disgorgement or penalties. She tried to introduce evidence of her financial condition in her post-trial brief. The ALJ refused to allow this evidence as untimely. The Commission specifically upheld this ruling by the ALJ based on Commission Rule 340(b) that requires post-trial submissions to cite to evidence in the trial record. Inability to pay must be introduced at trial in order to allow the Division of Enforcement to contest it.
Finally, the Commission found that Giesige's conduct was so egregious that it would not waive disgorgement or penalties in any event. It found her fraud knowing or extremely reckless.
Comment
The Commission announces that it will not waive disgorgement or penalties based on inability to pay where the fraudulent conduct was knowing or extremely reckless. Practitioners should also note that the Commission will not consider inability to pay evidence that is not introduced at trial. Attempting to introduce such evidence in post–trial briefs will not be countenanced.
Investment Advisers Barred Based On Vermont Sanctions
Mitchell M. Maynard, and Dorice A. Maynard, IA Act Rel. 2875, May 15, 2009
Time since appeal filed – 7 months 17 days
Time since last brief filed – 4 months 30 days
Pages – 17
Footnotes – 40
The Maynards (husband and wife) were barred for five years from associating with registered broker-dealers or investment advisers and other sanctions by state of Vermont. A Commission ALJ barred them from association with any investment adviser and the Commission upheld that decision on appeal.
Mitchell Maynard organized a mutual fund in 1998 and in 1999 formed an IA, Leveraged Index Management Co. (Limco) to manage another fund and registered with the Commission as an IA. Mitchell was president and treasurer of Limco and his wife Dorice was vice president of operations and marketing. She was primarily responsible for maintaining Limco's books and records but also assisted with marketing and solicited at least one advisory client.
Following a Commission exam of Limco that found numerous deficiencies Limco deregistered in early 2001. In 2002 Vermont brought charges and after a trial issued an order that found both Maynards had a substantive role in managing Limco. Vermont found that the Maynards had, among other things, misappropriated investor funds for their personal use, misrepresented Limco's performance, and failed to disclose a prior bankruptcy.
The ALJ barred the Maynards based on the Division of Enforcement's motion for summary disposition.
Because Limco was registered with the Commission at the time the events charged by Vermont occurred the Commission had jurisdiction over them regardless of whether or not Limco actually functioned as an investment adviser.
The Maynards complain that the SEC staff referred this matter to Vermont to evade the requirement in Commission proceedings that the staff exam report on which the proceedings are based be made available to them. In this case the staff did not provide the previous exam report to the Maynards as that exam was not the basis for the proceeding. The exam report did not include Brady material (material exculpatory evidence) because the Maynards were estopped from challenging the findings in the Vermont order. And because the decision by the Commission staff not to directly prosecute a case based on the earlier exam is a matter of prosecutorial discretion nothing prohibits the Commission from pursuing a separate remedy after it has foregone another.
Finally, because the Maynards were collaterally estopped from challenging the Vermont proceedings their due process rights were not violated because the ALJ did not hold an evidentiary hearing.
Comment
Nothing unusual here. One has to wonder why the Commission continues to write opinions in matters such as this that raise no issues of significance. If it was appropriate for the ALJ to act on a motion for summary disposition without a hearing, surely the Commission could manage to summarily affirm that decision unless unusual issues are raised.
Time since appeal filed – 7 months 17 days
Time since last brief filed – 4 months 30 days
Pages – 17
Footnotes – 40
The Maynards (husband and wife) were barred for five years from associating with registered broker-dealers or investment advisers and other sanctions by state of Vermont. A Commission ALJ barred them from association with any investment adviser and the Commission upheld that decision on appeal.
Mitchell Maynard organized a mutual fund in 1998 and in 1999 formed an IA, Leveraged Index Management Co. (Limco) to manage another fund and registered with the Commission as an IA. Mitchell was president and treasurer of Limco and his wife Dorice was vice president of operations and marketing. She was primarily responsible for maintaining Limco's books and records but also assisted with marketing and solicited at least one advisory client.
Following a Commission exam of Limco that found numerous deficiencies Limco deregistered in early 2001. In 2002 Vermont brought charges and after a trial issued an order that found both Maynards had a substantive role in managing Limco. Vermont found that the Maynards had, among other things, misappropriated investor funds for their personal use, misrepresented Limco's performance, and failed to disclose a prior bankruptcy.
The ALJ barred the Maynards based on the Division of Enforcement's motion for summary disposition.
Because Limco was registered with the Commission at the time the events charged by Vermont occurred the Commission had jurisdiction over them regardless of whether or not Limco actually functioned as an investment adviser.
The Maynards complain that the SEC staff referred this matter to Vermont to evade the requirement in Commission proceedings that the staff exam report on which the proceedings are based be made available to them. In this case the staff did not provide the previous exam report to the Maynards as that exam was not the basis for the proceeding. The exam report did not include Brady material (material exculpatory evidence) because the Maynards were estopped from challenging the findings in the Vermont order. And because the decision by the Commission staff not to directly prosecute a case based on the earlier exam is a matter of prosecutorial discretion nothing prohibits the Commission from pursuing a separate remedy after it has foregone another.
Finally, because the Maynards were collaterally estopped from challenging the Vermont proceedings their due process rights were not violated because the ALJ did not hold an evidentiary hearing.
Comment
Nothing unusual here. One has to wonder why the Commission continues to write opinions in matters such as this that raise no issues of significance. If it was appropriate for the ALJ to act on a motion for summary disposition without a hearing, surely the Commission could manage to summarily affirm that decision unless unusual issues are raised.
Boston Options Exchange Petition For Review Dismissed
Boston Options Exchange Group, LLC, Exchange Act Rel. 59927, May 14, 2009
Boston Options Exchange Group (BOX) applied to the Commission for review of a $2.3 million participation fee assessed upon it by the Options Price Reporting Authority when the Boston Stock Exchange sought to join OPRA. The Commission dismissed the proceeding.
OPRA is a National Market System Plan approved by the Commission under Exchange Act Section 11A. OPRA governs the process by which options market data are collected from participants, and disseminated.
OPRA sets participation fees for new members. When BSE sought to join OPRA the most recent new participant paid a $1.3 million. BSE joined OPRA in 2002 and was assessed a $2.3 million fee. In 2007 OPRA charged Nasdaq a similar $2.3 million participation fee. Nasdaq appealed that fee to the Commission, but reached a settlement that resulted in a $1.75 million fee. In 2007 BOX applied to OPRA for a reduction in its fee based on the settlement with Nasdaq. OPRA refused to provide BOX with a detailed explanation of how the fee was arrived at and denied the request for a reduction.
BOX's sought Commission review under Exchange Act Section 11A(b)(5) and Rule 608(d). The rule authorizes the Commission to in its discretion "entertain appeals in connection with . . . implementation or operation" of a national market system plan.
The Commission ruled that since appeals must be filed within thirty days and the fee was imposed in 2002 the BOX action was untimely since it was not filed until 2008. Under the most charitable view of the facts, the Commission noted that BOX waited at least four months to file after the last possible action by OPRA (when it declined to review the previous fee following the decision on its attempt to have the fee reduced in light of the settlement with Nasdaq) that could arguably be appealed.
Boston Options Exchange Group (BOX) applied to the Commission for review of a $2.3 million participation fee assessed upon it by the Options Price Reporting Authority when the Boston Stock Exchange sought to join OPRA. The Commission dismissed the proceeding.
OPRA is a National Market System Plan approved by the Commission under Exchange Act Section 11A. OPRA governs the process by which options market data are collected from participants, and disseminated.
OPRA sets participation fees for new members. When BSE sought to join OPRA the most recent new participant paid a $1.3 million. BSE joined OPRA in 2002 and was assessed a $2.3 million fee. In 2007 OPRA charged Nasdaq a similar $2.3 million participation fee. Nasdaq appealed that fee to the Commission, but reached a settlement that resulted in a $1.75 million fee. In 2007 BOX applied to OPRA for a reduction in its fee based on the settlement with Nasdaq. OPRA refused to provide BOX with a detailed explanation of how the fee was arrived at and denied the request for a reduction.
BOX's sought Commission review under Exchange Act Section 11A(b)(5) and Rule 608(d). The rule authorizes the Commission to in its discretion "entertain appeals in connection with . . . implementation or operation" of a national market system plan.
The Commission ruled that since appeals must be filed within thirty days and the fee was imposed in 2002 the BOX action was untimely since it was not filed until 2008. Under the most charitable view of the facts, the Commission noted that BOX waited at least four months to file after the last possible action by OPRA (when it declined to review the previous fee following the decision on its attempt to have the fee reduced in light of the settlement with Nasdaq) that could arguably be appealed.
CPA's Motion To Lift Temporary Suspension After Injunction Denied
William D. Shovers, Exchange Act Rel. 59874, May 6, 2009.
The Commission instituted disciplinary proceedings against CPA Shovers under its rule 102(e) and temporarily suspended him from practicing before the Commission at the same time. Rule 102(e)(3) allows temporary suspensions pending a hearing on the merits if the respondent has been enjoined from securities law violations or found to have violated the securities laws in a Commission enforcement action. Shovers was enjoined in late 2008 after a jury in a Commission civil action found he had violated, inter alia, the antifraud provisions of the securities laws.
Shovers moved that the temporary suspension be lifted until the Commission had decided the case on the merits and also moved for a hearing. The Commission denied the motion to lift the temporary suspension noting that Shovers may not collaterally attack the injunction or findings in the civil case. Shovers' request for a hearing was granted and ordered that an expedited hearing take place before an administrative law judge.
The Commission instituted disciplinary proceedings against CPA Shovers under its rule 102(e) and temporarily suspended him from practicing before the Commission at the same time. Rule 102(e)(3) allows temporary suspensions pending a hearing on the merits if the respondent has been enjoined from securities law violations or found to have violated the securities laws in a Commission enforcement action. Shovers was enjoined in late 2008 after a jury in a Commission civil action found he had violated, inter alia, the antifraud provisions of the securities laws.
Shovers moved that the temporary suspension be lifted until the Commission had decided the case on the merits and also moved for a hearing. The Commission denied the motion to lift the temporary suspension noting that Shovers may not collaterally attack the injunction or findings in the civil case. Shovers' request for a hearing was granted and ordered that an expedited hearing take place before an administrative law judge.
Comment
In a footnote the Commission noted that it would presume that Shavers was not prejudiced by the temporary suspension pending the hearing as he did not allege any harm. Practitioners should note this and be prepared to argue harm resulting from such a suspension if they seek relief from the stay pending a hearing.
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