Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
RICHARD J. ADAMS
November 30, 2000
|APPEARANCES:||Richard M. Humes, Associate General Counsel; Samuel M. Forstein, Assistant General Counsel; John J. Nicholas, Special Counsel; and Deborah A. Tarasevich, Attorney, for the Securities & Exchange Commission
Marc B. Dorfman and Arthur M. Schwartzstein for Applicant, Richard J. Adams
|BEFORE:||Lillian A. McEwen, Administrative Law Judge|
Pursuant to the Equal Access to Justice Act (EAJA), 5 U.S.C. § 504 (a)-(f), Adams seeks to recover attorney's fees and costs incurred as the prevailing party. Adams filed an Application for Award of Fees and Expenses on May 8, 1998, with supplements up to a final filing on September 1, 1998. The petition is based on billable hours at $75.00 per hour for two attorneys plus expenses. Adams requests $53,646.03. This decision concludes that he is entitled to that amount.
The Order Instituting Proceedings (OIP) in the instant case was filed on May 2, 1994. On June 9, 1994, the Administrative Law Judge (ALJ) assigned to the case issued an order granting the Motion of the Division of Enforcement (Division) for a Stay of the Proceedings in light of a remand by the United States Court of Appeals for the Third Circuit. In a statement dated February 10, 1995, the Division represented that settlements as to the other Respondents were likely and further proceedings would be necessary only as to Respondent Richard J. Adams (Respondent or Adams). The United States District Court to which the Adams case had been remanded postponed the matter indefinitely.
On June 28, 1995, the United States Securities and Exchange Commission (Commission) issued an Order Granting In Part And Denying In Part Motion to Dismiss, 59 SEC Docket 2044 (June 28, 1995), pursuant to Respondent Adams's Motion to Dismiss and pursuant to the Division's Motion to Amend the OIP. Specifically the Commission granted the Motion to Dismiss solely to the extent that the proceedings no longer would be based on entry of an injunction against Adams and it ruled that the proceeding was not barred by a statute of limitations. The Commission declined to rule on the Division's Motion to Amend the OIP. It reasoned that amendment was not required, in light of the allegation in the alternative in the OIP that Adams willfully engaged in conduct proscribed by Section 15(b)(6) of the Securities Exchange Act of 1934 (Exchange Act).
On August 31, 1995, the Commission issued its Order Dismissing Graystone Nash, Incorporated, from Proceedings. 60 SEC Docket 0244 (Aug. 31, 1995). On August 9, 1995, the Commission issued two orders, the first an Order Dismissing Thomas V. Ackerly from Proceedings, and another Order Instituting Proceedings Pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions. 59 SEC Docket 3021 (Aug. 9, 1995); 59 SEC Docket 3023 (Aug. 9, 1995). Pursuant to Respondent Dennis Williams's Offer of Settlement, the Commission's Order Making Findings And Imposing Remedial Sanctions as to Williams was dated August 9, 1995. 59 SEC Docket 3026 (Aug. 9, 1995). Further, on August 1, 1995, the Commission issued an Order Making Findings and Imposing Remedial Sanctions by Default against Respondent Vincent R. Ackerly, Jr. 59 SEC Docket 2875 (Aug. 1, 1995).
On September 5, 1995, the Chief ALJ issued an Order Redesignating Presiding Judge, and on September 11, 1995, a public hearing as to Respondent Richard J. Adams commenced before me in Washington, D.C. It ended on September 14, 1995. On June 27, 1996, I issued an Initial Decision dismissing the charges against Respondent Adams. The Commission also dismissed the case, after granting the Division's petition for review. Richard J. Adams, 66 SEC Docket 1553 (Feb. 11, 1998). The Commission's Rules disfavor further proceedings, such as an evidentiary hearing, on matters at issue in an EAJA application, and emphasize a prompt decision by the administrative law judge. See 17 C.F.R. §§ 201.55, .56. The findings and conclusions in this Decision are based on the record, which includes the record in the original proceeding and filings in the EAJA proceeding. Pursuant to the EAJA, 5 U.S.C. § 504(a)(1), and 17 C.F.R. § 201.35(a), "[t]he burden of proof that an award should not be made to an eligible prevailing applicant is on [the Division]."
The application was timely filed. The Commission issued its Order Dismissing Proceedings on February 11, 1998. Although the Division had filed a petition for review, it did not seek reversal of the decision to dismiss the case. The Division did seek reversal of the factual findings in the Initial Decision. The Commission in its Order clearly stated, however, that it intimated "no review on the merits." Furthermore, it concluded that because it had granted the Division's petition for review, the Initial Decision had "ceased to have any force or effect." The Commission based its decision to dismiss on "the age of this case" and the fact that the Division did not oppose dismissal. In turn, the Division's position was taken "in light of" the Johnson v. SEC decision, 87 F.3d 484 (D.C. Cir. 1996), and the procedural posture of the case. In federal district court, the Division was then "seeking" an injunction against Adams based on the same allegations as in the case before the Commission. On May 8, 1998, Adams filed an application for award of fees and expenses pursuant to the EAJA, eighty-six days after the Commission's Order.
Adams had ninety days to file an application for attorney's fees; this is derived from the addition of the Federal Rules of Appellate Procedure Rule 4(a) period of sixty days plus the EAJA period of thirty days. See Russell v. Nat'l Mediation Board, 764 F.2d 341, 348 (5th Cir. 1985), vacated on other grounds, 775 F.2d 1284 (5th Cir. 1985); Carter v. Bowen, 733 F. Supp. 1084, 1086 (S.D. Miss. 1990) (application dismissed). The Secretary in Carter v. Bowen granted the relief sought by the plaintiff and filed a motion to dismiss the district court action "which effectively asserted that no further appeal would be taken." Id. at 1086. The defendant in that case also filed his application ninety-one days after the order that entered a final judgment on the merits.
In the instant case, Adams certainly would have preferred a Commission Order that would similarly have prevented any further action being taken against him. Unlike the Secretary in Carter v. Bowen, the Division might still have been able to pursue Adams in the context of an injunction based on the same allegations described in the OIP. This possibility arose due to the Commission's decision not to address the merits of the instant case. Thus, I am reluctant to conclude that Adams had no basis for an appeal from the Commission's dismissal. This conclusion is supported by the court's reasoning in In re The Reporters Committee for Freedom of the Press, 773 F.2d 1325, 1330 (D.C. Cir. 1985). Although that court dismissed the appeal as moot, it reasoned that an underlying dispute might be capable of repetition in some contexts and thus some claims that might appear to be moot would not be barred.
Indeed, pursuant to 5 U.S.C. §§ 702, 704, Adams might have been "adversely affected or aggrieved" by the Commission's action in that the final decision did not dispose of the case on its merits for the purposes of precluding an injunction proceeding against him.
Obviously you can't appeal from a decision that is entirely in your favor. (Who would want to? Well, someone who desired the greater authority of an appellate decision, or . . . was troubled by the long-term implications of the court's analysis and feared that he had won a Pyrrhic victory.) But you can appeal from the parts of a generally favorable order that are unfavorable to you -- for example, from a refusal, in an order awarding judgment to the named plaintiffs, to certify their suit as a class action.
LaBuhn v. Bulkmatic Transport Co., 865 F.2d 119, 122 (7th Cir. 1988) (citations omitted). Thus, a party usually may not appeal from a judgment or decree in his favor. See Spencer v. Casavilla, 44 F.3d 74, 78 (2d Cir. 1994). However, such an appeal may be permitted. See EEOC v. Chicago Club, 86 F.3d 1423, 1431 (7th Cir. 1996).
The fact that the Division did not oppose dismissal of the case in light of the procedural posture of the case while it sought an injunction against Adams also demonstrates that Adams might have remained legally vulnerable due to the Commission's failure to reach the merits. Thus the Division's position here, that Adams could not have been aggrieved by the Commission's Order, is undercut by its earlier reference to the procedural posture of the case as a basis for its failure to object to the dismissal before the Commission. The Division had reasonably assumed that the Commission's dismissal without prejudice and without reaching the merits would still allow it to pursue an injunction against Adams. Therefore I conclude that Adams had standing to appeal the Order and that the appeal could not have been moot. Because Adams filed his claim eighty-six days after the Commission's decision, I conclude that he timely filed within the ninety days allowed.
Adams is Eligible
I also conclude that Adams is an eligible prevailing applicant, pursuant to the EAJA. The proceeding was an adversary adjudication because the United States was represented by counsel and the adjudication was required by statute to be determined on the record after opportunity for an agency hearing. The adjudication followed the Commission's process for formulation of its Order, which constituted a final disposition of the proceeding against Adams. The Division does not disagree with these conclusions. However, it contends, pursuant to 17 C.F.R. § 201.35, that its trial position was reasonable in law and fact, and that Adams is not entitled to an award. I disagree.
The Division's Position at Trial
No substantial justification exists for the Division's position at trial. "[T]he position of the agency was substantially justified" within the meaning of the EAJA only if it was "reasonable in law and fact." 5 U.S.C. § 504(a)(1); 17 C.F.R. § 201.35(a); Pierce v. Underwood, 487 U.S. 552, 565 (1988). An independent evaluation of the evidence in the adversary adjudication must be conducted through an EAJA perspective to determine whether or not the agency's position was substantially justified. See Rita C. Villa, 71 SEC Docket 2438, 2443-44 (Mar. 8, 2000). I concluded in the Initial Decision that the Division did not prove its case against Adams by a preponderance of the evidence. I now conclude that no substantial justification for the Division's position at trial existed, pursuant to the EAJA. Thus, most of the following facts were found in the Initial Decision, and they are based on the record, which is also cited in the Initial Decision.
A month after the OIP was filed in the instant case, the Court of Appeals for the Third Circuit presented the Division with a sound defeat. Adams had represented himself before the trial court, where the Division had persuaded it to issue not only an order precluding Adams from presenting evidence at a hearing on the Division's motion for a permanent injunction but also an order granting the Division summary judgment and disgorgement of over $60 million against Adams. See SEC v. Graystone Nash, Inc., 25 F.3d 187 (3d Cir. 1994); (Resp. Ex. 1.)
Neither Adams nor Ackerly were formally represented by counsel either during discovery or in the district court proceeding. They were deposed by telephone in 1992 on the 10th and 22nd of June, respectively. The SEC's counsel questioned them about their roles, remuneration, and decision-making responsibilities at Graystone, their participation in various stock transactions, any gains received by them as the result of trading, and any compensation other than salary they had received. Both Adams and Ackerly invoked the Fifth Amendment and refused to answer questions other than those pertaining to their names, addresses, current employment, and telephone numbers.
Id. at 189.
On October 23, 1992, the SEC filed a motion for an order of preclusion against Adams and for the entry of summary judgment. On December 14, 1992, Adams filed a response and affidavit in opposition.
Adams complained that the SEC had refused to produce documents that he needed in order to obtain expert testimony for his defense. He also offered to testify once the parallel criminal investigation against him by the U.S. Attorney in Newark, New Jersey had been concluded. He asserted that he was not an equity owner of Graystone Nash, Inc. (Graystone), had only received a total salary of approximately $150,000 for the years of 1986, 1987, and 1988, and that he was never a trader for the firm. "He also asserted that given a day in court, he could `deliver expert testimony to refute Plaintiff's case' and challenged in specific detail various statements made in depositions that the SEC offered in support of its motion for summary judgment." Id. at 189.
The motions were argued before the district court on January 25, 1993, where Adams appeared without counsel.
Adams also opposed the SEC's requests and made the following comments at the hearing:
These people [the SEC] have been given six years' worth of tax returns which clearly shows I made $50,000 a year . . . . $60 million is ludicrous. . . . I believe I can bring enough people to make [the SEC] look wrong and to realize there is no case here. I can bring expert testimony. I have friends in this business for 25 years who will testify that as an operations manager, I did my duty and that's all. . . . [A]s far as cooperation, I testified before our governing body, the [National Association of Securities Dealers], under oath, and that was submitted to the Commission, by the way. Also it should be noted that I'm the one that furnished almost 30,000 documents to these people. So I did cooperate. . . . I didn't have a share in the company. I had no reason to do this.
Id. at 189 (alterations in original). Counsel for the SEC did not comment on these remarks, and the court concluded the hearing at that point.
The appellate court questioned whether the filing of affidavits and the statements made at the trial court hearing indicated that Adams had decided to waive the Fifth Amendment privilege. The court went on to decide that the Division knew the salient facts at the time of the hearing, in support of its conclusion that Adams had been treated unfairly:
Another area of inquiry that was not explored at the hearing was the effect of Adams'[s] sworn statement to the National Association of Securities Dealers that the SEC had obtained. Whether that material constituted a waiver or whether it was a factor counseling a limitation on the SEC's request for total preclusion was not discussed. The thousands of documents that Adams asserted he had turned over to the SEC might also have had some relevance in determining the appropriate scope of preclusion, assuming that to be a proper remedy in the circumstances.
There is a lack of support in the record for the SEC's contention that it suffered prejudice because of the defendants' belated attempts to present evidence on their own behalf. The SEC asserts that the defendants' introduction of evidence at that late stage was unfair because it would delay action on the SEC's motion for summary judgment. This contention lacks substance. It was the SEC itself that had set the timetable by filing its motion for preclusion simultaneously with a request for summary judgment. The SEC's motion was apparently the first indication given to defendants that they might be unable to present any kind of defense or that a trial on the merits might not be held. If the SEC had wished to avail itself of a claim of prejudice -- asserting that defendants had "sandbagged" the agency at the eleventh hour -- the appropriateness of a preclusion order should have been resolved before the motion for summary judgment was filed.
Moreover, any allegation that the SEC was surprised by suddenly being confronted with new and unexpected evidence must be received with some caution. As noted earlier, Ackerly and Adams were but two of seven defendants who had been sued by the SEC. Before Adams and Ackerly appeared at the hearing, two co-defendants, Shawn M. Crane and Robert L. Rock, had entered into consent judgments for the disgorgement of $60,663.15 and $279,074.00, respectively, and had agreed to testify at any evidentiary proceeding requested by the SEC. In addition, the SEC had already taken the depositions of several individuals whose testimony was cited by the district court in support of summary judgment.
The SEC possessed substantial evidence in addition to the material that Adams asserted he had made available. It is apparent that the government had devoted substantial resources to expose the fraudulent security arrangements and to proceed against those responsible. Therefore, this appears to be a far cry from a case where invocation of the privilege prevented the opposing party from obtaining the evidence it needed to prevail in the litigation.
Nothing presently in the record persuades us that the SEC would have been unable to present a strong case even if Adams and Ackerly had been permitted to testify if they chose. The severe remedy of barring defendants from presenting any evidence from third parties was even less necessary. The preclusion sanction did not "level the playing field," but tilted it strongly in favor of the SEC. Courts must bear in mind that when the government is a party in a civil case and also controls the decision as to whether criminal proceedings will be initiated, special consideration must be given to the plight of the party asserting the Fifth Amendment.
Id. at 193-94 (footnote omitted).
The record in the instant case does not contradict the facts upon which the Third Circuit based its decision to reverse the district court's ruling and to remand the case. I infer that Adams's sworn testimony before the National Association of Securities Dealers (NASD) exculpated him. Because Adams was not impeached with his NASD testimony I conclude that his testimony at trial was consistent with it. Thus, well before the trial in the instant case began, the Division knew that Adams had a strong defense against the charges.
Adams, a high school graduate, is a Vietnam veteran who earned three Bronze Stars and a Purple Heart in the Army. (Tr. 758-60.)1 After his discharge in 1968, Adams worked for several securities firms where he specialized in stock transaction confirmations; stock delivery and bank reconciliation; cashiering, overseeing the "receive and deliver area"; or the bookkeeping and accounting office. (Tr. 762-67.) Adams became licensed in the securities industry in 1985. (Tr. 771.) Adams then became associated with Graystone, where he remained until December 1988. (Tr. 774-76.) Adams had no ownership interest in Graystone, although he was "the financial principal and operations manager with the title of vice president" in Bloomfield, New Jersey. (Tr. 776-78.) Outwater & Wells (Outwater), in Livingston, New Jersey, was the clearing agent for Graystone, but it also had independent sales operations that remained in place after its acquisition by Graystone. Adams did not supervise Outwater. (Tr. 746-47, 778-79.) At its peak, Graystone had 1,100 stockbrokers employed at thirty-five branches, each of which was incorporated and owned by a separate franchise owner. Adams had no supervisory responsibility over the registered representatives. (Tr. 120-21, 781-82; Resp. Exs. 4, 13.) However, he did handle bookkeeping problems by telephone. (Tr. 135.) Adams also received the trade execution blotters and passed them to key punchers for generation of confirmations. (Tr. 168-69.) He prepared financial statements and FOCUS reports required by the NASD and handled customer complaints. (Tr. 169-70, 746-47.) The registered representatives and office overhead for each branch were paid with the funds which Adams monitored. (Tr. 598-99, 631-40, 781-82.)
Adams did not prepare the prospectuses for the four underwritten offerings of W.I.N.E., Inc. (Wine); ATC Environmental, Inc. (ATC); Advanciers Group, Inc. (Advanciers); or Alfa International, Inc. (Alfa); participate in underwriting negotiations; or obtain or receive any of the warrants given to anyone in connection with the underwritings. (Tr. 784-86.) He did not communicate with registered representatives or managers on the subject of repurchasing units offered in any of the four offerings; and he did not give multiple ticks nor hear anyone giving multiple ticks. (Tr. 786-87.) Thomas Ackerly groomed Joseph Gentile to be his number-two man, and Adams was not the number-two man in the organization, nor did he set prices or have authority to change prices. (Tr. 718-19, 724, 788-89.) Adams did receive the daily price sheet from Thomas Ackerly or Dave Springer and faxed it to the branches. (Tr. 789; Div. Ex. 21.)
There were about fifty other vice presidents at Graystone. (Tr. 791.) Adams used the buy-sell formula as a payroll schedule for the branches. (Tr. 792.) The contests and promotions required him to compile lists from the order sheets for accurate tabulations. (Tr. 793-94, 845-49; Div. Exs. 8-18.) As for allocations, Adams never made his customers give or sell units back to Graystone, but he regularly brought monthly branch production figures to Thomas Ackerly, who determined the allocations that Adams disseminated. (Div. Ex. 2.) He was neither aware of nor involved in suppression of sell orders or refusals to execute sell orders. (Tr. 795-96.)
Adams's desk was not located in the front near or in Thomas Ackerly's office or in the "bull pen area," but rather "was in the back portion of the offices where all the filing and the execution machines were, the customer data base was for the clearing firm." (Tr. 225-26.) The trades were sent to the area where Adams worked so that they could be executed. The procedure was usually carried out by the personnel in the operations section. (Tr. 226-27.) Adams did not influence quotations from other brokerage firms for the four underwritten offerings or influence Graystone's quotations. (Tr. 795-96.) However, Adams did handle the paperwork for rescinding transactions of registered representatives who were identified as selling securities in states where they were not registered. (Tr. 798-800.) Adams did not set the commission rates, but he disseminated commissions that were "already set upon the trade." (Tr. 841.) He also faxed or caused someone else to fax to the branches memoranda as to bonus winners. (Tr. 845-49.)
In 1987 and 1988, Graystone conducted twelve to fifteen initial public offerings (IPO) in the form of shares of common stock and purchase warrants. (Tr. 603.) An aftermarket developed in each initial offering in 1987 and 1988. The price of the stock increased. (Tr. 612, 617, 625-26.) Thomas Ackerly's brother, Vincent Ackerly, was the trader in the firm and both Ackerly brothers set prices for which they would buy stock as market makers. (Tr. 221-24.) Graystone went out of business as a result of its inability to pay for all the securities it purchased from its clients. (Tr. 804-06.) Adams notified the NASD and the Commission of the shortage of net capital. (Tr. 227-28, 804-05.) The Division makes much of the testimony of the three Graystone managers. Therefore I will evaluate the testimony of each of these witnesses here, as I also did in the Initial Decision. Their testimony was not credible. It was also uncorroborated and incompetent and lacking in probative value.
The Division's reliance on the testimony of Stephen Ware to establish any intentional misconduct by Adams is misplaced. Ware had worked at Graystone first as a stockbroker in 1987, and then as operations manager in the Newport Beach office until January 1989, when the office closed. (Tr. 50-52, 121-32.) On cross-examination, he testified that the franchise owners Foley and Crane gave him the prices for shares and that they allocated shares. (Tr. 120-21.) Thus, he contradicted his own direct testimony. Ware had never met Adams in person, did not recognize him at the hearing, had never visited the New Jersey office where Adams and the administrative offices were located, and had never observed Adams interacting with any of the alleged wrongdoers. Most importantly, he did not provide dates for any of the conversations or notes for them. Thus there was no corroboration for the telephone conversations with Adams and no connection with the movement of the stock.
The Division introduced its exhibits 3, and 8 to 18 through Ware. (Tr. 75-76, 82.) However, the exhibits demonstrate mere recordkeeping and payroll duties that Adams carried out. Adams's name does not appear on exhibit 3. Division exhibit 3 is a memorandum dated August 12, 1988, to "All Managers and Corporate Officers" from "T.V.A. [Thomas V. Ackerly]" that alludes to a new telephone system; a new sales bonus program; a new pay schedule; the fact that "the formula is now at an end"; congratulations; and dates for managers meetings. On the second page, "formula" is handprinted with a bracket in the margin beside the sales payout figures.
Division exhibits 8 through 11 are one-page memoranda to managers with Adams's name typed on them. Each is dated September 19, 1988, and they each list names in the categories of top producers, bonus winners, and new winners, respectively, for August 1988. Division exhibit 12 is a one-page memorandum to "All Managers" from "Richie Adams." It is dated October 6, 1988, and it requests a list of all names for "stock bonus winners for September 1988, for verification purposes." ATC, VINO, and IEIB are listed under the heading "Bonus Stocks." Division exhibits 13 through 16 are one-page memoranda to branch managers with Adams's name typed on them. Each is dated October 18, 1988, and they list names in the categories of stock bonus winners 9-88; new account winners under ninety days; new account winners over ninety days, and top ten producers September 1988, respectively. Division exhibit 17 is a one-page memorandum dated October 24, 1988, to branch manager from "Rich Adams." It requests "lists of bonus winners this last pay period," with abbreviations for the applicable stocks. Division exhibit 18 is a one-page memorandum with the same date and headings. However, it corrects one of the bonus stock designations listed in Division exhibit 17. The exhibits introduced through Ware corroborate the theory of the Respondent and are consistent with the findings of fact in the Initial Decision.
On cross-examination, Ware additionally conceded that Merrill Lynch, where he had worked in the past, also gave bonuses. (Tr. 109-10.) There were no bonus programs running at Graystone when Ware was employed there as a stockbroker and he never received a bonus, although he had 75 to 100 clients. (Tr. 118-19.) The exhibits demonstrate clearly only that Adams handled bookkeeping problems and that he was responsible for payroll. In fact, the exhibits themselves describe no manipulative or deceptive policies.
Jose Gallego was the second witness called by the Division. Like Ware, he testified to mostly undated, unmemorialized conversations with Respondent. Gallego identified Division exhibit 21 as a quote sheet generated from Graystone in New Jersey "describing . . . the bid price . . . the offering price [and] . . . concessions" for securities that Graystone had underwritten and made a market in, including Advisors Capital (ADC), Alfa, and ATC. (Tr. 171-73.)
On cross-examination, Gallego contradicted most of his direct testimony. He conceded that he never had a conversation with Adams about requiring customers to sell shares back to Graystone or about the procedure of raising the prices of stock after the initial sale and that Thomas Ackerly, as president of Graystone, set policies from the corporate office in New Jersey. Gallego also testified that it was common practice in the industry to have "house stocks" in which a brokerage firm may take a particular interest; to have different commission schedules for various products; to have great differences between bid and ask prices; and to set limits on numbers of shares allocated for IPOs. (Tr. 214-21.) Finally, he admitted that Thomas Ackerly's brother, Vincent Ackerly, was the trader in the firm and both Ackerly brothers set prices for which they would buy stock as market makers. (Tr. 221-24.)
Gallego visited the Bloomfield office of Graystone and saw that Adams's desk was not located in the front near or in Thomas Ackerly's office or in the "bull pen area," but rather "was in the back portion of the offices where all the filing and the execution machines were, the customer data base was for the clearing firm." (Tr. 225-26.) The trades were sent to the area where Adams worked so that they could be executed. The procedure was usually carried out by the personnel in the operations section. (Tr. 226-27.) Shortly after Gallego reversed some buy orders into sell orders, "Graystone ceased to exist" because "they were liquid [sic] markets that they made positions in." (Tr. 227-28.) On redirect, the witness contradicted his own testimony on cross-examination as to the setting of prices and the requirement for customer sells at various points in time. Gallego's description of the physical location of Respondent's desk in New Jersey corroborates the Respondent's contention that his work was centered around purely bookkeeping and ministerial duties, rather than policy making or execution of policies that he had reason to know were manipulative or fraudulent.
Gallego's testimony on direct examination that Adams managed the operation and ran the office in the absence of Ackerly is contradicted by his description of the physical layout in New Jersey. Reliance by the Division on the testimony of Gallego is similarly misplaced. Although he described a scheme at Graystone that was probably manipulative and fraudulent, it would be impossible to conclude from a fair examination of his entire testimony that Adams was aware of it or that he participated in its execution intentionally or recklessly. Division exhibit 21 was introduced through Gallego. It is a "Graystone Nash Price sheet" containing abbreviations and "Bid," "Ask," and "Concession" columns with handwritten percentage figures under the handwritten column "Gross." No testimony connected Adams to the document and it does not demonstrate that Graystone or anyone else engaged in any illegal activity.
David Torrey was the third Graystone manager witness. He had met Adams three times in person, but he also testified about undated and unmemorialized telephone conversations with him. (Tr. 663.) Torrey had worked for Graystone as a registered representative and then manager in 1986, with the title of regional vice president, in Florida. (Tr. 596-97.) In his direct testimony, Torrey corroborated Adams's testimony as to his own duties. On cross-examination, Torrey testified that he "never knew what the tick prices would be before billing of the IPO" at Graystone. (Tr. 661.) I am unable to conclude from these undated conversations that Adams or anyone else at Graystone acted illegally. There is certainly no basis for a conclusion that Graystone repurchased units before the offering had been completed for a particular IPO or that Adams was involved in a scheme to manipulate the market as prohibited in Rules 10b-5 and 10b-6. Indeed, the activities and concerns attributed to Adams by this witness corroborate his contention that he was a bookkeeper who was responsible for managing disbursement to many employees scattered throughout the country. Division exhibits 4 through 7 are prospectuses for Graystone stocks Wine, Alfa, ATC, and Advancier, respectively. These were introduced through Torrey. (Tr. 605-07.)
The quality of the testimony of the three managers does not rise to the level of relevant evidence of wrongdoing or recklessness by Adams, mainly because the conversations they describe are not detailed, are not dated, and are not corroborated by any memoranda or notes. Thus, no reasonable person could conclude that the conversations occurred before the offerings were completed for each of the IPOs or that credit balances were created before the registration dates. No reasonable person could conclude that Graystone was on the other side of customer transactions alleged by Ware or Gallego. (Tr. 72-74, 191-210.) Their testimony in this regard is contradicted by Torrey, who testified that the price of the stock increased as a result of buying pressure from other clients and other offices. (Tr. 625-26.)
The testimony of the managers is also contradicted by the Division witness Henry Aselton. Aselton testified that he worked at Graystone from April 1987 until December 1988 as a registered representative in the Boca Raton, Florida, office. (Tr. 249-50.) "Virtually all" of Graystone's business was in the house stocks. The company was the underwriter for the Wine, ATC, Alfa, and Advanciers offerings. (Tr. 251.) Williams and Rickerts instructed Aselton to sell the shares "when they go to a profit." (Tr. 254-58.) The incentive for the brokers consisted of commissions that varied from ten to sixty percent. (Tr. 260-61, 274.) Williams, at management meetings, encouraged the registered representatives to sell the stock that carried the highest commissions reflected on the "chop sheets" that showed tick prices with higher broker commissions for stocks sold at the highest prices to clients. (Tr. 267-69.) Aselton asked Rickerts, his manager, to submit tickets that Aselton had written in advance for stocks selling at different tick prices, while Aselton was in South Carolina, and Rickerts did it. (Tr. 270-72.) Management told the brokers to hide the quote sheets "when the regulators come" to the office. (Tr. 274-75.) Rick DeMaio signed off on the sell tickets, which were done pursuant to a buy/sell formula set by management. (Tr. 277-79.) DeMaio refused to allow a "sell ticket" to be processed when Aselton put it in because Aselton "didn't have a buy" ticket to match it. (Tr. 280-81.) Aselton did not attribute any illegal conduct to Adams. On the contrary, Williams, Rickerts, and DeMaio may have acted illegally or unethically in the branch office to implement policies set by "management."
The Division witness Joseph McGowan also contradicts the testimony of the three managers. McGowan testified that he acquired the Outwater firm in March 1976. It was terminated in 1988 or 1989, and he was president and then chairman of the board of the company. (Tr. 343-44.) His firm cleared securities for Graystone, "would do the paperwork for them, the accounting, operational work . . . prepare confirmations, deliver them to the customers, and . . . receive and pay out monies and securities on behalf of Graystone" from 1985 through 1988. (Tr. 344.) Phase 3 Systems, Inc. (Phase 3 Systems) maintained "the books and records required by law" for Outwater. (Tr. 346.) The Graystone data was submitted to Phase 3 Systems along with Outwater data, but was "coded differently to distinguish them from us" for input. (Tr. 348.)
McGowan defined the buy/sell formula as the calculation "as to the business done during that month, and a number was derived and that was the pay-out to that office for the business that they had submitted during the period of time. And that formula was used in calculating the monies due to the branch manager and the respective salespeople." (Tr. 367.) Adams used the formula "in doing his calculation to determine the amount of money that was to be paid to each office." (Tr. 367-68.) Graystone controlled the markets in its house stocks because they were the only firm that had the customers that actually owned securities. Thus, "if a person wanted to sell the securities, it would be much easier and more efficient to sell through Graystone Nash than to go through a competing or another broker/dealer." (Tr. 369-70.)
On cross-examination, McGowan acknowledged that his description on direct examination of Division exhibit 24 as blue sheet responses was based on the SEC attorney's description and that he had never asked that the documents be created or seen blue sheet responses before. (Tr. 387.) Although it is his belief that they "are a summation of the activities of the firm in these respective securities" of Advanciers, Wine, or ATC, he cannot determine why those particular stocks were chosen for the document; he has no way of determining whether they are complete; and his handwriting does not appear on the exhibit. (Tr. 387-91.) He conceded on cross-examination that Ackerly acquired Outwater and that Joseph Gentile replaced McGowan as chairman in January 1988. (Tr. 404-05.) McGowan subsequently moved to the Bloomfield, New Jersey office and became executive vice president of Graystone. (Tr. 411.) Although compliance was controlled by Thomas Ackerly at all times, McGowan was placed in charge of the problem of unlicensed registered representatives who were working for the company in several states. (Tr. 411-13.) By November 1988, the sales force from Outwater had transferred to Graystone and were given Graystone record code numbers for reporting purposes, rather than Outwater numbers. (Tr. 440.) McGowan testified that exhibit 24 also contains Outwater trades involving Outwater clients. (Tr. 442-43, 451-52.) However, where the account is labeled a suspense account in exhibit 24, the profits and losses belong to Graystone. "The Outwater, Wells's suspense account is not to be confused with Outwater & Wells's trading accounts and the way it does business." (Tr. 450.) The suspense account is used "to resolve differences, balances, temporary things" and thus to correct errors. (Tr. 450-51.)
McGowan corroborates Adams's characterization of the buy/sell formula as a means of calculating payroll figures for Adams, who essentially acted as a cashier. He contradicts the image of Graystone as the sole purchaser of the IPO shares, and he explains Graystone's activity as a market maker rather than a manipulator. Again, conversations are not placed in time and are not noted, and thus lose significance. Most importantly, McGowan destroys the evidentiary value of exhibit 24, which forms the basis for the Division's expert's exhibits. Exhibit 24 contains trading data from another company, Outwater. He does not vouch for the completeness of the document, and because McGowan did not decipher the codes and disavowed the handwriting on the sheets, it is impossible for a reasonable person to determine whether the codes have been accurately interpreted or how the labels were placed on the data. He also drew a distinction between the suspense accounts and the trading accounts that is not apparent on the face of the data in the exhibit. Thus, McGowan's testimony requires that very little probative value can be derived from exhibit 24.
Karen Gella also testified about exhibit 24 for the Division. She was vice president of data center operations at Phase 3 Systems from 1984 through March 1994. Sunguard Financial Systems acquired the company in 1990. (Tr. 302-04.) She received a request for information regarding Outwater, a customer of Phase 3, in 1989. (Tr. 307-08.) She supervised the generation of a report from off-site storage tapes to execute the program in 1989. (Tr. 308.) The documents from the computer run were shipped out or sent to Gary Morgan. (Tr. 309-10.) Exhibit 24 contains "410A" reports for Outwater that were produced by Phase 3 Systems. (Tr. 310.)
On cross-examination, she admitted that she recognized the format of the documents in exhibit 24, but that she did not recall having seen the documents themselves before the date of her testimony, and that she did not recognize the documents themselves. (Tr. 313-14.) The handwriting on the documents is not hers, and she does not know whose handwriting it is. (Tr. 314.) She did not see the subpoena that called for the production of the exhibit, and she did not know what several of the codes meant that appeared on the columns. (Tr. 314-16.) She did not know the name of the person who ran the program or who generated the report and she agreed that in order to determine what the data in the exhibit was supposed to be, one would "have to see the request that came in," and she did not have a copy of the request. (Tr. 317-18.) The request was never produced by the Division.
Division exhibit 24 is a computer generated record from Outwater that includes over 2,500 pages. There are approximately 407 pages (for 6-1-88 to 8-1-88) for ATC; 491 pages (for 6-1-88 to 8-1-88) for ATC, including many of the same customers from the earlier lists, and additional trades that occurred during the same period of 6-1-88 to 8-1-88; 282 pages (for 2-24-88 to 4-24-88) for Alfa units, including many of the customers from the above lists, and other trades; 626 pages (for 2-24-88 to 4-24-88) for Alfa with some scattered handwritten notes on them; 362 pages (for 10-5-88 to 12-22-88) for Advancier; and 988 pages (for 8-26-87 to 10-26-87) for Wine. No reasonable person could conclude from the exhibit that Graystone purchased securities from the customers listed, because no evidence identified the Graystone proprietary or house accounts and nobody vouched for the accuracy of the data in exhibit 24. Thus, although the exhibit is voluminous and complex, its probative value is minimal.
Joseph Cella was qualified as an expert in the area of market surveillance. (Tr. 480-81.) He testified for the Division that, in his opinion, exhibit 24 was a "typical" blue sheet response to a request for information by a regulatory body. (Tr. 482.) However, he had no personal knowledge of how the exhibit was generated. (Tr. 501.) For his computations, which are contained in exhibits 25 A through H, Cella excluded accounts from exhibit 24 that were labeled syndicate accounts. (Tr. 495.) He included accounts that were in his opinion proprietary accounts. (Tr. 494-98.) Cella testified that the format for exhibits 25 A through H was a result of "a collaboration between myself, Mr. Bettigole [a Division attorney], and the secretary who typed it." (Tr. 509.)
Cella on cross-examination testified that it is not unusual for small brokerage firms to specialize in house stocks, and the proceeds from the underwriting of an IPO "are divided between the underwriter and the issuer, depending on the underwriting agreement." (Tr. 542.) Cella had not seen the underwriting agreement for Wine. (Tr. 542.) Thus, for the units sold for the syndicate account in exhibit 25A, he did not know how much "went to Wine Inc. and how much went to Graystone." (Tr. 543.) Exhibit 25A shows that on September 3 and 4, individuals bought shares for $10 and sold them for $17.50 to $54. (Tr. 545.) Cella conceded that there were transactions on exhibit 24 that were conducted subsequent to the dates shown on the charts he prepared. (Tr. 546.)
The Division contended that the data presented in exhibit 24 are reliable as representative of all the sales of units by Graystone as reflected in the prospectuses for Wine, Alfa, Advanciers, and ATC, (Div. Pr. Findings at 13), and that the computer sheets also show that Graystone repurchased most of the units within days of the opening of the aftermarket trading and then sold hundreds of thousands of shares of common stock at increasingly higher prices. It points out that the proprietary account trades are cross-referenced to offsetting customer transactions. According to the Division, the fund prospectuses were false and misleading because they stated that units of common stock and warrants were to be offered to the public at a stated price and that Graystone's compensation as underwriter consisted of "a commission or discount from the offering price, expenses and long term warrants." However, it contends that the hearing established that "the true nature of the offerings were distributions of common stock at multiple escalating tick prices in controlled markets." (Div. Pr. Findings at 15.)
Thus, the Division places great weight on the Cella computations. The computations of the expert Cella are contained in exhibits 25 A through H. However, they in turn are based on data in exhibit 24. Since the testimony of the Division witnesses requires a reasonable person to conclude that the data in exhibit 24 are likely to be inaccurate or incomplete, no reasonable person could attach great weight to the computations that Cella generated from them. Furthermore, Cella's testimony corroborates the theory of Respondent that Graystone engaged in no illegal conduct as a result of specialization in house stocks that was described by the managers. There is no evidence that any "proprietary account" trades were generally executed in an illegal manner or that Graystone alone controlled those accounts. There is no evidence that the prices at which the units and warrants were sold were artificially manipulated by anyone. Therefore, the prospectuses are not inaccurate according to exhibits 24 and 25, and Section 5 of the Securities Act of 1933 (Securities Act) was not violated. As for prior Graystone decisions, they cannot bind Adams and I cannot adopt their findings.
There are no dates or notes for the conversations that Mather and Boyle testified about having with Adams. (Div. Exs. 22, 23.) I cannot conclude from them, even assuming that they are accurate, that Adams was aware of any manipulation or that he knowingly participated in any illegal scheme. His responsibility for the physical allocation of stock to the branch offices does not per se make him privy to the strategy behind the decision to allocate. Finally, there is no proof that Graystone purchased stock illegally. Both depositions establish that Williams, who did not testify, was actively involved in the formulation of policy, not Adams. (Div. Ex. 22 at 41, Div. Ex. 23 at 31-32.) Thus, both depositions, on the whole, exculpate Adams.
Lester Morse, an attorney who represented Graystone in 1987 and 1988, and Adams both testified in Adams's case. Their testimony was exculpatory and is consistent with the findings of facts. They were both credible witnesses, based on their demeanor and appearance and the content of their responses to questions on direct and cross-examination. Furthermore, their testimony was corroborated by the majority of the Respondent's exhibits, including Respondent's exhibits 4, 5, 8, 9, and 13.
CONCLUSIONS OF LAW
In 1980 Congress adopted the EAJA after finding "that certain individuals . . . may be deterred from seeking review of, or defending against unreasonable governmental action because of the expense involved in securing the vindication of their rights." H.R. Rep. No. 96-1418, 96th Cong., 2d Sess. 5, reprinted in 1980 U.S.C.C.A.N. 4984, 4984. The EAJA permits prevailing parties to obtain awards of attorney fees and other expenses against the United States in certain administrative proceedings and judicial actions:
A prevailing applicant may receive an award for fees and expenses incurred in connection with a proceeding . . . unless the position of the Office or Division over which the applicant has prevailed was substantially justified. . . . The burden of proof that an award should not be made to an eligible prevailing applicant is on counsel for an Office or Division of the Commission, which must show that its position was reasonable in law and fact.
17 C.F.R. § 201.35(a).
Applicants under the statute must meet several threshold requirements. First, the EAJA applies only to "adversary adjudication." 5 U.S.C. § 504(a)(1). The EAJA defines an "adversary adjudication" as an "adjudication under section 554 of this title in which the position of the United States is represented by counsel or otherwise." 5 U.S.C. § 504(b)(1)(C). Section 554 covers adjudications required by statute to be determined on the record after opportunity for an agency hearing. 5 U.S.C. § 554(a)(1). In turn, these adjudications are defined as the "agency process for the formulation of an order," 5 U.S.C. § 551(7), and an "order" is defined as the "whole or part of a final disposition." 5 U.S.C. § 551(6).
Under the EAJA, a "final disposition" means "the date on which a decision or order disposing of the merits of the proceeding . . . becomes final and unappealable, both within the Commission and to the courts." 17 C.F.R. § 201.44(b). Section 25(a)(1) of the Exchange Act permits a "person aggrieved by a final order of the Commission" to obtain review in the United States Court of Appeals by filing a written petition within sixty days after entry of the order. 15 U.S.C. § 78y(a)(1).
Fees and Expenses
The Division has not disputed Adams's final accounting for fees and expenses (as described in the Dorfman letter of September 11, 1998) of $53,646.03. I have examined the schedules of fees and expenses submitted and find them to be reasonable and necessary in the defense of Adams's case and the EAJA proceeding. There is no evidence that the amount sought exceeds the prevailing rate for similar services in the community in which counsel for Adams ordinarily performs services. Reasonable attorney fees in an EAJA proceeding include fees for litigating the EAJA proceeding as well as the original adversary adjudication. See Russo Sec., Inc., 71 SEC Docket 74, 78 & n.14 (Nov. 10, 1999) (citing Commissioner, INS v. Jean, 496 U.S. 154 (1990); Trichilo v. Secretary of HHS, 823 F.2d 702, 707 (2d Cir. 1987)).
The EAJA was amended, effective March 29, 1996, to raise the maximum attorney fee payable to $125 an hour, for adversary adjudications commencing on or after that date. This adversary adjudication against Adams was commenced before that date. The Commission, furthermore, has not amended its Rules to raise the allowable maximum, which remains at $75 per hour. See 17 C.F.R. § 201.36(b). Adams's application in the amount of $53,646.03 will therefore be granted.
The Statute of Limitations
The Division contends that it had a reasonable basis for believing that the proceeding was not time barred, which was the sole basis for the Commission's dismissal of the proceeding. I do not agree. Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), reversed a Commission decision that held that 28 U.S.C. § 2462 did not apply to Commission proceedings. The Commission had ruled that the censure and suspension of Johnson were mere remedial actions, not a civil penalty. In Adams the Commission denied Adams's pretrial motion to dismiss on statute of limitations grounds. The Division contends that the decision in Johnson pertained to an issue of first impression in the D.C. Circuit, turning on the meaning of "penalty" in § 2462. Thus it argues that its interpretation of the term was reasonable. Because the sole basis for the Commission's dismissal of the instant case was the age of the case, the Division argues that if it had a reasonable basis for its belief that the OIP was timely filed, it is entitled to a dismissal of the fee application.
A careful reading of a recent appellate court decision reveals that the Division's reasoning is flawed. In March 1994, the court decided 3M Co. v. Browner, 17 F.3d 1453 (D.C. Cir. 1994). About two months later, on May 2, 1994, the OIP in the instant case was filed, and the Division sought to bar Adams permanently from the securities industry. In Canady v. SEC, No. 99-1407, 2000 U.S. App. LEXIS 27074 (D.C. Cir. Oct. 31, 2000), the court upheld the SEC decision that the respondent had waived the statute of limitations defense. The OIP in Canady was filed in October 1994, several months after the 3M decision. Unlike Adams, Canady did not raise the statute of limitations defense before her trial. Johnson was decided after Canady's trial. Also unlike Adams, Canady did not raise the defense in any post-trial papers until the motion for reconsideration was filed.
The court meets the argument that Canady could not reasonably be expected to have raised the defense before Johnson was issued in June 1996 by demonstrating that such a position conflicts with the clear ruling of 3M.
Canady contends she cannot reasonably be expected to have asserted the defense before Johnson issued in June 1996 when she had by then already filed her review brief with the Commission. As early as March 1994, however, this court held the statute applicable to agency as well as to judicial proceedings. See 3M Co. v. Browner, 17 F.3d 1453 (D.C. Cir. 1994). There was no reason thereafter to doubt that it applied to SEC proceedings. The only issue in Johnson was whether an SEC censure or professional suspension is a "civil fine, penalty, or forfeiture, pecuniary or otherwise" within the meaning of section 2462. As Canady acknowledges, uncertainty on the issue before Johnson definitively resolved it did not prevent counsel in other similar SEC proceedings, including, of course, Johnson itself, from timely asserting a section 2462 defense.
Canady, 2000 U.S. App. LEXIS 27074, at *10 n.5.
If there was no reason to doubt that 3M applied to SEC proceedings and if Canady was obliged to raise the defense of statute of limitations after 3M, the Division certainly acted unreasonably when it filed the OIP in the instant case. Its opposition to Adams's pretrial motion to dismiss and its persuasion of the Commission to deny the motion upon review do not transform an unreasonable position into a substantially justified one. The record establishes that the illegal acts attributed to Adams are alleged to have occurred from January 1987 to December 1988, when Graystone went out of business. I conclude that the filing of the OIP on May 2, 1994, was not substantially justified.
The Division's position at trial was not substantially justified. Proof of scienter in manipulation cases need not be direct, but rather may be inferred from circumstantial evidence, including evidence of price movement, trading activity, and other factors. See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91 n.30 (1983); Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977); Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986); Mawod & Co. v. SEC, 591 F.2d 588, 595-96 (10th Cir. 1979). Further, proof of manipulation is generally not based on a single activity, but rather on a course of conduct showing an intentional interference with the normal functioning of the market for a security. Indeed, manipulation is usually the result of acts, practices, and courses of conduct that deceive the marketplace:
Proof of a manipulation almost always depends on inferences drawn from a mass of factual detail. Findings must be gleaned from patterns of behavior, from apparent irregularities, and from trading data. When all of these are considered together, they can emerge as ingredients in a manipulative scheme designed to tamper with free market forces.
Pagel, Inc., 48 S.E.C. 223, 226 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986).
Moreover, it is not necessary to rely on direct evidence that a respondent willfully manipulated the market. Instead, I may rely on inferences drawn from the evidence adduced at the hearing to reach the conclusion that an illegal manipulation occurred. See Collins Sec. Corp. v. SEC, 562 F.2d 820, 822-23 (D.C. Cir. 1977).
I cannot conclude that Adams enforced, encouraged, participated in, or had knowledge of the "boiler-room tactics" in derogation of Sections 15(b) and 15A(b)(4) of the Exchange Act, as described in A.J. Caradean & Co., 41 S.E.C. 234 (1962). Section 5 of the Securities Act prohibits offers to sell and offers to buy a security before a registration statement is filed. Section 2(3) of the Securities Act, however, exempts preliminary negotiations or agreements between the issuer or other person on whose behalf the distribution is to be made and any underwriter or among underwriters. I cannot conclude that Adams assisted in these kinds of offers or negotiations prohibited by this section, either. Adams did not establish the prices that are described in the testimony and they cannot be attributed to him.
Because of the evidentiary problems with the trading data and with the testimony of the three managers, the Division has not proved that Graystone as the underwriter purchased securities while still participating in their distribution, as the wrongdoers in R.A. Holman & Co. v. SEC, 366 F.2d 446, 449 (2d Cir. 1966), and United States v. Charnay, 537 F.2d 341, 351 (9th Cir. 1976), did.
The Division has not sustained its burden of proving that an independent wrong existed; that Adams knew of the existence of the wrong; and that he rendered substantial assistance in effecting the wrong. Thus, he cannot be held responsible for violations of the securities laws. Like the defendants in Walck v. American Stock Exchange, Inc., 687 F.2d 778, 790 (3d Cir. 1982), Adams had duties that did not involve setting policy or monitoring the individuals who might have concocted a scheme to manipulate the market in the four IPOs. The numbers of transactions also would have made it impossible for him to notice any patterns. As in O'Neill v. Maytag, 339 F.2d 764, 768 (2d Cir. 1964), the facts in the instant case do not establish a deception. Adams concedes that he performed payroll functions that used the buy/sell formula established by the corporate owners. However, carrying out his accounting duties, Adams never "acted other than in good faith," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206 (1976), and no deceptive or manipulative scheme underlying the purchasing of stock was established that he could have enforced.
While an exemplary life up to the moment of wrongdoing will not excuse criminal or fraudulent conduct, such a life will stand a man in good stead when he is accused of shabby or criminal conduct which he denies, and when he is cast in a contest against accusers whose own lives present nothing special to support assertions of integrity.
Klopp v. SEC, 427 F.2d 455, 460 (6th Cir. 1970). Even if I assume that Graystone broke the law, I find it significant that no prior bad acts were alleged against Adams and that the Graystone employees who testified for the Division were not models of professional responsibility themselves. Adams's testimony demonstrated that he was not actively assisting a scheme and that he was not negligent. It was also consistent and reasonable in light of other credible evidence, such as the memoranda introduced by the Division in its case. Most importantly, Adams's professional duties as the only financial and operations limited principal at Graystone were staggering. They included:
a. final approval and responsibility for the accuracy of financial reports submitted to any duly established securities industry regulatory body;
b. final preparation of such reports;
c. supervision of individuals who assist in the preparation of such reports;
d. supervision of and responsibility for individuals who are involved in the actual maintenance of the member's books and records from which such reports are derived;
e. supervision and/or performance of the member's responsibilities under all financial responsibility rules promulgated pursuant to the provisions of the Exchange Act;
f. overall supervision of and responsibility for the individuals who are involved in the administration and maintenance of the member's back office operations; or
g. any other matter involving the financial and operational management of the member.
Schedule C, CCH NASD Manual, ¶ 1784, p. 1537 (1994).
It would be unreasonable for me to hold him responsible for any illegal trading practices described in the Division's proof, especially in light of the number of branches and employees that Graystone controlled. See Billings Assocs., 43 S.E.C. 641, 646-49 (1967). Likewise, there is no credible evidence that Adams assisted in or profited from sales before effective registration dates (which are prohibited by Section 5(a) of the Securities Act), unlike the wrongdoers in Franklin, Meyer & Barnett, 37 S.E.C. 47, 51-52 (1956).
The Division alleges that the trading strategy of Graystone was manipulative as in the following facts:
The insertion of increasingly higher bids in the sheets is the most universally employed device to create a false appearance of activity in the over-the-counter market, and tends to support the price at its inflated level. . . . It is significant that when [the underwriter] withdrew its support, the price of Gob stock rapidly dropped.
GOB Shops of America, Inc., 39 S.E.C. 92, 101 (1959) (footnote omitted).
The problem in the instant case, of course, is that this pattern of trading was not established and that it cannot be attributed to Graystone. The Division contends that related cases such as the Order Making Findings and Imposing Remedial Sanctions as to Thomas Ackerly, 59 SEC Docket 3023 (Aug. 9, 1995), should be taken into account. In this consent order, Ackerly neither admitted nor denied that, "[a]s a part thereof, arrangements were made with other firms to publish quotations at prices specified by Graystone and to acquire positions in the securities for later resale to Graystone. The firm regularly sought to control the supply of securities, including through purchases from other market makers." Id. at 3024-25.
The Commission's order sanctioning Ackerly is not binding on any other respondent. Id. at 3023 n.1. However, it exculpates Adams in that the complexity of the trading strategy renders it unlikely to be noticed by him as the sole financial and operations principal, and it also appears to be the brainchild of the men who would profit most from it. Since Adams had no financial stake in the company, he would be unlikely to participate in such an enterprise or to have knowledge of its machinations. Adams's responsibilities did not include awareness of trading strategies that were intentionally camouflaged on the books. Therefore, I find that he was not negligent in failing to correct any irregularities in the marketing of the IPOs. The record does not reveal specifically how he discovered the net capital problem, but I cannot assume that any other red flags should have caused him to act differently.
In assessing Adams's culpability, I am clearly unable to use proceedings as to other Graystone employees or owners to draw inferences. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 (1979); Goldberg v. Kelly, 397 U.S. 254, 266-67 (1970). However, Jeffrey J. Heet, 51 S.E.C. 979 (1994), is discussed by both parties in their posthearing submissions. I am also persuaded by the analysis in Heet that Adams should not be held accountable for possible wrongdoing of others. In Heet, the Commission set aside the NASD's findings that the financial and operations principal and executive vice president was responsible for unfair markups and commissions. The decision was based on the size of the firm, his lack of oversight responsibility, and his other duties. Adams did not engage in a course of business which operated as a fraud or deceit in the market. Therefore, he did not violate Section 10(b) of the Exchange Act or Rule 10b-5 thereunder or other related sections of the securities laws. The proceeding against Adams clearly lacked substantial justification. It was not reasonable in fact or in law.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), it is certified that the record includes the record compiled in the original proceeding against Adams and the items filed in this EAJA proceeding. Those items are:
05-15-98 Order Designating Presiding Judge.
06-02-98 Notice of Appearance, Richard M. Humes, Associate General Counsel, John J. Nicholas, Special Counsel, and Deborah A. Tarasevich, Attorney.
06-02-98 Motion of the Division To Bifurcate This Proceeding to Allow The Court to Make an Initial Determination As To Whether It has Subject Matter Jurisdiction.
06-02-98 Memorandum of Points and Authorities In Support of the Division Motion To Bifurcate This Proceeding For Fees And Costs Under The Equal Access To Justice Act.
06-08-98 Division's Motion For An Extension Of Time To Respond To Adams' Request For Attorney's Fees and Costs Under The Equal Access To Justice Act.
06-08-98 Division' Memorandum Of Points And Authorities In Support Of Its Motion For An Extension Of Time To Respond To Adams' Request For Attorney's Fees And Costs Under The Equal Access To Justice Act.
06-08-98 Brief Of Richard J. Adams In Opposition to Motion Of The Division To Bifurcate.
06-18-98 Order Denying Motion Of The Division Of Enforcement To Bifurcate This Proceeding And Order Granting The Division Of Enforcement's Motion For An Extension Of Time.
06-19-98 Transcript and disk received for prehearing held on 6/11/98, pages 1-29.
07-09-98 Division's Opposition To Richard J. Adams' Application For An Award Of Fees And Expenses Pursuant To The Equal Access To Justice Act.
08-07-98 Reply of Richard J. Adams In Further Support Of His Application For Fees And Expenses Pursuant to Equal Access To Justice Act.
08-17-98 Division's Surreply To Richard J. Adams' Application For An Award Of Fees And Expenses Pursuant To The Equal Access To Justice Act.
09-01-98 Respondent's Time and Expenses Records For EAJA Application.
09-03-98 Hearing Information Record: prehearing held on 6/11/98; Comments: Hearing waived by parties. August 7, 1998 set for filing of final papers by the Division (Response).
09-09-98 Letter to Judge McEwen from Marc B. Dorfman regarding computations for legal fees and expenses for Mr. Adam's EAJA Application.
09-11-98 Letter to Judge McEwen from Marc B. Dorfman regarding corrections to computations of legal fees and expenses for Mr. Adam's EAJA Application.
IT IS ORDERED that Richard J. Adams's Application for Fees and Expenses IS GRANTED in the amount of $53,646.03.
This order shall become effective in accordance with and subject to the provisions of Section 201.57 of the Commission's Rules, 17 C.F.R. § 201.57. Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. If neither party seeks review and the Commission does not take review on its own initiative, this initial decision shall become a final decision of the Commission on January 2, 2001.
Lillian A. McEwen
Administrative Law Judge
1 "(Tr.__.)" refers to the page of the hearing transcript from September 11 to 14, 1995.http://www.sec.gov/litigation/aljdec/id176lam.htm
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