SECURITIES EXCHANGE ACT OF 1934
Rel. No. 43963 / February 14, 2001
INVESTMENT ADVISERS ACT OF 1940
Rel. No. 1924 / February 14, 2001
Admin. Proc. File No. 3-9032
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In the Matter of MARC N. GEMAN,
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OPINION OF THE COMMISSION
BROKER-DEALER PROCEEDING
INVESTMENT ADVISER PROCEEDING
Grounds for Remedial Action
Aiding and Abetting and Causing Fraud in the Purchase and Sale of Securities
Aiding and Abetting and Causing Failure to Disclose Markups, Markdowns, or Similar Remuneration Received in Riskless Principal Transactions
Aiding and Abetting and Causing Failure to Make and Keep Required Books and Records
Former chief executive officer of registered broker-dealer and registered investment adviser aided and abetted and caused firm's: (i) fraudulent misrepresentations and omissions to state material facts in connection with purchase and sale of securities; (ii) failure to disclose markups, markdowns, or similar remuneration it received in riskless principal transactions; and (iii) failure to make and keep required records relating to the time of customer order entries and executions. Allegations that respondent aided and abetted and caused firm's (i) breach of itsobligation of best execution by executing retail customer orders at the National Best Bid and Offer price and then, in contemporaneous offsetting transactions, obtaining superior prices for itself in most instances; and (ii) failure to give notice to Commission of firm's failure to make and keep required records, are dismissed. Held, it is in the public interest to bar respondent from association with any broker, dealer, investment adviser, member of a national securities exchange, and member of a registered securities association with a right to reapply in three years; order him to cease and desist from committing or causing any violation, and from committing or causing any future violation of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 10b-10, 17a-3 and 17a-11 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940; and order him to pay a money penalty of $200,000.
APPEARANCES:
Donald T. Trinen, of Hart & Trinen, L.L.P., for Marc N. Geman.
Leslie J. Hendrickson and Robert M. Fusfeld, for the Division of Enforcement.
Appeal filed: August 18, 1997
Last brief received: March 10, 1998
Oral argument: April 5, 2000
I.
Marc N. Geman, the former chairman and chief executive officer of Portfolio Management Consultants, Inc. ("PMC" or the "Firm"), a registered broker-dealer and registered investment adviser, and the Division of Enforcement (the "Division") appeal from a decision of an administrative law judge.
The law judge found that PMC violated Section 17(a) of the Securities Act of 1933, 1 Section 10(b) of the Securities ExchangeAct of 1934 2 and Rule 10b-5 thereunder, 3 and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. 4 These findings were based on the law judge's conclusions that PMC failed to disclose to its customers, on a transaction-by-transaction basis, that it was executing trades as principal and that, as a result, it would profit from such trading, and that PMC misrepresented on its confirmations that the prices at which it executed principal trades were reported to the "consolidated tape," which disseminates last sale transaction information to the market.
The law judge further found that PMC violated Exchange Act Rule 10b-10(a)(8)(i)(A) 5 because it "did not disclose the amount of any mark-up, mark-down, or similar remuneration received as a result of the principal transactions." In addition, the law judge found that PMC violated Exchange Act Section 17(a)(1) 6 and Rules 17a-3(a)(6) and 17a-3(a)(7) thereunder 7 because it failed to keep records of the times of receipt of customer orders and times of execution of its principal trades with customers. Finally, the law judge found that PMC failed to report its recordkeeping deficiencies in violation of Exchange Act Rule 17a-11(d). 8 Geman, according to the law judge, aided and abetted and caused each of the above violations by PMC.
The law judge declined to find, as alleged by the Division, that PMC failed to provide its customers with "best execution." The Division had alleged that when PMC executed trades at the "national best bid and offer" ("NBBO") -- the highest quoted bid price and lowest quoted offer price from among all quotations entered in the Consolidated Quotation Service -- it instead should have given its customers the prices PMC obtained for itself in contemporaneous offsetting trades.
The law judge: barred Geman from association with any broker or dealer, investment adviser, national securities exchange or registered securities association; ordered him to cease and desist from committing or causing any violation, and from committing or causing any future violation of the Securities Act, Exchange Act, and Advisers Act provisions he was found to have violated; and ordered him to pay a money penalty of $500,000. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
II.
This case focuses on Geman's responsibility for PMC's trading practices, disclosures regarding those practices, and related recordkeeping between October 1992 and April 1994. 9 Except as specifically noted, the facts are not disputed. PMC's primary business activity during this period was the sponsorship of a comprehensive "individualized managed account" service, commonly referred to as a "wrap fee" program. Under the wrap fee program, PMC's customers paid PMC a flat "all-inclusive fee" equal to a percentage of the customer's assets under management in return forbrokerage, advisory, and custodial services that PMC or one of its affiliates provided to the customer's account. 10 PMC's customers were initially solicited to participate in the wrap fee program by third party investment advisers or broker-dealers which were paid by PMC for such referrals.
PMC advised wrap fee program customers in connection with the formulation of a written investment policy, the allocation of assets, and the selection of a portfolio manager, but did not recommend securities. The portfolio managers had a contractual relationship with PMC, but it appears that they had no common ownership or personnel with the Firm. Each of the twenty-five portfolio managers was a registered investment adviser (or a bank that was exempt from registration requirements), 11 had full discretionary authority over the wrap fee program accounts assigned to it, and executed trades through PMC. 12 Although PMC did not advise customers regarding individual investment decisions, it monitored the performance in their accounts and distributed quarterly performance reviews that evaluated each customer's portfolio based upon various measures, including performance within industry sectors and by the different portfolio managers. Geman characterized the reviews as "a fairly comprehensive performance report." PMC serviced approximately 800 customers through the wrap fee program with over $200 million under management.
A. Modification of Customer Service Agreement.
Prior to 1992, PMC executed all securities transactions on behalf of wrap fee program account customers on an agency basis. At some point during the fall of 1992, Geman determined that the Firm, which suffered a net loss of $720,621 in 1992, could increase revenue by executing certain of its wrap fee program account customers' market orders on a principal basis and then covering the Firm's long or short position by entering limit orders at more favorable prices. 13 Geman explained that "[t]here was a lot of order flow coming through the trading department, and we wanted to find out how we could utilize that order flow to help us take care of the expenses of the trading department."
Because PMC's original customer service agreement did not authorize principal trading, PMC sought customer consent to add the following language:
In effecting security transactions through PMC's broker-dealer, Client acknowledges that PMC may, to the extent permitted by applicable law, while acting as principal, execute purchase or sale orders received from the Portfolio Manager. The Client expressly authorizes PMC to effect such transactions. 14
Although PMC decided to begin principal trading because it believed it could profit thereby, the Firm never disclosed this reason to its customers. A letter sent by PMC to its customers in 1992 (the "1992 Letter") proposing this and certain other changes to its customer agreement stated only that "new regulatory interpretations and technological improvement to PMC's system capabilities" mademodification of the agreement necessary to allow the Firm "to fully utilize these automated systems . . . [and] obtain best execution." The 1992 Letter failed to elaborate regarding these "regulatory and technological" developments other than to state that the Firm henceforth would be able "to execute odd lot and block trade orders through automated systems that route information between your Portfolio Manager, PMC's trading desk and the various brokers and exchanges where we can obtain best execution."
The 1992 Letter also affirmatively represented that: "[t]here are no changes to any of the . . . fees that you are currently paying." The portion of PMC's customer agreement that addressed the manner in which the Firm was compensated by customers was left unchanged, stating that, "[a]s an all inclusive fee for the services to be performed or arranged by PMC," customers paid an amount based on a percentage of the market value of the managed assets. Moreover, although PMC's customer agreement expressly disclosed that PMC was entitled to retain, in connection with its administration of the wrap fee program accounts, certain special amounts in addition to the wrap fee, 15 the Firm failed to disclose that it could generate additional revenue by executing its customers' trades on a principal basis.
As limited as its disclosure was to customers, PMC was even less forthcoming to the portfolio managers regarding its principal trading. Prior to September 1992, PMC's contract with the portfolio managers did not provide for principal trading. Although it modified the standard agreement it executed with new portfolio managers during the fall of 1992 to permit principal trading, PMC did not amend the agreements that had been executed prior to that time. Nor did PMC provide the portfolio managers with copies of the 1992 Letter.
B. Execution of Trades as Principal.
In October 1992, after obtaining its customers' consent to modification of the customer agreement, PMC began executing certain of its customers' market orders on a principal basis. PMC's traders, whose compensation was tied to the Firm's trading profits, evaluated each market order to determine whether the Firm should execute the order as a principal -- rather than on an agency basis --based on whether the trader felt that it was likely that the Firm could execute a covering trade at a more favorable price through the use of a limit order. Among other factors, PMC's traders focused on whether the spread between a given security's quoted bid and offer prices exceeded 1/8. 16
Once a PMC trader decided to act in a principal capacity for a particular trade, the Firm would execute the customer order at the NBBO. PMC's trader would then use limit orders to seek to cover and flatten PMC's position in that security by the end of the trading day. 17 PMC did not make a market in any of the securities atissue, and traded as principal only in response to market orders from the portfolio managers acting on behalf of the Firm's customers. A customer order executed on an agency basis automatically would be routed by the Firm's computer system to either of two third market dealers, 18 Bernard L. Madoff Investment Securities or Trimark Securities, L.P., or to the Midwest Stock Exchange. 19
At the hearing before the law judge, one of PMC's two traders, Kathleen Shepard, discussed two examples of order processing when the Firm acted as principal. At some point during December 2, 1993, a portfolio manager placed a market order to sell 300 shares of the stock of Newmont Mining Corporation. The record shows that the Firm decided to execute the order as a principal and paid the customer $52 3/8 per
share. 20 At 2:12 p.m., PMC entered a limit order to sell 300 shares of Newmont at $52 5/8. Thirteen minutes after PMC entered its initial limit order, having been unable to sell the stock at $52 5/8 per share, it withdrew that order and entered a new limit order of $52 1/2. Six minutes later, PMC sold the 300 shares at $52 1/2. PMC's profit on the trade was $37.50.
Similarly, on September 21, 1993, PMC received a market order to buy 800 shares of K Mart Corp. The Firm decided to execute the trade as principal, and sold the shares to the customer at a price of $23 1/4. To cover the sale, PMC placed a limit order to buy K Mart for $23 at 10:09 a.m. At 10:24, PMC withdrew that initial limit order and replaced it with one at $23 1/8, at which price the Firm was able to execute the purchase. PMC made a profit of $100 on this trade.
When one of PMC's portfolio managers, Fox Asset Management ("Fox"), discovered in January 1994 that PMC was trading with its customers as principal rather than as agent as Fox had assumed, it stopped sending the Firm market orders and thereafter sent only limit orders. 21 Fox subsequently decided to sever its relationship with PMC because Fox believed that it was "ethically incorrect" for PMC to receive compensation beyond what it received through the wrap fees. Additionally, Fox directed PMC, until its termination with Fox became effective, to execute all its Fox orders on an agency rather than a principal basis.
Between October 1992 and April 1994, PMC executed 8,264 principal trades for its wrap fee program customers. With respect to the covering trades, 67% were profitable, 32% were unprofitable, and on 1% the Firm broke even. From these trades, PMC had total profits of $613,972, total losses of $149,108, and a net profit of $464,864.
C. Price Improvement by Third Market Dealers.
During the period at issue, the third market firms with which PMC traded, Madoff and Trimark, offered a service known as price improvement. The Madoff firm, for example, provided the service when it received a market order for one of the roughly 400 securities in which it made a market and the spread between the bid and offer quotation for that security exceeded 1/8. When Madoff received such an order, it guaranteed execution at no worse than the NBBO and attempted to obtain price improvement for the customer. If, after a minute, Madoff's price improvement system determined that price improvement was not then possible, Madoff would execute at the NBBO existing at the time the order was received. When Madoff obtained price improvement for a trade, it was relieved of its obligation to pay to PMC $.01 per share as payment for order flow.
Peter Madoff, Madoff's managing director, testified that 85% of the orders Madoff received did not qualify for price improvement because the spreads did not exceed 1/8. Of the 15% of the orders that did qualify for price improvement, P. Madoff stated that over 50% of those orders were executed at a price better than the NBBO.
Every time PMC traded as principal with one of its customer's market orders, the customer lost the opportunity for its market order to be sent to Madoff or another firm offering price improvement to such orders. Geman does not dispute this, but claims that, until the fall of 1993, he was unaware that certain market centers were offering price improvement.
P. Madoff stated that it began to offer price improvement in 1990 and, in October 1992, sent to all its clients, including PMC, a copy of a letter explaining its price improvement program. According to P. Madoff, the letter was addressed to "all senior management as well as the heads of the trading desks, the operations areas, that would be involved in our daily contact." Geman testified that he could not recall whether he had seen the letter or not, and the record contains no other evidence regarding whether Geman learned about price improvement opportunities before the fall of 1993. The law judge made no credibility determination regarding this issue. PMC's trader Shepard testified, however, that, during the period at issue, she was aware of Madoff's price improvement program and the circumstances under which a trade was eligible for price improvement.
D. Recordkeeping Failures.
PMC failed between March and December 1993 to record the times at which it executed as principal its customers' trades. Until March 1993, PMC reported the times at which it executed these principal trades with customers through the Automated Confirmation Transaction ("ACT") service. The Firm used its ACT report as a memorandum of the trade with its customer to satisfy the recordkeeping requirements of Exchange Act Rules 17a-3(a)(6) and (a)(7).
During the period at issue, Schedule G to the By-laws of the National Association of Securities Dealers, Inc. (the "NASD") required broker-dealers to report through ACT transactions in eligible securities within 90 seconds of execution. 22 The tradinginformation reported through ACT then became part of the Consolidated Tape, and was thereby available to other market participants. Schedule G contained a reporting exception for "'riskless' principal transactions." 23
In a letter to the NASD dated March 3, 1993, Geman agreed to an NASD directive that the Firm stop reporting its principal trades with customers through ACT. The NASD took the position, which was challenged by PMC, that the Firm's principal trades with customers were riskless principal trades and, for that reason, should not be reported pursuant to Schedule G. On March 13, 1993, PMC stopped reporting its principal trades with customers through ACT, but did not establish any alternative system to record the times of execution.
In December 1993, Geman learned that the Firm had failed to institute any alternative recordkeeping system for its principal trades with customers following the suspension of ACT reporting. As a result, Geman directed PMC's trading department to create a time-stamped order ticket for each trade it executed with a customer as principal as a "substitute[] for the missing ACT documentation." Geman also persuaded the NASD, in early January 1994, that in light of the "circumstances" PMC should be reporting on ACT. 24
E. Confirmation Disclosure.
Although PMC did not report its principal trades with customers between March and December 1993, its confirmations contained the following statement:
YOUR PRICE IS REPORTED PRICE
DIFFERENCE IS ZERO
As Geman conceded, the term "reported price" indicates that a trade is reported to the Consolidated Tape. The Firm's trades with customers were not so reported. The only trades that were reported were PMC's covering or offsetting trades, which were reported by the dealer with which PMC traded, and which were generally executed at different prices than those received by the Firm's customers. Thus this statement misled customers not only about whether their trades were reported, but also about whether the prices they received were the same as those that were reported to the Consolidated Tape.
III.
A. Allegations of Violations of Antifraud Provisions.
The law judge found that Geman aided and abetted and caused PMC's violations of Section 17(a) of the Securities Act, 25 Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, 26 and Sections206(1) and 206(2) of the Advisers Act, 27 in connection with the Firm's trading practices and its related disclosure to customers.
(i) Fraud in Connection with PMC's Disclosure Regarding its Trading Practices. We first address whether PMC provided inadequate disclosure to its customers regarding its trading practices, in violation of Securities Act Section 17(a), Advisers Act Sections 206(1) and (2), Exchange Act Section 10(b) and Rule 10b-5. We previously have held that, when a firm has a fiduciary relationship with a customer, it may not execute principal trades with that customer absent full disclosure of its principal capacity, as well as all other information that bears on the desirability of the transaction from the customer's
perspective. 28
In Arleen W. Hughes, we found that a registered broker-dealer who was also a registered investment adviser, such as PMC, violated the antifraud provisions of the securities laws by executing principal trades with her customers without disclosing fully the nature and extent of her adverse interest. Although the registrant had disclosed her principal status in her written agreement with her customers, we determined that such disclosure was inadequate to alert the customers to the potential conflict of interest. We held there that:
[I]f registrant chooses to assume a role in which she is motivated by conflicting interests . . . she may do so if, but only if, she obtains her client's consent after disclosure not only that she proposes to deal with them for her own account but also of all other facts which may be material to the formulation of an independent opinion by the client as to the advisability of entering into the transaction. 29
Similarly, in E.F. Hutton & Company Inc., 30 we found that a firm violated the NASD's rule requiring adherence to just and equitable principles of trade when it failed to execute a customer's limit order for the sale of stock although it sold shares of that security for its own account at prices above the limit price. We determined there that, by accepting the customer's limit order forexecution, the firm assumed fiduciary obligations to the customer. 31 As a result, the firm was precluded from trading for its own proprietary account ahead of the customer unless it had first informed the customer that this was the practice it intended to follow. We held that "[i]t is hornbook law that, absent disclosure and a contrary agreement, a fiduciary cannot compete with his beneficiary with respect to the subject matter of their relationship." 32
The principles controlling our decisions in Hughes and E.F. Hutton are applicable here. As the sponsor of the wrap fee program, PMC held itself out as a fiduciary acting in furtherance of its customers' investment objectives in return for an agreed-upon fee. 33 The Firm offered customers an integrated package of investment services, combining financial planning, investment advice, account management and trade execution. While PMC did not counsel customers regarding individual investment decisions, it was registered as an investment adviser and provided advice with respect to asset allocation and the selection of portfolio managers as well as analysis of the performance of customer accounts. As a fiduciary, PMC was obligated to "act for the benefit of [its] clients [and] to exercise the utmost good faith in dealing with clients . . . ." 34 The record establishes that the Firm breached that obligation here.
Geman denies that PMC had any legal obligation to inform its customers about its principal trading, although it chose to do so when it sent the 1992 Letter and obtained its customers' consent. Attempting to distinguish our holding in Hughes from the facts here, Geman claims that PMC, unlike the respondent in Hughes, "was not acting in an investment advisory capacity as to any principal transaction at issue." 35 Geman notes that, while Section 206(3) of the Advisers Act prohibits an investment adviser from trading as a principal unless he has the customer's informed consent, it also provides an exemption from such requirement where the firm is not acting as an investment adviser concerning the transaction in question. 36
Geman argues that, by basing his liability on PMC's failure adequately to disclose its principal capacity, the law judge effectively found a violation of Section 206(3) of the Advisers Act,which was not charged, rather than a violation of Sections 206(1) and 206(2) of the Advisers Act. Geman asserts that the purpose of Section 206(3) is to ensure that a customer is aware when an investment adviser has a proprietary interest in a security it is recommending. That purpose, according to Geman, is not implicated when the adviser is not making a recommendation. According to Geman, because PMC was "not acting in an investment advisory capacity as to any principal transactions at issue, the Advisers Act is irrelevant and PMC owed its clients no more disclosure than any broker-dealer would owe any customer on a principal transaction . . . ."
We disagree. Although the services PMC provided through the wrap fee program caused its customers to become involved with other fiduciaries (particularly the portfolio managers) in addition to PMC, the Firm nevertheless played a central role in the handling of its customers' investments. In our view, the fact that PMC did not provide advice regarding individual investment decisions did not, as Geman suggests, relieve it of its fiduciary obligations.
Advisers Act Section 206(3) mandates that investment advisers make certain disclosures under specified circumstances. It can be violated without a showing of fraud. Whether PMC made the requisite disclosure or came within the exception provided in Section 206(3) is a separate matter from whether it defrauded its customers under Sections 206(1) and (2) and the other antifraud provisions charged.
The record establishes that the Firm's conduct was fraudulent. Although PMC disclosed its decision to begin principal trading in the 1992 Letter, and thereafter on its trade confirmations and certain other Firm documents, it did so in a highly misleading manner. The 1992 Letter claimed that the proposed changes to the Firm's customer agreement were necessitated by "regulatory interpretations and technological improvements to PMC's systems capabilities." In fact, however, the most significant proposed change -- to begin principal trading -- was the result of Geman's determination that such trading could be profitable to the Firm. Additionally, PMC failed to identify trading profits as a source of revenue to the Firm from the wrap fee program accounts, although it expressly disclosed four other sources of revenue resulting from those accounts (i.e., wrap fee, payment for order flow fees, securities or other non-cash asset liquidation fees, and temporary investment administrative fees). PMC's misrepresentations and omissions were not inadvertent, but rather part of a calculated effort to exploit trading opportunities for its own gain.
Moreover, the Firm's misrepresentations and omissions were material in that they related directly to the financial terms of the customers' relationship with PMC and the quality of the Firm's execution of the customers' market orders. Geman contends that, because the Firm disclosed its principal status on its customer trade confirmations every time it acted in that capacity, its customers "presum[ably] . . . understood that PMC would thereby either make money, lose money, or break even." It is not necessarily the case, however, that a customer would appreciate the basis of the Firm's decision to begin principal trading. In our view, PMC had an obligation to apprise its customers not only of its principal status but of the implications of that status, i.e., that it was trading as principal because it believed that it could obtain better prices than the NBBO and that, in fact, it did so most of the time.
The Firm also had an obligation to disclose that certain third market dealers offered price improvement for market orders. At least in those instances where a customer's order was executed by the Firm on a principal basis, the customer lost the opportunity for its market order to be sent to Madoff or another firm offering price improvement to such orders. 37 PMC's failure to disclose these facts to its customers was a material omission. Geman claims that, until late 1993, he had no knowledge about price improvement opportunities offered by third market dealers. His denial is not convincing in light of his experience in the industry, position at the Firm, existing business relationship with Madoff, and the fact that PMC's trading department was admittedly aware of price improvement. Even if we accept Geman's denial as true, ignorance about such an important development affecting retail execution, particularly one involving the firms with which PMC regularly dealt, evidences a reckless disregard for PMC's obligations to keep its customers informed about material information related to the execution of their orders. Moreover, Geman's conduct rose above mere recklessness when, after learning about price improvement (in late 1993 or earlier), he neglected to cause the Firm to relay such information to its customers.
Geman also argues that the Firm acted in good faith because it obtained opinions from two "reputable" law firms regarding the legality of PMC's trading practices and its disclosure to customers. In an appropriate case, reliance on counsel may affect our assessment of a respondent's state of mind. 38 However, this is not such a case.
Both of the legal opinion letters concluded that PMC was not acting as an "investment adviser" in connection with the trades at issue and, therefore, was not required to comply with the transaction-by-transaction disclosure and consent requirements of Section 206(3) of the Advisers Act. Neither, however, opined regarding whether the Firm was complying with other provisions of the Advisers Act or other securities laws. 39 As indicated above, PMC was not alleged to have violated Section 206(3) of the Advisers Act, but Sections 206(1) and (2), as well as the antifraud provisions of the Securities Act and the Exchange Act.
Finally, Geman contends that any misstatements or omissions by the Firm regarding its trading practices related to its efforts to establish a wrap fee program account relationship with its customers, and were not made in connection with the purchase or sale of a security, as required to constitute a violation of the antifraud provisions of the Securities Act and the Exchange Act. We disagree. The plain meaning of the language of the provisions at issue is that, for a deceptive practice to constitute a violation of the antifraud provisions, it need only be directly related to securities transactions, not necessarily to the securities themselves or their value. This interpretation has been endorsed by the courts. 40
Decisions of the Firm's customers, acting through the portfolio managers, to execute trades with PMC potentially were influenced, in each case, by the Firm's lack of disclosure. Had the customers, andtheir proxies the portfolio managers, been informed about the Firm's trading strategy, its profitability to the Firm, and the impact it had on the customers' ability to obtain price improvement, they might have chosen to execute their trades with a different firm, with PMC only on an agency basis (as did one of the portfolio managers after it learned about the Firm's trading practices), or as limit orders.
(ii) Violative Confirmations. We next address whether PMC's confirmations violated the previously mentioned antifraud provisions, as well as Exchange Act Rule 10b-10(a)(8)(i)(A). That rule requires a dealer that is not a market maker, when trading an equity security for its own account, to disclose in writing any markup, markdown or similar remuneration it receives:
[I]f, after having received an order to buy [a security] from [a] customer, [the dealer] purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from such customer, he sold the security to another person to offset a contemporaneous purchase from such a customer. 41
As we observed in adopting this rule, the purpose of requiring dealers in what are characterized as "riskless" principal transactions to disclose their mark-up or mark-down is to "enable customers to make their own assessments of the reasonableness of transaction costs in relation to the services offered by broker-dealers." 42 The rule recognizes the economic reality that certain offsetting transactions, although executed at different times and with different parties, are so inextricably linked that it is appropriate to compress them together and view them as a single economic event. Where transactions are so linked, although no charge is paid directly by the retail customer, the customer is entitled to know the extent of his firm's profit as a means of evaluating the execution he has received.
In our view, the offsetting transactions involved in this case triggered the disclosure requirements of Rule 10b-10(a)(8)(i)(A). In opposition to such a conclusion, Geman argues that, because the Firm lost money on many of these trades, the trades could not be characterized as "riskless" and, for that reason, were not covered by the rule. According to Geman, "whether one is at risk for five seconds or five years, the broker can lose money and he is therefore at risk as a matter of law." 43
The applicability of Rule 10b-10(a)(8)(i)(A)'s disclosure requirements was addressed close to twenty years ago in a letter from the staff of the Division of Market Regulation (the "Market Regulation Letter"). 44 The Market Regulation Letter addressed whether disclosure is required when a firm, following receipt of a customer order to purchase a security, sells that security short to the customer and then, "very soon thereafter," buys the security from another person to cover its short position. 45 The staff opinedthat disclosure was required because the transactions were "designed to be offsetting." 46
A key factor, according to the Market Regulation Letter, in determining whether Rule 10b-10(a) applies is "close time proximity of [the] offsetting transactions." 47 The staff opined that, where a long or short position is "maintained overnight," the disclosure requirement would not apply because the offsetting covering transaction would not be "contemporaneous" with the initial customer transaction. 48
Implicit in the staff's position in the Market Regulation Letter is the view that a firm does not avoid the rule's disclosure requirements merely because it fails to cover its long or short trading positions immediately, i.e., that the assumption by a dealer of a certain degree of market risk does not negate the disclosure obligation under Rule 10b-10(a)(8)(i)(A). We concur in this reasoning. 50
In PMC's case, the limit orders it placed were clearly designed to effect transactions that would offset the market orders executed for PMC's customers. The record indicates that PMC's limit orders were always for the same number of shares for which a customer market order had recently been executed by PMC as principal. In addition, it appears that PMC chose a limit price so that each limit order would be executed quickly. The evidence suggests that, if the limit order was not executed within a reasonable period of time, the order was cancelled and a new limit order executed with a different limit price. PMC sought to cover its principal trades as quickly as possible and apparently did so "by the end of the trading day." We therefore conclude that PMC's covering trades constituted offsetting contemporaneous trades and that, as a result, the Firm violated the disclosure requirements of Rule 10b-10(a)(8)(i)(A). 51
In addition to not disclosing its remuneration, the Firm's confirmations contained the following statement:
YOUR PRICE IS REPORTED PRICE
DIFFERENCE IS ZERO
As the transactions here were structured, we believe this statement -- during the time that PMC was not reporting to the Consolidated Tape the retail trades it was executing as a principal -- suggested falsely that there was no difference between the prices customers paid or received in principal transactions with the Firm and the prices the Firm paid or received in its covering trades that were reported to the Consolidated Tape. In reality, the prices customers received differed in most cases from those received by PMC in its covering trades.
Geman argues that, since PMC's retail trades were executed at the NBBO, without markups, markdowns, or other additional charge tothe customers, its reported "trade price," i.e., the price at which it executed its principal retail trades and which it reported, or would have reported to the consolidated tape but for a contrary directive by the NASD, was always equal to the price charged or paid to the customer.
As indicated above, however, we view PMC's retail and covering trades as linked. Consequently, we disagree with Geman's assertion that PMC's retail principal trades were made without additional charges. By masking the fact that it profited from its principal trades with customers, the Firm misled those customers about the terms of its relationship with them. Moreover, had the Firm provided accurate disclosure and informed its customers clearly that it was often able to obtain better prices in covering trades than those received by the customers, the customers would have been aware of the possible availability of superior prices for themselves. PMC's confirmations, by obscuring this possibility with a false characterization of the Firm's covering trades, were materially misleading.
(iii) Scienter. Geman challenges PMC's liability by denying that the Firm had the requisite scienter. Scienter is a necessary element of a violation of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and Section 206(1) of the Advisers Act, 52 but need not be found to support a finding of violation of Sections 17(a)(2) and (a)(3) of the Securities Act and Section 206(2) of the Advisers Act. 53 In any event, there is ample evidence to support the finding that the Firm, in the 1992 Letter, trade confirmations, and other communications with customers, was intentionally misleading them regarding its trading practices. PMC's actions with respect to its disclosure tocustomers therefore demonstrate an "intent to deceive, manipulate, or defraud," 54 and support our findings of fraud.
* * *
We find that PMC willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act by engaging in the conduct described above. We further find that PMC willfully violated Exchange Act Rule 10b-10(a)(8)(i)(A) as a result of its failure to make written disclosure of the remuneration it received from its principal trading.
(iv) PMC's Duty of Best Execution. The Division alleges that the Firm breached its obligation of best execution by failing to provide its customers "with the superior prices that were reasonably available" when it traded with them at the NBBO rather than at the prices the Firm received in its covering transactions. The duty of best execution "requires that a broker-dealer seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances." 55 Failure to satisfy the duty of best execution can constitute fraud because a broker-dealer, in accepting an order from a customer, implicitly represents that it will execute it in a manner that maximizes the customer's economic benefit. 56 Although the law judge found that PMC had a duty of best execution to its customer, he concluded that the Firm fulfilled that duty by executing its trades with clients at the NBBO.
Citing a recent decision of the United States Court of Appeals for the Third Circuit, 57 the Division asserts -- and we agree --that routine execution of customer orders at the NBBO when better prices are reasonably available can be a violation of the duty of best execution. We therefore must determine whether the record establishes that, for the trades at issue, prices better than the NBBO were reasonably available. In our view, the record does not establish that fact.
PMC's traders executed customers' market orders on a principal rather than an agency basis when they determined that it might be possible, through the use of limit orders, to execute covering trades at prices better than the NBBO existing at the time of the customer orders. When acting as principal, the Firm executed the customer's order at the NBBO and entered its own limit order to cover the long or short position it had assumed in executing the customer's trade.
Once PMC executed a principal trade with a retail customer at the NBBO, it could make a profit only if the price it obtained in the covering trade was better than the NBBO. If the market moved against PMC, PMC lost money. Thus, PMC assumed a certain degree of risk whenit decided to trade as principal. 58 PMC's customers could have assumed the same risks and obtained the same results had they, like PMC, placed limit orders. Instead, acting through their agents, the portfolio managers, they entered market orders.
As it turned out, for many of the trades at issue it would have been economically advantageous for the customers to have entered limit orders (as PMC did). However, the Firm could not unilaterally convert its customers' market orders into limit orders and subject those customers to the risk of an adverse change in the market. 59 Such action by the Firm would have breached its fiduciary duty to execute its customers' orders as directed. It also would haveresulted in the Firm's customers receiving prices that were inferior to the NBBO one-third of the time.
While PMC, through the use of limit orders, was able to obtain better prices than the NBBO two-thirds of the time, it is not apparent on this record that the execution of market orders at better prices than the NBBO was possible for the trades at issue. In support of its contention that PMC's customers failed to receive best execution, the Division presented evidence regarding eight instances in which PMC executed its customer's order as a principal and then covered profitably the long or short position created by that customer trade through the use of a limit order.
To support its allegation of a breach of the obligation of best execution, the Division needed to show that, at the time the Firm executed its customer orders, better prices were reasonably available. Because PMC failed to record, for most of the period at issue, the execution times for its customer trades, it is very difficult to compare the prices that PMC's customers received with those that market participants were receiving in contemporaneous trades. Even if we make certain assumptions about when PMC's customer orders were likely to have been executed, based on the Firm's policy of executing such orders at the NBBO and on information in the record regarding when the covering trades occurred, we nevertheless find the Division's evidence to be inconclusive.
For example, one of the eight trades the Division identifies is PMC's purchase from its customer of 1,145 shares of Kohl's Corp. on September 2, 1993 at a price of $42 1/8. The Division notes that, on that date, 31 of the 40 trades in Kohl's stock were executed at prices higher than $42 1/8. Many of those trades, however, occurred before 1:00, when the inside bid price -- the price the Firm presumably paid its customer -- first dropped to $42 1/8. We assume, therefore, that the Firm did not execute this principal trade until, at the earliest, 1:00. Between 1:00 and the close of the market, there were only slightly more trades at prices higher than $42 1/8 (12 trades to 10), than at that price or below. 60
If the Division had been able to establish that, during the relevant period, market orders routinely were executed at better prices than the NBBO, this might have supported the conclusion that routine use of the NBBO in setting the prices at which PMC traded with its customers in principal trades was a failure of the Firm's duty to obtain best execution. The Division did not, however, allege that obtaining the NBBO for market orders was, as a general matter, a violation of best execution, 61 and we conclude that the record does not establish that prices better than the NBBO were reasonably available for the market orders at issue here.
The Division further contends that PMC traded with its customers on a principal basis when the customers' orders were likely to be eligible for the price improvement service offered by Madoff and other third market dealers, and that the Firm's actions therefore deprived its customers of the opportunity to benefit from such a service. The Division, however, failed to support this contention with evidence establishing that the trades at issue would have been eligible for price improvement. For example, while trades were ineligible for price improvement through Madoff unless the security's trading spread exceeded 1/8, the record does not show the extent of the spreads at the relevant times.
The Division blames its failure to present evidence regarding the extent of the spreads on the Firm's own failure to record the times of execution of its customers' market orders as principal. We agree that PMC's recordkeeping deficiencies detrimentally affected the Division's ability to assemble the requisite evidence in this case. They hindered the Division's ability to examine the market at the precise times that the trades in question occurred. It appears, however, that the recordkeeping deficiencies related to only a portion of the period at issue, i.e., for several months, the Firm apparently did record the times it executed covering trades. The Division failed to produce evidence regarding the applicable spreads for those months when the Firm was recording the times of its covering trades.
In any event, the Division retains the burden of proof regarding whether the customer orders at issue were eligible for price improvement or, more generally, whether prices better than the NBBO were reasonably available for those orders. While the record establishes that PMC's traders considered the spreads in determining whether to execute a trade as principal, it was not the only factor they considered, and the extent to which this factor influenced the traders' determinations is unclear. We therefore cannot conclude that the fact that PMC executed a trade indicates that the spread exceeded 1/8, making it eligible for price improvement. Moreover, because Madoff offered price improvement for only those securities in which it made a market, and because the record does not disclose which of the transactions at issue involved such securities, the extent to which these orders would have been eligible for price improvement would be uncertain even if the spreads exceeded 1/8.
Although we do not believe that the record supports a finding that PMC fraudulently violated its duty of best execution, we nevertheless are deeply troubled by the Firm's trading practices, particularly its failure to utilize a price improvement service on behalf of its customers. As discussed, P. Madoff indicated that roughly eight percent of the market orders Madoff received benefitted from price improvement, which suggests (without establishing) that at least some of the trades at issue might have been executed at superior prices had PMC, acting in an agency capacity, entered market orders with a firm offering price improvement.
We note that, in 1995, we proposed but ultimately declined to adopt Rule 11Ac1-5, which would have imposed a duty on market makers to offer for trades in listed securities price improvementopportunities akin to those offered by Madoff. 62 At that time, we concluded that the proposal required further study, particularly in light of our adoption of related rules designed to improve the price discovery process. We observed, however, that "the opportunity for price improvement can contribute to providing customer orders with enhanced executions." 63 We further observed that "broker-dealers deciding where to route or execute small customer orders in listed or OTC securities must carefully evaluate the extent to which this order flow would be afforded better terms if executed in a market or with a market maker offering price improvement opportunities." 64 In any event, and notwithstanding any ambiguity that may have once existed regarding the matter, it should now be clear that a firm must consider the potential for price improvement in carrying out its best execution obligations.
Although Geman testified that he was unaware of Madoff's price improvement system until late 1993, Madoff sent correspondence explaining it to PMC's senior management in October 1992, and one ofPMC's traders admittedly knew about the program during the period at issue. Moreover, the Firm's principal trading practices continued even after Geman learned about price improvement. It is also well recognized, in any event, that broker-dealers have a duty periodically to "examine their practices in light of market and technology changes and to modify those practices if necessary to enable their clients to obtain the best reasonably available prices." 65 Nevertheless, given the lack of evidence regarding the extent to which the trades at issue would have benefited -- if at all -- from price improvement, we have decided against finding a violation of the duty of best execution here.
B. Books and Records Violations.
Geman does not dispute the law judge's finding that PMC violated Section 17(a)(1) of the Exchange Act and Rule 17a-3(a) thereunder 66 by failing for approximately nine months to maintain acontemporaneous record of the times and prices of its principal trades. We thus find those violations. However, we reverse the law judge's finding that the Firm violated Exchange Act Rule 17a-11(d) by failing to report its record-keeping violations, because of a lack of supporting evidence in the record. 67
To establish a violation of Rule 17a-11(d), the Division might have introduced testimony or an affidavit from the staff person responsible for receiving such notice to the effect that it was never received. It did not do so, or introduce other evidence regarding this allegation. 68 Under the circumstances, we find that the Division has not met its burden of establishing that the Firm failed to give the requisite notice, and find no violation of this requirement.
C. Geman Aided and Abetted and Caused Violations.
(i) The record establishes that Geman willfully aided and abetted and caused the Firm's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-10(a)(8)(i)(A) thereunder, and Sections 206(1) and 206(2) of the Advisers Act, as described above. To make a finding of aiding and abetting here, the record must show: (a) violations by PMC; (b)general awareness by Geman of his role in the Firm's wrongdoing; and (c) that Geman knowingly or recklessly rendered substantial assistance to PMC. 69 In determining whether there has been "substantial assistance," we consider all of the facts and circumstances. 70
The Firm's violations are clear. It is also clear that Geman substantially assisted PMC's violations and that he did so with an awareness of the Firm's wrongdoing. As PMC's chief executive officer, Geman was responsible for establishing and implementing the Firm's principal trading strategy. Moreover, because he held a 35% ownership interest in the Firm, Geman had a strong financial incentive to see that strategy succeed, and furthered it by approving PMC documents, including the 1992 Letter and the Firm's trade confirmations, that misled customers about the Firm's trading practices and the implications of those practices. 71
(ii) We further conclude that Geman willfully aided and abetted and caused the Firm's recordkeeping violations. As indicated above, the record shows that Geman was an active "hands-on" manager of all broker-dealer related functions of PMC, including the trading department, and was responsible for these violations.
Geman asserts that he had no responsibility for the preparation of PMC's order tickets, and thus cannot be held liable for the fact that they failed to memorialize the times of execution of the Firm's principal trades. Moreover, he claims he had no reason to believe that the person at PMC to whom Geman had delegated this responsibility, Vali Nasr, was not acting in compliance with regulatory requirements. According to Geman, Nasr, a designated financial principal and PMC's chief financial officer during the entire period at issue, with sixteen years' experience in thesecurities industry, "frankly admitted his responsibility for PMC's failure to prepare proper order tickets." In addition, Geman asserts that, when he first learned that the Firm was not recording the execution times for its principal trades because of the suspension of ACT reporting, he took prompt action to remedy this lapse.
Nasr, who had primary responsibility for supervising the trading department, regularly reported to Geman concerning PMC's trading activities and recordkeeping. While Nasr testified that he was responsible for determining what kinds of records the Firm should keep to document its trading activity, he conceded that Geman was "involved" in the determination as well. Moreover, Nasr, who had no prior experience supervising a trading department, testified that the recordkeeping procedures were already established when he assumed supervisory responsibilities in 1992.
Geman corresponded directly with the NASD regarding the question of whether the Firm should be reporting its principal trades through ACT. He therefore knew, in March 1993, that the Firm had suspended its ACT reporting. Despite Geman's direct knowledge of this change in the Firm's reporting procedures, he took no steps to ensure that -- or inquire whether -- PMC was making alternative arrangements to satisfy recordkeeping obligations. Geman's inaction, which was at the very least reckless, amply supports a finding that he willfully aided and abetted the Firm's recordkeeping violations. 72
(iii) Geman claims that he cannot be found to have "willfully" caused or aided and abetted violations of the securities laws at issue because, he claims, he acted "in good faith and in a reasonable manner . . . at all times." Exchange Act Section 15(b)(4) 73 and Advisers Act Section 203(f), 74 pursuant to which these proceedings were instituted, authorize the imposition of sanctions where an individual who is associated with a broker, dealer or investment adviser has "willfully aided [and] abetted" violations of the securities laws. 75 According to Geman, one cannot commit a "willful" violation unless he knows or should have known that his actions or omissions were violative. 76
We have rejected, in another proceeding, a similar argument regarding the meaning of "willfully." We concluded that the structure of the Exchange Act, the regulatory framework it establishes, and Congressional ratification of the judicially accepted interpretation of the term counter the view that willfulness requires a finding of knowledge or reckless disregard of the law. 77 As we noted in that opinion, securities professionals, such as Geman,are part of a highly regulated industry and, as such, required to know the law that is applicable to their conduct within that industry. In light of this requirement, it would "make no sense" to permit ignorance of the law to serve as a defense. 78 Affirming our decision, the United States Court of Appeals for the District of Columbia stated that "'it has been uniformly held that "willfully" in this context means intentionally committing the act which constitutes the violation'" and does not require that the actor "'also be aware that he is violating one of the Rules or Acts.'"79 In any event, even if ignorance of the law were a defense, our findings regarding Geman's scienter would justify a finding of willfulness here.
IV.
At Geman's direction, PMC fraudulently misled its customers regarding its use of a principal trading strategy that generated substantial profits for the Firm, and thereby deprived those customers of the chance to obtain for themselves similar trading opportunities and profits. By furthering PMC's best interests at the expense of its customers, the Firm, at Geman's direction, abused its customers' trust. Geman also was responsible for significant recordkeeping violations by the Firm. 80
Geman has extensive experience in the securities industry. Between 1973 and 1983, he was an attorney in private practice specializing in advising clients about the requirements of the securities laws. From 1983 until 1990 when its ceased operations, Geman was a director, executive vice president and compliance and legal officer of The Stuart-James Co., Inc. 81 While there, Stuart-James and Geman were found liable for violating net capital requirements and sanctioned. 82 Thus, despite a highly sophisticated knowledge of the regulatory requirements of the industry, Geman has run afoul of those requirements on more than one occasion.
In this latest instance, Geman's misconduct occurred over an extended period. Under the circumstances, we find that the cease and desist order imposed by the law judge is appropriate. We also agree that it is in the public interest that Geman be barred from associating with a broker or dealer, investment adviser, member of a national securities exchange or member of a registered securities association. 83 However, in light of the fact that the evidence wasinsufficient to support a finding of violation in connection with PMC's best execution obligation and that allegations regarding best execution constituted a major focus of this proceeding, we will permit Geman to reapply for such association after three years.
Finally, while we believe that the public interest warrants the imposition of a substantial civil money penalty against Geman, we have determined to reduce the penalty assessed by the law judge. Section 21B of the Exchange Act and Section 203(i) of the Advisers Act authorize the imposition of civil money penalties where it is in the public interest to do so. 84 Section 21B(b) authorizes fines of $100,000 for each violative act or omission -- a "Third Tier" penalty -- if such act or omission involved "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement;" and if it "resulted in substantial losses to other persons or . . . gain to the person who committed the act or omission." Fines of $50,000 per violation -- a "Second Tier" Penalty -- are authorized where the conduct involved "fraud . . . or deliberate or reckless disregard of a regulatory requirement," without a showing of substantial losses to other persons or gains to the wrongdoer.
Geman argues that, because PMC has already "disgorged" over $600,000 in connection with its settlement of related Commission proceedings, the Firm's customers suffered no loss from the alleged misconduct. 85 In addition, he notes that, although PMC generated$464,864 in trading profits from the conduct at issue, Geman owned only 35% of PMC and therefore received only a portion of those profits. Geman further claims that, assuming the allegations in this case are true, there is only one fraudulent course of conduct at issue. Thus, he asserts, the Exchange Act constrains the Commission from imposing a penalty in excess of $100,000. 86
Although we consider a substantial civil penalty warranted, we agree that the $500,000 fine imposed by the law judge is excessive. Geman's conduct clearly constituted a Third Tier penalty, and thus we consider it appropriate in the public interest to impose on Geman a Third Tier fine of $100,000 as a result of his role in PMC's fraudulent disclosure to its customers. We further consider it appropriate to impose Second Tier fines of $50,000 each for Geman's conduct in connection with the Firm's recordkeeping violations and its violation of Exchange Act Rule 10b-10(a)(8)(i)(A).
An appropriate order will issue. 87
By the Commission (Chairman LEVITT and Commissioners HUNT and CAREY); Commissioner UNGER dissents as to the sanctions.
Jonathan G. Katz
Secretary
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 43963 / February 4, 2001
INVESTMENT ADVISERS ACT OF 1940
Rel. No. 1924 / February 4, 2001
Admin. Proc. File No. 3-9032
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In the Matter of MARC N. GEMAN,
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ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Marc N. Geman be, and he hereby is, barred from association with any broker, dealer, investment adviser, member of a national securities exchange, and member of a registered securities association, provided that, after three years, he may apply to become so associated, such application to be made to the appropriate self-regulatory organization or, if there is none, to the Commission; and it is further
ORDERED that Marc N. Geman cease and desist from committing or causing any violation and committing or causing any future violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, Rules 10b-5, 10b-10, 17a-3 and 17a-11 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940; and it is further
ORDERED that Marc N. Geman pay a civil money penalty of $200,000.
Geman's payment of the civil money penalty shall be: (i) made by United States postal money order, certified check, bank cashier's check, or bank money order; (ii) made payable to the Securities andExchange Commission; (iii) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549 within thirty days of the date of this order; and (iv) submitted under cover letter which identifies Geman as the respondent in this proceeding, and the file number of this proceeding. A copy of this cover letterand check shall be sent to Robert M. Fusfeld, Counsel for the Division of Enforcement, Securities and Exchange Commission, Central Regional Office, 1801 California Street, Suite 4800, Denver, Colorado 80202.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 15 U.S.C. §77q.
2 15 U.S.C. §78j.
3 17 C.F.R. §240.10b-5.
4 15 U.S.C. §80b-6.
5 17 C.F.R. §240.10b-10(a)(8)(i)(A).
6 15 U.S.C. §78q.
7 17 C.F.R. §240.17a-3.
8 17 C.F.R. §240.17a-11.
9 Administrative proceedings previously were instituted against PMC and its president, Kenneth Phillips, based on the same matters that are the subject of this proceeding. PMC and Phillips settled those proceedings, without admitting or denying findings, by consenting to entry of an order finding, among other things, that PMC and Phillips violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, that PMC violated and Philips aided and abetted PMC's violation of Section 206(2) of the Advisers Act, and that PMC violated Section 17(a)(1) of the Exchange Act. Portfolio Management Consultants, Inc., 52 S.E.C. 846 (1996). Pursuant to this settlement, PMC agreed to disgorge its principal trading profits for the period October 1, 1992 through April 22, 1994 (plus prejudgment interest), employ a compliance executive not unacceptable to Commission staff, and cease and desist from future violations of the provisions it was found to have violated. Phillips agreed to be censured and to pay a civil money penalty of $25,000. Our findings here with respect to PMC and Phillips are made only for the purpose of this proceeding, to which they are not parties.
10 See generally "Status of Investment Advisory Programs Under the Investment Company Act of 1940," Investment Company Act of 1940 Rel. No. 21260 (Aug. 2, 1995), 59 SEC Docket 2807, 2808; "Disclosure by Investment Advisers Regarding Wrap Fee Programs," Investment Advisers Act Rel. No. 1401 (Jan. 20, 1994), 55 SEC Docket 2760.
11 See Section 202(a)(11)(A) of the Advisers Act, 15 U.S.C. §80b-2(a)(11)(A).
12 According to PMC's agreement with the portfolio managers, the portfolio managers had the option of executing trades through broker-dealers other than PMC if the portfolio manager "believes that 'best execution' market price may be obtained elsewhere." The extent to which the portfolio managers used other broker-dealers is unclear from the record.
13 A limit order for the purchase or sale of securities allows for execution at a price no worse than that specified by the customer. See generally E.F. Hutton & Co., 49 S.E.C. 829, 830 n.2 (1988); Brown & Co., 43 S.E.C. 490, 495 n.7 (1967).
14 PMC added similar language to other Firm documents sent to customers before and during the period at issue. For example, PMC's January 1992 Form ADV disclosed that "[s]ubject to requisite disclosure and authorization, PMC may act as principal or agent from time to time. . . " and its performance reviews, which it distributed to customers during this period, stated that PMC "may act as principal or agent in executing orders placed by your portfolio manager for the purchase or sale of securities in your account."
15 These amounts included payments for order flow that PMC received from the broker-dealers with which it dealt, asset liquidation fees, and administrative fees for the temporary investment of customer funds in interest bearing accounts.
16 During the hearing before the law judge, PMC's trader Kathleen Shepard testified that, while the extent of the spread was a factor considered in determining whether to principal a trade, "[t]here are a number of other factors that would have entered into it." When she was asked: "All things being equal . . . would you be more . . . likely to principal [a] trade if the spread was more than an eighth?," she stated: "I can't answer that . . . . There are other factors involved . . . ." The Division did not pursue the matter.
The law judge found that PMC's traders were "to determine whether to execute the trade as an agent or principal by checking the spread . . . [and that i]f . . . the spread was greater than an eighth of a point, the trade would be executed as a principal." Neither the record references cited by the law judge nor anything else we have found in the record, however, supports this finding.
17 The Division asserts in its brief to us that testimony by Geman indicated that the Firm executed principal and covering trades simultaneously. The Division also suggests that, in at least one instance, the Firm executed the principal trade with its customer after first executing the covering trade. The Division further notes that PMC's recordkeeping failings make it impossible to know when the principal trades with customers occurred. In the Order Instituting Proceedings, however, the Division alleged merely that the Firm covered its principal trades with customers in "contemporaneous offsetting transactions." We consider the fact that PMC lost money on one-third of these trades as evidence that the Firm executed at least some of the covering trades subsequent to the principal trades with customers. Cf. Brown and Co., 43 S.E.C. 490, 495(1967) (fact that firms lost money on trades in which they acted as dealers was "in itself" indication that firms did not follow a practice of first executing the offsetting transactions).
18 A third market dealer is one that makes an over-the-counter market in securities that also are listed and traded on an exchange. See Payment for Order Flow, Securities Exchange Act Rel. No. 33026 (Oct. 6, 1993), 55 SEC Docket 495, 497 n.12. See also Division of Market Regulation, Securities and Exchange Commission, Market 2000: An Examination of Current Equity Market Developments (Jan. 1994).
19 The record contains little information about PMC's agency trading, which is not a basis for these proceedings.
20 Because during much of the period at issue PMC kept no records of the times at which it executed principal trades with customers, we do not known whether this price was consistent with the NBBO. However, the Division charged, and Geman does not dispute, that PMC "routinely executed orders . . . at the NBBO."
21 Fox made this discovery when PMC filled a Fox market order to buy at a price that Fox believed was above the current market. At Fox's request, PMC subsequently gave the customers involved a credit for the disputed amount.
22 See Schedule G to the NASD By-laws, NASD Manual at 1640 (1993). NASD requirements governing reporting of over-the-counter transactions in listed securities are now contained in Rules 6400 et seq. of the Marketplace Rules of the NASD. NASD Manual at 6401 (1999).
23 The NASD's By-Laws defined riskless principal transactions as ones:
[I]n which a member that is not a market maker in the security, after having received from a customer an order to buy, purchases the security as principal from another member or customer to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to another member or customer to satisfy the order to sell . . . . NASD Manual at 1643 (1993) (this definition can now be found in NASD Marketplace Rule 6420(d)(3)(B), NASD Manual at 6404 (1999)).
24 The basis for the NASD's apparent reversal regarding PMC's ACT reporting is not clear. Thus, it is unclear whether the NASD altered its view as to whether PMC's trades were riskless principal transactions.
25 The Securities Act makes it unlawful for sellers of securities:
(1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
26 Section 10(b) of the Exchange Act prohibits the use, "in connection with the purchase or sale of any security [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commissionmay prescribe . . . ."
Exchange Act Rule 10b-5 makes it unlawful:
(1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
27 Section 206 of the Advisers Act makes it unlawful for any investment adviser "(1) to employ any device, scheme, or artifice to defraud any client or prospective client; (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client."
28 See Arleen W. Hughes, 27 S.E.C. 629, 635 (1948)("It is well settled that a fiduciary, as, for example, an agent, who sells his own property to his principal must disclose his cost to the principal so that the principal will know what profits the fiduciary will realize by effecting the transaction."), aff'd sub nom., Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949); WilliamJ. Stelmack Corporation, 11 S.E.C. 601, 618 (1942) (agent must disclose not only that he "is acting on his own account, but also all other facts which he should realize have or are likely to have a bearing upon the desirability of the transaction from the viewpoint of the principal [including] the price paid by the agent for the property which he sells to the principal . . . and the price he receives for the property he buys from the principal."). See also Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) ("Courts have imposed on a fiduciary an affirmative duty of 'utmost good faith, and full and fair disclosure of all material facts,' as well as an affirmative obligation 'to employ reasonable care to avoid misleading' his clients.").
29Hughes, 27 S.E.C. at 637.
30 49 S.E.C. 829 (1988).
31 Id. at 831-32.
32 Id. at 832.
33 For example, one of its promotional brochures stated that "as an independent fiduciary, PMC is dedicated to providing the independent advisory and administrative services necessary to support [the customer] in meeting [his] unique and specialized goals and objectives."
34 SEC v. Moran, 922 F. Supp. 867, 895-96 (S.D.N.Y. 1996). See also SEC v. Blavin, 760 F.2d 706, 711-12 (6th Cir. 1985) (As a fiduciary, the standard of care to which an investment adviser must adhere imposes "an affirmative duty of 'utmost good faith, and full and fair disclosure of all material facts,' as well as an affirmative obligation to 'employ reasonable care to avoid misleading' his clients.") (citations omitted); William J. Stelmack Corporation, 11 S.E.C. 601, 618-19 (1942) (disclosure of principal status on confirmation and customer order blank did not relieve broker-dealer of "the fiduciary's duty of loyalty and its various incidents.").
35 Geman cites, as support, the definition of "investment adviser" contained in the Advisers Act, which provides that:
[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues . . . analyses or reports concerning securities; but does not include
. . . (C) any broker or dealer whose performance of such service is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor . . . .
15 U.S.C. §80b-2(a)(11).
36 Section 206(3) of the Advisers Act requires an investment adviser, when executing a trade as principal, to disclose to the customer the capacity in which it is acting and to obtain the customer's consent thereto, in writing and before the completion of the transaction. The section further provides, however, that it "shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction." 15 U.S.C. §80b-6(3).
37 The majority of orders were executed by PMC on an agency basis and routed automatically in most cases to dealers that offered the opportunity for price improvement if the order was eligible. See n.19, supra, and the accompanying text.
38 A valid defense of reliance on counsel must be predicated on a showing of the following four elements: (i) a request for advice on the legality of a proposed action; (ii) full disclosure of the relevant facts; (iii) receipt of advice that the action to be taken will be legal, and (iv) reliance in good faith on counsel's advice. See SEC v. Savoy Indus., Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981); William H. Gerhauser, Sr., Exchange Act Rel. No. 40639 (Nov. 4, 1998), 68 SEC Docket 1289, 1300 n.26.
39 See, e.g., Gallagher & Co., 50 S.E.C. 557, 563 (1991) (reliance on counsel no defense where given advice did not address the material omission at issue), aff'd, 963 F.2d 385 (llth Cir.) (Table), cert. denied, 506 U.S. 979 (1992).
40 See, e.g., U.S. v. Russo, 74 F.3d 1383, 1390 (2d Cir.) (finding short sale of stock to finance manipulation of trading in unrelated securities to satisfy "in connection with"requirement, and noting that the purpose of Exchange Act Section 10(b) and Rule 10b-5 "is to prevent fraud, whether it is 'a garden type variety of fraud, or presents a unique form of deception. Novel or atypical methods should not provide immunity from the securities laws.'" (quoting Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 11 n.7 (1971)), cert. denied, 519 U.S. 927 (1996); SEC v. Rana Research, Inc., 8 F.3d 1358, (9th Cir. 1993) ("While interpretations of 'in connection with' continue to change as applied to private plaintiffs, its meaning in SEC actions remains as broad and flexible as is necessary to accomplish the statute's purpose of protecting public investors."); Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 944-45 (3d Cir.) (firm's failure to disclose the interest rates on a margin account was actionable under Exchange Act Section 10(b) and Rule 10b-5 even though it did not "affect the investment value of a particular security," because it "induced [the plaintiff] to purchase certain securities to her financial detriment"), cert. denied, 474 U.S. 935 (1985). In Angelastro, the Court observed that "[m]any other types of fraud involving the trading process, rather than the investment value of the particular security, have also been found to come within the scope of section 10(b) and Rule 10b-5." Id. at 943 (citations omitted). See also U.S. v. Naftalin, 441 U.S. 768 (1979) (misrepresentation that seller owned stock when in fact he sold it "short" violated Section 17(a) of the Securities Act); Abrams v. Oppenheimer Gov't. Securities., Inc., 737 F.2d 582, 593 (7th Cir. 1984) ("the 'in connection with' requirement amounts to some nexus but not necessarily a direct and close relationship") (citations omitted); Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981) ("Misrepresentation of the risks of buying securities on margin . . . is fraud 'in connection with' the purchase of the securities."); Marbury Management, Inc. v. Kohn, 629 F.2d 705, 707 (2d Cir.) (salesperson trainee's misrepresentation that he was an experienced stockbroker and portfolio manager was actionable because the "misstatement of his status not only induced the purchase of the securities involved but their retention as investments as well"), cert. denied, 449 U.S. 1011 (1980).
41 17 C.F.R. §240.10b-10(a)(8)(i)(A). In adopting this rule, we observed that:
Disclosure of mark-ups and mark-downs in "riskless" principal transaction[s] should assist investors in comparing the costs they incur in transactions effected by broker-dealers on either an agency or "riskless" principal basis and in assessing those costs in relation to the quality of services provided by competing broker-dealers.
Securities Confirmations, Exchange Act Rel. No. 15219 (Oct. 6, 1978), 15 SEC Docket 1245, 1250.
42 Securities Confirmations, 15 SEC Docket at 1249.
43 Geman further questions the way in which such disclosure would operate since, at the time it executed its principal trades, PMC did not know whether (and, if so, how much) it would ultimately profit on the covering trades. Because PMC's policy was to execute the covering trades on the same day as the customer trades, we do not believe it would have been difficult to link these trades for the purpose of calculating the resulting profit and disclosing such information to the Firm's customers.
44 Letter from Roger D. Blanc, Chief Counsel, Division of Market Regulation to Buys-MacGregor, MacNaughton-Greenwalt & Co. (Jan. 2, 1980), 1980 SEC No-Act. LEXIS 2851.
45 Id. at *1. The Division Letter addressed two hypotheticalsituations, only one of which is relevant here.
46 Id. at *2.
47 Id.
48 Id. The staff justified its position by explaining that to construe the rule otherwise might, "among other things, require broker-dealers to depart from the usual practice of preparing confirmations at the close of each trading day." Id. This is because confirms in offsetting riskless principal trades would not be prepared until the offsetting trades were executed.
50 We note that the statements of the staff, expressed verbally or in writing, do not necessarily reflect the views of the Commission, nor do they have the force of law. They do reflect, however, the "'views of persons who are continuously working with the provisions of the statutes involved.'" Lowell H. Listrom, 50 S.E.C. 883, 886 n.3 (1992) (citation omitted). We "may choose to adopt or reject the staff's previously-stated reasoning with respect to the application of the particular regulation at issue
. . . ." Id.
51 Geman also contends that there was nothing for the Firm to disclose because the terms used by the rule, "markups" and "markdowns," refer to service charges added to or subtracted from the prevailing market price of a security in a retail trade, and because PMC's principal trades were executed at the NBBO, without any additional charge. As we have discussed, it is appropriate under these circumstances to view the retail and covering trades as part of the same economic event. Thus any profit resulting to the Firm should be viewed as a form of "similar remuneration" for purposes of Rule 10b-10(a)(8)(i)(A)'s disclosure requirements.
52 See Aaron v. S.E.C., 446 U.S. 680, 695, 697 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Steadman v. S.E.C., 603 F.2d 1126, 1134 (1979), aff'd, 450 U.S. 91 (1981); Scienter requirement in actions under antifraud provision of Investment Advisers Act, 133 A.L.R. Fed. 549 (and cases there cited).
53 Aaron v. S.E.C., 446 U.S. at 696; S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 196 (1963); Steadman, 603 F.2d at 1134.
54 Ernst & Ernst v. Hochfelder, 425 U.S. at 193.
55 Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir.), cert. denied, 525 U.S. 811 (1998). The United States Court of Appeals for the Third Circuit also stated that the "duty of best execution requires [a broker-dealer] to execute the plaintiffs' trades at the best reasonably available price." Id. See also Certain Market Making Activities on Nasdaq, Securities Exchange Act Rel. No. 40900 (Jan. 11, 1999), 68 SEC Docket 2930, 2940 (settled case) (citing Sinclair v. S.E.C., 444 F.2d 399 (2d Cir. 1971)); Arleen Hughes, 27 S.E.C. at 636.
56 See Newton, 135 F.3d at 273, where the court stated:
[T]he basis for the duty of best execution is the mutual understanding that the client is engaging in the trade -- and retaining the services of the broker as his agent -- solelyfor the purpose of maximizing his own economic benefit, and that the broker receives her compensation because she assists the client in reaching that goal.
The Division seems to argue, in their briefs and at oral argument, that PMC assumed a heightened best execution obligation by representing to customers that it would "ensure 'best net price'" and "optimal trading results." We view these representations as being equivalent to the representation that each broker-dealer makes, either implicitly or explicitly when it accepts a customer order, to seek to obtain the best price reasonably available.
57 Id. at 266.
58 Our finding that PMC was at risk is not inconsistent with our determination (discussed in Section III A (ii), supra) that the trades at issue constituted "riskless" principal transactions for purposes of the disclosure requirements of Exchange Act Rule 10b-10(a)(8)(i)(A). We previously have stated that "'[r]iskless' principal transactions, as defined in the rule, are in many respects equivalent to transactions effected on an agency basis . . . ." 15 SEC Docket at 1249. Where, as here, offsetting principal trades are the effective equivalent of agency trades, the presence of a limited degree of risk should not alter the characterization of those trades as riskless principal trades for purposes of the disclosure requirements of Rule 10b-10(a)(8)(i)(A).
59 While a dealer acting for its own account may seek better execution through a limit order than what is then available through a market order (and subject itself to the accompanying risk),
A broker receiving a market order from his customer . . . cannot delay execution for such periods of time but must execute reasonably promptly and be in a position to report the details to the customer . . . without undue delay.
Brown & Co., 43 S.E.C. 490, 495 (1967). See also Bateman Eichler, 47 S.E.C. 692, 694 n.5 (1982) ("in the absence of a clear understanding or indication to the contrary, trade custom requires a dealer to consummate transactions with customers promptly . . .").
60 Moreover, most of the trades at prices higher than $42 1/8 appeared to result from an upward change in the inside bid quotation, or were executed at prices that were consistent with the inside offer quotation. When the trade price is consistent with the inside offer, it is likely that the trade was a purchase from, rather than a sale to, a market maker, becausemarket makers typically buy at the bid side of the market and sell at the offer side. PMC's purchase from its customer was comparable, for pricing purposes, to a sale to a market maker because it presumably would be executed at the bid side of the market, i.e., at a price lower than the inside offer.
In another example, the Division points to a purchase by a PMC customer of 800 shares of National Fuel Gas Company at $34 3/8 per share, on a day when 21 out of 29 trades in that security were at lower prices. For those trades where the price was below that which PMC's customer paid, the price generally conformed to the inside bid at the time of that trade rather than the inside offer (the price at which PMC's principal trade was executed), indicating that the trade probably was a sale to, rather than a purchase from, a market maker, and therefore not comparable to the PMC trade.
61 The Division did not allege misconduct by PMC with respect to its agency trades, which apparently were generally executed at the NBBO.
62 See Order Execution Obligations, Exchange Act Rel. No. 37619A (Sept. 12, 1996), 62 SEC Docket 2210.
63 Id. at 2242.
64 Id. at 2243. We also "noted the importance of the opportunity for price improvement as a factor in best execution" and observed that "executing order flow on an automated basis, at the best bid or offer quotation, would not necessarily satisfy a broker-dealer's duty of best execution . . . ." Id. at 2243.
Additionally, in 1993, during the period at issue, we requested comments regarding the question of whether execution of small orders at the NBBO satisfied the best execution obligation. See Payment for Order Flow, Exchange Act Rel. No. 33026 (Oct. 13, 1993), 55 SEC Docket 495, 499 n.29. This request was triggered by the conclusion reached by an NASD special committee studying payment for order flow practices, to the effect that "when a flow of aggregated small orders is directed to a market maker in response to inducements for order flow, brokers receiving execution at the best published bid or offer are obtaining best execution for those small orders." Id. At that time, we offered our preliminary view that the committee's conclusion "may not be consistent with previous statements of the Commission regarding best execution." Id.
65 Newton, 135 F.3d at 271 n.3. As we have stated:
The scope of [the] duty of best execution must evolve as changes occur in the market that give rise to improved executions for customer orders, including opportunities to trade at more advantageous prices. As these changes occur, broker-dealers' procedures for seeking to obtain best execution for customer orders also must be modified to consider price [improvement] opportunities that become "reasonably available."
Order Execution Obligations, 62 SEC Docket at 2242-43.
66 Section 17(a)(1) of the Exchange Act requires that broker-dealers make and keep such records as are prescribed by Commission rules. Rule 17a-3(a) requires that every broker-dealer make and keep:
(6) A memorandum of each brokerage order . . . [which] shall show the terms and conditions of the order . . . the time of entry . . . the time of execution or cancellation. . . . (7) A memorandum of each purchase and sale for the account of such . . . broker, or dealer showing the price and, to the extent feasible, the time of execution; and, in addition, where such purchase or sale is with acustomer other than a broker or dealer, a memorandum of each order received, showing the time of receipt . . . . 17 C.F.R. §240.17a-3.
67 Rule 17a-11(d) requires that
Every broker or dealer who fails to make and keep current the books and records required by §240.17a-3 shall give notice of this fact that same day [by telegraphic notice or facsimile transmission]. The broker or dealer shall also transmit a report . . . within 48 hours of the notice stating what the broker or dealer has done or is doing to correct the situation.
68 While Geman testified, during the hearing, that he was unaware that the Firm had ever given the Commission formal notice of its recordkeeping violations, he also stated that he did not "know whether that notice wasn't given because it would have been given by Vali [Nasr]." Nasr was not asked whether he gave the requisite notice.
69 See, e.g., Sharon M. Graham, Exchange Act Rel. No. 40727 (Nov. 30, 1998), 68 SEC Docket 2056, 2066, aff'd, No. 99-1029 (D.C. Cir. 2000); Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
70 See, e.g., Woodward v. The Metro Bank of Dallas, 522 F.2d 84, 97 (5th Cir. 1975) ("Substantiality is a function of all the circumstances.").
71 Because we have found that Geman aided and abetted these violations, he was necessarily a cause of those violations. See Sharon M. Graham, 68 SEC Docket at 2071 n.35.
72 See James L. Owsley, 51 S.E.C. 524, 531 (1993) (fact that others shared compliance responsibility did not relieve branch manager, who was faced with "red flags," of his compliance responsibility). See also Donald T. Sheldon, 51 S.E.C. at 67 (respondent aided and abetted firm's violations where he, in bad faith, intentionally ignored the firm's improper practices).
73 15 U.S.C. §78o(b)(4).
74 15 U.S.C. 80b-3(f).
75 Section 21B, 15 U.S.C. §78u-2, also authorizes the imposition of civil penalties for willful aiding and abetting of violations of the securities laws.
76 Geman supports this contention by claiming that the law judge implicitly determined that Geman "intended no deception or wrongdoing," and that this determination, based on the law judge's evaluation of Geman's demeanor and credibility, is entitled to "substantial deference." To the contrary, the law judge, with respect to the Firm's disclosure to customers, expressly found that "PMC, through Geman, acted with the requisite scienter. Scienter has been described as 'a mental state embracing intent to deceive, manipulate, or defraud.'"
77 Jacob Wonsover, Exchange Act Rel. No. 41123 (March 1, 1999), 69 SEC Docket 694, aff'd, 205 F.3d 408 (D.C. Cir. 2000). While Wonsover dealt with the meaning of willfulness in the context of the Exchange Act, we believe its reasoning also is applicable to the term's use in the Advisers Act.
None of the cases cited by Geman in support of his argument regarding willfulness interprets the term in the context of the securities laws. As the Supreme Court has explained, "'willful' . . . is a 'word of many meanings,' and 'its construction is often influenced by its context'." Ratzlaf v. United States, 510 U.S. 135, 141 (1994) (internal brackets, ellipsis, and citation omitted).
78 Wonsover, 69 SEC Docket at 713.
79 Wonsover v. SEC, 205 F.3d at 414 (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C.Cir. 1965)).
80 As we have held, "[o]ur recordkeeping rules are a keystone of the surveillance of brokers and dealers by our staff and by the securities industry's self-regulatory bodies." Edward J. Mawod & Co., 46 S.E.C. 865, 873 n.39 (1977); aff'd, 591 F.2d 588 (10th Cir. 1979).
81 Stuart-James' broker-dealer registration was revoked following disciplinary proceedings brought by the Commission. See The Stuart-James Co., Exchange Act Rel. No. 32297 (May 12, 1993),54 SEC Docket 154; The Stuart-James Co., Initial Decision Rel. No. 32 (March 17, 1993), 53 SEC Docket 2623.
82 The Stuart-James Co., 48 S.E.C. 779 (1987), aff'd, 857 F.2d 796 (D.C. Cir. 1988), cert. denied, 490 U.S. 1098 (1989). In that case, the NASD censured Geman and fined him $500 jointly and severally with Stuart-James, sanctions we characterized as "light." Stuart-James, 48 S.E.C. at 782.
83 See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The court there identified the following factors in determining the appropriateness of Commission sanctions:
[T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.
We also have noted that "[w]hen we deal with these [disciplinary] matters, we must weigh the effect of our action or inaction on the welfare of investors as a class and on standards of conduct in the securities business generally." Richard C. Spangler, 46 S.E.C. 238, 254 n.67 (1976).
The Division also seeks a collateral bar against Geman, i.e., a bar from associating with any municipal securities dealer or investment company. However, since briefing was completed in this case, the United States Court of Appeals for the District of Columbia Circuit determined that the Commission lacks the authority to impose collateral bars. Teicher v. SEC,177 F.3d 1016 (D.C. Cir. 1999), cert. denied, 120 S.Ct. 1267 (2000).
84 15 U.S.C. §§78u-2(a) and 80b-3(i).
85 We deny Geman's motion to adduce additional evidence relating to PMC's obligation to pay disgorgement pursuant to an earlier settlement. See n.9, supra. Geman has not shown with "particularity" that "there were reasonable grounds for failure to adduce such evidence previously," as required by Rule 452 of the applicable Rules of Practice. 17 C.F.R §201.452. The evidence consists of two letters dated March 19, 1997 and March13, 1997, well before issuance of the initial decision in this case on August 5, 1997.
86 Geman claims that imposition of a money penalty against him violated his rights under the Fifth and Seventh amendments to the Constitution because there was no involvement by an Article III judicial officer, by Congress or by a jury. Geman does not support this claim with citation to any authority, and we reject it as baseless.
Geman further claims that this proceeding violates the Double Jeopardy Clause of the Constitution because PMC earlier had been the subject of Commission proceedings, as a result of which PMC agreed to pay disgorgement of its trading profits. The Supreme Court has held, however, that the Double Jeopardy "Clause protects only against the imposition of multiple criminal punishments for the same offense." Hudson v. United States, 118 S. Ct. 488, 493 (1997). The sanctions we are imposing here are civil in nature, and therefore not subject to the Double Jeopardy Clause. See William F. Lincoln, Exchange Act Rel. No. 39629 (Feb. 9, 1998), 66 SEC Docket 1433, 1440-43. Moreover, Geman was not a party to the earlier proceedings.
87 We hereby grant motions filed by the Division and Geman to admit supplemental briefs to the record to address the holding in Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266 (3d Cir.), cert. denied, 525 U.S. 811 (1998), which was issued subsequent to the completion of briefing in this matter. We also grant the Division's motion to strike all references to the investigative testimony of PMC's trader, Sender Zucker, in Geman's Rebuttal to Division of Enforcement's Reply to Supplemental Brief. This testimony constitutes additional evidence and Geman has not shown reasonable grounds for failing to adduce it earlier.
We have considered all of the arguments advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed herein.