SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 44224 / April 26, 2001
Admin. Proc. File No. 3-10009
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In the Matter of the Application of MARTIN LEE ENG For Review of Disciplinary Action Taken by the |
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OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS
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Registered securities association found that associated person of member firm published a statement on the Internet that contained a promise of specific results for which there was no reasonable basis. Held, association's action sustained.
APPEARANCES:
Edward B. Simpson and John Gigounas, of Simpson & Gigounas, for Martin Lee Eng.
Alden S. Adkins, Susan L. Beesley, and Jeffrey S. Davis, for NASD Regulation, Inc.
Appeal filed: September 9, 1999
Last brief filed: April 21, 2000
Martin Lee Eng ("Eng"), a former registered representative with Lam Securities Investments, Inc. ("LSI"), a member firm of the National Association of Securities Dealers, Inc. ("NASD"), appeals from the NASD's disciplinary action against him. The NASD found that Eng published promotional statements on the Internet that contained apromise of specific results for which there was no reasonable basis, in violation of NASD Conduct Rule 2210(d)(2)(C).1
The hearing panel censured Eng, fined him $5,000, and required that he requalify by examination before reassociating with an NASD member firm. On appeal, the NASD's National Adjudicatory Council ("NAC") modified the Hearing Panel's decision and ordered that its decision serve as a letter of caution to Eng. Eng now appeals that decision. We base our findings on an independent review of the record.
I.
The facts of the case are largely undisputed. Eng entered the securities industry in 1994. In October 1996, he joined LSI as a general securities representative. He left LSI in October 1997 and, since that time, he has not been associated with an NASD member.
In February 1997, the NASD conducted a scheduled examination of LSI, including a review of material that LSI published on the Internet. Using an Internet search engine to search for "Lam Securities Investments, Inc.," the examiner found that this phrase was mentioned twice on an Internet web page established and operated by Eng. The title of this web page was "GlobalForum.com" ("GlobalForum"). GlobalForum contained numerous links to other pages also operated by Eng. These pages contained material that Eng wrote on a variety of topics, including headline news stories, political analysis, business news, and stock market analysis.
From one of the pages on Eng's GlobalForum site, the examiner used a hyper-link to reach a page entitled "MartinEng.stockbroker." The URL web address for this page was "www.globalforum.com/stockbroker.htm." The first item on this page was a picture of Eng with the caption: "Licensed full time financial consultant. News columnist." This was followed by a table ofcontents listing several topics, including "Rules in Investing" ("Eng's Rules"). The page contained a hyper-link to LSI's Internet site.
The NASD examiner concluded that many of the statements in Eng's Rules were misleading and unsupported and forwarded the matter to the NASD Advertising Regulation Department for further review. Ultimately, this proceeding was instituted alleging several violations of NASD Conduct Rule 2210. The hearing panel found all of the statements to be violations and that Eng had acted recklessly in making them. Accordingly, the panel censured Eng, fined him $5,000, and ordered him to requalify by examination before reassociating with an NASD member firm.
On appeal, the NAC concluded that only the following statement violated NASD Conduct Rule 2210: "[s]ell a stock for a loss and still be able to come out with a gain later. E-mail me for this open secret knowledge only after you e-mail me for at least ten different occasions from surfing my site." The NAC held that Eng's conduct in publishing this statement was merely negligent and not reckless as the hearing panel had concluded and the NAC reduced the sanction against Eng to a letter of caution. Eng now appeals that decision.
II.
We must first determine whether Eng's statement advising that an investor could sell stock for a loss and then turn it into a gain violated Conduct Rule 2210. Eng neither addressed this question in his briefs to us or in the hearing before the NAC. However, in his initial hearing before the NASD he did assert that his statement did not violate the rule because it was referring to a tax strategy called "wash and sale". According to Eng, this strategy allows an investor who repurchases the same stock within 30 days of its sale to avoid reporting the loss and to later turn it into a gain if the price of the stock subsequently increases. The NAC found that the statement violated Conduct Rule 2210(d)(2)(C) because it contained a promise of a specific result for which there is no reasonable basis.
Eng's statement is most reasonably interpreted as a promise of a specific result, namely that a stock loss can somehow be turned into a gain. However, even under the tax strategy Eng posits, an investor merely avoids reporting a loss for tax purposes if the stock is repurchased within 30 days; he does not avoid the actual loss. Accordingly, we find that Eng's statement violated NASD Conduct Rule 2210(d)(2)(C).
Eng contends that the NASD's enforcement of Conduct Rule 2210 violated his free speech rights under the First Amendment to the Constitution. Eng concedes that the First Amendment restricts only government, not private, conduct. However, he argues that the NASD is a "governmental actor" because its disciplinary proceedings are subject to review by this agency. Since the NASD is a governmental actor, Eng contends, its disciplinary actions are subject to the limitations on government action imposed by the Constitution, including the First Amendment's prohibitions against governmental restrictions on speech.
Many courts and this Commission have determined that self-regulatory organizations such as the NASD are not subject to many of the constitutional limitations applicable to government agencies.2 With regard to the restrictions imposed by the First Amendment on government conduct, Eng does not cite any precedent in which the NASD was deemed to be a government entity for purposes of this Amendment, and we have found none.
Moreover, even if the NASD's enforcement of Conduct Rule 2210 were deemed to be state action, that action did not abridge Eng's First Amendment rights. The speech at issue here falls within the definition of commercial speech because it is speech that is designed to encourage a commercial transaction.3 As Eng himself hasadmitted, his reason for posting the Eng Rules on the Internet was "to put a little shingle out there." The subject of Eng's Rules is advice and tips for investing in the stock market. He identified himself on the GlobalForum site as a stockbroker and linked this page to LSI's Internet page.
Commercial speech is accorded less protection than other constitutionally-protected speech.4 In order to restrict commercial speech, the government is required to show that it has a substantial interest and that its restriction is carefully designed to achieve this interest, i.e. it is the most reasonably limited restriction available to achieve the government's interest.5 Commercial speech that is misleading or related to illegal activity can be banned.6 Conduct Rule 2210 is directed at speech that misleads by, among other things, giving a promise of a specific result for which there is no reasonable basis. Thus, even if the NASD were deemed to be a state actor, the enforcement of Conduct Rule 2210 would not violate its members' First Amendment rights.
III.
Eng argues that he should not be subject to any sanctions for his conduct. Our review of the appropriateness of the NASD's sanctions is governed by Section 19(e)(2) of the Exchange Act, which requires us to determine whether a self-regulatory organization'ssanctions are excessive or oppressive or impose an unnecessary or inappropriate burden on competition.7 The proper sanctions depend on the facts and circumstances of each case.8 The sanction imposed by the NASD upon Eng, a letter of caution, was the minimum sanction that the NASD could have imposed.9 We conclude that the NASD's sanction is neither excessive, oppressive, nor an unnecessary or inappropriate burden on competition.
IV.
In light of the foregoing considerations, we sustain the NASD's disciplinary action. An appropriate order will issue.10
By the Commission (Acting Chairman UNGER and Commissioners HUNT and CAREY).
Jonathan G. Katz
Secretary
SECURITIES EXCHANGE ACT OF 1934
Rel. No.44224 / April 26, 2001
Admin. Proc. File No. 3-10009
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In the Matter of the Application of MARTIN LEE ENG For Review of Disciplinary Action Taken by the |
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ORDER AFFIRMING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Martin Lee Eng be, and it hereby is, sustained.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
| 1 | NASD Conduct Rule 2210(d)(2)(C) states that "[c]ommunications with the public must not contain promises of specific results, exaggerated or unwarranted claims or unwarranted superlatives, opinions for which there is no reasonable basis, or forecasts of future events which are unwarranted, or which are not clearly labeled as forecasts." The NASD also concluded that Eng's conduct in publishing these statements was inconsistent with high standards of commercial honor in violation of Conduct Rule 2110. |
| 2 | See, e.g., Desiderio v. National Association of Securities Dealers, Inc., 191 F.3d 198, 206-07 (2d. Cir. 1999), cert. denied, __ U.S. __, 121 S. Ct. 756 (2001) and Duffield v. Robertson Stephens & Co., 144 F.3d 1182, 1200-03 (9th Cir. 1998), cert. denied 525 U.S. 982 (1998)(the NASD's arbitration procedures are not subject to the restrictions on government action imposed by the due process clause of the Fifth Amendment, the Seventh Amendment and the judicial forum clause of Article III of the U. S. Constitution because the NASD is not a government entity); See also Jones v. SEC, 115 F.3d 1173, 1183 (4th Cir. 1997) and William F. Lincoln, 53 S.E.C. 452, 462-63 (1998)(double-jeopardy clause of Fifth Amendment does not apply to NASD disciplinary proceeding because NASD is not a government agency); Herbert Garrett Frey, 53 S.E.C. 146, 153 n. 17 (1997) (NASD is not a government actor for purposes of the Fifth and Fourteenth Amendments and Supremacy Clause of the U.S. Constitution). |
| 3 | Board of Trustees of the State University of New York v. Fox,492 U.S. 469, 482 (1989). Commercial speech, as the Court has noted, is "expression related solely to the economic interests of the speaker and its audience". City of Cincinnati v. Discovery Network, Inc., 507 U.S. 410, 422 (1993)(quoting Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557, 561 (1980)). |
| 4 | Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 64-65 (1983); Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557, 562-3 (1980). |
| 5 | Board of Trustees of State University of New York, 492 U.S. at 480. See also Central Hudson Gas & Electric Corp., 447 U.S. at 564 (1980). |
| 6 | Greater New Orleans Broadcasting Association, Inc. v. U.S., 527 U.S. 173, 183 (1999); 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 500 n. 9 (1996). |
| 7 | 15 U.S.C. § 78s(e)(2). |
| 8 | Donald R. Gates, Exchange Act Rel. No. 41777 (Aug. 23, 1999), 70 SEC Docket 1228, 1236 and cases cited therein. |
| 9 | In our order of June 20, 2000 accepting jurisdiction of this case, we concluded that the letter of caution issued to Eng constituted a final disciplinary sanction for purposes of section 19(d) of the Exchange Act. We based our conclusion on both the fact that the letter of caution had resulted from a finding in a formal NASD disciplinary proceeding that Eng had violated an NASD rule and the fact that the letter of caution had been reported to the Central Registration Depository. |
| 10 | We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion. |