SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
For Review of Disciplinary Action Taken by the
CHICAGO BOARD OPTIONS EXCHANGE, INC.
OPINION OF THE COMMISSION
REGISTERED OPTIONS EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDING
Violations of Exchange Rules
Conduct Inconsistent with Just and Equitable
Principles of Trade
Failure to Provide Requested Information
Former associated person of former member of options exchange initiated and entered numerous options transactions from off the trading floor which cleared into member market-maker accounts. Former associated person also failed fully and timely to furnish testimony and information requested by the CBOE. Held, Exchange's findings of violations affirmed, and the sanctions it imposed sustained.
Michael Lubin, pro se.
Andrew D. Spiwak and Christopher R. Hill, for the Chicago Board Options Exchange, Inc.
Appeal filed: April 6, 2000
Last brief received: July 31, 2000
Michael Lubin, a former associated person and principal of Mitoric Trading, Inc. ("Mitoric"), a former member firm of the Chicago Board Options Exchange, Inc. ("CBOE" or the "Exchange"), appeals from CBOE disciplinary action.1 After a hearing, the CBOE's Business Conduct Committee found that Lubin, from on or about July 2, 1996 through on or about July 30, 1996, improperly initiated and entered numerous options orders from off the CBOE's trading floor, which cleared into the market-maker accounts of Irwin and Jeffrey Segal, members of the CBOE and nominees of Mitoric,2 in violation of Exchange Rule 8.1.3 The CBOE also found that Lubinviolated Exchange Rule 17.2(b) because he delayed and impeded the CBOE's investigation by refusing to provide an interview from April through August 1997.4 The CBOE censured Lubin, barred him from Exchange membership and from association with any Exchange member organization for a period of one month, and fined him $20,000.5 Lubin appealed, and the CBOE's Board of Directors affirmed the decision of the Business Conduct Committee in an opinion issued March 6, 2000. This appeal followed. We base our findings on an independent review of the record.
Before addressing the merits of this appeal, we resolve Lubin's challenge to the CBOE's assertion of disciplinary jurisdiction over him. CBOE Rule 17.1(a) provides in pertinent part that:
A . . . person associated with a member . . . who is alleged to have violated . . . any . . . rule of the Exchange or any interpretation thereof . . . regulating the conduct of business on the Exchange shall be subject to the disciplinary jurisdiction of the Exchange under this Chapter . . . .
In addition, Exchange Rule 17.1(b) states that:
Any member or person associated with a member shall continue to be subject to the disciplinary jurisdiction of the Exchange following such termination of membership or association with a member with respect to matters that occurred prior tosuch termination; provided that written notice of the commencement of an inquiry into such matters is given by the Exchange to such former member or former associated person within one year of receipt by the Exchange . . . of the latest written notice of the termination of such person's status as a member or person associated with a member.
Lubin was a principal of Mitoric through July 30, 1996 when the firm ceased to do business as a member of the CBOE. Given Lubin's status as a former associated person not otherwise associated with a CBOE member, under Rule 17.1 the CBOE had one year from July 30, 1996 to advise Lubin of the initiation of its investigation.
Lubin acknowledges that Exchange Rule 17.1(b) was "in full force" on April 23, 1997 when he was first notified that the CBOE had initiated its investigation. This notification date was months before the deadline of July 30, 1997. Lubin responded to a May 6, 1997 notification letter from the CBOE, and also exchanged several telephone messages with CBOE staff in May 1997 concerning the CBOE's attempts to schedule his testimony in connection with the investigation.6 Any claim by Lubin that he was not notified of the investigation within one year of his departure from Mitoric is disingenuous. We find that the CBOE's jurisdictional notice was timely and within the one-year limit set forth in Rule 17.1(b).
Lubin advances several arguments against the CBOE's jurisdiction over him. He claims that jurisdiction over him "lapsed" because: (1) there was a "gap o[f] one year and one day between April 23, 1997 and April 24, 1998 [the date of a subsequent letter from the CBOE to Lubin reminding him of its pending investigation]"; (2) a CBOE "Wells" notification letter7 of August 21, 1998 was datedmore than one year after his association with Mitoric; (3) and the Consent to Jurisdiction Form ("Consent Form") that he signed and filed with the CBOE in connection with his association with Mitoric was "altered" by Exchange staff. We find Lubin's arguments to be without merit and grounded on a misreading of Exchange Rule 17.1.
Lubin was notified timely of the CBOE's continuing jurisdiction by the April 1997 letter. Lubin does not explain the purported significance of the one year and one day lapse between the April 1997 and April 1998 letters. The April 24, 1998 letter merely served to alert Lubin that the investigation was continuing.
Lubin also appears to confuse the CBOE's obligation to give notice of an investigation with its notice to him of his right to submit a Wells Letter. Wells notification letters are mandated under Exchange Rule 17.2, which provides that: "[p]rior to submitting its report [to the Business Conduct Committee], the staff shall notify the person(s) who is the subject of the report . . . of the general nature of the allegations . . . ." The Wells Letter gave Lubin an initial opportunity to advise the CBOE "why no disciplinary action should be taken"8 against him, and had no bearing on whether the CBOE timely notified Lubin of its investigation.
Lubin argues that, in violation of his "rights" under Exchange Rule 17.1, the CBOE established jurisdiction over him "by simplyasserting it. When the Exchange tried to prove jurisdiction, an altered document [Consent Form] was produced." Although Lubin offers no proof for his allegation that Exchange staff had altered his Consent Form, even if the form had been altered, it would not change the CBOE's jurisdiction over Lubin.
A Consent Form is one of the documents submitted to the CBOE's Membership Department as part of an application for Exchange membership. The form does not create jurisdiction, but alerts associated persons of their obligation to adhere to the CBOE's Constitution and Rules.9 The CBOE did not establish jurisdiction over Lubin by a mere assertion; that was accomplished by Lubin's status as an associated person of a CBOE member and by the CBOE's timely notice to Lubin of commencement of its investigation pursuant to authority established by Rule 17.1(b).10
A. We now consider the CBOE's finding that during July 1996 Lubin improperly initiated and entered numerous options orders in the market-maker accounts of market-maker nominees of Mitoric inviolation of Exchange Rule 8.1.11 As an associated person who was not himself a market maker, Lubin was not authorized to initiate trades for the Segals' market-maker accounts. Such conduct was thus contrary to Rule 8.1(ii), which provides that only transactions "initiated from off the floor by a market maker who elects to receive market-maker treatment for off-floor orders . . . shall count as market maker transactions."12
The CBOE discovered the activity at issue in the course of its routine surveillance of trading activity on the floor of the CBOE. As part of that surveillance, the CBOE generates an exception report that reviews market-maker transactions and identifies situations when a market maker executes trades in person on the floor of the CBOE,while a floor broker is also executing trades on the market maker's behalf at or near the same time. The CBOE conducts surveillance for this activity so that it can determine whether the order executed by the broker is improperly being initiated by someone other than the market maker for the market maker's account.
During July 1996, the exception report revealed approximately 40 occasions when either Irwin or Jeffrey Segal executed a trade in person on the floor of the CBOE at the same time or within minutes of floor-broker orders being executed on their behalf in their market-maker accounts by Associated Options, Inc. ("Associated"), an Exchange member and floor brokerage firm that executed trades for Mitoric and the Segals. These trades entered on the Segals' behalf are the trades at issue here. None of the floor-broker order tickets for these latter trades were initialed by either of the Segals; the CBOE concluded that someone other than the Segals initiated the orders.13
Stuart Kipnes, President of Associated, testified that Mickey Franklin, who Kipnes knew to be an "associate" of Lubin and the Segals, and Lubin entered options orders for the Segals' market-maker accounts. Kipnes further testified that Lubin entered "more than ten" of the challenged options orders for the Segals' market-maker accounts in July 1996 by placing telephone calls to Associated and designating the orders for the Segals' accounts. Lubin's admissions and stipulation confirm this: Lubin admitted in testimony that he entered "probably less than 25%" of the challenged orders, and the "Agreed Stipulation" of documents and facts that he signed prior to the hearing concedes that "[d]uring July 1996, Michael Lubin entered options orders for Irwin Segal's market-maker account 'IS' and Jeffrey Segal's market-maker account 'SGL' from off the CBOE floor by placing telephone calls to Associated . . . ."
Lubin claims, however, that he did not "initiate" orders; rather, according to Lubin's testimony, it was "standard businesspractice" for the Segals to leave orders with Associated before the market's open or during the trading day which Lubin would "watch" during the day and give Associated a "wake-up call" to execute. Inconsistently, Lubin also testified that "I think in all cases he [Irwin Segal] knew about them [the trades] beforehand . . . maybe not exactly what was going to take place, but that a trade was going to take place." Lubin has attempted to shift responsibility for the improper trades to Associated, testifying that "[f]irst thing I do [sic] try to call Irwin [Segal], if I could not reach him . . . I would give the order [to Associated] and they would follow the proper floor procedure to notify him and obviously give him the right to say no." According to Lubin, this procedure was necessary "because he [Kipnes] would have the capacity to find Irwin Segal when I certainly couldn't"; Lubin was located in New York and Kipnes' booth on the trading floor was "next to Associated['s]" booth. Lubin does not explain why it would be necessary to call Segal if all Lubin was doing was giving Associated a "wake-up call" about Segal's previously placed orders.
Irwin Segal provided two different versions of the events. First, the Offer of Settlement signed by Irwin and Jeffrey Segal to resolve the CBOE's charges against the Segals and Mitoric stipulated that, during July 1996,
Lubin initiated and entered numerous option orders that increased or established positions in Irwin Segal's and Jeffrey Segal's market-maker accounts from off of the CBOE trading floor with Exchange floor broker members. The execution of these orders resulted in transactions representing numerous option contracts which Irwin Segal and Jeffrey Segal allowed to be cleared into their market-maker accounts [in violation of Rule 8.1].
At the hearing, however, Irwin Segal specifically repudiated that statement, testifying that he or Jeffrey Segal initiated all of the trades for their market-maker accounts. According to Irwin Segal's testimony, he discussed a "game plan" with Lubin prior to Lubin's trading in the market-maker accounts and communicated with Lubin "almost continually" during the trading day, instructing him on all trades. Irwin Segal also testified that he did not initial the floor-broker order tickets because "it [j]ust wasn't practical all the time." Not only is this version inconsistent with Irwin Segal's stipulation, it is inconsistent with Lubin's claim that orders were left with Associated and all Lubin did was give a "wake-up call."
Kipnes testified that he could not recall any instances where Lubin telephoned Associated to give a "wake-up call" about an order previously left with the firm by the Segals. Kipnes further testified that "very rarely" would the Segals telephone Associated to place an options order. He also testified that, other than the Segals, only Lubin or Franklin would enter orders for the Segals' market-maker accounts. Thus, no one else could be responsible for the improper trades at issue here.
The disciplinary panel did not find the testimony of either Irwin Segal or Lubin to be credible. However, they found Kipnes to be a believable witness. The record provides no basis for rejecting this determination.14 Accordingly, we find that Segal did not discuss the trades with Lubin prior to entry, and that Lubin improperly initiated and entered numerous options orders in the Segals' market-maker accounts without their prior knowledge or direction, in violation of Exchange Rule 8.1.
Lubin argues that the evidence presented at the hearing was insufficient to sustain the charge that he entered "any one" of the improper trades in the Segals' market-maker accounts during July 1996, and that an "inordinate amount of weight" was placed on the testimony of Kipnes, who accepted less than 20% of the orders coming into Associated during this time. We disagree.
The Statement of Charges alleges that Lubin "initiated and entered numerous options orders" in violation of Exchange Rule 8.1.15 As discussed, the record establishes that Lubin improperlyinitiated orders. Irwin Segal stipulated that Lubin entered "numerous" improper orders for the Segals' market-maker accounts. Lubin testified that "I do not know what percentage I did. It's probably less than 25%" of the trades identified by the CBOE as improper. Thus, Lubin concedes that he entered at least some of the improper orders.16
B. The CBOE also found that Lubin acted to impede and delay the CBOE's investigation from April through August 1997, in violation of Exchange Rule 17.2(b). During this period, the CBOE made repeated and varied attempts to notify Lubin of the need for his testimony in connection with its investigation of options trading in the Segals' market-maker accounts. As detailed below, Lubin engaged in a variety of dilatory and evasive tactics to avoid providing such testimony.
The CBOE sent a certified letter, dated April 2, 1997, to the home address appearing on Lubin's most recent Uniform Application for Securities Industry Registration or Transfer ("Form U-4"), notifying Lubin of its inquiry into Mitoric's trading activity and requesting that Lubin "contact us within seven(7) business days of receipt of this letter to schedule an interview. This interview may be conducted by telephone if desired." The letter was returned unclaimed.
A second letter, dated April 23, 1997 and sent by certified mail to the same address, reminded Lubin that pursuant to Rule 17.1 he continued to be subject to the CBOE's jurisdiction and had an obligation immediately to advise the CBOE of any change of address. The April 23 letter advised Lubin that "[f]ailure to accept correspondence sent via certified mail by the Exchange may constitute a violation of Exchange Rule 17.2(b) for impeding or delaying an Exchange investigation." The letter further requested that Lubincontact the CBOE within seven days of receipt of the letter to schedule an interview. This letter was also returned unclaimed.
Lubin admits that notices of attempted delivery of certified mail generally were left with the doorman at his home and that he "probably" received these notices. In his Motion to Dismiss, Lubin "acknowledges" that he was "first notified" of the CBOE's investigation on April 23. However, he failed to respond to either the April 2 or April 23 letter.
Lubin complains vehemently on appeal that the mailing of certified letters to either his home or office was improper because neither his doorman nor his office secretary was permitted to accept certified mail. However, Exchange Rule 17.12 provides that:
[a]ny charges, notices or other documents may be served on the Respondent . . . by deposit in the United States post office, postage prepaid via registered or certified mail addressed to the Respondent at his address as it appears on the books and records of the Exchange.
Lubin's signed Form U-4, filed with the CBOE, gives his consent to the provisions of this rule.17
On May 6, 1997 a letter with text identical to that of the April 23 letter was sent by certified mail to a new business address for Lubin provided to the CBOE by Irwin Segal. Lubin received this letter; he responded with a call to a CBOE staff investigator on May 13, 1997 during which Lubin agreed under protest to furnish tape-recorded telephonic testimony on May 19, 1997. Lubin advised the investigator that he would not be represented by counsel because he did not want to spend the money. Lubin refused, when asked, to leave a telephone number where he could be reached.
On May 16, 1997 Lubin left a telephone message for the investigator, stating that he would call on the date of the scheduled interview at 10 a.m.(CST). Lubin called on May 19th as agreed; however, the investigator was away from his desk until one or two minutes after 10 a.m. and missed Lubin's call. Although Lubin's message indicated that he would call back, he did not, nor did he leave a telephone number where he could be reached.
On May 20, 1997, at 7:40 a.m.(CST), Lubin left a voice message for the investigator indicating that he would be away for ten days; he did not leave a telephone number where he could be reached. On May 22, 1997 the CBOE responded with a letter sent by regular and certified mail to Lubin's business address. This letter stated in its entirety:
The Chicago Board Options Exchange's Department of Market Regulation, in connection with an investigation into the above referenced matter, has, on numerous occasions, attempted to arrange a suitable time for you to provide testimony to the Exchange for the last sixty (60) days. To date, the staff has been unsuccessful in doing so.
This is to advise you that Exchange Rule 17.2(b) reads, in part, 'No member or persons associated with a member shall impede or delay an Exchange investigation respecting possible violations within the disciplinary jurisdiction of the Exchange, nor refuse to furnish testimony [emphasis in original letter], documentary materials or other information requested by the Exchange during the course of its investigation.' A copy of Exchange Rule 17.2 is attached.
Please be advised that you are instructed to contact the staff no later than May 30, 1997 and provide a telephone number for the tape recorded interview to be conducted with you concerning the above captioned matter at 3:00PM on June 2nd. Failure to do so will result in [the] staff making a recommendation to the Business Conduct Committee for disciplinary action under Exchange Rule 17.2
In a facsimile transmission to the CBOE dated May 29, 1997, Lubin complained that the May 22 letter was "threatening," and asserted that he would not be "rushed" or "harassed" to comply withthe CBOE's requests for his testimony. The transmission did not provide a telephone number as the CBOE had requested. Lubin's only other response to the CBOE's May 22 letter was to leave a CBOE staff investigator a voice message on June 2, 1997 at 2:30 p.m.(CST), stating:
This is Michael Lubin once again. I guess we can't have the interview at the time you [emphasis in original] set up. So how dare you send me a letter like that ever again. Good-bye!
On June 3, 1997 the CBOE contacted and obtained from the American Stock Exchange LLC ("AMEX") a business telephone number for Lubin.18 The vice president of the CBOE's Department of Market Regulation ("DMR") reached Lubin at this number on June 6, 1997. Lubin indicated that he wanted to cooperate; he requested and was granted ten days to secure counsel. However, he changed his mind again and, by facsimile transmission dated June 12, advised the CBOE that he would proceed "pro se." Lubin also "insist[ed]" that, before any tape-recorded interview, the following "conditions" be agreed to:
a written retraction of all allegations . . . as we all know that they are completely unfounded and can certainly be viewed as an extreme form of harassment and could possibly be construed as libelous[,] a demonstration from the CBOE of any and all documents that I have signed including any [E]xchange rules which you believe give you the jurisdictional authority to compel me to testify . . . [and] a guideline or outline of the questions you intend to ask . . . .
In a certified letter dated June 23, 1997 and sent to Lubin's business address, the DMR provided Lubin with questions that his testimony was "generally intended to answer" and enclosed a copy of Exchange Rule 17.1 entitled "Disciplinary Jurisdiction." In addition, Lubin was advised that "no allegations have been made against you at this time"; the investigation involving Mitoric was inthe "fact finding stage"; and his testimony was "important to all parties concerned."19
Still Lubin evaded the taking of his testimony. By voice message on July 22, Lubin advised the DMR that he was on vacation and would telephone the CBOE "after the middle of August." On August 6, Lubin left a voice message for the DMR stating that he would call "later"; he did not leave a telephone number where he could be reached.
On August 7, Lubin again telephoned the DMR. He left a voice message stating that he would be on vacation and not at his office number, and left a cellular telephone number where he said he could be reached. From this date through August 11, 1997, staff attempts to reach Lubin at the cellular telephone number he provided were unsuccessful; there was never any answer.
Lubin again communicated with the CBOE on August 14, 1997; he left the DMR a voice message stating that he "assumed" that his testimony was no longer necessary since he had not heard from the CBOE. In response, the DMR attempted to reach Lubin at his cellular telephone number; there was no answer. On the same day, the DMR reached Lubin at his business telephone number and advised him that his testimony was required. Lubin informed the DMR that he would send a written letter, which should resolve "all" of the CBOE's "concerns."
Later on the same day, Lubin sent the CBOE a facsimile transmission of nine lines of text, ostensibly responding to the questions posed in the CBOE's letter of June 23, 1997. This transmission asserted that Irwin Segal initiated all orders for Mitoric and that on "several occasions" Lubin was asked to "watch orders for Mitoric that he [Irwin Segal] gave to Associated (the only trading floor firm that accepted orders for Mitoric)." Lubin also claimed that he and Irwin Segal received copies of all trade confirmations.
The August 14 transmission was very general and not fully responsive to the CBOE's questions. For example, although specifically requested by the CBOE in its June 23 letter, Lubin neither explained the manner in which the orders at issue wereentered on the CBOE floor and the trade confirmations received, nor provided the names of individuals who accepted the orders from Mitoric. Lubin's transmission advised the CBOE that he would be unavailable to provide "any additional information or a clarification" until "after Labor Day." At this point, the CBOE ceased attempts to contact Lubin. The record amply demonstrates that any such attempt would have been an exercise in futility.
At no time during the CBOE's investigation did Lubin furnish testimony. Lubin's responses to the CBOE's June 23 letter were incomplete and did not relieve him of his obligation "fully and promptly" to furnish testimony and information requested.20 He was called as a hostile witness by the CBOE during the disciplinary hearing.
An investigation by a self-regulatory organization ("SRO") such as the CBOE is not a game of hide-and-seek. In the absence of subpoena power, an SRO must rely on the cooperation of associated persons to obtain information necessary to conduct investigations.21 Lubin's behavior demonstrates a pattern of avoidance and evasion of the CBOE's investigatory process. Over a period of five months, he ignored repeated Exchange requests and warnings about the consequences of his continued failure to testify and provide information. Instead of leaving messages that included a convenient time and telephone number where he could be reached, Lubin either left no telephone number or provided a telephone number at which there was never any answer. Rather than make more than one attempt to reach the CBOE investigator on the day of the scheduled May 19 interview, Lubin asserted: "I didn't have a minute that day." Lubin never gave any explanation for his refusal to submit to scheduled testimony in June 1997. Neither Lubin's insubstantial, conclusory facsimile transmission of August 14, 1997 nor his eventual testimony at the hearing cured his failure to furnish testimony and information requested by the CBOE.
We previously have said that an SRO "should not have to bring a disciplinary proceeding and entertain an appeal in order to obtain compliance with its rules relating to investigations."22 Moreover, Lubin could not decide unilaterally that the CBOE did not need any further information or that his testimony was no longer needed. Nor could he impose conditions under which he would provide information to the CBOE, "including determining the appropriate time for responding to such requests."23 The CBOE's finding that Lubin impeded and delayed the CBOE's investigation into his conduct is amply supported by the record. Lubin's failure to cooperate subverted the ability of the CBOE to perform its investigation.24
Lubin argues that "[it] was due to the CBOE's incompetence that the investigation was delayed." He claims, among other things, that he "cooperated with the Exchange's every request immediately" and that he attempted to subject himself to the interview scheduled for May 19, 1997, but the investigator "intentionally" did not take his call. Lubin further argues that he would have submitted to an interview, if the CBOE had "asked the right way" by providing him with "15 days notice and just something without a threatening nature."
The record belies Lubin's allegations. Lubin never responded in a cooperative way to the CBOE's requests for information or to schedule his testimony, but engaged in "extraordinarily dilatory tactics"25 which were tantamount to a failure to cooperate. There is no basis for Lubin's assertion that the investigator"intentionally" missed his call. Nor can he complain that he was not given adequate notice -- more than four months after its initial request for testimony, the CBOE was still negotiating a date. Our review of the CBOE's correspondence with Lubin reveals nothing threatening or improper in either content or tone.
Accordingly, we conclude that, in violation of Exchange Rule 17.2(b), Lubin failed timely and fully to furnish testimony and information to the CBOE in connection with its investigation of alleged improper off-floor trades entered into the Segals' market-maker accounts.
A. Lubin raises a variety of procedural issues. Lubin asserts that he was denied "due process" in violation of Exchange Rule 17.2(d) because in "every letter without exception . . . there was not a single instance" in which he was given 15 days to respond.26 For example, Lubin cites letters dated April 2, April 23, and May 6, 1997 that requested that he contact the CBOE within 7 seven days of receipt of the letters to schedule an interview, the letter of May 22, 1997 that instructed him to contact the Exchange by May 30, and the letters of August 21, 1998 and October 26, 1998 that gave him 15 days from the dates of the letters to submit a Wells Letter. Lubin claims that under Rule 17.2(d), he should have been given "15 days from the date of receipt of notice to respond" to each of these Exchange requests. We disagree.
Rule 17.2(d) grants the subject of an Exchange investigation 15 days from the date of the notification to submit a Wells Letter; this rule does not apply to Exchange requests for testimony. There is no Exchange rule that expressly sets a time period for responding to such a request. Moreover, the April letters and the May 6 letter do not even request that Lubin testify on a certain date; they simply direct him to contact the staff to schedule a date for his testimony.
We find that Lubin was given the time required under Rule 17.2(d) to submit his Wells Letter. The CBOE Wells notificationletter of August 21, 1998 was not postmarked until September 11, 1998; the CBOE received a certified mail receipt for this letter on September 15. Notwithstanding Lubin's acknowledged receipt, when Lubin complained about the late postmark, the CBOE sent a second Wells notification letter dated October 26, 1998. At Lubin's request, the CBOE by letter dated November 5, 1998 granted him an extension until November 20, 1998 to submit his Wells Letter. This submission date was well over 15 days beyond the original September 11 service date, the September 15 receipt date, and the October 26 date of the second Wells notification letter. The November 5 letter even advised Lubin that, if he chose, he could submit his Wells Letter on December 2, 1998, the date the Business Conduct Committee would consider the allegations against him.27
B. Lubin contends that he was given only 14 days to respond to the Statement of Charges, in violation of Rule 17.5.28 This contention is without merit. The cover letter to the Statement of Charges dated December 9, 1998 states that "you shall have 15 days after service of the Statement of Charges to file a written answer thereto." By facsimile transmission dated December 22, 1998 Lubin acknowledged receipt of the Statement of Charges and requested access to the CBOE's investigative file under Exchange Rule 17.4(c).29 Inresponse to Lubin's written request on January 14, 1999, the CBOE, by letter of the same date, granted Lubin a "second"30 extension until January 26, 1999 to file his Answer to the Statement of Charges (seventeen days after his receipt of the documents and over a month after his acknowledged receipt of the Statement of Charges). Lubin submitted his Answer on January 25, 1999. We find that the CBOE gave Lubin more time than is required by Rule 17.5.
C. Lubin contends that paragraphs 9 and 12 of the Statement of Charges (which allege that he failed to provide testimony and information to the CBOE and impeded and delayed the CBOE's investigation, in violation of Exchange Rule 17.2) "contradict" the June 23, 1997 letter from the CBOE which states that "no allegations have been made against you at this time." Lubin is incorrect. As of the date of the CBOE's June 23 letter, the investigation was ongoing. The letter correctly advised Lubin that no allegations had been made against him when the letter was written. The Statement of Charges was issued subsequent to the CBOE's June 23 letter, after the CBOE staff concluded its investigation and following the Business Conduct Committee's review of the staff's investigative report and the Committee's decision to institute disciplinary action. We find no contradiction between the two documents.
D. Lubin makes a number of claims regarding CBOE staff misconduct. He describes staff members as "dangerous" and "wicked." He contends that the staff was "biased" and engaged in a "premeditated conspiracy" to harass and intimidate him. Lubin does not substantiate any of these claims other than by arguing the various procedural irregularities discussed above, which he seems to believe are proof of a conspiracy against him. As we concluded above, there is no merit to these assertions. There is no indication in the record that CBOE staff was unfair or not impartial in any way. Lubin was afforded a full opportunity before and during the hearing to present arguments and testimony, to cross-examine witnesses calledby the CBOE at the hearing, and to make all appropriate appeals and arguments in support.31
Lubin challenges the CBOE's sanctions as inconsistent with "smaller settlements" and "current [CBOE] sanction guidelines." 32 Determining whether sanctions are appropriate depends upon the facts and circumstances of each case.33
Lubin is correct that the monetary sanction against him is more severe than in the precedent cited. However, all of these cited cases involve settlements except one default decision,34 and it is well established that sanctions in settled cases may differ from those in litigated matters.35
Lubin's improper off-floor trading and evasion of the CBOE's investigation constitute serious violations involving a pattern of misconduct occurring over a significant period of time. We also find it significant that Lubin previously was disciplined by the AMEX for similar trading misconduct, and by the Philadelphia Stock Exchangefor excessive options trading in accounts in which he had an interest.36
We may modify the sanctions assessed by an SRO only if we conclude that they are excessive, oppressive, or impose an undue burden on competition.37 Given the gravity of Lubin's misconduct, we cannot make such a finding. Rather, we would have been prepared to find significantly stronger sanctions appropriate under the circumstances.
An appropriate order will issue.38
By the Commission (Chairman PITT and Commissioner UNGER).
Jonathan G. Katz
Admin. Proc. File No. 3-10183
In the Matter of the Application of
For Review of Disciplinary Action Taken by the
CHICAGO BOARD OPTIONS EXCHANGE, INC.
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED OPTIONS EXCHANGE
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the Chicago Board Options Exchange, Inc. against Michael Lubin be, and it hereby is, sustained.
By the Commission.
Jonathan G. Katz
|1||Applicant's appeal includes a request for both compensatory and punitive damages. The Commission has no statutory authority to consider such a request. Applicant's further request that CBOE staff conduct be investigated has been forwarded to the appropriate Commission offices for their consideration.|
|2||Mitoric was registered to transact business on the Exchange as a lessee organization and as a member organization associated with a market maker. Irwin Segal was a principal of Mitoric. Irwin Segal and Jeffrey Segal were registered with the Exchange to transact business as market makers and nominees of Mitoric. Irwin and Jeffrey Segal and Mitoric were charged by the CBOE in a separate action. They settled that action.|
|3||Exchange Rule 8.1 states in pertinent part that: "[a] Market-Maker is an individual (either a member or nominee of a member organization) . . . . Only transactions that are either (i) initiated on the floor of the Exchange or (ii) initiated from off the floor by a Market-Maker who elects to receive Market-Maker treatment for off-floor orders and who thereby becomes subject to the special requirements of paragraph B of Interpretation and Policy .03 under Rule 8.7 pertaining to Market-Maker treatment for off-floor orders shall count as Market-Maker transactions for the purposes of this Chapter and Rules 3.1 [members to conduct a "Public Securities Business"]and 12.3(b)(2) [establishes minimum "Margin Requirements-Customer Margin Accounts"]. The CBOE also found that Lubin's conduct violated Rule 4.1, which provides that "[n]o member shall engage in acts or practices inconsistent with just and equitable principles of trade."|
|4||Exchange Rule 17.2(b) requires that "[e]ach member and person associated with a member shall be obligated upon request by the Exchange to appear and testify, and to . . . furnish documentary materials and other information requested by the Exchange in connection with (i) an investigation . . . . No member or person associated with a member shall impede or delay an Exchange investigation or proceeding conducted pursuant to this Chapter . . . nor refuse to comply with a request made by the Exchange pursuant to this paragraph . . . ."|
|5||On August 17, 2000, the Commission granted a partial stay of the sanctions imposed on Lubin. See Michael Lubin, Order Granting Stay of Obligation to Pay Fine, Admin. Proc. File No. 3-10183 (August 17, 2000). Lubin did not seek a stay of the censure or bar.|
|6||In his brief in this appeal, Lubin denies receipt of the April 23, 1997 letter, contradicting his admission in his Motion to Dismiss before the CBOE. Lubin offers no explanation for his change in position and we accordingly see no reason to credit his revised stance. Even if Lubin did not receive the April 23 letter, however, he acknowledges receiving the CBOE's letter dated May 6, 1997, which was within the one-year deadline set forth in Rule 17.1.|
|7||Under Exchange Rule 17.2 subjects of CBOE investigations may submit a written statement, which the CBOE refers to as a"Wells Letter," to the CBOE's Business Conduct Committee, giving reasons why no disciplinary action should be taken against them. In this opinion we refer to the CBOE letter requesting such a statement as a "Wells" notification letter.|
|8||Exchange Rule 17.2 sets forth the Wells Letter process. Subsection (d) mandates that "[p]rior to submitting its report, the staff shall notify the person(s) who is the subject of the report . . . of the general nature of the allegations and of the specific provisions of the Exchange Act . . . or rules of the Exchange . . . that appear to have been violated . . . . [The person] shall have 15 days from the date of the notification . . . to submit a written statement to the [Business Conduct] Committee concerning why no disciplinary action should be taken. To assist . . . in preparing such a written statement, [the person] shall have access to any documents and other materials in the investigative file of the Exchange that were furnished by him or his agents."|
|9||Exchange Rule 3.6(a) states that "[p]ersons associated with member organizations shall be bound by the Constitution and Rules of the Exchange." By signing the Consent Form, an associated person affirms that "I hereby agree to abide by the Constitution and Rules of the Chicago Board Options Exchange as they shall be in effect from time to time."|
|10||Lubin filed a Motion to Compel the testimony of, among others, Mary Bender, Exchange Senior Vice President of Regulatory Services, in connection with his allegation that the CBOE lacked jurisdiction over him because the Consent Form he signed and filed with the CBOE was "subsequent[ly] alter[ed]" by an Exchange employee. In reply to Lubin's Motion, the CBOE argued that Bender was not involved in the investigation during 1996 and 1997, and became involved in the case only in the Fall of 1998. Barbara Casey, Exchange Vice President in charge of the Department of Market Regulation and responsible for the day-to-day running of the Department, testified at the hearing and was cross-examined by Lubin. Since the Consent Form is irrelevant to the CBOE's establishment of jurisdiction over Lubin, the CBOE's denial of Lubin's Motion to Compel Bender's testimony regarding its alleged alteration could not, as Lubin argues, constitute reversible error.|
|11||"Initiated is defined as making the ultimate decision to enter a purchase or sale order or entering into an in-person transaction." Exchange Regulatory Circular RG-95-15.|
|12||By entering orders in the Segals' market-maker accounts, Lubin caused the trades improperly to be treated as market-maker transactions. Market-maker transactions that clear in market-maker accounts receive favorable margin and capital treatment pursuant to Exchange Rule 12.3 ["Margin Requirements"], Rule 15c3-1 under the Securities Exchange Act of 1934 ["Net Capital Requirements"], and Federal Reserve Board Regulations X ["Borrowers of Securities Credit"] and T ["Credit by Brokers and Dealers"]. "This favorable treatment is given to Market-Makers in order to aid the Market-Maker in fulfilling his obligation to maintain a fair and orderly market in securities in which he deals . . . . Orders initiated from off the floor by a Market-Maker who elects to receive Market-Maker treatment for off-floor orders under Rule 8.1 [are] subject to the requirement that at least 80% of his total transactions (including closing transactions) during the same calendar quarter must be executed in person and that any off[-]floor orders must be for the purpose of hedging, reducing risk of, rebalancing or liquidating open positions of the Market-Maker." Exchange Regulatory Circular RG-96-32. These rules and regulations are designed to protect the interests both of market makers who, by virtue of their status, represent that they are able to satisfy the financial responsibilities of their trading decisions, and of the Exchange. Lubin was neither authorized to act as a market maker nor to have his trades receive the benefits that accrue to a market maker's transactions. See n.3, supra.|
|13|| Exchange Regulatory Circular RG-96-32 states that, "[o]nly a Market-Maker on a seat may initiate an order for his Market-Maker account . . . . Clerks and other members or non-members may not initiate orders for a Market-Maker's account."
Exchange Regulatory Circular RG-95-15 states that "any order initiated by a market-maker while he is on the trading floor must be personally initialed by the initiating market- maker."
|14||The credibility determination of an initial decision maker is entitled to considerable weight and deference, since it is based on hearing the witnesses' testimony and observing their demeanor. Keith L. DeSanto, 52 S.E.C. 316, 319 (1995), aff'd, 101 F.3d 108 (2d Cir. 1996). "Such determinations can be overcome only where the record contains substantial evidence for doing so." Anthony Tricarico, 51 S.E.C. 457, 460 (1993).|
|15||No specific orders, or number of orders, are identified in the Statement of Charges. In response to Lubin's request by letter dated November 5, 1998, the CBOE provided Lubin with a copy of a chart, prepared by a CBOE investigator, documenting the approximately 40 occasions where one of the Segals executed a trade in person at the same time or within a few minutes of the time when Lubin allegedly entered an order at a floor broker'sdesk for one of the Segals' market-maker accounts. During the hearing, the CBOE introduced this chart into evidence through Megan Flaherty, Chief Investigator in the Department of Market Regulation. Lubin had an opportunity to cross-examine the witness.|
|16||It is possible that some of the 40 trades identified as improper were entered by Franklin, and the record does not address whether any such trades would have been made pursuant to Lubin's direction. However, the record does establish that at least ten of the improper trades were executed by Lubin.|
|17||Although the record is unclear as to whether Lubin received a number of Exchange letters, Lubin cannot claim lack of notice or divest the CBOE of jurisdiction by changing his address or refusing to accept certified mail. See Gold v. SEC, 48 F.3d 987, 992-93 (7th Cir. 1995) (Self-regulatory organization retained jurisdiction over a member firm employee because it provided constructive notice of its investigation when it sent letters by regular and certified mail to his last known address, even though those letters were returned as undeliverable). See n.6, supra.|
|18||Prior to his association with the CBOE, Lubin was a member of the Philadelphia Stock Exchange, Inc. and the AMEX.|
|19||This letter also advised Lubin that "if the language in our letter to you dated May 22, 1997 offended you in any way, [we] sincerely apologize."|
|20||See Mark Allen Elliott, 51 S.E.C. 1148, 1150 (1994).|
|21||Richard J. Rouse, 51 S.E.C. 581, 584 (1993).|
|22||Edward C. Farni, II, 51 S.E.C. 1118, 1120 (1994). See alsoRobert A. Quiel, Exchange Act Rel. No. 39056 (Sept. 11, 1997), 65 SEC Docket 1023, 1026; Charles R. Stedman, 51 S.E.C. 1228, 1232 (1994).|
|23||Charles R. Stedman, 51 S.E.C. at 1231. See Richard J. Rouse, 51 S.E.C. at 585-86.|
|24||See Mark Allen Elliott, 51 S.E.C. at 1151; John A. Malach, 51 S.E.C. 618, 621 (1993).|
|25||Jonathan Garrett Ornstein, 51 S.E.C. 135, 140 (1992) (applicant failed to cooperate where he did not respond to correspondence from the National Association of Securities Dealers ("NASD"), refused and did not claim certified mail from the NASD, failed to timely notify the NASD of a new mailing address, and promised but failed to return telephone calls from NASD staff). See also Wedbush Securities, Inc. (f/k/a Wedbush Noble, Cooke, Inc.), 48 S.E.C. 963, 971-72 (1988); Gold v. SEC, 48 F.3d at 992-93.|
|26||See n.8, supra.|
|27||Lubin's Wells Letter was dated November 18, 1998.|
|28||Rule 17.5 provides that "[the respondent shall have 15 days after service of the charges to file a written answer thereto . . . ." Pursuant to Rule 17.12 service is effective on mailing. See n.16, supra.|
|29|| Rule 17.4(c) states that: "[p]rovided that a Respondent has made a written request for access to documents described hereunder within 60 calendar days after a statement of charges has been served upon the Respondent . . . Respondent shall have access to all documents concerning the case that are in the investigative file of the Exchange except for staff investigation and examination reports and materials prepared by the staff in anticipation of a disciplinary hearing . . . ." Lubin received the documents requested on January 9, 1999.
CBOE staff advised Lubin in a letter dated December 30, 1998 that "respondents typically do not obtain Rule 17.4(c) access until after they have answered the Statement of Charges." Lubin asserted that the staff's position "was a deliberate attempt to have him incriminate himself." We do not agree with Lubin's characterization, and in any event, he received the documents prior to submission of his answer.
|30||The record is unclear as to the date of Lubin's initial request for an extension to answer the Statement of Charges and the CBOE's first extension date.|
|31||The CBOE appropriately denied Lubin's Motion to Compel the testimony of Andrew Spiwak, Director of the CBOE's Office of Enforcement in the Legal Division, and lead counsel for the CBOE in this matter. In its reply to Lubin's Motion to Compel, the CBOE states that "the investigative and enforcement functions of the Exchange are conducted by different divisions of the Exchange, which report to different supervisors. Spiwak is not an Exchange investigator, but instead is the Exchange's chief enforcement attorney, who did not even involve himself in this matter until the point at which the Statement of Charges was being issued against Lubin in December of 1998." Spiwak, a primary target of Lubin's allegations of staff misconduct, did not supervise the investigation as Lubin claims. Lubin failed to specify any "rights" Spiwak denied him or otherwise to establish the relevancy of any testimony Spiwak might give.|
|32||During the disciplinary hearing, CBOE enforcement staff cited CBOE precedent for the sanctions recommended against Lubin. Lubin fails to cite any other precedent for any "smaller" Exchange sanctions imposed in similar cases. The CBOE does not have any specific written sanction guidelines.|
|33||Butz v. Glover Livestock Commission Co., 411 U.S. 182, 187 (1973).|
|34||See In re Barton P. Smith, CBOE File No. 97-0006 (June 4, 1997). In that case respondent was censured and barred from membership and association with an Exchange member or member organization for a period of two consecutive years for engaging in unauthorized options trading in a customer account and impeding and delaying an Exchange investigation; there was no monetary sanction. Since the two-year bar imposed on respondent was significantly longer than the one-month bar challenged by Lubin in this appeal, the case does not support Lubin's claim that the CBOE imposed a harsher sanction on him than in comparable disciplinary matters.|
|35||See David A. Gingras, 50 S.E.C. 1286, 1294 (1992).|
|36||According to the Stipulation, in 1986 the AMEX censured Lubin and imposed a joint and several fine of $10,000 against him. Under the terms of an Offer of Settlement, the Philadelphia Stock Exchange fined Lubin $2500 in 1982.|
|37||In his motion requesting a stay of the fine, Lubin claimed an inability to pay. Our order granting the stay noted Lubin's failure to provide information requested in the instructions to the Summary Financial Disclosure Statement which Lubin submitted with that motion, including "any federal tax returns filed" for the year of the violation "and all subsequent years," as well as a list of assets and schedules of any payments or disbursements by others on the applicant's behalf. See n.5, supra. Since issuance of our order, Lubin has not corrected these deficiencies or otherwise proved that he is unable to pay the fine. As the motion observed, the burden of demonstrating inability to pay rests with the applicant. See, e.g., Toney L. Reed, 52 S.E.C. 944, 947 n.12 (1996).|
|38||We have considered all of the arguments and contentions made by Applicant. We reject or accept these arguments and contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.|