SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45281 / January 15, 2002
Admin. Proc. File No. 3-10183
In the Matter of the Application of MICHAEL LUBIN
For Review of Disciplinary Action Taken by the CHICAGO BOARD OPTIONS EXCHANGE, INC. |
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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
Secretary
Footnotes
| 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. |