SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37572 \ August 14, 1996 Admin. Proc. File No. 3-8013 _________________________________________________ : In the Matter of the Application of : : TONEY L. REED : 3721 Millswood Drive : Irving, Texas 75062 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.: _________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDING Restitution Where Commission remanded proceeding for association to evaluate in first instance evidence respondent sought to introduce to Commission relevant to, among other things, respondent's ability to pay restitution order, but association declined to consider such evidence, held, restitution order vacated and proceeding again remanded with directive that association consider respondent's financial ability to make restitution. APPEARANCES: Toney L. Reed, pro se. T. Grant Callery and Deborah F. McIlroy, for the National Association of Securities Dealers, Inc. Appeal filed: February 21, 1995 Last brief filed: May 10, 1995 I. Toney L. Reed, during the relevant period the president and general securities principal of T.L. Reed Securities, Inc. ("Firm"), 1/ a former member of the National Association of Securities Dealers, Inc. ("NASD" or "Association"), again appeals 1/ The District Business Conduct Committee dismissed the Firm as a respondent in this disciplinary proceeding because the Firm had been liquidated in bankruptcy. ==========================================START OF PAGE 2====== from NASD disciplinary action. On remand of this proceeding, the NASD ordered Reed to pay restitution in the amount of $37,626.60. On review of Reed's initial appeal in 1994 we sustained both the NASD's findings that, among other things, the Firm, through Reed, charged customers excessive markups in the sale of securities, in violation of Sections 1 and 4 of the NASD Rules of Fair Practice ("NASD Rules"), and the following NASD-imposed sanctions against Reed: a censure, $25,000 fine, a one-year principal suspension and a requirement that Reed requalify by examination as a principal before acting in such capacity. 2/ We remanded, however, the NASD's further order that Reed make restitution of $40,175 to the customers who were charged excessive markups. This remand was prompted by Reed's proffer to us of certain evidence that he considered material to show the nature of his ownership interest in the Firm, the Firm's corporate structure, the monetary amounts that actually inured to his benefit, and his ability to pay restitution. 3/ Rather than admit and consider such evidence ourselves in the first instance, we directed that the NASD evaluate it and order an equitable outcome, in light of the evidence and our opinion. 4/ Our findings here are based on an independent review of the record. 5/ II. In its decision on remand, the National Business Conduct Committee ("National Committee") modified its initial restitution order only to the extent of recalculating the amount of the order in an effort to reflect our determination regarding the appro- 2/ Toney L. Reed, 51 S.E.C. 1009 (1994). We also sustained (1) the NASD's uncontested findings that Reed was responsible for various registration, supervision, recordkeeping, and reporting violations and thus violated Article III, Sections 1, 21, and 27 of the NASD Rules (id. at 1012), and (2) the NASD's imposition of costs (id. at 1014). 3/ Reed did not introduce this evidence before the NASD because the National Business Conduct Committee imposed the order of restitution on its review of the matter. 4/ 51 S.E.C. at 1014. 5/ On this second appeal, Reed again contests certain NASD findings that we sustained on his first appeal. We will not reexamine these findings. Bruce Martin Zipper, Securities Exchange Act of 1934 Release No. 35606 (April 17, 1995), 59 SEC Docket 332. ==========================================START OF PAGE 3====== priate respective prevailing market prices for the stock. 6/ In doing so, the National Committee rejected Reed's contention that he should not be responsible for restitution to the customers at issue because he had not profited personally to any substantial degree from the excessive markups charged these customers. We agree with this determination. As we stated in our initial opinion in this matter, an order for restitution properly may seek to restore customers' respective positions by returning to them the funds of which they were deprived. 7/ The amount awarded may exceed that by which the wrongdoer was unjustly enriched, if equity demands that the wrongdoer, rather than the customer, bear the loss. 8/ Such is the case here. As the National Committee observed, Reed was the Firm's president and general principal and owned a significant portion of the holding company that owned the Firm. He also was the individual who was involved actively in both the purchase of the stock for the Firm and the resale of that stock to the Firm's customers at excessive prices. Thus, it is equitable to require him to compensate those he injured by his pricing determinations. Moreover, it can be no surprise to Reed that the restitutionary amount was pegged to the prevailing market price of the stock. The NASD's Sanction Guidelines specify that, in sanctioning for markup/markdown violations, consideration should be given to requiring restitution to customers of the excess amount of the markup or markdown. 9/ 6/ The NASD initially had used a single base price of 52-1/2 cents (reflecting a Firm purchase of the stock in question on April 5, 1988). We found instead that for twenty-one retail sales by the Firm on April 6, 1988, the prevailing market price was 52-1/2 cents; for twenty-four retail sales on April 13 and 14, the prevailing market price was 51-1/2 cents; for eleven transactions between April 20 and May 20, the prevailing market price was 62-1/2 cents; and for an additional seven transactions during June 1988 the prevailing market price ranged from 52 cents to 62-1/2 cents. See Toney L. Reed, 51 S.E.C. at 1011-12. On remand, in deriving its modified restitution award, the NASD mistakenly utilized a base price of 52 cents for each of the seven transactions that took place during June 1988. When recalculated in accordance with our opinion (finding a prevailing market price of 62-1/2 cents for the last three June 1988 transactions), the revised restitution amount is $36,746.60, not $37,626.60. 7/ 51 S.E.C. at 1013. 8/ Restatement of Restitution,  1 cmt. e (1937), cited in Toney L. Reed, 51 S.E.C. at 1013 n.15. 9/ NASD Sanction Guidelines at 33 (1996). ==========================================START OF PAGE 4====== The National Committee further determined that it would not consider evidence of Reed's financial ability to pay restitution. We regard directing the NASD to consider Reed's financial ability to pay restitution as required by the Securities Exchange Act of 1934, which mandates that we determine whether a sanction is excessive or oppressive when reviewing an NASD disciplinary action on appeal. The National Committee's determinations, in the face of Reed's claim of bona fide inability to pay, not to consider that claim and to confirm its order directing that Reed pay restitution, appear to us to be unduly harsh. 10/ Accordingly, we vacate the restitution order and again remand this matter to the National Committee for its consideration of Reed's financial ability to make restitution. In doing so, we reiterate our preference that the NASD issue orders of restitution, in contrast to fines payable to the NASD, in instances in which losses have been suffered by identifiable customers as a result of a respondent's misconduct. 11/ We 10/ In this regard, we understand that it is the NASD's practice to revoke the registrations of respondents who fail to comply with NASD orders requiring payment of restitution. See, e.g., District Staff Memorandum 92-15/Regional Attorney Memorandum 92-14 from John E. Pinto and William R. Schief, NASD, to NASD District Directors, Regional Anti-Fraud and Market Surveillance Attorneys, at 5 (stating that if NASD staff does not receive timely payment of restitution ordered "the [NASD Market] Surveillance Department will send a letter to the respondent indicating that his NASD registration will be revoked pursuant to the By-Laws if the restitution and interest amount is not paid within 15 days"); id. (advising that it is the NASD staff's "responsibility to closely monitor and control those cases involving restitution so that [the NASD Market] Surveillance [Department] can initiate its revocation/expulsion efforts"). 11/ See, e.g., David Joseph Dambro, 51 S.E.C. 513, 518-19 (1993) ("The NASD clearly could have ordered the same amount paid to it as a fine. By instead ordering the money to be paid to the customer, the NASD custom-tailored the sanction to fit precisely the circumstances of the case."). Compare Investment Planning, Inc., 51 S.E.C. 592, 600 n.36 (1993) (stating that, in future cases, the "NASD should take care that . . . a measure [of disgorgement] is included in the sanctions"). In light of the practical consequence to NASD members and associated persons of a failure to pay ordered restitution -- registration revocation -- the NASD may wish to consider moderating the financial impact of restitution awards by making available a program similar to the installment payment program for payment of disciplinary sanctions to (continued...) ==========================================START OF PAGE 5====== also stress that, in requiring the NASD to consider Reed's financial ability to make restitution, we by no means wish to suggest what the outcome of that consideration should be. 12/ An appropriate order will issue. 13/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, and JOHNSON); Commissioner HUNT not participating. Jonathan G. Katz Secretary 11/(...continued) which we referred in our first opinion in this matter (see Toney L. Reed, 51 S.E.C at 1014 n.25). Additionally, the NASD may wish to consider, in future cases in which a respondent demonstrates bona fide inability to pay both a disciplinary fine and a restitution order, waiving a portion of the fine assessed in order to ensure that restitution is made. 12/ Reed, like any respondent raising the issue of his or her personal financial circumstances as they affect ability to pay a restitution order, has the burden of producing evidence in support of the claim and of proving bona fide insolvency. Compare 18 U.S.C. 3664(d) (Victim and Witness Protection Act provision that imposes on criminal defendant burden of demonstrating he or she lacks financial resources to comply with restitution order), discussed in United States v. Reese, 998 F.2d 1275, 1280-82 (5th Cir. 1993). We note that the (now-dated) financial disclosure information Reed provided reflects that Reed's total assets would exceed total liabilities if the sum of the restitution order and monetary fine assessed in this disciplinary proceeding is not included among Reed's liabilities. 13/ All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37572 \ August 14, 1996 Admin. Proc. File No. 3-8013 _________________________________________________ : In the Matter of the Application of : : TONEY L. REED : 3721 Millswood Drive : Irving, Texas 75062 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.: _________________________________________________: ORDER REMANDING DISCIPLINARY PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the order of restitution entered by the National Association of Securities Dealers, Inc. against Toney L. Reed be and it hereby is vacated, and that this proceeding be and it hereby is remanded to the Association for a determination, consistent with this opinion, of the appropriateness of such restitution. By the Commission. Jonathan G. Katz Secretary