SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40010 / May 20, 1998 INVESTMENT ADVISERS ACT OF 1940 Rel. No. 1722 / May 20, 1998 Admin. Proc. File No. 3-8394 : In the Matter of : : VICTOR TEICHER : VICTOR TEICHER & CO., L.P. : New York, New York : : ROSS S. FRANKEL : 5 Seymour Place East : Armonk, New York : : OPINION OF THE COMMISSION BROKER-DEALER AND INVESTMENT ADVISER PROCEEDINGS Jurisdiction The Commission is authorized under Section 203(f) of the Investment Advisers Act to bring proceedings against and sanction persons associated with unregistered investment advisers. Grounds for Remedial Action Criminal Convictions Injunction The partner of an unregistered investment adviser and the vice president of a registered broker-dealer were convicted, among other things, of securities fraud. The vice president was also enjoined and convicted of perjury and obstruction of justice in connection with a Commission investigation. Held, it is in the public interest to bar partner from association with any unregistered investment adviser, and to impose a collateral bar on vice president barring him from association with any investment adviser, registered or unregistered. APPEARANCES: Robert G. Morvillo, Catherine M. Foti, and John T. Hecht, of Morvillo, Abramowitz, Grand, Jason & Silberberg, P.C., for Victor Teicher and Victor Teicher & Co., L.P. Roger J. Bernstein, for Ross S. Frankel. Richard H. Walker, Carmen J. Lawrence, Edwin H. Nordlinger, Robert B. Blackburn, and Dorothy Heyl, for the Commission's Division of Enforcement. Appeal filed: March 13, 1995 Briefing completed: February 12, 1998 Oral argument: March 16, 1998 I. Victor Teicher & Co., L.P. ("Teicher Co."), an unregistered investment adviserexempt from registration under the Investment Advisers Act ("Act"), <(1)> and Victor Teicher, its sole general partner and 75% owner, appeal from the decision of an administrative law judge. Our Division of Enforcement also appeals from that decision with respect to Ross S. Frankel, who was a vice president of Drexel Burnham Lambert, Inc., formerly a registered broker- dealer. Based on the criminal convictions of Teicher Co. and Teicher ("the Teicher respondents") and their stipulation, <(2)> the law judge barred them from association with any broker, dealer, investment company, investment adviser (both registered and unregistered), and municipal securities dealer. On review, the Teicher respondents object only to that portion of the law judge's order that bars them from association with an unregistered investment adviser. They contend that we lack authority under the Act to bring administrative proceedings against and sanction unregistered advisers and their associated persons. On the basis of Frankel's criminal convictions, an injunction against him, and his consent, <(3)> the law judge barred Frankel from association with any broker, dealer, investment company, municipal securities dealer, member of a national securities exchange or member of a 1/ See Section 203(b) of the Act. Although the parties agree on Teicher Co.'s exempt status, the record does not disclose the precise basis for its exemption. 2/ The Teicher respondents agreed to be barred from association with any broker, dealer, investment company, registered investment adviser, or municipal securities dealer. 3/ In his answer to the order for proceedings herein, Frankel expressed his willingness to be barred from association with any broker, dealer, investment company, or municipal securities dealer. ======END OF PAGE 2====== registered securities association. However, the law judge denied the Division's request to bar Frankel from association with any investment adviser. Proceedings against Frankel having been instituted solely under the Securities Exchange Act ("Exchange Act"), the law judge concluded that he had no authority to impose an advisory bar on Frankel. Frankel did not appeal from the law judge's decision. However, the Division has appealed from the law judge's refusal to issue a collateral advisory bar against Frankel. II. From December 1985 to March 1986, Michael David, an associate in the corporate department of Paul, Weiss, Rifkind, Wharton & Garrison, a New York law firm, provided Teicher and Robert Salsbury, a Drexel research analyst, with confidential information concerning possible acquisitions by Paul Weiss clients. In addition, Salsbury provided Teicher with the names of companies on Drexel's "phantom list," a highly confidential list of companies that were the subject of mergers or takeovers by Drexel clients. Frankel was Salsbury's supervisor at Drexel. Salsbury passed on to Frankel confidential information that Salsbury received from David. On April 6, 1990, a jury convicted the Teicher respondents and Frankel of securities fraud for trading on the basis of material, non-public information that they knew had been misappropriated. The three respondents were also convicted of conspiracy, the Teicher respondents of fraud in connection with a tender offer, and Teicher and Frankel of mail fraud. In addition, as a result of giving false testimony in our investigation and destroying pertinent documents, Frankel was convicted of perjury and obstruction of justice. <(4)> On May 18, 1994, in an action brought by this Commission, Frankel was permanently enjoined, with his consent, from further violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. <(5)> III. A. Teicher respondents 4/ Teicher Co. was fined $600,000; Teicher was sentenced to 18 months' imprisonment, placed on probation for five years, and fined $200,000; and Frankel was sentenced to 18 months' imprisonment and fined $10,000. United States v. Victor Teicher & Company, L.P., et al., 88 Cr. 796 (CSH) (S.D.N.Y.). The convictions were affirmed on appeal. United States v. Teicher, 987 F.2d 112 (2d Cir.), cert. denied, 114 S. Ct. 467 (1993). 5/ Frankel was ordered to disgorge his insider trading profits, and to pay prejudgment interest on that amount and a civil penalty under the Insider Trading Sanctions Act. SEC v. Teicher, et al., 91 Civ. 1634 (MP) (S.D.N.Y.). ======END OF PAGE 3====== We turn first to the proceedings against Teicher. Section 203(f) of the Act provides in relevant part as follows: The Commission, by order, shall censure or place limitations on the activities of any person associated, ... or, at the time of the alleged misconduct, associated ... with an investment adviser, or suspend for a period not exceeding twelve months or bar any such person from being associated with an investment adviser, if the Commission [makes the necessary findings after notice and opportunity for hearing.] Section 202(a)(11) of the Act defines "investment adviser" as "any person who, for compensation, engages in the business of advising others ... as to the value of securities or as to the advisability of investing in, purchasing, or selling securities." Section 202(a)(17) defines "person associated with an investment adviser" to include "any partner ... of such investment adviser." It is undisputed that Teicher Co. falls within the Act's definition of investment adviser, and that Teicher was and is a person associated with that firm. Despite the clarity of the statutory language and the total absence of any ambiguity, respondents insist that Section 203(f) authorizes this Commission to take action only against persons associated with registered investment advisers. We see no basis for that interpretation. Nor is it consistent with proper canons of statutory construction. As the Supreme Court has made clear: [I]n interpreting a statute, a court should always turn first to one, cardinal canon before all others. We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there .... When the words of a statute are unambiguous, then this first canon is also the last: judicial inquiry is complete. <(6)> There is no basis for expanding Teicher Co.'s exemption from registration requirements into an exemption of its associated persons from Section 203(f). When Congress chose to exclude exempt advisers from the reach of some of the Act's provisions, it enacted specific language to that effect, as in Section 204 (dealing with required records and reports) and Section 205 (regulating the content of advisory contracts). No such language was inserted into Section 203(f). <(7)> Respondents also 6/ Connecticut National Bank v. Germain, 503 U.S. 249, 253-254 (1992). 7/ As the Supreme Court has stated, "Where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." Russello v. U.S., 464 U.S. 16, 23 (1983). ======END OF PAGE 4====== point to the fact that Section 203 of the Act is entitled "Registration of Investment Advisers." However, "the title of a statute and the heading of a section cannot limit the plain meaning of the text." <(8)> We have dealt with the jurisdictional issue raised by the Teicher respondents before. In prior proceedings under Section 203(f) against persons associated with unregistered advisers, we came to the same conclusion that we reach here; namely, that we have the authority to discipline such persons. <(9)> We have also determined that we have authority under the analogous provision of the Exchange Act, Section 15(b)(6), to discipline persons associated with unregistered broker- dealers. <(10)> We see no reason to depart from our prior determinations. Respondents argue that the legislative history of Section 203(f) shows that Congress intended to limit that provision to persons associated with registered advisers. However, the Supreme Court has stated that where, as here, the statutory language is clear and unambiguous, even "contrary indications in the statute's legislative history" will not be allowed to alter the plain meaning of the text. <(11)> Indeed, "only the most extraordinary showing of contrary intentions [by Congress] [can] justify a limitation on the plain meaning of the statutory language." <(12)> We find no such showing here. While the House and Senate Reports on Section 203(f) speak in one place of strengthening disciplinary controls over registered investment advisers, <(13)> they state in another that this Commission is being given authority to bar or suspend individuals "from associating with an investment adviser," without any indication that our authority is limited to registered advisers. <(14)> We further 8/ Brotherhood of Railroad Trainmen v. Baltimore and Ohio Railroad Co., 331 U.S. 519, 528-529 (1947). <(9)> See Dan King Brainard, 47 S.E.C. 991, 1000 n. 28 (1983); Alexander V. Stein, Investment Advisers Act Release No. 1497 (June 8, 1995), 59 SEC Docket 1493, 1497. 10/ John Kilpatrick, 48 S.E.C. 481, 487 (1986). 11/ Ratzlaf v. U.S., 510 U.S. 135, 147-148 (1994). See also Barnhill v. Johnson, 503 U.S. 393, 401 (1982). 12/ Garcia v. U.S., 469 U.S. 70, 75 (1984). 13/ H.R. Rep. No. 1382, 91st Cong., 2d Sess. 13 (1970); S. Rep. No. 184, 91st Cong., 1st Sess. 44 (1969). 14/ H.R. Rep. No. 1382, supra, at 41; S. Rep. No. 184, supra, at 46-47. ======END OF PAGE 5====== note that "[i]t is not the law that a statute can have no effects which are not explicitly mentioned in its legislative history." <(15)> It is well established that an investment adviser is a fiduciary whose actions must be governed by the highest standards of conduct. <(16)> In light of the extremely serious misconduct in which Teicher engaged, we consider that the public interest requires that he be barred from association with any unregistered investment adviser. Since we have determined to bar Teicher, and it appears that Teicher Co. is merely Teicher's alter ego, we need not address the issues raised with respect to Teicher Co. under Section 203(e) of the Act. B. Frankel As noted above, the proceedings against Frankel were instituted solely under Section 15(b) of the Exchange Act. Frankel, who was associated only with a broker-dealer, argues that we do not have authority under that Act to impose a collateral sanction barring him from association with an investment adviser, registered or unregistered. We recently dealt with the issue of whether we have authority to impose a collateral bar under Section 15(b). After careful and extensive consideration, we determined that we do possess that authority. <(17)> Moreover, we determined that, if a collateral advisory bar is imposed, it will effectively prevent both registered and unregistered advisory activities. <(18)> We see no reason to revisit these conclusions, and we reaffirm them. Frankel argues that the imposition of a collateral bar would deny him due process since the order for proceedings herein did not give him notice that such a bar was at issue. However, even if an administrative pleading is defective, the defect can be remedied if the record demonstrates that the respondent was given notice of the matter in question and afforded a sufficient opportunity to respond. <(19)> Here, at the very outset of hearings in this matter, Division counsel stated that our staff was 15/ Pittston Coal Group v. Sebben, 488 U.S. 105, 115 (1988). 16/ See, e.g., SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-192 (1963); Rosenfeld v. Black, 445 F.2d 1337, 1342-1344 (2d Cir. 1971). 17/ Meyer Blinder, Securities Exchange Act Release No. 39180 (October 1, 1997), 65 SEC Docket 1970, 1974-1981. Commissioner Hunt dissented from the conclusion that this Commission has the authority to impose collateral sanctions. 18/ Id., 65 SEC Docket at 1978-1979. 19/ See Aloha Airlines, Inc. v. CAB, 598 F.2d 250, 261-262 (D.C. Cir. 1979), and the authorities therein cited. ======END OF PAGE 6====== seeking an "industry-wide" bar against Frankel. And Frankel's counsel responded with the same arguments regarding our asserted lack of authority that he is now making to us. Thus, Frankel was clearly given sufficient notice of the collateral bar issue. Frankel further contends that, even assuming we have the authority to impose a collateral advisory bar, we should not impose one on him. He asserts, among other things, that his participation in the Teicher conspiracy was limited to a single security, that he has already been sufficiently punished for his misconduct, that no showing has been made that he engaged in any wrongdoing with respect to a customer or breached a fiduciary duty, and that he has had an unblemished record since 1986. We have stated that, in determining whether to impose a collateral bar, we must consider "whether the misconduct is of the type that, by its nature, `flows across' various securities professions and poses a risk of harm to the investing public in any such profession." We further stated that we must also consider whether the egregiousness of the misconduct shows the need for such a bar in order to protect the public. <(20)> We conclude that Frankel's misconduct warrants the imposition of a collateral bar. The law judge summed up the pertinent circumstances as follows: The conduct of ... Frankel was particularly egregious .... He not only facilitated the theft of confidential material from a law firm but, when discovered, ... destroyed evidence, lied under oath, and otherwise obstructed justice in an attempt to escape liability.... [Frankel] acted with the highest degree of scienter .... [D]uring the hearing, he offered no firm assurances that he would not commit future violations, although he was given a number of opportunities to offer such assurances. We have already pointed out that an investment adviser is a fiduciary who must act in accordance with the highest standards of behavior. We consider that Frankel's egregious misconduct demonstrated ethical lapses that disqualify him from assuming any post involving fiduciary responsibilities. In our view, an advisory bar is necessary to protect the investing public from the risk of harm at Frankel's hands. The public interest requires that he be barred from association with any investment adviser, registered or unregistered. <(21)> 20/ Meyer Blinder, supra, 65 SEC Docket at 1981. 21/ The Division's motion to withdraw its request for oral argument and to file a supplemental brief is granted. That brief and Frankel's reply memorandum are made part of the record herein. 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. ======END OF PAGE 7====== An appropriate order will issue. <(22)> By the Commission (Chairman LEVITT and Commissioners JOHNSON and UNGER); Commissioner HUNT dissenting in part and Commissioner CAREY not participating. Jonathan G. Katz Secretary Commissioner HUNT, dissenting in part: For the very most part, I join my colleagues in this fine opinion. But because I believe that the Commission and its staff may not seek "collateral" suspensions or bars in litigated matters, and should not seek them in settled matters, I dissent from this particular aspect of the bars imposed against Messrs. Frankel and Teicher. See Meyer Blinder, Securities Exchange Act Release No. 39180 (October 1, 1997), 65 SEC Docket 1970, 1982-1989 (Commissioner Hunt, dissenting). 22/ Since the parties sought review only with respect to certain determinations made by the law judge, our order shall give the requisite notice that the remainder of the law judge's decision has become the final decision of this Commission. ======END OF PAGE 8====== UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel No. 40010 / May 20, 1998 INVESTMENT ADVISERS ACT OF 1940 Rel No. 1722 / May 20, 1998 Admin. Proc. File No. 3-8394 : In the Matter of : : VICTOR TEICHER : VICTOR TEICHER & CO., L.P. : New York, New York : : ROSS S. FRANKEL : 5 Seymour Place East : Armonk, New York : : ORDER IMPOSING REMEDIAL SANCTIONS AND NOTICE OF FINALITY On the basis of the Commission's opinion issued this day, it is ORDERED that Victor Teicher be, and he hereby is, barred from association with any unregistered investment adviser; and it is further ORDERED that Ross S. Frankel be, and he hereby is, barred from association with any investment adviser, registered or unregistered. No appeal was taken with respect to the remainder of the administrative law judge's initial decision, and the Commission did not choose to review the decision on its own initiative. Accordingly, notice is hereby given, pursuant to Rule 360(e) of the Commission's Rules of Practice, that the remainder of the law judge's decision has become the final decision of the Commission. The order contained in that decision (1) barring Victor Teicher and Victor Teicher & Co., L.P. from association with any broker, dealer, registered investment adviser, municipal securities dealer or investment company and (2) barring Ross S. Frankel from association with any broker, dealer, municipal securities dealer, investment company, member of a national securities exchange or member of a registered securities association is hereby declared effective. By the Commission. Jonathan G. Katz Secretary