SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 41250 / April 5, 1999 Admin. Proc. File No. 3-8531 ________________________________________________ : In the Matter of : : LAURIE JONES CANADY : Rural Route 1 : Council Bluffs, Iowa 51503 : : ________________________________________________: OPINION OF THE COMMISSION BROKER-DEALER PROCEEDING Ground for Remedial Action Fraud in the Offer and Sale of Securities Former salesperson of registered broker-dealer churned customer accounts, engaged in unauthorized and unsuitable trading, and made fraudulent statements and omitted material facts in connection with the offer and sale of securities. Held, it is in the public interest to bar salesperson from association with any broker or dealer; to order salesperson permanently to cease and desist from committing or causing any violation and committing or causing any future violation of Section 17(a) of the Securities Act of 1933 or Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and to order salesperson to disgorge $23,624, less specified set-offs as substantiated by an accounting, plus prejudgment interest. APPEARANCES: Peter A. Cantwell, Paul H. Schleuerlein, and Adrienne R. Watson, of Cantwell & Cantwell, for Laurie Jones Canady. Gregory P. von Schaumburg, Jerrold H. Kohn and Richard J. Gorman, for the Division of Enforcement. Appeal filed: December 6, 1995 Last brief received: March 27, 1996 Oral argument: June 22, 1998 I. Laurie Jones Canady, formerly a salesperson in the Davenport, Iowa branch office of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("ML" or the "Firm"), appeals from the decision of an administrative law judge. The law judge found that Canady engaged in unauthorized and unsuitable trading in her customers' accounts, churned those accounts, and made material misrepresentations and omitted to make material disclosures to her customers. The law judge found that, by engaging in this conduct, Canady willfully violated Section 17(a) of the Securities Act of 1933 (the "Securities Act"), [1] Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), [2] and Rule 10b-5 thereunder. [3] Canady was barred from association with any broker or dealer, ordered to cease and desist from committing or causing any violation or future violation of the provisions she was found to have violated, and ordered to provide an accounting of commissions earned on the trades at issue and to disgorge $136,382 (plus prejudgment interest, but less the total amount of commissions charged on unsolicited trades). Canady seeks to have the law judge's decision dismissed or, in the alternative, remanded for rehearing. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. II. This case concerns Canady's actions with respect to the accounts of over twenty of her customers between 1988 and 1989. During the administrative hearing, the Division of Enforcement (the "Division") presented the testimony of four of Canady's customers (the "Testifying Customers"). The remaining customers (the "Non-testifying Customers") did not testify. Three of the Testifying Customers were widows with very little knowledge of or experience with securities. The fourth Testifying Customer had assumed primary responsibility for handling an account she owned jointly with her husband after her husband suffered a stroke and became mentally impaired. Three of the Testifying Customers testified that they told Canady that they sought relatively conservative investments. The fourth indicated that she never discussed with Canady her investment objectives. The record establishes that three of the Testifying Customers depended on Canady to make investment decisions in their accounts, but that the fourth exercised independent judgment in the account she co-owned with her husband. Each of the Testifying Customers also opened and utilized, on Canady's recommendation, margin accounts known as ML cash management accounts ("CMAs"). The CMA established a margin relationship unless the customer checked a box on the CMA customer agreement stating that the customer did not want the account "established with the Investor Credit service." Each of the Testifying Customers had little understanding of the implications of margin trading or that, in fact, such trading was occurring in their accounts. In addition to customer testimony, the Division presented a series of Division-prepared account summaries (the "Account Summaries") that reflect, among other things, the level of trading activity in these accounts measured by: (a) "turnover rate," i.e., the number of times during a given period that securities in an account are replaced by new securities; [4] and (b) "break-even" levels. For the accounts of the Testifying Customers, the Account Summaries reflect trading activity ranging from 9 to 22 months. The annualized turnover rates for the accounts of the Testifying Customers, as set forth in the Account Summaries, ranged between 2.62 and 7.28. According to the Division's calculations, the accounts of the Testifying Customers required an annualized percentage return ranging between 8.96% and 27.48% to "break-even" after paying commissions and margin interest. We summarize below the pertinent facts with respect to Canady's handling of the accounts of the Testifying Customers. A. Cynthia Christianson Sim. Cynthia Christianson Sim opened an account in March 1988 with a deposit of $180,000 in death benefits from her deceased husband. Sim's husband had died in December 1987, leaving Sim solely responsible for their two children, then aged seven and nine. Sim had attended college for two years and held an associate's degree. She was employed as a computer systems analyst. Sim, whose husband had been a C.P.A. and had managed their finances before his death, described herself as an unsophisticated investor. Sim told Canady that she sought "steady growth" and "no high risk investments" because she would need the money to cover the children's college costs. She gave Canady permission to "buy and sell" in her account, but asked Canady to contact her before doing so. Despite Sim's conservative investment goals, Canady indicated on Sim's new account form, which Sim never saw, that Sim wanted "speculative investments." Canady also had Sim open a margin account, but never explained the implications of margin trading. Sim had trouble understanding her ML account statements, and asked Canady to explain them. Sim felt that Canady never gave Sim "straight answers" about her account. In mid to late 1989, Sim noticed "negative numbers," i.e., margin debt, on her account statements. At one point in 1989, Sim's account had a margin debt of $252,408. When she asked Canady about her account statements, Canady told her "not to worry; that things were going fine." Canady used margin in Sim's account to pursue a short-term, "in and out" trading strategy involving "switches" [5] among unit investment trusts ("UITs"), municipal investment trusts ("MITs"), and mutual funds. Over the 24-month review period, Canady purchased over 14 different mutual funds and UITs for Sim's account. For example, on November 7, 1988, Canady purchased on margin 64 units of MIT Series 11 for roughly $58,000. On April 26, 1989, she sold the 64 units for $55,061, and purchased 40 units of MIT Series 18, a trust that held securities of a character and quality similar to those held in the MIT Series 11. Three months later, on June 29, 1989, Canady made an additional purchase for Sim's account of 23 units of MIT Series 11. For each of these purchases in Sim's account, Canady received a commission. Canady, however, received no commissions on her customers' sales of these securities. According to the Account Summaries, for the period April 1, 1988 to November 24, 1989, Sim's account had an annualized turnover rate of 4.58 on average monthly equity of $166,522. The Division further calculated that the account paid total commissions during the review period of $35,448, which represented 21.29% of the account's average equity, and total interest of $29,096. The Division determined that the account required a return of 23.26% (annualized) to break even. B. Carolyn Campbell. Carolyn Campbell opened a CMA and an individual retirement account ("IRA") with Canady, whom the Campbells had known since Canady was a 10- year-old child living in their neighborhood and whose wedding Campbell attended. Campbell's husband was responsible for making investment decisions for the family until his death in February 1988. Campbell was a high school graduate, worked for one year before getting married, and then became a housewife. Campbell testified that, on the night of her husband's funeral, Canady stopped by the Campbell home and asked Campbell whether she would be receiving any life insurance proceeds. When Campbell stated that she would be receiving $10,000, Canady urged her to invest it with Canady because Canady "had a good deal going." Campbell stated that she gave Canady no instructions about how to manage the accounts because Campbell was "not too knowledgeable" about investments and trusted Canady. Although the poor quality of the copy of her new account form makes it very difficult to read, it appears that, according to this document, Campbell sought "income" through "investment grade" and "good quality" investments. Canady told her that she would treat Campbell, who was then in her seventies, "like I would treat my own parents . . . ." Campbell also could not remember that Canady ever called her when Canady placed orders for Campbell's accounts. The record indicates that Canady used her authority over Campbell's accounts to engage in short-term, speculative trading of UITs. For example, on September 1, 1988, Canady sold in Campbell's CMA 30 units of Corporate Income Fund High Yield Series 10 for $23,775 that she had bought on margin on August 4, 1988, for $25,536. The prospectus for the CIF High Yield Series 10 described the security as "speculative." A week before the Series 10 sale, on August 23, 1988, Canady bought for Campbell 47 units of a similar UIT, CIF High Yield Series 9, for $44,147. Canady sold Campbell's Series 9 holdings in March 1989 for $33,972. Campbell, like Sim, had trouble understanding ML's account statements and sought Canady's assistance. Canady always told her that the account was "doing fine" and to disregard the statements because they were going to be revised. Canady also directed Campbell to throw away prospectuses she received. Although she had a margin account, Campbell did not understand the implications of margin trading, and Canady never informed her that Campbell was in debt to ML. During August 1988, Campbell owed ML more than $70,000 in margin debt. On May 23, 1989, Campbell sent ML a letter "revok[ing] prior authorization to trade securities in [her] account that had previously [been] issued to Lori Canady." Campbell also asked that no trades be executed in her account without her written authorization. The circumstances surrounding the preparation of this letter are unclear from the record. Canady introduced the letter at the hearing because, in it, Campbell asks about the level of margin trading in her account. Canady claims that this portion of the letter supports her contention that Campbell was aware that such trading was occurring in her account. Campbell denied writing the letter, although she admittedly signed it. Campbell testified that she thought that her accountant may have prepared it. She also denied any familiarity during the time in question with the concept of margin trading. According to the Account Summaries, the annualized turnover rate for this account, which had an average monthly equity of $15,619, was 7.28 for the period April 1, 1988 to September 29, 1989. The Division calculated that the account had total commission charges of $4,152, which represented 26.58% of the account's average equity, and total interest charges of $3,586. The Division determined that the account required a return of 33.03% (annualized) in profit to break even. For Campbell's IRA, the annualized turnover rate was 3.60 for the period July 1, 1988 to March 31, 1989, and the annualized break-even level was 8.96%, with total commissions of $1,328. C. Evelyn Fasbender. Evelyn Fasbender, a widow, opened her account in 1981 and over time invested her life savings of $38,000 with Canady. Fasbender, who had used her other assets to pay the costs of medical and nursing home care for her late husband, sought secure investments and growth. Fasbender never worked outside the home other than to do volunteer work. Fasbender testified that, during the 1988-89 period, she did not authorize any of the trades in her account. She testified that she never discussed margin trading with Canady, and never authorized margin trading in her account. Like the other Testifying Customers, she could not understand her monthly ML account statements and asked Canady to explain them. Canady told her that the account was "doing fine and . . . had plenty of money." Actually, however, the Account Summaries reflect that Fasbender had a $48,000 margin debt as of January 1989, which decreased to about $30,000 by late October 1989. During the hearing, Fasbender stated: "I trusted Laurie with my life. I really did." Fasbender first learned that her account had lost close to $30,000 after Canady left ML, when Canady's successor reviewed Fasbender's account with her. The Division calculated that, for the period January 1 through November 24, 1989, Fasbender's account had an annualized turnover rate of 3.83. Fasbender paid $2,016 in commissions, which represented 10.07% of average equity, and $3,028 in interest. The annualized break- even level of Fasbender's account was 27.48%. D. Mary and Richard Gruhl. Mary and Richard Gruhl, husband and wife, opened a joint account with Canady in 1983. In 1985, R. Gruhl retired from his position as an electrical contractor with a lump sum buyout and no pension. A year later, he suffered a stroke. Thereafter, M. Gruhl assumed primary responsibility for handling the account. M. Gruhl told Canady that, because the Gruhls had no pension, they had to have "nothing but conservative investments." M. Gruhl, who had last worked outside the home in 1945 as a secretary, testified that she did not consider herself to be a sophisticated investor. The record establishes, however, that M. Gruhl on occasion acted independently of Canady in making investment decisions. For example, shortly before the market break in 1987, M. Gruhl sold all of her stock holdings based on an article she had read in Money magazine, despite Canady's contrary recommendation. Later, during the period under review, M. Gruhl purchased Treasury securities for the account against Canady's advice. M. Gruhl was confused by the prospectuses for some of the securities recommended by Canady. When she brought them into Canady's office for an explanation, Canady told her that she did not need to keep the prospectuses. Canady then tossed the prospectuses into the trash. M. Gruhl also could not understand her monthly statements, and met with Canady for assistance on a regular basis. M. Gruhl testified that Canady repeatedly told her "not to worry, that everything was fine . . . she was taking care of it." Canady reassured M. Gruhl that margin debit balances on the Gruhls' account statements were a "mistake," "mean[t] nothing," and "would all be cleared off in the next statement." By January 1989, the Gruhls' account had a margin debt of $245,000. According to the Account Summaries, the annualized turnover rate for the Gruhls' account for the period January 1, 1988 to September 29, 1989 was 2.62. The account was charged a total of $19,297 in commissions, which represented 12.15% of its average equity, and $16,791 in interest. The Gruhls' account needed to generate a return of 12.98% (annualized) to break even. M. Gruhl testified that she understood that Canady would check with the Gruhls before trading in their account, but that Canady often failed to do so. M. Gruhl recalled that, at one point, she noticed that a zero- coupon bond had been purchased for their account without authorization. While Canady claimed at the hearing that R. Gruhl authorized the purchase, M. Gruhl testified that, at that time, her husband was still partially disabled from his stroke and that, as a result, "there [was] no way he could have ever [authorized] it." M. Gruhl further testified that, when she questioned Canady about the bond purchase in late 1989, Canady did not claim that R. Gruhl had authorized the purchase, but told M. Gruhl that it was the result of a "mistake in the computer . . . and would be changed [the following day]." Canady's branch manager, Steven Lyders, also testified that Canady told him (after M. Gruhl had complained to Lyders) that "the trade was a mistake, it was an error, and it should have never been bought in Mrs. Gruhl's account." As a result, Lyders cancelled the trade. III. A. Churning. The record establishes that Canady churned her customers' accounts. "Churning occurs when a securities broker buys and sells securities for a customer's account, without regard to the customer's investment interests, for the purpose of generating commissions." [6] It is well-settled that three elements are necessary to find churning: (i) trading in an account that is excessive in light of the customer's investment objectives; (ii) control by the salesperson over that trading; and (iii) scienter, which is established through evidence of intent to defraud or of willful and reckless disregard for the customer's interests. [7] "While no single test determines whether a broker churned an account, factors such as the turnover ratio . . . whether the broker engaged in `in and out' trading, and the number and frequency of trades in an account . . . provide a basis for the allegation that a broker engaged in excessive trading." [8] We traditionally have looked to an account's turnover rate to measure its level of trading activity. We also have measured trading activity by examining an account's break-even level, sometimes referred to as the "cost equity maintenance factor ("CEMF")." As reflected in the Account Summaries, the turnover rates for the accounts of three of the Testifying Customers, Sim, Campbell and Fasbender, ranged between 3.83 and 7.28, and the break-even levels for these accounts ranged from 8.96% to 27.48%. In light of these customers' conservative investment objectives, the trading activity in these accounts was excessive. [9] Canady argues that the periods over which we have measured the activity in these accounts -- review periods ranging between nine and twenty months -- are too short to support a finding of excessive trading. [10] We do not agree. As one commentator has pointed out, "[i]t is no defense to a claim of securities fraud in handling a customer's account that, during some periods of time, the broker managed to handle the account without committing securities fraud." [11] Nor do we agree with Canady's claim that our analysis of trading levels must include investments held by customers outside their accounts at the Firm. As we have held, "the assets by which the rate of activity is to be measured are those in the account, not other assets that the customer may possess." [12] We further conclude that Canady exercised the requisite control over the accounts of three of the Testifying Customers -- Sim, Campbell, and Fasbender, but not over the Gruhls' account. Although Canady never obtained formal discretionary authority over any of these accounts, Sim, Campbell, and Fasbender completely relied on Canady in making investment decisions. "In the absence of an express agreement, control may be inferred from the broker-customer relationship when the customer lacks the ability to manage the account and must take the broker's word for what is happening." [13] The requisite degree of control is met when, as here, "the client routinely follows the recommendations of the broker." [14] M. Gruhl, however, demonstrated an ability and willingness to make her own investment decisions regarding the Gruhls' ML account, which contradicts the law judge's finding of control. [15] Further supporting our finding of control with respect to the Sim, Campbell, and Fasbender accounts is the apparent vulnerability of each of these customers stemming from her relationship with Canady. As indicated, none of these customers, all of whom were widows and, in the case of two of the three, elderly, had any meaningful knowledge of or experience with securities matters. They lacked the sophistication necessary to assess independently Canady's handling of their accounts. [16] Additionally, we conclude that Canady acted with the scienter required to establish churning. The record establishes that Canady callously exploited for her own financial gain the confidence her customers placed in her. Canady's practice of engaging in switching among UITs, MITs, and mutual funds evidences at a minimum wilful and reckless disregard for the best interests of her customers, particularly in light of her fraudulent misrepresentations and omissions, which are discussed immediately below. [17] The record indicates that, during the relevant period, Canady made a total of $16,292 in commissions from the accounts at issue. Canady asserts that this amount represents a small portion of Canady's income during this time. We nevertheless view these commissions as an incentive for Canady's misconduct. [18] The record does not establish that Canady controlled the accounts of the Non-testifying Customers. We have held that customer testimony, while the most compelling evidence regarding the issue of control, is not essential to a finding of excessive trading "if the relevant information can be gleaned from other sources in the record." [19] With respect to proof of control, supporting evidence need not be limited to customer testimony, but also may include testimony by the salesperson, other firm personnel, customer affidavits or even customer correspondence. Such evidence is lacking here with respect to the Non-testifying Customers. Although the Division asserts that the "customer profile" of the Non- testifying Customers matches that of the Testifying Customers and that there are similarities in trading patterns between the accounts of the Testifying Customers and those of the Non-testifying Customers, we do not believe that these assertions are sufficient to establish control. Based upon the evidence that has been presented, a finding of control would require us to engage in speculation. Indeed, our conclusion -- after review of the record evidence adduced on the matter -- that Canady did not control the trading of Testifying Customer Gruhl illustrates the problems with the Division's request. We note that the Division, at the prehearing conference, originally proposed calling six of the twenty-two customers involved in this case. The law judge responded that calling so many witnesses was not "necessary" because "[w]e don't want to waste all that time. Six doesn't make it any better than one, actually." The law judge further suggested that Canady stipulate that the testimony from the customer witnesses would be "substantially the same." Canady's counsel strenuously refused to do so, however, stating that "inasmuch as we have the issues of control and suitability in this case, each and every customer must come in and must be examined on that information." Ultimately, as indicated, the Division chose to call just four of the witnesses, at which time Canady's counsel echoed his earlier view that it was necessary for each of the customers to testify. [20] No finding of control over an account could be made in the absence of evidence regarding the nature of Canady's relationship with the owner of that account. To the extent that the law judge discouraged additional evidence on this issue, testimonial or otherwise, he erred. [21] If the Division chose not to present customer testimony, it had to present some other form of evidence regarding Canady's relationships with the customers at issue. Its failure to do so precludes us from finding violations with respect to the accounts of the Non-testifying Customers. B. Misrepresentations and Omissions. The record further establishes that Canady made material misrepresentations and failed to provide material information to the Testifying Customers. According to the Testifying Customers, Canady misled them about the use of margin in their accounts and their accounts' profitability. [22] While Canady, in testimony before the law judge, strongly disputed her customers' testimony on these points, the law judge credited the customers. As we have consistently held, "credibility determinations of an initial fact finder are entitled to considerable weight [and] can be overcome only where the record contains `substantial evidence' for doing so." [23] This record affords us no reason to reject the law judge's credibility determinations. [24] At least some of these customers had personal ties to Canady. For example, Campbell had known Canady since Canady was a child and presumably would be disinclined to lie about Canady's conduct. Moreover, the customers' testimony regarding Canady's handling of their accounts was similar on important points such as their uniform assertions that Canady failed to explain the risks of margin trading, failed to alert them to losses in their accounts and falsely assured them that their accounts were doing "fine." This testimony further supports the law judge's determination to credit their version of events. [25] C. Suitability. The record also establishes that Canady made fraudulent unsuitable recommendations to the Testifying Customers. [26] Canady knew that her excessive use of margin in the accounts of the Testifying Customers was unsuitable in light of their stated conservative investment objectives. [27] Moreover, she failed to disclose to those customers the risk of such margin trading. [28] Canady defends the use of margin in these customers accounts by pointing to the fact that each of them executed new account forms that established a margin trading relationship. We have found, as discussed, that, while the Testifying Customers may have signed forms put in front of them, the Testifying Customers did not know that, by doing so, they had agreed to engage in margin trading. Canady then gave these customers a false sense of security by misleading them regarding the adverse impact of margin trading on their accounts. Canady further notes that her customers satisfied ML's margin trading requirements, which she claims were more stringent than federal requirements. However, the fact that these customers were eligible to trade on margin does not contradict our finding that such trading was unsuitable for them under the circumstances of this case, particularly in the absence of full disclosure by Canady of the risks involved. [29] Canady also defends her customer recommendations by claiming that they were based on an overall trading strategy that took into account ML's own prediction that long term interest rates would fall and certain tax advantages resulting from the swapping of UITs. Although she apparently concedes that she had "a market theory which did not work," she blames her customers' losses on the "savings and loan crisis and tax law changes [which] completely upset traditional expectations for the performance of UITs in relation to interest rate moves." The actual success or failure of Canady's purported trading strategy is irrelevant to the matters at issue here. Unknown to her customers, Canady's "trading strategy" generated high costs for her customers through excessive commissions and margin interest, as discussed above, and deviated grossly from these customers' stated conservative investment objectives. D. Unauthorized Trading. The record also establishes that Canady's purchase of a zero-coupon bond for the Gruhls' account in the fall of 1989 was unauthorized. In general, unauthorized trading violates the antifraud provisions when accompanied by deceptive conduct. [30] This requirement is satisfied here by Canady's failure to inform the Gruhls -- before the trade was made -- of the materially significant fact of her trade in their account. [31] * * * Accordingly, we find that Canady willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by engaging in the conduct described above. IV. Canady argues that the law judge exhibited obvious bias in favor of the Division throughout these proceedings and prejudged this matter. The record does not support these contentions. As an example of the law judge's asserted prejudgment, Canady's counsel cited at oral argument the fact that, during the second day of the hearing, the law judge asked Canady whether there was anything she felt "contrite about." This inquiry is not evidence of prejudgment. Moreover, it occurred after the law judge had heard extensive testimony from the Division accountant who had prepared the Account Summaries and from Canady herself. Canady's counsel also complains that he was "frequently berated by the bench for causing the evidentiary hearings to be unnecessarily protracted." While some of the law judge's comments (made to counsel for both sides) exhibited impatience with the pace of the proceedings, we do not believe this prejudiced Canady. [32] The hearing transcript indicates that the law judge generally was evenhanded in his treatment of the parties and permitted Canady to argue her defense within reasonably wide bounds. At several points, for instance, the law judge overruled objections by the Division that Canady's line of questioning was irrelevant to the issues in the case. Although the law judge repeatedly expressed concern about the length of the hearing, it appears that he sought to limit questioning by both sides. For example, as we noted previously, the Division's decision to call four customers, rather than the six it originally proposed, seems to have been heavily influenced by the law judge's clearly stated desire to expedite the proceedings. Although Canady complains that the law judge severely limited her counsel's cross-examination of the staff's witnesses, the record indicates that cross-examination was substantially more extensive than the Division's examination of these witnesses. In addition, Canady fails to explain how a longer cross- examination would have strengthened her defense. [33] Canady also claims that the law judge precluded her introduction of documentary evidence that illustrated the efforts made by both Merrill Lynch and Canady to ensure that their customers could read and understand the monthly account statements. Although the vagueness of Canady's charge -- it is unaccompanied by any record citation -- makes it unclear, it appears Canady is referring to the law judge's exclusion of certain ML publications designed to help ML customers understand the Firm's account statements. The copyright date for these publications, however, was well after the period at issue. In addition, at the law judge's request, the Division stipulated that, during the period at issue in this case, ML distributed publications to its customers that explained its account statements. Under the circumstances, we do not consider the law judge's ruling to have been error. V. Canady claims that the sanctions imposed by the law judge are excessive. Canady focuses on the disgorgement amount, which was based on commissions generated by the accounts at issue during 1988-1989. In Canady's view, the law judge improperly failed to deduct from the amount of her commissions (i) total taxes Canady paid; (ii) the salary Canady paid to her sales assistant; and (iii) amounts paid by Canady in settlement of customer complaints. Canady asserts that where, as here, the staff readily can determine the precise amount of ill-gotten gains, it must do so. Canady also asserts that the law judge's use of the Internal Revenue Service interest rate in assessing prejudgment interest was error. We agree with the law judge that Canady's misconduct was egregious. She abused the trust that her customers placed in her when she churned their accounts, misled them about her trading in their accounts and their accounts' profitability, engaged in unauthorized trading, and made unsuitable recommendations. It is therefore appropriate to require her to disgorge her ill-gotten profits. However, in light of our determination to reverse the law judge's finding of churning in the accounts of the Non-testifying Customers, we have determined to reduce the disgorgement amount ordered by the law judge to exclude the commissions paid by the Non-testifying Customers' accounts. We also have determined to reduce the disgorgement amount by deducting commissions on unsolicited trades for all of the accounts at issue here. We have further determined to deduct from the disgorgement amount any amounts Canady has already paid to the Testifying Customers in settlement of claims made by those customers with respect to the conduct at issue here. [34] To this end, Canady may submit an accounting showing commissions paid to her as a result of unsolicited trades and any amounts paid by her in settlement of claims made by the Testifying Customers. We find that Canady is entitled to no further modification of the disgorgement amount based upon taxes she has paid or other expenses she has incurred in connection with transactions here. [35] We further find that the interest rate assessed by the law judge was reasonable. While our revised Rules of Practice do not govern these proceedings, our revised Rule 600(b) specifies that the rate ordered by the law judge here -- the Internal Revenue Code Section 6621(a)(2) underpayment rate -- shall be utilized in computing interest on the sums to be disgorged. [36] The Exchange Act authorizes this Commission to assess "reasonable interest" in connection with an order for disgorgement. [37] As we explained in our 1995 release adopting our revised Rules of Practice, the Section 6621(a)(2) underpayment rate is a widely-published, floating rate that offers a proxy for the borrowing costs of a typical respondent and "ordinarily . . . is a reasonable and appropriate rate to use in assessing prejudgment interest on disgorgement ordered as the result of remedial administrative proceedings." [38] On consideration of the factors deemed relevant in assessing sanctions, [39] we find that the bar imposed by the law judge is appropriate in the public interest. Canady engaged in actions highly prejudicial to her customers over a twenty-month period. She has demonstrated a marked lack of remorse for those actions, and her conduct establishes that she poses a substantial, continuing risk of harm to investors. Consequently, we consider it to be in the public interest to bar Canady from association with any broker or dealer so that she is foreclosed from using her status as a securities professional to prey on vulnerable investors. We note that Canady expressed, during the hearing in this matter, little interest in future employment in the securities industry and, in fact, has not associated with any firm during the more-than-nine-year period that has elapsed since she left ML. Nevertheless, without a bar, Canady would be free to resume her career as a securities professional at any time, a decision that is likely given her relative youth (she is currently in her thirties) and high degree of financial success previously as a salesperson. [40] As a result of our imposition of a bar, Canady may not reenter the industry unless she can show that such reentry is consistent with the public interest. [41] Should she make such a showing, changes in her employment status, whether a move from one broker-dealer to another or a change in the nature of her employment or supervision within the same firm, will be subject to our review so long as the bar remains in effect. [42] Canady's conduct has demonstrated the clear need for this level of continuing oversight. [43] Similarly, Canady's abuse of her customers, which demonstrates that she remains a threat to investors, leads us to order her to cease and desist from causing or committing violations of the antifraud provisions of the Securities Act and Exchange Act. We reject Canady's claim that imposition of a cease and desist and disgorgement order constitutes "an improper and unconstitutional ex post facto application of the law." While we obtained the authority to issue such orders through The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the "Remedies Act"), which was enacted in October 1990, the ex post facto clause prohibits the retroactive application of a law that "inflicts a greater punishment, than the law annexed to the crime, when committed." [44] The disgorgement order, which merely deprives Canady of her ill-gotten gains, [45] is remedial and not punitive. [46] The cease and desist order similarly is remedial because it is forward-looking and is intended to lessen the risk of future harm to the public. [47] Consequently, because they are remedial and not punitive or criminal, these sanctions do not implicate the ex post facto clause. [48] As the Supreme Court has held, The question in each case where unpleasant consequences are brought to bear upon an individual for prior conduct, is whether the legislative aim was to punish that individual for past activity, or whether the restriction of the individual comes about as a relevant incident to a regulation of a present situation, such as the proper qualifications for a profession. [49] Nor does our action constitute a prohibited retroactive application of these provisions. Based upon its structure and language, we conclude that the Remedies Act authorizes the issuance of cease and desist and disgorgement orders against persons registered under the Exchange Act, such as Canady, for pre-Remedies Act conduct. [50] Use of our cease and desist and disgorgement authority accordingly is appropriate here. [51] Although Canady never raised the issue before the law judge or this Commission, certain of Canady's conduct that is the basis for the sanctions we impose here (including all of the conduct at issue involving the two Campbell accounts) occurred more than five years before these proceedings were instituted in October 1994. While these proceedings were pending, the District of Columbia Circuit held that the general federal statute of limitations, 28 U.S.C. § 2462, prohibited the imposition of a censure and s1upervisory suspension in another of our administrative proceedings that had been instituted more than five years after the conduct at issue in those proceedings had occurred. [52] It is well-established that "`[r]eliance on a statute of limitations is an affirmative defense and is waived if a party does not raise it in a timely fashion.'" [53] Canady's failure to raise the statute of limitations in this case constitutes a waiver of that claim. [54] Even when asked directly at oral argument to address the applicability of Johnson, Canady's counsel responded only vaguely and without reference to Section 2462 that the proceedings should never have been instituted and now -- having been appealed to us -- were aged. Although the Johnson decision issued after briefing was completed in this case, the District of Columbia Circuit had applied Section 2462 to administrative proceedings as early as March 1994. [55] Respondents in other administrative proceedings brought by this Commission, including the Johnson respondents, [56] raised Section 2462 as an affirmative defense before the appellate court's decision in Johnson. [57] In deeming Canady to have forfeited a statute of limitations defense, we are furthering both fairness and efficiency. As the District of Columbia Circuit has held, a party claiming the statute of limitations defense must give adequate notice of that claim in order to permit the other side "not only to frame legal arguments, but to establish relevant facts that might affect the applicability of the statute of limitations." [58] Canady's failure to raise the claim deprived the Division of such notice and opportunity to develop its factual and legal defenses to the claim. An appropriate order will issue. [59] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, and UNGER); Commissioner CAREY not participating. Jonathan G. Katz Secretary **FOOTNOTES** [1]: 15 U.S.C. Section 77q. [2]:15 U.S.C. Section 78j. [3]:17 C.F.R. § 240.10b-5. [4]:Shearson Lehman Hutton, Inc., 49 S.E.C. 1119, 1122 (1989). See also Michael H. Hume, Securities Exchange Act Rel. No. 35608 (Apr. 17, 1995), 59 SEC Docket 347, 349 n.4; Frederick C. Heller, 51 S.E.C. 275, 279 (1993) (explaining turnover rate as "`the ratio of total cost of purchases made for the account during a given period of time to the amount invested'")(citing Hecht v. Harris Upham & Co., 283 F. Supp. 417, 435 (N.D. Cal. 1968)); Looper & Co., 38 S.E.C. 294, 297 (1958). [5]:See Russell L. Irish, 42 S.E.C. 735, 737 n.5 (1965) (explaining that a "switch" involves one or more fund redemption transactions coupled with one or more related fund purchase transactions), aff'd, 367 F.2d 637 (9th Cir. 1966), cert. denied, 386 U.S. 911 (1967). [6]: Olson v. E.F. Hutton & Co., 957 F.2d 622, 628 (8th Cir. 1992) (citations omitted). See also Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498, 1501 (11th Cir. 1985); Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981). [7]:See, e.g., Hotmar v. Lowell H. Listrom & Co., 808 F.2d 1384, 1385 (10th Cir. 1987); Miley v. Oppenheimer & Co., 637 F.2d at 324. [8]:Craighead v. E.F. Hutton & Co., Inc., 899 F.2d 485, 490 (6th Cir. 1990) (citations omitted). See also the authority cited in n.1, supra. [9]:Compare Donald A. Roche, Securities Exchange Act Rel. No. 38742 (June 17, 1997), 64 SEC Docket 2042, 2046-47 (turnover rates ranging from 3.3 to 7.2 and CEMF ranging from 107% to 259% deemed excessive in light of customers' investment objectives); Henry J. Faragalli, Securities Exchange Act Rel. No. 37991 (Nov. 26, 1996), 63 SEC Docket 826, 833-34 (turnover rate of 7.5 and CEMF of 26.4 indicative of excessive trading); Gerald E. Donnelly, Securities Exchange Act Rel. No. 36690 (Jan. 5, 1996), 61 SEC Docket 47, 50 n.11 (citing approvingly respondent's acknowledgement that turnover rates of between 2 and 4 are presumptive of churning); Frederick C. Heller, 51 S.E.C. at 276-77 (turnover rate of 6.4 and CEMF of 36% indicative of excessive trading). Because, as discussed below (text at note 15), we find that Canady failed to exercise the requisite level of control, we need not reach the question of whether the level of trading in the Gruhls' account was excessive in light of their investment objectives. [10]:Canady supports this and other attacks on the Division's trading analysis by pointing to the testimony of Rob Lee, managing director of Bates Private Capital, who testified on her behalf. As our discussion herein indicates, we do not view Lee's criticism of the Division's trading analysis as valid. [11]:Dashjian, Overcoming Defenses to Churning Claims Under the Federal Securities Laws, 20 Securities Regulation Law Journal 362, 369 (1993) (observing that "[i]f there is excessive trading during any period, it makes no difference that the period was preceded or followed by a period of relative inactivity"), cited with approval in Peter C. Bucchieri, Securities Exchange Act Rel. No. 37218 (May 14, 1996), 61 SEC Docket 2771, 2778 (finding excessive trading in violation of rules of the National Association of Securities Dealers, Inc.). See also Frederick C. Heller, 51 S.E.C. at 279 (turnover analysis properly may focus on a portion of the life of the account where, for example, the period corresponds to a "drastic change in trading strategy, with its increased volume of trading"). In Bucchieri, we upheld a finding of excessive trading based upon a review period of eight months. [12]:Peter C. Bucchieri, 61 SEC Docket at 2778. See also Henry J. Faragalli, 63 SEC Docket at 834. [13]:Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975). [14]:Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th Cir. 1980). See also Carras v. Burns, 516 F.2d at 258-59 ("The issue is whether or not the customer, based on the information available to him and his ability to interpret it, can independently evaluate his broker's suggestions."). [15]:See, e.g., Newburger, Loeb & Co. v. Charles Goss, 563 F.2d 1057, 1070 (2d Cir. 1977) ("if a customer is fully able to evaluate his broker's advice and agrees with the broker's suggestions, the customer retains control of the account"), cert. denied, 434 U.S. 1035 (1978); Carras v. Burns, 516 F.2d at 258 ("a customer retains control of his account if he has sufficient financial acumen to determine his own best interests and he acquiesces in the broker's management"). [16]:See Tierna v. Blyth, Eastman, Dillon & Co., 719 F.2d 1 (1st Cir. 1983) (stressing the importance of evaluating the customer's sophistication in securities transactions and the ability to evaluate independently the broker's recommendations in dealing with the issue of a salesperson's control over a non-discretionary account); Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 677 (9th Cir. 1982) ("The touchstone [in determining control] is whether or not the customer has sufficient intelligence and understanding to evaluate the broker's recommendations and to reject one when he thinks it unsuitable."); Lieb v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 954 (E.D. Mich. 1978) (identifying "age, education, intelligence and investment experience of the customer" as important factors in determining level of control); aff'd, 647 F.2d 165 (6th Cir. 1981) (Table). [17]:Hotmar, 808 F.2d at 1386 (finding no "real evidence of deception" where "evidence tend[ed] to show [broker] freely shared all his knowledge and information with" the customer). [18]:Cf. Albert Vincent O'Neal, 51 S.E.C. 1128, 1130 (1994) (scienter found where excessive trading was done with the design of benefiting salespersons rather than their customers). [19]:Michael David Sweeney, 50 S.E.C. 761, 767 (1991) (finding excessive trading in the absence of customer testimony where "the pertinent information is readily available, particularly from [the salesperson's] own testimony"). [20]:Canady's counsel added that, "[i]f the Division of Enforcement does not choose to do so, then we understand and we think that that creates an opportunity to shorten this trial." [21]:The Division did not seek to introduce additional customer testimony or to make a proffer of that testimony. Accordingly, we will not remand this matter for the purpose of hearing such testimony. [22]:Cf. Albert Vincent O'Neal, 51 S.E.C. at 1131-32 (salespersons violated antifraud provisions by, among other things, misleading customers regarding losses in their accounts). [23]:Anthony Tricarico, 51 S.E.C. 457, 460 (1993). See also Universal Camera v. NLRB, 340 U.S. 474 (1950). [24]:Canady claims that the law judge violated the Federal Rules of Evidence by admitting, and basing his findings upon, various assertedly prejudicial evidence, including compromise offers by ML to Canady's customers, Canady's NASD Form U-5 (Uniform Termination Notice for Securities Industry Registration), a customer arbitration award against Canady and ML, and Canady's deposition in an unrelated proceeding introduced to impeach Canady during her testimony. Canady's reliance on the Federal Rules of Evidence is misplaced. See Opp Cotton Mills, Inc. v. Administrator, 312 U.S. 126, 155 (1940) (exclusionary rules for jury trials inapplicable to administrative proceedings in the absence of statutory requirements). Under the Rules of Practice that govern this proceeding, each party is entitled "to present such oral or documentary evidence . . . as may be required for a full and true disclosure of the facts. The hearing officer shall receive relevant and material evidence . . . and exclude all irrelevant, immaterial or unduly repetitious evidence." 17 C.F.R. § 201.14. The evidence at issue properly was admitted as relevant to matters in the case, including Canady's credibility. See, e.g., Charles P. Lawrence, 43 S.E.C. 607, 612-613 (1967) ("all evidence which `can conceivably throw any light upon the controversy' should normally be admitted. That such evidence might be excluded in a jury trial does not preclude or militate against its admission in a proceeding where it is not weighed by a jury, which could be unduly influenced, but by a hearing examiner who is legally trained and judicially oriented") (citing Samuel H. Moss, Inc. v. FTC, 148 F.2d 378, 380 (2d Cir. 1945), cert. denied, 326 U.S. 734; Hyun v. Landon, 219 F.2d 404, 408 (9th Cir. 1955), aff'd, 350 U.S. 990 (1956)). See also Clinton Engines Corporation, 41 S.E.C. 408, 411 (1963) (noting the "appropriateness of admitting evidence having some logical relevance even if it has only limited or slight probative value, and even thought it might be inadmissible before a jury"). While we have not relied on any of the disputed evidence in making our findings, the law judge stated that his finding that Canady was not credible was based on "the totality of the record, [his] observation of her during her testimony, the questions posed to her, including those posed by [the law judge], and the responses thereto." [25]:See Frank J. Custable Jr., 51 S.E.C. 643, 648 (1993) ("similarities in each customer's [challenged] testimony regarding [the salesperson's] behavior and treatment of them" strengthens finding of credibility). [26]:See Cruse v. Equitable Securities of New York, Inc., 678 F. Supp. 1023, 1030, 1031 (S.D.N.Y. 1987) (Rule 10b-5 is violated where the "defendant believed the securities traded were unsuitable in light of the investment objectives and needs of a client, and that defendant nevertheless traded in those securities"); Zaretsky v. E.F. Hutton & Co., 509 F. Supp. 68, 75 (S.D.N.Y. 1981) (antifraud provisions violated where "defendant believed the securities traded were unsuitable in light of the nature of the investment objectives and needs of the clients, and . . . the defendant nevertheless traded in those securities"). [27]:As we have explained, Trading on margin increases the risk of loss to a customer for two reasons. First, the customer is at risk to lose more than the amount invested if the value of the security depreciates sufficiently, giving rise to a margin call in the account. Second, the client is required to pay interest on the margin loan, adding to the investor's cost of maintaining the account and increasing the amount by which his investment must appreciate before the customer realizes a net gain. At the same time, using margin permit[s] the customers to purchase greater amounts of securities, thereby generating increased commissions for [the salesperson]. Stephen Thorleif Rangen, Securities Exchange Act Rel. No. 38486 (Apr. 8, 1997), 64 SEC Docket 731, 736. [28]:Compare Henry J. Faragalli, 63 SEC Docket at 837 (finding violation of NYSE rules based upon unsuitable use of margin and failure to explain the associated risks); Troyer v. Karcagi, 476 F. Supp. 1142, 1152 (S.D.N.Y. 1979) (opening or maintaining an unsuitable margin account, without disclosure of the unsuitability to the client, renders a brokerage house primarily liable under Rule 10b-5 if it acts with scienter). See also Timoleon Nicholaou, 51 S.E.C. 1215, 1217 (1994) (salesperson's use of margin in customer accounts to "an unwarranted extent" was inconsistent with customer's conservative investment objectives and violated just and equitable principles of trade), aff'd, 81 F.3d 161 (6th Cir. 1996) (Table). [29]:Canady complains that it "appeared" in the "mind" of the law judge that only the very wealthy could trade securities on margin. Canady's charge is not supported by the record. In any event, we agree with the law judge's conclusion that Canady's extensive use of margin in the accounts of the Testifying Customers, without adequate disclosure, was unsuitable. [30]:See Messer v. E.F. Hutton & Co., 847 F.2d 673, 678 (11th Cir. 1988); Brophy v. Redivo, 725 F.2d 1218, 1220-21 (9th Cir. 1984); SEC v. Hasho, 784 F. Supp 1059, 1110 (S.D.N.Y. 1992)(unauthorized trades violate the antifraud provisions of the securities laws when they are the result of, and accompanied by, "deception, misrepresentation or non-disclosure"). [31]:See Donald A. Roche, 64 SEC Docket at 2050. [32]:Cf. Jay H. Meadows, Securities Exchange Act Rel. No. 37156 (May 1, 1996), 61 SEC Docket 2444 (no prejudice to respondent where law judge made adverse "injudicious comments"), aff'd, 119 F.3d 1219 (5th Cir. 1997). At one point in the proceedings, the law judge admonished Canady's counsel as follows: I think you're far exceeding the necessity in this trial. You're making it into a three-week trial for absolutely no reason whatsoever. . . . And I think you have no respect for the Court's time, and that's particularly strong and convincing evidence to me. You wouldn't care if we stayed a month up here because you're getting a pay [sic] per diem. Subsequently, however, at the conclusion of the Division's case, Canady's counsel observed that he thought that the law judge was "very sensitive to the rights of due process and I thought that [the law judge] gave us very fair rulings." [33]:17 C.F.R. § 201.14. See also 5 U.S.C. § 556(d) (Administrative Procedure Act provision stating that "[a]ny oral or documentary evidence may be received, but the agency as a matter of policy shall provide for the exclusion of irrelevant, immaterial, or unduly repetitious evidence."). [34]:See SEC v. Palmisano, 135 F.3d 860 (2d Cir. 1998) (amounts paid to customers through criminal restitution proceeding may offset amounts assessed in civil disgorgement proceeding); SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1475 (2d Cir. 1996) (settlement payment properly taken into account in calculating disgorgement), cert. denied, 118 S. Ct. 57 (1997). [35]:Compare SEC v. Hughes Cap. Corp., 917 F. Supp. 1080, 1086, 1087 (D.N.J. 1996) (refusing to offset disgorgement by "certain `legitimate' business expenses [and noting that] the overwhelming weight of authority holds that securities law violators may not offset their disgorgement liability with business expenses"), aff'd, 124 F.3d 449 (3d Cir. 1997); SEC v. Great Lakes Equities Co., 775 F. Supp. 211 (E.D. Mich. 1991) (declining to reduce disgorgement amount by "overhead, commissions and other expenses"), aff'd without opinion, 12 F.3d 214 (6th Cir. 1993); SEC v. World Gambling, 555 F.Supp. 930, 935 (S.D.N.Y.) (declining to reduce disgorgement amount although it might have been "slightly overstated by overhead and income taxes"), aff'd, 742 F.2d 1440 (2d Cir. 1983) (Table); L.C. Wegard & Co., Inc., Securities Exchange Act Rel. No. 40046 (May 29, 1998), 67 SEC Docket 814, 823-24 ("to permit . . . deductions [for various associated expenses in calculating disgorgement] would confer an unwarranted benefit"); but see SEC v. Thomas James Assoc., Inc., 738 F. Supp. 88, 92 (W.D.N.Y. 1990) (permitting deduction of certain "necessary business expenses" including overhead and telephone charges). The courts have held that "[t]he amount of disgorgement ordered `need only be a reasonable approximation of profits causally connected to the violation [and that] any risk of uncertainty [in calculating disgorgement] should fall on the wrongdoer whose illegal conduct created that uncertainty.'" SEC v. First Jersey Securities, Inc., 101 F.3d at 1475. See also SEC v. First Pacific Bancorp, 142 F.3d 1186, 1192 n.6 (9th Cir. 1998) (no requirement when ordering disgorgement to "trace every dollar" connected to fraudulent scheme; court must merely make "reasonable approximation" of unjust profits), petition for rehearing pending, 96-56687; SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-31 (D.C. Cir. 1989) (Although the disgorgement amount must be "causally related to the wrongdoing," it need only be a "reasonable approximation" of the ill-gotten gain.). [36]:See 201 C.F.R. § 600(b). [37]:See Section 21B(e) of the Exchange Act. [38]:Revision Comment to Rule 600, Securities Exchange Act Rel. No. 35833 (June 9, 1995), 60 Fed. Reg. 32,738 at 32,787-88. See also SEC v. First Jersey Securities, Inc., 101 F.3d at 1476-77 (stating that "courts have approved the use of the IRS underpayment rate in connection with disgorgement"). [39]:See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The court there identified the following factors in determining the appropriateness of Commission sanctions: [T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. [40]:Her branch manager described her as the top producing salesperson in the Davenport office. [41]:Among the factors we consider in assessing the public interest in this connection are: the period of time which has occurred since imposition of the bar; the nature of the underlying misconduct; whether any attempts to undo resulting injury have been made by the respondent; the nature of the respondent's overall conduct during the period following entry of the bar; and the type and nature of the prospective duties and the history of the firm with which the respondent seeks to associate. See Applications for Relief from Disqualification, Securities Exchange Act Rel. No. 11267 (Feb. 26, 1975), 6 SEC Docket 346. See also Arthur H. Ross, 50 S.E.C. 1082, 1084-5 (1992)(applying public interest factors to denial of application for re-entry); Paul Van Dusen, 47 S.E.C. 668, 671 (1981) (applying public interest factors in assessing membership continuance application). [42]:See 6 SEC Docket at 347 n.2. [43]:See, e.g., Peter E. Aaron, Securities Exchange Act Rel. No. 31470 (Nov. 16, 1992), 52 SEC Docket 3813, 3817 ("The existence of a bar order, while difficult for the individual sanctioned, gives regulators continuing control over a serious violator's future participation in the securities industry."). [44]:Calder v. Bull, 3 U.S. (3 Dall.) 386, 390 (1798). [45]:See, e.g., Hately v. SEC, 8 F.3d 653 (9th Cir. 1993). [46]:See Donald A. Roche, 64 SEC Docket at 2051. [47]:See, e.g., Richard H. Morrow, Securities Exchange Act Rel. No. 35508 (March 17, 1995), 58 SEC Docket 2939, 2940 (describing a cease and desist order as "forward-looking relief akin to that granted in an injunction"). [48]:See Landgraf v. USI Film Products, 511 U.S. 244, 266 n.19 (1994)("We have construed [the ex post facto clauses] as applicable only to penal legislation."). See also American Steel Foundries v. Tri-City Central Trades Council, 257 U.S. 184, 201 (1921)(suggesting that prospective relief means that the relief is determined "as of the time of the hearing"); Duplex Printing Press Co. v. Deering, 254 U.S. 443, 464 (1921)(same). [49]:DeVeau v. Braisted, 363 U.S. 144, 160 (1960). [50]:For example, Section 1(c)(2)(B) of the Remedies Act explicitly states that the Act's prohibition on retroactive application of our authority to assess money penalties set forth in Section 1(c)(2)(A) -- i.e., that "[n]o civil penalty may be imposed . . . on the basis of conduct occurring before the date of enactment of this Act" -- will "not operate to preclude [this Commission] from ordering an accounting or disgorgement pursuant to the amendments made by this Act." This directive refers to accounting and disgorgement orders specifically to make clear that while, as specified in Section 202(e) of the Remedies Act (15 U.S.C. 78u-3(e)), Congress has authorized us to enter an order requiring an accounting and disgorgement in any proceeding in which we may impose a money penalty, we are not prohibited from entering these remedial orders for pre-Remedies Act conduct, even if we are precluded, by operation of Section 1(c)(2)(A), from imposing a money penalty for that conduct. [51]:See also Landgraf, 511 U.S. at 273 ("Even absent specific legislative authorization, application of new statutes passed after the events in suit is unquestionably proper in many situations. When the intervening statute authorizes or affects the propriety of prospective relief, application of the new provision is not retroactive."); Lindh v. Murphy, 117 S.Ct. 2059, 2071 (1997) (Rehnquist, C.J.) (stating, in dissent from majority's conclusion that Congress intended that certain legislation have prospective effect only, and without drawing majority's disagreement on the point, that "we have usually applied changes in law to prospective forms of relief"). See also Richard H. Morrow, 58 SEC Docket at 2940-41, (rejecting argument that cease and desist order could not be imposed for conduct pre-dating enactment of Remedies Act because such orders are prospective). [52]:Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996). [53]:Harris v. Department of Veterans Affairs, 126 F.3d 339, 343 (D.C. Cir. 1997) (citing Banks v. Chesapeake & Potomac Telephone Co., 802 F.2d 1416, 1427 (D.C. Cir. 1986)). See also Zipes v. Trans World Airlines, Inc., 455 U.S. 385, 393 (1982) ("filing a timely charge of discrimination with the EEOC is not a jurisdictional prerequisite to suit in federal court, but a requirement that, like a statute of limitations, is subject to waiver, estoppel, and equitable tolling"); Aceveo-Ramos v. United States, 961 F.2d 305, 307 (1st Cir.) (rejecting limitations defense in criminal context and noting that "every circuit that has addressed it has held that the statute of limitations is a waivable affirmative defense rather than a jurisdictional bar"), cert. denied, 506 U.S. 905 (1992); Wade v. Orange County Sheriff's Office, 844 F.2d 951, 955 (2d Cir. 1988) (statute of limitations is an affirmative defense that is waived if not raised). [54]:See 17 C.F.R. §§ 201.16(d), 201.17(b) (contentions not raised by a party before a law judge or the Commission on appeal may be deemed waived or abandoned). Similarly, Rule 8(c) of the Federal Rules of Civil Procedure (which do not apply to these proceedings) provides, under the heading "Affirmative Defenses," that "a party shall set forth affirmatively [in its pleading] . . . statute of limitations . . . and any other matter constituting an avoidance or affirmative defense." Even assuming that Section 2462 applies to these proceedings, the record indicates that all of Canady's conduct here may be viewed as part of a continuing, interconnected scheme to take advantage of her customers' lack of sophistication and trust to maximize her own compensation. An integral part of that scheme occurred within five years from institution of these proceedings. Accordingly, it would be in the public interest to consider, as we have done here, all of her fraudulent activity (both within and outside the limitations period) in assessing sanctions. Compare United States v. Stein, 456 F.2d 844 (2d Cir.), cert. denied, 408 U.S. 922 (1972) (securities fraud conviction upheld where manipulative activity straddled five-year statute of limitations period, even where the evidence of a continuing course of conduct within the limitations period was described as "slender"). See also Miley v. Oppenheimer & Co., 637 F.2d 318, 327 (5th Cir. 1981) (describing churning as a unified offense); U.S. v. Jensen, 608 F.2d 1349,1355 (10th Cir. 1979) ("the statute of limitations is no bar if there is an ongoing scheme continuing into the [limitations] period"); Donald A. Roche, 64 SEC Docket at 2050- 2051 (finding that Section 2462 did not apply to churning violation because violation was a unified offense and because portion of trading period at issue occurred within limitations period). [55]:See 3M Company v. Browner, 17 F.3d 1453, 1459 (D.C. Cir. 1994). [56]:Patricia A. Johnson, Securities Exchange Act Rel. No. 35698 (May 10, 1995), 59 SEC Docket 863. [57]:See, e.g., George Craig Stayner, CPA, Initial Decision Rel. No. 65 (May 8, 1995), 59 SEC Docket 945, 970, proceedings dismissed, Securities Exchange Act Rel. No. 39994 (May 14, 1998), 67 SEC Docket 425; Howard F. Rubin, Securities Exchange Act Rel. No. 35179 (Dec. 30, 1994), 58 SEC Docket 1478; Black & Company, Inc., Admin. Proc. File No. 3-3460 (July 12, 1974), 1974 SEC Lexis 3633, at *28-29; Thomson & McKinnon (Aug. 11, 1952) (unpublished memorandum opinion and order attached as Appendix B to Black & Company, Inc., 1974 SEC Lexis 3633, at *49). [58]:Harris v. Secretary, Department of Veterans Affairs, 126 F.3d 339, 344 (D.C. Cir. 1997). As one court has stated in explaining the policy behind the requirement that the limitations defense be raised timely, "[t]he purpose . . . is to avoid surprise and undue prejudice . . . by providing notice and the opportunity to demonstrate why the defense should not prevail." Venters v. City of Delphi, 123 F.3d 956, 967 (7th Cir. 1997) (citations omitted). See also Sanders v. Department of the Army, 981 F.2d 990, 991 (8th Cir. 1992) (declining to find waiver where "sufficient notice" of limitations defense was provided). The Seventh Circuit further has held that Once the availability of an affirmative defense is reasonably apparent, the defendant must alert the parties and the court to his intent to pursue that defense. "A defendant should not be permitted to `lie behind a log' and ambush a plaintiff with an unexpected defense." Venters v. City of Delphi, 981 F.2d at 968 (citations omitted). [59]:All of the arguments 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. 41250 / April 5, 1999 Admin. Proc. File No. 3-8531 ________________________________________________ : In the Matter of : : LAURIE JONES CANADY : Rural Route 1 : Council Bluffs, Iowa 51503 : : ________________________________________________: ORDER IMPOSING REMEDIAL SANCTIONS On the basis of the Commission's opinion issued this day, it is ORDERED that Laurie Jones Canady be, and she hereby is, barred from association with any broker or dealer, and it is further ORDERED that Laurie Jones Canady cease and desist from committing or causing any violation and committing or causing any future violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and it is further ORDERED that Laurie Jones Canady disgorge the amount of $23,624, representing the commissions received for trading in the accounts of Cynthia Christianson Sim, Carolyn Campbell, Evelyn Fasbender and Mary and Richard Gruhl (collectively, the "Testifying Customers") during the period at issue in this proceeding, plus prejudgment interest of $28,069 determined in conformity with 26 U.S.C. § 6621(a)(2) from February 20, 1990, the date on which Canady terminated her employment with Merrill Lynch, through the date of this order. Interest shall continue to accrue on all funds owed until they are paid. To the extent Canady can establish, through an accounting, that she received commissions during this period from unsolicited trades in the accounts of the Testifying Customers or that she contributed to the settlement of any complaints these Testifying Customers may have filed relating to the conduct that is the subject of this proceeding, the disgorgement amount will be reduced by these amounts. If Canady does not provide an accounting within thirty days of the date of this order, the disgorgement amount will remain fixed at that specified above. Interest shall continue to accrue on all funds owed until they are paid. In the event Canady chooses to submit an accounting, it shall be sent under cover letter to the Office of the Administrative Law Judges, 450 5th Street, N.W., Washington, D.C. 20549. Because the administrative law judge who heard this matter no longer is with the Commission, the Chief Administrative Law Judge shall designate an administrative law judge to review any accounting that Canady provides. The designated law judge shall review the accounting and determine whether it justifies a modification in the disgorgement amount. The law judge shall then set the new disgorgement amount, along with accrued interest, and a new date by which the total amount shall be paid by Canady. Canady's payment of disgorgement shall be: (i) made by United States postal money order, certified check, bank cashier's check, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549 within thirty days of the date of this order (or, in the event an accounting is provided by Canady, by the date set by the designated law judge); and (iv) submitted under cover letter which identifies Canady as Respondent in this proceeding, and the file number of this proceeding. A copy of this cover letter and check shall be sent to Gregory P. von Schaumburg, Counsel for the Division of Enforcement, Securities and Exchange Commission, Midwest Regional Office, 500 W. Madison Street, Suite 1400, Chicago, IL 60661, and to the designated law judge in the event an accounting is submitted. By the Commission. Jonathan G. Katz Secretary