United States of America
In the Matter of
EDWARD I. FRANKEL
|ORDER DENYING PETITION TO VACATE ADMINISTRATIVE BAR ORDER|
Introduction and Disposition. Petitioner Edward I. Frankel ("Frankel"), the subject of a 1972 order of the Commission, entered by his consent, has petitioned for relief from that order. This matter and two similar matters the Commission also decides today 1 provide an opportunity for the Commission to review its precedent concerning, and to discuss the standard that it uses for review of, petitions for relief from administrative bar orders. That standard reflects the Commission's interest in maintaining its ability to control, in the usual situation and consistent with its statutory obligations, the securities industry activities of individuals whom it has barred in response to findings of serious misconduct. The Commission concludes in this instance that, consistent with the public interest and the protection of investors, the petitioner cannot be permitted to function in the securities industry without the safeguards provided by the administrative bar. Accordingly, as discussed below, the Commission has determined to deny the petition to vacate.
Background. This is Frankel's third petition; the Commission denied his others in 1994 and 1997.
1. 1972 Consent Order. Frankel is subject to a 1972 order barring him from association in a supervisory position with any broker-dealer (the "1972 Frankel Order"). 2 In the 1972 FrankelOrder, the Commission found, on Frankel's consent, that Frankel, formerly a partner at Baerwald & DeBoer ("Baerwald"), a registered broker-dealer, and other respondents offered and sold unregistered securities of a company and effected sales of those securities without disclosing Baerwald's control, participation, and financial interest in their distribution. The Commission found that Frankel falsely confirmed to auditors of one of Baerwald's client-companies that Baerwald held certain U.S. Treasury bills for that client-company's account, thus causing the client-company to make filings with the Commission that falsely reflected the Treasury bills as an asset. It also found that Frankel made or caused to be made false and misleading entries on Baerwald's books and records that falsely confirmed that Baerwald held the Treasury bills for the client-company. 3
2. Frankel's Subsequent Work History. Since 1976, Frankel has been permitted by the Commission and the NASD to associate in a supervisory capacity with broker-dealer firms, notwithstanding the bar. Frankel received Commission consent in 1993 to associate with Aragon Financial Services, Inc. ("Aragon") as a general securities principal, a position from which he was terminated in January 2002. The Form U-5 Aragon filed on termination states that the basis was "Failure to contact home office by telephone (at least once per week) for two consecutive weeks, as required due to heightened supervision."
3. Disposition of Frankel's Prior Petitions to Vacate. As indicated, the Commission has denied Frankel's two prior petitions for relief. 4 In its 1994 order, the Commission cited the Division of Enforcement's opposition to Frankel's petition tovacate and referenced Frankel's assertions that the conduct underlying the 1972 Frankel Order occurred 26 years before and that he had since maintained an "unblemished business record." The Commission found that the latter assertion was "belied" by the fact of then-unresolved allegations made by the State of Florida against Frankel in an administrative complaint. The complaint alleged that Frankel, then a branch manager of Intrepid Securities, Inc., knowingly had allowed the firm to conduct a securities business in Florida without required registration with the state. The Commission found that it would be against the public interest for it to consider relinquishing control over Frankel's activities when the complaint remained pending against him.
In its 1997 order, the Commission concluded that Frankel had not demonstrated that vacation of the 1972 Frankel Order was warranted. 5 The Commission expressed its particular concern that Frankel had entered into a consent agreement with the State of Florida that imposed on him a cease and desist order and supervisory restrictions. The Commission stated that "[t]his recent event demonstrates the appropriateness of the continued control afforded by our 1972 Order over Frankel's activities within the industry," and that "[t]he Order's continued effectiveness maintains our ability to reject or restrict as appropriate Frankel's association with a broker-dealer." 6
4. Substance of Pending Petition. Frankel claims that both law and equity require that the 1972 Frankel Order be vacated as "significant changes in circumstances" have arisen since he consented to the order. 7 Among other things, Frankel cites the fact that 30 years have elapsed, and once more asserts thathis record has remained unblemished since the issuance of the 1972 Frankel Order. 8
He also argues that the impact on him of a 1994 National Association of Securities Dealers, Inc. ("NASD") rule assessing a $1,500 annual fee on its member firms that employ statutorily-disqualified individuals 9 warrants the vacation of the order as a "significant, and indeed unforseen, change in circumstance." Frankel claims that the fee caused his former employer, Aragon, to terminate his employment in January 2002. Frankel further claims that the fee hinders his ability to obtain other employment, and that, as a consequence, the 1972 Frankel Order "originally intended to be remedial in nature, [has become] an Order that has become nothing less than punitive." Frankel cites in further support of his petition Commission orders granting motions to vacate that rely on reasons he asserts are equally applicable to his situation passage of time and an unblemished record; an inability to obtain employment; and an inability to participate fully in the securities industry.
5. Division's Position on Pending Petition. The Division opposes Frankel's petition. The Division counters Frankel's claim that his record since the bar is "unblemished," pointing to the fact that the Florida proceedings resulted in the imposition of sanctions on Frankel. The Division, further, asserts that, while the NASD fee that Frankel posits establishes the need for relief from the bar may not have been foreseen at the time of Frankel's bar, the need for adequate oversight to ensure compliance with the sanction was a natural and foreseeable consequence of the bar. 10 It also contends that Frankel hasnot shown how the fee itself has harmed him, as Frankel remained in his last firm's employ for eight years after the NASD adopted the fee in 1994.
Standard Against Which the Commission Assesses Petitions to Vacate or Modify Bars. In determining requests to vacate or modify bars the Commission has considered the impact of the requested relief on the public interest and the protection of investors. 11 In orders denying the vacation or modification of bars, the Commission has cited, variously, Swift v. United States, 12 and Rufo v. Inmates of the Suffolk County Jail. 13 These orders have focused on the public interest and investor protection concerns presented should the Commission relinquish its control over the petitioners' activities. 14 In thoseinstances in which the Commission has vacated bar orders, 15 the Commission has applied a facts and circumstances test stressing, variously, the nature of the underlying misconduct and the length of time since entry of the Commission's bar order, 16 the extent to which prior relief from the order had been granted, the unblemished compliance record of the respondent since he or she had been permitted to return to the securities industry, and the Division of Enforcement staff's position with respect to the relief requested. In most of these matters, lifting the bar was the last in a series of incremental grants of relief -- that is, the petitioner earlier had been permitted to associate without restrictions. 17 Review of this precedent reflects that the Commission granted relief on concluding that there would be noadverse impact on the public interest and the protection of investors if the bar were vacated or modified. 18
The Commission's long-standing approach to petitions to vacate or modify, in sum, reflects the Commission's statutory obligation to ensure that a request for relief or modification comports with the public interest and investor protection, and demonstrates the use of the following standard for assessing such petitions 19:
In reviewing requests to lift or modify administrative bar orders, the Commission will determine whether, under all the facts and circumstances presented, it is consistent with the public interest and investor protection to permit the petitioner to function in the industry without the safeguards provided by the bar. In the usual case, bars will remain in place; relief will be appropriate only in compelling circumstances. Consideration of a range of factors guides the Commission's public interest/investor protection inquiry, and no one factor is dispositive. These factors are:
Consistent with the Commission's long-standing approach in this area, Commission administrative bars, which are imposed in response to findings of misconduct, will remain in place in the usual case and be removed only in compelling circumstances. Preserving the status quo ensures that the Commission, in furtherance of the public interest and investor protection, retains its continuing control over such barred individuals' activities. 20 At the same time, the Commission will act in response to those situations in which, under all the facts and circumstances, the equitable need for relief, consistent with the public interest and investor protection, warrants vacating or modifying a Commission bar order.
Application of Standard. On balance, on review of all the facts and circumstances, the Commission does not believe that the public interest and investor protection will be served if Frankel is permitted now to function in the industry without the safeguards provided by the bar to which he presently is subject. The Commission concludes that no compelling circumstances for removal of the bar have been shown; indeed, the factors that are relevant to that inquiry applied to the facts here militate strongly against relief:
Accordingly, IT IS ORDERED that the petition of Edward I. Frankel to vacate the order entered against him on August 4, 1972, be, and it hereby is, DENIED.
By the Commission.
Jonathan G. Katz
1 Ciro Cozzolino, Securities Exchange Act Rel. No. 49001 (December 29, 2003),_ SEC Docket ____; Stephen S. Wien, Exchange Act Rel. No. 34-49000 (December 29, 2003), __ SEC Docket ____.
2 W.E. Burnet & Co., Exchange Act Rel. No. 9711 (Aug. 4, 1972). The supervisory bar was limited by an exception thatspecified that "he may be a floor partner or officer of a broker-dealer which is a member of a national stock exchange and may own such minimum proprietary interest in such firm as may be necessary to qualify as a floor partner or officer provided a showing is made to the Commission that he is adequately supervised and does not participate in managerial duties." Additionally, Frankel was suspended for 50 days.
3 The Commission determined that Frankel and other individual respondents violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-6 thereunder, and aided and abetted violations of Sections 13(a), 14(a), 15(c) and 17(a) of the Exchange Act and Rules 13a-11, 14a-3, 14a-9, 15c1-5, 15c1-6, 17a-3 and 17a-4 thereunder.
4 Edward I. Frankel, Admin. Proc. File No. 3-2783 (Dec. 22, 1994)("1994 Frankel Order"); Edward I. Frankel, Exchange Act Rel. No. 38378 (Mar. 10, 1997), 64 SEC Docket 131 ("1997 Frankel Order").
5 The 1997 Frankel Order discussed United States v. Swift, 286 U.S. 106 (1932), and Rufo v. Inmates of the Suffolk County Jail, 502 U.S. 367 (1992), indicating that Frankel had not shown either that the bar imposed a "grievous wrong" (Swift, 286 U.S. 106, 119), or that there had been a "significant change in circumstances" (Rufo, 502 U.S. at 383) since issuance of the consent order, and that Frankel "ha[d] [not] demonstrated that the 1972 Order has caused harm beyond the negative stigma that is simply a natural consequence of the action taken against Frankel." 1997 Frankel Order at 6, 64 SEC Docket at 136 (footnotes omitted).
6 1997 Frankel Order at 6-7, 64 SEC Docket at 136-37 (footnote omitted).
7 This is the Rufo standard (502 U.S. at 383).
8 Frankel relies on the fact that the Florida regulator's complaint was "withdrawn" and highlights the fact that Frankel's registration in the State was approved. He does not reference the one-year prohibition, and the cease and desist order that, with his consent, accompanied that withdrawal and registration approval.
9 Schedule A to the NASD Bylaws, Section 12.
10 The Division cites to Peter E. Aaron, Exchange Act Rel. No. 31470 (Nov. 16, 1992), 52 SEC Docket 3813, 1317. In Aaron, the Commission considered the claim that, subsequent to the petitioner's bar, certain states had adopted a policy of refusing registration to barred individuals, and that this constituted a change in circumstances upon which relief could be grounded. The Commission rejected this argument, stating: "Even if some states have tightened their requirements regarding barred individuals, a development of that kind, in this context, cannot be deemed an unfair surprise."
11 See, e.g., Stephen S. Wien, Exchange Act Rel. No. 40239 (July 21, 1998), 67 SEC Docket 1781, 1783 ("[W]e are not convinced that lifting the bar would be consistent with the protection of public customers. . . . [Our] control is still a necessary safeguard in the public interest.").
12 286 U.S. 106 (1932). Swift requires a "clear showing of grievous wrong evoked by new and unforeseen conditions." Id. at 119. The Commission's citation to Swift in its denial orders dates back to the Commission's 1985 order in Cranford Delano Newell, Admin. Proc. File No. 3-6174 (Oct. 3, 1985). Commission orders denying requests to vacate or modify bars entered on consent which reference the Swift standard include Donald H. Parsons, Exchange Act Rel. No. 32948 (Sept. 23, 1993), 55 SEC Docket 112, 113; Peter E. Aaron, 52 SEC Docket at 3816; and Sam E. Whittaker, Admin. Proc. File No. 3-6252 (July 22, 1991).
13 502 U.S. 367 (1992). The Rufo standard for modification or vacation of a judicial consent order requires a showing that a "significant change in facts or in law warrants revision of the decree and that the proposed modification is suitably tailored to the changed circumstance." Id. at 383. Among the Commission's orders which reference Rufo are Stephen S. Wien, 67 SEC Docket at 1782; the 1997 Frankel Order, 64 SEC Docket at 135; Salvatore F. Geswaldo, Exchange Act Rel. No. 37896 (Oct. 30, 1996), 63 SEC Docket 342, 345; and First Omaha Securities Corp., Exchange Act Rel. No. 37654 (Sept. 6, 1996), 62 SEC Docket 2253, 2256.
14 See, e.g., First Omaha Securities Corp., 62 SEC Docket at 2260 (finding "significant governmental interest" in continuing the order, as "maintenance of the [o]rder functions to alert potential investors to the firm's disciplinary history"); Parsons, 55 SEC Docket at 114 ("The order against Parsons contains findings of very seriousmisconduct. Although limited relief from the order, such as that already granted, may be appropriate in certain discrete circumstances, the public interest requires that continuing control be maintained over Parsons' activities."); 1994 Frankel Order (concluding that "it would be against the public interest for us to consider relinquishing [our] control" over the petitioner while allegations of serious post-order misconduct remain unresolved); William H. Pike, Investment Company Act Rel. No. 40417 (July 20, 1994), 57 SEC Docket 589, 590, petition for review denied, Pike v. SEC, 52 F.3d 1122 (D.C. Cir. 1995) ("the public benefit of maintaining our Order outweighs any detriment to Pike that may result from its continuance").
15 The Commission granted relief from bars entered by consent in Mark E. Ross, Exchange Act Rel. No. 43033 (July 13, 2000), 72 SEC Docket 2587; John W. Bendall, Jr., Exchange Act Rel. No. 38326 (Feb. 24, 1997), 63 SEC Docket 2790; Ralph J. Hayes, Exchange Act Rel. No. 36604 (Dec. 19, 1995), 60 SEC Docket 2880; Bruce William Zimmerman, Exchange Act Rel. No. 36275 (Sept. 25, 1995), 60 SEC Docket 883; Munro J. Silver, Admin. Proc. File No. 3-7496 (Aug. 9, 1991).
16 In each of these matters, the underlying Commission orders involved findings of fraud, but the time elapsed since the Commission's bar order varied from 19 to 32 years.
17 Bendall and Ross are the exceptions. In Ross, the Commission noted that the Commission had relaxed certain (but not all) of the restrictions in the order (72 SEC Docket at 2587-88); in Bendall, while the NASD and the Commission had granted certain relief from the bar order, that grant was subject to certain conditions (63 SEC Docket at 2791).
18 In Ross, for example, the Commission cited favorably the Division's view that the order was "no longer needed to protect investors." 72 SEC Docket at 2588. In Bendall, similarly, the Commission highlighted the Division's position that "the requirements imposed on Bendall as a result of the bar no longer serve an important investor protection purpose." 63 SEC Docket at 2792.
19 Consistent with Chevron, USA, Inc. v. Natural Res. Def. Counsel, Inc., 467 U.S. 837 (1984), the Commission as an administrative agency is free to adopt any reasonable standard for relief from its orders, absent a statutory requirement to the contrary.
20 To paraphrase the U.S. Court of Appeals for the D.C. Circuit in SEC v. Clifton, 700 F.2d 744 (D.C. Cir. 1983), significant Commission interests would be impaired if a modification standard is adopted that too readily lifts consent orders against violators -- by settling with the Commission, violators receive significant benefits and the Commission, in turn, advances investors' interests through an order that permits continuing control over respondents.
The Commission's approach also reflects the need, in the usual case, for finality in administrative adjudications. As the Supreme Court has recognized:
If upon the coming down of the order litigants might demand rehearings as a matter of law because some new circumstance has arisen, some new trend has been observed, or some new fact discovered, there would be little hope that the administrative process could ever be consummated in an order that would not be subject to reopening.
Interstate Commerce Commission v. City of Jersey City, 322 U.S. 503, 514 (1944).
21 52 SEC Docket at 3817.
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