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U.S. Securities and Exchange Commission

Initial Decision of an SEC Administrative Law Judge

In the Matter of
Clarence Z. Wurts

FILE NO. 3-9114-EAJA

Before the
Washington, D.C. 20549

In the Matter of



October 31, 2001

APPEARANCES: Merri Jo Gillette and Catherine E. Pappas for the Division of Enforcement, Securities and Exchange Commission

Justin P. Klein and Thomas B. Roberts of Ballard Spahr Andrews & Ingersoll LLP for Applicant Clarence Z. Wurts

BEFORE: Carol Fox Foelak, Administrative Law Judge


This Initial Decision denies Clarence Z. Wurts's application for fees and expenses pursuant to the Equal Access to Justice Act (EAJA). Wurts, the owner of a small broker-dealer, sought reimbursement for his defense of charges concerning his supervision of an employee who engaged in securities fraud. The Commission found Wurts's supervision defective but imposed milder sanctions than the Division of Enforcement sought, which he argued was an "excessive demand" for sanctions under the EAJA. The Decision concludes that the demand for sanctions was not excessive as a matter of law, so Wurts cannot recover the costs of defending against it.


A. Procedural Background

This Initial Decision concerns an Application for an Award of Fees and Expenses pursuant to the Equal Access to Justice Act (EAJA), 5 U.S.C. § 504, and Sections 201.31-.59 of the Securities and Exchange Commission's (Commission) Rules, 17 C.F.R. §§ 201.31-.59, timely filed on April 12, 2001, by Clarence Z. Wurts. Wurts's EAJA application followed a final disposition in a proceeding against him that he argues arose from an "excessive demand" within the meaning of 5 U.S.C. § 504(a)(4). See Clarence Z. Wurts, 74 SEC Docket 319, 74 SEC Docket 2559 (Jan. 16, 2001).1 The Division of Enforcement (Division) filed an Answer, and Wurts, a Reply, pursuant to 17 C.F.R. §§ 201.52 and .53, respectively.2

The Commission's Rules disfavor further proceedings, such as an evidentiary hearing, on matters at issue in an EAJA application, and emphasize a prompt decision by the administrative law judge. See 17 C.F.R. §§ 201.55, .56. The findings and conclusions in this Initial Decision are based on the record, which includes the record in the original proceeding and filings in the EAJA proceeding. The burden of proof was placed on the Division. Cf. 5 U.S.C. § 504(a)(1); 17 C.F.R. § 201.35(a) ("The burden of proof that an award should not be made to an eligible prevailing applicant is on [the Division].") All arguments and proposed findings and conclusions that are inconsistent with this Decision were considered and rejected.

B. Allegations and Arguments of the Parties

Wurts argues that he offered to settle the underlying proceeding in an April 1996 Wells Submission on terms that were nearly identical to those that the Commission finally imposed in January 2001. He argues that the Division's rejection of his offer and request for sanctions throughout the proceeding constituted an excessive demand within the meaning of 5 U.S.C. § 504(a)(4) as being substantially in excess of, and unreasonable when compared to, the sanctions the Commission imposed. Wurts argues that, as of March 20, 2001, he reasonably incurred fees and expenses to defend against the excessive demand and to litigate the EAJA proceeding that total $70,986.76, when attorney fees are capped at $125 per hour, the maximum allowable in the EAJA. He asks for that sum plus additional fees and expenses incurred after March 20, 2001.

The Division argues that it never made a demand within the meaning of the EAJA and that it sought sanctions throughout the proceeding that were appropriate in light of the facts, precedent, and the regulatory climate at the time. Finally, it argues that Wurts's request is excessive as to the time period and as to the amount claimed.


A. Background Facts Concerning Wurts

The following facts were found in the Commission's Opinion. See Wurts, 74 SEC Docket at 2559-70. Wurts, who began his career in the securities industry in 1965, had no previous disciplinary history. He has been actively involved in industry self-regulation for many years, serving in various capacities with the New York Stock Exchange, the Philadelphia Stock Exchange, and the National Association of Securities Dealers (NASD). After working for several major wire houses, Wurts founded Philadelphia Investors, Ltd., (PIL), a broker-dealer, in 1989, and has been its president and sole owner since then. He has always had sole compliance responsibility for PIL and retained ultimate supervisory authority. PIL clears its transactions through Pershing on a fully-disclosed basis.

Wurts hired Michael G. Cohen to work at PIL in September 1992. Wurts was aware of Cohen's extensive disciplinary history, including unauthorized trading and failure to repay loans. Wurts employed special supervisory procedures to monitor Cohen's activities, such as requiring Cohen to submit his option trades to Wurts for pre-approval and to fill out a daily blotter so that Wurts could check it against the daily reports from Pershing. Cohen soon impressed Wurts and others at PIL with his diligence, knowledge of the securities industry, and meticulous attention to detail, and worked his way into a position of trust and responsibility. Wurts gave Cohen supervisory responsibility, and over time his oversight of Cohen diminished.

Before his employment at PIL, Cohen had formed limited partnerships and solicited investments for the stated purpose of options trading. Wurts forbade such activities but ignored red flags concerning Cohen's ongoing activities and did nothing to confirm Cohen's representation that he complied with the ban. Cohen continued to solicit new investments that he used fraudulently to cover trading losses and payment obligations to previous investors. Eventually his ability to raise new capital failed and he departed abruptly in April 1995.3 Wurts immediately contacted the NASD. Wurts reimbursed all PIL clients, and some non-clients, for their losses, for a total of $35,000, and improved PIL supervisory procedures.

The Commission referenced the factors set forth in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) in its Opinion. The Commission concluded that Wurts's supervisory failure was not an isolated incident, but a series of failings over a period of months, starting with hiring Cohen without thorough investigation of the limited partnerships despite his abysmal disciplinary history. The Commission found Wurts's lapses of judgment extraordinary, almost to the point of recklessness. Mitigating factors were that Wurts's lack of care in supervising Cohen was uncharacteristic, that he recognized the wrongful nature of his conduct and accepted responsibility for the lapses that occurred at PIL, and that he contacted the NASD as soon as he learned that Cohen might have engaged in misconduct. It was undisputed that the likelihood that he would commit future securities violations was low.

B. The Commission's Proceeding Against Wurts

On April 12, 1996, Wurts and PIL made an Offer of Settlement (Offer) in a Wells Submission on these terms:

    A censure;

    a six-month supervisory suspension for Wurts;

    continuing education on supervisory standards for Wurts in a form acceptable to the Commission; and

    an undertaking that PIL will retain a new compliance principal and branch office manager acceptable to the Commission who will assume Wurts's day-to-day supervisory duties over the retail broker-dealer activities of PIL.

Answer, Ex. C at 12-13.4 The Division, and subsequently, the Commission, rejected the Offer.

The Commission commenced a proceeding, seeking unspecified sanctions pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act) and civil penalties in an unspecified amount pursuant to Section 21B of the Exchange Act, against PIL and Wurts by an Order Instituting Proceedings (OIP) on September 27, 1996. Wurts and PIL were charged with failure to supervise Cohen with a view to preventing his violations of the securities laws during the period he was associated with PIL, from March 1992 through April 1995. The Division first requested specific sanctions in its January 23, 1997, prehearing brief, as follows:

Against Wurts:

    A six-month suspension;
    a supervisory and proprietary bar; and
    a $10,000 civil penalty.

Against PIL:

    A censure;
    undertakings that the firm revise its supervisory procedures; and
    a civil penalty of at least $50,000.

Following the three-day February 1997 hearing, the Division's May 8, 1997, posthearing brief asked for the same sanctions against Wurts and a censure and $50,000 penalty against PIL. It noted Wurts's clean record, his recognition of the wrongfulness of his conduct, and his sincerity of assurances against future violations. The March 20, 1998, Initial Decision concluded that PIL and Wurts failed reasonably to supervise Cohen with a view to preventing his violations and ordered sanctions against each. Philadelphia Investors, Ltd., 66 SEC Docket 2645 (A.L.J. Mar. 20, 1998) (ID). PIL and Wurts were censured, and PIL was ordered to hire an outside consultant, approved by the Division, to review its supervisory procedures; PIL was ordered to pay a $15,000 civil penalty, and Wurts, a $5,000 civil penalty. ID, 66 SEC Docket at 2662-65. As ordered, PIL and Wurts paid the penalties and hired an outside consultant.

The Division petitioned for review of the sanction ordered against Wurts. Its petition for review was dated April 7, 1998, and filed April 8. As amended on April 10, the petition urged that Wurts's supervisory failures required a sanction more severe than censure in addition to the civil penalty, "at minimum":

    A suspension "for a period of time" and

    a supervisory and proprietary suspension or bar.

Further settlement attempts followed, but were unsuccessful. Appl. at 18. The Division's July 29, 1998, brief in support of its petition for review asked for:

    A suspension "for a period of time" and

    a supervisory and proprietary bar, with the right to reapply after an "appropriate time."

Finally, at the December 8, 1999, oral argument the Division requested a nine-month supervisory and proprietary suspension.5

The Commission's decision was to censure Wurts and suspend him for six months from association in a supervisory capacity with any broker or dealer. Wurts, 74 SEC Docket at 2566-71. The Commission stated that suspending Wurts or barring him from a supervisory or proprietary role for a lengthy period could cause the closing of PIL, with serious consequences for its employees and customers. The Commission noted that Wurts had consented to and served a thirty-day supervisory suspension imposed by the Pennsylvania Securities Commission, arising from the Cohen situation, and concluded that PIL could operate for a limited period without Wurts's personal supervision and without harm to customers.

C. Fees and Expenses

Wurts seeks reimbursement for 488.2 hours of attorney fees and about $11,000 in expenses during the time from April 1996, when the Division rejected his Offer, through the filing of the EAJA application, as follows:

    April 19, 1996, through September 27, 1996, the date of the OIP: 0.7 hours, billed at $220 per hour, and $28.20 in expenses. Appl., Ex. C at 1, 19, 21, 33-34.

    October 3, 1996, through January 23, 1997, the date of the Division's prehearing brief specifying sanctions sought against Wurts and PIL: 138.3 hours, billed at $110 to $400 per hour, and $903.70 in expenses. Appl., Ex. C at 1-4, 19, 21-23, 33-34.

    January 24, 1997, through April 6, 1998: 212.3 hours, billed at $100 to $435 per hour, and $7,190.27 in expenses.6 Appl., Ex. C at 4-10, 19-20, 23-29, 33-34.

    April 7, 1998, the date of the Division's petition for review of the sanctions imposed against Wurts only, through the filing of the EAJA application: 158.9 hours, billed at $235 to $450 per hour, and $2,825.59 in expenses.7 Appl., Ex. C at 10-18, 30-34.

Wurts seeks recovery of actual attorney fees up to the statutory maximum of $125 per hour. The hourly rates that were charged were the prevailing market rates in the Philadelphia area for the type and quality of work performed. Appl. at 41-42. The majority of the services, about 395 hours, were provided by one attorney at a time, billed at $220 per hour in 1996, $215 in 1997, $235 in 1998, $245 in 1999, and $280 in 2001. Occasional assistance and review was provided by other attorneys, about 82 hours, billed at $100 to $450 per hour, and by legal assistants, 8 hours, billed at $90 per hour Appl., Ex. C at 1-21; Reply at 7.

Wurts had total assets of approximately $1,318,530 at the time of the OIP. Reply at Ex. A. Thus, his net worth was equal to or less than that sum.


Wurts has met the following requirements of the EAJA: The proceeding against him was an "adversary adjudication" within the meaning of the EAJA, 5 U.S.C. § 504(b)(1)(C)(i).8 Additionally, he is a "party" consistent with the requirements of 5 U.S.C. § 504(b)(1)(B)(i), in that his net worth did not exceed $2,000,000 at the time the adversary adjudication was initiated.

Three additional issues are discussed in this section. First, a "demand" within the meaning of 5 U.S.C. §§ 504(a)(4) and (b)(1)(F) first occurred on January 23, 1997, and continued for the remainder of the proceeding. Second, the amount that can be claimed for fees and expenses is reduced to $14,743.09 to comply with the $75 per hour maximum attorney fees permitted by the Commission's Rules and to limit the fees and expenses to those related to defending against what Wurts argues is the Division's "excessive demand"; such fees and expenses commenced on April 7, 1998. Third, the demand was not excessive within the meaning of the EAJA.

A. Date of the Demand

The EAJA provides:

"demand" means the express demand of the agency which led to the adversary adjudication, but does not include a recitation by the agency of the maximum statutory penalty (i) in the administrative complaint, or (ii) elsewhere when accompanied by an express demand for a lesser amount.

5 U.S.C. § 504(b)(1)(F).

The OIP was the administrative complaint. It authorized sanctions pursuant to Sections 15(b) and 19(h) of the Exchange Act and civil penalties pursuant to Section 21B of the Exchange Act, but did not specify any values. A demand, within the meaning of 5 U.S.C. §§ 504(a)(4) and (b)(1)(F), first occurred in the Division's January 23, 1997, prehearing brief.9 The Division asked that Wurts be suspended for six months from association with a broker-dealer and permanently barred from association in a supervisory or proprietary capacity and that he pay a $10,000 fine. The Division's May 8, 1997, posthearing brief asked for the same sanctions. Following the Initial Decision, which ordered sanctions against PIL, and a censure and $5,000 fine against Wurts, and with which Wurts and PIL complied, the Division petitioned for review as to Wurts. The Division's April 7, 1998, petition for review, as amended, asked that Wurts be suspended "for a period of time" and be suspended or barred from association in a supervisory and proprietary capacity. The Division's July 29, 1998, brief asked for a suspension "for a period of time" and a supervisory and proprietary bar with the right to reapply after an "appropriate time." At the December 8, 1999, oral argument the Division asked for a nine-month supervisory and proprietary suspension. The sanctions that the Division requested on each of these dates would have effectively closed PIL. Thus, what Wurts argues is an excessive demand first occurred on January 23, 1997, and continued for the remainder of the proceeding.

B. Fees and Expenses

Wurts argues that he should be awarded attorney fees reflecting the $125 per hour statutory maximum provided in 5 U.S.C. § 504(b)(1)(A). The maximum attorney fee payable in this proceeding, however, is $75 per hour. The EAJA was amended, effective March 29, 1996, to raise the maximum attorney fee payable to $125 per hour, for adversary adjudications commencing on or after that date. The adversary adjudication against Wurts was commenced after that date, and Wurts's accounting includes attorney fees over $125 per hour. The Commission, however, has not amended its Rules to raise the allowable maximum, which remains at $75 per hour. See 17 C.F.R. § 201.36(b). Wurts argues that the higher EAJA rate is controlling. This argument is without merit. The EAJA proscribes agency awards above the maximum; it does not require agencies to award fees at the maximum. Specifically, it provides, "attorney or agent fees shall not be awarded in excess of $125 per hour." 5 U.S.C. § 504(b)(1)(A)(ii). In any event, the undersigned must follow the Commission's Rules.

The Division first specified the sanctions it sought against Wurts in its January 23, 1997, prehearing brief. However, the fees and expenses between that date and April 6, 1998, include more than the cost of defending against what Wurts argues is the Division's excessive demand for a six-month suspension and supervisory and proprietary bar. The fees and expenses during that period also include the cost of PIL's and Wurts's defenses against additional sanctions that the Division requested, including fines totaling at least $60,000 and a censure of PIL.

The undersigned has examined the schedules of fees and expenses on and after April 7, 1998, submitted with Wurts's Application and found them to be reasonable in defending against what he argues is the Division's excessive demand. There is no evidence that the amount sought exceeds the prevailing rate for similar services in the community in which counsel for Wurts ordinarily performs services. Reasonable fees in an EAJA proceeding include fees for litigating the EAJA proceeding as well as the original adversary adjudication. See Russo Sec., Inc., 71 SEC Docket 74, 78 (Nov. 10, 1999) (citing Commissioner, INS v. Jean, 496 U.S. 154 (1990); Trichilo v. Secretary of HHS, 823 F.2d 702, 707 (2d Cir. 1987)). The total is $14,743.09, including attorney fees of $11,917.50 (158.9 hours at $75 per hour) and expenses of $2,825.59.

C. Excessive Demand

The undersigned has conducted an independent evaluation of the evidence in the adversary adjudication through an EAJA perspective to determine whether or not the demand was excessive. Cf. Rita C. Villa, 71 SEC Docket 2438, 2443-44 (Mar. 8, 2000) (holding that an independent evaluation of the evidence in the adversary adjudication must be conducted through an EAJA perspective to determine whether or not the agency's position was substantially justified).

In arguing that the Division's demand was excessive, Wurts references the Commission's Penalty-Reduction Policy for Small Entities, 64 SEC Docket 447, 62 Fed. Reg. 16076 (Apr. 4, 1997) (Penalty-Reduction Policy).10 This policy applies only to money penalties, however. Penalty-Reduction Policy, 64 SEC Docket at 448-49, 62 Fed. Reg. at 16077-78. Wurts did not challenge the money penalties ordered against him and against PIL.

1. The Demand was Substantially in Excess of the Commission's Decision.

The Division's demand was "substantially in excess of the decision of the [Commission]." See United States v. One 1997 Toyota Land Cruiser, 248 F.3d 889, 903 (9th Cir. 2001) (holding that a ratio of 40 to 1 is substantial). The Division from January 23, 1997, onward requested sanctions that included a proprietary bar or suspension that would have resulted in closing PIL, of which Wurts was sole owner, with serious consequences for its employees and customers, as the Commission recognized. In imposing a censure and six-month supervisory suspension, the Commission specifically chose a sanction that would not put PIL out of business, stating that PIL could operate for a limited period without Wurts's personal supervision and without harm to customers. See Wurts, 74 SEC Docket at 2570. In sum, the Division's demand was to close Wurts's business, PIL, and the Commission's decision was a sanction that would not close PIL. The fact that Wurts originally offered to settle for a six-month supervisory suspension underscores the conclusion that the Division's demand was substantially in excess of the Commission's decision.

2. The Demand was Not Unreasonable.

The Division's demand was not unreasonable. Both parties cite numerous Commission settlements to indicate the appropriate sanction for Wurts's supervisory failure. It goes without saying that settlements are not precedent, as the Commission has stressed many times.11 There are, however, a few litigated cases involving violations of the antifraud provisions by registered representatives in which sanctions were imposed for failure to supervise on owners of closely-held small broker-dealers. The sanctions that the Commission imposed on Wurts were consistent with those in the precedential cases. The sanctions that the Division sought on January 23, 1997, April 7, 1998, and December 8, 1999, were not inconsistent with those imposed in the precedential cases. In two cases the Commission left the broker-dealer in business. Sharon M. Graham, 53 S.E.C. 1072 (1998), aff'd, 222 F.3d 994 (D.C. Cir. 2000);12 Shaw, Hooker & Co., 46 S.E.C. 1361 (1977).13 In two cases it did not. Mississippi Valley Investment Co., 46 S.E.C. 499 (1976);14 Richard C. Spangler, 46 S.E.C. 238 (1976);15 see also, James Harvey Thornton, 53 S.E.C. 1210 (1999);16 Consolidated Investment Services, 52 S.E.C. 582 (1996).17 Thus, evaluating the evidence through an EAJA perspective, there is precedent for a sanction that would have ended PIL's existence under Wurts's ownership. Accordingly, it is concluded that the Division's demand was not unreasonable under the facts and circumstances of the case.


Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), it is certified that the record includes the items set forth in the record index issued by the Secretary of the Commission on December 4, 1997, and the items filed in this EAJA proceeding. Those items are (1) Clarence Z. Wurts's Application for an Award of Fees and Expenses and Memorandum of Law, filed April 12, 2001; (2) the Division of Enforcement's Response to Application for an Award of Fees and Expenses and Memorandum of Law, filed May 25, 2001; and (3) Respondent Clarence Z. Wurts's Reply in Support of His Application for an Award of Fees and Expenses, filed June 21, 2001.


IT IS ORDERED that Clarence Z. Wurts's Application for an Award of Fees and Expenses IS DENIED.

This order shall become effective in accordance with and subject to the provisions of Section 201.57 of the Commission's Rules, 17 C.F.R. § 201.57. Pursuant to that rule, a petition for review of this Initial Decision may be filed within twenty-one days after service of the decision. If neither party seeks review and the Commission does not take review on its own initiative, this Initial Decision shall become a final decision of the Commission on November 30, 2001.

Carol Fox Foelak
Administrative Law Judge


1 An EAJA application must be filed "within thirty days of a final disposition in the adversary adjudication" against the applicant. 5 U.S.C. § 504(a)(2). The proceeding against Wurts was authorized pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act). Section 25 of the Exchange Act provides that "[a] person aggrieved by a final order of the Commission entered pursuant to this title may obtain review of the order in [a] United States Court of Appeals" by filing a petition for review "within sixty days after the entry of the order." The Commission defines "final disposition" as the date when "any . . . complete resolution of the proceeding . . . becomes final and unappealable, both within the Commission and to the courts." 17 C.F.R. § 201.44(b); Richard J. Adams, 74 SEC Docket 2134 (Apr. 19, 2001). Thus the date of final disposition of the proceeding against Wurts was March 15, 2001, sixty days after the Commission's January 16 order, when the time for judicial review expired. Wurts's April 12 filing was twenty-six days later - within thirty days, and thus timely under the EAJA and the Commission's Rules. See 5 U.S.C. § 504(a)(2); 17 C.F.R. § 201.44(a).
2 Wurts's Application (Appl.) includes Exhibits (Ex.) A, B, and C. The Division's Answer includes Exs. A, B, C, and D. Wurts's Reply includes Exs. A, with Attachments (Att.) 1-10, and B. Reply Ex. B is comprised of Appl. Ex. A with highlighting and three additional cover pages. The Answer and Reply were timely filed on May 25 and June 21, respectively, pursuant to extensions of time to file granted by the undersigned. See 17 C.F.R. §§ 201.52 and .53.
3 Based on his wrongdoing over a period of years, including the time that he was associated with PIL, Cohen was convicted of mail fraud on January 18, 1996, and sentenced to a twenty-one month prison term and payment of $471,000 in restitution. The Commission barred him, by consent, from the securities industry. Michael G. Cohen, 62 SEC Docket 2846 (Sept. 27, 1996).
4 Answer, Ex. C is a fourteen-page letter dated April 12, 1996, to Donald Hoerl, Esq., District Administrator, from Maria R. McGarry, Esq., of Ballard Spahr Andrews & Ingersoll. The terms of the Offer contained in that letter differ slightly from the terms described by Wurts and found at Appl., Ex. A. Appl., Ex. A is not signed or dated. Therefore, the terms in Answer, Ex. C at 12-13 are accepted as the terms of Wurts's April 1996 Offer.
5 The Commission's Opinion refers to the Division's having asked for a nine-month supervisory and proprietary suspension at the oral argument. Wurts, 74 SEC Docket at 2560 n.2. The Division recalls filing a pleading requesting a nine-month supervisory and proprietary suspension about a week before the oral argument. The record, however, does not contain such a pleading, which, in any event, would have been substantially contemporaneous with the oral argument.
6 Included in the 212.3 hours were 8 legal assistant hours billed at $90 per hour. Appl., Ex. C at 4-5, 19-20.
7 A total of 2.0 hours billed on September 3, November 5, and December 9, 10, and 15, 1998, did not relate to the challenge to the sanctions against Wurts and are omitted. Appl., Ex. C at 15.
8 Section 504(b)(1)(C)(i) defines "adversary adjudication" as "an adjudication under section 554 of this title in which the position of the United States is represented by counsel or otherwise, but excludes an adjudication for the purpose of establishing or fixing a rate or for the purpose of granting or renewing a license." The OIP cited Sections 15(b) and 19(h) of the Exchange Act as authority for the proceeding against Wurts. Thus the proceeding was "on the record, after notice and opportunity for a hearing." See Sections 15(b)(6)(A) and 19(h)(3) of the Exchange Act. Statutory requirements for adjudications under the Administrative Procedure Act are found at 5 U.S.C. §§ 554-59; 5 U.S.C. § 554(a) commences, "[t]his section applies . . . in every case of adjudication required by statute to be determined on the record after opportunity for an agency hearing."
9 The Division's argument that a "demand" does not occur in connection with Commission administrative proceedings is rejected as inconsistent with the EAJA. See 5 U.S.C. § 504(a)(4). Congress did not exempt Commission adversary adjudications when it adopted that section.
10 The policy, which became effective March 29, 1997, was required by the Small Business Regulatory Enforcement Fairness Act, Pub. L. No. 104-121, 110 Stat. 857 (1996) (SBREFA). The SBREFA also amended the EAJA to add § 504(a)(4), under which Wurts filed his EAJA application. See 110 Stat. 862-63.
11 See Richard J. Puccio, 52 S.E.C. 1041, 1045 (1996) (citing David A. Gingras, 50 S.E.C. 1286, 1294 (1992), and cases cited therein); Robert F. Lynch, 46 S.E.C. 5, 10 n.17 (1975) (citing Samuel H. Sloan, 45 S.E.C. 734, 739 n.24 (1975); Haight & Co. Inc., 44 S.E.C. 481, 512-13 (1971); Security Planners Assocs., Inc., 44 S.E.C. 738, 743-44 (1971)); see also Kelley ex rel. Michigan Dep't of Natural Res. v. FERC, 96 F.3d 1482, 1489-90 (D.C. Cir. 1996) and cases cited therein. Commission settlement orders contain disclaimers to this effect. See Bear, Stearns Sec. Corp., 70 SEC Docket 710, 711 n.1 (Aug. 5, 1999). Similarly, speeches, cited by the Division, by the Director of Enforcement and Commissioners, are not precedent.
12 In Graham, Stephen Voss was president and owner of Voss & Co., Inc., a small firm with a single office consisting of one large room. A registered representative aided and abetted the securities fraud of a customer who dealt with his financial problems with a scheme, similar to check-kiting, of wash trades and matched orders. Voss was aware of and condoned the customer's activities at his firm. Voss had a disciplinary history. The Commission suspended Voss from association with a broker-dealer for three months, the same sanction ordered in the December 1995 Initial Decision. The Commission specifically rejected the Division's request for a longer suspension and for a supervisory and proprietary bar.
13 In Shaw, a broker-dealer and its 95% owner were respondents. The firm opened a branch office to trade options and staffed it with two registered representatives who defrauded customers over a three-month period. The owner knew that the volume of sales of one of the registered representatives was extremely large and had reason to believe that his sales pitch was misleadingly optimistic. The Commission noted that the owner and firm suffered heavy losses of more than $300,000 resulting from the inappropriate transactions, closed the branch after the three-month period, and intended not to trade options or to have a branch office in the future. The Commission censured the owner and imposed no sanction on the firm.
14 Respondents in Mississippi Valley were a broker-dealer and its three owners. A registered representative defrauded three unsophisticated widows by churning their accounts with risky and unsuitable transactions over a period of four years. The owners failed to inquire into this and did not step up their supervision even after an NASD complaint. The owners were suspended for six months with a proprietary and supervisory bar thereafter. The firm was allowed to withdraw its registration.
15 In Spangler, an individual was censured and his firm allowed to withdraw its registration. His supervisory lapse consisted of failing to stop employees from making false and misleading statements about a low-priced, speculative security over a one-week period.
16 The broker-dealer in Thornton had forty to fifty registered representatives in several states as independent contractors who paid about 10% of their commissions to the firm for minimal services. A registered representative fraudulently sold $325,000 in risky, illiquid, limited partnership interests to elderly persons on fixed incomes over a four-month period. The firm's president and sole principal knew of customer complaints and lawsuits, but, although heightened supervision was called for, never audited the registered representative's client accounts or inspected her office. The Commission ordered a $50,000 penalty against the firm and revoked its registration. The president was barred with the right to reapply in non-proprietary and non-supervisory capacity after three years and ordered to pay a $5,000 penalty. These sanctions were milder than those ordered in the March 1997 Initial Decision. The Commission stated that it was unusual to revoke a firm's registration for failure to supervise but that the broker-dealer served few of the traditional purposes of a securities firm.
17 The broker-dealer in Consolidated had 100 to 300 registered representatives, all at remote locations from the office where the firm and its two owners were located. A registered representative defrauded fifty to sixty people over a period of five years in a Ponzi scheme, with a net loss of $2.3 million. The owners were aware of the registered representative's disciplinary history when he was hired but never inspected his office or otherwise checked on his compliance with firm procedures during the five-year period. They also ignored red flags, such as a bank account they knew the registered representative kept under the firm's name. The firm itself had a disciplinary history. The Commission ordered a thirty-day suspension of the broker-dealer, a $50,000 penalty, and undertakings; each of the two co-owners was barred with the right to reapply after one year and ordered to pay a $50,000 penalty.


Modified: 10/31/2001