SECURITIES AND EXCHANGE COMMISSION
In the Matter of
CLARENCE Z. WURTS
OPINION OF THE COMMISSION
EQUAL ACCESS TO JUSTICE ACT PROCEEDINGS
Applicant, who was previously sanctioned by the Commission, sought an award of attorneys' fees and expenses under the Equal Access to Justice Act. Held, the application is denied because the staff's request was not excessive or unreasonable.
Carl G. Roberts, of Ballard Spahr Andrews & Ingersoll, LLP, for Clarence Z. Wurts.
Merri Jo Gillette and Catherine E. Pappas, for the Division of Enforcement.
Application filed: November 26, 2001
Last brief filed: March 8, 2002
Clarence Z. Wurts appeals from the decision of an administrative law judge, denying Wurts' application for attorneys' fees and costs under §504(a)(4) of the Equal Access to Justice Act ("EAJA").1 That section provides that a party may seek reimbursement of fees and other expenses related to the defense of an administrative proceeding if the agency's demand for sanctions in that proceeding "is substantially in excess ofthe decision of the adjudicative officer and is unreasonable when compared with such decision, under the facts and circumstances of the case . . . ." The law judge denied Wurts' application for fees. The law judge concluded that the Division of Enforcement's request for sanctions was not excessive as a matter of law. The law judge found that the request was reasonable, given the facts and circumstances of the case. We have conducted an independent review of the record.
A. Procedural History. Wurts is president and sole owner of Philadelphia Investors, Ltd. ("PIL"), a registered broker-dealer. In April 1996, following a staff investigation, Wurts made a so-called Wells submission.2 Wurts offered to settle allegations that he failed to supervise Michael G. Cohen, who was associated with PIL. Wurts offered to submit to a 15-day suspension in all capacities and a six-month supervisory suspension and to participate in continuing education classes.3 The staff informed Wurts that they would recommend that the Commission reject this offer. At Wurts' request, the staff submitted his offer to the Commission. We rejected the offer.
On September 23, 1996, we issued the order instituting this proceeding. In its prehearing brief, filed January 23, 1997, four months after the institution of the proceeding, the Division requested that Wurts be suspended in all capacities for six months, barred in a supervisory and proprietary capacity, and assessed a $10,000 civil money penalty. The Division argued that Wurts' conduct was egregious and that he had wilfully or recklessly ignored his duties as a supervisor.
Following a three-day hearing, an administrative law judge concluded that Wurts and PIL had failed to provide reasonable supervision over Cohen with a view to preventing his violations. The law judge also found that Wurts' failure was egregious, but,in light of factors that the law judge found mitigating, the law judge censured Wurts and assessed a $5,000 civil money penalty against him.
The Division appealed the sanctions assessed by the law judge. On appeal, the Division asked that Wurts be suspended in all capacities "for a period of time, and be suspended or barred from acting in a supervisory or proprietary capacity." At oral argument, the Division asked that the Commission impose on Wurts a nine-month supervisory and proprietary suspension.
B. The Commission's Decision on the Merits.4 On January 16, 2001, under Sections 15(b)(4)(E) and 15(b)(6)(A) of the Securities and Exchange Act of 1934,5 we found that Wurts failed reasonably to supervise Cohen with a view to preventing Cohen's violations of the securities laws.6 We briefly summarize that opinion.
Before coming to PIL, Cohen had organized and sold partnership interests in four limited partnerships. The limited partnerships were organized to invest in securities. In October 1991, Cohen organized Nomad Investment Club ("Nomad") to trade securities.7 Cohen was the general partner of the limited partnerships and the authorized agent of Nomad. Cohen had solediscretion over the limited partnerships' and Nomad's investments.
Cohen used most of the money that he raised through the limited partnerships and Nomad to trade stock options. Initially, Cohen's trading was successful. However, he began to suffer substantial losses. To disguise his losses, Cohen sent fictitious statements to his investors showing that their interests were increasing in value. Cohen also prepared fraudulent historical returns to attract new investors. In addition, Cohen diverted funds from Nomad to himself and to his other entities.
Wurts hired Cohen as a PIL registered representative in September 1992, knowing that Cohen had an extensive disciplinary history.8 However, Wurts believed that Cohen had "amended" his ways and that Cohen's options trading program would bring additional revenue to PIL.
Initially, Wurts imposed special supervisory procedures with respect to Cohen. For example, Cohen's options trades were to be pre-approved.9 Within a month, however, Wurts designated Cohen as PIL's registered options principal. In February 1993, Wurts made Cohen a principal of PIL and began to assign Cohen supervisory responsibilities, subject to Wurts' ultimate supervision.10 While Wurts intended to continue employing special supervisory procedures over Cohen, Cohen began making trades without Wurts' prior approval, informing Wurts of the trades after the fact.
When Wurts hired Cohen, he knew that Cohen had solicited investors for partnerships to trade options. Cohen assured Wurts that the limited partnerships were no longer active. Wurts instructed Cohen to cease all outside activities before coming to PIL. Wurts also directed Cohen not to trade options through limited partnerships at PIL and not to solicit investors for such partnerships. However, Wurts did not determine whether Cohen had ceased his investment activities.
A month after becoming associated with PIL, Cohen opened a PIL account for Nomad. Wurts reviewed the Nomad new account form and approved it. The new account form identified Cohen as the registered representative for the account and an agent for Nomad.11 Wurts did not ask for documentation of Cohen's discretionary authority to conduct transactions for Nomad. The form also claimed that Nomad had submitted partnership documentation and that Nomad was required to submit investment club papers. Wurts never asked to see any of these documents for Nomad. He also never asked Cohen whether Nomad was a new venture or a continuation of an existing venture.
Cohen deposited $15,000 in the Nomad account at PIL. By September 1994, Cohen had lost $13,500 in trading and then transferred another $1500 from Nomad's PIL account to Cohen's personal account. The remaining Nomad PIL account balance was reduced to approximately $50.
In August 1994, Cohen sought Wurts' permission to make a limited partnership offering featuring Cohen's trading program. Wurts directed Cohen to organize the new entity as an investment club, not a limited partnership. Cohen, however, formed Daedalus Investments, Limited Partnership. The new account form identified the customer as "Daedalus Investments LP c/o Michael Cohen," stated that the account was opened for a corporation or partnership, and identified Cohen as the registered representa-tive. Accompanying documents identified Cohen as the general partner of Daedalus. Wurts approved the new account form for Daedalus. However, he did not ask Cohen if Daedalus was a limited partnership.
With Wurts' consent, Cohen induced two PIL salespersons to sell Daedalus units to PIL customers. Daedalus raised $75,000. Cohen used $45,000 to pay off three investors in Nomad and two of his other limited partnerships, transferred $600 to anotherlimited partnership, paid himself $15,000, and sustained $3,369 in trading losses in the Daedalus account.
On April 21, 1995, Wurts learned that Cohen had left abruptly. Wurts subsequently discovered Cohen's violations and immediately contacted the National Association of Securities Dealers, Inc. ("NASD").12
When we considered this matter on appeal, we found that Wurts' conduct required something more severe than a censure. We therefore censured Wurts and suspended him from association with a broker-dealer in a supervisory capacity for a period of six months.
A party may receive attorneys' fees and costs under 5 U.S.C. §504(a)(4) "if the demand by the agency is substantially in excess of the decision of the adjudicative officer and is unreasonable when compared with such decision, under the facts and circumstances of the case. . . ."13
We do not believe the Division's request was excessive.14The legislative history of this provision states:
This test should not be a simple mathematical comparison. The Committee intends for it to be applied in such a way that it identifies and corrects situations where the agency's demand is so far in excess of the true value of the case, as demonstrated by the final outcome, that it appears the agency's assessment or enforcement action did not represent a reasonable effort to match the penalty to the actual facts and circumstances of the case.15
We recognize that we ultimately imposed a six-month supervisory suspension on Wurts.16 However, the Court of Appeals for the Eighth Circuit found that an agency's demand for revocation of a pilot's license, which ultimately resulted in a 180-day suspension, was not excessive.17
We also disagree with Wurts that the Division's position was unreasonable, given the facts and circumstances before it. Wurts urges that we should compare the Division's request with the factors set forth in Steadman v. SEC.18 These factors include:
the egregiousness of the respondent's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of any assurances against future violations, the respondent's recognition of the wrongful nature of the conduct, and the likelihood that the respondent's occupation will present opportunities for future violations.19
We considered Steadman in our determination of what sanction should be imposed on Wurts in the public interest.20 We believe that a comparison between the Division's request and ourapplication of these factors to Wurts confirms the reasonableness of the Division's request.
We found that Wurts' supervisory failure was serious. Wurts hired Cohen in spite of his known, serious disciplinary history. Although Wurts knew of Cohen's prior involvement with limited partnerships and Nomad, Wurts did not demand proof that these investment vehicles were no longer active.
While Wurts initially imposed special supervisory requirements on Cohen, he did not enforce them. Cohen began executing options trades without pre-approval. More troubling, Wurts allowed Cohen to assume supervisory responsibilities shortly after he arrived at PIL, making him the registered options principal within a month and a general principal of PIL four months thereafter.
Wurts' supervision of Cohen's accounts for Nomad and Daedalus also was substantially deficient. Wurts failed to detect that Daedalus was a limited partnership -- an organizational structure that Wurts had prohibited. He also failed to inquire about the heavy trading losses in Nomad, and did not notice the transfer of funds from the Nomad account to Cohen's own account.
We found that "Wurts's lapses of judgment were extraordinary, almost to the point of recklessness." These lapses were not isolated but occurred over a substantial period of time. We were also troubled by Wurts' arguments to the law judge that his supervision of Cohen was reasonable because it was designed to prevent unauthorized trading, the basis of the NYSE's prior disciplinary action against Wurts.21 We observed that Wurts had taken too narrow a view of his obligation to supervise an individual with a prior disciplinary history.
We recognized factors that mitigated Wurts' conduct. Some of these factors were known to the Division at the time it filed its prehearing brief. Wurts incorrectly placed trust in Cohen. Wurts had been employed 30 years in the industry without a prior disciplinary action. However, these factors do not necessarily make the Division's position unreasonable.
We previously stated that the relevant test of a supervisor's performance is whether the supervision was reasonably designed to prevent the violations at issue, not . . . whether, if all the many other supervisory functions he performed were taken into account, his overall supervisory performance somehow earned him a hypothetical passing grade.22
While we found that additional factors mitigated Wurt's conduct, many of these factors occurred after the Division filed its prehearing brief, and the Division could not anticipate them. For example, in testimony before the law judge, Wurts accepted responsibility for his supervisory lapses. In the spring of 1997, after the hearing in this matter, Wurts settled a proceeding with the Pennsylvania State Securities Commission, resulting in his being suspended in a supervisory capacity for thirty days and his reimbursement to customers of a total amount of $35,000 plus interest. After the initial decision, Wurts hired an independent consultant and substantially revised PIL's supervisory procedures.
Wurts argues that the Division's demand was excessive because it failed to consider the effect of suspending or barring Wurts on PIL, its employees, and customers. While we ultimately considered this factor in our resolution of the proceeding, given the seriousness of Wurts' failure as discussed above, we do not think that factor made the Division's suggested sanction in its prehearing brief unreasonable. We had previously made clear that the president of a broker-dealer:
is responsible for compliance with all of the requirements imposed on his firm unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person's performance is deficient.23
Wurts' failure here was serious, particularly given his experience and knowledge of compliance procedures. His delegation to Cohen of supervisory responsibility was "to the point of recklessness."
We also agree with the Division that, in weighing the reasonableness of the Division's request, we need to consider our practice with respect to sanctions in supervision cases in general. Our rejection of Wurts' initial offer reflected the seriousness with which we view failures to supervise. Moreover, around the time of this proceeding, we had suspended supervisors who failed to supervise reasonably from association with a registered entity in all capacities and imposed supervisory and proprietary bars on such persons.24 We had required similarly serious sanctions in settlements.25
Wurts argues that each of these proceedings could be distinguished on their facts. We agree that the cases do not duplicate the facts of this situation. However, our experience has been that fact patterns rarely duplicate themselves in our proceedings to enforce the securities laws. Given the seriousness of Wurts' dereliction and the concern with which we view such violations, we believe that the Division made a reasonable argument for sanctions in its prehearing brief.26
Accordingly, Wurts' application is denied.
By the Commission (Chairman DONALDSON and Commissioners GOLDSCHMID, ATKINS and CAMPOS); Commissioner GLASSMAN, not participating.
Jonathan G. Katz
Admin. Proc. File No. 3-9114-EAJ
In the Matter of
CLARENCE Z. WURTS
ORDER DENYING APPLICATION UNDER THE EQUAL ACCESS TO JUSTICE ACT
On the basis of the Commission's opinion issued this day, it is
ORDERED that the application of Clarence Z. Wurts for an award of attorneys' fees and costs under the Equal Access to Justice Act be, and it hereby is denied.
By the Commission.
Jonathan G. Katz
|1||Clarence Z. Wurts, Initial Decision Rel. No. 194 (Oct. 31, 2001), 76 SEC Docket 647.|
|2||A Wells submission is an opportunity for a person involved in an investigation to provide a written statement to the Commission setting forth the person's interests and position with regard to the subject matter of the investigation. 17 C.F.R. §202.5(c). See also 17 C.F.R. §201.240(c)(3) (governing submission of settlements to the Commission).|
|3||PIL offered to settle and accept a censure and an undertaking to retain a new compliance principal and branch office manager.|
|4||In his brief, Wurts substantially bases his description of the events at issue on testimony before the law judge and the initial decision. Our opinion on the merits did not adopt these facts. We understand that, for purposes of 5 U.S.C. §504(a)(4), the relevant comparison is between an agency's demand and the agency's final determination. See L&T Fabrication & Const., Inc. v. Sec'y of Labor, 197 F.3d 1289, 1290 (10th Cir. 1999) ("decision of the adjudicative officer" under EAJA is final agency decision, not decision of administrative law judge).|
|5||15 U.S.C. §§78o(b)(4)(E), 78o(b)(6)(A).|
|6||Clarence Z. Wurts, Exchange Act Rel. No. 43842 (Jan. 16, 2001), 74 SEC Docket 2559. Before we issued our opinion, Wurts paid the $5,000 civil money penalty assessed by the law judge. As a result, the penalty was not at issue at the time of our consideration of the Division's appeal.|
|7||Although Nomad was called an investment club, Cohen referred to all his entities as limited partnerships.|
|8||Wurts admitted that Cohen had "quite an extensive list of problems," including a 1984 NYSE disciplinary action for unauthorized options trading and judgment in four civil actions, all in 1979, for failure to repay personal loans totaling $57,900. We found that Cohen had not satisfied all of the judgments by the time Wurts was considering hiring him.|
|9||Wurts also required Cohen to fill out a daily options trading blotter. Wurts further sought the assistance of PIL's clearing broker to monitor Cohen's activities.|
|10||By December 1993, Cohen was responsible for supervising PIL's Philadelphia office. Cohen reviewed and approved new accounts opened by other salespersons and reviewed outgoing and incoming mail. He also conducted annual compliance procedures.|
|11||As Nomad's agent, Cohen received Nomad's account statements and had access to all the funds in Nomad's account.|
|12||Cohen subsequently pleaded guilty to one count of mail fraud. United States v. Cohen, Crim. No. 95-421 (E.D. Pa. Jan. 18, 1996). In September 1996, Cohen consented to a bar from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company. Michael G. Cohen, Exchange Act Rel. No. 37742 (Sept. 27, 1996), 62 SEC Docket 2846.|
|13|| 5 U.S.C. § 504(a)(4) provides:
|14||Given this conclusion, we do not address whether there was a "demand" in this proceeding within the meaning of 5 U.S.C. §504(a)(4).|
|15||142 Cong. Rec. S3244 (daily ed. Mar. 29, 1996) (Joint Managers' Statement of Legislative History and Congressional Intent). The Joint Managers' statement also makes clear that this provision is not to result in awarding attorneys' fees as a matter of course. Id.|
|16||The Division lowered its request for sanctions as the proceeding progressed. For example, at oral argument, the Division no longer requested that Wurts be suspended in all capacities and asked that he be suspended in a supervisory and proprietary capacity. We agreed with the Division that the public interest required more than a censure and a civil money penalty.|
|17|| Allen v. NTSB, 160 F.3d 431, 433 (8th Cir. 1998).
In United States v. One 1997 Toyota Land Cruiser, 2001 U.S. App. LEXIS 13790 *15 (9th Cir. 2001), the court found that a demand for $40,000 was excessive where the government ultimately settled for $1,000, plus costs. In that case, the government seized the respondent's car asserting that the owner's friend, who was an alleged drug dealer, hadpurchased the car with drug proceeds. After the forfeiture action was filed, the drug dealer pleaded guilty and admitted that he had purchased the car with drug proceeds.
The district court denied the government's motion for summary judgment in the forfeiture action. As the Court of Appeals explained, "Because the government cannot use information obtained after filing a forfeiture claim to establish probable cause to initiate such proceedings, the district court excluded [the drug dealer's] admissions." Thereafter, the government agreed to the settlement.
In contrast, this is not an instance where the Division attempted to initiate a proceeding with inadmissible evidence. The Division had gathered admissible evidence to support its allegations that Wurts failed reasonably to supervise Cohen in its investigation. That evidence was presented to and received by the Commission and demonstrated the Division's allegations by a preponderance of the evidence.
|18||603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981).|
|19||Wurts, 74 SEC Docket at 2567.|
|21||See n.8 supra.|
|22||Albert Vincent O'Neal, 51 S.E.C. 1128, 1135 (1994).|
|23||Thomas F. White, 51 S.E.C. 1194, 1197 (1994), cited in Sharon M. Graham, 53 S.E.C. 1072, 1085, 1090 (1998) (suspending president of small firm in all capacities for three months), aff'd, 222 F.3d 994 (D.C. Cir. 2000).|
|24||See, e.g., Consolidated Inv. Services, Inc., 52 S.E.C. 583, 591 (1996) (firm's majority owner and president and its senior vice-president barred from association in all capacities with the right to reapply in one year); Albert Vincent O'Neal, 51 S.E.C. at 1136 (barring branch manager in all capacities, with right to reapply in a non-proprietary, non-supervisory capacity). See also Sharon M. Graham, 53 S.E.C. at 1090.|
|25||See, e.g., Frank Klaus, Exchange Act Rel. No. 39165 (Sept. 30, 1997), 65 SEC Docket 1608 (respondent who was officer, principal, and a director suspended in all capacities for six months and barred in supervisory capacity with right to reapply in one year); Christopher LaPorte, Exchange Act Rel. No. 39171 (Sept. 30, 1997), 65 SEC Docket 1623 (founder, director, president, and principal suspended in all capacities for 12 months and barred in a supervisory capcity with a right to reapply after three years); GKN Securities Corp., Exchange Rel. No. 38173 (Jan. 15, 1997), 63 SEC Docket 1834 (respondent who was executive vice president and branch manager suspended in all capacities for 30 days and suspended in a supervisory capacity for 11 months); James Warren, Exchange Act Rel. No. 37715 (Sept. 24, 1996), 62 SEC Docket 2643 (branch manager suspended from association in a supervisory capacity for nine months); F. Otto Busot, Exchange Act Rel. No. 37660 (Sept. 9, 1996), 62 SEC Docket 2268 (branch manager suspended in all capacities for two months and barred in a supervisory capacity with a right to reapply after four years); John R. Moysey, Exchange Act Rel. No. 36247 (Sept. 19, 1995), 60 SEC Docket 765 (branch manager barred with right to reapply in a non-supervisory, non-proprietary capacity after two years); John H. Gutfreund, 51 S.E.C. 93, 114 (1992) (president suspended in all capacities for six months and vice chairman suspended in all capacities forthree months). Many of these settlements also required payment of civil money penalties.|
|26||We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.|
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