SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 38373 / March 7, 1997 Admin. Proc. File No. 3-8232 ___________________________________ : In the Matter of : : MARTIN B. SLOATE : 16 Stallion Trails : Greenwich, Connecticut : ___________________________________: OPINION OF THE COMMISSION BROKER-DEALER PROCEEDINGS Ground for Remedial Action Injunction Where president and chief compliance officer of registered broker-dealer was permanently enjoined from violating antifraud provisions of the Securities Exchange Act, held, in the public interest to bar respondent from association with any broker or dealer with the proviso that, after five years, he may apply to become so associated. APPEARANCES: Ira Lee Sorkin and Bryan A. McKenna, of Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, for Martin B. Sloate. Richard H. Walker, Edwin H. Nordlinger, Carmen J. Lawrence, Robert B. Blackburn, Amy C. Reich, Daniel R. Schnipper, Gregory J. Johnson, and Dorothy Heyl, for the Commission's Division of Enforcement. Appeal filed: June 27, 1994 Briefing completed: September 13, 1994 I. Our Division of Enforcement appeals from the decision of an administrative law judge barring Martin B. Sloate from association with any broker or dealer with a right to reapply after one year. The law judge found that, on June 30, 1993, Sloate was permanently enjoined, with his consent, from further violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Division raises three issues on appeal: 1) it argues that the law judge wrongly excluded from evidence the trial transcript of the injunctive action against Sloate; 2) it asserts that a one-year bar is too brief and that Sloate should be permanently barred; and 3) it seeks review of ==========================================START OF PAGE 2====== the law judge's refusal to impose a so-called "collateral bar" on Sloate, i.e., a bar from association with regulated entities other than brokers and dealers. -[1]- Our findings are based on an independent review of the record except for those findings that are not challenged on appeal. II. The injunctive Court found that Sloate purchased and solicited purchases of securities while in possession of material, non-public information that he knew or should have known was obtained in breach of a fiduciary duty. The Court's findings (and additional stipulated facts) may be summarized as follows. Throughout the 1980's until May 1993, Sloate was president and chief compliance officer of Sloate, Weisman, Murray & Co., Inc., a registered broker-dealer. One of his customers during most of the 1980's was Dr. Robert Willis, a psychiatrist and a friend of Sloate's since college days. Joan Weill, the wife of Sanford I. Weill, chief executive officer of Shearson Loeb Rhoades, was one of Willis' patients. Mr. Weill confided information to his wife about his business affairs, and Mrs. Weill, within the context of her psychiatrist-patient relationship, frequently relayed these confidences to Willis. This case involves two such instances that occurred some years apart. In early 1981, Sanford Weill held discussions involving a possible merger of Shearson and American Express Company. Five years later, in early 1986, he sought to become the chief executive officer of BankAmerica Corp. with the potential financial backing of Shearson. Weill informed his wife of both these matters, and Mrs. Weill communicated his confidences to Willis. Willis, in turn, conveyed the information to Sloate, telling him that the source of the confidential information was a patient who was a member of the Weill family. Willis traded on the information through Sloate, and Sloate purchased Shearson and BankAmerica securities for accounts in his name or under his control. Sloate also tipped the information to certain customers. The Court found that Sloate thereby violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 2/ -[1]- Sloate has not appealed any issues in this case. 2/ SEC v. Willis, et al., 825 F. Supp. 617 (S.D.N.Y. 1993). The Court ordered Sloate to pay $161,185.91, representing disgorgement of Sloate's $12,300 profit; $52,300 of his customers' profits; Sloate's commissions; prejudgment interest; and a $60,800 Insider Trading Sanctions Act penalty. ==========================================START OF PAGE 3====== III. The law judge refused to admit the transcript of Sloate's civil trial into evidence. The Division contends that it should have been admitted on the issue of what sanction should be imposed on Sloate in the public interest. The pertinent circumstances are as follows. Three weeks before the hearing, the parties identified their proposed witnesses and exhibits. Sloate listed 13 prospective witnesses (7 customers, 4 co-workers, and 2 persons with knowledge of his charitable works); the Division identified only 2 (Sloate and Sanford Weill). The Division also listed the 398- page trial transcript as a proposed exhibit, although it did not specify the purpose for which it was to be used. The Division did not use the transcript for impeachment or any other purpose during the hearing, and there is no further reference to it in the record until the Division moved for its admission at the end of its case. The law judge admitted that part of the transcript containing Sloate's testimony, but denied admission of the rest. He noted that the Division had not shown that four witnesses whose testimony was included in the transcript were unavailable to testify in these proceedings, and stressed the importance of making his own determinations as to the credibility of those witnesses. 3/ Sloate stresses the fact that the Division made no showing that the witnesses in question were unavailable. He further asserts that his present counsel had no opportunity to cross- examine those witnesses; that much of the injunctive testimony is irrelevant to the sanction issue; and that he would be prejudiced if the law judge could not assess the witnesses' credibility. The Division points to our former Rule of Practice 14(a) which provided that material and relevant evidence should be admitted. 4/ Prior to the hearing, the Division gave no indication to Sloate that it intended to use the entire trial transcript, which contains the testimony of six witnesses and the injunctive 3/ Two of the witnesses in the injunctive trial testified at the hearing herein: Sanford Weill and Sloate. Four other witnesses did not: Mrs. Weill, Willis, and two of Sloate's tippees, Kenneth Stein and Howard Kaye. The law judge concluded that, since Sanford Weill had testified at the hearing and the Division had failed to offer sufficient justification to admit his prior testimony, admission of that testimony was unwarranted. We agree with that determination. 4/ This proceeding was instituted and conducted under our old Rules of Practice. Our present Rule 320 merely provides that we or the hearing officer "may receive relevant evidence." ==========================================START OF PAGE 4====== Court's rulings, as evidence. Nor did it advise him of the purpose for which it intended to use the transcript. Thus, Sloate was unable to prepare for the Division's use of this material, and had no real opportunity to contradict it. Moreover, we consider that, whatever prior testimony individuals may have given, they should be called to testify at the hearing, if available, in order to give the law judge the opportunity to assess their credibility. 5/ Under all the circumstances, we think that the law judge's decision to exclude most of the trial transcript was proper. IV. The law judge noted that Sloate was fully aware of his actions in accomplishing the admitted violations, and that the public's confidence in the integrity of the securities markets was injured by his "flagrant and repeated securities law violations." He further noted that there were a substantial number of trades by Sloate, Willis, and Sloate's customers, and that Sloate acted with the highest degree of scienter. In mitigation, the law judge considered testimony by Sloate's customers and character witnesses, the "obvious contrition" Sloate exhibited in testifying at the hearing, Sloate's lack of other disciplinary history during his lengthy career in the securities business, his record of charitable works, and his payment of $161,000 in the injunctive action which included a penalty and disgorgement of his and his customers' profits. 6/ The record also contains a letter from the injunctive Court communicating the judge's view that, in light of all the testimony and arguments in Sloate's civil trial and the circumstances of the case, the settlement of that proceeding constituted the appropriate relief "to satisfy the public interest." 7/ 5/ We note that Sloate's testimony, which was admitted, discloses an adversarial relationship with witness Stein. We are concerned that this relationship, at a minimum, raises questions about credibility that would normally be resolved by observation of the witnesses by the trier of fact. Cf. Mark James Hankoff, 50 S.E.C. 1009, 1012 (1992) (in NASD review proceeding, we noted that, in determining whether to rely on hearsay evidence, it is necessary to evaluate its probative value and reliability and the fairness of its use. We pointed out that, in doing so, one factor to consider is whether a missing witness was available to testify). 6/ See n.2, supra. 7/ The Court expressed the view that Sloate should not be deprived of his status as a registered representative, although it stated that its view was not meant to govern our ultimate determination of the appropriate sanction. ==========================================START OF PAGE 5====== We agree with the law judge that a bar from association with any broker or dealer is appropriate. Sloate was a principal and compliance officer of a broker-dealer at the time he traded on insider information. His conduct was serious and repetitive and involved a high degree of scienter. In our view, Sloate's misconduct necessitates a more serious sanction than a bar with a right to reapply in one year. A registered securities professional who engages in the serious misconduct of insider trading should be excluded for a longer period of time. After knowingly receiving information revealed in the course of a confidential psychiatrist-patient relationship, Sloate accepted, made, and recommended trades based on that information. Such conduct is totally at odds with the integrity required of industry professionals. Nevertheless, in light of Sloate's lengthy and otherwise unblemished career in the securities industry, 8/ the considerations cited by the law judge, and the views expressed by the injunctive Court, we consider it unnecessary to impose a permanent bar as requested by the Division. For the same reasons, we view a collateral bar as unwarranted. Under all the circumstances, we conclude that a bar from association with any broker or dealer with the right to apply in five years to become so associated is appropriate in the public interest. An appropriate order will issue. 9/ By the Commission (Commissioners WALLMAN, JOHNSON, and HUNT); Chairman LEVITT not participating. Jonathan G. Katz Secretary 8/ Sloate, a registered representative for over 30 years, has never been charged with any other wrongdoing. 9/ All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. Admin. Proc. File No. 3-8232 ___________________________________ : In the Matter of : : MARTIN B. SLOATE : 16 Stallion Trails : Greenwich, Connecticut : ___________________________________: ORDER IMPOSING REMEDIAL SANCTION On the basis of the Commission's opinion issued this day, it is ORDERED, that Martin B. Sloate be, and he hereby is, barred from association with any broker or dealer with the proviso that, after five years, he may apply to become so associated. Such application should be made to the appropriate self-regulatory organization or, if there is none, to the Commission. By the Commission. Jonathan G. Katz Secretary