Morton Bruce Erenstein v. SEC

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
SEPT 16, 2008
No. 07-15736 THOMAS K. KAHN
Non-Argument Calendar CLERK
________________________
Agency No. 3-12529
MORTON BRUCE ERENSTEIN,
Petitioner,
versus
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
________________________
Petition for Review of a Decision of the
Securities and Exchange Commission
_________________________
(September 16, 2008)
Before BIRCH, DUBINA and BARKETT, Circuit Judges.
PER CURIAM:
Morton Bruce Erenstein, proceeding pro se, petitions for review of a final
disciplinary order of the Securities and Exchange Commission (“SEC”) affirming a
decision of the National Association of Securities Dealers (“NASD”), which found
that, as a securities dealer or associated person, he had violated two regulatory
rules and should be suspended for a period of one year.
Liberally construing his brief, Erenstein argues that his suspension
constituted an abuse of discretion as substantial evidence did not support the SEC’s
finding that he violated the rules. Because Erenstein also challenges certain
administrative decisions by the NASD or NAC, and suggests that the NASD
Panel’s failure to issue a decision within 60 days of the last post-hearing filing
mandated dismissal of the charges, we also examine whether de novo review by
the SEC of intermediate agency determinations rendered harmless any factual or
legal errors at those stages. Finally, Erenstein also argues that his right to due
process was violated during agency proceedings and that he was entitled to have
his counsel’s objections heard by an independent arbiter before the commencement
of disciplinary proceedings.
I.
The issues on appeal stem from a complaint filed with the NASD against
Erenstein by a former client. She alleged that he had converted $10,000 provided
to him for investment purposes. During an on-the-record interview by the NASD,
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with counsel present, Erenstein indicated that the money constituted compensation
for services he provided to the customer involving the sale of government bonds.
However, when asked whether he had declared the $10,000 as income on his 1998,
1999, or 2000 tax returns, Erenstein’s counsel objected on relevancy grounds and
instructed him not to answer. Although NASD staff informed Erenstein that they
had the authority to seek this information under NASD Procedural Rule 8210, and
that failure to respond could result in disciplinary action, under that rule and
NASD Conduct Rule 2110, Erenstein indicated his understanding, but still refused
to answer based on advice of counsel.
After some correspondence, during which counsel persisted with the
objection, NASD officials notified Erenstein in June 2004 that disciplinary action
would be recommended based on his failure to answer the on-the-record interview
question and respond to the written requests for tax records. In a June 21, 2004,
letter, Erenstein indicated that his 1998 federal tax return was being produced
under protest and no previous objection was being waived. The letter indicated
that an amended 1998 return had been filed in October 2003 to reflect the $10,000
income because Erenstein had initially overlooked the amount. Erenstein
contended that no adjudicatory forum existed in which to seek review of the
request for confidential documents, creating a due process issue and also an issue
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of whether the NASD complied with the statutory requirement that it provide a fair
and reasonable procedure for determining disciplinary matters.
A disciplinary hearing was held in December 2004, at which NASD’s
Department of Enforcement (“Department”) sought a one-year suspension. In May
2005, before a decision, Erenstein filed for bankruptcy. In November 2005, the
Department moved for issuance of a decision without monetary sanctions, i.e., a
one-year suspension, noting that the Bankruptcy Court had granted Erenstein a
discharge.
In December 2005, the NASD Hearing Panel (“Panel”) issued a decision
barring Erenstein for violating NASD Procedural Rule 8210 and Conduct Rule
2110 by refusing to answer an on-the-record interview question and failing to
respond to a written request for information until being notified that disciplinary
charges would be filed. After noting - erroneously - that the Department had
requested a bar, the Panel found that, under agency guidelines, a bar is appropriate
where the individual did not respond in any manner, while up to a two-year
suspension is appropriate where mitigation exists or the person did not respond in a
timely manner.
Erenstein’s counsel sought reconsideration from the Panel, stating that the
Department had requested only a one-year suspension, not a bar. Although the
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Panel issued a corrected decision, the sanction remained a bar.
Erenstein administratively appealed to the National Adjudicatory Council
(“NAC”) of the NASD, which reduced the sanction to a one-year suspension.
Erenstein then appealed to the SEC, which, in a November 14, 2007, corrected
opinion, affirmed the NAC’s findings of violations and the reduced sanction,
noting that it had independently reviewed the record. The SEC also rejected
Erenstein’s argument that Panel error had infected the proceedings. The SEC
determined that even if the relevance of the tax return was not explained during the
conversation, the relevance was patent from the context of the questions during the
on-the-record interview. The SEC found that the essential facts establishing the
violation of Rule 8210 were not disputed, and that NASD staff determines the
relevancy of a requested record, which they need not explain.
Erenstein then filed a timely petition for review.
A.
Congress enacted the Securities Exchange Act of 1934 (Exchange Act), 15
U.S.C. § 78a, et seq., to provide for the regulation of securities exchanges and
over-the-counter markets to prevent unfair practices. See Peoples Securities Co. v.
Securities and Exchange Co., 289 F.2d 268, 270 (5th Cir. 1961) (quotation marks
5
omitted).1 Section 15, in particular, regulates the over-the-counter market and
requires dealers engaged in securities transactions to register with the SEC. Id.
Section 15(b) provides that the SEC shall deny registration to a dealer if it finds
that such denial is in the public interest and that the dealer has willfully violated
any provision of certain federal securities laws, or of any rule under them. Id.
Section 15A of the Exchange Act, 15 U.S.C. § 78o-3, enacted in 1938 and
generally known as the Maloney Act, creates a medium for self-regulation of
over-the-counter dealers. See id.; Karsner v. Lothian, 532 F.3d 876, 880 (D.C. Cir.
2008). This section authorized the formation of national securities associations,
such as the NASD, for the purpose of supervising conduct of registered members.
Peoples Securities, 289 F.2d at 270; see also U.S. S.E.C. v. Vittor, 323 F.3d 930,
934 (11th Cir. 2003) (NASD is a self-regulatory organization).
In discharging this responsibility, the NASD is authorized to promulgate
rules and sanction any registered members who violate them. Krull v. S.E.C., 248
F.3d 907, 910 (9th Cir. 2001). The SEC has jurisdiction to review and enforce
disciplinary actions of the NASD. Alderman v. S.E.C., 104 F.3d 285, 287 n.3 (9th
Cir. 1997). A disciplined member may appeal to the SEC. Jones v. S.E.C., 115
1
Decisions of the Fifth Circuit, handed down prior to close of business on September 30,
1981, are binding precedent. Bonner v. City of Prichard, 661 F.2d 1206, 1209-10 (11th Cir.
1981) (en banc).
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F.3d 1173, 1179 (4th Cir. 1997). If the dealer is unsuccessful in this respect, he
may file a petition for review of such order in a federal circuit court of appeals. 15
U.S.C. § 78y(a).
On review, however, we will “affirm the SEC’s factual findings if they are
supported by substantial evidence.” Sheldon v. S.E.C., 45 F.3d 1515, 1517 (11th
Cir. 1995); 15 U.S.C. § 78y(a)(4). We conduct a de novo review of the SEC’s
legal conclusions. Orkin v. S.E.C., 31 F.3d 1056, 1063 (11th Cir. 1994).
Under NASD rules, Association staff have the right to:
(1) require a member . . . to provide information orally, in writing,
or electronically . . . and to testify at a location specified by
Association staff . . . with respect to any matter involved in the
investigation, complaint, examination, or proceeding; and
(2) inspect and copy the books, records, and accounts of such
member or person with respect to any matter involved in the
investigation, complaint, examination, or proceeding.
NASD Procedural Rule 8210(a). “No member . . . shall fail to provide information
or testimony or to permit an inspection and copying of books, records, or accounts
pursuant to this Rule.” NASD Procedural Rule 8210(c). Under NASD Conduct
Rule 2110, “[a] member, in the conduct of its business, shall observe the high
standards of commercial honor and just and equitable principles of trade.”
Courts will defer to an agency’s reasonable interpretation of its own
regulations. Federal Exp. Corp. v. Holowecki, — U.S. —, 128 S. Ct. 1147, 1155,
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170 L. Ed. 2d 10 (2008). The SEC has held that although NASD procedural rules
permit counsel to participate, no constitutional or statutory right to counsel exists
in NASD disciplinary proceedings. Sundra Escott-Russell, Exchange Act Release
No. 43,363, 54 S.E.C. 867, 874 n.18 (Sept. 27, 2000). Reliance on counsel is also
immaterial to the obligation of an associated person to supply information upon
request of the NASD. Id. at 872-73.
We have not previously analyzed the SEC’s affirmance of the NASD’s
imposition of sanctions for violations of Rules 8210 and 2110, and very few
federal appellate court decisions have analyzed the scope of the NASD’s authority
to request documents. See, e.g., PAZ Securities, Inc. v. S.E.C., 494 F.3d 1059
(D.C. Cir. 2007) (holding that SEC abused its discretion by failing to address
mitigating factors and not identifying remedial purpose for bar where petitioner
failed to respond to NASD’s repeated requests for information); Rooms v. S.E.C.,
444 F.3d 1208 (10th Cir. 2006)(noting SEC’s holding that Rule 8210 was not
violated, discussing sanctions under Rule 2110, and holding that complaint which
alleged violation of rules gave sufficient warning of prohibited conduct to satisfy
due process). Nevertheless, in civil cases, we have not required a showing of
compelling need before tax information may be obtained by a party in discovery,
but instead have determined that such information need be only arguably relevant.
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See Maddow v. Proctor & Gamble Co., Inc., 107 F.3d 846, 853 (11th Cir. 1997)
(affirming district court’s decision compelling discovery in ADEA civil suit, but
reversing award of attorney’s fees because “plaintiffs were substantially justified in
initially refusing discovery”).
Here, Erenstein did not dispute the validity of the NASD’s original efforts to
investigate a client’s charge of impropriety, although he did argue that the
information had been provided through alternative means. Although Erenstein
challenges the relevance of the returns themselves, whether he himself identified
the $10,000 as income at the time of receipt was probative because it showed
whether he asserted ownership over the funds at that time, consistent with his later
explanation that the sum represented a fee earned, and not funds entrusted to him
for investment. Erenstein also did not dispute the essence of the NASD charges -
that he failed to respond to a question during the October 2003 interview and later
refused to comply with the request for the returns. Instead, he asserted a defense of
justification based on (i) lack of relevance, and (ii) reliance on contrary advice of
counsel. To the extent the SEC rejected the former, that decision is factually and
legally supported. To the extent it rejected the latter, Erenstein cited no authority
to NASD staff, the Department, the Panel, the NAC, or to the SEC to show that
advice of counsel constituted a legal defense, and, as noted above, the SEC relied
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on prior agency determinations to the contrary, and this reliance is entitled to
deference. Accordingly, we conclude that substantial evidence supports the SEC’s
factual finding that the rules were violated, and that rejection of Erenstein’s
“advice of counsel” defense was neither contrary to law nor an abuse of the
agency’s discretion.
B.
The SEC may not overturn NASD-imposed sanctions unless it finds the
sanctions to be “excessive or oppressive” or if they impose an unnecessary or
inappropriate burden on competition. 15 U.S.C. § 78s(e)(2). We, in turn, will not
“overturn the SEC’s decision to impose a particular sanction [unless we find] a
gross abuse of discretion.” Orkin, 31 F.3d at 1066. This “standard recognizes
there is a range of choices within which we will not reverse the district court even
if we might have reached a different decision.” Siebert v. Allen, 506 F.3d 1047,
1049 n.2 (11th Cir. 2007) (42 U.S.C. § 1983 suit); see also Anderson v. Cagle’s,
Inc., 488 F.3d 945, 953-54 (11th Cir. 2007) (district court did not abuse its
discretion by decertifying a collective action alleging violations of the Fair Labor
Standards Act).
Because registration of broker-dealers is a means of protecting the public,
the determination of the sanctions necessary to protect the public rests primarily
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within the competence of the SEC. Tager v. Securities and Exchange Commission,
344 F.2d 5, 9 (2d Cir. 1965) (persuasive). “Where Congress has entrusted an
administrative agency with the responsibility of selecting the means of achieving
the statutory policy, the relation of remedy to policy is peculiarly a matter for
administrative competence.” Id. (quotation marks and internal quotation marks
omitted). The SEC has a “very large measure of discretion” in determining what
sanctions to impose at a particular time in particular cases and, failing a gross
abuse of discretion, an appellate court will not substitute its view as to what
sanctions will best accord with the regulatory powers of the Commission, or
otherwise adopt “a grudging interpretation of . . . legislation.” See id.; Whiteside
& Co. v. S.E.C., 557 F.2d 1118, 1120 (5th Cir. 1977) (internal citation omitted).
NASD Sanction Guidelines in effect in 2007 stated that, in determining
sanctions for violations of Rules 8210 and 2110, the nature of the information
requested should be considered, as should whether the information was provided,
the number of requests made, the time taken to respond, and the degree of
regulatory pressure required to obtain a response. The guidelines provided that a
failure to respond in any manner should be punished by a bar and a fine of $25,000
to $50,000. Where an individual fails to respond in a timely manner or mitigation
exists, the individual should be suspended for up to two years and should be fined
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between $2,500 and $25,000.
The sanction guidelines, however, are not rigid and mechanical and serve
only as a starting point for determining the proper disciplinary action. Otto v.
S.E.C., 253 F.3d 960, 967 (7th Cir. 2001). To the extent this issue is raised by
Erenstein on appeal, we find that the one-year suspension was not a gross abuse of
discretion for several reasons. First, the penalty was not at the high end of the
applicable Sanction Guidelines. Second, a one-year suspension was in the range of
reasonable choices, considering that Erenstein submitted the requested information
only after repeated demands by the NASD. Third, it is critically important to the
self-regulatory system that members and associated persons cooperate with NASD
investigations, especially because the NASD lacks subpoena power. Thus, the
SEC did not grossly abuse its discretion when it sustained Erenstein’s one-year
suspension.
C.
Although we have not specifically addressed in a published opinion whether
the SEC’s independent review of an NASD Panel’s decision cures any panel error,
other Circuits have so found. See, e.g., McCarthy v. S.E.C., 406 F.3d 179, 187 (2d
Cir. 2005) (persuasive) (SEC reached an independent decision not infected by any
defect in New York Stock Exchange Board’s determination); Schellenbach v.
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S.E.C., 989 F.2d 907, 912-13 (7th Cir. 1993) (persuasive) (SEC’s independent
review rendered attacks on NASD staff’s conduct irrelevant where SEC’s action
was not infected by NASD proceedings).
Under NASD Procedural Rule 9268(a), “[w]ithin 60 days after the final date
allowed for filing proposed findings of fact, conclusions of law, and post-hearing
briefs, or by a date established at the discretion of the Chief Hearing Officer, the
Officer shall prepare a written decision that reflects the views of the Hearing Panel
. . . .” Within 65 days after the final date, a written dissent may be prepared.
NASD Procedural Rule 9268(c). The decision shall be promptly served on the
parties. NASD Procedural Rule 9268(d).
We do not find reversible error. First, Erenstein has not cited any caselaw
for the proposition that the Panel’s failure to issue a decision within 60 days of the
last post-hearing filing mandated dismissal of the charges. Second, any error by
the Panel was cured by the SEC’s review and did not infect subsequent
proceedings because, inter alia, in affirming, the SEC noted that it independently
reviewed the record. Accordingly, we deny the petition with respect to this issue.
D.
We review de novo constitutional claims, including claims of due process
violations. See Ali v. U.S. Att’y Gen., 443 F.3d 804, 808 (11th Cir. 2006)
13
(immigration context).
We have not yet determined whether the NASD is a state actor subject to
due process requirements. Some courts have answered this question in the
affirmative. See, e.g., Rooms, 444 F.3d at 1214 (10th Cir. 2006) (finding that due
process applied to NASD, but rejecting due process argument where petitioner had
fair notice that his conduct violated NASD Rule 2110). Other courts have
determined that the NASD is not a state actor subject to due process requirements.
See, e.g., D’Alessio v. S.E.C., 380 F.3d 112, 120 n.12 (2d Cir. 2004). In one rule-
making dispute involving the NASD, this court reversed a grant of summary
judgment and remanded a case for a determination of, among other things,
whether, by applying the challenged rule in a retroactive fashion, the NASD
afforded due process to the plaintiffs administratively. Harwell v. Growth
Programs, Inc., 451 F.2d 240, 245 (5th Cir. 1971), modified on denial of rehearing,
459 F.2d 461 (5th Cir. 1972).
To the extent due process applies, a fundamental requirement is the
opportunity to be heard at a meaningful time and in a meaningful manner.
Armstrong v. Manzo, 380 U.S. 545, 552, 85 S. Ct. 1187, 1191, 14 L. Ed. 2d 62
(1965). “The touchstone of due process is protection of the individual against
arbitrary action of government.” Wolff v. McDonnell, 418 U.S. 539, 558, 94 S. Ct.
14
2963, 2976, 41 L. Ed. 2d 935 (1974). Some hearing is required before an individual
is finally deprived of a property interest. Id. at 557-58, 94 S.Ct. at 2975. This
requirement applies to the revocation of licenses. Id. at 558, 94 S.Ct. at 2976.
[W]hen governmental agencies adjudicate or make binding
determinations which directly affect the legal rights of individuals, it
is imperative that those agencies use the procedures which have
traditionally been associated with the judicial process. On the other
hand, when governmental action does not partake of an adjudication,
as for example, when a general fact-finding investigation is being
conducted, it is not necessary that the full panoply of judicial
procedures be used.
Hannah v. Larche, 363 U.S. 420, 442, 80 S. Ct. 1502, 1514-15, 4 L. Ed. 2d 1307
(1960).
We assume, for the limited purpose of deciding this appeal, that the NASD
could be a governmental actor, that the full range of due process rights apply
during its disciplinary proceedings, and that any actions by that entity are subject
to scrutiny where, as here, a petition for review of a decision by the SEC has been
filed. Even so, we conclude that Erenstein received all the due process to which he
was entitled. Specifically, we have never held that objections made to requests for
information by NASD staff should be heard by an independent arbiter, and such a
framework would seriously undermine the NASD’s ability to function as a self-
regulatory organization. Moreover, the record here suggests that officials acted in
a manner consistent with agency rules, that Erenstein received notice and an
15
opportunity to be heard, and that, because the omissions, if any, were subject to
review by both the SEC and this Court, no due process violation occurred.
Accordingly, we deny Erenstein’s petition for review in this respect as well.
PETITION DENIED.
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