Graham v. Securities & Exchange Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 1999 Decided August 18, 2000

No. 99-1029

Sharon M. Graham and
Stephen C. Voss,
Petitioners

v.

Securities and Exchange Commission,
Respondent

---------

On Petition for Review of an Order of the
Securities and Exchange Commission

---------

Ida Wurczinger Draim argued the cause and filed the
briefs for petitioners.

Susan S. McDonald, Senior Litigation Counsel, Securities
and Exchange Commission, argued the cause for respondent.
With her on the brief were David M. Becker, Deputy General
Counsel, Jacob H. Stillman, Solicitor, and Robert C. Stacy, II,
Attorney.

 Before: Ginsburg, Tatel, and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Garland.

Garland, Circuit Judge: Sharon Graham and Stephen Voss
petition for review of an order of the Securities and Exchange
Commission (SEC) sanctioning them for conduct relating to
trades executed for their customer, John Broumas. The
Commission found that Graham, a registered representative
with Voss' brokerage firm, violated section 10(b) of the Secu-
rities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by aiding and abetting Broumas in the fraudulent
trading of stock. The Commission further concluded that
Voss had failed reasonably to supervise Graham with a view
to preventing the securities violations. Graham challenges
the Commission's findings on several grounds; Voss' chal-
lenge depends solely upon the exoneration of Graham. Be-
cause we conclude that the Commission's decision was reason-
able and supported by substantial evidence, we deny the
petition for review and affirm the SEC's order.

I

Voss is the owner and president of an independent discount
brokerage firm, Voss & Co., Inc. (VCI), located in Springfield,
Virginia. Graham began working in the securities industry in
1982 and joined VCI in September of 1984. She was a
registered representative,1 as well as VCI's cashier and back
office assistant. She was also VCI's primary "house" broker,
handling house accounts on a noncommission basis as well as
some 250 of her own accounts for commissions. See J.A. at
371-72.2 Graham spent the bulk of her time performing

__________
1 A representative is a person associated with a National Associ-
ation of Securities Dealers (NASD) member firm who is engaged in
supervision, solicitation, or conduct of securities business. The
NASD requires that representatives of member firms register with
the Association and pass a qualifying exam. See 6 Louis Loss &
Joel Seligman, Securities Regulation 2809-11 & n.42 (3d ed. 1990).

2 At VCI, house accounts were not assigned to any particular
broker. Commissions on trades in these accounts were paid to the
firm rather than to the brokers executing the trades.

cashiering and back office duties. In February of 1990, she
received her principal's license.3 Graham's immediate super-
visor, James Pasztor, was VCI's vice-president, general man-
ager, and SEC compliance officer.

One of the firm's house accounts was a joint account in the
names of John Broumas and his wife, Ruth. Broumas' trou-
bles began when the stock market crashed in 1987. To cover
his losses, he borrowed heavily and by May 1989 owed
roughly $2 million in personal loans and $1 million in mort-
gages. See id. at 180-85. Unable to borrow any more from
banks, Broumas launched upon a scheme that the SEC
described as "similar to check-kiting." Sharon M. Graham,
Release No. 34-40727, 68 S.E.C. Docket 1934, 1998 WL
823072, at *2 (Nov. 30, 1998).4

Broumas held a substantial number of shares in the Class
A common stock of James Madison, Ltd. (JML), a holding
company for a family of banks with which he was affiliated.
Although JML stock was listed on the American Stock Ex-
change (AMEX), Broumas undertook a series of trades in the
over-the-counter market. Broumas arranged wash trades
and matched orders5 of JML stock among accounts in his own
name and in the name of nominees whose accounts he con-

__________
3 A principal is a person who is "actively engaged in the
management of the [NASD] member's ... securities business."
Markowski v. SEC, 34 F.3d 99, 101 n.1 (2d Cir. 1994) (internal
quotation omitted). An additional examination is required to be-
come registered as a principal. See 6 Loss & Seligman, supra, at
2810-11 n.42.

4 For a description of the mechanics of a check-kiting scheme,
see Williams v. United States, 358 U.S. 279, 281 n.1 (1982).

5 "Wash trades," also called "wash sales," are "transactions
involving no change in beneficial ownership." Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 205 n.25 (1976). "Matched orders" are
"orders for the purchase/sale of a security that are entered with the
knowledge that orders of substantially the same size, at substantial-
ly the same time and price, have been or will be entered by the
same or different persons for the sale/purchase of such security."
Id.; see Michael Batterman, 46 S.E.C. 304, 305 (1976).

trolled. Broumas directed these trades among at least 25
different brokerage accounts he controlled at 14 different
broker-dealers. In each case, he would instruct one broker to
buy and another to sell a specified number of shares at a
specified price, thus moving the stock from one of his (or his
controlled) accounts to another. See J.A. at 211. Neither
broker was told by Broumas that the other account also
belonged to or was controlled by him.

Broumas' stock was held in margin accounts.6 Under the
rules applicable to those accounts, Broumas could obtain the
proceeds from a sale one day after the transaction was
completed, but could wait at least five business days until the
settlement date to pay for the corresponding purchase. See
Graham, 1998 WL 823072, at *2; see also 12 C.F.R. s 220.4
(1989). When the settlement date arrived, Broumas some-
times executed another set of wash trades or matched orders
to obtain the funds he needed to make the payment--as if he
were playing a fiscal version of "musical chairs."7

As Broumas' financial situation continued to deteriorate,
"many of the broker-dealers with which he dealt ... bec[ame]
increasingly reluctant to extend him credit." Graham, 1998
WL 823072, at *2. Broumas then began to effectuate wash
and matched trades through accounts in the names of rela-
tives and business associates. The trades in these nominee

__________
6 In a margin account:

the broker lends the customer money to allow him to pur-
chase securities. The customer advances only a portion of
the purchase price and pays interest on the balance. The
broker maintains the securities purchased as collateral. If
the value of the securities declines, the broker may seek
more collateral for the protection of his "loan."

Liang v. Dean Witter & Co., 540 F.2d 1107, 1109 n.2 (D.C. Cir.
1976).

7 Broumas testified that the proceeds available to him during
the settlement period allowed him to "take care of my bank notes or
whatever was pressing me that day and then worry about how I
was going to handle the purchase price and the amount of the
purchase price a week later." J.A. at 209.

accounts were placed by Broumas or at his direction with
funds he provided and for his benefit. Between January 1,
1989 and June 30, 1990, Broumas effectuated 203 sets of wash
and match trades in JML stock, involving a total of 420
trades. Each trade typically involved the purchase and sale
of between 3,000 and 12,000 JML shares. See id.

Seventy-six of the directed trades were conducted by VCI,
and approximately 60 of those--an average of one every
week-and-a-half--were executed by Graham. At the begin-
ning of 1989, Broumas' joint account at VCI held 37,500
shares of JML stock. From January 23, 1989 through May
24, 1990, Broumas instructed VCI to exchange a total of
644,800 shares. Although Broumas' account was a "house"
account, a rapport soon developed between Broumas and
Graham and he began to ask for her specifically. Generally,
Broumas would give Graham a specific number of shares to
trade, a particular limit price, the name of the firm ("contra-
broker") that would execute the other side of the trade, and
the name of the broker he wanted her to contact at that firm.
After consulting the AMEX listing to verify that the order
price was within the listed bid and offer prices, Graham would
complete the trade. Broumas usually asked VCI to issue a
check for the proceeds the day after the sale. See id. at *3.

Graham observed that Broumas "had a peculiar way of
trading." J.A. at 306. Of the 100 house accounts she han-
dled during this time, only Broumas directed trades, and only
Broumas traded in such large quantities. See id. at 285.
Because Broumas always identified the specific contact per-
sons to call at the contra-brokers, Graham came to believe
that Broumas controlled the shares in the accounts or at least
"had connections" with them, id. at 382, although Broumas
never told her so and she "never asked him," id. at 286-87.
Finally, from her work as the firm's cashier, Graham noticed
that Broumas "never seemed to ... make any money on his
trades." Id. at 380, 383. Eventually, Graham asked Brou-
mas directly why he traded in such a strange manner, and
Broumas answered that "he owed bank notes or bank loans
and that for him to sell the stock was an easier way for him to

get the money to pay those loans, as opposed to having to go
to other means." Id. at 356-57; see also id. at 308.8

Due to Broumas' suspicious manner of trading, Graham
undertook special precautions to protect her firm's financial
interests. She knew that Broumas had financial problems,
that he had bounced checks, and that he often owed money on
his joint account. See id. at 288, 317, 343. As a consequence,
she feared that "Broumas' orders presented a financial risk to
the firm." Graham Br. at 14 (citing J.A. at 317). Graham
discussed Broumas' "peculiar way of trading" with her super-
visor, James Pasztor, and, as a safeguard, generally sought
his prior approval for Broumas' trades--something she rarely
did with respect to her other house accounts. J.A. at 283-85,
316-17.

By early 1989, Broumas was having difficulty making time-
ly payment for trades through his VCI joint account. Al-
though he had five business days to pay for a purchase, both
Graham and Voss knew that VCI's clearing firm,9 U.S. Clear-
ing Corp., had been required to obtain "quite a few" exten-
sions of time. Graham, 1998 WL 823072, at *4 (quoting,
without citation, J.A. at 296). In March of 1989, the margin
supervisor for the clearing firm told Pasztor that Broumas
had received too many extensions, and that he thought Brou-
mas might be "check kiting" through his brokerage account.
Pasztor agreed. See id. at *4 & n.17. As a consequence, the
clearing firm imposed restrictions on Broumas' account, and
directed Pasztor to bar trading unless the account already
contained cleared funds or stock. Pasztor informed Graham,

__________
8 At trial, Broumas claimed that he sold the shares to himself,
rather than to a buyer on the open market, because he "wanted to
maintain [his] position [in JML] at that price." J.A. at 212.

9 A clearing broker performs "back office services such as
clearing stock, handling customer funds, holding customer securi-
ties, dealing with transfer agents, and matching of trades with the
exchanges and market makers" for firms that do not have the
capacity to perform these functions. SEC Br. at 18 n.17; see, e.g.,
United States v. Russo, 74 F.3d 1383, 1386 (2d Cir. 1996).

Voss, and Broumas that the account was restricted. See id.
at *4.

Thereafter, Broumas called Voss and asked to open a
second account, entitled "Les Girls," purportedly for a part-
nership between Broumas' wife and daughter. Voss agreed
to permit the opening of the new account, although he never
spoke to Broumas' wife or daughter and testified that he
"suspected" Broumas would be advising on the trading. J.A.
at 564. Graham completed the form to open the "Les Girls"
account, although she had never spoken to Broumas' wife or
daughter either. Graham conceded that she regarded the
account as belonging to Broumas, and that she knew he
placed all the trades. Although she believed Broumas had
opened the Les Girls account to prevent the restricted joint
account "from being closed out or his position sold out," id. at
295-96, Graham nonetheless continued to place directed
trades for him. Broumas directed 40 JML stock trades
through the Les Girls account; between March 21 and Au-
gust 29, 1989, all of Broumas' VCI trades in JML stock were
effected through that account.

In February of 1990, Broumas began directing trades in
JML stock through yet another VCI account. These trades
were made through an already existing house account main-
tained by his friend and attorney, Lawton Rogers. Broumas
called Graham to direct trades through the Rogers account;
Graham would then call Rogers to confirm them. Graham
told Pasztor about the directed trades, who in turn told Voss.
Voss said he "didn't have a problem" with the trades because
Broumas and Rogers were "bosom buddies." Id. at 429.

At the beginning of April 1990, a check Broumas had given
VCI to pay for the purchase of JML shares was returned for
insufficient funds. Pasztor again restricted the joint account
and told Graham that Broumas could not trade without
cleared funds. Initially, Voss concurred. At the end of April,
however, Broumas invited Voss to lunch. Following the
lunch, Voss told Pasztor that Broumas could continue to
trade. Pasztor in turn informed Graham. See Graham, 1998
WL 823072, at *5.

 Eventually, Broumas became unable to satisfy his margin
calls and failed to pay for his last trade through VCI.
Although the firm liquidated Broumas' account, it suffered a
loss of over $60,000. See id. Broumas filed for personal
bankruptcy in early 1991. See id. at *2 n.3.

On September 27, 1991, the SEC filed a complaint in
district court alleging that, from January of 1989 through
July of 1990, Broumas violated the securities laws by execut-
ing wash trades in JML stock. See SEC v. John G. Brou-
mas, Civ.A.No. 91-2449 (D.D.C.). Without admitting or de-
nying the allegations, Broumas consented to the entry of a
permanent injunction against future violations. Subsequent-
ly, Broumas pled guilty to utilizing a check-kiting scheme to
meet margin calls. See United States v. Broumas, 69 F.3d
1178, 1179-80 (D.C. Cir. 1995).

On September 30, 1994, the SEC issued an administrative
complaint against Graham, Voss, and Pasztor in connection
with Broumas' trades from January 1989 through May 1990.
Graham was charged with willfully aiding and abetting Brou-
mas' violations of two sections of the Securities Exchange Act
of 1934: section 9(a)(1), which prohibits the effectuation of
wash trades or matched orders

[f]or the purpose of creating a false or misleading ap-
pearance of active trading in any security registered on a
national securities exchange, or a false or misleading
appearance with respect to the market for any such
security,

15 U.S.C. s 78i(a)(1), and section 10(b) (and Rule 10b-5
thereunder), which makes it unlawful

[t]o use or employ, in connection with the purchase or
sale of any security registered on a national securities
exchange ... any manipulative or deceptive device or
contrivance ...,

id. s 78j(b). Pasztor and Voss were charged with violating
section 15(b)(4)(E) for failing reasonably to supervise Graham
"with a view to preventing" the violations. Id. s 78o(b)(4)(E).
The charges against Pasztor were severed from those against
Voss and Graham. The SEC subsequently found Pasztor

liable for failure to supervise and sanctioned him with a
three-month suspension. See James J. Pasztor, Release No.
34-42008, 70 S.E.C. Docket 1979 (Oct. 14, 1999).

The charges against Graham and Voss were heard before
an Administrative Law Judge (ALJ), who found Graham and
Voss liable on all charges, suspended them from association
with any broker or dealer for two and three months, respec-
tively, and ordered Graham to cease and desist from future
violations. See Sharon M. Graham, Release No. 34-82, 60
S.E.C. Docket 2707, 1995 WL 769011, at *28 (Dec. 28, 1995).
On appeal, the SEC held that Broumas' trading did not
violate section 9(a)(1) because the specific manipulative intent
required under that section had not been established, and
hence that Graham did not aid and abet such a violation. See
Graham, 1998 WL 823072, at *6 n.27. However, the Com-
mission affirmed the ALJ's holding that Broumas' wash and
matched trades violated section 10(b) and Rule 10b-5 because
they operated as a fraud upon: a) the market for JML stock,
by creating a deceptive appearance of market activity; and
b) the brokerage firms through which Broumas traded, which
were induced to pay him money they would not have paid had
they known the sales were not bona fide. See id. at *5. The
Commission further affirmed the ALJ's findings that Graham
aided and abetted Broumas, and that Voss failed reasonably
to supervise, and it upheld the two- and three-month suspen-
sions. See id. at *7, *9, *10. Graham and Voss petition for
review of the Commission's order.

II

The securities laws provide for judicial review of SEC
disciplinary proceedings in the courts of appeals. See 15
U.S.C. s 78y(a)(1). The Commission's findings of fact, "if
supported by substantial evidence, are conclusive." Id.
s 78y(a)(4); see Steadman v. SEC, 450 U.S. 91, 96 n.12
(1981). Its other conclusions may be set aside "only if
'arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law,' 5 U.S.C. s 706(2)(A)." Wonsover v.
SEC, 205 F.3d 408, 412 (D.C. Cir. 2000) (internal quotation
omitted).

 Section 10(b) of the Securities Exchange Act of 1934 makes
it unlawful to use deceptive devices in connection with the
purchase or sale of securities. See 15 U.S.C. s 78j(b). Rule
10b-5, promulgated pursuant to section 10(b), specifically
provides that it is unlawful for any person, in connection with
the purchase or sale of any security:

(a) To employ any device, scheme, or artifice to de-
fraud,

(b) To make any untrue statement of a material fact or
to omit to state a material fact necessary in order to
make the statements made ... not misleading, or

(c) To engage in any act, practice, or course of busi-
ness which operates or would operate as a fraud or deceit
upon any person.

17 C.F.R. s 240.10b-5. Although variously formulated, three
principal elements are required to establish liability for aiding
and abetting a violation of section 10(b) and Rule 10b-5: (1)
that a principal committed a primary violation; (2) that the
aider and abettor provided substantial assistance to the pri-
mary violator; and (3) that the aider and abettor had the
necessary "scienter"--i.e., that she rendered such assistance
knowingly or recklessly. See SEC v. Fehn, 97 F.3d 1276,
1287-88 (9th Cir. 1996); Bloor v. Carro, Spanbock, Londin,
Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985); SEC v.
Falstaff Brewing Corp., 629 F.2d 62, 72 (D.C. Cir. 1980);
Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir.
1980); see also SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir.
1992).

Graham contests all three of these elements: She contends
that Broumas' conduct did not constitute a violation of section
10(b) or Rule 10b-5, that she did not substantially assist such
a violation, and that she did not do so knowingly or recklessly.
Graham and Voss further argue that the SEC is estopped
from sanctioning them because the SEC and National Associ-
ation of Securities Dealers (NASD) observed Broumas' trad-
ing and failed to alert petitioners to it or identify it as a
securities violation. Finally, Voss argues that because Gra-
ham is not guilty of aiding and abetting, he cannot be guilty

of failing reasonably to supervise her. We consider these
arguments below.

A

The SEC based its conclusion that Broumas' trades consti-
tuted a fraud under section 10(b) and Rule 10b-5 on two
independent theories. First, it concluded that the trades
constituted a fraud on the market for JML stock by creating
a deceptive appearance of market activity. Second, it con-
cluded that Broumas defrauded the broker-dealers through
which he traded by causing them to remit sales proceeds to
him that they would not have paid had they known the true
nature of the transactions. Although Graham challenges the
validity of the first theory,10 we need not resolve that dispute
because Broumas' trades clearly constitute violations under
the second.

As the SEC explained, Broumas, unable to obtain further
loans from banks, arranged wash trades and matched orders
"for the purpose of obtaining a float in a scheme similar to
check-kiting." Graham, 1995 WL 769011, at *4.11 Broumas'
scheme caused the selling brokers to pay him immediately
the anticipated proceeds from the contrived sales, payments
they would not have made had they realized that Broumas--
with his shaky financial condition--was also on the other side
of the transaction, promising to pay for the same stock within

__________
10 Graham disputes that Broumas' trades constituted a fraud on
the market. She argues, inter alia, that Broumas' trades were not
material because they constituted a small percentage of the total
volume of outstanding JML shares. The SEC counters that the
trades nonetheless made up a substantial proportion of the daily
volume of trades on the days they were reported.

11 Broumas acknowledged that he began wash trading because
he "didn't have the credit" to meet his existing obligations, J.A. at
174, and couldn't borrow money from a bank because he had
"reached [his] limit," id. at 213. He also testified that on many
occasions he sold JML stock to himself in order to meet margin
calls. See id. at 205.

five days. See Graham, 1998 WL 823072, at *6.12 Indeed,
not only did Broumas fail to disclose that he was on both
sides of the transaction, but he also took affirmative steps to
hide that fact--by trading through the Les Girls and Rogers
accounts--when the clearing firm restricted trading in his
own account.13

As we have noted, although Broumas received payment for
the sale immediately, he did not have to make payment for
the "purchase" of the same shares until five days later. Were
he unable to make that payment--an eventuality his uncer-
tain financial condition rendered likely and which ultimately
occurred--the selling broker (or the purchasing broker, if it
had paid over the funds to the selling broker and received the
stock) would be forced to cover the loss by selling the JML
shares. But there was no guarantee that those shares would
cover the amount advanced to Broumas by the broker--either
because the stock was no longer worth the price Broumas
himself had offered a week earlier,14 or because it had never

__________
12 See SEC v. Drysdale Sec. Corp., 785 F.2d 38, 42 (2d Cir. 1986)
(finding s 10(b) violation where, in order to honor its obligation to
resell securities on settlement date of reverse "repo," defendant
"had to purchase identical securities, something which its insolvency
may have rendered impossible"); see also A. T. Brod & Co. v.
Perlow, 375 F.2d 393, 397 (2d Cir. 1967) (upholding claim for fraud
against broker under s 10(b) where investors placed purchase order
with fraudulent intent to pay for securities only if their market
value increased by settlement date, and further noting that scheme
effectively resulted in "an involuntary extension of credit without
compliance with the margin requirements").

13 Broumas testified that he began asking Rogers to allow him
to direct trades through his account "[b]ecause I didn't have the
credit and my margin calls wouldn't permit me to trade with those
other brokers of mine." J.A. at 174; cf. United States v. Sayan,
968 F.2d 55, 61 (D.C. Cir. 1992) (affirming conviction for check-
kiting and noting that "creating fictitious payees and forging en-
dorsements" constituted a material part of the fraud, because "[i]f
[the defendant] had merely made the drafts payable to herself, the
bank would not have granted her immediate credit").

14 The price of JML Class A stock began to decline in February
of 1990. See Graham, 1995 WL 769011, at *2. On February 2,

been worth that amount in the first place.15 Indeed, some-
thing like this happened to VCI, which suffered a $60,000 loss
when forced to liquidate Broumas' account after he failed to
pay for his last transaction.16

Graham contends that Broumas' scheme cannot violate
section 10(b) because fraud on a broker is not fraud "in
connection with the purchase or sale of [a] security," as
required by the statutory language. 15 U.S.C. s 78j(b). To
constitute a violation of section 10(b), Graham maintains, "the
fraud must have been perpetrated upon an actual or potential
investor." Graham Br. at 27. As the brokers were never
parties to the securities transactions, but merely executed

__________
1990, it closed at $6 per share. On May 24, 1990, it closed at $4 5/8.
See J.A. at 754-55. Broumas testified that around this time the
"stock dropped dramatically and I had to sell a lot of things. I was
finding it difficult to meet those interest payments and those loan
payments." Id. at 188.

15 We note that unlike a plaintiff in a private damages action,
the SEC need not prove actual harm. See Schellenbach v. SEC, 989
F.3d 907, 913 (7th Cir. 1993); SEC v. Blavin, 760 F.2d 706, 711 (6th
Cir. 1985).

16 In her reply brief, Graham contends that Broumas did not
defraud the brokers into paying him the proceeds of the JML sales
because he was "entitled" to the money. Graham Reply Br. at 8.
Graham claims that the funds Broumas received from the "sell side"
of the transaction were the sale proceeds of his own stock, and
therefore his own money. The selling broker, however, did not pay
Broumas out of the actual proceeds of the sale, but rather out of
"proceeds" it anticipated would be paid five days later. Unbe-
knownst to the broker, that payment would have to come from
Broumas himself, and, if Broumas were unable to pay, the selling
broker's recourse was against the JML stock--which may well have
been insufficient to cover what the broker had paid out. Of course,
if the transaction is viewed from the "buy side," there is even less
justification for regarding the money as Broumas' own, as the
purchasing broker extended Broumas credit on margin to purchase
the stock from the contra-broker.

them, Graham contends that no violation of section 10(b) was
possible.

Graham's argument is foreclosed by the Supreme Court's
unanimous decision in United States v. Naftalin, 441 U.S. 768
(1979). There, the Court confronted the same challenge to a
criminal conviction under section 17(a)(1) of the Securities Act
of 1933, which makes it unlawful for any person "in the offer
or sale of any securities" to employ any device, scheme, or
artifice to defraud. 15 U.S.C. s 77q(a)(1). The defendant
had placed sell orders for stock he did not own, gambling that
he could make offsetting purchases at lower prices before he
was required to deliver the stock. Defendant did not dispute
that he defrauded the brokers who executed the orders, but
contended, as petitioners do here, that the statute "applies
solely to frauds directed against investors, and not to those
against brokers." Naftalin, 441 U.S. at 772.

The Court rejected the argument. It held that the statuto-
ry phrase, "in the offer or sale of any securities," was
intended to be "define[d] broadly," and is "expansive enough
to encompass the entire selling process, including the sell-
er/agent transaction." Id. at 773. The "language does not
require," the Court said, "that the fraud occur in any particu-
lar phase of the selling transaction," or "that injury occur to a
purchaser."17 Id.

Turning to the statutory purpose, Naftalin emphasized that
"neither this Court nor Congress has ever suggested that
investor protection was the sole purpose of the Securities
Act." Id. at 775. Although "[p]revention of frauds against
investors was surely a key part ... so was the effort to
achieve a high standard of business ethics ... in every facet
of the securities industry." Id. (internal quotation omitted)

__________
17 The Court noted that the case would be different if it had
been brought by private plaintiffs, because the class of plaintiffs
who may bring private actions under Rule 10b-5 is limited to
purchasers or sellers. See Naftalin, 441 U.S. at 774 n.6; see also
United States v. O'Hagan, 521 U.S. 642, 664-65 (1997); Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723, 751 n.14 (1975); SEC
v. National Sec., Inc., 393 U.S. 453, 467 n.9 (1969).

(second alteration in original); see United States v. O'Hagan,
521 U.S. 642, 658-59 (1997) (reaching same conclusion regard-
ing s 10(b) of the Securities Exchange Act). Moreover, the
Court continued, "the welfare of investors and financial inter-
mediaries are inextricably linked--frauds perpetrated upon
either business or investors can redound to the detriment of
the other and to the economy as a whole." Naftalin, 441 U.S.
at 776.

Although Naftalin involved section 17(a)(1) of the Securi-
ties Act, rather than section 10(b) of the Securities Exchange
Act, the relevant language is virtually identical. Compare 15
U.S.C. s 77q(a)(1) ("in the offer or sale of any securities"),
with id. s 78j(b) ("in connection with the purchase or sale of
any security"). Indeed, the Court recognized an argument
that section 17(a)(1) might be narrower than section 10(b),
but held that "even if 'in' were meant to connote a narrower
group of transactions than 'in connection with,' " it would still
cover fraud against brokers. Naftalin, 441 U.S. at 773 n.4.
Naftalin's application to the broader wording of section 10(b)
is, therefore, a fortiori. This point is further confirmed by
the Supreme Court's subsequent description of Naftalin as
having "appl[ied] s 17(a) of the 1933 Act to conduct also
prohibited by s 10(b) of the 1934 Act," Herman & MacLean
v. Huddleston, 459 U.S. 375, 383 (1983), and by its recent
affirmation that section 10(b) "does not confine its coverage to
deception of a purchaser or seller of securities," O'Hagan, 521
U.S. at 651. See also SEC v. Jakubowski, 150 F.3d 675, 680
(7th Cir. 1998) (noting that Naftalin was "a case under s 17
of the 1933 Act, which requires proof that the fraud occurred
'in' an offer or sales of securities--a tighter link, one might
suppose, than 'in connection with' ") (citation omitted); A. T.
Brod & Co. v. Perlow, 375 F.2d 393, 396-97 (2d Cir. 1967)
(holding that s 10(b) and Rule 10b-5 apply to frauds against
brokers).

Graham also contends that there cannot have been an
actionable fraud in this case because the SEC charged owners
and brokers at the contra-firms with securities violations like
those of petitioners. "Clearly," Graham declares, "Broumas'
alleged aiders and abettors cannot also be his defrauded

victims." Graham Br. at 26. This argument, too, is of no
avail.

First, even assuming that such a defense were valid, the
SEC did not charge all of the contra-brokers with securities
violations.18 Second, this purported defense has no applica-
tion to the clearing firms--none of which played any role in
Broumas' scheme and one of which expressly tried to restrict
it. Broumas, assisted by Graham and Voss, established and
traded through the Les Girls and Rogers accounts specifically
to avoid those restrictions, thus deceiving the clearing firm
into making the advances necessary to execute his transac-
tions. See Graham, 1998 WL 823072, at *3-*4; Richard D.
Chema, Release No. 34-40719, 68 S.E.C. Docket 1911, 1998
WL 820658, at *3 (Nov. 30, 1998) (concluding that Broumas
also defrauded another broker-dealer's clearing firm into
advancing funds); see also United States v. Russo, 74 F.3d
1383, 1388, 1390 (2d Cir. 1996) (upholding conviction under
s 10(b) where scheme involved generating false cash credits
from clearing broker).19

Finally, whatever the involvement of the brokers or own-
ers, fraud on their corporate institutions is an independent
matter.20 As the Supreme Court recognized in Naftalin,

__________
18 Broumas' wash trades involved a total of 14 different broker-
dealers. The VCI trades involved eight different firms, while the
SEC instituted administrative proceedings against four. See Gra-
ham, 1998 WL 823072, at *3 n.14.

19 Like the other brokers, the clearing firm was exposed to the
risk that funds it advanced might not have been repaid at the time
Broumas became insolvent. Although the clearing broker might be
able to recover against the introducing firm in the event of nonpay-
ment, it would incur transaction costs in so doing--and there was
always the risk that Broumas' scheme would bankrupt one of the
broker-dealers involved. See Richard D. Chema, 1998 WL 820658,
at *4-*5.

20 Cf. Superintendent of Ins. v. Bankers Life & Cas. Co., 404
U.S. 6, 12 (1971) (holding that s 10(b) applies to fraud on corpora-
tion by controlling stockholder, and that "the fact that creditors of
the defrauded" corporation "may be the ultimate victims does not

fraud on brokerage firms affects more than the health of
those firms alone. See Naftalin, 441 U.S. at 776. When the
music stops, the firm left without a chair (payment or collat-
eral) does not simply leave the game. "Losses suffered by
brokers," whether or not covered by insurance, "increase
their cost of doing business, and in the long run investors pay
at least part of this cost through higher brokerage fees." Id.
Equally important, fraud against brokers may "create a level
of market uncertainty that could only work to the detriment
of both investors and the market as a whole." Id. Accord-
ingly, we have no warrant for overturning the SEC's determi-
nation that Broumas violated section 10(b) and Rule 10b-5.

B

Having concluded that Broumas' stock-kiting scheme con-
stituted a primary violation of the securities laws, the next
question is whether Graham substantially assisted Broumas
in that violation. We have no doubt that she did. Graham
placed 60 directed trades for Broumas, an average of one
every week-and-a-half during the 18-month period at issue.
She opened the Les Girls account and executed wash trades
from both that account and from the account of Lawton
Rogers. Such conduct is more than sufficient to constitute
substantial assistance. See SEC v. U.S. Envtl., Inc., 155 F.3d
107, 112 (2d Cir. 1998) (holding trader who recklessly execut-
ed manipulative buy and sell orders for customer liable as
primary violator).

Graham contends that this conclusion is inconsistent with
our decision in Zoelsch v. Arthur Andersen & Co., 824 F.2d 27
(D.C. Cir. 1987). She describes Zoelsch as a case in which we
dismissed an aiding and abetting claim against an accounting
firm, "which had issued an audit report with respect to
corporate financial statements" but had "played no role in the
use of certain figures from those statements in a prospectus

__________
warrant disregard of the corporate entity") (footnote omitted);
United States v. Saks, 964 F.2d 1514, 1518-19 (5th Cir. 1992)
(affirming finding of intent to defraud banking institution, notwith-
standing bank officers' collusion with customer).

and no role in the publication of any misleading financial
statements." Graham Br. at 31. In fact, the accounting
firm's relationship to the misleading financial statements was
even further removed than Graham describes,21 but the dis-
tance reflected in her description suffices to distinguish that
case from this one: unlike the accounting firm in Zoelsch,
Graham did play a role--and a substantial one--in Broumas'
deceptive trades.

Graham further contends that she may not be regarded as
substantially assisting Broumas since the execution of his
trades was merely a "ministerial" act on her part. She had
"no discretion" with respect to the handling of Broumas'
accounts, she asserts, because "once Mr. Pasztor approved a
trade, [she] could not refuse to execute it." Id. at 14. But
Graham did have discretion. A registered representative can
always refuse to execute a trade she knows may constitute a
securities violation. Cf. U.S. Envtl., 155 F.3d at 112 ("Like
lawyers, accountants, and banks who engage in fraudulent or
deceptive practices at their clients' direction, [the defendant
broker] is a primary violator despite the fact that someone
else directed the market manipulation scheme."). Of course,
doing so might have made Graham's career at VCI more
difficult, but fear of such consequences does not excuse a
violation of the securities laws.

C

The real question here concerns the third element of aiding
and abetting liability: did Graham assist Broumas with the
requisite scienter? We have held that knowledge or reckless-
ness is sufficient to satisfy that requirement. See Kowal v.
MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir.
1994); SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992);
Zoelsch, 824 F.2d at 36; Dirks v. SEC, 681 F.2d 824, 844-45
(D.C. Cir. 1982), rev'd on other grounds, 463 U.S. 646 (1983).

__________
21 The defendant accounting firm had not issued the audit
report, but rather had provided information to another accounting
firm that had prepared the report. See Zoelsch, 324 F.2d at 34; see
also id. at 28-29, 35-36.

We are satisfied that Graham acted with at least extreme
recklessness in aiding Broumas' stock-kiting scheme.

The SEC did not hold Graham reckless merely for execut-
ing stock trades. Rather, during the course of executing
some 60 trades, Graham noticed numerous suspicious circum-
stances. She observed that Broumas invariably specified the
contra-broker for his trades, rather than using American
Securities, the firm VCI typically contacted for over-the-
counter trades in exchange-listed securities. Out of the more
than 300 accounts with which Graham worked, only Broumas
specified the contra-broker with whom to execute the trade,
and only Broumas traded in such large volumes. He also
detailed every aspect of the trade, including the specific
employee at the contra-broker with whom he wanted Graham
to speak. Cf. United States v. Corr, 543 F.2d 1042, 1046 (2d
Cir. 1976) (recognizing directed trades as evidence of manipu-
lation). Graham testified that, as a result, she assumed
Broumas controlled the shares in the accounts or at least
"had connections" with them.

Perhaps most important, Graham recognized, and discussed
with Pasztor, the fact that Broumas had "a peculiar way of
trading." J.A. at 306. Although these were "big money
trades" involving thousands of shares, and although he was
repeatedly buying and selling and paying commissions on the
transactions, Graham realized that Broumas was not making
any money on the trades. See id. at 380. This economically
irrational trading was a large red flag. See Edward J.
Mawod & Co. v. SEC, 592 F.2d 588, 595 (10th Cir. 1979)
(holding that broker willfully aided and abetted manipulative
wash and match trades scheme when he "knew or had reason
to know that such trading was economically irrational").

At the same time that she was noting these trading pecu-
liarities, Graham also knew that Broumas was experiencing
financial difficulties. She learned that he was buying and
selling JML stock as a method of borrowing money he needed
to repay bank loans. She knew that he was having trouble
paying for his trades on time, had received "quite a few"

extensions on his joint account, and had bounced checks.
J.A. at 288, 296, 343. She knew that VCI's clearing firm had
imposed restrictions on his joint account. And she knew that,
with her help, Broumas was circumventing those restrictions
by trading in accounts nominally owned by others. More-
over, when it came to her own firm's financial interests,
Graham took special precautions to protect against financial
loss, seeking Pasztor's authorization on almost every trade
because "I couldn't take a chance of writing an order when
the man would owe thousands of dollars in his account." Id.
at 317. All of this provides more than the "substantial
evidence" necessary to support the SEC's finding of scienter
on the part of Graham.

In her defense, Graham notes that she "stood to gain
absolutely nothing from Broumas' scheme," since Broumas
traded through a "house account" for which she did not
receive commissions. Graham Br. at 27. It is true that lack
of opportunity for personal gain may suggest lack of motive,
which may in turn be relevant to the question of scienter.
But the absence of commissions does not necessarily negate
either motive or scienter. Graham may have gone along with
Broumas' scheme (or hidden her head in the sand) to please
her bosses or to keep her job. Or she may have done so
merely because she was reckless, regardless of any motive to
gain money or favor. Either way, the absence of commis-
sions does not absolve her of responsibility. See U.S. Envtl.,
155 F.3d at 112 ("[A]s long as [broker], with scienter, effected
the manipulative buy and sell orders, [his] personal motiva-
tion for manipulating the market is irrelevant in determining
whether he violated s 10(b).").

Graham also points to the fact that she sought and obtained
approval for Broumas' trades from her immediate supervisor,
James Pasztor, who told her they were "fine." She "left it up
to my supervisor," she states, to "say that this was not
allowed." J.A. at 338. And she argues that this reliance
negates the scienter necessary for an aiding and abetting
violation. In support, Graham cites James L. Owsley, a case
in which the Commission excused the conduct of a broker
who, prior to selling his own stock in a company, was told by

a firm official with whom he consulted that it was not
necessary to disclose those sales to customers he was asking
to purchase the same stock at the same time. See 51 S.E.C.
524, 528 (1993).

The SEC rejected Graham's reliance defense, noting that
she is an experienced professional who has an independent
duty to use diligence "where there are any unusual factors."
Graham, 1998 WL 823072, at *6-*7 & n.30 (quoting Alessan-
drini & Co., Inc., 45 S.E.C. 399, 406 (1973)). Registered
representatives are "under a duty to investigate," Hanly v.
SEC, 415 F.2d 589, 595 (2d Cir. 1969) (internal quotation
omitted), and "red flags and suggestions of irregularities
demand inquiry as well as adequate follow-up and review,"
Frederick H. Joseph, 51 S.E.C. 431, 438 (1993). See Wons-
over, 205 F.3d at 411. Given the abundance of red flags here,
it would be very hard to characterize Graham's conduct as
anything but extremely reckless, regardless of the approvals
she received from Pasztor.

The Commission distinguished the Owsley decision on the
ground that, "[a]mong other things, ... [it] involved a single,
discrete inquiry and limited transactions." Graham, 1998
WL 823072, at *7 n.34. Nor did Owsley mention the pres-
ence of any suspicious circumstances or red flags. By con-
trast, this case involved 60 transactions over 18 months, with
Graham's involvement becoming increasingly more significant
(e.g., through the establishment of the Les Girls account and
the use of the Rogers account) at the same time that the
warning signs were becoming increasingly more prominent.

Graham's reliance on Pasztor, a VCI employee, also differs
substantially from the reliance at issue in SEC v. Steadman,
where we held that directors of a mutual fund company had
not been reckless in relying on a "formal, unqualified opinion
letter" from their outside counsel--an opinion also relied
upon by the funds' "disinterested independent auditor," a
major national accounting firm. 967 F.2d at 642. There
were no red flags in evidence in Steadman, nor were there
suspicious events creating reasons for doubt. Indeed, there
was no evidence at all that the directors were on notice of the

violation at issue, which arose from a failure to register the
funds' securities under state Blue Sky laws, other than the
SEC's view that "[s]ophisticated professionals like Steadman
might be assumed to have come across [such] information ...
at some point during" their careers. Id.

Graham, by contrast, was not simply a professional who
should have known better. She was a professional who was
aware of her customer's financial difficulties, aware that he
was trading in a suspicious and economically irrational man-
ner, and aware that he was trying to circumvent restrictions
that had been placed on his account--yet she assisted him
nonetheless. Cf. Wonsover, 205 F.3d at 411, 415 (holding, in
light of "several 'red flags,' " that broker's reliance on approv-
al of firm and its lawyers did not negate finding that he acted
willfully). Accordingly, we reject Graham's reliance defense
and affirm the SEC's determination that she recklessly, and
substantially, assisted Broumas in violating the securities
laws.22

D

Finally, Graham and Voss argue that the SEC is barred by
principles of "equitable estoppel" and "administrative inter-
pretation" from sanctioning them. They note that, "[f]rom
late 1988 through mid-1989, the NASD had several occasions
to review Broumas' directed trading in JML shares." Gra-
ham Br. at 33. The NASD concluded, petitioners assert,
"that so long as Broumas' trades were not reported to the
consolidated transaction reporting system of the exchanges,

__________
22 Commissioner Johnson dissented from the finding of liability
against Graham, solely on the ground that her reliance on the
advice of Pasztor and Voss was reasonable. See Graham, 1998 WL
823072, at *11-*12 (Johnson, Comm'r, dissenting). Even he, how-
ever, found the case an "exceedingly close call[ ]," which "necessari-
ly depend[ed] on the facts and circumstances." Id. While each
SEC Commissioner may make his or her own factual determina-
tions de novo, our standard of review requires deference to the
determinations of the Commission where they are supported by
substantial evidence.

they were not manipulative." Id.23 They also claim that
"[t]he NASD sought the SEC's view with respect to this
administrative interpretation and the SEC concurred." Id.
And they further contend that during 1988 and 1989, the SEC
conducted its own examination of Broumas' trading, and "did
not perceive" securities violations. Id. at 34.

At the start, it is important to describe accurately what
transpired during the examinations in question. First, the
NASD did not give Broumas' trades anything like a clean bill
of health, and certainly did not do so in the form of an
"administrative interpretation." An examiner simply con-
cluded, in an internal review, that because Broumas' trades
were not being included in the consolidated transaction re-
porting system, see supra note 23, they did not violate an
NASD rule that proscribes wash trades undertaken for the
purpose of creating the false appearance of market activity,
see NASD Manual, Sched. G, s 4(b) (1989). The examiner
was nonetheless troubled by the trades "because they didn't
smell right. There was something fishy about these trades
being prearranged, directed trades...." J.A. at 610; see
also id. at 616-17. The NASD referred the matter of Brou-
mas' trading to the SEC for further investigation. See id. at
608, 618, 804.

The SEC's role was even less formalized, and is of even
less comfort to petitioners. The support petitioners cite for
the proposition that "[t]he NASD sought the SEC's view with
respect to this administrative interpretation and the SEC
concurred" is no more than the NASD examiner's testimony
that he spoke to someone at the SEC--whose name and title
he could not recall--who "basically agreed" with his evalua-
tion. Id. at 610, 611. The support for petitioners' contention
that the SEC "did not perceive" securities violations in re-
viewing Broumas' trading is the testimony of an SEC examin-

__________
23 NASD rules require that most transactions in stocks listed on
the AMEX be reported on the "Consolidated Tape," NASD Manual,
Sched. G, ss 1(d), 2 (1989), which is the "consolidated transaction
reporting system for the dissemination of last sale reports in [such]
securities," id. s 1(b). Broumas' trades often were not reported.

er, who said that after reviewing the NASD examination, he
decided that "no conclusion could be reached as to whether
any violative activities have occurred." Id. at 802. The SEC
examiner therefore recommended that a "further review of
Mr. Broumas's activities should be conducted in order to
determine if insider trading or a check kiting scheme was
being perpetrated." Id. at 803; see also id. at 659. Further
review by the SEC eventually did result in the complaints at
issue here.

Even in circumstances where the doctrine of estoppel is
applicable,24 the following elements, at least, must be estab-
lished: that there was a "definite" representation to the party
claiming estoppel; that the latter "relied on its adversary's
conduct in such a manner as to change his position for the
worse"; and that the reliance was "reasonable." Heckler v.
Community Health Servs., 467 U.S. 51, 59 (1984) (internal
quotations and footnote omitted). Here, neither the NASD
nor the SEC made any representations at all to Graham or
Voss, and petitioners do not assert that they acted in reliance
on any such representations. Nor did either entity issue any
kind of opinion or "administrative interpretation" that might
have bound it, even as a matter of precedent, in a future
adjudication.25

__________
24 See Heckler v. Community Health Servs., 467 U.S. 51, 60
(1984) ("[I]t is well settled that the Government may not be
estopped on the same terms as any other litigant."); see also Office
of Personnel Management v. Richmond, 496 U.S. 414, 419, 421-22
(1990).

25 Of course, even if the NASD had done something to bind
itself, that would not have bound the SEC. As a private, nonprofit
corporation, the NASD conducts its own independent investigatory
and disciplinary actions, and is subject to limited review by the
SEC. See 15 U.S.C. s 78s; 6 Loss & Seligman, supra, at 2819-30.
There is "no statutory, regulatory, or historical reference to support
[an] argument that NASD discipline of its members was intended to
preclude ... disciplinary action by the SEC itself against a securi-
ties professional." Jones v. SEC, 115 F.3d 1173, 1179 (4th Cir.
1997).

 Instead, what we have in this case is nothing more than a
series of investigations into Broumas' trades, which ultimately
provided the SEC with sufficient understanding of the under-
lying scheme to file the complaint now before us. Neither
Broumas nor the petitioners can be said to have been cleared
along the way. And the SEC's failure to prosecute at an
earlier stage does not estop the agency from proceeding once
it finally accumulated sufficient evidence to do so.26

__________
26 See Investors Research, 628 F.2d at 174 & n.37 (rejecting
estoppel argument where there was "no evidence the Commission
learned all the facts of the violation" at early meetings with
petitioners); Capital Funds, Inc. v. SEC, 348 F.2d 582, 588 (8th Cir.
1965) (rejecting argument that the SEC was estopped because it
previously investigated but took no action); SEC v. Culpepper, 270
F.2d 241, 248 (2d Cir. 1959) (finding that routine examination
provided "no fact-basis for an estoppel" because "neither the Com-
mission nor its staff directly or indirectly caused the defendants to
understand that it concurred in the legality of the [subject] sales");
G.K. Scott & Co., 51 S.E.C. 961, 966 n.21 (1994) ("A regulatory
authority's failure to take early action neither operates as an
estoppel against later action nor cures a violation.") (internal quota-
tion omitted), review denied, 56 F.3d 1531 (D.C. Cir. 1995) (table
decision); cf. 15 U.S.C. s 78z ("No action or failure to act by the
Commission ... in the administration of this chapter shall be
construed to mean that the particular authority has in any way
passed upon the merits of, or given approval to, any security or any
transaction or transactions therein....").

In Klein v. SEC, 224 F.2d 861 (2d Cir. 1955), cited by petitioners,
the Second Circuit held that after an NASD committee had exam-
ined a broker's 50% markup and found no violation, it could not
sanction him for charging the same markup two years later because
the prior review "justified [the broker] in believing that a 50%
markup did not violate the Rules." Id. at 864. The court regarded
the NASD's earlier determination as "an interpretation of the Rules
on which [the broker] reasonably relied." Id. Klein is of no
assistance to petitioners, however, as they make no claim of reliance
on the SEC's initial investigation. In any event, the Second Circuit
subsequently appeared to limit Klein to actions of the NASD,
holding that because the SEC enforces an "Act of Congress," it
could not "be estopped even if it had acquiesced in" a transaction

 III

We conclude that substantial evidence supports the SEC's
determination that Graham aided and abetted Broumas' viola-
tions of section 10(b) and Rule 10b-5. Because Voss' defense
rested solely upon the exoneration of Graham, we also uphold
the SEC's determination that he failed reasonably to super-
vise her. The order of the SEC is

Affirmed.

__________
similar to the one it was now sanctioning. Culpepper, 270 F.2d at
248.