United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 16, 2006 Decided July 20, 2007
No. 05-1467
PAZ SECURITIES, INC. AND
JOSEPH MIZRACHI,
PETITIONERS
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order of the
Securities and Exchange Commission
David Clarke, Jr. argued the cause for petitioners. With
him on the briefs was Deborah R. Meshulam.
Michael A. Conley, Senior Special Counsel, argued the
cause for respondent. With him on the brief were Brian G.
Cartwright, General Counsel, Jacob H. Stillman, Solicitor, and
Susan K. Straus, Attorney.
Before: GINSBURG, Chief Judge, and ROGERS and
KAVANAUGH, Circuit Judges.
Opinion for the Court by Chief Judge GINSBURG.
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GINSBURG, Chief Judge: PAZ Securities, Inc. and its
president, Joseph Mizrachi, petition for review of an order of the
Securities and Exchange Commission sustaining the decision of
the National Association of Securities Dealers to expel PAZ
from membership and to bar Mizrachi from ever associating
with any NASD member firm as sanctions for Mizrachi’s failure
to respond to the NASD’s repeated requests for information
from and about PAZ. We hold the Commission abused its
discretion in two ways: (1) it failed to address certain mitigating
factors raised by the petitioners, specifically, that their failure to
respond had no potential either to injure the investing public or
to benefit themselves monetarily nor did the information
requested relate to conduct potentially injurious to the public or
beneficial to themselves; and (2) it did not identify any remedial
— as opposed to punitive — purpose for the sanctions it
approved. Accordingly, we grant the petition and remand this
matter for the Commission to consider anew whether the
sanctions are excessive or oppressive in light of the factors
raised in mitigation and to consider for the first time whether the
sanctions serve a remedial purpose, as required by § 19(e)(2) of
the Securities Exchange Act of 1934, 15 U.S.C. § 78s(e)(2).
I. Background
Joseph Mizrachi was the president of PAZ Securities, Inc.,
which was a member of the NASD, a “self-regulatory
organization” registered with the Commission as a “national
securities association” under Section 15A of the Securities
Exchange Act of 1934, 15 U.S.C. § 78o-3. The NASD adopts
rules to regulate the conduct of its members, § 15A(b)(3)-(7),
and may enforce those rules by imposing disciplinary sanctions
upon member firms and persons associated with them,
§ 15A(b)(8)-(9).
In February 2003 the NASD began a routine on-site
3
examination of PAZ and reviewed materials provided by Joseph
Mizrachi’s brother, Simon Mizrachi, in his capacity as vice
president of the firm. Joseph Mizrachi claims he was
unavailable at that time to respond to the NASD because he was
experiencing mental distress caused by marital difficulties and
was traveling abroad. Unable to obtain through Simon Mizrachi
everything it sought from PAZ, the NASD asked Joseph
Mizrachi and PAZ to provide additional written information.
Specifically, the NASD sent three letters to the petitioners
asking whether PAZ had implemented a continuing education
program; what investment banking or securities business the
firm had engaged in since February 2001; what specific duties
PAZ had assigned to, and what compensation PAZ had paid to,
certain individuals during the period 2000-2002; whether PAZ
had revised its written supervisory procedures as requested
(apparently by the NASD); why the NASD had not received the
firm’s 2001 audit on time; and whether PAZ had a written
expense sharing agreement with a company operated by Simon
Mizrachi that shared office space with PAZ.
The NASD sent the first letter on May 6, 2003 by overnight
courier to Joseph Mizrachi at the address listed for PAZ in the
NASD’s Central Registration Depository (CRD). On May 20,
2003 the NASD sent a second letter by express courier to the
same address requesting the same information. On July 23,
2003 it sent a third letter by first class and certified mail to the
address listed in the CRD for each petitioner. The return
receipts show that one “C.J. Mizrachi” signed for the letter sent
to PAZ’s registered address, but the return receipt card sent to
Joseph Mizrachi’s home address bears an illegible signature.
Joseph Mizrachi asserted before the Commission that he is not
C.J. Mizrachi, and C.J. Mizrachi is not further identified in the
record.
The petitioners do not contest that the NASD’s efforts to
4
notify them comply with NASD Procedural Rule 9134, which
provides the NASD may send documents by first class mail,
certified mail, or courier to the address listed in the CRD. Under
NASD Procedural Rule 8210(d), a member of the NASD or
person to whom a request for information is directed is deemed
to have received that request when it is sent to the last known
business address of the member firm or the last known
residential address of a person associated with the firm, as
reflected in the CRD. Therefore, the petitioners had
constructive, if not actual notice of the three letters requesting
information from PAZ.
On August 14, 2003 the NASD Department of Enforcement
filed with the NASD Office of Hearing Officers a complaint
alleging the petitioners had failed to respond to a request for
information, in violation of NASD Conduct Rule 2110 and
NASD Procedural Rule 8210. The Department of Enforcement
simultaneously sent by first class and certified mail a Notice of
Complaint, with the complaint attached, to the addresses listed
in the CRD for PAZ and for Joseph Mizrachi. The Department
repeated this drill on September 12, 2003. Though the record is
unclear whether Joseph Mizrachi received either of the Notices,
he admitted that Simon Mizrachi told him about the complaint,
apparently no later than October 2003.
In September 2003 Simon Mizrachi hired Douglas
Westendorf, Esq. to represent the petitioners before the NASD.
Pursuant to a motion Westendorf filed on September 26, the
NASD gave the petitioners until October 20 to answer the
complaint. The petitioners, however, still failed to answer the
complaint, and on October 28 the NASD Hearing Officer found
them in default. In November the Department of Enforcement
moved for entry of a default decision and served the motion
upon the petitioners and Westendorf. On December 31 the
NASD Hearing Officer entered a default decision against the
5
petitioners, expelling PAZ from membership in the NASD and
barring Joseph Mizrachi from ever associating with any NASD
member firm, the “standard” sanctions — absent mitigating
circumstances — recommended in the NASD Sanction
Guidelines (at 35).
On January 23, 2004 the petitioners belatedly responded to
the NASD’s request for information and moved to vacate the
default decision. In that motion, Joseph Mizrachi explained that
from January to August 2003 he had been traveling abroad to
visit family and to deal with emotional distress, for which he had
received counseling; from August 2003 to January 2004 he
claimed he had been traveling extensively for business. Joseph
Mizrachi claimed he and PAZ had relied upon Westendorf to
represent them and attributed their failure to respond to the
negligence of the attorney. The NASD Hearing Officer denied
the motion to vacate the default decision because the petitioners
had presented no evidence that their failure to respond was
attributable to negligence by Westendorf and therefore failed to
show good cause to vacate the default decision.
The petitioners appealed to the NASD’s National
Adjudicatory Council (NAC), arguing the sanctions imposed by
the Hearing Officer were unduly severe and should be reduced
upon the basis of three mitigating factors: (1) the petitioners’
misplaced reliance upon counsel to respond to the complaint; (2)
the unintentional nature of their failure to respond; and (3) the
nature of the information requested, which did not involve any
potential monetary gain to either of them. The NAC affirmed
the default decision, the sanctions, and the Hearing Officer’s
refusal to vacate the default decision. It found the petitioners’
failure to respond to the NASD’s requests for information were
not mitigated by the enumerated factors because Joseph
Mizrachi had at least constructive notice of the repeated requests
for information and the petitioners’ failure to respond was
6
“tantamount to stonewalling and a willful refusal to comply,”
which had “undermined” the NASD’s ability to fulfil its
regulatory responsibilities. The NAC did not respond to the
petitioners’ contention that their failure to respond was
mitigated because the information requested did not relate to any
potential monetary gain to them, except to say, “We have
considered and rejected without discussion all other arguments
of the parties.”
Before the Commission, the petitioners argued the sanctions
should be reduced because their failure to respond to the
NASD’s information requests (1) was unintentional (Principal
Consideration No. 13, NASD Sanction Guidelines at 7); (2) did
not injure the investing public (Principal Consideration No.10,
NASD Sanction Guidelines at 6), nor did the information
requested relate to injurious conduct (violation-specific
Principal Consideration No. 1, NASD Sanction Guidelines at
35); (3) did not stand to benefit them monetarily (Principal
Consideration No. 17, NASD Sanction Guidelines at 7), nor did
the information requested relate to conduct of benefit to them
(violation-specific Principal Consideration No. 1, NASD
Sanction Guidelines at 35); and (4) was attributable to their
reliance upon counsel to respond to the complaint (Principal
Consideration No. 7, NASD Sanction Guidelines at 6). The
Commission first determined that Joseph Mizrachi actually
knew about the requests for information by September 2003 but
neither contacted the NASD nor delegated that task to another,
which undermined the petitioners’ claim that their failure to
respond was unintentional. Next, the Commission rejected the
petitioners’ contention that they reasonably relied upon counsel
because Joseph Mizrachi apparently neither followed up with
Westendorf about filing an answer to the complaint nor asked
anyone to keep him updated on the matter. Finally, in response
to the petitioners’ suggestion that the nature of the information
requested mitigated their failure to respond, the Commission
7
said the “NASD’s requests were not as limited as [the
petitioners] contend”; they concerned generally “the nature of
PAZ’s investment banking and securities activities [and, more
specifically,] the duties and responsibilities of certain
individuals, and whether the firm had a written agreement
regarding shared expenses.” Moreover, “Even if the requests
had been limited” member firms and persons associated with
them “cannot second-guess NASD’s requests” because the
“NASD has a right to request information and require
cooperation.” The Commission emphasized the “importance of
complying with NASD’s information requests” because “[w]hen
members and associated persons delay their responses to
requests for information, they impede the ability of NASD to
conduct its investigations.” Because the petitioners had received
the standard sanction under the NASD Guidelines for failure to
respond to a request for information, and because the
Commission found that failure was unmitigated, the
Commission held the sanctions were neither excessive nor
oppressive.
II. Analysis
The petitioners argue the Commission abused its discretion
by affirming sanctions grossly disproportionate to their conduct
without considering certain mitigating factors and without
articulating a remedial rather than a punitive purpose for the
sanctions. Specifically, they contend the Commission did not
evaluate whether their failure to respond to the NASD’s requests
for information was mitigated because (1) it did not result in any
injury to the investing public (Principal Consideration No. 11,
NASD Sanction Guidelines at 6), (2) it did not have the potential
to benefit either of them monetarily (Principal Consideration
No. 17, NASD Sanction Guidelines at 7), and (3) the
information requested related to conduct neither potentially
injurious to the investing public nor potentially beneficial to
8
themselves (violation-specific Principal Consideration No. 1,
NASD Sanction Guidelines at 35).
The Commission responds that it may review a sanction
only to determine whether it is excessive or oppressive and may
not determine de novo whether it is otherwise appropriate. See
Krull v. SEC, 248 F.3d 907, 911 (9th Cir. 2001) (“Although the
Commission reviews the record de novo, its review of the
sanction is narrower — the sanction may be modified or
canceled only if it is ‘excessive or oppressive’”). The
Commission emphasizes that the NASD Sanction Guidelines,
which absent mitigating circumstances call for the expulsion of
a member firm and the lifetime bar of an associated person for
failure to respond to a request for information, show the
sanctions imposed are not “grossly disproportionate.” The
Commission also asserts it considered each of the mitigating
factors raised before it, and it may not now be faulted for failing
to consider mitigating factors the petitioners did not raise before
it.
Pursuant to § 19(e) of the Securities Exchange Act of 1934*,
*
Section 19(e), 15 U.S.C. § 78s(e), provides:
(1) In any proceeding to review a final disciplinary sanction
imposed by a self-regulatory organization ... —
(A) if the [Commission] ... finds that such member,
participant, or person associated with a member has
... omitted such acts, as the self-regulatory
organization has found him to have ... omitted, that
such ... omissions to act, are in violation of ... the
rules of the self-regulatory organization ... and that
such provisions are, and were applied in a manner,
consistent with the purposes of this chapter, [then the
Commission,] by order, shall so declare and, as
9
the Commission is to review de novo a disciplinary sanction
imposed by the NASD upon a member firm or a person
associated therewith to determine whether the sanction “imposes
any burden on competition not necessary or appropriate” to
further the purposes of the Act, or is “excessive or oppressive.”
See Otto v. SEC, 253 F.3d 960, 964, 966-67 (7th Cir. 2001) (“the
SEC conducts de novo review of the NASD’s sanctions”).
When evaluating whether a sanction imposed by the NASD is
excessive or oppressive, as we have stated before, “the
Commission must do more than say, in effect, petitioners are
bad and must be punished,” Blinder, Robinson & Co., v. SEC,
837 F.2d 1099, 1113 (D.C. Cir. 1988); at the least it must give
“[s]ome explanation addressing the nature of the violation and
appropriate, affirm the sanction imposed by the
self-regulatory organization, modify the sanction in
accordance with paragraph (2) of this subsection, or
remand to the self-regulatory organization for further
proceedings; or
(B) if [the Commission] does not make any such
finding it shall, by order, set aside the sanction
imposed by the self-regulatory organization and, if
appropriate, remand to the self-regulatory
organization for further proceedings.
(2) If the [Commission] ... having due regard for the public
interest and the protection of investors, finds after a
proceeding in accordance with paragraph (1) of this
subsection that a sanction imposed by a self-regulatory
organization upon such member, participant, or person
associated with a member imposes any burden on competition
not necessary or appropriate in furtherance of the purposes of
this chapter or is excessive or oppressive, [then the
Commission] may cancel, reduce, or require the remission of
such sanction.
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the mitigating factors presented in the record.” McCarthy v.
SEC, 406 F.3d 179, 189-90 (2d Cir. 2005) (reviewing
Commission decision affirming sanctions imposed by New York
Stock Exchange, a self-regulatory organization). The
Commission must be particularly careful to address potentially
mitigating factors before it affirms an order expelling a member
from the NASD or barring an individual from associating with
an NASD member firm — the securities industry equivalent of
capital punishment. Cf. Steadman v. SEC, 603 F.2d 1126, 1137-
40 (5th Cir. 1979) (“when the Commission chooses to order the
most drastic remedies at its disposal, it has a greater burden to
show with particularity the facts and policies that support those
sanctions and why less severe action would not serve to protect
investors”), aff’d on other grounds, 450 U.S. 91 (1981).
In this case the petitioners claim the Commission failed to
address several mitigating factors. Insofar as the petitioners
claim the Commission should have considered their previously
clean disciplinary record and that they did not attempt either to
mislead anyone or to conceal their present misconduct, their
arguments are forfeit because the petitioners did not raise them
before the Commission. 15 U.S.C. § 78y(c)(1). Insofar as the
petitioners preserved other claims, however, they are on solid
ground.
In the course of emphasizing in its decision the petitioners’
obligation to respond to the NASD’s requests for information
(the “NASD has a right to request information and require
cooperation from those persons it investigates”), the
Commission mischaracterized the petitioners’ argument, saying
they “suggest[ed] that the information requests were not
important because they focused on PAZ’s supervisory
procedures.” In fact, their argument was not that the
information sought was unimportant but rather that their failure
to respond to the NASD (1) was of no potential monetary
11
benefit to them and (2) did not result in any injury to the
investing public, and that (3) the information requested did not
relate to injurious conduct or conduct of potential monetary
benefit to them.
In addition, pursuant to Section 19 of the Act, the
Commission was obliged — but failed — to review the sanction
imposed by the NASD with “due regard for the public interest
and the protection of investors.” 15 U.S.C. § 78s(e)(2). As the
Second Circuit explained in Wright v. SEC, 112 F.2d 89, 94 (2d
Cir. 1940), that provision “authorizes [the Commission to order]
expulsion not as a penalty but as a means of protecting investors
.... The purpose of the order is remedial, not penal.”* If the
Commission upholds the sanctions as remedial, then it must
explain why; furthermore, “as the circumstances in a case
suggesting that a sanction is excessive and inappropriately
punitive become more evident, the Commission must provide a
more detailed explanation linking the sanction imposed to those
circumstances if it wishes to uphold the sanction.” McCarthy,
406 F.3d at 190; see also Occidental Petrol. Corp. v. SEC, 873
F.2d 325, 338 (D.C. Cir. 1989) (“in order to allow for
*
When Wright was decided, Section 19 authorized the Commission
itself “for the protection of investors ... to expel from a national
securities exchange any member or officer thereof” for certain
violations of the statute or of the rules and regulations thereunder.
Securities Exchange Act of 1934, Pub. L. No. 73-291, § 19(a)(3), 48
Stat. 881, 898-99 (codified at 15 U.S.C. § 78s(a)(3) (1940)). Although
the statute now calls for the sanction to be imposed in the first instance
by a self-regulatory organization, subject to review by the
Commission, that procedural change does not dilute the substantive
requirement that the sanction be remedial rather than punitive. See
§ 19(e)(2); McCarthy, 406 F.3d at 189-91 (holding Commission
abused its discretion by affirming exchange decision suspending
broker from membership without determining sanction was necessary
to protect investors).
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meaningful judicial review, the agency must produce an
administrative record that delineates the path by which it
reached its decision”). We do not suggest the Commission must
make an on-the-record finding that a sanction is remedial, but it
must explain why imposing the most severe, and therefore
apparently punitive sanction is, in fact, remedial, particularly in
light of the mitigating factors brought to its attention.
The Commission did state its view that the sanctions here
imposed by the NASD would “serve as a deterrent to others who
may be inclined to ignore NASD’s information requests,” but
such “general deterrence” is essentially a rationale for
punishment, not for remediation. Cf. Republic Steel Corp. v.
NLRB, 311 U.S. 7, 12 (1940) (“it is not enough to justify the
[National Labor Relations] Board’s requirements [of an
employer] to say that they would have the effect of deterring
persons from violating the [National Labor Relations] Act”
because the Board’s power “is remedial, not punitive”); United
States v. Bajakajian, 524 U.S. 321, 329 (1998) (“Deterrence ...
has traditionally been viewed as a goal of punishment”). Still,
we agree with the Second Circuit that, “[a]lthough general
deterrence is not, by itself, sufficient justification for expulsion
or suspension ... it may be considered as part of the overall
remedial inquiry.” McCarthy, 406 F.3d at 189. Here, however,
general deterrence was not considered as part of a larger
remedial inquiry; the Commission offered no other rationale
whatsoever. It simply held the sanctions were not excessive or
oppressive because the NASD had a right to the requested
information, the petitioners’ failure to respond was not
unintentional, and Joseph Mizrachi’s depression was not so
severe in August 2003 that he could not resume taking care of
business. Nowhere did the Commission advert to any purpose
other than “deterr[ing] others who may be inclined to ignore
NASD’s information requests.” Therefore, the Commission did
not adequately explain why the sanctions the NASD imposed
13
upon the petitioners were not punitive rather than remedial.
III. Conclusion
The Commission abused its discretion by failing to address
certain mitigating factors the petitioners raised before it and by
affirming the severe sanctions imposed upon them by the NASD
without first determining those sanctions were remedial rather
than punitive. The petition for review is therefore granted and
the case is remanded to the Commission for further proceedings
consistent herewith.
So ordered.