United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 12, 2008 Decided May 29, 2009
No. 08-1188
PAZ SECURITIES, INC. AND JOSEPH MIZRACHI,
PETITIONERS
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order
of the Securities & Exchange Commission
David Clarke Jr. argued the cause and filed the briefs for
petitioners.
Rada Lynn Potts, Senior Litigation Counsel, Securities &
Exchange Commission, argued the cause for respondent.
With her on the brief were Brian G. Cartwright, General
Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob
H. Stillman, Solicitor, and Michael A. Conley, Senior Special
Counsel.
Before: GINSBURG and KAVANAUGH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge GINSBURG.
2
GINSBURG, Circuit Judge: PAZ Securities, Inc. and its
president, Joseph Mizrachi, petition for review of an order of
the Securities and Exchange Commission sustaining sanctions
imposed upon them by the National Association of Securities
Dealers (NASD).* Because the Commission did not abuse its
discretion, we deny the petition.
I. Background
The facts underlying the petition are detailed in our
earlier opinion and we review them only briefly here. For a
more complete account, see PAZ Sec., Inc. v. SEC, 494 F.3d
1059, 1061-63 (2007) (PAZ I).
The NASD repeatedly requested information from PAZ
and, having received no response, filed a complaint alleging
Mizrachi and PAZ violated NASD Conduct Rule 2110 and
NASD Procedural Rule 8210. Mizrachi filed no answer and
the NASD issued a default judgment expelling PAZ and
barring Mizrachi from ever associating with a NASD
member. The petitioners appealed to the Commission, which
sustained the sanctions over the objection they were
“excessive or oppressive” and therefore subject to remission
under 15 U.S.C. § 78s(e)(2).
We reversed and remanded. 494 F.3d at 1061. We held
the Commission had abused its discretion in two ways. First,
it had mischaracterized, and therefore failed properly to
address, the petitioners’ arguments regarding mitigation. Id.
*
The NASD and the New York Stock Exchange have since merged
their member regulation functions into one self-regulatory
organization, the Financial Industry Regulatory Authority
(FINRA). See Exchange Act Release No. 56,145, 72 Fed. Reg.
42,169 (2007).
3
at 1065. Second, it had not identified “any remedial — as
opposed to punitive — purpose for the sanctions.” Id. at
1061. On remand, the Commission again sustained the
sanctions and the petitioners again seek review.
II. Analysis
We review for abuse of discretion a decision of the
Commission regarding sanctions imposed by the NASD.
Stoiber v. SEC, 161 F.3d 745, 753 (D.C. Cir. 1998). The
agency’s choice of remedy is “peculiarly a matter for
administrative competence,” and we will reverse it “only if
the remedy chosen is unwarranted in law or is without
justification in fact.” Am. Power & Light Co. v. SEC, 329
U.S. 90, 112-13 (1946).
The petitioners first contend the Commission violated the
letter and the spirit of this court’s mandate by giving
insufficient weight to the factors they raised in mitigation. In
PAZ I, we directed the Commission to consider on remand
whether the sanctions were excessive in light of three
arguments: that the petitioners’ failure to respond “(1) was of
no potential monetary 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.” 494 F.3d at 1065. The
petitioners argue the Commission gave “short shrift” to those
factors, but we conclude the Commission reasonably decided
no mitigation was warranted.
The Commission pointed out that a violation of
Procedural Rule 8210 would rarely, in itself, result in direct
injury to a customer or direct monetary gain for a violator.
PAZ Sec., Inc., Exchange Act Release No. 57,656, 2008 SEC
LEXIS 820 at *17 (PAZ II). It determined that failure to
4
respond is nevertheless a significant harm to the self-
regulatory system because it “undermines NASD’s ability to
detect misconduct”; therefore the lack of direct harm to
customers or benefit to violators does not mitigate a Rule
8210 violation. Id. at *17-18. The Commission further held
that, contrary to the petitioners’ argument, the requested
information did relate to potentially injurious conduct because
the responses could have revealed improper expense sharing
and unreported securities transactions. Id. at *18-19.
We hold the Commission did not abuse its discretion in
determining the lack of direct harm or benefit does not
mitigate a complete failure to respond in violation of
Procedural Rule 8210. See Stoiber, 161 F.3d at 753 (“We
will not lightly disturb the findings of an agency in its area of
expertise. ... [T]he Commission is better equipped to judge
[the significance of certain violations] than this Court.”)
(quoting Seaton v. SEC, 670 F.2d 309, 311 (D.C. Cir. 1982)).
The Commission also reasonably determined the requested
information related to potentially injurious conduct. In sum,
the Commission complied with our mandate, which did not
prejudge whether the factors raised by the petitioners were
necessarily mitigating.
The petitioners next argue the Commission abused its
discretion by determining the sanctions imposed by the
NASD were remedial. As we noted in PAZ I, a sanction may
be used to protect investors but not to punish a regulated
person or firm. 494 F.3d at 1065. We directed the
Commission to “explain why imposing the most severe, and
therefore apparently punitive sanction is, in fact, remedial.”
Id. at 1066. The petitioners contend the Commission’s
explanation is inadequate because the agency failed to
consider the factors outlined in Steadman v. SEC, 603 F.2d
1126, 1140 (5th Cir. 1979), aff’d on other grounds, 450 U.S.
5
91 (1981),* or to say why no lesser sanctions would suffice to
protect investors. We disagree.
We cited Steadman in PAZ I for the proposition that the
Commission must be “particularly careful to address
potentially mitigating factors” when it affirms an order to
expel a firm from the NASD. 494 F.3d at 1065. We did not,
however, direct the Commission to follow the Steadman
analysis in every case. Although the factors listed in
Steadman will often be relevant — and the Commission did
consider several of them without adverting eo nomine to
Steadman — we do not require the Commission to explain
itself by reference to “some mechanical formula.” Blinder,
Robinson & Co. v. SEC, 837 F.2d 1099, 1113 (D.C. Cir.
1988) (“Commission’s broad discretion in fashioning
sanctions in the public interest cannot be strictly cabined
according to some mechanical formula”).**
Here, the Commission made the necessary “findings
regarding the protective interests to be served” by expulsion.
*
Those factors are: “the egregiousness of the defendant’s actions,
the isolated or recurrent nature of the infraction, the degree of
scienter involved, the sincerity of the defendant’s assurances
against future violations, the defendant’s recognition of the
wrongful nature of his conduct, and the likelihood that the
defendant’s occupation will present opportunities for future
violations.” 603 F.2d at 1140.
**
The petitioners err in suggesting this court embraced Steadman in
Blinder, Robinson & Co. We noted Steadman “erected a daunting
standard to justify permanent exclusion from the securities
industry” but pointed out that “the crafting of an appropriate
remedy is peculiarly within the province of an expert agency.” 837
F.2d at 1111. We did not resolve the question now before the court
but rather remanded the case because the Commission had failed to
admit evidence regarding a salient point. Id. at 1112.
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See McCarthy v. SEC, 406 F.3d 179, 189 (2d Cir. 2005). The
Commission first explained the harm to investors when a
member firm fails to respond to a request for information.
PAZ II, 2008 SEC LEXIS 820 at *10-13. The Commission
then found Mizrachi posed “a clear risk of future misconduct”
because of his “cavalier disregard” for his obligation to
provide information, particularly while traveling, and his
business would often take him abroad in the future. Id. at
*28-29. Thus, the Commission reasonably determined the
sanctions were necessary to protect investors.
Furthermore, the petitioners err in arguing the
Commission must, in order to justify expulsion as remedial,
state why a lesser sanction would be insufficient. We require
the Commission to explain its reasoning in order to ensure it
reviewed the sanction with “due regard for the public interest
and the protection of investors.” 15 U.S.C. § 78s(e)(2). We
do not limit the discretion of the Commission to choose an
appropriate sanction so long as its choice meets the statutory
requirements that a sanction be remedial and not “excessive
or oppressive.” Id. Accordingly, we will not require the
Commission to choose the least onerous of the sanctions
meeting those requirements. See O’Leary v. SEC, 424 F.2d
908, 912 (D.C. Cir. 1970) (“While these [mitigating] factors
might have warranted a lighter sanction [than debarment],
they did not require one”) (quoting Tager v. SEC, 344 F.2d 5,
8 (2d Cir. 1965)); McCarthy, 406 F.3d at 188 (noting the
Exchange Act authorizes expulsion “as a means of protecting
investors, if ... necessary or appropriate to that end”) (quoting
Wright v. SEC, 112 F.2d 89, 94 (2d Cir. 1940)).
In support of their position, the petitioners point to our
statement in PAZ I that the Commission must show “why less
severe action would not serve to protect investors.” 494 F.3d
at 1065 (quoting Steadman, 603 F.2d at 1137). The court in
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Steadman recognized, however, that it was limited to deciding
whether the Commission had made “an allowable judgment in
its choice of the remedy,” 603 F.2d at 1139 (quoting Jacob
Siegel Co. v. FTC, 327 U.S. 608, 612 (1946)), and we quoted
Steadman only for the well-established rule that an agency
must adequately explain its decisions, see PAZ I, 494 F.3d at
1065; see also Rizek v. SEC, 215 F.3d 157, 161 (1st Cir.
2000) (explaining Steadman says “no more than ... that
agencies must sufficiently articulate the grounds of their
decisions”). As discussed above, the Commission here gave
adequate reasons for holding the sanctions are warranted to
protect investors. We require no more.
III. Conclusion
In sum, the Commission reasonably explained why the
sanctions are remedial and are not excessive or oppressive.
The petition for review is therefore denied.
So ordered.