United States Court of Appeals,
Fifth Circuit.
No. 93-4381.
Robert A. AMATO, Petitioner,
v.
SECURITIES AND EXCHANGE COMMISSION, Respondent.
April 20, 1994.
Petition for Review of an Order of the Securities and Exchange
Commission.
Before HIGGINBOTHAM and DUHÉ, Circuit Judges, and STAGG,1 District
Judge.
STAGG, District Judge.
Petitioner Amato seeks review of an order of the Securities
and Exchange Commission ("SEC") affirming disciplinary action taken
against him by the National Association of Securities Dealers, Inc.
("NASD"). Both the SEC and the NASD found that Amato had violated
Article III, Sections 1 and 4 of the NASD's Rules of Fair Practice.
Finding no error, we affirm.
FACTS.
Robert Amato was a retail salesman and the branch manager of
the New Orleans office of Brennan Ross Securities, Inc.2 Brennan
Ross had sold the majority of the initial public offering of the
stock in Barclays West, Inc. ("Barclays"),3 which closed around the
1
District Judge of the Western District of Louisiana,
sitting by designation.
2
Brennan Ross is now defunct.
3
Barclays was a highly speculative penny stock.
1
beginning of August 1989. During the three-month period following
August of 1989, Brennan Ross handled more than ninety percent of
all purchases and sales of Barclays stock. Ninety-five percent of
the New Orleans office's business consisted of transactions in
Barclays stock. The New Orleans office consisted of Amato and
three other salesmen.
For each sale, the salesman was given a "wholesale," or
"strike" quotation and an "offer" quotation by Brennan Ross'
trading department. The salesman was given the discretion to sell
the stock for any price between those two numbers, and his
commission consisted of the difference between the wholesale price
and the retail price. The salesman's salary was computed based on
a percentage of his gross commissions.
During this three-month period, Amato purchased 445,650 shares
from retail customers in seven transactions on behalf of Brennan
Ross. He sold 1,052,550 shares to his retail customers in
ninety-nine transactions. Almost eighty percent of his sales
transactions were at markups which exceeded twenty percent, and
more than sixty percent of the transactions were at markups that
exceeded forty percent. Amato's transactions in Barclays yielded
gross commissions of $93,999 over the three-month period following
August, 1989, producing $65,799 in compensation for him.
NASD filed a complaint against Amato for selling the Barclays
stock at an excessive markup, and the District Business Conduct
Committee found that he had violated Sections 1 and 4 of the NASD's
Rules of Fair Practice. Section 1 requires the observance of "high
2
standards of commercial honor and just and equitable principles of
trade." Section 4 requires that prices charged in over-the-counter
principal transactions with customers be "fair, taking into
consideration all relevant circumstances...." Amato was fined
$20,000 and suspended from trading for four weeks. NASD's National
Business Conduct Committee affirmed the District Committee, and
imposed an additional requirement that Amato requalify as a
registered representative by examination after completion of his
suspension. The Securities and Exchange Commission upheld this
decision.
APPELLANT'S ARGUMENTS.
Amato appeals this decision based on three arguments: 1) The
SEC erred in applying Sections 1 and 4 of the NASD Rules of Fair
Practice to impose liability on a salesman; 2) The SEC erred in
applying an ex post facto interpretation to a rule of conduct; and
3) Amato's due process rights were violated because the punishment
he received was excessive, and because he was the target of
selective prosecution. This court will address each argument in
turn.
A. Do Sections 1 and 4 of the NASD Rules of Fair Practice impose
liability on Amato?
Amato argues that sections 1 and 4 of the Rules of Fair
Practice promulgated by the NASD do not authorize a finding of
liability for a salesman for excessive markups of stock. He argues
that Sections 1 and 4 of the Rules of Fair Practice can not be
interpreted to impose liability; rather, they are to be construed
as aspirational guidelines. As mentioned earlier, Section 1 of
3
Article III of the Rules provides:
A member, in the conduct of his business, shall observe high
standards of commercial honor and just and equitable
principles of trade.
NASD Manual, ¶ 2151. Section 4 of Article III provides:
In "over-the-counter" transactions ... if a member buys for
his own account from his customer, or sells for his own
account to his customer, he shall buy or sell at a price which
is fair, taking into consideration all relevant
circumstances....
NASD Manual, ¶ 2154.
Amato further argues that under the Rules of Fair Practice of
the NASD Manual, it is the responsibility of the "member" of the
NASD, i.e. Brennan Ross, rather than the salesman, to ensure
compliance with applicable securities regulations. The NASD rules
indeed discuss compliance in terms of the "member's" actions, and
require the member to formulate written supervisory procedures in
order to ensure compliance with securities regulations. Amato
argues that his compliance with Brennan Ross' written procedures
exempts him from any liability. He also cites an excerpt from an
interpretation by the Board of Governors, in support of his
argument that Sections 1 and 4 of the Rules of Fair Practice are
merely aspirational:
The Board stated that it would be impractical and unwise, if
not impossible, to define specifically what constitutes a fair
spread on each and every transaction because the fairness of
a markup can be determined only after considering all of the
relevant factors. Under certain conditions a markup in excess
of 5 per cent may be justified, but on the other hand, 5 per
cent or even a lower rate is by no means always justified.
NASD Manual—Rules of Fair Practice, Article III, ¶ 2154, Sec. 4, p.
2055 (1990), Interpretations of the Board of Governors. Amato
4
suggests that the markup rule is a philosophy of business conduct
subject to interpretation. He argues that the rule imposed by his
case is untenable, because it would require stockbrokers in
satellite offices to question their home office regarding sales
prices before each transaction.
However, the ruling of the Commission in Amato's case was not
based solely on the wording of Sections 1 and 4. Rather, the
Commission found that Amato's "insider" position, in conjunction
with his violation of the rule, rendered him liable. The SEC
specifically noted that Amato "was intimately involved in the
pricing of these securities within parameters set by Brennan Ross'
trading department."4 Further, Amato "had to be aware" that his
commissions were a "suspiciously high percentage of the prices paid
by customers."5 The Commission found that Amato's role in this
incident was "especially troubling" because of the knowledge he
possessed. Because Amato was purchasing the stock from his
customers and selling it to them, he was in a position to know the
cost to Brennan Ross. The majority of stock brokers are not in a
position to have enough information and knowledge to be accountable
for excessive commissions. See generally In re Langley-Howard,
Inc., 43 S.E.C. 155, 1966 WL 3140, 1966 SEC LEXIS 186 (1966).
However, due to Amato's position as both buyer and seller of the
Barclays stock, he was in possession of such knowledge. The
Commission also found that Amato should, "at a minimum, have
4
SEC opinion at p. 4.
5
SEC opinion at p. 4.
5
questioned the large markup between the Firm's "wholesale' quotes
and the prices they were permitted to charge the public."6
Moreover, the NASD Manual specifically provides that "persons
associated with a member shall have the same duties and obligations
as a member under these Rules of Fair Practice."7 Amato's
arguments to the contrary are unpersuasive, and we affirm the
Commission's ruling on this issue.
B. Whether the Commission's conclusion that Article III imposed
liability of Amato was an impermissible ex post facto
application of the regulation?
In its opinion affirming Amato's sanctions, rendered on March
10, 1993, the SEC cited its own opinion in In re Willis H. Brewer,
Jr., Security Exchange Release No. 34-31964, 1993 WL 71024, 1993
SEC LEXIS 499 (Mar. 9, 1993). The Willis Brewer opinion found a
registered representative liable for excessive markups in
connection with the sale of stock. Amato argues that the use of
this case as precedent is an impermissible ex post facto
application of law. He maintains that a registered representative
in 1989 can not be expected to anticipate a change of the law in
1993.
This argument is completely without merit. While there are no
cases before Willis Brewer holding a registered representative
liable, none of the SEC cases preclude this possibility. Amato
argues that In re Langley-Howard, Inc., 43 S.E.C. 155, 1966 WL
6
SEC opinion at p. 6.
7
NASD Manual, Article I, Section 5(a), PP2005 at 2011
(1993).
6
3140, 1966 SEC LEXIS 186 (1966) stands for the proposition that
salesmen are not liable for excessive markups. However, the
reasoning in that case was based on the fact that it was unclear
whether the salesmen involved were put on notice that the markups
they were charging were unfair. In re Langley-Howard, Inc., 43
S.E.C. at 162, 1966 WL 3140, 1966 SEC LEXIS at 15. Implicit in the
court's holding is that a registered representative could incur
liability if he was on notice that the markup he was charging was
excessive.
Secondly, the NASD Rules of Fair Practice were in force in
1989. Therefore, Amato was charged with knowledge of Article I,
Section 5(a), which provided that "[p]ersons associated with a
member shall have the same duties and obligations as a member under
the Rules of Fair Practice." As a registered representative, he
was obligated to comply with Sections 1 and 4 of the Rules of Fair
Practice.
C. Was Amato denied due process by the fact and extent of his
punishment?
Amato argues that the sanction imposed on him was excessive,
and that he was the victim of selective prosecution by the SEC.
Essentially, Amato's argument is that the SEC abused its discretion
in imposing sanctions on him which were more severe than the
sanctions received by the other members of his firm. Brennan Ross'
head trader received a two-week suspension for his role in the
incident, and he shared a joint fine of $15,000 with Brennan Ross'
president. Amato argues that his punishment was clearly excessive
in light of the punishment imposed on these two individuals.
7
We review the Commission's decision to impose this particular
sanction on Amato for a gross abuse of discretion. See Whiteside
& Co., Inc. v. SEC, 883 F.2d 7, 10 (5th Cir.1989); Kane v. SEC,
842 F.2d 194, 201 (8th Cir.1988); Tager v. SEC, 344 F.2d 5, 9 (2d
Cir.1965). We can not say that the Commission's decision to fine
Amato $20,000, suspend him for four weeks, and require him to
requalify as a registered representative was a gross abuse of
discretion. Furthermore, both Brennan Ross' head trader and its
president settled the claims against them with the SEC. The
Commission has stated that it will reward such decisions to settle
when determining the sanctions to be imposed. In re Blinder
Robinson & Co., 48 S.E.C. 624, 636 n. 36 (1986), vacated on other
grounds, 837 F.2d 1099 (D.C.Cir.1988). We conclude that the SEC
was well within its discretion in imposing the sanctions on Amato.
Amato also argues that he was singled out to be punished by
the SEC in this situation. He states that he received unfair
treatment from the local NASD office from the beginning, and
subsequently began to complain through letters, initially directed
at the local NASD office. After not receiving a response to his
inquiries, he ultimately contacted the chairman of the NASD and the
acting director of the SEC. Amato provided copies of these letters
to Brennan Ross' compliance department. He never received a
response to any of his inquiries. The local security regulators
voiced displeasure that Mr. Amato had written such letters.
Brennan Ross assured the regulators that Mr. Amato would stop
writing these letters. Amato was subsequently informed by Brennan
8
Ross that if he wrote another letter of complaint to the regulatory
authority, his employment with Brennan Ross would be terminated.
Amato contends that he indeed stopped writing the letters, and was
consequently punished by the NASD.
In order to establish that he was unfairly prosecuted, Amato
must establish that he was singled out for prosecution while others
similarly situated were not, and that the action against him was
motivated by an arbitrary or unjustifiable consideration, such as
race, religion, or the desire to prevent the exercise of a
constitutionally-protected right, such as freedom of speech. See
United States v. Collins, 972 F.2d 1385, 1397 (5th Cir.1992), cert.
denied, --- U.S. ----, 113 S.Ct. 1812, 123 L.Ed.2d 444 (1993);
United States v. Huff, 959 F.2d 731, 735 (8th Cir.), cert. denied,
--- U.S. ----, 113 S.Ct. 162, 121 L.Ed.2d 110 (1992); C.E.
Carlson, Inc. v. SEC, 859 F.2d 1429, 1437 (10th Cir.1988). Amato
has introduced no evidence which comes close to meeting his burden
on this issue. Moreover, the Commission submitted a Memorandum
which evidences that the NASD had no objection to Mr. Amato's
letter-writing practices, as long as they did not interfere with
the NASD's conducting its branch office examinations.8 This
evidence falls far below Mr. Amato's burden, and we find his claim
to be without merit.
For the foregoing reasons, the judgment of the district court
is AFFIRMED.
8
Record at p. 1338.
9