192 F.3d 1209 (9th Cir. 1999), 98-70150, Yoshikawa v. Sec. & Exchange Comm
|Citation:||192 F.3d 1209|
|Party Name:||TERRANCE Y. YOSHIKAWA; KO SECURITIES, INC.,Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.|
|Case Date:||August 20, 1999|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted May 7, 1999--Seattle, Washington
Tolan S. Furusho, Bellevue, Washington, for the petitioners.
Angel Yang, Office of General Counsel, Securities and Exchange Commission, Washington, D.C., for the respondent.
Petition to Review a Decision of the Securities and Exchange Commission. SEC No. 3-9254.
Before: Robert R. Beezer, Charles Wiggins and Andrew J. Kleinfeld, Circuit Judges.
BEEZER, Circuit Judge:
Petitioners Terrance Yoshikawa and Ko Securities, Inc. (collectively, "Yoshikawa") appeal an order of the Securities and Exchange Commission ("SEC") holding that Yoshikawa violated Article III, Section 1 of the National Association of Securities Dealers ("NASD") Rules of Fair Practice.1 The SEC's order is founded on its factual finding that five discrete sets of securities transactions executed by Yoshikawa constitute securities "parking." We have jurisdiction pursuant to 15 U.S.C. S 78y(a)(1). As to the first transaction set, we remand to the SEC for further factual findings and conclusions. As to the remaining four transaction sets, we reverse the SEC's order.
The facts in this case are essentially undisputed. Ko Securities, Inc. ("Ko") is a member of the NASD. Terrance Yoshikawa is Ko's president, director and sole shareholder. We consider five separate sets of securities sales and purchases undertaken by Ko, at Terrance Yoshikawa's direction, between December 1991 and December 1993. Three accounts were involved, all of which were solely owned and controlled by Terrance Yoshikawa: (1) Ko's proprietary account ("Inventory Account"); (2) Terrance Yoshikawa's personal trading account ("Trading Account"); and (3) Terrance Yoshikawa's individual retirement account ("IRA"). These transactions all involved the common stock of DDI Pharmaceuticals, Inc. ("DDIX") and were effected to ensure that Ko's net capital remained above both the SEC's requirement during that time of $30,000,2see 17 C.F.R. S 240.15c3-1, and PaineWebber's (Yoshikawa's clearing firm) requirement of $100,000.
The transactions occurred as follows:
(1) On December 30, 1991, the Inventory Account sold 14,500 shares of DDIX to the IRA at a price of 6 1/8. On January 2, 1992, the Inventory Account purchased 14,500 shares of DDIX (in two separate transactions) from the IRA at a price of 6 1/2.
(2) On March 13, 1992, the Inventory Account sold 79,000 shares of DDIX to the Trading Account at a price of 7 1/8. On March 16, 1992, the Inventory Account purchased 79,000 shares of DDIX from the Trading Account at a price of 3.
(3) On March 16, 1992, the Inventory Account sold 75,000 shares of DDIX to the IRA at a price of 3. The Inventory Account purchased from the IRA 40,000 shares of DDIX at a price of 3 5/8 on
March 17, 5,000 shares of DDIX at a price of 3 on March 18 and 30,000 shares of DDIX at a price of 3 3/8 on March 19.
(4)-(5): (4) -- On December 7, 1993, the Inventory Account sold 35,825 shares of DDIX to the IRA at a price of 4 1/4. (5) -- On December 14, 1993, the Inventory Account purchased 20,000 shares of DDIX from the IRA at a price of 3. (4) -- On December 15, 1993, the Inventory Account pur chased 36,581 shares of DDIX from the IRA at a price of 2 3/4. (5) -- On December 17, 1993, the Inventory Account sold 20,000 shares of DDIX to the IRA at a price of 3 3/8.
At the end of every month, Ko was required to file with the NASD and the SEC a Financial and Operational Combined Uniform Single ("FOCUS") Part I Report setting forth Ko's net capital position. See 17 C.F.R. S 240.17a-5. Ko was also required to file the FOCUS Reports with PaineWebber. In calculating its net capital, Ko was not allowed to credit the pre- vailing market value of the DDIX stock held in its own account. Instead, Ko was required to take an appropriate deduction, or "haircut," from the market value of the DDIX stock that it owned.3
Following an NASD investigation, NASD's Market Surveillance Committee issued a formal complaint against Yoshikawa in May 1995. The complaint alleged that Yoshikawa had arranged to conceal the true ownership of DDIX on at least five occasions in order to reduce the risk of, or to prevent, Ko from falling below the minimum net capital requirements set by the SEC and/or PaineWebber. In its answer, Yoshikawa admitted executing the trades to prevent Ko from experiencing net capital problems, but denied violating any NASD rules.
After conducting a hearing, the NASD found in May 1996 that Yoshikawa had arranged through the securities transactions at issue to conceal the true ownership of DDIX "in order to reduce the risk of, or to prevent, [Ko] from falling below the minimum net capital requirements set by the[SEC] and/or its clearing firm, PaineWebber, Incorporated." Although the
NASD dismissed all allegations of fraud, it concluded that Yoshikawa had illegally "parked" the stock in Terrance Yoshikawa's personal accounts and had overstated Ko's net capital position. The NASD held that Yoshikawa's conduct violated Article III, Section 1 of the NASD's Rules of Fair Practice, which require members and their associated persons "in the conduct of [their] business, [to ] observe high standards of commercial honor and just and equitable principles of trade." NASD Manual (CCH) P 2151 at 2014 (1995) ("NASD Rules"). The NASD censured Yoshikawa, fined Yoshikawa $10,000 (jointly and severally between Terrance Yoshikawa and Ko), suspended Ko from proprietary trading and marketmaking for 20 business days and required Terrance Yoshikawa to attend a "compliance conference" with the NASD's Market Surveillance staff.
Yoshikawa appealed the NASD's decision to the National Business Conduct Committee ("NBCC"). The NBCC held a hearing on the matter and, on January 22, 1997, affirmed the NASD's decision in all respects, with the single exception of decreasing Ko's suspension from proprietary trading and market-making from 20 to 5 business days.
On February 21, 1997, Yoshikawa appealed to the SEC. On December 11, 1997, the SEC issued an order, following a de novo review of the record, affirming the holding of the NBCC and the NASD. In particular, the SEC held that Yoshikawa violated NASD Rules by "parking" DDIX stock:
We agree with the NASD that applicants' conduct constituted what is commonly known as "parking," and is inconsistent with just and equitable principles of trade. Applicants have admitted that these trades were done to shift losses or anticipated losses out of the Inventory Account and to avoid haircuts that oth erwise would have been required. Applicants' actions thereby alleviated actual or perceived prob lems for the Firm with its net capital requirements or [PaineWebber's] "guideline" that Ko maintain net capital of $100,000. Applicants' actions had the effect of inflating the Firm's net capital, misleading or potentially misleading the Commission, the NASD and other regulatory authorities, as well as [PaineWebber] about the true state of Ko's finances. Applicants' actions created a false and misleading picture of Ko's financial situation.
This timely appeal of the SEC's order followed. 4
We address the question whether any of Yoshikawa's charged conduct amounts to securities "parking. " We review for substantial evidence the SEC's factual finding that Yoshikawa "parked" securities. See Whiteside & Co., Inc. v. SEC, 883 F.2d 7, 9 (5th Cir. 1989). Substantial evidence means "more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Richardson v. Perales, 402 U.S. 389, 401 (1971).
We have described conduct constituting securities "parking" as follows:
[s]tock "parking" is a mechanism used to evade the net capital requirements of the [NASD]. When a bro kerage firm files the required monthly report with the NASD regarding its net capital condition, it must discount (or take a "haircut" on) the value of any stock it holds in its own account. To reach technical compliance with its net capital requirements, a bro kerage firm "sells" stock from its own account to a customer at market price. This avoids the discount for reporting purposes. Once the brokerage firm has filed its report with the NASD and met its net capital requirement, it then "buys" the shares back from the customer, usually at the same price at which it "sold" the stock, plus interest.
SEC v. Vigman, 74 F.3d 932, 933 n.3 (9th Cir. 1996).
In a case involving "parking" to obtain false tax losses, the Second Circuit defined "parking" as
a purported transfer of ownership in securities combined with a secret agreement providing the "seller" with the right to repurchase them at a later date. The "seller" receives the tax benefits of a loss realized by the "sale"; the "buyer" is compensated for the "cost of carrying" the securities. Since the agreement to resell ensures that the "seller" never loses control of the securities, the government considers "parking " a form of tax and securities fraud.
United States v. Jones, 900 F. 2d 512, 515 (2nd Cir. 1990). The Seventh Circuit has described "stock parking " as an arrangement in which "shares of stock are held by someone other...
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