Orkin v. S.E.C.
| Decision Date | 13 September 1994 |
| Docket Number | No. 93-4415,93-4415 |
| Citation | 31 F.3d 1056 |
| Parties | Fed. Sec. L. Rep. P 98,392, 1994-2 Trade Cases P 70,714 Robert Bruce ORKIN, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
William Nortman, Nortman & Bloom, P.A., Mark Richard Dern, Miami, FL, for petitioner.
Securities & Exchange Com'n, Office of the Gen. Counsel, Jacob H. Stillman, Leslie E. Smith, Christopher Paik, Eric Summergrad, Securities & Exchange Com'n, Washington, DC, for respondent.
Petition for Review of an Order of the Securities and Exchange Commission.
Before HATCHETT and EDMONDSON, Circuit Judges, and MELTON *, Senior District Judge.
Petitioner, Robert Bruce Orkin ("Orkin"), seeks review of an order of the Securities and Exchange Commission ("SEC") affirming disciplinary sanctions imposed by the National Association of Securities Dealers, Inc. ("NASD"). 1 The NASD sanctioned Orkin for violations of Article III, Sections 1 and 4 of the NASD's Rules of Fair Practice ("Rules"). Specifically, the NASD and the SEC found that Orkin breached the NASD's 5% markup policy by charging retail customers excessive prices in sales of Ortech Industries, Inc. ("Ortech") stock occurring from October 20, to December 10, 1987.
Orkin asserts as grounds for review that: 1) the SEC's determination that the retail markups were excessive was not supported by substantial evidence; 2) the SEC improperly affirmed the NASD's finding of markup violations when it determined that the prevailing market price of Ortech stock was different from that noted in Schedule A to the NASD complaint and adopted by NASD conduct committees; 3) the SEC erred in holding him liable for the markup violations because he did not have final authority to set retail prices; 4) the SEC erred in determining that the NASD's markup policy is not unconstitutionally vague, illegal, or unfair, especially as applied to the facts of this case; and 5) the sanctions imposed against him are too severe. For the reasons set forth below, we find substantial evidence to support the SEC's findings of fact and we concur in its legal conclusions. Accordingly, we deny Orkin's petition for review, affirm the order of the SEC, and lift the stay.
Orkin was President of Ortech between November 1986, and August 1987. In May 1987, he entered into a written employment agreement with Tri-Bradley Investments, Inc. ("Tri-Bradley"), an NASD member with its home office in Denver, Colorado. Orkin was registered as an NASD general securities principal. He agreed to act as a retail salesman and branch manager for a Tri-Bradley branch office in Margate, Florida. Orkin was to pay all operating expenses for the Margate branch office. In exchange, he was entitled to commissions of 80% of the difference between the retail price and the base or "strike" price of securities sold.
Orkin's written employment agreement required him to conduct business under the "full and complete supervision" of the home office. He was required to submit all customer orders to the home office for approval and execution. In accordance with the terms of Orkin's employment agreement, Mary Frances Mernah, a Tri-Bradley officer and trader, and Paul Hurtado, Jr., another officer and Mernah's supervisor, reviewed and accepted Orkin's retail orders and executed the trades at the Denver home office.
In June 1987, while Orkin was still President of Ortech, Brownstone-Smith Securities Corp. ("Brownstone") was the sole underwriter for an initial public offering of Ortech common stock. Two types of warrants, which could be exercised to purchase common stock during a designated period of time at a specified price, were also offered for sale. The market for Ortech stock and warrants was not active or "thin." Brownstone was involved in the vast majority of inter-dealer as well as retail trades in Ortech securities. 2
In October 1987, after leaving Ortech, Orkin negotiated with Brownstone to acquire Ortech warrants for Tri-Bradley. Tri-Bradley made three purchases of Ortech warrants between October 20, and December 10, 1987. Tri-Bradley was the sole purchaser of Ortech warrants during that period.
Between October 20, and December 10, 1987, Orkin solicited retail customers for Ortech common stock. Upon receiving a customer order, he would relay the customer's price to Mernah. Mernah then contacted market makers 3 in Ortech stock who were listed on the "pink sheets" 4 to obtain oral price quotations. There were no published quotations for Ortech stock during this period, although several firms listed themselves as market makers on the pink sheets. Pursuant to Tri-Bradley's policy, if the customer's price was within 5% of the lowest market maker quotation, Mernah accepted the order and executed the trade upon Hurtado's approval. Tri-Bradley was not a market maker in Ortech securities.
To obtain Ortech stock to fill Orkin's retail orders, Tri-Bradley exercised its Ortech warrants. Tri-Bradley's purchase and exercise cost of Ortech warrants was $.0175 per share of common stock. It charged Orkin's customers between $.035 and $.06 per share of Ortech stock, with only three sales occurring at $.035 and the vast majority of sales occurring at $.06.
In January 1989, the NASD filed a complaint against Hurtado, Mernah, and Orkin charging that they effected for Tri-Bradley and permitted Tri-Bradley to effect "over-the-counter sales of corporate securities to public customers, which transactions are described on Exhibit A [Schedule A] ... at prices which were not fair, taking into consideration all relevant circumstances." 5 Such unfair pricing violates the NASD 5% markup policy, an interpretation of Article III, Sections 1 and 4 of its Rules.
Schedule A identifies 208 retail sales of Ortech stock from October 20, through December 10, 1987, executed at prices of $.035 to $.06 at a cost of $.0175 to Tri-Bradley, resulting in markups of 100% to 243%. 6 These sales were solicited by Orkin and approved and executed by Mernah and Hurtado on behalf of Tri-Bradley. The markups were calculated using Tri-Bradley's cost to purchase and exercise the Ortech warrants as the best indicator of the prevailing market price for Ortech stock. Schedule A also lists eight inter-dealer trades of Ortech stock during that period: seven purchases by Brownstone at $.0175 to $.03 per share and a single sale by Brownstone at $.06.
After conducting an evidentiary hearing, the NASD District Business Conduct Committee ("DBCC") found that the sales identified on Schedule A were made in violation of the NASD's 5% markup policy. Because Tri-Bradley was not a market maker in Ortech securities, the DBCC used Tri-Bradley's cost of $.0175 to purchase and exercise Ortech warrants as the best evidence of the prevailing market price of Ortech stock. The resulting markups of 100% to 243% for the retail sales identified on Schedule A greatly exceed the 5% markup generally permitted under the NASD's policy and generated approximately $186,000 profit for Tri-Bradley.
The DBCC also concluded that despite language in his employment agreement requiring approval and execution of sales by Tri-Bradley's home office, Orkin played a predominant role in setting the retail price for Ortech stock. The DBCC thus found that Orkin violated Article III, Sections 1 and 4 of the NASD Rules. It imposed the following sanctions: censure, $50,000 fine, costs, and suspension from all NASD activity for thirty (30) days.
The NASD National Business Conduct Committee ("NBCC") upheld the DBCC's utilization of Tri-Bradley's cost in calculating the markups, but found that Orkin's participation in setting the retail price was limited. Nevertheless, the NBCC found that his participation was sufficient to hold him responsible for the excessive markups because he had been involved in Tri-Bradley's purchase of Ortech warrants, as well as in the sales of Ortech stock to public customers. The NBCC upheld the DBCC's sanctions of censure and costs. However, it reduced Orkin's fine to $15,000, and imposed a 90 day suspension from NASD principal activities.
The SEC conducted a de novo review of the record and found that: 1) the markups on 201 sales of Ortech stock listed on Schedule A were excessive; 2) Orkin was liable for the markup violations; 3) the markup policy was not an illegal restraint of trade or otherwise illegal, unconstitutional, or unfair; and 4) the sanctions imposed against Orkin were appropriate. The SEC found that the record evidence established a higher prevailing market price for Ortech stock than that found by the NASD. The SEC used the price paid by Brownstone for Ortech stock it purchased from other dealers as the best evidence of the prevailing market price because Brownstone dominated and controlled the Ortech market during the relevant period. The prevailing market price as determined by the SEC resulted in smaller, but still excessive, markups for the sales listed on Schedule A.
In concluding that Tri-Bradley sold Ortech stock to retail customers at prices that greatly exceeded the prevailing market price, the SEC began with the long-standing premise that a firm's markups on a security must be reasonably related to its prevailing market price. See, e.g., In re Alstead, Dempsey & Co., Inc., Securities Exchange Act Release No. 20,825 (April 5, 1984), 30 S.E.C. Docket 208, 1984 WL 50800, * 1 (S.E.C.). The general rule is that when a dealer is not a market maker with respect to a security, absent countervailing evidence, the best evidence of the prevailing market price is the dealer's contemporaneous cost in acquiring the security. E.g., Id.
The NASD set the prevailing market price for Ortech stock at Tri-Bradley's cost of purchasing and exercising its warrants because it determined that Orkin failed to present...
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