S.E.C. v. McCarthy

• Citation: 322 F.3d 650
• Decision Date: 03 March 2003
• Docket Number: No. 02-55201.,02-55201.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Kevin Michael McCARTHY; Thomas William Blodgett, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

322 F.3d 650

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Kevin Michael McCARTHY; Thomas William Blodgett, Defendants-Appellants.

No. 02-55201.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 4, 2003.

Filed March 3, 2003.

COPYRIGHT MATERIAL OMITTED

Gregory Sherwin, Fields, Fehn & Sherwin, Los Angeles, CA, for the defendants-appellants.

Thomas Karr, Special Trial Counsel, United States Securities and Exchange Commission, Washington, DC, for the plaintiff-appellee.

Appeal from the United States District Court for the Central District of California; David O. Carter, District Judge, Presiding. D.C. No. CV-01-01073-DOC.

Before D.W. NELSON, WARDLAW and FISHER, Circuit Judges.

OPINION

D.W. NELSON, Senior Circuit Judge.

Kevin McCarthy and Thomas Blodgett appeal the district court's order granting the Application of the United States Securities and Exchange Commission (the "Commission") seeking enforcement of a Commission order. The Commission affirmed a disciplinary decision of the National Association of Securities Dealers ("NASD"), fining McCarthy and Blodgett $48,892.37 and $50,453.33 respectively. Appellants appeal on the grounds that (1) the Commission does not possess standing to file this Application; (2) the district court erred in utilizing summary proceedings not authorized under the Federal Rules of Civil Procedure; (3) the district court failed to provide them with an opportunity to respond to the Commission's Application; and (4) Appellants were not permitted to assert affirmative defenses to the Commission's Application in district court.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Securities Exchange Act of 1934

Congress enacted the Securities Exchange Act of 1934 (the "Exchange Act") to "achieve a high standard of business ethics in the securities industry." Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). The Act allows for the creation of "national securities associations" for brokers and dealers and authorizes self-regulating organizations ("SROs") within the securities industry to self-regulate their members, subject to federal oversight by the Commission. 15 U.S.C. § 78o-3(a).

All such associations must be approved and registered by the Commission. The Exchange Act mandates that such associations promulgate rules designed, inter alia, to

prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect ... [the] national market system, and, in general, to protect investors and the public interest.

Id. § 78o-3(b)(6).

To date, only one such organization has ever received Commission approval—the NASD, a private nonprofit Delaware corporation. The Exchange Act requires the NASD, as a national securities association, to enforce its rules and impose sanctions on members that violate NASD rules and/or the Exchange Act. 15 U.S.C. § 78o-3(b)(7). NASD disciplinary orders are subject to review by the Commission. This system of joint public-private regulation of the securities industry reflects Congress's intent "to establish a `cooperative regulation' where [securities] associations would regulate themselves under the supervision of the SEC." Jones v. SEC, 115 F.3d 1173, 1179 (4th Cir.1997) (quoting S. Rep. No. 75-1455, at 3-4 (1938); H.R. Rep. No. 75-2307, at 4-5 (1938)). Commission decisions are appealable to the United States Courts of Appeals. 15 U.S.C. § 78y(a)(1).

B. McCarthy and Blodgett

McCarthy and Blodgett were officers of Atlanta-One, Inc. Atlanta-One specialized in the trade of foreign currency options on the Philadelphia Stock Exchange. McCarthy served as its president and was registered as a general securities principal. Blodgett was the company's vice president and was registered as a securities principal and an options principal.

Between April and November 1990, Atlanta-One charged unfair commissions to its clients in 353 different transactions involving foreign currency options. The commissions charged by Appellants were so excessive that it was virtually impossible for their clients to break even, much less profit, from their options trading. The commissions ranged from $50 to $89 per options contract. In the vast majority of cases, Appellants charged commissions that amounted to forty percent or more of their customers' initial investment. In fact, only twenty-four percent of Appellants' options were ever sold at a profit.

C. NASD Disciplinary Proceedings

On September 27, 1991, the NASD's District Business Conduct Committee sanctioned Appellants for violating the NASD's Rules of Fair Practice. The NASD District Committee found that Atlanta-One's commissions were excessive and unfair. Specifically, they were held to be in violation of Article III, Section 1 of the NASD Rules. Article III, Section 1 requires NASD members to "observe high standards of commercial honor and just and equitable principles of trade." McCarthy and Blodgett were fined $75,000 and $50,000 respectively in addition to $413 in costs. They were also suspended for thirty days and ordered to requalify before acting again in any capacity requiring qualification within the securities industry. Appellants appealed to the NASD's Business Conduct Committee. On March 10, 1992, the NASD Business Conduct Committee affirmed the decision of the NASD District Committee and imposed an additional $721 in costs.

Appellants appealed to the Commission. The Commission reviewed the matter de novo. On March 8, 1995, the Commission affirmed the NASD decision and "sustain[ed] the NASD's findings that [Appellants] charged excessive commissions in violation of Article III, Section 1 of the Rules of Practice." In re Atlanta-One, Inc., Exchange Act Release No. 34-35455, 58 S.E.C. Docket 2483, 1995 WL 103844 (Mar. 8, 1995), available at 337 Md. 641, 655 A.2d 400, 1995 WL 103975, at *4.

Appellants subsequently petitioned us for review of the Commission's decision. In a published opinion filed November 12, 1996, we denied the petition and affirmed the Commission's order, noting that Appellants charged their clients "excessive commissions that blatantly exceeded a fair and equitable level." Atlanta-One, Inc. v. SEC, 100 F.3d 105, 110 (9th Cir.1996).

On November 7, 2001, the Commission filed an "Application" in district court, requesting Appellants be ordered to comply with the Commission's order of March 8, 1995, and pay sanctions. That same day, the Commission served Appellants with the Application and all supporting documents filed in district court. No summons, however, was ever issued by the district court. Two weeks later on November 21, 2001, the district court summarily granted the Commission's Application without first convening a hearing or, alternatively, permitting Appellants to respond. Appellants appealed.

On June 21, 2002, the Commission moved to remand this action to district court. The Commission argued that Appellants should be given an opportunity to (1) respond to the Commission's Application and (2) raise affirmative defenses before the district court. The Commission explained that, "Remand is ... appropriate because [Appellants'] purported defenses raise substantive arguments whose resolution requires the development of facts not currently in the record." On August 30, 2002, this Court denied the motion without prejudice.

STANDARD OF REVIEW

The district court's interpretation of a statute is reviewed de novo. See In re Cardelucci, 285 F.3d 1231, 1233 (9th Cir.2002). Whether the procedures used by the district court violated the Due Process Clause is reviewed de novo. See Dittman v. California, 191 F.3d 1020, 1024-25 (9th Cir.1999).

DISCUSSION

I. The Commission's authority to enforce its order via an application to the district court.

Upon application by the Commission, § 21(e)(1) of the Exchange Act authorizes a district court to issue writs of mandamus, injunctions, and orders commanding any person to comply with the Exchange Act and orders issued thereunder. 15 U.S.C. § 78u(e). Specifically, § 21(e) states in pertinent part that:

Upon application of the Commission the district courts of the United States ... shall have jurisdiction to issue writs of mandamus, injunctions, and orders commanding (1) any person to comply with the provisions of this chapter [or with] ... the rules of a national securities exchange or registered securities association of which such person is a member or person associated with a member ....

15 U.S.C. § 78u(e).

In its Order of March 8, 1995 (the "Order"), the Commission affirmed the NASD's sanctions. The SEC's subsequent Application before the district court sought enforcement of the Order pursuant to § 21(e). We agree with the Fifth Circuit that "the Exchange Act, as we read the statute, explicitly provides for district court jurisdiction over actions brought to enforce SEC-ordered sanctions." Lang v. French, 154 F.3d 217, 222 (5th Cir.1998).

Appellants contend, however, that the Commission possesses no standing to seek enforcement of the NASD's decision. According to Appellants, the Commission's Application was not seeking enforcement of a Commission order but the enforcement of a NASD order. This interpretation mischaracterizes the facts in this case.

Section 21(e) of the Exchange Act expressly permits the Commission to seek enforcement of its orders by making application to the district court. 15 U.S.C. § 78u(e). "The fact that the SEC's order derives from the agency's adjudicatory role in the NASD's self-regulating disciplinary process ... has no bearing on the jurisdictional grant embodied in section 21(e)(1)." Lang, 154 F.3d at 222. The Exchange Act does not limit or restrict what types of Commission orders may be...