Siegel v. S.E.C., No. 08-1379.

• Decision Date: 12 January 2010
• Docket Number: No. 08-1379.
• Parties: Michael Frederick SIEGEL, Petitioner v. SECURITIES and EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

592 F.3d 147

Michael Frederick SIEGEL, Petitioner v. SECURITIES and EXCHANGE COMMISSION, Respondent.

No. 08-1379.

United States Court of Appeals, District of Columbia Circuit.

Argued September 14, 2009.

Decided January 12, 2010.

On Petition for Review of an Order of the Securities & Exchange Commission.

George C. Freeman, III argued the cause for petitioner. With him on the briefs was Meredith A. Cunningham.

Rada Lynn Potts, Senior Litigation Counsel, Securities and Exchange Commission, argued the cause for respondent. With her on the brief were David M. Becker, General Counsel, and Jacob H. Stillman, Solicitor.

Before: GARLAND, Circuit Judge, and EDWARDS and RANDOLPH, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge EDWARDS.

EDWARDS, Senior Circuit Judge:

This case involves a disciplinary action brought by the National Association of Securities Dealers ("NASD")^* against Michael Frederick Siegel ("Siegel"). From October 1997 to June 1999, Siegel worked as a registered, general securities representative with Rauscher Pierce Refsnes, Inc. ("Rauscher"), a NASD member firm. In 2002, NASD's Department of Enforcement filed a complaint with NASD's Office of Hearing Officers ("OHO") charging that, during his tenure with Rauscher, Siegel violated NASD Conduct Rules when four of his clients—Linda and Huntington Downer ("the Downers") and Dorothy and Barry Landry ("the Landrys")—invested in World Environmental Technologies, Inc. ("World ET"), a speculative, start-up company in search of financing. World ET eventually failed and the Downers and Landrys lost their investments. In its complaint, the Department of Enforcement alleged that Siegel violated NASD Conduct Rules 3040 and 2110 when he "sold away," i.e., engaged in private securities transactions on behalf of his clients without providing prior written notice to Rauscher, and NASD Conduct Rules 2310 and 2110 when he recommended World ET to his clients without having any reasonable grounds for believing that his recommendations were suitable.

After a hearing, an OHO panel found that Siegel had engaged in the violations alleged. The panel imposed a six-month suspension and a $20,000 fine for the Rules 3040/2110 violations, and a six-month suspension and a $10,000 fine for the Rules 2310/2110 violations. The panel declined to impose restitution and the suspensions were to be served concurrently. See Dep't of Enforcement v. Michael Frederick Siegel, No. C05020055 (Apr. 19, 2004) ("Initial OHO Decision"), reprinted in 2 J.A. 463-79. The matter was appealed to NASD's National Adjudicatory Council ("NAC"). Following a remand to the OHO panel, see In re Michael Frederick Siegel, No. C05020055 (July 26, 2005) ("Initial NAC Decision"), reprinted in 2 J.A. 482-87, NAC affirmed the panel's initial findings, with two modifications. NAC ordered Siegel to serve his suspensions consecutively and ordered Siegel to pay restitution in the amounts of $300,300 to the Downers and $100,000 to the Landrys. See In re Michael Frederick Siegel, No. C05020055 (May 11, 2007) ("Second NAC Decision"), reprinted in 2 J.A. 497-521; In re Michael Frederick Siegel, No. C05020055 (Dec. 4, 2007) ("NAC Supplemental Decision"), reprinted in 2 J.A. 642-58. Siegel appealed to the SEC, which affirmed NAC's decision on all counts. In re Michael Frederick Siegel, Exchange Act Release No. 58,737, 2008 WL 4528192 (Oct. 6, 2008) ("SEC Decision"), 2008 SEC LEXIS 2459, at *1-*58, reprinted in 2 J.A. 677-701.

In his petition for review to this court, Siegel's principal argument is that, because the SEC failed to properly assess the "cause" of the losses suffered by the Landrys and Downers, the agency's decision to uphold NASD's awards of restitution was an abuse of discretion. We agree. NASD General Principle No. 5, which the SEC purported to apply in this case, describes restitution as a "traditional remedy used to restore the status quo ante where a victim otherwise would unjustly suffer loss"; and it states that restitution may be ordered when a party "has suffered a quantifiable loss as a result of a respondent's misconduct." General Principle No. 5, FINRA Sanction Guidelines at 4 ("Principle 5"). The SEC completely failed to articulate any meaningful standards governing the level of causation required under Principle 5.

This case involves wealthy and sophisticated customers who were under no press of time to decide whether to invest; customers who invested specifically in furtherance of a desire to speculate; and a broker who did not profit from his wrongdoing and who has been fined and suspended for his violations. There is nothing in the SEC's decision to indicate why, in these circumstances, awards of restitution are appropriate under Principle 5. Indeed, the SEC's decision is incomprehensible insofar as it attempts to amplify any meaningful causal connection between Siegel's putative bad acts and the Downers' and Landrys' losses. And the SEC has cited no precedent, and we have found none, supporting restitution in a case of this sort. The SEC's judgment is fatally flawed for two reasons: First, the SEC's judgment is not supported by reasoned decisionmaking. Second, the SEC cites to no controlling precedent that includes reasoned decisionmaking supporting restitution under Principle 5 in a case of this sort. We therefore vacate the restitution order.

We reject Siegel's remaining challenges. Substantial evidence supports the SEC's findings that Siegel violated NASD's rules barring selling away and unsuitable recommendations. And the SEC did not abuse its discretion in imposing fines and consecutive six-month suspensions for Siegel's separate violations of Rules 3040/2110 and Rules 2310/2110.

I. BACKGROUND

A. Siegel's Involvement in World ET

Siegel has worked as a registered general securities representative since 1981. From October 24, 1997 to June 16, 1999, he was associated with Rauscher, a NASD member firm. In early 1997, before Siegel joined Rauscher, he had several conversations with representatives of World ET, where he learned of the company's burgeoning efforts to offer antibacterial services to the poultry and swine industries. World ET representatives advised Siegel that the company was seeking to acquire the formula for a product called "Nok-Out" that could kill 99% of bacteria, fungi, and viruses on contact. In December 1997, World ET purchased the formula via a promissory note.

Siegel subsequently agreed to join World ET's board, to serve as a consultant to the company, and to help it raise the capital necessary to go public. On November 24, 1997, Siegel submitted a written request to Rauscher's compliance department for approval to sit on World ET's board. The department approved Siegel's request, but noted that Siegel would "not be able to effect transactions in securities of [World ET]" if the company went public. Inter-Office Memorandum from Jill Ivancevich, Compliance Department, Rauscher Pierce Refsnes, Inc., to Michael Siegel (Nov. 24, 1997), reprinted in 1 J.A. 283.

B. Siegel's Involvement with the Downers and the Landrys

Siegel began managing investments for Huntington and Linda Downer in 1993. Huntington Downer was a prominent state legislator and former law firm partner, with experience in state budget and finance matters. Huntington Downer also had previously invested in speculative oil and gas ventures. The combined net worth of the Downers was between $1.5 million and $2 million. When Siegel joined Rauscher, the Downers transferred their holdings to a Rauscher account. Over time, the couple afforded Siegel significant discretion over their funds, providing him "complete authority" to do "what he wanted." Tr. of Hearing (Oct. 8-10, 2003), reprinted in 1 J.A. 49-50. The Downers acknowledged that they were "happy" with Siegel's representation. Id. at 50.

Siegel visited the Downers at their home in early 1997. The purpose of the meeting, according to Siegel, was to "bring them up to date" on the state of their investments. Id. at 188. The parties discussed personal matters, including Huntington Downer's interest in running for governor and Siegel's new radio show on investing. They also discussed World ET, Siegel's application to serve on the company's board, and the Nok-Out product. Siegel gave the Downers a Nok-Out sample to use on their cat's litter box. At some point during this meeting, Huntington Downer expressed an interest in investing with World ET. Siegel advised the Downers that they could not invest until the company went public, but Huntington Downer pressed Siegel to contact the company and inquire about investment opportunities. Siegel subsequently spoke with World ET representatives, who informed him that the Downers could invest $300,000 in World IEQ Technologies, Inc. ("World IEQ"), a purported subsidiary of World ET. Siegel relayed this information to the Downers, who asked Siegel to obtain the documentation necessary for them to invest.

On November 24, 1997, Siegel visited the Downers again, this time bringing documents related to the proposed World IEQ investment. The paperwork included a "Subscription Agreement" and a "Subscriber Prospective Offeree Questionnaire." Siegel did not review these documents prior to delivering them. As he later testified, had he done so, he would have seen that the offering documents were deficient. Both documents referenced an investment in a debenture, which is an unsecured bond. Neither document, however, included any information on interest rates or repayment terms. Moreover, the two documents were inconsistent in the limited investment information they provided. Huntington Downer promptly signed and returned the documents, but Siegel still declined to review the paperwork. He did, however, fax the documents to World ET. Later, on December 1, 1997, Siegel transferred $300,300 from the Downers' Rauscher account to a World IEQ bank account after receiving written authorization from...