Alderman v. S.E.C.

• Decision Date: 08 January 1997
• Docket Number: No. 95-70609,95-70609
• Citation: 104 F.3d 285
• Parties: 97 Cal. Daily Op. Serv. 214, 97 Daily Journal D.A.R. 327 Daniel Joseph ALDERMAN, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 285

104 F.3d 285

97 Cal. Daily Op. Serv. 214, 97 Daily Journal

D.A.R. 327

Daniel Joseph ALDERMAN, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 95-70609.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 6, 1996.

Decided Jan. 8, 1997.

Allan A. Fulsher, Beaverton, OR, for petitioner.

Randall W. Quinn, Securities and Exchange Commission, Washington, D.C., for respondent.

Petition for Review of an Order of the Securities and Exchange Commission. SEC No. 3-8546.

Before: CANBY, RYMER, and KLEINFELD, Circuit Judges.

RYMER, Circuit Judge:

Daniel Alderman seeks review of an order of the Securities and Exchange Commission that affirmed a disciplinary action against him by the National Association of Securities Dealers, Inc. Alderman was an associated person of American Interstate Financial Corp. (AIFC), an NASD member broker/dealer, and was an officer of AIFC's parent company, Peregrine Holdings, Ltd. He was disciplined for violating Article III, Section 1 of the NASD Rules of Fair Practice by failing promptly to return AIFC client funds that ended up in Peregrine's account. Alderman contends that the NASD Rule is too vague to be applied to him (and correspondingly, that the SEC and NASD lacked jurisdiction to discipline him) because the failure to reimburse funds occurred in Alderman's capacity as an officer of a non-NASD member company and did not arise from the conduct of the business of AIFC, the member firm. We agree with the SEC that wrongfully withholding funds on Peregrine's behalf that belonged to clients of AIFC, an NASD member firm of which Alderman was a director and control person, was inconsistent with his obligations on behalf of AIFC. As we have jurisdiction, 15 U.S.C. § 78y(a)(1), we uphold the Commission's order.

I

During 1992, Alderman was a director and the corporate secretary of AIFC, a broker/dealer registered with the NASD, and a director and vice president of AIFC's parent company, Peregrine. Alderman was a "control person" of both AIFC and Peregrine. Peregrine was not itself an NASD member, but it was, in turn, a control person of AIFC. ¹ AIFC and Peregrine operated from the same offices in Portland, Oregon.

Because AIFC was not licensed to hold client funds, it cleared its securities trades through another, unrelated company, Emmett A. Larkin Co. AIFC maintained trading accounts with Larkin for Peregrine and for other AIFC customers. It is undisputed that on July 24, 1992 Larkin accidentally credited Peregrine's AIFC trading account with $3,193.23 that should have gone into the account of AIFC's customers Joseph and Sylvia Sacca. In a routine "sweep" of the cash balance in its trading account, Peregrine transferred the mistaken deposit into its account at Bank of America. In late August 1992, Clarissa O'Hanley, Peregrine's vice president of finance and administration, discovered the error. She learned from AIFC's compliance officer that the money had come from the Saccas' account, so she transferred $3,193.23 out of Peregrine's money market account at Larkin into accounts payable. On September 10 or 11, 1992, O'Hanley drafted a check payable to the Saccas for $3,206.06 which she signed and presented to Alderman for his review and signature. She explained to him what had happened; Alderman signed the check, but did not authorize its release. (Peregrine checks were not being released during this time frame without Alderman's authorization because of the company's cash flow problems.) That check was voided October 31, but restitution, with interest, was made to the Saccas November 2 and 3, 1992, after an NASD auditor questioned the failure to reimburse.

In October 1993, the NASD initiated complaint proceedings charging that Alderman knowingly failed to permit Peregrine to reimburse the Saccas, which constituted misuse of customer funds in violation of Article III, Section 1 of the NASD Rules of Fair Practice. ² A hearing was held before the NASD's District Business Conduct Committee for District No. 3 in March 1994.

The DBCC issued a decision finding Alderman liable for the violation charged, censuring him for violating the Rules and fining him $3,000 plus litigation costs of about $1,600. The NASD's National Business Conduct Committee affirmed the DBCC's finding of violation and sustained the sanctions. After a de novo review of the record, the SEC found that Alderman deliberately withheld payment to the Saccas for over two months, and concluded that this violated his duty under Article III, Section 1, as an associated person of AIFC, to adhere to high standards of commercial honor and just and equitable principles of trade in conducting AIFC's business. ³ Daniel Joseph Alderman, 59 S.E.C. Docket 2075 (1995), 1995 WL 442069 (S.E.C.) * 1, * 2. The Commission also upheld the fine.

Alderman has timely sought review.

II

We review the Commission's factual findings for substantial evidence, 15 U.S.C. § 78y(a)(4), which means that we weigh pros and cons in the whole record with a deferential eye. Universal Camera Corp. v. NLRB, 340 U.S. 474, 488, 71 S.Ct. 456, 464-65, 95 L.Ed. 456 (1951); Howard v. FAA, 17 F.3d 1213, 1216 (9th Cir.1994). If the evidence is open to more than one interpretation, we must uphold the Commission's findings. Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir.1986). We will defer to an agency's construction of its own regulations except where the interpretation is "unreasonable" or "plainly erroneous." Lambert v. FDIC, 847 F.2d 604, 606 (9th Cir.1988). We review the SEC's affirmance of the NASD's imposition of sanctions for abuse of discretion. Carter v. SEC, 726 F.2d 472, 474 (9th Cir.1983).

III

Alderman takes issue with many of the findings of fact made by the DBCC and the SEC, but they are supported by substantial evidence. ⁴ His more forceful arguments are that Article III, Section 1 of the Rules is void for vagueness in its application to him, and that the NASD lacked jurisdiction since his failure to act did not arise from the conduct of business by a member firm. Alderman also contends that the SEC's order is an unconstitutional attempt to preempt state law regarding the internal governance of a private, non-member corporation organized under state law, and that he did not violate Article III, Section 1.

A

Although differently articulated, each of these submissions turns on Alderman's view that NASD sanctions may not be imposed on him because he allegedly failed to act in his capacity as an officer of a private, non-regulated corporation. Alderman was, of course, wearing two hats, but both the DBCC and the SEC found that he was in a position at Peregrine to delay reimbursement of funds that he knew belonged to AIFC clients. There is no question that Alderman had a duty as an associated person of AIFC to act in accordance with NASD ethical standards toward AIFC customers. This duty was his, not Peregrine's, and he didn't lose it simply because he also had (unregulated) responsibilities at Peregrine. When he acted to hold up reimbursement of the Saccas' money, albeit with his Peregrine hat on, Alderman knew that he was preventing the return of money belonging to his regulated firm's clients. As security of client funds was part and parcel of Alderman's AIFC business, his conduct with respect to those funds was appropriately subject to NASD regulation. For these reasons, applying Article III, Section 1 to him as a control person of AIFC cannot have come as a surprise. We therefore reject Alderman's vagueness challenge as applied, see Maynard v. Cartwright, 486 U.S. 356, 361, 108 S.Ct. 1853, 1857-58, 100 L.Ed.2d 372 (1988) (noting that objections to vagueness under the Due Process Clause rest on lack of notice and may be overcome in any specific case where reasonable persons would know their conduct is at risk), ⁵ and we hold that his refusal promptly to reimburse clients of his NASD member firm was sufficiently related to the business of AIFC to fall within the jurisdiction of the NASD.

B

Retaining the same underpinnings but changing the focus somewhat, Alderman maintains that the SEC's order impinged on the State of Oregon's power to create corporations and to govern their internal affairs because he had no corporate authority or duty to send a check to Larkin, and that to hold otherwise has the effect of preempting Oregon law. While it is true, as Alderman argues, relying on Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), that corporations such as Peregrine are creatures of state law, neither the NASD nor the SEC acted against Peregrine at all, let alone subjected Peregrine or any of its non-regulated personnel to the NASD Rules. Alderman...