Berdahl v. S.E.C., 77-1201

• Decision Date: 22 March 1978
• Docket Number: No. 77-1201,77-1201
• Citation: 572 F.2d 643
• Parties: Fed. Sec. L. Rep. P 96,359 Richard B. BERDAHL, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 643

572 F.2d 643

Fed. Sec. L. Rep. P 96,359

Richard B. BERDAHL, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 77-1201.

United States Court of Appeals Eighth Circuit.

Submitted Dec. 14, 1977.

Decided March 22, 1978.

Edward A. Zimmerman, Edina, Minn., for petitioner.

Paul Gonson, SEC, Washington, D. C., Harvey L. Pitt, Gen. Counsel, John M. Mahoney, Sp. Counsel and Edward B. Horahan, III, Atty., Washington, D. C., on brief, for respondent.

Before LAY, BRIGHT and HENLEY, Circuit Judges.

HENLEY, Circuit Judge.

Richard B. Berdahl petitions this court for review of a final order of the Securities and Exchange Commission (the "Commission") barring him from association with any broker or dealer, provided that after nine months he may apply to the Commission for permission to become associated with a broker or dealer in a nonsupervisory capacity. We deny the petition for review.

On July 3, 1971 Midland Securities Corporation ("Midland") became registered with the Commission as a broker-dealer in securities. Petitioner, who had founded Midland, became its registered principal in October, 1971. During this period he also served as Midland's president. In November, 1971 petitioner became Chairman of Midland's Board of Directors, a position which he held at all times relevant hereto. At the same time Bruce L. Hankerson, also a subject of these proceedings before the Commission, became Midland's new president.

It is not seriously disputed that petitioner played an active role in the development and operation of Midland, although, as will be seen, there is considerable dispute about his involvement in particular transactions and occurrences. Petitioner presided over Board meetings which occurred "at least once a month, (and) most times once a week." At these meetings members discussed, among other things, the hiring of employees and proposed underwritings. In addition, Board members often discussed among themselves, although not necessarily at official meetings, compliance and bookkeeping procedures.

Petitioner was involved with Midland's day-to-day operation. When Midland had problems with its checking account, petitioner induced a bank official to extend to Midland a $35,000.00 line of credit. He was also involved with hiring personnel, insuring that the Commission was informed of Midland's changes of officers and addresses, receiving monthly reports of the firm's capital position, as well as receiving periodic reports on varying subjects from Midland's officers and employees.

Midland's troubles with the Commission began in the fall of 1972 when a Commission investigation revealed numerous bookkeeping delinquencies and other violations. Subsequent investigation led to the Commission instituting this administrative enforcement proceeding.

After a three-day hearing the administrative law judge ("ALJ") found that petitioner had violated, or aided and abetted the violation of, several provisions of the securities laws and ordered petitioner barred from associating with any broker or dealer, provided that after nine months he might apply to the Commission for permission to become associated with a broker or dealer in a nonsupervisory capacity.

Petitioner timely appealed this decision to the Commission, which found that petitioner had violated the securities laws in the following particulars: (1) he wilfully violated antifraud provisions of the federal securities laws in connection with the offering of securities of Port Industries, Inc.; (2) he failed reasonably to supervise employees subject to his supervision in regard to violations of margin requirements; and (3) he had wilfully aided and abetted Midland's failure timely to file its 1971 annual report. The Commission affirmed the ALJ's imposition of the sanction.

In his petition for review, petitioner challenges the sufficiency of the evidence on the three above-mentioned violations. He also contends that the ALJ erred in allowing him to be represented by a co-respondent, Robert Knutson, at the administrative hearing. Finally, he asks this court to modify the Commission's sanction on the ground that it is too severe. We discuss these claims seriatim.

A. Sufficiency of the Evidence.

1. The Port Offering.

Beginning in June, 1972 Midland served as the underwriter for an offering of the securities of Port Industries, Inc. ("Port"), a small company engaged in real estate development. At the time of the offering Port had never earned any money and did not expect to be able to pay cash dividends in the foreseeable future. The Port offering circular, dated June 6, 1972, included the following language on the first page:

The proceeds from this offering will be held in escrow by Marquette National Bank of Minneapolis, and in the event that 93,750 (75%) of the shares offered hereby are not sold within 120 days of the date hereof, all amounts paid by purchasers will be refunded promptly.

In furtherance of this escrow account arrangement, Midland entered into an escrow impoundment agreement with Port and the Marquette National Bank. The agreement provided in pertinent part:

All proceeds received from the sale of the securities subject to this Impoundment Agreement on or after the date hereof shall be paid to the Impoundment Agent within two business days from the date of sale and deposited by Impoundment Agent in an escrow account. During the term of this Impoundment Agreement, the Issuer and Underwriter shall cause all checks received by them in payment for such securities to be either payable to the Impoundment Agent or endorsed forthwith to the Impoundment Agent.

On June 22, 1972 Midland began to receive proceeds from the Port offering. These proceeds were not placed in the escrow account as the offering circular had promised; instead, the proceeds were deposited in Midland's own accounts. Once placed in these accounts, the proceeds were used to finance Midland's operation. It was not until the latter part of July that Midland made its first attempt to place the Port offering proceeds in the escrow account. ¹

The ALJ found that Midland's failure promptly to escrow the Port offering proceeds violated the antifraud provisions of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, and § 15(c) (2) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o (c)(2), and Rule 15c2-4 thereunder, 17 C.F.R. § 240.15c2-4. The ALJ further found that petitioner had wilfully aided and abetted these violations. The Commission affirmed.

Petitioner contends that the Commission order must be reversed because there was no showing of scienter in regard to his involvement with the Port offering escrow violations. He relies on Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), where the Supreme Court held that scienter is a necessary element in a private cause of action brought under § 10(b) and Rule 10b-5. The Commission responds that the Hochfelder rationale should not be applied to Commission disciplinary actions brought pursuant to § 15 of the Securities Exchange Act of 1934, 15 U.S.C. § 78o.

On the record before us, we need not decide whether the Commission must prove scienter in a disciplinary proceeding ² alleging violations of § 10(b) and Rule 10b-5, ³ because, even if such a showing is required, the Commission adduced sufficient evidence to meet that standard.

It is conceded that petitioner was aware of the escrow provision in the Port offering circular and that he was also aware of the terms of the impoundment agreement. The crux of petitioner's argument is that he was wholly unaware of his employees' failure to place the funds in the escrow account. The record belies this argument.

At the hearing, James Ehlen, who was the back office manager at Midland during the period of the Port offering, testified that he "bugged" petitioner about the failure to escrow "a couple of times," although it is not clear precisely when these instances occurred. ⁴ It is, however, abundantly clear that petitioner knew of the escrow problem no later than July 20, 1972. On that date, he wrote a check transferring $100,000.00 from Midland's own account to the escrow account. Despite this knowledge, however, the record indicates that petitioner took no action to insure that the escrow violations would not continue. As a result, during a six-day period ending on July 24, Midland deposited an additional $64,000.00 of Port offering proceeds in its own account. ⁵ His intentional and knowing acquiescence in the continuation of this fraudulent practice constitutes a sufficient showing of scienter. ⁶

2. Margin Violations.

The evidence showed that during September and October, 1972 Midland violated § 4(c)(2) of Regulation T, 12 C.F.R. § 220.4(c)(2), in at least twenty-five instances by failing to cancel securities transactions of its customers who had failed to pay for securities within seven business days of purchase, as required by the regulation. Again, petitioner does not dispute the existence of the underlying violations, but contends that the evidence was not sufficient to show his involvement therein.

The violations at issue were largely due to one salesman, a Mr. White. The record discloses that petitioner and Hankerson were aware of these violations and met frequently with White in an effort "to get him cleaned up." These efforts failed and the violations continued. Having undertaken to supervise White's work with respect to the Regulation T violations, petitioner had an obligation to do more than announce a policy that salesmen should be careful to avoid Regulation T problems, where the circumstances indicated that more specific and self-executing procedures should have been initiated. See Sutro Bros. & Co., 41 S.E.C. 443, 462 (1963). We find substantial evidence on the record as a whole to support the...