Berko v. Securities and Exchange Commission, 204

Citation316 F.2d 137
Decision Date09 April 1963
Docket NumberNo. 204,Docket 27774.,204
PartiesIrwin BERKO, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Robert J. Ward, New York City (Aranow, Brodsky, Bohlinger, Einhorn & Dann, New York City, on the brief), for petitioner.

Peter A. Dammann, Gen. Counsel, Securities and Exchange Commission, Washington, D. C. (David Ferber, Assoc. Gen. Counsel, George P. Michaely, Jr., Sp. Counsel, and Donald R. Jolliffe, Atty., Securities and Exchange Commission, Washington, D. C., on the brief), for respondent.

Before CLARK, FRIENDLY and MARSHALL, Circuit Judges.

MARSHALL, Circuit Judge.

This is a petition for review of an order of the Securities and Exchange Commission entered pursuant to a remand by this court of a former order of the Commission. Berko v. S. E. C., 297 F.2d 116 (2 Cir., 1961). The original petition sought review of a Commission order of February 6, 1961, which found that Irwin Berko, a salesman, was a cause of revocation of the broker and dealer registration of his employer, MacRobbins & Co., Inc.

The Commission's original order revoking the registration of MacRobbins & Co. and finding petitioner a cause thereof was entered pursuant to Sections 15(b) and 15A(b)(4) of the Securities Exchange Act of 1934, as amended. 15 U.S.C.A. §§ 78o(b) and 78o-3(b) (4). In its Findings and Opinion the Commission held, on the basis of the record, that MacRobbins & Co. and nine of its salesmen, including petitioner, had violated the antifraud provisions of Section 17(a) of the Securities Act of 1933, 15 U.S.C.A. § 77q(a); of Sections 10(b) and 15(c) (1) of the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 78j (b) and 78o(c) (1); and of Rules 10b-5 and 15c1-2 thereunder, 17 C.F.R. 240.-10b-5 and 15c1-2, in the offer and sale of the stock of Sports Arenas, Inc., a Delaware corporation.

On the original petition for review, we found that the Commission's findings and legal theory lacked "that clarity and expression of purpose as derived through administrative experience necessary when issues not yet passed upon by any court are presented." 297 F.2d at 118. Accordingly, we remanded the case to the Commission, requesting "more complete findings and a clearer indication of the precise basis for its decision."1 Ibid. Without holding further hearings, the Commission filed a new opinion in which it reaffirmed its previous finding that petitioner was a cause of revocation of his employer's broker-dealer registration.2 This petition for review followed. 15 U. S.C.A. § 78y.

In its opinion on remand, the Commission reviews the applicable law and again emphasizes the evils inherent in "boiler-room" operations.3 There can be no question that MacRobbins was operating a "boiler-room" in plain violation of the statute and that there was ample evidence to support that portion of the order revoking its broker-dealer registration; indeed, the registrant had entered into a stipulation consenting to the revocation. MacRobbins had set up the operation for the principal and specialized purpose of selling a single stock, that of Sports Arenas, Inc. At least two brochures, both of which were properly found to be deceptive and misleading, were widely distributed through the mails. Ten salesmen were employed to make telephone calls to and receive telephone calls from prospective customers and to urge the purchase of Sports Arenas stock. A result was that more than 100,000 shares were sold between October 1957 and November 1958. The operation of MacRobbins was also characterized by a lack of knowledge or failure to disclose the true financial condition of Sports Arenas. As we said in our earlier opinion, "We applaud the efforts of the Commission in seeking better means of dealing with `boiler room' operations. * * *" 297 F.2d at 117.

The question we face here, however, is a somewhat different one. It is whether there is sufficient evidence in the record to support the Commission's finding that the petitioner Berko was a "cause" of the revocation of MacRobbins' registration within the meaning of Section 15A (b) (4) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78o-3(b) (4). We have examined the record carefully and concluded that the evidence is sufficient to support the Commission's order. The order is therefore affirmed.

An understanding of the relevant statutory background is necessary to decision in this case. Section 15(a) of the Securities Exchange Act of 1934 requires a "broker or dealer" to be registered. 15 U.S.C.A. § 78o(a). Section 15(b) provides for denying or revoking such registration if, inter alia, the broker on dealer "(D) has willfully violated any provision of the Securities Act of 1933, or of this chapter, or of any rule or regulation thereunder," and revocation is in the public interest. 15 U.S.C. A. § 78o(b). These provisions were the basis for the revocation of MacRobbins' registration. Since Berko was not a broker or dealer, there was no requirement that he be registered. Section 15 (b) also provides that the Commission may deny or revoke the registration of a broker or dealer if "any person directly or indirectly controlling or controlled by such broker or dealer, whether prior or subsequent to becoming such," falls within subsection (D), quoted above, an issue that would not arise in the present case unless or until Berko seeks employment with a new broker or dealer. Moreover, Section 15A(b) (4), 15 U.S.C.A. § 78o-3(b) (4), provides that an association of securities dealers must adhere to a rule that no broker or dealer shall be admitted to or continued in membership if "any person directly or indirectly * * * controlled by such broker or dealer * * * (C) by his conduct while employed by, acting for, or directly or indirectly controlling or controlled by, a broker or dealer, was a cause of any suspension, expulsion, or order of the character described in clause (A) or (B)," which includes orders revoking registration pursuant to Section 15. In order to give some measure of assurance to subsequent prospective employers, the Commission affords to all persons, such as salesmen, suspected of being a "cause" of revocation the opportunity to participate in registration revocation proceedings. Cf. Wallach v. S. E. C., 92 U.S.App.D.C. 108, 202 F.2d 462 (1953). In the present case, Berko elected to appear and participate in the proceedings. The result of such proceedings is often, as it was in Berko's case, a declaratory-type order that a salesman has been a "cause" of the revocation of the broker's registration, an order which in general will have the effect of preventing any other broker from employing the salesman without the prior approval of the Commission. See 2 Loss Securities Regulation 1314-23, 1384-85 (2 ed. 1961).

The facts of Berko's actions, as they are set out in the record, must be judged, therefore, against the statutory requirement of "cause." Surprisingly, the meaning of the word "cause" as it is used in the statute has not been the subject of detailed judicial construction. In R. H. Johnson & Co. v. S. E. C., 198 F. 2d 690, 696 (2 Cir.), cert. denied, 344 U. S. 855, 73 S.Ct. 94, 97 L.Ed. 664 (1952), this court, speaking through Judge Frank, rejected the contention that "`cause' must always be interpreted to mean `an immediate or inducing cause'."4 But neither that opinion nor the Commission nor common sense suggests that the statutory requirement should be deemed to have been met by a demonstration merely that the salesman's conduct was to some degree a factor in the revocation of his employer's registration. More than this is required.5 The determination of the point at which the balance is to be struck must be made on a case-by-case basis because, as a leading authority in this area has pointed out, the "relevant factors in determining `cause', it would seem, are not too different from those which go to `public interest' under § 15(b)." 2 Loss, Securities Regulation 1385 (2d ed. 1961). In short, the determination calls for an exercise of expertise, discretion, and policy selection on the part of the Commission.

Berko was employed by MacRobbins from June 1958 to December 1958; this was the first time that he had ever been employed either in the securities field or as a salesman on commission. Upon starting with MacRobbins he was given "some brochures" to read. In reply to a question, "You studied the green folders, the two of them, that we have in evidence and one or two articles —," Berko replied, "Yes." He also said that he had been given literature to mail out to people and that "I did mail out some literature, yes, sir." He denied having any knowledge that Sports Arenas was operating at a loss and said that during the time he was selling its stock, he was awaiting the annual financial statement of the corporation; he therefore necessarily admitted that he never was in a position to tell a customer that Sports Arenas was in fact operating at a loss.

One witness, Irving Thurm, testified that in 1958 he received literature from MacRobbins recommending Sports Arenas stock and that he telephoned Berko because "he had known somebody who had bought Sports Arena who had known Mr. Berko personally, and — feeling that if anyone was going to handle it, Mr. Berko would do just as well as anyone else." Since Thurm already knew of Sports Arenas from his friend, his conversation with Berko centered on the price of the stock. Berko represented to Thurm, who was buying the stock at $7 per share, that there was a good possibility that the price would rise to as high as $15 within a year. Thurm subsequently bought 60 shares.

Upon this evidence the Commission found that Berko was "chargeable with knowledge of the contents of the circular and of the brochures sent to prospective customers" and that "willful participation by Berko in such a fraudulent sales campaign constituted a course of business...

To continue reading

Request your trial
48 cases
  • State v. Brewer
    • United States
    • Court of Appeals of Tennessee. Court of Criminal Appeals of Tennessee
    • February 13, 1996
    ...Blavin, 760 F.2d 706, 711 (6th Cir.1985); accord SEC v. North Am. Research & Dev. Corp., 424 F.2d 63, 84 (2d Cir.1970); Berko v. SEC, 316 F.2d 137, 143 (2d Cir.1963); SEC v. Lum's, Inc., 365 F.Supp. 1046, 1059 (S.D.N.Y.1973).20 This Court does not possess the authority or power "to revise, ......
  • Securities and Exchange Com'n v. Texas Gulf Sulphur Co.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • August 13, 1968
    ...the interests of broader protection for the investing public so that negligent insider conduct has become unlawful. See Berko v. SEC, 316 F.2d 137, 141-142 (2 Cir. 1963); SEC v. Capital Gains, etc., Bureau, 375 U.S. 180, 193, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). A similar standard has been ......
  • Securities and Exchange Com'n v. Hasho, 90 Civ. 7953.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • February 13, 1992
    ...employer or an issuer. A registered representative or salesman in a boiler room: (1) may not rely solely on his employer, Berko v. SEC, 316 F.2d 137, 142 (2d Cir.1964); (2) may not rely blindly upon the issuer for information concerning a company, Hanly, 415 F.2d at 596; Levine v. SEC, 436 ......
  • United States Sec. v. Brown
    • United States
    • United States District Courts. United States District Court (Columbia)
    • September 27, 2010
    ...in enforcing the securities laws, and so a showing of reliance or injury to private individuals is "legally irrelevant." Berko v. SEC, 316 F.2d 137, 143 (2d Cir.1963) (finding reliance and injury to private shareholders "legally irrelevant" to Commission's Section 10(b) claim); see also Uni......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT