Buchman v. S.E.C.

• Decision Date: 20 April 1977
• Docket Number: No. 422,D,422
• Citation: 553 F.2d 816
• Parties: Fed. Sec. L. Rep. P 96,023 Sidney BUCHMAN and Joseph Buchman, Petitioners-Appellants, v. SECURITIES AND EXCHANGE COMMISSION, Respondent-Appellee. ocket 76-4184.
• Court: U.S. Court of Appeals — Second Circuit

Page 816

553 F.2d 816

Fed. Sec. L. Rep. P 96,023

Sidney BUCHMAN and Joseph Buchman, Petitioners-Appellants, v. SECURITIES AND EXCHANGE COMMISSION, Respondent-Appellee.

No. 422, Docket 76-4184.

United States Court of Appeals Second Circuit.

Argued Jan. 27, 1977.

Decided April 20, 1977.

Sidney Buchman and Joseph Buchman, petitioners-appellants pro se.

James H. Schropp, Special Counsel, Securities and Exchange Commission, Washington, D. C. (David Ferber, Solicitor to the Commission, Washington, D. C., of counsel), for respondent-appellee.

Before ANDERSON, OAKES and GURFEIN, Circuit Judges.

GURFEIN, Circuit Judge:

Joseph Buchman and Sidney Buchman appear pro se. They petition, pursuant to Section 25(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78y(a)(1), to review an order of the Securities and Exchange Commission (the Commission) entered on May 28, 1976. In that order the Commission sustained the determination of the National Association of Securities Dealers, Inc. (NASD) that the Buchmans, as principals of Shaskan & Co., Inc., an NASD member, had violated the NASD Rules of Fair Practice by failing to complete a contract with another NASD member, Torpie & Salzman, Inc. ("Torpie"), which used the facilities of John Muir & Co. The Commission affirmed the sanction imposed on Sidney, a $500 fine, but reduced the $2,000 fine levied by the NASD against Joseph to $1,000. The Commission's review of the NASD actions was pursuant to Section 15A(g) of the 1934 Act, 15 U.S.C. § 78o -3(g). ¹

Torpie filed a complaint with the NASD against Shaskan and the petitioners, among others, ² charging a violation of Article III, Section 1 of the NASD Rules of Fair Practice, which provides that "a member, in the conduct of business, shall observe high standards of commercial honor and just and equitable principles of trade." CCH NASD Manual, P 2151. The complaint was the culmination of a controversy between Torpie and Shaskan arising from the refusal of Shaskan, allegedly without justification, to complete a trade by accepting delivery and paying for 500 shares of Crystalography stock. Shaskan filed an answer defending on the ground that it had refused delivery of the stock in reliance upon advice of counsel and on certain releases of the Commission.

Shaskan entered into the purchase agreements involved on October 5, 1972. Six days thereafter, on October 11, 1972, the Commission suspended trading in Crystalography stock pursuant to Section 15(c)(5) of the 1934 Act, 15 U.S.C. § 78o (c)(5). See Securities Exchange Act Release No. 9815 (October 11, 1972). The settlement date for Shaskan's purchase of the Crystalography stock was October 13, 1972, two days after the entry of the suspension order. Muir did not tender delivery on that date. The Commission continued the trading suspension on a 10-day basis until May 18, 1973, seven months after the initial suspension. ³ During the entire period of the suspension, Shaskan refused to accept delivery in reliance upon Securities Exchange Act Release No. 7920 (July 19, 1966), in which the Commission took the position that a broker may complete, during a suspension, contracts entered into prior to the suspension only if, inter alia, "he has no reason to believe" that his customer is connected with the activity which prompted the suspension. ⁴ Conversely, Muir did not attempt to deliver the stock to Shaskan.

Muir did attempt delivery to Shaskan on May 18, 1973, the day the suspension was lifted. Shaskan refused to accept delivery based upon Securities Exchange Act Release No. 10156, 1 SEC Docket No. 16 at page 8, which publicly announced the termination of the suspension in trading in Crystalography stock.

That release contained this significant paragraph:

"The Commission also noted that it had been brought to its attention that there are unconsummated trades in (Crystalography) stock. In view of the allegation presented in the Crystalography release, broker-dealers should take the necessary measures to assure themselves that they are not unknowingly effecting a consummation of open contracts which may be in furtherance of a scheme to manipulate the price of the securities of Crystalography or would otherwise violate the Federal securities laws."

On May 18, 1973 Shaskan issued a written statement declaring:

"We are not accepting trades of Crystalography Corp., at this time, until further clarification by the S.E.C. of its findings and as to what measures we must take to assure ourselves that we are not unknowingly consummating open contracts which may be in furtherance of a scheme to manipulate the price of the securities of Crystalography or would otherwise violate the federal securities laws."

Shaskan did attempt to obtain "further clarification by the S.E.C." It had its counsel telephone to the Commission asking for advice as to what "necessary measures" Shaskan should take. Counsel was told to make his request for advice in the form of a letter. Such a letter was sent to the Commission on the same day. It was not answered by the Commission staff until a month later, on June 19, 1973.

In the meantime Shaskan's capital position had become impaired, and in early June the staff of the New York Stock Exchange directed Shaskan to fulfill open contracts with its customers. Among these transactions were purchases by its customers of Crystalography stock at about $10 per share. Some time before it received the long awaited June 19 letter from the Commission staff, it bought shares on the open market for delivery to its customers for about $1.00 per share, which was the price to which the stock plummeted after the suspension was lifted. ⁵ Muir did not attempt to explain to Shaskan why the shares it had tendered were not tainted by the manipulative scheme which prompted the initial suspension and Shaskan never accepted the 200 shares from Muir.

The District Business Committee of the NASD held, after a hearing at which Sidney Buchman, who was not involved in the Muir trade, testified on his own behalf, that Shaskan and Contemporary had no justification for refusing to accept delivery of the Crystalography shares, and, hence had acted in a manner inconsistent with just and equitable principles of trade in violation of Article III, Section 1, supra. Shaskan and Contemporary, see note 2, were suspended for ten days. Joseph Buchman was fined $2,000, as was Meyer Buchman, another principal of Shaskan. Sidney Buchman was fined $500. An appeal was taken and a subcommittee of the NASD Board of Governors held a hearing and affirmed the decision of the District Committee.

On appeal to the Commission, oral argument not having been requested, the Commission reviewed the record certified by the NASD. The Commission set aside the NASD's findings and sanctions as to Meyer Buchman, but sustained the NASD's finding of misconduct by Joseph and Sidney Buchman as well as Shaskan. The $500 fine levied against Sidney was sustained. The Commission reduced the fine levied against Joesph, however, to $1,000, on the ground that there was no violation in the Contemporary transaction, since Contemporary had never tendered the shares, and because Joseph's conduct may have been predicated to some extent on advice of counsel. ⁶

Joseph and Sidney Buchman, pro se, filed a petition for review in this court, pursuant to Section 25(a) of the Act, 15 U.S.C. § 78y(a). In our review we must consider the record as a whole, R. H. Johnson & Co. v. Securities Exchange Commission, 198 F.2d 690, 695 (2d Cir.), cert. denied,344 U.S. 855, 73 S.Ct. 94, 97 L.Ed. 664 (1952), which includes the body of evidence opposed to the Commission's view. See Universal Camera Corp. v. NLRB, 340 U.S. 474, 488, 71 S.Ct. 456, 95 L.Ed. 456 (1954). The respondent Commission recognizes that "the entire record may and should be viewed to determine whether there is substantial evidence to support the Commission's action," and concedes that the scope of judicial review set out in Universal Camera, supra, applies to review of Commission orders under § 25(a), even though § 25(a) does not contain the words "on the record considered as a whole." See also Kivitz v. SEC, 154 U.S.App.D.C. 372, 475 F.2d 956, 961 (1973); Klopp v. SEC, 427 F.2d 455, 460-61 (6th Cir. 1970). A Court of Appeals does not have to accept inferences drawn by the Commission unless it finds them to be legitimate inferences. Klopp v. SEC, supra. In this case, the Commission took no additional evidence and its inferences are based on the factual findings of the NASD. The Commission staff had no opportunity to judge and report issues of credibility.

With deference to the Commission, we believe that under the circumstances of this case, Shaskan's refusal to complete the Muir transactions during and after the suspensions, was colorably justified by the confusion as to the true state of the market and as to the applicable law. By this we do not mean that Shaskan necessarily has a defense to a claim by Muir for breach of contract. ⁷ But, as the Commission concedes, it is well-settled that " a breach of contract between NASD members is of no concern to the NASD or to the Commission if such breach does not contravene the ethical standards embodied in Article III, Section 1." The Commission itself has held that a refusal to complete a contract based on a reasonable belief that a transaction was part of a manipulative scheme does not violate Article III, Section 1. Southern Brokerage Co., 42 S.E.C. 449 (1966). There are, of course, situations in which this claim is a sham, and if it is found that "petitioner did not have a belief both honest and reasonable that there was a manipulative scheme afoot at the time of the contractual default," its failure to fulfill contractual obligations would violate Article III, Section 1. Nassau Securities Serv.v SEC, 348 F.2d 133, 135 (2d Cir. 1965). ⁸ The touchstone, in other words, is good faith the ultimate test of violation of an ethical...