Erenstein v. Securities and Exchange Commission, 091608 FED11, 07-15736

Docket Nº:07-15736
Opinion Judge:PER CURIAM:
Judge Panel:Before BIRCH, DUBINA and BARKETT, Circuit Judges.
Case Date:September 16, 2008
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit




No. 07-15736

United States Court of Appeals, Eleventh Circuit

September 16, 2008


Petition for Review of a Decision of the Securities and Exchange Commission Agency No. 3-12529

Before BIRCH, DUBINA and BARKETT, Circuit Judges.


Morton Bruce Erenstein, proceeding pro se, petitions for review of a final disciplinary order of the Securities and Exchange Commission ("SEC") affirming a decision of the National Association of Securities Dealers ("NASD"), which found that, as a securities dealer or associated person, he had violated two regulatory rules and should be suspended for a period of one year.

Liberally construing his brief, Erenstein argues that his suspension constituted an abuse of discretion as substantial evidence did not support the SEC's finding that he violated the rules. Because Erenstein also challenges certain administrative decisions by the NASD or NAC, and suggests that the NASD Panel's failure to issue a decision within 60 days of the last post-hearing filing mandated dismissal of the charges, we also examine whether de novo review by the SEC of intermediate agency determinations rendered harmless any factual or legal errors at those stages. Finally, Erenstein also argues that his right to due process was violated during agency proceedings and that he was entitled to have his counsel's objections heard by an independent arbiter before the commencement of disciplinary proceedings.


The issues on appeal stem from a complaint filed with the NASD against Erenstein by a former client. She alleged that he had converted $10, 000 provided to him for investment purposes. During an on-the-record interview by the NASD, with counsel present, Erenstein indicated that the money constituted compensation for services he provided to the customer involving the sale of government bonds. However, when asked whether he had declared the $10, 000 as income on his 1998, 1999, or 2000 tax returns, Erenstein's counsel objected on relevancy grounds and instructed him not to answer. Although NASD staff informed Erenstein that they had the authority to seek this information under NASD Procedural Rule 8210, and that failure to respond could result in disciplinary action, under that rule and NASD Conduct Rule 2110, Erenstein indicated his understanding, but still refused to answer based on advice of counsel.

After some correspondence, during which counsel persisted with the objection, NASD officials notified Erenstein in June 2004 that disciplinary action would be recommended based on his failure to answer the on-the-record interview question and respond to the written requests for tax records. In a June 21, 2004, letter, Erenstein indicated that his 1998 federal tax return was being produced under protest and no previous objection was being waived. The letter indicated that an amended 1998 return had been filed in October 2003 to reflect the $10, 000 income because Erenstein had initially overlooked the amount. Erenstein contended that no adjudicatory forum existed in which to seek review of the request for confidential documents, creating a due process issue and also an issue of whether the NASD complied with the statutory requirement that it provide a fair and reasonable procedure for determining disciplinary matters.

A disciplinary hearing was held in December 2004, at which NASD's Department of Enforcement ("Department") sought a one-year suspension. In May 2005, before a decision, Erenstein filed for bankruptcy. In November 2005, the Department moved for issuance of a decision without monetary sanctions, i.e., a one-year suspension, noting that the Bankruptcy Court had granted Erenstein a discharge.

In December 2005, the NASD Hearing Panel ("Panel") issued a decision barring Erenstein for violating NASD Procedural Rule 8210 and Conduct Rule 2110 by refusing to answer an on-the-record interview question and failing to respond to a written request for information until being notified that disciplinary charges would be filed. After noting - erroneously - that the Department had requested a bar, the Panel found that, under agency guidelines, a bar is appropriate where the individual did not respond in any manner, while up to a two-year suspension is appropriate where mitigation exists or the person did not respond in a timely manner.

Erenstein's counsel sought reconsideration from the Panel, stating that the Department had requested only a one-year suspension, not a bar. Although the Panel issued a corrected decision, the sanction remained a bar.

Erenstein administratively appealed to the National Adjudicatory Council ("NAC") of the NASD, which reduced the sanction to a one-year suspension. Erenstein then appealed to the SEC, which, in a November 14, 2007, corrected opinion, affirmed the NAC's findings of violations and the reduced sanction, noting that it had independently reviewed the record. The SEC also rejected Erenstein's argument that Panel error had infected the proceedings. The SEC determined that even if the relevance of the tax return was not explained during the conversation, the relevance was patent from the context of the questions during the on-the-record interview. The SEC found that the essential facts establishing the violation of Rule 8210 were not disputed, and that NASD staff determines the relevancy of a requested record, which they need not explain.

Erenstein then filed a timely petition for review.


Congress enacted the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a, et seq., to provide for the regulation of securities exchanges and over-the-counter markets to prevent unfair practices. See Peoples Securities Co. v. Securities and Exchange Co., 289 F.2d 268, 270 (5th Cir. 1961) (quotation marks omitted).1 Section 15, in particular, regulates the over-the-counter market and requires dealers engaged in securities transactions to register with the SEC. Id. Section 15(b) provides that the SEC shall deny registration to a dealer if it finds that such denial is in the public interest and that the dealer has willfully violated any provision of certain federal securities laws, or of any rule under them. Id.

Section 15A of the Exchange Act, 15 U.S.C.A. § 78o-3, enacted in 1938 and generally known as the Maloney Act, creates a medium for self-regulation of over-the-counter dealers. See id.; Karsner v. Lothian, 532 F.3d 876, 880 (D.C. Cir. 2008). This section authorized the formation of national securities associations, such as the NASD, for the purpose of supervising conduct of registered members. Peoples Securities, 289 F.2d at 270; see also U.S. S.E.C. v. Vittor, 323 F.3d 930, 934 (11th Cir. 2003) (NASD is a self-regulatory organization).

In discharging this responsibility, the NASD is authorized to promulgate rules and sanction any registered members who violate them. Krull v. S.E.C., 248 F.3d 907, 910 (9th Cir. 2001). The SEC has jurisdiction to review and enforce disciplinary actions of the NASD. Alderman v. S.E.C., 104 F.3d 285, 287 n.3 (9th Cir. 1997). A disciplined member may appeal to the SEC. Jones v. S.E.C., 115 F.3d 1173, 1179 (4th Cir. 1997). If the dealer is unsuccessful in this respect, he may file a petition for review of such order in a federal circuit court of appeals. 15 U.S.C. § 78y(a).

On review, however, we will "affirm the SEC's factual findings if they are supported by substantial evidence." Sheldon v. S.E.C., 45 F.3d 1515, 1517 (11th Cir. 1995); 15 U.S.C. § 78y(a)(4). We conduct a de novo review of the SEC's legal conclusions. Orkin v. S.E.C., 31 F.3d 1056, 1063 (11th Cir. 1994).

Under NASD rules, Association staff have the right to:

(1) require a member . . . to provide information orally, in writing, or electronically . . . and to testify at a location specified by Association staff . . . with respect to any matter involved in the...

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