Klopp v. Securities and Exchange Commission

• Decision Date: 05 June 1970
• Docket Number: No. 19411.,19411.
• Citation: 427 F.2d 455
• Parties: Ralph Martin KLOPP, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

427 F.2d 455 (1970)

Ralph Martin KLOPP, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 19411.

United States Court of Appeals, Sixth Circuit.

June 5, 1970.

Morris Berick, Cleveland, Ohio, for petitioner; Burke, Hager & Berick, Morris Berick, Cleveland, Ohio, on brief.

Walter P. North, S. E. C., Washington, D. C., for respondent; Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, Jacob H. Stillman, Asst. Gen. Counsel, Alan Blank, Atty., S. E. C., Washington, D. C., on brief.

Before COMBS, Circuit Judge, O'SULLIVAN, Senior Circuit Judge, and WILSON, District Judge.

O'SULLIVAN, Senior Circuit Judge.

We consider the petition of Ralph Martin Klopp for review of an order of the Securities and Exchange Commission whereby he, a registered Cleveland representative of the brokerage firm of Paine, Webber, Jackson & Curtis, was found guilty of willful violation of Section 17(a) of the Securities Act and Sections 10(b) and 15(c) (1) of the Exchange Act and Rules 10b-5 and 15c1-2,

"by making false and misleading statements of material facts concerning one of his customer\'s accounts."

The punishment imposed upon petitioner Klopp was that he be,

"barred from being associated with any broker or dealer provided that after one year he may become associated with a broker or dealer in a non-supervisory capacity upon a showing that he will be adequately supervised."

The hearing examiner who heard the case had ordered that Klopp be "suspended from association with a broker-dealer for a period of four months from the effective date of this order." The Commission, however, felt that notwithstanding Klopp's "previous good record and his public service in civilian life and with the armed forces," the "public interest" required that a "more substantial sanction be imposed."

We read the Commission's order as permanently forbidding the petitioner from progressing in his chosen profession no matter what his conduct and accomplishment in the remaining years of his life.

We reverse.

The case borders on fantasy. In substance, the alleged wrongdoing of Klopp was that he took advantage of two busy bachelors, each in his thirties, who were very much "on the make" in the stock market. It is claimed that, motivated only by a desire to increase his commission earnings, Klopp persuaded Kerzman and Kaucnik to increase their trading by telling them that he had a doctor client who was a big and successful trader, whose activities might well provide a pattern for Kerzman and Kaucnik to follow.

The promise of success in this plan was enhanced by Klopp allegedly telling the bachelors that the big "doctor" had available to him a "Chinese Chartist." Neither of Klopp's accusers testified as to his understanding of the abilities or powers of a "Chinese Chartist." Perhaps they wished to leave the impression that Klopp led them to believe that the source of the doctor's uncanny predictive ability was a Chinese Chartist, possessed of a clairvoyant "system" for charting the future course of the stock market or some other equally accurate mystic capacity. At the trial, Kerzman and Kaucnik were not asked by the Commission's attorneys, nor did they volunteer, their own understanding of the connotations of the word. They never asked Klopp to tell them about it. Neither our own perusal of the record nor the expertise of the Commission provided us with any understanding of the phrase's meaning.

The accusers testified in effect that while Klopp did not identify his doctor client by name, Klopp promised to let them know when the doctor made a significant sale or purchase of stocks held in his portfolio. Kerzman and Kaucnik claim that they employed this false information, believing it to be true, in their own trading — all to their detriment and loss. They testified that this program began in about July of 1962, and continued until September of 1963. At that time they went to the SEC, not, they said, to accuse Klopp, but to find out whether there really was a big doctor who enjoyed the success that seemed to elude them. The Commission's order, which instituted this proceeding, was entered on January 20, 1966. The hearing examiner's Initial Decision came down November 28, 1967, and the Order of the Commission on review was announced January 22, 1969.

It was assumed throughout the hearing that one of Klopp's clients, a Dr. Rigel, may have been the big operator that Kerzman and Kaucnik were importuned to follow. Petitioner Klopp denied the charges made by his accusers, although he said there were times when he would discuss some customers' accounts with others. He stated that he did not make a practice of such discussions. He said:

"I might have said something like, in a general way, I had a doctor that bought, you know, something or other. I am talking in a general nature now."

When asked whether he had occasion to discuss the holdings of any of his customer's accounts with any other customer in 1962, he answered, "I might have in an offhand manner," and further, "I might have said `Paine-Webber has made a recommendation on General Motors and I have had a lot of my customers buy General Motors.' I could have said this to another customer." To the question by the hearing examiner, "And how about the doctor that you said in an offhand way you might have made some reference to other customers?" the petitioner answered, "I might have used that description. I had a doctor that bought a lot of, you know, Beckman Instruments or something of that sort. It's possible I could have said that, yes, sir. * * * it is not my best recollection that I did, but I wouldn't want to deny it."

Petitioner Klopp testified that his accusers were around his desk at Paine-Webber frequently, even daily at times; that they heard him talking on the telephone to his customers, including a Dr. Rigel, and other of his clients, some of whom were doctors. Throughout the hearing there was an extensive comparison of the buying and selling in Dr. Rigel's account with the activities of Kerzman and Kaucnik.

We are aware of the limitations of our review power and that the weight to be given the evidence and the testing of the credibility of the witnesses is in general, and initially, the prerogative of the involved administrative agency. We think, however, that a good beginning will be a review of the characters and lives of the adversaries — Klopp on the one hand and Kaucnik and Kerzman on the other. We think such review will be helpful in testing whether the Commission has met its burden of proving the charge it makes against the petitioner.

Ralph Martin Klopp was 42 years old at the time of the hearing in 1966. As a young man, he had graduated from Cleveland South High School; he was president of his senior class. He was president of the National Honor Society and a member of the school student council. During his high school days he was employed by the Cleveland Press in various capacities, first as newsboy and later in the circulation department of the paper. He then obtained a scholarship and attended the Case School of Applied Sciences — later Case Institute. He entered Case in 1942 and after completion of his first year he enlisted as a private in the Corps of Engineers of the United States Army. He was assigned to a combat engineers battalion whose primary function was to "construct engineering structures, mostly bridges, in a combat zone under fire," thus to facilitate the movement of troops. He went overseas in September, 1944, having become a so-called "buck" sergeant in his "outfit." He was in England and France, serving on the continent in the combat area until the end of the war. Overseas he was promoted first to Technical Sergeant and then to Master Sergeant, the highest non-commissioned rank. Thereafter, he was given a battlefield commission as a Second Lieutenant. He earned two battle stars for the Rhineland and Central European campaigns. He received a Good Conduct Medal and was awarded the Croix de Guerre. He returned to the United States in the spring of 1946 and was then released from active service into the Inactive Reserve. He reentered Case Institute and graduated in January, 1949, with a Bachelor of Science degree in Mechanical Engineering. In college he was a member of Alpha Chi Sigma, an honorary society. He was on the staff of a school publication called "The Differential" and was its business manager for one year. He was vice-president of his fraternity, Phi Kappa Tau.

Upon graduation in 1949, Klopp went to work for Johns-Mansville Corporation, and receiving promotion, returned to Cleveland, Ohio, from Charleston, West Virginia, to become District Sales Manager in the Cleveland Office. He worked for Johns-Mansville until his resignation in 1958. During those years Klopp was a member of a service club and was active in the affairs of his church. On the hearing of this matter, he gave the following as his reason for resigning from Johns-Mansville:

"In my job as district sales manager, I was intimately connected with the sale of materials to people like contractors, municipal and city governments and in that area — sometimes it was necessary to do things and there were some policies that I just seriously disagreed with.

"Well, you would have to — there were gratuities involved with contractors; there were payoffs; there were, at conventions there were — well there were call girls and things like that."

That the foregoing was the reason for Klopp leaving Johns-Mansville was confirmed by John S. Watterson of Paine-Webber who said all of their references on Klopp were good, and

"In the case of Mr. Klopp, I can recall that Mr. Cowden told me that he talked to the manager at Johns-Mansville and that he told him that — he had said to Mr. Klopp that he was too honest to be in the business that he was in, selling supplies to municipalities where he had to grease the palm of somebody to get an order; that it was repulsive to

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