Nees v. Securities and Exchange Commission

• Citation: 414 F.2d 211
• Decision Date: 09 July 1969
• Docket Number: 22459.,No. 22487,22487
• Parties: Robert W. NEES, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. William REIGEL, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

414 F.2d 211 (1969)

Robert W. NEES, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

William REIGEL, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

Nos. 22487, 22459.

United States Court of Appeals Ninth Circuit.

July 9, 1969.

COPYRIGHT MATERIAL OMITTED

Sander L. Johnson, Los Angeles, Cal. (argued) for Nees.

Bernard I. Segal, Los Angeles, Cal. (argued) for Reigel.

David Ferber (argued), Solicitor, Philip A. Loomis, Jr., Gen. Counsel, Donald M. Feuerstein, Asst. Gen. Counsel, Richard E. Nathan, Atty., S. & E. C., Washington, D. C., for appellee.

Before BARNES and CARTER, Circuit Judges and TAYLOR, District Judge.^*

BARNES, Circuit Judge:

These two cases, combined on appeal, challenge an order of the Securities and Exchange Commission barring both petitioners from association with any securities broker or dealer. Petitioners, who were salesmen for Century Securities Company, were found to have willfully violated, or to have aided and abetted the violation of, the anti-fraud provisions of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a)¹ and §§ 10(b) and 15(c) (1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)² and 78o(c) (1).³

The securities whose sale triggered the action reviewed here were those of the Jayark Films Corp. (hereafter Jayark), a distribution organization. Two issues of Jayark are involved; the first lot, but not the second, was registered. During the period petitioners were active in selling Jayark, that company was negotiating with Samual Goldwyn Productions for the acquisition of films for television. When an agreement failed to materialize, Jayark unsuccessfully attempted to make a deal with Paramount Pictures Corporation.

The hearing examiner found that petitioner Nees was guilty of "a reckless abandonment and disregard of his obligation for fair dealing in accordance with the standards of the profession" in his sales of a speculative and unregistered security, and that petitioner Reigel, in selling the registered security, made statements "hardly in accord with the facts." The Commission affirmed, pointing out, in regard to petitioner Reigel, that, although he did not sell any unregistered Jayark securities to the public, he "was active in obtaining * * * unregistered shares for registrant and must have known that registrant, which was making a market * * * was acquiring the shares with a view to distribution."

Because petitioners' claims are disparate, we consider them separately, predicating our jurisdiction to review on 15 U.S.C. §§ 77i and 78y.

The Appeal of Robert W. Nees

According to the Commission's opinion, petitioner Nees did not appear at the initial proceeding conducted before the hearing examiner on Aug. 9, 25, 26 and 27, 1965. Petitioner had been served with an order for the proceedings and filed an answer to the allegations. However, he did not receive the notice of the hearing which was mailed to the address listed for him with the Commission. Nees had moved out of state, and, although he had left a change of address with the post office, he had failed to notify the Commission of his new address. When he learned that a default judgment had been entered against him, he moved to reopen the record. That application was granted by the hearing examiner on Dec. 3, 1965.

Before the reconvened hearing, petitioner's counsel requested clarification of the record, contending that the evidence previously taken could not be used against petitioner inasmuch as he was entitled to a de novo hearing. No specific objection was made to any portion of the record. Petitioner's motion was denied, the hearing examiner pointing out that the order reopening the proceedings "clearly contemplated that the record made at the original hearings would stand against Nees." R.T. at 2010.

The reopened proceedings were conducted on Feb. 14, 1966, Nees appearing by counsel. Two of petitioner's former customers, after confirming their testimony in the record, were extensively cross-examined by petitioner. Petitioner testified in his own behalf.

Petitioner makes two general assignments of error before this court: 1. insufficient evidence existed to prove that petitioner had made fraudulent representations which caused investors to purchase the stock in question; 2. petitioner's right to due process of law was infringed upon when he was refused a de novo hearing. Finding no merit in either contention, we affirm the ruling of the Commission.

Petitioner first contends that the Commission's findings of fact are "clearly erroneous," claiming no proof was introduced of any misrepresentations made by petitioner. We find this allegation to be patently without merit. For example, witness Book originally testified as to sales statements made by petitioner which were shown to be misleading, if the hearing examiner believed Book, when those statements were compared with the testimony of Nees' employer. When the proceedings were reopened, Book confirmed his previous testimony and, when examined by petitioner's counsel, reiterated his statements. Witness Heuvel also testified as to the exaggerated claims made for the stock by petitioner and, in the reopened hearing, stated that, if called upon to testify again, his evidence would be the same. On cross-examination, the witness' narrative of the transaction with petitioner was not challenged by the petitioner.

Our scrutiny of the record convinces us that sufficient evidence was introduced to justify the hearing examiner's finding, as affirmed by the Commission, that petitioner willfully violated § 17(a) of the Securities Act and Sections 10(b) and 15(c) (1) of the Exchange Act by his "flagrant misrepresentations and patently unconscionable guarantees" regarding the stock. We reject petitioner's assignment of error on this point.

Petitioner's second point, phrased in terms of due process, is that instead of merely allowing petitioner to cross-examine witnesses who had previously testified against him, the hearing examiner should have completely retried the case as to petitioner. Because we find the reopened proceedings to have been responsive to the mandate of fundamental fairness, we decline to reverse the hearing examiner and the Commission on this point.

Petitioner's argument is that the case against him was built, in part, on the testimony of witnesses appearing at the first but not the second hearing, and upon stipulations agreed to at the initial proceeding. Petitioner fails to name the witnesses who were not available at the second phase of the hearing, outline their testimony, or list the stipulations resulting in this alleged breach of his right to due process. Our examination of the opinions of both the hearing examiner and the Commission reveals no reliance on witnesses not participating in the reopened proceedings. The hearing examiner's finding that petitioner made misleading statements was based on his acceptance of the credibility of the witnesses whose testimony is outlined above. Similarly, the Commission's statement of petitioner's wrongdoing is taken from the testimony of these two witnesses. Additionally, the Commission, considering the objections which are now made to this court, pointed out that petitioner's counsel only requested to cross-examine the two customers testifying against petitioner.

Petitioner neither states what stipulations were used against him or explains how he was prejudiced. Petitioner's reticence on this point may stem from the fact that he was excluded from pre-trial stipulations. In any event, we find no stipulations mentioned with regard to petitioner in the opinion of either the hearing examiner or the Commission.

In Hansen v. SEC, 130 U.S.App.D.C. 45, 396 F.2d 694, cert. denied, 393 U.S. 847, 89 S.Ct. 134, 21 L.Ed.2d 118 (1968), the court was presented with an appeal from an S.E.C. order where the testimonial record of a prior proceeding had been admitted as evidence against the appellant in a subsequent proceeding. The court stated, at 694-695:

"Since the witnesses who testified in the prior proceeding were made available to petitioner for cross-examination, we find no error.

"* * * In a matter such as this one, involving charges of fraud and manipulation in the issuance of stock, with a lengthy record, it was within the Commission\'s discretion to receive the transcribed testimony, while still comporting with fairness to petitioner by offering the opportunity to cross-examine any witness whose transcribed testimony was so received."

We are in agreement with this result, and find petitioner's contention to be similarly without merit.

Petitioner is thus left with the argument that his due process rights were abridged because, although he was able to cross-examine the two witnesses testifying against him, he was not present when they were examined directly. We find this to be a specious argument. The crux of the guarantee petitioner relies upon is the right to confrontation. Petitioner was accorded an opportunity to review with each witness the testimony originally elicited and to cross-examine each on what he said. We do not understand, and petitioner does not explain, how he was injured by this process. Petitioner's counsel was able to observe the demeanor of the witnesses and to challenge them on any point of fact or recollection. We find no abuse of petitioner's rights there.

Our conclusion is reinforced by three related facts. First, the standard for admission of evidence in an administrative proceeding is not as stringent as that enforced by courts of law, so long as fundamental fairness is observed. See, e. g., Hansen v. SEC, supra; Giant Food Inc. v. FTC, 116 U.S.App.D.C. 227, 322 F.2d 977 (1963), cert. dismissed, 376 U.S. 967, 84 S.Ct. 1121, 12 L.Ed.2d 82 (1964). Second, the fact petitioner did not receive the notice of the initial proceeding was, at least in part, his own fault since he had been notified of the pendency of the proceedings but...