Pagel, Inc. v. S.E.C.
| Decision Date | 22 October 1986 |
| Docket Number | Nos. 85-5295,85-5300,s. 85-5295 |
| Citation | 803 F.2d 942 |
| Parties | Fed. Sec. L. Rep. P 92,963 PAGEL, INC.; Jack W. Pagel; and Duane A. Markus, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Richard B. Solum and Jan Stuurmans, Minneapolis, Minn., for petitioners.
Catherine T. Dixon, Washington, D.C., for respondent.
Before ARNOLD, FAGG and WOLLMAN, Circuit Judges.
Pagel, Inc., a Minneapolis registered broker-dealer in securities, its president and sole stockholder, Jack W. Pagel, and its executive vice president, Duane A. Markus, petition for review of a final order of the Securities and Exchange Commission (Commission) revoking the broker-dealer registration of Pagel, Inc., and barring Pagel and Markus from association with any broker or dealer. We affirm the Commission's order.
Pagel, Inc., served as the principal underwriter for the first public offering of the securities of FilmTec Corporation in March 1979. 1 Pursuant to the underwriting agreement, the firm was to underwrite the sale of 320,000 shares of FilmTec stock at $3.25 per share, with an option to purchase an additional 32,000 shares should customer allocations exceed the original number of shares. Retaining the balance for itself, the firm allotted only 34,800 shares of the issue to other dealers. On March 26, 1979, Pagel, Inc., began offering FilmTec at 3 1/4. The offering was ostensibly completed on March 29, 1979, when the firm exercised its over-allotment option, increasing its share of the offering to 317,200 shares, or over 90% of the total issue.
On March 30, 1979, aftermarket trading began, with the firm's opening prices for FilmTec stock set at 4 3/8 bid and 4 5/8 offered, increases of 35% and 42%, respectively, over the offering price of 3 1/4. At this time, Pagel, Inc., began to maintain a "long" position in Filmtec, or an excess of purchases from its customers over sales to them, which would continue until March 1980. The firm's Filmtec trading activities were all at the direction of Pagel and Markus. Within the first fifteen minutes of trading, the firm's customers sold 49,300 shares of FilmTec to the firm and purchased 39,205 shares, including 7,650 shares purchased by Markus through nominees, and the firm raised the price of FilmTec to 5 3/4 bid and 7 offered. By the day's closing, Pagel, Inc., had purchased a total of 70,455 shares from its customers and sold a total of 56,830 shares, charging as much as 7 3/4.
During the next seven trading days, April 2-10, 1979, the firm's customers sold 88,987 shares and purchased 66,680 shares, a 33% excess of sales over purchases. By April 10, 1979, the firm's long position had increased to 48,607 shares, but seven other dealers were short FilmTec stock in the amount of 4,750 shares. Pagel, Inc., and its customers cumulatively owned 329,875 shares, or 93.7% of the 352,000-share public offering. Despite the lack of customer demand, evidenced by the excess of customers' sales over purchases, Pagel, Inc., was offering FilmTec at a high of 10 1/2, an increase of more than 300% above the offering price of 3 1/4.
Between April 11, 1979, and the end of February 1980, Pagel, Inc., continued to dominate the FilmTec market, and the stock remained at a fairly constant price level. Throughout March 1980, however, the firm steadily lowered its prices for FilmTec, this despite the fact that customers' purchases exceeded customers' sales for the month. The firm's prices for FilmTec declined from 14 bid and 15 1/2 offered on March 3, to 7 bid and 8 1/2 offered on March 31, a 50% drop in price in one month. On March 21, 1980, with a bonus the firm gave to him, Pagel purchased 32,000 shares of FilmTec from the firm, apparently its entire inventory, at a price of 7 1/2. The sale enabled Pagel, Inc., to realize a $180,000 tax loss at the close of its fiscal year on March 31, offsetting the firm's trading profits. Furthermore, Pagel acquired stock with a potential for realizing long-term capital gains.
On June 9, 1982, the Commission ordered a public proceeding to determine whether petitioners 2 had violated provisions of the securities laws and to determine what remedial action, if any, would be appropriate. An evidentiary hearing was held before an Administrative Law Judge (ALJ) on December 13-21, 1982. On August 29, 1983, the ALJ found that Pagel, Inc., Pagel, and Markus had violated the fraud, manipulation, and record keeping provisions of the securities laws by: (1) manipulating the price of FilmTec stock in the initial eight days of public trading; (2) manipulating the price of FilmTec stock in March 1980 to secure significant tax and investment benefits; (3) purchasing FilmTec stock within the period of distribution; and (4) failing to maintain records identifying the beneficial ownership of nominee accounts through which Pagel and Markus traded. The ALJ recommended the revocation of the firm's broker-dealer registration and the barring of Pagel and Markus from association with any broker or dealer.
Petitioners appealed the ALJ's decision to the Commission, which held that petitioners had violated the prohibitions of fraud and manipulation in securities dealings contained in section 17(a) of the Securities Act of 1933, 3 and section 10(b) of the Securities Exchange Act of 1934, 4 and Rule 10b-5 thereunder. 5 The Commission also found that petitioners had violated the provisions of Rule 10b-6, 17 C.F.R. Sec. 240.10b-6 (1986), prohibiting the purchase of securities by an underwriter participating in a distribution of the securities. Additionally, the Commission found that Pagel, Inc., had violated, and Pagel and Markus aided and abetted its violations of, the record keeping provisions of section 17(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78q(a) (1982), and Rule 17a-3(a)(9) thereunder, 17 C.F.R. Sec. 240.17a-3(a)(9) (1986). The Commission approved the sanctions imposed by the ALJ. In re Pagel, Inc., Exchange Act Release No. 22,280, [1985-1986 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 83,909 (Aug. 1, 1985).
Petitioners challenge the sufficiency of the evidence supporting the Commission's findings with respect to the violations of section 17(a) of the Securities Act, section 10(b) of the Securities Exchange Act, and Rule 10b-5. They also argue that the Commission erred in drawing an adverse inference from the individual petitioners' invocation of their fifth amendment privilege against self-incrimination and in approving the ALJ's exclusion of expert testimony. Petitioners argue further that the Commission imposed excessive sanctions. 6
First, petitioners argue that the evidence does not support the Commission's finding of manipulation of the market in FilmTec stock. They contend that "regardless of how much prominence [Pagel, Inc.] had in the making of the FilmTec market during the periods in question and the effect its trades had on price, there was no unlawful purpose, intent to induce others to act, artificial prices, or prices based on factors other than legitimate ones." Petitioners' (Pagel, Inc.'s and Pagel's) Brief at 12 (footnote omitted).
Our review of the Commission's findings, pursuant to the Securities Act, 15 U.S.C. Sec. 77i (1982), and the Securities Exchange Act, 15 U.S.C. Sec. 78y (1982), is limited to whether the findings are supported by substantial evidence on the record as a whole. Brickner v. Federal Deposit Insurance Corp., 747 F.2d 1198, 1201 n. 4 (8th Cir.1984); Edward J. Mawod & Co. v. Securities & Exchange Commission, 591 F.2d 588, 593 (10th Cir.1979); Capital Funds, Inc. v. Securities & Exchange Commission, 348 F.2d 582, 585 (8th Cir.1965); Barnett v. United States, 319 F.2d 340, 343 (8th Cir.1963). Our task is not to weigh the evidence, "but only to determine that there is in the record ' "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." ' " Steadman v. Securities & Exchange Commission, 450 U.S. 91, 99, 101 S.Ct. 999, 1006, 67 L.Ed.2d 69 (1981) (quoting Consolo v. Federal Maritime Commission, 383 U.S. 607, 620, 86 S.Ct. 1018, 1026, 16 L.Ed.2d 131 (1966) (quoting Consolidated Edison Co. v. National Labor Relations Board, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938))).
In connection with the securities markets, manipulation is a "term of art * * * connot[ing] intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976); see Feldbaum v. Avon Products, Inc., 741 F.2d 234, 237 (8th Cir.1984). As this case illustrates, there is room for considerable disagreement whether manipulation may be present on a given set of facts. The Commission, however, did not find petitioners liable solely because of their dominant position in the FilmTec market. Rather, it determined that petitioners had manipulated the market by abusing their position both during the first eight days of aftermarket trading and in March 1980. The Commission stated When individuals occupying a dominant market position engage in a scheme to distort the price of a security for their own benefit, they violate the securities laws by perpetrating a fraud on all public investors. In addition, their failure to disclose that market prices are being manipulated not only constitutes an element of a scheme to defraud, but is also a material omission of fact in the offer and sale of securities.
In re Pagel, Inc., supra, p 83,909, at 87,752. The Commission primarily relied on evidence of the price movements of FilmTec stock and the trading activities of petitioners during the periods at issue to conclude that manipulation had occurred. We agree that "rapidly rising prices in the absence of any demand are well-known symptoms of * * * unlawful market operations."...
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