Paz Securities, Inc. v. S.E.C.

• Decision Date: 20 July 2007
• Docket Number: No. 05-1467.,05-1467.
• Citation: 494 F.3d 1059
• Parties: PAZ SECURITIES, INC. and Joseph Mizrachi, Petitioners v. SECURITIES and EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

494 F.3d 1059

PAZ SECURITIES, INC. and Joseph Mizrachi, Petitioners v. SECURITIES and EXCHANGE COMMISSION, Respondent.

No. 05-1467.

United States Court of Appeals, District of Columbia Circuit.

Argued November 16, 2006.

Decided July 20, 2007.

On Petition for Review of an Order of the Securities and Exchange Commission.

David Clarke, Jr. argued the cause for petitioners. With him on the briefs was Deborah R. Meshulam.

Michael A. Conley, Senior Special Counsel, argued the cause for respondent. With him on the brief were Brian G. Cartwright, General Counsel, Jacob H. Stillman, Solicitor, and Susan K. Straus, Attorney.

Before: GINSBURG, Chief Judge, and ROGERS and KAVANAUGH, Circuit Judges.

Opinion for the Court by Chief Judge GINSBURG.

GINSBURG, Chief Judge:

PAZ Securities, Inc. and its president, Joseph Mizrachi, petition for review of an order of the Securities and Exchange Commission sustaining the decision of the National Association of Securities Dealers to expel PAZ from membership and to bar Mizrachi from ever associating with any NASD member firm as sanctions for Mizrachi's failure to respond to the NASD's repeated requests for information from and about PAZ. We hold the Commission abused its discretion in two ways: (1) it failed to address certain mitigating factors raised by the petitioners, specifically, that their failure to respond had no potential either to injure the investing public or to benefit themselves monetarily nor did the information requested relate to conduct potentially injurious to the public or beneficial to themselves; and (2) it did not identify any remedial — as opposed to punitive — purpose for the sanctions it approved. Accordingly, we grant the petition and remand this matter for the Commission to consider anew whether the sanctions are excessive or oppressive in light of the factors raised in mitigation and to consider for the first time whether the sanctions serve a remedial purpose, as required by § 19(e)(2) of the Securities Exchange Act of 1934, 15 U.S.C. § 78s(e)(2).

I. Background

Joseph Mizrachi was the president of PAZ Securities, Inc., which was a member of the NASD, a "self-regulatory organization" registered with the Commission as a "national securities association" under Section 15A of the Securities Exchange Act of 1934, 15 U.S.C. § 78o-3. The NASD adopts rules to regulate the conduct of its members, § 15A(b)(3)-(7), and may enforce those rules by imposing disciplinary sanctions upon member firms and persons associated with them, § 15A(b)(8)-(9).

In February 2003 the NASD began a routine on-site examination of PAZ and reviewed materials provided by Joseph Mizrachi's brother, Simon Mizrachi, in his capacity as vice president of the firm. Joseph Mizrachi claims he was unavailable at that time to respond to the NASD because he was experiencing mental distress caused by marital difficulties and was traveling abroad. Unable to obtain through Simon Mizrachi everything it sought from PAZ, the NASD asked Joseph Mizrachi and PAZ to provide additional written information. Specifically, the NASD sent three letters to the petitioners asking whether PAZ had implemented a continuing education program; what investment banking or securities business the firm had engaged in since February 2001; what specific duties PAZ had assigned to, and what compensation PAZ had paid to, certain individuals during the period 2000-2002; whether PAZ had revised its written supervisory procedures as requested (apparently by the NASD); why the NASD had not received the firm's 2001 audit on time; and whether PAZ had a written expense sharing agreement with a company operated by Simon Mizrachi that shared office space with PAZ.

The NASD sent the first letter on May 6, 2003 by overnight courier to Joseph Mizrachi at the address listed for PAZ in the NASD's Central Registration Depository (CRD). On May 20, 2003 the NASD sent a second letter by express courier to the same address requesting the same information. On July 23, 2003 it sent a third letter by first class and certified mail to the address listed in the CRD for each petitioner. The return receipts show that one "C.J. Mizrachi" signed for the letter sent to PAZ's registered address, but the return receipt card sent to Joseph Mizrachi's home address bears an illegible signature. Joseph Mizrachi asserted before the Commission that he is not C.J. Mizrachi and C.J. Mizrachi is not further identified in the record.

The petitioners do not contest that the NASD's efforts to notify them comply with NASD Procedural Rule 9134, which provides the NASD may send documents by first class mail, certified mail, or courier to the address listed in the CRD. Under NASD Procedural Rule 8210(d), a member of the NASD or person to whom a request for information is directed is deemed to have received that request when it is sent to the last known business address of the member firm or the last known residential address of a person associated with the firm, as reflected in the CRD. Therefore, the petitioners had constructive, if not actual notice of the three letters requesting information from PAZ.

On August 14, 2003 the NASD Department of Enforcement filed with the NASD Office of Hearing Officers a complaint alleging the petitioners had failed to respond to a request for information, in violation of NASD Conduct Rule 2110 and NASD Procedural Rule 8210. The Department of Enforcement simultaneously sent by first class and certified mail a Notice of Complaint, with the complaint attached, to the addresses listed in the CRD for PAZ and for Joseph Mizrachi. The Department repeated this drill on September 12, 2003. Though the record is unclear whether Joseph Mizrachi received either of the Notices, he admitted that Simon Mizrachi told him about the complaint, apparently no later than October 2003.

In September 2003 Simon Mizrachi hired Douglas Westendorf, Esq. to represent the petitioners before the NASD. Pursuant to a motion Westendorf filed on September 26, the NASD gave the petitioners until October 20 to answer the complaint. The petitioners, however, still failed to answer the complaint, and on October 28 the NASD Hearing Officer found them in default. In November the Department of Enforcement moved for entry of a default decision and served the motion upon the petitioners and Westendorf. On December 31 the NASD Hearing Officer entered a default decision against the petitioners, expelling PAZ from membership in the NASD and barring Joseph Mizrachi from ever associating with any NASD member firm, the "standard" sanctions — absent mitigating circumstances — recommended in the NASD Sanction Guidelines (at 35).

On January 23, 2004 the petitioners belatedly responded to the NASD's request for information and moved to vacate the default decision. In that motion, Joseph Mizrachi explained that from January to August 2003 he had been traveling abroad to visit family and to deal with emotional distress, for which he had received counseling; from August 2003 to January 2004 he claimed he had been traveling extensively for business. Joseph Mizrachi claimed he and PAZ had relied upon Westendorf to represent them and attributed their failure to respond to the negligence of the attorney. The NASD Hearing Officer denied the motion to vacate the default decision because the petitioners had presented no evidence that their failure to respond was attributable to negligence by Westendorf and therefore failed to show good cause to vacate the default decision.

The petitioners appealed to the NASD's National Adjudicatory Council (NAC), arguing the sanctions imposed by the Hearing Officer were unduly severe and should be reduced upon the basis of three mitigating factors: (1) the petitioners' misplaced reliance upon counsel to respond to the complaint; (2) the unintentional nature of their failure to respond; and (3) the nature of the information requested, which did not involve any potential monetary gain to either of them. The NAC affirmed the default decision, the sanctions, and the Hearing Officer's refusal to vacate the default decision. It found the petitioners' failure to respond to the NASD's requests for information were not mitigated by the enumerated factors because Joseph Mizrachi had at least constructive notice of the repeated requests for information and the petitioners' failure to respond was "tantamount to stonewalling and a willful refusal to comply," which had "undermined" the NASD's ability to fulfil its regulatory responsibilities. The NAC did not respond to the petitioners' contention that their failure to respond was mitigated because the information requested did not relate to any potential monetary gain to them, except to say, "We have considered and rejected without discussion all other arguments of the parties."

Before the Commission, the petitioners argued the sanctions should be reduced because their failure to respond to the NASD's information requests (1) was unintentional (Principal Consideration No. 13, NASD Sanction Guidelines at 7); (2) did not injure the investing public (Principal Consideration No. 10, NASD Sanction Guidelines at 6), nor did the information requested relate to injurious conduct (violation-specific Principal Consideration No. 1, NASD Sanction Guidelines at 35); (3) did not stand to benefit them monetarily (Principal Consideration No. 17, NASD Sanction Guidelines at 7), nor did the information requested relate to conduct of benefit to them (violation-specific Principal Consideration No. 1, NASD Sanction Guidelines at 35); and (4) was attributable to their reliance upon counsel to respond to the complaint (Principal Consideration No. 7, NASD Sanction Guidelines at 6). The Commission first determined that Joseph Mizrachi actually knew about the requests for information by September 2003 but neither contacted the NASD nor delegated that task to another, which undermined the petitioners' claim that their failure to...