Rincover v. State, Dept. of Finance, Securities Bureau

Decision Date29 November 1993
Docket NumberNo. 20156,20156
Citation866 P.2d 177,124 Idaho 920
PartiesLawrence RINCOVER, Plaintiff-Appellant, v. STATE of Idaho, DEPARTMENT OF FINANCE, SECURITIES BUREAU, Defendant-Respondent. Boise, Sept. 1993 Term
CourtIdaho Supreme Court

Bauer and French, Boise, for plaintiff-appellant. Randal J. French, argued.

Larry EchoHawk, Atty. Gen., Marilyn T. Scanlan, Deputy Atty. Gen., Boise, for defendant-respondent. Marilyn T. Scanlan, argued.

JOHNSON, Justice.

This case concerns the denial of an application for registration of a securities salesperson. We conclude that the denial of the application violated the applicant's right to due process of law, because: (1) the notice to the applicant of the reasons for the denial prior to a hearing did not adequately notify the applicant of the reasons upon which the denial was based after a hearing, and (2) the provisions of I.C. § 30-1413(7) referring to "dishonest and unethical practices" are unconstitutionally vague as applied to the applicant's conduct.

I.

THE BACKGROUND AND PRIOR PROCEEDINGS.

Lawrence Rincover was a registered securities salesperson for several years before 1990. In early 1990, the Idaho department of finance (the department) conducted an investigation of various matters concerning Rincover's conduct as a securities salesperson, including loans he obtained from clients named Vincent (the Vincent matter) and investment advice he gave to a client named Totorica (the Totorica matter). In July 1990, Rincover discontinued his employment as a securities salesperson in Idaho. In 1991, Rincover applied to become a registered securities salesperson in Idaho again.

The director of the department (the director) issued an order and notice (the initial order) denying Rincover registration as a securities salesperson. Rincover requested a hearing. Following a hearing before a hearing officer appointed by the director, the hearing officer submitted findings of fact, conclusions of law, a memorandum decision, and a proposed order denying Rincover's application. The director accepted the findings of fact, conclusions of law, and memorandum decision, and entered a final order (the final order) denying Rincover's application.

Rincover filed a petition for judicial review of the final order. The district judge affirmed the final order denying Rincover's application. Rincover appealed to this Court.

On appeal, Rincover raises several issues. We conclude that the resolution of two of these issues is dispositive.

II.

THE INITIAL ORDER DID NOT PROVIDE RINCOVER THE NOTICE REQUIRED BY THE SAFEGUARDS OF DUE PROCESS OF LAW.

Rincover asserts that the denial of his application violated his right to due process of law, because the initial order did not notify him that the director would deny the application in the final order based on a violation of I.C. § 30-1403(2) or § 30-1403(3) in the Totorica matter. We agree.

Rincover was entitled to the safeguards of due process of law before he was deprived of the opportunity to practice his profession. H & V Engineering, Inc. v. Idaho State Bd. of Professional Eng'rs and Land Surveyors, 113 Idaho 646, 649, 747 P.2d 55, 58 (1987). Notice, including the right to be fairly notified of the issues to be considered, is a critical aspect of due process in any administrative process. Grindstone Butte Mut. Canal Co. v. Idaho Power Co., 98 Idaho 860, 865, 574 P.2d 902, 907 (1978). In contested administrative cases, the Idaho Administrative Procedure Act requires that the pre-hearing notice include reference to the particular sections of the statutes and issues involved. I.C. §§ 67-5209(b)(3)-(4).

In this case, the initial order made only one reference to I.C. § 30-1403. This reference did not relate to the Totorica matter. The only reference to the Totorica matter was a conclusion of law that Rincover lacked the necessary fitness to engage in the securities business because of his recommendation to Totorica of a high commission investment which, based on Totorica's stated objectives, age, income, and net worth, was unsuitable. The hearing officer rejected this as a basis for denying Rincover's application.

The hearing officer did conclude, however, that Rincover wilfully violated I.C. §§ 30-1403(2)-(3) by representing to Totorica that an investment was guaranteed and by failing to advise Totorica of the risks associated with the investment. In the final order, the director accepted the hearing officer's conclusions.

The initial order failed to provide Rincover with the notice required by the safeguards of due process of law.

III.

THE STATUTORY REFERENCE TO "DISHONEST OR UNETHICAL PRACTICES" IS UNCONSTITUTIONALLY VAGUE AS APPLIED TO THE VINCENT MATTER.

Rincover asserts that the provisions of I.C. § 30-1413(7) are unconstitutionally vague as applied to his conduct in the Vincent matter. We agree.

We first note that as we construe Rincover's contentions, he does not assert that this statute is facially vague. Therefore, we address only the question whether it is vague as applied to his conduct in the Vincent matter.

I.C. § 30-1413(7) provides that the director may deny registration of a securities salesperson if the director finds that the denial is in the public interest and that the applicant "has engaged in dishonest or unethical practices in the securities business." In the initial order, the director said that Rincover's dishonest and unethical practices in connection with the Vincent matter included:

a) borrowing in excess of $30,000 in the form of two loans from a securities client.

b) failing to repay moneys borrowed from a securities client.

c) violating an agreement with the Department of Finance to repay the money borrowed from the securities client.

d) failing to comply with the Prohibited Practices section of his broker-dealer compliance manual which explicitly states: "Registered representatives are specifically prohibited from ... borrowing money or securities from a customer or loan same to customer."

e) violating Article III, Section 1 of the NASD Rules of Fair Practice by borrowing money from a securities client.

Article III, § 1 of the NASD [National Association of Securities Dealers] Rules of Fair Practice (the NASD rules) states: "A member, in the conduct of [the member's] business, shall observe high standards of commercial honor and just and equitable principles of trade."

The hearing officer rejected all of the director's grounds for denying Rincover's application based on the Vincent matter, except the one concerning unethical practices. As to this ground, the hearing officer concluded:

Rincover engaged in unethical practices in the securities business by obtaining loans from the Vincents during a period of time in which a client-representative relationship existed between the Vincents and Rincover.

The hearing officer also concluded that Rincover's obtaining loans from the Vincents violated the broker-dealer compliance manual and the NASD rules, but stated that these violations did not constitute a basis for the denial of Rincover's application. In his memorandum decision, the hearing officer explained his reasoning concerning the Vincent matter:

As for Rincover's dealings with the Vincents, it appears that Rincover manipulated a friendship to obtain a substantial sum in loans. In borrowing money from securities clients, he created a situation involving very clear conflicts of interest. Moreover, he ignored provisions in [the broker-dealer compliance manual] prohibiting such loans. The hearing officer finds this fact to be of significance inasmuch as the record reflects that with respect to employees supervised by Rincover, ... Rincover preached strict adherence to [the broker-dealer compliance manual]. However, Rincover obviously felt that his actions were governed by different standards.

In the final order, the director denied Rincover's application "based upon [Rincover's] dishonest and unethical conduct which constituted wilful violations of the Idaho Securities Act."

Rincover cites H & V Engineering and Tuma v. Board of Nursing, 100 Idaho 74, 593 P.2d 711 (1979) in support of his vagueness assertion. In each of these cases, the Court ruled that the statutory provisions as applied by the agency involved were unconstitutionally vague. Recently, the Court revisited H & V and Tuma in Krueger v. Board of...

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