Wasson v. S.E.C., 76-1665

• Decision Date: 21 June 1977
• Docket Number: No. 76-1665,76-1665
• Parties: Fed. Sec. L. Rep. P 96,092 George WASSON, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 879

558 F.2d 879

Fed. Sec. L. Rep. P 96,092

George WASSON, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 76-1665.

United States Court of Appeals Eighth Circuit.

Submitted April 11, 1977.

Decided June 21, 1977.

Ronald R. Fletcher, Minneapolis, Minn., for petitioner.

David Ferber, Securities & Exchange Commission, Washington, D. C., for respondent.

Before HEANEY, ROSS and STEPHENSON, Circuit Judges.

HEANEY, Circuit Judge.

George Wasson petitions this Court, pursuant to § 25(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78y(a)(1), to review an order of the Securities and Exchange Commission suspending him from associating with any broker or dealer for a period of forty-five days. The order was based upon the Commission's determination that Wasson willfully violated and willfully aided and abetted violations of §§ 5(a) ¹ and (c) ² of the Securities Act of 1933, 15 U.S.C. § 77e(a) and (c), in connection with the sale of S & M Industries, Inc. (S & M) common stock. We affirm that portion of the order finding violations of § 5(a)(1) and § 5(c) and reverse the remainder.

On September 16, 1970, the Commission issued an order for private proceedings against twenty-eight respondents, including Wasson. In particular, he was charged with participating in the sale of a substantial block of unregistered S & M common stock. That transaction was initiated by Kenneth Roth, a Miami resident and an officer of S & M, who employed Richard Mackay, a Texas attorney, to arrange an exchange of some of Roth's S & M shares for automobiles from a Minneapolis dealership. Mackay, in turn, contacted Howard Davidson, a Minneapolis resident, and asked him to locate an interested automobile dealer. Samuel Proman, general manager of a Minneapolis automobile dealership, expressed some interest in the exchange and on April 14, 1969, called Wasson to inquire about the price of S & M stock. At Proman's request, Wasson followed the stock's listings for about a week and reported to Proman periodically.

Soon thereafter, Proman agreed to exchange seven automobiles for 30,000 shares of S & M stock. Title to the automobiles was to be placed in the names of seven outstate residents. Arrangements were made for Wasson to sell the stock because Proman wanted the proceeds immediately. The share certificates were delivered from Miami, on April 22, and the parties decided that Davidson would take the shares in his name as he was the only person known in Minneapolis. The shares were to be transferred directly to the automobile dealership; but when Proman brought the certificates to Wasson for sale, he was told that the dealership had no account. They agreed to sell the shares in Davidson's name.

On April 24, Wasson opened an account in Davidson's name and prepared an agreement assigning the proceeds to the automobile dealership. During this meeting, Wasson informed his superiors at Walston and Company of the contemplated transaction; and based on this information, they commenced an investigation of the securities' transferability. Subsequently, the securities were sold on the open market.

After two days of hearings, the Administrative Law Judge concluded that Wasson violated §§ 5(a) and 5(c) of the Act by participating in the sale of unregistered securities. In particular, Wasson was sanctioned for failing to discover, when a simple inquiry of Davidson would have revealed, that the S & M shares were owned by a control person, and for failing to disclose to his superiors certain critical factors regarding the transaction which would have caused greater caution in their investigation. In detailing the undisclosed facts which suggested the questionable nature of the transaction, the Administrative Law Judge stated:

What none of these persons (Mr. Wasson's superiors) knew, but Mr. Wasson did know, was that Davidson was not the owner of the shares, the Lincoln automobiles were to be received by several persons other than Davidson, who was acting for Mackey (sic) and Roth, among others, and that the assignment of funds by Davidson to Prestige was in part designed to permit the delivery of the cars prior to settlement date.

Wasson's failure to investigate and reveal completely his knowledge of the transaction formed the basis for the Administrative Law Judge's decision that he sold unregistered securities. The Commission sustained the findings of the Administrative Law Judge, but reduced the sanction imposed.

In his appeal of the Commission's order, Wasson raises the following issues: (1) that he was deprived of due process by the Commission's misstatement, in its Order of Proceedings, of the transaction out of which the charge arose, (2) that he was effectively denied the right to cross-examine adverse witnesses, (3) that the Commission's order lacked findings and reasons sufficient to support its determination that Wasson violated the Securities Act of 1933, (4) that the Commission's determination that Wasson sold or offered to sell unregistered securities was not supported by substantial evidence, and (5) that Wasson's conduct was not willful as a matter of law. Our consideration of each issue follows.

I. The Notice Issue.

In its Order of Proceedings, the Commission mistakenly charged Wasson with violating the Securities Act in connection with the sale of 23,000 shares of S & M stock. On the second day of hearings before the Administrative Law Judge, the Order was amended to reflect the actual number of shares (30,000) involved in the Davidson transaction. Wasson was not present at the second day of hearings and no attempt was made to notify him of the amendment. The 23,000 figure refers to a block of shares which were provided to Walston and Company in partial substitution for the Davidson shares once Walston determined that the latter were not freely transferable.

In substance, Wasson argues that he relied on the original Order and was not aware that the Davidson transaction was the subject of the Commission's investigation and hearing. He claims this misunderstanding prevented him from adequately preparing his defense to the transaction for which he was sanctioned. There are several flaws in this argument. First, if, in fact, Wasson believed that the Commission was only investigating the 23,000-share transaction, he must also have assumed that no possible charge could be brought against him since he was not involved in the receipt or sale of the substitute shares. However, the original Order clearly indicated that Wasson and others were charged with willfully violating the Securities Act and ordered them to respond to those charges. He never objected to these charges which leads us to believe that he realized which transaction was involved. More importantly, there is considerable evidence, both from his testimony at the hearings ³ and from his previous correspondence with the Commission, ⁴ that Wasson was not misled and, in fact, fully understood the charges brought against him.

II. The Right to Cross-Examine Adverse Witnesses.

Because Wasson appeared pro se, the Administrative Law Judge informed him of his right to counsel, his right to refuse to incriminate himself, his right to produce evidence, and his right to testify in his own behalf. He was not told that he had the right to cross-examine adverse witnesses. Under Rule 14(a) of the Commission's Rules of Practice ⁵ and § 7 of the Administrative Procedures Act, ⁶ parties are entitled "to conduct such cross-examination as may be required for a full and true disclosure of the facts." Wasson argues that his right to cross-examine was implicitly denied by the Administrative Law Judge's failure to include it among the rights explained.

As a general rule, we believe parties appearing pro se in administrative proceedings should be advised of all pertinent rights to which they are entitled. In this case, Wasson should have been informed of his right to cross-examine adverse witnesses. Nevertheless, we do not think Wasson's suspension should be reversed because of the Administrative Law Judge's failure in this regard. In presenting this argument, Wasson identifies no ways in which the failure prejudiced him and no instances where the opportunity to cross-examine might have helped his case. Under these circumstances, we believe the error was harmless.

III. Adequacy of the Commission's Findings.

In its opinion, the Commission sanctioned Wasson for directly violating §§ 5 (a) and (c) of the Securities Act of 1933 and for aiding and abetting those violations. Wasson claims that the Commission's opinion lacked adequate findings and reasons in support of those determinations.

Section 8 of the Administrative Procedures Act, 5 U.S.C. § 557(c)(3)(A), requires that agency adjudications provide findings, conclusions and the reasons or bases therefor on all material issues of fact and law. The purpose for requiring findings of fact is to furnish parties and the reviewing court with a sufficiently clear basis for understanding the premises used by the tribunal in reaching its conclusions of law. Northeast Broadcasting Inc. v. F. C. C., 130 U.S.App.D.C. 278, 400 F.2d 749 (1968). In many cases, the absence of required findings has been fatal to the validity of agency decisions. Anglo-Canadian Shipping Co. Ltd. v. Federal Maritime Comm'n, 310 F.2d 606 (9th Cir. 1962). See Saginaw Broadcasting Co. v. Federal C. Comm'n, 68 App.D.C. 282, 96 F.2d 554, cert. denied sub nom. Gross v. Saginaw Broadcasting Co., 305 U.S. 613, 59 S.Ct. 72, 83 L.Ed. 391 (1938). However, the standard applied in reviewing agency decisions is not a rigid one. Although findings are required when an agency performs its adjudicatory function, reversing an agency order for failure to abide by this command is inappropriate when the path followed by the agency can be discerned and when its statement is sufficiently precise to permit meaningful judicial review. Colorado Interstate Gas Co. v. Federal Power...