Westmark Asset Management Corp. v. Joseph, No. 00CA2125.

• Decision Date: 25 October 2001
• Docket Number: No. 00CA2125.
• Citation: 37 P.3d 516
• Parties: WESTMARK ASSET MANAGEMENT CORPORATION and Michael A. Usher, Plaintiffs-Appellants, v. Fred J. JOSEPH, Securities Commissioner for the State of Colorado; and Colorado Division of Securities, Defendants-Appellees.
• Court: Colorado Court of Appeals

37 P.3d 516

WESTMARK ASSET MANAGEMENT CORPORATION and Michael A. Usher, Plaintiffs-Appellants, v. Fred J. JOSEPH, Securities Commissioner for the State of Colorado; and Colorado Division of Securities, Defendants-Appellees.

No. 00CA2125.

Colorado Court of Appeals, Div. I.

October 25, 2001.

Dwyer, Huddleson & Ray, P.C., Joel M. Funk, Megan L. Hayes, Fort Collins, CO, for Plaintiffs-Appellants.

Ken Salazar, Attorney General, Gerald R. Rome, Assistant Attorney General, Patricia A. Cooper, Assistant Attorney General, Denver, CO, for defendants-appellees.

Opinion by Judge TAUBMAN.

Plaintiffs, Westmark Asset Management Corporation (Westmark) and Michael A. Usher, appeal the final order of defendants, Fred J. Joseph, Securities Commissioner for the State of Colorado, and the Colorado Division of Securities (Division), denying their application for licensure as an investment advisor and investment advisor representative, respectively. We affirm.

On August 27, 1999, Westmark and Usher submitted applications for licensure with the Division. When the applications were filed, Usher was subject to a disciplinary order of the Securities and Exchange Commission (SEC). The Division sought to deny the two applications on the grounds that the SEC order constituted a statutory disqualification from licensure pursuant to the Colorado Securities Act (Act), § 15-51-410(1)(f)(II), C.R.S.2001. The Division commenced administrative proceedings to deny the applications and provided Westmark and Usher notice of the hearing, the hearing date, and the charges.

Before the hearing, both parties filed prehearing statements and moved for summary judgment. In denying the motions, the Administrative Law Judge (ALJ) concluded that the denial of a license application was discretionary, genuine issues of material fact existed, and the Division failed to establish that denying the applications was "in the public interest."

In January 2000, the ALJ conducted a hearing to determine whether the applications should be denied. The ALJ framed the issues accordingly: (1) whether Usher was subject to an SEC order that qualified as grounds for denial pursuant to § 11-51-410(1)(f)(II); and if so, (2) whether denial of the license applications was necessary or appropriate in the public interest and consistent with the purposes and provisions of the Act, in accordance with the requirements of § 11-51-704(2), C.R.S.2001.

In a thorough, well-reasoned initial decision, the ALJ ruled in March 2000 that the license applications of Westmark and Usher should be granted. The ALJ concluded that although the Division had established that Usher was subject to an SEC order under § 11-51-410(1)(f)(II), denial was not necessary or appropriate in the public interest or consistent with the purposes and provisions of the Act.

The Division filed exceptions to the ALJ's initial decision and argued that sufficient evidence existed in the record from which the commissioner could conclude that denial of the license applications was necessary or appropriate in the public interest and consistent with the purposes and provisions of the Act.

In October 2000, the commissioner issued a lengthy decision in which he agreed with the Division, reversed the ALJ's initial decision, and issued a final order denying the license applications of Westmark and Usher.

I. Due Process

Westmark and Usher contend that the Division and the commissioner denied their right to procedural due process by not providing adequate notice, prior to the administrative hearing, of the public interest standard used to evaluate their applications. We disagree.

Section 11-51-410(1), C.R.S.2001, provides that the securities commissioner may deny an application for licensure under the Act if he or she makes two findings: (1) that the applicant meets one of the criteria listed in subsections (a) through (l) of § 11-51-410(1), and (2) that the action meets the requirements of § 11-51-704(2).

Section 11-51-704(2), in turn, provides in pertinent part: "No rule, form, or order may be made, amended, or rescinded unless the securities commissioner finds that the action is necessary or appropriate in the public interest and is consistent with the purposes and provisions of this article."

As set forth in § 11-51-101(2), C.R.S.2001, "The purposes of [the Act] are to protect investors and maintain public confidence in securities markets while avoiding unreasonable burdens on participants in capital markets. This article is remedial in nature and is to be broadly construed to effectuate its purposes."

The Act, § 11-51-101(3), C.R.S.2001, also states:

The provisions of this article and rules made under this article shall be coordinated with the federal acts and statutes to which references are made in this article and rules and regulations promulgated under those federal acts and statutes, to the extent coordination is consistent with both the purposes and the provisions of this article.

Adequate notice reasonably conveys information that will allow a license applicant a reasonable opportunity to prepare for a hearing. Price Haskel, Inc. v. Denver Dep't of Excise & Licenses, 694 P.2d 364 (Colo. App.1984).

In determining whether a license applicant has been accorded procedural due process, there must be sufficient administrative and statutory standards and safeguards to protect against the exercise of unfettered discretion. Squire Rest. & Lounge, Inc. v. City & County of Denver, 890 P.2d 164, 166 (Colo.App.1994). In making such determination, a reviewing court may examine the overall statutory scheme to determine whether it provides adequate notice to persons of ordinary intelligence of the conduct that will be considered relevant to the inquiry at issue. Squire, supra, 890 P.2d at 168-69.

We disagree with the contentions of Westmark and Usher that without notice of the applicable standard defining public interest before the ALJ hearing, they were deprived of the opportunity to present relevant evidence, and that this deprivation was exacerbated by the commissioner's use of a different standard of public interest. We also disagree with the contentions of Westmark and Usher that the commissioner relied on a standard of public interest that had not been expressed by the Division at the hearing, was not contained in the record, had not been previously articulated in any regulation, and was not contained in any prior reported decision of the commissioner or any Colorado court. We do so for several reasons.

First, Westmark and Usher indicated to the Division on at least four occasions that they understood an evaluation of whether their applications were "in the public interest" would be a consideration in denying their applications. On none of these occasions did Westmark and Usher allege the public interest standard was unclear or request a definition from the Division. Indeed, they argued successfully before the ALJ that the denial of their license applications was not in the public interest. They did so by presenting evidence concerning the mitigating factors surrounding Usher's disciplinary history, the limited sanctions imposed against him by the SEC, and Usher's intent to modify his past behavior in a different segment of the securities industry. Westmark and Usher did not raise the issue of lack of standards concerning the public interest until they filed their response to the Division's appeal of the ALJ's initial decision.

Furthermore, Westmark and Usher did not identify what additional evidence, if any, they would have presented had they known of the factors the commissioner considered.

Second, the record reveals that the commissioner applied the same "public interest" standard as did the ALJ. Both defined public interest in the context of the purposes of the Act as set forth in § 11-51-101(2). However, for additional guidance, the commissioner cited the factors in Steadman v. Securities & Exchange Commission, 603 F.2d 1126, 1140 (5th Cir.1979), aff'd on other grounds, 450 U.S. 91, 101 S.Ct. 999, 67 L.Ed.2d 69 (1981). In assessing the propriety of sanctions imposed for violations of federal securities law, the Steadman court articulated six factors: (1) the egregiousness of the respondent's actions; (2) the isolated or recurrent nature of the infractions; (3) the degree of scienter involved; (4) the sincerity of the respondent's assurances against future violations; (5) the respondent's recognition of the wrongful nature of his or her conduct; and (6) the likelihood that his or her occupation will present opportunities for future violations.

Although the ALJ did not cite Steadman in her initial decision, she evaluated whether the license applications were in the public interest by considering these same factors.

Third, Hide-A-Way Massage Parlor, Inc. v. Board of County Commissioners, 198 Colo. 175, 597 P.2d 564 (19...