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PAZ Securities, Inc. v. Securities and Exchange Commission

May 29, 2009


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

The opinion of the court was delivered by: Ginsburg, Circuit Judge

Argued December 12, 2008

Before: GINSBURG and KAVANAUGH, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

PAZ Securities, Inc. and its president, Joseph Mizrachi, petition for review of an order of the Securities and Exchange Commission sustaining sanctions imposed upon them by the National Association of Securities Dealers (NASD).*fn1 Because the Commission did not abuse its discretion, we deny the petition.

I. Background

The facts underlying the petition are detailed in our earlier opinion and we review them only briefly here. For a more complete account, see PAZ Sec., Inc. v. SEC, 494 F.3d 1059, 1061-63 (2007) (PAZ I).

The NASD repeatedly requested information from PAZ and, having received no response, filed a complaint alleging Mizrachi and PAZ violated NASD Conduct Rule 2110 and NASD Procedural Rule 8210. Mizrachi filed no answer and the NASD issued a default judgment expelling PAZ and barring Mizrachi from ever associating with a NASD member. The petitioners appealed to the Commission, which sustained the sanctions over the objection they were "excessive or oppressive" and therefore subject to remission under 15 U.S.C. § 78s(e)(2).

We reversed and remanded. 494 F.3d at 1061. We held the Commission had abused its discretion in two ways. First, it had mischaracterized, and therefore failed properly to address, the petitioners' arguments regarding mitigation. Id. at 1065. Second, it had not identified "any remedial - as opposed to punitive - purpose for the sanctions." Id. at 1061. On remand, the Commission again sustained the sanctions and the petitioners again seek review.

II. Analysis

We review for abuse of discretion a decision of the Commission regarding sanctions imposed by the NASD. Stoiber v. SEC, 161 F.3d 745, 753 (D.C. Cir. 1998). The agency's choice of remedy is "peculiarly a matter for administrative competence," and we will reverse it "only if the remedy chosen is unwarranted in law or is without justification in fact." Am. Power & Light Co. v. SEC, 329 U.S. 90, 112-13 (1946).

The petitioners first contend the Commission violated the letter and the spirit of this court's mandate by giving insufficient weight to the factors they raised in mitigation. In PAZ I, we directed the Commission to consider on remand whether the sanctions were excessive in light of three arguments: that the petitioners' failure to respond "(1) was of no potential monetary benefit to them and (2) did not result in any injury to the investing public, and that (3) the information requested did not relate to injurious conduct or conduct of potential monetary benefit to them." 494 F.3d at 1065. The petitioners argue the Commission gave "short shrift" to those factors, but we conclude the Commission reasonably decided no mitigation was warranted.

The Commission pointed out that a violation of Procedural Rule 8210 would rarely, in itself, result in direct injury to a customer or direct monetary gain for a violator. PAZ Sec., Inc., Exchange Act Release No. 57,656, 2008 SEC LEXIS 820 at *17 (PAZ II). It determined that failure to respond is nevertheless a significant harm to the self-regulatory system because it "undermines NASD's ability to detect misconduct"; therefore the lack of direct harm to customers or benefit to violators does not mitigate a Rule 8210 violation. Id. at *17-18. The Commission further held that, contrary to the petitioners' argument, the requested information did relate to potentially injurious conduct because the responses could have revealed improper expense sharing and unreported securities transactions. Id. at *18-19.

We hold the Commission did not abuse its discretion in determining the lack of direct harm or benefit does not mitigate a complete failure to respond in violation of Procedural Rule 8210. See Stoiber, 161 F.3d at 753("We will not lightly disturb the findings of an agency in its area of expertise. ... [T]he Commission is better equipped to judge [the significance of certain violations] than this Court.") (quoting Seaton v. SEC, 670 F.2d 309, 311 (D.C. Cir. 1982)). The Commission also reasonably determined the requested information related to potentially injurious conduct. In sum, the Commission complied with our mandate, which did not prejudge whether the factors raised by the petitioners were necessarily mitigating.

The petitioners next argue the Commission abused its discretion by determining the sanctions imposed by the NASD were remedial. As we noted in PAZ I, a sanction may be used to protect investors but not to punish a regulated person or firm. 494 F.3d at 1065. We directed the Commission to "explain why imposing the most severe, and therefore apparently punitive sanction is, in fact, remedial." Id. at 1066. The petitioners contend the Commission's explanation is inadequate because the agency failed to consider the factors outlined in Steadman v. SEC, 603 F.2d 1126, 1140 ...

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