Levine v. SEC ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
5-10-2005
Levine v. SEC
Precedential or Non-Precedential: Precedential
Docket No. 04-1049
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-1049
DAVID M. LEVINE, TRIPLE J PARTNERS, INC.,
Petitioners
v.
SECURITIES AND EXCHANGE COMMISSION,
Respondent
On Appeal from an Order of
the Securities and Exchange Commission
(No. 0090-1)
Submitted Under Third Circuit LAR 34.1(a)
April 4, 2005
Before: BARRY, AMBRO and COWEN, Circuit Judges
(Filed May 10, 2005 )
Evan M. Levow, Esquire
Pamela Moore, Esquire
Levow & Costello
1415 Route 70 East
Cherry Hill Plaza, Suite 200
Cherry Hill, NJ 08034
Counsel for Petitioners
Giovanni P. Prezioso
General Counsel
Meyer Eisenberg
Deputy General Counsel
Eric Summergrad
Deputy Solicitor
Dominick V. Freda, Esquire
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Counsel for Respondent
OPINION OF THE COURT
AMBRO, Circuit Judge
David Levine and Triple J Partners (collectively
“Levine”) petition for review of the decision of the Securities
2
and Exchange Commission (“SEC”) sustaining (1) the
determination of the New York Stock Exchange (“NYSE”) that
they had violated § 11(a) of the Securities Exchange Act of 1934
(hereinafter “Exchange Act”) and SEC Rule 11a-1(a) (as well as
various other SEC and NYSE rules), and (2) the NYSE’s
imposition of sanctions for those violations.1 We deny the
petition.
I. Factual Background and Procedural History
Although many issues have been raised in this appeal,2
1
For convenience, hereinafter we refer to the petitioners
simply as “Levine” unless the context requires otherwise.
2
In addition to challenging the SEC’s decision that he violated
§ 11(a) and Rule 11a-1(a), Levine also argues that the SEC
abused its discretion in finding that he: (1) received or agreed to
receive a share of the profits and losses in the account at issue
in violation of Exchange Rule 352(c); (2) received trade
executions while not in the trading crowd in violation of
Exchange Rule 117.10; (3) made material misstatements in his
sworn testimony in violation of Exchange Rule 476(a); (4)
allowed his badge number to be used for transactions in which
he was not the executing broker; (5) permitted his clerks to
transmit orders to a specialist that were not written market or
limit price orders (i.e., orders that were not in the proper form)
in violation of Exchange Rule 123A.20; (6) failed to supervise
his employees and failed to “reasonably supervise or control”
3
we discuss only the issue of (and therefore only the facts relating
to) Levine’s alleged violation of § 11(a) of the Exchange Act, 15
U.S.C. § 78k(a)(1), and its implementing regulation, SEC Rule
11a-1(a), 17 C.F.R. § 240.11a-1(a), as we discern nothing to add
to the SEC’s treatment of the other issues and certainly nothing
that would cause us to question the SEC’s rulings.
At the time of the events at issue in this case (1996 to
1998), David Levine was a lessee member of the NYSE, a self-
regulatory organization registered under the Exchange Act.
Levine was also the principal of Triple J Partners (“Triple J”),
a partnership also a member of the NYSE. Levine was at this
time an independent floor broker, commonly referred to as a
“two-dollar broker,” i.e., for every 100 shares traded through
him a commission of $2.00 was charged.
One of Levine’s customers while he was a two-dollar
broker was Tribeca Capital Corporation (“Tribeca”). Tribeca’s
principal, Timothy J. Barry, had been a friend of Levine’s since
the late 1980s. Tribeca also was a public customer of the Oscar
certain other business activities in violation of Exchange Rule
342; and (7) failed to keep accurate books and records in
violation of SEC Rules 17A-3 and 17A-4 and Exchange Rule
440. Levine also argues that, even if the SEC did not abuse its
discretion in sustaining the NYSE’s determination that he was
guilty of the above violations, the SEC did abuse its discretion
in upholding the sanctions imposed by the NYSE.
4
Gruss & Sons (“Oscar Gruss”) clearing firm.
Instead of placing orders for securities with Levine by
first going through Oscar Gruss, as public customers like
Tribeca must, Barry (for Tribeca) placed orders directly with
Levine for shares of Putnam Intermediate Government Trust
(“PGT”). The NYSE floor specialist who handled PGT was
William Shanahan, who Levine testified was “one of [his] best
friends.” Shanahan allowed Levine to circumvent NYSE
procedures for placing orders in PGT. Among other things,
Shanahan at times allocated more stock to Tribeca than the
volume that was indicated on the order list Levine gave
Shanahan for PGT for a particular trading day. The NYSE
investigator who conducted the investigation into Levine’s
conduct testified before the NYSE that Oscar Gruss (and thus
Tribeca) had the bulk of the transactions in PGT for the sample
period that he reviewed. The investigator also testified that he
did not think it was necessary to conduct a profit/loss analysis of
Tribeca’s trades in PGT because, due to the way the trades were
made (which he described as “buying at a low price and selling
at the next available high price”), there was no way that there
could have been a loss.
Levine claimed that he had a negotiated rate arrangement
with Tribeca. According to him, such an arrangement meant
that a customer could pay its broker whatever the customer
wanted. Levine, however, also testified that he initially charged
Tribeca a commission of $2.00 per 100 shares traded for it and
5
that the rate later increased to $3.00 per 100 shares when
Tribeca switched from Oscar Gruss to a different clearing firm.
From February 1996 to August 1996, Levine received
several overpayments from Tribeca. For example, in February
1996, he received from it $120,000 in payment even though, if
Levine had been paid at his $2.00 per 100 shares rate, he would
have been entitled to only about $32,000 in commissions. On
the other hand, after Shanahan was removed from his position
as a NYSE floor specialist, there was a five-month period
(September 1996 to January 1997) during which Levine was
paid nothing by Tribeca even though he was entitled to about
$99,000 in commissions. The net, however, was that, from
January 1996 to February 1998, Tribeca paid Levine about
$330,000 more than he was entitled if paid at his claimed billing
rates.
Levine testified that Tribeca was not the only customer
that paid him whatever it wanted or that missed payments. He
explained that when customers missed payments, it was usually
because their money was tied up. He also speculated that when
Barry (on behalf of Tribeca) sent him large overpayments, it was
to make up for previous months when Tribeca had been unable
to pay him.
During this time period, Levine introduced Robert Miller,
another independent broker, to Barry and the Tribeca account.
Miller testified before the NYSE that Levine told him he could
6
“make a lot of money with the account.” Miller stated that he
made trade executions for Barry (and thus Tribeca) every month
during the relevant period but that he was not paid every month.
According to Miller, he did not question Barry about this. He
stated that he had “lost [Tribeca] money” and guessed that this
was the reason he was not paid.
Miller received $25,000 in payment from Tribeca in July
1996 and testified that he was “amazed” at its size. When he
asked Levine what he had done to deserve such a payment,
Levine “kind of laughed, and then he said[,] [‘]I told you that if
you did the right thing, he [Barry] would pay you off.[’]” Later,
in September or October of that year, Miller had another
conversation with Levine concerning a large payment from
Oscar Gruss. Miller testified that Levine explained to him that
“[Tribeca] was paying [Miller] up to 70 percent of what [Miller]
earned” and that if Miller wanted the payment in cash, the
amount would be reduced to only 50 percent of what Miller
earned for Tribeca.
The NYSE’s expert witness, Joseph Cangemi, testified
that payments to independent brokers are generally consistent
and that brokers do not usually receive payments in excess of
their bills. He also testified that, although customers do
occasionally miss payments, “there is never a period where you
get nothing consistently.” Cangemi reviewed the charts
reflecting Tribeca’s payments to Levine and opined that there
was no correlation between the payments and the work Levine
7
was doing for Tribeca. Cangemi noted that Levine was being
overpaid by Tribeca by up to 400 percent in some months.
In June 2000, the NYSE brought charges against Levine
and Triple J based on their conduct between January 1996 and
February 1998. The NYSE Hearing Panel held thirteen days of
hearings and unanimously found them guilty on all charges. The
Hearing Panel also imposed sanctions on them, including a six-
month suspension from membership in the NYSE and a fine of
$100,000.
Levine and Triple J asked the NYSE Board of Directors
to review the hearing panel’s decision. The Board considered
the record and written submissions by the parties and held oral
argument. It summarily affirmed the “decisions of the Hearing
Panel in all respects.” Levine and Triple J then appealed to the
SEC.
The SEC undertook an independent review of the record.
It sustained (1) the NYSE’s determination that Levine and
Triple J violated the Exchange Act, SEC rules, and NYSE rules,
as well as (2) the sanctions imposed by the NYSE. They now
petition for review of that decision.
II. Jurisdiction and Standard of Review
The SEC had jurisdiction to review the disciplinary
action taken by the NYSE pursuant to §§ 19(d)(2) and 19(e)(1)
8
of the Exchange Act, 15 U.S.C. §§ 78s(d)(2), (e)(1). We have
jurisdiction over the petition for review of the SEC’s decision
under § 25(a)(1) of the Exchange Act, 15 U.S.C. § 78y(a)(1).
“Commission findings of fact are conclusive for a
reviewing court ‘if supported by substantial evidence.’”
Steadman v. SEC, 450 U.S. 91, 96 n.12 (1981) (quoting 15
U.S.C. § 78y); see also MFS Secs. Corp. v. SEC, 380 F.3d 611,
617 (2d Cir. 2004) (stating that the SEC’s findings of fact must
be affirmed if supported by substantial evidence); Todd & Co.,
Inc. v. SEC, 557 F.2d 1008, 1013 (3d Cir. 1977) (reviewing SEC
opinion for substantial evidence). In addition, “[t]he
Administrative Procedure Act, which applies to our review of
Commission orders, provides that a reviewing court shall hold
unlawful and set aside agency action, findings, and conclusions
found to be . . . arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.” MFS Secs. Corp., 380
F.3d at 617 (internal quotation and citations omitted). The
SEC’s interpretation of ambiguous text in the Exchange Act is
“entitled to deference if it is reasonable.” SEC v. Zandford, 535
U.S. 813, 819–20 (2002) (citing United States v. Mead Corp.,
533 U.S. 218, 229–30 & n.12 (2001)).
III. Discussion
Section 11(a) of the Exchange Act provides that “[i]t
shall be unlawful for any member of a national securities
exchange to effect any transaction on such exchange for its own
9
account, the account of an associated person, or an account with
respect to which it or an associated person thereof exercises
investment discretion . . . .” 15 U.S.C. § 78k(a)(1). It is unclear
from the plain language of this statute when an account will be
considered the broker’s own account. Rule 11a-1(a), the
implementing regulation, further provides:
No member of a national securities exchange,
while on the floor of such exchange, shall initiate,
directly or indirectly, any transaction in any
security admitted to trading on such exchange, for
any account in which such member has an
interest, or for any such account with respect to
which such member has discretion as to the time
of execution, the choice of security to be bought
or sold, the total amount of security to be bought
or sold, or whether any such transaction shall be
one of purchase or sale.
17 C.F.R. § 240.11a-1(a) (emphasis added). The Rule does not
define what type of evidence will suffice to show that a broker
has an interest in an account, but the SEC in Exchange Act
Releases has set standards, discussed below, for when violations
of § 11(a) and Rule 11a-1(a) are deemed to exist.
The SEC concluded here that Levine violated § 11(a) and
Rule 11a-1(a) by executing trades for an account in which he
had an interest—the Tribeca account. The SEC’s decision in
10
this case reiterated its position, taken previously in other, similar
cases, that “where an Exchange member shares the economic
risk of trades in another account, that member has an interest in
the account” for purposes of the statute and rule. See In re
David M. Levine, 81 SEC Docket No. 1782, Exchange Act
Release No. 34-48670, 2003 WL 22570694, at *9 (Nov. 7,
2003). The SEC concluded that this standard was met here
because the pattern of overpayments to Levine from Tribeca
during periods of consistently profitable executions in PGT,
followed by periods of no payments or minimal payments even
when Levine continued to perform substantial amounts of work
for Tribeca, “although circumstantial, demonstrate[d] that
[Levine was] sharing profits and losses with Tribeca.” Id. In
reaching this determination, the SEC found that “[t]he payments
Tribeca made to [Levine] have no apparent relationship to
[Levine’s] commission rates.” Id. at *8.3
3
The SEC decision recognized that the NYSE found not
credible Levine’s hearing testimony and noted that “[c]redibility
determinations of an initial fact-finder are entitled to
considerable weight and deference, since they are based on
hearing the witnesses’ testimony and observing their demeanor.”
Levine, 2003 WL 22570694 at *5 n.21 (citing In re Brian A.
Schmidt, 76 SEC Docket No. 2255, Exchange Act Release No.
34-45330, 2002 WL 89028, at *2 n.5 (Jan. 24, 2002)). The SEC
therefore gave deference to the NYSE’s credibility
determination.
11
Levine’s main argument in the petition for review is that
the circumstantial evidence presented to the SEC was
insufficient to prove any of the charges against him, particularly
the violations of § 11(a) and Rule 11a-1(a). He does not
explicitly challenge the SEC’s interpretation of those provisions
as unreasonable, but does argue that the SEC should have
considered the prevailing NYSE interpretation of § 11(a) at the
time of the events at issue, found in a 1998 letter from Richard
Grasso, then Chairman and CEO of the NYSE, to the SEC (the
“Grasso letter”). It allegedly required proof of intent to violate
§ 11(a) and stated that sharing in the profits of an account did
not, by itself, create an interest in that account.
As mentioned above, the interpretation of § 11(a) and
Rule 11a-1(a) the SEC applied here—that a member has an
interest in an account for purposes of those provisions where the
member shares in the economic risk of trades in the
account—has been articulated in prior SEC Exchange Act
Releases dealing with conduct remarkably similar to Levine’s.
In In re New York Stock Exchange, 70 SEC Docket 106,
Exchange Act Release No. 34-41574, 1999 WL 430863 (June
29, 1999), the SEC held that “any compensation arrangement
that results in the exchange member sharing in the trading
performance of an account, however structured, makes the
account that member’s ‘own account,’ or constitutes an
‘interest’ in the account, for purposes of Section 11(a) and Rule
11a-1.” Id. at *3 (holding that the NYSE failed to enforce
compliance with § 11(a) and Rule 11a-1(a) by failing to oversee
12
properly the conduct of independent brokers who were being
compensated based on a percentage of their accounts’ trading
profits or losses). The SEC proceeded to hold individual
brokers liable for violations of § 11(a) and Rule 11a-1(a) based
on its interpretation of when a broker is considered to have an
interest in an account. See In re John R. D’Alessio, 79 SEC
Docket No. 2786, Exchange Act Release No. 47627, 2003 WL
1787291 (Apr. 3, 2003) (holding that broker violated § 11(a)
and Rule 11a-1(a) when he shared in the profits and losses of
trades in one of his customer’s accounts); see also In re Edward
John McCarthy, 81 SEC Docket No. 465, Exchange Act Release
No. 48554, 2003 WL 22233276 (Sept. 26, 2003) (same).
We believe this interpretation is reasonable and entitled
to deference. See Zandford, 535 U.S. at 819–20. Common
sense tells us that, if a broker’s compensation is tied to the
performance of an account, he or she has an interest in that
account. If the account does well, the broker does well, and vice
versa. Thus, as a broker is clearly interested in maximizing his
or her compensation, such a person is hardly neutral, for account
performance affects his or her compensation. As the SEC
explained in D’Alessio, a case where the broker “entered into an
agreement with [a customer] that not only provided that he
receive 70 percent of the trading profits, but also required him
to contribute 70 percent of the trading losses in the [account],”
this arrangement made the broker “a partner” in the account
because the broker and the customer shared “in the economic
risk of the trades.” D’Alessio, 2003 WL 1787291 at *6.
13
Having determined that the SEC’s interpretation of
§ 11(a) and Rule 11a-1(a) is reasonable, we turn to whether that
interpretation was properly applied in this case. We address in
turn each of Levine’s arguments that it was not.
The SEC has previously dispensed with Levine’s
argument that it should have deferred to the NYSE’s
interpretation in the Grasso letter in determining whether he
violated § 11(a). The pertinent section of the Grasso letter states
that arrangements whereby “financial remuneration [to brokers]
may be tied to the profitability of trading . . . have not typically
been deemed to establish an ownership interest in a customer
account for which brokerage service is performed.” D’Alessio,
like Levine, argued from this that, during the relevant time
period, the NYSE condoned profit and loss sharing
arrangements between brokers and their customers. The SEC
rejected this argument, stating: “The letter, rather, reflects the
Exchange’s position that partnership relationships such as the
arrangement that [D’Alessio] had with [his customer] in which
the parties shared in not only the profits but the losses of each
transaction—a traditional indication of ownership—were
prohibited.” D’Alessio, 2003 WL 1787291 at *10. Given that
the letter does not indicate that the NYSE would condone a
compensation arrangement in which both profits and losses in
account were shared by a broker, the SEC’s interpretation of the
letter is a rational one. Therefore, Levine’s reliance on the
14
Grasso letter is unpersuasive.4
Levine also cited the Grasso letter in support of his
argument that intent is required for a violation of § 11(a). The
letter stated that, in the view of a NYSE committee investigating
the trading practices of independent brokers, “it would be
necessary to establish a broker’s intent before it would be
possible to conclude that the broker was a ‘partner’ in an
account for purposes of Section 11(a).” Even if Levine is
correct that his intent must have been established to prove a
violation of § 11(a) and Rule 11a-1(a), his argument that he
lacked the requisite intent (and that the SEC’s decision must
therefore be overturned) is wanting. Both the NYSE and the
SEC refused to credit Levine’s denials regarding his knowledge
4
Notably, the Grasso letter also does not state that a
compensation arrangement tied to profitability could never be
considered to establish a broker’s interest in a customer’s
account. Rather, it asserts that such an arrangement “typically”
would not be deemed to show an ownership interest. The letter
also reiterated a NYSE committee’s conclusion “that if a broker
is compensated for his or her services based on the profitability
of transactions in such a way that he or she becomes, in effect,
a ‘partner’ with his or her customer in the trade, such broker
may become subject to the restrictions contained in Section
11(a) as to proprietary trading by Exchange members.”
15
of why he was being overpaid and then underpaid by Tribeca.5
In addition, Miller’s testimony that Levine introduced him to the
Tribeca account, and told him that he was being paid based on
a percentage of what he earned for the account, supports well
the conclusion that Levine acted knowingly with regard to his
own similar compensation arrangement with Tribeca. Indeed,
Levine points to no evidence that would lead us to disturb the
SEC’s findings on this issue.
Finally, we are left with Levine’s argument that the
circumstantial evidence in this case was insufficient to support
the SEC’s determination that he violated § 11(a) and Rule 11a-
1(a). In making this argument, Levine essentially asks us to
credit his version of events. However, Levine’s speculation that
the overpayments he received from Tribeca might have been
made to compensate him for prior missed payments takes not the
first step in convicing us to conclude that the SEC’s decision
should be overturned. As the SEC stated in rejecting this same
5
In particular, the NYSE stated: “To accept Mr. Levine’s
denials of these facts, the Hearing Panel would have to believe
that Mr. Levine accepted the customer’s gross overpayments
without clear knowledge of the reasons for such overpayments;
that he similarly tolerated a long period of non-payment; [and]
that he never explained to a broker to whom he had introduced
the customer that the customer paid on the basis of profits. We
do not give credence to Mr. Levine’s denials and claims of
ignorance.”
16
argument when it was raised before the Commission:
We believe that the seven fact witnesses and one
expert witness who testified for the Exchange,
together with the exhibits, demonstrated that
[Levine and Triple J] had an interest and were
sharing profits in the Tribeca account. The
arrangements between [Levine and Triple J] and
Shanahan resulted in consistently profitable
executions for Tribeca during the time Shanahan
was the PGT specialist. During the same period
[Levine and Triple J] received correspondingly
large over-payments from Tribeca. As soon as
Shanahan was removed, and for two months
thereafter, [Levine and Triple J] did not receive
any PGT executions. Although they performed
substantial work for Tribeca over the next five
months, they received no or minimal payments.
We believe that this pattern, although
circumstantial, demonstrates that [Levine and
Triple J] were sharing profits and losses with
Tribeca.
Levine, 2003 WL 22570694 at *9. In the face of this substantial
evidence undergirding the SEC’s conclusion that Levine shared
in the profits and losses of the Tribeca account and thus violated
§ 11(a) and Rule 11a-1(a), we decline to disturb the SEC’s
findings.
17
IV. Conclusion
To recap, the SEC’s findings of fact are conclusive if
supported by substantial evidence, its actions cannot be set aside
unless they are arbitrary and capricious, and its interpretations
of the Exchange Act are entitled to deference if they are
reasonable. The SEC’s interpretation of § 11(a)—that it is
violated when a broker trades in an account in which he or she
has an interest and that sharing in the economic risk of trades in
an account is tantamount to having such an interest—is
reasonable and we defer to that interpretation here. When a
broker shares in the profits and losses of an account, it
effectively becomes in part his or her account, thus bringing the
broker within the ambit of § 11(a). In this case, as in D’Alessio,
the pattern of overpayments to Levine when he was making
profitable executions in PGT for Tribeca, and the lack of any
payments at all for other periods of time, strongly show that
Levine shared the economic risk of trading in the Tribeca
account. Cf. D’Alessio, 2003 WL 1787291 at *3. Levine’s
arguments to the contrary underwhelm, as do his arguments
regarding the portions of the SEC decision dealing with
violations of other SEC and NYSE rules and the imposition of
sanctions. Accordingly, we deny the petition for review.
18