Levine v. SEC ( 2005 )


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  •                                                                                                                            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    Precedential or Non-Precedential: Precedential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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    http://digitalcommons.law.villanova.edu/thirdcircuit_2005/1103
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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