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SEC Order Affirming Broker Suspension Vacated

An SEC order affirming an exchange finding that a floor broker acted improperly was sustained by a federal appeals panel (2ndCir). The order affirming the exchange-imposed two-year suspension was reversed, however.

The case arose from the "Oakford" scandal at the New York Stock Exchange, in which a securities trading company allegedly conspired with several floor traders at the NYSE to give the brokers a beneficial interest in the company accounts in return for the brokers' use of their investment discretion for the company's benefit. In this case, the SEC upheld an NYSE finding that the broker had an impermissible interest in the company accounts and that he engaged in impermissible discretionary trading. The Commission also upheld the SRO sanctions, including censure, fines and a two-year suspension. According to the SEC, the suspension and fines were justified because of the necessity "to hold floor brokers to the highest standards of honesty and integrity."

On appeal, the 2nd Circuit panel held that the broker's evidentiary and due process claims with regard to the improper conduct findings were procedurally barred. The court concluded that the broker waived these objections by failing to raise them in his initial brief. Such a finding would not result in " manifest injustice," concluded the court, because the SEC independently evaluated the extensive factual record developed by the NYSE and ultimately reached a reasoned decision upholding the SRO decision.

With regard to the suspension, however, the court vacated the sanction and remanded the matter to the SEC for further consideration. " We hold that the Commission failed to support the sanction it chose with findings and conclusions, and provided no meaningful statement of the reasons or basis therefore in support of the discretion it exercised on this record," said the panel. The purpose of expulsion or suspension from trading is to protect investors, stated the court, and not to penalize brokers. The Commission's order could not be sustained, concluded the court, in light of the "SEC's lack of findings and conclusions regarding the remedial and protective efficacy" of the suspension.

‚ McCarthy v. SEC (2ndCir) is reported at ¶93,231 .