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Hiller v. Securities and Exchange Commission

decided: June 4, 1970.


Moore and Feinberg, Circuit Judges, and Bonsal,*fn* District Judge.

Author: Moore

MOORE, Circuit Judge:

The orders at issue in this petition for review arose out of a private administrative proceeding instituted by the Securities and Exchange Commission (SEC) against the broker-dealer firm of Richard Bruce & Co. (Bruce & Co.) and several individuals connected with the firm. Melvyn Hiller was president of Bruce & Co. from 1957 until 1963, when the firm's registration was revoked as a result of the SEC proceedings and Bruce & Co. ceased doing business.

The Commission found that fraud had been perpetrated on customers of Bruce & Co. in the solicitation of purchase orders for shares in Transition Systems, Inc. (Transition) and that Hiller, as president and one of three principals in Bruce & Co., was responsible for the fraudulent activities. The background of this case and the nature of the fradulent solicitations were described in the opinion comprising our decision in Gross v. Securities and Exchange Commission, 2 Cir., 418 F.2d 103 (1969), in which we sustained the Commission's disciplinary action against the vice-president of Bruce & Co. for his participation in the firm's fraudulent course of conduct with respect to Transition stock. That decision, of necessity, rested on our conclusion that the Commission's findings relating to the existence of fraud were supported by substantial evidence. Hiller has asked us to review once more the record in the Bruce & Co. proceedings. We have done so, and we affirm the Commission's findings.

Aside from the Commission's findings of fact, Hiller argues that the Commission's determination that fraud was committed in the course of Bruce & Co.'s conduct with respect to Transition stock was based on a misconception of the applicable law. In his brief, Hiller consistently states that the basic issue was whether or not Bruce & Co., its officers and its registered representatives had "reasonable grounds to believe" that statements made to customers in connection with sales of Transition shares were "untrue or misleading."*fn1 To confine the issue in that manner is to misconceive the legal responsibility of a broker-dealer. "A securities dealer occupies a special relationship to a buyer of securities in that by his position he implicitly represents he has an adequate basis for the opinions he renders." Hanly v. Securities and Exchange Comm'n, 415 F.2d 589, 596 (2d Cir. 1969) (footnotes omitted). The duty to avoid use of unconfirmed rumors and reports as a basis for recommending stock to purchasers is, if anything, even more clear in the circumstances presented here, because Bruce & Co. had underwritten the Transition issue and Hiller was a member of Transition's board of directors. As the Commission observed, a report disseminated by representatives of Bruce & Co. in connection with recommending Transition stock, "notwithstanding the fact that customers are advised that the report is unconfirmed, gains in authority and credibility." In Hanly, supra, the court summarized the securities dealer's responsibility when he actively solicits a purchase order as follows: "He cannot recommend a security unless there an adequate and reasonable basis for such recommendation." 415 F.2d at 597.

There was substantial evidence in the record that Bruce & Co. salesmen recommended Transition stock on the basis of extravagant reports of government contracts and active interest in Transition's prospective product shown by a variety of glamorous potential purchasers. The apparent source of these reports was the brother of one of Transition's principals. Hiller himself considered the source unreliable, and he was totally unable to confirm any of the reports, although his investigation uncovered no facts which specifically negated any of the rumors. Nevertheless, as the Commission found, Hiller continued to authorize and even encourage active solicitation of orders for Transition stock on the basis of the unconfirmed reports. The Commission found that there was no adequate and reasonable basis for such recommendations, and we agree. It is settled that "the making of representations to prospective purchasers without a reasonable basis, couched in terms of either opinion or fact and designed to induce purchases, is contrary to the basic obligation of fair dealing borne by those who engage in the sale of securities to the public." In the Matter of Mac Robbins & Co., Inc., 41 S.E.C. 116, 119 (1962), aff'd sub nom. Berko v. Securities and Exchange Comm'n, 316 F.2d 137 (2d Cir. 1963); accord, Charles P. Lawrence, Securities Exchange Act Release No. 8213 (Dec. 19, 1967), aff'd sub nom. Lawrence v. Securities and Exchange Comm'n, 398 F.2d 276 (1st Cir. 1968); A.T. Brod & Co., Securities Exchange Act Release No. 8060 (April 26, 1967). Bruce & Co. acted in disregard of that "basic obligation" when it actively solicited purchases of Transition stock without reasonable grounds for believing that reports disseminated in connection with such solicitations had a basis in fact. As president of the firm, Melvyn Hiller was properly held responsible for the fraudulent course of conduct described in the record.

Hiller also contends, as Stanley Gross and Aaron Fink (a Bruce & Co. salesman) have already contended before this court, that the penalty imposed by the Commission was arbitrary and unreasonable in view of the nature of their violations, and that the Commission should not be allowed to impose sanctions in excess of those deemed appropriate by the Hearing Examiner. We reject these arguments for the reasons given in the two prior cases, Gross v. Securities and Exchange Comm'n, 418 F.2d 103, 107 (2d Cir. 1969); Fink v. Securities and Exchange Comm'n, 417 F.2d 1058, 1059 (2d Cir. 1969), and in Hanly, supra, 415 F.2d at 597-598.

Additionally with regard to the sanctions imposed by the Commission, Hiller argues that the imposition of a bar in his case is inconsistent with the lesser penalties ordered by the Commission in other cases involving what Hiller considers to be more serious violations of the securities laws. Comparison of sanctions in other cases is foreclosed, however, by our decision in Dlugash v. Securities and Exchange Commission, 373 F.2d 107 (2d Cir. 1967). There petitioners complained that other parties in the same proceeding suffered disproportionately less severe penalties. We concluded that, even if the penalties were disproportionate, "it is irrelevant because the sanctions imposed upon the petitioners were well within the Commission's discretion." A fortiori, we cannot disturb the sanctions ordered in one case because they were different from those imposed in an entirely different proceeding. "Failing a gross abuse of discretion, the courts should not attempt to substitute their untutored views as to what sanctions will best accord with the regulatory powers of the Commission. * * *" Tager v. Securities and Exchange Comm'n, 344 F.2d 5, 8-9 (2d Cir. 1965).

A finding of a "gross abuse of discretion" might be supported by proof of the suggestion emphasized by counsel at oral argument that the Commission has consistently applied a different standard to the violations of "large and powerful Wall Street establishments," and thus exercised its powers discriminatorily. No evidence to that effect has been called to our attention, and the six cases cited in Hiller's brief lend no support to that conclusion.

Other arguments advanced by the petitioner do not merit discussion,*fn2 and we affirm the orders of the Commission barring Hiller from the securities industry and denying his petition for rehearing.

No ...

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