Robert E. Gibbs v. Securities and Exchange Commission
Docket: 93-9555
Court: Court of Appeals for the Tenth Circuit; May 13, 1994; Federal Appellate Court
Unpublished opinions can now be cited if they have persuasive value on a material issue and are attached to the citing document or provided to the court and parties during oral argument, as per a General Order from November 29, 1993. Robert E. Gibbs petitioned the Tenth Circuit Court of Appeals for review of a Securities and Exchange Commission (SEC) decision that upheld the National Association of Securities Dealers (NASD) sanctions against him for unauthorized transactions in a customer’s account. The NASD found Gibbs had conducted three unauthorized trades for customer Norman Crank, violating NASD Rules. Additional charges included unauthorized transactions in other accounts and unsuitable recommendations.
Gibbs raised three issues for review: (1) whether the SEC’s findings were supported by substantial evidence; (2) whether the SEC’s actions were arbitrary and capricious; and (3) whether he received a fair hearing per NASD and SEC rules, the Administrative Procedure Act, and the Fifth Amendment's due process clause.
In October 1990, a NASD subcommittee held a hearing regarding these charges, during which Crank testified that Gibbs executed trades without authorization, while Gibbs claimed the trades were authorized and attributed confusion to company name changes. The subcommittee’s recommendation was reviewed by the full DBCC, which found Gibbs guilty of unauthorized trading and imposed a censure, a $15,000 fine, mandated payment of proceedings costs, and a 30-day suspension from NASD membership.
Mr. Gibbs appealed sanctions imposed by the NASD's District Business Conduct Committee (DBCC) to the NASD's National Business Conduct Committee (NBCC), which conducted a de novo review. The NBCC upheld the DBCC's credibility assessment favoring Mr. Crank but overturned findings of unauthorized transactions in four other customers' accounts, citing reliance on hearsay. Consequently, the NBCC reduced the sanctions to a censure and a $3,000 fine, lifting the suspension of NASD association and hearing costs. Mr. Gibbs then appealed this decision to the SEC, which affirmed the findings regarding unauthorized transactions in Mr. Crank's account and granted a stay on sanctions pending review.
The standard of proof for violations of securities rules is the preponderance of the evidence, and sanctions require a minimum evidence threshold. The SEC has broad discretion in disciplinary sanctions, and its decisions are not disturbed without clear abuse of discretion. Mr. Gibbs argued that the SEC's affirmation was flawed due to its reliance on the NASD record without assessing witness demeanor, alleging the SEC merely deferred to the NASD's conclusions. However, the SEC is permitted to base its decisions on the NASD record, and the review indicated thorough scrutiny of the NASD's findings.
Mr. Gibbs claimed the SEC ignored evidence favoring him but did not specify this evidence or provide necessary citations to the record, failing to meet appellate procedural requirements. The court does not engage in searching the record for support for an appellant's claims, especially when represented by counsel. Despite Mr. Gibbs' assertions, the record contained substantial evidence supporting the SEC's decision.
Additionally, Mr. Gibbs alleged a violation of his Fifth Amendment due process rights due to Mr. Crank's remote testimony by telephone, denying him a face-to-face confrontation. He contended that this lack of direct observation undermined the hearing panel's credibility assessment of Mr. Crank.
Due process requires that individuals be given the opportunity to be heard at a meaningful time and in a meaningful manner, as affirmed in Mathews v. Eldridge. Agency decision-makers are afforded substantial discretion to determine appropriate procedures for fair hearings. While Fifth Amendment due process rights apply to agency adjudications, the right to face-to-face confrontation of witnesses has not been established in this context. Additionally, NASD's lack of subpoena power means requiring physical presence of witnesses could unduly burden the agency. The SEC found that Mr. Gibbs had sufficient opportunity to cross-examine a witness and received all due process. The Sixth Amendment right to confrontation is limited to criminal proceedings, as established in SEC v. Jerry T. O'Brien, Inc., and telephone testimony is permissible if it allows for immediate cross-examination, as noted in United States v. Sunrhodes. Mr. Gibbs' argument attempting to equate NASD proceedings with criminal processes is therefore invalid. Furthermore, Gibbs' claim regarding the SEC's concern about credibility determinations in a prior case, due to an absent witness, was taken out of context and does not pertain to the legitimacy of telephone testimony in his case.
Gibbs also contended that the DBCC panel was biased because member James Couglin had previously testified against Gibbs' employer, Stuart James, in an NASD arbitration. Gibbs argued for Couglin's disqualification based on this past testimony, claiming Couglin's negative views on Stuart James compromised his ability to provide a fair hearing to Gibbs.
Mr. Gibbs failed to demonstrate a sufficient factual basis for disqualifying an individual under Article X, Section 1 of the NASD Code of Procedure, according to the NBCC. The NBCC determined that Mr. Gibbs did not suffer prejudice from the final decision being made by the full committee rather than a subcommittee, and this finding was supported by an independent de novo review. The SEC upheld this conclusion, stating that Mr. Gibbs' claims of bias were unsubstantiated and did not invalidate NASD actions. It found no evidence of bias or conflict of interest affecting Mr. Couglin's impartiality in the case and noted that the claims of bias were further weakened by the reviews conducted by both the NBCC and the SEC.
Mr. Gibbs could not argue direct bias against him from Mr. Couglin, as he was only associated with Stuart James through employment, which was peripheral to the case. Mr. Gibbs' assertion that Mr. Couglin's past testimony against Stuart James implied bias against him lacked substantial backing, as no conflict of interest was shown to compromise Mr. Couglin's decision-making.
The Supreme Court has established that individuals in judicial roles must be disqualified if they have a vested interest in the outcome. However, a significant demonstration of personal bias is necessary for disqualifying a hearing officer. Mr. Gibbs' claims of bias were deemed weak and conclusory, particularly since there was no evidence presented to support the assertion of bias, such as Mr. Couglin's arbitration report.
Lastly, Mr. Gibbs contended that the admission of a settlement offer from Stuart James to Mr. Crank raised an inference of guilt and compromised his right to a fair hearing. However, the specific settlement letter in question did not mention Mr. Gibbs, and while his counsel objected to its admission, the reasons for the objection were not clearly articulated.
The SEC affirmed that NASD's proceedings are informal and not governed by traditional court rules of evidence, permitting the admission of evidence under the Administrative Procedures Act, which allows "any oral or documentary evidence" barring irrelevant or repetitive content. The DBCC properly admitted a settlement letter, and Mr. Gibbs' claim that this compromised his fair hearing was rejected. Mr. Gibbs was found to have had a sufficient opportunity to defend against NASD misconduct charges. The SEC's sanctions against him were supported by substantial evidence and deemed not an abuse of discretion. The court's order affirmed the SEC's decision, indicating it is not binding precedent except under specific legal doctrines. The NASD must adhere to the Securities Exchange Act and its own regulations. The record included references to past unauthorized trades by an agent, with a settlement request highlighted. Mr. Gibbs, represented by two attorneys, cross-examined a witness without objection to the format. Alleged violations occurred from 1984 to 1989 while he was employed by Stuart James. There was no evidence that the DBCC acted on Gibbs' motion regarding an attorney's disqualification, and no bias was found in the proceedings. The SEC’s reliance on de novo reviews in response to bias claims was noted as potentially improper but irrelevant due to the meritless nature of Gibbs' claims.
