Securities and Exchange Commission v. Kevin Michael McCarthy Thomas William Blodgett
Docket: 02-55201
Court: Court of Appeals for the Ninth Circuit; March 3, 2003; Federal Appellate Court
Kevin McCarthy and Thomas Blodgett appeal a district court order that granted the Securities and Exchange Commission (SEC) enforcement of a Commission order affirming disciplinary actions taken by the National Association of Securities Dealers (NASD). McCarthy was fined $48,892.37 and Blodgett $50,453.33. The appellants raise several arguments: (1) the SEC lacks standing to file the enforcement application; (2) the district court improperly used summary proceedings not permitted under the Federal Rules of Civil Procedure; (3) they were not given an opportunity to respond to the SEC's application; and (4) they were denied the chance to present affirmative defenses in district court.
The excerpt also provides background on the Securities Exchange Act of 1934, which was enacted to uphold high ethical standards in the securities industry, allowing for the creation of national securities associations like the NASD, which is the only organization currently approved by the SEC. The Act mandates these associations to enforce rules and impose sanctions on members who violate regulations, with NASD disciplinary decisions subject to SEC review. This arrangement reflects a cooperative regulation model, designed to protect investors and ensure market integrity. The Commission’s decisions can be appealed to the United States Courts of Appeals.
McCarthy and Blodgett, officers of Atlanta-One, Inc., engaged in the trading of foreign currency options, were found to have charged excessive and unfair commissions to clients from April to November 1990, affecting 353 transactions. Commissions ranged from $50 to $89 per contract, often exceeding forty percent of clients' initial investments, resulting in only 24% of options being sold at a profit. The NASD's District Business Conduct Committee sanctioned them on September 27, 1991, for violating NASD Rules of Fair Practice, specifically Article III, Section 1, which mandates high standards of commercial honor. McCarthy was fined $75,000 and Blodgett $50,000, both faced additional costs and a 30-day suspension with a requirement to requalify. Following an appeal, the NASD's Business Conduct Committee upheld the sanctions on March 10, 1992, adding further costs. The Commission affirmed the NASD's findings on March 8, 1995, stating the charges were excessively high. After a denial of their petition for review in 1996, the Commission sought district court enforcement of its order and sanctions on November 7, 2001. The district court granted the Commission’s Application without a hearing. On June 21, 2002, the Commission requested a remand for Appellants to respond and present defenses, which was denied without prejudice by the Court on August 30, 2002. The interpretation of statutes by the district court and any procedural due process violations are subject to de novo review.
The Commission has the authority to enforce its orders through applications to district courts, as outlined in § 21(e)(1) of the Exchange Act. This section allows district courts to issue writs of mandamus, injunctions, and orders compelling compliance with the Exchange Act and related rules. The Commission's March 8, 1995 Order affirmed the NASD's sanctions, and the SEC subsequently sought enforcement of this Order through the district court under § 21(e). The Fifth Circuit supports the interpretation that the Exchange Act grants district courts jurisdiction to enforce SEC-ordered sanctions.
Appellants argue that the Commission lacks standing to enforce the NASD's decision, claiming the Application pertains to NASD enforcement rather than a Commission order. However, the text of § 21(e) explicitly allows the Commission to seek enforcement of its orders issued under the Exchange Act. The Commission's role in affirming NASD decisions does not affect its standing to enforce its orders in district court, regardless of whether it acts in an appellate capacity.
The conclusion is that the Commission does possess standing to enforce its Order in district court under § 21(e). Additionally, § 21(e) permits the use of summary proceedings in district court for enforcing Commission orders. Although the Federal Rules of Civil Procedure generally govern district court procedures, the Supreme Court has recognized exceptions allowing for summary proceedings when expressly authorized by statute, which can bypass standard trial procedures. Summary proceedings allow for more expedited processes, often without formal pleadings or traditional notices.
The plain meaning of a statute is authoritative unless it results in absurd outcomes. In cases of ambiguity, legislative history is examined for interpretation. Under § 21(e) of the Exchange Act, district courts are empowered to issue writs, injunctions, and orders upon the Commission's application. Appellants argue that § 21(e) does not permit summary proceedings, equating "application" with "action" and asserting a need for formal civil actions under Federal Rules for enforcement. This interpretation is rejected, as differing terminology in statutes indicates distinct meanings intended by Congress. The distinction between "application" and "action" is crucial; "action" refers to formal judicial proceedings, while "application" does not carry the same connotation. Consequently, the use of "application" in § 21(e) suggests that summary proceedings are appropriate for enforcing Commission orders, rather than requiring full civil actions.
An "action" is defined as the formal procedure through which parties seek legal or equitable relief in court by filing a complaint, thereby activating relevant legal and procedural rules. The Federal Rules of Civil Procedure govern all such actions in U.S. district courts unless stated otherwise by law. In contrast, an "application" is simply a motion, which is a request for a specific court ruling and does not initiate formal legal proceedings like an action does. Congress uses the term "action" in statutes, such as the Securities Act and the Exchange Act, when mandating the Commission to file formal civil actions in district court, indicating a clear distinction from applications.
The Second Circuit's interpretation in SEC v. Sprecher supports this distinction, allowing for summary proceedings to enforce Commission subpoenas based on statutory authorization for applications. Summary proceedings are deemed suitable when the merits of a case have already been thoroughly litigated, as was the case with the NASD's claims against the Appellants, who had multiple opportunities to contest the merits before various committees and courts.
The purpose of Section 21(e) is to enforce compliance from NASD members with Commission orders, not to create additional layers of litigation. Therefore, it is seen as unnecessary and inefficient to allow further substantive litigation in light of the extensive prior adjudication, and the section empowers district courts to issue enforcement orders without reopening the merits of the case.
Section 21(e) of the Securities Act is designed to facilitate a summary procedure for enforcing Commission orders, as it reflects Congress's intent to expedite enforcement once the opportunity for adjudication has passed. The text emphasizes that appellants should not be able to delay enforcement of valid orders. Summary proceedings are permissible under various legal contexts when explicitly authorized by statute, as established by precedents such as Scanlon and Sprecher. The Second Circuit has affirmed the Commission's ability to enforce subpoenas and IRS levies through summary proceedings, indicating a broader acceptance of such processes.
The Securities Amendments of 1975 aimed to provide the Commission with "broad and flexible authority" to enhance market efficiency and investor confidence. Specifically, the Senate Committee Report outlines that the amendments grant district courts jurisdiction to compel compliance with the Exchange Act and enforce Commission orders upon the Commission's application. This provision is intended to bolster the Commission's oversight and enforcement capabilities, promoting a more vigorous securities market.
The document warns that requiring plenary proceedings could hinder the Commission's willingness to act, thereby undermining investor confidence and creating inefficiencies in securities law enforcement. Overall, summary procedures are positioned as essential tools for achieving the legislative goals of a more responsive and effective securities regulatory framework.
§ 21(e) of the Exchange Act permits the use of summary proceedings to enforce Commission orders in district court. Due process mandates that parties have a chance to respond meaningfully before any judgment is rendered. This includes providing notice to interested parties and the opportunity to be heard, as articulated in various case law. In the current situation, the district court ruled on the Commission's Application without scheduling a hearing or allowing the Appellants to respond, violating due process principles. The court's action occurred just two weeks after the Application was filed, without any procedure to ensure the Appellants could present their case, such as a briefing schedule or a hearing.
Additionally, the Commission's filing did not adhere to Local Rules, specifically failing to designate a hearing date and provide the required notice to the non-moving party. The Commission acknowledged in a motion that the case should be remanded for the district court to consider the Appellants' arguments. Consequently, the order from the district court is vacated, and the case is remanded to allow the Appellants the opportunity to respond and present their affirmative defenses regarding the Commission's enforcement action.
