Petition for Review of an Order of the Securities and Exchange Commission.
Before ESCHBACH, POSNER, and COFFEY, Circuit Judges.
William F. Miller and Mister Discount Stockbrokers, Inc. petition this court, pursuant to section 25(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78y(a)(1), to review an order of the Securities and Exchange Commission. We affirm the order of the Commission.
The Securities and Exchange Commission ("Commission") is a federal agency charged with the regulation of the securities industry. Due to the size of the industry, the Commission relies upon the industry members to aid in the enforcement of federal securities laws. Although regulatory and final authority ultimately rests with the Commission, associations of securities broker dealers registered with the Commission pursuant to section 15A(a) of the Securities Exchange Act, 15 U.S.C. § 78o-3(a), are empowered to enforce association members' compliance with federal securities laws, Commission regulations, and the association's own rules and regulations by imposing an appropriate sanction. 15 U.S.C. § 78o-3(b)(7).
The National Association of Securities Dealers ("NASD") is a registered association of securities broker-dealers, which, when enforcing members' compliance with applicable rules and regulations, must "provide a fair procedure for the disciplining of members and persons associated with members . . . ." 15 U.S.C. § 78o-3(b)(8). The disciplinary process established by the NASD provides that the NASD Regional District Business Conduct Committee ("District Committee") has original jurisdiction of all complaints regarding member violations, and may conduct hearings, make findings, and impose penalties. Any final action taken by the District Committee is, upon timely application of an aggrieved party, subject to review by the NASD Board of Governors, which considers the record before the District Committee and "such other evidence as it may deem relevant" and may in turn either affirm, reverse, or modify the action taken by the District Committee. Any final disciplinary sanction imposed by the Board of Governors is subject to review by the Commission, 15 U.S.C. § 78s(d), and final orders of the Commission are reviewable only in the United States Court of Appeals. 15 U.S.C. § 78y(a).
In 1977, Mister Discount Stockbrokers, Inc. ("Mister Discount") began conducting business as a discount broker-dealer with William F. Miller as its chief executive officer and sole operating principal and joined the NASD. In March, 1980, the NASD received a letter from Mister Discount's certified public accountant informing the NASD that a deficiency of some $9,000.00 existed in Mister Discount's special reserve account, resulting in a violation of Commission rule 15c3-3, 17 C.F.R. § 240.15c3-3. On April 9, 1980, the NASD and the Commission commenced a joint examination of Mister Discount's financial records and discovered serious irregularities and violations of both the rules of the NASD and the Commission.
The District Committee of the NASD filed a complaint against Mister Discount and William F. Miller on July 24, 1980 alleging four separate violations of the NASD Rules of Fair Practice. The first count of the complaint alleged that Mister Discount and Miller violated Sections 1 and 18 of Article III of the NASD Rules of Fair Practice by engaging in a general securities business, impliedly representing that Mr. Discount could deal fairly with the public, while they neither knew nor could have known the true net capital condition of Mr. Discount due to its deteriorating operational and financial condition. The second count alleged that the petitioners violated Sections 1, 18, and 27 of Article III by failing to take necessary and required steps to remedy the deteriorating financial condition of Mr. Discount, and failed to adequately supervise the operation of Mr. Discount to assure compliance with the applicable regulations. The third count alleged that petitioners violated Sections 1, 18, and 21 of Article III by failing to comply with various provisions of Commission rules regarding keeping accurate financial records and an adequate reserve account. The fourth court alleged that the petitioners violated Section 1 of Article III by violating a restrictive agreement between the petitioners and the Commission and the NASD that had been entered on April 9, 1980. A subcommittee of the District Committee conducted an evidentiary hearing and found that Mister Discount and Miller had violated the Rules of Fair Practice as charged in the first three counts, but dismissed the fourth count. The District Committee censured Mister Discount and Miller, expelled Mister Discount from the NASD, and further barred Miller from associating as a registered principal with any NASD member or from functioning in a supervisory position with an NASD member.
Miller and Mister Discount appealed the decision of the District Committee to the NASD Board of Governors, which in turn modified the District Committee's findings with a dismissal of that portion of the third count based on a finding of an intent to defraud. The Board of Governors affirmed all other findings along with the sanctions imposed by the District Committee. The petitioners next appealed the decision of the Board of Governors to the Commission. The Commission set aside the findings of violations of certain Commission reporting rules that were included in the third count, but otherwise affirmed the findings and sanctions of the Board of Governors. Miller and Mister Discount have now petitioned this court, pursuant to 15 U.S.C. § 78y(a)(1), to review the order of the Commission, claiming that the disciplinary procedures of the NASD violated various of the petitioners' due process rights, and that the sanctions imposed were excessive and inappropriate.
The petitioners allege that their rights to due process of law under the Fifth Amendment to the Constitution have been violated in that: 1) the NASD prosecutorial staff initially selected the members of the District Committee hearing panel; 2) the NASD prosecutorial staff participated ex parte in the deliberations of the hearing panel and the District Committee; 3) the NASD prosecutor drafted NASD decision; 4) the NASD adjudication was based on subjective criteria rather than on objective laws, rules, and regulations; and 5) the NASD disciplinary procedures did not adequately provide for discovery prior to the disciplinary hearing. As we have previously stated:
"This court does not review actions of the [NASD] because [NASD] disciplinary actions 'are subject to full review by the Securities and Exchange Commission . . ., with a hearing before it if requested, the taking of further evidence it may deem relevant, and a decision based on its own findings.' Nassau Securities Service v. Securities and Exchange Commission, 348 F.2d 133 (2d Cir. 1965). Our role is to review the order of the Commission. We will consider errors in [NASD] proceedings 'only if and to the extent that they infected the Commission's action by leading to error on its part.' ...