Appeals Court Upholds SEC Order Against Virginia Brokerage Firm
By JUDITH BURNS
Dow Jones Newswires
WASHINGTON -- A U.S. appeals court has upheld an order sanctioning
a broker for aiding and abetting a client's fraudulent stock sales, saying the
broker should have bucked her bosses rather than break securities laws.
In a decision issued Friday, the U.S. Court of Appeals for the District of
Columbia concluded the Securities and Exchange Commission acted
reasonably in sanctioning broker Sharon Graham and her employer,
Stephen Voss, owner of a Springfield, Va., independent discount
brokerage company.
"We're very pleased," said Susan McDonald, an SEC senior litigation
counsel who argued the appeal on behalf of the agency. She said the ruling
indicates "strong support" from the court for the commission's stance in the
case.
Ida Draim, a partner at the Washington, D.C., law firm of Dickstein,
Shapiro, Morin & Oshinsky LLP, who represents Ms. Graham and Mr.
Voss, said her clients are "deeply disappointed" with the decision. "As far
as we're concerned, this case is not yet over," she added.
The case stems from trades made by John Broumas, a former chairman of
Madison National Bank of Virginia, who took a beating in the 1987 stock
market collapse and was in dire financial straights by 1989, when he began
using accounts at Voss & Co., to engage in "wash" trades, the SEC said.
In a scheme similar to check-kiting, about every 10 days Mr. Broumas
would sell thousands of shares of stock in James Madison Ltd., a bank
holding company, to himself or to accounts he controlled, the SEC said.
The trades didn't generate profits, but allowed Mr. Broumas to obtain cash
from the stock sales a few days before payment for the purchases came
due.
The trading came to halt after 18 months, when Mr. Broumas was unable
to meet margin calls or pay for his last transaction. In a subsequent
settlement with the SEC, Mr. Broumas didn't admit or deny the agency's
allegations, but agreed to an order barring him from future violations. He
later pled guilty to criminal charges of using a check-kiting scheme to meet
margin calls.
The SEC charged Ms. Graham, a registered representative at Voss &
Co., with aiding and abetting Mr. Broumas, and took action against Mr.
Voss for failing to supervise Ms. Graham.
In 1995, an administrative law judge found Ms. Graham and Mr. Voss
liable, and on appeal to the full SEC, the commission affirmed most of the
law judge's findings. In what he termed an "exceedingly close call,"
Commissioner Norman Johnson dissented on grounds that Ms. Graham
reasonably relied on her supervisors' advice in helping Mr. Broumas make
the trades.
On appeal to the federal court, Ms. Graham contended the trades weren't
fraudulent and that she didn't knowingly or recklessly help Mr. Broumas
violate securities laws. Mr. Voss argued that since Ms. Graham wasn't
aiding and abetting Mr. Broumas, he couldn't be found to have failed to
supervise her.
In its decision, the D.C. Circuit Court concluded that the trades were
fraudulent and said it had no doubt Ms. Graham helped Mr. Broumas
execute them, ignoring warning signs that amounted to "a large red flag."
The court rejected Ms. Graham's contention that she had no discretion in
handling the account and couldn't buck her bosses once they approved the
trades.
"Graham did have discretion," the court reasoned. "A registered
representative can always refuse to execute a trade she knows may
constitute a securities violation."
While the court acknowledged that taking a tough stance could have made
Ms. Graham's work life "difficult," or even gotten her fired, it said fear of
the consequences doesn't excuse her behavior.
The fact that Ms. Graham didn't personally benefit from the trades, which
were handled through a "house" account that paid commissions to the
company, rather than to the individual broker, doesn't absolve her, the
court added.
Having upheld the SEC's case against Ms. Graham, the court concluded
that the evidence also supports the SEC's finding that Mr. Voss failed to
supervise the broker he employed.
Write to Judith Burns at judith.burns@dowjones.com |
