Fed. Sec. L. Rep. P 96,106 Todd and Company, Inc. and Thomas K. Langbein v. Securities and Exchange Commission, 557 F.2d 1008, 3rd Cir. (1977)

557 F.
2d 1008
Fed. Sec. L. Rep. P 96,106

TODD AND COMPANY, INC. and Thomas K. Langbein,
Petitioners,
v.
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
No. 76-1690.
United States Court of Appeals,

Third Circuit.
Argued March 29, 1977.
Decided June 27, 1977.
Lawrence E. Jaffe, Marcus, Rosen, Breslow, Levy, Jaffe & Fiorello,

Totowa, N. J., for petitioners.
David Ferber, Sol. to the Commission, Alan Rosenblat, Asst. Gen.
Counsel, Linda W. Jarett, Atty., S. E. C., Washington, D. C., for
respondent.
Before ADAMS, ROSENN and WEIS, Circuit Judges.
OPINION OF THE COURT
WEIS, Circuit Judge.
A statutory plan for self-regulation by a securities dealers association provides

for sanctions and procedural safeguards, including an appeal to the Securities
and Exchange Commission. We find no constitutional obstacles to this largely
non-judicial plan for settlement of disputes. However, we must vacate an order
of the S.E.C. that failed to insist upon strict compliance by the association with
its own procedural precepts.
In January, 1973, the District Business Conduct Committee for District No. 12
of the National Association of Securities Dealers, Inc., (N.A.S.D.), filed a
complaint against petitioners Todd and Company, its president, Langbein, and a
number of its salesmen, charging violations of the N.A.S.D. Rules of Fair
Practice. The complaint stated two causes: first, on April 19, and 20, 1972,
petitioners allegedly sold Automated Medical Laboratories, Inc. stock to the
public without disclosing that Todd and Company both dominated and
controlled the market and arbitrarily set the prices for that stock; and second,
Todd and Company allegedly executed the transactions "at prices, and realized
profits, which were unreasonable and unfair." Todd and Company, a registered
broker-dealer, was a member of the N.A.S.D. and subject to its rules.
3
Petitioners' difficulties began in March, 1972, when Todd underwrote a public

offering of 250,000 shares of Automated Medical Laboratories stock at $2.00
per share on an "all or none, best efforts" basis.1 Allegedly in an effort to secure
a wide distribution, Todd limited subscriptions to 500 shares per customer.
However, in many instances prospective purchasers were permitted to purchase
only a portion of the amount sought, often as little as 25 or 50 percent, despite
the fact that the original request was for less than 500 shares. The offering was
completed on April 17, 1972. On the following day, Todd began trading the
stock on the basis of $4.00 bid, $5.00 asked, double the offering price for this
obscure stock. During the next two days, April 19 and 20, Todd solicited
customers to either buy or sell, and more than 100,000 shares changed hands,
resulting in a gross profit to petitioners of $112,542.25.
After a hearing, the District Business Conduct Committee found that petitioners
sold at unfair prices as alleged in the second cause of the complaint. The
Committee commented on the 100 percent increase in the stock's price from its
initial offering to the value set on April 19, and 20:
5
"(A)
premium is only a measure of an underlying demand for shares in excess of the
supply. Where supply is sufficient to meet the demand, the co-existence of a
premium can only result from an arbitrary price in a controlled market.
6 our view the violation charged in the second cause of complaint rests on whether
"In
Todd took advantage of its ability to set the price at the expense of its customers.
We find that they did."
7
The Committee found petitioners' conduct "to be inconsistent with just and
equitable principles of trade and to constitute separate and distinct violations of
Sections 1, 4 and 18 of the Rules of Fair Practice." However, the first cause
was dismissed, the Committee deciding disclosure of Todd's market domination
was unnecessary. The Committee then: (1) suspended Todd's membership in
the N.A.S.D. for one year; (2) barred Langbein from associating with a
N.A.S.D. member for one year and limited the capacity in which he could be
employed by other members for two years; (3) assessed a $50,000 fine; and (4)
fined Todd's salesmen and suspended them for 30 days.
8
Petitioners appealed to the N.A.S.D. Board of Governors which took testimony

and heard argument. In the course of affirming the Committee's decision on the
second cause, the Board also determined that the first charge had been proven
and reinstated it. However, the Board gave no notice of its intention to consider
reinstating the first cause in advance of the hearing. Despite the presence of the
additional violation, the Board reduced the sanctions by easing the restrictions
on Langbein's employment during the two-year period and dismissing the
complaint as to the salesmen. The Securities and Exchange Commission
affirmed the N.A.S.D.'s decision but further reduced the suspensions from 1
year to 6 months.
Petitioners contend that the N.A.S.D. standards are unconstitutionally vague;

that the Securities Exchange Act of 1934, 15 U.S.C. 78o -3, authorizing the
registration of the N.A.S.D., is an unconstitutional delegation of legislative
authority; and that the Commission erred in affirming the Board of Governors'
action in reinstating the first cause. We agree only with the last assertion.2
10
In 1938, Congress adopted the Maloney Act, 15 U.S.C. 78o -3, to provide for
self-regulation of the over-the-counter securities market. The statute permits the
Securities and Exchange Commission to register an organization which has
adopted rules
11
"designed
to prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade . . . and, in general, to protect the investors and the
public interest . . . ." 15 U.S.C. 78o -3(b) (6).3
12
Under the statute, disciplinary rules must require specific charges, a hearing of
record, and a statement of the findings. 15 U.S.C. 78o -3(h).4 If the
Association disciplines a member, a right of appeal to the Securities and
Exchange Commission is provided. After affording the opportunity for a
hearing, the Commission determines whether the petitioner committed the
charged acts and whether they are in violation of the Association's rules. The
S.E.C. may then reduce, cancel, or leave undisturbed the penalty imposed. 15
U.S.C. 78s(e).5 The Commission is not restricted to the record before the
Association but may conduct a hearing of its own and consider such evidence
as it deems relevant.
13
Petitioners first attack the Maloney Act as an unconstitutional delegation of
13
Petitioners first attack the Maloney Act as an unconstitutional delegation of

legislative power to a private institution. In R. H. Johnson & Co. v. Securities &
Exchange Com'n., 198 F.2d 690 (2d Cir.), cert. denied,344 U.S. 855, 73 S.Ct.
94, 97 L.Ed. 664 (1952), the Court of Appeals for the Second Circuit dismissed
an identical challenge to the Act. Because the Commission (1) has the power,
according to reasonably fixed statutory standards, to approve or disapprove the
Association's rules; (2) must make de novo findings aided by additional
evidence if necessary, and (3) must make an independent decision on the
violation and penalty, the court found no merit in the unconstitutional
delegation argument. We agree.6 The Association's rules and its disciplinary
actions were subject to full review by the S.E.C., a wholly public body, which
must base its decision on its own findings. Nassau Securities Service v.
Securities and Exchange Com'n., 348 F.2d 133 (2d Cir. 1965).
14
Petitioners also contend that the N.A.S.D. rules are so vague as not to inform
members of the forbidden conduct and practices. It may be that the rules are
couched in broad, general language.7 However, " '(i)t is well established that
vagueness challenges to statutes which do not involve First Amendment
freedoms must be examined in the light of the facts of the case at hand.' United
States v. Mazurie, 419 U.S. 544, 550 (95 S.Ct. 710, 42 L.Ed.2d 706) (1975)."
United States v. Powell, 423 U.S. 87, 92, 96 S.Ct. 316, 319, 46 L.Ed.2d 228
(1975). Moreover, "(o)ne to whose conduct a statute clearly applies may not
successfully challenge it for vagueness." Parker v. Levy, 417 U.S. 733, 756, 94
S.Ct. 2547, 2562, 41 L.Ed.2d 439 (1974). In the case sub judice, petitioners'
patent violation of the N.A.S.D. rules overcomes the vagueness challenge.
15
Even if petitioners' conduct had been somewhat more marginal, we could not
sustain their argument. "All the Due Process Clause requires is that the law
give sufficient warning that men may conduct themselves so as to avoid that
which is forbidden." Rose v. Locke, 423 U.S. 48, 50, 96 S.Ct. 243, 244, 46
L.Ed.2d 185 (1975). The language of Section 18 of the Rules of Fair Practice is
not substantially different from that contained in 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. 78j(b), or the Commission's own freewheeling Rule 10b-5, 17 C.F.R. 240.10b-5, neither of which are
unconstitutionally vague. United States v. Persky, 520 F.2d 283 (2d Cir. 1975).
In our view, the N.A.S.D. Rules, addressed to a specialized industry, fairly put
those governed on notice, and we think the conduct under review would
reasonably have been expected by members to violate the Rules.8 Accordingly,
we reject petitioners' vagueness challenge.
16
We have reviewed the S.E.C.'s opinion and conclude that substantial evidence
supports its decision finding a violation of the second count. Our function is not
to independently weigh the facts as petitioners would have us do. Rather, after
reviewing the record considered as a whole, including the evidence opposed to

the S.E.C. view, we are to determine whether substantial evidence supports the
Commission's decision. Buchman v. S.E.C., 553 F.2d 816 (2d Cir. 1977); R. H.
Johnson & Co. v. S.E.C., supra. The Commission was within its competence in
deciding that the petitioners manipulated the market to sell at unreasonable
prices. The Commission found that petitioners deliberately created the
impression of a "hot issue" by artificially limiting the number of shares sold to
each customer; intensively stimulating the market by contacting almost all
purchasers; and carefully balancing purchases against sales. On this record, we
cannot say that such findings were not supported by substantial evidence.
17
However, we are concerned with the clear disregard of the N.A.S.D. appellate
procedures. The N.A.S.D.'s Code provides that an aggrieved member may
appeal the disciplinary action taken by a District Business Conduct Committee
within 15 days of the decision while the Board of Governors may, on its own
motion, also request review within 45 days. Sec. 15(a).9 The Board has the
right to review a decision dismissing a complaint and, "after appropriate notice
and opportunity for hearing," may reinstate the complaint and impose
sanctions. Sec. 17.10
18
In the case at bar, only the aggrieved member appealed the Committee's
decision the Board did not. Therefore, the Committee's decision on the second
cause was the only matter preserved for review before the Board of Governors.
Since the Board neither appealed the first cause's dismissal nor gave notice to
petitioners that the dismissal was to be reconsidered, the Board's scope of
review was limited by petitioners' appeal. The statute and rules are clear: a
party being sanctioned or disciplined must have notice of the charges. If the
Committee dismisses a charge, it cannot be reinstated by the Board of
Governors without notice and the opportunity to be heard on that specific
charge. To do otherwise would overlook the clear requirement of the statute
requiring notice and hearing.
19
The S.E.C. admits that "(t)he Board reversed the District Committee's dismissal
of the first charge without notice to respondents," but argues that "the
Association's error, if any, was patently harmless," since both charges "turn on
the same facts." We disagree. The Board of Governors' action violated the
N.A.S.D. rules and deprived petitioners of the procedural benefit due them. If
the Board had observed the rules, it would have imposed punishment for but
one violation. In this non-judicial setting, foreclosing the possibility of
receiving a lessor penalty than that ultimately assessed is not an illusory injury.
20
Charged with making independent decisions and its own interpretations of the
N.A.S.D.'s rules, the Commission must insure fair treatment of those

disciplined by the Association. The independent review function entrusted to
the S.E.C. is a significant factor in meeting serious constitutional challenges to
this self-regulatory mechanism. Since it is a departure from the traditional
governmental exercise of enforcement power in the first instance, confidence in
the impartiality and fairness of the Association's procedures must be
maintained. The S.E.C., therefore, should not cavalierly dismiss procedural
errors affecting the rights of those subjected to sanctions but should insist upon
meticulous compliance by the private organization.
21
Neither the Commission nor the Board of Governors specified a separate

penalty for each charge. Consequently, we do not know whether a lesser
penalty would have been imposed by either body if only one count were left
standing. The Commission should have remanded the case to the Board of
Governors with instructions to dismiss the first cause and to reconsider the
sanction. Thereafter, if the petitioners were still dissatisfied, the Commission
could have again reviewed the imposed sanctions. So that petitioners' rights
may be protected, we direct that this procedure be followed. Accordingly, the
order of the S.E.C. will be vacated and the case will be remanded with
instructions to proceed in accordance with this opinion.
Either all the shares were to be sold or none of them. If all the shares were not
sold, the purchase money would be returned to the subscribers
Petitioners raise several additional issues which do not require discussion
The statute was amended in 1975, and the quoted portion was formerly codified
at 15 U.S.C. 78o -3(b)(8). The amendments did not take effect until after the
case had been submitted to the S.E.C. There are no changes in the substantive
law applicable to this case and the U.S.C. citations to those portions of the
statute are the current ones. Changes in the appropriate procedural aspects are
noted infra
Formerly 15 U.S.C. 78o -3(b)(10)
The review provisions were formerly covered by 15 U.S.C. 78o -3(h)
The appeal to the S.E.C. was briefed in early 1975 and argued before the
Commission on July 15, 1975. The 1975 amendments did not become effective
until December 1, 1975. There are some changes in the amendments as they
apply to hearings before the Commission, e. g., under the 1934 Act, the S.E.C.
is to make its decision "upon consideration of the record before the association
and such other evidence as it may deem relevant . . . ." The 1975 amendment,
on the other hand, states ". . . which hearing may consist solely of consideration
of the record before the self-regulatory organization and opportunity for the
presentation of supporting reasons to affirm, modify, or set aside the sanction . .
. ." Our consideration of this case is confined to the 1934 Act, and we do not
intimate any view on the constitutionality of the 1975 amendment
7
The applicable rules provide:

"Sec. 1. A member, in the conduct of his business, shall observe high standards
of commercial honor and just and equitable principles of trade.
"Sec. 4. In 'over-the-counter' transactions, whether in 'listed' or 'unlisted'
securities, if a member buys for his own account from his customer, or sells for
his own account to his customer, he shall buy or sell at a price which is fair,
taking into consideration all relevant circumstances, including market
conditions with respect to such security at the time of the transaction, the
expense involved, and the fact that he is entitled to a profit; and if he acts as
agent for his customer in any such transaction, he shall not charge his customer
more than a fair commission or service charge, taking into consideration all
relevant circumstances including market conditions with respect to such
security at the time of the transaction, the expense of executing the order and
the value of any service he may have rendered by reason of his experience in
and knowledge of such security and the market therefore.
"Sec. 18. No member shall effect any transaction in, or induce the purchase or
sale of, any security by means of any manipulative, deceptive or other
fraudulent device or contrivance."
We need not decide whether Section 1 of the Rules of Fair Practice standing
alone would withstand a vagueness challenge. See Klein v. Securities and
Exchange Commission, 224 F.2d 861 (2d Cir. 1955). Here, it has been found
that two other rules were also violated
"Sec. 15(a). If a District Business Conduct Committee shall take any

disciplinary action against any member, or shall dismiss any complaint, as
hereinabove provided, such action or dismissal shall be subject to review by the
Board of Governors on its own motion within forty-five (45) days after the date
of the notice required by Section 11 hereof. Any such action or dismissal shall
also be subject to review upon application by any person aggrieved thereby,
filed within fifteen (15) days after the date of the notice required by Section 11
hereof."
10
"Sec. 17. In any proceeding to review the action of a District Business Conduct
Committee in dismissing any complaint against a member, if the Board of

Governors after appropriate notice and opportunity for hearing, upon
consideration of the record before the District Business Conduct Committee
and of such other evidence as it may deem relevant, shall determine that the
member should have been disciplined, it may set aside the action taken by the
District Business Conduct Committee and may impose any penalty upon the
member provided for in Section 1 of Article V of the Rules of Fair Practice,
which the Board of Governors may, in its discretion, deem to be just . . . ."
(Emphasis supplied)

Fed. Sec. L. Rep. P 96,106 Todd and Company, Inc. and Thomas K. Langbein v. Securities and Exchange Commission, 557 F.2d 1008, 3rd Cir. (1977)

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557 F.

Fed. Sec. L. Rep. P 96,106

United States Court of Appeals,

Lawrence E. Jaffe, Marcus, Rosen, Breslow, Levy, Jaffe & Fiorello,

A statutory plan for self-regulation by a securities dealers association provides

Petitioners' difficulties began in March, 1972, when Todd underwrote a public

Petitioners appealed to the N.A.S.D. Board of Governors which took testimony

Petitioners contend that the N.A.S.D. standards are unconstitutionally vague;

Petitioners first attack the Maloney Act as an unconstitutional delegation of

Petitioners first attack the Maloney Act as an unconstitutional delegation of

reviewing the record considered as a whole, including the evidence opposed to

N.A.S.D.'s rules, the Commission must insure fair treatment of those

Neither the Commission nor the Board of Governors specified a separate

Petitioners raise several additional issues which do not require discussion

Formerly 15 U.S.C. 78o -3(b)(10)

The review provisions were formerly covered by 15 U.S.C. 78o -3(h)

The applicable rules provide:

"Sec. 15(a). If a District Business Conduct Committee shall take any

Committee in dismissing any complaint against a member, if the Board of

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