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Full Opinion
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 6, 2001 Decided December 21, 2001
No. 00-1480
Michael J. Markowski and
Joseph F. Riccio,
Petitioners
v.
Securities and Exchange Commission,
Respondent
Petition for Review of Orders of the
Securities and Exchange Commission
William VanDercreek argued the cause and filed the briefs
for petitioners.
Susan S. McDonald, Senior Litigation Counsel, Securities
& Exchange Commission, argued the cause for respondent.
With her on the brief were David M. Becker, General Coun-
sel, Meyer Eisenberg, Deputy General Counsel, Jacob H.
Stillman, Solicitor, and Susan K. Straus, Attorney.
Before: Randolph and Garland, Circuit Judges, and
Williams, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
Williams.
Williams, Senior Circuit Judge: Petitioners Michael J.
Markowski and Joseph F. Riccio seek review of a Securities
and Exchange Commission order sustaining a disciplinary
action taken by the National Association of Securities Dealers
("NASD"). The order imposed liability under Rule 10b-5 for
manipulating the stock market and under certain NASD
Conduct Rules for causing the publication of "non-bona fide"
bid quotations. The SEC also found against Markowski but
not Riccio for violations of a restriction agreement governing
his firm's inventory holdings and for failure to cooperate with
an NASD investigation. In re Markowski, Exchange Act
Release No. 43,259 (SEC Decision Sept. 7, 2000) ("SEC
Decision"). We affirm the Commission's order.
* * *
Markowski was the chairman, CEO, and majority share-
holder of Global America, Inc., then an NASD-member firm
that specialized in emerging growth companies. Riccio was
Global's trader. In June 1990 Global underwrote an initial
public offering of Mountaintop Corporation, an Alaskan vodka
producer. The Mountaintop securities included common
stock, warrants and "units" (each of which could be ex-
changed for two shares of common stock and two warrants).
Because the SEC does not rest its conclusions on data as to
quantities involved, the relationships among these securities
need not detain us. In "aftermarket" trading (i.e., after the
IPO), Global dominated the market for Mountaintop securi-
ties, accounting for an overwhelming majority of both pur-
chase and sale volume.
From the IPO in June 1990 until Global's closing in Janu-
ary 1991, Global supported the price of Mountaintop securi-
ties. The SEC said that this support took two forms: Global
(1) maintained high bid prices for Mountaintop securities, and
(2) absorbed all unwanted securities into inventory, thereby
preventing sales from depressing market prices. In re Mar-
kowski, Exchange Act Release No. 43,503, at 2 (SEC Decision
Nov. 1, 2000) ("SEC Denial of Reconsideration"). In the end
these efforts proved unsustainable. Global closed its doors in
January 1991, and Mountaintop's price dropped precipitous-
ly--about 75% in one day. Id.
In July 1998 the NASD's National Adjudicatory Council
("NAC") held Markowski and Riccio in violation of s 10(b) of
the Securities Exchange Act of 1934, 15 U.S.C. s 78j(b), Rule
10b-5 thereunder, 17 C.F.R. s 240.10b-5, and NASD Con-
duct Rules 2110, 2120, 3310 for their activities in Mountain-
top. Specifically, the NAC found that Markowski and Riccio
had engaged in manipulative, deceptive, and fraudulent con-
duct, and had published non-bona fide quotations. The NAC
also found that Markowski had violated the terms of Global's
Restriction Agreement and had refused to submit to an
NASD investigative interview.
By way of remedy, the NAC ordered that Markowski and
Riccio be censured and barred in all capacities from associa-
tion with any member of the NASD, and that they be fined
$300,000 and $250,000, respectively. See Final Order of the
National Adjudicatory Council, NASD Regulation, Inc., No.
CMS920091, at 1-2 (July 13, 1998).
On appeal, the SEC sustained the NAC's findings and
sanctions. SEC Decision at 1. The SEC later denied peti-
tioners' motion for reconsideration. SEC Denial of Reconsid-
eration at 3. Markowski and Riccio now seek review.
* * *
We note at the outset that the charge of publishing non-
bona fide quotations flowed fairly ineluctably from the finding
of manipulation: Rule 3310 bars publishing, or causing to be
published, reports of a transaction as a purchase or sale of
securities unless the NASD member believes that "such
transaction was a bona fide purchase or sale"; an interpreta-
tion of Rule 3310 by the NASD Board of Governors, IM-3310,
reads the rule as embracing the case of a member who causes
a quotation to be published "without having reasonable cause
to believe that such quotation ... is not published for any
fraudulent, deceptive or manipulative purpose." If the find-
ing of manipulation is supportable, then the second violation
follows handily.
Petitioners first seem to argue that because Global's bids
and trades in this case were "real"--they involved real cus-
tomers, real transactions, and real money--the trades cannot
be classified as an unlawful manipulation. Indeed, Global's
activities were unlike classic schemes using fraudulent devices
such as "wash sales" or "matched sales" in which the targeted
securities are "traded" back to the sellers themselves or
among known parties to give a false appearance of sales and
market interest. See, e.g., SEC v. U.S. Environmental, Inc.,
155 F.3d 107, 109 (2d Cir. 1998); see also Louis Loss & Joel
Seligman, Fundamentals of Securities Regulation 1045-46
(4th ed. 2001) (describing the typical manipulative scheme).
On the basis of this distinction, petitioners argue--rather
summarily--that their conduct must have been lawful.
Liability for manipulation wholly independent of fictitious
transactions in fact raises interesting questions. Without
such transactions, the core of the offense can be obscure. It
may be hard to separate a "manipulative" investor from one
who is simply overenthusiastic, a true believer in the object of
investment. Both may amass huge inventories and place
high bids, even though there are scant objective data support-
ing the implicit estimate of the stock's value. Legality would
thus depend entirely on whether the investor's intent was "an
investment purpose" or "solely to affect the price of [the]
security." United States v. Mulheren, 938 F.2d 364, 368 (2d
Cir. 1991). Given the typical ambiguity of intent, commenta-
tors have suggested that imposing liability may chill investors
from transactions that actually contribute to the efficiency of
securities markets. Daniel R. Fischel & David J. Ross,
"Should the Law Prohibit 'Manipulation' in Financial Mar-
kets?," 105 Harv. L. Rev. 503, 523 (1991) (expressing concerns
about the manipulation doctrine's overdeterrence effects); see
also Mulheren, 938 F.2d at 368 (expressing misgivings about
basing 10b-5 violations purely on whether or not a "transac-
tion is effected for an investment purpose").
Commentators have also suggested that where manipu-
lative behavior is solely defined in terms of the actor's
purpose, it may well be self-deterring as a general matter, so
that any need for an external sanction is slight. Purely
"trade-based" manipulation schemes, in which the manipu-
lator simply buys a security in order to induce higher prices
and then sells to take advantage of the price change, are
likely to fail. First, it is difficult unilaterally to cause price to
rise. Second, it is even more difficult to sell subsequently at
a price high enough to cover both purchase costs and transac-
tion costs. For one thing, if the actor's purchases are such as
to give the market a material upward thrust, his later sales
may equivalently drive it down. See Fischel & Ross, supra,
at 512-19. But see Steve Thel, "$850,000 in Six Minutes--
The Mechanics of Securities Manipulation," 79 Cornell L.
Rev. 219 (1994) (suggesting that manipulators may profit
from very small, short-lived price changes).
These arguments, however, are of little use to Markowski
and Riccio. Whatever the practical concerns, we cannot find
the Commission's interpretation to be unreasonable in light of
what appears to be Congress's determination that "manipu-
lation" can be illegal solely because of the actor's purpose.
See Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 843-44 (1984). Section 9(a)(2) of
the Securities Exchange Act, 15 U.S.C. s 78i(a)(2), manifests
this idea by declaring it unlawful
[t]o effect ... a series of transactions in any security
registered on a national securities exchange creating
actual or apparent active trading in such security or
raising or depressing the price of such security, for the
purpose of inducing the purchase or sale of such security
by others.
Id.1 This provision is quite separate from the subsections of
s 9 prohibiting manipulation through fraudulent devices such
as wash sales, 15 U.S.C. s 78i(a)(1)(A), matched sales, id. at
__________
1 15 U.S.C. s 78i has been slightly altered since Global's closure
in 1991, but those amendments are irrelevant in this proceeding.
s 78i(a)(1)(B)-(C), and false statements, id. at s 78i(a)(4).
Given Congress's clear endorsement for sanctions against this
sort of manipulation, the Commission's inclusion of it within
the phrase "manipulative ... device" in s 10(b), id. at
s 78j(b), cannot have been unreasonable.
The Commission's interpretation is also consistent with its
rules governing an issuer's purchases of its own securities.
See Securities Exchange Act of 1934, Rule 10b-18, 17 C.F.R.
s 240.10b-18. Issuer repurchases are perfectly real transac-
tions. But the Commission has created a safe harbor mea-
sured in terms of timing, volume, and price; purchases
outside the safe harbor are subject to possible enforcement
action as manipulations. See Purchases of Certain Equity
Securities by the Issuer and Others; Adoption of Safe Har-
bor, 47 Fed. Reg. 53,333 (1982).
Further, to the extent that the case against liability for
"trade-based" manipulation depends on its inherently self-
deterring character, petitioners' situation may be distinguish-
able. The activity in Mountaintop furthered an external
purpose. At least in the short term, Global supported Moun-
taintop's price not to profit from later sales of Mountaintop,
but to maintain customer interest in Global generally and to
sustain confidence in its other securities. As James Shanley,
Global's chief operating officer, testified, petitioner Riccio
explained his refusal to lower his bid price: "If we do that on
one stock, they [presumably, holders of Global's stocks] will
hit us on all the stocks." Thus, the prospects of losing some
money on Mountaintop in the short run would not deter
Global from manipulating--if that cost was worth the benefit
of keeping its customers and preserving confidence in its
other stocks.
Apart from their conceptual attack on liability for manipu-
lation where the trades are "real," petitioners argue that
Global's $1,400,000 net loss on Mountaintop precludes any
finding of scienter. In the alternative, they say that these
losses in Mountaintop at least cut against a finding of manipu-
lation. Neither variation is persuasive. Just because a ma-
nipulator loses money doesn't mean he wasn't trying. In-
deed, as suggested above, attempts to support a price for an
ulterior purpose seem unlikely to prevail if success will take a
long time--protracted struggle against market fundamentals
will exhaust the manipulator's resources.
Petitioners' third claim asserts that some of the evidence
before the Commission was so defective that the Commis-
sion's findings lack substantial evidence. They point to possi-
ble infirmities in the NASD's Chronological Transaction Anal-
ysis ("CTA"), which the NASD used to support its findings
that Global's bid prices were higher than needed to acquire
the stock, and that its inventories of Mountaintop securities
were larger than could be explained by a genuine investment
intent. However compelling the criticisms may be, they are
inapposite. The Commission made clear that its findings of
manipulation rested not on the CTA, but on the statements
from the firm's own personnel. SEC Denial of Reconsidera-
tion at 2. That testimony, which the Commission was entitled
to credit, substantially supports the Commission's key find-
ing: that the firm bought Mountaintop securities in order to
maintain their apparent market price.
For example, Shanley testified that Mountaintop securities
opened "too high" and remained at high levels only because
Global was "always supporting the stock." He further re-
counted conversations with Markowski in which he argued
that supporting a stock against the market was impossible--
as the event seemed to prove. And Gary Boccio, Global's
compliance officer, testified that Markowski explained his
refusal to reduce Global's inventory by saying that "he didn't
want to show we had any weakness in the stocks." Indeed,
Riccio himself admitted that although there was no demand in
the open market, Global made the sole high bid for days, even
months, on end. (Global evidently was able to offload much
of the Mountaintop stock that it acquired on special "clients"
of Markowski, whose role--victims? coconspirators? some
other class?--neither side in this litigation has seen fit to
explain.) Riccio said that he maintained Global's bids be-
cause he feared a drop in price and the customer complaints
it would generate.
Finally, Markowski challenges the SEC's findings that he
violated Global's restriction agreement by maintaining inven-
tory positions exceeding 200% of Global's excess net capital,
and that he refused to submit to an NASD investigative
interview. Markowski acknowledges the ancillary character
of these issues, however, and asks for relief regarding them
only if we find no basis for the principal manipulation charge.
Since we find that sufficient grounds support the manipu-
lation charge, we need not reach these issues.
In any event, the arguments are unconvincing. Substantial
evidence, including testimony from Shanley and a memoran-
dum from Boccio, support the SEC's finding that Markowski
knew about Global's continuing violations of the restriction
agreement. See, e.g., Patrick v. SEC, 19 F.3d 66, 69 (2d Cir.
1994). Similarly, the SEC reasonably found that Markow-
ski's eventual acquiescence in an NASD request for an inter-
view two months after his scheduled interview and four
months after NASD's initial request neither qualified as "full
and prompt cooperation" nor was sufficient to cancel his prior
recalcitrance. In re Borth, 51 S.E.C. 178, 180-81 (1992)
(discussing the importance of timely cooperation with NASD
investigations); In re Williams, 50 S.E.C. 1070, 1072 (1992)
(holding that litigation concerns did not excuse delays in
cooperation).
* * *
The order of the SEC is
Affirmed.