Petition — Sloan v. Securities & Exchange Commission

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Te Suprem tun &

EILED

OCTOBER TERM, 1976

76-1547

SAMUEL H. SLOAN and SAMUEL H. SLOAN

d/b/a SAMUEL H. SLOAN & CO.,

Petitioners,

~against-

SECURITIES & EXCHANGE COMMISSION, RAY

GARRETT, JR., PHILIP A. LOOMIS, JR., JOHN R.

EVANS, A. A. SOMMER, JR., 24 GEORGE A.

FITZSIMMONS,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SAMUEL H. SLOAN

Petitioner pro se

1761 Eastburn Avenue, Apt. A5

Bronx, New York 10457

(212) 749-4727

Dick Bailey Printers, 290 Richmond Ave., Staten Islend, N.Y. 16802

Tel.: (212) 447-5358

INDEX

Page

ED cedcckticcescedtnaceuscecedécsuce 1

Pt cncckdds ceesesededondsduecdéeduncces 2

ED cceccncceccceececsesécesteces 3

Constitutional Provisions Involved.................. 6

Statutory Provisions Involved ...................... 8

PD caGccccbuctlvécbddddnvecdéctevcess 15

ED < ccnciccueeseeedséecveceacees 25

Reasons for Granting the Writ ..................... 31

PES ch edcecccceeeedcacccscecceseceseceee 70

Appendix A—Order for Public Proceedings Dated

SA o54-0d6eegdecdacdeuentensceeeee la

Appendix B—Order Postponing Hearing and Denying

Motion for More Definite Statement Dated July 31,

FEROS PT Teer eer TTT TTT TTT TTTTe 5a

Appendix C—Order on Motion for More Definite

Statement Dated August 18, 1972............... 1a

Appendix D—Initial Decision Dated April 24, 1973 ... 9a

Appendix E—Findings and Opinion of the Securities &

Exchange Commission Dated April 28, 1975...... 23a

Appendix F—Order of the Securities & Exchange

Commission Imposing Remedial Sanctions Dated

FE COU 5 v6 cubulngsecbichnenewivenctacas 36a

Appendix G—Opinion of the United States Court of

Appeals for the Second Circuit Dated November

Bs TEE Sccbbudintcnaeddbocdacdustatadesess<s 38a

Appendix H—Order Denying Petition for Rehearing

ee EY Ae SUD ccccccccccsesiccecces 5la

Appendix I—Order Denying Suggestion that the

Rehearing be En Banc Dated January 24, 1977... . 52a

Appendix J—Order Denying Suggestion that the

Rehearing be en Banc Dated January 24, 1977 ... . 53a

Appendix K—Order Suspending Trading in Stock of

Canadian Javelin Ltd. from April 29, 1975 Through

May 8, 1975S Dated April 29, 1975............... 54a

Appendix L—Informational Memorandum Dated May

DeGP envnedessubatieneesdeeeseeanenss 55a

Appendix M—Net Capital Computation of Samuel H..

Sloan & Co. Prepared by Securities & Exchange

Commission Investigator Arthur Bruder as of

EE GE 6 cave nusdudesueebscesnedecue< 56a

Albertson v. Subversive Activities Control Board, 382

I ae id oh es 32

American Power Co. v. S.E.C., 329 U.S. 90 (1946) .... 35

iii

Arthur Lipper Corp. v. S.E.C., SA7 F.2d 171 (2d Cir.

PET ddd ss igeduieneges tba veoebeueus swow Ge

Atlas Roofing Co. v. Occupational Safety and Health

Review Commission, U.S.——, 51 L.Ed. 2d

TED Le ded pecbecugeceesesecces 64

Buchman v. S.E.C., slip op. 3093 (2d Cir. April 20,

PPEPPPTIT TIT TT TTTIT TTL ETT 55

Connally v. General Construction Co., 269 U.S. 385

cue ceer ceed ede oe eeStESe ne Fbs 96050546 60

Cummings v. Missouri, 71 U.S. (4 Wall) 277 (1866) ... 32

Economou v. U.S. Dept. of Agriculture, 494 F.2d 519

EE 25k bb n6s dedkeheG es SeNenersocess 46

FEA v. Algonquin SNG, Inc., 426 U.S. 548 (1976) .... 39

Grosso v. United States, 390 U.S. 62 (1968) .......... 48

Haynes v. United States, 390 U.S. 85 (1968) .......... 48

Humphrey's Executor v. United States, 295 U.S.602

DK <ccecdenhenenectessesaedeswoncesoeess 33

Jaffee & Co. v. S.E.C., 446 F.2d 387 (2d Cir. 1971) . . 38,40

Jacobowitz v. United States, 424 F.2d SSS (Ct. claims

AEE Di ede a. 6 alt oe eeweateuenes 54

Jencks v. United States, 353 U.S. 657 (1957) ......... 67

Jones v. S.E.C. 298 U.S.1 (1936) «2.6.6.6... -ceeenten 34

Leary v. United States, 39S U.S. 6 (1969) .......... 44,48

Marchetti v. United States, 390 U.S. 39 (1968) ....... 48

Matter of International Shareholders Services Corp., 9

S.E.C. Docket 821; Securities Exchange Act

Release No. 12389 (June 8, 1976) ............... 68

Matter of Edward C. Jaegerman, 10 S.E.C. Docket

726; Securities Exchange Act Release No. 12905

8 Pere 33

National Cable Television v. United States, 415 U.S.

SOO (EGR occccccccsccecesess senna 69

Prentis v. Atlantic Coast Line Co., 211 U.S. 210 (1908) 32

Re Ruffalo, 390 U.S. 544 (1968) 2.6... eee 35

Samuel H. Sloan, 6 S.E.C. Docket 772, Securities

Exchange Act Release No. 11376 (April 28, 1975).. 2

S.E.C. Sloan, 538 F.2d 313 (2d Cir. 1976), cert. denied

Dkt. No. 76-365 (December 13, 1976) ....... 25,40

S.E.C. v. Sloan, 535 F.2d 679 (2d Cir. 1976), cert.

denied Docket No. 76-982 (April 18, 1977) ....... 25

S.E.C. v. Sloan, 369 F. Supp. 996 (S.D.N.”. 1974). . 30,68

Shapiro v. United States, 335 U.S. 1 (1948) .......... 47

Sloan v. S.E.C., SA7 F.2d 152 (2d Cir. 1976) .. 2,32,34,36

Sloan v. S.E.C., 527 F.2d 11 (2d Cir. 1975), cert.

denied 426 U.S. 935 (1976) «2... 6 eee 25

Sloan v. S.E.C., S35 F.2d 676 (2d Cir. 1976), cert.

denied Dkt No. 76-58 (October 12, 1976)......... 25

United States v. Darby, 312 U.S.100 (1941) .......... 47

United States v. Lovett, 328 U.S. 303 (1946) ......... 32

United States v. Morton Salt Co., 338 U.S. 632 (1950) . 47

United States v. Rosner. 516 F.2d 269 (2d Cir. 1975) .. 67

Withrow v. Larkin, 421 U.S. 35 (1975) «6. 66 eee ee 32

Yakus v. United States, 321 U.S. 414 (1944) ......... 47

CONSTITUTION

Article 1, Section 8, Clause 3.2... 6.66 ec cece es 6

Article 1, Section 9, Clause 3... 1.66.66 ec cee 6

Artio£ge 111, Sectiom 1.1... cc cece cree ecccenccees 5,7,33

Article III, Section 2, Clause 3... . 6... 6-6 e eens 5,7,33

Amendment Four .... 2... 6666 eee e nee 7

Amendment Five ....... ©. 6 6 cee 4,5,7,34,51,65

Ra bc « cavccevtcescutesseceds 5,7,64.65

Amendment Eight .................000ccceeee. 5,8,65

REISE Sc ccccccccsccccscsotessaseus 5,8,65

REI TE 000 cc ncccbccvcvcedecocesecéess 5,8,65

STATUTES AND RULES

Freedom of Information Act, 5 U.S.C. §552... . 6,46,65,66

Administrative Procedure Act, SU.S.C. §SS6(d) . . . 8,45,54

Administrative Procedure Act, 5 U.S.C. §558 (c) . .5,8,51,52

Securities Exchange Act of 1934

SESE, COG Ge ccccccvccccccecsccees 6,9,70

Ste, CD U.GL BOD c cccccccccccccccccccces 9

§1S(b)(S), 1S U.S.C. §78o(b)S) .......... 3,10,36,37 ,39

§1S(b)(6), 1S U.S.C. §78o(b)(6) ...... 2.6... 11,34,36

§1S(b)(7), 1S U.S.C. §78e(b)7) ... 2... 11,33,37,39

§1Sic3), 1S U.S.C. §7Bole 3)... 2... eee 12,47

a Fee, COU. GHD oc cccccccccccccccececes 12

G2Stad. 13 U.S.C. GHbylad .. cece ccccceess 13,58,66,69

eee, SPU, BID cccccccccccceseces 14,44,47

Judicial Code, 28 U.S.C. §12S4(1) . 6. cece 2

S.E.C. Rule 1Sb 1-2, 17 CFR §240.1Sb1-2 ........... 25

S.E.C. Rule 1Se3-1, 17 CFR §240.1S¢3-1 . 4,15-19,25,47,52

S.E.C. Rule 17a-3, 17 CFR §240.17a-3... 4,19-21,25,46,57,

60,61

vii

S.E.C. Rule 17a-4, 17 CPR §240.17a-4..........-- 25,52

S.E.C. Rule 17a-S, 17 CFR §240.17a-S..... 4,21-23,47 48,49

S.E.C. Rule 17a-10, 17 CFR §240.17a-10...... 4,23-24,45

S.E.C. Rule 17a-11, 17 CFR §240.17a-11...... 4,24-25,41

Supreme Court Rule 23(S) ......-- +--+ eee eee eeees 25

In the

SUPREME COURT OF THE UNITED STATES

October Term, 1976

No.

SAMUEL H. SLOAN and SAMUEL H. SLOAN d/b/a

SAMUEL H. SLOAN & CO.,

Petitioners,

~against-

SECURITIES & EXCHANGE COMMISSION, RAY

GARRETT, JR., PHILIP A. LOOMIS, JR., JOHN R.

EVANS, A.A. SOMMER, JR., GEORGE A. FITZ-

SIMMONS,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

Petitioner respectfully prays that a writ of certiorari issue

to review the decision of the United States Court of Appeals

for the Second Circuit dated November 18, 1976 which (1)

affirmed the order of the Securities and Exchange Com-

mission dated April 28, 1975 which revoked the broker

dealer registration of Samuel H. Sloan & Co. and barred

Samuel H. Sloan from being associated with any broker or

dealer and (2) declared the first of a series of orders of the

Securities & Exchange Commission suspending trading in

the stock of Canadian Javelin Ltd. to be valid.

OPINIONS BELOW

The decision by the Administrative Law Judge of the

Securities & Exchange Commission dated July 31, 1972

which denied a motion for a more definite statement was

not reported and is included as Appendix B to this petition.

The Initial Decision of the Administrative Law Judge of the

Securities & Exchange Commission dated April 25, 1973 to

revoke the broker dealer registration of Samuel H. Sloan &

Co. and to bar Samuel H. Sloan from being associated with

any broker or dealer was not reported and is included as

Appendix D to this petition. The final decision of the

Securities & Exchange Commission dated April 28, 1975 to

revoke the broker dealer registration of Samuel H. Sloan &

Co. and to bar Samuel H. Sloan from being associated with

any broker or dealer was reported as Samuel H. Sloan, 6

S.E.C. Docket 772, Securiites Exchange Act Release No.

1! 76 (April 28, 1975) and is included as Appendix E to

this petition. The opinion of the United States Court of

Appeals for the Second Circuit dated November 18, 1976

which affirmed the order of the Securities & Exchange

Commission and which declared invalid a series of orders,

except for the first order, suspending trading in the stock of

Canadian Javelin Ltd. is reported as S/oan v. S.E.C., S47

F.2d 182 (2d Cir. 1976) and is included as Appendix G to

this petition. An opinion dated December 27, 1976 which

was docketed on January 24, 1977 and which amended the

opinion of the Court of Appeals dated November 18, 1976

is included as Appendix H to this petition. Copies of two

orders dated January 24, 1977 which denied petitions for a

rehearing and suggestions that the rehearing be en banc

are included as Appendix | and Appendix J to this petition.

JURISDICTION

Jurisdiction of this Court is invoked under 28 U.S.C.

1254(1). The opinion of the United States Court of Appeals

for the Second Circuit, which disposed of two previously

unconsolidated cases dealing with (1) broker dealer

registration and (2) trading suspensions, was dated

November 18, 1976. Both parties then filed petitions for a

rehearing and suggestions that the rehearing be en banc.

No action was taken on these petitions until January 24,

1977 when orders were entered denying suggestions that

the rehearing be in banc and a Per Curiam opinion was

entered dated December 27, 1976 amending the opinion of

November 18, 1976. The time within which to petition this

Court for a writ of certiorari starts on January 24, 1977 and

runs for 90 days thereafter.! This time was extended until

May 15, 1977 by order of Mr. Justice Marshall.

QUESTIONS PRESENTED

1. Was the Court of Appeals in error in ruling that the

entry of an injunction is in itself sufficient grounds to

support the revocation of a broker dealer registration under

§1S(b)(SHC) of the Securities Exchange Act of 1934?

2. Are the findings of the Securities & Exchange

Commission supported by substantial evidence?

3. Was the lifetime bar imposed upon Samuel H. Sloan a

penalty more severe than that permitted by statute?

4. In this case, in which the broker dealer registration of

Samuel H. Sloan & Co. was revoked and Samuel H. Sloan

1. Due to the fact that the Per Curiam opinion amending the November 18.

1976 opinion was backdated to December 27, 1976, the Acting Solicitor

Genera! filed a motion for an extention of time to May 26, 1977 to file a petition

for a writ of certiorari in this case. Part of the reason given for filing this motion

was “to avoid any problems with regard to the timeliness of a petition.”’ See

Motion of the Acting Solicitor General p. 2. However, the December 27, 1976

opinion appears to resolve only the petition for rehearing filed by the S.E.C

and not the petition for rehearing filed by this petitioner, which presumably

continued to be pending. In any event, in order to avoid any uncertainty

regarding this situation, this petitioner consulted the Deputy Clerk of the

United States Court of Appeals, Mr. Vincent A. Carlin, who advised the

petitioner that the time within which to petition for a writ of certiorari began to

run on January 24, 1977. This is clearly correct since the December 27, 1976

apinion was not docketed and was not made available to the parties and to the

public until January 24, 1977. See e.g. New York Law Journal, January 25,

1977, p. 1, cols. 4-5, which reported:

“The three judges who made the original ruling on November 18,

1976, in Sloan v. SEC. 75-4087, yesterday denied a petition for a

rehearing and the courts nine active judges denied a petition for a

rehearing en banc.”

was barred for life from being associated with any broker or

dealer, wer the penalties imposed too severe, particularly in

view of the weak evidentiary support for the findings of

fact, the inordinately long time in which this proceeding

has been pending and the tremendous disparity between

the sanctions invoked against petitioners in this case and

those invoked by the Securities & Exchange Commission in

other similar cases?

5. Do the rules of the Securities & Exchange Com-

mission which require brokers and dealers to maintain

books, records and other documents for inspection by

investigators of the Securities & Exchange Commission

(Rule 17a-3, 17 CFR §240.17a-3), to file various periodic

reports with the Securities & Exchange Commission (Rules

17a-S and 17a-10, 17 CFR §§240.17a-5 and 240.17a-i0)

and to notify the Securities & Exchange Commission by

telegram whenever the net capital rule of the Securities &

Exchange Commission has been violated by the broker

dealer (Rule 17a-11, 17 CFR §240.17a-11) deprive broker

dealers of the rights guaranteed to them by the Fourth and

Fifth Amendments to the Constitution?

6. Is the net capital rule of the Securities & Exchange

Commission, (Rule 1Sc3-1, 17 CFR §240.15Sc3-1) un-

constitutionally vague and uncertain and were the

petitioners constitutional rights violated by the haphazard

methods employed by the various Securities & Exchange

Commission investigators in computing the net capital of

Samuel H. Sloan & Co.?

7. Was the petitioner deprived of his Fifth Amendment

right to notice and a hearing and his Sixth Amendment

right to be informed of the nature and the cause of the

accusations against him by the three page order for public

proceedings which merely recited statutory language and

did not state with particularity what Samuel H. Sloan and

Samuel H. Sloan & Co. was accused of doing and by the

Securities & Exchange Commission's continuously shifting

theories of the prosecution of its case?

8. Did the petitioner have a stautory and constitutional

right to withdraw his broker dealer registration, thereby

terminating the proceedings against him, and is the broker

dealer registration requirement itself unconstitutional?

9. Is the order of the Securities & Exchange Commission

revoking the broker dealer registration of Samuel H. Sloan

& Co. and barring Samuel H. Sloan for life from being

associated with any broker or dealer an unconstitutional

bill of attainder?

10. Since the Securities & Exchange Commission made

no finding that the petitioner used the means or in-

strumentalities of interstate commerce or purchased or sold

any security, was the Securities & Exchange Commission

without jurisdiction to impose santions upon the

petitioner?

11. Is the risk of bias in an administrative proceeding

such as this too high to be constitutionally tolerable and

does an administrative proceeding such as this violate the

constitutional principles embodied in Article III Section 1,

Article II] Section 2 paragraph 3, and Amendments 5, 6, 7,

8.9 and 10 of the Constitution?

12. Since the Securities & Exchange Commission failed

to notify the petitioners in writing of facts or conduct which

might warrant the commencement of agency action and did

not provide the petitioners the opportunity to demonstrate

or achieve compliance with all lawful requirements prior to

the commencement of agency proceedings, and since the

Securities & Exchange Commission does not deny that

petitioners were in compliance with all applicable net

capital, bookkeeping and reporting requirements at the

time the administrative proceeding was commenced, did

the Securities & Exchange Commission violate the Ad-

ministrative Procedure Act, 5 U.S.C. §558(c), when it

| BEST COPY AVAILABLE

commenced its administrative proceeding against

petitioners and must therefore the sanctions invoked

against petitioners be vacated?

13. In view of the recent release, pursuant to a Freedom

of Information Act request by the petitioner, of certain

records and files of the Securities & Exchange Commission

which show that according to these records and files a

number of violations of the rules of the Securities & Ex-

change Commission which were “found’’ by the Com-

missioners on April 25, 1975 did not in fact occur, should

the order of the Securities & Exchange Commission be

vacated and/or should this Court take other remedial

action?

14. Was there sufficient evidence to justify the decision

by the Securities & Exchange Commission to suspend

trading in the stock in Canadian Javelin Ltd. for a ten day

period from April 29, 1975 through May 8, 1975.

1S. Is Section 12(k) of the Securities Exchange Act of

1934, 1S U.S.C. §78l(k), which gives the Securities &

Exchange Commission the author'ty summarily to suspend

trading in a security for a period not exceeding ten days,

unconstitutional?

CONSTITUTIONAL PROVISIONS INVOLVED

Article 1, Section 8, clause 3 provides:

The Congress shall have the power ... to

regulate commerce with foreign nations, and

among the several States, and with the Indian

tribes.

Article 1, Section 9, clause 3 provides:

No bill of attainder or ex post facto law shall be

passed.

Article Ill, Section |, in pertinent part, provides:

The judicial power of the United States, shall be

vested in one Supreme Court, and in such inferior

courts as the Congress may from time to time

ordain and establish. The judges, both of the

Supreme and inferior courts, shall hold their

offices during good behavior . .

Article III, Section 2, clause 3 in pertinent part provides:

The trial of all crimes . . . shall be by jury. . .

Amendment Four, in pertinent part, provides:

The right of the people to be secure in their

persons, houses, papers and effects, against

unreasonable searches and seizures shall not be

violated .. .

Amendment Five, in pertinent part, provides:

No person shall be held to answer for a capital

or otherwise infamous crime unless on presentment

or indictment of a Grand Jury ... nor shall be

compelled in any criminal case to be a witness

against himself, nor be deprived of life, liberty or

property, without due process of law .. .

Amendment Six, in pertinent part. provides:

In all criminal prosecutions, the accused shall

enjoy the right to a speedy and public trial, by an

impartial jury of the State and district wherein the

crime shall have been committed ... and to be

informed of the nature and cause of the accusation

Amendment Seven, in pertinent part, provides:

In suits at common law. where the value in

controversy shall exceed twenty dollars, the right of

trial by jury shall be preserved .. .

Amendment Eight provides:

Excessive bail shall not be required . .. nor

cruel and unusual punishments inflicted.

Amendment Nine provides:

The enumeration in the Constitution, of certain

rights, shall not be construed to deny or disparage

others retained by the people.

Amendment Ten provides:

The powers not delegated to the United States by

the Constitution, nor prohibited by it to the States,

are reserved to the States respectively, or to the

people.

STATUTORY PROVISIONS INVOLVED

The Administrative Procedure Act, 5 U.S.C. §556(d), in

pertinent part, provides:

Except as otherwise provided by statute, the

proponent of a rule or order has the burden of

proof. Any oral or documentary evidence may be

received, but the agency as a matter of policy shall

provide for the exclusion of irrelevant, immaterial,

or unduly repetitious evidence. A sanction may not

the institution of agency proceedings therefor, the

licensee has been given—

(1) notice by the agency in writing of the facts or

conduct which may warrant the action; and

(2) opportunity to demonstrate or achieve

compliance with all lawful requirements.

Section 12(k) of the Securities Exchange Act of 1934, 15

U.S.C. §781(k). provides:

(k) If in its opinion the public interest and the

protection of investors so require, the Commission

is authorized summarily to suspend trading in any

security (other than an exempted security) for a

period not exceeding ten days, or with the approval

of the President, summarily to suspend aii trading

on any national securities exchange or otherwise,

in securities other than exempted securities, for a

period not exceeding ninety days. No member of a

national securities exchange. broker, or dealer

shall make use of the mails or any means or in-

strumentality of interstate commerce to effect any

transaction in, or to induce the purchase or sale of,

any security in which trading is so suspended.

Section 15(a) and (b) of the Securities Exchange Act of

1934, 15 U.S.C. §780(a) and (b), at the time of the order of

the Securities & Exchange Commission dated April 28,

1975, in pertinent part, provided:

be imposed or rule or order issued except on

consideration of the whole record or those parts

thereof cited by a party and supported by and in

accordance with the reliable probative, and

substantial evidence... . Sec. 15. ns sigan or ae on —

_ : : one whose business 1s exclusively intrastate) sha

The Adeniaistrative Procedure Act, 5 U.S.C. §558(c), in make use of the mails or of - means or in-

pertinent pest, provides: strumentailty of interstate commerce to effect any

. . » Except in cases of willfulness or those in transaction in, or to induce the purchase or sale of,

which public health, interest, or safety requires any security (other than an exempted security or

otherwise, the withdrawal, suspension, revocation, commercial paper, bankers’ acceptances, or

or annulment of a license is lawful only if, before commercial bills) otherwise than on a national

securities exchange, unless such broker or dealer is

registered in accordance with subsection (b) of this

section.

(2) The Commission may by such rules and

regulations or orders as it deems necessary or

appropriate in the public interest or for the

protection of investors, either unconditionally or

upon specified terms and conditions or for

specified periods, exempt from paragraph (1) of

this subsection any broker or dealer or class of

brokers or dealers specified in such rules,

regulations, or orders.

(b)(S) The Commission shall, after appropriate

notice and opportunity for hearing, by order

censure, deny registration to, suspend for a period

not exceeding twelve months, or revoke the

registration of, any broker or dealer if it finds that

such censure, denial, suspension, or revocation is

in the public interest and that such broker or

dealer, whether prior or subsequent to becoming

such, or any person associated with such broker or

dealer, whether prior or subsequent to becoming so

associated—

order, judgment, or decree of any court of com-

petent jurisdiction from acting as an investment

adviser, underwriter, broker, or dealer, or as an

affiliated person or employee of any investment

company, bank, or insurance company, or from

engaging in or continuing any conduct or practice

in connection with any such activity, or in con-

nection with the purchase or sale of any security.

(D) has willfully violated any provision of the

Securities Act of 1933, or of the Investment Ad-

visers Act of 1940, or of the Investment Company

Act of 1940, or of this title, or of any rule or

regulation under any of such statutes.

(6) .. . Any registered broker or dealer may,

upon such terms and conditions as the Commission

may deem necessary in the public interest or for the

protection of investors, withdraw from registration

by filing a written notice of withdrawal with the

Commission. If the Commission finds that any

registered broker or dealer, or any broker or dealer

for whom an application for registration is pend-

ing. is no longer in existence or has ceased to do

business as a broker or dealer, the Commission

shall by order cancel the registration or application

of such broker or dealer.

(7) The Commission may, after appropriate

notice and opportunity for hearing, by order

censure any person, or bar or suspend for a period

not exceeding twelve months any person from

being associated with a broker or dealer, if the

Commission finds that such censure, barring, or

suspension is in the public interest and that such

person has committed or omitted any act or

omission enumerated in clause (A), (D) or (E) of

paragraph (5) of this subsection or has been

convicted of any offense specified in clause (B) of

said paragraph (5) within ten years of the com-

menecment of the proceedings under this paragraph

or is enjoined from any action, conduct, or practice

specified in clause (C) of said paragraph (5S). It

shall be unlawful for any person as to whom such

an order barring or suspending him from being

associated with a broker or dealer is in effect,

willfully to become, or to be, associated with a

broker or dealer, without the consent of the

Commission, and it shall be unlawful for any

broker or dealer to permit such a person to

become, or remain, a person associated with him,

without the consent of the Commission, if such

broker or dealer knew. or in the exercise of

reasonable care. should have known, of such

order.

Section 15ic)(3) of the Securities Exchange Act of 1934,

1S U.S.C. §780(c)(3), at all pertinent times, provided:

(c3) No broker or dealer shall make use of the

mails or of any means or instrumentality of in-

terstate commerce to effect any transaction in, or

to induce or attempt to induce the purchase or sale

of, any security (other than an exempted security

or commercial paper, bankers’ acceptances, or

commercial bills) in contravention of such rules

and regulations as the Commission shall prescribe

as necessary or appropriate in the public interest or

for the protection of investors to provide

safeguards with respect to the financial respos-

sibility and related practices of brokers and dealers

including. but not limited to, the acceptance of

custody and use of customers’ securities, and the

carrying and use of customers’ deposits or credit

balances. Such rules and regulations shall require

the maintenance of reserves with respect to

customers’ deposits or credit balances, as deter-

mined by such rules and regulations.

Section 1 7(a) of the Securities Exchange Act of 1934, 15

U.S.C. §78q(a), at all pertinent times, provided:

Sec. 17. (a) Every national securities exchange,

every member thereof, every broker or dealer who

transacts a business in securities through the

medium of any such member, every registered

securities association, and every broker or dealer

registered pursuant to section 15 of this title, shall

make. keep. and preserve for such periods, such

accounts, correspondence, memoranda, papers,

books, and other records, and make such reports, -

as the Commission by its rules and regulations may

prescribe as necessary or appropriate in the public

interest or for the protection of investors. Such

accounts, correspondence. memoranda, papers.

books, and other records shall be subject at any

time or from time to time to such reasonable

periodic. special, or other exeaminations by

examiners or other representatives of the Com-

mission as the Commission may deem necessary or

appropriate in the public interest or for the

protection of investors.

Section 2Sia) of the Securities Exchange Act of 1934,

U.S.C. §784(a). provides:

Sec. 25. (al) A person aggrieved by a final

order of the Commission entered pursuant to this

title may obtain review of the order in the United

States Court of Appeals for the circuit in which he

resides or has his principal place of business, or for

the District of Columbia Circuit, by filing in such

court, within sixty days after the entry of the order,

a written petition praying that the order be

modified or set aside in whole or in part.

(2) A copy of the petition shall be transmitted

forthwith by the clerk of the court to a member of

the Commission or an officer designated by the

Commission for that purpose. Thereupon, the

Commission shall file in the court the record on

which the order complained of is entered, as

provided in section 2112 of tithe 28, United States

Code, and the Federal Rules of Appellate

Procedure.

(3) On the filing of the petition, the court has

jurisdiction, which becomes exclusive on the filing

of the record. to affirm or modify and enforce or to

set aside the order in whole or in part.

(4) The findings of the Commission as to the

facts, if supported by substantial evidence, are

conclusive.

(S) If either party applies to the court for leave to

adduce additional evidence and shows to the

satisfaction of the court that the additional

evidence is material and that there was reasonable

ground for failure to adduce it before the Com-

mission, the court may remand the case to the

Commission for further proceedings, in whatever

manner and on whatever conditions the court

considers appropriate. If the case is remanded to

the Commission, it shall file in the court a sup-

plemental record containing any new evidence, any

further or modified findings, and any new order.

Section 32(a) of the Securities Exchange Act of 1934, 15

U.S.C. §78ffla), provides: .

Sec. 32. (a) Any person who willfully violates any

provision of this title, or any rule or regulation

thereunder the violation of which is made unlawful

or the observance of which is required under the

terms of this title. or any person who willfully and

knowingly makes, or causes to be made, any

Statement in any application, report, or document

required to be filed under this title or any rule or

regulation thereunder or any undertaking con-

tained in a registration statement as provided in

subsection (d) of section 15 of this title, which

statement was false or misleading with respect to

any material fact, shall upon conviction be fined

not more than $10,000, or imprisoned not more

than two years, or both, except that when such

person is an exchange, a fine not exceeded

$500,000 may be imposed; but no person shall be

subject to imprisonment under this section for the

violation of any rule or regulation if he proves that

he had no knowledge of such rule or regulation.

RULES INVOLVED

Securities & Exchange Commission Rule 15c3-1, 17 CFR

§240.15¢3-1. in pertinent part, provided:

Reg. §240.15c3-1. (a) No broker or dealer shall

permit his aggregate indebtedness to all other

persons to exceed 2000 per centum of his net

capital, and every broker or dealer shall have the

net capital necessary to comply with the following

conditions:

(1) If he becomes registered as a broker or dealer

on and after August 13, 1971, his aggregate in-

debtedness to all other persons on and after August

3, 1972 and for 12 months after becoming

registered shall not exceed 800 per centum of his

net capital, and except as provided for in sub-

paragraphs (a)(3) and (a)(4) hereof, he shall have

and maintain net capital of not less than $25,000;

and

(2) If he became registered as a broker or dealer

before August 13. 1971, and he does not come

within the provisions of subparagraph (a)(3) or

(a4) hereof, he shall have and maintain net

capital of not less than $15,000 commencing July

31, 1973, and $25,000 commencing July 31, 1974;

(bX3) The Commission may, upon written

application, exempt from the provisions of this

rule, either unconditionally or on specified terms

and conditions. any broker or dealer who satisfies

the Commission that, because of the special nature

of his business. his financial position, and the

safeguards he has established for the protection of

customers’ funds and securities, it is not necessary

in the public interest or for the protection of in-

vestors to subject the particular broker or dealer to

the provisions of this rule.

(1) The term “aggregate indebtedness” shall be

deemed to mean the total money liabilities of a

broker or dealer arising in connection with any

transaction whatsoever, including, among other

things: money borrowed; money payable against

securities loaned and securities ‘‘failed to receive’’;

the market value of securities borrowed (except for

delivery against customers’ sales) to the extent to

which no equivalent value is paid or credited;

customers’ free credit balances; credit balances in

customers’ accounts having short positions in

securities; and equities in customers’ commodities

futures accounts; but excluding

(i) Indebtedness adequately collateralized, as

hereinafter defined, by securities or spot com-

modities owned by the broker or dealer;

(ii) Indebtedness to other brokers or dealers

adequately collateralized as hereinafter defined, by

securities or spot commodities owned by the broker

or dealer;

(iii) Amounts payable against securities loaned

which securities are owned by the broker or dealer;

(iv) Amounts payable against securities failed to

receive which securities were purchased for the

account of, and have not been sold by, the broker

or dealer:

(2) The term “net capital’ shall be deemed to

mean the net worth of a broker or dealer (that is,

the excess of total assets over total liabilities),

adjusted by

(i) Adding unrealized profits (or deducting

unrealized losses) in the accounts of the broker or

dealer and, if such broker or dealer is a part-

nership, adding equities (or deducting deficits) in

accounts of partners, as hereinafter defined;

(ii) Deducting fixed assets and assets which

cannot be readily converted into cash (less any

indebtedness secured thereby) including, among

other things, real estate; furniture and fixtures;

exchange memberships; prepaid rent, insurance

and expenses; good will; organization expenses; all

unsecured advances and loans; customers’ un-

secured notes and accounts; deficits in customers’

accounts, except in bona fide cash accounts within

the meaning of section 4(c) of Regulation T of the

Board of Governors of the Federal Reserve Sysiem;

and the funds on deposit in a “segregated trust

account” in accordance with Rule 27d-1 under the

Investment Company Act of 1940, but only to the

extent that the amounts on deposit in such

segregated trust account exceed the amount of

liability reserves established and maintained for

refunds of charges required by Sections 27(d) and

27(f) of the Investment Company Act of 1940.

Provided, however, that the cash and market value

of securities, as reduced by the appropriate per-

centages provided in subparagraph (C) below,

which are deposited with a clearing fund main-

tained by a clearing corporation or similar

department or association of a national securities

exchange or registered national securities

association using a continuous net settlement

system for the clearance and settlement of

securities transactions (hereinafter called ‘clearing

agency’) need not be deducted under the

provisions of this subparagraph. [As amended in

Release No. 34-9460 (€78,491), effective March 6,

1972, 37 F.R. 1474; and Release No. 34-9587

(€78,759), May 8, 1972, 37 F.R. 9390.]

(iii) Deducting the percentages specified

below of the market value of all securities, long and

short (except exempted securities) in the capital,

proprietary and other accounts of the broker or

dealer, including securities loaned to the broker or

dealer pursuant to a satisfactory subordination

agreement, as hereinafter defined, and if such

broker or dealer is a partnership, in the accounts of

partners, as hereinafter defined:

(d) On [all securities, excluding nonconvertable

debt and preferred securities], the deduction shall

be 30 per cent; Provided, however, That such

deduction need not be made in the case of (1) a

security which is convertible into or exchangeable

for other securities within a period of 30 days,

subject to no conditions other than the payment of

money, and the other securities into which such

security is convertible, or for which it is ex-

changeable, are short in the accounts of such

broker or dealer or partner, or (2) a security which

has been called for redemption and which is

redemable within 90 days.

(v) Deducting, in the case of a broker or dealer

who has open contractual commitments, the

respective deductions as specified in subdivision

uli) of this sub paragraph, from the value

(which shall be the market value whenever there is

a market) of each net long and each net short

position contemplated by any existing contractual

commitment in the capital, proprietary and other

accounts of the broker or dealer and, if such

broker or dealer is a partnership, in accounts of

partners, as hereinafter defined: Provided,

however, That this deduction shall not apply to

exempted securities, and that the deduction with

respect to any individual commitment shall be

reduced by the unrealized profit, in any amount

not greater than the deduction provided for in

subdivision (iti) of this subparagraph (or increased

by the unrealized loss), in such commitment; and

that in no event shall an unrealized profit on any

closed transactions operate to increase net capital.

(ix) Deducting 10°° of the contract price of each

item in the securities failed to deliver account

which is outstanding 40 to 49 calendar days;

deducting 20° of the contract price of each item in

the securities failed to deliver account which is

outstanding SO to S9 calendar days; and deducting

30% of the contract price of each item in the

securities tailed to deliver account which is out-

standing 60 or more calendar days.

(8) The term “customer” shall mean every

person except the broker or dealer: provided.

however, that partners who maintain “accounts of

partners” as herein detined shall not be deemed to

be customers insofar as such accounts are con-

cerned.

Securities & Exchange Commission Rule 17a-3, 17 CFR

§240.17a-3, in pertinent part, provided:

Reg. §240.17a-3. (a) Every member of a

national securities exchange who transacts a

business in securities directly with others than

members of a national securities exchange, and

every broker or dealer who transacts a business in

securities through the medium of any such

member, and every broker or dealer registered

pursuant to Section 15 of the Securities Exchange

Act of 1934, as amended, shall make and keep

current the following books and records relating to

his business:

(1) Blotters (or other records of original entry)

containing an itemized daily record of all pur-

chases and sales of securities, all receipts and

deliveries of securities (including certificate

numbers), all receipts and disbursements of cash

and all other debits and credits. Such records shall

show the account for which each such transaction

was effected, the name and amount of securities,

the unit and aggregate purchase or sale price (if

any). the trade date, and the name or other

designation of the person from whom purchased or

received or to whom sold or delivered.

(2) Ledgers (or other records) reflecting all

assets and liabilities, income and expense and

capital accounts.

(3) Ledger accounts (or other records) itemizing

separately as to each cash and margin account of

every customer and of such member, broker or

dealer and partners thereof, all purchases, sales,

receipts and deliveries of securities and com-

modities for such account and all other debits and

credits to such account

(4) Ledgers (or other records) reflecting the

tollowing:

(A) securities in transfer;

(B) dividends and interest received;

(D) monies borrowed and monies loaned

(together with a record of the collateral therefor

and any substitutions in such collateral);

(E) securities failed to receive and failed to

deliver.

(11) A record of the proof of money balances of

all ledger accounts in the form of trial balances,

and a record of the computation of aggregate

indebtedness and net capital, as of the trial

balance date, pursuant to §240. 15¢3-1; Provided.

however. (i) That such computation need not be

made by any member. broker or dealer un-

conditionally exempt from §240.1Sc3-1 by sub-

paragraph (b)(1) or (b)(3), thereof; and (ii) that

any member of an exchange whose members are

exempt from §240.1Sc3-1 by subparagraph (b)(2)

thereof shall make a record of the computation of

aggregate indebtedness and net capital as of the

trial balance date in accordance with the capital

rules of at least one of the exchanges therein listed

of which he is a member. Such trial balances and

computations shall be prepared currently at least

once a month.

Securities & Exchange Commission Rule 17a-5, 17CFR

§240.17a-5, in pertinent part, provided:

Reg. §240.17a-5. (a) Filing reports. (1) This rule

shall apply to every member of a national securities

exchange who transacts a business in securities

directly with or for others than members of a

national securities exchange, every broker or

dealer (other than a member) who transacts a

business in securities through the medium of any

member of a national securities exchange, and

every broker or dealer registered pursuant to

section 15 of the act.

(2) Every member. broker or dealer subject to

this rule shall file reports of financial condition

containing the information required by Form

X-17A-5, as follows: (A) a report shall be

filed as of a date within each calendar year, except

that (i) the first report of a member, broker or

dealer (other than one succeeding to and con-

tinuing the business of another member, broker or

dealer) shall be as of a date not less than one nor

more than five months after the date on which such

member. broker or dealer becomes subject to this

rule (in the case of a registered broker or dealer

this shall be the date the registration becomes

effective) and (ii) a member, broker or dealer

succeeding to and continuing the business of

another member, broker or dealer need not file a

report as of a date in the calendar year in which the

succession occurs if the predecessor member,

broker or dealer has filed a Form X-17A-S report

in compliance with this rule as of a date in such

calendar year; (B) such reports shall be filed not

more than 60 days after the date of the report of

financial conditions; (C) reports for any two

consecutive years shall not be as of dates within

four months of each other; and, (D) the member,

broker or dealer shall on the date on which a

preliminary audit examination commences, if the

preliminary audit procedures performed requires a

report on Part III of Form X-17A-S, notify in

writing the Regional Office of the Commission for

the region in which the member, broker or dealer

has its principal place of business that such

preliminary audit examination has commenced

and shall file as required by subparagraph (a)(2),

not later than 45 days thereafter, a duplicate

original of Part II] of Form X-17A-S, signed by an

officer, partner or principal, with such Regional

Office which shall be deemed confidential.

(3) The reports provided for in this rule shall be

tiled in duplicate original with the Regional Office

of the Commission for the region in which the

member, broker or dealer has his or its principal

place of business and except as provided for in

subparagraph (b)(3) shall be available for

examination at the principal office of the member,

broker or dealer.

(b) Nature and Form of Reports. Each report of

financial condition filed pursuant to paragraph (a)

of this section shall be prepared and filed in ac-

cordance with the following requirements:

(1) The report of a member, broker or dealer

shall be certified by a certified public accountant

or a public accountant who shall be in fact in-

dependent;

(2) Attached to the report shall be an oath or

affirmation that. to the best knowledge and belief

of the person making such oath or affirmation, (i)

the financial statement and supporting schedules

are true and correct and (ii) neither the member,

broker, or dealer, nor any partner, officer, or

director, as the case may be, has any proprietary

interest in any account classified solely as that of a

customer. The ¢ .th or affirmation shall be made

before a person duly authorized to administer such

oaths or affirmations. If the member, broker, or

dealer is a sole proprietorship, the oath or af-

firmation shall be made by the proprietor; if a

partnership, by a general partner; or if a cor-

poration, by a duly authorized officer.

Securities & Exchange Commission Rule 17a-10,

CFR §240.17a-10, in pertinent part, provided:

Reg. §240.17a-10. (a) Every member of a

national securities exchange and every broker or

dealer registered pursuant to Section 15 of the Act

shall, not later than 120 days after the close of each

calendar year (commencing with the calendar year

1969), file a report of his income and expenses and

related financial and other information for such

calendar vear on Form X-17A-10.

(d) In the event any member, broker. or dealer

finds that he cannot file his report for any year

within the time specified in paragraph (a) hereof

without undue hardship, he may file with the

Commission an application for an extension of

time to a specified date which shall not be later

than 150 days after the close of the calendar year

for which the report is made. The application shall

state the reasons for the requested extension and

shall contain an agreement to file the report on or

before the specified date.

Securities & Exchange Commission Rule 17a-11,

CFR §240.17a-11, in pertinent part, provided:

Reg. §240.17a-11. (a) Every broker, dealer or

member of a national securities exchange or of a

registered securities association, subject to Rule

1Sc3-1 or to a net capital rule of a national

securities exchange or registered securities

association, whose net capital at any time is less

than the minimum required by any capital rule to

which such person is subject, shall:

(1) give telegraphic notice as set forth in

paragraph (e) hereof that such person's net capital

is less than is required by any such capital rule,

identifying the applicable net capital rule or rules.

The notice shall be given on the same day that such

person's capital becomes less than required by any

of the aforesaid rules to which such person is

subject; and

(2) within 24 hours thereafter file a report of his

financial condition as of the date which required

the giving of the notice in subparagraph (a)(1)

hereof.

(e) Every notice and report required to be given

or filed by this rule shall be given to or filed with

the principal office of the Commission in

Washington, D.C., with the Regional Office of the

_— ~--

——— ee

Commission for the region in which the member,

broker or dealer has his or its principal place of

business, and with each national securities ex-

change and registered securities association of

which such person is a member.

— OF THE CASE

This is the last of a series of essentially related cases, the

others of w were presented to this Court on prior oc-

casions.2 See (in order of the date of the court of appeals

decision) Sloan v. S.E.C.. 527 F. 2d 11 (2d Cir. 1975), cert.

denied 426 U.S. 935 (1976); S.E.C. v. Sloan, 538 F.2d 313

(2d Cir. 1976). cert. denied Dkt. No. 76-3605 (December 13,

1976) (two cases); Sloan v. S.E.C.. 535 F.2d 676 (2d Cir.

1976). cert. denied Dkt. No. 76-5® (October 12, 1976);

S.E.C. v. Sloan, 535 F.2d 679 (2d Cir. 1976). cert. denied

Dkt. No. 76-982 (April 18, 1977).

The litigation between Samuel H. Sloan (“Sloan”) and

the Securities & Exchange Commission (“S.E.C."") began

on June 17, 1971 when the S.E.C. instituted an injunctive

action against Sloan and Samue’ H. Sloan & Co. (“Sloan &

Co."") by filing a complaint in ine United States District

Court for the Southern District of New York. The com-

plaint alleged violations of S.E.C. Rules 1Sb1-2, 1Se3-1,

17a-3, and 17a-4, 17 CFR §§240.1S5b1-2, 240.1S¢3-1.

240.17a-3 and 240.17a-4.5 On June 21, 1971 the S.E.C.

applied for and obtained a temporary restraining order

which, inter alia, prohibited Sloan and Sloan & Co. from

making any purchases and sales of securities. Through this

order, the S.E.C. then obtained a freeze on Sloan's bank

2. Although there are actually two cases involved, the Court of Appeals

consolidated them in its November 18, 1976 opimion and has been treating

them as consolidated ever since. A single petition covering both cases us hereby

filed in this Court as permitted by Rule 2S) of the Supreme Court Rules.

3. Subsequently, the allegation of a violation of Rule 1Sb1-2 was abandoned

by the S.E.C.

account. On June 23, 1971, immediately prior to the

commencement of a scheduled hearing in the United States

District Court, the S.E.C. offered to lift the freeze on

Sloan's bank account if Sloan would “consent” to the entry

of a preliminary injunction. Sloan accepted this offer and

his “consent” to a preliminary injunction was entered on

June 24, 1971.

One of the terms of the preliminary injunction was that

Sloan would retain a certified public accountant to prepare

a certified financial statement of Sloan & Co. as at June 30.

1971. Since Sloan's accountant, Raymond Leon. who

had filed an X-17A-S report for Sloan & Co. as at January

29. 1971, was unsatisfactory to the S.E.C., the S.E.C. staff

personnel handling this matter on June 21, 1971 offered to

introduce Sloan to an accountant who would be satisfactory

to the S.E.C. Sloan accepted this offer and was introduced

to Robert W. Taylor (“Taylor”), an attorney and ac-

countant who was a personal friend of Joseph O. Barton.

the then head of the Broker Dealer Inspection Division of

the New York Regional Office of the S.E.C. When the

matter of the preliminary injunction was discussed on June

23. 1971, William Nortman (“Nortman™), the S.E.C.

attorney in charge of this case, said that he would agree to

accept a preliminary injunction and abandon his ap-

plication for the appointment of a temporary receiver if

Sloan would stipulate to use Taylor as his accountant.

Sioan, through his attorney, Roy L. Weiss (“Weiss"’).

stipulated to this condition. See Transcript of hearing of

June 23, 1971, p. 17.

The preliminary injunction, of course, left the case

unresolved but the S.E.C. chose not to bring it to trial for

the time being. Meanwhile, Taylor conducted his promised

audit of the books of Sloan & Co. and at a meeting at the

offices of the S.E.C. on July 28, 1971, with Sloan, Nortman

and Weiss present. Taylor revealed that the results of his

audit were that as at June 30, 1971 Sloan & Co. had no

customer accounts or customer liabilities and had net

capital of $48,770.32. but that Sloan & Co. also had a

substantial short and fail to deliver position in the bonds of

Management Assistance. Inc.. a company then going

through reorganization, and after taking haircuts to reflect

this and other trading positions. Sloan & Co. had a net

capital deficiency of $19,221.90. Taylor also reported that

this deficiency would be climinated entirely if Sloan were

able to buy the bonds at current market prices and make

delivery so as to cover his short position. At the conclusion

of this meeting an agreement was reached whereby Sloan &

Co. would not do any business except (1) to buy short

positions, (2) to sell long positions, and (3) to receive and

deliver securities and to pay checks so as to consummate

existing contractual commitments. Nortman represented

that this arrangement would be satisfactory to the S.E.C.

Sloan & Co. was never able to buy the Management

Assistance, Inc. bonds to cover the short position because

in the course of the reorganization almost all of the out-

standing bonds had been exchanged pursuant to an ex-

change offer for common and preferred stock and as a

result the bonds which Sloan needed to buy were not

available on the market. Because of this, and because of

the prohibition on new business while this situation per-

sisted. the financial position of Sloan & Co. became frozen

and Sloan himself went to work for another stock

brokerage firm. Meanwhile, Sloan & Co. continued to

submit monthly trial balances and other financial

schedules to the S.E.C.

Eventually, through the passage of time, Sloan & Co.

was able to buy back some of the Management Assistance

bonds and in other cases the contracting brokers agreed to

accept the equivalent amount of common and preferred

stock, which were in plentiful supply. and as a result

the liabilities of Sloan & Co. gradually became reduced to

the point where it could resume normal operations as a

broker dealer. as it did in early 1972.

On April 25, 1972, with its injunctive action still dor-

mant, the S.E.C. instituted an administrative proceeding

against Sloan and Sloan & Co. The Order for Public

Proceeding. see Appendix A, made allegations

those made in the injunction action filed on June 17, 1971

and additionally alleged the entry y a preliminary in-

junction by consent. (See App. 3a).4

The order recited the language of the statute and the

rules alleged to have been violated. It stated that Sloan &

Co. had violated Rules 17a-3 and 17a-4 “from about

January. 1971 to present,”’ that it had violated Rule 153-1

“from about January, 1971 to on or about January 31, 1972

with the exception of the month of March, 1971," that it

had violated Rule 17a-S “from on or about October 10,

1970 to May 5, 1971,” that it had violated Rule 17a-10

“from on or about April 30, 1971 to on or about December

2, 1971.” and that it had violated Rule 17a-11 “from on or

about September 15, 1971 to the present."’ (App. la-3a).

Sloan retained Taylor, his S.E.C. appointed accountant.

to act as his attorney in this case and Taylor filed a motion

for a more definate statement “so as to narrow down the

exact time period or events involved with a view of per-

mitting Respondent to properly prepare its defense." This

motion was strenuously opposed by the S.E.C. staff and

was deniea by Administrative Law Judge Ralph Hunter

Tracy. who ruled that it was not necessary “for the notice of

proceedings to detail and itemize all the particular acts,

which together constitute the offense."’ (App. 6a).

Thereafter, a hearing was held from October 30, 1972

until November |. 1972. Four witnesses testified for the

S.E.C., none for Sloan. The witnesses were Arthur Bruder

and Sheldon Kanoff. staff investigators who had examined

the books and records of Sloan & Co., Sloan himself, and

Joseph Iny, a stock broker with whom Sloan had had

4 Hereafter. such references are to pages of the appendices to this petition.

SO a ae

financial dealings. The transcript of the testimony came to

467 pages and a total of 61 exhibits (including sub-exhibits)

were offered into evidence by the S.E.C. No exhibits were

offered by Sloan. The record which was ultimately

generated came to a total of 1,286 pages.

After the hearing. the S.E.C. filed 73 proposed findings

of fact which alleged 63 separate violations of S.E.C.

rules. Sloan, through counsel, filed a responsive brief. On

April 24, 1973, Judge Tracy rendered an Initial Decision

which did not agree with the findings proposed by the

S.E.C. staff, but did agree with the conclusions that the

broker dealer registration of Sloan & Co. should be

revoked and that Sloan should be barred from being

associated with any broker or dealer. Sloan then petitioned

the S.E.C. for review. This petition was granted and briefs

were filed. Thereafter, in an unrelated development, Sloan

& Co. voluntarily ceased operations and filed a broker

dealer withdrawal request on S.E.C. Form BDW. The

S.E.C. did not act on this request andon December 3, 1973

an attorney for the S.E.C. staff wrote a letter to Sloan

which stated that ‘a voluntary broker-dealer withdrawal at

this point is unacceptable and clearly represents an attempt

to vitiate the integrity of Commission administrative

proceedings."’ (Record p. 1259). As a result Sloan & Co.

continued as a broker dealer on an involuntary basis until

April 28, 1975S when the SEC finally formally denied

Sloan's broker dealer withdrawal request and revoked the

broker dealer registration of Sloan & Co. and barred Sloan

personally from being associated with any broker or dealer.

Review of this order is now sought in this petition for a writ

of certiorari.

During the period of nearly two years between the time

when Sloan & Co. went out of business and filed a broker

dealer withdrawal request and the time when the S.E.C.

ultimately acted, Sloan attempted to obtain court vin-

dication of various claims by him that the SEC had acted

improperly and in some cases illegally in the course of its

activities. These attempts to obtain court vindication back-

fired as the SEC obtained two injunctions, dated January

18, 1974 and January 17, 1975, and a suit for declaratory

relief filed in the district court and a petition for review of a

series of S.E.C. trading suspension orders filed in the Court

of Appeals were both dismissed. These court actions were

the subject of the cases previously cited. Sloan's appeals

trom the two injunctions were dismissed sua sponte by the

court of appeals. Sloan himself was later held in contempt

of court and his appeal from the contempt order was

dismissed. Then the injunction action in which the con-

tempt proceeding was brought was dismissed as moot and

the injunction dated January 17, 1975 was thereby

automatically vacated. Thus all that remains outstanding

from all of those proceedings is the injunction of January

18, 1974 which was entered after a decision reported as

S.E.C. v. Sloan, 369 F. Supp. 996 (S.D.N.Y. 1974).

However, the outgrowth of these proceedings was that

Sloan was ultimately partially successful with one of his

claims, namely the claim of illegality and un-

constitutionality of the S.E C.’s trading suspension policies.

That determination forms the second part of the case

presented here for review. Although the court of appeals

rejected petitioner's contention that the suspension orders

were not supported by substantial evidence and further

held that petitioner's argument that a trading suspension is

unconstitutional was frivolous, it declared a series of

suspension orders except for the first order invalid as

violative of the statute. Review of those parts of this

decision adverse to the petitioner is sought in this petition

for a writ of certiorari. The entire record offered by the

S.E.C. in support of the first trading suspension is included

as appendix K and appendix L to this petition. Appendix K

is the initial trading suspension order and appendix L is an

“informational memorandum” with one line deleted,

which, according to the S.E.C. demonstrates the factual

basis for the trading suspension.

REASONS FOR GRANTING THE WRIT

The case presented here involves questions of national

interest and importance. Illustrative of this point is the fact

that on November 19, 1976, the decision of the Court of

Appeals was reported on the front page of the Wall Street

Journal, on the front page of the financial section of the

New York Times and in the headlines of the New York Law

Journal. In addition, the filing by the S.E.C. of a petition

for a rehearing en bane was reported in the Wall Street

Journal for December 6, 1976 and the denial of the

petitions for a rehearing en bane was reported in the

headline of the New York Law Journal for January 25,

1977. Moreover, the decision of the Court of Appeals was

published in full text on the front page of the New York

Law Journal for Monday, November 22, 1976 and has since

been frequently discussed in law review articles and other

legal publications.

Although most of the attention of the press has been on

those aspects of the decision of the Court of Appeals in

which this petitioner prevailed, the issues which the Court

of Appeals decided favorably to this petitioner are legally

and factually intertwined with those issues in which the

S.E.C. prevailed. The following discussion will demon-

strate the importance of the legal issues involved in this

case. However, initially it should be pointed out that if this

Court decides not to review the decision of the Court of

Appeals, the validity of S.E.C. procedures with respect to

its trading suspension policies will, for practical purposes,

have been finally and forever judicially decided without the

possibility of further review in this or any other court. This

circumstance alone should be sufficient to require plenary

review of the decision of the Court of Appeals.

In the 43 years since the passage of the Securities Ex-

change Act of 1934, there has never been a case decided by

this Court involving a broker dealer revocation proceeding.

Yet the importance of these proceedings can hardly be

underestimated, affecting as they do the entire securities

industry and thereby the national economy. In the case

presented here, the petitioner contends, inter alia, that the

broker dealer registration requirement is unconstitutional

under Albertson v. Subversive Activities Control Board,

382 U.S. 70, 79 (1965S) and other cases. However, this

position was one of many rejected by the Court of Appeals

as ‘‘frivolous.”’ 547 F.2d at 155. The repeated use by the

Court of Appeals of the term frivolous is unfortunate as it

sheds little light on the issues presented. The petitioner

further contends that the risk of bias in these ad-

ministrative proceedings is too high to be constitutionally

tolerable, Withrow v. Larkin, 421 U.S. 35, 46-47 (1975)

and that in accordance with principles explained in United

States v. Lovett, 328 U.S. 303, 314-318 (1946) the lifetime

bar imposed upon Sloan is an unconstitutional bill of

attainder. These contentions were also classified to the

Court of Appeals as “frivolous” in spite of their apparent

merit. A broker dealer registration revocation, a lifetime

bar, and a trading suspension are all legislative acts as

defined in Parents v. Atlantic Coal Line Co., 211 U.S. 210,

226 (1908) and yet they inflict punishment without a

judicial trial. This is particularly true of a lifetime bar

because, as this Court stated in the analogeous case of

Cummings v. Missouri, 71 U.S. (4 Wall) 277, 321-322

(1866):

“in the pursuit of happiness all avocations, all

honors, all positions, are alike open to everyone,

and that in the protection of these rights we are all

equal before the law. Any deprivation or

suspension of these rights for past conduct is

punishment, and can be in no otherwise defined.”

Thus, it is apparent from analogeous case law that Sloan

has been punished and yet there clearly has been no

judicial trial because a judicial trial must be conducted

before a judge appointed for life in accordance with Article

IIl, Section I of the Constitution and the right to a trial by

jury and the other rights guaranteed by Article III, Section

2, Clause 3 and the Sixth Amendment must be preserved.

Although this Court has characterized the functions of an

independent administrative agency such as the S.E.C. as

“predominantly quasi-judicial and quasi-legislative,”

Humphrey's Executor v. United States, 295 U.S. 602, 624

(1935), thereby coining a term adopted by the S.E.C. itself

in this case, (App. 33a n. 23), that still does not give an

agency such as the S.E.C. the authority to usurp the

functions of either the legislature or the judiciary, as the

S.E.C. has done here. Moreover, as a matter of statutory

construction a lifetime bar is impermissible. The pertinent

words of Section 15(b)(7) of the Securities Exchange Act are

as follows:

“The Commission may ... by order ... bar or

suspend for a period not exceeding twelve months

any person from being associated with any broker

or dealer .

Petitioner submits that this wording demonstrates a

congressional intent to give the S.E.C. the authority to

impose a bar for a maximum period of twelve months.

The S.E.C. contends, to the contrary, that

the term “bar” implies permanence. However, the

S.E.C.’s position is inconsistant with the actions it takes

since it often imposes a bar for a period of limited duration.

See e.g. Matter of Edward C. Jaegerman, 10 S.E.C. Docket

726, 728, Securities Exchange Act Release No. 12905

(October 19, 1976) where a two year bar was imposed. In

spite of this, the Court of Appeals agrees with the S.E.C.’s

arguments on this point and has recently held that the

S.E.C. has the choice of imposing either a permanent bar

or a suspension for a period of a maximum of one year. See

Arthur Lipper Corp. v. S.E.C., 5A7 F.2d 171, 185 Qd Cir.

1976) rehearing en banc denied, slip op. 2625, 2626 (April

1, 1977) (Oakes J. Dissenting). It is submitted that this view

cannot withstand analysis and as a matter of statutory

construction should be overruled by this Court.

Turning now to the specific facts of this case, petitioner

contends that under the constitutional principles set forth

in Jones v. S.E.C., 298 U.S. 1 (1936) as well as under the

statutory provisions of § 15(b)(6) of the Securities Exchange

Act of 1934, Sloan & Co. had an absolute right to withdraw

its broker dealer registration, which would have

automatically terminated the proceedings against Sloan

and Sloan & Co. The fact that the Jones case involved a

registration statement concerning securities rather than a

broker dealer registration does not diminish its ap-

preciability to the instant case since Jones set forth general

constitutional principles which clearly apply here.

Petitioner also contends that his Fifth Amendment right

to notice and a hearing and his Sixth Amendment right to

be informed of the nature and the cause of the accusations

against him were violated in this proceeding. A reading of

the three page Order for Public Proceedings, Appendix A,

readily demonstrates that the Court of Appeais was in error

in ruling that the order set forth allegations ‘with great

particularity.”’ 547 F. 2d at 155. This becomes even more

evident when one compares the Order with the Initial

Decision, Appendix D, and with the Final Decision, Ap-

pendix E particularly in view of the S.E.C.’s own statement

that its findings were ‘‘based upon an independent review

of the record” (App. 30a, n. 2). It can be seen from these

documents that the theory of prosecution of the S.E.C.’s

case was continuously shifting, and in fact it continued to

shift when this case was argued before the Court of Ap-

peals. It is especially noteworthy that approximately half of

the Final Decision of the S.E.C. deals with events which

occurred in 1973, 1974 and 1975S which obviously were not

alleged in the Order for Public Proceedings and were not

proven at the hearing because they had not yet occurred.

Clearly, Sloan and Sloan & Co. did not know and could not

have known that these events and circumstances were

forming the basis for the accusations against them until

they actually received the Final Decision of April 28, 1975.

Consequently, in accordance with principles set forth in

cases such as Re Ruffalo, 390 U.S. 544, SSO (1968), the

severe sanctions invoked by the S.E.C. must be vacated.

On Appeal, the S.E.C. defended its procedure by

stating that the events of 1973, 1974 and 1975 were con-

sidered only with respect to the matter of sanctions and

since, according to the S.E.C., the imposition of sanctions

is unreviewable by a Court of Appeals except upon a

showing of ‘abuse of discretion’, the S.E.C. could impose

sanctions based on facts and circumstances other than

those proven at the hearing. However, the underpinnings of

this argument were knocked out by the recent opinion of

Arthur Lipper Corp. v. S.E.C., supra, which held the

matter of sanctions to be generally reviewable. (The S.E.C.

is certain to seek review of that decision in this court). If the

Arthur Lipper Corp. decision is correct, then it follows that

the facts which form the basis for the sanctions imposed by

the S.E.C. must be proven at the hearing and this would

mean that the order issued by the S.E.C. here must be

vacated.» Moreover, even without the benefit of the Arthur

Lipper Corp. decision the sanctions must be set aside “if

the remedy chosen is unwarranted in law or is without

justification in fact’ American Power Co. v. S.E.C., 329

U.S. 90, 112-113 (1946) and there is no way to determine if

the remedy is ‘‘without justification in fact’’ if the S.E.C. is

5 Petitioner believes that the holding in the Arthur Lipper Corp. case is in

conflict with the court's decision in the instant case because, inter alia, the

factors which the court cited. including the lengthy delay and the disparity in

the sanctions, were equally present here. Petitioner accordingly filed a motion

in the Court of Appeals to file an amended petition for rehearing and

suggestion that the rehearing be en banc to reflect this development in case law

but this motion was denied and his amended petition for rehearing was never

distributed to the Court.

going to base its imposition of sanctions on f

act

alleged or proven at a hearing, as is the case here. ea

Even the S.E.C. will have to agree that the Court of

— made a glaring misstatement in the law when it

id:

“Each of these injunctions was in itself a sufficient

ground to support the revocation of Sloan’s broker

dealer license under Section 15(b)(6)(c) of

Act.” S47 F. 2d at 155. estos

This statement is incorrect. It is clear that

Court of Appeals made this error is that ho teat at i

S.EC., p. 3 n. 1, which purported to quote the law as it

existed at the time of its April 28, 1975 decision, sub-

stituted in two key places three little dots for certain words

: aye hae - to Sege> a misleading impression of what

Statute scid. i

ue ee e full and correct quotation of the

(S) The Commission shall, after appropriate

notice and opportunity for hearing, by order

censure, deny registration to, suspend for a period

not exceeding twelve months, or revoke the

registration of, any broker or dealer if it finds that

such censure, denial, suspension, or revocation is

in the public interest and that such broker or

dealer, whether prior or subsequent to becoming

such, or any person associated with such broker or

dealer, whether prior or subsequent t i

poesia goa q 0 becoming so

order, judgment, or decree of any court of com-

petent jurisdiction from acting as an investment

adviser, underwriter, broker, or dealer, or as an

affiliated person or employee of any investment

company, bank, or insurance company, or from

engaging in or continuing any conduct or practice

in connection with any such activity, or in con-

nection with the purchase or sale of any security.

(D) has wilfully violated any provision of the

Securities Act of 1933, or of the Investment Ad-

visers or of this chapter, or of any rule or regulation

under any of such statutes.

The brief of the S.E.C., however, quoted the law by stating

the following:

“In this regard, Section 15 (b\S) provided, inter

alia, that the ‘Commission shall . . . suspend for a

period not exceeding twelve months, or revoke the

registration of, any broker or dealer if it finds

_..that such broker or dealer ...(C) is per-

manently or temporarily enjoined by . . . any court

of competent jurisdiction . . . from engaging in or

continuing any conduct or practice in connection

with any .. . activity as a broker or dealer or} (D)

has willfully violated any provision of

_.. |Securities Exchange Act or of the rules

promulgated by the Commission thereunder. |.’

From this it can be seen that the S.E.C., in drafting its

brief, placed **. . ."’ where the law says “after appropriate

notice and opportunity for hearing’ and at a later point

placed **...°* where the law says “if it finds that such

censure, denial, suspension or revocation is in the public

interest. ..."

Once the law is read correctly, it can be seen that an

injunction in itself is not sufficient grounds to support the

revocation of a broker dealer registration. There are three

additional required elements which are (1) notice, (2) the

opportunity for a hearing and (3) a finding by the S.E.C.

that the revocation is in the public interest. The same three

elements are also required for a bar or suspension under

Section 15(b)(7) of the Securities Exchange Act. None of

these three elements are present in the instant case and

hence the decision of the Court of Appeals must be

reversed.

The requirement that there be a finding of public in-

terest has been noted in prior judicial opinions. For in-

stance, in Jaffee & Co. v. S.E.C., 446 F. 2d 387, 394 (2d Cir.

1971) the Court of Appeals stated:

“Had Jaffee & Co. been afforded adequate notice,

it would have had an opportunity, both to take

action to lessen the attractiveness of invoking

derivative sanctions and to introduce evidence

before the hearing examiner tending to show that

the use of such sanctions would not have been in

the public interest. These opportunities were

totally denied by reason of the course adopted in

the notice and at the commission's hearing.”

The decision of the S.E.C. in the instant case did have a

section labeled “public interest’. However, nothing

discussed in that section was supported by or even alluded

to in the 1286 page record of the proceedings before the

S.E.C. Therefore, the findings of the S.E.C. regarding

“public interest’ were not supported by substantial

evidence and hence must be set aside and since a finding of

public interest is an essential element in an S.E.C.

disciplinary proceeding, the orders of the S.E.C. must be

vacated in their entirety. However, the Court of Appeals

bypassed this entire argument by its erroneous ruling that

an injunction in itself is a sufficient ground to support the

revocation of a broker dealer license.

That section of the S.E.C.’s opinion which dealt with

“public interest’ was devoted to a discussion of the very

injunctions cited in the Court of Appeals opinion and to

related court proceedings. The decision of the S.E.C. set

forth its version of the terms of a preliminary injunction

issued by United States District Judge Robert J. Ward on

January 17, 1975 in an action instituted by the S.E.C. on

December 30, 1974 and quoted out of context and in a

highly prejudicial way trom papers filed by Sloan in the

Court of Appeals in a motion for a stay of that injunction

and in a prior petition for a writ of mandamus in that case

which asked the Court of Appeals to disqualify Judge Ward

from proceeding further. (App. 28a-29a). In effect, the

S.E.C. held that it was in the “public interest’’ not to have

the authority of the S.E.C. challenged by a person such as

Sloan and that Sloan should be barred from the securities

business for that reason. However, it is clear from recent

decisions of this Court that a delegation to an ad-

ministrative agency of the broad discretionary authority to

decide what is in the “public interest” is unconstitutional.

See FEA v. Algonquin SNG, Inc. __ U.S. 49 L.

Ed. 2d 49, 5&8 n. 10 une 17, 1976). Thus, in view of the

manner in which the S.E.C. has exercised authority here,

§15(b)(5) and §15(b)(7) of the Securities Exchange Act are

unconstitutional.

As it was pointed out previously, Sloan and Sloan & Co.

did not have prior notice that either the

court filings or the preliminary injunction issued by Judge

Ward on January 17, 1975 or the permanent injunction

issued by Judge Ward on January 18, 1974 were going to

form the basis for the penalties imposed by the S.E.C. on

April 28, 1975. The S.E.C. itself demonstrated the im-

portance of these subsequent events by stating in its

decision that it gave “weight’’ to the existence of the second

injunctive suit in imposing sanctions (App. 28a) and by

Stating:

‘Here we have facts and circumstances before us

that were unknown to and could not possibly have

been foreseen by our staff at the time of the set-

tlement talks [which occurred prior to the hearing

in Oct. - Nov. 1972] (App. 34a, n. 24).”

It should be obvious that if the staff of the S.E.C. did not

know and “could not have foreseen” the “‘facts and cir-

cumstances” which formed the basis for the S.E.C.’s

imposition of sanctions, then Sloan did not know and could

not have foreseen these facts and circumstances either. Had

Sloan been afforded adequate notice, he, like the petitioner

in Jaffee & Co. v. S.E.C., supra, would have had the op-

portunity to introduce evidence before the Administrative

Law Judge and to present legal arguments tending to show

that the events of 1973, 1974 and 1975 referred to in the

S.E.C.’s opinion did not demonstrate that it was in the

public interest to impose sanctions on Sloan and Sloan &

Co. The position of the Court of Appeals to the contrary

boils down to the bald assertion that any time the S.E.C.

obtains an injunction in a United States District Court,

even by consent and without the defendant admitting or

denying the charges, it can use that injunction as a basis for

the imposition of administrative penalties without (1)

notice (2) an opportunity for a hearing (3) an independent

finding of public interest. This is clearly contrary to the

requirements set by Congress in Section 15(b) of the

Securities Exchange Act and hence the decision of the

Court of Appeals must be reversed.

On the basis of the foregoing it would seem apparent

that the decision of the Court of Appeals should be reversed

and this case should be remanded to that Court to

determine if the findings by the S.E.C. of violations by

Sloan and Sloan & Co. of S.E.C. rules and regulations are

supported by substantial evidence. However, the S.E.C. has

indicated, in a brief in opposition to a petition for a writ of

certiorari filed under Docket No. 76-365, that it is prepared

to argue that the Court of Appeals did review the evidence

and found it to be sufficient. This petitioner regards that

view as untenable since the opinion of the Court of Appeals

did not mention the term “substantial evidence’’ although

the petitioner devoted 7S pages of his brief to the argument

that the evidence was insufficient. Even the S.E.C. ad-

mitted that its principal witness, Arthur Burder, “‘ap-

_— —— wie Ge tS

peared to be confused during the cross examination”’, briet

p. 19, but it argued that the evidence was sufficient to

support a finding that Sloan and Sloan & Co. had com-

mitted at least some rule violations. In view of this, it seems

reasonable to assume that had the Court of Appeals agreed

that the evidence was sufficient it would have so stated and

the absence of any discussion of the evidence means that

either the court believed that it was unnecessary to review

the evidence or the Court agreed with petitioner's argument

that the evidence was insufficient and rested its decision on

the grounds that an injunction is in itself sufficient to

support the revocation of a broker dealer registration.

In any event, it can be readily demonstrated that based

upon the evidence in the record it could not be found that

Sloan and Sloan & Co. wilfully violated any of the rules

involved. This can be seen by taking up each of the rules in

reverse order as follows:

S.E.C. Rule 17a-11, 17 CFR §240.17a-11, requires a

broker dealer to send a telegram to the S.E.C. notifying the

S.E.C. of any violation the S.E.C. net capital rule ‘‘on the

date of the violation.” The Order for Public Proceedings

alleged that Sloan & Co. violated the rule on September 15.

1971, the date that the rule went into effect. The decision of

the S.E.C. later “found” that this violation had occurred

(App. 32a, n. 17) although two essential elements of proof

were missing. First, the S.E.C. made no effort to prove that

Sloan violated the net capital rule on September 15, 1971.

Second, the S.E.C. failed to prove that Sloan did not send a

telegraphic notice to the S.E.C. on that date or that he

“wilfully” failed to do so.

On appeal, the $.E.C. admitted this error and stated that

the opinion of the S.E.C. had assumed “arguendo” that

Sloan & Co. had not violated the net capital rule from July

28, 1971 until January, 1972. Nevertheless, the S.E.C.

argued that Sloan & Co. was required to notify the S.E.C.

by telegram of its January, 1972 net capital deficiency and

hence violated Rule 17a-11 by failing to do so. In other

words, the S.E.C. argued that Sloan & Co. had not violated

Rule 17a-11 on September 15, 1971 as the S.E.C. had

found, but that he had violated the rule in January, 1972.

The making of this argument provides one of the many

examples of the continuously shifting theories of the

prosecution of the S.E.C.’s case. In any event, the claim

that Sloan violated Rule 17a-11 in January, 1972 has as its

underpinnings the finding of the S.E.C. that Sloan & Co.

had a net capital deficiency of $718 on January 31, 1972.

(App. 26a) But the record shows that this finding was based

upon faulty computations by S.E.C. investigator Kanoff of

Sloan's net capital. In particular, Kanoff failed to give

Sloan & Co. full credit for the market value of certain

proprietary securities, principally Shareholders Excalibure

Investments, an actively traded European mutual fund

with over a billion dollars in assets, which Kanoff never-

theless valued at zero. When asked why he valued these

securities at zero, Kanoff testified that he did so “as a

matter of expediency”’ (Transcript p. 244) and because his

supervisor told him “not to bother” looking it up.

(Transcript p. 242). Kanoff also testified that had he given

these and certain other similarly treated items their full

value rather than zero, Sloan & Co. would have been “right

on the button” as far as being in compliance with the

S.E.C.’s net capital rule. (Transcript p. 247). In short, it

was Kanoff's faulty computation of Sloan’s net capital

which created an otherwise non-existant violation of the

S.E.C.’s net capital rule on January 31, 1972.

At this point it is appropriate to mention that errors of

this sort were typical of the computations made by Kanoff

as a whole. For example, in the trial balances for July 31

and August 31, 1971, Sloan & Co. was long an item of 200

Voplex Corp. (Transcript p. 213-215, 230-231, 265-266).

Kanoff valued this item at zero in spite of a computation

submitted to the S.E.C. by Sloan which was available to

Kanoft and which showed Voplex Corp. to be worth $14

per share. Voplex Corp. was listed and traded on the

American Stock Exchange but K anoff still valued its shares

at zero apparently because he did not bother to look up the

American Stock Exchange prices. Thus, Kanoffs com-

putations for July 31, 1971 and August 31, 1971 were off by

at least $2,800. Typical of its attitude towards this case, the

S.E.C. has yet to admit that Kanoff was in error and that

Voplex Corp. was traded on the American Stock Exchange

at $14 per share on the dates in question even though this

information is readily available in financial publications.

Similarily, with respect to the August 31, 1971 trial

balance, a failure in the S.E.C. photocopy machine caused

three security positions worth $1676.25 to be washed out

and Kanoff did not include the value of these securities in

computing Sloan's net capital. (Compare Record p. 601

with Record p. 607-608). Kanoff, when confronted with this

mistake on cross examination, admitted the error.

(Transcript p. 232, 233 and 249). While honest human

errors of this sort are understandable, it is significant to

note that a year later in the trial in the injunction action

before Judge Ward, the S.E.C. attorneys offered into

evidence the identical capital computations containing the

same errors without any explanation that Kanoff had

previously admitted under oath that these computations

contained mistakes. Judge Ward then proceeded to

overrule all attempts by Sloan to show that these com-

putations were wrong and incorporated the results of these

computations into his findings of fact.

Of course, these computational errors now seem to be of

little moment since the S.E.C. conceeded, for the purposes

of the appeal and contrary to the apparent findings of the

S.E.C., that Sloan & Co. did not violate the net capital rule

on any date starting from July 31, 1971 and continuing

through December 31, 1971 since Sloan & Co. was not

doing business during this period. However, in view of this

concession it should be noted that the finding of a violation

of the net capital rule on January 31, 1972 is predicated not

only on the finding of a $718 net capital deficiency on that

date but also upon a finding that in January, 1972 Sloan

“inserted quotations for various securities in the pink

sheets published by the National Quotation Bureau, Inc.”

(App. 26a). There is no evidence to support this finding and

the finding itself is untrue. Since there is no evidence to

support this finding it follows that there is insufficient

evidence to support a finding of a violation of the net

capital rule on January 31, 1972 and from this it follows

that there is insufficient evidence to support a finding of a

violation of Rule 17a-11 on the same date.

In arguing this point, the petitioner went one step further

in the Court of Appeals by po: ating out that under Fifth

Amendment principles set forth in cases such as Leary v.

United States, 39S U.S. 6, 16 (1969) a statute or rule

requiring that an individual notify the government by

telegram that he has violated a criminal statute, is un-

constitutional. This argument is clearly correct since a

violation of the net capital rule is made criminal by §32(a)

of the Securities Exchange Act and hence Rule 17a-11 must

be found to be unconstitutional even if the S.E.C. had been

able to prove a violation, which it did not do.

witness and to ask Sloan under oath whether he submitted quotations to the

pink sheets in January, 1972. When Sloan failed to respond affirmatively, the

S.E.C. tried to impeach his testimony. This attempt to prove this finding was

clearly improper. If the S.E.C. wanted to do so it had only to produce a copy of

the pink sheets, which are readily available to the S.E.C. and show a quotation

inserted by Sloan in January, 1972. The S.E.C. failed to do so. Un a related

point, the S.E.C. computations concerning whether Sloan & Co. was in

compliance with the net capital rule turned primarily on the valuation of the

proprietary securities held by Sloan and Sloan and Co. specialized as a market

maker in over-the-counter securities and invariably held a large securities

mventory for that reason. Since an error of 10% or less in determining the

market value of Sloan's security inventory would make the difference in

whether Sloan & Co. was shown to be in or out of compliance with the net

capital rule on the dates in question, clearly the S.F.C. was required to produce

the pink sheets, the Wall Street Journal, or other sources of security prices in

order to demonstrate that its market valuations were correct. Again, the S.E.C.

ftarled to do so.

- a SC a AE a

Turning now to the finding that Sloan & Co. wilfully

violated Rule 17a-10, it should be pointed out that the

S.E.C. made no effort to prove this violation through

testimony at the administrative hearing. The only reference

to Rule 17a-10 is the entire record of this proceeding (not

counting briefs, decisions and orders) is in an attestation

signed by the Deputy Records officer of the S.E.C. This

attestation stated that “a report on Form X-17A-10 was

filed June 8, 1972 by Samuel H. Sloan d/b/a Samuel H.

Sloan & Co. pursuant to the provisions of the Securities

Exchange Act of 1934."’ This statement clearly referred to

Sloan's 1972 filing, which is not in issue in this case.

Nevertheless, the decision of the S.E.C. states that

“respondent says he did not [file an X-17A-10 Report] until

December, 1971."" (App. 32a, n. 16). In fact, respondent

made no such statement. On appeal, the S.E.C. claimed

that this statement by respondent (the petitioner here)

could be found in his answer. (Brief p. 26). However, the

answer filed by the respondent merely stated that the report

required by Rule 17a-10 was filed late, without stating

when it was filed, and denied “that such late filing was

wilfully done so as to violate Section 17(a) of the Exchange

Act.” (Record p. 694). Under the Administrative

Procedure Act, 5 U.S.C. §556 (d), the burden of proof at

the administrative hearing was on the S.E.C., since the

S.E.C. was the proponent of the order being sought. For

the S.E.C. to invoke sanctions under §15(b)(5)(C) and

§1S(b)(7) of the Securities Exchange Act, it must prove (1)

that there was a violation of a rule and (2) that the violation

was wilfull. In the case of the allegation of a violation of

Rule 17a-10, since the S.E.C. did not make an effort to

demonstrate either through testimony or documentary

evidence that there was a rule violation, it clearly did not

prove that the violation was wilfull. It should also be noted

that during the period in question, Sloan employed the

services of three certified public accountants, one of which,

Taylor, was hand picked by the S.E.C. Each of these

accountants prepared for filing a separate X-17A-5 report

at considerable expense to Sloan & Co.” Sloan & Co. also

submitted trial balances and supporting schedules to the

S.E.C. on a monthly basis, although not required by any

rule to do so.8 Since Rule 17a-10 simply requires a one

page unaudited statement of income and expenses for each

calendar year and since Sloan was submitting far more

comprehensive and detailed information to the $.E.C. on a

regular basis, it is obvious Sloan simply did not realize that

an X-17A-10 report was required in addition to all of the

other reports he was submitting and that neither his ac-

countants nor his attorney nor the S.E.C. itself told him

about it.9

In any event, a violation of Rule 17a-10 is clearly de

minimus. Knowing what a broker dealer’s income and

expense was for a calendar year does not help the S.E.C.

learn whether its rules have been violated, nor does it serve

any regulatory purpose. Although it has been held that

Congress may require business entities to keep records and

——

7. Taylor charged Sloan & Co. $1200 for preparing his financial report as at

June 30, 1971. A previous accountant, Martin London, billed Sloan & Co. $650

for preparing an X-17A-S report as at September 25, 1970.

8. The decision of the S.E.C. states that ultimately the S.E.C. staff obtained

“almost all of the trial balances it requested.” (App. 31a, n. 10). It also states

that Sloan & Co. violated Rule 17a-3 by virtue of the fact that the S.E.C. “staff

generally had to make about two or three requests for each trial balance it

obtained.” (App. 26a). However, it can be seen from reading Rule 17a-3 that

although it requires every broker dealer to maintain, among other things,

monthly trial balances, see Rule 17a-3(a)(1 1), it does not require a broker dealer

to submit these trial balances along with supporting schedules to the S.E.C.

Moreover, since Sloan's office was only about six brocks away from the New

York Regional office of the S.E.C., it was a simple matter for an S.E.C. in-

vestigator to come to Sloan's office and examine his monthly trial balances and

indeed the S.E.C. investigators often did so.

¥. It is significant to note that the S.E.C. does not claim that it had previously

advised Sloan of any of the rule violations alleged in the Order for Public

Proceedings or that it sent the customary warning letter sent in similar cases.

See Economou v. U.S. Dept. of Agriculture, 494 F.2d 519 (2d Cir. 1974).

Indeed, in response to a Freedom of Information Act request discussed infra.

the S.E.C. released to Sloan a memorandum dated Apri! 20, 1971 which stated

that the commission had instructed the staff “to warn Sloan about the alleged

violations.’’ The staff never did so The S.E.C. has recently advised Sloan that

this memorandum was releasea \o him unintentionally.

make reports, United States v. Morton Salt Co., 338 U.S.

632, 647-651 (1950), these reports must reasonably be

related to a specific purpose. Shapiro v. United States, 335

U.S. 1, 32 (1948); Yakus v. United States, 321 U.S. 414,

424 (1944): United States v. Darby, 312 U.S. 100, 125

(1941). In its brief to the Court of Appeals, the S.E.C.

argued that the reports required by Rule 17a-10 are “used

by the Commission for statistical purposes necessary in

connection with the commission's regulation of broker-

dealers." (Brief p. 33). No further information was

provided such as why this statistical information was

necessary or where it was compiled or published. On this

basis, Rule 17a-10 is unconstitutional.

The converse situation is presented with regard to the

next rule which the S.E.C. found that Sloan and Sloan &

Co. had wilfully violated, namely Rule 17a-S. Rule 17a-5

requires brokers and dealers to file with the S.E.C ,

comprehensive certified financial statements on a periodic

basis. The S.E.C. argues that these reports are necessary

because they enable the S.E.C. to determine if the broker

dealer is in compliance with the net capital rule, Rule 1Se

3-1. This is clearly correct since a report filed on Form X-

17A-S must state specifically whether or not the broker

dealer is in compliance with the net capital rule and if there

is a net capital violation, the exact amount of the net

capital deficiency.

As was noted in the discussion concerning the alleged

Rule 17a-11 violation, a violation of the net capital rule is

criminal inasmuch as it constitutes violation of Section

1Sic)(3) of the Securities Exchange Act. Under §32(a) ot

the Securities Exchange Act, any person convicted of a

violation of any provision of the Securities Exchange Act or

any rule or regulation thereunder shall be fined not more

than $10,000 or imprisoned not more than two years or

both. Therefore, a broker dealer who files an X-17A-5

report which states that he is in violation of the net capital

rule is confessing to .he federal government that he has

committed a serious crime. Consequently, Rule 17a-5 is

unconstitutional under the Fifth Amendment principles set

forth in cases such as Marchetti v. United States, 390 U.S.

39, 47 (1968); Grosso v. United States, 390 U.S. 62, 64

(1968); Haynes v. United States, 390 U.S. 85, 96 (1968)

and Leary v. United States, 395 U.S. 6, 16 (1969).

In spite of the compelling logic to this argument, the

Court of Appeals disagreed, ruling that the Securities

Exchange Act “is not criminal but clearly regulatory in

nature.” 547 F.2d at 154. How it reached this conclusion is

not explained. The S.E.C. argued to the Court of Appeals

that the reports required by Rule 17a-5 and Rule 17a-11

“are not designed to ferret out criminal wrongdoing but

... to provide a means of determining whether broker

dealers are in compliance with the financial responsibility

requirements.” (Brief p. 32). In other words, the S.E.C.

argued that it uses the X-17A-S and X-17A-11 reports, not

to determine if broker dealers are committing a crime, but

to determine if they are violating the law. The S.E.C. has

no interest in knowing, in the absolute sense, how much

capital a broker dealer has. It is only interested in knowing

whether or not the broker dealer is in compliance with the

net capital rule. Due to the complex provisions of the net

capital rule, a broker dealer with a net capital of

$10,000,000 can nevertheless have a net capital deficiency

whereas a broker dealer with net capital of only $5000 and

sometimes even less can be in full compliance with the rule.

The reports required by Rule 17a-5S serve only one purpose,

and that is to tell the S.E.C. whether the broker dealer is in

compliance with the net capital rule. If there is any other

purpose, the S.E.C. has yet to state what it is.

With regard to the claim that Sloan & Co. wilfully

violated Rule 17a-S, here again the S.E.C.'s case is again

weak. The evidence adduced at the hearing by the S.E.C.

consisted of the answers to three questions which were

propounded when Sloan was testifying as a witness for the

S.E.C. The first question was “were you aware that you

had to file an X17AS for 1970?" Sloan answered, “Yes.”’

The second question was, “Was this report filed on or by

January 15, 1971?"’ Sloan answered, “No.” (Transcript p.

334). The third question was, “Why wasn’t it filed as of

January 15, 1971?"’ To this question, Sloan gave a lengthy

answer which he elaborated on during cross examination.

Sloan's uncontradicted testimony was that he hired an

accountant named Martin London of the New York City

accounting firm of Lader, Scheps & London, who

proceeded to prepare an X-17A-S report as at September

25, 1970. (Transcript p. 424). However, when Sloan went

to file this report, he was told by Lawrence Jaffee, an at-

torney in the Division of Legal Interpretation of the S.E.C..,

that the report London had prepared was not acceptable as

an X-17A-S report because, unbeknownst to Sloan at the

time he had hired London, London was a partner in a small

stock brokerage firm in Long Island and it was the view of

the Division of Legal Interpretation of the New York

Regional Office of the S.E.C. that any partner or officer of

any registered securities broker dealer was not “in-

dependent” within the meaning of Rule 17a-5 (b)(1) and

therefore could not act as an independent certified public

accountant for any other registered securities broker

dealer. Based upon this ruling, Jaffee instructed Sloan to

prepare a new report not as of a date within the time

required for filing an X-17A-S report but as of the most

current date possible. (Transcript p. 385). Sloan did as

instructed and subsequently his new accountant, Raymond

Leon, filed an X-17A-5 report as of January 29, 1971 which

was treated as a 1970 filing. 10 Later, Sloan submitted yet a

10. The Administrative Law Judge stated that the report of financial con-

dition as of January 29, 1971 was treated as a 1971 filing (App. 16a). This was

not correct. At the administrative hearing, the attorney representing the S.E.C.

stated “there's no allegation that Mr. Sloan has not filed the X-17A-S report for

1970” (Transcript p. 428) which, in its brief to the Court of Appeals, the S.E.C.

explained as meaning that the S.E.C. was instead alleging that Sloan had not

filed the X-17A-5 report on time. (Brief p. 27 n. 22). Also, the allegation in the

Order for Public Proceedings was that Rule 17a-S was violated “from on or

about October 10, 1970 to March S, 1971."’ March 5, 1971 was the date Sloan

filed the January 29, 1971 report. Thus it is clear that this report was taken as

satisfying the 1970 filing requirement.

third X-17A-S report, this one reflecting the financial

condition of Sloan & Co. as of June 30, 1971, for the

purpose of satisfying the 1971 filing requirement.

During the administrative hearing, the S.E.C. seemed to

be advancing a new charge, not alleged in the Order for

Public Proceedings, that Sloan & Co. had failed to file an

X-17A-5S report for 1971. This allegation was based on the

assertion that the June 30, 1971 filing was not accepted by

the S.E.C. (Incidently, the $.E.C. never notified Sloan that

this filing had not been accepted and in fact notified

Sloan’s accountant that the filing had been accepted

(Transcript p. 172-173) ). Testimony was taken on the

question of who on the staff of the S.E.C. made the

decision not to accept the June 30, 1971 report as an X-

17A-S filing and why this decision was made. (Transcript

p. 172-174). However, the Administrative Law Judge said

that he was unable to see why it was not accepted as an X-

17A-S filing (Transcript p. 173-174) and the S.E.C. did not

press its argument further.

Once this background is understood, the finding that

Sloan & Co. wilfully violated Rule 17a-S is not so obvious as

the decision of the $.E.C. makes it appear. (App. 32a, n.

16). The threshold question would seem to be whether the

S.E.C. acted arbitrarily and capriciously in refusing to

accept Sloan's X-17A-5 report as of September 25, 1970.

Had the S.E.C. been willing to accept this report, the filing

requirement would have been satisfied and the instant case

would probably never have come before the courts.!!

11. The S.E.C. started its investigation of Sloan and Sloan & Co. after

receiving a letter from Sloan & Co. which stated that it was unable to file its X-

17A-5S report on time. The letter was sent on January 11, 1971 and Bruder, the

S.E.C. staff investigator, made his first visit to Sloan's office the next day.

— ee"

Then, assuming the S.E.C. was correct in refusing to

accept Sloan's September 25, 1970 report, the next

question is whether Sloan knew or should have known that

this report would not be acceptable and whether, as a

consequence, he wilfully violated Rule 17a-S. The third

question is whether under applicable Fifth Amendment

principles, the Government can constitutionally require the

filing of an X-17A-S report which may require a broker

dealer to admit criminal wrongdoing. Finally the fourth

question is whether, assuming the answer to the first three

questions is favorable to the position of the S.E.C., it is

appropriate for the S.E.C. to bar Sloan for life from being

associated with any broker or dealer because in 1971 he was

four months late in filing his X-17A-S report.12

Actually, all of this is of little moment because it can be

seen that S.E.C. is not authorized to institute an agency

proceeding based merely upon a claim of a late filing of a

required financial report. The Administrative Procedure

Act, S U.S.C. §558(c)(2), requires the agency to give the

respondent the “‘opportunity to demonstrate or achieve

compliance with all lawful requirements.’’ With regard to

the violations of the financial reporting requirements, the

Order for Public Proceedings in this case alleged and the

S.E.C. found that the violation of Rule 17a-S ended on

March 5, 1971 and the violation of Rule 17a-10 ended on

December 2, 1971 (App. 2a-3a, App. 32a). The S.E.C.

12. It is worth mentioning that the S.E.C. continued to give Sloan trouble

with respect to the matter of X-17A-S reports. At a later date Sloan submitted

an X-17A-S report prepared by Taylor as of July 31, 1972. The S.E.C. refused to

accept this filing, stating that Taylor had appeared as counsel of record in this

administrative proceeding and the S.E.C. would not permit the same person to

act as both attorney and accountant for a broker dealer. Consequently, Sloan

was forced to hire yet a fourth accountant who succeeded in preparing an X-

17A-S report dated December 31, 1972 which proved acceptable to the S.E.C.

This, over a period of slightly more than two years, Sloan & Co. had a tota! of

five X-17A-S reports prepared, of which three were rejected for arbitrary

reasons which Sloan could not have anticipated. In view of Sloan's substantial

efforts to satisfy the capricious demands of the S.E.C., it can hardly be said that

he wilfully violated Rule 17a-5

commenced its administrative proceeding on April 25,

1972 which was 13 and 4 months respectively after the

conclusion of the alleged financial reporting violations.

Therefore, the violations of Rule 17a-S and 17a-10 were

non-existant at the time the S.E.C. commenced its agency

proceeding against Sloan and Sloan & Co. consequently

under 5 U.S.C. §558(c) the sanctions invoked in this case

are “‘unlawful.”’

The foregoing points have eliminated all but two of the

rules which the S.E.C. found that Sloan and Sloan & Co.

had violated. The rules which remain are Rule 15c 3-1 (the

net capital rule) and Rule 17a-3 (the bookkeeping rule). 13

The entire record generated by the S.E.C. with regard to its

claims that Sloan and Sloan & Co. had violated the net

capital rule on various dates consisted of handwritten

‘capital computations” and related documents which had

been prepared by Bruder and Kanoff, the two S.E.C. staff

investigators who testified at the administrative hearing.

These capital computations were put

into the record after only a cursory explanation of what

they were based upon. On cross examination, Kanoff

admitted at several points that his computations contained

mistakes. Bruder, however, refused to admit any errors.

Actually, most of Bruder’s figures bore no relation to the

financial position of Sloan & Co. On direct examination,

Bruder was asked nothing more than whether he prepared

the figures and what his bottom line conclusion was. No

further attempt was made by the S.E.C. to probe into how

Bruder arrived at his computations or what was their

factual basis. On cross examination, Bruder testified that

he prepared his balance sheets for Sloan & Co. partly by

taking figures he found somewhere in Sloan's books and

records and partly by including in figures which he

generated himself. (Transcript p. 57-61). Bruder was not an

13. The Administrative Law Judge found that Sloan and Sloan & Co. had

also violated Rule 17a-4. (App. 13a). However, the S.E.C. reversed this finding.

(App. 3a, n. 6).

accountant and, as far as the record shows, may not even

have been a high school graduate. His testimony on cross

examination and an examination of his capital com-

putations shows that he took figures from various assorted

places in Sloan's books and records and included them in

his rendition of Sloan & Co.'s general ledger trial balance.

When doing this put the trial balance he was preparing out

of balance, Bruder then looked for other offsetting figures

and if he could not find such figures he would create them

himself. For example, in his January 18, 1971 trial balance,

among those items labeled “‘non-current assets” Bruder

listed ‘Receipts, Deliveries to customers =$9851.25."" On

the liabilities side, Bruder listed “receipts, payments a/c

customers = $11,010.13."" Sloan, incidently, had no

customers at this time. Bruder admitted on cross

examination that he did not find either of these figures in

Sloan's general ledger accounts. (Transcript p. 58-60).

Anyone with an elementary knowledge of bookkeeping

principles knows that neither “Receipts, Deliveries to

customers’’ nor “Receipts, payments a/c customers” are a

proper general ledger item. Nevertheless, Bruder inserted

these partially offsetting figures and then took the $9851.25

figure as a deduction from the net capital of Sloan & Co.

Only after this and other equally ill-founded deductions did

Bruder arrive at his final figures which purported to show a

net capital deficiency for Sloan & Co. in the amount of

$28,016.70.

Annexed hereto as Appendix M is Bruder’s net capital

computation for Sloan & Co. as of January 18, 1971. Any

accountant can take one glance at this document and

determine that the person who prepared it did not know the

first thing about basic accounting and bookkeeping

principles. Actually, the original document offered into

evidence by the S.E.C. is illegible and Appendix M has

been prepared for purposes of this petition with the aid of a

magnifying glass. (Even with the use of a magnifying glass

an inscription in the lower left hand corner of the original

document remains indecipherable). Appendix M is in-

cluded by way of illustration since it is typical of the

numerous computations introduced into evidence by the

S.E.C. which form the underlying basis for the S.E.C.’s

decision to bar Sloan for life from being associated with any

broker or dealer.

On appeal, the brief for the S.E.C. did not offer a word in

defense of the obviously nonsensical computations of

Bruder or the admittedly erroneous computations of

Kanoff. Instead, the S.E.C. rested its argument on the

point that “the capital computations involved were ad-

mitted into evidence without any objection being made by

Sloan's counsel.” (Brief p. 25). However, under 5 U.S.C.

§SS6(d) there was no basis for an objection by Sloan's

counsel on the grounds of admissibility. Administrative

proceedings such as this one are not bound by the technical

rules of evidence but after documents are received in

evidence the burden of proof remains on the “proponent of

the order’ to demonstrate that the documentary evidence

has probative value. See Jacobowitz v. United States, 424

F.2d SSS, 559 (Ct. Claims, 1970). Clearly, capital com-

putations riddled with mistakes, as most of the com-

putations submitted by the S.E.C. admittedly or self

evidently were in this case, have no probative value.

Moreover, under 5 U.S.C. § SS8ic) Sloan should have had

the opportunity, prior to the commencement of agency

proceedings, to examine the capital computations and to

demonstrate that they were wrong. Sloan was not given this

opportunity and not only did the S.E.C. not let Sloan and

his attorney and accountants examine the capital com-

putations prior to the commencement of the agency

proceedings, but the S.E.C. staff vigorously resisted all

atiempts by Sloan's attorney to force production of these

documents and the S.E.C. attorney in charge of its case

even wrote a nasty letter to the Administrative Law Judge

(Record p. 742) when on August 15. 1972 he ordered their

production (App. 7a-8a). Indeed, at the hearing, Taylor.

Sloan's attorney, complained that he still had not been

given the computations for January 29, 1971.

Of course, the appropriate time to permit Sloan to see

the January 29, 1971 computation was not on October 30,

1972, the first day of the hearing, or even two months

before the scheduled hearing. Instead, the S.E.C. should

have provided Sloan with a copy of its computations for

January 29, 1971 in either January or February, 1971 and

should have advised Sloan of its conclusion that Sloan &

Co. was in violation of the net capital rule and given Sloan a

meaningful opportunity to demonstrate that the figures

were incorrect and/or to take corrective action. This point

goes to the question of wilfullness. How can the S.E.C.

claim that Sloan and Sloan & Co. wilfully violated the net

capital rule in early 1971 when the S.E.C. itself, which had

access to computations which Sloan did not have, never

stated that this occurred until more than a year later?

Compare Buchman v. S.E.C., slip. op. 3093, 3103 Qd Cir.

April 20. 1977).

The record in this case shows that Sloan had every reason

to believe that he was in compliance with the net capital

rule. As noted previously, Sloan & Co. filed with the S.E.C.

a certified X-17A-S statement as of January 29, 1971 which

had been prepared by Raymond Leon, a certified public

accountant. This certified X-17A-S statement showed

Sloan & Co. to have a net capital of $4,529.99 in excess of

the S.E.C.’s requirements. The S.E.C. has never challenged

the validity or the accuracy of this filed X-17A-5 report. Yet

it continues to maintain, without a word of explanation.

that Sloan & Co. was in violation of the net capital rule on

January 29, 1971.

Like the January 18 ‘971 computation, it can clearly be

seen that Bruder’s January 29, 1971 computation was

wrong. Most of the net capital deficiency he “found” was

based upon a deduction of $10,000 which Bruder took from

Sloan's net capital. No logical explanation has ever been

given for this deduction. As noted previously, the S.E.C. on

appeal did not defend the accuracy of any of the capital

computations but merely stated that no objection had been

made to their admissibility. Bruder’s testimony was that he

had deducted the $10,000 as an “unconfirmed gift’ from

Sloan's mother. He testified that he had not found this item

anywhere in the assets of Sloan & Co. (Transcript p. 69),

that Sloan's mother did not write to the S.E.C. to say that

she had given her son $10,000 (Transcript p. 71), and that

consequently Bruder had included the sum of $10,000 as a

“liability” of Sloan & Co. (Transcript p. 70). This assertion

makes no logical sense. Neither Sloan nor his mother nor

the books and records of Sloan & Co. stated that Sloan had

received $10,000 from his mother as a gift or otherwise and

yet Bruder deducted $10,000 from the net capital of Sloan

& Co.

The Administrative Law Judge demonstrated his

misunderstanding of the case when he said that Sloan

“claimed a $10,000 gift from his mother, which was not

supported” (App. 15a). Actually, it was the other way

around. Moreover, the Administrative Law Judge's

Statement that the gift was “not supported"’ was based on

the false testimony by Bruder that Sloan had failed to give

him a deposit slip showing a deposit of $10,000. This false

testimony occurred when Alan Rashes, the attorney ap-

pearing for the S.E.C., asked Bruder a question in

preparation to offering a deposit slip dated January 29,

1971 into evidence. Rashes asked Bruder whether Sloan

ever gave him a deposit slip, obviously expecting a “yes”

answer. (Transcript p. 90). When, to the surprise of Rashes,

Bruder gave a “no” answer, Rashes put the deposit slip

away leaving the Administrative Law Judge with the false

impression that the $10,000 deposit “was not supported.”

Actually, by introducing the $10,000 deposit slip, Rashes

was trying to confuse the issue since this item could not

possibly have represented the $10,000 which Sloan sup-

posedly received from his mother at a much earlier date.

A year later, at the trial of the parallel injunctive action,

Sloan obtained an order from Judge Ward requiring the

S.E.C. to search its records and produce such a deposit slip,

if one existed. After making a tremendous protest to Judge

Wards order, the S.E.C. produced a deposit slip and an

April, 1971 trial balance, both of which had been sub-

mitted to the S.E.C. and both of which the S.E.C. had

claimed in its proposed findings of fact that it had never

received. Sloan then wrote to the S.E.C. and advised that

Bruder and Kanoff had now admittedly testified falsely

when they said that the deposit slip and the April, 1971

trial balance respectively had never been received by the

S.E.C. (Record p. 1255-1256). However, the S.E.C.

sidestepped the problem of perjured testimony by its two

staff investigators (Transcript p. 90 and p. 102), knowingly

induced and left uncorrected by its staff attorneys in charge

of the prosecution of its case, when it said that the receipt

of these items had “no bearing’ on the net capital

deficiencies. (App. 31a, n. 8). This was not correct as it can

be seen that the S.E.C., in a quick shift of its theory of

prosecution of its case, offered Sloan's failure to give

Bruder the $10,000 deposit slip as ‘‘proof”’ that Bruder was

correct in deducting $10,000 from Sloan's net capital.

Significantly, Kanoff, who was assigned to this matter

after Bruder retired from the S.E.C.,which occurred shortly

after he made his computation as of January 29, 1971, did

not deduct the mysterious $10,000 figure when he com-

puted the net capital of Sloan & Co. as of February 26,

1971. He did, however, deduct the sum of $58,175 as a

“loan payable” to one Joseph Iny. Iny was a stock broker

with whom Sloan had had financial dealings unrelated to

his activities as a market maker in over-the-counter

securities. The sum of $58,175 was the total amount of

money which had changed hands between Sloan and Iny.

However, Iny, who testified as a witness for the S.E.C., did

not testify that he ever loaned Sloan the sum of $58,175. In

fact, he testified, directly to the contrary, that although he

“wouldn't question |Sloan's| honestly” he was afraid to put

“too much money in his hands.” (Transcript p. 382-383).

Iny also testified that he was “‘satisfied’’ with the results of

his financial dealings with Sloan (Transcript p. 381)

although Sloan had “personally offended’ him at a later

date, (Transcript p. 390).

The record of this proceeding contains documents

setting forth details of all of the financial transactions

between Sloan and Iny during the pertinent period. An

examination of these documents shows that Sloan did not

owe Iny $58,175 or any other sum of money on February

26, 1971. Nevertheless, Kanoff arrived at the conclusion

that Sloan & Co. had a net capital deficiency of $15,961

after deducting a “loan payable’ of $58,175 from Sloan's

net capital. There is no factual basis for this deduction and,

like the previously discussed deductions, the brief of the

S.E.C. did not, obviously because it could not, defend the

accuracy or the validity of this deduction.

Thus it can be seen that the S.E.C.’s capital com-

putations for January 18, 1971, January 29, 1971, February

26, 1971, and January 31, 1972 were plainly and, in the

latter case, admittedly erroneous and, as noted previously,

the S.E.C. now agrees that no violations of the net capital

rule occurred on any of the dates from July 30, 1971

through December 31, 1971. That leaves June 30, 1971 as

the only other date on which the S.E.C. specifically found a

net capital violation.!4 However, due to an anomaly in the

14. The appeal brief for the $.E.C. claims that Sloan himself testified that

he was in violation of the net capital rule on July 28, 1971, and that this

testimony can be found on pages 409-410 of the transcript. However, on those

pages Sloan testified that Taylor told the S.E.C. at the July 28, 1971 meeting

that the report Taylor had prepared showed that Sloan & Co. did not have

sufficient net capital to do business. As the S.E.C. well knows, the matter

discussed at the July 28, 1971 meeting was Taylor's report concerning the net

capital of Sloan & Co. as of June 30, 1971. In any event, in urging that there

was a violation of the net capital rule on July 28, 1971, the S.E.C. was urging

the Court of Appeals to make « finding which the S.E.C. itself did not make.

Under § 2Sia)4) of the Securities Exchange Act, the Court of Appeals does not

have the authority to make new findings of fact and is only authorized to set

aside those findings of fact which are not supported by ‘substantial evidence.”

way in which the S.E.C. computes the net capital of broker

dealers, a net capital computation reflects the proprietary

securities owned by the broker dealer five business days

earlier. In this case, that micans that ihe computation of the

net capital of Sloan & Co. as of June 30, 1971 involved

a valuation of the securities owned by Sloan & Co. on June

23, 1971, five business days earlier, since any securities

bought or sold by Sloan & Co. on or after June 24, 1971

would not reach settlement date until on or after July 1,

1971 and consequently would not be reflected on he June

30, 1971 capital computation. However, the fact is that on

June 23, 1971 and the days immediately proceeding, Sloan

and Sloan & Co. were prohibited by a temporary

restraining order obtained by the S.E.C. from effecting any

purchases and sales of securities. Thus, in the normal

circumstance, if the net capital of Sloan & Co. had become

impaired, the situation could have been rectified by selling

the long positions or buying the short positions maintained

by Sloan & Co. so as to reduce the 30% haircut to the extent

necessary to rectify the capital impairment. However, in

this case, Sloan & Co. was prohibited by a district court

order from conducting the necessary market operations to

rectify any net capital problems that might arise. Con-

sequently, it cannot be found that Sloan and Sloan & Co.

wilfully violated the net capital rule on June 30, 1971.

From this point it can further be seen that the net capital

rule is unconstitutionally vague and uncertain. Every time

the S.E.C. computes net capital, it bases its computation on

the market price of the security positions of the broker

dealer as they existed five business days earlier. If it

happens that during the five days between the trade date

and the settlement date, the securities owned by the broker

dealer as of the trade date fluctuate the wrong way, the

result might be a net capital violation, even though the

offending securities were sold as many as four days prior to

the date of the computation. For this reason, it is im-

possible for a broker dealer to tell whether a transaction is

legal at the time he makes the transaction and hence under

cases such as Connally v. General Construction Co., 269

U.S.385, 391 (1926) the net capital rule is unconstitutional.

On appeal, the S.E.C. admitted that “because of market

fluctuations it might be difficult for a broker-dealer to

know whether he was in compliance with the capital

requirements” (Brief p. 29) but argued that this problem

would not arise if the broker used “trade date accounting

rather than the settlement date accounting used by Sloan &

Co.” However, “settlement date’’ accounting is used by

virtually all broker-dealers and is required for all broker-

dealers who are members of the New York Stock Exchange.

Moreover, it was Bruder and Kanoff, not Sloan & Co., who

made the decision to use “settlement date’’ accounting. It

was they alone who made the computations which, ac-

cording to the S.E.C., show that Sloan & Co. was in

violation of the net capital rule. Clearly, Sloan & Co. was

not in a position to dictate the accounting methods used by

Bruder and Kanoff. In addition, the “trade date’ ac-

counting method has a variety of other even more serious

infirmities which explains the fact that it is virtually never

used by broker dealers. Among these is the fact that under

the trade date method, all sales of securities become “‘fails

to deliver’’ five days before the settlement date and this

results in an increase in the aggregate indebtedness which

automatically results in a reduction in the net capital

available to the broker dealer.

The foregoing analysis has been somewhat tedious but it

nevertheless has demonstrated that the record does not and

could not show that Sloan and Sloan & Co. wilfully violated

the net capital rule on any of the dates in question. That

leaves only the violation of Rule 17a-3, the bookkeeping

rule. A discussion of this alleged violation requires a

sentence by sentence analysis of the decision of the S.E.C.

which required 37 pages of the petitioner's brief in the

Court of Appeals and which resulted in the conclusion that

none of the statements made by the S.E.C. regarding

violations of Rule 17a-3 were supported by ‘‘substantial

evidence”. It would not be appropriate to include this

analysis in this petition for a writ of certiorari. For this

reason, only a few brief points will be made. First, many of

the facts found in the S.E.C.’s decision do not constitute

recordkeeping violations. For example, the decision states

that the S.E.C. staff had to ask two or three times for each

trial balance it obtained. (App. 26a). However, regardless of

how much this might inconvenience the S.E.C., it does not

constitute a violation of Rule 17a-3. Second, many of the

S.E.C.’s findings are directly contradicted by the record.

For example, the decision states that on January 18, 1971

Sloan “furnished something.”” (App. 25a). Bruder,

however, did not testify that Sloan furnished “something.”

Instead, he testified that he received from Sloan

“something which may have been a trial balance. I'd have

to examine it.’’ After examining the document in question,

Bruder said that it was ‘‘a trial balance as of January 14,

1971." (Transcript p. 26). Thus, Sloan did not furnish

“something’’ but instead furnished a trial balance as of

January 14, 1971. Similarity, the decision of the S.E.C.

states that Sloan had ‘“‘no books, per se’’ and that “‘all

|Sloan| had were debit and credit slips."’ (App. 25a). To be

sure, Kanoff's testimony does support this finding but

Kanoff went on to testify that the records Sloan maintained

were the usual kind of records one would see in a broker

using a computer system. (Transcript p. 204). The decision

of the S.E.C. further states that computations of net capital

were not prepared as required (App. 25a-26a) but Sloan's

uncontradicted testimony in the record was that he had

prepared all of the required capital computations and that

these capital computations were available in his office any

time anyone from the S.E.C. wanted to see them. (Tran-

script p. 331). Third, although the main thrust of the

S.E.C.’s claim that Sloan violated the bookkeeping rule is

derived from Bruder’s testimony that certain items “‘were

not properly recorded,’ were ‘‘not kept current” or were

not “prepared,”’ Bruder was unable to specify in any more

detail than that found in the S.E.C.’s decision which

records it was that were not “properly recorded,” “‘kept

current” or ““prepared.’’ Moreover, the S.E.C. did not offer

into evidence originals or copies of any of the records or

ledgers which it claims were not properly prepared and the

only “evidence” in support of the finding of a violation of

the recordkeeping rule was Bruder’s extremely hazy

recollection of the state of Sloan’s records a year and a half

earlier. For example, on direct examination, Bruder

testified that Sloan & Co. did not maintain a general

ledger. (Transcript p. 23). On cross, however, he explained

that the general ledger of Sloan & Co. was “not properly

maintained.”’ (Transcript p. 51). Sloan’s counsel then spent

several pages of the transcript pressing Bruder for details

concerning the manner in which Sloan's general ledger and

other records were ‘“‘not properly maintained.” Invariably,

Bruder’s answer boiled down to “I can’t recall at this time”

or words to that effect. For example, on pages 53-54 of the

transcript Bruder testified:

Q. Did you say, Mr. Bruder, that there was no

general ledger maintained by Sloan & Co.?

A.1 said the general ledger was not properly

maintained.

Q.I ask you again, how was it improperly

maintained then?

A. 1 explained that the capital account was not

properly maintained. Entries for certain capital

were not put in there, also income and expense was

not properly recorded there.

Q. How was the income and expense improperly

recorded?

A. There were missing items.

Q. Such as?

A. Certain items of commissions, | would say.

Q. Wheat specifically were the commissions

omitted?

A. Well, Mr. Sloan had a rather—rather, Sloan &

Co. had executed an agency transaction. There

were certain commissions that were omitted or in

the book. I can’t recall at this time.

Q. Do you know, if your testimony is, sir, that the

records were improperly maintained because of

this, | ask you what commission was not recorded

on what agency transaction?

A. That, Mr. Taylor, is a very hard question. |

can't answer that.

Q. You don’t know, fine, okay. That is the

response.

It is submitted that this testimony, which ironically

forms the entire basis for the S.E.C.’s finding that “income

and expense items were not properly recorded’”’ (App.

2Sa),!5 does not provide substantial evidence sufficient to

justify the revocation of the broker-dealer registration of

Sloan & Co. and the lifetime bar preventing Sloan from

being associated with any broker or dealer.

In short, the S.E.C.’s case is inordinately weak, if not

non-existent. This explains why it is clear that the Court of

Appeals did not and could not have reviewed the evidence

and found it to be sufficient and why it must have based its

decision solely upon its erroneous ruling, discussed supra.

that an injunction in itself is sufficient to support the

1S. On direct examination, Bruder testified that there were “no account

records of income and expenses.” (Transcript p. 23). Here and elsewhere,

when Bruder’s testimony on direct examination was in conflict with his

testimony on cross examination, the decision of the S.E.C. reflects what Bruder

said on cross examination. It is interesting to note that although Bruder

testified that Sloan & Co. maintained “‘no account records of income and

expenses,” the trial balance he prepared as of January 18, 1971, which is in-

cluded as Appendix M, has an item labeled “Operating Expenses $5135.05."

revocation of a broker-dealer registration. It should also be

pointed out that the decision of the S.E.C. is jurisdic-

tionally defective in that the S.E.C. did not find and the

S.E.C. staff did not prove that Sloan or Sloan & Co.

purchased or sold any security or made any use of the

means or instrumentalities of interstate commerce.

In any event, if the S.E.C. continues to maintain the

untenable position that the Court of Appeals reviewed the

record and found that the findings of fact were supported

by “substantial evidence,” it will encounter a problem

arising from the point that it is clear from decisions of this

Court that in any proceeding brought by the Government in

which punishment might be inflicted, the accused has the

constitutional right to have the facts tried by a jury as

opposed to, in this instance, an Administrative Law Judge

whose principal qualification for the job is his many years

of dedicated service as an employee of the S.E.C. and who

has never found for any respondent in any proceeding over

which he has presided. Sloan has been barred for life from

being associated with any broker dealer. That is clearly

punishment. For that reason, under the Sixth Amendment

and possibly the Seventh Amendment, Sloan had the

constitutional right to have the facts tried by a jury. This is

clear from this Court’s decision in Atlas Roofing Co. v.

Occupational Safety and Health Review Commission,

U.S. . 51 L.Ed. 2d 464 (March 23, 1977). Moreover, it

should be noted that the S.E.C. staff proposed that this

proceeding be settled with merely a sixty day suspension of

Sloan and Sloan & Co. The tremendous desparity between

this settlement proposal and the punishment ultimately

inflicted demonstrates that the potential for vindictiveness

in administrative proceedings before the S.E.C. is high.

Indeed, it is evident that the real reason that Sloan has

been punished as severely as he has is not that he did

anything which violated the Securities Exchange Act but

that he was outspokenly critical of the S.E.C. itself. (See

28a-29a). In fact, this is the only case in the history of the

S.E.C. in which the same or comparable penalties have

been invoked based solely upon a finding of a violation of

the net capital, bookkeeping and reporting rules where no

fraud was involved. For this reason and because of con-

stitutional considerations too familiar to be recited in detail

here, there is a substantial question as to yang se

proceedings against Sloan and Sloan & Co. have violat

the Fifth, Sixth, Seventh, Eighth, Ninth and Tenth

Amendments as well as §558(c) of the Administrative

Procedure Act. It is submitted that this question is of

sufficient importance as to require resolution by this Court.

There is one further matter. Shortly after the passage of

the 1975 amendments to the Freedom of Information Act,

Sloan requested the S.E.C. to provide him with a copy of all

documents in its files relating to the investigation and

prosecution of Sloan and Sloan & Co. After Sloan gave the

S.E.C. numerous extentions of time, the S.E.C. wrote a

letter dated September 2, 1976 which stated that, with

certain specified exceptions, all of the requested material

would be released. However, due in part to problems with

the photocopy machine in the public reference room of the

S.E.C., Sloan was unable to make copies of the ‘released

documents until only about a week before the oral

argument of this case before the Court of Appeals.

Contained in the released documents were some

statements which contradicted the findings of the S.E.C.

For example, the decision of the S.E.C. found that when

Kanoff visited Sloan's office on May 6, 1971, he was unable

to verify Sloan's trial balance. (App. 25a). However, in a

memorandum dated May 7, 1971 which discussed the May.

6 visit, Kanoff stated: “‘To the extent of the trial balance, I

was able to verify same.”’ In addition, the released material

contained documents which were not in themselves ex-

culpatory but which were sufficient to impugn the validity

of certain of the S.E.C.’s findings. For example, one

document was a typewritten net capital computation

prepared by an unidentified member of the S.E.C. staff

which stated that Sloan & Co. had a net capital deficiency

of only $1657.09 on January 29, 1971. Although this

computation did not show Sloan & Co. to be in compliance

with the net capital rule, it was considerably at variance

with the handwritten and illegible computation prepared

by Bruder which purported to show a net capital deficiency

of $11,912 on the same date.

On the basis of this material, Sloan filed a motion

pursuant to Section 25(a)(S) of the Securities Exchange Act,

15 U.S.C. § 78y(a)(S), to remand this case to the S.E.C. with

leave to adduce additional evidence. However, the Court of

Appeals ignored this motion in its November 18, 1976

decision.

Sloan also appealed to the S.E.C. from the refusal of the

S.E.C. on September 2, 1976 to provide him with the

remaining documents in accordance with the Freedom of

Information Act. This appeal was decided on March 28,

1977 with Commissioners Loomis, Evans and Pollack

participating. The decision was that the previously

withheld documents would be released to Sloan with the

exception of those parts which contained staff opinions

which would be excised. Sloan actually obtained the

documents on April 20, 1977.

Among the documents released to Sloan was a five page

memorandum dated February 16, 1971 which stated:

On February 4, 1971 a member of the staff

visited Registrant’s offices in order to determine (1)

whether Registrant was still conducting business

and (2) whether Registrant’s books and records

had been put in order.

It appeared that Registrant was still conducting

business as a broker-dealer. It further appears that

Registrant has no public customers and is dealing

strictly for its own account. Further, Registrant's

books and records now appear to be current and

are being brought to order and appear to balance.

On February 4, the staff prepared another trial

balance which also reflected the firm's financial

condition as of January 18, 1971. An analysis of the

trial balance indicated |remainder of paragraph

excised |.

According to the second analysis of the firms

January 18, 1971 position prepared on February 4,

it appears that registrant is now in compliance with

the Commission's Net Capital Rule. Registrant's

capital situation now appears to be as follows:

Aggregate Indebtedness $9,565.76

Required Minimum Net Capital $5,000.00

Adjusted Net Capital $9,572.92

Total (Excess) $4,572.92

The above quoted passage is exculpatory in nature and is

of such high value that it could not have been overlooked by

the S.E.C. Clearly, the existence and contents of this

memorandum should have been made known to the

defense prior to the administrative hearing and the failure

of the S.E.C. to do so requires either a remand or an

outright reversal of the decision of the S.E.C. See United

States v. Rosner, 516 F.2d 269, 272 (2d Cir. 1975) citing

Jencks v. United States, 353 U.S. 657 (1957) and other

cases. This is particularly true since the Administrative

Law Judge denied the request by Sloan's counsel to

examine the investigatory files of the S.E.C. (Transcript p.

109-110).

The importance of the fact of this February 4, 1971 visit

cannot be overestimated. In addition to the obvious points,

it should be noted that the S.E.C. never previously revealed,

either in this administrative proceeding or in the parallel

injunctive proceeding, that a visit on February 4, 1971 took

place. The S.E.C. did find that Bruder visited Sloan's office

on February 25, 1971. (App. 25a). However, Bruder ac-

tually testified that he received Sloan's trial balance and

prepared his computation of January 29, 1971 on February

25, 1971 in the offices of the S.E.C., not in Sloan's office.

(Transcript pp. 37, 83). None of the memorandums

prepared by the S.E.C. and released pursuant to the

Freedom of Information Act mention any visit by any

S.E.C. investigator to Sloan's office in February, 1971 on

any date other than February 4, 1971. Thus, it appears that

the February 25, 1971 visit, which the S.E.C. “found” in its

decision (App. 25a), never took place.!6

The memorandum’s released to Sloan contain numerous

additional items of interest. For example, one

memorandum stated that on November 24, 1970 the New

York Regional office of the S.E.C. denied the request of

Sloan & Co. for an extention of time to file its Rule 17a-5

report. However, Sloan and Sloan & Co. were never notified

of the denial of this request. Under S.E.C. Rule 17a-Sid),

the denial of such a request must be by order in writing. In

the Matter of International Shareholders Services Corp., 9

S.E.C. Docket 821, 823; Securities Exchange Act Release

No. 12389 June 8, 1976) the S.E.C. dismissed a proceeding

based on a Rule 17a-S violation on the ground that its staff

had failed to comply timely with this rule. Based upon that

decision the finding of the Rule 17a-S violation here should

also be set aside. It is clear that the S.E.C. staff did not

enter an order and give any written notification to Sloan

and Sloan & Co. because had it done so it would have

retained a copy in its records and the material released to

Sloan under the Freedom of Information Act, which is

16. Judge Ward also “found” that a February 25, 1971 visit had occurred.

See S.E.C. v. Sloan, supra, %9 F. Supp. 996, 369 F. Supp. 996, 998, 49.

However, it is obvious that Judge Ward merely copied the proposed findings of

fact submitted by the S_E.C. before the trial because had he checked the trial

transcript he would have seen that Bruder never testified that he visited Sloan's

office in February, 1971. It is significant to note that the Administrative Law

Judge did not “find” that there had been a February 25, 1971 visit but rather

found that there had been a visit on January 25. 1971. (App. Ila).

supposed to include all the files and records of the S.E.C..,

contained no order of notification. Sloan did not and could

not have argued the significance of these points before the

S.E.C., because the Freedom of Information Act material

just discussed was not released to him until long after the

S.E.C. concluded its proceedings. Therefore, at a

minimum, this case should be remanded pursuant to

§2SiaXS) of the Securities Exchange Act with leave to

adduce additional evidence.!7

In addition to the foregoing matters, this petition

requests this Court to review that part of the decision of the

Court of Appeals which upheld the validity of the initial

order suspending trading in the stock of Canadian Javelin

Ltd. Petitioner contends that the order in question was not

supported by substantial evidence and that a summary

suspension of trading is unconstitutional. Moreover,

petitioner contends that the questions presented are of

sufficient importance as to require the granting of a

petition for a writ of certiorari.

It can be seen from examining Appendix L that the

Court of Appeals is in error when it states that the record

demonstrates ‘sufficient evidence of probable

manipulation of (Canadian Javelin Ltd's} common stock

and of the false and fraudulent representations as to its

soundness and value. ...” 547 F.2d at 156. The record

itself, which consists of appendix K and appendix L, says

something entirely different and is devoid of ‘substantial

evidence.” In addition it is clear from National Cable

Television v. United States, 415 U.S. 336, 342 (1974) that a

law which gives an independent administrative agency the

broad authority to act in accordance with what it perceives

to be the “public interest” and which provides no stan-

17. In December, 1975 Sloan requested that the S.E.C. itself grant this relief

on different grounds but the New York Regional Office opposed Sloan's

motion with a memorandum which stated that under §2Sia) the Court of

Appeals has “exclusive jurisdiction” to do so. The motion was denied.

dards to guide the administrative agency in making the

decision whether to act, is unconstitutional as a delegation

of legislative power. On this basis, it is submitted that

Section 12(k) of the Securities Exchange Act is un-

constitutional.

CONCLUSION

For all of the reasons set forth above, this petition for a

writ of certiorari should be granted.

Respectfully submitted,

SAMUEL H. SLOAN

1761 Eastburn Ave., Apt. AS

Bronx, N.Y. 10457

(212) 749-4727

May 4, 1977

APPENDIX A

ORDER FOR PUBLIC PROCEEDINGS

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

In the Matter of

SAMUEL H. SLOAN d/b/a

SAMUEL H. SLOAN & CO. (8-157S0)

The Commission's public official files disclose that

A. Samuel H. Sloan d/b/a Samuel H. Sloan & Co.

(Sloan & Co.) a sole proprietorship with his principal place

of business at 120 Liberty Street, New York, New York, has

been registered with the as a broker-dealer pursuant to

Section 15(b) of the Securities Exchange Act of 1934

(“Exchange Act”) since May 10, 1970.

B. Sloan & Co. is a member firm of S.E.C.O.

As a result of an investigation, the Division of Trading

and Markets has obtained information which tends to show

and it alleges that:

A. During the period from about January, 1971 and

continuing to the present, Sloan & Co. has willfully

violated Section 17(a) of the Exchange Act and Rules 17a-3

and 17a-4 thereunder in that Sloan & Co. has failed to

accurately make, keep current or maintain certain of its

books and records including, but not limited, to:

(1) ledgers (or other records) reflecting all assets

and liabilities, income and expense and capital

accounts;

(2) A_ securities record or ledger reflecting

separately for each security as of the clearance

dates of all “long’’ and “‘short’’ positions (in-

cluding securities in safekeeping) carried by such

member, broker or dealer for his account;

(3) Ledgers (or other records) reflecting

securities failed to receive and to deliver;

(4) Copies of all confirmations of all purchases

and sales of securities and copies of notices of all -

other debits and credits for securities, cash and

other items for the account of customers and

partners of such member, broker or dealer; and

(S) A record of proof of money balances of all

ledger accounts in the form of trial balances.

B. During the period from about January 1971 to on or

about January 31, 1972 with the exception of the month of

March 1971, Sloan & Co. willfully violated Section 15S(c)3

of the Exchange Act and Rule 15c3-1 thereunder in that

Sloan & Co. made use of the mails and means and in-

strumentalities of interstate commerce to effect tran-

sactions in and to induce and attempt to induce the pur-

chase and sale of securities (other than an exempted

security or commercial paper, bankers’ acceptances, or

commercial bills) otherwise than on a national securities

exchange when Sloan & Co.'s aggregate indebtedness to all

other persons exceeded 2,000 per centum of its net capital

and Registrant did not have and did not maintain net

capital of not less than $5,000.

C. During the period from on or about October 10, 1970

to March 5, 1971, Sloan & Co. willfully violated Section

17(a) of the Exchange Act and Rule 17a-S thereunder, in

that Sloan & Co. failed to file a report of its financial

condition with the Commission for the calendar year 1970

within the time specified by said rule.

D. During the period from on or about April 30, 1971 to

on or about December 2, 1971, Sloan & Co. willfully

violated Section 17(a) of the Exchange Act and Rule 17a-10

thereunder, in that Sloan & Co. failed to file a report of

income and expenses with the Commission for the calendar

year 1970 within the time specified by said Rule.

E. From on or about September 15, 1971, to the present,

Sloan & Co. willfully violated Section 17(a) of the Ex-

change Act and Rule 17a-11 thereunder in that Sloan &

Co. failed to telegraphically notify the Commission that it

was not in compliance with the net capital rule (15¢3-1),

file within 24 hours a report of its financial condition or file

a Form X-!7a-11 report within the time specified by said

Rule.

F. On June 24, 1971, the United States District Court for

the Southern District of New York entered an order by

consent, which order preliminarily enjoined Sloan & Co.

and Sloan from conducting a business as a broker-dealer in

securities at a time when Sloan & Co. or any other

registered broker-dealer of which Sloan became a principal

or controlling person was not in compliance with Sections

1S(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1,

17a-3 and 17a-4 thereunder.

In view of the allegations made by the Division of

Trading and Markets, the commission deems it necessary

that public proceedings be instituted to determine:

A. Whether the allegations set forth in Section II hereot

are true and in connection therewith to afford respondents

an opportunity to establish any defenses to such

allegations; and

B. What, if any, remedial action is appropriate in the

public interest pursuant to Section 15(b) and 15A of the

Exchange Act.

it is Hereby Ordered that a public hearing for the

purpose of taking evidence on the questions set forth in

Section III hereof be held at a time and place to be fixed

and before a hearing examiner to be designated by further

order as provided by Rule 6 of the Commission's Rules of

Practice (17 CFR 201.6).

It is Further Ordered that each party file an answer to

the allegations contained in the order for proceedmgs

within fifteen (15) days after service upon him of said order

provided by Rule 7 of the Commission's Rules of Practice.

If any party fails to file the directed answer or fails to

appear at a hearing after being duly notified, such party

shall be deemed in default and the proceedings may be

determined against such party upon consideration of the

order for proceedings, the allegations of which may be

deemed to be true.

This order shall be served upon Sloan & Co. and Sloan

personally or by certified mail forthwith.

By the Commission.

s/Ronald F. Hunt

Ronald F. Hunt

Secretary

APPENDIX “B”

ORDER POSTPONING HEARING

AND DENYING MOTION FOR

MORE DEFINITE STATEMENT

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

July 31, 1972

In the Matter of

SAMUEL H. SLOAN d/b/a

SAMUEL H. SLOAN & CO.

(8-15750)

The order for proceedings (“Order”) entered on April

25, 1972 pursuant to Sections 1S(b) and 15A of the

Securities Exchange Act of 1934 (‘Act’) is based upon

charges of the Division of Trading and Markets

(“Division’’) that registrant, Samuel H. Sloan & Co.

wilfully violated Sections 15(c)(3) and 17(a) of the Act and

Rules 1Sc3-1, 17a-3, 17a-4, 17a-S, 17a-10 and 17a-11,

thereunder.

On June 15, 1972 a prehearing conference was held

which resulted in an order by the undersigned concerning

specific items to which the parties had agreed to stipulate.

In addition, on June 20, 1972, counsel for registrant met

with counsel for the Division at wa.ch time all documents

relating to Paragraphs A & B of the Order were reviewed.

Registrant has moved for a more definite statement as to

paragraph A and E of the Order. Registrant seeks details

regarding its own records concerning ledger, stock record,

ledgers for Fail to deliver and Fail to receive, confirmations

of customers and partners and trial balances. Registrant.

also moves for continuation of the hearing pending

compliance with the Order under this motion.

The Division, in opposition points out that the

stipulation, which was the subject of the ¢ Order of June 16,

1972, has been executed and that on June 20, 1972

registrant was allowed to examine all net worth com-

putations prepared by the Division.

It is well-established that in a notice of hearing such as

the one in question, a respondent is entitled to sufficient

information concerning the charges and issues involved to

permit him to make adequate preparation of a defense, but

is not entitled to a disclosure of the evidence upon which

the Division intends to rely for proof of those charges and

issues. M.J. Reiter Co., 39 SEC 484 (1959); Keith Richard

Securities Corp., 39 SEC 240 (1958). Nor is it necessary for

the notice of proceedings to detail and itemize “‘all ahe

particular acts, which together constitute the offense.”

Michael J. Meehan, 1 SEC 238, 240 (1935).

Under applicable principles it appears that in view of the

pre-hearing conference and subsequent order concerning

the stipulation of facts and the June 20th meeting with

Division counsel registrant has been reasonably apprised of

the charges against it, and it not entitled to the sought-for

particulars as a matter of right.

Accordingly, It is Ordered that the motion of registrant

for a more definite statement is denied except to the extent

it has already been complied with by the Division.

It is Ordered, further, that the hearing now scheduled to

commence on August 14, 1972 is postponed to 11:00 A.M.

on September 11, 1972, at the place heretofore designated.

s/Ralph H. Tracy

Ralph H. Tracy

Hearing Examiner

APPENDIX “C”

ORDER ON MOTION FOR MORE

DEFINITE STATEMENT

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

August 18, 1972

In the Matter of

SAMUEL H. SLOAN d/b/a

SAMUEL H. SLOAN & CO.

(8-157S0)

The order for proceedings (‘Order’) entered on April

25, 1972 pursuant to Sections 15(b) and ISA of the

Securities Exchange Act of 1934 (‘Act’) is based upon

charges of the Division of Trading and Markets

(“Division”) that registrant, Samuel H. Sloan & Co..,

wilfully violated Sections 1S5(c)(3) and 17(a) of the Act and

Rules 1Sc3-1, 17a-3, 17a-4, 17a-S, 17a-10 and 17a-11,

thereunder.

On June 15, 1972 a prehearing conference was held

which resulted in an order by the undersigned concerning

specific items to which the parties had agreed to stipulate.

In addition, on June 20, 1972, counsel for registrant met

with counsel for the Division at which time all documents

relating to Paragraphs A & B of the Order were reviewed.

Registrant's motion for a more definite statement as to

paragraph A and E of the Order was denied on July 31,

1972. Registrant has now renewed its motion as to the

following particular documents:

i. Copies of computations as at the month end

for: 1-18-71, 1-29-71, 2-26-71, 6-30-71, 7-31-71, 8-31-71,

9-30-71, 10-8-71, 10-19-71, 11-30-71, 12-2-71, 12-31-71,

and 1-31-72.

2. Copies of long and short positions as marked

to the market on each of the respective dates.

3. Copies of all exhibits stipulated to.

In view of the prehearing conference and subsequent

order concerning the stipulation of facts and the June 20th

meeting with Division counsel at which time respondent

was shown the requested documents, and upon con-

sideration of all the circumstances,

It is Ordered that the motion of respondent for a more

definite statement is granted and that the requested

documents be furnished forthwith.

s/Ralph H. Tracy

Ralph H. Tracy

Hearing Examiner

APPENDIX “D”

INITIAL DECISION

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

In the Matter of

SAMUEL H. SLOAN d/b/a

SAMUEL H. SLOAN & CO.

(8-15750)

APPEARANCES:

Alan R. Rashes, Jerome M. Selvers and Thomas Beirne,

of the New York Regional Office of the Commission for the

Division of Enforcement.

Robert W. Taylor for Samuel H. Sloan and Samuel H.

Sloan & Co.

BEFORE:

Ralph Hunter Tracy, Administrative Law Judge

THE PROCEEDING

This is a public proceeding instituted by an order of the

Commission (“Order”) dated April 25, 1972, pursuant to

Sections 15(b) and 15A of the Securities Exchange Act of

1934 (“Exchange Act”) to determine whether, as charged

by the Division of Enforcement (‘Division’)! Samuel H.

Sloan (“Sloan’’) d/b/a Samuel H. Sloan & Co., (“Sloan &

Co.” or “registrant’’) willfully violated Sections 15(c)(3)

and 17(a) of the Exchange Act and Rules 15c3-1, 17a-

3,4,5,10, and 11, thereunder, during various specified

periods, and the remedial action, if any, that might be

appropriate in the public interest.

10a

The order included an allegation that on June 24, 1972,

the U.S. District Court for the Southern District of New

York had entered a consent decree temporarily enjoining

respondents from violating certain of the foregoing counts.

Respondents were represented by counsel throughout the

proceeding and proposed findings of fact and conclusions

of law and briefs in support were filed by the parties.

The findings and conclusions herein are based upon the

preponderance of the evidence as determined from the

record and upon observation of the witnesses.

FINDINGS OF FACT AND LAW

Respondents

Sloan is the sole proprietor of Sloan & Co., 120 Liberty

Street, New York, New York, which has been registered

with the Commission as a broker-dealer pursuant to

Section 15(b) of the Exchange Act since May 10, 1970.

Registrant has never been a member of the National

Association of Securities Dealers (“NASD”).

Injunctions Chargeable to Respondents

Section 15(b)(S)(C) of the Exchange Act provides that

one of the bases for revocation of a broker-dealer’s

registration or the imposition of lesser sanctions is the

existence of a described permanent or temporary in-

junction issued by a court of competent jurisdiction.2

The Order alleges, and the record establishes, that on

June 24, 1971, the U.S. District Court for the Southern

District of New York entered a consent judgment

preliminarily enjoining Sloan & Co. and Sloan from

conducting a business as a broker-dealer in securities at a

time when Sloan & Co. or any other registered broker-

dealer of which Sloan became a principal or controlling

person was not in compliance with the Commission's net

lla

capital and bookkeeping rules. In addition, the Court

ordered Sloan to engage the services of a certified public

accountant to prepare a certified report of the firm's

financial condition, as of June 30, 1971, to be in the

Commission's possession no later than July 31, 1971.

Bookkeeping Violations

The record establishes that during the period from

January, 1971 to April 25, 1972, registrant, as charged in

the Order, committed a number of violations of Section

17(a) of the Exchange Act and Rules 17a-3 and 17a-4

thereunder by failing to maintain and to keep accurate and

current certain required books and records.3 At the time of

an inspection of the books and records of registyant

conducted by a Commission investigator on January 12,

and 13, 1971, a number of deficiencies existed. The general

ledger disclosing assets, liabilities, income and expense,

and capital account, was not current; no account record of

bank balances or income and expenses was being kept; the

firm's trading account, the fail to deliver and the fail to

receive accounts were not current; the Sloan capital ac-

count was only posted to July 19, 1970; no trial balances

had been prepared;4 and the stock record was not in

compliance. Registrant was informed of these violations by

Commission letter of January 14, 1971, and requested to

submit a trial balance supported by certain specified

schedules. On January 18, 1971, registrant submitted what

purported to be a trial balance but the Commission in-

vestigator testified that a net capital computation could not

be prepared from it so on January 25, 1971, he returned to

registrant's office and prepared a computation of net

capital as of January 18, 1971, using whatever books and

records available.

Subsequent visits to registrant's office by another

Commission investigator in March, April, May, June and

August. 1971 disclosed that the books and records were not

17a-3 and 17a-4."’ In support of this contention they assert

that the testimony of the two Commission investigators

concerning numerous violations of the record keeping rules

was “so absolutely incredible as to defy understanding.”

However. the record does not support this contention. On

the contrary, a careful review of their testimony, together

with some 19 supporting exhibits, plus observation of their

demeanor. leads to the conclusion that rather than being

incredible their testimony was credible and worthy of

beliet.

The requirement that records be kept embodies the

requirement that such records be true and correct.>

Compliance with the rule relating to maintenance of books

and records is regarded as an “unqualified statutory

mandate” dictated by a broker-dealer’s obligation to in-

vestors to conduct its securities business on a sound basis.®

Respondents’ other principal argument is that there is no

evidence that they willfully violated the record keeping

requirements. The argument that any violation arising out

of the failure to make and keep current registrant's books

and records cannot be considered “willfull” is rejected.

Willfullness for purposes of Section 1S(b) of the Exchange

Act does not require that a person know that he is breaking

the law but only that he intended to do the act that resulted

in the violation. ’

Upon consideration of all the circumstances it is found

that Sloan, d/b/a Samuel H. Sloan & Co., willfully

13a

violated Section 17(a) of the Exchange Act and Rules 17a-3

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