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Ruling Aids SEC in Theft Cases

Regulation: The Supreme Court reaffirms the agency's right to sue brokers who sell clients' securities and steal the proceeds.

June 04, 2002|From Bloomberg News

WASHINGTON — The Securities and Exchange Commission can sue brokers who sell client-owned securities and abscond with the proceeds, the Supreme Court said Monday, reinstating agency power that a lower court had stripped.

The unanimous ruling lets the SEC seek to recoup $343,000 that former Maryland broker Charles Zandford stole from two of his clients.

The Bush administration had said a ruling for Zandford would create a "serious gap" in investor protections and reverse six decades of SEC practice.

The high court's decision authorizes suits by both investors and the SEC under a federal securities-fraud law.

Writing for the court, Justice John Paul Stevens said the 1934 Securities Exchange Act "must be read flexibly, not technically and restrictively."

The ruling is "a win for investors," said F. Joseph Warin, a lawyer who filed a brief supporting the SEC on behalf of the National Assn. of Securities Dealers. "By the court speaking 9-0, it emphasized that the type of behavior that was involved in this case will not be tolerated."

The U.S. 4th Circuit Court of Appeals had said the 1934 law covers only wrongdoing that involves either "manipulation of a particular security" or deception about its value.

The ruling is the Supreme Court's first concerning the SEC's authority since a 1997 decision that helped the agency press insider-trading cases.

SEC Chairman Harvey L. Pitt said the decision enables the SEC "to continue aggressive enforcement action against brokers who abuse their clients' trust in securities transactions."

Zandford's lawyer didn't respond to a call requesting comment.

The SEC suit was a follow-up to a criminal case in which Zandford was found guilty of 13 counts of wire fraud and sentenced to more than four years in prison.

The criminal jury concluded that Zandford, a broker at Dominick & Dominick Securities Inc., victimized William Wood and his daughter, Diane Wood Okstulski. The two gave the broker almost $420,000 with instructions to invest it conservatively.

Zandford bought securities for the Woods, then systematically sold them, putting the proceeds into his own accounts. In some instances, he wrote checks to himself from a mutual fund account held by his clients.

The issue before the Supreme Court was whether that conduct falls within the scope of the Securities Exchange Act, which authorizes civil suits over broker deception "in connection with the purchase or sale of any security."

Stevens said the Zandford case met the definition because the sale of the Wood family's securities and the theft of the money were all part of a single scheme.

Zandford's "fraud coincided with the sales themselves," Stevens wrote.

Stevens said not all cases of broker theft are covered under the federal law.

The law doesn't affect a broker who simply steals cash from a client account, with no security sale taking place, Stevens said.

Investors in those cases would have to use other legal avenues to recoup their money, including traditional state-law suits.

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