The Securities and Exchange Commission is appealing a ruling that prevents it from sanctioning former officials of self-regulatory organizations.
In a case decided last month, an administrative law judge at the SEC said that the agency’s enforcers couldn’t seek to sanction Salvatore Sodano, the chief executive at the American Stock Exchange in New York from September 1999 to January 2005, for failing to fix trading violations that occurred at the exchange from 1999 to 2004.
The judge, Robert G. Mahoney, said the Securities Exchange Act of 1934 did not give the SEC authority to charge an individual who no longer is an officer or director of an SRO.
SEC enforcement staff members, who have appealed the adverse ruling to the full commission, called it an “unduly narrow interpretation” of the law.
“If left undisturbed, the [administrative law judge’s] ruling would lead to the absurd result that officers and directors of SROs could evade the commission’s authority through resignation,” the appeal said.
What’s relevant in the case, according to SEC staff members, is when the alleged transgressions occurred, not Mr. Sodano’s status when the charges were brought.
The ruling is “absurd,” said Bill Singer, a securities lawyer with Stark & Stark of Lawrenceville, N.J., and a former Amex lawyer. “It points out the hypocrisy embedded in the SRO system, which retains for two years jurisdiction [over individual] brokers.
“What’s good for the goose should be good for the gander,” he added.
In his decision, Mr. Mahoney said the section of the exchange act that covers SRO officials “is unambiguous on its face, referring to the officers and directors of an SRO only in the present [tense].”
Legal technicality
After SEC enforcers brought formal charges against him last March, Mr. Sodano argued that, based on legislative history, Congress did not want the SEC to have authority over former SRO officials.
In 1987, Congress amended both the exchange act and the Investment Advisers Act of 1940 to allow for a permanent bar against individual brokers or advisers, regardless of whether they were registered currently. At the same time, Congress did not likewise amend sections in those laws applying specifically to officers and directors at SROs, Mr. Sodano argued.
Mr. Mahoney ruled that when Congress includes particular language in one section of a statute but omits it in another section, “it is generally presumed that Congress acts intentionally.”
SEC spokesman John Nester said he was not aware of any attempt by the agency or anyone in Congress to change the laws. Calls to the Senate Banking Committee and the House Financial Services Committee were not returned.
Unfair treatment alleged
Mr. Sodano’s lawyer, William Baker III, a partner in the Washington office of Los Angeles-based Latham & Watkins LLP, declined to comment. But in a filing with the SEC last month, Mr. Baker said the SEC enforcement team “grossly exaggerates” the violations and “ignores the extensive efforts” Mr. Sodano made to bring the exchange into compliance with order-handling rules.
The filing said that the SEC has not filed any enforcement actions against
New York Stock Exchange officers for similar problems.
The Amex itself settled related charges last March.
Mr. Sodano was hired by NASD chief executive Frank G. Zarb in June 1997 as the NASD’s chief financial officer. Today, Mr. Sodano is dean of the Frank G. Zarb School of Business at Hofstra University in Hempstead, N.Y.
