Cody v. Securities & Exchange Commission
2012 WL 3871561
1st Cir.2012Background
- Richard G. Cody challenged FINRA's determination that he mismanaged client accounts and imposed sanctions.
- Cody, a FINRA-licensed registered representative, exercised de facto control over clients' accounts, trading without explicit client authorization.
- Investments included a Credit Suisse Security (CMO/ABS collateralized by mobile-home loans) and non-investment grade bonds for James Bates' IRA.
- Credit Suisse Security declined in value; Bates' and DeSimone's accounts suffered substantial losses; Cody earned commissions from frequent trading.
- FINRA and the SEC found Cody's recommendations unsuitable and his trading excessive for unsophisticated, risk-averse clients.
- Cody petitioned the SEC; the SEC upheld liability and sanctions after reviewing de novo.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FINRA is a state actor requiring due process | Cody argues due process protections apply. | FINRA procedures satisfy due process requirements. | Due process satisfied; no substantial state-actor defect. |
| Whether the Hearing Panel erred by excluding expert testimony | Guild testimony could aid understanding fixed income. | Testimony unnecessary; ruled irrelevant. | Panel properly exercised discretion; objection forfeited. |
| Whether Credit Suisse Security was suitable for clients | Recommendation was suitable given clients' needs. | Security was unsuitable due to risks and ratings. | Unsuitable recommendation; supports liability. |
| Whether purchases of non-investment grade bonds were appropriate | Bates needed higher yield; purchases justified by withdrawals. | Departing from strategy without Bates' consent was improper. | Purchases unsuitable; lack of authority invalidates. |
| Whether excessive trading unsupported by client objectives was improper | Trading volume was within customer tolerance. | Trading harmed by turnover and commissions; mitigated by outcomes. | Excessive trading established; sanction appropriate. |
Key Cases Cited
- Gold v. SEC, 199 F.3d 987 (7th Cir. 1995) (statutory due process obligations for SROs)
- Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198 (2d Cir. 1999) (state-actor implications of NASD/NASD-like conduct)
- Jones v. SEC, 115 F.3d 1173 (4th Cir. 1997) (due process concerns with NASD rules)
- Rooms v. SEC, 444 F.3d 1208 (10th Cir. 2006) (dicta on NASD rule fair warning)
- Krull v. SEC, 248 F.3d 907 (9th Cir. 2001) (de novo review standard and substantial evidence)
- Erdos v. SEC, 742 F.2d 507 (9th Cir. 1984) (suitability rule violation regardless of motive)