World Trade Financial Corp. v. U.S. Securities & Exchange Commission
2014 U.S. App. LEXIS 866
9th Cir.2014Background
- Petitioners World Trade, Adams, Michel, and Brickell challenged an SEC order affirming FINRA/NAC sanctions for Section 5(a)/(c) violations and related NASD supervisory-rule breaches.
- World Trade was an SEC-registered broker-dealer; Michel and Adams were its principals supervising trading activity; Brickell was a principal and Chief Compliance Officer.
- World Trade’s Supervisory Manual instructed how to handle 144 stock, with procedures requiring inquiry before selling restricted stock; unlegended stock was processed through transfer/clearing without inquiry.
- Camryn Information Services and iStorage were involved in a reverse merger and stock movements that stripped restrictive legends; shares were later sold to the public via World Trade in 2004–2005.
- Several red flags accompanied the iStorage shares (short history, reverse merger, thin trading, noncompliance with legends) but Brickell failed to inquire about origins or status of the shares.
- The Commission and FINRA found violations of Sections 5(a)/(c) and NASD Rules 2110/3010; the court denied the petition for review and upheld sanctions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether trades violated Section 5(a)/(c) given the broker’s exemption. | World Trade argued Section 4(4) exemption applies without a duty to inquire. | SEC/FINRA held a duty of reasonable inquiry before claiming exemption. | Yes; exemptions require reasonable inquiry and did not apply. |
| Whether Petitioners had a duty of reasonable inquiry. | Petitioners contended no heightened inquiry was required. | Commission required a reasonable inquiry given red flags. | Yes; a reasonable inquiry was required and not satisfied. |
| Whether reliance on third-parties can satisfy the duty of reasonable inquiry. | Petitioners relied on industry practice and third parties. | No established industry practice; reliance not a safe harbor. | No; reliance on third parties did not absolve duty. |
| Whether supervisory system was inadequate under NASD 3010. | World Trade’s system complied with industry practice. | System inadequate to detect unlawful distributions. | Yes; supervisory system fell short. |
| Whether sanctions were unreasonably punitive. | Sanctions were excessive beyond industry norms. | Discretionary sanctions within FINRA guidelines; justified by egregious conduct. | No; sanctions reasonable and within discretion. |
Key Cases Cited
- SEC v. Ralston Purina Co., 346 U.S. 119 (1953) (exemption construction and registration policy under the 1933 Act)
- SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072 (9th Cir. 2010) (narrowly construed exemptions; duty of inquiry emphasized)
- Wonsover v. SEC, 205 F.3d 414 (D.C. Cir. 2000) (requires searching inquiry when red flags indicate underwriter risk)
- Geiger v. SEC, 363 F.3d 481 (D.C. Cir. 2004) (warning that broker must conduct inquiry where necessary under circumstances)
- Quinn & Co. v. SEC, 452 F.2d 943 (10th Cir. 1971) (brokers cannot rely on legends alone; must investigate)