Petitioner, Robert Bruce Orkin (“Orkin”), seeks review of an order of the Securities and Exchange Commission (“SEC”) affirming disciplinary sanctions imposed by the National Association of Securities Dealers, Inc. (“NASD”). 1 The NASD sanctioned Or-kin for violations of Article III, Sections 1 and 4 of the NASD’s Rules of Fair Practice (“Rules”). Specifically, the NASD and the SEC found that Orkin breached the NASD’s 5% markup policy by charging retail customers excessive prices in sales of Orteeh Industries, Inc. (“Orteeh”) stock occurring from October 20, to December 10, 1987.
Orkin asserts as grounds for review that: 1) the SEC’s determination that the retail markups were excessive was not supported by substantial evidence; 2) the SEC improperly affirmed the NASD’s finding of markup violations when it determined that the prevailing market price of Orteeh stock was different from that noted in Schedule A to the NASD complaint and adopted by NASD conduct committees; 3) the SEC erred in holding him hable for the markup violations because he did not have final authority to set retail prices; 4) the SEC erred in determining that the NASD’s markup policy is not unconstitutionally vague, illegal, or unfair, especially as applied to the facts of this case; and 5) the sanctions imposed against him are too severe. For the reasons set forth below, we find substantial evidence to support the SEC’s findings of fact and we concur in its legal conclusions. Accordingly, we deny Or-kin’s petition for review, affirm the order of the SEC, and lift the stay.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. FACTS
Orkin was President of Orteeh between November 1986, and August 1987. In May
Orkin’s written employment agreement required him to conduct business under the “full and complete supervision” of the home office. He was required to submit all customer orders to the home office for approval and execution. In accordance with the terms of Orkin’s employment agreement, Mary Frances Mernah, a Tri-Bradley officer and trader, and Paul Hurtado, Jr., another officer and Mernah’s supervisor, reviewed and accepted Orkin’s retail orders and executed the trades at the Denver home office.
In June 1987, while Orkin was still President of Ortech, Brownstone-Smith Securities Corp. (“Brownstone”) was the sole underwriter for an initial public offering of Ortech common stock. Two types of warrants, which could be exercised to purchase common stock during a designated period of time at a specified price, were also' offered for sale. The market for Ortech stock and warrants was not active or “thin.” Brownstone was involved in the vast majority of inter-dealer as well as retail trades in Ortech securities. 2
In October 1987, after leaving Ortech, Or-kin negotiated with Brownstone to acquire Ortech warrants for Tri-Bradley. Tri-Brad-ley made three purchases of Ortech warrants between October 20, and December 10, 1987. Tri-Bradley was the sole purchaser of Or-tech warrants during that period.
Between October 20, and December 10, 1987, Orkin solicited retail customers for Or-tech common stock. Upon receiving a customer order, he would relay the customer’s price to Mernah. Mernah then contacted market makers 3 in Ortech stock who were listed on the “pink sheets” 4 to obtain oral price quotations. There were no published quotations for Ortech stock during this period, although several firms listed themselves as market makers on the pink sheets. Pursuant to Tri-Bradley’s policy, if the customer’s price was within 5% of the lowest market maker quotation, Mernah accepted the order and executed the trade upon Hurtado’s approval. Tri-Bradley was not a market maker in Ortech securities.
To obtain Ortech stock to fill Orkin’s retail orders, Tri-Bradley exercised its Ortech warrants. Tri-Bradley’s purchase and exercise cost of Ortech warrants was $.0175 per share of common stock. It charged Orkin’s customers between $.035 and $.06 per'share of Ortech stock, with only three sales occurring at $.035 and the vast majority of sales occurring at $.06.
In January 1989, the NASD filed a complaint against Hurtado, Mernah, and Orkin charging that they effected for Tri-Bradley and permitted Tri-Bradley to effect “over-the-counter sales of corporate securities to public customers, which transactions are described on Exhibit A [Schedule A] ... at prices which were not fair, taking into consideration all relevant circumstances.” 5 Such unfair pricing violates the NASD 5% markup policy, an interpretation of Article III, Sections 1 and 4 of its Rules.
B. THE NASD PROCEEDINGS
After conducting an evidentiary hearing, the NASD District Business Conduct Committee (“DBCC”) found that the sales identified on Schedule A were made in violation of the NASD’s 5% markup policy. Because Tri-Bradley was not a market maker in Or-tech securities, the DBCC used Tri-Brad-ley’s cost of $.0175 to purchase and exercise Orteeh warrants as the best evidence of the prevailing market price of Orteeh stock. The resulting markups of 100% to 243% for the retail sales identified on Schedule A greatly exceed the 5% markup generally permitted under the NASD’s policy and generated approximately $186,000 profit for Tri-Bradley.
The DBCC also concluded that despite language in his employment agreement requiring approval and execution of sales by TriBradley’s home office, Orkin played a predominant role in setting the retail price for Orteeh stock. The DBCC thus found that Orkin violated Article III, Sections 1 and 4 of the NASD Rules. It imposed the following sanctions: censure, $50,000 fine, costs, and suspension from all NASD activity for thirty (30) days.
The NASD National Business Conduct Committee (“NBCC”) upheld the DBCC’s utilization of Tri-Bradley’s cost in calculating the markups, but found that Orkin’s participation in setting the retail price was limited. Nevertheless, the NBCC found that his participation was sufficient to hold him responsible for the excessive markups because he had been involved in Tri-Bradley’s purchase of Orteeh warrants, as well as in the sales of Orteeh stock to public customers. The NBCC upheld the DBCC’s sanctions of censure and costs. However, it reduced Orkin’s fine to $15,000, and imposed a 90 day suspension from NASD principal activities.
C. THE SEC PROCEEDINGS
The SEC conducted a de novo review of the record and found that: 1) the markups on 201 sales of Orteeh stock listed on Schedule A were excessive; 2) Orkin was liable for the markup violations; 3) the markup policy was not an illegal restraint of trade or otherwise illegal, unconstitutional, or unfair; and 4) the sanctions imposed against Orkin were appropriate. The SEC found that the record evidence established a higher prevailing market price for Orteeh stock than that found by the NASD. The SEC used the price paid by Brownstone for Orteeh stock it purchased from other dealers as the best evidence of the prevailing market price because Brownstone dominated and controlled the Orteeh market during the relevant period. The prevailing market price as determined by the SEC resulted in smaller, but still excessive, markups for the sales listed on Schedule A.
In concluding that Tri-Bradley sold Orteeh stock to retail customers at prices that greatly exceeded the prevailing market price, the SEC began with the long-standing premise that a firm’s markups on a security must be reasonably related to its prevailing market price.
See, e.g., In re Alstead, Dempsey & Co., Inc.,
Securities Exchange Act Release No. 20,825 (April 5, 1984),
In addition to Tri-Bradley’s retail sales, Schedule A identifies eight inter-dealer trades in Ortech stock, all involving Brownstone: seven purchases and one sale. In the seven sales, Brownstone paid no more than $.03 per share for Ortech stock.
7
Prices paid by a dominating and controlling market maker constitute evidence of prevailing market price.
In re Meyer Blinder,
Securities Exchange Act Release No. 31,095 (August 26, 1992),
The SEC held Orkin liable for the excessive markups because he played a significant role in pricing and was “at least grossly negligent in aiding Tri-Bradley in effecting retail sales of Ortech at excessive prices” because he had reason to believe that Ortech stock prices had not risen to the level charged his customers. 9 The SEC found that Orkin breached his fiduciary duty to ensure that his customers were charged a fair price.
The SEC cited a number of facts indicating that Orkin knew or should have known the retail prices were excessive. Orkin was a NASD registered general securities principal and a Tri-Bradley branch manager who was familiar with the 5% markup policy and had to have an understanding of securities pricing. He had assisted Tri-Bradley in obtaining the Ortech warrants and therefore knew the cost Tri-Bradley would incur to fill his retail orders. Because he was involved in Ortech’s initial public offering, Orkin also was in a position to know that Ortech stock was not actively traded and that Brownstone dominated and controlled the market. Moreover, Orkin suggested the prices his customers should offer.
The SEC opined that these facts, along with the fact that Orkin was entitled to a commission calculated on the basis of the retail price, rendered him more than a mere salesman or order taker with respect to the Ortech stock sales. The SEC thus refused to permit Orkin to abdicate his responsibility to his customers by hiding behind a formalistic employment agreement that gave the final authority to approve the price and execute the trade to the home office and deemed him responsible for the excessive markups.
The SEC dismissed Orion’s challenge to the NASD’s markup policy as illegal, uneon-
Orkin also attempted to convince the SEC that because of the unique factual situation presented, the markup policy did not give sufficient notice that the markups at issue would be considered excessive, precluding fair application of the markup policy to his case. Orkin claimed that no reported cases discuss application of the markup policy where a dealer exercises warrants in order to fill retail orders or where evidence of another dealer’s domination and control provides the basis for calculating the prevailing market price. The SEC found, however, that the NASD proceedings were conducted fairly and that the markup policy was fairly applied on the facts of the case.
The SEC specifically concluded that the evidence of Brownstone’s domination and control of the Orteeh market was properly considered as a factor in evaluating the fairness of Tri-Bradley’s retail prices. With respect to a firm that is not a market maker in a security, the NASD markup policy creates a presumption that a dealer’s contemporaneous cost is the best evidence of the prevailing market price, in the absence of countervailing evidence. Tri-Bradley’s cost was its purchase and exercise price of Orteeh warrants. Before the NASD, Orkin asserted that the unpublished phone quotations obtained by Mernah were countervailing evidence of Orteeh stock’s prevailing market price. He also pointed to the single inter-dealer sale by Brownstone listed on Schedule A, as well as to the three other inter-dealer trades outside the relevant period, to support the reliability of the oral quotations.
The SEC observed that the NASD countered Orkin’s position by asserting that the oral quotations were unreliable because the Orteeh market was not active and independent; it was dominated and controlled by Brownstone during the period. The inter-dealer trades listed on Schedule A, all involving Brownstone, evidence its domination and control. Brownstone’s domination and control was asserted by an NASD investigator at the DBCC hearing. Orkin had ample opportunity to rebut that evidence before the NASD and SEC. The SEC considered Brownstone’s domination and control a factor necessarily and appropriately taken into consideration in establishing the prevailing market price for Orteeh stock under SEC precedent. As a result, the SEC concluded that the NASD erred to the extent that it ignored such evidence and relied solely on Tri-Brad-ley’s cost to establish the prevailing market price.
The SEC further opined that the sanctions assessed against Orkin by the NBCC were not excessive, even when compared with those imposed against Mernah. The SEC noted that the sanctions against Mernah were imposed in the context of settlement and that merely because Orkin’s sanctions were more severe does not render them excessive.
See Butz v. Glover Livestock Commission Co.,
Moreover, the SEC found that Orkin’s conduct merited the sanctions imposed. The
II. ANALYSIS
The SEC’s factual findings must be affirmed if supported by substantial evidence. 15 U.S.C. § 78y(a)(4) (1988). This Court conducts a de novo review of the SEC’s legal conclusions.
A. MARKUP VIOLATIONS
Orkin poses a two-pronged challenge to the SEC’s finding of markup violations on the facts of this case. He first asserts that the evidence was insufficient to support the SEC’s finding of excessive markups. His second challenge is that when the SEC rejected the prevailing market price utilized by the NASD, as reflected on Schedule A, it should have determined that the violations as charged were not supported. According to Orkin, by calculating the prevailing market price differently, the SEC in effect required him to defend against a new charge.
The NASD adopted its
5%
markup policy as an interpretation of Article III, Sections 1 and 4 of the NASD Rules.
Handley Inv. Co. v. SEC,
The SEC reviewed its markup policy in,
In re Alstead, Dempsey & Co., Inc.,
Securities Exchange Act Release No. 20,825 (April 5, 1984), 30 S.E.C. Docket. 208,
The prevailing market price is the price at which dealers trade with one another.
See, e.g., Alstead, Dempsey,
Where a market maker is involved, markups may be computed using the price charged by the firm or other market makers in actual sales to other dealers.
See, e.g., LSCO Sec.,
A dealer charged with markup violations may prevent application of these general rules by presenting countervailing evidence that another measure is better evidence of prevailing market price. Nevertheless, the use of quotations to establish the prevailing market price, as urged by Orkin in this case, is widely recognized as problematic.
See, e.g., LSCO Sec.,
We must concur with the SEC’s application of its precedent on the facts of this ease. The fact that Brownstone dominated and controlled the Ortech market is a relevant circumstance in determining whether the retail prices Tri-Bradley charged were fair, even though Tri-Bradley was not a market maker in Ortech stock. Throughout the NASD and SEC proceedings, Orkin himself argued the unfairness of ignoring prices paid by other dealers, and of strictly using TriBradley’s contemporaneous cost as the best evidence of prevailing market price. Orkin attempted to present countervailing evidence justifying the use of the unpublished quotations obtained by Mernah from Ortech market makers as evidence of the prevailing market price. He maintained that the quotations Mernah obtained were validated by a single inter-dealer sale of Ortech stock by Brownstone shown on Schedule A and three inter-dealer sales after the relevant period. Orkin cannot have it both ways.
Applying well-established precedent, the SEC found that the unpublished quotations and the single sale by Brownstone during the relevant period were not indicative of the prevailing market price for Ortech stock. There is no question that quotations are unreliable for assessing the prevailing market price in a thinly traded, obscure market. The single sale by Brownstone does not evidence the reliability of the quotations in this case because Brownstone dominated and controlled the Ortech market; it could charge any price it wanted for Ortech stock due to the purchasing dealer’s lack of bargaining power.
When a dealer dominates the market to the extent that it controls wholesale prices, the only reliable basis for determining prevailing market price is the price the dominating dealer is willing to pay other dealers.
See, e.g., Alstead, Dempsey,
The SEC’s determination did not amount to a new charge against Orkin. Discerning the prevailing market price and computing the resulting markup for any retail stock sale must be done on a case by case basis. Accordingly, the nature of the violations charged in the NASD complaint placed Orkin on notice that all relevant circumstances would be considered. The SEC based its finding of markup violations on evidence in the record since the initial hearing before the DBCC. This Court cannot ascribe as error the SEC’s consideration of sales by a dominating and controlling dealer during the relevant period. We find that the SEC appropriately and fairly applied its precedent to the facts before it in concluding that the markups charged in 201 sales of Ortech stock listed on Schedule A were unfair.
B. ORKIN’S LIABILITY FOR MARKUP VIOLATIONS
Orkin has maintained throughout these proceedings that he had no responsibility or authority to set the retail price for Ortech stock because his employment agreement with Tri-Bradley permitted him to conduct securities business only under the complete supervision of the Denver home office. He claims that his employment agreement rendered him a mere order taker for the home office, which retained sole authority to set retail prices and execute trades. He asserts that as a result, he appropriately relied on his superiors, Mernah and Hurtado, to comply with the NASD pricing rules.
The Fifth Circuit Court of Appeals recently rejected the argument that stock brokers or salesmen are exempt from responsibility for fair pricing under Sections 1 and 4 of the NASD Rules.
Amato v. SEC,
The
Amato
court concurred with the SEC’s finding that the salesman was liable for charging excessive markups because he was intimately involved in the pricing of securities within the parameters set by his firm’s trading department.
Id.
at 1283. Moreover, because the salesman purchased stock from customers which he then resold to other customers, he was in a position to know the firm’s cost, unlike many stock brokers.
Id.
This knowledge, similar to that possessed by Orkin in this case, was the key to the salesman’s liability. Furthermore, a salesman cannot absolve himself of responsibility for compliance with the NASD Rules simply by relying on the directives of his superiors.
In re Dan King Brainard,
47 S.E.C. 991, Securities Exchange Act Release No. 20,408 (November 22, 1983),
The SEC’s finding that Orkin was liable for markup violations because he knew or should have known that the retail prices were excessive is amply supported by the record. Orkin’s knowledge concerning the Ortech market and Tri-Bradley’s cost to acquire Ortech stock put him in a position to know that the prices Tri-Bradley charged his customers were excessive. He also should have known that because the Ortech market was obscure and thinly traded that quotations were an unreliable basis upon which to calculate markups.
12
In addition, Orkin solicited the orders and participated in the pricing of Ortech stock by suggesting prices his customers should offer.
13
He also stood
C. LEGALITY OF THE MARKUP POLICY
Orkin asserts that the markup policy 1) is illegal under federal anti-trust laws in that it results in price fixing and unduly restrains trade; 2) has never been approved in accordance with the Administrative Procedures Act; 3) is based on an antiquated survey of dealer pricing practices and its enforcement is arbitrary and capricious; and 4) as administered, is so difficult to comply with that it is rendered unconstitutional.
In
Meyer Blinder,
We are similarly unpersuaded by Orkin’s argument that the markup policy is unfair because no reported cases involve similar facts. Specifically, Orkin notes that no published decision addresses markups where a dealer exercises warrants to fill retail orders or where the market of a security is dominated and controlled by a party not charged in the complaint. As a result, Orkin argues that he did not have adequate notice of the rules he was required to abide by as an NASD member.
While we have been unable to locate a decision involving the precise factual situation before us, none of the SEC cases that Orkin has cited or that we have reviewed preclude the SEC’s findings. 15 The markup policy is clear, well-established, and capable of being fairly applied to the facts of this case. Orkin had sufficient notice that the NASD Rules prohibited his conduct in this case. By its definition, the markup policy must be applied case-by-case and all relevant circumstances must be considered in determining the prevailing market price for a security and whether a fair retail price has been charged. For the reasons set forth above, we cannot find that the SEC unfairly or improperly concluded that Orkin was responsible for excessive markups in 201 retail sales of Ortech stock. These arguments by Orkin do not warrant reversal of the SEC’s order.
D. SEVERITY OF SANCTIONS
Finally, Orkin claims that the sanctions imposed against him were too severe. He compares the sanctions assessed against him with those imposed on Mernah, who he asserts had greater responsibility for setting retail prices at Tri-Bradley.
We may overturn the SEC’s decision to impose a particular sanction only upon finding a gross abuse of discretion.
See, e.g. Amato,
CONCLUSION
For the foregoing reasons, Orkin’s petition for review is DENIED, the SEC’s order is AFFIRMED, and the stay is lifted.
Notes
. The NASD is a self regulating organization. It commenced disciplinary action against Orkin by filing a complaint on January 27, 1989. The NASD's District Business Conduct Committee ("DBCC”) then conducted an evidentiary hearing on the complaint on October 11, 1990, and issued an opinion on January 24, 1991. Orkin sought review by NASD’s National Business Conduct Committee ( ‘NBCC”). The NBCC reviewed the proceedings before the DBCC, conducted its own hearing on June 6, 1991, and issued an opinion on September 30, 1991. Orkin appealed the NBCC’s decision to the SEC. The SEC made de novo determinations of fact and law. This court now reviews the SEC’s Opinion and Order dated March 23, 1993.
See Shultz v. SEC,
. An NASD investigator testified at the DBCC hearing that he estimated that Brownstone was involved in 98% of all Ortech trades.
. A market maker includes any dealer who, with respect to a security, buys from and sells to other dealers.
. "Pink sheets” are the NASD’s published inter-dealer quotation system. Pink sheets also list market makers for a given security.
. The complaint was the fruit of an NASD investigation of Brownstone. The charge against Hurtado, along with a second charge, were withdrawn when he died before the DBCC hearing was held. Tri-Bradley, also named in the complaint, and Mernah submitted offers of settlement which were accepted by the NBCC. Tri-Bradley was censored, fined $118,000, and expelled from NASD membership. Mernah was fined $10,000 and suspended from acting in a NASD principal capacity for 90 days.
. The opinions of the NASD and SEC refer to a high markup of 248 %. As reflected on Schedule A, the correct figure is 243 %
. The SEC gave Orkin the benefit of the doubt by setting the prevailing market price at $.03 because in fact, of the seven purchases by Brownstone, only the last was made at $.03 per share. The remaining purchases were made at $.0175 to $.0275 per share.
. The SEC again gave Orkin the benefit of the doubt as to seven of the 208 trades listed on Schedule A. In support of his position that the unpublished quotations obtained by Memah were the best evidence of Ortech's prevailing market price, Orkin pointed to three inter-dealer trades not involving Brownstone that occurred after the relevant time period: on December 16 and 17, 1987, at $.07 and on January 26, 1988, at $.05. While noting that Brownstone’s domination and control affected all inter-dealer trades rendering them unreliable for establishing the prevailing market price and that these trades occurred after the relevant time period, the SEC used the two $.07 trades to set the prevailing market price for Ortech stock five business days before they occurred.
See, e.g., In re Nicholas A. Codispoti,
48 S.E.C. 842, Securities Exchange Act Release No. 24,946 (September 29, 1987),
. Orkin raises the argument in his brief that the SEC erred in finding that he “aided and abetted” Tri-Bradley’s markup violations. In the context of its opinion, the SEC’s use of the word “aided" does not connote a finding of such liability. We do not address this argument further as the SEC determined that Orkin was liable as a principal with regard to the markup violations.
. “[A] dealer may not exploit the ignorance of his customer to extract unreasonable profits resulting from a price which bears no reasonable relation to the prevailing price.” Duker & Duker, 6 S.E.C. 386, 388-89 (1939).
. An integrated dealer is a market maker who also sells the security in the retail market.
. Using quotations unsubstantiated by a dealer’s own sales to calculate markups displays at a minimum reckless indifference to the duty owed to customers.
In re Adams Sec., Inc.,
Securities Exchange Act Release No. 34,028 (May 9, 1994); 56 S.E.C. Docket -,
. At the DBCC hearing, Orkin testified that he based the prices he suggested to customers on conversations with brokers on the street. At the NBCC hearing, Orkin claimed that each day Mernah supplied him with quotations for various stocks and that the Ortech prices he suggested were based on information she supplied. In either case, Orkin is still responsible for the markup violations. Orkin should have known that quotations were an unreliable indicator of the prevailing market price for Ortech, especially when they were 100% to 243% above the cost
.
In re Robert Bruce Orkin,
Securities Exchange Act Release No. 32,035,
. The cases cited by Orkin are inapposite. For example, unlike the SEC panel in
In re Kevin B. Waide,
Securities Exchange Act Release No. 30,561 (April 7, 1992), 51 S.E.C. Docket —,