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Univ. of Toledo College of Law

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Thursday, December 9, 2010

SEC Plans to Review Supervisory Failure Case Involving Broker-Dealer's GC

The SEC  recently declined to affirm summarily an administrative law judge's dismissal of proceedings brought against Theodore W. Urban,  formerly general counsel, executive vice president, and member of the Board of Directors of Ferris Baker Watts, Inc. ("FBW" or the "Firm"), a registered broker-dealer and investment adviser.  In her decision, the law judge concluded that Urban should not be sanctioned, under Sections 15(b)(4)(E) and 15(b)(6) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940,for supervisory failure.  According to the SEC's order:

This case involves allegations that Urban failed to supervise Stephen Glantz, a top-producing FBW salesperson. The law judge found that Glantz violated the antifraud provisions of the securities laws based on various misconduct and that Urban supervised him; however, the law judge declined to hold Urban liable for supervisory failure because she concluded that Urban, who had sought to have Glantz terminated, acted reasonably under the circumstances. In particular, the law judge found that Urban reasonably relied on the Firm's director of retail sales, Louis Akers, to exercise heightened supervision over Glantz once indications of Glantz's misconduct were made known. Moreover, even if reliance on Akers to supervise Glantz was unreasonable, Urban could not be faulted, the law judge found, for failing to raise concerns about Glantz with the Firm's Chief Executive Officer or its Board of Directors because Urban reasonably believed that they would simply defer to Akers, who had opposed Urban's recommendation that Glantz be terminated.

...

Based on our own preliminary review of the record, and given the important matters of public interest this case presents, summary affirmance does not appear appropriate here. As a general matter, we note that Commission review of the findings and conclusions of an initial decision is conducted de novo.  We note further that, although the Commission grants "considerable weight and deference" to credibility determinations of the law judges, those determinations are not sacrosanct. Moreover, the proceeding raises important legal and policy issues, including whether Urban acted reasonably in supervising Glantz and responded reasonably to indications of his misconduct, whether securities professionals like Urban are, or should be, legally required to "report up," and whether Urban's professional status as an attorney and the role he played as FBW's general counsel affect his liability for supervisory failure.

Under the circumstances, it appears appropriate to consider the record and the parties' arguments as part of the normal appellate process rather than the abbreviated process involved with a summary affirmance. We will therefore deny Urban's motion, though our denial should not be construed as suggesting any view as to the outcome of this case.

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