UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


GRAHAM, SHARON M.

v.

SEC


99-1029a

D.C. Cir. 2000


*	*	*


Garland, Circuit Judge: Sharon Graham and Stephen Voss  petition for
review of an order of the Securities and Exchange  Commission (SEC)
sanctioning them for conduct relating to  trades executed for their
customer, John Broumas. The  Commission found that Graham, a
registered representative  with Voss' brokerage firm, violated section
10(b) of the Secu- rities Exchange Act of 1934 and Rule 10b-5
promulgated  thereunder by aiding and abetting Broumas in the
fraudulent  trading of stock. The Commission further concluded that 
Voss had failed reasonably to supervise Graham with a view  to
preventing the securities violations. Graham challenges  the
Commission's findings on several grounds; Voss' chal- lenge depends
solely upon the exoneration of Graham. Be- cause we conclude that the
Commission's decision was reason- able and supported by substantial
evidence, we deny the  petition for review and affirm the SEC's


I


Voss is the owner and president of an independent discount  brokerage
firm, Voss & Co., Inc. (VCI), located in Springfield,  Virginia.
Graham began working in the securities industry in  1982 and joined
VCI in September of 1984. She was a  registered representative,1 as
well as VCI's cashier and back  office assistant. She was also VCI's
primary "house" broker,  handling house accounts on a noncommission
basis as well as  some 250 of her own accounts for commissions. See
J.A. at  371-72.2 Graham spent the bulk of her time performing 




__________

n 1 A representative is a person associated with a National Associ-
ation of Securities Dealers (NASD) member firm who is engaged in 
supervision, solicitation, or conduct of securities business. The 
NASD requires that representatives of member firms register with  the
Association and pass a qualifying exam. See 6 Louis Loss &  Joel
Seligman, Securities Regulation 2809-11 & n.42 (3d ed. 1990).


2 At VCI, house accounts were not assigned to any particular  broker.
Commissions on trades in these accounts were paid to the  firm rather
than to the brokers executing the trades.


cashiering and back office duties. In February of 1990, she  received
her principal's license.3 Graham's immediate super- visor, James
Pasztor, was VCI's vice-president, general man- ager, and SEC
compliance officer.


One of the firm's house accounts was a joint account in the  names of
John Broumas and his wife, Ruth. Broumas' trou- bles began when the
stock market crashed in 1987. To cover  his losses, he borrowed
heavily and by May 1989 owed  roughly $2 million in personal loans and
$1 million in mort- gages. See id. at 180-85. Unable to borrow any
more from  banks, Broumas launched upon a scheme that the SEC 
described as "similar to check-kiting." Sharon M. Graham,  Release No.
34-40727, 68 S.E.C. Docket 1934, 1998 WL  823072, at *2 (Nov. 30,


Broumas held a substantial number of shares in the Class  A common
stock of James Madison, Ltd. (JML), a holding  company for a family of
banks with which he was affiliated.  Although JML stock was listed on
the American Stock Ex- change (AMEX), Broumas undertook a series of
trades in the  over-the-counter market. Broumas arranged wash trades 
and matched orders5 of JML stock among accounts in his own  name and
in the name of nominees whose accounts he con-




__________

n 3 A principal is a person who is "actively engaged in the  management
of the [NASD] member's ... securities business."  Markowski v. SEC, 34
F.3d 99, 101 n.1 (2d Cir. 1994) (internal  quotation omitted). An
additional examination is required to be- come registered as a
principal. See 6 Loss & Seligman, supra, at  2810-11 n.42.


4 For a description of the mechanics of a check-kiting scheme,  see
Williams v. United States, 358 U.S. 279, 281 n.1 (1982).


5 "Wash trades," also called "wash sales," are "transactions  involving
no change in beneficial ownership." Ernst & Ernst v.  Hochfelder, 425
U.S. 185, 205 n.25 (1976). "Matched orders" are  "orders for the
purchase/sale of a security that are entered with the  knowledge that
orders of substantially the same size, at substantial- ly the same
time and price, have been or will be entered by the  same or different
persons for the sale/purchase of such security."  Id.; see Michael
Batterman, 46 S.E.C. 304, 305 (1976).


trolled. Broumas directed these trades among at least 25  different
brokerage accounts he controlled at 14 different  broker-dealers. In
each case, he would instruct one broker to  buy and another to sell a
specified number of shares at a  specified price, thus moving the
stock from one of his (or his  controlled) accounts to another. See
J.A. at 211. Neither  broker was told by Broumas that the other
account also  belonged to or was controlled by him.


Broumas' stock was held in margin accounts.6 Under the  rules
applicable to those accounts, Broumas could obtain the  proceeds from
a sale one day after the transaction was  completed, but could wait at
least five business days until the  settlement date to pay for the
corresponding purchase. See  Graham, 1998 WL 823072, at *2; see also
12 C.F.R. s 220.4  (1989). When the settlement date arrived, Broumas
some- times executed another set of wash trades or matched orders  to
obtain the funds he needed to make the payment--as if he  were playing
a fiscal version of "musical chairs."7


As Broumas' financial situation continued to deteriorate,  "many of the
broker-dealers with which he dealt ... bec[ame]  increasingly
reluctant to extend him credit." Graham, 1998  WL 823072, at *2.
Broumas then began to effectuate wash  and matched trades through
accounts in the names of rela- tives and business associates. The
trades in these nominee 




__________

n 6 In a margin account:


the broker lends the customer money to allow him to pur- chase
securities. The customer advances only a portion of  the purchase
price and pays interest on the balance. The  broker maintains the
securities purchased as collateral. If  the value of the securities
declines, the broker may seek  more collateral for the protection of


Liang v. Dean Witter & Co., 540 F.2d 1107, 1109 n.2 (D.C. Cir. 


7 Broumas testified that the proceeds available to him during  the
settlement period allowed him to "take care of my bank notes or 
whatever was pressing me that day and then worry about how I  was
going to handle the purchase price and the amount of the  purchase
price a week later." J.A. at 209.


accounts were placed by Broumas or at his direction with  funds he
provided and for his benefit. Between January 1,  1989 and June 30,
1990, Broumas effectuated 203 sets of wash  and match trades in JML
stock, involving a total of 420  trades. Each trade typically involved
the purchase and sale  of between 3,000 and 12,000 JML shares. See


Seventy-six of the directed trades were conducted by VCI,  and
approximately 60 of those--an average of one every 
week-and-a-half--were executed by Graham. At the begin- ning of 1989,
Broumas' joint account at VCI held 37,500  shares of JML stock. From
January 23, 1989 through May  24, 1990, Broumas instructed VCI to
exchange a total of  644,800 shares. Although Broumas' account was a
"house"  account, a rapport soon developed between Broumas and  Graham
and he began to ask for her specifically. Generally,  Broumas would
give Graham a specific number of shares to  trade, a particular limit
price, the name of the firm ("contra- broker") that would execute the
other side of the trade, and  the name of the broker he wanted her to
contact at that firm.  After consulting the AMEX listing to verify
that the order  price was within the listed bid and offer prices,
Graham would  complete the trade. Broumas usually asked VCI to issue a
 check for the proceeds the day after the sale. See id. at *3.


Graham observed that Broumas "had a peculiar way of  trading." J.A. at
306. Of the 100 house accounts she han- dled during this time, only
Broumas directed trades, and only  Broumas traded in such large
quantities. See id. at 285.  Because Broumas always identified the
specific contact per- sons to call at the contra-brokers, Graham came
to believe  that Broumas controlled the shares in the accounts or at
least  "had connections" with them, id. at 382, although Broumas 
never told her so and she "never asked him," id. at 286-87.  Finally,
from her work as the firm's cashier, Graham noticed  that Broumas
"never seemed to ... make any money on his  trades." Id. at 380, 383.
Eventually, Graham asked Brou- mas directly why he traded in such a
strange manner, and  Broumas answered that "he owed bank notes or bank
loans  and that for him to sell the stock was an easier way for him to


get the money to pay those loans, as opposed to having to go  to other
means." Id. at 356-57; see also id. at 308.8


Due to Broumas' suspicious manner of trading, Graham  undertook special
precautions to protect her firm's financial  interests. She knew that
Broumas had financial problems,  that he had bounced checks, and that
he often owed money on  his joint account. See id. at 288, 317, 343.
As a consequence,  she feared that "Broumas' orders presented a
financial risk to  the firm." Graham Br. at 14 (citing J.A. at 317).
Graham  discussed Broumas' "peculiar way of trading" with her super-
visor, James Pasztor, and, as a safeguard, generally sought  his prior
approval for Broumas' trades--something she rarely  did with respect
to her other house accounts. J.A. at 283-85,  316-17.


By early 1989, Broumas was having difficulty making time- ly payment
for trades through his VCI joint account. Al- though he had five
business days to pay for a purchase, both  Graham and Voss knew that
VCI's clearing firm,9 U.S. Clear- ing Corp., had been required to
obtain "quite a few" exten- sions of time. Graham, 1998 WL 823072, at
*4 (quoting,  without citation, J.A. at 296). In March of 1989, the
margin  supervisor for the clearing firm told Pasztor that Broumas 
had received too many extensions, and that he thought Brou- mas might
be "check kiting" through his brokerage account.  Pasztor agreed. See
id. at *4 & n.17. As a consequence, the  clearing firm imposed
restrictions on Broumas' account, and  directed Pasztor to bar trading
unless the account already  contained cleared funds or stock. Pasztor




__________

n 8 At trial, Broumas claimed that he sold the shares to himself, 
rather than to a buyer on the open market, because he "wanted to 
maintain [his] position [in JML] at that price." J.A. at 212.


9 A clearing broker performs "back office services such as  clearing
stock, handling customer funds, holding customer securi- ties, dealing
with transfer agents, and matching of trades with the  exchanges and
market makers" for firms that do not have the  capacity to perform
these functions. SEC Br. at 18 n.17; see, e.g.,  United States v.
Russo, 74 F.3d 1383, 1386 (2d Cir. 1996).


Voss, and Broumas that the account was restricted. See id.  at *4.


Thereafter, Broumas called Voss and asked to open a  second account,
entitled "Les Girls," purportedly for a part- nership between Broumas'
wife and daughter. Voss agreed  to permit the opening of the new
account, although he never  spoke to Broumas' wife or daughter and
testified that he  "suspected" Broumas would be advising on the
trading. J.A.  at 564. Graham completed the form to open the "Les
Girls"  account, although she had never spoken to Broumas' wife or 
daughter either. Graham conceded that she regarded the  account as
belonging to Broumas, and that she knew he  placed all the trades.
Although she believed Broumas had  opened the Les Girls account to
prevent the restricted joint  account "from being closed out or his
position sold out," id. at  295-96, Graham nonetheless continued to
place directed  trades for him. Broumas directed 40 JML stock trades 
through the Les Girls account; between March 21 and Au- gust 29, 1989,
all of Broumas' VCI trades in JML stock were  effected through that


In February of 1990, Broumas began directing trades in  JML stock
through yet another VCI account. These trades  were made through an
already existing house account main- tained by his friend and
attorney, Lawton Rogers. Broumas  called Graham to direct trades
through the Rogers account;  Graham would then call Rogers to confirm
them. Graham  told Pasztor about the directed trades, who in turn told
Voss.  Voss said he "didn't have a problem" with the trades because 
Broumas and Rogers were "bosom buddies." Id. at 429.


At the beginning of April 1990, a check Broumas had given  VCI to pay
for the purchase of JML shares was returned for  insufficient funds.
Pasztor again restricted the joint account  and told Graham that
Broumas could not trade without  cleared funds. Initially, Voss
concurred. At the end of April,  however, Broumas invited Voss to
lunch. Following the  lunch, Voss told Pasztor that Broumas could
continue to  trade. Pasztor in turn informed Graham. See Graham, 1998 


Eventually, Broumas became unable to satisfy his margin  calls and
failed to pay for his last trade through VCI.  Although the firm
liquidated Broumas' account, it suffered a  loss of over $60,000. See
id. Broumas filed for personal  bankruptcy in early 1991. See id. at


On September 27, 1991, the SEC filed a complaint in  district court
alleging that, from January of 1989 through  July of 1990, Broumas
violated the securities laws by execut- ing wash trades in JML stock.
See SEC v. John G. Brou- mas, Civ.A.No. 91-2449 (D.D.C.). Without
admitting or de- nying the allegations, Broumas consented to the entry
of a  permanent injunction against future violations. Subsequent- ly,
Broumas pled guilty to utilizing a check-kiting scheme to  meet margin
calls. See United States v. Broumas, 69 F.3d  1178, 1179-80 (D.C. Cir.


On September 30, 1994, the SEC issued an administrative  complaint
against Graham, Voss, and Pasztor in connection  with Broumas' trades
from January 1989 through May 1990.  Graham was charged with willfully
aiding and abetting Brou- mas' violations of two sections of the
Securities Exchange Act  of 1934: section 9(a)(1), which prohibits the
effectuation of  wash trades or matched orders


[f]or the purpose of creating a false or misleading ap- pearance of
active trading in any security registered on a  national securities
exchange, or a false or misleading  appearance with respect to the
market for any such  security,


15 U.S.C. s 78i(a)(1), and section 10(b) (and Rule 10b-5  thereunder),
which makes it unlawful


[t]o use or employ, in connection with the purchase or  sale of any
security registered on a national securities  exchange ... any
manipulative or deceptive device or  contrivance ...,


id. s 78j(b). Pasztor and Voss were charged with violating  section
15(b)(4)(E) for failing reasonably to supervise Graham  "with a view
to preventing" the violations. Id. s 78o(b)(4)(E).  The charges
against Pasztor were severed from those against  Voss and Graham. The
SEC subsequently found Pasztor 


liable for failure to supervise and sanctioned him with a  three-month
suspension. See James J. Pasztor, Release No.  34-42008, 70 S.E.C.
Docket 1979 (Oct. 14, 1999).


The charges against Graham and Voss were heard before  an
Administrative Law Judge (ALJ), who found Graham and  Voss liable on
all charges, suspended them from association  with any broker or
dealer for two and three months, respec- tively, and ordered Graham to
cease and desist from future  violations. See Sharon M. Graham,
Release No. 34-82, 60  S.E.C. Docket 2707, 1995 WL 769011, at *28
(Dec. 28, 1995).  On appeal, the SEC held that Broumas' trading did
not  violate section 9(a)(1) because the specific manipulative intent 
required under that section had not been established, and  hence that
Graham did not aid and abet such a violation. See  Graham, 1998 WL
823072, at *6 n.27. However, the Com- mission affirmed the ALJ's
holding that Broumas' wash and  matched trades violated section 10(b)
and Rule 10b-5 because  they operated as a fraud upon: a) the market
for JML stock,  by creating a deceptive appearance of market activity;
and  b) the brokerage firms through which Broumas traded, which  were
induced to pay him money they would not have paid had  they known the
sales were not bona fide. See id. at *5. The  Commission further
affirmed the ALJ's findings that Graham  aided and abetted Broumas,
and that Voss failed reasonably  to supervise, and it upheld the two-
and three-month suspen- sions. See id. at *7, *9, *10. Graham and Voss
petition for  review of the Commission's order.


II


The securities laws provide for judicial review of SEC  disciplinary
proceedings in the courts of appeals. See 15  U.S.C. s 78y(a)(1). The
Commission's findings of fact, "if  supported by substantial evidence,
are conclusive." Id.  s 78y(a)(4); see Steadman v. SEC, 450 U.S. 91,
96 n.12  (1981). Its other conclusions may be set aside "only if 
'arbitrary, capricious, an abuse of discretion, or otherwise not  in
accordance with law,' 5 U.S.C. s 706(2)(A)." Wonsover v.  SEC, 205
F.3d 408, 412 (D.C. Cir. 2000) (internal quotation  omitted).


Section 10(b) of the Securities Exchange Act of 1934 makes  it unlawful
to use deceptive devices in connection with the  purchase or sale of
securities. See 15 U.S.C. s 78j(b). Rule  10b-5, promulgated pursuant
to section 10(b), specifically  provides that it is unlawful for any
person, in connection with  the purchase or sale of any security:


(a) To employ any device, scheme, or artifice to de- fraud,


(b) To make any untrue statement of a material fact or  to omit to
state a material fact necessary in order to  make the statements made
... not misleading, or


(c) To engage in any act, practice, or course of busi- ness which
operates or would operate as a fraud or deceit  upon any person.


17 C.F.R. s 240.10b-5. Although variously formulated, three  principal
elements are required to establish liability for aiding  and abetting
a violation of section 10(b) and Rule 10b-5: (1)  that a principal
committed a primary violation; (2) that the  aider and abettor
provided substantial assistance to the pri- mary violator; and (3)
that the aider and abettor had the  necessary "scienter"--i.e., that
she rendered such assistance  knowingly or recklessly. See SEC v.
Fehn, 97 F.3d 1276,  1287-88 (9th Cir. 1996); Bloor v. Carro,
Spanbock, Londin,  Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985); SEC
v.  Falstaff Brewing Corp., 629 F.2d 62, 72 (D.C. Cir. 1980); 
Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir.  1980);
see also SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir.  1992).


Graham contests all three of these elements: She contends  that
Broumas' conduct did not constitute a violation of section  10(b) or
Rule 10b-5, that she did not substantially assist such  a violation,
and that she did not do so knowingly or recklessly.  Graham and Voss
further argue that the SEC is estopped  from sanctioning them because
the SEC and National Associ- ation of Securities Dealers (NASD)
observed Broumas' trad- ing and failed to alert petitioners to it or
identify it as a  securities violation. Finally, Voss argues that
because Gra- ham is not guilty of aiding and abetting, he cannot be


of failing reasonably to supervise her. We consider these  arguments
below.


A


The SEC based its conclusion that Broumas' trades consti- tuted a fraud
under section 10(b) and Rule 10b-5 on two  independent theories.
First, it concluded that the trades  constituted a fraud on the market
for JML stock by creating  a deceptive appearance of market activity.
Second, it con- cluded that Broumas defrauded the broker-dealers
through  which he traded by causing them to remit sales proceeds to 
him that they would not have paid had they known the true  nature of
the transactions. Although Graham challenges the  validity of the
first theory,10 we need not resolve that dispute  because Broumas'
trades clearly constitute violations under  the second.


As the SEC explained, Broumas, unable to obtain further  loans from
banks, arranged wash trades and matched orders  "for the purpose of
obtaining a float in a scheme similar to  check-kiting." Graham, 1995
WL 769011, at *4.11 Broumas'  scheme caused the selling brokers to pay
him immediately  the anticipated proceeds from the contrived sales,
payments  they would not have made had they realized that Broumas--
with his shaky financial condition--was also on the other side  of the
transaction, promising to pay for the same stock within 




__________

n 10 Graham disputes that Broumas' trades constituted a fraud on  the
market. She argues, inter alia, that Broumas' trades were not 
material because they constituted a small percentage of the total 
volume of outstanding JML shares. The SEC counters that the  trades
nonetheless made up a substantial proportion of the daily  volume of
trades on the days they were reported.


11 Broumas acknowledged that he began wash trading because  he "didn't
have the credit" to meet his existing obligations, J.A. at  174, and
couldn't borrow money from a bank because he had  "reached [his]
limit," id. at 213. He also testified that on many  occasions he sold
JML stock to himself in order to meet margin  calls. See id. at 205.


five days. See Graham, 1998 WL 823072, at *6.12 Indeed,  not only did
Broumas fail to disclose that he was on both  sides of the
transaction, but he also took affirmative steps to  hide that fact--by
trading through the Les Girls and Rogers  accounts--when the clearing
firm restricted trading in his  own account.13


As we have noted, although Broumas received payment for  the sale
immediately, he did not have to make payment for  the "purchase" of
the same shares until five days later. Were  he unable to make that
payment--an eventuality his uncer- tain financial condition rendered
likely and which ultimately  occurred--the selling broker (or the
purchasing broker, if it  had paid over the funds to the selling
broker and received the  stock) would be forced to cover the loss by
selling the JML  shares. But there was no guarantee that those shares
would  cover the amount advanced to Broumas by the broker--either 
because the stock was no longer worth the price Broumas  himself had
offered a week earlier,14 or because it had never 




__________

n 12 See SEC v. Drysdale Sec. Corp., 785 F.2d 38, 42 (2d Cir. 1986) 
(finding s 10(b) violation where, in order to honor its obligation to 
resell securities on settlement date of reverse "repo," defendant 
"had to purchase identical securities, something which its insolvency 
may have rendered impossible"); see also A. T. Brod & Co. v.  Perlow,
375 F.2d 393, 397 (2d Cir. 1967) (upholding claim for fraud  against
broker under s 10(b) where investors placed purchase order  with
fraudulent intent to pay for securities only if their market  value
increased by settlement date, and further noting that scheme 
effectively resulted in "an involuntary extension of credit without 
compliance with the margin requirements").


13 Broumas testified that he began asking Rogers to allow him  to
direct trades through his account "[b]ecause I didn't have the  credit
and my margin calls wouldn't permit me to trade with those  other
brokers of mine." J.A. at 174; cf. United States v. Sayan,  968 F.2d
55, 61 (D.C. Cir. 1992) (affirming conviction for check- kiting and
noting that "creating fictitious payees and forging en- dorsements"
constituted a material part of the fraud, because "[i]f  [the
defendant] had merely made the drafts payable to herself, the  bank
would not have granted her immediate credit").


14 The price of JML Class A stock began to decline in February  of
1990. See Graham, 1995 WL 769011, at *2. On February 2, 


been worth that amount in the first place.15 Indeed, some- thing like
this happened to VCI, which suffered a $60,000 loss  when forced to
liquidate Broumas' account after he failed to  pay for his last
transaction.16


Graham contends that Broumas' scheme cannot violate  section 10(b)
because fraud on a broker is not fraud "in  connection with the
purchase or sale of [a] security," as  required by the statutory
language. 15 U.S.C. s 78j(b). To  constitute a violation of section
10(b), Graham maintains, "the  fraud must have been perpetrated upon
an actual or potential  investor." Graham Br. at 27. As the brokers
were never  parties to the securities transactions, but merely




__________

n 1990, it closed at $6 per share. On May 24, 1990, it closed at $4
5/8.  See J.A. at 754-55. Broumas testified that around this time the 
"stock dropped dramatically and I had to sell a lot of things. I was 
finding it difficult to meet those interest payments and those loan 
payments." Id. at 188.


15 We note that unlike a plaintiff in a private damages action,  the
SEC need not prove actual harm. See Schellenbach v. SEC, 989  F.3d
907, 913 (7th Cir. 1993); SEC v. Blavin, 760 F.2d 706, 711 (6th  Cir.
1985).


16 In her reply brief, Graham contends that Broumas did not  defraud
the brokers into paying him the proceeds of the JML sales  because he
was "entitled" to the money. Graham Reply Br. at 8.  Graham claims
that the funds Broumas received from the "sell side"  of the
transaction were the sale proceeds of his own stock, and  therefore
his own money. The selling broker, however, did not pay  Broumas out
of the actual proceeds of the sale, but rather out of  "proceeds" it
anticipated would be paid five days later. Unbe- knownst to the
broker, that payment would have to come from  Broumas himself, and, if
Broumas were unable to pay, the selling  broker's recourse was against
the JML stock--which may well have  been insufficient to cover what
the broker had paid out. Of course,  if the transaction is viewed from
the "buy side," there is even less  justification for regarding the
money as Broumas' own, as the  purchasing broker extended Broumas
credit on margin to purchase  the stock from the contra-broker.


them, Graham contends that no violation of section 10(b) was 
possible.


Graham's argument is foreclosed by the Supreme Court's  unanimous
decision in United States v. Naftalin, 441 U.S. 768  (1979). There,
the Court confronted the same challenge to a  criminal conviction
under section 17(a)(1) of the Securities Act  of 1933, which makes it
unlawful for any person "in the offer  or sale of any securities" to
employ any device, scheme, or  artifice to defraud. 15 U.S.C. s
77q(a)(1). The defendant  had placed sell orders for stock he did not
own, gambling that  he could make offsetting purchases at lower prices
before he  was required to deliver the stock. Defendant did not
dispute  that he defrauded the brokers who executed the orders, but 
contended, as petitioners do here, that the statute "applies  solely
to frauds directed against investors, and not to those  against
brokers." Naftalin, 441 U.S. at 772.


The Court rejected the argument. It held that the statuto- ry phrase,
"in the offer or sale of any securities," was  intended to be
"define[d] broadly," and is "expansive enough  to encompass the entire
selling process, including the sell- er/agent transaction." Id. at
773. The "language does not  require," the Court said, "that the fraud
occur in any particu- lar phase of the selling transaction," or "that
injury occur to a  purchaser."17 Id.


Turning to the statutory purpose, Naftalin emphasized that  "neither
this Court nor Congress has ever suggested that  investor protection
was the sole purpose of the Securities  Act." Id. at 775. Although
"[p]revention of frauds against  investors was surely a key part ...
so was the effort to  achieve a high standard of business ethics ...
in every facet  of the securities industry." Id. (internal quotation
omitted) 




__________

n 17 The Court noted that the case would be different if it had  been
brought by private plaintiffs, because the class of plaintiffs  who
may bring private actions under Rule 10b-5 is limited to  purchasers
or sellers. See Naftalin, 441 U.S. at 774 n.6; see also  United States
v. O'Hagan, 521 U.S. 642, 664-65 (1997); Blue Chip  Stamps v. Manor
Drug Stores, 421 U.S. 723, 751 n.14 (1975); SEC  v. National Sec. ,
Inc., 393 U.S. 453, 467 n.9 (1969).


(second alteration in original); see United States v. O'Hagan,  521
U.S. 642, 658-59 (1997) (reaching same conclusion regard- ing s 10(b)
of the Securities Exchange Act). Moreover, the  Court continued, "the
welfare of investors and financial inter- mediaries are inextricably
linked--frauds perpetrated upon  either business or investors can
redound to the detriment of  the other and to the economy as a whole."
Naftalin, 441 U.S.  at 776.


Although Naftalin involved section 17(a)(1) of the Securi- ties Act,
rather than section 10(b) of the Securities Exchange  Act, the
relevant language is virtually identical. Compare 15  U.S.C. s
77q(a)(1) ("in the offer or sale of any securities"),  with id. s
78j(b) ("in connection with the purchase or sale of  any security").
Indeed, the Court recognized an argument  that section 17(a)(1) might
be narrower than section 10(b),  but held that "even if 'in' were
meant to connote a narrower  group of transactions than 'in connection
with,' " it would still  cover fraud against brokers. Naftalin, 441
U.S. at 773 n.4.  Naftalin's application to the broader wording of
section 10(b)  is, therefore, a fortiori. This point is further
confirmed by  the Supreme Court's subsequent description of Naftalin
as  having "appl[ied] s 17(a) of the 1933 Act to conduct also 
prohibited by s 10(b) of the 1934 Act," Herman & MacLean  v.
Huddleston, 459 U.S. 375, 383 (1983), and by its recent  affirmation
that section 10(b) "does not confine its coverage to  deception of a
purchaser or seller of securities," O'Hagan, 521  U.S. at 651. See
also SEC v. Jakubowski, 150 F.3d 675, 680  (7th Cir. 1998) (noting
that Naftalin was "a case under s 17  of the 1933 Act, which requires
proof that the fraud occurred  'in' an offer or sales of securities--a
tighter link, one might  suppose, than 'in connection with' ")
(citation omitted); A. T.  Brod & Co. v. Perlow, 375 F.2d 393, 396-97
(2d Cir. 1967)  (holding that s 10(b) and Rule 10b-5 apply to frauds


Graham also contends that there cannot have been an  actionable fraud
in this case because the SEC charged owners  and brokers at the
contra-firms with securities violations like  those of petitioners.
"Clearly," Graham declares, "Broumas'  alleged aiders and abettors
cannot also be his defrauded 


victims." Graham Br. at 26. This argument, too, is of no  avail.


First, even assuming that such a defense were valid, the  SEC did not
charge all of the contra-brokers with securities  violations.18
Second, this purported defense has no applica- tion to the clearing
firms--none of which played any role in  Broumas' scheme and one of
which expressly tried to restrict  it. Broumas, assisted by Graham and
Voss, established and  traded through the Les Girls and Rogers
accounts specifically  to avoid those restrictions, thus deceiving the
clearing firm  into making the advances necessary to execute his
transac- tions. See Graham, 1998 WL 823072, at *3-*4; Richard D. 
Chema, Release No. 34-40719, 68 S.E.C. Docket 1911, 1998  WL 820658,
at *3 (Nov. 30, 1998) (concluding that Broumas  also defrauded another
broker-dealer's clearing firm into  advancing funds); see also United
States v. Russo, 74 F.3d  1383, 1388, 1390 (2d Cir. 1996) (upholding
conviction under  s 10(b) where scheme involved generating false cash
credits  from clearing broker).19


Finally, whatever the involvement of the brokers or own- ers, fraud on
their corporate institutions is an independent  matter.20 As the
Supreme Court recognized in Naftalin, 




__________

n 18 Broumas' wash trades involved a total of 14 different broker-
dealers. The VCI trades involved eight different firms, while the  SEC
instituted administrative proceedings against four. See Gra- ham, 1998
WL 823072, at *3 n.14.


19 Like the other brokers, the clearing firm was exposed to the  risk
that funds it advanced might not have been repaid at the time  Broumas
became insolvent. Although the clearing broker might be  able to
recover against the introducing firm in the event of nonpay- ment, it
would incur transaction costs in so doing--and there was  always the
risk that Broumas' scheme would bankrupt one of the  broker-dealers
involved. See Richard D. Chema, 1998 WL 820658,  at *4-*5.


20 Cf. Superintendent of Ins. v. Bankers Life & Cas. Co., 404  U.S. 6,
12 (1971) (holding that s 10(b) applies to fraud on corpora- tion by
controlling stockholder, and that "the fact that creditors of  the
defrauded" corporation "may be the ultimate victims does not 


fraud on brokerage firms affects more than the health of  those firms
alone. See Naftalin, 441 U.S. at 776. When the  music stops, the firm
left without a chair (payment or collat- eral) does not simply leave
the game. "Losses suffered by  brokers," whether or not covered by
insurance, "increase  their cost of doing business, and in the long
run investors pay  at least part of this cost through higher brokerage
fees." Id.  Equally important, fraud against brokers may "create a
level  of market uncertainty that could only work to the detriment  of
both investors and the market as a whole." Id. Accord- ingly, we have
no warrant for overturning the SEC's determi- nation that Broumas
violated section 10(b) and Rule 10b-5.


B


Having concluded that Broumas' stock-kiting scheme con- stituted a
primary violation of the securities laws, the next  question is
whether Graham substantially assisted Broumas  in that violation. We
have no doubt that she did. Graham  placed 60 directed trades for
Broumas, an average of one  every week-and-a-half during the 18-month
period at issue.  She opened the Les Girls account and executed wash
trades  from both that account and from the account of Lawton  Rogers.
Such conduct is more than sufficient to constitute  substantial
assistance. See SEC v. U.S. Envtl., Inc., 155 F.3d  107, 112 (2d Cir.
1998) (holding trader who recklessly execut- ed manipulative buy and
sell orders for customer liable as  primary violator).


Graham contends that this conclusion is inconsistent with  our decision
in Zoelsch v. Arthur Andersen & Co., 824 F.2d 27  (D.C. Cir. 1987).
She describes Zoelsch as a case in which we  dismissed an aiding and
abetting claim against an accounting  firm, "which had issued an audit
report with respect to  corporate financial statements" but had
"played no role in the  use of certain figures from those statements
in a prospectus 




__________

n warrant disregard of the corporate entity") (footnote omitted); 
United States v. Saks, 964 F.2d 1514, 1518-19 (5th Cir. 1992) 
(affirming finding of intent to defraud banking institution, notwith-
standing bank officers' collusion with customer).


and no role in the publication of any misleading financial 
statements." Graham Br. at 31. In fact, the accounting  firm's
relationship to the misleading financial statements was  even further
removed than Graham describes,21 but the dis- tance reflected in her
description suffices to distinguish that  case from this one: unlike
the accounting firm in Zoelsch,  Graham did play a role--and a
substantial one--in Broumas'  deceptive trades.


Graham further contends that she may not be regarded as  substantially
assisting Broumas since the execution of his  trades was merely a
"ministerial" act on her part. She had  "no discretion" with respect
to the handling of Broumas'  accounts, she asserts, because "once Mr.
Pasztor approved a  trade, [she] could not refuse to execute it." Id.
at 14. But  Graham did have discretion. A registered representative
can  always refuse to execute a trade she knows may constitute a 
securities violation. Cf. U.S. Envtl., 155 F.3d at 112 ("Like 
lawyers, accountants, and banks who engage in fraudulent or  deceptive
practices at their clients' direction, [the defendant  broker] is a
primary violator despite the fact that someone  else directed the
market manipulation scheme."). Of course,  doing so might have made
Graham's career at VCI more  difficult, but fear of such consequences
does not excuse a  violation of the securities laws.


C


The real question here concerns the third element of aiding  and
abetting liability: did Graham assist Broumas with the  requisite
scienter? We have held that knowledge or reckless- ness is sufficient
to satisfy that requirement. See Kowal v.  MCI Communications Corp.,
16 F.3d 1271, 1276 (D.C. Cir.  1994); SEC v. Steadman, 967 F.2d 636,
641 (D.C. Cir. 1992);  Zoelsch, 824 F.2d at 36; Dirks v. SEC, 681 F.2d
824, 844-45  (D.C. Cir. 1982), rev'd on other grounds, 463 U.S. 646




__________

n 21 The defendant accounting firm had not issued the audit  report,
but rather had provided information to another accounting  firm that
had prepared the report. See Zoelsch, 324 F.2d at 34; see  also id. at
28-29, 35-36.


We are satisfied that Graham acted with at least extreme  recklessness
in aiding Broumas' stock-kiting scheme.


The SEC did not hold Graham reckless merely for execut- ing stock
trades. Rather, during the course of executing  some 60 trades, Graham
noticed numerous suspicious circum- stances. She observed that Broumas
invariably specified the  contra-broker for his trades, rather than
using American  Securities, the firm VCI typically contacted for
over-the- counter trades in exchange-listed securities. Out of the
more  than 300 accounts with which Graham worked, only Broumas 
specified the contra-broker with whom to execute the trade,  and only
Broumas traded in such large volumes. He also  detailed every aspect
of the trade, including the specific  employee at the contra-broker
with whom he wanted Graham  to speak. Cf. United States v. Corr, 543
F.2d 1042, 1046 (2d  Cir. 1976) (recognizing directed trades as
evidence of manipu- lation). Graham testified that, as a result, she
assumed  Broumas controlled the shares in the accounts or at least 


Perhaps most important, Graham recognized, and discussed  with Pasztor,
the fact that Broumas had "a peculiar way of  trading." J.A. at 306.
Although these were "big money  trades" involving thousands of shares,
and although he was  repeatedly buying and selling and paying
commissions on the  transactions, Graham realized that Broumas was not
making  any money on the trades. See id. at 380. This economically 
irrational trading was a large red flag. See Edward J.  Mawod & Co. v.
SEC, 592 F.2d 588, 595 (10th Cir. 1979)  (holding that broker
willfully aided and abetted manipulative  wash and match trades scheme
when he "knew or had reason  to know that such trading was
economically irrational").


At the same time that she was noting these trading pecu- liarities,
Graham also knew that Broumas was experiencing  financial
difficulties. She learned that he was buying and  selling JML stock as
a method of borrowing money he needed  to repay bank loans. She knew
that he was having trouble  paying for his trades on time, had
received "quite a few" 


extensions on his joint account, and had bounced checks.  J.A. at 288,
296, 343. She knew that VCI's clearing firm had  imposed restrictions
on his joint account. And she knew that,  with her help, Broumas was
circumventing those restrictions  by trading in accounts nominally
owned by others. More- over, when it came to her own firm's financial
interests,  Graham took special precautions to protect against
financial  loss, seeking Pasztor's authorization on almost every trade
 because "I couldn't take a chance of writing an order when  the man
would owe thousands of dollars in his account." Id.  at 317. All of
this provides more than the "substantial  evidence" necessary to
support the SEC's finding of scienter  on the part of Graham.


In her defense, Graham notes that she "stood to gain  absolutely
nothing from Broumas' scheme," since Broumas  traded through a "house
account" for which she did not  receive commissions. Graham Br. at 27.
It is true that lack  of opportunity for personal gain may suggest
lack of motive,  which may in turn be relevant to the question of
scienter.  But the absence of commissions does not necessarily negate 
either motive or scienter. Graham may have gone along with  Broumas'
scheme (or hidden her head in the sand) to please  her bosses or to
keep her job. Or she may have done so  merely because she was
reckless, regardless of any motive to  gain money or favor. Either
way, the absence of commis- sions does not absolve her of
responsibility. See U.S. Envtl.,  155 F.3d at 112 ("[A]s long as
[broker], with scienter, effected  the manipulative buy and sell
orders, [his] personal motiva- tion for manipulating the market is
irrelevant in determining  whether he violated s 10(b).").


Graham also points to the fact that she sought and obtained  approval
for Broumas' trades from her immediate supervisor,  James Pasztor, who
told her they were "fine." She "left it up  to my supervisor," she
states, to "say that this was not  allowed." J.A. at 338. And she
argues that this reliance  negates the scienter necessary for an
aiding and abetting  violation. In support, Graham cites James L.
Owsley, a case  in which the Commission excused the conduct of a
broker  who, prior to selling his own stock in a company, was told by


a firm official with whom he consulted that it was not  necessary to
disclose those sales to customers he was asking  to purchase the same
stock at the same time. See 51 S.E.C.  524, 528 (1993).


The SEC rejected Graham's reliance defense, noting that  she is an
experienced professional who has an independent  duty to use diligence
"where there are any unusual factors."  Graham, 1998 WL 823072, at
*6-*7 & n.30 (quoting Alessan- drini & Co., Inc., 45 S.E.C. 399, 406
(1973)). Registered  representatives are "under a duty to
investigate," Hanly v.  SEC, 415 F.2d 589, 595 (2d Cir. 1969)
(internal quotation  omitted), and "red flags and suggestions of
irregularities  demand inquiry as well as adequate follow-up and
review,"  Frederick H. Joseph, 51 S.E.C. 431, 438 (1993). See Wons-
over, 205 F.3d at 411. Given the abundance of red flags here,  it
would be very hard to characterize Graham's conduct as  anything but
extremely reckless, regardless of the approvals  she received from


The Commission distinguished the Owsley decision on the  ground that,
"[a]mong other things, ... [it] involved a single,  discrete inquiry
and limited transactions." Graham, 1998  WL 823072, at *7 n.34. Nor
did Owsley mention the pres- ence of any suspicious circumstances or
red flags. By con- trast, this case involved 60 transactions over 18
months, with  Graham's involvement becoming increasingly more
significant  (e.g., through the establishment of the Les Girls account
and  the use of the Rogers account) at the same time that the  warning
signs were becoming increasingly more prominent.


Graham's reliance on Pasztor, a VCI employee, also differs 
substantially from the reliance at issue in SEC v. Steadman,  where we
held that directors of a mutual fund company had  not been reckless in
relying on a "formal, unqualified opinion  letter" from their outside
counsel--an opinion also relied  upon by the funds' "disinterested
independent auditor," a  major national accounting firm. 967 F.2d at
642. There  were no red flags in evidence in Steadman, nor were there 
suspicious events creating reasons for doubt. Indeed, there  was no
evidence at all that the directors were on notice of the 


violation at issue, which arose from a failure to register the  funds'
securities under state Blue Sky laws, other than the  SEC's view that
"[s]ophisticated professionals like Steadman  might be assumed to have
come across [such] information ...  at some point during" their
careers. Id.


Graham, by contrast, was not simply a professional who  should have
known better. She was a professional who was  aware of her customer's
financial difficulties, aware that he  was trading in a suspicious and
economically irrational man- ner, and aware that he was trying to
circumvent restrictions  that had been placed on his account--yet she
assisted him  nonetheless. Cf. Wonsover, 205 F.3d at 411, 415
(holding, in  light of "several 'red flags,' " that broker's reliance
on approv- al of firm and its lawyers did not negate finding that he
acted  willfully). Accordingly, we reject Graham's reliance defense 
and affirm the SEC's determination that she recklessly, and 
substantially, assisted Broumas in violating the securities  laws.22


D


Finally, Graham and Voss argue that the SEC is barred by  principles of
"equitable estoppel" and "administrative inter- pretation" from
sanctioning them. They note that, "[f]rom  late 1988 through mid-1989,
the NASD had several occasions  to review Broumas' directed trading in
JML shares." Gra- ham Br. at 33. The NASD concluded, petitioners
assert,  "that so long as Broumas' trades were not reported to the 
consolidated transaction reporting system of the exchanges, 




__________

n 22 Commissioner Johnson dissented from the finding of liability 
against Graham, solely on the ground that her reliance on the  advice
of Pasztor and Voss was reasonable. See Graham, 1998 WL  823072, at
*11-*12 (Johnson, Comm'r, dissenting). Even he, how- ever, found the
case an "exceedingly close call[ ]," which "necessari- ly depend[ed]
on the facts and circumstances." Id. While each  SEC Commissioner may
make his or her own factual determina- tions de novo, our standard of
review requires deference to the  determinations of the Commission
where they are supported by  substantial evidence.


they were not manipulative." Id.23 They also claim that  "[t]he NASD
sought the SEC's view with respect to this  administrative
interpretation and the SEC concurred." Id.  And they further contend
that during 1988 and 1989, the SEC  conducted its own examination of
Broumas' trading, and "did  not perceive" securities violations. Id.


At the start, it is important to describe accurately what  transpired
during the examinations in question. First, the  NASD did not give
Broumas' trades anything like a clean bill  of health, and certainly
did not do so in the form of an  "administrative interpretation." An
examiner simply con- cluded, in an internal review, that because
Broumas' trades  were not being included in the consolidated
transaction re- porting system, see supra note 23, they did not
violate an  NASD rule that proscribes wash trades undertaken for the 
purpose of creating the false appearance of market activity,  see NASD
Manual, Sched. G, s 4(b) (1989). The examiner  was nonetheless
troubled by the trades "because they didn't  smell right. There was
something fishy about these trades  being prearranged, directed
trades...." J.A. at 610; see  also id. at 616-17. The NASD referred
the matter of Brou- mas' trading to the SEC for further investigation.


The SEC's role was even less formalized, and is of even  less comfort
to petitioners. The support petitioners cite for  the proposition that
"[t]he NASD sought the SEC's view with  respect to this administrative
interpretation and the SEC  concurred" is no more than the NASD
examiner's testimony  that he spoke to someone at the SEC--whose name
and title  he could not recall--who "basically agreed" with his
evalua- tion. Id. at 610, 611. The support for petitioners' contention
 that the SEC "did not perceive" securities violations in re- viewing
Broumas' trading is the testimony of an SEC examin-




__________

n 23 NASD rules require that most transactions in stocks listed on  the
AMEX be reported on the "Consolidated Tape," NASD Manual,  Sched. G,
ss 1(d), 2 (1989), which is the "consolidated transaction  reporting
system for the dissemination of last sale reports in [such] 
securities," id. s 1(b). Broumas' trades often were not reported.


er, who said that after reviewing the NASD examination, he  decided
that "no conclusion could be reached as to whether  any violative
activities have occurred." Id. at 802. The SEC  examiner therefore
recommended that a "further review of  Mr. Broumas's activities should
be conducted in order to  determine if insider trading or a check
kiting scheme was  being perpetrated." Id. at 803; see also id. at
659. Further  review by the SEC eventually did result in the
complaints at  issue here.


Even in circumstances where the doctrine of estoppel is  applicable,24
the following elements, at least, must be estab- lished: that there
was a "definite" representation to the party  claiming estoppel; that
the latter "relied on its adversary's  conduct in such a manner as to
change his position for the  worse"; and that the reliance was
"reasonable." Heckler v.  Community Health Servs., 467 U.S. 51, 59
(1984) (internal  quotations and footnote omitted). Here, neither the
NASD  nor the SEC made any representations at all to Graham or  Voss,
and petitioners do not assert that they acted in reliance  on any such
representations. Nor did either entity issue any  kind of opinion or
"administrative interpretation" that might  have bound it, even as a
matter of precedent, in a future  adjudication.25




__________

n 24 See Heckler v. Community Health Servs., 467 U.S. 51, 60  (1984)
("[I]t is well settled that the Government may not be  estopped on the
same terms as any other litigant."); see also Office  of Personnel
Management v. Richmond, 496 U.S. 414, 419, 421-22  (1990).


25 Of course, even if the NASD had done something to bind  itself, that
would not have bound the SEC. As a private, nonprofit  corporation,
the NASD conducts its own independent investigatory  and disciplinary
actions, and is subject to limited review by the  SEC. See 15 U.S.C. s
78s; 6 Loss & Seligman, supra, at 2819-30.  There is "no statutory,
regulatory, or historical reference to support  [an] argument that
NASD discipline of its members was intended to  preclude ...
disciplinary action by the SEC itself against a securi- ties
professional." Jones v. SEC, 115 F.3d 1173, 1179 (4th Cir.  1997).


Instead, what we have in this case is nothing more than a  series of
investigations into Broumas' trades, which ultimately  provided the
SEC with sufficient understanding of the under- lying scheme to file
the complaint now before us. Neither  Broumas nor the petitioners can
be said to have been cleared  along the way. And the SEC's failure to
prosecute at an  earlier stage does not estop the agency from
proceeding once  it finally accumulated sufficient evidence to do




__________

n 26 See Investors Research, 628 F.2d at 174 & n.37 (rejecting 
estoppel argument where there was "no evidence the Commission  learned
all the facts of the violation" at early meetings with  petitioners);
Capital Funds, Inc. v. SEC, 348 F.2d 582, 588 (8th Cir.  1965)
(rejecting argument that the SEC was estopped because it  previously
investigated but took no action); SEC v. Culpepper, 270  F.2d 241, 248
(2d Cir. 1959) (finding that routine examination  provided "no
fact-basis for an estoppel" because "neither the Com- mission nor its
staff directly or indirectly caused the defendants to  understand that
it concurred in the legality of the [subject] sales");  G.K. Scott &
Co., 51 S.E.C. 961, 966 n.21 (1994) ("A regulatory  authority's
failure to take early action neither operates as an  estoppel against
later action nor cures a violation.") (internal quota- tion omitted),
review denied, 56 F.3d 1531 (D.C. Cir. 1995) (table  decision); cf. 15
U.S.C. s 78z ("No action or failure to act by the  Commission ... in
the administration of this chapter shall be  construed to mean that
the particular authority has in any way  passed upon the merits of, or
given approval to, any security or any  transaction or transactions


In Klein v. SEC, 224 F.2d 861 (2d Cir. 1955), cited by petitioners, 
the Second Circuit held that after an NASD committee had exam- ined a
broker's 50% markup and found no violation, it could not  sanction him
for charging the same markup two years later because  the prior review
"justified [the broker] in believing that a 50%  markup did not
violate the Rules." Id. at 864. The court regarded  the NASD's earlier
determination as "an interpretation of the Rules  on which [the
broker] reasonably relied." Id. Klein is of no  assistance to
petitioners, however, as they make no claim of reliance  on the SEC's
initial investigation. In any event, the Second Circuit  subsequently
appeared to limit Klein to actions of the NASD,  holding that because
the SEC enforces an "Act of Congress," it  could not "be estopped even
if it had acquiesced in" a transaction 


III


We conclude that substantial evidence supports the SEC's  determination
that Graham aided and abetted Broumas' viola- tions of section 10(b)
and Rule 10b-5. Because Voss' defense  rested solely upon the
exoneration of Graham, we also uphold  the SEC's determination that he
failed reasonably to super- vise her. The order of the SEC is


Affirmed.




__________

n similar to the one it was now sanctioning. Culpepper, 270 F.2d at 
248.