Control, and therefore associated person status, lacking
In 1993, the SEC brought a civil enforcement action against Nicholas Zahareas, the president and majority shareholder of a brokerage firm in Greece, which resulted in an order permanently barring Zahareas from the U.S. securities industry.
In 1996, Tuschner & Co., a registered broker-dealer in the U.S., underwrote an IPO of ACT Teleconferencing. John M. Tuschner, president and CEO of Tuschner, agreed to pay Zahareas a foreign finders fee for recruiting Greek citizens to purchase shares in the ACT offering, and further agreed that Zahareas thereafter would continue to refer Greek investors to Tuschner & Co. and receive commission-based compensation.
In 1997, the SEC brought another action, alleging that Tuschner & Co. unlawfully associated with a barred person, and that Tuschner aided and abetted his firms violation by allowing Zahareas to become associated with the firm. According to the SEC, Tuschner controlled Zahareas, who therefore was an associated person within the meaning of that phrase in the Securities Exchange Act of 1934. Tuschner & Co. settled. Thereafter, the District Court granted summary judgment in favor of the SEC against Tuschner.
Reversing, a divided Eighth Circuit Panel finds that Zahareas was not controlled by Tuschner. Zahareas was almost certainly not an employee of Tuschner, who never put Zahareas on his firms payroll, never paid him a salary, and never visited Zahareas office, let alone directed his work or hired or monitored his employees. A majority of the Panel rejected the District Courts reasoning that Tuschner controlled Zahareas by virtue of the fact that Zahareas depended on Tuschner for access to the ACT IPO underwritten by Tuschner & Co.
Refusal to sell does not establish control. To hold that a refused buyer becomes an associated person, whenever an underwriter does not sell to that buyer, would expand the scope of liability under §78c(a)(18) beyond recognition.
The Panel concluded by noting that, even if it were to depart from the plain meaning of associated person in favor of public policy, it would interpret the law in a more, not less, restrictive manner, in light of the following: Zahareas customers were all Europeans; Congress carefully limited the federal securities laws to the domestic shores of the United States; and the SEC never promulgated a rule applicable to transactions by a registered broker-dealer with a foreign broker, as in this case.
Accordingly, public policy argued for a restrictive definition of associated person on the facts of the case. (SLC Ref. No. 2001-49-06)
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.