Reprint permission from the January 7, 2002 issue of Crain's Chicago Business.
For nearly 50 years, the Securities and Exchange Commission has gone to bat for investors and sued crooked stockbrokers who abscond with their customers' money.
But only now, in an exceptionally egregious Maryland case, has the U.S. Supreme Court agreed to decide whether the agency really has the right to protect investors against stockbroker fraud. The court will be making a big mistake if it doesn't give the SEC the go-ahead.
The facts of the case, outlined in court documents, are wrenching.
Between 1987 and 1990, Charles Zandford, a Bethesda stockbroker, swindled William R. Wood and his daughter, Diane Wood Okstulski, out of their life savings. Mr. Zandford's customers were trusting and particularly vulnerable: Mr. Wood, who has since passed away, was elderly and both physically and mentally disabled; Ms. Okstulski was also mentally disabled.
Mr. Wood asked Mr. Zandford to invest their $419,255 conservatively, but by September 1990, the money was gone. Mr. Zandford had sold all the stock from his customers' joint account and pocketed the proceeds. He then used the money to invest in securities through his girlfriend's brokerage accounts, to buy cars and to pay off his credit card debts and bank loans.
A federal grand jury eventually indicted Mr. Zandford on 13 counts of wire fraud. He was found guilty by a jury of all charges, was sentenced to 52 months in prison and was ordered to repay $10,800.
Enter the SEC. Relying on the federal securities laws, the commission filed suit against Mr. Zandford and asked that he be disgorged of $343,000 in ill-gotten gain.
The case looked like a slam dunk for the agency and, in fact, the trial court ruled in its favor. The judge found that the wire fraud convictions denied Mr. Zandford any right to dispute the facts or assert his innocence.
But Mr. Zandford's lawyers filed an appeal. They argued that, when a broker steals money from a customer's account, his theft has nothing to do with "market integrity or investor understanding." And for that reason, the SEC has no lawful enforcement role.
The Appellate Court, which had already upheld Mr. Zandford's conviction and sentence, took notice of his "reprehensible" conduct, but bought his lawyers' arguments. The court, known for being as tough on federal agencies as it is on crime, concluded that this was a garden-variety breach of contract or common-law fraud case and dismissed the commission's action.
The court seemed to agree with Steven H. Goldblatt, one of the lawyers for Mr. Zandford, that the case just didn't pose an issue of national concern and that broker theft is handled perfectly well by other federal and state laws.
Mr. Zandford's lawyer is dead wrong, and so is the Appellate Court. Brokers are the link between investors and the securities markets, and broker fraud shakes investor confidence and undermines the markets.
Mr. Zandford's lawyers insist that his sale of the securities in Mr. Wood's and Ms. Okstulski's account had no connection to the theft. But the SEC, the champion of investor rights, contends that the securities sales were at the heart of Mr. Zandford's scheme.
Whether or not Mr. Zandford's theft was directly tied to the sale of a security should make absolutely no difference. The SEC needs the tool of civil enforcement to go after brokers who steal from their customers, lie to them about the risks of buying stock on margin or churn customers' accounts. Allowed to stand, the Appellate Court's ruling would create a serious gap in investor protection.
Now, it's up to the Supreme Court. Let's hope it reads the securities laws broadly enough to permit the SEC to continue protecting all of us against stockbroker fraud. Were the court to do otherwise, it would abdicate its responsibility to the financial markets and the investors and companies that count on their integrity.
Marc J. Lane is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law. He can be reached at firstname.lastname@example.org
Copyright © 2002 by Crain Communications Inc.