Eichler v. Securities and Exchange Commission

In March 1977, Bateman Eichler, Hill Richards, Inc. (BEHR) (plaintiff) was the managing underwriter for a syndicate of underwriters for an offering for Jhirmack Enterprises, Inc., which was traded over the counter. BEHR also served as one of 15 market makers for Jhirmack stock. The syndicate sold more shares than it owned, requiring BEHR to acquire additional shares. BEHR also had to acquire Jhirmack shares to satisfy orders from its customers. However, BEHR’s bid price for Jhirmack was not nearly high enough in light of significant demand. Instead of raising its bid price and taking other action to attract more shares, which would have driven the market price up, BEHR allocated its available shares to customers. Thus, on March 25, 26, and 29, BEHR accepted 56 market orders—which a broker is expected to fulfill completely and at the best available market price, with the customer bearing the risk of market-price increases—for 23,875 shares, but BEHR acquired only 12,375 shares, which it allocated. BEHR did not obtain the customers’ informed consent for this allocation. The National Association of Securities Dealers (NASD) censured and fined BEHR and certain employees for violating the NASD’s Rules of Fair Practices. BEHR unsuccessfully appealed to the NASD’s Board of Governors. The Securities and Exchange Commission (SEC) (defendant) affirmed, ruling that BEHR had to fulfill market orders as best as possible or to obtain informed consent for a different arrangement. BEHR sought judicial review, arguing that its allocation system was justified because (1) raising its bid price would have raised the market price, which would have displeased customers, and (2) it dominated the market for Jhirmack stock and thus would have been subject to discipline if it raised its bid price. BEHR further argued that (1) it did not have an independent duty to advise customers about market conditions, (2) as a market maker it had an obligation to maintain an orderly market for Jhirmack, and (3) its allocation system was in its customers’ best interests.