World Trade Financial Corp. v. SEC

739 F.3d 1243 (2014)

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World Trade Financial Corp. v. SEC

United States Court of Appeals for the Ninth Circuit
739 F.3d 1243 (2014)

Facts

World Trade Financial Corporation (World Trade) (defendant) was a broker-dealer registered with the Securities and Exchange Commission (SEC) (plaintiff) and was a member of the Financial Industry Regulatory Authority (FINRA). Rodney Michel and Jason Adams (defendants) owned World Trade and served as its principals. Frank Brickell (defendant) was World Trade’s chief compliance officer and representative and also served as a principal. World Trade’s written supervisory policy stated that any representative selling unregistered stock must inquire into the relevant company and terms of the stock before executing any transaction. However, World Trade’s practice was to identify unregistered stock based on a stock certificate’s restrictive legend. A World Trade representative would send any stock certificate bearing such a legend to a clearing firm to be cleared and sold. Between 2004 and 2005, Brickell sold over two million shares of iStorage stock. Despite the questionable background of iStorage and red flags surrounding its stock, Brickell made no inquiry into the stock’s origin, and the stock turned out to be unregistered despite the fact that its stock certificates contained no restrictive legend. FINRA instituted a disciplinary action and concluded that World Trade and Michel, Adams, and Brickell (collectively, the principals) violated § 5 of the Securities Act of 1933 for selling unregistered shares. World Trade and the principals appealed to the SEC, claiming that they were entitled to the brokers’ exemption under § 4(4) of the Securities Act of 1933. Specifically, they argued that they satisfied their duty to conduct a reasonable inquiry as required by § 4(4) by relying on third parties in accordance with standard industry practice. The SEC disagreed and issued an order upholding FINRA’s findings. World Trade and the principals appealed.

Rule of Law

Issue

Holding and Reasoning (Gould, J.)

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