Securities and Exchange Commission v. Zandford – Oral Argument – March 18, 2002

Media for Securities and Exchange Commission v. Zandford

Audio Transcription for Opinion Announcement – June 03, 2002 in Securities and Exchange Commission v. Zandford

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William H. Rehnquist:

Mr. Roberts.

Matthew D. Roberts:

Mr. Chief Justice, and may it please the Court. Stockbrokers like the respondent are the critical link between the National Securities Markets and individual investors who trust brokers to buy and sell securities for their benefit.

Respondent betrayed that trust by selling his customers’ securities not for their benefit, but for a secret purpose of misappropriating the proceeds and by embezzling the proceeds as he had planned.

In so doing, Respondent violated Section 10(b) of the Securities Exchange Act and Rule 10b-5.

Those provisions prohibit the use of fraud in connection with the purchase or sale of any security.

Respondent–

Antonin Scalia:

Mr. Roberts, could you clarify for me what the government’s position is in this case?

Suppose… suppose that the broker had not, when he sold the stock, intended to embezzle but then he made the sale and the sale enabled his embezzling.

After selling it, he conceived the scheme to embezzle.

Is it the government’s position that in that situation a 10(b) would still cover it?

Matthew D. Roberts:

–That embezzlement would not be in connection with the prior sale under the theory that we are asking the Court to adopt here.

But the SEC believes that it would be a violation of 10(b) under a different theory which isn’t a necessary consequence of the one–

Antonin Scalia:

We don’t have to agree with that to rule for you–

Matthew D. Roberts:

–You don’t have to agree with that to find a violation here.

Antonin Scalia:

–Now, the SEC adjudications that you rely upon, what kind of a situation do they involve?

Do they all involve–

Matthew D. Roberts:

They involve both situations, Your Honor.

Antonin Scalia:

–Both situations.

Matthew D. Roberts:

Both situations.

Anthony M. Kennedy:

Does the SEC routinely audit brokers’ accounts or do spot audits to ensure compliance with the theory you are suggesting here or are they just reactive when they find out about a firm?

Matthew D. Roberts:

I am not aware that they routinely audit the brokers.

The NASD does do that and then refers matters to the SEC and consults with the SEC.

The SEC also would respond to complaints that they got or take investigations if they had reason to believe it was called to their attention.

Anthony M. Kennedy:

And I take it that if the NASD tells the SEC of the existence of a fraud, the SEC can then request the United States Government to prosecute if there is a wire fraud or–

Matthew D. Roberts:

They could request a prosecution, Your Honor, but it’s important that the SEC is the federal agency that’s charged with maintaining the integrity of the markets and investor confidence in the markets, have direct authority to prevent and to pursue the kind of fraud that’s involved here which is very… potentially very unsettling to the markets.

Because since most transactions are made through brokers, if customers and investors can’t trust their brokers to be executing their transactions for the customer’s benefit rather than for the broker’s benefits, the markets can’t function effectively.

William H. Rehnquist:

–Well, do you say then that any fraud by a broker in connection with a customer is actionable by the SEC.

Matthew D. Roberts:

That goes back to the question that Justice Scalia asked me, Your Honor.

And under the theory that we are advocating here, and for the Court to rule for us here, you don’t need to conclude that.

The SEC does take that position.

William H. Rehnquist:

Does take what position?

Matthew D. Roberts:

That any fraudulent conversion by a broker from a brokerage account is a violation of 10(b) because it’s fraud and it’s in connection with the purchase or sale of securities; because the very purpose of the brokerage account is to buy and sell securities.

And the broker has access to the customer’s assets–

William H. Rehnquist:

That’s quite a leap–

Matthew D. Roberts:

–for the purpose of–

William H. Rehnquist:

–That’s a leap from any case we’ve ever decided.

Matthew D. Roberts:

–That is beyond any case that I’m aware that you have decided.

But here the broker actually converted the securities by means of fraudulent sales.

And his deception not only caused the sales, it was material to the sales.

And the sales themselves, because they were fraudulent, coincided with and completed the fraud.

And that’s very much in tune… that’s really controlled by past cases of the Court.

For instance in the Bankers Life case, the Court held that corporate fiduciaries violated Section 10(b) when they deceived the corporation into believing that it would receive the proceeds of the securities that the corporation sold.

William H. Rehnquist:

But there were misrepresentations about a particular security.

That didn’t happen here.

Matthew D. Roberts:

There wasn’t a misrepresentation in Bankers Life about a particular security, there was a misrepresentation that the corporation would receive the proceeds.

And there was that same misrepresentation here, Your Honor, only it was by way of an omission or a course of conduct rather than an affirmative statement.

Because the customers had entrusted Respondent with the authority to trade on their behalf, with the understanding and the implicit representation that he would trade on their behalf and that they would receive the proceeds of the sales, that they would be used for their benefit in other trades when–

David H. Souter:

So in this case the fraud could have been avoided under your theory if the broker had gotten in touch with the clients and said I’m going to sell this but I’m going to use the money for myself.

That would have turned it from fraud under 10(b) into theft.

Matthew D. Roberts:

–That would have turned it from fraud into theft.

It would have also been a breach of his fiduciary duty if he went ahead and they didn’t authorize him.

But just like in O’Hagan–

David H. Souter:

But it wouldn’t have been fraud.

Matthew D. Roberts:

–It wouldn’t have been fraud if there was no deception.

It’s critical to a 10(b)e violation that there be deception of some kind.

Ruth Bader Ginsburg:

Mr. Roberts, there’s one point in your reply brief that I didn’t quite grasp.

This action is brought by the SEC.

Matthew D. Roberts:

Yes.

Ruth Bader Ginsburg:

And it hinges on the wrong that was done to the customer.

Could the customer bring this very lawsuit, could the customer have sued the broker for a 10(b) violation?

Matthew D. Roberts:

In this circumstance, yes, the customer could have brought a private action against the broker, Your Honor.

That wouldn’t be true in every circumstance because the customer, a private plaintiff seeking damages has to prove elements of a violation in addition to what the SEC must prove.

A customer has to show causation of the transaction and loss or damages to the customer.

The customer also has to be an actual purchaser seller.

In the situation where there’s a sale by the broker of the customer’s securities, the purchaser-seller requirement will be met.

But there might not be the damages that are necessary unless the broker follows through with his scheme to misappropriate the proceeds of the sale.

Ruth Bader Ginsburg:

But this time he did.

Matthew D. Roberts:

But he did.

Ruth Bader Ginsburg:

There’s another curiosity in this case.

There was a prosecution for wire fraud, the restitution sought was $10,800.

And now the SEC is going after the broker for a much larger sum.

Why wasn’t a greater sum asked in the wire fraud case?

Matthew D. Roberts:

I don’t know, Your Honor, why the restitution award in the criminal action was limited to $10,000.

But it’s clear that Respondent, it’s clear from the allegations in the complaint and also from the criminal trial that Respondent did embezzle far more than that amount of the Woods’ assets.

And that’s one of the reasons that it’s important for the SEC to be able to pursue this action.

Because if it had to rely on the criminal action, then there wouldn’t be a full disgorgement of the improper gains by the broker.

And there would be far less deterrent to this kind of activity.

Of course a criminal prosecution is significant deterrent, but–

Antonin Scalia:

Mr. Roberts, did the allegations of your complaint in this case accord with the narrower theory that you now say is enough to decide this case?

That is to say, as I read your description of the complaint, it did not say that the sales of the security were made with the intention at the time the sales were made of absconding with the proceeds.

All it said is that he sold the securities and stole the funds.

Matthew D. Roberts:

–It does… it does comport with our theory, Your Honor.

It doesn’t in so many words allege the intent at the time.

But the factual allegations in the complaint necessarily give rise to that inference.

Because, first, one of the allegations is that Respondent issued checks to himself on the mutual fund account and that the cashing of those checks caused the sales.

And so when he took the money, he necessarily by writing the checks to himself, he necessarily had the intent at the time.

And then there are additional allegations–

Antonin Scalia:

Wait.

Excuse me.

He wrote the checks before the sales were made?

Matthew D. Roberts:

–In the… in the mutual fund checks, if you look at Page 28A, of the petition, in paragraph 16 of the complaint, it describes the beginning of the fraudulent scheme in May of 1988, shortly after Mr. Wood was hospitalized as a result of his stroke, and notes that between May and June 1988, Zandford, without the prior knowledge or consent of Wood and Okstulski, issued three checks to himself totaling $41,000.

The checks were drawn on a joint mutual fund account held by Wood and Okstulski outside of their Dominick account, and the funds represented therein were obtained through the sale of mutual fund shares–

Antonin Scalia:

It doesn’t say they were later obtained.

It just says they were obtained.

I don’t see that that says that the funds weren’t there until the… until the checks were written.

Matthew D. Roberts:

–I think the way that that kind of account works is that it’s like a checking account with your mutual funds.

You write the check, you write the checks on the account and the redeeming of the check causes the sales of the mutual funds.

But regardless of whether it precisely states that, that’s certainly a reasonable inference or facts that can be proved based on these allegations which is all that’s necessary to get past the dismissal of the complaint, Your Honor.

And in addition on the other allegations on the next page and the paragraphs on the next page, there are description of repeated sales and repeated conversions over a long period of time.

And, you know, one time maybe he formed the intent after the sales, although that’s unlikely given that this happened after the allegations in the previous paragraph.

But 13 more times, Your Honor, I think that it’s hard to believe.

Ruth Bader Ginsburg:

Who gets the recovery, Mr. Roberts?

Matthew D. Roberts:

The recovery goes to the… to the government, but the SEC has a policy of if there are identifiable victims to endeavor to give the victims those… those funds and to make them whole if they are available.

So here where there are identifiable victims, they would do that.

William H. Rehnquist:

Well, isn’t it a little odd, you have two different branches of the government, perhaps not branches, but two different proceedings, one a criminal proceeding which authorizes restitution.

And in that proceeding the decision was made that $10,000 would be allowed, awarded in restitution.

Then the SEC comes along and says, no, that wasn’t enough.

We want to get, you know, several hundred thousand more.

Matthew D. Roberts:

Well, the restitution, first of all, the purposes of restitution and disgorgement are different in that one is aimed on the… is focused on the making whole the loss to the… to the people that are injured, whereas the other is aimed at requiring the wrongdoer to disgorge any benefit that he got from the scheme.

But in addition, Your Honor, the statute provides for a civil action and gives the SEC the power to do that in order to further its role in ensuring the integrity of the markets and ensuring investor confidence in the markets.

And it empowers the SEC rather than the individual U.S. attorneys to determine when it’s necessary to ask for that kind of a remedy in order to further those purposes.

And the SEC properly made that determination, made that determination here.

Anthony M. Kennedy:

Well, just to explore the point, is there anything in the record to show that these victims lost only $10,000 and that the broker just made all the rest by churning–

Matthew D. Roberts:

No.

Their record I think establishes that they lost everything that they had entrusted to him which was 420 roughly, thousands of dollars’ worth.

Sandra Day O’Connor:

–Mr. Roberts, isn’t it the case sometimes in criminal proceedings where restitution is ordered that full restitution is not ordered for a variety of reasons, the victim’s family… the defendant’s family may have certain needs and the Court may decide, well, I’m just going to order a limited amount of restitution.

Does that happen sometimes?

Matthew D. Roberts:

Yes, that certainly happens, Your Honor.

Thank you.

William H. Rehnquist:

And if the family has needs, the SEC doesn’t have to worry about it, I take it?

Matthew D. Roberts:

Well, the SEC does its own balancing of what’s appropriate to further the interests and it asks for a disgorgement which is an equitable remedy.

And the Court takes into account those concerns in deciding whether to award it.

And here the District Court did determine that it was appropriate to award disgorgement in the amount of $343,000.

Ruth Bader Ginsburg:

It is odd that there was no kind of, apparently no cooperation here, that the criminal case goes on for that limited amount and then the SEC comes in after.

Don’t the relevant prosecutors talk to each other in advance about a case like this?

Matthew D. Roberts:

Yes, they do talk to each other.

But the decision, Your Honor, whether to bring the prosecution and what to charge and what to ask for is the decision of the prosecutors, whereas the decision of what is appropriate to pursue as a civil action in order to further the purposes of the securities laws is the responsibility of the SEC.

And if the two arms don’t necessarily agree that that can all be done in a criminal proceeding, then sometimes a civil proceeding is necessary to accomplish the goals and–

Antonin Scalia:

The SEC is an independent regulatory agency, isn’t it?

Matthew D. Roberts:

–Yes, it is.

Antonin Scalia:

So it’s not within the control of the President?

Matthew D. Roberts:

Um–

Antonin Scalia:

So if the Justice Department disagrees with the SEC, the SEC can still go off on its own.

Is that the way the scheme works in theory?

Matthew D. Roberts:

–Well, in theory, Your Honor, yes.

Although here in the Supreme Court the Solicitor General represents the SEC.

And in order for the SEC to come here, the Solicitor General has to authorize the action.

Ruth Bader Ginsburg:

Is there any limit, if we have a broker, a licensed broker, is there any limit at all or just any fraud by a licensed broker falls within 10(b)?

Matthew D. Roberts:

Well, again, I’d like to reiterate that to decide this case and under the theory that we are advancing here, you don’t need to reach that.

But even under the other theory that I alluded to, there are limits to what would be covered.

For instance a broker could defraud customers by convincing them to pursue an investment advisory relationship.

And that would not be… that would not necessarily be covered.

In addition, the broker might defraud the customers of assets that are outside of the brokerage account and that aren’t securities because the broker has developed a relationship of trust with the customer.

That wouldn’t be covered under the other theory.

In addition, the broker, I guess it’s a similar thing, the broker could defraud the customer into making some other kind of investments, real estate investments, because of the relationship of trust that had developed.

But the SEC has consistently taken the position that with regard to brokerage accounts and the brokerage relationship that involves the purchase or sale of securities and that exists for the purpose of the purchase or sale of securities, that it is a violation when the broker defrauds its customer.

Ruth Bader Ginsburg:

Suppose the… suppose Zandford were not a licensed broker, he just was pretending to be a broker but he wasn’t at all.

He went to these people and said, I’m a broker, give me your money; and the same thing happened?

Matthew D. Roberts:

That would still be… and then he… they gave him the money and he purchased securities and then sold the securities?

Ruth Bader Ginsburg:

Yes, but he’s not licensed to sell any.

Matthew D. Roberts:

That would still be a violation, Your Honor, because he would have the same fiduciary relationship with them by virtue of them making him their agent for securities transactions and entrusting their assets to him to engage in securities transactions.

And when he sold for the secret purpose of misappropriating the proceeds rather than for their benefit, and he did not disclose that he was doing that, he would be deceiving them in connection with the sale of securities, just as Mr. Zandford did here.

And that would be a violation under these circumstances.

If there are no further questions, I would like to reserve the remainder of my time for rebuttal.

William H. Rehnquist:

Very well, Mr. Roberts.

Mr. Goldblatt, we’ll hear from you.

Steven H. Goldblatt:

Mr. Chief Justice, and may it please the Court: We do not dispute, I don’t think it can be disputed, that this conduct obviously is covered by any number of laws, civil, criminal, state, federal, the rules of this self-regulatory organization, and the Court below recognized that as well.

But it treated the question of whether or not Mr. Zandford was also liable under Section 10(b) as a different question requiring a specific proof.

And it is that proof that the Court found wanting.

In that regard, I think it’s also important that one of the pivotal factors in our theory of the case was that this was a discretionary account.

And the SEC was relying on the bare facts alleged in the wire fraud indictment to prove its case.

And under those circumstances, there was no investment decision being made by the victims in this case.

And we argued to the Court below and we submit to this Court that that’s a pivotal distinction in 10(b) context.

Because 10(b) deals with investment decisions.

And if no one is being defrauded in the decision they are making as to the purchase or sale, all that leaves the SEC with in this case is the conversion of the proceeds.

William H. Rehnquist:

Well, the District Court granted summary judgment in favor of the SEC as I understand it.

Steven H. Goldblatt:

That’s correct.

William H. Rehnquist:

And the Court of Appeals reversed and in effect granted summary judgment for Mr. Zandford.

Steven H. Goldblatt:

That’s also correct.

William H. Rehnquist:

So you have to take the allegations in the complaint as true at that point I think, don’t you?

Steven H. Goldblatt:

Mr. Chief Justice, we don’t think so, because those allegations were not being considered by the Court of Appeals.

I think the SEC at various points has indicated in its pleadings that the facts alleged in the indictment were the same as the complaint, and that may have caused part of the problem.

But the only facts alluded to by the Court of Appeals as you indicated is in effect granting summary judgment to the non-moving party.

In that regard, there’s no reference at all in the opinion of the Court of Appeals referring to any of the facts in the complaint.

They refer to the indictment.

William H. Rehnquist:

Well, should there have been some reference to the facts in the complaints since they were about to render summary judgment against the SEC?

Steven H. Goldblatt:

That may well be the case.

The problem we have with that is the question of issue preservation.

When the SEC petitioned for rehearing, ordinarily… in the ordinary case, if you reverse an order granting summary judgment, you obviously don’t grant summary judgment to the non-moving party; you remand for further proceedings.

But when the SEC moved for rehearing and rehearing en banc, it did not raise the issue with the Court as to why it had remanded with instructions to dismiss.

Steven H. Goldblatt:

So on this record you really don’t know what the reasoning of the Court of Appeals was.

Ruth Bader Ginsburg:

But wouldn’t they have to, Mr. Goldblatt?

This… a complaint to be thrown out when there’s been nothing beyond the complaint doesn’t… mustn’t you listen to the facts as pled in the complaint?

Steven H. Goldblatt:

Justice Ginsburg, my point is, is that the question that I think that is presented in this case is whether the SEC by its own actions limited itself to the facts asserted for purposes of summary judgment which were the facts in the indictment.

Now, if the Court of Appeals is operating under the assumption that that was their case, it could, if that was their case and it was clear that was what it had to consider, if it concluded those facts were insufficient as a matter of law, that would be the only rationale in light of its opinion which only considered the facts in the indictment.

William H. Rehnquist:

But the government’s petition here sets forth some facts.

The stockbroker sells his customers for his own benefit.

And so it… and in your brief in opposition you didn’t challenge that question, did you?

Steven H. Goldblatt:

Yes, I did.

William H. Rehnquist:

You did?

What did you say?

Steven H. Goldblatt:

I challenged the… in our brief in opposition, we challenged any consideration of any facts beyond the indictment, that any issue with regard to facts in the complaint were not before the Court of Appeals and were not relied on by the SEC.

William H. Rehnquist:

But that just seems weird in a way.

I mean, this is a civil action.

And to insist that it be tried on the facts and an indictment in the criminal case as opposed to as alleged in a complaint in this very case seems odd.

Steven H. Goldblatt:

I absolutely agree.

But the question is not so much whether that was of the making of the Court of Appeals or whether that was of the making of the SEC.

And I think it was the Court’s understanding that that was the SEC’s position, that they were narrowing themselves to the indictment, and that’s what the Court considered.

But regardless, even with the facts, I mean, if I’m wrong on that, regardless of the facts even with the facts that the SEC relies on from the complaint, you essentially have the same problem.

And again, it’s not a question of whether this conduct is covered.

It’s covered under the broker rules.

But for purposes of 10(b) as the SEC now concedes, this would also affect private actions.

And in that regard, these facts simply do not meet the paradigm for a 10(b) violation which is either that somebody is duped into buying or selling a security, a particular security, because that’s the paradigm for the statute, or in limited circumstances such as a case like O’Hagan, where it affects market integrity, the Court has also found liability.

But that’s in a situation–

Anthony M. Kennedy:

Suppose that the customer comes to the broker and says, here’s 100 shares of the ABC Company, sell these shares for me and put the money in your broker account.

And the broker, before he sells, has the intent to take the money for the broker’s own account.

Is there a fraud under your theory?

Steven H. Goldblatt:

–Under that theory, I would submit there is a fraud.

That is unauthorized to take the money in that situation and he’s duped into turning over the securities to the broker, and there is an investment decision being made.

But you have a particular–

Anthony M. Kennedy:

No.

He’s made the investment decision in my hypothetical.

He said, I don’t want your advice about selling.

You sell these things.

I’m directing you to do that.

Steven H. Goldblatt:

–In that circumstance, if he then sells the security and places it in the account, then he has completed the instructions.

But if he sells the security and converts it to his own use, then I believe you don’t have in that situation, in other words, if those are the instructions from the client to the broker… I correct myself.

That would not be a 10(b)e violation.

It will be a violation of the broker rules.

It will be a conversion.

It will be a criminal act.

But there will be no fraud.

He will have carried out the instructions to sell the stock.

There’s no inducement there to sell–

Anthony M. Kennedy:

Well, only in really a Pickwickian sense of the term.

He carried out the instructions to sell the stock but he keeps the money.

Nobody would construe the instructions that way.

Steven H. Goldblatt:

–Understood.

But nor were… the instructions were to sell the stock.

He is not being duped into selling the stock.

That is exactly what he wanted done.

What he’s being duped into is the proceeds are being converted.

But the difference with Bankers Life is that the 10(b) violator in that case actually goes to the person and says we should sell this, with the intent of diverting the proceeds.

That person is duped into believing by the actor that they are making the sale with the understanding that they will get the proceeds.

Again it… for purposes of–

Stephen G. Breyer:

How does that differ from here?

I thought here that what our facts that we are assuming are that the stockbroker says to the client, I have control of your account and I’ll sell for your benefit.

That’s the implicit instruction.

The client says sell for my benefit.

And here the stockbroker sells for his own benefit.

Stephen G. Breyer:

What’s the difference between that case which is this one, and the one Justice Kennedy is putting?

Steven H. Goldblatt:

–I think the difference is for purposes of the 10(b) paradigm it requires that the sale be induced by the broker for fraudulent reasons.

If all he’s doing is converting the proceeds–

Stephen G. Breyer:

But here we also have, as they have emphasized about 50 times, not simply stealing.

What we have is a sale of stock where the stockbroker has the intent when he sells the stock to keep the money, contrary to what the implicit assumption is about what the client wants.

Now, that seems to be a little extra thing here so we don’t have to reach all these broad issues.

Now, what do we… that’s what I find indistinguishable.

Steven H. Goldblatt:

–Justice Breyer, here is the distinction that I would draw.

In the Bankers Life situation where you have the sale induced, the 10(b) violation is complete when the sale is made.

In the situation you describe, until and unless the broker, having followed the instructions and sold the stock, until and unless he actually converts the proceeds to his own use, you don’t have a 10(b) violation.

Stephen G. Breyer:

Why don’t you?

I mean, if we could ever prove it?

Suppose in fact the broker, because we had a mind-reading machine, sold the stock in order to convert the proceeds, puts the money in the account and then dies.

I mean, you know, it’s a little weird, but nonetheless if we could ever prove such a thing, why wouldn’t that be a violation of 10b-5?

Steven H. Goldblatt:

Because until and unless he actually converts the proceeds, he hasn’t violated 10(b).

He has not done anything against his client’s instructions.

Stephen G. Breyer:

He hasn’t?

He has converted… he has sold the shares, contrary to the instruction, sell them for my benefit, for his own benefit.

Steven H. Goldblatt:

My point is that until he actually converts, while that money is still in the acccount, while the stock has been sold consistent with the directions, until and unless he actually converts the proceeds to his own use, he has not violated 10(b).

Antonin Scalia:

But what about, never mind the taking of the proceeds.

Suppose you have a broker who for some reason because he has an interest in a company or something else sells stock in a customer’s account where it didn’t really make sense to sell it.

The only benefit from selling it is a benefit for the broker himself.

His brother-in-law is with a company that would profit from this sale of the stock.

Would that be covered by 10(b)?

Steven H. Goldblatt:

I think that would be covered by 10(b).

Antonin Scalia:

Well, why isn’t that the same situation here?

Because this sale was not a sale… never mind the later theft… the sale was not a sale for the benefit of the customer which is what he’s promised to do.

He’s promised, I’ll manage these stocks for your benefit.

And here he sells them when the customer’s interest did not call for a sale.

The only reason the sale happened is that the broker had his own interest in mind.

Steven H. Goldblatt:

Justice Scalia, the reason why that doesn’t work here is because as the Court of Appeals found, there’s no evidence in this record to establish that the sales themselves were inconsistent with the client’s interests.

Regardless of what Zandford may have been thinking, the evidence simply showed that they were sold.

He has discretionary power to do it–

Antonin Scalia:

Well, does it have to be inconsistent?

Do you have to prove that they were inconsistent with the interest or is it enough to prove that the broker did not act in the customer’s interest?

Isn’t that enough for the breach of the fiduciary duty?

Even if it turns out that, what do you know, it was a good idea to sell, the market crashes, nonetheless he was guilty of a fiduciary breach if he didn’t sell it because he thought it would help the customer but he thought it would help him.

Wouldn’t that be a breach right then and there?

Steven H. Goldblatt:

–It might be a breach of fiduciary duty in the trust sense.

It does not affect the sale unless you can establish that the sale is unauthorized, it is inconsistent with the client’s interest.

Antonin Scalia:

It is unauthorized.

I didn’t authorize him to sell stock for his benefit.

The whole idea was he was supposed to sell it for mine.

Steven H. Goldblatt:

But the sale itself was authorized.

The only point I’m bringing out is in a situation like Bankers Life where the broker induces the sale with fraudulent intent, you have a complete violation when the stock is sold.

It makes no difference after that whether the broker is successful or unsuccessful in diverting the proceeds.

You have established a fraudulent sale in which an investor’s decision has been induced by fraudulent intent.

In the situation where the sale is authorized, either because the client calls the broker and says I want you to sell XYZ Corporation today, and the broker does that–

Antonin Scalia:

That one I agree with.

Steven H. Goldblatt:

–In that situation, regardless of what the broker is thinking, he may be thinking I’m going to take the money and run.

Antonin Scalia:

But that isn’t what happened here.

The customer didn’t call up and say sell.

Steven H. Goldblatt:

No, but–

Antonin Scalia:

The broker has authority to sell but he has authority to sell in the interest of the client.

And no interest of the client called for the sale of these securities.

The only thing that called for the sale of the securities was without selling them, I can’t get the money to steal.

Steven H. Goldblatt:

–Justice Scalia, in that regard we point to two decisions from the 7th Circuit in O’Brien and Congregation that deal with discretionary accounts.

And when a client turns money over to an investment counselor or broker and says, you make the decisions, I’m giving you blanket authority, and that’s what we have in this record; in that situation, that takes you out of the 10(b) paradigm.

William H. Rehnquist:

Well, it’s true in effect that not every breach of fiduciary duty is a fraud.

Steven H. Goldblatt:

That’s correct.

Steven H. Goldblatt:

Not every breach of fiduciary duty is a fraud, and not every breach of fiduciary duty will violate 10(b).

David H. Souter:

But in your paradigm, you are saying the authorization is induced by fraud and that’s crucial.

But in… why don’t you have the equivalent of it here?

Because what you have here is a continuing authorization.

There is an authorization generally given at the beginning and the theory is that that authorization continues so that at every moment subsequent to that the client is saying yes, you may sell these things or buy as you see fit for my benefit, so that at any moment at which the client remains silent and allows that authorization to continue, if at that moment the broker has formed the intent, which you would take to be sufficient, why doesn’t that function in the same way as the authorization specifically induced?

The client is being quiet and he’s continuing the authorization because the broker is implicitly lying.

Steven H. Goldblatt:

Justice Souter, my answer to that is this: If it is shown, in other words, assuming you have a discretionary account to invest conservatively, if a broker then goes and buys a penny stock, that is outside the scope of the discretionary authorization and it would be a violation of 10(b).

What the–

David H. Souter:

Well, it’s outside of the authorization at the beginning because the authorization under no circumstances covered that kind of a sale.

Steven H. Goldblatt:

–Yes, it was outside the scope of the authority.

David H. Souter:

But the term of the authorization that I’m saying is crucial, and what I thought you were saying is crucial in the case that you succeed is the term of the authorization that in effect says, you may sell this stock for my benefit.

And you are saying if a specific decision to that effect is induced by fraud, that’s enough.

It gets you within the rule.

And I’m saying if a continuing decision, a decision evidenced by the client’s silence is induced, that should be sufficient too.

Steven H. Goldblatt:

And one of the things that the Court of Appeals found here was that that was not established.

With regard to the various sales, when these checks were written, the Court concluded there was nothing in the record to conclude that those sales–

David H. Souter:

Okay.

Then maybe this case should come out your way.

But as a matter of theory, isn’t it the same case whether it’s a continuing authorization or an authorization which is specifically induced?

Steven H. Goldblatt:

–In either situation if you can show that the sale itself is a violation of that authorization or a breach of it, yes.

But in this case the Court was very careful on that in saying not only that this was a discretionary account, but in light of the allegations in the indictment there was just no proof in the record that any of these sales were in violation–

John Paul Stevens:

Yes, but you are going back to the indictment and ignoring the complaint.

Steven H. Goldblatt:

–Even with the complaint there’s really nothing in the complaint that they are relying on other than the mutual fund account, and again–

John Paul Stevens:

Well, the course of conduct, one transaction after another is relevant; isn’t it?

Steven H. Goldblatt:

–Not given the time factor.

And we are not talking… the time factor is actually from March of ’88 to September of ’90.

And in that regard there’s just nothing in the record… we don’t even know what the securities were that were bought or sold.

And that’s the problem with their theory of this case.

It’s overarching in where it goes.

There’s no proof that any of these sales were not consistent with the authorization, were not in the client’s interests.

Steven H. Goldblatt:

And they didn’t attempt to prove it.

Ruth Bader Ginsburg:

In the case of churning would you–

John Paul Stevens:

–Well, is there any proof that any of the proceeds were ever given to the owner of the principal?

Steven H. Goldblatt:

The proof is that the proceeds go to three contracts that were determined by the jury in the wire fraud case to be fraudulent that are agreements that were between Zandford and the clients.

One was a personal loan, one was an investment that the Court determined to be fraudulent.

That’s where the fraud takes place.

That’s where the conversion takes place, not sooner, under our theory and under what the Court found.

Antonin Scalia:

You say that there’s no evidence that the sale was made for the fraud.

But if as the government says, some of these sales were made to cover a check written on the account, the sale would not have occurred had the check not been written.

And that check he wrote to himself or to one of these contract accounts.

Doesn’t that make it automatic that the sale occurred in order get the money to pay him?

Steven H. Goldblatt:

I don’t believe so, Justice Scalia.

And I don’t believe that was their theory in the indictment.

The checks were written on the account but he had authority to do that.

There’s no–

Antonin Scalia:

Fine.

Steven H. Goldblatt:

–indication that was wrong–

Antonin Scalia:

And is the writing of the check what caused the sale?

Steven H. Goldblatt:

–Positions were liquidated in order to pay the checks.

Antonin Scalia:

Right.

Steven H. Goldblatt:

But there’s no indication that those sales were not a deliberate decision to sell those securities at that point to take the money and put it into something else.

There’s nothing to indicate that that was unauthorized to do that.

Because we don’t know what the thoughts were.

Antonin Scalia:

It was authorized?

David H. Souter:

I’m missing something.

Why do you write the check first if all you intend to do is to take the proceeds and buy another stock for the client’s benefit?

It’s the sequence of the check, I think, that’s bothering me.

Steven H. Goldblatt:

Well, the sequence of the check is to take the money out of the account and invest it otherwise, which is why you would do it that way or could do it that way.

But we know very little about it.

But there’s nothing–

David H. Souter:

Doesn’t it matter who the check is written to?

I mean, I presume these checks that the government was referring to were not checks sort of payable to the mutual fund to buy more stock or payable for the purchase of other stock.

It was simply payable to the broker; wasn’t it?

Steven H. Goldblatt:

–Well, it was payable to the broker or accounts controlled by the broker.

But as the evidence establishes in the record on affirming the appeal on the sufficiency of the evidence claim, the money went into other investments.

And that’s what Zandford’s defense was.

These were other legitimate investments and that’s what I was doing with the money, and they knew about it and that’s what that was.

David H. Souter:

So they can’t… you are saying they can’t trace any proceeds necessarily from the checks drawn into Zandford’s personal accounts or–

Steven H. Goldblatt:

Well, they… the way they describe it, it goes to accounts controlled by Zandford.

So they do indicate that the conversion of the proceeds into other investments was fraudulent.

Anthony M. Kennedy:

–Well, let me just see what your theory is here.

Suppose the way it works is that there’s a mutual fund account and the broker decides, I want to take this money for my own purposes to spend on a pleasure cruise.

I write the check that causes the sale of the security.

Under your theory, is there a 10b-5 violation?

Steven H. Goldblatt:

If the writing of the check is unauthorized, it’s going to be a 10b-5 violation.

Anthony M. Kennedy:

Everybody knows he didn’t… the client didn’t authorize the broker to take a pleasure cruise.

That’s my hypothetical.

Steven H. Goldblatt:

Then it would be a 10b-5e violation.

What the Court found lacking here was any evidence that the sale itself of the securities by the writing of the check established a 10b-5–

Stephen G. Breyer:

But it’s alleged properly.

I mean, I read on Page 29A, in July… there’s a misprint in the paragraph, but in July 1998 Zandford without the prior knowledge or consent of… must be of Wood… sold three securities in the Wood account for a total of $145,000.

What their claim is, is that without the client’s consent, the broker sold the securities and then after that he used the proceeds for himself.

All right.

Now, on your theory, that alleges a violation of the securities law.

Is that right?

Steven H. Goldblatt:

–Under my theory, that would allege it.

Stephen G. Breyer:

All right.

Steven H. Goldblatt:

But the Court of Appeals found–

Stephen G. Breyer:

Fine.

Then the correct thing of disposition in your view of this case, since the allegation is there, and since the Court of Appeals said that the criminal case didn’t investigate this matter about whether it was or without the client’s consent, your view is we should have a remand so that they can have a trial on the question of whether Mr. Wood did consent to the sale.

Stephen G. Breyer:

Is that right?

Steven H. Goldblatt:

–No, Justice Breyer, that’s not right.

Stephen G. Breyer:

Because?

Steven H. Goldblatt:

Because two things.

One, the Court of Appeals found that there was no evidence because it was a discretionary account, that there was anything unauthorized about it.

There wasn’t any consent needed.

Stephen G. Breyer:

Of course there was no evidence.

That’s because the government relied upon the criminal case.

So the Court of Appeals says they are wrong to rely on that.

Then as you pointed out at the beginning, the correct result is to send it back so now the government has a chance to put in other evidence, if you are right about what the evidence shows.

Steven H. Goldblatt:

In the ordinary course I would agree with that.

All other things being equal, that would be the result.

But if in fact the SEC by its litigation posture chose to rest exclusively on the criminal indictment, this other case–

Stephen G. Breyer:

You mean there is something in this record where the SEC says, by the way, if this criminal case does not provide sufficient evidence, we do not intend to put in any other evidence.

Where does it say that?

Steven H. Goldblatt:

–It doesn’t say that.

There are representations that the criminal case is the same as the civil case.

At the time of our argument in this case, we argued to the Court that if this is all they have, if the criminal indictment is… yes, in the Court of Appeals.

If this is all they have, then there’s nothing to send it back for.

Because this evidence in the criminal case–

Stephen G. Breyer:

You mean it’s going to be agreed that there is no doubt that this retarded individual of a very advanced age agreed that his securities would be sold for the purpose of the broker running off with the money?

Steven H. Goldblatt:

–Justice Breyer, I think that–

Stephen G. Breyer:

I say that with some sarcasm in my voice, because it sounds to me incredible.

Steven H. Goldblatt:

–Obviously these are very hard facts to argue.

But my point is, he went to jail for almost five years.

It violates all sorts of rules, provisions, statutes, there’s no question about this.

This conduct is controlled.

The Court of Appeals had no doubt about that.

But a 10(b) violation is different.

And also the SEC’s litigation posture is different.

Steven H. Goldblatt:

If they are going to give up the facts in the complaint and argue the case on the indictment, in a strategical attempt to get the Court to rule the way they want, which is the broadest possible 10(b), then they have got to live with it.

And when the fact–

John Paul Stevens:

That’s for purposes of their affirmative motion for summary judgment.

They could then say these facts are established.

That’s not a sufficient reason for granting summary judgment the other way around.

Steven H. Goldblatt:

–I absolutely agree, Justice Stevens, and our only point there is–

John Paul Stevens:

Therefore, we should not ignore the allegations of the complaint that go beyond the indictment.

Steven H. Goldblatt:

–The only objection I have to that is the fact that they sought rehearing and they sought rehearing and bond, and not one word was mentioned about a remand for dismissal.

They were still arguing collateral estoppel and on the facts of the indictment we win outright.

They did not even bring it to the attention of the Court.

John Paul Stevens:

That’s because they were trying to win outright.

Steven H. Goldblatt:

That’s right.

John Paul Stevens:

But that doesn’t justify your winning outright.

Steven H. Goldblatt:

When they file… of course.

There’s no question that both sides agree that Bankers Life and O’Hagan control and we say it’s clear we win.

That’s the normal case.

But when they don’t seek rehearing on that basis so this Court doesn’t even know why the Court of Appeals did what it did, and when they file for certiori and don’t raise that as a claim for reversing or–

William H. Rehnquist:

Well, when you say we don’t know the reason why the Court of Appeals did what it did, I mean, it wrote an opinion, which usually gives the reason why the Court of Appeals did what it did.

Are you complaining that they didn’t say anything on rehearing?

Steven H. Goldblatt:

–What I’m saying is when this comes up for the first time in the opinion of the Court of Appeals and they file for rehearing, and they don’t even bring it to the attention of the Court so that the Court can determine whether there is something to be corrected or whether this is the Court’s understanding from oral argument that is what their case is.

William H. Rehnquist:

You are saying that the government didn’t raise this issue in their petition for rehearing to the Court of Appeals.

Steven H. Goldblatt:

They did not even mention it.

William H. Rehnquist:

Well, but I don’t know that they have to.

I mean, so long as they properly petition here, I don’t know that you need have a petition for rehearing in the Court of Appeals.

Steven H. Goldblatt:

Ordinarily I would absolutely agree, Mr. Chief Justice.

But I think when it’s something that comes up in the opinion from the Court of Appeals that on its face doesn’t have any explanation that basically says instead of going back so you can prove your case, we’re throwing it out completely, and they don’t say a word to the Court of Appeals, that’s the wrong remedy.

I mean, that’s the first thing–

Ruth Bader Ginsburg:

But Mr. Goldblatt, the Court of Appeals decision didn’t turn on issue preclusion, it turned on a notion that in order to have a violation of 10(b) you had to have some kind of misleading about the merits of a certain security, something tied to the security, and not that they regarded this as a common law crime as theft.

Steven H. Goldblatt:

–The Court concluded–

Ruth Bader Ginsburg:

I mean, the point they made was it’s the same as if what was entrusted to the broker were a car and he sold the car for himself instead of the customer.

Steven H. Goldblatt:

–The point was that the securities were incidental to this fraud.

They were not an integral part of it, and–

John Paul Stevens:

May I just interrupt with one.

The question presented is whether when the stockbroker sells his customer’s certain securities for his own benefit.

Now, do we have to assume he sold them for his own benefit at the time the sale was made or are you saying in fact he sold them for his principal’s benefit and later decided to appropriate the proceeds?

Steven H. Goldblatt:

–Justice Stevens, what I am saying is there is no proof in this record that at the time of the sales–

John Paul Stevens:

Well, maybe there’s no proof but the question we are asked to decide is when he does it for his own benefit is it a violation of 10(b)4?

That’s what the question is.

Steven H. Goldblatt:

–I understand that, Justice Stevens, and–

John Paul Stevens:

And what’s your answer to the question?

Your answer to the question is he didn’t do it.

Steven H. Goldblatt:

–My answer to the question is it is authorized sale, either on the instructions of the–

John Paul Stevens:

Well, if it’s a sale for his own benefit.

Steven H. Goldblatt:

–And at the same time it is also consistent with the client’s instructions, until he converts, he has not violated 10(b).

John Paul Stevens:

Even though the sale was for his own benefit at the time he made the sale.

Steven H. Goldblatt:

Even though he… if it is for his own benefit… in other words, it could be both at the same time.

At the time of the sale, if the client calls you and says sell my XYZ stock, I want it sold today, and you sell it with the intent to convert the proceeds, that sale is not simply for the broker’s benefit.

It is consistent with the instructions.

It is an authorized sale.

Until and unless he actually converts the proceeds, he has violated nothing.

David H. Souter:

But when you say it is consistent with the instruction, you are assuming the instruction simply means you can buy or you cancel, whereas the argument is that the instruction is you can buy for my benefit or you cancel for my benefit.

And if we accept the latter characterization as true, then even under your own theory, he was not making a sale that he was authorized to make.

Steven H. Goldblatt:

I would disagree, Justice Souter.

On this record it may well be that it was for his benefit, but I don’t think you can conclude it was not for his client’s benefit as well.

Antonin Scalia:

Mr. Goldblatt, before you sit down, would you say something about the fact that you have adjudications by the SEC that adopt the theory that they are arguing before us, why shouldn’t we defer if the question is a close one?

Steven H. Goldblatt:

As I understand it–

Antonin Scalia:

These are formal adjudications under the Administrative Procedures Act and they have ruled in accordance with the theory that the government is now arguing.

Why isn’t that entitled to deference?

Steven H. Goldblatt:

–Justice Scalia, assuming… and because my time has run out… assuming that Congress in fact delegated the discretion to the Agency, I don’t think you can find in any of the various things that they rely on, any rule dealing with 10(b) or Section 10b-5 that speaks to the precise issues that are raised in this case or even close to them.

What they do is they have rules that in 16 or so cases, or whatever the number, they have prosecuted for 10(b) violations brokers who convert.

Steven H. Goldblatt:

But they are not necessarily, as a matter of fact I don’t recall any of them being discretionary accounts or presenting the type of 10(b) analysis, fraud in connection with a purchase or sale of securities.

David H. Souter:

So you are saying we can defer it, but there’s nothing to defer it to.

Steven H. Goldblatt:

That is correct.

Assuming there is deference, there’s nothing to defer it to, and if there was, it would be a rule that they are ultimately asking for that a broker any time they convert from the account violates 10(b) and that would be arbitrary.

That is not the way this rule is applied.

It is applied on a careful case-by-case basis.

So whichever way you go on that, I don’t think it gets them the deference they seek.

I would add, however, with the little time that I have left, that I do not believe they would get that deference.

On churning, Justice Ginsburg, just to get to that point, in a churning case, I think that is more the O’Hagan paradigm.

You consummate the fraud through the sale itself.

It is the sale that completes the violation.

It is the sale that consummates the violation of fiduciary duty.

That’s the difference between here and a churning case.

Until and unless Zandford converts those proceeds, which is done through agreements that are outside the scope of the securities laws, he has not violated 10(b).

In a churning case, the sale itself consummates it and it meets the other conditions that are required in O’Hagan.

That is a different situation and it is also established, of course, in that situation through the pattern of sales you have the proof that you don’t have here, which is that those sales were not in the client’s interests.

If you cannot establish that they–

William H. Rehnquist:

Thank you, Mr. Goldblatt.

Steven H. Goldblatt:

–Thank you.

William H. Rehnquist:

Mr. Roberts.

Mr. Roberts, the government wants the Court of Appeals reversed here, I’m sure.

But does it want the summary judgment granted by the District Court for the SEC affirmed?

Matthew D. Roberts:

No, Your Honor, we didn’t seek review of the reversal of the summary judgment.

We sought review of a different part of the Court of Appeals opinion.

After it reversed the summary judgment, it explained why it didn’t think summary judgment could be granted, it went on to say that the allegations in the complaint didn’t state a claim under 10(b).

And that’s what we want reversed.

And the Court of Appeals relied on the facts in Page 8A of the petition.

The Court of Appeals states in the part of the opinion that’s relevant here that the SEC, I’m in the middle paragraph of that page under the B, and I think it’s the third sentence, says it, meaning the SEC, alleges that Zandford defrauded the Woods by failing to inform them that he intended to sell their securities in order to obtain the proceeds for himself.

So the facts that the Court of Appeals were considering are precisely the same facts that we are relying on here, Your Honor.

And the–

Antonin Scalia:

Go ahead.

I have a different subject.

Finish this one.

Matthew D. Roberts:

–Okay.

I was just going say that the indictment is no different in any event, and on Page 41A in paragraph 5 of the indictment it alleged that Charles Zandford caused checks to be issued against the security positions of William R. Wood and Diane Okstulski and made payable to Charles Zandford, thereby causing their securities to be liquidated.

Stephen G. Breyer:

But it doesn’t say it was without their consent.

Nowhere in the–

Matthew D. Roberts:

It says it was part of a scheme and artifice to defraud.

Stephen G. Breyer:

–That’s true.

That’s true.

Matthew D. Roberts:

So I think that pretty well encompasses that.

Antonin Scalia:

Mr. Roberts, we have apparently some, I would call it a factual disagreement, as to whether any adjudications by the SEC adopt the theory that you are arguing before us today.

What are your best cases?

Matthew D. Roberts:

Okay.

I would point to, on page 36 of our brief we discuss the Southeastern Securities Corporation adjudication, Your Honor, from 1949, seven years after the SEC promulgated Rule 10(b).

In that case the facts were that the president and director of the brokerage firm sold the customer’s securities without her knowledge or consent and converted the proceeds of the sale to his own use.

And after explaining that there was a relationship of trust and confidence and that he had a fiduciary duty, the SEC addressed the argument that this conduct was authorized because he had discretion over the customer’s affairs by virtue of a general power of attorney, and rejected that argument, noting that even assuming the power of attorney’s validity, it didn’t authorize this conduct absent a showing of full and specific disclosure to and understanding consent by the customer.

And then the Commission concluded that the stockbroker’s taking and sale of the customer’s securities and his use of the proceeds constituted a willful abuse of his trust and a violation of–

Antonin Scalia:

When do you say Rule… or Section 10(b) is violated?

Let’s assume that this scheme is discovered before he actually runs off with the money.

He sold the stocks in order to run off with the proceeds, but you get him before he runs off with the proceeds.

Has there been a violation–

Matthew D. Roberts:

–Yes.

Antonin Scalia:

–at the time of the sale?

Matthew D. Roberts:

Yes.

There’s a violation at the time of the sale.

Antonin Scalia:

Okay.

Matthew D. Roberts:

The discretionary authority doesn’t make the sale authorized because he’s authorized only to sell for the benefit of the customers.

Antonin Scalia:

Well, I mean, it seems to me that’s logical and that sort of makes me worry about… about the great scope of litigation that we are inviting if you say civil actions not by the Commission but by individuals are also available under this theory.

Whenever a broker sells stock, he’s always open to the charge that he wasn’t doing it in my interest, he was doing it in his own, and you have a lawsuit.

Matthew D. Roberts:

Two… two points to address that concern, Your Honor.

First of all, as I was discussing with Justice Ginsburg earlier, when there is… a private action requires proof of damages.

And if the broker doesn’t follow through with his plan to convert the proceeds, there will be… it will be frequently the case that the customer can’t show damages and needs to be able to allege those as a required part of the action, couldn’t bring it at all, end of case.

Antonin Scalia:

Well, the stock’s gone up.

I mean, the stock that has been sold has gone up enormously.

Matthew D. Roberts:

Right.

Antonin Scalia:

And all the plaintiff has to allege is you really didn’t sell it in my interest, you sold it because you were going to run off with the proceeds, and look what happened, the stock went way up.

Matthew D. Roberts:

No, Your Honor.

Under the Private Securities Litigation Reform Act, the plaintiff has to state with particularity facts giving rise to a strong inference that the defendant acted with the requisite fraudulent state of mind.

William H. Rehnquist:

Well, are you saying that every breach of fiduciary duty is a fraud under 10(b)?

Matthew D. Roberts:

No, Your Honor.

Only secret or deceptive breaches of fiduciary duty are frauds.

Anthony M. Kennedy:

What about a standard churning case?

William H. Rehnquist:

Aren’t most breaches of fiduciary duty secret?

I mean, you don’t announce that you are breaching a fiduciary duty.

Matthew D. Roberts:

Many of them, particularly breaches of the duty of loyalty will be secret, Your Honor.

But not every breach of fiduciary duty is going to be… is going to be secret or knowing.

A breach of the duty of care wouldn’t even be knowing necessarily.

A breach of the duty of fairness as in the Santa Fe case where all the factors disclosed would not be deceptive, there would be no violation.

But in O’Hagan, the Court explained that when the… when a fiduciary pretends loyalty to the principal and instead embezzles the principal’s property, that’s a fraud.

And that’s a fraud–

Anthony M. Kennedy:

What happens with standard churning cases?

Matthew D. Roberts:

–This is… this is just like a standard churning case, Your Honor.

A churning case is one–

Anthony M. Kennedy:

Well, is there authority that this is a 10b-5 violation–

Matthew D. Roberts:

–Yes.

Anthony M. Kennedy:

–and it’s a given or are we holding that in this case.

Matthew D. Roberts:

Well, you are not addressing churning because obviously that’s not here.

But I think that the courts of appeal have unanimously concluded that churning is a violation.

And that’s because the broker who has control over the account and who’s been entrusted with trading authority by the customer is making the trades, not in furtherance of the customer’s investment objectives but in furtherance of the broker’s aim of gaining commission.

Anthony M. Kennedy:

So if you prevail in this case, this case will be authority which validates all of the circuit opinions holding that churning is a violation.

Matthew D. Roberts:

Well, again, Your Honor, churning is… it’s a different… it’s a different factual scenario because there are repeated sales and because the proceeds aren’t taken.

And I suppose that a distinction could be drawn between when the proceeds are taken and if the proceeds… if it isn’t a question of taking the proceeds but just making a commission, which the customer knows that the broker is doing.

But I do think this would be strong precedent in support of those cases.

Antonin Scalia:

Would you want to argue that distinction, Mr. Roberts?

Matthew D. Roberts:

Not particularly.

I was acknowledging that I think this would be strong precedent.

But I… Respondent concedes that churning is covered, the courts of appeals unanimously have held that churning is covered.

I have no doubt that churning is covered.

The SEC has no doubt that churning is covered.

So you wouldn’t be breaking… wouldn’t be breaking new ground in holding that.

I mean, it would be in the sense that it would be your decision, but you can make the distinctions in future cases that you feel are appropriate and necessary, Your Honor.

[Laughter]

Antonin Scalia:

Too true.

[Laughter]

Matthew D. Roberts:

If there are no further questions, the Government would ask that the decision of the Court of Appeals be reversed.

William H. Rehnquist:

Thank you, Mr. Roberts.

The case is submitted.