Maryland Securities Commissioner v. U.S. Securities Corp.

DAVIS, Judge. An Administrative Law Judge (ALJ) found, and the Maryland Securities Commissioner (Securities Commissioner) affirmed, that appellees Anthony D. Roberts and his company, U.S. Securities Corporation (USSC), violated the Maryland Securities Act by engaging in a scheme to defraud Maryland investors in connection with an offering of Printron, Inc. (Printron) stock during January and February 1992. Specifically, the ALJ and the Securities Commissioner found that appellees misrepresented and omitted material facts, thereby misleading investors regarding the true reasons that Printron was not available for sale in Maryland. The Securities Commissioner ordered appellees to pay a $30,000 fine, subject to mitigation for any amounts paid as restitution within thirty days of the issuance of the order.

Appellees sought judicial review of the Securities Commissioner’s decision by the Circuit Court for Montgomery County. It reversed the decision, holding that the fine was time-barred by the statute of limitations embodied in Md.Code (1995 RepLVol.), Cts. & Jud. Proc. (C.J.) § 5-107.

The Securities Commissioner appealed and raised one question for our review, reframed below: Did the circuit court err in holding that C.J. § 5-107 bars an administrative action for the issuance of fines instituted more than one year from the date of the alleged violation? Additionally, appellees present three questions that were raised, but not addressed, in the lower court due to the court’s threshold decision that the statute of limitations set forth in C.J. § 5-107 applied. Nevertheless, because we will reverse that decision and answer question I in the affirmative, we will address the three additional questions. We reframe them as follows: II.

Was there a sale of securities in the State of Maryland implicating the regulatory authority of the Securities Commissioner? ⁵⁸⁰ III. Did appellees make any untrue statement of a material fact or omit any material fact thereby defrauding or deceiving any person in connection with the offer or sale of securities?

IV

Did appellees’ actions constitute an act, practice, or course of business operating as a fraud or deceit on those attempting to purchase shares of the Printron special offering? As with the first question, we answer these questions in the affirmative and reverse the judgment of the circuit court. FACTS The Maryland Securities Division (Securities Division) began to investigate appellees’ activities in late 1993, after it was contacted by the National Association of Securities Dealers, Inc. (NASD), a self-regulatory organization that polices the brokerage industry. NASD provided information that appellees may have offered and sold unregistered securities to more than twenty unknown Maryland investors during a September 1991 offering of Printron stock.

The Securities Commissioner issued administrative subpoenas to appellees. Appellees, however, did not respond to them. On January 25, 1995, the Securities Division brought an administrative action against appellees for fraud in the offer and sale of unregistered securities in violation of Md.Code (1993 Repl.Vol., 1997 Supp.), Corps. & Ass’ns (C.A. or Maryland Securities Act), §§ 11-301(2), 11-301(3), and 11-501. The Securities Division sought a fine of up to $5,000 per violation and revocation of appellees’ broker-dealer registrations.

While reserving final authority, appellant referred the matter to the Office of Administrative Hearings (OAH). Prior to the OAH hearing, appellees filed a motion to dismiss, arguing that C.J. § 5-107 imposed an applicable one-year statute of limitations that began to run from the date of the alleged violations. Administrative Law Judge A. Michael Nolan denied appellees’ motion to dismiss, holding that C.J. § 5-107 did not apply to administrative actions. ⁵⁸¹ Based on the evidence produced at the two-day hearing, the ALJ issued his Proposal for Decision, finding that the Securities Division had established that appellees engaged in nine separate violations of the Maryland Securities Act, falling under C.A. §§ 11-301(1), 11-301(2), 11-301(3), and 11-501. Appellees filed exceptions to the proposed decision, including the ALJ’s denial of their motion to dismiss.

On August 28, 1996, the Securities Commissioner issued a Ruling on Exceptions and Final Decision affirming the ALJ’s denial of appellees’ motion to dismiss on the basis of C.J. § 5-107. In his final decision, the Securities Commissioner adopted, with some modification, the ALJ’s findings of fact and conclusions of law that appellees violated C.A. §§ 11-301(2), 11-301(3) and 11-501. 1 The Securities Commissioner reduced the fine recommended by the ALJ from $45,000 to $30,000. 2 The order provided that appellees “may apply within 30 days of this Final Order for mitigation of the civil monetary penalty based upon restitution made to Maryland Investors.” The Securities Commissioner’s Final Decision contains explicit findings of fact and conclusions of law based upon the ALJ’s detailed summary of the evidence, the ALJ’s findings of fact based on the evidence, and the Commissioner’s review of the record. The following facts are gleaned from the Commissioner’s and ALJ’s findings. At all relevant times, appellee USSC was registered as a broker-dealer in Maryland and the District of Columbia.

Appellee Roberts was registered as a broker-dealer agent in Maryland. On August 22, 1991 and again on January 1, 1992, ⁵⁸² USSC entered into an agreement with Printron to act as a placement agent for a private placement of Printroris stock. Although Printron had issued other securities that were registered and being sold in Maryland at the time, Printron planned to sell this offering through a private placement exemption from the registration requirement. 3 In September 1991, a proceeding instituted by the United States Securities and Exchange Commission (SEC) resulted in a Final Judgment and Permanent Injunction against Printron and one of its officers, Eleanor L. Schuler, regarding the offer or sale of securities. As a result, Printron’s stock offering was disqualified from the private placement exemption to Maryland’s registration requirements.

See COMAR 02.02.04.15B(4)(b) (prior to 1995 recodification) (“bad boy” disqualification provisions). In late 1991, Printron applied for, and was granted, a “no-action” letter 4 permitting the sale of a limited number of shares of the offering to a specified Maryland resident, Clarence L. Elder. In subsequent letters of early 1992, the “no action” position was expanded to permit the sale of securities valued at $627,777 to Mr. Elder and certain members of his family. Those family members were Barbara Elder, LeAnn Elder, C. Louise Elder, Lisa M. Elder, and Josephine Parrish.

Mr. Elder, however, recommended the stock to other Maryland residents, including his sister, Cherry Elder Smith, Joseph W. Peters, Frederick Kail, Dr. Joanne Waeltermann, Michael G. Peters, and George Guest (who in turn recommended the stock to Warren Dorsey). Mr. Elder advised these individuals to contact appellees about purchasing the stock. ⁵⁸³ During the summer of 1991, appellees attempted to arrange for the sale of shares in the Printron offering to Dr. Joanne Waeltermann, a Maryland resident, but the subscription agreements were rejected by counsel for Printron because the prospective purchaser lived in Maryland. Subsequently, appellees attempted to arrange for the sale of shares in the Printron offering to Dr. Waeltermann and other Maryland residents through a District of Columbia trust created by Curtían R. McNeily, Esq., an attorney who represented USSC. The attempt to sell the stock through the trust was also rejected by Printron’s counsel, and McNeily advised USSC to abandon the idea of using the trust.

A number of Maryland residents wanted to purchase shares in the private placement offering, but were advised by appellees or by Printron that they could not do so because they were residents of Maryland, where the stock could not be traded. After the idea of purchasing the stock through a trust was abandoned, however, McNeily advised various Maryland residents, who were referred to him by appellees, that they could purchase the stock through a person appointed as their agent in the District of Columbia. McNeily informed the Maryland residents that the shares could be held in the District of Columbia until they could be traded legally in Maryland. He then suggested that he be appointed an agent for the prospective Maryland investors.

Admittedly, McNeily was attempting to construct a legal arrangement whereby residents of Maryland could purchase shares of the private placement stock. At the suggestion or direction of appellee Roberts, several Maryland residents, including Dr. Joanne Waeltermann, Joseph Peters, Wendell Phillips, Cherry Elder Smith, Michael Peters, and Warren Dorsey, appointed McNeily as their agent. In his capacity as agent, he obtained shares of the Printron offering in the District of Columbia on the Maryland residents’ behalf. Each of the individual purchasers was a Maryland resident, and they made all the arrangements for the appointment of ⁵⁸⁴ McNeily as agent and for the purchase of the Printron stock from within Maryland.

McNeily purchased the Printron stock for the Maryland investors through USSC and paid USSC a fee or commission in excess of $10,000 out of the funds provided by the Maryland investors. He retained the share certificates in “street name” 5 until December 1992, after which the stock was registered for sale in Maryland. At that time he prepared individual share certificates and sent them to the Maryland investors reflecting the number of shares purchased on their behalf. Additionally, the Securities Commissioner’s Final Decision adopted the AL J’s findings of fact restated below: (1) Appellees omitted material facts in its dealings with Maryland investors Joseph Peters, Warren Dorsey, and Frederick Kail regarding the inability of Maryland residents to purchase the Printron stock.

(2) Appellees made a false and misleading statement to Maryland investor Frederick Kail when Roberts stated that the reason that a trustee was necessary for Printron stock purchase[s] was because the transaction involved IRA funds. (3) Appellees omitted a material fact in its dealings with Maryland investor Dr. Joanne Waeltermann regarding the inability of USSC to act in Maryland as a broker in purchasing the Printron stock. (4) Appellees omitted a material fact in its dealings with Maryland investor Cherry Elder Smith concerning ownership of the Printron stock she purchased. (5) Appellees made misleading statements that led.Maryland investor Michael G. Peters to believe that the delay in the registration of Printron stock in Maryland was due to “paperwork” and would only last for a few days ⁵⁸⁵ or weeks.

Appellees failed to state to Michael G. Peters that the true reason for the delay in registering the stock for sale in Maryland was a result of a prior court injunction against Printron and a Printron officer obtained in an SEC enforcement action. In finding that a fine was appropriate, both the ALJ and appellant considered appellees’ bad faith and misleading behavior in the offer and sale of Printron stock. Appellees’ bad faith was evidenced by their attempts to mislead the NASD and the Securities Division as to the existence, nature, and extent of appellees’ transactions with twenty-eight Maryland investors. Although the records reflect that USSC apparently received commissions for the transactions, Roberts, through USSC, acted as though he had no knowledge of the transactions, and alleged that the payments were for consulting work.

Appellees also refused to provide the Securities Division with any documents in response to administrative subpoenas duces tecum issued by the Securities Commissioner. Nevertheless, appellees sought judicial review of the Securities Commissioner’s decision in the circuit court, which reversed the decision against appellees on the grounds that the one-year limitation under C.J. § 5-107 applies to administrative proceedings for a fine, and the Securities Division’s action was brought more than one year from the date of the alleged violations. This appeal followed. DISCUSSION STANDARD OF REVIEW Because this is an appeal from a circuit court’s review of an agency’s final decision, our role in this appeal “ ‘is precisely the same as that of the circuit court.’ ” Dep’t of Human Resources v. Thompson, 103 Md.App. 175, 188 , 652 A.2d 1183 (1995) (quoting Dep’t of Health & Mental Hygiene v. Shrieves, 100 Md.App. 283, 303-04 , 641 A.2d 899 (1994)).

A petition to a circuit court for judicial review of an agency’s final administrative decision is governed by the Maryland Administrative Procedure Act (APA). Md.Code (1995 Repl. ⁵⁸⁶ Vol., 1997 Supp.), State Gov. (S.G.) § 10-222. Section 10-222(h) of the APA provides that, upon review of an agency decision, the circuit court may: (1) remand the case for further proceedings (2) affirm the final decision; or (3) reverse or modify the decision if any substantial right of the petitioner may have been prejudiced because a finding, conclusion, or decision: (i) is unconstitutional; (ii) exceeds the statutory authority or jurisdiction of the final maker; (iii) results from an unlawful procedure; (iv) is affected by any other error of law; (v) is unsupported by competent, material, and substantial evidence in light of the entire record as submitted; or (vi) is arbitrary or capricious.

S.G. § 10-222(h)(3) (1995). A reviewing court may not make its own findings of fact, Board of County Comm’rs v. Holbrook, 314 Md. 210, 218 , 550 A.2d 664 (1988), or supply factual findings that were not made by the agency. Ocean Hideaway Condo, v. Boardwalk Plaza, 68 Md.App. 650, 662 , 515 A.2d 485 (1986). Findings of fact are essential in order for the reviewing court to review meaningfully the agency’s decision.

See Gray v. Anne Arundel Co., 73 Md.App. 301, 307-09 , 533 A.2d 1325 (1987). Moreover, it is the agency’s function to determine the inferences to be drawn from the facts. On review, neither the circuit court nor this Court may substitute its judgment for that of the agency. Eberle v. Baltimore County, 103 Md.App. 160, 165 , 652 A.2d 1175 (1995).

On appeal, our task is to review the agency’s findings of fact under the substantial evidence test. Thompson, 103 Md.App. at 190 , 652 A.2d 1183 (citing State Election Bd. v. Billhimer, 314 Md. 46, 58-59 , 548 A.2d 819 (1988)). “Substantial evidence is ‘such relevant evidence as a reasonable mind ⁵⁸⁷ might accept as adequate to support a conclusion.’ ” Thompson, 103 Md.App. at 191 , 652 A.2d 1183 (quoting Caucus Distributors, Inc. v. Md. Securities Comm’r, 320 Md. 313, 323-24 , 577 A.2d 783 (1990)); see also Relay Improvement Ass’n v. Sycamore Realty Co., Inc., 105 Md.App. 701, 714 , 661 A.2d 182 (1995), aff'd 344 Md. 57 , 684 A.2d 1331 (1996); Moseman v. County Council of Prince George’s County, 99 Md.App. 258, 262-63 , 636 A.2d 499 , cert. denied, 335 Md. 229 , 643 A.2d 383 (1994) (both stating that “substantial evidence means more that a ‘scintilla of evidence,’ such that a reasonable person could come to more than one conclusion.”). In other words, the question on appeal becomes whether a reasoning mind could reasonably have reached the agency’s factual conclusion. Eberle, 103 Md.App. at 166 , 652 A.2d 1175 . “ ‘The test is reasonableness, not rightness.’ ” Snowden v. Mayor of Baltimore, 224 Md. 443, 448 , 168 A.2d 390 (1961) (quoting 4 Davis, Administrative Law Treatise, § 29.11 (1958)).

The reviewing court ordinarily must view the agency’s findings of fact with deference. Snowden, 224 Md. at 448 , 168 A.2d 390 . Further, we may uphold the agency’s decision only if “ ‘it is sustainable on the agency’s findings and for the reasons stated by the agency.’ ” United Parcel Serv., Inc. v. People’s Counsel, 336 Md. 569, 577 , 650 A.2d 226 (1994) (quoting United Steelworkers v. Bethlehem Steel, 298 Md. 665 , 472 A.2d 62 (1984)). In contrast to factual challenges, when the question before the agency involves one of statutory interpretation or an issue of law, our review is more expansive.

Liberty Nursing Center v. Dep’t of Health & Mental Hygiene, 330 Md. 433, 443 , 624 A.2d 941 (1993). Under this more expansive review, we may substitute our judgment for that of the agency. Thompson, 103 Md.App. at 190 , 652 A.2d 1183 . This standard of review is aptly named the “substituted judgment standard.” Id.

Thus, we are not bound by the agency’s statutory or legal conclusions. Id; Dep’t of Health and Mental Hygiene v. Riverview Nursing Centre, Inc., 104 Md. App. 593 , 657 A.2d 372 , cert. denied, 340 Md. 215 , 665 A.2d 1058 (1995); Dep’t of Health and Mental Hygiene v. Reeders ⁵⁸⁸ Memorial Home, Inc., 86 Md.App. 447 , 586 A.2d 1295 (1991). Moreover, we are “under no constraints in reversing an administrative decision which is premised solely upon an erroneous conclusion of law.” People’s Counsel for Baltimore County v. Maryland Marine Mfg. Co., 316 Md. 491, 497 , 560 A.2d 32 (1989). “A challenge to a regulatory interpretation is, of course, a legal issue.” Thompson, 103 Md.App. at 191 , 652 A.2d 1183 (citation omitted). “Modification or reversal of the agency’s decision is only appropriate when the petitioner has demonstrated that substantial rights of the petitioner have been prejudiced by one or more of the causes specified in § 10-222(h).” Thompson , 103 Md.App. at 191, 652 A.2d 1183 (citing Bernstein v. Real Estate Comm’n, 221 Md. 221, 230 , 156 A.2d 657 (1959) appeal dismissed, 363 U.S. 419 , 80 S.Ct. 1257 , 4 L.Ed.2d 1515 (I960)).

Lastly, in the absence of evidence to the contrary, administrative officers will be presumed to have properly performed their duties and to have acted regularly and in a lawful manner. Johnstown Coal & Coke Co. v. Dishong, 198 Md. 467, 474 , 84 A.2d 847 (1951). All legal intendments will be indulged in favor of the administrative decision. Id.

It will be presumed to be correct and valid, as long as the parties involved have been given a reasonable opportunity to be heard. Id. Accordingly, we must examine the record to determine whether the ALJ and the Commissioner applied the correct law and whether there was substantial evidence from which a reasonable mind could arrive at the factual conclusions reached by the ALJ. As a threshold matter, however, we address the legal issue as to limitations.

I Appellant argues that the circuit court erred when it held that the statute of limitations embodied in C.J. § 5-107 applied to administrative actions for monetary fines or penal ⁵⁸⁹ ties. In support thereof, appellant avers that the language of C.J. § 5-107 and applicable case law reflect that the statute applies only to judicial proceedings as opposed to administrative hearings. We agree. Section 5-107 contains a one-year statute of limitations that begins to run from the date of the