This is a saga but not a great one. Frankly, not even a modest one. Come to think of it, as sagas go, this is more like a shaggy-dog story that starts with much promise only to fritter away into so much fluff and meaningless detail.
Way Back When: 1999 through 2004
From September 1999 until January 2005, Salvatore F. Sodano was the Chairman and CEO of the American Stock Exchange ("AMEX"), a quasi-governmental self-regulatory organization ("SRO"). From 1998 through 2004, the AMEX was a subsidiary of the NASD, Inc. In December 2004, following the sale of the AMEX, Sodano resigned as Chairman and CEO in January and April 2005, respectively. He subsequently became Dean of the Frank G. Zarb School of Business at Hofstra University in New York. In 2007, the SEC approved the consolidation into the Financial Industry Regulatory Authority ("FINRA") of the member firm regulatory functions of the NASD, Inc. and NYSE Regulation, Inc. In 2008, NYSE Euronext acquired the American Stock Exchange and re-branded it as the NYSE Amex Equities.
In case you forgot, in 1999, Frank G. Zarb was Chairman, CEO and President of NASD, Inc.; Richard G. Ketchum was Chief Operating Officer and Executive Vice President of NASD, Inc.; and Mary L. Schapiro was President of NASD Regulation, Inc. In 2004, Mr. Ketchum was General Counsel of the Corporate and Investment Bank of Citigroup Inc., and then became the first chief regulatory officer of the New York Stock Exchange. In 2004, Ms. Schapiro was Vice Chairman of NASD and President, Regulatory Policy and Oversight. Mr. Ketchum is now Chairman and Chief Executive Officer of the Financial Industry Regulatory Authority ("FINRA"), and Ms. Schapiro is the Chair of the United States Securities and Exchange Commission ("SEC"). Quite a high-stakes game of musical chairs at the AMEX, NYSE, NASD, FINRA, and SEC.
It Begins On an Auspicious Date
On September 11, 2000, the SEC settled administrative proceedings against the AMEX (the "September 2000 Order") based upon findings that the SRO failed to support critical customer-protection rules relating to firm quotes and trading ahead. The expectation by the federal regulator was that AMEX would get its house in order. Little did we all know how much the world would change a year to the day later.
In 2003, an SEC investigation of the AMEX determined that the exchange had still not enhanced and improved its regulatory enforcement programs as required by the September 2000 Order. Subsequently, the SEC investigated Sodano's alleged failure to comply with the undertakings in the 2000 settlement and to fulfill his responsibilities as an SRO officer.
And then, virtually nothing.
Somehow, someway, four years transpired as the SEC's staff did . . . did what? Oh, yeah, they diligently continued to investigate Sodano's alleged AMEX failures. You remember--those same failures that the Staff determined existed way back in 2003 (and which arose from settled proceedings from 2000). What exactly delayed the staff's Sodano investigation for four years escapes me, but I'm sure an official SEC spokesperson will put it all in perspective for us. To be fair, the SEC was hot on the trail of both Bernie Madoff and Sir Allen Stanford; and let's not forget how the federal regulator was working overtime to buttress all those defenses against the building subprime crisis and the ensuing economic tsunami.
Finally (belatedly, I would suggest), on March 22, 2007 the SEC charged Sodano with failing to enforce compliance with the Exchange Act during his term as the AMEX's Chairman and CEO. You know, that same "term" when the AMEX was a subsidiary of the old NASD, which was in the capable hands of executives such as current FINRA honcho Ketchum and SEC head Schapiro. The SEC alleged that the AMEX's regulatory deficiencies resulted in large part from Sodano's failure to
The SEC alleged that Sodano's inattention to and apparent lack of interest in regulation filtered down the management chain creating an environment in which regulation was not a priority, and, therefore, compliance with the securities laws and the AMEX's rules was not enforced.
If you look over that formidable laundry list and keep in mind Sodano's lofty position, you would likely expect that the SEC was prepared to throw the kitchen sink at him. However, the only sanction sought by the SEC against Sodano was a Censure. What's a "censure." Why it's a word -- a strong one at that, a word that suggests unhappiness with what someone did or didn't do. No, it's not a fine or a suspension but, then again, they do say that the pen is mightier than the sword. So, the word "censure" must count for something. Or, then again, maybe it's just so much bureaucratic garbage.
Current, Former -- and Why It Matters
To be fair to the diligent Wall Street cops at the SEC, Section 19(h)(4) of the Exchange Act only provides the SEC with the authority
to remove from office or censure any officer or director of such self-regulatory organization [if] such officer or director has willfully violated any provision . . .willfully abused his authority, or without reasonable justification or excuse has failed to enforce compliance.
Amazing! If a lowly stockbroker screws up they can fine him, suspend him, bar him, or sometimes throw his lousy carcass in jail. However, when the head of the American Stock Exchange fails to discharge his regulatory role, then the only sanction on the books was to remove him from office (which wouldn't do much since Sodano had already resigned) or censure him.
Not one to apparently go down without a fight, Sodano wasn't about to sit quietly and accept even a measly censure. His legal team moved to dismiss the SEC's charges based upon the argument that the SEC lacked authority to proceed against him because the Section 19(h)(4) only permitted the SEC to censure or remove a current officer or director, and, Sodano had not been an AMEX officer or Director since April 2005 (some two years before the proceeding was instituted). In attempting to refute Sodano's statutory interpretation, the SEC Staff urged a "common sense" reading of 19(h)(4). The Staff protested that Sodano's interpretation would allow an SRO officer to "evade a censure simply by resigning as an officer or director."
Laugh at Sodano's chutzpah and/or applaud the SEC's valiant effort -- it doesn't matter. Sodano's line of attack was persuasive and an SEC Administrative Law Judge dismissed the case. On August 20, 2007, the ALJ granted Sodano's Motion and dismissed the charges because he found that 19(h)(4) does not provide for sanctioning a former officer or director. The ALJ noted that Congress has drafted many statutes that impose the ability to sanction individuals formerly associated with any number of entities. However, that was clearly not the case here and the language must be construed as written.
On Second Thought
Upon reviewing the ALJ's Decision (and probably also feeling the heat of the resulting firestorm of criticism), the SEC determined that the statute and the authorities raised in the proceeding lead to the conclusion that Section 19(h)(4) authorizes the SEC to censure both current and former SRO officers and directors. As a result, in December 2008, the SEC reversed the ALJ's Initial Decision dismissing the proceeding against Sodano and remanded the proceeding to the ALJ for a hearing to consider the underlying charges against Sodano, which were never reached because the Initial Decision dismissed the proceeding on Sodano's motion for summary disposition.
This all sort of begins around 1999, gets initially flagged and settled in 2000, sort of rears its ugly head again in 2003, staggers around drunkenly to 2007 when the SEC charges Sodano, and then gets sent into a ditch with the ALJ's dismissal in 2008 and the SEC's remand. Then 2008 became 2009. Then 2009 became 2010. Never seems to be much of rush when it comes to regulation.
The Whimper -- Not a Bang
On February 22, 2010, the SEC published an Order Making Findings Pursuant to Section 19(h) of the Securities Exchange Act of 1934. (In the Matter of Salvatore F. Sodano, '34 Act Release # 61562 ), http://www.sec.gov/litigation/admin/2010/34-61562.pdf . The Order informs us that
Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Sodano and the subject matter of these proceedings, which are admitted, Sodano consents to the entry of this Order Making Findings Pursuant to Sections 19(h) of the Securities Exchange Act of 1934 ("Order"), as set forth below. . .
. . . .
From at least 1999 through June 2004, the Amex had critical deficiencies in its surveillance, investigative, and enforcement programs for assuring compliance with its rules as well as the federal securities laws. These regulatory deficiencies resulted in part from Sodano's failure to take adequate steps to ensure that he and the Amex were meeting their regulatory obligations. As a result of the Amex's failure adequately to surveil for and investigate violations of, and to enforce, certain options order handling rules, the Amex violated Section 19(g) of the Exchange Act. In addition, the Amex failed to furnish accurate records and, as a result, violated Section 17(a)(1) of the Exchange Act and Exchange Act Rule 17a-1. As CEO, Sodano, without reasonable justification or excuse, failed to enforce compliance by Amex's members and associated persons with the Exchange Act, the Exchange Act rules and regulations, and the Amex's own rules, within the meaning of Section 19(h)(4) of the Exchange Act.
Dizzy with impatience, I flipped to the end of the Order, where I learned - with some dismay that sent me staggering to the comfort of the nearest chair - that
In view of the foregoing, the Commission deems it appropriate, in the public interest and for the protection of investors to issue this Order agreed to in Respondent Sodano's Offer. Accordingly, the Commission hereby finds that Respondent Sodano, without reasonable justification or excuse, failed to enforce compliance with the Exchange Act, Exchange Act rules and regulations, and Amex rules by Amex members and associated persons within the meaning of Section 19(h)(4) of the Exchange Act.
After all these years and allocation of SEC staff, the denouement of this story is that the SEC issued the Order finding that Sodano failed to enforce the AMEX's compliance rules and regulations? Maybe I'm missing something? That's it? Sodano's settlement offer was essentially that he consented to the entry of the Order. No -- I didn't misunderstand; that's how this decade long saga ends. Beowulf thinks better of it and opts for the La-Z-Boy, six-pack of beer, and his high-definition cable. Let someone else slay the monsters.
In the Matter of Salvatore F. Sodano
In the Matter of Certain Activities of Options Exchanges
In the Matter of Certain Activities of Options Exchanges
Bill Singer's Prior Commentary on the Sodano Case