## Facts

- Charles Hughes & Co., Inc. was a New York registered broker-dealer engaged in over-the-counter (OTC) securities trading.
- The SEC initiated administrative proceedings alleging willful violations of Securities Act § 17(a) and Exchange Act § 15(c)(1) in connection with retail OTC sales.
- The firm sold certain securities to customers at prices very substantially above prevailing OTC market levels without disclosing the markup or market price.
- Customers were generally solicited retail purchasers with limited ability to ascertain OTC market prices and who relied on the dealer for pricing information.
- The SEC treated the firm’s contemporaneous acquisition cost and inter-dealer pricing as evidence of the prevailing market price and found the markups unusually large.
- After hearings, the SEC revoked the firm’s broker-dealer registration under Exchange Act § 15(b), finding willful violations and that revocation was in the public interest.
- The firm petitioned for judicial review in the Second Circuit.

## Issues

1. Whether a broker-dealer’s nondisclosure of substantial OTC markups, when selling to solicited customers at prices far above prevailing market levels, can constitute “fraud or deceit” under Securities Act § 17(a) and Exchange Act § 15(c)(1) without affirmative misstatements.
2. Whether substantial evidence supported the SEC’s findings of willful violations and whether revocation under Exchange Act § 15(b) was within the SEC’s authority and consistent with the public interest.

## Decision

- The Second Circuit denied the petition for review and affirmed the SEC’s order revoking the firm’s broker-dealer registration.
- The court held that charging prices very substantially above prevailing OTC market prices, coupled with nondisclosure of the markup and market conditions to customers lacking market knowledge, could operate as fraud or deceit under § 17(a) and § 15(c)(1).
- The court concluded the SEC could rely on contemporaneous cost and inter-dealer pricing as probative evidence of prevailing market price in the OTC context.
- The court upheld the SEC’s determination of willfulness based on the repeated pattern of transactions and sustained the revocation as a permissible public-interest remedy.

## Legal Principles

- Federal securities antifraud provisions reach schemes and practices that operate as fraud or deceit, including material omissions, not only affirmative misrepresentations.
- In retail OTC sales to solicited customers who reasonably rely on the dealer for pricing, a broker-dealer may have a duty to disclose material pricing facts, including the approximate prevailing market price and the existence of a substantial markup.
- Excessive, undisclosed markups may support an inference of fraud when market opacity and customer dependence make silence misleading.
- For evaluating markups in OTC markets, a dealer’s contemporaneous acquisition cost and recent inter-dealer prices may serve as evidence of prevailing market price absent contrary proof.
- The SEC may revoke a broker-dealer’s registration under Exchange Act § 15(b) upon finding willful violations and determining revocation is in the public interest; courts generally defer to the SEC’s remedial judgment when supported by substantial evidence.

## Conclusion

The court sustained the SEC’s authority to treat undisclosed, substantial OTC markups to solicited retail customers as fraudulent by omission and affirmed revocation of the broker-dealer’s registration based on willful violations and a public-interest finding.


Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943)