## Facts

- Five securities salesmen associated with broker-dealers recommended and sold stock of U.S. Sonics Corporation, a speculative electronics company that later failed and entered bankruptcy.
- From September 1962 through August 1963, the salesmen promoted Sonics stock to public customers using highly optimistic recommendations and projections.
- The recommendations relied heavily on issuer-supplied materials and sales literature that the salesmen did not reasonably verify.
- The salesmen failed to investigate or disclose adverse information about Sonics, including poor financial condition and other negative facts that were known to them or readily ascertainable through reasonable inquiry.
- Customers purchased Sonics stock in reliance on the recommendations; after Sonics’ collapse, the investments became essentially worthless and complaints followed.
- The SEC brought administrative proceedings alleging willful violations of Securities Act § 17(a), Exchange Act §§ 10(b) and 15(c)(1), and SEC Rule 10b-5.
- A hearing examiner found violations and imposed sanctions; on independent review, the SEC increased sanctions and barred each salesman from association with any broker or dealer (subject to later reconsideration).

## Issues

1. Whether the salesmen willfully violated federal antifraud provisions by making optimistic recommendations that were materially misleading due to omissions of adverse information known or reasonably ascertainable.
2. Whether the SEC’s industry-bar sanctions were within statutory authority and not an abuse of discretion.

## Decision

- The court affirmed the SEC’s order in all respects.
- Substantial evidence supported findings that the salesmen made materially misleading recommendations by omitting adverse facts they knew or should have discovered through reasonable inquiry.
- The court upheld the SEC’s conclusion that the violations were “willful” in the administrative sense.
- The court sustained the sanctions barring the salesmen from association with any broker or dealer as within the SEC’s lawful discretion and consistent with the public interest.

## Legal Principles

- A securities salesman recommending a security must do more than avoid affirmative misstatements; the salesman must disclose material adverse facts of which the salesman is aware or should be aware.
- Fraud may consist of optimistic recommendations or representations made without disclosure of known or reasonably discoverable adverse information that makes the recommendation materially misleading.
- Broker-dealer personnel have a duty of reasonable inquiry before recommending a security and may not rely blindly on issuer promotional materials.
- In SEC administrative proceedings, “willful” violations do not require proof of bad motive; reckless disregard or deliberate indifference to known or easily discoverable adverse facts may satisfy willfulness.
- Courts generally defer to the SEC’s choice of sanction when supported by the record and reasonably tied to investor protection and market integrity.

## Conclusion

The court upheld SEC findings that salesmen committed willful antifraud violations by recommending a speculative stock based on unverified promotional materials while omitting adverse facts they knew or should have discovered, and it sustained SEC-imposed industry bars as a permissible and non-excessive remedy.


Hanly v. Sec. & Exch. Comm’n, 415 F.2d 589 (2d Cir. 1969)