## Facts

- Daniel R. Lehl was a registered representative (securities salesman) associated with First Choice Securities in Denver, Colorado; First Choice was a registered member of the National Association of Securities Dealers, Inc. (NASD).
- In 1990, Lehl sold Champions Sports, Inc. stock to retail customers.
- Between July 17 and August 3, 1990, Lehl sold 285,000 shares to retail customers in eleven separate transactions.
- Customers were charged 6.5¢ per share, the “execution price” set by the firm.
- The Denver office obtained the stock internally at a 5¢ per share “strike price,” and both the strike price and execution price were posted daily on a board in the Denver office.
- The difference between the strike price and the execution price was the firm’s “gross commission,” from which Lehl’s commissions were paid; Lehl knew these facts.
- Lehl did not know and did not ask what First Choice paid to acquire the Champions stock, which was 3.125¢ per share in nine transactions and 3.5¢ per share in two transactions.
- NASD disciplinary proceedings concluded that Lehl participated in charging unfair and excessive prices without proper disclosure to customers, in violation of Article III, Sections 1 and 4 of the NASD Rules of Fair Practice; the NASD District Business Conduct Committee censured Lehl and required him to requalify by examination.
- On appeal, the NASD National Business Conduct Committee affirmed and added a $5,000 fine plus costs.
- On de novo review, the Securities and Exchange Commission (SEC) affirmed the NASD’s findings in relevant part and sustained the sanctions.
- Lehl petitioned the United States Court of Appeals for the Tenth Circuit for review under § 25(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78y(a)(1), arguing in part that the SEC’s use of the NASD’s “5% markup policy” amounted to improper regulation of securities prices.

## Issues

1. Whether substantial evidence supported the SEC’s findings that Lehl violated Article III, Sections 1 and 4 of the NASD Rules of Fair Practice by participating in charging unfair and excessive prices without proper disclosure.
2. Whether the SEC unlawfully regulated or fixed securities prices by relying on the NASD “5% markup policy” when affirming the NASD’s unfair-pricing determination.
3. Whether the SEC properly treated the NASD’s 5% policy as a guideline rather than a binding rule, and whether enforcement on that basis was within the SEC’s authority.
4. Whether the SEC-sustained NASD sanctions (censure, requalification by examination, and a $5,000 fine plus costs) were excessive or oppressive.

## Decision

- The Tenth Circuit affirmed the SEC’s final order sustaining the NASD disciplinary action.
- The court held that the SEC’s factual findings were conclusive because they were supported by substantial evidence in the administrative record.
- The court agreed that Lehl could be held responsible for participating in unfair pricing where he knew the customer execution price, knew the firm’s strike price and resulting gross commission, and failed to inquire into the firm’s contemporaneous acquisition cost despite clear warning signs of a large markup.
- The court rejected Lehl’s claim that the SEC’s action was improper price regulation, concluding that the SEC used the NASD 5% markup policy as an interpretive guide and evidentiary benchmark for assessing fairness, not as a rigid price-control rule.
- The court upheld the sanctions as consistent with the securities laws’ remedial aims and not excessive or oppressive.

## Legal Principles

- On judicial review under 15 U.S.C. § 78y(a)(1), the SEC’s factual findings are conclusive if supported by substantial evidence; courts do not reweigh the record.
- NASD Rules of Fair Practice Article III, § 1 requires “high standards of commercial honor and just and equitable principles of trade,” and § 4 requires prices and commissions that are fair in light of the circumstances.
- A registered representative may be disciplined for participating in unfair pricing when readily available information signals that customer prices may be excessive; claiming ignorance of the firm’s cost will not excuse a failure to make reasonable inquiry.
- The NASD “5% markup policy” is a guideline used to evaluate fairness; it is not a safe harbor and not a binding ceiling or floor. Markups above or below 5% can be unfair or fair depending on the facts.
- The SEC may rely on NASD pricing guidance as an interpretive tool in reviewing NASD disciplinary actions without exceeding its statutory authority or engaging in unlawful price fixing.
- Sanctions sustained by the SEC will be upheld when supported by the record and when they further the purposes of the federal securities laws.

## Conclusion

The Tenth Circuit affirmed the SEC’s order sustaining NASD discipline against Daniel Lehl for participating in unfair and excessive markups on Champions Sports stock, holding that substantial evidence supported the violation findings, that the SEC’s use of the NASD 5% markup policy was a lawful fairness benchmark rather than price control, and that the censure, requalification requirement, and $5,000 fine plus costs were not excessive.


Lehl v. Securities and Exchange Commission, 90 F.3d 1483 (1996)