## Facts

- Global America, Inc., an NASD-member broker-dealer, underwrote a June 1990 IPO for Mountaintop Corporation securities (common stock, warrants, and units exchangeable for shares and warrants).
- Michael J. Markowski was Global’s chairman/CEO and majority shareholder; Joseph F. Riccio was Global’s trader.
- In the aftermarket, Global dominated trading in Mountaintop securities, accounting for the overwhelming majority of purchase and sale volume.
- Global implemented a price-support program by (1) maintaining high bid prices and (2) buying unwanted Mountaintop securities into inventory to prevent sales pressure from lowering market prices.
- Global’s support became unsustainable; after Global closed in January 1991, Mountaintop’s price dropped about 75% in one day.
- NASD adjudicators found Markowski and Riccio engaged in manipulative conduct, including causing the publication of non-bona fide bid quotations, and imposed sanctions (censure, industry bars, and fines).
- On review, the SEC sustained the NASD’s findings and sanctions and additionally found Markowski violated an inventory restriction agreement and failed to cooperate with an NASD investigation.

## Issues

1. Whether aftermarket “price support” through high bids and inventory absorption constitutes market manipulation under Exchange Act § 10(b) and Rule 10b-5 when the trades are real and the trader incurs losses.
2. Whether manipulation liability under § 10(b) and Rule 10b-5 requires fictitious transactions (e.g., wash sales or matched orders).
3. Whether substantial trading losses negate scienter for a manipulation finding.
4. Whether substantial evidence supported the SEC’s affirmance of NASD findings and sanctions, including NASD rule violations based on non-bona fide quotations and Markowski’s additional violations.

## Decision

- The court affirmed the SEC’s order sustaining the NASD disciplinary action and sanctions.
- The court held the SEC could treat Global’s price-support trading and quotations as manipulation under § 10(b) and Rule 10b-5 despite the absence of fictitious trades.
- The court rejected the argument that economic losses preclude a finding of manipulative intent.
- The court upheld findings that petitioners caused non-bona fide quotations in violation of NASD Conduct Rules 2110, 2120, and 3310.
- The court left undisturbed the SEC’s additional findings against Markowski for violating an inventory restriction agreement and failing to cooperate with the NASD.

## Legal Principles

- Market manipulation under § 10(b) and Rule 10b-5 is not limited to fictitious trades; real transactions can be manipulative when executed with intent to create or maintain an artificial price.
- The defining feature of manipulation is intentional distortion of market price formation that misleads investors about genuine supply, demand, or price levels.
- Trading losses do not, by themselves, negate scienter where the record supports an inference of deliberate price-support activity.
- Quotations may be “non-bona fide” when they do not reflect genuine trading interest and are used as part of a price-support scheme, supporting violations of NASD Conduct Rules requiring commercial honor and just and equitable principles.
- On judicial review of SEC action sustaining SRO discipline, the court will uphold agency findings supported by substantial evidence and sanctions within the agency’s authority.

## Conclusion

The D.C. Circuit upheld SEC and NASD findings that a broker-dealer’s dominance-based price-support strategy—maintaining inflated bids and absorbing unwanted shares—can constitute market manipulation and non-bona fide quoting under federal securities law and NASD rules, even when trades are genuine and loss-making, so long as the conduct is intended to create artificial prices.


Markowski v. SEC, 274 F.3d 525 (D.C. Cir. 2001)