## Facts

- Pagel, Inc., a registered broker-dealer, served as principal underwriter for FilmTec Corporation’s March 1979 initial public offering (IPO) of 320,000 shares at $3.25 per share, with a 32,000-share overallotment option.
- Pagel, Inc. retained most of the offering, allotting 34,800 shares to other dealers and, after exercising the overallotment option, holding about 317,200 shares (over 90% of the total issue).
- The firm’s FilmTec trading and pricing decisions were directed by its president and sole stockholder, Jack W. Pagel, and its executive vice president, Duane A. Markus.
- On the first day of aftermarket trading, the firm opened at materially higher bid/ask prices than the offering price and raised prices further shortly after trading began.
- During the early aftermarket period and continuing until about March 1980, Pagel, Inc. maintained a continuing “long” position (net customer sales to the firm exceeding customer purchases from it).
- The SEC found that, despite limited genuine customer demand, Pagel, Inc. raised and maintained FilmTec’s price while using purchase activity to create the appearance of active trading, including purchases by Markus through nominee accounts.
- The SEC found the firm supported elevated prices for about a year and later reduced the price in a pattern suggesting pricing was driven by the firm’s interests rather than independent market forces.
- Near fiscal year-end, Jack Pagel purchased remaining FilmTec shares held by the firm, and the firm recognized a sizable tax loss that offset earlier trading profits.
- An SEC administrative law judge found a manipulative scheme violating Exchange Act § 10(b) and Rule 10b-5, Exchange Act § 15(c)(1), and certain self-regulatory organization rules; the SEC affirmed and imposed revocation of Pagel, Inc.’s registration and bars against Pagel and Markus from association with any broker or dealer.

## Issues

1. Whether substantial evidence supported the SEC’s findings that petitioners engaged in manipulative and deceptive conduct in connection with FilmTec stock in violation of the federal securities laws.
2. Whether the SEC’s sanctions—revoking the broker-dealer registration and imposing associational bars—were an abuse of discretion.
3. Whether the ALJ’s evidentiary rulings, including exclusion of proposed expert testimony, denied petitioners a fair administrative hearing.

## Decision

- The court denied the petition for review and affirmed the SEC’s order in full.
- The court held that the SEC’s manipulation findings were supported by substantial evidence on the record as a whole.
- The court held that the sanctions were within the SEC’s remedial discretion and were not unduly harsh given the seriousness, scope, and duration of the violations and petitioners’ roles.
- The court upheld the ALJ’s evidentiary rulings, including the exclusion of expert testimony, finding no arbitrary action and no deprivation of a fair hearing.

## Legal Principles

- Judicial review of SEC fact-finding in enforcement orders applies the “substantial evidence on the record as a whole” standard.
- Market manipulation under Exchange Act § 10(b) and Rule 10b-5 may be shown through domination and control of a thin market, artificial price support, and trading practices that create a misleading appearance of market activity or demand (including use of nominee accounts).
- The SEC has broad authority to impose remedial sanctions in the public interest; appellate courts generally will not disturb sanctions absent an abuse of discretion.
- Administrative law judges have discretion over evidentiary rulings in SEC proceedings; excluding expert testimony does not violate fairness or due process if the ruling is not arbitrary and the record remains adequate for decision.

## Conclusion

The Eighth Circuit sustained the SEC’s determination that a broker-dealer and its principals manipulated an underwritten stock’s aftermarket through market domination, artificial pricing, and misleading trading activity, and it affirmed severe remedial sanctions and the ALJ’s management of the evidentiary record under deferential standards of review.


Pagel, Inc. v. SEC, 803 F.2d 942 (8th Cir. 1986)