## Facts

- Al Rizek, a vice president and broker at PaineWebber in Puerto Rico, traded U.S. Treasury securities (including zero-coupon bonds) in five customer accounts over roughly ten months in 1993.
- The customers had conservative investment objectives, but Rizek pursued a high-risk, short-term trading strategy and increased risk by trading on margin.
- The trading activity was excessive and generated large commissions and mark-ups for Rizek while causing approximately $195,000 in customer losses on accounts averaging about $700,000 in total balances.
- An enforcement expert testified there was no rational economic basis for repeatedly swapping similar zero-coupon bonds because their prices generally move in parallel.
- An ALJ recommended a two-year suspension and disgorgement exceeding $275,000.
- The SEC instead ordered a permanent bar from association with any broker or dealer, a cease-and-desist order, a $100,000 civil penalty, and disgorgement exceeding $120,000.
- Rizek did not contest the findings of excessive trading; he challenged the permanent bar and the civil penalty.

## Issues

1. Whether the SEC acted arbitrarily or capriciously in finding sufficient scienter to support a permanent industry bar and a $100,000 civil penalty for churning in violation of Exchange Act § 10(b) and Rule 10b-5.
2. Whether a reviewing court should require the SEC, before imposing a permanent bar, to show that a lesser sanction would not adequately protect the public interest.

## Decision

- The First Circuit denied the petition for review and affirmed the SEC’s order.
- The court held that the record supported the SEC’s scienter finding, including inferences of at least recklessness from the prolonged, unsuitable, economically irrational trading pattern and resulting losses.
- The court upheld the permanent bar and $100,000 civil penalty as within the SEC’s statutory authority and supported by the seriousness of the misconduct.
- The court refused to adopt a rule requiring the SEC to prove that no lesser sanction would suffice before imposing a permanent bar.

## Legal Principles

- Scienter under Exchange Act § 10(b) and Rule 10b-5 may be established by at least reckless disregard for customers’ interests, inferred from sustained churning and unsuitable trading inconsistent with customers’ objectives and lacking economic justification.
- Judicial review of SEC-imposed sanctions is highly deferential; a sanction will be upheld unless it is arbitrary, capricious, or otherwise outside statutory bounds.
- The SEC is not bound by an ALJ’s recommended sanction and may impose a different or more severe sanction when supported by the record and justified as serving the public interest.
- A permanent bar does not require a formal showing that lesser sanctions would be inadequate; the SEC may choose the remedy it finds necessary to protect investors and deter future misconduct.

## Conclusion

The First Circuit affirmed the SEC’s determination that Rizek’s excessive, unsuitable, and economically irrational trading in conservative customer accounts supported a finding of scienter and justified a permanent industry bar and substantial civil penalty, and it declined to impose a least-restrictive-sanction prerequisite on the Commission’s remedial choices.


Rizek v. SEC, 215 F.3d 157 (1st Cir. 2000)