[00:00:01] Speaker 00: Case number 14-1134, Donald L. Coach and Coach Assessment Management LLC Petitioners versus Securities and Exchange Commission. [00:00:09] Speaker 00: Mr. Gorman for the petitioners. [00:00:11] Speaker 00: Mr. Frieda for the respondent. [00:00:16] Speaker 05: Mr. Gorman, good morning. [00:00:17] Speaker 05: Let me just say that we have the fan on because we're trying to cool things off, but we'll all try to speak into the mic and if you'll make sure you do. [00:00:28] Speaker 04: Thank you, Your Honor. [00:00:30] Speaker 04: I do hear the fan. [00:00:30] Speaker 04: I appreciate that. [00:00:32] Speaker 04: I'll try to speak over the fan so that we don't have a problem. [00:00:35] Speaker 05: Okay. [00:00:39] Speaker 04: May it please the Court, my name is Tom Gorman. [00:00:42] Speaker 04: I have the privilege of representing Coach Asset Management, and Donald Poach is sitting here in the front row behind me. [00:00:52] Speaker 04: is about one thing really. [00:00:54] Speaker 04: It's about whether or not an investment advisor who has a long-term track record of placing highly profitable trades for his clients that reach two, three, four hundred percent in returns for these people and has very rigid standards can place the trades here, four separate trades, with a valid business purpose. [00:01:17] Speaker 04: and based on a program that Mr. Koch created from his years of advising the Federal Reserve, the Open Market Committee, from his years of being a professor and his years of being a far-necked bank, and then be charged with manipulation. [00:01:31] Speaker 04: We submit, Your Honor, that they cannot. [00:01:34] Speaker 04: There's really four issues here that drive this case. [00:01:39] Speaker 04: And the first two are really the preeminent ones. [00:01:42] Speaker 04: Can the SEC create a new rule of decision for this case on appeal after the trial, after the hearing? [00:01:53] Speaker 04: Can they create that rule? [00:01:54] Speaker 04: Second, can they then use that rule to ignore virtually all of the evidence in the record to make their decision and make it based only on their new rule? [00:02:07] Speaker 04: The third and fourth are similar. [00:02:08] Speaker 04: The third concerns the standards for primary liability, where again, the SEC disregarded the statutory scheme, contrary to the central bank. [00:02:17] Speaker 04: They disregarded the standard that they put in their OIP, and then they created a new open-ended standard, and the final one is exactly the same. [00:02:25] Speaker 04: That is, can they take a statute passed in 2010 [00:02:30] Speaker 04: Enhance the penalties for Mr. Coach by retroactively applying it to 2009 conduct. [00:02:36] Speaker 04: We submit that they cannot. [00:02:39] Speaker 04: We turn first to the primary issue of this case. [00:02:44] Speaker 04: Can the SEC rewrite the rules? [00:02:48] Speaker 04: The statutes here are straightforward. [00:02:50] Speaker 04: It's Section 10B and Section 206 of the Advisors Act. [00:02:53] Speaker 04: The language of the statutes is perfectly clear. [00:02:56] Speaker 04: The statutes say you have to have cienter, you have to have marketplace deception to have a violation of the statute. [00:03:04] Speaker 04: There are three decades [00:03:06] Speaker 04: of Supreme Court decisions starting with Hockfelder going through Santa Fe, going through Dirks, going through Zanford, which is cited by the SEC, saying those elements have to be here. [00:03:20] Speaker 04: The SEC tried to fit their case into those. [00:03:25] Speaker 04: They claim, in their opinion, that yes, they admit that those standards apply. [00:03:29] Speaker 04: They admit there has to be Hockfelder, Santa Fe. [00:03:32] Speaker 04: They admit that there has to be Santa Fe deception. [00:03:34] Speaker 04: But rather than doing that, [00:03:37] Speaker 04: What they do is they create a new rule. [00:03:39] Speaker 04: And I would respectfully direct the court to page 21 of their opinion, where they create basically a little syllogism. [00:03:45] Speaker 04: They say basically this. [00:03:47] Speaker 04: A, you have to have some sort of interference with the markets. [00:03:51] Speaker 04: That creates an artificial price. [00:03:53] Speaker 04: And then they quote one of their cases, where there's week after week after week of manipulation, the Thomas J. Koharis case. [00:04:01] Speaker 04: Then they take that and they say, if you interfere with it, that will make deception. [00:04:07] Speaker 04: This is on page 21. [00:04:09] Speaker 04: That creates deception. [00:04:10] Speaker 04: Deception violates the statute, is the third part of it. [00:04:13] Speaker 04: Therefore, we have Hockfelder-Sienther, we have Santa Fe, deception. [00:04:20] Speaker 04: The problem with that is, when you scrape it down and look at it, and you go to page 27 of their opinion, you find out what they're doing. [00:04:28] Speaker 04: There they say, a priori. [00:04:32] Speaker 04: Not citing a case, not citing the facts. [00:04:34] Speaker 04: They say a priori reasoning tells us that if you go into the marketplace and you want to have the price higher, you have wrongful intent. [00:04:44] Speaker 04: And from that wrongful intent, when you place a trade, they will presume deception. [00:04:49] Speaker 04: So without showing anything in the market, without showing anything that's wrong in the intent, because seeking a higher price is not wrong under certain circumstances, they create this based on inductive reasoning. [00:05:01] Speaker 04: That inductive reasoning is nothing. [00:05:03] Speaker 06: Well, don't they argue that what they wanted to do was not just get a higher price, but to get a higher closing price just for the sake of having that higher closing price? [00:05:13] Speaker 01: Do you dispute that? [00:05:14] Speaker 01: I'm sorry? [00:05:15] Speaker 06: Did you dispute that, that that's what they found was a violation here, was getting a higher closing price just for the sake of having a higher closing price? [00:05:23] Speaker 04: Getting a higher closing price here meant, Your Honor, was not manipulating the market. [00:05:27] Speaker 04: If you look at the conduct, the record's perfectly clear. [00:05:30] Speaker 04: Every time Mr. Koch said in an email or on the tapes, [00:05:33] Speaker 04: We want a higher closing price. [00:05:35] Speaker 04: What happened? [00:05:36] Speaker 04: Jeff Kristinell, the trader, went and took the price that he picked and put it as the limit order, which was the limitation on how much they would pay for the stock. [00:05:45] Speaker 04: And that limitation was fitting right inside their program. [00:05:50] Speaker 04: So it wasn't the market. [00:05:52] Speaker 04: The conduct here shows that. [00:05:54] Speaker 04: Undisputed evidence from Kristinell, who was called by the division, [00:05:58] Speaker 04: is exactly that. [00:06:00] Speaker 04: That's what they wanted. [00:06:01] Speaker 04: They wanted that particular price level as the SEC called, and that's something that happens every day in the marketplace. [00:06:07] Speaker 04: The Commission's own market national market rules, market rule 610, [00:06:12] Speaker 06: Do you dispute that pumping up the closing price is properly deemed to be a violation of securities laws? [00:06:23] Speaker 04: You don't dispute that. [00:06:24] Speaker 06: You accept that someone who was trying to deliberately manipulate the closing price would be violating this? [00:06:30] Speaker 06: Absolutely. [00:06:33] Speaker 06: You go ahead. [00:06:34] Speaker 04: I mean, if you look at the commission's cases, the Kocher-Harris case, the Chemer case where they actually did mark the close, those cases are built on day after day after day going into the market and right at the close, pushing up the cost. [00:06:47] Speaker 06: So what does it matter whether it's day after day as opposed to quarter after quarter? [00:06:51] Speaker 04: It's the pattern, your honor. [00:06:53] Speaker 04: There is no pattern here. [00:06:54] Speaker 04: There's trades at the end of September. [00:06:56] Speaker 04: There's trades at the end of December. [00:06:58] Speaker 04: And that's it. [00:06:59] Speaker 03: So how long does the pattern? [00:07:00] Speaker 03: Those are the ends of the quarters, right? [00:07:02] Speaker 03: I'm sorry, your honor. [00:07:02] Speaker 03: Those are the ends of the quarter. [00:07:04] Speaker 04: Those are the ends of a quarter when the markets tend to be deeper and more liquid. [00:07:08] Speaker 04: And we have to remember HCBC, one of the stocks here, only trades 20% of the days on the year. [00:07:14] Speaker 04: The other stocks only trade parts of the days. [00:07:16] Speaker 04: And when that was ended. [00:07:17] Speaker 03: He's doing this at the end of the quarter and his compensation [00:07:21] Speaker 03: modest compensation from clients is based on prices at the end of the quarter, right? [00:07:27] Speaker 04: His compensation is based on prices at the end of the quarter. [00:07:29] Speaker 03: He's not seeking best execution. [00:07:31] Speaker 03: That's pretty clear from the email exchanges and phone conversations, right? [00:07:35] Speaker 04: Your Honor, that's incorrect. [00:07:36] Speaker 04: The record here is undisputed that in fact they got best execution. [00:07:41] Speaker 04: The trader who placed every one of these trades testified they got best execution. [00:07:47] Speaker 04: Each one of the other [00:07:48] Speaker 04: Professionals in this case testified that they got best execution, and the stats bear that out. [00:07:54] Speaker 04: If you look at the spreads that are on Commission Exhibit 278, which is an internal document from Huntley Securities, it lists the spreads in one column. [00:08:04] Speaker 04: Jeff Kristinell, the trader, testified that those spreads represent national best price, national best ask. [00:08:11] Speaker 04: The executions here and the closing price that Coach got in every single instance [00:08:17] Speaker 04: with a handful of exceptions on the individual executions, but the individual closing prices all fit right within best execution. [00:08:26] Speaker 04: You can't, as the SEC said, get best execution and manipulate the market. [00:08:32] Speaker 04: So there is no real manipulation here. [00:08:35] Speaker 04: In fact, as Professor Gerald testified, there was basically no market impact at all. [00:08:42] Speaker 04: When you look at, for example... That's not required, is it, for manipulation? [00:08:47] Speaker 04: Yes, Your Honor, there has to be some impact in the market. [00:08:50] Speaker 03: Santa Fe makes a- A kind of manipulation or an attempt at manipulation that is otherwise, let's say, undisputed, does not avoid liability because it was unsuccessful. [00:09:01] Speaker 04: Being unsuccessful doesn't avoid liability, I agree, but there still has to be some impact in the marketplace because you have to violate the statute. [00:09:10] Speaker 04: The only way that you can violate the statute is if you have to see enter and if there's some marketplace impact. [00:09:16] Speaker 04: So if you're unsuccessful, [00:09:17] Speaker 04: If you're unsuccessful, clearly you could have an attempt, but you still have to have some impact in the marketplace. [00:09:25] Speaker 03: So you're saying if you're unsuccessful, then I think that sounds like it's contradicting what you said before. [00:09:32] Speaker 03: You don't have to be successful. [00:09:34] Speaker 03: Doesn't that mean you don't have to have an effect on the price? [00:09:38] Speaker 04: No, you have to have some effect in the marketplace. [00:09:40] Speaker 04: You have to somehow have something that distorts the market price, that creates a false signal, that does something in the marketplace. [00:09:47] Speaker 03: Isn't that a successful manipulation? [00:09:50] Speaker 04: That's not successful marking the close. [00:09:52] Speaker 04: Marking the close is getting the last trade and pushing the last trade higher. [00:09:56] Speaker 04: I understand that. [00:09:57] Speaker 03: The manipulation is broader than marking the close. [00:10:00] Speaker 03: That's correct. [00:10:01] Speaker 03: I thought you said that you were suggesting you needed to have some actual effect on price and here it didn't. [00:10:08] Speaker 04: you have to have some effect on the price or some effect on the marketplace. [00:10:12] Speaker 04: The manipulation ultimately may not be successful. [00:10:15] Speaker 04: The trader might not make any money, for example. [00:10:17] Speaker 04: The trader might not succeed in pushing the price so that he could change his margin requirements, which I think was the Kocha Harris case. [00:10:25] Speaker 04: The trader might not get exactly what he wants. [00:10:28] Speaker 04: But here, there was no motive at all for this. [00:10:32] Speaker 04: The commission tries to create one with the fees, which they didn't charge. [00:10:36] Speaker 04: Then they try to create. [00:10:37] Speaker 03: Well, what was the disgorgement of $4,000? [00:10:41] Speaker 03: Was that the fees? [00:10:42] Speaker 04: The disgorgement was the fees, which turned out to be less than Mr. Coach refunded to his clients for accounts. [00:10:49] Speaker 03: True, true, but irrelevant. [00:10:51] Speaker 04: It's a very small amount, but the real motive here, Your Honor, was not what was charged. [00:10:57] Speaker 04: What they charged as the motive was to enhance his reputation. [00:11:00] Speaker 04: This did not enhance his reputation, because if you look at what happened, not only is the statement effect of these numbers so small nobody would see it, [00:11:08] Speaker 04: But, more importantly, Kathleen Marshall testified in the passages about, she is the compliance director at Huntley, she testified that when you went online, which is the whole conversation that started this motive idea, [00:11:23] Speaker 04: that every day the prices were valued at what the last trade was. [00:11:29] Speaker 04: So if this was the motive, what the clients would see, for example, take Alice Smith's account, the SEC's statistician testified that high country closed on August 31st at $10 on her statement. [00:11:42] Speaker 04: If the next month she saw Mr. Coach buy it for $20, and then she looked at it on, say, October 15th, she would see it back at 10, and so forth. [00:11:53] Speaker 04: But if you see this sort of ipsy-dissy pattern of up and down and up and down and up and down, which is what the clients would see if this was a motive, Mr. Coach would get more calls. [00:12:03] Speaker 04: then he was worried about, and that was his whole concern, was that people wouldn't be looking at the long term. [00:12:08] Speaker 04: As he sent an email to Kathleen Marshall about this particular issue, the point here is, I don't want clients looking at the short term, but when they looked at it every day, what they would see is up and down and up and down and up and down, and if he manipulated these stocks the way the SEC says, the pattern would be worse. [00:12:29] Speaker 04: He would be shooting himself in the foot to make that kind of an arrangement here. [00:12:34] Speaker 04: The fact of the matter is when you look at the evidence in this case, [00:12:39] Speaker 04: And it's almost all undisputed. [00:12:41] Speaker 04: Best execution, virtually no market disturbance. [00:12:45] Speaker 04: Best prices are around. [00:12:48] Speaker 04: Trades carefully placed in small segments so that they wouldn't disturb the marketplace. [00:12:52] Speaker 04: There is no evidence of manipulation. [00:12:55] Speaker 04: And perhaps the Chev trade on December 31 is perhaps the poster child for all of this. [00:13:01] Speaker 04: There, all they did was accept the offer that was made in the marketplace all day. [00:13:08] Speaker 04: It was one offer. [00:13:10] Speaker 04: If you look carefully at the communications between the trader and Mr. Coach, what Mr. Coach said, wait till the end, pop that one at 905, [00:13:20] Speaker 04: If you have to, the trader waited. [00:13:24] Speaker 04: He waited till the end. [00:13:25] Speaker 04: The spreads had widened. [00:13:26] Speaker 04: This was right between the spreads. [00:13:28] Speaker 04: No other offers. [00:13:29] Speaker 04: He made the buy at $9.05. [00:13:32] Speaker 04: One purchase. [00:13:33] Speaker 04: They did nothing in the marketplace except buy at the only offer that was accepted. [00:13:38] Speaker 04: It was within the initial investment. [00:13:39] Speaker 06: What about, I think it was high country. [00:13:41] Speaker 06: That's where he said, [00:13:43] Speaker 06: I need it above 2025. [00:13:45] Speaker 06: Do whatever you need to do to get it above 2025. [00:13:48] Speaker 06: That's not about purchasing a certain number of shares. [00:13:52] Speaker 06: That's about driving up the closing price. [00:13:54] Speaker 06: And his emails or phone messages show that he wanted it done right at the close. [00:14:02] Speaker 06: What do we do with that? [00:14:03] Speaker 04: Your Honor, there's nothing in those communications that says drive up the price. [00:14:07] Speaker 06: I want... I need to get it above 20. [00:14:09] Speaker 06: Yes. [00:14:09] Speaker 06: You 25. [00:14:10] Speaker 06: 2025, I'm happy. [00:14:13] Speaker 06: Do whatever you have to do. [00:14:14] Speaker 06: That seems like it's all about the price, not about the shares. [00:14:17] Speaker 04: It is all about the price. [00:14:18] Speaker 04: It is all about the shares. [00:14:20] Speaker 06: It's all about... It's not about the shares. [00:14:22] Speaker 06: It's about the closing price. [00:14:23] Speaker 04: It's about both, Your Honor, because as the price lathers up, that gives them the opportunity to get the execution. [00:14:30] Speaker 04: Recall, what this is from the trader's point of view, from Mr. Coach's point of view, [00:14:35] Speaker 04: He's placing a trade for a stock that doesn't trade on 85% of the days of the year. [00:14:40] Speaker 04: He's placing a trade for a stock that you can almost not purchase. [00:14:44] Speaker 04: It's so illiquid, Professor Jarrell said that it was like a private negotiation to buy this stock. [00:14:49] Speaker 04: And he says, my limit, as high as I'm willing to spend, is $25. [00:14:54] Speaker 04: You set that limit at $25, but then what else does he say in those tapes? [00:15:00] Speaker 04: He says, you trade this in market share 100s and 200s. [00:15:04] Speaker 04: Don't just send the whole trade down there and display this $25 price to the market. [00:15:10] Speaker 06: If you need 5,000 shares, do whatever you need to do. [00:15:12] Speaker 04: 5,000 shares? [00:15:13] Speaker 06: Prior to the close, then you don't even have time for these other people to come into the market and start selling. [00:15:17] Speaker 06: You're just bumping up the price at the close. [00:15:19] Speaker 04: 5,000 shares, 1,000 to 5,000 is the usual size block that Coach Asset buys. [00:15:27] Speaker 04: It's right in Mr. Schneider's work. [00:15:30] Speaker 04: There's no dispute about that. [00:15:31] Speaker 04: And the 5,000 shares is as many as he wants to buy. [00:15:34] Speaker 04: And he says, look, if you need more, call me. [00:15:38] Speaker 04: We'll talk about that. [00:15:39] Speaker 04: And that's what happened with Chevy. [00:15:40] Speaker 04: They set that one at 5,000. [00:15:42] Speaker 04: Also, when they bought 5,000, [00:15:45] Speaker 04: Mr. Tristinell, the trader, pulled the limitations and they wound up with 6,600 shares of stock. [00:15:52] Speaker 04: Five, six days before, they couldn't get a share. [00:15:55] Speaker 04: On the 23rd of December, they tried to buy that stock. [00:15:58] Speaker 04: They couldn't get it. [00:15:59] Speaker 04: This is the way that they tried to buy the stock. [00:16:02] Speaker 04: Take a look closer at September 30th. [00:16:05] Speaker 04: On September 30th, Mr. Coach was in the market in the morning for high country. [00:16:10] Speaker 04: He bought some stock. [00:16:11] Speaker 04: He had a limit of 18 on that day. [00:16:14] Speaker 04: That's where he set it initially. [00:16:16] Speaker 04: He got that stock, then what did he do? [00:16:18] Speaker 04: He dropped it. [00:16:19] Speaker 04: He dropped the limit to 16. [00:16:22] Speaker 04: Got some stock, couldn't get a fill. [00:16:25] Speaker 04: got a partial order. [00:16:26] Speaker 04: So then he talked to the trader, there's a series of emails about this, and they moved the cap to 25. [00:16:32] Speaker 04: When they moved it to 25, then they broke the order into little pieces, and they got best execution on every single one of those, and the price laddered up and they closed out at 23.50. [00:16:44] Speaker 04: What they did on December 31 is just a replay of this. [00:16:47] Speaker 04: Mr. Coach tried first at one price. [00:16:49] Speaker 04: He tried a second price on the 30th of September. [00:16:53] Speaker 04: Tried to get it cheaper. [00:16:55] Speaker 04: And then when they couldn't, they went to the higher price. [00:16:59] Speaker 04: But they tried to get it cheaper first. [00:17:00] Speaker 04: And they did get it at best execution. [00:17:03] Speaker 04: That's what the commission has ignored. [00:17:05] Speaker 04: You look at the commission's opinion, they said, basically, we don't know what to do with Cristinella's testimony about best execution. [00:17:12] Speaker 04: And they ignored Kathleen Marshall. [00:17:14] Speaker 04: And they ignored the valid business purpose and the testimony from Mr. Snyder as irrelevant. [00:17:19] Speaker 04: And they ignored Professor Gerald, basically with some nits and nats picking at his opinion, all of which are wrong. [00:17:25] Speaker 04: So what they did was they ignored the testimony. [00:17:29] Speaker 04: They ignored the way these orders were executed. [00:17:31] Speaker 04: They ignored the markets. [00:17:33] Speaker 04: And they came to a conclusion based on an a priori presumption. [00:17:37] Speaker 04: That, Your Honor, they can't do. [00:17:39] Speaker 04: They can't simply rewrite Santa Fe. [00:17:42] Speaker 04: They can't rewrite three decades worth of decisions and then go on. [00:17:46] Speaker 05: Let me stop you if anyone doesn't have any questions. [00:17:49] Speaker 05: We'll give you a couple minutes to reply. [00:17:51] Speaker 05: Thank you, Your Honor. [00:17:52] Speaker 05: Mr. Frieda. [00:18:07] Speaker 02: May it please the court. [00:18:11] Speaker 02: I think what Judge Millett was getting at was that there's substantial evidence to support the Commission's finding that Coach engaged in the practice of marking the close. [00:18:23] Speaker 02: All of the arguments he's raised here today were arguments that were raised below and that the Commission considered and rejected on the evidence. [00:18:32] Speaker 02: And the evidence consisted essentially of these emails and telephone conversations in which it's very clear that [00:18:41] Speaker 02: The intent of Coach and Cam was to raise the price of these thinly traded stocks at the end of the quarter in order to apparently inflate the account values for his clients. [00:18:57] Speaker 02: Every one of these arguments he raised, he raised the deception point, he raised the [00:19:03] Speaker 02: He raised the... I'm just trying to think about the point about the reasonable best execution point. [00:19:15] Speaker 06: What do we do with that? [00:19:16] Speaker 06: What do we do with that? [00:19:19] Speaker 06: The evidence is that it was best execution. [00:19:21] Speaker 06: This isn't an ordinary... He is the market. [00:19:23] Speaker 06: I don't know how he's manipulating himself, but essentially he is the market. [00:19:26] Speaker 06: Some days he was 100%. [00:19:28] Speaker 06: of the market. [00:19:29] Speaker 06: I don't know how he can self-manipulate. [00:19:31] Speaker 06: And you've got best executions, and you've got a strategy that requires enticing people out there to get, to make them actually want to come sell anything. [00:19:42] Speaker 02: Well, I mean, as the Commission found on the record here, I mean, when he enters the market with the intent to manipulate, to raise the price, that's inconsistent with his CD2. [00:19:51] Speaker 06: When you say intent to manipulate, to raise the price, you don't mean that, right? [00:19:54] Speaker 06: Raising the price itself is not an intent to manipulate, is it? [00:19:58] Speaker 06: If you need to raise the price just to get people to come into the market, that's not manipulation, is it? [00:20:04] Speaker 02: If that were what were going on here, but I mean that's not what was going on here. [00:20:09] Speaker 02: And what was going on here was someone entering the market with the intent to raise the price, and that's market manipulation, that's marking the close. [00:20:18] Speaker 02: So the fact that, and it wasn't, let me back up for a minute, it wasn't best execution. [00:20:24] Speaker 06: He intended to raise the price. [00:20:26] Speaker 06: He really wanted to raise the price, but he did it at noon rather than 4 o'clock or 3 o'clock, whatever the market closing time was. [00:20:34] Speaker 06: Would that be a violation? [00:20:35] Speaker 06: Would that be manipulative if he tried to drive the price up at noon because he wanted to draw people into the marketplace? [00:20:41] Speaker 02: Well, I mean, I think if you were actually engaged in the strategy of attempting to entice other sellers into the market, that, as the commission said, that may well be a legitimate trading strategy. [00:20:53] Speaker 02: It's just not what happened here. [00:20:55] Speaker 06: But that may be. [00:20:56] Speaker 06: So it's not manipulative just to go in with the intent of raising the price? [00:21:01] Speaker 02: No. [00:21:01] Speaker 02: If it's based upon a legitimate trading strategy, no. [00:21:04] Speaker ?: OK. [00:21:05] Speaker 02: But in the context of this case, I think, as the commission reasonably found, when you enter the market with the intent to raise the price at the end of the day, [00:21:21] Speaker 02: in order to setting an artificially high closing price that that's market manipulation. [00:21:28] Speaker 06: So what if he's the only market? [00:21:31] Speaker 06: He's the only one buying it seems like. [00:21:34] Speaker 02: There were other buyers in the market and there were other buyers who were getting better [00:21:42] Speaker 02: better prices for their transactions on the same days. [00:21:47] Speaker 02: For example, I mean, he drove himself up. [00:21:49] Speaker 02: The first day that he realized how to do this, or that he figured out that he wanted to, in September, his earlier purchase was at 16. [00:21:56] Speaker 02: He then told Christianelle, okay, try to drive it up to as near as 25 without appearing manipulative, and they purchased at 23 and a half. [00:22:08] Speaker 02: And with that one day's trading, he artificially inflated his client's account values by approximately $1 million. [00:22:15] Speaker 02: So it was not an insignificant amount. [00:22:21] Speaker 02: But back to the best execution point, specifically with the Christianel testimony, as the Commission found, Christianel wasn't very clear on this because he also testified that they were not [00:22:34] Speaker 02: trying to purchase the shares at the best price we can. [00:22:37] Speaker 02: And that was direct testimony from him. [00:22:40] Speaker 02: He also admitted that they were attempting to mark the close. [00:22:44] Speaker 02: So I think the commission was correctly discounted this testimony. [00:22:50] Speaker 03: It seemed like somebody who didn't know what he was doing. [00:22:53] Speaker 02: Christian Al? [00:22:55] Speaker 02: Yeah. [00:22:55] Speaker 02: He lost his job, right? [00:22:56] Speaker 02: He did lose his job. [00:22:58] Speaker 03: Whatever he did was not consistent with the policies of the House. [00:23:02] Speaker 02: No. [00:23:03] Speaker 02: And when it was brought to his attention. [00:23:05] Speaker 03: It wasn't clear that he even understood that. [00:23:08] Speaker 02: I think that's true. [00:23:10] Speaker 02: I think, well, I mean, to gather from the evidence and the record, it appears that once the brokerage came to him with the information about his trading activity, he said, well, actually, the quote is, he said, yeah, this isn't even the worst. [00:23:24] Speaker 02: You should see what we did with High Country. [00:23:27] Speaker 02: So because we came with him with the information, I think it was from Chevy Yacht. [00:23:31] Speaker 02: So yeah, I don't know, but he did fess up, he did come clean about what they were doing and he testified regarding the parameters of their arrangement. [00:23:45] Speaker 03: The message to him saying we don't want to appear manipulative. [00:23:50] Speaker 03: That could be quite a sensible and lawful message, right? [00:23:56] Speaker 03: Saying, look, here's what we want to do, we understand what the rules are, so do it in such a way that, because after all, if it can be done without appearing to be manipulative, without being manipulative, so much the better. [00:24:09] Speaker 02: That may well be true in certain circumstances. [00:24:13] Speaker 02: And if that were the only statement we had, if that were just a stray remark we had without the trading activity itself and without the other statements they had and without Christianel's testimony about what he understood that instruction to mean. [00:24:26] Speaker 03: Well, it seems to be a safe word. [00:24:28] Speaker 03: But Marshall, she knows what she's doing, right? [00:24:31] Speaker 03: Yes. [00:24:31] Speaker 03: So what did she say in her report? [00:24:34] Speaker 02: She said it was market manipulation, I believe. [00:24:37] Speaker 02: The report, you mean the inside the... The inside? [00:24:39] Speaker 02: Yeah. [00:24:40] Speaker 02: Yeah, she did. [00:24:41] Speaker 02: She asked Coach to justify why this shouldn't be considered. [00:24:45] Speaker 03: Did she ever say they were not getting best execution? [00:24:49] Speaker 02: Her testimony? [00:24:50] Speaker 02: I don't recall whether she testified about that. [00:24:54] Speaker 02: I don't recall it being in the report. [00:24:58] Speaker 02: The only testimony I recall was coaches and Christianells, which as I said, the commission, I think, reasonably discounted based upon all of the evidence. [00:25:09] Speaker 02: And as the commission concluded, I mean, it's inconsistent with your duties to find the best prices reasonably available in the market if you are entering the market to raise the price artificially. [00:25:30] Speaker 03: Well, I'm not sure if it's true of all of these trades, but several at least. [00:25:34] Speaker 03: Wasn't the instruction a sort of laddered approach? [00:25:38] Speaker 02: I mean, I don't know if it was a laddered approach in the sense that Mr. Coach argues in his brief. [00:25:46] Speaker 02: I mean, I think the instructions were, here's the amount that I'm authorizing, up to 5,000 shares. [00:25:56] Speaker 02: Let me know if you need more. [00:25:57] Speaker 02: But really, the focus was on getting the price. [00:25:59] Speaker 02: So get it up to 20, 25, and I'm happy, is the quote. [00:26:04] Speaker 02: Get that one. [00:26:05] Speaker 03: How's that different from a limit order? [00:26:08] Speaker 03: Give me 5,000 shares, no more than 25. [00:26:12] Speaker 02: That's the difference. [00:26:13] Speaker 03: First executions are laddered at 22 and so on. [00:26:15] Speaker 02: Right. [00:26:15] Speaker 02: That's the difference, Judge Ginsburg. [00:26:17] Speaker 02: He didn't say, I'd like 5,000 shares with a limit of 25. [00:26:22] Speaker 02: That's a different type of instruction. [00:26:24] Speaker 03: Would anything have been different? [00:26:26] Speaker 02: In the case? [00:26:28] Speaker 03: Yeah, if it said that, in the facts of what happened with the executions. [00:26:33] Speaker 02: I mean, it depends on, do we have the other evidence available? [00:26:36] Speaker 02: I mean, I think the commission conceded that what he was arguing he was doing could be a legitimate business trading strategy, depending on the circumstances. [00:26:48] Speaker 02: But his intent was clear from the conversations and from the email exchanges, [00:26:53] Speaker 02: to artificially raise the price at the end of the day in order to mark the close. [00:26:58] Speaker 02: So yeah, it could be a legitimate trading strategy, but it wasn't one here. [00:27:06] Speaker 06: If he had done everything the same here, he didn't have the emails or the audio tapes. [00:27:11] Speaker 06: Everything was the same. [00:27:13] Speaker 06: And he produced evidence that said, look, this is a very strange and unusually illiquid market. [00:27:20] Speaker 06: And I'm trying to ladder the price up. [00:27:22] Speaker 06: And yeah, I'm going to offer more because it's all you got. [00:27:24] Speaker 06: It's hard to get these people to let these shares out of their hands. [00:27:30] Speaker 06: I've got to do something to give them an incentive to come into the market. [00:27:35] Speaker 06: And quite frankly, if I do it closer to the end of the day, word will get out overnight in this illiquid market, and there'll be more there for me in the morning. [00:27:43] Speaker 06: Would that be a violation? [00:27:44] Speaker 02: I mean, again, that's a tougher case. [00:27:49] Speaker 06: What's a tougher case? [00:27:51] Speaker 06: I've just tried to drive the price up at closing. [00:27:54] Speaker 06: But I've done it because I think that's how I can best get people to come into the market both at that time and the next day so I can buy the stuff I want to buy. [00:28:03] Speaker 02: I think there's a line between a legitimate trading strategy and one in which you're attempting to manipulate the market. [00:28:09] Speaker 02: There's an economic purpose. [00:28:11] Speaker 02: that's reasonable behind the strategy that you've just outlined. [00:28:17] Speaker 02: But the trading strategy here is contrary to the rational economic purpose. [00:28:21] Speaker 06: I mean, on the facts you're taking... If I did the exact same thing that I said, and whew, reports will look better and those clients will quit calling me. [00:28:28] Speaker 06: So all the same stuff, that's how I'll get this market to move. [00:28:31] Speaker 06: I want people to sleep on it overnight, so I gotta go with the clothes. [00:28:34] Speaker 06: And thank the Lord, it'll make the account values better and they'll stop bothering me. [00:28:39] Speaker 02: So now you've gone down the road of a mixed motive. [00:28:42] Speaker 06: Yes, I have. [00:28:43] Speaker 02: Yes. [00:28:44] Speaker 02: I think in terms of a mixed motive, I mean, there again. [00:28:47] Speaker 06: The effect on the market is exactly the same. [00:28:50] Speaker 02: Right, but market manipulation. [00:28:53] Speaker 02: This is about whether or not you're entering the market with a manipulative purpose. [00:29:00] Speaker 02: And what that means is, if you're entering the market just to implement your legitimate trading strategy, then that's one thing. [00:29:07] Speaker 02: But if you're entering the market to do something different, to drive up the price in order to achieve the goal of raising your account statement values for your clients, [00:29:18] Speaker 02: that has a different effect on the market. [00:29:21] Speaker 06: The market is presumed... And you're finding here he only had one motive? [00:29:24] Speaker 06: I mean, this seems to me, you know, given his trading strategy and the uniquely illiquid market in which he was operating, that in fact this was a dual motive case, but wasn't analyzed that way. [00:29:35] Speaker 02: He's never proved that he actually had a legitimate trading strategy. [00:29:38] Speaker 06: As the Commission said... Didn't you have the burden of proof? [00:29:41] Speaker 02: But he, yes, you're right. [00:29:43] Speaker 02: But as the Commission said, in its opinion, if this were in fact his trading strategy in making these trades, then you would see evidence of him using it in other circumstances. [00:29:56] Speaker 02: And the evidence goes the opposite way. [00:29:58] Speaker 02: He rarely traded at the end of the day before this period of time. [00:30:03] Speaker 02: He rarely traded. [00:30:04] Speaker 02: He often traded in the middle of the month. [00:30:07] Speaker 06: except for... But he said, look, I tried to get these particular stocks at other times and in other ways, and it didn't work. [00:30:12] Speaker 06: So I just went to when the fission was best, right? [00:30:15] Speaker 06: When the fission was best at the close of the quarter. [00:30:18] Speaker 06: But the records show that he'd already tried to buy these same things at a different time, correct? [00:30:23] Speaker 06: And it hadn't worked. [00:30:25] Speaker 02: Right, but you would assume that... Right, you agree that he tried to do it before it didn't work, and so he went when the fish were biting in his view. [00:30:32] Speaker 02: But the Commissioner reasonably rejected this as being his motive for entering these trades in light of the conversations, in light of the emails, and in light of the fact that he really didn't have any evidence to support the claim that he tried to do this. [00:30:48] Speaker 06: But is it legal error not to address this as a mixed motive case? [00:30:51] Speaker 02: I don't think so because I don't think he raised any evidence that was credible to support his claim that it was a mixed motive. [00:31:00] Speaker 02: I think all of the evidence points to the fact that he entered the market in order to artificially raise the price of securities at the end of the day, which is an open market manipulation similar to what happened in Markowski. [00:31:13] Speaker 02: And this court found with a violation of the anti-fraud provisions. [00:31:18] Speaker 03: In those middle of the month trades, was he always buying? [00:31:21] Speaker 02: Yes. [00:31:22] Speaker 02: He was almost always a buyer. [00:31:29] Speaker 02: Well, if the court has nothing further. [00:31:30] Speaker 05: All right. [00:31:31] Speaker 05: Thank you. [00:31:32] Speaker 02: Thank you. [00:31:37] Speaker 05: Why don't you take two minutes? [00:31:41] Speaker 04: Thank you, Your Honor. [00:31:43] Speaker 04: First, Mr. Coach did have a legitimate trading strategy. [00:31:47] Speaker 04: There was extensive testimony about this from Mr. Snyder. [00:31:51] Speaker 04: The Commission dismissed it in a footnote as irrelevant. [00:31:56] Speaker 04: Second, Mr. Kristinell's testimony did not say that Mr. Coach wanted to mark the close. [00:32:03] Speaker 04: There is no statement from Kristinell to that effect. [00:32:06] Speaker 04: If you look carefully at the cross-examination or the direct examination of Kristinell, by the Commission, every question was phrased in terms of [00:32:15] Speaker 04: Do they want to get a price level? [00:32:17] Speaker 04: Do they want to move the price? [00:32:19] Speaker 04: There's nothing that says, at the end of the day, end the market. [00:32:22] Speaker 04: There's nothing that says that it's going to be marked to close. [00:32:26] Speaker 04: The Commission's counsel is simply wrong. [00:32:28] Speaker 04: Third, Ms. [00:32:29] Speaker 04: Marshall did not testify at that hearing that, in fact, this was marking the close. [00:32:34] Speaker 04: She reported back to the New York Stock Exchange ARCA on a question about why there was end-of-the-day trading that was generated from the Chev trades on December 31st. [00:32:45] Speaker 04: What she did say is, if there are small executions, as there are here, that, in fact, then you will get the best price. [00:32:53] Speaker 04: She also said that it would be smart for a trader [00:32:57] Speaker 04: to bid up in markets like this in certain circumstances over the ask in the marketplace if you want to get a block of stock. [00:33:04] Speaker 04: And the reason for that is very straightforward. [00:33:07] Speaker 04: Most of the offers in the market are for 100 or 200 shares. [00:33:10] Speaker 04: If you want to buy 5,000, 1,000, some block, you're going to have to bid up. [00:33:16] Speaker 04: And that's exactly what the national market rules of the SEC do. [00:33:20] Speaker 04: The bottom line here is this is a legitimate trading strategy. [00:33:24] Speaker 04: Mr. Coach executed it to make profitable trades for his clients, and he did. [00:33:30] Speaker 04: The Commission never, ever challenged that. [00:33:32] Speaker 04: If this rule stands, every trader on Wall Street, every mutual fund that bids up, and they do it every day, and if you look at National Market Rule 610, they give examples of that in the commentary to the rules from 2005. [00:33:47] Speaker 04: Many traders bid up for business reasons, and it happens every day. [00:33:52] Speaker 04: That means mutual funds, like Fidelity, Vanguard, are going to have to pay more because they won't be able to bid over. [00:33:59] Speaker 04: They'll have to buy in 1 in 200 share lots. [00:34:02] Speaker 04: That will drive up the transaction costs and drive up the cost of the stock. [00:34:06] Speaker 04: That's what Mr. Coach was trying to avoid here. [00:34:09] Speaker 04: The testimony is undisputed. [00:34:10] Speaker 04: So there's a valid program. [00:34:12] Speaker 03: I thought you were not sure where you were going with the point about the large funds buy. [00:34:19] Speaker 03: is that they would drive up the cost for them to be buying small lots. [00:34:23] Speaker 03: Correct. [00:34:24] Speaker 03: So is the result that they don't do it? [00:34:27] Speaker 04: The result is that either they're not going to do it, or the clients are going to have to pay more for the securities. [00:34:31] Speaker 04: Either way, the cost to the clients will increase. [00:34:36] Speaker 04: And that's one of the reasons that the commission wrote National Market Rule 610 that said when you cross the market, [00:34:43] Speaker 04: Meaning, when you go over the ask in the marketplace, they don't display those orders to the marketplace. [00:34:49] Speaker 04: And the Commission wrote that rule in 2005. [00:34:52] Speaker 04: They directed NASDAQ and everybody else to implement it because they didn't want that kind of bidding. [00:34:57] Speaker 04: They weren't saying it was illegitimate. [00:34:59] Speaker 04: They just didn't want it to influence the price. [00:35:01] Speaker 04: Mr. Coach accomplished that here in a different way. [00:35:04] Speaker 04: Mr. Kristinell testified. [00:35:07] Speaker 04: He said those markets with the limit orders are only in Huntley's system. [00:35:11] Speaker 04: That's where you see them. [00:35:14] Speaker 04: He then broke those orders up into little pieces so the limit cap didn't go down for execution. [00:35:19] Speaker 04: So it's 100, 200, 300, and you see the executions on the commission's own exhibits. [00:35:25] Speaker 04: Those executions are all at the valid price in the marketplace. [00:35:29] Speaker 04: They're all at best execution. [00:35:31] Speaker 06: Didn't he say at one point, I can't remember which stock it was, that be careful, there's another seller out there, and if he sees what you're doing, he'll flood the market? [00:35:44] Speaker 04: Yes, you're right. [00:35:45] Speaker 06: How is that consistent with the legitimate trading strategy? [00:35:47] Speaker 06: If his point is, I want to get more shares here that I can buy, I want to entice them out, then why would he say, drive up the price, but don't let that guy put his shares on the market? [00:35:56] Speaker 04: Exactly correct, Charlie. [00:35:57] Speaker 04: That's a quote from the Commission's opinion. [00:35:59] Speaker 04: That's a piece of that conversation between Kristinell and Mr. Coach. [00:36:03] Speaker 04: This is frankly the reason that we tried to make the transcripts available to make sure that everybody could take a look at what was said there, because if you read the rest of that passage, it goes on and it says that person they're talking about is an OTC market maker who has a duty to maintain [00:36:19] Speaker 04: an orderly market. [00:36:20] Speaker 04: He switches sides. [00:36:21] Speaker 04: Sometimes he buys, sometimes he sells. [00:36:23] Speaker 04: And then the rest of the passage, they say the market maker will then pick up the stock, meaning buy it. [00:36:29] Speaker 04: And if he picks up the stock and starts buying it early in the day, the price is going to start to run. [00:36:34] Speaker 04: If the price starts to run, it may run past the limits of Mr. Koch's program, because his program says you can only buy it below tangible book value. [00:36:44] Speaker 04: It's a value that he puts into the program to protect his clients from paying too much. [00:36:49] Speaker 04: If it goes too early, that's what will happen. [00:36:52] Speaker 04: Professor Gerald, when he testified, said, he looked at the markets and he said, the markets imply here on December 31, 2009, that if you had bought early, the prices would have been significantly higher. [00:37:04] Speaker 04: So that's a good example of exactly why these trades were executed the way they were. [00:37:09] Speaker 04: That's exactly why the commission's clipped portions of those transcripts don't show you actually what's going on. [00:37:16] Speaker 04: The executions, if you just look at the commission's exhibits, 278, they're all in little pieces. [00:37:22] Speaker 04: They're not the way they're described in the commission's order. [00:37:25] Speaker 04: The commission describes them as [00:37:29] Speaker 04: They're slamming the close all the time. [00:37:31] Speaker 04: It's not what happened. [00:37:33] Speaker 04: There's one big order at the top. [00:37:34] Speaker 04: They break it in little pieces. [00:37:36] Speaker 04: And then they send the little pieces down. [00:37:38] Speaker 04: And the little pieces get the executions at the price in the marketplace between the bid and the ask for the most part, getting you best execution. [00:37:45] Speaker 04: It was careful execution. [00:37:47] Speaker 04: It was carefully done. [00:37:49] Speaker 04: And that's why Professor Jarrell was able to say, no market impact. [00:37:55] Speaker 04: All right. [00:37:56] Speaker 04: Thank you. [00:37:56] Speaker 04: Thank you.