June 29, 2012
IN THE MATTER OF PERPETUAL SECURITIES, INC., CATHY Y. HUANG AND YOUWEI P. XU.
On appeal from the Department of Law and Public Safety, Division of Consumer Affairs, New Jersey Bureau of Securities.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted November 10, 2011
Before Judges Axelrad, Sapp-Peterson and Ostrer.
Appellants, Perpetual Securities, Inc., Cathy Y. Huang, and Youwei P. Xu (collectively, appellants), appeal from a final agency decision of the New Jersey Bureau of Securities (the Bureau) revoking Perpetual's broker-dealer registration, revoking Huang's and Xu's individual agent registrations, imposing a $10,000 penalty against Xu, and imposing a $30,000 penalty against Huang, of which $20,000 represented a penalty for Huang's failure to produce records. We affirm.
Perpetual is a brokerage firm registered in New York. Huang is Perpetual's part-owner, Vice President, and Compliance Officer, and Xu is its part-owner, CEO, and President. Before the events giving rise to the instant appeal occurred, the National Association of Securities Dealers (NASD) initiated enforcement actions against Perpetual arising out of its failure to pay an arbitration award issued by NASD on November 14, 2000.
On November 25, 2002, NASD suspended Perpetual's registration based upon its failure to pay the arbitration award. Throughout the suspension proceedings, Perpetual was represented by counsel, and it was Perpetual's attorney who received notice of the Suspension Decision via facsimile and first class mail. A courtesy copy of the Suspension Decision was also sent to Huang.
Despite the suspension, trade blotters and trade confirmations showed trades executed by Perpetual during December 2002 and January 2003. According to Huang, who was interviewed during the Bureau's investigation, Perpetual continued to engage in securities transactions during this period because notice of the suspension was not received until January 14, 2003. Huang also admitted Perpetual made arrangements for customers to execute trades during the suspension period through Perpetual's internet trading platform. She told the investigators that after January 14, "she called all her clients and told them that they could no longer make any purchases or sales in their accounts; and if they needed to engage in any transactions, they should contact her clearing firm, Advantage." NASD reinstated Perpetual on May 16, 2003.
NASD next filed an administrative complaint against appellants on June 30, 2004. On September 7, 2004, appellants appeared pro se and filed an answer to the complaint. A hearing conference was scheduled, but appellants requested and were granted a postponement. They attempted to postpone the conference again hours before the rescheduled hearing was set to begin due to Huang's alleged health condition. The hearing officer denied the request because Huang had spoken to the case administrator on the phone two hours prior to making the request and was able to communicate on the phone easily, and she made no reference to a health condition. When appellants failed to appear as scheduled, the hearing officer issued an order finding them in default. Another hearing was scheduled, this time to provide appellants an opportunity to explain why the default order should be vacated, but they failed to appear at that proceeding. On July 1, 2005, a default decision was issued, with the hearing officer finding appellants conducted business while subject to a suspension in violation of NASD rules.
Appellants appealed the NASD default decision to the National Adjudicatory Council (NAC), which upheld the NASD decision finding that Perpetual operated while suspended and that Huang had provided incomplete and untimely responses to NASD's requests for information. As a result of its decision, NAC expelled Perpetual from NASD membership and barred Huang and Xu from conducting securities business in any capacity.
Appellants appealed the NAC decision to the Securities and Exchange Commission (SEC), and the SEC sustained the NAC's findings on October 4, 2007. Appellants filed a motion for reconsideration, but the SEC denied this motion on December 13, 2007.
While the proceedings before the NAC and SEC were pending, the Bureau was conducting its own investigation. During the course of this investigation, Bureau investigators met with Huang on March 4, 2004. The investigators requested that Huang produce certain records, which Huang said she could not do because all of Perpetual's records had been destroyed when she and Xu decided to close the business.
After this interview and after gathering other information, the Bureau Chief issued a five-count administrative complaint against appellants on October 14, 2004. Count I alleged "Perpetual was the subject of an order of a self-regulatory organization suspending it from a national securities association[,]" N.J.S.A. 49:3-58(a)(1), (2)(vi). Count II alleged Perpetual "continued to engage in the sale of securities while" under suspension by the NASD, and from November 25, 2002 until May 16, 2003, Perpetual engaged in over 600 transactions and received commissions, in violation of the NASD suspension order, N.J.S.A. 49:3-56, -58(a)(1) and -58(a)(2)(ii); N.J.S.A. 49:3-70.1. Count III alleged "Huang and Xu, as senior executives and control persons of Perpetual, failed to maintain books and records for three years[,] in violation of [New Jersey] securities law[s]," N.J.S.A. 49:3-58(a)(1) and -58(a) (2)(ii); N.J.S.A. 49:3-59(b); N.J.S.A. 49:3-70.1. Count IV alleged "Huang made false and misleading statements to Bureau staff in connection with an investigation," N.J.S.A. 49:3-54, -58(a)(1) and -58(a)(2)(ii); N.J.S.A. 49:3-70.1 Count V alleged "Perpetual and Huang made false and misleading statements in a document filed with the Bureau[,]" N.J.S.A. 49:3-54, -58(a)(1) and -58(a)(2)(ii); N.J.S.A. 49:3-70.1. The Bureau withdrew Counts IV and V before any motions were filed or hearings occurred.
Appellants filed a response to the complaint and the matter was transferred to the Office of Administrative Law as a contested case for a hearing before an Administrative Law Judge (ALJ). N.J.S.A. 52:14B-10. Prior to the hearing, the ALJ considered numerous applications, most of which were resolved by order dated December 7, 2006. On January 10, 2007, the ALJ issued an order granting partial summary decision to the Bureau, determining Perpetual was the subject of an order of a self-regulatory organization suspending it from a national securities association and defendants violated New Jersey's securities statute, N.J.S.A. 49:3-58(2)(ii). In reaching this decision, the ALJ adopted the factual findings of NASD and the NAC.
A hearing on the remaining counts in the complaint was scheduled for January 16, 2007. Defendants failed to appear at the hearing. Instead, they sent an "emergency notification" the night before, claiming they could not enter the United States from Canada because of a passport issue and also due to "cold and snow." The ALJ granted the Bureau's application for the entry of default and to move forward with the hearing. At the hearing, the ALJ heard testimony from the two former Bureau staff members who interviewed Huang. Both witnesses testified Huang told them that when she and Xu closed down Perpetual, they threw out "everything that was related to the business" and essentially gathered the records and "drove them to a dumpster and threw them out."
Notwithstanding the entry of default, appellants submitted, and the ALJ accepted, three documents as part of their post-hearing submissions: (1) a Brief Response to Default Trial Decision, dated February 13, 2007; (2) a Memorandum on Abused Default Trial, dated March 5, 2007; and (3) a Request for a Hearing on Bureau's False Statements and Perjuries, dated March 19, 2007. In each of these documents, they criticized the trial process and requested that the ALJ reopen the hearing. The ALJ denied the request.
On May 10, 2010, the ALJ issued an initial decision. He found no reason to reopen the hearing because "[t]here were no passport requirements yet in effect that would have prevented [Huang and Xu] from travel[ing] to the United States as of January 16, 2007. [Huang and Xu] were aware of the hearing date." He also found appellants continued to engage in the sale of securities while their registration was suspended by NASD, but he was not convinced, based solely upon the testimony at the hearing, that Huang and Xu disposed of all of Perpetual's records in violation of N.J.S.A. 49:3-59(b).
On June 28, 2010, the Bureau Chief issued a Final Decision and Order adopting the ALJ's initial decision with a modification concerning the unavailability of Perpetual's records. The Bureau Chief determined appellants' failure to produce records, Huang's admission "that she disposed of all the records pertaining to Perpetual Securities, Inc.," and the testimony of the Bureau staff members were sufficient to find a violation of N.J.S.A. 49:3-59(b). He assessed a penalty of $30,000 against Huang and $10,000 each against Perpetual and Xu, and he permanently revoked the registrations of Perpetual, Huang, and Xu.
Appellants filed a notice of appeal on July 29, 2010. They also filed a motion to supplement the record on February 17, 2011, but this court denied that motion on March 15, 2011.
On appeal, appellants raise the following points for our consideration:
THE FINAL DECISION WAS NOT SUPPORTED BY SUBSTANTIAL EVIDENCE.
[APPELLANTS] DID NOT ENGAGE IN ANY TRADING DURING THE SUSPENSION PERIOD. [APPELLANTS] DID NOT WITHHOLD PERPETUAL'S RECORDS FROM THE NEW JERSEY BUREAU OF SECURITIES INVESTIGATORS.
HUANG DID NOT DISPOSE OF PERPETUAL'S RECORDS AT A GARBAGE DUMP.
. . . APPELLANTS WERE NOT AFFORDED THEIR RIGHT TO DUE PROCESS.
Appellate review of administrative agency decisions is limited. Henry v. Rahway State Prison, 81 N.J. 571, 579 (1980). We will not disturb a final administrative decision unless it is shown to be arbitrary, capricious or unreasonable, or in violation of legislative policies expressed or implied in the act governing that agency. Id. at 579-80; Campbell v. Dep't of Civil Serv., 39 N.J. 556, 562 (1963). In determining whether an agency decision was arbitrary, capricious or unreasonable, the court must consider (1) whether the agency followed the legislative authority; (2) whether there is substantial evidence in the record to support such a finding; and (3) whether, in applying the law to the facts, the agency clearly erred in reaching a conclusion that could not reasonably have been made. In re Carter, 191 N.J. 474, 482-83 (2007) (quoting Mazza v. Bd. of Trs., 143 N.J. 22, 25 (1995)). As long as the agency's decision meets this criteria, it should be afforded great deference, even if the reviewing court would have reached a different result. Id. at 483. "[I]n the absence of a showing that it was arbitrary, capricious or unreasonable, or that it lacked fair support in the evidence," we will not disturb a final administrative agency decision. Id. at 482 (quoting Campbell, supra, 39 N.J. at 562). "Arbitrary and capricious action of administrative bodies means willful and unreasoning action, without consideration and in disregard of circumstances." Worthington v. Fauver, 88 N.J. 183, 204 (1982) (quoting Bayshore Sewerage Co. v. Dep't of Envtl. Prot., 122 N.J. Super. 184, 199 (Ch. Div. 1973), aff'd, 131 N.J. Super. 37 (App. Div. 1974)).
In arguing that the final decision was not supported by substantial, credible evidence in the record, appellants essentially take issue with the factual findings of the ALJ that they engaged in trading during the suspension period, withheld records from the Bureau and Huang discarded Perpetual records in the dumpster. The ALJ found, as a fact, that appellants were subject to an order from NASD, a self-regulated organization, suspending Perpetual's registration on November 25, 2002, for failure to pay an arbitration award, and that the question of their notice of the suspension was previously adjudicated. Likewise, the ALJ credited the certification from the Deputy Bureau Chief and the supporting documentation accompanying the certification evidencing in excess of 600 securities transactions involving Perpetual and its officers, Huang and Xu, during the period of the suspension. Finally, the ALJ credited the testimony of Bureau investigators that during their interview with Huang, Huang told them she disposed of all the records pertaining to Perpetual.
These findings are entitled to our deference. See Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974) ("Findings by the trial judge are considered binding on appeal when supported by adequate, substantial and credible evidence."). It is undisputed that a prior order from NASD issued following a proceeding where appellants were represented by counsel. It is also undisputed that notice of the suspension was provided to appellants in accordance with NASD Rule 9132(c), which "requires service to be made upon a person's counsel when that counsel has filed a notice of appearance." Appellants do not dispute they were thereafter afforded the opportunity to challenge notice of the suspension. The evidence before the ALJ also included a certification from the Deputy Bureau Chief and accompanying documents detailing continued securities transactions during the period of suspension. The ALJ heard testimony from witnesses to whom Huang admitted that documents requested by the Bureau, as part of its investigation, were not available because they had been destroyed. Although appellants were permitted to file post-hearing submissions, given the ALJ's findings, the submissions were obviously unpersuasive.
The evidence the ALJ considered was not rendered incompetent because it may have included hearsay documents. The evidence upon which a final administrative agency decision is reached may include hearsay evidence, provided the agency's findings are not entirely based upon hearsay evidence. Weston v. State, 60 N.J. 36, 51 (1972). Those findings must be supported by a residuum of legally competent evidence. Ibid.; In re Toth, 175 N.J. Super. 254, 262 (App. Div. 1980); N.J.A.C. 1:1-15.5.
We are satisfied the findings here, as the Bureau Chief detailed, were not based solely upon hearsay evidence. Nor was the evidence weakened because it had not been viewed under the lens of cross-examination. The mode of proof acceptable where default has been entered is at the discretion of the judge. See A.B. v. Y.Z., 184 N.J. 599, 605 (2005) (noting that in a proof hearing, "the defaulting party's participation, including the extent and manner of cross-examination, is not a matter of right but subject to judicial discretion" (citing Jugan v. Pollen, 253 N.J. Super. 123, 129-35 (App. Div. 1992), certif. denied, 138 N.J. 271 (1994))). Thus, the Bureau properly credited the ALJ's factual findings.
In addition, we find no error in the Bureau's departure from the ALJ's determination that Huang's admission that she disposed of all the records was insufficient to sustain Count III. Where the agency head departs from the recommendations of the ALJ, the Administrative Procedure Act expressly provides that in "reviewing the decision of an administrative law judge, the agency head may reject or modify findings of fact, conclusions of law or interpretations of agency policy in the decision, but shall state clearly the reason for doing so." N.J.S.A. 52:14B-10(c). The Bureau Chief complied with this requirement by specifically noting that "records required by the statute to be kept, which I find were requested before and during Huang's interview, and again later as part of the discovery in this matter, were at no time made 'accessible to the Bureau' as required by [N.J.S.A. 49:3-59(b)]." He additionally concluded:
Even if the records were not discarded in the manner described by Huang to the investigators, the statute was nevertheless violated because respondents withheld the records from the Bureau. By focusing too intently on whether or not Huang was truthful when she said the records were destroyed, the ALJ interpreted the statutory requirements too narrowly. Given Huang's statements, the ALJ's insistence that the Bureau would nevertheless need to have made additional or more formal requests for the records to establish a violation would, under the circumstances of this case, produce an absurd result. Huang was a custodian of records and compliance officer for Perpetual Securities, Inc. The Bureau was entitled to request records directly from her, and to rely upon her statement against interest that the records had been discarded. Respondent Huang had ample opportunity at various times to retract her statement and/or supply the records, but failed to do so.
Appellants finally assert they were not afforded procedural due process because they did not have the opportunity to cross-examine the Bureau's witnesses at the hearing or have any of their own witnesses testify and present their own case. They cite In re Mountain Ridge State Bank, 244 N.J. Super. 115, 117 (App. Div. 1990), where the Commissioner of Banking made both factual and legal determinations that the defendant bank failed to comply with a Cease and Desist Order, was insolvent, and was in an unsafe and unsound condition. The Federal Deposit Insurance Corporation (FDIC) then entered into an agreement to transfer the deposit liabilities and certain assets of the bank to another company. Ibid. The Commissioner and FDIC took these actions without notice to the bank and without providing the bank any opportunity to be heard. Ibid. Following appeal, we remanded the case back to the Commissioner, who was directed to refer the case to the Office of Administrative Law for a full hearing. Id. at 118. The factual record here is clearly distinguishable.
The Bureau provided appellants with a full opportunity to participate in the proceedings. Prior to the hearing, appellants filed nearly two dozen pre-hearing motions. Their request for yet another adjournment of the hearing was found to be "untimely, unsupported by sufficient documentation," and viewed by the ALJ "to be part of the continuing effort to delay the hearing of this matter." There is ample evidence in the record to support this conclusion, and we discern no basis to reach a contrary conclusion. Where a litigant unreasonably fails to take advantage of the opportunity to present evidence to be heard in a proceeding, the litigant will not be heard to complain later of a lack of due process. See Leang v. Jersey City Bd. of Educ., 198 N.J. 557, 578-79 (holding plaintiff would not be permitted to pursue her claim that she was deprived of due process where she failed to take advantage of the statutory protections afforded to her).
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