222 F.3d 994 (D.C. Cir. 2000)
Sharon M. Graham and Stephen C. Voss, Petitionersv.Securities and Exchange Commission, Respondent
No. 99-1029
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 8, 1999Decided August 18, 2000

On Petition for Review of an Order of the Securities and Exchange Commission
Ida Wurczinger Draim argued the cause and filed the  briefs for petitioners.
Susan S. McDonald, Senior Litigation Counsel, Securities  and Exchange Commission, argued the cause for respondent. With her on the brief were David M. Becker, Deputy General  Counsel, Jacob H. Stillman, Solicitor, and Robert C. Stacy, II,  Attorney.
Before:  Ginsburg, Tatel, and Garland, Circuit Judges.
Opinion for the Court filed by Circuit Judge Garland.
Garland, Circuit Judge:


1
Sharon Graham and Stephen Voss  petition for review of an order of the Securities and Exchange  Commission (SEC) sanctioning them for conduct relating to  trades executed for their customer, John Broumas.  The  Commission found that Graham, a registered representative  with Voss' brokerage firm, violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated  thereunder by aiding and abetting Broumas in the fraudulent  trading of stock.  The Commission further concluded that  Voss had failed reasonably to supervise Graham with a view  to preventing the securities violations.  Graham challenges  the Commission's findings on several grounds;  Voss' challenge depends solely upon the exoneration of Graham.  Because we conclude that the Commission's decision was reasonable and supported by substantial evidence, we deny the  petition for review and affirm the SEC's order.


2
* Voss is the owner and president of an independent discount  brokerage firm, Voss & Co., Inc. (VCI), located in Springfield,  Virginia.  Graham began working in the securities industry in  1982 and joined VCI in September of 1984.  She was a  registered representative,1 as well as VCI's cashier and back  office assistant.  She was also VCI's primary "house" broker,  handling house accounts on a non-commission basis as well as  some 250 of her own accounts for commissions.  See J.A. at  371-72.2  Graham spent the bulk of her time performing cashiering and back office duties.  In February of 1990, she  received her principal's license.3  Graham's immediate supervisor, James Pasztor, was VCI's vice-president, general manager, and SEC compliance officer.


3
One of the firm's house accounts was a joint account in the  names of John Broumas and his wife, Ruth.  Broumas' troubles began when the stock market crashed in 1987.  To cover  his losses, he borrowed heavily and by May 1989 owed  roughly $2 million in personal loans and $1 million in mortgages.  See id. at 180-85.  Unable to borrow any more from  banks, Broumas launched upon a scheme that the SEC  described as "similar to check-kiting."  Sharon M. Graham,  Release No. 34-40727, 68 S.E.C. Docket 1934, 1998 WL  823072, at *2 (Nov. 30, 1998).4


4
Broumas held a substantial number of shares in the Class  A common stock of James Madison, Ltd. (JML), a holding  company for a family of banks with which he was affiliated. Although JML stock was listed on the American Stock Exchange (AMEX), Broumas undertook a series of trades in the  over-the-counter market.  Broumas arranged wash trades  and matched orders5 of JML stock among accounts in his own  name and in the name of nominees whose accounts he controlled.  Broumas directed these trades among at least 25  different brokerage accounts he controlled at 14 different  broker-dealers.  In each case, he would instruct one broker to  buy and another to sell a specified number of shares at a  specified price, thus moving the stock from one of his (or his  controlled) accounts to another.  See J.A. at 211.  Neither  broker was told by Broumas that the other account also  belonged to or was controlled by him.


5
Broumas' stock was held in margin accounts.6  Under the  rules applicable to those accounts, Broumas could obtain the  proceeds from a sale one day after the transaction was  completed, but could wait at least five business days until the  settlement date to pay for the corresponding purchase.  See  Graham, 1998 WL 823072, at *2;  see also 12 C.F.R. § 220.4  (1989).  When the settlement date arrived, Broumas sometimes executed another set of wash trades or matched orders  to obtain the funds he needed to make the payment--as if he  were playing a fiscal version of "musical chairs."7


6
As Broumas' financial situation continued to deteriorate,  "many of the broker-dealers with which he dealt ... bec[ame]  increasingly reluctant to extend him credit."  Graham, 1998  WL 823072, at *2.  Broumas then began to effectuate wash  and matched trades through accounts in the names of relatives and business associates.  The trades in these nominee accounts were placed by Broumas or at his direction with  funds he provided and for his benefit.  Between January 1,  1989 and June 30, 1990, Broumas effectuated 203 sets of wash  and match trades in JML stock, involving a total of 420  trades.  Each trade typically involved the purchase and sale  of between 3,000 and 12,000 JML shares.  See id.


7
Seventy-six of the directed trades were conducted by VCI,  and approximately 60 of those--an average of one every  week-and-a-half--were executed by Graham.  At the beginning of 1989, Broumas' joint account at VCI held 37,500  shares of JML stock.  From January 23, 1989 through May  24, 1990, Broumas instructed VCI to exchange a total of  644,800 shares.  Although Broumas' account was a "house"  account, a rapport soon developed between Broumas and  Graham and he began to ask for her specifically.  Generally,  Broumas would give Graham a specific number of shares to  trade, a particular limit price, the name of the firm ("contrabroker") that would execute the other side of the trade, and  the name of the broker he wanted her to contact at that firm. After consulting the AMEX listing to verify that the order  price was within the listed bid and offer prices, Graham would  complete the trade.  Broumas usually asked VCI to issue a  check for the proceeds the day after the sale.  See id. at *3.


8
Graham observed that Broumas "had a peculiar way of  trading."  J.A. at 306.  Of the 100 house accounts she handled during this time, only Broumas directed trades, and only  Broumas traded in such large quantities.  See id. at 285.Because Broumas always identified the specific contact persons to call at the contra-brokers, Graham came to believe  that Broumas controlled the shares in the accounts or at least  "had connections" with them, id. at 382, although Broumas  never told her so and she "never asked him," id. at 286-87.Finally, from her work as the firm's cashier, Graham noticed  that Broumas "never seemed to ... make any money on his  trades."  Id. at 380, 383.  Eventually, Graham asked Broumas directly why he traded in such a strange manner, and  Broumas answered that "he owed bank notes or bank loans  and that for him to sell the stock was an easier way for him to get the money to pay those loans, as opposed to having to go  to other means."  Id. at 356-57;  see also id. at 308.8


9
Due to Broumas' suspicious manner of trading, Graham  undertook special precautions to protect her firm's financial  interests.  She knew that Broumas had financial problems,  that he had bounced checks, and that he often owed money on  his joint account.  See id. at 288, 317, 343.  As a consequence,  she feared that "Broumas' orders presented a financial risk to  the firm."  Graham Br. at 14 (citing J.A. at 317).  Graham  discussed Broumas' "peculiar way of trading" with her supervisor, James Pasztor, and, as a safeguard, generally sought  his prior approval for Broumas' trades--something she rarely  did with respect to her other house accounts.  J.A. at 283-85,  316-17.


10
By early 1989, Broumas was having difficulty making timely payment for trades through his VCI joint account.  Although he had five business days to pay for a purchase, both  Graham and Voss knew that VCI's clearing firm,9 U.S. Clearing Corp., had been required to obtain "quite a few" extensions of time.  Graham, 1998 WL 823072, at *4 (quoting,  without citation, J.A. at 296).  In March of 1989, the margin  supervisor for the clearing firm told Pasztor that Broumas  had received too many extensions, and that he thought Broumas might be "check kiting" through his brokerage account. Pasztor agreed.  See id. at *4 & n.17.  As a consequence, the  clearing firm imposed restrictions on Broumas' account, and  directed Pasztor to bar trading unless the account already  contained cleared funds or stock.  Pasztor informed Graham, Voss, and Broumas that the account was restricted.  See id.  at *4.


11
Thereafter, Broumas called Voss and asked to open a  second account, entitled "Les Girls," purportedly for a partnership between Broumas' wife and daughter.  Voss agreed  to permit the opening of the new account, although he never  spoke to Broumas' wife or daughter and testified that he  "suspected" Broumas would be advising on the trading.  J.A.  at 564.  Graham completed the form to open the "Les Girls"  account, although she had never spoken to Broumas' wife or  daughter either.  Graham conceded that she regarded the  account as belonging to Broumas, and that she knew he  placed all the trades.  Although she believed Broumas had  opened the Les Girls account to prevent the restricted joint  account "from being closed out or his position sold out," id. at  295-96, Graham nonetheless continued to place directed  trades for him.  Broumas directed 40 JML stock trades  through the Les Girls account;  between March 21 and August 29, 1989, all of Broumas' VCI trades in JML stock were  effected through that account.


12
In February of 1990, Broumas began directing trades in  JML stock through yet another VCI account.  These trades  were made through an already existing house account maintained by his friend and attorney, Lawton Rogers.  Broumas  called Graham to direct trades through the Rogers account; Graham would then call Rogers to confirm them.  Graham  told Pasztor about the directed trades, who in turn told Voss. Voss said he "didn't have a problem" with the trades because  Broumas and Rogers were "bosom buddies."  Id. at 429.


13
At the beginning of April 1990, a check Broumas had given  VCI to pay for the purchase of JML shares was returned for  insufficient funds.  Pasztor again restricted the joint account  and told Graham that Broumas could not trade without  cleared funds.  Initially, Voss concurred.  At the end of April,  however, Broumas invited Voss to lunch.  Following the  lunch, Voss told Pasztor that Broumas could continue to  trade.  Pasztor in turn informed Graham.  See Graham, 1998  WL 823072, at *5.


14
Eventually, Broumas became unable to satisfy his margin  calls and failed to pay for his last trade through VCI. Although the firm liquidated Broumas' account, it suffered a  loss of over $60,000.  See id.  Broumas filed for personal  bankruptcy in early 1991.  See id. at *2 n.3.


15
On September 27, 1991, the SEC filed a complaint in  district court alleging that, from January of 1989 through  July of 1990, Broumas violated the securities laws by executing wash trades in JML stock.  See SEC v. John G. Broumas, Civ.A.No. 91-2449 (D.D.C.).  Without admitting or denying the allegations, Broumas consented to the entry of a  permanent injunction against future violations.  Subsequently, Broumas pled guilty to utilizing a check-kiting scheme to  meet margin calls.  See United States v. Broumas, 69 F.3d  1178, 1179-80 (D.C. Cir. 1995).


16
On September 30, 1994, the SEC issued an administrative  complaint against Graham, Voss, and Pasztor in connection  with Broumas' trades from January 1989 through May 1990.Graham was charged with willfully aiding and abetting Broumas' violations of two sections of the Securities Exchange Act  of 1934:  section 9(a)(1), which prohibits the effectuation of  wash trades or matched orders


17
[f]or the purpose of creating a false or misleading appearance of active trading in any security registered on national securities exchange, or a false or misleading appearance with respect to the market for any such security,


18
15 U.S.C. § 78i(a)(1), and section 10(b) (and Rule 10b-5  there under), which makes it unlawful


19
[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange ... any manipulative or deceptive device or contrivance ...,


20
id. § 78j(b).  Pasztor and Voss were charged with violating section 15(b)(4)(E) for failing reasonably to supervise Graham  "with a view to preventing" the violations.  Id. § 78o(b)(4)(E).The charges against Pasztor were severed from those against  Voss and Graham.  The SEC subsequently found Pasztor liable for failure to supervise and sanctioned him with a  three-month suspension.  See James J. Pasztor, Release No.  34-42008, 70 S.E.C. Docket 1979 (Oct. 14, 1999).


21
The charges against Graham and Voss were heard before  an Administrative Law Judge (ALJ), who found Graham and  Voss liable on all charges, suspended them from association  with any broker or dealer for two and three months, respectively, and ordered Graham to cease and desist from future  violations.  See Sharon M. Graham, Release No. 34-82, 60  S.E.C. Docket 2707, 1995 WL 769011, at *28 (Dec. 28, 1995).On appeal, the SEC held that Broumas' trading did not  violate section 9(a)(1) because the specific manipulative intent  required under that section had not been established, and  hence that Graham did not aid and abet such a violation.  See  Graham, 1998 WL 823072, at *6 n.27.  However, the Commission affirmed the ALJ's holding that Broumas' wash and  matched trades violated section 10(b) and Rule 10b-5 because  they operated as a fraud upon:  a) the market for JML stock,  by creating a deceptive appearance of market activity;  and  b) the brokerage firms through which Broumas traded, which  were induced to pay him money they would not have paid had  they known the sales were not bona fide.  See id. at *5.  The  Commission further affirmed the ALJ's findings that Graham  aided and abetted Broumas, and that Voss failed reasonably  to supervise, and it upheld the two and three-month suspensions.  See id. at *7, *9, *10.  Graham and Voss petition for  review of the Commission's order.

II

22
The securities laws provide for judicial review of SEC  disciplinary proceedings in the courts of appeals.  See 15  U.S.C. § 78y(a)(1).  The Commission's findings of fact, "if  supported by substantial evidence, are conclusive."  Id.  § 78y(a)(4);  see Steadman v. SEC, 450 U.S. 91, 96 n.12  (1981).  Its other conclusions may be set aside "only if  'arbitrary, capricious, an abuse of discretion, or otherwise not  in accordance with law,' 5 U.S.C. § 706(2)(A)."  Wonsover v.  SEC, 205 F.3d 408, 412 (D.C. Cir. 2000) (internal quotation  omitted).


23
Section 10(b) of the Securities Exchange Act of 1934 makes  it unlawful to use deceptive devices in connection with the  purchase or sale of securities.  See 15 U.S.C. § 78j(b).  Rule  10b-5, promulgated pursuant to section 10(b), specifically  provides that it is unlawful for any person, in connection with  the purchase or sale of any security:


24
(a) To employ any device, scheme, or artifice to de-fraud,


25
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made ... not misleading, or


26
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.


27
17 C.F.R. § 240.10b-5.  Although variously formulated, three  principal elements are required to establish liability for aiding  and abetting a violation of section 10(b) and Rule 10b-5:  (1)  that a principal committed a primary violation;  (2) that the  aider and abettor provided substantial assistance to the primary violator;  and (3) that the aider and abettor had the  necessary "scienter"--i.e., that she rendered such assistance  knowingly or recklessly.  See SEC v. Fehn, 97 F.3d 1276,  1287-88 (9th Cir. 1996);  Bloor v. Carro, Spanbock, Londin,  Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985);  SEC v.  Falstaff Brewing Corp., 629 F.2d 62, 72 (D.C. Cir. 1980);Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir.  1980);  see also SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir.  1992).


28
Graham contests all three of these elements:  She contends  that Broumas' conduct did not constitute a violation of section  10(b) or Rule 10b-5, that she did not substantially assist such  a violation, and that she did not do so knowingly or recklessly. Graham and Voss further argue that the SEC is estopped  from sanctioning them because the SEC and National Association of Securities Dealers (NASD) observed Broumas' trading and failed to alert petitioners to it or identify it as a  securities violation.  Finally, Voss argues that because Graham is not guilty of aiding and abetting, he cannot be guilty of failing reasonably to supervise her.  We consider these  arguments below.


29
* The SEC based its conclusion that Broumas' trades constituted a fraud under section 10(b) and Rule 10b-5 on two  independent theories.  First, it concluded that the trades  constituted a fraud on the market for JML stock by creating  a deceptive appearance of market activity.  Second, it concluded that Broumas defrauded the broker-dealers through  which he traded by causing them to remit sales proceeds to  him that they would not have paid had they known the true  nature of the transactions.  Although Graham challenges the  validity of the first theory,10 we need not resolve that dispute  because Broumas' trades clearly constitute violations under  the second.


30
As the SEC explained, Broumas, unable to obtain further  loans from banks, arranged wash trades and matched orders  "for the purpose of obtaining a float in a scheme similar to  check-kiting."  Graham, 1995 WL 769011, at *4.11  Broumas' scheme caused the selling brokers to pay him immediately  the anticipated proceeds from the contrived sales, payments  they would not have made had they realized that Broumas-with his shaky financial condition--was also on the other side  of the transaction, promising to pay for the same stock within five days.  See Graham, 1998 WL 823072, at *6.12  Indeed,  not only did Broumas fail to disclose that he was on both  sides of the transaction, but he also took affirmative steps to  hide that fact--by trading through the Les Girls and Rogers  accounts--when the clearing firm restricted trading in his  own account.13


31
As we have noted, although Broumas received payment for  the sale immediately, he did not have to make payment for  the "purchase" of the same shares until five days later.  Were  he unable to make that payment--an eventuality his uncertain financial condition rendered likely and which ultimately  occurred--the selling broker (or the purchasing broker, if it  had paid over the funds to the selling broker and received the  stock) would be forced to cover the loss by selling the JML  shares.  But there was no guarantee that those shares would  cover the amount advanced to Broumas by the broker--either  because the stock was no longer worth the price Broumas  himself had offered a week earlier,14 or because it had never been worth that amount in the first place.15  Indeed, something like this happened to VCI, which suffered a $60,000 loss  when forced to liquidate Broumas' account after he failed to  pay for his last transaction.16


32
Graham contends that Broumas' scheme cannot violate  section 10(b) because fraud on a broker is not fraud "in  connection with the purchase or sale of [a] security," as  required by the statutory language.  15 U.S.C. § 78j(b).  To  constitute a violation of section 10(b), Graham maintains, "the  fraud must have been perpetrated upon an actual or potential  investor."  Graham Br. at 27.  As the brokers were never  parties to the securities transactions, but merely executed them, Graham contends that no violation of section 10(b) was  possible.


33
Graham's argument is foreclosed by the Supreme Court's  unanimous decision in United States v. Naftalin, 441 U.S. 768  (1979).  There, the Court confronted the same challenge to a  criminal conviction under section 17(a)(1) of the Securities Act  of 1933, which makes it unlawful for any person "in the offer  or sale of any securities" to employ any device, scheme, or  artifice to defraud.  15 U.S.C. § 77q(a)(1).  The defendant  had placed sell orders for stock he did not own, gambling that  he could make offsetting purchases at lower prices before he  was required to deliver the stock.  Defendant did not dispute  that he defrauded the brokers who executed the orders, but  contended, as petitioners do here, that the statute "applies  solely to frauds directed against investors, and not to those  against brokers."  Naftalin, 441 U.S. at 772.


34
The Court rejected the argument.  It held that the statutory phrase, "in the offer or sale of any securities," was  intended to be "define[d] broadly," and is "expansive enough  to encompass the entire selling process, including the seller/agent transaction."  Id. at 773.  The "language does not  require," the Court said, "that the fraud occur in any particular phase of the selling transaction," or "that injury occur to a  purchaser."17  Id.


35
Turning to the statutory purpose, Naftalin emphasized that  "neither this Court nor Congress has ever suggested that  investor protection was the sole purpose of the Securities  Act."  Id. at 775.  Although "[p]revention of frauds against  investors was surely a key part ... so was the effort to  achieve a high standard of business ethics ... in every facet  of the securities industry."  Id. (internal quotation omitted) (second alteration in original);  see United States v. O'Hagan,  521 U.S. 642, 658-59 (1997) (reaching same conclusion regarding § 10(b) of the Securities Exchange Act).  Moreover, the  Court continued, "the welfare of investors and financial intermediaries are inextricably linked--frauds perpetrated upon  either business or investors can redound to the detriment of  the other and to the economy as a whole."  Naftalin, 441 U.S.  at 776.


36
Although Naftalin involved section 17(a)(1) of the Securities Act, rather than section 10(b) of the Securities Exchange  Act, the relevant language is virtually identical.  Compare 15  U.S.C. § 77q(a)(1) ("in the offer or sale of any securities"),  with id. § 78j(b) ("in connection with the purchase or sale of  any security").  Indeed, the Court recognized an argument  that section 17(a)(1) might be narrower than section 10(b),  but held that "even if 'in' were meant to connote a narrower  group of transactions than 'in connection with,' " it would still  cover fraud against brokers.  Naftalin, 441 U.S. at 773 n.4.Naftalin's application to the broader wording of section 10(b)  is, therefore, a fortiori.  This point is further confirmed by  the Supreme Court's subsequent description of Naftalin as  having "appl[ied] § 17(a) of the 1933 Act to conductalso  prohibited by § 10(b) of the 1934 Act," Herman & MacLean  v. Huddleston, 459 U.S. 375, 383 (1983), and by its recent  affirmation that section 10(b) "does not confine its coverage to  deception of a purchaser or seller of securities," O'Hagan, 521  U.S. at 651.  See also SEC v. Jakubowski, 150 F.3d 675, 680  (7th Cir. 1998) (noting that Naftalin was "a case under § 17  of the 1933 Act, which requires proof that the fraud occurred  'in' an offer or sales of securities--a tighter link, one might  suppose, than 'in connection with' ") (citation omitted);  A. T.  Brod & Co. v. Perlow, 375 F.2d 393, 396-97 (2d Cir. 1967)  (holding that § 10(b) and Rule 10b-5 apply to frauds against  brokers).


37
Graham also contends that there cannot have been an  actionable fraud in this case because the SEC charged owners  and brokers at the contra-firms with securities violations like  those of petitioners.  "Clearly," Graham declares, "Broumas'  alleged aiders and abettors cannot also be his defrauded


38
victims."  Graham Br. at 26.  This argument, too, is of no  avail.


39
First, even assuming that such a defense were valid, the  SEC did not charge all of the contra-brokers with securities  violations.18  Second, this purported defense has no application to the clearing firms--none of which played any role in  Broumas' scheme and one of which expressly tried to restrict  it.  Broumas, assisted by Graham and Voss, established and  traded through the Les Girls and Rogers accounts specifically  to avoid those restrictions, thus deceiving the clearing firm  into making the advances necessary to execute his transactions.  See Graham, 1998 WL 823072, at *3-*4;  Richard D.  Chema, Release No. 34-40719, 68 S.E.C. Docket 1911, 1998  WL 820658, at *3 (Nov. 30, 1998) (concluding that Broumas  also defrauded another broker-dealer's clearing firm into  advancing funds);  see also United States v. Russo, 74 F.3d  1383, 1388, 1390 (2d Cir. 1996) (upholding conviction under  § 10(b) where scheme involved generating false cash credits  from clearing broker).19


40
Finally, whatever the involvement of the brokers or owners, fraud on their corporate institutions is an independent  matter.20  As the Supreme Court recognized in Naftalin, fraud on brokerage firms affects more than the health of  those firms alone.  See Naftalin, 441 U.S. at 776.  When the  music stops, the firm left without a chair (payment or collateral) does not simply leave the game.  "Losses suffered by  brokers," whether or not covered by insurance, "increase  their cost of doing business, and in the long run investors pay  at least part of this cost through higher brokerage fees."  Id.  Equally important, fraud against brokers may "create a level  of market uncertainty that could only work to the detriment  of both investors and the market as a whole."  Id.  Accordingly, we have no warrant for overturning the SEC's determination that Broumas violated section 10(b) and Rule 10b-5.

B

41
Having concluded that Broumas' stock-kiting scheme constituted a primary violation of the securities laws, the next  question is whether Graham substantially assisted Broumas  in that violation.  We have no doubt that she did.  Graham  placed 60 directed trades for Broumas, an average of one  every week-and-a-half during the 18-month period at issue. She opened the Les Girls account and executed wash trades  from both that account and from the account of Lawton  Rogers.  Such conduct is more than sufficient to constitute  substantial assistance.  See SEC v. U.S. Envtl., Inc., 155 F.3d  107, 112 (2d Cir. 1998) (holding trader who recklessly executed manipulative buy and sell orders for customer liable as  primary violator). Graham contends that this conclusion is inconsistent with  our decision in Zoelsch v. Arthur Andersen & Co., 824 F.2d 27  (D.C. Cir. 1987).  She describes Zoelsch as a case in which we  dismissed an aiding and abetting claim against an accounting  firm, "which had issued an audit report with respect to  corporate financial statements" but had "played no role in the  use of certain figures from those statements in a prospectus and no role in the publication of any misleading financial  statements."  Graham Br. at 31.  In fact, the accounting  firm's relationship to the misleading financial statements was  even further removed than Graham describes,21 but the distance reflected in her description suffices to distinguish that  case from this one:  unlike the accounting firm in Zoelsch,  Graham did play a role--and a substantial one--in Broumas'  deceptive trades.


42
Graham further contends that she may not be regarded as  substantially assisting Broumas since the execution of his  trades was merely a "ministerial" act on her part.  She had  "no discretion" with respect to the handling of Broumas'  accounts, she asserts, because "once Mr. Pasztor approved a  trade, [she] could not refuse to execute it."  Id. at 14.  But  Graham did have discretion.  A registered representative can  always refuse to execute a trade she knows may constitute a  securities violation.  Cf. U.S. Envtl., 155 F.3d at 112 ("Like  lawyers, accountants, and banks who engage in fraudulent or  deceptive practices at their clients' direction, [the defendant  broker] is a primary violator despite the fact that someone  else directed the market manipulation scheme.").  Of course,  doing so might have made Graham's career at VCI more  difficult, but fear of such consequences does not excuse a  violation of the securities laws.

C

43
The real question here concerns the third element of aiding  and abetting liability:  did Graham assist Broumas with the  requisite scienter?  We have held that knowledge or recklessness is sufficient to satisfy that requirement.  See Kowal v.  MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir.  1994);  SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992);Zoelsch, 824 F.2d at 36;  Dirks v. SEC, 681 F.2d 824, 844-45  (D.C. Cir. 1982), rev'd on other grounds, 463 U.S. 646 (1983).  We are satisfied that Graham acted with at least extreme  recklessness in aiding Broumas' stock-kiting scheme.


44
The SEC did not hold Graham reckless merely for executing stock trades.  Rather, during the course of executing  some 60 trades, Graham noticed numerous suspicious circumstances.  She observed that Broumas invariably specified the  contra-broker for his trades, rather than using American  Securities, the firm VCI typically contacted for over-the counter trades in exchange-listed securities.  Out of the more  than 300 accounts with which Graham worked, only Broumas  specified the contra-broker with whom to execute the trade,  and only Broumas traded in such large volumes.  He also  detailed every aspectof the trade, including the specific  employee at the contra-broker with whom he wanted Graham  to speak.  Cf. United States v. Corr, 543 F.2d 1042, 1046 (2d  Cir. 1976) (recognizing directed trades as evidence of manipulation).  Graham testified that, as a result, she assumed  Broumas controlled the shares in the accounts or at least  "had connections" with them.


45
Perhaps most important, Graham recognized, and discussed  with Pasztor, the fact that Broumas had "a peculiar way of  trading."  J.A. at 306.  Although these were "big money  trades" involving thousands of shares, and although he was  repeatedly buying and selling and paying commissions on the  transactions, Graham realized that Broumas was not making  any money on the trades.  See id. at 380.  This economically  irrational trading was a large red flag.  See Edward J.  Mawod & Co. v. SEC, 592 F.2d 588, 595 (10th Cir. 1979)  (holding that broker willfully aided and abetted manipulative  wash and match trades scheme when he "knew or had reason  to know that such trading was economically irrational").


46
At the same time that she was noting these trading peculiarities, Graham also knew that Broumas was experiencing  financial difficulties.  She learned that he was buying and  selling JML stock as a method of borrowing money he needed  to repay bank loans.  She knew that he was having trouble  paying for his trades on time, had received "quite a few" extensions on his joint account, and had bounced checks. J.A. at 288, 296, 343.  She knew that VCI's clearing firm had  imposed restrictions on his joint account.  And she knew that,  with her help, Broumas was circumventing those restrictions  by trading in accounts nominally owned by others.  Moreover, when it came to her own firm's financial interests,  Graham took special precautions to protect against financial  loss, seeking Pasztor's authorization on almost every trade  because "I couldn't take a chance of writing an order when  the man would owe thousands of dollars in his account."  Id.  at 317.  All of this provides more than the "substantial  evidence" necessary to support the SEC's finding of scienter  on the part of Graham.


47
In her defense, Graham notes that she "stood to gain  absolutely nothing from Broumas' scheme," since Broumas  traded through a "house account" for which she did not  receive commissions.  Graham Br. at 27.  It is true that lack  of opportunity for personal gain may suggest lack of motive,  which may in turn be relevant to the question of scienter.But the absence of commissions does not necessarily negate  either motive or scienter.  Graham may have gone along with  Broumas' scheme (or hidden her head in the sand) to please  her bosses or to keep her job.  Or she may have done so  merely because she was reckless, regardless of any motive to  gain money or favor.  Either way, the absence of commissions does not absolve her of responsibility.  See U.S. Envtl.,  155 F.3d at 112 ("[A]s long as [broker], with scienter, effected  the manipulative buy and sell orders, [his] personal motivation for manipulating the market is irrelevant in determining  whether he violated § 10(b).").


48
Graham also points to the fact that she sought and obtained  approval for Broumas' trades from her immediate supervisor,  James Pasztor, who told her they were "fine."  She "left it up  to my supervisor," she states, to "say that this was not  allowed."  J.A. at 338.  And she argues that this reliance  negates the scienter necessary for an aiding and abetting  violation.  In support, Graham cites James L. Owsley, a case  in which the Commission excused the conduct of a broker  who, prior to selling his own stock in a company, was told by a firm official with whom he consulted that it was not  necessary to disclose those sales to customers he was asking  to purchase the same stock at the same time.  See 51 S.E.C.  524, 528 (1993).


49
The SEC rejected Graham's reliance defense, noting that  she is an experienced professional who has an independent  duty to use diligence "where there are any unusual factors."Graham, 1998 WL 823072, at *6-*7 & n.30 (quoting Alessandrini & Co., Inc., 45 S.E.C. 399, 406 (1973)).  Registered  representatives are "under a duty to investigate," Hanly v.  SEC, 415 F.2d 589, 595 (2d Cir. 1969) (internal quotation  omitted), and "red flags and suggestions of irregularities  demand inquiry as well as adequate follow-up and review,"  Frederick H. Joseph, 51 S.E.C. 431, 438 (1993).  See Wonsover, 205 F.3d at 411.  Given the abundance of red flags here,  it would be very hard to characterize Graham's conduct as  anything but extremely reckless, regardless of the approvals  she received from Pasztor.


50
The Commission distinguished the Owsley decision on the  ground that, "[a]mong other things, ... [it] involved a single,  discrete inquiry and limited transactions."  Graham, 1998  WL 823072, at *7 n.34.  Nor did Owsley mention the presence of any suspicious circumstances or red flags.  By contrast, this case involved 60 transactions over 18 months, with  Graham's involvement becoming increasingly more significant  (e.g., through the establishment of the Les Girls account and  the use of the Rogers account) at the same time that the  warning signs were becoming increasingly more prominent.


51
Graham's reliance on Pasztor, a VCI employee, also differs  substantially from the reliance at issue in SEC v. Steadman,  where we held that directors of a mutual fund company had  not been reckless in relying on a "formal, unqualified opinion  letter" from their outside counsel--an opinion also relied  upon by the funds' "disinterested independent auditor," a  major national accounting firm.  967 F.2d at 642.  There  were no red flags in evidence in Steadman, nor were there  suspicious events creating reasons for doubt.  Indeed, there  was no evidence at all that the directors were on notice of the violation at issue, which arose from a failure to register the  funds' securities under state Blue Sky laws, other than the  SEC's view that "[s]ophisticated professionals like Steadman  might be assumed to have come across [such] information ...  at some point during" their careers.  Id.


52
Graham, by contrast, was not simply a professional who  should have known better.  She was a professional who was  aware of her customer's financial difficulties, aware that he  was trading in a suspicious and economically irrational manner, and aware that he was trying to circumvent restrictions  that had been placed on his account--yet she assisted him  nonetheless.  Cf. Wonsover, 205 F.3d at 411, 415 (holding, in  light of "several 'red flags,' " that broker's reliance on approval of firm and its lawyers did not negate finding that he acted  willfully).  Accordingly, we reject Graham's reliance defense  and affirm the SEC's determination that she recklessly, and  substantially, assisted Broumas in violating the securities  laws.22

D

53
Finally, Graham and Voss argue that the SEC is barred by  principles of "equitable estoppel" and "administrative interpretation" from sanctioning them.  They note that, "[f]rom  late 1988 through mid-1989, the NASD had several occasions  to review Broumas' directed trading in JML shares."  Graham Br. at 33.  The NASD concluded, petitioners assert,  "that so long as Broumas' trades were not reported to the  consolidated transaction reporting system of the exchanges, they were not manipulative."  Id.23  They also claim that  "[t]he NASD sought the SEC's view with respectto this  administrative interpretation and the SEC concurred."  Id. And they further contend that during 1988 and 1989, the SEC  conducted its own examination of Broumas' trading, and "did  not perceive" securities violations.  Id. at 34.


54
At the start, it is important to describe accurately what  transpired during the examinations in question.  First, the  NASD did not give Broumas' trades anything like a clean bill  of health, and certainly did not do so in the form of an  "administrative interpretation."  An examiner simply concluded, in an internal review, that because Broumas' trades  were not being included in the consolidated transaction reporting system, see supra note 23, they did not violate an  NASD rule that proscribes wash trades undertaken for the  purpose of creating the false appearance of market activity,  see NASD Manual, Sched. G, S (b) (1989).  The examiner  was nonetheless troubled by the trades "because they didn't  smell right.  There was something fishy about these trades  being prearranged, directed trades...."  J.A. at 610;  see  also id. at 616-17.  The NASD referred the matter of Broumas' trading to the SEC for further investigation.  See id. at  608, 618, 804.


55
The SEC's role was even less formalized, and is of even  less comfort to petitioners.  The support petitioners cite for  the proposition that "[t]he NASD sought the SEC's view with  respect to this administrative interpretation and the SEC  concurred" is no more than the NASD examiner's testimony  that he spoke to someone at the SEC--whose name and title  he could not recall--who "basically agreed" with his evaluation.  Id. at 610, 611.  The support for petitioners' contention  that the SEC "did not perceive" securities violations in reviewing Broumas' trading is the testimony of an SEC examiner, who said that after reviewing the NASD examination, he  decided that "no conclusion could be reached as to whether  any violative activities have occurred."  Id. at 802.  The SEC  examiner therefore recommended that a "further review of  Mr. Broumas's activities should be conducted in order to  determine if insider trading or a check kiting scheme was  being perpetrated."  Id. at 803;  see also id. at 659.  Further  review by the SEC eventually did result in the complaints at  issue here.


56
Even in circumstances where the doctrine of estoppel is  applicable,24 the following elements, at least, must be established:  that there was a "definite" representation to the party  claiming estoppel;  that the latter "relied on its adversary's  conduct in such a manner as to change his position for the  worse";  and that the reliance was "reasonable."  Heckler v.  Community Health Servs., 467 U.S. 51, 59 (1984) (internal  quotations and footnote omitted).  Here, neither the NASD  nor the SEC made any representations at all to Graham or  Voss, and petitioners do not assert that they acted in reliance  on any such representations.  Nor did either entity issue any  kind of opinion or "administrative interpretation" that might  have bound it, even as a matter of precedent, in a future  adjudication.25


57
Instead, what we have in this case is nothing more than a  series of investigations into Broumas' trades, which ultimately  provided the SEC with sufficient understanding of the underlying scheme to file the complaint now before us.  Neither  Broumas nor the petitioners can be said to have been cleared  along the way.  And the SEC's failure to prosecute at an  earlier stage does not estop the agency from proceeding once  it finally accumulated sufficient evidence to do so.26

III

58
We conclude that substantial evidence supports the SEC's determination that Graham aided and abetted Broumas' violations of section 10(b) and Rule 10b=5. because Voss' defense rested solely upon the exoneation of Graham, we also uphold the SEC's determination that he failed reasonably to supervise her.  The other of the SEC is

Affirmed


Notes:


1
 A representative is a person associated with a National Association of Securities Dealers (NASD) member firm who is engaged in  supervision, solicitation, or conduct of securities business.  The  NASD requires that representatives of member firms register with  the Association and pass a qualifying exam.  See 6 Louis Loss &  Joel Seligman, Securities Regulation 2809-11 & n.42 (3d ed. 1990).


2
 At VCI, house accounts were not assigned to any particular  broker.  Commissions on trades in these accounts were paid to the  firm rather than to the brokers executing the trades.


3
 A principal is a person who is "actively engaged in the  management of the [NASD] member's ... securities business."Markowski v. SEC, 34 F.3d 99, 101 n.1 (2d Cir. 1994) (internal  quotation omitted).  An additional examination is required to become registered as a principal.  See 6 Loss & Seligman, supra, at  2810-11 n.42.


4
 For a description of the mechanics of a check-kiting scheme,  see Williams v. United States, 358 U.S. 279, 281 n.1 (1982).


5
 "Wash trades," also called "wash sales," are "transactions  involving no change in beneficial ownership."  Ernst & Ernst v.  Hochfelder, 425 U.S. 185, 205 n.25 (1976).  "Matched orders" are  "orders for the purchase/sale of a security that are entered with the  knowledge that orders of substantially the same size, at substantially the same time and price, have been or will be entered by the  same or different persons for the sale/purchase of such security."Id.;  see Michael Batterman, 46 S.E.C. 304, 305 (1976).


6
 In a margin account:
the broker lends the customer money to allow him to purchase securities.  The customer advances only a portion of the purchase price and pays interest on the balance.  The broker maintains the securities purchased as collateral.  If the value of the securities declines, the broker may seek more collateral for the protection of his "loan.
"Liang v. Dean Witter & Co., 540 F.2d 1107, 1109 n.2 (D.C. Cir.  1976).


7
 Broumas testified that the proceeds available to him during  the settlement period allowed him to "take care of my bank notes or  whatever was pressing me that day and then worry about how I  was going to handle the purchase price and the amount of the  purchase price a week later."  J.A. at 209.


8
 At trial, Broumas claimed that he sold the shares to himself,  rather than to a buyer on the open market, because he "wanted to  maintain [his] position [in JML] at that price."  J.A. at 212.


9
 A clearing broker performs "back office services such as  clearing stock, handling customer funds, holding customer securities, dealing with transfer agents, and matching of trades with the  exchanges and market makers" for firms that do not have the  capacity to perform these functions.  SEC Br. at 18 n.17;  see, e.g.,  United States v. Russo, 74 F.3d 1383, 1386 (2d Cir. 1996).


10
 Graham disputes that Broumas' trades constituted a fraud on  the market.  She argues, inter alia, that Broumas' trades were not  material because they constituted a small percentage of the total  volume of outstanding JML shares.  The SEC counters that the  trades nonetheless made up a substantial proportion of the daily  volume of trades on the days they were reported.


11
 Broumas acknowledged that he began wash trading because  he "didn't have the credit" to meet his existing obligations, J.A. at  174, and couldn't borrow money from a bank because he had  "reached [his] limit," id. at 213.  He also testified that on many  occasions he sold JML stock to himself in order to meet margin  calls.  See id. at 205.


12
 See SEC v. Drysdale Sec. Corp., 785 F.2d 38, 42 (2d Cir. 1986)  (finding § 10(b) violation where, in order to honor its obligation to  resell securities on settlement date of reverse "repo," defendant  "had to purchase identical securities, something which its insolvency  may have rendered impossible");  see also A. T. Brod & Co. v.  Perlow, 375 F.2d 393, 397 (2d Cir. 1967) (upholding claim for fraud  against broker under § 10(b) where investors placed purchase order  with fraudulent intent to pay for securities only if their market  value increased by settlement date, and further noting that scheme  effectively resulted in "an involuntary extension of credit without  compliance with the margin requirements").


13
 Broumas testified that he began asking Rogers to allow him  to direct trades through his account "[b]ecause I didn't have the  credit and my margin calls wouldn't permit me to trade with those  other brokers of mine."  J.A. at 174;  cf. United States v. Say an,  968 F.2d 55, 61 (D.C. Cir. 1992) (affirming conviction for check kiting and noting that "creating fictitious payees and forging endorsements" constituted a material part of the fraud, because "[i]f  [the defendant] had merely made the drafts payable to herself, the  bank would not have granted her immediate credit").


14
 The price of JML Class A stock began to decline in February  of 1990.  See Graham, 1995 WL 769011, at *2.  On February 2, 1990, it closed at $6 per share.  On May 24, 1990, it closed at $4 5/8.See J.A. at 754-55.  Broumas testified that around this time the  "stock dropped dramatically and I had to sell a lot of things.  I was  finding it difficult to meet those interest payments and those loan  payments."  Id. at 188.


15
 We note that unlike a plaintiff in a private damages action,  the SEC need not prove actual harm.  See Schellenbach v. SEC, 989  F.3d 907, 913 (7th Cir. 1993);  SEC v. Blavin, 760 F.2d 706, 711 (6th  Cir. 1985).


16
 In her reply brief, Graham contends that Broumas did not  defraud the brokers into paying him the proceeds of the JML sales  because he was "entitled" to the money.  Graham Reply Br. at 8.Graham claims that the funds Broumas received from the "sell side"  of the transaction were the sale proceeds of his own stock, and  therefore his own money.  The selling broker, however, did not pay  Broumas out of the actual proceeds of the sale, but rather out of  "proceeds" it anticipated would be paid five days later.  Unbeknownst to the broker, that payment would have to come from  Broumas himself, and, if Broumas were unable to pay, the selling  broker's recourse was against the JML stock--which may well have  been insufficient to cover what the broker had paid out.  Of course,  if the transaction is viewed from the "buy side," there is even less  justification for regarding the money as Broumas' own, as the  purchasing broker extended Broumas credit on margin to purchase  the stock from the contra-broker.


17
 The Court noted that the case would be different if it had  been brought by private plaintiffs, because the class of plaintiffs  who may bring private actions under Rule 10b-5 is limited to  purchasers or sellers.  See Naftalin, 441 U.S. at 774 n.6;  see also  United States v. O'Hagan, 521 U.S. 642, 664-65 (1997);  Blue Chip  Stamps v. Manor Drug Stores, 421 U.S. 723, 751 n.14 (1975);  SEC  v. National Sec., Inc., 393 U.S. 453, 467 n.9 (1969).


18
 Broumas' wash trades involved a total of 14 different broker dealers.  The VCI trades involved eight different firms, while the  SEC instituted administrative proceedings against four.  See Graham, 1998 WL 823072, at *3 n.14.


19
 Like the other brokers, the clearing firm was exposed to the  risk that funds it advanced might not have been repaid at the time  Broumas became insolvent.  Although the clearing broker might be  able to recover against the introducing firm in the event of nonpayment, it would incur transaction costs in so doing--and there was  always the risk that Broumas' scheme would bankrupt one of the  broker-dealers involved.  See Richard D. Chema, 1998 WL 820658,  at *4-*5.


20
 Cf. Superintendent of Ins. v. Bankers Life & Cas. Co., 404  U.S. 6, 12 (1971) (holding that § 10(b) applies to fraud on corporation by controlling stockholder, and that "the fact that creditors of  the defrauded" corporation "may be the ultimate victims does not warrant disregard of the corporate entity") (footnote omitted);United States v. Saks, 964 F.2d 1514, 1518-19 (5th Cir. 1992)  (affirming finding of intent to defraud banking institution, notwithstanding bank officers' collusion with customer).


21
 The defendant accounting firm had not issued the audit  report, but rather had provided information to another accounting  firm that had prepared the report.  See Zoelsch, 324 F.2d at 34;  see  also id. at 28-29, 35-36.


22
 Commissioner Johnson dissented from the finding of liability  against Graham, solely on the ground that her reliance on the  advice of Pasztor and Voss was reasonable. See Graham, 1998 WL  823072, at *11-*12 (Johnson, Comm'r, dissenting).  Even he, however, found the case an "exceedingly close call[ ]," which "necessarily depend[ed] on the facts and circumstances."  Id.  While each  SEC Commissioner may make his or her own factual determinations de novo, our standard of review requires deference to the  determinations of the Commission where they are supported by  substantial evidence.


23
 NASD rules require that most transactions in stocks listed on  the AMEX be reported on the "Consolidated Tape," NASD Manual,  Sched. G, SS d), 2 (1989), which is the "consolidated transaction  reporting system for the dissemination of last sale reports in [such]  securities," id. S (b).  Broumas' trades often were not reported.


24
 See Heckler v. Community Health Servs., 467 U.S. 51, 60  (1984) ("[I]t is well settled that the Government may not be  estopped on the same terms as any other litigant.");  see also Office  of Personnel Management v. Richmond, 496 U.S. 414, 419, 421-22  (1990).


25
 Of course, even if the NASD had done something to bind  itself, that would not have bound the SEC.  As a private, nonprofit  corporation, the NASD conducts its own independent investigatory  and disciplinary actions, and is subject to limited review by the  SEC.  See 15 U.S.C. § 78s;  6 Loss & Seligman, supra, at 2819-30.There is "no statutory, regulatory, or historical reference to support  [an] argument that NASD discipline of its members was intended to  preclude ... disciplinary action by the SEC itself against a securities professional."  Jones v. SEC, 115 F.3d 1173, 1179 (4th Cir.  1997).


26
 See Investors Research, 628 F.2d at 174 & n.37 (rejecting  estoppel argument where there was "no evidence the Commission  learned all the facts of the violation" at early meetings with  petitioners);  Capital Funds, Inc. v. SEC, 348 F.2d 582, 588 (8th Cir. 1965) (rejecting argument that the SEC was estopped because it previously investigated but took no action); SEC v. Culpepper, 270 F.2d 241, 248 (2d Cir. 1959) (finding that routine examination provided "no fact-basis for an estoppel" because "neither the commission nor its staff directly or indirectly caused the defendants to understand that it concurred in the legality of the [subject] sales"); G.K. Scott & Co., 51 S.E.C 961, 966 n. 21 (1994) ("A regulatory authority's failure to take early action
neither operates as an estoppel against later action nor cures a violation.") (internal quotation omitted), review denied, 312 U.S. App. D.C. 461, 56 F.3d 1531 (D.C. Cir. 1995) (table decision); cf. 15 U.S.C.  78z ("No action or failure to act by the Commission ... in the administration of this chapter shall be construed to mean that the particular authority has in any way passed upon the merits of, or given approval to, any security or any transaction or transactions therein....").
In Klein v. SEC, 224 F.2d 861 (2d Cir. 1955), cited by petitioners, the Second Circuit held that after an NASD committee had examined a broker's 50 markup and found no violation, it could not sanction him for charging the same markup two years later because the prior review "justified [the broker] in believing that a 50 markup did not violate the Rules." Id. at 864. The court regarded the NASD's earlier determination as "an interpretation of the Rules on which [the broker] reasonably relied." Id. Klein is of no assistance to petitioners, however, as they make no claim of reliance on the SEC's initial investigation. In any event, the Second Circuit subsequently appeared to limit Klein to actions of the NASD, holding that because the SEC enforces an "Act of Congress," it could not "be estopped even if it had acquiesced in" a transaction similar to the one it was now sanctioning. Culpepper, 270 F.2d at 248.


