On November 6, 2002, three employees of the Texas State Securities Board issued an Emergency Cease and Desist Order against me without notice, without a hearing, and — as their own sworn testimony would later confirm — without completing their investigation.
The order was published worldwide within hours: posted to the TSSB's website, distributed to hundreds of recipients on their mailing list, and entered into the NASD's Central Registration Depository — the national database consulted by every broker-dealer and member of the public when vetting a securities professional. Within hours of publication, TD Waterhouse and Fidelity Investments terminated their relationships with me, revoked my trading authority over millions of dollars of client assets, and sent letters to all of my clients. Every client was shocked and upset. A 16-year record with no disciplinary actions and no customer complaints — gone.
The order declared me guilty of fraud and actions threatening "irreparable harm to the public." I had not been interviewed. My clients had not been interviewed. The project sponsor had not been interviewed. No background check had been run, or if it had, a 16-year clean record was simply ignored.
I was not notified before the order was issued. I was not given the chance to respond. The defendants timed the issuance to occur the day after my securities registration with my broker-dealer lapsed — a deliberate choice, because had my registration been active, a hearing would have been legally required before the order could take effect. They knew exactly what they were doing.
When I requested a hearing to contest the order, the staff attorney — Joseph Jason Rotunda — engaged in what I can only describe as a sustained campaign of intimidation. He told me the agency had never lost a hearing on an emergency order. That a final order could be years in the making. That one in four emergency orders resulted in a hearing. Most of these statements were false. His goal was to pressure me — an unrepresented layperson — into waiving my right to a hearing. It worked. I signed a consent order I did not fully understand, drafted by the very person who had already decided I was guilty.
It would later emerge, through discovery, that during the months between the emergency order and the consent agreement, Rotunda had come into possession of information favorable to me — and chose not to disclose it to his superiors. Deputy Commissioner Morgan, who approved the original order, admitted under oath that he had given "little consideration" to the harm it would cause, was unaware I had a securities license, and stated that the "Agency doesn't spend much time" considering the possible harm from issuing an emergency order.
On November 22, 2004, I filed a federal civil rights action under 42 U.S.C. §1983 against Rotunda, Grauer, and Morgan in their individual capacities. The complaint is reproduced in full below. The TSSB's repeated subsequent notifications to the SEC are the direct cause of the enforcement action that consumed the next two decades of my life.
The First Amended Complaint is reproduced below in full. Filed pro se, November 22, 2004.
1. Plaintiff is an individual who resides in Travis County, Texas.
2. Defendants are: David Andrew Grauer who may be served at 2002 Barton Parkway, Austin TX 78704 or 208 East 10th Street, 5th Floor, Austin TX; Joseph Jason Rotunda who may be served at 6602 Colina Ln. or 509 W 11th St. Austin TX; John Robert Morgan who may be served at 2802 Quanah, Round Rock TX, or 208 East 10th Street, 5th Floor, Austin TX; and John Does 1-5 currently unknown (whose identity will be revealed through discovery in the possession of Defendants), collectively referred to as "Defendants."
3. Plaintiff is a citizen of the State of Texas and the defendants are citizens of the State of Texas. Jurisdiction is founded on the existence of a Federal question. The action arises under the 14th Amendment of the Constitution of the United States, and Title 42 Section §1983 of the U.S. Code, and Title 28 §1331 (district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States). Venue is proper in the U.S. District Court for the Western District of Texas Austin Division, as all of the events giving rise to Plaintiff's claim occurred in Travis County.
4. This action is brought under 42 U.S.C. §§1983 and 1985(3) and 28 U.S.C. §2201. This is an action for money damages and injunctive relief brought on behalf of Plaintiff David Disraeli, who was severely damaged by the actions of defendants acting under color of the laws of the State of Texas through negligence, gross negligence, conspiracy, refusing or neglecting to prevent malicious prosecution and malicious abuse of process, malicious prosecution, intentionally and deliberately inflicting emotional distress, tortious interference with business contracts, tortious interference with business potential, business disparagement, abuse of discretion, abuse of office, violation of trademark, violation of trade dress, and obstruction of justice. Plaintiff's right to work in the profession for which he is trained was summarily and immediately blocked, enjoined, and otherwise interfered with by action of the Defendants and his professional reputation was irreparably damaged. This action by Defendants is in violation of the due process rights Plaintiff is guaranteed under the United States and Texas Constitutions and in contravention of his Constitutional right of the presumption of innocence, as codified in the 14th Amendment of the United States.
5. Defendants violated Plaintiff's due process rights when they conspired to issue and then did issue an Ex Parte Cease and Desist Order against Plaintiff, without notice or hearing, investigation or due diligence. The action of Defendants was brought in bad faith and for the purposes of harassing the Plaintiff. Even if the court were to find that Defendants' actions, collectively or individually, were within the scope of their official duties, Plaintiff will show that Defendants' actions caused them to forfeit their qualified and absolute immunities. The defendants, each of them licensed attorneys, knew or should have known that the issuance of the Order, the wording of the Order, and publishing it worldwide would prevent registration with the Securities Board and effectively bar Plaintiff from employment in the securities industry without a hearing, and would permanently damage his reputation, prior to notice and hearing. Plaintiff's interest in his securities license and professional reputation is a protected property right under the 14th Amendment. See Barry v. Barchi and Gibson et al. v. Berryhill et al.
6. On or about November 6, 2002, John Robert Morgan, then the Deputy Commissioner of the State Board of Securities of Texas (hereafter "The Agency"), entered an Emergency Cease and Desist Order against Plaintiff without notice or hearing. The order was a definitive finding of guilt of Plaintiff of fraud and actions threatening "irreparable harm to the public" involving the offer of sale of interests in a real estate development called "Charterhouse at Horseshoe Bay." The conclusions of law enunciated in the Order were not based on existing law or precedent, but legal fiction.
7. The aforesaid order was immediately published throughout the world via the State Securities Board's website, sent to hundreds of recipients on the board's mailing list, and a summarized version was entered into the Central Registration Database (CRD) operated by the National Association of Securities Dealers (NASD). The CRD is accessible by members of the public and all potential employers. The Agency's issuance of the order came immediately after Plaintiff's Securities Registration terminated with James Wheeler and Company, an NASD broker/dealer. The defendants knew, or should have known, that the existence of the order would make employment impossible in the securities industry. By waiting until the registration with James Wheeler ended to issue the order, defendants successfully barred Plaintiff from the securities industry without a hearing, which otherwise would have been required had the registration been in effect. The order, as it reads, is a declaratory finding of guilt by the Commissioner where the accused has not had a hearing, trial, presentation of evidence, opportunity to present facts, cross-examine witnesses, or otherwise defend himself. Doctors, lawyers, pharmacists, and many other licensed professionals are all afforded a hearing before revocation and are not prohibited from practicing their profession before that hearing occurs. Plaintiff will show that defendants acted without authority, with negligence, in bad faith, wantonly, and with malice.
8. Defendants violated Plaintiff's 14th Amendment rights to due process by failing to adequately investigate their claims, choosing the most damaging remedy to effect their claim, and by ignoring all other remedies available to them. Plaintiff will show that defendants never once asked Plaintiff to voluntarily cease his activities, but instead chose the remedy most likely to inflict the greatest harm to Plaintiff.
9. Furthermore, Defendant Morgan, who had final approval for the issuance of the order, has admitted under oath that he gave little consideration as to the effect the order would have on Plaintiff, his business, or reputation; that he was unaware that Plaintiff had a securities license; that having an emergency cease-and-desist order on one's securities record would render them unemployable; and further that the "Agency doesn't spend much time" considering the possible harm which could come from the issuance of an emergency order (see deposition pages attached as Exhibit D). This failure is a gross failure of the considerations of injunctive relief — an analysis of the "Private Interest." Defendant Grauer has stated under oath that when deciding to issue an emergency order, certain facts are gathered and a determination is made "at that point, put a standstill, find out what kind of blue sky is being offered or is this real, what is this you know" (see deposition pages attached as Exhibit E). Defendant Grauer clearly states that emergency orders are issued during the fact-finding process, not after. Defendant's own admissions are tantamount to gross negligence. Plaintiff also alleges, upon information and belief, that the Defendants knew or should have known that the conduct and actions of Plaintiff were not fraudulent. Defendants knew or should have known that its allegations were without merit and not founded in law or fact. Defendant Morgan had a duty to ascertain the truth of the information that was supplied to him, but he failed that duty. Defendant Grauer had a duty to perform a complete investigation and he failed in his duty.
10. Defendants could not have determined if a security was being offered, or if fraud were involved, given the limited amount of information they had at their disposal when issuing the order. The defendants did not interview the proposed sponsor of the project in question, Venture Interests Inc.; did not interview other offerees; did not thoroughly interview the Plaintiff; did not perform a background check of Plaintiff or chose to ignore it and his 16-year history of no disciplinary actions or customer complaints; did not interview any investors or clients of Plaintiff; did not determine if Plaintiff was authorized to represent Venture Interests; and had not yet reviewed Plaintiff's client account statements.
11. On or about December 5, 2002, Plaintiff requested a hearing before the State Office of Administrative Hearings requesting that the Order be modified or set aside. Following the request for hearing, Defendant Rotunda, either on his own or in collusion with the other defendants and/or other unknown defendants, began a massive cover-up and obstruction effort. This effort was intended to conceal their negligence and avoid embarrassment in front of the commissioner. This obstruction, coercion, and collusion began as informal discussions between Defendant Rotunda and Plaintiff. During these discussions, Defendant Rotunda engaged in intimidation, threats of criminal prosecution, and coercion in an effort to force Plaintiff to abandon his right to a hearing. Defendant Rotunda made the statement that the Agency had never lost a hearing on an Emergency Order; that a final order could be years in the making; that the Agency had never modified an Emergency Order; that he personally was responsible for almost 40% of the Emergency Orders in existence; and that one in four Emergency Orders resulted in a hearing. Most of Defendant Rotunda's statements were false or materially misleading in light of the fact that the Agency had never had a hearing on an Emergency Order. Furthermore, Defendant Rotunda stated that even if an agreement was reached prior to the hearing, he was not certain that there was a method of approaching the commissioner due to the ex-parte rules — when in fact he knew that if the staff and respondent had a settlement agreement, he could simply place it in the possession of the commissioner for her signature, a routine procedure. Defendant Rotunda's statements and actions were designed to inflict emotional distress upon Plaintiff and to further the Defendants' effort to avoid a hearing. Defendant Rotunda drafted language in the agreed order designed to trick Plaintiff into believing that he was not admitting or denying any violations. The order known as CDO-1504 is attached as exhibit "B." Defendants knew that during the previous ten years the respondents in contested cases against the Securities Board resulted in a decision adverse to the respondent in 100% of the cases. Defendants knew that the final decision maker, the commissioner could alter the final proposals of decision issued by the administrative law judge and had in fact done so, multiple times in order to arrive at a decision consistent with her staff's position.
On or about October 30, 2002, Defendant Rotunda requested reams of documents from Plaintiff's broker/dealer, including information about Plaintiff's spouse's T-shirt business — in an effort to interfere with or otherwise damage Plaintiff's contractual relationship with his broker/dealer, harass Plaintiff, and inflict emotional distress. Defendants did not wait to analyze the information they requested from Wheeler before issuing the Order. On October 31, 2002, Plaintiff resigned voluntarily from Wheeler, and defendants immediately issued the Order, knowing full well that Plaintiff would be barred from the securities industry without notice and hearing. These actions represent intentional deprivation of Plaintiff's due process rights. Plaintiff will introduce evidence that between the time the Order was a contested matter (December 3, 2002 and April 2, 2003), Defendant Rotunda came into possession of documents and information favorable to Plaintiff and chose not to disclose it to his superiors, or alternatively his superiors were deliberately indifferent toward it.
12. Defendants will surely argue that they did not violate Plaintiff's due process rights because Plaintiff was entitled to a hearing. Defendants however knew, or should have known, that the hearing provided for in section 23.2 of the Texas Securities Act is constitutionally infirm and that Plaintiff's reputation would forever be "stained" by their prior actions. The United States Supreme Court has said that a hearing must be conducted at a reasonable time in a reasonable manner (see Armstrong v. Manzo). The High Court went on to say that "the hearing subsequently granted to petitioner did not remove the constitutional infirmity since petitioner was forced to assume burdens of proof which, had he been accorded notice of the adoption proceedings, would have rested upon the moving parties." Defendants knew or should have known that section 23.2 hearings have no timetable for a final decision. The Supreme Court has also ruled in Barry v. Barchi that the respondent may very well suffer the full effects of deprivation before being able to put the State to test. Defendants knew or should have known that section 23.2 hearings do not provide for a hearing before a neutral decision maker and that the commissioner is ineligible as the decision maker due to bias and a ten year history of bias. Finally, the Supreme Court in Mathews v. Eldridge establishes a three-part test to determine whether a particular hearing process is constitutionally adequate. Section 23.2 of the Texas Securities Act fails all three tests as applied in Plaintiff's case. Defendants, being attorneys, are fully aware of the concept of due process and were consciously indifferent to it.
13. On or about March 3, 2003, Defendant Rotunda made an offer of settlement to Plaintiff where the finding of fraud and irreparable harm would be taken out of the emergency order and replaced by a consent order. During the intervening 4 months between the issuance of the emergency order and the offer of settlement, Defendant Rotunda conducted numerous hours of meetings with Plaintiff and continued his investigation into Plaintiff's business. During these intervening months, Rotunda and his superiors discovered that there never was fraud or potential harm to the public — and therefore no reason to have issued the original order. For this reason, Defendant Rotunda was authorized to offer a settlement. Upon information and belief, Defendant Morgan, the Deputy Commissioner drew his conclusion based on evidence presented only by his staff, and not on testimony from Plaintiff or any member of the public. Defendants' conclusions were the result of its predisposition to expect fraud, selective interpretation of the Texas Securities Act and an alternative motive: the staff's desire for professional recognition of its superiors and the upcoming State Legislature's budget hearings where the agency did indeed receive additional funding. Mr. Rotunda has since capitalized on his participation in the issuance of Emergency Cease and Desist Orders by accepting a job with the District Attorney in Travis County as a prosecutor.
14. Defendants' arbitrary and reckless use of its ability to issue Emergency Cease and Desist Orders runs afoul of the standards set by the Securities and Exchange Commission. The SEC may issue Cease and Desist Orders under Federal Law only after notice and opportunity for hearing. Only under the most extreme conditions can the SEC take emergency measures. E.g., if the SEC believes that continuation of certain behavior is likely to result in significant dissipation or conversion of assets, or substantial harm to the public interest prior to the completion of its proceedings, it may enter an order only if the Commission determines that notice and hearing prior to entry would be impracticable or contrary to the public interest. In the case of The Order issued against Plaintiff, the SSB had any number of other remedies available to it which it chose not to pursue. For example the SSB could have discussed its concerns with Plaintiff and reached an agreement, or alternatively it could have discussed its concerns with the Sponsor of the proposed project. Either remedy would have halted Plaintiff's activities. Instead, Defendants issued an Emergency Cease and Desist Order and sent a copy to T D Waterhouse and Fidelity Investments, where Plaintiff maintained client accounts and had long standing relationships. Within hours, T D Waterhouse terminated Plaintiff's business relationship, revoked his trading authority leaving millions of dollars unmanaged, and sent letters to all of Plaintiff's clients. Each and every client was shocked and mentally upset by the letter. Since the order is a declaratory finding of guilt, and was worded with the harshest possible language, significant damage was done to Plaintiff's professional reputation, prior to any form of due process. In addition to alleging fraud, the order stated that Plaintiff was terminated from James Wheeler and Co., when Plaintiff resigned voluntarily. The order announced to the world that Plaintiff had a Federal Tax Lien without checking to see that it was on appeal, and was immaterial. Plaintiff will prove that the existence of the order caused substantial financial harm, and that the harm will continue indefinitely. Both T.D. Waterhouse and Fidelity Investments have continually refused to conduct business with Plaintiff because of the wording of the order.
14. [Second paragraph] Defendants knew or should have known that emotional distress was the likely result of their conduct. Defendants' conduct was extreme and outrageous, beyond all possible bounds of decency and utterly intolerable in a civilized community. Defendants' actions were the proximate cause of Plaintiff's emotional distress.
Defendants in this case acted under color of the laws of the State of Texas in the management structure of the Texas Securities Board. Morgan was the deputy commissioner, Grauer was the director of enforcement, and Rotunda was a staff attorney. Each defendant knew, or should have known, that they would be violating Plaintiff's constitutionally guaranteed rights by issuing an ex-parte order and then publishing and distributing it nationally. Furthermore, Defendant Morgan, and at least one Unknown Defendant, acted in a supervisory capacity with "deliberate indifference" to Plaintiff's rights and failed to create and administer proper policies and procedures to prevent deprivation of individual's rights. See Rivas v. Freeman, 940 F.2d 1491 (11th Cir. 1991).
15. Plaintiff's business name David Henry Disraeli d/b/a Disraeli and Associates, as it was used from 1992 until at least November of 2002 is protected under Federal Trademark Law. Trademarks are defined as any word, name, symbol, or device, or any combination thereof — used by a person, or to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown. Plaintiff will show that defendants published Plaintiff's name without his consent and in a disparaging manner. Plaintiff will further show that defendants are "persons" as described in Title 15 §1125 and therefore lose their immunities. Plaintiff is entitled to damages thereof.
16. Defendants' actions represent those that are intended to be actionable under US 42 §1983. Each act was committed under the color of State Law and in contravention of Plaintiff's rights. Therefore the immunities provided to Defendants must fail.
Respectfully submitted,
David H. Disraeli, Pro Se
609 The High Road
Austin, TX 78746
512.334.6650