==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 107 ADMINISTRATIVE PROCEEDING FILE NO. 3-8798 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ In the Matter of : : INITIAL DECISION TERRY T. STEEN and : MARCH 7, 1997 RODGER E. THORNTON : _________________________ APPEARANCES: Thomas D. Carter and Polly A. Atkinson for the Division of Enforcement, Securities and Exchange Commission, Central Regional Office Daniel F. Wake for Respondent Terry T. Steen BEFORE: Carol Fox Foelak, Administrative Law Judge I. INTRODUCTION The Securities and Exchange Commission (Commission) initiated this proceeding by an Order Instituting Proceedings (OIP) on September 6, 1995, pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act). The OIP alleged that Respondent Steen, while associated as a registered representative with a broker-dealer, willfully violated Sections 5(a) and 5(c) of the Securities Act in connection with the stock of Stat-Tech International Corporation (Stat-Tech). ==========================================START OF PAGE 2====== I held a hearing in Denver, Colorado, on March 19 and 20, 1996. The hearing concerned only Respondent Steen (hereinafter "the Respondent").-[1]- The Division of Enforcement (Division) called nine witnesses, including the Respondent, from whom testimony was taken. The Respondent recalled himself and called one additional rebuttal witness. A number of exhibits were received into evidence.-[2]- Pursuant to the requirements of the Administrative Procedure Act,-[3]- I considered the following post hearing pleadings: (a) Division's Post Hearing Brief, dated May 10, 1996; (b) Respondent's Post Hearing Brief, dated June 10, 1996; and (c) Division's Reply to Steen's Proposed Findings of Fact, Conclusions of Law and Brief, dated June 25, 1996.-[4]- The Division seeks a cease and desist order, a 12 month suspension from association with any broker or dealer, disgorgement, and penalties. The Respondent argues that a three month suspension, with no disgorgement or penalties, is an appropriate remedy. In general, the parties agreed on a substantial number of findings of fact and conclusions of law. My findings and conclusions are based on the record and my observations of the witnesses' demeanor. I have applied preponderance of the evidence as the applicable standard of proof. I have considered and rejected all the arguments and proposed findings that are inconsistent with this decision. A. Violations The OIP alleged that, from August 1989 through March 1992, Respondent Steen, while associated as a registered representative with a broker-dealer, willfully violated Sections 5(a) and 5(c) of the Securities Act in connection with the stock of Stat-Tech International Corporation (Stat-Tech), for which no registration ---------FOOTNOTES---------- -[1]- Respondent Thornton's Offer of Settlement, which the Commission later accepted, was pending. See Rodger E. Thornton, Order Making Findings and Imposing Sanctions, 62 SEC Docket 1202 (August 1, 1996). -[2]- Citations to exhibits offered by the Division and the Respondent will be noted as "Div. Ex. __" and "Resp. Ex. __," respectively. Citations to the transcript of the hearing will be noted as "Tr. __." -[3]- See, specifically, 5 U.S.C.  557(c). -[4]- Citations to the Respondent's Post Hearing Brief and the Divisions's Reply Brief are designated "Resp. Brief" and "Div. Reply Brief," respectively. ==========================================START OF PAGE 3====== statement was in effect. The record includes evidence of transactions in restricted Stat-Tech stock on behalf of affiliates-[5]- in the accounts of Therese M. Lamb, Delaware Technology Corporation (DTC), Melvin H. Takaki, and Hayden H. Thompson. Respondent Steen admits that the Division established a prima facie case that he violated Sections 5(a) and 5(c) of the Securities Act. Resp. Brief at 1. From August 1989 to January 1992, he sold through jurisdictional means approximately 8 million shares of restricted Stat-Tech stock, for which no registration statement was filed with the Commission,-[6]- for affiliates of the issuer, and sold Stat-Tech stock to retail customers and to the public. Answer at 1. Since a prima facie case is established, the Respondent has the burden of proving that the securities met an exemption from Securities Act registration requirements, and may offer evidence that he made appropriate inquiries regarding the status of the subject securities.-[7]- As discussed below, no exception or exemption was proven. B. Statute of Limitations While this proceeding was pending, the United States Court of Appeals for the District of Columbia Circuit held in Johnson v. SEC, 87 F.3d 484, 485 (D.C. Cir. 1996), reh'g den., Aug. 28, 1996, that a Commission "proceeding resulting in a censure and a six-month disciplinary suspension of a securities industry supervisor was a proceeding 'for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise,' within the meaning of [28 U.S.C.]  2462." As a result, the court found that the section's five-year statute of limitations "does apply to SEC proceedings under Section 15(b) of the Securities and [sic] Exchange Act of 1934 which seek to censure and suspend a securities supervisor." Id. at 492. The court stated, however, that the statute of limitations does not apply to a proceeding ---------FOOTNOTES---------- -[5]- Affiliates include officers, directors, greater-than- 10% shareholders, and family members who are in a control relationship with the corporation. Restricted securities include "securities that are acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or series of transactions not involving any public offering." Securities Act Rule 144(a). -[6]- See also Div. Ex. 1011. -[7]- See SEC v. Ralston Purina Co., 346 U.S. 119 (1953); Quinn and Co. v. SEC, 452 F.2d 943, 945-47 (1971), cert. denied, 406 U.S. 957 (1972); Pennaluna & Co. v. SEC, 410 F.2d 861, 865, 870 (9th Cir. 1969), cert. denied, 396 U.S. 1007 (1970); SEC v. Culpepper, 270 F.2d 241, 246 (2d Cir. 1959). ==========================================START OF PAGE 4====== for disgorgement. Id. at 491. Respondent Steen's actions as to the accounts of Ms. Lamb and Mr. Takaki occurred more than five years before the Order Instituting Proceedings in this case, but can be considered in the public interest in determining what, if any, remedial action is appropriate under Sections 15(b) and 19(h) of the Exchange Act and whether a money penalty should be assessed pursuant to Section 21B of the Exchange Act. See Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1110 (D.C. Cir. 1988), cert. denied, 488 U.S. 869 (1988). Transactions regarding DTC and Mr. Thompson do not run afoul of the statute of limitations. II. FINDINGS OF FACT AND CONCLUSIONS OF LAW A. The Stat-Tech Debacle Stat-Tech was formed in 1988 when its predecessor, Static Buster, Inc., merged with Gleneagle Capital Corporation (Gleneagle), a blind pool.-[8]- Tr. 53, 342; Div. Ex. 707 at 3; Resp. Ex. 1 at 3. The company's name was changed from Gleneagle to Stat-Tech International Corporation in early 1989. Div. Ex. 707 at 4; Div. Ex. 761 at 1. Stat-Tech's business plan was to manufacture and market static-control devices made from electro-conductive plastics. Div. Ex. 508 at 2; Div. Ex. 707 at 3-4. Raynard M. Fenster was the founder, president, chief executive officer (CEO), greater-than-50% controlling shareholder, and a director of Stat-Tech, from its beginning in 1988 until he resigned in January 1992. Resp. Ex. 1 at 3. On May 30, 1995, the Commission filed a complaint in the United States District Court for the District of Colorado, SEC v. Fenster, et al., Civ. Action No. 95-N-1367, against Mr. Fenster. Other defendants included account holders discussed in this proceeding: Therese M. Lamb, Delaware Technology Corporation, Russel V. Price, Melvin H. Takaki, and Hayden H. Thompson. Resp. Ex. 1. The complaint alleged fraud in connection with the sale of Stat-Tech securities. The Division and the Respondent stipulated that the allegations contained in the complaint, Resp. Ex. 1, are true. Tr. 160; Resp. Ex. 3 at 1. Mr. Fenster conducted a fraudulent scheme to illegally distribute Stat-Tech common stock to the public at artificially inflated prices. Resp. Ex. 1 at 6. He made materially false and ---------FOOTNOTES---------- -[8]- "A blind pool corporation does not have an independent business purpose, but is created to merge with another private company that possesses a business purpose and requires additional capital." U.S. v. Meyer Blinder, 10 F.3d 1468, 1471 n.2 (9th Cir. 1993). ==========================================START OF PAGE 5====== fraudulent public statements about Stat-Tech in press releases, brochures, newspaper articles, broker-dealer due diligence and other materials, advertisements, Forms 10-K and 10-Q, and in financial statements which were distributed. Id. He portrayed Stat-Tech, an unprofitable company with no viable product and falsified financial information, as a profitable and successful growth company with fully audited financial statements. He also misappropriated Stat-Tech funds and illegally exercised Stat-Tech stock warrants without paying consideration. Id. at 8-10, 12-13, 17. Mr. Fenster and the other defendants named in the complaint benefitted from the fraudulent scheme when they sold approximately 33 million unregistered shares of Stat-Tech stock into the market for over $1,703,000. Id. at 6. B. Respondent Steen Terry T. Steen began working in the securities industry in 1975. Tr. 25; Div. Ex. 1009 at 1. He holds a Series 7 brokerage license and is presently licensed in five states, including Colorado. Tr. 25; Div. Ex. 1009 at 2. His only previous compliance problem occurred in 1982 when the State of Colorado fined him $500 for engaging in transactions in the state when he was not licensed in the state; Dean Witter, his then employer, paid the fine as an acknowledgement of its practical, if not legal, responsibility for the infraction. Tr. 60-61; Div. Ex. 1009. Since 1983, the Respondent has worked as a registered representative in the Longmont, Colorado, office of Rocky Mountain Securities (RMS), a registered broker-dealer. Div. Ex. 1009 at 1. He is an independent contractor with RMS under an arrangement which is a strong incentive to avoid losses; he receives 80% for profitable broker transactions but is responsible for 100% of his losses. Tr. 325-26, 342-43; Div. Ex. 1010. Respondent Steen became interested in Stat-Tech stock in January 1989 when he attended a Stat-Tech due diligence presentation in Denver. Tr. 26, 67-68; Div. Ex. 1009 at 2. He met Mr. Fenster, the president and CEO of Stat-Tech, and Mr. Takaki and Mr. Thompson, who were directors of the company. Tr. 26-27; Div. Ex. 1009 at 2. He also received a prospectus and financial statements and had access to Stat-Tech's 10-K forms, 10-Q forms, Standard & Poor's listing, articles of incorporation and other due diligence materials. Tr. 27-28, 34-36; Div. Ex. 659; Div. Ex. 1009 at 2-3, 5. Mr. Fenster later flew him to tour the company's facilities in Pueblo, Colorado. Tr. 68; Div. Ex. 1009 at 2. The Respondent developed a due diligence package for the company, and in March 1989 recommended that RMS become a market maker for the stock. Tr. 28-29, 68-70. RMS then began ==========================================START OF PAGE 6====== marketing Stat-Tech stock. Div. Ex. 1009 at 2. The Respondent has had treatment, beginning in March 1989 and continuing throughout the period at issue, for mental problems, but his functioning was not impaired by his diagnosis. Tr. 415-23. The Respondent suffered consequences such as divorce, child support obligations, bankruptcy, and loss of customers as a result of his involvement with Stat-Tech; he does not own a house or a car. Tr. 65-67, 76, 403; Div. Reply Brief at 9. Respondent Steen continues to work as a registered representative at RMS, which did not sanction him for his activities related to Stat-Tech. Tr. 63-64, 356. As a result of his experience with Stat-Tech, however, he now only trades NASDAQ and exchange-listed securities. Tr. 67. C. Lamb and Takaki Accounts Respondent Steen admits that he violated the registration requirements of Securities Act Sections 5(a) and 5(c) when he sold Stat-Tech stock for Ms. Lamb and Mr. Takaki, and that he deserves a sanction for these violations. He admits that he mistakenly thought that if a stock certificate did not have a restrictive legend, it was not a restricted security. The shares of Ms. Lamb and Mr. Takaki did not have restrictive legends. Tr. 53-54, 56; Div. Ex. 1008. The absence of a restrictive legend, however, does not "relieve a broker-dealer from his duty as a professional in the securities business to make reasonable inquiry to assure himself that he is not participating in an illegal sale of unregistered securities." Stone Summers & Co., 45 S.E.C. 105, 109 (1972); see also Quinn and Co. v. SEC, 452 F.2d 943, 946-47 (1971), cert. denied, 406 U.S. 957 (1972); Quinn and Co., 44 S.E.C. 461, 470 (1971). The Respondent sold 4.8 million shares of Stat-Tech stock through Ms. Lamb's RMS account while she was an affiliate of Stat-Tech. Tr. 88-96; Div. Ex. 1008. She was the secretary, treasurer, a director, and an affiliate by marriage to the president and CEO of Stat-Tech. Tr. 50, 141, 143-45, 353. Conflicting evidence was presented about what the Respondent knew about Ms. Lamb and when he knew it. Mr. Horning, RMS's president and compliance officer, learned in the spring of 1990 that Ms. Lamb was Mr. Fenster's wife, and treasurer and secretary of Stat- Tech, when he was reviewing Stat-Tech's 1989 Form 10-K. Tr. 352- 54. This "rang a bell" because he approves all tickets and he recalled seeing sell tickets in her account. Tr. 353. Recognizing that selling unregistered securities is a serious violation, he closed her account and asked Respondent Steen to ==========================================START OF PAGE 7====== prepare a written explanation. Tr. 354-55.-[9]- As Mr. Horning recalled telling the Respondent, Ms. Lamb's relationship to Stat-Tech was "right here in the 10-K." Tr. 354. Significant red flags should have been even more noticeable to the Respondent. Mr. Horning was familiar with Ms. Lamb's name merely from reviewing all order tickets while Ms. Lamb was actually the Respondent's customer. Mr. Takaki was a director and therefore an affiliate of Stat-Tech when Respondent Steen sold 300,000 shares of Stat-Tech stock through Mr. Takaki's account in 1989-90. Tr. 102-03; Div. Ex. 1006. At the time of the sales Respondent Steen knew that Mr. Takaki was a director of Stat-Tech. Tr. 27, 72. He admitted that he did not make the appropriate inquiries which would have alerted him to the fact that he was illegally selling restricted stock. Tr. 55-56, 71-72. D. DTC and Thompson Accounts - Rule 144 Respondent Steen admits that he sold unregistered Stat-Tech stock for Delaware Technology Corporation (DTC) and Mr. Thompson. He processed the sales under Rule 144 and now realizes that the shares did not meet the requirements of Rule 144. However, he claims that he met the level of inquiry required of a registered representative when assessing tradeability under Rule 144, and therefore that he should not be sanctioned for these transactions. ---------FOOTNOTES---------- -[9]- The Respondent never satisfactorily responded to Mr. Horning's request. Tr. 355. ==========================================START OF PAGE 8====== 1. Rule 144 Rule 144 of the Securities Act lists criteria under which restricted securities and securities held by affiliates or control persons may be resold without registration. The rule prevents the creation of public markets in securities when the issuers have not made adequate current information available to the public. Preliminary Note to Securities Act Rule 144. The requirements of Rule 144(b) through (i) include provisions that: 1) current public information be available regarding the issuer of the securities; 2) at least two years elapse between the time the securities are acquired from an issuer or affiliate and the date the securities are resold under the rule; 3) the amount of securities able to be sold is limited, depending on whether the sale is by an affiliate or not; 4) the securities be sold in brokers' transactions or with a market maker; 5) Commission Form 144 be filed depending on the size of the transaction; and 6) the person filing the form has a bona fide intention to sell the securities within a reasonable time. The Commission has made very clear the obligation imposed on broker-dealers to inquire when distributing unregistered securities: [A] dealer who offers to sell, or is asked to sell a substantial amount of securities must take whatever steps are necessary to be sure that this is a transaction not involving an issuer, person in a control relationship with an issuer or an underwriter. For this purpose, it is not sufficient for him merely to accept "self-serving statements of his sellers . . . without reasonably exploring the possibility of contrary facts." The amount of inquiry called for necessarily varies with the circumstances of particular cases. A dealer who is offered a modest amount of a widely traded security by a responsible customer, whose lack of relationship to the issuer is well known to him, may ordinarily proceed with considerable confidence. On the other hand, when a dealer is offered a substantial block of a little-known security either by a person who appears reluctant to disclose exactly where the securities came from, or where the surrounding circumstances raise a question as to whether or not the ostensible sellers may be merely intermediaries for controlling persons or statutory underwriters, then ==========================================START OF PAGE 9====== searching inquiry is called for. Distribution by Broker-Dealers of Unregistered Securities, Exchange Act Release No. 4445 (February 2, 1962). Brokers, as "professionals in the securities business and as persons dealing closely with the investing public, are expected to secure compliance with the requirements of the [Securities] Act to protect the public from illegal offerings." Quinn and Co., 452 F.2d at 946. They are "uniquely positioned to ask relevant questions, acquire material information, or disclose their findings." Kane v. SEC, 842 F.2d 194, 199 (8th Cir. 1988) (citing Wasson v. SEC, 558 F.2d 879, 886 (8th Cir. 1977)). They are under a duty to investigate. Quinn and Co., 452 F.2d at 947. RMS had a compliance manual that contained provisions designed to prevent violations of Rule 144. Tr. 328-38; Div. Ex. 1003. Additionally, RMS has annual compliance training that includes the handling of Rule 144 securities, control stock, and restricted stock; the Respondent has attended these sessions since RMS first employed him in 1984. Tr. 338-40. The RMS account opening form and RMS compliance manual spell out questions that should be considered when a registered representative sells the stock of affiliates or control persons. Tr. 348-49; Div. Ex. 1003 at 22-23. The manual, while directing brokers to contact the compliance department, warns that the representative will be liable for failing to ask the right questions and making sales of restricted securities in violation of Rule 144. Id. at 22-24. Additionally, Rule 144 is covered in the Series 7 exam for registered representatives. Tr. 326-27. 2. DTC Account DTC was formed to develop aviation electrostatic products, but its technology was a sham and the company was essentially devoid of assets. Tr. 230-36, 240-42, 248, 273-75. DTC was incorporated in March 1990. Div. Ex. 717. Mr. Price was DTC's president and a director, Mr. Fenster was the vice president and a director, and Ms. Lamb was the corporate secretary and a director. Tr. 57, 146, 225-28; Div. Ex. 506; Div. Ex. 717. Mr. Fenster had a heavy hand in running the corporation, and he and Ms. Lamb financed the corporation. Tr. 221-32, 238-41, 252-53, 273-74. Mr. Fenster used DTC's plane and sailboat and received a reduced rental rate for Stat-Tech at a building owned by DTC. Tr. 232-33, 273-78. Mr. Price knew little about aviation electrostatic technology, but received Stat-Tech shares on behalf of DTC from Mr. Fenster, in exchange for the sham technology. Tr. 230-31, 240-46, 251-53. Mr. Price called Respondent Steen in August 1991 to sell over 1.7 million shares of DTC's restricted Stat-Tech stock, and indicated that Mr. Fenster said that the stock should be ==========================================START OF PAGE 10====== processed under Rule 144. Tr. 56-58, 75-76, 245-46, 256-59, 261- 63, 267-68. The certificate to be transferred was dated June 18, 1991, and thus did not meet the two-year holding requirement of Rule 144. Tr. 56, 245-46; Div. Ex. 451. While evidence was presented suggesting that Mr. Price and DTC acquired 10 million shares of Stat-Tech stock in 1989, I decline to credit this evidence over the date appearing on the certificate. Tr. 284-86; Div. Ex. 451 at Bates 403-19; Div. Ex. 1005. The evidence was to the effect that Mr. Fenster promised the shares to Mr. Price in 1989 and 1990 but issuance of the stock certificate was delayed. These dates are uncorroborated. Indeed DTC was not incorporated until 1990. The record does not explain a two year delay in issuance of the stock certificate, other than Mr. Price's testimony that "I kept asking Mr. Fenster, when am I going to get the shares for the technology or the ideology that I transferred to you. He kept putting me off, putting me off, and then finally this was the date that he got it done." Tr. 285.-[10]- The Respondent claims that he met his duty of inquiry as a registered representative as to DTC. He contends that he followed the RMS compliance manual by alerting the compliance officer that he was executing a Rule 144 sale, and that he could not have known that false Rule 144 documentation had been submitted by Mr. Fenster. He claims that he did not know that Ms. Lamb was DTC's corporate secretary, or that Mr. Fenster was financing DTC, but acknowledged that if true he should have recognized that there was a control problem if DTC sold Stat-Tech stock. Resp. Brief at 11-13. Respondent Steen did not meet his duty of inquiry as a registered representative as to the DTC account, and he violated the registration requirements of Securities Act Sections 5(a) and 5(c) when he sold over 1.7 million shares of unregistered Stat Tech stock for DTC. Tr. 99-101; Div. Ex. 451; Div. Ex. 1005. He failed to meet his duty of inquiry when he filled out the new account form for DTC and failed to ask Mr. Price relevant questions about stock restrictions, legends, where his Stat-Tech stock came from, and how long it was held. Tr. 57-58, 270. He gave deficient information to the compliance department when he alerted them to the Rule 144 sales and mistakenly thought that he had met his duty of inquiry. Tr. 76. He cannot rely on his compliance department or on opinions of counsel to discover ---------FOOTNOTES---------- -[10]- Division Exhibits 451 and 1005 include, along with other Rule 144 documentation, letters from counsel for Stat-Tech which confirm that the shares were issued in June 1991. Counsel attributes to "administrative delays within the Company" the difference between the date the shares were issued as listed on the certificate and the earlier dates claimed by DTC to be the issuance dates on which transfers of technology were made. Div. Ex. 451 at Bates 407; Div. Ex. 1005 at Bates 407. ==========================================START OF PAGE 11====== answers to questions that are best asked by him. See Sorrell v. SEC, 679 F.2d 1323, 1327 (9th Cir. 1982); Wasson v. SEC, 558 F.2d 879, 886 (8th Cir. 1977); Mark E. O'Leary, 43 S.E.C. 842, 848 (1968). Respondent Steen did not ask for the names of the DTC officers and directors. Tr. 57, 261; Div. Ex. 1009 at 3. He assumed that Mr. Price had authorization to trade on behalf of DTC. Tr. 57, 264; Div. Ex. 1009 at 3-4. If, as a prudent registered representative, he had demanded proof of Mr. Price's trading authorization, he would have discovered that Ms. Lamb was the secretary and a director of DTC. Tr. 264, 333-34; Div. Ex. 506. From previous inquiries, he should have also known that Ms. Lamb was the secretary and a director of Stat-Tech, the company whose shares DTC was selling. This is a significant conflict which a registered representative would want to discover, because it is a red flag that Ms. Lamb could have been acting in concert. Tr. 361-62. Securities Act Rule 144(e)(1) provides that an affiliate cannot sell more than one percent of the shares of the class outstanding within a three-month period (the 1% Rule), and Rule 144(e)(3)(vi) requires two or more affiliates who "agree to act in concert for the purpose of selling securities of an issuer" to aggregate their sales within a three-month period in applying the 1% Rule. Appropriate inquiries would have also revealed Mr. Fenster's position in and influence over DTC. The Respondent should have questioned the relationship among Mr. Fenster, Stat-Tech, and DTC, particularly when the RMS new account opening form completed by Respondent Steen for DTC stated that DTC was referred by Stat- Tech. Div. Ex. 533; Div. Ex. 1009 at 3. RMS's compliance manual specifically warns brokers to account for sales to "beneficial owners," which include sales by that person and by relatives of the person, when calculating sales under the 1% Rule. Div. Ex. 1003 at 24. The Respondent cannot blame his mistakes on Mr. Fenster's fraud. "There is no exemption from the registration provisions of the [Securities] Act for a person otherwise subject thereto, on the ground that he was defrauded by the issuer." Quinn and Co., 44 S.E.C. at 465. 3. Thompson Account Similarly, Respondent Steen did not meet his duty of inquiry as a registered representative as to the account of Mr. Thompson. Mr. Thompson was a director of Gleneagle and Stat-Tech from late 1988 until the fall of 1990, and held more than ten percent of Stat-Tech stock. Tr. 174, 180; Div. Ex. 451 at Bates 393. The Respondent violated the registration requirements of Securities Act Sections 5(a) and 5(c) when he sold 1.3 million shares of unregistered Stat-Tech stock for Mr. Thompson in June 1991. Tr. 103-04, 108-11; Div. Ex. 451; Div. Ex. 1007; Div. Ex. 1009 at 8. ==========================================START OF PAGE 12====== The Respondent claims that the Stat-Tech shares at issue were acquired in November 1988, rather than May 1990 as stated on Mr. Thompson's Stat-Tech certificate. Respondent Steen claims that the date on the Stat-Tech certificate is the date on which Mr. Thompson was issued a Stat-Tech certificate to substitute for a certificate in the old company name, Gleneagle. Tr. 179. There were two 4,050,000 share certificates owned and transferred by Mr. Thompson: Certificate 131, in the Gleneagle name, was issued in November 1988. Those shares were transferred to Fenster family members on May 23, 1990; Certificate 131 was cancelled and Certificates 609 through 613, under the Stat- Tech name, were issued to them. Certificate 608 was authorized by Mr. Fenster for the transfer agent to issue to Mr. Thompson on May 23, 1990; 1,300,000 of these Stat-Tech shares were sold by Respondent Steen for Mr. Thompson on July 29, 1991, for August 5 settlement; Certificate No. 608 was presented for transfer on August 13. Tr. 95-96, 103-04, 108-11; Div. Ex. 1007 at Bates 3324. The shares sold by Respondent Steen could not have been held for two years as required by Rule 144. As in the case of DTC, the Respondent claims that he satisfied his duty of inquiry into the status of shares when he alerted the compliance department that Mr. Thompson's sale was under Rule 144. Tr. 74-75, 176; Div. Ex. 451. Mr. Thompson did not recall being asked questions relating to Rule 144, and relied on his previous broker and attorney to convey information to Respondent Steen. Tr. 175-76, 180-82. "When a broker ignores the obvious need for further inquiry, even in reliance on assurances from other brokers or attorneys, he violates the act." Sorrell v. SEC, 679 F.2d at 1327. It is clear that the Respondent did not meet the duty of inquiry required of a registered representative. Further evidence of Respondent Steen's failure to meet his duty of inquiry is his lack of concern that 77.2% of Stat-Tech stock was owned by officers and directors, as stated in Stat- Tech's 1989 Form 10-K, although he bore the risk of making a market in Stat-Tech stock. Tr. 29-30, 35-37. Although he testified at the hearing that he asked the questions on the new account opening form which would have given him insight into the nature of the sales that he effected, he acknowledged earlier, in investigative testimony, that he did not spend much time asking new account opening form questions and thought that the information was voluntary. Tr. 39-41. ==========================================START OF PAGE 13====== E. Respondent's Gains from Stat-Tech Transactions Division Exhibit 1002 is RMS's end-of-month sales blotter record for Respondent Steen's inventory account for month-long periods ending August 18, 1989, through January 24, 1992. Based on that exhibit the Division states that the Respondent made a total of $257,934.20 in commissions and profits from his transactions in Stat-Tech stock during that time. The Division calculated the amount by netting the "AE Net"-[11]- figures for all buys and sells of Stat-Tech stock into and out of the Respondent's RMS inventory account. This amount, however, includes sales and purchases involving customers other than the four customers addressed at the hearing, and involving trades other than those proven to be in violation of Rule 144 on the record. The commissions and profits attributable to proven violative trades involving Ms. Lamb, Mr. Takaki, DTC, and Mr. Thompson equal approximately $68,068.40. See Appendix 1 for details of the calculations. F. Conclusion In all four cases the securities were held for less than two years at the time of sale, and thus could not have met the requirements of a Rule 144 sale. The Respondent admits his errors as to Ms. Lamb and Mr. Takaki, but not as to DTC and Mr. Thompson. Respondent Steen had ample notice of his duty as to all four accounts. He should have asked the questions indicated on the RMS account opening form, followed the guidance given in RMS's compliance manual and at compliance meetings, and followed internal compliance procedures more closely. A prudent representative would have discovered the numerous red flags indicated by the record. Respondent Steen had access to Stat-Tech's 10-K forms, 10-Q forms, prospectus, financial statements, Standard & Poor's listing, articles of incorporation and other due diligence materials. He compiled a due diligence package, recommended that his firm become a market maker in the stock, and became a market maker. It is not enough for a registered representative merely to contact the compliance department when a Rule 144 sale is indicated. Willfulness "Brokers and securities salesman are under a duty to investigate, and a violation of that duty brings them within the term 'willful' of the Securities Act." Quinn and Co., 452 F.2d at 947. "It is well settled that a finding of willfulness under the Exchange Act does not require an intent to violate, but merely an intent to do the act which constitutes a violation." ---------FOOTNOTES---------- -[11]- AE stands for "Account Executive." Tr. 363. ==========================================START OF PAGE 14====== Quinn and Co., 44 S.E.C. at 469. See also Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981); Arthur Lipper Corp. v. SEC, 547 F.2d 71, 180 (2d Cir. 1976), cert. denied. 434 U.S. 1009 (1978); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). Respondent Steen intended to offer to sell and to sell Stat-Tech securities on behalf of the four customers at issue, and no registration statement was in effect as to those securities. Although the Respondent has sought treatment for continuing mental problems, his functioning was not impaired by his diagnosis. In conclusion, the Respondent willfully violated Securities Act Sections 5(a) and 5(c). III. PUBLIC INTEREST Imposition of administrative sanctions requires consideration of: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Respondent Steen's violations were recurring if not egregious. He willfully sold approximately 8 million shares of restricted securities in violation of Sections 5(a) and 5(c) of the Securities Act to four customers in multiple transactions from 1989 to 1992. Although the shares were sold for pennies each, these sales were not insignificant. He had, however, no previous disciplinary history except for a licensing infraction for which his employer accepted responsibility. Scienter has been described as "a mental state embracing intent to deceive, manipulate, or defraud." Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is not an element of a violation of Sections 5(a) and 5(c) of the Securities Act, but "the respondent's state of mind is highly relevant in determining the remedy to impose." Steadman, supra, at 1140. Although the Respondent's violations were willful, the record does not show ==========================================START OF PAGE 15====== that he acted with scienter. He was not shown to have acted with an "intent to deceive, manipulate or defraud." The Respondent recognizes the wrongful nature of his conduct to some extent. He agrees that he did not meet his duty of inquiry as to Ms. Lamb and Mr. Takaki and states that if confronted with a similar situation in the future he would ask more questions. He does, however, argue that he met his duty as to DTC and Mr. Thompson and blames some of his problems on the fact that he and others were taken in by Mr. Fenster's fraud. The circumstances surrounding the sale of Stat-Tech stock in all four instances should have compelled the Respondent to undertake a searching inquiry. Regarding the likelihood that the Respondent's occupation will present opportunities for future violations, the Respondent has decided to trade only NASDAQ and exchange-listed securities. This shows sincerity on his part to prevent the recurrence of a situation such as with Stat-Tech. The consequences he suffered from his involvement with Stat-Tech -- family problems, loss of customers and bankruptcy -- lend weight to his assurances against future violations. Sanctions The Division requests that Respondent Steen be ordered to cease and desist from further violations of Sections 5(a) and 5(c) of the Securities Act, suspended from association with any broker or dealer, ordered to pay $257,934.20 in disgorgement, and ordered to pay a "significant" money penalty. 1. Cease and Desist Section 8A of the Securities Act provides that the Commission may order a person to cease and desist from violating Securities Act provisions, rules, and regulations, if that person "is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation" and "is violating, has violated, or is about to violate any provision of [the Securities Act]."-[12]- The Respondent does not dispute the imposition of a cease and desist order. In view of his violations, a cease and desist order is in the public interest. ---------FOOTNOTES---------- -[12]- The OIP referenced Section 21C of the Exchange Act, as well as Section 8A of the Securities Act, in connection with the cease and desist and disgorgement remedies. Section 21C, however, does not apply to the violations found, of Securities Act Sections 5(a) and 5(c). ==========================================START OF PAGE 16====== 2. Disgorgement The Division requests that Respondent Steen be ordered to pay $257,934.20 in disgorgement. However, the Respondent's gains from the proven violative trades involving customers Lamb, Takaki, DTC, and Thompson total $68,068.40. That is the appropriate amount because it is causally related to the proven wrongdoing. SEC v. First City Financial Corp., 890 F. 2d 1215 (D.C. Cir. 1989); see also Hateley v. SEC, 8 F.3d 653 (9th Cir. 1993). Accordingly, Respondent Steen should be ordered to disgorge $68,068.40 plus prejudgment interest under Section 8A of the Securities Act. The Respondent claims that he is unable to pay disgorgement, noting that he has gone through bankruptcy and does not own a house or a car, and argues that the public interest will not be served by ordering such a sanction. The amount of ill-gotten gains that should be disgorged can be determined despite a present inability to pay. Further, since the disgorgement amount determined is directly tied to proven violative transactions, the sanction is in the public interest. Additionally, it should be noted that Respondent Steen's general representations concerning his financial status are not a sufficient showing of inability to pay a disgorgement amount. 3. Suspension The Division urges that the Respondent be suspended from association with any broker-dealer for twelve months, while the Respondent argues that a three month suspension is sufficient. A six month suspension is appropriate in light of the Steadman factors analyzed above. Mitigating factors are his lack of scienter and the unlikelihood of a recurrence of his violations, in light of the steps he has taken to avoid a recurrence and the other consequences he has suffered as a result of his violations. In support of a lesser sanction, the Respondent cites to several administrative proceedings including Administrative Law Judge decisions, settlements, and Kane v. SEC, supra, in which a six month suspension was imposed and upheld on appeal. Kane v. SEC is "not on all fours" with the instant case but is sufficiently similar to support the imposition of a six month suspension on the Respondent. 4. Money Penalty The Division has requested that the Respondent be ordered to pay a "significant" money penalty pursuant to Section 21B of the Exchange Act. The Division did not, however, quantify an appropriate penalty or otherwise provide analysis pursuant to ==========================================START OF PAGE 17====== Section 21B(b) and (c), and I have not imposed a civil penalty.-[13]- To the extent that the record contains evidence relevant to the factors enumerated in Section 21B(c), it weighs against imposition of a penalty. The mitigating Steadman factors noted above are relevant in this connection. Based on the findings and conclusions set forth above, Respondent Terry T. Steen will be ordered, pursuant to Section 8A of the Securities Act, and Sections 15(b) and 19(h) of the Exchange Act, to: be suspended for six months from association with a broker or dealer and from association with a member of a national securities exchange or registered securities association; disgorge $68,068.40, representing commissions and profits he received, plus prejudgment interest; and cease and desist from committing or causing violations or future violations of Sections 5(a) and 5(c) of the Securities Act. IV. CERTIFICATION OF RECORD Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. Section 201.351(b), I hereby certify that the record includes the items set forth in the corrected record index issued by the Secretary of the Commission on June 28, 1996, as well as the Commission's Order Making Findings and Imposing Sanctions Against Rodger E. Thornton dated August 1, 1996, 62 SEC Docket 1202, and Order Cancelling Hearing as to Respondent Thornton dated August 5, 1996. V. ORDER Based on the findings and conclusions set forth above, I ORDER that Terry T. Steen be and hereby is suspended for six months from association with any broker or dealer and from association with a member of a national securities exchange or registered securities association. I FURTHER ORDER, pursuant to Section 8A of the Securities Act, that Terry T. Steen disgorge $68,068.40, plus prejudgment interest from February 1, 1992, through the last day of the month preceding which payment is made, at the rate of interest established under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C.  6621(a)(2), compounded quarterly, pursuant to Rule 610 of the Commission's Rules of Practice, 17 C.F.R.  201.610. ---------FOOTNOTES---------- -[13]- Civil penalties could not be assessed for violations that occurred before October 15, 1990, the date of enactment of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Remedies Act Section 1(c)(2)(A). The Respondent's gains from violative transactions after October 15, 1990, total $18,897.75. See Appendix 1. ==========================================START OF PAGE 18====== Payment shall be made on the first day after this decision becomes final. Such payment shall be: (i) made by United States postal money order, certified check, bank cashier's check or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Office of the Secretary, Securities and Exchange Commission, 450 Fifth St., N.W., Washington, D.C. 20549; and (iv) submitted under cover letter which identifies Mr. Steen as the Respondent in these proceedings, and the file number of these proceedings. The Division shall submit a plan of disgorgement no later than sixty (60) days after Respondent Steen has paid any or all of the disgorgement amount and interest. I FURTHER ORDER, pursuant to Section 8A of the Securities Act, that Terry T. Steen cease and desist from committing or causing violations or future violations of Sections 5(a) and 5(c) of the Exchange Act. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. Section 201.360 (1996). Pursuant to that rule, a petition for review of this initial decision may be filed within 21 days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within 21 days after service of the initial decision upon him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. Carol Fox Foelak Administrative Law Judge APPENDIX 1 Notes The spreadsheet on the following pages lists the Stat-Tech sales and purchases through the Respondent's inventory account "#43" during the periods covered in Division Exhibit 1002, which were used to approximate the commissions and profits attributable to proven violative trades involving Ms. Lamb, Mr. Takaki, DTC, and Mr. Thompson. The first four columns list the settlement date of the transaction at issue, the customer's name, and the amount of Stat-Tech shares that were bought or sold. For the calculations in column 5, the Respondent's Stat-Tech trading profits were estimated by including: 1) AE Net figures for sales by the customers of Stat-Tech stock into the Respondent's inventory account at RMS, 2) AE Net figures for the matching buys of the Respondent of Stat-Tech shares into his account, where available, and 3) proportionate estimates of AE Net figures which match these sales of Stat-Tech stock out of the Respondent's inventory account, using price information for the next sales in time out of the Respondent's inventory account. Cancelled transaction prices were not used. "AE Profit Stock" transactions were not included because the meaning of this category is not clear from the record.-[14]- Accordingly, as totalled in column 5, commissions and profits attributable to proven violative trades involving Ms. Lamb, Mr. Takaki, DTC, and Mr. Thompson amount to $68,068.40. ---------FOOTNOTES---------- -[14]- Mr. Horning testified that by adding the amounts in the AE Net column and netting out the losses, the total would reflect Respondent Steen's compensation on Stat-Tech. Tr. 368. In reaching its disgorgement figure, however, the Division often did not include the AE Net figure for "AE Profit Stock". Div. Ex. 1002 at final, unnumbered page.