INITIAL DECISION RELEASE NO. 113 ADMINISTRATIVE PROCEEDING FILE NO. 3-9060 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________ : In the Matter of : : INITIAL DECISION FREDERICK C. GARTZ : August 6, 1997 : _________________________: APPEARANCES: Robert J. Burson, Joy M. Boddie, and Gregory P. von Schaumburg for the Division of Enforcement, Securities and Exchange Commission Stanley T. Padgett for Frederick C. Gartz Timothy P. Burke for PaineWebber Inc. BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission ( Commission ) initiated this proceeding on August 12, 1996, 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 ). I held a hearing in Naples, Florida, on October 21, 22, and 23, 1996. The Division of Enforcement ( Division ) presented testimony from nine witnesses and introduced eighty-one exhibits. Frederick C. Gartz ( Mr. Gartz ) presented four witnesses and introduced twenty-three exhibits.<(1)> I received the Division s Post Hearing Brief and Proposed Findings of Fact and Conclusions of Law on November 25, 1996; the Respondent s Post Hearing Brief and Proposed Findings of Fact and Conclusions of Law on <(1)> Citations are to the hearing transcript (Tr. __) and to the exhibits admitted into evidence at the hearing. The Division s exhibits are (Div. Ex. __), and the Respondent s exhibits are (R s Ex. __). ======END OF PAGE 1====== December 24, 1996; and the Division s Reply Brief on January 22, 1997.<(2)> Issues Whether Mr. Gartz violated the antifraud provisions of the securities statutes in twelve transactions that occurred from August 12, 1991, until approximately January 1992, by (1) selling to customers illiquid investments with a significant degree of risk which were unsuitable in light of their age, financial condition, and stated conservative investment objectives and which caused an excessively high concentration of this type of investment in their accounts; (2) selling investments at higher than market prices and failing to seek or obtain the best price reasonably available under the circumstances; (3) representing both the buyer and the seller in transactions and thus impermissibly benefiting one customer to the detriment of the other; and (4) failing to disclose to buyers that they were not paying the most favorable prices available. Findings of Fact My findings and conclusions are based on the record and hearing the witnesses testimony and observing their demeanor. I applied preponderance of the evidence as the applicable standard of proof. PaineWebber Inc. PaineWebber Inc. ( PaineWebber ) is a registered broker-dealer and a member of the New York Stock Exchange, Inc., the National Association of Securities Dealers, Inc. ( NASD ) and all other major stock, options, and futures exchanges. In 1991-92, PaineWebber employed approximately 4,800 registered representatives in several hundred retail branch offices. (Tr. 299.) On January 17, 1996, the Commission, pursuant to Section 8A of the Securities Act, and Sections 15(b), 21B, and 21C of the Exchange Act, entered an Order Instituting Public Administrative Proceedings, Making Findings, Imposing Remedial Sanctions, and Issuing Cease and Desist Order ( Settlement Order ) against PaineWebber.<(3)> (R s Ex. 2; PaineWebber Incorporated, 61 SEC Docket 179 (Jan. 17, 1996).) PaineWebber consented to the order without admitting or denying the findings it contained. The Commission found that between 1986 and 1992, PaineWebber violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act and Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder, in that its: <(2)> The Briefs are very difficult to use effectively because none of them include a table of contents, an alphabetized table of cases, a table of statutes, and a table of other authorities cited as required by the Rules of Practice. 17 C.F.R.  201.152(e). <(3)> Mr. Gartz was not a party to the settlement but he introduced it into evidence in this proceeding. (Tr. 293.) ======END OF PAGE 2====== sales and marketing materials for four families of direct investments -- PaineWebber/Geodyne oil and gas programs, PaineWebber Insured Mortgage Partners, PaineWebber/Independent Living Mortgage, and Pegasus Aircraft Partners -- overstated benefits and understated risks of the investments, and characterized certain direct investments as suitable for conservative investors without sufficiently disclosing the risk of loss of principal. In addition, PaineWebber sold direct investments (including, but not limited to, those mentioned above) to numerous investors for whom they were unsuitable and in concentrations too high given the investors age, financial condition, sophistication and investment objectives. . . . PaineWebber also violated Section 17(a) of the Exchange Act and Rule 17a-3 thereunder by failing to make and keep certain required records of purchases and sales of direct investments on the secondary market. (R s Ex. 2, Exhibit A at 2-3.) The Settlement Order found further that PaineWebber failed: reasonably to supervise ten [registered representatives] (two of whom were branch office managers . . . ) in eight branch offices,<(4)> who engaged in fraudulent sales practices in connection with certain retail customer accounts. (R s Ex. 2, Exhibit A at 3.) Among other things, the Settlement Order obligated PaineWebber to pay an aggregate of $292.5 million for the benefit of purchasers of direct investments that it sold and to pay a civil penalty of $5 million. (R s. Ex. 2, Exhibit A at 29-30.) In addition, PaineWebber agreed to pay $75 million in non-cash benefits to direct investment purchasers as part of a class action settlement of litigation involving its direct investments. (R s Ex. 3; R s Proposed Findings of Fact at 5.) Respondent Mr. Gartz completed three years of undergraduate study at the University of Notre Dame in South Bend, Indiana. He served in the U.S. Army in Vietnam in 1966-68,<(5)> and later received a Bachelor of Science degree in business management from Saint Joseph s College in Rensselaer, Indiana. Mr. Gartz s first employer was the Naples, Florida office of McCormick & Co., in 1971. When the Naples office of McCormick & Co. became part of PaineWebber in 1975, Mr. Gartz became the office manager, a position he held until the end of 1991. (Tr. 637-38.) <(4)> The branch offices were: Miami, Florida; Flint, Michigan; Naples, Florida; Grand Rapids, Michigan; Tampa, Florida; Omaha, Nebraska; Spokane, Washington; and Sioux City, Iowa. (R s Ex. 2, Exhibit A at 16-24.) <(5)> He received the Bronze Star Air Medal and the Vietnam Campaign Medal. (Tr. 636-37.) ======END OF PAGE 3====== Mr. Gartz was a producing branch manager in that a major part of his income came from his activities as a broker. In 1990-91, Mr. Gartz advised between 300 to 400 clients with approximately $80 million of invested assets. (Tr. 301, 640-41.) Direct investments were one of Mr. Gartz s main areas of activity, and he estimated that his clients placed about $7 to $8 million of their total assets in this type of security. However, PaineWebber officials believed the amount to be considerably higher. PaineWebber s vice president of the Direct Investment Department ( D.I. Dept. ) knew Mr. Gartz in 1991 because Mr. Gartz and the Naples office sold a lot of direct investments.<(6)> (Tr. 389.) PaineWebber s deputy director of compliance estimated that Mr. Gartz sold between $25 and $30 million of direct investments which he believed was a high amount. (Tr. 301-02.) Mr. Gartz bought small amounts of direct investments for his own account. (Tr. 695.) Mr. Gartz s income from PaineWebber was $218,010 in 1990 and $211,810 in 1991. He earned a $50,000 bonus in 1991 which he did not take because he didn t feel that it was the right thing to do under the circumstances . . . because [he] caused [PaineWebber] a lot of trouble. (Tr. 683-84.) In 1993 and 1994, Mr. Gartz had income from wages of $8,613 and $3,135, respectively.<(7)> Mr. Gartz s record of community involvement includes service as president of the local Rotary Club and Catholic Social Services; on the board of several churches, church-related schools, the local Y.M.C.A. and United Way; as president and board member of the civic association in the community in which he resides; as chair and board member of the community s development district, a governmental body authorized to issue development bonds; and as a member of the county planning commission. (Tr. 638-40.) PaineWebber placed Mr. Gartz on disability leave status in January 1992 on condition that he seek inpatient treatment for alcoholism.<(8)> (Tr. 319.) In March 1992, he spent three weeks in an inpatient facility where he was diagnosed as an alcoholic at the severe stage. (Tr. 680, 738; R s Ex. 24.) PaineWebber ended Mr. Gartz s employment some time prior to March 1992. (Tr. 684, 746.) Since July 1992, Mr. Gartz has been employed as an insurance agent with Northwestern Mutual Life Insurance Co. He uses his Series 6 license which is registered with the insurer s broker-dealer subsidiary, Northwestern Mutual Investments Services, Inc., to sell variable annuities and variable life products. (Answer at 3; Tr. 685.) Mr. Gartz believes that his employer will terminate his employment if he loses his securities <(6)> D.I. Dept. is now known as the Private Investments Department. The terms are synonymous. <(7)> The income information is from copies of Mr. and Mrs. Gartz s joint federal tax return. (R s Ex. 33.) <(8)> The PaineWebber Compliance Department official sent to Naples in the fall of 1991 found a gun in Mr. Gartz s desk and the official became concerned about his personal safety. (Tr. 318- 19.) ======END OF PAGE 4====== licenses.<(9)> (Tr. 685.) On September 30, 1993, District 7 of the NASD informed Mr. Gartz that it had concluded that no action against him was warranted based on its investigation of the circumstances disclosed in the Form U-5, Uniform Notice of Termination of Registration, which PaineWebber filed when Mr. Gartz left his employment. (R s Ex. 32.) Direct Investments or Private Placements PaineWebber sold approximately $3 billion of direct investments between 1986 and 1992. (R s Ex. 2, Exhibit A at 3.) PaineWebber s direct investments referred to certain limited partnerships and real estate investment trusts which PaineWebber marketed aggressively through its D.I. Dept. and which it sold to customers through its network of registered representatives. PaineWebber s registered representatives believed they could rely on the D.I. Dept. s marketing materials and informational meetings, and they did so. (Tr. 555-58.) In 1991-92, PaineWebber s direct investments at issue had certain common characteristics: * they were proprietary or affiliated offerings because PaineWebber subsidiaries or affiliates were the sponsors, advisors, and/or the general partner of each of the issuers. (Tr. 272; Div. Exs. 70 at 60, 72 at 13; R s Ex. 2, Exhibit A at 3.) * they were illiquid because they were not publicly traded, i.e., they were not listed on any exchange or listed on NASDAQ. (Tr. 264-66, 277; R s Ex. 2, Exhibit A at 3.) Until November 1991, PaineWebber operated a direct investment information system ( DIN ) or matching program which listed direct investment sellers, their offering price, and the account representative on an in-house electronic bulletin board which was available on brokers workstations and Quotron machines in all PaineWebber offices. (Tr. 265-72.) The DIN system also showed the price in the three most recent trades on sales where the broker sought a commission. (Tr. 408-09.) * customers believed that their holdings were valued at the amount shown on their statement, however the statements noted in very small print that the asset value of some direct/private placements were shown at original cost.<(10)> (Tr. 247-49, 257, 409-11, 449-451, 465.) <(9)> Record does not show what licenses he holds in addition to the Series 6. <(10)> The following appeared amid a lot of text on the back of the statement: Values presented for insurance products, annuities, and private investments (direct investments) are provided by the insurance company or sponsor (sources considered reliable) and the accuracy is not guaranteed. Generally, direct investment prices are listed at initial offering price for the first 3 years. Prices (continued...) ======END OF PAGE 5====== PaineWebber showed par values even though it maintained sales records that showed that units of the direct investment sold for less than par during the period.<(11)> (Div. Ex. 67.) * transfers of direct investments required that both the buyer and the seller sign letters of authorization and transfer documents, and that the general partner of the issuer approve the transfer. (Tr. 181.) The account executive is responsible for getting the documentation to the general partner. (Tr. 203.) The approval process should take from 30 to 60 days. (Tr. 180-82.) The transfer of funds from the buyer to the seller should occur after the general partner approved the transfer, but in the transactions at issue where Mr. Gartz was the account executive, the funds were transferred to the seller before this occurred. (Tr. 269, 421.) * they were not marginable securities. (Tr. 173.) Transactions Mr. Gartz controlled each of the accounts at issue because the customers trusted him and always followed his advice. A registered representative may control an account when a customer relies upon the broker to such an extent that the broker is positioned to control the volume and frequency of the transactions in the account or where the customer routinely follows the representative s recommendations. John M. Reynolds, 50 S.E.C. 805, 806 (1992); Donald A. Roche, 64 SEC Docket 2042, 2049 n.14 (June 17, 1997). Mr. Gartz read each of the Prospectuses word for word and reviewed other materials before recommending that his customers buy PaineWebber direct investments. (Tr. 90-91.) When his customers requested that he sell their direct investments, Mr. Gartz did not use PaineWebber s in-house DIN system to check what other sellers were asking for similar units. In all but one transaction, Mr. Gartz arranged the sale to another of his customers and he represented both the seller and the buyer. In all sales, Mr. Gartz had the buyer pay the original offering price for the units. (Tr. 672.) Mr. Gartz did not benefit financially from any of the transactions because he did not charge the buyer a commission when a maximum seven percent commission was allowed. (Tr. 277, 672-73.) The transactions at issue occurred in the secondary market and involved the following PaineWebber direct investments: <(10)>(...continued) may or may not represent current or future market value. To obtain current quotations, when available, contact your Investment Executive. (Div. Ex. 25.) <(11)> PaineWebber claims it showed direct investments at original cost for the first three years in accord with the Investment Program Association convention. It no longer does so. (Tr. 409- 11.) ======END OF PAGE 6====== A. PaineWebber Independent Living Mortgage Fund, Inc. ( Independent Living Mortgage ) Independent Living Mortgage was a 1989 issue totaling $50 million offered at ten dollars per share, at a minimum investment of five thousand dollars, for a real estate investment trust formed to make construction and participating mortgage loans secured by real estate. (Div. Ex. 72.) Independent Living Mortgage expected to make all or most loans to Angeles Corporation ( Angeles ), a development company, to acquire or develop rental housing units for independent senior citizens. The Prospectus noted that this investment involved risks in addition to the general risk associated with real estate that the property would generate insufficient income to cover expenses. (Div. Ex. 72 at 21.) The construction loans to be made were more risky than loans secured by real estate on which improvements had been completed. (Id.) Also, there was a risk from lack of diversification in that the loans would go exclusively to Angeles, and that the success of the enterprise depended on the expertise of Angeles s wholly owned subsidiary, Angeles Housing, a recently organized company with limited experience in the field of senior housing. (Div. Ex. 72 at 6, 14.) In addition, the default risk would be greater because the investments may be secured by properties of the same type located in the same general geographic area. (Div. Ex. 72 at 14.) The Prospectus noted that there was no assurance that the issuer would achieve its investment objectives, and that it anticipated that investors would receive a quarterly ten percent yield on their investment based on a commitment by Angeles. (Div. Ex. 72 at 4.) The Prospectus noted that the performance of Angeles was of substantial importance to Independent Living Mortgage, and that Angeles s maximum aggregate liabilities amounted to 3.6 times its book net worth. (Div. Ex. 72 at 5.) At the hearing, Mr. Gartz described Angeles as a $4 billion publicly traded company, and stated that PaineWebber s D.I. Dept. represented to brokers that Angeles guaranteed that unit holders would receive a ten percent return for the first four years. (Tr. 648.) In fact, the Prospectus for a later offering, Independent Living Mortgage II, issued in 1990, put Angeles s book net worth at $32 million.<(12)> (Div. Ex. 73 at 21.) The Independent Living Mortgage Prospectus specified that the offering was suitable only for persons or entities of adequate means having no need for liquidity of their investment. (Div. Ex. 72 at 7.) It explained that because it did not expect a public trading market for shares to develop, an owner may not be able to sell shares readily and, therefore, the purchase <(12)> This later Prospectus dated August 8, 1990, estimated Angeles s commitments to be six times its net worth of $32 million. (Div. Ex. 73 at 7, 21.) PaineWebber s marketing materials for Independent Living Mortgage II advertised the securities as a way to lock in a ten percent yield in a time of falling interest rates. (R s Exs. 11, 18.) Angeles Housing reported a net loss for each of its first three fiscal years and in 1990 it expected to report net losses from operations for the next four to five years. (Div. Ex. 73 at 22.) ======END OF PAGE 7====== should be considered a long-term investment. (Div. Ex. 72 at 18.) The Prospectus s discussion of the reinvestment plan noted that investors should not assume that they would be able to sell their shares to the Reinvestment Agent in the future, but that the latter would attempt to match buy and sell orders. However, this service did not constitute a market that investors could rely on to sell their shares. (Div. Ex. 72 at A-2.) 1. The Sullivans Father Richard K. Sullivan, a Roman Catholic priest, opened a joint account with his 88 year old mother at PaineWebber in June 1991.<(13)> Father Sullivan chose Mr. Gartz as the account executive because he knew Mr. Gartz from his activities in the church where Father Sullivan was stationed. The account held $50,000 that Mrs. Sullivan had received from the sale of her home. Mrs. Sullivan s only other assets were certificates of deposit of about $40,000 and annual pension income of about $6,480. Father Sullivan told Mr. Gartz that their investment objective was to have the account provide sufficient income to pay his mother s housing costs. Father Sullivan, who acted for his mother in managing the account, was not knowledgeable about securities. Father Sullivan trusted Mr. Gartz to invest the funds in safe, low risk investments which would accomplish the account s purpose. He accepted and followed Mr. Gartz s investment advice and signed whatever documents Mr. Gartz asked him to sign. (Div. Ex. 36 at 15-16, 24-25.) Relying on Mr. Gartz s advice, Father Sullivan transferred the entire $50,000 from the Sullivan s PaineWebber Money Market account and purchased units of Independent Living Mortgage sometime after June 1991. (Div. Ex. 36 at 17-18.) Mr. Gartz arranged for the Sullivans to purchase the units from the account of Elsie Barker, another of his clients. PaineWebber s deputy director of compliance, who was sent to review Mr. Gartz s accounts in the fall of 1991, found the documentation for this transaction confusing. (Tr. 160-80.) The Barker letter of authorization for the transfer of units to the Sullivan account is dated May 2, 1991. (Div. Ex. 34.) However, the Sullivans signed the letters of authorization for the sale of their Money Market and purchase of the units on August 6 and August 20, 1991, respectively. (Div. Ex. 34.) Records for the account indicate that the Sullivans sold shares in their Money Market account on August 8, 1991, and received Independent Living Mortgage units in their account on December 19, 1991. (Div. Ex. 35.) The Sullivans received the expected nine or ten percent return on Independent Living Mortgage initially, but the return dropped to less than four percent, and Father Sullivan asked PaineWebber to buy the securities back after Independent Living Mortgage went into receivership in 1993 or 1994. The Sullivans did not suffer any financial loss because PaineWebber <(13)> The parties agreed to the admission of Father Sullivan s testimony in the form of a videotape and transcript of his deposition taken on October 16, 1996, subject to my ruling on the objections made at the deposition. (Div. Exs. 36, 36A; Tr. 524- 26.) I find that the objections provide no reason to strike the witness s testimony. ======END OF PAGE 8====== purchased the units back at their request on March 7, 1994.<(14)> (Div. Ex. 36 at 32, 35.) 2. Marjorie Moore The evidence contains a letter of authorization dated October 23, 1991, from Marjorie Moore, a customer of Mr. Gartz, directing the transfer of $5,000 from her account to the Sullivan account for purchase of Independent Living Mortgage. (Div. Exs. 39, 40.) Father Sullivan did not authorize the sale, was unaware that it occurred, and did not know that a $5,000 transfer by Ms. Moore into the account was the source of the $1,250 check his mother received in October 1991. (Div. Exs. 35 and 36 at 25-26.) The preponderance of the evidence supports the Division s claim that Mr. Gartz arranged for Marjorie Moore to buy 500 units of Independent Living Mortgage from the Sullivans because the Sullivan account contained only $462 after he had them buy $50,000 worth of Independent Living Mortgage in August. Mr. Gartz made the sale to Marjorie Moore to get money to pay the Sullivans what they thought was interest on their units of Independent Living Mortgage in October 1991. (Division s Proposed Findings of Fact at 13-14.) 3. Marguerite M. Adams Mrs. Adams and her husband opened a joint account at PaineWebber with Mr. Gartz as account executive in 1988 or 1989. While her husband was alive, Mrs. Adams did not have any dealings with Mr. Gartz about the account. (Tr. 252.) In March 1991, the account held $40,000 in two direct investments, Pegasus Aircraft Partners II, L.P. ( Pegasus ) and Corporate Property Associates-10 ( CPA-10 ), and $5,000 in a Money Market fund. (R s Ex. 1.) Mr. Adams died in April 1991 and Mrs. Adams had Mr. Gartz change the account to a single account in her name in June or July 1991. (Div. Ex. 22.) At the time she was 66 years old, a homemaker with an annual income of between $18,000 and $20,000, and her total assets of about $100,000 were in her PaineWebber account.<(15)> (Tr. 221-22, 225-26, 250-51.) She did not own a home. Her investment objective was to obtain income and she did not want to take any risk. (Tr. 229.) In the summer of 1991, Mr. Gartz called and suggested to Mrs. Adams that she take money from her money market account, where she had placed Mr. Adams s life insurance proceeds, and invest in Independent Living Mortgage because it would pay a higher rate of interest than the money market was paying, ten percent rather than four or five percent. (Tr. 230-33.) Mrs. Adams consulted with her son, who urged her to get more information, <(14)> The Sullivans quarterly returns went from $1,250, or 10 percent, to $450, or 3.6 percent. (Div. Ex. 36 at 34.) <(15)> Mrs. Adams testified that the new account form erroneously stated her net worth at $300,000, her liquid income at $60,000, and her annual income at $50,000. (Tr. 225-26; Div. Ex. 22.) ======END OF PAGE 9====== especially about liquidity. (Tr. 232.) Mrs. Adams authorized the purchase on August 6, 1991, after Mr. Gartz assured her that she would be able to the redeem her units within a fairly good time because [she] didn t want to tie up [her] money that [she] couldn t get it out if [she] needed to. (Tr. 231.) Mr. Gartz assured her it would not take that long to sell if something came up and she needed to get her money out, and she took this to mean that she would have her money within a month. (Tr. 231-33, 252.) He represented that this was the last of a new offering. Mrs. Adams asked for a Prospectus but never received one. (Tr. 232.) Mr. Gartz arranged for Mrs. Adams to buy units of Independent Living Mortgage at $10 a unit from the account of another of his customers, Alexander Hirst. The sum of $11,150 was transferred from Mrs. Adams s account on August 8, 1991, and the account received units of Independent Living Mortgage on December 6, 1991. (Div. Exs. 25, 27.) In December 1991, 76 percent of Mrs. Adams s total assets were in direct investments. (Div. Ex. 25.) From at least April 1991 until August 1991, when the money from Mrs. Adams was transferred into the Hirst account, the Hirst account had a debit balance. One of only two possible explanations is that Mr. Gartz authorized a check disbursement out of the account before he could find a buyer for the units, and then he had Mrs. Adams buy the units to cover the debit balance in the account.<(16)> (Tr. 186-89.) This unusual occurrence is not a sound business practice. (Tr. 186-87.) Mrs. Adams did not suffer any financial loss because PaineWebber bought the units back from her after she complained when the returns on Independent Living Mortgage dropped precipitously after December 1991.<(17)> (Tr. 247-48.) 4. Thomas Frazee Thomas Frazee, opened an Individual Retirement Account ( IRA ) at PaineWebber with Mr. Gartz in about 1980, six years before he retired. The account had assets of $300,000 to $350,000. Mr. Frazee also had securities valued at about $150,000 in an account with another brokerage firm. Mr. Frazee told Mr. Gartz he was a conservative investor interested in safety and preserving capital, and who wanted his investments to generate income. (Tr. 478.) <(16)> The other possibility is that the original trade was never paid, but there is no evidence that this occurred. <(17)> PaineWebber also bought back her units of Pegasus and CPA- 10. (Tr. 249.) Mrs. Adams was upset to learn that the quarterly payments had included a partial return of principal. (Tr. 248.) In 1993, some PaineWebber brokers in the Naples office were upset to learn that quarterly distributions on PaineWebber Insured Mortgage Partners included return of principal. (R s Ex. 8; Tr. 552.) ======END OF PAGE 10====== When Mr. Gartz called in November 1991 and recommended that he buy $50,000 worth of Independent Living Mortgage, Mr. Frazee asked about liquidity because he was concerned that he might already own sufficient direct investments. (Tr. 490-91.) He already owned $45,000 worth of Geodyne I/P-1, $50,000 worth of Independent Living Mortgage Inc. II, and one more which he had purchased on Mr. Gartz s recommendation.<(18)> (Tr. 487, 490-91; Div. Ex. 10A.) Mr. Frazee s notes from a November 14 conversation with Mr. Gartz where the latter claimed that PaineWebber guaranteed that (1) Independent Living Mortgage would pay a 10 percent return, and (2) it would repurchase the units for what he paid at the end of any quarter, appear to have been taken in 1990 not 1991. (Tr. 480-82, 498-501, 657-58.) Even though 1990 is outside the time period when the alleged violations occurred, Mr. Gartz does not contend that he corrected this false and misleading information when he urged Mr. Frazee to purchase Independent Living Mortgage in 1991. (Tr. 657-58.) Based on Mr. Gatz s advice, Mr. Frazee purchased $50,000 worth of Independent Living Mortgage on November 20, 1991.<(19)> (Div. Ex. 7.) Mr. Gartz arranged for Mr. Frazee to purchase the units from the account of another of his customers, Sarah a/k/a Sally Coffey, at the original unit cost of $10. Ms. Coffey had sent Mr. Gartz a written directive to sell the two direct investments in her account, Independent Living Mortgage and PaineWebber Insured Mortgage Partners on April 20, 1991, because she needed the funds for a real estate purchase.<(20)> (Div. Ex. 4.) Mr. Gartz advised her to wait until after June to sell so that she would receive interest for the quarter, and told her that it would take a week to sell the units. (Tr. 448, 453.) Ms. Coffey was surprised to learn at the end of the summer that she still owned the units and she called Mr. Gartz to find out why, but did not get a satisfactory answer. (Tr. 454.) Mr. Frazee later complained to PaineWebber about his direct investments. As a result, PaineWebber offered to buy back his units of Geodyne and either Independent Living Mortgage or Independent Living Mortgage II. (Tr. 492.) In October 1996, Mr. Frazee owned Independent Living Mortgage which was valued at between $20,500 and $30,500. (Id.) <(18)> The Settlement Order refers to twenty-nine PaineWebber oil and gas limited partnerships referred to as Geodyne Institutional Pension Programs ( IP ) and Geodyne Energy Income Programs. (R s Ex. 2, Exhibit A at 4.) <(19)> The units were transferred into his account in January 1992. (Div. Exs. 3, 10C.) <(20)> In the same certified mail letter, Ms. Coffey directed Mr. Gartz to consolidate the joint account she had with her mother with her account. (Tr. 448.) Ms. Coffey s parents, who died in 1990 and 1991, had been customers of Mr. Gartz. Her mother added Ms. Coffey s name to her account in the late 1980s when Ms. Coffey s husband was diagnosed with lung cancer. Ms. Coffey has six children. ======END OF PAGE 11====== B. PaineWebber Insured Mortgage Partners 1A ( Insured Mortgage Partners ) Insured Mortgage Partners was a 1987 offering totaling $250 million dollars to fund two series of limited partnerships which invested in a diversified portfolio of federally insured or coinsured mortgage loans through the purchase of Government National Mortgage Association ( Ginnie Mae ) securities.<(21)> (Div. Ex. 71 at 1; Tr. 101.) The offering was sold at one hundred dollars a unit, with a five thousand dollar minimum for individual investors. The Prospectus indicates that the general partner anticipated having to have the units listed on NASDAQ within twelve to thirty-six months, but it specified that there was no assurance that a public trading market would develop. (Div. Ex. 71 at 3, 24.) The units were, in fact, never traded publicly. (Tr. 101, 266.) The Prospectus which Mr. Gartz read warned that: Unitholders may not be able to liquidate their investments in the event of an emergency. In addition, if the Units are not listed on NASDAQ, the Units may not be readily accepted as collateral for a loan. Consequently, the purchase of Units should be considered only as a long-term investment. Furthermore, even if a market for the sale of Units were to develop, there can be no assurance given as to the value which a Unitholder could receive for his Unit. (Div. Ex. 71 at 24-25.) Contrary to the cautionary statements in the Prospectus, PaineWebber s D.I. Dept. circulated to registered representatives materials aimed at aggressively marketing Insured Mortgage Partners. The following example is in one of the formats used:<(22)> A Safety-Conscious Investor s Dream ALL THE BENEFITS OF GOVERNMENT - INSURED MORTGAGES . . . PLUS SAFETY - AAA QUALITY Principal and base interest guaranteed by instrumentalities of U.S. government. Base yield can increase but never drop. UPSIDE PARTICIPATION Participation features propel yield higher as demand inflation drives up rents and property values while investors are assured a maximum priority return. HOLDING PERIOD Projected 8 to 10 years LIQUIDITY Units will be NASDAQ traded within 12 to 36 months of Partnership closing to accommodate the unforeseen investor circumstance. . . . <(21)> The record contains various names for the two series which I will refer to as Insured Mortgage Partners and Insured Mortgage Partners 1B. <(22)> This undated material also reminded brokers that they would receive 5.5% non-grid gross commission with 40% payout with 50% retroactive volume bonus. (R s Ex. 14.) ======END OF PAGE 12====== YOUR BUYERS *All conservative investors *IRA and Keogh Investors *CD and Treasury buyers *Pension Plans and Credit Unions *Large Savings Accounts (R s Ex. 14.) In one piece of material dated in 1987, PaineWebber s D.I. Dept. promoted Insured Mortgage Partners as a product that provided safety of principal, a high initial yield that beats short-term CDs, liquidity, and strong upside potential. (R s Ex. 15.) In material dated in 1988 or 1989, it urged PaineWebber brokers to solicit sales of Insured Mortgage Partners 1B to clients who are adverse to risk, but do want premium returns (10- 13%) . . . It s perfect for retirement funding or as a CD alternative. (R s Ex. 17.) Marketing materials issued in the late 1980s described the holding period as 8 - 10 years to partnership liquidation, and asked What Pays 7 - 7.5% with Attractive Upside AND is Guaranteed by the United States Government. . . ? (R. Ex. 23.) Mr. Gartz relies on PaineWebber s D.I. Dept. for his belief that the underlying Ginnie Maes held by Insured Mortgage Partners either could not be prepaid or had conditions which made prepayment unlikely so that the yield on the units would not drop in response to falling interest rates like individual Ginnie Maes, and that the eight to eight and a half percent return could not go down but could increase. (Tr. 648-50.) 1. Ina A. Tourtellotte and Palma Pasqualini In 1985, Mrs. Tourtellotte, a retired widow, opened accounts with Mr. Gartz for herself and her mother, Mrs. Pasqualini, an 82 year old widow. Mrs. Pasqualini depended on Mrs. Tourtellotte s advice in handling the account. These were Mrs. Tourtellotte first brokerage accounts. She selected Mr. Gartz because of his reputation in the community as someone she could trust. Mrs. Tourtellotte put all her assets, $194,000, which included the proceeds from the sale of her home in Connecticut, and $80,000 of her mother s assets in their respective individual PaineWebber accounts. (Tr. 36, 43.) Mrs. Tourtellotte told Mr. Gartz that her main concern was safety of principal, and that this account and her part time employment were her only sources of income. She informed him that she and her mother were widows who depended on these assets for their livelihood. (Div. Ex. 21.) Mrs. Tourtellotte followed all of Mr. Gartz s recommendations, and left it up to him to decide what was best for her and her mother.<(23)> (Tr. 38, 72.) <(23)> In the summer of 1991, things occurred which concerned Mrs. Tourtellotte. For example, she had told Mr. Gartz she needed funds to start a business, and thought he arranged for the money to come from her account. When she received notices for payment from PaineWebber that she did not understand, she asked Mr. Gartz who told her everything was all right and not to worry. (Tr. 42.) In fact, Mr. Gartz had Mrs. Tourtellotte borrow the money from PaineWebber on margin. In August 1991, she paid PaineWebber interest at 10% on an average loan balance of $27,192. (Div. Ex. 12A.) ======END OF PAGE 13====== Mr. Gartz told Mrs. Tourtellotte that interest was high on PaineWebber direct investments and there was no risk because the funds were government insured. (Div. Ex. 21.) In July 1991, the Tourtellotte account owned $75,000 of Insured Mortgage Partners 1B and $20,000 of Independent Living Mortgage. Some 61 percent of Mrs. Tourtellotte s assets consisted of direct investments. (Div. Ex. 12A.) The Pasqualini account owned Ginnie Mae certificates and $25,000 of Insured Mortgage Partners. (Tr. 44-46.) On her statement for August 1991, Mrs. Tourtellotte noticed a $12,403 withdrawal from her account and a $45,364 withdrawal from her mother s account. (Tr. 42-46, 56-58.) Mrs. Tourtellotte was unaware of letters of authorization dated August 14, 1991, authorizing transfer of these funds for the purchase of Insured Mortgage Partners. (Tr. 48-51.) Neither Mrs. Tourtellotte nor her mother signed the authorizations.<(24)> (Tr. 49-50, 55.) Funds were transferred from Mrs. Tourtellotte s and Mrs. Pasqualini s accounts to the account of Rudolph and Eunice Schmitt for the purchase of Insured Mortgage Partner 1B at $100 a unit.<(25)> (Div. Exs. 14, 18; Tr. 86-88.) The Schmitts were customers of Mr. Gartz who were sick and wanted to liquefy their assets. When Mrs. Tourtellotte questioned Mr. Gartz, he did not tell her that he had purchased direct investments but said that PaineWebber was revamping its customer statements and the money was in her account. PaineWebber returned all the funds that Mrs. Tourtellotte and Mrs. Pasqualini invested in direct investments, except the loan amount, after Mr. Tourtellotte contacted an attorney and complained to PaineWebber in April 1992. (Div. Ex. 21; Tr. 68-69.) 2. Louis Camill Mr. Gartz was the account executive on the joint account of Louis J. and Margaret L. Camill, which transferred $50,000 to the Marshall & Isley Trust account on June 14, 1991. (Div. Ex. 31.) The trust was not a client of Mr. Gartz. Louis Camill signed transfer papers to buy units of Insured Mortgage Partners on August 8, 1991, and Lori Bremen signed for the seller, the Marshall & Isley Trust for benefit of John Shomer Trust, on September 14, 1991. (Div. Ex. 30.) On December 19, 1991, 500 units were transferred out of the Marshall & Isley Trust to the Camill account. (Tr. 204; Div. Ex. 32.) None of the parties to the transaction testified at the hearing. C. Pegasus Aircraft Partners II, L.P. ( Pegasus ) Pegasus was a 1989 offering of $145.6 million of limited partnership units at twenty dollars per unit, with a minimum investment of five thousand dollars. (Div. Ex. 70 at 1.) Pegasus was formed to acquire used commercial aircraft and to lease them to commercial airlines. The offering was limited to individual investors with a minimum annual gross income <(24)> The Order Instituting Proceedings does not allege that Mr. Gartz forged his customers signatures on documents. <(25)> The funds were withdrawn, but according to the Division, the units were not transferred from the Schmitt s account. (Division s Proposed Findings of Fact at 18.) ======END OF PAGE 14====== and/or net worth. (Div. Ex. 70 at 4.) The Prospectus noted that: This Offering involves various material risks, including risks associated with the ownership and leasing of aircraft, federal aircraft regulation, state and local regulation of airports and air carriers, general economic and business considerations, federal income tax matters, the lack of liquidity because of the absence of a market for the Units and material adverse tax consequences under existing federal tax law if a public market should develop. . . . The only persons who should subscribe for Units are those who have adequate financial means to assume such risks and to provide for their current needs and personal contingencies and who can afford to bear the full loss of, and who have no need for liquidity with respect to, their investment. (Div. Ex. 70 at 3-4.) Mr. Gartz recalled that PaineWebber s D.I. Dept. claimed that the aircraft could probably be leased for ten years and then sold at the purchase price because the planes would be modernized and maintained at a high level by the lessees due to government requirements. (Tr. 650-51.) Also, aircraft rentals would not be a problem even if a particular lessee encountered financial difficulty because of the worldwide need for aircraft. (Tr. 651.) 1. John Durig In 1991, Mr. Durig opened two accounts with Mr. Gartz on the recommendation of his father who was one of Mr. Gartz s customers. Mr. Durig s PaineWebber accounts had about $250,000 in total assets, and he also had retirement accounts at another brokerage firm. The activities at issue involve Mr. Durig s trust account which he opened at PaineWebber on March 15, 1991. Mr. Durig s new account form shows his investment objectives listed in order of priority as growth, safety, income, and speculation. (Div. Ex. 47; Tr. 512.) Mr. Durig believed his account objectives to be growth, some liquidity because of college expenses, and a reasonable return.<(26)> (Tr. 509, 520.) When he opened the account, Mr. Durig authorized the purchase of two direct investments: $50,000 worth of R & D Partners III and $50,000 of Independent Living Mortgage II. (Tr. 512; Div. Ex. 47.) His statement for October 1991 shows ownership of these units and $50,000 worth of Corporate Property Associates 11 which raised the percentage of direct investments in the portfolio to 89.54 percent. (Div. Ex. 50A.) Mr. Durig s January 1992 account showed that he owned Pegasus. (Tr. 513.) Mr. Durig did not authorize or sign the letter of authorization, dated August 16, 1991, directing the withdrawal of $10,000 from his account, and the transfer of $5,000 to Harry E. Allen and the transfer of <(26)> Mr. Durig s use of the term liquidity means being able to get his money from the investment in about a month. (Tr. 522.) ======END OF PAGE 15====== $5,000 to Avelyn B. Booty for the purchase of Pegasus units. (Tr. 519-20.) As a pilot aware of situations where bankrupt airlines terminated aircraft leases, Mr. Durig would not have purchased Pegasus. (Tr. 514.) Mr. Durig contacted officials at PaineWebber and it bought back the Pegasus units.<(27)> (Tr. 514-15.) 2. Robert A. and Leona F. Bliven Neither Mr. or Mrs. Bliven nor Patricia A. Frericks, who the Division claims were customers of Mr. Gartz, testified at the hearing. The evidence is that on May 1, 1991, $25,000 was transferred from the Blivens account to the Frericks account. (Div. Ex. 61; Division Findings of Fact at 23.) On September 30, 1991, the Blivens signed transfer documents to buy 1,250 units of Pegasus from Ms. Frericks. Ms. Frericks signed transfer documents to sell on the same date. (Div. Ex. 63.) The Pegasus general partner approved the transfer on December 5, 1991, effective the first day of the next quarter, January 1, 1992. (Id.) D. PaineWebber Equity Partners II ( Equity Partners II ) Equity Partners II was an investment in commercial properties. (Tr. 651.) In late August 1991, Mr. Gartz s customer Anna Innis bought $10,562 worth of Equity Partners II at par or $1.00 a unit from another of his customers, Patricia A. Frericks. PaineWebber valued the units at $0.70 a unit on Ms. Frericks s August 1991 statement. (Tr. 120-24; Div. Exs. 60, 61.) Legal Conclusions<(28)> I find the Mr. Gartz willfully violated the antifraud provision of the securities statutes in that in connection with the offer and sale of securities, which involved instruments of interstate commerce, he employed devices and schemes to defraud which caused Father Sullivan, Mrs. Adams, Mrs. Tourtellotte, Mrs. Pasqualini, and Mr. Frazee, older unsophisticated investors with limited assets, to believe that investing in Independent Living Mortgage and Insured Mortgage Partners involved little risk and was appropriate to achieve their investment objectives when Mr. Gartz knew, or was reckless in not knowing, that this information was false.<(29)> <(27)> Mr. Durig was part of a class action settlement with respect to other direct investments which Mr. Gartz sold him. His PaineWebber statement for August 1996 did not show a value for R & D Partners III, but it valued Corporate Properties Associates 11 at over $50,000, and Independent Living Mortgage at between $24,500 and $41,350. (Tr. 515-18.) <(28)> I have considered all the arguments advanced by the parties and reject those that are inconsistent with this decision. <(29)> I reject Respondent s position that because the Order Instituting Proceeding charged conduct between August 12, 1991, (continued...) ======END OF PAGE 16====== Willfulness implies a deliberate action as distinguished from an accidental, inadvertent, or negligent violation. United States v. Baldwin, 770 F.2d 1550, 1557-58 (11th Cir. 1985), cert. denied, 475 U.S. 1120 (1986). Courts have long held that willfulness in the context of Section 15(b) of the Exchange Act means no more than intentionally committing the act that constitutes the violation. Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); C. James Padgett, 64 SEC Docket 312, 331 n.34 (March 20, 1997). Liquid assets are cash or assets that can be immediately converted to cash. Black s Law Dictionary 838 (5th ed. 1979). In the period August 1991 through January 1992, Mr. Gartz knew that that units of the four PaineWebber direct investments at issue in this proceeding were illiquid in that they were not publicly traded, they were not listed on any exchange or with NASDAQ, and there was no guarantee of repurchase under the reinvestment programs. Mr. Gartz acted fraudulently in that he lied and told Mrs. Adams that Independent Living Mortgage was a liquid investment; he made the same false representation to Mrs. Tourtellotte about Insured Mortgage Partners; and he did not disclose to the Sullivans, Mrs. Adams or to Mr. Frazee that the Independent Living Mortgage Prospectus, which he read word for word, warned that the investment was appropriate only for persons of adequate means with no need for liquidity, and that Independent Living Mortgage would bear the risk of any decline in property values.<(30)> (Tr. 101-08; Div. Ex. 72 at 7, 14.) Mr. Gartz knew these investors were all retired individuals who wanted to invest in safe investments which would earn income needed for their living expenses, yet he engaged in deceptive conduct which caused them to put a large portion, and in some cases all, of their assets in direct investments which he knew did not satisfy their investment objectives. On <(29)>(...continued) until approximately January 1992, I should not consider record evidence about the Sullivan, Adams, and Camill trades. (Respondent s Post Hearing Brief at 2 n.2.) In the Sullivan account almost all the parts of the transactions at issue occurred within this period; funds for Mrs. Adams s purchase left her account on August 8, 1991, and she received the units on December 6, 1991; the seller in the Camill transaction signed the transfer papers on September 14 and the Camill account received the units in December 1991. The fact that part of the transaction occurred outside the dates specified does not disqualify the transaction. <(30)> Mr. Gartz denies making most of the representations, and being responsible for the conduct, which his customers attribute to him. Based on my observation of the witnesses and the many discrepancies in Mr. Gartz s sworn testimony, I believe the witnesses. For example, Mr. Gartz denies he told Mr. Frazee that PaineWebber guaranteed payment of 10 percent interest on Independent Living Mortgage, and that it would it buy back the units for purchase price at the end of any three month period. (Tr. 659-60.) However, Mr. Frazee s notes written contemporaneously with the phone conversation support his position. (Div. Ex. 9.) ======END OF PAGE 17====== Mr. Gartz s recommendation, and as noted he controlled these accounts, the Sullivans invested their entire PaineWebber account, Mrs. Adams invested almost all her total assets, Mrs. Tourtellotte invested over sixty percent and later over eighty percent of her total assets, Mrs. Pasqualini invested almost ninety percent of her total assets, and Mr. Frazee invested approximately half the assets in his PaineWebber account, in risky, illiquid securities. Mr. Gartz s own witness expressed serious concerns about the participation in the securities industry of brokers who put a large portion of a customer s assets in direct investments. (Tr. 578-79.) Mr. Gartz s fraudulent conduct included false representations of material issues including, for example, that Independent Living Mortgage would earn ten percent when he knew that to achieve this projected return some housing developments as yet unbuilt would have to be fully occupied, and that the projection depended on the performance of Angeles, a developer with no record of success in senior citizen housing. Also, in 1991, Mr. Gartz should have been aware that the prospectus for Independent Living Mortgage II dated August 8, 1990, reported that Angeles experienced a net loss of over $6.7 million from operations in the first three quarters of fiscal 1990. (Div. Ex. 73 at 22.) Material information is what a reasonable investor would consider significant in making an investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). This information was significant to all the investors who specified income as a primary investment objective. The Sullivans, for example, were depending on their limited assets to cover the housing expense of Mrs. Sullivan who was 88 years old in 1991. Mrs. Adams s no nonsense manner and her attention to detail cause me to believe that she made clear to Mr. Gartz that her objective was to obtain income and not to incur any risk with her principal. (Tr. 227, 229.) I find her testimony persuasive that she did not provide Mr. Gartz with the exaggerated financial information on her new account form. (Tr. 223-26.) Mr. Gartz s explanation that he got the information from the late Mr. Adams is unpersuasive because the account was for Mrs. Adams and Mr. Adams had been dead for several months. Violations of Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act require a finding of scienter, a mental state embracing intent to deceive, manipulate or defraud, which can be satisfied by a showing of recklessness approaching intentional conduct. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990), cert. denied, 499 U.S. 976 (1991); Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 (11th Cir. 1985); Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 115 F.3d 1127, 1129 (3d Cir. 1997). The overwhelming evidence is that between August 12, 1991, and January 1992, when he recommended that his customers purchase these direct investments, Mr. Gartz knew, or was reckless in not knowing, that they were not liquid, safe investments. The persuasive evidence is that Mr. Gartz had reasons other than the buyers best interests in making these sales. Mr. Gartz had the Sullivans buy units of Independent Living Mortgage because he was under pressure by another customer to sell the units. Elsie Barker, who sold the units to the Sullivans, had been a customer of Mr. Gartz. In early 1991, Mr. Ferrin, Ms. Barker s grandson and the executor of her estate, threatened to report Mr. Gartz to PaineWebber if he did not liquidate the direct ======END OF PAGE 18====== investments in Ms. Barker s account, including $69,000 worth of units in Independent Living Mortgage. (Tr. 117-19, 171-72, 342-45.) Mr. Gartz could not find buyers for the units, so he had PaineWebber in effect buy back some of the units in February and March 1991 creating a debit in the account.<(31)> (Tr. 170-72.) Once the estate cashed the check, the only way to eliminate the debit in the account was to sell the securities in the account. (Tr. 175.) The paperwork documenting the transfer of the units from the Barker account to the Sullivan account is unusual and raises questions.<(32)> (Tr. 170-80.) Mr. Gartz further willfully violated the antifraud provisions when he caused the Sullivans, Mrs. Adams, and Mr. Frazee to pay $10 a unit for Independent Living Mortgage units when he knew, or was reckless in not knowing, that units were available for less than this amount. PaineWebber s DIN program, which was available to Mr. Gartz, indicates six sales of Independent Living Mortgage in August 1991 ranging from a low of $6.98 a unit to a high of $8.00 a unit, and seven sales in November 1991 ranging from a low of $7.50 a unit to a high of $9.50 a unit. (Div. Ex. 67 at 15-16; Tr. 400-04.) Mr. Gartz offered no reason why he did not check PaineWebber s DIN system which would have shown offers to sell Independent Living Mortgage units at less than $10 a unit in August and November 1991 when he arranged for the purchase by the Sullivans, Mrs. Adams, and Mr. Frazee. (Tr. 700.) PaineWebber s procedures called for account executives to consult the DIN screen, but it was not required. However, it was understood that a representative would get the best price for the customer - the lowest price for buyers and the highest price for sellers. (Tr. 276.) Mr. Gartz had a duty to obtain the best price for his customers, and his failure to do so in these circumstances was a fraudulent act.<(33)> <(31)> It appears that the account was put in a debit position when the estate executor was allowed to withdraw $183,214.59 in February 1991. (Tr. 170-74.) Transfer of the Independent Living Mortgage units to the Sullivan account occurred on December 19, 1991. (Tr. 177-79.) <(32)> According to the Division, because the transfer of funds left very little assets in the Sullivan account for several months, Mr. Gartz arranged a transfer of $5,000 from another customer, Marjorie Moore, into the Sullivan account in exchange for 500 shares of Independent Living Mortgage. Mr. Gartz then issued the Sullivans a check for $1,250 from the $5,000. (Division s Proposed Findings of Fact at 13-14.) Father Sullivan knew nothing about the sale, and believed the October 24, 1991, check for $1,250 was the quarterly interest on Independent Living Mortgage. (Div. Ex. 36 at 24-26.) <(33)> Under the shingle theory, investors are entitled to rely on the implied representation that they will be dealt with fairly, honestly and in accord with industry standards. Trost & Co., 12 S.E.C. 531, 535 (1942); Duker & Duker, 6 S.E.C. 386, 388- 89 (1939). See also, Thomas L. Hazen, The Law of Securities (continued...) ======END OF PAGE 19====== For all these reasons, Mr. Gartz also acted fraudulently when he arranged for (1) Anna Innis to pay $1.00 a unit for Equity Partners II in August 1991, when PaineWebber valued the units at $0.70 on the seller s account statement, and when the DIN program showed sales in the month at between $0.28 and $0.45, and (2) Mrs. Tourtellotte and Mrs. Pasqualini to buy Insured Mortgage Partners 1B at $100 a unit in August 1991 when the DIN program showed the previous three sales in June and May occurred at between $70.25 and $95.56 a unit.<(34)> (Div. Ex. 67; Tr. 120-23.) Even if you accept Mr. Gartz s claim that Mr. Durig authorized the purchase of Pegasus units, which Mr. Durig denied, Mr. Gartz s conduct was fraudulent in that he knew Pegasus did not fit Mr. Durig s investment objectives of income, safety, and liquidity. The Pegasus Prospectus spelled out the considerable risks involved and specified that the investment was for persons with no need for liquidity. (Div. Ex. 70 at 4.) Moreover, by 1990 and 1991, Mr. Gartz knew that certain airlines that leased airplanes from Pegasus had filed for bankruptcy, and that Pegasus units were neither listed on the NASDAQ nor publicly traded. (Tr. 109-16; Div. Exs. 81, 82, 83.) Moreover, in August 1991, he arranged for Mr. Durig to pay the original offering price of twenty dollars a unit when sales in the month occurred at a low of $17.09 to a high of $19.00. (Div. Ex. 67.) I reject Respondent s claim that he did not act with scienter because he relied on materials supplied by PaineWebber, a firm that in 1991 had a very good reputation in the industry. (Tr. 618.) PaineWebber s marketing materials for these direct investments consisted of indefensible hype.<(35)> Some of the materials in evidence bear no dates and those that have dates were issued in 1987 through 1989, well before August 1991. (R s Exs. 10, 11, 13, 15, 16, 17, 22.) The preponderance of the evidence does not establish that Mr. Gartz relied on these materials when he acted illegally. Mr. Gartz testified that he relied on the materials to some extent. (Tr. 645.) The weight of the evidence is that Mr. Gartz knew, or was reckless in not knowing, by August <(33)>(...continued) Regulation, 423-28 (2d ed. 1990). Investors can be deceived by undisclosed conduct that is inconsistent with this representation. See, e.g., Charles Hughes & Co. v. SEC, 139 F.2d 434, 437 (2d Cir. 1943), cert. denied, 321 U.S. 786 (1944). <(34)> The evidence concerning the Camill purchase is insufficient to show illegal conduct. <(35)> The following statement from a one-page circulation touting Insured Mortgage Partners 1B, quoted in the format in which it appeared, stated: Sales Incentives: * 5.7% commission - 40% payout with 10% volume bonus. * Broker residuals at $100,000 of sales in the product. * The Choice is Yours Incentive Trip (Monte Carlo, France, Vail, Colorado or BOTH.) (R s Ex. 12.) ======END OF PAGE 20====== 1991 that much of the marketing information that the D.I. Dept. had supplied to PaineWebber s representatives was inaccurate. Mr. Gartz recommended that the Sullivans buy Independent Living Mortgage at the same time he was having trouble selling this and other direct investments for at least two others customers: Sarah Coffey and the Barker estate. Ms. Coffey directed Mr. Gartz to sell her direct investments in April 1991. He estimated it took him about six months to do so. (Tr. 117-18.) The determinative fact is that Mr. Gartz lied, misrepresented, or did not disclose to investors material information which he knew or was reckless in not knowing. The Division places great emphasis on the unsuitability of Mr. Gartz s activities citing Clark v. John Lamula Investors, Inc., 583 F.2d 594, 600 (2d Cir. 1978), for the proposition that violations of the antifraud provisions occur where the broker recommended the investment even though he knew or reasonably believed that the investors were unsuitable. Since Mr. Gartz s activities violated specific provisions of the securities statutes, there is no reason here to take up the limited Commission case law on suitability, a subject more often addressed by the self-regulatory organizations. Public Interest The final issue is what Commission action is appropriate in view of the findings.<(36)> Since Mr. Gartz has been found to have violated the antifraud provisions of the securities statutes and rule thereunder, a cease and desist order pursuant to Section 8A of the Securities Act and 21C of the Exchange Act is appropriate. I reject Respondent s unsupported claim that Section 504 of the Rehabilitation Act of 1973 ( Rehabilitation Act ) prohibits the imposition of any penalty or sanction against Mr. Gartz because it would constitute discrimination on the basis of a disability in violation of the Rehabilitation Act. (Respondent s Post Hearing Brief at 11.) Section 504 provides that no otherwise qualified handicapped individual shall, solely by reason of his handicap, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving federal financial assistance. I find Section 504 inapplicable to this situation where a regulatory agency is acting in the public interest to protect investors.<(37)> Finally, the case law as cited by the Division supports its position that the Rehabilitation Act <(36)> The Division would bar Mr. Gartz from association with a broker-dealer, investment adviser, investment company or municipal securities dealer; order him to cease and desist from his fraudulent activities; and require him to pay an appropriate Second Tier penalty. (Division s Reply Brief at 22-23.) Respondent maintains that the Commission should impose no sanctions and dismiss the proceeding. (Post Hearing Brief at 10, 12.) <(37)> The evidence does not show that Mr. Gartz s illegal conduct occurred while he was under the influence of alcohol or that his alleged disability caused his actions. ======END OF PAGE 21====== does not limit the Commission s authority. Community Television of Southern California v. Gottfried, 459 U.S. 498 (1983). Established criteria for determining what sanctions are appropriate in the public interest in proceedings such as this, instituted pursuant to Sections 15(b) and 19(h) of the Exchange Act, include deterrence and: 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); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). 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. at 254 n.67; Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Mr. Gartz s actions were blatant in that over a five-month period, by actions that were willful and displayed a high degree of scienter, he illegally took advantage of seven investors who had very little knowledge of the securities markets. These unsophisticated investors trusted Mr. Gartz to control most or all the assets they had accumulated over a lifetime. They accepted Mr. Gartz s professional judgment based on his position as local branch manager of a major brokerage firm, his experience in the industry, and his good reputation in the community. Mr. Gartz s fraudulent actions are exacerbated by the fact that he knew that most of the older investors needed to keep their assets safe because they needed to earn income to support them in retirement, and that the younger investors wanted income for their children. Since Mr. Gartz does not admit that he acted illegally, it is probable that if allowed to participate in the industry in an unsupervised capacity he will continue his illegal activities. Inexplicably, Mr. Gartz expressed no remorse for having betrayed the confidence of his customers. Yet, while claiming he acted in reliance on PaineWebber s misleading marketing materials, Mr. Gartz is sorry for causing trouble for PaineWebber, which terminated his employment. The securities industry depends on the integrity of its members. The record indicates that Mr. Gartz does not tell the truth. He blamed the events that are the basis of this proceeding on his failure to complete the necessary paperwork. (Tr. 684, 746.) He stated under oath that PaineWebber s Naples office always received internal ratings that were above satisfactory. Later he claimed he forgot that for 1990 the office was rated below standard, a rating lower than unsatisfactory. (Tr. 723- 24.) He told PaineWebber s internal auditors that he needed time to find the documentation for the transactions involving direct investments, but he failed to produce it. (Tr. 208-09.) Several of his misrepresentations to customers have been noted, but there are others. For example, he claimed to have always told his customers that the limited partnerships were long- term investments with a potential for repurchase in emergencies or where ======END OF PAGE 22====== people had to have their money back through a repurchase program, i.e., the possibility that the partnership would buy units back depending on demand for them. (Tr. 116, 660-61.) However, almost every customer witness testified that Mr. Gartz represented that direct investments were liquid in that they could sell them in a reasonable time. Despite Mr. Gartz s denial, the evidence is persuasive that he had a check sent to Mr. Ferrin from the Elsie Barker account before he sold some of her direct investments. (Tr. 118.) Mr. Ferrin, executor of Mrs. Barker s estate, threatened to report Mr. Gartz for taking too long to sell the assets in the account, and Mr. Gartz acknowledged he had trouble finding buyers. Mr. Gartz admitted to PaineWebber s Deputy Director of Compliance that they cut him one check or a series of checks to effectively buy back the partnerships from, from him or from the estate. (Tr. 171.) I considered the following circumstances to be sufficiently mitigating so as to lower the maximum available sanction of a bar from association with a broker-dealer to a bar with the right to reapply after two years for admission in a non-supervisory, non-proprietary capacity.<(38)> Prior to these transgressions, Mr. Gartz had not been the subject of any customer complaints or regulatory action during his twenty years in the securities industry in which he held a high profile position and had a large number of clients. Mr. Gartz s actions were not motivated by personal financial gain because he did not profit from his illegal activities. Mr. Gartz was and is excessively loyal to PaineWebber. His status at the broker-dealer was very important to him, and PaineWebber encouraged its registered representatives to sell direct investments and recognized those who did. Mr. Gartz is 53 years of age, a veteran with an enviable record of military service and civic and charitable activities, who has sought treatment for a serious drinking condition. I find it is not in the public interest to impose a civil penalty as the Division requested.<(39)> Several of the public interest considerations listed in the statute as a guide to when a penalty should be imposed are missing or are satisfied by the other action taken. (Division s Post Hearing Brief at 33.) There has been no showing that Mr. Gartz s customers suffered financial harm, or that Mr. Gartz was unjustly enriched. Mr. Gartz lost his position at PaineWebber and his wages went from above $200,000 in 1990 and 1991, to less than $10,000 in 1992 and 1993. (R s Ex. 33.) In 1995, he had earnings of about $28,000 from Northwestern Mutual Life Insurance Co. Mr. Gartz s wife has had to seek part time employment, and in 1994 he had three dependents. (Id.) The guidance provided by the case law is that the Commission often has found a civil penalty to be in the public interest where respondents have a history <(38)> I deny the Division's requests that I bar Mr. Gartz from association with any investment adviser, investment company, or municipal securities dealer because this proceeding was instituted pursuant to Section 15(b) of the Exchange Act which does not provide for such sanctions. <(39)> The Division states no reasons for its request except that it is allowed in this situation. ======END OF PAGE 23====== of violations and past regulatory actions or injunctions have not achieved the desired goal of compliance. First Securities Transfer Systems, Inc., 60 SEC Docket 441, 447-48 (Sept. 1, 1995); New Allied Development, 63 SEC Docket 807, 822 (Nov. 26, 1996). I therefore consider it highly significant that Mr. Gartz has no history of prior violations. In these circumstances, barring Mr. Gartz from association with a broker-dealer for a minimum of two years with the right to reapply in a limited capacity will serve as a deterrent. Record Certification Pursuant to Rule 351(b) of the Commission s Rules of Practice, 17 C.F.R.  201.351(b) (1996), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on February 14, 1997. ======END OF PAGE 24====== Order Based on the findings set out above, I ORDER, pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h), and 21C of the Exchange Act, that Frederick C. Gartz: 1. shall cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and 2. is barred from being associated with any broker or dealer, and from being associated with a member of a national securities exchange or registered securities association, with the right to reapply in a non- supervisory, non-proprietary capacity in two years. 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.  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. __________________________ Brenda P. Murray Chief Administrative Law Judge ======END OF PAGE 25======