Initial Decision of an SEC Administrative Law Judge
In the Matter of
Michael Lapp and
William Lucas
INITIAL DECISION RELEASE NO. 171
ADMINISTRATIVE PROCEEDING
FILE NO. 3-9144
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
______________________________
:
In the Matter of :
:
MICHAEL LAPP and : INITIAL DECISION
WILLIAM LUCAS : August 31, 2000
:
______________________________
PROCEDURAL BACKGROUND
On October 10, 1996, the Securities and Exchange Commission (Commission) instituted public administrative proceedings and cease and desist proceedings pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Exchange Act) against Respondents Michael Lapp (Lapp)1 and William Lucas (Lucas).2
The Order Instituting Proceedings (OIP) alleges that, during the period in or about June 1996 through July 1996, Respondents, in the offer or sale or in connection with the purchase or sale of securities, using jurisdictional means, directly or indirectly engaged in a device, scheme, or artifice to defraud; obtained money or property by means of materially false statements or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon any purchaser in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
The OIP alleges that in furtherance of this scheme, Respondents, in knowing or reckless disregard of registered representatives' or registered principals' duties to their customers, offered to pay, and did pay undisclosed compensation to person(s) whom they believed to be registered representative(s) or registered principal(s) to induce them to purchase the common stock of Command Credit Corp. (CDMD), whose stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act, for the accounts of customers. As an example, the OIP alleges that on or about July 16, 1996, Respondents, directly or indirectly, transferred or caused to be transferred, 20,300 shares of CDMD stock to a broker-dealer which was undisclosed compensation for previous purchases, arranged by Respondents, of 58,000 shares of CDMD at prices ranging from $0.281 to $0.34 per share by the broker-dealer.
Based on the record in this proceeding, including the Division of Enforcement's (Division) Motion for Partial Summary Disposition, Respondent William Lucas Opposition to Motion for Summary Disposition and Memorandum in Support of the Opposition, and the Division's Reply Memorandum, I issued an Order Granting Motion for Partial Summary Disposition (Granting Order), 72 SEC Docket 109 (Mar. 29, 2000). In the Granting Order, I concluded that during the period in or about June 1996 through July 1996, Lucas willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder as alleged. Id. at 111-12.
The question presented is whether it is in the public interest to impose a cease and desist order, or other remedial sanctions upon Lucas.
The Division filed a Memorandum in Support of a Permanent Penny Stock Bar Against William Lucas (Memorandum in Support) on May 15, 2000, and Lucas filed a Memorandum in Opposition of a Permanent Stock Bar and in Support of a Suspension of Three Years Nun[c] Pro Tunc to June 3, 1999 (Memorandum in Opposition) on June 28, 2000. The Division then filed a Reply Memorandum on July 10, 2000.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The findings and conclusions of my Granting Order are hereby incorporated by reference into this initial decision. The relief sought by the Division is a cease and desist order pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, disgorgement of $4,210.22 pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, and a penny stock bar pursuant to Section 15(b)(6) of the Exchange Act. Lucas does not oppose the imposition of a cease and desist order. (Memorandum in Support at 2; Memorandum in Opposition at 2-3.) Further, the parties have stipulated that $4,210.22 is the proper amount of disgorgement.
In his Memorandum in Opposition to the imposition of a permanent penny stock bar, Lucas does not contest that the CDMD stock that is the subject of this proceeding is a "penny stock." Section 3(a)(51) of the Exchange Act states that "[t]he term `penny stock' means any equity security other than a security that is . . . excluded, on the basis of exceeding a minimum price." Further, for purposes of Section 15(b)(6), Rule 3a51-1 of the Exchange Act sets out several tests to determine whether an equity security should be classified as a "penny stock." One test provides that the security, except for purposes of Section 7(b) of the Securities Act and Rule 419 thereunder, will be considered a "penny stock" if it has a price of less than $5 which can be determined based on the price at which the security is purchased or sold in a particular transaction. 17 C.F.R. § 240.3a51-1(d)(1)(i). As reflected in paragraphs twenty-seven through thirty-two of Count Two of the Indictment, to which Lucas pled guilty, he transferred at least 1,550,000 shares of CDMD stock to the "Florida Victim" as repayment for purported trading losses of $1 million. (Declaration of Burk Burnett in Support of a Permanent Penny Stock Bar Against William Lucas (Burnett Declaration) Exhibit B.) This results in a per share price of less than $1 and is evidence that the CDMD shares are properly classified as a "penny stock."
Based on the above findings, I conclude that the CDMD stock is a "penny stock" within the meaning of Rule 3a51-1 of the Exchange Act.
Under Sections 15(b)(6)(A)(i) and 15(b)(4)(D) of the Exchange Act, the Commission may censure, limit the activities of, suspend for up to twelve months, or bar from participating in an offering of penny stock, any person who was participating in an offering of any penny stock during the time of the alleged misconduct if the Commission finds that imposing any sanction is in the public interest and that person has willfully violated any provision of the Securities Act, the Exchange Act, and/or rules thereunder. Sections 15(b)(6)(A)(ii) and 15(b)(4)(B) of the Exchange Act also allow the Commission to impose the same sanctions upon a person who has been convicted of a felony or misdemeanor involving the purchase or sale of any security within ten years of the commencement of a proceeding. Willfulness is defined as intending to commit the acts which constitute the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); James E. Ryan, 47 S.E.C. 759, 761 n.9 (1982). Lucas has been found to have willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Relevant considerations in making the public interest determination include the following:
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 the particular case and the value of the sanction in preventing a recurrence. See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970). Sanctions should demonstrate to the particular respondent, the industry, and the public generally that egregious conduct will merit a harsh response. See Arthur Lipper Corp., 547 F.2d at 184.
The conduct of Lucas was egregious and committed with a high degree of scienter. As chairman, president, and chief financial officer of CDMD, Lucas had a fiduciary duty to the shareholders of the company. I concur with the findings of the District Court that the conduct of Lucas was an abuse of trust. (Burnett Declaration Exhibit F at 352 (Sentencing Minutes).) The District Court used the phrase "enormity of what he did" to describe the nature of the wrongdoing of Lucas which is indicative of the egregiousness of his actions. Id. at 351. The fraudulent conduct involved a scheme resulting in losses exceeding $1.5 million, and Lucas's failure to appreciate the enormity of his actions supports the finding that he has failed to recognize the wrongful nature of his conduct. Id. at 349-51. The District Court further found that Lucas did not "really acknowledge that he did anything wrong." Id. at 350. At one point during sentencing, Lucas denied any involvement in a "scheme to bribe brokers" and explained that he was guilty because of his part in a conspiracy. Id. at 283. Lucas admitted that he knew what he did was legally wrong, but that he was sorry and would not do it again.
I just want to say because I, we fought so hard to prove the money side, or tried to prove the money side, in the case doesn't mean that I am not terribly sorry and distressful. Two and a half years waiting for this day has been a nightmare for me and my entire family. Of course I'm sorry that it happened. Of course I wish I could just turn back time. But, so please don't, you know, interpret my argument that the numbers aren't what they say they are, I believe they're somewhat less, and, of course, you will make that decision in the final analysis, but because I fought so hard to try and prove our side of the case doesn't mean I'm not terribly sorry. I know I did wrong. And I guess I'll never have a chance to do it again anyway, but I would never do it again.
Memorandum in Opposition at 6. However, Lucas also testified that that he did not believe that he was harming the then existing shareholders of CDMD by issuing additional stock through fraudulent Form S-8 Consulting Agreements. (Burnett Declaration Exhibit F at 292-94). The District Court ultimately sentenced Lucas to a prison term of fifty-one months along with two years of supervised release and ordered Lucas to pay a $300 special assessment and $270,025 in restitution. (Burnett Declaration Exhibit E (Judgment of Conviction).)
Furthermore, in response to subpoenas issued by the Division after it started its investigation into this matter, Lucas attempted to conceal these fraudulent exchanges of stock for consulting services by having employees of his company, CDMD, submit fraudulent Form S-8 Consulting Agreements. (Burnett Declaration Exhibit C at 15-16 (Plea Minutes).) Therefore, based on Lucas's willful violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the public interest considerations discussed above, I find that it is in the public interest to impose a bar upon Lucas from participating in an offering of penny stock.
RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items set forth in the revised record index issued by the Secretary of the Commission on August 29, 2000.
ORDER
Based on the findings and conclusions set forth above:
IT IS ORDERED that, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, William Lucas shall cease and desist from committing any violations or future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
IT IS FURTHER ORDERED that, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, William Lucas shall disgorge $4,210.22, plus prejudgment interest from July 18, 1996, (see Burnett Declaration Exhibit B at 9 (date of transfer of stock to undercover broker indicated in indictment)), through the last day of the month preceding the month in which payment of disgorgement is made.3 The rate of interest shall be that established under Section 6621(a)(2) of the Internal Revenue Code, 28 U.S.C. § 6621(a)(2), compounded quarterly, pursuant to Rule 600, 17 C.F.R. § 201.600, of the Commission's Rules of Practice.
IT IS FURTHER ORDERED that, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, William Lucas be, and hereby is, barred from participating in the offering of any penny stock, including acting as a promoter, finder, consultant, agent, or other person who engages in actions with a broker, dealer, or issuer for purposes of the issuance or trading of any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.
This initial decision 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. Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one 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 twenty-one 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.
___________________________
Robert G. Mahony
Administrative Law Judge
Footnotes
1 On September 15, 1999, at a prehearing conference, counsel for the Division of Enforcement represented that it will recommend to the Commission that it accept Lapp's Offer of Settlement.
2 The findings, conclusions, and orders herein are binding solely on Lucas.
3 Respondent's counsel represented in a conference call on August 3, 2000, that the monies to be paid pursuant to the District Court's order of restitution will also satisfy the disgorgement award.
http://www.sec.gov/litigation/aljdec/id171rgm.htm
