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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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In the Matter of CHARLES F. KIRBY
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INITIAL DECISION
December 7, 2000 |
APPEARANCES:
Robert M. Fusfeld for the Division of Enforcement, Securities & Exchange Commission
David A. Zisser for Respondent Charles F. Kirby
Jeffrey J. Scott for Respondents Gene C. Geiger and Alfred Peeper
John S. Lutz for Respondent Edward H. Price
BEFORE:
Brenda P. Murray, Chief Administrative Law Judge
The Securities and Exchange Commission ("Commission") issued an Order Instituting Proceedings ("OIP") on May 7, 1998, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), and Sections 15(b), and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"). The OIP alleges that Respondent Kirby willfully violated Section 5(a) and/or Section 5(c) of the Securities Act by offering to sell, selling, and/or delivering after sale, 133,333 shares of unregistered stock to the public. The OIP further alleges that Respondents Geiger and Peeper willfully violated Section 5(a) and/or Section 5(c) of the Securities Act by offering to sell, selling, and/or delivering after sale over 2.8 million shares of unregistered stock to the public. The OIP further alleges that Respondent Price failed reasonably to supervise willful violations of Section 5(a) and/or Section 5(c) of the Securities Act by Respondents Geiger and Kirby.
I held a hearing in this matter in Denver, Colorado, on September 8, 9, and 10, 1998. The Division of Enforcement ("Division") offered thirteen witnesses and twenty-nine exhibits. Respondent Price offered two witnesses, including one expert, and eighteen exhibits. Respondent Kirby offered no witnesses and four exhibits. Respondents Geiger and Peeper offered three witnesses, including two experts, and seven exhibits. The Division filed proposed findings of fact and conclusions of law, and a posthearing brief on December 14, 1998, and a reply brief on February 23, 1999.1 Respondent Price filed proposed findings of fact and conclusions of law, and a posthearing brief on February 8, 1998. Respondents Geiger and Peeper jointly filed proposed findings of fact and conclusions of law, and a posthearing brief on February 8, 1998. Respondent Kirby filed proposed findings of fact and conclusions of law, and a posthearing brief on February 9, 1998.2
I. RELATED PROCEEDINGS
On the same day it issued the OIP, May 7, 1998, the Commission filed a civil action against Golden Eagle International, Inc. ("Golden Eagle"), Ronald A. Knittle, Mary A. Erickson, Gregory G. Vernon, Timberline Consulting, Inc., and Paul B. Vernon in the U.S. District Court for the District of Colorado ("the Court"), SEC v. Golden Eagle International, Inc., Civil Action No. 98-Z-1020 (D. Colo.).3 (Resp. Kirby Ex. M.) Gregory Vernon and Paul Vernon are brothers. (Tr. 489.)
On August 25, 1998, the Court enjoined Paul B. Vernon from further violations of Sections 10(b) and 13(d) of the Exchange Act and Rules 10b-5 and 13d-1 thereunder and Sections 5(a), 5(c), and 17(a) of the Securities Act. Mr. Vernon was ordered to pay a civil penalty of $5,000. 67 SEC Docket 2748 (Aug. 28, 1998).
On March 4, 1999, the Court enjoined Golden Eagle from further violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 13a-1, 13a-11, 13a-13, and 12b-20 thereunder. 69 SEC Docket 937 (Mar. 8, 1999).
On September 21, 1999, the Court enjoined Mr. Knittle from further violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(d) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13d-1 thereunder, and Sections 5(a), 5(c), and 17(a) of the Securities Act. The Court also enjoined Ms. Erickson, from further violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Sections 5(a), 5(c), and 17(a) of the Securities Act. The Court ordered Mr. Knittle and Ms. Erickson to jointly and severally disgorge $150,000 but waived payment and did not impose a civil penalty based on a demonstrated inability to pay. 70 SEC Docket 1916 (Sept. 22, 1999).
On December 9, 1999, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b)(6)(A) of the Exchange Act ("Order"). In the Order, entered with the consent of the Respondents, the Commission barred Mr. Knittle and Gregory Vernon from participating in an offering of penny stock, including acting as a promoter, finder, consultant, agent, or other person who engages in activities with a broker, dealer, or issuer for purposes of issuing, trading or inducing or attempting to induce the purchase or sale of any penny stock. Ronald A. Knittle and Gregory G. Vernon, 71 SEC Docket 619 (Dec. 9, 1999).
Pursuant to Section 12(k) of the Exchange Act, the Commission suspended trading in Golden Eagle from June 22, 1998, through July 6, 1998. 67 SEC Docket 1150 (June 19, 1998).
None of the Respondents in this administrative proceeding are named defendants in the related civil proceeding. (Tr. 508-09.)
II. FINDINGS OF FACT
My findings are based on the record and my observation of the witnesses' demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). I have considered all proposed findings and conclusions and arguments that the parties raised and I accept those that are consistent with this decision.
Edward H. Price and Spencer Edwards, Inc.
Mr. Price graduated from the University of Colorado with a bachelor of science degree in finance. He became a registered representative in 1969, and has been associated with several broker-dealers.4 (Tr. 610.) In March 1994, Mr. Price and other persons employed at the brokerage firm of Cohig and Associates ("Cohig") left and bought a small broker-dealer, World Securities Corp., and changed the name to Spencer Edwards, Inc. ("Spencer Edwards"). (Tr. 610, 634.) In 1995 and 1996, Mr. Price owned approximately 30% of Spencer Edwards, and he was the firm's president, chief executive officer, office manager, and compliance officer. (Tr. 609-10, 615, 741; Div. Ex. 67.) Mr. Price's "eyes and ears" at the firm in 1995-96 was its operations manager, Shawna Roatch, a high school graduate hired as a receptionist at the predecessor firm in 1994. (Tr. 698-99, 817, 836.) Mr. Price was responsible for implementing compliance procedures at the firm, and for reviewing every trade that every customer made. (Tr. 615-16; Div. Ex. 67 at 5.) Mr. Price handled this responsibility by himself until the second half of 1996 when he hired an assistant. (Tr. 655.) Prior to being deposed by the Commission in September 1996, Mr. Price believed a broker-dealer could rely totally on a transfer agent to determine whether a certificate was restricted. (Tr. 739-40.)
In 1995 and 1996, Mr. Price was directly responsible for supervising Mr. Kirby, a firm principal who owned 30% of the firm through CKC Partners, and Mr. Geiger, a registered representative.5 (Tr. 209, 613-14, 667, 740; Div. Ex. 67 at Exhibit C.) All these individuals worked with Mr. Price at a single office in Englewood, Colorado, a Denver suburb. (Tr. 241, 613-14; Div. Ex. 67 at Exhibit C.) In June 1995, Spencer Edwards bought an office from Baraban Securities. (Tr. 613.) This acquisition increased the number of client accounts and caused the number of associated registered representatives to go from fifteen to thirty-two. (Tr. 613, 625.) From June 1995 through 1996, Spencer Edwards had about 10,000 customer accounts that Hanifen, Imhoff Clearing Corp. ("Hanifen Imhoff") maintained as Spencer Edwards's clearing agent. (Tr. 620-23, 625; Resp. Price Ex. A-18.)
Mr. Price and Mr. Kirby have been friends since 1982 when Mr. Price supervised Mr. Kirby, then the chief trader, at the brokerage firm E.J. Pittock. (Tr. 38, 629-30, 695.) Mr. Price hired Mr. Kirby in November 1984 knowing Mr. Kirby had a disciplinary history in the securities industry, that he traded actively in personal accounts, and that he bought stock in private transactions. (Tr. 38, 626-30, 695-97; Resp. Price Ex. A-28.) Mr. Price also hired Mr. Geiger who he had worked with and supervised at Cohig. (Tr. 707.)
In 1982, the Commonwealth of Massachusetts entered a cease and desist order against Mr. Price for violating the state's registration provisions for securities. (Tr. 611-12.)
Charles F. Kirby
Mr. Kirby graduated from Babson College in December 1977. (Tr. 287.) He entered the securities industry in 1978 where he has been employed as a trader since 1981. (Tr. 206-07.) A lot of his activity is day trading. (Tr. 215.) Mr. Kirby controls trading in a family account, CKC Partners ("CKC"), at Spencer Edwards. (Resp. Price Ex. A.) Mr. Kirby represents that CKC is owned by the CKC Family Trust that he formed to benefit his three children. (Tr. 208-09, 235, 261-62, 287; Resp. Price Ex. A.) Mr. Kirby was unsure whether the CKC Family Trust was an irrevocable trust. (Tr. 235-36.) I find that CKC and Mr. Kirby were one and the same. Mr. Kirby was a part owner of CKC, he exercised total control over the account, and persons at Spencer Edwards considered the CKC account his personal account. (Tr. 255-56, 287-88, 628-32; Resp. Price Ex. A-28.)
First Eastern Securities submitted a Form U-5, Uniform Termination Notice for Securities Industry Registration, dated November 12, 1985, to the National Association of Securities Dealers ("NASD") noting that Mr. Kirby had been terminated because he "violated firm procedures in that he apparently falsified the firm's trading position by executing trades with various [b]roker/[d]ealers but failed to complete the required order ticket." (Tr. 626-27; Div. Ex. 8b.) On September 17, 1987, the NASD censured Mr. Kirby and fined him $5,000.6 (Tr. 249.) On May 3, 1993, the NASD censured Mr. Kirby, fined him $5,000, and suspended him from association in any capacity with any NASD member for five days for engaging in excessive markups. (Tr. 248-49, 268; Div. Ex. 8c at 36.)
Mr. Kirby joined Spencer Edwards in late 1994, but because of his disciplinary history his licenses did not transfer over to the firm until March 1995, when he became the firm's trader, a principal, and training manager. (Tr. 254-55, 262-66.) Prior to becoming associated with Spencer Edwards, Mr. Kirby had been associated with E.J. Pittock, Wedbush and Noble, First Eastern Securities, J.W. Gant & Associates, Inc., and Tamarron Investment, Inc., where he was chairman of the board and president. (Tr. 31, 205-07, 267.)
As head trader in 1995-96, Mr. Kirby's activities were mainly principal transactions on behalf of Spencer Edwards. An assistant did most of the agency trades on behalf of the firm's customers. (Tr. 237-38.) Mr. Kirby did not recommend purchases and sales of stock to customers. (Tr. 206.) Mr. Kirby was the trader for Spencer Edwards when he testified at the hearing on September 8, 1998. (Tr. 207.)
Gene Clayton Geiger
Gene Clayton Geiger, age thirty-five, was born in Cairo, Nebraska. Mr. Geiger's formal education ended with his graduation from high school in Sterling, Colorado. (Tr. 769.) Mr. Geiger entered the securities industry in 1986 or 1987. (Tr. 292-93, 770-71.) He has worked as a registered representative at Cohig, R.B. Marich, and World Securities. (Tr. 293.) Since 1988, Mr. Geiger and his partner Tom Kaufmann have been the brokers of record for a number of accounts where Mr. Peeper has power of attorney. (Tr. 294-99, 331.) Mr. Kaufmann and Mr. Geiger were partners on all accounts and split their gross commissions equally. (Tr. 29, 294-98.) Mr. Geiger's attempt to defend himself by blaming Mr. Kaufmann for doing the administrative work on the transactions is unsupported by the evidence that Mr. Geiger and Mr. Kaufmann acted together on the transactions at issue. (Tr. 328, 361-64.)
Mr. Geiger has received substantial commissions as the registered representative from trading activity in accounts which Mr. Peeper directed at Spencer Edwards and its predecessor firm. (Tr. 295, 331.) The six or seven accounts directed by Mr. Peeper are among Spencer Edwards's most active accounts. (Tr. 635-36.) In 1996, Mr. Geiger had no disciplinary history and was not the subject of any customer complaints. (Tr. 771.)
Alfred Peeper
Alfred Peeper, a citizen of the Netherlands who resides in Spain, has been in the financial industry since 1966. (Tr. 427, 446.) Since the late 1970s, Mr. Peeper has been investing in U.S. securities in his capacity as an investment adviser with power of attorney for ten to fifteen non-U.S. companies and financial institutions.7 (Tr. 254, 428, 435-36.) In 1996, Mr. Geiger was the account executive on the following accounts at Spencer Edwards that Mr. Peeper managed: La Salle Investment Ltd. ("La Salle"), Ashley Purchase Holding, Orient New Investments, Euram B.V. ("Euram"), Kenbo Management, Orientstar, International Futures Holding, and La Roche Holdings S.A. (Tr. 298-99, 402-03, 415, 515, 539; Resp. Price Ex. P, Resp. Geiger and Peeper Ex. P.) Mr. Peeper charges annual advisory fees based on a percentage of the trading profits of his clients. (Tr. 430-31.) La Salle did not generate trading profits in 1996 or 1997 from his activities and consequently Mr. Peeper did not collect any advisory fees for those years. (Tr. 432; Resp. Geiger and Peeper Ex. P.)
Mr. Peeper's practice was to purchase blocks of relatively low priced securities of American companies in offshore transactions and to sell the securities into the U.S. markets in reliance on the Regulation S exemption. (Tr. 334, 416, 556; Resp. Price Ex. A-28.)
Golden Eagle International, Inc.
On July 21, 1988, Gary Griffin and his wife, Terry Whiteside, organized Beneficial Capital Financial Services Corp. ("Beneficial Capital"). (Resp. Kirby Ex. B.) In 1994, Beneficial Capital was a shell corporation. Its stock was held by members of the public, but it had ceased operations. Its balance sheet as of December 31, 1994, showed assets of $10,156, and its statement of operations for calendar 1994 showed a negative net income of $119,354. (Div. Ex. 68 at F-4.) Beneficial Capital shares were not trading in 1994, but allegedly they had traded at some earlier time. (Tr. 312; Div. Ex. 68 at 3-4.) In 1994, Beneficial Capital's total shareholders numbered less than 100, and Ms. Whiteside was the majority shareholder. (Tr. 312-13.)
In November 1994, Ronald Knittle and his wife, Mary Erickson, paid $75,000 in return for 85% of the stock of Beneficial Capital. (Tr. 310-14.) Mr. Knittle became the company's president, chief executive officer, director, and board chair. Ms. Erickson became the secretary/treasurer and a director. (Div. Ex. 68 at 11.) Mr. Knittle had the restricted stock he received put in the names of nominees such as Ravia Seydler,8 Ms. Erickson's mother, and Paul Vernon, a trusting neighbor. (Tr. 313-14, 450-52.) On February 2, 1995, Beneficial Capital was renamed Golden Eagle. (Tr. 58; Div. Ex. 68 at 3.) In 1995-96, Golden Eagle was a development stage company that intended to engage in acquiring, developing, and operating gold, silver, and other precious metal properties. (Tr. 160; Div. Ex. 68 at 3.) In June 1995, Golden Eagle shares were penny stocks traded on the NASD Over-The-Counter Bulletin Board. (Tr. 212, 281.) Spencer Edwards did not maintain a due diligence file on Golden Eagle because Spencer Edwards was not one of the six or seven market makers in Golden Eagle stock. (Tr. 237-38, 273-74, 278, 344.)
Mr. Knittle also used Kimi Hunsaker, a clerical assistant at Golden Eagle, as a nominee to hold his Golden Eagle shares. (Tr. 188, 463-65, 472; Div. Ex. 26.) Ms. Hunsaker considered Mr. Knittle and Ms. Erickson, her neighbors and fellow church members, close personal friends. (Tr. 188-89, 463.) Ms. Hunsaker served as another nominee for Mr. Knittle by agreeing to have shares put in her name which Ms. Seydler transferred to her at Mr. Knittle's direction on December 7, 1995. (Tr. 62, 65, 451-52, 465-66; Div. Ex. 1.) Ms. Hunsaker never intended to purchase Golden Eagle stock and she never paid for the shares that Ms. Seydler transferred to her. (Tr. 467, 486.) Ms. Hunsaker believed Ms. Seydler was an officer of Golden Eagle and she accepted Mr. Knittle's explanation that the stock would be more "flexible" in her name than in Ms. Seydler's name. (Tr. 466-67.) Following Mr. Knittle's instructions, Ms. Hunsaker took her stock certificates to the transfer agent who drew up new certificates showing her as the seller of 500,000 Golden Eagle shares to La Salle on January 29, 1996. Ms. Hunsaker gave the new certificates to Mr. Knittle. (Tr. 467-68, 551-52; Div. Ex. 1, Resp. Price Ex. S.)
Paul Vernon, another nominee for Mr. Knittle, is an architect who in November 1994, had known Mr. Knittle, a fellow church member and neighbor, for about a year. (Tr. 492, 509-10.) Mr. Vernon committed the following acts at Mr. Knittle's direction. On December 12, 1994, at Mr. Knittle's request, Mr. Vernon signed a Form 13D that was filed with the Commission on December 19, 1994, in which Mr. Vernon falsely represented that he used his funds to purchase 492,334 restricted shares of Beneficial Capital for $37,500, and that he had no connection with management. (Tr. 491-93; Resp. Kirby Exs. A, M.) In addition, Mr. Vernon signed twelve to eighteen blank stock powers and other legal documents at Mr. Knittle's request without understanding the significance of the documents. (Tr. 495, 501-02.) Mr. Vernon also received and delivered cashier's checks at Mr. Knittle's request.9 (Tr. 495.)
Mr. Knittle moved stock in nominee names without their knowledge. For example, Mr. Vernon did not know that Ms. Whiteside transferred 133,333 shares of Beneficial Capital stock to him on November 29, 1994, at Mr. Knittle's direction. (Tr. 67-70, 492-94; Div. Ex. 2.) Mr. Vernon did not know that 85,000 shares were transferred from his account to Bainbridge, Inc. ("Bainbridge") on February 16, 1995,10 and that 48,333 shares were transferred from his account to Ms. Hunsaker on May 11, 1995. (Tr. 69, 499; Div. Ex. 2.) Mr. Knittle also arranged for Bainbridge and Ms. Hunsaker to transfer these shares to Euram, one of Mr. Peeper's accounts, on June 14, 1995. (Tr. 69; Div. Ex. 2.) Ms. Hunsaker was not aware of the transfer of shares to her, and of the transfer of shares from her to Euram. (Tr. 468-69.) On June 14, 1995, these shares were deposited to the CKC account at Spencer Edwards. (Tr. 68; Div. Ex. 2.)
III. LEGAL CONCLUSIONS
1. Did Respondent Kirby willfully violate Section 5(a) and/or Section 5(c) of the Securities Act by offering to sell, selling and/or delivering after sale, 133,333 shares of unregistered stock into the marketplace in June 1995?
In June 1995, Mr. Knittle called Mr. Geiger and told him that he had two Golden Eagle shareholders who wanted to sell a block of 133,333 shares of stock, and asked if Mr. Geiger had any clients that might be interested. (Tr. 401-02.) Mr. Geiger told Mr. Knittle that Mr. Peeper might be interested in purchasing the shares on behalf of the Euram account. (Tr. 402.) Mr. Knittle subsequently couriered a certificate to Mr. Geiger for 133,333 shares of Golden Eagle made out to Euram.11 (Tr. 402-03, 423; Div. Ex. 52.) Mr. Peeper declined the purchase, and Mr. Geiger quickly offered the shares to his co-worker Mr. Kirby who purchased the block of 133,333 Golden Eagle shares in a private transaction on behalf of CKC for $25,000 on June 14, 1995.12 (Tr. 209-11, 216-17, 404-06; Div. Exs. 42, 52.)
Mr. Kirby gave conflicting testimony under oath about the purchase. On March 14, 1996, Mr. Kirby could not remember the circumstances.
My best guess would be that someone offered me some stock and I made them a bid and they said okay. . . . I don't remember who initiated it or how it started. After I pulled my records I saw that the stock was delivered into my account and I found the check and the check was for $25,000. I had no -- when I got the subpoena I had no recollection of how many shares I had bought, what I paid for it, none of that.
(Tr. 225-26.) In sworn testimony more than two years later, on September 8, 1998, Mr. Kirby remembered that (1) Mr. Geiger solicited the sale while they were working at Spencer Edwards, (2) Mr. Geiger who represented the seller told him the stock was free trading and that he had checked with the transfer agent and the issuer, (3) he refused to pay Mr. Geiger for the stock until Mr. Geiger checked with the clearing broker, Hanifen Imhoff, and the transfer agent that the shares were free trading, and (4) Mr. Geiger would not identify the seller except to say it was an individual. (Tr. 209-19, 228, 243, 257; Div. Ex. 41.)
Mr. Kirby gave Mr. Geiger a check where the payee's name was blank because Mr. Geiger was "vague" about the seller's identity. (Tr. 214.) Mr. Kirby did not personally question either the transfer agent or Golden Eagle as to whether or not the block of 133,333 Golden Eagle shares were free trading, and/or to determine the identity of the seller and how he or she had acquired the shares. (Tr. 228-29.) Mr. Geiger subsequently filled out the "Pay To" section of the check and made it payable to "Mary Erickson." (Tr. 229-30; Div. Ex. 41.) Mr. Kirby testified that he only opens his bank statements once a year at tax time and did not see the returned check with Ms. Erickson's name on it, until just prior to his investigative testimony in March 1996. (Tr. 231-32.)
Spencer Edwards's Compliance Manual in effect at the time required that all employees notify the firm in writing in advance of their participation in a private transaction.
Prior to participating in any private securities transaction, the registered representative or employee shall provide written notice to [Spencer Edwards] describing in detail the proposed transaction and such person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction . . . .
(Div. Ex. 67 at 60.) Neither Mr. Kirby nor Mr. Geiger notified Spencer Edwards or Mr. Price in writing of their participation in the purchase and sale of Golden Eagle shares. (Tr. 247, 290, 632-33, 672.)
Mr. Kirby paid significantly less than the prevailing market price for Golden Eagle stock. (Tr. 213.) The 133,333 Golden Eagle shares were deposited in the CKC account on June 14, 1995, and by June 23, 1995, Mr. Kirby had sold them all into the public market for a total of $56,352.60 and a net profit of $31,000. (Tr. 232-35, 282; Div. Ex. 44, Resp. Price Ex. J.)
Discussion and Legal Conclusions
Section 5(a) and Section 5(c) of the Securities Act prohibit the offer to sell, the offer to buy, the sale, or delivery after sale, of a security, by jurisdictional means, directly or indirectly unless a registration statement is in effect as to that security. I reject Mr. Kirby's first argument that he did not violate Section 5(c) which relates to offers to sell because he did not offer to sell unregistered Golden Eagle shares but rather he accepted a market maker's offer to buy. (Resp. Kirby Br. 11-12.) Section 2(a)(3) of the Securities Act defines an "offer" as "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value" (emphasis added). Mr. Kirby's sales to market makers are included in the statutory definition of offer.
It is basic hornbook law that Section 5 of the Securities Act requires registration for any sale by any person of any security unless Section 3 or Section 4 specifically exempts it from the registration provisions. Section 4(1) exempts from the registration provisions of Section 5 transactions by any person not an issuer, underwriter, or dealer. Section 2(a)(11) defines an "underwriter" as "any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking."
The Division has established a prima facie case of a Section 5 violation by showing that: i) there was no registration statement in effect or filed with the Commission with respect to the 133,333 Golden Eagle shares (Tr. 100, 236), ii) Mr. Kirby offered and sold the securities, and iii) the offer and sale of the Golden Eagle securities was accomplished using transportation or communication by means of interstate commerce and by use of the mails. See SEC v. Continental Tobacco Co., 463 F.2d 137, 155 (5th Cir. 1972). When the Division meets its burden of proving the prima facie elements of a Section 5 violation, the burden shifts to the Respondent to prove the availability of any exemptions. See SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953); Quinn & Co. v. SEC, 452 F.2d 943, 945-46 (10th Cir. 1971) (exemptions from registration must be strictly construed as public policy strongly supports registration); Pennaluna & Co. v. SEC, 410 F.2d 861, 865 (9th Cir. 1969).
Mr. Kirby argues that his sale of Golden Eagle stock was exempt from registration under the provisions of Section 4(1) because CKC was not an "underwriter." (Resp. Kirby Br. 12-16.) I reject this argument and find that CKC was an underwriter because it bought the shares from the issuer with a view to distribution. Mr. Knittle, an issuer, put these shares in the names of nominees, originally Paul Vernon and later Bainbridge and Ms. Hunsaker. (Tr. 468; Div. Ex. 2.) A nominee is "[a] person designated to act in place of another, usually in a very limited way." Black's Law Dictionary 1072 (7th ed. 1999). These nominees assumed Mr. Knittle's legal status as issuers. The statute defines an "issuer" as "any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer." 15 U.S.C. § 77b(a)(11). Mr. Kirby was an underwriter as that term is defined in the statute in that he bought the shares from Ms. Hunsaker, an issuer, with the stated objective of distribution or trading the shares for a profit as soon as possible, which he did. (Tr. 67-68, 212, 215, 228; Div. Exs. 2, 44.) Mr. Kirby's prior trading practices and the short period of time in which he resold these securities are objective evidence that he purchased with the intent to distribute. See Jacob Wonsover, 69 SEC Docket 694, 705 n.25 (Mar. 1, 1999) ("A distribution within a relatively short period after acquisition is evidence of an original intent to distribute.") (citation omitted), petition denied, Wonsover v. SEC, 205 F.3d 408, 413-16 (D.C. Cir. 2000).
The fact that Mr. Kirby sold these shares to market makers rather than directly to the public does not preclude a finding that there was a "distribution." A "distribution" for purposes of Section 2(a)(11) is the entire process through which a block of securities is dispersed and ultimately comes into the hands of the investing public. See Jacob Wonsover, 69 SEC Docket at 705 n. 25 (citing Oklahoma-Texas Trust, 2 S.E.C. 764, 769 (1937), aff'd, 100 F.2d 888 (10th Cir. 1939)); see generally SEC v. Culpepper, 270 F.2d 241 (2d. Cir. 1959). Mr. Kirby acted as a conduit through which these restricted shares were distributed into the public market, and therefore he acted as a statutory underwriter.
I reject Mr. Kirby's claim that his sales of Golden Eagle stock did not constitute a "distribution" under Section 2(a)(11) because the amount purchased and sold was not "substantial" in comparison with the total number of Golden Eagle shares outstanding. (Resp. Kirby Br. 13-15.) There is no requirement that the number of shares sold be some percentage of the outstanding float to come within the meaning of a "distribution." See Quinn & Co. v. SEC, 452 F.2d at 946 (resale of 25,000 shares of stock by statutory underwriter deemed a distribution); Robert G. Leigh, 50 S.E.C. 189, 195 n.14 (1990) (resale of 26,000 shares deemed a distribution). Mr. Kirby justified the significant discount to market price that he paid for the Golden Eagle shares to the liquidity and market risk problems attendant with this large number of shares. (Tr. 274-76.) Mr. Kirby's position that the share size was significant supports my finding that the block of 133,333 shares that Mr. Kirby purchased and sold was a distribution as that term is used in Section 2(a)(11).
For all the reasons stated, I find the Mr. Kirby willfully violated Sections 5(a) and 5(c) of the Securities Act.13
2. Did Respondents Geiger and Peeper willfully violate Section 5(a) and/or Section 5(c) of the Securities Act by offering to sell, selling and/or delivering after sale over 2.8 million shares of unregistered stock into the marketplace?
Resolution of this issue involves Mr. Peeper's purchase of restricted Golden Eagle shares for the La Salle account - 500,000 shares from Ms. Hunsaker for $25,000 and 2,335,250 shares from Mr. Hills for $119,000, and the sale of those shares into the open market. La Salle has not paid Ms. Hunsaker for the stock it received from her because she had not paid the prior certificate holder, Ms. Seydler. (Tr. 351-55.) On Mr. Knittle's advice, La Salle claims to have put $25,000 in an escrow account. (Tr. 353-55, 433-34.) La Salle sold or transferred the shares out of the account in about seven months for gross receipts of $1.3 million.
Hunsaker Transaction
In December 1995, Mr. Knittle told Mr. Geiger that he had a shareholder that wanted to sell a block of 500,000 restricted shares of Golden Eagle. (Tr. 336-39.) Mr. Geiger contacted Mr. Peeper who bought the block of stock in a private transaction from Ms. Hunsaker, a nominee of Mr. Knittle.14 (Tr. 336-37.) Mr. Geiger negotiated the purchase with Mr. Knittle, he did not talk with the reputed owner Ms. Hunsaker before he and Mr. Knittle reached on oral agreement for a purchase price of $25,000, or $.05 a share when the market price of Golden Eagle was $.40 a share. (Tr. 337-38, 344-45.) Given the evidence of misrepresentations by Mr. Geiger, I give no weight to his claim there was a written contract. (Tr. 354.) There is no written contract in evidence. Mr. Geiger did not receive a commission from La Salle or Mr. Peeper. (Tr. 365.)
Under Spencer Edwards's normal procedures, the office manager showed restricted certificates to Mr. Price in his capacity as compliance officer and then forwarded the certificates to the clearing agent. The clearing agent noted a pending legal issue and sent them to the transfer agent for resolution of whether to remove the restriction. (Tr. 692, 818-20, 825-29.) On January 31, 1996, Mr. Geiger received the 500,000 restricted Golden Eagle share certificate that Mr. Knittle had Ms. Hunsaker deliver to Spencer Edwards. (Tr. 85, 338-39.) Ms. Erickson signed the restrictive legend as the secretary of Golden Eagle and Mr. Knittle signed as the president. (Resp. Price Ex. V.) Mr. Geiger avoided review by Spencer Edwards's compliance by sending the restricted Hunsaker certificates directly to the transfer agent. (Tr. 337-39, 641-44; Resp. Price Ex. A-28 at 3.)
On January 26, 1996, Mr. Geiger and Tom Kaufmann, without informing Mr. Price, prepared and sent the transfer agent paperwork representing that the restrictive legend could be legitimately removed from the share certificate in reliance on Rule 144 under the Securities Act, 17 C.F.R. §230.144. (Tr. 339, 343, 347-48; Resp. Price Exs. T, U, V, W.) The paperwork consisted of a 144 notice sent to the SEC, a client representation letter, and a broker representation letter. (Tr. 636.) Mr. Kaufmann signed the paperwork as a principal at Spencer Edwards, but he had no authority from the firm to do so. (Tr. 685-86.) Mr. Geiger did not conduct any independent investigation to support the representations he and Mr. Kaufmann made to the transfer agent, but relied entirely on oral representations made by Mr. Knittle. (Tr. 339-43.)
Mr. Peeper did not investigate Ms. Hunsaker prior to selling the Hunsaker stock into the market, and claims to have relied on Mr. Geiger and Mr. Brovarone. (Tr. 444-45.) However, there is no evidence that Mr. Brovarone issued an opinion letter to Mr. Peeper in connection with the propriety of the sale of Hunsaker shares. (Tr. 445.) Mr. Peeper alleges that Mr. Geiger told him that the transfer agent would remove the legend on the Hunsaker stock because it had been held for longer than two years. (Tr. 445, 518-19.) According to Mr. Peeper he knew the stock was restricted, "[b]ut we freed it out because of us holding it for two years, I believe." (Tr. 445.)
The block of 500,000 shares of Golden Eagle was received in the La Salle account on January 31, 1996. (Div. Ex. 46.)
Hills Transaction
David Hills received 2,335,250 restricted shares of Golden Eagle when he worked for the company from May 1, 1995, to September 15, 1995, as executive vice president, and director. (Tr. 159-61, 164.) Mr. Hills entered into a termination agreement with Mr. Knittle and Golden Eagle on September 8, 1996, whereby Mr. Hills would return 2,135,250 restricted Golden Eagle shares if Golden Eagle reimbursed him certain amounts and repurchased restricted Golden Eagle shares that his family and friends had purchased on his recommendation.15 (Tr. 161-65; Div. Exs. 60-62, 64.)
Mr. Hills asked Mr. Geiger who he knew had traded Golden Eagle shares to find a buyer for a portion of his restricted Golden Eagle stock in mid-December 1995 because he needed money and Golden Eagle did not pay him the money it owed to him and otherwise fulfill the terms of the termination agreement. (Tr. 164-66, 193.) Mr. Geiger indicated he would talk to Mr. Knittle about the sale. (Tr. 167, 366-69.) In early January 1996, Mr. Hills believed, based on information from Mr. Geiger, that Mr. Peeper would buy 666,000 shares on January 15, 1996 for $156,000. (Tr. 167-69.) When Mr. Hills delivered the shares, Mr. Geiger informed Mr. Hills that Mr. Knittle insisted that Mr. Hills sell his entire holdings of 2.3 million restricted shares. (Tr. 169-71.) Subsequently, Mr. Geiger arranged for Mr. Peeper's Orientstar account to purchase 2,335,250 restricted shares of Golden Eagle from Mr. Hills for $119,000 for a per share price of $0.05. (Tr. 169-75, 369; Div. Ex. 65.) Mr. Hills delivered 2,335,250 shares of Golden Eagle to Mr. Geiger at Spencer Edwards on February 1, 1996, and signed a stock purchase agreement that was faxed to him on February 2, 1996. (Tr. 172-76, 377; Div. Exs. 64, 65.) Mr. Geiger issued a receipt to Mr. Hills for the certificates and delivered them to the transfer agent rather than the firm's compliance department. (Tr. 377, 677; Div. Exs. 64.) These actions by Mr. Geiger violated Spencer Edwards's compliance manual. (Tr. 676-79; Div. Ex. 67 at 40-41, 70.)
Another client of Mr. Peeper's, La Salle, paid Mr. Hills $119,000 for the shares. (Tr. 369.) Mr. Hills received a wire transfer of $56,000 on February 2, 1996; a check for $50,000 from La Salle that was dated November 4, 1995, on February 9, 1996; and a wire transfer of $13,000 on April 29, 1996.16 (Tr. 178-79, 369; Div. Exs. 58, 59.)
Dennis Brovarone, an attorney representing La Salle, sent a letter to the transfer agent, American Securities Transfer, Inc., on February 5, 1996, falsely representing that he had received "certain representations from the Seller and the Buyer," and based on documentation he reviewed, the sale of 2,335,250 shares by the seller "was exempt from the registration requirement of the [Securities Act] by reason of Rule 904 of Regulation S." (Resp. Price Ex. A-11.) Mr. Brovarone also falsely represented that Golden Eagle and its common stock were registered with the Commission pursuant to Section 12 of the Exchange Act. (Resp. Price Ex. A-11.) Mr. Brovarone's answers were evasive, but the weight of the evidence is that he relied totally on information that Mr. Geiger gave him. (Tr. 558-61, 573-77, 581-82.) Mr. Brovarone had worked for Golden Eagle for about six weeks in the fall of 1995, and he had been Mr. Geiger's personal attorney and had been counsel at R.B. Marich where Mr. Geiger had also been employed. (Tr. 554-56.) At Mr. Geiger's initiative, Mr. Brovarone had worked for about a year for entities that Mr. Peeper represented. Mr. Geiger referred people who wanted to sell Golden Eagle shares to Mr. Brovarone. (Tr. 381-82) The Colorado Bar issued a private censure to Mr. Brovarone in 1987. (Tr. 584-85.)
Ms. Seydler, a nominee of Mr. Knittle's, signed letters from Golden Eagle dated February 5 and 6, 1996, as "attorney-in-fact" requesting that the transfer agent remove the restrictive legends from the 2,335,250 shares that had belonged to Mr. Hills. (Tr. 453, Resp. Geiger and Peeper Exs. G, H.) Ms. Seydler, who was not an attorney, wrote the letters at the request of either Mr. Knittle or Ms. Erickson. (Tr. 455-58.) The request relied on Mr. Brovarone's opinion letter. (Resp. Geiger and Peeper Ex. H.)
Discussion and Legal Conclusions
To achieve the Securities Act's objective of making adequate reliable information available to the public, Section 5 prohibits the offer and sale of securities to the public which have not been registered. The Division has established a prima facie case of a Section 5 violation by Mr. Peeper and Mr. Geiger by showing that: i) there was no registration statement filed with the Commission with respect to the 500,000 block and the 2,335,250 block of Golden Eagle shares (Tr. 100.); ii) La Salle sold the securities; and iii) the offer and sale of the Golden Eagle securities from the La Salle account was accomplished through transportation or communication in interstate commerce and by use of the mails. See SEC v. Continental Tobacco Co., 463 F.2d at 155.
As an initial matter, I reject Mr. Peeper's argument that he cannot be found to have violated Section 5 because he was an adviser rather than an owner of La Salle and he did not personally benefit from the transactions. (Resp. Geiger and Peeper Br. 14.) Mr. Peeper actively managed the account and he made all investment decisions. (Tr. 331-32.) Mr. Peeper decided to buy and sell Golden Eagle shares for La Salle. Mr. Geiger dealt exclusively with Mr. Peeper. (Tr. 328.) Respondents cite no authority to support their claim that personal benefit is required for a Section 5 violation, and the broad language used in Section 2(a)(11) to define an underwriter indicates otherwise.
Respondents argue that they did not violate Section 5 because they acted in good faith believing that the Hunsaker transaction was an exempt transaction pursuant to Rule 144 under the Securities Act and the Hills transactions was an exempt transaction pursuant to Regulation S, Section 4(1), and counsel's opinion.17 (Resp. Geiger and Peeper Br. 1-2, 12-34.)
Exemptions from the general policy of the Securities Act requiring registration are strictly construed against the claimant of such an exemption and the burden of proof is on the claimant. See Quinn & Co. v. SEC, 452 F.2d at 945-46; Gearhart & Otis, Inc., 42 S.E.C. 1, n.3 (1964).
Regulation S Exemption Does Not Apply To Sale of 2.3 Million Shares
Mr. Peeper purchased for La Salle approximately 2.3 million restricted Golden Eagle shares, and he sold all those shares in just over six months at a considerable profit pursuant to Regulation S. The evidence is persuasive that Mr. Peeper, Mr. Geiger, and Mr. Knittle worked together on the transactions.
In 1990, the Commission adopted Regulation S, Rules Governing Offers and Sales Made Outside the United States Without Registration Under the Securities Act of 1933. Regulation S generally provides that Section 5 does not apply to offers or sales of securities that occur outside the United States. See 17 C.F.R. § 230.901. The Regulation establishes two non-exclusive safe harbors: 1) Rule 903 covers offers or sales by the issuer and its affiliates; and 2) Rule 904 pertains to resales by non-affiliates of the issuer. See 17 C.F.R. §§ 230.903, .904.
Mr. Peeper's direct sale of unregistered securities into the United States is not covered by Regulation S, and therefore this transaction was subject to the registration provisions of Section 5. See Preliminary Note 6, 17 C.F.R. § 230.901 ("Regulation S is available only for offers and sales of securities outside the United States. Securities acquired overseas, whether or not pursuant to Regulation S, may be resold in the United States only if they are registered under the Act or an exemption from registration is available."); see also Europe and Overseas Commodity Traders, S.A., v. Banque Paribas London, 147 F.3d 118, 124 (2d Cir. 1998) ("[A]ny offer or sale must fit the definition of an `offshore transaction,' which requires inter alia that no offer be made to a person in the United States." (footnote omitted)). According to one commentator:
After the Regulation S restricted period ends, a seller must establish the availability of section 4(1), section 4(3), or some other exemption for resales into the United States of securities offered and sold outside the United States under Regulation S because all sales of securities in the United States . . . must be either registered under section 5 . . . or exempt from such registration.
Guy P. Lander, Regulation S - Securities Offerings Outside the United States, 21 N.C. J. Int'l L. & Com. Reg. 339, 388 (Winter 1996).
Since Regulation S has been in effect there has been concern that less scrupulous traders might use the rule as a device to cleanse restricted securities of their limitations on resale by routing them offshore through a Regulation S transaction. See Thomas L. Hazen, 1 Treatise on the Law of Securities Regulation, 312 (3d ed. 1995).18 Mr. Peeper's purchase and sale of the 2.3 million restricted shares is an example of this type of unscrupulous conduct. The La Salle account received 2,335,250 shares on February 6, 1996. (Tr. 378.) By August 9, 1996, La Salle had sold or transferred out of the account all the Golden Eagle restricted shares it received from Ms. Hunsaker and Mr. Hills. La Salle realized a considerable profit by selling unregistered securities to market makers at prices from $0.093 to $1.00 a share. (Tr. 433; Div. Ex. 46.) Even if Respondents should prevail in their claim that they came within the technical requirements of Regulation S, it is not applicable here where the obvious motive of the participants was to sell unregistered securities to unsuspecting investors in the United States.
In view of the objective of these rules and the policies underlying the [Securities Act], Regulation S is not available with respect to any transaction or series of transactions that, although in technical compliance with these rules, is part of a plan or scheme to evade the registration provisions of the [Securities Act]. In such cases, registration under the Act is required.
Preliminary Note 2, 17 C.F.R. § 230.901.
Rule 144 Exemption Does Not Apply to Sale of Hunsaker Shares
Sections 4(1) and 4(4) of the Securities Act specify that the provisions of Section 5 shall not apply to:
(1) Transactions by any person other than an issuer, underwriter, or dealer.
(4) Brokers' transactions executed upon customers' orders on any exchange or in the over-the-counter market but not the solicitation of such orders.
Securities Act Rule 144, Persons Deemed Not to be Engaged in a Distribution and Therefore Not Underwriters, promulgated in 1972 and modified since, is an effort to define the scope of the statutory exemptions to registration as set out in Sections 4(1) and 4(4).
Rule 144 is designed to implement the fundamental purposes of the [Securities Act], as expressed in its preamble, "To provide full and fair disclosure of the character of the securities sold in interstate commerce and through the mails, and to prevent fraud in the sale thereof . . . ."
Preliminary Note, 17 C.F.R. § 230.144.
Rule 144 creates a bright line "safe harbor" whereby certain conduct is exempt. See 1 Hazen, supra, at 285-87. In 1996, when Mr. Peeper sold Golden Eagle shares, Rule 144 allowed a non-affiliate to lawfully sell restricted shares to the public after a minimum two-year holding period had elapsed from the time that the shares were originally acquired from the issuer or affiliate, and any resale, if certain conditions were met.19 Rule 144 also specified that the two-year period shall not begin until the full purchase price was paid. See 17 C.F.R. § 230.144(d)(1) (1996).
I reject Mr. Peeper's argument that his sale of the Hunsaker shares was subject to the Rule 144 exemption. (Resp. Geiger and Peeper Brief 12-21). Rule 144 is inapplicable as to the Hunsaker transaction because the two-year minimum holding period was not satisfied. Calculation of the holding period began with the purchase by Mr. Peeper for La Salle because Mr. Peeper acquired the shares directly from Ms. Hunsaker, a nominee of the issuer. The periods when Ms. Seydler and Ms. Hunsaker had the certificates in their names cannot be used to calculate the two-year computation.
As a result of its reexamination of the tacking concept embodied in Rule 144, the Commission today is amending the Rule to permit holders of restricted securities acquired in a transaction or series of transactions not involving any public offering to add to their own holding period those of prior holders unaffiliated with the issuer. No such tacking will be permitted, however, where the seller has purchased from an affiliate of the issuer whose presence in the chain of title will trigger the commencement of a new holding period.
Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, 55 Fed. Reg. 17,933, 17,941 (1990).
Moreover, with respect to the Hunsaker shares, the holding period did not even begin to run because Mr. Peeper has not paid for the shares. See 17 C.F.R. § 230.144(d)(1).
Respondents have not carried their burden of showing that the Hunsaker and Hills transactions were exempt transactions pursuant to Rule 144 and Regulation S, respectively.
Section 4 Exemption Does Not Apply To Respondents
I find that Section 4 does not exempt Mr. Peeper and Mr. Geiger from the registration requirements of Section 5. (Resp. Geiger and Peeper Br. 12-34.) According to Hazen:
The legislative history of section [2(a)(11)] reveals that the congressional intent was to include as underwriters all persons who might operate as conduits for securities being placed into the hands of the investing public. So long as the ultimate purchasers are members of the general public, as opposed to qualified private placement purchasers, the transaction calls for the protection of the Securities Act's registration provisions.
1 Hazen, supra, 271-72 (footnotes omitted).
Individual investors who are not professionals in the securities business may be "underwriters" within the meaning of that term as used in the Act if they act as links in a chain of transactions through which securities move from an issuer to the public. Section 2(a)(11) defines the term underwriter broadly as:
any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking.
Mr. Peeper
Mr. Peeper sold unregistered Golden Eagle shares to the public as a statutory underwriter. There is nothing in the record to support Respondents' claim that Mr. Peeper did not buy the Golden Eagle shares with a view to distribute. (Resp. Geiger and Peeper Br. 13.) To the contrary, the evidence is persuasive that Mr. Peeper acquired the shares for La Salle intending to distribute them to the public. Mr. Peeper began selling Golden Eagle shares from the La Salle account on January 24, 1996, when the account had a zero balance in anticipation of receipt of the 500,000 shares from Ms. Hunsaker. (Div. Ex. 46.) The Hunsaker shares were received in the La Salle account on January 31, 1996. (Div. Ex. 46.) Mr. Peeper's sales of Golden Eagle shares, prior to acquisition, is objective evidence of his intent to distribute. See Jacob Wonsover, 69 SEC Docket at 705 n.25. My finding that Mr. Peeper bought with a view towards distribution is supported by his prior trading history of purchasing securities in private transactions and reselling them in the United States in reliance on the Regulation S exemption. (Tr. 416-21, 635; Resp. Price Ex. A-28.)
Mr. Peeper occupied underwriter status for two reasons. The first basis is that Mr. Peeper had a "direct or indirect participation in [the] undertaking" which was the distribution of Golden Eagle shares to the investing public. 15 U.S.C. § 77b(a)(11). The record makes it clear that Mr. Knittle engaged in a scheme to take unregistered Golden Eagle shares to market through a series of nominees with respect to the Hunsaker shares, and through negotiating the sale of shares held by Mr. Hills. Mr. Peeper participated as the last link in the chain of distribution to the public, in that he offered and sold over 2.8 million shares of Golden Eagle into the public market without registration. Respondents emphasize that they sold the Golden Eagle shares to market makers and not to the public generally, but this is a distinction without a difference because the role of a market maker is to sell to the public.
An alternative basis for finding Mr. Peeper to be a statutory underwriter is that he "purchased from an issuer with a view to . . . distribut[e]." 15 U.S.C. § 77b(a)(11). The record shows that Ms. Hunsaker was a nominee of Mr. Knittle, and therefore as a legal matter Mr. Peeper's purchase from Ms. Hunsaker was a purchase from Golden Eagle. I reject Respondents' argument that Mr. Peeper's purchase from Mr. Hills was not a purchase from the issuer. (Geiger and Peeper Br. 25-27.) Although Mr. Hills was not an affiliate of the issuer at the time of sale, in a very real sense Mr. Peeper purchased the shares held by Mr. Hills from Golden Eagle or Mr. Knittle. My finding is based on the facts of the Hills transaction. Those facts make clear that while Mr. Hills discussed the sale of the shares with Mr. Geiger, it was Mr. Knittle who controlled the sale by giving permission for it to happen and then by dictating the terms of sale. Mr. Geiger recalled Mr. Knittle telling him in connection with the shares held by Mr. Hills, "I need to sell some stock or I need to get some stock sold." (Tr. 368.) The persuasive evidence is that Mr. Knittle acted to satisfy the terms of the termination agreement between Golden Eagle and Mr. Hills. Mr. Hills agreed to return the 2.1 million shares of Golden Eagle he received in connection with his employment after Golden Eagle paid Mr. and Mrs. Hills money it owed to them. In January 1996, Golden Eagle was in default on this debt. Mr. Knittle was afraid that Mr. Hills would dispose of the 2.1 million shares in a manner that would "crumble the market" for Golden Eagle shares and he wanted to keep that market viable. (Tr. 368) Based on these facts, I find that Mr. Peeper was a statutory underwriter because he, in effect, purchased the Hills shares from Mr. Knittle, the issuer or a person controlling the issuer.
Mr. Geiger
Mr. Geiger meets the definition of a statutory underwriter because of his "direct . . . participation" in Mr. Peeper's sale of unregistered shares to the public. 15 U.S.C. 77b(a)(11); see also SEC v. Culpepper, 270 F.2d at 250. Mr. Geiger participated in Mr. Knittle's sale and distribution scheme on two fronts. First he brought the offers to sell from Mr. Knittle and Mr. Hills to Mr. Peeper's attention with a positive recommendation. According to Mr. Peeper, Mr. Geiger "drove me crazy about [buying Golden Eagle]." (Tr. 534-35.) Second, as Mr. Peeper's agent he negotiated the purchase terms with Mr. Knittle and Mr. Hills, he arranged for, approved, and processed the documentation for the purchase, and then as Mr. Peeper's broker he facilitated sales of the shares into the market. (Tr. 168-76, 534-35; Div. Exs. 64, 65.)
Respondents Did Not Act In Good Faith
The good faith argument is irrelevant as to Mr. Peeper and Mr. Geiger because a seller or someone offering to sell unregistered securities need not be shown to have acted with scienter to establish a violation of Section 5. See SEC v. Thomas D. Kienlen Corp., 755 F. Supp. 936, 939 (D. Or. 1991) (citation omitted); Butcher & Singer Inc., 48 S.E.C. 640, 643 (1987).
I reject Mr. Geiger's defense that as a registered representative he was only required to perform a ministerial task in preparing and submitting the 144 paperwork because the transfer agent performed the true vetting process. (Tr. 339-40.) A broker is obliged to determine that securities are registered before selling them to the public as free trading shares.20 See Kane v. SEC, 842 F.2d 194 (8th Cir. 1988) (broker must make appropriate inquiries before distributing unregistered securities). Spencer Edwards's compliance manual affirms this obligation. "The SEC has spoken very forcefully concerning the obligation of a broker/dealer to inquire into the facts to determine whether registration of a block of securities must be effected before the securities are sold."21 (Tr. 677; Div. Ex. 67 at 70.) The Commission made it clear over thirty years ago that securities professionals were required to investigate the legitimacy of transactions where substantial blocks of restricted securities in a little known issuer were being offered at below market prices in private transactions. See Distribution By Broker-Dealers Of Unregistered Securities, 1962 SEC LEXIS 74 (Feb. 2, 1962). Mr. Geiger, while negotiating the Hunsaker purchase, did not know the seller's identity and did not care. (Tr. 359-60.) Mr. Geiger made no independent investigation and considered the identity of the seller irrelevant. When Mr. Knittle, who represented the seller, informed Mr. Geiger that the stock was being held in the name of Ms. Hunsaker neither Mr. Peeper nor Mr. Geiger made an attempt to talk with Ms. Hunsaker about her purported ownership of the restricted securities. (Tr. 338, 444.) The evidence is that Mr. Geiger made no inquiries of Mr. Hills as to the circumstances of his ownership of the 2.3 million shares. Mr. Geiger and Mr. Peeper resold these Golden Eagle shares to the public without the most basic inquiry as to their origin.
Mr. Geiger's actions are as damaging to his good faith defense as his omissions. Mr. Geiger knowingly breached Spencer Edwards's compliance procedures set up to prevent the improper removal of restrictions on unregistered securities. Acting with his partner, Mr. Kaufmann, Mr. Geiger deliberately sent the certificates showing Ms. Hunsaker as the owner of 500,000 shares and Mr. Hills as the owner of 2,335,250 shares directly to the transfer agent and deliberately avoided Spencer Edwards's compliance manual procedures which required that he submit a restricted certificate to Mr. Price for review. (Div. Ex. 67 at 77-79, Resp. Price Ex. A-28 at 3.) All these certificates bore restrictive legends. In addition, Mr. Geiger failed to show Spencer Edwards's compliance department the paperwork he sent to the transfer agent to support the removal of the restriction from the certificates pursuant to Rule 144.22 (Tr. 361-65, 636-37.) He did this in violation of the provisions of Spencer Edwards's compliance manual which required that "[a]ll [Rule 144] transactions must be approved by the Compliance Department prior to entering any such trade and only after completed documentation has been received and approved by [Spencer Edwards's] legal counsel as well as by the issuer's counsel." (Div. Ex. 67 at 77.)
Another example of Mr. Geiger's bad faith is his failure to inform the transfer agent that Ms. Hunsaker had not paid Ms. Seydler for the 500,000 shares Ms. Hunsaker was selling to La Salle. (Tr. 352, 358.) In his investigative testimony, Mr. Geiger believed receiving consideration was necessary to start the holding period under Rule 144. (Tr. 355-56.) At the hearing, Mr. Geiger testified that Mr. Knittle assured him that this was not a problem, and Mr. Geiger claimed that the transfer agent would not consider the buyer's failure to pay important in determining whether the restrictive legend should be removed from the share certificate. (Tr. 353, 360-61.)
Mr. Geiger was responsible for fraudulent material information in the letter that attorney Dennis Brovarone sent to the transfer agent on February 5, 1996, on behalf of La Salle requesting removal of the restrictions from Mr. Hills's certificates.23 (Resp. Price Ex. A-11.) Mr. Knittle and Mr. Geiger knew each other for some time before the events at issue. (Tr. 328-31.) Mr. Geiger introduced Mr. Brovarone to Mr. Knittle and to Mr. Peeper. (Tr. 556.) Contrary to what he represented in his letter, Mr. Brovarone did not review any documents and he did not speak with the seller or the buyer. (Tr. 558-61, 573-77, 581, 586-87.) The opinions Mr. Brovarone expressed in the letter were based entirely on the representations of Mr. Geiger. Mr. Geiger did not tell Mr. Brovarone that Mr. Hills had resigned as executive vice president and director of Golden Eagle about five months before, on September 7, 1995, or that Mr. Hills tendered the stock on February 1, 1996, and La Salle did not tender full payment for the stock until April 29, 1996.24 (Tr. 560-61, 577; Div. Ex. 69.) Mr. Geiger used the client trust account of Mr. Brovarone to move funds in connection with transactions in the accounts Mr. Peeper directed. (Tr. 556, 566-70.)
Mr. Geiger also demonstrated bad faith in ignoring Spencer Edwards's compliance manual requirement that all employees give Spencer Edwards written notice prior to participating in any private securities transaction. (Tr. 365; Div. Ex. 67 at 60-61, Resp. Price Ex. A-19.) The Hunsaker and Hills transactions were private transactions and Mr. Geiger did not seek and receive the firm's approval for his participation.
Experts' Opinions And Advice of Counsel
Respondents' are wrong that their experts' opinions and the advice of counsel provide persuasive evidence that they did not violate Section 5. Carylyn K. Bell gave credible expert testimony that it is industry practice for broker-dealers to rely on transfer agents to determine whether a restriction should be removed from a certificate, and that to make that decision, transfer agents rely on information from the company and company counsel.25 (Tr. 729; Resp. Geiger and Peeper Ex. R.) A broker-dealer is obligated to determine whether securities are registered or that they are not required to be registered before selling securities to the public. See Kane v. SEC, 842 F.2d 194. Broker-dealers who delegate this responsibility totally to others do so at their peril.26 Brokers are not entitled to rely on the bare representations of the issuer in satisfaction of their duty to investigate the circumstances behind a transaction. See Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969); M.V. Gray Invs., Inc., 44 S.E.C. 567, 569 (1971). The acquiescence of transfer agents and clearing agents to a transaction, or their removal of restrictive legends from stock certificates, also does not diminish a broker's duty to investigate. See Sorrell v. SEC, 679 F.2d 1323, 1327 (9th Cir. 1982) ("broker not entitled to rely on lack of cautionary legends on stock certificates"); Stead v. SEC, 444 F.2d 713, 716 (10th Cir. 1971) ("the fact of calling the transfer agent is obviously not sufficient inquiry"); Robert G. Leigh, 50 S.E.C. 189, 194 (1990); Butcher & Singer, Inc., 48 S.E.C. at 643; Stone Summers & Co., 45 S.E.C. 105, 109 (1972).
It is ironic that these Respondents would defend their actions by claiming they relied on the transfer agent since the unanimous evidence is that Mr. Geiger acted to mislead the transfer agent and subvert the process which they now claim as a defense. Mr. Geiger requested that Mr. Brovarone write the letter. (Tr. 559.) As detailed above, the letter that Mr. Brovarone sent as issuer's counsel to the transfer agent made false representations and omitted material facts based on information Mr. Geiger gave or failed to provide to Mr. Brovarone. Furthermore, as detailed above, Mr. Geiger knowingly avoided Spencer Edwards compliance procedures in dealing with the transfer agent.
The expert opinion of John T. Christensen in support of Mr. Geiger and Mr. Peeper was unpersuasive.27 (Tr. 773-813; Resp. Peeper and Geiger Ex. Q.) Mr. Christensen could not identify any section of the rule that supported his claim that Regulation S allowed an offer and sale to a person in the United States of unregistered stock forty-one days after purchase by a buyer outside the United States. (Tr. 789.) Mr. Christensen offered no support for his view that the sale to La Salle pursuant to Regulation S was a "cleansing transaction" that allowed the sale of these unregistered shares into the United States markets within two years. (Tr. 792-93.) Mr. Christensen erroneously believed there was no relationship between La Salle and Golden Eagle despite evidence that Mr. Geiger was representing La Salle and at the same time assisting Mr. Hills and Mr. Knittle in selling Golden Eagle shares. (Resp. Peeper and Geiger Ex. Q at 4.) Mr. Christensen's views are also based on the mistaken belief that La Salle relied on the legal opinion of counsel when Mr. Geiger, La Salle's representative, provided Mr. Brovarone with false information to get the opinion he wanted. (Resp. Peeper and Geiger Ex. Q at 4.) Finally, Mr. Christiansen's position assumes erroneously that Respondents behaved properly in dealing with Spencer Edwards's compliance department and the transfer agent.
Respondents claim that they acted in reliance on Mr. Brovarone's legal opinion is false. Mr. Geiger could not have relied on Mr. Brovarone's legal opinion as to the 2,335,250 shares because he testified he never saw it. (Tr. 350-51.) Moreover, he knew that it contained false and misleading information that he gave to Mr. Brovarone. Mr. Peeper was not sure there was a legal opinion on the Hunsaker shares so he could not have relied on it. (Tr. 444-45.) The elements for an advice of counsel defense are not present here: (1) make a complete disclosure to counsel; (2) request counsel's advice as to the legality of the contemplated action; (3) receive advice that it was legal; and (4) rely in good faith on that advice. See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1101-02 (2d Cir. 1972); United States v. Custer Channel Wing Corp., 376 F.2d 675, 683 (4th Cir. 1967).
For all the reasons stated, I find that Mr. Geiger and Mr. Peeper willfully violated Section 5(a) and Section 5(c) of the Securities Act by offering to sell, selling, and delivering after sale over 2.8 million shares of unregistered stock into the marketplace in the period January through August 1996.
3. Did Respondent Price fail reasonably to supervise Respondents Geiger and Kirby with a view to preventing their willful violations of Section 5(a) and/or Section 5(c) of the Securities Act?
Section 15(b)(6) of the Exchange Act, including by reference Section 15(b)(4)(E), directs the Commission to sanction a person associated with a broker or dealer, if it is in the public interest, where the person acting in a supervisory capacity has "failed reasonably to supervise, with a view to preventing violations of the [federal securities laws] rules, and regulations, another person who commits such a violation, if such other person is subject to his supervision." Section 15(b)(4)(E) provides that a person has not failed reasonably to supervise another, if (1) a system of procedures is in place and is being applied which reasonably would be expected to prevent and detect, insofar as practicable, the violations, and (2) the person reasonably discharged her obligations and had no reasonable cause to believe that these procedures and system were not being complied with.
Mr. Price was Mr. Geiger and Mr. Kirby's direct supervisor. (Div. Ex. 67 at Exhibit C.) In 1995-96, Spencer Edwards had in effect a compliance manual with provisions that would have reasonably been expected to prevent and detect Respondents' violations. (Div. Ex. 67.) Mr. Kirby and Mr. Geiger received copies of the manual and were responsible for knowing its contents. (Tr. 245, 614-15; Div. Ex. 67 at Introduction.) The issue is whether in these circumstances Mr. Price's supervision was reasonable.
Mr. Price's Supervision of Mr. Kirby
In deciding this issue it is necessary to put matters in context. Supervision of persons associated with a broker-dealer is unquestionably an extremely important function, and it is incumbent on supervisors to be alert and vigilant. See Donald T. Sheldon, 51 S.E.C. 59, 78-79 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995). Mr. Price was aware of Mr. Kirby's prior regulatory violations and his unrefuted testimony is that he carefully reviewed Mr. Kirby's trades and talked with him daily about his trading activities. See Albert Vincent O'Neal, 51 S.E.C. 1128 (1994); Donald T. Sheldon, 51 S.E.C. 59; Gotham Sec. Corp., 46 S.E.C. 723 (1976). (Tr. 697-98.)
The compliance manual requires all employees to give Spencer Edwards written notice prior to participating in any private securities transaction. (Div. Ex. 67 at 60-61.) Mr. Kirby violated Spencer Edwards's compliance procedures by not submitting a written request to Mr. Price for advanced authorization to engage in the private purchase of Golden Eagle shares. (Tr. 631-32.) In addition, despite his years in the industry, Mr. Kirby violated the very basic requirement set out formally in Spencer Edwards's compliance manual:
The SEC has spoken very forcefully concerning the obligation of a broker/dealer to inquire into the facts to determine whether registration of a block of securities must be effected before the securities are sold.
(Div. Ex. 67 at 70.) These procedures were in place to prevent violations of the securities laws such as the sale of unregistered securities. (Div. Ex. 67 at 60-61.)
Given Mr. Kirby's covert activities, there is no evidence of suspicious or irregular events which should have caused Mr. Price to act to detect and prevent Respondent's illegal activities. Mr. Kirby purchased the Golden Eagle shares in a private transaction "away from" Spencer Edwards so the firm did not have a ticket for the transaction and the Golden Eagle shares delivered to the firm were free trading shares. (Tr. 245; Price Ex. A-28 at 4.) Neither Mr. Price nor Hanifen Imhoff had notice that the securities were unregistered.28 Other considerations that persuade me that Mr. Price exercised reasonable supervision are the following. Mr. Kirby joined Spencer Edwards in November 1994, but his license did not transfer to the firm until March 1995. Mr. Price knew Mr. Kirby was transferring shares into the CKC account at Spencer Edwards from his accounts at other firms in the period November 1994 - June 1995. Mr. Kirby's violations of Section 5 occurred in June 1995. (Tr. 630.) Mr. Price knew that Mr. Kirby traded personally in his CKC account, however, the stock activity report which showed the deposit of Golden Eagle shares into the CKC account did not identify the deposit as a purchase or a transfer from another account. (Tr. 631.) Neither the size of Mr. Kirby's Golden Eagle purchase nor his trading activity in Golden Eagle was unusual for Mr. Kirby's account. (Tr. 215, 631, 695.)
I disagree with the Division that Mr. Price was obligated to question Mr. Kirby about the Golden Eagle stock he was selling from the CKC account in June 1995 because of the "possibility" that it was acquired in a private transaction. (Tr. 631; Div. Br. 36.) The seven-month time period from November 1994 to June 1995 is insufficient to fault Mr. Price for not having become suspicious because Mr. Kirby had not requested permission to engage in any private transactions.29 Mr. Kirby's prior violations did not involve Section 5. This record does contain sufficient evidence to find that Mr. Price should have asked Mr. Kirby whether he had violated the compliance manual. (Tr. 864-65.)
Mr. Price had a rational basis to expect that Mr. Kirby would act appropriately even though he knew Mr. Kirby committed infractions concerning record-keeping and excessive markups in 1985, 1987 and 1993. (Tr. 249-53; Div. Exs. 8b,30 8c.) Mr. Kirby was not a stranger to Mr. Price, they had been friends for about twelve years. Mr. Price had supervised Mr. Kirby at another firm. Mr. Price and Mr. Kirby had bought Spencer Edwards with a third person in late 1994. Mr. Price knew Mr. Kirby had successfully dealt with alcohol problems prior to about 1988. (Tr. 695-97.) Even though Spencer Edwards increased in size from fifteen to thirty-two registered representatives in June 1995, it was a small one-office firm where people generally discussed their trading activities. (Tr. 220, 613, 711.) Mr. Price had no reason to expect that Mr. Kirby would hide his activities from his review.
I have given weight to the expert testimony of Anthony Petrelli in support of Mr. Price.31 (Resp. Price Ex. A-28.) Mr. Petrelli was a credible witness who found Mr. Price's supervision reasonable and who emphatically believes that "[T]here is no way to establish checks and balances for covert acts if [information] is not coming through the firm's normal procedures." (Tr. 859.)
For all these reasons, I find Mr. Price's supervision of Mr. Kirby was reasonable and accordingly that Mr. Price did not violate Section 15(b)(6) of the Exchange Act. 32
Mr. Price's Supervision of Mr. Geiger
Here it is also necessary to put matters in context to decide whether Mr. Price's supervision was reasonable. Mr. Geiger deliberately violated Spencer Edwards's compliance manual to hide his illegal actions from Mr. Price and Shawna Roatch, the firm's operations manager, who managed the back office and who brought unusual items to Mr. Price's attention.33
The Division acknowledges Mr. Geiger's covert activities but faults Mr. Price for not doing an independent investigation of Mr. Geiger in February 1996 and July 1996 based on information he had at those times. Mr. Price questioned Mr. Geiger in February 1996, about the sizeable trading that occurred in Mr. Peeper's accounts. He accepted Mr. Geiger's explanation that Mr. Peeper was legitimately reselling into the public market pursuant to Regulation S. Mr. Price did not check the validity of Mr. Geiger's response with any independent source. On July 16, 1996, when the Commission subpoenaed Mr. Geiger in connection with its investigation of Spencer Edwards's responsibility for trading in unregistered Golden Eagle shares, Mr. Price accepted Mr. Geiger's explanation that Mr. Geiger had confirmed the legality of the transactions with the issuer and the transfer agent.34 (Tr. 639-40, 652.) The Division argues that Mr. Price should not have relied on the answers he received from Mr. Geiger and faults him for not acting aggressively when "La Salle resumed its massive sales of Golden Eagle in July 1997." (Div. Br. 39.) The Division emphasizes that the supervisory obligations imposed by the federal securities laws require a vigorous response even to indications of wrongdoing. It notes case law where a failure to supervise occurred where supervisors were aware only of "red flags" or "suggestions" of irregularity, rather than situations where supervisors were explicitly informed of an illegal act. John H. Gutfreund, 51 S.E.C. 93, 108 (1992); see also Consolidated Inv. Servs., 52 S.E.C. 582, 588 (1996) ("any indication of irregularity brought to a supervisor's attention must be treated with the utmost vigilance").
I share the Division's sense of outrage at what occurred, but I disagree that Mr. Price's supervision was unreasonable. Mr. Peeper's trades at Spencer Edwards had been the subject of two inquiries in 1994 and 1995 and neither resulted in any prohibitions. In October 1994, Mr. Price participated in discussions with the NASD to resolve the "the activity occurring in the foreign accounts of Thomas Kaufmann and Eugene Geiger" or Mr. Peeper's accounts, a pending matter noted in the NASD's review of Spencer Edwards. (Tr. 419-20, 650-52, 747; Resp. Price Ex. A-22.) The NASD informed Mr. Price in a letter dated December 5, 1995, that "it had determined to file this investigation without action." (Tr. 650; Price Ex. A-23.) In addition, Mr. Price knew that Hanifen Imhoff reviewed Mr. Peeper's trading practices in 1994 but took no action. (Tr. 417-18, 650, 747.)
Mr. Price knew Mr. Peeper's trading practices "quite well." (Tr. 650.) The La Salle account had a long history at Spencer Edwards and its predecessor firm and had done previous transactions involving Regulation S. (Tr. 650, 746-47.) The trades in 1995 and 1996, appeared facially similar to other trades Mr. Geiger had handled in Mr. Peeper's accounts at Spencer Edwards and the predecessor firm. When Mr. Price questioned Mr. Geiger in February and July 1996, he had no reason to think Mr. Geiger would lie about his dealings with the issuer and the issuer's attorney. (Tr. 744-45, 763.) Mr. Geiger had no prior disciplinary record or customer complaints. (Tr. 707-08.) Mr. Price had known Mr. Geiger for about six or seven years and had supervised him at Cohig. (Tr. 707.)
Based on my observation of Mr. Price's demeanor I found his denial that he had any suspicion that Mr. Geiger violated Section 5 credible.35 Mr. Price is the only Respondent who gave consistent, candid testimony throughout the proceeding. I have given weight to the credible expert opinion of Mr. Petrelli that Mr. Price acted reasonably in these circumstances. (Resp. Price Ex. A-28.)
For all these reasons, I conclude that Mr. Price carried out his supervision of Mr. Geiger in a reasonable manner and he did not violate Section 15(b)(6).
IV. PUBLIC INTEREST 36
Respondents make the general assertion that the Division's recommended sanctions are harsh, punitive, draconian, and excessive. (Resp. Geiger and Peeper Br. 49, Resp. Kirby Br. 27-31.) They cite Respondents' respective regulatory histories and they claim that in 1995-96 there was substantial disagreement about the application of the rules relating to the registration exemptions. (Resp. Geiger and Peeper Br. 49.) I find the recommended sanctions much too lenient for the reasons stated.
Cease and Desist
The Division seeks to have Mr. Kirby, Mr. Geiger and Mr. Peeper ordered to cease and desist from violations of Sections 5(a) and 5(c). (Div. Br. 42-45, Div. Reply 21.) Respondents argue that there is no evidence that they will commit future violations. Mr. Kirby cites to his changed business practices. (Resp. Kirby Br. 30.) Mr. Geiger notes that "[u]nintentional mistakes are common in the complex business of securities transactions." (Resp. Geiger and Peeper Br. 48-49.) If it is determined that Mr. Geiger violated the law, he submits that the maximum sanction should be a cease and desist order and a maximum two-week suspension. (Resp. Geiger and Peeper Br. 50.) Mr. Peeper believes that the case should be dismissed as to him, but if some sanction is imposed the only fair and reasonable sanction is a cease and desist order. (Resp. Geiger and Peeper Br. 50.)
Section 8A of the Securities Act provides that the Commission may order a person found to be violating, to have violated, or about to violate a provision of the Securities Act or any rule or regulation thereunder, to cease and desist where the person knew or should have known that his or her actions caused or contributed to the violations.
Mr. Kirby, Mr. Geiger, and Mr. Peeper violated Sections 5(a) and 5(c) of the Securities Act. The registration provisions that they violated are the heart of the regulatory framework in place since 1933. Each of these individuals was an experienced securities professional. Each knew or should have known that he was acting illegally. There is no evidence to support their claim that their violations were caused by their confusion over the law or their reliance on a transfer agent who had accurate information. The evidence is that these Respondents acted deliberately to make a considerable profit for themselves without any concern for public investors. On these facts a cease and desist order is appropriate.
Remedial Sanctions
Sections 15(b)(6) and 19(h) of the Exchange Act authorize the Commission to censure, limit the activities of, suspend for up to twelve months, or bar from association with a broker or dealer or from participation in a penny stock offering a person associated with a broker-dealer, and to suspend or bar someone from being associated with a national securities exchange or registered securities association who has willfully violated any provision of the Securities Act where it is in the public interest to do so. Respondents' Section 5 violations were willful, defined as intending to commit the acts which constitute the violation. See Arthur Lipper Corp., 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).
The criteria for determining what, if any, sanction is in the public interest are set out in Steadman:
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); see also Donald T. Sheldon, 51 S.E.C. at 86. The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. See Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975).
The Division recommends that the Commission (1) suspend Mr. Kirby from association with a broker or dealer for eight months, and (2) bar Mr. Geiger from association with a broker or dealer with the right to reapply after fifteen months. (Div. Br. 42-44, Div. Reply 21.)
Mr. Kirby and Mr. Geiger's conduct was egregious. They not only violated the statute, but they acted deliberately to hide what they were doing from established review procedures. Mr. Kirby and Mr. Geiger violated established rules and professional standards to cause unregistered securities to enter the public market because it served their self-interests. Mr. Kirby caused investors to spend $56,000 on securities that did not belong in the public market. Mr. Geiger was responsible for investors paying some $1.3 million for securities of dubious value over a seven-month period.
Both Mr. Kirby and Mr. Geiger had a high degree of scienter as to the ramifications of their actions. Their attempts to blame others and their unwillingness to accept responsibility for their illegal actions indicate a high probability that they will commit future violations. The strong indicators that Mr. Kirby cannot be trusted to obey the securities laws include the nature of Mr. Kirby's violations, his prior disciplinary history, and his betrayal of a long-standing friend and business partner, Mr. Price.37 The Commission has held consistently that a Respondent's prior disciplinary record is a significant factor in determining the appropriate sanction. See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d at 1100; Richard J. Puccio, 52 S.E.C. 1041, 1046 & n.10 (1996) (citing Howard Alweil, 51 S.E.C. 14, 17 (1992)); The Stuart-James Co., Order on Motion to Admit Disciplinary Records, 1990 SEC Lexis 3940 (Aug. 22, 1990) (the general principle applied in cases too numerous to cite is that a respondent's prior disciplinary record is to be taken into account in determining the appropriate sanction).
I conclude that Mr. Geiger cannot be trusted to obey the securities laws based on all the factors enumerated, the fact that he lied to Mr. Price about his activities and his lack of candor under oath.
These facts make it abundantly clear that laws and compliance manuals are insufficient to stop persons set on violating the securities laws. A strong sanction is required based on the above considerations and the need to deter these Respondents and others from similar conduct. For these reasons, I bar Mr. Kirby and Mr. Geiger from association with a broker or dealer and from participation in a penny stock offering with the right to reapply after five years.
Disgorgement
Section 8A(e) of the Securities Act and Section 21B(e) of the Exchange Act, empower the Commission in any cease and desist proceeding or proceeding in which the Commission may impose a penalty to order an accounting and disgorgement, including reasonable interest. The Division seeks to have Mr. Kirby, Mr. Geiger, and Mr. Peeper disgorge $31,352.60, $15,202.48, and $1,350,217.47, respectively, plus prejudgment interest. (Div. Br. 42-46, Reply Br. 21.)
Disgorgement is a remedial measure equitable in nature. Its purpose is "to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws." SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989); see also Al Rizek, 70 SEC Docket 927 (Aug. 11, 1999), aff'd, 215 F.3d 157 (1st. Cir. 2000). Mr. Kirby and Mr. Geiger received these funds illegally from their participation in the sale of unregistered securities to public investors. I find therefore that Mr. Kirby should disgorge his profit of $31,352.60, plus prejudgment interest since July 1, 1995, and Mr. Geiger should disgorge $15,202.48, plus prejudgment interest since September 1, 1996. I have set the dates for the start of prejudgment interest on the first day of the month following the end of the illegal activities. (Tr. 232-35; Div. Exs. 44, 46.) I accept the Division's representation that $15,202.48 was Mr. Geiger's share of the gross commissions paid on La Salle's sales of the Golden Eagle shares purchased in the Hills and Hunsaker transactions. (Div. Br. 43.) "Disgorgement need only be a reasonable approximation of profits causally connected to the violation." SEC v. First City Fin. Corp., 890 F.2d at 1231 (citing Elkind v. Liggett & Meyers, Inc., 635 F.2d 156, 171 (2d Cir. 1980)).
The Division requests that I order Mr. Peeper to disgorge $1,350,217.47 which it calculates as La Salle's total proceeds from the sales of Golden Eagle from the account after the deposit of the shares from the Hills and Hunsaker transactions, minus the $119,000 cost. (Division Br. 46 n.98.) I reject the request because there is no evidence that Mr. Peeper was unjustly enriched as the result of his illegal acts. Mr. Peeper was not an owner of La Salle and he did not receive a fee for managing the account in 1996. (Tr. 432; Resp. Geiger and Peeper Ex. P.)
Civil Penalties
Section 21B of the Exchange Act authorizes the imposition of three tiers of civil penalties in any proceeding instituted pursuant to Section 15(b)(6) where there has been a willful violation of the Securities Act and a penalty is in the public interest. At the first tier, the maximum penalty for each act or omission for an individual is $5,000. The second tier applies for acts or omissions involving fraud, deceit, manipulation, or deliberate or reckless disregard of regulatory requirements. The maximum second tier amount for an individual is $100,000 per occurrence.
The Division argues that Mr. Geiger's participation in sales of Golden Eagle shares were violations involving deception, deceit, and a reckless disregard of regulatory requirements that merit a second tier penalty of $50,000. (Div. Br. 43.) The Division cites New Allied Development Corp., 52 S.E.C. 1119 (1996), as support for the calculation of penalties on a per violation basis, in this case $221 each. (Div. Br. 43 n.96.) The Division recommends that the Commission impose a penalty of $10,000 on Mr. Kirby since he "engaged in only a single violation."38 (Div. Br. 44.)
Mr. Kirby and Mr. Geiger merit penalties at the second level because their actions involved deceit and a deliberate or reckless disregard for regulatory requirements. Substantial penalties are called for given these facts and as a credible attempt at deterring others from similar actions. Given Mr. Kirby's disciplinary record, the blatant disregard he has shown for regulatory requirements, and his lack of candor in giving testimony to the Commission, I impose on Mr. Kirby a penalty of $200,000 for the "series of transactions" in which he violated Section 5 by selling unregistered shares of Golden Eagle into the public markets.39 The evidence is that Mr. Kirby has enjoyed considerable financial success in the securities industry. Mr. Kirby realized a $31,000 profit in nine days on his $25,000 investment in Golden Eagle shares. This range of short-term profits and losses is not an unusual occurrence for Mr. Kirby. (Tr. 282-83.)
I assess a penalty of $300,000 on Mr. Geiger based on his outrageous conduct that resulted in numerous sales of unregistered securities for a total of $1.3 million over seven months, and his inability to respond truthfully to inquiries by the Commission and Spencer Edwards's compliance department. Mr. Geiger has also enjoyed considerable financial success from his participation in the securities industry, much of it from his representation of Mr. Peeper. (Tr. 295, 331.)
V. 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 described in the record index issued by the Secretary of the Commission on June 30, 1999.
VI. ORDER
Based on the findings and conclusions set forth above:
I ORDER, pursuant to Section 8A of the Securities Act, and Section 21C of the Exchange Act, that Charles F. Kirby, Gene C. Geiger, and Alfred Peeper shall cease and desist from committing or causing any violations or any future violations of Sections 5(a) and 5(c) of the Securities Act;
I FURTHER ORDER, pursuant to Sections 15(b)(6) and 19(h) of the Exchange Act, that Charles F. Kirby and Gene C. Geiger are barred from association with a broker or dealer and from participation in a penny stock offering with the right to reapply after five years;
I FURTHER ORDER, pursuant to Section 8A(e) of the Securities Act and Section 21B(e) of the Exchange Act that Charles F. Kirby shall disgorge $31,352.60, plus prejudgment interest from July 1, 1995, and Gene C. Geiger shall disgorge $15,202.48, plus prejudgment interest from September 1, 1996;
I FURTHER ORDER, pursuant to Section 21B of the Exchange Act, that Charles F. Kirby shall pay a civil penalty of $200,000, and that Gene C. Geiger shall pay a civil penalty of $300,000; and
I FURTHER ORDER, that the proceeding is DISMISSED as to Edward H. Price.
Payment of disgorgement and penalties, plus interest, shall be made on the first day following the day this decision becomes final by certified check, United States postal money order, bank cashier's check, or bank money order payable to the U.S. Securities and Exchange Commission. The check and a cover letter identifying Charles F. Kirby or Gene C. Geiger as a Respondent in Administrative Proceeding No. 3-9602, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission's Division of Enforcement.
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. 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 such party, 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
| 1 | On March 8, 1999, the Division filed a pleading noting the Commission's decision in Jacob Wonsover, 69 SEC Docket 694 (Mar. 1, 1999). |
| 2 | "(Tr. __.)" refers to the transcript of the hearing. I will refer to the Division and Respondent exhibits as "(Div. Ex. __.)," and "(Resp. __ Ex. __.)," respectively. I will refer to the Division's posthearing filings as "(Div. Br. or Reply Br__.)," and the Respondents' posthearing filings as "(Resp.__Br.__.)." |
| 3 | On July 16, 1999, the Court entered an order enjoining Gregory Vernon from further violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 5(a), 5(c), 17(a), and 17(b) of the Securities Act. The Court ordered Gregory Vernon to disgorge $70,000 but waived payment and did not impose a civil penalty based on his demonstrated inability to pay. 70 SEC Docket 854 (Aug. 5, 1999). |
| 4 | From 1969 to 1974, Mr. Price was a registered representative with the brokerage firms Hayden Stone, Shearson Hamil, Eastman Dillon, and Blythe Eastman Dillon. (Tr. 610.) From 1974 to 1976, he was the vice president of Institutional Securities of Colorado. (Tr. 610.) From 1976 to 1989, Mr. Price was associated with E.J. Pittock, which became RAF Financial, in a number of roles over time including part owner, director, executive committee member, and branch manager. (Tr. 610.) In 1989, Mr. Price moved to Cohig and Associates where he was a part owner and served on the management committee and as a branch manager. (Tr. 610.) |
| 5 | The third owner was a Mr. Marcum who owned 40% of the firm and who was chairman of the three-person board. (Tr. 740-41; Resp. Price Ex. A-28.) |
| 6 | The NASD could not produce the record. Mr. Kirby represented that the result was a settlement and that it involved a record-keeping allegation. (Tr. 249.) |
| 7 | Mr. Peeper and Mr. Geiger disagree on Mr. Peeper's trading style. According to Mr. Geiger, he and Mr. Peeper trade on the basis of technical factors, "a lot of times we trade stocks and we don't even know there's a company underneath of it." (Tr. 425.) Mr. Geiger has seen Mr. Peeper lose millions in failed transactions. (Tr. 372.) According to Mr. Peeper, who also manages investments for European accounts, normally he visits companies or gathers information about them before he invests. (Tr. 533.) |
| 8 | On November 29, 1994, Mr. Knittle arranged for a block of Beneficial Capital stock to be transferred to Ms. Seydler, ostensibly as collateral for a $250,000 loan that her husband made to the company. (Tr. 61-62, 451; Div. Ex. 1.) |
| 9 | In December 1994, $46,720 worth of Golden Eagle stock was sold from Mr. Vernon's account at Strategic Resource Management. (Tr. 495-96; Div. Ex. 10.) Mr. Vernon did not direct this trade. (Tr. 496-97.) Mr. Knittle instructed Mr. Vernon to transfer the proceeds of this transaction to Ms. Erickson via cashier's check, and Mr. Vernon did so. (Tr. 497; Div. Ex. 11.) |
| 10 | In February 1995, Donald F. Cummings a custom home builder operating under the name Bainbridge, received 70,000 shares of Golden Eagle stock from Mr. Knittle and Ms. Erickson as a deposit toward building a house. (Tr. 549.) The stock was escrowed and returned when the deal did not close. (Tr. 548-49.) Mr. Cummings has never met Mr. Vernon, and does not know him. (Tr. 549.) |
| 11 | The 133,333 shares of Golden Eagle that Mr. Kirby purchased were first issued to Terry Whiteside. When Mr. Knittle and Ms. Erickson acquired Beneficial Capital, Mr. Knittle directed Ms. Whiteside to transfer her shares to Paul Vernon on November 29, 1994. Mr. Knittle had 85,000 shares transferred from Mr. Vernon to Bainbridge, on February 16, 1995, and 48,333 shares transferred from Mr. Vernon to Ms. Hunsaker on May 11, 1995. On June 13, 1995, Mr. Knittle had Bainbridge and Ms. Hunsaker transfer these shares to Euram, certificate G0488. (Tr. 67-70; Div. Exs. 2, 52.) The next day, June 14, 1995, 133,333 shares and a "Letter of Relinquishment" from Euram signed by Mr. Peeper to CKC Partners were deposited in the CKC account relinquishing all rights in certificate G0488. (Tr. 67-68, 284-85, 422-23; Div. Ex. 42.) The Golden Eagle shares that Spencer Edwards received from Euram did not bear a restrictive legend. (Tr. 829; Resp. Price Ex. D.) |
| 12 | Mr. Kirby defined the term "block" as a substantial amount of an illiquid stock purchased at less than the market price. (Tr. 289-90.) |
| 13 | A finding of willfulness does not require intent to violate the law, or "reckless disregard of a regulatory requirement." Jacob Wonsover, 69 SEC Docket at 711. To commit a willful violation, a Respondent need only have intentionally committed the act that constitutes the violation. See Arthur Lipper Corp., 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). I reject Respondents' claim that the decision in United States v. O'Hagan, 117 S. Ct. 2199, 2214 (1997), has raised the willfulness standard under Section 15(b)(4)(D) of the Exchange Act, to include a culpable intent. (Geiger and Peeper Br. 46.) I find O'Hagan to be inapplicable to this proceeding because O'Hagan pertained to the requirement of culpable intent for the imposition of criminal liability for a violation of Rule 10b-5. My interpretation of the willfulness standard has been squarely supported by the Court of Appeals of the District of Columbia in Wonsover v. SEC, 205 F.3d 408, 413-14 (D.C. Cir. 2000). |
| 14 | The 500,000 Golden Eagle share certificate held by Ms. Hunsaker had the legend:
(Resp. Price Ex. V.) |
| 15 | The conditions were: 1) Golden Eagle pay to close a bank account which was overdrawn and upon which Mr. and Mrs. Hills were personally liable; 2) Golden Eagle repay Mr. and Mrs. Hills salary and expenses due in the amount of $33,350.12; and 3) certain friends and family members be allowed to redeem their stock. (Div. Ex. 60.) |
| 16 | The last payment came from Mr. Brovarone's Colorado Lawyers Trust Account Foundation account. (Tr. 566, 569-70.) |
| 17 | The good faith and reliance on counsel arguments have no support in the record and, even if they had support, they are not a valid defense to a Section 5 violation but rather go to whether sanctions are appropriate in the public interest. See Blinder, Robinson & Co., v. SEC, 837 F.2d 1099, 1109-11 (D.C. Cir. 1988); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 182 (2d Cir. 1976) ("Petitioners' reliance on [counsel's] advice goes not to the violation, but to the penalty."). |
| 18 | In 1995, the Commission staff released an interpretative release of Regulation S that stated:
Problematic Practices Under Regulation S, 60 Fed. Reg. 35,663, 35,664 (1995). The Commission amended Regulation S on February 25, 1998 to address the abusive practices that had developed. 63 Fed. Reg. 9632 (1998). |
| 19 | Rule 144 defines "affiliate" of an issuer as a person that "directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with" the issuer. 17 C.F.R. § 230.144(a)(1). As pertinent to this situation Rule 144 defines "restricted securities" as "[s]ecurities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering." 17 C.F.R. § 230.144(a)(3)(i). See also Terry T. Steen, 67 SEC Docket 837, 840 (June 2, 1998). A 1998 amendment which shortened the holding period is inapplicable. Revision of Holding Period Requirements in Rules 144 and 145, 62 Fed. Reg. 9242 (1997). |
| 20 | Mr. Geiger's expert on securities industry practices, Mr. Christensen, agreed that a broker asked to sell a substantial amount of securities must take whatever steps are necessary to be sure that the transaction does not involve an issuer or a person controlled by the issuer, or an underwriter. (Tr. 805.) |
| 21 | The compliance manual also requires review and written approval by the firm's compliance department where the sale involves an unusually large block of stock in relation to the issuer's total outstanding stock. (Tr. 677-78; Div. Ex. 67 at 70.) The 2,335,250 shares represented 7% of Golden Eagle's outstanding shares. (Tr. 678-79.) |
| 22 | Mr. Price thought the paperwork contained inconsistencies and he would have questioned Mr. Geiger and Mr. Kaufmann if he had seen it. (Tr. 689-92.) |
| 23 | The evidence strongly suggests that Mr. Geiger participated with Mr. Knittle in a fraudulent scheme to sell unregistered stock to the public. |
| 24 | Mr. Brovarone represented in his letter that La Salle's purchase of 2,335,250 shares from Mr. Hills closed on November 10, 1995. (Resp. Price Ex. A-11.) |
| 25 | Ms. Bell founded Corporate Stock Transfer in 1984 and has been president of the firm since that date. (Tr. 729, 731.) The firm's clients include about 400 public companies and it processes about 500 restricted certificates each month. (Tr. 729.) |
| 26 | "The fact that a defendant in a negligence action was following the standards of its industry does not necessarily immunize that defendant from liability." Doe v. Cutter Biological, Inc., 971 F.2d 375, 382-83 (9th Cir. 1992) (citing Texas & Pacific Ry. Co. v. Behymer, 189 U.S. 468, 470 (1903) and Martinez v. Korea Shipping Corp., 903 F.2d 606, 610 (9th Cir. 1990)). |
| 27 | Mr. Christensen is the owner of Fordham Consulting of Denver, Colorado. Mr. Christensen holds a bachelor of science degree from Fordham University. He has thirty years experience in the securities industry including service as a principal in two broker-dealer firms and as an assistant director for the NASD. (Resp. Peeper and Geiger Ex. Q.) |
| 28 | Hanifen Imhoff generated Spencer Edwards's stock activity report that Mr. Price reviewed daily. The report notes restricted certificates that the firm received as a legal item. (Tr. 619-20.) |
| 29 | I note Mr. Petrelli's expert testimony that Mr. Price might not have been concerned because Mr. Kirby's prior private transactions involved private placements where the firm he was associated with was the selling agent. (Tr. 694-95, 863-64.) |
| 30 | Div. 8b is a Form U-5 filed with the NASD by a firm that discharged Mr. Kirby. It is in evidence for the fact that Mr. Price was aware of the filing not for the truth of the allegation. (Tr. 250-53.) |
| 31 | Mr. Petrelli holds bachelor of science and master of business administration degrees from the University of Colorado. He has twenty-six years of experience in the securities industry and is director of corporate finance and a member of the management committee of the broker-dealer, Neidiger, Tucker, Bruner, Inc. (Resp. Price Ex. A-28.) |
| 32 | When Mr. Price found out on September 6, 1996, that Mr. Kirby had not sought authorization for the private transaction in Golden Eagle shares in June 1995, he took no action because Mr. Kirby had not committed any violations since June 1995. (Tr. 666-67.) |
| 33 | These violations include the following:
|
| 34 | Mr. Price learned on September 5, 1996, from the Division that Mr. Geiger had sent the 144 paperwork directly to the transfer agent on the Hunsaker shares in violation of Spencer Edwards's compliance manual. On September 6, 1996, Mr. Price sanctioned Mr. Geiger and Mr. Kaufmann. (Tr. 663-64.) He placed Mr. Geiger on heightened supervision for a year, and he fined Mr. Kaufmann $500 and placed him on heightened supervision for six months. (Tr. 664-66.) |
| 35 | However, I do not understand Mr. Price's position given the following testimony I consider contradictory.
(Tr. 708-09, 746.) |
| 36 | Since I have found that Mr. Price did not commit the alleged violations, I will not consider the Division's request that the Commission suspend Mr. Price from association with a broker or dealer for four months after which he be allowed to re-associate only in a non-supervisory, non-proprietary capacity for another four months, and assess a second tier penalty of $10,000. (Div. Br. 44-45.) |
| 37 | Mr. Kirby was not a credible witness. As noted, in at least one instance his investigative testimony is vastly different from his testimony at the hearing. At the hearing he could not remember many things, and he does not think he did anything improper. (Tr. 210-11, 223-27, 257.) Mr. Kirby believes he told Mr. Price of an earlier private transaction, yet Mr. Price knew of no prior request. (Tr. 227, 667-68.) |
| 38 | Since the maximum fine to an individual at the first tier is $5,000, Mr. Kirby assumes that the Division is considering Section 5(a) and Section 5(c) as separate violations. (Resp. Kirby Br. 27 n.16.) |
| 39 | I do not understand the Division's position that Mr. Kirby engaged in a single violation. |
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