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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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In the Matter of HUBER HOGAN CONSULTING, INC.,
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INITIAL DECISION August 13, 2002 |
| APPEARANCES: | Rabia Cebeci, Esq. and Joel Kornfeld, Esq. for the Division of Enforcement, Securities and Exchange Commission
Timothy A. Knotts and Robert E. Hogan appeared pro se for Huber Hogan Consulting, Inc. |
| BEFORE: | Lillian A. McEwen, Administrative Law Judge |
SUMMARY
Huber Hogan Consulting, Inc. (Huber Hogan), willfully violated Section 204 of the Investment Advisers Act of 1940 (Advisers Act) and Rule 204-5 thereunder by failing to file Part I of Form ADV-Y2K by the June 7, 1999, deadline. This Initial Decision (Decision) imposes sanctions on Huber Hogan, including a cease-and-desist order and a censure.
PROCEDURAL HISTORY
On August 26, 1999, the Securities and Exchange Commission (Commission) issued an Order Instituting Proceedings (OIP) pursuant to Sections 203(e) and 203(k) of the Advisers Act. On February 29, 2000, a public hearing was held before me, with regard to Huber Hogan, in New York, New York. Russon Financial Services, Inc., and Robert C. Sears entered into settlement agreements with the Commission and are not subject to this Decision. The Division of Enforcement (Division) called two witnesses in its case in chief. Timothy Knotts (Knotts) testified on behalf of Huber Hogan and called one additional witness in its defense. I admitted into evidence eight exhibits for the Division and eleven exhibits for Huber Hogan.1
ISSUES PRESENTED
The OIP alleges that Huber Hogan has been registered with the Commission as an investment adviser; that it reported assets under management of $25 million or more; and that it was therefore required to file Part I of Form ADV-Y2K with the Commission by June 7, 1999. The OIP also alleges that Huber Hogan failed to file the requisite form, thereby willfully violating Section 204 of the Advisers Act and Rule 204-5 thereunder. If I conclude that the allegations in the OIP are true, I must then determine what, if any, remedial sanctions are appropriate pursuant to the federal securities laws.
FINDINGS OF FACT
The findings and conclusions in this Decision are based on the record and the demeanor of the witnesses who testified at the hearing. Preponderance of the evidence was applied as the standard of proof. See Steadman v. SEC, 450 U.S. 91, 102 (1981). All arguments, testimony, and proposed findings and conclusions that were inconsistent with this Decision were rejected. Having reviewed the entire record, I find the following facts to be true.
Huber Hogan, d.b.a. Hogan and Knotts Financial Group, is located in Red Bank, New Jersey, and has been incorporated since 1984. (Tr. 33.) Knotts and Bob Hogan (Hogan) are vice president and president, respectively, of Huber Hogan, which employed only two additional persons. (Tr. 34-35, 88-89.) Knotts and Hogan both were Series 7 licensed in 1986, and both received certified financial planning degrees in 1989. (Tr. 35-36.) A registered investment adviser and full-service financial planning firm, Huber Hogan has over $65 million in assets under management and about 100 clients. (Tr. 35-38; Div. Ex. 8, p. 13.)
Rabia Cebeci (Cebeci), senior special counsel at the Commission's Pacific Regional Office in Los Angeles (LA Office), has worked for the Commission since 1991. (Tr. 14.) Cebeci was responsible for mailing out reminder letters for the filing of Form ADV-Y2K pursuant to Commission rules, which were published in the Federal Register. (Tr. 14-16.) The Commission's website also discussed the information. (Tr. 16.) Blank ADV-Y2K forms were mailed to investment advisers before each filing deadline - first for December 7, 1998, and then for June 7, 1999. (Tr. 15-16; Div. Ex. 1.) The instruction pages that accompanied the blank forms told the investment adviser where and when to make the required filings. (Tr. 18; Div. Ex. 1.) The initial Huber Hogan Form ADV-Y2K was filed in a timely fashion with the Commission on December 7, 1998. (Tr. 19-20, 42-44; Div. Ex. 2.) As of June 7, 1999, Huber Hogan had not filed the updated form, although it knew from the filing instructions that it was required to file Form ADV-Y2K a second time on or before June 7, 1999. (Tr. 21, 42-44; Div. Ex. 2.)
Knotts, a 39-year old Eagle Scout, has a bachelor of science degree in environmental planning and management from the University of California. From April 5, 1999, to July 15, 1999, Knotts managed the building that Huber Hogan occupied and owned. (Tr. 77-81, 90.) He also handled personnel matters, marketing, and compliance; it was his responsibility, therefore, to file the updated form at issue in this proceeding. (Tr. 81-82, 88.) Knotts prepared the firm's 1999 Form ADV, which was signed by Hogan. (Div. Ex. 8.) The Commission sent the firm a reminder letter by Federal Express on June 16, 1999. (Tr. 20-21; Div. Ex. 3.) The letter informed Huber Hogan that it had until June 28, 1999, to file the form without enforcement action. (Tr. 22-23.) Federal Express records show that Huber Hogan received the letter, signed for by J. Pendell, on June 17, 1999, at 9:30 a.m. (Tr. 23; Div. Ex. 4.)
Cebeci's office sent out approximately 600 letters like the June 16, 1999, letter sent to Huber Hogan. (Tr. 91.) Knotts' name, telephone number, and email address were accurately listed on the initial, timely filed, Form ADV-Y2K, but no attempt was made to contact any delinquent firms through any of these means. (Tr. 92-93.) The June 16th Commission reminder letter was addressed "Attention Chief Executive Officer" and "Dear Sir or Madam" due to the volume of letters sent out and to the need to "expedite the process." (Tr. 94.) Huber Hogan missed the deadline for the second filing due to "extenuating circumstances." (Tr. 69.) Although three employees worked for Huber Hogan on June 1, 1999, one employee, Joanne Simpson-Young, had left the country due to a death in her family and then resigned. (Tr. 70, 80-88; Resp. Ex. 11.) The June 16th letter was opened by employee Julie Pendell. (Tr. 70.) Knotts mistakenly placed it in the wrong file - the "to be read later file" - because the letter was not addressed to him by name, but to "Dear Sir or Madam." (Tr. 70-71, 75-77.)
Between June 16 and July 8, 1999, Cebeci's search of the Commission's database and filings showed that Huber Hogan had not filed the updated form. (Tr. 25-26; Div. Ex. 5.) On July 9, 1999, the LA Office's staff sent a second letter to Huber Hogan by Federal Express, informing it of the staff's intent to recommend enforcement proceedings because of Huber Hogan's failure to meet the June 7, 1999, deadline. (Tr. 29; Div. Ex. 6.) Knotts opened the second Commission letter dated July 9, 1999, as soon as it arrived at Huber Hogan. (Tr. 71, 75.) The letter informed the chief executive officer that an administrative proceeding would be initiated. (Div. Ex. 6.) Only then did Knotts discover that Huber Hogan had received an earlier reminder letter that he had never read. (Tr. 71, 98; Div. Ex. 6.) Knotts talked with Commission employees Cebeci and Sandra Harris (Harris), and "seemed upset" that he had missed the filing date. (Tr. 95.) Cebeci told him to "memorialize it in a writing" for the Commission. (Tr. 95.) On July 14, 1999, Knotts wrote Harris a letter explaining the mistake. (Tr. 29-30, 71-72, 97-98; Res. Ex. 10.) That letter was treated as a Wells submission before the OIP was issued. (Tr. 97.) Knotts also promptly mailed the updated Form ADV-Y2K on July 14, 1999, thirty-seven days late. (Tr. 72-73; Div. Ex. 7.)
Thus, on June 17, 1999, Huber Hogan had received the Commission's letter dated June 16, 1999, but it did not file the updated form until July 14, 1999. (Tr. 46; Div. Ex. 6 and 7.) Knotts had been "reminded" by the Commission's second letter, dated July 9, 1999, that the filing was late and thereafter filed the form. (Tr. 47.) On August 26, 1999, Knotts read Huber Hogan's name in a list of violators discussed in a story published in the New York Times. He received a copy of the OIP on September 1, 1999. (Tr. 72-74.)
CONCLUSIONS OF LAW
Section 204 of the Advisers Act and Rule 204-5 thereunder required Huber Hogan to file a completed Form ADV-Y2K twice -- initially by December 7, 1998, and an update by June 7, 1999 -- to assess the investment adviser's year 2000 readiness. Huber Hogan filed the first report on time, but failed to file the update by the deadline. It also failed to file the update within the established grace period, which ended on June 28, 1999. Huber Hogan filed its update about two weeks later on July 14, 1999. Huber Hogan was registered with the Commission as an investment adviser with over $65 million under management. I conclude that Huber Hogan willfully violated Section 204 of the Advisers Act and Rule 204-5 thereunder by failing to file an updated Part I of Form ADV-Y2K by the June 7, 1999, deadline.
Section 204 of the Advisers Act states that "[e]very investment adviser who makes use of the mails or of any means or instrumentality of interstate commerce in connection with. . . its business as an investment adviser. . . shall. . . make and disseminate such reports as the Commission, by rule, may prescribe as necessary or appropriate in the public interest. . . ." 15 U.S.C. § 80b-4. Rule 204-5, promulgated under Section 204, states that "[e]very investment adviser registered with the Commission that has assets under management of not less than $25 million. . . must file with the Commission: (a) A completed Form ADV-Y2K. . . no later than December 7, 1998; and (b) An additional completed Form ADV-Y2K no later than June 7, 1999." 17 C.F.R. § 275.204-5.
Although Section 204 and Rule 204-5 do not explicitly require a finding of willfullness, Section 203(e)(5) of the Advisers Act, under which this OIP was partially brought, requires a finding of willfulness before the Commission shall censure any investment adviser. See 15 U.S.C. § 80b-3(e)(5). "Willfully" simply means that one intentionally committed the act that constitutes the violation; they need not know that they are violating the law. See Wonsover v. SEC, 205 F.3d 408, 413-414 (D.C. 2000); see also Steadman v. SEC, 603 F.2d 1126, 1135 (5th Cir. 1979); Arthur Lipper Corp v. SEC, 547 F.2d 171, 180 (2d Cir. 1977); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). Moreover, the Commission has held that the "failure to make a required report, even though inadvertent, constitutes a willful violation." Jesse Rosenblum d.b.a. Harbine Fin. Serv., 30 SEC Docket 857, 860 (1984).
I conclude that Huber Hogan willfully violated Section 204 of the Advisers Act and Rule 204-5 thereunder by failing to file an updated Part I of Form ADV-Y2K by the June 7, 1999, deadline and the extended June 28, 1999, deadline. Huber Hogan was an investment adviser registered with the Commission, with over $65 million in assets under management. (Div. Ex. 8.) Therefore, Huber Hogan was required to file Part I of Form ADV-Y2K twice - initially by December 7, 1998, and an update by June 7, 1999. Huber Hogan made the initial filing but failed to make the subsequent filing until July 14, 1999, thirty-seven days after the filing deadline. (Div. Ex. 7; Tr. 29-30.) Moreover, Huber Hogan admits that it knew of the requirement for the subsequent filing but failed, nevertheless, to file the update timely. The several mitigating circumstances articulated by Huber Hogan in its defense do not exculpate Huber Hogan, but they are relevant to the issue of appropriate sanctions.
SANCTIONS
The Division requests a censure, a cease-and-desist order, and a civil monetary penalty be levied against Huber Hogan. (Div. Br. 3.) It requests a first-tier penalty of $10,000, and argues that the amount is consistent with other penalties for similar violations. (Div. Br. 15-16.) Having found the allegations in the OIP to be true, I now turn my attention to discussing the appropriate sanctions.
When the Commission determines administrative sanctions it considers what is in the public interest; specifically, it considers a number of different factors, including but not limited to:
[T]he 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.
Charles W. Steadman v. SEC, 603 F.2d at 1140 (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)).
Taking into consideration these public interest factors, I find that Huber Hogan's inaction demonstrated ignorance of, and disregard for, the securities laws and regulations. I do not, however, find its behavior to be egregious. Huber Hogan's information technology had actually been upgraded to prepare the firm for Y2K. (Resp. Exs. 1-4.) I accept Knotts' contention that the flawed overnight delivery system (relegating unspecified mail to a "to be read later" file) at Huber Hogan contributed to the delay in filing the necessary form. (Res. Ex. 5.) He also states credibly that the system has been corrected. (Tr. 110-113; Resp. Exs. 6-9.) Finally, Knotts took full responsibility for Huber Hogan's inaction and gave assurances that similar violations will not occur again. For these reasons and the reasons articulated below I find a censure and a cease-and-desist order proper, but a civil penalty to be unwarranted.
Censure.
Section 203(e) of the Advisers Act authorizes the Commission to censure any investment adviser if it is in the public interest and the investment adviser or any person associated with the investment adviser willfully violated any provision of the Advisers Act. See 15 U.S.C. §§ 80b-3(e) and 80b-3(e)(5). A censure is nothing more than a formal reprimand for specific conduct. See Black's Law Dictionary, 216 (7th ed. 1999). Here the late filing reveals the absence of an internal system for ensuring that the regulatory obligations of the firm are met. An effective internal system protects investors. A censure is therefore appropriate and in the public interest.
Cease and Desist.
Section 203(k) of the Advisers Act authorizes the Commission to issue a cease-and-desist order against any person who is violating, has violated, or is about to violate any provision of the Advisers Act or rules thereunder. See 15 U.S.C. § 80b-3(k). Although the Commission must consider whether there is a reasonable likelihood of such violations in the future, it may look at past violations as an indication of future violations. See KPMG Peat Marwick LLP, 74 SEC Docket 384, 429 (Jan. 19, 2001), petition denied, 289 F.3d 109 (D.C. Cir. May 14, 2002).
Accurate and timely reporting is fundamental to the Commission's regulation of the securities markets, and the Commission determines what substantive reports are required, and when they are required. Although Huber Hogan cannot violate Rule 204-5 in the future (because it concerns year-2000 readiness), given the likelihood that it will remain in the industry, it could face future reporting requirements promulgated under Section 204 of the Advisers Act. Just as the censure lets the firm know what it did was wrong, the cease-and-desist informs it not to allow it to happen again. For these reasons, I conclude that a cease-and-desist order is appropriate.
Civil Penalty.
Section 203(i) of the Advisers Act authorizes the Commission to impose civil monetary penalties for willful violations of the Advisers Act if the penalty is in the public interest. See 15 U.S.C. § 80b-3(i). In determining whether a penalty is in the public interest, Section 203(i)(3) authorizes the Commission to consider (1) whether the act involved fraud, deceit, or deliberate or reckless disregard of a regulatory requirement; (2) the harm to other persons resulting directly or indirectly from the act; (3) the extent to which one was unjustly enriched; (4) whether one has previously violated the securities laws; (5) the need to deter such person from committing such acts; and (6) any other matters as justice requires. See 15 U.S.C. § 80b-3(i)(3).
Although the violation was willful as defined in law and shows some disregard for regulatory requirements, I conclude that a monetary penalty is not in the public interest. The violation did not involve fraud or deceit or result in unjust enrichment. No harm to clients occurred. Moreover, Huber Hogan has no history of securities law violations. The censure and cease-and-desist order will therefore serve to deter Huber Hogan and others. For these reasons, I find that a civil monetary penalty is not appropriate.
RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), it is certified that the record includes the items set forth in the record index issued by the Secretary of the Commission on August 2, 2000.
ORDER
IT IS ORDERED that, pursuant to Section 203(e) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-3(e), Huber Hogan Consulting, Inc. IS HEREBY CENSURED for violating Section 204 of the Investment Advisers Act of 1940 and Rule 204-5 thereunder.
IT IS FURTHER ORDERED that, pursuant to Section 203(k) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-3(k), Huber Hogan Consulting, Inc. CEASE-AND-DESIST from committing or causing any violations or future violations of Section 204 of the Investment Advisers Act of 1940.
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 (1998). 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.
______________________________
Lillian A. McEwen
Administrative Law Judge
____________________________
| 1 | Citations to the hearing transcript, and exhibits offered by the Division and the Respondent will be noted as "Tr. __," "Div. Ex. __," and "Resp. Ex. __," respectively. Citations to the Division's Post Hearing Brief will be noted as "Div. Br. __." |
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