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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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In the Matter of PETER C. LYBRAND
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INITIAL DECISION
September 3, 2003 |
| APPEARANCES: | Richard E. Simpson and Laura M. Jarsulic for the Division of Enforcement, United States Securities and Exchange Commission. Jorge Luis Flores for Respondent Peter C. Lybrand f/k/a Peter C. Tosto. |
| BEFORE: | Lillian A. McEwen, Administrative Law Judge. |
Respondent Peter C. Lybrand f/k/a Peter C. Tosto (Lybrand) willfully violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder in connection with his involvement with certain penny stocks. This Initial Decision permanently bars Lybrand from participating in any offering of penny stock.
The Securities and Exchange Commission (Commission) instituted this proceeding on February 5, 2003, pursuant to Section 15(b)(6) of the Exchange Act, and Lybrand filed his Answer (Answer) on March 6, 2003. I held a public hearing in Eglin, Florida, from April 29 to 30, 2003, at which Lybrand testified and the Division of Enforcement (Division) called no witnesses. Twenty-three exhibits from Lybrand and twenty exhibits from the Division were admitted into evidence. The Division and Lybrand filed their Post-Hearing Briefs on June 17 and June 23, 2003, respectively. Subsequently, the Division and Lybrand filed Reply Briefs on July 1 and July 7, 2003, respectively.1
The Order Instituting Proceedings (OIP) alleged that on October 18, 2000, Lybrand pled guilty before the United States District Court for the Southern District of New York to criminal charges of market manipulation, false statements, perjury, and obstruction of justice arising from his involvement with Polus, Inc. (Polus), Citron, Inc. (Citron), and Electronic Transfer Associates, Inc. (ETA). United States v. Tosto, 00 Cr. 1082 (DC) (S.D.N.Y. Oct. 18, 2000) (Criminal Action). The OIP alleged that the District Court subsequently convicted Lybrand in the Criminal Action, as well as in an unrelated criminal case on March 15, 2001, and sentenced him to a combined prison term of eighty-seven months. United States v. Tosto, 00 Cr. 1082 (DC) (S.D.N.Y. Mar. 29, 2001); see also United States v. Tosto, 98 Cr. 444 (DC) (S.D.N.Y. Mar. 15, 2001). The OIP further alleged that on March 28, 2002, the United States District Court for the Southern District of New York entered a final judgment by default against Lybrand, permanently enjoining him from committing future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and ordering him to pay disgorgement, prejudgment interest, and a civil penalty. SEC v. Lybrand, Civ. No. 00-1387 (SHS) (S.D.N.Y. Mar. 28, 2002) (Civil Action). In addition, the OIP alleged that the Criminal and Civil Actions both concerned Lybrand's manipulation of, and unregistered transactions in, penny stocks issued by Polus, Citron, and ETA, from which Lybrand realized illegal profits in excess of $6.3 million. Finally, the OIP charged that as a result of his conduct underlying the Commission's civil complaint and the criminal complaint, Lybrand participated in a penny stock offering. If I conclude that the allegations in the OIP are true, I must then determine whether a penny stock bar is appropriate in the public interest pursuant to Section 15(b)(6)(A) of the Exchange Act.
The findings and conclusions herein are based on the entire record. I applied preponderance of the evidence as the standard of proof for the Division's case. See Steadman v. SEC, 450 U.S. 91, 102 (1981). I have considered and rejected all arguments and proposed findings and conclusions that are inconsistent with this Initial Decision.
Lybrand, now thirty-eight years old, worked as a registered representative for six years after graduating from high school. (Tr. 21-23, 219; Div. Ex. 1.) From 1990 through 1999, Lybrand was a self-employed stock promoter with offices in Madison, Georgia. (Answer ¶ II; Tr. 162-63; Div. Exs. 1, 4.) He is presently incarcerated at the Eglin Federal Prison Camp on Eglin Air Force Base in Eglin, Florida. (Answer ¶ II; Tr. 21.) At all relevant times, Lybrand owned and controlled eight foreign companies: Admiral Investments Ltd.; Compulink International Corp.; Drawbridge Investments Ltd.; Glittergrove Investments Ltd.; Grafton Investments Ltd.; Greenford Investments Ltd.; McDonalds Ltd.; and Oasis Enterprises Ltd. (Tr. 27, 108-09, 164-66; Div. Exs. 1, 4.) He also owned and controlled three domestic companies: Investor Relations, Inc.; Tellerstock, Inc.; and Conversant Enterprises, Inc. (Tr. 27, 162-64; Div. Exs. 1, 4.) The domestic companies were public relations firms through which Lybrand conducted stock promotional activities. (Tr. 162-64; Div. Exs. 1, 4.)
Lybrand has a long history of fraudulent conduct. At least two customers lodged complaints about Lybrand's conduct as a registered representative with the National Association of Securities Dealers (NASD) and received arbitration awards. (Tr. 232-34; Div. Exs. 17, 18.) The NASD suspended Lybrand from association with any member and fined him $15,000 after he presented a client with a $5,000 check drawn on an account with insufficient funds. (Tr. 219-21; Div. Ex. 13.)
In 1990, Lybrand was convicted of criminal securities fraud in connection with the company Video Delivery. (Tr. 229.) Lybrand was also convicted of securities fraud for bribing stockbrokers to recommend stock of San Diego Bancorp. (Tr. 222-25, 228; Div. Ex. 15.) After pleading guilty in that case, Lybrand gave false testimony in September 1998 at the criminal trial of two of the brokers that he bribed. (Div. Exs. 5, 20.) As a result of his false testimony, the court ordered a new trial and Lybrand was subsequently convicted of perjury. (Tr. 202-03; Div. Exs. 7, 20.) The government procured Lybrand's testimony pursuant to a cooperation agreement that required him to be truthful in exchange for a reduced sentence. (Div. Ex. 20.) Prior to his testimony, Lybrand had participated in twenty-two separate instances of stock manipulation. (Tr. 236.)
Lybrand has also been subjected to civil and administrative sanctions for his misconduct. In 1996, the United States District Court for the District of Colorado permanently enjoined him from violating the federal antifraud and registration provisions. (Tr. 226-28; Div. Ex. 16.) Shortly thereafter, the Commission permanently barred him from association with any broker or dealer and, in 1997, ordered him to cease and desist from violating the antifraud provisions of the securities laws. (Tr. 222-23; Div. Exs. 14, 19.)
Lybrand's misconduct underlying the instant proceeding began when he gained ownership and control over the foreign companies. (Div. Exs. 1, 4.) He then agreed to acquire a controlling amount of stock in Polus, Citron, and ETA from Richard and Donald Kern and Charles Wilkins in exchange for cash. (Tr. 117, 166-67; Div. Exs. 1, 4.) Instead of paying for the shares, Lybrand instructed the three men to sell their shares to the public in amounts and at prices that he specified in order to receive the sale price. (Tr. 168-74; Div. Exs. 1, 4.) In return, the trio transferred a large percentage of the outstanding shares of Polus, Citron, and ETA to Lybrand. (Tr. 166-72; Div. Exs. 1, 4.) All three companies were mere shells, with no assets, income, or business operations, and all three traded at prices below $5.00 per share. (Tr. 166-67, 180, 217-18; Resp. Exs. 1-14).
In June 1998, Lybrand, often using Investor Relations, Inc., as his base of operations, initiated a series of manipulative activities with respect to the market for Polus, Citron, and ETA stock that continued until the Commission suspended trading of such stock in January 1999. (Tr. 172-74, 204, 212, 217; Div. Exs. 1, 3-5.) Lybrand first arranged a series of matched orders to create the appearance of an active market for the securities. (Tr. 172-77; Div. Exs. 1, 3, 4.) In particular, he illegally coordinated the Kerns' and Wilkins's sell orders with buy orders from various friends and brokers, setting the prices and amounts at which all orders were entered. (Tr. 172-180; Resp. Exs. 1-15; Div. Exs. 1, 3, 4.) Lybrand then continued to manipulate the market for Polus, Citron, and ETA stock by engineering additional matched orders and wash sales, and participated in issuing false and misleading press releases while aware of their content. (Tr. 77-97, 172-80, 198, 204-12, 217; Div. Exs. 1, 4, 5; Resp. Exs. 1-15, 19, 21, 22.) The three companies are presently worthless and remain non-operational. (Tr. 212-14.) When Lybrand's company began receiving threats on message boards, he contacted the Federal Bureau of Investigation. (Tr. 99-102.) As a result of the ensuing investigation, the trading patterns described above were discovered. (Tr. 99-102, 201-03.)
After the Commission suspended trading in Polus, Citron, and ETA stock, Lybrand made several false statements to law enforcement authorities in an attempt to conceal his ownership and control of the foreign companies. (Tr. 165-66, 202-03, 214; Div. Exs. 5, 7.) He also enlisted the help of Fortress Asset Management (Fortress) in an effort to impede the Commission's investigation into his ownership of the foreign entities. (Tr. 214-16; Div. Ex. 12.) For these actions, Lybrand was subsequently convicted of false statements, perjury, and obstruction of justice. (Div. Exs. 5, 7.)
Lybrand conducted these manipulative activities in order to induce investors fraudulently to purchase Polus, Citron, and ETA stock and increase their respective prices, thereby enabling him to profit illegally upon selling the unregistered shares of companies with no assets, income, or business operations to the public. (Tr. 114, 166-67, 172-85, 196-204, 217-19; Div. Exs. 1, 5.) Thus, by his actions, including the use of Internet messages and search engines, Lybrand attempted to, and did, induce others to buy and sell Polus, Citron, and ETA stock while he engaged in prohibited activities with brokers and dealers. (Tr. 92-97, 114, 172-85, 204, 217; Div. Exs. 1, 5; Resp. Exs. 19, 21, 22.)
On October 18, 2000, Lybrand pled guilty before the United States District Court for the Southern District of New York to criminal charges of securities fraud, perjury, false statements, and obstruction of justice in connection with his manipulation of the market for Polus, Citron, and ETA stock. (Answer ¶ II; Tr. 28, 103-06, 137-39, 205; Div. Ex. 5.) Based on his guilty plea, on March 15, 2001, the District Court convicted Lybrand on all counts (as well as an unrelated criminal case) and sentenced him to a combined prison term of eighty-seven months, the maximum amount under the plea agreement. (Answer ¶ II; Tr. 103-06, 137-39; Div. Exs. 6, 7.) On March 28, 2002, the United States District Court for the Southern District of New York permanently enjoined Lybrand from violating Sections 5(a), 5(c), and 17(a) of the Securities Act, and Exchange Act Section 10(b) and Rule 10b-5 thereunder in connection with his involvement with Polus, Citron, and ETA stock. (Tr. 139-45; Div. Ex. 2; Resp. Post-Hearing Brief 7.)
Criminal convictions cannot be collaterally attacked in an administrative proceeding. Elliott v. SEC, 36 F.3d 86, 87 (11th Cir. 1994); see also Ted Harold Westerfield, 69 SEC Docket 722, 729 n.22 (Mar. 1, 1999); William F. Lincoln, 53 S.E.C. 452, 455-56 (Feb. 9, 1998); Meyer Blinder, 53 S.E.C. 250, 253 (Oct. 1, 1997); Benjamin G. Sprecher 52 S.E.C. 1296, 1302 (Apr. 18, 1997). Furthermore, findings of fact and conclusions of law made in a prior injunctive action are similarly immune from attack in a subsequent administrative proceeding. Elliott, 36 F.3d at 87; see also Westerfield, 69 SEC Docket at 729 n.22; Blinder 53 S.E.C. at 253. Lybrand acknowledges the permanent injunction and criminal conviction, and admits that the conduct underlying the Criminal and Civil Actions concerned his manipulation of, and transactions in, unregistered Polus, Citron, and ETA stock. (Answer ¶ II; Tr. 137-45, 147-48.) I have therefore taken official notice of the criminal conviction and guilty plea in United States v. Tosto, 00 Cr. 1082, and I conclude that the United States District Court for the Southern District of New York is a court of competent jurisdiction. See 17 C.F.R. § 201.323. I have also taken official notice of the judgment rendered in the injunctive proceeding captioned SEC v. Lybrand, Civ. No. 00-1387, and I conclude that the United States District Court for the Southern District of New York is a court of competent jurisdiction. See 17 C.F.R. § 201.323. Based on the above, I conclude that Lybrand was convicted of an offense enumerated in Section 15(b)(4)(B) of the Exchange Act within ten years of this proceeding. I further conclude that Lybrand has been enjoined from engaging in conduct in connection with the purchase or sale of a security.
Rule 3a51-1 sets forth several tests to determine whether an equity security is a "penny stock." First, the security must not have been registered or approved for registration on a national securities exchange that makes transaction reports available pursuant to 17 C.F.R. § 240.11Aa3-1. 17 C.F.R. § 240.3a51-1(e). Second, the security must not have been "authorized, or approved for authorization . . . for quotation in the National Association of Securities Dealers' Automated Quotation System (NASDAQ), provided that price and volume information with respect to transactions in that security is required to be reported on a current and continuing basis and is made available to vendors of market information . . . ." 17 C.F.R. § 240.3a51-1(f). Polus, Citron, or ETA stock was never registered, approved for registration, or traded on a national securities exchange. In addition, Polus, Citron, or ETA stock was never authorized or approved for authorization for quotation on the NASDAQ quotation system. Third, the security must not, except for purposes of Section 7(b) of the Securities Act and Rule 419 thereunder, have a price in excess of $5.00. 17 C.F.R. § 240.3a51-1(d). Prior to Lybrand's manipulative and fraudulent activities discussed above, Polus, Citron, and ETA stock each traded at less than $5.00 per share. (Tr. 180, 217-18; Resp. Exs. 1-14.)
Finally, the issuer of the relevant security must not have (1) "net tangible assets in excess of $2,000,000, if the issuer has been in continuous operation for at least three years, or $5,000,000, if the issuer has been in continuous operation for less than three years;" or (2) "average revenue of at least $6,000,000 for the last three years." 17 C.F.R. § 240.3a51-1(g). Because Polus, Citron, and ETA each had minimal or no assets, no income, and no business operations, each met the definition of the term "penny stock" as set forth in Section 3(a)(51)(A) of the Exchange Act and Rule 3a51-1 thereunder. Therefore, each was a penny stock within the meaning of Section 15(b)(6) of the Exchange Act.
Section 15(b)(6)(C) of the Exchange Act provides that the term "person participating in an offering of penny stock" includes "any person acting as any promoter, finder, consultant, agent, or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock." As previously discussed, Lybrand engaged in prohibited activities with brokers and dealers with the purpose of inducing or attempting to induce investors fraudulently to purchase penny stocks issued by Polus, Citron, and ETA. Accordingly, I conclude that Lybrand participated in the offering of a penny stock within the meaning of Section 15(b)(6)(C) of the Exchange Act. I further conclude that Lybrand's misconduct occurred pursuant to his participation in a penny stock offering.
Section 15(b)(6)(A) of the Exchange Act provides two separate avenues for imposing a penny stock bar after notice and opportunity for hearing. First, the Commission may bar a person from participating in offerings of penny stock if (1) a bar is in the public interest, and (2) the person has been enjoined in connection with the purchase or sale of a security, and who, at the time of the misconduct alleged in the injunctive action, was participating in a penny stock offering. Ralph W. LeBlanc, Exchange Act Rel. No. 48254, __ SEC Docket __, (July 30, 2003). Second, the Commission may also impose a penny stock bar if (1) a bar is in the public interest, and (2) the person was participating in a penny stock offering at the time of the alleged misconduct and has been convicted of an offense specified in Section 15(b)(4)(B) of the Exchange Act within ten years of the commencement of the instant proceeding. Sprecher, 52 S.E.C. at 1297 n.2. Exchange Act Section 15(b)(4)(B) offenses include perjury, making false statements, or those involving the purchase or sale of securities.
I have concluded that the allegations in the OIP are true. Specifically, I have found that Lybrand was enjoined in connection with his participation in a penny stock offering. I have also found that at the time of Lybrand's misconduct, he was participating in the offering of a penny stock and was convicted of an offense enumerated in Exchange Act Section 15(b)(4)(B) within ten years of the instant proceeding. The remaining issue is whether a penny stock bar is appropriate in the public interest. In determining whether a sanction is necessary in the public interest, I am guided by the following factors:
[T]he egregiousness of the respondent's actions, the isolated or recurrent nature of the of the infraction, the degree of scienter involved, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his conduct, and the likelihood that the respondent'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). In proceedings based on an injunction, the Commission has considered the circumstances surrounding the injunctive action in making the public interest determination. Marshall E. Melton, Exchange Act Rel. No. 48228, __ SEC Docket __, (July 25, 2003). Willfulness does not require intent to violate, but merely intent to do the act that constitutes a violation. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976).
Lybrand's conduct, for which he was convicted and enjoined, involved a high degree of scienter. Lybrand intentionally orchestrated the wash sales and matched orders in order to induce investors fraudulently to purchase Polus, Citron, and ETA stock, thereby increasing the prices and enabling him to profit. (Tr. 172-84, 204, 217; Div. Ex. 5.) Thus, his actions were committed willfully. Moreover, following the trading suspension order, Lybrand made several false statements to law enforcement authorities and enlisted the help of Fortress in an attempt to conceal his ownership and control of the foreign companies and impede the Commission's investigation. (Tr. 165-66, 202-03, 214-16; Div. Exs. 5, 7, 12.) Lybrand's attempted cover-up shows that he was determined to succeed with the scheme at all costs and that he knew of the wrongful nature of his conduct.
Lybrand's actions were egregious and recurrent. He engaged in the manipulative transactions repeatedly from June 1998 until January 1999, a period of more than six months. (Tr. 212; Resp. Exs. 1-15; Div. Exs. 1, 3, 4.) These transactions were large, involved multiple accounts, and enabled him to realize over $6 million in illegal profits. (Resp. Exs. 1-15; Div. Exs. 1, 2.) Furthermore, Lybrand's activities ceased only when the Commission suspended trading in Polus, Citron, and ETA stock. (Tr. 212.) Thereafter, Lybrand deliberately attempted to impede the Commission's investigation into his misconduct. (Tr. 165-66, 202-03, 214-16; Div. Exs. 5, 7, 12.) Finally, he has a long history of securities fraud that includes criminal convictions.
In opposition to the imposition of sanctions, Lybrand contends that he will not be a danger to violate the securities laws in the future. (Tr. 122-23.) He stated that he intends to comply with all applicable rules and regulations, and that he would request assistance from an attorney or the Commission before engaging in any securities related activities. (Tr. 114-15, 118-19, 122-23.) He further argues that he has rehabilitated himself, as evidenced by his participation in such activities as Bible study, drug and alcohol counseling, and enrollment in college. (Resp. Post-Hearing Brief 4; Resp. Reply Brief 4.)
Lybrand's intent to refrain from future violations is a mitigating circumstance. Nevertheless, "past misconduct [may be] the basis for an inference that the risk of probable future misconduct [is] sufficient to require the exclusion from the securities business." Arthur Lipper Corp., 46 S.E.C. 78, 101 (Oct. 24, 1975), rev'd on other grounds, 547 F.2d 171 (2nd Cir. 1976). Including the conviction and injunction underlying the present matter, Lybrand has been convicted of securities fraud on three separate occasions, permanently enjoined from violating the securities laws twice, barred from associating with any broker and dealer or investment adviser, and suspended by the NASD. Moreover, his convictions for false statements and perjury cast serious doubt on his trustworthiness, as well as the sincerity of his assurances that he will not commit any future violations.
Lybrand also does not recognize any wrongdoing. He denied that he knowingly committed the manipulative acts underlying the crimes to which he pled guilty and the violations that he is enjoined from committing. (Tr. 101, 103-04, 106-07.) Instead, he repeatedly blamed others for allowing the violations to occur. (Tr. 33, 47-49, 63-64, 71-72, 75-76, 79, 83-88, 108-10, 114-16, 123-25.) He also blamed others for the false and misleading press releases. (Tr. 79, 83-88.) Lastly, he testified that he only pled guilty to fraud as a "matter of convenience to benefit [from the sentencing guidelines]." (Tr. 104, 205.)
Lybrand's testimony appears to be an attempt to relitigate matters that were previously decided by courts of competent jurisdiction, and therefore, he is precluded from doing so here. Whatever Lybrand's motivations are, however, his excuses clearly establish that he refuses to take responsibility for his wrongful conduct. Furthermore, the systematic nature of Lybrand's violations together with his denial of responsibility persuades me to conclude that he is a risk to commit similar violations in the future. See Nolan Wayne Wade, Exchange Act Rel. No. 48245, __ SEC Docket __, (July 29, 2003), citing Lipper, 46 S.E.C. at 101 (respondent's failure to recognize magnitude of misconduct can indicate likelihood of repeating it.)
Finally, although Lybrand's activities presently may be limited due to his incarceration, his occupation as a stock promoter would afford him opportunities to commit future violations of the securities laws upon his release. Lybrand has expressed his continued desire to work in the securities industry after his release and has presented no evidence that he has relinquished control over his promotional companies, the client base of which consists of companies whose securities are traded on the NASD Bulletin Board. (Tr. 114-15, 118-19, 122-23, 162-64; Div. Ex. 4.) Accordingly, if he is allowed to re-enter the securities industry, he will have ample opportunities to commit future violations. Therefore, I find that it is in the public interest to bar Lybrand permanently from participating in any offering of penny stock.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I hereby certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on June 12, 2003.
IT IS ORDERED, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, that Peter C. Lybrand f/k/a Peter C. Tosto be, and he hereby is, permanently barred from participating in the offering of any penny stock, including acting as a promoter, finder, consultant, or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.
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) of the Commission's Rules of Practice, 17 C.F.R. § 201.360(d)(1), within twenty-one days after service of the initial decision upon them, 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 transcript of the hearing will be noted as "(Tr. __.)." Citations to the Division's and Respondent's exhibits will be noted as "(Div. Ex. __.)," and "(Resp. Ex. __.)," respectively. Citations to the Division's and Respondent's Post-Hearing Briefs will be noted as "(Div. Post-Hearing Brief __.)," and "(Resp. Post-Hearing Brief __.)," respectively. Citations to the Division's and Respondent's Post-Hearing Reply Briefs will be noted as "(Div. Reply Brief __.)," and "(Resp. Reply Brief __.)," respectively.
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