==========================================START OF PAGE 1====== INITIAL DECISION NO. 84 ADMINISTRATIVE PROCEEDING FILE NO. 3-8755 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION ____________________________ In the Matter of : : GARY A. SMITH : INITIAL DECISION : JANUARY 4, 1996 : ____________________________ APPEARANCES: James Davidson and Rebecca Carlins for the Securities and Exchange Commission's Division of Enforcement, Midwest Regional Office. Gary A. Smith, pro se.* BEFORE: Brenda P. Murray, Chief Administrative Law Judge * It is unclear whether Mr. Smith has legal counsel. The Securities and Exchange Commission (Commission) initiated this proceeding on July 17, 1995, pursuant to Sections 203(e) and 203(f) of the Investment Advisers Act of 1940 (Advisers Act). The case is unique in that Mr. Smith, the respondent, has gone to extreme means and threatened bodily harm to federal government employees as part of his denial that the Commission has authority in these matters. In 1991 Mr. Smith refused to allow Commission examiners to review the books and records of companies he controlled and he threatened the examiners with bodily harm. Tr. 22-23. To examine documents in Mr. Smith's control, the Division had to obtain a court order and court enforcement of subpoenas. Id. On September 1, 1993, Mr. Smith wrote the following to Division counsel on letterhead which described him as Chair and CEO, Goods & Services International, Inc., a public Utah holding company: I don't give a shit what the SEC does or doesn't do. You hav [sic] a lot of power but you can't use any of it on me because I will never agree that you hav [sic] any jurisdiction over Trustees including me. All Trustees operate ONLY under State Uniform Probate Codes, which is none of your God damned business. So take your Investment Advisers Act of 1940 and all of its rules and stick them up your ass. ... I will never register under any conditions, to be a registered investment adviser and agree to come under SEC jurisdiction. ... I will not pay one (1) penny civil penalty, even if every judge in the U.S.A. orders me to do so wrongly and it is enforced by the U.S. Army. ... The only penalty I am willing to accept is incarceration for taking your life, the life of George M. Marovich and the she bitch you work for, if necessary as a last resort to clear varmints from this good earth, to which I would consider the same as justified homicide for the public good. I strongly believe that the SEC in this instance is trying to ==========================================START OF PAGE 2====== operate outside the mandate provided by Congress in enacting into law the Act. The SEC is not empowered by law to change the definition of an investment adviser, as inacted [sic]. ...You can go [term deleted] yourself because I will never submit to your illegal abuse. I'd rather kill you, with possible consequences, than to provide you with a precedent to hurt all other state Trustees... Let's have at it shyster! If I win, you keep your life and I chop off your little circumsized [sic] penis from the public dole and you can work in private business where you will soon learn to hav [sic] respect for other people's rights. If you win, I won't register as an Investment Adviser, I won't pay the U.S. Government one penny as tribute, you lose your life and all 50 state's hav [sic]to rewrite their Uniform Probate Codes to say that all Trustees must kiss the ass of all SEC regulators. ...All of this is none of the fed's God damned business because these activities are only under state laws. ... You son-of-a-bitch, you only hav [sic] three choices. Either sign the dismissal consent decree (which I don't like), send a counter offer (which I will like and sign) or let's fight. The back alley or the courts? If it is the courts, I'll tie your ass up for months, hopefully with national news coverage in an entertaining but real cause celebre. When I'm done with you - the SEC won't hav [sic] money in their budget for paperclips. ... If you don't like being called a cocksucker, you might consider my feelings when you wrongly call me an "Unregistered Investment Adviser." ... The rain of truth will wash clean your reign of illegal abuse and the Judge's wrongful order, contrary to law, will come back to haunt him for life. ... Now, I'm going back to work to do my duty to provide trusteeship of all assets, including securities, for foundations and trusts, all of which is none of your God damned business... This war won't be over until I say it's over. Sooner or later either the SEC or you will go away - one way or another. Div. Ex. 5. On June 27, 1995, Mr. Smith was committed to the Federal Medical Center in Rochester, MN, pursuant to an order of the ==========================================START OF PAGE 3====== United States District Court for the Eastern District of Michigan, Southern Division, dated May 16, 1995, which found Mr. Smith suffering from a mental disease or defect rendering him mentally incompetent to the extent that he is unable to understand the nature and consequences of the proceeding against him, and committed him in custody for treatment and evaluation. -[1]- The criminal action in U.S. v. Smith, Criminal No. 93-80954 (U.S.E.D. MI) is based on death threats Mr. Smith sent to Judge Avern Cohn, the presiding judge in SEC v. Gary A. Smith, Civil Action No. 93 CV 74410 DT, and to James Davidson, counsel for the Division. -[2]- Division of Enforcement (Division) counsel informed me by letter dated December 4, 1995, that Mr. Smith had been released from the Federal Medical Center in Rochester, MN, on October 26, 1995 and that he had been found mentally competent to assist in his defense. Tr. 30-31. -[3]- ---------FOOTNOTES---------- -[1]- Exhibit 1 to the Division's Motion to Postpone the Hearing dated September 13, 1995. The committal date is from Respondent's Motion for Adjournment which I received November 15, 1995. -[2]- Tr. 8. However, Judge Cohn's Memorandum Regarding Grant of Plaintiff's Motion for Summary Judgment (Memorandum) states that the U.S. Attorney filed criminal charges against Mr. Smith regarding the substance of a letter he sent to the Commission indicating his disagreement with its investigation of him. SEC v. Gary A. Smith, Civil Action No. 93 CV 74410 DT, Memorandum at 8 n.3. I assume that letter is Div. Ex. 5 which I quoted at pp. 1-2. -[3]- I allow into evidence as Div. Ex. 6 a letter to me from Division counsel reciting information he obtained at my request. The letter cites as the source the Assistant U.S. Attorney assigned to the criminal matter, who informed Division (continued...) ==========================================START OF PAGE 4====== Neither Mr. Smith nor Attorney Robert A. Kuhr -[4]- responded to the numerous phone messages and faxed copies of a notice and an order my office sent informing them of the November 14 prehearing conference, and confirming the date, time, and place of the November 16 hearing. -[5]- Neither Mr. Smith nor Attorney Kuhr participated in the prehearing conference on November 14 where Division counsel indicated that it was ready to proceed. -[6]- Since there was no objection, I ordered that the hearing would begin as scheduled on November 16. On November 15, 1995 at 5:00 p.m., Attorney Kuhr, "counsel for purposes of this motion only," faxed to me a Motion for Adjournment contending that the proceeding should not proceed because Mr. Smith had not been found mentally competent, he was ---------FOOTNOTES---------- -[3]-(...continued) counsel that a competency hearing for Mr. Smith was scheduled for early December. -[4]- By letter dated October 11, 1995, Mr. Smith informed Division counsel that on his release from the Federal Medical Center he would answer the Order through his attorney Robert A. Kuhr, Esq., 17016 Mack Ave., Grosse Pointe Park, MI 48230. -[5]- These communications are in addition to copies of all orders, including one issued September 14, 1995, setting the hearing for November 16, that the Commission's Secretary sent to the respondent by certified mail. Because my office was unable to get Mr. Smith or Attorney Kuhr to inform us whether the respondent would attend the hearing, I set a telephone prehearing conference for November 14 to discuss whether the hearing would take place. Agreement on the date of the hearing was important, since both parties are located outside of Washington, the site of the hearing. -[6]- The telephone operator could get no answer at the either Mr. Smith's number or Attorney Kuhr's number. Attorney Kuhr called my office following the conference and was aware that the conference had taken place. ==========================================START OF PAGE 5====== unable to assist in his defense, and he has not been able to retain counsel. In view of the blatant refusal of the respondent and Attorney Kuhr to participate in the scheduling conference held the previous day, I refused their last-minute request and the hearing took place as scheduled. The Division presented no witnesses but offered five exhibits which I received and made part of the record. FINDINGS OF FACT I applied preponderance of the evidence as the applicable standard of proof. I find the allegations in the Order Instituting Proceedings (Order) to be true. My findings and conclusions are based on the record. On December 19, 1994, Judge Cohn found that since April 1987, Mr. Smith engaged in acts, transactions, practices and courses of business which constitute violations of Sections 203(a), 204, 205(a)(2), and 206(4) of the Advisers Act and Rules 204-2, 204-3, and 206(4)-2(a) thereunder. He granted the Commission's motion for summary judgment, and permanently enjoined Mr. Smith from continuing to operate in violation of the Advisers Act and Rules thereunder. Div. Ex. 1, SEC v. Gary A. Smith, Civil Action No. 93 CV 74410 DT, Order of Permanent Injunction and Civil Penalties. -[7]- ---------FOOTNOTES---------- -[7]- The illegal actions consisted of (1) acting as an unregistered investment adviser, (2) providing inadequate safeguards for client funds, (3) failing to maintain required books and records, (4) failing to furnish disclosure documents, (continued...) ==========================================START OF PAGE 6====== On January 6, 1995, Judge Cohn found that Mr. Smith acted as an unregistered investment adviser in the period 1987 to 1994; that he managed between three and five million dollars in assets in 115 client accounts; that at least seventy-five percent of the value of the assets consisted of securities; and that his clients resided in 14 states and foreign countries. Div. Ex. 2 at 3, SEC v. Gary A. Smith, Memorandum. In the civil action, Mr. Smith did not dispute the Commission's charges that he failed to comply with the statute. Memorandum at 14. The court rejected Mr. Smith's only defense that his activities did not come within the terms of the Advisers Act. Div. Ex. 2 at 9 n.4 An alternative basis for my findings is that Mr. Smith did not file an answer to the Commission's Order which is the basis for this proceeding, and that he had notice of the hearing held November 16, 1995 but did not appear. Rules 6(e) and 7(e) of the Commission's Rules of Practice provide that a person who fails to file an answer to the Order, or who does not appear at a hearing of which he has been duly notified, shall be deemed in default and the allegations in the Order may be deemed to be true. 17 C.F.R.  201.6(e) and 7(e). -[8]- I find Mr. Smith in default, and the allegations in the Order to be true. ---------FOOTNOTES---------- -[7]-(...continued) and (5) failing to provide a non-assignability clause in client contracts. Memorandum at 1. -[8]- This proceeding is governed by the Commission's Rules of Practice in effect prior to July 24, 1995. ==========================================START OF PAGE 7====== PUBLIC INTEREST It is in the public interest to bar Mr. Smith from participating in the securities industry because he does not accept federal jurisdiction over activities which Congress and the courts have described as those of an investment adviser. Div. Exs. 4 and 5. In addition, Mr. Smith's irrational death threats against federal government employees indicate that Mr. Smith does not have the temperament and judgment required of a person who acts as a fiduciary in a position of trust and responsibility. Finally, Mr. Smith merits a severe sanction when measured against the criteria of Steadman v. SEC, 603 F.2d 1126, (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981), which is the customary starting point for assessing what sanction is appropriate in the public interest: ...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 at 1140. Mr. Smith's illegal activities were blatant, widespread, and continued for some seven years. Mr. Smith had been a co-owner and president of a registered investment adviser from 1982 through March 31, 1987 so he knew that what he was doing for compensation from 1987 through 1994 came within the definition of investment adviser activities and that registration was required. ==========================================START OF PAGE 8====== Mr. Smith has given no assurance that he will discontinue his illegal activities, to the contrary he has defiantly refused to acknowledge responsibility for the violations of the Advisers Act, and rules thereunder, that this record shows he committed. Judge Cohn's finding that without a permanent injunction "there is a substantial likelihood that Defendant Smith will violate the Advisers Act in the future" is additional evidence that Mr. Smith's occupation in the securities industry will almost certainly result in future violations. -[9]- A severe sanction is also warranted to deter others from similar activities. Steadman v. SEC, 603 F.2d at 1142. There is no evidence of any mitigating circumstances. ORDER Based on the findings and conclusions set forth above, I ORDER pursuant to Section 203(f) of the Advisers Act that Gary A. Smith is barred from association with any investment adviser. -[10]- ---------FOOTNOTES---------- -[9]- It is unclear whether or not Mr. Smith has stopped his illegal activities. As recently as November 1995, telephone calls to Mr. Smith's phone number were answered in the name of one of the companies through which he has acted illegally as an investment adviser. Tr. 10-11. -[10]- Since Mr. Smith was operating unregistered investment advisers, revocation of registration under Section 203(e) of the Advisers Act is inappropriate. The sanction that I have imposed is the severest sanction possible under the terms of the statute under which the Commission instituted the proceeding. The Division has asked that Mr. Smith be barred, in addition, from association with a broker, dealer, investment (continued...) ==========================================START OF PAGE 9====== This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Commission's Rules of Practice. 17 C.F.R 201.17(f). Pursuant to that rule, this initial decision shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant Rule 17(b) within 15 days after service of the initial decision upon him or her, unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to a 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 Washington, D.C. January 4, 1996 ---------FOOTNOTES---------- -[10]-(...continued) company, or municipal securities dealer. Tr. 19. Those sanctions are provided for in statutes other than the Advisers Act, which was the sole authority cited for this proceeding. The Commission has this issue before it in pending cases.