INITIAL DECISION RELEASE NO. 85 ADMINISTRATIVE PROCEEDING FILE NO. 3-8593 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION : In the Matter of : : ROBIN RUSHING and HAROLD : INITIAL DECISION ("B.J.") GALLISON, JR. : January 26, 1996 : : APPEARANCES: Carl A. Tibbets for the Division of Enforcement, Securities and Exchange Commission Irving M. Einhorn, Attorney for the Respondents BEFORE: Burton S. Kolko, Administrative Law Judge This administrative proceeding was instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Respondents Robin Rushing ("Rushing") and Harold Gallison, Jr. ("Gallison") willfully aided and abetted and caused Burnett Grey Inc. ("Burnett") to violate Section 15(c)(2) of the Exchange Act and Rule 15c2-11 thereunder, and what, if any, remedial sanctions are appropriate and in the public interest. A hearing was held in this matter on June 7 and June 8, 1995, in San Diego, California to determine whether the allegations brought by the Division of Enforcement ("Division") with regard to the Respondents were true and to afford them an opportunity to establish any defense. The Division and the Respondents filed their initial briefs and findings of fact and conclusions of law on September 25, 1995. Reply briefs were filed on October 31, 1995. The Division filed a Statement in Reply to New Point Raised on November 7, 1995. The findings and conclusions herein are based upon the preponderance of the evidence as determined by the record and upon my observation of the various witnesses who testified at the hearing, as well as the briefs, and the proposals of facts and law of the Division and Respondents. Findings of Fact During 1990, Respondents were employed by Burnett, a broker- dealer registered with the Commission pursuant to Section 15(b) ==========================================START OF PAGE 2====== of the Exchange Act. Order Instituting Proceedings II.A. During the time Rushing was employed at Burnett, she held supervisory and financial principal licenses: Series 7 and 24. Tr. 273-274.-[1]- Gallison was Rushing's immediate supervisor. Gallison was in charge of compliance at Burnett and supervised Rushing's market-making activities. He was responsible for compliance with the federal securities laws and the rules of the Securities and Exchange Commission, including being responsible for insuring that the firm and its traders complied with Section 15 of the Exchange Act and Rule 15c2-11 thereunder. Ex. 21B, 21C, Tr. 32-34. Gallison had the responsibility and authority to approve all market-making, trading, and billing of due diligence fees, as well as to determine the extent of due diligence necessary to make a market in a security at Burnett. Tr. 134-36, 189-90, 198-99. Rushing made a market in the securities of Astro Enterprises, Inc. ("Astro") at Burnett. Astro filed its registration statement in January 1990. Ex. 7A. At that time, 12,000,000 shares of Astro common stock with a par value of $.001 were held by 400 shareholders. Ex. 7A. Astro reported that as of September 30, 1989 (unaudited) $5,236,621 of its $5,960,692 in assets were held by nine subsidiaries of a wholly owned Astro subsidiary that allegedly had interests in ten pieces of property ---------FOOTNOTES---------- -[1]-References to the hearing transcript will be cited as Tr. __. References to Exhibits will be cited as Ex. __. ==========================================START OF PAGE 3====== in the western United States, and reported $11,613 in total revenues and an operating loss of $64,326. Ex. 7A. Rushing was familiar with Astro and had made a market in its securities prior to her employment with Burnett. Tr. 286. Rushing had access to the person who ran Astro, Ernst Hiestand, as well as to the president of Astro's public relations consulting company. She obtained information about Astro and its stock from them. Tr. 95-97. Astro was a publicly held company filing reports with the SEC. Ex. 7A. Astro's stock was traded over the counter and quoted in the National Daily Quotation Service ("NQB") "pink sheets." Ex. 30. The Commission issued an Order Suspending Trading in Astro's securities on May 4, 1990 ("Trading Suspension Order"). Ex. 1A. In its Trading Suspension Order, the Commission stopped trading in Astro's securities for ten days and indicated that there was a lack of adequate and accurate current information on Astro and "that questions had been raised about the accuracy and adequacy of Astro's financial statements and other disclosures, developments in the market for its securities and sales of securities in the United States." Ex. 1A. The Trading Suspension Order and the reasons for the suspension were printed and publicly disseminated in the SEC News Digest and the SEC Docket. Ex. 1C and 1D. The Trading Suspension Order was sent to and received by the Respondents. Ex. 1B. After the ten day trading suspension expired, Astro, the issuer, through Ernst Hiestand, contacted Rushing and asked her ==========================================START OF PAGE 4====== to make a market in Astro's securities. Tr. 206, 288. Rushing's motivation for trading Astro was to make money by buying and selling Astro at a profit. Tr. 284. She told Gallison that she wanted to resume trading in Astro, and gathered all information necessary to complete a due diligence file for Burnett so that Burnett would have all documentation necessary to resume quotations in Astro's securities. Tr. 289. Gallison decided that Burnett would charge Astro a due diligence fee before resuming its market-making. Tr. 369. Rushing knew that she needed an audited annual report before making a market in Astro's securities, and contacted Astro's auditors to determine why they were delayed in releasing their report on Astro's financial statements. The auditors told her that they were having trouble verifying Astro's assets. Tr. 142- 43. Respondents received Astro's due diligence fee on or about June 20, 1990. Ex. 15B. Rushing obtained the current filings for Astro. Astro's most recent Form 8-K, filed with the Commission on June 21, 1990, contained updated audited financial statements. Ex. 2A. The auditor's opinion attached to Astro's financial statements was qualified because the auditor was unable to verify the existence of a large portion of Astro's assets. Ex. 2A. In order to resume quotations in Astro, Rushing completed a Form 211 to be filed with the NQB and signed the form on June 21, 1990. Ex. 8A. Gallison also signed the form on that date as an ==========================================START OF PAGE 5====== officer of Burnett approving the market-making. Ex. 8A. Rushing failed to check a box on Form 211 that would have indicated that Astro was an Exchange Act reporting company. Rushing admitted that she made this mistake. Tr. 292-293. Rushing attached Astro's Form 8-K containing the current, audited financial statements to the Form 211 and filed them with the NQB. The only Astro financial statement that Respondents had when they submitted their market-making application was the 1989 pro forma financial statement filed on Current Report Form 8-K. Ex. 2A, Tr. 139 and 321. Astro had not filed an annual report for 1989 on Form 10-K as required by Section 13 of the Exchange Act and Rule 13a-1 thereunder. Ex. 2A. Respondents did not have Astro's quarterly report on Form 10-Q for the first quarter of 1990 which was filed on May 31, 1990. Ex. 3A, Tr. 321. Respondents also had none of Astro's business plans. Tr. 137. Rushing traded in Astro stock after respondents caused a market to be made in the stock, both wholesale and retail. Ex. 33L and M, and 31E. Gallison approved the trades. Tr. 226. Conclusions of Law The Order Instituting Proceedings in this matter alleges that Respondents Rushing and Gallison willfully aided and abetted and caused Burnett's violation of Section 15(c)(2) of the Exchange Act and Rule 15c2-11 thereunder. Order Q. No other violations are charged. Rule 15c2-11 details the requirements that a broker-dealer must adhere to in order to resume quotations ==========================================START OF PAGE 6====== in the securities of an issuer after the expiration of a trading suspension in that security. The parties disagree about which subparagraph of Rule 15c2- 11 is applicable to this case. The Respondents argue, in summary, that Astro is a reporting company and that brokers who wish to resume quotations after a suspension has expired in a security issued by a reporting company must meet the requirements of 15c2-11(a)(3). Subsection 3 of Rule 15c2-11(a), as in effect at the time, made it a fraudulent, manipulative, and deceptive practice for any broker or dealer to submit any quotation for publication unless: . . . (3) the broker or dealer has a reasonable basis for believing that the issuer is current in filing the reports required to be filed at regular intervals pursuant to Section 13 . . . and the broker or dealer has in his records the issuer's most recent annual report filed pursuant to Section 13 . . . together with any other reports required to be filed at regular intervals under such provisions of the [Exchange] Act which have been filed by the issuer after such annual report, if the issuer is required to file reports pursuant to Section 13 of the Securities Exchange Act of 1934 (15 U.S.C.  78m); or . . . . The Respondents argue that Astro was current in its filings and that Burnett maintained copies of Astro's filings and, therefore, the requirements of Rule 15c2-11 were met. The Division disagrees. The Division argues that a broker-dealer must meet the requirements of subsection 3 or subsection 5 of Rule 15c2-11(a). If subsection 3 requirements are met, the broker-dealer may resume quotations. However, if subsection 3 requirements are not met, which the Division believes to be true in this case, then ==========================================START OF PAGE 7====== the requirements of subsection 5 must be met.-[2]- If neither subsections 3 nor 5 requirements are met, there has been a violation of the Rule. I agree with the Division's interpretation of the Rule. Respondents contend that when they resumed quotations in Astro, Burnett had met the requirements of Rule 15c2-11(a)(3). Respondents argue that Burnett had a reasonable belief that Astro was current in its filings with the Commission since it had just received Astro's Form 8-K report containing Astro's most recent audited financial statements. Further, Respondents state that Astro had filed all quarterly reports required by the Commission after it had registered with the Commission by filing a Form 10 Registration Statement in January 1990. The Division concurs that Respondents had a copy of a Form 8-K Current Report which is used to report on such matters as change in control, acquisition or disposition of assets, bankruptcy, changes in accountants and directors, and pro forma financial statements or financial statements of acquired businesses. Ex. 2A. However, the Division disagrees that Respondents had all the documentation necessary under the rule to make a market in Astro securities after the suspension. The Division contends that Respondents did not have in their records the annual report for 1989 required to be filed by Astro on Form 10-K pursuant to Section 13 of the Exchange Act and Rule 13a-1 ---------FOOTNOTES---------- -[2]-Subsection 5 of Rule 15c2-11(a) is set out on page 8 infra. ==========================================START OF PAGE 8====== thereunder. Astro never filed the annual report required by Section 13. The Division also asserts that the Respondents did not have in their records the other reports required to be filed at regular intervals by Section 13 and Rule 13a-13 thereunder. Specifically, Respondents did not have Astro's first quarterly report for 1990 required to be filed on Form 10-Q by May 15, 1990 and actually filed by Astro on May 31, 1990. Ex. 3A. Respondents argue that Astro was not required to file its first annual report under Rule 13a-1 under the Exchange Act before Respondents applied to make a market in Astro securities on June 21, 1990. Rule 13a-1 requires every issuer to "file an annual report on the appropriate form authorized or prescribed therefor for each fiscal year after the last full fiscal year for which financial statements were filed in its registration statement." The issuer here, Astro, filed audited financial statements in its Form 10 registration statement only for the full fiscal years ending November 30, 1988, December 31, 1987, and December 31, 1986. Ex. 7A at 23-29. Astro did not file financial statements with its registration or otherwise for fiscal year 1989. Astro did include with its registration form unaudited financial statements for the nine months ending September 30, 1989, but those financial statements were not purported to be for a full year, nor were they audited as required and as the financial statements for Astro's prior years were. ==========================================START OF PAGE 9====== Astro was required by Section 13 of the Exchange Act and Rule 13a-1 thereunder to file an annual report with audited financial statements for the fiscal year 1989 ending December 31, 1989 before a market was made by Respondents in June 1990. That annual report was required by Rule 15c2-11(a) to be obtained by Respondents before they made the market in Astro securities. I find that the Respondents did not have in their records Astro's 1989 Annual Report or Astro's First Quarterly Report for 1990, which are required to be filed pursuant to Section 13. I further find that the Respondents had no reasonable basis for believing that Astro was current in filing the reports required to be filed by Section 13. Therefore, I conclude that the Respondents did not meet the requirements set out in Rule 15c2- 11(a)(3) when they resumed making a market in Astro. The supplementary information published along with the 1985 amendment to Rule 15c2-11 states that, "Only when the paragraph (a)(3) information is not reasonably available may a broker- dealer substitute the information required by paragraph(a)(5)." Initiation or Resumption of Quotations Without Specified Information, 31 SEC Docket 1041, 1046 (1984). Giving the Respondents the benefit of the doubt that the information was not reasonably available because it had not been filed with the Commission, the Respondents may still resume the trading if they meet the requirements set out in subsection 5 of the Rule. Rule 15c2-11(a)(5), as in effect at the time, made it a fraudulent, ==========================================START OF PAGE 10====== manipulative, and deceptive practice for any broker or dealer to submit any quotation for publication unless: (5) the broker or dealer has in his records, which he had no reasonable basis for believing was not true and correct, certain information including the issuer's most recent balance sheet, profit and loss statement and retained earnings statement, similar financial information for the preceding two fiscal years . . . . The Respondents have argued that they met the requirements set out in subsection 3 and, therefore, did not need to meet the requirements set out in subsection 5. The Division states that regardless of this claim, the Respondents failed to meet the requirements of either section. Indeed, the Respondents concede in their post-hearing brief that if a broker-dealer had to "rely upon Rule 15c2-11(a)(5) and its more stringent review requirements [it] would have made it much more difficult, if not impossible, for anyone to resume quotations in Astro." Respondent's Brief at 13. Under subsection 5, Respondents were required to have a reasonable basis for believing that the financial statements they obtained were true and correct and that there was no reasonable basis for doubting the truth and correctness of the information. Respondents had clear reasons for doubting that the assets shown in the pro forma financial statements were accurate. Respondents had an auditor's report stating that the accounting firm could not give an opinion on the financial statements because of their inability to verify the assets. Ex. 2A. Respondents had been forced to stop trading in Astro's securities because of the Commission's findings of a lack ==========================================START OF PAGE 11====== of adequate current information and its doubts about the accuracy and adequacy of Astro's financial statements and other disclosures. Ex. 1A. Rushing had spoken to the auditors before they refused to opine, and the auditors told her that they were having trouble verifying the assets. Tr. 143. Respondents had more than a reasonable basis; they had a compelling basis for doubting the veracity and accuracy of the financial statements. I conclude that the Respondents had no reasonable basis for believing that the financial statements of Astro that they had in their possession were true and correct. Further, the fact that Astro, a reporting company required to file annual reports, had not filed an annual report in 1989, should have raised red flags to any broker-dealer that there was a potential problem in making a market in Astro securities. The Respondents had a responsibility after the May 4, 1990 Trading Suspension of Astro securities to "conduct a careful review in a professional manner of the basis for the trading suspension to determine whether there is a reasonable basis for the broker-dealer to believe that the information about the issuer in the broker-dealer's knowledge or possession is true and correct." Initiation or Resumption of Quotations Without Specified Information, 44 SEC Docket 1072, 1075-76 (1989). The Commission indicated in the release adopting the 1985 amendment to Rule 15c2-11 that, "The Rule is intended to require a broker-dealer to give some measure of attention to financial and other information about the issuer of a security before it ==========================================START OF PAGE 12====== commences trading in that security". 31 SEC Docket at 1042. The Respondents failed to give sufficient attention to the available financial information concerning Astro, as well as the unavailability of certain required financial information, before they resumed quotations in Astro after the expiration of the trading suspension. The Respondents' actions and omissions of actions were willful within the meaning of the Rule. They had an "awareness of the underlying facts, not the labels the law places on those facts .... A knowledge of what one is doing and the consequences of those actions suffices." SEC v. Falstaff Brewing Corp., 629 F.2d 62, 77 (D.C. Cir. 1980), cert. denied, 449 U.S. 1012 (1980). Accordingly, I find that the Respondents aided and abetted and caused Burnett's violation of Section 15(c)(2) of the Exchange Act and Rule 15c2-11 thereunder. The Division requests that both Respondents be suspended for a period of at least twelve months from association with a broker-dealer and from participating in any offering of penny stock, and that they be ordered to cease and desist from committing any violation or causing any future violation of Section 15(c)(2) and Rule 15c2-11 thereunder. Although I find that Respondents violated Rule 15c2-11 as alleged, there were mitigating circumstances that merit a less stringent sanction than the Division has requested. The Commission has stated that, "Sanctions cannot be assessed mechanistically. Due regard must be given 'to the facts and ==========================================START OF PAGE 13====== circumstances that differentiate one man's case from another's.' We are not here to punish [the Respondent]." Leo Glassman, 46 S.E.C. 209, 211 (1975). In imposing administrative sanctions, the Commission may take into account such factors as: ...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 his occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir., 1979), aff'd on other grounds, 450 U.S. 91 (1981). The record has demonstrated that this is the first and only time that the Respondents have been confronted with a situation like this. This case involves one isolated infraction. Rushing has been involved in no prior disciplinary matters. Gallison was involved in one prior disciplinary action, but that sole transgression occurred nearly a decade ago, soon after he first entered the securities business. He testified that he was required to disgorge $7,000 in commissions but received no suspension whatsoever. Tr. 334-342. Furthermore, Gallison stated that he is critical to the operations of his current firm, La Jolla Capital, which has nearly 100 licensed brokers. Tr. 358-359, 372-373. The firm could easily go out of business if he were suspended for any significant period of time. Tr. 358-363, 371-372. The Respondents clearly regret ever having gotten involved with Astro and would never make the mistake again that they made in this case. There has been no evidence introduced ==========================================START OF PAGE 14====== that their conduct, in resuming quotations in Astro, was part of any nefarious plan. Based on the foregoing, I conclude that a 12 month suspension and a penny stock bar are too harsh a sanction and that in this case a cease and desist order would best serve the public interest. ORDER Based on the findings and conclusions set forth in this decision, I ORDER that the Respondents Robin Rushing and Harold Gallison, Jr. cease and desist from committing any violation or causing any future violation of Section 15(c)(2) of the Securities Exchange Act of 1934 and Rule 15c2-11 thereunder. Pursuant to Commission Rule of Practice 17(f), this initial decision shall become the final decision of the Commission as to each party who has not, within fifteen days after service of this initial decision upon him or her, filed a petition for review of this initial decision pursuant to Rule 17(b), unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision. If a party timely files a petition for review, or the Commission takes action to review as to a party, the initial decision shall not become final with respect to that party. ==========================================START OF PAGE 15====== Burton S. Kolko Administrative Law Judge Washington, D.C. January 26, 1996