INITIAL DECISION RELEASE NO. 91 ADMINISTRATIVE PROCEEDING FILE NO. 3-8642 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION _______________________________ In the Matter of : : ALAN E. ROSENTHAL : INITIAL DECISION : June 19, 1996 : _______________________________ APPEARANCES: Larry P. Ellsworth and Michael P. O'Callaghan for the Division of Enforcement, Securities and Exchange Commission Eliot Lauer and Michael Quinn for Alan E. Rosenthal BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission (Commission) instituted this proceeding on March 15, 1995, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 (Exchange Act). The Order Instituting Proceedings (Order) alleges that Mr. Rosenthal was convicted after a jury trial of offering a gratuity in connection with a pension plan investment in violation of 18 U.S.C.  2 and 1954. United States v. Rosenthal, 91 Cr. 412 (LLS) (S.D.N.Y. June 10, 1992), aff'd, 9 F.3d 1016 (2d Cir. 1993). I will refer to the district court decision as Rosenthal I and the appellate court decision as Rosenthal II. Mr. Rosenthal admitted the allegation as to his conviction only to the extent that a verdict was entered against him of aiding and abetting the giving of a "thing of value" to a pension fund manager in violation of 18 U.S.C.  1954.-[1]- Answer at I. A. I held a hearing on April 27, 1995, in Washington, D.C., to determine whether the allegations of the Division of Enforcement (Division) as set out in the Order are true, to afford the ---------FOOTNOTES---------- -[1]- Count Eight before redaction by the district court stated: From in or around December 1985 through in or around October 1986 . . . the defendant ALAN E. ROSENTHAL . . . unlawfully, willfully and knowingly gave and offered and promised to give and offer, directly and indirectly, fees, kickbacks, commissions, gifts, loans, money and things of value, to officers, counsel, agents and employees of an organization which provided benefit plan services to, and to agents, counsel, and custodians of, employee pension and welfare benefit plans which were subject to title [sic] I of the Employee Retirement Income Security Act because of or with intent to influence their actions, decisions, and other duties related to questions and matters concerning such plans, namely, false and fraudulent tax losses through the 1985 Tax Trades, to David B. Solomon in connection with the investment by him of monies on behalf of employee pension and welfare benefit plans that were clients of [Solomon Asset Management]. Rosenthal II at 1020-21. The district court deleted the words "false and fraudulent" from the count before charging the jury. Id. ==========================================START OF PAGE 3====== Respondent an opportunity to defend his actions, and to determine what, if any, remedial action is appropriate in the public interest pursuant to Section 15(b) of the Exchange Act. Neither party called any witnesses at the hearing. The Division introduced into evidence the district court's Judgment and Probation/Commitment Order in Rosenthal I. Div. Ex. 3. The hearing record consists of a one page district court order and a transcript of a hearing at which there was no witness testimony.-[2]- The Division filed its initial brief on May 16, 1995, and the Respondent filed his on June 2, 1995. The Division filed a reply brief on June 19, 1995. Issues Since the Respondent admitted that he had been convicted of a felony described in Section 15(b) of the Exchange Act within ten years of when the Commission instituted this administrative action, the issue is whether it is the public interest to impose a sanction on him, and, if so, what the sanction should be. Findings of Fact-[3]- ---------FOOTNOTES---------- -[2]- I marked for identification but did not allow into evidence what the parties referred to as the superseding indictment, Div. Ex. 1, the redacted indictment, Div. Ex. 2, and one hundred pages of excerpts from the trial testimony of Michael Milken and David Solomon in Rosenthal I. Respondent's Ex. 1. -[3]- I applied preponderance of the evidence as the applicable standard of proof. I have considered all the arguments and contentions, and I accept those that are consistent with this decision. ==========================================START OF PAGE 4====== I find the factual assertions in the Order to be true.-[4]- In reaching this conclusion, I rely primarily on the appellate court's decision which found that the amendment of the indictment was permissible and that the evidence sustained Mr. Rosenthal's conviction.-[5]- From March 1976 through April 1990, Mr. Rosenthal was employed by Drexel Burnham Lambert Incorporated (Drexel), a registered broker-dealer. Order; Answer at 1. In 1985, Mr. Rosenthal headed Drexel's Convertible Bond Department and Michael Milken (Mr. Milken) headed Drexel's High Yield Bond Department. Rosenthal II at 1017-18. David Solomon was the majority shareholder of Solomon Asset Management (SAM), a registered investment adviser. SAM was an important client of Mr. Milken because 70 percent of the assets it managed were corporate pension funds, and it invested these assets primarily in high yield bonds. SAM's assets under management peaked at approximately $2.5 billion, and it did 50 to 75 percent of its overall business with Drexel. Id. at 1017. In 1985, Drexel faced increased competition for SAM's high yield bond business. Id. at 1024. ---------FOOTNOTES---------- -[4]- I find no basis for Respondent's claim that his conviction was for aiding and abetting. The district court's Judgment and Commitment Order and the appellate court's affirmance state that Mr. Rosenthal was convicted of violating 18 U.S.C.  1954. Div. Ex. 3. However, even if Mr. Rosenthal were correct, this would not change my findings. I note that in its reply brief, the Division states that Mr. Rosenthal was punished as a principal in the violation. Reply Brief at 1. -[5]- I took judicial notice of Rosenthal II. ==========================================START OF PAGE 5====== In December 1985, Mr. Solomon requested that Mr. Milken help find him a tax shelter for his personal short term gains. Mr. Solomon called Mr. Rosenthal because Mr. Milken instructed him to "tell Alan [Rosenthal] what you need and Alan will take care of it for you." Id. at 1018. A few days later, Rosenthal called Solomon with the names of two securities - American Adventure and Patient Technology - that could be used to generate the desired losses. Rosenthal proposed prices and quantities and suggested that Solomon's personal broker, Arthur Dresner, contact Rosenthal to consummate the trades. Acting through Dresner, Solomon purchased the American Adventure bonds on December 2, and the Patient Technology bonds on December 4, 1985, from Drexel for a little over $4,100,000. Approximately one week later, Solomon spoke with Rosenthal concerning arrangements to have Drexel repurchase the bonds from him. Again acting through Dresner, Solomon sold the bonds back to Drexel for approximately $2,500,000, generating a loss for Solomon of about $1,600,000. Solomon claimed this loss on his 1985 federal income tax return, which reduced his federal tax liability by approximately $800,000.-[6]- Id. Following a trial by jury, Mr. Rosenthal was convicted of offering a gratuity in connection with a pension plan investment, in violation of 18 U.S.C.  1954. He was sentenced to a one year suspended prison term and three years probation. As a condition ---------FOOTNOTES---------- -[6]- In 1986, as agreed, Mr. Milken allowed Mr. Solomon to recoup his 1985 losses through the purchase of an interest in a limited partnership called MacPherson. The 1985 tax trades, which Mr. Rosenthal arranged, combined with the 1986 MacPherson transaction, resulted in a tax savings of approximately $480,000 by Mr. Solomon. Rosenthal II at 1018. The appellate court found that there was sufficient evidence for the jury to conclude that, by arranging the 1985 tax trades with the knowledge that Mr. Solomon expected to recoup the resultant tax losses through later dealings with Drexel, Mr. Rosenthal gave a thing of value to Mr. Solomon. Id. at 1023. ==========================================START OF PAGE 6====== of probation, he was ordered to pay a fine of $250,000, and to perform 300 hours of community service. Additionally, he was required to pay a $50 special assessment. Div. Ex. 3. The court of appeals affirmed his conviction. Findings of Law Mr. Rosenthal's 1992 conviction for offering a gratuity to Mr. Solomon in violation of 18 U.S.C.  1954 is one of the enumerated acts which triggers the application of Section 15(b)(6) of the Exchange Act.-[7]- The section provides that the Commission "shall censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar such person from being associated with a broker or dealer, or from participating in an offering of penny stock, if the Commission finds, on the record after notice and opportunity for a hearing, that such censure, placing of limitations, suspension, or bar is in the public interest." Public Interest Considerations The purpose of sanctions is not to punish but to protect investors and the high character of the securities industry from future harm. 6 Louis Loss & Joel Seligman, Securities Regulation, 3044-56 (3rd ed. 1989); Berko v. SEC, 316 F.2d 137, 141-42 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211-12 ---------FOOTNOTES---------- -[7]- Incorporating two subsections of Section 15(b)(4), Section 15(b)(6) provides for a sanction, if it is in the public interest, where a person has been convicted, within 10 years of when the proceeding was commenced, of a crime that involves the purchase or sale of any security, or arises out of the conduct of the business of a broker or dealer. Section 15(b)(4)(B)(i) and (ii) of the Exchange Act. ==========================================START OF PAGE 7====== (1975). Established criteria for determining what sanction is appropriate in the public interest include: 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). In addition, sanctions serve as a deterrent to the Respondent and to others. Steadman v. SEC, 603 F.2d at 1142; Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976), cert. denied, 434 U.S. 1009 (1978). I find Mr. Rosenthal's position that he deserves a lesser sanction because his conviction was based on a single, isolated incident unpersuasive. Mr. Rosenthal's behavior was egregious in that it was a felony involving intentional wrongdoing whereby he arranged over $6 million in security purchases and sales so that an important Drexel client could shelter personal gains from the payment of federal income taxes, in hopes that the client would act in his fiduciary capacity to benefit Drexel. Mr. Rosenthal, in his responsible position with a major broker-dealer, acted with scienter in that he committed these illegal actions knowing that their purpose was to cause this individual to use his key role as an investment adviser with $2.5 billion in pension funds ==========================================START OF PAGE 8====== under management to benefit Drexel.-[8]- Rosenthal II at 1020, 1024. The appellate court found: Solomon and Milken both testified that Rosenthal understood that the purpose of the 1985 Tax Trades was to generate personal losses for Solomon. Such an accommodation was likely to insure that Drexel would remain in Solomon's favor. We conclude that there was sufficient evidence presented to the jury from which it could conclude that Rosenthal acted with intent to influence Solomon in his position as a pension fund manager. Rosenthal II at 1024. It is axiomatic that persons convicted of certain types of crimes are not persons of unquestioned honesty and integrity, and it has been established that the securities industry presents many opportunities for abuse and overreaching, so that it is in the public interest not to allow participation by individuals whose continued participation would expose investors to undue risks. Richard C. Spangler, Inc., 46 S.E.C. 238, 252-53 (1976). See Archer v. SEC, 133 F.2d 795, 803 (8th Cir. 1943), cert. denied, 319 U.S. 767 (1943); Hughes v. SEC, 174 F.2d 969, 975-76 (D.C. Cir. 1949). It follows that someone whose behavior has been established "beyond a reasonable doubt" to have been so ---------FOOTNOTES---------- -[8]- I reject Respondent's claim that his conduct "was not, by any standard, 'egregious', nor is there any evidence that Rosenthal acted with anything beyond the most minimal level of scienter." Respondent's Brief at 2. In view of the criminal conviction, it is incorrect for counsel to claim that, "The undisputed facts show only that Rosenthal engaged in lawful securities transactions all conducted in accordance with ordinary industry practice." Respondent's Brief at 6. ==========================================START OF PAGE 9====== unacceptable to society that it is characterized as a felony,-[9]- should receive, in the absence of mitigating circumstances, a severe sanction. Moreover, Congress in writing Section 15(b) of the Exchange Act viewed past misconduct as the basis for an inference that the risk of probable future misconduct was sufficient to require exclusion from the securities business. Arthur Lipper Corp., 46 S.E.C. 78, 101 (1975). Mr. Rosenthal has not introduced any mitigating evidence. Instead, his conduct, beyond that underlying his criminal conviction, indicates that the strongest sanction is needed to protect the public interest. Even though a jury has found him guilty, and the appellate court has confirmed his conviction, Mr. Rosenthal still does not acknowledge that he did anything illegal. Furthermore he has not offered any evidence to indicate that he will not commit similar acts in the future. The evidence in this record indicates a high probability that Mr. Rosenthal will commit additional illegal acts since he claims that he merely "engaged in lawful securities transactions all conducted ---------FOOTNOTES---------- -[9]- A "felony" is defined as, "A crime of a graver or more serious nature than those designated as misdemeanors . . . [u]nder federal law, and many state statutes, any offense punishable by death or imprisonment for a term exceeding one year. 18 U.S.C.A.  1." Black's Law Dictionary, 555 (5th ed. 1979). ==========================================START OF PAGE 10====== in accordance with ordinary industry practice."-[10]- Respondent's Brief at 6. An additional consideration which supports application of a strong sanction, but which I did not rely on as a basis of my conclusions, is that Mr. Rosenthal did not appear and offer testimony about facts and circumstances peculiarly within his knowledge, thus creating an adverse inference that to do so would have damaged his position. 2 Wigmore, Evidence,  289 (3rd ed. 1940); Strathmore Securities, Inc., 43 S.E.C. 575, 590 (1967), aff'd 407 F.2d 722 (D.C. Cir. 1969); see also Sterling-Harris Ford, Inc., 315 F.2d 277, 279 (7th Cir. 1963), cert. denied, 375 U.S. 814 (1963); N. Sims Organ & Co., Inc. v. SEC, 293 F.2d 78, 80-81 (2nd Cir. 1961), cert. den., 368 U.S. 968 (1962); SEC v. Kelly Andrews & Bradley, Inc., 341 F. Supp. 1201, 1205 (S.D.N.Y. 1972). For all the reasons stated, I find that Mr. Rosenthal should be barred from association with any broker or dealer or from participating in an offering of penny stock.-[11]- I deny the Division's requests that I bar Mr. Rosenthal from association with any investment adviser, investment company, or municipal ---------FOOTNOTES---------- -[10]- One of the puzzling questions raised but not resolved on this record is whether it was standard operating practice for Mr. Rosenthal to arrange substantial trades structured to achieve a desired result based on a single phone call from a Drexel customer invoking the name of Mr. Milken. -[11]- Respondent agrees that a sanction is appropriate, and recommends a one-year suspension or bar with the right to reapply after two years. The Division requests a permanent bar from association with a broker, dealer, investment adviser, investment company, and municipal securities dealer. ==========================================START OF PAGE 11====== securities dealer because this proceeding was instituted pursuant to Section 15(b)(6) of the Exchange Act which does not provide for such sanctions.-[12]- Order Based on the findings set out above, I ORDER, pursuant to Section 15(b)(6) of the Exchange Act, that Alan E. Rosenthal is barred from being associated with any broker or dealer or from participating in an offering of penny stock. 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 (1995). 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 to Rule 17(b) within 15 days after service of the initial decision upon that party, 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. ---------FOOTNOTES---------- -[12]- The Division's reference to a 1987 Senate Report on the Commission's Authorization Act of 1987 is not sufficient to overturn this Office's longstanding policy on this issue which is before the Commission. ==========================================START OF PAGE 12====== __________________________________ Brenda P. Murray Chief Administrative Law Judge Washington, D.C. June 19, 1996