INITIAL DECISION RELEASE NO. 99 ADMINISTRATIVE PROCEEDING FILE NO. 3-8234 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION __________________________ In the Matter of : : INITIAL DECISION JAMES A. SEHN and : November 4, 1996 SAMUEL O. FORSON : ___________________________ APPEARANCES: Stephanie Avakian and Peter D. Goldstein for the Division of Enforcement, Securities and Exchange Commission Samuel O. Forson, pro se BEFORE: Lillian A. McEwen, Administrative Law Judge PROCEDURAL HISTORY The United States Securities and Exchange Commission ("Commission") instituted these proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"). The Order Instituting Proceedings ("OIP") was filed on November 22, 1993. On January 4, 1994, the Administrative Law Judge ("ALJ") assigned to the case issued an order postponing the hearing pursuant to a Motion to Postpone the Commencement of Hearings and Stay Discovery which was filed by the People of the State of New York. THE HEARING On September 5, 1995, the Chief ALJ issued an Order Redesignating Presiding Judge, and on May 1, 1996, a public hearing commenced before me in Queens, New York. It ended on the same day, as to Respondent Samuel O. Forson only. Pursuant to Respondent James A. Sehn's Offer of Settlement, the Commission's Order Making Findings and Imposing Remedial Sanctions as to Sehn was dated July 30, 1996. 62 SEC Docket 1229 (1996). Thus the hearing proceeded as to Respondent Forson only. The hearing record consists of no sworn testimony. The Division of Enforcement ("Division") submitted eleven exhibits which I admitted without objection from the Respondent. The Respondent submitted no exhibits. ISSUES At the beginning of the hearing, I granted, without objection, the Division's Motion to Withdraw Allegations II.A through II.G from the Order Instituting Administrative ==========================================START OF PAGE 2====== Proceedings Against [sic] Samuel O. Forson, which had been filed with my office on March 4, 1996. (Tr. 11.)-[1]- Pursuant to Rule 11(e) of the Commission's Rules of Practice, 17 C.F.R. 201.11(e) (1995), this amendment of the OIP removed all issues of substantive willful violations of the securities laws from my consideration. Thus the first issue before me is whether on February 14, 1992, the Respondent was permanently enjoined by consent by the United States District Court for the Southern District of New York from violating certain of the federal securities laws, specifically Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"); Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder, in SEC v. Oxford Capital Securities, Inc., 92 Civ. 0935 (S.D.N.Y. Feb 14, 1992). If I find that Respondent was enjoined as described, the second issue is whether and how he should be sanctioned. After the hearing, the Division filed its Proposed Findings of Fact and Conclusions of Law and a Brief in Support. Respondent has filed no post-hearing papers.-[2]- FINDINGS OF FACT ---------FOOTNOTES---------- -[1]-"(Tr.__.)" refers to the page of the hearing transcript of May 1, 1996. -[2]-The Division's Proposed Findings of Fact and Conclusions of Law is referred to by page number as "(Div. Pr. Findings)"; the Division's Brief in Support is referred to as "(Div. Br.)." ==========================================START OF PAGE 3====== The findings and conclusions herein are based on the entire record. I applied preponderance of the evidence as the applicable standard of proof for the Division's case. Respondent Forson was born in Ghana, West Africa. (Div. Ex. 11 at 97.)-[3]- He is thirty-eight years old. (Tr. 36; Div. Ex. 1 at 5.) He has been employed in the securities industry since 1982. (Div. Ex. 1 at 5.) On February 14, 1992, the United States District Court for the Southern District of New York, issued a "Final Judgment of Permanent Injunction as to Defendant Samuel O. Forson by Consent (Reserving on the Issues of Disgorgement and Civil Penalties)." Respondent Forson and his attorney signed a "Consent to Final Judgment of Permanent Injunction as to Defendant Samuel O. Forson (Reserving on the Issues of Disgorgement and Civil Penalties)" on February 14, 1992. (Div. Ex. 2.) There are no accompanying findings of fact or conclusions of law, Respondent Forson having waived their entry. (Div. Ex.2 at 2.) However, a detailed, twenty-page complaint had been filed in the district court case on February 5, 1992. (Div. Ex. 1.) On April 15, 1995, a related criminal trial by jury was concluded in the Supreme Court of the State of New York with a finding of guilty against Respondent Forson and seven other co- defendants. (Div. Exs. 4 and 5.) The trial judge stayed imposition of a seven to twenty-one year prison term to take ---------FOOTNOTES---------- -[3]-Each Division Exhibit is referred to by number as "(Div. Ex. ___.)." ==========================================START OF PAGE 4====== effect after restitution-related sentencing issues could be resolved. (Div. Ex. 11 at 184.) Thus, at the time of the hearing in the instant case, Respondent Forson was held without bond pending sentencing at Rikers Island, New York City Department of Corrections, Queens, New York. (Tr. 40-44.) Respondent Forson was permanently enjoined from: making use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell any securities through the use or medium of any prospectus or otherwise, unless a registration statement is in effect as to a security; carrying such securities or causing them to be carried through the mails or in interstate commerce, by any means or instruments of transportation, for the purpose of sale or for delivery after sale, unless a registration is in effect as to such securities; or making use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any securities, unless a registration statement has been filed as to such securities, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under Section 8 of the Securities Act, in violation of Sections 5(a) and 5(c) of the Securities Act. Respondent Forson was also permanently enjoined, in the offer or sale of any securities by the use of any means or ==========================================START OF PAGE 5====== instruments of transportation or communication in interstate commerce or by the use of the mails, from directly or indirectly employing any device, scheme, or artifice to defraud, or obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements in the light of the circumstances under which they were made, not misleading; or engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser, in violation of Section 17(a) of the Securities Act. Respondent Forson was also permanently enjoined from directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange: employing any device, scheme, or artifice to defraud; making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security, in violation of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. Respondent Forson was also permanently enjoined from aiding and abetting any broker or dealer in making use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other ==========================================START OF PAGE 6====== than commercial paper, bankers' acceptances, or commercial bills) otherwise than on a national securities exchange of which it is a member by means of any manipulative, deceptive, or other fraudulent device or contrivance, in violation of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 promulgated thereunder. (Div. Ex. 2 at 1-5.) I find that the following facts were established by a preponderance of the evidence in the record as of February 5, 1992 (the date of the filing of the complaint underlying the injunction): 1. Samuel O. Forson was Oxford Capital's and Oxford Consolidated's vice president. Respondent Forson had been employed in the securities industry since 1982 and had been employed by Oxford Capital since 1987. He resided in Brooklyn, New York. (Div. Ex. 1 at 5.) 2. Respondent Forson and others sold over $2 million of Oxford debt securities to more than fifty investors accompanied by misrepresentations. For example, he falsely told investors Oxford Capital had assets under management; that interest was tax free; that their investments were guaranteed; and that the Oxford Corporation would pay their taxes. (Div. Ex. 1 at 1-3.) Respondent Forson, with three others, controlled Oxford Capital Securities and Oxford Consolidated. In November 1991, the National Association of Securities Dealers ("NASD") suspended Oxford Capital. In 1988, Respondent Forson and others were fined and censured ==========================================START OF PAGE 7====== by the NASD for net capital violations. (Div. Ex. 1 at 4.) Oxford Consolidated was a holding company that controlled several other companies. Beginning in the summer of 1991, the two companies failed to pay overhead expenses on their business premises. (Div. Ex. 1 at 8.) 3. When the Oxford debt obligations matured, Oxford issued bad checks in payment. Proceeds of investor funds were commingled, and disbursements were made for non-business related expenses. (Div. Ex. 1 at 9.) Respondent Forson never paid taxes for any of the investors and none of the funds were insured. (Div. Ex. 1 at 10.) Even after the 1991 NASD investigation, Respondent Forson's company continued to issue investment agreements containing misrepresentations. (Div. Ex. 1 at 10.) CONCLUSIONS OF LAW Contentions of the Parties I. The Division The Division contends that the allegations filed in the injunction action should also be given considerable weight and that Respondent Forson acted with a high degree of scienter. Because it is likely that he will violate the federal securities laws in the future, the appropriate sanction in their view is a permanent bar from association with any broker, dealer, investment adviser, investment company or municipal securities dealer. (Div. Pr. Findings at 6; Div. Br. at 1-2.) II. The Respondent ==========================================START OF PAGE 8====== Respondent Forson contends that the allegations in the complaint and in the criminal indictment are untrue and that all he and his partners did was to run a business and borrow money. (Tr. 32-33.) He and his partners sold unregistered debt instruments that they may not have paid for. However, he denied lying, stealing or borrowing money. (Tr. 37, 48.) Evaluation of the Evidence It is clear that the Commission can properly act against Respondent Forson: With respect to any person who is associated, who is seeking to become associated, or, at the time of the alleged misconduct, who was associated or was seeking to become associated with a broker or dealer. . . the Commission, by order, 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. . .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 and that such person . . . is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, dealer, municipal securities dealer, government securities broker, government securities dealer, transfer agent, foreign person performing a function substantially equivalent to any of the above, or entity or person required to be registered with the Commodity Exchange Act or any substantially equivalent foreign statute or regulation, or as an affiliated person or employee of any investment company, bank, insurance company, foreign entity substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Exchange Act or any substantially equivalent foreign statute or regulation, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security. ==========================================START OF PAGE 9====== Sections 15(b)(6)(A)(iii) and 15(b)(4)(C) of the Exchange Act. The United States District Court for the Southern District of New York is a "court of competent jurisdiction." It permanently enjoined Respondent from continuing conduct and practices in connection with the purchase or sale of the securities which Respondent and others described as "Investment Agreements" within the meaning of the statute. (Div. Ex. 1 at 10.) The injunction that is at the heart of the instant case was imposed by consent and without findings of fact. However, the Exchange Act makes no exception for a consent injunction. [T]he action required in the public interest as the result of an injunction may be inferred from all the circumstances surrounding the injunctive action. Moreover, that precedent suggests that, in practical effect, the allegations in the complaint in an action settled by consent may, in a subsequent proceeding before us, be given considerable weight for purposes of assessing the public interest. Defendants in injunctive actions should be aware of this consequence. Charles P. Elliott, 50 S.E.C. 1273, 1277 (1992), aff'd, 36 F.3d 86 (11th Cir. 1994); see also Richard J. Puccio, 59 SEC Docket 2433 (July 10, 1995) (consent injunction in initial decision); David M. Haber, 59 SEC Docket 0059 (Apr. 5, 1995) (consent injunction unaccompanied by findings of fact); Peter C. Calcutta, 55 SEC Docket 2500 (Dec. 23, 1993) (consent injunction in initial decision); Michael Keith Howard, 56 SEC Docket 0576 (Feb. 25, 1994) (initial decision). CONCLUSIONS OF LAW ==========================================START OF PAGE 10====== A "consent injunction in which the allegations are denied no less than one issued after trial upon a determination of the allegations, may furnish the sole basis for remedial action under Section 15(b) of the Exchange Act if such action is in the public interest." Cortlandt Investing Corp., 44 S.E.C. 45, 53 (1969). Documents on which the court based its action serve to place the injunction and its terms in perspective and are properly included in the record. Kimball Securities Inc., 39 S.E.C. 921, 923-924 (1960). Thus, I have properly placed great weight on the civil complaint. In making my findings of the injunction's implications in the public interest, I have not considered the indictment upon which Respondent was convicted, the jury's verdict, the judge's remarks at sentencing, or any other matter that is subject to challenge in a criminal appeal. See Charles P. Elliott, 52 S.E.C. at 1277 n.22. Although I admitted into evidence sworn testimony from the criminal case, I have not relied on that testimony either. Respondent's representations, the civil complaint, and the permanent injunction are the bases for my findings and conclusions. ==========================================START OF PAGE 11====== The Public Interest At the time of the misconduct involved in the injunctive action, Respondent Forson was associated with a broker-dealer, and the injunction falls within one of the categories covered by the applicable statute. Hence, the remaining issue is the sanction that is appropriate in the public interest. In this light, I have taken into account the following factors: 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). The amount of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Respondent Forson's actions were particularly egregious because they involved the theft of millions of dollars from investors. The fraud occurred over a number of years, involved over fifty investors, and did not result from an isolated event but rather from a pattern of coordinated acts. Scienter has been described as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is established by a showing that ==========================================START OF PAGE 12====== the defendant acted intentionally or with severe recklessness. Raymond L. Dirks, 47 S.E.C. 434, 447 n. 47 (1981), rev'd on other grounds, 463 U.S. 646 (1983); see Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir. 1981); see also Warren v. Reserve Fund, Inc.,728 F.2d 741, 745 (5th Cir. 1984); Hackbart v. Holmes, 675 F.2d 1114, 1118 (10th Cir. 1982); Sunstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1039 (7th Cir. 1977). Respondent Forson's intent to deceive and defraud investors is demonstrated by: the NASD violations incurred during the course of his conduct; his ten-year employment in the securities industry; the complexity of the schemes that were generated to deceive the investors; the financial interest that Respondent Forson maintained in the ventures; and the recurring failures to repay the victims. The high degree of scienter established in the instant case is therefore a mental state that is close to malice. Respondent demonstrates no assurances against future violations and he recognizes no wrongful conduct for which he takes responsibility. Finally, because his most productive adult professional years have probably been spent in the securities industry, he is likely to continue to work in the industry. Thus, when he is released from prison, Respondent Forson is likely to have fresh opportunities for future violations of the securities laws. It is therefore in the public interest that Respondent Forson be barred permanently from association with any broker or dealer. The Division requests that Respondent Forson also be ==========================================START OF PAGE 13====== barred from association with any municipal securities dealer, investment company or investment adviser. Those sanctions, however, are provided for in statutory sections other than Sections 15(b) and 19(h) of the Exchange Act, the sole authority cited for this proceeding. The issue of whether a collateral bar can be imposed is presently before the Commission. ==========================================START OF PAGE 14====== ORDER Based on the findings and conclusions set forth above, I ORDER, pursuant to Sections 15(b) and 19(h) of the Exchange Act, that Samuel O. Forson be and hereby is barred from association with any broker or dealer. This order shall become effective in accordance with and subject to the provisions of Rule 17 of the Commission's Rules of Practice, 17 C.F.R. Section 201.17. Pursuant to that rule, a petition for review of this initial decision may be filed within 15 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 17(b) within 15 days after service of the initial decision upon them, unless the Commission, pursuant to Rule 17(c), 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 Washington, D.C. November 4, 1996