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SECURITIES AND EXCHANGE COMMISSION
|
In the Matter of ROBERT M. FULLER |
OPINION OF THE COMMISSION
CEASE-AND-DESIST PROCEEDING
Causing Violation of Antifraud Provisions
Causing Failure to Comply with Reporting Requirements
Respondent, former Chairman of the Board of Directors and Executive Vice-President of a public corporation, was a cause of corporation's fraudulent statements and omissions in connection with the offer and sale of securities and of corporation's reporting violations. Held, it is in the public interest to order Respondent to cease and desist from committing or causing any violations or future violations of the antifraud and reporting provisions of the securities laws.
APPEARANCES:
William P. Hicks, Alex Rue, and M. Graham Loomis, for the Division of Enforcement.
Anthony L. Cochran, of Chilivis, Cochran, Larkins & Bever, LLP, for Robert M. Fuller.
Appeal filed: August 22, 2002
Last brief received: November 27, 2002
Oral argument held: July 24, 2003
Robert M. Fuller, former Chairman of the Board of Directors and Executive Vice President for Investor Relations of Vista 2000, Inc. ("Vista"), appeals from an administrative law judge's decision. The law judge found, pursuant to Section 21C of the Securities Exchange Act of 1934, 1 that Fuller caused Vista to violate antifraud and reporting provisions of the securities laws. The law judge ordered Fuller to cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act of 1933, 2 Sections 10(b) and 13(a) of the Exchange Act, 3 and Exchange Act Rules 10b-5, 13a-1, and 12b-20. 4 We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
Robert M. Fuller founded Vista's predecessor in 1991 5 and served as Chairman of Vista's Board of Directors and its Executive Vice President of Investor Relations until he resigned those positions in late January, 1995. 6 Vista was organized to manufacture trigger guards to prevent unintended discharges of firearms.
In 1994, Vista's Board of Directors consisted of Fuller, Richard P. Smyth, and Norman Wicks. Smyth was a co-founder of Vista with Fuller. He also served as a Director, President, andChief Executive Officer of Vista. 7 Wicks joined the company in 1992, and served as Vista's Chief Financial Officer, Secretary, Treasurer, and as a Director during the relevant period. Wicks resigned his positions with Vista on January 23, 1995. 8
On October 24, 1994, Vista filed a Form SB-2 Registration Statement that became effective October 25, 1994, with respect to a firm commitment initial public offering ("IPO") of units including one share of Vista's common stock and two common stock purchase warrants. In the Registration Statement, Vista undertook to file a post-effective amendment to reflect any facts or events representing a fundamental change in the information in the Registration Statement. 9 Greenway Capital Corporation ("Greenway") was the managing underwriter on Vista's IPO and became a market maker in Vista shares. The successful IPO raised approximately $4.5 million in net proceeds and closed on November 1, 1994. The proceeds were wired into Vista's account at the First National Bank of White County ("FNB").
Vista's Form SB-2 Registration Statement limited the temporary investment of any IPO proceeds not immediately necessary for Vista's business to "interest bearing securities such as certificates of deposit, United States government obligations or money market funds or instruments." Fuller admitted that he was aware of this "use of proceeds" limitation contained in the registration statement.
On November 10, 1994, Fuller, Smyth, and Wicks held a Vista Board meeting. During the meeting, Smyth suggested that Vista transfer $1 million to $1.5 million of the IPO proceeds toGreenway to open an investment account. Wicks opposed the suggestion. Fuller stated that he would not approve such an investment unless Greenway had Securities Investor Protection Corporation ("SIPC") insurance. The Board minutes state that the matter was tabled for further discussion.
Board minutes notwithstanding, Fuller testified that the Board had approved the opening of the account once it was determined that Greenway had SIPC insurance. Fuller testified that, within a week of the Board meeting, he learned that Greenway had SIPC insurance and he authorized opening an investment account and transferring $1 million to that account. Wicks testified that Fuller told him about Fuller's approval, as well as that Smyth and Fuller had wired $1 million from FNB to Greenway. 10
In fact, the account had been opened and the money had been transferred before the November 10 Board meeting. On October 25, 1994, the same day Vista began public trading, Smyth opened a brokerage account at Greenway in his wife's name, Nancy Estroff, with a mailing address in Augusta, Georgia ("the Greenway Account"). Although Smyth did not deposit any money with Greenway or its clearing broker, Adler Coleman Clearing Corporation ("Adler Coleman"), he directed Greenway to purchase Vista stock for the account on the day he opened it. Greenway cancelled these purchases on November 1, 1994, the settlement date, for lack of payment.
Between October 27 and November 2, 1994, Smyth continued to purchase Vista shares for the Greenway Account, placing eight orders on November 2. Greenway cancelled each of these purchases when they remained unpaid on their respective settlement dates. By the end of the day on November 2, 1994, the Greenway Account owed Greenway more than $2 million for unpaid purchases of Vista shares. No money had been deposited in the account as of that date.
Between November 8 and November 15, 1994, Smyth submitted a second New Account Application and supporting documents to Greenway. Smyth identified the new account holder as "FSPI Investment Account," and used Fuller's Helen, Georgia post office box as the mailing address for the account. Along with the new application, Smyth submitted a corporate resolution, dated November 8, 1994, that purported to be from FSPI, Vista's wholly-owned subsidiary, and a Corporate Account Agreement authorizing the account in FSPI's name and the investment of $1 million in the account. The letterhead for the resolution also listed Fuller's Helen, Georgia post office box address. Greenwayprocessed these documents as an account-holder name change for the Greenway Account. That is, Greenway assigned to the FSPI account the account number that had previously been assigned to the account opened in the name of Nancy Estroff. After November 15, 1994, Adler Coleman sent confirmations, corrections and cancellations for the Greenway Account to the attention of R.M. Fuller at Fuller's Helen, Georgia post office box. 11
On November 9, 1994, $1 million was wired from Vista's account at FNB to the Greenway Account. These funds represented approximately 22% of the net proceeds Vista received from its IPO. After Greenway received this transfer and cancelled the prior days' unpaid trading, there was still an outstanding unpaid balance of more than $325,000 in the Greenway Account.
Fred Luthy, one of the partners at Greenway, knew both Smyth and Fuller from their participation in the Vista IPO. Luthy testified that, in late November, 1994, he learned that the Greenway Account was about to be "sold out" to pay for Smyth's unpaid purchases of Vista shares. Luthy testified that he called Smyth, who refused to send any money. Luthy stated that, before the account was sold out at the end of November, he telephoned Fuller and told him about Smyth's unpaid purchases. Luthy stated that Fuller's response was one of astonishment. However, Fuller did nothing in response to this information.
Fuller signed Vista's 1994 Form 10-KSB on January 23, 1995. In preparing this document, Vista's attorneys included allegations provided to them by Smyth claiming that Greenway had engaged in unauthorized trading in Vista shares. Specifically, Note 13 of the 1994 Form 10-KSB stated, in pertinent part:
In November Greenway . . . as agent for the Company (but without the Company's knowledge or consent), repurchased 187,280 Units . . . . Later in the month (again without the Company's knowledge) Greenway resold 120,000 of the Units. . . . In management's judgment, this unauthorized action by Greenway (which first came to the Company's attention on Friday, January 27, 1995)violates the underwriting agreement and other agreements between the Company and Greenway. 12
Fuller did nothing to cause Vista to correct the false statement contained in Note 13. 13 Fuller resigned from Vista on January 25, 1995, citing personal reasons. 14 Vista filed its 1994 Form 10-KSB with the Commission on February 1, 1995.
In December, 1994, Fuller informed Alan Davis, a certified public accountant who was Fuller's personal friend and had prepared Fuller's individual tax returns, 15 that Vista was looking for a new auditor for its 1994 fiscal year financial statements. Fuller previously had given Davis 60,000 shares of Vista stock and Fuller knew that Davis still owned these Vista shares as of December, 1994.
At that time, Davis was renting space in the Atlanta offices of the accounting firm, Roemmich & Seymour, P.A. ("R&S"). Davis and J. Allen Seymour, a certified public accountant and a member of R&S, submitted a letter to Vista's Board of Directors, proposing that they both would work on Vista's audit as a joint venture between Davis and R&S. The proposal letter specificallystated that Davis would provide services on the engagement. Fuller admitted seeing the letter, and remembers Davis and Seymour personally making their proposal to the Vista Board of Directors. Vista's Board of Directors retained Davis and R&S at a December 30, 1994 Board meeting. Fuller did not disclose to anyone then, or at any other time, that Davis owned Vista shares.
Seymour testified that Davis had regular contact with Fuller during the audit, and that he overheard Davis's telephone conversations with Fuller during the audit. Seymour also stated that Davis informed him that Davis had obtained information for the audit directly from Fuller. Despite this testimony, and the fact that Fuller signed Vista's management representation letter, which was addressed to both Davis and R&S, Fuller claims that he did not have personal knowledge of Davis's involvement in the audit, and did not speak with him during the audit.
Section 21C of the Exchange Act authorizes the Commission to order a person who was a cause of a violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation. 16 To issue such an order, we must find that: (1) a primary violation occurred, (2) there was an act or omission by the respondent that was a cause of the violation, and (3) the respondent knew, or should have known, that his conduct would contribute to the violation. 17 The primary violations at issue here are Vista's alleged violations of the antifraud provisions of the Securities and Exchange Acts, and its reporting violations under the Exchange Act.
Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit the making of material misrepresentations or omissions in connection with the purchase, offer or sale of any security. 18 A fact is material if there is a substantial likelihood that a reasonableinvestor would consider it important in determining how to act. 19 Section 17(a)(1) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder require a showing of scienter. However, scienter is not necessary to prove a violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act. 20
It is undisputed that Vista omitted and misrepresented material facts in its filings with the Commission. 21 Pursuant to Item 512 of Regulation SB, Vista provided an undertaking in its Registration Statement to file a post-effective amendment to reflect any facts or events representing a fundamental change in the information in the Registration Statement. 22
Smyth's use of the IPO proceeds to purchase Vista shares was inconsistent with the representations in Vista's Form SB-2 Registration Statement that Vista's IPO proceeds would be used to fund operations of the company or, temporarily, to purchase interest-bearing securities. The securities listed in the Registration Statement as examples of what might be purchased were all relatively safe, stable investments. Instead, nearly 23% of the proceeds were used to purchase securities that were non-interest bearing, i.e., Vista shares. Vista's status as a start-up company meant that its shares were inherently more speculative than, for example, the United States government obligations suggested in the Registration Statement. The amount of the proceeds invested in the Greenway Account, together with the speculative nature of the investments, made this use of theproceeds a fundamental, material departure from the use of proceeds limitation in the Registration Statement. A reasonable investor would have wanted to know that such a substantial amount of the proceeds of the offering was not used in accordance with the purpose stated in the Registration Statement. 23 Vista thus should have filed a subsequent corrective disclosure and omitted to do so. 24
Vista also misrepresented in its Form 1994 10-KSB that Greenway purchased Vista IPO shares using Vista funds without authority, when in fact the shares were purchased for the Greenway Account at the direction of Smyth, using Vista's IPO proceeds. This misstatement was material for the same reasons as the failure to disclose in a post-effective amendment that the proceeds were being used inconsistently with the representations in the Registration Statement.
In addition, Vista misrepresented in its Form 10-KSB that the auditors who audited Vista's financial statements were independent. Representations concerning the independence of an auditor certifying an issuer's financial statements are material. 25
With respect to the failure to disclose the use of the IPO proceeds, Vista's scienter is established because the purchasesof its own shares were made at the direction of Smyth. 26 Smyth, as Vista's president and chief executive officer, must have known of the restriction on the use of proceeds contained in the IPO, and was at least reckless in failing to make Vista disclose that the IPO proceeds were being used for a purpose other than what was stated in the Form SB-2. However, given the fact that Smyth placed the account in the name of FSPI and arranged to have statements sent to Fuller's home rather than to Vista's offices, we find that he knew that his use of the IPO funds to purchase Vista shares was fraudulent and took deliberate steps to conceal his conduct. Similarly, Smyth knowingly provided false information to Vista's attorneys concerning the information included in Note 13 of the 1994 Form 10-KSB. Thus, we find that Vista violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10(b)(5) thereunder by omitting to disclose to investors that the IPO proceeds were being used to purchase Vista shares and by falsely asserting in the 1994 Form 10-KSB that Greenway repurchased Vista's IPO units without authorization.
Fuller knew about the use of proceeds limitation in the IPO registration statement. He knew that the $1 million deposited into the Greenway Account constituted IPO proceeds because he admits he approved the transfer. He was fully apprized of Smyth's improper use of the IPO proceeds to trade in Vista stock in the Greenway Account. He received confirmations and account statements detailing the activity in Vista shares in the Greenway Account. Fuller was specifically informed by Fred Luthy shortly before November 22, 1994 about losses that Smyth incurred in the Greenway Account through unpaid purchases of Vista shares. 27
As Chairman of the Board and Executive Vice President of Vista, Fuller was obligated to ensure that the company's public statements were accurate. 28 Fuller took no steps to have Vista file a post-effective amendment to its Form SB-2 Registration Statement, reflecting the material change to its "use of proceeds" information. He knew, or was reckless in not knowing, that this omission would contribute to Vista's fraudulent failureto disclose the use of IPO proceeds. 29 Accordingly, we conclude that he was a cause of this violation. 30
Fuller also admitted that when he signed Vista's 1994 Form 10-KSB he was aware of Note 13 and its contents, which stated that Greenway had made unauthorized trades in Vista's account. Despite his knowledge of matters concerning Smyth's purchases of Vista shares in the Greenway Account, Fuller signed the Form without correcting the misrepresentations in Note 13, and therefore, he also caused those misrepresentations. 31
Fuller disputes that his conduct concerning Smyth's use of the IPO proceeds establishes that he committed any acts or omissions that he knew or should have known would contribute to Vista's violations. Fuller argues that his signature on the Corporate Account Agreement, filed with the FSPI New Account Application changing the name and address of the Greenway Account, was forged. With respect to the authorization of the transfer of funds from FNB to the Greenway Account, he claims that, because of Smyth's history of forging Fuller's signature, it is "probable" that Fuller's signature on this document, too, was forged. 32 It is not relevant for our purposes, however, because Fuller admits that he approved the transfer, whether he signed the new account forms and the authorization or not.
Fuller denies that he received any Greenway Account documents from Adler Coleman. However, under the "mailbox" rule, we may presume that documents mailed in the regular course of business were received. 33 Between November 15, 1994 and January 23, 1995, Adler Coleman generated and mailed in the ordinary course of business seventeen confirmations and two account statements to Fuller's post office box address in Helen,Georgia. 34 Luthy testified that Adler Coleman, Greenway's clearing firm, had an established business practice of mailing computer-generated confirmations and account statements to Greenway account holders. Luthy also testified that Greenway would receive returned confirmations and statements that could not be delivered because of an incorrect address. Nothing in the record indicates the return of any of the confirmations or statements for the Greenway Account.
Fuller contends that there is an abundance of evidence to rebut the presumption of the "mailbox" rule. First, he claims that the rule is inapplicable because the mailings used the wrong zip code. The record, however, shows that the seventeen confirmations and two account statements contained Fuller's name, post office box number, town and state, with a zip code that was incorrect only as to the last number. The postmaster general of Gillsville, Georgia, the town with the zip code that was used, testified via stipulation that in 1994 any mail that was delivered to the Gillsville post office with a Helen, Georgia address, but an incorrect zip code, would have been corrected and sent to the Helen, Georgia post office. She testified that the Gillsville facility is small and that all mail is sorted by hand. It is implausible that the Gillsville facility would have failed to follow correctly its procedures nineteen out of the nineteen times Adler Coleman sent documents to Fuller's Helen, Georgia address.
Fuller claims that some of the confirmations were not sent in the course of business because there appear to be large gaps of time between the trade dates and dates the confirmations were processed. However, the confirmations cited by Fuller are either "corrected confirmations," i.e., confirmations that corrected the original confirmation, or confirmations that reflect cancellations of the original transaction. It stands to reason that these types of confirmations would be generated some time after the original trade dates. Fuller also claims that there are missing confirmations, and that this fact rebuts the presumption that Adler Coleman routinely generated a confirmation for every trade. However, the three confirmations Fuller identifies as missing were generated on or before November 10, 1994, and therefore were mailed to Nancy Estroff's address.
Fuller also points to many other purported irregularities with the Greenway Account and confirmations that he contendsrebut the presumption of the "mailbox" rule. 35 The "irregularities" Fuller cites do not relate to the process of generating or mailing confirmations or statements. 36 There is no evidence to suggest that Adler Coleman failed in the ordinary course of business to generate seventeen confirmations and two account statements and mail them to Fuller. We find that Fuller is presumed to have received the Greenway Account statements from Adler Coleman detailing Smyth's use of the IPO proceeds to purchase Vista shares.
Fuller denies ever speaking with Luthy about this matter, The law judge credited Luthy's testimony about their discussions over Fuller's denials. We give considerable weight to the credibility determination of a law judge "since it is based on hearing the witnesses' testimony and observing their demeanor. . . . Such determinations can be overcome 'only where the record contains 'substantial evidence' for doing so.'" 37 Fuller provided no evidence to disprove Luthy's claim, and the record does not identify any motive for Luthy to testify untruthfully asto this matter. 38 We see no reason to disturb the law judge's credibility determination. 39
Accordingly, we find that Fuller was a cause of Vista's fraudulent failure to disclose the use of the IPO proceeds and false statements in Note 13 of the 1994 Form 10-KSB.
With respect to Vista's failure to disclose that Davis lacked independence when he conducted the audit of Vista's 1994 financial statements, Fuller does not concede that he had the requisite scienter to establish Vista's violation, or that Fuller was a cause of the violation. The record does not support Fuller's claims.
Fuller admitted that he knew that during the 1994 audit Davis still owned the stock Fuller had given him. Fuller testified that he knew that Vista's auditors were required to be independent, and that Davis' ownership of Vista stock meant that Davis did not meet that requirement. 40
Fuller claims that he was not aware that Davis was working on the audit, and that he never spoke to Davis during the audit. His claim is directly contradicted by the record. Fuller admitted that he saw the written proposal from Davis and R&S, and that he noticed that Davis had signed it. That proposal specifically stated that Davis would provide services for the audit. Fuller admits being present when Davis and Seymour made a personal presentation to Vista's Board of Directors concerning their proposal to Vista. Fuller also signed Vista's managementrepresentation letter to the auditor, which was addressed to both Davis and R&S.
Seymour's testimony concerning Fuller's communications with Davis during the audit contradicts Fuller's claim that he did not know Davis was working on the audit. 41 The law judge found Seymour's testimony to be credible. We do not find any evidence in the record that causes us to question the law judge's credibility finding. 42
Fuller also attempts to shift blame to Wicks, arguing that Wicks, who signed Davis' stock certificate in March 1994, knew that Davis owned Vista shares. As a corporate officer and Chairman of Vista's Board of Directors, Fuller was responsible for ensuring that Vista's Form 10-KSB disclosed material facts of which he had knowledge. 43 Fuller signed the Form 10-KSB; Wicks did not. The law judge credited Wicks' statements at the hearing that, when Davis was hired in December 1994, Wicks did not remember Davis' name from when he signed the stock certificate many months previously.
We find that Fuller's knowledge that Davis was not independent establishes Vista's scienter in falsely stating in its 1994 Form 10-KSB that its auditors were independent. Accordingly we find that Vista violated Sections 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 under the Exchange Act. We also find that Fuller caused this violation when he signed the 1994 Form 10-KSB.
Pursuant to Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, Vista was required to file with the Commission annualreports containing financial statements prepared in conformity with the requirements of the Commission's rules and regulations. Reports filed under this section must be true and correct. 44 Exchange Act Rule 12b-20 requires the addition of material information if such information is necessary to make those statements not misleading.
Vista violated Section 13(a) and Rules 13a-1 and 12b-20 because its 1994 Form 10-KSB, filed with the Commission, contained the false information that Greenway had made unauthorized trades in Vista's account and that the auditors of the 1994 financial statements were independent. Fuller was a cause of these misstatements because he signed the Form 10-KSB when he knew, or was reckless in not knowing, that these statements were false. 45
Having found that Fuller was a cause of Vista's violations, we turn to whether imposition of a cease-and-desist order is appropriate. In making such a determination, we consider a range of public interest factors, including:
the seriousness of the violation, the isolated or recurrent nature of the violation, the respondent's state of mind, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his or her conduct, and the respondent's opportunity to commit future violations. 46
Because a cease-and-desist order is a forward-looking sanction, we have considered the degree to which the record must show a risk of future violations before we will impose such a sanction. 47 In KPMG, we concluded that the "likelihood of future violation" requirement that governs the issuance of injunctions in court proceedings is not the appropriate standard for issuance of a cease-and-desist order in an administrative proceeding. 48 Although we concluded that there must be a showing of "some risk" of future violations, we also decided that the "risk need not be very great to warrant issuance of a cease-and-desist order. In the ordinary case, and absent evidence to the contrary, a finding of past violation raises a risk of future violation sufficient to support our ordering a respondent to cease and desist." 49
A cease-and-desist order is warranted here. Fuller demonstrated a high degree of scienter in causing Vista's violations. Moreover, Fuller does not offer any assurances against future violations. To the contrary, in spite of much record evidence showing reckless, or knowing, conduct on Fuller's part, he repeatedly attempts to shift blame onto Wicks and others. His claims on appeal that he was unaware of Davis' involvement in the 1994 audit are disingenuous in light of the weight of evidence establishing his knowledge of that involvement.
In 1999, Fuller served as chairman for another company that went public, and continues to serve as an officer and director of start-up companies. Thus, we believe that his occupation provides him opportunity to commit future violations. Accordingly, we find it in the public interest to order Fuller to cease and desist from causing any violations or future violations of Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, and 13a-1 thereunder.
An appropriate order will issue. 50
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, and ATKINS); Commissioner CAMPOS not participating.
Jonathan G. Katz
Secretary
In the Matter of ROBERT M. FULLER |
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Robert M. Fuller cease and desist from committing or causing any violation of or future violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934; and from causing any violation of or future violation of Exchange Act Section 13(a) and Rules 12b-20 and 13a-1.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | 15 U.S.C. § 78u-3. |
| 2 | 15 U.S.C. § 77q(a). |
| 3 | 15 U.S.C. §§ 78j(b) and 78m(a). |
| 4 | 17 C.F.R. §§ 240.10b-5, 240.13a-1 and 240.12b-20. |
| 5 | The predecessor, TriggerGuard, Inc., after one other name change, became Vista in 1993, changed its state of incorporation from Georgia to Delaware, and placed its operating assets in Family Safety Products, Inc. ("FSPI"), a wholly-owned subsidiary incorporated in Georgia. |
| 6 | Fuller has organized and raised capital for a number of start-up companies, both before and after the period relevant to this matter. He has served as the chairman of the board, a director, and president of at least one company that offered its shares to the public since the relevant period. |
| 7 | We brought an action against Smyth for his conduct related to Vista in SEC v. Smyth, et al., Civil Action No. 1:01-CV-1344-CC, (N.D. Ga. May 25, 2001). Although no final judgment has been entered, the court issued an Order of Permanent Injunction against Smyth on Sept. 24, 2001. Both Smyth and his wife refused to testify before the law judge in the instant matter, asserting their Fifth Amendment privilege. |
| 8 | Wicks is a certified public accountant and had prior work experience in the Commission, as an auditor with Arthur Andersen, and as chief financial officer of other private companies before coming to Vista. |
| 9 | Vista was engaged in a continuous offering pursuant to Rule 415, 17 C.F.R. § 230.415. |
| 10 | Wicks also stated that, when he asked both Fuller and Smyth about how the money was being invested, they claimed not to know. Wicks made several unsuccessful attempts to obtain this information from Greenway. |
| 11 | Adler Coleman mailed confirmations of transactions, corrections and cancellations in the Greenway Account, which were processed on November 10, 1994 or earlier, to the Estroff mailing address. |
| 12 | Note 13 states that Vista first discovered the problem on January 27, 1995. Fuller's signature page is dated January 23, 1995. Nevertheless, Fuller admitted that the Form 10-KSB that he signed contained the disclosure in Note 13 regarding unauthorized trading by Greenway. |
| 13 | Fuller also signed Vista's management representation letter to its outside auditors on January 23, 1995. This letter stated, in part, that "there have been no irregularities involving management or employees who have significant roles in the internal control structure." |
| 14 | On or before January 23, 1995, Wicks told Fuller about a letter that Wicks had found from Global Equities Group, Inc. ("Global Equities"), a securities broker-dealer, addressed to Smyth and demanding payment for Vista IPO shares that Smyth had purchased in an account there. The letter also accused Smyth of illegal market manipulation. Wicks informed Fuller that he was going to resign; he did so on January 23, 1995. In response to this information, Fuller suggested that his own resignation might be appropriate. |
| 15 | Davis was one of the defendants in the civil action brought by the Commission against Smyth. |
| 16 | 15 U.S.C. § 78u-3. |
| 17 | See Erik W. Chan, Securities Exchange Act Rel. No. 45693 (Apr. 4, 2002), 77 SEC Docket 851, 859-60. |
| 18 | The misrepresentations must be made by the use of the mails or any means or instrumentality of interstate commerce. The use of the interstate mail to make filings with the Commission satisfies this requirement. SEC v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993). |
| 19 | See Basic v. Levinson, 485 U.S. 224, 231-32 (1988). |
| 20 | Aaron v. SEC, 446 U.S. 680, 697 (1980). Scienter may be established by a showing of recklessness. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1284 (11th Cir. 1999). Recklessness is an "extreme departure from the standards of ordinary care . . . present[ing] a danger of misleading buyers and sellers that is either known to the [actor] or is so obvious that the actor must have been aware of it." Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir), cert. denied, 434 U.S. 875 (1977). |
| 21 | It is also undisputed that these statements were made in connection with the offer, purchase, and sale of Vista stock. Vista's shares traded in the secondary market and it was engaged in a continuous offering of the shares underlying its warrants. |
| 22 | 17 C.F.R. § 228.512. Item 512 requires this undertaking if the small business issuer is offering securities in a continuous offering pursuant to Rule 415, 17 C.F.R. § 230.415. |
| 23 | See Erik W. Chan, 77 SEC Docket at 859 ("[m]any of the misrepresentations in and omissions from these documents concerned issues fundamental to [the issuer's] business, including . . . its intended use of the proceeds from the securities offerings. As such, the misrepresentations and omissions were material."). |
| 24 | See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1095 (2d Cir. 1972) ("[p]ost-effective developments which materially alter the picture presented in the registration statement must be brought to the attention of public investors.") (footnote omitted). |
| 25 | See Cornucopia Gold Mines, 1 S.E.C. 364 (1936). See also, KPMG Peat Marwick LLP, Exchange Act Rel. No. 43862 (Jan. 19, 2001), 74 SEC Docket 384, 405-06, petition denied, 289 F.3d 109 (D.C. Cir. 2002) ("In enacting the federal securities laws, Congress underscored the crucial function of independent auditors by requiring, or permitting the Commission to require, that 'independent' public accountants certify financial statements filed with the Commission by public companies and others."). |
| 26 | The scienter of a corporation's officers and directors establishes the scienter of the corporation for purposes of the antifraud provisions. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1096, n.16. Our findings here with respect to Smyth and Vista are solely for the purpose of this proceeding. |
| 27 | Fuller also knew from Wicks' mention of the Global Equities letter that Smyth was trading in Vista stock in a Global Equities account, a fact that tended to corroborate Luthy's statements. |
| 28 | See Erik W. Chan, 77 SEC Docket at 860. |
| 29 | We have stated that the "knew or should have known" language of Exchange Act Section 21C is "classic negligence language". KPMG Peat Marwick LLP, 74 SEC Docket at 421. Our finding that Fuller's conduct was at least reckless exceeds the statutory language of Section 21C. |
| 30 | Fuller claims that the law judge erred by finding him liable simply because he authorized opening the Greenway Account and Vista's transfer of IPO proceeds into that account. He contends that this finding violates his due process rights because the Order Instituting Proceedings never charged him with liability on this basis. Our de novo review of this matter cures any error a law judge may make in finding violations that have not been charged.
In our view, the finding that Fuller authorized the opening of the Greenway Account and transfer of funds to that account is relevant for the purpose of establishing that Fuller knew the Account existed and was funded by proceeds from Vista's IPO. This finding is the basis for the further finding that, once Fuller learned Smyth was trading in Vista shares in the Greenway Account, he knew that IPO proceeds were being used improperly for that purpose and therefore had a duty to cause Vista to amend the registration statement. Our findings are consistent with those of the law judge. |
| 31 | In his brief, Fuller states that he relied on Vista's counsel to confirm the information in Note 13. His assertion does not raise a cognizable defense. A claim of reliance on advice of counsel requires a showing that the party claiming it made a complete disclosure to independent counsel, sought advice as to the legality of his conduct, and relied on that advice in good faith. See, e.g., Markowski v. SEC, 34 F.3d 99, 104-05 (2d Cir. 1994); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 181-82 (2d Cir. 1976),cert. denied, 434 U.S. 1009 (1978). There is no evidence in the record that Fuller, although he admittedly read Note 13, sought counsel's advice concerning it when he signed the Form 10-KSB or that he disclosed to counsel the information Fuller had learned about Smyth's trading in the account. |
| 32 | The authorization is not in the record. The law judge concluded Fuller must have signed the document because the signatures of two of the three Vista Directors were required, Wicks credibly denied signing, and the only other people who had authority to sign were Smyth and Fuller. Fuller also tries to shift blame to Wicks by stating that Wicks received Vista's bank statements, and should have noticed that the transfer of funds from FNB happened on November 9, 1994. The timing of the opening of the account and transfer of funds is irrelevant, because Fuller approved and authorized them, even if he did so after the fact. |
| 33 | See Meckel v. Continental Resources Co., 758 F.2d 811, 817 (2d. Cir. 1985) (holding that "the presence of . . . proof [of regular mailing practices] establishes prima facie evidence of the mailing and creates a rebuttable presumption as to receipt.") See also Wells Fargo Business Credit v. Ben Kozloff, Inc., 695 F.2d 940, 944 (5th Cir.), cert. denied, 464 U.S. 818 (1983) (noting that "[p]lacing letters in the mail may be proved by circumstantial evidence, including customary mailing practices used in the sender's business"). |
| 34 | Although most of the purchases were made before the name change on the account, well into December confirmations were sent of the trades selling out positions for which no payment had been made by the settlement date. |
| 35 | Fuller claims that there were two separate accounts with the same account number. It is unclear what the significance of this might be, even if there were evidence supporting such a theory. The issue here is whether Fuller knew, or was reckless in not knowing, about the use of the IPO proceeds for trading in Vista shares. This is established by his approval of the transfer of IPO funds to the Greenway account and the mailing of account documents evidencing how the funds were being used. |
| 36 | These alleged irregularities include: (1) the account opening forms have a forged signature, (2) the listed account representative did not receive commissions from account activity, (3) the second New Account Application listed a post office box address, (4) the account had a large number of cancelled trades, (5) Smyth opened the account in his wife's maiden name, and (6) no one from Greenway signed the second New Account Application. |
| 37 | See Brian A. Schmidt, Exchange Act Rel. No. 45330 (Jan 24, 2002), 76 SEC Docket 2255, 2258 n.5 (citations omitted). |
| 38 | Fuller claims that alleged discrepancies between the testimony by Luthy and by Wicks concerning whether Wicks called Luthy to ask about the nature of the investments in the Greenway Account demonstrate that Luthy's testimony about his conversation with Fuller is not believable. The alleged discrepancies are on an unrelated point, and the law judge's credibility determination with respect to Luthy was specific as to Luthy's testimony about the conversation with Fuller. |
| 39 | The law judge fully considered Luthy's disciplinary history before making her determination. |
| 40 | An auditor is not independent if he owns stock in the audit client. Rule 2-01(c)(1)(i) of regulation S-X ("Investments in Audit Clients. An accountant is not independent when: (A) The accounting firm, any covered person in the firm . . . has any direct investment in the audit client . . . ."). 17 C.F.R. § 210.2.01(c)(1)(i). |
| 41 | Seymour settled proceedings against him. J. Allen Seymour, CPA, Exchange Act Rel. No. 44461 (June 21, 2001), 75 SEC Docket 800. |
| 42 | Fuller contends that we should disregard Seymour's testimony that Davis solicited information from Fuller and had several telephone conversations with Fuller during the audit, because Seymour also testified that he lacked confidence in Davis. Fuller's contention is unpersuasive. Seymour testified that his lack of confidence stemmed from the fact that Davis told Seymour he was going to dispose of his Vista stock, and Davis never did so. This testimony has no bearing on whether Seymour overheard telephone conversations during which Davis was speaking to Fuller about the audit. |
| 43 | See Erik W. Chan, 77 SEC Docket at 867. |
| 44 | See Howard v. Everex, 228 F.3d 1057, 1062 (9th Cir. 2000) (citations omitted). There is no scienter element involved in these provisions; the filing of a materially false statement constitutes a violation. SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978). |
| 45 | Fuller claims that it is an "important issue" for the Commission to consider whether "a former staff accountant in the Enforcement Division will be given preferential treatment by the Commission." This statement reflects Fuller's repeated allegations that Wicks, a former staff accountant with the Division, rather than Fuller, is to blame for Vista's violations. This contention is wholly lacking in merit. As we found above, Fuller was responsible for ensuring the accuracy of Vista's documents. Whether others also had an obligation to do so does not insulate Fuller from liability for his own misconduct. See Erik W. Chan, 77 SEC Docket at 867.
Fuller also complains that the law judge erred because she considered Vista to be a "total hoax." Fuller's reading of the Initial Decision is incorrect. The law judge said in dicta that "it was not clear from the record whether Vista was a total hoax." Her statement was not the basis for any finding against Fuller. |
| 46 | KPMG Peat Marwick LLP, 74 SEC Docket at 436. See also Joseph J. Barbato, 53 S.E.C. 1259, 1281 n.31 (1999); Donald T. Sheldon, 51 S.E.C. 59, 86 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995). |
| 47 | Id. at 429-436. |
| 48 | Id. |
| 49 | Id. |
| 50 | We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion. |
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