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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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In the Matter of RICHMARK CAPITAL CORPORATION
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INITIAL DECISION March 18, 2002 |
| APPEARANCES: | Jeffrey Blair Norris, Karen Whitaker and David Peavler for the Division of Enforcement, Securities and Exchange Commission.
Frank C. Razzano and J. Tara Holubar of Dickstein Shapiro Morin & Oshinsky LLP, for Respondents RichMark Capital Corporation and Doyle Mark White. |
| BEFORE: | Robert G. Mahony, Administrative Law Judge |
I. INTRODUCTION.
The Securities and Exchange Commission (Commission) initiated this proceeding by an Order Instituting Public Administrative and Cease-and-Desist Proceedings (OIP) on August 2, 1999, against RichMark Capital Corporation (RichMark) and Doyle Mark White (White) pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b)(6), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act).
A hearing was held in Fort Worth, Texas, October 16 through 20 and 23 through 24, 2000. The Division of Enforcement (Division) called twenty-two witnesses. Respondents called five witnesses. The record includes forty-nine exhibits from the Division, forty-one exhibits from Respondents, four Joint Exhibits, and four Administrative Law Judge Exhibits.1
The findings and conclusions herein are based on the record, my observation of the witnesses, all arguments and proposals of fact and law, as well as the relevant statutes and regulations. Preponderance of the evidence was applied as the standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). All arguments, proposed findings, and conclusions put forth by the parties were considered and those consistent with this decision were accepted.
The OIP alleges that Respondents violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, from approximately July 1998 through at least August 1998 by causing a corporate profile of PCC Group, Inc. (PCCG) to be circulated to RichMark customers that omitted the fact that RichMark had an investment banking agreement (Agreement) with, and was receiving compensation from, PCCG. The OIP further alleges that Respondents failed to disclose to RichMark customers that it was receiving compensation from PCCG while recommending the purchase of its stock. The OIP also alleges that Respondents failed to disclose that RichMark was selling its position in PCCG stock while encouraging its customers to purchase it.
RichMark and White contend that the evidence fails to support the allegations. Respondents argue that the disclosure of RichMark's Agreement undertaken by RichMark and White is consistent with industry practice. Specifically, they argue that the legend placed on the front of confirmation tickets and the statements on the back of them, as well as press releases, a CNBC story, a letter mailed to shareholders, and PCCG's Form S-3 registration statement filed with the Commission on June 24, 1998, provided adequate disclosure of the Agreement and proved that RichMark and White did not intend to hide the investment banking relationship from customers. Furthermore, they argue that the confirmation tickets also disclosed that RichMark might have been selling its position in PCCG stock while encouraging customers to buy the same.
As to RichMark, the Division seeks a second-tier civil penalty, disgorgement, a ninety day suspension of its registration, and a cease-and-desist order. As to White, the Division seeks a second-tier civil penalty, joint liability for fifty percent of RichMark's disgorgement, a bar from association with any broker or dealer for a period of not less than eighteen months, and a cease-and-desist order. Respondents assert that the proceeding should be dismissed.
II. FINDINGS OF FACT.
A. Introduction.
1. Respondents RichMark Capital Corporation and Doyle Mark White.
RichMark was incorporated in Texas in February 1997 and is a subsidiary of RMC Holdings, which owns one hundred percent of RichMark stock. White and Richard Monello (Monello) each own fifty percent of RMC Holdings.2 (Tr. 752-54, 1086; Jt. Ex. 1 at 1.) RichMark has been registered with the Commission as a broker-dealer since July 23, 1997, pursuant to Section 15(b) of the Exchange Act. (Tr. 1086; Jt. Ex. 1 at 1.) From RichMark's inception, Monello has been president. (Tr. 1087-88.) White has been vice-president, secretary, and treasurer. (Tr. 752, 755; Jt. Ex. 1 at 1-2.) At its inception, RichMark's only other employee was Don Hawkins (Hawkins), White's sales assistant at previous broker-dealers. Hawkins also became a licensed registered representative. (Tr. 1085, 1088.)
When RichMark's La Jolla, California, office opened in November 1997, Monello relocated to La Jolla from Texas, so that he could permanently oversee the operation.3 (Tr. 785, 1144.) By July 1998, Monello was the chief supervisor of ten to twelve employees. In 1998, the La Jolla office was the flagship branch, accounting for about fifty percent of RichMark's retail brokerage business. (Tr. 784-86, 1144.)
At the La Jolla office, Monello provided advice to the registered representatives, recommended securities, and approved the dissemination of sales literature.4 He remained in frequent contact with White, who was in Dallas, Texas. He sought White's input on major decisions in the La Jolla office as well as how to encourage the registered representatives to sell PCCG stock. (Tr. 791-92, 1146.)
2. First Southwest Company.
RichMark had a clearing agreement with First Southwest Company (FSW), which executed RichMark's trades. (Tr. 162, 1086-87; Div. Ex. 49.) RichMark introduced the trades and FSW cleared and processed the transactions. (Tr. 115, 1087.) FSW also tracked RichMark's incoming cash flows, check disbursements, stock flows, and transaction records. (Tr. 115.) FSW was the custodian of assets for RichMark's customers. (Tr. 136, 141, 162-63, 181, 183.)
As the clearing broker, FSW did not have any direct contact with RichMark's customers. (Tr. 115-16, 163.) FSW did not provide compliance services to RichMark and did not provide investment advice to RichMark's customers. (Tr. 162-63.) If customers called with complaints, FSW notified RichMark, but did not attempt to solve the customers' problems. (Tr. 115, 140, 163.) The only agreement between FSW and RichMark's customers was the new account agreement, which stated that the customer agreed to arbitration in the event of problems between the customer and FSW. (Tr. 116, 137.)
RichMark's trades were sent from its La Jolla office to its Dallas office for White's review before being sent to FSW.5 (Tr. 120, 122, 792-93, 1141-42.) Execution of the trades by FSW generated a trade confirmation. (Tr. 123-24.) Trade confirmations are written notifications to customers that confirm the purchase or sale of a security from the customers' accounts.6 FSW mailed confirmations to RichMark's customers after the trades were executed, usually the same day. (Tr. 171.)
B. Investment Contract.
1. Introduction to PCCG.
In 1998, Jack Wen (Wen) was the president and chief executive officer of PCCG. Its common stock traded over-the-counter (OTC) on the Nasdaq SmallCap System. (Tr. 190-91; Resp. Ex. 6.)
PCCG's corporate profile described the company as follows:
[PCCG] is a wholesale distributor of microcomputer products, serving a select client base which includes value-added resellers, system integrators and dealers. The Company has strong ties with a number of foreign and domestic vendors of peripheral and subsystem equipment. [PCCG] distribution is managed through its Pomona, California headquarters.
(Div. Ex. 5.)
2. The Investment Banking Agreement.
Gary Blum (Blum), PCCG's corporate counsel and a board member, approached RichMark about becoming an investment banker for PCCG. (Tr. 1097.) As these discussions progressed, White and Monello approached David Firestone (Firestone)7 to provide investment banking services through RichMark. (Tr. 759, 1018, 1097-98, 1122.)
Firestone and White went to PCCG and met with Wen, George Rodda, a board member and a co-founder of the company, and Blum for a presentation about the company and its goals. The goals included reorganizing PCCG to enhance shareholder value, identifying acquisition candidates, and creating business relationships with credit facilities and investment banking firms. (Tr. 759, 1018-19, 1031.)
After his initial meeting, Firestone accepted the consulting work and was given the title, "Managing Director of Investment Banking." (Tr. 1019-20, 1032, 1098.) Under his contract, Firestone was extended the title for the consulting engagement.8 (Tr. 1020.)
On March 10, 1998, PCCG and RichMark entered into a one-year Agreement, which could be terminated by either party upon thirty days written notice.9 (Tr. 192, 756; Div. Ex. 1.) The Agreement called for RichMark to seek acquisitions, establish lines of credit, introduce the company to the financial market, and provide better public exposure, with the ultimate goal of raising the stock price of PCCG. (Tr. 192.) Blum, Wen, Firestone, and Monello negotiated the terms and signed the Agreement, which White drafted. (Tr. 194, 196, 758-59, 1020, 1099, 1122.) At the time of the signing, the closing bid for PCCG stock on the OTC market was at $2 7/8. (Jt. Ex. 1.) It was not actively traded. (Tr. 1143.)
The terms of the Agreement, in relevant part, are as follows:
[RichMark] agrees to advise and assist [PCCG] with (i) general strategic planning and corporate finance matters, (ii) assist in obtaining a $15,000,000.00 secured line of credit or other financing facility, (iii) effecting acquisition transactions, which may include identifying and evaluating acquisition opportunities and participating in the negotiations with potential candidates on behalf of [PCCG], (iv) issuing or selling of debt and/or equity securities of [PCCG] through a private placement, (v) introduce [PCCG] to an investor relations company which will assist in developing a marketing plan, a broker lead generation program, issue press releases, handle investor inquiries, sponsor broker teleconferences, and road shows, (vi) advise [PCCG] regarding positioning itself within the financial community, (vii) introduce and foster relations with broker-dealers within our network who will provide additional financial and market support, (viii) providing an analyst to write a research report which will generate additional interest in the brokerage community.
(Div. Ex. 1 at 1, "Exclusive Financial Advisor/Investment Banker Agreement.")
RichMark's compensation was as follows:
[PCCG] shall pay to [RichMark] a monthly retainer of $5,000, commencing upon the date of execution of this Agreement and on the same date of each month thereafter. In addition, upon execution of this Agreement, [PCCG] agrees to issue [RichMark] or its designee shares or options to purchase shares of [PCCG]'s common stock as delineated on Exhibit "A."10
(Div. Ex. 1 at 1, "Exclusive Financial Advisor/Investment Banker Agreement.") The compensation in the Agreement was heavily weighted to options because that is the way in which Wen wanted to pay. White would have preferred cash because RichMark had financial needs. (Tr. 1099-1100.)
Shortly after signing the Agreement, White informed RichMark's legal counsel, George David Gordon, Jr., (Gordon) of RichMark's actions.11 At White's request, Gordon reviewed PCCG's most recently filed Forms 10-Q and 10-K and reported to White that the company looked financially healthy. (Tr. 1055-56, 1068, 1100.) Gordon also informed White that the Commission was investigating investment banking agreements for sham contracts designed to disguise financial compensation for promoting the company's stock. Gordon advised that RichMark needed to make sure that it was performing the services described in the Agreement. At this time Gordon did not review the Agreement, nor did he provide his advice in writing. (Tr. 1057, 1068-70.)
Each month RichMark provided an invoice itemizing the monthly retainer of $5,000 and other expenses. During the life of the Agreement, from March 1998 through January 1999, RichMark received a total of $55,000 in monthly retainer fees and $2,127.50 in expense reimbursements. (Jt. Ex. 1 at 3.) RichMark also received 25,000 PCCG shares upon execution of the Agreement. The stock certificates were placed in an RMC Holdings account at FSW on April 15, 1998. (Tr. 200, 762, 1123; Jt. Ex. 1 at 3.)
Monello felt "very fortunate" to have the Agreement because it would count for a significant portion of RichMark's 1998 revenues. Monello was concerned about RichMark's revenues, although he believed that RichMark would have found other revenue sources to remain functioning, the Agreement with PCCG was "a relief."12 (Tr. 794-95.) Monello also hoped that the Agreement would place RichMark into a new level of business. (Tr. 797.)
White denied that RichMark would have been insolvent without the Agreement. He believed the compensation from PCCG was not essential to RichMark meeting expenses and that RichMark was not in a financially precarious position. White maintains that he would have found another deal if the Agreement had not worked with PCCG. Otherwise, he would have provided more of his own money. (Tr. 1154-55.)
C. Services Provided under the Agreement.
1. RichMark and Firestone.
Firestone, on behalf of RichMark, provided strategic planning and corporate finance assistance from approximately March to October 1998. (Tr. 212, 1021, 1103.) He identified potential acquisition candidates for the company, including Millenium Electronics, a publicly traded corporation that distributed memory components; Niki, a privately owned company involved in video game components; and Imgeon, a San Francisco Bay area company. (Tr. 217, 241-42, 1022, 1024, 1035, 1044.) Firestone identified the companies, approached them, discussed potential deal structures, and presented them to Wen. (Tr. 215-17, 1022-24.) Wen scheduled meetings and conducted negotiations with the companies, but no transactions were concluded. (Tr. 1023, 1034.)
Firestone introduced PCCG to a variety of financial institutions and investment banking firms, including Manufacturers Bank, Capital Business Credit, Webb Bush Morgan Securities, and Transworld Consulting. (Tr. 1026-27, 1029, 1037, 1044.) Preliminary discussions occurred with these firms, but Wen did not enter into any agreements. (Tr. 1026, 1036.) Firestone secured an invitation from Hambrecht & Quist, a banking firm specializing in technology, to attend a technology conference in San Francisco, which Wen accepted but did not attend. (Tr. 231, 1027, 1037.) Finally, a Philadelphia Stock Exchange application was filed, but Wen discontinued the listing process because he believed that the necessary audit would be too expensive.13 (Tr. 232-33, 244-45.)
Firestone also advised PCCG and Wen on matters of corporate finance. He advised PCCG to expand its board of directors and include an independent, outside third party. He further advised that PCCG create formalized procedures for corporate governance and responsibilities for the chief executive officer to report to the board of directors. He believed that PCCG should retain new corporate counsel, and define acquisition candidates to raise proceeds. (Tr. 214-15, 218-20, 1024-25, 1028, 1035-36, 1039.) Wen retained Troy & Gould as corporate counsel to review PCCG's corporate governance. (Tr. 221, 1038.) Other advice from Firestone included conducting a preferred stock offering, and establishing a website. (Tr. 228-30, 232, 243-44, 1039.) Firestone periodically informed White of his activities with PCCG. (Tr. 1041.)
2. Coffin Communications Group.
RichMark introduced PCCG to Coffin Communications Group (Coffin) an investor relations firm that provides services to small-capital, public companies.14 (Tr. 50-52, 207.) Coffin assists in out-sourcing investor communications such as printed materials, road shows, meeting with members of the investment community and performing media relations. (Tr. 52.) In early 1998, Firestone and Wen met with Coffin officers to discuss the services Coffin could provide to PCCG. PCCG was looking at growth opportunities in light of the services RichMark was to provide and believed that investor relations would soon be an important part of its growth. Coffin was retained to assist the company in reviewing, editing, and marketing its drafted materials for public dissemination, and to nurture interest in PCCG within the financial community. (Tr. 53-56, 207.)
RichMark suggested that Coffin prepare a corporate profile of PCCG. (Tr. 209; Div. Ex. 5.) Michael Betat (Betat), the senior account executive prepared the corporate profile. His goal was to create a cohesive investment story that represented PCCG as a compelling investment opportunity. (Tr. 58-60, 87.) The corporate profile was promotional literature for individuals in the financial community, not individual investors. (Tr. 209; Div. Ex. 5.) PCCG instructed Coffin to provide the corporate profile and any other materials RichMark requested. (Tr. 72.) Coffin's engagement with PCCG lasted four months, terminating on or about July 1, 1998. PCCG determined that Coffin was not moving fast enough to increase stock prices as PCCG and RichMark had expected. (Tr. 63, 84-85, 231-33.)
RichMark did not directly participate in creating the corporate profile, although Firestone reviewed it. (Tr. 1109.) White arranged for the corporate profile to be sent to all of RichMark's registered representatives. (Tr. 772-73, 1138, 1141.) Although White and Monello knew the corporate profile was not intended for individual investors, White directed FSW to mail it to all of RichMark's customers with their June 1998 statements.15 (Tr. 776, 1111, 1139.) Monello only learned of this after White had arranged it, but he assumed that RichMark customers would receive the corporate profile. (Tr. 773-76.) It did not disclose the Agreement between PCCG and RichMark, but White and Monello did not believe any disclosure was necessary because Coffin independently produced the corporate profile. (Tr. 776, 779, 1110-11, 1137-39.)
D. RichMark Promotes PCCG Stock.
Immediately following the signing of the Agreement, RichMark encouraged its registered representatives to "cold call" individuals to promote and sell PCCG stock.16 (Tr. 797, 862-63, 1142.) Monello was enthusiastic about RichMark's association with PCCG and led frequent sales meetings to promote PCCG stock to the registered representatives. He emphasized that PCCG had strong fundamentals with consistent earnings and revenue growth. It had a small amount of outstanding stock that was undervalued, and it was a "jewel" with long-term potential. (Tr. 780, 790, 834, 854, 1143.)
The corporate profile created by Coffin was provided to the registered representatives in the La Jolla office and Monello encouraged them to distribute the corporate profile to their customers. (Tr. 800.) Monello predicted that the price per share would rise to $10 or $12 in twelve to eighteen months. To further encourage the registered representatives to sell PCCG stock, RichMark contemplated offering compensation beyond the normal commission.17 (Tr. 800-04.)
Monello discouraged customer sales of PCCG stock. He encouraged registered representatives to sell PCCG stock to new customers and did not want current PCCG customers to sell their shares. He also encouraged the registered representatives to introduce PCCG stock to customers who purchased stock in other technology-related companies. (Tr. 832-34, 857-63.)
Monello denies that RichMark's registered representatives were selling PCCG stock solely because RichMark had the Agreement with PCCG that included stock options. (Tr. 798-99.) He testified that the Agreement was not an incentive to recommend the stock; it was simply a separate compensation earned by RichMark. (Tr. 835-36.)
1. Disclosure of Investment Banking Relationship with PCCG.
Monello was RichMark's registered compliance officer and responsible for instructing registered representatives in the La Jolla office concerning disclosure.18 (Tr. 804, 808-10.) In general, Monello thought it was important for customers to know about RichMark's relationship with PCCG and he monitored the registered representatives to make sure the disclosure occurred. (Tr. 813, 816, 858.) Both White and Monello testified that they instructed their registered representatives to inform potential customers and their current customers of the relationship between RichMark and PCCG.19 (Tr. 768, 804.) Although Monello believed that there was no legal obligation to inform customers about the Agreement, White believed that RichMark had to disclose the PCCG/RichMark relationship to customers because the customers were entitled to information that might reflect on the firm's objectivity. (Tr. 811-12, 1147.) Gordon advised White and Monello that the registered representatives needed to disclose the existence of the relationship when speaking to customers. (Tr. 1101.)
To show that disclosure of the Agreement occurred, White and Monello identified several documents that contained the information. They believe the relationship was communicated through the trailer on the confirmations, a letter to PCCG's shareholders, PCCG's Form S-3 filing, and press releases to the Dow Jones Online News, CNBC, and the Wall Street Journal. (Tr. 858.)
a) Trailer on Confirmations.
Gordon advised RichMark to have the registered representatives orally disclose the investment banking relationship to customers, and to place a trailer on the confirmations to provide written disclosure. (Tr. 1101, 1057.) Hawkins contacted FSW and asked it to put the legend on the front of the confirmation. (Tr. 1102.) In determining what legend to put on the confirmation, Gordon said it was not necessary to put the terms of the Agreement on the confirmation. (Tr. 1106.) Furthermore, RichMark was limited to thirty characters for the message. RichMark, working with FSW, crafted "RichMark consults for PCCG," to be manually placed on the front of the confirmations. (Tr. 1102.)
White states that he learned after-the-fact that the trailer was not placed on all the confirmations because individuals at RichMark occasionally forgot to tell FSW to add the trailer. At other times, individuals at FSW forgot to add it. (Tr. 1106-08.) He did not go back to inform the customers. (Tr. 1171.)
From the language on the trailer, White expected investors to understand that RichMark was receiving monthly cash payments of up to $5,000 from PCCG. He also expected a reasonable investor to extrapolate that RichMark had stock options from PCCG even though the actual disclosure did not state this. (Tr. 1153-54.)
b) Letter to PCCG Shareholders.
When the Agreement was signed, Wen provided a current shareholders list to RichMark. Sabnani, at Coffin, helped Monello draft a letter to send to those shareholders announcing the new investment banking relationship between PCCG and RichMark. (Tr. 89, 838-40, 848, 1104; Resp. Ex. 32.) Dated April 15, 1998, the letter states:
Dear Shareholder:
We are pleased to announce that [PCCG] has retained [RichMark] in an investment banking capacity.
The nature of our relationship with [PCCG] will be to explore ways in which we can enhance shareholder value.
Headquartered in Dallas, Texas, [RichMark] is a full service Investment Banking and brokerage firm with an additional location in La Jolla, California.
We believe that we have important and timely information regarding your current investment in this company.
Please contact us at you earliest convenience.
(Resp. Ex. 32.)
c) News Releases.
On April 16, 1998, the Wall Street Journal ran a short news piece on RichMark. (Tr. 91, 854, 1104; Resp. Exs. 11, 11A.) With the headline "Russel 2000, NASDAQ composite rises to highs, ICC surges 71 percent, and [PCCG] jumps 46 percent," the article stated that PCCG retained RichMark in an investment banking capacity to explore opportunities to enhance shareholder value. (Tr. 856.) About the same time, the Dow Jones Online News ran a release, which stated that RichMark had entered an investment banking relationship with PCCG. (Tr. 853, 1104; Resp. Ex. 10.) CNBC ran a short piece on the company, as well. (Tr. 1104.)
Sabnani testified that Coffin helped RichMark prepare a press release dated May 12, 1998. The release states that for the three months ended March 31, 1998, PCCG reported revenues of $19,734,000, net income of $666,000, or $.23 cents per share. This compared with revenues of $13,610,000 and net income of $18,000, or $.01 cent per share for the same period the previous year. For the six months ended March 31, 1998, PCCG reported revenues of $43,479,000 and net income of $740,000, or $.26 cents per share, compared with revenues of $27,289,000 and net income of $184,000, or $.04 per share for the same period in the previous year. (Tr. 93-94, Resp. Ex. 12.)
d) Form S-3 Filing for PCCG.
In June 1998, PCCG filed a Form S-3 registration statement with the Commission on EDGAR, a public database for Commission filings. (Tr. 769, 1147; Div. Ex. 23.) Attached to the Form S-3 was a copy of the Agreement. White learned of the filing in June and Monello learned of it in July. Neither made it available to the registered representatives or the customers. (Tr. 769, 831-32, 1147-48.) White believes that the registered representatives had the responsibility to do some due diligence on the companies of the stock they were selling and provide this information to the customers. White concedes that the registered representatives may not have been aware of the existence of the Form S-3. (1148-50.)
2. Disclosure of Stock Selling Activities.
White and Monello knew that RichMark's registered representatives were selling PCCG shares to customers during the same time they were selling the PCCG stock. (Tr. 767, 1132-33, 1143.)
On April 29, 1998, RMC Holdings transferred 5,000 shares of PCCG stock to Whitestone Group Inc. These shares were part of the initial 25,000 shares received as compensation under the Agreement. (Jt. Ex. 1 at 4.) RichMark exercised its option on August 19, 1998, pursuant to the Agreement, and purchased 25,000 shares of PCCG at $2.50 per share. These shares were received into the RMC Holdings account at FSW on August 26, 1998. (Jt. Ex. 1 at 3; Div. Ex. 4.) The only shares that went into the RMC Holdings account were from the Agreement with PCCG. (Tr. 766-67.) The parties have stipulated that, during July and August 1998, White and Monello sold the PCCG stock received as compensation as follows:
| July 9 | RMC Holdings account sold 1,000 shares at $6.00 per share. |
| July 10 | RMC Holdings account sold 1,500 shares at $6.00 per share. |
| July 10 | RMC Holdings account sold 1,500 shares at $6.125 per share. |
| July 13 | RMC Holdings account sold 466 shares at $6.00 per share. |
| July 21 | RMC Holdings account sold 1,500 shares at $6.25 per share. |
| July 31 | RMC Holdings account sold 1,000 shares at $5.50 per share. |
| July 31 | RMC Holdings account sold 2,534 shares at $5.9375 per share. |
| August 7 | RMC Holdings account sold 4,700 shares at $5.9375 per share. |
| August 13 | RMC Holdings account sold 10,000 shares at $5.9688 per share. |
The total is 24,200 shares for $144,498.375. (Jt. Ex. 1 at 3; Div. Ex. 17; Tr. 1132-33.) In September, White and Monello made the following sales of PCCG stock received as compensation from PCCG:
| September 14 | RMC Holdings account sold 2,000 shares at $4.125 per share. |
| September 16 | RMC Holdings account sold 1,100 shares at $3.875 per share. |
| September 16 | RMC Holdings account sold 3,500 shares at $3.875 per share. |
| September 17 | RMC Holdings account sold 3,700 shares at $3.875 per share. |
The total is 10,300 shares for $40,412.50. (Div. Ex. 17.) White and Monello both decided to make these sales. (Tr. 764-65.)
Monello did not inform RichMark customers of the RMC Holdings sales, because he assumed they were generally aware that such sales were occurring from the language on the back of the confirmations.20 (Tr. 768, 868.) He testified that the normal way to disclose that a brokerage firm is selling the same stocks that customers are buying is on the back of the confirmation. Monello believed that he did not have to announce RichMark's selling activities to the "whole world." The sales were not a "no confidence" statement in the stock, nor did the sales mean that there was impending bad news about PCCG. (Tr. 868-69, 1114.) Because of the disclosures on the confirmation and in the media concerning the investment banking relationship, White and Monello thought it unnecessary to inform the registered representatives that they might sell PCCG stock to pay expenses. (Tr. 770.) RichMark was a start-up company and its finances were "on a shoestring." (Tr. 822, 866, 1114.)
3. RichMark Supervisors.
a) Chad E. Wiegand.
Chad E. Wiegand (Wiegand) was hired by Monello in July 1998 as the branch manager of the La Jolla office.21 (Tr. 453-55, 477.) Monello advised that RichMark was PCCG's investment banker and that it was going to help PCCG grow in order to raise the value of PCCG stock. (Tr. 455, 464.) Wiegand asked for more information about the relationship, but Monello said there was nothing more. Wiegand knew that RichMark and PCCG had an Agreement and that RichMark was to be compensated in warrants. He also knew that Firestone was helping to promote PCCG and raise capital. Wiegand considered these "positives" about PCCG and may have told "one or two" customers about the Agreement. (Tr. 465, 473-75.)
Wiegand learned more about PCCG when Monello asked him to create his own "pitch sheet" to help registered representatives sell PCCG stock. The pitch sheet included information about the small number of shares outstanding, the small market capitalization in relationship to its sales, the yearly growth in sales and earnings forecasts, and some information about PCCG's business, but not the Agreement with RichMark. He showed the pitch sheet to Monello who approved it. (Tr. 457-58, 468, 473-75)
Monello provided Wiegand with the corporate profile of PCCG, and encouraged him to distribute it to customers. (Tr. 456; Div. Ex. 5.) Wiegand also used the RichMark brochure as a marketing piece along with his business card and the corporate profile, as an introduction to potential customers. (Tr. 472; Div. Ex. 24.) Wiegand received earnings predictions for PCCG from Firestone of $0.50 to $0.60 cents per share for the following year, which Wiegand told customers. (Tr. 463-64.)
Wiegand confirmed that the registered representatives were instructed to cold call customers or potential customers. Usually the registered representatives had to obtain their own leads, but someone supplied them with a list of PCCG shareholders who were called and encouraged to buy more PCCG stock. The only registered representatives to get those leads were ones that said they would push PCCG stock. (Tr. 460-61.)
Monello held meetings twice a day to encourage the sale of PCCG stock. Wiegand also discussed selling PCCG stock with Monello individually about four times each week. (Tr. 458-59.) Monello told the registered representatives that there would be a one hundred percent payout, when typically it was a forty to sixty percent payout. Monello also talked about warrants and a warrant pool in which the registered representatives could participate based on their loyalty, seniority, and production of customers purchasing PCCG stock, but the warrant pool never materialized. (Tr. 461-63.)
When Wiegand brought purchase orders for stock other than PCCG to Monello, he wanted to know why customers were not purchasing PCCG. Monello was also unhappy when Wiegand brought PCCG sell orders and told him that he did not want the stock sold. Wen would be "watching the DTC sheets," which track trades in the stock, and would be "very upset" if he saw that RichMark was selling the stock for customers. Wiegand's sell orders were not executed timely and would sometimes take hours to be executed. At times, he was told that the market could not handle the selling of PCCG, or that the market was not liquid enough. When the sale order did get executed it would be at a quarter to a half point lower than where the order should have been. (Tr. 470-72.)
Wiegand did not refer shareholders to review any Commission filings. (Tr. 468-69.) He only vaguely remembered a Wall Street Journal article that mentioned the investment banking relationship. He was not aware of the letter sent in April 1998 to PCCG shareholders concerning the relationship. (Tr. 475-77; Div. Ex. 2; Resp. Ex. 32.) After about two months of selling PCCG stock, Monello told Wiegand that the Commission was investigating RichMark and that they should start telling customers that they had an investment banking relationship with PCCG. (Tr. 467-68.)
In or about November 1998, approximately four months after Wiegand's employment began, Monello informed him that RichMark was selling PCCG stock from the RMC Holdings account while the registered representatives were encouraging customers to purchase it. It was explained to him that RichMark needed to exercise the options received from the Agreement to remain liquid and continue operating. Wiegand was never instructed to disclose this to customers. (Tr. 469, 468.) If he had known that RichMark was selling PCCG stock, he would not have recommended it to customers. (Tr. 470.) Wiegand believes he sold approximately 20,000 to 30,000 shares to twelve to fifteen customers, and that all of these sales occurred prior to learning about RichMark's selling its PCCG stock. (Tr. 456, 478.)
b) Richard Lundgren.
Monello hired Richard Lundgren (Lundgren) in January 1998.22 He worked at RichMark until July or August 1998. Early in his employment, he was made interim manager in the La Jolla office; Monello was his supervisor. As interim manager, Lundgren occasionally spoke with White in the Dallas office. (Tr. 716-19.)
White and Monello introduced Lundgren to PCCG. They encouraged him and the registered representatives to get customers to purchase the stock. The office had morning meetings and conference calls with Firestone, who Lundgren believed to be a consultant or analyst familiar with PCCG. They discussed how PCCG was undervalued, and had good earnings projections and revenue streams. Monello predicted that the stock had potential to go to $15 or $20 based on the company's potential earnings and revenues. (Tr. 722-25.)
Monello provided Lundgren with a corporate profile and a RichMark brochure for use in the office when making cold calls. (Tr. 723-24, 741; Div. Ex. 5.) They were to be sent to potential customers with the registered representative's business card to show the validity of the company. (Tr. 741.) In general, PCCG stock was the "house product" that White and Monello encouraged all registered representatives to mention in any conversation with a potential investor. (Tr. 725.)
Although not part of his usual sales pitch to potential investors, Lundgren would sometimes include the fact that there was "some sort of agreement" between the two companies as a sales tool to show that RichMark was serious about PCCG. It was a "positive" in attempting to have customers purchase the stock. (Tr. 735, 743.) Lundgren, however, could not provide any further information about the relationship because he did not know any of the details. (Tr. 729, 735.) He also mentioned it to the registered representatives as something to add to their sales pitches. (Tr. 744.) If requested by the customer, Lundgren would send the corporate profile to them. (Tr. 723.) He instructed the customer on how to use the EDGAR system to check information, but he did not alert them to any specific filings because he was not aware of any. (Tr. 734.)
According to Lundgren, when PCCG was mentioned on CNBC in April or May 1998, the trading volume increased. Because it was thinly traded, the stock price increased from $3 to $7 per share in a matter of minutes. (Tr. 726-27.) During the same time there was a Wall Street Journal article about a relationship between PCCG and RichMark. He also learned of the Dow Jones Online News article stating that RichMark was PCCG's investment banker. (Tr. 742.)
Lundgren learned through the office "rumor mill" that RichMark sold shares it received from PCCG into the market. Lundgren thought RichMark was selling stock to pay expenses. He confronted White and Monello and asked why he and the registered representatives should recommend the stock when RichMark was selling its own, but he never got a straight answer. (Tr. 735-38.)
White and Monello discouraged any PCCG sales to the market. When customers sought to sell their PCCG stock, White was reluctant to execute the orders. He inquired to determine if the customer could be persuaded not to sell. He wanted the registered representatives to hold any sell orders for the day and try to find buyers throughout the branch offices rather than execute a sell order to the market. Monello would reiterate the positives of the company and encourage the purchase of more PCCG stock rather than selling it. (Tr.739-41.)
Lundgren believes PCCG was near $3 per share when he began to recommend it. He believes he sold 50,000 to 70,000 shares to ten to twenty customers. He never arranged for or knew that a trailer was supposed to be placed on the confirmations. (Tr. 721-23, 726.)
4. Registered Representatives.
a) Andrew Yaros.
Andrew Yaros (Yaros) worked at the La Jolla office from March 1998 to January or February 1999. RichMark sponsored him for the registered representative's license test and he became a certified registered representative in July 1998. His direct supervisor was Lundgren and above Lundgren was Monello. (Tr. 327-28.)
PCCG was the first stock Lundgren told Yaros to recommend to customers. (Tr. 329.) Lundgren and the other managers instructed him to cold call potential PCCG customers. (Tr. 333.) Yaros was provided with a corporate profile of PCCG. He obtained a market guide on the company, which provided the company's fundamentals. (Tr. 330; Div Ex. 5.) He also sent a RichMark brochure to all prospects, new customers and those who had previously purchased PCCG stock. (Tr. 344; Div. Ex. 24.)
The supervisors called monthly meetings to encourage Yaros and the other registered representatives to sell PCCG because it was a good long-term investment. They also provided price projections of $13 to $14, which Yaros passed on to his customers. As an incentive, Monello told the registered representatives that they would receive shares in warrants that would be compensation above the normal commission on the PCCG stock sales. Yaros never received any of this compensation. (Tr. 332-337.) Yaros sold PCCG stock in at least twelve trades. (Tr. 345-46.)
Although Monello told Yaros to disclose that RichMark was the investment banker for PCCG, Yaros knew little about the arrangement and was not provided information to provide to customers. (Tr. 334, 339.) Yaros was not informed that RichMark was receiving compensation from PCCG. (Tr. 337-38.)
Yaros was not provided with PCCG's Form S-3 or any other Commission filings for his review. (Tr. 330, 340; Div. Ex 23.) He had access to the EDGAR system while at RichMark, but did not know how to use it. (Tr. 345.) Yaros was also never informed that RichMark was selling the stock from the Agreement while recommending that its registered representatives buy it for customers. (Tr. 341.)
b) Albert Carazolez.
Albert Carazolez (Carazolez) was employed as a registered representative at RichMark from June to August 1998. He has had his Series 7, Series 55, and Series 63 licenses for nine years, and is currently working on his Series 24. (Tr. 351.) Monello was his supervisor. (Tr. 355.) Initially, California would not license Carazolez because of his discipline history and RichMark had to supervise all his activity, including stock recommendations. (Tr. 373.)
Monello provided lists of investors for Carazolez to call and recommend PCCG stock. If Carazolez sold stock other than PCCG, Monello would recommend that the customer also buy PCCG. (Tr. 360.) RichMark provided Carazolez with a corporate profile of PCCG and RichMark brochures to mail to customers, especially those opening new accounts, which described RichMark and its services. (Tr. 356-57, 368; Div. Exs. 5, 24.)
Carazolez testified that Monello held daily meetings and gave the registered representatives information to "talk up the PCCG stock." Monello was encouraged about how the price and earnings per share would increase. He predicted that earnings per share would reach $.63 or $.67 cents. Carazolez was told that PCCG was a good investment at $5 to $7 per share, with "talk" that it would go to $10 to $12 per share. Carazolez repeated the information he received about the stock to his customers. (Tr. 359-61.)
Carazolez testified that if he attempted to execute sell orders of PCCG, Monello would suggest that he find another customer to purchase the stock or not go through with the order. Monello also suggested that he attempt to sell more PCCG stock to the customer. (Tr. 367.)
Other than the corporate profile, Carazolez never received specific instructions or anything written to disclose to his customers. He was not aware of any relationship between RichMark and PCCG. After three or four weeks of selling PCCG stock, Carazolez learned about the Agreement between RichMark and PCCG and that RichMark was receiving stock from PCCG. He was never informed that RichMark was selling the stock it received as compensation from the Agreement. (Tr. 361-65, 378-79, 383) Carazolez believes he sold PCCG stock to approximately twenty customers, but probably would not have if he had known RichMark was selling shares received as compensation. (Tr. 357, 366.)
c) Harry Grey.
Harry Grey (Grey) has his Series 7 and Series 63 licenses, and has been in the brokerage industry since 1985. (Tr. 492.) He was employed as a registered representative at RichMark's La Jolla office from May 1998 until February 1999. At various times, Lundgren, Wiegand, and Monello were his direct supervisors. (Tr. 492-93.)
California authorities did not want to license Grey without "heightened supervision" because he traded in Missouri before being licensed. He also engaged in unauthorized trading, churned accounts, misrepresented the value of securities, failed to disclose recommended securities that were speculative, purchased unsuitable securities, and misrepresented his position. Missouri authorities had previously imposed a cease-and-desist order, and suspended him for thirty days. Even with this disciplinary history, RichMark thought that he was qualified to do the work and hired him. (Tr. 515-517.)
Monello and the supervisors introduced Grey to PCCG stock when he joined RichMark. He was provided with a PCCG corporate profile and statements to make when talking to customers. (Tr. 494-96; Div. Ex. 5). He was also provided with RichMark brochures that he sent out as an introduction to customers and individuals opening new accounts. (Tr. 509.) Grey learned from Monello that RichMark had a business relationship with PCCG. He only told his customers that RichMark was the investment banker for PCCG, because he had no other information. (Tr. 501-03, 513-14.)
In general, all customers were encouraged to purchase PCCG stock. (Tr. 495.) The registered representatives would have meetings with Monello in which he would "talk up" the stock and pressure the registered representatives to sell it. Specifically, Monello told the registered representatives to get customers to purchase the stock because it would reach $15 per share. Other stock purchases were frowned upon, and Monello would question purchase orders that did not include PCCG. (Tr. 498-99.)
Monello told Grey that if he received orders from customers to sell their PCCG stock, he should find another customer willing to buy the shares rather than sell them into the market. White would also question whether Grey should really sell the stock for the customer, claiming that the market could not handle a sell-off of PCCG stock. (Tr. 507-08.)
In November, after he had sold PCCG to customers, Grey learned that RichMark was selling its PCCG shares on the market. Grey assumed that RichMark was selling into the market since Monello was using warrants as an incentive for the registered representatives and because the volume of the stock fluctuated. (Tr. 505-07.) He did not confront Monello or state his assumptions to his customers. (Tr. 512.) He would not have recommended PCCG stock, if he had known RichMark was selling its shares at the same time. (Tr. 507.) Grey believes he sold 30,000 to 35,000 shares of PCCG stock to approximately eight customers. (Tr. 495.) Although Grey does not recall selling PCCG after realizing that RichMark was selling it, there are confirmations with his name on them in December 1998 and January 1999. (Tr. 511, 526.)
d) Todd Matthew Pitcher.
Todd Matthew Pitcher (Pitcher) obtained his Series 7 and Series 63 licenses in 1997. He was employed at RichMark from early 1998 to February or March 1999. He was a registered representative under the direct supervision of Lundgren. When Lundgren left, Wiegand supervised him. (Tr. 386-88.)
Monello, Lundgren, and the other supervisors introduced Pitcher to PCCG stock and Monello specifically encouraged him to have customers purchase it. The PCCG corporate profile was provided along with other information from a market guide. Pitcher was encouraged to pass this information to prospects and to cold call customers. To facilitate cold calling, he was provided with a list of current shareholders in PCCG and other leads. (Tr. 389-93.) Prospective customers would be sent an introduction letter and a RichMark brochure. (Tr. 402-03; Div. Ex. 24.)
Monello conducted weekly meetings for the registered representatives to learn about PCCG and to encourage the sale of its stock. (Tr. 394.) The registered representatives also learned about PCCG through conference calls with PCCG and Coffin. Pitcher learned from these meetings that RichMark had a contractual relationship with PCCG. (Tr. 391, 395.) He told customers that he saw a story on CNBC about PCCG and RichMark. (Tr. 411.) Pitcher tried to include as much information as he could when trying to sell PCCG to a customer. (Tr. 395-96.)
When entering purchasing orders of other stock, Monello encouraged the purchase of PCCG. (Tr. 392.) He was not very sympathetic to sell orders. Monello would discourage the sale of the stock by the customer, but never explicitly instructed Pitcher not to take sell orders. (Tr. 401-02.)
When Pitcher began selling PCCG, it was approximately $3 per share. (Tr. 392.) When it reached $7 per share, Pitcher questioned whether they should continue to sell it. (Tr. 393, 405.) He believed that since the stock rose over one hundred percent in a couple of months, it could easily decline that rapidly. (Tr. 405.) In general, the talk was that PCCG would continue to have an upside. (Tr. 397.) Monello believed that customers should continue to purchase the stock. He suggested that the stock had plenty of upside and not to back away. (Tr. 393.) Monello predicted that the market price would go into the teens. (Tr. 397.)
In his conversations with customers, Pitcher used the PCCG/RichMark relationship as a selling point, but he did not go into any specific terms of the Agreement or provide a summary of the information. Accordingly, customers were not informed of the type and extent of compensation RichMark was receiving from PCCG or the performance options if prices and volume level reached a certain benchmark. He never disclosed the possible additional compensation or told customers to review Commission filings, because he was not aware of their existence. (Tr. 390-91, 395, 398-400; Div. Ex. 23.)
He believes he sold PCCG stock to fifteen to twenty customers. (Tr. 389.) While selling the stock, Pitcher was not aware that RichMark was selling the stock it had received as compensation. If he had known, his decision to sell would more likely have changed although he still believed that the stock was an appropriate investment. (Tr. 400-01, 404.)
5. The Testifying Customers.
a) Betty M. Kureca.
Betty M. Kureca (Kucera) of Mount Prospect, Illinois, became a customer of RichMark in July 1998. (531, 534.) Her registered representative, Troy Peters (Peters), recommended PCCG as a very safe investment and suggested Kureca purchase 1,000 shares. (Tr. 535; Div. Exs. 31, 32.) In November 1998, she sold the stock for a profit of approximately $2,000. (Tr. 541; Div. Ex. 32.) She was never told about any relationship between RichMark and PCCG, or about the Agreement or its terms. Nor was she informed that RichMark was selling PCCG from its own account. (Tr. 536-38.)
b) Marty Lee Halverson.
Marty Lee Halverson (Halverson), of Diamond Bar, California, retired in 1996. In April 1998 she was cold called by Pitcher and she opened an account at RichMark. (Tr. 545-46.) Pitcher recommended PCCG stock. Halverson recalls that Pitcher told her that it was a technology stock in a company that he dealt with all the time. (Tr. 548-49.) Because this was her first purchase of stock, she relied on Pitcher's judgment and purchased 500 shares of PCCG. (Tr. 553, 564-65; Div. Ex. 35.) Successive purchases were made thereafter, although Halverson cannot recall that Pitcher called and received her authorization. (Tr. 559-60, 563-64; Div. Ex. 35.) She recalls selling the PCCG shares but does not recall the amount of each sale. (Tr. 558, 561; Div. Ex. 35.) Halverson closed the account in August or September when Pitcher left RichMark and he subsequently sold the rest of her stock. She made money on all of her trades. (Tr. 547, 576.)
Halverson testified that Pitcher never mentioned a relationship between RichMark and PCCG, or about the Agreement or its terms. (Tr. 555-56, 574.) Nor did Pitcher discuss with her that RichMark was selling PCCG stock from its own account. (Tr. 556-57.) She would have liked to have known about any relationship between RichMark and PCCG if there was one at the time of the transaction. (Tr. 565.)
Halverson believes she probably received the confirmations, but she never read the back of them (Tr. 550-51, 575-76; Resp. Ex. 28.) She also does not recall seeing "RichMark consults for PCCG" on the confirmations. (Tr. 562, 564; Div. Ex. 35.)
Just prior to Pitcher leaving RichMark, Halverson inferred from their conversations that there was some type of underlying relationship between RichMark and PCCG because during the last purchase Pitcher made for her, he indicated that he did not want to sell her the stock at $7 per share, but RichMark was making him do it. (Tr. 567-68, 572.)
c) Alejandro Penaloza.
Alejandro Penaloza (Penaloza) owns a retail business and lives in Wasco, California. He opened his RichMark account on April 3, 1998, and closed it on May 20, 1999. (Tr. 629-32; Div. Ex. 34.) He bought 2,200 shares of PCCG on May 12, 1998, and 1,300 shares on July 8, 1998, through his registered representative, David Montesano. (Tr. 637, 640; Div. Ex. 34).
Penaloza does not recall anyone disclosing that there was a relationship between RichMark and PCCG or about the Agreement, or any registered representative incentives. Nor was he told that RichMark was selling PCCG stock while recommending it to him. (Tr. 638-39, 641-42.)
When Penaloza attempted to sell his shares the first time, he was persuaded to buy 1,300 additional shares. (Tr. 643; Div. Ex. 34.) Three or four months later, when he again tried to sell he was told not to, and when he tried to talk to a registered representatives, he was told that they were busy. (Tr. 644.) The third time he tried to sell the PCCG shares, another registered representative, Bill Wellsome (Wellsome), argued with him but finally agreed to sell all the shares. However, Penaloza's confirmation indicated that only 1,000 shares were sold. Wellsome told him that he did not think it was a good idea to sell all the shares, so he only sold 1,000. Penaloza then called Wiegand, who was no longer at RichMark. Thereafter, Wiegand sent him the appropriate forms to transfer the stock and it was sold. (Tr. 647.)
Penaloza does not remember the printed material on the back of the confirmations or recall reading the information on who to call if he had any questions about the confirmation. He just paid attention to the number of shares and the price. If he did see the back of the confirmation, it did not mean anything to him. (Tr. 649, 652-54.)
d) Wayne Earl Dahl.
Wayne Earl Dahl (Dahl) of Panama City Beach, Florida, is a chiropractor with clinics in Minneapolis, Minnesota. He opened an account with RichMark in March 1998, and closed it in February 1999. (Tr. 655-57; Div. Ex. 38.) Peters recommended that he purchase PCCG stock. (Tr. 658-59.) Dahl vaguely remembers Peters stating that PCCG's net sales had doubled, that gross profits were up, and that good things were happening with the company. (Tr. 672-73.) Dahl purchased 3,000 shares on August 12, 3,000 shares on August 13, and 2,500 shares on December 18, 1998. He sold 3,000 PCCG shares each on December 15 and 31, 1998. (Tr. 659, 662; Div. Exs. 37, 38.)
Peters, the only registered representative to whom Dahl spoke, did not mention any relationship between PCCG and RichMark or speak of an Agreement or its details. Peters did not indicate that registered representatives might receive additional compensation for selling PCCG shares. Furthermore, he did not state that RichMark was selling PCCG shares while recommending that Dahl purchase PCCG shares. (Tr. 660-61.)
Dahl had other brokerage accounts over the past ten years. (Tr. 670.) He assumed that the information he was provided was "pure" and not motivated by any outside sources such as the company forcing the registered representative to "push" a stock. Information concerning an investment banking relationship would be important investment information. (Tr. 661-62.) However, Dahl stated that when he received the confirmations, he did not read the back page and does not recall seeing the legend on the front. (Tr. 663, 670.) Had he read the legend he would have only understood that "consulting" was taking place but does not believe that he would have understood the type of advice, why it would be given, or what it had to do with his investment. He spoke with his registered representative on a daily basis and expected to be told everything he needed to know. (Tr. 666.)
e) Jack E. Mitchell.
Jack E. Mitchell (Mitchell) resides in Riverside, California. He retired in September 1998. (Tr. 675, 681-82.) In July 1998, Mitchell opened an account at RichMark when Carazolez cold called him. He bought 200 shares of PCCG on July 28, 1998, and sold them on December 4, 1998. Mitchell does not recall any discussion concerning the relationship between RichMark and PCCG. (Tr. 676-77; Div. Exs. 25, 26.)
f) Deborah Kays.
Deborah Kays (Kays) resides in San Diego, California, and owns a temporary staffing company. She was cold called by Yaros and became a customer of RichMark in July 1998. At that time she purchased 100 shares of PCCG, but she does not recall Yaros informing her of any relationship between PCCG and RichMark or the Agreement. (Tr. 683-64, Div. Exs. 29, 30.) She does not recall being informed that RichMark was selling its own PCCG stock while recommending that she purchase PCCG stock. (Tr. 686-87.)
She testified that Yaros compared the PCCG stock to another stock, GeoWorks, in making his sales pitch. However, the records reflect that she purchased GeoWorks in January 1999, months after her PCCG purchase. (Tr. 684-85, 690-91.)
g) Ali Ebadat.
Ali Ebadat (Ebadat) of San Diego, California, is an insurance broker. (Tr. 693.) He opened an account at RichMark and purchased 500 shares of PCCG in August 1998. (Tr. 694, Div. Ex. 27, 28.) His registered representative, Wellsome, recommended the purchase to him. (Tr. 694.)
Ebadat does not recall any conversation concerning any relationship between RichMark and PCCG or an Agreement. He does not recall Wellsome describing any additional compensation to registered representatives, or that RichMark was selling its PCCG stock while recommending that he purchase it. He was never referred to any Commission filings or saw any news articles. (Tr. 695-97.)
When Ebadat received his confirmation he focused on the number of shares and the price per share, but did look on the back of the confirmation. (Tr. 698, 701.) He does not recall seeing the trailer "RichMark consults for PCCG" when he got the confirmation. (Tr. 698; Div. Ex. 27.) He does recall seeing the trailer on his account statement, but it did not mean anything to him. (Tr. 699.) He acknowledged that a consultant was someone who gave advice to someone else, but he did not know that RichMark was compensated by PCCG. (Tr. 701.)
h) William Rapaglia.
William Rapaglia (Rapaglia) resides in Durham, North Carolina. He does consulting and is vice-president of Nevada Mining Company. Rapaglia was a customer of Lundgren and became a customer of RichMark when Lundgren became employed there. Rapaglia had a personal account and a partnership account, Cristobal Family Limited Partnership (Cristobal), with RichMark. Lundgren recommended PCCG to him and he purchased 5,000 shares on April 21, 1998, and 5,000 shares on May 6, 1998, for the Cristobal account (Tr. 579-82; Div Ex. 39.)
Prior to these purchases, he did not speak to anyone other than Lundgren. Lundgren told Rapaglia that PCCG was a technology company; it had just been on CNN and had potential to be a "great buy." He was told that PCCG had the same advertising company, Coffin, as another stock that had run up to $50 per share. (Tr. 582-83, 599.) After purchasing the stock, Rapaglia obtained information from Sabnani. (Tr. 584.)
Rapaglia was not provided with information on any relationship between RichMark and PCCG. He was not informed that there was an Agreement, nor that PCCG was providing RichMark with cash and stock compensation, or that registered representatives were offered additional compensation to sell the stock. Rapaglia was not directed to a Commission filing, news releases, or Wall Street Journal article. (Tr. 583-85, 600-01.) At the time Rapaglia received the confirmations, he did not notice the trailer "RichMark consults for PCCG" on the confirmations or account statements. (Tr. 596-97, 625-26, Div. Ex. 39.)
Several months after his purchases, he learned that RichMark was selling PCCG stock when Peters mentioned that RichMark had "got[ten] out of our[] [shares] already." Rapaglia spoke with Don Johnson, the chief financial officer of PCCG, because he was concerned about the stock's low price. Johnson acknowledged that RichMark had an Agreement with PCCG, but PCCG was not happy with RichMark's performance. (Tr. 586-87.) Rapaglia questioned Lundgren, who stated that there was an investment banker relationship, but he did not know what that meant. Rapaglia did not ask him to elaborate. (Tr. 604-609.)
Rapaglia also had several discussions about the decline in the stock price with White and Monello. White and Monello said that the stock would go up, but it was still declining in late August to early September. Rapaglia stated that it might be because RichMark was selling its own PCCG stock into a thinly traded market. White commented that they had a right to sell their stock, but Rapaglia said that he did not think that they did. (Tr. 588-90.)
i) Joel Holt.
Joel Holt (Holt) testified on behalf of Respondents. He is the president of Keystone Laboratories in Asheville, North Carolina, a forensic drug-testing laboratory. Holt met White about eight years ago and he and his wife opened accounts at RichMark with White. (Tr. 1046-47.)
White called Holt in September 1998, to tell him about PCCG stock. Holt thought that he could make some money on the stock. At the time, White told him that he was going to receive options for the investment banking work. Holt, an active investor for about forty years, understood that RichMark was being compensated for the investment banking work. He does not recall White telling him that RichMark was selling its stock, but he knew that that kind of thing occurred. He also thought that the back of the confirmation says that RichMark has a right to sell it. Holt would have been surprised if White had not told him about the relationship with PCCG. He believed that if White were investing in it, the stock would probably "work out." (Tr. 1047-49, 1052-53.)
E. The Experts.
1. Frederick W. Smolen.
Frederick W. Smolen (Smolen) testified as an expert for Respondents about the business practices involving sales and disclosures of RichMark and FSW and the industry.23 (Tr. 942.)
Smolen examined PCCG's public filings and its financial condition. He prepared a chart showing its three-year trend of sales, gross profits, and operating income. (Tr. 953; Resp. Ex. 21.) He collected the information from an audited Form 10-K, the annual report filed with the Commission. The chart indicates that PCCG, from 1996 to 1998, was growing rapidly, with sales and gross profits doubling and income quadrupling. (Tr. 954.) A second chart compares PCCG's performance for six months ended March 31, 1997, and six months ended March 31, 1998, and indicates that sales, gross profits, income, and net income all increased. (Resp. Ex. 22.)
Smolen also conducted a survey on how brokerage houses disclose investment banking agreements to their customers. (Tr. 956-60.) In Washington, D.C., he assembled information dealing with recommendations that are made by various institutional brokerage firms, as well as analysts and smaller broker-dealers. Smolen also visited four brokerage or securities service organizations in Fort Worth, Texas, to learn about the type of information they have with respect to recommendations and corporate profiles. They were First Union Securities, Charles Schwab, T.D. Waterhouse, and Signal Securities. (Tr. 957.)
Smolen described the results of his survey as follows:
Most of the disclosures related to investment banking agreements, as well as business relationships, are included in the small fine print at the end of most of the corporate profiles or recommendations. And the small fine print at least, in part, states that the organization, its officers, directors and employees may or may not have a position in the securities, may or may not be buying and selling the securities inconsistent with the recommendation, and they may or may not have a financial and investment banking relationship with [ ] any organization that is mentioned in the particular recommendation.
(Tr. 958.)
Based on his review of the materials and thirty years of experience with financial institutions, Smolen opined that investment banking relationships are disclosed "generically." This means using general phrasing that the representatives or the institutions may or may not have positions or financing agreements, and may take positions that could be contrary to any recommendations. (Tr. 960-61.) Generic disclosures are used because it is cost prohibitive and a practical impossibility to keep printed materials current on a daily basis. (Tr. 958-59.)
Furthermore, Smolen opined that most disclosures, if not all, have fine print that directs persons interested in additional information to contact the broker or clearinghouse. (Tr. 960.) He testified that in a practical sense, it is too difficult to disclose all relationships to customers through printed materials, but it is quite easy for registered representatives to provide this information orally. (Tr. 998-99.) His survey was not a statistical analysis; but he has a ninety-five percent confidence level in the results. (Tr. 951, 961, 995-96.) Smolen did not have the documents he used in creating his survey available.24 (Tr. 998.)
Smolen analyzed the volume of PCCG stock traded on a daily basis. (Tr. 984; Resp. Ex. 9) In January and February 1998, the stock traded on only two days and three days respectively. (Tr. 984.) Between January 13 and February 10, 1998, and February 13 and March 2, 1998, there was no trading in PCCG stock. There was also no trading in PCCG stock on March 9, 1998; however, as of March 10, 1998, the day the Agreement was signed, PCCG stock traded almost every day for the rest of the first quarter and all of the second, third, and fourth quarters of the fiscal year. (Tr. 985-86.)
Smolen also conducted his own disgorgement calculations. (Resp. Ex. 27.) Based on the time period for the alleged violations, he used the difference between the June 30, 1998, closing price and each of RichMark's PCCG sales during July and August to calculate any illegal gains. His opinion is that RichMark should disgorge $861 if a violation is found. Smolen used the base price as of June 30, 1998, because there is no allegation of any illegal activity on or before that date. (Tr. 963-64, 966, 1001.)
Smolen believes that it is inappropriate to base disgorgement on commissions received by RichMark for selling PCCG stock to customers.25 In an alleged scheme that manipulates the stock to a higher price, the ill-gotten gain is the inflated price minus the price at which the stock would have sold without the manipulation. (Tr. 965-66.)
Smolen reviewed the Division's proposed disgorgement calculations. The Division's disgorgement chart indicates a $19 fee for all the transactions except one, which was $32. (Tr. 969-70; Div. Ex. 18.) Smolen believes that the Division's identification of a $19 commission fee does not comport with the actual confirmation tickets that denote a $32 fee. He determined that there is a $27 commission fee and a $5 mailing fee charged to RichMark by FSW for each transaction, for a total of $32 in fees per trade. (Tr. 968.) Smolen concluded that the $19 fees should be increased to $32, which decreases the disgorgement amount sought by the Division by $13 on 404 trades, or $5,252. (Tr. 970-72, 1001.)
2. Robert W. Lowry.
The Division called Robert W. Lowry (Lowry) as an expert witness on rebuttal.26 In preparation for his testimony, Lowry reviewed transcripts of the hearing, investigative testimony, the corporate profile, the trading records of RichMark and other broker-dealers who traded PCCG; the NASD documentation of PCCG trading activity; the clearing agreement between FSW and RichMark, the Agreement between RichMark and PCCG and PCCG's Form S-3 registration. (Tr. 1193-94.)
In the context of industry standards and regulatory requirements, Lowry opined that RichMark's activities concerning disclosure of the Agreement were "not adequate." His opinion is that Smolen's survey is too limited and is not sufficiently tailored to answer the questions presented in this proceeding. The firms surveyed by Smolen were very large broker-dealers with national exposure. None were the size of RichMark, nor did any conduct the type of business that RichMark conducted, which was primarily selling low priced OTC stocks. (Tr. 1195-97.)
Lowry believes that the beginning point is "full disclosure," which means providing an investor with sufficient information to make an informed decision, whether or not to buy or sell a stock. Lowry opined that generic disclosure should be only a part of full disclosure. Such disclosures on confirmations are designed to inform customers that, as a business activity, the broker-dealer may be buying and selling the same stock that it is recommending. If specificity as to the amount of stock the broker-dealer traded is demanded, the broker-dealer would have to issue reports on a daily basis. (Tr. 1197-99.)
Lowry testified that disclosure is a case-by-case determination, based on what information is available and how the information is disseminated. He outlined several factors the industry considers in determining whether disclosure is adequate:
(Tr. 1196-2001.)
In Lowry's opinion, the Agreement between RichMark and PCCG was "very significant" because it provided one-third of RichMark's revenue over approximately a two-year period. (Tr. 1201.) In reviewing the trading volume and price history, Lowry believes that RichMark's activities of promoting PCCG stock did have a significant impact on the market. (Tr. 1211-13.)
Lowry believed that the notation "RichMark consults for PCCG" does not disclose the conflict of interest between RichMark and its customers that the Agreement created. It does not provide any information about the services that RichMark performs for PCCG. It does not say whether RichMark is being compensated for its consulting services; and it does not alert the customer that there is any reason to question the registered representative's motivation for promoting PCCG stock. (Tr. 1213-14.)
Lowry opined that statement number 12 on the back of the confirmation, "For a full explanation, contact your registered representative" is a disclosure to inform the customer of FSW's activities. It is a FSW disclosure to customers that, outside the contractual relationship it has with RichMark, FSW may have adverse interest concerning the stock being transacted. Furthermore, Lowry opined that the introducing broker is not a representative of the clearing broker unless specifically described as such in their clearing agreement. Therefore, RichMark is not a representative of FSW because the clearing agreement does not recognize it as such. (Tr. 1219-20.)
Lowry agreed that it is a judgment call whether the confirmations provide adequate disclosure for both FSW and RichMark. Although the back of the confirmation is generated by FSW, Lowry opined that RichMark had the responsibility to make sure the disclosures are adequate. If the confirmation generated by FSW is not adequate, it is RichMark's responsibility to provide an appropriate vehicle for RichMark's disclosures, not FSW. (Tr. 1208-09.)
Lowry also believed that disclosures made on a confirmation received by customers after the sale of the stock are not made in a timely manner. (Tr. 1215.) Furthermore, Lowry opined that even if one considers generic disclosure on a confirmation adequate, in RichMark's case, the registered representatives did not have any additional information to provide if customers had any concerns. (Tr. 1205.)
Lowry also stressed that the confirmation is only a part of the full disclosure regime. He believes that the most important disclosures should come at the point of sale. (Tr. 1210.) Lowry opined that RichMark should have first disclosed the Agreement and the fact that RichMark was selling its own shares of PCCG stock, when the registered representatives contacted the customers. (Tr. 1248-49.)
Lowry testified that a corporate profile is designed to provide information to registered representatives in order to promote and sell the corporation's stock, but it is not meant for the actual investor. Lowry opined that it was inappropriate for RichMark to disseminate corporate profiles to its customers. He further opined that it would have been misleading for RichMark to make disclosures on the corporate profile, because it did not prepare it. Therefore, Lowry would not expect RichMark to rely on the corporate profile to meet its disclosure requirements. (Tr. 1221-23.)
III. CONCLUSIONS OF LAW.
By motion filed October 5, 2000, Respondents moved to limit the Division's proof of alleged violative conduct to the period set out in the OIP, which alleges that such conduct occurred "from approximately July 1998 through at least August 1998."
In support of its motion, Respondents state that at a meeting with Division counsel on September 29, 2000, approximately three weeks before the hearing set on October 16, 2000, the Division informed Respondents that it intended to present evidence of alleged illegal conduct from March to September 1998. Respondents object, noting that in August 1999 they moved for a more definite statement of the allegations, at which time the Division opposed the motion on the grounds that, inter alia, the time frame set out in the OIP was specific as to the time and the nature of the conduct. The Division further responded that the OIP "specifies the time period during which the sales at issue took place." Based upon these representations, the Motion for a More Definite Statement was denied.
Respondents contend that it is prejudicial to allow the Division to offer evidence in support of the allegations substantially outside the approximate time set in the OIP, because such evidence, if credited, could substantially increase any disgorgement and/or suspension if a violation is found. Respondents point out that all of the evidence for the expanded period was available to the Division before the OIP was filed. However, they do not object to the admissibility of evidence pertaining to the expanded period as relevant background information. The Division argues that to have evidence considered for the period March through September is within the scope of the violations alleged in the OIP. The Division also argues that the Respondents have not shown that admitting evidence in this expanded period would prejudice them.
In its prehearing and posthearing briefs, dated October 5, 2000, and March 9, 2001, the Division suggests that RichMark's "misconduct" continued after September 17, 1998, but only seeks disgorgement to that date because it is the date of the last sale of PCCG shares from the RMC Holdings account. (Div PreH. Br. at 36-37; Div. PostH. Br. at 97.) Therefore, the time frame set out in the OIP for the alleged illegal conduct is virtually identical to the period during which most of the PCCG shares were sold from the RMC Holdings account.
At a prehearing conference on October 6, 2000, I ruled that I would admit the evidence and rule on the Respondents' Motion in Limine at the conclusion of the hearing. I find that the evidence for the entire period is relevant as background information and to evaluate the positions of the parties. However, when the Division's Response to the Motion for a More Definite Statement is considered along with its position to associate the period of disgorgement with most of the RMC Holdings sales, the Division's case must fairly be limited to the time frame set out originally in the OIP. Therefore, the Respondents' Motion in Limine is GRANTED.
The OIP alleges that Respondents violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, collectively known as the antifraud provisions, because they caused a corporate profile to be circulated to RichMark customers and broker-dealers that failed to disclose RichMark's Agreement with PCCG and that RichMark received compensation therefrom while encouraging its customers to purchase PCCG stock. The Division also alleges that, in furtherance of the scheme, Respondents failed to disclose that RichMark was selling its position in PCCG while encouraging its customers to purchase PCCG stock. (OIP ¶¶ B1-B3.)
Section 17(a) of the Securities Act prohibits using the mails or instruments of interstate commerce in the offer or sale of securities to employ any device, scheme, or artifice to defraud; use false statements or omissions of material fact to obtain money or property; or engage in any transaction, practice, or course of business which is or would operate as a fraud or deceit upon a purchaser.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, make it unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security to make an untrue statement or omission of material fact; use any device, scheme, or artifice to defraud; or engage in any act practice or course of business which operates or would operate as a fraud or deceit upon any person.
For liability to attach under the antifraud provisions, omissions or misstatements must be material. Materiality is a mixed question of law and fact, dependent on the circumstances at the time of the alleged misstatement.27 See Ganino v. Citizens Utils. Co., 228 F.3d 154, 162, 165 (2d Cir. 2000). The test for materiality is whether there is a substantial likelihood that a reasonable investor would consider the information important to the investment decision, and would view it as having significantly altered the total mix of available information. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992).
When a person or entity has information that another is entitled to know because of a fiduciary or similar relationship of trust and confidence, a duty to speak arises. See Chiarella v. United Sates, 445 U.S. 222, 228 (1980); Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972). A broker is considered to be a fiduciary of his customer, owing the customer a duty to disclose material information. See Magnum Corp. v. Lehman Bros. Kuhn Loeb, Inc., 794 F.2d 198, 200 (5th Cir. 1986); Richard H. Morrow, 59 SEC Docket 2825, 2831 (1995).
Scienter is a required element under Section 17(a)(1) of the Securities Act, Section 10(b), and Rule 10b-5 of the Exchange Act, but not Sections 17(a)(2) and 17(a)(3) of the Securities Act.28 See Aaron v. SEC, 446 U.S. 680, 697 (1980). The Supreme Court has defined scienter as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The scienter requirement is also satisfied by showing that the respondent acted recklessly, defined as "an extreme departure from the standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992) (quoting Sunstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)); see also Hollinger v. Tital Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990).
Upon signing the Agreement with PCCG on March 10, 1998, White and Monello encouraged RichMark registered representatives to cold call customers to promote and sell PCCG stock. The registered representatives testified that Monello held office meetings to encourage these calls. Some registered representatives were supplied with calling lists while others had to generate their own. Furthermore, White and Monello offered incentives to the registered representatives for "pushing" PCCG stock. Because they directed RichMark's registered representatives to contact customers to solicit purchases of PCCG stock, Respondents placed themselves in a fiduciary relationship and owed the potential customer a duty to make complete disclosure of material information pertaining to any investment decisions.
Coffin prepared the corporate profile at issue. It does not disclose the Agreement between PCCG and RichMark. It was intended only for brokers but was also disseminated by RichMark to its customers by their registered representatives and with their June 1998 statements. It advised anyone who wanted information about the company to contact PCCG or Coffin. (Div. Exs. 5, 11; Jt. Ex.1 at 4.) Monello believed that the corporate profile did not have to disclose the Agreement because, other than Firestone making a few grammatical corrections, RichMark had no involvement in its creation (Tr. 55-57, 207.) However, I find that the failure to disclose the Agreement in or with the corporate profile sent to RichMark customers omitted information that was clearly material because the customer was prevented from knowing that any recommendation to purchase PCCG shares might be based upon RichMark's financial interest created by the Agreement rather than the investment value of the security. See SEC v. Hasho, 784 F. Supp. 1059, 1109-10 (S.D.N.Y. 1992) (citing Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970)). I further find that White and Monello caused the corporate profile to be distributed to RichMark's customers.
The evidence establishes that the Agreement was disclosed in April to PCCG shareholders and the financial press. There is no evidence that Respondents directed that it not be disclosed in the corporate profile. Respondents contend that they made adequate disclosure of the relationship with PCCG through the trailer on the confirmations as well as other disclosures in the media. For the trailer, they chose the particular wording, "RichMark consults for PCCG" because of space limitations and because their counsel advised them that the details of the Agreement with PCCG did not have to be disclosed. Respondents further contend that the "boilerplate" on the back of the confirmation puts the customer on notice that RichMark, as broker, may be buying or selling from its own account. These assertions are without merit. The trailer, which was not on many of the confirmations due to mistakes at either RichMark or FSW, gives no meaningful information about the PCCG/RichMark relationship and the back of the confirmation refers to the activities of the clearing firm FSW, not RichMark. Finally, Respondents' reliance on the Form S-3 filing is misplaced. The filing of a required form with the Commission does not, by itself, place the document into the "total mix" of information for investors, and there is no evidence to suggest that it was otherwise disseminated. See United Paperworkers Int'l Union v. Int'l Paper Co., 985 F.2d 1190, 1199 (2d Cir. 1993). I conclude that the Agreement should have been disclosed in or with the corporate profile sent to RichMark customers, but the earlier efforts at disclosure lead me to further conclude that this failure was negligent, not reckless.
White and Monello testified that it was important for customers to know about the PCCG/RichMark relationship and they instructed their registered representatives to insure that the disclosure occurred. Monello was the registered compliance officer and he testified that he monitored registered representatives to insure that the disclosure occurred. I do not credit this testimony. The supervisors, Wiegand and Lundgren, testified to having little information other than some general knowledge that the Agreement existed. Wiegand, as the La Jolla office branch manager in July 1998, created a pitch sheet that was shown to Monello, who did not make any changes to it. The pitch sheet did not include disclosure of the Agreement or that White and Monello were selling PCCG shares. Likewise, the registered representatives and testifying customers were not fully informed about the investment banking relationship or the selling of PCCG shares from the RMC Holdings account by White and Monello. Further, the testimony of the registered representatives establishes that sales by customers of their PCCG shares were discouraged. Instead, they were told to encourage the customers to buy more.
The evidence establishes that White and Monello had an economic motive to aggressively promote the sale of PCCG stock in order to increase the market price and thereby the value of the PCCG shares received as compensation under the Agreement. As soon as this effort began the market price of PCCG moved quickly from $3 to $7 per share. During the period of July 9 to August 13, 1998, White and Monello sold 24,200 PCCG shares from the RMC Holdings account for $144,498. In addition they sold an additional 10,300 shares for $40,412 through September 17, 1998, which date I find to be within the scope of the OIP. These sales constituted a course of conduct that created a conflict of interest that had to be disclosed to customers.29
In order to maximize the value of these shares, in light of the thinly traded market, it was necessary for Respondents to not disclose the fact that they were selling PCCG shares against their buy recommendation to customers. This is further evidenced through Monello and White discouraging current customers from selling their PCCG shares into the market and the delay in selling those shares. Without RichMark creating and sustaining a market in the thinly traded PCCG stock by non-disclosure, the value of RichMark's PCCG shares would have plummeted. Respondents concerted efforts establish an intent to deceive and defraud customers.
Regardless of what was disseminated to the public several months earlier by Coffin or disclosed in the media about the PCCG/RichMark relationship, it was not information that was in the total mix of information available to investors when the RMC Holdings account shares were sold. See, e.g., Jaroslawicz v. Engelhard Corp. 704 F. Supp. 1296, 1306 (D. N.J. 1989).
I conclude that Respondents RichMark and White violated Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, by recklessly omitting to disclose the selling of PCCG shares from the RMC Holdings account while encouraging RichMark customers to purchase the same, and violated Section 17(a)(2) and (3) by negligently omitting to disclose the Agreement to RichMark customers.
IV. SANCTIONS.
When the Commission determines administrative sanctions, it considers:
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) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), aff'd on other grounds, 450 U.S. 91 (1981).
The Commission determines sanctions pursuant to a public interest standard. Thus, in addition to issues related to the violator, it "weigh[s] the effect of [its] action or inaction on the welfare of investors as a class and on standards of conduct in the securities business generally." Arthur Lipper Corp., 46 S.E.C. 78, 100 (1975); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). The amount of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. See Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211-12 (1975).
1. Cease and Desist.
Sections 8A of the Securities Act and 21C of the Exchange Act authorize the Commission to issue a cease-and-desist order against a person who "is violating, has violated, or is about to violate" any provision of the Acts or rules thereunder.30 A finding that a respondent has violated the federal securities laws does not necessarily mandate the imposition of such an order. See, e.g., Warran G. Trepp, 70 SEC Docket 2037 (Sept. 24, 1999).
In determining whether a cease-and-desist order is appropriate, the Commission considers the Steadman factors, stated above, as well as the recency of the violation, the degree of harm to investors, and the combination of sanctions against the respondent. See KPMG Peat Marwick LLP, 74 SEC Docket 384, 436 (Jan. 19, 2001), recon. denied, 74 SEC Docket 1351 (Mar. 8, 2001), appeal pending, No. 01-1131 (D.C. Cir.). This is a flexible inquiry, and no one factor is determinative. However, "[a]bsent evidence to the contrary, a finding of [a] violation raises a sufficient risk of future violation." KPMG, 74 SEC Docket at 429-30.
Due to the nature of Respondents' violation, the willful failure to disclose a material conflict of interest, it is appropriate to order that the Respondents cease-and-desist from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. RichMark's business presents Respondent's with the opportunity to commit federal securities law violations in the future. In order to protect RichMark's future customers, a cease-and-desist order will be issued against RichMark and White.
2. Disgorgement.
Section 8A(e) of the Securities Act and Sections 21B(e) and 21C(e) of the Exchange Act authorize disgorgement of ill-gotten gains from RichMark and White. Disgorgement is an equitable remedy that requires a violator to give up wrongfully obtained profits causally related to the proven wrongdoing. See SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-32 (D.C. Cir. 1989). It returns the violator to where he would have been absent the violative activity.
In determining a disgorgement amount, the Division has the burden of proving an amount that reasonably approximates the amount of unjust enrichment. See First City Fin. Corp., 890 F.2d at 1232 ("Although the [Division] bears the ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment . . . the government's showing of [respondents'] actual profits on the tainted transactions at least presumptively satisfied that burden. [Respondents] [are] then obliged clearly to demonstrate that the disgorgement figure was not a reasonable approximation."). "The calculation of those gains, lie within the discretion of the trial court, which `must be given wide latitude in these matters.'" SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996) (quoting SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995)). "Any risk of uncertainty . . . should fall on the wrongdoer whose illegal conduct created that uncertainty." Patel, 61 F.3d at 140; see also First City Fin. Corp., 890 F.2d at 1232.
The Division seeks disgorgement based on the commissions made by RichMark on the transactions of PCCG shares with customers. Because of my decision to grant Respondents' Motion in Limine, discussed above, the commissions from 200 trades executed from the beginning of July through September 17, will be disgorged. The PCCG transactions that occurred in the limited time period were conducted with customers who were not informed of the material conflict of interest.
The commissions received by RichMark on the PCCG transactions total $25,617.86. Although four errors were identified during the hearing, only one comes into play with the methodology described above. A September 16 transaction on Division Exhibit 18 shows a commission of $6,656.25, but the confirmation ticket shows a commission of $656.25. (Div. Ex. 15, transaction number 64008.) For my disgorgement calculation, $656.25 was used.
The Respondents' argument that fees paid to FSW for clearing the trades should be subtracted from the commission amount is unpersuasive. "The deductions for overhead, commissions and other expenses are not warranted. The manner in which [Respondents] chose to spend their misappropriation is irrelevant as to their objection to disgorgement." SEC v. Great Lakes Equities Co., 775 F.Supp. 211, 214-15 & n.22 (E.D. Mich. 1991), aff'd, 12 F.3d 214 (6th Cir. 1993) (unpublished table decision); see also SEC v. Benson, 657 F.Supp. 1122, 1127 (S.D.N.Y. 1987); SEC v. Dimensional Entertainment Co., 493 F.Supp. 1270, 1283 (S.D.N.Y. 1980). The benefit or unjust enrichment of a respondent includes not only what it gets to keep in its pocket after the fraud, but also the value of the other benefits the wrongdoer receives through the scheme. Here, the Respondents argue in essence that they ought to receive free services from FSW for clearing the fraudulent transactions. See, e.g., Laurie Jones Canady, 69 SEC Docket 1468, 1486-87 (Apr. 5, 1999), recon. denied, 70 SEC Docket 905 (Aug. 6, 1999), review denied, 230 F.2d 362 (D.C. Cir. 2000); L.C. Wegard & Co., Inc., 67 SEC Docket 814, 823-24 (May 29, 1998).31
Furthermore, Respondents methodology for disgorgement, which assumes the sale of all PCCG stock out of the RMC Holdings account for the July through September time period at the June 30 market price, will not be considered. The Division has not argued for disgorgement from the profits made by RMC Holdings, who is not a respondent.
The evidence does not establish an amount that reasonably approximates each Respondent's ill-gotten gain; therefore, RichMark and White will be jointly and severally liable to disgorge $25,617.86.
3. Civil Money Penalty.
Section 21B of the Exchange Act authorizes the Commission to impose civil money penalties for willful violations of the Securities Act and Exchange Act or rules thereunder. In considering whether a penalty is in the public interest, the Commission may consider six factors: (1) fraud; (2) harm to others; (3) unjust enrichment; (4) previous violations; (5) deterrence; and (6) such other matters as justice may require. See New Allied Dev. Corp., 52 S.E.C. 1119, 1130 n.33 (1996); First Sec. Transfer Sys., Inc., 52 S.E.C. 392, 395-96 (1995); see also Jay Houston Meadows, 52 S.E.C. at 787-88; Consolidated Inv. Servs., Inc., 52 S.E.C. 582, 590-91 (1996). Civil money penalties in addition to other sanctions may be necessary for the purpose of deterrence. See Section 21B(c)(5) of the Exchange Act.
Second-tier penalties, as the Division requests, are applicable when the violative acts involve fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement. The maximum amount of penalty for each such act or omission is $55,000 for a natural person or $275,000 for any other person.32 See Section 21B(b)(2) of the Exchange Act; see also, Colin S. Diver, The Assessment and Mitigation of Civil Money Penalties by Federal Administrative Agencies, 79 Colum. L. Rev. 1435, 1440-41 (1979).
In light of RichMark and White's willful conduct over at least a two and a half month time period, and their willful disregard in providing material information to their customers, it is in the public interest to impose civil money penalties in the amount of $275,000 against RichMark, and $55,000 against White.
4. Suspension.
Sections 15(b)(6)(A) and 19(h) of the Exchange Act empower the Commission to "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, after notice and opportunity for hearing, that such sanction is in the public interest and such person has, among other things, willfully violated any provisions of the Exchange Act or the rules and regulations thereunder. See Section 15(b)(6)(A).
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. Having been directed by the Act to draw that inference whenever our discretion leads us to consider it appropriate, we must do so if the legislative aim is to be attained.
Arthur Lipper Corp., 46 S.E.C. 78, 101 (1975) (citations omitted).
The Division seeks a suspension of RichMark's registration for a period of ninety days; and a bar against White from association with any broker or dealer for a period of not less than eighteen months. Although there is no evidence of any prior violations by White, who has been in the securities business for over ten years, or RichMark, the disclosure failures over the relevant time period were egregious and committed with an intent to deceive and defraud. Furthermore, Respondents' blatant disregard of a material conflict of interest exploited the relationship of trust between RichMark and their customers.
Accordingly, it is in the public interest to suspend the registration of Richmark for a period of ninety days, and to suspend White from association with any broker or dealer for a period of ninety days.
V. RECORD CERTIFICATION.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. 201.351(b), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on February 11, 2002.
VI. ORDER.
Based on the findings and the conclusions set forth above:
IT IS ORDERED that, pursuant to Sections 8A of the Securities Act and 21C of the Exchange Act, Respondent RichMark Capital Corporation and Respondent Doyle Mark White CEASE AND DESIST from committing or causing any violations or future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
IT IS FUTHER ORDERED that, pursuant to Sections 8A of the Securities Act and 21C of the Exchange Act, Respondent RichMark Capital Corporation and Respondent Doyle Mark White JOINTLY AND SEVERALLY DISGORGE $25,617.86, plus prejudgment interest at the rate established under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), compounded quarterly, pursuant to Rule 600 of the Commission's Rules of Practice, 17 C.F.R. § 201.600. Pursuant to Rule 600(a), prejudgment interest is due from October 1, 1998, through the last day of the month preceding which payment is made; and
IT IS FURTHER ORDERED that, pursuant to Section 21B of the Exchange Act, Respondent RichMark Capital Corporation PAY A CIVIL MONEY PENALTY of $275,000, and Respondent Doyle Mark White PAY A CIVIL MONEY PENALTY of $55,000.
IT IS FURTHER ORDERED that, pursuant to Sections 15(b)(6)(A) and 19(h) of the Exchange Act, the registration of Respondent RichMark Capital Corporation is SUSPENDED for a period of ninety days, and Respondent Doyle Mark White is SUSPENDED from association with any broker or dealer for a period of ninety days.
Payment of disgorgement and penalties shall be made on the first day following the day this Initial Decision becomes final by certified check, U.S. Postal money order, bank cashier's check or bank money order payable to the Securities and Exchange Commission. The check[s] and a cover letter identifying the Respondent[s] and Administrative Proceeding No. 3-9954, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission's Division of Enforcement at the same address.
This Order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this Initial Decision may be filed within 21 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 360(d)(1) within 21 days after service of the Initial Decision upon him, unless the Commission, pursuant to Rule 360(b)(1), 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.
____________________________
White graduated from the University of North Texas in 1981 with a bachelor's degree in business administration and a minor in marketing. He earned his Series 7 license in February 1992 and his Series 63 license in March 1992. (Jt. Ex. 1 at 1.) He was employed as a registered representative at Harris Securities, Inc., from January 1992 to September 1993; Texas Securities, Inc., from September 1993 to November 1993; Americap Financial, Inc., from November 1993 to April 1994; Signal Securities, Inc., from April 1994 to May 1994; Reynolds Kendrick Stratton, Inc., from May 1994 to June 1994; WB. McKee Securities, Inc., from June 1994 to March 1995; Strategic Resource Management, Inc., from March 1995 to August 1997. (Tr. 1083-85; Jt. Ex. 1 at 1-2.) White has no disciplinary history. (Tr. 1086.)
The confirmation also disclosed that FSW made a market in PCCG stock. (Tr. 176-77.)
[RichMark] shall be granted 25,000 shares upon execution with an option to purchase [PCCG]'s unrestricted common stock as follows:
(Tr. 760-62; Div. Ex. 1 at 6; Jt. Ex. 1 at 3.)
Smolen is presently employed by Financial Investigations and Services, Inc., Washington, D.C., a company he founded that provides specialized financial and forensic services. (Tr. 936-37.) Smolen also sits on the ethics committee of the District of Columbia Society of CPAs and is the chairman of the SEC Practice Committee. Smolen has never been licensed or employed as a registered representative, as a supervisor of a registered representative, or as a compliance officer in a brokerage firm. (Tr. 941-43.)
Lowry currently owns his own consulting firm, RL Consulting Services. His company, in which he is the sole employee, consults and appears in litigation, arbitration, civil actions, and criminal cases concerning broker-dealers. This work includes advising broker-dealers on disclosure of business practices. Lowry has previously testified as an expert in federal courts concerning disclosure and broker-dealers. Private companies and the government have used his services. With private firms, he reviews their activities, and makes recommendation for going forward in response to regulators. (Tr. 1188-93.)
Robert G. Mahony
Administrative Law Judge
Footnotes
1 Citations to the transcript of the hearing, to exhibits offered by the Division and Respondents, and to joint exhibits will be noted as "(Tr. __.)," "(Div. Ex. __.)," "(Resp. Ex. __.)," and "(Jt. Ex. __.)," respectively.
2 Monello resides in Irving, Texas. He received his Series 7 and Series 63 licenses in 1987, and his Series 24 license in 1990. He entered the securities industry in 1987. (Tr. 746.)
3 The La Jolla office closed in January or February 2000. (Tr. 789.)
4 White did not take an active roll in managing the day-to-day activities in the La Jolla office. (Tr. 1145.)
5 Monello preferred that all orders be executed through White in the Dallas office. (Tr. 721.) If White was unavailable in the Dallas office and the La Jolla office had a market order, Richard Lundgren, a manager in the La Jolla office, would send the trade order directly to FSW. (Tr. 721.)
6 The confirmation is a pre-printed form except for the specific information of the actual transaction such as the number of shares, the execution price, the introducing firm, and the registered representative. (Tr. 182; Resp. Ex. 28.) The parties represented on the confirmation include: RichMark, the RichMark registered representative, FSW, and the customer. (Tr. 140; Resp. Ex. 28.) Other disclosures on the back of the confirmation include the direction that any questions are to be addressed to the registered representative. (Tr. 182.)
7 Firestone graduated from University of Southern California in 1989 with a bachelor's degree in public administration, and is experienced in investment banking. (Tr. 1017.) White had business dealings with Firestone in the past, and knew Firestone was a competent investment banker. (Tr. 1098.)
8 Firestone was to be paid in cash by RichMark, but instead he was compensated with PCCG stock. (Tr. 1020-21.)
9 This was RichMark's first major investment banking relationship. (Tr. 757-58.)
10 Exhibit "A" provides:
11 Gordon, an attorney licensed in Oklahoma in 1988, graduated from University of Tulsa Law School. He is employed at his own firm, G. David Gordon & Associates, P.C., specializing in mergers and acquisitions and securities law. He has a bachelor's degree in business administration from Baylor University with a major in accounting. (Tr. 1055-56.) Gordon began representing White in 1995. (Tr. 1062.)
12 Monello testified that he and White had "pull[ed] rabbits out of hats before" when money was tight. (Tr. 795.)
13 White personally tried to get PCCG listed on the Philadelphia Stock Exchange. (Tr. 1103.)
14 Although RichMark put Wen in contact with Bill Coffin, Wen and Bill Coffin had previously met and were already in the process of scheduling a meeting when Firestone provided Wen with the referral. (Tr. 52-53, 230-31.)
15 The last page of the corporate profile specifically says, "Readers are advised that this information is intended only for the use of broker-dealers." (Tr. 1139; Div. Ex. 5.)
16 Cold calling is the practice of making unsolicited calls to potential customers. See Barron's Dictionary of Financial and Investment Terms 93 (4th ed. 1995).
17 Monello never told registered representatives to tell customers about the "incentive program" because it never materialized. He did not think he had to disclose any incentive programs until they actually existed. (Tr. 821.)
18 Monello believed that Hawkins was responsible for instructing the registered representatives about the Agreement with PCCG. Monello instructed Hawkins to insure that the disclosure was made, but it was difficult to know how much monitoring Hawkins could do from Dallas. (Tr.808-17.)
19 In an interview with the Commission in October 1998, White stated that Hawkins was in charge of instructing the registered representatives. (Tr. 1150-51.)
20 White testified that the disclosure that RichMark was selling PCCG stock is evidenced on the back of the confirmations. Item 12 states, "First Southwest Company, its representatives, officers or directors may from time to time have a long or short position and buy or sell securities of this company." (Tr. 1115; Resp. Ex. 40.) The confirmation also states, "For full explanation contact your registered representative." (Tr. 1115; Resp. Ex. 40.) This indicated to White that RichMark was a representative of FSW in the context of the confirmations. White believed that this is an industry practice and has always been a known fact. (Tr. 1125, 1127, 1130.) However, the clearing agreement never stated that RichMark was a representative of FSW. (Tr. 1127; Div. Ex. 49.)
21 Wiegand received his Series 7 and Series 63 licenses in 1991, and his Series 24 license in 1998, which has expired. (Tr. 451.) Various broker-dealers have employed him since 1991. (Tr. 451.)
22 Lundgren obtained his Series 7 and Series 63 licenses in 1987, and his Series 24 in the early 1990s. He has been in the brokerage industry since 1987. (Tr. 715.)
23 Smolen has a master of business administration from New York University Graduate School of Business and an undergraduate degree from Pace University. He has taken various professional and non-professional courses related to the securities industry, accounting, and finance matters; and he has also made various presentations in these related topics. He is a licensed certified public accountant, a member of the American Institute of Certified Public Accountants (AICPA), and is accredited by the AICPA in business valuation. He has extensive experience in performing investigations and analyses in the securities industry and work relating to broker-dealers. (Tr. 935-37.)
24 The Division's Motion to Strike Testimony of Fred Smolen in Whole or in Part, filed on June 7, 2001, argues that Respondents deliberately withheld, until the filing of their posthearing brief, documentation upon which Smolen based his expert testimony. Respondents admit that their Attachments Tabs F and G of their Post Hearing Brief (Attachments) were not produced to the Division before the hearing or offered in evidence, and are now produced to show that a survey was undertaken, but not for the truth of the matter asserted. (Resp. Br. 54.) The Division's Motion to strike Smolen's testimony is DENIED.
25 Smolen opined on whether RichMark's conduct was a "pump and dump" scheme. (Tr. 964.) He testified that the elements for such a scheme are: 1) identification of a company which lacks fundamentals; 2) purchase of that company's stock by third parties, who take a large position; 3) dissemination of materially false and misleading information about the financial and business affairs of the corporation; 4) sale of the securities by the people who initiated the pump and dump scheme; 5) the stock price drops and the other investors who purchased the stock are left holding the losses. (Tr. 964-65.) In his opinion, PCCG had fundamentals.
26 Lowry has a bachelor's degree in business management from the University of Maryland. His twenty-eight years in the securities field, and specifically his twenty-three years in the Division of Market Regulation at the Commission, provided him with experience of over 200 broker-dealer examinations and numerous oversight inspections of the National Association of Securities Dealers (NASD) and the New York Stock Exchange. Examinations included investigation for violations of rules, customs, or industry practices, which included disclosure in sales practices of broker-dealers and the use and adequacy of information in making presentations to customers. (Tr. 1187-90.) Lowry does not have a Series 24 license and is not a licensed compliance officer, although he has provided oversight on compliance work. (Tr. 1237.)
27 RichMark is made accountable by the actions of its responsible officers, White and Monello. See C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1435 (10th Cir. 1988); A.J. White & Co. v. SEC, 556 F.2d 619, 624 (1st Cir. 1977). A corporation's scienter may be imputed from that of individuals controlling it. See SEC v. Blinder, Robinson & Co. Inc., 542 F. Supp. 468, 476 n.3 (D. Colo. 1982) (citing SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1096-97 nn.16-18 (2d Cir. 1972)).
28 A finding of negligence is adequate to establish a violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act. See Jay Houston Meadows, 52 S.E.C. 778, 785 & n.16 (1996), aff'd, 119 F.3d 1219 (5th Cir. 1997); see also Steadman, 967 F.2d at 643 & n.5 (citing Aaron v. SEC, 446 U.S. 680, 701-02 (1980)); Newcome v. Esrey, 862 F.2d 1099, 1102 n.7 (4th Cir. 1988).
29 I do not credit Respondents' explanation that these shares were sold to pay bills. There is no evidence of any bills and it is highly unlikely that RichMark incurred over $180,000 in bills in about two months.
30 The Division requests sanctions pursuant to Sections 8A of the Securities Act and 15(b)(4), 19(h), 21B, and 21C of the Exchange Act. The Commission must find willful violations to impose sanctions under Sections 15(b), 19(h), and 21B of the Exchange Act. A finding of willfulness does not require an intent to violate, but merely an intent to do the act which constitutes a violation. See Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000); see also Steadman, 603 F.2d at 1135. In this proceeding, the Respondents' actions are willful, in that they intended to act in the manner they did, resulting in the omission of the material information.
31 Respondents' Motion to Preclude Introduction of Evidence After the Close of Hearing, filed May 8, 2001, argues that the Division's revisions to Division Exhibit 18 go beyond the directions given to it and the parties' agreement. Respondents argue that the new column is "new information" and employing a new method of calculating disgorgement. In light of the fact that the FSW fees will not be taken into consideration, Respondents' motion is moot. Division's Exhibit 18A will not be admitted.
32 The $55,000 and $275,000 penalties apply to the violations pursuant to 17 C.F.R. § 201.1001. See 17 C.F.R. §§ 201.1001 (1996 adjustment) and .1002 (2001 adjustment).
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Modified: 03/19/2002