SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 38658 / May 20, 1997 Admin. Pro. File No. 3-8832 ___________________________________ : In the Matter of : : RUSSELL G. KOCH : ___________________________________: OPINION OF THE COMMISSION BROKER-DEALER PROCEEDINGS Ground for Remedial Action Injunction Respondent consented to an injunction that permanently enjoined him from the offer and sale of unregistered securities and from violating the antifraud provisions of the securities laws. Held, it is in the public interest to bar respondent from participating in any offering of penny stock. APPEARANCES: Robert A. Kaye, Tollefsen & Company P.C., for Russell G. Koch. Thomas M. Melton and Lindsay McCarthy, for the Division of Enforcement. Appeal filed: October 16, 1996 Last brief filed: January 7, 1997 I. Russell G. Koch, formerly a registered principal as well as the owner and president of Kochcapital, Inc. ("Kochcapital"), a former broker-dealer, -[1]- appeals from the decision of an ---------FOOTNOTES---------- -[1]- On May 27, 1992, as the result of an unrelated action, the Commission, with the consent of Koch and Kochcapital, barred Koch from association with any broker, dealer, investment adviser, investment company or municipal securities dealer, and revoked Kochcapital's registration as a broker- dealer. ==========================================START OF PAGE 2====== administrative law judge. -[2]- The law judge found that on January 25, 1995, the United States District Court for the District of Utah, with Koch's consent, entered a final judgment ("Final Judgment") that permanently enjoined Koch from the offer and sale of unregistered stock and from violations of the antifraud provisions of the securities laws. -[3]- The law judge also found that Koch's activities providing the basis for the Commission's civil action included participation in a penny stock offering of securities traded in the United States. The law judge therefore barred Koch from participating in any offering of penny stock. Our findings are based on an independent review of the record except to the extent the findings below are not challenged on appeal. II. We instituted this administrative proceeding by order dated September 26, 1995 ("Order"), pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act"). -[4]- The Order alleged that a permanent injunction was entered against Koch with respect to violations of Sections 5(a), 5(c) and 17(a) ---------FOOTNOTES---------- -[2]- Greg M. Anderson, the other respondent in this action, has not appealed the order of default entered against him. -[3]- SEC v. Unifirst Corp., Civ. No. 93-C-867B (D. Utah Jan. 25, 1995). This civil injunctive action, which was filed by the Commission on September 28, 1993, included eight defendants in addition to Koch, all of whom consented to being enjoined from future violations of the federal securities laws. -[4]- Section 15(b)(6)(A) provides, in relevant part: "[w]ith respect to any person . . ., at the time of the alleged misconduct, who was participating in an offering of any penny stock, the Commission . . . shall . . . bar such person . . . from participating in an offering of penny stock, if the Commission finds . . . such . . . bar is in the public interest and that such person . . . (iii) is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4)." Section 15(b)(4)(C), in part, includes a permanent or temporary injunction from engaging in or continuing any conduct or practice in connection with either the activity of a broker or dealer, or the purchase or sale of a security. ==========================================START OF PAGE 3====== of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The civil action resulting in the January 1995 injunction was based on Koch's role in distributing unregistered securities of Unifirst Corporation ("Unifirst"). -[5]- According to the complaint in that action, in April, 1990, Koch agreed that Kochcapital would act as the lead market maker in selling Unifirst stock to the public. The complaint also alleged that Koch, prior to making a market in Unifirst's securities, knew that the assets disclosed in Unifirst's audited balance sheet were overvalued. The complaint further alleged that Koch required Unifirst's president to establish nominee customer accounts at various broker-dealers and then transfer free-trading Unifirst stock into the accounts so that Koch could sell the stock to the public. Finally, the complaint alleged that Unifirst's president provided Koch 100,000 shares of Unifirst stock to be allocated among Koch and his "brokers" as undisclosed compensation for making a market in Unifirst's securities. On January 19, 1995, Koch consented to the entry of an injunction against him without admitting or denying the allegations contained in the complaint. The district court entered the Final Judgment several days thereafter. III. Koch raises several jurisdictional claims which we address at the outset. A. Section 15(b)(6) of the Exchange Act was amended as part of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 ("Remedies Act") -[6]- to authorize the Commission to bar any person from participating in a penny stock offering if, among other things, that person has been enjoined from engaging in any conduct or practice in connection with either the activity of a broker or dealer, or the purchase or sale of any security. Koch contends initially that the ---------FOOTNOTES---------- -[5]- Unifirst allegedly was formed when a pre-existing, shell corporation acquired a prior corporation by the same name and then changed its name to Unifirst. -[6]- Pub. L. No. 101-429, 1990 U.S.C.C.A.N. (104 Stat.) 931 (Oct. 15, 1990). The Remedies Act provided that the amendments to Section 15(b)(6) would become effective on the earlier of October 15, 1991, or the issuance of final regulations implementing the amendments. See Remedies Act  1(c)(3)(A), 1990 U.S.C.C.A.N. (104 Stat.) at 932. ==========================================START OF PAGE 4====== Commission lacks jurisdiction over this proceeding because use of Section 15(b)(6), as amended, to impose a penny stock bar against him is an improper retroactive application of the Remedies Act since it is based on conduct -- Koch's actions in 1990 related to Unifirst's securities -- that occurred before the effective date of the Remedies Act. -[7]- We find that Koch properly is subject to a penny stock bar pursuant to Section 15(b)(6). Section 15(b)(6) provides that an injunction may be an independent basis for a proceeding seeking to bar a person from the penny stock market. Thus, use of the January 1995 injunction here as the basis for the penny stock bar against Koch is not a retroactive application of the statute since the injunction was entered more than three years after the effective date of the Remedies Act. -[8]- Koch uses the phrase "Ex Post Facto" and makes references to "Ex Post Facto doctrine" throughout his retroactivity argument. ---------FOOTNOTES---------- -[7]- Koch also suggests that we would not have jurisdiction over these claims against him absent a retroactive application of Section 15(b)(6)(C) - - a provision of the Remedies Act that extends our authority to persons such as promoters and consultants who work with brokers, dealers or issuers to issue or trade penny stocks. For the reasons discussed in the text, the Remedies Act is not retroactively applied here because this action is based upon the January 1995 injunction. In any event, this action properly is based on Section 15(b)(6)(A) because the complaint in the civil injunctive action alleged that Koch was associated with a broker or dealer at the time of the alleged misconduct. In fact, Koch acknowledges in his brief that "[a]ll findings of wrongdoing relate to events when Russell Koch was the principal of a licensed broker/dealer. . . ." -[8]- See Benjamin G. Sprecher, Exchange Act Rel. No. 35156 (Dec. 27, 1994), 58 SEC Docket 1375, 1376. As support for his retroactivity argument, Koch relies upon that part of our decision in Sprecher in which we held that, in the circumstances presented, a sanction of disgorgement would be an improper retroactive application of the Remedies Act. Koch disregards the relevant portion of our Sprecher opinion where we held that the use of a criminal conviction based upon pre-Remedies Act conduct, but entered after the effective date of the Remedies Act, to impose a penny stock bar was not a retroactive application of the Remedies Act. ==========================================START OF PAGE 5====== To the extent Koch thereby intends to make a separate argument that the instant action violates the Ex Post Facto Clause of the Constitution, this argument fails. -[9]- Courts that have considered ex post facto claims in instances where an administrative sanction was imposed for the same conduct that was the basis for a criminal conviction have held that the administrative sanction was remedial -- as opposed to punitive -- and, thus, constitutional. -[10]- As we have had an opportunity to observe in a prior case, the sanctions provided in the Remedies Act, as applied in this proceeding, are remedial, not punitive. -[11]- Indeed, Congress explained that the penny stock reforms of the Remedies Act sought to remedy the "[u]nscrupulous market practices" and substantial problems in the penny stock market, in part, by protecting both investors in and issuers of new securities. -[12]- Thus, imposing a penny stock bar is not prohibited by the Ex Post Facto Clause. Accordingly, we reject Koch's arguments that this action is either an improper retroactive application of the Remedies Act or a violation of the Ex Post Facto Clause, and find that we have jurisdiction over this matter. B. Koch also claims that, based upon the D.C. Circuit's holding in Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), this ---------FOOTNOTES---------- -[9]- The Ex Post Facto Clause prohibits the retroactive application of a law that "inflicts a greater punishment, than the law annexed to the crime, when committed." Calder v. Bull, 3 U.S. (3 Dall.) 386, 390 (1798). -[10]- See DiCola v. FDA, 77 F.3d 504 (D.C. Cir. 1996) (FDA sanction of permanent debarment from providing services to the pharmaceutical industry based on guilty plea for conduct that occurred before statute directing debarment was amended did not violate the Double Jeopardy and Ex Post Facto Clauses); Bae v. Shalala, 44 F.3d 489 (7th Cir. 1995) (FDA debarment order based on felony conviction for conduct that occurred before statute was amended was remedial and not retroactive application prohibited by Ex Post Facto Clause). -[11]- See Benjamin G. Sprecher, Securities Exchange Act Rel. No. 38485 (April 8, 1997), ___ SEC Docket ___. -[12]- See Remedies Act  502, 1990 U.S.C.C.A.N. (104 Stat) at 951-52. ==========================================START OF PAGE 6====== administrative proceeding is time-barred since the events that were the basis for the Final Judgment occurred outside the applicable statute of limitations. -[13]- Without deciding whether Johnson applies to an administrative proceeding where the sanction at issue is a penny stock bar, we find that the instant action is not time-barred. Section 15(b)(6)(A)(iii) authorizes the imposition of sanctions, including a penny stock bar, based upon the entry of an injunction. The Division of Enforcement ("Division") initiated this action seeking a penny stock bar on the basis of the injunction issued against Koch. -[14]- In other words, since this cause of action did not "accrue" until the Final Judgment was entered against Koch, the date of the conduct underlying the injunction is not relevant. Therefore, we find that this action is not time-barred because the injunction against Koch was entered on January 25, 1995, and the Order was issued only eight months later on September 26, 1995. IV. The law judge conducted a one-day hearing at which the Division presented four witnesses and fifty-six exhibits, while Koch offered one witness and two exhibits, one of which was not admitted. The law judge found that Koch was subject to a permanent injunction from the offer and sale of unregistered stock and from violating the antifraud provisions of the securities laws. The law judge determined that the injunction stemmed from Koch's offer and sale of Unifirst while he was associated with Kochcapital and that Unifirst was a penny stock. The law judge also found that Koch's activities related to Unifirst essentially were as alleged in the complaint filed in the federal civil injunctive action. In determining that an administrative sanction would be in the public interest, the law judge considered the factors articulated in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. ---------FOOTNOTES---------- -[13]- In Johnson, the D.C. Circuit found the five-year statute of limitations set forth in 28 U.S.C.  2462 applicable to proceedings brought before us under Section 15(b) of the Exchange Act seeking to censure and suspend a securities supervisor. Johnson, 87 F.3d at 492. Section 2462 provides that the limitations period for an action covered by the statute begins to run "when the claim first accrued." -[14]- See Timothy Mobley, Exchange Act Rel. No. 36689 (Jan. 5, 1996), 61 SEC Docket 42, 45 (proceeding under Section 15(b)(6)(A)(iii) is based on the existence of an injunction). ==========================================START OF PAGE 7====== 1979), aff'd on other grounds, 450 U.S. 91 (1981). -[15]- Applying these factors to the evidence presented, the law judge concluded that it was in the public interest that Koch be barred from participating in the offering of any penny stock. Specifically, the law judge found that Koch's actions relating to Unifirst were egregious since Koch: (1) knowingly fostered the misrepresentations or omissions regarding Unifirst's financial statements and the fact that only a few individuals controlled the overwhelming majority of Unifirst's publicly traded stock; and (2) directed the establishment of nominee trading accounts to hold Unifirst securities and used these accounts to manipulate Unifirst's publicly traded stock. The law judge also found that Koch had an extensive disciplinary history, including several violations involving penny stocks. -[16]- ---------FOOTNOTES---------- -[15]- These factors include: "the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations." Steadman, 603 F.2d at 1140. -[16]- The law judge found that the civil injunctive action on which the instant proceeding is premised was the second such action filed against Koch. On May 12, 1992, the United States District Court for the Western District of Washington permanently enjoined Kochcapital from violating, and Koch from aiding and abetting violations of, Section 15(c)(2) of the Exchange Act and Rule 15c2-6 thereunder. This injunction was the basis for our decision to revoke Kochcapital's registration and bar Koch from associating with any broker, dealer, investment adviser, investment company or municipal securities dealer. See, supra, n. 1. In addition, the law judge found that the National Association of Securities Dealers, Inc. censured, fined, barred, monitored, assessed legal fees, ordered rescission and restitution from, and entered several arbitration awards against Koch; and expelled Kochcapital from membership as a result of numerous securities law and rule violations. The law judge further found that, between 1987 and 1993, nineteen states either: (1) revoked or suspended the licenses of Koch and/or Kochcapital; or (2) fined, or issued cease and desist orders against, Koch and/or Kochcapital. ==========================================START OF PAGE 8====== The law judge further found that Koch refused to recognize the wrongful nature of his actions, as Koch had attempted to minimize his disciplinary history to various business people by explaining that the charges were meritless, exaggerated or the product of bureaucratic meddling. Lastly, the law judge found that Koch continues to raise capital for start-up companies and has offered to assist such companies to issue penny stock. The law judge concluded that Koch's involvement in the penny stock market as a promoter and Koch's promises "to take fledgling companies public through the penny stock market" afford Koch opportunities to harm securities investors and markets by committing future securities law violations. Koch contends that the law judge abused her discretion by concluding that a penny stock bar was in the public interest after applying the Steadman factors to the facts of this matter. -[17]- We reject this argument. There is a vast amount of evidence in the record, evidence that Koch does not challenge in this appeal, supporting the law judge's finding. -[18]- The record plainly demonstrates the egregiousness, as well as the recurrent nature, of Koch's illicit conduct. The evidence also establishes that Koch's current employment presents opportunities for future violations. Koch has continued to raise capital for start-up companies through the promotion of speculative securities and to present himself to investors and company managers as a stock promoter who can assist in selling or offering company ownership to the public. Through his involvement in such business, Koch undoubtedly will face opportunities to engage in future securities laws violations to the public's detriment. Thus, we agree with the law judge that application of the Steadman factors to the facts of this case ---------FOOTNOTES---------- -[17]- Koch also claims that the law judge improperly relied upon the Steadman factors in her analysis of the public interest since these factors are relevant only to the selection of a sanction after a "formal finding of wrongdoing." Koch provides no authority -- either in Steadman or otherwise -- supporting this proposition. Section 15(b)(6)(A) requires a determination that any sanction be in the public interest, and we previously have held that it is appropriate to employ the Steadman factors to make such a determination. Benjamin G. Sprecher, Securities Exchange Act Rel. No. 38485 (April 8, 1997), ___ SEC Docket ___. -[18]- Moreover, Koch fails to identify any evidence that would contradict the law judge's finding. ==========================================START OF PAGE 9====== warrants the sanction of the penny stock bar against Koch. -[19]- V. We find that a penny stock bar against Koch is in the public interest, as it will prevent him from acting as a promoter, finder, consultant or agent in a penny stock offering. As we have noted, the fact that Koch still participates in the penny stock industry indicates that he will have the opportunity to continue to put investors at risk. Barring Koch from such practices will rectify this situation. In addition, preventing Koch from conducting business in penny stocks is precisely the type of remedy Congress contemplated when it enacted the Remedies Act. -[20]- An appropriate order will issue. -[21]- By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary ---------FOOTNOTES---------- -[19]- Accordingly, we reject Koch's claim that the law judge abused her discretion in finding that a penny stock bar against Koch was in the public interest since the Division had failed to establish that a lesser sanction was not more appropriate. -[20]- Congress found that the penny stock market suffered from "[u]nscrupulous market practices" and other substantial problems, in part, because many professionals banned from the securities markets became involved in penny stocks. See Remedies Act  502, 1990 U.S.C.C.A.N. (104 Stat) at 951-52. As a result, Congress sought to rid the penny stock market of securities professionals who were repeat offenders of the federal or state securities laws. See H.R. Rep. No. 617, 101st Cong., 2d Sess. 20-21 (1990), reprinted in 1990 U.S.C.C.A.N. 1408, 1422-23. -[21]- All of the arguments advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. ==========================================START OF PAGE 10====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. Admin. Pro. File No. 3-8832 ___________________________________ : In the Matter of : : RUSSELL G. KOCH : ___________________________________: ORDER BARRING RESPONDENT FROM PARTICIPATION IN ANY OFFERING OF PENNY STOCK On the basis of the Commission's opinion issued this day, it is ORDERED that Russell G. Koch be, and hereby is, barred from participation in any offering of penny stock. By the Commission. Jonathan G. Katz Secretary