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SECURITIES AND EXCHANGE COMMISSION |
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In the Matter of
RUSSELL W. STEIN, FORD D. ALBRITTON, JR., and DOVER AND ASSOCIATES, INC.
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OPINION OF THE COMMISSION
Failure to Comply with Reporting Requirements
Principal of a registered investment adviser provided services to institutional funds, and did not disclose personal financial matters, thereby allegedly violating antifraud provisions, and aiding and abetting the investment adviser's violation of Investment Advisers Act disclosure and reporting requirements. Friend of the principal and the friend's company allegedly aided and abetted the principal in the alleged violations of the antifraud provisions. Held, the proceeding against the principal, friend, and friend's company for violation of the anitfraud provisions of the Investment Advisers Act was incorrectly charged and is dismissed. As to the proceeding against the principal for aiding and abetting the investment adviser's reporting requirements violation , the allegations have been established, and it is in the public interest to suspend principal from association with any investment adviser for a period of twelve months, to order him to cease and desist from committing or causing any violation of Section 204 of the Investment Advisers Act of 1940 and Rule 204-1(b) thereunder, and Section 207 of the Investment Advisers Act of 1940, and to impose a civil money penalty of $30,000.
APPEARANCES:
Robert A. Brunig and Christopher E. Kirkpatrick, for the Division of Enforcement.
Walter G. Pettey III and Stephen G. Gleboff, of Hughes & Luce, L.L.P., for Russell W. Stein, Ford D. Albritton, Jr., and Dover and Associates, Inc.
Appeal filed: October 18, 1999
Last brief received: January 31, 2000
I.
The Division alleged that Russell W. Stein, a registered representative with Merrill Lynch, which was dually registered with the Commission as a broker-dealer and an investment adviser, violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940�1 by failing to disclose a potential conflict of interest to his employer and his employer's clients between late 1991 and the end of 1995. Respondents Ford D. Albritton, Jr. and Dover and Associates, Inc. ("Dover") were charged with causing and aiding and abetting Stein's alleged violations. Stein was also charged with causing and aiding and abetting Merrill Lynch's alleged violations of Section 204 and Rule 204-1(b) thereunder, and of Section 207 of the Advisers Act, by failing to disclose the potential conflict of interest in its Forms ADV.
The administrative law judge dismissed the charges against all of the Respondents, finding that Stein was not an investment adviser subject to the Advisers Act. The law judge found further that, even if Stein were an investment adviser pursuant to the Advisers Act, (1) he did not violate the antifraud provisions of that Act, because he committed no fraud against Merrill Lynch's institutional clients, and (2) he had no potential or real conflict of interest with Merrill Lynch's institutional clients. In light of these findings, the law judge also found that Albritton and Dover did not aid and abet Stein's alleged violations, and that Stein did not aid and abet any alleged violation by Merrill Lynch of Section 204 and Rule 204-1(b) thereunder, and Section 207, because Merrill Lynch did not fail to disclose required information in its Forms ADV. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
II.
Stein became a registered person with Merrill Lynch in 1975, and became a listed principal on Merrill Lynch's investment adviser registration in 1982. From 1985 through May 1995, when he left the firm, Stein was a First Vice President. Beginning in 1990, Stein headed a Merrill Lynch group that marketed and managed an investment consulting service called the Asset Information Management Program ("AIM"). Under the AIM program, investment funds contracted with Merrill Lynch for four basic services: investment policy formulation, asset allocation, investment manager searches, and quarterly investment manager performance measurement. In 1991 and 1992 Stein's group assisted many institutional funds with investment manager searches. Five of these funds (including the Texas A&M University System ("Texas A&M")) selected Austin, Calvert and Flavin ("ACF") as one of their investment managers.
In late 1991, Stein's long-time friend and business acquaintance, Respondent Albritton, was emerging from personal bankruptcy. Albritton was a well-known alumnus of Texas A&M University, who from 1982 to 1990 had served on the University's Board of Regents and had donated significant sums to the University. He also had numerous business contacts throughout Texas as a former head of major companies. In December of that year, Albritton registered as an investment adviser with the Texas State Securities Board. He also formed Dover, a Texas corporation wholly owned by Albritton and registered with the State of Texas since January 1992 as a securities dealer.
At about this time, Stein asked Albritton about his future business plans. Albritton explained that he was interested in any professional opportunities that Stein might come across that would enable Albritton to draw upon his vast network of contacts in Texas. Sometime in late 1991 or early 1992, Stein introduced Albritton to five investment management companies, including ACF. ACF hired Dover to help ACF maintain its accounts with Texas A&M and other clients and to solicit new business for the firm. 2 ACF paid Dover a quarterly retainer fee and a referral fee for any advisory fees ACF collected from clients attributable to Dover.
In January 1993, Stein loaned Albritton approximately $27,500. At about this time, Stein also expressed interest in buying the rights to a sky box owned by Albritton at Texas A&M University's football stadium. The rights to the sky box cost $18,600 annually. The month after Stein's original offer, the 1993 payment was due for the box and Albritton was unable to pay it. Although Albritton had originally rejected Stein's offer to buy the sky box, at this time he made an agreement with Stein that, if Stein would forgive the $27,500 debt and would help Albritton with the 1993 sky box payment and payments over the next few years, he would allow Stein to use the sky box and grant Stein a right of first refusal to purchase the use of the box from Albritton, if Albritton ever decided to sell it. Stein subsequently wrote two more checks to Albritton, one for $15,000 and another for $20,000. 3 The box arrangement continued until 1997, when Albritton allowed Stein to purchase the use of the box outright.
In furtherance of his agreement with ACF, Albritton offered hunting and fishing opportunities to ACF and its clients. Providing such expeditions involved leasing large areas of land (often 20,000 acres or more). Professional guides and hunting outfitters are frequently used to handle these and other logistics. In late 1991, Stein's son, Stephen Stein, an accomplished hunter, formed Mayfair Services ("Mayfair"), a hunting outfitter company. In order to help his son start his business, Stein loaned Stephen a total of $68,700 for Mayfair's operating cash flow needs over the first three years of its existence. Albritton's company, Dover, engaged Mayfair to provide hunting services for Dover's clients, including ACF. 4 Mayfair conducted an average of 40 hunting and fishing trips per year for Dover and other clients, and by 1997 had over 30 different clients. Dover provided Mayfair with 95% of its income during the period under review.
Stein did not disclose to Merrill Lynch or to its AIM clients that he had introduced Albritton to ACF and other investment managers, that Albritton and Dover had entered into an agreement with ACF, that Dover had entered into an agreement with Mayfair, or anything about his personal financial relationships with Albritton or his son.
III.
Stein was charged as a primary violator of Section 206 of the Advisers Act on the basis that he allegedly did not disclose a conflict between his personal interests and the interests of Merrill Lynch's clients. The Division claims that Stein had a conflict of interest because he received an indirect economic benefit from ACF, arising from Dover's employment with ACF and Mayfair's agreement with Dover. The Division argues that Albritton's and Stephen Stein's continued employment provided an economic benefit to Stein because their employment ensured that they could repay the loans Stein had made to them. Thus, according to the Division, Stein had an interest in advising Merrill Lynch's clients in the AIM program to select ACF as one of their investment managers. Albritton and Dover were charged as aiders and abettors of Stein's alleged violation.
We do not address the merits of the Division's claims with respect to Stein's alleged violation of Section 206. Section 206 applies by its terms only to investment advisers, rather than associated persons of investment advisers. 5 Sections 206(1) and (2) specifically prohibit "investment advisers" from committing fraud on "any client or prospective client." Only investment advisers can be charged with primary liability pursuant to Section 206, and "persons associated with investment advisers" must be charged as aiders and abettors.
Texas A&M and other fund clients were clients of the investment adviser, Merrill Lynch, not Merrill Lynch's employee, Stein. The Division argues that Stein should be considered an investment adviser because the activities he performed on behalf of Merrill Lynch were those of an investment adviser. There is no evidence, however, that Stein acted in any capacity other than as a Merrill Lynch employee in his dealings with Merrill Lynch clients under the AIM program. Many employees of investment advisers, of necessity, perform investment adviser activities because an adviser can only act through its employees. 6 Nonetheless, the Act's sections distinguish between those applicable to investment advisers and to their associated persons. 7
For these reasons, we believe the charges were incorrectly brought against Stein as a primary violator of Section 206 of the Advisers Act and must be dismissed. 8
IV.
Stein was also charged with aiding and abetting Merrill Lynch's alleged violations of Advisers Act Section 204 and Rule 204-3 thereunder, and of Section 207, arising from Merrill Lynch's failure to amend its response to Item 13.A of Part II of Form ADV for the fiscal years 1992-1995 to disclose the economic benefit Stein allegedly received in connection with his advice to clients concerning the selection and retention of ACF. 9 A person is liable as an aider and abettor of a securities law violation if (1) another person commits a primary violation; (2) the aider and abettor generally was aware or knew that his or her actions were part of an overall course of conduct that was improper or illegal; and (3) the aider and abettor knowingly and substantially assisted the primary violation. 10
First, we consider whether the Division established a primary violation by Merrill Lynch. The disclosures in Part II of Form ADV are required pursuant to Rule 204-3. Instructions for Form ADV require prompt amendment to the Form if, among other things, any information in Part II becomes materially inaccurate. Moreover, Section 204 requires the filing of annual updates to Form ADV and such filings constitute the filing of "reports" within the meaning of Section 207. Section 207 proscribes the filing of reports with the Commission that contain material misstatements. It is undisputed that Merrill Lynch did not update Part II of Form ADV during the period under review to reflect that Stein received any economic benefit. Thus, if Stein did receive an economic benefit, and if such benefit was material, Merrill Lynch's Form ADV and its annual updates were materially inaccurate in violation of Section 204 and Rule 204-3 thereunder and Section 207.
The Division contends that Stein received an "economic benefit" that was continuing in nature, both because ACF employed Albritton, and because Albritton, in turn, engaged Stephen Stein's hunting company. 11 Under this theory, the Division argues that, because this conflict was never disclosed, Merrill Lynch's institutional investors were denied information that was material to an evaluation of the disinterestedness of Stein's investment advice.
The Division's theory of the economic benefit derived from Albritton's employment with ACF is that Albritton was able to repay his alleged $62,500 indebtedness to Stein by virtue of the compensation ACF paid to Dover. 12 The record indicates, however, that Stein forgave Albritton's initial indebtedness of $27,500 and made subsequent payments totaling at least $35,000 in exchange for Albritton's giving Stein the use of, and right of first refusal to, the sky box.
The specifics of the sky box arrangement are not clear because they were never memorialized in writing. How much Stein paid pursuant to the agreement, and when, was decided informally between Stein and Albritton. The rights to the sky box cost $18,600 per year, and the amount paid by Stein to Albritton during the review period totaled at least $62,500. 13 Nothing in the record contradicts Stein's or Albritton's characterizations that Albritton exchanged a valuable asset that he owned (the right to use the sky box) to pay off his initial indebtedness and for the additional monies paid to him by Stein.�14 Therefore, the Division has not established an economic benefit to Stein arising from Albritton's employment with ACF.
The analysis is different with respect to the employment of Stephen Stein's firm, Mayfair, by Albritton's firm, Dover. Stein loaned Stephen Stein a total of $68,700 to cover operating expenses for Mayfair over the first three years of its existence. As a result of the employment by ACF of Albritton's firm Dover, Dover was able to provide Mayfair with 95% of its income during the review period. Stephen Stein was thus able to repay all but $33,795 of the amount loaned to him by his father. Moreover, Stephen Stein had been financially dependent on his father prior to the creation of Mayfair, and the money Stephen Stein received from Dover (paid by ACF) relieved Stein of the economic burden of providing for his son's living expenses. Thus, Stein received an economic benefit from the money his son earned from ACF.
Our inquiry does not end there, however. To require disclosure, the economic benefit must be received "in connection with giving advice to clients." The law judge concluded that any alleged benefits did not meet this test both because ACF had already come to the attention of Stein's AIM clients prior to the loans to Albritton and Stephen Stein, and because ACF had no knowledge of the financial transactions among Stein, Albritton, and Stein's son.
Although the AIM clients were aware of, and in some cases had already selected, ACF before Dover began using Mayfair to entertain ACF clients, Stein continued to provide the clients with advisory services after the relationship between Dover and Mayfair began. Specifically, Stein provided quarterly reports on the performance of the investment managers selected pursuant to the AIM program, including ACF. Although the bulk of this report was in the form of a statistical analysis prepared by Merrill Lynch without Stein's input, Stein was responsible for providing a summary of the report and its meaning for the clients. Thus, he was in a position to influence the conclusions the clients reached about the significance of the statistical data. The fact that ACF did not know of the financial arrangements among Stein, Albritton and Stein's son is irrelevant; Stein knew, and Stein was the person in a position to urge AIM clients to retain the services of ACF.
Having found that Stein received an economic benefit, we must determine whether the benefit was material so as to obligate disclosure by Merrill Lynch in its Form ADV. As stated by the United States Supreme Court:
[T]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor . . . . An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. 15
We conclude that reasonable investors would consider it important that their AIM account executive was recommending to them the continued use of an investment manager who was the principal means of employment of the account executive's financially dependent son, and that this information should have been disclosed on Merrill Lynch's Form ADV. Merrill Lynch's failure to make such material disclosure in its Form ADV, and the subsequent filing of its materially inaccurate Form ADV, constitute the primary violations of Section 204 and Rule 204-3 thereunder and Section 207 that Stein is accused of aiding and abetting.
We also find that Stein was generally aware of, or knew that his conduct was part of, an overall course of conduct that was improper or illegal. In SEC v. Capital Gains Research Bureau, Inc., 16 the Supreme Court observed that the Advisers Act "reflects a congressional recognition 'of the delicate fiduciary nature of an investment advisory relationship,' as well as a congressional intent to eliminate, or at least to expose, all conflicts of interest . . . ." 17 The Court cited a Commission report 18 which concluded:
that investment advisers could not "completely perform their basic function -- furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments -- unless all conflicts of interest between the investment counsel and the client were removed." 19
The Court held that an investment adviser has "an affirmative duty of 'utmost good faith, and full and fair disclosure of all material facts,' as well as an affirmative obligation 'to employ reasonable care to avoid misleading' his clients." 20
Stein has been a listed principal on Merrill Lynch's investment adviser registration since 1982. As such, he is required to be aware of his and Merrill Lynch's fiduciary obligations to Merrill Lynch's investment adviser clients, and the consequent disclosure requirements for Merrill Lynch to prepare properly its Forms ADV. As we have previously noted, registered securities professionals have not only agreed to be subject to numerous statutes, rules, and regulations, but have been registered and have passed examinations demonstrating their knowledge of the securities laws. 21 For four consecutive years, Stein omitted any mention to Merrill Lynch of the financial arrangements among his son, Dover, and ACF, which provided Stephen Stein with 95% of his income during this period, thereby relieving Stein of the burden of supporting his son and enabling his son to repay a significant portion of a loan made to him by Stein. We find, therefore, that the second prong of the aider and abettor test is met.
Finally, we find that Stein knowingly and substantially assisted Merrill Lynch's disclosure and reporting violations. It was Stein's obligation to inform Merrill Lynch of any of his conflicts necessitating disclosure and he failed to do so each year from 1992 through 1995. This failure, in turn, resulted in Merrill Lynch's failure promptly to amend its Form ADV. Thus, we find that Stein wilfully aided and abetted Merrill Lynch's disclosure and reporting violations in its Form ADV from 1992 through 1995. 22
V.
We consider a range of factors relevant to a determination that a sanction is in the public interest, including:
the seriousness of the violation, the isolated or recurrent nature of the violation, the respondent's state of mind, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his or her conduct, and the respondent's opportunity to commit future violations. 23
Several of these factors militate in favor of strong sanctions against Stein. The nature of the violations is serious. As discussed above, for a fiduciary such as Stein, the disclosure of potential conflicts of interest is fundamental to preserving the integrity of the relationship with the client. The disclosure failures continued for a number of years. Given Stein's training and years of experience in the securities industry, the nature of the conflict should have been obvious to him, and yet he failed to alert his employer of the need to make required disclosure. Although Stein does not dispute the facts underlying our findings, he does not show any recognition of the manner in which those facts establish a clear potential conflict of interest necessitating disclosure. Stein is still employed in the securities industry, and therefore his occupation presents opportunities for future violations. Accordingly, we find it is in the public interest to suspend Stein from association with any investment adviser for twelve months.
The Division also seeks a penalty against Stein pursuant to Section 21B of the Securities Exchange Act of 1934 ("Exchange Act") and Section 203(i) of the Advisers Act. Those provisions provide for first-tier penalties of up to $5,000 against a natural person who wilfully aids and abets violations of the Advisers Act; second-tier penalties of up to $50,000 against a natural person if the violative conduct involved deliberate or reckless disregard of a regulatory requirement; and third-tier penalties of up to $100,000 for a natural person if the conduct involves both deliberate or reckless disregard of a regulatory requirement and the conduct resulted in substantial losses or created a significant risk of such losses to others or resulted in substantial pecuniary gain to the respondent. 24 Determination of the public interest in assessing the penalty requires a consideration of the above factors and also of whether the respondent has been disciplined for prior securities laws violations, the need to deter the respondent and other persons from committing such conduct, and such other matters as justice may require. 25
Since we have found that Stein wilfully aided and abetted Merrill Lynch's Advisers Act violations, his misconduct meets the test for first-tier penalties. We further find that, given Stein's years of experience in the securities industry and the obviousness of the disclosure obligation, Stein's conduct involved, at a minimum, reckless disregard of Merrill Lynch's regulatory duties, thus subjecting him to second-tier penalties. Nonetheless, the record does not establish losses or significant risk of losses to others, or that the pecuniary gain to Stein from having ACF enable Stephen Stein to support himself and pay back loans to his father was substantial enough to warrant third-tier penalties. Moreover, Stein has no prior disciplinary history. Accordingly, we find that it is in the public interest to impose a second-tier penalty of $30,000.
The Division also seeks a cease-and-desist order under Section 203(k) of the Advisers Act. 26 Because a cease-and-desist order is a forward-looking sanction, we have considered the degree to which the record must show a risk of future violations before we will impose such a sanction. 27 In KPMG, we concluded that the "likelihood of future violation" requirement that governs the issuance of injunctions in court proceedings is not the appropriate standard for issuance of a cease-and-desist order in an administrative proceeding. 28 Although we concluded that there must be a showing of "some risk" of future violations, we also decided that the "risk need not be very great to warrant issuance of a cease-and-desist order. In the ordinary case, and absent evidence to the contrary, a finding of past violation raises a risk of future violation sufficient to support our ordering a respondent to cease and desist." 29 To put it another way, "evidence showing that a respondent violated the law once probably also shows a risk of repetition that merits our ordering him to cease and desist." 30 Here, Stein's aiding and abetting violations raise at least "some risk" of future violations, and therefore satisfy the standard articulated by our decision in KPMG. 31
While, in the ordinary case, a finding of a past violation will give rise to a sufficient risk of future violations to warrant cease-and-desist relief, it is appropriate to consider other factors which may either militate against imposition of the sanction, or further emphasize the need for this forward-looking remedy. 32 Here, the record is more than adequate to justify relief. Specifically, the violations were ongoing for a period of years. 33 Moreover, Stein's troubling insistence that the facts he admits do not constitute a conflict of interest triggering the disclosure obligations of Sections 204 (and Rule 204-1(b) thereunder) and 207 suggests that he is insufficiently sensitized to the circumstances constituting a conflict that he may similarly err in the future.
Accordingly, we find that it is in the public interest to order Stein to cease and desist from violations of those provisions of the Advisers Act. 34
An appropriate order will issue. 35
By the Commission (Chairman DONALDSON and Commissioner CAMPOS); Commissioner GLASSMAN dissenting and Commissioners GOLDSCHMID and ATKINS not participating.
Jonathan G. Katz
Secretary
INVESTMENT ADVISERS ACT OF 1940
Rel. No. 2114 / March 14, 2003
Admin. Proc. File No. 3-9309
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In the Matter of
RUSSELL W. STEIN, FORD D. ALBRITTON, JR., and DOVER AND ASSOCIATES, INC.
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ORDER DISMISSING PROCEEDING IN PART AND IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that the proceedings against Russell W. Stein for violation of the antifraud provisions of the Investment Advisers Act of 1940, and against Ford D. Albritton, Jr. and Dover and Associates, Inc. for aiding and abetting Stein's alleged violation, be, and they hereby are, dismissed; and it is further
ORDERED that Russell W. Stein shall cease and desist from committing or causing any violations or any future violations of Section 204 of the Investment Advisers Act of 1940 and Rule
204-1(b) thereunder and Section 207 of the Investment Advisers Act; and it is further
ORDERED that Russell W. Stein be, and hereby is, suspended from associating with any investment adviser and from associating with any investment company for twelve months, effective as of the opening of business on March 31, 2003; and it is further
ORDERED that Russell W. Stein be, and hereby is, assessed a civil penalty of $30,000.
By the Commission.
Jonathan G. Katz
Secretary
2 Another investment management company, Eagle Management Trust, also hired Albritton. His affiliation with that firm is not at issue here.
3 The latter check was marked "football."
4 The record also briefly mentions that Stein executed a revolving note as a co-borrower in late 1994 for a $150,000 line of credit for a telephone company of which Albritton, Stein's son, and a third party were owners. The record does not disclose whether the line of credit was accessed at any time. None of the litigants make arguments based on the existence of the line of credit.
5 Section 206 is thus distinguished from the antifraud provisions of the Securities Act of 1933, 15 U.S.C. § 77q; and the Securities Exchange Act of 1934, 15 U.S.C. § 78j, which proscribe fraud by any "person."
6 Section 202(11) defines an "investment adviser," in pertinent part, as
[A]ny person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities�.�. . .
Section 202(17) defines a "person associated with an investment adviser" as
[A]ny partner, officer or director of such investment adviser (or any person performing similar functions), or any person, directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser . . . .
7 See, e.g. §§ 203(e) and (f) of the Act.
8 Accordingly, the charges against Albritton and Dover as aiders and abettors of Stein also must be dismissed.
9 Item 13.A of Part II of Form ADV asks:
Does the applicant or a related person have any arrangements, oral or in writing, where it:
A. Is paid cash by or receives some economic benefit (including commissions, equipment or non-research services) from a non-client in connection with giving advice to clients?
10 Graham v. SEC, 222 F.3d 994, 1000 (D.C. Cir. 2000); Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
11 The Division contends that this continuing conflict of interest created an ongoing requirement for Merrill Lynch to disclose the economic benefits Stein received in its Forms ADV for fiscal years 1992-1995.
12 The Division also alleged that Stein benefitted because Albritton performed no, or at least minimal, work pursuant to the contract with ACF, and that the job was really a gift from Stein to Albritton. The law judge made findings suggesting that Albritton did not do much for ACF while employed by it, and the record supports these findings. However, there is nothing in the record supporting the conclusion that ACF's hiring of Albritton was intended as a sham, or that Stein knew the extent of Albritton's performance for ACF. The law judge made no conclusions concerning this "gift" theory, and the Division does not press that theory on appeal.
13 The record includes evidence of this specific amount; Albritton's testimony suggests that there may have been other payments.
14 The Division claims on appeal that the arrangement concerning the sky box was that Stein gained access to the box because Albritton was able to pay for the box using the money ACF paid Albritton. The Division cites no record evidence supporting this version of the sky box arrangement. In fact, the record suggests that Stein would have preferred to purchase the right to the sky box outright, rather than participate in the sharing arrangement to which Albritton agreed.
15 TSC Industries v. Northway, Inc., 426 U.S. 438, 445, 449 (1976). See also Valicenti Advisory Services, Inc., Initial Decision Rel. No. 111 (July 2, 1997), 64 SEC Docket 2363, aff'd, Valicenti Advisory Services, Inc. v. SEC, 198 F.3d 62 (2d Cir. 1999), cert. denied, 530 U.S. 1276 (2000) (applying TSC Industries "materiality" standard to Advisers Act case).
16 375 U.S. 180 (1963).
17 Id. at 282-83.
18 Investment Trusts and Investment Companies, Report of the Securities and Exchange Commission, Pursuant to Section 30 of the Public Utility Holding Company Act of 1935, on Investment Counsel, Investment Management, Investment Supervisory, and Investment Advisory Services, H.R. Doc. No. 477, 76th Cong., 2d Sess. 1 (1939) ("SEC Report").
19 375 U.S. at 187 (citing SEC Report at 28).
20 Id. at 194.
21 Jacob Wonsover, Securities Exchange Act Rel. No. 41123 (March 1, 1999), 69 SEC Docket 694, petition for review denied, Wonsover v. SEC, 205 F.3d 408 (D.C. Cir. 2000).
22 "Wilfully" in this context means intentionally committing the act that constitutes the violation. There is no requirement that the actor be aware that he is violating federal securities laws. See Wonsover v. SEC, 205 F.3d at 414. See also Steadman v. SEC, 603 F.2d 1126, 1135 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981); and Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976).
23 KPMG Peat Marwick LLP, Exchange Act Release No. 43862 (Jan.�19, 2001), 74 SEC Docket 384, 436 motion for reconsideration denied, Exchange Act Release No. 44050 (Mar.�8, 2001), 74 SEC Docket 1351, petition denied, 289 F.3d 109 (D.C. Cir. 2002). See also Joseph J. Barbato, 53 S.E.C. 1259, 1281 n.31; Donald T. Sheldon, 51 S.E.C. 59, 86 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
24 15 U.S.C. § 78u-2(b) and 15 U.S.C. § 80b-3(i)(2). "Reckless disregard" has been defined as "an extreme departure from the standards of ordinary care . . . ." Bruce E. Straughn, Securities Exchange Act Rel. No. 45939, 77 SEC Docket 1933, 1936 (May 15, 2002), quoting S.E.C. v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992).
25 15 U.S.C. § 78u-2(c) and 15 U.S.C. § 80b-3(i)(3).
26 15 U.S.C. 80b-3(k). That provision authorizes the Commission to issue a cease-and-desist order against any person who was a cause of a violation of the Advisers Act, or any rule or regulation thereunder, due to an act or omission the person knew or should have known would contribute to such violation. We have held that the "knew or should have known" language constitutes a negligence standard. KPMG, 74 SEC Docket at 421 (discussing identical language in both Section 203(k) and Exchange Act Section 21C of the Exchange Act). Stein's failure to alert Merrill Lynch to his potential conflict of interest was a cause of Merrill Lynch's failure to meet its disclosure obligations under the Advisers Act. We found above that Stein's conduct was not merely negligent, but that it showed at a minimum a reckless disregard for a regulatory requirement.
27 Id. at 429-436.
28 Id.
29 Id. Respondents in KPMG argued before the D.C. Circuit that this language created an improper presumption that could be applied in an arbitrary and capricious manner to ignore evidence running counter to a finding of "some risk." KPMG, LLP v. SEC, 289 F.3d 109 at 124 (D.C. Cir. 2002). Respondents misconstrued our holding. Our decision was based on the unremarkable proposition that a respondent's past violation is a sufficiently valid predictor of a future one to permit us to draw an inference of some risk of future violation. This conclusion was based on the Commission's experience in enforcing the securities laws and was intended to give both the Division and respondents guidance as to the type of showing the Division needs to make to warrant cease-and-desist relief.
30 Id. at 430.
31 The D.C. Circuit, in affirming our imposition of a cease-and-desist order in KPMG, stated that our order denying reconsideration of our original KPMG order "suggests that [the Commission] may no longer consider, as [the Commission made clear in its original order] that any one of [the Commission's] findings of a violation, standing alone, would suffice" under this "some risk" standard to enter a cease-and-desist order. 109 F.3d at 125. In the court's view, language in the reconsideration order (discussing all factors justifying the cease-and-desist order) "suggested" that in the reconsideration order we modified our original order and adopted a "serious-risk-of future violation" standard that might not be satisfied by a finding of only one past violation. Id. We did not. The discussion in the reconsideration order was intended to reaffirm, and not depart from, language in the original order concerning factors we consider in the exercise of our broad sanctioning discretion.
32 In KPMG, for example, we held first that the facts of the case gave rise to not merely some risk of future violations but to a serious risk. That risk, combined with several other aggravating factors, underscored the necessity for a cease-and-desist order. To be clear, however, the finding of a "serious risk" was not required to warrant relief. A lesser degree of risk -- "some risk" -- and a different mix of other sanctioning factors, may well be sufficient to warrant relief.
33 The only factor here that might militate against a cease-and-desist order is that the conduct at issue is eight to ten years old. This factor is outweighed by the serious, continuing nature of the violations and Stein's apparent lack of understanding of the nature of the conflict requiring disclosure.
34 Appellants filed a Motion To Adduce Additional Evidence ("Motion") challenging the credibility of a witness in the hearing below, Bernard Vonderhaar, an official with one of the investment advisers (AmeriTrust) recommended in the AIM program with whom Stein purportedly attempted to obtain employment for Albritton. At the hearing, Vonderhaar testified that, at a meeting that allegedly occurred among Stein, Albritton and him, Stein stated: "I want you to meet your new partner [Albritton] . . . You are going to write [Albritton] a check for 40% of your commission . . ." The Division argued to the law judge that this testimony showed that Stein was demanding a "'kickback' -- through Albritton�-- for recommending AmeriTrust to his Merrill Lynch institutional clients." These allegations are not part of the Order Instituting Proceedings and they are not addressed in the Initial Decision. The Division raises the argument again on appeal, and this argument prompted the Appellants' Motion. The argument is outside the scope of the Order Instituting Proceedings, and is rejected for that reason. Appellants' Motion is therefore moot.
35 We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.
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Modified: 03/18/2003