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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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In the Matter of THE ROCKIES FUND, INC.,
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INITIAL DECISION |
| APPEARANCES: | Robert M. Fusfeld for the Division of Enforcement, Securities and Exchange Commission
Edward J. Meehan, Roberto Iraola for The Rockies Fund, Inc., Stephen G. Calandrella, Charles M. Powell, and Clifford C. Thygesen David A. Zisser for John C. Power |
| BEFORE: | Brenda P. Murray, Chief Administrative Law Judge |
The Securities and Exchange Commission ("Commission") issued an Order Instituting Proceedings ("OIP") on June 1, 1998, pursuant to Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("ICA") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). I will refer to The Rockies Fund, Inc. ("Rockies Fund" or "Fund"), Respondent Calandrella, Respondent Powell, and Respondent Thygesen as the "Respondents." I will refer to Respondent Power separately.
I held a five-day public hearing, November 2 through 6, 1998, in Denver, Colorado. The Division of Enforcement ("Division") presented ten witnesses and introduced seventy-nine exhibits. Respondents presented eight witnesses, including one expert, Clarence D. Hein, and introduced thirty-six exhibits. Respondent Power and Respondent Calandrella sponsored one expert witness, Junius W. Peake. Respondent Power introduced sixteen exhibits. Following the hearing, I admitted into evidence pages 210-16 of the hearing transcript in Carroll A. Wallace, CPA, Admin. Proc. 3-9862. I hereby grant a request to admit into evidence a copy of the Default Judgment in Calandrella v. Katz, No. 96 CV 267, Dist. Ct. Boulder County, Colo. (May 27, 1999).
The Division filed Proposed Findings of Fact and Conclusions of Law, and a Brief in Support of Proposed Findings of Fact and Conclusions of Law. The two documents are dated February 5, 1999. Respondents filed a Response and Further Proposed Findings of Fact and Conclusions of Law, and a Brief in Support of Proposed Findings of Fact and Conclusions of Law. The two filings are dated March 30, 1999. Respondent Power filed Proposed Findings of Fact and Conclusions of Law and a supporting brief, both dated March 29, 1999. The Division filed a Reply Brief dated April 7, 1999.1
I. ISSUES2
The Division alleges that:
(1) Respondent Power and Respondent Calandrella willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by manipulating the market for Premier Concepts, Inc., ("Premier") stock from approximately June 1994 through December 1994,
(2) Respondents willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 in connection with the Fund's annual and quarterly reports for periods from June 1994 through December 1995,
(3) The Rockies Fund willfully violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 in connection with the Fund's annual and quarterly reports from June 1994 through December 1995, and Respondents Calandrella, Thygesen, and Powell willfully aided and abetted or caused the violations, and
(4) Respondent Calandrella willfully violated Section 57(k)(1) of the ICA in October 1994 by accepting compensation for the Fund's purchase of Premier securities while acting as an agent of the Fund, and he willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 by not disclosing the facts to any independent representative of the Fund.
II. FINDINGS OF FACTS
My findings are based on the record and my observation of the witnesses' demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). I have considered all proposed findings, conclusions, and arguments raised by the parties and accept those consistent with this decision.
The Rockies Fund, Inc.
The Rockies Fund is a closed-end investment company incorporated in Nevada on August 2, 1983, and headquartered in Colorado Springs, Colorado.3 (Div. Ex. 8 at 1, 3.) On November 16, 1983, the Rockies Fund completed a public offering in which it sold 425,000 shares of common stock at $8.00 per share and received net proceeds of almost $2.9 million. (Div. Ex. 8 at 3.) The Rockies Fund elected to be a business development company ("BDC") when it began in 1983.4
The Small Business Investment Incentive Act of 1980 amended the ICA and established a new system of regulation for BDCs. This regulatory system was designed so that "business enterprises, particularly small growing and financially troubled enterprises, can-in a manner consistent with the interests of investor protection-more readily raise needed capital." H.R. Rep. No. 96-1341, at 19 (1980), reprinted in 1980 U.S.C.C.A.N. 4800, 4801. However, the House Committee on Interstate and Foreign Commerce also observed:
While recommending these statutory changes, the Committee is cognizant of the need to avoid compromising needed protection for investors in the name of reducing regulatory burdens. As observed above, any "reform" that results in undermining investor confidence in the integrity of the market place could have an effect precisely the opposite of its intended benefits to capital formation. The [ICA] was enacted to eliminate the widespread abuses and breaches of fiduciary duties that were uncovered in unregulated investment companies. . . . [BDCs], no less than any other investment companies, are potentially subject to these
abuses. . . . Consequently, this legislation is intended to preserve to the fullest possible extent these types of protections, while at the same time reducing unnecessary regulatory burdens.
H.R. Rep. No. 96-1341, at 22 (1980), reprinted in 1980 U.S.C.C.A.N. 4800, 4804.
A BDC is a "domestic, closed-end company that is operated for the purpose of making investments in small and developing businesses and financially troubled businesses; that makes available significant managerial assistance to its portfolio companies; and that has notified the Commission of its election to be subject to the system of regulation established by sections 55 through 65 of the [ICA]." Interim Notification Forms for Business Development Companies, 22 SEC Docket 602, 603 (Mar. 26, 1981) (footnotes omitted). In keeping with the ICA, the Rockies Fund invests primarily in small cap or early growth stage companies with the objective of capital appreciation. (Tr. 536-37.) It often invests in small financially troubled companies intending to make them financially viable. Sometimes the Rockies Fund buys a company out of bankruptcy; other times, it provides active management assistance where a company needs capital and marketing ideas. (Div. Ex. 8 at 3.)
In February 1991, Respondent Calandrella, then age thirty-one and a high school graduate, purchased 140,000 of the Rockies Fund's 640,000 shares outstanding and "took over" the Fund.5 (Tr. 208-09; Div. Ex. 8 at 3.) Respondent Calandrella made additional purchases, and on March 15, 1995, he owned 31.2% of the Fund's outstanding shares. The other large owner was D. A. Davidson & Co. ("D.A. Davidson"), a licensed broker-dealer, with 36.8%.6 (Div. Ex. 8 at 25.) Respondent Calandrella has been president and a director of the Rockies Fund since February 1991. On January 30, 1994, he also became chief executive officer and treasurer of the Fund. (Div. Ex. 8 at 19.) D. A. Davidson gave Respondent Calandrella a proxy to vote its common shares in 1991 and that authority was automatically renewed if the net asset value of the Fund increased from the preceding year. The proxy expired by its own terms on January 1, 1994. (Div. Ex. 8 at 21.) Respondent Calandrella received a salary of $16,000 in 1993, and $48,000 in 1994. (Tr. 204; Div. Ex. 8 at 19, 24.) According to Respondent Calandrella, he loaned the Fund an amount less than several hundred thousand dollars from 1991 through 1995. (Tr. 214, 216.) In addition to the Rockies Fund, Respondent Calandrella owned Aztec Capital Corporation and was and/or is affiliated with a number of public companies as an officer, director, and/or substantial owner.7 (Tr. 214-15; Div. Ex. 8 at 19.) The Fund's Form 10-K for year-end 1994 represents that Respondent Calandrella "has been an officer or director of, or has otherwise been affiliated with or a promoter of, fifteen companies which have successfully undertaken blank check initial public offerings." (Div. Ex. 8 at 19.) Respondent Calandrella estimated that he was involved in sixty to eighty different company filings with the Commission between 1994 and 1998. (Tr. 768.) In his May 1995 investigative testimony, Respondent Calandrella said he was the principal buyer of Rockies Fund shares since 1991. (Tr. 211-12.)
In 1994 and 1995, Respondent Calandrella and two independent directors, Respondent Powell and Respondent Thygesen, made up the Rockies Fund board, and the Fund had four employees including Respondent Calandrella. (Tr. 1304-05; Div. Ex. 8 at 16, 19, Div. Ex. 12 at 18.) Respondents Calandrella, Powell, and Thygesen were and are affiliated with many of the same public companies. (Tr. 217, 224-25, 881-83.) Respondent Thygesen is president and chief executive officer of American Educational Products, a public company where Respondent Calandrella is a board member. (Tr. 882.) Respondent Thygesen earned a bachelor of science degree in industrial administration from the University of Illinois, and has known Respondent Calandrella since the mid-1980s. (Tr. 879, 881, 903-04.) Respondent Thygesen has served on the boards of about fifteen public companies. (Tr. 881-82.) He accepted Respondent Calandrella's invitation to join the Rockies Fund board in 1991. (Tr. 879.)
Respondent Powell has known Respondent Calandrella since the early 1980s. (Tr. 1153.) Respondent Calandrella invited him to become a Rockies Fund board member in 1991. (Tr. 1149.) Respondent Powell earned a bachelor of science degree in accounting from the University of Colorado in 1976. (Tr. 1112.) He was a CPA for about two years, but has spent most of his career in management positions with small technology companies and has started several companies. (Tr. 1115-16.) In 1998, Respondent Powell was vice president of sales for a large software company. (Tr. 1115.) He has served as an officer or director of about ten public companies. (Tr. 1113-14.) In January 1995, while a director of the Rockies Fund, Respondent Powell replaced Respondent Calandrella as a director of Premier. Powell served as a Premier director until the end of 1996. (Tr. 475, 1114, 1154.)
The Commission's staff conducted an examination of the Rockies Fund in March 1994. (Tr. 1166-67, 1169.) The deficiency letter sent at the conclusion of the examination, did not raise any of the allegations in the OIP. (Tr. 1172-77.) The Rockies Fund responded to that letter. (Tr. 1178.)
Respondent Power
Respondent Power attended several colleges but did not graduate. (Tr. 964.) His primary occupation is president of the Redwood MicroCap Fund, Inc. ("Redwood MicroCap"), a registered investment company. (Tr. 964, 1067.) Respondent Power is engaged in many varied business activities with his brothers, Brian and Mark, and he owns Power Curve, a private company.8 (Tr. 964, 970, 973-75, 1034; Power Ex. 17.) In the matters at issue here, Respondent Power appears to have acted and invested at all times for Redwood MicroCap. (Tr. 1067-68.) Respondents Power and Calandrella began investing in many of the same companies in 1983 when they were in their early twenties.9 (Tr. 224-25, 228, 233-34, 976.) Before he was an officer and director of the Rockies Fund, Respondent Calandrella was a director of and a substantial investor in Redwood MicroCap. (Tr. 227, 231-33, 238.) From 1992 through 1995, Respondents Power and Calandrella loaned or borrowed funds from each other in undocumented transactions. (Tr. 234-36.) In 1993 and 1994, the two men were close friends and, depending on the transactions they were involved in, talked as often as two to five times a day. (Tr. 236.) The relationship became strained in June 1994, but they were trusted friends from 1992 through 1995. (Tr. 234-38, 997-98, 1191, 1339-40; Div. Ex. 43.)
Premier Concepts, Inc.
Premier's 1994 Report to Shareholders set forth its status as follows:
Premier Concepts, Inc., a Colorado corporation ("Premier" or the "Company") in March 1994, acquired substantially all of the assets, and assumed certain liabilities used in connection with the operation of a nationwide chain of 27 faux jewelry stores operating under the trademark "Imposters." The transaction was undertaken pursuant to an Amended Plan of Reorganization of American Fashion Jewel, Inc., d/b/a "Imposters," dated January 24, 1994 and confirmed by the United States Bankruptcy Court for the Northern District of California on February 24, 1994. . . .
. . . .
To raise the capital necessary to complete the Imposters's acquisition, the Company sold in private offerings (i) 100,000 shares of Common Stock for an aggregate consideration of $70,000 to the Trustee in Bankruptcy for [Imposters], (ii) 300,000 shares of Common Stock for an aggregate consideration of $75,000 to institutional investors which had been shareholders of [Imposters], and (iii) in a private placement, an aggregate of 463,750 Units at a price of $2.00 per Unit, each Unit consisting of two shares of Common Stock and one Class C Common Stock Purchase Warrant exercisable for two years to purchase one additional share of Common Stock at an exercise price of $2.00 per share. In the aggregate, the foregoing represented the sale of 1,327,500 shares for an aggregate price of $1,072,500.
. . . .
In April 1993, three (3) additional reproduction jewelry stores were acquired when the Company exchanged 100,000 shares of its Common Stock and Class D Common Stock Purchase Warrants for 100% of the outstanding common shares of Mirage Concepts, Inc. The stores acquired in the transaction are . . . located in California and Arizona.
(Resp. Ex. 19 at 1-3.)
The following is an expansion on the above terse statement from Premier's annual report. (Resp. Ex. 19.) Premier was incorporated under the laws of Colorado on July 14, 1988, under the name Protron Systems, Inc. Protron Systems, Inc. changed its name to Silver State Holding, Inc. on March 27, 1991. It became Silver State Casinos, Inc. ("Silver State") on March 30, 1993. (Div. Ex. 29 at 4.) Silver State was a public company and its shares were traded over-the-counter and quoted in the "pink sheets" issued by the National Quotation Bureau, Inc.10 (Div. Ex. 29; Tr. 476.) As of December 31, 1993, Respondent Calandrella owned 8.2% of the shares outstanding. (Div. Ex. 29 at 9.) He was also president and a director. (Div. Ex. 29 at 9.) Silver State changed its name to Premier on February 21, 1994. (Div. Ex. 29 at 4.)
An understanding of how the Rockies Fund became involved with Premier goes back to 1991 or 1992. Mark Power and Raymond Stanz formed Mirage Concepts, Inc. ("Mirage"), a joint venture to expand the jewelry store that Mr. Stanz operated and owned as a sole proprietor in a California shopping mall owned by Mark Power. (Tr. 456-57, 1029-31.) Mirage was an Arizona C corporation owned 50% by Mr. Stanz and 50% by Mark Power and Respondent Power. (Tr. 346-48, 457-59, 1032.) Mr. Stanz was president of Mirage. (Tr. 450.) In 1993 through 1994, Mirage operated three stores, two in Arizona and one in San Francisco. (Tr. 459-60, 1032-33; Div. Ex. 75.) Respondent Power and Mr. Stanz decided to expand Mirage by acquiring Imposters, a bankrupt chain of twenty-seven retail faux jewelry stores similar to Mirage.11 (Tr. 462-66, 1034-37; Power Ex. 3.) Respondent Power invited Respondent Calandrella to join him, Mr. Stanz, and Mark Power in the purchase of Imposters because they could not handle the acquisition cost of at least $1 million by themselves. (Tr. 464-66, 1039-43.) Respondent Calandrella suggested that Silver State/Premier purchase Imposters because it would make it easier to achieve a public offering of securities and a listing on the Nasdaq SmallCap Market.12 (Tr. 1040-41.) Respondent Calandrella signed the Commitment Letter dated January 4, 1994, which Imposters accepted. (Div. Exs. 29, 30.) The bankruptcy court approved the acquisition and Imposters's Amended Plan of Reorganization became effective on March 3, 1994.13 (Div. Ex. 75 at 7, Resp. Ex. 18.) Following the acquisition, Premier focused its business solely on operating costume (a.k.a., "faux") jewelry stores. (Tr. 127-28.)
Pursuant to the Amended Plan of Reorganization, Premier was committed to bring $1 million in cash equity into the acquisition of Imposters. (Div. Ex. 29 at Bates 8405.) On February 22, 1994, Premier authorized a private placement to finance the acquisition ("Imposters PP"). (Tr. 97, 190; Div. Ex. 23.) The offering was 500,000 units each consisting of two shares of common stock and one Class C warrant exercisable at $2.00 per share. (Div. Ex. 23.) The authorizing board resolution specified that these Premier shares and Class C warrants were "restricted securities" under the Securities Act of 1933 ("Securities Act") and that certificates should bear Premier's "customary restrictive legend."14 (Div. Ex. 23.)
Respondent Calandrella and Respondent Power expected that they would put Premier on a sound footing and obtain a Nasdaq listing in 1994 or early 1995. (Tr. 100-01, 352-53, 355, 392-94, 486-87, 980, 988, 1040-42; Power Ex. 9.) They conveyed their optimistic appraisal of a Nasdaq listing and a public offering, including registration of outstanding restricted shares, to the investors and others. (Tr. 391-93, 433-34; Div. Ex. 88 at 58.) The following persons bought Premier units in the Imposters PP that raised approximately $1 million:
| Ranald Butchard
Vancouver, British Columbia |
$200,000, pursuant to Regulation S15 |
| Redwood MicroCap | $152,500 |
| Rockies Fund | $125,00016 |
| Ray Hand | $125,000 |
| Kober Corporation | $50,000 |
| Respondent Calandrella | $47,500 |
| Mirage Concepts | $35,000 |
| Roger Flahive, Stella Melillo, Werner Lienmann, Ralph F. Stonebraker, and Resources Trust Co./Gene Fox IRA | $25,000 each |
| Richard Huebner | $15,000 |
| Randy Black, Donald Hamilton, and Hanifen Imhoff/R. Flahive IRA | $12,500 each |
| Hanifen Imhoff/ S. Huebner IRA | $10,000 |
| Peter L. Hirschburg | $5,000 |
(Div. Exs. 23, 31, 57, Resp. Ex. 19.)
Mr. Stanz, Premier's chief operating officer, and Respondent Power, who held no formal title, began operating the former Imposters stores in early 1994. Premier also began operating the three Mirage stores in February or March 1994. (Tr. 109, 345, 392, 1043, 1047-49, 1340.) In May 1994, the Premier board-Respondent Calandrella, Peter Bloomquist,17 and Gerald Jacobs-authorized Premier to acquire all outstanding Mirage shares for 135,000 Premier units consisting of one share of common stock and one Class D warrant. (Tr. 446; Div. Ex. 41.) Premier's Form 10-Q for the period ended September 30, 1994, represented that Premier acquired Mirage effective April 1, 1994. However, for reasons not in evidence, Premier did not issue shares and the owners of Mirage did not receive Premier shares at this time. (Tr. 351-52, 468-70, 669-71, 1048-49; Div. Ex. 75 at 7.)
In late May 1994, Respondent Calandrella and Respondent Power had a disagreement. Respondent Calandrella directed Mr. Stanz to deal only with him and not with Respondent Power. (Tr. 464-67, 1045-49, 1062-63.) In August 1994, Mr. Stanz resigned his position in which he handled the day-to-day management of Premier because of disagreements with Respondent Calandrella. (Tr. 346, 361-63, 386, 388-91; Div. Exs. 43, 44.) Points of disagreement included discovering that Premier had considerable liabilities, the injection of Sissel B. Greenberg into Premier's management, and Respondent Calandrella's refusal to purchase Mr. Stanz's Premier shares. (Tr. 376-77, 388, 390-91, 394, 984.) Ms. Greenberg had replaced Respondent Calandrella as president and chief executive officer of Premier on June 20, 1994. (Tr. 94-95; Resp. Ex. 19.) Ms. Greenberg has degrees from a university in Norway and the University of Denver, including a bachelor of science degree in finance and an MBA. (Tr. 93.) A personal relationship between Ms. Greenberg and Respondent Calandrella ended unamicably at the end of 1994. (Tr. 176-77.)
In a document signed December 5, 1994, the Premier board consented to an arrangement whereby in return for a loan commitment of up to $100,000 from the Fund, Premier granted the Fund Class D warrants to purchase up to 150,000 shares of common stock at $1.125 per share. (Tr. 876-77; Div. Ex. 57 at Bates 65.)
The Commission requires that a company be current in its filings in order to have a public offering. Premier updated Silver State's delinquent Commission filings in late December 1994. (Tr. 108-09.) Because of the Commission investigation and this proceeding, the Rockies Fund, Respondent Calandrella, Redwood MicroCap, and Respondent Power had to dispose of their Premier holdings to satisfy underwriters and Nasdaq. (Tr. 186, 194-95, 201-02; Div. Ex. 66.) By letter dated December 18, 1996, Premier agreed to buy the Fund and Respondent Calandrella's Premier shares. (Tr. 195; Div. Ex. 66.) Premier was listed on Nasdaq in April 1997. (Tr. 101.) In November 1998, Premier stock was priced at $1.125 per share. (Tr. 200.)
III. CONCLUSIONS OF LAW
1. Did Respondents Calandrella and Power willfully violate Section 10(b) of the Exchange Act and Rule 10b-5 by manipulating the market for Premier common stock through various means, including but not limited to engaging in matched orders and wash sales or trading through nominee accounts in the period June through December 1994?
Section 10(b) of the Exchange Act states in part:
It shall be unlawful for any person, . . . by the use of any means or instrumentality of interstate commerce or of the mails, . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . .
Rule 10b-5 makes it unlawful for any person using interstate commerce or the mails in connection with the purchase or sale of a security to:
(1) employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any
person . . . .
17 C.F.R. § 240.10b-5
The transactional and interstate commerce requirements are satisfied because during 1994 and 1995, shares of the Rockies Fund, which were registered with the Commission under Section 12(g) of the Exchange Act, were traded on the OTC Bulletin Board, and people outside Colorado bought and sold Premier shares.
To violate Section 10(b) of the Exchange Act and Rule 10b-5, a person must have acted with scienter. The Supreme Court has defined scienter as "a mental state embracing the intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976); C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1435 (10th Cir. 1988). The scienter requirement is satisfied by a showing that a person acted recklessly, as in a manner that is "an extreme departure from the standards of ordinary care, and 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." Hackbart v. Holmes, 675 F.2d 1114, 1118 (10th Cir. 1982); see also Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990); C.E. Carlson Inc., 859 F.2d at 1435.
Market manipulation is the "intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst, 425 U.S. at 199. "In essence, a manipulation is intentional interference with the free forces of supply and demand. Proof of a manipulation almost always depends on inferences drawn from a mass of factual detail." Pagel, Inc., 48 S.E.C. 223, 226 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986); see also United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972). The Commission has found that "[m]anipulation strikes at the heart of the pricing process on which all investors rely. It attacks the very foundation and integrity of the free market system." L.C. Wegard & Co., Inc., 67 SEC Docket 814, 817 n.5 (May 29, 1998). "[R]apidly rising prices in the absence of any demand are well known symptoms of [a manipulation]." Dlugash v. SEC, 373 F.2d 107, 109 (2d Cir. 1967). "This small floating supply of stock [100,000 shares] operated to make its market price more susceptible to the effect of buying in the market." Harold T. White, 3 S.E.C. 466, 477 (1938).
"[T]he term [manipulation] refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity." Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977). Matched orders and wash sales occur where buyers and sellers work together, knowing what the other is doing, the order to buy and the order to sell are contemporaneous, the orders are substantially the same size, and the parties know that their orders will be executed at substantially the same price. A matched order is "one placed with the knowledge that an offsetting order on the other side has already been or is about to be placed." Edward J. Mawod & Co., 46 S.E.C. 865, 869 (1977), aff'd, Edward J. Mawod & Co. v. SEC, 591 F.2d 588 (10th Cir. 1979). A wash sale is "one in which the ownership of the security remains unchanged." Edward J. Mawod, 46 SEC at 869. A showing of damage is not necessary for a finding of manipulation in a proceeding brought by the Commission to redress the public interest. See Edward J. Mawod, 46 S.E.C. at 871-72 (citing White, 3 S.E.C. at 540-41 and Russell Maguire & Co., Inc., 10 S.E.C. 332, 350-52 (1941)); see also Richard D. Chema, 68 SEC Docket 2017, 2023 (Nov. 30, 1998).
The Division charges Respondent Calandrella and Respondent Power with manipulation that violated the antifraud provisions of the Exchange Act because they:
engaged in matched trades to keep Butchard's sales of Premier stock from adversely affecting the market price of Premier stock. Further, the evidence is clear that Power engaged in wash trades at escalating prices at substantial cost to himself at a time when he had an admitted cash shortage. Calandrella and Power dominated and controlled the Premier trading market. It was their trading, at prices they set, that drove the price of Premier stock from $1 to $2.25.
(Div. Br. 46.)
The Division charges that Respondent Calandrella and Respondent Power used matched orders and Respondent Power used wash sales to manipulate the market for Premier shares and their activities caused Premier's bid price to go from $1.00 on June 10, 1994, to $2.25 on December 31, 1994. (Div. Exs. 1, 19, 20; Div. Br. 23, 27-35.) The Division's position is that matched orders and wash sales are not per se manipulative but they are manipulative:
when persons such as Calandrella and Power who are savvy market professionals with a motive to raise the price of the stock engage in matched and wash trades, dominate and control the market, execute their trades at ever increasing prices, the price of the stock rises, there are no corporate developments which explain the price rise, and the price collapses after the trading ceases . . . .
(Reply Br. 18.)
The Division maintains that Respondent Calandrella and Respondent Power need not have specifically intended to manipulate the price of Premier, it is sufficient that they engaged in a course of conduct that operated as a fraud or deceit as to the nature of the market and were either aware or recklessly indifferent to the consequences of their actions, citing SEC v. U.S. Environmental, Inc., 155 F.3d 107, 111 (2d Cir. 1998), and Chema, 68 SEC Docket at 2022. (Div. Br. 49.)
Respondent Calandrella maintains that there is no credible evidence of manipulation because he did not engage in any of the challenged trades, and he and Respondent Power were hardly speaking to each other during this five-month period so they could not have worked together to commit fraud. Furthermore, Respondent Calandrella argues that the Division has failed to establish scienter, and even under the Division's reading of SEC v. U.S. Environmental, Inc., it has to prove that the Premier trades were per se manipulative and there has been no showing that he intended to manipulate the market. (Resp. Br. 6, 10-19.)
Respondent Power maintains that there has been no showing that (1) his trading caused an increase in the price of Premier shares or that he intended to create such an appearance, (2) he acted for the purpose of creating a false or misleading appearance with respect to the market, or (3) he acted with a manipulative purpose or intention. Respondent Power argues that when a charge of manipulation arises out of the practices described in Sections 9(a)(1) and (2) of the Exchange Act, the specific "purpose" element of those sections must be present. Otherwise, manipulation would have a very different meaning under Section 10(b) of the Exchange Act than it does under Section 9 of the Exchange Act.18 (Power Br. 16-17.) Respondent Power maintains that he bought and sold Premier for the legitimate purposes of buying stock from someone who wished to sell, or to generate credit. (Power Proposed FF and CL 11.) In support of his position, Respondent Power cites several cases, including Santa Fe Indus., 430 U.S. at 475-76, Ernst & Ernst, 425 U.S. at 199, SEC v. Resch-Cassin & Co., Inc., 362 F. Supp 964, 977-78 (S.D.N.Y. 1973), Chema, 68 SEC Docket at 2022 n.10, and Michael Batterman, 46 S.E.C 304 (1976), and the expert opinion of Professor Junius W. Peake who saw no evidence of manipulation. (Power Br. 11-28.)
I find that Respondents Calandrella and Power, acting with scienter, manipulated the market for Premier shares during the relevant period through matched orders of Mr. Butchard's shares and wash sales because they deliberately engaged in deceptive conduct which caused the price of Premier stock to rise. I reach this conclusion for the following reasons. Respondents Calandrella and Power and their friends controlled Premier in 1994. (Tr. 844-45.) Premier was listed on the OTC Bulletin Board in 1994, but there was no trading by the general public in Premier stock. (Tr. 126, 484-85, 850-51.) During the relevant period, June 10 through December 30, 1994, trading in Premier stock was so inactive that Respondent Calandrella referred to it as "the stock that trades by appointment only." (Tr. 484-85.)
Of the sixty-seven entries on a list of Premier trades that occurred in this roughly six-month period, all but four transactions occurred between accounts at Hanifen Imhoff, the single market maker, and McDermid St. Lawrence Chisholm Ltd. ("McDermid"), a broker-dealer in Vancouver, Canada. Mr. Butchard was a registered representative at McDermid and Respondent Power maintained accounts there.19 (Div. Ex. 1.) Forty-five of the sixty-seven Premier transactions occurred in the first three months when Mr. Butchard sold about half of the 200,000 Premier shares that he acquired subject to Regulation S in the Imposters PP. (Tr. 1000-03; Div. Ex. 88 at 83-147.) Mr. Butchard's sales were significant because they represented a substantial portion of the public float of Premier shares of between 400,000 and 500,000 shares in 1994. (Tr. 851-53.) Respondent Power arranged most, if not all, of Mr. Butchard's sales because Respondent Calandrella was illiquid during the period, but Respondent Calandrella participated in and approved of Respondent Power's actions. (Tr. 125, 264, 270, 850-51, 856-59, 874, 997-1000.) Mr. Butchard was a long time friend and business associate of Respondent Calandrella and Respondent Power. (Tr. 239-40.) Mr. Butchard owned 15% of Redwood MicroCap and he loaned Redwood MicroCap between $100,000 and $200,000 in 1992 or 1993. (Tr. 977.) Mr. Butchard, Respondent Power, and Respondent Calandrella have been directors of the Combined Penny Stock Fund. (Tr. 230-31.) Mr. Butchard sold his shares to Hanifen Imhoff because he understood from Clifford L. Neuman that a market sale of his Premier shares to a market maker removed the Regulation S restriction.20 (Tr. 116; Div. Ex. 88 at 78.) Mr. Butchard discussed his trades with Respondent Power who told him he would be able to sell the Premier stock when there was no market for Premier shares. Mr. Butchard knew Respondent Power was assisting Hanifen Imhoff find buyers. He understood there was a buyer for the shares when he placed his limit orders and it was "quite possible" Respondent Power was buying his shares. (Div. Ex. 88 at 84-85, 95, 97-101.) Mr. Butchard specified the price at which he would sell his Premier shares. He could not recall why he chose a certain price, but admitted that Respondent Power set one price. (Div. Ex. 88 at 93-94, 101, 108-10, 119, 121-22, 144, 147.)
The persuasive evidence is that Respondents Power and Calandrella, either personally or through persons or firms they controlled or strongly influenced, bought Mr. Butchard's shares at prices that were arbitrary and had no legitimate basis. (Tr. 857-74, 988-92, 997-999, 1005-07.) Respondent Power arranged trades using the accounts of Power Curve, Redwood MicroCap fund, the Power IRA, his daughter Aubrey Power's account, and the Brian Power account that he controlled. (Tr. 324-25, 1008, 1015-16.) Respondent Power strongly influenced the purchase by Neon Rainbow. Neon Rainbow is controlled by Allen Williams, a friend and business associate of Respondent Power who lives in Canada. Mr. Williams was or had been a director of the Combined Penny Stock Fund, as had Respondents Calandrella and Power, Mr. Butchard, and Mr. Nacht. (Tr. 230-31, 977-78, 992; Div. Ex. 88 at 14-16.) Respondent Calandrella controlled the investments of Nathan Katz, a business associate. Respondent Calandrella loaned Mr. Katz the money to purchase Premier shares. (Tr. 860-62, 866-69, 871-74.) Arthur Nacht, a dentist and friend of Respondent Calandrella's for many years, made loans to Respondent Calandrella and the Fund, and received investment advice from Respondent Calandrella. (Tr. 240-42, 639-642.) Respondent Calandrella had discretionary authority to place orders in Mr. Nacht's Hanifen Imhoff account and, to Mr. Nacht's surprise, Respondent Calandrella was able to place orders in Mr. Nacht's Cohig account.21 (Tr. 648-49, 658-59.)
Mr. Butchard paid $200,000 for the 200,000 Premier shares and 100,000 Class C warrants he acquired in the Imposters PP. (Div. Ex. 23.) Mr. Butchard sold approximately 180,000 Premier shares in June through August 1994 to Respondent Power and entities that he and Respondent Calandrella controlled for about $201,000. (Tr. 1004; Div. Ex. 1.)
1. Mr. Butchard sold 50,000 Premier shares to Hanifen Imhoff at $1.10 per share on June 10, 1994. On June 15, Nathan Katz bought 25,000 of Mr. Butchard's shares at $1.125 per share, and Power Curve bought 25,000 of Mr. Butchard's shares at $1.125 per share.22 (Div. Ex. 1 at nos. 1-5, Div. Ex. 88 at 96; Div. Proposed FF and CL 352)
2. Mr. Butchard sold 25,000 Premier shares to Hanifen Imhoff at $1.00 per share on June 17, 1994. On the same day, Richard Huebner bought 8,000 of Mr. Butchard's shares at $1.00 per share, Brian Power bought 7,000 of his shares at $1.03125 per share, and Neon Rainbow bought 10,000 shares at $1.03125 per share. (Div. Ex. 1 at nos. 6-11, Div. Ex. 88 at 108, 111.)
3. Mr. Butchard sold 50,000 Premier shares to Hanifen Imhoff at $1.00 per share on June 21, 1994. On the same day, Hanifen Imhoff sold the 50,000 shares back to McDermid at $1.01 per share. The next day, the shares were sold in varying amounts to three of Mr. Butchard's customers (Barr, K. Phillips, and Brad Butchard) at McDermid for $1.01 per share. (Div. Ex. 1 at nos. 12-17.) On June 29, two of Mr. Butchard's customers (Brad Butchard and K. Phillips) sold the 37,000 shares they purchased to three other Butchard customers (Gecko Holdings, J. Crone, and Marj. Butchard) for $1.125 per share. (Div. Ex. 1 at nos. 16, 17, 23-27.) Mr. Butchard sold his stock to his customer accounts at McDermid through Hanifen Imhoff because Mr. Neuman told him he had to sell his Regulation S shares in a market sale to a market maker to eliminate the restriction. (Div. Ex. 88 at 114-19.)
4. Mr. Butchard sold 25,000 Premier shares to Hanifen Imhoff at $1.04 per share on June 23, 1994. On the same day, Redwood MicroCap purchased these 25,000 shares at $1.05 per share from Hanifen Imhoff. (Div. Ex. 1 at nos. 18-20; Div. Ex. 88 at 120.)
5. Mr. Butchard sold 10,000 Premier shares to Hanifen Imhoff at $1.25 per share on June 28, 1994. On June 30, Nathan Katz bought those 10,000 shares for $1.25 per share. (Div. Ex. 1 at nos. 21, 22, 28.) It appears that Mr. Katz bought Mr. Butchard's shares. (Tr. 1005; Div. Proposed FF and CL 359.)23
6. Mr. Butchard sold 10,000 shares to Hanifen Imhoff at $1.50 per share on August 9, 1994. On August 19, Mr. Katz bought these 10,000 shares and another 500 shares from Hanifen Imhoff at $1.53125 per share. (Tr. 1005; Div. Ex. 1 at nos. 35-36, 39; Div. Proposed FF and CL 361.)24
7. Mr. Butchard sold 10,000 Premier shares to Hanifen Imhoff at $1.75 per share on August 23, 1994. On August 30, 1994, Mr. Nacht bought those share in his account at Cohig for $1.78125 per share. (Tr. 1005; Div. Ex. 1 at nos. 40, 41, 45; Div. Proposed FF and CL 362.)25
In addition to the matched sales, Respondent Power admits to directing a series of "wash trades" in Premier in 1994. (Tr. 1006-08.)
1. On July 6, Brian Power's account at Hanifen Imhoff sold 5,000 Premier shares at $1.4375 per share to Hanifen Imhoff. On July 8, Power Curve's account at McDermid sold 14,000 Premier shares to Hanifen Imhoff at $1.50 per share. On July 8, Respondent Power's account at Hanifen Imhoff bought these 19,000 shares for $1.515 per share. (Tr. 1006-07; Div. Ex. 1 at nos. 29-32.)
2. On July 25, Respondent Power's account at Hanifen Imhoff sold 17,000 Premier shares to McDermid at $1.50 per share. On the same day, Power Curve's account at McDermid bought these 17,000 shares at the same price. (Tr. 1007-09; Div. Ex. 1 at nos. 33, 34.)
3. On August 17, Power Curve's account at McDermid sold 14,000 Premier shares to Hanifen Imhoff at $1.75 per share. On the same day, Brian Power's account at Hanifen Imhoff bought 17,000 shares at the same price. (Div. Ex. 1 at nos. 37, 38.)
4. On August 25, Brian Power's account at Hanifen Imhoff sold 14,500 Premier shares to McDermid at $1.75 per share. These shares were purchased by Respondent Power's account at McDermid on the same day at the same price. (Tr. 1010-11; Div. Ex. 1 at nos. 42, 43.)
5. On September 19, Brain Power's account at Hanifen Imhoff sold 1,500 Premier shares to Hanifen Imhoff at $1.875 per share. Power Curve's account at McDermid bought these shares the same day at $2.00 per share. (Tr. 1013-14; Div. Ex. 1 at nos. 50-52.)
6. On October 21, Respondent Power's account at McDermid sold 4,250 Premier shares to Hanifen Imhoff at $2.50 per share. On the same day, Respondent Power's IRA account at YDSA bought 2,500 shares at $2.56250 from Hanifen Imhoff. Also on the same day, the account of Respondent Power's minor child at Hanifen Imhoff bought 1,750 shares at $2.50 per share. (Tr. 1015-16; Div. Ex. 1 at nos. 57-61.)
Additional evidence that Respondent Calandrella acted to increase the price of Premier shares is found in his admission to at least two people that he could cause Premier's stock price to increase. Respondent Calandrella told Mr. Stanz that Premier was so illiquid that he could change the price with a phone call, that he had gotten Premier's stock price to $2.00 and that he was going to get it to $3.00. He also told Mr. Stanz that "friends of the Rockies" were trading the stock. (Tr. 374, 376-77, 378-81, 384-85.) In 1994, Ms. Greenberg asked Respondent Calandrella why Premier's stock price was increasing. Respondent Calandrella responded that a little trading could affect the price of a thinly traded stock like Premier and that he, Respondent Power, and a person in Canada were trading the stock. (Tr. 124-25.) Respondent Calandrella made calls to an inexperienced trader at Hanifen Imhoff who set the market maker's price for Premier. In these calls, Respondent Calandrella indicated an interest in Premier and mentioned that he might purchase additional Premier shares. (Tr. 264-69.) The trader admitted that the only inquiries about Premier came from Respondent Calandrella, and that indications of interest in Premier could have caused him to raise Hanifen Imhoff's bid. (Tr. 267-68, 270.)
I reject Respondent Power and Respondent Calandrella's defense that to violate Section 10(b) of the Exchange Act they must be shown to have acted with a manipulative purpose required for a Section 9(a) violation, and that the Division has not made such a showing. The Commission specifically rejected this argument in Chema:
It is not necessary to find that Broumas acted with manipulative intent in order to conclude that his wash sales defrauded investors. It is sufficient if Broumas engaged in a course of conduct that operated as a fraud or deceit as to the nature of the market for [James Madison, Limited]. Here the reported JML wash trades substantially distorted investors' perception of the market, creating a false appearance of enhanced activity. Broumas was either aware of or recklessly indifferent to this natural consequence of his actions.
Chema, 68 SEC Docket at 2022 (footnote omitted); see also United States v. Charnay, 537 F.2d 341, 350 (9th Cir. 1976) (holding that neither Section 10(b) of the Exchange Act nor Rule 10b-5 require proof of purpose to induce trading as is required under Section 9(a) of the Exchange Act).
Even though such a showing is not required, the evidence is persuasive that Respondents Calandrella and Power acted with a manipulative intent or an intent to mislead investors by creating the false appearance of market activity. Chema, 68 SEC Docket at 2022. As persons experienced in securities trading, Respondents Calandrella and Power knew that their actions created the false impression of active trading in Premier common stock, and that it would increase the price of Premier shares. Respondent Power insisted that he was not responsible for the increased value in Premier because many of his trades conducted through McDermid were unreported. The evidence is that those trades did result in reports by Hanifen Imhoff of its trades with McDermid caused by Respondent Power. (Div. Ex. 1.) But for the market interference of Respondents Power and Calandrella, there is nothing in this record that explains why a company that lost $823,942 for the fiscal year ended December 31, 1994, whose 1994 audit concluded there was substantial doubt it would continue as a going concern, and whose projected financial success was based on a changed marketing strategy for a chain of bankrupt retail jewelry stores would have the price of its illiquid shares increase in the over-the-counter market from $1.00 on June 10, 1994 to $2.25 per share on December 30, 1994. (Tr. 158-60, Div. Exs. 19, 20, 77.) There was no positive information available about Premier because it made no filings and issued no press releases. (Tr. 147.)
Respondents Calandrella and Power also benefited from having Premier appear to have a relatively high stock price in 1994 because it increased the value of their Premier holdings and the likelihood that Premier would repay its loans. Redwood MicroCap acquired $152,500 in Premier stock in the Imposters PP. (Tr. 978.) Respondent Power, Redwood MicroCap and Power Curve also loaned Premier approximately $55,000. (Tr. 1068-69.) The Fund loaned Premier funds in 1994. (Tr. 139.) Respondents Calandrella and Power, the Fund, and Redwood MicroCap personally guaranteed various fees totaling approximately $200,000 in connection with buying Imposters out of bankruptcy. (Tr. 489-90, 1060-61; Div. Ex. 52; Power Exs. 6, 7, 8.) The evidence is that Respondents Calandrella and Power arranged for the sales of Mr. Butchard's shares at specific price levels so that the market price of Premier would not collapse and hinder their efforts to get Premier listed on the Nasdaq and to assist their friend Mr. Butchard. (Tr. 239-40, 661, 852-74, 986-87, 986-1002.) They did so to avoid the general result referenced by their expert, Clarence D. Hein, that selling shares in smaller companies with low trading volumes is impractical because it dramatically reduces the stock price. (Tr. 957-58.) The value of Premier was a key factor in attaining the Nasdaq listing that Respondents Calandrella and Power wanted and expected. Respondents Calandrella and Power arranged purchases and sales that were not arms-length transactions, but were prearranged transactions with no economic validity. For example, Mr. Butchard sold Premier for $1.00 a share and used the proceeds to buy Premier at $1.25 per share. (Div. Ex. 88 at 106.) The net cost to Brian Power of his Premier trades was $28,898.75 when his annual income was about $50,000 and he was looking to obtain funds to finance a wine company. (Tr. 66, 327.) The net cost to Power Curve, Redwood MicroCap, and Respondent Power's IRA was $9,497.50, $26,255, and $6,508.25, respectively. (Tr. 66-67.) The inference is that a person engages in manipulation when he knows trades are economically irrational. See Edward J. Mawod, 591 F.2d at 595.
The evidence does not support Respondents Calandrella and Power's position that in the second half of 1994 and in 1995, the level of animus between them was such that they were "hardly speaking" so they would not have worked together to manipulate the market for Premier shares. (Resp. Br. 12.) Respondents Calandrella and Power engaged in activities in 1994 and 1995 that demonstrate that they still worked together closely. In 1993 and 1994, the two sometimes spoke as often as two to five times a day. (Tr. 236.) In March 1995, Respondents Calandrella and Power negotiated an arrangement to settle Premier's acquisition of Mirage whereby Respondent Power agreed to transfer 12,500 Premier shares to the Fund that were due Respondent Calandrella from Mr. Stanz. (Tr. 967-68.) In May 1995, Respondent Calandrella loaned Redwood MicroCap $100,000, possibly not documented because of mutual trust. (Tr. 235.)
I accorded Mr. Peake's expert opinion that Respondents Calandrella and Power did not engage in manipulation little deference because it was based on beliefs that were plainly erroneous. Mr. Peake's view of manipulation is limited to situations involving insider trading, and he believed the Premier trades were bona fide because a market maker participated in the transactions. (Tr. 606-07, 616-18; Resp. Ex. 50.)
2. From June 1994 through December 31, 1995, did the Respondents willfully violate Section 10(b) of the Exchange Act and Rule 10b-5 by making untrue statements of material facts or omitting material facts from the Rockies Fund's annual and quarterly reports concerning: (1) the amount of the Fund's net assets; (2) the restricted status of the Fund's Premier holdings; (3) the value of the Fund's restricted and unrestricted Premier securities, and (4) the valuation of restricted Premier securities in accord with disclosed valuation policies?
During the same period, did the Rockies Fund and Respondent Calandrella willfully violate Section 10(b) of the Exchange Act and Rule 10b-5 by making untrue statements of material facts or omitting material facts from the Rockies Fund's annual and quarterly reports concerning the amount of Premier shares the Fund owned?
Respondents were responsible for the Rockies Fund's annual and quarterly reports filed with the Commission pursuant to Section 13 of the Exchange Act. See Section 64 of the ICA. The three directors signed the Rockies Fund's two Forms 10-K at issue. (Div. Exs. 8, 12.) Respondents Powell and Thygesen reviewed the quarterly filings on Form 10-Q that Respondent Calandrella signed. (Tr. 731-32, 818, 830, 1116-17.) Respondent Calandrella prepared the portfolio valuations that the board considered. (Tr. 731-32, 804, 884-85.) Each quarter Respondents Calandrella, Powell, and Thygesen signed consent resolutions assigning values to the assets in the Fund's portfolio, including Premier securities. (Div. Exs. 15, 16.) Respondents knew that these valuations were reflected in the financial statements that were part of the Fund's annual and quarterly filings with the Commission. (Tr. 706-07; Div. Exs. 6, 7, 7A, 8, 9, 10, 11, 12.)
To be violative of Section 10(b) of the Exchange Act and Rule 10b-5, the Respondents' misstatements or omissions must be material. Materiality is measured by whether or not there is a substantial likelihood that under all the circumstances, a reasonable person would consider the omitted or misstated information significant in making an investment decision. See Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Materiality has both quantitative and qualitative aspects. See American Institute of Certified Public Accountants ("AICPA"), Codification of Statements on Auditing Standards ("AU") § 312.11. Information about the value of the Fund's Premier holdings was material to an investor or potential investor in 1994 and 1995 because Premier was one of the larger positions in the Rockies Fund's portfolio that consisted of some twenty to twenty-five securities. (Tr. 809; Div. Exs. 6, 7, 7A, 8, 9, 10, 11, 12.) For the year ended December 31, 1994, the Rockies Fund valued the Premier securities at issue at $686,000, or 40% of the Rockies Fund's net assets of $1.7 million. (Div. Ex. 8 at 3, financial statements at 7.) At year-end 1995, the Rockies Fund valued these Premier shares at almost $270,000, or over 20% of the Rockies Fund's net assets of $1.3 million.26 (Div. Ex. 12 at 3, financial statements at 5.) The Rockies Fund considered its ownership of Premier a "sizeable portion of its securities" in 1994. (Resp. Br. 14.)
The Division alleges that the Fund's valuation of its Premier holding was illegal for the reasons stated in the OIP. (Div. Br. 35-46, Reply Br. 8-15.) Respondents acknowledge that the valuations of Premier appear to have been closely associated with Premier's bid price. (Resp. Br. 25.) However, Respondents allege "the valuation of all the Rockies Fund's holdings, including its Premier stock, was the product of a concerted effort by the board of directors, in good faith, to arrive at their best estimate of the true value of Premier." (Resp. Br. 25.) Respondents argue that "even though Premier's shares were misclassified as unrestricted for the filings pertaining to the June 1994 through June 1995 quarters, the board's valuations were unaffected since the board attempted to value its securities based on all available information." (Resp. Br. 26.)
(1) Did Respondents violate Section 10(b) of the Exchange Act and Rule 10b-5 as to the amount of the Fund's net assets?
Did the Fund and Respondent Calandrella violate Section 10(b) of the Exchange Act and Rule 10b-5 as to the amount of Premier shares the Fund owned?
"Kober shares"
The Division challenges the Fund's representation on its Form 10-Q for the quarter ended June 30, 1994, that it owned 25,000 Premier shares acquired in June 1994, from Kober Corporation and Kober Financial ("Kober").27 (Div. Ex. 6; Div. Br. 6, 41.) The Division alleges it was improper for the Fund to claim it owned the shares "while the terms of the acquisition were disputed and before August 1996 when the matter was finally resolved." (Div. Br. 41.)
The evidence is muddled and the transactions are undocumented, but I conclude that Kober lent Premier $50,000 for a $5,000 fee in February 1994. I reach this conclusion based on a letter detailing the transaction written by a representative of Kober. (Div. Ex. 33.) In April 1994, Kober inquired as to when it could expect payment of $55,000. It was given the option of converting the loan to Premier stock. (Div. Ex. 33.) Kober wanted cash but it was only able to get half the loan in cash and half in Premier restricted stock. In May 1994, Kober agreed to convert half the loan to Premier securities, and Respondent Calandrella took over the repayments and agreed to pay Kober $27,500 for 25,000 shares of Premier within a week. (Tr. 516, 663, 786, 1199-1204, 1221; Div. Ex. 33.) The Rockies Fund paid Kober $27,500 for the shares in four unequal payments beginning June 29, 1994, and ending January 27, 1995.28 (Div. Ex. 39.)
Kober never received any Premier stock certificates so in August 1994, Kober requested a Premier 55,000 share certificate because it needed to transfer shares to the Rockies Fund for the $27,500 it expected to receive. (Tr. 1220-21; Div. Ex. 33.) Kober still did not receive a certificate. On March 9, 1995, Mr. Neuman requested that Kober submit stock transfer forms to transfer 25,000 Premier shares to the Rockies Fund and 25,000 shares to itself. (Tr. 666-67; Div. Ex. 35.) On March 14, 1995, Kober's treasurer summarized the situation to Mr. Neuman as follows:
We have never received the share certificate. . .
In a nutshell, the Kober Corporation invested $50,000 and was to receive back $55,000. It elected to convert 1/2 its holdings to the stock. Although it took some time, the Kober Corporation has received $27,500. $27,500 is still invested. It would seem to me that the Kober Corporation is due 27,500 shares and 27,500 warrants.
(Div. Ex. 36.)
Kober signed a stock power and assignment on August 5, 1996, to transfer ownership of 25,000 Premier shares to the Rockies Fund.29 (Tr. 1212-14; Div. Ex. 90.)
I disagree with the Division that the Fund could not properly claim it owned the 25,000 Premier shares until August 1996, when Kober authorized the transfer of shares to the Fund. There are many confusing aspects of the transaction caused by Respondent Calandrella's failure to document his oral agreements, and Premier's failure, while Respondent Calandrella was president, to issue certificates to investors in the Imposters PP. However, there is no dispute that in May or June 1994, Kober and Respondent Calandrella agreed that the Fund would pay Kober $27,500, and Kober would transfer restricted Premier shares to the Fund. (Tr. 1221.) After this date, Kober tried to get the original certificates so it could transfer half the shares to the Fund. Kober accepted an initial payment for the shares in June 1994, and it did not complain or try to break the deal because it did not receive payment in full until January 27, 1995. Accounting Series Release ("ASR") 118 states that "[t]he statement of assets and liabilities of a registered investment company . . . frequently includes securities as to which contracts to purchase have been entered into but which have not been received." Codification of Financial Reporting Policies, § 404.03 (Apr. 1982).30 I reject the Division's argument that the Fund could not claim ownership because a check indicated "[f]or purchase of Premier stock" and did not set forth a stated quantity or a stated price as called for by Colorado statute. (Reply Br. 29-30.)
For all the reasons stated, I find the Fund's Form 10-Q for the quarter ended June 30, 1994, listing 25,000 shares acquired from Kober does not violate Section 10(b) of the Exchange Act and Rule 10b-5.
"Stanz shares"
The Fund reported ownership of 85,000 Premier shares obtained from Mr. Stanz beginning with its Form 10-Q for the quarter ended March 31, 1995, and its Form 10-K for the fiscal year ended December 31, 1995. (Div. Exs. 9, 10, 11, 12.) The Division claims it was wrong for the Fund to claim this amount because Mr. Stanz never had 17,500 of the 85,000 shares he agreed to transfer to the Fund. (Div. Br. 41, Reply Br. 30.)
Mr. Stanz owned 50% of Mirage and as such should have had 17,500 Premier restricted shares as a result of Mirage's purchase of 35,000 shares in the Imposters PP. He also should have had 67,500 shares as a result of Premier's acquisition of Mirage in April 1994, for 135,000 Premier restricted shares. (Div. Ex. 75 at 7.) Respondent Calandrella gave an oral commitment in early 1994, consented to in writing by Premier's board in May 1994, that Premier would acquire Mirage for 135,000 Premier units, one common stock share and one Class D warrant. However, Premier did not issue stock to Mirage in 1994. (Tr. 111, 468-70, 679; Div. Exs. 41, 47.) When Ms. Greenberg replaced Respondent Calandrella as Premier's president in June 1994, she concluded that the price was too high and she attempted to reduce the amount to 80,000 shares. (Tr. 174-75, 474-75, 982-83, 1062-63; Div. Ex. 51.) Premier ultimately paid Mirage 100,000 shares. (Tr. 117-18, 679-80; Div. Ex. 52.)
To resolve Mr. Stanz's claims, an October 13, 1994 settlement agreement obligated Mr. Stanz to transfer 85,000 Premier shares to the Rockies Fund in exchange for $85,000 from the Fund.31 (Tr. 1326; Div. Exs. 44, 47.) The Fund paid Mr. Stanz $60,000 on October 4, 1994, and $25,000 on December 19, 1994. (Tr. 368; Div. Ex. 45.) Mr. Stanz, however, only had 67,500 Premier shares-17,500 from Mirage's purchase in the Imposters PP and 50,000 shares from the sale of Mirage. The origin of the 17,500 additional Premier shares to make up the 85,000 that Mr. Stanz committed to transfer to the Fund is not clear. The best evidence is that the source was an agreement reached between Respondent Calandrella and Respondent Power in March 1995. (Tr. 965-68, 1099-01; Div. Exs. 53, 54.) Respondent Power and Power Curve gave the Fund 12,500 shares and Respondent Calandrella gave the Fund 5,000 shares. (Tr. 678, 695-96, 965-66, 1100-01; Div. Exs. 53, 54; Div. Proposed FF and CL 145.)32
In October 1994, Mr. Stanz agreed to transfer to the Fund 85,000 Premier shares in which he had a valid ownership claim. By the end of March 1995, the Fund received 85,000, pursuant to this agreement. (Tr. 678-79.) The thrust of the Division's argument seems to be that 17,500 shares did not come from Mr. Stanz, however, the source of the shares is secondary. The preponderance of the evidence is that the Fund had title to 85,000 shares of restricted Premier securities on March 31, 1995. This evidence does not prove a violation by Respondents of Section 10(b) of the Exchange Act and Rule 10b-5.
Premier's Second Private Offering
The Fund's Form 10-Q for the quarter ended September 30, 1995, showed it acquired 200,000 Premier shares in September 1995. (Div. Ex. 11.) The Division claims it was fraudulent to include these 200,000 restricted Premier shares because (1) "it was improper for the Rockies Fund to claim ownership of the 200,000 shares acquired in the 1995 private placement prior to December 1995 when the contract was signed and payment made," and (2) there was nothing but a "handshake" deal with respect to the Premier stock until a document was signed in December 1995, so that Rockies' claim to own 200,000 shares "before December was clearly improper." (Div. Br. 41, Reply Br. 30.)
Most of the facts on this issue are disputed. The parties do agree that Premier needed funds badly in 1995. It had a second private placement in December 1995 at $.25 per share, which raised $225,000 ("Second PP"). (Tr. 177-78, 190, 193-94; Div. Exs. 58, 63.) Premier negotiated an Investment Term Sheet dated September 30, 1995, with Respondent Power by which Premier agreed to sell and Redwood MicroCap agreed to buy a minimum of 600,000 and a maximum of 1,000,000 Premier shares at $.25 per share. (Tr. 177; Div. Ex. 63.) Respondents claim that Respondents Calandrella and Power had an oral agreement in September 1995 that Respondent Calandrella would purchase 200,000 shares at $50,000 for the Fund, and it recorded ownership on its Form 10-Q for the quarter ended September 30, 1995 in keeping with its practice of claiming ownership as of the trade date which in this private transaction was the date it agreed orally to purchase. (Tr. 506-509, 698-99, 833-34.) Respondent Calandrella, on behalf of the Fund, signed a subscription agreement to buy 200,000 shares at $50,000 in the Second PP on December 19, 1995. The Fund issued a check dated December 14, 1995, for $45,000 to "Neuman Escrow Account."33 (Div. Exs. 58, 59.) Mr. Neuman, Premier's attorney, instructed the transfer agent to issue 200,000 Premier shares to the Fund on January 18, 1996. (Div. Ex. 61.)
The Fund and Respondent Calandrella argue that the Division incorrectly interprets ASR 113 as requiring a written documentation to create an enforceable right in the shares. (Resp. Br. 31.) ASR 113 provides:
Where the investment company negotiates the acquisition of the restricted securities directly from the owner of the securities, there are three significant dates. The first occurs when the investment company and the seller orally agree upon the price and the amount of the securities (the "handshake date"). At this point, there would not seem to be any enforceable right of the investment company to demand the securities from the seller since, in most states, particularly those which have adopted the [UCC], there is no enforceable right unless there exists some writing "sufficient to indicate that a contract has been made for sale of a stated quantity of described securities at a defined or stated price (Section 8-319(a) of the [UCC]).
Codification of Financial Reporting Policies, § 404.04.a (Apr. 1982).
Respondents cite Colorado law in 1994 through 1995, which provided that a contract for the sale of securities was not enforceable unless there was a written document indicating there was a contract for sale of a stated quantity at a defined or specified price, or within a reasonable time, a written confirmation was received by the party against whom enforcement was sought. (Resp. Br. 31-31, citing Colo. Rev. Stat. § 8-319.) Respondents consider the December 1995 subscription a confirmation of the alleged September purchase that created an enforceable right to the 200,000 shares as of September 1995. (Resp. Br. 35.)
I find that Respondents violated Section 10(b) of the Exchange Act and Rule 10b-5 by showing on the Fund's Form 10-Q for the quarter ended September 30, 1995, that it held 200,000 restricted Premier shares valued at $175,000. (Div. Ex. 11.) The only evidence that Respondent Calandrella orally agreed to buy the shares is his self-serving statement. (Tr. 834.) This misrepresentation is material because the value of 200,000 shares at $175,000 is 46% of the Fund's total Premier holdings of $377,781, and 11% of the Fund's total investments in securities of $1,583,430. (Div. Ex. 11.)
(2) Did Respondents violate Section 10(b) of the Exchange Act and Rule 10b-5 as to the restricted status of the Fund's Premier holdings?
The Fund admittedly misrepresented in all of its filings for 1994 and the first two quarters in 1995, that it held over 125,000 unrestricted Premier common shares when almost all the Premier shares it owned were restricted. (Tr. 492-93, 746-48, 752-53; Div. Exs. 4, 5, 6, 7, 7A, 8, 9, 10; Resp. Br. at 44.) The Division does not contest the unrestricted status of 500 shares of Premier that the Rockies Fund purchased in the open market in 1992 and 250 shares from a stock split in 1993. (Tr. 493.) This misclassification error was repeated in the "Consent Resolutions of the Board of Directors of Rockies Fund, Inc." by which the board ratified, adopted, and approved the valuations of the portfolio securities for each quarter in 1994, and the first two quarters of 1995. (Div. Exs. 14, 15.)
I reject as false Respondents' position that this misclassification was caused by an oversight or clerical error by a staff person who simply added the new restricted Premier shares to the Fund's 750 shares of Premier that were unrestricted. (Tr. 747-48, 1146-47; Resp. Br. 44.) The investment term sheet for the Imposters PP described Respondent Calandrella as having "extensive experience in areas of corporate finance, mergers and acquisitions." (Div. Ex. 29 at 9.) Respondent Calandrella demonstrated singular knowledge and intelligence in his testimony. Much of his success has been based on recognizing investment value. Based on the evidence in this record, it is inconceivable that Respondent Calandrella, who prepared the valuations for the board, did not notice an error of such major proportions over such an extensive period. (Tr. 757-58, 884-85, 1167-68.) Respondent Calandrella's erroneous claim, made during the investigation of these matters, that the Fund's Premier restricted shares could be treated as unrestricted because restricted shares acquired in the Imposters PP had demand registration rights supports a finding that he deliberately misrepresented the Premier shares as unrestricted. (Tr. 752-53.) The Investment Term Sheet specifies:
Registration Rights: As soon as is practicable after the Effective Date of [Imposters's Amended Plan of Reorganization] . . . the Company has agreed to prepare and file with the SEC a Registration Statement, registering for sale the Shares . . . .
. . . .
Offering Risk Factors: There is only a limited public trading market for the Company's Common Stock and no assurance that such market will continue. While the Company has agreed to register for sale under the Act the securities purchased in the Offering, there can be no assurance that the Registration Statement will be declared effective, that the securities can be qualified for sale in all desired states, or that a liquid public market for the shares will exist at the time the Registration Statement becomes effective and the Common Stock eligible to be sold. . . .
(Div. Ex. 29 at 3, 12.)
Respondent Calandrella knew in 1994 that Premier was not able to register its shares because it was not current in its filings with the Commission, and it did not have the funds to pay for the work that was necessary to accomplish a registration. (Tr. 108-09, 138-39, 487-88.)
I find that the Respondents violated Section 10(b) of the Exchange Act and Rule 10b-5 by participating in a scheme to misrepresent in the Fund's filings that the Fund's Premier shares were unrestricted. This misinformation was material because restricted and unrestricted securities are significantly different. Respondent Calandrella's actions were intentional. Respondents Thygesen and Powell acted intentionally or recklessly by simply accepting without any verification Respondent Calandrella's false representations.
(3) Did Respondents violate Section 10(b) of the Exchange Act and Rule 10b-5 as to the value of the Fund's restricted and unrestricted Premier securities?
Section 2(a)(41) of the ICA, made applicable to BDCs by Section 59 of the ICA, defines "value" of an investment company's assets as market value for securities with readily available market quotations, and "fair value as determined in good faith by the board of directors" for all other securities and assets.
Respondents' position that Premier's restricted and unrestricted shares had the same value because Premier's unrestricted shares were illiquid is implausible in these circumstances.34 (Resp. Br. 24-30.) The ICA and the accounting literature support the common sense notion that a security that can be publicly traded is more valuable than a security of the same class that cannot be publicly traded.35 ASR 113 addresses valuing restricted securities, and states in part:
It is critically important that an investment company properly value its portfolio securities. . . .
. . . Section 2(a)(41) of the [ICA] and Rule 2a-4 thereunder requires that in determining asset value, "securities for which market quotations are readily available" must be valued at current market value while other securities and assets must be valued at "fair value as determined in good faith by the board of directors."
. . . For valuation purposes, therefore, restricted securities constitute securities for which market quotations are not readily available. Accordingly, their fair values must be determined in good faith by the board of directors and this obligation necessarily continues throughout the period these securities are retained in the company's portfolio.
. . . .
Restricted securities are often purchased at a discount, frequently substantial, from the market price of outstanding unrestricted securities of the same class. This reflects the fact that securities that cannot be readily sold in the public market place are less valuable than securities, which can be sold, and also the fact that, by the direct sale of restricted securities, sellers avoid the expense, time and public disclosure which registration entails.
As a general principle, the current fair value of restricted securities would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. . . . [T]he valuation of restricted securities at the market quotation for unrestricted securities of the same class would, except for the most unusual situations, be improper. . . .
. . . .
In summary, there can be no automatic formula by which an investment company can value restricted securities in its portfolio to comply with Section 2(a)(41) and Rule 2a-4. It is the responsibility of the board of directors to determine the fair value of each issue of restricted securities in good faith; and the data and information considered and the analysis thereof should be retained for inspection by the company's independent auditors. While the board may . . . determine the method of valuing each issue of restricted security in the company's portfolio, it must continuously review the appropriateness of any method so determined. . . .
Codification of Financial Reporting Policies, § 404.04.a (Apr. 1982) (emphasis in original).
The Imposters PP investment term sheet differentiated restricted and unrestricted securities. It noted that Premier common stock traded over-the-counter, was quoted in the pink sheets, and the public market for the stock had been "highly illiquid." (Div. Ex. 29 at 1.) It stated that the restricted shares offered were not registered and therefore could not be sold to the public so that investors should consider their investment "totally illiquid." (Div. Ex. 29 at 12.) Respondent Calandrella recognized that unrestricted securities are more valuable than restricted securities when he chose to acquire Imposters through a public shell company. He did so intending to facilitate a public offering of unrestricted Premier securities because he and Respondent Power considered a public offering preferable to a private offering of restricted securities. In his investigative testimony, Respondent Calandrella opined that the value of restricted securities was generally discounted from zero to 50% depending on whether they would become free trading in six months or one or two years. (Tr. 716-17.)
The case law supports my finding that, except for the most unusual situations, restricted securities and unrestricted securities have different values. In Schwartz v. Slawter, 751 F.2d 317, 321 (10th Cir. 1984), the court affirmed a lower court holding that a plaintiff could not prove damages for failure to receive restricted securities based on evidence of bid and ask quotes from the pink sheets for unrestricted stock of the same issuer traded in the over-the-counter market. In Robert F. Lynch, 46 S.E.C. 5, 7 (1975), the Commission found a violation of the antifraud provisions where a respondent's improper conduct included valuing restricted securities at the same market price prevailing for unrestricted securities of the same issuer and class. In Report of Investigation in the Matter of Greater Washington Investors, Inc., 17 SEC Docket 40, 44 (Mar. 22, 1979), a report of the Commission under Section 21(a) of the Exchange Act, the Commission found it improper to value restricted stock acquired in private transactions using average bid price for unrestricted securities of the same class as "[n]o discount from such market price was taken to adjust for any diminution in value resulting from the restrictive feature." In Parnassus Invs., Initial Decision, 67 SEC Docket 2760 (Sept. 3, 1998), final, 68 SEC Docket 586 (Oct. 8, 1998), an administrative law judge found that the board violated ASR 113 and failed to act in good faith where it simply rubber stamped a recommendation and valued restricted securities at the same price as unrestricted securities.
Respondents rely on the opinions of Carroll Wallace of KPMG Peat Marwick LLP, ("KPMG") the Fund's auditor, and Clarence D. Hein, an expert, as support for their valuations of Premier. (Resp. Br. 27-30.) KPMG audited the Fund's annual financial statements that were submitted as part of the Form 10-K filings in 1994 and 1995. (Tr. 536, 560.) I find the testimony of Mr. Wallace and Mr. Hein unpersuasive. Both Mr. Wallace and Mr. Hein accepted and did not verify Respondent Calandrella's representations on key issues that impacted their conclusions. First and foremost, Mr. Wallace and Mr. Hein accepted Respondent Calandrella's unsubstantiated claim that the board engaged in a good faith effort to arrive at fair value when there is absolutely no documentation to support such a claim.36 (Tr. 562, 574-77, 934-36; Resp. Ex. 49 at 2.) Mr. Wallace did not check the documentation that would have revealed that the Fund's Premier shares did not have demand registration rights and he did not verify that the Premier shares were unrestricted. (Tr. 580-86.) Mr. Hein offered the following opinion based not on any independent analysis he made, but rather KPMG's inexplicable audit opinion that the board's valuation procedures were reasonable and documented as to the Fund's December 31, 1994 financials:
The Rockies Fund valued its investment in Premier at estimated fair value as determined in good faith by the Board of Directors. The Board of Directors considered general factors which included fundamental, analytical data relating to the investment, restrictions, an evaluation of the forces which influence the market, how Premier was progressing as a company, the quoted market price of the stock, and other factors such as their opinion of the overall value of the company and proposed public offering.
(Resp. Ex. 49 at 2-3.)
Mr. Hein's opinion is unpersuasive because it lacks factual support. In addition, I question his independence and his credibility based on the business his firm receives as auditor for American Educational Products, Premier, and other companies where Respondents are officers and/or directors. (Tr. 217, 226, 925-29.) Hein & Associates, LLP, a CPA and consulting firm with four offices in Colorado, California, and Texas, with twenty-one partners and about ninety-five employees, has earned over $200,000 as auditor for companies associated with the Respondents. (Tr. 925-29, 947.) Mr. Hein's disciplinary record and his failure to review relevant documents relating to the subject he opined on also caused me to discount his views. Mr. Hein did not review either the board's consent resolutions or the valuation policy contained in the Fund's 1983 prospectus. (Tr. 933.) In a consent order entered on July 2, 1996, the Commission imposed sanctions on Hein & Associates, LLP, in a proceeding conducted pursuant to Rule 102(e) of the Commission's Rules of Practice. (Div. Ex. 92.) See Hein & Associates, LLP, 62 SEC Docket 747 (July 2, 1996). Mr. Hein was the engagement partner on the audit at issue, and he was present at a meeting where the Commission's staff received false information about the work done by the audit manager. The firm agreed to accept a censure, to retain an independent reviewer, and to implement the reviewer's recommendations as to the firm's independence quality controls.37 (Div. Ex. 92.)
Mr. Wallace did not know the whereabouts of the supporting data or documentation for the board's conclusion that the bid price for unrestricted Premier stock was the appropriate value for restricted Premier stock. (Tr. 562.) Mr. Wallace is the subject of a pending Commission administrative proceeding with respect to his activities in these matters. Carroll A. Wallace, CPA, Admin. Proc. 3-9862.
ASR 118 states that a company's valuation policies should be in accord with certain standards, and that "any deviation from a stated valuation policy . . . should be disclosed in the financial statements or notes thereto." Codification of Financial Reporting Policies, § 404.03.b.i. (Apr. 1982). Respondents did not follow ASR 118 in their valuation of Premier because they offered no explanation for why they did not value the Fund's restricted Premier securities using the valuation methods that the Fund, at different times, represented it would follow. The Fund's 1983 prospectus stated that:
The "Public Market Method" is the preferred method of valuation and is used when there is an established public market for the portfolio company's securities. The bid price of the security on the date of valuation will be used to establish the fair market value. In those instances where the Company owns "restricted securities" of a public company, such securities will be valued at a discount from the fair market value of similar publicly traded securities. The extent of the discount will vary with each security holding, depending on the nature and extent of the restriction on the sale of the securities and the breadth of the market for similar unrestricted securities.
(Div. Ex. 17 at 20.)
At a meeting held February 15, 1995, the Fund board adopted "Procedures For Valuing Portfolio Investments For The Period Ended December 31, 1994." (Div. Ex. 13.) The board minutes for the meeting, the only set of minutes that exists for any board meeting, stated that these valuation procedures "were utilized by the [Fund] since inception." (Div. Ex. 13.) There is no evidence that this in fact happened. The valuation procedures stated:
Unrestricted Securities: . . . Generally, if more than one valuation is documented the Board will use the lower, more conservative, value.
Restricted Securities: . . . Generally, these investments are held at cost until events or conditions-such as strong operations, a growing market share, proven competent management, or a third party transaction-indicate appreciation in value. If there has been a substantial decline in the investee's operations, market conditions, or management's performance, the Board will write-down the investment to a more appropriate value. The Board meets quarterly to monitor investment progress and perform valuations.
(Div. Ex. 13.)
There is no evidence to support Respondents' claim that investments in restricted securities were carried at estimated fair value as determined in good faith by the Board. (Tr. 933-37; Div. Ex. 8 at 13, Resp. Ex. 49 at 2.) There is absolutely no documentation of any board deliberations. The only set of board minutes is a one and one-half page resolution stating that for the purpose of valuation, the board adopts attached procedures and methodologies. The attachment is the "Procedures For Valuing Portfolio Investments For The Period Ended December 31, 1994." (Div. Ex. 13.) The board did not document the methods used to value the securities in the Fund's portfolio and did not document any differences in methods of valuing restricted securities vis-à-vis unrestricted securities. (Tr. 817-18, 836-38, 1125-27, 1356.) The documentation for the Fund's quarterly valuations of its portfolio consists of a two-page form, "Consent Resolutions," by which the board ratified, adopted, and approved the valuations of securities proposed by Respondent Calandrella. (Tr. 757-58, 884-86, 897.) Attached to each consent resolution as Exhibit A is a list of the approximately twenty-five securities in the Fund's portfolio with one or two sentences about each security stating the per share value. (Tr. 1125-26; Div. Exs. 14, 15, 16.) This is all the written material the board received on valuations. (Tr. 1142-43.)
The record is devoid of any documentation or other evidence to support Respondents' position that the Fund's board valued Premier and each holding in the portfolio in good faith based on discussions of a wide range of factors, and that these discussions occurred on telephone calls or at face-to-face meetings. (Tr. 728-29, 740, 754-55, 835-36, 1241-42.) Respondents Calandrella, Thygesen, and Powell made general claims that they could not support with specific facts. No one had any notes or specific recollection of any meeting they had attended. Respondents' testimony on this issue was inconsistent and unpersuasive. (Tr. 727-29, 743, 754-55, 795-97, 808-11, 886, 1122-26.) Respondents Thygesen and Powell could not remember details of any discussion about Premier in 1994 or 1995. (Tr. 886-90, 1138, 1145-49.) Respondent Thygesen could not recall ever changing a value proposed by Respondent Calandrella. (Tr. 885.) Respondent Thygesen admitted that it was the Fund's practice to value stock with demand registration rights as unrestricted securities. (Tr. 894-98.) Respondent Thygesen admitted, and Respondent Powell admitted and denied, that (1) if there was a market price for the stock there was no discussion as to its value, (2) unrestricted securities were generally valued at market price, and (3) the board valued restricted shares of Premier the same way they valued unrestricted securities. (Tr. 1137, 1139-41.) These admissions and the evidence taken as a whole establish that Respondents valued the Fund's restricted Premier shares using the bid price for unrestricted Premier shares as a floor, and that the independent directors approved the information Respondent Calandrella provided about the Fund's portfolio without any exploration of fair market value. (Tr. 808, 888-889.) Finally, there is no reason to doubt the Commission examiner who recalled that Respondent Calandrella told him in March 1994 that he prepared the valuations and the board signed off on them with very little discussion. (Tr. 1167-68.)
The particular filings at issue
Financial information that must be disclosed within the various periodic filing requirements imposed by the Commission has been held to be highly material to investors. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 n.9, 1422 n.11 (3d Cir. 1997); In re Kidder Peabody Sec. Litig., 10 F.Supp. 2d 398, 410 (S.D.N.Y. 1998). Respondents acted with scienter because they are experienced securities practitioners who knew that as officers and/or directors of a public company they were responsible for representing to investors the fair value of the company's assets, but acting deliberately or recklessly they did not carry out that responsibility. (Tr. 714, 880-81, 1112.) The persuasive evidence is that Respondents Thygesen and Powell, without sufficient inquiry, willingly consented to materially false information about Premier that Respondent Calandrella proposed, and Respondents knew this information was going to be filed with the Commission and made available to the public. Respondents acted willfully in that they intentionally committed the acts constituting the violations. Moreover, in these circumstances, they knew or reasonably should have known that their conduct was improper. See Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965); see also Wonsover v. SEC, 205 F.3d 408 (D.C. Cir. 2000).
Form 10-Q for Quarter ended June 30, 1994 (Div. Ex. 6.)
The Fund listed the following Premier shares as unrestricted:
Cost 6/30/94 |
Value 6/30/94 | |
| 750 common stock | $2,562.50 |
$1,125.00 |
| 112,000 common stock38 (source Imposters PP) |
$112,500.00 |
$168,750.00 |
| 12,500 common stock (source Caribou) | ||
| 25,000 common stock (source Kober) | $27,500.00 |
$37,5000.00 |
| 62,500 Warrants |
Respondents misrepresented that the Fund held unrestricted Premier shares when all but 750 shares were restricted. The Fund represented that it valued its Premier holdings at "its quoted market price of $1.50 per share." (Div. Ex. 6.) This representation was false because on June 30, 1994, Hanifen Imhoff, the single market maker, opened with a bid of $1.25 and closed with a bid of $1.375.39 (Div. Ex. 19.) Use of $1.50 per share substantially overvalued the Fund's 112,000 restricted common shares at $168,750 and its 25,000 restricted common shares at $37,500.
The Fund should have valued its Premier securities at fair value as determined in good faith by the board as required by Section 2(a)(41) of the ICA. It did not do so. Further evidence of Respondents' lack of good faith is found in their failure to use or distinguish either "a discount from the fair market value of similarly publicly traded securities," the method the prospectus stated the Fund would use to value restricted securities, or the valuation policy for unrestricted shares the Fund adopted for its December 31, 1994 filing, which the Fund alleged it had been using since its inception. (Div. Exs. 13, 17 at 20.) The former valuation method described in the prospectus called for application of the most conservative price for unrestricted securities where there was more than one quote available. (Div. Ex. 13.) Here, however, the board used a value for restricted Premier securities that was higher than either bid price for unrestricted Premier securities. There is no justification for the Fund to have used $1.50 to value its restricted Premier shares when the highest bid for unrestricted shares on June 30, 1994, was $1.375. (Div. Ex. 19.)
Application of a value of $1.25 per share for 112,000 shares and 25,000 shares of Premier results in values of $140,000 rather than $168,750 and $31,250 rather than $37,500 or a reduction of $35,000. However, if the Fund valued the 112,000 shares at their cost of $1.00 and the 25,000 shares at their cost of $1.10 as called for by the valuation policy it adopted for the period ending December 31, 1994, for restricted securities, the Premier shares would be valued at $112,000 and $27,500, respectively, or a reduction of $66,750.
For all the reasons stated, Respondents made material misrepresentations as to the value of Fund's Premier holdings in its Form 10-Q for the quarter ended June 30, 1994.
Form 10-Q for Quarter ended September 30, 1994 (Div. Exs. 7, 7A.)
The Fund listed the following Premier shares as unrestricted:
Cost 9/30/94 |
Value 9/30/94 | |
750 common stock |
$2,562.50 |
$1,406.25 |
|
112,000 common stock40 (source Imposters PP) |
$112,500.00 |
$210,937.50 |
25,000 common stock (source Kober) |
$27,500.00 |
$46,875.00 |
62,500 "B" Warrants41 |
||
10,000 "C" Warrants |
$6,250.00 | |
13,600 "C" Warrants |
$8,500.00 |
Respondents misrepresented that the Fund held unrestricted Premier shares when all but 750 shares were restricted. Respondents valued the Premier shares at $1.88 each based on its "quoted market price." (Div. Ex. 7 at 9, 20, Div. Ex. 14 at Bates 93.) Hanifen Imhoff's bid price for Premier on September 30, 1994, was $1.875. (Div. Ex. 19.)
The Fund should have valued its Premier securities at fair value as determined in good faith by the board as required by the ICA Section 2(a)(41). It did not do so. The Fund did not value the securities at "a discount from the fair market value of similar publicly traded securities" which is the valuation method the prospectus stated it would use and did not explain why it was not using the valuation method the Fund said it would follow. (Div. Ex. 17.) See ASR 118. If the Fund valued the securities at the cost of $1.00 for the 112,000 shares acquired in the Imposters PP and $1.10 for the shares acquired from Kober, as called for by the valuation policy it adopted for the period ended December 31, 1994, which it professed to have been using, the respective values would have been $112,000 and $27,500, rather than $210,937.50 and $46,875. The correct valuation would reduce the value of Premier shares shown in the filing by $118,312.50.
These differences constitute a material misrepresentation in the value of the Fund's assets as shown in the Form 10-Q filing for September 30, 1994. For all the reasons stated, Respondents made material misrepresentations as to the value of Fund's Premier holdings in its Form 10-Q for the quarter ended, September 30, 1994.
The Fund's mistaken valuation of its Premier's Class C warrants at $54,687, rather than $0 is not a violation of Section 10(b) of the Exchange Act and Rules 10b-5 inasmuch as the Fund filed a correction on November 22, 1994, eight days after filing the original Form 10-Q. (Div. Exs. 7, 7A, 14 at 24.)
The representation that 23,600 Class C warrants were valued "at the discount from market price" when in fact the valuation was the difference between the bid price of the unrestricted common stock and the exercise price does not constitute a violation of Section 10(b) of the Exchange Act and Rule 10b-5. (Div. Exs. 7, 7A at 20; Div. Proposed FF and CL 22.) The description was inaccurate but the valuation was reasonable.
Form 10-K for Fiscal Year ended December 31, 1994 (Div. Ex. 8.)
The Fund listed the following Premier shares as unrestricted:
Cost 12/31/94 |
Value 12/31/94 | |
750 common stock |
$2,563.00 |
$1,688.00 |
112,500 common stock (source Imposters PP) |
$112,500.00 |
$253,125.00 |
25,000 common stock (source Kober) |
$27,500.00 |
$56,250.00 |
60,000 common stock (source Stanz) |
$60,000.00 |
$135,000.00 |
25,000 common stock (source Stanz) |
$25,000.00 |
$56,250.00 |
62,500 "C" Warrants |
$15,625.00 | |
150,000 "D" Warrants |
$168,750.00 |
Respondents misrepresented that the Fund held unrestricted Premier shares when all but 750 were restricted. (Div Ex. 8.) Hanifen Imhoff's opening bid on December 30, 1994, was $2.00 and its closing bid was $2.25. (Div. Ex. 20.) Respondents valued all Premier shares at $2.25 per share.
Independent of manipulation, the overwhelming evidence is that that Premier's restricted securities were not worth $2.25, the bid price for unrestricted shares on December 31, 1994. Premier's net loss from operations for the year ended December 31, 1994 was $823,942. (Div. Ex. 77.) Premier's 1994 year-end audit noted that the financial statements had been prepared "assuming that the company will continue as a going concern," which indicates that the auditors were uncertain that Premier could survive financially. (Tr. 106; Div. Ex. 77.) The auditors noted that, "[Premier's] continued existence is dependent on its ability to raise additional capital and ultimately achieve profitable operations. Those conditions raise substantial doubt about the Company's ability to continue as a going concern." (Div. Ex. 77.)
If Respondents had valued the 222,500 restricted Premier shares at cost, their total value would be $225,000, rather than the $500,625 shown in the filing. This overstated value was a material misrepresentation. In addition, this valuation violates Section 2(a)(41) of the ICA because there is no evidence that Respondents acting in good faith determined that this was the fair value. Respondents showed a lack of good faith in valuing Premier securities. They failed to consider and distinguish the valuation method used from the representation in the Fund's 1983 prospectus, that the Fund valued restricted securities at a discount from the fair market value of similar publicly traded securities, and the policy adopted for the Form 10-Q as of December 31, 1994, which called for a valuation of restricted securities at cost, unless circumstances show an appreciation in value. (Div. Exs. 13, 17.)
The above facts demonstrate persuasively that the Fund's valuation of its total Premier holdings in the Form 10-K filing on December 31, 1994, at $686,888 a number that was inflated by $275,625 ($500,625 minus $225,000) was a material misstatement and was a violation of Section 10(b) and Rule 10b-5. (Div. Ex. 8.)
Forms 10-Q for Quarters ended March 31, 1995 and June 30, 1995 (Div. Exs. 9, 10.)
The Fund listed the following Premier shares as unrestricted:
Cost 12/31/95 |
Value 3/31/95 & 6/30/95 | |
750 common stock |
$2,562.50 |
$1,125.00 |
112,500 common stock (source Imposters PP) |
$112,500.00 |
$168,750.00 |
25,000 common stock (source Cohig) |
$27,500.00 |
$37,500.00 |
60,000 common stock (source Stanz) |
$60,000.00 |
$90,000.00 |
25,000 common stock (source Stanz) |
$25,000.00 |
$37,500.00 |
62,500 "C" Warrants |
||
150,000 "D" Warrants |
$56,250.00 |
In both Forms 10-Q, Respondents misrepresented that the Fund held unrestricted Premier shares when all but 750 shares were restricted. (Tr. 818; Div Exs. 9, 10.) In addition, the Fund valued its Premier shares at $1.50 per share which it represented to be the "quoted market value." (Div. Exs. 9 at 16, 10 at 16.) This representation was false because on March 31, 1995, and on June 30, 1995, the bid price was $1.00 and the ask price was $2.00. (Div. Ex. 20.) The Fund used the $1.50 value for its Premier shares because it could then show a value of $56,250 for 150,000 Class D warrants that had an exercise price of $1.125. If the Fund had valued its Premier shares at the bid price of $1.00, the Class D warrants would have no value. (Tr. 818-19, 823.) Respondents valued Premier restricted shares at the midpoint between the bid and ask quotes for the unrestricted shares in violation of the Fund policy adopted for the December 31, 1994 filing of using the lower, more conservative value where more than one valuation is documented for unrestricted securities, and valuing restricted securities at cost until events or conditions indicate an appreciation in value. (Tr. 822-23; Div. Ex. 13.) The result was that the Fund valued its restricted Premier higher than it should have valued its unrestricted Premier securities.
Respondents' valuation of the Fund's Premier securities at $391,125 on Form 10-Q for the quarters ended March 31, 1995, and June 30, 1995, a 72% increase over the cost of $227,562.50, was a material misrepresentation. (Div. Exs. 9, 10.) In both filings, the Fund's valuation violated Section 2(a)(41) of the ICA, which requires fair value as determined in good faith by the board. Again, the Respondents exhibited a lack of good faith by ignoring the prospectus which represents that the Fund values restricted securities at a discount from the fair market value of similarly publicly traded securities, and the valuation policy of December 31, 1994, which calls for a valuation of restricted securities at cost, unless circumstances show an appreciation in value. (Div. Exs. 13, 17.)
For all the reasons stated, Respondents violated Section 10(b) of the Exchange Act and Rules 10b-5 in connection with both filings.
Form 10-Q for Quarter ended September 30, 1995 (Div. Ex. 11.)
This is the first of the filings at issue which accurately described the vast majority of Premier shares as restricted in the "schedule of investments." (Div. Ex. 11 at 7.) However, the notes to the financials misrepresented these shares as unrestricted. (Tr. 492-93, 747-48, 893-94, 1146-47; Div. Ex. 11 at 16.)
Cost 9/30/95 |
Value 9/30/95 | |
750 common stock |
$2,562.50 |
$656.25 |
112,500 common stock (source Imposters PP) |
$112,500.00 |
$98,437.50 |
25,000 common stock (source Cohig) |
$27,500.00 |
$21,875.00 |
60,000 common stock (source Stanz) |
$60,000.00 |
$52,500.00 |
25,000 common stock (source Stanz) |
$25,000.00 |
$21,875.00 |
8,500 common stock (source open market) |
$6,375.00 |
$7,437.50 |
200,000 common stock (source Second PP) |
$50,000.00 |
$175,000.00 |
150,000 "D" Warrants |
On September 29, 1995, the last trading day of the month, the three market makers in Premier had bids of $.375, $.75, and $.25. (Div. Ex. 20 at Bates 4654.) Without any explanation, the Fund valued both restricted and unrestricted shares at $.875 per share, which is higher than any of the bids. Based on Section 2(a)(41) of the ICA, the Respondents should have valued the Fund's restricted Premier shares at fair value based on a good faith effort by the board. They did not do so. Moreover, they did not explain why the Fund did not follow either (1) the representations in the prospectus that restricted shares would be valued at a discount from publicly traded shares, or (2) the valuation policy adopted February 15, 1995, for the period ended December 31, 1994, that restricted shares would be held at cost until events or conditions caused an appreciation in value, and where there is more than one value for unrestricted securities the Fund would use "the lower, more conservative value." (Div. Exs. 13, 17.)
Respondents should have valued the Fund's restricted Premier shares at a significant write-down from cost in view of Premier's continuing operating losses and the warnings expressed by the auditor in the 1994 audit. (Div. Ex. 77.) Respondent Powell, a former CPA and Premier director in 1995, believed that Premier was no better off at the end of 1995 than it was in 1994 when it suffered operating losses of over $800,000. (Tr. 1130-35.) Respondents violated the Fund's policy by using a $.875 value rather than the lowest bid price of $.25. In addition, as I found earlier, it was fraudulent for Respondents to (1) claim in this filing that the Fund owned 200,000 Premier restricted shares acquired in the Second PP, and (2) to value those shares at $.875 per share within thirty days of the alleged purchase for $.25 per share when nothing happened to cause the share to increase more than 200%.
For all the reasons stated, the Fund's valuation of its Premier securities at $377,781.25, a 33% increase over the cost of $283,937.50, was a material misrepresentation and a violation of Section 10(b) of the Exchange Act and Rule 10b-5. (Div. Ex. 11.)
Form 10-K for Fiscal Year ended December 31, 1995 (Div. Ex. 12.)
The Fund listed the following Premier shares:
Cost 12/31/95 |
Value 12/31/95 | |
750 common stock |
$2,563.00 |
$469.00 |
112,500 common stock (source Imposters PP) |
$112,500.00 |
$70,313.00 |
25,000 common stock (source Cohig) |
$27,500.00 |
$15,625.00 |
60,000 common stock (source Stanz) |
$60,000.00 |
$37,500.00 |
25,000 common stock (source Stanz) |
$25,000.00 |
$15,625.00 |
8,500 common stock (source open market) |
$6,374.00 |
$5,313.00 |
200,000 common stock (source Second PP) |
$50,000.00 |
$125,000.00 |
150,000 "D" Warrants |
The Fund valued the 431,750 restricted Premier shares it claimed to own at $.625 per share, its "quoted market value." (Div. Ex. 12 at 8.) The last trading day of the year was December 29, 1995. On that date, the bid prices of the two market makers for Premier shares were $.375 and $.25. The inside or highest bid on December 29 of $.625 was a carry over from December 28. (Div. Ex. 20 at Bates 4664.) This quote appears to be an error since the same market maker opened on December 29, 1995, with a bid of $.25 (Div. Ex. 20 at Bates 4664.) In any event, the inside bid dropped to $.375 at 1:53 p.m. on December 29, 1995.
Respondents did not value Premier shares at fair value based on a good faith effort by the board as Section 2(a)(41) of the ICA required them to do. Respondents should have valued the restricted shares at a considerable write-down from cost that was either $1.00 or $1.10 per share. The discount or write-down should have been considerable because Premier suffered a net loss of $823,942 in 1994, and Respondent Powell, a former CPA and director of Premier and the Fund in 1995, gave persuasive testimony that Premier was not better off at the end of 1995 vis-à-vis 1994 because it lacked cash for fresh inventory and store upgrades.42 (Tr. 1131-35; Div. Ex. 77.)
Finally, the Fund signed a subscription agreement to purchase restricted Premier shares in the Second PP at $.25 per share on December 19, 1995. This purchase, less than twelve days before the valuation, is dispositive that the value of the restricted shares on December 31, 1995, was $.25. (Div. Ex. 58.) Respondents' claim that the $.25 purchase price was inapplicable as to the value of all the Fund's holdings of restricted shares because it purchased the 200,000 shares in a "fire sale" is unpersuasive. Whatever the conditions, $.25 was how much purchasers were willing to pay for restricted shares of Premier in December 1995.
For all the reasons stated, the Fund's valuation of its Premier shares in its Form 10-K for year-end 1995 at $269,845, a 5% reduction from a cost of $283,937, was a material representation of the value of its Premier holdings. (Div. Ex. 12.) For all the reasons stated, Respondents violated Section 10(b) of the Exchange Act and Rule 10b-5 by making untrue statements of material facts in the Fund's Form 10-K for the year ended December 31, 1995.
3. From June 1994 through December 31, 1995, did the Fund willfully violate, and did Respondents Calandrella, Powell, and Thygesen aid and abet and cause the Fund's violations of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 by filing reports that did not comply with GAAP and Regulation S-X and that contained untrue statements of material facts and omitted to state material facts?
Section 13(a) of the Exchange Act, which requires issuers to file reports that the Commission prescribes as necessary or appropriate for the protection of investors and to insure fair dealing in the security, is applicable to the Fund because it has shares registered pursuant to Section 12(g) of the Exchange Act. See also Section 64 of the ICA. Rule 12b-20 is a general requirement that the filings provide information, in addition to what is specified, so that the filing is not misleading. 17 C.F.R. § 240.12b-20. Rules 13a-1 and 13a-13 mandate the submission of annual and quarterly reports that comply with Regulation S-X, which sets forth the form, contents, and requires that financial statements are presented in conformity with GAAP. 17 C.F.R. §§ 240.13a-1, 13a-13.
The Division alleges that the Fund violated the reporting requirements of Section 13(a) of the Exchange Act and the rules cited above, and that Respondents Calandrella, Thygesen, and Powell aided and abetted and caused the violations. (Div. Br. 45-46.)
Respondents acknowledge that: (1) the Fund's filings mistakenly classified Premier stock as unrestricted, and (2) the filing for the quarter ended September 30, 1994, mistakenly assigned a value of $54,687.50 to Class C warrants that the board found had no value. Respondents maintain that all their mistakes were immaterial, and that the Fund corrected the value of the warrants with a revised filing eight days later. (Resp. Br. 44-45.) As noted previously, I did not consider Respondents' conduct concerning the Class C warrants in the Form 10-Q for the period ended September 30, 1994, to be a violation of Section 10(b) of the Exchange Act or Rule 10b-5.
Based on my previous conclusions that the Fund's Form 10-K and Form 10-Q filings for the period June 30, 1994, through December 31, 1995, contained false and misleading information about its Premier holdings that violated Section 10(b) of the Exchange Act and Rule 10b-5, I find that the Fund willfully violated Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13. I also find that Respondents Calandrella, Powell, and Thygesen aided and abetted and caused these violations.
The obligation to file reports with the Commission includes an obligation that the filings be accurate. See General Aircraft Corp. v. Lampert, 556 F.2d 90, 96 n.9 (1st Cir. 1977). Commission rules, including record-keeping and reporting requirements, "are not merely technical, but involve fundamental requirements imposed on those who wish to engage in the securities business." Mark James Hankoff, 48 S.E.C. 705, 709 (1987). The Fund willfully violated Section 13(a) and Rules 12b-20, 13a-1, and 13a-13 because the Fund's quarterly and annual filings with the Commission were false and misleading in material respects and thus were in violation of GAAP.
A person is a cause of another's violation if he or she knew or should have known that his or her act or omission would contribute to the violation. See Valicenti Advisory Servs., Inc., 68 SEC Docket 1805, 1812 n.11 (Nov. 18, 1998), aff'd, 198 F.3d 62 (2d Cir. 1999). Aiding and abetting requires a primary violation, general awareness by the aider or abettor that he was part of an overall activity that was improper, and knowledge that he was substantially assisting in the conduct that constituted the primary violation. See Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); IIT v. Cornfield, 619 F.2d 909, 922-24 (2d Cir. 1980); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 95 (5th Cir. 1975.)
Respondent Calandrella was the main actor in that he knowingly initiated and carried out the illegal acts. As president and de facto control person of the Fund, Respondent Calandrella was responsible for knowing the applicable regulatory requirements and for the Fund's failure to comply with them. See Hankoff, 48 S.E.C. at 708 (citing Hammon Capital Mgmt Corp., 48 S.E.C. 264, 265 (1985)). Respondents Thygesen and Powell knowingly participated with Respondent Calandrella in the wrongdoing. Their conduct is particularly egregious because they are educated individuals, experienced in leading public companies, and because independent or disinterested directors have enhanced status in the regulatory structure of BDCs.
There is one instance, however, where the provisions of the [ICA] are tightened to some extent with respect to [BDCs]. Section 10(a) of the [ICA] presently requires that at least 40 percent of the directors of a registered investment company be called "disinterested" directors. By contrast, the Bill requires that [BDCs] have a majority of disinterested investors. The special status of such companies under the [ICA] places particular responsibility on their boards of directors to assure compliance with the [ICA's] provisions . . . .
. . . The role of independent directors is fundamental to the statutory system of investor protection created by Congress in the [ICA].
H.R. Rep. No. 96-1341, at 25-26 (1980), reprinted in 1980 U.S.C.C.A.N. 4800, 4807-08.
Respondents Calandrella, Thygesen, and Powell willfully aided and abetted and caused the Fund's violations because they knew that as president and/or directors they were responsible for evaluating the Fund's portfolio of assets, that Premier securities were a major Fund holding, and that their failure to do so substantially assisted the Fund's violations.
4. Did Respondent Calandrella willfully violate Section 57(k)(1) of the ICA and Section 10(b) of the Exchange Act and Rule 10b-5 in October 1994, by causing the Rockies Fund to pay $85,000 to Mr. Stanz for 85,000 shares of Premier to forego Mr. Stanz's legal claim against Respondent Calandrella, without disclosing the facts to the independent members of the board or any other independent representative of the Fund, and accepting personal compensation for the purchase?
Section 57(k)(1) of the ICA makes it unlawful for any person associated with a BDC, other than a broker or underwriter, to accept any compensation in connection with the purchase or sale of property to or from a BDC while acting as the BDC's agent. The Division alleges that Respondent Calandrella violated Section 57(k)(1) of the ICA and Section 10(b) of the Exchange Act and Rule 10b-5 because, while acting as agent for the Fund, Respondent Calandrella used Fund assets to extinguish Mr. Stanz's legal claims against him and Premier. (Div. Br. 43-45, Reply Br. 28-29.)
Respondent Calandrella responds that the charges have no merit for several reasons: (1) Section 57(k)(1) of the ICA does not apply because the release was not "compensation," (2) Respondent Calandrella received no economic benefit as a result of the release because Mr. Stanz's claims had no merit, (3) Respondent Calandrella's release was compensation for the release he received, (4) Respondent Calandrella assumed Mr. Neuman, who prepared the release, would not have permitted him to sign it if doing so was not proper, and (5) Respondent Calandrella disclosed his actions to an independent representative of the Fund because Mr. Neuman was the Fund's outside counsel. (Resp. Br. 20-23.)
I find the allegations to be true. Mr. Stanz and Respondent Power believed that Respondent Calandrella misrepresented the status of Silver State/Premier. (Tr. 394-99, 681-82, 983-84; Div. Ex. 44.) Mr. Stanz and Respondent Power claim Respondent Calandrella falsely represented that Silver State/Premier was a shell company with no assets or liabilities, which could be used to achieve a public offering in 1994. (Tr. 394-97, 984.) They later discovered it had liabilities and that it was delinquent in filing reports with the Commission. These factors and lack of funds made it impossible for Premier to register a secondary offering in 1994.43
Also, Respondent Calandrella, while Premier's president, did not fulfill his commitment to pay Mirage 135,000 Premier units for Mirage's assets. Ms. Greenberg, who was a close associate of Respondent Calandrella for most of 1994, attempted to reduce the agreed upon purchase price when she became Premier's president in June 1994. (Tr. 95, 174-75, 352, 368, 424-26, 468-71, 983; Div. Exs. 41, 51.) Premier's 10-Q for the period ended September 30, 1994, states:
In connection with [Premier's] purchase out of bankruptcy of the assets of American Fashion Jewels Inc., d/b/a Imposters, [Premier] had an agreement in principle with the shareholders of Mirage . . . .
[Premier] has reserved 80,000 shares of common stock to be issued for the acquisition of Mirage . . . . While the agreement covering the acquisition contemplates the issuance of 130,000 shares, the Company believes that it has grounds for set-off to reduce that number and is engaging in negotiations to resolve the issues.
. . . .
Effective April 1, 1994, [Premier] also acquired Mirage, Inc. a company that owns [three] jewelry retail stores.
(Div. Ex. 75 at 6-7.)
During the dispute, Premier threatened to rescind its purchase of Mirage even though Premier had been operating the Mirage stores since early 1994. (Tr. 451, 468-70.) Mr. Stanz wrote the following to Mr. Neuman on October 4, 1994:
I am informing you that if we do not have a fully executed set of documents by the close of business this Friday, I intend to retain a San Francisco law firm with $25,000 of Mirage's funds to pursue a recision based on fraud and misrepresentation of Premier's balance sheet and to recover damages suffered to it as a result.
(Div. Ex. 44.)
On October 13, 1994, Mr. Stanz individually, Premier, the Rockies Fund, Redwood MicroCap, and Respondents Calandrella and Power individually, signed a settlement agreement negotiated by Respondents Calandrella and Power. This agreement affirmed the purchase of Mirage by Premier for 135,000 units of Premier and provided that the Fund would buy 85,000 restricted shares of Premier from Mr. Stanz for $85,000. (Div. Ex. 47.) On October 25, 1994, Mr. Stanz individually, Premier, Mirage, the Rockies Fund, Redwood MicroCap, and Respondents Calandrella and Power individually, entered a mutual general release covering them and their officers, directors, and employees. (Div. Ex. 48.)
The basis for my conclusion that Respondent Calandrella willfully violated Section 57(k)(1) of the ICA is that the dispute was between Respondent Calandrella and Mr. Stanz, yet Respondent Calandrella used Fund assets to reach a settlement. (Tr. 192, 366.) Respondent Calandrella acknowledges that there was no dispute between Mr. Stanz and the Fund so that the Fund had no dog in that fight. (Tr. 192, 366, 686-68.) The Fund's agreement to purchase all of Mr. Stanz's restricted Premier shares at $1.00 per share or $85,000, which Mr. Stanz wanted, benefited Premier and Respondent Calandrella. I reject Respondent Calandrella's position that it was appropriate to offer this "investment opportunity" to the Fund. (Tr. 687-88.) The fact that the dispute between Respondent Calandrella and Mr. Stanz had been going on for several months, and the settlement occurred shortly after Mr. Stanz threatened immediate legal action, supports a finding that Respondent Calandrella's agreement that the Fund would buy Mr. Stanz's Premier shares was based on his interests and not the Fund's.
I conclude that Respondent Calandrella willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 because Respondent Calandrella did not inform the Fund's independent directors of the reason why the Fund purchased 85,000 restricted Premier shares from Mr. Stanz for $1.00 per share. (Tr. 900-02.) This information was material and Respondent Calandrella had scienter in that he deliberately withheld the information from the board. The evidence is that Mr. Neuman was representing Premier, the Fund, Redwood MicroCap, Respondents Calandrella and Power, and perhaps Mirage. (Tr. 690.) Even assuming Mr. Neuman was an objective outside counsel to the Fund, disclosure to him was not a substitute for disclosure by Respondent Calandrella, the president of the Fund and a director, to the independent directors regarding his conflict of interest.
I find that Respondent Calandrella received a benefit from the settlement in that it removed the possibility that he would be named in a lawsuit. Finally, the good faith reliance on counsel defense is inapplicable because it requires: (1) a complete disclosure to counsel, (2) a request for counsel's advice as to the legality of the contemplated action, (3) receipt of advice that the contemplated action was legal, and (4) good faith reliance on the advice. See Markowski v. SEC, 34 F.3d 99, 104-05 (2d Cir. 1994); SEC v. Savoy Indus., Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981); SEC v. Manor Nursing Ctrs, Inc., 458 F.2d 1082, 1101-02 (2d Cir. 1972). None of these elements are present here. As noted, Mr. Neuman represented multiple parties. (Tr. 690.) Respondent Calandrella did not ask Mr. Neuman whether it was legal for the Fund to purchase Mr. Stanz's shares, rather Respondent Calandrella expected Mr. Neuman to inform him whether his actions were legal in all matters. (Tr. 688-90.) There is no evidence that Mr. Neuman told Respondent Calandrella his actions were legal, and there is no evidence that Respondent Calandrella acted in reliance on that advice.
IV. PUBLIC INTEREST
Cease and Desist
The Division seeks a cease and desist order against Respondents and Respondent Power pursuant to Section 21C of the Exchange Act, and also pursuant to Section 9(f) of the ICA as to Respondent Calandrella. (Div. Br. 54; OIP at 4.) Sections 21C and 9(f) empower the Commission to order persons who have violated or caused a violation of the Exchange Act and ICA, respectively, or Commission rules and regulations under those statutes, to cease and desist from committing or causing such violations. The Commission's latest guidance on applicable considerations in making such a determination is "Steadman plus":44
We conclude that, while Congress intended that cease-and-desist orders be forward-looking, like injunctions, it intended that the showing of risk of future violations be significantly less than that required for an injunction. . . .These comments indicate that, in the ordinary case, a finding of a past violation is sufficient to demonstrate a risk of future ones. . . .
Along with the risk of future violations, we will continue to consider our traditional factors in determining whether a cease-and-desist order is an appropriate sanction based on the entire record. Many of these factors are akin to those used by courts in determining whether injunctions are appropriate, 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. In addition, we consider whether the violation is recent, the degree of harm to investors or the marketplace resulting from the violation, and the remedial function to be served by the cease-and-desist order in the context of any other sanctions being sought in the same proceedings. This inquiry is a flexible one and no one factor is dispositive. This inquiry is undertaken not to determine whether there is a "reasonable likelihood" of future violations but to guide our discretion.
KPMG Peat Marwick LLP, 2001 SEC LEXIS 98, at *114-16 (Jan. 19, 2001) (footnote omitted).
Respondents contend that the Division's recommendations are unwarranted.45 They contend that if violations occurred, they were technical. They argue there is no need for a cease and desist order because the Fund cooperated with the Commission's investigation and has improved its record-keeping and valuation procedures; Respondent Calandrella accepted responsibility for reporting mistakes; and Respondents Calandrella, Thygesen, and Powell have learned the need to be precise in conducting the Fund's business. (Resp. Br. 47, 49-50.)
I conclude that a cease and desist order as to Respondents and Respondent Power is appropriate for the following reasons. Respondents and Respondent Power engaged in repeated fraudulent activities in blatant violation of well-known and accepted provisions of the securities laws and regulations over an extended time period. The Commission has specifically rejected Respondents and Respondent Power's argument that the lack of quantifiable harm to investors is exculpatory.
Respondents argue that, in spite of the circumstances that have just been narrated, there was no manipulation here. That contention rests on their claim that Epoch was a "huge success" after the merger. The unarticulated major premise is that a showing of damage is essential to a finding of manipulation.
That premise is erroneous. It confuses private actions for money damages with proceedings brought to redress the public interest. No proof of damage is needed in the latter type of case. The express provisions of the Act and the legislative history show that Congress was bent on stamping out deceptions of this character. No exception was made for the occasional victimless manipulation. The evil sought to be remedied is . . . deception.
Edward J. Mawod, 46 S.E.C. at 871 (footnotes omitted).
In any event, the fact that there is no evidence that investors suffered financial losses is offset by the unquantifiable damage done to confidence in the public markets by sham transactions and bogus stock values for publicly traded securities. Respondents Power and Calandrella manipulated the market for Premier shares for five months. Manipulation is among the most serious offenses in the hierarchy of securities violations in that it strikes at the integrity of the pricing process on which all investors rely. See J.A.B. Securities Co., Inc., 17 SEC Docket 1086, 1092 (June 25, 1979).
Respondents Calandrella, Thygesen, and Powell caused the Fund to disseminate materially false information to potential investors in eight separate filings made over one and a half years. These violations were not technical in that they were not theoretical or abstract errors or omissions. On eight separate occasions, Respondents acted deliberately to mislead the investing public. Based on Respondent Calandrella's regulatory history, a cease and desist order is necessary to improve the odds of compliance. Respondent Power has no history of prior violations, but these violations were significant and deliberate. As manager of a registered investment company and a board member of numerous public companies, Respondent Power will have many opportunities to repeat his illegal conduct, and it appears he attempted to avoid detection by using Canadian brokerage accounts. Respondents Thygesen and Powell have no history of prior violations, but they totally ignored the high level of fiduciary responsibility independent directors owed to the Fund's shareholders. It is also significant that Respondents and Respondent Power did not acknowledge their violations or show any remorse.
Activities Bar
The Division cites Section 21C of the Exchange Act and Section 9(b) of the ICA as the statutory basis for the sanctions against Respondents Calandrella, Thygesen and Powell, and, also Section 9(f) of the ICA as to Respondent Calandrella. (Div. Br. 53; OIP at 4.) The Division recommends that the Commission (1) bar Respondent Calandrella from association with any investment company, investment adviser, broker-dealer or municipal securities dealer, and (2) bar Respondents Thygesen and Powell from association with any investment company. (Div. Br. 53-57, Reply Br. 32-34.) The Division's brief was filed before the decision in Teicher v. SEC, 177 F.3d 1016 (DC Cir. 1999), which prohibits imposition of a sanction beyond what is specified in the statute pursuant to which the proceeding was authorized.
Respondents contend that the recommended sanctions are not in the public interest because they will damage Respondents' careers. However, based on the findings in this decision, a curtailment of Respondents' activities is necessary to protect the public markets. In response to Respondents' claim that sanctions could put the Fund out of business, I take official notice that the Rockies Fund filed with the Commission on December 13, 1999, a Form N-54C, notification of withdrawal of election to be subject to portions of the ICA as a BDC, and a Form 15, certification and notice of termination of the registration of securities under Section 12(g) of the Exchange Act. See Rule 323 of the Commission's Rules of Practice, 17 C.F.R. § 201.323.
I reject Respondents' claim that the sanctions the Division recommends are an unjustifiable departure from the sanctions imposed in Parnassus. (Resp. Br. 47-49.) Sanctions in this case cannot be assessed by what was found applicable in Parnassus or any another case because no set of facts is identical. It is well established that the severity of a sanction depends on the facts of the particular case and the value of the sanction in preventing a recurrence. See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). The "Steadman plus" factors are also applicable here. KPMG Peat Marwick, 2001 SEC LEXIS 98, at *114-16.
Application of the "Steadman plus" factors results in the need for strong sanctions. Respondent Calandrella was a licensed registered representative with five different broker-dealers in 1980 through 1982, and 1984 through 1985. (Tr. 205-07.) He admits to being the subject of numerous complaints while he was associated with Tri Securities, which filed a Form U-5 in July 1985, stating that Calandrella had engaged in "writing of wooden tickets, free riding, and use of nominees" and "violations of Reg. T." (Tr. 207-08.) In 1988, the NASD censured Respondent Calandrella and fined him $1,000. (Tr. 207, 1282-83.) Respondent Calandrella's record of improper conduct is one factor that indicates an activities bar is appropriate. Respondent Calandrella also gave conflicting sworn testimony on several issues in this proceeding. (Tr. 518-23, 752-53.) In addition, even though Respondent Calandrella knew he owed a fiduciary duty to the Fund as an officer and director, he misrepresented and withheld material information from the other Fund directors and from the Fund's auditor.46 (Tr. 687.) Finally, a strong sanction is needed to deter others from engaging in illegal activities. In view of his willful violations of the securities statutes, rules and regulations, I find it to be in the public interest pursuant to Section 9(b) of the ICA to prohibit permanently Respondent Calandrella from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company, or affiliated person of such investment adviser, depositor, or principal underwriter.
Respondents Thygesen and Powell deserve strong sanctions because they are knowledgeable, experienced persons who willfully violated the securities statutes, rules, and regulations. As noted, independent directors serve an important role under the ICA's provisions for BDCs. Respondents Thygesen and Powell abdicated the fiduciary duty they owed to the Fund and its shareholders. Accordingly, pursuant to Section 9(b) of the ICA, I prohibit Respondent Thygesen and Respondent Powell from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company, or affiliated person of such investment adviser, depositor, or principal underwriter, for a period of three years.
Civil Penalty
The Division recommends that the Commission order (1) Respondent Calandrella to pay a $500,000 civil penalty, and (2) Respondents Thygesen and Powell to pay a civil penalty of $100,000 each. (Div. Br. 53-57, Reply Br. 32-34.) Respondents argue that civil penalties are inappropriate because if violations exist, they did not involve fraud, no one was harmed, and Respondents were not unjustly enriched. (Resp. Br. 47.) They contend that this high level of penalties will prevent future respondents from cooperating with the Division. (Resp. Br. 51.)
The OIP cited Section 9(d) of the ICA as the authority for any civil penalties. Section 9(d) of the ICA specifies three graduated levels of monetary penalties applicable where a person has willfully violated the securities statutes. Third tier penalties are applicable because these Respondents violated the Exchange Act and the rules and regulations by actions that involved fraud, deceit, manipulation, and deliberate or reckless disregard for regulatory requirements, thereby creating a significant risk of loss. These same considerations and the need to deter others, which are public interest factors specified in Section 9(d)(3) of the ICA, persuade me that the following civil penalties will serve the public interest. The maximum per act or omission for a natural person is $100,000 at the third tier. Respondent Calandrella will receive a $500,000 civil penalty, which on a per act basis is $50,000 per filing and $100,000 for manipulation. Respondents Thygesen and Powell will each receive a $160,000 civil penalty, which on a per act basis is $20,000 for each of the eight false financial reports.
V. RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b) (1998), I certify that the record includes the items described in the record index issued by the Secretary of the Commission on October 19, 2000, and the Default Judgment in Calandrella v. Katz, No. 96 CV 267, Dist. Ct. Boulder County, Colo. (May 27, 1999).
VI. ORDER
Based on the findings and conclusions set forth above:
I ORDER pursuant to Section 21C of the Exchange Act, that The Rockies Fund, Inc., shall cease and desist from committing or causing any violations or future violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13;
I FURTHER ORDER pursuant to Section 9(f) of the ICA and Section 21C of the Exchange Act, that Stephen G. Calandrella shall cease and desist from committing or causing any violations or future violations of Section 10(b) of the Exchange Act and Rules 10b-5, Section 57(k)(1) of the ICA, and from aiding and abetting or causing any violations or future violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13;
I FURTHER ORDER pursuant to Section 21C of the Exchange Act, that Charles M. Powell and Clifford C. Thygesen shall cease and desist from committing or causing any violations or future violations of Sections 10(b) of the Exchange Act and Rule 10b-5, and from aiding and abetting or causing any violations or future violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13;
I FURTHER ORDER pursuant to Section 21C of the Exchange Act, that John C. Power shall cease and desist from committing or causing any violations or future violations of Section 10(b) of the Exchange Act and Rule 10b-5;
I FURTHER ORDER pursuant to Section 9(b) of the ICA, that Stephen G. Calandrella is permanently prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter;
I FURTHER ORDER pursuant to Section 9(b) of the ICA, that Charles M. Powell and Clifford C. Thygesen are prohibited for a period of three years from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter;
I FURTHER ORDER pursuant to Section 9(b) of the ICA, that Stephen G. Calandrella shall pay a civil penalty of $500,000; and
I FURTHER ORDER pursuant to 9(b) of the ICA, that Charles M. Powell and Clifford C. Thygesen shall each pay a civil penalty of $160,000.
Payment of penalties shall be made on the first day following the day this decision becomes final by certified check, United States postal money order, bank cashier's check, or bank money order payable to the U.S. Securities and Exchange Commission. The check and a cover letter identifying Stephen G. Calandrella, Charles M. Powell, or Clifford C. Thygesen as a Respondent in Administrative Proceeding No. 3-9615, 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.
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 twenty-one 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 twenty-one days after service of the initial decision upon such party, 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.
______________________________
Brenda P. Murray
Chief Administrative Law Judge
Footnotes
| 1 | "(Tr. __.)" refers to the transcript of the hearing. I will refer to the Division's exhibits as "(Div. Ex. __.)," Respondents' exhibits as "(Resp. Ex. __.)," and Respondent Power's exhibits as "(Power Ex. __.)." I will refer to the parties' posthearing briefs as "(Div. Br. __. or Reply Br. __.)," "(Resp. Br. __.)," and "(Power Br. __.)." I will refer to proposed findings of fact and conclusions of law as "(Div. Proposed FF and CL __.)," "(Resp. Proposed FF and CL __.)," and "(Power Proposed FF and CL __.)." |
| 2 | I have changed the order of the allegations from the OIP. |
| 3 | Closed-end investment companies are defined in Section 5(a)(2) of the ICA. Generally speaking:
Dictionary of Finance and Investment Terms 90 (4th ed. 1995). Fund shares have always traded at a discount to net asset value. (Tr. 212.) |
| 4 | BDCs are defined in Section 2(a)(48) of the ICA. There are few active BDCs. (Tr. 229-30, 1168.) |
| 5 | From 1983 through January 1991, Galbreath Financial Services Corporation served as both the manager and adviser of the Rockies Fund. (Div. Ex. 17 at 5.) Effective January 29, 1991, the Fund terminated its then-existing management and adviser agreements. (Div. Ex. 8 at 3.) |
| 6 | Respondent Calandrella purchased his initial interest in the Fund from a brokerage firm in Montana that was the controlling shareholder of the Fund in 1991. (Tr. 1284-85.) Because D.A. Davidson is located in Great Falls, Montana, I assumed it was the seller. (Resp. Ex. 29.) D.A. Davidson and Hanifen, Imhoff Inc. ("Hanifen Imhoff") were "underwriters' representatives" on the Fund's public offering in 1983. (Div. Ex. 17 at 3.) According to Respondent Calandrella, D.A. Davidson is the largest clearing firm for transactions on the Pacific Stock Exchange. (Tr. 285.) |
| 7 | The public companies include: The 24th Capital Corporation; American Educational Products; the predecessor company to Sell Robotics International; Cogenco International, Inc.; Hands to Service Co., or its predecessor, Enterprise Capital; Gold Capital Corporation; Good Times Restaurants, Inc.; Guardian Technologies; the predecessor company to Jones Naughton Entertainment; Kelly Motors, Ltd.; Marco Foods; Optimax Industries, Inc.; Pebble Beach Acquisitions; Realtime Resources; Renaissance Concepts; Solomon Trading Co.; Southwest Capital; Tago Biosource; and U.T., Inc. (Tr. 216-28.) Respondent Calandrella was a director of the Combined Penny Stock Fund, Inc., an investment company, in the 1980s. (Tr. 218, 230.) In 1998, Respondent Calandrella was a director and president of Global Casinos, Inc. ("Global Casinos"), a public company. (Tr. 219.) |
| 8 | Respondent Power's family owns and operates the Nut Tree restaurant in Vacaville, California. (Tr. 974.) The Nut Tree restaurant and related entities encompass several partnerships and corporations, which employed between 650 and 700 people in 1998. (Tr. 336.) Respondent Power and his brothers are the beneficiaries of family trusts. (Tr. 1086.) |
| 9 | Respondent Power has been or is associated as an officer or director with many public companies: The 24th Capital Corporation; Biosource International; Camelback Capital; Combined Penny Stock Fund, Inc.; Good Times Restaurants, Inc.; Guardian Technologies; Horizon Acquisitions; Intelligent Financial Holdings, which became Redwood Broadcasting; Kelly Motors, Ltd.; Kodiak Resources, a predecessor to Latin Foods International; Optimax Industries, Inc.; Pebble Beach Acquisitions; Power Ventures; Renaissance Concepts; Solomon Trading Co.; Southwest Capital; and Tago Biosource, which might have been a predecessor to U.T., Inc. (Tr. 968-73.) Respondent Calandrella was involved with many of these companies. See supra note 7. |
| 10 | Silver State had a "small" public offering on April 2, 1992. (Tr. 476; Div. Ex. 29 at 4.) |
| 11 | American Fashion Jewels, Inc., d/b/a Imposters, entered bankruptcy in May 1993. (Tr. 97.) |
| 12 | The Nasdaq has minimum quantitative measures for inclusion in the Nasdaq National Market and the Nasdaq SmallCap Market. The testimony was in terms of Nasdaq, but it appears that the listing sought was the less stringent SmallCap Market, which requires total shareholder equity of $2 million and $1 million market value for the public float. (Power Ex. 9.) |
| 13 | On March 3, 1994, Premier's common stock price quoted in the pink sheets was $4.00 per share, giving retroactive effect to a one-for-four reverse stock split that occurred on March 11, 1994. (Resp. Ex. 18 at 2.) |
| 14 | Restricted securities are defined in Securities Act Rule 144. 17 C.F.R. § 230.144. |
| 15 | As stated in an Interpretive Release issued in 1995:
Problematic Practices under Regulation S, 59 SEC Docket 1998, 1998 (June 27, 1995) (footnotes omitted). |
| 16 | The Rockies Fund borrowed the $125,000 from the Caribou Bridge Fund ("Caribou"). The loan authorized on March 14, 1994, matured on June 10, 1994. The cost was $2,500 and a "commitment fee" of 12,500 Premier shares. Caribou required the Fund to post collateral of securities, including the Premier shares the Fund was using the money to purchase. (Tr. 494-502; Div. Ex. 24.) On March 14, 1994, The Rockies Fund had 12,500 shares of the 125,000 shares it purchased issued to Caribou Capital Corporation. (Div. Ex. 25.) On or about November 13, 1995, Caribou Capital Corporation returned to the Fund the certificate for 112,500 Premier shares it held as collateral. (Tr. 504; Div. Ex. 27.) |
| 17 | Mr. Bloomquist met Respondent Calandrella in 1992. (Tr. 1185.) Respondent Calandrella was a director of Global Casinos and Mr. Bloomquist was Global Casinos's financial officer for three years beginning in August 1994. (Tr. 219, 1185, 1195.) Mr. Bloomquist was a Premier director from 1994 to 1996. (Tr. 1186.) |
| 18 | Section 9 of the Exchange Act makes it unlawful for any person:
|
| 19 | Div. Ex. 1 does not indicate sixty-seven separate trades because there are a number of double counts. For example, when an account at McDermid sold to Hanifen Imhoff in an unreported transaction, Hanifen Imhoff's purchase from McDermid is shown as a separate entry reported to the National Association of Securities Dealers, Inc. ("NASD"). (Div. 1 at nos. 1-2.) Thirty-one of these entries were reported to the NASD; thirty-six entries were not reported. (Div. Ex. 1.) The four trades which were not between accounts at Hanifen Imhoff and McDermid were: (1) on August 30, 1994, Hanifen Imhoff sold 10,000 shares to Cohig & Associates, Inc. ("Cohig") for $1.78125 per share, (2) on the same day and at the same price, Arthur Nacht at Cohig purchased 10,000 shares from Hanifen Imhoff, (3) on October 21, 1994, Hanifen Imhoff sold 2,500 shares at $2.56250 per share to Yee Desmond Schroeder & Allen ("YDSA"), and (4) on the same day and at the same price, Power IRA at YDSA bought 2,500 shares from Hanifen Imhoff. (Div. Ex. 1 at nos. 44, 45, 59, 60.) |
| 20 | Mr. Neuman was counsel to Respondents Calandrella and Power, Rockies Fund, Premier, Mirage, and Redwood MicroCap. (Tr. 690, 1223-25.) |
| 21 | The evidence of control or strong influence is not present with respect to Mr. Huebner, a Hanifen Imhoff employee, who purchased in the Imposters PP. |
| 22 | The Power Curve account was at McDermid so Hanifen Imhoff had to sell the 25,000 shares back to McDermid. |
| 23 | Respondent Calandrella disputes this Proposed Finding of Fact. Respondent Power does not. |
| 24 | Respondent Calandrella disputes this Proposed Finding of Fact. Respondent Power does not. |
| 25 | Respondent Calandrella disputes this Proposed Finding of Fact. Respondent Power does not. |
| 26 | There is no support in the record for Respondent Calandrella's statement that the Rockies Fund had $2.5 million in assets in 1995. (Tr. 212.) |
| 27 | The Fund's filings for the following quarter reported the same 25,000 shares with an initial investment date of March 1994, but subsequent filings used an acquisition date of June 1994. (Div. Exs. 7, 8, 9, 10, 11, 12.) Kober eventually sold its assets to Cohig. (Tr. 1197.) |
| 28 | Respondent Calandrella's testimony that he did not know the source of the shares the Fund bought from Kober is inconsistent with his investigative testimony and other evidence. (Tr. 519-23; Div. Ex. 33.) |
| 29 | The unnotarized stock power and assignment dated June 14, 1994, appears to be erroneous. (Tr. 1212-14; Div. Exs. 37, 40, 90.) |
| 30 | In 1982, the Commission issued the Codification of Financial Reporting Policies, a compendium of accounting and auditing information supplied to interested parties over many years. Mr. Hein, Respondents' expert, agreed that ASR 113 and ASR 118 are part of the hierarchy of generally accepted accounting principles ("GAAP") and are important in accounting for securities owned by investment companies. (Tr. 932.) GAAP consists of the conventions, rules, and procedures that define accepted accounting practice. See Dictionary of Finance and Investment Terms 217 (4th ed. 1995). |
| 31 | The agreement was signed by Ms. Greenberg for Premier, Respondent Calandrella for the Fund and himself individually, Respondent Power for Redwood MicroCap and himself individually, and Mr. Stanz. (Div. Ex. 47.) The parties also executed a "Mutual General Release." (Div. Ex. 48.) |
| 32 | Respondent Power does not dispute this Proposed Finding of Fact. |
| 33 | The $5,000 difference was made up by cancellation of a loan. (Tr. 699.) |
| 34 | As is discussed below, the Fund used quotes for unrestricted Premier securities to value its restricted Premier securities. I previously concluded that the quotes for unrestricted Premier securities were the product of manipulation by Respondents Calandrella and Power. |
| 35 | According to published studies, restricted securities sell at an average price discount of about 34%. See William L. Silber, Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices, Fin. Analysts J., July-Aug. 1991 at 60 (citing T.A. Solberg, Valuing Restricted Stocks: What Factors Do The Courts and the Service Look For?, J. Tax'n, Sept. 1979, and 5 U.S. Securities and Exchange Commission, Institutional Investors Study Report (1971)). |
| 36 | According to Mr. Hein, "You have to go to good faith." (Tr. 957.) |
| 37 | Mr. Hein is a licensed CPA in Colorado and Texas. Neither state took any action as a result of the Commission order. (Tr. 937-38.) |
| 38 | This number should be 112,500. |
| 39 | The bid is the "highest price a prospective buyer is prepared to pay at a particular time for a trading unit of a given security." Dictionary of Finance and Investment Terms 48 (4th ed. 1995). Hanifen Imhoff was the only market maker in Premier shares until May 26, 1995. Hanifen Imhoff and William V. Frankel & Co., Inc., were the two market makers from May 26, 1995, until July 6, 1995, when Paragon Capital Corporation became a third market maker. (Div. Ex. 19.) |
| 40 | This number should be 112,500. |
| 41 | It appears that these warrants were mislabeled as Class B warrants and were actually Class C warrants. |
| 42 | Premier had an operating loss for the quarters ended June 30, 1994, September 30, 1994, April 30, 1995, July 30, 1995, and the fiscal year ended December 31, 1994. (Div. Exs. 74, 75, 76, 77, 78.) Premier changed its reporting year in 1995. Premier showed a net operating profit of $16,513 for the three months ended October 29, 1995. (Div. Ex. 79.) |
| 43 | Respondent Calandrella, on the other hand, believed Mr. Stanz and Respondent Power misled him because Premier, under Mr. Stanz's direction, was not profitable in 1994. (Div. Ex. 43.) |
| 44 | See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981):
|
| 45 | Respondent Power's brief did not address sanctions, but concentrated on his position that the Division did not prove he manipulated the market for Premier shares. |
| 46 | For example, Respondent Calandrella falsely represented that the restricted Premier shares the Fund acquired in the Imposters PP had demand registration rights, and he did not tell Respondents Thygesen and Powell that the Fund was buying Mr. Stanz's Premier shares to settle his legal dispute with Mr. Stanz. |
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