Kevin M. Glodek, Exchange Act Rel. 60937, November 4, 2009
Time since appeal – 7 months 11 days
Time since last brief – 4 months 2 days
Glodek was found by the NASD to have committed fraud by making false statements to customers. He was fined $25,000 and suspended from association for six months. He did not dispute the finding of violations or the fine. He did appeal the suspension.
Glodek had a consulting agreement with a company by which he received stock in a company. He recommended the stock to customers making predictions that the company's stock would more than double within a few months. He also claimed the stock, then trading over-the counter would soon be listed on the Amex. Also, despite the company had significant unpaid payroll tax liabilities to the IRS, he claimed to customers the company was debt free.
Predictions of substantial and specific price increase of a stock are fraudulent unless there is a reasonable basis for them.
Glodek argued that it was improper for the NASD to increase the suspension above that imposed by the initial hearing panel. The Commission rejected this claim. It also disagreed with his claim that NASD should have justified its upward departure as the final sanction was within published NASD sanction guidelines. The Commission further noted that a lack of previously disciplinary history is not a mitigating factor.
The statute requires the SEC to uphold NASD sanctions if it finds they achieve the goal of being both remedial and suitable to deter future violations and not excessive or oppressive.
Bon Mots
$967,000 Disgorgement Order Based On Unregistered Stock Sales Upheld
Rodney R. Schoemann, Securities Act Rel. 9076, October 23, 2009
Time since last brief filed – 6 months 7 days
Time since appeal filed – 8 months 25 days
Schoemann is a professional stock market trader. The ALJ found that he had violated the registration provisions of § 5 of the Securities Act and entered a cease and desist order against him as well as requiring him to disgorge his profits of $967,901. The Commission upheld the sanctions on appeal.
Schoemann bought the stock from an individual in the business of purchasing shell companies with a view toward selling their stock publicly. He later sold the stock into the markets.
The Commission found that due to the seller's ownership of a large block of the issuer's stock and his activities on behalf of the company that he was a control person of the issuer. Therefore, Schoemann was a statutory underwriter since he bought the stock from an "issuer" with a view toward re-selling it to the public. Thus, his sales were not exempt from the registration provisions of the Securities Act. As the opinion summarizes, "[i]ndividual investors who are not securities professionals may be deemed 'underwriters' within the statutory meaning of that term if they act as links in a chain of securities transactions from issuers or control persons to the public."
The Commission rejected Schoemann's advice of counsel defense, noting that § 5 is a strict liability statute and that good faith is not a valid defense. As is its practice, the Commission also applied a strict test of the privilege and found Schoemann's claim wanting as the lawyer in question was not Schoemann's counsel. It noted that one cannot legally rely on the advice of another's counsel.
This case presents a useful summary of some of the key concepts underlying the registration provisions of the Securities Act. Those who participate in a "distribution," the process by which stock is transferred to the public by issuers or their control persons are likely to violate the statute.
Time since last brief filed – 6 months 7 days
Time since appeal filed – 8 months 25 days
Schoemann is a professional stock market trader. The ALJ found that he had violated the registration provisions of § 5 of the Securities Act and entered a cease and desist order against him as well as requiring him to disgorge his profits of $967,901. The Commission upheld the sanctions on appeal.
Schoemann bought the stock from an individual in the business of purchasing shell companies with a view toward selling their stock publicly. He later sold the stock into the markets.
The Commission found that due to the seller's ownership of a large block of the issuer's stock and his activities on behalf of the company that he was a control person of the issuer. Therefore, Schoemann was a statutory underwriter since he bought the stock from an "issuer" with a view toward re-selling it to the public. Thus, his sales were not exempt from the registration provisions of the Securities Act. As the opinion summarizes, "[i]ndividual investors who are not securities professionals may be deemed 'underwriters' within the statutory meaning of that term if they act as links in a chain of securities transactions from issuers or control persons to the public."
The Commission rejected Schoemann's advice of counsel defense, noting that § 5 is a strict liability statute and that good faith is not a valid defense. As is its practice, the Commission also applied a strict test of the privilege and found Schoemann's claim wanting as the lawyer in question was not Schoemann's counsel. It noted that one cannot legally rely on the advice of another's counsel.
This case presents a useful summary of some of the key concepts underlying the registration provisions of the Securities Act. Those who participate in a "distribution," the process by which stock is transferred to the public by issuers or their control persons are likely to violate the statute.
Commission Refuses To Allow Former Chief Accountant To Testify in Fanny Mae Litigation
Fanny Mae Securities Litigation, Exchange Act Rel. 60772, October 2, 2009
The Ohio Public Employees Retirement System as lead plaintiffs in a class action suit against Fanny Mae subpoenaed Donald Nicolaisen the former chief accountant of the Commission to testify at a deposition. Nicolaisen had testified before Congress that Fanny Mae accounting practices did not comply with generally accepted accounting principles.
Pursuant to Commission rules the Commission's general counsel issued a decision denying the request. This appeal followed.
There is a split in the circuits over the standard of review to be employed by a federal agency in these situations – whether the Administrative Procedure Act arbitrary and capricious standard or the FRCP should be applied. The Commission followed D.C. Circuit precedent and used the FRCP. Using that standard, the Commission decision analyzes: 1) whether the deposition would cause undue burden to the Commission; 2) whether the testimony would likely invade the SEC's privileges; and 3) whether the testimony would consist of expert opinion or fact testimony.
The Commission concluded that the testimony would be largely expert opinion and to the extent that it was factual, would largely be protected by the Commission's deliberative process privilege. The opinion expresses concern that allowing present or former staff to routinely testify would impose a significant burden on the Commission as the staff issues numerous comments on company periodic filings and provides accounting guidance on a regular basis.
The Commission also noted that its deliberative process privilege protects the internal discussions of its staff. See, pages 8-9 of the Commission's opinion.
The Ohio Public Employees Retirement System as lead plaintiffs in a class action suit against Fanny Mae subpoenaed Donald Nicolaisen the former chief accountant of the Commission to testify at a deposition. Nicolaisen had testified before Congress that Fanny Mae accounting practices did not comply with generally accepted accounting principles.
Pursuant to Commission rules the Commission's general counsel issued a decision denying the request. This appeal followed.
There is a split in the circuits over the standard of review to be employed by a federal agency in these situations – whether the Administrative Procedure Act arbitrary and capricious standard or the FRCP should be applied. The Commission followed D.C. Circuit precedent and used the FRCP. Using that standard, the Commission decision analyzes: 1) whether the deposition would cause undue burden to the Commission; 2) whether the testimony would likely invade the SEC's privileges; and 3) whether the testimony would consist of expert opinion or fact testimony.
The Commission concluded that the testimony would be largely expert opinion and to the extent that it was factual, would largely be protected by the Commission's deliberative process privilege. The opinion expresses concern that allowing present or former staff to routinely testify would impose a significant burden on the Commission as the staff issues numerous comments on company periodic filings and provides accounting guidance on a regular basis.
The Commission also noted that its deliberative process privilege protects the internal discussions of its staff. See, pages 8-9 of the Commission's opinion.
Rep and Branch Managers Barred and Ordered To Pay Penalties For Participating In Scheme To Evade Mutual Fund Market Timing Restrictions
Thomas C. Bridge, James D. Edge, Jeffrey K. Robles, Exchange Act Rel. 60736, September 29, 2009
Time since appeal filed – 1 year five months 29 days
Time since last brief filed – 1 year two months four days
Time since oral argument – 4 months 16 days
All three respondents were formerly associated with A.G. Edwards. Bridge, Charles Sacco (who settled the case before trial and consented to a bar with a right to reapply to associate with a broker or dealer after two years) were found after trial to have violated the anti-fraud provisions of the Exchange and Securities Acts for employing deceptive tactics to evade mutual fund restrictions on frequent market market timing trades. Edge (Bridge's branch manager) and Robles (Sacco's branch manager) were found at trial to have failed to supervise. The Commission upheld the ALJ's findings of violations and barred Bridge from broker-dealer association with a right to reapply after five years. Edge was barred from associating as a supervisor with a right to reapply after five years and Robles was barred from supervisory association with a right to reapply in three years. Bridge was also subjected to a cease and desist order and ordered to pay $39,000 of disgorgement and a $240,000 civil penalty. Edge was ordered to pay a $120,000 penalty and Robles a $39,000 penalty.
Market timing for the uninitiated is "the frequent buying and selling of mutual fund shares in order to take advantage of the fact that there may be a lag between a change in the value of a mutual fund’s portfolio securities and the reflection of that change in the fund’s share price." Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings (Final Rule), Investment Company Act Rel. No. 26418 (Apr. 16, 2004), 82 SEC Docket 2685, 2686 n.11. It is itself not illegal but "may nevertheless harm shareholders because it may dilute the value of long-term shareholders’ interests, may cause mutual funds to manage their portfolios in a disadvantageous manner, and may incur increased brokerage and administrative costs related to the frequent purchases and redemptions associated with market timing." Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings (Proposed Rule), Investment Co. Act Rel. No. 26287 (Dec. 11, 2003), 81 SEC Docket 2971, 2979-80. (internal quotations omitted)
Many mutual funds place restrictions on frequent trading to limit this practice and the harm it causes to other shareholders. Bridge and Sacco took various steps to conceal their frequent trading activities, including opening up multiple accounts in different customer names in an attempt to hide the identities of their clients from the mutual funds. The Commission found that Robles knew of Sacco's trading and restrictions on his trading my funds, but did not attempt to confirm wither Sacco was complying with those restrictions. The amount of trading was huge – Bridge over a two year period bought and sold $1.1 billion of fund shares. Edge knew of restriction letters that Bridge received from funds and Bridge established new accounts for a client who wanted to market time.
The Commission ruled that because Bridge and Sacco undertook various deceptive tactics, such as opening new accounts under different names after clients had been warned to cease frequent trading they violated the anti-fraud provisions. The Commission found that this conduct involved the making of materially false statements or omissions.
Comment
The Commission hinged its finding of violations on the false statement and material omission clauses of the anti-fraud provisions. But the statues and rules also prohibit any device, scheme, or artifice to defraud. No materially false statement or omission is required. Why does the Commission feel compelled to seek material omissions or statements when it could simplify matters by finding that Bridge and Sacco engaged in a fraudulent scheme? Suppose Bridge and Sacco had engaged in trades for clients that they knew exceeded fund restrictions on frequent trading but had not set up deceptive new accounts to evade restriction letters from funds? Would not their conduct, which they knew violated published fund trading limits, have still violated the device, scheme or artifice clause? Under the Commission's formulation the rep (and his client) who engage in frequent trading only until receiving a warning letter from a fund are given a limited license to steal from long term fund shareholders. This is the flaw in insisting that anti-fraud liability is limited to material deception – the violation doesn't occur until after the fund restricts trading activity by the account and the pre-letter trades are immunized.
Why does the Commission delay resolution of cases such as this for oral arguments? If it is going to insist on hearing oral arguments why would it wait more than 9 months after the briefs were filed to schedule the argument?
Time since appeal filed – 1 year five months 29 days
Time since last brief filed – 1 year two months four days
Time since oral argument – 4 months 16 days
All three respondents were formerly associated with A.G. Edwards. Bridge, Charles Sacco (who settled the case before trial and consented to a bar with a right to reapply to associate with a broker or dealer after two years) were found after trial to have violated the anti-fraud provisions of the Exchange and Securities Acts for employing deceptive tactics to evade mutual fund restrictions on frequent market market timing trades. Edge (Bridge's branch manager) and Robles (Sacco's branch manager) were found at trial to have failed to supervise. The Commission upheld the ALJ's findings of violations and barred Bridge from broker-dealer association with a right to reapply after five years. Edge was barred from associating as a supervisor with a right to reapply after five years and Robles was barred from supervisory association with a right to reapply in three years. Bridge was also subjected to a cease and desist order and ordered to pay $39,000 of disgorgement and a $240,000 civil penalty. Edge was ordered to pay a $120,000 penalty and Robles a $39,000 penalty.
Market timing for the uninitiated is "the frequent buying and selling of mutual fund shares in order to take advantage of the fact that there may be a lag between a change in the value of a mutual fund’s portfolio securities and the reflection of that change in the fund’s share price." Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings (Final Rule), Investment Company Act Rel. No. 26418 (Apr. 16, 2004), 82 SEC Docket 2685, 2686 n.11. It is itself not illegal but "may nevertheless harm shareholders because it may dilute the value of long-term shareholders’ interests, may cause mutual funds to manage their portfolios in a disadvantageous manner, and may incur increased brokerage and administrative costs related to the frequent purchases and redemptions associated with market timing." Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings (Proposed Rule), Investment Co. Act Rel. No. 26287 (Dec. 11, 2003), 81 SEC Docket 2971, 2979-80. (internal quotations omitted)
Many mutual funds place restrictions on frequent trading to limit this practice and the harm it causes to other shareholders. Bridge and Sacco took various steps to conceal their frequent trading activities, including opening up multiple accounts in different customer names in an attempt to hide the identities of their clients from the mutual funds. The Commission found that Robles knew of Sacco's trading and restrictions on his trading my funds, but did not attempt to confirm wither Sacco was complying with those restrictions. The amount of trading was huge – Bridge over a two year period bought and sold $1.1 billion of fund shares. Edge knew of restriction letters that Bridge received from funds and Bridge established new accounts for a client who wanted to market time.
The Commission ruled that because Bridge and Sacco undertook various deceptive tactics, such as opening new accounts under different names after clients had been warned to cease frequent trading they violated the anti-fraud provisions. The Commission found that this conduct involved the making of materially false statements or omissions.
Comment
The Commission hinged its finding of violations on the false statement and material omission clauses of the anti-fraud provisions. But the statues and rules also prohibit any device, scheme, or artifice to defraud. No materially false statement or omission is required. Why does the Commission feel compelled to seek material omissions or statements when it could simplify matters by finding that Bridge and Sacco engaged in a fraudulent scheme? Suppose Bridge and Sacco had engaged in trades for clients that they knew exceeded fund restrictions on frequent trading but had not set up deceptive new accounts to evade restriction letters from funds? Would not their conduct, which they knew violated published fund trading limits, have still violated the device, scheme or artifice clause? Under the Commission's formulation the rep (and his client) who engage in frequent trading only until receiving a warning letter from a fund are given a limited license to steal from long term fund shareholders. This is the flaw in insisting that anti-fraud liability is limited to material deception – the violation doesn't occur until after the fund restricts trading activity by the account and the pre-letter trades are immunized.
Why does the Commission delay resolution of cases such as this for oral arguments? If it is going to insist on hearing oral arguments why would it wait more than 9 months after the briefs were filed to schedule the argument?
Investment Adviser Association Bar Imposed Based on Securities Fraud Conviction and Injunction
Martin A. Armstrong, Investment Advisers Act Rel. 2926, September 17, 2009
Time since appeal filed - 5 months 22 days
Time since last brief - 9 days
Armstrong was associated with an investment adviser and was convicted of conspiracy to commit securities fraud and commodities fraud. The Commission barred him from association with an investment adviser.
In 2006 Armstrong pled guilty to conspiracy to commit securities, wire, and commodities fraud. He was sentenced to 60 months imprisonment and ordered to pay $80 million in restitution to 60 defrauded clients. He was also enjoined in a Commission civil case.
Armstrong denied that he was associated with an investment adviser, which if true, would have deprived the Commission of jurisdiction to bring an administrative case against him. The Commission rejected this argument, noting that it does not permit respondents to deny allegations contained in a civil complaint when they consent to an injunctive order.
Time since appeal filed - 5 months 22 days
Time since last brief - 9 days
Armstrong was associated with an investment adviser and was convicted of conspiracy to commit securities fraud and commodities fraud. The Commission barred him from association with an investment adviser.
In 2006 Armstrong pled guilty to conspiracy to commit securities, wire, and commodities fraud. He was sentenced to 60 months imprisonment and ordered to pay $80 million in restitution to 60 defrauded clients. He was also enjoined in a Commission civil case.
Armstrong denied that he was associated with an investment adviser, which if true, would have deprived the Commission of jurisdiction to bring an administrative case against him. The Commission rejected this argument, noting that it does not permit respondents to deny allegations contained in a civil complaint when they consent to an injunctive order.
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