Transfer agent, Issuer reporting violations
Time between appeal and decision – 12 months, 16 days
Time between last brief and decision – 9 months, 25 days
Pages – 28
Comment
Perhaps the most significant ruling in this case is the imposition of a cease and desist order against the company whose transfer agent registration was revoked and officer who was barred from transfer agent association because the cease and desist orders would serve the remedial purpose of encouraging [them] "to take their responsibilities more seriously in their future dealings with the clearance and transfer systems and the Commission." In justifying this sanction the Commission stated, "[w]e find that the record as a whole, especially the evidence with regard to the seriousness, recentness, and recurrent nature of the violations, the harm to the marketplace and the regulatory scheme, and the very high degree of scienter, establishes a sufficient risk that Respondents would commit future violations to warrant imposition of cease-and-desist orders. Based on all of these factors, we find cease-and-desist orders against Respondents to be in the public interest."
Also significant is the fact that the Commission increased the penalty against one respondent from $50,000 to $100,000. That respondent was responsible for the transfer agent violations and failed to cooperate with an SEC staff examination.
Finally, the Commission overturned the ALJ's sanction of revoking the issuer's registration because despite the egregious past violations, the company has devoted "significant resources to satisfying its reporting obligations," has become current with its periodic filings, and retained a consultant to improve its internal accounting functions. It did impose a cease and desist order against future filing violations. It is therefore clear that the Commission is reluctant to revoke the registration of a delinquent issuer that has become current and has taken other steps to make repeat violations less likely and will in the future be subject to a cease and desist order.
Key points
- The Commission considered as evidence a statement in a responpondent's Wells submission that she contradicted in her oral trial testimony.
- "'The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership . . . , are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.' Failure to comply jeopardizes the efficacy of the Congressionally-mandated national system for the prompt and accurate clearance and settlement of transactions in securities." (footnotes omitted).
A transfer agent is required to keep records demonstrating that it has complied with the turn-around rule. - "A willful violation of the securities laws means merely 'that the person charged with the duty knows what he is doing.' Wonsover v. SEC, 205 F.3d 408, 414 (2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor 'also be aware that he is violating one of the Rules or Acts.' Id. (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965))
- The aiding and abetting scienter requirement can be satisfied with proof of actual knowledge or reckless disregard.
- Incomplete response by transfer agent to staff request for documents and to conduct physical examination for 2 ½ months violates the obligation to make required records available for inspection by the SEC staff.
- The person who delayed the transfer agent's response and submitted an incomplete response to the staff document request was an aider and abetter of the violations and a cause.
- There is no scienter requirement to establish a violation of the periodic reporting requirements of Exchange Act Section 13.
- Corporate officer who "engaged in acts and omissions that he knew or should have known would result in [the company's] reporting violations was a cause of those violations.
- The fact that the ALJ denied respondents request for a postponement of the hearing did not establish that the ALJ was biased against respondents and should have withdrawn from the proceeding.
- Revocation of transfer agent registration was appropriate as the failure to transfer items occurred for a three month period that the Commission characterized as egregious, recurrent, and prolonged.
- The fact that the company no longer acts as a transfer agent is irrelevant in considering sanctions as there is an opportunity for future violations because it could in the future resume that role.
- Despite revocation of the transfer agent's registration and a bar from association with a transfer agent for an individual, a cease and desist order was in the public interest in order to "serve the remedial purpose of encouraging [them] to take their responsibilities more seriously in their future dealings with the clearance and transfer systems and the Commission."
- A $25,000 penalty was imposed for each month respondent aided and abetted transfer agent violations and another $25,000 for failure to comply with staff inspection requests.
- Because the company only had revenues of $1,544 and was in financial difficulty, and had a going concern qualification of its financial statements, the penalty of $100,000 against the company imposed by the ALJ was overturned as not in the public interest.
- Because the proceedings against one respondent were instituted only under Sections 12(j) and 21C of the Exchange Act, no penalty was appropriate and the penalty imposed by the ALJ against that respondent was also overturned.
Summary
Phlo Corp. manufactured beverages and acted as its own transfer agent (and was so registered with the Commission) for its publicly traded securities. James Hovis was executive vice presidenet of the company and Anne Hovis was the company's general counsel. The initial decision found that Phlo willfully violated transfer agent turnaround requirements and failed to make documents available for inspection by SEC staff. It also found that A. Hovis aided and abetted and caused the transfer violations and failure to provide records for examination. The ALJ also found that Phlo failed to timely file periodic reports with the SEC from March 2003 through November 2005 and that J. Hovis aided and abetted and caused those violations. The ALJ ordered civil penalties of $100,000 against Phlo, $25,000 against J. Hovis and $50,000 against A. Hovis, revoked Phlo's transfer agent registration, barred A. Hovis from associating with any transfer agent and imposed cease and desist orders on all respondents.
The initial decision was upheld in all respects, except that the penalty for A. Hovis was increased to $100,000 and no penalties were imposed against the company and J. Hovis.
Exchange Act rules require that registered transfer agents turn around 90 percent of routine items within three business days. Reports sent to Phlo by its Depository Trust Corp. showed that for three months in 2003 Phlo failed to meet the three day turnaround rule for fifty-four items. Phlo did not offer evidence that it had met the three day requirement and there was no evidence the items were non-routine. A. Hovis also was notified by DTC staff of the failure to turn around items. A. Hovis also explicitely refused to transfer items to Cede & Co.(DTC's nominee). She claimed that DTC had no legal right to insist that securities be registered in the name of Cede. The SEC staff told A. Hovis Phlo was required to transfer to Cede if instructed to do so by DTC despite her claim that this was facilitating naked short selling in Phlo stock. During a heated conversation with SEC staff A. Hovis refused to provide a legal basis for her position. When the hearing in this matter began in September 2005, a number of the transfers had still not been completed. Indeed, at the time of the oral argument on appeal, some of the transfers were still pending.
SEC staff pursuant to the Commission's inspection authority requrested various documents from Phlo in late October 2003. The documents were never provided and at one point the staff visited the registered location of the transfer agent, which was locked. Despite a request from the SEC staff, A. Hovis never contacted the staff to arrange a date for an inspection of that registered location. Finally, in mid-January 2004, A. Hovis provided some, but not all of the requested documents. The remaining documents have never been produced.
Because the Division of Enforcement met its initial burden of showing turn around violations by proof that all fifty-four items received by Phlo in June through August 2003 were still outstanding in early September 2003, the burden then shifted to Phlo to refute that evidence. Further, Phlo failed to respond to a request for documents that sought the required logs which document a transfer agent's compliance with the turn around rule.
A. Hovis aided and abetted the transfer agent violations and Phlo's failure to provide requested documents to the SEC staff. A. Hovis was a cause of the violations as well.
Between March 2003 and November 2005 Phlo failed to timely file three annual reports and eight quarterly reports with the SEC (the delinquencies ranged from three days to twenty months). Six of the eleven filings were more than a year late. During this time the company had four auditors.
J. Hovis admitted he was responsible for overall management of the company. He signed the company's annual and quarterly reports. He was found to be a cause of Phlo's reporting violations.
It was appropriate under the Steadman factors to revoke Philo's transfer agent registration and bar A. Hovis from associating with a transfer agent. It is appropriate to impose cease and desist orders against Phlo and A. Hovis for transfer agent violations despite the revocation and bar to "serve the remedial purpose of encouraging [them] to take their responsibilities more seriously in their future dealings with the clearance and transfer systems and the Commission."
