Enjoined Investment Adviser Barred With Right To Reapply In Five Years - No Explanation Provided

Robert Radano, IA Act Rel. 2750 (June 30, 2008)

Time since appeal filed - 2 years, 2 months, 16 days
Time since last brief filed - 1 year, 11 months, 27 days
Time since oral argument - 1 month, 25 days
Pages - 18
Footnote - 82

Summary

Rodano was the managing director and sole owner of an investment adviser registered with Connecticut. The ALJ barred him based on a previous injunction prohibiting anti-fraud violations. Rodano was enjoined because he knowingly allowed Steven Bolla, a barred individual to associate with the advisory firm and failed to disclose Bolla’s bar to clients. The D.C. Circuit upheld the injunction, but remanded to the district court after finding the injunctive order overly broad.

The district court found that Radano’s violations were “flagrant, deliberate, and part of a pattern.”

The Commission noted that in assisting clients in choosing investment managers and advised clients about asset allocations, Radano’s firm met the statutory definition of an investment adviser. Because Rodano managed and owned the firm and advised clients, he was an associated person of an adviser.

Rodano argued that his fraud was not so egregious as to justify a lifetime bar. It also found that Rodano betrayed the trust of his clients despite an adviser’s duty of “utmost good faith.” The Commission also rejected Rodano’s argument that because no investor funds were lost, the sanction should be lessened, finding that the quality of investment advice provided was not a relevant issue in the case. Despite noting that Rodano’s violations were egregious and demonstrated “a high degree of scienter” and demonstrated a “troubling lack of integrity” the Commission modified the lifetime bar to one permitting Rodano to reapply in five years.

After many pages of similarly stern rhetoric the Commission’s conclusion that a permanent bar is not appropriate is surprising to say the least. The Commission concludes that a bar with a right to reapply in five years will impress upon Rodano the seriousness of his misconduct and reduce the likelihood of recurrrence. It further concluded that removing him from the industry for a substantial period of time will “help to ensure his compliance.” No explanations for these conclusions is provided.

Comment

Can you say ipse dixit? The Commission prefaces its conclusions with literally pages of inconsistent rhetoric about the egregious nature of Rodano’s violations. The utter lack of explanation for the conclusion that less than a permanent bar is appropriate will inspire future litigation by other enjoined individuals and discourage ALJs from entering orders without holding hearings. The Commission owes some duty to explain its reasoning. This type of unexplained arbitrary decision making is disgraceful. Picking a number from a hat is simply not acceptable. Why five years and not four or three or two? If the word egregious has any meaning at all, why less than a permanent bar? Last, what explains the Commission’s scheduling oral argument a full ten months after the last brief was received?

NYSE Sanctions Against Firm For Submitting Inaccurate Trading Data Upheld

Schone-Ex, LLC, Exchange Act Rel. 57857 (May 23, 2008)

Time since appeal filed - 10 months, 7 days

Times since last brief - 7 months, 5 days

Pages - 15

Footnotes - 33

Summary

This case is interesting because the Commission adopted a "destruction of the business" test for evaluating whether fines are excessive or oppressive (the statutory test) with virtually no discussion and citation to only one case which does not rule that to be the exclusive definition of the statutory terms. 

NYSE requested that Shone-Ex (a member firm) submit data to it concerning short sale transactions through a so-called "blue sheet."  The firm made an inaccurate response and was also sanctioned for failing to supervise its blue-sheet supervisory procedures.  Blue sheets are a mechanism whereby the SEC, and other regulators request that firms supply trading data on selected trades, usually as part of a regulatory investigation.  These requests and responses are now done electronically but in the distant past (for example when I first went to work for the SEC) they were done by a paper form on blue paper sent to the firm by the regulators (and hence the name "blue sheet").  Regulators traditionally use these forms to determine the names and account numbers of traders.

NYSE censured the firm and fined it $300,000.  The Commission upheld the sanctions.

NYSE's blue sheet requests were in 2002 and 2004.  Shon-Ex executes trades for an affiliated clearing firm, Schonfeld Securities.  Both firms have the same CEO and compliance officer.  Schone-Ex contracted with an independent data processing firm to file blue sheets with regulators.  During the period in question, no one at the firm verified the accuracy of submissions made by the data processing firm even though copies were sent to the firm.  In June  2004 NYSE discovered that blue sheet responses concerning 146 trades wrongly showed 100 short trades as long.  Schone-Ex's CEO contacted the data firm, but it was slow to correct the reporting errors.  In November 2004 the firm notified NYSE that it had submitted inaccurate blue sheet responses from June through October.  Thus, the exchange did not obtain accurate data until November.  The firm did not put into place procedures to ensure the accuracy of blue sheet responses until May 2005.

At trial, even Schon-Ex's expert agreed that the blue sheet system is a vital regulatory surveillance system.  

Schone-Ex admitted that it submitted erroneous data to NYSE and did not maintain adequate procedures to verify the accuracy of data submitted on its behalf by the data processing firm. It noted that the trades were accurately recorded on its own books and that the errors were solely those of the data processing firm.

The primary challenge on appeal was Schone-Ex's claim that the penalty was excessive.  Exchange Act Section 19(e) requires that the SEC sustain NYSE sanctions unless it finds that the sanction is excessive, oppressive or imposes an unnecessary or inappropriate burden on competition.  In evaluating sanctions the SEC addresses "the nature of the violation and the mitigating factors."  The SEC also evaluates the seriousness of the offense, the harm to the investing public, the potential gain to the broker, the potential for repetition, and the deterrent value on the offending broker and others.  Further, the courts have directed that the SEC determine that sanctions are "remedial and not excessive or oppressive."

The Commission found that the record was unclear as to whether the NYSE investigation was hindered by the inaccurate submissions (indeed NYSE found that the harm to the investigation "should not weigh heavily" in assessing a penalty).  It nevertheless concluded that the misconduct was "significant."  In doing so the Commission noted the critical regulatory role of blue sheet responses.  It further noted that the inaccurate data submitted covered trades over a several year period.  The Commission found that Schone-Ex did not promptly and forcefully move to correct the problems or to put surveillance procedures into place.  

Schone-Ex also complained that in supporting the sanctions, NYSE relied on sanctions in settled disciplinary actions against other firms.  The Commission noted that NYSE rules specifically allow reference to prior disciplinary actions without exempting settlements.  

Practitioners should note that the SEC also relies on settled SEC matters as precedent for substantive law.  See, Carl L. Shipley, Release 34-10870, fn. 6 (June 21, 1974), 1974 SEC LEXIS 3113 ("A long series of such non-adjudicative orders issued in many cases may be significant for certain purposes as pointing to a settled administrative construction or practice. But an isolated order or two of [that type] is of no general import. Such cases are not to be confused with those in which we accept an offer of settlement, issue an order that makes findings, and imposes the sanction assented to by the settling respondent or respondents, and either together with the order or at a later time issue an opinion stating our views on the issues raised."). The Supreme Court has long recognized that "the interpretation of an agency charged with the administration of a statute is entitled to substantial deference."  Blum v. Bacon, 457 U.S. 132, 141 (1982).  

Another significant factor considered by the Commission was that Schone-Ex had three prior disciplinary actions, including one involving failure to supervise.  The Commission noted that NYSE had also considered the disciplinary history of a subsidiary of the firm, but noted that it did not consider that matter.

Last, the Commission rejected Schone-Ex's claim that the fine was excessive.  It noted that the firm had not established that the fine "threatens its business."  Needless to say, this is a very high bar for a firm challenging a sanction to meet.

Comment

This case indicates that the Commission takes the failure of firms to submit accurate trading data to regulators very seriously.  It will reverse a fine as excessive only if the firm can show that the penalty is so large as to "threaten [the] business" of the firm.  Needless to say, this construction of the statutory words "excessive or oppressive" are ready made for appeal.  The Commission justified its conclusion only by quoting from McCarthy v. SEC, 406 F.3d 179, 190 (2d Cir. 2005) ("a compelling argument can be made that suspending McCarthy now will not serve remedial interests and will work an excessive and punitive result - namely, the destruction of the brokerage practice McCarthy has built during several years of rule-abiding trading.").  The fact that in McCarthy the Court found destruction of the business to be "excessive or oppressive" of course does not mean that only destruction of the business can be deemed "excessive or oppressive."  Its willingness to adopt the destruction of the business test with no further discussion and analysis seems to run a significant risk of appellate reversal.  So, once again we see an ipse dixit pronouncement from the Commission, this time in connection with a significant regulatory standard, namely when industry fines will be upheld.

Commission Reverses NASD Fraudulent Markups Ruling Despite Finding "A Profound Disregard" For The Duty To Treat Customers Fairly

Dennis Todd Lloyd Gordon and Sterling Scott Lee, Exchange Act Release 57-57655 (April 11, 2008)

Time since appeal filed - 1 year, 1 month, 19 days

Time since last brief filed - 10 months, 12 days

Pages - 31

Footnotes - 102

Summary

This opinion is a travesty.  Despite finding that the the firm charged excessive markups and the individuals involved were aware of the pricing of the trades and "evince[d]" a profound disregard for the essential duty to treat one's customers fairly" without explanation it simply concluded that the record did not support a finding of fraud.   It is not out of line here to quote Woody Allen ("mockery of a sham").  The Commission has found fraud violations in literally dozens of similar markup cases.  The total failure to explain its conclusion that there was no fraud shown in the record is unacceptable for a public agency that purports to act in a judicial role. Under what circumstances will the Commission find sufficient evidence of fraud in the markup context?  We should expect more from the SEC.

The NASD sanctioned Gordon, the CEO of a broker-dealer and Lee, the president and chief compliance officer.  It found that they permitted an unregistered individual to function as a principal, and thereby failed to maintain an accurate membership application, caused the firm to charge excessive markups to customers in thirty-one transactions and failed to disclose the markups on confirmations.  The NASD barred Gordon and Lee and ordered them to pay joint and several restitution of $20,000 plus interest.

The Commission upheld the findings of violations relating to the unregistered principal.  As to the markups, it found them excessive under long standing precedent, but did not find them fraudulent.  As discussed below, this portion of the opinion is a stunning default by the Commission as it literally offered no explanation for its conclusion that there was no fraud.  It found Lee responsible for failure to disclose the markups to customers, but exonerated Gordon on this charge.

The bars imposed by the NASD for the unlicensed principal were sustained.  The bars based on the markups were reduced to a two year suspension because of the unexplained conclusion that there was no fraud.  Lee was given an additional thirty day suspension based on failure to disclose the markups.  The NASD order requiring restitution to customers for the excessive markups was upheld.

Unlicensed Principal

Lee and Gordon hired an individual at the broker who had a disqualifying criminal conviction that they claimed no knowledge of.  That individual exercised authority over a broad range of firm operations, including recruiting, hiring, firing, setting sales quotas, resolving a customer complaint, dealing with the clearing firm for the broker, and setting policy on use of firm equipment.  In particular the unregistered principal recruited registered representatives and helped the firm set up a branch office.  In short, the unregistered individual had an active management role at the firm.  These facts were established through emails.  

NASD rules define a principal as an associated person "actively engaged in the management of the member's investment banking or securities business, including supervision, solicitation, conduct of business, or training . . . "  Further, the requirement to register does not hinge on the individual's title, but rather "on the functions that he or she performs."  

Needless to say, the Commission found that the unregistered individual while "not holding an official managerial title nonetheless filled a management role . . . ."  It found that he "devoted a substantial amount of time and attention" to the broker "giving instructions and orders to Gordon and Lee about a wide variety of matters relating to the conduct [of the business]." Such persons who devote "significant time to firm affairs and participate in management decisions" are principals.

The Commission rejected the defense argument that each individual act of the unregistered individual was required to meet the legal definition of association as a principal. For example, it argued that firms hire recruiters to assist in the hiring of staff without those recruiters being required to register. In rejecting this argument, the Commission noted that "[i]n determining whether an individual is required to register as a principal we consider all of the relevant facts and circumstances, including the cumulation of individual acts that might not, on their own, show management."

The Commission also sustained the related finding that as a result of the unregistered principal, the firm's filings with the NASD were inaccurate in violation of NASD rules.  

The Commission also upheld the introduction into evidence of the investigative testimony of the unregistered individual and emails he authored despite the fact that Gordon and Lee were not permitted to attend and cross examine his testimony and he did not testify at the hearing.  It noted that hearsay may be used by the NASD, depending on the probative value of the evidence and the fairness of its use.  In evaluating the NASD's use of hearsay evidence, the Commission considers whether the statement is sworn, contradicted by direct testimony, whether the declarant was available to testify and whether the hearsay is corroborated.  The Commission found the evidence highly reliable as the testimony implicated the unregistered individual in the violations and was corroborated by other evidence.  It found his emails consistent with emails authored by Gordon and Lee.  

Finally, the Commission noted that it will not overturn credibility determinations unless there is substantial evidence for doing so.     

Markups

The thirty-one transactions at issue were in a thinly traded bulletin board OTC stock.  The trades were riskless principal trades in which the firm sold stock from its inventory to customers while contemporaneously acquiring the stock only after the sale to the customer had been made.  The firm was not a market maker in the stock.  Lee personally executed the trades and Gordon reviewed documentation for the trades at month-end.

The firm bought the stock from the seller at the inside bid plus five percent.  It sold the stock to the buyer at the inside offer.  Total firm profits on the trades were $32,000 (but it paid registered reps seventy-five percent of the total profits).  Markups ranged from twelve to fifty-five percent.

Of note is the fact that Gordon wrote to the Commission a request for a "no-action" letter that disclosed these facts. 

Now for a brief discussion of the arcane rules relating to markups (sales to customers) and markdowns (purchases from customers).  Both the Commission and the NASD prohibit excessive undisclosed markups or markdowns in securities transactions.  The analysis of these situations is complex and involves issues of whether or not the firm is a market maker, whether it dominates and controls the market, and other factors.  The NASD prohibits markups in excess of five percent unless the firm can show unique circumstances justify a higher markup. However, it also takes the position that markups of less than five percent may not necessarily be fair.  The Commission does not use a percentage analysis, but instead under the umbrella of the anti-fraud provisions of Rule 10b-5 prohibits transactions with customers where a broker charges prices that are not "reasonably related to the prevailing market price of the security."  

When a firm is not a market-maker the bests evidence of current market price (absent other evidence) is the dealer's contemporaneous cost.  When a dealer engages in riskless principal trades (as was the case here), contemporaneous cost must be used as the basis for calculating markups. This is because a riskless principal trades is the economic equivalent of an agency trade because the dealer is only buying in order to fill a customer order that is already in hand.  The firm is acting as an intermediary without exposing itself to any significant market risk.

Here, the firm was not maintaining an inventory in the stock, but was buying only to match retail purchase orders from customers.  The Commission found that the firm did not meet its burden of justifying markups exceeding five percent.  It noted that inter-dealer quotations may not be used as the basis for determining contemporaneous cost when calculating markups.  Gordon and Lee argued that there were special circumstances, namely the efforts they took to locate sellers of the stock and to locate buyers.  They did not produce an documents to support their claims to have endured extraordinary expenses.  Here, the prices charged were mechanically computed based on the bid/ask spread, and did not hinge on any extraordinary expenses involved in the transactions.  When prices are calculated independent of any special expenses and based on a mechanical formula, the Commission will not find support a defense claim of special circumstances that justify failure to calculate markups based on contemporaneous cost.

Comment

There is nothing remarkable about this decision as it relates to the unregistered principal violations.  The legal standard is a clear and longstanding one.  The most interesting issues relate to the evidence the Commission found persuasive.  First, it relied on voluminous emails. Second, it found highly persuasive the fact that persons dealing with the unlicensed principal understood that he was speaking and acting on behalf of the firm.

However, the markup discussion in this decision is another matter. In a stunning display of ipse dixit, with literally no explanation, the Commission found that the markups were not fraudulent on this record. It provided not a shred of explanation for this conclusion.  None.  It did find that in violation of SEC rule 10b-10, Lee was responsible for the fact that the firm did not disclose the markups.

This truly is a sorry result.  The Commission and the NASD have found markups of the magnitude here to be fraudulent and in violation of Rule 10b-5 in literally dozens of cases.  It is not a new legal concept that requires markups by non-market makers to be calculated based on contemporaneous cost when the firm is filling orders with in riskless principal transactions. At the very least, the Commission owes the industry and practitioners an explanation of why it did not find that the very high markups here were fraudulent.  For it to fail to do so is simply inexcusable.  This is particularly important here, where the Commission found not justification for the markups charged.

Most remarkable is the fact that the ipse dixit pronouncement that there was no fraud is contradicted later in the opinion when the Commission, in justifying its reduction of the sanction for the excessive markups finds that the conduct of Gordon and Lee "evinces a profound disregard for the essential duty to treat one's customers fairly."

Adelphia Audit Partner Sanctioned - No Reliance On Prior Audits

Gregory M. Dearlove, AAER 2779

Time since appeal filed - 2 years, 4 months, 1 day.

Time since final brief filed - 2 years, 27 days.

Time since oral argument - 1 year, five months, 7 days.

Pages - 60

Footnotes - 168

Summary

This is a disciplinary proceeding against a CPA and arises from the Adelphia fraud. Respondent was formerly a partner at Deloitte & Touche and was the engagement partner for the audit of Adelphia for the 2000 audit of that firm. He was denied the privilege of appearing or practicing before the Commission with a right to reapply after four years.  He was also ordered to cease and desist violations of Exchange Act Section 13(a).  The ALJ had barred him from appearing before the SEC.

Adelphi filed for bankruptcy in June 2002 after disclosing related party transactions with the Rigas family that controlled the company.  As part of a settlement with the Department of Justice, Adelphia agreed to pay $715 million to a victims' restitution fund and the DOJ declined to file criminal charges.  In 2005 the Rigas settled civil charges brought by the Commission and consented to injunctive relief.  The Commission also brought an administrative action against Deloitte which the firm settled, among other things it agreed to a $25 million penalty and consented to findings it had "engaged in repeated instances of unreasonable conduct" concerning the 2000 audit of Adelphia.

This opinion contains a comprehensive discussion of the Generally Accepted Auditing Standards (GAAS) that apply to audits of public companies.  Among other things, "[u]nless and until an auditor obtains an understanding of the business purpose of material related party transactions, the audit is not complete."

Respondent argued that he should have been able to rely on the fact that the related party transactions had been subject to prior year audits.  The Commission rejected Dearlove's argument, stating "[W]e reject any suggestion that the conduct of prior auditors should be a substitute for the standards established by GAAS."  Further, it noted that rotation of auditors has long been required by the AICPA and federal law as a means of insuring impartiality. The Commission also rejected this defense on factual grounds, finding that the 2000 audit did not document how the prior audits were performed or what evidential matter supported those conclusions.  

Much of the opinion discusses highly technical accounting issues.  Those are summarized very briefly below.

The Commission noted that it was improper for Adelphia to net its related party receivables and payables.  Also, the company reflected a dramatic drop in the net figure, which the Commission found should have alerted the auditors to more carefully scrutinize this matter. Dearlove could not explain how the audit had tested this practice by the company.  The work papers do not reflect that the auditors gave any consideration to the propriety of this netting by the company.  The Commission found that Dearlove accepted the practice "primarily, if not solely" because the prior auditors had as well.

The ALJ rejected the Division of Enforcement's claim that Adelphia's treatment of various debt as a contingent, rather than a primary liability was wrong.  The Division did not appeal this finding.  Nevertheless, the Commission found that Dearlove's auditing of this was not in compliance with GAAS.  This is an important finding, accountants will be held liable for a GAAS violation even if the underlying accounting was appropriate.  Thus, getting to the right result is not a defense in a Rule 102(e) proceeding.  In support of this conclusion, the Commission noted that disclosures relating to the debt were not adequate.

Adelphia transferred debt from its subsidiaries to various Rigas controlled entities after the close of quarters, but nevertheless retroactively reflected the lesser debt amounts on the company's books. The Commission found this debt reclassification a violation of GAAP, even though there was no expert testimony that supported this conclusion.  The absence of expert opinion does not prevent the Commission from making findings as to the "principles of accounting."

The Rigas acquired Adelphia stock with funds borrowed jointly by themselves and Adelphia.  This debt was not recorded on Adelphia's books.  The Commission also found the auditors violated professional standards in their audit of these transactions.

The opinion contains a comprehensive discussion of the factors the Commission will consider when disciplining auditors.  It noted that auditors play a crucial rule in the system of public reporting as "[i]nvestors have come to rely on the accuracy of the financial statements of public companies when making investment decisions.  Because the Commission has limited resources, it cannot closely scrutinize every financial statement.  Consequently, the Commission must rely on the competence and independence of the auditors who certify, and the accountants who prepare, financial statements.  In short, both the Commission and the investing public rely heavily on accountants to assure corporate compliance with federal securities law and disclosure of accurate and reliable financial information."

It also noted that a negligent audit can inflict as much harm on investors as one that is conducted with an improper motive.  

The Commission found that it was appropriate to impose a cease and desist order against Dearlove for causing Adelphia's Exchange Act reporting violations.  In doing so it reiterated a three part test for "causing" liability namely: 1) a primary violation; 2) respondent contributed to the violation; and 3) respondent knew or should have known his conduct would contribute to the violations.  It further noted that negligence was sufficient to satisfy the knowledge requirement of the test.

The Commission rejected Dearlove's claim that the Commission's rule that set a deadline for trial judge to issue an opinion violates due process because here, a motion for a sixty day postponement of the trial was denied by the judge.   In rejecting this argument the Commission cited to the test set forth in Unger v. Sarafite, 376 U.S. 575 (1964) which noted that there is no mechanical test for deciding when denial of a continuance is so arbitrary as to violate due process.  The Commission noted that it has long articulated the test in terms of whether the denial "constituted 'an unreasoning and arbitrary insistence upon expeditiousness in the face of a justifiable request for delay.'"  In the past the Commission has rarely found a denial of due process when there were extraordinary circumstances for a postponement of trial, such as the respondent being left without counsel shortly before the hearing.  Here the judge's schedule allowed for 121 days between service of the order and completion of the hearing.  Further,  counsel was familiar with the matter as he had been involved in the matter for the two prior years when respondent's investigative testimony was taken.

Comment

The Commission's finding that Dearlove violated GAAS even though the accounting treatment of a debt item was appropriate is highly significant for auditors of public companies.  They can thus be held responsible for bad auditing practices even if the underlying accounting was valid.

Also noteworthy is the Commission's conclusion that it may make findings that accounting principles were not properly applied even absent expert testimony to support such a finding.  The Commission will make its own judgments about what constitutes proper accounting treatment of a transaction.

The Commission noted that under some circumstances "unreasonable conduct is not necessarily a less egregious disciplinary matter than either intentional or reckless conduct, or highly unreasonable conduct in circumstances warranting heightened scrutiny."

The Commission allowed respondent to reapply for reinstatement after four years. It stated, with little explanation, that it believed this sanction would encourage rigorous compliance with auditing standards, without being punitive.  This reversion to ipse dixit reasoning may cause the Commission issues before the court of appeals should an appeal be taken.

The Commission's finding that an auditor who signs an audit report after conducting an audit that does not comply with GAAS contributes to a violation of the reporting provisions is significant.

The Commission's ruling that there was no due process violation because the trial judge denied Dearlove's motion for a 60 day continuance after scheduling 121 days between the start of the proceedings and conclusion of the trial is one that practitioners should note.  This is another case where the Commission is clearly signaling that it will not interfere with scheduling or trial management decisions by its ALJs.  It pointed out that Commission rules specify such deadlines are not rigid and that the trial judge can petition the Commission to extend the deadline for rendering an initial decision.  Someone prone to sarcasm might note that the Commission took significantly longer than 121 days after oral argument to render its opinion, let alone the 300 days it allocated for the ALJ to conclude the trial and render an opinion.

Sisung Securities Corp., Lawrence J. Sisung,Jr., Exchange Act Rel. 56741, November 5, 2007

NASD Appeal, Municipal Securities Rulemaking Board Rules

Time between appeal and decision - 1 year, 1 month, 9 days.

Time between last brief and decision - 10 months, 2 days.

Pages - 16

Summary

The NASD found that the firm and its president violated MSRB rules.  The firm was fined 30,000 and $10,000 jointly and severally with the president.  The president was fined $20,000 and 10,000 jointly and severally with the firm.  The Commission upheld some of the findings of violations and reversed others.

The NASD found violations of Rule G-37, the "pay to play rule" which prohibits engaging in municipal securities business within two years of making contributions.  The NASD also found violations pertaining to record keeping concerning political contributions.  The charges involved a real estate development firm owned by the president of the brokerage firm that shared office space with the broker and made campaign contributions through checks signed by the president.  Some of the persons receiving contributions sat on a Louisiana state commission that was required to approve any bonds issued by the state or any of its political subdivisions.  Counsel advised the president that such contributions would not bar the securities firm from underwritings for political subdivisions as opposed to the state commission.

The NASD attributed the contributions to the president and his firm even though they did not formally make them.  The Commission upheld this finding, noting that where a municipal finance professional signs checks or authorizes contributions to officials personally, the contributions should be attributed to the individual.  

The Commission overturned the findings of the pay to play rule violations because the contributions were not made to an "official of an issuer" as defined in the rule. This was because the members of the state commission did not "possess the requisite authority to influence the outcome of the hiring of a dealer or financial advisor for municipal securities business by a political subdivision issuer."  It held that in order to be subject to the rule, the official was required to have the authority to appoint persons responsible for the selection of the securities dealer and that ability to influence, standing alone was insufficient.  

The Commission encouraged the MSRB to consider amending the rule to prohibit the type of conduct here due to its concerns that the conduct raised issues of possible improper influence, although it noted there was no evidence of that here.

The Commission upheld the finding of record keeping violations.  MSRB rules require that municipal securities dealers keep records of contributions, whether direct or indirect. Respondents argued that the firm making the contributions kept records, and that it was not necessary to make a separate duplicate record on the books of the securities dealer.  The Commission rejected this argument, noting that the NASD had no examination authority over the books of the affiliate.  

The Commission rejected Respondents' claim that the Equal Access to Justice Act applies to proceedings of a self regulatory organization such as the NASD.  

Finally, the Commission upheld the sanctions that related to the books and records violations it sustained the NASD fines, namely $20,000 against the firm, of which $10,000 was joint and several with the president.  The fines exceeded those set forth in the NASD guidelines for non-egregious cases.  Respondents did not address the sanctions in their briefs.  

Comment

The Commission opinion offers little explanation of why the fines were appropriate, noting simply that the NASD did not impose other sanctions.  The opinion did not explain why a departure from the NASD guidelines was appropriate, other than to recite that the rather banal claim that the public interest requires appropriate sanctions.  It did not find that the conduct was egregious.  This reasoning obviously begs the question.  There is really no explanation of why the NASD sanctions were appropriate other than the Commissions ipse dixit conclusion that they were.  Unlike some recent Commission decisions that offer real explanations and discussion of sanctions, this one reverts to the style of decision that has caused the D.C. Circuit no little impatience with the Commission's articulation of its sanction decisions.

This facts of this case were not disputed.  It involved a straightforward interpretation of a MSRP rule.  So, why did it take the Commission more than a year to rule on this hardly earth shattering case?

Perpetual Securities Inc., et. al., Exchange Act Rel. 56613, October 4, 2007

NASD appeal, violation of NASD suspension, failure to cooperate

Time from appeal to decision - 1 year, 22 days.

Time from final brief to decision - 7 months, 30 days.

21 pages

Summary

The NASD expelled a securities firm and barred two persons, its CFO and Financial and Operations principal, and the CEO.  The Commission sustained the expulsion of the fimr and the bars against the CFO, and CEO for violation of a NASD suspension order but reduced the separate sanction against the CFO for not properly responding to NASD information requests to a two year suspension.  

In late 2002 the NASD ordered the firm's membership be suspended because it had failed to pay an arbitration award in favor of a customer.  The firm conducted limited business after the suspension for about six weeks (earning $1895 in commissions).  The suspension was lifted in May 2003. The NASD began an investigation into violation of the suspension order in early 2004 and sent three requests for information to the firm.  It received an incomplete response to one of those requests from the CFO.   NASD proceedings were begun in June 2004. Respondents claimed the NASD was biased against them and that various documents had not been properly served.  Their motions were denied as was their motion for a postponement.  At a pretrial hearing the CEO claimed his health problems prevented him from fully participating and he failed in another attempt to obtain an adjournment.  The CFO sought to delay another prehearing conference claiming dire medical problems, but did not provide any documentation for her claims.  The hearing officer issued a default order due to Respondent's failure to appear at the pretrial conference.  After receiving medical documentation he scheduled another hearing to determine if the default should be lifted.  Unsurprisingly, Respondent's also sought to delay that hearing on medical grounds.  The NASD declined to lift the default.

The Commission found that the medical documentation did not address the ability of Respondents to appear at the hearings which were scheduled to be by telephone conference call.  

The Commission rejected the claim that service of the suspension order on Respondent's counsel was improper because counsel only represented them for purposes of appealing that order because NASD rules do not provide for counsel to make a limited appearance.

Respondents claimed their lawyer never notified them of the suspension order but the Commission found the evidence showed they had actual notice of the suspension order. 

The CFO claimed he was not at the firm due to the illness of a family member and could not be responsible for violation of the suspension order.  The Commission rejected this defense noting that by law he was responsible for compliance unless he delegated that responsibility and monitored the performance of the person to whom that responsibility was delegated. 

The CFO either did not respond, or provided incomplete, or tardy responses to several NASD requests for information.

The NASD hearing officer rejected certain pleadings by the respondents because of a faulty caption.  The Commission found this was not an error.

The Commission found that operating the firm while suspended was a very serious breach and was too serious to allow Respondents to remain in the business.

It found no aggravating circumstances to justify departure from the sanction guideline of a two year suspension for failure to respond to information requests timely and completely. 

Comment

The Commission found it was proper for the hearing officer to reject certain pleadings, apparently by the pro se individual Respondents because the caption of the pleadings was erroneous on the grounds that the hearing officer has discretion in managing the proceedings. There is no substantive discussion of this issue in the opinion.  The Commission does not say what pleadings were involved or what issues they raised.  This was the hearing officer that Respondents claimed was biased against them.  The Commission's summary dismissal of this issue is not otherwise explained.  Certainly if the pleadings were meaningful the hearing officer's rejection because of an incorrect caption would arguably in fact be evidence of bias. This is the kind of ipse dixit thinking that has gotten the Commission in trouble in several recent Court to Appeals decisions.

Perhaps in response to adverse Court of Appeals decisions cautioning the Commission to provide a full explanation when it bars an individual, the discussion in this opinion of why bars are appropriate is lengthy and detailed.  

As to the bar imposed for failure to timely and fully respond to information requests, the Commission found the conduct to be aggravated.  Yet the Commission found the complete bar excessive.  NASD sanction guidelines provide for a bar when there is no response at all and for a two year suspension where there is an inadequate response. 

Key Points

• Respondents carry the burden of proving that their default was excusable for medical reasons.  They must demonstrate good cause for failing to appear at pretrial conferences.
• The fact that the hearing officer required Respondents to produce medical documentation did not demonstrate bias.
• Service of the suspension order on Respondent's counsel was proper under NASD rules. 
• Respondents may not collaterally challenge the suspension order in these proceedings.  The Commission previously  upheld that order.
• Under NASD rules, the firm's FINOP was responsible for all matters "involving the financial and operational management of the member."
• The firm's President and CEO was responsible for compliance with the law unless that duty had been responsibly delegated. 
• Information requests were sent to the registered address of the firm.  It was not a defense for the CFO for her to claim that she did not receive prompt notice because the address had changed.  This is because NASD rules provide for such requests to be sent to the registered address of the firm. 
• Stating in response to a NASD request for information that requested documents are not available is not an adequate response.  An explanation that details efforts to find the records is required.
• Concerning sanctions for delayed and incomplete responses to NASD inquiries, a two year suspension as provided in the NASD sanction guidelines is appropriate in "the absence of aggravating circumstances indicating a fundamental unfitness to participate in the securities industry. . . ."

Conrad P. Seghers, Investment Advisers Act Rel. 2656, September 26, 2007

Injunction as basis for IA Act sanction, summary disposition.

Time from appeal to decision - 6 months, 25 days.

Time from last brief to decision - 4 months 9 days.

Pages - 16

Summary

Respondent appealed an ALJ's initial decision barring him from association with any investment adviser.  He was permanently enjoined from violating the anti-fraud provisions of the securities laws in 2006 after a trial before a jury.  Both the SEC and defendant appealed to the court of appeals.  Respondent had solicited investments in a fund and provided inflated valuations of fund assets that were incorporated into monthly statements sent to fund investors.  The overvaluations reported to investors ranged from 47% to 77% for four months in 2001 and totaled between $23 and $24 million.  Respondent also personally invested in the funds, eventually losing more than $900,000.  The district court found that he acted "knowingly and recklessly."

The ALJ granted the Division of Enforcement's motion for summary disposition.  

Respondent made three arguments on appeal.  1) the proceeding should be stayed pending disposition of his appeal of the district court injunction; 2) summary disposition was wrong, he should have had an evidentiary hearing; and 3) the sanction was excessive.

As to the first claim, the Commission noted that it has statutory jurisdiction regardless of whether an appeal is pending of the inunction that forms the jurisdictional basis for the proceeding.

Respondent claimed that summary disposition is inconsistent with the statutory right that sanctions be "on the record after notice and opportunity for hearing."  The Commission ruled that the statute does not require a evidentiary hearing.  Summary disposition is appropriate in administrative proceedings where there are no genuine issues of fact in dispute (citing First Second, Ninth, and D.C. Circuit cases).  It did note that in proceedings based on injunctions or convictions, that an evidentiary hearing might be appropriate in the rare  situation where there are genuine factual issues concerning facts that could mitigate Respondent's conduct.  It found Respondent here did not meet that burden because he could show no specific evidence of mitigation likely to result fro such a hearing.  The facts he suggested were relevant were an apparent attempt to contest the district court's findings, which are not properly subject to collateral attack.  Respondent is collaterally estopped from challenging both the injunction and the underlying factual findings upon which the injunction was based.  The fact that investors would have testified in Respondent's favor was not contested by the Division and was therefore considered in determining the appropriate sanction does not entitle him to a hearing.     

The permanent bar imposed by the ALJ was upheld.  Respondent's conduct was egregious.  Respondent engaged in fraud in his role as an investment adviser, a role which involves the an affirmative duty to act as a fiduciary. His claims to have learned from this experience such that  he no longer represents a danger to investors is outweighed by the seriousness of his previous violations.  

Comment

The opinion's disposal of Respondent's argument that he was unfairly charged with lack of remorse by the Division of Enforcement for pursuing his appeal involves limited discussion and analysis, and a statement by the Commission that he is nevertheless entitled to vigorously defend himself.   This ipse dixit pronouncement, without analysis is a concern as the Commission continues to adopt a seemingly inconsistent position.  One the one hand, lack of remorse is a "public interest" factor evaluated in determining sanctions.  One the other, the Commission claims that a respondent may nevertheless vigorously defend himself without penalty.  This opinion is not helpful in reconciling these positions.

Key Points

• Unless it is vacated, a permanent injunction is a valid statutory basis for administrative proceedings, regardless of whether an appeal is pending.  citing, among other cases, Michael T. Studer, Exchange Act Rel. 50411 (9/20/04), 83 SEC Docket 2853, 2859 ("[T]he fact that [a respondent] is still litigating [an injunctive] action does not affect our statutory authority to conduct this proceeding.").
• While one factor the Commission considers in assessing sanctions is the respondent's recognition of the wrongful nature of his conduct, failure to acknowledge conduct as wrongful is consistent with the right to defend against the charges.
• Summary disposition is usually appropriate when a proceeding is based on an underlying injunction or criminal conviction.
• A Respondent may be entitled to an evidentiary hearing where a proceeding is based on an injunction or criminal conviction in the rare instance where he can put forward specific evidence that could mitigate his conduct.  Respondent has the burden of specifying such evidence in  order to be entitled to a hearing and will not be permitted to collaterally attack findings in the underlying proceeding.
• The IA Act prohibits both affirmative fraud and failure to disclose.
• False representations about the performance of an investment fund by an investment adviser constitutes a "serious abuse of trust."
• Because the sanctions are not intended to punish, but to protect the public, the fact that Respondent lost large amounts of his personal investments is not relevant in determining the sanction as it is designed to protect the public from repeat violations by Respondent as well as to deter others from similar violations.  
• Evidence from individual investors that they did not think Respondent defrauded them is irrelevant as the Commission considers the welfare of investors as a class, and not the interests of a particular set of investors.
• General deterrence by itself does not justify a sanction, but it is a factor that may properly be considered.    

Richard F. Kresge, Exchange Act Rel. 55988 (June 29, 2007)

NASD Appeal, control person liability.

Time between appeal and decision - 10 months, 0 days.

Time between last brief and decision - 7 months, 0 days.

Pages - 26

Comment

NASD found that respondent (the president of a broker-dealer) failed to supervise a branch office and failed to establish and enforce an adequate supervisory system. He was also found liable for violations of NASD rules concerning failing to register a registered representative and principal, failure to report customer complaints to the NASD and other rule violations. Respondent was barred in all capacities, ordered to pay restitution to customers of $3.8 million plus interest, and assessed costs of $9,500. Because the Commission dismissed findings of control person liability, the matter was remanded for a redetermination of sanctions.

This case presents a classic failure to supervise situation, unfortunately very typical of some small firms. It is of interest for its laundry list of fairly obvious supervisory failures.

Almost as an afterthought, at the conclusion of the opinion, the Commission makes a startling pronouncement about the scope of control person liability under Exchange Act Sectcion 20(a). The Commission found that Respondent did not have control person liability for violation of NASD Rules of Conduct because he did not personally participate in the underlying violative conduct. The opinion supports this strange conclusion by distinguishing the two cases relied on by the NASD, finding that in each, the presidents of the firms had actual personal involvement in the underlying conduct. Thus, 20(a) liability is being limited to actual participants in the underlying conduct. This is a remarkable pronouncement because, without extensive analysis, it seems to narrowly limit the scope of Section 20(a) liability beyond the specific language and clear intent of the statue simply because cases cited by the NASD involved personal involvement. Further, such a reading would render Section 20(a) unnecessary as persons with knowledge will usually be liable as direct participants or as aiders and abetters. The Commission's analysis obviously begs the question of why the statute itself should be so interpreted. Query whether the Commission believes that this qualification should apply in all potential Section 20(a) contexts? One has to wonder why such a significant matter is dealt with summarily and with so little discussion. Also, the Commission simply announced that it found the record did not support control person liability under Exchange Act Section 20(a) for respondent based on violations of Exchange Act Section 10(b) by salesmen. It unfortunately offered no explanation for this pronouncement.

In an ambiguous footnote 31, the Commission implies that a person who cannot hire and fire, reward and punish, cannot be a supervisor. Surely the Commission does not mean that this footnote be taken literally and instead it should be interpreted to mean that ability to hire and fire is simply a factor in determining on a case by case basis whether a person is in fact a supervisor. This is because there are in fact supervisors who do not have the ability to hire and fire.

Key Points

• "Assuring proper supervision is a critical component of broker-dealer operations."
• Whether a particular supervisory system or written procedures is "in fact reasonably designed to achieve compliance" is a fact specific inquiry.
• "The president of a brokerage firm is responsible for the firm's compliance with all applicable requirements unless and until he or she reasonably delegates a particular function to another person in the firm, and neither knows nor has reason to know that such person is not properly performing his or her duties."
• Compliance systems must be tailored specifically to the firm's business and must address the activities of all of its reps and associated persons.
• Firm's president, CEO, financial and operations principal, and compliance officer had ultimate responsibility for the firm's operations.
• Even if there is a chain of qualified supervisors in the chain of command, "it is not sufficient for the person with overarching supervisory responsibilities to delegate supervisory responsibility to a subordinate, even a capable one, and then simply wash his hands of the matter until a problem is brought to his attention. . . . Implicit is the additional duty to follow up and review that delegated authority to ensure that it is being properly exercised." Here Kresge failed in that duty because he made no inquiry of his subordinate supervisors about anything happening at the branch office except it's financial performance.
• Respondent's argument that he delegate supervisory responsibility to others was rejected because, among other things, there is "an obvious need to keep [a] new office with . . . untried personnel under close supervision."
• Supervisory procedures were not specifically changed and tailored to reflect the fact that this very small firm acquired a new branch office.
• Supervisory procedures must set forth a specific chain of command and describe the division of supervisory duties in each office.
• Respondent cannot escape his supervisory failures by the fact that the NASD staff approved the firm's written procedures.
• Registered reps who change firms frequently in a short period are a red flag for compliance and supervision issues.
• A registered rep with a criminal conviction, or a pending customer arbitration, or less than two years of industry experience present supervisory red flags.
• Firms are required to make reasonable efforts "to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their assigned responsibilities." Respondent failed in this duty concerning a branch manager who had only 6 months previously passed the principal's exam, had repeatedly changed firms in the last 5 years, and because he did not contact any of the manager's previous employers.
• Respondent had a duty to supervise the supervisor of the branch office, and failed to do so. He never reviewed any of the office's records and made no attempt to review the branch manager's performance. Although there was another individual designated as the immediate supervisor of the branch manger, that individual had been with the firm for only 6 months, had a wide variety of other duties, including personal customer accounts which Respondent knew were "overwhelming." Further, that individual almost never actually visited the branch office. Respondent also knew that individual did not review suitability of transactions in the branch office.
• The fact that someone has passed the supervisory exam does not automatically qualify them to be a supervisor. The firm must still determine that the individual can "effectively conduct their . . . responsibilities."
• An individual who negotiated the sale of a branch office, which he financed and owned, to the firm, was often present at the office was an associated person who should have been registered with the NASD. This is because he financed the office, was actively involved in hiring and firing, participated in meetings, and purported to act as the leader of registered reps in the office.
• Respondent's recantation at the hearing of previous sworn testimony was rejected by the hearing panel which credited his earlier inculpatory testimony. The Commission noted that "credibility determinations of an initial fact finder are entitled to considerable weight" and declined to overturn that determination.

Addition Discussion

Respondent has been in the industry since 1978 and founded the broker dealer in 1986. He was president, CEO, financial and operations principal, and owned 95 percent of the firm. He was the firm's compliance officer except during the period January 2002 through June 2002. The firm employed 10 persons and until January 2001 specialized in bonds, mutual funds, and listed securities.

In January 2001 the firm acquired a branch office that had 50 registered reps. In August 2001 the firm entered into an arrangement where it "acquired" another branch office in Brooklyn, purportedly controlled by one Ferragamo. There was no written agreement for this arrangement. In September 2001 on Ferragamo's recommendation, Respondent hired a branch manager for the Brooklyn office. The branch manager had worked for 6 firms in 5 years and Kresge did not contact any of them before hiring the manager. The new branch manager received no training. The office manager had passed the principal's examination only 6 months previously. Kresge also hired a number of registered reps for the Brooklyn office on Ferrigamo's recommendation, despite knowing that each had worked for a number of brokerage firms over a short period. Kresge knew none of these reps received a compliance manual and didn't know if they received any training concerning sales practices or suitability.

The Brooklyn branch primarily sold penny stocks, contrary to Ferragamo's representation to Kresge before the acquisition that it mainly sold listed securities. Other than casual conversations about the financial status of the branch office, Kresge did nothing to monitor the supervision of that office. Kresge never reviewed any records of the office, including records of customer complaints and customer account activity. He admitted that information in those records raised serious questions about the propriety of certain penny stock sales activity by the branch. Kresge knew that the person he had designated to supervise the branch manager was overwhelmed with other duties, but never monitored his supervision of the branch.

In January 2002, because the Brooklyn office was overwhelming, Kresge hired a consultant on compliance, who he made compliance officer in February 2002. The compliance director was supposed to revise the firm's written supervisory procedures as Kresge knew at the time that the current procedures did not establish a supervisory chain of command. A draft of revised procedures was distributed throughout the firm in March and April 2002. This draft did not deal with penny stocks or bonds. It did not provide for methods to detect violations or ensure compliance. Further, there was no chain of command specified. The duties of the new compliance director were unclear. He did not have hiring and firing authority. Before he left the firm in June 2002 he recommended that the firm begin tape recording of Brooklyn reps. He also recommended that sales scripts be banned. Kresge ignored these recommendations. In April 2002 Kresge learned that two Brooklyn reps were operating from an unregistered location. That office was closed and the reps were placed under heightened supervision based on customer complaints about their sales practices.

From October 2001 when it opened, until April 2002, three reps in the Brooklyn office engaged in egregious sales practice fraud in selling three penny stocks. Each was tiny, and had assets of less than $100,000, minimal revenues, and operating losses. Each had "going concern" opinions issued by their auditors. The three reps solicited firm customers to buy $8.3 million of the three penny stocks. They enthusiastically recommended the stocks to customers, predicted rising prices for the stocks, but failed to disclose the poor financial condition of the companies. Many of the customers were retirees who were not interested in, and had no history of investing in speculative stocks.

From October 2001 until January 2002, when Kresge was the firm's compliance director, the Brooklyn office sold $3 million of one of the penny stocks. Kresge admitted the firm never attempted to determine whether it was in compliance with rules pertaining to penny stocks.

NASD rules require firms to report customer complaints. While compliance director Respondent was responsible for doing so, yet he never reviewed customer complaint files and never discussed customer complaints with the manager of the Brooklyn office. Respondent claims he did not report complaints because he was unaware of them. This in itself demonstrates the failure of the firm's supervisory procedures.

The Commission dismissed findings by the NASD that Respondent was liable under Exchange Act Section 20(a) for various activities of registered reps as a control person. Without explanation the Commission simply found that the record did not support this conclusion.

Sky Capital LLC (Exchange Act Rel. 55828 (May 30, 2007)

NASD Appeal - Jurisdiction - Alleged NASD staff misconduct

Time between appeal and decision - 6 months, 3 days.
Time between last brief and decision - 5 months, 4 days.
Pages - 9

Comment

Sky Capital, a broker dealer, applied for NASD membership. The application was denied. Later, the NASD reconsidered and permitted the application with various restrictions. Over a period of years the firm expanded and alleged that the NASD staff obstructed those efforts, although its expansions were ultimately permitted. Sky Capital also complained that the NASD staff conducted eight examinations of its operations. The firm claimed that the examinations were designed to destroy it by draining its financial resources. Two of those examinations were in progress at the time of the appeal. The other six had resulted in two minor disciplinary actions, which Sky consented to. Sky Capital filed a complaint with the NASD's Office of Ombudsman alleging staff harassment. To date the NASD has not acted upon that complaint.

The Commission found that it had no jurisdiction because the NASD had not issued any formal and final disciplinary orders. "We have stated that SRO action 'is not reviewable merely because it adversely affects the applicant.'"(footnote omitted)

This is a routine matter in which the Commission applied very clear statutory jurisdictional requirements and clear precedent. One must wonder why nine pages of ink were spilled deciding this and why it took five months to issue an opinion.

Without any explanation of why, the Commission simply stated that "the decisional process would not be significantly aided by oral argument." One has to wonder what determines whether or not oral argument will take place. The explanation in this decision provides no clue as to what factors the Commission uses to make this determination.

Key Points

• Without explanation the Commission denied Sky Capital's request for oral argument stating that "[w]e have determined that the presentation in the briefs and the decisional process would not be significantly aided by oral argument."
• The SEC's authority to review NASD actions is governed by Exchange Act Section 19(d). Review of a SRO action is limited in that section to actions that: 1) impose final disciplinary action; 2) deny membership; 3) prohibit or limit access to services of the SRO; or 4) bar a person from associating with a member. Since the complaint does not allege any such jurisdictional action, the Commission found it had no jurisdiction.
• Exchange Act Section 19(f) does not provide for Commission jurisdiction in the absence of jurisdiction under Section 19(d).
• The Commission has no jurisdiction to award damages or reassign NASD staff as requested by the firm. Under Exchange Act Section 19(e), the Commission's remedies when reviewing a NASD action are limited to affirming, modifying, or setting aside NASD sanctions.
• The NASD's Office of Ombudsman is does not provide a "fundamentally important service" that is central to the function of the NASD and therefore alleged failure of that office to act does not invoke Commission jurisdiction.

Dennis A. Pearson, Securities Exchange Act Rel. 55597 (April 6, 2007)

Motion for reconsideration, NASD disciplinary appeal

Comment

This matter involves a motion for reconsideration of a December 11, 2006, Commission opinion reviewing a NASD Disciplinary action.

The initial commission decision can be found here. The Commission rejected the motion for reconsideration with no explanation other than a cryptic footnote stating that reconsideration is only appropriate to correct manifest errors of law or fact or if there is newly discovered evidence. The Commission does not explain what points the motion raised or why it was deficient in meeting the standard. One would have hoped that the Commission could have provided a more complete explanation to guide practitioners in the future, hence the ipse dixit label.

America's Sports Voice, Inc., Exchange Act Rel. 55511 (March 22, 2007)

Issuer reporting violations

Time between appeal and decision - 7 months, 6 days.
Time between last brief and decision - 4 months, 30 days.
Pages - 10

Comment

This is a routine matter revoking the registration of a company that had repeatedly failed to comply with the periodic reporting requirements since 2001. The Company had not filed any annual or quarterly reports since June 2001. The Commission affirmed the ALJ's initial decision revoking the registration of the company.

Remarkably, the Commission denied the Division of Enforcement motion for summary affirmance without explanation, merely citing Richard Kern, Exchange Act Release 51115 (February 1, 2005)(observing that "summary affirmance is rare, given that generally we have an interest in articulating our views on important matters of public interest.").

The Commission failed to articulate what in this opinion involved any "views on important matters of public interest" that justified denial of the motion. This was not the first case of its kind and would seem particularly appropriate for summary disposition.

Key Points

• No scienter is required to establish a violation of the reporting provisions of Exchange Act Section 13(a).
• In determining sanctions against an issuer the Commission considers: the seriousness of the violations, whether the violations are isolated or recurring; the degree of culpability; the issuers efforts to cure the violations; and the credibility of any assurances, if any, concerning future compliance.
• Compliance with reporting requirements is mandatory and may not be subject to conditions from the registrant.
• Harm to existing investors from a revocation must be weighed against harm to potential future investors and both existing and potential investors are harmed by continuing lack of current and reliable financial information about the company.

Summary

There isn't much to say here. The company had not made any periodic filings since June 2001. The Commission suspended trading in the stock for 10 days in June 2006.

Revocation was appropriate because the company's violations were "numerous and extended over a lengthy period."

Particularly important is the fact that although current management took control of the company before June 2004, the company is 29 months delinquent in filing a Form 10-KSB for that year. The company has also made no filings despite the June 2006 trading suspension and the later institution of this proceeding.