UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 42237/December 15, 1999
INVESTMENT ADVISERS ACT OF 1940
Release No. 1847/December 15, 1999
File No. 3-10018
In the Matter of :
: ORDER MAKING FINDINGS AND
BRIAN D. O'TOOLE, d/b/a O'TOOLE : IMPOSING CEASE AND DESIST
CAPITAL MANAGEMENT, : ORDER AND REMEDIAL SANCTIONS
SPECTRUM SECURITIES INC., : BY DEFAULT
and STEVEN D. PIRRONE :
The Securities and Exchange Commission (Commission) initiated this proceeding on September 20, 1999, by an Order Instituting Proceedings (OIP), pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Exchange Act) and Sections 203(e), (f), and (k) of the Investment Advisers Act of 1940 (Advisers Act).
The OIP was served on Respondent Brian D. O'Toole (O'Toole) on September 28, 1999. By the terms of the OIP and Rule 220(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.220(b), O'Toole's Answer was due twenty days after service of the OIP. To date, O'Toole has failed to file an Answer or other responsive pleading in this matter.
Pursuant to Rules 155(a)(2) and 220(f), a respondent that fails to file an Answer to the OIP or otherwise defend the proceeding may be deemed to be in default. The administrative law judge may determine the proceeding against the respondent upon consideration of the record, including the OIP, the allegations of which may be deemed to be true. On November 4, I ordered O'Toole to show cause, by November 24, why he should not be held in default and why I should not impose the remedies the Division requested. No Answer or other responsive pleadings were received from O'Toole.
O'Toole is in default within the meaning of Rule 155(a). He failed to answer the OIP and has not otherwise defended the proceeding. See Rules 155(a)(2) and 220(f). Accordingly, I find that the allegations in the OIP are true:1
1. O'Toole was associated with several broker-dealers as a registered representative from 1987 until he was discharged in June 1996 by the brokerage firm which employed him at the time (Prior Firm). O'Toole has not been associated as a registered representative with a broker-dealer since June 1996.
2. O'Toole has done business as O'Toole Capital Management (OTCM) since the summer of 1996. He has been registered with the Commission as an investment adviser (#801-52976) doing business as OTCM since September 1996. O'Toole lived in the Denver, Colorado area until March or April 1998, when he moved to Cheyenne, Wyoming where he continues to hold himself out as an investment adviser.
3. O'Toole was married to Dorthy Chikly (Chikly) from September 1993 to March 1998.
4. Spectrum Securities, Inc. (Spectrum) is a corporation registered with the Commission as a broker-dealer since 1993.
5. After he was discharged by his Prior Firm in June 1996, O'Toole contacted approximately twenty-five brokerage firms and expressed a desire to associate with those firms as a registered representative. Only two of those firms were willing to review his application. He submitted materials to Spectrum in June or July of 1996. O'Toole contends that he withdrew his request to associate with Spectrum shortly after he submitted it, but Spectrum claims it declined O'Toole's application in July 1996.
6. Chikly also applied to become associated with Spectrum as a registered representative. Her application was approved, and she became associated with Spectrum as a registered representative in August 1996. Chikly was also identified as an associated person giving advice on O'Toole's Form ADV.
7. During at least the last half of 1996, O'Toole held himself out to clients, potential clients, and the public as a registered representative of Spectrum. He informed at least 150-200 of his Prior Firm customers that he was affiliated with Spectrum and provided them with forms to transfer their accounts to Spectrum. The business card he provided to those customers indicated that the corporate headquarters of OTCM were located at Spectrum. O'Toole continued to make these representations and provide these materials after he withdrew his request to associate with Spectrum or Spectrum rejected it.
8. O'Toole created and used brochures for OTCM which falsely stated that he was a registered representative, that he was affiliated with Spectrum, that he would earn commissions on trades placed through Spectrum, and that his clients included estates, banks, and charitable organizations. O'Toole used these brochures after he withdrew his request to associate with Spectrum or Spectrum rejected it.
9. After Chikly became associated with Spectrum, O'Toole began using her license to function as a registered representative. In the period from approximately August 1996 through August 1997, he transferred over forty-nine customers and forty accounts to Spectrum, and effected forty-eight trades to those customers totaling over $200,000. None of these customers ever spoke to Chikly concerning any aspect of the trades in their accounts. Rather, as to all of these customers and accounts, O'Toole obtained the information for and completed all of the transfer and new account forms. Similarly, as to all of the trades, O'Toole communicated with the customer, completed any paperwork associated with the trade, and communicated with the traders. Chikly had other full-time employment, in addition to her employment with Spectrum, from August 1996 through August 1997. O'Toole failed to disclose to customers that Chikly was their Spectrum representative and that their trades were being effected through her registration.
10. Chikly knew that O'Toole was using, and allowed him to use, her registration at Spectrum to effect securities transactions and otherwise function as a registered representative. O'Toole willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that, directly or indirectly, in connection with the purchase or sale of securities by use of the means or instrumentalities of interstate commerce or by use of the mails, he employed devices, schemes, or artifices to defraud; made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, transactions, practices, or courses of business which would operate as a fraud or deceit. Among other things, O'Toole misled clients and potential clients by holding himself out as a registered representative with Spectrum and by conducting a securities business using Chikly's registration.
12. O'Toole willfully violated Section 15(a)(1) of the Exchange Act in that, while he was not registered as a broker with the Commission, he made use of the means or instrumentalities of interstate commerce to engage in the business of effecting transactions in securities for the account of others, and effected transactions in, or induced or attempted to induce the purchase or sale of, securities.
13. O'Toole willfully violated Sections 206(1) and (2) of the Advisers Act in that, directly or indirectly, in connection with the purchase or sale of securities by use of the means or instrumentalities of interstate commerce, he employed devices, schemes, or artifices to defraud clients or prospective clients, and engaged in transactions, practices, or courses of business which operated as a fraud or deceit upon clients and potential clients by holding himself out as a registered representative with Spectrum and by conducting a securities business using Chikly's registration. O'Toole also willfully violated Section 206(1) and (2) of the Advisers Act by making misrepresentations, failing to disclose information, recommending unsuitable investments, and otherwise placing his interests above those of his clients.
14. O'Toole willfully violated Section 206(4) of the Advisers Act in that, directly or indirectly, by use of the mails or means or instrumentalities of interstate commerce, he engaged in acts, practices, or courses of business that the Commission defines as fraudulent, deceptive, or manipulative in rules promulgated under the Advisers Act.
A. O'Toole willfully violated Rule 206(4)-1 under the Advisers Act in that he published, circulated, and distributed advertisements which contained untrue statements of material facts or which were otherwise false or misleading.
B. O'Toole willfully violated Rule 206(4)-4(a)(2) under the Advisers Act in that he failed to disclose to clients and prospective clients all material facts with respect to legal or disciplinary events that were material to an evaluation of his integrity
C. O'Toole willfully violated Rule 206(4)-4(a)(1) of the Advisers Act in that he had discretionary authority over the funds or securities of his clients and failed to disclose to clients and prospective clients all material facts with respect to a financial condition of his which was reasonably likely to impair his ability to meet contractual commitments to clients.
15. O'Toole willfully violated Section 204 and Rule 204-3 under the Advisers Act in that he failed to furnish each advisory client and prospective advisory client with a copy of Part II of his Form ADV or written document containing at least that information.
16. O'Toole willfully violated Section 207 of the Advisers Act in that he willfully made untrue statements of material fact in his application for registration as an investment adviser on Form ADV.
17. O'Toole willfully violated Section 205(a)(1) of the Advisers Act in that he entered into investment advisory contracts which provided for compensation to him on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of his clients. Several clients with such contracts had less than $500,000 under O'Toole's management and net worths of less than $1 million. O'Toole did not reasonably believe that these clients had net worths of over $1 million when he entered into the advisory agreement with them.
The Division requests a cease and desist order, remedial sanctions, and civil money penalties. The starting point for assessing what sanction is appropriate in the public interest requires consideration of many factors, including deterrence and:
[t]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that his occupation will present opportunities for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), aff'd on other grounds, 450 U.S. 91 (1981). The Court of Appeals for the District of Columbia explained that "[t]he `public interest' standard is obviously very broad, requiring that the Commission consider a full range of factors bearing on the judgment about sanctions that the expert agency ultimately must render." Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1110 (D.C. Cir. 1988). The severity of sanctions depends on the facts of each case and the value of the sanction in preventing a recurrence of the violative conduct. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211 (1975); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). Sanctions should demonstrate to the particular respondent, the industry, and the public generally that egregious conduct will merit a harsh response. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976).
Cease and Desist Proceedings
If the Commission finds, after notice and opportunity for a hearing, that any person is violating, has violated, or is about to violate any rule or regulation, Section 21C of the Exchange Act and Section 203(k) of the Advisers Act authorize the Commission to impose a cease and desist order against that person. They provide that the Commission may issue an order against "such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision, rule, or regulation."
I find that O'Toole willfully violated the securities laws. Therefore, I find it especially necessary that O'Toole be ordered to cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 15(a)(1) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 205(a)(1), 206(1), (2), and (4), and 207 of the Advisers Act and Rules 204-3, 206(4)-1, 206(4)-4(a)(1), and 206(4)-4(a)(2) thereunder.
Section 15(b) of the Exchange Act and Section 203(f) of the Advisers Act authorize the Commission to impose administrative sanctions against persons associated with or seeking to be associated with, respectively, broker-dealers or investment advisers. Specifically, the provisions allow the Commission to censure, place limitations on the activities or functions of such persons, or suspend for a period not exceeding twelve months, or bar such persons from being associated with a broker-dealer or investment adviser if the Commission finds that, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or bar is in the public interest. O'Toole's fraudulent misrepresentations and omissions, rather than occurring in a single instance, spanned at least the last half of 1996. O'Toole's actions affected at least forty-nine customers and allowed him to effect forty-eight trades for those customers totaling over $200,000. The nature of his actions clearly indicates that they were undertaken with the intent to deceive investors. O'Toole's non-responsive actions following the OIP in this matter indicate he lacks remorse for his conduct. For these reasons, I conclude it is in the public interest to bar O'Toole from being associated with any broker, dealer, or investment adviser.
Civil Money Penalty
Section 21B of the Exchange Act and Section 203(i) of the Advisers Act authorize the Commission to assess civil money penalties in any proceeding instituted pursuant to Sections 15(b) of the Exchange Act and 203(e) and (f) of the Advisers Act against any person, after notice and an opportunity for an administrative trial, if it finds that such person has willfully aided, abetted, counseled, commanded, induced, or procured a violation of any provision of the Securities Act or the Exchange Act. I find that an assessment of civil penalties is not in the public interest and, therefore, reject the Division's request. See Section 21B(c) of the Exchange Act and Section 203(i)(3) of the Advisers Act; see also New Allied Development Corp., 63 SEC Docket 807, 821 n.33 (Nov. 26, 1996); First Securities Transfer System, Inc., 60 SEC Docket 441, 446 (Sept. 1, 1995).
IT IS ORDERED, pursuant to Section 21C of the Exchange Act and Section 203(k) of the Advisers Act, that Respondent Brian D. O'Toole cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 15(a)(1) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 205(a)(1), 206(1), (2), and (4), and 207 of the Advisers Act and Rules 204-3, 206(4)-1, 206(4)-4(a)(1), and 206(4)-4(a)(2) thereunder.
IT IS FURTHER ORDERED, pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the Advisers Act, that Respondent Brian D. O'Toole be barred from association with any broker, dealer, or investment adviser.
Robert G. Mahony
Administrative Law Judge
1 The findings in this Order are made pursuant to O'Toole's default and are not binding on any other person in this or any other proceeding.