UNITED STATES OF AMERICA
In the Matter of
JOHN K. BOYD, III
ORDER INSTITUTING PUBLIC
The Securities and Exchange Commission ("Commission") deems it appropriate in the public interest and for the protection of investors that public administrative proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") be instituted against John K. Boyd, III ("Boyd").
In anticipation of the institution of these proceedings, Boyd has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Boyd admits the jurisdiction of the Commission over him and over the subject matter of the administrative proceedings proposed to be instituted against him by the Commission. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except the findings in paragraph III.A., which Boyd admits, Boyd consents to the entry of this Order Instituting Public Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions ("Order") making the findings and imposing the remedial sanctions set forth below.
Accordingly, IT IS ORDERED that proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and they hereby are, instituted.
On the basis of this Order and the Offer, the Commission makes the following findings: 1
A. Boyd, age 60, at all relevant times was executive vice-president, chief compliance officer, financial and operations principal, and designated supervisory employee at a midwestern broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act ("the Firm"). Boyd is no longer employed by the Firm.
Violations by Registered Representatives under Boyd's supervision of Section 10(b) of the Exchange Act, Rules 10b-5 and 10b-6 thereunder, Rule 101 of Regulation M, and Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act")
B. In approximately January 1997, a registered representative employed at the Firm and supervised by Boyd learned from the president of Edgerton Musical Amplifiers, Inc. ("Edgerton") that Edgerton was attempting to raise capital by offering stock for sale. The stock was offered pursuant to Rule 504 of Regulation D of the Securities Act, an exemption from the registration requirements of the Securities Act.
C. The registered representative informed another registered representative employed at the Firm and supervised by Boyd of the investment opportunity. On February 20, 1997, the two registered representatives each subscribed to purchase 142,000 shares directly from Edgerton. On February 24, 1997, the two registered representatives closed the transactions by paying $125,000 each for their shares, or $.88 per share. The two registered representatives each withdrew funds from their personal accounts at the Firm to pay for the stock and then deposited the stock into their accounts at the Firm.
D. On February 19, 1997, Edgerton stock closed at $4.38. No trades occurred on February 20. The stock closed at $3.25 on February 21. Thus, the price that the two registered representatives paid was a significant discount from the market price.
E. The two registered representatives purchased an additional 100,000 shares each directly from Edgerton on or about May 21, 1997. They paid $.20 per share. The last reported trade before these purchases was the $.38 closing price on May 16, 1997; thus, these purchases also occurred at a discount to the market price.
F. Shortly after purchasing Edgerton stock directly from Edgerton in February 1997, the two registered representatives began recommending to their customers that they buy Edgerton stock in the market. Their customers then bought Edgerton stock at market prices, which were significantly higher than the price paid by the two registered representatives for their Edgerton stock.
G. At the same time that they were recommending Edgerton stock to their customers, the two registered representatives were selling Edgerton stock out of their personal accounts at the Firm in OTC market transactions in interstate commerce. These sales and their customers' simultaneous purchases accounted for most of the trading volume in the stock. Because Edgerton stock was very thinly traded at the time of the sales by the two registered representatives, the purchases by their customers significantly enhanced the two registered representatives' ability to sell. Thus, the two registered representatives had an economic interest contrary to the interests of their customers, which the two registered representatives did not disclose to their customers.
H. The two registered representatives also did not disclose to their customers that their customers could possibly pay a lower price for their stock by buying directly from Edgerton through its offering of stock under Rule 504, which continued until June 1997.
I. As a result of these omissions to disclose material facts from February through June 1997, the two registered representatives willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
J. The two registered representatives were engaged in a distribution of Edgerton stock under Regulation M under the Exchange Act and former Rule 10b-6 under Section 10(b) of the Exchange Act. The distribution was distinguished from ordinary trading transactions by the magnitude of the offering and by special selling efforts and selling methods by the two registered representatives.
K. While engaged in the distribution, the two registered representatives, on four occasions between February and June 1997 bought Edgerton stock in matched transactions.
L. The two registered representatives willfully violated Rule 10b-6 and Rule 101 of Regulation M by purchasing Edgerton stock themselves, as discussed in paragraph K, while they were participating in the distribution of Edgerton stock.
M. The two registered representatives offered and sold Edgerton stock that they had acquired from Edgerton to the public in OTC market transactions.
N. As a result of their Edgerton stock sales, the two registered representatives willfully violated Sections 5(a) and 5(c) of the Securities Act, when no registration statement was filed by these individuals or in effect as to their Edgerton stock.
Boyd Failed Reasonably to Supervise the Two Registered Representatives
O. To carry out his supervisory responsibilities over the two registered representatives and other registered representatives of the Firm, Boyd, among other things, reviewed the Firm's trade blotters on a daily basis. Because he performed this daily review he should have seen the two registered representatives' sales of Edgerton from their Firm accounts occurring simultaneously with purchases of Edgerton by their customers.
P. This pattern of the two registered representatives trading in the opposite direction from their clients should have led Boyd to inquire into the situation. Moreover, the Firm prohibited registered representatives from engaging in securities transactions outside of the Firm without obtaining prior approval from the Firm. Thus, Boyd should have inquired into the source of the Edgerton stock being sold by the two registered representatives.
Q. In addition, no later than March 1997, Boyd received a request for information from the NASDR about a different microcap stock traded by the two registered representatives. As with Edgerton, one of the registered representatives had a material interest in that other issuer. The Firm and Boyd regarded this interest in the other issuer to be such a breach that, upon learning of it, the Firm asked the registered representative to resign in September 1997. Had Boyd, upon receipt of the NASDR inquiry, questioned the two registered representatives about the other issuer, he might have learned that they had an interest in Edgerton.
R. Boyd thus had "red flags" that should have put him on notice that the two registered representatives were violating the provisions of law described above. Nevertheless, Boyd's response consisted of one discussion with the two registered representatives about Edgerton and a suitability review of their respective customer accounts in which there were purchases of Edgerton stock, after which he made no further inquiry and took no further action. Thus, Boyd failed reasonably to supervise the two registered representatives with a view to preventing their violations, within the meaning of Sections 15(b)(4)(E) and 15(b)(6)(A) of the Exchange Act.
In view of the foregoing, the Commission deems it appropriate in the public interest and for the protection of investors to impose the sanctions specified by Respondent in his Offer.
Accordingly, IT IS ORDERED that:
A. Boyd be suspended from association in a supervisory or proprietary capacity with any broker or dealer for a period of six months, effective on the second Monday following entry of the Order. Boyd shall provide to the Commission, within 30 days after the end of the six-month suspension period described above, an affidavit that he has complied fully with the suspension in this paragraph A; and
B. Boyd shall, within ten days of the entry of the Order, pay a civil money penalty pursuant to Section 21B of the Exchange Act, in the amount of $20,000 to the United States Treasury. Such payment shall be (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (4) submitted under cover letter that identifies Boyd as a Respondent in these proceedings
and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Randall J. Fons, Securities and Exchange Commission, 1801 California Street, Suite 4800, Denver, CO 80202.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this proceeding or any other proceeding.|
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