INITIAL DECISION RELEASE NO. 116 ADMINISTRATIVE PROCEEDING FILE NO. 3-9105 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ : In the Matter of : : IRA WILLIAM SCOTT : INITIAL DECISION : September 9, 1997 _________________________:_ APPEARANCES: Peter K.M. Chan and David J. Medow for the Division of Enforcement, Securities and Exchange Commission Ira William Scott, pro se BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission ( Commission ) initiated this proceeding on September 27, 1996, to determine whether the Division of Enforcement s ( Division ) allegations are true that on December 1, 1992, the Superior Court of Porter County, Indiana, entered a judgment of conviction against Ira William Scott on nine counts of felonies involving the sale of securities, including fraud in connection with the sale of a security, and four counts of felonies for theft, for the illegal activities spelled out in the criminal information filed with the court, and, if so, what remedial action was appropriate in the public interest pursuant to Section 203(f) of the Investment Advisers Act of 1940 ( Advisers Act ).<(1)> Mr. Scott filed an answer on October 25, 1996. I conducted a teleconference on October 11, 1996, and because the respondent lacked the financial resources to travel to Washington, D.C., I held the public hearing in Hammond, Indiana, on November 20, 1996. (PH Tr. 8-9; Answer.) The Division did not call any witnesses at the hearing, but introduced seven exhibits that I accepted into evidence. Mr. Scott <(1)> At the hearing, I granted the Division s unopposed request to amend the Order Instituting Proceedings ( OIP ) by replacing references to March 11 in parts I.A. and I.B. of the OIP with May 16. (Tr. 6-7; see Commission Rules of Practice, Rule 200(d)(2), 17 C.F.R.  201.200(d)(2) (1996).) ======END OF PAGE 1====== appeared pro se, testified on his own behalf, and introduced three exhibits, one of which I accepted into evidence.<(2)> The Division filed its Post-Hearing Brief and its Proposed Findings of Fact and Conclusions of Law on December 26, 1996, Mr. Scott filed his Response to the Post-Hearing Brief of the Division of Enforcement and Proposed Findings of Fact ( Response ) on January 14, 1997, and the Division filed its Post-Hearing Reply Brief on February 6, 1997. Findings of Fact My findings and conclusions are based on the record. I applied preponderance of the evidence as the applicable standard of proof. I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision. Respondent Mr. Scott studied business, accounting, finance, and economics at Purdue University and Valparaiso University in 1980-84, however, he did not graduate or receive a degree from either institution. (Tr. 39-40; Div. Ex. 1.) At the time of the hearing in November 1996, Mr. Scott was employed as a [j]ourneyman, heavy equipment mechanic. (Tr. 40.) Mr. Scott has been employed as a business financial consultant. (Id.) He does not hold any securities licenses from the State of Indiana and he is not registered with the National Association of Securities Dealers. (Id.) From May 16, 1986, until August 12, 1988, Ira William Scott was registered as an investment adviser doing business as Ira W. Scott, a sole proprietorship, pursuant to Section 203 of the Advisers Act.<(3)> (Div. Exs. 1, 2.) The filed investment adviser application which Mr. Scott signed on March 3, 1986, indicates that he was a consultant who held the designations Certified International Financier/International Society of Financiers. (Div. Ex. 1; Form ADV, at 1 and at Sch. D page 2.) On May 1, 1987, Sprint Telecommunications ( Sprint ) activated an account which Mr. Scott opened in the name of Global Finance Corporation ( GFC ), a private corporation of which he was president and sole <(2)> I will refer to pages of the prehearing transcript as PH Tr. __, to pages of the hearing transcript as Tr. __, to the Division s exhibits listed on Counsel s Exhibit Number 1 as Div. Ex. __, and to Mr. Scott s exhibit as Resp. Ex. 2. <(3)> The Commission received Mr. Scott s Form ADV-W, Notice of Withdrawal from Registration as Investment Adviser, on June 13, 1988, and the regulations provide that withdrawal shall become effective on the 60th day after filing with the Commission or within such shorter time as the Commission may determine. (Div. Ex. 2; Tr. 16; OIP II.A.; 17 C.F.R.  275.203-2.) ======END OF PAGE 2====== shareholder.<(4)> (Div. Ex. 6 at 2; Tr. 30.) Sprint issued Mr. Scott eleven credit cards with access codes. (Div. Ex. 6 at 2.) When Mr. Scott opened the Sprint account, he owed MCI Telecommunications $15,000. (Id. at 6.) In May 1987, Mr. Scott contacted Thomas Sutherland about purchasing shares of Value Plus Communications, Inc. ( VPC ), a corporation Mr. Scott established and managed which he claimed was in the business of purchasing long-distance time from telephone companies and reselling that time.<(5)> (Id. at 2-3.) Mr. Scott was not a registered broker, dealer, agent, or investment advisor with the State of Indiana, and VPC securities were not registered with the state. (Id. at 3.) Mr. Scott assured Mr. Sutherland that he would not lose his initial investment in VPC of $5000, that he could sell the stock back to VPC at any time, and that stock dividends would be thirty to thirty-five percent of the investment. (Id. at 2.) He told this investor that he would receive free long-distance telephone service and provided him with an access code that Sprint had issued to GFC to use when making calls. (Id.) In May 1987, Mr. Scott solicited Deborah Cristea, Mr. Sutherland s daughter, and assured her that her investment in VPC would increase in value and that she could get back her initial $1500 investment at any time. (Id.) Mr. Scott provided Ms. Cristea with an access code for making long- distance telephone calls. (Id. at 2-3.) In November 1987, Mr. Scott told Charles and Lorraine Hroma that they could get their investment in VPC back at any time, that they would receive interest payments on their investments at regular intervals in an amount equaling fifteen and one half percent of their investment, that returns on investments in VPC had been good, and that they would receive free long- distance telephone service. (Id. at 3.) The Hromas invested $1000 in a convertible debenture with Mr. Scott. (Id.) Mr. Scott falsely assured Mr. Sutherland, Ms. Cristea, and Charles and Lorraine Hroma that VPC was an on-going business; although Mr. Scott had collected approximately $60,000 from investors, VPC had no assets from which it could generate dividends or interest. (Id. at 7-8.) Mr. Scott failed to make any payments on the Sprint account even though a Sprint representative made several attempts to collect the monies owed. (Id. at 6.) When Sprint closed the account on December 17, 1987, Mr. Scott owed $42,067.59. (Id.) Sprint found that Mr. Scott had 117 stolen access codes that belonged to Sprint, and that VPC investors had <(4)> Mr. Scott claimed that GFC was a private corporation, an investment banking company, and a general partnership. (Tr. 30- 31.) <(5)> Mr. Scott alleges that during this period, All the business I did was under [GFC] as far as commercial investment banking and some under Standard Mortgage Services. (Tr. 8, 27.) Mr. Scott was president of Standard Mortgage Services which he claimed was a limited partnership managed/operated by the general partnership, GFC. (Tr. 30-31.) ======END OF PAGE 3====== several of the access codes that Sprint had issued to GFC. (Id. at 3.) Mr. Scott opened an account with All-Net, another long-distance telephone company, after Sprint closed his account. (Id. at 6.) His pattern of behavior was to establish accounts with providers of long-distance telephone service and then fail to make payments on the account. (Id.) The State of Indiana charged in a criminal information filed with the Superior Court of Porter County, Indiana, that between May 13 and December 17, 1987, Mr. Scott, who was not registered with the Indiana Securities Division as an agent of VPC, knowingly effected the offer and sale of unregistered VPC securities, which were not exempt from registration, and, while doing so, knowingly engaged in acts, practices, and courses of business which operated as a fraud or deceit on investors by failing to disclose VPC s true financial condition, failing to disclose the background of the company, and guaranteeing that VPC would (1) earn returns of thirty- five percent and fifteen and one half percent interest; (2) pay the money back within a year; (3) not lose money; and (4) return an investor s funds at any time, and that he knowingly or intentionally exerted unauthorized control over the property of these investors and Sprint. (Div. Ex. 3; Indiana v. Scott, Information, 64D01-8805-CF-76 (1988).) A jury found Mr. Scott guilty of thirteen felony counts on September 11, 1992, and the superior court entered a judgment of conviction and sentenced Mr. Scott on December 1, 1992. (Tr. 9; Div. Ex. 6 at 4.) The superior court sentenced Mr. Scott to fifteen months of home detention, ten and one half years of formal probation, and ordered him to pay restitution in the amount of $49,349.<(6)> (Div. Ex. 5; Indiana v. Scott, Order Modifying Sentencing, 64D01-8805-CF-76 (July 17, 1995).) The Court of Appeals of Indiana, Third District, affirmed the trial court s judgment on September 29, 1994. (Div. Ex. 6; Scott v. Indiana, 64A03-9303-CR-00098 (Sept. 29, 1994).) The Supreme Court of Indiana denied Mr. Scott s petition for transfer of his appeal on March 9, 1995. (Div. Ex. 7; Scott v. Indiana, Denial of Petition for Transfer (March 9, 1995).) It appears that Mr. Scott also filed a habeas corpus petition which was denied. (PH Tr. 14-15.) Mr. Scott admitted that the superior court entered judgment of conviction against him on a total of thirteen felony counts - nine counts involved the sale of securities and four counts were for theft. (PH Tr. 12; Tr. 36, 41; Div. Ex. 4; Indiana v. Scott, Sentencing Order, 64D01-8805- CF-76 (Dec. 1, 1992).) I ruled that the doctrine of collateral estoppel and legal precedent precluded Mr. Scott from disputing the validity of his conviction.<(7)> (PH Tr. 14-16; Tr. 13, 21, 39.) <(6)> The original sentence was for one and a half years incarceration on each of the four theft counts, with the sentence suspended, and four years for three of the counts involving securities crimes, with three and a half years suspended. (Div. Exs. 3- 4.) <(7)> See FDIC v. Daily (In re Daily), 47 F.3d 365, 368-69 (Bankr. 9th Cir. 1995) ( It is implicit in the doctrine of collateral estoppel that, where a party has been accorded a full and fair (continued...) ======END OF PAGE 4====== Conclusions of Law I reject Mr. Scott s defense that the Commission has no jurisdiction because he did not commit the actions which were the basis of his conviction while doing business as an investment adviser as alleged in part II.B. of the OIP. (Tr. 9, 27, 36.) Section 202(a)(17) of the Advisers Act defines the term any person associated with an investment adviser as any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser. Mr. Scott was associated with an investment adviser during the relevant period because he controlled and was president of Ira W. Scott, a sole proprietorship registered as an investment adviser. Moreover, the Commission has proceeded against individuals who were neither registered investment advisers nor persons associated with registered investment advisers based on the nature of their activities. See Alexander V. Stein, 59 SEC Docket 1493 (June 8, 1995); Joseph P. D Angelo, 46 S.E.C. 736 (1976), aff d without opinion, 559 F.2d 1202. Mr. Scott s activities come within the statutory definition of an investment adviser in that, for compensation, he engaged in the business of advising members of the public as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. Advisers Act Section 202(a)(11). Issue Section 203(f) of the Advisers Act requires that the Commission sanction any person associated with an investment adviser if such person has been convicted of offenses that involve theft and misappropriation of funds, the purchase or sale of any security, or that arise out of the conduct of the business of an investment adviser, within ten years of the commencement of the administrative proceeding, if such a sanction is in the public interest. See Advisers Act Section 203(e)(2). In view of Mr. Scott s conviction, the only issue is what, if any, sanction is appropriate in the public interest. Public Interest Certain criteria for assessing the public interest are well established: the 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 the defendant's occupation will present opportunities for future violations. <(7)>(...continued) opportunity to litigate an issue in a prior proceeding, due process is not violated by denying the party a further opportunity to litigate the same issue in a subsequent proceeding. ) and Lamb Brothers, Inc., 46 S.E.C. 1053, 1058 n.22 (1977). ======END OF PAGE 5====== Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). By statute an investment adviser is a fiduciary, and as such has an affirmative duty of utmost good faith, and full and fair disclosure of all material facts, as well as an affirmative obligation to employ reasonable care to avoid misleading his clients. SEC v. Capital Gains Bureau, Inc., 375 U.S. 180, 194 (1963). This Commission and the courts have acknowledged that the position of investment adviser is an occupation that can cause havoc unless engaged in by those with appropriate background and standards. Benjamin Levy Securities, Inc., 46 S.E.C. 1145, 1147 (1978); Joseph P. D Angelo, 46 S.E.C. at 737; Marketlines, Inc. v. SEC, 384 F.2d 264, 267 (2d Cir. 1967), cert. denied, 390 U.S. 947 (1968). Measured against these criteria, Mr. Scott s conduct, beliefs, and attitude indicate that it is in the public interest to impose the most severe sanction permissible under the statute with the objective of preventing him from ever participating in the securities industry. Mr. Scott knowingly engaged in a course of fraudulent conduct over a period of several months that was so serious and outrageous as to be criminal, and he either does not understand or is feigning understanding of this fact. The court of appeals found that Mr. Scott s representations were false, that Mr. Scott promised investors performance for their investments which he knew he could not perform, that investors would not have invested their money with Mr. Scott had he not made these representations, and that, from the evidence, the superior court jury could have reasonably inferred that Scott personally received the investments and that money was spent by him and two other individuals. (Div. Ex. 6 at 7.) The court of appeals noted that, [a]lthough there was evidence that Mr. Scott had collected approximately $60,000.00 in investments, [VPC] had no assets. (Id.) Mr. Scott did not return investors funds despite their requests that he do so. (Id. at 3.) Mr. Scott does not recognize that his conduct was wrong and has provided no assurance that he will not violate the law in the future. (Tr. 38-39.) In his testimony in this proceeding, Mr. Scott displayed no remorse or appreciation that his conduct was illegal and that it damaged public investors: The main thing I m concerned about is the fact that if I was barred from dealing with investments [sic] firms in the future, if any opportunities did come up with -- to make money with like accredited investors, I wouldn t want to be barred from the opportunity. I have no interest in individual investors and I never have as far as advising them on stocks and bonds and things of that nature. [Sic] Only interest I ever had actually was large commercial equity placement. (Tr. 36-37.) ======END OF PAGE 6====== Mr. Scott s response to his conviction, which resulted from a jury trial, and an appellate court s findings that the evidence and law supported that result, is one of denial and defiance. According to Mr. Scott, The reason why the public is not in danger is because I, in fact, never did steal anyone s money. I never committed the act of theft and the act of fraud or the act of selling unregistered securities. (Tr. 38-39.) In similar situations where it has found a bar to be appropriate, the Commission has noted that when past misconduct involves fraud, fidelity to the public interest requires consideration of the fact that the securities business is one in which opportunities for dishonesty recur constantly. Alexander V. Stein, 59 SEC Docket at 1501 n.20 (citing Richard C. Spangler, 46 S.E.C. at 252-53). Mr. Scott has taken several positions that are inconsistent and/or unintelligible. In the face of felony convictions that involved several individuals, Mr. Scott inexplicably attempts to avoid responsibility for his illegal action with the claim that he never really did anything with individual investors, only as an officer of the corporation seeking capitalization of that corporation. (PH Tr. 20-21; Tr. 35-38.) The OIP used the designation IWS to refer to Ira W. Scott, the sole proprietorship registered as an investment adviser. Mr. Scott s answer stated that he did not do business as Ira W. Scott and not IWS. This record, and my observation of Mr. Scott s demeanor at the hearing, indicate that it is almost certain that Mr. Scott will commit future violations of the securities laws if he is allowed to participate in the securities industry in the future. (Tr. 37-39, 41; see also Mr. Scott s Response.) There are no mitigating circumstances. For all the reasons, I find that it is in the public interest to bar Mr. Scott from being associated with an investment adviser.<(8)> Record Certification Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R.  201.351(b) (1996), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on January 16, 1997. Order Based on the findings and conclusions set forth above, I ORDER, pursuant to Section 203(f) of the Investment Advisers Act of 1940, that Ira William Scott is barred from being associated with an investment adviser. <(8)> I deny the Division s request that I bar Mr. Scott from association with any broker, dealer, municipal securities dealer, or investment company because these measures are beyond those authorized by Section 203(f) of the Advisers Act which the Commission cited as the basis for this proceeding. (OIP III.B.; Division s Post-Hearing Brief at 8.) ======END OF PAGE 7====== This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R.  201.360 (1996). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. __________________________ Brenda P. Murray Chief Administrative Law Judge ======END OF PAGE 8======