INITIAL DECISION RELEASE NO. 129 ADMINISTRATIVE PROCEEDING FILE NO. 3-9277 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. : In the Matter of : : INITIAL DECISION Michael J. Markowski : August 3, 1998 : : APPEARANCES: Alistaire Bambach for the Division of Enforcement, Securities and Exchange Commission William VanDercreek for Respondent Michael J. Markowski BEFORE: Lillian A. McEwen, Administrative Law Judge PROCEDURAL HISTORY On March 20, 1997, the Securities and Exchange Commission ("Commission") issued its Order Instituting Public Administrative Proceedings, pursuant to section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Notice of Hearing (the "OIP"). The hearing in this matter took place in the Commission's offices in Washington, D.C. on July 8-10, and 14-15, 1997. The Division of Enforcement ("Division") offered three witnesses and thirty-one exhibits. Respondent Michael J. Markowski offered three witnesses and forty-six exhibits.[1] Markowski was called as a witness in the Division's case and testified on his own behalf. I deferred a ruling on whether any statute of limitations barred the OIP. Markowski has argued that the OIP should be barred by a five-year statute of limitations since the conduct underlying the Commission's complaint in the district court occurred during the years from 1989 through early 1991. However, I conclude that the entry of the permanent injunction against Markowski by the district court on February 6, 1996, provides an independent basis under the Exchange Act to institute an administrative proceeding. The Commission has recently ruled on similar facts that the entry of an injunction provides an independent basis to institute an administrative proceeding where the conduct underlying the civil action was more than five years old. See Russell Koch, 64 SEC Docket 1616 (May 20, 1997). That case is binding on this Judge. Thus, this action was timely commenced and the issues are properly before me. The Motion to Dismiss for Lack of Jurisdiction is therefore hereby DENIED. After the hearing, Markowski filed a Suggestion for Post-Hearing Oral Argument and Leave to File Supplemental Response to Correct Factual Misstatements in the Division's Reply Brief. The Division opposes the submission. The Suggestion for Post-Hearing Oral Argument is hereby DENIED, pursuant to Rule 340(c)(2) of the Commission's Rules of Practice for lack of good cause. The request for Leave to File Supplemental Response to Correct Factual Misstatements is GRANTED, pursuant to Rule 340(b) and (c)(2). The Supplemental Response points out in great detail many "errors" in the Division's filings. Thus, good cause was established for its submission. I have examined it and taken it into account. It is a lengthy document that counsel obviously spent a great deal of time preparing. It would be unfair to Markowski to fail to consider it. ISSUES The proceeding was instituted to determine whether the Division's allegations contained in the OIP are true and to give Respondent an opportunity to establish any defenses. The Division alleges that Markowski was enjoined from engaging in activities specified in Exchange Act Section 15(b)(4)(C). If I find the allegations are true, the issue is what, if any, remedial action against Markowski is necessary and appropriate in the public interest or for the protection of investors pursuant to Section 15(b)(6). FINDINGS OF FACT The following facts were established by a preponderance of the evidence in the entire record. They constitute proof by the Division of the allegations in the OIP. Markowski is 41 years old and began working in the brokerage industry in 1979. (Tr. 720; Div. Ex. 5.) From May 1, 1989, through February 4, 1991, Markowski was associated with Global America, Inc. ("Global"), a broker- dealer registered with the Commission. (Div. Ex. 5.) During his association with Global, Markowski was the firm's president, owner, and chief executive officer. (Tr. 301.) On August 24, 1995, the Commission filed a civil action against Markowski in the United States District Court for the Southern District of New York, a court of competent jurisdiction. The complaint charged Markowski and Joseph Riccio, the firm's trader, with the manipulation of the market prices of the securities of three issuers, Capucino's, Mountaintop, Inc. ("Mountaintop"), and Auto Depot, Inc. ("Auto Depot"), beginning with their respective initial public offerings ("IPOs") and continuing through at least November 1990. The complaint also charged Markowski and Riccio with creating artificial demand for the securities by conducting aggressive and fraudulent sales campaigns to promote the securities, and with causing Global brokers under their instruction and supervision to unlawfully solicit aftermarket orders during the distribution of the IPO units. (Div. Ex. 1.) The complaint also charged Markowski with restricting the supply of the securities, by, inter alia, discouraging and refusing to execute customers' sell orders, and by engaging in other illegal activities. (Div. Ex. 1.) On February 9, 1996, the United States District Court entered a Final Consent Judgment of Permanent Injunction and Other Equitable Relief Against Markowski (the "Permanent Injunction"). (Div. Ex. 2.) In the Permanent Injunction, Markowski was enjoined from future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-6 thereunder. (Div. Ex. 2.) Global was formed in 1989 by Respondent Markowski and his brother, David Markowski. Respondent Markowski had previously been a broker at D.H. Blair & Co., Inc. ("D.H. Blair"), a broker-dealer registered with the Commission, and brought approximately eighteen brokers from D.H. Blair to start Global. At its peak, Global had between 150 and 200 employees with six offices in Florida, New York, and Europe. (Tr. 85.) As principal, president, chief executive officer, and owner of Global, Markowski was ultimately responsible for the firm's compliance with the federal securities laws and the rules of the National Association of Securities Dealers ("NASD"). (Tr. 321.) Global dominated and controlled the markets for the securities of Capucino's, Mountaintop, and Auto Depot. (Div. Ex. 1; Tr. 311-16, 763.) Global also maintained price leadership for the securities of Capucino's, Mountaintop, and Auto Depot throughout the time period after each IPO went effective. (Div. Ex. 1.) Shortly after Capucino's, Mountaintop, and Auto Depot's IPOs concluded and the securities began public trading in the after-market, the prices of the securities doubled. (Tr. 737.) Beginning in September 1989, however, the number of unexecuted sale orders substantially increased over time. (Tr. 125.) The firm's customers also complained of unauthorized trading in their accounts. (Tr. 129, 178; Div. Ex. 1, 18.) Global soon had insurmountable problems with delayed sale orders and crossing of trades. (Tr. 110-16, 164, 752-53, 876; Div. Ex. 8, 16.) Global also purchased large blocks of stock for the firm's inventory account from individual customers at prices that were below the prevailing market price and resold the same stock to other customers at the market price. (Tr. 126-28, 760-61.) Markowski implemented policies at Global that discouraged customers from selling Global-backed securities. For example, Global had a policy against solicited sell orders, regardless of the financial condition of the issuer of the security. (Tr. 138, 145-46, 150-52, 756-58; Div. Ex. 8, 9, 16, 19.) By December 1990, Global was in dire financial condition. Vendors were owed at least $500,000, the firm owed its clearing broker at least $750,000, and there were several million dollars of unexecuted customer sell orders outstanding. (Tr. 765.) Customers were filing complaints daily. (Div. Ex. 20.) On January 16, 1991, Global ceased operations due to net capital problems. (Div. Ex. 1.) At that time, the market for the securities of Capucino's, Mountaintop, and Auto Depot collapsed, resulting in substantial losses to Global's customers. (Div. Ex. 1; Tr. 197.) Despite having consented to an injunction in which he neither admitted nor denied the Commission's allegations in the district court action, Markowski attempted to prove that no market manipulation took place by calling an expert witness, Professor Kathleen Hagerty, and submitting a report prepared by her. Professor Hagerty rendered her opinions based on broad generalities. Moreover, Professor Hagerty failed to consider any evidence of Global's operations and conduct. Specifically, Professor Hagerty failed to consider evidence of Global's sales practices, the firm's policies, or the unexecuted customer sell orders at Global. Professor Hagerty also failed to consider adequate statistical or numerical data on which to formulate a considered opinion. She did not consider the firm's account statements, inter- dealer bids for the time period covered by the district court action, evidence of the public float of the securities that were the subject of the district court action, or complete pricing information for the time period contained in the district court action. Nonetheless, Professor Hagerty admitted that all of these factors are important in assessing whether or not the market for a particular security was manipulated. (Tr. 1029-1042.) Thus, because Professor Hagerty did not consider these factors, I reject her testimony that the sudden increase and decline of the securities were not unusual. Markowski's testimony revealed that while at Global he lacked any understanding of the significance of the regulatory scheme governing the securities industry. For example, he did not regard it as serious that one-third of the firm's brokers had customer complaints naming them. (Tr. 599.) Markowski had no understanding of the duties and obligations of NASDAQ market makers. (Tr. 355.) He admitted that he did not care if the price of securities he sold his customers declined, nor did he care whether he obtained the maximum value for his investment banking clients. (Tr. 317, 367.) Furthermore, although he was well aware of the size of the firm's inventory position and the tremendous cash drain that it created on the firm's capital position, Markowski never instructed Riccio to sell the firm's inventory position. (Tr. 358.) Markowski knew that by selling the firm's inventory of securities on the open market a price fall would occur and he did not want to sell the firm's inventory at "fire sale" prices. (Tr. 614-20.) Markowski's conduct was knowing and intentional and demonstrated an extremely high level of scienter. Markowski knew that the firm had problems with unexecuted customer sell orders, but did not believe that unexecuted sell orders in the amount of $20,000 per broker were a serious problem. (Tr. 357.) Markowski's testimony that he did not know there were unexecuted sell order tickets in the trading room in late December 1990 was contradicted by his subsequent testimony that the trading room was a mess and order tickets were everywhere. (Tr. 360-62.) Markowski denies doing anything wrong. At the time of the hearing in this matter, he contended that he delegated supervisory responsibility to others and that he did not engage in any illegal conduct. Markowski has not repaid any of Global's former customers who lost money when the firm went out of business. However, he has been the subject of several arbitrations arising out of his association with Global America. The arbitrations have resulted in monetary awards against Markowski for failing to execute sales of stock, market manipulation, unauthorized purchases of stock, and failure to remit customer funds. (Div. Ex. 6, Tr. 464-74.) Yet, as of the date of the hearing in this matter, Markowski had failed to pay any of the outstanding arbitration awards. (Tr. 464-74.) Markowski has also been sued for several million dollars by former investors in Global who lost their investments. He is presently involved in litigation with those individuals and has not repaid any of them. (Tr. 725.) Markowski has an extensive disciplinary history arising from the facts in the instant case. In addition, the NASD's Market Surveillance Committee brought a disciplinary action against Markowski in 1991, alleging violations of the NASD's Rules of Fair Practice for Global's refusal to give its staff access to the firm's books and records in connection with an on-site examination arising out of the closing of the firm. As a result of that action, the NASD imposed sanctions against Markowski including a censure, a fine of $50,000, a two-year suspension in all capacities, and a permanent bar from being a principal or having a financial interest in any member firm. That decision was affirmed by the Commission, Michael J. Markowski, 51 S.E.C. 553 (1993), and by the United States Court of Appeals for the Second Circuit, Markowski v. SEC, 34 F.3d 99 (2d Cir. 1994). (Div. Ex. 3.) Markowski would like to remain in the securities industry as a broker. (Tr. 641.) He would also like to sell securities in Europe. (Tr. 642.) He is presently building Internet sites for brokerage firms and is optimistic that this work will continue in the future. (Tr. 722.) If he is not barred from the securities industry, he will have many opportunities to violate the federal securities laws in the future. CONCLUSIONS OF LAW Section 15 of the Exchange Act provides the basis for a permanent bar, suspension, or censure of a broker-dealer of securities. Specifically, Section 15(b)(6) authorizes the Commission to censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar such person from being associated with a broker-dealer, or from participating in an offering of penny stock, if it is found in the public interest to do so and such person is enjoined from any action, conduct or practice specified in Section 15(c)(4)(C).[2] On February 9, 1996, a court of competent jurisdiction, the United States District Court for the Southern District of New York, entered a final judgment against Markowski permanently enjoining him from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rules 10b-5 and 10b-6 thereunder. Thus, I am authorized to sanction Markowski pursuant to Section 15(b) of the Exchange Act. Although the injunction was imposed by consent of Markowski, the Exchange Act makes no exception for a consent injunction. The action required in the public interest as the result of an injunction may be inferred from all the circumstances surrounding the injunctive action. Moreover, the allegations in the complaint in an action settled by consent may, in a subsequent proceeding before the Commission, be given considerable weight for purposes of assessing the public interest. Charles P. Elliot, 50 S.E.C. 1273, 1277 (1992), aff'd 36 F.3d 86 (11th Cir. 1994); Samuel O. Forson, 65 SEC Docket 24 (July 21, 1997). Finally, although a respondent may present evidence as to the appropriateness of the sanctions to be imposed against him, he is precluded from contesting the allegations in the complaint and from relitigating the facts underlying the Commission's complaint. Samuel O. Forson, 65 SEC Docket at 24. The Public Interest At the time of the misconduct involved in the injunctive action, Respondent Markowski was associated with a broker-dealer and the injunction falls within one of the categories covered by the applicable statute. Hence, the remaining issue is what sanction is appropriate in the public interest. In this light, I have taken into account the following factors: 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. 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). Markowski's actions were particularly egregious because they involved the loss of millions of dollars from investors. The fraud occurred over a number of months, involved many investors, and did not result from an isolated event, but rather from a pattern of coordinated acts. Scienter has been described as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is established by a showing that the individual acted intentionally or with recklessness. Raymond L. Dirks, 47 S.E.C. 434, 447, n.47 (1981), rev'd on other grounds, 463 U.S. 646 (1983); see Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir.) (en banc), cert. denied, 454 U.S. 965 (1981); see also Warren v. Reserve Fund, Inc., 728 F.2d 741, 745 (5th Cir. 1984); Hackbart v. Holmes, 675 F.2d 1114, 1118 (10th Cir. 1982); Sunstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1039 (7th Cir.), cert. denied, 434 U.S. 895 (1977). Markowski had primary responsibility for Global's compliance with the federal securities laws because he was Global's principal, owner, and chief executive officer. See Patrick v. SEC, 19 F.3d 66 (2d Cir. 1994) (high-level officers of broker-dealer responsible for supervision of appointed representatives); Mark James Hankoff, 48 S.E.C. 705 (1987) (head of broker-dealer could not rely on compliance personnel to insulate him from violating NASD rules when he was aware of firm's deficient net-capital position); David M. Haber, 59 SEC Docket 59 (Apr. 5, 1995) (president of broker-dealer responsible for firm's compliance with the federal securities laws and abdication of those duties justified imposition of permanent bar); Donald T. Sheldon, 51 S.E.C. 59 (1992), aff'd 45 F.3d 1515 (11th Cir. 1995); Everest Securities, 62 SEC Docket 1914 (Aug. 26, 1996) (firm's president was primarily responsible for compliance with securities laws despite that such person purported to only have limited control over firm's affairs); Kirk A. Knapp, 50 S.E.C. 858 (1992); C. James Padgett, 64 SEC Docket 319 (Mar. 20, 1997) (firm's principals responsible for conducting diligence to ensure compliance with federal securities laws). A firm's official is relieved of responsibility for compliance with the federal securities laws only when 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." Mark James Hankoff, 48 S.E.C. at 707. Here, Markowski was fully aware of the conduct of the firm's representatives and traders because he directed that conduct. He was also aware that there were unexecuted customer sale orders, boiler room tactics, cross trades, and unauthorized purchases occurring at Global. Markowski acted with a high degree of scienter. His intent to deceive and defraud investors is demonstrated in several ways: the NASD violations incurred during the course of his conduct; his long employment in the securities industry; the complexity of the schemes that were generated to deceive the investors; the financial interest that Respondent Markowski maintained in the ventures; and the recurring failures to repay the victims. Respondent gives no credible assurances against future violations and recognizes no wrongful conduct for which he takes responsibility. Finally, because his most productive adult professional years have been spent in the securities industry, he is likely to continue to work in the industry. Thus, Markowski is likely to have fresh opportunities for future violations of the securities laws. It is therefore in the public interest that Markowski be barred permanently from association with any broker or dealer. CERTIFICATION OF RECORD Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. 201.351(b), I hereby certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on November 13, 1997. ORDER Based on the findings and conclusions set forth above, I ORDER, pursuant to Section 15(b) of the Exchange Act, that Michael J. Markowski be and hereby is barred from association with any broker or dealer. This Order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commissions's Rules of Practice, 17 C.F.R. 201.360. 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 them, 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. ______________________ Lillian A. McEwen Administrative Law Judge **FOOTNOTES** [1]: Citations are to the hearing transcript "(Tr. __)" and to the exhibits admitted into evidence at the hearing. The Division's exhibits are "(Div. Ex.__)," and the Respondent's exhibits are "(Resp. Ex.__)." [2]: Section 15(c)(4) covers persons who have been "permanently or temporarily enjoined by order, judgment, or decree of any court or competent jurisdiction from acting as . . . a broker, dealer . . . or from engaging in or continuing any conduct or practice in connection with . . . the purchase or sale of any security."