INITIAL DECISION RELEASE NO. 145
UNITED STATES OF AMERICA
PROCEDURAL AND FACTUAL BACKGROUND
On October 10, 1996, the Securities and Exchange Commission (Commission) issued its Order Instituting Public Administration Proceedings, Cease and Desist Proceedings and Notice of Hearing (OIP) pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Exchange Act).
The OIP alleges that Respondents Alfred Avasso (Avasso) and Robert Schulman (Schulman) willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Specifically, the OIP alleges that Avasso and Schulman, in a knowing disregard of registered representatives' duties to their customers, paid undisclosed compensation in the amount of 15,000 shares of Grayhound stock1 to persons whom they believed to be registered representatives, to induce them to purchase 50,000 shares of Grayhound common stock for resale to customers. (OIP .4.)
Actually, Avasso and Schulman paid the kickback to undercover agents posing as broker-dealers as part of a sting operation undertaken by the Federal Bureau of Investigation (FBI).2 Both Schulman and Avasso were subsequently indicted, and this administrative proceeding was postponed pending the completion of the criminal matters. On July 29, 1998, Schulman was convicted after trial. Avasso pled guilty and a judgment of conviction was entered against him on July 22, 1998.
On April 20, 1999, the Division of Enforcement (Division) requested that a default judgment be entered against Schulman.3 Specifically, the Division requested that Schulman be: (1) ordered to cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (2) barred from participating in penny stock offerings pursuant to Section 15(b)(6) of the Exchange Act; and (3) ordered to disgorge the amount of his unjust enrichment along with prejudgment interest. The range of disgorgement requested ranges from a minimum of $5,626.00, with prejudgment interest of $1,316.24, to a maximum of $18,750, with prejudgment interest of $4,387.47. On April 26, 1999, I again ordered Respondent Schulman to show cause by May 14, 1999, why he should not be held in default and why the requested sanctions should not be imposed against him.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Respondent Schulman filed a letter, dated April 23, 1999, but not received by this office until April 28, 1999, in which he contests some of the relief sought by the Division, but not the facts alleged in the OIP. I accept this letter as his Answer. See Rule 220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220. The facts alleged in the OIP are the same as those found against Schulman in the criminal proceeding. Accordingly, Schulman is collaterally estopped from denying those facts in this proceeding. See, e.g., United States v. Podell, 572 F. 2d 37, 35 (2nd Cir. 1978). Therefore, I find that Respondent Schulman violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Respondent Schulman does not contest the imposition of a cease and desist order or a bar from participating in penny stock offerings. He does, however, oppose disgorgement.
The "unjust enrichment" or "gains" targeted for disgorgement need not be limited to "profits"; they may also include all illegal payments received. SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985) (finding that unjust enrichment includes the value of benefits a wrongdoer receives through the scheme, not merely the profits after the fraud); see also Great Lakes Equities Co., 775 F. Supp. 211, 214 (E.D. Mich. 1991). In its letter dated April 20, 1999, I found the Division made a credible and presumptive showing that the compensation Schulman received from Grayhound qualifies as unjust enrichment and would have fallen in the range of $5,625 to $18,750, not including prejudgment interest. See Division's Letter, dated April 20, 1999, at 2-3.
Once the government presumptively shows that its disgorgement figure reasonably approximates the amount of unjust enrichment, the burden shifts to the respondent to clearly demonstrate that the disgorgement figure is not a reasonable approximation. SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996);SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995); SEC v. First City Financial Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989). Any risk of uncertainty as to the disgorgement amount "should fall on the wrongdoer whose illegal conduct created that uncertainty." First City, 890 F.2d at 1232 (citations omitted).
The Division represents that it seeks disgorgement of "any payment made to Schulman for promoting Grayhound stock since the undercover operation terminated the scheme before any illegal profits were generated." (emphasis added) Division's Letter, dated April 20, 1999, at 2. Respondent Schulman opposes the Division's disgorgement request and by sworn Affidavit, he states: "In connection with my activities with respect to the common stock of Grayhound Electronics, Inc., as more fully alleged by the Division in its Order Instituting Proceedings, I neither sought nor received any form of compensation, consideration, payment, offset, unjust enrichment or anything of value, either directly or indirectly." See Respondent Schulman's Affidavit, dated June 29, 1999.
The Division "concedes that it has little evidence pertaining to the amount of compensation that Schulman received for his participation in the illegal transactions. The Division has been unable to generate any supplemental information on Schulman's share in the fraudulent scheme from Grayhound, Inc . . . ." See Division's Letter of April 20, 1999.
The Division has made a good faith effort to determine an estimate of Schulman's unjust enrichment by deriving a figure based upon the sum similar to the amount of proceeds the fraud would have produced and from the evidence of the taped conversations between Schulman, Avasso, and the FBI. In my Order of June 4, I found that this effort makes a credible and presumptive showing of unjust enrichment by Respondent Schulman. Nonetheless, I now further find that Respondent Schulman, by Affidavit, has met his burden of rebutting that presumption by showing that the disgorgement figure is not a reasonable approximation. The Division concedes that it is unable to produce evidence of unjust enrichment. Therefore, no disgorgement is ordered.
Based on the findings and conclusions set forth above:
IT IS ORDERED that, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Respondent Schulman is ordered to cease and desist from committing or causing violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
IT IS FURTHER ORDERED that, pursuant to Section 15(b)(6) of the Exchange Act, Respondent Schulman is barred from participation in any penny stock offering.
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. Pursuant to that rule, a petition for review of this initial decision may be filed within 21 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 21 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.
-- The securities of Grayhound Electronics, Inc. are listed on the Over-the-Counter Bulletin Board pursuant to Rule 15c2-11 of the Exchange Act. (OIP .1.) -- Beginning in 1995, the FBI formed and operated a fictitious broker-dealer under the name Thorton Capital, Inc. The FBI targeted various stock promoters who were engaged in illegal kickback schemes. -- On December 14, 1998, I ordered Schulman to file his Answer to the OIP by December 21, 1998. Schulman, however, failed to do so. On January 28, 1999, I ordered Schulman to show cause by February 16, 1999, why he should not be held in default and why the sanctions requested by the Division should not be imposed against him. Again, Schulman failed to comply. Schulman also failed to appear at either the February 1, 1999, or the April 7, 1999 prehearing conferences.