Initial Decision of an SEC Administrative Law Judge
In the Matter of
December 8, 1999
||Edward G. Sullivan and Andrew H. Valli for the Division of Enforcement, Securities and Exchange Commission|
|Ronnie R. Neihart, Pro Se|
|Before:||Robert G. Mahony, Administrative Law Judge|
The United States Securities and Exchange Commission ("Commission") instituted this proceeding on August 19, 1999, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 ("Exchange Act"). The Order Instituting Proceedings ("OIP") alleges that on or about January 20, 1999, the United States District Court for the Northern District of Georgia entered an injunction against Respondent Neihart and Synvion Corporation. The injunction, among other things, permanently enjoined Neihart from violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from causing violations, as a controlling person, of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. The injunction also permanently barred Neihart from serving as an officer or director of an issuer pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act.
The OIP was served on Neihart on or about August 20, 1999. Neihart filed his Answer on or about September 13, 1999. Pursuant to my prehearing order, dated September 27, 1999, a hearing was held on October 19, 1999, in Raleigh, North Carolina. The Division of Enforcement ("Division") was represented by counsel. Neihart failed to appear in person or by counsel. The Division introduced five exhibits, but called no witnesses.1
Whether it is in the public interest to impose remedial sanctions upon Neihart as a result of the permanent injunction.
Neihart was President and CEO of Synvion Corporation from July 1997 through late 1998 ("the relevant period"). During the relevant period, Synvion was a reporting company pursuant to Section 12(g) of the Exchange Act. Neihart participated in the offer and sale of Synvion common stock. On or about January 20, 1999, a judgment was entered against him by the United States District Court for the Northern District of Georgia in an action brought by the Commission as set out in the OIP (Div. Ex. 4; Respondent's Answer at ¶¶ 1-5.)
From July 1997 through November 23, 1998, Neihart raised approximately $961,000 through material misrepresentations and omissions in connection with the purchase or sale, and in the offer or sale, of unregistered securities. Specifically, Neihart sold 11,000,000 shares of Synvion to seventy investors from six states. (Div. Ex. 4.)3 Neihart misrepresented, among other things: (1) that Synvion would be quoted on NASDAQ at a price of up to $64 per share, when, in fact, Synvion had never filed an application to be quoted on NASDAQ with the National Association of Securities Dealers, Inc.; (2) the commercial viability of ETA10 supercomputers worth $20 million which Synvion owned, when, in fact, the supercomputers were worthless; (3) the existence of contracts with several large, publicly-traded corporations, including NCR Corporation, AT&T Corporation, and Lucent Technologies, Inc., when, in fact, these contracts did not exist; (4) the existence of a lucrative stock lease agreement with Prudential Securities, Inc., when, in fact, there was no such stock lease agreement; and (5) that a cease and desist order issued against Neihart on December 6, 1996, by the Securities Division of the State of North Carolina had been "cleared up," when, in fact, the cease and desist order was in full force and effect. (Div. Ex. 4.)
The findings of fact in the permanent injunction, which are incorporated herein, along with my additional findings set out below, support my conclusion that it is in the public interest to bar Respondent from being associated with any broker or dealer and from participating in the offering of any penny stock.
Rule 3a51-1 of the Exchange Act provides several tests to determine whether an equity security should be classified as a "penny stock." The first applicable test is that the security must not have been "registered, or approved for registration upon notice of issuance, on a national securities exchange that makes transaction reports available pursuant to 17 C.F.R. 240.11Aa3-1. . . ." 17 C.F.R. § 240.3a51-1(e). Another test is that the security must not have been "authorized, or approved for authorization upon notice of issuance, for quotation in the National Association of Securities Dealers' Automated Quotation system (NASDAQ), provided that price and volume information with respect to transactions in that security is required to be reported on a current and continuing basis and is made available to vendors of market information pursuant to the rules of the National Association of Securities Dealers, Inc." 17 C.F.R. § 240.3a51-1(f). There is no evidence that Synvion stock was ever registered or approved for registration, nor was it traded on a national securities exchange. Furthermore, there is no evidence that Synvion stock was ever authorized for quotation on an automated quotation system or was ever sponsored by a registered securities association in any capacity.
A third test provides that the security must not, except for the purposes of Section 7(b) of the Securities Act and Rule 419 thereunder, have a price in excess of $5. 17 C.F.R. § 240.3a51-1(d). The record establishes that Respondent and Synvion raised approximately $961,000 from the offer and sale of 11,000,000 shares. This results in a per share price of less than $1. This is further evidence that the Synvion shares should be classified as a penny stock. The final applicable test provides that the issuer must not have: (1) "[n]et tangible assets in excess of $2,000,000, if the issuer has been in continuous operation for at least three years or $5,000,000, if the issuer has been in continuous operation for less than three years;" or (2) "[a]verage revenue of at least $6,000,000 for the last three years." 17 C.F.R. § 240.3a51-1(g). Synvion's purported assets, the ETA10 supercomputers with an alleged value of $20,000,000, were worthless. The District Court found that, other than issuing stock, Synvion did not appear to have any operations. (Div. Ex. 4.) Indeed, the fact that Synvion's total revenue for 1995 was $22,500 indicates that Synvion had minimal assets. (Tr. 13-14.) Finally, there are no financial statements or periodic reports to demonstrate that Synvion's net tangible assets exceed the threshold. (Div. Ex. 4.) Accordingly, any assets that Synvion had were minimal and further support the "penny stock" classification.
Based on the above findings, I conclude that the Synvion stock is a penny stock within the meaning of Exchange Act Rule 3a51-1.
The Division has proven by a preponderance of the evidence that Neihart was permanently enjoined from engaging in illegal conduct related to penny stock offerings. The only remaining issue is whether remedial sanctions ought to be imposed against Neihart. The Division asks that Respondent be barred from being associated with any broker or dealer and from participating in the offering of any penny stock.
Section 15(b)(6) of the Exchange Act empowers the Commission to impose administrative sanctions against persons associated with broker-dealers. Specifically, Section 15(b)(6) of the Exchange Act authorizes the Commission to censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding twelve months, or bar such person from being associated with a broker or dealer 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.
Pursuant to Exchange Act Sections 15(b)(6) and 15(b)(4)(C), proof that a court of competent jurisdiction has enjoined a person who was participating in the offering of a penny stock provides a sufficient basis for imposing remedial sanctions against the party so enjoined, provided that the sanctions are in the public interest. See Russell G. Koch, 52 S.E.C. 1330, 1331 n.4 (1997), vacated on other grounds, Koch v. SEC, 177 F.3d 784 (9th Cir. 1999).4 Even where the injunction was entered by consent and without findings of fact, "the action required in the public interest may be inferred from all the circumstances surrounding the injunctive action." Charles Phillip Elliot, 50 S.E.C. 1273, 1277 (1992) (footnote omitted). See also, Matt Matson, 65 SEC Docket 1458, 1461 (Sept. 25, 1997) (determining that it is in the public interest to impose a penny stock bar though the underlying injunction was entered by consent against the Respondent).
The following are relevant considerations in making the public interest determination:
the egregiousness of the respondent's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his conduct, and the likelihood that the respondent's 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 the 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, 211-212 (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).
Neihart's fraudulent misrepresentations and omissions, rather than occurring in a single instance, spanned a period of approximately seventeen months and allowed him to raise approximately $961,000 by selling 11,000,000 Synvion shares to seventy investors in six states. The egregious nature of his misrepresentations and omissions indicates that they were made with the intent to deceive investors. Additionally, Respondent's failure to appear at the proceeding to contest the charges indicates that he lacks remorse for his actions. For these reasons, I conclude that it is in the public interest to bar Respondent from being associated with any broker or dealer and from participating in the offering of any penny stock.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on December 3, 1999.
Based on the findings and the conclusions set forth above, pursuant to Section 15(b)(6) of the Exchange Act, I order that Respondent Ronnie R. Neihart be and hereby is barred from association with any broker or dealer.
It is further ordered that Respondent Ronnie R. Neihart be and hereby is barred from participating in the offering of any penny stock, including acting as a promoter, finder, consultant, agent, or other person who engages in actions with a broker, dealer, or issuer for purposes of the issuance or trading of any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.
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 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.
Robert G. Mahony
Administrative Law Judge
1 Citations to the hearing transcript will be indicated by "(Tr. __.)." Division exhibits will be cited by number as "(Div. Ex. __.)." The Division offered the following exhibits: Complaint for Injunctive and Other Relief, SEC v. Ronnie R. Neihart and Synvion Corp., No. 1:98-CV-3341-WBH (N.D. Ga. Nov. 23, 1998) (Div. Ex. 1); Order to Show Cause, Temporary Restraining Order, Order Freezing Assets, Order Prohibiting Destruction of Documents and Order Expediting Discovery, SEC v. Ronnie R. Neihart and Synvion Corp., No. 1:98-CV-3341-WBH (N.D. Ga. Nov. 25, 1998) (Div. Ex. 2); Order of Preliminary Injunction with Findings of Fact and Conclusions of Law, SEC v. Ronnie R. Neihart and Synvion Corp., No. 1:98-CV-3341-WBH (N.D. Ga. Dec. 8, 1998) (Div. Ex. 3); Order of Permanent Injunction with Findings of Fact and Conclusions of Law as to Defendants Neihart and Synvion, SEC v. Ronnie R. Neihart and Synvion Corp., No. 1:98-CV-3341-WBH (N.D. Ga. Jan. 20, 1999) (Div. Ex. 4); and Order Setting Amount of Civil Penalties Previously Imposed Against Defendant Neihart, SEC v. Ronnie R. Neihart and Synvion Corp., No. 1:98-CV-3341-WBH (N.D. Ga. Apr. 19, 1999) (Div. Ex. 5).
2 My findings are based on the pleadings and evidence in the record, Div. Exs. 1-5. I applied preponderance of the evidence as the applicable standard of proof. Steadman v. SEC, 450 U.S. 91 (1981).
3 Neihart is prevented from relitigating findings from a prior civil injunction. See, e.g., Meyer Blinder, 65 SEC Docket 1970, 1973 (Oct. 1, 1997).
4 In Koch v. SEC, the 9th Circuit held that, pursuant to the principles articulated in Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994) (finding that "the presumption against retroactive legislation is deeply rooted in our jurisprudence."), the Commission is not authorized to impose a penny stock bar based on conduct that predated the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. This proceeding does not involve a Landgraf issue because both the injunction and the underlying conduct antedated the 1990 legislation.
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