Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
April 26, 2000
William H. Kuehnle and Gautam Dutta for the Division of Enforcement, Securities and Exchange Commission.
Philip W. Horton and Richard B. Benenson of Arnold & Porter for Respondent Herbert Moskowitz
Carol Fox Foelak, Administrative Law Judge
This Initial Decision dismisses charges against Herbert Moskowitz. Moskowitz, a passive investor in Ferrofluidics Corporation, was charged with failing to disclose his son-in-law's purchase and sale of Ferrofluidics stock in Schedule 13D filings. Schedule 13D and other Williams Act requirements provide information to investors about takeovers. Moskowitz funded the purchase, during May and June 1991, which, when added to his own investment, totaled 5.9% of Ferrofluidics stock outstanding. When he called the loan two months later, his son-in-law sold the stock, and the total declined below 5%. The Decision concludes that Moskowitz was not the "beneficial owner" of his son-in-law's shares within the meaning of the Schedule 13D disclosure requirements and thus committed no violation.
Assuming for the sake of argument that Moskowitz was the beneficial owner of the shares and thus violated the disclosure requirements, the Decision concludes that no sanction should be imposed. The evidence shows that Moskowitz would have made the filings had he known they were required, and that he filed a Schedule 13D when his own interest exceeded 5%, shortly after the period when his son-in-law held stock. The only sanction authorized in this proceeding is a cease and desist order, which is too harsh under the circumstances. An additional factor is the length of time that elapsed between the conduct at issue and this proceeding, which was stayed for an extended period during the pendency of criminal proceedings against Ferrofluidics insiders for wrongdoing unrelated to the violation charged against Moskowitz. The insiders included Moskowitz's brother Ronald, who was convicted of securities fraud in connection with Ferrofluidics stock.
A. Procedural Background
The Securities and Exchange Commission (Commission) initiated this proceeding, pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act), by an Order Instituting Proceedings (OIP) on September 25, 1997.1 The Commission then stayed the proceeding pending the outcome of criminal proceedings against three insiders of Ferrofluidics Corporation (Ferrofluidics).2 Following guilty pleas and a conviction in the criminal cases, and settlements with two respondents in this proceeding, the undersigned held two days of hearings concerning the remaining respondent in Washington, D.C., June 1-2, 1999. The Division of Enforcement (Division) and Respondent each called two witnesses from whom testimony was taken -- Respondent Moskowitz and his son-in-law Kamrooz Abir. A number of exhibits were admitted into evidence.3
The findings and conclusions in this Initial Decision are based on the record. Preponderance of the evidence was applied as the standard of proof. Pursuant to the Administrative Procedure Act,4 the following posthearing pleadings were considered: (a) the Division's July 21, 1999, Proposed Findings of Fact and Conclusions of Law and Posttrial Brief; (b) the Respondent's August 31 Proposed Findings of Fact and Conclusions of Law and Post-Trial Brief; and (c) the Division's September 17 Response and Posttrial Response Brief. All arguments and proposed findings and conclusions that are inconsistent with this decision were considered and rejected.
B. Allegations and Arguments of the Parties
The proceeding concerns transactions in 1991 in the stock of Ferrofluidics. The OIP alleges that Moskowitz funded the purchase by his daughter and son-in-law, during May and June 1991, of Ferrofluidics stock, which, when combined with his own interest, made him a 5.9% beneficial owner of Ferrofluidics. Then, the OIP alleges, he called in the loan to his daughter and son-in-law, causing them to sell the stock between July 10 and August 1. Thus, the OIP alleges, he violated Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder by failing to file, and later amend, Schedule 13D following these events to reflect an increase in his beneficial ownership above 5%, followed by a decrease of more than 1%. The Division seeks a cease and desist order.
The Respondent contends that the proceeding should be dismissed. He contends that he committed no violation and the proceeding was brought in order to bring pressure on him in reference to the Government's proceedings against his brother Ronald Moskowitz.
C. Procedural Issues
In his Proposed Findings of Fact and Conclusions of Law, Respondent argues that evidence introduced by the Division and the Division's proposed findings 1-8, 10-12, 17-19, 21, 66-78, and 83, concerning his stock ownership in other companies and Schedule 13D filings as to those companies, are irrelevant and immaterial. This evidence is not, however, irrelevant and immaterial. The Division seeks a cease and desist order against Respondent for alleged violations in 1991 concerning Schedule 13D filings. If it is concluded that Respondent's 1991 conduct was violative, evidence concerning his practices in more recent Schedule 13D filings is relevant to whether a cease and desist order should be imposed because it bears on the likelihood of future violation. Additionally, the Commission has ruled that administrative law judges should be inclusive in making evidentiary determinations in its proceedings. See City of Anaheim, Order Vacating Grant of Motion to Exclude Evidence, 71 SEC Docket 191, 193-94 & nn. 4-8 (Nov. 16, 1999); See also Russo Sec., Inc., Order Denying Motion for Sanctions, 71 SEC Docket 66, 68-69 (Nov. 9, 1999).
Despite its proffer of the above evidence, the Division argues that any respondent who violated a provision of the securities laws in the past may be ordered to cease and desist from violating it in the future even if there is no likelihood of a future violation. The Commission, however, has not adopted this view.5 Additionally, such a ruling would, by taking into account only past conduct, cause this proceeding to be time barred under the five-year statute of limitations provided in 28 U.S.C. § 2462. See Johnson v. SEC, 87 F.3d 484, 489-90 (D.C. Cir. 1996). This proceeding was initiated September 25, 1997, and the conduct at issue occurred in 1991.
II. FINDINGS OF FACT
There is little dispute as to the facts in this case; the parties differ as to the conclusions to be drawn from the facts. Respondent Herbert Moskowitz was a sometime passive investor in Ferrofluidics.6 His brother, Ronald Moskowitz, formerly Ferrofluidics' Chief Executive Officer (CEO), is a convicted felon, having been convicted of securities fraud in connection with Ferrofluidics stock.7 The allegations against Respondent are not connected with his brother's wrongdoing or that of other insiders involved in the fraudulent schemes.
Respondent Herbert Moskowitz practiced dentistry for about twenty years in the Albany, New York, area before becoming involved in various businesses that sought to develop and market products related to the prevention, diagnosis, and treatment of disease. Tr. 30-37, 50-66, 280, 391-92, 395. None of the products has been a marketing success to date. Tr. 66-67, 341-49. Moskowitz remains enthusiastic, however, about the benefits that could result from these and other products he hopes to develop. Tr. 281-89. Currently, he is the manager of a law office in Albany. Tr. 14. The pendency of this proceeding has affected him adversely in business. Tr. 332-33, 337-38.
Respondent was never involved in Ferrofluidics in any way except as a passive investor. Tr. 41-46, 297, 308-09. Respondent's contacts with his brother Ronald have been infrequent. Tr. 334-35. His determination to avoid his brother intensified in 1994 after being subpoenaed by the Commission to give investigative testimony about him; Moskowitz concluded that the less he knows, the better. Tr. 335. The record contains extensive evidence concerning Respondent's dealings regarding his medical products corporations. Tr. 16-29, 33-41, 50-67, 132-34, 202-05, 230-69, 280-99, 340-49; Div. Exs. 58-63; Resp. Exs. 10, 13, 14. By contrast, the record is devoid of evidence that Respondent had knowledge of his brother's fraudulent schemes or had any inside knowledge regarding Ferrofluidics at all. Tr. 68-70, 123-24, 206-08, 211-12, 214-16. For example, Respondent learned for the first time at the hearing that his brother had deceived him concerning collateral for a loan. Tr. 211-12, 214-16, 335-36.
B. Respondent's Stockholdings in Ferrofluidics
At the beginning of 1991, Moskowitz held no stock in Ferrofluidics.8 Tr. 300. In early 1991 his brother, who was in financial difficulty because he owed millions of dollars on real estate investments that had declined in value, approached him for a loan. Tr. 67-72. The terms, as negotiated in an Albany restaurant, called for Respondent to advance up to $3 million in the next few months under a line of credit. Tr. 68-103, 302-05; Div. Exs. 1-3, 5, 7, 11-16. As an incentive to make the loan, Respondent was to receive a total of 150,000 Ferrofluidics warrants in two installments.9 Respondent understood that when he received the second installment he would have an interest exceeding 5% in Ferrofluidics and would have to file a Schedule 13D. Tr. 107, 306; Div. Ex. 3. Upon evaluating the suitability of Ferrofluidic warrants or stock as collateral for his loan, he determined that it was a good investment and purchased about 10,000 shares for himself, 700 shares for his wife's Individual Retirement Account, and 200 shares for his son during March, April, and May 1991; his wife's and son's shares were sold in March 1992.10 Tr. 124-131, 134; Div. Exs. 31, 32, 37-40. Respondent received 105,000 warrants on about June 5. Tr. 112. Respondent believed Ferrofluidics was a good investment; he never held its securities for any purpose other than investment. Tr. 309, 315.
C. The Abir Transactions
Kamrooz Abir, Moskowitz's son-in-law, graduated from the Wharton School of Finance in 1988; his degree was in economics, with a concentration in finance and entrepreneurial management; he also has a strong computer science background. Tr. 359-60. Abir's family fled Iran, where he was born, in 1978; thereafter he lived in Israel and the United States. Tr. 390. Abir started working for General Electric (GE) as a consultant in 1988, implementing enterprise resource planning and infrastructure management, and also worked for a time as a registered representative with a broker-dealer. Tr. 163-64, 360-61, 393. Starting in January 1990, Abir commenced working with Respondent to develop plans for the management and funding of companies to produce medical products. Tr. 361, 391-92. Abir worked in a home office in Respondent's home. Tr. 361-63, 394-95. Since 1996, Abir has consulted full-time for GE; he was not able to earn enough income from working with Respondent. Tr. 410-12.
Abir's only involvement with Ferrofluidics was as a passive investor. Tr. 396. In March 1991, Moskowitz and Abir signed a one-page hand-written agreement describing financial arrangements whose stated purpose was "To assist [Abir and his wife] in purchasing a home." Tr. 141-42, 310-11, 398; Div. Ex. 17. Specifically, if they stayed in the Albany area, Abir was to buy Moskowitz's home after the latter built a new one.11 Tr. 147, 152, 312-13, 398; Div. Ex. 17. The agreement envisioned that Moskowitz might lend Abir funds for a down payment on a home or that he might lend funds for investments such that Abir could use any profits for a down payment. Tr. 312, 400-01; Div. Ex. 17. Concerning the investment alternative, the agreement provided, "Herb will lend Kami money (at Herb's discretion) for investment opportunities selected by Herb." Div. Ex. 17. Respondent was to select the investment, and if Abir concurred in the selection, he could borrow the money and make the investment. Tr. 143-46, 311-12. The timing and price of any purchases of the approved investment were at Abir's discretion. Tr. 160, 369-75. The agreement also provided for Abir to pay 7% interest on the loan, to bear the risk of loss, and use any profits toward his home down payment. Div. Ex. 17. At the time they made the agreement Respondent knew that he would likely call the loan within the next several months to advance funds under the line of credit to his brother. Tr. 156, 320. Respondent was also generally aware of Abir's financial situation such that he knew that Abir probably would sell the stock to repay the loan. Tr. 151.
Starting on May 24, 1991, Moskowitz loaned Abir a total of $400,000 for the purpose of buying Ferrofluidics stock. Tr. 153-55, 368-69, 399; Div. Exs. 19, 24, 29. Abir considered Ferrofluidics a good investment at the time. Tr. 409. The Abirs opened a Quick & Reilly account that contained only the stock bought with the loan from Moskowitz; Abir wished to keep separate books on transactions funded with the borrowed money. Tr. 365-66, 403-04; Div. Ex. 19. Abir considered it Moskowitz's money and wanted to keep it separate, so that Moskowitz would be protected in the event of misfortune. Tr. 381-83, 415-16; Div. Ex. 30A.12 The Abirs and Moskowitz executed a Quick & Reilly trading authorization form giving Moskowitz the right to trade the account. Tr. 317-19, 383-84, 404-08; Div. Ex. 18. Although not indicated on the boilerplate form, this was only to be used in case of emergency, such as the Abirs' death; Abir had an appreciation of the possibility of disasters from his background and frequent trips abroad. Tr. 317-19, 383-84, 404-06. Since the Abirs did not encounter a disaster during their ownership of the Ferrofluidics stock, the trading authorization did not come into effect. Tr. 405. Moskowitz did not have a trading authorization for any other account of Abir's. Tr. 415. Abir then made a series of purchases of Ferrofluidics stock in May and June 1991 which totaled 41,000 shares.13 Tr. 369-75; Div. Exs. 19, 20A, 23-24.
Moskowitz did not have voting power over the Abir shares. Tr. 316, 404. There is no evidence in the record to the contrary. The Division's argument that there was no occasion to vote the shares during the time they were owned does not constitute evidence that Moskowitz had voting power. It goes without saying that the Division has the burden of proof. Moskowitz is not required to prove he did not have voting power. The Division must prove that he did have voting power to support a finding to that effect.
When Moskowitz called the loan to meet a draw on the line of credit, Abir sold the Ferrofluidics stock in a series of transactions in July and August 1991 and remitted the entire proceeds, about $532,000, to the Respondent. Tr. 173-78, 191-93, 319-21, 399; Div. Exs. 21A, 22-24, 27-29, 55-57. The $532,000 included profits in addition to 7% interest on the short-term $400,000 loan. Tr. 407. Abir's profit was to go toward the down payment on Moskowitz's house. Div. Ex. 17. Moskowitz did not need the entire $532,000 to meet the draw; after he made the final, $900,000 payment on the line of credit on August 9, his bank account from which the $900,000 was debited contained $104,357. Div. Exs. 56-57.
Subsequently Abir took back the amount he owed in income taxes on the profitable sale. Tr. 401; Div. Ex. 29. There was, and is, a running balance of money between Moskowitz and Abir. Tr. 179-81, 324-26, 401-03; Div. Ex. 29.
The shares were not pledged to Moskowitz as collateral for the loan. Tr. 321, 407; Div. Ex. 17. Abir had little else as a source of liquidity. Tr. 411. When Moskowitz called the loan Abir could have margined the stock, since the price had risen, or sold less than all of it; he chose to lock in the profit and sell the stock. Tr. 407.
D. Schedule 13D
Moskowitz understood that when an individual accumulates 5% of the stock in a company, he must file a Schedule 13D and make another filing if his holdings decrease below 5%. Tr. 328. Moskowitz filed a Schedule 13D on September 17, 1991, following the August 14 receipt of the second installment of warrants, stating that his interest was 6.3%.14 Div. Ex. 42. The filing also noted his wife's and son's interests. Div. Ex. 42. On March 6, 1992, he filed an amendment reflecting his February 6 sale of shares that reduced his interest below 5%. Div. Ex. 50.
During the June-July 1991 period of Abir stock ownership, the Abir stock added to Moskowitz's stock and warrants totaled more than 5%; the total decreased below 5% when the Abir stock was sold two months later. Moskowitz did not make Schedule 13D filings on these occurrences, nor did he disclose the Abir transactions on his September 1991 Schedule 13D filing because he believed he did not own the Abir stock, either directly or beneficially. Tr. 326; Div. Ex. 42. Had he known that he could have been considered the beneficial owner, he would have made the filings. Tr. 327. The fact that, on his September 1991 Schedule 13D, he disclosed his wife's interest and son's interest, for which he disclaimed beneficial ownership, lends support to the finding that he would have filed during the period of Abir ownership had he known he could have been considered the beneficial owner. There is no evidence in the record to show a motive for any delay in Moskowitz's disclosing his 5% ownership in Ferrofluidics. Moskowitz's only reason for owning Ferrofluidics or recommending it to Abir was as an investment. Tr. 309, 327-28.
Moskowitz has a general understanding of the reporting requirement, but relies on an attorney to assist him. Tr. 39, 328-30. At the time of the hearing, he believed that he was in compliance with Schedule 13D filing requirements. Tr. 330-31. He has, however, made late filings.15 Tr. 225-68; Div. Exs. 58-60, 63; Resp. Exs. 10, 13, 14. Official notice is taken of the Commission's Electronic Data, Gathering, Analysis, and Retrieval (EDGAR) system. A review of the EDGAR archives discloses that a significant minority of all Schedule 13D filings are days, weeks, and even months late.
III. CONCLUSIONS OF LAW
In this section, it is concluded that Respondent did not violate Section 13(d) of the Exchange Act and Rules 13d-1 and -2 thereunder. In the alternative, assuming arguendo that he did commit those violations, it is concluded that a cease and desist order, which the Division requests, should not be issued.
A. The Williams Act and Schedule 13D
Respondent was charged with violations under the Williams Act, as Sections 13(d) - (e) and 14(d) - (f) of the Exchange Act are known. The purpose of the Williams Act is to provide shareholders sufficient time and information about those planning takeover bids so as to make informed investment decisions. Sections 13(d) and 14(d), and the Commission's Rules thereunder, include disclosure requirements for those planning takeover bids. The Schedule 14D filing requirement is aimed at tender offers. The Schedule 13D filing requirement, at issue in this proceeding, is aimed at creeping acquisitions and open market or privately negotiated large block purchases. The purpose of Section 13(d) is to "`alert investors to potential changes in corporate control so that they [can] properly evaluate the company in which they had invested or were investing.'" United States v. Bilzerian, 926 F.2d 1285, 1297 (2d Cir. 1991) (quoting GAF Corp. v. Milstein, 453 F.2d 709, 720 (2d Cir. 1971)). The Commission has made clear that the duty to make Schedule 13D filings, however, is not dependent on any intention to gain control of the company but on a mechanical 5% ownership test. Oppenheimer & Co., 47 S.E.C. 286 (1980).
Respondent was charged with violating Exchange Act Section 13(d) and Rules 13d-1 and -2 thereunder by failing to make Schedule 13D filings that disclosed the Abir transactions.16 These provisions require a person who attains beneficial ownership of more than 5% of a corporation's stock to file a Schedule 13D within ten days. For any material change, including a decrease below 5%, he must file an amendment "promptly." Transactions in the security within the previous sixty days must be disclosed on the Schedule 13D. The theory on which Respondent was charged is that he was the beneficial owner of the Abir stock.17 There is no dispute that Respondent did not make Schedule 13D filings that disclosed the Abir shares; the issue is whether he was their beneficial owner.
Beneficial ownership is determined pursuant to Rule 13d-3, which provides:
(a) For the purposes of Section[ ] 13(d) . . . of the Act a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:
(1) Voting power which includes the power to vote, or to direct the voting of, such security; and/or;
(2) Investment power which includes the power to dispose, or to direct the disposition, of such security.
(Emphasis added). Additionally, Rule 13d-3(b) provides:
[a]ny person who . . . creates . . . [an] arrangement . . . with the purpose or effect of . . . preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) . . . of the Act shall be deemed for purposes of such section[ ] to be the beneficial owner of such security.
Scienter is not required to establish a violation of the reporting provisions of Section 13(d) of the Exchange Act. See SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978).
B. Respondent did not violate Exchange Act Section 13(d) and Rules 13d-1 and -2 thereunder .
1. Respondent did not have voting power or a scheme to evade reporting requirements.
Moskowitz did not have voting power over the shares. There is no evidence in the record to the contrary. Nor did he create the Abir stock ownership as part of a scheme to evade the reporting requirements of Section 13(d).18 There is no evidence in the record to support a finding that there was a scheme, or even suggesting a motive for a scheme. To the contrary, shortly after the period of Abir ownership, when Moskowitz's own ownership exceeded 5%, he disclosed it on Schedule 13D, and also disclosed the holdings of family members who lived in his household.
2. Respondent did not have investment power.
The evidence does not show that Moskowitz had or shared the power to dispose or direct the disposition of Abir's Ferrofluidics stock. Although there are facts that might tend to show that Abir shared investment power with Moskowitz, when other facts are considered, on balance it is concluded that Moskowitz did not have investment power over the Abir shares within the meaning of Rule 13d-3(a)(2). This conclusion is reached in light of available precedent and the purpose of the Williams Act.
There is no precedent that analyzes investment power in the case of a passive investor who loaned money to his son-in-law to make a passive investment. Indeed, there are no cases that hold a passive investor in violation of Schedule 13D requirements. Rather, the cases on investment power also include such factors as motives to conceal ownership or control purpose, or to commit fraud. See United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991) (defendant secretly accumulated stock through a nominee, misrepresented the source of funds used to purchase stock, and misrepresented a privately negotiated transaction as an open market transaction; misrepresentations concerning these acts on Schedule 13D violated 18 U.S.C. § 1001); SEC v. First City Fin. Corp., 890 F.2d 1215 (D.C. Cir. 1989) (secret accumulation of stock through nominee accounts over a period of six weeks before disclosure of stockholdings and intent to attempt hostile takeover of major corporation; corporation's buy back profited beneficial owner $15 million); Wellman v. Dickinson, 682 F.2d 355 (2d Cir. 1982) (corporate insider involved in takeover attempt failed to disclose he had joined takeover group); SEC v. Savoy Indus., Inc., 665 F.2d 1310 (D.C. Cir. 1981) (individual with a history of securities laws violations organized a takeover group to function at his direction; Schedule 13D did not disclose his role or control intent).19
The record does not show that Moskowitz required Abir to purchase Ferrofluidics stock or to sell the stock when he did. The record does not show that Abir was required to borrow money. Rather, if Abir chose to borrow money from Moskowitz, he could invest it only in an investment proposed by Moskowitz. If Abir did not agree with Moskowitz's proposal or did not want to borrow at all, there would have been no Abir investment in Ferrofluidics. By virtue of his education and experience, Abir was capable of evaluating the merits of investing in Ferrofluidics. Additionally, the timing and prices of the purchases and sales were in Abir's discretion.
At the time when Moskowitz called the loan, Abir did not have to sell the Ferrofluidics stock. He could have margined the stock because the price had risen. Alternatively, he could have sold less than all the stock to meet his obligation to repay $400,000 plus interest. Abir chose to lock in his profit by selling all the stock; pursuant to their agreement, all profits were to be applied toward Abir's down payment on Moskowitz's home. There is no evidence that Moskowitz required Abir to sell the stock. Indeed, since over $100,000 remained in the bank account from which Moskowitz's $900,000 loan payment was debited, Moskowitz did not need the full $532,000.
Concerning the family relationship, Abir maintained his own household while he was working for Moskowitz.20 He chose to work for Moskowitz, but he was qualified and able to obtain other employment as shown by his education and past and subsequent work experience.
The separate account, the trading authorization that did not come into effect, and Abir's notes of transactions in "Herb's Acct" show that Abir did not treat the loan from Moskowitz as his own money. He was concerned about the large size of the loan and maintaining his ability to repay it. These facts in themselves could show that Abir shared investment power with Moskowitz. However, in light of the other facts discussed above, on balance, it is concluded that Moskowitz did not have investment power within the meaning of Rule 13d-3. This conclusion is more compelling in light of the absence of precedent holding that conduct like Moskowitz's is violative and the absence of control purpose by Moskowitz.
C. In the alternative, assuming, arguendo, that Respondent violated Exchange Act Section 13(d) and Rules 13d-1 and -2 thereunder, a cease and desist order should not issue.
The Division requests a cease and desist order, the only sanction available in this proceeding, having argued that Respondent's failure to disclose the Abir transactions on Schedule 13D filings violated Exchange Act Section 13(d) and Rules 13d-1 and -2, thereunder. Assuming, arguendo, that Respondent did commit those violations, it is concluded that a cease and desist order should not issue.
Section 21C of the Exchange Act authorizes the Commission to issue a cease and desist order against a person who "is violating, has violated, or is about to violate" any provision of the Act or rules thereunder. Whether there is a reasonable likelihood of such violations in the future must be considered. The relevant factors to consider when assessing the likelihood of recurrent violation include "`whether a defendant's violation was isolated or part of a pattern, whether the violation was flagrant and deliberate or merely technical in nature, and whether the defendant's business will present opportunities to violate the law in the future.'" SEC v. Steadman, 967 F.2d 636, 648 (D.C. Cir. 1992) (quoting SEC v. First City Fin. Corp., 890 F.2d at 1228).
The failure to file involved one instance of stock that was purchased and sold within a two-month period by Respondent's son-in-law; thus his violations were isolated. In view of Respondent's state of mind -- that he would have made the appropriate filings had he known that he could be considered the beneficial owner of the Abir shares -- the violations were "merely technical" rather than "flagrant and deliberate." In light of Respondent's activities promoting start-up companies, his business will present opportunities to violate the law in the future. However, although Respondent has made late Schedule 13D filings concerning his holdings in these companies, there is no evidence in the record of a failure to disclose beneficial ownership of stock held by a nominee in any other Schedule 13D filing.
An additional factor is the distance in time of Respondent's nonreporting of the Abir transactions. The Commission commenced this proceeding more than six years after the transactions, and subsequently stayed it for another year so as not to adversely impact criminal prosecutions against defendants connected with Ferrofluidics.
The only arguably relevant precedent is Oppenheimer & Co., 47 S.E.C. 286 (1980), in which Oppenheimer, a broker-dealer, acquired from an institutional client more than 5% of a company's stock but did not file Schedule 13D until ten months later. Oppenheimer argued that it had no intention of seeking control of the company, that its failure was inadvertent, and that inadvertence cannot constitute willfulness. The Commission held, however, that the duty to file Schedule 13D was not dependent on any intention to gain control but on a mechanical 5% ownership test, and that Oppenheimer knew or should have known of that requirement. The Commission imposed the sanction of censure. Id. at 289. Censure, which is a milder sanction than a cease and desist order, is not available in this case.
IV. ULTIMATE CONCLUSIONS
No violation alleged in the OIP was proved. Additionally, assuming, arguendo, that Respondent did violate Section 13(d) reporting requirements in regard to the Abir transactions in 1991, no sanction should be imposed. Accordingly, the proceeding will be dismissed.
V. RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), it is certified that the record includes the items set forth in the record index issued by the Secretary of the Commission on February 18, 2000; and, additionally, the April 26, 2000, Order Correcting Transcript of Trial Testimony.
IT IS ORDERED that this administrative proceeding IS DISMISSED.
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 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.
Carol Fox Foelak
Administrative Law Judge
|1||The proceeding originally was styled Kedar Gupta, Alvan Chorney, and Herbert Moskowitz. Gupta's and Chorney's portions of the proceeding were settled. Kedar Gupta, 69 SEC Docket 2508 (May 20, 1999).|
|2||See the Commission's unpublished November 19, 1997, Order Granting Interim Stay and February 4, 1998, Order Postponing Proceedings, which ordered this proceeding "postponed until the disposition of United States v. Ronald Moskowitz, 97 Cr. 1122 (MBM), United States v. Jan R. Kirk, 97 Cr. [1032 (RWS)], and United States v. Jerome R. Allen, 97 Cr. 979 (DC)." The Commission was concerned that production to Respondents of the Division's investigation file and witness testimony would prejudice the prosecutions.|
|3||Citations to exhibits offered by the Division and Respondent and to the transcript of the hearing will be noted as "Div. Ex. __," "Resp. Ex. __," and "Tr. __," respectively.|
|4||See 5 U.S.C. § 557(c).|
|5||Neither the Commission nor any court of appeals has ruled on whether the Commission must find a likelihood of future violation to issue a cease and desist order. See Warren G. Trepp, Order Dismissing Proceedings, 70 SEC Docket 2037 (Sept. 24, 1999). The courts have, however, ruled that a likelihood of future violation is required when considering the cease and desist authority of other administrative agencies. See Citizens State Bank v. FDIC, 751 F.2d 209, 214-15 & n.9 (8th Cir. 1984); Borg-Warner Corp. v. FTC, 746 F.2d 108, 110-11 (2d Cir. 1984); NLRB v. Savin Bus. Machs. Corp., 649 F.2d 89, 93 (1st Cir. 1981); Precious Metal Assocs. v. CFTC, 620 F.2d 900, 912 (1st Cir. 1980). Cease and desist authority was added to the sanctions available to the Commission in administrative proceedings by the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. As noted in the House Report on the legislation, other federal agencies, for example, the Commodity Futures Trading Commission, Federal Trade Commission, National Labor Relations Board, and each of the federal bank regulatory agencies, are empowered to issue cease and desist orders; a cease and desist order was described as an administrative remedy comparable to an injunction. H.R. Rep. No. 101-16, at 23-24 (1990). A likelihood of future violation is required for an injunction. See United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953); SEC v. Steadman, 967 F.2d 636, 647-48 (D.C. Cir. 1992).|
|6||Ferrofluidics produces ferrofluids. Ferrofluids are magnetic fluids that sense and seal leaks in machinery, lubricate machine parts, and dampen noises in semiconductor and electronics equipment. The company was sold in 1999. Tr. 295-96; Ferrofluidics Agrees to Takeover by Japanese, N.Y. Times, Oct. 21, 1999, at C4; Ferrofluidics Sold to Japanese Company, Associated Press State & Local Wire, Oct. 21, 1999, at BC cycle Business News; Japanese Company to Buy Ferrofluidics, Boston Globe, Oct. 21, 1999, at C10; Spin-Off Firm Will Buy Nashua's Ferrofluidics, Union Leader (Manchester, N.H.), Oct. 21, 1999 at BIZ.|
|7||Ferrofluidics and a number of individuals faced federal criminal, civil, or administrative charges. Ronald Moskowitz was convicted of securities fraud and conspiracy in November 1998 and sentenced to eight years in prison on November 30, 1999. The wrongdoing included inflating Ferrofluidics' earnings in 1992, secret payments to obtain a favorable analyst's report, and false statements about the company's capital based on a sham $12 million private placement of Ferrofluidics stock. Financially pressed, he profited through selling stock through various family trusts for $14 million. See Executives Sentenced in Securities Fraud, N.Y. Times, Dec. 1, 1999, at C19; Ex-Ferrofluidics CEO Convicted of Fraud for Boosting Shares, Wall St. J., Nov. 27, 1998, at B5; Ferrofluidics Ex-CEO Gets Prison Sentence for Inflating Stock, Wall St. J., Dec. 1, 1999, at B7D. There is no fact, evidence, or allegation in this proceeding against Respondent Herbert Moskowitz involving him with the securities fraud and wrongdoing of his brother.|
|8||Respondent had purchased Ferrofluidics stock in an initial public offering and in the open market in the early 1980s and sold it after a few years. Tr. 41-46, 299-300.|
|9||Respondent sold the stock derived from the warrants in a private placement in February 1992 for approximately $1,129,500. Tr. 201, 208-14, 309-10; Div. Exs. 44-45, 47, 50. Payments on the loan, however, stopped when Respondent was still owed $500,000. Tr. 215. At his brother's request, Respondent had released his security interest in the collateral, in reliance on a history of timely payments, and was never able to collect the $500,000. Tr. 215.|
|10||One thousand of Moskowitz's shares were sold in August 1991. Div. Ex. 34. The record is unclear as to the disposition of the remaining 9,000 shares.|
|11||Moskowitz commenced building a new home, but eventually abandoned the effort and stayed in his existing home. Tr. 323-24.|
|12||Div. Ex. 30A is Abir's handwritten summary, entitled "Herb's Acct.," of his purchases and sales of Ferrofluidics in the Quick & Reilly account.|
|13||The Division suggests that Abir's purchases on limit orders were intended to prop up the price of the stock (despite the fact that he sold at a profit after a short holding period). This assumes that the broker-dealer would fail to give best execution and fraudulently fill Abir's order at the limit when the market price was lower. Further, there is no evidence in the record of a motive for either Abir or Moskowitz to overpay for the stock.|
|14||Among other criticisms of the filing, the Division takes issue with Moskowitz's identifying himself as a dentist, in response to Item 2. Moskowitz's answer was not untrue. In any event there is no dispute concerning his response to Item 4, "Purpose of Transaction," indicating that he had acquired the securities for investment purposes. Moskowitz was at all times a passive investor in Ferrofluidics.|
|15||An April 22, 1997, filing concerning Life Medical Sciences, Inc. had a November 29, 1996, Date of Event which Requires Filing; a March 24, 1999, filing had a February 19, 1998, Date of Event which Requires Filing. Div. Exs. 58, 59.|
|16||Subsequent to the events in question, the reporting requirements for a passive investor, such as Respondent, with a less than 20% holding, were relaxed. See Amendments to Beneficial Ownership Reporting Requirements, Final Rule, 66 SEC Docket 902 (Jan. 16, 1998). The effective date of the rule amendments was February 17, 1998.|
|17||The Division also argues that Moskowitz was part of a group, within the meaning of Rule 13d-5. This was not, however, alleged in the OIP.|
|18||The Division incorrectly argues that an arrangement designed to make it appear that beneficial ownership does not exist, in itself, violates the reporting requirements pursuant to Rule 13d-3. Such an arrangement violates the reporting requirements only if it is "part of a plan or scheme to evade the reporting requirements of section 13(d) or (g) of the [Exchange] Act."|
|19||It goes without saying, and the Commission has stressed many times, that settlements are not precedent. See, e.g., Richard J. Puccio, 52 S.E.C. 1041, 1045 (1996); See also Kelley ex. rel. Michigan Dep't of Natural Resources v. FERC, 96 F.3d 1482, 1490 (D.C. Cir. 1996) (settlements are not precedent). Even so, there are no Commission settlements that find violations in circumstances like this case; all settlements involving investment power in Schedule 13D filings also include such factors as fraud or concealment of control purpose. See, e.g., Texas Vanguard Oil Co., 66 SEC Docket 2319 (Mar. 16, 1998) (majority shareholder engaged in fraudulent price manipulation of stock and failed to amend Schedule 13D to disclose increase in holdings); Capital General Corp., 54 SEC Docket 1714 (July 23, 1993) (shares nominally owned by respondent's mother and children; respondent engaged in unregistered distributions, false statements, and fraud); Gabelli Group, Inc., 49 S.E.C. 895 (1988) (controlling shareholder of entity that bought 18% of target's stock failed to disclose control purpose); Harvey Katz, 47 S.E.C. 1044 (1984) (registered representatives acted as a group, failed to disclose control purpose).|
|20||The "pecuniary interest" version of beneficial ownership, in Section 16(a) of the Exchange Act, is broader and more inclusive than the Section 13(d) beneficial ownership at issue here. It provides a rebuttable presumption of such ownership in securities held by a person's immediate family members in the same household. See Exchange Act Section 16(a) and Rule 16a-1(a)(2)(ii)(A); Ownership Reports and Trading by Officers, Directors and Principal Stockholders, Notice of Proposed Rule Making, 42 SEC Docket 570, 574-77 (Dec. 13, 1988). The Commission has historically deemed a person to be the beneficial owner of securities held by immediate family members sharing the same residence. See Form BD, Adoption of Form Amendments, 51 SEC Docket 2728, 2730 n.25 (July 31, 1992).|
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