Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
RALPH W. LEBLANC
November 21, 2000
William P. Hicks, for the Division of Enforcement, Securities and Exchange Commission
Marshall H. Lichtenstein, for Respondent Ralph W. LeBlanc
Robert G. Mahony, Administrative Law Judge
The Securities and Exchange Commission (Commission) issued an Order Instituting Public Administrative Proceedings (OIP) pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 (Exchange Act) in this matter on September 30, 1999. The Division of Enforcement (Division) alleges that from 1992 through February 1996, Respondent Ralph W. LeBlanc (LeBlanc) participated in the offer and sale of Alpha Diversified Industries, Inc. (Alpha) common stock, and through that period LeBlanc was president and chairman of the board of directors of Alpha. The Division further alleges that at all relevant times, Alpha's common stock constituted a "penny stock" as defined by the Exchange Act and Rules promulgated thereunder. The Division further alleges that on September 10, 1997, the Commission commenced an action, SEC v. Alpha Diversified Industries, Inc., et. al., Civil Action No. 97-2814 "B" (E.D. La.), in the United States District Court for the Eastern District of Louisiana, and on March 26, 1999, the Court entered a judgment enjoining LeBlanc from future violations of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
A public hearing was held on March 21, 2000, in New Orleans, Louisiana, to determine whether a penny stock bar against LeBlanc was in the public interest pursuant to Section 15(b)(6) of the Exchange Act. The Division's evidence consists of five exhibits, and it called Respondent as a witness. Respondent introduced fifteen exhibits into evidence and called one witness.
II. PRELIMINARY MATTERS
Respondent filed a motion to dismiss this matter, dated March 14, 2000, arguing that as a matter of law, Section 15(b)(6) was not applicable to him because he had never been a broker, dealer, or associated person. Respondent argued that Section 15(b)(6), when read in conjunction with Section 15(b)(4), applies only to brokers, dealers, and associated persons. This argument is without merit. Section 15(b)(6)(A)(iii) authorizes the law judge to issue sanctions against "any person" participating in a penny stock offering, if such person has been enjoined from any action, conduct, or practice specified in Section 15(b)(4)(C). Section 15(b)(4)(C) pertains to those persons "enjoined . . . from engaging in or continuing any conduct or practice . . . in connection with the purchase or sale of any security." Therefore, Sections 15(b)(6)(A) and 15(b)(4)(C), on their face, do not restrict penny stock limitations to brokers, dealers, and associated persons. See Benjamin G. Sprecher, 52 S.E.C. 1296, 1299 n.16 (1997) ("[Respondent] is not . . . , either a registered person under Section 15(b) of the Exchange Act, or a person affiliated with a registrant. However, the Remedies Act amendment to Section 15(b) of the Exchange Act expanded this Commission's authority over persons, such as [Respondent], who participate in penny stock offerings.").
Respondent further argued that Congress intended the 1990 Amendments to Section 15(b)(6) to apply only to recidivist brokers, dealers, and associated persons, to prevent them from returning to the penny stock market in the guise of promoters and consultants. However, in light of the clear language of the statute, such an inquiry is not necessary. Reference to legislative history and the purposes of a statute is only appropriate if the plain text of the statute is ambiguous. See Novak v. Kasaks, 216 F.3d 300, 310 (2d Cir. 2000) (citing Dowling v. United States, 473 U.S. 207, 218 (1985)). Accordingly, Respondent's motion to dismiss this action is DENIED.
III. FINDINGS OF FACT
My findings and conclusions are based upon the record and my observation of the witnesses who testified at the hearing, the arguments and proposals of fact and law, and the relevant statutes and regulations. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). In establishing a factual predicate for my public interest determinations, I have given considerable weight to the Commission's allegations in its complaint in the injunctive action against Respondent. See Charles Phillip Elliot, 50 S.E.C. 1273, 1277 (1992) ("[T]he allegations in the complaint in an action settled by consent may, in a subsequent proceeding before us, be given considerable weight for purposes of assessing the public interest."), aff'd per curiam, 36 F.3d 86 (11th Cir. 1994); see also Samuel O. Forson, 65 SEC Docket 24, 25 (July 21, 1997) (holding that Respondent was estopped from contesting allegations in complaint in prior injunctive action settled by consent).
LeBlanc is fifty-nine years old, married, and has three children. (Tr. 15-16.)1 He received his undergraduate degree from Tuskegee Institute, and performed graduate studies in business at the University of New Orleans. (Tr. 16-17.) Alpha is a Colorado corporation with its principal office in Metairie, Louisiana. (Div. Ex. 1 at 4.) Respondent controls Alpha, and has been employed as president and CEO of Alpha, since 1991. (Tr. 7.) His main endeavor has been the development, manufacture, and sale of fuel efficient oil filters for vehicles and equipment. (Tr. 20, 28-30.)
During the relevant period, Respondent offered and sold approximately six or seven million shares of Alpha common stock at prices ranging from $.02-$1.00, and raised approximately $577,000 from eighty investors. (Tr. 7-8; Div. Ex. 1 at 1, 5-6.) Respondent's involvement in Alpha stock sales activity included drafting solicitation letters, appearing in promotional videos, and making personal sales. (Tr. 8-9; Div. Ex. 1 at 5-6.) In making these sales, Respondent utilized an August 1, 1993 private placement memorandum, as well as numerous other documents and a promotional videotape, that contained fraudulent misrepresentations including: 1) the solicitation and sale of a block of Alpha common stock was approved under federal and state law; 2) Respondent and his wife had personally contributed $62,000 to Alpha; 3) Respondent and his wife had personally contributed $85,000 to Alpha; 4) "insiders" had contributed almost $430,000 to Alpha; 5) Alpha's goal was to have its stock publicly trading at $5.00 to $20.00 a share within two to three years; and 6) a block of Alpha Stock, ostensibly representing unexercised options by consultants and employees, offered at $.25 a share was worth $1.00 a share in the marketplace. (Div. Ex. 1 at 6-12.) These materials also contained gross exaggerations of the level of public interest and sales of Alpha common stock. (Div. Ex. 1 at 6-12.) Pursuant to the sales of Alpha stock, Respondent also represented to potential investors Alpha was having conferences with several government agencies, and that it was at the cusp of making significant sales. (Tr. 40-41.)
Alpha stock has never been registered or approved for registration on any exchange and no transaction reporting plan was filed with the Commission regarding Alpha stock. (Tr. 9.) Alpha stock also has never been authorized for quotation in the National Association of Securities Dealers' Automated Quotation System (NASDAQ). (Tr. 9.) During the relevant period, sales of Alpha's oil filters were minimal. Most of Alpha's gross receipts were derived from sales of its common stock, intercompany transfers, and loans. (Div. Ex. 1 at 12.) Respondent explained that his sales were hampered by the ensuing Commission investigation. (Tr. 41.)
On September 10, 1997, the Commission filed an injunctive action (Injunctive Action) against Respondent in the United States District Court for the Eastern District of Louisiana. SEC v. Alpha Diversified Indus., Inc., Civil Action No. 97-2814 "B" (E.D. La.). (Div. Ex. 1.) On March 26, 1999, the court entered a consent judgment against Respondent, enjoining him from future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. (Div. Exs. 2,3.) Prior to the Injunctive Action, Respondent had never been charged by any governmental entity with any crime or securities law violation. (Tr. 23.)
Respondent LeBlanc continued to sell Alpha stock after the Injunctive Action was filed, and continued sales after the injunction was issued. (Tr. 9.) Respondent made sales to fifteen persons, most of whom were existing shareholders. (Tr. 10-11.)
Respondent testified that he formed Alpha, because after having worked on oil filter technology for fifteen years, he felt that he had a marketable product. (Tr. 20.) Respondent further testified that from the time he formed Alpha, to when the Injunctive Action was filed, Respondent spent at least $150,000 in legal and accounting fees to insure that his actions were in compliance with the law. (Tr. 20-21.) Despite Respondent's access to securities counsel for the preparation of the private placement memorandum, Respondent sent additional correspondence to investors without showing it to his attorney. (Tr. 21-22, 43.) Respondent testified that he engaged in this behavior out of ignorance and until the Injunctive Action was filed, he believed that his activities were in full compliance with the securities laws. (Tr. 21, 43.) Respondent further testified that the Commission investigation and resulting Injunctive Action had interfered with his business. (Tr. 25, 35, 41.) Respondent claimed to have learned from his experience, and undertook to remain fully compliant with the securities laws in the future. (Tr. 35-36.) Respondent explained that his prior securities law violations stemmed from his lack of understanding of the registration process. (Tr. 47.) According to Respondent, investors could not understand the private placement memorandum and requested that he prepare executive summaries for them. (Tr. 48.)
If allowed to do so, Respondent intends to solicit further investment in Alpha pursuant to Regulation D. Respondent has retained the legal services of Christopher Moran, formerly a staff attorney at the Commission's Atlanta District Office, and testified that he intends to pay scrupulous attention to Mr. Moran's instructions as to how to remain in compliance with the law. (Tr. 27-28; Resp. Exs. 15, 16.)
Alpha has immediate capital needs to further advance sales and purchase inventory. (Tr. 24.) Alpha contracts the manufacture of its oil filter products to several manufacturing companies, and these companies require an advance cash deposit to fill orders. (Tr. 24-26, 45-46; Resp. Ex. 14.) Alpha also needs additional funds to hire installers, because Respondent can no longer install the products himself due to physical disability. (Tr. 26.) Respondent attempted to get a bank loan, but was rejected because the bank viewed Alpha as a "start-up" and because Alpha's level of sales would not justify a loan. (Tr. 26-27.)
Alpha's oil filters come in different sizes, ranging from four inches in diameter and six inches in length, to eight inches in diameter and thirty-six inches in length. (Tr. 28-29.) Oil filter prices range from $135 to $5,500. (Tr. 29.) Alpha has focused on marketing its product to the commercial and industrial market. (Tr. 30.) Gross sales in Alpha's products for 1999, were $62,861.96, a significant improvement from 1998. (Tr. 30-31; Resp. Exs. 2-12.) Respondent testified that he has received indications of interest from the U.S. government, and the U.S. Navy in his product. (Tr. 30.) He estimated sales of between $250,000 and $300,000 in 2000. (Tr. 46.) Respondent further testified that Texaco has expressed an interest in his product, and that Texaco estimates millions of dollars in sales. (Tr. 46.)
Jessie J. Riggins, III, testified on behalf of Respondent and affirmed Texaco's interest in Alpha's product. Mr. Riggins has been employed with Texaco for twenty-four years, and is currently a reliability engineer and coordinator for the Louisiana South region. (Tr. 49.) Mr. Riggins testified that Texaco originally accepted two test units of Alpha's products, and after positive test results were obtained, purchased two units in 1999, and an additional six units in 2000. (Tr. 50-54; Resp. Exs. 3, 12, 13.) Mr. Riggins further testified that Respondent would be giving a presentation of his product to 150 to 200 Texaco mechanics in the near future. (Tr. 54-55.)
IV. CONCLUSIONS OF LAW
Under Section 15(b)(6)(A)(iii) of the Exchange Act the Commission may, with respect to "any person participating, or, at the time of the alleged misconduct, who was participating, in an offering of any penny stock," censure, place limitations on, suspend for up to twelve months, or bar from participating in an offering of penny stock, if the Commission finds that such sanction is in the public interest and that such person is enjoined from any action, conduct, or practice specified in Section 15(b)(4)(C). As here relevant, Section 15(b)(4)(C) covers activity in connection with the purchase or sale of any security.
The record shows that on March 26, 1999, Respondent was enjoined by a court of competent jurisdiction from future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in connection with the purchase and sale of Alpha stock. During the relevant period, Respondent controlled Alpha, and engaged in activities designed to further the sales of Alpha stock.
Respondent conceded that Alpha stock constituted "penny stock" as defined by the Exchange Act and rules thereunder. (Resp. Answer at 4.) Section 3(51) of the Exchange Act, and Rule 3a51-1 thereunder, generally define a "penny stock" as "any equity security," with certain enumerated exceptions. Excepted securities include securities registered on a national securities exchange; securities authorized for quotation in NASDAQ; and/or securities priced at $5 or more per share. See 17 C.F.R. § 240.3a51-1(d)-(f). Alpha stock has never been registered on any exchange or on NASDAQ, and for the relevant period sold at prices ranging from $.02-$1.00. I therefore conclude that Alpha stock was "penny stock" for purposes of Section 15(b)(6)(A)(iii).
The only remaining question is whether sanctions against Respondent are in the public interest. The Division seeks a permanent penny stock bar against Respondent. Relevant considerations in making the public interest determination are:
the egregiousness of the Respondents' actions; the isolated or recurrent nature of the infraction; the degree of scienter involved; the sincerity of the Respondents' assurances against future violations; the Respondents' recognition of the wrongful nature of their conduct; and the likelihood that Respondents' occupations will present opportunities for future violations.
See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (citation omitted). The severity of a sanction depends on the facts of the particular case and the value of the sanction in preventing a recurrence. See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970). Sanctions should demonstrate to the particular respondent, the industry, and the public generally that egregious conduct will merit a harsh response. See Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976).
Respondent's misrepresentations in the private placement memorandum, promotional videotape, and other documents, were numerous and egregious. Respondent misrepresented the value of the shares, projected future share valuations totally out of line with reality, and lied about capital contributions by himself and other "insiders." Respondent also grossly exaggerated the success and sales prospects of Alpha in order to induce investment. The nature of the misrepresentations indicates a high level of scienter. Although Respondent testified that he recognized that he had violated the securities laws, and undertook to never do so again, he failed to recognize the extent of his wrongdoing. He characterized his prior violations as inadvertent, and faulted the Commission's decision to investigate these violations and bring an injunctive action against him as interfering with the success of his business. He testified that he has hired competent legal counsel and will carefully follow counsel's instructions in conformance with the law. However, he also had legal counsel in his prior offerings, and still chose to solicit investors with promotional materials that he never showed to his lawyer. Respondent has continued to solicit investment in his company subsequent to the injunction, and intends to continue doing so. Based on the above considerations, I conclude that a permanent bar from penny stock offerings is in the public interest.
V. RECORD CERTIFICATION
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 September 6, 2000.
Based on the findings and conclusions set forth above, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, I ORDER that Respondent Ralph W. LeBlanc be hereby barred from participating in an offering of penny stock.
This initial decision 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.
Robert G. Mahony
Administrative Law Judge
1 "(Tr. ___.)" refers to the transcript of the hearing. I will refer to the Division's exhibits as "(Div. Ex. ___.)" and Respondent's exhibits as "(Resp. Ex. ___.)."http://www.sec.gov/litigation/aljdec/id174rgm.htm
|Home | Previous Page||