Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
September 5, 2001
|APPEARANCES:|| Stephen J. Crimmins, Gina M. Brown, and Christopher M. Cutler for the Division of Enforcement, Securities and Exchange Commission
H. Thomas Fehn for Respondent Robert Thomas Clawson
|BEFORE:||Robert G. Mahony, Administrative Law Judge|
The Securities and Exchange Commission (Commission) instituted this proceeding by an Order Instituting Proceedings (OIP) on December 23, 1996, pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act).
The OIP alleges that from on or about September 1, 1991, until about December 1996, Respondents John L. Banach, formerly known as J. Leo Lawson (Banach), Robert Clawson (Clawson or Respondent), Trent Gribben (Gribben), Tariq Khan (Khan), Terry Lewis (Lewis), Troy Mikulka (Mikulka), Reagan Richmond (Richmond), Randle Villa (Villa), Kevin Woodbridge (Woodbridge), Woodbridge & Associates (Associates), and 381143 Alberta Ltd. (Alberta Ltd.) willfully violated Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder (collectively referred to as the antifraud provisions).1 Only Respondent Clawson remains in this proceeding.
The OIP alleges that, at all relevant times, Banach was the president and chief executive officer of Enrotek Ltd. (Enrotek), a Nevada corporation with offices in Irvine, California and Calgary, Alberta, Canada. Its common stock, the sale of which is the subject of this proceeding, was traded in the over-the-counter markets, including the NASD OTC Bulletin Board. Alberta Ltd. was a Canadian corporation owned and controlled by Banach.
Associates was a California corporation engaged in public relations, investor relations, and financing services for publicly-held companies, including Enrotek. Woodbridge was the president, chief executive officer, and majority shareholder of Associates. Mikulka was a minority shareholder, and a registered representative. The other Respondents, including Clawson, were registered representatives or the functional equivalent at various broker-dealers.
The OIP alleges that Clawson willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder when he participated in the scheme to sell Enrotek securities to clients in return for undisclosed payments of money made or arranged by other Respondents. The Division of Enforcement (Division) requests that Clawson be (1) barred from participating in penny stock offerings and from associating with any broker or dealer; (2) directed to account for and disgorge the fruits of any ill-gotten gains; (3) directed to pay prejudgment interest; and (4) directed to pay a third-tier civil monetary penalty of $100,000.
Clawson argues that the only issue to be decided is whether he received undisclosed payments for recommending Enrotek stock to his clients. He acknowledges that a broker is obligated to disclose the receipt of such payments, but posits that this obligation only arises after a payment has been received. Therefore, Clawson argues that he was not obligated to make such a disclosure because he never received an undisclosed payment during the course of recommending the Enrotek stock to his clientele.
A hearing was held in Los Angeles, California, on February 12, 2001. The Division filed its Post Hearing Brief and Proposed Findings of Fact and Conclusions of Law on April 18, 2001. Clawson filed his Post Hearing Submission on June 5, 2001. The Division filed its Reply on June 20, 2001.2
II. SUMMARY OF THE EVIDENCE
Enrotek and Payments to Brokers
In 1991, Enrotek was a newly formed corporation that engaged in the development, construction, and marketing of real estate properties in Europe and North America. (Div. Ex. 9.) Throughout the latter portion of 1991, Enrotek started purchasing undeveloped property in Portugal. (Div. Ex. 6.)
On September 25, 1991, Banach and Woodbridge entered into a service agreement whereby Woodbridge, for a period of one year, agreed to create a demand and maintain a market for Enrotek's stock, to raise the price to $5.00 per share, and increase the company's shareholder base to a minimum of 250 shareholders.3 Banach wanted to increase the number of Enrotek shareholders to qualify the company for listing on the NASDAQ. The agreement also required Woodbridge to increase the number of Enrotek shares traded to at least 50,000 a month to help enhance the stock's attractiveness to institutional investors. (Tr. 23; Div. Ex. 3.)
During the course of fulfilling the service agreement, Woodbridge introduced Banach to Dennis Williams (Williams), a former broker who was barred from the securities industry. (Tr. 24, 100.) After Williams and Banach had developed a relationship, Williams paid Woodbridge a finder's fee of $15,000 for introducing him to Banach. (Tr. 67-69.) Williams stated that he had contacts in the investment banking industry and he could arrange to have market makers sell Enrotek to help create buying interest for the stock.4 (Tr. 24.) Based on these representations, Williams received 300,000 shares of Enrotek stock to maintain a market and to pay brokers for recommending it to their retail clients, as well as payment for his services. (Tr. 87.)
To facilitate their agreement, Williams and Banach each created an account with a New York brokerage firm, Russo Securities (Russo). The Williams account, Western Wildcatters, was created with his 300,000 shares of Enrotek. Likewise, Banach's account, Alberta Ltd., was also established with 300,000 shares. It was Williams's and Banach's intent to use these shares to fill purchase orders presented to them by brokers who purchased the stock for their clients. Thereafter, whenever a sale was made in Enrotek, Russo was instructed to fill the order using shares from both of these accounts. Thus, for every share of Enrotek sold from the Banach account, one share was sold from the Williams account. (Tr. 87-88.)
Williams testified that if, for example, he received a buy order for 10,000 shares of Enrotek stock from one of his brokers, he took the order to Jay Nance (Nance), the office manager at First American Biltmore Securities (FABS), who assisted Williams in placing his trades. Nance passed the buy order to a trader at FABS who, in turn, directed the buy order to a trader at Russo. The order was then filled by selling 5,000 shares from each account. Williams and Banach each received fifty percent of the proceeds from every sale of Enrotek stock. (Tr. 87-88.)
However, to perpetuate this arrangement Williams needed to find buyers. Since Williams was barred from the securities industry, he could not directly solicit sales from investors. (Tr. 100, 110.) Instead, working as a consultant, he worked with brokers throughout the country to sell Enrotek to their retail clients. (Tr. 92.) Brokers from the California offices of FABS and Cruttenden Roth Incorporated (Cruttenden) were primarily involved in this nationwide sales effort. (Tr. 89.) Through previous stock promotions, Williams and Woodbridge established a history of paying brokers on time for securities that they recommended to their clients. Thus, they were able to solicit brokers to sell Enrotek. (Tr. 122.)
Whenever a broker executed a trade, Williams and Nance determined whom to pay. If the transaction was by a FABS broker, Nance reviewed the trade blotters to see who traded Enrotek, and at what quantities. If someone other than a FABS broker transacted in Enrotek, they could call Russo to determine what trades had been executed and by whom. If an outside broker was to be paid, he had to send a copy of the trade confirmation to verify that he bought the stock for his customer. (Tr. 90-91.)
After the trade was executed and the settlement date had passed, Williams, or Woodbridge on his behalf, took the revenue generated from the trade and paid cash to those brokers who had recommended Enrotek to their clients. Williams's agreement with these brokers was that they would receive twenty-five percent of the amount invested by their clients in addition to the broker's commission. Williams also retained fifty percent of the revenues in his account at Russo in order to maintain a fair and orderly market and to assure liquidity for Enrotek. After Williams subtracted the revenues used to pay the brokers and maintain liquidity, he retained the remaining twenty-five percent to pay for expenses incurred while marketing the securities, and to compensate himself and Nance for their efforts in the promotion. (Tr. 89-91.)
According to Woodbridge, in December 1991 the arrangement between Williams and Banach "ran out." (Tr. 26, 43-44.) Because Williams stopped generating support for the Enrotek stock, the payments to brokers ceased and the price started to deflate. This meant Banach needed additional buyers to support Enrotek's stock price. (Tr. 26.)
To do this, during the first half of January 1992, Banach arranged for Woodbridge to resume paying brokers in the California offices of FABS and Cruttenden at the rate of $0.40 cents per share for their clients' purchases of Enrotek.5 (Tr. 26-27, 65.) Thereafter, Woodbridge collected purchase tickets from brokers in these offices so he could confirm that they had purchased Enrotek for their clients. Woodbridge sent the trade confirmations via facsimile to Banach who then sent cashier's checks to Woodbridge so he could pay the brokers. To make the payments, Woodbridge used combinations of cash, cashier's checks, and money orders. (Tr. 27-28.) Ultimately, Banach sent Woodbridge three or four cashier's checks totaling $100,000 to $110,000 for payments to brokers. During the first half of 1992, Banach's money ran out and Woodbridge stopped making payments to brokers. (Tr. 53-55.) Woodbridge testified that he paid Richmond, Khan, and Clawson, who worked at Cruttenden; and Lewis, Gribben, and Mikulka, who worked for FABS, for selling Enrotek. (Tr. 28.)
Specifically, Woodbridge testified that Clawson accepted payments from him late in 1991, and early in 1992. (Tr. 28, 80-81.) The first payment occurred when Woodbridge, Clawson, Khan, and Richmond drove to a bank with a cashier's check from Banach. This check totaled about $25,000 or $30,000, and was issued to compensate Clawson, Khan, and Richmond for their efforts in steering their clients into purchasing Enrotek stock. (Tr. 29, 62.) Woodbridge cashed this check and used the proceeds to issue several other cashier's checks to pay these brokers.6 (Tr. 63.)
As a result of this distribution, Woodbridge testified that Clawson received a cashier's check for about $10,000 to $15,000, and that Khan received a cashier's check totaling between $10,000 and $12,000.7 (Tr. 63.) Woodbridge also testified that he paid Clawson $10,000 in cash when Clawson visited Woodbridge at his firm, Associates. His total payments to Clawson were $20,000 to $25,000. (Tr. 29.)
Richmond, however, contradicted Woodbridge as to both the form of payment made by Woodbridge and the brokers to whom Woodbridge made payments. Specifically, Richmond testified that while he was at the bank, he witnessed Woodbridge pay Clawson and Khan in cash and that he was not the recipient of any of those payments. Richmond also stated that he was aware of Clawson's receipt of payments from Mikulka, who was Woodbridge's partner, on three occasions at the FABS office for selling Enrotek.8 (Tr. 134.)
Williams testified that although Clawson was usually paid by Woodbridge, he made two payments to Clawson totaling $20,000; a cash payment of $5,000, and a cashier's check for $15,000 in December 1991.9 (Tr. 91-92, 112.) The cashier's check was issued to compensate Clawson for generating $60,000 worth of total sales, or approximately 30,000 shares of Enrotek stock at about $2.00 per share. (Tr. 112-13.)
In 1987, Clawson accepted his first job in the securities industry at Stuart James.10 He and Woodbridge were both hired by Stuart James on the same day and interacted on a daily basis. In 1991, after moving to Cruttenden, Woodbridge helped Clawson leave Stuart James for employment at Cruttenden. One month later, Woodbridge left Cruttenden to start his own firm, Associates. (Tr. 175-79.)
Clawson was a registered representative at Cruttenden while Williams and Woodbridge were paying Cruttenden brokers to recommend Enrotek to their clients. (Tr. 28, 181-82; Div. Ex. 19.) He met Williams through an introduction by Woodbridge when he visited Woodbridge's office, which was located across the hall from the FABS office. (Tr. 24, 84-86, 179.)
Clawson traded Enrotek securities from January 8, 1992, through April 1992. (Tr. 149-50; Div. Ex. 19.) Clawson testified that he sold between 60,000 and 70,000 shares of Enrotek to about ten of his retail customers. (Tr. 182.) At this point in time, these sales marked the only time that Clawson solicited clients to purchase a pink sheet stock, which he acknowledged is at the lowest level in the hierarchy of stock trading. (Tr. 182-84.) Enrotek stock began to trade on November 7, 1991, in the pink sheets and closed the day at $1.125 per share. (Div. Ex. 32.)
Prior to March 1992, Cruttenden instructed its brokers that they were no longer allowed to buy Enrotek for their clients. (Tr. 185.) Thereafter, Cruttenden's brokers took their Enrotek trades to Woodbridge who redirected them to FABS for execution. (Tr. 109-10, 135.)
John Campos (Campos) testified as a witness for the Division. He became a client of Clawson through a "cold call" in 1990. At that time Clawson was working at Stuart James. Subsequently, Clawson moved to Cruttenden and Campos agreed to transfer his account so that he and Clawson could continue to do business. In January 1992, Clawson told Campos that Enrotek was a stock that he was involved with, and that he was "very closely associated with the company." Campos then bought 10,000 shares at $2.82 per share in an account for his wife and mother-in-law. (Tr. 142-44, 161.) In early March, although a broker at Cruttenden, Clawson opened an account at FABS for Campos so he could purchase an additional 10,000 shares of Enrotek at $2.00 to 2.25 per share. Clawson told Campos that he would get a better execution price for him at FABS due to the size of Campos's 10,000-share purchase. Clawson persuaded Campos to purchase these additional shares to "cost average down" the losses that he was encountering based on his first purchase of the stock in his wife's and mother-in-law's account at Cruttenden. (Tr. 145-46, 155.) Mikulka was listed as the broker on the FABS account. (Tr. 155.) Clawson also told Campos that the stock had tremendous potential, that he owned Enrotek stock in his own account, and that he expected the stock to go up as high as $18.00 per share within a short time. (Tr. 143, 148-49, 154.)
Near the end of March, Clawson told Campos that the stock had "momentum" and that he would take Campos "north of $6.00." Clawson told Campos that he had met the Enrotek officers in Canada and that he was "in close contact with the company and knew the insiders." Campos subsequently purchased another 5,000 shares at $3.63 per share. By the end of March 1992, Campos had purchased a total of 25,000 Enrotek shares. Because it was a penny stock, and Campos had nowhere to go to get pricing information, the purchases were based upon Clawson's recommendations. (Tr. 144, 149-50.)
On April 1, 1992, the price of Enrotek stock went down and Clawson again recommended that Campos purchase more shares of the stock to "average down" the price of his previous purchases. Campos then purchased an additional 10,000 shares of Enrotek stock in blocks of 6,000 and 4,000 at $2.37 per share in the FABS account. Clawson said he would start "peeling off" Campos's shares when the price reached $6.00 per share. Ultimately, Campos owned 35,000 shares worth about $93,000. (Tr. 152.)
Subsequent to this purchase, Campos was concerned about the price of the stock and he flew to California to find out what was going on with Enrotek. On this trip, he met Clawson in person for the first time. (Tr. 151.) When they met, Clawson tried to calm Campos down and convince him that he had no reason to worry. At this time, Campos also met Woodbridge and Mikulka. (Tr. 151.) They also told him that some news was coming out very soon and the stock would go above $6.00 per share. Whenever he wanted to sell, Clawson would dissuade him and convince him to hold on because Clawson believed that he would make a sizeable profit. Although he was the FABS broker on the account, Campos never worked with Mikulka or instructed him to sell any of the Enrotek shares in his FABS account. (Tr. 154-55.) Instead, all of Campos's dealings were with Clawson because Clawson was controlling the stock. However, the stock never got above the $3.00 to 4.00 per share price range. (Tr. 152, 162-63.)
Another investor, Anthony Micari (Micari), testified as a witness for the Division. Micari opened an account at Cruttenden in 1990 or 1991. Clawson was assigned as his account representative. (Tr. 165.) In January 1992, Micari purchased 25,000 shares of Enrotek through Clawson. Clawson told him about a land deal that Enrotek had entered into in Portugal and that the transaction was a "no lose situation." It was the "deal of the century." The price was going to go "through the roof." On three of four occasions when Micari wanted to sell, Clawson would dissuade him. However, in March 1992, Micari sold 5,000 shares of the 25,000-share block that was up for sale and made a small profit. On other occasions, Clawson told him there were no buyers and that if he tried to sell, he would get nothing for his stock. Micari lost $54,500 on his Enrotek investment. He described himself as a fairly experienced investor, and that he was aware that this was a speculative investment. (Tr. 167-170.)
In April 1992, Clawson, along with Khan and Richmond, visited Enrotek's facilities in Canada. (Resp. Brief at 5.) Once there, Clawson toured Enrotek's facilities and spoke with Banach. During this conversation, Banach informed Clawson that he had authorized Woodbridge to pay brokers for selling Enrotek stock to their clients. Based on this conversation, Clawson understood Banach's statement to be an invitation for Clawson to receive payments for recommending Enrotek stock to his clients. (Tr. 186-87.)
Upon his return to the United States, Clawson mailed Banach a bill requesting payment for the Enrotek stock that he had sold to his clients. (Tr. 187-88.) However, while Clawson admits that he submitted this bill to Banach, he denies having received any monies from Banach, Woodbridge, Williams, or Mikulka. Furthermore, Clawson testified that Enrotek's policy of paying cash for brokers to steer their clients into Enrotek stock had changed, and that the company was instead offering restricted securities to those brokers who continued to sell Enrotek stock to their clients. Again, Clawson contends that he refused to accept the restricted stock because he realized that it was unlawful to accept such payments. (Tr. 190-91.)
III. FINDINGS OF FACT AND CONCLUSIONS OF LAW
The findings and conclusions are based on the evidence, my observation of the witnesses, all arguments and proposals of fact, as well as the pleadings, relevant statutes, regulations, and case law. The applicable standard of proof is preponderance of the evidence. See Steadman v. SEC, 450 U.S. 91 (1981).
Section 17(a) of the Securities Act prohibits using the mails or instruments of interstate commerce in the offer or sale of securities to (1) employ any device, scheme, or artifice to defraud; (2) use false statements or omissions of material fact to obtain money or property; or (3) engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser of securities.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security to (1) employ any device, scheme, or artifice to defraud; (2) make any untrue statement or omission of a material fact; or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Materiality is a mixed question of law and fact and depends on the circumstances at the time of the alleged misstatement. See Ganino v. Citizens Utils. Co., 228 F.3d 154, 162, 165 (2d Cir. 2000). The test for materiality is whether there is a substantial likelihood that a reasonable investor would consider the information important to the investment decision, and would view it as having significantly altered the total mix of available information. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Thus, claims may not be dismissed for lack of materiality unless the issues are "so obviously unimportant http://web2.westlaw.com/result/result.wl?
RLT=CLID%5FQRYRLT3542266&RLTDB=CLID%5 [Webmaster's Note: URL is a single unbroken line.] to a reasonable investor that reasonable minds could not differ on the question of their importance." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985).
The Division contends that Clawson acted in furtherance of the scheme because he allegedly received undisclosed payments for recommending Enrotek stock. A person who recommends a stock must disclose if he will gain financially from the sale above and beyond the normal compensation charged for his advice. See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 188, 200-01 (1963).
Clawson's Alleged Receipt of Payments
Woodbridge, Richmond, and Williams testified that Clawson received extra payments that were in addition to those commissions charged to his customers in exchange for his efforts in recommending Enrotek stock to his clients. Each of these witnesses has been convicted for engaging in essentially the same conduct for which Clawson is charged, and have agreed to cooperate with the Division.
Woodbridge testified that Clawson accepted payments from him on two occasions. (Tr. 28, 80-81.) One payment was made at a bank by cashier's check; the other was in cash. Neither this check, nor those Woodbridge supposedly gave to Khan and Richmond were introduced into evidence. (Tr. 63.) Woodbridge also testified that he gave the Division a list of people to whom he had made payments. That list was not produced, and this testimony was not rebutted. (Tr. 71-72.)
Richmond's testimony about the same occasion is inconsistent with Woodbridge's. Specifically, Richmond testified that while he was at the bank, he witnessed Woodbridge pay Clawson and Khan in cash and that he was not the recipient of any of those payments. (Tr. 133-34.) This testimony contradicts Woodbridge as to both the form of payment made by Woodbridge and the brokers to whom Woodbridge made payments. (Tr. 134.)
Williams testified that he paid Clawson on several occasions when Clawson visited his office. (Tr. 91-92.) In December 1991, he made two payments to Clawson totaling $20,000. One was a $5,000 cash payment and the second was a $15,000 check. (Tr. 112.) The $15,000 check was to compensate Clawson for selling 30,000 shares of Enrotek stock that was valued at about $60,000. (Tr. 112-13.) While the Division did submit a copy of a $15,000 check that purported to have been issued by Williams to Clawson in December 1991, there is no credible evidence that this check was cashed by Clawson. Although Clawson was the payee, Williams's driver's license number is written on the back of the check, and there is no legible endorsement by Clawson. (Tr. 116; Div. Ex. 2.)
I do not credit the testimony of Woodbridge, Richmond, or Williams to establish that Clawson received undisclosed payments as alleged. Woodbridge and Richmond were inconsistent in describing the purported payments at the bank, and their testimony that they paid Clawson for promoting Enrotek stock is accorded no weight. Further, the check does not establish that Clawson received anything, and I accord it no weight.
I conclude that the Division did not offer any persuasive evidence that Clawson received payments for having his customers purchase Enrotek stock. Because this matter was under investigation by the Division and the U. S. Attorney for an extended period, the Division should have been able to obtain some type of documentary evidence to establish that Clawson received payments.
However, this conclusion does not end the inquiry. The issue to be decided is whether, taken as a whole, the preponderance of the evidence establishes that Clawson participated in a scheme to defraud in violation of the antifraud provisions. The Division is not required to prove that he actually received monies or a benefit to be found in violation of the antifraud provisions. See Dirks v. SEC, 463 U.S. 646, 664 (1983).
The Securities Act, the Exchange Act and the rules promulgated thereunder, were enacted for one fundamental purpose, "to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." Capital Gains Research Bureau, Inc., 375 U.S. at 186. In applying these standards it is important to know that the antifraud provisions were intended to be construed "not technically and restrictively, but flexibly to effectuate [their] . . . remedial purposes." Id. at 195.
To find Clawson guilty of violating Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Division must prove that Clawson acted with scienter. See Aaron v. SEC, 446 U.S. 680, 697 (1980). The Supreme Court has defined scienter as "a mental state embracing [an] intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The scienter requirement may also be met by showing that the Respondent acted recklessly, defined as "an extreme departure from the standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977); see also Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990); Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982).
Clawson's activities must be analyzed in the context of his close associations with Woodbridge, Mikulka, and Williams, as well as all of the circumstances surrounding the marketing of Enrotek stock from November 1991 to April 1992.
Clawson testified that he sold between 60,000 and 70,000 shares of Enrotek stock to about ten retail customers. Enrotek was the only pink sheet stock he ever sold. Clawson knew that such stocks are at the bottom of the stock trading hierarchy and are highly speculative investments.11 (Tr. 182-84.) During the course of recommending these purchases, Clawson told his clients that the stock had tremendous potential, that he owned Enrotek stock in his own account, and that he expected the stock to go up as high as $18.00 a share within a short time. (Tr. 143, 148-49, 154.) According to Micari, Clawson's exact words were "25,000 shares is the play. This is like the deal of the century." (Tr. 166-67.)
Moreover, he pressed his clients to purchase more shares of Enrotek stock because the stock had "momentum" and would take them "north of $6.00." In addition, when Campos and Micari wanted to sell, Clawson told them to not only hold their positions, but to increase them because he was "in close contact with the company and knew the insiders." (Tr. 149, 150.) Discouraging sales in order to keep large supplies of a security off the market is a classic badge of fraud in a market manipulation scheme. See Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1984). It is well established that a basic aim of the antifraud provisions of the securities laws is to "prevent rigging of the market and to permit operation of the natural law of supply and demand." SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1466 (2d Cir. 1996) (quoting United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972)). I find that these statements were made to tout the stock and lull the investors into a false sense of security about their investment, and were made in furtherance of the scheme.
Prior to March 1992, Cruttenden instructed its brokers that they were not allowed to buy Enrotek for their clients. (Tr. 185.) Thereafter, Clawson opened an account for Campos at FABS, with Mikulka as the broker of record. Clawson then convinced Campos to purchase an additional 25,000 shares of Enrotek supposedly because he could get a better price at FABS and Campos could dollar average his holdings because the price was going down. I find, however, that the failure to tell Campos that the real reason for opening the account at FABS was that Cruttenden would not let its brokers purchase additional Enrotek stock was an omission to state a material fact. This omission was in furtherance of the scheme.
Campos testified about his trip to California to meet with Clawson and express his concerns about his Enrotek investment. (Tr. 151.) Once they met, Clawson attempted to convince Campos that he had no reason to worry. During the visit Clawson escorted Campos to a meeting with Woodbridge and Mikulka at Associates in an effort to calm Campos down and reaffirm his decision to invest in Enrotek. (Tr. 151.) Woodbridge and Mikulka were not associated with Clawson's brokerage firm, Cruttenden, but more importantly, had an agreement with Banach to develop a market and recommend Enrotek stock to their clients. (Div. Ex. 3.) I find that this meeting was arranged to further lull Campos into a false sense of security about his investment. Bringing Campos to meet with Woodbridge and Mikulka is evidence that I credit to support my finding that Clawson knew about Woodbridge's agreement with Banach, and the market making activities that were underway for Enrotek stock.
In April 1992, Clawson visited Enrotek's Canadian facilities and met with Enrotek officials. It was during this visit that he claims to have first learned of his ability to receive extra compensation in exchange for steering his customers into Enrotek stock. Thereafter, Clawson sent Banach a bill that listed the number of Enrotek securities that he had sold to his clients. (Tr. 187-88.)
All of the events surrounding the market making activities for Enrotek, beginning with the agreement between Banach and Woodbridge, occurred in a relatively short period of time. Given Clawson's close association with Woodbridge, Mikulka, and others involved in recommending Enrotek stock during this time, I do not credit Clawson's testimony to the effect that he learned of Banach's agreement to pay brokers only when he went on this trip to Canada.
Campos testified that Clawson told him about his trip to Enrotek's Canadian facilities and his conversations with its officials. I find that this disclosure was also designed to lull Campos into a false sense of security. (Tr. 149-50.) I find that there is no plausible explanation as to why Clawson would go to Canada to research a company that he was prohibited from selling at Cruttenden, unless he was intentionally participating in the scheme to sell the Enrotek stock as evidenced by diverting trades to FABS.
For the foregoing reasons, I conclude that Clawson acted with scienter and willfully engaged in a scheme to defraud Enrotek investors in violation of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.12
The Division requests that Clawson be (1) barred from participating in penny stock offerings and from association with any broker or dealer; (2) directed to account for and disgorge the fruits of any ill-gotten gains; (3) directed to pay prejudgment interest; and (4) directed to pay a third-tier civil monetary penalty of $100,000.
The imposition of administrative sanctions requires consideration of:
[T]he 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 likelihood that the defendant'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 severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. See 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). Sanctions should demonstrate to the particular respondent, the industry, and the public generally, that egregious conduct will elicit a harsh response. See Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976).
I have concluded that Clawson acted with a high degree of scienter in furtherance of the fraudulent scheme to market Enrotek stock. He sold between 60,000 and 70,000 shares of Enrotek to about ten clients including Campos and Micari. Clawson lulled his clients into a false sense of security about their investments and dissuaded them from selling them, which caused them to suffer substantial losses. Furthermore, he used his status as a registered representative as a means of furthering this scheme. Clawson neither expressed remorse, nor acknowledged the wrongful nature of his conduct. Finally, Clawson's continued presence in the securities industry presents the opportunity for future violations.
Penny Stock Bar and Bar from Association with any Broker or Dealer
Section 15(b) of the Exchange Act authorizes the Commission to order a wide range of sanctions restricting the ability of any broker, dealer, or person associated with such broker or dealer, to serve in the securities industry if it finds that such person willfully violated any provision of the antifraud provisions.
Clawson used his status as a registered representative of Cruttenden to willfully perpetrate securities fraud and, thus, the severest sanction is warranted. Clawson will be barred from participating in any penny stock offerings and from associating with any broker or dealer.
Accounting and Disgorgement
Because I am unable to conclude from the evidence presented that Clawson received undisclosed payments for engaging in this scheme, I decline to order an accounting or disgorgement.
The Division seeks the imposition of a civil monetary penalty of $100,000 against Clawson pursuant to Section 21B of the Exchange Act. Clawson will be ordered to pay a third-tier civil monetary penalty in the amount of $100,000. This amount is supported by the public interest analysis set forth above, and by my finding that Clawson's willful violations involved fraud and resulted in substantial losses or created the risk of substantial losses to other persons.
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 August 8, 2001.
IT IS ORDERED that, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, Respondent Robert Thomas Clawson 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.
IT IS FURTHER ORDERED that, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, Respondent Robert Thomas Clawson be, and hereby is, barred from association with any broker or dealer.
IT IS FURTHER ORDERED that, pursuant to Section 21B of the Securities Exchange Act of 1934, Respondent Robert Thomas Clawson pay a third-tier civil monetary penalty in the amount of $100,000.
Payment of penalties shall be made on the first day following the day this Initial Decision becomes final by certified check, U.S. Postal money order, bank cashier's check or bank money order payable to the Securities and Exchange Commission. The check and a cover letter identifying the Respondent and Administrative Proceeding No. 3-9208, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should also be sent to the Commission's Division of Enforcement at the same address.
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|| On May 24, 2000, Respondents Banach, Villa, and Alberta Ltd. were held in default under Rule 155(a)(2) of the Commission's Rules of Practice, 17 C.F.R. § 201.155(a)(2), for failing to file an answer to the OIP. See John L. Banach, Order Making Findings and Imposing Remedial Sanctions by Default as to Respondent Banach, Respondent Villa, and Respondent 381143 Alberta Ltd., 72 SEC Docket 1411 (May 24, 2000).
Prior to the hearing on February 12, 2001, Respondents Gribben, Khan, Lewis, Mikulka, Richmond, Woodbridge, and Associates submitted settlement offers which were accepted by the Commission, and resolved the issues raised by this proceeding as to them. See John L. Banach, Order Making Findings and Imposing Remedial Sanctions as to Trent David Gribben, 74 SEC Docket 244 (Jan. 18, 2001); Order Making Findings and Imposing Remedial Sanctions as to Terry Lee Lewis, 74 SEC Docket 251 (Jan. 18, 2001); Order Making Findings and Imposing Remedial Sanctions as to Ronald Troy Mikulka, 74 SEC Docket 258 (Jan. 18, 2001); Order Making Findings and Imposing Remedial Sanctions as to Reagan B. Richmond, 74 SEC Docket 265 (Jan. 18, 2001); Order Making Findings and Imposing Remedial Sanctions as to Kevin Lee Woodbridge, 74 SEC Docket 272 (Jan. 18, 2001); Order Making Findings and Imposing Remedial Sanctions as to Woodbridge & Associates, 74 SEC Docket 279 (Jan. 18, 2001); Order Making Findings and Imposing Remedial Sanctions as to Tariq Samad Khan, 74 SEC Docket 957 (Feb. 9, 2001). The findings made in the Orders are binding solely upon those Respondents and not upon Clawson.
Additionally, in connection with the above described matters, Respondents Gribben, Lewis, and Mikulka each pled guilty to one count of conspiracy to commit securities fraud, and Woodbridge pled guilty to securities fraud under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in U.S. v. Nance, No. CR-S-96-271 (D. Nev. 1996). See John L. Banach, 74 SEC Docket at 244; 74 SEC Docket at 251; 74 SEC Docket at 258; 74 SEC Docket at 272. Likewise, in connection with the matters described in the Orders above, among other things, Richmond also pled guilty to one count of conspiracy to commit securities fraud in U.S. v. Richmond, No. 98-447(ILG) (E.D.N.Y. 1998). See John L. Banach, 74 SEC Docket at 265.
|2||I refer to the transcript of the hearing as "(Tr. ___.)." I will refer to the Division's exhibits as "(Div. Ex. ___.)" and Respondent's exhibits as "(Resp. Ex. ___.)." Additionally, I will refer to the Division's Post Hearing Brief as "(Div. Brief at ___.)" and the Respondent's Post Hearing Brief as "(Resp. Brief at ___.)."|
|3||Woodbridge had successfully promoted the securities of one other public company, the Aqua Vie Beverage Company (Aqua Vie). Through Woodbridge's marketing efforts, the price of Aqua Vie stock increased from $0.75 per share to $2.00 or $3.00 per share. Woodbridge was expected to achieve the same results with Enrotek. (Tr. 44-45.)|
|4||Williams was convicted of racketeering in or about 1994, for bribing brokers. As a result of that conviction, Williams served five months in jail. In exchange for a reduced sentence, Williams agreed to cooperate with the government's investigation. (Tr. 98-99.)|
|5||Woodbridge did not turn over any records about payments because they were sent to Banach during the course of their relationship. (Tr. 30-31.) In 1995, Woodbridge testified that he wore a recording device in an attempt to get incriminating information from several brokers, including Clawson, who were allegedly receiving payments in addition to regular commissions. (Tr. 33-34.) The Division did not introduce any evidence at the hearing that was obtained as a result of Woodbridge wearing the recording device. Woodbridge also testified that during the Division's investigation into this matter, he gave a Division attorney a list of people to whom he had made payments. That list was not produced for this hearing, and this testimony was not rebutted. (Tr. 71-72.)|
|6||The Division has not produced copies of any of these cashier's checks. (Tr. 63.)|
|7||At the hearing, Woodbridge testified that he paid cashier's checks to Clawson, Khan, and Richmond for their purchases of Enrotek stock. (Tr. 29, 62-63.) Clawson denied ever receiving this money. (Tr. 190; Resp. Brief at 8.)|
|8||Richmond testified that while he and Clawson worked at Stuart James & Company (Stuart James), Clawson informed him that he could receive extra commissions in addition to those charged to his clients if he persuaded them to purchase Aqua Vie. (Tr. 128.) He also testified that while he worked at Cruttenden, Clawson and Woodbridge informed him that if he were to buy Enrotek stock for his clients, he would receive an extra $0.25 per share in addition to the commissions he charged his clients. (Tr. 132.) Richmond pled guilty to securities fraud involving a different security. In order to get a reduced sentence, he agreed to cooperate with the Division in this proceeding. He also has been barred from the securities industry. (Tr. 136-37.)|
|9||The Division submitted a copy of this check during the hearing. Williams's driver's license number was written on the back of the check. (Div. Ex. 2.) Clawson maintains that he did not receive any money from Williams and that he did not endorse or cash this check. (Tr. 190; Resp. Brief at 7-8.)|
|10||Currently, Clawson is a senior vice president at Stuart Securities in Newport Beach, California. (Tr. 171, 175.)|
|11||Pursuant to Rule 3a51-1 of the Exchange Act, I find that the Enrotek stock sold by Clawson was a "penny stock." During the course of the scheme that is alleged to have occurred in this proceeding, the price of Enrotek stock never exceeded $5.00 per share. (Tr. 152-53; Div. Ex. 32.) See 17 C.F.R. § 240.3a51-1(d) (stating that except for the purposes of Section 7(b) of the Securities Act and Rule 419 thereunder, an equity security is a "penny stock" unless it has a price in excess of $5.00 or more).|
|12||Willfulness is defined as intending to commit the acts which constitute the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Arthur Lipper Corp. V. SEC, 547 F.2d 171, 180 (2d Cir. 1976); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); James E. Ryan, 47 S.E.C. 759, 761 n.9 (1982).|
|Home | Previous Page||