Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
CHRISTOPHER A. LOWRY
| INITIAL DECISION
September 14, 2001
|APPEARANCES:||Kenneth E. Yeadon and Linda Ieleja Gerstman for the Division of Enforcement, Securities and Exchange Commission
David W. Larson for Christopher A. Lowry
|BEFORE:||Brenda P. Murray, Chief Administrative Law Judge|
The Securities and Exchange Commission ("Commission") issued an Order Instituting Proceedings ("OIP") on December 19, 2000, pursuant to Section 203(f) of the Investment Advisers Act of 1940 ("Advisers Act"), alleging that the United States District Court for the District of Minnesota enjoined Christopher A. Lowry and Fountainhead Retirement Plan Services, Inc., d/b/a 401(k) University ("401(k) University") from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, collectively the antifraud provisions. See SEC v. Lowry, No. 00-348 (MJD/JGL) (D. Minn. Dec. 7, 2000). The OIP also alleges that Mr. Lowry committed the violations specified in the Amended Verified Complaint for a Temporary Restraining Order, Preliminary and Permanent Injunction and Other Equitable Relief ("Complaint") that resulted in the permanent injunction.
I held a hearing in Minneapolis, Minnesota, on April 17, 2001. The Division of Enforcement ("Division") presented testimony from Mr. Lowry, Ron Hudak, Phillip Allen, and John Frye and introduced twenty-five exhibits.1 On April 24, 2001, I accepted a late-filed exhibit proffered by the Division. Respondent testified on his own behalf, and presented testimony from Shawn Moore, Gary Vasko, and John Seppala and introduced nine exhibits.2
The parties filed prehearing and posthearing briefs. The Division's Post Hearing Brief and its Proposed Findings of Fact and Conclusions of Law are dated June 11, 2001. Mr. Lowry filed his Post Hearing Brief and Proposed Findings on July 16, 2001. The Division filed its Post Hearing Reply Brief on August 6, 2001.3
The issues are (1) what sanction is in the public interest where Mr. Lowry, without admitting or denying liability, consented to a permanent injunction based on allegations that he and 401(k) University willfully violated the antifraud provisions of the Securities Act and the Exchange Act; and (2) whether Mr. Lowry willfully violated the antifraud provisions as alleged in the OIP and, if he did, what sanction is in the public interest. (Stipulations ¶2.)
II. FINDINGS OF FACT
My findings are based on the record and my observation of the witnesses' demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91, 102 (1981). I have considered all the posthearing findings, conclusions, and arguments that the parties raised and accept those that are consistent with this decision.
Christopher A. Lowry and No-Load Advisors
Mr. Lowry, age forty-one, graduated from Hamline University in St. Paul, Minnesota in 1982 with a bachelor of science degree in International Studies. (Tr. 202.) From 1984 to 1988, Mr. Lowry was a sales representative with IDS Financial Services, a registered broker-dealer. (Tr. 58.) Mr. Lowry holds a state license to sell insurance in Minnesota. (Tr. 57.)
Mr. Lowry filed a bankruptcy petition on August 7, 1987. (Tr. 203-04; Div. Ex. Q at Sch. D.) The United States Bankruptcy Court for the District of Minnesota issued a discharge order in the bankruptcy proceeding on November 16, 1987. (Div. Ex. Q at Sch. D.) Mr. Lowry claimed that he filed for bankruptcy because beginning in January 1986 through the fall of 1987 he was disabled by chronic fatigue syndrome, which prevented him from working full-time and resulted in large medical bills. (Tr. 203-04; Div. Ex. Q at Sch. D.) I question Mr. Lowry's explanation of why he filed for bankruptcy for several reasons. There is evidence in this record that Mr. Lowry lies when it suits his purpose. Shawn Moore, who has known him since childhood and who he considers to be like a sister, could not confirm that Mr. Lowry was seriously ill for almost two-years.4 (Tr. 71, 145.) Mr. Lowry was sufficiently healthy to successfully complete the course work so as to earn a Certified Financial Planner designation from the College of Financial Planning in 1987. (Div. Ex. Q at Sch. D.)
Mr. Lowry incorporated Lowry Investors Services, Inc., d/b/a No-Load Advisors ("No-Load Advisors") in Minnesota on November 11, 1988. (Div. Ex. Q at 4.) No-Load Advisors is a registered investment adviser with the state of Minnesota, and with the Commission effective May 22, 1992. (Tr. 60; Div. Ex. Q, Part 1 at 3.) Mr. Lowry professed to put customers first. (Tr. 125-26.) He promoted No-Load Advisors as providing clients with objective advice and better products at lower costs because unlike some sales representatives, No-Load Advisors does not promote any in-house investment products. (Tr. 208.) He has always been the president, chief executive officer, sole employee, majority shareholder, and only director of No-Load Advisors. (Tr. 59, 193; Div. Ex. A at 3.) Mr. Lowry owns 84.1% of No-Load Advisors' shares. (Div. Ex. S at 3.)
In December 2000, No-Load Advisors had 70 to 100 clients and $25 to 32 million in assets under management. (Div. Ex. A at 3, Div. Ex. E at 1.) No-Load Advisors does not have custody of client funds. (Tr. 91, 126-27; Resp. Br. at 20.) At the hearing in April 2001, Mr. Lowry was unsure how many clients No-Load Advisors had or why he indicated on the Form ADV he filed on February 28, 2001, that No-Load Advisors had 101 to 250 clients. (Tr. 61-63; Div. Ex. P at Item 5.) Six witnesses, who either had been or still were clients of No-Load Advisors, were highly complimentary of Mr. Lowry's services as an investment adviser.
Mr. Lowry's signed amended statement of financial condition dated May 18, 2000, represents that No-Load Advisors owed him $202,000 on a loan made January 1, 1989, and that the firm owed him $150,000 for "backpay for 1996, 1997, and 1998" subject to shareholder approval. (Div. Ex. S.) Mr. Lowry claimed in a Wells submission dated July 24, 2000, and a letter he wrote in March 2000, that No-Load Advisors owed him $63,000 on a promissory note made in 1995 at 9% interest and approximately $200,000 in promissory notes issued before 1995. (Tr. 216-17; Div. Ex. E at 1, Div. Ex. F at 1.)
The Employee Retirement Income Security Act of 1974 created the legal framework for 401(k) plans. A 401(k) plan is an "employer-sponsored salary deferral plan allowing individuals to contribute a portion of gross salary to a savings plan or company profit-sharing plan. Contributions and income earned are tax-deferred until withdrawn at age 59.5, or when the employee retires or leaves the company." Barron's Dictionary of Banking Terms 200 (3d ed. 1997). In 1995, Mr. Lowry came up with the idea of creating an "administration company" that would apply the cost saving principles that he used in No-Load Advisors to the business of administering 401(k) plans.5 (Tr. 92-93, 124-26, 211; Div. Ex. E at Exhibit A.) He worked on the concept for a few years before he incorporated 401(k) University in Minnesota on July 17, 1998. (Tr. 71-72, 216; Div. Ex. E at Exhibit A.) According to 401(k) University's business plan:
Our mission is delivering an outstanding curriculum of enlightened and persuasive financial education while providing high-quality and cost-effective 401(k) administrative and investment advisory services, with the purpose of advancing the fiduciary responsibilities of 401(k) plan trustees by enhancing the retirement nest-eggs of 401(k) plan participants.
(Div. Ex. G.)
The target market for 401(k) University is 401(k) plan trustees of companies with 100 to 1,000 employees. (Tr. 223.) Mr. Lowry believes that if given an hour to talk to 401(k) plan trustees he can convince them that 401(k) University offers a better way to administer their 401(k) plans. (Tr. 223.)
Mr. Lowry described 401(k) University as very much like an investment adviser, but he views investment management as the "simple part of the 401(k) equation." (Tr. 92-93, 209.) Mr. Lowry claimed that like No-Load Advisors, 401(k) University offers an advantage over most companies administering 401(k) plans that sell their own in-house investment products because it has no in-house investments and will therefore give objective advice. (Tr. 207-10.) Under its business plan, 401(k) University will group 401(k) plans together to provide lower-priced investment management services, as well as to provide educational and administrative services to 401(k) plans. (Tr. 73, 92-94, 125-26, 207-10.)
Mr. Lowry expressed an unshakeable belief that 401(k) University can be a successful business by managing 401(k) plans in a low cost way. (Tr. 215; Div. Ex. F.) Mr. Lowry expected 401(k) University to charge its clients the absolute lowest fees for investment advice, and charge flat fees for plan administration and educating fund trustees and their staffs. According to Mr. Lowry, 401(k) plan participants pay an average of about 1.1% of the amount invested, but 401(k) University will charge participants a significantly lower fee of three tenths of one percent. (Tr. 210.) Mr. Lowry believed that 401(k) University would save 401(k) plans "a bundle on the investment management costs." (Tr. 210.) Mr. Lowry viewed his business plan for 401(k) University as "putting the whole industry on its head." (Tr. 209-10.)
Mr. Lowry lived in modest circumstances and used funds he earned from No-Load Advisors to develop 401(k) University from 1996 until 1999. (Tr. 63, 69-70, 128, 213-17, 226.) Mr. Lowry worked hard and spent a great deal of money developing educational materials and promoting the project. (Tr. 177-78, 214.) By his account, Mr. Lowry lived a pauper's life by choice. (Tr. 226.) Mr. Lowry estimated he spent "tens of thousands if not into the hundreds of thousands" of dollars marketing 401(k) University. (Tr. 214.) He hired an attorney and received trademark protection for the name 401(k) University, and he later hired a firm that specializes in developing brand recognition. (Tr. 207, 213; Div. Ex. G.) Mr. Lowry has banners, educational materials, and sweatshirts bearing the 401(k) University logo. (Tr. 213-14.)
Mr. Lowry did not take a salary from No-Load Advisors from 1996 through 1999, but he wrote checks on the company's account when he needed money. (Tr. 273; Div. Ex. S.) Mr. Lowry ran No-Load Advisors and 401(k) University from the same office and the two corporations "shared everything," including a single checking account in the name of No-Load Advisors. (Tr. 74.) In 1997, 1998, and 1999, Mr. Lowry wrote checks to himself from the single No-Load Advisors checking account that held all 401(k) University funds. (Tr. 273-75; Div. Ex. Y.)
|Interest on Notes||7,000||7,000||7,000|
|Principal on Notes||20,000||23,000||17,000|
|Total to Mr. Lowry||45,000||50,000||90,000|
(Div. Ex. Y.)
Despite devoting considerable time and resources to the project, Mr. Lowry has not found a firm interested in working with him to develop 401(k) University:
I talked to everybody I could. I went out to companies. I talked to them. I was out in San Francisco talking to Charles Schwab about it in 1996. I talked to the Strong companies. I talked to all kinds of mutual funds [sic] companies. I talked to lots and lots of people.
(Tr. 211.) Industry professionals are not "keen on this idea of cutting their investment management fees." (Tr. 211-12.)
One of Mr. Lowry's supporters explained that 401(k) University threatened existing institutions because it would probably reduce their investment management fees:
Schwab, for instance, would be one. Fidelity would be another. They're huge in the 401(k) business. They've got a fairly good lock on well, for instance, our company. Fidelity manages all of the 401(k) business for Computer Associates. We have 18,000 people. The trustee's fees for that are probably fairly significant. And in addition, we're locked into Fidelity funds as far as our investment medium goes. So I would say that a company like Fidelity would be fairly threatened by someone who came in with lower fees, greater flexibility and a greater menu of investment options for 401(k) investors for a given company.
In May through December 1999, Mr. Lowry personally offered and sold $488,000 worth of unregistered 401(k) University shares to fourteen clients of No-Load Advisors in a private offering.6 (Tr. 23, 79-80; Div. Exs. X, W.) All the checks but one were made out to No-Load Advisors and deposited in the single checking account.7 (Tr. 81-82.) Mr. Lowry did not segregate the funds from 401(k) University stock sales from No-Load Advisors' funds. (Tr. 83.) Mr. Lowry intended to raise an additional $1 million by selling more 401(k) University stock. (Tr. 76; Div. Ex. A at 6-7, Div. Ex. G at 22.) Mr. Lowry distributed copies of the business plan he drafted to each investor when soliciting investments in 401(k) University. (Tr. 75.) The business plan stated:
The purpose of this plan is to raise $1,500,000 to finance the capital and operating requirements of 401(k) University through the year 2000. This capital will be used in the following manner:
General Office Equipment $35,000 Initial Web-Site Development 235,000 Additional Administration Equipment 70,000 Debt Retirement 85,000 Marketing Blitz 65,000 401(k) University Educational Materials 210,000 Operating Capital 800,000 1,500,000
(Tr. 74, 76; Div. Ex. A at 4, Div. Ex. G at 22.)
Mr. Lowry dramatically increased the funds he received from No-Load Advisors in 1999 and 2000. In the period April 1, 1999, to March 30, 2000, No-Load Advisors and 401(k) University paid Mr. Lowry a salary of $51,000. (Div. Ex. S at 7.) In the same time period, No-Loan Advisors paid Mr. Lowry $9,600 in fringe benefits (for car/health care), $8,400 for interest on notes, and $16,800 for repayment of principal. (Tr. 272; Div. Ex. S at 7.)
Mr. Lowry remarried on December 11, 1999. (Tr. 239.) In the fall of 1999, when Mr. Lowry realized that his future wife would receive a fiancé visa that would permit her to come from Kazakhstan, he began searching for suitable living accommodations because his efficiency apartment was unsuitable for two people. (Tr. 226-32.) Mr. Lowry thought a friend's home would be available for a three-year rental, but the arrangements fell through in mid-August 1999. (Tr. 226-28.) On October 25, 1999, Mr. Lowry bought a personal residence that cost $159,900. Mr. Lowry wrote a check for $156,500 that was drawn on 401(k) University's funds and used those funds to pay for the property.8 (Tr. 82-83, 235-36.)
Mr. Lowry controlled 401(k) University. (Div. Ex. A at 1.) He owned 63% of 401(k) University's outstanding shares. (Tr. 193; Div. Ex. S at 3.) Officially he was the "Dean of Students" (president) but because he was the only employee, he held every position and was the only member of the board of directors.9 (Tr. 73, 96; Div. Ex. A.) Mr. Lowry did not ask 401(k) University shareholders for permission to take the money, and he waited until February 2000 to inform shareholders that he had "borrowed" the funds. (Tr. 243-46; Resp. Proposed Findings at 8.) Mr. Lowry testified that in 2000, No-Load Advisors had gross income of $200,000, and expenses of about the same amount. (Tr. 64-66.) No-Load Advisors paid Mr. Lowry $70,000 or $72,000 in 2000. (Tr. 273.)
On December 17, 1999, Mr. Lowry successfully solicited John Frye to invest $40,000 in 401(k) University. (Div. Ex. W.) When Mr. Lowry gave Mr. Frye the business plan and represented that Mr. Frye's funds would be used to develop the company, he did not inform Mr. Frye that he had taken a sizeable portion of 401(k) University funds for his personal use. (Tr. 85, 162-64, 166.) The evidence is persuasive that Mr. Frye would not have invested in 401(k) University if he had known that Mr. Lowry had taken investor funds for his personal use and that he was the subject of a Commission investigation. (Tr. 166.)
The Division began investigating Mr. Lowry's activities in November 1999. (Resp. Proposed Findings at 4.) On February 15, 2000, the Commission filed the Complaint against Mr. Lowry and 401(k) University in the United States District Court for the District of Minnesota. (Div. Exs. A, D.) See SEC v. Lowry, No. 00-348 (MJD/JGL) (D. Minn. Dec. 7, 2000). The Complaint charged Mr. Lowry with misappropriating $156,500 of 401(k) University's funds, and alleged that he violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (Div. Ex. A.) The Complaint requested emergency action by the district court because "401(k) University desperately needs cash for its continued operations," and Mr. Lowry was continuing to offer and sell 401(k) University securities and planned to raise an additional $1 million that he would likely misappropriate. (Div. Ex. A at 2.)
The district court issued a temporary restraining order against Mr. Lowry and 401(k) University on February 15, 2000, and an Order of Preliminary Injunction and Other Relief ("Preliminary Injunction") on February 24, 2000. (Tr. 191-92; Div. Ex. D at 3-4.) The district court froze the assets of Mr. Lowry and 401(k) University from February 15, 2000 to December 7, 2000. (Resp. Br. at 11.) Mr. Lowry signed a Consent and Stipulation on February 24, 2000, in connection with the Preliminary Injunction. (Div. Ex. D at 4.)
In March 2000, after he had consented to the Preliminary Injunction and while ostensibly cooperating in the Division's investigation, Mr. Lowry wrote an "Open Letter to Our Shareholders and an Appeal for Your Support" ("Open Letter") in which he proclaimed his innocence and blamed the Commission for 401(k) University's lack of success. Mr. Lowry wrote that "my actions would not have had any adverse effects on the shareholders had they been completed without the SEC's interference." (Tr. 197; Div. Ex. F at 1.) Mr. Lowry characterized the Commission's actions as "outrageous" and he claimed that the "ramifications of the SEC actions cost all the shareholders hundreds of thousands of dollars of lost opportunity." (Tr. 199; Div. Ex. F at 4.) He told shareholders that had he "been allowed to proceed unhindered by the SEC, my plans would have worked to the best interests of all the shareholders." (Div. Ex. F at 4.) He complained that "[I]n February, the SEC made hasty and ill informed judgments, and took damaging actions that made it difficult to continue building the company. I question - as you should - whether the SEC's actions ever considered the best interests of the shareholders." (Div. Ex. F at 5.) Mr. Lowry wrote the letter "to rally the troops," so as to get 401(k) University "back on the road." (Tr. 265.) He professes to understand how an outsider would have difficulty following what he did. (Tr. 265.)
On December 7, 2000, the district court entered a Final Order and Judgment of Permanent Injunction and Other Relief ("Permanent Injunction").10 (Div. Ex. B.) The Permanent Injunction incorporates Mr. Lowry's Consent and Stipulation to the Preliminary Injunction and his Consent and Stipulation to the Permanent Injunction. (Div. Ex. B at 6, Div. Ex. C, Div. Ex. D at 4-5.) The district court ordered Mr. Lowry to disgorge $156,500.11 (Div. Ex. B at 3-4, Div. Ex. W.) Mr. Lowry has complied with the disgorgement order.12 (Tr. 262.) The district court did not order Mr. Lowry to pay a civil penalty based on his sworn statement of financial condition. (Div. Ex. B at 4.)
In the Consent and Stipulation that was incorporated into the Permanent Injunction, Mr. Lowry represents that he:
Understands and agrees to comply with the Commission's policy "not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings." (17 C.F.R. § 202.5(e)). In compliance with this policy, Lowry agrees: (i) not to take any action or to make . . . any public statement denying, directly or indirectly, any allegation in the Complaint or creating the impression that the Complaint is without factual basis; and (ii) that upon the filing of this Consent, Lowry hereby agrees to withdraw any papers filed in this action to the extent that they deny any allegation in the Complaint.
(Div. Ex. C at 2.)
Mr. Lowry's claims that the Commission's actions have prevented 401(k) University from achieving success are false. (Tr. 86, 90, 93, 144, 181-82; Div. Ex. F.) Mr. Lowry worked to make 401(k) University a viable business for three years before the Division began investigating his activities in late 1999. (Tr. 89, 207, 211-12.) In 1998, Mr. Lowry's attempt to "launch" 401(k) University was delayed and made more costly when the accounting firm he had been negotiating with to handle administrative responsibilities for 401(k) University ended the negotiations. (Tr. 217-18.) Mr. Lowry rescheduled the "launch" for July 1999, but it did not occur because Mr. Anderson, who began working on sales in January 1999, quit on July 31, 1999. (Tr. Tr. 72-73, 219-20, 222-23.) In November 1999, anticipating a rescheduled "launch" of 401(k) University, Mr. Lowry hired Debbie O'Brien and Tammy Mann as sales people; David Potts, a CPA, as treasurer; and Edward Tilford, to manage a web site.13 (Tr. 85-87, 232-34.) In addition to monthly salaries of approximately $13,000, and rent of $1,400, 401(k) University began incurring significant expenses for marketing in late 1999. (Tr. 233-34; Div. Ex. A at 7.)
As noted above, until November 1999 Mr. Lowry commingled 401(k) University's funds with No-Load Advisors' funds in one checking account in the name of No-Load Advisors.14 (Tr. 74; Div. Ex. A at 5.) As of September 30, 1999, that account had a balance of $2,405.22, and the single source of funds was 401(k) University investor deposits. (Div. Ex. A at 5.) Mr. Lowry had exclusive control over the No-Load Advisors account. (Div. Ex. A at 5.) Between October 15 and October 25, 1999, Mr. Lowry received $230,000 from 401(k) University investors that he deposited in the No-Load Advisors account.15 (Div. Ex. A at 5.) Mr. Lowry had exclusive control over the disbursement of 401(k) University funds. (Tr. 73; Div. Ex. A at 6.) Mr. Lowry wrote checks without approval from anyone else as he controlled 401(k) University and was the only board member. (Tr. 95-96; Resp. Ex. 1.) At the end of 1999, 401(k) University had no clients.16 (Tr. 89.)
As of February 9, 2000, 401(k) University had approximately $3,500 in its checking account, and had no clients. (Tr. 89-94; Div. Ex. A at 7.) As of February 15, 2000, neither 401(k) University nor No-Load Advisors had any financial statements, accounting ledgers, or schedules. (Div. Ex. A at 5.)
In one of the many contradictions in this record, Mr. Lowry claimed on his amended statement of financial condition on March 30, 2000, that his majority interest in 401(k) University had no value. (Div. Ex. S at 3.) In the same month, Mr. Lowry wrote in the Open Letter, "if the SEC stops me from pursuing my dream of building 401(k) University, you will likely lose 100% of your investment." (Div. Ex. F at 5.) Based on Mr. Lowry's statements, 401(k) University investors believe that 401(k) University shares have value but that they would lose that value if the Commission prohibits Mr. Lowry from leading 401(k) University. (Tr. 32-33, 137, 139, 140-41, 185-86; Div. Ex. F at 5.) However, Mr. Lowry does not expect a suspension or bar to stop his plans to develop 401(k) University. (Tr. 263.)
At the "first annual meeting of the shareholders of [401(k) University]" on May 22, 2000, fourteen 401(k) University shareholders signed a resolution that ratified Mr. Lowry's actions, which were described as a loan. Some shareholders did not attend the meeting. (Tr. 141-42.) The resolution asked that Mr. Lowry be allowed to continue to operate 401(k) University. (Resp. Exs. 6A, 6B, 6C.)
III. CONCLUSIONS OF LAW
The applicable legal authority is Section 203(f) of the Advisers Act which, by incorporating Sections 203(e)(4) and 203(e)(5), authorizes entry of a sanction where it is in the public interest and a person associated with an investment adviser has been enjoined from conduct in connection with the purchase or sale of any security or has willfully violated any provision of the Securities Act or the Exchange Act. As president, chief executive officer, sole employee, majority shareholder, and only director of No-Load Advisors, Mr. Lowry was a person associated with an investment adviser as defined by Section 202(a)(17) of the Advisers Act. The parties agree that Mr. Lowry was permanently enjoined from violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (Stipulations ¶2.) See SEC v. Lowry, No. 00-348 (MJD/JGL) (D. Minn. Dec. 7, 2000). The Division could have sought a sanction relying solely on the Permanent Injunction. See Seaboard Inv. Advisers, Inc., 74 SEC Docket 201, 205 (Jan. 10, 2001); Charles Phillip Elliott, 50 S.E.C. 1273 (1992), aff'd, 36 F.3d 86 (11th Cir. 1994). In this proceeding, however, the Division also sought to prove that Mr. Lowry willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.
Section 17(a) of the Securities Act makes it unlawful for a person in the offer or sale of securities using the means of interstate commerce or the mails to employ any device, scheme, or artifice to defraud; to obtain money by making any untrue statement of material fact or omitting to state a material fact; or to engage in any act, practice or course of business which would operate as a fraud or deceit upon any person. Section 10(b) of the Exchange Act, in conjunction with Rule 10b-5, contains the same prohibitions under the same conditions "in connection with" the purchase or sale of securities.
The overwhelming evidence is that Mr. Lowry willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. Mr. Lowry used the mails and means of interstate commerce to offer and sell 401(k) University securities, making oral and written representations that investments would be used to develop 401(k) University into a successful business enterprise. Contrary to his representations and without disclosing his actions, Mr. Lowry misappropriated $156,500 of 401(k) University funds to buy a personal residence. (Tr. 14-21, 82-83, 94, 235-36.) The term misappropriation is accurate because Mr. Lowry applied another's property or money dishonestly to his own use. See Black's Law Dictionary 1013 (7th ed. 1999).
I reject Mr. Lowry's claims that he did not misappropriate 401(k) University's funds on October 25, 1999, because Minnesota law and custom permit loans to corporate officers, and that 401(k) University shareholders ratified the "loan."17 (Resp. Br. at 32-34.) Mr. Lowry's defense that 401(k) University made a "short-term loan" to him of $156,500 is unpersuasive for lack of support. (Tr. 94, 235, 244.) No documentation was created on October 25, 1999, to show a loan was intended. Mr. Lowry offers a $156,500 promissory note that he gave to 401(k) University dated November 1, 1999, presumably to show that he borrowed the funds. (Div. Ex. T.) This note is not persuasive evidence that Mr. Lowry intended to create a short-term or bridge loan on October 25, 1999. Mr. Lowry allegedly drafted and signed this promissory note the day the Commission began an audit of No-Load Advisors and asked questions about 401(k) University.18 (Tr. 237-39.) Mr. Lowry did not produce a copy of the promissory note in response to a subpoena for all documents relating to the expenditure of 401(k) University funds, or when he gave investigative testimony to the Division in February 2000. (Tr. 98-100.) Moreover, the term short-term financing applies to "loan or credit facility with a maturity of one year or less" but the note dated November 1, 1999, is for a term of seven years. (Tr. 95-96; Div. Ex. T.) Barron's Dictionary of Banking Terms 423 (3d. ed. 1997). Even if there had been a valid loan, Mr. Lowry acted fraudulently because he did not inform investors that he borrowed, or was going to borrow, 401(k) University funds for his personal use, when he offered and sold securities, using the means or instruments of interstate commerce. Mr. Lowry cannot use a Minnesota statute that allows loans by a corporation to corporate officers to validate actions that clearly violate the Securities Act and Exchange Act. The actions at issue here have traditionally been measured by a developed federal standard. See L.W. Laird v. Integrated Res., Inc., 897 F.2d 826, 836 (5th Cir. 1990).
The so-called "ratification" is based on Mr. Lowry's false representation that he borrowed $156,500 of 401(k) University funds on October 25, 1999. Even if ratification were possible, the shareholders of 401(k) University cannot change the illegal nature of Mr. Lowry's actions. The doctrine of ratification, which is the adoption or confirmation of previous actions by which the prior actions are given effect as if originally authorized, is not applicable where the original action was a violation of the federal securities laws and regulations. See cf. Green v. Brown, 398 F.2d 1006, 1010 (2d Cir. 1968) ("[T]here is an additional question . . . whether there could be ratification of a violation of section 21 [of the Investment Company Act] in any event, since that section . . . omits any provision for shareholder authorization and characterizes the loans there prohibited as `unlawful.'"); Gottesman v. Gen. Motors Corp., 268 F.2d 194, 197 (2d Cir. 1959) ("[T]he wrongful acts alleged-violations of the antitrust laws by Du Pont-can in no way be ratified or rectified by a vote of the shareholders of General Motors."); Rogers v. Am. Can Co., 187 F. Supp. 532, 537 (D.N.J. 1960) (stating that it is legally impossible to ratify a violation of the federal antitrust laws); The Equity Corp., 1970 SEC Lexis 510, at *17 (March 5, 1970) ("In our opinion, shareholder ratification of conduct violative of the [Investment Company] Act is precluded under general principles of federal law as well as by Section 47 of the [Investment Company] Act."). In addition, there is a line of cases holding that shareholders cannot ratify alleged violations of federal law. See Phillips v. Bradford, 62 F.R.D. 681, 688 (S.D.N.Y. 1974); Dopp v. Am. Elec. Labs., Inc., 55 F.R.D. 151, 155 (S.D.N.Y. 1972).
Information that Mr. Lowry had misappropriated funds or was intending to misappropriate funds was material because a reasonable investor or potential investor would consider it significant that 401(k) University's majority shareholder converted 32% of the funds 401(k) University received over an eight month period to his personal use. (Tr. 84.) See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992). The evidence is that at least two 401(k) University investors, Mr. Hudak and Mr. Frye, would not have purchased shares of 401(k) University if they had known that Mr. Lowry would use or had used 401(k) University funds for his personal benefit. (Tr. 20, 25, 164, 166.)
Mr. Lowry acted willfully. He intended to do the acts that constituted the violation. See Arthur Lipper Corp., 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).
To violate Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, a person must be found to have acted with scienter defined as "intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). A showing of recklessness suffices to show scienter.19 See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990). Mr. Lowry acted with scienter because he deliberately, or at a minimum recklessly, acted contrary to the material representations he made in offering and selling 401(k) University securities. Mr. Lowry took the money from 401(k) University because a woman who was coming to the United States to marry him in December 1999 expected him to provide suitable living accommodations. (Tr. 226.) Mr. Lowry wanted funds to close on the purchase of real estate and 401(k) University funds "acted as a convenience for a tight spot." (Tr. 102.)
Mr. Lowry claims that he expected Phillip Allen and his father-in-law to loan 401(k) University $150,000, and that he intended to borrow this amount from 401(k) University to close on the house. (Tr. 105, 228-31.) However, Mr. Allen did not loan 401(k) University the funds by October 25, 1999, the date of the real estate closing. (Tr. 234-36, 244.) It was doubtful Mr. Lowry could have obtained a mortgage to finance almost the entire purchase price because he reported taxable income of $7,000 in both 1997 and 1998. (Tr. 271, 274-75; Div. Ex. Y.) Finally, it would have been difficult for Mr. Lowry to obtain a mortgage when he did not even consider applying for one until close to October 25, 1999. (Tr. 229-30.) The fact that Mr. Lowry arranged for 401(k) University to borrow $57,500 from David Potts in January and February 2000, knowing Mr. Potts used his credit card and IRA account as his source of funds, indicates that Mr. Lowry had limited resources from which to obtain funds. (Tr. 87.)
Additional evidence that Mr. Lowry acted with scienter is the fact that he waited until February 2000, when he realized the Division was interviewing 401(k) University investors, to inform investors that he had "borrowed" $156,500 of the offering proceeds on October 25, 1999. (Tr. 34, 84-85, 154-55, 163-64, 186; Resp. Proposed Findings at 4.) Several investors appear to have learned of Mr. Lowry's actions from the Division before Mr. Lowry contacted them. (Tr. 129-30, 154-55, 179-81.)
Mr. Lowry's apparent position is that he did not violate the securities statutes and rules, or that the violations were not egregious because he "did not intend to use money from investors for his house purchase at that time he authored or distributed his business plan." (Resp. Proposed Findings at 8.) I disagree. Mr. Lowry used the business plan and made similar oral representations when he offered and sold 401(k) University shares to investors from October 15 through October 25, 1999. By this time, Mr. Lowry knew that he was going to take $156,500 of 401(k) University funds for the real estate closing that occurred on October 25, 1999. Similarly, Mr. Lowry offered and sold 401(k) University shares to seven additional investors in the period of October 26 through December 31, 1999. (Div. Ex. X.) Mr. Lowry does not contest the testimony of Mr. Frye, which appears typical of Mr. Lowry's representations to this group of investors. Mr. Lowry represented to Mr. Frye, after he had taken $156,500 of 401(k) University funds, that 401(k) University funds were used to develop 401(k) University as a business enterprise. (Tr. 163.) Mr. Lowry did not inform Mr. Frye that he had taken or borrowed 401(k) University funds for himself on October 25, 1999, or that he was the subject of a Commission investigation. (Tr. 163-64, 166.)
Mr. Lowry's claim that he could have taken money by canceling some of the notes he held from No-Load Advisors is irrelevant and inaccurate. (Tr. 270-71.) It is irrelevant what he could have done; the issue is what Mr. Lowry did. Second, it is inaccurate because the notes Mr. Lowry held were from No-Load Advisors, but No-Load Advisors did not have $156,500. Mr. Lowry took 401(k) University funds because most of the money in the checking account belonged to 401(k) University. (Tr. 271-72.) Mr. Lowry acknowledges this fact but claims he could have gotten legitimate access to the 401(k) University funds by simply merging the companies on the day he took the money.20 (Tr. 272.) Mr. Lowry's cavalier attitude toward investor funds raises significant public interest considerations.
I reject Mr. Lowry's position that Section 203(f) of the Advisers Act does not authorize the Commission to sanction Mr. Lowry for a violation of the Exchange Act, and that "[s]anctions affecting the activities of an investment advisor should be limited when the underlying violation arises elsewhere in the securities field." (Resp. Br. at 12, 20.) The Division is correct that the holdings in the cases Mr. Lowry cites are not applicable to this situation. For example, Monetta Fin. Servs., Inc., Initial Decision, 72 SEC Docket 72 (Mar. 27, 2000), involved imposition of a collateral bar, which is not the case here, and James Harvey Thornton, 69 SEC Docket 49 (Feb. 1, 1999), where the Commission held that a penny stock bar required a showing of penny stock fraud is also inapplicable. The statutory prerequisites are present here so that pursuant to Section 203(f) of the Advisers Act the Commission can, if it is in the public interest, censure Mr. Lowry, place limitations on his activities, suspend him from association with an investment adviser for a maximum of twelve months, or bar him from association with an investment adviser for violations of the Securities Act and Exchange Act. See Ira William Scott, 53 S.E.C. 862, 867-68 (1998).
The Division recommends that the Commission bar Mr. Lowry from association with an investment adviser to protect the public interest. (Tr. 279; Div. Br. at 8-21.) Mr. Lowry does not contest imposition of a sanction, but he contests the imposition of a suspension or bar as contrary to the public interest and a penalty to Mr. Lowry. (Tr. 279; Resp. Br. passim.) Mr. Lowry wants to continue to act as a person associated with an investment adviser. He does not consider 401(k) University to be an investment adviser. Mr. Lowry argues that if subject to a bar or suspension he would find a different job that would provide "just the salary." He would not have the "extra money that [he] could spend on 401(k) University as [he has] now" from being associated with an investment adviser. (Tr. 263.)
In determining whether a sanction under Advisers Act Section 203(f) is in the public interest, we look to 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 the respondents' occupations will present opportunities for future violations.
Seaboard Inv. Advisers, Inc., 74 SEC Docket at 207; see also Donald T. Sheldon, 51 S.E.C. 59, 86 (1992), (citing Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981)), aff'd, 45 F.3d 1515 (11th Cir. 1995). 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, 141-42 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 251-52 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975).
Mr. Lowry argues that his conduct was not egregious because it was related to a single isolated event and no investor lost money. (Resp. Br. at 14.) He maintains that while he might have been reckless he did not "intentionally endeavor to defraud" investors and, thus, did not have a high degree of scienter. (Resp. Br. at 15.) Mr. Lowry stresses the importance the Commission places on a person's prior disciplinary history and the unanimous satisfaction of his investment adviser clients with his services. (Resp. Br. at 14-15.)
I disagree with Mr. Lowry for the following reasons. Mr. Lowry's misappropriation of $156,500 or 32% of the funds that his investment adviser clients had invested in 401(k) University was egregious and involved a high degree of scienter. Mr. Lowry took funds from investors who knew him as their investment adviser. Based on this relationship, these investors relied on Mr. Lowry's representation that he would use their funds to develop 401(k) University, the new business that he enthusiastically described to them. He deliberately misstated his intention, failing to tell the investors that the money would be used for his personal benefit. He also misstated that 401(k) University funds were used to develop the business enterprise to those who invested after October 25, 1999. In February 2000, only after the Division began its investigation did Mr. Lowry acknowledge to some investors that he had taken 401(k) University funds for his personal use. (Resp. Proposed Findings at 8.) In making his disclosure, Mr. Lowry claimed to have made a mistake and to have borrowed the money. The Division characterizes Mr. Lowry as defiant and unrepentant. (Div. Br. at 15-17.) The evidence supports the Division's position.
Mr. Lowry's posthearing brief does not give any citations to "sincere . . . assurances against future violations" because there are none. (Resp. Br. at 16-17.) There is evidence that Mr. Lowry was distraught that the Division knew of his actions and the consequences might be that he would not be able to continue operating an investment adviser. There is no evidence, however, that Mr. Lowry recognizes that he violated the antifraud provisions and is remorseful at having done so. Throughout the investigation and this formal proceeding Mr. Lowry has shown a lack of sincerity and has exhibited Machiavellian behavior. On the one hand, he consented to the Preliminary Injunction on February 24, 2000, on the other hand, in the same month he testified in a deposition that he believed he had done nothing wrong. (Tr. 245; Div. Ex. D.) Similarly, he consented to the entry of the Permanent Injunction and stipulated to the entry of findings consistent with the allegations of misappropriation while claiming to investors and in testimony that he had done nothing wrong and received the funds as a loan. (Div. Exs. A, C; Stipulations ¶1.) For all the reasons already stated, Mr. Lowry's explanation that 401(k) University loaned him $156,500 is false.21 On May 8, 2000, Mr. Lowry filed an amended Form ADV for No-Load Advisors that described the civil proceeding as:
Injunctive action to penalize Christopher A. Lowry for making omissions of fact with respect to the sale of securities. Mr. Lowry Dispute [sic] and deny the allegations and have consented to a preliminary, limited injunction, pending resolution.
(Div. Ex. Q, Schedule D at 3.) The Division notified Mr. Lowry on September 15, 2000, that this amended Form ADV was not in accord with terms of the "settlement," and would have to be withdrawn or amended because it "denies the allegations of the Complaint." (Div. Ex. R.)
Mr. Lowry's claim that at the time he believed he could legitimately take $156,500 of investor funds for his personal use and not disclose or document the taking is implausible. (Tr. 101-02, 243-45.) Mr. Lowry is a college graduate, was a registered representative, a Certified Financial Planner, and associated with an investment adviser. Based on his education and securities industry experience, Mr. Lowry's position that he believed he acted correctly until a lawyer told him that it was improper to surreptitiously take corporate funds for his personal use is absurd. (Tr. 244-45.) See Jacob Wonsover, 69 SEC Docket 694, 712 (Mar. 1, 1999) ("Members of the securities industry agree to be subject to the statutes, rules, and regulations administered by the Commission and self-regulatory organizations, and, before entering the business, generally must apply for registration and pass examinations demonstrating their knowledge of the securities laws.")
In addition to the illegal conduct that is the basis of this proceeding, it is in the public interest to note that Mr. Lowry appeared indifferent and without any remorse when acknowledging that he had lied in the past to obtain investor funds.22 For example, Mr. Lowry falsely represented to Mr. Allen that 401(k) University needed to borrow funds because of a short-term business problem.23 (Tr. 229.) Mr. Lowry knew he was lying when he made this representation because at the time he intended to use the funds from Mr. Allen and his father- in-law to buy a house. (Tr. 228-29.) Mr. Lowry never told Mr. Allen that the funds would be used to buy a house. (Tr. 38-39, 45-46, 230.) Mr. Lowry also drafted and distributed a business plan for 401(k) University that falsely represented that Shawn Moore "will become full-time president of 401(k) University at the beginning of year 2000."24 (Div. Ex. G at 17.) Ms. Moore never committed to working full time for 401(k) University. (Tr. 128-29, 144-45.)
It is also relevant that there is no evidence that Mr. Lowry would have voluntarily repaid $156,500 to investors if the Division had not begun an investigation that resulted in court-ordered disgorgement.
Mr. Lowry is very persuasive and has convinced some investors that he is a victim of incompetent government actions. At least three investor witnesses believe Mr. Lowry and they are critical of the Division's actions.25 On the other hand, one investor witness, who listened to Mr. Lowry's explanation is unconvinced that Mr. Lowry believes he did anything wrong. (Tr. 34.)
Taken as a whole, the evidence is persuasive that Mr. Lowry does not sincerely accept that he has violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. Even though Mr. Lowry has no prior disciplinary record, the evidence in this record indicates that Mr. Lowry would likely violate the law in the future and a strong sanction is necessary to deter him and others. (Tr. 206.) For all the reasons stated, I find it in the public interest to bar Mr. Lowry from association with any investment adviser.
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 described in the record index issued by the Secretary of the Commission on August 9, 2001.
Based on the findings and conclusions set forth above I ORDER pursuant to Section 203(f) of the Investment Advisers Act of 1940 that Christopher A. Lowry is barred from association with an investment adviser.
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 (1998). 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 such party, 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.
Brenda P. Murray
Chief Administrative Law Judge
|1||I granted a motion allowing Mr. Frye, who was out of town on business, to respond to the subpoena by testifying via telephone. (Tr. 160, 169.)|
|2||"(Tr. __.)" refers to the transcript of the hearing. I will refer to the Division's and the Respondent's exhibits as "(Div. Ex. __.)," and "(Resp. Ex. __.)," respectively.|
|3||I will refer to the Division's initial posthearing filings as "(Div. Br.__.)" and "(Div. Proposed Findings __.)"; Respondent's posthearing filings as "(Resp. Br.__.)" and "(Resp. Proposed Findings __.)"; and the Division's second posthearing filing as "(Div. Reply __.)."|
|4||Ms. Moore is an investor in 401(k) University. (Tr. 126-28.) She loaned Mr. Lowry $30,000 to assist him pay for counsel. (Div. Ex. S at 2.)|
|5||Mr. Lowry planned to make No-Load Advisors one of a number of subsidiaries of 401(k) University. (Tr. 89-94.)|
|6||Mr. Lowry purchased 455,250 shares of 401(k) University on July 17, 1998, for $300 or $0.001 per share. (Div. Ex. X.) On August 1, 1998, ten investors purchased a total of 100,000 shares of 401(k) University for $200,000 or $2.00 per share. (Div. Ex. X.)|
|7||John Seppala, with his wife, invested $40,000 on October 26, 1999. (Tr. 179; Div. Exs. X, W.) Ron Hudak invested $40,000 on October 15, 1999, and his business partner, Gary Mundis, with his wife, invested $40,000 on October 25, 1999. (Tr. 19, 26; Div. Ex. X.) Shawn Moore invested a total of $15,000 with purchases on August 1, 1998, and December 1, 1999. (Tr. 128; Div. Ex. X.) Two brothers, Roger and Gary Vasko, each invested $75,000 on October 18, 1999. John Frye, with his wife, invested $40,000 on December 17, 1999. (Tr. 164; Div. Exs. X, W.)|
|8||The check was drawn on No-Load Advisors' checking account but the only substantial funds in the account belonged to 401(k) University. (Tr. 82-83, 270-72.)|
|9||John Anderson worked for 401(k) University on a contract basis during the first half of 1999. (Tr. 72-73.) Four people were briefly 401(k) University employees beginning in November 1999. (Tr. 233.)|
|10||The Division considers that Mr. Lowry violated the Permanent Injunction entered December 7, 2000, because he did not take steps to withdraw his answer denying the allegations in the civil action until March 20, 2001, and he waited until February 28, 2001, to file an accurate amended Form ADV. (Div. Exs. P, V; Div. Br. 14-15.) Mr. Lowry did not act until the Division reminded him for the third time on February 14, 2001, that he was obliged to do so. (Div. Ex. U.)|
|11||The Permanent Injunction ordered Mr. Lowry and 401(k) University to transfer funds that had been retained in their accounts to new bank accounts until Mr. Lowry satisfied his disgorgement obligations. (Tr. 250; Div. Ex. B at 5-6; Div. Br. at 15.) Mr. Lowry waited until February 16, 2001, to establish the new accounts. (Div. Exs. I, J.) The Division considers this delay a violation of the Permanent Injunction. (Div. Br. at 15, Div. Reply at 3.)|
|12||Mr. Lowry faults the Division for the delay in reaching an agreement on disgorgement. (Resp. Br. at 11.) A disgorgement order agreed to by the Division and Mr. Lowry was entered January 22, 2001. This allowed the removal of the lien on Mr. Lowry's home and he obtained a mortgage in February 2001, opened new bank accounts in February 2001, and repaid investors $156,500. (Tr. 249-51; Resp. Exs. 9, 10; Resp. Br. at 11.)|
|13||Mr. Lowry claimed that he had to let these employees go because the district court froze his assets; however, it appears that 401(k) University had insufficient funds to pay monthly salaries and rental expense in late 1999. (Tr. 86-87, 90, 144.)|
|14||Mr. Lowry opened a separate bank account for 401(k) University in November 1999. (Tr. 73-74, 82; Div. Ex. A at 5.)|
|15||As has been noted, Mr. Lowry raised $488,000 from 401(k) University investors from May through December 1999. (Tr. 23; Div. Exs. X, W.)|
|16||Mr. Lowry represented that 20% of No-Load Advisors' clients were 401(k) plans and it had 70 to 100 clients. (Tr. 60-61, 89, 223; Div. Ex. A at 3, Div. Ex. E at 1.) He claimed that he was going to transfer No-Load Advisors' clients that were 401(k) plans over to 401(k) University. (Tr. 89, 223.)|
|17||The first sentence of the Complaint states that "[t]his matter involves the misappropriation by [Mr. Lowry] of at least $156,500." (Div. Ex. A.) Mr. Lowry agreed not to deny the allegations in the Complaint when he signed the Consent and Stipulation that was incorporated into the Permanent Injunction. (Div. Ex. C at 2.) Mr. Lowry's claim that he did not misappropriate funds directly contradicts his Consent and Stipulation. (Resp. Br. at 32-34.)|
|18||Mr. Lowry was not sure he drafted the note on November 1, 1999. (Tr. 96.) The audit found deficiencies in No-Load Advisors' record-keeping. (Tr. 243.)|
|19||Recklessness is 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." Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569-70 (9th Cir. 1990) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)); see also Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992).|
|20||Mr. Lowry stated that he was going to merge No-Load Advisors and 401(k) University "at the end of the year." (Tr. 81-82.) He does not explain how this would have been possible without some notice to 401(k) University shareholders. Mr. Lowry considers 401(k) University to be "his company." (Tr. 243.)|
|21|| In an amended Form ADV for No-Load Advisors received by the Commission on February 28, 2001, Mr. Lowry summarized the civil action as follows:
(Div. Ex. P at Part II, number 14.)
|22||Mr. Lowry did not give his investment adviser clients prompt notice that the district court had entered a Permanent Injunction against him on December 7, 2000. (Tr. 192.) In its posthearing brief, the Division charges that Mr. Lowry admitted violating Section 206(4) of the Advisers Act and Rule 206(4)-4(a)(2) and (c) which make it a fraudulent act for an investment adviser to fail to disclose to a client or prospective client promptly all material facts with respect to a legal or disciplinary event that is material to an evaluation of the adviser's integrity or ability to meet contractual commitments to clients. (Div. Br. at 7-8, 15, Resp. Br. at 23-24, Div. Reply at 1-3.) See 17 C.F.R.§ 275.206(4)-4(a)(2) and (c). The OIP does not contain these allegations so they are beyond the scope of this proceeding.|
|23||Mr. Allen had been a client of No-Load Advisors since the early 1990s. (Tr. 36, 51.) Mr. Allen had expressed a strong interest in 401(k) University in 1995. In May 1999, he informed Mr. Lowry that he had decided not to become a long-term investor. (Tr. 221-22.)|
|24||Ms. Moore is a graduate of the University of Minnesota and earned a master of business administration degree from St. Thomas University in Minneapolis, Minnesota. (Tr. 120.) During her eleven years with Deluxe Check Printers, Ms. Moore specialized in marketing to financial institutions. (Tr. 121.) In 1995, she joined Travelers Express as director of financial services and product development. (Tr. 121.) Ms. Moore has been a self-employed contract marketer since 1998. (Tr. 119, 121-22.)|
|25||Mr. Vasko is disgusted at the time it took the Division to complete the investigation because "the longer it got dragged out, he's just burning up money and burning up time and the business wasn't going to survive." (Tr. 155-58.) Ms. Moore was intimidated when the Division called to inquire about Mr. Lowry and asked whether she thought she should retain an attorney. (Tr. 133.) She found it unprofessional for the Division at the conclusion of the conversation to direct her to keep the conversation confidential. Based on her business experience, she believes the Division should issue confidentiality warnings before the conversation began. (Tr. 133.) Mr. Seppala questions the Division's priorities and competency. (Tr. 190.)|
|Home | Previous Page||