Initial Decision of an SEC Administrative Law Judge
In the Matter of Jerome M. Wenger
INITIAL DECISION RELEASE NO. 192
UNITED STATES OF AMERICA
This Initial Decision bars Jerome M. Wenger from participating in any offering of penny stock. It is based on an injunction ordered against him in 2000 by the U.S. District Court for the Southern District of Florida. That court concluded that Wenger violated the securities laws by fraud and illegal touting and permanently enjoined him from committing any further violations of the securities laws. Omnigene Diagnostics, Inc., had paid him to recommend its stock in his newsletter and syndicated radio talk show during 1996. Wenger did not make any independent investigation of the company, and did not tell listeners and readers that he was paid to promote the stock or that he owned shares, which he sold at a profit before trading was suspended and the price plummeted.
A. Procedural Background
The Securities and Exchange Commission (Commission) instituted this proceeding, pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act), on March 27, 2001, with an Order Instituting Proceedings (OIP). Pursuant to leave granted by an August 28 Order and to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. § 201.250, the Division of Enforcement (Division) filed a Motion for Summary Disposition on August 20, and Respondent Wenger filed his Response on September 7. Rule 250(b) requires the administrative law judge to act "promptly" on a Motion for Summary Disposition.
This Initial Decision is based on the Division’s Motion for Summary Disposition; Wenger’s Response; and Wenger’s Answer to the OIP, dated April 27, 2001. There is no genuine issue with regard to any fact that is material to this proceeding, and the Division is entitled to summary disposition as a matter of law. All material facts that concern the activities for which Wenger was enjoined were already litigated, and decided against him, in the proceeding on which this proceeding is based. Wenger is collaterally estopped from relitigating those material facts in this proceeding. Any other facts contained in his pleadings have been taken as true, pursuant to Rule 250(a), in the light most favorable to Wenger. All arguments and proposed findings and conclusions that are inconsistent with this decision were considered and rejected.
B. Allegations and Arguments of the Parties
The OIP alleges that on March 15, 2000, as amended April 7, 2000, a final judgment of permanent injunction was entered against Wenger in SEC v. Omnigene Development, Inc., f/k/a/ Omnigene Diagnostics, Inc., No. 98-8672-CIV-JORDAN (S.D. Fla. 2000) (SEC v. Omnigene) based on his violations of Sections 17(a) and 17(b) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The OIP further alleges that Wenger was participating in an offering of penny stock at the time he committed the violations. The Division urges that Wenger be barred from participating in any offering of penny stock.
Wenger argues that it is not in the public interest to impose a penny stock bar against him. Referencing the factors set forth in 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)), he maintains that the violations underlying the injunction do not warrant a penny stock bar because they were not egregious, were isolated rather than recurrent, did not involve a high degree of scienter, and were in reliance on advice of counsel. He further maintains that his non-disclosures were not material and, alternatively, that any duty to disclose was discharged by various disclaimers. He also maintains that Section 17(b) of the Securities Act is unconstitutional. As to the future, he states that the violations will not recur and that his current occupation will not present any opportunities for repeating the same violations. Finally, if the Commission determines that remedial action is in the public interest, he requests a suspension that might be lifted on a showing of rehabilitation, rather than a bar.
Wenger also requests a stay. He argues that he is hampered in his ability to present evidence of his sincerity and recognition of the wrongfulness of his actions in this administrative proceeding because he has asserted his Fifth Amendment privilege against self-incrimination in three criminal proceedings, one of which arises out of the same fact situation as the instant proceeding.
C. Procedural Issues
1. Collateral Estoppel
Wenger disputes the elements of his securities fraud and illegal touting violations. He argues that his violations did not involve a high degree of scienter. He further maintains that his non-disclosures were not material and, alternatively, any duty to disclose was discharged by various disclaimers. These arguments are unavailing. The district court decided these issues in concluding that Wenger violated Sections 17(a) and 17(b) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
A respondent in a Commission administrative proceeding is not permitted to relitigate the merits of a proceeding that resulted in an injunction against him. He may not relitigate the findings of fact or conclusions of law made by the court in the underlying civil proceeding. See BFG Sec., Inc., 2001 SEC LEXIS 1521 at *5 n.5 (July 31, 2001); Robert Sayegh, 69 SEC Docket 1307, 1312 (Mar. 30, 1999), recon., 70 SEC Docket 1126 (Aug. 19, 1999); John Francis D’Acquisto, 53 S.E.C. 440, 444 (1998).
2. Stay Request
Wenger’s stay request will be denied. It is based on his intent to invoke his Fifth Amendment privilege against self-incrimination until the criminal proceedings against him are resolved. An adverse inference may be drawn from a respondent’s refusal to testify in a Commission administrative proceeding.1 However, consistent with Rule 250, no adverse inference will be drawn from Wenger’s silence, and the facts of his pleadings will be taken as true. Thus, he has not been hampered in his defense in this proceeding by invoking his Fifth Amendment privilege against self-incrimination. The basis for his stay request lacks merit, and the interests of justice do not otherwise require a stay. See SEC v. Dresser Indus., 628 F.2d 1368, 1375-76 (D.C. Cir. 1980) (discussing factors, including a party’s Fifth Amendment privilege against self-incrimination, that bear on a court’s determination of whether to stay a civil proceeding pending the outcome of a criminal proceeding).
3. Official Notice
Official notice is taken of the following orders in SEC v. Omnigene that were included in the Motion for Summary Disposition at Exhibits A, B, and C and in Wenger’s Response at Exhibit C:
March 15, 2000, Order Granting Plaintiff’s Motion for Summary Judgment against Wenger (Div. Ex. 1).
April 7, 2000, Order Modifying Order Granting Summary Judgment (Div. Ex. 2).
April 7, 2000, Final Judgment and Permanent Injunction enjoining Wenger from committing any further violations of the securities laws and ordering him to pay disgorgement plus prejudgment interest totaling $66,796.36 and a civil fine of $15,000 (Div. Ex. 3).
Official notice is taken of the following item that was included in Wenger’s Response at Exhibit B:
June 28, 1994, letter from David R. Sonnenberg to Wenger rendering legal advice concerning the radio broadcasts (Resp. Ex. 1).
II. FINDINGS OF FACT
On March 15, 2000, as amended April 7, 2000, the United States District Court for the Southern District of Florida entered a final judgment of permanent injunction against Wenger in SEC v. Omnigene based on his violations of Sections 17(a) and 17(b) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Div. Exs. 1-3. The court enjoined Wenger from committing any further violations of the securities laws of the United States of America and ordered him to disgorge $50,662.50 plus prejudgment interest of $16,133.86 and to pay a civil fine of $15,000. Div. Ex. 3. The court’s March 15, 2000, Order Granting Plaintiff’s Motion for Summary Judgment made findings of fact and conclusions of law. Div. Ex. 1.
From 1991 to 1996 Wenger published a newsletter and produced a syndicated radio show, both of which promoted stocks and were entitled The Next SuperStock. Div. Ex. 1 at 2. In July 1996 Omnigene hired Wenger to promote its stock in exchange for 66,000 shares of Omnigene, worth $165,000. Div. Ex. 1 at 2. Wenger purchased an additional 1,000 shares in the market. Div. Ex. 1 at 2. The next month the newsletter promoted Omnigene stock in an item beginning on the first page. Div. Ex. 1 at 2. The last page contained a boilerplate, vague disclaimer concerning possible conflicts of interest. Div. Ex. 1 at 2. Omnigene was featured on the radio show at least four times from October to November 1996. In three of the broadcasts Wenger said he was a "consultant" for Omnigene and that he had purchased Omnigene on the open market. Div. Ex. 1 at 2-3. He did not disclose in either the newsletter or radio show that he had been paid 66,000 shares to promote Omnigene stock. Div. Ex. 1 at 3. Wenger made no effort to investigate Omnigene before encouraging his readers and listeners to invest in it. Div. Ex. 1 at 5. Between October 17 and November 19, 1996, when the Commission suspended trading in Omnigene, Wenger sold 10,000 shares of Omnigene for $50,662.50. Div. Ex. 1 at 3, 5.
During the period that Wenger was promoting Omnigene, its price rose. The price was $1.00 on July 6, 1996, $2.00 on August 1, $2.50 on September 3, $3.625 on October 9, $4.75 on October 21, and $5.50 on November 6.2 The Commission suspended trading in Omnigene on November 19, 1996, when it closed at over $6.00; it opened at 87.5 cents when trading resumed. Div. Ex. 1 at 5.
The district court concluded that Wenger’s failure to disclose his position in Omnigene was a material omission and was misleading to his readers and listeners. The vaguely worded disclaimer was also misleading. Div. Ex. 1 at 5. Similarly, the court concluded that Wenger’s statement that he was a consultant to Omnigene when his only relationship to the company was to tout its stock was misleading. Div. Ex. 1 at 5. Concerning scienter, the court concluded that he was "at least severely reckless" in failing to make any independent investigation and in failing to disclose his ownership of stock and the true nature of his relationship with Omnigene. Div. Ex. 1 at 5. Thus, the court concluded his actions constituted securities fraud in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The court also concluded that his conduct was illegal touting in violation of Section 17(b) of the Securities Act and that the disclaimers did not comply with the requirements of Section 17(b). Wenger violated the securities laws in the 1980s while publishing a similar newsletter. Div. Ex. 1 at 7.3
Wenger argues that his violative actions were undertaken in reliance on the advice of counsel.4 Wenger sought the advice of counsel concerning his radio broadcasts. Resp. Ex. 1. In a June 28, 1994, letter to Wenger, David R. Sonnenberg, his attorney, states that Wenger told him that the practical limitations of airtime precluded Wenger from making anything more than a general statement that he is a paid consultant, and that Wenger believed that this was not deceptive. Sonnenberg goes on to say, "[h]owever, I have explained to you that the SEC may well find the level of disclosure problematic [and] I believe that you may well better position yourself for the oncoming battle which we expect with the SEC by informing the public, on your radio broadcasts" that details are available on request, and that "such an approach would go a long way toward reducing your exposure on this particular issue." Resp. Ex. 1. Consistent with Rule 250, this must be viewed in the light most favorable to Wenger. However, Sonnenberg’s advice does not refer to or apply to the newsletter. Indeed, Wenger’s stated reason for limiting disclosure on the radio – practical limitations of airtime – could not apply to the newsletter.
Wenger is no longer involved in any securities-related activities. Response at 10. He recognizes the wrongfulness of his conduct. Response at 8. Wenger does not intend to engage in securities fraud and illegal touting in the future, and there is no reasonable likelihood that his current occupation will present any opportunities for such future violations. Answer at 5-6.
III. CONCLUSIONS OF LAW
Wenger violated Sections 17(a) and 17(b) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in 1996 by his actions in promoting Omnigene stock and was enjoined from further violations of the securities laws in 2000. Omnigene stock was penny stock within the meaning of Exchange Act Rule 3a51-1(d)(1). At the time of the violations for which he was enjoined Wenger was participating, by means of his violative conduct, in an offering of penny stock within the meaning of Section 15(b)(6)(A) of the Exchange Act. Wenger has been enjoined "from engaging in or continuing any conduct or practice . . . in connection with the purchase or sale of any security" within the meaning of Sections 15(b)(4)(C) and 15(b)(6)(A)(iii) of the Exchange Act. The injunction, and the violative conduct as well, occurred within five years of the commencement of this proceeding and thus within the applicable five-year statute of limitations. See Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996) (discussing the relevance to Commission proceedings of 28 U.S.C. § 2462, a statute of general applicability that provides a five-year statute of limitations for the enforcement of any civil fine, penalty, or forfeiture).
Wenger argues that Section 17(b) of the Securities Act is unconstitutional. The Commission is not authorized to declare Acts of Congress unconstitutional, and Wenger cites no authority to the contrary.
As the Division requests, Wenger will be barred from participating in any offering of penny stock. This sanction will serve the public interest and the protection of investors, pursuant to Section 15(b)(6) of the Exchange Act. It accords with Commission precedent and sanction considerations set forth in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979).
Wenger’s unlawful conduct, for which he was enjoined, involved a high degree of scienter, "at least severely reckless," and was egregious and recurring, continuing for several months in 1996. Wenger’s disciplinary history, his 1984 settlement of fraud charges involving a newsletter, adds to his scienter and the egregious and recurrent nature of his violation.
The facts that Wenger recognizes the wrongfulness of his conduct, that his current occupation does not provide the opportunity for future securities fraud and illegal touting, and that he has foresworn such future violations are mitigating factors. The fact that Wenger sought the advice of counsel concerning disclosure on his radio broadcasts is also a mitigating factor. His lawyer’s advice was irrelevant to his incomplete and misleading disclosure in the newsletter, however, and must be seen in light of Wenger’s disciplinary history of fraud charges in connection with a newsletter.
Although Wenger’s present circumstances and intention to refrain from violations in the future are mitigating circumstances, "past misconduct [may be] the basis for an inference that the risk of probable future misconduct [is] sufficient to require exclusion from the securities business." Arthur Lipper Corp., 46 S.E.C. 78, 101 (1975). In spite of Wenger’s good intentions, he would still be free to participate in penny stock offerings, so it is necessary to take appropriate preventative action in the public interest and for the protection of investors. Id. at 101 n.72.
Additionally, in litigated administrative proceedings based on an injunction against an individual who committed antifraud violations involving penny stock the Commission imposes a penny stock bar. See Russell G. Koch, 52 S.E.C. 1330 (1997), reversed on other grounds, 177 F.3d 784 (9th Cir. 1999). Similarly, in litigated proceedings based on an injunction against an individual who is associated with a broker-dealer or investment adviser the Commission almost invariably imposes a bar. See Michael J. Markowski, 74 SEC Docket 1537 (Mar. 20, 2001), appeal pending, No. 01-1181 (D.C. Cir.); Seaboard Investment Advisers, Inc., 74 SEC Docket 201 (Jan. 10, 2001); Martin R. Kaiden, 70 SEC Docket 439 (July 20, 1999); Robert Sayegh, 69 SEC Docket 1307 (Mar. 30, 1999); John Francis D’Acquisto, 53 S.E.C. 440 (1998); Demitrios Julius Shiva, 52 S.E.C. 1247 (1997); Robert I. Moses, 52 S.E.C. 1026 (1996); Timothy Mobley, 52 S.E.C. 592 (1996); David M. Haber, 52 S.E.C. 201 (1995).5
V. PROCEDURAL ORDER
IT IS ORDERED that Jerome M. Wenger’s request to STAY this proceeding IS DENIED.
IT IS FURTHER ORDERED that the October 5, 2001, scheduled hearing date in this proceeding IS VACATED.
IT IS ORDERED that Jerome M. Wenger IS BARRED from participating in any offering of penny stock.
This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this 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.