Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
ALPHA TECH STOCK TRANSFER,
|APPEARANCES:||Robert K. Hunt and Alison J. Okinaka for the Division of Enforcement, Securities and Exchange Commission
James N. Barber for Alpha Tech Stock Transfer and James W. Farrell
|BEFORE:||Brenda P. Murray, Chief Administrative Law Judge|
The Securities and Exchange Commission ("Commission") issued an Order Instituting Proceedings ("OIP") on April 17, 2001, pursuant to Sections 17A(c)(3) and 17A(c)(4)(C) of the Securities Exchange Act of 1934 ("Exchange Act"). That OIP ordered public administrative and cease-and-desist proceedings to: (1) determine whether allegations of illegal conduct are true; (2) allow Respondents to present a defense; and (3) decide whether remedial action and civil penalties are appropriate.1
I held prehearing conferences on May 29, 2001, and December 6, 2001, and a public hearing in Salt Lake City, Utah, on December 10 and 11, 2001. At the hearing, the Division of Enforcement ("Division") called seven witnesses, including James W. Farrell, and introduced twenty-one exhibits. Respondents called Mr. Farrell and Charles Anthony Ferracone, and introduced two exhibits.2
The Division filed its Proposed Findings of Fact and Conclusions of Law and a Brief in Support on February 6, 2002. Respondents' Reply Brief and Proposed Findings of Fact and Conclusions of Law were due on March 5, 2002. On March 7, 2002, Respondents filed for an extension of time for their posthearing submission. I postponed the due date to March 18, 2002, but I did not receive Respondents' filing as of the date of this decision.
The issues presented here are whether Alpha Tech Stock Transfer ("Alpha Tech") willfully violated Sections 17(a)(3) and 17A(d) of the Exchange Act and Exchange Act Rule 17Ad-10(b) and (g), and whether Mr. Farrell willfully aided and abetted the violations.
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 (1981). I have considered all the proposed findings and conclusions, and arguments raised by the parties and accept those consistent with this decision.
Mr. Farrell graduated from the University of Denver in 1971 with a bachelor of science degree in business administration, and he has spent his career working as a business consultant. (Tr. 7-9; Resp. Ex. 1.) In 1989, Mr. Farrell organized Alpha Tech, a registered transfer agent, and he has operated it continuously with one or two employees. (Tr. 87-89, 91, 109.) Section 3(a)(25) of the Exchange Act defines a "transfer agent" as: 3
[A]ny person who engages on behalf of an issuer of securities or on behalf of itself as an issuer of securities in (A) countersigning such securities upon issuance; (B) monitoring the issuance of such securities with a view to preventing unauthorized issuance, a function commonly performed by a person called a registrar; (C) registering the transfer of such securities; (D) exchanging or converting such securities; or (E) transferring record ownership of securities by bookkeeping entry without physical issuance of securities certificates.
(15 U.S.C.§18c(a)(25).) "Under the Exchange Act, a transfer agent is generally any person who engages in certain activities `on behalf of an issuer of securities or on behalf of itself as an issuer of securities. . . .' This definition makes clear that the fiduciary relationship of acting as a transfer agent runs primarily to the issuer . . . ." Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, 74 SEC Docket 2778, 2787-88 (May 18, 2001). Alpha Tech is organized as a trust with Mr. Farrell as the trustee. (Tr. 87-89; Div. Ex. 23.) In 1996, Alpha Tech was headquartered in Salt Lake City, Utah, and had approximately 100 clients. (Tr. 89-90; Div. Exs. 17, 23.)
From 1992 through 1996, Mr. Farrell, Mr. Ferracone, and Whitney Lund urged companies to participate in a stock-leasing program run by James Ericksteen, which they characterized as a way for small public companies to raise capital.4 Mr. Farrell and other promoters received five or ten percent of the fee that a company paid to participate in the stock-leasing program. (Tr. 95-98, 125, 138, 209, 270; Div. Ex. 19.) Mr. Farrell and Mr. Ferracone had an arrangement to split the fee equally. (Tr. 142-43, 313.) According to Mr. Farrell, the program called for public companies to place their treasury shares with European insurance companies who were willing to pay a fee because they could show the shares as an asset on their balance sheets.5 (Tr. 271.) Mr. Farrell represented that international construction companies were willing to enter a stock-leasing program to "enhance their balance sheet" because the laws of certain European countries permitted companies to book as an asset the difference between what they paid for the "right to purchase" the shares and the trading price of the issuer. (Tr. 131-32, 138-40, 185-86.)
Alpha Tech purchased another transfer agent, Specialized Stock Transfer, and replaced it as the transfer agent for Say Yes Foods, Inc. ("Say Yes") in April 1996. (Tr. 107-08.) Say Yes was a start-up company headquartered in Las Vegas, Nevada, that produced and distributed non-fat milk products. (Tr. 12-13, 55.) Robert Donas and others organized Say Yes, and took it public after they merged it with a public shell company in February 1996. (Tr. 12-15, 39-41, 84-85.) Dan Ferraro had rights to the formula that was the basis of Say Yes's product line, and he and Mr. Donas were major shareholders of Say Yes. (Tr. 40, 169-70; Div. Ex. 15 at 5.) Mr. Donas raised $5 million for Say Yes, and, in addition, the company raised net proceeds of $4.5 million from a private offering. (Tr. 57; Div. Ex. 15 at 11.) Say Yes opened on the NASD OTC Bulletin Board at $1.50 a share. (Tr. 56.) In April 1996, Say Yes's shares were priced at around $4.00 a share, and at one point Say Yes's shares sold for over $5.00 a share. (Tr. 21, 56, 284-85.) On December 31, 1997, Say Yes's closing bid price was $2.06 a share. (Div. Ex. 15 at 1.) Say Yes never made a profit and ceased doing business in 1999. (Tr. 20, 55.)
In its role as transfer agent for Say Yes, Alpha Tech had stock certificates onhand that were preprinted with the signatures of Say Yes's secretary, Charles Thomas, and president, Brian Roberts. (Tr. 16-19, 45, 101-03.) As a general practice, Mr. Farrell, acting for Alpha Tech, would issue the certificates at Say Yes's direction by countersigning and delivering the certificates and recording the issuance on the records Alpha Tech maintained for Say Yes. (Tr. 47, 101-06.) On April 18, 1996, Alpha Tech issued two Say Yes certificates, number 1633 and number 1634, representing an issue of 1.4 million restricted shares of Say Yes treasury stock to Philmont A.V.V. ("Philmont"). (Div. Exs. 2, 3, 23.) Mr. Farrell claims that the certificates were part of an unsuccessful stock-leasing program, and that the two certificates were returned to Say Yes within one or two days. (Tr. 144-46, 159-60, 182, 186-87, 190.) Later, on June 13, 1996, Mr. Farrell signed a third certificate, number 1784, representing an issue of two million restricted shares of Say Yes treasury stock to Philmont. (Tr. 142; Div. Ex. 4.) Mr. Farrell then, as part of a stock-leasing program, gave the three certificates to Mr. Ferracone and Mr. Ericksteen who allegedly delivered them to Union Securities, a broker-dealer in Vancouver, Canada, for safekeeping.6 (Tr. 149-52, 286, 290, 308-09.) Mr. Ferracone claims that at the same time he also transmitted two subscription agreements for the shares to Mr. Ericksteen.7 (Tr. 306.) Mr. Farrell understood that Mr. Ericksteen held the shares in the name of Philmont and that they were leased to a third party with the right to purchase. (Tr. 138, 185-86, 269-70, 292.) Alpha Tech did not record the transfer of 3.4 million shares to Philmont on the master securityholder file listing Say Yes's shareholder accounts. (Tr. 163.)
Say Yes was "dumbfounded" in the summer of 1997 when Lehman Brothers International (Europe) ("Lehman") sued to have the three certificates that had been issued to Philmont representing 3.4 million shares of unregistered common stock, or 17.5 percent of Say Yes's total shares outstanding, reissued to Lehman.8 (Tr. 21-23, 52, 227-28, 245; Div. Exs. 2, 3, 4, 5 at 9, 15 at 15.) In June 1997, Say Yes had 19.4 million shares outstanding. This number included 15.5 million free-trading shares and 3.9 million restricted shares. (Div. Ex. 7.) Lehman gained custody of the three Say Yes certificates, numbered 1633, 1634, and 1784, that were in Philmont's account at a private bank in Guernsey, one of the Channel Islands. (Tr. 225-26; Div. Exs. 5, 15 at 15); See Lehman Brothers International (Europe) v. Philmont A.V.V., Ch. 1996 L No. 2855, (High Court of Justice, Chancery Division). When it learned of the lawsuit, Say Yes immediately confronted Mr. Farrell on June 7, 1997, because it had not authorized Alpha Tech to transfer 3.4 million shares to Philmont. (Tr. 22-23.)
Alpha Tech defends its actions by claiming that Say Yes, Mr. Donas, and Mr. Thomas, had approved issuance of the certificates so that Say Yes could raise funds by participating in a stock-leasing program. (Tr. 205-07.) When representatives of Say Yes questioned Mr. Farrell on June 7, 1997, as to why Alpha Tech had issued the three certificates to Philmont, he claimed to have done so to raise money for Say Yes. (Tr. 23-25.) There is no support in the record for Mr. Farrell's claim. Mr. Farrell contends that in April 1996, Say Yes executed a subscription agreement that included a board of director's resolution authorizing the issuance of shares represented by certificates numbered 1633 and 1634. (Tr. 141-42, 180, 184-85.) Mr. Farrell also described the existence of an "original subscription agreement" and a "second subscription agreement" that were signed by Say Yes. Mr. Farrell claims that the subscription agreements in this case, as in other stock-leasing programs, gave the prospective buyer the right to purchase the shares at a ten to fifteen percent discount from the current market price. (Tr. 133-34.) Mr. Farrell considers that in a stock-leasing program a share certificate is "nothing but a piece of paper" until the shares were paid for, similar to a real estate deed of trust or a certificate created in anticipation of a transaction. (Tr. 100, 128, 164-67, 184, 195.) Before the sale is accomplished, the prospective purchaser pays a fee for the right to buy the shares, usually a small percentage of the value of the shares. A small percentage of a large number resulted in annual leasing fees of hundreds of thousands of dollars.9 (Tr. 138-40.) Mr. Ferracone estimated the lease payment for the 3.4 million shares of Say Yes to be about $100,000 per month. (Tr. 291.)
Mr. Farrell claims to have participated in as many as forty or fifty stock-leasing programs before this one. (Tr. 124-25, 135-36, 166, 186; Div. Ex. 19.) According to Mr. Farrell, in a stock-leasing program, a company's transfer agent would sign a stock certificate after the company signed a subscription agreement. Mr. Ericksteen, the stock-leasing program manager, would then deposit the stock certificates into a secure location and the party leasing the shares would make payments back to the issuer. (Tr. 138-40, 152.)
The three certificates representing the 3.4 million Say Yes shares that Alpha Tech issued to Philmont were valued at over $10 million before Lehman sued Say Yes in June 1997 to have those shares reissued in its name. (Tr. 34-35, 54-55; Div. Ex. 12.) I credit the testimony of Timothy Willardson, Say Yes counsel, who determined after investigation that Lehman accurately asserted that the shares had been worth over $10 million when it acquired them and had dropped in value by more than one-third when it filed its suit to have them reissued. (Tr. 246-47.) The amended complaint in Say Yes's action against Lehman and others put the amount in controversy, exclusive of interest and costs, at over $1 million. (Div. Ex. 5.) Say Yes stock suffered a considerable drop in value as a result of the litigation. (Tr. 246.)
The inescapable conclusion from all the evidence is that Say Yes never agreed to participate in a stock-leasing program, and that Alpha Tech acted without authority when it issued the three certificates to Philmont. Except for the testimony of Mr. Farrell and Mr. Ferracone, the record contains considerable consistent oral and documentary evidence that Say Yes did not authorize Alpha Tech to issue the three certificates. (Tr. 271-80, 281, 304.) Michael Eldredge, Christopher Rousselle, Denver Snuffer, Mr. Thomas, and Mr. Willardson all testified that Mr. Farrell accepted responsibility for issuing the three certificates without authority and apologized for the trouble that he had caused on two occasions.10 The first occasion was on July 7, 1997, when Say Yes's officials questioned Mr. Farrell about Lehman's demand. At this meeting, Mr. Farrell signed a letter addressed to Say Yes's president, Mr. Thomas, confirming:
That the [three] share certificates were printed and subsequently canceled with out the [sic] knowledge of [Say Yes] or its board of directors. Additionally, . . . [Say Yes] nor its board had any knowledge of the existence of the [three] share certificates until today.
(Tr. 23-27, 222, 249-50; Div. Ex. 1.)
The second occasion occurred at a meeting Say Yes's officials held with its legal counsel on July 9, 1997. (Tr. 223-28, 238-41, 244, 249-50, 254-56.) Mr. Eldredge began representing Alpha Tech in various matters in 1994, and he began representing Say Yes in January or February 1997. Mr. Eldredge notified Say Yes and Alpha Tech in July 1997, that he could not represent either of them because Mr. Farrell's admission in his July 7, 1997, letter that he issued Say Yes shares without authority created a conflict of interest between them. (Tr. 221-22.) Say Yes retained Mr. Snuffer and Mr. Willardson to contest Lehman's claim to the 3.4 million shares on Mr. Eldredge's recommendation. (Tr. 252-55.)
I reject Mr. Farrell's claim that Mr. Thomas was a knowing participant in the stock-leasing program. (Tr. 125-31, 180, 193-94, 285.) I credit Mr. Thomas's testimony that he had not heard of stock-leasing in 1996, and that Say Yes never agreed to participate in a stock-leasing program. (Tr. 44, 52, 336.) I do so because I observed Mr. Thomas and he presented credible testimony that was consistent with the testimony of Mr. Eldridge, Mr. Rousselle, Mr. Snuffer, and Mr. Willardson. Mr. Farrell's testimony, on the other hand, is contradictory and implausible. For example, there is no support in the record for Mr. Farrell's claim that he was pressured by Mr. Thomas into signing the letter dated July 7, 1997, and that he was told that the letter would not be made public. (Tr. 169-73, 301-02.) Several witnesses who were present when Mr. Farrell signed the letter described Mr. Ferraro and Mr. Thomas as angry and upset, but they testified that Mr. Farrell willingly signed the letter as an acknowledgement that Alpha Tech had no authority to issue the three certificates. These witnesses agreed that it was understood that Say Yes would use the letter to protect its interests. (Tr. 25-31, 241-44, 301-02; Div. Ex. 1.) Mr. Farrell's claim that he did not protest Say Yes's use of the letter because he believed Say Yes knew he had done nothing wrong and would protect him is implausible. (Tr. 301-03) In addition, Mr. Farrell testified at the hearing that Mr. Donas was his main contact at Say Yes and that he dealt with him about ninety-nine percent of the time. (Tr. 146-48.) However, in his investigative testimony, Mr. Farrell testified that Mr. Thomas was his main contact at Say Yes. (Tr. 147.) I find that Mr. Farrell gave untruthful testimony based on his demeanor at the hearing and the content of the entire record. (Tr. 304-05.)
Mr. Farrell claims that Mr. Donas authorized issuance of the three certificates as part of Say Yes's participation in the stock-leasing program, but Mr. Donas was not an officer or director of Say Yes in 1996 so he could not act for Say Yes. (Tr. 83-84, 180, 185, 205-07, 334-35.) In 1996, Mr. Thomas was the officer of Say Yes who generally authorized Alpha Tech to issue certificates. (Tr. 47, 50.) Mr. Thomas did not direct or authorize Alpha Tech to issue Say Yes shares represented by certificate numbers 1633, 1634, and 1784. (Tr. 52.) Mr. Farrell's and Mr. Ferracone's testimony is disputed by six people who testified and by the following four sworn affidavits. Brian Roberts, an officer and director of Say Yes from approximately March through November 1996, denied that Say Yes's board of directors approved any subscription agreements or documents pertaining to the issuance of shares to Philmont. (Tr. 332-33, 335; Div. Ex. 13.) Timothy Zuch, an officer and director of Say Yes from approximately May 1996 through 1999, did not authorize Alpha Tech to issue certificate number 1784, dated June 13, 1996. (Div. Ex. 12.) Henry David Still, a director of Say Yes from approximately 1995 through 1999, neither knew about nor consented to the issuance of the three certificates, and did not sign any subscription agreements pertaining to them. (Div. Ex. 14.) Mr. Rousselle, who also testified in person, never heard that the company was participating in a stock-leasing program. (Tr. 62-64, 67; Div. Ex. 11.)
Mr. Farrell claimed that Mr. Eldredge provided Alpha Tech with both written and oral legal opinions that Say Yes's proposed stock-leasing program was legitimate. (Tr. 215-18, 228, 232, 312-13.) However, Alpha Tech and Mr. Farrell did not produce any written legal opinions, copies of any signed subscription agreements, or board resolutions that support their claims. (Tr. 97-98, 125-28, 141-42, 164, 180, 280, 311-13.) The evidence is compelling that Mr. Farrell and Mr. Ferracone testified falsely that they received: (1) legal opinions that the Say Yes's stock-leasing program was legal; and (2) documents from Say Yes authorizing Alpha Tech to issue the three certificates.
Mr. Farrell's position on whether Alpha Tech issued Say Yes's securities is contradictory. He argued that the certificates representing 3.4 million Say Yes shares were not issued because no payment was ever received. (Tr. 164.) However, he also maintained that Say Yes authorized the issuance of certificates numbered 1633 and 1634 by subscription agreements that contained board resolutions. Mr. Farrell admits the Say Yes board did not authorize the issuance of certificate number 1784. (Tr. 100, 184). It is significant that the certificates themselves do not support Mr. Farrell's position that Alpha Tech did not commit the violations because these shares "represented a transaction that may happen." (Tr. 182.) On their face the certificates do not contain any such qualification. The certificates contain a single legend, which states that the shares of stock represented by the certificates were not registered under the Securities Act of 1933.11 (Tr. 164-65, 181-82, 229; Div. Exs. 2, 3, 4.)
In Mr. Farrell's view, the existence of a subscription agreement signed by the issuer is essential to prove that a company wanted to participate in the stock-leasing program. (Tr. 136, 154-55, 173-74, 305.) However, Alpha Tech and Mr. Farrell do not have copies of any subscription agreements that they claim Say Yes executed in connection with these transactions. (Tr. 7, 140-42, 164, 173-74.) Mr. Farrell began to claim that Say Yes had signed subscription agreements that included a board resolution authorizing issuance of certificates numbered 1633 and 1634 only after Say Yes actively sought to collect $120,000 in legal fees and costs from Alpha Tech. (Tr. 184, 244-45, 247-48, 257-58.) Mr. Thomas did not sign a subscription agreement for these three certificates, and he did not think that any subscription agreements existed. (Tr. 35-36.) It was not until shortly before the hearing in this proceeding that Mr. Snuffer, who has been involved with these matter since July 1997, first heard the allegation that subscription agreements existed. (Tr. 259-60.) Mr. Eldredge denied that he prepared or revised a subscription agreement for Say Yes, and Mr. Snuffer denied that Mr. Farrell ever gave him copies of any subscription agreements. (Tr. 141-42, 173-74, 232, 260.) Mr. Willardson did not see any subscription agreements among the records that he examined while conducting extensive discovery related to the Lehman lawsuit. (Tr. 247.)
There is no basis for Mr. Farrell's claim that the Division has custody of any subscription agreements. (Tr. 136, 143.) First, this claim is contrary to Mr. Ferracone's testimony that he gave the two subscription agreements to Mr. Ericksteen. (Tr. 200, 305-06.) Second, there is no reason to doubt the testimony of Norman Joseph Korb, a senior staff accountant in the Division, that in the investigation prior to this proceeding only Mr. Farrell, his counsel, and perhaps Mr. Ferracone mentioned subscription agreements. (Tr. 328.) Other witnesses denied that subscription agreements existed. (Tr. 328.) Moreover, Alpha Tech and Mr. Farrell did not produced any subscription agreements or any documents that show Say Yes's management was aware of a stock-leasing program in response to a Commission subpoena for all related documents. (Tr. 329.)
Mr. Korb's description of the thorough but futile search that the Division conducted supports my finding that the subscription agreements mentioned by Mr. Farrell as crucial to a stock-leasing program never existed.12 (Tr. 329-31.) Mr. Farrell had responded to a subpoena in connection with SEC v. Farrell, No. 97CV1684H (POR) (S.D. Cal. 1997). (Tr. 329.) Mr. Korb arranged for Division counsel in that proceeding to search their records for any material that indicated Say Yes knew about a stock-leasing program. They found nothing. (Tr. 329-30.) In addition, Mr. Korb retrieved from storage and personally examined forty-three boxes of documents and records that were gathered as part of the earlier investigation. He found nothing to indicate that Say Yes participated in a stock-leasing program. Moreover, almost all the material was generated in 1993 and 1994, well before the three certificates were issued in April and June 1996. (Tr. 330-31.) Finally, Mr. Korb examined boxes of materials that were gathered by Say Yes's counsel in the Lehman litigation, but he found nothing that indicated that Say Yes knew of or participated in the issuance of certificates numbered 1633, 1634, and 1784. (Tr. 331.)
My finding that Say Yes did not authorize Alpha Tech to issue certificates numbered 1633, 1634, and 1784 is supported by the ruling of the district court in Say Yes Foods, Inc. v. Philmont A.V.V., Civil No. 2:97-CV-548C (D. Utah 1997), where the court issued a declaratory judgment canceling and declaring null and void the three Say Yes certificates held by Lehman because no consideration was paid for the shares.13 (Tr. 52-54, 256-57.) In addition, I found Mr. Snuffer credible that he would not have represented to the district court that Alpha Tech issued the three certificates without Say Yes's approval if he had any reason to doubt this crucial fact. (Tr. 258.) Finally, in its answer to Say Yes's complaint, Alpha Tech did not deny that it had no authority to issue the certificates, and its answer to the amended complaint admitted that Say Yes's board of directors did not authorize the sale of Say Yes stock represented by the three certificates. (Tr. 257; Div. Ex. 24 at ¶ 45.)
Conclusions of Law
The OIP alleges that Alpha Tech willfully violated Sections 17(a)(3) and 17A(d) of the Exchange Act and Rule 17Ad-10(b) and (g), thereunder, and that Mr. Farrell willfully aided and abetted Alpha Tech's violations
Section 17(a)(3) states that every registered transfer agent shall make and keep for prescribed periods of time such records as the appropriate regulatory agency prescribes as necessary or appropriate to further the purposes of Section 17A. Section 17A(d)(1) states that no registered transfer agent shall engage in any activity as a transfer agent in contravention of any Commission rule or regulation. The result is that a violation of a Commission regulation is an automatic violation of Sections 17(a)(3) and 17A(d)(1).
Rule 17Ad-10(a)(1) states that every transfer agent shall promptly and accurately post to the master securityholder file information representing every certificate transferred.14 Rule 17Ad-10(b) specifies that every transfer agent shall maintain and keep current an accurate master securityholder file and subsidiary file.
Scienter, a mental state embracing an intent to deceive, manipulate, or defraud, is not required to establish violations of the Commission's reporting and recordkeeping requirements. See S.E.C. v. Drexel Burnham Lambert, Inc., 837 F. Supp. 587, 610 (S.D. N.Y. 1993); S.E.C. v. World-Wide Coin Invs., LTD, 567 F. Supp. 724, 748-49 (N.D. Ga. 1983) ("The concept that the books and records provisions of the [Federal Corrupt Practices Act] embodies a scienter requirement would be inconsistent with the language of section 13(b)(2)(A), which contains no words indicating that Congress intended to impose such a requirement."); see also Curtis L. Dally, 65 SEC Docket 1540, 1544 (Sept. 29, 1997) (involving a settlement in which the Commission held that "No showing of scienter is required to establish a violation of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-13 and 13b2-1 promulgated thereunder").
As defined by Exchange Act Rule 17Ad-9, a "`Master securityholder file' is the official list of individual securityholder accounts," and a "`subsidiary file' is any list or record of accounts, security holders, or certificates that evidences debits or credits that have not been posted to the master security holder file."
Alpha Tech willfully violated Sections 17(a)(3) and 17A(d) and Rule 17Ad-10(b) because it was Say Yes's transfer agent and it failed to record that Say Yes's certificates numbered 1633 and 1634, for 800,000 shares and 600,000 shares, respectively, were issued to Philmont on April 18, 1996, and that Say Yes's certificate number 1784 for two million shares was issued to Philmont on June 13, 1996. (Tr. 156-63; Div. Exs. 2-4, 8, 9.) The term willful means intentionally committing the acts that constitute the violation. See Wonsover v. SEC, 205 F.3d 408, *414 (D.C. Cir. Mar. 14, 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); C. James Padgett, 52 S.E.C. 1257, 1266 n.34 (1997), aff'd sub nom. Sullivan v. SEC, 159 F.3d 637 (D.C. Cir. 1998) (unpublished table decision).
Mr. Farrell and Alpha Tech also defend their actions with the claim that they relied in good faith on the advice of Mr. Eldredge, Alpha Tech's legal counsel, and other attorneys. (Tr. 144-45, 156-64, 166-68, 179-80.) Mr. Farrell and Alpha Tech failed to prove the essential elements of a reliance on counsel defense. Alpha Tech and Mr. Farrell have not shown that they: (1) made complete disclosure to counsel; (2) requested an opinion from counsel on whether their proposed actions were lawful; (3) received an opinion from counsel that it was not necessary to record issuance of 3.4 million shares of Say Yes's securities; and (4) that acted in good faith in reliance on that advice. See Markowski v. SEC, 34 F.3d 99, 104-05 (2d Cir. 1994); Gerhauser, 68 SEC Docket 1289, 1300 n.26 (Nov. 24, 1998) (citing John Thomas Gabriel, 51 S.E.C. 1285, 1292 (1994), aff'd, 60 F.3d 812 (2d Cir. 1995) (unpublished table decision)); Richard J. Lanigan, 52 S.E.C. 375, 377 n.9 (1995). Mr. Eldredge denies that he advised Alpha Tech that it was not required to record the issuance of 3.4 million shares on Say Yes's books and records because it was part of a stock-leasing arrangement. (Tr. 232.) I found Mr. Eldredge to be credible and accept his denial as true. I base this finding on my observations of Mr. Eldredge's demeanor and the content of his sworn testimony. Finally, a person claiming to have relied on counsel has the burden of proof, and Alpha Tech and Mr. Farrell have not carried that burden. They failed to put in evidence any of the written opinions that Mr. Eldridge and the other attorneys allegedly provided, and the only support for their claim is the testimony of Mr. Farrell and Mr. Ferracone. (Tr. 280; See Gerhauser, 68 SEC Docket at 1300 n.26.)
Rule 17Ad-10(g)(1) provides that the transfer agent shall buy an equal number of equity securities within sixty days of discovering a record difference caused by an over-issuance. Under Rule 17Ad-9(g), a record difference occurs when the total number of shares in the master securityholder file does not equal the number of shares in the control book or when the security transferred contains "certificate detail different from the certificate detail currently on the master securityholder file." An over-issuance can occur when the transfer agent identifies erroneously issued certificates. See Loss & Seligman, supra, at 2937 n.128. I find that Alpha Tech willfully violated Section 17(a)(3) and Rule 17Ad-10(g)(1) because it knew that Say Yes had an over-issuance of 3.4 million shares and it did not buy 3.4 million shares of Say Yes securities to eliminate the condition within sixty days.
Aiding and abetting violations of the securities laws involve three elements: (1) a primary violation by another party; (2) awareness or knowledge by the aider and abettor that his or her role was part of an overall activity that was improper; and (3) that the aider and abettor knowingly and substantially assisted in the conduct that constituted the primary violation. See Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 47-48 (2d Cir. 1978); Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009-10 (11th Cir. 1985); Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94-95 (5th Cir. 1975). Mr. Farrell willfully aided and abetted Alpha Tech's violations because he knew that Alpha Tech had violated provisions of the Exchange Act and the rules thereunder, and he knew that his actions caused Alpha Tech's violations. (Tr. 105, 116, 122.)
The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970); 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). The following considerations comprise the relevant norms for assessing the public interest determination:
[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 the likelihood that the defendant's occupation will present opportunities for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981); see also Donald T. Sheldon, 51 S.E.C. 59, 86 (1992).
The nature of the offense and the aggravating circumstances surrounding Alpha Tech's actions call for a most severe sanction. Mr. Farrell caused Alpha Tech to commit a flagrant breach of the fiduciary duty it owed to its principal for his own economic benefit. Mr. Farrell had a high degree of scienter when he committed the acts at issue. He is a college graduate with thirty years experience as a business consultant; he had operated as a one-person registered transfer agent for seven years; and his testimony evidenced considerable knowledge of the duties of a transfer agent and other aspects of the securities industry. Mr. Farrell's improper actions continued over an extended period of time. Alpha Tech's books and records violations and its failure to correct the over-issuance of Say Yes's stock began in April 1996, and continued until Say Yes terminated Alpha Tech as its transfer agent in early 1998. (Tr. 318) By his testimony, Mr. Farrell showed himself to be knowledgeable, and totally unreliable. As detailed in this decision, he is unshakable and unapologetic even though he has no supporting documents, and numerous witnesses contradicted his version of events.
On September 16, 1997, the Commission challenged the legality of Mr. Farrell's stock-leasing activities in SEC v. Farrell. (Div. Ex. 19.) The complaint alleged that Mr. Farrell was a trustee of Delta West Management Trust, an Isle of Man trust, and Alpha Tech Business Services Trust, a Utah trust, and that both trusts were established to engage in stock-leasing transactions.15 (Div. Ex. 19 at 3.) On June 18, 1998, Mr. Farrell consented to the entry of a permanent injunction enjoining him from violations of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The district court ordered Mr. Farrell to disgorge $7,400. It did not assess a civil penalty based on Mr. Farrell's Statement of Financial Condition. (Tr. 189; Div. Ex. 18.). See SEC v. Farrell, No. 97CV1684H (POR) (S.D. Cal. 1998). Despite the injunction, Mr. Farrell did not offer any assurance in this proceeding that he would abide by the securities laws and rules and regulations in the future, and did not acknowledge the wrongful nature of his conduct. The Steadman criterion that accords consideration to whether a person recognizes the wrongful nature of his conduct does not make it inappropriate for someone to argue strongly that he or she believed that they acted legally before and after the violations. It does, in my opinion, make it relevant in judging the public interest implications, specifically the likelihood of recidivism, when someone insists that they did not commit allegations even though the evidence is overwhelming that they acted illegally, and when the person is subject to a permanent injunction based on the same type of conduct.
A person's prior disciplinary history is a relevant consideration in determining an appropriate sanction. See Pagel, Inc. v. SEC, 803 F.2d 942, 948 (8th Cir. 1986); SEC v. First Financial Group of Texas, 645 F.2d 429 (5th Cir. 1981); J.V. Ace & Co., Inc., 47 SEC Docket 1874, 1882 (1990); Walter Capital Corp., 45 SEC Docket 140, 144 (1989); W. N. Whelen & Co., Inc, 46 SEC Docket 1889, 1895-96 (1990); LSCO Securities, Inc., 43 SEC Docket 1354, 1360 (1989); Michael J. Markowski, Exchange Act Release No. 44086 (March 20, 2001). Alpha Tech and Mr. Farrell have committed other violations in addition to those found in this decision. On August 26, 1999, the Commission accepted an Offer of Settlement from Alpha Tech that resolved allegations that Alpha Tech violated Sections 17(a)(3) and 17A(d)(1) of the Exchange Act and Rule 17Ad-18 thereunder, by failing to file with the Commission Form TA-Y2K regarding its Year 2000 compliance efforts. The Commission found that Alpha Tech did not have the financial ability to pay a civil penalty, and issued a censure. (Div. Ex. 21.); see Alpha Tech Stock Transfer Trust, 70 SEC Docket 1276 (Aug. 26, 1999). On August 21, 2000, the Commission censured Mr. Farrell and Alpha Tech, and ordered them: (1) to cease and desist from committing or causing any violations or future violations of Sections 17(a)(3) and 17A(d)(1) of the Exchange Act and Rules 17Ac2-1, 17Ac2-2, 17Ad-6, 17Ad-7, 17Ad-10, 17Ad-12, 17Ad-13, 17Ad-15, 17Ad-16, 17f-1, and 17f-2 thereunder; (2) to retain an independent CPA to conduct semi-annual reviews of Alpha Tech's practices, policies and procedures; and (3) to pay a $10,000 civil penalty. (Div. Ex. 22.). See Alpha Tech Stock Transfer Trust, 73 SEC Docket 233 (Aug. 21, 2000). Mr. Farrell has paid the $10,000 civil penalty. (Tr. 323-24; Resp. Ex. 2.)
I conclude that the Commission should revoke Alpha Tech's registration and bar Mr. Farrell from association with a transfer agent because they present a threat to investors and less severe measures have been ineffective.
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 January 28, 2002.
Based on the findings and conclusions set forth above:
I ORDER, pursuant to Section 17A(c)(3) of the Securities Exchange Act of 1934, that the transfer agent registration of Alpha Tech Stock Transfer be and hereby is revoked;
I FURTHER ORDER, pursuant to Section 17A(c)(4)(C) of the Securities Exchange Act of 1934, that James W. Farrell is barred from being associated with a transfer agent.
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 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||The reference to a cease-and-desist proceeding appears to be in error because the OIP was not instituted pursuant to Section 21C of the Exchange Act.|
|2||The start of the hearing was delayed to allow for Commission consideration of Respondents' Offer of Settlement. The Commission rejected the proposed settlement in late September 2001. "Tr. __" refers to the transcript of the hearing. Joint Exhibit 1 contains stipulations by the parties. I will refer to the Joint Exhibit, Division's Exhibits, and Respondents' Exhibits as "Jt. Ex. 1," "Div. Ex. __," and "Resp. Ex. __," respectively.|
|3||The Commission began regulating the securities transfer and clearance process in 1975 as a result of the "back office" crisis that occurred in 1967-70. VI Loss & Seligman, Securities Regulation 2897 (3d ed. 1990). Section 17A(c)(1) of the Exchange Act, part of the Securities Acts Amendments of 1975, makes it mandatory for persons to register with the Commission in order to operate as transfer agents in interstate commerce in connection with securities registered under Section 12 of the Exchange Act. "In cases where the transfer agent is a bank, it will register with the appropriate bank regulatory agency, and in the case of all other transfer agents, registration shall be with the Commission." Loss & Seligman, supra at 2922-23 (citing S. Rep. No. 94-75, 94th Cong., 1st Sess. 57 (1975)).|
|4||Mr. Ferracone attended Pasadena City College for two years. In December 2001, he was a business consultant assisting small public companies with finance and business plans. (Tr. 315-16.) Mr. Lund was closely involved in Mr. Farrell's activities that are at issue here. (Tr. 97, 125, 153-54, 168-69, 208-09, 218-19, 222.)|
|5||Treasury stock is described as "previously issued shares of stock repurchased and held by the issuer." Barron's Dictionary of Banking Terms, 477 (3rd. 1997).|
|6||Alpha Tech's records do not show any shares issued to Philmont, but reflect that Say Yes issued certificate numbers 1633 and 1634 for 30,000 shares and 40,000 shares, respectively, to Philadep & Co., on April 19, 1996. (Div. Ex. 8.)|
|7||A subscription agreement is a document evidencing an intent to buy newly issued securities. Barron's Dictionary of Finance and Investment Terms, 569 (4th ed. 1995).|
|8||The record does not reference a lawsuit by Lehman to have Say Yes reissue the certificates. In response to the Lehman's demand, however, Say Yes filed a lawsuit in the district court in Utah. See Say Yes Foods, Inc. v. Philmont A.V.V., Civil No. 2:97-CV-548C (D. Utah 1997). A third lawsuit mentioned in this decision is a civil action brought by the Commission in 1997 against the Respondents and others for engaging in stock-leasing programs. See SEC v. Farrell, No. 97CV1684H (POR) (S.D. Cal. 1998).|
|9||Philmont allegedly agreed to pay $12 million to buy 1.4 million shares of Say Yes's stock represented by certificates numbered 1633 and 1634, and monthly interest of $40,000. (Div. Exs. 5 at ¶ 20, 24 at 4.)|
|10||Mr. Rousselle was a board member before Say Yes went public and rejoined the board in early 1997. Mr. Thomas was Say Yes's secretary and board member in 1996 when Alpha Tech issued the certificates. He was Say Yes's president in 1997 when Lehman wanted the certificates reissued. Mr. Snuffer and Mr. Willardson represented Say Yes in the suit to recover the certificates from Lehman. (Tr. 236-37, 253-56.)|
|11|| All the certificates at issue here contained a "Regulation S" restriction, however, the word not is missing from the legend on certificates numbered 1633 and 1634.
(Div. Exs. 2, 3, 4) (emphasis added)
|12||The Commission has employed Mr. Korb, a graduate of the University of North Dakota and a CPA, since 1975. (Tr. 327.)|
|13||Say Yes challenged Lehman's status as a bona fide purchaser. Lehman settled the action after it partially lost a motion for summary judgment. (Tr. 198, 256-57.) Alpha Tech and Mr. Farrell paid Say Yes approximately $50,000 pursuant to a settlement. (Tr. 207-08, 245.)|
|14||The Commission enacted Rule 17Ad-10(a)(1) in 1983, "in response to examples of substandard transfer agent performance." Loss & Seligman, supra, at 2934.|
|15||Mr. Farrell appears to have operated Alpha Tech Business Services Trust. (Tr. 213; Div. Ex. 19 at 3.) Mr. Ferracone refused to testify in the Commission's investigation that led to SEC v. Farrell, in which he was a named defendant. (Tr. 317.) In that civil action, Mr. Ferracone consented to the entry of a cease-and-desist order against further participation in stock-leasing programs. (Tr. 304-05.)|
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