Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
ROBERT M. FULLER
August 2, 2002
|APPEARANCES:||Alex Rue and William P. Hicks for the Division of Enforcement, Securities and Exchange Commission
Anthony L. Cochran and Brian F. McEvoy, of Chilivis, Cochran, Larkins & Bever LLP for Robert M. Fuller
Robert Plotkin of Paul, Hastings, Janofsky & Walker for Richard P. Smyth and Nancy Estroff Smyth
|BEFORE:||Brenda P. Murray, Chief Administrative Law Judge|
I. Procedural History
On September 17, 2001, the Securities and Exchange Commission ("Commission") issued an Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 ("OIP"). I held hearings in Atlanta, Georgia, on December 17 through 19, 2001. The Division of Enforcement ("Division") presented eight witnesses, and introduced thirty-seven exhibits.1 Two witnesses, Richard P. Smyth and his wife, Nancy Estroff Smyth, refused to answer any questions citing the Fifth Amendment to the Constitution. (Tr. 465, 467-68.) Robert M. Fuller testified on his own behalf and presented four witnesses, including one expert. Mr. Fuller offered five exhibits.
The Division filed Proposed Findings of Fact and Conclusions of Law and a Brief on February 26, 2002. Mr. Fuller filed Proposed Findings of Fact, a Denial and Refutation of the Division's Proposed Findings of Fact, and a Brief on March 14, 2002.2 The Division filed a Reply Brief on April 7, 2002.
My findings and conclusions are based on the record and my observation of the witnesses' demeanor. I have drawn an adverse inference from the Smyths' failure to testify or explain in an administrative proceeding facts and circumstances about which they had first-hand knowledge. See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976); N. Sims Organ & Co. v. SEC, 293 F.2d 78, 80-81 (2d Cir. 1961); SEC v. Kelly Andrews & Bradley, Inc., 341 F.Supp. 1201, 1205 (S.D.N.Y. 1972); In the Matter of Daniel R. Lehl, 77 SEC Docket 2153, 2167 n.33 (2002). 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 raised by the parties and I accept those that are consistent with this decision.
The OIP alleged that Mr. Fuller caused Vista 2000, Inc. ("Vista") to violate Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder, by acquiescing in the actions of Vista's chief executive officer who used $1.3 million of Vista's initial public offering ("IPO") proceeds to buy units in the IPO; by signing Vista's Form 10-KSB40 ("1994 Form 10-K") for the year ended September 30, 1994, knowing it contained false information about the purchase of units in the IPO; and by filing financial statements that were not prepared by independent auditors. The OIP also charged that Mr. Fuller caused Vista to violate Section 13(a) of the Exchange Act, and Rules 13a-1 and 12b-20 by filing reports that were not in accordance with Commission rules and regulations. The final issue is whether the Commission should issue a cease and desist order if Mr. Fuller caused Vista's violations.
III. Findings of Fact
A. Robert M. Fuller
Mr. Fuller is a 1970-71 graduate of the University of Georgia with a major in journalism, advertising, and public relations. (Tr. 63.) Although he does not consider himself a promoter, Mr. Fuller's business practice is to invite a network of people who trust his investment advice to participate in various business ventures. (Tr. 73-75, 501-03, 654.) Mr. Fuller has enjoyed considerable financial success based on his ability to organize and raise capital for start-up companies. For example, he helped create and take public URCARCO, now known as AmeriCredit.3 (Tr. 66-67.) Mr. Fuller and his family realized profits of between $1 and $2 million from their sale of URCARCO securities. (Tr. 70-71.) Mr. Fuller also organized Detention Management Services, a private company that supervises people on probation for committing misdemeanors. In November 2000, Mr. Fuller and three partners sold that company for $8.2 million. (Tr. 134, 136-37.)
Mr. Fuller incorporated TriggerGuard, Inc. in the state of Georgia on December 19, 1991, based on an idea for a gun trigger mechanism that he believed would save children's lives. (Tr. 43, 85-86; Div. Ex. 5 at 5.) In July 1992, TriggerGuard, Inc. changed its name to Firearm Safety Products, Inc. ("FSP"). (Div. Ex. 5 at 5.) In October 1993, FSP changed its state of incorporation to Delaware, changed its name to Vista, and placed its operating assets in Family Safety Products, Inc. ("FSPI"), a wholly owned subsidiary incorporated in Georgia. (Tr. 334; Div. Ex. 5 at 5.)
Vista represented itself as a development stage enterprise until September 30, 1993, with an initial product line of three devices designed to deter access to, and accidental discharge of, firearms, especially by children. It did not ship any products until March 1993. (Div. Ex. 6 at 2.) Vista's office was in Roswell, Georgia, a suburb of Atlanta. (Tr. 382.) Mr. Fuller, however, who was chairman of the board and executive vice president for investor relations, worked from Helen, Georgia, about one hundred miles north of Atlanta. (Tr. 62; Div. Ex. 8.) To assist in funding Vista's operations, Mr. Fuller recruited individuals with high net incomes who were willing to invest substantial sums of money.4 (Tr. 73-76.) Mr. Fuller resigned from Vista in a letter dated January 25, 1995, and entered into a severance agreement with Vista on January 26, 1995. (Div. Exs. 17, 20.) On February 23, 1995, Vista filed a Form 8-K with the Commission stating that the Vista board accepted Mr. Fuller's resignation on February 1, 1995. (Div. Ex. 18.)
On October 25, 1994, Mr. Fuller and his family owned 343,420 Vista shares. (Div. Ex. 9.) In February or March 1995, after the events that are the subject of this proceeding occurred, Mr. Fuller entered into an agreement with Vista that converted $231,100, which he had allegedly loaned to Vista, plus interest of $54,694, into 178,622 additional shares of Vista common stock.5 (Tr. 177-79; Div. Ex. 21.) Between October 5, 1994, and February 9, 1996, Mr. Fuller and his children received $1,769,706 on sales of Vista shares. (Div. Ex. 9.) Mr. Fuller's total cash investment in Vista was $850. (Tr. 84-85.)
C. Vista's Board of Directors
In 1994, Vista's board of directors consisted of Mr. Fuller, Mr. Smyth, and Norman Wicks. (Tr. 235; Div. Ex. 5 at 36.) Mr. Fuller hired Mr. Smyth in 1991 based on a resume and a phone call. (Tr. 85.) In 1992, Mr. Smyth became Vista's president and chief executive officer. (Div. Ex. 5 at 35.) Mr. Smyth received a B.S./B.A. degree from the University of South Florida. Prior to joining Vista, Mr. Smyth was president of Integrated Computer Graphics, Inc., from December 1986 until February 1989, and president of a business-consulting group, The Technology & Services Group, Inc., from February 1989 until November 1991. (Div. Ex. 5 at 36.)
The Commission initiated a civil action against Mr. Smyth on May 25, 2001, relative to the matters that are the subject of this proceeding.6 (Tr. 468-69; Resp. Ex. 4, Securities and Exchange Commission v. Richard P. Smyth, et al., Civil Action No. 1: 01-CV-1344 (D. Ga. Filed May 25, 2001).)
Mr. Smyth recruited Mr. Wicks in 1993, and Mr. Wicks became Vista's chief financial officer, secretary, and treasurer. (Tr. 234-35; Div. Ex. 15.) Mr. Wicks graduated from college in 1962 and became a certified public accountant ("CPA") in 1964. (Tr. 231.) Two accounting firms employed Mr. Wicks before he joined the Commission's staff from 1967 to 1976. (Tr. 231-32.) After he left the Commission, Arthur Andersen & Co. ("Andersen") employed Mr. Wicks in litigation support and in audits for about four years. (Tr. 232.) After leaving Andersen and before joining Vista in 1993, Mr. Wicks was chief financial officer at Glassrock Home Healthcare, Inc., Integrated Computer Graphics, Inc., Consolidated Equities Corp., and Dickens Data Systems, Inc., all Atlanta based companies. (Tr. 233-34; Div. Ex. 5 at 36.)
It is not clear from the record whether Vista was a total hoax. Mr. Wicks reportedly referred to Vista as "Rick's Myth" because Mr. Smyth caused it to do a "lot of crazy things . . off the cuff" such as issue inaccurate financials and press releases. (Tr. 339, 419, 422.) For example, Mr. Smyth's name appears on a Form 8-K for Vista dated February 16, 1995, that claimed that Bobby Cox, Manager of the Atlanta Braves baseball team, and Victor Connell were appointed to the Vista board on January 15, 1995. (Tr. 426-28, 432-33, 621-22; Div. Ex. 18.) There is nothing in the record, however, that indicates Mr. Cox or Mr. Connell agreed to serve on the Vista board. Although Mr. Smyth allegedly obtained Mr. Cox's consent to serve on the Vista board, given Mr. Smyth's lack of credibility, Vista's alleged relationship with Mr. Cox is questionable. (Tr. 621-22.)
D. Vista's Initial Public Offering
On October 24, 1994, Vista filed a registration statement that went effective October 25, 1994, authorizing a firm commitment IPO of one million units at a price of $5.50 per unit for gross proceeds of $5.5 million. (Tr. 186-87; Div. Ex. 5.) Each unit consisted of one share of common stock and two common stock purchase warrants. The successful IPO closed on November 1, 1994. (Tr. 322; Div. Ex. 6 at Note 13.) Vista received approximately $4.5 million from the IPO. (Tr. 105.) On October 25, 1994, Vista common stock began trading on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") SmallCap Market System. (Tr. 186-87; OIP citing Commission's public files.) It moved to the NASDAQ National Market System on February 13, 1996, where it traded until it was delisted on May 31, 1996. (OIP citing Commission's public files.)
Steven A. Cunningham was the partner at Stribling, Cunningham, Newlin & Porter who handled Vista's registration statement and other matters from September 1994 until some time in 1996. (Tr. 238, 443, 451, 632-33; Div. Exs. 5, 10.) John Klapper, an associate at the time, assisted Mr. Cunningham on Vista matters. (Tr. 445.)
Greenway Capital Corporation ("Greenway") was a broker-dealer from November 1990 until July 1997. (Tr. 311, 409, 420.) In 1994, Greenway had between 125 and 150 registered representatives and several offices outside New York, including Atlanta. (Tr. 419-21.) Ben Giacchino, a registered representative and an owner of Greenway's Atlanta office, introduced Mr. Smyth to Greenway in New York. (Tr. 314-15.) Greenway was an underwriter on Vista's IPO and a market maker in Vista shares. (Tr. 376; Div. Ex. 5.) Fred Luthy, one of Greenway's owners, knew Mr. Fuller and Mr. Smyth from handling Vista's IPO.7 (Tr. 318-20, 323, 380-81.)
E. Improper Trading in Vista Shares
Mr. Smyth opened account number 23-330094 in his wife's maiden name, Nancy Estroff, at Greenway on October 26, 1994, the day after Vista began trading publicly.8 (Tr. 326-28; Div. Ex. 23.) Mr. Luthy and Mr. Giacchino disagreed on who opened the account. Mr. Giacchino signed Ms. Estroff's application and the account documentation bears his account number, but Mr. Giacchino denied knowing anything about the account. (Tr. 376, 474, 477-78, 481-84, 486, 488-89; Div. Ex. 23.) Mr. Giacchino claimed that people at Adler, Coleman and Greenway in New York gave out all account numbers, and opened the account in Ms. Estroff's name. (Tr. 474-75, 490-91.) Mr. Giacchino denied that he conducted trades in the account or received commissions. (Tr. 481-84, 494-96, 498.)
Mr. Luthy, on the other hand, claimed that Greenway's Atlanta office established the account, a trader in New York executed orders forwarded from Atlanta, and that the Atlanta office received commissions on transactions in the account. (Tr. 375-78, 389-90, 394.) According to Mr. Luthy, Greenway's Atlanta office was almost a self-contained unit with its own head of operations, trading, and compliance, and Greenway New York "just took . . . 15 or 12 percent off the top." (Tr. 315, 375-77, 478.) Unfortunately, the trading tickets, which would show who authorized the trades, no longer exist. (Tr. 394-96.)
It is very unusual for a brokerage account to change from an individual account to a company account; however, on November 8, 1994, two weeks after the account was opened, the name on account number 23-330094 was changed from Nancy Estroff to "FSPI Investment account" ("Vista account"). (Tr. 183, 326-28, 344-45, 350, 489-90, 496.) The new, undated account application included a "Corporate Account Agreement" that authorized opening an account in the name of the corporation. (Div. Ex. 22.) Mr. Fuller's and Mr. Smyth's signatures are on the Corporate Account Agreement dated November 8, 1994. (Div. Ex. 22.) The address for the Vista account was Mr. Fuller's address except for the last digit of the zip code. (Tr. 628-29.) The Division did not challenge Mr. Fuller's claim that he did not sign his name on the Corporate Account Agreement. (Tr. 183; Division's Proposed Findings of Fact and Conclusions of Law no. 32 at 11.) Prior to this proceeding, however, Mr. Fuller never complained to Mr. Wicks that Mr. Smyth had forged his signature on any document. (Tr. 303.) Because the weight of the evidence indicates otherwise, the fact that Mr. Fuller might not have signed the account form does not establish that Mr. Fuller did not know and approve of opening the Vista account on November 8, 1994. (Tr. 620.)
On November 10, 1994, nine days after Vista received almost $4.5 million of IPO proceeds, the Vista board considered a proposal by Mr. Smyth that Vista open an investment account at Greenway with $1 to $1.5 million.9 (Tr. 235-37; Div. Ex. 10.) At the board meeting, Mr. Fuller stated that he "would not support an investment that was not covered by [Securities Investor Protection Corporation] SIPC insurance."10 (Div. Ex. 10.) Mr. Wicks opposed the proposal and noted that Mr. Smyth had reported that Greenway was weak financially. Mr. Cunningham opined that such an investment had risks. (Tr. 237; Div. Ex. 10.) The minutes for the meeting, which Mr. Wicks drafted, state that the board tabled the issue of establishing an investment account at Greenway. (Tr. 620, Div. Ex. 10.)
In his sworn testimony, Mr. Fuller insisted that he did not know the account had been opened before the board considered the issue. (Tr. 95, 619-20.) His testimony is unpersuasive, however, because the Vista account received $1 million of IPO proceeds from the First National Bank of White County on November 9, 1994. (Div. Ex. 24.) Mr. Fuller and Mr. Smyth must have authorized the transfer because two board signatures were required to transfer funds, and Mr. Wicks gave credible testimony that he did not authorize the transfer. (Tr. 243.) Mr. Fuller also told Mr. Wicks in the week following the board meeting that he and Mr. Smyth had transferred funds into the Vista account. (Tr. 240-43, 288; Div. Ex. 31.)
Beginning on October 25, 1994, and continuing through early November 1994, Mr. Smyth purchased Vista shares on numerous occasions at per share prices from $5.00 to $7.03, in the Vista account. (Tr. 325-28; Div. Exs. 24, 25.) Even with the transfer of $1 million of IPO proceeds into the account on November 9, 1994, the deficit balance in the account was $507,527. (Tr. 350-53; Div. Ex. 25.)
Mr. Luthy claims that he first learned that Mr. Smyth was trading Vista shares in the Vista account sometime after November 9, 1994, when Greenway was going to sell out the account because Mr. Smyth had not paid "a couple of hundred thousand dollars" for purchases of Vista shares. (Tr. 323-26, 334-35, 350, 389-90, 405-06.) Mr. Luthy also claimed that he called Mr. Fuller in November 1994 and urged him to exert pressure on Mr. Smyth to pay for the Vista shares. (Tr. 326.) Mr. Fuller, however, denied receiving such a call from Mr. Luthy or knowing in November 1994 that the Vista account at Greenway was overdrawn by approximately $600,000. (Tr. 615.) Greenway or Adler, Coleman sold the Vista shares to collect payment on or about November 22, 1994. (Tr. 351-55, 406-07; Div. Exs. 12, 25.)
F. Mr. Wicks Resigns From Vista
Mr. Wicks resigned from Vista on January 23, 1995. (Div. Ex. 15.) His resignation followed two incidences that he found disturbing. First, on January 13, 1995, Mr. Wicks received a letter from Mr. Cunningham commenting on a press release that Mr. Wicks knew nothing about that said the Vista board approved a stock repurchase plan. (Div. Exs. 31, 33.) In the letter, Mr. Cunningham advised "it would be inappropriate to use monies raised in an initial public offering for [repurchasing Vista stock] since such a use was never discussed or contemplated in the prospectus for the IPO." (Tr. 296, 455; Div. Ex. 33.) Second, on or about January 19, 1995, Mr. Wicks found a letter to Mr. Smyth from Global Equities Group, Inc. ("Global") demanding that Mr. Smyth pay for 50,000 Vista shares that he purchased on December 19, 1994, at $3.75 per share for a total of $188,520, including commissions. (Tr. 247; Div. Ex. 34.) The Vista share price had dropped below $2.75 per share by December 27, 1994, and Global accused Mr. Smyth of attempting to manipulate the price of Vista shares to prevent the price drop that he knew was coming. (Div. Ex. 34.) Mr. Wicks was very concerned about the contents of the letter, and took the letter to Mr. Cunningham and Mr. Klapper. (Tr. 247, 252-53.)
G. Auditor Independence
Vista began looking for an auditor to replace KPMG Peat Marwick ("KPMG") in late 1994. KPMG wrote a letter to Vista dated November 22, 1993, noting that in connection with the 1993 audit, KPMG "noted certain matters involving the Company's internal control structure and its operations that KPMG considered to be reportable conditions under standards established by the American Institute of Certified Public Accountants" ("AICPA"). (Div. Ex. 29 at Tab D.) Mr. Fuller, however, asserted that KPMG did not want to continue to audit Vista and would only continue to do so for an extraordinarily high cost. (Tr. 50, 52, 54.)
Mr. Fuller arranged to have Alan T. Davis, his long time friend who had been his personal accountant, audit Vista's 1994 financials. (Tr. 46, 50-55, 254-55.) The audit workpapers state that the initial contact was made "through Alan Davis CPA, - [Mr.] Fuller, a board member and Alan's client." (Div. Ex. 29 at Tab C.) Mr. Wicks first met Mr. Davis, who he knew to be an associate or a friend of Mr. Fuller's, in the summer of 1994 at Mr. Fuller's office in Helen, Georgia. (Tr. 254-55.)
Mr. Davis suggested to J. Allen Seymour of Roemmich & Seymour, P.A, ("Roemmich & Seymour") that they submit a proposal to audit Vista and Promotional Marketing Inc. ("PMI") as a joint venture. (Tr. 254, 507-08.) Although the Vista board minutes show that the board engaged Roemmich & Seymour to audit Vista's 1994 financials, the evidence leaves no doubt that Vista intended to retain, and did retain, both Roemmich & Seymour and Mr. Davis. (Div. Exs. 8 at 2 and 30.) Mr. Fuller admitted that Vista retained both Mr. Davis and Roemmich & Seymour. (Div. Ex. 8.) In addition, the auditors' proposal stated that Mr. Davis, Mr. Seymour, and Mr. Roemmich had a long association and often work together on engagements. Finally, Mr. Seymour and Mr. Davis signed the engagement letter. (Div. Ex. 29 at Tab D.) Mr. Wicks signed for Vista on December 24, 1994. (Div. Ex. 29 at Tab D.)
Although Mr. Fuller gave Mr. Davis 60,000 Vista shares on November 1, 1991, Mr. Fuller gave contradictory testimony on whether he believed Mr. Davis was an independent auditor in 1994. (Tr. 30, 56, 202-03, 277, 530; Div. Exs. 8 at 2, 32.) On the one hand, Mr. Fuller thought Mr. Davis was independent because he knew Mr. Davis was going to exchange his Vista shares for shares of a company belonging to his brother-in-law. (Tr. 205, 223.) On the other hand, Mr. Fuller testified that he knew that Mr. Davis owned Vista shares at the time of the audit. (Tr. 561-62, 573-74.) In any event, it is undisputed that Mr. Fuller did not verify that Mr. Davis was independent, and he did not tell the Vista board that he had given Mr. Davis 60,000 Vista shares. (Tr. 60, 206, 223, 259.)
Mr. Seymour understood that neither he nor Mr. Davis could do the audit alone because the Commission required a concurring review so that a minimum of two auditors was required on the audit. (Tr. 516-17.) Mr. Seymour was responsible as the signing CPA, and Mr. Davis was the concurring partner. (Tr. 516, 522.) Mr. Davis and Mr. Seymour agreed that they would review each other's work. They charged the same partner rate of $125 per hour; each performed about half of the work; and they divided the approximately $24,000 fee equally. (Tr. 261-62, 520, 522, 541.) The audit took about one month to complete. (Tr. 514.)
Mr. Seymour also understood from Mr. Davis that PMI was Mr. Davis's tax client and that Mr. Fuller had owned PMI. (Tr. 508, 513, 536.) Mr. Fuller denies that he ever told Mr. Davis that he owned PMI, which Vista agreed to acquire on November 30, 1994. (Tr. 610; Div. Ex. 6.) The status of PMI vis-à-vis Vista was a major concern in the audit and the circumstantial evidence suggests that as someone who owned a substantial number of Vista shares, it was in Mr. Fuller's interest to have the financial relationship reviewed by a friendly, non-independent auditor. (Tr. 514-15.) Mr. Davis did all the initial work on PMI, subject to Mr. Seymour's review.11 (Tr. 513.) Vista's 1994 financials showed revenues of $1.2 million from a transaction with PMI. (Tr. 625; Div. Ex. 6 at 2, 12.)
Mr. Fuller contends that he did not have personal knowledge of Mr. Davis's involvement in the audit. (Div. Ex. 8 at 6.) However, Mr. Seymour gave credible testimony that he had no doubt Mr. Fuller was fully aware of Mr. Davis's extensive participation. (Tr. 512-14, 519.) Mr. Seymour remembers Mr. Fuller being at one meeting, he observed Mr. Davis in phone conversations with Mr. Fuller about audit issues, Mr. Fuller called Mr. Seymour's office looking for Mr. Davis, and Mr. Davis represented that he obtained information and materials from Mr. Fuller. (Tr. 512-15, 518, 541.) Mr. Wicks also believed that Mr. Fuller knew Mr. Davis was working on the audit. (Tr. 262.)
H. Vista's 1994 Financials, Note 13
In January 1995, Mr. Smyth told Mr. Cunningham that Greenway had engaged in unauthorized trading in Vista shares. (Tr. 460-61.) The auditors received this information after they completed their fieldwork on January 20, 1995, but they included the following as Note 13 "Subsequent Event" to the audited financials ("Note 13"). (Tr. 533, 544-45.)
In November 1994, Greenway . . . managing underwriter for the Company's initial public offering, as agent for the Company (but without the Company's knowledge or consent), repurchased 187,280 Units for a total cost of $1,325,388. Later in the month (again, without the Company's knowledge), Greenway resold 120,000 of the Units at a total price of $532,431. In December 1994, approximately $204,000 was transferred to [the] Company's operating account. . . . In management's judgment, this unauthorized action by Greenway (which first came to the Company's attention on Friday, January 27, 1995) violates the underwriting agreement and other agreements between the Company and Greenway . . . the Company is currently considering several courses of action to protect its interests, including legal proceedings against Greenway and its principals.
(Div. Ex. 6 at 15.) Mr. Cunningham and Mr. Klapper reviewed the 1994 Form 10-K filing that Vista prepared. (Tr. 425, 444, 452.) It is not clear whether Mr. Smyth authored Note 13, or whether Mr. Cunningham authored it based on the false representations of Mr. Smyth. (Tr. 441, 445, 460-61, 541-42.) Mr. Seymour agreed to include the footnote in the audit based on information from Mr. Smyth that Mr. Cunningham and Mr. Klapper confirmed. (Tr. 542-44.) According to Mr. Luthy, Mr. Smyth bragged that he added the above language to the financials "to cover his ass." (Tr. 402.)
I. Vista's 1994 Form 10-K Filed February 1, 1995
Vista's 1994 Form 10-K filed with the Commission on February 1, 1995, included an Independent Auditors' Report ("1994 audit") prepared by Mr. Davis and Mr. Seymour of Roemmich & Seymour dated January 20, 1995, for the fiscal year that ended September 30, 1994. (Tr. 517-18; Div. Ex. 6.) Note 13 is in the financials that are part of the 1994 audit. The cover sheet stated that the 1994 audit was conducted in accordance with generally accepted auditing standards ("GAAS"), and that Vista's financial statements presented the financial position of Vista in conformity with generally accepted accounting principles ("GAAP"). (Div. Ex. 6 at 6.)
Mr. Fuller signed the 1994 Form 10-K on January 23, 1995. (Tr. 622; Div. Ex. 6 at 16.) Mr. Cunningham did not know on February 1, 1995, that Mr. Wicks had resigned as an officer and director on January 23, 1995, and that Mr. Fuller had resigned as an officer and chairman of the board in a letter dated January 25, 1995. (Tr. 447-49, 462-63.)
IV. Conclusions of Law
Mr. Fuller is charged with causing Vista's violations. Section 21C of the Exchange Act authorizes the Commission to require a person who was a cause of a violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation. This statutory language has been reduced to three essentials for finding that someone caused a violation: (1) a finding that a primary violation occurred, (2) a finding that an act or omission by the respondent caused the violation, and (3) a finding that the respondent knew, or should have known, that his/her conduct would contribute to the violation. See Erik W. Chan, 77 SEC Docket 851, 859-860 (Apr. 4, 2002).
The word cause is used as a noun in Section 21C of the Exchange Act. As a noun, cause is defined as "[s]omething that produces an effect or result." Black's Law Dictionary 212 (7th ed.1999). The case law has established that causation is a question to be determined by balancing the facts in each situation. See Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963). While a direct nexus between the respondent's conduct and the violation is not required, something more is required than conduct that was a factor to some degree. See id. at 140-41 (citing R. H. Johnson & Co. v. SEC, 198 F.2d 690, 696-97 (2d Cir. 1952) (It is not necessary that conduct be an immediate or inducing cause but it must be more than a factor to some degree.)); Erik W. Chan, 77 SEC Docket at 860 (Corporate officer caused antifraud violations where he participated in or knew about the subject of every misrepresentation or omission in offering materials and did not correct misrepresentation or add necessary information.)
A. Antifraud Violations: Section 17(a), Section 10(b), and Rule 10b-5
Section 17(a) of the Securities Act declares it unlawful for any person in the offer or sale of securities, by use of any means of interstate commerce, directly or indirectly (1) to employ any device, scheme, or artifice to defraud, (2) to obtain money or property by means of any untrue statement of material fact or any omission of a material fact necessary in order to make the statements made not misleading, or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 10(b) of the Exchange Act makes it unlawful for any person in connection with the purchase or sale of any security by use of any means of interstate commerce to use or employ any manipulative or deceptive device or contrivance in contravention of the Commission rules and regulations. Rule 10b-5 pursuant to Section 10(b) makes it unlawful for any person, under the conditions specified in Section 10(b), to (1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 are antifraud provisions. While negligence is sufficient for a violation of Sections 17(a)(2) and 17(a)(3), Sections 17(a)(1) and 10(b) require a showing of scienter, defined as a state of mind embracing an intent to deceive, manipulate, or defraud. See Aaron v. SEC, 446 U.S. 680, 685-86, 701-02 (1980). Case law under Section 10b-5 of the Exchange Act and Rule 10b-5 has established that reckless conduct can be sufficient to establish scienter. See Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1284 (11th Cir. 1999). Recklessness occurs where there is "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." Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)); See Lovelace v. Software Spectrum, Inc., 78 F.3rd 1015, 1018 n.2 (5th Cir. 1996). "[A] corporation's knowledge and action can only be that of its directors, officers, and employees." Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 780 (3d Cir. 1976). See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972); SEC v. Manus, Fed. Sec. L. Rep. (CCH) ¶ 98,307, at 91,924 (S.D.N.Y. 1981). "Circumstantial evidence is often the only means of establishing scienter, direct evidence is not necessary." Meyer Blinder, 50 S.E.C. at 1230.
Vista violated these antifraud provisions because it used the means of interstate commerce to offer, purchase, and sell its securities in a scheme to defraud investors, it made untrue statements of material fact, and omitted to state material facts necessary so that the statements made were not misleading, and it engaged in acts, practices and a course of conduct that were fraudulent.
(1) Registration Statement Did Not Disclose That IPO Proceeds Could Be Used to Buy Vista Shares
Vista's registration statement for the IPO stated that the proceeds would be used for debt repayment (32%), sales and marketing (11%), new product development (11%), acquisitions (23%) and general corporate purposes (23%) with the caveat that "[u]ntil the proceeds of this Offering are used for the purposes stated above, the Company may invest them temporarily in interest-bearing securities such as certificates of deposit, United States government obligations, or money funds or instruments." (Div. Ex. 5 at 17.) Vista violated the antifraud provisions because Mr. Smyth acting with an intent to defraud used $1 million, or twenty-two percent, of net IPO proceeds to buy Vista shares during the IPO and in the aftermarket when the registration statement did not disclose that the proceeds would be used to buy Vista shares, and Vista did not file an amendment and inform investors that it used IPO proceeds for a different purpose than those described in the registration statement. (Tr. 105; Div. Ex. 5.)
I conclude that Mr. Fuller caused the violations by knowingly or recklessly (a) allowing the Vista account at Greenway, which Mr. Smyth used to purchase Vista shares, (b) authorizing the transfer of $1 million of Vista's IPO funds into the Vista account, which funds Mr. Smyth used to buy Vista shares, and (c) not monitoring the status of the account, which allowed Mr. Smyth to conduct illegal trades.
(a) Agreeing to a Trading Account
Mr. Fuller's testimony about his role in establishing Vista's account at Greenway is implausible, inconsistent, and contradicted by other evidence. For example, Mr. Fuller's testimony contradicts the board minutes and the testimony of Mr. Wicks. (Tr. 239; Div. Ex. 10.) Mr. Fuller claimed that on November 10, 1994, the board approved opening an account at Greenway and transferring $1 million of IPO proceeds into the account subject to clarification that Greenway was covered by SIPC insurance. (Tr. 94-96, 634.) He also claimed that the Vista board approved opening an account at Greenway on a phone call after the board meeting. (Tr. 95-96, 613-14, 642.) The minutes of the Vista board meeting on November 10, 1994, however, state that after discussion the board tabled Mr. Smyth's proposal that Vista open an investment account at Greenway with $1 or $1.5 million.12 (Tr. 238-39; Div. Ex. 10.)
I observed Mr. Wicks and found his testimony credible that he did not know on November 10, 1994, that Vista already had opened an account at Greenway, that the board did not formally approve opening the Vista account, that Mr. Fuller told him the week following the board meeting that Mr. Fuller had approved opening the Vista account, and that Mr. Fuller and Mr. Smyth did not know what investments would occur in the Vista account. (Tr. 239-40, 242-43, 288, 614; Div. Exs. 10, 31.)
Mr. Fuller gave contradictory testimony on this subject on several occasions. Mr. Fuller admitted in his investigative testimony given in 1999, that trading was not a contemplated use of Vista's IPO proceeds, and that he did not "have a clue" why Mr. Smyth raised the issue of an investment account. (Tr. 635-36.) In the same investigative testimony, Mr. Fuller claimed that the board authorized the Vista account so that it could use IPO proceeds for equity investments in Fortune 500 companies. (Tr. 636-38.) Mr. Fuller's position that trading in equities comported with the language in Vista's registration statement, which allowed the proceeds to be placed "temporarily in interest-bearing securities such as certificates of deposit, United States government obligations or money market funds or instruments" is an absurd rationalization. (Tr. 637-40, 663-64; Div. Ex. 5 at 17.)
Based on this evidence, I find that Mr. Fuller knew on November 10, 1994, that Vista had established a brokerage account at Greenway, and that he acquiesced in Mr. Smyth's use of IPO proceeds for trading equities in the account knowing it was contrary to representations in the registration statement.
(b) Transfer of IPO Funds
Mr. Fuller and Mr. Smyth authorized the transfer of $1 million of Vista's IPO proceeds from The First National Bank of White County to Vista's account at Greenway before the board meeting on November 10, 1994. I reach this conclusion despite Mr. Fuller's denial because the funds were credited to the Vista account on November 9, 1994. (Div. Exs. 24, 25.) Mr. Wicks did not authorize the transfer and The First National Bank of White County required the signatures of two Vista board member to transfer funds. (Tr. 242-43.) The only other persons who could sign were Mr. Smyth and Mr. Fuller. (Tr.242.) Mr. Wicks and Mr. Fuller moved Vista's funds to The First National Bank of White County because a previous bank had disbursed funds to Mr. Smyth on a Vista check with only Mr. Smyth's signature even though Vista required two signatures as a control measure for the disbursement of funds. (Tr. 242-43, 268-70.) In addition, Mr. Fuller also told Mr. Wicks in the week after the board meeting that he and Mr. Smyth had transferred $1 million of Vista funds to Vista's account at Greenway. (Tr. 150, 240.)
(c) Monitoring Vista's Trading Account
As Greenway's clearing broker, Adler, Coleman created account statements and confirmations for all Greenway accounts. (Tr. 480.) The record contains copies of account statements and confirmations for the Vista account prepared by Adler, Coleman. (Div. Exs. 12, 13, 14.) There is nothing in the record to indicate that Adler, Coleman deviated from its established business practice in sending out monthly computer-generated statements and timely confirmations of transactions in the Vista account to the address on the account.13 (Tr. 314-16, 344-45, 365-66, 480-81, 486.) The address for the Vista account was "FSPI Investment Account, Attn: Rm Fuller, P.O. Box 908, Helen, Georgia 30543." (Div. Exs. 12, 13, 22, 24.) This address is Mr. Fuller's, except that his zip code is 30545, not 30543. (Tr. 62.) In the regular course of business, U.S. Postal personnel would put the correct zip code, 30545, on mail sent to zip code 30543 with an address in Helen, Georgia. (Div. Ex. 3.) Some confirmations in account 23-330094 were addressed to Mr. Fuller and some were addressed to Nancy Estroff. (Tr. 343-44; Div. Exs. 13, 14, 25.)
The confirmations contain a "process date, which is the date the confirmation was created." (Tr. 373.) The record contains confirmations to Nancy Estroff that show process dates beginning on October 27, 1994, and ending November 10, 1994. (Div. Ex. 14.) The Division prepared an exhibit from the confirmations that shows trade dates and settlement dates. (Div. Ex. 25.) The exhibit shows confirmations sent to Mr. Fuller beginning with a trade date of October 31, 1994. (Div. Ex. 25.) The earliest confirmation in the Vista account shows a "process date" of November 15, 1994. (Tr. 372-73, 416-17; Div. Ex. 13.) Based on this evidence, I reject Mr. Fuller's claim that he did not know Mr. Smyth was trading Vista shares in the Vista account in November 1994. (Tr. 186-87, 620-21, 646; Div. Exs. 12, 13, 24, 25.)
I also reject Mr. Fuller's claim that he relied on Mr. Wicks to monitor activity in the Vista account because Mr. Wicks reviewed Vista's monthly bank statements. (Tr. 98-100, 614.) First, Mr. Fuller did not bother to check that Mr. Wicks was scrutinizing the bank statements in a timely manner. (Tr. 645.) Second, Vista's bank statements show debits and credits in that account but do not disclose trading in the Vista account. (Tr. 645.) Mr. Wicks asked Mr. Luthy for information about the Vista account because Mr. Fuller and Mr. Smyth professed not to know about the nature of the investments. (Tr. 198-99, 243-45.) Then Mr. Wicks told Mr. Fuller that Mr. Luthy did not supply him with information about the account after promising to do so. (Tr. 97-98, 117-18, 243-46, 289-93; Div. Ex. 31.) Although Mr. Fuller claimed to have responded by leaving Mr. Luthy a voice mail in December 1994 requesting that Mr. Luthy provide Mr. Wicks with the information, he took no further action. (Tr. 117-18.) Mr. Luthy never supplied Mr. Wicks with information; moreover, he denied that Mr. Wicks or Mr. Fuller requested any account information in late 1994 and early 1995. (Tr. 336-37, 381.)
In summary, I find that Mr. Fuller's recklessness caused Vista to commit fraud because he allowed Mr. Smyth to use the IPO proceeds for a purpose that was not disclosed in the "use of proceeds" section of the registration statement. As detailed previously, the registration statement represented that the IPO proceeds would be used to develop new products and product lines, pay sales and marketing expenses, repay debt, make acquisitions, and for other general corporate purposes. (Div. Ex. 5 at 16.) Mr. Fuller knew and approved of a Vista account at a broker-dealer and transferred twenty-two percent of the IPO proceeds into that account. (Tr. 98-99, 105.) After allowing the funds to be placed in a vulnerable location, he totally abandoned his obligation to see that Vista funds were used for a legitimate purpose. (Tr. 105-07.) The following testimony makes clear that Mr. Fuller did nothing to monitor the account to assure that Vista's IPO proceeds were used only for the purposes represented to public investors. (Tr. 98-107.)
Q. All right. So your testimony is that you authorized an account to be opened where a million dollars worth of your IPO proceeds were deposited and you took no steps to determine that the investment was made according to your terms or made no effort to find out what happened with it?
A. None, because, again [Mr. Wicks's] responsibility and Rick Smyth's responsibility. I'm not trying to pass the buck but that's just how the statement works. It does in every other company I've been involved in. I mean that's their role. My role is not to manage that, not to be involved in it. I live a hundred miles away for a very specific reason: I don't want day-to-day stuff. I want to be able to be less involved so I can develop new products, you know, new opportunities. One of the things I did was look for new merger opportunities. You know, that's just not the role that I ever wanted to be involved in, and didn't, not in that. Not in Americredit, URCARCO or any of the others.
. . .
Q. And you just testified that you never looked at the account statement - -
. . .
Q. My question really is this: Did you check on the investment at Greenway after you authorized it?
A. No, I did not.
(Tr. 98-99, 105, 107.) (Footnote added.)
(d) Mr. Fuller's Defenses
Mr. Fuller contends that he cannot be held responsible because he was not physically present at Vista headquarters; he depended on Mr. Smyth and Mr. Wicks to assure that Vista operated properly; and his personal life was particularly stressful in 1994. (Tr. 61, 99-100, 611-13.) These defenses are unpersuasive. Mr. Fuller accepted the responsibilities of chairman of the board and executive vice president for investor relations of a public company. He cannot simply avoid the responsibilities that go with those positions by not going to the office. Under Delaware law, Mr. Fuller as an officer and director of a Delaware corporation owed a fiduciary duty to Vista and its shareholders. See 8 Del. C. § 102(b)(7); Steven E. Arnold v. Society for Savings Bancorp, Inc., 678 A.2d 533, 539 (Del. 1996); See also Mary E. McMullin v. Walter F. Beran, 765 A.2d 910, 918 (Del. 2000). The evidence is clear that Mr. Fuller knew he had these responsibilities, and he deliberately or recklessly ignored them. (Tr. 173-74, 629-30.)
Mr. Fuller should not be allowed to rely on the performance of Mr. Wicks or Mr. Cunningham when the evidence is persuasive that he did not disclose to them at the board meeting that Mr. Smyth had already established the Vista account, and that he and Mr. Smyth had transferred $1 million into the account. I disagree with Mr. Fuller that his conduct should be excused because he experienced turmoil in his personal life. Mr. Fuller alleges that he was under considerable stress because a tornado destroyed a home he was constructing, his wife suffered a stress-related illness, and his daughter won the Miss Teenage Georgia competition, which caused her to enter other pageants and consider new career options. These events occurred in March and August 1994, while Mr. Fuller's actions that are at issue here occurred in late October 1994 through February 1, 1995.
(2) False Information in Vista's 1994 Form 10-K
"Corporate financial statements are one of the primary sources of information available to guide the decisions of the investing public." United States v. Arthur Young, 465 U.S. 805, 810 (1984). Vista violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 by representing in Note 13 to the financial statements included in its 1994 Form 10-K, that Greenway engaged in unauthorized trading of Vista shares as an agent for Vista. Mr. Smyth knew this to be false and Mr. Fuller knew, or was reckless in not knowing, it was false.15 (Div. Ex. 6.) In addition, Note 13 was fraudulent because it did not disclose that Vista began trading its shares in October 1994, and that Vista used $1 million in IPO proceeds to pay for the trades. Both the false information provided and the omitted information were material. See Basic v. Levinson, 485 U.S. 224, 231-32 (1988) (A representation is material when there is a substantial likelihood that a reasonable investor would consider it important in determining how to act.) Given the blatant falsity of the information and the fact that Mr. Smyth and Mr. Fuller benefited by the fraud, it is reasonable to infer that they acted with the intent to defraud.
The evidence is persuasive that Mr. Fuller knew, or was reckless in not knowing, that Mr. Smyth, not Greenway acting independently, traded Vista shares beginning in October 1994 when he signed the 1994 Form 10-K on January 23, 1995, and when Vista made the filing on February 1, 1995. First, I find Mr. Luthy's testimony credible that he notified Mr. Fuller in November 1994 that Greenway was going to sell out the Vista account because of deficits created by Mr. Smyth's trading in Vista shares. Because it was in Mr. Luthy's interest to obtain payment for Greenway, it is reasonable that he would call and ask Mr. Fuller, who he knew from the IPO, to use his influence to get Mr. Smyth to pay for trades in the Vista account. Second, the persuasive evidence is that Mr. Fuller received copies of confirmations for trades in the account and account statements for the months of November and December 1994. Third, I find Mr. Wicks's testimony credible that when he told Mr. Fuller he was resigning because he took exception to trades by Mr. Smyth Mr. Fuller responded, "if that type of thing is going on, then I think that maybe I should consider that too." (Tr. 251-52; Div. Ex. 34.) Finally, it is reasonable to expect that Mr. Cunningham and/or Mr. Klapper would have brought the Global letter that Mr. Wicks delivered to them alleging Vista trades by Mr. Smyth to Mr. Fuller's attention since at the time they believed Mr. Fuller was chairman of the board.
Mr. Fuller caused these antifraud violations because he signed Vista's 1994 Form 10-K as board chairman and a director knowing the filing contained false material information and that it omitted material information needed to make the representations made not misleading. (Div. Ex. 6 at 16.); See Erik W. Chan, 77 SEC Docket at 860. Mr. Fuller enabled Vista to make the fraudulent filing because the Commission requires that a majority of the board of directors, among others, sign the Form 10-K.16 (Tr. 449.); See Amendments to Annual Report Form, Related Forms, Rules, Regulations, and Guides; Integration of Securities Acts Disclosure Systems, 45 Fed. Reg. 63630 (Sept. 25, 1980).17 "Key corporate officers should not be allowed to make important false financial statements knowingly or recklessly, yet still shield themselves from liability to investors simply by failing to be involved in the preparation of those statements." Howard v. Everex Systems, Inc., 228 F.3d 1057, 1062 (9th Cir. 2000).
Mr. Fuller denies that he caused Vista to file a false 1994 Form 10-K and raises the reliance on counsel defense. (Respondent's Brief 8.) The defense of reliance on counsel, however, requires a showing that the claimant made full disclosure to counsel, received counsel's advice that the actions proposed were legal, and relied in good faith on that advice. See Manor Nursing Ctrs, Inc., 458 F.2d at 1101-02; Markowski v. SEC, 34 F.3d 99, 104-05 (2d Cir. 1994). I reject Mr. Fuller's defense that his representation, that the information in Note 13 in Vista's 1994 Form 10-K was accurate, was based in reliance on the advice of lawyers and accountants. A person claiming to have relied on counsel must have acted in good faith. See United States v. Traitz, 871 F.2d 368, 382 (3d Cir. 1989). Mr. Fuller did not act in good faith because he knew material, relevant information that he did not disclose to the lawyers about Vista's account at Greenway and the trading in the account by Mr. Smyth. See Erik W. Chan, 77 SEC Docket at 866-67 (A corporate officer cannot pass on to others his responsibility for ensuring that offering documents disclosed material facts of which he had knowledge.).
(3) False Representation That Audit Was Conducted By Independent Auditor
The purpose of Rule 2-01 of the Commission's Regulation S-X is to ensure that auditors are qualified and independent of their audit clients both in fact and appearance. See Qualifications of Accountants, 17 C.F.R. § 210.2-01. One of the first things the Commission looks at in determining independence is whether a relationship creates a conflicting interest between the accountant and the audit client. Rule 2-01 provides that:
(b) The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement.
(c)(1) Financial Relationships. An accountant is not independent if, at any point, during the audit and professional engagement period, the accountant has a direct financial interest or a material indirect financial interest in the accountant's audit client, such as:
(i) Investments in Audit Clients. An accountant is not independent when:
(A) The accounting firm, any covered person in the firm, . . . has any direct investment in an audit client . . . .
Regulation S-X defines an audit as "an examination of the financial statements by an independent accountant in accordance with [GAAS]." See Definitions of Terms Used in Rule S-X, 17 C.F.R. § 210.1-02(d). The AICPA, the national organization of the public accounting profession, through its senior technical body on auditing matters, the Auditing Standards Board, promulgates GAAS. The GAAS are set out in the AICPA publication, The Codification of Statements on Auditing Standards ("Codification"). One of three general standards specifies that the auditor is to maintain an independence in mental attitude in all matters relating to the audit. See Codification AU § 150.02 (1994) ("AU §__."). The auditing standard titled Independence, AU § 220, states as follows:
.02 This standard requires that the auditor be independent . . . he must be without bias with respect to the client since otherwise he would lack that impartiality necessary for the dependability of his findings, however excellent his technical proficiency may be.
.03 It is of utmost importance to the profession that the general public maintain confidence in the independence of independent auditors. Public confidence would be impaired by evidence that independence was actually lacking . . . . To be independent, the auditor must be intellectually honest; to be recognized as independent, he must be free from any obligation to or interest in the client, its management, or its owners. For example . . . an auditor with a substantial financial interest in a company might be unbiased in expressing his opinion on financial statements of the company, but the public would be reluctant to believe that he was unbiased. Independent auditors should not only be independent in fact; they should avoid situations that may lead outsiders to doubt their independence.
.04 The profession has established, through he AICPA's Code of Professional Conduct, precepts to guard against the presumption of loss of independence.
.05 The [Commission] has also adopted requirements for independence of auditors who report on financial statements filed with it . . . .
AU §§ 220.02-.05 (Emphasis in original).
"When an accountant is not independent, any procedures he might perform would not be in accordance with [GAAS], and he would be precluded from voicing an opinion on such statements." AU § 504.09. Two basic elements of an auditor's standard report are a title that includes the word independent and a statement that the audit was conducted in accordance with GAAS. AU § 508.08.
Vista violated the antifraud provisions because it falsely represented that its 1994 Form 10-K contained financials that were the subject of an independent audit and that they were prepared in accordance with GAAS. These misrepresentations were material. See Basic, Inc. v. Levinson, 485 U.S. at 231-32. Mr. Seymour acknowledged that Mr. Davis's stock ownership caused the audit to lack independence. (Tr. 546.) Mr. Seymour would not have signed the audit if he had known that Mr. Davis falsely stated that he had divested himself of Vista shares because Mr. Davis's lack of independence tainted Mr. Seymour and the firm of Roemmich & Seymour. (Tr. 529-30.) Mr. Fuller knew, or was reckless in not knowing, that Mr. Davis was not independent when he worked on Vista's 1994 audit. (Tr. 202-03; Div. Ex. 32.) At the time, Mr. Davis owned 23,333 Vista shares worth about $100,000. (Tr. 277; Div. Ex. 28 at workpaper 10/12, Resp. Ex. 4 at 65.)
Unlike Vista's other antifraud violations where Mr. Smyth committed the primary violation attributable to Vista - registration statement did not disclose that IPO proceeds used to buy Vista shares, and false information in Note 13 in Vista's 1994 Form 10-K - I find that Mr. Fuller committed the antifraud violation as to auditor independence, which is attributable to Vista. The OIP, however, does not allege that Mr. Fuller committed a violation, but that he caused one. It is axiomatic that as the person committing the violation, he was the cause of the violation. Mr. Fuller signed Vista's 1994 annual report when he knew, or was reckless in not knowing, that it contained false and misleading information as to the independence of the auditors.
I reject the expert opinion of Cheryl L. King that the audit was independent because it was a "hybrid" situation in that Mr. Davis did not sign the audit report and he was a supervised independent contractor not a Roemmich & Seymour partner, shareholder, or principal; and Roemmich & Seymour took full responsibility for the audit.18 (Tr. 562, 602; Resp. Ex. 5 at 5-8.) Ms. King viewed Seymour & Roemmich as independent, but she acknowledged that the Commission Order accepting Mr. Seymour's Offer of Settlement found that Seymour & Roemmich was not independent. (Tr. 566-68; Div. Ex. 37, J. Allen Seymour, CPA, Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-And-Desist Order, Exchange Act Release No. 44461 (June 21, 2001).) Contrary to Ms. King's assumptions, the evidence is that Mr. Davis was an equal partner with Mr. Seymour in the audit. Mr. Davis and Mr. Seymour both signed the proposal and the engagement letter dated December 22, 1994. (Div. Ex. 29 at D.) Mr. Fuller noticed Mr. Davis's name on the proposal that showed Mr. Davis, Mr. Seymour, and Mr. Roemmich as "partners." (Tr. 657-68; Div. Ex. 29 at D.) The engagement letter, which was signed by Mr. Davis and Mr. Seymour, stated:
We are pleased to confirm our understanding of the services we are to provide for Vista 2000, Inc. We will audit the financial statements of Vista 2000, Inc. as of September 30, 1994.
(Div. Ex. 29 at D.) Finally, Mr. Fuller signed the management representation letter dated January 23, 1995, which is address to Roemmich & Seymour and to Mr. Davis. (Tr. 658; Div. Ex. 7.)
Ms. King also assumed that Mr. Seymour did most of the audit work, and that Mr. Fuller was not well aware of Mr. Davis's role in the audit. (Tr. 559-60, 573-74; Resp. Ex. 5 at 4-5.) Neither of these assumptions is true. The audit team consisted of Mr. Seymour, Mr. Davis, and Mr. Davis's assistant. (Tr. 520.) Mr. Seymour and Mr. Davis each did about half the audit work. (Tr. 541.) Mr. Davis did all the work on the long-term receivables from PMI, a material issue in the audit, and Mr. Fuller was the source of the information. (Tr. 513-14; Div. Ex. 6 at 12.)
Mr. Fuller caused the violations because he knew, or was reckless in not knowing, that Mr. Davis lacked independence and that Mr. Davis was a key participant in the audit. I disagree with Ms. King that it was reasonable for Mr. Fuller as a non-accountant to not realize the importance of auditor independence. Mr. Fuller specialized in taking companies public and he is an experienced officer and director of public companies. An audit by an independent party has been a basic requirement in the government's regulation of public companies since at least 1972. (Tr. 572-73.) Given his experience and business acumen, Mr. Fuller knew, or was reckless in not knowing, that Vista had to file annual financial reports audited by an independent auditor.
Finally, I disagree with Ms. King that Mr. Fuller was entitled to rely on the fact that Mr. Wicks, Mr. Seymour, and Mr. Roemmich did not raise concerns about Mr. Davis's independence. Neither Mr. Wicks nor Mr. Seymour knew that Mr. Davis owned Vista shares at the time of the audit. (Tr. 260, 508, 529-30.) After the IPO, Vista had about 250 shareholders. It is therefore unreasonable to assume that Mr. Wicks knew Mr. Davis owned Vista stock simply because he maintained the corporate records and signed Vista's stock certificates. (Tr. 661.) Mr. Roemmich had no auditing expertise and was primarily a financial planner who played no role in the audit engagement. (Tr. 517, 588-90.) The evidence is clear that only Mr. Fuller and Mr. Davis knew that Mr. Davis owned Vista shares.
B. Violations of Section 13(a)(2) of the Exchange Act and Exchange Act Rules 13a-1 and 12b-20
Section 13(a) of the Exchange Act requires that every issuer of registered securities file reports prescribed by the Commission. Section 13(a)(2) empowered the Commission to require that independent public accountants certify annual and quarterly reports. Rule 13a-1 requires that an issuer file annual reports on the prescribed form and it is implicit that the information in the reports be accurate. Information concerning the financial condition of a company is presumptively material. See SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985). Rule 12b-20 requires that reports contain all material information that is necessary to make the statements made not misleading. Neither of these sections requires a showing of scienter. Therefore, a violation occurs when a filing contains false or misleading information that is material, or omits to state material information necessary so that the statements made are not misleading. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978); SEC v. Kalvex, Inc., 425 F. Supp. 310, 315-16 (S.D.N.Y. 1975).
Section 13(a)(2) of the Exchange Act required Vista to file an annual report that contained audited financial statements that are true and correct. See SEC v. IMC International, Inc., 384 F. Supp. 889, 893-94 (N.D. Texas), aff'd, 505 F.2d 733 (5th Cir. 1974); General Aircraft Corp. v. Lampert, 556 F.2d 90, 96 n.9 (1st Cir. 1977). Rule 13a-1, pursuant to Section 13(a), mandates that filed financial statements conform to Commission rules and regulations. Exchange Act Rule 12b-20 requires that statements contain information so that the statements made in the filed reports are not materially misleading. Vista violated all of these provisions because it filed a 1994 Form 10-K that contained false and misleading material information and omitted material information necessary to make the statements made not misleading, and it failed to amend its Form SB-2 to disclose that the proceeds were used for a purpose not disclosed in the registration statement that went effective on October 25, 1994. (Tr. 437-38.) Mr. Fuller and Mr. Smyth acting for Vista signed the 1994 Form 10-K that resulted in the primary violations. For all the reasons previously stated, Mr. Fuller caused the violations.
V. Cease and Desist
Section 21C of the Exchange Act provides that the Commission may order a person who was a cause of a violation of the statutes or the regulations, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing the violation or any future violation. The applicable considerations for ordering someone to cease and desist are set out in KPMG Peat Marwick LLP, 74 SEC Docket 384, 429 (Jan. 19, 2001), petition denied, 289 F. 3d 109 (D.C. Cir. May 14, 2002), which holds that in the ordinary case a finding of a past violation is sufficient to demonstrate a risk of future violations. It also reiterates the applicability of the public interest factors cited by the court in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981).
[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.
Id. at 1140; See Joseph J. Barbato, 69 SEC Docket 178, 200 n.31 (Feb. 10, 1999); See also Donald T. Sheldon, 51 S.E.C. 59, 86 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
Mr. Fuller's actions were egregious. He was the key person in a successful effort to obtain $5.5 million from public investors for Vista and then he caused Vista to violate the antifraud provisions and reporting requirements of the securities statutes and Commission regulations. The evidence is persuasive that Mr. Fuller knew, or was reckless in not knowing, of Mr. Smyth's illegal activities, and that he approved hiring Mr. Davis to co-conduct Vista's 1994 audit when he knew, or was reckless in not knowing, that Mr. Davis was not an independent auditor.
The record taken as a whole, demonstrates that Mr. Fuller knew, or was not reckless in not knowing, that his acts and omissions contributed, or would contribute, to the primary violations and that he acted with an intent to deceive, manipulate, or defraud public investors. To accept Mr. Fuller's position that he was duped, one has to ignore that Mr. Fuller allowed Mr. Smyth to set up a brokerage account, that he transferred substantial IPO proceeds to that account, and that he did not know Mr. Davis was not an independent auditor. Next you have to believe that Mr. Fuller coincidentally positioned two scoundrels, one a longtime friend and associate, where they could commit fraudulent acts, which coincidentally benefited him financially; and that he was unaware of their activities.
Mr. Fuller showed no concern or remorse that many public investors lost their investments in Vista while he and his family realized over $1.7 million on an $850 investment. Mr. Seymour who was the subject of press reports and who lost clients as a result of his involvement with Vista was told that Mr. Fuller was the source of the deception. (Tr. 547.)
Mr. Fuller's claim that he had no reason to be suspicious of Mr. Smyth is false. Mr. Fuller knew that Mr. Wicks questioned Mr. Smyth's honesty. (Tr. 247-50, 252, 268-71; Div. Exs. 10.) Mr. Wicks and Mr. Fuller transferred funds from a bank where Vista had an account because it had allowed Mr. Smyth to bypass Vista's requirement that checks have two signatures of board members. (Tr. 268-71, 273; Div. Ex. 10.) Also on November 10, 1994, the board refused Mr. Smyth's request for a $200,000 reimbursement because he could not document the alleged expenses. (Div. Ex. 10.) Vista ultimately paid Mr. Smyth. Since Mr. Wicks did not authorize payment, Mr. Fuller must have done so. (Tr. 249-50.)
While Mr. Fuller asserted that he would do things differently in the future, his answers under oath demonstrated that he does not accept responsibility for his actions. He offered a great many explanations and justifications, but he did not acknowledge serious wrongdoing, rather he insisted that he did his job "and did it well." (Tr. 103.) Under oath, Mr. Fuller did not know, could not remember, or was not sure about most of his actions involving Vista. (Tr. 40, 44-45, 56, 58, 60-61, 82, 85-86, 89-91, 120, 154-59, 162-63, 165-70, 173-74, 176-79, 212, 214, 216, 218.) Based on this record, there is high probability that Mr. Fuller, who according to this record was key to raising $5.5 million in seven or eight days, will violate the securities laws and regulations in the future given his ability to attract investors for new business ventures.
For all these reasons, I find it necessary to order Mr. Fuller to cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(a)(2) of the Exchange Act, and Rules 10b-5, 12b-20, and 13a-1.
VI. 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 April 17, 2002.
Based on the findings and conclusions set forth above:
I ORDER, pursuant to Section 21C of the Securities Exchange Act of 1934, that Respondent Robert M. Fuller shall cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, and 13a-1.
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||"(Tr.__.)" refers to the transcript of the hearing. I will refer to the Division's exhibits and Respondent's exhibits as "(Div. Ex.__.)" and "(Resp. Ex.__.)," respectively.|
|2||Mr. Fuller submitted a letter dated April 15, 2002, correcting a typographical error in the Brief.|
|3||URCARCO had been listed on the New York Stock Exchange. (Tr. 66.) According to Mr. Fuller, the price of URCARO stock "went up and then right back down." (Tr. 68.)|
|4||Mr. Fuller engaged in the same type of activities in 1999 as an officer and board chairman of U.S. Cast Products, a Texas company, which he and some friends merged with a public shell. (Tr. 71-73.)|
|5||The conversion price of $1.60 per share was eighty-five percent of the average of the closing sales price of Vista common stock for twenty consecutive trading days prior to the date of the agreement. (Div. Ex. 21.)|
|6||Boss Holdings, the successor company to Vista, initiated a legal action against Mr. Smyth in the state courts of Georgia alleging that he misappropriated Vista funds. (Tr. 469-70.) According to Mr. Smyth's attorney, the "settlement has been breached and it's the subject of litigation in the federal bankruptcy court" in Orlando, Florida. (Tr. 470.)|
|7||While associated with Greenway, Mr. Luthy was the subject of two disciplinary proceedings before the NASD. (Tr. 358-62.) He entered settlements in both cases. (Tr. 361.) In one case, he was suspended from association with a broker or dealer for two months. (Tr. 360.) In the other case, he was suspended from association with a broker or dealer for fifteen days, suspended from acting as a supervisor for a year, and ordered to take thirty hours of education before he could act in a supervisory capacity. (Tr. 361-62.) Mr. Luthy is now a business consultant. (Tr. 311.) He has a degree in aviation management from Embry Riddle Aeronautical University, Daytona Beach, Florida, and an associate degree in business from the State University of New York at Farmingdale. (Tr. 310-11.)|
|8||Greenway used documents bearing the letterhead of its clearing broker Adler, Coleman Clearing Corp. ("Adler, Coleman"). (Tr. 245, 314, 330, 386.) The record contains an undated new account form for customer Nancy Estroff that was faxed on October 26, 1994. (Div. Ex. 23.) Greenway did not require a customer signature on new account forms. (Tr. 331-32.)|
|9||At a special board meeting on November 10, 1994, Mr. Fuller, Mr. Smyth, and Mr. Wicks, awarded Mr. Fuller and Mr. Smyth a bonus of $120,000 each for their efforts on the IPO. (Div. Ex. 10.)|
|10||The Securities Investor Protection Act of 1970 created SIPC, which can pay customers of liquidated broker-dealers up to a maximum of $500,000.|
|11||Mr. Davis is a named defendant in Securities and Exchange Commission v. Richard P. Smyth, et al., Civil Action No. 1: 01-CV-1344 (D. Ga. Filed May 25, 2001). (Resp. Ex. 4.)|
|12||The source of funds was the IPO proceeds received just days before. (Tr. 637; Div. Ex. 6 at 4.)|
|13||Mr. Fuller's position appears to be that evidence is required from someone at Adler, Coleman who remembers mailing account statements and confirmations to him. (Tr. 25, 365-66.)|
|14||Mr. Fuller's reference to "the statement" appears to be "something from Peat Marwick that says in defined roles of responsibilities . . . if you've got an on-site chairman, you've got one thing. If you've got an off-site chairman, you've got a whole different set of facts. And that's exactly what we had." (Tr. 100-01.)|
|15||Vista reported the illegal trading activity as a material subsequent event learned after the close of Vista's fiscal year, but before the 1994 Form 10-K filing occurred. (Tr. 533, 544-45.)|
|16||Although, it makes no sense chronologically, Mr. Fuller claimed to have known of the contents of Note 13 when he signed the 1994 Form 10-K. However, Mr. Fuller signed the 1994 Form 10-K on January 23, 1995, and Note 13 states that Vista learned of the unauthorized trading on January 27, 1995. Mr. Fuller could not explain the discrepancy in dates. (Tr. 658-59; Div. Ex. 6.)|
|17||The instructions to the Form 10-K require that a majority of a registrant's directors sign the annual report form. I take official notice of this fact pursuant to Rule 323 of the Commission's Rules of Practice. See 17 C.F.R. § 201. 323.|
|18||Ms. King, a cum laude graduate of Georgetown University, is a CPA and a member of the Georgia Society of CPAs and the AICPA. (Resp. Div. 5.) Ms. King has seven years of public accounting experience with Ernst & Young and Deloitte & Touche. She has held the positions of Vice President and Corporate Controller of First Data Corporation, and Senior Vice President and Chief Financial Officer of the corporation's card processing division. Ms. King joined Tatum CFO Partners, L.L.P., in Atlanta in 1999. (Tr. 603-06.) In December 2001, Ms. King was Chief Financial Officer of Alogent Corp. (Resp. Div. Ex. 5.)|
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