==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 93 ADMINISTRATIVE PROCEEDING FILE NO. 3-8698 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION ____________________________ In the Matter of : : WILLIAM EDWIN SOMDAHL : INITIAL DECISION : July 22, 1996 ____________________________ APPEARANCES: Thomas M. Melton and Brent R. Baker, Division of Enforcement, Securities and Exchange Commission William Edwin Somdahl, pro se BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission ("Commission") instituted this proceeding on May 18, 1995, pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"). As directed by the Commission in its Order Instituting Public Proceedings ("Order"), I held a hearing in Phoenix, Arizona, on July 24, 1995. The Division of Enforcement ("Division") called four witnesses: William Edwin Somdahl, James H. Fors, Oliver Washburn, and Gregory Harry. The Division introduced nine exhibits.1 The Respondent appeared pro se. He called two witnesses, himself and Dennis Patrick, and did not offer any exhibits. On September 5, 1995, the Division filed Proposed Findings of Fact, Conclusions of Law, and Brief in Support.2 Respondent's Brief is a one-page handwritten letter dated October 2, 1995. On October 13, 1995, the Division filed a Reply Brief. Issue The proceeding was instituted to determine whether the Division's allegations are true that, among other things, from at least 1986 through April 1988, the Respondent willfully violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"); Section 10(b) of the Exchange Act, and Rule 1References to the exhibits are to Div. Ex. __. I did not admit Div. Ex. 7 at the hearing, but allowed Mr. Somdahl time to review this investigative testimony and to object to its admissibility. By order issued August 22, 1995, I admitted Div. Ex. 7 when Mr. Somdahl did not file any objections. 2The Division's Brief in Support is referred to as "Initial Brief." ==========================================START OF PAGE 2====== 10b-5 thereunder, and whether on October 4, 1994, a U.S. district court enjoined the Respondent from further violations of these provisions of the securities laws and rule. SEC v. Fors, Civil Action No. 92-1843 PHX PGR (D. Ariz. Oct. 4, 1994); Findings, Order and Final Judgment of Permanent Injunction Against William Edwin Somdahl, Div. Ex. 3 at 8-12. The Order directed that the Respondent be given an opportunity to establish any defenses. Order at 3. Since briefing was completed, the U. S. Court of Appeals for the District of Columbia has held that the five-year statute of limitations specified in 28 U.S.C.  2462 3 applied to an administrative proceedings in which the Commission censured a respondent and suspended her from acting in a supervisory capacity with any broker or dealer for six-months. Johnson v. SEC, No. 95-1340, 1996 U.S. App. LEXIS 14917 (D.C. Cir. June 21, 1996). Respondent Mr. Somdahl has a high school diploma and over two years of college courses in the areas of business and accounting. He 3The statute provides that: Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued. I will deal with Johnson because Mr. Somdahl is a pro se litigant, and I assume that is the reason he has not raised the issue of its impact on his situation. ==========================================START OF PAGE 3====== began working in the securities industry when he was about 24 or 26 years of age. Tr. 15. He began doing accounting support activities and later earned a Series 7 registered representative license, a Series 63 license, and a financial and operations principal license.4 Tr. 91. Mr. Somdahl spent his twenty-four year career in the securities industry with a number of broker- dealer firms, mainly in the Minneapolis, Minnesota area.5 In 1985, the National Association of Securities Dealers ("NASD") censured Mr. Somdahl and barred him from association with any NASD member as a financial and operations principal and limited his association with any NASD member as a general securities principal.6 Div. Ex. 3 at 7; Div. Ex. 5; Tr. 16-17. In 1989, Mr. Somdahl consented to a five-day suspension of his registered representative license in the state of Minnesota 4 Evidence other than Mr. Somdahl's recollection indicates that he also held a license as a general securities principal. Div. Ex. 5. 5CenPac Securities in Phoenix, AZ; Heiner & Stock in Minneapolis, MN; Robert S.E. Peterson Company in Excelsior, MN; Bentley Securities in Denver, CO; E.J. Pinnock Inc. in Minnetonka, MN; C.S. Ashman & Co. in Minneapolis, MN; Midwest Discount Securities in Minneapolis, MN; and Suburban Securities in Minnetonka, MN, a firm he began and of which he was president. Tr. 15-16; Div. Ex. 7 at 10. According to Mr. Somdahl, CenPac Securities is the only firm that was still in business in 1990. Div. Ex. 7 at 10. 6Additionally, Mr. Somdahl was the subject of two other customer complaints to the NASD. The record does not disclose how they were resolved. Div. Ex. 7 at 12. ==========================================START OF PAGE 4====== based on allegations that he offered and sold unregistered securities in the state.7 Div. Ex. 3 at 8; Div. Ex. 6. Mr. Somdahl moved from Minneapolis to the Phoenix, Arizona, area in 1988. Div. Ex. 7 at 6. He does not appear to have been associated with a broker-dealer since March 21, 1989. Div. Ex. 3 at 8. In July 1995, Mr. Somdahl concluded just over four years as an accounting technician with the state of Arizona. Tr. 13. 7Mr. Somdahl was the defendant in a civil suit brought by a customer in a securities transaction that was related to his bankruptcy filing. Div. Ex. 7 at 12-13. ==========================================START OF PAGE 5====== Findings of Fact8 A public "pre-1933 shell corporation" ("shell") is a company whose securities are allegedly exempt from registration under former Section 3(a)(1) of the Securities Act, and it has no assets or active business pursuits.9 Tr. 33, 39, 68-70. In the late 1980s, Mr. Fors represented to three private companies - Micro Books International, Inc. ("Micro-Books"), SouthCo Communications Corp. ("SouthCo"), and Walsh Communications Group ("Walsh") - that they could raise funds from public investors, without incurring the cost of registering their securities offerings with the Commission if they merged their private companies with public companies that pre-dated the Securities Act and then sold shares of the public company. Div. Ex. 3 at 1-2. Mr. Fors characterized his activities of taking the documents of an active private company and merging it with a pre-1933 shell as a "reverse merger." Tr. 33. Micro-Books, SouthCo, and Walsh entered into agreements with Mr. Fors to merge with public companies. Div. Ex. 3 at 3. 8My 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. I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision. 9 Former Section 3(a)(1), repealed in 1987, exempted from registration any security that was sold or disposed of by the issuer, or bona fide offered to the public, prior to or within sixty days after the enactment of the Securities Act. The section did not apply to any new offering of any such security after sixty days. James L. Owsley, 51 S.E.C. 524, 526 n.6 (1993). ==========================================START OF PAGE 6====== Mr. Fors's representations were part of an illegal "scheme to revive dormant corporations, whose securities were traded prior to 1933, in order to sell their stock to the public pursuant to a claimed exemption from registration under former Section 3(a)(1) of the Securities Act." James L. Owsley, 51 S.E.C. 524, 525-26 (1993). The public shells were shams. Twenty-five years ago, the Commission characterized this activity as the classic pattern of an unlawful distribution of unregistered securities. Bohn-Williams Securities Corp., 44 S.E.C. 709, 711 (1971). See also United States v. Schwenoha, 383 F.2d 395 (2nd Cir. 1967). Supposedly the shells were legitimate records of old inactive corporations collected by an attorney in California or New York. Tr. 35, 66. In fact, most of them were old Delaware corporations that the state deemed defunct or dissolved because they had not paid franchise taxes or fulfilled reporting requirements. Tr. 68-69. Persons took steps to make it appear that a valid pre-1933 corporation existed. Their activities included constructing original shareholder lists from names taken from tombstones, drafting new materials to look like old corporate records, putting the corporation into active status in the state of incorporation, and then moving the corporation to Nevada. Tr. 38-39, 69-70. Mr. Fors met Mr. Somdahl through Neil Woodington, a friend of Mr. Somdahl's who ran a boiler room operation10 in Arizona 10The Commission has described a boiler room operation as "a high pressure sales campaign, involving the use of repeated telephone (continued...) ==========================================START OF PAGE 7====== with his daughters - Rebecca Riggs, Deborah Grace Tjosvold, and Sara Hall Goldman - selling securities in pre-1933 shell companies before the mergers occurred. Tr. 34-35, 37; Initial Brief at 9 n.2. Mr. Fors, Mr. Somdahl, Lester Force Boynick, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman sold stock in Micro- Books, SouthCo, and Walsh before the merger took place to raise money to buy the shells to be used in the mergers. Div. Ex. 3 at 2, 4. These individuals, all defendants in the civil injunctive action, contacted investors throughout the United States and offered to sell stock in these three companies for $1.00 per share.11 Securities such as these which sell at low prices, trade in the pink sheets12, and are highly speculative, are referred to 10(...continued) calls, to induce persons previously unknown to [the caller] to buy highly speculative [securities] about whose underlying value '[h]e knew nothing and apparently cared little.'" Charles Michael West, 47 S.E.C. 39, 40 (1979) (footnote omitted). 11 Mr. Fors, Mr. Boynick, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman were all permanently enjoined. Neil Woodington died before the Commission began the civil action. Initial Brief at 9 n.2 and n.3. Mr. Fors, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman pled guilty to securities felony crimes. Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman consented to the entry of "association bars." Mr. Fors consented to a bar from participating in the securities industry and from participating in an offering of penny stock. Initial Brief at 9 n.3; Tr. 45. 12The pink sheets show bid and asked prices, or expressions of interest in, specific securities submitted by broker-dealers and are published daily on pink paper by the National Quotation Bureau, Inc., a private company. General Bond & Share Co., v. SEC, 39 F.3d 1451, 1453 (10th Cir. 1994). ==========================================START OF PAGE 8====== as penny stocks.13 Tr. 48-50; Complaint for Permanent Injunction and Permanent Relief, Div. Ex. 1 at 17. Mr. Fors purchased most shells, including the three to be merged with Micro-Books, SouthCo, and Walsh, for between $45,000 and $75,000 each, from Jerry Timothy of Salt Lake City, Utah.14 Tr. 35-36. The money used to pay for the shells was raised by pre-merger sales of securities and was transmitted to Mr. Timothy. Tr. 35, 38. Mr. Fors was adept at completing the paper work and getting companies like Micro-Books, SouthCo, and Walsh listed on the pink sheets quickly.15 Tr. 43. As compensation for obtaining the shell companies and arranging for the preparation of informational materials, Mr. Fors received restricted and free- trading stock. Div. Ex. 3 at 3. Mr. Fors, Mr. Boynick, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman were part of a group that controlled Micro-Books, SouthCo, and Walsh. Div. Ex. 3 at 4. Mr. Fors had Mr. Timothy transfer a portion of the stock in the 13Penny stocks are highly speculative, low-priced securities, generally sold in the over-the-counter markets and generally not listed on an exchange, which are used increasingly to defraud investors. H.R. Rep. No. 617, 101st Cong., 2d Sess. 8 (1990). 14Mr. Timothy, who made a business of the practice, also resurrected the shells which were the subject of James L. Owsley, 51 S.E.C. at 526. 15In an eighteen-month period, Mr. Fors executed eight to twelve mergers in this manner. Tr. 36. At the time he was a private individual who held no licenses. His company, James H. Fors & Associates, was in the business of greyhound racing. Tr. 45. In July 1995, Mr. Fors was the general manager, a fifty percent owner, and a salesman at Fam's Auto in Florida. Tr. 32. ==========================================START OF PAGE 9====== three shell corporations to his name, the names of Mr. Boynick, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman, the names of new investors, his wife's name, and the names of other nominee shareholders. Div. Ex. 3 at 4. Ten percent of the shell's public stock was retained in the names of the alleged "original," pre-1933 shareholders to lend credibility to the appearance that the company had been in business since before 1933. Div. Ex. 7 at 64. The remaining ninety percent of the public stock was distributed among the nominees who controlled the corporation. Div. Ex. 7 at 25; Tr. 38-39. From some point in 1986 until April 4, 1988, Mr. Somdahl assisted Mr. Fors and others by setting up accounts in their names or their nominees at Heiner & Stock, the broker-dealer in Minneapolis, where he was associated as a registered representative, and by selling the unregistered securities of these three companies to his customers. Div. Ex. 3 at 2-3, 5. No registration statement was filed or in effect as to these securities when Mr. Somdahl made the sales. Div. Ex. 3 at 2. Mr. Somdahl solicited his customers to purchase these shares, knowing that the securities were being pre-sold in order to fund the mergers. Tr. 37; Div. Ex. 3 at 6. Mr. Somdahl knew, or should have known, but did not disclose when he sold these securities, that certain individuals controlled these three companies because they held all the issued and outstanding shares before the mergers and that the same persons held controlling interests in the companies because of their ownership in the ==========================================START OF PAGE 10====== purportedly free-trading shares after the merger. Tr. 38, 40; Div. Ex. 3 at 6. I find that, as alleged in the Order, on October 4, 1994, the United States District Court for the District of Arizona found that Mr. Somdahl had violated Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and enjoined him from future violations. SEC v. Fors, Civil Action No. 92-1843 PHX PGR; Div. Ex. 3 at 8-12. Conclusions of Law Section 15(b) requires that the Commission sanction someone who, at the time of the misconduct, was associated with a broker or dealer and who has been enjoined from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security, if it finds it is in the public interest to do so. I conclude that Section 15(b) authorizes a sanction against Mr. Somdahl, if it is in the public interest, based on the issuance of the injunction without independent findings that Mr. Somdahl's conduct from 1986 through April 1988 violated the securities laws and regulations as alleged in the Order.16 16For this reason, the holding in Johnson v. SEC, No. 95-1340, 1996 U.S. App. LEXIS 14917 (D.C. Cir. June 21, 1996), if it should become final, would have a limited impact on this proceeding. In reaching my legal conclusion, I have not considered the testimony of Oliver Washburn, who purchased penny stocks including $15,000 of shares of Walsh on Mr. Somdahl's recommendation. Tr. 47-64. Mr. Washburn's testimony was very credible, and, if considered, would compel a finding that Mr. (continued...) ==========================================START OF PAGE 11====== Even though Mr. Somdahl's actions underlying the injunction, which occurred five years before the Commission instituted this proceeding, are not the basis for the Commission's authority to issue a sanction, they can be considered on the public interest issue. "The 'public interest' standard is obviously very broad, requiring that the Commission consider the full range of factors bearing on the judgment about sanctions that the expert agency ultimately must render." Blinder, Robinson & Co., Inc. v. SEC, 837 F.2d 1099, 1110 (D.C. Cir.), cert. denied, 488 U.S. 869 (1988). Public Interest In addition to deterrence, other established criteria for determining what sanction is appropriate in the public interest include: the 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); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). My application of these criteria to Mr. Somdahl cause me to conclude that Mr. Somdahl's violations were blatant in that he orchestrated the sale of stock in three companies as part of a 16(...continued) Somdahl violated the securities laws and regulations in 1986-1988 as alleged in the Order. ==========================================START OF PAGE 12====== notorious fraudulent scheme to sell unregistered securities. According to the district court, Mr. "Somdahl's conduct was not isolated, but involved numerous instances of misconduct over an extended period of time." Div. Ex. 3 at 7. At the hearing and in investigative testimony, Mr. Somdahl demonstrated a clear understanding of the ruse of using pre-1933 shell companies to avoid the requirements of the securities laws. Tr. 23-25, 81-85; Div. Ex. 7 at 24-28. According to Mr. Harry, "we knew; we were big boys, we knew what we were doing, and we knew we were breaking the law. [Mr. Somdahl was] aware of all the little tricks involved."17 Tr. 85. The district court found that at the time he sold shares of Micro-Books, SouthCo, and Walsh, Mr. Somdahl knew or should have know that (1) the securities were not registered, and (2) Mr. Fors, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman controlled all of the issued and outstanding shares of these three companies prior to the mergers and controlling interests in the purportedly free-trading shares after the mergers. Div. Ex. 3 at 6. My observation of Mr. Somdahl and my review of the evidence persuade me that, despite his denials, Mr. Somdahl acted with a high degree of scienter in that he knew his activities were illegal.18 17Mr. Somdahl was referred to Mr. Harry by Mr. Fors and purchased a shell from him. Tr. 67-68. 18 To establish a violation of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, or Rule 10b-5 thereunder, in this proceeding the Division must show that the defendant (continued...) ==========================================START OF PAGE 13====== Mr. Somdahl does not acknowledge the wrongful nature of his actions. It is very likely that, if given the opportunity, Mr. Somdahl will violate the security laws and regulations in the future since he does not acknowledge that he acted illegally despite (1) the permanent injunction entered against him, as well as (2) a court order that found significant probative evidence that he was a substantial participant in the interstate distribution of unregistered securities and that, acting with scienter, he omitted to disclose a number of material facts to investors in connection with the offer, purchase and sale of securities. Div. Ex. 2 at 2-3; Div. Ex. 3; Tr. 88. The district court found "that there is a reasonable likelihood under the totality of the circumstances that the violative conduct will recur." Div. Ex. 2 at 3. Other factors that indicate a high likelihood of reoccurrence are that Mr. Somdahl profited substantially from commissions on stock sales and purchases of the three companies, and that Mr. Somdahl tried to take a company public by the same illegal means that Mr. Fors employed. Div. Ex. 3 at 8; Tr. 42- 44, 67-76. 18(...continued) acted with scienter. See Aaron v. SEC, 446 U.S. 680 (1980). Violations of Sections 17(a)(2) and 17(a)(3) do not require proof of scienter. The permanent injunction found that Mr. Somdahl violated Section 17(a), but the court's order was more specific and found that the Commission met its burden of proving a violation of Section 17(a)(1). Div. Ex. 3 at 9; Div. Ex. 2 at 3. I find that the district court's finding that Mr. Somdahl violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act is conclusive evidence that Mr. Somdahl acted with scienter. ==========================================START OF PAGE 14====== Mr. Somdahl's claim that he never had the opportunity to present his case in court, with its implication that the result would have been different if he had a chance to put on evidence, is unpersuasive. The fact that the district court granted the Division's motion for summary disposition does not demonstrate that Mr. Somdahl was treated unfairly, but rather, as the court noted, that the uncontroverted evidence established that Mr. Somdahl's actions constituted violations of the federal securities laws. Div. Ex. 2 at 3. I reject Mr. Somdahl's contention, raised in his brief, that the Division deprived him of materials necessary to his defense. The district court specifically rejected the same claim for lack of support, and Mr. Somdahl did not advance such a claim at the administrative hearing.19 Div. Ex. 2 at 2; Tr. 5-11, 86. I reject Mr. Somdahl's claims that his employer knew and approved of his activities and that he believed what he did was legal are mitigating considerations.20 Contrary to Mr. Somdahl's claim, the evidence is that the broker-dealer did not approve of this type of illegal activity, but even if the broker- dealer knew, that would not mitigate Mr. Somdahl's conduct because he alone is responsible for his actions. Tr. 82-84; Div. 19Mr. Somdahl referred to a letter he sent to the SEC many, many years ago requesting the return of documents so that he could defend himself. He stated that he received some of the requested documents and then went on to another topic. Tr. 89. 20The doctrine of collateral estoppel prevents Mr. Somdahl from attacking the validity of the injunction by arguing that he was not at fault. ==========================================START OF PAGE 15====== Ex. 7 at 27-28. The case law is unequivocal that registered representatives have a duty to investigate and ensure that they have an adequate and reasonable basis for recommending a security, and they must disclose facts which they know or are reasonably ascertainable. SEC v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992); Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969). The fact that other regulatory bodies have disciplined Mr. Somdahl for what appear to be actions different from what caused the injunction - the NASD censure and bar in 1985 and the Minnesota suspension in 1989 - indicate that strong measures are required to curb his proclivity for illegal activities and to protect the investing public. Div. Exs. 5, 6. Another consideration is that the securities industry presents many opportunities for dishonesty, abuse, and overreaching so that it is in the public interest not to allow participation by individuals like Mr. Somdahl whose continued participation would expose investors to undue risks.21 Richard C. Spangler, Inc., 46 S.E.C. 238, 252-53 (1976). See also Archer v. SEC, 133 F.2d 795, 803 (8th Cir. 1943), cert. denied, 319 U.S. 767 (1943); Hughes v. SEC, 174 F.2d 969, 975-76 (D.C. Cir. 1949). 21I find Mr. Patrick's testimony on behalf of Mr. Somdahl to be credible. However, Mr. Patrick did not know Mr. Somdahl in a professional capacity and here his reputation is contrary to Mr. Patrick's information. ==========================================START OF PAGE 16====== For all the reasons stated, I conclude that the public interest requires that Mr. Somdahl receive the most severe sanction possible under the authorizing statutes. ORDER Based on the findings and conclusions set forth above, I ORDER, pursuant to Sections 15(b) and 19(h) of the Exchange Act, that William Edwin Somdahl is barred from being associated with a broker or dealer, from participating in an offering of penny stock, and from being associated with a member of a national securities exchange or registered securities association.22 This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Commission's Rules of Practice, 17 C.F.R. 201.17 (1995). Pursuant to that rule, this initial decision shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 17(b) within 15 days after service of the initial decision upon that party, unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to a party. If a party timely files a petition for review, or the Commission acts to review as to a 22 In his Brief, Mr. Somdahl represented that he had no interest in returning to the securities industry and "all I ask is that I be left alone." However, he indicated to the district court that he intended to reenter the securities industry, complained that the Commission's investigation prevented him from obtaining a position with an NASD member, and requested reinstatement of all his NASD licenses to deal in securities. Div. Ex. 3 at 8. In discussions during this proceeding, he was willing to accept a sanction of some type but seemed unwilling to accept a bar from participating in a penny stock offering. Tr. 28. ==========================================START OF PAGE 17====== party, the initial decision shall not become final as to that party. ______________________________ Brenda P. Murray Chief Administrative Law Judge Washington, D.C. July 22, 1996