SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41629 / July 20, 1999
Admin. Proc. File No. 3-9403
In the Matter of the
Martin R. Kaiden
OPINION OF THE COMMISSION
Grounds for Remedial Action
Fraudulent Offer of Prime Bank Instruments
President of a registered broker-dealer offered fictitious prime bank instruments to potential customer in communications that made statements about the instruments without any basis. President also was enjoined from violations arising from these offers of these instruments. Held, it is in the public interest to bar respondent from association with a broker, dealer, or a member of a national securities exchange or of a registered securities association.
Martin R. Kaiden, pro se.
Kevin T. Duffy, Jr., Andrew J. Geist, Robert Knuts, George N. Stepaniuk, and Abimbola Kolawole, for the Division of Enforcement.
Appeal filed: April 14, 1998
Last brief received: July 1, 1998
Martin R. Kaiden and the Division of Enforcement appeal from a decision of an administrative law judge. The law judge found that Kaiden, who, during the period at issue, was the president and sole shareholder of Martin Kaiden Company, Inc. ("Kaiden Company"), a former broker-dealer, violated Section 17(a) of theSecurities Act of 1933 1* by offering fictitious prime bank instruments to a potential customer and that Kaiden had consented to entry of an injunction prohibiting further violations of certain provisions of the securities laws arising from this same conduct. 2 The law judge determined that Kaiden should be barred from association with a broker, dealer, or member of a national securities exchange or registered securities association.
Kaiden appeals both the merits of the law judge's decision and the sanctions imposed. The Division appeals from the law judge's refusal to bar Kaiden from association with a municipal securities dealer, investment adviser, or investment company (a "collateral bar"). We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. 3
A. The Respondent. Kaiden is 70 years old. He received a college degree from Columbia College and a masters of business administration from New York University. He entered the securities business in 1974, and founded Kaiden Company in 1977. Kaiden Company primarily engaged in the offer and sale of private placements and limited partnerships. Kaiden Company withdrew its registration as a broker-dealer in 1994.
B. Kaiden's Correspondence with Hancock. Between May and August 1993, Kaiden prepared and sent a series of letters and memoranda on Kaiden Company letterhead to John Hancock Mutual Life Insurance Company ("Hancock"). Kaiden's correspondence offered Hancock the opportunity to purchase fictitious instruments denominated "Standby Letters of Credit" ("SLCs") and"Prime Bank Guarantees" ("PBGs"), as well as participation in "programs" involving these instruments.
According to Kaiden, SLCs and the PBGs were issued variously by "one or more of the top 100 world banks" or by European banks "ranked in the top 50" that "rated AA or better." SLCs purportedly carried no interest, but were discounted "to yield 6.4% and 7.5% at maturity" while PBGs bore interest of 7.5% or 8.5% per annum. Both SLCs and the PBGs were "standardized by the International Chamber of Commerce in Paris, rule ICC 400 or 500" and "traded internationally, endorsed and transferred, sold or used as collateral." The instruments were traded "bank-to-bank" in "billions of U.S. dollars per week."
In addition to direct investments in SLCs and PBGs, Kaiden offered Hancock certain "exceptional programs." The programs variously were managed by "top 15" European "prime banks," an unidentified insurance company, certain "investment managers," or "program operators." Certain of the programs guaranteed principal and/or interest. Several programs also offered a "profit," ranging from 2% to 5-6% per month, in addition to interest. The "guarantees" in some programs were in the form of SLCs and/or PBGs. One program, however, offered a "corporate pay order" to be "endorsed and guaranteed by a top Swiss bank" (later identified as "Swiss Bank Corp.") "for [the investor's] profit over and above the 10% interest."
Kaiden also offered Hancock a so-called "Roll Program." According to Kaiden, an unidentified "Provider" had contracts to acquire prime bank instruments at a deep discount. The investor would pay a "spread" above what the Provider paid the issuing bank, plus a fee to Kaiden. The "Provider" had "arrangements with" a large group of buyers to acquire these instruments at a discount. The "Provider" further pre-arranged sales of these instruments at the "retail price" to wealthy individuals and institutions. The Provider had a contract to purchase and sell between $500 billion and $1 trillion of these discounted instruments per year. An investor could obtain "extraordinary returns" on a "very secure basis."
Kaiden did not contact any bank, insurance company, or accounting company to verify any particular fact that he represented to Hancock, including the existence of these instruments or programs. Rather, Kaiden testified, he based these representations on conversations that he had with numerous people "around the world" 4and brochures or "manuscripts." At the hearing, Kaiden could not identify any of these individuals or provide titles or sources for the
manuscripts. 5 Kaiden claimed that he found these unidentified persons credible." 6
After Kaiden's initial contacts, representatives of Hancock informed Kaiden that they could not verify the existence of these instruments and asked Kaiden for further information. Kaiden responded that there was "little hope" of getting independent confirmation of the instruments. He stated that "tens of billions of dollars" of "these transferable (negotiable) instruments" traded "daily." However, Kaiden claimed that there were only a limited number of persons who knew about the instruments because of their "unique nature." The instruments were "not required to be registered," the transactions were "private," and "there are strictures against solicitation." He urged Hancock to have its bank contact the "Verifying Bank" for particular instruments in which it was interested to authenticate their existence.
Hancock contacted several banks and investment bankers about Kaiden's solicitations. Hancock's contacts reported that the offering was "some kind of a scam," that they could not "understand how these instruments would work," and that "the legitimacy of these instruments was highly questionable." 7Hancock determined not to invest in the instruments offered by Kaiden.
C. The Injunction. On August 18, 1997, Kaiden consented, without admitting or denying the allegations of the amended complaint, to the entry of an injunction from violations arising from Kaiden's and Kaiden Company's offers of fictitious prime bank securities to an "institutional investor," i.e.,
Hancock. 8 The district court's order prohibited Kaiden from violating Securities Act Section 17(a) or from acting or omitting to act while directly or indirectly controlling a broker-
dealer 9where such act or omission resulted in the broker-dealer's violation of Section 15(c)(1)(A) of the Securities Exchange Act of 1934 10or Exchange Act Rule 15c1-2. 11 The district court also imposed on Kaiden a $50,000 civil penalty.
A. The Instruments and Programs Offered by Kaiden Were Securities.
Kaiden asserts that none of the instruments or programs that he offered was a security within the meaning of the securities laws. In Part III.B. below, we conclude that these instruments were fictitious. However, as the United States Court of Appeals for the Seventh Circuit has held, "it is the representations made by the promoters, not their actual conduct, that determine whether an interest is an investment contract (or other security)." 12 For purposes of determining whether the instruments offered are securities, therefore, we will analyze them based on Kaiden's representations with respect to their characteristics.
Section 2(1) of the Securities Act defines the term "security" to include a "note" or "investment contract." 13 In determining whether an instrument falls within the statutory definition of security, the courts and the Commission look to the substance, rather than the form, of the transaction, and "the emphasis should be on economic reality." 14
1. Notes. In Reves v. Ernst & Young, 15 the Supreme Court held that a note is presumed to be a security unless (1) it bears a strong resemblance to certain types of notes recognized, based on four factors, as being outside the investment market regulated under the securities laws, or (2) it should be added, based on a balancing of the same four factors, to that list of excluded notes. 16* Congress intended to define the term "security" with sufficient breadth to encompass virtually any instrument that might be sold as an investment. 17
The first Reves factor weighs the motivations that would prompt a reasonable borrower and lender to enter into the particular transaction, i.e., whether a lender is motivated by the profit that the note will generate or whether the note is intended to facilitate a "commercial or consumer purpose," suchas purchase of an asset or consumer good. 18 Here, Kaiden represented that these instruments would generate substantial interest and "profit" to investors, not that they would facilitate a commercial transaction.
The Reves analysis also considers the plan of distribution for the instruments. 19 While Kaiden argues that there was no plan of distribution since he corresponded only with Hancock, Kaiden represented that he was an intermediary for various "Providers" and "Investment Managers," who engaged in numerous transactions in these instruments, "cutting," buying, and reselling them. Moreover, Kaiden represented that there was an active bank-to-bank trading market for these instruments worth billions and trillions of U.S. dollars.
We also conclude that the third Reves factor -- whether the investing public would reasonably expect that the particular instrument is a security -- is satisfied. 20 Kaiden described the instruments and programs as "investments offering . . . high monthly returns" or "extraordinary returns on a well-secured basis." The investing public reasonably would expect that the instruments were investments when approached in this manner.
The fourth Reves factor is the presence of an alternative scheme of regulation or other factor that significantly reduces the risk of the instrument so as to make regulation under the securities laws unnecessary. Kaiden stated in his letters and memoranda to Hancock that there was no scheme of regulation applicable to the instruments. 21
Based on our consideration of the Reves factors, we conclude that these instruments do not bear a family resemblance to notes that are not investments, nor should they be added to the list of instruments excluded from securities laws.
2. Investment Contracts. The Supreme Court in SEC v. W.J. Howey Co. 22 held that a transaction is an investment contract if a person invests money in a common venture and is led to expect profits to be derived from the entrepreneurial efforts of others. 23 Kaiden admits that his offers of programs involving SLCs and PBGs contemplated the investment of money. However, he questions whether the success of the investments depended on the efforts of others. Nevertheless, Kaiden repeatedly referred to "Providers" who arranged for "cutting" SLCs and PBGs, "Investment Managers" who arranged for their resale, and trading by both an Investment Manager and a trader. Each of these activities suggests that the success of the investments depended on the entrepreneurial skill of these managers, traders, and "Providers."
Kaiden further asserts that the instruments that he offered did not involve a common venture. A common enterprise within the meaning of Howey can be established by so-called "horizontal commonality," which contemplates the tying of each individual investor's fortune to the fortunes of others, by, for example, pooling assets or sharing profits. 24 Kaiden's communications offered "profitable trading participation" in programs in which the operator would purchase discounted prime bank instruments and resell the instruments. The "Roll Program," for example, offered Hancock the opportunity to "participate in trading" done by a "Provider," with "arrangements with a large group of buyers." The "Provider" would purchase and resell PBGsand SLCs, using "the investor funds" to effect the transaction. It appears that these programs involved both pooling interests and sharing profits.
* * * * *
We conclude that Kaiden's descriptions of these instruments demonstrate that these instruments were securities under Securities Act Section 2(1).
B. Kaiden Violated Securities Act Section 17(a).
Securities Act Section 17(a) states that no person in the "offer or sale of any securities" may:
(1) . . . employ any device, scheme, or artifice to defraud, or . . .
(3) . . . engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
In his correspondence with Hancock, Kaiden made a variety of representations about the instruments that he offered, including the most fundamental one -- that these instruments existed. He further claimed, among other things, that these instruments carried "unconditional guarantees" from creditworthy institutions, that they would pay high monthly interest and "profits," that they were standardized and could therefore be traded bank-to-bank, and that there was a market for these instruments that traded in the billions and trillions of dollars. 25
Kaiden asserts that the Division failed to "conclusively prove" that SLCs and PBGs did not exist. The Division is required to demonstrate a violation of the securities law by thepreponderance of the evidence. 26 To demonstrate that the instruments offered by Kaiden did not exist, the Division introduced evidence that Hancock contacted a variety of banks and investment banks and determined that the instruments were likely a scam. In addition, the Division introduced various regulatory alerts issued by the Commission and federal financial institution supervisory agencies, 27 as well as Canadian regulators, warning of "'Prime Bank' schemes." The Division further cites a series of judicial determinations issued after the events at issue finding that such instruments were fraudulent and
fictitious. 28 We believe that the Division has established that these instruments do not exist by a preponderance of the evidence.
Kaiden's testimony reveals that he was at a minimum reckless in making his representations about PBGs and SLCs. Kaiden admitted before the law judge that he failed to contact any bank or other institution to verify his representations. 29 Although he claimed that the instruments traded in "billions of US dollars," Kaiden did not know any investment manager who dealt in prime bank securities, nor did he know any investor in such instruments who had received a profit. Moreover, although he named several firms that allegedly were involved in these instruments or programs, he had no contact with those firms. For example, he represented that Price Waterhouse in England was monitoring one of the prime bank programs. He did not contact anyone at Price Waterhouse in England to determine if the firm was monitoring such investments. 30 Kaiden also offered to Hancock a program purportedly managed by an otherwise unidentified entity named Baffee AG. An investor in the Baffee AG program was supposed to receive a "corporate pay order" that was "guaranteed and endorsed by" Swiss Bank Corp. Kaiden admits that he never contacted anyone at Swiss Bank Corp. to confirm their alleged guarantee of the Baffee AG program. Indeed, he never spoke to anyone at Baffee AG. 31
Instead, Kaiden claims that he relied on conversations with 50-100 persons "around the world" and reading of "manuscripts." At trial, he could not identify a single one of these individuals, nor could he remember the title of any of the manuscripts that unnamed persons provided to him. The law judge, who heard the testimony and observed Kaiden's demeanor, found Kaiden's testimony "that he did not remember any details of the events at issue because they occurred a long time ago is not believable," and the law judge did "not credit any of [Kaiden's] testimony on this issue." The credibility judgments of the fact finder are entitled to considerable weight and deference. We reject such determinations only where there is substantial evidence in the record for doing so. 32 That is not the situation here.33
Kaiden asserts that his representations were not made with scienter because the bank instruments had to be authenticated by Hancock's bankers before the transfer of funds from Hancock'saccounts.34 Absent this validation, Kaiden insists there would have been no transaction and he would have received no compensation. 35 In his initial letters to Hancock, however, Kaiden suggested two alternate investment strategies for these instruments. One, referred to as "cash first," required the would-be investor to demonstrate that it had "the necessary funds available." The other, "collateral first," permitted the investor to obtain "prior evidence of the specific instrument, including cusip numbers, etc." According to Kaiden, a "collateral first" investor would pay more for the instrument. Thus, there was an inducement to employ the "cash first" alternative.
Furthermore, the documentation in the record regarding the "collateral first" alternative demonstrates that Hancock's ability to confirm the quality of an underlying prime bank instrument or the guarantee before payment was limited. The investor would receive only "authentication of original hard copy safekeeping receipts, and CUSIP and Registration Numbers of the Debentures, including date of purchase. The original hard copies of the Debentures are held in safekeeping by the Issuing Bank." The "corporate pay order" committed "Swiss Bank Corp. to pay the investor from the account of Baffee A.G." There was no provision to permit Hancock to confirm the amounts in the Baffee A.G. account or whether the balance would be sufficient to satisfy the claims against that account.
Moreover, while Kaiden stated that the documents transferring the investor's funds would commit the investor to release the funds "on receipt" of this very limited documentation, the sample document to transfer the funds, termed a "Swift," appears to authorize immediate transfer of funds. Thus, the Swift states that it is "irrevocable" and a "bindingfully performed due bill and is immediately released for cash payment against invoice."
Kaiden was an experienced securities representative with an extensive business background. He understood that he had to verify the existence and legitimacy of these instruments. Yet, he persisted in claiming that these instruments (which he further claimed were guaranteed, creditworthy, and profitable) were valid, even after Hancock's representative alerted Kaiden that Hancock's inquiries had not confirmed their existence. His representations about these instruments without any basis evidence scienter. 36We find that Kaiden willfully violated Securities Act Sections 17(a)(1) and (3).
Under Exchange Act Section 15(b)(6),37 we may institute administrative proceedings against an associated person of a broker-dealer based on an injunction from engaging in or continuing any conduct or practice in connection with acting as abroker or dealer. 38 Kaiden does not dispute that the injunction was entered against him. He asserts that he did not have sufficient funds to contest the injunction. This objection, however, is inappropriate for this forum. A consent injunction cannot be collaterally attacked in an administrative proceeding. 39
Kaiden raises a procedural objection. He notes that the order instituting this proceeding states that Kaiden sent "five letters" to Hancock. In October 1997, Kaiden went to the Commission's offices to review the documents to be admitted in this proceeding. At that time, he received a file that contained only five letters. However, when he received the Division's exhibit list, the list included two additional documents sent by Kaiden to Hancock -- two memoranda each dated July 14, 1993.
From the record, it appears that Kaiden received adequate notice of these additional documents. On November 19, 1997, Kaiden executed a stipulation stating that he prepared both July 14 memoranda. The hearing was not held in this matter until December 18, 1997. In addition, Kaiden cites these memoranda to us as evidence in his defense. 40 We conclude that Kaiden prepared and knew of these memoranda and that he was not prejudiced by any delay in receiving them. 41
We next decide what sanction is in the public interest. The selection of a remedy involves consideration of many factors. These include the egregiousness of the respondent's conduct, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his conduct, and the likelihood that the respondent's occupation will present opportunities for future violations.42
Kaiden asserts that he believed that PBGs and SLCs existed, and observes that the regulatory warnings about prime bank instruments were issued after he made his offers to Hancock. Kaiden notes that he has not been in the securities industry since 1994,43 and thus no longer presents a threat to the public. He represents that he regrets his actions and that he now understands that he should not have offered the instruments if he could not confirm their existence. He states that his activities resulted in no harm to Hancock. He is 70 years old, has no prior disciplinary history, and has never repeated this violative conduct.
The Division counters that Kaiden continues to refuse to acknowledge that the PBGs and SLCs did not exist although he has been repeatedly confronted with evidence demonstrating that fact. The law judge failed to credit Kaiden's testimony that he believed such instruments existed or that he had sources for his information about prime bank instruments but could not recall them. The Division notes that, absent a sanction, nothing would prevent Kaiden from returning to the industry. The Division also asserts that a person who refuses to acknowledge the fictitious nature of prime bank instruments "has no place in the securities industry."
We believe that Kaiden's behavior was egregious and demonstrated a complete lack of appreciation of his obligationsunder the securities laws. We share the Division's concern that Kaiden continues to refuse to acknowledge that these prime bank instruments were fictitious. We therefore agree with the law judge that a bar from association with a broker-dealer or member of a self-regulatory organization is appropriate. 44
An appropriate order will issue. 45
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY, and UNGER)
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41629 / July 20, 1999
Admin. Proc. File No. 3-9403
In the Matter of the
Martin R. Kaiden
ORDER IMPOSING REMEDIAL SANCTION
On the basis of the Commission's opinion issued this day, it is
ORDERED that Martin R. Kaiden be, and he hereby is, barred from association with a broker, dealer, or a member of a national securities exchange or of a registered securities association.
By the Commission.
Jonathan G. Katz
--15 U.S.C. § 77q(a).
-- SEC v. Martin Kaiden, Final Consent Judgment of Permanent Injunction and Other Relief as to Defendant Martin Kaiden, 97 Civ. 0641 (DC) (S.D.N.Y. Aug. 18, 1997). Kaiden was enjoined from violations of Section 17(a) of the Securities Act and from acting or omitting to act, while in control of a broker or dealer, if such act or omission constituted a violation of Section 15(c)(1)(A) of the Securities Exchange Act of 1934 or Exchange Act Rule 15c1-2.
-- The Order Instituting Proceedings further alleged that Kaiden aided and abetted violations of Section 15(c)(1)(A) of the Exchange Act, 15 U.S.C. § 78o(1)(A), and Exchange Act Rule 15c1-2, 17 C.F.R. § 240.15c1-2. The law judge made no findings with respect to this allegation, and no party has appealed from this omission. That allegation is dismissed.
-- During the hearing, Kaiden described the number of people to whom he spoke variously as "65 to 100," "60, 70, 80," "50-60," and "70-80."
-- As discussed below, the law judge did not find this testimony by Kaiden to be credible.
-- Kaiden testified that one of the "people I was dealing with at the time had brought an investor in and was paid. That was verification to me."
-- Kaiden had claimed that banks issued these instruments "off-balance sheet" in order to "improve capital ratios" and "the return" on assets. One investment banker contacted by Hancock questioned how any bank could "'sell' their off-balance sheet commitment to provide credit to others, let alone package this commitment into a tradable security."
-- SEC v. Martin Kaiden, Final Consent Judgment of Permanent Injunction and Other Relief as to Defendant Martin Kaiden, 97 Civ. 0641 (DC) (S.D.N.Y. Aug. 18, 1997).
-- Exchange Act Section 20(a), 15 U.S.C. § 78t(a) (setting forth liability of controlling persons).
-- 15 U.S.C. § 78o(c)(1)(A).
-- 17 C.F.R. § 240.15c1-2. At the same time, the court entered an order enjoining Kaiden Company from violations of Securities Act Section 17(a), Exchange Act Section 15(c)(1)(A), and Rule 15c1-2.
-- SEC v. Lauer, 52 F.3d 667, 670 (7th Cir. 1995) (holding that, although the defendant sold a fictitious instrument, the court's determination of whether the instrument was a security would be made based on the defendant's representations about the investment).
-- 15 U.S.C. § 77b(1).
-- Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).
Thus, Kaiden's assertion that none of the instruments or programs can be a security because none is denominated a "note" fails. The Supreme Court has stated that it will not be "bound by legal formalisms, but instead [will] take account of the economics of the transaction under investigation." Reves v. Ernst & Young, 494 U.S. 45, 61 (1990), citing with approval Tcherepnin v. Knight, 389 U.S. at 336.
-- 494 U.S. at 56. See also Banco Espanol de Credito v. Security Pacific Nat'l Bank, 973 F.2d 51, 55-56 (2d Cir. 1992) (applying the Reves test to determine whether an instrument is a note for purposes of Securities Act Section 2(1)).
-- Reves, 494 U.S. at 66-67. The Court of Appeals for the District of Columbia Circuit has further noted that "the presumption [that a note is a security] is only rebutted when the two-step, four-factor analysis based on all the evidence leads to the conclusion that the note is not a security." Stoiber v. SEC, 161 F.3d 745, 749 n.7 (D.C. Cir. 1998), cert. denied, 62 U.S.L.W. 3641 (Apr. 19, 1999).
Courts have found a note to be a security even where all four Reves factors are not satisfied. See, e.g., Stoiber, 161 F.3d at 752 (two of four Reves factors "strongly favor" treating notes as securities); National Bank of Yugoslavia v. Drexel Burnham Lambert, Inc., 768 F. Supp. 1010, 1016 (S.D.N.Y. 1991) (determining that note was security because "three of four Reves factors weigh in favor of finding that the [investments] were `securities'").
-- Trust Co. of Louisiana v. N.N.P. Inc., 104 F.3d 1478, 1489 (5th Cir. 1997).
-- Reves, 494 U.S. at 66.
-- Id. Kaiden asserts that he did not believe that these instruments were securities. Reves, however, looks to the reasonable expectations of investors generally.
--Kaiden cites Marine Bank v. Weaver, 455 U.S. 551 (1982). There, the Supreme Court held that certificates of deposit issued by federally-regulated banks were not securities because they were subject to comprehensive regulation under the banking laws.
Kaiden argues that he believed SLCs and PBGs were instruments "issued and guaranteed by major Western European banks" and cites conversations with unnamed persons, who described the instruments to him as "bank instruments." Marine Bank did not hold that all bank instruments were excluded from the securities laws. Rather, the Reves courtcited Marine Bank as an example of a situation in which the court would determine that "the existence of another regulatory scheme [i.e., federal regulation of banks] significantly reduces the risk of the instrument, thereby rendering application of the Securities Act unnecessary." Reves, 494 U.S. at 66-67. As noted above, however, Kaiden explicitly stated that SLCs and PBGs were not subject to any regulatory scheme.
-- 328 U.S. 293 (1946).
-- Compare Prime Investors, Inc., Securities Exchange Act Rel. No. 38487 (April 8, 1997), 64 SEC Docket 742, 752 & n.24 (applying test for investment contract) (citing United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852 (1975) and SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946)).
-- See, e.g., SEC v. Lauer, 52 F.3d at 670.
--Kaiden also asserts that his representations were not material because of Hancock's sophistication. Materiality, however, is judged by an "objective" standard, "involving the significance of an omitted or misrepresented fact to a reasonable investor." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 444 (1976). The test for materiality is whether the reasonable investor would consider a fact important in making his or her investment decision. Id. at 448. We believe a reasonable investor would consider the existence of the instruments, as well as their profitability, creditworthiness, and guarantors, material.
-- Steadman v. SEC, 450 U.S. 91, 102 (1981); Donald Sheldon, 51 S.E.C. 59, 77 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
To demonstrate these instruments' existence, Kaiden cites a November 1992 memorandum to Hancock that was apparently produced to Kaiden during discovery. In that memorandum, a representative of Citibank states that "there is a large secondary market trading" letters of credit.
This memorandum is not probative of the existence of PBGs or SLCs sold by Kaiden. The Citibank memorandum makes no reference to prime banks, prime bank instruments, or PBGs. While the memorandum discusses secondary trading in letters of credit, the discussion deals with letters of credit issued in the United States. Further, the Citibank representative made clear that the representative had no personal familiarity with the secondary market for letters of credit. Kaiden does not claim that he relied on this memorandum nor that he knew of its existence when he contacted Hancock. Rather, it appears that, before the events at issue, Hancock had received a solicitation to purchase other prime bank instruments from an unrelated third party and asked Citibank for its views.
-- These agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
--Kaiden states that he could not have known in advance that regulatory agencies would issue these alerts. We agree that he could not anticipate the alerts' issuance. We believe, however, that the alerts are probative of the fictitious nature of these instruments.
We also believe that the record strongly suggests that, if Kaiden had performed proper due diligence, he might well have come to the same conclusion that the regulatoryauthorities reached. The Division introduced various declarations and affidavits from bankers stating that similar instruments were fictitious or making clear that the particular institution did not deal in such instruments. Instead, as demonstrated below, Kaiden did not have a basis for representing that SLCs or PBGs existed.
-- Q: Taken as a whole, Mr. Kaiden, in the seven letters that you wrote, was there any particular fact, a bank, an insurance company, accounting company, that you bothered to call to verify the existence of the instruments that you were offering?
A: No, sir.
-- Kaiden stated that he called Price Waterhouse in New York, but no one at that office knew "anything about it" since "each office [had] their own clients."
--Kaiden claims that he spoke to Baffee AG's representative in the United States. This representative was affiliated with an entity called Fortrade International, Inc. Kaiden testified that he spoke to the representative on a conference call, but Kaiden could not recall the representative's name.
-- Jay Houston Meadows, Securities Exchange Act Rel. No. 37156 (May 1, 1996), 61 SEC Docket 2444, 2456 n.28, aff'd, 199 F.3d 1219, 1227 (5th Cir. 1997).
Kaiden further suggests that the law judge may have developed a bias against him because of Kaiden's failing memory. We see nothing in the record that evidences bias on the part of the law judge. Compare Meadows v. SEC, 199 F.3d at 1227-28; United States v. Laurins, 857 F.2d 529, 537 (9th Cir. 1988) ("A trial judge is more than an umpire, and may participate in the examination of witnesses to clarify evidence, confine counsel to evidentiary rulings, ensure the orderly presentation of evidence, and prevent undue repetition."), cert. denied, 492 U.S. 906 (1989).
--Before us, Kaiden states that he was nervous when he testified before the law judge and has a bad memory for names. We do not find this assertion to be a sufficient basis for overturning the law judge's determination. We share the law judge's incredulity that Kaiden could not remember the name of a single individual involved in transactions of this alleged magnitude.
We further note that, while Kaiden stated at the hearing that he could not remember because the transactions had occurred 4-1/2 years earlier, the Commission staff took Kaiden's testimony in 1994. During this investigatory testimony, Kaiden invoked his Fifth Amendment privilege against self-incrimination, but he was at least alerted to the matters that were of concern to the staff.
-- Kaiden argues that Hancock is a highly sophisticated insurance company that did not accept his representations about these instruments. In an enforcement action, the Commission does not need to demonstrate that the target of a representation relied on the misrepresentations. SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1986); Hanly v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969).
--Kaiden also asserts that Hancock suffered no loss and that therefore there is no violation of Securities Act Section 17(a)(3) because his actions did not operate as a scheme to defraud Hancock. However, Section 17(a)(3) also prohibits "any transaction, practice, or course of business" that "would operate as a fraud or deceit." Had Hancock transmitted funds as a result of Kaiden's offer of fictitious instruments, Kaiden's offer would have operated as a fraud and deception on Hancock.
--Scienter is not required to demonstrate a violation of Securities Act Section 17(a)(3). Aaron v. SEC, 446 U.S. 680, 697 (1980).
Kaiden notes that, in SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1467 (1996), the United States Court of Appeals for the Second Circuit described scienter as the "intent to deceive, manipulate or defraud" or "at least knowing misconduct." We believe Kaiden's conduct satisfies this standard. We further note that the Second Circuit has found that scienter may be established through recklessness. SEC v. U.S. Environmental, Inc., 155 F.3d 107, 111 (2d Cir. 1998); SEC v. McNulty, 135 F.3d 732, 741 (2d Cir. 1998) (holding that scienter "may be established through a reckless disregard for the truth").
Kaiden further claims, without citation to authority, that Securities Act Section 17(a)(1) requires a higher level of scienter than Exchange Act Section 10(b). However, in First Jersey, the court observed that "essentially the same elements must be established" for Section 17(a)(1) and Section 10(b). 101 F.3d at 1467. See also Meadows v. SEC, 199 F.3d at 1226 (finding severe recklessness constitutes scienter for purposes of Securities Act Section 17(a)(1)).
--U.S.C. § 78o(b)(6).
-- Exchange Act Section 15(b)(6) (authorizing institution of proceeding against any associated person for, among other things, being enjoined from any act or practice described in Exchange Act Section 15(b)(4)(C), 15 U.S.C. § 78o(b)(4)(C)).
-- See Elliot v. SEC, 36 F.3d 86, 87 (11th Cir. 1994). Cf. Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1108 (D.C. Cir. 1988) (holding that issues that could have been adjudicated in a prior injunctive proceeding held in a District Court cannot be litigated in a later administrative proceeding), cert. denied, 488 U.S. 869 (1989); Benjamin G. Sprecher, Securities Exchange Act Rel. No. 38485 (Apr. 8, 1997), 64 SEC Docket 720, 729; Alexander V. Stein, Investment Advisers Act Rel. No. 1497 (June 8, 1995), 59 SEC Docket 1493, 1501.
-- On January 13, 1995, Kaiden gave investigatory testimony in his capacity as custodian of Kaiden Company's records. It appears that the July 14 memoranda were introduced during that testimony.
--Kaiden also notes that the certified record index filed at the conclusion of the hearing before the law judge omittedhis and the Division's post-trial briefs. He asks that the record index be amended to include these documents. Under our Rule of Practice 350, 17 C.F.R. § 201.350, briefs are part of the record in Commission administrative proceedings. Under Rule of Practice 351, 17 C.F.R. § 201.351, the record index should have included the briefs. The Commission considered the post-trial briefs in this proceeding.
-- See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981).
--At the time of the hearing before the law judge, Kaiden testified that he was an insurance agent.
-- In light of the decision in Teicher v. SEC, No. 98-1287 (D.C. Cir. June 1, 1999), we deny the Division's request for the imposition of a collateral bar on Kaiden.
-- We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed herein.