SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42144 / November 16, 1999
Admin. Proc. File No. 3-9832
:
In the Matter of the Application of :
:
KEITH L. MOHN :
4678 Clinton Drive :
West Bloomfield, Michigan 48324 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
:
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS
Violations of Conduct Rules
Conduct Inconsistent with Just and Equitable Principles of Trade
Failure to Inform Employer of Private Securities Transactions
Person associated with member firm engaged in private securities transactions
without prior written notification to member. Held, association's
findings of violation and sanctions it imposed are sustained, except that
the fine is reduced by $2,222.
APPEARANCES:
Walter L. Baumgardner, Musilli, Baumgardner, Wagner & Parnell,
P.C., for Keith L. Mohn.
Alden S. Adkins, Susan L. Beesley, and Deborah F. McIlroy,
for NASD Regulation, Inc.
Appeal filed: February 22, 1999
Last brief received: June 1, 1999
I.
Keith L. Mohn, formerly a registered investment company and variable
contracts representative with John Hancock Distributors, Inc., a member of the
National Association of Securities Dealers, Inc. ("NASD"), appeals
from NASD disciplinary action. The NASD found that Mohn engaged in private
securities transactions in violation of NASD Conduct Rules 3040 and 2110. 1
It censured Mohn, fined him $52,222, and barred him from associating with any
member in any capacity. 2 We
base our findings on an independent review of the record.
II.
A. Background
Mohn worked at the Detroit Mohn General Agency, a franchisee of Hancock. Mohn
received a copy of Hancock's compliance manual that contained a description of
private securities transactions or "selling away" that explained that
selling away was "an extremely serious regulatory violation" that
could "result in severe penalties." Mohn also attended Hancock
compliance seminars that discussed selling away.
Mohn became interested in Citi Equity Group, Inc. limited partnerships in the
early 1990s. 3 Mohn's wife,
Lisa Mohn, was a registered representative. Beginning in 1983, she had worked
for various broker-dealers solely as a sales assistant; she had stopped working
in 1991. In February 1993, Mohn forwarded Lisa Mohn's Form U-4 (Uniform
Application for Securities Registration or Transfer) to Mariner Financial
Services, Inc., which offered Citi Equity interests. She became associated with
Mariner. In April 1993, however, Mariner informed Mohn that Mariner had
determined to stop offering Citi Equity interests.
In April 1993, Mohn asked Hancock to allow him to sell Citi Equity interests.
By letter dated April 23, 1993, Mary Owston, Hancock's product manager, rejected
Mohn's suggestion and expressed several concerns about Citi Equity and the
soundness of its offerings. Mohn, however, persisted. In June 1993, he wrote to
Robert Watts, then Hancock's president, urging that Hancock offer Citi Equity
interests. Mohn dismissed Watts' concerns and asserted that Citi Equity was
"credible, ethical, they are the biggest, they have succeeded." He
urged that Hancock establish a pilot program at the Mohn agency "to prove
that the sale of this product will be profitable for Hancock as well as for our
representatives." Watts was unpersuaded and reaffirmed Hancock's
determination not to offer Citi Equity interests.
Later in 1993, Mohn contacted Damian Kassab, a former high school
acquaintance, who was then president of Martha R. Seger & Associates, Inc.
Mohn asked Kassab to hire Lisa Mohn as a registered representative. 4
While Martha Seger offered limited partnerships, Kassab had no prior knowledge
of Citi Equity until either Mohn or Lisa Mohn told him about the company.
Neither Mohn nor Lisa Mohn told Kassab that Mariner and Hancock had refused to
sell Citi Equity interests. Lisa Mohn became associated with Martha Seger in
February 1994. However, she went to the firm's offices rarely and effected only
five transactions at Martha Seger. All five involved the purchase by Keith
Mohn's customers of Citi Equity partnership interests. 5
B. Sales of Citi Equity
The Shettlers. John Shettler initially contacted the Mohn agency in
response to a Hancock advertisement. Over several months, John and his wife,
Carolyn Shettler, had a series of meetings with Mohn and Michael Aller, an
employee of the Mohn agency. Several of these meetings were held at the Mohn
agency. Mohn described himself as an "expert" on tax shelters. He
formulated a financial plan that recommended, among other things, that the
Shettlers invest in a vehicle that would generate an unspecified form of tax
credit. Mohn recommended that the Shettlers finance this and other
recommendations by liquidating General Motors stock that John Shettler held in
his 401(k) account. Mohn told the Shettlers that he would choose a tax credit
program for them.
In March 1994, Mohn told the Shettlers that he had chosen such a program,
Citi-South Carolina Partners II. He gave them the private placement memorandum.
Neither Mohn nor Aller told the Shettlers that Hancock refused to offer Citi
Equity interests, or that they would have to purchase these interests through
Lisa Mohn at another firm. The Shettlers filled out the Citi-South Carolina
subscription agreement dated February 24, 1994. Mohn completed the portions of
the subscription agreement that designated the number of units, total amount
due, and the payee on the check. His office notarized the subscription agreement
and forwarded it to Martha Seger over Mohn's signature. As of the date of the
hearing, neither of the Shettlers had met or spoken to Lisa Mohn. 6
The Soehrens. Stephen and Martha Soehren owned John Hancock Mutual
Life Insurance Co. life insurance policies. They contacted the Mohn agency to
increase the amount of those policies. Beginning in the fall of 1993, the
Soehrens had a series of meetings with Mohn and Jordan Pollack, another employee
of the Mohn agency. 7 Mohn
prepared a financial analysis that recommended that the Soehrens purchase an
investment that would generate tax credits and that they borrow against their
Hancock insurance policies to finance their purchase.
In March 1994, Mohn recommended that the Soehrens purchase Citi-South
Carolina Partners II. Neither Mohn nor Pollack told the Soehrens that Hancock
refused to offer Citi Equity interests or that Lisa Mohn or Martha Seger would
have anything to do with the transaction.
The Soehrens became concerned when Mohn would not accept their endorsed
Hancock checks to pay for the partnership interest. Martha Soehren called Gary
Lefkowitz of Citi Equity. Lefkowitz told her that the partnerships were risky
"and that if we wanted to get out, now is the time to do it." When
Stephen Soehren asked Mohn about Lefkowitz's statements, Mohn assured Soehren
that Lefkowitz was a good money manager and that Mohn had faith in Lefkowitz.
Stephen Soehren testified that he and his wife had a great deal of confidence in
Mohn.
The Citi-South Carolina partnership closed before the Soehrens tendered their
subscription agreement. On Mohn's recommendation, the Soehrens purchased Citi-Virginia
Beach Partners at the end of March 1994. Again, Mohn completed the number of
units and amounts in the subscription agreement, and his office notarized the
agreement and forwarded it to Martha Seger.
C. Mohn's Conduct After the Transactions
In May 1994, Kassab saw an article in the New York Times describing
Lefkowitz' indictment and arrest. John Rogers, Martha Seger's compliance
officer, contacted the Mohns on vacation and informed them of Lefkowitz' arrest.
Martha Seger subsequently suspended Lisa Mohn's registration. 8
Rogers also asked for records of Keith Mohn's contacts with the customers who
purchased Citi Equity interests. The Mohn agency sent Rogers logs that described
Mohn's contacts with these customers, including the Shettlers and Soehrens. The
logs stated that Mohn had contacted these customers and had explained the
programs to these customers. 9
Later in 1994, based on an independent complaint that Mohn was selling
products not approved by Hancock, Hancock undertook an investigation of Mohn's
activities. When the Hancock investigator began contacting Mohn's clients, Mohn
left a voice-mail message for the Soehrens, stating that he may have forgotten
to tell them that the Citi Equity transaction had been placed through his wife. 10
Mohn's office provided the Hancock investigator with copies of Mohn's customer
logs. However, unlike the logs provided to Martha Seger, these logs represented
that Mohn's activities had been conducted on Lisa Mohn's
behalf. 11
The Shettlers lost their entire $27,778 investment in Citi-South Carolina, in
addition to paying substantial taxes on the sale of the General Motors stock
from the 401(k) account. The Soehrens lost all $35,844 that they invested in
Citi-Virginia Beach and, at the time of the NASD hearings, were still paying off
the loans that they had taken against their insurance policies. Both the
Shettlers and the Soehrens received no tax credits from their Citi Equity
interests. 12
III.
Conduct Rule 3040(a) states, "No person associated with a member shall
participate in any manner in a private securities transaction except in
accordance with the requirements of this Rule." 13
Rule 3040(b) requires that an associated person give the member firm prior
written notice that describes the proposed transaction in detail. Mohn admits
that he did not provide Hancock with any notice, let alone prior written notice,
of his activities. This is not surprising since Hancock had already informed
Mohn twice that it did not want to be involved with Citi Equity interests.
Rather, Mohn asserts that Lisa Mohn effected the transactions through Martha
Seger and received the resulting commissions. The Commission, however, has held
that Rule 3040 prohibits an associated person from participating "in any
manner" in a securities transaction. 14
Mohn plainly participated in the Citi Equity transactions. Neither the Shettlers
nor the Soehrens knew of Citi Equity before Mohn's presentation, and Mohn chose
the particular Citi Equity partnership for them. He testified that he determined
that these transactions were suitable for the Shettlers and the Soehrens. He
assisted in completing their subscription agreements and had his office process
them.
In contrast, Lisa Mohn's participation in these transactions was minimal. 15
She neither met with nor spoke to the Shettlers or the Soehrens. Mohn testified
that Lisa Mohn had "limited" knowledge of tax credits, and Lisa Mohn
stated that she relied on Mohn's suitability determinations. While she testified
that she considered the Shettlers and Soehrens her clients, the only action she
described with respect to these transactions was providing Mohn a copy of the
private placement memoranda. 16
The District Business Conduct Committee ("District Committee"), which
heard Mohn's testimony and observed his demeanor, found "that Mohn's
testimony that he referred [the Shettlers and the Soehrens] to Mrs. Mohn is not
credible and that there is no basis from the facts presented that any referral
was made regarding the sales in question." Credibility findings of the fact
finder are entitled to substantial deference, and we find no reason to overturn
this determination. 17
Mohn asserts that he did not receive any compensation for these transactions.
18 However, Rule 3040(d)
makes clear that an associated person must give his or her member firm prior
written notice of transactions that are not for compensation. The rule further
provides that the member firm "may, at its discretion, require that person
to adhere to specified conditions in connection with" the associated
person's participation in the transaction. 19
Mohn's failure deprived Hancock of this opportunity.
Mohn argues that he provided Hancock with a form of notice because, at
Hancock's expense, he became a Chartered Financial Counselor. Mohn asserts that
this status notified Hancock that he would present financial plans to customers.
We previously rejected a similar argument, noting that the fact that an
associated person might be "'ordinarily involved' in such transactions
while associated with [a member firm] does not mean that he was exempt from the
notice requirement." 20
Rule 3040 requires prior written notice of particular transactions. Mohn's
status did not inform Hancock of participation in any transaction, let alone
transactions involving Citi Equity interests.
Mohn further claims that Hancock knew that, as a Chartered Financial
Counselor, he had an obligation to recommend suitable investments to his
clients, regardless of whether the investments were approved by Hancock. Mohn
does not explain why his obligation to recommend any particular suitable
investment was inconsistent with his informing Hancock of his intent to do so.
Moreover, as described above, Mohn did substantially more than merely recommend
the Citi Equity interests to the Shettlers and Soehrens.
Mohn notes that the NASD has recognized the competing demands of individuals
who are both registered representatives and investment advisers. He suggests
that certain NASD statements make clear that he had no obligation to give notice
to Hancock, citing, for example, Notice to Members 94-44. That Notice to
Members, however, states that former Article III, Section 40 [now Rule 3040]
applies to any transaction in which a person who is both an investment adviser
and a registered representative "participated in the execution of the
trade." The notice explains that a person is "clearly participating in
the execution of trades . . . where he or she enters an order on behalf of the
[representative's] customer for a particular securities transaction with a
brokerage firm other than" his or her member firm. The notice further
states that, if the registered representative receives no compensation for the
transaction, the associated person nonetheless is subject to the requirement
that the associated person give notice under Rule 3040(d). 21
We sustain the NASD's determination that Mohn violated Conduct Rules 2210 and
3340. 22
IV.
Mohn complains that the sanctions imposed on him are excessive, and asserts
that the permanent bar is harsh. He cites other proceedings involving a variety
of violations in which lesser sanctions were imposed and asserts that the
sanctions imposed on him are not in proportion to sanctions imposed in other
cases. Under Section 19(e)(2) of the Exchange Act, 23
we affirm the NASD's determination to impose a particular sanction unless we
find it "excessive or oppressive."
The sanctions imposed by the NASD are within the range provided for in the
NASD's Sanction Guidelines for "Selling Away (Private Securities
Transactions)." As the Guidelines note, "[i]n more serious cases . . .
, a bar should be standard." Among the factors cited in the NASD's Sanction
Guidelines in assessing sanctions for Rule 3040 are willful disregard of known
requirements, use of the employer's offices or facilities, and attempts to
conceal the activity.
Mohn consciously disregarded Rule 3040's requirements. He attended Hancock
compliance seminars at which selling away was discussed, and he possessed a
manual describing prohibitions against selling away. He twice was instructed
that Hancock did not want to offer Citi Equity interests for reasons that
Hancock officials explained in detail. Mohn instead induced Martha Seger to
permit sales of Citi Equity interests and arranged for his wife to affiliate
with Martha Seger.
Mohn actively solicited these transactions using Hancock facilities:
formulating these recommendations as part of an overall Hancock financial plan,
conducting meetings with the Shettlers at the Mohn agency, sending
correspondence on Hancock letterhead, and using Hancock staff to notarize and
transmit documents. Not surprisingly, the District Committee credited the
Shettlers' and Stephen Soehren's testimony that they believed that they were
purchasing the Citi Equity interests through Mohn and Hancock.
Moreover, when Mohn's activities came to Hancock's attention, Mohn attempted
to convince the Soehrens to tell Hancock that they had purchased Citi-Virginia
Beach through his wife and suggested that they otherwise limit their responses
to the investigator. He insisted to the Hancock investigator that these
transactions had been referred to his wife. He created two sets of customer
logs: one for Martha Seger that showed that he had actively participated in the
transactions, and the second for Hancock, which reflected his acting on Lisa
Mohn's behalf.
Mohn complains that the NASD imposed such heavy sanctions because it wants to
deter others from violations of Rule 3040, not because of his conduct. We have
made clear however that Rule 3040 is important. By prohibiting "selling
away" from the member with whom a registered representative is associated,
Rule 3040 protects investors from the hazards of unmonitored sales, while
protecting the member firm from exposure to loss and
litigation. 24 Mohn
solicited investors for highly risky investments, precisely the type of security
offerings that required heightened scrutiny by a broker-dealer, one of the many
reasons Hancock had not wanted to undertake offering Citi Equity interests.
The fine of $52,222 includes the $2,222 paid to Lisa Mohn in commissions. As
noted earlier, the NASD has asserted that, while circumstances might suggest
that Mohn had access to these commissions, it does not argue on appeal that the
commissions were compensation to Mohn. Under these circumstances, we believe it
is appropriate to reduce the fine by this amount.
Based on the foregoing, we do not find that the remaining sanctions imposed
by the NASD against Mohn are either excessive or oppressive.
An appropriate order will issue. 25
By the Commission (Chairman LEVITT and Commissioners JOHNSON,
HUNT, CAREY, and UNGER)
Jonathan G. Katz
Secretary
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42144 / November 16, 1999
Admin. Proc. File No. 3-9832
:
In the Matter of the Application of :
:
KEITH L. MOHN :
4678 Clinton Drive :
West Bloomfield, Michigan 48324 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
:
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES
ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the National Association of
Securities Dealers, Inc. against Keith L. Mohn, and the Association's assessment
of costs, be, and they hereby are, sustained; provided, however, it is
ORDERED that the fine be, and its hereby is, reduced by $2,222.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 Conduct Rule 3040 prohibits any
person associated with a member firm from participating in any manner in a
private securities transaction outside the regular course or scope of his or her
employment without providing prior written notice to the member. Conduct Rule
2110 requires that members and associated persons "observe high standards
of commercial honor and just and equitable principles of trade."
2 The NASD also assessed costs.
3 Citi Equity claimed that its
limited partnerships would generate tax credits by constructing and operating
low-income affordable housing developments. Before the transactions at issue
here, Mohn and his wife purchased in the secondary market an interest in one of
the Citi Equity partnerships, Citi-Central Plains II.
4 Mohn told Kassab that Lisa Mohn
wanted a part-time job that would permit her to service existing clients and
stay home with their children. Kassab testified that he viewed Lisa Mohn's
association as an accommodation to Mohn, an old friend, and not "from a
profit perspective."
Lisa Mohn provided Martha Seger with a Form U-4 that omitted her association
with Mariner, as well as with a second firm, Portfolio Asset Management Group,
Inc.
5 The NASD did not allege any
violations with respect to three of these transactions. Lisa Mohn received
$2,222 in commissions from Martha Seger.
6 The Shettlers subsequently filed
suit against Hancock; Mohn; Mohn's supervisor, Laurence Mohn (who is also Mohn's
father); the Mohn agency; Lisa Mohn; and Martha Seger with respect to their
purchase of Citi-South Carolina.
7 These meetings all occurred at the
Soehrens' home.
8 Lisa Mohn resigned from Martha
Seger on July 19, 1994.
9 For example, the log sent to
Martha Seger describing contacts with the Soehrens was entitled
"Citi-Virginia Beach Log for Mr. and Mrs. Stephen Soehren." The log
indicated that Mohn had met with the Soehrens "to discuss South Carolina
Partners program and other investment portfolio ideas" and spoke to them
about "getting into South Carolina Partners program as it is winding
down." Mohn met repeatedly with the Soehrens to provide them with documents
and monitor their execution.
10 The message further stated,
"All I need for you to do is just tell them that you realize it's not
Hancock and that, you know, the statement should say my wife's name on it."
The message also said, "That's all [the investigator has] a right to ask
you, by the way, and I would suggest that other personal things that you're
doing are none of his business."
11 Hancock received logs for Mohn's
contacts with the Soehrens entitled "Tax Credit Programs." In that
log, Mohn "met with the Soehrens to discuss tax credit programs" and
spoke with them "on Lisa's behalf regarding their desire to purchase tax
credit program." He retrieved documents and checks "on Lisa's
behalf."
At the hearing before the NASD, Mohn claimed that he did not keep any logs.
He further testified that, without his knowledge, his secretary had prepared
both sets of logs because she "wanted to be helpful." The District
Business Conduct Committee did not credit his testimony. We see no reason to
disturb this credibility determination. See text accompanying n.18.
At the close of its investigation, Hancock fined Mohn $25,000.
12 At the National Adjudicatory
Council hearing, Mohn informed the committee that the Shettlers and Soehrens had
been reimbursed in full jointly by Mohn, Lisa Mohn, and Hancock. There is no
further information in the record about these settlements.
13 Mohn admits that interests in
Citi-South Carolina Partners II and Citi-Virginia Beach Partners are securities.
See, e.g., SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
14 See, e.g., Stephen
J. Gluckman, Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418,
421 (associated person introduced customers to issuer, participated in meetings
between them, and prepared sales agreements); Charles E. French, 52
S.E.C. 858, 862 (1996) (associated person introduced customer to issuer and
negotiated terms of transaction); James L. Owsley, 51 S.E.C. 524, 531-32
(1993) (associated person arranged and attended meeting between issuer and
customer); The Cambridge Group, Inc., 50 S.E.C. 752, 753 (1991)
(associated person referred firm's customers to another broker-dealer), modified
sub nom., Hateley v. SEC, 8 F.3d 653 (9th Cir. 1993) (as to
sanctions).
15 In response to a question at
the District Committee hearing, Mohn admitted the following:
Q: So you didn't really direct [these transactions] to your wife, you handled
it for your wife?
A: Yes.
16 Mohn claims that the
Shettlers' testimony before the NASD contradicted their testimony in their civil
suit against Mohn. Mohn's brief, however, attaches pleadings filed in that suit,
not testimony. Argument of counsel is not evidence.
Moreover, while the pleadings suggest that the Shettlers' counsel theorized
that Lisa Mohn may have had a more active role in their purchase (e.g.,
that she effected the transaction or chose the particular partnership for them),
the record here is clear that Mohn participated in these transactions.
17 Jay Houston Meadows, 52
S.E.C. 778, 784 n. 13 (1996), aff'd, 119 F.3d 1219 (5th Cir. 1997).
18 While Lisa Mohn deposited her
commissions in the Mohn's joint checking account, the sole account maintained by
the Mohns, the NASD does not argue to us that this was compensation to Mohn.
19 We have previously stated that
while the rule "speaks only of the imposition of 'conditions' on
participation in uncompensated transactions, it would appear that under a
reasonable interpretation, a firm's restrictions on its sales force may include
a total prohibition." Jay Frederick Keeton, 50 S.E.C. 1128, 1131
(1992).
20 Charles A. Roth, 50
S.E.C. 1147, 1151 (1992), aff'd 22 F.3d 1108 (D.C. Cir.) (Table), cert.
denied, 513 U.S. 1015 (1994).
21 Another NASD opinion letter
cited by Mohn similarly states that, if the associated person participates in
the execution of a transaction, that person is subject to the notice
requirements of Rule 3040.
The remaining NASD statements upon which Mohn relies discuss whether an
associated person is participating in a transaction for compensation, which
would require the registered representative both to give written prior notice
and obtain prior approval of his or her member firm, or a transaction not for
compensation, which requires only that the registered representative give
notice. Both types of transactions are subject to Rule 3040. Compare
Rules 3040(c) (Transactions for Compensation) and 3040(d) (Transactions Not for
Compensation).
22 Mohn asserts that he should be
afforded a hearing under the new NASD Code of Procedure, which authorizes
hearing panels composed of a hearing officer and two persons associated with
NASD members. However, when we approved the NASD's new Code of Procedure, we
also approved a transition provision that permitted cases instituted before the
effective date of the rules (August 7, 1997), to be conducted under the
then-existing procedural rules. Order Approving Proposed Rules Change, Exchange
Act Rel. No. 38908 (Aug. 7, 1997), 65 SEC Docket 265, 278, 62 Fed. Reg. 43,385,
43,398 (Aug. 13, 1997). This case was instituted October 15, 1996. Moreover,
Mohn does not articulate any particular objection to the District Committee's
conduct of the proceeding, and our review of the record indicates that Mohn had
a fair hearing.
Mohn also asserts that this proceeding is barred by the general statute of
limitations set forth in 28 U.S.C.
? 2462. This statute provides a five-year statute of limitations period
applicable to government actions and has been applied to certain Commission
proceedings by the United States Court of Appeals for the District of Columbia
Circuit in Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996). The proceedings
here were commenced within five years of the complained-of events.
23 15 U.S.C. ? 78s(e)(2).
24 See, e.g., William
Lewis Morgan, 51 S.E.C. 622, 625 (1993).
25 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.
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