SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
STEVEN D. GOODMAN
For Review of Disciplinary Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLNARY PROCEEDINGS
Violation of Exchange Act and Conduct Rules
Fraud in Sale of Securities
Registered representative of member firm of registered securities association defrauded customers by making fraudulent representations and omitting to state material facts in sale of speculative securities. Held, association's findings of violation and the sanctions it imposed are sustained.
Steven D. Goodman, pro se.
Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Vickie R. Olafson, for NASD Regulation, Inc.
Appeal filed: December 9, 1999
Briefing completed: April 13, 2000
Steven D. Goodman, who during the relevant period was a registered representative in the Pittsburgh office of Hibbard Brown & Co., Inc., a former member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that, during 1993, Goodman violated Section 10(b) of theSecurities Exchange Act of 1934,1 Rule 10b-5 thereunder,2 and NASD Conduct Rules 2110 and 21203 by defrauding three customers in connection with his sale of certain speculative securities.4 It barred Goodman from association with any NASD member firm in any capacity, and fined him $75,000.5 We base our findings on an independent review of the record.
A. In July 1993, Goodman recommended that his customer Edward Regula purchase shares of Process Equipment, Inc.6 Goodman stated that Process was "the hottest stock he ever ran into," that he had recently met with the company's president and had inside information, that he had invested a substantial amount of his own money in the company, and that, if Regula purchased the stock, he should make a $10,000 to $15,000 profit within probably two to four weeks.
There was no basis for Goodman's euphoric representations. Hibbard's own internal report on Process, which Goodman admittedly received in July 1993 prior to soliciting Regula, stated that Process was a high risk, speculative stock and that the risks of aninvestment included high industry competition and the firm's economic weakness and recent losses. The report noted that, for the nine-month period ending January 31, 1993, Process had suffered a net loss of $181,836. For its fiscal years ending April 30, 1991 and April 30, 1992, the company had sustained net losses of $412,884 and $333,053, respectively.
Goodman pressured Regula to buy 10,000 shares of Process for $50,000. Initially, Regula refused because of the large sum of money involved. However, he finally agreed to the purchase on condition that his stock would be sold automatically if its price fell below $4.50 a share, ensuring that Regula's losses would not exceed $5,000. Goodman guaranteed that Regula would not lose more than that amount, and Regula made the purchase. Thereafter, Regula reminded Goodman of the stop-loss order on several occasions, and Goodman continually assured him that the order was in effect.7
In late August, Regula decided to sell his Process stock since he needed the money for his business. However, Goodman put him off, stating that the stock was "not doing anything," and that Regula should be patient and give Goodman another seven to 10 days. Finally, in late September, unable to get any quotes on Process from Goodman, Regula contacted Hibbard's New York office and was told that the stock was selling for about $2.50 a share. Regula assumed that his stock must have been sold in accordance with the stop-loss agreement. However, when he called Goodman, Goodman stated that "he had been too busy and the stock went out from underneath him too fast." Regula then called Goodman's superior but was told that there was no such thing as a stop-loss order on over-the-counter securities.
B. In August 1993, Goodman called his customer Michael Guzzi five or six times urging him to purchase shares of Process. Goodman told Guzzi that Process was a great opportunity, that Guzzi couldn't lose, and that Guzzi should trust him and sell the money market fund he owned in order to buy Process.8 Goodman did not disclose any of the risks of an investment in Process or any pertinent financial data.
As Goodman was aware from Hibbard's own August 1993 internal report on Process and from Process's recently filed annual report, the company had suffered a net loss of $259,826 for its fiscal year ended April 30, 1993, its third yearly loss in a row. In addition, its revenues had dropped from $2,231,812 in fiscal 1992 to $1,949,832in fiscal 1993. Goodman did not disclose these circumstances to Guzzi. Instead, he gave Guzzi an outdated 1991 report on Process prepared by another firm which stated that the company was "on the fast track of becoming an international leader in the area of automated food, wine, and biotech processing systems." In a footnote, the report stated that it had been compiled "for and on behalf of" Process from information supplied by management, and that the information it contained was "not guaranteed as to accuracy or completeness."9
On Goodman's advice, Guzzi cashed in shares of his money market fund and purchased Process on August 20. Shortly after his purchase, he became nervous about his investment and called Goodman. However, Goodman dissuaded Guzzi from selling his stock, and stated, "I'll tell you when to sell." It does not appear that any advice to sell was ever given.
In September 1993, Goodman recommended that Guzzi purchase shares of U.S. Transportation Systems, Inc. ("UST"), another speculative stock.10 Goodman told Guzzi that UST was a "great investment" and that Guzzi "couldn't lose." Goodman did not disclose any of the risks associated with an investment in UST, or furnish any financial information about the company including the fact that, for its fiscal year ended December 31, 1992, UST had suffered a net loss of $3,569,235. Guzzi purchased 3,000 shares of UST on Goodman's recommendation.
Guzzi stated that Goodman was "extremely aggressive" in pressing him to invest, suggesting that he borrow the necessary funds or use money saved for his children's education. When Guzzi subsequently called Goodman to complain about his stocks' decline in value, Goodman urged him to invest more money in order to lower his average cost per share. According to Guzzi, his total investment of $8,687 was worth only about $250 at the time of the hearing in this matter.
C. In October 1993, Goodman told his customer Ravindra Tetambe that Goodman could make him a lot of money throughinvestments in low-priced stocks that could quadruple or go even higher in a very short period of time. Goodman stated that he knew the chief executive officer of Great American Recreation, Inc. ("GAR"),11 and that its stock, currently selling for less than $3.00 a share, had great potential to rise to double digits in a very few months. Goodman did not give Tetambe any negative information about GAR, and did not supply any financial information. Tetambe purchased 1,000 shares of GAR on October 27. On the same day, Goodman called Tetambe back and urged him to buy another 1,000 shares of GAR. Goodman stated that GAR was "a very hot company," that Goodman had very few shares left, and that if Tetambe didn't make another purchase he might never be able to get the stock again at such a great price. On Goodman's advice, Tetambe purchased another 1,000 shares of GAR.12
Goodman admittedly had access at Hibbard to the latest Commission filings of the companies he recommended. He testified that "[r]eading 10-Ks, 10Qs . . . is your best asset. It's your customer's best asset. How can he make a decision on what to do if he doesn't have the information?" However, Tetambe received no such information. GAR's 10-K for its fiscal year ended April 30, 1993 disclosed that the company had lost $5,276,471 in 1991 and $7,804,865 in 1992. While GAR reported net income of $214,869 for fiscal 1993, the gain was the result of a "quasi reorganization" without any improvement in operating performance. In fact, GAR's 1993 revenues fell $713,744 below their 1992 level.
One week after Tetambe's purchases of GAR, Goodman called and recommended that Tetambe invest in UST. Goodman stated that UST was trading at a very low price, 1-3/8, and that it would easily go up to 6 or 7 in a few months and might even reach double digits in a year. Goodman did not mention any risks associated with an investment in UST, nor did he disclose any financial information about the company. Relying on Goodman's recommendation, Tetambe purchased 2,000 shares of UST.
In November 1993, Goodman called Tetambe again and recommended that he purchase shares of Consolidated Technology Group Ltd., which was trading for around $6.00 per share.13 Goodman represented thatthe stock's price would increase to between $15 and $20 a share in just six months to a year. When Tetambe complained that the prices of his previous purchases, GAR and UST, were falling, Goodman told him not to worry. Goodman stated that he was taking care of Tetambe's investments, that the lower prices were "just market fluctuations," and that, if Tetambe invested about $10,000 in Consolidated, his investment would be worth $70,000 to $80,000 in a year. Goodman did not mention any risks or disclose any financial information. On November 26, Tetambe purchased 500 shares of Consolidated.
Consolidated's 10-K annual report for its fiscal year ended July 31, 1993 showed that the company had suffered net losses for each of its fiscal years from 1989 through 1992.14 Although the company reported net income of about $660,000 for fiscal 1993, the 10-K report noted that the profit was due to a one-time gain resulting from the acquisition of certain assets.
After Tetambe purchased Consolidated, Goodman called him five or six times a week with additional recommendations, and asked whether Tetambe could use the proceeds from other investments to buy them. Tetambe declined to make additional purchases. Noting that the price of Consolidated was falling, he asked Goodman to sell his Consolidated stock. Goodman refused, stating that, if Tetambe sold the stock, he would have to pay Hibbard a large commission and thereby lose a large part of his investment. Goodman also refused to send Tetambe his Consolidated share certificates so that Tetambe could sell them through another broker. Tetambe finally got the certificates after calling Hibbard's New York office and threatening legal action if they were not sent to him.
Tetambe lost his entire $5,000 investment in GAR when the company went bankrupt, and recovered only $70 of his $2,754 investment in UST. He sold his Consolidated shares at a loss as soon as he received the share certificates from Hibbard.
A securities salesman has a duty to ensure that there is a reasonable basis for the recommendations he makes to customers.15 Goodman ignored that obligation. He engaged in a course of conduct that was directly contrary to the basic responsibilities imposed on professionals in the securities industry.16 He not only made wholly irresponsible statements and predictions, but withheld material information from investors. Moreover, he used high pressure tactics to induce sales, and increased customer losses by dissuading customers from selling and by failing to execute sell orders.
We reject Goodman's claim that he did not act with scienter. Goodman was certainly aware that there was no reasonable basis for his assurances that the stocks he recommended "couldn't lose" or for his extravagant predictions of substantial price increases and investor profits in a short period of time. Moreover, as described above, he deliberately withheld negative information concerning the securities he was recommending, and engaged in unscrupulous high pressure sales tactics. Thus he acted with the requisite scienter.
Goodman argues that his "enthusiastic" use of superlatives should not be construed as fraud, that he relied on his supervisors and Hibbard's research department, and that the recommendations he made were suitable for his customers. We reject these contentions. What Goodman characterizes as "enthusiasm" was blatant fraud that has no place in the securities business. We have long condemned the use of such tactics,17 and have repeatedly held that it is inherently fraudulent to predict specific and substantial increases in the price of a speculative security.18 Statements made by a salesman's superiors are not an adequate basis for representations to customers,19 and it is clear that Goodman did not rely on Hibbard's internal research reports. As noted above, none of the negative information contained in Hibbard's reports on Process was relayed to customers. Goodman's claim that his recommendations were suitable for his customers is inapposite. Suitability is not an issue in this proceeding. On the contrary, the issue is whether, in making his recommendations, Goodman defrauded his customers by means of material misstatements and omissions. We think it clear that he did.
Goodman further contends that, since his three customers were "educated . . . businessmen" with prior investment experience, they were not misled with respect to the securities they purchased fromhim. He also argues that the NASD erred in failing to credit his testimony which contradicted his customers' claims that he made material misstatements and omissions.
Goodman's customers can hardly be characterized as sophisticated. In any event, we have repeatedly rejected arguments that customers were not defrauded because they were sophisticated or experienced.20 As for Goodman's credibility, we have often pointed out that credibility determinations of the initial decision maker are entitled to considerable weight and deference since they are based on hearing witnesses testify and observing their demeanor.21 We see no reason to disagree with the NASD's assessment here, particularly in view of the similarities in the testimony of Goodman's customers.22
In light of the foregoing, we sustain the NASD's findings of violation.
Goodman argues that the bar imposed on him by the NASD is totally unwarranted. He asserts that he is a responsible professional who sought to make money for his clients, and that he poses no threat to the investing public. He further contends that the NASD imposed less severe sanctions on various Hibbard officials and salesmen whose misconduct was more serious than that found with respect to him. Finally, he complains that the $75,000 fine assessed by the NASD exceeds the $5,000 - $50,000 range suggested by the NASD's Sanction Guidelines.
We cannot agree that Goodman is a responsible professional. On the contrary, we have found him guilty of egregious misconduct. Goodman engaged in high pressure, fraudulent sales tactics in utterdisregard of his obligations to investors. He totally ignored his professional responsibilities at his customers' expense. Moreover, this is not the first regulatory action that has been taken against Goodman. In 1992, he was disciplined by the State of Ohio, with his consent, for misrepresentations to a customer in connection with the sale of a security.
The appropriate remedial action to be taken against a respondent depends on the particular facts and circumstances of each individual case.23 Moreover, it appears that most, if not all, of the "less severe" sanctions that Goodman cites were imposed pursuant to offers of settlement. We have frequently pointed out that pragmatic considerations justify the acceptance of lesser sanctions in negotiating a settlement.24 We further note that the NASD's Sanction Guidelines are not designed to prescribe fixed penalties. Instead, as their name suggests, they merely provide a "starting point" in the determination of appropriate remedial action.25 Here Goodman's egregious misconduct fully justifies the NASD's imposition of a $75,000 fine.
Goodman takes no responsibility for his actions. Instead, he continues to deny that he did anything wrong. We cannot agree that he poses no threat to the investing public. On the contrary, we consider that the imposition of a bar is appropriate to protect the public from further harm at his hands.
In sum, Goodman has exhibited a disturbing disregard for the standards that govern the securities industry. We consider his exclusion from that industry an appropriate safeguard, and the $75,000 fine fully warranted. Thus we do not find the sanctions assessed by the NASD excessive or oppressive.
An appropriate order will issue.26
By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY, and UNGER).
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 43889 / January 26, 2001
Admin. Proc. File No. 3-10116
In the Matter of the Application of
STEVEN D. GOODMAN
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 Steven D. Goodman, and the Association's assessment of costs, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
1 15 U.S.C. § 78j(b).
2 17 C.F.R. § 240.10b-5.
3 Conduct Rule 2110 requires adherence to "high standards of commercial honor and just and equitable principles of trade." Conduct Rule 2120 proscribes fraud in connection with the purchase or sale of securities.
4 These securities were among the so-called Hibbard "house stocks." Generally, these stocks were low-priced, over-the-counter securities of development companies. The house stocks were the focus of firm-wide telephonic sales conference calls conducted from New York by Hibbard's senior management, and Hibbard salesmen were pressured to sell these stocks to customers.
5 The NASD also assessed costs against Goodman. It dismissed charges that Goodman engaged in abusive sales practices in a managerial capacity, that he caused and engaged in the unauthorized purchase of securities for customers' accounts, and that he was responsible for supervisory deficiencies.
6 Process was in the business of designing and manufacturing sanitary stainless steel systems used in manufacturing processes in the wine, food, and bio-technology industries.
7 The record is unclear as to whether, on Goodman's recommendation, the stop-loss price was later raised to $5.00 when the price of Process purportedly rose by 50 cents a share.
8 Goodman also told Guzzi that Guzzi could easily follow an investment in Process on NASDAQ. In fact, Process was an over-the-counter "pink sheet" stock that was not traded on NASDAQ.
9 Goodman claims that, before Guzzi purchased Process, Goodman showed him Hibbard's August 1993 report on the company which cited the speculative nature of its stock and disclosed the risks of an investment. However, Guzzi denied being told that Process was speculative and could not recall being informed of any risks. He further stated that, when he asked for a research report on Process, all he got was the outdated 1991 report referred to above. The NASD credited Guzzi's testimony, and we see no reason to disagree with that assessment.
10 UST was principally engaged in providing passenger bus service at various locations throughout the United States.
11 GAR owned and operated an amusement park and a ski area in northern New Jersey.
12 Goodman argues that, contrary to the claim made by Tetambe, he did not tell Tetambe that he would not be charged any commission on his GAR purchases. The NASD did not base its findings of fraud on any such misrepresentation, and we have not done so.
13 Consolidated was engaged in the manufacture and sale ofprecision electronic instruments.
14 The losses ranged from about $120,000 to $835,000.
15 Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969).
16 Goodman admitted that, at one time during this period, he had a sign on his desk reading "Punish the weak. Manipulate the naive." The record in this case demonstrates his commitment to that philosophy.
17 See, e.g., Irving Friedman, 43 S.E.C. 314, 319 (1967).
18 See, e.g., Joseph Barbato, Securities Act Release No. 7638 (February 10, 1999), 69 SEC Docket 178, 191, and the authorities there cited; Cortlandt Investing Corporation, 44 S.E.C. 45, 50 (1969).
19 Dan King Brainard, 47 S.E.C. 991, 996-997 (1983).
20 See, e.g., William L. Kicklighter, Jr., 51 S.E.C. 1, 5 (1991), aff'd sub nom. Brown v. SEC, 992 F.2d 328 (11th Cir. 1993) (Table); Gilbert F. Tuffli, Jr., 46 S.E.C. 401, 405 (1976).
21 See, e.g., Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992).
22 Citing Poindexter v. Wedbush, Noble, Cooke, Inc., 1983 Fed. Sec. L. Rep. (CCH) ¶ 99,093, Goodman argues that the failure to honor a stop-loss order is at worst a breach of contract and not fraud. However, the case he cites is inapposite. The court in that action merely held that, in accordance with the Supreme Court's decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), plaintiffs had no cause of action under the Exchange Act's antifraud provisions since their claim did not involve the purchase or sale of a security.
23 See Butz v. Glover Livestock Commission Co., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-859 (2d Cir. 1970).
24 See, e.g., Richard J. Puccio, 52 S.E.C. 1041, 1045 (1996).
25 Peter W. Schellenbach, 50 S.E.C. 798, 803 (1991), aff'd, 989 F.2d 907 (7th Cir. 1993).
26 We have considered all of the parties' contentions. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed herein.
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