SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45926 / May 15, 2002
Admin. Proc. File No. 3-9339
In the Matter of the Application of JOHN P. GOLDSWORTHY
For Review of Action Taken by the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. |
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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 findings of violation made by the National Association of Securities Dealers, Inc. against John P. Goldsworthy, and the bar from association with any member firm in any capacity, and the assessment of costs imposed, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
______________________________
| 1 | Section 1 of the Rules [now Conduct Rule 2110] requires the observance of "high standards of commercial honor and just and equitable principles of trade." Section 40 [now Conduct Rule 3040] provides, among other things, that, prior to participating in any securities transaction outside the regular course or scope of his or her employment, a person associated with a member firm must give that firm prior written notice. Section 40 further provides that if the associated person may receive selling compensation as a result of a private securities transaction, he or she must secure written approval from the member firm for each such private securities transaction. |
| 2 | John P. Goldsworthy, 53 S.E.C. 576 (1998). |
| 3 | The NASD had distributed these Investor Questionnaires to note purchasers during its initial investigation to solicit information about the SCF transactions. The testimony of thethree testifying note purchasers was consistent with their written responses in the Investor Questionnaires. |
| 4 | SCF was initially named St. Charles Funds, Inc. |
| 5 | Goldsworthy personally solicited these loans from an individual investor (Duane Cady) and from an insurance company. The promissory notes, issued in 1992, are not encompassed by this NASD proceeding. |
| 6 | Ryan committed suicide on March 4, 1994, shortly after his resignation. |
| 7 | A Schedule of Checking Account Activity in SCF Account dated March 9, 1994, shows that Goldsworthy used the proceeds to repay, among other things, part of the loan from Cady and to pay an NASD disciplinary fine. The Schedule also shows that Goldsworthy drafted checks to pay for office expenses, secretarial services, legal fees, salaries, and regulatory fees. Goldsworthy made out other checks to "cash." |
| 8 | Smith Barney made all but one of the customers whole. Goldsworthy has made restitution payments to the remaining customer as a result of the order issued in the Louisiana criminal case. |
| 9 | Goldsworthy's meeting with investor Charles Walsten was the subject of hearing testimony. During cross examination, Goldsworthy asked if Walsten remembered that Goldsworthy explained at the meeting that the notes would be repaid either from "the securities commissioner or Smith Barney or this company has to get up and running in order to make money to be able to repay these notes." Walsten agreed that this was the substance of Goldsworthy's explanation.
The record reflects that investor Allen Querens also met with Goldsworthy after Ryan's resignation; it is not clear whether this was the same meeting concerning which Walsten testified. |
| 10 | Goldsworthy claims in his appeal brief that "the best proof of this position" is that, in a prior proceeding, the Commission assertedly found that the 1992 notes, identical in form to the 1993 notes, were not securities. We did not make the claimed finding. From his erroneous premise, Goldsworthy concludes that the 1993 notes cannot be securities unless Smith Barney's marketing of the notes is considered.
The NASD had brought a disciplinary proceeding against Goldsworthy for conduct occurring prior to December 1992, relating to the formation of SCF. The proceeding concluded with a Letter of Acceptance, Waiver and Consent in which Goldsworthy, without admitting or denying liability, accepted and consented to the entry of findings that he: (1) became registered as an investment adviser contrary to a policy of his employer memberfirm prohibiting such registration; (2) formed St. Charles Funds, Inc. and St. Charles Mutual Funds, Inc. and failed to update his form U-4 to reflect this outside business activity; and (3) opened an account in the name of St. Charles Funds, Inc. with Smith Barney without notifying his employer in writing that he was affiliated with another member firm. Contrary to Goldsworthy's assertions, the NASD, in evaluating the 1992 misconduct in connection with that settled proceeding, did not make a determination regarding whether or not the 1992 notes were securities. Indeed, NASD staff involved in the investigation testified explicitly to this effect before the NASD hearing panel in this matter, and the settlement document does not contain allegations regarding the sale of the 1992 notes. The Commission did not review the NASD's settled proceeding and thus made no determination regarding the 1992 notes. As noted supra at note 5, the proceeding now before us involves only the 1993 note sales. |
| 11 | See LA. CIV. CODE ANN. Bk. III, T. XV, Ch. 2 (2002) (Principal is liable for acts of agent when agent acts within scope of his or her authority and when principal ratifies agent's unauthorized conduct by accepting the benefits of that conduct.). The record reflects that Goldsworthy accepted from Ryan and Smith Barney, without question as to their source, all funds derived from the note sales. Yet, the "Schedule of Checking Activity in SCF,Inc, Account" dated March 9, 1994, furnished Goldsworthy by Smith Barney, reflects a sales campaign broader than that to which the meeting attendees purportedly had agreed. |
| 12 | Timmreck v. Munn, 433 F. Supp. 396, 400-01 (N.D. Ill. 1977) (rejecting suggestion that boilerplate language that disclaims statements made in promotional literature should preclude a court from considering such statements in assessing a deal as a securities transaction, on the ground that securities analysis requires inquiry into the substance of the transaction and emphasis upon economic reality rather than mere form).
If a disclaimer in fact had been provided to and understood by customers, this would have been relevant to the third Reves factor, which focuses on note investors' reasonable expectations about a note's securities status. See 494 U.S. at 69, and discussion infra at Section III.3. |
| 13 | 15 U.S.C. § 78c(a)(10). |
| 14 | 494 U.S. 56. |
| 15 | The four factors are: (1) the motivations that would prompt a reasonable borrower and lender to enter into the transaction; (2) the plan of distributing the note to determine whether it is an instrument in which there is common trading for speculation or investment; (3) the reasonable expectations of the investing public; and (4) the existence of another regulatory scheme that significantly reduces the risk of the note and thus renders the application of the securities laws unnecessary. Reves, 494 U.S. at 66-67. |
| 16 | The types of notes that are not securities include:
(1) the note delivered in a consumer financing; (2) the note secured by a mortgage on a home; (3) the short-term note secured by a lien on a small business or some of its assets; (4) the note evidencing a character loan to a bank customer; (5) the short-term note secured by an assignment of accounts receivable; (6) the note which formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized); and (7) the note evidencing a loan by a commercial bank for current operations. Reves, 494 U.S. at 65 (citations omitted). |
| 17 | See, e.g., Stoiber v. SEC, 161 F.3d 745, 752 (D.C. Cir. 1998) (finding note to be a security where two of four factors weighedstrongly in favor of a security finding); Nat'l Bank of Yugoslavia v. Drexel Burnham Lambert, Inc., 768 F.Supp. 1010, 1015-1016 (S.D.N.Y. 1991) (finding note to be a security where three of four Reves factors met and "fourth cannot sensibly take this investment transaction outside the federal securities laws"). |
| 18 | Reves, 494 U.S. at 65. |
| 19 | Stoiber, 161 F.3d at 750. |
| 20 | Id. at 752. |
| 21 | Reves, 494 U.S. at 72-73. |
| 22 | Id. |
| 23 | Id. at 66. |
| 24 | Id. |
| 25 | In his solicitation of note purchasers, Ryan told customers that the funds were "seed money." |
| 26 | 15 U.S.C. § 80a-14(a). We note that the capital requirement is not a short-term obligation. The capital requirement, because it must be maintained by a mutual fund company at all times, is a permanent obligation. |
| 27 | See supra note 7. |
| 28 | Goldsworthy suggests that at least some of the customers might not have testified entirely truthfully about their motivation because of possible restrictions on their testimony imposed in non-disclosure agreements that are not in the record but that Goldsworthy claims were signed by customers when Smith Barney reimbursed them for their losses from the SCF notes. This is speculation that Goldsworthy failed to test through questioning of the customers on cross-examination. |
| 29 | Reves, 494 U.S. at 68 n.4. |
| 30 | Id. at 68. |
| 31 | Cf. Banco Espanol de Credito v. Security Pacific Nat'l Bank, 973 F.2d 51, 55 (2d Cir. 1992) (finding notes not to be securities where distribution limited to the solicitation of "sophisticated financial or commercial institutions" and where resale was specifically prohibited without written permission). |
| 32 | Gerald J. Stoiber, 53 S.E.C. 171, 178 (1997), petition for review denied, 161 F.3d 745 (D.C. Cir. 1998) (footnote omitted) (rejecting the contention that a distribution of thirteen notes is insufficient, as a matter of law, to constitute a public distribution). |
| 33 | William L. Morgan, 51 S.E.C. 622 (1993). See also Robin Bruce McNabb, Securities Exchange Act Rel. No. 43411 (Oct. 4, 2000), 73 SEC Docket 1470, 1477, appeal pending, No. 00-71528 (9th Cir.) (six customers). |
| 34 | Reves, 494 U.S. at 69 (finding reasonable note purchasers' acceptance of advertisements' characterization of notes as investments). |
| 35 | Cf. Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 814 (2d Cir. 1994) (finding reasonable investors' expectations that note purchase was an investment when purchase made on the advice of a registered representative). |
| 36 | 494 U.S. at 69. |
| 37 | Id. at 67. |
| 38 | Reves, 494 U.S. at 67 (emphasis added). |
| 39 | In our opinion in Stoiber, 53 S.E.C. at 179, we explained that state law provisions allowing for enforcement of promissory notes in the courts do not represent the type of comprehensive regulatory schemes that render unnecessary the need for application of the federal securities laws. |
| 40 | Conduct Rule 3040 defines selling compensation as any compensation paid directly or indirectly from whatever source as a result of the purchase or sale of a security. The NASD made this definition broad in scope and "intended it to include any item of value received." Morgan, 51 S.E.C. at 627. At the remand hearing, Goldsworthy admitted that there is "legal precedent" that the proceeds he received from the note sales, which he categorizes as "salary," were selling compensation if the underlying notes were securities. |
| 41 | Specifically, Goldsworthy admits that he did not provide written notice to USSCC regarding his intention to issue the 1993 SCF notes and that, consequently, USSCC did not give him written permission to sell the notes. Goldsworthy further admits that he did not provide USSCC with notice regarding the individual note sales. Goldsworthy contends, however, that USSCC understood that he intended to solicit additional loans because, shortly before his employment with USSCC, he had provided the firm with copies of the two 1992 notes discussed supra at note 5 and accompanying text. His contention is not determinative ofthis appeal since the Conduct Rules require written notice to, and written approval from, USSCC. |
| 42 | See Stephen J. Gluckman, Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 425. |
| 43 | Gilbert M. Hair, 51 S.E.C. 374, 378 (1993). |
| 44 | Gluckman, 70 SEC Docket at 428 & n.31. |
| 45 | See Gateway Stock & Bond, Inc., 43 S.E.C. 191, 195 (1966) (finding that sufficient evidence of applicants' violations was adduced at NASD hearings and rejecting allegation that NASD's lack of subpoena power denied applicants due process). |
| 46 | See Exchange Act Section 19(e)(2), 15 U.S.C. § 78s(e)(2). Goldsworthy does not claim, and the record does not show, that the NASD's action has imposed an undue burden on competition. |
| 47 | NASD Sanction Guidelines (1998 ed.) at 8-9 and 15 (Private Securities Transactions). |
| 48 | Id. at 15. |
| 49 | Morgan, 51 S.E.C. at 625. |
| 50 | We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed herein. |