Securities Act of 1934
Rel. No. 46746 / October 30, 2002
Admin. Proc. File No. 3-10518
In the Matter of the Application of FRANK THOMAS DEVINE c/o David A. Genelly, Esq. Vanasco, Genelly & Miller 401 South LaSalle Street, Suite 1302 Chicago, Illinois 60605 For Review of Disciplinary 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 disciplinary action taken by the National Association of Securities Dealers, Inc., against Frank Thomas Devine, and the costs assessed, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
| 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 employment without providing prior written notice to the member. Such notice must describe in detail the proposed transaction and the person's proposed role in it. The notice must also state whether the associated person has received or may receive selling compensation in connection with the transaction. If the associated person will receive compensation, the person must receive written approval from the member firm. Conduct Rule 2110 requires that members and associated persons "observe high standards of commercial honor and just and equitable principles of trade." |
| 2 | The Bulletin stated: The All American Life Insurance Company is philosophically opposed to the use of viatical settlements. We believe that accelerated death benefit provisions are a better method of achieving this end, and can do so at less cost to the policyholder. As you and your producers are independent contractors, we would not dictate to you how to conduct your business, except as it affects our company. In that regard the following restrictions apply to any agent of All American Life Insurance Company:
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| 3 | Each PCO lender was required to sign a statement that the "loan transaction is not an investment as defined by the Securities and Exchange Commission . . . ." The lenders were further required to assert that the "loan transaction is not to be considered a public offering, stock option, private placement or limited partnership" and that they were not acting with PCO as a "partnership, joint venture or syndicate in any manner whatsoever," but, rather, "all parties are acting independently of each other." |
| 4 | SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996) (holding that fractional interests in life insurance policies and non-recourse notes offered to IRA accounts that could not purchase fractional interests directly were not securities). |
| 5 | The opinion letter stated, "under the authority of the Life Partners case, there is no question and it is my opinion that the transaction as structured is not the sale of securities, and thus does not violate such law." |
| 6 | None of Devine's PCO investors were customers of U.S. Life Equity or All American. Devine asserts that the five customers had high net worth and were experienced investors, particularly with commercial loans. |
| 7 | On September 18, 1998, Laing pleaded guilty to securities fraud and mail fraud and was sentenced to 96 months in prison and ordered to pay restitution. See United States v. David Laing, No. 97-0638 (S.D.N.Y. Sept. 18, 1998). On November 13, 1997, the Commission filed a complaint in the Southern District of New York alleging that Laing and PCO "fraudulently raised approximately $95 million from investors nationwide by offering and selling securities in the form of investments in a loan program offered by PCO." The complaint further alleged that Laing and PCO "falsely represented that they would use the proceeds of the sales of the PCO Loan Program to make investments in viatical settlements . . . . [and that Laing and PCO] misappropriated and otherwise misused the proceeds of the offering." On February 17, 1999, the Court entered a final consent judgment in which Laing was enjoined from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. In April 1997, at the request of the California Department of Corporations, the Los Angeles Superior Court appointed a receiver to oversee investor claims for reimbursement from PCO and its principals. |
| 8 | On May 17, 2001, the NASD issued an opinion finding that Devine, Fergus, and Blake had violated NASD Conduct Rules 3040 and 2110. The NASD fined Fergus $8,000, suspended him for 60 days from associating with a member firm in any capacity, and required him to requalify by examination as an investment company and variable contracts products representative prior to acting in any capacity requiring that registration. The NASD fined Blake $35,000, suspended him for 180 days, and required him to requalify by examination. Neither Fergus nor Blake appealed the NASD's decision. |
| 9 | 15 U.S.C. § 77b; 15 U.S.C. § 78c(a)(10). Section 3(a)(10) excludes from the definition of the term "note" any note with a maturity not exceeding nine months. The PCO notes had a term of twelve months. |
| 10 | See Holloway v. Peat, Marwick, Mitchell & Co., 879 F.2d 772, 777 (10th Cir. 1989), vacated on other grounds, 494 U.S. 1014 (1990), and reaff'd, 900 F.2d 1485 (10th Cir. 1990); Sanderson v. Roethenmund, 682 F. Supp. 205, 206 (S.D.N.Y. 1988). |
| 11 | Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990) ("Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called."). |
| 12 | Reves, 494 U.S. at 64-65, 67. |
| 13 | Id. at 64-5. See, e.g., Stoiber v. SEC, 161 F.3d 745, 752 (D.C. Cir. 1998) (two of four Reves factors "strongly favor" treating notes as securities). |
| 14 | For example, as the Reves Court explained: If the seller's purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a "security." Reves, 494 U.S. at 66. |
| 15 | The Court explained, if instruments are "offered and sold to a broad segment of the public," that is sufficient "to establish the requisite 'common trading' in an instrument." Id. at 68. |
| 16 | Id. at 66 ("The Court will consider instruments to be 'securities' on the basis of such public expectations, even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not 'securities' as used in that transaction."). |
| 17 | Id. at 66-67. |
| 18 | Id. at 749 n.7. |
| 19 | Examples of notes that are not securities include: notes delivered in consumer financing, notes secured by a home mortgage, short-term notes secured by a lien on a small business or some of its assets, or secured by an assignment of accounts receivable, and notes evidencing a loan by a commercial bank for current operations. Id. at 65; Banco Espanol de Credito v. Security Pacific National Bank, 973 F.2d 51, 56; Gerald James Stoiber, 53 S.E.C. 171, 175 n.9, petition denied, 161 F.3d 745 (D.C. Cir. 1998). |
| 20 | Another form of the Escrow Agreement states that Laing "irrevocably assigns the insurance carrier [sic] to pay beneficiary proceeds to" Escrow Plus. However, there is no evidence of consent by any carrier to the purported assignment. |
| 21 | Stoiber, 161 F.3d at 750. |
| 22 | The Court in Reves emphasized that "profit" in the context of notes means "a valuable return on an investment," which "undoubtedly includes interest." Reves, 494 U.S. at 68 n.4. |
| 23 | Reves, 494 U.S. at 68. |
| 24 | Even if we were to conclude that this factor were absent, its absence does not "add much to the inquiry into whether the promissory notes are securities. The Supreme Court itself described this factor as a one-way ratchet . . . . It allows notes that would not be deemed securities under a balancing of the other three factors nonetheless to be treated as securities if the public has been led to believe they are. It does not, however, allow notes which under the other factors would be deemed securities to escape the reach of regulatory laws." Stoiber, 161 F.3d at 751 (citation omitted). |
| 25 | Blake and Fergus also characterized the PCO notes as investments during their testimony. Blake described the notes as having "less risk for a comparable return for a pretty good year in the stock market." Fergus testified that the notes offered the lenders a "good opportunity for them to get a good rate of return without stock market risk." |
| 26 | SEC v. Life Partners, 87 F.3d at 548-549. |
| 27 | Id. at 548. |
| 28 | Id. at 549. |
| 29 | In a document entitled "Frequently Asked Questions" ("FAQ") that PCO furnished to its prospective investors, PCO stated that its investment product differed from other viatical contracts. PCO noted that, while other companies make the investor "a partner in the policy," PCO, in contrast, provides that the "[l]ender is never a partner in the policy." The FAQ also emphasized that, with other companies, the "[i]nvestor's interest varies with [the] time of [the] seller's death." With PCO, in contrast, "[e]ach lender is guaranteed a 25% interest per annum." PCO answered the question "Why can't I be the beneficiary on the Policy?" as follows: "If you're tied to one single policy, you would be tied to that seller. If the seller exceeds life expectancy this could limit your payoff. PCO pays its Lenders from a fund of beneficiary proceeds from the pooled policies which ensures timely repayment of the loan." |
| 30 | We sustain the NASD's finding that Devine's conduct violated Rule 2110. We have previously held that a violation of another Commission or NASD rule or regulation is inconsistent with just and equitable principles of trade. Stephen J. Gluckman, Securities Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 428; Steven B. Theys, 51 S.E.C. 473, 480 (1993). |
| 31 | 15 U.S.C. § 78s(e)(2). |
| 32 | Id. Devine does not claim, and the record does not show, that the NASD's action imposed an undue burden on competition. |
| 33 | The NASD calculated the amount of the fine by adding the amount Devine had retained in commissions from his purported improper sales activities ($9,825.42), after paying a portion of his commissions ($9,836.50) to a court-appointed receiver, to the amount ($25,000) that the NASD determined he should be fined for violating the NASD Conduct Rules. Devine asserts that a fine of up to $10,000 is appropriate. |
| 34 | NASD Sanctions Guidelines (1998 ed.) at 8. |
| 35 | James L. Owsley, 51 S.E.C. 524, 531 (1993); Peter K. Lloyd, 51 S.E.C. 200, 201-02 (1992). |
| 36 | Jim Newcomb, Exchange Act Rel. No. 44945 (October 18, 2001), 76 SEC Docket 172, 181; Gluckman, 70 SEC Docket at 436; Ronald J. Gogul, 52 S.E.C. 307, 312 (1995). See also Jay Frederick Keeton, 50 S.E.C. 1128, 1130 (1992) (outside sales activities, even if uncompensated, expose investors to possible losses and employers to possible liability). |
| 37 | Devine also notes that he has no prior disciplinary history. |
| 38 | We do not agree with the NASD that the All American bulletin reasonably led Devine to conclude that he did not need to give notice to U.S. Life Equity. The fact that the insurance subsidiary did not prohibit its independent agents from engaging in the offer and sale of viatical programs (other than to its customers) was not relevant to Devine's obligation to contact U.S. Life Equity. U.S. Life Equity had made clear in its supervisory materials that it wanted prior written notice of potential securities transactions. Given the limitations on our role with respect to NASD sanctions, we do not find any basis to reduce Devine's sanction further. |
| 39 | NASD Sanction Guidelines (1998 ed.) at 15 ("Selling Away Private Securities Transactions"). See Jim Newcomb, supra; Ronald J. Gogul, 52 S.E.C. at 312.
Devine argues that the sanctions imposed on him are more severe than those imposed in similar cases. We consistently have held that the appropriate sanctions in a case depend on its particular facts and circumstances and cannot be determined by comparison with action taken in other cases. A.S. Goldman & Co., Inc., Exchange Act Rel. No. 44328 (May 21, 2001), 75 SEC Docket 49, 69 n.53. See also Butz v. Glover Livestock Commission Co. Inc., 411 U.S. 182, 187 (1973). |
| 40 | We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion. |