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INITIAL DECISION RELEASE NO. 93
ADMINISTRATIVE PROCEEDING
FILE NO. 3-8698
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
____________________________
In the Matter of :
:
WILLIAM EDWIN SOMDAHL : INITIAL DECISION
: July 22, 1996
____________________________
APPEARANCES: Thomas M. Melton and Brent R. Baker, Division of
Enforcement, Securities and Exchange Commission
William Edwin Somdahl, pro se
BEFORE: Brenda P. Murray, Chief Administrative Law Judge
The Securities and Exchange Commission ("Commission")
instituted this proceeding on May 18, 1995, pursuant to Sections
15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange
Act"). As directed by the Commission in its Order Instituting
Public Proceedings ("Order"), I held a hearing in Phoenix,
Arizona, on July 24, 1995. The Division of Enforcement
("Division") called four witnesses: William Edwin Somdahl, James
H. Fors, Oliver Washburn, and Gregory Harry. The Division
introduced nine exhibits.1
The Respondent appeared pro se. He called two witnesses,
himself and Dennis Patrick, and did not offer any exhibits.
On September 5, 1995, the Division filed Proposed Findings
of Fact, Conclusions of Law, and Brief in Support.2
Respondent's Brief is a one-page handwritten letter dated October
2, 1995. On October 13, 1995, the Division filed a Reply Brief.
Issue
The proceeding was instituted to determine whether the
Division's allegations are true that, among other things, from at
least 1986 through April 1988, the Respondent willfully violated
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933
("Securities Act"); Section 10(b) of the Exchange Act, and Rule
1References to the exhibits are to Div. Ex. __. I did not admit
Div. Ex. 7 at the hearing, but allowed Mr. Somdahl time to review
this investigative testimony and to object to its admissibility.
By order issued August 22, 1995, I admitted Div. Ex. 7 when Mr.
Somdahl did not file any objections.
2The Division's Brief in Support is referred to as "Initial
Brief."
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10b-5 thereunder, and whether on October 4, 1994, a U.S. district
court enjoined the Respondent from further violations of these
provisions of the securities laws and rule. SEC v. Fors, Civil
Action No. 92-1843 PHX PGR (D. Ariz. Oct. 4, 1994); Findings,
Order and Final Judgment of Permanent Injunction Against William
Edwin Somdahl, Div. Ex. 3 at 8-12. The Order directed that the
Respondent be given an opportunity to establish any defenses.
Order at 3.
Since briefing was completed, the U. S. Court of Appeals for
the District of Columbia has held that the five-year statute of
limitations specified in 28 U.S.C. 2462 3 applied to an
administrative proceedings in which the Commission censured a
respondent and suspended her from acting in a supervisory
capacity with any broker or dealer for six-months. Johnson v.
SEC, No. 95-1340, 1996 U.S. App. LEXIS 14917 (D.C. Cir. June 21,
1996).
Respondent
Mr. Somdahl has a high school diploma and over two years of
college courses in the areas of business and accounting. He
3The statute provides that:
Except as otherwise provided by Act of Congress, an
action, suit or proceeding for the enforcement of any
civil fine, penalty, or forfeiture, pecuniary or
otherwise, shall not be entertained unless commenced
within five years from the date when the claim first
accrued.
I will deal with Johnson because Mr. Somdahl is a pro se
litigant, and I assume that is the reason he has not raised the
issue of its impact on his situation.
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began working in the securities industry when he was about 24 or
26 years of age. Tr. 15. He began doing accounting support
activities and later earned a Series 7 registered representative
license, a Series 63 license, and a financial and operations
principal license.4 Tr. 91. Mr. Somdahl spent his twenty-four
year career in the securities industry with a number of broker-
dealer firms, mainly in the Minneapolis, Minnesota area.5
In 1985, the National Association of Securities Dealers
("NASD") censured Mr. Somdahl and barred him from association
with any NASD member as a financial and operations principal and
limited his association with any NASD member as a general
securities principal.6 Div. Ex. 3 at 7; Div. Ex. 5; Tr. 16-17.
In 1989, Mr. Somdahl consented to a five-day suspension of
his registered representative license in the state of Minnesota
4 Evidence other than Mr. Somdahl's recollection indicates that
he also held a license as a general securities principal. Div.
Ex. 5.
5CenPac Securities in Phoenix, AZ; Heiner & Stock in Minneapolis,
MN; Robert S.E. Peterson Company in Excelsior, MN; Bentley
Securities in Denver, CO; E.J. Pinnock Inc. in Minnetonka, MN;
C.S. Ashman & Co. in Minneapolis, MN; Midwest Discount Securities
in Minneapolis, MN; and Suburban Securities in Minnetonka, MN, a
firm he began and of which he was president. Tr. 15-16; Div. Ex.
7 at 10. According to Mr. Somdahl, CenPac Securities is the only
firm that was still in business in 1990. Div. Ex. 7 at 10.
6Additionally, Mr. Somdahl was the subject of two other customer
complaints to the NASD. The record does not disclose how they
were resolved. Div. Ex. 7 at 12.
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based on allegations that he offered and sold unregistered
securities in the state.7 Div. Ex. 3 at 8; Div. Ex. 6.
Mr. Somdahl moved from Minneapolis to the Phoenix, Arizona,
area in 1988. Div. Ex. 7 at 6. He does not appear to have been
associated with a broker-dealer since March 21, 1989. Div. Ex. 3
at 8. In July 1995, Mr. Somdahl concluded just over four years
as an accounting technician with the state of Arizona. Tr. 13.
7Mr. Somdahl was the defendant in a civil suit brought by a
customer in a securities transaction that was related to his
bankruptcy filing. Div. Ex. 7 at 12-13.
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Findings of Fact8
A public "pre-1933 shell corporation" ("shell") is a company
whose securities are allegedly exempt from registration under
former Section 3(a)(1) of the Securities Act, and it has no
assets or active business pursuits.9 Tr. 33, 39, 68-70. In the
late 1980s, Mr. Fors represented to three private companies -
Micro Books International, Inc. ("Micro-Books"), SouthCo
Communications Corp. ("SouthCo"), and Walsh Communications Group
("Walsh") - that they could raise funds from public investors,
without incurring the cost of registering their securities
offerings with the Commission if they merged their private
companies with public companies that pre-dated the Securities Act
and then sold shares of the public company. Div. Ex. 3 at 1-2.
Mr. Fors characterized his activities of taking the documents of
an active private company and merging it with a pre-1933 shell as
a "reverse merger." Tr. 33. Micro-Books, SouthCo, and Walsh
entered into agreements with Mr. Fors to merge with public
companies. Div. Ex. 3 at 3.
8My findings are based on the record and my observation of the
witnesses' demeanor. I applied preponderance of the evidence as
the applicable standard of proof. I have considered all proposed
findings and conclusions and all contentions, and I accept those
that are consistent with this decision.
9 Former Section 3(a)(1), repealed in 1987, exempted from
registration any security that was sold or disposed of by the
issuer, or bona fide offered to the public, prior to or within
sixty days after the enactment of the Securities Act. The
section did not apply to any new offering of any such security
after sixty days. James L. Owsley, 51 S.E.C. 524, 526 n.6
(1993).
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Mr. Fors's representations were part of an illegal "scheme
to revive dormant corporations, whose securities were traded
prior to 1933, in order to sell their stock to the public
pursuant to a claimed exemption from registration under former
Section 3(a)(1) of the Securities Act." James L. Owsley, 51
S.E.C. 524, 525-26 (1993). The public shells were shams.
Twenty-five years ago, the Commission characterized this activity
as the classic pattern of an unlawful distribution of
unregistered securities. Bohn-Williams Securities Corp., 44
S.E.C. 709, 711 (1971). See also United States v. Schwenoha, 383
F.2d 395 (2nd Cir. 1967). Supposedly the shells were legitimate
records of old inactive corporations collected by an attorney in
California or New York. Tr. 35, 66. In fact, most of them were
old Delaware corporations that the state deemed defunct or
dissolved because they had not paid franchise taxes or fulfilled
reporting requirements. Tr. 68-69. Persons took steps to make
it appear that a valid pre-1933 corporation existed. Their
activities included constructing original shareholder lists from
names taken from tombstones, drafting new materials to look like
old corporate records, putting the corporation into active status
in the state of incorporation, and then moving the corporation to
Nevada. Tr. 38-39, 69-70.
Mr. Fors met Mr. Somdahl through Neil Woodington, a friend
of Mr. Somdahl's who ran a boiler room operation10 in Arizona
10The Commission has described a boiler room operation as "a
high
pressure sales campaign, involving the use of repeated telephone
(continued...)
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with his daughters - Rebecca Riggs, Deborah Grace Tjosvold, and
Sara Hall Goldman - selling securities in pre-1933 shell
companies before the mergers occurred. Tr. 34-35, 37; Initial
Brief at 9 n.2. Mr. Fors, Mr. Somdahl, Lester Force Boynick,
Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman sold stock in Micro-
Books, SouthCo, and Walsh before the merger took place to raise
money to buy the shells to be used in the mergers. Div. Ex. 3 at
2, 4. These individuals, all defendants in the civil injunctive
action, contacted investors throughout the United States and
offered to sell stock in these three companies for $1.00 per
share.11
Securities such as these which sell at low prices, trade in
the pink sheets12, and are highly speculative, are referred to
10(...continued)
calls, to induce persons previously unknown to [the caller] to
buy highly speculative [securities] about whose underlying value
'[h]e knew nothing and apparently cared little.'" Charles
Michael West, 47 S.E.C. 39, 40 (1979) (footnote omitted).
11 Mr. Fors, Mr. Boynick, Mrs. Riggs, Mrs. Tjosvold, and
Mrs.
Goldman were all permanently enjoined. Neil Woodington died
before the Commission began the civil action. Initial Brief at 9
n.2 and n.3.
Mr. Fors, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman pled
guilty to securities felony crimes. Mrs. Riggs, Mrs. Tjosvold,
and Mrs. Goldman consented to the entry of "association bars."
Mr. Fors consented to a bar from participating in the securities
industry and from participating in an offering of penny stock.
Initial Brief at 9 n.3; Tr. 45.
12The pink sheets show bid and asked prices, or expressions
of
interest in, specific securities submitted by broker-dealers and
are published daily on pink paper by the National Quotation
Bureau, Inc., a private company. General Bond & Share Co., v.
SEC, 39 F.3d 1451, 1453 (10th Cir. 1994).
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as penny stocks.13 Tr. 48-50; Complaint for Permanent
Injunction and Permanent Relief, Div. Ex. 1 at 17.
Mr. Fors purchased most shells, including the three to be
merged with Micro-Books, SouthCo, and Walsh, for between $45,000
and $75,000 each, from Jerry Timothy of Salt Lake City, Utah.14
Tr. 35-36. The money used to pay for the shells was raised by
pre-merger sales of securities and was transmitted to Mr.
Timothy. Tr. 35, 38.
Mr. Fors was adept at completing the paper work and getting
companies like Micro-Books, SouthCo, and Walsh listed on the pink
sheets quickly.15 Tr. 43. As compensation for obtaining the
shell companies and arranging for the preparation of
informational materials, Mr. Fors received restricted and free-
trading stock. Div. Ex. 3 at 3. Mr. Fors, Mr. Boynick, Mrs.
Riggs, Mrs. Tjosvold, and Mrs. Goldman were part of a group that
controlled Micro-Books, SouthCo, and Walsh. Div. Ex. 3 at 4.
Mr. Fors had Mr. Timothy transfer a portion of the stock in the
13Penny stocks are highly speculative, low-priced
securities,
generally sold in the over-the-counter markets and generally not
listed on an exchange, which are used increasingly to defraud
investors. H.R. Rep. No. 617, 101st Cong., 2d Sess. 8 (1990).
14Mr. Timothy, who made a business of the practice,
also
resurrected the shells which were the subject of James L. Owsley,
51 S.E.C. at 526.
15In an eighteen-month period, Mr. Fors executed eight to
twelve
mergers in this manner. Tr. 36. At the time he was a private
individual who held no licenses. His company, James H. Fors &
Associates, was in the business of greyhound racing. Tr. 45. In
July 1995, Mr. Fors was the general manager, a fifty percent
owner, and a salesman at Fam's Auto in Florida. Tr. 32.
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three shell corporations to his name, the names of Mr. Boynick,
Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman, the names of new
investors, his wife's name, and the names of other nominee
shareholders. Div. Ex. 3 at 4. Ten percent of the shell's
public stock was retained in the names of the alleged "original,"
pre-1933 shareholders to lend credibility to the appearance that
the company had been in business since before 1933. Div. Ex. 7
at 64. The remaining ninety percent of the public stock was
distributed among the nominees who controlled the corporation.
Div. Ex. 7 at 25; Tr. 38-39.
From some point in 1986 until April 4, 1988, Mr. Somdahl
assisted Mr. Fors and others by setting up accounts in their
names or their nominees at Heiner & Stock, the broker-dealer in
Minneapolis, where he was associated as a registered
representative, and by selling the unregistered securities of
these three companies to his customers. Div. Ex. 3 at 2-3, 5. No
registration statement was filed or in effect as to these
securities when Mr. Somdahl made the sales. Div. Ex. 3 at 2.
Mr. Somdahl solicited his customers to purchase these shares,
knowing that the securities were being pre-sold in order to fund
the mergers. Tr. 37; Div. Ex. 3 at 6. Mr. Somdahl knew, or
should have known, but did not disclose when he sold these
securities, that certain individuals controlled these three
companies because they held all the issued and outstanding shares
before the mergers and that the same persons held controlling
interests in the companies because of their ownership in the
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purportedly free-trading shares after the merger. Tr. 38, 40;
Div. Ex. 3 at 6.
I find that, as alleged in the Order, on October 4, 1994,
the United States District Court for the District of Arizona
found that Mr. Somdahl had violated Sections 5(a), 5(c), and
17(a) of the Securities Act and Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder, and enjoined him from future
violations. SEC v. Fors, Civil Action No. 92-1843 PHX PGR; Div.
Ex. 3 at 8-12.
Conclusions of Law
Section 15(b) requires that the Commission sanction someone
who, at the time of the misconduct, was associated with a broker
or dealer and who has been enjoined from engaging in or
continuing any conduct or practice in connection with the
purchase or sale of any security, if it finds it is in the public
interest to do so. I conclude that Section 15(b) authorizes a
sanction against Mr. Somdahl, if it is in the public interest,
based on the issuance of the injunction without independent
findings that Mr. Somdahl's conduct from 1986 through April 1988
violated the securities laws and regulations as alleged in the
Order.16
16For this reason, the holding in Johnson v. SEC, No.
95-1340,
1996 U.S. App. LEXIS 14917 (D.C. Cir. June 21, 1996), if it
should become final, would have a limited impact on this
proceeding. In reaching my legal conclusion, I have not
considered the testimony of Oliver Washburn, who purchased penny
stocks including $15,000 of shares of Walsh on Mr. Somdahl's
recommendation. Tr. 47-64. Mr. Washburn's testimony was very
credible, and, if considered, would compel a finding that Mr.
(continued...)
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Even though Mr. Somdahl's actions underlying the injunction,
which occurred five years before the Commission instituted this
proceeding, are not the basis for the Commission's authority to
issue a sanction, they can be considered on the public interest
issue. "The 'public interest' standard is obviously very broad,
requiring that the Commission consider the full range of factors
bearing on the judgment about sanctions that the expert agency
ultimately must render." Blinder, Robinson & Co., Inc. v. SEC,
837 F.2d 1099, 1110 (D.C. Cir.), cert. denied, 488 U.S. 869
(1988).
Public Interest
In addition to deterrence, other established criteria for
determining what sanction is appropriate in the public interest
include:
the egregiousness of the defendant's actions, the
isolated or recurrent nature of the infraction, the
degree of scienter involved, the sincerity of the
defendant's assurances against future violations, the
defendant's recognition of the wrongful nature of his
conduct, and the likelihood that the defendant's
occupation will present opportunities for future
violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on
other grounds, 450 U.S. 91 (1981); Richard C. Spangler, Inc., 46
S.E.C. 238, 254 n.67 (1976).
My application of these criteria to Mr. Somdahl cause me to
conclude that Mr. Somdahl's violations were blatant in that he
orchestrated the sale of stock in three companies as part of a
16(...continued)
Somdahl violated the securities laws and regulations in 1986-1988
as alleged in the Order.
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notorious fraudulent scheme to sell unregistered securities.
According to the district court, Mr. "Somdahl's conduct was not
isolated, but involved numerous instances of misconduct over an
extended period of time." Div. Ex. 3 at 7. At the hearing and
in investigative testimony, Mr. Somdahl demonstrated a clear
understanding of the ruse of using pre-1933 shell companies to
avoid the requirements of the securities laws. Tr. 23-25, 81-85;
Div. Ex. 7 at 24-28. According to Mr. Harry, "we knew; we were
big boys, we knew what we were doing, and we knew we were
breaking the law. [Mr. Somdahl was] aware of all the little
tricks involved."17 Tr. 85.
The district court found that at the time he sold shares of
Micro-Books, SouthCo, and Walsh, Mr. Somdahl knew or should have
know that (1) the securities were not registered, and (2) Mr.
Fors, Mrs. Riggs, Mrs. Tjosvold, and Mrs. Goldman controlled all
of the issued and outstanding shares of these three companies
prior to the mergers and controlling interests in the purportedly
free-trading shares after the mergers. Div. Ex. 3 at 6. My
observation of Mr. Somdahl and my review of the evidence persuade
me that, despite his denials, Mr. Somdahl acted with a high
degree of scienter in that he knew his activities were
illegal.18
17Mr. Somdahl was referred to Mr. Harry by Mr. Fors and
purchased
a shell from him. Tr. 67-68.
18 To establish a violation of Section 17(a)(1) of the
Securities
Act, Section 10(b) of the Exchange Act, or Rule 10b-5 thereunder,
in this proceeding the Division must show that the defendant
(continued...)
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Mr. Somdahl does not acknowledge the wrongful nature of his
actions. It is very likely that, if given the opportunity, Mr.
Somdahl will violate the security laws and regulations in the
future since he does not acknowledge that he acted illegally
despite (1) the permanent injunction entered against him, as well
as (2) a court order that found significant probative evidence
that he was a substantial participant in the interstate
distribution of unregistered securities and that, acting with
scienter, he omitted to disclose a number of material facts to
investors in connection with the offer, purchase and sale of
securities. Div. Ex. 2 at 2-3; Div. Ex. 3; Tr. 88. The district
court found "that there is a reasonable likelihood under the
totality of the circumstances that the violative conduct will
recur." Div. Ex. 2 at 3.
Other factors that indicate a high likelihood of
reoccurrence are that Mr. Somdahl profited substantially from
commissions on stock sales and purchases of the three companies,
and that Mr. Somdahl tried to take a company public by the same
illegal means that Mr. Fors employed. Div. Ex. 3 at 8; Tr. 42-
44, 67-76.
18(...continued)
acted with scienter. See Aaron v. SEC, 446 U.S. 680 (1980).
Violations of Sections 17(a)(2) and 17(a)(3) do not require proof
of scienter. The permanent injunction found that Mr. Somdahl
violated Section 17(a), but the court's order was more specific
and found that the Commission met its burden of proving a
violation of Section 17(a)(1). Div. Ex. 3 at 9; Div. Ex. 2 at 3.
I find that the district court's finding that Mr. Somdahl
violated Section 17(a) of the Securities Act and Section 10(b) of
the Exchange Act is conclusive evidence that Mr. Somdahl acted
with scienter.
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Mr. Somdahl's claim that he never had the opportunity to
present his case in court, with its implication that the result
would have been different if he had a chance to put on evidence,
is unpersuasive. The fact that the district court granted the
Division's motion for summary disposition does not demonstrate
that Mr. Somdahl was treated unfairly, but rather, as the court
noted, that the uncontroverted evidence established that Mr.
Somdahl's actions constituted violations of the federal
securities laws. Div. Ex. 2 at 3.
I reject Mr. Somdahl's contention, raised in his brief, that
the Division deprived him of materials necessary to his defense.
The district court specifically rejected the same claim for lack
of support, and Mr. Somdahl did not advance such a claim at the
administrative hearing.19 Div. Ex. 2 at 2; Tr. 5-11, 86.
I reject Mr. Somdahl's claims that his employer knew and
approved of his activities and that he believed what he did was
legal are mitigating considerations.20 Contrary to Mr.
Somdahl's claim, the evidence is that the broker-dealer did not
approve of this type of illegal activity, but even if the broker-
dealer knew, that would not mitigate Mr. Somdahl's conduct
because he alone is responsible for his actions. Tr. 82-84; Div.
19Mr. Somdahl referred to a letter he sent to the SEC many,
many
years ago requesting the return of documents so that he could
defend himself. He stated that he received some of the requested
documents and then went on to another topic. Tr. 89.
20The doctrine of collateral estoppel prevents Mr. Somdahl
from
attacking the validity of the injunction by arguing that he was
not at fault.
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Ex. 7 at 27-28. The case law is unequivocal that registered
representatives have a duty to investigate and ensure that they
have an adequate and reasonable basis for recommending a
security, and they must disclose facts which they know or are
reasonably ascertainable. SEC v. Hasho, 784 F. Supp. 1059, 1107
(S.D.N.Y. 1992); Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969).
The fact that other regulatory bodies have disciplined Mr.
Somdahl for what appear to be actions different from what caused
the injunction - the NASD censure and bar in 1985 and the
Minnesota suspension in 1989 - indicate that strong measures are
required to curb his proclivity for illegal activities and to
protect the investing public. Div. Exs. 5, 6. Another
consideration is that the securities industry presents many
opportunities for dishonesty, abuse, and overreaching so that it
is in the public interest not to allow participation by
individuals like Mr. Somdahl whose continued participation would
expose investors to undue risks.21 Richard C. Spangler, Inc.,
46 S.E.C. 238, 252-53 (1976). See also Archer v. SEC, 133 F.2d
795, 803 (8th Cir. 1943), cert. denied, 319 U.S. 767 (1943);
Hughes v. SEC, 174 F.2d 969, 975-76 (D.C. Cir. 1949).
21I find Mr. Patrick's testimony on behalf of Mr. Somdahl to
be
credible. However, Mr. Patrick did not know Mr. Somdahl in a
professional capacity and here his reputation is contrary to Mr.
Patrick's information.
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For all the reasons stated, I conclude that the public
interest requires that Mr. Somdahl receive the most severe
sanction possible under the authorizing statutes.
ORDER
Based on the findings and conclusions set forth above, I
ORDER, pursuant to Sections 15(b) and 19(h) of the Exchange Act,
that William Edwin Somdahl is barred from being associated with a
broker or dealer, from participating in an offering of penny
stock, and from being associated with a member of a national
securities exchange or registered securities association.22
This order shall become effective in accordance with and
subject to the provisions of Rule 17(f) of the Commission's Rules
of Practice, 17 C.F.R. 201.17 (1995). Pursuant to that rule,
this initial decision shall become the final decision of the
Commission as to each party who has not filed a petition for
review pursuant to Rule 17(b) within 15 days after service of the
initial decision upon that party, unless the Commission, pursuant
to Rule 17(c), determines on its own initiative to review this
initial decision as to a party. If a party timely files a
petition for review, or the Commission acts to review as to a
22 In his Brief, Mr. Somdahl represented that he had no
interest
in returning to the securities industry and "all I ask is that I
be left alone." However, he indicated to the district court that
he intended to reenter the securities industry, complained that
the Commission's investigation prevented him from obtaining a
position with an NASD member, and requested reinstatement of all
his NASD licenses to deal in securities. Div. Ex. 3 at 8. In
discussions during this proceeding, he was willing to accept a
sanction of some type but seemed unwilling to accept a bar from
participating in a penny stock offering. Tr. 28.
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party, the initial decision shall not become final as to that
party.
______________________________
Brenda P. Murray
Chief Administrative Law Judge
Washington, D.C.
July 22, 1996