UNITED STATES OF AMERICA Before The SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7363 / November 12, 1996 Securities Exchange Act of 1934 Release No. 37939 / November 12, 1996 Administrative Proceeding File No. 3-8901 _______________________________ : ORDER MAKING FINDINGS AND : IMPOSING REMEDIAL SANCTIONS In the Matter of : PURSUANT TO SECTION 8A OF : THE SECURITIES ACT OF 1933 GEORGE R. JOHNSTON, : AND SECTIONS 15(b), 19(h) JOHNSTON KENT SECURITIES, INC.: and 21C OF THE SECURITIES : EXCHANGE ACT OF 1934 : _______________________________ I. In connection with this administrative proceeding ordered pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), George R. Johnston ("Johnston") and Johnston Kent Securities, Inc. ("Johnston Kent") have submitted Offers of Settlement ("Offers") for the purpose of settling these proceedings, which Offers the Securities and Exchange Commission ("Commission") has determined to accept.1 Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings in this order, except as to the Commission's jurisdiction over them and Paragraphs II.A. and II.B., which they admit, Johnston and Johnston Kent consent to the findings and entry of the sanctions set forth below. II. 1 The Order for Public Proceedings in this matter was issued on December 20, 1995. In the Matter of George R. Johnston, Johnston Kent Securities, Inc., Administrative Proceeding File No. 8-38895; Securities Act Release No. 7249; Exchange Act Release No. 36614/December 20, 1995. ==========================================START OF PAGE 2====== On the basis of the Order for Public Proceedings Pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h) and 21C of the Exchange Act and the Offers submitted by Johnston and Johnston Kent, the Commission finds that: A. Johnston Kent was a registered broker-dealer located in Denver, Colorado. Its registration became effective with the National Association of Securities Dealers, Inc. ("NASD") on December 28, 1987 and with the Commission on February 5, 1988. B. Johnston Kent had two principals, Johnston, its secretary, and Franklyn Frye ("Frye"), its president, each of whom owned a fifty percent interest in the firm. C. In or about December 1994, Johnston provided Robert C. Wilson ("Wilson") with Johnston Kent letterhead stationery and confirmations that purported to be issued by Johnston Kent. In doing so, Johnston knowingly assisted Wilson, Gary F. Long ("Long") and Debenture Guaranty Corporation ("Debenture Guaranty") in a scheme to defraud investors. In addition, and in furtherance of the scheme, Johnston personally made material misstatements to entities and individuals who invested money through Debenture Guaranty, Wilson, and/or Long. In particular: 1. On or about March 13, 1995 and March 17, 1995, Debenture Guaranty provided U.S. Employer Consumer Association ("USEC") with Johnston Kent confirmations falsely reporting that $1.75 million had been invested in Treasury Bills that were being held at Johnston Kent for the benefit of USEC of North Carolina. 2. In or about March 1995 USEC received a Johnston Kent confirmation dated December 28, 1994 which falsely reported that Johnston Kent was holding $9.69 million in U.S. Treasury securities in a Debenture Guarantee account for USEC of Florida. An accompanying letter on Johnston Kent letterhead, dated February 9, 1995, stated that the securities account had a cash value of $9.97 million and was free of any liens, encumbrances and/or margins. 3. On or about May 8, 1995, Johnston confirmed to USEC's independent auditors orally and in writing that the $1.75 million had been so invested. 4. On or about March 30, 1995, Wilson gave National ==========================================START OF PAGE 3====== Family Care Life Insurance Company ("NFC") a Johnston Kent confirmation, dated December 29, 1994, falsely reporting that Johnston Kent held $9.9 million of Treasury Bills in the name of Debenture Guaranty for the benefit of NFC. 5. On or about August 21, 1995, Johnston sent NFC by facsimile transmission a document confirming that, as of December 31, 1994, Johnston Kent had held $9.9 million Treasury Bills in the name of Debenture Guaranty for the benefit of NFC. 6. On or about August 22, 1995, Johnston sent NFC by facsimile transmission a document confirming that, as of that date, Johnston Kent held $9.9 million in Treasury Bills in the name of Gary Long for the benefit of NFC. 7. In or about April 1995, Wilson provided North American Technologies Group, Inc. ("NATK") with a counterfeit Johnston Kent confirmation which falsely represented that the $3.2 million in U.S. Treasury Bills were on deposit at Johnston Kent irrevocably held for the benefit of NATK. 8. On May 5, 1995, Debenture Guaranty provided Leading Edge Brokerage, Inc. ("Leading Edge") with a Johnson Kent confirmation falsely reporting that $5 million in Treasury Bills were held at Johnston Kent for the benefit of Leading Edge. D. None of the securities transactions reflected by the false confirmations identified in paragraphs II.C.1. through 8. above actually took place. E. None of the documents identified in paragraphs II.C.1. through 8. above were retained by Johnston Kent. F. In or about February 1995 and March 1995 Johnston Kent received $95,000 from Debenture Guaranty which were illicit proceeds from Debenture Guaranty's unlawful scheme. G. By the actions described in paragraphs II.C. above, Johnston and Johnston Kent willfully aided and abetted and caused Debenture Guaranty's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that, directly or indirectly, by use of the mails and means and instrumentalities of interstate commerce, and in connection with the offer, purchase, or sale of securities, they employed devices, schemes, and ==========================================START OF PAGE 4====== artifices to defraud investors or potential investors, made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in transactions, practices, and courses of business which were fraudulent, deceptive and manipulative. H. By failing to maintain the records relative to the transactions described in paragraph II.C. above, Johnston Kent willfully violated, and Johnston willfully aided and abetted and caused Johnston Kent's violations of Section 17(a) the Exchange Act and Rule 17a-4 thereunder by failing to maintain the bogus confirmations and other written communications with investor clients of Debenture Guaranty. I. Respondent Johnston Kent has submitted a sworn financial statement and other evidence and asserted its financial inability to pay disgorgement or a civil penalty. Respondent Johnston has submitted a sworn financial statement and asserted his financial inability to pay a civil penalty. The Commission has reviewed Johnston Kent's and Johnston's sworn financial statement and other evidence adduced by them, and (provided that they have submitted a true, accurate and complete sworn affidavit establishing their financial condition, including their assets, liabilities, income and expenses) has determined that Johnston Kent does not have the ability to pay disgorgement of $95,000, which Johnston Kent received from Debenture Guaranty in connection with the activities described in paragraph II.C. above, and that neither Johnston Kent nor Johnston have the ability to pay a civil penalty. III. In view of the foregoing, the Commission finds that it is appropriate and in the public interest to impose the sanctions which are set forth in the Offers submitted by Johnston and Johnston Kent. Accordingly, IT IS HEREBY ORDERED that: A. The registration of Johnston Kent be revoked; B. Johnston be barred from association with any broker, dealer, investment adviser, investment company, or municipal securities dealer from the date of the entry of the Order; C. Johnston and Johnston Kent cease and desist from ==========================================START OF PAGE 5====== committing or causing any ==========================================START OF PAGE 6====== violation or future violation of Section 17(a) of the Securities Act or Sections 10(b) and 17(a) of the Exchange Act and Rules 10b-5 and 17a-4 thereunder; D. Johnston Kent disgorge $95,000, plus prejudgment interest, dating to the date of this Order, at the prejudgment rate, provided, however, that the payment of such disgorgement is waived based upon Johnston Kent's demonstrated inability to pay disgorgement; and E. The Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to determine whether Respondents' provided accurate and complete financial information at the time such representations were made; (2) determine the amount of disgorgement and prejudgment interest to order Johnston Kent to pay and/or the amount of the civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondents' offers of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Respondents was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of disgorgement and prejudgment interest to order and the amount of civil penalties to be imposed and whether any additional remedies should be imposed. Johnston Kent and Johnston may not, by way of defense to such petition, contest the findings in this Order or assert that disgorgement and/or a civil penalty should not be ordered for the violations of the federal securities laws found herein or contest the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. Jonathan G. Katz Secretary