==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37069 \ April 5, 1996 Admin. Proc. File No. 3-8676 _________________________________________________ : In the Matter of the Application of : : DHB CAPITAL GROUP, INC. : 55 Northern Boulevard : Greenvale, New York 11548 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- DENIAL OF NASDAQ SMALLCAP MARKET LISTING Minimum Bid Price Requirement Public Interest Concern Arising From Control Person's Disciplinary History Where registered securities association acted consistently with its rules and the purposes of the securities laws in denying an issuer's request that its securities be included in the association's automatic quotation system, because the stock bid price did not meet the required minimum and the issuer's controlling shareholder, officer, and director had a history of securities law violations, held, review proceeding dismissed. APPEARANCES: Robert Trevisani, of Gadsby & Hannah, for DHB Capital Group, Inc. T. Grant Callery and Norman Sue, Jr., for the National Association of Securities Dealers, Inc. Appeal filed: April 18, 1995 Last brief filed: August 4, 1995 I. ==========================================START OF PAGE 2====== DHB Capital Group, Inc. ("DHB" or the "Company") appeals the decision of the National Association of Securities Dealers, Inc. ("NASD") to deny the Company's application to include the Company's securities on the Nasdaq SmallCap Market. The NASD found that DHB failed to meet the $3.00 minimum bid price required for initial inclusion. -[1]- The NASD also denied DHB's application in light of certain enforcement action taken in 1992 against the Company's controlling shareholder, officer, and director, David Brooks. -[2]- Our findings are based on an independent review of the record. II. On December 18, 1992, in settlement of an injunctive complaint filed by this Commission, Brooks consented to a permanent injunction by the United States District Court for the Southern District of New York, against aiding and abetting violations of Section 15(b) and 15(f) of the Securities ---------FOOTNOTES---------- -[1]- Section 1(c)(4) of Part II of Schedule D to the NASD By-Laws ("Qualification Requirements By- Law"). DHB met various other requirements for initial inclusion, including the requirement that the issuer have at least $4 million in assets and at least $2 million in capital and surplus. Sections 1(c)(2) and (3) of the NASD Qualification Requirements By-Law. -[2]- The NASD invoked its authority under Sections 1 and 3(a)(3) of the Qualification Requirements By- Law. The former specifies, as relevant here, that the NASD may deny initial inclusion in the Nasdaq SmallCap Market or apply additional or more stringent criteria for the initial inclusion of particular securities based on any event, condition, or circumstance which exists or occurs that makes initial inclusion inadvisable or unwarranted in the opinion of the NASD, even though the securities meet all enumerated criteria for initial inclusion. The latter provides that the NASD may deny inclusion or apply additional or more stringent criteria for the initial inclusion of particular securities if the NASD finds it is necessary to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, or to protect investors and the public interest. The record indicates that Brooks is the beneficial owner of approximately 80% of DHB's stock. ==========================================START OF PAGE 3====== Exchange Act of 1934 and Rule 15b3-1 thereunder. -[3]- On December 23, 1992, Brooks consented to an order in which this Commission barred him from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company, with a right to apply after five years to become so associated. -[4]- ---------FOOTNOTES---------- -[3]- SEC v. Haddad et al., 92 Civ. 9122 RPP (S.D.N.Y.). In addition, Brooks consented to an order directing that he not cause, directly or indirectly, any broker or dealer registered with this Commission to fail to disclose in its Form BD information and documents concerning the broker- dealer and its associated persons, as required by Commission rule. Brooks also consented to a further order directing that he not cause, directly or indirectly, any broker or dealer registered with this Commission to fail to establish, maintain, or enforce written policies and procedures reasonably designed to prevent the firm's and its associated persons' misuse of material non-public information. We note that DHB incorrectly asserts in its reply brief that David Brooks was not permanently enjoined. Brooks also was ordered to pay, jointly and severally with Jeffrey Brooks Securities ("JBS") and Jeffrey Brooks (his brother), a civil penalty of $405,000. -[4]- Jeffrey Brooks Securities, Inc. et al., Securities Exchange Act Rel. No. 31657 (December 23, 1992), 53 SEC Docket 0384. In that order, we found that Brooks shared de facto control over certain aspects of JBS's operations by participating in the decision to hire Andrew Cohen, a registered representative (who, with others, then engaged in an insider trading scheme), and by sharing the authority with his brother, Jeffrey Brooks, to direct and control Cohen's trading activities. We thus found that Brooks was a controlling person at JBS during a specified period (although not disclosed to be such in the firm's BD Form). We also found Brooks had been enjoined (as described immediately above), that Brooks failed, as a controlling person at JBS, to take appropriate steps to prevent insider trading violations by Cohen, and that Brooks aided and abetted JBS's reckless failure to establish, maintain or enforce policies and procedures to prevent the misuse of nonpublic information, and failed reasonably to (continued...) ==========================================START OF PAGE 4====== On October 22, 1992, shortly before Brooks agreed to our bar order, he organized DHB as a holding company. Brooks is the controlling shareholder of the Company, as well as the Chairman of the Board, Chief Executive Officer, and Director. -[5]- On July 15, 1994, the Company filed the application for inclusion in the Nasdaq SmallCap Market that is at issue in this appeal. -[6]- In denying DHB's application in an August 1994 letter, the NASD staff advised that the inside bid price on the Over-The-Counter ("OTC") Bulletin Board for the Company's securities was 2-9/16, a price below the required minimum bid price of $3.00 per share. The NASD staff also denied the application because of Brooks' history of securities law violations. On DHB's subsequent appeal to the Nasdaq Listing Qualifications Committee ("Qualifications Committee"), that entity, too, denied inclusion, largely on the basis of the consent injunction entered against Brooks in 1992, the serious ---------FOOTNOTES---------- -[4]-(...continued) supervise Cohen. As stated in our order, Brooks did not admit or deny these findings, except that related to entry of the injunction. -[5]- Since the formation of the Company, DHB has acquired four subsidiaries. Protective Apparel Corporation of America ("PACA") engages in the development, manufacture and distribution of bullet and projectile-resistant garments and similar devices. Intelligent Data Corporation (of which DHB is a 98% owner) is a developmental stage company that designs and produces sophisticated telecommunication equipment. NDL Products, Inc., acquired in December 1994, manufactures and distributes over 900 products relating to protective athletic apparel and equipment. DHB Media Group, Inc. (formerly known as Royal Acquisition Corp.), acquired in April 1994, engages in the syndication and distribution of films. DHB presently has roughly $12 million in assets and $9 million in annual revenues. -[6]- This is not the first time DHB has applied for inclusion of its securities in the Nasdaq SmallCap Market. DHB's September 1993 application for inclusion also was denied pursuant to Sections 1 and 3(a)(3) of the NASD Qualification Requirements By-Law. DHB represents that, rather than appeal this earlier denial, it sought and obtained in June 1994 a listing on the Boston Stock Exchange. ==========================================START OF PAGE 5====== nature of the allegations made by us in 1992, and our bar order. In March 1995, the NASD Hearing Review Committee ("Review Committee") affirmed the Qualifications Committee's decision not to include DHB's securities in the Nasdaq SmallCap Market. -[7]- As one basis for its determination, the Review Committee found that, as of January 25, 1995, DHB's bid price was 2-3/8, below the $3.00 minimum bid price required for initial inclusion. -[8]- The Review Committee further found that, "given the extremely serious nature of the SEC allegations made against Brooks, and the fact that he was only recently enjoined," exclusion of DHB from the Nasdaq SmallCap Market "is necessary to protect investors and the public interest and to maintain public ---------FOOTNOTES---------- -[7]- In an attempt to address the concerns expressed by the NASD, Brooks proposed to the Review Committee that he would put 44% of DHB's shares into a voting trust, and his remaining interest in the Company into a trust for the benefit of his children. The voting trust would be administered by a Trustee selected by the NASD in its sole discretion, and terminate in December 1997. Brooks also proposed to relinquish all managerial control over DHB by resigning his position as Chief Executive Officer, and to dilute his influence over DHB as a director by agreeing to the appointment of four outside directors. Brooks also proposed a stock alienation limitation, effective through December 1999, by which Brooks would limit the number of shares he may sell publicly, in the absence of a registration statement, to "assure" that sales are at a volume absorbable by the market, and which would preclude Brooks from selling his shares if the price fell below $3.00. DHB advises that it also has offered to meet any additional criteria the NASD may impose. -[8]- DHB objects to the use of January 25, 1995 as the benchmark date because on March 24, 1995, the date of the order denying DHB's application, the Company's common stock bid price was 3-1/8. DHB also notes that, on August 22, 1995, the Company's common stock bid price was $5.00. While the significance of January 25th as a benchmark date is not clear, we note that DHB's common stock bid price consistently was below the $3.00 minimum bid price during the pendency of the application; indeed, a record document reflects that DHB's bid price was below the $3.00 bid price requirement on 56 out of 84 days listed in that document. ==========================================START OF PAGE 6====== confidence" in the Nasdaq SmallCap Market. The Review Committee advised that it had considered the Company's offer to implement certain restrictions on Brooks' connection to the Company, but noted that the proposals "would not change Brooks' role as a director of the Company." The Review Committee advised that "nothing short of complete divestiture" would eliminate its concerns. III. DHB seeks reversal of the NASD's action and an order directing the NASD to include DHB's securities in the Nasdaq SmallCap Market. On our review of NASD action of this nature, if we find that the specific grounds on which such NASD action is based exist in fact, that such action is in accordance with applicable NASD rules, and that these rules are and were applied in a manner consistent with the purposes of the securities laws, we must dismiss the appeal, unless we find that the NASD's action imposes an undue burden on competition. -[9]- As an initial matter, we conclude that the NASD's decision to decline DHB's application to include its securities in the Nasdaq SmallCap Market because the Company's bid price was below the $3.00 minimum bid level meets these standards, warranting dismissal of this review proceeding. We further conclude that the NASD's reliance on Brooks' disciplinary history as a further basis for denial also accords with these standards. In June 1994 (before DHB filed its application), we approved certain amendments to the NASD's Qualification Requirements By- Law that make explicit that, in order to maintain the quality of and public confidence in its market, the NASD may exercise its discretion in denying initial inclusion and may apply additional or more stringent criteria for inclusion. -[10]- DHB acknowledges the discretion afforded the NASD in these matters, but asserts that this discretion was abused in this instance because the NASD refused DHB's application based on the NASD's ---------FOOTNOTES---------- -[9]- See Section 19(f) of the Securities Exchange Act of 1934, 15 U.S.C.  78s(f); KLH Engineering Group, Inc., Securities Exchange Act Rel. No. 36422 (October 26, 1995), 60 SEC Docket 1714, 1718; Biorelease Corporation, Securities Exchange Act Rel. No. 35575 (April 6, 1995), 59 SEC Docket 84, 89. -[10]- Securities Exchange Act Rel. No. 33899 (April 12, 1994), 56 SEC Docket 1294, 1298 (proposing release); Securities Exchange Act Rel. No. 34151 (June 3, 1994), 56 SEC Docket 2654 (adopting release). ==========================================START OF PAGE 7====== misinterpretation and misunderstanding of the nature of our charges and the injunctive and bar orders to which Brooks thereafter consented in 1992. DHB claims that this misinterpretation has "subsequently mistakenly and continuously tainted David Brooks as a so-called 'bad boy'." -[11]- While certain NASD staff at one point may have misapprehended the nature of our enforcement actions against Brooks, it is clear from further correspondence between the NASD and DHB, and from the NASD's decision that is the subject of this appeal, that the NASD's decision is based on an accurate understanding of the 1992 orders. DHB further contends that the NASD should be required to include the Company's securities because Brooks has agreed to additional and more stringent conditions than the minimum required by the NASD By-Laws. DHB asserts that these conditions should alleviate any NASD concerns with respect to Brooks' involvement with DHB. As we have stated, however, "inclusion of a security on Nasdaq . . . entail[s] an element of judgment given the expectations of investors and the imprimatur of listing on a particular market." -[12]- Meeting the minimum listing requirements thus does not guarantee a listing, nor does an agreement to do more than the minimum required. -[13]- ---------FOOTNOTES---------- -[11]- DHB bases its assertion largely on the fact that, in a letter dated December 1, 1993 to DHB, NASD staff stated, incorrectly, that Brooks "was subject to a final judgment of permanent injunction by the Securities and Exchange Commission for alleged insider trading violations in connection [with his brother's firm.]" DHB also refers to a letter dated December 30, 1993, from the Qualifications Committee to DHB, in which the NASD staff referred to David Brooks' brother, rather than to David Brooks, and described the consent order as a "cease and desist order." -[12]- See Securities Exchange Act Rel. No. 34151, 56 SEC Docket at 2656. As we further explained in the cited release, permitting discretion is appropriate, given that "[s]ecurities listed for trading or included in Nasdaq often . . . are exempt from many of the state blue sky laws, which apply concepts of merit regulation to determine whether investors in that state may purchase the issuer's securities." Id. -[13]- Compare KLH Engineering Group, Inc., 60 SEC Docket at 1720; Biorelease Corp., 59 SEC Docket at 92; In re ORS Automatic, Inc., 48 S.E.C. 490, 493 (1986); Tassaway, Inc., 45 S.E.C. 706, 709 (1975). ==========================================START OF PAGE 8====== Here, the NASD has expressed quite plainly that it is troubled by Brooks' prior misconduct. We find that the NASD's concerns as to Brooks are legitimate. While DHB contends that the violations at issue were technical in nature, we disagree, as the underlying conduct undermines both the regulation of securities firms and its registered representatives, and the protection of investors. -[14]- Moreover, we cannot agree that the proposed conditions should alleviate the NASD's concerns. The facts remain that Brooks has a history of serious securities law violations -[15]- and a significant ownership interest in DHB, and proposes to retain his position as a DHB director. We do not find it unreasonable that the NASD, reviewing both Brooks' past conduct and his proposed level of involvement in DHB, remains uneasy about the potential for illicit conduct in connection with the operation of DHB or the market for its securities, and unwilling to expose public investors to that possibility. Nor do we find, as DHB contends, that the NASD's action in this case is inconsistent with the terms of our 1992 order. -[16]- We barred Brooks from association with any ---------FOOTNOTES---------- -[14]- This Commission has made it clear that it is critical for investor protection that a brokerage firm establish and enforce effective procedures to supervise its employees. See Donald T. Sheldon, et al., 51 S.E.C. 59, 78-79 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995). See also Adams Securities, Inc., et al., 51 S.E.C. 1092, 1097 (1994); G.K. Scott & Co., Inc., et al., 51 S.E.C. 961, 970 (1994), aff'd, No. 94-1161 (D.C. Cir. 1995) (unpublished opinion). -[15]- Citing Central Bank of Denver v. First Interstate Bank of Denver, 114 S.Ct. 1439 (1994), DHB attempts to minimize the impact of our enforcement action against Brooks by contending that we presently are precluded from proceeding against alleged violators under an aiding and abetting theory. However, Central Bank dealt with the implied right of private plaintiffs to recover money damages. -[16]- On this point DHB relies on a letter written by a member of our Division of Enforcement staff that states that the 1992 order "does not affect in any way Mr. Brooks' right . . . to be associated in any way, including as a director or officer, with a public company which is not a registered broker- (continued...) ==========================================START OF PAGE 9====== broker, dealer, municipal securities dealer, investment adviser or investment company, and afforded him the right to apply after five years to again become so associated. The NASD's decision to deny inclusion -- based in part on the fact that, upon finding that Brooks committed serious securities law violations, we barred him (with his consent) from the industry -- is a collateral consequence of Brooks' misconduct that he might well have anticipated. It also is a proper exercise of the NASD's authority under its Qualification Requirements By-Law. DHB further asserts that excluding the Company's securities from the Nasdaq SmallCap Market stifles competition and impedes the purposes of the Exchange Act. Investors are entitled to assume that the securities in the system meet the system's standards and that "the risk associated with investing in Nasdaq is market risk rather than the risk that the promoter or other persons exercising substantial influence over the issuer is acting in an illegal manner." -[17]- Even in cases where the NASD has delisted a security from the Nasdaq Smallcap Market (in contrast to denying initial inclusion as in this case), we have acknowledged that, while exclusion from a quotation system may hurt existing investors, primary emphasis must be placed on the interests of prospective future investors. -[18]- In any event, DHB currently is listed on two alternative electronic markets, the NASD's OTC Bulletin Board and the Boston Stock Exchange. Finally, DHB asserts that the NASD has acted in an arbitrary and capricious manner. In support of its assertion, DHB advises that another company's securities have been included in the Nasdaq SmallCap Market despite that company's association with a notorious securities law violator. -[19]- Each action on ---------FOOTNOTES---------- -[16]-(...continued) dealer or investment advisor." We note that this quoted statement speaks only to the specific terms of our order, not to the collateral consequences of that order. -[17]- See Tassaway, Inc., 45 S.E.C. at 709; Securities Exchange Act Rel. No. 34151, 56 SEC Docket at 2656. -[18]- See Biorelease Corporation, 59 SEC Docket at 92; Tassaway, Inc., 45 S.E.C. at 709; Securities Exchange Act Rel. No. 34151, 56 SEC Docket at 2656. -[19]- We have not reviewed the decision to which DHB refers, and our reference to it here should not be (continued...) ==========================================START OF PAGE 10====== an application for inclusion, however, is taken on the basis of all facts and circumstances presented, and reviewed by us (if appealed) on that basis as well. We find that, in the matter before us, the NASD acted neither arbitrarily nor capriciously but in accordance with its responsibilities to investors. -[20]- IV. We find that a sufficient factual basis exists to deny DHB's application that its securities be included in the Nasdaq SmallCap Market, and that the NASD acted with respect to DHB both fairly and in accordance with its rules which it applied in a manner consistent with the purposes of the securities laws. Accordingly, this review proceeding shall be dismissed. An appropriate order will issue. -[21]- By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary ---------FOOTNOTES---------- -[19]-(...continued) taken as any indication of our endorsement (or disapproval) of the decision. -[20]- For this reason we deny DHB's request that we order the NASD to provide a list of companies (1) that have a controlling person who has been found to have violated the federal securities laws or has entered into a consent decree with respect to the federal securities laws; and (2) the securities of which have been granted or denied inclusion in the Nasdaq SmallCap Market. -[21]- All of the arguments advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37069 \ April 5, 1996 Admin. Proc. File No. 3-8676 _________________________________________________ : In the Matter of the Application of : : DHB CAPITAL GROUP, INC. : 55 Northern Boulevard : Greenvale, New York 11548 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: ORDER DISMISSING REVIEW PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the application for review filed by DHB Capital Group, Inc. be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary