UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-39565 / January 22, 1998 Admin. Proc. File No. 3-8992 : In the Matter of the Application of : : GERALD JAMES STOIBER : 19140 Kristine Trail : Mokena, Illinois 60448 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.: : ORDER DENYING REQUEST FOR RECONSIDERATION On September 22, 1997, we issued an opinion, from which Commissioner Hunt dissented, sustaining the findings of the National Association of Securities Dealers, Inc. ("NASD") that Stoiber violated Article III, Sections 1 and 40 of the NASD's Rules of Fair Practice ("NASD's Rules"). <(1)> Stoiber sold securities in the form of promissory notes to thirteen of his securities customers without giving prior written notification to the member with which he was associated, American Investment Services, Inc. ("AIS"). Stoiber now petitions us to reconsider our findings and conclusions, claiming that the NASD did not prove that the notes at issue were securities, that we reversed the burden of proof applicable in a self-regulatory organization disciplinary proceeding, and that he was therefore denied due process. NASD Regulation, Inc. opposes Stoiber's Petition for Reconsideration. Stoiber admitted that he had issued notes and that he did not give AIS prior written notice. The remaining issue was whether the notes constituted securities. Stoiber claims that, in concluding that the notes were securities, we did not cite any of the evidence adduced by the NASD staff, but rather limited our analysis to criticism of the evidence adduced by the Applicant. However, as required by Section 19(e) of the Securities Exchange Act of 1934, we undertook a de novo review of this matter. Accordingly, we independently analyzed the evidence in the record, <(1)> Gerald James Stoiber, Securities Exchange Act Release No. 39112 (September 22, 1997), 65 SEC Docket 1309. ======END OF PAGE 1====== including testimony, the notes themselves, the customers' affidavits, and the customers' files at AIS. Many of the facts that were significant to our determination that the notes were securities are highlighted in our opinion. For example, we noted that Stoiber issued these notes to individuals who were his AIS customers, in order to engage in commodities transactions and to pay his personal expenses, and that the customers expected to receive a favorable interest rate on the notes at issue. Stoiber made the same general representations to these customers. The customers did not negotiate individualized terms for their investments, did not obtain financial information from Stoiber, and were not in the business of making loans. Our analysis of these facts was guided by the Supreme Court's decision in Reves v. Ernst & Young, 494 U.S. 56 (1990). Reves adopted a "family resemblance" test for determining whether notes are securities. In that case, the Court explained that there is a presumption that notes are securities. Such a presumption may be overcome if the notes have a strong resemblance to certain types of notes recognized as being outside the investment market regulated under the securities laws <(2)> or should be added to the list. <(3)> We weighed the evidence presented and considered all of Stoiber's contentions. We concluded for the reasons stated in our opinion (including Stoiber's relationship with AIS's customers, the limited information that the customers received, and the rate of return that they were promised) that these notes were securities. We do not find that Stoiber has been denied due process. Stoiber also contends that our reliance on Reves has reversed the burden of proof applicable in a self-regulatory organization disciplinary <(2)> Id. at 65. The Supreme Court believed that the following notes are not securities: the note delivered in consumer financing; the note secured by a mortgage on a home; the short-term note secured by a lien on a small business or some of its assets; the note evidencing a character loan to a bank customer; the short-term note secured by an assignment of accounts receivable; the note that simply formalizes an open- account debt incurred in the ordinary course of business; and the note evidencing a loan by a commercial bank for current operations. <(3)> The four factors to consider in determining whether the notes are not securities are: (1) the motivations that would prompt a reasonable borrower and lender to enter into the transaction; (2) the plan of distributing the notes; (3) the reasonable expectations of the investing public regarding whether the instruments were securities; and (4) the presence of any alternative scheme of regulation or other factor that significantly reduces the risk of the instrument so as to make regulation under the securities laws unnecessary. 494 U.S. at 66-67. ======END OF PAGE 3====== proceeding. <(4)> As noted, the Supreme Court stated in Reves that there is a presumption that notes are securities. Stoiber observes that a self-regulatory organization is required to prove its case by a preponderance of the evidence. He asserts that our consideration of the Reves presumption reversed this burden of proof. Stoiber, in his brief to us, urged application of the Supreme Court's analysis from Reves. In any event, we are governed by the Supreme Court's opinion in Reves in determining how to analyze the notes at issue to determine if they were securities. While, under Reves, there is a presumption that notes are securities, we believe that the Supreme Court made clear that the presumption was rebuttable. <(5)> The NASD was required to show that the notes at issue were securities by a preponderance of the evidence. <(6)> We found that the evidence developed in the record demonstrated that the notes at issue were securities, concluding that "the factors described in Reves do not suggest that these notes should be excluded from regulation under the securities laws" and finding that "we believe the other prongs of Reves are also satisfied." At all times the burden of persuasion remained with the NASD as to whether Stoiber's conduct violated Article III, Sections 1 and 40 of the NASD's Rules. <(7)> In sustaining the NASD's findings that the notes were securities, we examined the entire record and applied all of the factors set forth in Reves. We found that the preponderance of the evidence supported the disciplinary action. <(8)> Accordingly, IT IS ORDERED that the petition for reconsideration filed by Gerald James Stoiber be, and it hereby is, denied. By the Commission. <(4)> We assume that Stoiber refers to the burden of persuasion, i.e., the requirement that the case be proved by a preponderance of the evidence, not merely the burden of going forward to produce evidence. <(5)> Reves v. Ernst & Young, 494 U.S. at 64. <(6)> See, e.g., Western Capital and Securities, Inc., 50 S.E.C. 247 (1990). <(7)> See James M.Bowen, 51 S.E.C. 1152, 1154 n.9 (1994)(After the NASD demonstrates a prima facie case, applicant is required to come forward with evidence. The burden of persuasion remains with the NASD.). <(8)> The proper standard to be applied is the preponderance of the evidence standard. See, e.g., Steadman v. SEC, 450 U.S. 91, 101 (1981); Seaton v. SEC, 670 F.2d 309, 311 (D.C. Cir. 1982); Ernest A. Cipriani, Jr., 51 S.E.C. 1004, 1006 (1994); Kirk A. Knapp, 50 S.E.C. 858 (1992). ======END OF PAGE 4====== Jonathan G. Katz Secretary Commissioner HUNT, concurring: I dissented from the Commission's September 22, 1997 opinion regarding Mr. Stoiber because I was unable to determine on the record before us whether or not the instruments in question were securities. I still hold that view. Nevertheless, I support today's holding that there is no reason for the Commission to reconsider our findings and conclusions from that September day. The Commission carefully considered on a de novo basis whether or not the instruments were, in fact, securities. The Commission also properly applied Reves. Mr. Stoiber was not denied due process and, therefore, I see no reason to reconsider his case.