SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 41126 / March 1, 1999 Admin. Proc. File No. 3-9355 ___________________________________________________ : In the Matter of : : TED HAROLD WESTERFIELD : : ___________________________________________________: OPINION OF THE COMMISSION BROKER-DEALER PROCEEDING Grounds for Remedial Action Conviction Injunction Practice and Procedure Collateral Bar Permanent Bar Associated person of a registered broker-dealer was convicted of and enjoined from violations arising from a kickback scheme with an investment adviser. Held, it is in the public interest to bar respondent from association with a broker, dealer, municipal securities dealer, investment adviser, investment company, or a member of a national securities exchange or of a registered securities association. APPEARANCES: Ted Harold Westerfield, pro se. Stephen J. Crimmins, for the Commission's Division of Enforcement. Appeal filed: March 6, 1998 Last brief received: June 25, 1998 I. In this administrative proceeding, we consider what sanction should be imposed in the public interest on Ted Harold Westerfield in the aftermath of a criminal conviction and injunction arising from his participation in a fraudulent scheme. The Division of Enforcement ("Division") appeals from the decision of an administrative law judge. [1] The law judge determined that Westerfield, a former associated person of a broker-dealer, should be barred from association with any broker or dealer, with a right to reapply after five years. The Division, in its appeal, challenges the law judge's failure to impose a collateral, or industry-wide, bar, and his failure to impose a permanent bar. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. II. A. Westerfield was found guilty by a jury on March 14, 1996, of violating Section 10(b) of the Securities Exchange Act of 1934 [2] and Exchange Act Rule 10b-5; [3] of aiding, abetting, and causing a violation of Section 206 of the Investment Advisers Act of 1940; [4] of conspiring to engage in fraudulent and deceptive business practices in violation of 18 U.S.C. § 371; and of committing mail fraud in violation of 18 U.S.C. § 1341. Westerfield was sentenced to fifteen months in prison, fined $1,050, and ordered to pay restitution in the amount of $105,465.50. [5] In convicting Westerfield, the jury necessarily found the following allegations from the indictment to be true. [6] From approximately April 1990 through approximately April 1991, Westerfield was employed as an account executive with Gruntal & Co., a securities brokerage firm located in New York City. Westerfield's responsibilities at Gruntal included executing orders for the purchase and sale of high-yield bonds on behalf of Gruntal customers. G. Albert Griggs, Jr., a friend of Westerfield's, was employed as a bond analyst and assistant portfolio manager in Massachusetts by Keystone Custodian Funds, Inc., an investment adviser to the Keystone mutual funds, managed by Keystone Group, Inc. (collectively, "Keystone"). In that position, Griggs' principal responsibility was to analyze high-yield bonds and to identify profitable investment opportunities for the Keystone mutual funds. As part of his duties, Griggs recommended that the Keystone mutual funds purchase and sell particular high-yield bonds at specified prices. As an associated person of an investment adviser, Griggs owed a fiduciary duty to Keystone and its shareholders. [7] Both Westerfield and Griggs understood that Griggs was prohibited from accepting compensation from persons other than Keystone in connection with any securities transaction that he recommended to the Keystone mutual funds. Griggs further was obligated to represent the best interests of the Keystone mutual funds in the purchase and sale of the bonds. In April 1990, Westerfield and Griggs entered into a secret kickback scheme that lasted through November 1990. As agreed, Griggs placed orders for Keystone's purchases and sales of high- yield bonds with Westerfield, who then executed those transactions through Gruntal. In each transaction, Westerfield obtained a brokerage commission from Gruntal, the size of which depended on Gruntal's profit from that transaction. As part of their agreement, Westerfield retained all commissions he earned on transactions referred by Griggs up to an amount equal to Griggs' gross annual compensation from Keystone. Westerfield and Griggs shared equally all commissions above that amount. Westerfield and Griggs concealed this kickback arrangement from Gruntal and Keystone. In steering Keystone brokerage business to Westerfield, Griggs failed to negotiate to obtain for Keystone the best possible prices from Gruntal or through firms other than Gruntal. Instead, Griggs recommended that Keystone purchase high-yield bonds from Gruntal and sell high-yield bonds to Gruntal in order to maximize Westerfield's commissions and, in turn, the amount of Griggs' kickbacks. Westerfield knew that his arrangement to split portions of his commissions with Griggs compromised Griggs' decision-making on behalf of Keystone. During 1990, Griggs caused Keystone to purchase from Westerfield and Gruntal approximately $15,850,000 par value of various high-yield bonds, at an aggregate price of approximately $8,157,750, and to sell to Westerfield and Gruntal approximately $16,250,000 par value of various high-yield bonds, at an aggregate price of approximately $6,000,000. The scheme netted Westerfield $209,687.50 in commissions from Gruntal -- nearly all of the compensation Westerfield earned from Gruntal in 1990. From these commissions, Westerfield kicked back to Griggs an aggregate of approximately $35,000 in cash. B. On June 3, 1997, the United States District Court for the Southern District of New York entered a final judgment permanently enjoining Westerfield from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, from violating, or aiding, abetting, counseling, commanding, inducing, or procuring violations of Section 204 of the Advisers Act [8] and Advisers Act Rule 204-1(b), [9] and from violating or conspiring to violate Section 17(e)(1) of the Investment Company Act of 1940. [10] As discussed below, the court based its decision on the doctrine of collateral estoppel resulting from the criminal case, and on the likelihood of future violations by Westerfield. The court ordered Westerfield to disgorge $210,931, together with prejudgment interest in the amount of $133,896, for a total of $344,827. The court provided that Westerfield could offset against this amount any amounts that he paid in satisfaction of the restitution ordered in the criminal case against him. C. In this proceeding, the administrative law judge imposed on Westerfield a bar from associating with any broker or dealer, with a right to reapply in five years. The law judge declined to impose a collateral bar. He noted that the sentencing judge in the criminal case imposed on Westerfield a sentence at the low end of the sentencing guidelines range for Westerfield's convictions. The sentencing judge, according to the sentencing hearing transcript, stated: I don't usually say very much at all in sentencings, but it strikes me that Mr. Westerfield is a very talented person, willing to work very hard, and I hope [with] this experience behind him he will go on to do the things he is capable of. The law judge concluded that Westerfield was unlikely to commit future violations due to the criminal and civil sanctions already imposed upon him. The law judge also expressed the view that it would be difficult for any convicted felon to obtain employment as a securities professional. III. A. Under Exchange Act Sections 15(b)(6) [11] and 15(b)(4)(B), [12] we have the authority to institute administrative proceedings against any person convicted of certain enumerated crimes. These enumerated crimes include, among other things, committing within ten years a violation of 18 U.S.C. § 1341 or a felony involving the purchase or sale of a security or arising out of the conduct of the business of a securities professional. [13] Under Section 15(b)(4)(C) of the Exchange Act, [14] our proceedings also may be based on an injunction from engaging in or continuing any conduct or practice in connection with being a broker or dealer or from any activity in connection with the purchase or sale of a security. If we find that the person has been the subject of any of these actions, we consider whether it is in the public interest to impose sanctions on that person. Westerfield does not dispute that the violations leading to his conviction and injunction are included in the Exchange Act sections cited above. B. In determining whether a sanction is in the public interest and, if so, the appropriate sanction, we examine the following factors: [T]he egregiousness of the [respondent's] actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the [respondent's] assurances against future violations, the [respondent's] recognition of the wrongful nature of his conduct, and the likelihood that the [respondent's] occupation will present opportunities for future violations. [15] Westerfield's conduct was egregious. Westerfield engaged with Griggs in a scheme to pay and receive kickbacks in disregard of Griggs' fiduciary duty to his customers. Westerfield and Griggs concealed the scheme from their respective employers. Griggs channeled trades through Westerfield in exchange for secret payments on a prearranged schedule. Westerfield made more than $200,000 in commissions from this scheme and kicked back to Griggs $35,000. [16] Westerfield's commissions from his arrangement with Griggs constituted nearly all his income for that year. Westerfield's conduct demonstrates a high degree of scienter, including planning, executing, and concealing the fraudulent scheme. We disagree with Westerfield's assertion that, because he had committed no prior disciplinary infraction, his illegal conduct was isolated. [17] The record reflects that, pursuant to the scheme, he and Griggs effected numerous violative transactions over seven months. [18] The transactions were large and involved several accounts. Another factor in our determination of the appropriate sanctions is the sincerity of Westerfield's assurances against future violations. [19] In the criminal case, the judge sentenced Westerfield at the low end of the guideline range and offered praise for his perceptions of Westerfield's talent and work ethic. The sentencing judge, however, did not comment on whether Westerfield has made assurances against future violations. When given an opportunity to speak to the sentencing court, Westerfield offered a claim of mental illness as a mitigating factor in his violation but did not address the subject of future violations. We note, however, that the United States District Court that enjoined Westerfield cited Westerfield's "refusal to recognize any wrongdoing" as a basis for stating: In this case, the systematic nature of Westerfield's violations together with his denial of liability create a reasonable likelihood that Westerfield's violations might continue in the future absent an injunction. [20] Similarly, the law judge concluded that Westerfield "made no assurances against future violations" and "discounts the wrongful nature of his fraudulent conduct and sees himself as a victim of the legal system." In his brief to the Commission, Westerfield now states, "You can rest assured that Respondent will never knowingly do anything that would even be considered questionable in the future." Westerfield, however, downplays the wrongfulness of the conduct described in this opinion and emphasizes his frustration with the legal process. [21] He claims that the evidence against him was insufficient and was unfairly based primarily on Griggs' testimony. He alleges that unfair leniency was granted to Griggs, claims that his own attorney in the criminal trial was incompetent, and complains that the jury that found him guilty did not include members of the financial community. [22] Westerfield also exhibits little understanding of the extent of his obligations under the securities laws. For instance, in his brief to the Commission, Westerfield argues that, because he could have participated in an even more harmful scheme, his violation was not a case of "truly egregious" behavior. He, moreover, insists that $35,000 in kickbacks is not "a substantial sum." He also claims that the $210,000 that he derived from the scheme was "minuscule" by Wall Street standards. While Westerfield contends that the trades were appropriate for Gruntal and Keystone, [23] whether or not the trades were suitable does not diminish Westerfield's offense. [24] The administrative law judge stated that Westerfield "recognized that his criminal conviction may adversely affect his future employment opportunities." [25] Westerfield also asserts that, since he is now a truck driver, his occupation is unlikely to present opportunities for secret kickback schemes. We believe, however, that, absent a permanent bar, Westerfield may try again to become a securities professional. Westerfield has spent his entire career in the securities industry, and in 1991, he briefly established his own investment management company. Mindful of the protection of investors and consistent with the public interest, [26] we impose on Westerfield a permanent bar. A permanent bar gives us control over the timing and circumstances of any possible future re-entry by Westerfield as a securities professional, upon analysis of the public interest and protection of investors at such future time. [27] Given the nature of Westerfield's conduct, we believe that the bar should not be time-limited. IV. The Commission has determined that, under the "place limitations" language of Section 15(b)(6), we may impose a collateral, or industry-wide, bar, when the public interest and protection of investors so require. [28] The Division asks that we impose a collateral bar on Westerfield. As we stated in Meyer Blinder: In determining whether to impose a collateral bar, we consider foremost whether the misconduct is of the type that, by its nature, "flows across" various securities professions and poses a risk of harm to the investing public in any such profession. We also consider whether the egregiousness of the respondent’s misconduct demonstrates the need for a comprehensive response in order to protect the public. [29] As we stated above, Westerfield's conduct was egregious. He engaged in a scheme with an investment adviser that endured for an extended period of time and involved numerous transactions. For the year in question, Westerfield made virtually his entire living off the scheme. We further find that Westerfield's conduct clearly satisfies the requirement that misconduct flow across the securities industry. Westerfield's secret kickback scheme with an associated person of an investment adviser resulted in a violation of the investment adviser's fiduciary duty to its investment company customers. Westerfield was convicted under the Exchange Act and the Advisers Act, and enjoined from violations of the Exchange Act, the Advisers Act, and the Investment Company Act. We further are concerned that there are opportunities to participate in kickback schemes in any capacity in the securities industry. Westerfield is a threat to the integrity of any aspect of the securities industry in which he might be employed. [30] Consistent with the public interest and protection of investors, we find that Westerfield's misconduct merits **FOOTNOTES** [1]: Ted Harold Westerfield, Initial Decision No. 120 (February 9, 1998), 66 SEC Docket 1616. Westerfield did not appeal the law judge's decision. [2]:15 U.S.C. § 78j(b). [3]:17 C.F.R. § 240.10b-5. [4]:15 U.S.C. § 80b-6. [5]:The judgment against Westerfield in the criminal case was entered on December 31, 1996, United States v. Westerfield, No. 95 CR 219-001 (S.D.N.Y. Dec. 31, 1996), and affirmed on June 24, 1997, by the United States Court of Appeals for the Second Circuit. United States v. Westerfield, 116 F.3d 466 (2d Cir.) (Table), cert. denied, 118 S.Ct. 352 (1997). [6]:This statement of facts appeared in our Order Instituting Proceedings. The law judge found that Westerfield admitted the validity of the facts alleged in the order. In his brief to us, Westerfield does not dispute that the events occurred as alleged. As discussed below, however, Westerfield continues to challenge the merits of his conviction. [7]:It is well settled that an investment adviser is a fiduciary whose advice must be disinterested. See, e.g., SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-192, 201 (1963); Ahmed Mohamed Soliman, Securities Exchange Act Rel. No. 35609 (Apr. 17, 1995), 59 SEC Docket 356, 362 & n.14. [8]:15 U.S.C. § 80b-4. [9]:17 C.F.R. § 275.204-1(b). [10]:15 U.S.C. § 80a-17(e)(1). SEC v. Westerfield, No. 94 Civ. 6997 (S.D.N.Y. June 3, 1997) (Final Judgment). [11]:15 U.S.C. § 78o(b)(6). [12]:15 U.S.C. § 78o(b)(4)(B). [13]:Id. [14]:15 U.S.C. § 78o(b)(4)(C). [15]:Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), aff'd on other grounds, 450 U.S. 91 (1981). See also, Meyer Blinder, Exchange Act Rel. No. 39180 (October 1, 1997), 65 SEC Docket 1970, 1972 n.5; Donald T. Sheldon, 51 S.E.C. 59, 86 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995). The United States District Court that enjoined Westerfield found a reasonable likelihood that Westerfield's violations would continue absent an injunction, based on the duration of the scheme and the number of transactions under the agreement, Westerfield's "refusal to recognize any wrongdoing," and the "systematic," as opposed to isolated, nature of the scheme. SEC v. Westerfield, No. 94 Civ. 6997, slip op. at 8 (May 23, 1997) (Order and Opinion). [16]:Westerfield paid Griggs through various means, including traveling from New York to Massachusetts to deliver cash to Griggs, delivering cash to Griggs during Griggs' trips to New York, and sending cash to Griggs from New York to Massachusetts via Federal Express. [17]:Compare Steadman, 603 F.2d at 1140. [18]:See Michael T. McAuliffe, 48 S.E.C. 86, 87-88 (1985) (finding that where bond trader benefitted himself and others at his employer's expense for twelve months, "this case does not involve a momentary and isolated lapse, but the perpetration of a calculated and dishonest scheme over a lengthy period of time"). See also Donald A. Roche, Securities Exchange Act Rel. No. 38742 (June 17, 1997), 64 SEC Docket 2042, 2051 (fraudulent price predictions, a misleading statement concerning a stop/loss order, and churning over a period of nine months were "not isolated, but extended over a period of time"); Richard J. Daniello, 50 S.E.C. 42, 46 (1989) (four months of misappropriating employer's funds was not isolated); Stephen M. Carter, 49 S.E.C. 998, 990 (1988) (ten months of theft, forgery, and falsification of records was not isolated). [19]:Compare Steadman, 603 F.2d at 1140. [20]:SEC v. Westerfield, No. 94 Civ. 6997, slip op. at 8 (Order and Opinion). [21]:In a February 10, 1997 letter to the United States District Court Judge, for example, Westerfield refers to the legal process as "almost five years of legal harassment from the government." [22]:To the extent that Westerfield's arguments may be viewed as a challenge to this conviction, the doctrine of collateral estoppel set forth in Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 & n.5 (1979), precludes our consideration of such contentions. Pursuant to that doctrine, neither a criminal conviction nor material findings in an injunctive proceeding may be collaterally attacked in an administrative proceeding. See id.; Elliott v. SEC, 36 F.3d 86, 87 (11th Cir. 1994); William F. Lincoln, Securities Exchange Act Rel. No. 39628 (February 9, 1998), 66 SEC Docket 1433, 1436 & n.7; Blinder, 65 SEC Docket at 1973 & n.11. Westerfield also claims that, because the Division failed to bring an enforcement action immediately after his violative conduct, it cannot now consider him a threat. The bases of the present proceeding, however, are the criminal conviction and the entry of the injunction, which occurred in 1996 and 1997, respectively. We note that Commission staff filed the complaint in the injunctive proceeding on September 26, 1994. [23]:Westerfield contends, without substantiation, that his trades contributed to "windfall" profits of $300,000,000, a return of 41.79% for Griggs' customers in 1991. Therefore, he argues, his conduct was not egregious because the trades were profitable. These numbers seem to be based on Westerfield's own calculations, and contradict charts that Westerfield supplied to the administrative law judge. Westerfield has offered no source for the charts or for the numbers contained within the charts. In any event, we believe his argument is precluded by the judgment in the criminal case. The complexity of determining the exact amount of the loss to Griggs' clients through the bond trading conducted under the scheme required the court to estimate the loss. At a minimum, the customers were charged substantial commissions on these trades. The judge therefore ordered restitution in the amount of $105,465.50, which was one-half of the loss estimated to have occurred from payment of Westerfield's commissions. The United States Court of Appeals for the Second Circuit affirmed the methods used by the District Court Judge in calculating the loss, stating that, due to the conservative estimate, "any arbitrariness on the court's part would be in Westerfield's favor." United States v. Westerfield, No. 96-1747, slip. op. at 4, reported at 116 F.3d at 466. [24]:See Kevin Eric Shaughnessy, Securities Exchange Act Rel. No. 40244 (July 22, 1998), 67 SEC Docket 1798, 1805 (upholding sanctions imposed by a self-regulatory organization because respondent's contentions that trades pursuant to a kickback scheme were suitable, "even if true, do not justify a reduction in sanctions"). See also Capital Gains Research Bureau, 375 U.S. at 195 (holding that injury is not a prerequisite to enjoining fraudulent or deceitful practices under the securities laws); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985) (holding that the Commission is not required to demonstrate that clients detrimentally relied on misstatements concerning objectivity of investment recommendations). Compare United States v. Waymer, 55 F.3d 564, 572 (11th Cir. 1995), cert. denied, 517 U.S. 1119 (1996) (finding that, where breach of fiduciary duty is alleged, question of undisclosed payments is material because disclosure may prompt renegotiation of contracts at a better price). [25]:Compare Steadman, 603 F.2d at 1140; Archer v. SEC, 133 F.2d 795, 803 (8th Cir.), cert. denied, 319 U.S. 767 (1943); Hughes v. SEC, 174 F.2d 969, 975-76 (D.C. Cir. 1949). [26]:See Section 15(b)(6) of the Exchange Act, 15 U.S.C. § 78o(b)(6). [27]:See Midland Securities Corp., 46 S.E.C. 755, 761 n.34 (1977) (noting that, because this Commission has the discretion to permit modification of bars or re-entry of barred persons, "so-called permanent bars are actually bars of indefinite duration.") (citing Hanly v. SEC, 415 F.2d 589, 598 & n.21 (2d Cir. 1969) and Vanasco v. SEC, 395 F.2d 349, 353 (2d Cir. 1968)). [28]:Blinder, 65 SEC Docket at 1974-1975. [29]:Blinder, 65 SEC Docket at 1981. [30]:Westerfield protests that imposition of a collateral bar "would establish a dangerous precedent for all cases involving institutional brokers" because such brokers exchange securities across different segments of the securities industry. Westerfield misconstrues our analysis. Whether conduct "flows across" deals with whether the misconduct could be committed in various capacities within the securities professions. Here, we have concluded that such opportunities exist. imposition of a permanent bar from association with a broker, dealer, municipal securities dealer, investment adviser, investment company, or a member of a national securities exchange or of a registered securities association. An appropriate order will issue. [1] By the Commission (Chairman LEVITT and Commissioners JOHNSON, CAREY, and UNGER); Commissioner HUNT concurring in part and dissenting in part. Jonathan G. Katz Secretary Commissioner HUNT, concurring as to the findings and the imposition of a permanent broker-dealer bar, but dissenting as to imposition of a collateral bar for the reasons stated in his dissent in Meyer Blinder, Securities Exchange Act Rel. No. 39180 (October 1, 1997) 65 SEC Docket 1970, 1982. **FOOTNOTES** [31]:We have considered all of the parties' contentions. We have rejected or sustained them 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. 41126 / March 1, 1999 Admin. Proc. File No. 3-9355 ___________________________________________________ : In the Matter of : : TED HAROLD WESTERFIELD : : ___________________________________________________: ORDER IMPOSING REMEDIAL SANCTION On the basis of the Commission's opinion issued this day, it is ORDERED that Ted Harold Westerfield be, and he hereby is, barred from association with a broker, dealer, municipal securities dealer, investment adviser, investment company, or a member of a national securities exchange or of a registered securities association. By the Commission. Jonathan G. Katz Secretary