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SECURITIES AND EXCHANGE COMMISSION
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In the Matter of CHRISTOPHER A. LOWRY |
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OPINION OF THE COMMISSION
INVESTMENT ADVISER PROCEEDING
Grounds for Remedial Action
Injunction
Misrepresentations and Omissions of Material Facts
President of registered investment adviser violated the antifraud provisions of the securities laws in connection with misrepresentations that he made to investors, who were also his advisory clients, of his use of offering proceeds, and his diversion of the proceeds to his personal use. He is subject to a permanent injunction for violating the securities laws. Held, it is in the public interest to bar respondent from association with any investment adviser.
APPEARANCES:
David W. Larson, of Martin & Squires, P.A., for Christopher A. Lowry.
Kenneth E. Yeadon and Linda Ieleja Gerstman, for the Division of Enforcement.
Appeal filed: October 11, 2001
Last brief received: January 23, 2002
I.
Christopher A. Lowry, president of Lowry Investors Services, Inc., d/b/a No-Load Advisors ("No-Load Advisors"), a registered investment adviser during the relevant period, appeals from anadministrative law judge's decision. The law judge concluded that Lowry should be barred from association with any investment adviser in connection with misrepresentations that he made to his advisory clients regarding his use of offering proceeds invested in a second company that he controlled, Fountainhead Retirement Plan Services, Inc., d/b/a 401(k) University ("401(k) University"). We base our findings on an independent review of the record, except for those findings not challenged on appeal.
II.
Lowry has been in the securities industry since 1984. In 1988, he incorporated No-Load Advisors, a registered investment adviser. 1 Lowry was the president and sole employee of No-Load Advisors. Lowry owned 84.1% of No-Load Advisors' outstanding shares. 2
In the mid-1990s, Lowry developed the concept of an "administrative company" that would group 401(k) plans to provide lower-priced investment management, educational, and administration services to small employers offering 401(k) plans. 3 In July 1998, Lowry incorporated 401(k) University. Lowry held the title of "Dean of Students" of 401(k) University. Lowry was 401(k) University's sole officer, as well as the sole member of its board of directors. Lowry owned the majority, or 63%, of 401(k) University's outstanding shares.
Lowry used funds earned from No-Load Advisors to develop 401(k) University. Lowry ran No-Load Advisors and 401(k) University from the same office. The two corporations "shared everything," including a single checking account in No-Load Advisors' name. Lowry did not take a formal salary from No-Load Advisors between 1996 and 1998, but wrote checks on the No-LoadAdvisors account when he needed money. 4 At all times, Lowry had exclusive control over the No-Load Advisors checking account and the disbursement of No-Load Advisors and 401(k) University funds.
Between May and December 1999, Lowry offered and sold $488,000 of 401(k) University common stock to several clients of No-Load Advisors in a private offering. He distributed 401(k) University's business plan to each client in soliciting investments. The business plan stated that Lowry sought to raise $1.5 million to finance the capital and operating requirements of 401(k) University through the year 2000. The business plan provided that 401(k) University would use the offering proceeds in the following manner:
| General Office Equipment: | $ 35,000 | Initial Web-Site Development: | $ 235,000 | Additional Administration Equipment: | $ 70,000 | Debt Retirement: | $ 85,000 | Marketing Blitz: | $ 65,000 | 401(k) University Educational Materials: | $ 210,000 | Operating Capital: | $ 800,000 | |
TOTALS | $1,500,000 |
Lowry made no other representations to his clients about the use of 401(k) University offering proceeds.
All but one of the investors' checks were made payable to No-Load Advisors and were deposited into No-Load Advisors' checking account. Lowry commingled the funds of the two corporations. Lowry made no effort to segregate or account specifically for the proceeds of 401(k) University's stock sales.
In early September 1999, Lowry entered into a contract to buy a house. Lowry did not have sufficient funds of his own, but wanted to provide suitable living accommodations for his fiancee. At some point, Lowry determined to use 401(k) University offering proceeds to pay for the house. Lowry admitted that he did not disclose to his advisory clients that he planned to use a portionof their investment in 401(k) University to buy a house. Lowry also admitted that he did not seek prior permission from 401(k) University shareholders to use company funds for this purpose.
As of September 30, 1999, there was $2,405.22 in the No-Load Advisors checking account. Between October 15, 1999 and October 25, 1999, Lowry received $230,000 in 401(k) University offering proceeds. Lowry deposited those proceeds into No-Load Advisors' checking account.
On October 25, 1999, the closing date on the property, Lowry gave the seller a check for $156,500, drawn on the No-Load Advisors checking account. Lowry acknowledged that the proceeds from the sale of 401(k) University stock comprised nearly the entire balance in the account. Lowry's use of 401(k) University offering proceeds to purchase a house was contrary to the statements in the corporation's business plan and Lowry's representations that investor funds would be used to finance the business. At the hearing, Lowry admitted that the availability of 401(k) University offering proceeds in the No-Load Advisors checking account "acted as a convenience for a tight spot."
After Lowry purchased his house with 401(k) University offering proceeds, he continued to raise money for 401(k) University using its business plan. In December 1999, Lowry offered and sold $40,000 of 401(k) University stock to No-Load Advisors client John Frye. When Lowry gave Frye a copy of the business plan, Lowry represented that Frye's investment would be used to develop 401(k) University. Lowry did not disclose to Frye that he had taken approximately one-third of the previously raised proceeds for his own use. Frye testified that he would not have purchased 401(k) University stock had he known that Lowry had taken a significant portion of the company's funds to buy a house.
Lowry also solicited funds from Phillip Allen, a No-Load Advisors client who had previously declined to invest in 401(k) University. Lowry did not disclose to Allen that he spent $156,500 of 401(k) University offering proceeds to purchase a house. Allen refused to loan money to Lowry and 401(k) University once he learned from a local newspaper of the Commission's action against them.
On November 1, 1999, the Commission's staff commenced a routine audit of No-Load Advisors' books and records andquestioned Lowry about 401(k) University. 5 The staff issued subpoenas to Lowry and 401(k) University seeking, among other things, documents reflecting the use of 401(k) University offering proceeds. Lowry did not produce any such document. When the staff took his testimony in February 2000, Lowry was asked about his handling of $156,500 of the offering proceeds. Lowry claimed that 401(k) University loaned him the money. Several days after his testimony was taken, he produced a promissory note between 401(k) University and himself for $156,500, dated November 1, 1999.
In February 2000, the Commission brought a complaint in district court against Lowry and 401(k) University. The complaint sought a permanent injunction for Lowry's misrepresentations concerning the use of 401(k) University offering proceeds, in violation of Section 17(a) of the Securities Act of 1933 6 and Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. 7 At this time, Lowry informed some investors that he had "borrowed" $156,500 of 401(k) University's offering proceeds to purchase a house. On December 7, 2000, the district court permanently enjoined Lowry and his company, with their consent, from violating the securities laws. 8 The district court also ordered Lowry to disgorge $156,500, plus prejudgment interest. 9
III.
Under 203(f) of the Investment Advisers Act of 1940 ("Advisers Act"), 10 we may sanction a person associated with an investment adviser 11 if it is in the public interest and theassociated person has satisfied the conditions of Advisers Act Section 203(e). Section 203(e) permits us to impose sanctions where, among other things, the person has willfully violated any provision of the federal securities laws or has been enjoined from engaging in conduct in connection with the purchase or sale of a security. 12
As an initial matter, Lowry disputes the law judge's finding that he "misappropriated" 401(k) University funds. Lowry does not dispute that he wrote 401(k) University's business plan. The business plan represented that the offering proceeds would be used solely for 401(k) University business expenses. Lowry conceded before the law judge that he used $156,500, or one-third, of 401(k) University's offering proceeds to purchase a home, contrary to the statements in 401(k) University's business plan and Lowry's representations to investors that the funds would be used for 401(k) University business expenses. After Lowry purchased the house, he did not tell a subsequent investor that the disclosure with respect to the use of proceeds was inaccurate. Lowry consented to an injunction arising from this conduct. 13 Thus, Lowry cannot deny the allegations in the Commission's complaint or in the district court's injunctive order.
Lowry contends that he "borrowed" the money and that state law permits loans from corporations. Even if there had been a valid "loan," Lowry acted fraudulently because he failed to disclose that he had "borrowed" or intended to "borrow" investor funds for his personal use when he offered and sold 401(k) University stock to his No-Load Advisors clients. The fact that a majority of the company's investors in the offering may have ratified Lowry's purported "loan" several months after he usedthe funds does not affect our authority to sanction him for conduct that violated the securities laws. 14
Moreover, there is no evidence to support a finding of a corporate "loan." Lowry failed to document the alleged loan when he took a portion of 401(k) University offering proceeds on October 25, 1999 to close on his house. Lowry did not produce the promissory note in response to a subpoena or when he gave investigative testimony in February 2000. When he finally produced the note in the days following his investigative testimony, the note was dated November 1, 1999, the same date that the Commission's staff arrived at his office and began its audit of No-Load Advisors. Lowry acknowledged at the hearing that he was unsure whether he actually signed the note on that date. 15
Furthermore, Lowry made contradictory statements about the purpose of the promissory note. In a March 2000 letter to 401(k) University shareholders, Lowry stated that the promissory note was to "secure" his services as 401(k) University's "key employee." Lowry contradicted this statement at the hearing, however, and testified that the note "wasn't to retain [his] services." He also disclaimed any intention of leaving 401(k) University.
IV.
In considering whether an administrative sanction serves the public interest, we consider the factors identified in Steadman v. SEC: the egregiousness of a respondent's conduct, the isolated or recurrent nature of the violation, the degree of scienter, the sincerity of the respondent's assurances against future violations, the respondent's recognition that the conductwas wrongful, and the likelihood of recurring violations. 16 The appropriate sanction depends on the facts and circumstances of each case, and cannot be determined by comparison to action taken in other cases. 17
Lowry's conduct was egregious and involved a high degree of scienter. 18 As an associated person of an investment adviser, Lowry was a fiduciary with a duty to act in good faith, to disclose all material facts, and to employ reasonable care to avoid misleading his clients. 19 Lowry's No-Load Advisors advisory clients relied on his material representations that he would use their investment to develop 401(k) University. 20 Lowry failed to disclose his intention to use investor funds "as a convenience for a tight spot" and diverted one-third of the funds to his personal benefit. 21 More significantly, afterpurchasing his new home with 401(k) University offering proceeds, Lowry continued to offer and sell company stock to other investment advisory clients without disclosing what he had done. Lowry waited until February 2000 -- when the Commission brought its injunctive action against him -- to inform some investors that he had "borrowed" $156,500 of the offering proceeds to purchase a house on October 25, 1999. In these circumstances, we conclude that it is in the public interest to bar Lowry from association with an investment adviser.
Lowry asserts that he did not intentionally endeavor to defraud his advisory clients. Lowry's explanation that he took the $156,500 as a "convenience," and his failure to inform new investors that he had taken the funds, belie this assertion. His conduct demonstrates that Lowry's misuse of one-third of 401(k) University offering proceeds was deliberately and knowingly intended by him.
Lowry notes that he has no prior disciplinary record. While this may be true, Lowry has not offered any sincere assurances against future securities law violations or expressed serious recognition of wrongdoing. 22 For example, the injunctive orderprevented Lowry from publicly denying any of the allegations in the Commission's complaint. 23 Lowry was notified by the Division of Enforcement that, in accordance with the terms of his settlement with the Commission, No-Load Advisors' May 2000 investment adviser form ("Form ADV") would have to be amended or withdrawn because it denied the complaint's allegations. Lowry delayed amending No-Load Advisors' Form ADV until February 28, 2001. 24 As a result, for nearly three months, from December 7, 2000, to February 28, 2001, Lowry represented to the public and to prospective clients that the Commission's allegations were baseless, even though he had consented to an injunction and was prohibited from denying the allegations of the complaint.
In the amended Form ADV that he filed on February 28, 2001, Lowry continued to characterize his diversion of 401(k) University offering proceeds as a "loan." Lowry's refusal to recognize his wrongdoing and his public posture that his behavior was appropriate demonstrate that his conduct poses a future threat of harm.
Lowry argues that he should not be barred from the investment advisory business because the underlying violations relate to the offer and sale of securities, and not to his fitness as an investment adviser. As set forth above, AdvisersAct Section 203(f) authorizes us to impose sanctions against an associated person of an investment adviser if he has willfully violated any provision of the securities laws or has been enjoined from engaging in conduct in connection with the purchase or sale of any security. These prerequisites have been satisfied in this proceeding. 25
Lowry argues that his No-Load Advisors clients will suffer if he is barred from the investment advisory business. 26 Lowry's clients remain free to find another investment adviser. The Commission has an obligation to protect the investing public.
Lowry argues that 401(k) University will collapse without him. He suggests that the Commission has failed to consider the interests of the company's shareholders. The opinion in Steadman v. SEC 27 makes it clear that the public interest determination extends beyond the consideration of particular investors to the public-at-large. In any event, we observe that Lowry indicated in his March 2000 sworn statement of financial condition that 401(k) University's business had been "terminated" in November 1999. 28 This representation would appear to render his argument moot.
Lowry argues that lesser sanctions could protect the investing public. He suggests, for example, that he be ordered to cease and desist from violating the securities laws. However, he is already subject to an injunction from further violations of the securities laws. Lowry also suggests that he be censured, but such a sanction would not remove him from a position to engage in similar misconduct. We do not find that the lesser sanctions proposed by Lowry, including that he be prohibited for ninety days from soliciting or accepting business for No-Load Advisors' successor, 29 provides sufficient protection for investors or prevents against a recurrence.
An appropriate order will issue. 30
By the Commission (Chairman PITT and Commissioners GLASSMAN and GOLDSCHMID); Commissioners ATKINS and CAMPOS not participating.
Jonathan G. Katz
Secretary
Admin. Proc. File No. 3-10390
In the Matter of CHRISTOPHER A. LOWRY |
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ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Christopher Lowry be, and he hereby is, barred from association with any investment adviser.
By the Commission.
Jonathan G. Katz
Secretary
1 No-Load Advisors first registered with the Commission in 1992. As of April 2001, No-Load Advisors had 70 to 100 clients and $25 to $32 million in assets under management. No-Load Advisors did not have custody of client funds.
2 The remaining 15.9% of No-Load Advisors' shares was owned by 401(k) University.
3 A 401(k) plan is an employer-sponsored retirement savings vehicle in which contributions accumulate on a tax-deferred basis.
4 Lowry identified the purposes for the checks as "Expense Reimbursement," "Interest on Notes," and "Principal on Notes." Lowry drew from the No-Load Advisors checking account approximately $45,000 in 1997, $50,000 in 1998, and $90,000 in 1999.
5 The routine audit found deficiencies in No-Load Advisors' record-keeping.
6 15 U.S.C. § 77q(a).
7 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.
8 SEC v. Lowry, No. 00-348 (MJD/JGL) (D. Minn. Dec. 7, 2000).
9 Id. The district court did not order Lowry to pay a civil penalty based on his sworn statement of financial condition.
10 15 U.S.C. § 80b-3(f).
11 Advisers Act Section 202(a)(17) defines a "person associated with an investment adviser" as "any partner, officer, ordirector of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser." 15 U.S.C. § 80b-2(a)(17). It is undisputed that Lowry falls within this definition.
12 15 U.S.C. § 80b-3(e).
13 See SEC v. Lowry, No. 00-348 (MJD/JGL) (D. Minn. Dec. 7, 2000).
14 See, e.g., Wilshire Discount Sec., Inc., 51 S.E.C. 547, 551 n.15 (1993) (rejecting argument in NASD disciplinary action that majority of investors endorsed and ratified applicant's fraudulent use of proceeds).
15 The note contained no schedule for the repayment of a specific amount of principal. Rather, the note stated that principal payments were to be made annually in amounts determined by 401(k) University's board of directors. At the time, Lowry was the sole member of 401(k) University's board. The note also called for repayment after seven years -- a term inconsistent with Lowry's claim that he gave himself a "short-term" loan.
16 Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981).
17 See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); John Francis D'Acquisto, 53 S.E.C. 440, 445 n.14 (1998).
18 See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976) (defining scienter as an "intent to deceive, manipulate, or defraud").
19 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (internal quotations and footnotes omitted).
20 See TCS Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (information is material if a reasonable investor would consider it important in evaluating an investment). Lowry does not dispute the materiality of his representations to his advisory clients.
21 Lowry maintains that his conduct was not egregious because none of his advisory clients lost money as a result of his actions. The record demonstrates that, as a result of the district court's order, Lowry repaid the $156,500 that he diverted.
Lowry also disputes the finding that he would not have repaid his clients voluntarily had the Commission not commenced its investigation. Lowry, however, does not cite to any evidence showing that he intended to repay the money. His repayment of funds after the fact would not have excused his initial misrepresentations, and, in any event, deprived his clients of their funds until they were repaid.
22 The law judge did not credit Lowry's assertions of remorse. She found, among other things, that Lowry was insincere and had a "cavalier attitude toward investor funds." Lowry challenges these credibility determinations on the ground that they were based on erroneous factual findings. We defer to the fact-finder's credibility determinations in the absence of substantial evidence to the contrary. See Universal Camera Corp. v. NLRB, 340 U.S. 474, 496 (1951). In light of Lowry's treatment of 401(k) University offering proceeds, his creation of "loan" documentation, and his subsequent explanations to his advisory clients, we find no reason to reverse the law judge's determinations.
Lowry disputes other findings that the law judge made in her determination that he lacked credibility. These findings related to such matters as the state of his health in the 1980s, his ability to obtain a residential mortgage, and whether he misrepresented that 401(k) University had hired apresident. We have not considered these findings in our assessment of what sanction is in the public interest.
23 The injunctive order also required Lowry to withdraw any court pleading that denied the allegations in the complaint. Lowry waited almost four months, or until March 20, 2001, to request the withdrawal of his answer to the complaint.
24 Lowry claimed that he delayed filing because the Division of Investment Management had set a deadline of February 28, 2001, for compliance with a new computerized system. However, Lowry had been notified twice by the Division of Enforcement, once by letter and once by telephone, that he needed to amend his Form ADV. He does not suggest that he attempted to amend his Form ADV before February 28, 2001. In any event, Lowry cannot shift to the Commission his responsibility for satisfying his legal obligations. Compare, e.g., Russo Sec., Inc., Exchange Act Rel. No. 44186 (Apr. 17, 2001), 75 SEC Docket 1124A, 1124L (respondent cannot shift responsibility for compliance with the securities laws to regulatory authorities).
25 See Ira William Scott, 53 S.E.C. 862, 867 (1998) (upholding Commission's jurisdiction to sanction respondent under Advisers Act Sections 203(e) and 203(f) notwithstanding respondent's defense that his fraudulent conduct involved the sale of securities to investors in his capacity as corporate officer rather than as investment adviser; stating that "Sections 203(e) and (f) . . . do not limit [the Commission's] ability to impose sanctions to only those persons who commit the specified felonies in their capacity as an investment adviser.").
The two cases cited by Lowry, Monetta Financial Services, Inc., Initial Decision No. 162 (Mar. 27, 2000), 72 SEC Docket 72, appeal pending, No. 3-9546, and James Thornton, 53 S.E.C. 1210 (1989), aff'd, 199 F.3d 440 (5th Cir. 1999) (Table), are inapposite. In Monetta, the law judge rejected the Division of Enforcement's recommendation of a collateral bar as to one of the respondents. The law judge found that that respondent's alleged conduct occurred solely in relation to his investment advisory activities, and that there was no showing that he posed a threat to the investing public in other facets of the securities industry. In James Thornton, the Commission found that a penny stock bar was inappropriate because the respondent had not participated in a penny stock fraud. Here, by contrast, the bar sought by the Division is specifically authorized by the Advisers Act.
26 At the administrative hearing, several former or current No-Load Advisors clients expressed their satisfaction with Lowry's investment advisory services and criticized the Division's action against him. We have considered their testimony but believe that the conduct established in the record demonstrates the need to protect the public by barring Lowry.
27 603 F.2d 1126 (5th Cir. 1979).
28 Lowry argues that, as an individual associated with a small firm, he is being subjected to disparate treatment compared to individuals associated with larger firms. Lowry has produced no evidence of disparate treatment. See Russo Sec., Inc., Exchange Act Rel. No. 44186 (Apr. 17, 2001), 75 SEC Docket 1124A, 1124P. We do not see any such evidence based on the record before us. For cases where we have barred a person associated with a large firm, see, for example, Laurie Jones Canady, Exchange Act Rel. No. 41250 (Apr. 5, 1999), 69 SEC Docket 1468 (former Merrill Lynch, Pierce, Fenner & Smith, Inc. salesperson), petition denied, 230 F.3d 362 (D.C. Cir. 2000), and J. Stephen Stout, Exchange Act Rel. No. 43410 (Oct. 4, 2000), 73 SEC Docket 1441 (former PaineWebber, Inc. salesperson).
29 On April 16, 2001, the day before the administrative hearing in this case, Lowry filed an amended Form ADV in which he changed the name of No-Load Advisors to Folioedvisors.
30 We have considered all of the parties' contentions and have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.
Lowry moved, contemporaneously with the filing of his reply, for leave to submit as additional evidence "A Statement to the SEC Commission from the Elected Board of Directors of 401(k) University." The document is a statement and argument in support of Lowry by three directors of 401(k) University. Pursuant to Rule of Practice 452, a movant must show "with particularity" that the additional evidence is material and that there were reasonable grounds for his failure to adduce such evidence previously. 17 C.F.R. § 201.452. Lowry has failed to make this showing.
The document merely reiterates arguments already made by Lowry, both before the law judge and on appeal. In addition, two of the three 401(k) University board members testified similarly at the hearing. The third board member was scheduled to testify, but could not appear due to a scheduling conflict. This board member was replaced by his brother, who was also his business partner. Lowry could have offered the third board member's affidavit, yet chose not to do so.
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Modified: 09/04/2002