UNITED STATES OF AMERICA
In the Matter of
STEVEN EUGENE SCOTT,
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Steven Eugene Scott ("Respondent") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 15(b)(6) of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these administrative proceedings, Scott has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings herein, Scott consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act and Section 15(b)(6) of the Exchange Act, Making Findings and Imposing Sanctions.
On the basis of this Order and Scott's Offer of Settlement, the Commission makes the following findings:1
This matter concerns Scott's participation in an unregistered distribution of the stock of a no-assets/no-revenues shell corporation, Nemdaco, Inc., which was listed on the NASDAQ bulletin board. Through nominee accounts for which Scott acted as the registered representative, a stock promoter who secretly controlled Nemdaco sold over 4.7 million shares of Nemdaco into the market between February 1995 and May 1997. The stock sold by the promoter through Scott derived directly from Nemdaco and from former controlling persons of Nemdaco and it constituted over 50 percent of the outstanding shares of Nemdaco. Scott thereby sold shares on behalf of an issuer and he participated in an unregistered distribution of shares, in violation of the registration provisions of the securities laws, Sections 5(a) and 5(c) of the Securities Act.
Steven Eugene Scott is a 51 year old Massachusetts resident who worked as a registered representative for several broker-dealers from 1989 through 1997. Between February 1995 and March 1997 Scott worked for Prudential Securities, Inc., Dean Witter Reynolds, Inc. and Thomas Green Securities, Inc. Scott is currently an officer and director of a holding company which is seeking to acquire other companies.
In 1992 Scott met Stanley Schulman, a 65 year old California promoter of microcap securities with a criminal record for fraud. In 1994 Schulman asked Scott to sell securities on his behalf and Scott agreed.
Between June 1994 and May 1997 Schulman opened eight securities brokerage accounts with Scott using six different nominee corporate names (Schulman used two names twice). These names were: Coubert Dennis, Ltd., Sterling Worth Capital Partners, Ltd., Albemarle Investments, Ltd., Thermonics, Ltd., Allied London Investments, Ltd. and Countrywide Consultants, Ltd. In the account opening documents, signed by Schulman and Scott, the six names used by Schulman are identified as purported "United Kingdom corporations." Schulman was listed as the "President" of all six; Schulman was also identified as the "sole officer," "director" and/or the "secretary" of the six "corporations." No other individual was identified as being affiliated in any way with the six accounts. Schulman was theonly person with authority to execute trades in the accounts. Although various addressees in the United Kingdom were given on the Certificates of Foreign Status, an Internal Revenue Service form included in the account opening documents, Schulman's personal residential address in California was the address given for mailing monthly account statements, cash payments and trade confirmations. Certain of the accounts had check writing privileges and Schulman was the only person with check writing authority. No person other than Schulman ever received the benefit of any proceeds from the accounts.
In December 1994 Nemdaco was a public shell with slightly over six million common shares outstanding. The company had previously operated nightclubs but, at that time, it had no revenues, ongoing business operations or significant assets. Nemdaco's then controlling shareholders held over 80 percent of the outstanding stock. Nemdaco is registered with the Commission pursuant to Section 12(g) of the Exchange Act and its stock was listed on the NASDAQ bulletin board. The market for the publicly held shares of Nemdaco was thinly traded. In February 1995 Nemdaco filed a Form 8-K with the Commission stating that "Coubert Dennis, Ltd." had purchased the 80 percent controlling interest in Nemdaco from its former controlling shareholders. In May 1995 "Coubert Dennis, Ltd." filed a Schedule 13-D with the Commission disclosing that it had purchased the controlling interest in the company. Stanley Schulman signed the Schedule 13-D as "director" of Coubert Dennis, Ltd. Nemdaco's Form 10-KSB, for the period ending June 30, 1996, disclosed that "Coubert Dennis, Ltd.," the largest shareholder in Nemdaco, had the same address as Schulman's personal residence in California and the same address used on the nominee securities brokerage account. At no time from December 1994 to the present has Nemdaco filed a statement with the Commission for the purpose of registering stock for sale to the public, either on behalf of itself or on behalf of selling shareholders.
In February 1995 Nemdaco began issuing a series of press releases announcing Nemdaco's entry into various business deals, including several investments in mainland China, none of which ever came to fruition. The releases coincided with the increase of Nemdaco's stock price from under $.10/share to over $1.50/share by January 1996. The releases also coincided with an increase in the volume of trading in Nemdaco.
After Nemdaco began to issue press releases, Schulman began using the nominee accounts to sell large quantities of Nemdaco stock. Between February 1995 and May 1997 Schulman deposited over 5 million Nemdaco shares into the nominee accounts. Schulman instructed Scott generally to sell Nemdaco whenever the market "looked good" and Scott complied. Schulman and Scott spoke on the telephone regularly and Scott entered over 400 sell orders for Nemdaco, in amounts ranging from several hundred to several hundred thousand shares. In total, Scott sold 4.7 million shares of Nemdaco out of Schulman's nominee accounts over the two year period. Total proceeds from the sales exceeded $1.4 million. All of the sales were to other broker dealers. Scott sold no shares of Nemdaco to his retail brokerage clients. Outside of selling Nemdaco, and transferring blocks ofNemdaco to other persons as directed by Schulman, no other significant activity took place in the nominee accounts. Scott received his usual commission on all transactions in Nemdaco.2
C. Legal Analysis
Section 5(a) of the Securities Act prohibits any person, directly or indirectly, from selling a security in interstate commerce unless a registration statement is in effect as to the security. Section 5(c) of the Securities Act prohibits the offer to sell a security unless a registration statement has been filed for the security.3 Section 4(1) of the Securities Act exempts from Section 5 transactions by persons other than an issuer, underwriter or dealer. Section 2(11) of the Securities Act defines an "underwriter" to include, "any person who ... offers or sells for an issuer in connection with, the distribution of any security, or participates or has direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking..." For the purposes of Section 2(11) the term "issuer" includes, "any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer."
Scott violated Sections 5(a) and 5(c) of the Securities Act when he offered and sold 4.7 million shares of Nemdaco from Schulman's nominee accounts in what amounted to a continuous public offering between February 1995 and May 1997. No registration statement was in effect for the securities Scott offered and sold and no exemption from Section 5 was available. Scott was anunderwriter in that he offered and sold Nemdaco for an "issuer," that is, Schulman and his nominees, in connection with a distribution of Nemdaco, and Scott participated directly in that distribution.4
Scott's violations of Sections 5(a) and 5(c) were willful. The Commission has stated on numerous occasions that professionals working in the securities industry must exercise due care to avoid the sale of unregistered securities for which no exemption is available. As stated in Securities Act Release No. 4445 (Feb. 2, 1962):
[A] dealer who offers to sell, or is asked to sell a substantial amount of securities must take whatever steps are necessary to be sure that this is a transaction not involving an issuer, person in a control relationship with an issuer or an underwriter. For this purpose, it is not sufficient for him merely to accept "self-serving statements of his sellers and their counsel without reasonably exploring the possibility of contrary facts."
The amount of inquiry called for necessarily varies with the circumstances of particular cases. A dealer who is offered a modest amount of a widely traded security by a responsible customer, whose lack of relationship to the issuer is well known to him, may ordinarily proceed with considerable confidence. On the other hand, when a dealer is offered a substantial block of a little known security, either by persons who appear reluctant to disclose exactly where the securities came from, or where the surrounding circumstances raise a question as to whether or not the ostensible sellers may be intermediaries for controlling persons or statutory underwriters, then searching inquiry is called for.
See also, e.g., In re Paulson Investment Company and Richard Schiller, Exchange Act Rel. No. 29943 (Nov. 14, 1991), 1991 SEC LEXIS 2560.
Further, it is settled that an industry professional may not rely upon the absence of restricted legends on stock certificates when the circumstances surrounding the transaction indicate the need for a thorough investigation to determine whether the professional is participating in the sale of unregistered securities. Butcher & Singer Inc., 48 S.E.C. 640, 643 (1987).
Given the facts of this case, Scott had a duty, which he failed to follow, to conduct just such a "searching inquiry." The circumstances surrounding this matter -- Schulman's opening of nominee accounts and delivery of millions of shares of a thinly traded stock to those accounts -- put Scott on notice of a potential scheme to evade the registration provisions of the securities laws. However, Scottconducted little or no inquiry. Even a cursory review of Nemdaco's public filings would have revealed that Schulman's nominee, "Coubert Dennis, Ltd.," was the majority shareholder of Nemdaco. Had this public disclosure been compared to the information in the account opening documents prepared by Scott and Schulman, it would have caused any reasonably prudent securities professional to be concerned about possible participation in an unregistered distribution. Yet, Scott made no further inquiry about the registration of Nemdaco and willingly accepted his commissions for selling the stock. Accordingly, Scott willfully violated Sections 5(a) and 5(c) of the Securities Act.
In view of the foregoing, the Commission has determined it is in the public interest to accept Scott's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act of 1933, that Respondent Steven Eugene Scott cease and desist from committing or causing any violation and any future violation of Sections 5(a) and 5(c) of the Securities Act of 1933.
IT IS FURTHER ORDERED, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, that Respondent Steven Eugene Scott be, and hereby is, suspended from association with any broker or dealer for a period of six (6) months, effective on the second Monday following the entry of this Order. Respondent Steven Eugene Scott shall provide to the Commission, within thirty (30) days after the end of the six (6) month suspension period, an affidavit that he has complied fully with the suspension. Scott shall deliver such affidavit to Linda Chatman Thomsen, Associate Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington DC 20549-0708.
IT IS FURTHER ORDERED, pursuant to Section 21B(a)(1) of the Securities Exchange Act of 1934, that Respondent Steven Eugene Scott shall pay a civil money penalty to the United States Treasury in the amount of Ten Thousand U.S. Dollars ($10,000.00), with Five Thousand ($5,000.00) of that amount due within seven (7) days of the entry of the Order. The second payment of Five Thousand ($5,000.00) shall be due within six (6) months of the entry of this Order. Such payments shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Steven Eugene Scott as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Linda Chatman Thomsen, Associate Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington DC 20549-0708.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|2||The stock certificates delivered to Scott by Schulman did not bear any restrictive legend; the legend had been removed on Schulman's orders. The shares sold by Schulman had come from the former controlling shareholders of Nemdaco and from issuances of stock by Nemdaco under bogus claims of exemption pursuant to Regulation S. Following these stock issuances, Nemdaco's total shares outstanding rose from approximately 6 million to approximately 10 million.|
|3||The Commission establishes a prima facie violation of Section 5(a) by showing that: (1) no registration statement was filed or was in effect as to the security, (2) the defendants offered or sold the security, and (3) that means or instrumentalities of interstate transportation or communication or the mails were used in connection with the offer or sale. SEC v. Continental Tobacco Co. of South Carolina, Inc., 463 F.2d 137, 155 (5th Cir. 1972). Once the Commission establishes a prima facie case, the burden of proof shifts to the defendants to show that an exemption from registration was available for the offer or sale of the security. SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953). Exemptions from the registration provisions of the Securities Act are narrowly construed by the courts. SEC v. Murphy, 626 F.2d 633, 641 (9th Cir. 1980).|
|4||Given the number of Nemdaco shares sold by Scott compared to the total shares outstanding, a "distribution" of Nemdaco to the public unquestionably took place.|
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