==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 100 ADMINISTRATIVE PROCEEDING FILE NO. 3-9050 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________ : In the Matter of : : DANIEL D. DIETRICH and : INITIAL DECISION ROBERT J. JUDGE : NOVEMBER 7, 1996 : ______________________________: APPEARANCES: Sidney G. Wigfall, Robert N. Knuts and James J. Tyne for the Division of Enforcement, Securities and Exchange Commission, Northeast Regional Office Robert J. Judge, pro se BEFORE: Carol Fox Foelak, Administrative Law Judge The Securities and Exchange Commission (Commission) initiated this proceeding by an Order for Public Proceedings on July 26, 1996, pursuant to Sections 15(b)(6) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act). It alleged that Respondent Robert J. Judge had been enjoined from violating Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in a Final Judgment Of Permanent Injunction And Other Equitable Relief (Final Judgment) in SEC v. Aqua Technologies, Inc., 93 Civ. 8223 (WK) (S.D.N.Y. Jan. 23, 1996) (SEC v. Aqua Technologies). It alleged that the underlying facts were that Respondent Judge, while a registered representative, made material misrepresentations and omissions in selling Aqua common stock to public investors from September 1992 through September 1993. I held a hearing in New York City on October 8, 1996. Because an order of default had already been entered against Daniel D. Dietrich, the hearing concerned only Respondent Judge.-[1]- Eighteen exhibits, offered by the Division of Enforcement (Division), were received into evidence.-[2]- Neither party called any witnesses. After the Division rested its case, the Respondent, pro se, summarized his position, noted the sanctions that had already been imposed on him, and argued that additional sanctions should not be imposed. The Division filed its Proposed Findings of Fact and Conclusions of Law and Post-Hearing Memorandum on October 21, 1996. No further pleadings were received.-[3]- I have, however, considered the Respondent's closing argument, Tr. 10-13, in the nature of a post trial brief. My findings and conclusions are based on the record. I have applied preponderance of the evidence as the applicable standard of proof.-[4]- FINDINGS OF FACT AND CONCLUSIONS OF LAW The Final Judgment, entered on January 23, 1996, enjoined Respondent Judge from violations of the antifraud provisions of the securities laws, Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Additionally, he was ordered to disgorge, jointly and severally with his co-defendant Dietrich, $382,475 plus prejudgment interest of $72,554 and to pay a $25,000 civil penalty. SEC v. Aqua Technologies; Ex. 1. The injunction had originally been entered on consent on December 8, 1993. Ex. 1 at 2. The remaining relief followed the court's February 15, 1995, Memorandum and Order granting summary judgment against Judge and his co-defendants. Exs. 2, 3, 4, 5. From approximately October 1992 through November 1993, the Respondent raised $466,870 through sale of stock in Aqua ---------FOOTNOTES---------- -[1]- Daniel D. Dietrich and Robert J. Judge, Order Making Findings and Imposing Sanctions by Default Against Respondent Daniel D. Dietrich, Securities Exchange Act of 1934, Release No. 37775 (October 2, 1996). -[2]- Citations to exhibits will be noted as "Ex. __." Citations to the transcript of the hearing will be noted as "Tr. __." -[3]- October 29, 1996, was the due date for replies. -[4]- I have considered and rejected all the arguments and proposed findings that are inconsistent with this decision. ==========================================START OF PAGE 2====== Technologies, Inc. (Aqua) by means of material misrepresentations and omissions relating to, among other things, the nature of Aqua's business and its intended use of the proceeds. Ex. 4 at 2; Ex. 6. Although some of the proceeds could not be accounted for, the Respondent and his co-defendant Dietrich diverted at least $382,475 to their own use and benefit, contrary to representations made to investors. Ex. 4 at 3-6. The misappropriation occurred from about October 1992 to November 1993. Ex. 4 at 12. During this time period the Respondent was associated as a registered representative with registered broker-dealers -- Greenway Capital Corporation through December 4, 1992; Quest Capital Strategies, Inc., in January 1993; Securities Planners, Inc., through July 30, 1993; and M. Rimson & Co. from about October 1993 to August 1994. Exs. 7-17. In conclusion, the Respondent has been enjoined from violations of the antifraud provisions of the securities laws based on misconduct while associated with broker-dealers. The Division argues that it is in the public interest to bar him from association with any broker or dealer and from association with a member of a national securities exchange or registered securities association pursuant to Sections 15(b)(6) and 19(h), respectively, of the Exchange Act. PUBLIC INTEREST Imposition of administrative sanctions requires consideration of: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The amount of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). The Respondent's activities were egregious. According to the December 14, 1995, Report and Recommendation of Magistrate Judge Barbara A. Lee, whose findings were adopted by the court, "The flagrant character of the fraud in this case is beyond dispute: a review of the checks and credit card statements makes 3 clear that the defendants and their families saw the proceeds of the public offering as a windfall to themselves, not only for payment of personal expenses, but for such extravagances as $100 tips on meals that in total cost less than that amount. [footnote omitted] The documentary evidence rules out any other inference than theft, pure and simple." Ex. 5 at 4-5; Ex. 1 at 3. The violations were not isolated. To the contrary, the Respondent's violative course of conduct continued for over a year. The Respondent acted with scienter, that is "a mental state embracing intent to deceive, manipulate, or defraud," since scienter is an element of a violation of Rule 10b-5. Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is found where a broker acts with "intent to defraud or with willful and reckless disregard for the [customer's] interest." Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981). As noted above, the court in SEC v. Aqua Technologies found the fraud "flagrant" and characterized the scheme as "theft, pure and simple." Ex. 5 at 4-5; Ex. 1 at 3. In his closing argument, the Respondent said that he was sorry that people lost money; "[w]e were trying to run a business, maybe not one of the best, but we definitely tried." Tr. 12. These statements in mitgation are noted, but fall short of an assurance against future violations. Certainly the Respondent has not acknowledged the wrongfulness of his conduct. There is no evidence in the record concerning the Respondent's current occupation. He argues that he could never be a stockbroker again because of his record. Tr. 12. Nonetheless, he is legally free to work in the securities industry in the future, so it is necessary to take appropriate preventive action. The Respondent disputes some of the facts that were found in the Final Judgment in SEC v. Aqua Technologies. Tr. 10-11. However, the doctrine of collateral estoppel as well as Commission case law preclude any attack in this proceeding on the validity of the Final Judgment against him or of the district court's findings of fact. Blinder, Robinson & Co., Inc., 48 S.E.C. 624, 628-30 (1986), vacated and remanded, 837 F.2d 1099 (D.C. Cir. 1988), cert. denied, 488 U.S. 869 (1988); Kimball Securities, Inc., 39 S.E.C. 921, 924 n.4 (1960); J.D. Creger & Co., 39 S.E.C. 165 (1959); Kaye, Real & Co., Inc., 36 S.E.C. 373, 375 (1955); and James F. Morrissey, 25 S.E.C. 372, 381 (1947). 4 The Respondent also argues that the sanctions he has already received, including the fine and disgorgement, are sufficient and that he should not be barred from association with any broker or dealer. Tr. 12-13. A bar, however, is not merely an additional penalty. It is for the protection of the public and is clearly appropriate in light of the facts in this case. By his unlawful conduct, the Respondent has demonstrated that he lacks the honesty required of a securities professional. A severe sanction is also warranted to deter others from similar activities. For the above reasons, it is in the public interest that the Respondent be barred from association with any broker or dealer or with a member of a national securities exchange or registered securities association. 5 CERTIFICATION OF RECORD Pursuant to Rule 351(b)(6) of the Commission's Rules of Practice, 17 C.F.R. Section 201.351(b), I hereby certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on October 17, 1996, as well as the Division's Proposed Findings of Fact and Conclusions of Law and Post-Hearing Memorandum, filed October 21, 1996. ORDER Based on the findings and conclusions set forth above, I ORDER, pursuant to Sections 15(b)(6) and 19(h) of the Exchange Act, that Robert J. Judge be and hereby is barred from association with any broker or dealer and from association with a member of a national securities exchange or registered securities association. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. Section 201.360. Pursuant to that rule, a petition for review of this initial decision may be filed within 21 days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within 21 days after service of the initial decision upon him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. Carol Fox Foelak Administrative Law Judge 6 First, he argues that the Steadman factors should not apply in this case because no wrongdoing has formally been found. As noted, however, an injunction is a sufficient basis under Exchange Act Sections 15(b)(4) and (b)(6) to assess sanctions in the public interest. The Respondent next argues that he should not be sanctioned because the Division failed to allege any violations in the past four years or otherwise show that he is a present threat to public investors. This argument is without substance. The Commission has noted that "Congress, in writing Section 15(b) of the Exchange Act, viewed past misconduct as the basis for an inference that the risk of probable future misconduct was sufficient to require exclusion from the securities business." Arthur Lipper Corp., 46 S.E.C. 78, 101 (1975). Finally, the Respondent argues that he has no intent or desire to be involved in activities similar to his violative activities. In spite of such statements, the Respondent is still legally free to participate in penny stock offerings, so it is necessary to take appropriate preventive action. Id. at 101 n.72. In sum, the Respondent's arguments against a penny stock bar are not persuasive. 7