INITIAL DECISION RELEASE NO. 109 ADMINISTRATIVE PROCEEDING FILE NO. 3-9046 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ___________________________________ : In the Matter of : : JAMES THORNTON, and PAYNE & :INITIAL DECISION THORNTON, INC., d/b/a :March 25, 1997 RETIREMENT INVESTMENT GROUP : __________________________________: APPEARANCES: Christian R. Bartholomew for the Division of Enforcement, Securities and Exchange Commission Christopher A. Colvert for James Thornton, and Payne & Thornton, Inc., d/b/a Retirement Investment Group BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission ( Commission ) initiated this proceeding pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ( Exchange Act ). Pursuant to the directive in the Commission s Order Instituting Proceedings ( Order ) issued July 25, 1996, I held a public hearing in Washington, D.C., on October 7, 1996. At the hearing, the Division of Enforcement ( Division ) called no witnesses and introduced fifty-eight exhibits.-[1]- Respondent James Thornton testified for the Respondents and introduced three exhibits. The parties filed post-hearing pleadings. The last filing occurred on December 18, 1996. My findings and conclusions are based on the record and my observation of the witness s demeanor. I applied preponderance ---------FOOTNOTES---------- -[1]- Citations are to the hearing transcript (Tr. __) ; the investigative transcript taken September 27, 1991 contained in Div. Ex. 23 (Invest. Tr. __) ; and to the exhibits admitted into evidence at the hearing. The Division s Exhibits are (Div. Ex. __), and Respondents Exhibits are (Resp. Ex. __.). ==========================================START OF PAGE 2====== of the evidence as the applicable standard of proof. Issue Mr. Thornton admitted that, as alleged in the Order, he violated Sections 15(b)(4)(E) and 15(b)(6) of the Exchange Act by failing reasonably to supervise Gail G. Griseuk, a registered representative associated with Payne & Thornton, Inc., doing business as Retirement Investment Group ( Retirement ), who willfully violated Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 ( Securities Act ) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, from July 25, 1991, to about November 1991. The issue remaining is what, if any, actions are in the public interest pursuant to Sections 15(b), 19(h), and 21B of the Exchange Act. (Resp. Answer and Resp. Brief; Tr. 4-6.) Findings of Fact Gail G. Griseuk Retirement s compliance manual specifies that it is the primary responsibility of the President to interview and investigate all individuals before accepting them for employment with this firm. -[2]- (Div. Ex. 29 at 11.) Mr. Thornton hired Gail Griseuk as a registered representative associated with Retirement in St. Petersburg, Florida, based on conversations where he found her to be knowledgeable and he perceived she would have rapport with clients. He did not use a written application form or any formal criteria in hiring registered representatives. (Tr. 90-93.) Mr. Thornton admits he failed to investigate Ms. Griseuk s record in the industry as he was required to do before he hired her. In addition, his claim that he was not sure he had seen adverse information about Ms. Griseuk on June 2, 1988, when he signed a Form U-4 for her to become associated as a registered representative with Retirement, is unbelievable.-[3]- (Tr. 97-99.) On the same day that Mr. Thornton signed the Form U-4, Birchtree Financial Services, Inc. ( Birchtree ), a registered ---------FOOTNOTES---------- -[2]- The document referred to as Retirement s compliance manual consists of two pages of a document given to registered representatives in 1986. (Tr. 12-14.) -[3]- Filing a Form U-4, Uniform Application for Securities Industry Registration or Transfer, with the National Association of Securities Dealers ( NASD ) is required for a person to become associated with a registered broker-dealer. ==========================================START OF PAGE 3====== broker-dealer, filed a Form U-5, Uniform Termination Notice for Securities Registration Termination, with the NASD that showed Ms. Griseuk had been permitted to resign, and that (1) Ms. Griseuk was a defendant in a customer suitability lawsuit filed in Pinellas County, Florida, on June 2, 1988; (2) the Florida Division of Securities and Investor Protection was investigating Ms. Griseuk for alleged misconduct; and (3) Birchtree would maintain an open file concerning Griseuk and Associates until these matters and two other requests for arbitration were resolved. (Div. Ex. 8B.) Ms. Griseuk acknowledged these three matters in a filing with the NASD on August 31, 1988. (Div. Ex. 9B.) Complaints about Ms. Griseuk s business practices had been the subject of considerable press coverage. (Div. Ex. 53 at 22- 23.) -[4]- On October 31, 1989, while she was associated with Retirement, a Florida court ordered Ms. Griseuk, GAI International Investment Advisors, Inc. ( GAI ), a registered investment adviser she owned and operated, and two other persons, to pay $898,528 as the result of an arbitration award against them. (Div. Ex. 41, Lance v. Griseuk, Cir. Ct. for Pinellas Cty, Florida, Civil Div. No. 88-8583-07 (Oct. 31, 1989).) On November 30, 1989, the NASD s Special Registration Review unit sent Retirement a copy of Ms. Griseuk s disciplinary history and requested additional information concerning three pending customer complaints against her. (Div. Ex. 11A.) It is unbelievable that Mr. Thornton would not notice adverse information about the firm s number one salesperson who was producing thirty percent or more of the firm s sales. (Tr. 103- 04.) I therefore do not believe Mr. Thornton that Beverly Struck, who worked in Retirement s office, probably brought to my attention the U-4 and it went right by me. (Tr. 103.) On December 29, 1989, Retirement sent four U-4 disclosure reporting pages describing actions against Ms. Griseuk to the NASD in response to its request. (Div. Ex. 11B.) In response to a NASD request on January 13, 1990, to Mr. Thornton s attention, Ms. Struck forwarded additional information to the NASD on February 6, 1990, relative to the bankruptcy filing on May 5, 1989, of Ms. Griseuk, Griseuk Realty, and Gail Griseuk and Associates, and information noting that Ms. Griseuk ---------FOOTNOTES---------- -[4]- Susan W. Byrd, who answered Ms. Griseuk s newspaper advertisement for registered representatives in September 1989, wondered how Ms. Griseuk could still be in the securities business because of the adverse publicity she had received in the press. ==========================================START OF PAGE 4====== was the subject of customer complaints.-[5]- (Div. Ex. 12B.) Mr. Thornton was responsible for supervising Ms. Griseuk s activities as a registered representative from June 1988 to December 1991 when he terminated her association with Retirement. In 1995, Ms. Griseuk settled charges which the Commission brought against her pursuant to Sections 15(b), 19(h), and 21C of the Exchange Act, Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ( Advisers Act ), and Section 8A of the Securities Act. In doing so, Ms. Griseuk consented to findings that from about December 1990 to about November 1991, while she was a registered representative with Retirement, she willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act in connection with the offer, purchase and sale of nearly $5 million worth of securities. (Div. Ex. 40, Gail G. Griseuk, 59 SEC Docket 318 (April 18, 1995).) As part of the settlement, Ms. Griseuk acknowledged that while she was a registered representative with Retirement she willfully aided and abetted and caused GAI to willfully violate Sections 204, 206(1), 206(2), and 206(4) of the Advisers Act and Rules 204-1, 204-2, 204-3, and 206(4)-4 thereunder. The Commission s Order Making Finding and Imposing Remedial Sanctions directed that Ms. Griseuk cease and desist from committing or causing any violations or future violations of the statutes and rules cited; barred her from association with any broker, dealer, municipal securities dealer, investment company or investment adviser; and ordered her to pay disgorgement of $370,786 plus interest, the approximate amount of her commissions. The Commission found Ms. Griseuk was unable to pay this amount and waived payment of all but $20,000. Mr. Thornton admits that he violated: Section 15(b)(6) of the Exchange Act by not reasonably supervising Ms. Griseuk in that he failed to: (1) investigate all investor complaints with a view to detecting and stopping in a timely manner Ms. Griseuk s violative sales activities in connection with the fraudulent sales of limited partnerships to her customers, despite Mr. Thornton s duty pursuant to Retirement s written supervisory ---------FOOTNOTES---------- -[5]- Division counsel characterized as remarkable Mr. Thornton s testimony that he essentially had no knowledge that [Ms. Griseuk] had been sued for securities problems, and no knowledge that she had been the subject of a Florida state investigation, and had only the most vague knowledge of her personal bankruptcy. (Tr. 16.) ==========================================START OF PAGE 5====== procedures to do so; (2) review all customer accounts on a monthly basis despite Mr. Thornton s duty pursuant to Retirement s written supervisory procedures to do so; and (3) perform heightened supervision of Ms. Griseuk despite notification of investor complaints against Ms. Griseuk, and other red flags such as the lawsuits filed against Ms. Griseuk and failing to investigate the function of Rhodes Capital, GAI and Gail Griseuk and Associates during his visits to Ms. Griseuk s place of business, despite the signs advertising these companies and the possible implications for Retirement. Section 15(b)(4)(E) of the Exchange Act by not reasonably supervising Ms. Griseuk in that he failed to: (1) have in place or implement any additional supervisory procedures once Retirement was on notice of possible violations of the federal securities laws by Ms. Griseuk; and (2) perform heightened supervision despite notification of investor complaints against Ms. Griseuk, other red flags such as the lawsuits filed against Ms. Griseuk and failing to investigate the function of Rhodes Capital, GAI and Gail Griseuk and Associates during his visits to Ms. Griseuk s place of business despite the signs advertising these companies and the possible implications for Retirement. (Order at 2-3.) Respondents - James Thornton and Retirement Mr. Thornton graduated from the University of Florida in 1954 with a degree in chemical engineering, and earned a masters in business administration ( MBA ) from Stanford. (Tr. 126-27; Invest. Tr. at 11.) Mr. Thornton, age 64, entered the securities industry in 1969 when he became a licensed registered representative. (Tr. 50.) In 1976, Mr. Thornton and a Mr. Payne purchased a broker-dealer, Houston Investment Group. Mr. Thornton bought Mr. Payne s ownership interest around 1980. (Tr. 131-32.) From 1979 to 1991 or 1992, Mr. Thornton operated the registered broker-dealer as Payne & Thornton, Inc., doing business as Houston Investment Group. In 1991 or 1992, Mr. Thornton changed the d/b/a name to Retirement Investment Group.-[6]- (Tr. 35) I consider Mr. Thornton s actions to be those of Retirement, a Texas corporation headquartered in Houston, because he controlled and operated the firm. (Resp. Brief at 1; SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972).) ---------FOOTNOTES---------- -[6]- I will use the name Retirement to refer to the broker-dealer whatever the time period. ==========================================START OF PAGE 6====== For estate planning purposes, Mr. Thornton transferred ownership of Retirement to his daughter, Hazel Thornton, in 1983 or 1984 when he was doing much better financially.-[7]- (Tr. 112-13.) Ms. Thornton has had no role in the firm s activities and the transfer of ownership to his daughter did not change Mr. Thornton s control of the firm s operations. (Tr. 35.) Since 1977, Mr. Thornton has been Retirement s president and has been registered with the NASD as a general securities representative, general securities principal, Retirement s financial and operations principal, and its designated compliance officer. (Tr. 40; Div. Ex. 15 at 2.) Mr. Thornton conducts business from an office in Houston, Texas, with a salaried staff of three people: an office manager, an assistant office manager, and a clerical employee. (Tr. 69-70.) As noted earlier, Retirement s written documentation concerning supervision and compliance, its compliance manual, consists of two pages of a 30 page document given to registered representatives headed Supervisory Procedures for Payne & Thornton d/b/a Houston Investment Group. (Div. Ex. 29 at 11-12.) In addition, in 1991 Mr. Thornton sent all registered representatives three one- page letters. (Div. Ex. 30.) Contrary to NASD policy, Mr. Thornton does not consider Retirement s registered representatives to be employees but rather persons on commission-based contracts.-[8]- (Invest. Tr. 31.) Retirement received fifteen to twenty percent of the sales commissions generated by its sale representatives, and it does not pay their licensing fee or any of their business expenses. (Tr. 93-94.) However, Retirement s agreement with Ms. Griseuk provided for a 90/10 split. (Tr. 26, 161-62.) It received approximately $41,000 from Ms. Griseuk s illegal activities as an associated registered representative. (Tr. 26.) She initially accounted for about thirty percent of the firm s ---------FOOTNOTES---------- -[7]- Like so many of his statements, this appears inconsistent with Mr. Thornton s position that Retirement has never made a profit. (Tr. 130-31.) -[8]- The NASD has stated, [i]rrespective of an individual s location or compensation arrangements, all associated persons are considered to be employees of the firm with which they are registered for purposes of compliance with NASD rules governing the conduct of registered persons and the supervisory responsibilities of the member. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not later the obligations of the individual and the firm to comply with all applicable regulatory requirements. (Div. Ex. 20, NASD Notice to Members, September 12, 1986, at 1-2.) ==========================================START OF PAGE 7====== business, which had increased to about fifty percent before she was terminated. (Tr. 103-04.) In 1991, Mr. Thornton was not sure of the number of registered representatives associated with Retirement. (Invest. Tr. 31-38.) He estimated that he spent less than fifteen percent of his time on his compliance duties; he could not quantify how many times he followed up on information on a customer s new account form; he had never seen a questionable transaction in a customer s account; and he was aware of only one customer complaint against a registered representative. (Invest. Tr. 57- 58, 93-95, 110-12.) In addition to Mr. Thornton s admissions relative to his failure reasonably to supervise Ms. Griseuk described later, I find that Mr. Thornton did not perform the following supervisory duties of Retirement s president: (a) interview and investigate all individuals before accepting them for employment, including contacting references, banking relations and former employers; (b) approve the opening of all new accounts, including limited partnership applications; (c) review all customer files monthly, including verifying all confirmations against order tickets to detect irregularities; (d) review and approve all incoming and outgoing mail; and (e) investigate and resolve all customer complaints. (Div. Ex. 29 at 11-12; Tr. 22-23, 97-99.) Mr. Thornton s failure reasonably to supervise occurred when Retirement had considerably fewer registered representatives than it now has. Registered Number of Year representatives States 1988 32 1989 36 1990 55 1991 48 5 or 6 1992 55 1993 38 1994 59 1996 64/68 11 (Div. Ex. 37; Resp. Ex. B; Tr. 89-91; Invest. Tr. 32-33.) Mr. Thornton earns about $36,000 in salary from Retirement, and about $45,000 annually in commissions as a registered representative. (Tr. 54, 56.) Mr. Thornton filed for personal ==========================================START OF PAGE 8====== bankruptcy in 1993. (Tr. 36, 132-33.) The record does not contain financial information for Retirement for the period at issue. However, there is no evidence to dispute Mr. Thornton s claim that Retirement has never made a profit, or that he has left commissions he earned in the firm over the last several years to build the firm. (Tr. 56, 131.) In calendar year 1995, Retirement lost $1,576 on total income of almost $1.3 million. (Resp. Ex. B.) Financial Service Company of Houston d/b/a James R. Thornton ( Financial Service ), a sole proprietorship owned by Mr. Thornton, paid the bills for Retirement. Financial Service s status is unclear because Mr. Thornton testified in 1991 that Financial Service was no longer functioning as a business. (Invest. Tr. 15-16.) However, in 1995 Retirement paid Financial Service management fees of $109,156. (Tr. 111-12; Resp. Ex. B.) The Order does not allege that the payments were improper, and there is no evidence to dispute Mr. Thornton s position that all these funds were used to pay Retirement s broker-dealer expenses. (Tr. 111-12, 128-29; Resp. Ex. B.) Public Interest -[9]- Section 21B(a) of the Exchange Act authorizes the imposition of a civil penalty in a proceeding instituted pursuant to Sections 15(b)(4) or 15(b)(6), where a respondent has violated provisions of the Exchange Act or has failed reasonably to supervise within the meaning of Section 15(b)(4)(E) and a penalty is in the public interest. All the following factors which the statute cites as relevant public interest considerations are present here and indicate that a penalty is in the public interest: whether the act or omission for which the penalty is assessed involved deliberate or reckless disregard of regulatory requirements; the harm to other persons resulting either directly or indirectly from such act or omission; whether the person has been previously found by another regulatory agency to have violated state securities laws or the rules of a self-regulatory organization; and the need to deter such person and others from committing such acts or omissions. See Section 21B(c). I find it appropriate and in the public interest to (1) revoke Retirement s broker-dealer registration and order it to pay a first tier civil money penalty of $50,000, and (2) bar Mr. Thornton from association with a broker-dealer and from participating in any penny stock offering, and order him to pay a ---------FOOTNOTES---------- -[9]- I have considered all the arguments and contentions and accept those that are consistent with this decision. ==========================================START OF PAGE 9====== first tier civil money penalty of $5,000.-[10]- This sanction and penalty are supported by the applicable legal standard and are necessary to deter Mr. Thornton and others from future illegal conduct. In addition to deterrence, other established criteria for determining what sanction is appropriate in the public interest include: 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); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). I conclude that imposing the most severe sanctions allowed to me under the statutes with respect to Mr. Thornton s participation in the securities industry is in the public interest because I find Mr. Thornton to be a considerable threat to the investing public. Mr. Thornton has compiled an ---------FOOTNOTES---------- -[10]- The maximum first tier penalty for each act or omission is $5,000 for a natural person or $50,000 for any other person. Even though the record shows that Mr. Thornton deliberately or recklessly disregarded the regulatory requirement of supervision, I will impose a first tier penalty since there is no showing that he benefited financially, and the Division supports a penalty at this level, but at the maximum level. (Resp. Ex. B.) The Division asks that Retirement be censured and ordered to pay a first tier civil money penalty in the amount of $25,000, and that Mr. Thornton be suspended for one-year from association with any broker or dealer, with the right to re-apply after that time in a non-supervisory, non-proprietary capacity, and ordered to pay a first tier civil money penalty in the amount of $5,000. On brief, Respondents recommend that Mr. Thornton be barred as an operating principal and that they be allowed to pay the fine imposed in installments. (Resp. Brief at 5-6.) At the hearing, Respondents counsel stated that Mr. Thornton may not be the president of a company that we d want to have operate any more. And it may be appropriate for the protection of the investing public to say we don t want Jim Thornton ever to be in a supervisory capacity again, ever. (Tr. 37.) ==========================================START OF PAGE 10====== overwhelming record of recurrent improper conduct in the securities industry since 1979; he offers no sincere assurances against future violations; he does not recognize that any of his prior actions were wrong; and the evidence is persuasive that he will not conform his activities to what is legal and acceptable. This record contains descriptions of some eight reported incidents in which regulatory authorities in several states and the NASD have initiated and concluded actions against the Respondents, mainly by way of settlements. Respondents Regulatory History Respondents prior disciplinary records are almost always a significant factor in determining appropriate sanctions, and repeated violations are a factor that weigh in favor of significant sanctions. Also, the Commission has routinely considered orders in settled proceedings as part of a respondent s disciplinary history. Stuart-James Co., Inc., Order on Motion to Admit Disciplinary Records, 52 SEC Docket 764 (August 22, 1990); Howard Alweil, 51 S.E.C. 14, 18 (1992); see Pagel, Inc. v. SEC, 803 F.2d 942, 948 (8th Cir. 1986); J. V. Ace & Co., 50 S.E.C. 461, 467 (1990) (net capital and other violations); W. N. Whelen & Co., 50 S.E.C. 282, 287 (1990); Walter Capital Corp., 50 S.E.C. 176, 179-80 (1989) (net capital violations); LSCO Securities, Inc., 49 S.E.C. 1126, 1130 (1989). On July 12, 1979, and on December 2, 1981, the NASD accepted letters of admission, waiver and consent signed by Mr. Thornton. In each matter, Mr. Thornton agreed to a censure and fine of $500.-[11]- (Div. Ex. 5 at 21-22; Div. Ex. 6.) On September 27, 1983, the NASD District Business Conduct Committee for District No. 6 ( DBCC ) in Houston Investment Group, Member, James H. Thornton, Registered General Securities Principal, Complaint No. TEX-352-SC, found that the Respondents violated Exchange Act Rules 15c2-4 and 15c2-4(b) in that they did not promptly transmit to escrow accounts, or otherwise properly handle, funds received for the sale of limited partnership interests. (Div. Exs. 6, 18.) The NASD censured Respondents and fined them $1,000, jointly and severally. ---------FOOTNOTES---------- -[11]- The Division s Post-hearing Brief incorporates its Pretrial Brief. At page 14 of the latter document, the Division posits that both of these matters, NASD No. AWC-35 (1979) and NASD No. AWC-43 (1981), involved books and record violations by both Respondents, citing Div. Ex. 5, the NASD s Central Registration Depository record for James Thornton. My review of Div. Ex. 5, specifically pages 21 and 22, confirms the sanctions and penalties only as to Mr. Thornton. ==========================================START OF PAGE 11====== On July 15, 1987, Mr. Thornton signed a document designated Letter of Acceptance, Waiver and Consent, TEX-519-AWC, before the NASD DBCC in the matter titled DBCC No. 6 vs. Houston Investment Group, Member; James Thornton, Direct Participation Program Principal. (Div. Ex. 17.) Mr. Thornton, for Retirement and for himself individually, consented to a finding that Retirement had violated Exchange Act Rule 10b-9 in that it failed to refund subscribers funds in connection with an all or nothing offering when the minimum number of units had not been sold on the closing date, and accepted a sanction of censure and a $1,000 fine, jointly and severally. (Div. Exs. 6, 17.) On July 20, 1987, Mr. Thornton signed a document designated Letter of Acceptance, Waiver and Consent, TEX-470-AWC ( Consent ), for Retirement and for himself individually, in the matter before the NASD DBCC titled Houston Investment Group, Member; James Thornton, Registered Principal; and Michael S. Brown, Registered Representative ( the Brown case ). (Div. Ex. 16.) In the Consent, Retirement and Mr. Thornton acknowledged that Mr. Brown had paid for three investor purchases in an all- or-nothing offering so that the purchases were not bona fide within the meaning of Rule 10b-9 and funds were released from escrow before all the units in the offering were sold; and that James Thornton failed to evidence written supervisory approval of the subscription documents as required by the firm s internal supervisory procedures. (Div. Ex. 16.) The Consent which Mr. Thornton signed in the Brown case found that the parties conduct had violated the NASD s Rules of Fair Practice, and issued a sanction of censure and fine of $3,000, jointly and severally. The Consent noted that Retirement and Mr. Thornton had both been the subject of several prior disciplinary matters: 1. The sanctions and penalties imposed on July 12, 1979, and December 2, 1981, described earlier, and 2. on an unspecified date - a sanction of censure and $1,000 fine for violations of Exchange Act Rule 15c2-4. On September 9, 1992, the State of Georgia, Commissioner of Securities, suspended the licenses of Retirement and Mr. Thornton for six days and fined them $2,500, jointly and severally, based on a finding that they failed to exercise diligent supervision over the securities sales activities of a registered representative, Hugh Edger Bowman II ( the Bowman case ). Mr. Bowman converted to his own personal use $80,000 that he received from investors to whom he sold units of limited partnership interests not registered in the State of Georgia. (Div. Ex. 3, Order of Suspension and Civil Penalty, Retirement Investment Group and James Harvey Thornton, Case No. 50-92-0268(B).) ==========================================START OF PAGE 12====== On June 3, 1994, the NASD DBCC accepted Respondents settlement in Jerrell Jay Cosby, general securities principal, Retirement Investment Group, member, and James Harvey Thornton, municipal principal, Complaint No. CO6930021. The DBCC characterized Mr. Thornton s activities as inadvertent and noted that Retirement had reviewed and revised its procedures and had retained new personnel to assure proper supervision and training. (Div. Ex. 15 at 3.) Based on these considerations, the DBCC mistakenly believed that sanctions imposed by the settlement were sufficiently remedial to deter Respondents from any further misconduct. Mr. Thornton and Retirement accepted a censure and a monetary sanction of $2,500, jointly and severally. All three Respondents accepted imposition of restitution and/or disgorgement of $6,787, jointly and severally. (Id. at 4.) In addition to these recorded regulatory violations, there appear to be others. Mr. Thornton mentioned additional complaints against the Respondents which do not appear to be included in Respondents regulatory history, and certain exhibits refer to others. See for example, the Certification of NASD Business Records and Mr. Thornton s Forms U-4 and U- 5.-[12]- (Div. Exs. 4, 6; Invest. Tr. 13-15, 25.) Actions by regulatory authorities have not caused Mr. Thornton to obey the law. Even though the State of Texas in 1987 and the State of Georgia in 1992 reprimanded him for failing to supervise registered representatives in the Brown and Bowman cases, from July 25, 1991 to about November 1991 he violated the securities laws and Retirement s own supervisory procedures in failing reasonably to supervise to Ms. Griseuk, and this failure caused great harm to public investors.-[13]- Mr. Thornton s failure to terminate Ms. Griseuk s association with Retirement until the end of 1991, considerably after he found out about her prior activities and before she committed the illegal activities described below, is indefensible. (Tr. 17-22; Div. Ex. 8A.) Cullen Baker resigned his position with Ms. Griseuk because of her unethical business practices in June 1991. In early July, he described Ms. Griseuk s illegal activities to Mr. Thornton, ---------FOOTNOTES---------- -[12]- One example is the Statement of Claim, Answer, Notice of Withdrawal of Claim and close out letter for NASD Arbitration Case No. 92-00955, Charles D. Williamson and Milgros D. Williamson vs. Retirement Investment Group f/k/a The Houston Investment Group and James H. Thornton. (Div. Ex. 4.) -[13]- The Order charges Mr. Thornton with failure to supervise Ms. Griseuk from July 25, 1991, to about November 1991. Ms. Griseuk was associated with Retirement from June 1988 through December 1991. The evidence is that Mr. Thornton failed reasonably to supervise all Retirement s registered representatives for the entire period. ==========================================START OF PAGE 13====== who was concerned, not about investors, but how he could protect himself. (Div. Ex. 51 at 119-25.) There is not a shred of evidence to support Mr. Thornton s counsel s argument that Griseuk was a wake up call, and whereas [Mr. Thornton] may not have gotten [the message] up until [Ms. Griseuk], he certainly got it afterward. (Tr. 32-33; Resp. Brief at 3.) The evidence is that Mr. Thornton continues to operate as he has in the past, and that he did not make the operational changes that he represented to the NASD in 1994 that he had made. (Div. Ex. 15 at 3.) Moreover, at the hearing on October 7, 1996, Mr. Thornton admitted that a new complaint was pending against Retirement in Arizona because of the activities of a registered representative whom he had allowed to park his license with Retirement until he could go on and start his own firm. -[14]- (Tr. 118-19.) First Securities Transfer Systems, Inc., 60 SEC Docket 441, 448 (Sept. 1, 1995), is distinguishable because it involved fraudulent conduct, but similar in that the Commission imposed a bar and a steep monetary penalty to stress the obligation to comply with the securities laws and noted respondents long history of securities law violations and that past sanctions were ineffective. Because Mr. Thornton refuses to acknowledge that he has ever done anything wrong, the probability that he will continue violating the securities laws and regulations is almost certain. In every one of the situations enumerated above, even those where he had signed a consent, Mr. Thornton faulted the regulatory authority and attempted to excuse his actions and those of the registered representative against whom the regulatory authority made findings and took action. Mr. Thornton characterized the outcome of the Brown case as a bum rap, and he does not believe that the registered representative who paid for three investor purchases in an all-or-nothing offering so that funds were released from the escrow account before all the offering units were sold acted fraudulently. (Tr. 109-11; Invest. Tr. 25-26, 108.) Similarly, Mr. Thornton disagrees with the outcome of the Bowman case in 1992, but claims he did not appeal because the cost was $10,000, the appeal would be decided by attorneys who worked for the state, and he suspected he would not receive a fair hearing. (Tr. 47-48, 107-09.) Initially, Mr. Thornton testified that Mr. Bowman borrowed $60,000 from a next door neighbor but finally acknowledged that Georgia authorities found that Mr. Bowman received $80,000 from six investors and that he converted the money to his personal use. He insisted that the ---------FOOTNOTES---------- -[14]- Counsel evidently did not consider this complaint when he argued that Retirement had no record of misconduct related to supervision after Ms. Griseuk. (Resp. Brief at 4.) ==========================================START OF PAGE 14====== findings in the order in the Bowman case, which he consented to, are incorrect. (Tr. 104-06; Div. Ex. 3.) Mr. Thornton s most outrageous rationalization, which he has maintained since 1991, is that he is taking the heat, while he will accept some of the blame for Ms. Griseuk s illegal conduct, it was really the fault of the system because the NASD should not have granted the application he signed and allowed Ms. Griseuk to be associated with Retirement as a registered representative.-[15]- (Tr. 19-20, 97-102.) Mr. Thornton s testimony at this hearing and in the investigative phase of this proceeding belie the fact that he has been active in the securities industry for thirty years, that he held responsible positions with a registered broker-dealer, and that he holds an undergraduate degree from a respected university in the field of chemical engineering and an MBA from Stanford. In an industry that depends on the integrity of its members, I find that Mr. Thornton lies and deliberately obfuscates, and that he uses excuses such as, I just absolutely blew it, and You know, I ve said I m sorry. I don t know what else to tell you as a ruse to continue using a broker-dealer and his position in the industry to take advantage of the investing public.-[16]- (Tr. 99, 102.) Despite the regulatory findings set out in this decision, Mr. Thornton s sworn testimony in 1991 was that he had never been named as a defendant or a respondent in any action brought by any state agency or the NASD. (Invest. Tr. 13.) In 1991, Mr. Thornton testified that we re in the process of updating the compliance manual, and [w]e ll be rewriting this entire supervisory document. (Invest. Tr. 98-103.) I find that Mr. Thornton gave blatantly untruthful testimony under oath at the hearing on October 7, 1996, when he claimed that Retirement s compliance manual had been updated because it is absurd to assume that Respondents would have done so and then failed to bring copies to the hearing and introduced them in evidence. (Tr. 80- 82.) According to counsel, I regret I don t have them with me. (Tr. 33.) Respondents did not seek to submit copies as a late- filed exhibit. When Mr. Thornton settled with the NASD DBCC in June 1994, he represented that Retirement had taken steps to assure that ---------FOOTNOTES---------- -[15]- Mr. Thornton has not changed his apparent view expressed in 1991 that registration assures compliance by registered representatives. (Invest. Tr. 106-12.) -[16]- Respondent has offered nothing to support his counsel s statement that he is a man of personal integrity, and this record supports a contrary conclusion. (Tr. 19, 37.) ==========================================START OF PAGE 15====== such action would not recur, that it had reviewed and revised its procedures and had retained new personnel to assure proper supervision and training. (Div. Ex. 15 at 3.) Contrary to these claims, at the hearing in this proceeding in October 1996, Mr. Thornton acknowledged that he was the still the sole person at Retirement in charge of compliance, and the compliance manual in evidence gives responsibility for supervision to the president only.-[17]- (Div. Ex. 29 at 11-12; Tr. 82-83, 89.) Based on undisputed evidence, including the fact that Retirement s headquarters staff in Houston consists of Mr. Thornton, an office manager, an assistant manager, and a clerical employee, which is basically what it had in 1991, I find that the firm has not added any new personnel to assure supervision and training since 1994. Retirement provides little, if any, service to its registered representatives. It receives fifteen to twenty percent of representatives gross commissions for recommending a product line that Mr. Thornton selects consisting of investments in mutual funds, limited partnerships, and leasing equipment investments designed to earn a twelve percent annual yield (Tr. 92-96, 127-28.) According to Mr. Thornton, Retirement s product line is a list of investments, not a list of securities: It s whatever the investor might buy. For example, we might do the due diligence on a public program and rate it compared to other public programs. . . . A public program is where a firm has gone to the SEC and gotten national approval of the books and the offering memorandum that s been not checked as a recommendation of the investment but just said the book is accurate. . . . We would judge that book compared to another similar product and say, For these conditions, we think this one is better. . . . We don t do stocks. We do, we would evaluate in our limited ability to evaluate a mutual fund performance, money manager performance, partnership performance, leasing equipment performance, so we have an approved product list that the rep can only sell off that list. -[18]- ---------FOOTNOTES---------- -[17]- Mr. Thornton did not explain the contradiction when he also testified that Alan Snelling, a registered representative in Dallas, is a licensed principal and does preliminary checking for the Dallas office, and that the compliance manual needs to be changed to show that Mr. Snelling has a role in supervision. (Tr. 91.) -[18]- This response and many of Mr. Thornton s statements raise questions as to his meaning and understanding. For example Mr. Thornton defines a fixed asset as one like a CD or a bond so the face value is fixed. (Invest. Tr. 72.) ==========================================START OF PAGE 16====== (Tr. 94-96.) Retirement has no research department or internal audit department. (Invest. Tr. 96.) Mr. Thornton consistently used the pronoun we to describe who performed the functions of due diligence, compliance, and supervision at Retirement. Only when questioned did he acknowledge that he alone did all these things. (Tr. 127; Invest. Tr. 80, 95.) The NASD has described Retirement s business as selling direct participation programs and has noted that the firm operates pursuant to the exemption contained in Exchange Act Rule 15c3-3k(2)(ii), and had a minimum net capital requirement of $5,000. (Div. Ex. 16.) In 1995, fifty-five percent of Retirement s revenue, or $708,712, came from transactions in mutual funds, and thirty-one percent, or $400,621, came from transactions in limited partnerships. (Resp. Ex. B.) I reject Mr. Thornton s defense that because he has been found only to have committed technical violations and has he not been found to have defrauded investors is a mitigating factor in determining the sanction necessary to protect the public interest. The evidence is that Mr. Thornton used Retirement to allow almost any registered representative to stay active in the industry, and that these representatives, most prominently and recently Ms. Griseuk, committed egregious fraud on the investing public.-[19]- (Div. Ex. 53 at 38-41; Tr. 118-20.) Ms. Griseuk was able to commit fraud in the sale of almost $5 million dollars worth of illiquid limited partnerships to predominantly elderly clients because Mr. Thornton allowed her to associate with Retirement.-[20]- Broker-dealer firms organized in one or two person offices must meet the same high standards of supervision as traditionally organized firms. Royal Alliance Associates, Inc., 63 SEC Docket 1843, 1849 (Jan. 15, 1997). Retirement admits that it failed to meet this standard in 1988 through 1991, when it had about 50 registered representatives in five or six states. Mr. Thornton ---------FOOTNOTES---------- -[19]- Mr. Thornton allows registered representatives who do not want to lose their license due to inactivity to associate with Retirement. He estimated in 1991 that forty-five percent of Retirement s registered representatives were non-active. (Invest. Tr. 33-39; Tr. 118-19) -[20]- Investors will not get any of their commissions returned since the Commission waived all but $20,000 of the $370,000 it ordered Ms. Griseuk to disgorge because of her demonstrated inability to pay. (Div. Ex. 40 at 4.) In the Bowman case, Mr. Thornton failed to supervise Mr. Bowman who caused investors to lose $80,000. (Div. Ex. 3.) ==========================================START OF PAGE 17====== had minimal contact with registered representatives associated with Retirement, and registered representatives did not to have any contact with Retirement other than filing their registration through the firm. (Div. Ex. 53 at 38.) In 1991, Mr. Thornton was not certain how many registered representatives were associated with Retirement. (Invest. Tr. 32-38.) The evidence is that Mr. Thornton continues to fail reasonably to supervise Retirement s associated registered representatives because he is not doing anything differently in 1996 than he did in 1991 when he admits he failed reasonably to supervise Ms. Griseuk. Mr. Thornton stated that his supervision was better in 1996 because he had a better system, but he did not provide any details and did not introduce any evidence to support his statement. (Tr. 82-83, 97.) Moreover, in 1996 Mr. Thornton acknowledged that he has only performed limited site visits to the offices outside Houston; that we have not done spot checks to local offices very often; and that he has not checked very often that customers are satisfied with the representatives in that they received what they thought they were purchasing. (Tr. 120-25.) Based on Mr. Thornton s testimony, especially those portions where he agrees that he has not made surprise visits to Retirement s many one or two person offices, and the fact that Retirement s compliance manual does not provide for surprise inspections or for heightened supervision of registered representatives who have evidenced prior misconduct, I find that Mr. Thornton did not reasonably supervise Retirement s registered representatives in 1996.-[21]- (Tr. 83-84.) Both the Commission and the NASD have recognized a need for surprise inspections of broker-dealer offices that are operated by one or two representatives. See, e.g., Consolidated Investment Services, 61 SEC Docket 20, 26-27 (Jan. 5, 1996) (broker-dealer supervision of a small office run by a single registered representative inadequate without surprise inspections). On September 12, 1986, the NASD, in a distribution to all members, noted that experience has shown a pattern of rule violations stemming from NASD members employing registered persons who engage in securities-related activities at locations away from members offices. It urged several preventive measures, none of which Mr. Thornton used, including unannounced visits that included review of customer account documentation and other books and records, meetings with representatives to discuss products being sold and methods being used, and an examination of correspondence and sales literature. ---------FOOTNOTES---------- -[21]- Mr. Thornton has given contradictory testimony on whether he made unannounced visits to Ms. Griseuk s office in Jacksonville, Florida. During the investigation of these matters he stated that he did not make any unannounced visits. (Tr. 84- 89; Invest. Tr. 63-64.) ==========================================START OF PAGE 18====== (Div. Ex. 20.) The present situation is aggravated by the fact that in 1990-91 the broker-dealer had 40 to 50 registered representatives in five or six states, and in 1996 it had 64 or 68 representatives located in 32 cities in 11 states in 1996. (Resp. Ex. B; Tr. 89-92.) I am unpersuaded by Respondents defenses that Mr. Thornton cooperated with the Division in the Griseuk matter, a sanction will impact Retirement s innocent employees, and barring Mr. Thornton from the securities industry will prevent him from making a living. By cooperating in a Commission investigation, Mr. Thornton was only doing what was required. I question Mr. Thornton s concern for his employees since he has been on notice since at least July 25, 1996, that a sanction might issue against him, yet in October 1996 he had not even arranged for a replacement if he should be barred from supervisory responsibilities.-[22]- (Tr. 113.) This record demonstrates that the public interest in not allowing Mr. Thornton to participate in the industry outweighs his desire to participate. Finally, I find that this record as a whole demonstrates that the sanction imposed is necessary to deter Mr. Thornton and others who treat so casually the securities laws and regulations. Record Certification Pursuant to Rule 351(b) of the Commission s Rules of Practice, 17 C.F.R.  201.351(b) (1996), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on December 10, 1996. Order Based on the findings and conclusions set forth above, pursuant to Sections 15(b), 19(h), and 21B of the Exchange Act, I ORDER that: (1) Retirement s broker-dealer registration is revoked and it is required to pay a civil money penalty of $50,000, and ---------FOOTNOTES---------- -[22]- The headquarters employees in 1996 are different people than worked in Retirement s office in 1991. Compare Invest. Tr. 21-23 and Tr. 69-71, 103. ==========================================START OF PAGE 19====== (2) Mr. Thornton is barred from being associated with a broker or dealer, from being associated with a member of a national securities exchange or registered securities association, and from participating in an offering of penny stock, and he is required to pay a civil money penalty of $5,000.-[23]- 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.  201.360 (1996). 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. _____________________________ Brenda P. Murray Chief Administrative Law Judge ---------FOOTNOTES---------- -[23]- Payment should be made on the first day after this decision becomes final. Such payment shall be: (i) made by United States postal money order, certified check, bank cashier s check, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Office of the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (iv) submitted under cover letter which identifies James Thornton, and Payne & Thornton, Inc., d/b/a Retirement Investment Group, as Respondents in this proceeding, and 3-9046 as the file number of these proceedings.