INITIAL DECISION RELEASE NO. 138 ADMINISTRATIVE PROCEEDING FILE NO. 3-8873 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. _______________________________ In the Matter of : : INITIAL DECISION NICHOLAS P. HOWARD : March 24, 1999 _______________________________ APPEARANCES: Yuri B. Zelinsky and Laura B. Josephs for the Division of Enforcement, Securities and Exchange Commission. Richard D. Marshall, William O. Purcell, and Alan S. Brodherson for Respondent Nicholas P. Howard. BEFORE: Carol Fox Foelak, Administrative Law Judge SUMMARY Nicholas Howard was charged with aiding and abetting violations of the antifraud provisions and other securities laws. His employer, James Capel, Inc. (JCI), and New Europe Hotels (NEH) committed the primary violations in connection with JCI’s "best efforts" marketing of two private placements of NEH stock. Howard was in charge of marketing the offerings. JCI and NEH violated Exchange Act Rule 10b-9 because the first, "part or none," offering was closed without receiving the required minimum proceeds from bona fide sales. JCI itself purchased shares to reach the minimum, and another investor’s purchase was financed from the proceeds of the offering through a loan scheme approved by JCI and NEH’s board of directors. Subscribers in neither offering were informed of the irregularities, which constituted material misrepresentations and omissions. Additionally, JCI sold NEH shares to a mutual fund to which it was an investment adviser, which violated Section 17(a) of the Investment Company Act. This Initial Decision concludes that Howard’s actions substantially assisted JCI’s and NEH’s violations. For example, he informed subscribers in the first offering that JCI was planning to invest but not that JCI’s investment would be counted toward the minimum; as an NEH director he voted to approve the loan scheme. The Decision concludes that he did not know that his role was part of an overall activity that was improper, but that he was reckless in not knowing this. On the basis of his substantial assistance and reckless lack of knowledge, he aided and abetted JCI’s and NEH’s violations. The Decision orders him to cease and desist from such violations, suspends him for three months from association with a broker-dealer, and orders a $50,000 penalty. I. INTRODUCTION The Securities and Exchange Commission (Commission) initiated this proceeding by an Order Instituting Proceedings (OIP) on October 30, 1995, pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b)(6) and 21(C) of the Securities Exchange Act of 1934 (Exchange Act). The OIP alleges that in 1990 and 1991 Nicholas P. Howard willfully aided and abetted and caused violations by New Europe Hotels (NEH) of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-9 thereunder, and violations by James Capel Inc. (JCI) of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, Rules 10b-5 and 10b-9 thereunder, and Section 17(a) of the Investment Company Act of 1940 (Investment Company Act), in connection with two private placements by JCI of NEH securities. I held a hearing in New York City on April 9, 10, 11, 12, 15, and 16, 1996, to determine whether the allegations in the OIP were true and what, if any, sanctions are appropriate against Howard in the public interest. The Division of Enforcement (Division) called seven witnesses from whom testimony was taken, including Respondent Howard. Respondent’s counsel called three witnesses, including Respondent Howard. A large number of exhibits were admitted into evidence.[1] My findings and conclusions are based on the record. Pursuant to the Administrative Procedure Act,[2] I considered the following post-hearing pleadings: (a) the Division’s June 30, 1996, Proposed Findings of Fact and Conclusions of Law and Post- Hearing Brief; (b) the Respondent’s August 13, 1996, Proposed Findings of Fact and Conclusions of Law and Posthearing Brief; and (c) the Division’s August 27, 1996, Objections to Respondent’s Proposed Findings of Fact and Conclusions of Law and Reply Brief. I applied preponderance of the evidence as the standard of proof. I considered and rejected all arguments and proposed findings that are inconsistent with this decision. The Division seeks a cease and desist order pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act; a suspension of at least nine months pursuant to Section 15(b)(6) of the Exchange Act; and a money penalty in an unspecified amount pursuant to Section 21(B) of the Exchange Act. Howard contends that the proceeding should be dismissed. II. FINDINGS OF FACT A. Respondent Howard was born in Malta in 1958. (Div. Ex. 28 at 5.) He received a B.A. degree in jurisprudence from Oxford University in 1980 and took the solicitors exams in London in 1981. (Tr. 211- 12; Div. Ex. 28 at 5.) He started work as an articled clerk in London but left before completing the two year term necessary to qualify as a lawyer. (Tr. 211-12; Div. Ex. 28 at 5.) He joined Republic Bank Corporation of Texas in London in 1982 as a credit analyst; after moving to Texas in 1984 and completing a formal credit training program, he became a junior lender in the bank’s international department. (Tr. 212-13.) In 1986 he joined National Westminster Bank in Dallas, where his responsibilities focused on the bank’s marketing and corporate lending activities. (Tr. 213.) Howard began working in the securities industry in 1987 when he joined JCI, a registered broker-dealer located in New York City. (Tr. 214; Div. Ex. 28 at 6, Div. Ex. 102 at Stip. 1; Resp. Ex. 97.) JCI’s parent is James Capel & Company, Ltd. (JCC), a securities brokerage firm in London; another affiliate is Van Meer James Capel N.V. (VMJC), a securities brokerage firm in the Netherlands. (Tr. 13; Div. Ex. 102 at Stip. 2.) JCC, VMJC, and JCI are collectively referred to as the Capel Group. (Tr. 13; Div. Ex. 102 at Stip. 3.) The Capel Group is part of the Hongkong Shanghai Bank Corp., which also includes the Marine Midland Bank. (Tr. 12-13; Resp. Ex. 97 at 7.) Howard passed the series 7 examination in 1987 after joining JCI. (Tr. 218-19.) His job was to market European equity securities to American and Canadian institutional investors. (Tr. 214-15.) In 1990 he became the head of that effort, with three people reporting to him; he reported to Peter Green, the president of JCI. (Tr. 221, 357.) He became a member of JCI’s board of directors, but Green required him to step down after a short time because he failed to pass the series 24 examination. (Tr. 224-25; Div. Ex. 102 at Stip. 18.) In late 1991 Howard was promoted to head international sales at JCI, in charge of marketing Japanese, British, Latin American, and European securities to JCI’s North American client base of approximately 150 institutional investors. (Tr. 339-40; Div. Ex. 28 at 7-8.) About twenty-five people, including salespeople, secretaries, and junior associates, reported to him. (Tr. 340; Div. Ex. 28 at 8.) Howard was asked to resign from JCI because of the failure of NEH. (Tr. 430.) In 1993 he joined Lehman Brothers and is a senior vice-president and the head of international equity sales and sales trading at the firm. (Tr. 407-08.) Twenty-five sales people report to him. (Tr. 408.) **FOOTNOTES** [1]: Citations to exhibits offered by the Division and the Respondent and to the transcript of the hearing will be noted as "Div. Ex. __," "Resp. Ex. __," and "Tr. __," respectively. [2]: See, 5 U.S.C. § 557(c). 1 B. The First Offering 1. Howard’s Idea In 1990, Howard’s institutional customers were interested in investment opportunities created by the fall of communism in eastern Europe. (Tr. 227-28.) Howard believed that westerners would flock to the region, creating a demand for new hotels; the customers responded positively to his idea of an investment product that focused on hotels in eastern Europe. (Tr. 227-29; Div. Ex. 28 at 14.) Howard’s idea eventually became NEH, a Netherlands Antilles corporation, incorporated on December 20, 1990, whose business plan was to develop hotel properties in eastern and central Europe. (Tr. 26-27, 227-28; Div. Ex. 3, Div. Ex. 102 at Stip. 6.) NEH was listed on the Amsterdam Stock Exchange on January 4, 1991. (Div. Ex. 102 at Stip. 17.) Howard consulted Albert DeVaul, the chairman and chief executive officer of IDG Development Corporation (IDG), a real estate development company, about the feasibility of developing hotels in eastern Europe. (Tr. 25, 226-228, 362; Div. Ex. 102 at Stip. 25.) Howard’s wife had introduced him to DeVaul during the summer of 1990. (Tr. 226, 362; Div. Ex. 28 at 13.) IDG had retained her interior design firm, Daiker-Howard, Inc. (Daiker- Howard), to work on hotel projects it was developing.[3] (Tr. 25, 226, 362; Div. Ex. 28 at 13, 46.) Howard concluded that DeVaul had a good record as a developer and introduced him to Joel Matcovsky,[4] the head of JCI’s corporate finance department,[5] to discuss the possibility of going forward with NEH as a securities offering. (Tr. 227-29, 362.) The corporate finance department then took steps to move NEH from a concept to a product. (Tr. 28-29.) Matcovsky described the NEH concept to senior officials of the Capel Group and arranged an August 28, 1990, meeting at the Savoy Hotel in London to present the proposal. (Tr. 36-41; Div. Ex. 80.) The meeting was attended by Howard, Matcovsky, Gerkin, Henderson, and DeVaul, as well as James Fergusson, one of two co- chairmen of JCC, Duncan Penrose, the Capel Group’s worldwide head of new equity issues, Han Vermeullen of VMJC, and others. (Tr. 39-44, 233-34, 672.) DeVaul presented the NEH proposal, and the Capel Group officials responded positively. (Tr. 41-42, 44, 235.) On August 29 Howard and Henderson met with Anthony Robson, the executive vice-president of IDG and discussed the structure, organization, and marketing of NEH. (Div. Ex. 77.) Thereafter NEH became a real project at JCI, which was in the "driver’s seat" but shared the deal with VMJC and Vermeullen, who would take NEH public on the Amsterdam stock exchange. (Tr. 45.) 2. The Offering JCI sold NEH common stock in the United States in two private placements which closed in January (First Offering) and November of 1991 (Second Offering). (Div. Ex. 102 at Stips. 16, 52.) JCI was the exclusive selling agent in the U.S. for the NEH offerings, and its affiliates were underwriters for the offerings in Europe. (Div. Ex. 102 at Stip. 11.) The first offering, which closed January 2, 1991, was offered to investors on a "part or none" basis.[6] (Div. Ex. 1 at 2, 10, Div. Ex. 3 at 2, 10, Div. Ex. 102 at Stips. 12, 16.) It had two components, the "International Offering" and the "U.S. Placement." (Div. Ex. 1 at 1.) a. Offering Documents JCI retained the Rogers & Wells law firm to prepare offering documents for use in the U.S., while VMJC prepared other documentation in Amsterdam. (Tr. 50-51, 183, 239, 366-67.) David Scherl, an associate in Rogers & Wells’ corporate department, drafted documents under the supervision and review of Leonard Mackey,[7] a partner at the firm. (Tr. 557-60, 621, 623- 24.) Henderson’s role in drafting was restricted to supplying information for descriptive paragraphs, for example about IDG’s past activities, to Rogers & Wells. (Tr. 493.) Henderson worked full time on the NEH deal and facilitated the flow of documents and information among JCI, VMJC, IDG and the attorneys. (Tr. 47-48, 492-93, 560; Div. Ex. 28 at 16.) Henderson and, to a lesser extent, Matcovsky were the contacts between JCI and Rogers & Wells. (Tr. 493, 559.) By October 1990 Rogers & Wells began forwarding drafts of the offering documents to Henderson. (Tr. 367, 493.) Henderson distributed the drafts to various JCI and IDG personnel, incorporated any comments into revised drafts, and returned them to Rogers & Wells. (Tr. 367, 492, 493-94, 496-98.) Howard had no particular role in this process but was kept in the picture. (Tr. 48-49, 54, 58, 127-28, 238-40, 366-69, 491-98.) Howard was consulted about marketing approach, for example, whether hotels should be confined to eastern Europe and exclude Russia to best appeal to investors. (Tr. 48-49, 497.) Offering documents for the U.S. Placement included the November 12, 1990, Preliminary Offering Memorandum (POM) and the December 21, 1990, United States Direct Placement and Offering Memoranda. (Div. Exs. 1-3.) JCI marketed the U.S. Placement to institutional investors in the United States while its affiliates within the Capel Group marketed the International Offering to investors who were not citizens, residents, or entities of the United States. (Div. Ex. 1 at 1.) The POM stated that JCI would offer NEH common stock on a "best efforts, part or none" basis for 20 Deutsche Marks (DM) per share. (Div. Ex. 1 at 2.) The maximum number of shares offered was 5,000,000, and the minimum, 2,500,000. (Div. Ex. 1 at 2.) Subscribers were required to deliver payment for their shares in immediately available funds to JCI no later than five business days prior to the closing date, December 17, 1990, of the first offering. (Div. Ex. 1 at 2, 39.) The POM stated, "[i]f the Offering is terminated . . . the purchase price. . . will be returned to . . . investor[s] as soon as practicable." (Div. Ex. 1 at 39-40.) JCI’s mailing department sent copies of the POM to its mailing list of about 150 institutional investors in North America. (Tr. 243, 252-53, 500-01; Div. Ex. 88 at 31-34.) The December 21 Offering Memorandum lowered the minimum to 2,000,000 shares and postponed the payment, settlement and closing dates, but otherwise contained the same representations as to its "part or none" character and return of investor funds. (Div. Ex. 3 at 2, 10, 42.) The January 2, 1991, Placement Agreement between JCI and NEH designated JCI as the exclusive selling agent for the U.S. Placement of NEH securities. (Div. Ex. 4 at 2.) JCI agreed to market the shares of NEH common stock using its "reasonable best efforts, part or none" to find purchasers for the shares at 20 DM per share. (Div. Ex. 4 at 2.) The Placement Agreement provided that if subscriptions for at least 2,000,000 shares (40,000,000 DM) had not been received and accepted by January 2, 1991, no shares would be issued and any funds received from subscribers would be returned to them in full. (Div. Ex. 4 at 3, 10.) NEH agreed to pay JCI a commission of one DM for each share sold in the first offering and to reimburse JCI for up to 1,000,000 DM for expenses. (Div. Ex. 4 at 12-13.) b. Marketing JCI marketed the U.S. Placement in November and December 1990. (Tr. 64.) Howard’s group was primarily responsible for marketing it. (Tr. 65, 74-75, 133, 253.) Howard telephoned American institutional investors and solicited them to purchase NEH stock. (Tr. 280; Div. Ex. 28 at 20-21; Div. Ex. 81; Div. Ex. 88 at 25-26; Div. Ex. 89.) Howard also arranged road shows at which NEH management presented its business plan to potential investors. (Tr. 64-65, 253-55, 673-74; Div. Exs. 82-83.) These were large institutional investors with billions of dollars under management. (Tr. 328- 31; Div. Exs. 67, 68, 81, 82.) Howard planned the logistics and message of the road shows, and corporate finance trained and rehearsed management for its presentations. (Tr. 253-55.) Howard attended road shows and distributed copies of the POM to prospective investors who requested them. (Tr. 256, 674-75; Div. Exs. 82-83.) Howard opined that such institutional investors rely on offering documents, not the salesman, for information about an offering. (Tr. 331.) Howard was in contact with the twenty-five or thirty potential investors that expressed interest in the offering. (Tr. 283-84.) Howard skimmed through the POM but did not read it closely. (Tr. 243, 247-248.) Instead, he relied on a sales brief (or sales memorandum or talk sheet), a two or three page summary of the deal. (Tr. 243, 504.) Henderson, with contributions from Matcovsky and Howard, prepared the sales brief. (Tr. 504.) Howard opined that salesmen usually rely on the sales brief and do not read the offering document in detail. (Tr. 243.) Howard relied on the corporate finance department and outside counsel for the accuracy of the contents of the offering documents and sales brief. (Tr. 251, 262-63, 317.) He did not ask anyone whether there were any specific material facts about the terms of the offering that he needed to be aware of. (Tr. 261-62.) Neither outside counsel nor Matcovsky or anyone else at JCI explained the precise legal requirements of a part or none offering or that there were certain sales that could not be counted toward the minimum. (Tr. 369-71.) There was no compliance handbook at JCI. (Tr. 428-29.) Sales lagged, possibly due to unfavorable conditions in the securities markets relating to the Persian Gulf war. (Tr. 67-68, 75, 275-76; Div. Ex. 28 at 21, Div. Ex. 75 at 7.) Eventually the Capel Group lowered the minimum to 2,000,000 shares and extended the subscription deadline. (Tr. 71-72; Div. Ex. 3, Div. Ex. 102 at Stips. 13, 14, 56.) Howard understood that lowering the minimum was a material event, and he disclosed it to investors. (Tr. 276; Div. Ex. 28 at 21.) Sales totals remained below expectations. (Tr. 75, 279; Div. Ex. 28 at 21.) Eventually, concern grew at JCI and within the Capel Group that the lowered minimum would not be met by the close of the subscription period. (Tr. 77; Div. Ex. 28 at 21.) By this point, the offering had been the subject of media attention. (Tr. 76-77, 279-80; Div. Ex. 28 at 24.) Senior management of the Capel Group joined the marketing effort in a final effort to place the offering. (Tr. 279-80, 374-75; Div. Ex. 28 at 24-25.) Penrose, in London, kept the "book," recording subscription totals. (Tr. 126, 178.) Howard recorded orders he received at JCI, notified Green and Matcovsky of the subscriptions and forwarded the information to Penrose. (Tr. 372; Div. Ex. 32; Div. Ex. 88 at 26.) Penrose consolidated the order information and disseminated worldwide sales totals. (Tr. 277-78.) At the end of the subscription period Howard received worldwide sales totals daily. (Tr. 278.) Despite the efforts of its senior management, the Capel Group failed to find investors willing to subscribe to all 2,000,000 shares. (Div. Ex. 28 at 25, Div. Ex. 102 at Stip. 21.) 3. The Capel Group’s Shares Faced with an impending subscription deadline, the Capel Group decided to obtain, for its own accounts, sufficient shares to close the first offering. (Tr. 375.) On December 20, 1990, before the end of the subscription period, the Capel Group took 100,000 shares in lieu of its 2,000,000 DM fee for acting as the worldwide selling agent and paid 1,113,000 DM for the remaining 55,650 shares. (Div. Ex. 102 at Stips. 22, 23; Resp. Ex. 17.) Fergusson and David Dugdale, the co-chairmen of JCC, made the decision to acquire the shares. (Tr. 123, 175, 375; Div. Ex. 28 at 25.) The 155,650 shares -- almost 8% -- were counted toward the 2,000,000 share minimum. (Div. Ex. 102 at Stip. 24.) Green informed Howard, before the end of the subscription period, of the co-chairmen’s decision. (Tr. 289; Div. Ex. 28 at 25, Div. Ex. 102 at Stip. 59.) Howard saw the Capel Group’s investment as a material event. (Tr. 282, 289.) Before the close of the offering he informed all the seven or eight subscribers and the undecided "fence sitters" that the Capel Group had decided to invest. (Tr. 282-84.) He reasoned that it was a marketing plus that the Capel Group was going to co-invest and take some risk along with the other investors. (Tr. 380.) He did not tell investors that the Capel Group’s shares would count toward the subscription minimum. (Tr. 287.) Howard regarded the minimum only as a target that needed to be met so that the business would have sufficient capital to go forward; he did not understand that the minimum also assures investors that other investors consider the offering price appropriate or the concept of a bona fide investor. (Tr. 248-49; 287-89; 369-71.) Howard testified that he believed that the lawyers had been consulted and that there were no legal problems with the Capel Group’s actions. (Tr. 377-79, 435-37.) His testimony is to some extent inconsistent with his August 5, 1993, investigative testimony that he did not know whether counsel had been consulted and that it was Matcovsky’s area of responsibility. (Div. Ex. 28 at 26.) Nonetheless it is clear that he believed there were no legal problems. He relied on Matcovsky and outside counsel to check the legality of JCI’s actions and did not consider it his responsibility. 4. The European Warrant Fund’s Shares Prior to 1990, Howard participated in the development and creation of several fund products at JCI, including the European Warrant Fund (EWF). (Tr. 22-23, 115, 295.) The EWF is a closed end investment company designed to invest primarily in European warrants and is registered with the Commission pursuant to Section 8 of the Investment Company Act. (Tr. 295; Div. Ex. 102 at Stip. 43.) Julius Baer Securities, Inc. (Baer), served as the EWF’s investment adviser. (Div. Ex. 102 at Stip. 44.) JCI served as a subadviser to the EWF pursuant to an agreement between JCI, Baer, and the EWF dated July 16, 1990. (Div. Ex. 102 at Stip. 45.) Howard knew that JCI had a subadvisory agreement with Baer. (Tr. 297.) During the subscription period, Howard received an indication of interest on behalf of the EWF from Markus Schiegg at Baer for 30,000 NEH shares. (Tr. 383-84.) At Howard’s direction, a sales assistant filled out an order ticket which indicated that Baer had subscribed to 30,000 shares on behalf of the EWF. (Tr. 381-83; Div. Ex. 42.) Before the close of the subscription period, Howard and his staff contacted investors to confirm their subscriptions. (Tr. 384.) Howard was unable to contact Schiegg, who was on vacation, to confirm the EWF order, and asked Green how to handle the situation. (Tr. 384-85.) Green told him that JCI should purchase the stock, and to ask Schiegg if he wanted to firm up the order on his return. (Tr. 385.) Green does not recall the conversation but confirmed that Howard had no authority to commit the firm’s capital or order a trade for JCI’s book. (Tr. 358-59, 386; Div. Ex. 88 at 7-9, 15- 17.) Prior to the end of the subscription period JCI subscribed to 30,000 shares of NEH and held them in a JCI-controlled account. (Div. Ex. 102 at Stip. 46.) Howard contacted Penrose in order to update him on the Baer transaction. (Tr. 387.) He informed Penrose it was an aftermarket order; he did not tell him to count the shares toward the minimum. (Tr. 387-92; Div. Exs. 32, 81.) The 30,000 shares purchased by JCI were counted toward the minimum. (Div. Ex. 102 at Stip. 47.) On January 4, 1991, two days after the closing, JCI sold 30,000 shares of NEH to the EWF. (Div. Ex. 102 at Stip. 48.) 5. IDG’s Shares NEH retained DeVaul, IDG and IDG Europe to develop the NEH projects.[8] (Div. Ex. 102 at Stips. 25, 27-29.) As disclosed in the POM, IDG was to have been given 75,000 shares of NEH stock, free of charge, as so-called founders shares and had agreed to purchase an additional 75,000 shares at the offering price. (Div. Ex. 102 at Stips. 30-32.) However, in late December 1990, Matcovsky informed DeVaul that IDG would not receive the free founders shares because another investor objected. (Tr. 85-87; Div. Ex. 102 at Stip 33.) To receive the shares IDG had to pay an additional 1,500,000 DM, or about $1 million. (Div. Ex. 102 at Stip. 34.) DeVaul was dissatisfied with this. (Tr. 85-89.) DeVaul suggested that advancing IDG’s fees would ease the burden on his cash flow caused by paying for the shares and enable the business to go forward.[9] (Tr. 87-90.) Calls and meetings dealing with this problem included, in addition to DeVaul and Matcovsky, Henderson, Green, Webster, and Mackey; Howard was not involved in the discussions. (Tr. 90-95, 141-46, 176-77, 290-91, 565-66, 582-84.) Ultimately DeVaul proposed a plan whereby NEH would deposit an amount equal to IDG’s fees over its contract term in a bank which would use the deposit as collateral for a loan to IDG. (Tr. 93-94.) This plan was adopted, with the approval of Green and Webster.[10] (Tr. 91- 95.) The NEH Board of Managing Directors then met by telephone conference call and approved the proposal; the Board’s resolution was dated December 31, 1990. (Tr. 97-99; Div. Ex. 13.) Howard, a director,[11] was not on the conference call;[12] but Matcovsky called him later and obtained his approval. (Tr. 97-99, 141, 290-93.) Matcovsky told him that one board member, Richard R. West, Dean of the New York University Graduate School of Business, had supported a less cautious plan, to pay IDG its fees in advance outright. (Tr. 99, 180-81, 291.) Matcovsky told Howard that Rogers & Wells had been consulted and approved the advances.[13] (Tr. 181-83, 334; Div. Ex. 17 at JC 00786.) At the time, the NEH Board of Managing Directors included DeVaul, who was the chairman, and Matcovsky. (Tr. 96-97; Div. Ex. 75 at JCI-H 11308.) Accordingly, NEH assisted IDG in obtaining two loans totaling $885,000. (Div. Ex. 102 at Stip. 35.) On January 3, 1991, NEH purchased a $550,000 certificate of deposit from the Founders Bank of Arizona and assigned it to IDG Europe, which pledged it as collateral for a $525,000 loan. (Div. Ex. 102 at Stips. 36, 37.) On February 4, NEH deposited $35,000 into a money market account and purchased a $360,000 certificate of deposit from the Fountain Bank in Arizona on February 4, 1991. (Div. Ex. 102 at Stip. 38.) NEH assigned these to IDG Europe, which pledged them as collateral for a $360,000 loan from Fountain Bank to IDG Europe. (Div. Ex. 102 at Stip. 39.) These loans were used to pay for IDG’s shares. (Tr. 457-72; Div. Exs. 41, 41A.) IDG purchased 150,000 shares of NEH stock in the names of IDG Europe and of Estancia Corporation, an affiliate of IDG, owned by DeVaul; the 150,000 shares were counted toward the 2,000,000 share minimum. (Div. Ex. 102 at Stips. 40-42.) Howard did not inform investors that NEH advanced fees to IDG, which enabled it to pay for the shares it purchased, or that the shares were counted toward the subscription minimum. (Div. Ex. 28 at 44.) 6. The Closing About 15% of the NEH shares were sold in the U.S. (Tr. 160- 61, 371.) The subscription period ended December 20, payment date was December 27, settlement date was December 28, and the first offering closed January 2, 1991.[14] (Tr. 298-300, 453; Div. Ex. 3 at 5, 14, 42, Div. Ex. 102 at Stips. 14-16.) Howard played no part in the decision to close the offering. (Tr. 178.) Full payment for the subscribed shares was not received and accounted for by the closing date. (Tr. 300-04, 453-57.) Howard learned of problems on January 4 when subscribers who had attempted to pay called him to complain that they were having difficulty settling their trades.[15] (Tr. 300-02, 397.) Settlements were not his responsibility, but to assist these important customers Howard tried to help solve the problems with the aid of Charles Sugg, a JCI employee.[16] (Tr. 301-02, 397- 98, 453, 484.) Investors’ funds were not returned to them after the first offering closed; all efforts were directed to collecting or accounting for funds that were not received or accounted for. (Tr. 301-02, 453.) IDG had not made full payment for the 150,000 shares by the closing date. (Tr. 457-72; Div. Exs. 41, 41A.) C. The Second Offering NEH made a second private placement offering of its securities, which was marketed to U.S. investors by JCI in October and November 1991. (Tr. 320, 515; Div. Exs. 5-8, Div. Ex. 102 at Stip. 49.) The offering documents included an October 28, 1991, Preliminary Offering Memorandum (POM 2), a November 12, 1991, Preliminary Direct Placement Memorandum, and November 27, 1991, Direct Placement and Offering Memoranda. (Tr. 516-17; Div. Exs. 5-8.) Henderson coordinated their drafting by Rogers & Wells. (Tr. 110, 312, 515-18.) Howard skimmed through them but did not read them closely. (Tr. 317-18.) He relied on the corporate finance department and outside counsel to ensure their accuracy. (Tr. 332.) Howard outlined the script for the road show presentations. (Tr. 324-27; Div. Exs. 58, 59.) He attended the U.S. road shows and distributed copies of the POM 2 to prospective investors. (Tr. 315-21; Div. Ex. 5.) Howard also instructed his staff to distribute the final Offering Memorandum to potential investors. (Tr. 318-20.) The subscription period ended November 19, the payment and settlement dates were November 26, and the second offering closed November 27, 1991. (Div. Ex. 8 at 5; Div. Ex. 102 at Stips. 50-52.) A total of 391,000 NEH shares were sold in the second offering. (Div. Ex. 71.) Neither JCI nor NEH disclosed to investors in the second offering that the first offering had been closed through the purchase of shares by JCI and NEH’s funding of IDG’s purchase of shares, or that full payment for subscribed shares had not been received by the close of the first offering. (Div. Exs. 5-8, 58- 59.) The final Offering Memorandum, dated November 27, 1991, the date the second offering was closed, contained the first disclosure concerning IDG’s purchase. A footnote to NEH’s first audited financial statements, appended to the Offering Memorandum, stated that NEH had "pledged certain cash balances in favor of IDG Europe, Ltd;" the footnote did not disclose the date or amount of the pledge, or that the pledged funds were used as collateral for loans that IDG used to pay for shares subscribed in the first offering. (Div. Ex. 8 at JC 00518, JC 00538.) Rogers & Wells knew about the IDG loans by the time of the second offering. (Tr. 403-07, 546-48; Resp. Ex. 53, Resp. Ex. 114 at RW 0000099, 0000104.) Howard believed that the lawyers had been consulted and the loans did not raise any legal problem. (Tr. 334, 404-07.) Mackey testified that he knew about the loans in August 1991 but did not know that their purpose was to enable IDG to pay for shares until 1992. (Tr. 566.) This is not necessarily consistent with his testimony (Tr. 565-66, 582-84) that he had discussed on December 28, 1990, the possibility of a loan from the Hongkong Shanghai Bank or Marine Midland Bank to IDG secured by an advance of fees for the purpose of paying for its shares, but does not undercut the finding that Howard believed that the lawyers found no problem with the loans and that the offering materials contained all necessary disclosures. Howard also believed at the time of the second offering that the lawyers had been consulted concerning the Capel Group’s investment in the first offering and had approved it. (Tr. 406- 07.) D. Credibility - DeVaul’s Testimony DeVaul, a key figure in the failed enterprise, testified at the hearing. (Tr. 669-767.) Much of his testimony corroborated others’ testimony. However, no weight has been placed on his testimony as to facts that are disputed or not corroborated by credible evidence elsewhere in the record. Much of his testimony consisted of grudging monosyllabic responses to leading questions or was evasive. (Tr. 669-706 passim, 717, 751.) Also, he was unable to recall facts that he would be expected to remember, for example, that most of the NEH stock was sold outside the U.S. (Tr. 729.) Or that Richard West was, from the outset, one of five individuals who were members of the Board of Managing Directors of which DeVaul was chairman. (Tr. 740-42; Div. Ex. 3 at 26-29, Div. Ex. 29.) An example of unreliable, inconsistent, testimony concerned Howard’s role at Board meetings between the date of his resignation and its approval by the shareholders. DeVaul testified that Howard continued to vote but that his replacement also voted throughout the period. (Tr. 693, 753-55.) Whether or not either statement is true, both are not. An example of more lengthy unreliable testimony occurs at Tr. 699-705, 766. DeVaul testified that he asked Mackey at a meeting in February 1991 whether the IDG loan scheme and other transactions were legal. He testified that Mackey assured him that they were legal, that he asked Mackey for a letter to that effect, and that a letter dated September 3, 1991, was the letter Mackey provided. (Div. Ex. 101.) Mackey testified that there were no such discussions about the IDG shares during the February meeting and that the September 3, 1991, letter was in answer to an inquiry made around that time. (Tr. 830-33.) Mackey’s version is consistent with a timely reply to IDG’s request and with his billing records. (Tr. 832.) DeVaul offered no explanation of the six month gap between the alleged discussion and the letter that allegedly corroborated Mackey’s having approved the legality of the loan scheme in a discussion in February. III. CONCLUSIONS OF LAW In this section it is concluded that Howard willfully aided and abetted and caused violations by JCI and NEH of the antifraud provisions and Rule 10b-9. Additionally, he willfully aided and abetted and caused JCI’s violations of Section 17(a) of the Investment Company Act. His secondary liability is based on conclusions that he substantially assisted JCI’s and NEH’s violative conduct and that he was reckless in not knowing that his role was part of an overall activity that was improper. A. Antifraud Provisions and Rule 10b-9 The OIP charged Howard with aiding and abetting and causing violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder, commonly referred to as the antifraud provisions, as well as of Exchange Act Rule 10b-9. Section 17(a) of the Securities Act makes it unlawful "in the offer or sale of" securities, by jurisdictional means, to: 1) employ any device, scheme, or artifice to defraud, 2) obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary to make the statement made not misleading, or 3) engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe similar practices "in connection with" the purchase or sale of securities. The activities at issue in this proceeding were "in the offer or sale of" securities and "in connection with" the purchase or sale of securities, by jurisdictional means. Exchange Act Rule 10b-9 provides that "it shall constitute a ‘manipulative or deceptive device or contrivance,’ as used in section 10(b) of the Act, for any person, directly or indirectly, in connection with the offer or sale of any security, to make any representation" that a security is being offered on a "part or none" basis unless the security being offered is part of an offering being made on the condition that the consideration paid will be promptly refunded to the purchasers unless a specified number of shares are sold at a specified price within a specified time.[17] Rule 10b-9 and the antifraud provisions are violated in a part or none offering if investor funds are not returned when the required minimum proceeds are not raised by the specified time. Gallagher & Co., 50 S.E.C. 557, 564-65 (1991). The purpose of Rule 10b-9 is not only to assure that the issuer has sufficient funds to go forward with its business plan but also to give investors some reasonable indication that they are paying a fair market price; closing without bona fide sales to the public of the required minimum number of shares is therefore fraudulent. See Richard H. Morrow, Opinion of the Commission, 67 SEC Docket 2706, 2710-11 & cases cited in n.4 (Sept. 2, 1998); Requirements of Rules 10b-9 and 15c2-4 Under the Securities Exchange Act of 1934 Relating to Issuers, Underwriters and Broker-Dealers Engaged in an "All-or-None" Offering, Exchange Act Release No. 11532, 7 SEC Docket 403-04 (July 11, 1975). 1. Scienter Scienter is required to establish violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-9 thereunder; it is "a mental state embracing intent to deceive, manipulate, or defraud." Aaron v. SEC, 446 U.S. 680, 686 & n.5, 695-97 (1980); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976); Svalberg v. SEC, 876 F.2d 181, 184 (D.C. Cir. 1989).[18] Recklessness can satisfy the scienter requirement under Securities Act Section 17(a)(1) and Exchange Act Section 10(b) and Rules 10b-5 and 10b-9 thereunder. David Disner, 63 SEC Docket 2246, 2254 & n.20 (Feb. 4, 1997); Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990). See also Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981); Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir. 1980). Reckless conduct is conduct which is "‘highly unreasonable’ and which represents ‘an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.’" Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978), (quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977)). For the purposes of Rule 10b-9, it is sufficient to show that the violator "knew what they were doing and what the consequences of the actions, or inactions would be." Svalberg, 876 F.2d at 184 (citing SEC v. Falstaff Brewing Co., 629 F.2d 62, 77 (D.C. Cir. 1980). 2. Primary Violations by JCI and NEH The Respondent neither affirmatively concedes nor disputes that JCI and NEH committed the primary violations alleged. The minimum in the first offering was not achieved by the payment, settlement, or closing dates because JCI’s purchases, IDG’s purchases, which were financed by NEH, and JCI’s purchase for aftermarket sale to EWF should not have been counted toward the minimum. The Capel Group did not find public investors willing to subscribe to all 2,000,000 shares and in order to reach the subscription minimum, the Capel Group took shares in lieu of fees and purchased the unsold portion of the first offering. It also arranged for loans collateralized from NEH’s proceeds from the offering to enable IDG to purchase shares. It also counted shares that JCI purchased for aftermarket sale to the EWF toward the minimum. These were not bona fide sales for credit toward the minimum. See Gallagher & Co., 50 S.E.C. 557, 558-67 (1991) (part or none offering closed through purchase by an insider who used borrowed funds that were repaid from the offering proceeds); Svalberg, 876 F.2d at 183-84 (appeal of National Association of Securities Dealers (NASD) disciplinary action; all or none offering closed by purchase by persons associated with underwriter of almost 7% of offering); C.E. Carlson v. SEC, 859 F.2d 1429, 1431-36 (10th Cir. 1988) (entities related to underwriter and issuer purchased shares to reach minimum in part or none offering with short term loans that were repaid from offering proceeds); SEC v. Electronics Warehouse, Inc., 689 F. Supp. 53, 58-63 (D. Conn. 1988), aff’d sub nom. SEC v. Calvo, 891 F.2d 457 (2d Cir. 1989) (appearance of sales of specified minimum in part or none offering attained through deposit in escrow account of short term loans that were repaid from the offering proceeds); SEC v. Blinder, Robinson & Co., Inc., 542 F. Supp. 468, 472-80 (D.Colo. 1982), aff’d, 1983 U.S. App. LEXIS 16806; Fed. Sec. L. Rep. (CCH) P99,491 (10th Cir. Sept. 19, 1983) (purchase by underwriter financed by loans repaid from offering proceeds in all or none offering); A.J. White & Co. v. SEC, 556 F.2d 619, 621-23 (1st Cir. 1977) (half the minimum in all or none offering raised through short term bank loans rather than bona fide sales to investors). The record shows that JCI and NEH acted with the requisite scienter in entering non bona fide sales for the purpose of closing the first offering and in failing to disclose this to subscribers in the first offering and in the offering materials for the second offering.[19] It was known throughout JCI and the Capel Group that the subscription minimum of the first offering had not been reached through bona fide sales to investors by the closing date. The decision was made at the highest levels of the Capel Group to purchase sufficient NEH shares to close the first offering. The NEH board of directors approved the fee advances by NEH that enabled IDG to finance its purchase of NEH securities which were counted toward the subscription minimum, and this plan was approved by JCI. It was widely known in JCI and the Capel Group and by the NEH Board of Managing Directors, including by DeVaul and Matcovsky, that the entire subscription debt, most notably IDG’s, had not been paid by the closing date. Nonetheless neither JCI nor NEH took any steps to return subscribers’ funds. As a result, JCI and NEH violated Section 10(b) of the Exchange Act and Rule 10b-9 by failing to return investors funds after having represented to investors that the first offering would not be closed unless 2,000,000 shares had been sold and paid for by the closing date of the first offering. Additionally JCI and NEH violated the antifraud provisions by failing to disclose the circumstances surrounding the closing of the first offering and the fact that there were insufficient sales of shares to reach the specified minimum. 3. Material Misrepresentations The record also shows material misrepresentations within the meaning of Securities Act Section 17(a)(2) and Exchange Act Section 10(b) and Rule 10b-5(2) thereunder. For the reasons stated above, these were made with scienter. a. Misrepresentations The record shows that neither JCI nor NEH informed subscribers in the first offering of the share purchases that should not have been counted toward the minimum. Offering documents for the second offering did not disclose that the first offering had been closed improperly. These facts constituted intentional misstatements and omissions within the meaning of Securities Act Section 17(a)(2) and Exchange Act Rule 10b-5(2). **FOOTNOTES** [3]: Howard is a member of the board of Daiker-Howard, a private company. (Div. Ex. 28 at 11.) After the close of the first offering, Daiker-Howard contracted with NEH to provide design services on several NEH projects for approximately $350,000. (Div. Ex. 28 at 46, 49-50.) [4]: Matcovsky is a 1968 graduate of New York University Law School and a member of the New York bar. (Tr. 8-9, 15.) After working for the Commission from 1968 to 1971, he pursued a career in the securities industry. (Tr. 9-11, 156-158.) JCI hired him in 1987 to develop a corporate finance department. (Tr. 12, 17- 18.) By 1990 he was a director of JCI and in charge of its corporate finance department, which developed its own investment products and engaged in the full range of investment banking activities. (Tr. 21.) He is currently a partner of the Chatsworth Group, a consulting firm that provides financial service companies with advice on new product issues. (Tr. 14.) [5]: In addition to Matcovsky, the corporate finance department consisted of Lee Gerkin, Christopher Henderson, and Joel Schneider. (Tr. 487-88.) [6]: In a best efforts part or none, also known as a mini-max, offering, a specified minimum amount of proceeds must be raised by a specified date. If the minimum is not raised by that date, the offering expires and all funds already received must be returned to investors. If the minimum is raised by the date set forth in the offering materials, the offering may continue until a specified maximum amount of proceeds has been raised, or until the specified closing date of the offering, whichever comes first. Richard H. Morrow, 67 SEC Docket 2706, 2708 (Sept. 2, 1998). A best efforts offering contrasts with a firm commitment underwriting in which the underwriter makes an outright purchase from the issuer of the securities to be sold to the public and bears the risk of loss on any unsold portion. A best efforts offering most frequently occurs with a new company with no operating record. See John Downes & Jordan Elliot Goodman, Barron’s Dictionary of Finance and Investment Terms 47, 191 (4th ed. 1995). [7]: Leonard Mackey has been with Rogers & Wells for over twenty years. (Tr. 557.) His practice focuses on the securities laws and investment companies, and he has been involved in numerous securities offerings. (Tr. 558.) Eventually, Mackey was retained as counsel to NEH and prepared the offering documents for the second offering of NEH securities. (Tr. 186, 570.) [8]: NEH’s board of directors was dissatisfied with the services of IDG and DeVaul and was in the process of terminating their arrangements by June 1992. (Div. Ex. 75 at 6-7, 24.) [9]: There is an apparent conflict in the evidence as to whether IDG needed the money to pay for the shares or to use as working capital to enable the business to go forward. This is a distinction without a difference since money is fungible. Additionally, the loans were in fact used to pay for IDG’s shares. [10]: On December 28, 1990, Matcovsky and Gerkin discussed with Mackey the possibility of a loan from the Hongkong Shanghai Bank or Marine Midland Bank to IDG secured by an advance of fees for the purpose of paying for its shares; Mackey did not tell them that this would violate Rule 10b-9. (Tr. 141-46, 565-66, 582- 84.) [11]: Howard became an NEH director in December 1990; he attended Board meetings ex officio after his March 1991 resignation until November 1991, when his replacement, William Leary, was ratified by the shareholders. (Tr. 273, 306-310, 320-22, 364; Div. Ex. 3 at 26, Div. Exs. 29, 34, 56, Div. Ex. 75 at 3, Div. Exs. 91-92, 95, Div. Ex. 102 at Stips. 9-10; Resp. Exs. 50, 52.) Leary also attended. (Div. Exs. 56, 91; Resp. Exs. 46, 50, 52.) The minutes omit Howard from the list of directors present and list him with others "also present;" he participated in discussions but did not vote. (Div. Exs. 56, 91; Resp. Ex. 50.) DeVaul’s testimony that Howard continued to vote (which is inconsistent with his testimony that Leary voted) is rejected. (Tr. 693, 753- 55.) See the discussion, infra, of the credibility of DeVaul’s testimony. [12]: The resolution required a majority vote of those present; a majority of the Board was required for a quorum. (Div. Ex. 3 at 60.) [13]: There is a conflict in the evidence as to whether Rogers & Wells was aware of the plan. (Tr. 181-83, 566-68; Div. Ex. 17 at JC 00786; Resp. Ex. 140.) It is unnecessary to resolve the conflict to find that Howard believed that counsel had approved the plan. Also, Howard’s testimony at Tr. 334 is to some extent inconsistent with his August 5, 1993, investigative testimony that he could not be sure whether counsel was consulted. (Div. Ex. 28 at 39.) Nonetheless it is clear that Howard relied on Matcovsky and did not consider it his responsibility to check the legality of the plan. [14]: Payment date is the date by which investors must pay for their shares; settlement date is the date when investors must deliver their completed subscription agreements. (Tr. 298; Div. Ex. 3 at 5, 14, 42.) According to the POM and Offering Memorandum, JCI was entitled to extend these deadlines. (Div. Ex. 1 at 5, Div. Ex. 3 at 5, 14.) [15]: Howard was on vacation from JCI from December 22, 1990 until January 4, 1991; he and his family left for the United Kingdom December 22 and returned to the U.S. December 28. (Tr. 301, 393.) [16]: A factor that contributed to the settlement difficulties was that VMJC had instructed the Capel Group offices to inform subscribers to send their payments to the Trinkaus and Burkhardt bank in Dusseldorf, Germany. (Tr. 303.) Later during the holiday period subscribers were told to send their payments to the Midland Bank in Amsterdam. (Tr. 303-04, 473-74; Resp. Ex. 154 at 1.) [17]: A second condition is that the total amount due the seller be received by him by a specified date. Rule 10b-9(a)(2)(B). The Division does not contend that this aspect of Rule 10b-9 was violated, and there is insufficient evidence in the record to make a finding as to the date NEH received the funds raised in the first offering. But see Resp. Ex. 8, which implies that NEH received DM 38,000,000 (i.e., DM 40,000,000 less JCI’s 5% fee for which it accepted NEH shares in lieu of cash). [18]: Scienter is not required to establish a Section 17(a)(2) or (3) violation; a finding of negligence is adequate. Richard H. Morrow, 67 SEC Docket 2706, 2715 (Sept. 2, 1998) (citing Aaron, 446 U.S. at 696-97); Jay Houston Meadows, 61 SEC Docket 2444, 2453 n.16 (May 1, 1996), aff’d, 119 F.3d 1219 (5th Cir. 1997); SEC v. Steadman, 967 F.2d 636, 643 & n.5 (D.C. Cir. 1992) (citing Aaron, 446 U.S. at 701-02)); Newcome v. Esrey, 862 F.2d 1099, 1102 n.7 (4th Cir. 1988)). [19]: NEH and JCI are accountable for the actions of their responsible officers. C.E. Carlson, Inc., 859 F.2d at 1435; A.J. White & Co., 556 F.2d at 624. These included, as to JCI, Matcovsky, Howard, and others, and as to NEH, Matcovsky, Howard, DeVaul, and others. A corporation’s scienter may be imputed from that of individuals controlling it. See Blinder, Robinson & Co. 542 F. Supp. at 476 n.3 (citing SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1083, 1096-97, nn.16-18 (2nd Cir. 1972)). 2 b. Materiality The standard of materiality is whether or not a reasonable investor or prospective investor would have considered the information important in deciding whether or not to invest in NEH. See SEC v. Steadman, 967 F.2d at 643; see also Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 240 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). The misrepresentation prohibited by Rule 10b-9 is "always material." FAI Investment Analysts, Inc., 46 S.E.C. 1134, 1136 n.11 (1977). In an offering of shares in a new company with no operating record, one of investors’ major concerns is whether they are paying a fair market price. The inability of the underwriter to sell the specified minimum to bona fide investors may indicate the price is too high; thus closing an offer completed with non bona fide sales may significantly mislead the legitimate investors as to a crucial factor in their decision. A. J. White & Co., 556 F.2d at 623. The number and percentage of shares -- 335,650 shares, or about 17% -- credited toward the 2,000,000 share minimum from transactions that were not bona fide was substantial.[20] See Svalberg, 876 F.2d at 183-84 (failure to inform investors in an all or none offering that stock, amounting to 7% of offering, was purchased by persons associated with the underwriter was material); C.E. Carlson, 859 F.2d at 1435 (failure to inform investors that entities related to underwriter and issuer would purchase stock to close the offering with proceeds from the offering was material); Electronics Warehouse, Inc., 689 F. Supp. at 63 (failure to inform investors of scheme to reach minimum in part or none offering by short term loans that were repaid from offering proceeds was material); A.J. White & Co., 556 F.2d at 183 (fact that one half the minimum was raised through short term bank loans rather than bona fide sales to investors was material) . 4. Aiding and Abetting; Cause For aiding and abetting liability under the federal securities laws, three elements must be established: (1) a primary or independent securities law violation that has been committed by some other party; (2) awareness or knowledge by the aider and abettor that his or her role was part of an overall activity that was improper; and (3) that the aider and abettor knowingly and substantially assisted the conduct that constitutes the violation. Woods v. Barnett Bank, 765 F.2d 1004, 1009 (11th Cir. 1985); Investors Research v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); IIT v. Cornfield, 619 F.2d 909, 922 (2d Cir. 1980); Woodward v. Metro Bank, 522 F.2d 84, 94-97 (5th Cir. 1975); SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974); Russo Securities, Inc., 65 SEC Docket 1990, 1998 & n.16 (Oct. 1, 1997); Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff’d., 45 F.3d 1515 (11th Cir. 1995); William R. Carter, 47 S.E.C. 471, 502-03 (1981). A person cannot escape aiding and abetting liability by claiming he was ignorant of the securities laws. Sharon M. Graham and Stephen C. Voss, Opinion of the Commission, Exch. Act Rel. No. 40727, 1998 SEC LEXIS 2598, at *29 n.33 (Nov. 30, 1998). A respondent who aids and abets a violation also is a cause of the violation, within the meaning of Sections 8A of the Securities Act and 21C of the Exchange Act. Sharon M. Graham and Stephen C. Voss, Opinion of the Commission, 1998 SEC LEXIS 2598, at *30 n.35.[21] Those sections authorize the Commission to issue cease and desist orders. If it finds that a person "is violating, has violated, or is about to violate" any provision of the Acts, it may enter a cease and desist order against "such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation." Beyond its holding that a respondent who aids and abets a violation is a cause of the violation, neither the Commission nor the courts have ruled on the state of mind indicated by "knew or should have known" and whether it differs according to whether the primary violation requires scienter, negligence, or strict liability. The legislative history of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which authorized cease and desist orders in Commission administrative proceedings, is silent on this issue. The Commission has hinted at a lesser standard of culpability for "cause" than for aiding and abetting, by contrasting the "knew or should have known" language with the requirement of scienter for aiding and abetting liability. Id. However, the Commission has not decided any litigated cases in which it concluded that a respondent was a cause, by negligent acts or omissions, of securities law violations that require scienter for a primary violation. Accordingly, in analyzing Howard’s secondary liability for JCI’s and NEH’s violations of the antifraud provisions and Rule 10b-9, the same standard for state of mind will be used for determining aiding and abetting and cause. The first element, primary violations by JCI and NEH of the antifraud provisions and Rule 10b-9 has been established. The second and third elements are present as well. a. Substantial Assistance The third element, knowing and substantial assistance to the conduct that constituted the violations of the antifraud provisions and Rule 10b-9, is clearly present. Howard marketed the first offering and distributed offering materials to potential investors. While he played no part in the decision to close the first offering, he rendered substantial and knowing assistance to the improper closing and failure to return subscribers’ funds. He informed subscribers that the Capel Group was going to invest without informing them that its shares were to be counted toward the minimum in order to close the offering. He helped get subscription payments from those whose payments had not been accounted for after the improper closing which enabled NEH to retain investors’ funds despite its obligation to return them. As a director of NEH he voted to approve the loan scheme that enabled IDG to pay for its shares, in effect, out of the proceeds of the offering. Howard led the marketing effort for the second offering and distributed offering materials but omitted to disclose the circumstances surrounding the improper closing of the first offering. b. Awareness or Knowledge Howard did not know that his role was part of an overall activity that was improper. He had not learned the requirements of a part or none offering and believed that Matcovsky, higher management in the Capel Group, and outside counsel had approved actions that violated the antifraud provisions and Rule 10b-9. However, the knowledge or awareness requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or active participant. See Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990); Cornfeld, 619 F.2d at 923, 925; Rolfe, 570 F.2d at 47-48; Woodward, 522 F.2d at 97. The recklessness standard applies in this case. Howard had a duty to investigate and to disclose material facts to investors to which he was selling NEH stock; the investors’ sophistication did not lessen this duty. Hanly v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969). Howard owed a duty to NEH investors to correct any material misrepresentations and disclose all material changes in the information that he had given to investors in offering documents or otherwise. Manor Nursing, 458 F.2d at 1095-96. Also, he was an active participant in some of the acts which constituted the violations of the antifraud provisions and Rule 10b-9. He voted, as a director of NEH, to approve the IDG loan plan. He distributed offering materials, which failed to disclose the improper closing of the first offering, and otherwise participated in selling the second offering. He was also in charge of marketing the first offering and was the investors’ contact. Was Howard reckless in his lack of knowledge and thus subject to aiding and abetting and causing liability for JCI’s and NEH’s violations of the antifraud provisions and Rule 10b-9? Or was he merely negligent and absolved from secondary liability? It is concluded that he was reckless. Howard’s substantial assistance to the violative conduct flowed from his failure at the beginning to learn the requirements of the specific part or none offering that he was selling to institutional investors. He knew that it was necessary that a specified minimum of proceeds be raised to fund the business plan, but had no understanding of the second purpose of Rule 10b-9, that public investors of a company with no operational history receive some assurance that the price they paid was a fair market price for the potential risks and rewards reflecting the judgment of the other public investors.[22] He also lacked an understanding of the strict requirement that subscribers’ funds be returned if the minimum proceeds are not received timely, which was clearly violated by IDG’s late payment. Howard’s failure to learn the requirements of his offering violated his duty as a salesman. Hanly, 415 F.2d at 595-96. It may be, as he contends, that part or none offerings are infrequent and their requirements are not widely known, but it was his obligation to know the requirements of the specific offering he was selling. His opinion that sophisticated institutional investors rely on the offering materials, not the word of a salesman, is correct insofar as material facts are disclosed in the offering materials. However, the Capel Group’s investment was not disclosed in the offering materials. Nor was the fact that IDG shares counted toward the minimum were financed by the proceeds of bona fide investors. The investors could only learn about these things from their salesman, Howard. He had an obligation to inform his customers of developments that materially altered the information in the offering materials. Manor Nursing, 458 F.2d at 1095-96. Had he had the requisite knowledge about the part or none offering, he could have given subscribers complete information concerning the Capel Group’s investment. He could have asked questions. As a director of NEH he might have questioned the IDG loan scheme. He could have questioned the terms of the offering materials for the second offering. Because of his failure to learn the requirements of the part or none offering, he informed other investors that the Capel Group was purchasing shares but not that the shares, and their purchase price and waiver of fees, would be counted toward the minimum. Similarly he had no recognition of the impropriety of the bootstrap operation by which NEH in effect financed the purchase of the IDG shares from the proceeds of other investors. In sum, he had a duty to know the terms of the part or none offering. He violated that duty, so that his lack of awareness of requirements was reckless and directly related to his acts that substantially assisted the primary violations of the antifraud provisions and Rule 10b-9. Accordingly, it is concluded that Howard willfully aided and abetted and was a cause of JCI’s and NEH’s violations of the antifraud provisions and Rule 10b-9. B. Section 17(a) of the Investment Company Act The OIP charged Howard with aiding and abetting and causing JCI’s violation of Section 17(a) of the Investment Company Act. Section 17(a)(1) prohibits any affiliated person of a registered investment company acting as principal from knowingly selling securities to a registered investment company. An "affiliated person" includes any investment adviser of a registered investment company. Section 2(a)(3)(E) of the Investment Company Act. A violation of Section 17(a)(1) does not require a showing of scienter. During the period of the first offering, JCI was an investment adviser to the EWF within the meaning of Sections 2(a)(3)(E) and 17(a)(1) of the Investment Company Act by virtue of its subadvisory agreement with the EWF. JCI’s sale to the EWF of 30,000 NEH shares from the first offering violated Section 17(a)(1) of the Investment Company Act. JCI’s primary violation satisfies the first element of an aiding and abetting violation. The third element, that Howard knowingly and substantially assisted the conduct that constitutes the violation, is present. Howard accepted an order on behalf of the EWF and, when he was unable to confirm it just prior to the close of the subscription period asked Green how to handle the situation so as to keep the shares available for the order. Green then took further steps that consummated the violative transaction, ordering JCI to buy the shares and resell them to the EWF. The second element is present as well. Howard did not know that his role was part of an overall activity that was improper. However, as discussed above, the knowledge or awareness requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or active participant. Howard knew that the EWF was a registered investment company to which JCI provided investment advice and recommendations in the capacity of investment adviser. The potential for conflict of interest is obvious. As a licensed securities professional and a senior sales official of JCI, Howard was responsible for knowing the restrictions that applied to the transactions between JCI and the EWF. Howard was reckless in not knowing that the sale to the EWF was improper. Accordingly, it is concluded that Howard willfully aided and abetted and was a cause of JCI’s violation of Section 17(a) of the Investment Company Act. C. Willfulness The Division requests sanctions pursuant to Sections 8A of the Securities Act and 15(b), 21B, and 21C of the Exchange Act. A finding that the violations were willful violations is necessary to impose sanctions under Sections 15(b) and 21B of the Exchange Act. It is well settled that a finding of willfulness does not require an intent to violate, but merely an intent to do the act which constitutes a violation. Jacob Wonsover, Opinion of the Commission, Exch. Act Rel. No. 41123 at 16-20, 1999 SEC LEXIS 430 at *34-*42, (Mar. 1, 1999); Steadman v. SEC, 603 F.2d 1126, 1135 (5th Cir. 1979), aff’d on other grounds, 450 U.S. 91 (1981); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). The acts which constituted Howard’s violations were, as described above, clearly intentional. The violations were thus willful. IV. SANCTIONS The Division requests a cease and desist order; a suspension of not less than nine months from association with any broker or dealer;[23] and civil penalties of an unspecified amount. The Respondent argues that this proceeding should be dismissed. For the reasons discussed below, these sanctions will be ordered: a cease and desist order; a three month suspension from association with any broker or dealer; and $50,000 in civil penalties. **FOOTNOTES** [20]: The total includes 155,650 shares that the Capel Group took for its own account, 30,000 shares that JCI bought for aftermarket sale to the EWF, and IDG’s 150,000 shares. [21]: Accord, Richard D. Chema, Opinion of the Commission, Exch. Act. Rel. No. 40719, 1998 SEC LEXIS 2592, at *22 n.20 (Nov. 30, 1998); Adrian C. Havill, Opinion of the Commission, Exch. Act. Rel. No. 40726, 1998 SEC LEXIS 2599, at *23 n.26 (Nov. 30, 1998). [22]: The fact that IDG was asked to pay for shares originally intended to be issued free of charge because another subscriber complained should have eventually alerted Howard to the second purpose of Rule 10b-9. The complaint showed that the subscriber desired assurance that the price it was paying was a fair market price. [23]: The Division’s Post-Hearing Brief suggests a "collateral" suspension, but concludes by requesting a suspension "from association with any broker or dealer." (Div. Post-Hearing Brief at 39, 42.) In any event Howard’s misconduct is not of the nature that flows across various securities professions or is so egregious that it requires the comprehensive response of a collateral sanction in order to protect the public. Meyer Blinder, Opinion of the Commission, 65 SEC Docket 1970, 1981-82 (Oct. 1, 1997). Indeed, a collateral suspension might be oxymoronic. Id. See also, Ted Harold Westerfield, Opinion of the Commission, Exch. Act Rel. No. 41126, 1998 SEC LEXIS 433, at *20-*22 (Mar. 1, 1999). 3 A. Sanction Considerations When the Commission determines administrative sanctions, it considers: 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) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978), aff’d on other grounds, 450 U.S. 91 (1981)). The Commission determines sanctions pursuant to a public interest standard.[24] Thus, in addition to issues related to the violator, it "weigh[s] the effect of [its] action or inaction on the welfare of investors as a class and on standards of conduct in the securities business generally." Arthur Lipper Corp., 46 S.E.C. 78, 100 (1975); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). 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); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). B. Sanctions 1. Cease and Desist Pursuant to Sections 8A of the Securities Act and 21C of the Exchange Act, if the Commission finds that a person "is violating, has violated, or is about to violate" any provision of the Acts, it may enter a cease and desist order against "such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation." As concluded above, Respondent Howard was a cause of JCI’s and NEH’s violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rules 10b-5 and 10b-9 thereunder and of JCI’s violation of Investment Company Act Section 17(a). Further, the record shows a reasonable likelihood of such violations in the future.[25] The relevant factors to consider when assessing the likelihood of recurrent violation include "‘whether a defendant’s violation was isolated or part of a pattern, whether the violation was flagrant and deliberate or merely technical in nature, and whether the defendant’s business will present opportunities to violate the law in the future.’" SEC v. Steadman, 967 F. 2d 636, 648 (D.C. Cir. 1992) (quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1228 (D.C. Cir. 1989)). Howard’s violations consisted of several discrete acts and omissions over a period of several months. Thus his violations were not isolated but were part of a pattern. The violations fell between "flagrant and deliberate" and "merely technical." He presently has a position of responsibility in the securities industry at Lehman Brothers, with twenty-five sales people reporting to him, so his business will present opportunities to violate the law in the future. His failure to learn the requirements of the part or none offering he marketed or to recognize the impropriety of selling NEH shares to the EWF adds to the likelihood of future violation. Accordingly, it is appropriate to order him to cease and desist from committing or causing and violations or future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Rules 10b-5 and 10b-9 thereunder, and Investment Company Act Section 17(a). 2. Suspension The Division requests, pursuant to Section 15(b) of the Exchange Act, that Howard be suspended from association with any broker or dealer for a period of not less than nine months. Based on the factors enunciated in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), it is in the public interest to suspend Howard from association with a broker-dealer for a period of three months. This limited suspension, combined with other sanctions ordered, is an appropriate remedy and deterrent. While his violative actions continued over a period of months, his violations were not extremely egregious. Concerning scienter, Howard was reckless in not knowing that his acts contributed to JCI’s and NEH’s violations of the securities laws. He did not, however, have a high conscious intent. Because of his lack of knowledge he relied on his understanding that higher level officials at JCI and outside counsel approved such acts as the JCI investment and the IDG loan scheme and he did not question them. The position that Howard holds at Lehman Brothers presents him with the opportunity to commit violations of the securities laws in the future. Consistent with his defense of the charges against him, he has not recognized the wrongful nature of his conduct. A three month suspension is consistent with the remedies ordered in Sharon M. Graham and Stephen C. Voss, Opinion of the Commission, Exch. Act Rel. No. 40727, 1998 SEC LEXIS 2598 (Nov. 30, 1998) and Adrian C. Havill, Opinion of the Commission, Exch. Act Rel. No. 40726, 1998 SEC LEXIS 2599 (Nov. 30, 1998). In those cases respondents who aided and abetted violations of the antifraud provisions had relied on improper guidance from supervisors. 3. Civil Money Penalty Section 21B(a) of the Exchange Act authorizes the Commission to impose civil money penalties for willful violations of the Securities or Exchange Acts or rules thereunder. In considering whether a penalty is in the public interest, the Commission may consider six factors: (1) fraud, (2) harm to others, (3) unjust enrichment, (4) previous violations, (5) deterrence, and (6) such other matters as justice may require. Section 21B(c). New Allied Dev. Corp., Opinion of the Commission, 63 SEC Docket 807, 821 n.33 (Nov. 26, 1996); First Sec. Transfer Sys., Inc., Opinion of the Commission, 60 SEC Docket 441, 446-48 (Sept. 1, 1995). See also Jay Houston Meadows, Opinion of the Commission, 61 SEC Docket 2444, 2456-58 (May 1, 1996), aff’d, 119 F.3d 1219 (5th Cir. 1997); Consolidated Inv. Servs., Opinion of the Commission, 61 SEC Docket 20, 32-34 (Jan. 5, 1996). Howard willfully aided and abetted violations of the antifraud provisions and other securities laws -- Securities Act Section 17(a), Exchange Act Section 10(b) and Rules 10b-5 and 10b-9, and Investment Company Act Section 17(a). His violative actions "involved fraud [and] reckless disregard of a regulatory requirement" within the meaning of Exchange Act Section 21B(c)(1). There is no evidence in the record of unjust enrichment, or previous violations. Nor is there any evidence in the record concerning harm to others arising from his actions. A penalty is in the public interest in this case. A penalty in addition to a cease and desist order and suspension is necessary for the purpose of deterrence. See Exchange Act Section 21B(c)(5); H. Rep. 101-616 (1990). A second tier penalty is appropriate because the violative acts involved reckless disregard of a regulatory requirement. See Section 21B(b)(2). The maximum second tier penalty for a natural person for "each act or omission" is $50,000 for the violations in this proceeding.[26] Exchange Act Section 21B, like most civil penalty statutes, leaves the precise unit of violation undefined. See Colin S. Diver, The Assessment and Mitigation of Civil Money Penalties by Federal Administrative Agencies, 79 Colum. L. Rev. 1435, 1440-41 (1979). Howard’s entire course of action was in connection with marketing the shares of one corporation, NEH, and will be considered as one violation. Accordingly, a second tier penalty of $50,000 is in the public interest. V. RECORD CERTIFICATION Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I hereby certify that the record includes the items set forth as of the record index issued by the Secretary of the Commission on May 23, 1996. VI. ORDER Based on the findings and conclusions set forth above: IT IS ORDERED that, pursuant to Sections 8A of the Securities Act and 21C of the Exchange Act, Nicholas P. Howard cease and desist from committing or causing any violations or future violations of Securities Act Section 17(a), of Exchange Act Section 10(b) and Rules 10b-5 and 10b-9 thereunder, and of 17(a)(1) of the Investment Company Act. IT IS FURTHER ORDERED that, pursuant to Section 15(b) of the Exchange Act, Nicholas P. Howard be, and hereby is, suspended from association with any broker or dealer for a period of three months. IT IS FURTHER ORDERED that, pursuant to 21B of the Exchange Act, Nicholas P. Howard pay a civil penalty of $50,000. Payment of the penalty shall be made on the first day following the day this initial decision becomes final by certified check, U.S. Postal money order, bank cashier’s check or bank money order payable to the Securities and Exchange Commission. The check and a cover letter identifying the Respondent Nicholas P. Howard and Administrative Proceeding No. 3-9034, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission’s Division of Enforcement at the above address. 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. 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 **FOOTNOTES** [24]: See, e.g., Exchange Act Sections 15(b)(6)(A) and 21B(a), (c), and (d). [25]: Neither the Commission nor any court of appeals has ruled on whether the Commission must find a likelihood of future violation to issue a cease and desist order. The courts have, however, ruled that a likelihood of future violation is required when considering the cease and desist authority of other administrative agencies. See Precious Metal Associates, Inc. v. CFTC, 620 F.2d 900, 912 (1st Cir. 1980); Borg-Warner Corp. v. FTC, 746 F.2d 108, 110-11 (2d Cir. 1984); NLRB v. Savin Bus. Mach. Corp., 649 F.2d 89, 93 (1st Cir. 1981); Citizens State Bank v. FDIC, 751 F.2d 209, 214-15 & n.9 (8th Cir. 1984). Cease and desist authority was added to the sanctions available to the Commission in administrative proceedings by the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. As noted in the House Report on the legislation, other federal agencies, for example, the Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), National Labor Relations Board (NLRB), and each of the federal bank regulatory agencies, are empowered to issue cease and desist orders; a cease and desist order was described as an administrative remedy comparable to an injunction. H. Rep. 101-16, at 23-24 (1990). A likelihood of future violation is required for an injunction. SEC v. Steadman, 967 F.2d 636, 647-48 (D.C. Cir. 1992); United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953). [26]: The Commission increased the amounts for violations occurring after December 9, 1996. Adjustment to Civil Monetary Penalty Amounts, 61 Fed. Reg. 57773 (Nov. 8. 1996). 4