INITIAL DECISION RELEASE NO. 139 ADMINISTRATIVE PROCEEDING FILE NO. 3-9374 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ___________________________________ : In the Matter of : : INITIAL DECISION HUDSON INVESTORS FUND, INC., : March 30, 1999 HUDSON ADVISERS, INC., : JAVED ANVAR<1> LATEF, and : LARRY ALAN STOCKETT : ___________________________________ APPEARANCES: Thomas M. Melton and Brent R. Baker for the Division of Enforcement, Securities and Exchange Commission Steven Altman for Respondents Hudson Investors Fund, Inc., Hudson Advisers, Inc., and Javed Anver Latef Larry Alan Stockett, pro se BEFORE: G. Marvin Bober, Administrative Law Judge I. INTRODUCTION A. Procedural History The Securities and Exchange Commission ("Commission") issued its Order Instituting Proceedings ("OIP") in this matter on August 26, 1997, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Sections 9(b), 9(d), and 9(f) of the Investment Company Act of 1940 ("Company Act"), and Sections 203(e), 203(f), 203(i), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"). The Division of Enforcement ("Division") alleges as the bases for Respondents' violations of the federal securities laws that, inter alia, Respondent Larry Alan Stockett entered into certain agreements with Respondents Hudson Investors Fund, Inc., Hudson Advisers, Inc., and Javed Anver Latef (collectively "the Hudson Respondents"); that the Hudson Respondents failed to disclose to investors the existence of these agreements and the nature of their relationship with Mr. Stockett; and that Mr. Stockett improperly influenced the Hudson Respondents' investment decisions. An administrative trial was held on February 23, 24, 25 and 26, 1998, in New York, New York in order to: (i) determine whether the allegations contained in the OIP are true; (ii) provide Respondents with an opportunity to defend these allegations; and (iii) determine what, if any, sanctions are appropriate in the public interest pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Sections 9(b), 9(d), and 9(f) of the Company Act, and Sections 203(e), 203(f), 203(i), and 203(k) of the Advisers Act, including civil money penalties. At the trial, the Division called nine witnesses, including Mr. Latef and Mr. Stockett. The Division offered fifty-five exhibits at the trial and one exhibit after trial, all of which I admitted into evidence. The Hudson Respondents called three witnesses and offered four exhibits, all of which I admitted into evidence. Respondent Stockett testified on his own behalf. He offered nine exhibits at the trial and three exhibits after trial, all of which I admitted into evidence. I also admitted into evidence an organizational flow chart related to Hightec, Inc., as ALJ Exhibit 1.<2> My findings and conclusions are based on the record and my observations of the witnesses' demeanor. I applied preponderance of the evidence as the standard of proof. I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision. II. FINDINGS OF FACT A. The Hudson Entities 1. Hudson Investors Group, Inc. Respondent Javed Anver Latef and businessman Akram Choudhry were interested in investing and creating investment opportunities for others. (Tr. 797-98, 1010.) Together, they shared common investment principles. (Tr. 797-98, 1010-11.) They wanted to invest only in socially and ethically responsible companies which, for example, were not involved in tobacco, alcohol, gambling, or discriminatory interests or practices. (Tr. 797-98, 800-01, 1010-11.) Mr. Choudhry and Mr. Latef, along with some other individuals, created an investment vehicle, the Hudson Investors Group, Inc. ("Hudson Group"), which made investments with these principles in mind. (Tr. 797-98, 1010- 11.) The Hudson Group was established in about 1990 or 1991 as a private New Jersey corporation and has not been registered with the Commission. (Tr. 798-99.) Mr. Choudhry, individually and through family members, was always the largest investor in the Hudson Group and controlled the entity. 2. The Hudson Investors Fund, Inc. In 1994, after some early success with the Hudson Group, Mr. Choudhry and Mr. Latef formed a mutual fund, the Hudson Investors Fund, Inc. ("Hudson Fund" or the "Fund"), so that other individuals, some with little investment capital, who believed in the investment principles and ideals of the Hudson Group, could participate and benefit. (Tr. 1010-13, 1018-21.) According to its prospectus, the Hudson Fund "is a diversified open-end investment management company seeking as its primary objective growth of capital with production of income as a secondary objective. The Fund will seek to achieve these objectives through investment in the securities of companies which meet strict ethical standards." (Tr. 938-39; Div. Exs. 10, 11; see Tr. 1044.) The Hudson Fund has been registered with the Commission since August 1994. (See Div. Post. Brief at 2.) Mr. Latef has always been the Fund's president, and the person in charge of its operation. (Tr. 801.) Mr. Choudhry was responsible for the initial financial investment in the Fund, in the amount of $100,000, and at all relevant times held a majority of the shares of the Fund. (Tr. 801-02, 971-72, 1012-13, 1015- 16; see also Div. Ex. 87 at L.) He was not, however, involved in any of the investment decisions for the Fund, either through the Fund itself, its investment adviser, or its management company. (Tr. 1015.) The Fund's maximum net asset value has been $250,000 to $300,000 throughout its existence. (Tr. 801, 804.) a. Hudson Advisers, Inc. Hudson Advisers, Inc. ("Hudson Advisers") has been registered with the Commission as an investment adviser since March 1993. (See Div. Post. Brief at 3.) Mr. Latef owns Hudson Advisers and has always been its president. (Tr. 803; see also Tr. 156; Div. Exs. 1, 2.) Pursuant to an investment advisory agreement dated May 1, 1994, the Hudson Fund appointed Hudson Advisers<3> "to act as investment adviser to the Fund in connection with the Fund's investments." (Tr. 162; Div. Ex. 16.) Hudson Adviser's compensation was set at a percentage of the Fund's average daily net asset value, paid monthly. (Div. Ex. 16.) Mr. Latef signed the agreement on behalf of both parties. The investment advisory agreement had been renewed on a yearly basis, had not been terminated, and was in full force at the time of the trial. (Tr. 162; see Div. Ex. 16.) b. Hudson Investment Management, Inc. Hudson Investment Management, Inc. ("Hudson Management") provides management services to the Hudson Fund pursuant to a management agreement dated May 1, 1994, which Mr. Latef signed on behalf of both parties. (Tr. 160-61, 175-77, 182; Div. Ex. 17.) Mr. Latef owns Hudson Management and has always been its president. (Tr. 803.) The management agreement required the Hudson Fund to pay Hudson Management a set monthly fee for management services calculated as a percentage of the "average capital" of the Fund, and stated that the Fund "shall not be required to reimburse [Hudson Management] for any expenses incurred by [Hudson Management] in the performance of its services." (Tr. 160-61, 807; Div. Ex. 17.) No other entities provided management services to the Fund. (Tr. 160.) The management agreement was still in effect at the time of the trial and Hudson Management still provided services to the Fund pursuant to that agreement. (Tr. 161, 169.) The Hudson Fund never produced enough revenue to cover its expenses, including the fees charged by Hudson Management and Hudson Advisers for their services. (Tr. 807-08, 1021.) As such, Mr. Choudhry, initially through the Hudson Group and later individually, covered the Fund's expenses; Mr. Latef received little or no compensation as president of the Hudson Fund, Hudson Advisers, or Hudson Management;<4> and Hudson Management and Hudson Advisers waived their management fees. (Tr. 806-08, 964, 1020-21, 1028.) B. The Business Arrangement 1. Larry Alan Stockett Larry Alan Stockett is a publisher of information on initial public offerings ("IPO") and a self-described expert in the IPO field. (Tr. 17, 24, 28, 259-60, 373, 375, 378, 1074-79; see, e.g., Div. Ex. 71 at 83; Div. Ex. 75 at 83; Stockett Exs. 1A-F, 2D-E, 3B-C, 4B-C, 5C-D, 7D-F, 9A-H.) He provides investment information services, training services, data processing services, computer research, and statistical analysis to investors through various media, and promotes a stock selection program which uses a computer system to track stocks. (Tr. 20, 24-25, 29-30, 1074-79; see Div. Ex. 86.) He also created for investors an Internet database with stock and IPO information. (Tr. 1093-95; see also Div. Ex. 86.) Thousands of people apparently attended his seminars and workshops, listened to his radio program, and watched his television show. (Tr. 1075.) From at least 1994, Mr. Stockett operated this business through OTC Emerging Growth Fund, Inc. ("OTC"). As owner, president, and manager of OTC, Mr. Stockett conducted seminars around the United States for the purpose of soliciting investors who were interested in learning how to invest in IPOs. (See Div. Ex. 6 at 2; Tr. 295, 342, 396-97, 678-79.) Mr. Stockett provided the same information on a nationwide television "infomercial" that was paid for by the IPO Network, Inc. ("IPO Network"), another company owned by Mr. Stockett, and a subsidiary of OTC. (See Div. Ex. 6 at 3; Tr. 283, 342, 396-97, 724.) Essentially, OTC and the IPO Network were the same operation, and Mr. Stockett conducted the investment information activities described above through both entities. (Tr. 396-98; Div. Ex. 56 at 12-13.) Much of the funding for the two companies came from private investors. (Tr. 1072, 1089-90.) Mr. Stockett had convinced these investors that he could predict which IPOs would perform well. (Tr. 1080- 81.) a. Mr. Stockett and the Hudson Fund Michael Reis, an acquaintance of Mr. Choudhry's, knew that Mr. Choudhry and Mr. Latef were having difficulty attracting new investors to the Hudson Fund. (Tr. 1016-17.) Mr. Reis apparently discussed the Hudson Fund's troubles with an attorney named Dan Luciano. (Tr. 1016-17.) Mr. Luciano then contacted Mr. Choudhry by telephone and told him that "there was an individual who can really help the mutual fund greatly, and it was a good idea to see him and talk to him." (Tr. 1017.) That individual was Mr. Stockett. Subsequently, Mr. Stockett and Mr. Luciano met with Mr. Choudhry and Mr. Latef at Mr. Choudhry's home to discuss the Hudson Fund. (Tr. 810-11, 1017.) Mr. Latef and Mr. Choudhry wanted the Fund to grow, and were hopeful after they met Mr. Stockett that he could help do that by attracting new investors to the Fund and by providing services to Hudson Management. (Tr. 241-42, 812, 1024-25, 1046.) Mr. Stockett represented to Mr. Latef and Mr. Choudhry that he had connections with large investors who might be interested in investing in the Fund. (Tr. 812-14.) He also represented that he was going to secure a license for a stock selection software program and that he was going to market this program to financial institutions. (Tr. 816.) Mr. Stockett told Mr. Latef that he was looking for a company to utilize the program and serve as an example to others. (Tr. 816.) According to Mr. Latef, Mr. Stockett "thought that it would do well for Hudson Fund to try the system." (Tr. 816.) Mr. Latef and Mr. Choudhry decided to enter into a business arrangement with Mr. Stockett, the purpose of which was to attract new investors to the Fund, increase assets under management, improve investment selection and, overall, make the Fund successful. (Tr. 241-42, 812, 817-21, 1018, 1022-26, 1046, 1128.) The business arrangement was formalized in four written agreements signed on August 7, 1996. (Div. Exs. 18, 19, 20, 21.) The agreements would, among other things, confer ownership of Hudson Management and Hudson Advisers to Mr. Stockett upon the exercise of certain options. Mr. Stockett signed all four agreements as the president of Neuropro, Inc. ("Neuropro Nevada"), a purported Nevada corporation located at 99 Marinero Circle #201, Tiburon, California 94920, which was Mr. Stockett's home address at the time. (Tr. 292, 673-74; Div. Exs. 18, 19, 20, 21.) b. Mr. Stockett's Business Plan Mr. Stockett's business plan during this period was to expand his client base and provide to these clients a broad range of financial services and opportunities. (Tr. 811-12.) It involved purchasing companies with large member-based resources and entering into joint ventures with other companies for client services. Mr. Stockett saw the arrangement with the Hudson entities as an attractive opportunity to foster his business concerns: "I felt that, in the future I would want to offer a mutual fund to . . . clients when I got the thousands of clients as my customer base." (Tr. 20-21.) One major step in Mr. Stockett's business plan was to secure licensing rights to a trading system owned by Chris Lazarus and his company, The New Industrialist, Inc. ("The New Industrialist"). (Tr. 738-40.) The New Industrialist, located in New Jersey, published The New Industrialist magazine, which provided information to investors about securities, mutual funds, and investing, generally. (See Tr. 33, 35, 183; see, e.g., Div. Exs. 71, 75; Stockett Exs. 2A-7G.) It utilized a trading system which relied primarily on the data produced from a mainframe computer system running a software program hereinafter referred to as the "Neuropro System." (See generally, Tr. 256-57.) The New Industrialist magazine included a printout of the data produced from the Neuropro System. (See Tr. 205, 821-22.) Mr. Stockett also published his research in the magazine. (Tr. 33; Div. Ex. 71 at 83; Div. Ex. 75 at 83; Stockett Exs. 2D-E, 3B-C, 4B-C, 5C-D, 7D-F.) Approximately one week before the Neuropro Nevada contracts were executed, Mr. Stockett negotiated a contract with The New Industrialist, on behalf of the IPO Network, for licensing rights to the Neuropro System.<5> (Tr. 738-41.) Mr. Stockett intended to promote Neuropro Nevada as an investment information service which would utilize the Neuropro System.<6> (Tr. 739-40, 816.) With the Hudson Fund as a Neuropro Nevada client, Mr. Stockett could then promote Neuropro Nevada and his own investment strategy to other investors and companies using the Fund as an example. (Tr. 245-46, 816; see infra section II.B.7.) Another major step in Mr. Stockett's plan was his purchase of Hightec, Inc. ("Hightec") in November 1996. (Tr. 681.) Mr. Stockett used Hightec, a public corporation, as a holding company. Through Hightec he acquired privately held entities and booked their assets. (Tr. 352-53, 687-88.) Under Mr. Stockett's direction, Hightec purchased the IPO Network. (See Div. Ex. 56 at 12.) Hightec later targeted and purchased member-based companies, including Karate International Corporation, which became a subsidiary of Hightec, as did the IPO Network.<7> (Tr. 687, 692-93; see also ALJ Exhibit 1; Div. Ex. 9 at 12-13; Div. Ex. 56 at 12-13.) Mr. Stockett further expanded his client base and services on February 19, 1997, when he executed a Share Purchase and Settlement Agreement for Hightec's purchase of stock in S.I.N.C.L.A.R.E. Group, Inc. ("Sinclare").<8> (Stockett Ex. 16.) Sinclare became another subsidiary of Hightec. (Tr. 692-93; ALJ Exhibit 1.) Sinclare, a Canadian company, held a license from The New Industrialist to use its Neuropro System and to publish a Canadian version of The New Industrialist magazine.<9> (Tr. 30- 32, 35-40, 43-44, 204.) Flex Quote, a Sinclare software product, also used the Neuropro System. (Tr. 30-31; see also Div. Ex. 71 at 78-79; Stockett Exs. 2B-C, 5E-F, 6B-C.) Mr. Stockett became president of Sinclare upon its purchase by Hightec. (Stockett Answer at 1, dated Oct. 29, 1997; Stockett Pre. Brief at 6; Stockett Post. Brief at 8.) c. Mr. Stockett's Disciplinary History Mr. Stockett claims that he has never attempted to hide his disciplinary history. (Tr. 1082-88.) He did not, however, offer any information about his disciplinary record to Mr. Latef or Mr. Choudhry at any time during negotiation or execution of the contracts.<10> (Tr. 237, 839-40.) In fact, he has an extensive disciplinary record in the securities industry that includes: (i) a 1985 permanent injunction from the United States District Court for the Eastern District of Virginia which enjoined him from engaging in acts and practices which constitute or would constitute violations of the antifraud provisions of the federal securities laws; (ii) a 1988 permanent injunction from the State of California which enjoined him from offering to sell or selling certain securities in California and assessed civil penalties; and (iii) a 1996 cease and desist order from the State of Oregon which ordered Mr. Stockett and OTC to cease and desist from offering securities in Oregon and to pay a civil penalty. (Div. Exs. 4, 5, 6; see also Div. Ex. 9 at 15-16; Div. Ex. 56 at 15-16; Tr. 696-98.) 2. The August 7, 1996, Agreements a. The Stock Option Agreements Mr. Latef and Mr. Stockett negotiated two stock option agreements which were virtually identical. The first agreement was between Hudson Management and Neuropro Nevada, and was signed by Mr. Stockett as president of Neuropro Nevada and Mr. Latef as president of Hudson Management. (Tr. 155, 292, 824; Div. Ex. 18.) This agreement granted Neuropro Nevada an irrevocable option to acquire all of the common stock of Hudson Management for $100 for a term expiring on July 31, 2001. (Tr. 169-70; Div. Ex. 18.) The second agreement was between Hudson Advisers<11> and Neuropro Nevada, and was signed by Mr. Stockett as president of Neuropro Nevada and Mr. Latef as president of Hudson Advisers. (Tr. 156, 292, 824; Div. Ex. 19.) This agreement granted Neuropro Nevada an irrevocable option to acquire all of the common stock of Hudson Advisers for $100 for a term expiring on July 31, 2001. (Tr. 170; Div. Ex. 19.) Mr. Latef was president and sole shareholder of both Hudson Management and Hudson Advisers at the time of the agreements. (Tr. 155-56.) Both agreements included certain covenants which required Hudson Management and Hudson Advisers, respectively, to: (i) cause the Hudson Fund to remain current with all of its filings under the Company Act; (ii) receive consent from Neuropro Nevada before declaring a dividend, recapitalizing or reclassifying its capital stock, or issuing new shares; and (iii) receive consent from Neuropro Nevada before entering into any material agreement or incurring any expenditure which in the aggregate exceeded $2,000 per month. (Div. Exs. 18, 19; Tr. 271-72.) In addition, both agreements contained provisions which stated: "The option shall not entitle [Neuropro Nevada] to any of the rights (including voting rights) of a shareholder of [Hudson Management or Hudson Advisers, respectively] unless and until the option granted herein is exercised by [Neuropro Nevada]." (Div. Exs. 18, 19.) 1 b. The Service Agreement Mr. Latef and Mr. Stockett negotiated a service agreement between Neuropro Nevada, Hudson Management, and "Hudson Advisors Group, Inc.,"<12> which was signed by Mr. Stockett as president of Neuropro Nevada and by Mr. Latef as president of Hudson Management and "Hudson Advisors Group, Inc." (Div. Ex. 21; Tr. 158, 292, 824.) Pursuant to the service agreement, Neuropro Nevada contracted to provide to Hudson Management certain services, including: (i) a sample portfolio, updated monthly; (ii) a ranking, updated at least weekly, of the top five stocks in an industry; (iii) a daily list of stocks with high profit potential; and (iv) a notice, from time to time, of stocks identified as an immediate buy or sell. (Div. Ex. 21; see Tr. 686, 817-18, 821, 825.) The agreement contemplated that Neuropro Nevada would obtain the information provided to Hudson Management from a "Licensor" that was a "data processing service bureau" and which: (i) has a proprietary software, based on developed models and screens, to buy and sell initial public offering securities and (ii) is the licensee of one or more computerized stock trading systems which can be utilized as investment tools in making investment decisions of securities listed on various stock exchanges . . . . (Div. Ex. 21.) Hudson Management was required to pay Neuropro Nevada nine- tenths of the management fee which Hudson Management was authorized to charge the Hudson Fund as consideration for receipt of the services. (Div. Ex. 21.) Failure to provide these services, among other things, would be a default of the agreement and a cause for its termination. (Div. Ex. 21; see Tr. 955-56.) The agreement also stated the following: It is specifically provided that [Neuropro Nevada] will not participate in or in any way influence the management of the Fund. The use of the Services delivered by [Neuropro Nevada] will be at the sole and absolute discretion of [Hudson] Management and/or [Hudson Advisers]. [Hudson] Management and/or [Hudson Advisers] represent and acknowledge that the Services are one of the many investment tools which should be used in making an investment decision and reliance should not be placed on any one tool or research provider in making such decision. (Div. Ex. 21; see also Tr. 247-50, 824.) 2 c. The "Expense Agreement" Mr. Latef and Mr. Stockett negotiated an expense agreement between Neuropro Nevada, Hudson Management, Hudson Advisers,<13> and the Hudson Group, which was signed by Mr. Stockett as president of Neuropro Nevada and by Mr. Latef as president of Hudson Management, Hudson Advisers, and the Hudson Group. (Div. Ex. 20; Tr. 157, 292, 824.) The expense agreement was executed "In connection with the Option Agreements." (Div. Ex. 20.) Pursuant to the agreement, Neuropro Nevada contracted to "pay for the budgeted and approved costs and expenses of operating [the Hudson Fund] to the extent that [the] fees available to [Hudson Advisers] and [Hudson] Management from the Fund are not sufficient to cover such costs and expenses." (Div. Ex. 20; Tr. 822, 829-30.) Mr. Latef understood that Mr. Stockett, either individually or through one of his companies, would be responsible for paying if a deficiency existed. (Tr. 822, 828- 29.) The authorized monthly operating budget was dependent upon the Fund's net assets. If the Fund's net assets were less than $1 million, the approved monthly operating budget would be $10,000. (Div. Ex. 20; Tr. 822.) In addition, the expense agreement stated, "It is understood that [the Hudson Group] has paid for certain expenses of the Fund for years 1995 and 1996. As additional consideration, Neuropro [Nevada] will pay [the Hudson] Group the sum of Fifty Thousand Dollars ($50,000.00) concurrent with the execution hereof." (Div. Ex. 20; see Tr. 171, 293-94, 676-77.) 3. Neuropro Nevada is Dead on Arrival Mr. Latef believed that Neuropro Nevada was a valid and existing company owned and/or operated by Mr. Stockett when the contracts were signed. (Tr. 830-31.) He soon realized, however, that Neuropro Nevada was never formed as a corporation and that it did not exist at the time the contracts were signed, or at anytime thereafter.<14> (Tr. 738, 742-48, 761-66, 961-62.) Apparently, the Neuropro System was expensive to operate. Around the time Mr. Stockett was negotiating with Mr. Latef, therefore, he also was negotiating with alleged "investors" who would provide additional financing, including one investor who was going to invest $10 million into the Hudson Fund/Neuropro Nevada endeavor. (Tr. 21, 251-52, 738-40, 1129-31.) Those investors, however, never materialized. (Tr. 21, 738-40, 1129-31.) This was evident almost immediately after the agreements were signed. (Tr. 739-40.) Mr. Stockett testified that it was too costly for Neuropro Nevada to provide services to Hudson Management without the investors and the infusion of money into the Fund. (Tr. 21- 22, 255-57, 841.) According to Mr. Stockett, he then assigned his interests in the Neuropro Nevada contracts to OTC, the IPO Network, and/or Hightec.<15> (Tr. 733-34, 742-44, 753-54, 757-60.) As late as April 1997, the Internet site for the IPO Network's corporate history noted that there existed a "Neuropro contract with Hudson Investment Fund."<16> (Tr. 291-92; Div. Ex. 66.) Hightec's Private Offering Memorandum ("POM"), which was drafted by Mr. Stockett, stated that the IPO Network had contracts with the Hudson Fund and demonstrated the association through an organizational flow chart.<17> (Tr. 694; ALJ Exhibit 1; Div. Ex. 56 at second page 6, 12; see also Div. Ex. 9 at 12.) The organizational chart included in the POM indicated a control relationship between Mr. Stockett (through the IPO Network) and Hudson Management, Hudson Advisers, and the Hudson Fund, although Mr. Stockett argued otherwise.<18> (ALJ Exhibit Ex. 1; Div. Ex. 56 at second page 6; see Tr. 730-36.) Mr. Stockett never showed Mr. Latef any of the assignments. (Tr. 742-48, 764-69, 777-78.) He stated that, thereafter, he concentrated his "entire efforts on raising money for the Fund." (Tr. 22.) Meanwhile, he made payments to the Hudson Group and Hudson Management in furtherance of the business arrangement contemplated in the written agreements. (See, e.g., Tr. 252, 941-45.) 4. Conclusions About the Contracts The Respondents contend that the Neuropro Nevada agreements are unenforceable and void as a matter of law because: (i) Neuropro Nevada did not exist as a corporation or entity when the agreements were signed or at any time thereafter and (ii) Hudson Management was never provided with any services as required by the service agreement. (Tr. 250-51, 840-41, 954-56, 1127-28.) I agree that the written contracts are invalid. Nevertheless, the evidence adduced at the trial suggests that there was an implicit understanding between Mr. Stockett and the Hudson Respondents that Mr. Stockett would retain the options. For example: (i) Mr. Stockett, through OTC, made a $50,000 payment to the Hudson Group; (ii) Mr. Stockett, individually and through companies he controlled, made payments totaling $75,000 to Hudson Management; (iii) Mr. Stockett made numerous representations to third parties that he owned the Hudson Fund and/or controlled its investments; and (iv) Mr. Stockett and Mr. Latef maintained, even during the trial, that Mr. Stockett could exercise the options.<19> Mr. Stockett continued to hold the options to purchase the stock of Hudson Advisers and Hudson Management, therefore, even though he failed to: (i) incorporate Neuropro Nevada; (ii) attract the large investors to the Fund; and (iii) provide the services required under the service agreement. (See, e.g., Tr. 252, 686.) In addition, the parties had a significant interest in maintaining a business relationship. Mr. Latef and Mr. Choudhry believed that Mr. Stockett's involvement would benefit the Fund by increasing the number of its investors and, thus, increasing its assets under management. Mr. Stockett felt that he could use his relationship with the Fund to promote and foster his personal business ventures. 5. The Payments In the months following execution of the agreements, Hudson Management received various payments from Mr. Stockett. (Tr. 174-76, 180-81, 253-54, 293, 674; Div. Ex. 14 at 8-13.) Mr. Stockett, through his entities and individually, was responsible for over ninety percent of the money provided to Hudson Management from August 1996 through March 1997, which totaled approximately $75,000. (Tr. 177, 253-55, 292-93, 674.) Mr. Stockett also made a $50,000 payment to the Hudson Group on August 16, 1996.<20> (Tr. 81, 171, 174, 292-93, 674, 676-77, 726; Div. Ex. 14 at 7.) No payments were ever made by Neuropro Nevada. (Tr. 299, 941-45; see, e.g., Tr. 678-79.) Mr. Latef never refused a payment, and never told Mr. Stockett that he would refuse a payment, just because it did not come from Neuropro Nevada.<21> (Tr. 678-79, 682, 941-45.) On September 12, 1996, Mr. Stockett, through OTC, wired $10,000 into Hudson Management's account at the Bank of New York ("BONY"). (Tr. 81-82, 180-81, 295, 678, 722, 726; Div. Ex. 14 at 8.) On October 10, 1996, there was a deposit of $10,006.73, from OTC into Hudson Management's BONY account.<22> (Tr. 82, 181-82; Div. Ex. 14 at 9; see also Div. Exs. 25, 26.) On November 8, 1996, The New Industrialist wired $5,000 into Hudson Management's BONY account.<23> (Tr. 82-83, 183-84, 299, 679, 722-23, 727; Div. Ex. 14 at 10.) On December 4, The New Industrialist wired an additional $5,000 into the account. (Tr. 83-84, 185-85, 300, 723, 727; Div. Ex. 14 at 11.) On December 16, there was another deposit of $1,000 in the account, source unknown. (Tr. 83; Div. Ex. 14 at 11.) On December 20, there was a deposit of $20,000 directly from Mr. Stockett. (Tr. 83, 186, 300, 680, 728-29; Div. Ex. 14 at 11.) On February 25, 1997, there was a $10,000 deposit from Hightec into the Hudson Management account.<24> (Tr. 84, 187-88, 300, 302, 681, 723, 729; Div. Ex. 14 at 12.) On March 21, there was another $10,000 deposit from Hightec into the account.<25> (Tr. 85, 188, 307-08, 683, 723-24, 729; Div. Ex. 14 at 13.) On March 18, there was a deposit of $2,000, source unknown. (Tr. 85-86; Div. Ex. 14 at 13.) Mr. Latef claims that Mr. Stockett's payments to Hudson Management were used to pay for its expenses and were not used to pay the expenses of the Fund or Hudson Advisers. (Tr. 174-77, 181.) According to Mr. Latef, "The Fund is supposed to pay its own expenses, and it does." (Tr. 175.) He also alleges that such payments were not made pursuant to the expense agreement since that agreement was invalid. (Tr. 173-74.) Mr. Stockett testified that the actual purpose of the $50,000 payment to the Hudson Group (an additional $10,000 was allegedly paid to an attorney for fees) and the other payments to Hudson Management were for the purchase price of the options on Hudson Management and Hudson Advisers. (Tr. 293-94, 297-300, 675, 680; see Div. Exs. 18, 19, 20.) He wanted to "keep the doors of the Fund open" in order to maintain his options, and he and Mr. Latef agreed to keep the Fund going until they found a buyer. (Tr. 680-81, 963-64.) According to Mr. Latef, "We needed the help. We wanted to close it and he wanted us to continue it." (Tr. 945.) Mr. Latef stated that Mr. Stockett "wanted us to be in business until such time where he can form a group that he can be part of. He came in as sort of head of the group or be [sic] a major part of the group." (Tr. 870-71; but see Tr. 201- 02.) Admittedly, there is no clear evidence in the record (i.e. cashed checks or other documents) that shows direct payments to the Fund or Hudson Advisers or that any of the money was diverted to the Fund or Hudson Advisers for any use. Nevertheless considering the nature of Mr. Latef's relationship to these entities and the fact that all three operated from the same location, it is likely that the money paid to Hudson Management was used to pay the Fund's expenses. (See Tr. 120, 175.) The payments were also used by Mr. Stockett to maintain his options and to "keep the doors of the Fund open."<26> As mentioned earlier, the Fund never produced enough revenue to cover its expenses and, absent contribution from Mr. Latef or Mr. Choudhry, its main source of revenue was Mr. Stockett. Mr. Stockett stopped making payments soon after March 1997. (Tr. 189-90.) Mr. Latef and Mr. Choudhry, thereafter, began paying expenses personally whenever there was a shortfall. (Tr. 192, 1030-31, 1060.) 6. The Hudson Fund Investments Although Mr. Stockett never provided the services required pursuant to the service agreement, he did provide some information about stocks to Mr. Latef, particularly IPOs.<27> (Tr. 686, 714, 861, 953.) During the relevant period, Mr. Stockett published his IPO research, generally lists of the best and worst performing new issues, in both The New Industrialist and New Issues Outlook. (Tr. 258-63, 686; see, e.g., Div. Ex. 71 at 83; Div. Ex. 75 at 83; Stockett Exs. 2D-E, 3B-C, 4B-C, 5C-D, 7D-F, 9A-H.) Mr. Latef discussed with Mr. Stockett some of the securities listed in his "publication" which were "recommendations of Neuropro, Inc.," and purchased some of those securities for the Fund.<28> (Tr. 193-95, 235-37, 861; Div. Ex. 14 at 6; Div. Ex. 22; see, e.g., Stockett Exs. 9C-D.) He also used "the resource produced by Neuropro and printed in the New Industrialist" in selecting securities for the Fund. (Tr. 205, 259-60; see, e.g., Div. Ex. 71 at 83.) On December 31, 1996, Mr. Latef purchased ten securities on behalf of the Fund. (Div. Ex. 14 at 6.) All ten of these securities were listed in New Issues Outlook among the twenty "Biggest Gainers From Offering to December 16, 1996," a chart which Mr. Stockett was responsible for producing and publishing. (Tr. 260-61, 861-62, 888-90, 898; compare Stockett Ex. 9C with Div. Ex 14 at 6.) The Hudson Fund purchased 20,000 shares of Hightec stock on December 6, 1996, and 500 more shares on December 11. (Div. Ex. 14 at 6; Tr. 89, 189.) The purchase price for the 20,500 Hightec shares ranged from $.88 to $1.62 for a total purchase price of $21,022. (Div. Ex. 14 at 6.) After these shares were purchased, the Fund's holdings in Hightec comprised twelve percent of its net asset value. (Div. Post. Brief at 9.) Mr. Latef testified that he later sold one quarter of the Fund's Hightec position at $5.50 per share, which resulted in a profit for the Fund in its Hightec position. (Tr. 196, 863-64.) The Fund purchased 5,000 shares of Sinclare stock on January 13, 1997, 35,000 shares on January 14, and 10,000 shares on February 11, at prices ranging from $.23 to $.35 per share. (Div. Ex. 14 at 6; Tr. 89, 951-52.) After these shares were purchased, holdings in Sinclare stock comprised 5.3% of the Hudson Fund's net asset value. (Div. Post. Brief at 9.) According to the Division, "By February 28, 1997, the price of Hightec stock was $1.625 a share and the price of Sinclare stock had risen to $.54 a share. As of that date, combined holdings in those two stocks comprised 23% of Hudson Fund's total assets. By June 24, 1997, the prices of Hightec and Sinclare stock had dropped to $.625 and $.11 respectively, and as of that date, 11.94% of Hudson Fund's assets were invested in those stocks." (Div. Post. Brief at 9-10.) Mr. Latef asserts that he made all decisions as to which stocks to purchase for the Hudson Fund and that no other person had ever been involved in that decision-making process. (Tr. 804.) He claims to have used several independent sources of information in deciding which stocks to purchase, including publications, newsletters, and software products. (Tr. 804-06.) Mr. Latef and Mr. Stockett generally deny that Mr. Stockett told Mr. Latef which securities to buy for the Fund or that Mr. Latef asked Mr. Stockett which securities he should buy for the Fund. (See, e.g., Tr. 260-63, 272-74, 714, 1122-23.) Mr. Latef asserts that Mr. Stockett never forced him to buy a particular security. (Tr. 857.) Mr. Latef specifically denies that money paid to the Hudson Group or Hudson Management by Mr. Stockett was, or was supposed to be, used to purchase stock in any company. (Tr. 857.) According to both men, Mr. Latef did not tell Mr. Stockett which securities he was going to buy. (Tr. 261-63, 892-93.) As further support of his lack of control over the Fund's investments, Mr. Stockett argues that he would have recommended sales of certain securities, pursuant to his investment system, at times when Mr. Latef did not sell those securities. (Tr. 715- 17.) According to Mr. Latef, the first time he became aware of Hightec was when he saw a notice in a special edition of The New Industrialist magazine, which he received in the first few days of December. (Tr. 206, 213; Div. Ex. 71 at 48; see also infra, section III.A.1. at n.42 and accompanying text.) Mr. Latef discussed Hightec with Mr. Stockett and "a couple of brokers" before he purchased Hightec shares for the Fund, but he did not speak to anyone at the company and did not review the Hightec prospectus. (Tr. 196-98.) Mr. Latef claims that he did not know of any relationship between Mr. Stockett and Hightec at the time of the Fund's purchases of Hightec securities in December 1996, but found out Mr. Stockett was affiliated with Hightec approximately one week later.<29> (Tr. 188, 199, 263, 265, 268, 863, 900.) Mr. Stockett allegedly did not tell Mr. Latef anything about his involvement with Hightec at anytime prior to Mr. Latef's purchases. (Tr. 1125.) The filing of Hightec's Form 8-K on December 16, 1996, was triggered by Mr. Stockett's purchase of stock in Hightec on November 20, 1996, which made him the majority shareholder and beneficial owner of the company.<30> (Div. Ex. 45A.) On November 21, 1996, the new board of directors, which included Mr. Stockett, voted Mr. Stockett president and chief financial officer of Hightec and changed the address of its primary executive offices to Mr. Stockett's home address in Tiburon. (Tr. 98-99, 263-65; Div. Ex. 45A.) Mr. Latef did not see any Hightec filings prior to his purchase and could not have seen this Form 8-K since it was filed after the Fund's purchases of Hightec securities. (Tr. 923.) According to Mr. Stockett, he did not know that Mr. Latef purchased any Hightec securities until January 1997. (Tr. 1123-24.) Before he purchased shares of Sinclare, Mr. Latef once again asked Mr. Stockett's opinion and also "discussed [the company] with many people." (Tr. 202.) Mr. Latef claims that he did not know whether or not Mr. Stockett had an affiliation with Sinclare at the time of the purchase. (Tr. 203, 273-74, 900.) In fact, Mr. Stockett was not a shareholder or owner of the company on any of the dates of purchase. (Tr. 1125.) He did not hold office in Sinclare until February 24, 1997. (Tr. 1125-26.) Mr. Latef asserts that he probably would not have purchased Sinclare stock had he known that Mr. Stockett was going to be the president of Sinclare in the future. (Tr. 900.) According to Mr. Latef, he contacted Mr. Stockett to get his opinion on Hightec and Sinclare, and not for approval of or advice on such a purchase for the Fund. (Tr. 196, 202.) Further, Mr. Stockett alleges that he did not make specific recommendations to purchase either Hightec or Sinclare to Mr. Latef, although later as president of Sinclare, he was recommending Sinclare securities on an Internet Web page. (Tr. 686-87, 714, 717-18.) 7. Mr. Stockett Markets the Fund a. Mr. Stockett Searches for Partners Part of Mr. Stockett's plan was to use the Hudson Fund as a marketing tool by promoting it as an example of the successful implementation and utilization of his investment plan and strategy. He explained: And while I was not recommending that people even buy the Hudson Fund, I was introducing it to them in the same way I teach them that small stocks grow at a faster growth rate than large stocks. I told people that small mutual funds can grow at faster growth rates than larger mutual funds, and I use . . . the Hudson Fund as an example of a small mutual [f]und which had subscribed to our newsletters, had invested in some IPOs in the aftermarket, and had achieved actual performance that was documented that had made it the top performing fund. And I only did that in the context that this was evidence that my research services work, not that I told them which IPOs to buy, not that I controlled him or ordered him or managed him. Simply that my system which I teach with play money and everything else is an effective system. (Tr. 714-15.) The weight of the evidence, however, contradicts Mr. Stockett's assertion that he promoted the Hudson Fund for this limited purpose. In fact, Mr. Stockett represented to potential partners and investors in various business negotiations that he held an ownership interest in the Hudson Fund and the related entities, that he was responsible for selecting the Fund's investments, and that he was responsible for the Fund's success. These prospective business deals also demonstrate the importance of the Hudson Fund to Mr. Stockett's overall business plan. i. Karate International Corporation In December 1996, Mr. Stockett entered into negotiations with Scott Woods to purchase a chain of karate schools doing business under the name Karate International Corporation ("Karate International"), which Mr. Woods owned and operated. (Tr. 415- 16; Div. Ex. 56 at 12.) According to their agreement, Karate International would receive financing from Hightec, Karate International would become a wholly owned subsidiary of Hightec, and Mr. Woods would receive stock in Hightec. (Tr. 416-17, 430- 31.) Jerry Greunbaum met Mr. Stockett in January 1997 by virtue of his relationship as counsel for Mr. Woods and an entity related to Karate International, United Studio of Self Defense of Northern California, LLC. (Tr. 415-16.) Mr. Greunbaum understood that Mr. Stockett controlled Hightec, and that Mr. Stockett had the potential to become a major shareholder in the company. (Tr. 431-32, 437.) At the time, Mr. Stockett represented to Mr. Greunbaum that he owned or operated a brokerage firm in Oregon, a television show, a mutual fund, and, at one time, a paperless company based in the Watergate complex in Washington, DC; and he showed Mr. Greunbaum documents in support of his representations. (Tr. 418- 21; see, e.g., Div. Exs. 60, 70.) The mutual fund to which Mr. Stockett referred was the Hudson Fund. (Tr. 421.) Mr. Stockett gave Mr. Greunbaum the Hudson Fund's prospectus, and told him that he had recently entered into an agreement for control of the Fund, that he did control the Fund, and that he controlled the investments in the Fund. (Tr. 421-23, 426-29; see Div. Ex. 11; see also Tr. 443, 471, 474; but see Tr. 477.) He also promoted its performance to Mr. Greunbaum. (Tr. 422-23.) The deal closed in January 1997. (Div. Ex. 56 at 12.) Mr. Greunbaum did not consider the Hudson Fund information relevant to the Hightec/Karate International transaction. (Tr. 430-31, 433.) ii. Benefits Administration, Inc. Roy Thomas Kidd is chief executive officer ("CEO") of Benefits Administration, Inc. ("BAI"), located in Chesapeake, Virginia, and is president and CEO of Harbor Capital Corp., which is BAI's parent. (Tr. 483.) BAI procured and packaged services, discounts, and other promotional materials for organizations with large memberships, and sold those packages to individuals who were members of the specific organization. (Tr. 500.) Mr. Kidd met Mr. Stockett in February 1997 in Chesapeake, Virginia. (Tr. 489.) Mr. Kidd had received some promotional materials related to Hightec, the IPO Network, Sinclare, and the Hudson Fund from an acquaintance. (Tr. 485-87, 489; see Div. Ex. 65.) BAI was a private company in need of capital. Mr. Kidd sought to take the company public and believed a deal with Mr. Stockett would help BAI reach its financing goals. (Tr. 491.) The substance of the deal was that there would be a share exchange between Hightec and BAI such that BAI would become a wholly owned subsidiary of Hightec. (Tr. 496, 501-02, 519.) Hightec would also put up $250,000 as part of the process. (Tr. 496, 502.) In addition, there was an agreement between BAI and Sinclare. (Tr. 496-97, 502.) BAI was an attractive acquisition for Mr. Stockett because BAI maintained databases with names of people who were members of professional organizations and associations. (Tr. 501.) He could use this vast resource of names to promote and expand the IPO Network, his stock selection program (including the Neuropro System), and a purported dividend reinvestment program. (Tr. 499-502.) Mr. Kidd received copies of the Hightec POM from an acquaintance prior to his meeting with Mr. Stockett, and also from Mr. Stockett at the meeting. (Tr. 491-92, 513; see Div. Ex. 56.) Mr. Stockett also presented Mr. Kidd with promotional materials related to his other endeavors. (Tr. 492-93; Div. Exs. 60, 70.) Mr. Kidd got the impression that Mr. Stockett and the IPO Network were one and the same. (Tr. 494.) Mr. Stockett told Mr. Kidd that the IPO Network purchased the karate schools for the purposes of conducting investment seminars in the evening at those facilities. (Tr. 494.) Mr. Stockett also told Mr. Kidd that he managed the Hudson Fund and that he received a fee for his services, and showed Mr. Kidd an article about the Fund which ranked it as a top ten performer to demonstrate his success as a manager. (Tr. 495, 513.) Mr. Stockett disclosed his regulatory problems to Mr. Kidd. (Tr. 497-98.) The deal was consummated in February 1997, but was rescinded by the parties soon thereafter. (Tr. 506, 509-12, 526-27.) iii. Julie Teague Garth Julie Teague Garth first spoke to Mr. Stockett in April 1997 when she called the Hightec corporate office to acquire a copy of the Hightec prospectus. (Tr. 536.) She told Mr. Stockett that she was an investor and discussed her investment background. (Tr. 536-37.) She made the call because, as an investor in BAI, she was concerned about its deal with Hightec, and wanted to learn more about the company.<31> (Tr. 552-54, 572-73.) She did not relate this information to Mr. Stockett during the initial call. (Tr. 555.) Ms. Garth had the Hightec POM delivered to her attorney's office in Houston. (Tr. 531-32, 536-37, 565; see Div. Ex. 56.) She reviewed the POM, including the organizational flow chart. (Tr. 538, 557; see Div. Ex. 56 at second page 6.) The day after receipt of the POM, Mr. Stockett and Ms. Garth spoke again by telephone. (Tr. 538-46, 555; see Div. Ex. 57.) In their conversation, Mr. Stockett represented to Ms. Garth that he owned eighty-five percent of Hightec; that he was working on a joint venture with AT&T related to Internet access, including free use of FlexQuote, with which he had some relationship; and that there was an article about Sinclare in Barron's, with a focus on Mr. Stockett and his activities and leadership within Sinclare and its success. (Tr. 544, 550, 556; Div. Ex. 57.) Mr. Stockett then made an offer to Ms. Garth related to Hightec. (Tr. 545-46; Div. Ex. 57.) He told her that she could put up $250,000, in exchange for Hightec stock, in order to purchase "this Flex Quote system that he wanted." (Tr. 546; Div. Ex. 57.) Then he told her she could purchase a fifty percent interest in the Hudson Fund for $150,000. (Tr. 546, 556, 577; Div. Ex. 57.) Ms. Garth requested that Mr. Stockett provide her with a written summary of the discussion. (Tr. 546-48, 565, 577.) Mr. Stockett sent a letter dated April 10, 1997, which memorialized certain details of the proposed deal and which included a promissory note and stock escrow agreement. (Tr. 546-48, 565, 577; Div. Ex. 62.) Mr. Stockett and Ms. Garth had two or three more telephone conversations after delivery of the letter. (Tr. 548.) In those conversations, Mr. Stockett told Ms. Garth that he had a "controlling interest in the Hudson Investors Fund. He told me that he helped run and manage the Fund." (Tr. 549.) She also understood from the conversations and the organizational flow chart that the IPO Network held a controlling interest in Hudson Advisers, Hudson Management, and the Hudson Fund. (Tr. 550, 580-81; Div. Ex. 56 at second page 6; ALJ Exhibit 1.) Mr. Stockett then sent another letter, dated April 15, 1997, imposing time limitations on the deal. (Tr. 548; Div. Ex. 64.) By this time, Ms. Garth suspected that what Mr. Stockett was representing to her about his control of the Hudson Fund was not true. (Tr. 562, 581-83.) Ms. Garth did not invest with Mr. Stockett. (Tr. 551.) iv. Clark Fork Compost and Reclamation Gregory Andres Kennett is the president and a member of the board of directors of Clark Fork Compost and Reclamation ("Clark Fork") of Missoula, Montana. (Tr. 588-89.) Mr. Stockett made a series of proposals on behalf of Hightec to purchase Clark Fork. (Tr. 589.) He held two face-to-face meetings with Mr. Kennett in Missoula, on May 13 and 22, 1997, and made presentations to Clark Fork's board of directors at both meetings. (Tr. 590, 592.) Mr. Stockett discussed the Hudson Fund during the second meeting, calling it a top performing fund and claiming responsibility for its success. (Tr. 591-93.) He mentioned it as just one example of his many successful business ventures. (Tr. 610.) Mr. Stockett made an offer to purchase Clark Fork, which is memorialized in a letter he prepared, dated May 13, 1997, and which was distributed to those present at the May 13 meeting. (Tr. 594; Div. Ex. 80.) There were a series of other proposals that were offered after the May 22 meeting. (Tr. 598; Div. Exs. 77, 78, 79.) The transaction never took place. (Tr. 604-06.) v. Select Capital Advisors Arthur David Candland was president of Select Capital Markets West ("Select West") from January through June 1997. (Tr. 621.) It and its parent company, Select Capital Advisors ("Select Capital"), a Florida corporation, deal in mergers and acquisitions, and procure capital for small to medium size corporations. (Tr. 621.) In late April or early May 1997, Mr. Candland received a referral from Select Capital for a project seeking financing for a compost business in Missoula, Montana. (Tr. 622.) Based on that lead, Mr. Candland called and spoke to Mr. Stockett. (Tr. 622.) Mr. Stockett told Mr. Candland that he sought financing for several projects, including the compost deal. (Tr. 622.) Mr. Candland sent him Select West information and Mr. Stockett delivered information about Hightec. (Tr. 622.) Mr. Stockett represented that Hightec was a holding company that acquired other entities and assets; had acquired the compost operation in Montana; was buying the purchasing network in Wyoming; and had a controlling interest in a Canadian stock quote software program. (Tr. 623.) The financial information Mr. Stockett provided to Mr. Candland indicated that Hightec owned a controlling interest in the Hudson Fund, and Mr. Stockett told Mr. Candland that he controlled the Fund. (Tr. 624, 633.) Mr. Stockett also provided Mr. Candland with promotional materials for the IPO Network and a prospectus for the Hudson Fund. (Tr. 623, 629, 642; see Div. Ex. 11.) It was always Mr. Candland's understanding that Hightec had acquired a controlling interest in the Hudson Fund in exchange for Hightec stock in the Fund. (Tr. 650, 661-62, 669.) Mr. Stockett met with Mr. Candland and Select Capital's president, Ronald Williams, and pitched a deal whereby Select West would become a fifty percent partner in ownership in the Hudson Fund and the Hudson Group. (Tr. 624, 700.) Mr. Stockett prepared a due diligence package for the Hudson Fund from documents provided to him by Mr. Latef. (Tr. 712; Div. Ex. 87.) He showed this package to Mr. Williams. (Tr. 755-56.) The deal required payment of cash and Select Capital stock to Hightec in exchange for Hightec stock as well as placement of Select Capital securities in the Hudson Fund. (Tr. 624-25.) A letter/agreement dated June 11, 1997, from Mr. Stockett to Mr. Williams and Mr. Candland, signed by all three men, outlined the structure of the agreement. (Div. Ex. 73; Tr. 625, 700-02.) The agreement reveals much about Mr. Stockett's plans for the Hudson Fund. Mr. Candland understood from that letter and what Mr. Stockett represented to him orally that Mr. Stockett controlled the Hudson Fund or certainly had some interest in it. (Tr. 632.) By the terms of the agreement, the parties contemplated the following arrangement: (i) Mr. Williams would become a "50-50 partner" in each of Mr. Stockett's ventures, including the Hudson Fund and the Hudson Group; (ii) the Hudson Fund and the Hudson Group would change their names to Select Capital Fund and Select Capital Partners, respectively; and (iii) Mr. Stockett would instruct Mr. Latef, the "registered investment advisor," to "purchase positions in each of Select Capital Advisor's client's stocks which are publicly traded." (Div. Ex. 73; Tr. 699-700.) The letter further states that, "Aftermarket support for the stocks funded by Select Capital Advisors, Inc. will be provided by the Select Capital Fund and the Select Capital Partners private hedge fund" and that "[i]n the interim, it would be highly desirable to get Hightec and Sinclare stocks performing and to add additional holdings to the Hudson Investors Fund to assure its 2d quarter performance." (Div. Ex. 73; Tr. 700-02.) An earlier letter, dated May 29, 1997, from Mr. Stockett to Albie Landwehr, a partner in Select Capital, also reveals much about Mr. Stockett's intentions for the Hudson Fund. (Div. Ex. 74; Tr. 626, 703-05.) According to that letter and an attached spreadsheet, the Hudson Fund and the Hudson Group would be renamed and Select Capital would invest over $4 million to purchase Select Capital stocks for the Fund. (Div. Ex. 74; Tr. 702-05.) The whole basis for the proposal was that Mr. Stockett would sell his interest in the Hudson entities to Select Capital through the option agreements. (Tr. 705.) The parties discussed and the letters indicated that the Hudson Fund would change names. (Tr. 635, 652; Div. Exs. 73, 74.) Mr. Stockett claims he told Mr. Latef about the name change. (Tr. 699-70.) Mr. Candland never contacted anyone at the Hudson Fund about the name change. (Tr. 635-36.) He never asked for a due diligence package from Mr. Stockett with respect to the Hudson Fund or any other entity. (Tr. 646.) Mr. Stockett did show Mr. Candland the relationship chart. (Tr. 649.) Mr. Candland believed that there was an agreement in principle between Mr. Stockett and Select Capital but that no money changed hands. (Tr. 628.) Mr. Latef did not authorize Mr. Stockett to do anything in relation to the Select Capital transaction. (Tr. 857.) Mr. Stockett did tell him, however, that people at Select Capital were interested in investing in the Fund. (Tr. 910-11.) Mr. Stockett apparently disclosed his intentions to Mr. Choudhry. (See Tr. 1034-37, 1052-53, 1059-60, 1062.) Mr. Stockett alleges that he contracted with Select Capital to continue the payments for the options. (Tr. 308-10; see also Stockett Post. Brief at ¶ 17.) He testified that he wanted Select Capital to purchase the options and take over responsibility of the payments. (Tr. 684.) He alleges that he notified Mr. Latef of his intent to assign the options. (Tr. 685.) b. The Solicitation of Investors; The New Industrialist Magazine Mr. Latef visited The New Industrialist home page on the Internet in the middle of 1996, requested a free copy of The New Industrialist magazine, and received several free copies thereafter. (Tr. 221.) Mr. Latef used the Neuropro System report, which was printed in The New Industrialist magazine, as a resource in selecting securities for the Fund. (Tr. 205, 219, 223.) Mr. Stockett began publishing his IPO research, "presented by IPO Network," in The New Industrialist around August 1996. (Tr. 258-260; see, e.g., Div. Ex. 71 at 83; Div. Ex. 75 at 83; Stockett Exs. 2D-E, 3B-C, 4B-C, 5C-D, 7D-F.) 1. The Winners Edition A special edition of The New Industrialist magazine, called the Winners United States Edition ("Winners Edition"), Volume 01, No. 2, was published in December 1996. (Tr. 206; Div. Ex. 71.) According to a notice in that magazine, Hightec would distribute this special Winners Edition of The New Industrialist pursuant to an agreement/understanding between The New Industrialist and Wealth International Network, LLC ("WIN"), and subject to a "strategic alliance entered into with IPO Network which has assigned the understandings to [Hightec]." (See Div. Ex. 71 at 48.) Apparently, WIN's objective was to provide investors with information about potential investments, to organize seminars, conferences, and investment clubs, and to promote investment opportunities. (See generally Div. Ex. 71.) The Winners Edition included an application for membership in WIN, as well as articles and advertisements for WIN and the Winners Edition. (Tr. 214; Div. Ex. 71 at 34-46, 88; see generally Div. Ex 71.) Also included in this Winners Edition of The New Industrialist was: (i) an article about the Hudson Fund titled "Investors Choice: The best stock for WIN members," which Mr. Latef claims he had no part in producing or writing; (ii) an advertisement for the Hudson Fund which, according to Mr. Latef, the Hudson entities did not authorize or pay for; (iii) a copy of the Fund prospectus which, according to Mr. Latef, The New Industrialist was not authorized to print; and (iv) an application for investment in the Fund (which is attached to the prospectus); as well as (v) notices, reports, commentary, advertisements, and information about Hightec and Neuropro.<32> (Tr. 204-10, 215, 274, 858; Div. Ex. 71 at 1, 15, 47-74, 86; see generally Div. Ex. 71.) Mr. Latef saw the Winners Edition in late November or early December 1996.<33> (Tr. 206, 951.) Mr. Latef maintains that he was not aware that WIN was going to tout the Hudson Fund to its customers/members. (Tr. 276.) Mr. Stockett alleges that he provided a copy of the Hudson Fund prospectus to Mr. Lazarus; that Mr. Lazarus was responsible for writing the article; and that he did not provide any of the performance information discussed in the article. (Tr. 711-12.) i. The Prospectus and Hudson Fund Investors Mr. Latef notified Mr. Lazarus, by letter, the he did not want the magazine to print the Fund prospectus.<34> (Hudson Ex. 1; Tr. 206-09, 860.) Mr. Latef, however, accepted investment applications filed by prospective customers which were copied or removed from the Winners Edition of The New Industrialist and accompanied by checks and money orders.<35> (Tr. 91-92, 208-09; see Div. Exs. 29-37, 41-43.) Some investors identified themselves as WIN members or affiliates, and one investor check is made out to WIN. (Tr. 93, 223, 228; Div. Exs. 29-37, 41-43.) That WIN check was endorsed by the Hudson Fund and deposited into its account. (Tr. 94; Div. Ex. 41.) Mr. Latef claims that he verified that the check was for investment in the Fund. (Tr. 228.) Some investors inquired about Mr. Stockett's status with the Fund, and one investor sent a letter to the Hudson Fund asking for confirmation that Mr. Stockett "is manager of investments for the fund." (Div. Ex. 44; Tr. 93, 231-32.) Neither Mr. Latef, nor anyone at the Fund, ever provided WIN management with written notification that Mr. Stockett was not manager of, or investment adviser for, the Fund. (Tr. 231-34.) WIN itself invested $10,000 in the Hudson Fund. (Tr. 225-26; Div. Ex. 36.) 3 ii. The Advertisements and the Article The article on page one of the Winners Edition contained several inaccurate statements about the Hudson Fund.<36> (Tr. 210-11; Div. Ex. 71 at 1; see also Hudson Ex. 1.) One advertisement for Neuropro in the Winners Edition stated that the Fund "has become the first mutual fund to formally accept the challenge and has licensed the use of Neuropro's proprietary software and data bases so that it can use NeuroPro's artificial intelligence software to improve on its own predictive track record." (Div. Ex. 71 at 86.) It also contained a quote attributed to Mr. Latef which was not provided by Mr. Latef and which, according to Mr. Latef, was also inaccurate. (Tr. 211-12; Div. Ex. 71 at 86.) An identical Neuropro advertisement, which was printed in the December 1996 issue of The New Industrialist, United States Edition, Volume 3, Number 21, also contained the quote attributed to Mr. Latef. (Tr. 217; Div. Ex. 75 at 86.) Mr. Latef asserts that the information in that advertisement, related to him and the Hudson Fund, is also inaccurate. (Tr. 217.) Another notice in the Winners Edition, captioned "BIG NEWS," also promoted the Fund's use of Neuropro. (Div. Ex. 71 at 15.) It stated, for example, that "The New Industrialist is pleased to announce that the Hudson Investors Fund uses Neuropro software and databases to assist its investment advisors in selection, allocation, and timing of its fund investment and trading decisions." (Div. Ex. 71 at 15.) Mr. Latef raised the issue of inaccuracies in the article and the Neuropro advertisements with Mr. Lazarus by letter, but claims that he was never able to speak with him, either by telephone or in person. (Hudson Ex. 1; Tr. 212-13, 215-16, 858, 860-61.) He took no other steps to correct the statements attributed to him in the advertisements. (Tr. 217-18.) Mr. Latef claims also that The New Industrialist was not authorized to publish the advertisement for the Fund that appeared in the Winners Edition, and that he told Mr. Lazarus, by letter, that he did not authorize publication of that, or any, advertisement for the Fund.<37> (Tr. 215-16; Div. Ex. 71 at 47; Hudson Ex. 1.) 4 III. CONCLUSIONS OF LAW A. Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the Company Act The Division argues that the Hudson Respondents violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the Company Act because they did not disclose to investors certain material information about their relationship with Mr. Stockett, including: (i) the existence of the agreements; (ii) that Mr. Stockett was responsible for payments made to Hudson Management, the Hudson Group, and the Hudson Respondents during the relevant time period; and (iii) that Mr. Stockett recommended certain securities to the Hudson Respondents for investment in the Fund.<38> The Division argues that Mr. Stockett obtained control over the Hudson Respondents and the Fund's investment decisions because he held options to purchase Hudson Advisers and Hudson Management and made payments benefiting the Hudson Respondents.<39> (See Div. Post. Brief at 15-17, 23-24.) It argues, further, that Mr. Stockett directed the Fund to invest in certain securities, including Sinclare and Hightec, in which, at the time of the purchases, Mr. Stockett allegedly either owned an interest or was otherwise connected. It contends, also, that payments made by Mr. Stockett to the Hudson Respondents were made in order to influence the investment decisions of the Fund. I conclude that Mr. Stockett did not possess determinative control over the Hudson Respondents in any aspect of their operation, including investment decisions. The Hudson Respondents, however, should have otherwise disclosed their relationship with Mr. Stockett. Even absent enforceable written contracts, the Hudson Respondents should have revealed to investors that: (i) they had negotiated to sell Hudson Advisers and Hudson Management to Mr. Stockett; (ii) during the relevant time period, Mr. Stockett was almost exclusively responsible for the financial support of Hudson Management, to the direct benefit of the Hudson Fund and Hudson Advisers; and (iii) the Fund had invested in securities in companies from which it had received payments and in which Mr. Stockett held an interest. The Hudson Respondents, therefore, violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the Company Act because they did not disclose this material information. 1. Control Control is defined in both the Company Act and the Advisers Act as "the power to exercise a controlling influence over the management or policies of a company." Company Act Section 2(a)(9); Advisers Act Section 202(a)(12). The evidence throughout is that Mr. Latef retained exclusive control over all decisions relating to the Hudson entities, notwithstanding that Mr. Stockett held options to purchase Hudson Advisers and Hudson Management and that he funded the continuing operation of Hudson Management, Hudson Advisers, and the Fund. Mr. Latef held complete operational control over the Hudson entities and was solely responsible for all of the reporting required by the securities laws. There is no evidence that Mr. Stockett had any influence, direct or indirect, over such reporting. Further, I conclude that Mr. Stockett did not make any investment decisions on behalf of Hudson Advisers or the Hudson Fund and did not exert significant or determinative influence over the Fund's investment decisions. There is an obvious correlation between the securities listed on page three of the December 19, 1996, publication of New Issues Outlook, Issue 171, for which Mr. Stockett was responsible, and the securities purchased by the Fund on December 31, 1996. (Tr. 260-61, 861-62, 888-90; compare Stockett Ex. 9C with Div. Ex. 14 at 6.) Although these ten securities were selected from a source produced by Mr. Stockett, Mr. Latef had independent access to the same source. (See Tr. 861-62, 892.) I conclude that Mr. Latef made an independent decision to purchase those ten stocks, after conducting his own research and analysis. (Tr. 861-63, 867-69, 892-93, 925-26.) While Mr. Stockett may have provided information to Mr. Latef about these securities, there is no direct evidence that he coerced Mr. Latef to make these purchases or that Mr. Latef otherwise felt obligated or pressured to make these purchases. The circumstances surrounding the Fund's investment in Hightec and Sinclare securities, however, bring into question Mr. Latef's independence over those investment decisions. First, there is the obvious issue of Mr. Stockett's payments to the Hudson Respondents, including those payments made by The New Industrialist, Hightec, and OTC, and the influence they carried. Next, neither company is listed in the IPO information produced by Mr. Stockett which was published in The New Industrialist and New Issues Outlook. (Tr. 925; see, e.g., Div. Ex. 71 at 83; Div. Ex. 75 at 83; Stockett Exs. 2D-E, 3B-C, 4B-C, 5C-D, 7D-F, 9C.) Further, it does not appear that Mr. Latef conducted the intensive analysis normally performed prior to purchasing Hightec or Sinclare: neither company was listed in the independent resources he normally used.<40> (Tr. 926-28.) Mr. Stockett alleges that he faxed Mr. Latef a press release announcing that Hightec had negotiated with the IPO Network, The New Industrialist, and WIN to market and distribute the Winners Edition. (Tr. 22, 24, 26; see also Tr. 265-67, 901.) He claims that this press release is what prompted Mr. Latef's purchase of Hightec shares on December 6 and December 11, 1996. (Tr. 16, 22, 24, 26; see also Tr. 265-67, 901.) Mr. Latef did not recall seeing the press release and no evidence was provided at the trial to conclude that the document was, in fact, sent to or received by Mr. Latef.<41> (Tr. 265-67, 901.) Mr. Latef stated, only, that "Sincl[are] and Hightec were picked from New Industrialist." (Tr. 927; see generally Tr. 926-28.) Hightec and Sinclare were, in fact, advertised and promoted in The New Industrialist before Mr. Latef bought their shares for the Fund and Mr. Latef testified that he at least saw a Hightec "notice" in the Winners Edition before he invested in the company.<42> (Tr. 883-84, 949; see, e.g., Div. Ex. 71 at 48; Stockett Exs. 2B- C, 6B-C.) He admits, however, that he discussed both companies with Mr. Stockett prior to purchase of their shares. Mr. Stockett's representations to potential business partners, that he owned and/or controlled the Hudson entities, is another factor to consider in determining whether Mr. Stockett did, in fact, own or control the Hudson entities or determine the Fund's investments. His statements in letters to Select Capital executives suggest, for example, that he held significant and determinative control over the Hudson entities. They demonstrate, also, that Mr. Stockett intended to purchase securities for the Fund in companies in which he owned, controlled, or otherwise held an interest. Again, however, while Mr. Stockett may have provided information to Mr. Latef about Hightec and Sinclare, and while he may have represented to others that he owned and/or controlled the Hudson entities, there is no direct evidence that he forced Mr. Latef to make the Hightec and Sinclare purchases or that he exerted significant or determinative influence over those investment decisions. There is no direct evidence that these purchases were a quid pro quo for Mr. Stockett's continued financial support of Hudson Management, or that Mr. Stockett otherwise coerced Mr. Latef. The fact that Mr. Stockett was in a control and/or ownership position with Hightec when Mr. Latef made the purchases also is not determinative on the issue of whether Mr. Stockett controlled Mr. Latef's investment decisions. In fact, his lack of an ownership or control position in Sinclare at the time of that purchase supports the opposite view. It is also inconclusive in this evidentiary calculus that Hightec later purchased Sinclare.<43> Further, Mr. Stockett's statements to potential business partners may not have reflected the truth. At least one prospective business partner believed that Mr. Stockett was lying to her about his relationship with the Hudson entities. While circumstantial evidence exists to support of the Division's position that Mr. Stockett controlled the Hudson Respondents' investment decisions, the total mix of evidence is not persuasive on this issue. I conclude, therefore, that Mr. Stockett did not control the Hudson Respondents' investment decisions; that it was Mr. Latef's decision to purchase Hightec and Sinclare securities on behalf of the Fund; that Mr. Latef retained exclusive and determinative control over the investment decisions of the Fund; and that Mr. Stockett did not control Hudson Advisers or the Hudson Fund and was not a "control person" of any of the Hudson entities. 2. Conclusion The Hudson Fund, Hudson Advisers, and Mr. Latef willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the Company Act because they failed to disclose to shareholders: (i) the nature of Mr. Stockett's business relationship with the Hudson Respondents; (ii) Mr. Stockett's payment of "expenses"; and (iii) that the Fund had invested in securities in companies from which it had received payments and in which Mr. Stockett held an interest. This omitted information was material because a reasonable shareholder would have considered it significant in making an investment decision. See Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988); see also TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). If a reasonable Hudson Fund investor or potential investor was aware of the omitted information, for example, he or she may have questioned the independence of Mr. Latef's investment decisions and may have decided not to invest in the Fund. The Hudson Respondents were aware that investors had access to inaccurate information and that they may have been investing in the Fund based on that information. They knowingly accepted investment applications from investors who received materially misleading information from the Winners Edition of The New Industrialist and from Mr. Stockett. There is only one instance, in a dozen or so applications, where the Hudson Respondents specifically disabused an investor of incorrect information he received related to investment in the Fund. That investor asked specific questions regarding Mr. Stockett's role in making investment decisions for the Hudson Fund. Mr. Stockett's affiliation with Hightec was also material information which needed to be disclosed to investors based on his relationship with the Hudson Respondents and their ultimate decision to invest in Hightec. The Hudson Respondents failed to disclose to investors that the Fund was investing in a company controlled by an interested third party and Mr. Stockett substantially assisted in this concealment. The evidence is that Mr. Stockett concealed his relationship with Hightec from Mr. Latef when they discussed the company prior to its purchase by the Fund. Mr. Stockett knew, from this discussion, that Mr. Latef was interested in investing in Hightec. At that time, Mr. Stockett had either acquired the company or was in the process of doing so. He did not, however, tell this to Mr. Latef. In any event, I believe that Mr. Latef was recklessly indifferent to Mr. Stockett's financial interest in Hightec or his relationship with the company.<44> Mr. Latef failed to conduct a thorough analysis of the company prior to purchasing its shares. There were independent sources of evidence, including the Winners Edition and the December issue of The New Industrialist, which, if combined with his usual investigation, may have revealed Mr. Stockett's links to the company. In addition, Mr. Latef made no disclosure about this potential conflict of interest after he found out about the affiliation. He also continued, thereafter, to hold Hightec shares in the Fund's account. In order to establish violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Division must also show that Respondents acted with scienter. Aaron v. SEC, 446 U.S. 680, 697, 701-02 (1980). Scienter is found where the participants acted with "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976). Recklessness may also satisfy this intent requirement. SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992); Dirks v. SEC, 681 F.2d 824, 844-45 (D.C. Cir. 1982), rev'd on other grounds, 436 U.S. 646 (1983). The recklessness required is an "extreme departure from the standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992) (quoting Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990)); see also Steadman, 967 F.2d at 641-42. Sections 17(a)(2) and 17(a)(3) of the Securities Act do not require scienter for their violation. Steadman, 967 F.2d at 643 n.5. The preceding discussion demonstrates that the Hudson Respondents knew, at least when the above cited investor made contact with them, that their relationship with Mr. Stockett was an important, material piece of information for investors in making their decision to invest in the Hudson Fund. They did not, however, disseminate this material information to the public and were, at a minimum, reckless in their conduct. It was even more important for the Hudson Respondents to disclose the information in this case, where investors were receiving inconsistent and inaccurate information about Mr. Stockett and his relationship with the Hudson Respondents. Mr. Stockett was, most likely, responsible for much of the inaccurate information the above cited investor, and others, received about the Hudson Fund. Articles, commentaries, and advertisements in the Winners Edition of The New Industrialist and the December issue of The New Industrialist, which contained inaccurate information about the Hudson Respondents, indicate substantial ties between Mr. Stockett and these publications. Mr. Stockett never disclosed these ties to Mr. Latef. Around this time, Mr. Stockett also conducted WIN seminars where he discussed the Hudson Fund to WIN members and potential, and eventual, Hudson Fund investors. The Hudson Respondents knew, also, that Mr. Stockett was seeking "business partners" for the Fund and that it was likely that Mr. Stockett was representing to these people that he held options to purchase Hudson Advisers and Hudson Management, or that he actually owned or controlled these entities as well as the Fund. The Hudson Respondents should have acted more responsibly in disclosing their relationship with Mr. Stockett knowing that there was material misinformation available to the investing public. I conclude, therefore, that the Hudson Respondents recklessly disregarded their duty to disclose material information to investors in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. As the investment adviser and, therefore, as a fiduciary, Hudson Advisers, by and through Mr. Latef, owed its clients "an affirmative duty of utmost good faith, and full and fair disclosure of all material facts." SEC v. Capital Gains Research Bureau, 375 U.S. 180, 194 (1963) (citations omitted). The Hudson Fund, Hudson Advisers, and Mr. Latef also violated Section 34(b) of the Company Act because they did not disclose this material information in the Hudson Fund prospectus or any other reports required to be filed with the Commission. I conclude, also, that Mr. Stockett aided and abetted these violations because: (i) he knew that the Hudson Respondents were violating the securities laws by not disclosing certain material information; and (ii) he knowingly and substantially assisted in the commission of the violations by concealing information from Mr. Latef and/or by contributing to misinformation disclosed to investors. Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009 (11th Cir. 1985); Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). B. Section 204 of the Advisers Act and Rule 204-1(b) thereunder and Section 207 of the Advisers Act The Hudson Respondents violated certain reporting requirements by failing to include the material information described above in public documents. Hudson Advisers violated Section 204 of the Advisers Act and Rule 204-1(b) thereunder because it failed to disclose material information in its public filings, including its Forms ADV or any amendment thereto.<45> Hudson Advisers, through Mr. Latef, failed to disclose to the Hudson Fund and its shareholders that a third party, Mr. Stockett, held options to purchase Hudson Advisers and Hudson Management and that he funded the continuing operation of Hudson Management, to the direct benefit of Hudson Advisers and the Fund. Hudson Advisers also failed to disclose, when it purchased shares of Hightec for the Fund or at any time thereafter, that Mr. Stockett owned or controlled Hightec. Hudson Advisers and Mr. Latef also violated Section 207 of the Advisers Act<46> because they filed a Form ADV-S on April 2, 1997, signed by Mr. Latef, which affirmatively misrepresented that there was no need to amend the company's Form ADV. (See Div. Ex. 2.) Mr. Stockett aided and abetted Hudson Advisers' violation of Section 204 and Rule 204-1(b) and Hudson Advisers' and Mr. Latef's violation of Section 207 because he knew that Hudson Advisers and Mr. Latef were violating these reporting provisions. Mr. Stockett substantially assisted in the commission of the violations by concealing information from Mr. Latef and/or by contributing to misinformation disclosed to investors. I cannot conclude, however, that Mr. Latef aided and abetted Hudson Advisers' violation of Section 204 of the Advisers Act and Rule 204-1(b) thereunder, as argued by the Division, because that allegation is defectively pleaded in the OIP.<47> C. Section 203(a) of the Advisers Act; Sections 15(a), 15(c), and 48(a) of the Company Act The Division alleges that Mr. Stockett engaged in activities on behalf of the Hudson Fund which bring him within the definition of "investment adviser" contained in Section 202(a)(11) of the Advisers Act. Specifically, the Division argues that Mr. Stockett provided investment advice to and made investment decisions for the Hudson Fund portfolio, without exemption or registration, in violation of Section 203(a).<48> Mr. Stockett, on the other hand, argues that he is exempt from the registration requirements of the Advisers Act because he is a publisher. (Tr. 17.) Section 202(a)(11) defines investment adviser as: any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include . . . the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation. A determination as to whether a person is an investment adviser, therefore, will depend on whether the person: (i) provides investment advice, or issues reports or analyses, regarding securities; (ii) is in the business of providing such services; and (iii) provides such services for compensation. I conclude that Mr. Stockett did not act as an investment adviser because the third prong of this analysis was not satisfied in connection with his activities with the Hudson Respondents. The Division focuses on Mr. Stockett's conduct vis-à-vis the Hudson Respondents, not his behavior generally, in alleging that Mr. Stockett violated Section 203(a) of the Advisers Act. I will not, therefore, make a determination about whether Mr. Stockett's conduct outside of his relationship with the Hudson Respondents meets this definition or, if it does, whether Mr. Stockett is otherwise exempt from registration. I do, however, believe that Mr. Stockett is, generally, in the business of providing investment advice and issuing reports and analyses regarding securities. As part of that business, he discussed specific securities with Mr. Latef and provided information or advice about Hightec, Sinclare, and at least ten other securities. Thus, the first two prongs of the definition have been satisfied in relation to the Hudson Respondents. The Division suggests in its brief, that the third prong, the compensation requirement, is satisfied because "Neuropro and Stockett's agreement with Hudson Advisers provides that 90% of any advisory fees received by Hudson Advisers from Hudson Fund are to be passed through to Neuropro, a company controlled by Stockett." (Div. Post. Brief at 28.) There is no evidence, however, that Mr. Stockett received this, or any, fee in relation to the investment advice he provided to the Hudson Respondents. Arguably, the Hudson Fund's investment in Hightec conferred an economic benefit upon Mr. Stockett (the price of Hightec shares increased in value some time after the Fund's investment), which might satisfy the compensation requirement. The Division does not, however, make this argument. Further, the evidence is not sufficient to show a nexus between Mr. Stockett's advice and any economic benefit he derived therefrom, or between the Fund's investment in Hightec and the increase in value of the Hightec shares. Nor do I find that Mr. Stockett served as an investment adviser to the Fund pursuant to Section 2(a)(20) of the Company Act. Section 2(a)(20) defines "'investment adviser' of an investment company" as: (i) any person who, pursuant to contract with such company, regularly furnishes advice to such company with respect to the desirability of investing in, purchasing or selling securities or other property, or is empowered to determine what securities or other property shall be purchased or sold by such company and (ii) any other person who, pursuant to contract with a person described above, regularly performs substantially all of the duties undertaken by such person described above. For the reasons stated above in Section III.A.1., I conclude that Mr. Stockett did not regularly furnish advice to either the Hudson Fund or Hudson Advisers, through Mr. Latef, with respect to the desirability of investing in, purchasing or selling securities or other property, and that Mr. Stockett was not empowered to determine what securities or other property were to be purchased or sold by the Fund, Hudson Advisers, or Mr. Latef. Further, the fact that Hudson Advisers, Hudson Management, and Neuropro Nevada executed the service agreement is irrelevant since the contract as written was invalid: the services described in the written contract were never provided and Neuropro Nevada never existed. Mr. Stockett's activities related to the Hudson entities, in fact, meet the criteria in one of the exemptions to the definition in Section 2(a)(20) since he acted as "a person who furnishe[d] only statistical and other factual information, advice regarding economic factors and trends, or advice as to occasional transactions in specific securities, but without generally furnishing advice or making recommendations regarding the purchase or sale of securities." I cannot, therefore, conclude that Mr. Stockett acted as an investment adviser, in relation to the Hudson Respondents, in violation of Section 203(a) of the Advisers Act. Based on this, the Division's allegation that Mr. Stockett violated Sections 15(a) and 15(c) by virtue of Section 48(a) of the Company Act must also fail. Section 15(a) makes it unlawful for a person to act as an investment adviser to an investment company unless that person enters into a contract with the investment company or its investment adviser which has been approved by a majority of the outstanding voting securities of the investment company. Section 15(c) requires the investment advisers to transmit to the investment company any information which is reasonably necessary to evaluate the terms of such contract. Section 48(a) prohibits any person, directly or indirectly, to cause to be done any act or thing through or by means of any other person which it would be unlawful for such person to do under the provisions of this title or any rule, regulation, or order thereunder. The Division argues that no "vote was held with respect to the agreement between Neuropro and Stockett and Hudson Advisers, and Stockett did not transmit to the [Hudson Fund] the information which was needed to evaluate the contract." (Div. Post. Brief at 29.) I conclude, however, that Mr. Stockett did not act as an investment adviser to the Hudson Fund and, therefore, he could not, and did not, violate Sections 15(a) and 15(c) of the Company Act by virtue of Section 48(a). The contract to which the Division refers is, therefore, irrelevant to this analysis: no one except for Hudson Advisers, by and through Mr. Latef, acted as investment adviser to the Fund, and Hudson Advisers and the Fund had an existing and valid contract under these provisions. IV. SANCTIONS Imposition of any administrative sanction requires consideration of certain public interest factors, including: 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) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). The Division recommends that: (i) all Respondents be ordered to cease and desist from future violations of the securities laws; (ii) Mr. Latef be suspended from association with an investment adviser and an investment company for a period of twelve months; and (iii) Mr. Stockett be barred from association with any broker, dealer, municipal securities dealer, investment adviser, and investment company. It also recommends that civil penalties be assessed, without discussing the appropriateness of this sanction or providing recommended amounts. A. Bar and Suspension Section 203(f) of the Advisers Act and Section 9(b) of the Company Act authorize the Commission to impose sanctions on any person who has, as in this case, willfully made or caused to be made in any application for registration or any report required to be filed with the Commission any false or misleading statements of material fact or has omitted to state a material fact, or has willfully violated or willfully aided and abetted a violation of the federal securities laws.<49> Under Section 203(f) the Commission may censure or place limitations on the activities of any person who has committed such violations and who is associated, seeking to become associated, or, at the time of the alleged misconduct, was associated or seeking to become associated with an investment adviser, or suspend for a period not exceeding twelve months or bar any such person from being associated with an investment adviser. Under Section 9(b) the Commission may prohibit any person who has committed such violations from affiliating or associating with an investment company. 1. The Suspension of Mr. Latef Mr. Latef willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because he recklessly disregarded his duty to disclose material information to Hudson Fund investors. He violated Section 34(b) of the Company Act because he did not disclose this material information in the Hudson Fund prospectus or any other reports required to be filed with the Commission. He also violated Section 207 of the Advisers Act because he signed and filed a Form ADV-S which affirmatively misrepresented that there was no need to amend Hudson Advisers' Form ADV. Mr. Latef's reckless behavior posed a significant threat to the Hudson Fund shareholders and other investors. Disclosure is the essence of securities regulation. It prevents fraud and reduces risk. It is important for the investing public to have all material information available to it, therefore, before making investment decisions. In this case, investors did not possess material information about the Hudson Respondents' relationship with Mr. Stockett. The risks involved in investing in the Fund rose significantly with Mr. Stockett's participation. The potential for fraud was great. Investors should have had this information at their disposal. Mr. Latef was responsible for providing the "full and fair" disclosure necessary here, and was reckless in not doing so. I do not believe, though, that Mr. Latef intended to defraud investors in the Hudson Fund. Mr. Choudhry and the Hudson Group were majority shareholders and knew as much as Mr. Latef about the activity surrounding the Fund. I also believe that, in forming the Fund, Mr. Latef and Mr. Choudhry acted with good intentions, and that their decision to work with Mr. Stockett was made in good faith. Further, this is the only instance of disciplinary action involving Mr. Latef or any of the Hudson Respondents. This was an isolated incident related to their involvement with Mr. Stockett. There is also no evidence that Mr. Latef benefited financially from his association with the Hudson entities. To the contrary, there is much evidence that Mr. Latef suffered significantly. He was well-educated and had held several important high-paying jobs, his last as a hotel executive.<50> While working for the Hudson entities he received little or no income and apparently received no other economic benefit. Although his conduct was egregious, it was not so egregious as to merit the year-long suspension recommended by the Division. Nevertheless, Mr. Latef does not seem to recognize the wrongfulness of his conduct and, therefore, there is a greater likelihood that his association with the Hudson Respondents will present opportunities for future violations. He is willing, however, to "publish any curative disclosure the Commission may require." (Hudson Post. Brief at 21.) Considering all of the above, including mitigating factors, I believe it is appropriate in the public interest to suspend Mr. Latef from association with an investment adviser and an investment company for three months. 2. Mr. Stockett is Collaterally Barred Mr. Stockett aided and abetted the Hudson Respondents' violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 34(b) of the Company Act, and Sections 204 and 207 of the Advisers Act and Rule 204-1(b) because: (i) he knew that the Hudson Respondents were violating the securities laws by not disclosing certain material information; and (ii) he knowingly and substantially assisted in the commission of the violations by concealing information from Mr. Latef and/or by contributing to misinformation disclosed to investors. Honesty is a basic quality required of securities professionals. There are elements of scheming and deception in Mr. Stockett's conduct in this case that cast serious doubt on his ability ever to operate in the securities industry in an honest and forthright manner. His intent, demonstrated in the various business dealings described in the record, was to eventually gain control of the Hudson Fund and use it to manipulate stock prices in companies in which he and his partners held an interest. He had already swept the Hudson Respondents into his web of deceit, but he never consummated the big-money deal that would have triggered his takeover of the Hudson Respondents' business and fostered his potentially massive fraud. It was his relationship with the Hudson Respondents that caused their violations of the securities laws; Mr. Stockett's misconduct was, therefore, the root of the evil in this case. There are no mitigating factors. Mr. Stockett denies any and all wrongdoing and fails to admit or recognize the significance of his activity. There is a substantial likelihood that Mr. Stockett will commit future violations of the securities laws. Over the last decade, Mr. Stockett's sole occupation has involved investors, investing, and seeking out capital. It is also relevant, if not determinative, on the issue of the appropriateness of a sanction in the public interest that Mr. Stockett has a significant disciplinary history in the securities industry. The public interest, therefore, requires the imposition of a harsh sanction against Mr. Stockett. The Division requests that Mr. Stockett be barred from association with any broker, dealer, municipal securities dealer, investment adviser, and investment company. This is commonly referred to as an industry-wide bar or "collateral bar." The Commission recently decided that it had the authority to issue such collateral bars against respondents "in cases where it is contrary to the public interest to allow someone to serve in any capacity in the securities industry." Meyer Blinder, 65 SEC Docket 1970, 1981 (Oct. 1, 1997). Two factors to consider in determining whether a collateral bar is appropriate in the public interest are whether the respondent's "misconduct is of the type that, by its nature, 'flows across' various securities professions and poses a risk of harm to the investing public in any such profession" and "whether the egregiousness of the respondent's misconduct demonstrates the need for a comprehensive response in order to protect the public." Id. In light of the public interest factors cited above, I conclude that it is appropriate to issue a collateral bar against Mr. Stockett. The allegations, findings, and conclusions against Mr. Stockett were made pursuant to the Securities Act, Exchange Act, Advisers Act, and Company Act. Mr. Stockett's activities necessarily "flowed across" the various securities professions and posed a significant risk of harm to the investing public. His conduct was egregious and requires an immediate and comprehensive response in order to protect the public interest. B. Cease and Desist Section 8A of the Securities Act, Section 21C of the Exchange Act, Section 9(f) of the Company Act, and Section 203(k) of the Advisers Act provide that the Commission, after notice and opportunity for a hearing, may enter an order requiring any person who "is violating, has violated, or is about to violate," or who causes a violation of any provision, rule, or regulation of the securities laws to cease and desist from committing or causing such violation and any future violation of the same provision, rule, or regulation. These statutes, by their terms, permit the entry of a cease and desist order upon concluding that a violation of the securities laws has occurred. Mr. Stockett and the Hudson Respondents have violated various provisions of the securities laws. Considering this and the public interest factors cited above, I find that it is appropriate to issue a cease and desist order against all of the Respondents. 5 C. Civil Money Penalty Section 21B of the Exchange Act, Section 9(d) of the Company Act, and Section 203(i) of the Advisers Act authorize the Commission to assess civil money penalties against any person if it finds that such person has willfully violated or willfully aided and abetted a violation of a provision of the federal securities laws or has willfully made or caused to be made in any application for registration or report required to be filed with the Commission any false or misleading statements of material fact or has omitted to state a material fact. Since Respondents willfully violated or willfully aided and abetted violations of provisions of the federal securities laws and willfully made or caused to be made in documents required to be filed with the Commission misleading statements of material fact and omitted to state material facts, I may assess a civil money penalty against them if I find it is in the public interest. The above-referenced provisions specify a three-tier system for assessing the maximum amount of a penalty. In the first tier, the maximum penalty for each act or omission is $5,000 for a natural person or $50,000 for any other person. In the second tier, the maximum amount for each act or omission is $50,000 for a natural person or $250,000 for any other person if the act or omission involved fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement. In the third tier, the maximum amount for each act or omission is $100,000 for a natural person or $500,000 for any other person if the act or omission (i) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and (ii) directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in substantial pecuniary gain to the person who committed the act or omission. The assessment of a penalty depends on a finding that such an assessment is in the public interest. The public interest finding must support the amount of a particular assessment, not merely the overall decision to assess a penalty. See First Securities Transfer System, Inc., 60 SEC Docket 441, 447 n.15 (Sept. 1, 1995). The factors to consider in determining whether a civil money penalty and the penalty amount are in the public interest are: (i) whether the act or omission for which the penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; (ii) the harm to other person(s) resulting either directly or indirectly from such act or omission; (iii) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior; (iv) whether the respondent previously has been found by the Commission, another regulatory agency or a self-regulatory organization to have violated federal or state securities laws or the rules of a self-regulatory organization or has been enjoined or convicted by a court of competent jurisdiction of violations of such laws or rules; (v) the need to deter respondent and others from committing such acts or omissions; and (vi) such other matters as justice may require. Applying these criteria, I find that a third tier civil money penalty of $50,000 is appropriate against Mr. Stockett and that no money penalty should be issued against the Hudson Respondents. The Respondents' acts and omissions involved fraudulent and deceitful conduct and posed a significant risk of substantial losses to investors. Mr. Stockett's conduct, however, exhibited a higher level of scienter and egregiousness. The evidence is that Mr. Stockett intended to continue and expand his course of fraudulent and manipulative conduct. He has been disciplined by three government bodies for prior violative conduct and has, generally, demonstrated a reckless disregard of regulatory requirements. It is overwhelmingly likely that Mr. Stockett will violate the securities laws in the future, which emphasizes the need to deter him from doing so. I do not believe, however, that the Hudson Respondents should receive a civil money penalty. The public interest discussion above, with respect to Mr. Latef, is relevant in this analysis. Particularly important is that none of the Hudson Respondents were unjustly enriched, and that investors lost little or no money. I also consider the Hudson Respondents' level of scienter and their willingness to work with the Commission as mitigating factors. Further, I believe that a money penalty against the Hudson Respondents, in addition to the sanctions already ordered against them, would be excessive and not 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) (1998), I certify that the record includes the items set forth in the corrected record index issued by the Secretary of the Commission on March 23, 1999. VI. ORDER Based on the findings and conclusions set forth above, I ORDER, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 9(f) of the Company Act, that Hudson Investors Fund, Inc. shall cease and desist from committing or causing a violation or any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the Company Act; I FURTHER ORDER, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Section 9(f) of the Company Act, and Section 203(k) of the Advisers Act, that Hudson Advisers, Inc. shall cease and desist from committing or causing a violation or any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 34(b) of the Company Act, and Sections 204 and 207 of the Advisers Act and Rule 204-1(b) thereunder; I FURTHER ORDER, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Section 9(f) of the Company Act, and Section 203(k) of the Advisers Act, that Javed Anver Latef shall cease and desist from committing or causing a violation or any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 34(b) of the Company Act, and Section 207 of the Advisers Act; I FURTHER ORDER, pursuant to Section 9(b) of the Company Act and Section 203(f) of the Advisers Act, that Javed Anver Latef be, and hereby is, suspended from being associated with an investment adviser or an investment company for a period of three months; I FURTHER ORDER, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Section 9(f) of the Company Act, and Section 203(k) of the Advisers Act, that Larry Alan Stockett shall cease and desist from committing or causing a violation or any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 34(b) of the Company Act, and Sections 204 and 207 of the Advisers Act and Rule 204-1(b) thereunder; I FURTHER ORDER, pursuant to Section 9(b) of the Company Act and Section 203(f) of the Advisers Act, that Larry Alan Stockett be, and hereby is, barred from association with any broker, dealer, municipal securities dealer, investment adviser, and investment company; and I FURTHER ORDER, pursuant to Section 21B of the Exchange Act, Section 9(d) of the Company Act, and Section 203(i) of the Advisers Act, that Larry Alan Stockett pay a third tier civil penalty in the amount of $50,000. Payment of penalties shall be made on the first day following the day this initial decision becomes final by certified check, United States 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 and the proceeding designation, Administrative Proceeding File No. 3-9374, 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 also should be sent to the Commission's Division of Enforcement. 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 (1998). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one 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 twenty-one days after service of the initial decision upon such party, 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. _______________________ G. Marvin Bober Administrative Law Judge **ENDNOTES** <1>: According to evidence in the record, Respondent Latef's middle name should be spelled "Anver." <2>: See my Order on Exhibits, November 30, 1998, for my ruling related to the evidence in this proceeding. I will refer to the Division's exhibits as "(Div. Ex. __)," to the Hudson Respondents' exhibits as "(Hudson Ex. __)," and to Mr. Stockett's exhibits as "(Stockett Ex. __)." I will refer to the transcript as "(Tr. __)." <3>: The investment advisory agreement refers to "Hudson Advisors, Inc." (Div. Ex. 16.) The Hudson Fund's prospectus also refers to the Fund's investment adviser as "Hudson Advisors, Inc." (Div. Exs. 10, 11.) I conclude that the Hudson Fund's investment adviser is, and has always been, the same entity. For purposes of this decision, I will refer to the Fund's investment adviser as "Hudson Advisers," notwithstanding the inconsistent references to this entity throughout the record. (See, e.g., Tr. 177, 179; Div. Exs. 10, 11, 16.) <4>: Mr. Latef stated that he was never compensated for his work at Hudson Management or Hudson Advisers, and that his main source of support came from the Hudson Group and his wife, who was working. (Tr. 806.) <5>: As Mr. Stockett explained, "Now, I had a license in hand to offer Neuropro data processing services and information services from the IPO Network." (Tr. 739.) I ordered Mr. Stockett to submit the licensing agreement as an exhibit after the trial. (Tr. 740-41, 772-73, 784-86, 1117- 18.) In response, he submitted a Distributorship Agreement between The New Industrialist and the IPO Network which was signed on September 25, 1996, more than a month after the Hudson contracts were executed. (See Stockett Ex. 17.) The Distributorship Agreement did include a paragraph, however, which allowed the IPO Network to "sub- license, market and distribute" the Neuropro System. (Stockett Ex. 17 at 1.) <6>: According to Mr. Stockett, Neuropro Nevada would provide different services than those provided by the IPO Network up to that point. (Tr. 739- 40.) <7>: According to the Hightec Private Offering Memorandum, which was prepared by Mr. Stockett, On December 31, 1996, [Hightec] entered into negotiations to acquire 100% of the stock of Karate International Corporation (KIC), and its predecessor organization the United Studios of Self Defense of Northern California, LLC. The closing of the acquisition occurred on January 15, 1997. The IPO Network plans to establish offices co- located with some or all of the KIC training centers. KIC currently operates 6 company owned karate training centers and is the franchisor for an additional 26 franchisee owned Karate training centers. The IPO Network plans to offer its training seminars and financial services products to the 5,000 students of KIC and to individual investors who attend free seminars to be conducted at the current and future KIC training centers. (Div. Ex. 56 at 12.) <8>: As Mr. Stockett further explained: I basically have been in a mode attempting to make acquisitions that would achieve a membership base for the company that would allow me to go back into teaching, but without having to essentially solicit money. To attract the students I attempted to buy membership-based organizations and to buy companies including Sinclare Group which . . . had a software product and had over 100,000 users of that software product. They were already computer literate and on the internet and getting realtime [sic] stock quotes on the internet and, therefore, I could teach that audience of investors how to be better investors by simply updating my own Web site and electronically communicating with 100,000 people, which is much easier to do then [sic] get on an airplane and fly around the country giving seminars. (Tr. 1091.) <9>: According to Mr. Stockett, since The New Industrialist was out of business by February 1997, he had to purchase Sinclare in order to continue to provide the Neuropro System. (Tr. 760-61.) <10>: Mr. Latef claims that if he was aware of Mr. Stockett's disciplinary history at the time of the negotiations he would not have signed the contracts. (Tr. 839.) <11>: The second stock option agreement refers to "Hudson Advisors, Inc." and is signed by Mr. Latef as president of "Hudson Advisors, Inc." (Div. Ex. 19.) Taken in the context of the negotiations underlying this agreement, as supported by the testimony of witnesses and the evidence admitted in this proceeding, "Hudson Advisors, Inc." and "Hudson Advisers, Inc." are the same entity. (See, e.g., Tr. 178.) <12>: Although there is some dispute in the record, it otherwise appears from the context of the service agreement and the evidence regarding its creation that the reference to "Hudson Advisors Group, Inc." is meant to refer to the Fund's investment adviser, Hudson Advisers. (See, e.g., Tr. 158-59, 164-68, 178.) Mr. Latef intended to sign on behalf of Hudson Advisers. (Tr. 168, 178.) <13>: The expense agreement refers to "Hudson Advisors, Inc." and is signed by Mr. Latef as president of "Hudson Advisors, Inc." (Div. Ex. 20.) Taken in the context of the negotiations underlying this agreement, as supported by the testimony of witnesses and the evidence admitted in this proceeding, "Hudson Advisors, Inc." and "Hudson Advisers, Inc." are the same entity. (See, e.g., Tr. 178.) <14>: Mr. Stockett stated, "I never attempted to form Neuropro of Nevada. . . . I never attempted to conduct business as Neuropro, Inc. I never formed the corporation. I never got a bank book. I never did anything." (Tr. 738.) Mr. Latef visited The New Industrialist one or two days after he signed the agreements at issue, and began to question whether Neuropro Nevada actually existed as a corporation. (Tr. 831-38, 949.) From this visit, he realized that Neuropro Nevada did not exist as a Nevada corporation and called Nevada authorities to verify this fact, which they did; he also told Mr. Choudhry what he had learned about Neuropro Nevada. (Tr. 831-37, 920; see also Tr. 1027-28, 1039-40, 1047, 1056.) Thus, he considered the written agreements void. (Tr. 169, 837- 38, 941, 962-63, 973-74.) <15>: I ordered Mr. Stockett to produce this assignment document after the trial. (Tr. 733-34, 753-54, 773, 783-84, 1116.) He failed to do so. <16>: Mr. Stockett alleges that this material first appeared on the Internet sometime around February 24, 1997. (Tr. 305.) <17>: At the trial, Mr. Stockett reiterated his position that the IPO Network had a contract/agreement with Hudson Advisers and Hudson Management, and that Hightec, since it owned the IPO Network, technically was privy to the agreement. (Tr. 307.) <18>: Mr. Stockett claimed, for example, that the chart showed that the IPO Network only provided "Neuropro Service" to the Hudson entities and did not control them. (Tr. 730-36.) The chart, however, linked the IPO Network with the Hudson entities and stated, in the Hudson Fund box: "Mutual Fund Managed Since 8/7/96." (Tr. 694; ALJ Ex. 1; Div. Ex. 56 at second page 6.) Mr. Stockett testified that this showed that the Fund was managed by Hudson Advisers and Hudson Management, not the IPO Network, from August 7, 1996, the time of the agreements. (Tr. 730-37.) <19>: For example, Mr. Latef stated, "Basically, if these options can be arranged in a way that they can be exercised I would have no problems. But as they stand today, they are not exercisable but similar options and an entity that exists and all of that I have no problem." (Tr. 941; see also Tr. 945- 46, 956-57, 976- 77, 1057.) He stated it was a moral obligation to fulfill the terms of the contract if Mr. Stockett wished. (Tr. 960-61, 969.) Further, he testified: We still believe that we can give him the option whenever he wants. He knows it. I know it. And I state to you that we can give the option in his personal name. If he wants the option in Neuropro's name, it's not worth the price of the paper it's written on. If he wants a personal option he is most welcome and I found him a very decent man regardless of whatever anybody else might say about him but aside of I have no problem with that we took the money. We stand by whatever our understandings are. We gladly signed [sic] it in his personal name or any other companies [sic] name, today tomorrow or whenever he likes. (Tr. 976-77.) Mr. Latef also stated that if Mr. Stockett wanted to exercise his options he could, so long as he provided the back payments he owed. (Tr. 948.) <20>: The check for $50,000 was drawn on Mr. Stockett's personal checking account because the original check, drawn on an OTC account, was returned for insufficient funds. (Tr. 719-22; Div. Ex. 14 at 7.) <21>: At no time during the relevant period did the Hudson Fund's assets under management exceed $1,000,000. (Tr. 801, 804.) Pursuant to the expense agreement, therefore, Neuropro Nevada was required to pay Hudson Management $10,000 per month. The record demonstrates that Mr. Stockett made these payments in monthly increments of approximately $10,000. (Tr. 674; Div. Ex. 14 at 8-13.) Mr. Latef expected these payments and called Mr. Stockett when payments were past due. (Tr. 186-87, 674-76.) <22>: This check, dated October 9, 1996, was drawn from the Hudson Fund, made out to Hudson Management, and redeemed by Mr. Stockett. (Tr. 65-66, 296-97; Div. Exs. 25, 26.) A letter signed by Mr. Stockett, as president of OTC, to Mr. Latef, authorized Mr. Latef to withdraw $10,000 invested by OTC in the Hudson Fund and to transfer the proceeds to Hudson Management "to pay the ongoing operating expenses of the management company." (Tr. 67, 296-98, 850; Div. Ex. 26.) <23>: Mr. Latef believed that Mr. Stockett arranged for that payment, although he held no ownership interest in the company or magazine at the time, because the magazine owed him money. (Tr. 183-85, 220, 254-55, 679-80.) <24>: Mr. Stockett claims he loaned the money to Hightec and Hightec wrote the check. (Tr. 723.) <25>: Mr. Stockett later testified at the trial that he loaned money to the IPO Network and, since the IPO Network and Hightec shared a checking account, had the IPO Network deposit $10,000 on a Hightec check. (Tr. 723-24.) <26>: The payments were not loans or part of a loan - there was never a promissory note, no interest was assigned, and there never has been any repayment of the money. (See Tr. 120, 181, 243-44, 270, 281, 685-86, 870-71; but cf. Tr. 69-70, 123-24, 130.) <27>: Mr. Stockett explained that he was teaching Mr. Latef about investments and provided him newsletters, research, and information to make Mr. Latef a better investor/investment adviser. (Tr. 714.) <28>: Mr. Latef described, in general terms, the nature of his discussions with Mr. Stockett: Mr. Stockett, I believe, knew a lot about IPOs. So therefore, the stocks which I picked up from his four- page publication I called him to get some background on those stocks, and I discussed them in detail with him, and then I picked up some stocks . . . around twelve or ten or whatever. . . . I never discussed with him suitability for the Fund. I discussed with him the upside potential and things like that, as you would discuss with anybody who is knowledgeable about the background of the stock. . . . Other stocks I can sit and analyze myself, but Initial Public Offerings you have to go to an expert who can project into the future fairly and accurately, and I believe Mr. Stockett was one of those experts, because he was printing a publication. He was maintaining a site on the Web and he was even having a column in New Industrialist. (Tr. 194-95.) <29>: According to Mr. Latef, "I found out that he was affiliated with Hightec after I bought it. It was about a week later I found it out and I was not very happy about it, because for one reason if he was affiliated with that stock I would have not consider[ed] his opinion on that stock because it cannot be unbiased." (Tr. 863.) Mr. Latef stated that had he known of Mr. Stockett's affiliation with Hightec he "probably would have thought [the purchase] over very carefully and probably [would] not" have purchased stock in Hightec. (Tr. 900.) He stated, "I would be extremely careful if a president called me or any officer of a company called me because whatever opinion they gave me is not kind of unbiased." (Tr. 899.) <30>: Mr. Stockett secured his purchase with a promissory note in the amount of $160,000, which was due and payable ninety days from the close of the transaction. (Div. Ex. 45A.) The stock was held in escrow and was supposed to be released upon full payment by Mr. Stockett. (Div. Ex. 45A.) Mr. Stockett, apparently, never paid the money due on the promissory note. (See Div. Ex. 81.) <31>: She was already an "investor" in, or associated with, BAI at the time by virtue of a $100,000 loan she made to the company in January 1997, for which she received "dividends." (Tr. 553-54, 569-70.) Ms. Garth later became a stockholder of BAI and in June 1997 became a member of its board of directors. (Tr. 528, 569.) Mr. Kidd apparently had no idea that she contacted Mr. Stockett, posing as an investor, until after the fact. (Tr. 528, 531-33, 568.) <32>: "Neuropro," "NeuroPro," and "Neuropro, Inc." are terms used frequently throughout the Winners Edition and are used interchangeably to refer to a Neuropro corporation, its trademark, and its software system. (See, e.g., Div. Ex. 71 at 86; see generally Div. Ex. 71.) I will refer to them, generally, as "Neuropro" for purposes of this section. <33>: This was not the first that Mr. Latef had heard of WIN. Approximately two months before he saw the Winners Edition, a certified public accountant visited the Hudson offices, told Mr. Latef that he was an officer of WIN, told Mr. Latef a little about WIN, and invested $100 in the Fund. (Tr. 213-14, 223, 227.) <34>: Mr. Latef had previously hired Mr. Lazarus and The New Industrialist, however, to print 2,500 copies of the Fund's prospectus on The New Industrialist's printer, based on Mr. Stockett's referral. (Tr. 275-76.) <35>: There is testimony that Mr. Latef discussed a mass mailing of the prospectus with Mr. Stockett, prior to the distribution of the Winners Edition. (Tr. 278.) Circumstantial evidence indicates that Mr. Latef approved the mailing in order to take advantage of the fact that WIN was making substantial restitutional payments to its members, such that WIN members would invest their returned funds in the Hudson Fund. (Tr. 278.) <36>: The article includes the following paragraph which, according to Mr. Latef, is an untrue statement: The Hudson Fund has employed on a "test basis" for a portion of its portfolio, The New Industrialist Neuropro System. The Fund has used the Neuropro System since August 11, 1996, and performance gain to December 9, 1996, was 19.6% on the net capital committed. Naturally, this performance may not be indicative of future events, and the Fund may elect not to use Neuropro in the future. However, the results underscore the reliability of data supplied by The New Industrialist. (Div. Ex. 71 at 1; Tr. 210-11.) <37>: The text in the advertisement appears to come from the Fund's prospectus. The logo, however, is inaccurate. (Tr. 215.) <38>: Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange, and in connection with the offer, purchase, or sale of any securities: (i) to employ any device, scheme, or artifice to defraud; (ii) to make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (iii) to engage in any act, transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser. Section 34(b) of the Company Act makes it unlawful for: (i) any person to make any untrue statement of material fact in any registration statement, application, report, account, record, or other document filed or transmitted pursuant to this title or the keeping of which is required pursuant to Section 31(a); and (ii) any person so filing, transmitting, or keeping any such document to omit to state therein any fact necessary in order to prevent the statements made therein, in the light of the circumstances under which they were made, from being materially misleading. <39>: The Division alleges that the option agreements gave Mr. Stockett control over Hudson Advisers and Hudson Management, and that potential investors were entitled to know about this. (Div. Post. Brief at 15-16, 23- 24.) The Division argues, "Due to his role as the sole source of financing for Hudson Fund and Hudson Advisers and his option to acquire Hudson Advisers and [Hudson Management] for $100 each, Stockett exerted significant, if not determinative, influence over Hudson Fund's investment decisions." (Div. Post. Brief at 15-16.) It argues, further, that Mr. Stockett's influence over the investment decisions of the Hudson Fund "is evidenced by the large percentage (over 50%) of Hudson Fund's portfolio which was recommended by Stockett and by the significant percentage (nearly 12%) invested in Hightec and Sinclare, companies controlled by Stockett and of which Stockett is president." (Div. Post. Brief at 16.) <40>: There may have been a short mention in one of the resources. (Tr. 927-28.) <41>: There is a press release in the record as part of Division Exhibit 45A, Hightec's Form 8-K, dated November 20, 1996, filed with the Commission on December 16, 1996. As mentioned above, Mr. Latef testified that he did not see this Form 8-K prior to the Hightec purchase. <42>: This "notice" was a self-serving promotion of Hightec. It is likely that Mr. Stockett was responsible for its appearance in the Winners Edition. The notice is titled "HIGH TECH INC. (HTEH) $.75" and provides, in pertinent part: High Tech Inc. (HTEH) is considered a special situation and the report in this column is presented as a notice and not as a commentary. Therefore, Neuropro will not rate the stock because of a direct business relationship by [sic] the publisher The New Industrialist Company. Under a series of agreements, The New Industrialist Company has assigned a license to distribute The New Industrialist and Wealth International Network, LLC, has agreed to distribute a private label edition of The New Industrialist to be called the Winners' Edition. Manage [sic] has set a goal for the potential revenue stream which allow [sic] the Company to sell at 10 times earnings or $18 a share over the long-term. However, this projection is based on management's assessment of the agreements and the likelihood of implementing them on a commercial basis in the mid- term. These agreements are under a strategic alliance entered into with IPO Network which has assigned the understandings to HTEH. (Div. Ex. 71 at 48.) Although the spelling of the company name is different, it is the Hightec at issue in this proceeding. This notice should have been a red flag to Mr. Latef of Mr. Stockett's involvement in Hightec, The New Industrialist, and the Winners Edition. Mr. Latef denies that this notice raised any red flags. (Tr. 949- 50.) <43>: The apparent benefit to an interested Mr. Stockett at the time of the Fund's purchase of Sinclare shares (i.e. the increased price for Sinclare shares) later would have been a detriment to him in Hightec's purchase of the company (i.e. the increased purchase price for Sinclare). <44>: I also question Mr. Latef's judgment in making investment decisions related to Hightec and Sinclare. Mr. Latef accepted $10,000 from The New Industrialist, on behalf of Mr. Stockett, before the Fund invested in Sinclare. At the time, The New Industrialist and Sinclare were related entities and, later, Mr. Stockett purchased an interest in Sinclare and became its president. Mr. Latef also accepted $20,000 from Hightec while the Fund still held an investment in the company. <45>: Section 204 provides: Every investment adviser who makes use of the mails or of any means or instrumentality of interstate commerce in connection with his or its business as an investment adviser . . . shall make and keep for prescribed periods such records . . . , furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. Rule 204-1(b) requires an investment adviser to file an amendment to its registration application, including amendments, if information contained in the registration statement or its amendments becomes inaccurate. <46>: Section 207 provides: It shall be unlawful for any person willfully to make any untrue statement of a material fact in any registration application or report filed with the Commission under section 203 or 204, or willfully to omit to state in any such application or report any material fact which is required to be stated therein. <47>: The OIP alleges that, by the conduct described above, Mr. Latef "caused and willfully aided, abetted, counseled, commanded, induced or procured violations of Section 204 of the Investment Company Act and Rule 204-1(b) thereunder." (OIP at II.B.6., II.B.17. (emphasis added).) <48>: Section 203(a) provides that "it shall be unlawful for any investment adviser, unless registered under this section, to make use of the mails or any means or instrumentality of interstate commerce in connection with his or its business as an investment adviser." <49>: Willfulness does not require an intent to violate the law, nor does it require "deliberate or reckless disregard of a regulatory requirement." See Jacob Wonsover, Exchange Act Rel. No. 41123, 1999 WL 100935, at *9 (Mar. 1, 1999). It is sufficient if the respondent intends to commit the act which constitutes the violation. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); James E. Ryan, 47 S.E.C. 759, 761 n.9 (1982). Where, as here, the scienter requirement of the antifraud provisions is satisfied, the willfulness standard is also met. V.F. Minton Securities, Inc., 51 S.E.C. 346, 352 (1993). <50>: Mr. Latef holds degrees in economics from a university in Pakistan, has a degree in business from a university in Scotland, and has studied law. (Tr. 794, 935-37.) Mr. Latef worked in England as an accountant. (Tr. 795.) He came to United States and worked as the comptroller of a company in Houston for about a year. (Tr. 796.) In January 1996, he left to join a company that managed the Roosevelt Hotel on Madison Avenue in New York City. (Tr. 796.) He worked for the Roosevelt Hotel for six years as director of finance and senior vice-president, and was essentially in charge of the whole operation. (Tr. 797-98.) He left the hotel in 1991 to pursue a business opportunity with Mr. Choudhry. (Tr. 797.) Mr. Latef, apparently, was granted reciprocal privileges as a certified public accountant when he was in Texas. (Tr. 800, 937.) In addition, he holds several securities licenses. (Tr. 800.) He has no disciplinary history related to his activity in the securities industry. (Tr. 800.) 6