Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
ANNABLE TURNER &
| INITIAL DECISION
September 30, 2002
|APPEARANCES:|| J. Kevin Edmundsen for the Division of Enforcement, Securities and Exchange Commission
Respondent Roger E. Turner, pro se,
|BEFORE:||Lillian A. McEwen, Administrative Law Judge|
The Respondents, Annable Turner & Co., Inc. (ATCO) and Roger E. Turner (Turner), violated Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act) by employing a device, scheme, or artifice to defraud, and by willfully making false statements and omissions. ATCO also willfully violated Section 204 of the Advisers Act and Rules 204-1(c) and 204-2 thereunder by failing to file and maintain true, current, and accurate reports. Turner willfully aided and abetted ATCO's Section 204 violation, and its violations of the rules thereunder. This Initial Decision (Decision) bars Turner from affiliating with any investment adviser, broker, or dealer; and it revokes ATCO's registration.
On September 8, 1999, the Securities and Exchange Commission (Commission) issued an order instituting proceedings (OIP) pursuant to Sections 15(b) and 19(h) of the Exchange Act and Sections 203(e) and (f) of the Advisers Act. From March 14 to March 16, 2000, a public hearing was held before me at a United States correctional facility in Beaumont, Texas. The Division of Enforcement (Division) called four witnesses in its case in chief. Turner neither testified nor called any witnesses in his or ATCO's defense. I admitted into evidence thirty-four exhibits for the Division, and one exhibit for ATCO and Turner.1
The OIP alleges (1) that ATCO has been registered with the Commission as an investment adviser since January 1989; (2) that, at all times relevant, Turner owned 100 percent of ATCO's outstanding shares, controlled the adviser's activities, and was a registered representative with a broker-dealer registered with the Commission; (3) that ATCO and Turner conducted a "ponzi" scheme by which they defrauded ATCO's advisory clients and other investors out of approximately $5.46 million; (4) that Turner misappropriated and commingled investors' funds, and used the funds to make ponzi payments to other clients, pay his personal expenses, and fund ATCO and his other businesses; (5) that Turner encouraged additional investments, engaged in an ongoing deception, and provided falsified ATCO statements; and (6) that ATCO failed to make any Form ADV-S filings between September 1, 1994, and December 17, 1996, and failed to preserve and secure certain required records.
The OIP alleges that as a result of the aforementioned activities ATCO and Turner willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Advisers Act. The OIP also alleges that ATCO willfully violated Section 204 of the Advisers Act and Rules 204-1(c) (as in effect during the relevant time) and 204-2 thereunder; and that Turner willfully aided and abetted ATCO's Section 204 violation and the rules thereunder. Finally, the OIP alleges that Turner pled guilty to a federal criminal action charging him with violating Sections 17(a) and 24 of the Securities Act, in a proceeding titled United States of America v. Roger E. Turner, Criminal Action No. 397-CR-427-G (1997), before the United States District Court, Northern District of Texas, in Dallas, Texas. If I conclude that the allegations in the OIP are true, I must then determine what, if any, remedial sanctions are appropriate pursuant to the federal securities laws.
FINDINGS OF FACT
The findings and conclusions in this Decision are based on the record and the demeanor of the witnesses who testified at the hearing. Preponderance of the evidence was applied as the standard of proof. See Steadman v. SEC, 450 U.S. 91, 102 (1981). All arguments, testimony, and proposed findings and conclusions that were inconsistent with this Decision were rejected. Having reviewed the entire record, I find the following facts to be true.
Turner and ATCO.
From November 1983 until June 1987, Turner worked for three successive securities firms - E. F. Hutton & Co. (E. F. Hutton), VCG Securities, and Integrated Resources Equity Corp. (Div. Ex. 9.) Turner obtained his Series 7 and Series 63 licenses in 1984, and his Series 24 license in 1987. (Tr. 74; Div. Ex. 9.) In October 1986 he was discharged from E. F. Hutton, and in 1988 he was censured and fined $2,500 by the National Association of Securities Dealers, Inc. (NASD). (Tr. 73-74, 134, 138.) Turner incorporated ATCO as its president in June 1987; he also worked as a registered representative with Royal Alliance Associates, Inc. (Royal), a registered securities dealer, from November 1989 through April 1996. (Tr. 247; Div. Exs. 2, 4, 9.) As ATCO's principal and as a registered representative with Royal, Turner gained the trust of many investors. (Div. Exs. 4, 9.)
ATCO, a Texas corporation with its principal place of business in Grand Prairie, Texas, submitted its initial investment adviser registration application on Form ADV on or about December 1, 1988. (Div. Exs. 1, 2, 4, 9.) Turner signed the application as president of ATCO on or about November 10, 1988. (Tr. 76; Div. Ex. 9.) Nowhere in the application, however, is there any disclosure of the censure and fine imposed on Turner by the NASD in 1988. (Tr. 76-77.) Pursuant to the provisions of the Advisers Act, ATCO's registration became effective January 13, 1989. (Div. Ex. 1.) Since September 7, 1994, however, ATCO failed to file with the Commission the requisite Form ADV-S. (Div. Ex. 1.) ATCO also failed to maintain monthly bank statements, and provided clients false and misleading statements. (Tr. 53; Div. Ex. 4.) Moreover, ATCO has failed to pay its franchise tax to Texas, and it has become an inactive corporation. (Tr. 77.)
In addition to running ATCO and working at Royal, Turner also held an ownership interest or was otherwise closely affiliated with several other Texas corporations, including Manufactures Acceptance Corporation, Inc. (MAC), Physicians Billing and Bookkeeping, Inc. d/b/a HealthTeam Management (HTM), and R.E. Turner & Co. (RET) (collectively Turner's Other Businesses). (Tr. 49, 95-96, 102-03; Div. Ex. 4.) HTM, via Turner, filed for voluntary bankruptcy protection in November 1996. (Tr. 253, 258.) MAC was involuntarily placed in bankruptcy around September 1997, but subsequently emerged. (Tr. 253, 257.)
Turner and ATCO's Scheme to Defraud.
Joseph Dauper (Dauper) invested 100 percent of his retirement account, approximately $340,000, with Turner and ATCO in the early 1990's. (Tr. 268-70, 275; Div Exs. 12 at 20, and Ex. 13.) Dauper instructed Turner to invest the money conservatively. (Tr. 270.) Dauper was looking for something safe with an eight percent return. (Tr. 270.) Turner initially invested Dauper's retirement funds in mutual funds. (Tr. 270-71, 275; Div. Ex. 12 at 21.) In 1993, however, Turner advised Dauper to liquidate some of his investments and transfer the funds into other investments. (Tr. 271, 275; Div. Ex. 12 at 22.) Pursuant to Turner's instruction, Dauper wired $89,000 and $19,500 to a bank account that belonged to RET. (Tr. 275; Div. Exs. 8, 12 at 23.) Turner never used the funds for investments but instead paid earlier investors and debts with the funds. (Tr. 275; Div. Ex. 12 at 23.) Turner falsely told Dauper that his investments were in a "cash account" earning interest. (Tr. 275; Div. Ex. 12 at 23.) In 1995, Turner received an additional $140,000 by liquidating some of Dauper's other mutual funds. (Tr. 275; Div. Ex. 12 at 24.) Turner informed Dauper falsely that his funds had been invested in a preferred stock traded on the over-the-counter market known as "MAC Preferred 8%" and that Dauper had received $11,200 in income in 1995 and 1996. (Tr. 275; Div. Ex. 12 at 24-25.) The funds were actually deposited in a corporate account controlled by Turner and were used to pay off earlier investors and other debts. (Tr. 275; Div. Ex. 12 at 24.) Finally, in October 1996, Turner persuaded Dauper to transfer an additional $67,000 from an IRA, and to pay the accompanying taxes and penalties for early withdrawal on $50,000 of that amount. (Tr. 275, 278, 281-82; Div. Ex. 12 at 25.) Turner falsely represented that an investment in HTM was an IRA-qualified security, that HTM was an established corporation recently acquired as part of a consolidation, and that HTM was a "no lose situation" that would increase four or five times in value. (Tr. 275, 278-79; Div. Ex. 12 at 25.) Turner did not tell Dauper the truth - that HTM had not paid its taxes in several years, that the company was insolvent, and that it was about to file for bankruptcy. (Tr. 275, 278-79, 284; Div. Ex. 12 at 26.) Dauper requested the return of his money, but he has received no restitution from Turner or ATCO. (Tr. 275-77; Div. Ex. 12 at 26.)
Donald Weast (Weast), after retiring in 1996, contacted Turner for investment and retirement advice; they discussed HTM. (Tr. 288, 290.) In February 1997, Weast transferred $150,000 from his IRA to Turner for investment in HTM, making the check payable to HTM. (Tr. 291.) Turner told Weast falsely that HTM was an IRA-qualified investment. (Tr. 292, 309-10, 319.) Turner never informed Weast that HTM had voluntarily filed for bankruptcy in November 1996, and Weast never received any shares of HTM. (Tr. 293-94, 320.) Weast asked for a return of his money and eventually sued Turner. (Tr. 294.) The court issued a default judgment with treble damages equaling $375,000 against Turner, but Weast has not received any restitution. (Tr. 296-97.)
The total amount of money Turner and ATCO received from investors in the scheme was approximately $4.9 million; the total amount dispersed to the same investors was approximately $1.5 million, leaving a difference of approximately $3.5 million. (Tr. 66; Div. Exs. 8, 16-35.) This amount was misappropriated and transferred as needed to Turner's Other Businesses. (Tr. 56, 68-70, 97.) For example, on February 3, 1993, Doris Stevenson (Stevenson) made a $60,000 investment; the same day $52,600 was paid out to an earlier investor, Leo Gard; the only funds from which payment could be made were from Stevenson's investment. (Tr. 70.) Investors' monies were also being used for Turner's personal benefit. (Tr. 71-72, 123.) For example, on July 26, 1994, Flosie Daggett and Helen Stevens made an investment of $135,000; approximately $7,000 of that amount was used to pay for Turner's wedding reception. (Tr. 71.) There was no evidence that ATCO or Turner ever used investors' funds to purchase securities. (Tr. 69, 158.)
The Criminal Case.
On December 17, 1997, the United States of America initiated federal criminal securities charges against Turner in the United States District Court for the Northern District of Texas (Federal District Court). (Div. Ex. 2.) The proceeding was titled United States of America v. Roger E. Turner, Criminal Action No. 397-CR-427-G. (Div. Ex. 2.)
On the same date, Turner freely and knowingly pled guilty in Federal District Court to violating Sections 17(a) and 24 of the Securities Act, 15 U.S.C. 77q(a) and 77x. (Div. Ex. 3.) I find the following facts to be true, as described in the plea stipulation: Turner was a registered agent of Royal from November 1989 through April 1996. From January 1990 through January 1997, Turner operated ATCO as an investment adviser. During this same time Turner held an ownership interest in MAC, HTM, and RET. Turner acted as an investment adviser to numerous individuals and advised investors to place their funds in various securities in which Turner had an interest. Turner used interstate commerce in furtherance of his fraud and received clients' monies via interstate commerce. Turner made false and fraudulent representations in order to induce investors, including representations that the investors' monies would be placed in a qualified retirement account, that recommended investments were safe and solvent, that investors would receive a substantial return on their investments, and that certain specific investments would be made. Contrary to these representations, investors' funds were never placed in qualified retirement accounts, investments made were high risk in nature and in companies with precarious financial conditions, and specific investments articulated were never made. Turner omitted to disclose material information, including that the quarterly statements contained false and inaccurate information, that investments were made into a fictitious company, that funds paid to investors as earnings were actually funds from other clients, and that HTM was in poor financial health and had filed or was about to file for bankruptcy. (Div. Ex. 4.)
On May 12, 1998, the Honorable A. Joe Fish of the Federal District Court sentenced Turner to thirty-four months of imprisonment. (Div. Exs. 5, 6.) On May 13, 1998, the court entered its final judgment. (Div. Ex. 6.) In that judgment the court ordered restitution in the amount of $2,979,615.31 be provided to identified victims in identified amounts. (Div. Exs. 6, 7.) Turner has paid approximately $15,000 in total restitution, and that amount was paid in response to the first civil suit initiated by attorney Jeanne Crandall. (Tr. 202, 260.) That suit resulted in a default judgment against Turner of approximately $1 million. (Tr. 201; Div. Ex. 11.) Even though MAC and HTM entered bankruptcy, the investors never received any assets. (Tr. 253.) The only restitution they have obtained has come through settlements with third parties. (Tr. 207, 209.) The investors remain, however, far from being made whole. (Tr. 207, 218.)
CONCLUSIONS OF LAW
Turner argued during the hearing in the instant case that his plea agreement and factual resume were "signed in a state of shock" and that he was coerced into signing them because of the government's threats to pursue his family. (Tr. 25-26, 149-50.) I reject his representations. Criminal convictions cannot be collaterally attacked in an administrative proceeding. See Elliot v. SEC, 36 F.3d 86, 97 (11th Cir. 1994); Meyer Blinder, 53 S.E.C. 250, 253 (1997); Benjamin G. Sprecher, 64 S.E.C. Docket 720, 729 (April 8, 1997); see also Robert Sayegh, 69 SEC Docket 1307, 1312 (Mar. 30, 1999); John Francis D'Acquisto, 53 S.E.C. 440, 444 (1998). Although respondents may present evidence as to the appropriateness of the sanction, they are precluded from contesting the allegations and relitigating the facts. See Samuel O. Forson, 65 SEC Docket 24, 25 (July 21, 1997). I have, therefore, taken official notice of the plea agreement and factual resume in United States of America v. Roger E. Turner, Criminal Action No. 397-CR-427-G, and I conclude that the Federal District Court is a court of competent jurisdiction. See 17 C.F.R. 201.323.
ATCO is a Registered Investment Adviser.
Section 203(c) of the Advisers Act allows one to register as an investment adviser by submitting an application to the Commission containing such information as the Commission may prescribe. See 15 U.S.C. 80b-3(c). The Commission shall by order grant such registration, or institute a proceeding to determine whether registration should be denied. See id. ATCO submitted its initial investment adviser registration application, Form ADV, under Section 203(c) of the Advisers Act to the Commission on or about December 1, 1988. (Div. Exs. 1, 2, 4, 9.) The application identifies Turner as the president and controlling owner of ATCO; it was signed by Turner as president of ATCO on or about November 10, 1988. (Tr. 76; Div. Ex. 9.) Pursuant to Section 203(c)(2)(A) of the Advisers Act, ATCO's registration became effective January 13, 1989. I therefore conclude that ATCO is a registered investment adviser and that Turner controlled and owned ATCO.
Antifraud Provisions - 17(a), 10(b), and 206.
The Securities Act, Exchange Act, and Advisers Act each have their own antifraud provision. Section 17(a) of the Securities Act declares it unlawful for any person in the offer or sale of securities, by use of any means of interstate commerce, directly or indirectly (1) to employ any device, scheme, or artifice to defraud, (2) to obtain money or property by means of any untrue statement of material fact or any omission of a material fact necessary in order to make the statements made not misleading, or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. See 15 U.S.C. 77q(a).
Section 10(b) of the Exchange Act makes it unlawful for any person in connection with the purchase or sale of any security by use of any means of interstate commerce to use or employ any manipulative or deceptive device or contrivance in contravention of the Commission's rules and regulations. See 15 U.S.C. 78j. Rule 10b-5, pursuant to Section 10(b), makes it unlawful for any person, under the conditions specified in Section 10(b), to (1) employ any device, scheme, or artifice to defraud, (2) make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading, or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. See 17 C.F.R. 240.10b-5.
Sections 206(1) and 206(2) of the Advisers Act state that it is unlawful for any investment adviser, by use of mail or any means of interstate commerce, (1) to employ any device, scheme, or artifice to defraud any client or prospective client; or (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. See 15 U.S.C. 80b-6.
In Connection With.
Sections 17(a) and 10(b) only apply, respectively, to transactions concerning "the offer or sale of securities" and "in connection with the purchase or sale of any security." See 15 U.S.C. 77q and 78j. These concepts have been interpreted broadly. See SEC v. Zandford, 122 S. Ct. 1899, 1903 (2002); Rubin v. United States, 449 U.S. 424, 429 (1981); see also Superintendent of Ins. v. Bankers Life and Cas. Co., 404 U.S. 6, 12 (1971). In the instant case, Turner and ATCO solicited investors to sell certain investments they already owned and to invest the money via Turner and ATCO in different securities. I conclude that these facts are sufficient to meet the requirements of Sections 17(a) and 10(b).
Scienter and Materiality.
Although the OIP alleged violations of Sections 17(a), 10(b), and 206 only generally, certain subsections require a showing of scienter. While negligence is sufficient for a violation of Sections 17(a)(2), 17(a)(3), and 206(2), Sections 17(a)(1) and 10(b), and Rule 10b-5 require a showing of scienter, defined as a state of mind embracing an intent to deceive, manipulate, or defraud. See Aaron v. SEC, 446 U.S. 680, 686-97, 701-02, 709 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976); SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195 (1963). Moreover, some circuits have found that violations of Section 206(1) require a showing of scienter. See SEC v. Steadman, 967 F.2d 636, 641 & n.3 (D.C. Cir. 1992); Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). Reckless conduct can be sufficient to establish scienter. See Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1284 (11th Cir. 1999).
Case law dictates that misrepresentations and omissions must be material to violate the securities laws. See Basic, Inc. v. Levinson, 485 U.S. 224, 240 (1988). Materiality depends on the significance a reasonable investor would place on the misrepresentation. See id. An omission is material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Id. at 231-32 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). An adviser has an affirmative duty of utmost good faith to avoid misleading its clients by disclosing all material facts. See Laird v. Integrated Resources, Inc., 897 F.2d 826, 837 (5th Cir. 1990).
I conclude that Turner and ATCO had the requisite scienter for violating Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(1) of the Advisers Act; and that their misrepresentations and omissions were material. First, Turner pled guilty to Section 17(a); second, Turner and ATCO made false and fraudulent representations, and omissions, to potential investors for the purpose of inducing investors to invest; and third, Turner and ATCO used investors' money for improper purposes including their own benefit. (Tr. 68-71; Div. Exs. 3, 4.) Turner and ATCO also failed to inform potential investors that HTM was in bankruptcy when soliciting money. Turner and ATCO told investors that investments were qualified IRA investments when they were not, and they never used the proceeds to purchase securities, but rather paid off prior investors and personal debts. Certainly Turner's and ATCO's clients would have refused to invest money in a bankrupt company, under the control of a broker who would soon steal it from them. I find these representations and omissions to be material and to demonstrate clearly the requisite scienter.
In sum I conclude that ATCO and Turner, in connection with the offer and sale of securities, and with the requisite scienter, made materially false and fraudulent representations in order to induce investors to invest; specifically, Turner misrepresented to investors that their funds would be placed in qualified individual retirement accounts, that the investments recommended were safe and financially sound, that investors would receive substantial returns on their investments, and that their monies would be used to purchase specific investments. (Div. Ex. 4.) None of these representations were true. ATCO and Turner also omitted to disclose to investors material facts necessary to make statements made not misleading; namely, that MAC and HTM had or were about to file for bankruptcy, that monthly statements provided to investors were fraudulent, and that the investors' funds were not invested but used to pay off other investors and debts. (Tr. 284, 292-94; Div. Ex. 4.) These fraudulent communications and the exchange of money occurred via interstate commerce, and were made to induce investments. (Div. Ex. 4.) I therefore conclude that ATCO and Turner violated Section 17(a), of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act.
Section 204, Rules 204-1(c) (as in effect during the relevant period, 1994-1996) and 204-2, and Turner's Aiding and Abetting of the Violations.
Section 204 states that every investment adviser who makes use of interstate commerce in connection with its business shall make and disseminate such reports as the Commission prescribes as necessary or appropriate in the public interest or for the protection of investors. See 15 U.S.C. 80b-4. Rule 204-1(c) (as in effect during the relevant period, 1994 through December 1996) required investment advisers to file Form ADV-S within ninety days of the end of the fiscal year. See 17 C.F.R. 275.204-1(c) (1994-1996); 61 Fed. Reg. 68,503 (December 27, 1996) (staying the filing of Form ADV-S); 62 Fed. Reg. 28,112 (May 22, 1997) (rescinded Form ADV-S and replaced it with other annual amendment filings). Rule 204-2 states that every investment adviser registered with the Commission shall make and keep true, accurate, and current records relating to its investment advisory business. See 17 C.F.R. 275.204-2.
In the instant case, ATCO provided its clients with false and misleading monthly reports. These reports misrepresented to investors that the investors' monies were earning certain returns and were invested in particular securities. ATCO also failed to keep and maintain bank statements and account statements for periods covering multiple months up to years. ATCO had not filed with the Commission requisite Form ADV-S from September 7, 1994, until December 1996, when the Commission stayed the filing requirement. Finally, ATCO's initial registration application failed to disclose that Turner had been sanctioned by NASD. Based on the above, I find that ATCO violated Section 204 of the Advisers Act and Rules 204-1(c) and 204-2 thereunder.
I also conclude that Turner aided and abetted ATCO's Section 204 violations. For aiding and abetting liability, three requirements must be met. First, there must be a primary securities violation; second, the aider and abettor must be aware or knowledgeable that his role was part of the overall improper activity; and third, the aider and abettor must substantially assist the conduct that causes the violation. See Graham v. SEC, 222 F.3d 994, 1000 (D.C. Cir. 2000); Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); Woodward v. Metro Bank, 522 F.2d 84, 94-97 (5th Cir. 1975); Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
In the instant case, Turner was the president of ATCO. He signed ATCO's registration statement knowing that he had been sanctioned by the NASD, and he did not disclose that fact. He also failed to maintain complete and accurate files for ATCO's customers and failed to file ATCO's requisite Form ADV-S. These actions by Turner clearly demonstrate that he had the requisite knowledge to aid and abet the underlying violations. The actions also demonstrate that Turner substantially assisted ATCO's violation. Having already concluded that ATCO violated Section 204 of the Advisers Act and Rules 204-1(c) and 204-2 thereunder, I now conclude that Turner aided and abetted ATCO's violations.
The Division requests that Turner be barred from associating with investment advisers or broker-dealers, that ATCO's registration as an investment adviser be revoked, and that ATCO and Turner be required to provide a complete accounting and disgorge their improper gains. Having found the allegations in the OIP to be true, I now turn my attention to discussing the appropriate sanctions.
When the Commission determines administrative sanctions it considers what is in the public interest; specifically, it considers a number of different factors, including but not limited to:
[T]he 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 at 1140 (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)). The severity of sanctions depends on the facts of each case and the value of the sanction in preventing a recurrence. See Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Taking into consideration these public interest factors, I find the actions of Turner and ATCO were egregious and demonstrated a high degree of scienter. Turner gave no assurances against future violations and at no time recognized any wrongful conduct for which he takes responsibility.
Section 203(f) of the Advisers Act authorizes the Commission to bar any person from being associated with an investment adviser if the Commission finds that the bar is in the public interest and that such person (1) has been convicted of any crime by a court of competent jurisdiction which the Commission finds involves the purchase or sale of any security or arises out of the conduct of being a broker, dealer, or investment adviser, (2) willfully made a false or misleading statement with respect to a material fact in any application for registration or report filed with the Commission, or (3) willfully violated any provision of the Securities Act, Exchange Act, or Advisers Act. See 15 U.S.C. 80b-3(f).
Section 15(b)(6)(A) of the Exchange Act authorizes the Commission to bar any person from being associated with a broker or dealer if the Commission finds that the bar is in the public interest and that such person (1) has been convicted of any crime by a court of competent jurisdiction which the Commission finds involves the purchase or sale of any security or arises out of the conduct of being a broker or dealer, (2) willfully made a false or misleading statement with respect to a material fact in any application for registration or report filed with the Commission, or (3) willfully violated any provision of the Securities Act, Exchange Act, or Advisers Act. See 15 U.S.C. 78o.
Turner pled guilty to violating Section 17(a) of the Securities Act. He also willfully made material misrepresentations to the Commission in ATCO's registration statement by failing to articulate the NASD's sanctions against him. I find a bar to be in the public interest due to the egregiousness of the violations. Turner's disregard for securities laws and regulations is evident. His behavior and refusal to accept responsibility dictate that he be barred from associating with any investment adviser or any broker-dealer as defined by Section 202 of the Advisers Act and Section 3 of the Exchange Act.
Revoking ATCO's Registration.
Section 203(e) of the Advisers Act authorizes the Commission to revoke the registration of any investment adviser if the revocation is in the public interest and the investment adviser or any person associated with the investment adviser (1) willfully made a false or misleading statement with respect to any material fact in any application for registration or report filed with the Commission, (2) has been convicted of any crime by a court of competent jurisdiction which the Commission finds involves the purchase or sale of any security or arises out of the conduct of being a broker or investment adviser, or (3) willfully violated any provision of the Securities Act, Exchange Act, or Advisers Act. See 15 U.S.C. 80b-3(e).
It is clear in this proceeding that a revocation of ATCO's registration is appropriate. Turner pled guilty to violating Section 17(a) of the Securities Act. In connection with his plea, he stipulated that he made false and fraudulent representations to induce investors, omitted to disclose material information necessary to make the statements made not misleading, and misappropriated investors money. Turner and ATCO also willfully made material misrepresentations to the Commission in ATCO's registration statement by failing to articulate the NASD's disciplinary action and sanctions against Turner. Moreover, the record indicates that ATCO is no longer entitled to be registered with the Commission as an investment adviser. ATCO had not filed required Form ADV-S since September 1994, and it is no longer active as a corporation. Given the egregiousness of the violations, the fact that ATCO is no longer a functioning entity, and the fact that allowing ATCO to remain registered could facilitate future violations, I conclude that ATCO's registration under the Advisers Act should be revoked, and that such revocation is in the public interest.
Accounting and Disgorgement.
Section 21B(e) of the Exchange Act and Section 203(j) of the Advisers Act state that in any proceeding in which the Commission may impose a penalty the Commission may also enter an order requiring an accounting and disgorgement including reasonable interest. See 15 U.S.C. 78u-2; 15 U.S.C. 80b-3(j). Having concluded that sanctions are appropriate under both Acts, I turn my attention to the additional sanction of accounting and disgorgement.
Disgorgement is slightly different than restitution. See Toney L. Reed, 51 S.E.C. 1009, 1013 (1994). Restitution is defined as the amount that will make victims whole. See Reed, at 1013 (citing SEC v. Blavin, 557 F. Supp. 1304, 1316 (E.D. Mich. 1983), aff'd, 760 F.2d 706 (6th Cir. 1985)); see also Hibbard, Brown & Co., 58 SEC Docket 2769, 2787 (March 13, 1995). Disgorgement is the amount of unlawful gain or loss avoided by the wrongdoer. See Hateley v. SEC, 8 F.3d 653, 655 (9th Cir. 1993) (purpose of disgorgement is to deprive a person of ill-gotten gains and prevent unjust enrichment). Due to the complexity in determining the exact amount, courts have held that the amount of the disgorgement ordered need only be an approximation of the wrongdoer's profit or loss avoided, and the risk of uncertainty in calculating the amount falls on the wrongdoer whose illegal conduct created the uncertainty. See Laurie Jones Canady, 69 SEC Docket 1468, 1487 n.35 (April 5, 1999) (quoting SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1475 (2d Cir. 1996)); see also SEC v. First Pacific Bancorp, 142 F.3d 1186, 1192 n.6 (9th Cir. 1998) (one is not required to trace every dollar; only need to make a reasonable approximation); SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-31 (D.C. Cir. 1989) (disgorgement amount only needs to be a reasonable approximation of ill-gotten gains). Although restitution and disgorgement are distinct, amounts paid to victims via criminal restitution proceedings may offset amounts assessed in disgorgement proceedings. See SEC v. Palmisano, 135 F.3d 860, 863 (2d Cir. 1998); First Jersey Securities, Inc., 101 F.3d at 1475. However, amounts paid by third parties to victims do not offset the amount of disgorgement.
Prior to the instant proceeding, the Federal District Court in a criminal action ordered restitution in the amount of $2,979,615.31; civil litigation has resulted in judgments for over $1,000,000 in restitution, interest, and punitive damages. Although the Division requests disgorgement in the amount of $3,462,088, I find that disgorgement is not warranted. Rule 630 of the Commissions Rules of Practice states that in any proceeding concerning disgorgement, the respondent may present evidence of an inability to pay. See 17 C.F.R. 201.630. The administrative law judge may also consider the evidence in determining whether disgorgement is in the public interest. See id. Turner submitted credible evidence as to his financial status and his inability to pay. (Resp. Ex. 1.) The Federal District Court also waived fining Turner $6,000 due to his inability to pay. (Div. Ex. 6.) Finally, the restitution ordered to be paid by Turner by the Federal District Court and the civil judgments is approximately the same amount requested by the Division as disgorgement. To order disgorgement, above and beyond the amount already imposed by judicial order, where Turner has no means by which to satisfy the judgment would be futile and thus would not serve the public interest. Therefore, an accounting and disgorgement will not be ordered.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. 201.351(b), it is certified that the record includes the items set forth in the record index issued by the Secretary of the Commission on March 22, 2001.
IT IS ORDERED, pursuant to Section 203(f) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-3(f), that Roger E. Turner BE, AND HE HEREBY IS, BARRED from associating with any investment adviser as defined by Section 202 of the Investment Advisers Act.
IT IS FURTHER ORDERED, pursuant to Section 15(b) of the Exchange Act of 1934, 15 U.S.C. 78o, that Roger E. Turner BE, AND HE HEREBY IS, BARRED from associating with any broker or dealer as defined by Section 3 of the Securities Exchange Act of 1934.
IT IS FURTHER ORDERED, pursuant to Section 203(e) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-3(e), that Annable Turner & Company, Inc.'s, registration BE, AND IT HEREBY IS, REVOKED.
This Order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. 201.360. Pursuant to that rule, a petition for review of this Initial Decision may be filed within 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 files a timely petition for review, or the Commission acts to review as to a party, the Initial Decision shall not become final as to that party.
Lillian A. McEwen
Administrative Law Judge
|1||Citations to the hearing transcript, and exhibits offered by the Division and Respondents will be noted as "(Tr. __.)," "(Div. Ex. __.)," and "(Resp. Ex. __.)," respectively.|
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