Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
STEVEN J. ERLSTEN
November 8, 2002
|APPEARANCES:||James A. Kidney, Jeffrey P. Weiss, and William F. McGovern for the Division of Enforcement, Securities and Exchange Commission.
L. Van Stillman for Steven J. Erlsten.
Derek L. DuBois, pro se.
|BEFORE:||Lillian A. McEwen, Administrative Law Judge|
Respondents Steven J. Erlsten and Derek L. DuBois violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, by willfully making material omissions in the sale of securities to their customers. This Initial Decision imposes sanctions, including a bar and a cease-and-desist order, on both Erlsten and DuBois.
On September 27, 1999, the United States Securities and Exchange Commission (Commission) issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings (OIP) against Steven J. Erlsten (Erlsten), William H. Clark (Clark), Derek L. DuBois (DuBois) and Aaron Finkelstein (Finkelstein) pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b)(6), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act). Respondents Clark and Finkelstein have settled this matter with the Commission. An Order Making Findings And Imposing Remedial Sanctions against Clark was issued on April 7, 2000, Securities Act Release No. 7847, Exchange Act Release No. 42650. An Order Making Findings And Imposing Remedial Sanctions against Finkelstein was issued on April 7, 2000, Securities Act Release No. 7848, Exchange Act Release No. 42651.
On February 1 through 3, 2000, I held a public hearing, as to Erlsten and DuBois only, in the Commission's headquarters in Washington, D.C. During the hearing, seven witnesses testified for the Division of Enforcement (Division). Erlsten testified on his own behalf and three witnesses testified for DuBois. I admitted into evidence forty-one exhibits from the Division, four from Erlsten, and two from DuBois.1
The OIP alleged that Erlsten and DuBois willfully violated, and committed or caused violations of, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5, by failing to disclose to their respective customers that they had been, or would be, compensated for inducing their customers to purchase the stock of Tracker Corporation of America (Tracker). Erlsten and DuBois contend that the Division failed to prove that they violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5.
If I conclude that the allegations in the OIP are true, I must then determine whether remedial action is necessary or appropriate pursuant to Sections 15(b)(6) and 19(h) of the Exchange Act; whether Erlsten and DuBois should be ordered to pay disgorgement and prejudgment interest pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act; whether civil penalties against Erlsten and DuBois are appropriate pursuant to Section 21B of the Exchange Act; and whether Erlsten and DuBois should be ordered to cease and desist from committing or causing violations of, and any future violations of, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act.
The findings and conclusions herein are based on the entire record. I applied preponderance of the evidence as the applicable standard of proof for the Division's case. See Steadman v. SEC, 450 U.S. 91, 102 (1981). I considered all post-hearing findings, conclusions, and arguments raised by the parties, and I accept those that are consistent with this Initial Decision. Based on the evidence in the record, I find the following facts to be true.
Corporate Relations Group, Inc. (CRG), a Florida corporation and subsidiary of Stratcomm Media, Ltd. (Stratcomm), was an investor relations firm that promoted emerging public companies. (Tr. 122, 174, 282.) In order to raise money for its corporate clients, CRG employed a variety of marketing techniques, including advertisements by newspaper and facsimile, and insertions of flyers and response cards in magazines. (Tr. 177, 283.) Prospective investors responded by calling or mailing response cards to CRG. (Tr. 283.) CRG support staff, or Broker Relations Executives (BREs), distributed the leads to brokers to encourage them to have their clients invest in CRG's client companies. (Tr. 178.) Beginning in 1994, monetary compensation was offered to brokers to encourage them to have their customers buy stock in CRG's clients, including Tracker and Global Spill Management, Inc. (GSMI). (Tr. 287.)
The manner in which brokers were compensated for selling stock of CRG's clients was as follows. CRG would open a brokerage account in its name with a broker and deposit stock of a client company into the brokerage account. (Tr. 122-23, 134, 351-52.) The broker would then cross the CRG client stock with his or her customers. (Tr. 134-36, 351-53.) The term "cross" is defined as a "securities transaction in which the same broker acts as agent in both sides of the trade" (i.e. the broker is the seller's agent and the buyer's agent.). Barron's Dictionary of Finance and Investment Terms 129 (5th ed. 1998). Following the crossing of CRG stock, CRG would send brokers checks as compensation with check stubs, which stated "Finders Fee" and identified the company. (Tr. 138-39, 353; Div. Exs. 3 at 1-14; 4 at 1-2, 5, 10-11, 13-14; 12 at 1-2, 4, 6, 10.) In addition, some checks written to brokers included handwritten calculations of the compensation earned for selling client stock. (Div. Exs. 4 at 6, 12, 15-16; 12 at 3, 5, 7.) John Kim (Kim) and Michael Pitts (Pitts) were among the brokers who were paid by CRG to sell Tracker stock to their customers. (Tr. 121-23, 344, 351-353.)
Erlsten received his Series 7 and 63 licenses in October 1990. (Tr. 370.) From August 1994 through August 1995, Erlsten was an account representative for Prudential Securities, Inc. (Prudential). (Tr. 371-72.) Erlsten was a friend of James Skalko (Skalko) and James Spratt (Spratt) whom he met in the early 1990s through a men's tennis league. (Tr. 375-77.) Spratt and Skalko ran the day-to-day operations of CRG, which included investment banking, managing the sales staff, and compensating BREs and brokers. (Tr. 176, 180, 290.) Spratt brought Tracker stock to Erlsten's attention and strongly recommended it. (Tr. 379-82.) In September 1994, Erlsten attended a Tracker due diligence meeting in Toronto, Canada, where he met Robert Veitia (Veitia), the Chairman of Stratcomm. (Tr. 175, 373-74, 382, 709.)
After the meeting and pursuant to Spratt's request, Erlsten opened an account in CRG's name at Prudential. (Tr. 384-85; Div. Ex. 24.) Erlsten was the account representative, and Spratt exercised trading authority over the account. (Tr. 382-85.) On November 3, 1994, CRG deposited 175,000 shares of Tracker stock into the account. (Tr. 389-90; Div. Ex. 24 at 4.) The following day, 25,000 shares of Tracker stock in CRG's account were crossed with Erlsten's other customers, including Mitchell and Bridget Gordon (Gordons), Robert and Leila Dudding (Duddings), and H.D. Freeman (Freeman). (Tr. 390, 397-98, 433; Div. Ex. 24 at 3; Div. Ex 26 at 4-24.) On November 4, the Gordons purchased 5,000 shares of Tracker stock for $34,013.95, and the Duddings purchased 10,000 shares of Tracker stock for $67,741.43. (Tr. 432; Div. Ex. 26 at 6, 23). On November 4 and 16, Freeman bought a total of 15,000 shares of Tracker for a total cost of $101,126.36. (Tr. 423; Div. Ex. 26 at 18-19.) In January 1995, the Gordons' Tracker investment dropped to $25,000. (Div. Ex. 27 at 40.) In September 1995, Freeman's investment had dwindled to $42,195.00. (Div. Ex. 28 at 77.) Freeman sued Prudential based on Erlsten's actions and settled for $41,000. (Div. Ex. 28 at 20-21.)
In addition to Tracker stock, Erlsten also sold shares of GSMI to his customers. (Tr. 446-47.) Specifically, on December 21, 1994, Erlsten sold 2,000 shares of GSMI to James Pace and 5,000 shares to Mike Herrin. (Tr. 446-47; Div. Ex. 30 at 2.) Following Erlsten's sales of Tracker and GSMI stock to his customers, CRG wrote Erlsten two checks. On November 16, 1994, CRG wrote a check for $5,000 to Erlsten with a check stub that stated "Finder's Fees Tracker." (Tr. 439; Div. Ex. 5 at 1.) On November 30, CRG wrote a check to Spratt for $6,586.94 and a check to Skalko for $6,713.12. (Div. Ex. 6 at 1, 3.) Attached to the Spratt and Skalko checks were two pieces of paper with handwritten calculations, which showed commissions generated by Spratt and Skalko on the sale of Tracker stock and contained a subtraction of $5,000 for Erlsten's sale of Tracker stock. (Tr. 451; Div. Ex. 6 at 2, 4.) The notations were similar to the notations attached to checks written to Kim and Pitts. (Div. Exs. 4 at 6, 12, 15-16; 12 at 3, 5, 7.) On January 16, 1995, Erlsten received a second check from CRG for $1,100.00. (Tr. 441; Div. Ex. 5 at 2.) The check stub attached stated "Finder's Fee - GSMI." (Tr. 441; Div. Ex. 5 at 2.) Erlsten's customers received account statements in the mail and Erlsten did not tell his customers that he was being compensated for his sales of Tracker and GSMI stocks. (Tr. 442-43; Div. Ex. 26.) I find that Erlsten received compensation from CRG for selling Tracker to his customers and that he failed to disclose this information to his customers.
Erlsten's financial condition is perilous. His net worth is $2,100.00 and he has no savings. (Erlsten Ex. 2 at 1-2, 4.) He is self-employed and his Series 7 and 63 licenses lapsed in 1995. (Tr. 370.) Erlsten has been discharged in bankruptcy and presently resides in Apopka, Florida. (Tr. 369; Erlsten Ex. 3.)
DuBois, the possessor of Series 7, 8, 24, 63, and 65 licenses, has worked for a number of securities firms since 1986. (Tr. 528-33.) During 1994, DuBois was employed by Tamaron Investments (Tamaron), which later became Baraban Securities, Inc. (Baraban). (Tr. 533.) While employed at Tamaron, he worked closely with Juan Campo (Campo), an account opener. (Tr. 474, 476-77.) Campo and DuBois had conversations about obtaining leads from Jack Rodriguez (Rodriguez), CRG's vice president of broker-relations. (Tr. 280-81, 541.) Rodriguez sent DuBois information about Tracker and other companies that CRG promoted. (Tr. 535-36.)
In September 1994, DuBois went to a Tracker due diligence meeting in Toronto, Canada, where he met Skalko and Veitia. (Tr. 533-34, 538.) Thereafter, on November 2, 1994, CRG opened an account with DuBois at Baraban with DuBois as the account executive. (Tr. 542-43, 548; Div. Ex. 35; 36.) The account was opened with 25,000 shares of Tracker stock. (Tr. 543.) On November 30, 1994, DuBois's customers purchased shares of Tracker; he sold 1,000 Tracker shares to Gary Drennon for $6,498.80; 250 shares to Richard E. Stiner for $1,647.55; 1,000 shares to Richard and Martha May for $6,498.80; 750 shares to Charles P. Nicholson for $4,905.05; 1,000 shares to Paul Hetrick for $6,498.80; and 1,000 shares to Richard W. Schmalfuss for $6,498.80. (Tr. 551-52; Div. Ex. 37.) DuBois sold a total of 5,000 shares of Tracker for $32,547.80 on that one day.
DuBois faxed confirmations of the November 30 purchases of Tracker stock to CRG care of Rodriguez and Veitia. (Tr. 553-56, 558; Div. Ex. 9 at 2-4.) It was not DuBois's usual practice to fax confirmations to an outsider, nor did he inform his customers that he was doing so. (Tr. 553-54.) On December 12, 1994, a $2,562 CRG check was made payable to DuBois and was subsequently voided. (Div. Ex. 8 at 1.) The check stub stated "Finder's Fee - Tracker." (Div. Ex. 8 at 1.) On December 16, a CRG check was made payable to Campo for the same amount with a check stub, which stated "Finder's Fee - Tracker." (Div. Ex. 8 at 2.) Campo cashed the check at his bank, Sun Bank, kept $112, and had his bank issue a $2,450 money order payable to DuBois, who deposited it in his account at Farmers & Merchants Bank. (Tr. 484, 567-68; Div. Ex. 20; 33.) Campo did not owe DuBois any money at the time he delivered DuBois the $2,450 money order. (Tr. 495.) DuBois's customers received account statements from their respective brokerage firms in the mail, and DuBois did not inform them of the CRG compensation. (Tr. 553; Div. Ex. 36; 37.) I find that DuBois received compensation from CRG for selling Tracker stock to his customers and failed to disclose the compensation to them. From October 1995 to the present, DuBois has been the branch manager for Moors & Cabot, a securities firm in Reisterstown, Maryland. (Tr. 527-28.) DuBois and two other partners own the branch. (Tr. 528.)
For the reasons stated herein, I conclude that Erlsten and DuBois violated the antifraud provisions of the securities laws.
Section 17(a) of the Securities Act provides:
It shall be unlawful for any person in the offer or sale of any securities . . . (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact . . . , 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.
15 U.S.C. § 77q(a).
Section 10(b) of the Exchange Act provides that:
It shall be unlawful for any person . . . (b) [t]o use or employ, in connection with the purchase or sale of any security . . . , any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b).
Pursuant to Section 10(b) of the Exchange Act, the Commission has promulgated Rule 10b-5, which makes it unlawful for any person:
(a) [t]o employ any device, scheme, or artifice to defraud, (b) [t]o make any untrue statement of a 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 (c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
In order to establish liability under these provisions, the Commission has the burden of proving, by a preponderance of the evidence: (1) a misrepresentation, omission, or other fraudulent device; (2) materiality; (3) in the offer or sale, or in connection with the purchase or sale, of a security; (4) scienter; and (5) the use of any means or instruments of transportation or communication in interstate commerce, or of the mails, or any facility of any national securities exchange. See SEC v. Hasho, 784 F. Supp. 1059, 1106 (S.D.N.Y. 1992).
"[M]ateriality depends on the significance the reasonable investor would place on the withheld or misrepresented information." Basic, Inc. v. Levinson, 485 U.S. 224, 240 (1988). 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 Ind., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Misrepresentations and omissions regarding a registered representative's own economic self-interest are material facts. See Affiliate Ute Citizens of Utah v. United States, 406 U.S. 128, 153 (1972) (market maker status); see also Ettinger v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 835 F.2d 1031, 1033 (3d Cir. 1987) (excessive commissions); Hasho, 784 F. Supp. at 1109-110 (amount of commissions is a material fact); SEC v. Morrow, 67 SEC Docket 2706, 2718 (1998) (a salesman must disclose material adverse facts including any self-interest that could influence his recommendation); SEC v. Shaughnessy, 67 SEC Docket 1798, 1801 (1998) (kickbacks to sell particular securities are material to an investor's decision whether to purchase those securities). The failure to disclose such economic self-interest "deprives the customer of the knowledge that his registered representative might be recommending a security based upon the registered representative's own financial interest rather than the investment value of the recommended security." Hasho, 784 F. Supp. at 1110.
Liability for failing to disclose material information is "premised upon a duty to disclose arising from a relationship of trust and confidence between parties to a transaction." Chiarella v. United States, 445 U.S. 222, 230 (1980). A fiduciary relationship exists between a stockbroker and the client. See Arleen W. Hughes, 27 S.E.C. 629, 634-35 (1948), aff'd, 174 F.2d 969 (D.C. Cir. 1949); see also, Marc N. Geman, 74 SEC Docket 999, 1011-13 (2001), appeal pending, No. 01-9512 (10th Cir.). As a fiduciary, a broker owes the client a duty of loyalty to disclose all material information fully and completely. See Hughes, 27 S.E.C. at 636. Brokers violate their duty to clients when their interests conflict with those of the clients' absent disclosure. See id. at 635.
The "in connection with" requirement has been broadly construed by the Supreme Court. See Hasho, 784 F. Supp. at 1106 (citing Superintendent of Ins. v. Bankers Life and Casualty Co., 404 U.S. 6, 12 (1971)). "[A]ny statement that is reasonably calculated to influence the average investor satisfies the `in connection with' requirement of Rule 10b-5." Hasho, 784 F.Supp. at 1106. The Supreme Court has held that it is enough that the fraudulent scheme and sale of securities coincide. See SEC v. Zandford, 122 S.Ct. 1899, 1904 (2002).
In order to make a claim of a violation of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5, a respondent must be shown to have acted with scienter. See Aaron v. SEC, 446 U.S. 680, 701-02 (1980). Scienter has been interpreted to mean "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Intentional or reckless conduct has been deemed sufficient to satisfy the scienter requirement. See SEC v. Jakubowski, 150 F.3d 675, 681 (7th Cir. 1998), cert. denied, 525 U.S. 1103 (1999); see also Sundstrand Corp v. Sun Chem. Corp., 553 F.2d 1033, 1039 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977). Reckless conduct is defined as:
[A] highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and 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.
Sundstrand, 553 F.2d at 1045. Sections 17(a)(2) and 17(a)(3) of the Securities Act do not require a showing of scienter. See Aaron, 446 U.S. at 702. A showing of negligence is sufficient under Sections 17(a)(2) and 17(a)(3) of the Securities Act. See SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001).
In the context of a material omission, any requirement of scienter is satisfied where the defendant has actual knowledge of material information and fails to disclose the material information. See Fenstermacher v. Philadelphia National Bank, 493 F.2d 333, 340 (3d Cir. 1974) (scienter satisfied where defendant had actual knowledge of material information); see also Thomas v. Duralite Co., 524 F.2d 577, 584 (3d Cir. 1975), aff'd, 559 F.2d 1209 (3d Cir. 1977) (knowledge of material facts and failure of disclosure provide adequate bases for culpability sufficient to establish liability for violation of § 10(b) of the Exchange Act and Rule 10b-5). The jurisdictional clauses under the antifraud provisions are given broad interpretation and are satisfied by intrastate telephone calls and by incidental use of the mails. See McDaniel v. United States, 343 F.2d 785, 787-88 (5th Cir. 1965), cert. denied, 382 U.S. 826 (1965); see also Ruebe v. Pharmacodynamics, Inc., 348 F. Supp. 900, 912 (D.C. Pa. 1972); Ingraffia v. Belle Meade Hosp., Inc., 319 F. Supp. 537, 538 (D.C. La. 1970).
The evidence presented by the Division at the hearing was largely circumstantial evidence. However, the mere fact that the Division's case rested on circumstantial evidence is not fatal. As has been stated, circumstantial evidence alone is sufficient to prove any fact and may be strong enough to overcome direct evidence to the contrary, including direct testimony. See Michalic v. Cleveland Tankers, Inc., 364 U.S. 325, 330 (1960); see also, O'Brien v. National Gypsum Co., 944 F.2d 69, 72 (2d Cir. 1991). The Supreme Court has held that "in any lawsuit, a plaintiff may prove his or her case by direct or circumstantial evidence." U.S. Postal Service Bd. Of Governors v. Aikens, 460 U.S. 711, 714 n.3 (1983). In cases involving securities fraud, it has been held that circumstantial evidence is a well-accepted method for the plaintiff to prove his or her case. See SEC v. Moran, 922 F. Supp. 867, 890 (S.D.N.Y. 1996); see also SEC v. Musella, 748 F. Supp. 1028, 1038 (S.D.N.Y.), aff'd, 898 F.2d 138 (2d Cir. 1990), cert. denied, 498 U.S. 816 (1990).
DuBois and Erlsten violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 by failing to disclose to their respective customers that they were receiving compensation for selling them Tracker securities. I conclude that the CRG compensation scheme was material because any reasonable investor would have been influenced by it. As brokers, Erlsten and DuBois had fiduciary relationships with their respective clients, and their failures to disclose that they were receiving compensation on the sale of Tracker stock were material omissions. In addition, Erlsten's and DuBois's failures to state that they were receiving, or would receive, compensation at the time they were selling Tracker stock to their customers were in connection with the purchase or sale of securities. Erlsten and DuBois also acted with the requisite scienter because they knew they would receive compensation from CRG for selling Tracker stock and failed to disclose this information to their customers. Moreover, the manner in which DuBois received compensation from CRG, by means of Campo in an effort to hide the transactions demonstrates consciousness of guilt. See SEC v. Netelkos, 592 F. Supp. 906, 920 (S.D.N.Y. 1984) (finding that concealment of recipients' identities, their respective backgrounds, and nature of transactions are strongly indicative of an intent to deceive, manipulate, or defraud). I conclude that DuBois hoped that the insertion of Campo would protect his identity and conceal his wrongdoing. Finally, Erlsten's and DuBois's customers received account statements from their respective brokerage firms in the mail. I conclude that Erlsten's and DuBois's actions were sufficient to trigger the jurisdictional clauses under the antifraud provisions.
Along with the documents produced by the Division, the Division's witnesses, Ruthenbeck, Rodriguez, Pitts, Kim, Campo, Erlsten, and DuBois supported the conclusion that Erlsten and DuBois committed the alleged violations. DuBois's witnesses, Melvina Stricklin and Thomas R. Curtis (Curtis), had no personal knowledge regarding DuBois's receipt of money from Campo. (Tr. 630, 643.) Curtis's testimony conflicted with Campo's who received the money and forwarded it to DuBois. DuBois's and Erlsten's testimony that they received CRG money innocently was contradicted by the credible evidence of CRG business tactics.
I have concluded that the Division has established that Erlsten and DuBois committed the illegal acts described in the OIP. The remaining issue is the sanction that is appropriate in the public interest. Sections 15(b)(6) and 19(h)(3) of the Exchange Act authorize me to impose sanctions on any person associated with a broker-dealer, member of a national securities exchange, or registered securities association, if it is in the public interest and the person has willfully violated any provision of the federal securities laws. The following factors are relevant for determining the public interest:
[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 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The severity of a sanction 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); see also Richard C. Spangler, Inc., 46 S.E.C. 238, 254, n. 67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Willfulness does not require intent to violate, but merely intent to do the act which constitutes a violation. See Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976), cert. denied, 434 U.S. 1009 (1978).
DuBois's and Erlsten's actions were egregious. DuBois and Erlsten owed a fiduciary duty to their clients to act in their best interests; they knew or recklessly disregarded the fact that they accepted compensation without disclosure. Erlsten's and DuBois's clients placed their trust and confidence in them to recommend stocks without secret inducements for those recommendations, and they violated that trust. Erlsten and DuBois acted with a high level of scienter, "knowingly" and "willfully." They recommended to their respective customers that they purchase Tracker stock while they secretly agreed with CRG to promote the stock for money. Erlsten and DuBois have made no assurances that they will not conduct future violations of the securities laws. Finally, DuBois continues to be employed as a registered representative associated with a broker-dealer. Thus, there is a strong likelihood that DuBois will violate the federal securities laws in the future. It is therefore in the public interest that Erlsten and DuBois be barred permanently from associating with any broker or dealer, member of a national securities exchange or registered securities association.
Section 8A of the Securities Act and Section 21C of the Exchange Act provide that the Commission can enter an order against a person, who is violating, has violated, or is about to violate any provision of the Securities Act and the Exchange Act, to cease and desist from committing or causing violations and future violations of the provisions of the Securities Act and the Exchange Act. In issuing a cease-and-desist order, there must be a "reasonable likelihood of future violations." KPMG Peat Marwick, LLP, 74 SEC Docket 384, 429 (2001), petition denied, No. 01-1131 (D.C. Cir. 2002). As the Commission has stated, "[a]bsent evidence to the contrary, a finding of violation raises a sufficient risk of future violation." Id. at 430. Erlsten and DuBois willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. Based on Erlsten's and DuBois's disregard for the securities laws, there exists a strong likelihood that they will violate the antifraud provisions of the securities laws in the future; cease-and-desist orders are appropriate against Erlsten and DuBois.
Section 8A of the Securities Act and Section 21C of the Exchange Act provide that "the Commission may enter an order requiring accounting and disgorgement, including reasonable interest." The purpose of disgorgement is to prevent the wrongdoer from profiting from the illicit conduct. See Robert A. Magnan, 59 SEC Docket 2276, 2313 (1995). When calculating disgorgement, separating legal from illegal profits exactly may, at times, be a near-impossible task; therefore, disgorgement need only be a reasonable approximation of profits causally connected to a violation. See Joseph J. Barbato, 63 SEC Docket 626, 649 (1996). The evidence presented at the hearing establishes that Erlsten derived $5,000 as compensation from CRG for selling Tracker stock to his customers and DuBois received $2,450 from CRG.
Pursuant to Rule 630 of the Commission's Rules of Practice, 17 C.F.R. § 201.630, a respondent may present evidence of an inability to pay disgorgement, interest, or a penalty and the hearing officer may, in his or her discretion, consider evidence concerning ability to pay in determining whether disgorgement, interest, or a penalty is in the public interest. See Terry T. Steen, 53 S.E.C. 618 (1998); First Securities Transfer System, Inc. and Steven Telsey, 52 S.E.C. 392 (1995). Erlsten presented financial information regarding his inability to pay a civil penalty. I conclude that Erlsten does not have the ability to pay a civil penalty if one is imposed upon him for violations of the securities laws. Erlsten is self-employed and does not have a current income. His net worth is $2,100. Thus, an order of disgorgement is likely to prove a futile act and would not be in the public interest. I am not persuaded by First Securities or by Steen that Erlsten is able to pay disgorgement. No disgorgement will be ordered against Erlsten.
With respect to DuBois, he did not present any evidence regarding his inability to pay. However, the amount of money that DuBois received was relatively small, $2,450. In addition, DuBois will have lost his livelihood as a broker-dealer since he is being permanently barred from associating with a broker-dealer. Thus, an order of disgorgement against DuBois would not deter others and, therefore, would not be in the public interest. No disgorgement will be ordered against DuBois.
Pursuant to Section 21B(b)(2) of the Exchange Act, the Division seeks second-tier penalties in the amount of $5,000 against Erlsten and DuBois, separately. The assessment of a penalty pursuant to Section 21B of the Exchange Act depends on the finding that such assessment is in the public interest.
In determining the public interest, the Commission may consider: (1) whether the act or omission for which such penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; (2) the harm to other persons resulting either directly or indirectly from such act or omission; (3) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior; (4) whether such person previously has been found by the Commission, another appropriate regulatory agency, or a self-regulatory organization to have violated the Federal securities laws, State securities laws, or the rules of a self-regulatory organization, has been enjoined by a court of competent jurisdiction from violations of such laws or rules, or has been convicted by a court of competent jurisdiction of violations of such laws or of any felony or misdemeanor described in section 15(b)(4)(B); (5) the need to deter such person and other persons from committing such acts or omissions; and (6) such other matters as justice may require. See 15 U.S.C. § 78u-2(c).
Erlsten's omissions were done knowingly and deliberately. However, the amount of compensation that Erlsten received was relatively small, $5,000. Erlsten does not have a history of security law violations. Furthermore, Erlsten is not able to pay a civil penalty. Section 21B(d) of the Exchange Act and Rule 630 of the Commission's Rules of Practice, 17 C.F.R. § 201.630, authorize me to consider such evidence in determining whether to impose penalties on Erlsten. The same reasoning for not imposing disgorgement against Erlsten also applies for not imposing this civil penalty. Thus, there will be little or no deterrence value by imposing a sanction against Erlsten. I conclude for all these reasons that Erlsten should not be assessed civil penalties.
With respect to DuBois, his omissions were also done knowingly and deliberately. The amount of compensation that DuBois received was relatively small, $2,450. DuBois does not have a history of security law violations. DuBois sold Tracker stock to his customers over a short period of time, less than one month. I conclude for all these reasons that DuBois should not be assessed civil penalties either.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on March 22, 2001.
Based on the findings and conclusions set forth above:
IT IS ORDERED, pursuant to Section 15(b) of the Securities Exchange Act of 1934, that Steven J. Erlsten be, and he hereby is, permanently BARRED from associating with a broker or dealer.
IT IS FURTHER ORDERED, pursuant to Section 19(h) of the Securities Exchange Act of 1934, that Steven J. Erlsten be, and he hereby is, permanently BARRED from associating with a member of a national securities exchange or registered securities association.
IT IS FURTHER ORDERED, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, that Steven J. Erlsten CEASE AND DESIST from committing or causing violations or future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
IT IS FURTHER ORDERED, pursuant to Section 15(b) of the Securities Exchange Act of 1934, that Derek L. DuBois be, and he hereby is, permanently BARRED from associating with a broker or dealer.
IT IS FURTHER ORDERED, pursuant to Section 19(h) of the Securities Exchange Act of 1934, that Derek L. DuBois be, and he hereby is, permanently BARRED from associating with a member of a national securities exchange or registered securities association.
IT IS FURTHER ORDERED, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, that Derek L. DuBois CEASE AND DESIST from committing or causing violations or future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
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 him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this Initial Decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the Initial Decision shall not become final as to that party.
Lillian A. McEwen
Administrative Law Judge
1 "(Tr. __.)" refers to the transcript of the hearing. I will refer to the Division's exhibits as "(Div. Ex. __.)," DuBois's exhibits as "(DuBois Ex. __.)," and Erlsten's exhibits as "(Erlsten Ex. __.)."
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