Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
JAMES F. GLAZA,
| INITIAL DECISION
September 8, 2003
|APPEARANCES:|| Polly A. Atkinson and Thomas D. Carter for the Division of Enforcement, |
United States Securities and Exchange Commission
Walter J. Baumgardner for Respondent James F. Glaza d/b/a Falcon Financial Services, Inc.
|BEFORE:||Robert G. Mahony, Administrative Law Judge|
The Securities and Exchange Commission (Commission) issued an Order Instituting Proceedings (OIP) on January 21, 2003, against Respondent James F. Glaza d/b/a Falcon Financial Services, Inc. (Glaza), pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Exchange Act). The OIP alleges that Glaza, as a registered representative, willfully violated Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in connection with the offer, purchase, and sale of shares of OnLine Power Supply, Inc., a Nevada corporation (OnLine or the Company), during the period from approximately August 1999 to approximately May 2000 (relevant period).
Glaza filed his Answer to the OIP on April 2, 2003. The Division of Enforcement (Division) and Glaza filed Stipulations of Fact and Conclusions of Law (Stipulations) on July 3, 2003, pursuant to Rule 324 of the Commission's Rules of Practice, 17 C.F.R. § 201.324.1 The parties also stipulated to admitting five investigative exhibits, DX 26, 29, 30, 69 and 138.
Glaza does not oppose the entry of an order, based on these Stipulations, that (1) orders him to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (2) bars him from association with any broker-dealer; (3) bars him from participating in any offering of a penny stock; (4) orders disgorgement, plus prejudgment interest; and (5) assesses a third-tier penalty. (Stips. 1-5.)
On July 31, 2003, the Division filed its posthearing brief. On August 4, 2003, Glaza filed his posthearing brief and twenty exhibits. None of Glaza's posthearing exhibits were included in the Stipulations and are not admitted into evidence, except for part of exhibit 15, which is DX 138.2
My findings are based on the Stipulations and exhibits filed by the parties. I have applied preponderance of the evidence as the standard of proof. See Steadman v. SEC, 450 U.S. 91, 97-104 (1981). I have considered and rejected all proposed findings, conclusions, and arguments that are inconsistent with this decision.
Glaza became a registered representative in 1988. He has been associated with several companies including D.E. Frey & Co., Inc.3 (D.E. Frey), Dominion Capital Corporation4 (Dominion Capital), and Dominion Capital's successors, Northstar Securities, Inc. (Northstar), a registered broker-dealer and investment adviser of OnLine, and Rushmore Securities, Inc. (Rushmore). Since 1993, Glaza has been associated with Falcon Financial Services, Inc. (Falcon), a privately held Colorado corporation of which he is the president. (Stips. 6-10.)
OnLine is a Nevada corporation based in Denver, Colorado, and successor to OnLine Entertainment, Inc., which was a successor to Roth Financial Fitness, Inc. OnLine's business is to develop new products in the power supply industry such as internal computer supply devices. (Stip. 11; DX 69 at 3.)
During the relevant period, OnLine's stock was a penny stock and was quoted on the National Association of Securities Dealers' (NASD) Over-the-Counter Bulletin Board.5 Kris M. Budinger (Budinger) was OnLine's president, director, and became its chief executive officer in 2000. Larry G. Arnold (Arnold) was chairman of the board of directors and chief executive officer, holding these positions until March 2000. (Stips. 12-13, 15, 17; DX 69 at 3.)
During the relevant period, Glaza was one of several registered representatives selling OnLine stock pursuant to a sales agreement between OnLine and Northstar. During this period, Glaza sold over 8.6 million shares of OnLine in three penny stock offerings that were offered to investors through offering memoranda. No registration statements were effected for these offerings, and no exemption from registration was available. (Stips. 16-25.)
Glaza failed to disclose to investors additional compensation he received from OnLine. By sales agreement, Glaza received a ten percent commission as part of his compensation for the sale of OnLine stock.6 During the relevant period, Glaza received $780,131 in commissions relating to the sale of OnLine shares. Although this ten percent commission was disclosed to investors through offering memoranda and by oral representations, OnLine also allowed Glaza to use commission proceeds to purchase Company stock at discounted prices of $0.45 (until the year 2000) or at $1.84 per share. OnLine's investors were not informed of this additional compensation in the form of discounts.7 During the same period, existing and potential investors were solicited to buy the stock at a price per share ranging from $2.00 to $5.00 per share. (Stips. 28-32, 109; DX 69 at 20.)
Additionally, Glaza failed to disclose that Falcon's pension plan, of which he was the primary trustee, loaned OnLine $88,000 on March 2, 1999, for operating expenses. OnLine repaid the loan principal, plus interest at an annual rate of eighteen percent from the proceeds of its offerings. Glaza failed to inform his customers that he, as trustee, had loaned OnLine money, that he would be repaid using proceeds of an offering, and that if the stock were not sold, he might not be repaid. (Stips. 33-35.)
Glaza made stock price and earnings projections to existing and potential investors that had no basis in fact and were misleading to investors. During the relevant period, Glaza told existing and potential investors that the price per share of OnLine stock, then trading at $1.88 to $3.00 per share, would increase to between $70 to $120 per share during the next two years. (Stip. 36.) Glaza made these projections without consulting OnLine and despite reported losses of the Company in later Commission filings. Many of Glaza's unjustified projections were included in tape-recorded conversations he had with investors.8 (Stips. 41-46, 89, 97-102.)
Among the many projections made to individual investors, Glaza told Carol Porter in late 1999 (referring to her holdings of OnLine stock), "Don't cash out, you have 4,000 shares there, so that's $24,000 at the moment roughly. But it's going-I think that it's [sic] worth $400,000 before it's done . . . . Kris [Budinger] . . . projected [the stock price] to [be] $120 a share by the end of the following year. So you can see the enormous potential for the stock. It could be several hundred dollars a share." Glaza also told Dr. Bruce Haughey, after he asked about the availability of OnLine stock, "You bought [OnLine's] stock at two bucks. It's now at $30 and we're projecting $120. Would you sell at $30? If you did, I would personally come down there and break your arm."9 When asked during investigative testimony about the projections of OnLine being worth $30 to $120 in the future, Glaza said he made the statement "to many people many times." (Stips. 38-42.)
In his monthly newsletter "Falcon Files," in a column titled "Predicting OnLine Power Supply Stock Prices," Glaza wrote that investors should be willing to pay $30 per share for the stock and may be willing to pay $40, $50 or more per share based on a price-earnings multiple of thirty purportedly used for the power supply industry.10 OnLine's president, Budinger, never approved the newsletters Glaza sent to investors, several issues of which contained statements about OnLine. (Stips. 27, 52; DX 26.)
Glaza also failed to disclose to Downing and his wife, who bought $8,000 worth of stock and had little investment experience, the existence of any risk factors associated with an investment in OnLine stock. Glaza told Downing that OnLine's stock would climb to $100 or $120 per share. Downing advised that he would have wanted to know if Glaza based his projections on net earnings and that OnLine never had net earnings. (Stips. 48-51.)
Further, Glaza told investors in his summer 1999 newsletter that OnLine would earn $2.29 per share by the end of 2000. Glaza based this figure on a sixty percent discount of revenue projections in OnLine's business plan. If these earnings per share actually had occurred, they would have generated approximately $48 million in total earnings for OnLine. OnLine never had any net earnings. Glaza's projections did not disclose that any significant revenue growth was contingent on OnLine's ability to raise substantial funds. Budinger never gave Glaza information regarding earnings projected for the year 2000, nor was Budinger the source of the statement about OnLine discounting certain projections by sixty percent. (Stips. 88-90.)
OnLine's earnings never justified the representations Glaza made to investors. Financial statements for the six months ending June 30, 1997, indicated that the Company had revenues of $50,000 and a net loss of $316,400. OnLine stated that its revenues had "declined significantly from the prior year period." For the period ending December 31, 1998, OnLine reported sales of $262,964 and a net loss of $1,449,530. OnLine's 1998 audit also included a "going concern" opinion. For 1999, OnLine's Form 10-KSB/A, filed on May 17, 2000, showed that its revenues that year totaled $299,408, its cost of sales was $233,386, and its net loss ran $1,588,355. (Stips. 93-94, 99.)
During 2000, OnLine stock reached an inter-day trading high of $30.00 a share; however, the highest closing price for the year was $10.50. In 2001, the highest closing price was $7.00, and in 2002, $3.95. (Stips. 56-57.)
Glaza stipulated that he knew it was inappropriate to make stock price projections. In his June 2001 investigative testimony, Glaza stated, "I don't recall that I ever stopped making projections or what I call speculation about where the price of the stock might be. To this day, I still do." Glaza stipulates to making similar projections to customers in addition to those recorded in conversations. (Stips. 40, 43, 53-54.)
Glaza misrepresented the extent to which OnLine had received orders from various distributors of OnLine's products. Among his misrepresentations, he stated in a newsletter that OnLine "had established fourteen distributorships for its product lines; forty-five potential customers had provided specifications (totaling over $230 million); and several other contracts were being negotiated." Glaza also represented to multiple investors that there were $40 million in orders for one of OnLine's products and that OnLine had "$320 million in orders and another $400 [million] under negotiation." Further, he overstated the extent to which OnLine had solidified contracts for its products by telling investors that Erikkson Communications, and other high-profile telecommunications companies, had selected OnLine as their sole vendor for all their power supplies. OnLine's confidential business plan dated July 1999, in comparison, stated that the Company had developed only "significant interest" from these potential customers. (Stips. 58, 61, 68-70, 74-77, 80-83.)
Budinger had no knowledge of the bases for Glaza's statements regarding potential customer orders, which amounted to upwards of $230 million in gross revenue. Budinger also never told Glaza that potential customer orders of $30 million in gross revenue existed. (Stips. 59, 64.)
OnLine's purported orders were never obtained. In a Form 8-K report, filed with the Commission on February 29, 2000, OnLine stated, "We have to date signed no contracts for any of our [OnLine] products" and that "to date small orders for [OnLine] product[s] have been received for engineering evaluation purposes." OnLine's private placement memorandum, dated April 5, 2000, stated, "If we don't receive any orders for our products by late 2000 or early 2001, the value of our investment could be reduced or eliminated . . . . [H]owever, so far we have not received any orders, and it's possible no orders will be received." (Stips. 85-86.)
In his June 2001 investigative testimony, Glaza confirmed that he knew that OnLine had received only one order in 1999 for four hundred "evaluation units" at a price of less than $200 per unit. In fact, OnLine did not receive any other orders until a few weeks before his investigative testimony. Glaza testified, "I was taking what were really serious indications of interest and saying they were orders." (Stip. 87.)
Glaza falsely informed investors that OnLine had applied to be listed on the National Association of Securities Dealers Automated Quotation System (NASDAQ). In conversations with individual investors and in a newsletter, Glaza represented that OnLine "had filed" an application to become listed on NASDAQ. OnLine, however, never applied for a NASDAQ listing, and no one represented to Glaza that the Company had filed, or was in the process of filing, with NASDAQ. Glaza testified that he took no action to confirm OnLine's application for a NASDAQ listing before making such claims.11 (Stips. 103-107.)
Sections 5(a) and 5(c) of the Securities Act provide generally that it is unlawful for a person, directly or indirectly, to sell, deliver a security, offer to sell or offer to buy, a security through any means of interstate commerce unless a registration statement is in effect. The OIP alleges that Glaza willfully violated Sections 5(a) and 5(c) of the Securities Act by selling OnLine's unregistered securities under offerings of common stock when no exemption from registration was available. During the relevant period, OnLine made three such offerings, none of which met exemption requirements. Glaza has stipulated that he offered to sell and sold these shares during the relevant period and that no exemption from registration was applicable. Accordingly, I conclude that Glaza willfully violated Sections 5(a) and 5(c) of the Securities Act.
Section 17(a) of the Securities Act prohibits any person from using, directly or indirectly, the mails or instruments of interstate commerce in the offer or sale of securities to employ any device, scheme, or artifice to defraud; use false statements or omissions of material fact to obtain money or property; or engage in any transaction, practice, or course of business that operates or would operate as a fraud or deceit upon a purchaser. Similarly, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit any person from using, directly or indirectly, the mails or instruments of interstate commerce in connection with the purchase or sale of any security to employ any device, scheme, or artifice to defraud; make any untrue statement or omission of material fact; or engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person.
1. Fiduciary Duty
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). Securities dealers owe a special duty of fair dealing to their clients. SEC v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992) (citing Hughes & Co. v. SEC, 139 F.2d 434, 437 (2d Cir. 1943)); see also Timoleon Nicholaou, 51 S.E.C. 1215, 1223 (July 28, 1994), aff'd, 81 F.3d 161 (6th Cir. 1996) (respondent "exhibited a disturbing lack of understanding of a registered representative's fiduciary duty to his customers"). By his recommendation, a registered representative implies a reasonable investigation has been made and that his recommendation rests on the conclusions based on such investigation. Hasho, 784 F. Supp. at 1107. A registered representative who makes representations lacking an adequate basis will incur liability even if he believed the representations he was making were true. Id. Moreover, registered representatives dealing in over-the-counter stocks are under a special duty not to take advantage of their customer's trust and confidence. Id. at 1107-1108 (citing Hughes, 139 F.2d at 436-37).
As a registered representative, Glaza offered and sold common stock of OnLine. By virtue of his position, Glaza was a fiduciary to his clients. Glaza's clients, in effect, placed their trust and confidence in him and followed his recommendations to buy, sell, or hold OnLine's over-the-counter stock.
"[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). A misstatement or omission is material if there is "a substantial likelihood" that a reasonable investor would consider the information important to the investment decision and would view that information as having significantly altered the "total mix" of available information. Basic, 485 U.S. at 231-32. Materiality is a mixed question of law and fact and is to be determined on a case-by-case basis. Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000); see also Basic, 485 U.S. at 238-240.
Material facts include "not only information disclosing the earnings . . . of a company but also those facts which affect the probable future of a company and which may affect the desires of investors to buy, sell, or hold the company's securities." Hasho, 784 F. Supp. at 1108 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968)). Positive proof of reliance is not necessary to establish the alleged violations of the anti-fraud provisions so long as the information withheld or the misstatements made are material. Id.; see also Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972).
In addition, misrepresentations and omissions regarding a registered representative's own economic self-interest are material facts. Ute, 406 U.S. at 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 1110 (amount of commissions); Richard H. Morrow, 53 S.E.C. 772, 781 (1998) (undisclosed compensation); Derek L. Dubois, Securities Act Rel. No. 8264, slip at 7 (Aug. 13, 2003) (third-party compensation). 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.
Glaza made several material misstatements and withheld material information in order to induce potential and existing customers to buy, sell, or hold OnLine stock. As a registered representative, Glaza neglected his special duty to his customers by proffering unjustified projections on future stock price and earnings, misrepresenting potential customer orders, and misstating the Company's activities in regard to an alleged NASDAQ listing. Further, Glaza made material omissions by failing to disclose additional compensation he received from OnLine and the existence of a loan he made to OnLine. These false statements and omissions are material because a reasonable investor would consider them important in deciding whether to purchase or sell stock through a registered representative who had a financial stake in that very transaction. By misstatements and omissions of material facts, Glaza deprived the customers of the knowledge that he might be recommending that stock in his own financial interests and not those of his customers.
Scienter is a required element under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, but not Sections 17(a)(2) and 17(a)(3) of the Securities Act. Aaron v. SEC, 446 U.S. 680, 701-02 (1980). The Supreme Court has defined scienter as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The scienter requirement is satisfied by showing that a respondent acted recklessly, defined as "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 [respondent] or is so obvious that the actor must have been aware of it." Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977); see also Hollinger v. Tital Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990); Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992). However, merely negligent conduct may also establish liability under Sections 17(a)(2) and 17(a)(3) of the Securities Act. SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001); see also Jay H. Meadows, 52 S.E.C. 778, 785 n.16 (1996), aff'd, 119 F.3d 1219 (5th Cir. 1997).
Glaza acted with scienter. Based on the preponderance of evidence, I conclude that Glaza acted recklessly by making his unjustified stock price and earnings projections, overstating customer orders, and not disclosing his additional compensation. His material misstatements and omissions misled customers and were an extreme departure from the standards of ordinary care.
4. In Connection With
The Supreme Court broadly construes the "in connection with" requirement. Hasho, 784 F. Supp. at 1106 (citing Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971)). To wit, "[a]ny statement that is reasonably calculated to influence the average investor satisfies the `in connection with' requirement." Id.; see also SEC v. Zandford, 122 S.Ct. 1899, 1904 (2002). As long as "a fraudulent scheme [exists] in which the securities transactions and breaches of fiduciary duty coincide," such fraud is "in connection with" the purchase or sale of securities. Zanford, 122 S.Ct. at 1904.
During the relevant period, Glaza sold 8.6 million shares of OnLine. During the same period, Glaza made material misstatements and omissions to potential and existing investors in regard to stock price and earnings projections, customer orders, his compensation, and OnLine's alleged NASDAQ listing. Accordingly, Glaza's misconduct was "in connection with" the purchase and sale of securities.
The jurisdictional clauses under the antifraud provisions are afforded broad interpretation and are satisfied by merely placing intrastate telephonic calls and by incidental use of the mails. McDaniel v. United States, 343 F.2d 785, 787-88 (5th Cir. 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). This matter meets the jurisdictional requirement because Glaza mailed his newsletters containing false and misleading statements to potential and existing investors.
I have concluded that Glaza committed the violations charged in the OIP. The remaining issue is to determine the sanctions that are appropriate in the public interest. The Division requests that Glaza be (1) ordered to cease and desist from committing or causing any violations and any future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (2) barred from association with any broker-dealer; (3) barred from participating in any offering of penny stock; (4) ordered to disgorge $780,131 in ill-gotten gains, plus reasonable prejudgment interest; and (5) assessed a third-tier civil monetary penalty.12
The following factors are relevant in 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 that constitutes a violation. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976).
Section 8A of the Securities Act and Section 21C of the Exchange Act permit the Commission to enter a cease-and-desist order against any person, who is violating, has violated, or is about to violate any provision of the Securities Act and Exchange Act, or any rule or regulation thereunder, from committing or causing such violation and any future violation of the same provision, rule, or regulation. The Commission has held that in order to issue a cease-and-desist order, there must be "some likelihood of future violations" and "[a]bsent evidence to the contrary, a finding of [a] violation raises a sufficient risk of future violation." KPMG Peat Marwick, LLP, 74 SEC Docket 384, 429-30 (2001), pet. denied, 289 F.3d 109 (D.C. Cir. 2002).
Based on the instant violations, a strong likelihood exists that Glaza will violate the same provisions of the Securities Act and Exchange Act in the future. Accordingly, a cease-and-desist order, which Glaza does not oppose, is appropriate in this matter.
Section 15(b)(6) of the Exchange Act authorizes the imposition of sanctions on any person associated with a broker-dealer, if it is in the public interest and the person has willfully violated, or aided and abetted a violation of any provision of the federal securities laws. Among the possible sanctions available thereunder are censure, limitations on the activities or functions of such person, or suspension for a period not exceeding twelve months, or a bar on such person from being associated with a broker or dealer, or from participating in any offering of penny stock.
Glaza's actions were egregious. As a registered representative, he sold OnLine's penny stock to investors. Acting in his fiduciary role, he made false and misleading statements to his customers that overstated projections on future stock price and earnings, customer orders, and regarding OnLine's alleged NASDAQ listing. Glaza also made material omissions when he failed to disclose his additional compensation in the form of stock discounts and the existence of a loan he made to OnLine. Although the loan was, in fact, prior to the relevant period, it is sufficiently proximate in time to be properly considered as a material omission of information that he should have disclosed to investors. As a consequence of the above actions, Glaza misled investors into believing that the recommendations that he made in his newsletters and orally were in their best interests when, in fact, Glaza had an undisclosed financial interest of his own. Given the gravity of Glaza's violations and his lack of remorse for his actions, I conclude that permanent bars against his association with any broker-dealer and against his participation in any future penny stock offering-both of which Glaza does not oppose-are appropriate sanctions in this matter.
Section 8A(e) of the Securities Act and Sections 21B(e) and 21C(e) of the Exchange Act authorize an order of disgorgement, including reasonable interest, in any administrative proceeding in which a cease-and-desist order is sought or civil monetary penalty could be imposed. Disgorgement seeks to deprive the wrongdoer of his ill-gotten gains. SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-32 (D.C. Cir. 1989). It is remedial, not punitive, in nature and also provides an effective deterrent in future violations. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972). Disgorgement returns the violator to where he would have been absent the violative activity. Once the Division shows that its disgorgement figure reasonably approximates the amount of unjust enrichment, the burden of going forward shifts to the respondent to demonstrate clearly that the Division's disgorgement figure is not a reasonable approximation. SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996); see also SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995). Any risk of uncertainty as to the disgorgement amount falls on the wrongdoer whose illegal conduct created that uncertainty. First City, 890 F.2d at 1232. "The calculation of those gains, lie within the discretion of the trial court, which `must be given wide latitude in these matters.'" Lorin, 76 F.3d at 462 (quoting Patel, 61 F.3d at 140).
The Division seeks disgorgement of $780,131, which equals Glaza's total commissions on sales of OnLine shares during the relevant period, plus reasonable prejudgment interest. Glaza stipulated to the amount of commissions and failed to proffer evidence that distinguishes the ill-gotten gains from those that were obtained legally, if any. I conclude, therefore, that $780,131, plus prejudgment interest, is an appropriate amount to be disgorged.
Section 21B of the Exchange Act authorizes the Commission to impose a civil monetary penalty against any person, if it finds that the penalty is in the public interest and the person has willfully violated, or aided and abetted a violation of the Securities Act, Exchange Act, or the rules or regulations thereunder. Section 21B(b)(3) of the Exchange Act provides for a maximum third-tier civil monetary penalty of $100,000 against a natural person for violations involving fraud and substantial losses to others. For violations occurring after December 9, 1996, and before February 2, 2001, the amount for a third-tier penalty has been increased to $110,000, to account for inflation. 17 C.F.R. § 201.1002. Glaza's actions took place between August 1999 and May 2000 and involve serious allegations of fraud and substantial monetary losses to investors. Accordingly, the Division seeks a civil monetary penalty in the amount of $110,000.
A civil monetary penalty under Section 21B of the Exchange Act must be found to be 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. Section 21B(c) of the Exchange Act.
Glaza's violations were serious and involved a reckless disregard of securities laws. He failed to live up to his fiduciary duty by continually making material misrepresentations, both orally and in his newsletters, that misled potential and existing investors in regard to OnLine's future stock prices and earnings, customer orders, and an alleged NASDAQ listing, as well as in regard to his actual financial interest in OnLine stock. During the relevant period, Glaza amassed commissions for his fraudulent sale of OnLine shares totaling $780,131. Although Glaza has, to a degree, cooperated in the investigation and adjudication of this matter, he has demonstrated little remorse for his misconduct. I conclude, in light of the foregoing, that a maximum third-tier civil monetary penalty in the amount of $110,000 against Glaza is appropriate to protect the public interest.
Based upon the findings and conclusions set forth above:
IT IS ORDERED, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, that James F. Glaza CEASE AND DESIST from committing or causing violations, and any future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder;
IT IS FURTHER ORDERED, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, that James F. Glaza is hereby BARRED permanently from being associated with any broker or dealer;
IT IS FURTHER ORDERED, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, that James F. Glaza is hereby BARRED from participating in any offering of penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock;
IT IS FURTHER ORDERED, pursuant to Section 8A(e) of the Securities Act of 1933 and Sections 21B(e) and 21C(e) of the Securities Exchange Act of 1934, that James F. Glaza hereby DISGORGE $780,131, plus prejudgment interest from June 1, 2000, through the last day of the month preceding the month in which payment of disgorgement is made, at such rate of interest established under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), compounded quarterly, in accordance with Rule 600 of the Commission's Rules of Practice, 17 C.F.R. § 201.600; and
IT IS FURTHER ORDERED, pursuant to Section 21B of the Securities Exchange Act of 1934, that James F. Glaza hereby pay a CIVIL MONETARY PENALTY of One Hundred Ten Thousand Dollars ($110,000).
Payment of the penalty shall be made by certified check, U.S. postal money order, bank cashier's check, or bank money order payable to the Securities and Exchange Commission on the first day following the day this Initial Decision becomes final. The check and a cover letter identifying the Respondent and Administrative Proceeding No. 3-11012, shall be delivered by hand or courier to the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop-3, Alexandria, Virginia 22312. A copy of the cover letter shall be sent to Polly A. Atkinson and Thomas D. Carter, Division of Enforcement, Central Regional Office, U.S. Securities and Exchange Commission, 1801 California Street, Suite 1500, Denver, Colorado 80202-2648.
This Initial Decision shall become effective in accordance with and subject to the provisions of 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 17 C.F.R. § 201.360(d)(1) within twenty-one days after service of the Initial Decision upon him, unless the Commission, pursuant to 17 C.F.R. § 201.360(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.
Robert G. Mahony
Administrative Law Judge
1 The Stipulations are referred to by number and cited herein as (Stip. ___.). The Division's investigative exhibits admitted into evidence are referred to as (DX. ___ at ___.) and the transcript of the prehearing conference, dated June 30, 2003, as (Tr. ___.). The Division's and Glaza's posthearing briefs are referred to as (Div. Brief at ___.) and (Resp. Brief at ___.), respectively.
2 On August 11, 2003, the Division moved to strike portions of Glaza's posthearing brief. The Response was filed on August 25, 2003. The Division contends that portions of the brief attempt to depart from the Stipulations and exhibits admitted into the evidence. I agree. The purpose of stipulating is to save time and money by allowing both parties to agree on certain facts necessary to the outcome of the dispute. FDIC v. St. Paul Fire and Marine Ins. Co., 942 F.2d 1032, 1038 (6th Cir. 1991). In order for this purpose to be realized, the parties must be able to depend on the stipulations. Id. To allow a party to agree to stipulations and later retract or undermine them, would open up a new avenue of strategic behavior. A party could attempt to mislead by agreeing to factual stipulations only to later call them into question or disregard them entirely. Accordingly, this case will be decided on the factual matters and exhibits described in the Stipulations. See Quest Med., Inc. v. Apprill, 90 F.3d 1080, 1087 (5th Cir. 1996) ("Under federal law, stipulations of fact fairly entered into are controlling and conclusive and courts are bound to enforce them.").
3 In February 1998, an arbitration panel found Glaza and D.E. Frey liable for fraudulent transactions in a customer account and ordered them to pay the customer $135,537. (Stip. 8.)
4 Dominion Capital ceased business operations in 1998. On May 13, 1999, the Commission revoked its broker-dealer registration and levied a civil penalty for, among other things, failing to adequately supervise several of its registered representatives who were violating federal securities laws. Dominion Capital, 69 SEC Docket 1784 (May 13, 1999).
5 See Sections 15(b)(6) and 3(a)(51) of the Exchange Act and Rule 3a51-1. From October 1998 to October 1999, OnLine offered preferred stock at $2.00 per share, and common stock during the relevant period, at $2.00 per share. (Stips. 17, 24.)
6 Technically, Glaza received a nine percent commission; the broker-dealer with which Glaza was associated retained the remaining one percent. (Stip. 30.)
7 Glaza did inform Richard Downing (Downing) that he [Glaza] was also purchasing stock but failed to inform Downing that he was buying at a lower price. (Stip. 51.)
8 On August 5, 1999, the NASD directed Northstar to implement a taping system for the recording of all conversations between clients and registered persons. (Stip. 37.)
9 Glaza made similar recorded statements to investors Jackie Barondeau and Hank Mass. (Stips. 44-47.)
10 Glaza circulated a monthly newsletter for Falcon named "Falcon Files" that contained information about OnLine and other information relevant to financial planning. (Stip. 26.)
11 Downing advised that he would have wanted to know that Glaza never asked anyone at OnLine whether they had filed documents with the NASD to effectuate a listing. (Stip. 108.)
12 Glaza does not object to sanctions that orders him to cease and desist from committing registration and securities fraud violations and bars him from association with any broker-dealer and from participating in any penny stock offering. The parties defer to the Administrative Law Judge to set an appropriate amount for disgorgement and a third-tier penalty. (Stips. 1-5.)http://www.sec.gov/litigation/aljdec/id235rgm.htm
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