Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
CASTLE SECURITIES CORP. and MICHAEL T. STUDER
January 23, 2004
Alexander W. Vasilescu and Jayne K. Blumberg for the Division of Enforcement, United States Securities and Exchange Commission
Michael T. Studer, pro se, and for Castle Securities Corp.
Lillian A. McEwen, Administrative Law Judge
Respondents Castle Securities Corp. (Castle) and Michael T. Studer (Studer) (collectively, Respondents), violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act), and Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-3, 10b-5, 10b-6, and 15c1-2 thereunder, in connection with the offering and trading of securities. As a result, Castle and Studer were permanently enjoined from committing future violations of these provisions. This Initial Decision revokes the registration of Castle as a broker or dealer and bars Studer from association with any broker or dealer.
The Securities and Exchange Commission (Commission) initiated this proceeding on August 20, 2003, pursuant to Section 15(b) of the Exchange Act, and Respondents filed a timely Answer. I held a public hearing in New York, New York, on October 21, 2003, at which Studer testified on behalf of himself and Castle and when called by the Division of Enforcement (Division). Three exhibits from Respondents and four exhibits from the Division were admitted into evidence. The Division and Respondents filed their Post-Hearing Briefs on November 20 and December 16, 2003, respectively, and the Division filed its Reply Brief on December 23, 2003.
The Order Instituting Proceedings (OIP) alleged that on September 13, 1994, the Commission filed a civil injunctive complaint in the United States District Court for the Southern District of New York against Respondents and others. SEC v. U.S. Environmental, 94 Civ. 6608 (S.D.N.Y.) (PKL) (Civil Action). The OIP alleged that the Commission's amended complaint in the Civil Action asserted that from approximately July 1989 through at least 1991, Respondents and others conspired to and did conduct a fraudulent blind pool offering designed to bring public U.S. Environmental, Inc. (USE). The OIP alleged that they subsequently manipulated the price of USE stock through fraudulent trading techniques and misrepresentations and then sold their shares to investors. The OIP also alleged that USE stock was a penny stock.
The OIP further alleged that on July 21, 2003, after a bench trial in October 2002, the district court granted the Commission's application for final judgments against Castle and Studer. The OIP alleged that, in granting the Commission's application, the district court issued an opinion and order in which it concluded that Castle and Studer had violated Sections 5(a), 5(c), and 17(a) of the Securities Act, and Sections 10(b) and 15(c)(1) of the Exchange Act, and Rules 10b-3, 10b-5, 10b-6 (the predecessor to Rule 101 of Regulation M), and 15c1-2 thereunder, and permanently enjoined Castle and Studer from violating these provisions in the future. Finally, the OIP alleged that the district court also ordered Castle and Studer to disgorge $134,224 in ill-gotten gains, plus prejudgment interest from September 30, 1990. SEC v. U.S. Environmental, 94 Civ. 6608 (PKL), 2003 WL 21697891 (S.D.N.Y. July 21, 2003).
If I conclude that the allegations in the OIP are true, I must then determine, pursuant to Section 15(b) of the Exchange Act, whether remedial sanctions against Castle and Studer are appropriate in the public interest.
The findings and conclusions herein are based on the entire record. I applied preponderance of the evidence as the standard of proof for the Division's case. See Steadman v. SEC, 450 U.S. 91, 102 (1981). I have considered and rejected all arguments and proposed findings and conclusions that are inconsistent with this Initial Decision.
Castle is a New York corporation located in Freeport, New York, and a wholly owned subsidiary of Castle Holding Corp. (Castle Holding). (Tr. 84; Div. Exs. 1, 4; Answer at 1.) Castle has been registered with the Commission as a broker or dealer pursuant to Section 15(b) of the Exchange Act since at least 1985, and was a member of the National Association of Securities Dealers, Inc. (NASD). (Div. Exs. 1, 4; Answer at 1.)
Studer, now fifty-three years old, resides in Amityville, New York, and holds Series 7, 24, 62, and 63 licenses. (Tr. 83; Div. Ex. 1; Answer at 1.) After graduating from college in 1971, Studer worked as an accountant for seven years. (Tr. 83.) He became a certified public accountant in 1975, and since July 1987 has been the sole owner of Michael T. Studer, CPA, P.C., a public accounting firm. (Tr. 83-84; Div. Exs. 1, 4.) He became a licensed securities broker in 1981, founded Castle in 1985, and has served as president, treasurer, and a director of Castle since its inception. (Tr. 84; Div. Exs. 1, 4; Answer at 1; Resp. Pre-Hearing Brief at 2.) Studer is also associated with Citadel Securities (Citadel), a broker or dealer registered with the Commission and owned by Castle Holding. (Tr. 54; Answer at 1.) Castle's and Citadel's offices are located at the same address, Studer's current work address. (Tr. 53-54.)
Studer has owned or controlled between twenty and thirty-three percent of Castle Holding since January 1, 1988. (Div. Exs. 1, 4.) Prior to the events underlying the Civil Action, Studer was aware that blind pool companies could be misused by securities fraudsters, as a result of an unrelated Commission investigation into his involvement in underwriting a blind pool offering for Dynamic Capital Corp. (Div. Ex. 1.) I have taken official notice of the NASD decision, dated November 3, 2003, that denied Castle's application to remain a member firm and denied Studer's application to remain associated with Castle and Citadel as a result of the judgment rendered in the Civil Action. See 17 C.F.R. § 201.323.
On September 13, 1994, the Commission filed a civil injunctive complaint in the United States District Court for the Southern District of New York against Respondents and others. (Tr. 29; Div. Ex. 2.) The Commission's complaint charged that from approximately July 1989 through at least 1991, Respondents and others conspired to and did conduct a fraudulent blind pool offering designed to bring USE public, they subsequently manipulated the price of USE stock through fraudulent trading techniques and misrepresentations, then sold their shares to investors. (Div. Exs. 2, 3.)
On August 24, 1995, the district court dismissed, with prejudice, the charge that, during the period from 1989 through 1991, Respondents and the other defendants conspired to violate various provisions of the securities laws. (Div. Exs. 1-4.) The district court also disposed of three claims made against other defendants involving violations of the periodic reporting and antifraud provisions of the securities laws after September 1990. (Div. Exs. 1-4.) None of these three claims alleged any misconduct on the part of Respondents. (Div. Ex. 3.) Finally, the court dismissed one claim made solely against a relief defendant. (Div. Ex. 1-3.) The case proceeded to trial only as to the remaining five claims made against Respondents-Counts Two through Six of the Commission's amended complaint. (Div. Exs. 1-4.)
As relief for Respondents' alleged violations, the Commission sought a permanent injunction, disgorgement of ill-gotten gains, and prejudgment interest. (Div. Exs. 2, 3.) The Commission and Respondents stipulated to the fact that Castle traded USE securities during the period from September 1989 until August 1990 at a profit of approximately $170,000. (Div. Exs. 1, 4.) The Commission requested prejudgment interest for the period from September 1, 1990, through October 31, 2002. (Div. Ex. 1.)
Following a bench trial in October 2002, the United States District Court for the Southern District of New York found that Castle and Studer, along with others, conducted a fraudulent blind pool offering, manipulated the market for USE securities, and fraudulently sold the securities of USE. (Div. Exs. 1-4.) Below is a summary of the district court's findings, which I find to be true.
Respondents oversaw the creation of and initial investment in Windfall Capital Corp. (Windfall), a shell corporation that had no operating business, assets, or revenue. (Tr. 107; Div. Exs. 1, 2.) On December 5, 1988, Windfall filed a registration statement with the Commission, seeking to register one million units, each to be sold at $0.05. (Div. Ex. 1.) On February 3, 1989, it filed an amendment thereto (Windfall Offering). (Div. Ex. 1.) Each offering document was filed under Respondents' supervision. (Div. Ex. 1.) The Commission declared Windfall's registration statement effective in February 1989, and the Windfall Offering subsequently closed in August 1989. (Div. Exs. 1-3.) Within two weeks of the closing, Windfall and USE entered into a merger agreement at Castle's office in Freeport, New York. (Tr. 110; Div. Exs. 1, 3.) Pursuant to the terms of that agreement, Windfall acquired all the outstanding stock of privately held USE, and Windfall changed its name to USE. (Tr. 110; Div. Exs. 1, 3.) The merger allowed the securities of USE to be publicly traded without going through an initial public offering. (Div. Ex. 1.)
Respondents' conduct in the Windfall Offering and merger was fraudulent because Windfall's registration statement and amendment failed to disclose the actual terms of the Windfall Offering, and Respondents and the other defendants, in offering and selling Windfall securities, made misrepresentations and omissions of material fact. (Div. Exs. 1-3.) Specifically, Respondents and the other defendants misrepresented and omitted, among other things, that: (1) Studer acted as an undisclosed promoter, and Castle acted as an undisclosed underwriter; (2) the terms of the merger were arranged before the Windfall Offering closed; (3) by prearrangement among Respondents and the other defendants, the Windfall Offering was acquired entirely by Respondents and the other defendants or by their nominees; (4) the Windfall Offering was controlled by the other defendants, who had a prearranged undisclosed call option to purchase the entire portion of the Windfall Offering that their nominees had not acquired directly; and (5) the other defendants would commence a public offering through resales after the Windfall Offering purportedly closed, and after the stock price had been manipulated upwards. (Div. Ex. 1.)
Pursuant to an agreement between the other defendants and Studer, Castle became the initial, and then principal, market maker of USE securities, which formerly were the Windfall securities registered with the Commission. (Tr. 47, 48; Div. Ex. 1.) At the time, USE securities were to be quoted on the pink sheets of the NASD's over-the-counter market, and USE had no revenues and only $11,550 in assets. (Div. Ex. 1.) Through Castle's trading as a market maker in USE securities, under the supervision of Studer, the other defendants were able to raise artificially the price of USE securities from $0.05 per share to more than $5.00 per share by using manipulative and deceptive devices. (Div. Ex. 1.) These manipulative and deceptive devices included effecting: (1) offers, purchases, and sales of USE securities in return for promises of risk-free profit for engaging in such trades; (2) directed and controlled trades of USE securities; (3) wash sales and matched orders; and (4) trades involving undisclosed nominees. (Div. Ex. 1.)
Beginning in January 1990, the other defendants and Castle, under Studer's control and oversight, then sold USE securities to public investors at manipulated prices. (Div. Ex. 1.) When the price of USE stock ultimately declined, many of these investors lost most or all of their money. (Div. Ex. 1.) Castle, however, traded USE securities from September 1989 until August 1990 at a profit of at least $170,000. (Div. Exs. 1, 4.) No registration statement was in effect regarding the Respondents' and the other defendants' plan of distribution, which came to rest in August 1990. (Div. Ex. 1.)
On July 21, 2003, the United States District Court for the Southern District of New York entered its opinion and order in which it concluded that Castle and Studer had violated Sections 5(a), 5(c), and 17(a) of the Securities Act, and Sections 10(b) and 15(c)(1) of the Exchange Act, and Rules 10b-3, 10b-5, 10b-6 (the predecessor to Rule 101 of Regulation M), and 15c1-2 thereunder in connection with the offering and trading of securities issued by Windfall and USE, and permanently enjoined Castle and Studer from violating these provisions in the future. (Tr. 38; Div. Ex. 1.)
In imposing the injunction, the district court found a likelihood of future violations based on Respondents' conduct following the Windfall and USE frauds. (Div. Ex. 1.) Studer provided testimony in August 1990 to Commission investigators in which he denied any involvement with the other defendants or the formation of Windfall. (Div. Ex. 1.) Additionally, from approximately November 1991 through April 1992, Castle, under Studer's supervision, manipulated the market for the securities of another issuer, Reshone International Investment Group, Ltd. (Div. Ex. 1.) Neither Castle nor Studer denied that the manipulation occurred, but claimed that a Castle employee was responsible. (Div. Ex. 1.) Castle also conducted an allegedly fraudulent securities scheme through a registered representative in its New York City branch from 2001 through 2002. (Div. Ex. 1.) Studer appeared for a deposition, but refused to answer most of the staff's questions, instead invoking his Fifth Amendment privilege against self-incrimination. (Div. Ex. 1.) During the investigation of this allegedly fraudulent scheme in May 2002, Studer falsely represented to a member of the Commission's examination staff that Castle had not received any complaints related to an unregistered offering of securities undertaken by Castle Holding. (Div. Ex. 1.)
The district court ordered Castle and Studer to pay disgorgement in the amount of $134, 224, which represented Castle's profit from trading in USE securities from September 1989 to August 1990, plus prejudgment interest beginning on September 30, 1990. (Tr. 51, 94; Div. Ex. 1.) Studer was held jointly and severally liable with Castle for the full disgorgement amount because he played an intimate role in the fraudulent transactions. (Div. Ex. 1.) Respondents have since filed notices of appeal from the district court's judgment as well as a motion for a new trial. (Tr. 39; Answer at 2; Resp. Post-Hearing Brief at 2.)
Lastly, although the OIP alleges that Respondents' course of conduct occurred from 1989 through at least 1991, the evidence in the record before me establishes that Respondents' underlying misconduct ended no later than September 1990. The district court found that the distribution of USE securities came to rest in August 1990. (Div. Ex. 1.) The court further found that Castle and Studer traded USE securities from September 1989 until August 1990, which the court relied on in calculating disgorgement. (Div. Exs. 1, 4.) Consistent with this time frame, the Commission requested prejudgment interest beginning on September 1, 1990, and the district court ordered prejudgment interest beginning on September 30, 1990. (Div. Ex. 1.) The only allegations in the Commission's amended complaint that involved conduct occurring after September 1990 were either dismissed or did not allege any misconduct on the part of Respondents. (Div. Exs. 1-4.) Finally, the Division has not pointed to any specific evidence that establishes Respondents' misconduct subsequent to September 1990. Accordingly, I find that Respondents' misconduct underlying the Civil Action ended no later than September 1990.
The United States District Court for the Southern District of New York entered an opinion and order on July 21, 2003, in which it found that Castle and Studer had violated Sections 5(a), 5(c), and 17(a) of the Securities Act, and Sections 10(b) and 15(c)(1) of the Exchange Act, and Rules 10b-3, 10b-5, Rule 10b-6 (the predecessor to Rule 101 of Regulation M), and 15c1-2 thereunder, and permanently enjoined Castle and Studer from violating these provisions in the future. I have taken official notice of the final judgment rendered in the injunctive proceeding SEC v. U.S. Environmental, and I conclude that the United States District Court for the Southern District of New York is a court of competent jurisdiction. See 17 C.F.R. § 201.323. Based on the foregoing, I conclude that Castle and Studer were each enjoined from engaging in conduct in connection with the purchase or sale of a security.
It is well established that findings of fact and conclusions of law made in an injunctive action cannot be attacked in a subsequent administrative proceeding. Joseph P. Galluzzi, 78 SEC Docket 1125, 1129 (Aug. 23, 2002); Ted Harold Westerfield, 69 SEC Docket 722, 729 n.22 (Mar. 1, 1999); Demetrius Julius Shiva, 52 S.E.C. 1247, 1249 (Mar. 12, 1997). Respondents' pending appeals do not alter the finality or preclusive effect of the judgment. Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1104 n.6 (D.C. Cir. 1988), cert. denied, 488 U.S. 869 (1988). Accordingly, to the extent that Respondents raise challenges to the findings of fact and conclusions of law made in the Civil Action, which are incorporated herein, such challenges are rejected.
The Division seeks to bar Studer under the penny stock bar provisions of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931 (1990) (Reform Act). (Div. Pre-Hearing Brief at 25-29, 32; Div. Post-Hearing Brief at 13.) Studer opposes such a bar on the basis that it would involve an improper retroactive application of the Reform Act because his misconduct occurred prior to the Reform Act's enactment. (Tr. 90; Resp. Pre-Hearing Brief at 5; Resp. Post-Hearing Brief at 8.) As I found above, any misconduct that Castle and Studer committed occurred no later than September 1990, while Congress passed the Reform Act on October 15, 1990, and delayed the effective date of the penny stock bar provisions for the earlier of twelve months or upon the issuance of final regulations initially implementing such provisions. See Reform Act § 1(c)(3)(A), 104 Stat. at 932.
The Division contends that retroactive application of the Reform Act is not at issue because it seeks to bar Studer based solely on the permanent injunction issued against him on July 21, 2003. In support of its position, the Division relies on Proffitt v. FDIC, which held that, under Section 8(e) of the Federal Deposit Insurance Act (FDIA), 12 U.S.C. § 1818(e), the same misconduct can result in separate enforcement actions, each of which has its own accrual date for purposes of the five-year limitations period set forth in 28 U.S.C. § 2462. 200 F.3d 855, 862-65 (D.C. Cir. 2000). According to the Division, Section 15(b)(6)(A) of the Exchange Act is akin to Section 8(e) of the FDIA in Proffitt, in that, under each, the same misconduct gives rise to separate claims. (Div. Pre-Hearing Brief at 28-29.) The Commission has held that Section 15(b)(6)(A) of the Exchange Act provides three alternative grounds for Commission action resulting from the same misconduct-an injunction, a conviction, or the misconduct itself-each of which has its own accrual date. See Michael J. Markowski, 74 SEC Docket 1537, 1540 (Mar. 20, 2001). Because the injunction against Studer was issued following the Reform Act's enactment, the Division argues that an order imposing a penny stock bar would not involve retroactive application of the Reform Act. (Div. Pre-Hearing Brief at 28-29.)
Based on the parties' arguments and the facts of this case, the issue I must decide is whether the penny stock bar provisions of the Reform Act would operate retroactively when applied to a post-Reform Act injunction that is issued as a result of pre-Reform Act misconduct. The presumption against retroactive legislation is deeply rooted in our jurisprudence. Landgraf v. USI Film Products, 511 U.S. 244, 265 (1994). The Supreme Court based this presumption on "[considerations of fairness, which] dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted." Id. Nonetheless, a clear statement by Congress that the statute is to have retroactive effect will override the presumption in most instances. Id. at 266-68. Although statutory retroactivity is clearly disfavored, deciding when a statute operates retroactively is not a simple task. Id. at 268. To provide guidance, the Supreme Court prescribed an analytical framework for inquiries into retroactivity when a case implicates a statute enacted after the events at issue. Id. at 280.
First, the court must "determine whether Congress has expressly prescribed the statute's proper reach." Id. at 280. If it has, then the court must give effect to congressional intent. Id. If the statute does not contain such an express command, "the court must determine whether the new statute would have retroactive effect, i.e., whether it would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed." Id. A statute does not operate retroactively merely because it is applied in a case arising from conduct that occurred prior to the statute's enactment or draws upon antecedent facts for its operation. Id. at 269 & n.24 (citing Cox v. Hart, 260 U.S. 427, 435 (1922)). Rather, the court must determine "whether the new provision attaches new legal consequences to events completed before its enactment." Id. at 270. If the statute does have retroactive effect, then the traditional presumption instructs us that the statute does not govern absent clear congressional intent favoring such a result. Id. at 280.
In Koch v. SEC, a case noted by both parties, the Ninth Circuit applied the analytical framework from Landgraf to the same issue in controversy here. 177 F.3d 784 (9th Cir. 1999). In Koch, the Commission brought a civil injunctive action in 1993, alleging that Koch had violated the registration and antifraud provisions of the securities laws while acting as a market maker for a penny stock. Id. at 785. The Commission alleged that Koch committed these violations prior to and during April 1990, six months before Congress enacted the Reform Act. Id. at 785. In January 1995, Koch consented to the entry of a permanent injunction. Id. Later that same year, the Commission initiated an administrative proceeding pursuant to the Reform Act based solely on the injunction, seeking a penny stock bar against Koch. Id. An administrative law judge granted the bar and the Commission affirmed. Id. Koch appealed, arguing that, under Landgraf, the order imposing a penny stock bar was an improper retroactive application of the Reform Act because his underlying misconduct had occurred prior to the statute's enactment. Id.
The Ninth Circuit analyzed the issue under the principles set forth in Landgraf. Id. at 786-89. The court first determined that Congress did not expressly identify the temporal reach of the Reform Act. Id. at 786. Accordingly, the court examined whether the Reform Act attached new legal consequences to events completed prior to its enactment. Id. The Commission argued, as the Division does here, that no retroactive application of the Reform Act was involved because the bar against Koch was based only on the injunction, which occurred after enactment, not the underlying misconduct. Id. at 786-87. Koch responded that the injunction itself was based on his antecedent misconduct and, therefore, so was the penny stock bar. Id. at 785. As such, Koch argued the bar attached new consequences to his pre-Reform Act conduct. Id. at 787.
The Ninth Circuit agreed with Koch, reasoning that although the Commission may proceed based on one of three independent grounds under the Reform Act, any such proceeding serves the purpose of protecting the public from individuals who have shown themselves unfit because of earlier misconduct. Id. at 787. Put another way, the substance of the Commission's case is the underlying violations alleged to have been committed. Id. The text of Section 15(b)(6)(A) of the Exchange Act evidences as much through its repeated references to the time of the underlying misconduct. Id. Similarly, application of the Steadman public interest factors involves referring to the conduct that gave rise to the injunction or the respondent's failure to acknowledge the past wrongdoing. Id. at 787-88. Thus, for purposes of a Landgraf analysis, the court concluded that the event to which the Reform Act attaches the legal consequence of a penny stock bar is the underlying misconduct, regardless of whether the administrative proceeding is based on an injunction or conviction. Id. at 788. Moreover, because the Reform Act armed the Commission with powers to bar those involved with penny stocks that it did not previously possess, imposing such a bar on account of Koch's pre-Reform Act misconduct increased the consequences of such misconduct. Id. at 788-89. Consequently, the presumption against statutory retroactivity applied, thereby compelling the court to hold that the Reform Act does not authorize the Commission to impose a penny stock bar on an individual whose underlying misconduct predated the enactment of Section 15(b)(6)(A) of the Exchange Act. Id. at 789.
Neither party has directed me to controlling federal or Commission precedent that would dispose of the issue raised herein, and I have not discovered any. Although Koch is not binding, in light of the similar facts involved I find the Ninth Circuit's Landgraf analysis and rationale persuasive. The Division's reliance on Proffitt is misplaced because that case, like Markowski, dealt solely with when a cause of action accrues for purposes of calculating the statute of limitations period under 28 U.S.C. § 2462. Retroactive application of the underlying statutes, however, was not at issue in either case. Moreover, because the Division has not argued that any of the exceptions to the presumption against retroactivity identified in Landgraf apply, I will not address their relevance here. See Landgraf, 511 U.S. at 273-75. Accordingly, I conclude that the Reform Act does not authorize the imposition of a penny stock bar on an individual whose underlying misconduct occurred entirely prior to the enactment of Section 15(b)(6)(A) of the Exchange Act. Therefore, the Division's request for an order barring Studer from participating in any offering of penny stock must be denied.
Section 15(b)(6)(A) of the Exchange Act authorizes the Commission to sanction any person who is, or at the time of the alleged misconduct was, associated with a broker or dealer if (1) the person is enjoined from engaging in any conduct or practice in connection with the purchase or sale of a security and (2) such a sanction is in the public interest. Section 15(b)(4)(C) of the Exchange Act permits the Commission to sanction a registered broker or dealer if it finds that (1) such broker or dealer or any person associated with such broker or dealer is enjoined from engaging in any conduct or practice in connection with the purchase or sale of a security and (2) the sanction is in the public interest.
I have already concluded that Castle and Studer were each enjoined from engaging in conduct in connection with the purchase or sale of a security. The remaining issue is what sanctions, other than a penny stock bar, are appropriate in the public interest. The Division also seeks orders revoking Castle's registration as a broker or dealer and barring Studer from associating with any broker or dealer. The Respondents request an order denying the imposition of any remedial sanctions. In determining whether a sanction is necessary in the public interest, the following factors control:
[T]he egregiousness of the respondents' actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the respondents' assurances against future violations, the respondents' recognition of the wrongful nature of their conduct, and the likelihood that the respondents' occupations will present opportunity for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (citation omitted), aff'd on other grounds, 450 U.S. 91 (1981). In proceedings based on an injunction, the Commission considers the circumstances surrounding the injunctive action when making the public interest determination. Marshall E. Melton, 80 SEC Docket 2812, 2814 (July 25, 2003).
Castle's and Studer's actions were both egregious and recurrent. They filed false offering documents with the Commission to hide their scheme, manipulated the price of USE stock upwards, and then sold the stock to investors, resulting in substantial profits for Castle but substantial losses to those investors. (Div. Exs. 1-3.) Castle's and Studer's fraudulent conduct, rather than involving a single instance, occurred continuously over a period of more than one year. (Div. Ex. 1.) Castle and Studer have also been associated with other instances of alleged fraud, both before and after the events underlying the injunction. (Tr. 54-55, 88-89, 97-98, 123-25; Div. Ex. 1.) Castle's and Studer's actions involved a high degree of scienter because they knowingly or recklessly committed multiple violations of the securities laws in connection with the offering and trading of Windfall and USE. (Div. Ex. 1.)
Castle and Studer fail to recognize their wrongful conduct. Although Studer admits that he may have exercised bad judgment in improperly supervising others, he continues to deny that he and Castle had any further involvement. (Tr. 16, 47, 48, 50-51, 58, 60, 69, 84, 86, 114-15; Resp. Pre-Hearing Brief at 1-2; Resp. Post-Hearing Brief at 5-7.) Both Respondents consistently deny responsibility for or awareness of any wrongdoing; rather, they blame others for its occurrence. (Tr. 16, 44, 46, 47, 48, 50-51, 60, 69, 70, 85-86, 91-92, 103, 111-15; Answer at 1-2; Resp. Ex. 2; Resp. Pre-Hearing Brief at 1-2; Resp. Post-Hearing Brief at 5-7.)
Finally, Castle and Studer contend that sanctions are unnecessary because neither is a risk to commit future violations and that their occupations will not present opportunities for future violations, as each either has exited or will be exiting the securities industry. (Tr. 20, 80, 85; Resp. Exs. 5, 6; Resp. Post-Hearing Brief at 2-3, 7.) Studer's opposition is undermined by the fact that he presently holds and wants to maintain his securities licenses, and has expressed his desire to continue working in the securities industry, in general, and with Citadel, in particular. (Tr. 87, 98-99; Resp. Ex. 6; Resp. Post-Hearing Brief at Attachment.) As a result, Studer would be in a position to engage in future illegal activities, just as Castle would be similarly situated if it were to remain registered as a broker or dealer. Moreover, even if I were to accept Respondents' assertions as true, that would not preclude the imposition of sanctions. See William C. Piontek, Exchange Act Rel. No. 48903, __ SEC Docket __, (Dec. 11, 2003) (finding bar in the public interest even though respondent no longer employed in securities industry).
Although Castle and Studer claim that neither will commit any future violations, "past misconduct [may be] the basis for an inference that the risk of probable future misconduct [is] sufficient to require the exclusion from the securities business." Arthur Lipper Corp., 46 S.E.C. 78, 101 (Oct. 24, 1975), rev'd on other grounds, 547 F.2d 171 (2d Cir. 1976). Here, Castle and Studer violated multiple provisions of the securities laws as a result of their involvement with Windfall and USE. Based on Castle's and Studer's past misconduct, I infer that each remains a threat to commit future misconduct, in spite of their assurances to the contrary. Furthermore, deterring others from engaging in similar misconduct serves a valid regulatory purpose. Accordingly, I find that it is in the public interest to bar Studer from association with any broker or dealer and to revoke the registration of Castle as a broker or dealer.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I hereby certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on November 24, 2003.
Based on the findings and conclusions set forth above:
IT IS ORDERED that, pursuant to Section 15(b)(4)(C) of the Securities Exchange Act of 1934, the registration of Castle Securities Corp. as a broker or dealer is hereby REVOKED;
IT IS FURTHER ORDERED that, pursuant to Section 15(b)(6)(A) of the Securities Exchange Act of 1934, Michael T. Studer is hereby BARRED from association with any broker or dealer; and
IT IS FURTHER ORDERED that the Division of Enforcement's request for an order barring Michael T. Studer from participating in any offering of penny stock is hereby DENIED.
This Initial Decision 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) of the Commission's Rules of Practice, 17 C.F.R. § 201.360(d)(1), within twenty-one days after service of the Initial Decision upon them, unless the Commission, pursuant to Rule 360(b)(1), determines on its own to 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
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