==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 98 ADMINISTRATIVE PROCEEDING FILE NO. 3-8805 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION _________________________ In the Matter of : : DANNY G. PINKERTON and : INITIAL DECISION KEVIN N. CAMPBELL : October 18, 1996 : __________________________ APPEARANCES: Robert M. Fusfeld, Leslie J. Hendrickson, and Michael R. MacPhail for the Division of Enforcement, Securities and Exchange Commission R. Parker Semler for Kevin N. Campbell BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission ("Commission") instituted this proceeding on September 11, 1995, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 ("Exchange Act"). The Order Instituting Proceedings ("Order") alleges that from about March 1993 through about September 1993, Mr. Campbell willfully violated Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. I held hearings in Denver, Colorado, on November 28 through December 1, 1995. The Division of Enforcement ("Division") presented nine witnesses and introduced twenty-seven exhibits. Respondent Campbell testified and presented four witnesses and introduced five exhibits.-[1]- The Division and Respondent Campbell submitted Proposed Findings of Fact and Conclusions of Law and Briefs in Support on January 22, 1996 and March 6, 1996, respectively. The Division filed its Reply Brief on March 18, 1996. Issues The issues are whether Respondent Campbell, a registered representative, willfully violated the securities statutes by: (1) directing and or participating in the offer and sale in interstate commerce of Balance For Life ("BFL") securities for which no registration was filed or in effect; (2) engaging in fraudulent conduct in the offer and sale of approximately ---------FOOTNOTES---------- -[1]- I will refer to the exhibits as Div. Ex. __ and R's Ex.__. Mr. Pinkerton appeared pro se at the hearing and presented one witness. On June 25, 1996, the Commission issued an Order Making Findings and Imposing Remedial Sanctions and a Cease-And- Desist Order as to Danny G. Pinkerton. 62 SEC Docket 0506. ==========================================START OF PAGE 3====== $243,000 of BFL securities to eleven investors in that he failed to make inquiry appropriate under the circumstances, or to verify the accuracy of information provided to him before he conveyed that information to other brokers and investors, and that he made material misrepresentations about the potential for public trading of BFL stock on the NASDAQ and the prices at which BFL stock would trade in the future.-[2]- If Respondent Campbell is found to have committed these violations, the issues are whether the Commission should order him to cease and desist and to disgorge funds, and whether it should assess civil penalties, and impose sanctions in the public interest and to protect investors. Findings of Fact-[3]- Respondent Kevin Campbell, age thirty-nine, a vocational school graduate from a small town in Kansas, worked as a machine operator from 1976 until 1989 when he passed the examination and received his Series 7 license which permitted him to become a ---------FOOTNOTES---------- -[2]- On September 28, 1995, the Commission filed a complaint in U.S. District Court against Richard K. Steele, Sr., Richard K. Steele, Jr., Peter C. Tosto, and Marcia Ann Coppertino alleging, among other things, violations of the antifraud provisions of the securities statutes in the conduct of three unregistered offerings of BFL stock from 1991 through 1994 which resulted in sales of more than $1,400,000 of stock to at least 82 investors throughout the United States. (R's Ex. S, Complaint in Civil Action No. 95-D-2471 (D. Col.).) -[3]- My findings are based on the record and my observation of the witnesses' demeanor. I applied preponderance of the evidence as the applicable standard of proof. I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision. ==========================================START OF PAGE 4====== registered representative with a broker-dealer. (Tr. 203-04, 207.) From 1989 to March 1993, Mr. Campbell worked as a registered representative for several registered broker-dealers in the Denver area including Stuart-James, Brandon Ross Securities, and Tamaron Investments ("Tamaron"). He was one of Tamaron's most successful sales persons with over three hundred clients. In 1992 he earned approximately $110,000. (Tr. 352.) Danny J. Pinkerton, Mr. Campbell's close friend and co- worker at Stuart-James and Tamaron, became branch manager of the new Denver office of Rockefeller, Rothschild and Steele ("RR&S"), a registered broker-dealer, in March 1993. At Mr. Pinkerton's invitation, Mr. Campbell joined RR&S on March 16, 1993. (Tr. 207-08.) Mr. Pinkerton and Mr. Campbell, along with another registered representative, Ms. Kimberly Brodkin, opened impressive offices for RR&S on May 21, 1993, in downtown Denver.-[4]- Mr. Campbell's business card identified him as senior vice president; however, the evidence is persuasive that during this period Mr. Campbell functioned as sales manager. Mr. Campbell and Mr. Pinkerton claimed that Mr. Campbell assumed a supervisory role after September 1993. However, in investigative testimony in March 1994, Mr. Campbell acknowledged that he acted as sales manager. "Basically, my job entails, more or less the sales ---------FOOTNOTES---------- -[4]- The offices were furnished with expensive leather, marble, glass, and large works of art and with private space for eleven sales representatives. (Tr. 371-72, 578; Div. Ex. 62 at 79.) ==========================================START OF PAGE 5====== manager type part of the operation, basically, more or less, is what my job is, more or less a sales manager. I recruit, interview, and hire the brokers." (Tr. 224-26.) Mr. Pinkerton's investigative testimony given in March 1994, was that Mr. Campbell recruited and supervised the brokers. (Tr. 80.) Mr. Pinkerton told the brokers to go to Mr. Campbell for help with their sales technique. (Tr. 78-81, 436.) One registered representative, Ross Rozen, who I believe gave credible testimony, understood that Mr. Campbell was the sales manager. (Tr. 470, 474-76.) Registered representatives were told to refer phone inquiries to Mr. Campbell from an advertisement that RR&S ran in the Denver newspaper in June 1993. (Tr. 508-09; Div. Ex. 38A.) Mr. Campbell had about 150 clients while most of the brokers had very few.-[5]- Balance For Life securities BFL is a public company subject to the reporting requirements of Section 15(d) of the Exchange Act.-[6]- BFL was incorporated in Delaware and headquartered in Beverly Hills, ---------FOOTNOTES---------- -[5]- For example, Mr. Pinkerton and Ms. Brodkin had twenty- five and two clients, respectively. -[6]- "Section 15(d), in place since 1936, requires an issuer that files a registration statement under the '33 Act in connection with a public distribution to file periodic reports thereafter under the scheme set forth in Section 13 of the '34 Act. In other words, such issuers become subject to the periodic disclosure obligations of publicly held companies, but not (as do Section 12 registrants) to the other postregistration provisions." James D. Cox, Robert W. Hillman, Donald C. Langevoort, Securities Regulation, Cases and Materials, 700 (1991). I take official notice of the fact that the Commission's records indicate that BFL filed a registration statement under the Securities Act on March 17, 1989. ==========================================START OF PAGE 6====== California. (Tr. 237-38.) Richard K. Steele, Sr. ("Mr. Steele"), the president of RR&S who controlled the broker-dealer, was the majority shareholder, president, chief executive officer, and chairman of BFL. (Tr. 49, 172, 221, 236; Div. Ex. 40 at iv, 3, 11.) Mr. Steele was forty-five years old in 1993, a 1969 graduate of the Georgia Institute of Technology, and a former senior vice president at Shearson Lehman Hutton, Inc. (Div. Ex. 40 at 10-11.) Mr. Steele was by all accounts a charismatic individual with persuasive sales skills. His wife, Sandy Mitchell, was the author of The Official Celebrity Register 1993- 94: Intimate Information on the World's Most Popular Movie and Television Stars (1993), and had appeared on such television shows as Phil Donahue, A Current Affair, and Hard Copy. (Tr. 674-78.) Mr. Campbell was impressed with both Mr. and Mrs. Steele. (Tr. 221-22, 675, 682.) BFL's private placement memorandum dated February 1, 1993, described a private placement offering of 1.5 million units consisting of one common share and one warrant at $3.00 per unit.-[7]- The warrant was exercisable at $4.50. RR&S was the placement agent for the offering. A minimum of 50,00 units, or sales of $150,000, were required to close the offering, and the maximum sales were set at 1.5 million units, or $4.5 million. (Div. Ex. 40 at ii-iii.) The term "private placement" refers to ---------FOOTNOTES---------- -[7]- This was at least the second private offering of BFL securities. Mr. Steele, Sr., and his son Richard Steele, Jr., sold unregistered convertible preferred shares of BFL in 1991. (Tr. 366-67.) The Steeles engaged in a third private offering followed the one that is at issue here. (Tr. 164.) ==========================================START OF PAGE 7====== language in Section 4(2) of the Securities Act which exempts from registration transactions by an issuer not involving any public offering. The exemption "applies to offerings to institutional investors that are sufficiently sophisticated and have sufficiently strong bargaining positions that they do not need the protections of federal registration. Secondly, the exemption also applies to an offering that is made to a limited number of qualified private individuals who, like institutional investors, are sufficiently sophisticated and are able to bear the investment's risk so as not to need the [Securities] Act registration protections." See Thomas Lee Hazen, The Law of Securities Regulation, 169, 183-84 (2nd ed. 1990).-[8]- It is generally accepted that private placements are very risky investments for individual investors. (Tr. 653.) However, Mr. Campbell believed that private placements were no more risky than publicly traded stocks. (Tr. 268-70.) The private placement memorandum for the offering and the sales video promoting BFL securities represented that BFL was a health-care company that was developing nutritional supplements, anti-smoking products, and prototype vitamins. (Div. Ex. 40.) In fact, BFL had no operations, no manufacturing capability, and no revenue. BFL was located in RR&S's offices in Beverly Hills, and Mr. Steele was its single employee. (Tr. 108-09, 229-30.) ---------FOOTNOTES---------- -[8]- The Commission's Regulation D, 17 C.F.R.  230.501- .506, is a series of six rules establishing three small issue or limited offering exemptions from the registration requirements of the Securities Act. ==========================================START OF PAGE 8====== Mr. Campbell made the following materially false representations to customers by furnishing them with a private placement memorandum which contained the following false information: The offering proceeds would be held in a separate, interest bearing account maintained at Bank of America, Beverly Hills, California. If the maximum is raised, the stock will qualify and trade on the National Association of Securities Dealers Automated Quotation system ("NASDAQ"). If the maximum is not raised, it will trade on the Bulletin Board until it qualifies for NASDAQ.-[9]- RR&S, an investment banking firm, had signed a letter of intent to be acquired by BFL. RR&S specializes in raising capital for the health-care industry. BFL recently entered an exclusive marketing arrangement with Advantage Life, Inc., which distributes health- related products, Smoker's Choice and Quit Power Program, in over 32,000 retail outlets throughout the United States. Over the next twelve months, BFL will introduce numerous new self-care products to address health care needs. Over the past year, BFL continued to expand potential retail distribution with chains such as K-Mart, Wal- Mart, Eckerd, Walgreens, Osco/Sav-On and many others. BFL has 3.125 million BFL shares outstanding, of which 61,000 are without restriction on resale. (Div. Ex. 40 at ii, 1, 2, 5-6, 9-12, 17.) In addition, BFL's private placement memorandum contained, along with the financial statements, an audit letter signed "Marcia Ann Coppertino, Ph.D., et al.", on the letterhead of Coppertino, Phelps and Zacowitz, which stated: We have compiled the Balance Sheet, Profit and Loss ---------FOOTNOTES---------- -[9]- I assume the reference is to NASD' Over-The-Counter Bulletin Board. ==========================================START OF PAGE 9====== Statement and Schedule of Expenses WITH FULL AUDIT THEREOF FOR BALANCE FOR LIFE, INC. as of May 31, 1992 . . . Management has elected to omit substantially all of any unnecessary disclosures generally required. If the omitted intentions of the disclosures were included, undue influence about the financial means, positions and results might draw wrong user and conclusions. (Div. Ex. 40 at 25.) The industry practice during the time period at issue was that commissions on a security traded on the NASDAQ averaged between two to five percent with the registered representative keeping at most sixty to seventy-five percent of the gross commission.-[10]- (Tr. 43, 47, 232-33, 472.) At RR&S, sales representatives received commissions of between two and a half percent and five percent and shared half of that with the branch manager on sales of securities other than BFL. (Tr. 232.) However, in an unusual arrangement, on BFL sales persons received eleven percent commissions and were able to keep the entire amount. (Tr. 388-89.) Selling BFL securities was the main, almost exclusive, activity of RR&S's Denver office from March to September 1993. (Tr. 54, 388, 470.) During this period, Mr. Steele continually represented in daily staff meetings through Mr. Pinkerton, in videos or by conference calls, that the closing would occur any day, that a registration statement had been filed with the Commission, that upwards of a million and a half dollars ---------FOOTNOTES---------- -[10]- At Tamaron brokers paid out fifty percent of their commissions to the branch manager. (Tr. 47.) ==========================================START OF PAGE 10====== worth of the offering had been sold, and later that the offering was oversubscribed, that BFL would begin trading any day on the NASDAQ, and that the price of shares after the opening would be in the range of eight to ten dollars. (Counsel's Ex. 1; Div. Ex. 38A; Tr. 271-74, 278, 514.) According to the private placement memorandum, the offering would close on June 15, 1993, but the issuer could extend the closing to a date no later than September 15, 1993, which is when the issue closed. Total proceeds were only $608,100 based on sales of 202,700 units to twenty-eight investors.-[11]- (Counsel's Ex. 1.) When he learned the results of the closing, Mr. Campbell claims to have been angry with Mr. Steele for falsely misrepresenting during the summer that over a million dollars of the offering had been sold. Mr. Campbell realized that this meant that BFL shares could not be listed on the NASDAQ because the maximum, $4.5 million, had not been sold. (Tr. 272-74.) The common and preferred stock of BFL have never publicly traded. (Counsel's Ex. 1.) Legal Conclusions The evidence is overwhelming and indisputable that Mr. Campbell committed the violations as alleged in the Order. He willfully offered, recommended, and sold in interstate commerce, ---------FOOTNOTES---------- -[11]- On brief, the Division claims that RR&S's Denver office sold $579,000 worth of BFL securities to twenty-three investors who lost their entire investments. (Initial Brief at 2.) ==========================================START OF PAGE 11====== 86,000 units of BFL's unregistered securities to eleven investors at three dollars a unit for proceeds of $258,000 on which he earned commissions of $28,380. (Counsel's Ex. 1.) Mr. Campbell knew or should have known that these securities were not registered, there was no registration statement on file, and they were not exempt from registration. SEC v. Universal Major Industries, Corp., 546 F.2d 1044 (2d Cir. 1976) (scienter is not required to establish a violation of Section 5 of the Securities Act.) The Commission has warned that the mere fact that a security may allegedly be exempt from the registration requirements of the Securities Act does not relieve a broker-dealer or associated persons of their obligations. It may increase their responsibilities, since neither the dealer nor the customer receive the protection which registration under the Securities Act is designed to provide. (Securities Act Release No. 4445, 3 Fed. Sec. L. Rpt. (CCH) 22,759; Everest Securities, Inc., 62 SEC Docket 1914 (August 26, 1996).) In connection with the offer, sale, and purchase of these BFL securities, Mr. Campbell willfully employed devices and schemes to defraud, he obtained money by means of untrue statements of material facts or omissions, and he engaged in transactions, practices, and courses of conduct which operated as a fraud or deceit on investors. I reject Mr. Campbell's defense that he was an earnest, honest rube taken in by a slick talking apparently successful promoter, and that "I told [customers] exactly what I was being ==========================================START OF PAGE 12====== told." (Tr. 271-72, 279, 682.) It is black letter law that: Brokers and salesmen are "under a duty to investigate, and their violation of that duty brings them within the term 'willful' in the Exchange Act." Thus, a salesman cannot deliberately ignore that which he has a duty to know and recklessly state facts about matters of which he is ignorant. He must analyze sales literature and must not blindly accept recommendations made therein. The fact that his customers may be sophisticated and knowledgeable does not warrant a less stringent standard . . . . In summary, the standards by which the actions of each [securities salesman] must be judged are strict. He cannot recommend a security unless there is an adequate and reasonable basis for such recommendation. He must disclose facts which he knows and those which are reasonably ascertainable. By his recommendation he implies that a reasonable investigation has been made and that his recommendation rests on the conclusions based on such investigation. Where the salesman lacks essential information about a security, he should disclose this as well as the risks which arise from his lack of information. A salesman may not rely blindly upon the issuer for information concerning a company, although the degree of independent investigation which must be made by a securities dealer will vary in each case. Securities issued by smaller companies of recent origin obviously require more thorough investigation. (citations omitted.) Hanly v. SEC, 415 F.2d 589, 595-97 (2d Cir. 1969); see also SEC v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992) (a stockbroker's special duties to his customers of fair dealing and full disclosure cannot be avoided by relying either on his employer or an issuer); Quinn & Co., v. SEC, 452 F.2d 943, 946-47 (10th Cir. 1971) (salesmen are under a duty to investigate, and a violation of that duty brings them within the term 'willful'); Strathmore Securities, Inc., 43 S.E.C. 575, 582 (1967) (salesmen, no less than broker-dealers, should be aware of the requirements ==========================================START OF PAGE 13====== necessary to establish an exemption from the registration requirements of the Securities Act, and they should be reasonably certain such an exemption is available); Mark E. O'Leary, 43 S.E.C. 842, 848 n.13 (1968), aff'd 424 F.2d 908 (D.C. Cir. 1970); Merrill Lynch, Pierce, Fenner & Smith Inc., 45 S.E.C. 185, 188, 191 (1973); and Everest Securities, Inc., 62 SEC Docket at 1920 (brokers-dealers are under a duty to investigate the securities they recommend, and their failure to do so subjects them to liability for violations of the antifraud provisions of the securities laws). Mr. Campbell failed to make inquires appropriate under the circumstances, or to verify the accuracy of information provided to him by others about the BFL securities which he recommended that investors purchase. Mr. Campbell admits to doing no investigation, inquiry, or analysis. Mr. Campbell's due diligence investigation consisted of reading the private placement memorandum, and doing some research which he describes as "nothing other than just reading a lot of articles about [the health care trend] in the market place." (Tr. 235-37.) Mr. Campbell failed to notice that the audit letter accompanying the BFL financial statements in the placement memorandum from "Marcia Ann Coppertino, Ph.D., et al." was highly irregular and nonsensical. (Tr. 243-45.) He claims that he and Mr. Pinkerton ascertained that BFL's corporate charter was in good standing because they called "out in Los Angeles, wherever you can call to see that a charter is in good standing." (Tr. 237.) Like so ==========================================START OF PAGE 14====== many of Mr. Campbell's unsupported assertions and denials, this one is suspect because the first page of the private placement memorandum states that BFL is a Delaware corporation. (Tr. 236- 38.) Other instances of Mr. Campbell's unacceptable behavior include his failure to check with the Commission that BFL had made an appropriate filing covering these securities,-[12]- and his not reviewing copies of BFL's annual and quarterly reports which it should have filed with the Commission.-[13]- RR&S's due diligence file on BFL securities at the Denver office was a farce because it contained only the private placement memorandum.-[14]- (Tr. 82.) Mr. Campbell was wrong to accept, without any support, Mr. Steele's advice that he could ignore language in the private placement memorandum that BFL securities were only being offered to accredited investors as defined in Rule 506 of the Regulation D exemption.-[15]- (Tr. 245-48.) Furthermore, the Denver ---------FOOTNOTES---------- -[12]- As noted later, Ms. Brodkin called the Commission and learned that BFL securities were not eligible for the S-3 registration statement that Mr. Steele claimed would allow public trading. (Tr. 406-08.) -[13]- Mr. Campbell claims that in late summer, after he had sold BFL securities, he asked for copies of BFL's filings but accepted the explanation from BFL's corporate counsel that copies were unavailable because accountants were making corrections. (Tr. 239-40.) -[14]- Mr. Rozen, with less than one year experience as a registered representative, refused to sell BFL and left the firm after two months because he thought BFL was far too speculative and did not make a lot of sense. (Tr. 521-22.) -[15]- An accredited investor is a natural person with income of $200,000, or joint income with spouse of $300,000, in (continued...) ==========================================START OF PAGE 15====== office did not keep count of the number of sales to unaccredited investors, so Mr. Campbell did not know whether the number exceeded the thirty-five allowed. (Tr. 115, 126, 249-50.) Mr. Campbell went beyond blindly relying on fraudulent information supplied by Mr. Steele, he deliberately ignored information which conflicted with what the issuer told him, and he chose to ignore facts which required him to perform a more thorough investigation before recommending these securities. Hanly, 415 F.2d at 597. For example, Mr. Campbell knew, ignored, and did not disclose to customers that the issuer and the broker-dealer were controlled by the same individual, and that salespeople were receiving eleven percent commissions which were two or three times higher than on sales of NASDAQ listed stocks. These facts and the offering's status as a private placement by what essentially was a start-up company indicated a very high level of risk to investors which required Mr. Campbell to investigate and verify the information in the private placement memorandum. (Tr. 328.) He did not do so. Furthermore, Mr. Campbell falsely represented to customers that BFL had filed registration documents which would permit public trading in BFL private placement shares on the NASDAQ when he knew this was not true. Mr. Pinkerton learned on approximately June 15, 1993, from Mr. Steele, and, I believe, ---------FOOTNOTES---------- -[15]-(...continued) each of the two most recent years, and reasonable expectation of the same level of income in the current year, or one with a net worth, with or without a spouse, of over one million dollars. Rule 501; Section 2(15) of the Securities Act. ==========================================START OF PAGE 16====== told Mr. Campbell that Mr. Steele claimed that the registration statement that allegedly had been filed did not cover this BFL offering, but rather it covered only 61,000 shares of BFL's 3,125,000 shares of common stock already outstanding.-[16]- (Tr. 101-07.) In addition, Mr. Campbell knew that Mr. Steele had been representing for two years that BFL stock would soon trade publicly. I reach these conclusions because Mr. Pinkerton had this information, and I attribute to Mr. Campbell facts known by Mr. Pinkerton. Mr. Campbell and Mr. Pinkerton were close friends who did not keep secrets from one another and that friendship continued at the time of the hearing. (Tr. 82-83, 198, 208, 213- 14, 377-80; Div. Ex. 62R at 39.) Mr. Campbell joined RR&S at Mr. Pinkerton's invitation and their offices were across the hall from one another. Ms. Brodkin told Mr. Pinkerton no later than March 1993, while they worked together at Tamaron or when they began working together to set up RR&S's Denver office, that she had invested $10,000 in an earlier BFL private placement two years before, that Mr. Steele and Richard K. Steele, Jr., had told her that a registration statement would be filed for her convertible preferred shares, and they had continually assured her for the last two years that BFL would soon begin to trade ---------FOOTNOTES---------- -[16]- Mr. Pinkerton never understood Mr. Steele's position that BFL had "61,000 shares of free trading stock out there that would have to be registered before these shares that we sold could trade." (Tr. 106.) ==========================================START OF PAGE 17====== publicly.-[17]- (Tr. 63-65.) Mr. Campbell claimed he did not learn that Ms. Brodkin purchased BFL in 1991 from Mr. Pinkerton until she left RR&S in late July or early August, 1993. (Tr. 322-23.) I find his position unpersuasive because there is nothing in the record to indicate why Mr. Pinkerton would wait months before sharing this information with Mr. Campbell. (Tr. 63-65, 201.) Even Mr. Campbell's own witness, Stanley A. Baker, an experienced securities person, faulted a registered representative, Mr. Campbell, for ignoring the following "red flags" which he was required to resolve before he could offer the BFL private placement to accredited investors: ---------FOOTNOTES---------- -[17]- Ms. Brodkin had recommended that RR&S establish an office in Denver, and recommended Mr. Pinkerton to head it. (Tr. 362-63.) She talked with Richard Steele, Jr., who sold her the BFL shares, at least twice a month to check on whether they could be publicly traded. He continually assured her that trading would begin soon. (Tr. 370-71.) Ms. Brodkin, who received her Series 7 license in December 1992, called the Commission's Denver office and learned that BFL was not eligible for the type of registration that Richard Steele, Jr., had told her it would obtain. (Tr. 406-08). She left RR&S on either July 25 or August 2, 1993, because: Brokers were leaving, checks were bouncing, secretaries were leaving, you know just things weren't running smoothly as I thought, at least, an office should. You know, when everybody's paychecks bounce and the secretaries are threatening to leave because they're not getting paid and, I mean, even the manager's check is bouncing. And I had already at that point, I had called the SEC to find out about the S-3 registration and free trading and all that and, basically, I saw an investigation coming and I didn't want to be there when it started. (Tr. 405.) ==========================================START OF PAGE 18====== (1) the fact that the person who owned and controlled RR&S also owned and controlled the issuer and was the only source of information about BFL; and (2) the highly unusual auditor's letter accompanying the financial statements which does not contain required language and does not comply with the standard report form used by accountants in rendering audit opinions.-[18]- (Tr. 650-55.) Further support for my conclusions is the expert opinion of Andrew Carr Conway, Jr., a certified public accountant in Colorado and Nebraska, and a member of the staff of the Commission's Denver Regional Office for thirteen years responsible for reviewing registration statements and offering circulars. (Tr. 695.) Mr. Conway, who had reviewed thousands of financial reports in offering statements, characterized the auditor's letter as on its face nonsensical and fundamentally inconsistent, and had never before seen what was supposed to be an auditor's report/opinion on financial statements where the person or firm rendering the opinion was not identified as a certified public accountant. (Tr. 702-06.) I find that Mr. Campbell was required to investigate these matters further, and it is highly probable that such an inquiry would have revealed that the BFL offering was a sham. Mr. Campbell's recommendations to investors that they purchase BFL securities beginning in June 1993 through September 1993 included the following false and misleading information: BFL shares would trade publicly any day; shares would initially trade at a premium; three broker-dealers would make a market in the ---------FOOTNOTES---------- -[18]- The standards are set out in The Codification of Statements on Auditing Standards  AU 508.07-.09. (Tr. 700-01.) ==========================================START OF PAGE 19====== stock; these market makers would take the price of BFL shares up to $8.00 to $10.00 a share; and BFL shares would double from the $3.00 unit offering price. (Tr. 299-302, 556-59.) The persuasive evidence for this finding is found in Mr. Campbell's admissions that he told his customers what Mr. Steele told him and others about BFL, testimony at the hearing, and Mr. Campbell's very detailed notes of conversations with customers. (Tr. 142-45, 299-300.) Mr. Campbell acknowledged that Mr. Steele represented that the offering should open at a premium. (Tr. 299.) On June 16, 1993, Mr. Campbell thanked a customer, Arnold Fisher, who purchased $15,000 worth of BFL for getting his check in and for his confidence, and told him "what the game plan was for BFL." (Div. Ex. 62R at 13.) Mr. Campbell assured Mr. Fisher on September 22, 1993, that "if he hangs in there it will pay off." (Div. Ex. 62R at 14.) On August 9, 1993 he told a customer, Richard Hall, who purchased $15,000 worth of BFL, that BFL would close on Wednesday, and that something big was going on with it. (Div. Ex. 62R at 30.) Mr. Hall, called to testify by Mr. Campbell, understood from him that the BFL offering was oversubscribed and that it would open at a premium when trading began. (Tr. 597.) On July 19, 1993, he told a customer, Brant Lee, who purchased $15,000 worth of BFL, that BFL would begin trading any day in the next three weeks, on August 11 he assured Mr. Lee it was just around the corner, and on August 31 he told him it might ==========================================START OF PAGE 20====== trade the next day. (Div. Ex. 62R at 38, 39.) On July 20, 1993, when John Herman, who purchased $39,000 worth of BFL, told Mr. Campbell that Irene Herman, who I assume was his wife and who had purchased $66,000 units, would need $30,000 Mr. Campbell told him "BFL will get her there shortly." (Div. Ex. 62R at 56.) When Ms. Herman told Mr. Campbell on June 30 that she needed $15,000 in two to three weeks, he told her he was not sure how soon BFL would trade but he was confident of the results. (Div. Ex. 62R at 52.) On August 6, 1993, Mr. Campbell told Mr. Herman that BFL will have great news within the next two weeks. (Div. Ex. 62R at 66.) On August 5, 1993, Mr. Campbell's notes indicate that he made his client David Zaharias happy when he "told him what I thought we could expect [from BFL] and what the end result should be." (Div. Ex. 62R at 79.) Mr. Campbell told Mr. Zaharias, who purchased $15,000 worth of BFL, that BFL would trade on NASDAQ or the pink sheets any day, that it would double in price, and that it could go as high as ten dollars a share. (Tr. 555-58.) Mr. Campbell admittedly passed on information to customers from "BFL Sales Points for Brokers," and from information provided at sales meetings that he knew or should have known was false and misleading. (Div. Exs. 38B, 38C.) For example, the "BFL Sales Points for Brokers," which he and other representatives used, mentions BFL's "tremendous potential (a $17 to $45 stock)," that BFL shares "will be listed on NASDAQ (symbol:BALL)," and that RR&S recommended another medical company ==========================================START OF PAGE 21====== that went from $3.50 "to $18.00 in 90 days."-[19]- (Div. Ex. 38B.) Mr. Campbell's notes from sales meetings indicate that he conveyed to investors the following false and misleading information: the BFL offering was "a private placement, but only technically and will trade as an [Initial Public Offering]; "should start trading in June, shares will be free trading thru an S-3 registration;" that customers are advised "to stay in investment for 90 days to allow news coming out to appreciate the stock;" and "doctors, and 35,000 retail outlet network. Products will go on shelves in all of these outlets."-[20]- (Div. Ex. 38C.) Finally, Mr. Campbell's unpersuasive claim that if he had it to do over he would (1) investigate the security thoroughly before recommending BFL to clients, (2) demand copies of Form 10- Q and Form 10-K filings, (3) check with the Commission that the issuer had in fact made the Regulation D filing, (4) only sell to accredited investors and on a limited basis to sophisticated investors, (5) make sure that the firm's compliance department ---------FOOTNOTES---------- -[19]- Mr. Rozen is quite sure that Mr. Campbell gave him copies of notes from a sales meeting, and "BFL Sales Points for Brokers," which read like a talking sheet or scripted telephone call with a customer. (Div. Exs. 38B, 38C; Tr. 474-77, 525-28.) -[20]- Mr. Rozen's abbreviated notes repeat much of what Mr. Campbell noted, and show additional false and misleading representations by Mr. Steele which Mr. Pinkerton repeated and Mr. Campbell accepted. (Tr. 514.) These included claims that shares at the Initial Public Offering will sell for between $5.25 and $5.50, "firm will hold until $8-10, 3 market makers will take it [to] 8-10," should recommend that clients hold until it gets to $6.50-7.00, and $1.6-1.7 of the $4.5 million offering sold. (Div. Ex. 38A; Tr. 497-515.) ==========================================START OF PAGE 22====== was monitoring sales, and (6) not do general solicitations or cold calling or broadly disseminate the private placement memorandum is an admission that he acted illegally in 1993. (Tr. 680-81.) Public Interest By all established criteria, Mr. Campbell's conduct merits a severe sanction.-[21]- His illegal behavior was blatant in that he willfully and knowingly offered and sold over $250,000 of unregistered securities to investors in violation of a registered representative's duty of inquiry, and made false and misleading representations of material information and failed to disclose material information to customers whom he knew relied on him and trusted him. (Tr. 271.) His illegal activities were not isolated but continued for seven months. The Steadman criteria include a person's recognition of the wrongful nature of the illegal conduct and sincerity against future misconduct. Mr. Campbell's self-serving, ambiguous position on these issues is not reassuring for the investing public. On the one hand, Mr. Campbell claims he did no wrong because he only repeated what others told him. On the other hand, he maintains that he would act differently and properly if he had it to do over, and that he is a better registered representative today because of the BFL experience. (Tr. 680-82.) The securities industry is heavily dependent on the ---------FOOTNOTES---------- -[21]- Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). ==========================================START OF PAGE 23====== integrity of its participants. The sense of the evidence is that Mr. Campbell lies, and ignores or professes to be ignorant of the very basic duties of a registered representative which would impede his money making activities. For example, Mr. Campbell did not recall or did not remember whether Mr. Steele represented at what price BFL would begin trading. (Tr. 298-99.) Mr. Pinkerton, on the other hand, remembered that Mr. Steele told all the brokers that there were three market makers "who'll sell the stock at $8 to $10." (Tr. 143.) Mr. Campbell denied knowing before August 1993 that Ms. Brodkin had purchased BFL in 1991 and that since that time Mr. Steele and Richard K. Steele, Jr., had been telling her that it was going to trade publicly soon. I believe Ms. Brodkin that she told people in the RR&S Denver office from March through July 1993 that she had bought BFL in 1991 on information that it would trade publicly soon. (Tr. 377- 820, 409.) Mr. Campbell believed it was important to his job to keep very detailed notes of conversations with customers and discussions at staff meetings. (Tr. 251; Div. Ex. 62R.) I therefore find his truthfulness questionable because he had no notes to support his testimony that he called California authorities to check that BFL's charter was in good standing, and he called one of the three broker-dealers who allegedly was going to be a market maker in BFL stock, and he called BFL's counsel who allegedly told him that BFL's annual and quarterly reports, Forms 10-K and 10-Q, were not on file with the Commission because the accountants were making revisions. (Tr. 239-41.) Mr. ==========================================START OF PAGE 24====== Campbell never called the Commission to inquire as to the status of the reports. (Tr. 239, 680.) Typical of the contradictions in Mr. Campbell's position is that he testified at least twice that he stayed with RR&S after the BFL offering closed on September 15, 1993, because he felt it was his duty to his clients, and that he left when he concluded in December 1994 that it was not going to trade. (Tr. 277, 346- 47.) However, the third time the issue came up he stated: ==========================================START OF PAGE 25====== Well, you know, I'll be honest with you. I'm not going to say I necessarily gave up hope on the Balance For Life. What I could not tolerate anymore was not being paid. I had and I still have about a $15,000 commission that has never been paid to me by Flemming, Anderson, [Cohen & Lee] and that's why I left.-[22]- (Tr. 352.) Mr. Campbell's claim that certain of his customers refused refunds of their investments after talking to Mr. Steele is unsupported in the record. Four BFL investors, two of whom were Mr. Campbell's customers, Mr. Zaharias and Mr. Hall, did not get their money refunded. (Tr. 557, 592, 605.) Mr. Pinkerton told his client Mr. Crowther that Mr. Steele would not return any money. (Tr. 535, 547.) Mr. Hall, who was called to testify by Mr. Campbell, stated that Mr. Campbell did not offer him an opportunity to recover his $15,000 investment. (Tr. 605.) The evidence is persuasive that Mr. Campbell does not believe that he acted illegally, and it is highly probable that he will commit violations in the future. Mr. Campbell's conduct after the time period specified in the Order is relevant on the public interest issue. Mr. Campbell continued in 1994 and 1995 to tell customers who had purchased BFL that it would soon trade ---------FOOTNOTES---------- -[22]- In approximately August 1994, RR&S affiliated with another broker-dealer, Flemming, Anderson, Cohen & Lee. Mr. Campbell left RR&S and joined D.E. Fry as a registered representative on December 31, 1994, when Mr. Pinkerton closed the Denver office. (Tr. 55, 206, 275.) Mr. Campbell earned approximately $15,000 in 1994. Mr. Campbell had no difficulty finding a firm in Denver to associate with after leaving RR&S because he was an experienced salesperson with no disciplinary history and had a large number of clients. (Tr. 276.) Mr. Campbell was employed at D.E. Fry at the time of the hearing as a registered representative in a non-supervisory capacity. (Tr. 641.) ==========================================START OF PAGE 26====== publicly when he had no reason to believe this was true. He claims he did not promise anything: "I told them exactly what I was being told." (Tr. 279.) Mr. Campbell continued to stay in touch with Mr. Steele after he left RR&S and, in March 1994, he testified that Mr. Steele was an honest man. (Tr. 274, 279.) Mr. Campbell discussed this proceeding with two people after he learned the Division would call them as witnesses, Mr. Slater and Mr. Zaharias. Mr. Campbell called Mr. Slater who had also been a registered representative at RR&S and who considered Mr. Campbell his good friend and mentor. (Tr. 436-37.) I find it very likely that this witness gave less than candid testimony to avoid harming Mr. Campbell.-[23]- Mr. Campbell also raised the subject with Mr. Zaharias, a customer. Mr. Zaharias has known Mr. Campbell for approximately ten years because their sons are close friends. Mr. Campbell informed Mr. Zaharias that he was the only investor listed to testify that Mr. Campbell made price predictions about BFL, and that he could lose his securities license from an adverse decision in this proceeding. (Tr. 552-54.) I view Mr. Campbell's actions as an attempt to unfairly influence the outcome of the proceeding. Both witnesses were obviously uncomfortable in being placed in a situation where their testimony could be the basis for action adverse to Mr. Campbell's personal interests. ---------FOOTNOTES---------- -[23]- For example, on the issue of whether Mr. Campbell spent time assisting brokers with their sales technique, this witness gave testimony which appears to differ from his earlier statements to the Division. (Tr. 438-43.) ==========================================START OF PAGE 27====== A final reason why it is in the public interest that Mr. Campbell receive the most serious sanction is to deter others from similar conduct. Despite his blatantly illegal conduct, other registered representatives regarded Mr. Campbell as a great success because he had a large number of customers and substantial earnings.-[24]- To let his illegal activities go unsanctioned would encourage this type of activity. Cease and Desist and Disgorgement Section 8A of the Securities Act and Section 21C of the Exchange Act authorize the Commission to order a respondent who, after notice and opportunity for hearing, has been found to have violated provisions of the securities statutes, rules or regulations to cease and desist from committing or causing such violations and any future violations, and to require a respondent to make an accounting and disgorgement, including reasonable interest. Based on my factual and legal findings and conclusions, I find it appropriate to order Mr. Campbell to cease and desist and to require that he disgorge his earnings from illegal activities ---------FOOTNOTES---------- -[24]- Mr. Campbell earned approximately $110,000 in 1992 and $70,000 in 1993. (Tr. 352.) In 1995, his home was worth about four million dollars. (Tr. 683.) RR&S had an arrangement with Aurora, Colorado, Community College where students worked as interns with the registered representatives at RR&S. (Tr. 607, 616-23.) The one witness who had been an intern at RR&S, Irving Carey, was very impressed by Mr. Campbell's success, and "smile and dial" technique. (Tr. 261, 616-21.) The witness described the calls that the interns made for the registered representatives. He did not mention that the interns were ever asked to research a security. ==========================================START OF PAGE 28====== of $28,380, and interest. See SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307-08 (2d Cir. 1971), cert. denied, 404 U.S. 1005 (1971), rehearing denied, 404 U.S. 1064 (1972). Because Mr. Campbell has filed for bankruptcy, I will not order him to pay the disgorgement amount.-[25]- SEC v. Bilzerian, Fed Sec. L. Rptr. [CCH] [1992 Transfer Binder] 97,252 (D.Mass. 1992) (automatic stay does not prevent court from merely fixing amount of disgorgement, but does prevent enforcement of such an order); SEC v. Accomoando, Fed. Sec. L. Rptr. [CCH] [1992-93 Transfer Binder] 97,252 (D. Mass. 1992) (SEC injunctive action exempt from automatic stay provision of bankruptcy code as an action pursuant to governmental policy or regulatory powers); F.N. Wolf & Co., 60 SEC Docket 3348, 3400 (January 3, 1996) (Division believed it appropriate in view of bankruptcy to set amount but not to order respondent to make payment). Civil Penalties I have found that Mr. Campbell willfully violated the provisions of the securities statutes in a proceeding instituted pursuant to Section 15(b)(6) of the Exchange Act. This prompts the issue of whether it is in the public interest to assess a civil penalty against Mr. Campbell as authorized by Section 21B ---------FOOTNOTES---------- -[25]- Mr. Campbell filed under Section 7 of the Bankruptcy Code on May 21, 1996. In re Campbell, No. 96-16172 (Bankr. D. Colo.). The Division requested that I determine the amount of disgorgement but that I not order the Respondent to pay to avoid any possible violation of the stay provisions of the bankruptcy code. (Motion Regarding Disgorgement and Penalties as to Respondent Campbell, dated June 5, 1996.) Mr. Campbell did not reply to the Motion. ==========================================START OF PAGE 29====== of the Exchange Act. I find that Mr. Campbell should be assessed a penalty of $550,000.-[26]- I find a sanction at the second tier or middle level appropriate because Mr. Campbell's illegal actions involved blatant fraud, deceit, and a deliberate disregard of the law and regulatory requirements; he has made no attempt at restitution; and a steep monetary penalty is required to deter Mr. Campbell and others from similar conduct by impressing on them their obligations to comply with the securities laws.-[27]- First Securities Transfer Systems, Inc., 60 SEC Docket 0441, 0448 (September 1, 1995.) I have not accepted the Division's recommendation that the penalty be at the third tier or highest level because Mr. ---------FOOTNOTES---------- -[26]- Tier two specifies $50,000 as the maximum penalty for each act or omission. I have considered Mr. Campbell's sales to each of his eleven BFL customers as a separate act. Section 21B(b)(2). My Order will fix the amount of the penalty but I will not order Mr. Campbell to pay this amount for the same reasons I will not order him to disgorge funds. -[27]- Mr. Campbell bears some responsibility for what happened to all BFL customers who purchased securities from brokers in RR&S's Denver office since he served as office sales manager. In addition, he knew what was happening but never voiced any concerns, and it appears that everyone in the office, including Mr. Pinkerton, but especially the inexperienced registered representatives, looked to him for advice. This was especially true of Randy Slater, the registered representative who sold BFL to one of the customers who testified, a seventy- five year old retiree with income in 1993 of $30,000. (Tr. 437, 442-43, 568-70.) The financial losses to unaccredited BFL customers, Mr. Crowther lost $66,000, Mr. Brandsma lost $36,000, and Mr. Hall lost $15,000, were relatively substantial. (Tr. 536-38, 543, 592, 605.) Mr. Crowther did very little trading for a period after this experience. (Tr. 548.) ==========================================START OF PAGE 30====== Campbell has not been the subject of any other findings of the type to be considered in making this public interest determination, and Mr. Campbell's unjust enrichment of $28,380 was not substantial. Record Certification Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. 201.351(b)(1996), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on February 8, 1996, as corrected by Order of March 14, 1996. Order Based on these findings and conclusions, and pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h), and 21C of the Exchange Act, I ORDER that Kevin S. Campbell: 1. is barred from association with any broker or dealer, from participating in an offering of penny stock, and from being associated with a member of a national securities exchange or registered securities association; 2. shall cease and desist from committing or causing any violations or 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; 3. shall disgorge $28,380, plus prejudgment interest from October 1, 1993, the day following the end of the period of violations, to the date of this Order at the rate of interest established under Section 6621(a)(2) of the Internal Revenue Code, compounded quarterly.-[28]- 17 C.F.R.  201.600(b); and ---------FOOTNOTES---------- -[28]- If and when the Respondent pays any or all of the disgorgement amount, the parties shall submit to the Office of Administrative Law Judges, within 60 days, a plan for the administration and distribution of those funds. ==========================================START OF PAGE 31====== 4. is assessed a penalty of $550,000. 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 (1996). 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. ______________________________ Brenda P. Murray Chief Administrative Law Judge Washington, D.C. October 18, 1996