Securities and Exchange Commission
In the Matter of
DEREK L. DUBOIS
OPINION OF THE COMMISSION
Ground for Remedial Action
Failure to Disclose Anticipated Compensation from Sale of Securities
Registered representative received compensation from a stock promoter for effecting sales of certain securities without disclosing the fee arrangement or the payments to the representative's clients. Held, it is in the public interest to bar respondent from association with any broker or dealer, member of a national securities exchange, or member of a registered securities association; to order respondent to cease and desist from committing or causing violations and future violations of the antifraud provisions of the securities laws; and to order respondent to disgorge $2,450, plus prejudgment interest.
Derek L. DuBois, pro se.
James A. Kidney and Jeffrey P. Weiss, for the Division of Enforcement.
Appeal filed: November 29, 2002
Last brief received: March 6, 2003
Derek L. DuBois, a registered representative with Moors & Cabot, a registered broker-dealer, appeals from the decision of an administrative law judge. 1 Pursuant to Rule 411(c) of the Rules of Practice, 2 we, on our own initiative, ordered review of what sanctions, if any, are appropriate in this matter. 3
The law judge found that DuBois violated Section 17(a) of the Securities Act of 1933, 4 Section 10(b) of the Securities Exchange Act of 1934, 5 and Exchange Act Rule 10b-5 6 by willfully making material omissions in the sale of securities to his customers. The law judge barred DuBois from association with any broker or dealer, or with any member of a national securities exchange, or with any member of a registered securities association. The law judge also ordered DuBois to cease and desist from committing or causing violations and future violations of these provisions of the Securities Act and the Exchange Act. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
DuBois entered the securities industry in 1986. Soon thereafter, he joined J.W. Gant & Associates ("J.W. Gant") as a registered representative. While employed at J.W. Gant in Maryland,DuBois became acquainted with James Skalko, 7 Jerry Kirby, 8 and Thomas R. Curtis. 9
From November 1992 until October 1993, DuBois, then a senior broker at Tamaron Investments ("Tamaron"), worked with Juan "John" Campo. 10 DuBois supervised Campo, split certain commissions with him, and, on occasion, lent Campo money. Campo left Tamaron for another brokerage firm in December 1993, but remained in contact with DuBois.
Beginning in the spring of 1994, DuBois was contacted regularly at Baraban Securities (the successor company to Tamaron) by Jack Rodriguez, 11 who had been given DuBois' name by Campo. Rodriguezwas a sales representative for Corporate Relations Group, Inc. ("CRG"). CRG was a Florida investor relations firm promoting emerging public companies. CRG marketed its corporate clients aggressively through various advertising channels. When prospective investors responded to these advertisements, CRG sales representatives like Rodriguez distributed these names as "leads" to selected salespersons as a means of encouraging the salespersons to recommend to their individual customers the stocks of companies that CRG was promoting.
In 1994, CRG informed salespersons that CRG would compensate them for selling The Tracker Corporation of America ("Tracker") stock. Tracker was a Delaware corporation specializing in the recovery of missing items through the use of bar code labels on personal property. Tracker stock traded on the OTC Bulletin Board. In the fourth quarter of 1994, Tracker stock's trading range was generally between $5 and $7 per share. In order to receive compensation, the salespersons had to send trade confirmations to Rodriguez demonstrating their sales of Tracker stock. If approved by CRG management, CRG's accounting department "would cut a check and mail it out."
Rodriguez testified that, sometime in 1994, he offered DuBois a monetary incentive to sell Tracker stock to DuBois' customers. DuBois denied that he was offered compensation by CRG to sell Tracker stock. DuBois insisted Rodriguez had sent him information on several companies since the spring of 1994, and DuBois had determined that only Tracker merited his interest.
In September 1994, DuBois attended a Tracker due diligence meeting in Toronto, where he saw Skalko. 12 Skalko was a CRG principal and ran CRG's day-to-day operations. DuBois was introduced to Roberto Veitia, the chairman and president of the parent company of CRG. DuBois subsequently sent Veitia a thank-you letter, concluding, "I look forward to doing business with you in the future."
On November 2, 1994, Veitia opened a CRG corporate account at Baraban Securities through DuBois. On November 30, 1994, DuBois solicited six of his clients to purchase a total of 5,000 shares ofTracker stock at 6 3/8 on the OTC Bulletin Board all in a single day. 13 DuBois did not tell any of his clients that he would be compensated by CRG for inducing them to purchase Tracker stock. After settlement on December 7, 1994, DuBois faxed the trade confirmations to CRG with a handwritten note that read "Jack/Roberto: 5000 SHS at 6 3/8." 14 DuBois admitted that he did not normally fax confirmations to a third party.
On December 12, 1994, five days after DuBois' clients' trades settled, CRG issued a check payable to DuBois for $2,562, with the accompanying notation "Finder's Fee Tracker." 15 Dubois never deposited that check, and an unidentified person wrote "VOID" across the check.
On December 16, 1994, CRG issued a check payable to Campo for $2,562, also with the notation "Finder's Fee Tracker." CRG attached a copy of the Campo check to the Tracker confirmations that DuBois had faxed to CRG. Campo testified that he had not performed any services for CRG that warranted compensation.
At the Miami airport a few days later, Rodriguez handed the check to Campo. Campo was instructed to deliver the funds to DuBois. 16 Campo cashed the check, retained $112 for himself, and used the balance of the funds $2,450 to purchase a money order payable to DuBois.
On December 23, 1994, DuBois deposited the money order into his bank account. DuBois testified that he thought the money order from Campo was the repayment of a loan that he might have made to Campo during their days at Tamaron. 17 Prior to the hearing, DuBois obtained from Kirby 18 handwritten calculations purporting to show loans made by DuBois to Campo at Tamaron and offsetting payments. Although Campo agreed that he had taken draws from DuBois at Tamaron, Campo testified that he had repaid those draws and, upon leaving Tamaron, did not owe DuBois any money. Campo further stated that he neither borrowed any money from DuBois outside of his work at Tamaron nor after he left Tamaron.
Under cross-examination by the Division, Curtis, DuBois' friend and subordinate, admitted that he initially suggested to DuBois that the money order from Campo represented the repayment of a loan when DuBois sought his advice regarding the Commission's investigation.
When a salesperson recommends a security to a customer, the salesperson must disclose material facts with respect to the investment. The salesperson must not only avoid affirmative misstatements, but also must disclose "material adverse facts," including any self-interest that could influence such investment advice. 19
DuBois contends that the Division of Enforcement did not prove that he violated the antifraud provisions because the Division and the law judge relied on circumstantial evidence. Here, the preponderance of the evidence, both direct and circumstantial, implicates DuBois in CRG's incentive program for salespersons. The law judge found that DuBois' testimony that he believed the money order from Campo was repayment for a loan he had made to Campo was contradicted by the credible evidence of CRG's manner of doing business, including its payments to salespersons. DuBois was aware of at least some of CRG's business practices. For example, in accordance with CRG's requirements, DuBois faxed confirmations ofTracker trades to CRG although this was admittedly not his usual practice. CRG responded by issuing a check (bearing the notation "Finder's Fee Tracker") payable to DuBois. After that check was somehow voided, CRG immediately issued a check to Campo for the identical amount. 20
A prospective investor would consider it material that a salesperson who was recommending a particular investment was being compensated by a third party for doing so; as a result, the salesperson's recommendation of that investment might not be disinterested. 21 DuBois' failure to disclose his arrangement deprived his customers of the opportunity to consider DuBois' own interest in recommending Tracker stock. 22
Scienter can be demonstrated by circumstantial evidence. 23 As the Supreme Court has observed, "[c]ircumstantial evidence is not only sufficient, but may also be more certain, satisfying andpersuasive than direct evidence." 24 In fraud cases, in particular, "proof of scienter  is often a matter of inference from circumstantial evidence." 25
Here, DuBois suddenly began to recommend Tracker stock even though he rarely recommended OTC Bulletin Board stocks. He failed to disclose to his customers his compensation arrangement with CRG when inducing them to purchase Tracker stock. In an effort to conceal this special compensation, DuBois returned the $2,562 check that CRG sent him. The funds were subsequently routed through Campo. Campo, after subtracting $112 for himself, delivered the balance of $2,450 in the form of a money order to DuBois, who deposited it into his own bank account. It appears that the insertion of Campo into the scheme was designed to protect DuBois' identity and conceal his actions.
We also note that the only support for DuBois' assertion that Campo was repaying a loan came from his former J.W. Gant colleagues who also were associated with CRG. DuBois relied on Kirby to provide him with calculations, ostensibly culled from old Tamaron records, in an attempt to exculpate himself. Curtis advised DuBois on his testimony about Campo's alleged loan repayment. 26
In light of all the foregoing, we find that DuBois willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5 by making material omissions in the sale of Tracker stock to his customers.
Agencies have substantial discretion in assessing administrative sanctions. 27 In assessing whether a sanction is in the public interest, we consider the following factors:
[T]he egregiousness of the [respondent's] actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the [respondent's] assurances against future violations, the [respondent's] recognition of the wrongful nature of his conduct, and the likelihood that the [respondent's] occupation will present opportunities for future violations. 28
DuBois' actions were egregious. By recommending Tracker stock to his customers in exchange for compensation from CRG, DuBois abused the trust placed in him as a securities professional. DuBois asserts that it would be a "travesty of justice" to bar him from the securities industry because his clients rely on him. However, DuBois abused the trust of his clients who relied on him as a securities professional. 29
DuBois also acted with a high degree of scienter, as evidenced in part by DuBois' "washing" of the CRG payment through Campo in order to conceal his identity. DuBois' employment as a securities professional will present opportunities for future violations.
Consistent with the public interest and the protection of investors, we find that DuBois' misconduct merits imposition of a bar from association with any broker or dealer, member of a national securities exchange, or member of a registered securities association. We also conclude that it is appropriate to order DuBois to cease and desist from committing or causing violations andfuture violations of the provisions of the Securities Act and the Exchange Act.
The law judge did not order disgorgement because she had barred DuBois and the amount he gained was "relatively small." We believe it appropriate to assess disgorgement in the amount of $2,450 (the amount he received from CRG), plus any accrued prejudgment interest. DuBois should not benefit from any ill-gotten gain, no matter how modest the amount.
An appropriate order will issue. 30
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID and ATKINS); Commissioner CAMPOS, not participating.
Jonathan G. Katz
In the Matter of
DEREK L. DUBOIS
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Derek L. DuBois be, and hereby is, barred from association with any broker or dealer, member of a national securities exchange, or member of a registered securities association; and it is further
ORDERED that DuBois cease and desist from committing or causing violations and future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5; and it is further
ORDERED that, within 30 days of the entry of this order, DuBois shall disgorge $2,450, plus prejudgment interest computed at the rate set forth in Rule 600 of the Commission's Rules of Practice, from January 1, 1995, to the date of payment.
Payment of disgorgement shall be (i) made by United States postal money order, certified check, bank cashier's check, or bank money order made payable to the Securities and Exchange Commission; (ii) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (iii) submitted under cover letter which identifies DuBois as the respondent in this proceeding, and gives the file number of this proceeding. A copy of the cover letter and check shall be sent to James A. Kidney, counsel for the Division of Enforcement,Securities and Exchange Commission, 450 Fifth St., N.W., Washington, D.C. 20549-0808.
By the Commission.
Jonathan G. Katz
1 DuBois currently is co-owner and branch manager of the Moors & Cabot office in Reisterstown, Maryland.
2 17 C.F.R. § 201.411(c).
3 Order Granting Petition for Review, Directing Review on Commission Initiative, and Scheduling Briefs, Adm. Proc. File No. 3-1003 (Dec. 11, 2002).
4 15 U.S.C. § 77q.
5 15 U.S.C. § 78j.
6 17 C.F.R. § 240.10b-5.
7 At the time, Skalko was a manager in a J.W. Gant office in Florida. Skalko would later become a principal of Corporate Resources Group, Inc. ("CRG"), described infra.
On August 11, 2000, Skalko consented to the entry of a judgment in the U.S. District Court for the Middle District of Florida, which permanently enjoined him from violating the antifraud, antitouting, and registration provisions of the federal securities laws. The consent judgment also required Skalko to pay disgorgement and prejudgment interest in the amount of $425,000 and a civil penalty of $100,000. Lit. Rel. No. 16717 (Sep. 21, 2000), 73 SEC Docket 1106.
8 Kirby was a partner at J.W. Gant. Kirby would later become a "core broker of the month" for CRG.
9 DuBois and Curtis worked in the same J.W. Gant office. Curtis also knew Skalko through their association with J.W. Gant and was listed in a CRG publication as a broker of the month. Curtis now works for DuBois at Moors & Cabot.
10 Campo testified at the hearing that he had been convicted in Florida for trafficking in cocaine. He was released on bond instead of being imprisoned. Campo testified that, under the terms of his release, he was obligated to testify truthfully in any hearings and to cooperate fully with the authorities.
11 On February 2, 2000, Rodriguez consented to the entry of a judgment in the U.S. District Court for the Middle District of Florida, which permanently enjoined him from violating the antifraud and registration provisions of the federal securities laws. The consent judgment also requiredRodriguez to pay disgorgement and prejudgment interest in the amount of $19,432.79, which was waived because of Rodriguez's demonstrated inability to pay. Lit. Rel. No. 16447 (Feb. 22, 2000), 71 SEC Docket 2221.
12 See text accompanying note 7.
13 DuBois testified that it was unusual for him to trade Bulletin Board stocks.
Within two to four weeks of their purchase of Tracker stock, DuBois sold his individual clients' Tracker shares at approximately 5½ per share as the stock price began to fall.
14 The names in the note referred to Jack Rodriguez and Roberto Veitia. Rodriguez testified that he received the confirmations faxed by DuBois.
15 DuBois testified that he did not receive the check. However, on December 13, 1994, the day after CRG issued the check, Rodriguez sent an overnight courier package to DuBois. It is unclear whether the check was enclosed.
16 Although Campo testified that he arranged with somebody to retain some of the money, Campo did not identify that person.
17 During his testimony, DuBois alleged variously that the money order from Campo represented the repayment of a loan for the purchase of a used car, or for new tires.
18 DuBois testified that he was unaware that Kirby was associated with CRG.
19 See Richard H. Morrow, 53 S.E.C. 772, 781 (1998); Gilbert Zwetsch, 50 S.E.C. 816, 818 (1991).
20 DuBois accuses the Division of ignoring what he claims is the exculpatory testimony of Rodriguez. DuBois asserts that, when the Division asked Rodriguez how DuBois responded to his invitation of a bribe, Rodriguez said, "'No, he just wanted leads.'" Rodriguez actually testified, "[DuBois] was working the stock, but . . . he just wanted leads, as far as I can remember." We believe that DuBois' faxing of trade confirmations to CRG and the series of checks that CRG issued to DuBois and Campo demonstrate that DuBois expected to be paid by CRG for selling Tracker stock.
21 Morrow, 53 S.E.C. at 784. See also Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153 (1972); Kevin Eric Shaughnessy, 53 S.E.C. 692, 695 (1998) ("a reasonable investor would consider [a] broker's acceptance of kickbacks to sell particular securities material to the investor's decision whether to purchase those securities based on the broker's recommendation"). Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. See Basic Inc. v. Levinson, 485 U.S. 224, 230-31 (1988) (citing TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
22 Morrow, 53 S.E.C. at 784.
23 See Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30 (1983).
24 Michalic v. Cleveland Tankers, Inc., 364 U.S. 325, 330 (1960) (citing Rogers v. Missouri Pacific R. Co., 352 U.S. 500, 508, n.17).
25 Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30 (1983).
26 DuBois now asserts that Campo's money order arrived with a note bearing the greeting "Merry Christmas." He did not suggest that Campo's payment was a gift until his brief in support of his petition for review.
27 See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 185 (1973) (holding that an agency's choice of sanction is "peculiarly a matter for administrative competence") (internal quotations omitted).
28 Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981).
29 This is not the first time that DuBois has skirted the securities laws. In the early 1990s, for example, Tamaron disciplined DuBois for the unauthorized sale of securities to an individual in Kansas.
30 We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.
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