Keith L. Mohn
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42144 / November 16, 1999
Admin. Proc. File No. 3-9832
:
In the Matter of the Application of :
:
KEITH L. MOHN :
4678 Clinton Drive :
West Bloomfield, Michigan 48324 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
:
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS
Violations of Conduct Rules
Conduct Inconsistent with Just and Equitable Principles of Trade
Failure to Inform Employer of Private Securities Transactions
Person associated with member firm engaged in private securities transactions without prior written notification to member. Held, association's findings of violation and sanctions it imposed are sustained, except that the fine is reduced by $2,222.
APPEARANCES:
Walter L. Baumgardner, Musilli, Baumgardner, Wagner & Parnell, P.C., for Keith L. Mohn.
Alden S. Adkins, Susan L. Beesley, and Deborah F. McIlroy, for NASD Regulation, Inc.
Appeal filed: February 22, 1999
Last brief received: June 1, 1999
I.
Keith L. Mohn, formerly a registered investment company and variable contracts representative with John Hancock Distributors, Inc., a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that Mohn engaged in private securities transactions in violation of NASD Conduct Rules 3040 and 2110. 1 It censured Mohn, fined him $52,222, and barred him from associating with any member in any capacity. 2 We base our findings on an independent review of the record.
II.
A. Background
Mohn worked at the Detroit Mohn General Agency, a franchisee of Hancock. Mohn received a copy of Hancock's compliance manual that contained a description of private securities transactions or "selling away" that explained that selling away was "an extremely serious regulatory violation" that could "result in severe penalties." Mohn also attended Hancock compliance seminars that discussed selling away.
Mohn became interested in Citi Equity Group, Inc. limited partnerships in the early 1990s. 3 Mohn's wife, Lisa Mohn, was a registered representative. Beginning in 1983, she had worked for various broker-dealers solely as a sales assistant; she had stopped working in 1991. In February 1993, Mohn forwarded Lisa Mohn's Form U-4 (Uniform Application for Securities Registration or Transfer) to Mariner Financial Services, Inc., which offered Citi Equity interests. She became associated with Mariner. In April 1993, however, Mariner informed Mohn that Mariner had determined to stop offering Citi Equity interests.
In April 1993, Mohn asked Hancock to allow him to sell Citi Equity interests. By letter dated April 23, 1993, Mary Owston, Hancock's product manager, rejected Mohn's suggestion and expressed several concerns about Citi Equity and the soundness of its offerings. Mohn, however, persisted. In June 1993, he wrote to Robert Watts, then Hancock's president, urging that Hancock offer Citi Equity interests. Mohn dismissed Watts' concerns and asserted that Citi Equity was "credible, ethical, they are the biggest, they have succeeded." He urged that Hancock establish a pilot program at the Mohn agency "to prove that the sale of this product will be profitable for Hancock as well as for our representatives." Watts was unpersuaded and reaffirmed Hancock's determination not to offer Citi Equity interests.
Later in 1993, Mohn contacted Damian Kassab, a former high school acquaintance, who was then president of Martha R. Seger & Associates, Inc. Mohn asked Kassab to hire Lisa Mohn as a registered representative. 4 While Martha Seger offered limited partnerships, Kassab had no prior knowledge of Citi Equity until either Mohn or Lisa Mohn told him about the company. Neither Mohn nor Lisa Mohn told Kassab that Mariner and Hancock had refused to sell Citi Equity interests. Lisa Mohn became associated with Martha Seger in February 1994. However, she went to the firm's offices rarely and effected only five transactions at Martha Seger. All five involved the purchase by Keith Mohn's customers of Citi Equity partnership interests. 5
B. Sales of Citi Equity
The Shettlers. John Shettler initially contacted the Mohn agency in response to a Hancock advertisement. Over several months, John and his wife, Carolyn Shettler, had a series of meetings with Mohn and Michael Aller, an employee of the Mohn agency. Several of these meetings were held at the Mohn agency. Mohn described himself as an "expert" on tax shelters. He formulated a financial plan that recommended, among other things, that the Shettlers invest in a vehicle that would generate an unspecified form of tax credit. Mohn recommended that the Shettlers finance this and other recommendations by liquidating General Motors stock that John Shettler held in his 401(k) account. Mohn told the Shettlers that he would choose a tax credit program for them.
In March 1994, Mohn told the Shettlers that he had chosen such a program, Citi-South Carolina Partners II. He gave them the private placement memorandum. Neither Mohn nor Aller told the Shettlers that Hancock refused to offer Citi Equity interests, or that they would have to purchase these interests through Lisa Mohn at another firm. The Shettlers filled out the Citi-South Carolina subscription agreement dated February 24, 1994. Mohn completed the portions of the subscription agreement that designated the number of units, total amount due, and the payee on the check. His office notarized the subscription agreement and forwarded it to Martha Seger over Mohn's signature. As of the date of the hearing, neither of the Shettlers had met or spoken to Lisa Mohn. 6
The Soehrens. Stephen and Martha Soehren owned John Hancock Mutual Life Insurance Co. life insurance policies. They contacted the Mohn agency to increase the amount of those policies. Beginning in the fall of 1993, the Soehrens had a series of meetings with Mohn and Jordan Pollack, another employee of the Mohn agency. 7 Mohn prepared a financial analysis that recommended that the Soehrens purchase an investment that would generate tax credits and that they borrow against their Hancock insurance policies to finance their purchase.
In March 1994, Mohn recommended that the Soehrens purchase Citi-South Carolina Partners II. Neither Mohn nor Pollack told the Soehrens that Hancock refused to offer Citi Equity interests or that Lisa Mohn or Martha Seger would have anything to do with the transaction.
The Soehrens became concerned when Mohn would not accept their endorsed Hancock checks to pay for the partnership interest. Martha Soehren called Gary Lefkowitz of Citi Equity. Lefkowitz told her that the partnerships were risky "and that if we wanted to get out, now is the time to do it." When Stephen Soehren asked Mohn about Lefkowitz's statements, Mohn assured Soehren that Lefkowitz was a good money manager and that Mohn had faith in Lefkowitz. Stephen Soehren testified that he and his wife had a great deal of confidence in Mohn.
The Citi-South Carolina partnership closed before the Soehrens tendered their subscription agreement. On Mohn's recommendation, the Soehrens purchased Citi-Virginia Beach Partners at the end of March 1994. Again, Mohn completed the number of units and amounts in the subscription agreement, and his office notarized the agreement and forwarded it to Martha Seger.
C. Mohn's Conduct After the Transactions
In May 1994, Kassab saw an article in the New York Times describing Lefkowitz' indictment and arrest. John Rogers, Martha Seger's compliance officer, contacted the Mohns on vacation and informed them of Lefkowitz' arrest. Martha Seger subsequently suspended Lisa Mohn's registration. 8 Rogers also asked for records of Keith Mohn's contacts with the customers who purchased Citi Equity interests. The Mohn agency sent Rogers logs that described Mohn's contacts with these customers, including the Shettlers and Soehrens. The logs stated that Mohn had contacted these customers and had explained the programs to these customers. 9
Later in 1994, based on an independent complaint that Mohn was selling products not approved by Hancock, Hancock undertook an investigation of Mohn's activities. When the Hancock investigator began contacting Mohn's clients, Mohn left a voice-mail message for the Soehrens, stating that he may have forgotten to tell them that the Citi Equity transaction had been placed through his wife. 10 Mohn's office provided the Hancock investigator with copies of Mohn's customer logs. However, unlike the logs provided to Martha Seger, these logs represented that Mohn's activities had been conducted on Lisa Mohn's
behalf. 11
The Shettlers lost their entire $27,778 investment in Citi-South Carolina, in addition to paying substantial taxes on the sale of the General Motors stock from the 401(k) account. The Soehrens lost all $35,844 that they invested in Citi-Virginia Beach and, at the time of the NASD hearings, were still paying off the loans that they had taken against their insurance policies. Both the Shettlers and the Soehrens received no tax credits from their Citi Equity interests. 12
III.
Conduct Rule 3040(a) states, "No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule." 13 Rule 3040(b) requires that an associated person give the member firm prior written notice that describes the proposed transaction in detail. Mohn admits that he did not provide Hancock with any notice, let alone prior written notice, of his activities. This is not surprising since Hancock had already informed Mohn twice that it did not want to be involved with Citi Equity interests.
Rather, Mohn asserts that Lisa Mohn effected the transactions through Martha Seger and received the resulting commissions. The Commission, however, has held that Rule 3040 prohibits an associated person from participating "in any manner" in a securities transaction. 14 Mohn plainly participated in the Citi Equity transactions. Neither the Shettlers nor the Soehrens knew of Citi Equity before Mohn's presentation, and Mohn chose the particular Citi Equity partnership for them. He testified that he determined that these transactions were suitable for the Shettlers and the Soehrens. He assisted in completing their subscription agreements and had his office process them.
In contrast, Lisa Mohn's participation in these transactions was minimal. 15 She neither met with nor spoke to the Shettlers or the Soehrens. Mohn testified that Lisa Mohn had "limited" knowledge of tax credits, and Lisa Mohn stated that she relied on Mohn's suitability determinations. While she testified that she considered the Shettlers and Soehrens her clients, the only action she described with respect to these transactions was providing Mohn a copy of the private placement memoranda. 16 The District Business Conduct Committee ("District Committee"), which heard Mohn's testimony and observed his demeanor, found "that Mohn's testimony that he referred [the Shettlers and the Soehrens] to Mrs. Mohn is not credible and that there is no basis from the facts presented that any referral was made regarding the sales in question." Credibility findings of the fact finder are entitled to substantial deference, and we find no reason to overturn this determination. 17
Mohn asserts that he did not receive any compensation for these transactions. 18 However, Rule 3040(d) makes clear that an associated person must give his or her member firm prior written notice of transactions that are not for compensation. The rule further provides that the member firm "may, at its discretion, require that person to adhere to specified conditions in connection with" the associated person's participation in the transaction. 19 Mohn's failure deprived Hancock of this opportunity.
Mohn argues that he provided Hancock with a form of notice because, at Hancock's expense, he became a Chartered Financial Counselor. Mohn asserts that this status notified Hancock that he would present financial plans to customers. We previously rejected a similar argument, noting that the fact that an associated person might be "'ordinarily involved' in such transactions while associated with [a member firm] does not mean that he was exempt from the notice requirement." 20 Rule 3040 requires prior written notice of particular transactions. Mohn's status did not inform Hancock of participation in any transaction, let alone transactions involving Citi Equity interests.
Mohn further claims that Hancock knew that, as a Chartered Financial Counselor, he had an obligation to recommend suitable investments to his clients, regardless of whether the investments were approved by Hancock. Mohn does not explain why his obligation to recommend any particular suitable investment was inconsistent with his informing Hancock of his intent to do so. Moreover, as described above, Mohn did substantially more than merely recommend the Citi Equity interests to the Shettlers and Soehrens.
Mohn notes that the NASD has recognized the competing demands of individuals who are both registered representatives and investment advisers. He suggests that certain NASD statements make clear that he had no obligation to give notice to Hancock, citing, for example, Notice to Members 94-44. That Notice to Members, however, states that former Article III, Section 40 [now Rule 3040] applies to any transaction in which a person who is both an investment adviser and a registered representative "participated in the execution of the trade." The notice explains that a person is "clearly participating in the execution of trades . . . where he or she enters an order on behalf of the [representative's] customer for a particular securities transaction with a brokerage firm other than" his or her member firm. The notice further states that, if the registered representative receives no compensation for the transaction, the associated person nonetheless is subject to the requirement that the associated person give notice under Rule 3040(d). 21
We sustain the NASD's determination that Mohn violated Conduct Rules 2210 and 3340. 22
IV.
Mohn complains that the sanctions imposed on him are excessive, and asserts that the permanent bar is harsh. He cites other proceedings involving a variety of violations in which lesser sanctions were imposed and asserts that the sanctions imposed on him are not in proportion to sanctions imposed in other cases. Under Section 19(e)(2) of the Exchange Act, 23 we affirm the NASD's determination to impose a particular sanction unless we find it "excessive or oppressive."
The sanctions imposed by the NASD are within the range provided for in the NASD's Sanction Guidelines for "Selling Away (Private Securities Transactions)." As the Guidelines note, "[i]n more serious cases . . . , a bar should be standard." Among the factors cited in the NASD's Sanction Guidelines in assessing sanctions for Rule 3040 are willful disregard of known requirements, use of the employer's offices or facilities, and attempts to conceal the activity.
Mohn consciously disregarded Rule 3040's requirements. He attended Hancock compliance seminars at which selling away was discussed, and he possessed a manual describing prohibitions against selling away. He twice was instructed that Hancock did not want to offer Citi Equity interests for reasons that Hancock officials explained in detail. Mohn instead induced Martha Seger to permit sales of Citi Equity interests and arranged for his wife to affiliate with Martha Seger.
Mohn actively solicited these transactions using Hancock facilities: formulating these recommendations as part of an overall Hancock financial plan, conducting meetings with the Shettlers at the Mohn agency, sending correspondence on Hancock letterhead, and using Hancock staff to notarize and transmit documents. Not surprisingly, the District Committee credited the Shettlers' and Stephen Soehren's testimony that they believed that they were purchasing the Citi Equity interests through Mohn and Hancock.
Moreover, when Mohn's activities came to Hancock's attention, Mohn attempted to convince the Soehrens to tell Hancock that they had purchased Citi-Virginia Beach through his wife and suggested that they otherwise limit their responses to the investigator. He insisted to the Hancock investigator that these transactions had been referred to his wife. He created two sets of customer logs: one for Martha Seger that showed that he had actively participated in the transactions, and the second for Hancock, which reflected his acting on Lisa Mohn's behalf.
Mohn complains that the NASD imposed such heavy sanctions because it wants to deter others from violations of Rule 3040, not because of his conduct. We have made clear however that Rule 3040 is important. By prohibiting "selling away" from the member with whom a registered representative is associated, Rule 3040 protects investors from the hazards of unmonitored sales, while protecting the member firm from exposure to loss and
litigation. 24 Mohn solicited investors for highly risky investments, precisely the type of security offerings that required heightened scrutiny by a broker-dealer, one of the many reasons Hancock had not wanted to undertake offering Citi Equity interests.
The fine of $52,222 includes the $2,222 paid to Lisa Mohn in commissions. As noted earlier, the NASD has asserted that, while circumstances might suggest that Mohn had access to these commissions, it does not argue on appeal that the commissions were compensation to Mohn. Under these circumstances, we believe it is appropriate to reduce the fine by this amount.
Based on the foregoing, we do not find that the remaining sanctions imposed by the NASD against Mohn are either excessive or oppressive.
An appropriate order will issue. 25
By the Commission (Chairman LEVITT and Commissioners JOHNSON,
HUNT, CAREY, and UNGER)
Jonathan G. Katz
Secretary
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42144 / November 16, 1999
Admin. Proc. File No. 3-9832
:
In the Matter of the Application of :
:
KEITH L. MOHN :
4678 Clinton Drive :
West Bloomfield, Michigan 48324 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
:
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Keith L. Mohn, and the Association's assessment of costs, be, and they hereby are, sustained; provided, however, it is
ORDERED that the fine be, and its hereby is, reduced by $2,222.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 Conduct Rule 3040 prohibits any person associated with a member firm from participating in any manner in a private securities transaction outside the regular course or scope of his or her employment without providing prior written notice to the member. Conduct Rule 2110 requires that members and associated persons "observe high standards of commercial honor and just and equitable principles of trade."
2 The NASD also assessed costs.
3 Citi Equity claimed that its limited partnerships would generate tax credits by constructing and operating low-income affordable housing developments. Before the transactions at issue here, Mohn and his wife purchased in the secondary market an interest in one of the Citi Equity partnerships, Citi-Central Plains II.
4 Mohn told Kassab that Lisa Mohn wanted a part-time job that would permit her to service existing clients and stay home with their children. Kassab testified that he viewed Lisa Mohn's association as an accommodation to Mohn, an old friend, and not "from a profit perspective."
Lisa Mohn provided Martha Seger with a Form U-4 that omitted her association with Mariner, as well as with a second firm, Portfolio Asset Management Group, Inc.
5 The NASD did not allege any violations with respect to three of these transactions. Lisa Mohn received $2,222 in commissions from Martha Seger.
6 The Shettlers subsequently filed suit against Hancock; Mohn; Mohn's supervisor, Laurence Mohn (who is also Mohn's father); the Mohn agency; Lisa Mohn; and Martha Seger with respect to their purchase of Citi-South Carolina.
7 These meetings all occurred at the Soehrens' home.
8 Lisa Mohn resigned from Martha Seger on July 19, 1994.
9 For example, the log sent to Martha Seger describing contacts with the Soehrens was entitled "Citi-Virginia Beach Log for Mr. and Mrs. Stephen Soehren." The log indicated that Mohn had met with the Soehrens "to discuss South Carolina Partners program and other investment portfolio ideas" and spoke to them about "getting into South Carolina Partners program as it is winding down." Mohn met repeatedly with the Soehrens to provide them with documents and monitor their execution.
10 The message further stated, "All I need for you to do is just tell them that you realize it's not Hancock and that, you know, the statement should say my wife's name on it." The message also said, "That's all [the investigator has] a right to ask you, by the way, and I would suggest that other personal things that you're doing are none of his business."
11 Hancock received logs for Mohn's contacts with the Soehrens entitled "Tax Credit Programs." In that log, Mohn "met with the Soehrens to discuss tax credit programs" and spoke with them "on Lisa's behalf regarding their desire to purchase tax credit program." He retrieved documents and checks "on Lisa's behalf."
At the hearing before the NASD, Mohn claimed that he did not keep any logs. He further testified that, without his knowledge, his secretary had prepared both sets of logs because she "wanted to be helpful." The District Business Conduct Committee did not credit his testimony. We see no reason to disturb this credibility determination. See text accompanying n.18.
At the close of its investigation, Hancock fined Mohn $25,000.
12 At the National Adjudicatory Council hearing, Mohn informed the committee that the Shettlers and Soehrens had been reimbursed in full jointly by Mohn, Lisa Mohn, and Hancock. There is no further information in the record about these settlements.
13 Mohn admits that interests in Citi-South Carolina Partners II and Citi-Virginia Beach Partners are securities. See, e.g., SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
14 See, e.g., Stephen J. Gluckman, Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 421 (associated person introduced customers to issuer, participated in meetings between them, and prepared sales agreements); Charles E. French, 52 S.E.C. 858, 862 (1996) (associated person introduced customer to issuer and negotiated terms of transaction); James L. Owsley, 51 S.E.C. 524, 531-32 (1993) (associated person arranged and attended meeting between issuer and customer); The Cambridge Group, Inc., 50 S.E.C. 752, 753 (1991) (associated person referred firm's customers to another broker-dealer), modified sub nom., Hateley v. SEC, 8 F.3d 653 (9th Cir. 1993) (as to sanctions).
15 In response to a question at the District Committee hearing, Mohn admitted the following:
Q: So you didn't really direct [these transactions] to your wife, you handled it for your wife?
A: Yes.
16 Mohn claims that the Shettlers' testimony before the NASD contradicted their testimony in their civil suit against Mohn. Mohn's brief, however, attaches pleadings filed in that suit, not testimony. Argument of counsel is not evidence.
Moreover, while the pleadings suggest that the Shettlers' counsel theorized that Lisa Mohn may have had a more active role in their purchase (e.g., that she effected the transaction or chose the particular partnership for them), the record here is clear that Mohn participated in these transactions.
17 Jay Houston Meadows, 52 S.E.C. 778, 784 n. 13 (1996), aff'd, 119 F.3d 1219 (5th Cir. 1997).
18 While Lisa Mohn deposited her commissions in the Mohn's joint checking account, the sole account maintained by the Mohns, the NASD does not argue to us that this was compensation to Mohn.
19 We have previously stated that while the rule "speaks only of the imposition of 'conditions' on participation in uncompensated transactions, it would appear that under a reasonable interpretation, a firm's restrictions on its sales force may include a total prohibition." Jay Frederick Keeton, 50 S.E.C. 1128, 1131 (1992).
20 Charles A. Roth, 50 S.E.C. 1147, 1151 (1992), aff'd 22 F.3d 1108 (D.C. Cir.) (Table), cert. denied, 513 U.S. 1015 (1994).
21 Another NASD opinion letter cited by Mohn similarly states that, if the associated person participates in the execution of a transaction, that person is subject to the notice requirements of Rule 3040.
The remaining NASD statements upon which Mohn relies discuss whether an associated person is participating in a transaction for compensation, which would require the registered representative both to give written prior notice and obtain prior approval of his or her member firm, or a transaction not for compensation, which requires only that the registered representative give notice. Both types of transactions are subject to Rule 3040. Compare Rules 3040(c) (Transactions for Compensation) and 3040(d) (Transactions Not for Compensation).
22 Mohn asserts that he should be afforded a hearing under the new NASD Code of Procedure, which authorizes hearing panels composed of a hearing officer and two persons associated with NASD members. However, when we approved the NASD's new Code of Procedure, we also approved a transition provision that permitted cases instituted before the effective date of the rules (August 7, 1997), to be conducted under the then-existing procedural rules. Order Approving Proposed Rules Change, Exchange Act Rel. No. 38908 (Aug. 7, 1997), 65 SEC Docket 265, 278, 62 Fed. Reg. 43,385, 43,398 (Aug. 13, 1997). This case was instituted October 15, 1996. Moreover, Mohn does not articulate any particular objection to the District Committee's conduct of the proceeding, and our review of the record indicates that Mohn had a fair hearing.
Mohn also asserts that this proceeding is barred by the general statute of limitations set forth in 28 U.S.C.
? 2462. This statute provides a five-year statute of limitations period applicable to government actions and has been applied to certain Commission proceedings by the United States Court of Appeals for the District of Columbia Circuit in Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996). The proceedings here were commenced within five years of the complained-of events.
23 15 U.S.C. ? 78s(e)(2).
24 See, e.g., William Lewis Morgan, 51 S.E.C. 622, 625 (1993).
25 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 herein.
Last Reviewed or Updated: Dec. 18, 2023