SECURITIES AND EXCHANGE COMMISSION
In the Matter of
QUEST CAPITAL STRATEGIES, INC.
OPINION OF THE COMMISSION
BROKER-DEALER AND INVESTMENT ADVISER PROCEEDINGS
Ground for Remedial Action
Failure to Supervise
Registered broker-dealer and investment adviser, and its president, failed to exercise reasonable supervision over a branch office manager who defrauded customers. Held, it is in the public interest to require firm to conduct inspections of its branch offices and other registered representatives, to bar president from association with any broker-dealer or investment adviser in a supervisory capacity with a right to apply to become so associated after one year, and to impose money penalties of $50,000 each on firm and its president.
Thomas R. Lee and Richard Pali, for Quest Capital Strategies, Inc. and David Chen Yu.
Carmen J. Lawrence, Wayne M. Carlin, Leslie Kazon, Anna T. Majewicz, and Caren N. Pennington, for the Division of Enforcement.
|Appeal filed:||May 3, 1999|
|Briefing completed:||October 4, 1999|
|Oral argument:||July 18, 2001|
The Division of Enforcement appeals from the decision of an administrative law judge dismissing proceedings against Quest Capital Strategies, Inc., a registered broker-dealer and investment adviser, and David Chen Yu, Quest's president and sole owner. The order for proceedings in this matter charges that, from about August 1992 through August 1993, Respondents failed to exercise reasonable supervision over John Nakoski, a Quest registered representative, with a view to preventing his violations of the securities laws. We base our findings on an independent review of the record except to the extent that the findings below are not challenged on review. 1
Quest, with headquarters in California, has four branch offices and about 700 registered representatives located throughout the United States. The vast majority of the firm's representatives work out of their homes and sell securities part-time without on-site supervision. Quest treats its representatives as franchise operators. The firm owns no equity in its branch offices, and does not pay any of its salesmen's operating expenses. It receives a percentage of its salesmen's commissions.
Nakoski became a part-time salesman with Quest in 1988, and a full-time Quest representative in July 1992. That same month, after passing the Series 24 principal examination, he opened a Quest branch office in Kingston, New York, where he conducted a brokerage business under the name Nakoski Investment Management ("NIM"). Yu admittedly was in charge of supervising Nakoski throughout the relevant period.
It is undisputed that, as found by the law judge, Nakoski willfully violated antifraud provisions of the securities laws 2 from January 1992 through August 1993 in connection with his offer and sale of notes that he described as "fixed income loan agreements." Thirty-six investors, twenty of whom had Quest brokerage accounts with Nakoski's branch office, purchased the notes, loaning Nakoski a total of more than $450,000.
Nakoski's initial loan agreements promised investors 15% interest, a rate reduced to 12% in later versions of the agreement. Repayment of principal and interest was "guaranteed by the full faith and credit of [NIM] and John Nakoski personally." The funds were to be invested by Nakoski "in the manner he deem[ed] best," and investors were told they could withdraw all or part of their money at any time without penalty.
Nakoski engaged in extensive advertising of his loan agreements. He mailed out at least 1,000 brochures, took out newspaper ads, promoted the loans at investment seminars and "chalk-talks" that he conducted, and rented a billboard on the main road leading into Kingston which carried his advertisement from July 1992 through June 1993. During the period August 1992 through August 1993, materials relating to the loan agreements were kept in Nakoski's branch office, including at times advertisements on the wall of the reception area and brochures in a wall rack in that area.
As detailed in the law judge's decision, the notes issued by Nakoski were clearly securities that met the criteria established by the Supreme Court in Reves v. Ernst & Young. 3 Nakoski promoted his loan agreements as investments, and solicited the general public to invest in them. Moreover, Nakoski's customers viewed the agreements as investments. 4
Nakoski stressed to investors that their money would be safe, with principal and interest "guaranteed." One of his brochures stated as follows:
We do not need insurance because we keep 100% of your money in cash. We do not loan the money out to anyone. We just arrange options transactions on the money. The profits we make more than pay your 12% interest. The fact that we keep 100% of your money in cash at all times allows us to fully guarantee your principal, and allows you to withdraw your money in whole or in part at any time, with no fees or charges of any kind.
In fact, Nakoski used investors' funds primarily to pay the expenses of his branch office and to trade in highly speculative futures and options on futures. From the outset, he suffered losses on his commodities trading and eventually lost more than $300,000. He did not disclose his mounting losses to investors. On the contrary, he sent investors misleading monthly statements reflecting the total amount of their investment plus accrued interest, creating the impression that their money was still secure. Because of his losses, Nakoski stopped soliciting funds for his loan agreements in August 1993. Subsequently, he was unable to pay investors who tried to withdraw their money, and his customers suffered substantial losses.
Nakoski filed for bankruptcy protection in July 1994, and resigned from Quest the following month. In February 1996, he pled guilty to New York State criminal charges arising from his conduct with regard to the loan agreements. 5
In August 1992, Yu learned that Nakoski had been engaging in violations of Quest's compliance directives. Quest distributed compliance manuals, updated regularly, to all of its registered representatives including Nakoski. The manuals prohibited the following activities unless approved by Quest's compliance department: (1) borrowing money from a client; (2) engaging in private securities transactions outside the scope of employment; (3) engaging in any money raising activities other than as agent for Quest in a firm-approved transaction; and (4) the use of any unapproved sales literature or advertising material.
On August 7, 1992, Nakoski telephoned Yu and informed him that Commission investigators had contacted Nakoski regarding his newspaper advertisement (unapproved by Quest) soliciting loans from the public. Nakoski faxed a handwritten note explaining that he was trying to "borrow money. . .to help. . .set up [his] branch office." He also sent a copy of his advertisement, which offered "12% Guaranteed Interest on your money," and a copy of a blank loan agreement.
Nakoski also informed Yu that he had already borrowed money under his loan program. The record does not support the law judge's finding that Nakoski deceived Yu by telling him that he had yet to raise any money from investors (although he had already obtained $90,500). Nakoski testified that, although he could not pinpoint the precise conversation, he discussed with Yu in August 1992 the fact that he had already borrowed money from investors. And, although Yu's testimony was hardly a model of consistency, he admitted that he had received this information from Nakoski, stating as follows:
[O]n the fixed income loan agreement[s]. . ., I thought he was doing a couple, one or two. I didn't know he was doing 30 or 40 of them. Of course, that's going to be a big problem. But I talked to him, and he said, 'No more. That's it.'. . .I just [didn't] know that he [was] doing it on such a big scale. I never [knew it was on] such a big scale.
Thus, in August 1992, Yu was put on notice that Nakoski had deliberately violated Quest's compliance directives. Yet, both at that time and subsequently, Yu was content to rely on Nakoski's oral and written assurances that he would not solicit any more loans and would submit all future advertising to Quest for approval. Yu's attitude is illustrated by the testimony he gave when asked if he had done anything to verify that Nakoski had stopped advertising his loan program. Yu stated:
Well, my thinking is that [Nakoski] is accountable for himself. He is [a licensed principal]. He's a branch manager. He's at the same level of education that I have in securities. He has the same licenses that I have. . . .I told him several times there will be no solicitation of funds and he understood me. . . .If the guy want[s] to do it behind my back, I don't know how I can catch that. But the guy promised me. The guy never had any problem before. . . .[H]is U-4 was clean, . . . [and he came] from a good company. . . .So there [was] no reason for me to [think] that he [was] going to [break his word].
On August 10, 1992, two Division investigators met with Nakoski at his office, and discussed his advertising and loan agreements. When they left, they stated that they would send Nakoski a letter expressing their concerns in detail. Nakoski reported on the meeting to Yu, who repeated his prior admonitions against further borrowing and the use of unapproved advertising. Yu told Nakoski that they would discuss the matter further when Nakoski received the Division's letter.
On August 24, Yu met with Nakoski and other Quest salesmen at a Quest annual sales meeting in New Haven, Connecticut. 6 Nakoski, like the other salesmen attending the meeting, was asked to bring his files with him for review. However, Yu admitted that he had no way of knowing whether Nakoski brought all of his files to the meeting. Yu reviewed the files that Nakoski brought and the Quest annual questionnaire that Nakoski had filled out. Nakoski certified that he "was aware" that he could not sell any money raising programs without prior written approval. He checked "no" in response to the questionnaire's inquiry as to whether he had submitted all advertising to Quest for approval, but stated that such advertising was "attached." However, the only advertising attached to the questionnaire was a copy of a small NIM advertisement that Nakoski had placed in the yellow pages. The advertisement did not mention Nakoski's loan program.
On August 31, 1992, Derek Burke, one of the Division investigators who had met with Nakoski, sent Nakoski a letter memorializing their meeting at Nakoski's office. The letter expressed the Division's concerns that Nakoski's loan agreements might be unregistered securities, and that Nakoski might be using misleading advertising to promote the agreements. Afterreceiving a copy of the letter, Yu spoke with Nakoski, repeated his earlier admonitions, and directed Nakoski to reply to the letter.
Nakoski answered Burke's letter on September 24. He stated that on August 11 he had canceled his advertisement soliciting investments in his loan program, that his advertising brochure was no longer being used, and that all future advertising would be submitted to Quest for approval. He stated, however, that he might want to borrow money in the future, and attached a copy of a revised version of his loan agreement. Yu, who received a copy of the letter, stated that he was not disturbed by this statement. He considered that Nakoski was simply trying to win the Division's approval as a means of pressuring Quest to approve the loan program.
In October 1992, Yu called Burke and was told that the Division was closing its investigation of Nakoski. Yu indicated that, as a result, he felt that he need not concern himself any further with the matter.
On November 4, 1992, the advertising department of the National Association of Securities Dealers, Inc. ("NASD") sent Yu a letter inquiring about an NIM billboard advertisement that had "recently" been brought to the NASD's attention. The letter stated that a photograph of the billboard was enclosed, and that it appeared to be an offer by NIM of an investment that could earn 12% interest with no penalty for early withdrawal. Yu testified that the photograph was not enclosed in the NASD's letter. However, he did not call the NASD to obtain a copy of the photograph, which carried the handwritten notation "Taken 10/15/92." 7 According to Yu, he didn't feel it necessary to see the photograph because he "didn't know there was anything different than before . . . . In [his] mind, [it] was the same thing [that he had already seen]." He stated that, if he had seen the photograph, he probably would have fired Nakoski.
Yu replied to the NASD on November 17, enclosing Burke's letter to Nakoski and Nakoski's reply to Burke which, according to Yu, had "satisfied the . . . Commission." The NASD responded on December 1, stating that the matter would be forwarded to its New York District Office for appropriate action, and that Yu would be apprised of the results of any further investigation. Yu heard nothing further from the NASD.
On August 9, 1993, the day after Quest's 1993 annual sales meeting in Nakoski's area, and a year after Yu first learned ofNakoski's loan activities, Yu conducted Quest's first inspection of Nakoski's branch office. As noted above, August 1993 was the month Nakoski stopped soliciting loans due to his losses in commodities trading. Yu's visit was pre-arranged with Nakoski, and Yu found nothing in the office relating to Nakoski's loan program.
The Securities Exchange Act empowers us to discipline supervisors on the basis of a failure "reasonably to supervise, with a view to preventing violations of the [securities laws]" by persons subject to their supervision who violate those laws. 8 We have made it abundantly clear that supervisors must act decisively to detect and prevent violations of the securities laws when an indication of irregularity is brought to their attention. 9 Moreover, once a supervisor learns that a registered representative has engaged in misconduct, the representative cannot be retained unless he or she is subjected to enhanced supervision. 10
Quest and Yu had more than an "indication of irregularity" with respect to Nakoski's conduct. In August 1992, Respondents learned that Nakoski had deliberately flouted the firm's compliance policies. That knowledge should have triggered heightened supervision of Nakoski by Quest and Yu. Instead, Respondents were content to rely on Nakoski's assurances that he would not repeat his misconduct. Thereafter, Quest and Yu ignored red flags indicating that Nakoski might still be engaging in violative activity. They learned that, despite Nakoski's assurances to Yu that he would not solicit any more loans, he had written to Burke that he was considering further borrowing, and submitted to Burke a revised version of his loan agreement. More significantly, they learned in November that a Nakoski billboard advertising his loan program had recently been brought to the NASD's attention. Nakoski had assured Yu that he would not advertise again without Quest's permission and, as Respondentswere aware, had informed Burke that his loan advertisement soliciting funds had been canceled on August 11. Yet, despite this clear indication that Nakoski might still be conducting his loan program, Yu did nothing, not even taking the trouble to obtain a copy of the photograph obtained by the NASD.
This record reveals a substantial abdication of supervisory responsibility. We have repeatedly stressed that supervisors cannot rely on the unverified representations of their subordinates, 11 including responses to questionnaires like those employed by Quest. 12 Yet, instead of dismissing Nakoski when his misconduct was discovered, or instituting the necessary heightened supervision of his activities, Respondents (except for one belated pre-announced inspection) simply relied on Nakoski's assurances, which were false.
Respondents could have taken a number of steps to implement a heightened supervision of Nakoski. Quest could have conducted surprise inspections of Nakoski's branch office. Respondents argue that, since they had no proprietary or equity interest in the office, they had no right to conduct an inspection without Nakoski's permission. In fact, Quest's independent contractor's agreement with Nakoski gave Respondents that right. In any event, securities firms are required to supervise their employees. A surprise inspection is a compliance tool that is necessarily available to every securities firm in carrying out its supervisory responsibilities. A firm cannot permit its ability to supervise effectively to be negated or impeded by an "independent contractor" whose right to engage in the securities business depends on affiliation with a registered firm charged with the duty to supervise.
Respondents could also have questioned Nakoski's salesmen and office personnel about his loan program. Despite Respondents' arguments to the contrary, the record shows that, during the relevant period, Yu's contacts with Nakoski's salesmen were limited to routine encounters at the 1992 and 1993 Quest annual sales meetings, where Yu did little more than go over the salesmen's annual questionnaires. Yu did not question the salesmen about Nakoski's loan program until 1994, many months after the period at issue. Nor did Yu ever question Nakoski's secretary, Doreen Arnesen. Arnesen testified that, had she beenasked, she would have disclosed that Nakoski was soliciting customers to invest in his 12% fixed income loans. 13
Nakoski's assurances could also have been tested by questioning his customers. Respondents assert that no customers complained, and that Quest sent all active customers monthly statements and "activity" letters thanking them for their business and inviting them to call if they had any problem. This was wholly inadequate. As we have previously pointed out, "[s]upervisory personnel cannot rely solely upon complaints from customers to bring misconduct of employees to their attention, particularly where customers . . . may fail to realize that they have been mistreated." 14 Here Nakoski lulled his customers into a false sense of security by sending them monthly statements reflecting principal and accrued interest.
The Exchange Act provides a defense to charges of deficient supervision if "there have been established procedures, and a system for applying such procedures" that supervisors have followed and that "would reasonably be expected to prevent and detect, insofar as practicable, [the relevant misconduct]." 15 According to Respondents, Quest's procedures and its system for applying them met the statutory test. 16
Respondents had a comprehensive set of rules for their representatives to follow. However, as set forth above, their "system" for applying those rules to the misconduct at issue waswoefully inadequate. 17 Relying on a subordinate's assurances is hardly an effective method of preventing or detecting violations. Respondents argue that their overall supervisory system, including Quest's "unique" method of monitoring trades executed through the firm, exceeded industry standards. However, as we have previously pointed out, we must consider whether Respondents' supervision was reasonably designed to prevent the violations at issue, not weigh their supervisory performance in other areas against their deficiencies in the area under review. 18
The law judge and Respondents cite various other circumstances as evidence that Respondents' supervision was reasonable. All of them are lacking in merit.
1. Respondents and the law judge point out that, prior to August 1992, Nakoski's record was unblemished. They also cite his "cooperative and responsive attitude" after his misconduct was discovered. The law judge additionally noted that Nakoski was "a young, articulate, smart, choir-boy type person." From this, she concluded that "Yu and Quest could not reasonably be expected to supervise such a person in a business context so as to prevent the conduct that is revealed by the facts."
Respondents, however, learned in August 1992 that Nakoski had deliberately violated the firm's compliance policies. This would have warned reasonable supervisors not to rely any longer on the absence of a prior record. Moreover, once they discovered Nakoski's misconduct, Respondents could not reasonably rely on his "cooperative attitude," glib tongue, or "choir-boy appearance" in determining appropriate supervisory measures. In addition, Respondents ignore the fact that there had recently been a major change in Nakoski's relationship with Quest that provided motivation for his conduct. In July 1992, Nakoski had gone from working on a part-time basis out of his home to working full-time in the new branch office he had opened. As he told Yu, he needed money to "help set up" that office.
2. The law judge found, and Respondents contend, that Burke's August 31, 1992 letter to Nakoski, which Yu read, served to corroborate Nakoski's assurances of good behavior. We cannot agree. Burke's letter stated in relevant part as follows:
I write to memorialize the meeting between yourself and the staff of the New York Regional Office in your office on August 10, 1992. . . .It is our understanding that NIMhas solicited funds pursuant to a "loan agreement." It is also our understanding that NIM has not received any funds pursuant to the "loan agreement" and further that NIM has decided not to continue to solicit funds by means of the "loan agreement."
It is clear that Burke's letter did not corroborate Nakoski's statements to Yu, but merely reflected what Nakoski told Division investigators at their August 10 meeting. 19
3. Respondents claim that the Division obstructed them in their efforts to supervise Nakoski. They assert that, although the Division knew that Nakoski had already raised money pursuant to his loan program, this information was not only deliberately withheld from them but also misrepresented in Burke's August 31 letter, which stated that no funds had yet been raised. Respondents base these contentions on handwritten notes taken by Burke when he interviewed Nakoski on August 10, 1992. The notes stated as follows:
Friends lent money. Option.
$50,000 - $100,000
friends NO agreement.
Respondents' arguments are disingenuous. As noted above, Yu was well aware that Nakoski had already raised money pursuant to his loan program. Moreover, it appears that Burke was misled by Nakoski. Burke's August letter reflected his understanding that NIM had "not received any funds pursuant to the 'loan agreement'" (emphasis added). The most plausible interpretation of Burke's notes is that he was told that Nakoski had obtained six personal loans from friends, not from any public solicitation and not pursuant to Nakoski's loan program. 20 In any event, Respondents' supervisory obligations did not turn on whether ornot they knew that Nakoski had already obtained loans at the time his misconduct was discovered. Even without that knowledge, Respondents were aware that Nakoski had violated Quest's compliance directives. That circumstance was sufficient to require them to place Nakoski under heightened supervision.
Respondents further claim that the Division attempted to conceal Burke's notes in a mass of other material that was turned over to them, and that, by the time Burke identified his notes when he was on the witness stand, it was impossible for Respondents to use them in examining Nakoski and other witnesses. These contentions are totally lacking in merit. In accordance with the law judge's order, the notes in question were turned over to Respondents several days in advance of the hearings. Subsequently, after Nakoski had testified, the law judge gave Respondents permission to recall him later for further testimony. However, even after Burke had identified his notes, Respondents chose not to recall Nakoski. Nor did they seek to recall any other witness for questioning with respect to the notes.
4. Respondents raise various other contentions seeking to shift the blame for their own supervisory failings to the Division and the NASD. They argue that the Division never advised them that Nakoski had violated the law, never warned them to place him under surveillance, and never told them to conduct a surprise inspection.
We have repeatedly pointed out that a broker-dealer cannot shift its responsibility for compliance with applicable requirements to the NASD or to us. 21 We note, however, that Burke's letter warned Respondents that Nakoski might be offering unregistered securities and using misleading sales literature. The letter suggested that these matters be explored by Quest's compliance department and with legal counsel. Respondents ignored our staff's suggestions.
Respondents also cite, in support of their claim that their supervision was reasonable, the Division's notification that it was closing its investigation of Nakoski, and the NASD's silence after telling Respondents that it would keep them informed of further developments. According to Respondents, these circumstances corroborated Yu's belief that Nakoski had not violated the law.
We reject these contentions. Inaction on the part of regulatory authorities does not absolve broker-dealers of theirsupervisory responsibilities. 22 Nor could Respondents reasonably rely on such inaction in determining what supervisory steps were necessary in the circumstances presented to them. Nearly thirty years ago we announced our policy with respect to giving notice that staff investigations are being closed, stating in relevant part as follows:
The Commission is instructing its staff that in cases where such action appears appropriate, it may advise a person under inquiry that its formal investigation has been terminated. . . .Even if such advice is given, however, it must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff's investigation of that particular matter . . . [The determination to close an investigation] may be based upon various reasons, some of which, such as workload considerations, are clearly irrelevant to the merits of any subsequent action. 23
5. Finally, Respondents argue that they cannot be held responsible for failing to detect and prevent frauds like those by Nakoski where "the perpetrator so insidiously circumvents a firm's procedures." We disagree. While there may be cases where a salesman engages in misconduct outside the scope of his employment that cannot reasonably be detected by supervisors, this case is not one of them. Here Respondents were put on notice at the outset that Nakoski had violated Quest's policies and procedures. Yet they failed to take appropriate action to prevent his violative activities.
We conclude that Respondents failed to exercise reasonable supervision with a view to preventing Nakoski's violations of antifraud provisions. 24
Respondents argue that they should not be sanctioned. They assert that they did not ignore Nakoski's misconduct, that his fraud was an isolated event, that they have an elaborate plan for preventing future fraud, and that they have enhanced Quest's compliance program.
Respondents' supervisory failures were egregious. They had actual knowledge that Nakoski, who needed money to set up his branch office, had deliberately violated Quest's directives in an apparent effort to obtain that money. Yet Respondents passively accepted Nakoski's assurances and ignored subsequent red flags indicating that Nakoski was continuing his violative conduct. Their abdication of supervisory responsibility permitted Nakoski's fraudulent scheme to continue for an entire year, and resulted in substantial losses to investors.
Yu's attitude towards his supervisory obligations is particularly disturbing. Yu characterized the misconduct he discovered in August 1992 as "a simple advertising violation . . . [that] people commit . . . every day." He expressed the view that, as a licensed principal and branch manager, Nakoski was "accountable for himself." And he stated that he didn't know any way to prevent Nakoski from doing things "behind [Yu's] back."
In light of the foregoing, we have determined to impose the following sanctions and limitations for the protection of investors. We conclude that Quest shall not be permitted to maintain any branch office unless it is supervised by an on-site registered principal and subjected to semi-annual surprise inspections. Quest registered representatives who are not employed in a branch office (or in Quest's main office) may not be retained as associated persons of Quest unless they are subjected to annual inspections, on a surprise basis if possible. 25 We also deem it appropriate to impose a money penalty of $50,000 on Quest.
Yu has amply demonstrated grave deficiencies as a supervisor. We conclude that he should be barred from association with any broker-dealer or investment adviser in a supervisory capacity. However, we shall permit Yu to apply for permission to become so associated after one year, upon an appropriate showing. We shall assess a second-tier money penalty of $50,000 against Yu in light of his reckless disregard of his supervisory obligations.
An appropriate order will issue. 26
By the Commission (Commissioners HUNT and UNGER); Chairman PITT participating for quorum purposes, and abstaining.
Jonathan G. Katz
INVESTMENT ADVISERS ACT OF 1940
Rel. No. 1990 / October 15, 2001
Admin. Proc. File No. 3-8966
In the Matter of
QUEST CAPITAL STRATEGIES, INC.
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Quest shall not maintain any branch office that is not supervised by an on-site registered principal and subjected to semi-annual surprise inspections, and shall not employ or contract with any registered representative who is not in its main office or a branch office unless that representative is subjected to an annual inspection, on a surprise basis if possible; and it is further
ORDERED that David Chen Yu be, and he hereby is, barred from association with any broker-dealer or investment adviser in a supervisory capacity with the proviso that, after one year, he may apply to become so associated, upon an appropriate showing, such application to be made to the appropriate self-regulatory organization or, if there is none, to the Commission; and it is further
ORDERED that, within 30 days of the entry of this order, Quest and Yu shall each pay a civil money penalty in the amount of $50,000. Payment shall be (a) 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; (b) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, 6432 General Green Way, Suite B, Mail Stop 0-3, Alexandria, Virginia 22312; and (c) submitted under a coverletter that identifies Quest and Yu as respondents in this proceeding and the file number of this proceeding. Copies of the cover letter and check shall be sent to Wayne M. Carlin, counsel for the Division of Enforcement, Securities and Exchange Commission, Northeast Regional Office, 233 Broadway, New York, New York 10279.
By the Commission.
Jonathan G. Katz
|1||Rule of Practice 451(d), 17 C.F.R. § 201.451(d), permits a member of the Commission who was not at oral argument to participate in the decision of the proceeding if that member has reviewed the oral argument transcript prior to such participation. Chairman Pitt, who was not a member of the Commission at the time that the Commission held oral argument in this matter, has reviewed the transcript of the oral argument.|
|2||Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)) and Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5). The law judge also found that Nakoski was an unregistered investment adviser and willfully violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-6) and Rule 206(4) thereunder (17 C.F.R. § 275.206(4)).|
|3||494 U.S. 56 (1990). See also Stoiber v. SEC, 161 F.3d 745 (D.C. Cir. 1998), cert. denied, 526 U.S. 1069 (1999).|
|4||As the Supreme Court stated in Reves at 61, "Congress' purpose in enacting the securities laws was to regulateinvestments, in whatever form they are made and by whatever name they are called" (emphasis in original).|
|5||Nakoski was charged with violating state securities laws. On June 12, 1995, without admitting or denying the charges against him, he was permanently enjoined with his consent from further violations of federal antifraud provisions. SEC v. Nakoski, 95-CV-0738 (RSP) (N.D.N.Y.). Nakoski was also barred (with his consent in Commission administrative proceedings) from association with any broker, dealer, investment adviser, municipal securities dealer or investment company. John T. Nakoski, Exchange Act Release No. 35947 (July 10, 1995), 59 SEC Docket 2336.|
|6||Yu held a number of such meetings at various locations around the country in order to accommodate his extensive sales force.|
|7||The NASD had received the photograph, with an unsigned cover letter dated October 29, 1992, from an anonymous tipster who presumably took the photograph and affixed the notation.|
|8||Sections 15(b)(4)(E) and 15(b)(6), 15 U.S.C. §§ 78o(b)(4)(E) and (b)(6). The Investment Advisers Act contains identical disciplinary authority in Sections 203(e) and 203(f) (15 U.S.C. 80b-3(e) and (f)).|
|9||See Consolidated Investment Services, Inc., 52 S.E.C. 582, 588 (1996), and the cases cited in note 27 thereof. See also Edwin Kantor, 51 S.E.C. 440, 446-447 (1993).|
|10||Consolidated Investment Services, Inc., supra, 52 S.E.C. at 588-589, and the cases cited therein at note 28. See also James Harvey Thornton, 53 S.E.C. 1210, 1213-1214 (1999), aff'd, 199 F.3d 440 (5th Cir. 1999) (Table).|
|11||See, e.g., John H. Gutfreund, 51 S.E.C. 93, 108 (1992); Michael H. Hume, 52 S.E.C. 243, 248 (1995).|
|12||See Consolidated Investment Services, Inc., supra, 52 S.E.C. at 587.|
|13||Respondents point out that Arnesen gave a negative answer when asked if she would have revealed whether Nakoski was "borrowing money." Arnesen apparently interpreted that question as relating to Nakoski's personal affairs. When the question was reframed to reference Nakoski's 12% loan program, Arnesen indicated that she would have provided information about the program|
|14||Reynolds & Co., 39 S.E.C. 902, 917 (1960).|
|15||Section 15(b)(4)(E) of the Exchange Act, 15 U.S.C. § 78o(b)(4)(E). The same defense is provided by Advisers Act Section 203(e) (15 U.S.C. 80b-3(e)).|
|16||Respondents claim that the Division had the burden of proving that Respondents could not rely on this defense. We think it clear, however, that, as with most defenses, the burden of proof rested on Respondents.|
|17||See Gary E. Bryant, 51 S.E.C. 463, 471 (1993).|
|18||See Albert Vincent O'Neal, 51 S.E.C. 1128, 1135 (1994).|
|19||Yu was aware of that fact. He testified, "When I read [Burke's letter], I said, well, he (Nakoski) told the S.E.C. the same thing he told me . . . . So John is very consistent in that regard . . . . [H]e was telling the same story to everybody."|
|20||Burke was questioned about his notes, but stated that he had no recollection of his conversation with Nakoski and that the notes did not refresh his recollection. According to Nakoski, he told Burke that he had yet to raise any money by means of his brochure, and that Burke mistakenly changed "brochure" to "loan agreement" in his letter. Nakoski testified that he "didn't correct [Burke] because [he] didn't want to prolong the dealings [he'd] had with him."|
|21||See, e.g., Richard R. Perkins, 51 S.E.C. 380, 384 n.20 (1993); Variable Investment Corporation, 46 S.E.C. 1352, 1354 n.6 (1978); Don D. Anderson & Co., Inc., 43 S.E.C. 989, 991 (1968), aff'd, 423 F.2d 813 (10th Cir. 1970).|
|22||See, e.g., G.K. Scott & Co., Inc., 51 S.E.C. 961, 966 n.21 (1994), aff'd, 56 F.3d 1531 (D.C. Cir. 1995)(Table); Melvin Y. Zucker, 46 S.E.C. 731, 733 (1976).|
|23||Procedures Relating to the Commencement of Enforcement Proceedings and Termination of Staff Investigations, Securities Act Release No. 5310 (September 27, 1972). See 17 C.F.R. § 202.5(d).|
|24||Respondents claim that the Division is targeting "small and new" broker-dealers like Quest for harsh treatment. It is questionable whether Quest, which has been a registeredbroker-dealer since 1985 and has about 700 registered representatives, qualifies as either "small" or "new." In any event, Respondents have not adduced any evidence in support of their claim, and we find no basis for it.|
|25||Yu testified that Quest is already instituting a program for inspecting the operations of non-branch office representatives "on a surprise or unannounced basis, if possible." At the time of the hearings, Quest did not conduct any on-site inspections of those representatives.|
|26||We have considered all of the arguments advanced by the parties. We have rejected or accepted them to the extent that they are inconsistent or in accord with the views expressed herein.|