SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45609 / March 21, 2002
Admin. Proc. File No. 3-9435
In the Matter of HERBERT MOSKOWITZ |
: |
ORDER IMPOSING REMEDIAL SANCTION
On the basis of the Commission's opinion issued this day, it
is
ORDERED that Herbert Moskowitz cease and desist from committing or causing any violation or future violation of Section 13(d) of the Securities Exchange Act of 1934 and Rules 13d-1 and 13d-2 thereunder.
By the Commission.
Jonathan G. Katz
Secretary
Endnotes
1 15 U.S.C. § 78m(d).
2 17 C.F.R. § 240.13d-1.
3 17 C.F.R. § 240.13d-101.
4 This action also was instituted against Kedar Gupta and Alvan Chorney, respectively a former general manager of a division of Ferrofluidics Corporation and a former Ferrofluidics vice president and director, charging distinct Section 13(d) violations, arising from the failure of these respondents to disclose certain agreements with respect to their voting of their Ferrofluidics shares. See In the Matter of Kedar Gupta, Alvan Chorney, and Herbert Moskowitz, Securities Exchange Act Rel. No. 39128 (Sept. 25, 1997), 65 SEC Docket 1418. Gupta and Chorney settled the Section 13(d) charges against them without admitting or denying the findings of violations. See In the Matter of Kedar Gupta, Alvan Chorney, and Herbert Moskowitz, Exchange Act Rel. No. 41429 (May 20, 1999), 69 SEC Docket 2508.
5 17 C.F.R. § 240.13d-2.
6 The Division sought a cease-and-desist order prohibiting Moskowitz from committing or causing any violations of, and committing or causing any future violations of, Section13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder.
7 SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978). As the United States Court of Appeals for the Second Circuit observed in GAF Corp. v. Milstein, the purpose of Section 13(d) is "to alert the marketplace to every large, rapid aggregation or accumulation of securities, regardless of technique employed." 453 F.2d 709, 717 (2d Cir. 1971). See also Levy v. Southbrook Int'l Invs., Ltd., 263 F.3d 10, 15-16 (2d Cir. 2001) ("Section 13(d) and the rules promulgated thereunder are reporting requirements intended to provide investors with . . . [disclosure of information] implicat[ing] access to inside information and the potential for insider trading."), petition for cert. filed (U.S. Feb. 26, 2002) (No. 01-1272).
8 15 U.S.C. § 78m(d)(1). Exceptions to this rule are made for certain national securities exchange member record holders of securities, pledgees of securities, and underwriters. See 17 C.F.R. § 240.13d-3(d)(2)-(4).
9 15 U.S.C. § 78m(d)(2).
10 Rule 13d-1(b)(1) permits certain entities that hold securities on a discretionary basis for another, such as broker-dealers, banks, insurance companies and registered investment companies and investment advisers, who would otherwise be required to file a Schedule 13D to file instead a short-form statement on Schedule 13G, provided the entity has met two conditions: (1) it must have acquired the securities in the ordinary course of its business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect; and (2) it must promptly notify the person (or group) for whom it holds, on a discretionary basis, the securities, of any acquisition or transaction on behalf of that person (or group) that might be reportable under Section 13(d). 17 C.F.R. § 240.13d-1(b)(1).
11 17 C.F.R. §§ 240.13d-1 and 240.13d-2(a).
12 17 C.F.R. § 240.13d-3.
13 17 C.F.R. § 240.13d-3(a)(2).
14 17 C.F.R. § 240.13d-3(a).
15 SEC v. First City Fin. Corp., 890 F.2d 1215, 1221 (D.C. Cir. 1989).
16 Over the past fourteen years, Moskowitz has founded and taken public several companies, including Marrow-Tech Inc., Magna Lab, Inc., and Life Medical Sciences, Inc. He has served as an officer or director of these companies as well as of another public company, Echocath Inc. Moskowitz also has been a principal of two companies Moskowitz identified in testimony as "passive investment companies," Magar Inc. and Alliance Partners.
17 We instituted this proceeding in 1997 and later stayed it pending the outcome of the criminal proceeding against Moskowitz's brother and other insiders of Ferrofluidics. R. Moskowitz was convicted of securities fraud and conspiracy in November 1998 and sentenced to eight years in prison in November 1999. The U.S. Court of Appeals for the Second Circuit affirmed the conviction and sentence in May 2000. U.S. v. Moskowitz, 215 F.3d 265 (2d Cir.), cert. denied, 531 U.S. 1014 (2000).
In a related civil action, the Commission alleged that R. Moskowitz violated the antifraud and certain other provisions of the federal securities laws. On May 31, 2000, the U.S. District Court for the Southern District of New York entered a final judgment against R. Moskowitz that enjoins him from violating the antifraud provisions, and certain reporting, internal controls, and recordkeeping provisions of the federal securities laws. Without admitting or denying the Commission's allegations, R. Moskowitz consented to the entry of the judgment, which also bars him from acting as an officer or director of a public company. SEC v. Ferrofluidics Corp., Litigation Rel. No. 16584 (June 6, 2000), 72 SEC Docket 1807.
18 According to its Form 10-Q for the quarter ended March 31, 1991, Ferrofluidics had 2,400,175 shares outstanding; 120,008.75 shares represented 5% of the securities of the company - the triggering percentage for Schedule 13D reporting.
19 On August 6, 1991, Moskowitz sold 1,000 of these shares.
20 Moskowitz testified during the Division's investigation that he knew at the time he made the agreement that within a few months he likely would call any investment loan in order to advance funds to his brother under the loan he had extended. Moskowitz also testified that he knew at the time he made the agreement with Abir that Abir would probably sell any stock he purchased in order to repay the loan.
21 Moskowitz testified that the reason for the (assertedly provisional) trading authorization was concern about the personal danger to Abir posed by his business travels to Israel.
22 This notation reflected a check for $200,000 that Abir received from Moskowitz on May 30, 1991. This was the second of three checks Abir received from Moskowitz from late May through late June 1991 to finance the purchase ofFerrofluidics shares.
23 The shares, however, had not been pledged to Moskowitz as collateral for Moskowitz's loan to Abir.
24 Moskowitz testified that he has "still not settled up" for what Abir owes him and for what he owes Abir.
25 17 C.F.R. § 240.13d-1.
26 In fact, as detailed in note 29 and accompanying text, since Moskowitz first acquired beneficial ownership of more than 5% of Ferrofluidics' outstanding shares on June 5, 1991, he was obligated to report his ownership in mid-June 1991.
27 In August 1991, Moskowitz sold 1,000 Ferrofluidics shares held in his own name, so these shares were not included in the number of shares he claimed to own beneficially in his September 1991 Schedule 13D.
28 In the September 1991 Schedule 13D, Moskowitz disclaimedbeneficial ownership of the nominal number of Ferrofluidics shares held in his son's account. Such a disclaimer is permitted under Rule 13d-4. While he did not expressly disclaim in the Schedule 13D beneficial ownership of the reported shares held in his wife's account, he did state that "she has the sole power to vote and to dispose of" these shares. In his brief to us, he asserts that this reference was a disclaimer of his beneficial ownership of these shares as well.
29 As already discussed supra note 18, Ferrofluidics had approximately 2.4 million shares outstanding as of March 31, 1991. The various holdings owned outright or, as we explain below in Section III of this opinion, beneficially owned by Moskowitz on June 5, 1991 consisted of the 10,400 shares held in his own name, the 900 shares held by his wife and minor son, the 105,000 shares represented by the first tranche of warrants transferred to Moskowitz, and 26,000 shares held in the Abir Quick & Reilly account as of that date. These holdings represented approximately 5.93% of Ferrofluidics outstanding shares. An additional 14,100 Ferrofluidics shares were purchased for the Abir account later in June 1991, increasing the percentage beneficially owned by Moskowitz at the end of the month to approximately 6.55%.
30 Moskowitz received total proceeds of approximately $1.3 million from the sale.
31 On February 6, 1992, Moskowitz exercised warrants to purchase 25,000 Ferrofluidics shares and sold these shares the same day. He also sold an additional 1,000 Ferrofluidics shares in an open market transaction on that day.
32 According to that amended Schedule 13D, Moskowitz's Ferrofluidics holdings as of February 6, 1992 represented about 4.1% of outstanding Ferrofluidics shares. On subsequent days in February 1992, Moskowitz exercised his remaining warrants for 125,000 Ferrofluidics shares and then sold these shares.
33 The law judge concluded that, "[s]ince the Abirs did not encounter a disaster during the ownership of the Ferrofluidics stock, the trading authorization did not come into effect." Herbert Moskowitz, Initial Decision Rel. No. 163 (Apr. 26, 2000), 72 SEC Docket 912, 918.
34 Moskowitz was asked if he understood that the trading authorization gave him "the power to buy and sell securities in [his] daughter's and son-in-law's Quick & Reilly account." Moskowitz's answer was a simple and direct "yes."
35 Cf. Jacob Wonsover, Exchange Act Rel. No. 41123 (Mar. 1, 1999), 69 S.E.C. Docket 694, 707-08 (finding no reason to disturb law judge's determination not to credit respondent's claim at the administrative hearing that he had made a searching inquiry into the tradeability of a large block of stock, when respondent earlier had offered to the Division in investigative testimony a less "self-serving" version of events to the effect that he made no inquiries), petition for review denied, 205 F.3d 408 (D.C. Cir. 2000).
36 Neither Moskowitz nor Abir suggested at any point in this proceeding that they ever informed Quick & Reilly of the existence or terms of this purported oral agreement.
37 While it is true, as Moskowitz points out, that the trading authorization was printed on a standard form agreement without space to note any limitations on Moskowitz's investment authority, this is not proof of Moskowitz's claim that there were limitations. The law judge's contrary conclusion was plainly wrong.
38 Dan A. Druz, 52 S.E.C. 130, 134 n.16 (1995), aff'd, 103 F.3d 112 (3d Cir. 1996)(Table); see also Anthony Tricarico, 51 S.E.C. 457, 460 (1993).
39 Warren R. Schreiber, 53 S.E.C. 912, 914 (1998).
40 Valicenti Advisory Serv., Inc., 53 S.E.C. 1033, 1040 n.9 (1998) (citing Anthony Tricario, 51 S.E.C. at 460).
41 "As Rule 13d-3 makes plain, simply holding or even sharing investment power is sufficient to confer beneficial ownership." Schaffer ex rel. Triton Energy Corp. v. Soros, 1994 U.S. Dist. LEXIS 9886 at *21 (S.D.N.Y. 1994), reh'g granted in part, 1994 U.S. Dist. LEXIS 15508 (S.D.N.Y. 1994)(reaffirming in part and vacating in part on issue unrelated to beneficial ownership).
42 Schaffer, 1994 U.S. Dist. LEXIS 9886 at *16.
43 As Judge Pollack noted in SEC v. Drexel Burnham Lambert Inc.: "[t]he inquiry 'focuses on any relationship that, as a factual matter, confers on a person a significant ability to affect how . . . investment power will be exercised. . . .'" 837 F. Supp. 587, 607 (S.D.N.Y. 1993) (emphasis in original) (citation omitted), aff'd sub nom. SEC v. Posner, 16 F.3d 520 (2d. Cir. 1994).
Even though Moskowitz had no secured interest in the securities, he caused the sale transactions by calling his loan to Abir, as the Ferrofluidics shares represented the only asset Abir possessed capable of satisfying the loan. Moskowitz conceded during his investigative testimony that he had specifically advised his son-in-law in advance of the Ferrofluidics purchases that he could provide Abir with the funds for only "a limited period of time . . . because [he was] going to need them back in order to be able to satisfy [his] obligations to [R. Moskowitz]." Moskowitz further explained that "that's when [Abir was] going to have to close out his position, and return the money to [Moskowitz], so that [Moskowitz could] satisfy [his] obligation" to R. Moskowitz.
44 In addition to the facts outlined above, we note, in particular, that the Ferrofluidics shares were the only asset in Abir's Quick & Reilly account and that the proceeds from the sale of the shares were wired directly to Moskowitz within a week or so after the last sale from the account.
45 Given the unique circumstances, we see no basis for Moskowitz's claims that a finding of beneficial ownership here will create a range of policy problems for lenders, creditors and others (e.g., Moskowitz claims that a finding of liability would "turn[] many unsuspecting lenders into beneficial owners" and "unsuspecting people into lawbreakers").
46 Exchange Act Rule 13d-3(b) directs that "[a]ny person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) or 13(g) of the Act shall be deemed for purposes of such section to be the beneficial owner" of the security. 17 C.F.R. § 240.13d-3(b). The Division advises that Abir purchased many of the Ferro-fluidics shares at prices that it asserts were higher than the prevailing market price and that this pattern of purchases reflects an attempt to support the share price. Thus, under the Division's theory, nondisclosure of the Abir purchases hid from the market Moskowitz's asserted attempts to support the price of the stock.
47 Moskowitz, as did the law judge, points to the fact that he disclosed his wife's and son's Ferrofluidics shares on his Schedule 13D filed in September 1991, and argues that this disclosure is evidence that he did not intend to hide anything from the market. However, Moskowitz's wife and son held together only a nominal 900 shares. In contrast, Abir's Quick & Reilly account held 40,100 shares and disclosure regarding this number of shares would clearly have had much more significance to the market.
48 In support of this claim, Moskowitz points to the law judge's statement that "[h]ad [Moskowitz] known that he could have been considered the beneficial owner [of the Abir holdings] he would have made the filings." This statement is not persuasive on the matter, as it was not grounded in an explicit credibility assessment and is belied by Moskowitz's Section 13(d) compliance failures discussed infra.
49 See, e.g., Jacqueline Badger Mars, Exchange Act Rel. No. 40362 (Aug. 25, 1998), 67 SEC Docket 2522 (settled order); Oppenheimer & Co., 47 S.E.C. 286 (1980) (settled order). As we said in Oppenheimer, "[t]he duty to file with this Commission and to notify the issuer was not dependent on any intention by [the stockholder] to gain control of [the public company], but on a mechanical 5% ownership test." Id. at 287.
50 We have not considered the Division's assertion that, because Moskowitz was making a large loan to, and receiving a massive fee in warrants from, his brother, the CEO of Ferrofluidics, and also benefitted handsomely from his later sales of the Ferrofluidics stock arranged by his brother, his claimed passive investor status is questionable. Given the irrelevance of the question whether Moskowitz's ownership was active or passive, we decline to address it.
51 Exchange Act Section 21C(a) authorizes the Commission to order persons to cease and desist from committing securities law violations or future securities law violations if it finds that "any person is violating, has violated, or is about to violate any provision" of the Exchange Act. 15 U.S.C. § 78u-3(a).
52 Exchange Act Rel. No. 43862 (Jan. 19, 2001), 74 SEC Docket 384, motion for reconsideration denied, Exchange Act Rel. No. 44050 (Mar. 9, 2001), 74 SEC Docket 1351, appeal filed,No. 01-1131 (D.C. Cir. 2001).
53 74 SEC Docket at 430.
54 Id. at 436.
55 Id. (quoting SEC v. Steadman, 967 F.2d 636, 647-648 (D.C. Cir. 1992)).
56 Id.
57 Id. at 436 n.148.
58 See note 17 supra.
59 In support of his claimed scrupulous compliance with Section 13(d), Moskowitz introduced into evidence Schedules 13D reflecting his share ownership in LMSI and Magna-Lab, Inc. ("MLI"). However, these filings, when considered with other Schedules 13D filed by Moskowitz respecting his LMSI and MLI holdings that were introduced into evidence by the Division, belie Moskowitz's claims of compliance. For instance, although Moskowitz was a founder and principal stockholder of LMSI, and that company's 1993 proxy statement reflects that Moskowitz beneficially owned more than 5% of the common stock, at least as of April 1993, Moskowitz did not file his initial Schedule 13D until March 1995. Similarly, Moskowitz filed an initial Schedule 13D for MLI ten months after the Schedule 13D indicated that he had acquired his more than 5% interest. This was a year after the company had gone public. Moskowitz also failed to file required amendments reflecting numerous changes to his ownership interest in both companies; on other occasions he filed his amendments to these Schedules 13D weeks or months late; and on still other occasions the filings appear to have containedincomplete information on his holdings.
60 We note that Moskowitz conceded in his testimony before the law judge that he never had any Schedule 13D compliance-related discussions about the Ferrofluidics shares held in Abir's account.
61 See Markowski v. SEC, 34 F.3d 99, 104-05 (2nd Cir. 1994) (specifying that, in order to invoke the defense, the respondent must show that he: (1) made complete disclosure to counsel; (2) sought counsel's advice as to the legality of his conduct; (3) received advice that the conduct waslegal; and (4) relied in good faith on that advice).
62 Compare Arthur Lipper Corp. v. SEC, 547 F.2d 171, 181-82 (2d Cir. 1976) (rejecting defense where counsel not in a position to give wholly disinterested advice and petitioners could not reasonably have thought he was); United States v. Piepgrass, 425 F.2d 194, 198 (9th Cir. 1970) (jury entitled to reject defense where counsel was respondent's business partner); Draney v. Wilson, Morton, Assaf & McElligott, 592 F.Supp. 9, 11 (D. Ariz. 1984) (defense of reliance on advice of counsel rejected where counsel was respondent's business adviser).
63 Moskowitz illogically, and in an attempt to shift from himself the burden of establishing the defense, would have us conclude from this record insufficiency that there is "no basis for concluding that these allegations support the issuance of a cease and desist order."
64 SEC v. Drexel Burnham Lambert Inc., 837 F. Supp. at 607, quoting SEC v. First City Fin. Corp., 890 F.2d at 1230.
65 87 F.3d 484 (D.C. Cir. 1996). Section 2462 states in pertinent part that, "[e]xcept as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued. . . ."
66 87 F.3d at 489. Cf. SEC v. Ogle, [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,739, at 93,598 (N.D. Ill. 2000) (Section 2462 does not apply to SEC civil enforcement actions seeking injunctive relief because "equitable remedies merely preserve the status quo; they do not constitute a punitive award"); SEC v. Williams, 884 F. Supp. 28, 30 (D. Mass. 1995) (SEC enforcement action not barred by 28 U.S.C. § 2462 because injunctive action seeks equitable relief). See also SEC v. Fehn, 97 F.3d 1276, 1287(9th Cir. 1996) (quoting American Steel Foundries v. Tri-City Cent. Trades Council, 257 U.S. 184, 201 (1921)) (injunctions constitute prospective relief and "'operate[] in futuro'").
Indeed, Johnson itself recognized that even a suspension or bar would be remedial, if that sanction was not "sufficiently punitive" (87 F.3d at 488) to be deemed a penalty. As the U.S. Court of Appeals for the District of Columbia Circuit later emphasized in Proffitt v. FDIC, 200 F.3d 855, 861 (D.C. Cir. 2000)(emphasis added)(citation omitted), the suspension in Johnson was a penalty within the meaning of Section 2462 because it "went 'beyond compensation of the wronged party' and because the SEC had not focused on Johnson's current competence or risk to the public." In contrast, our decision here expressly focuses on the future.
67 Moskowitz also would characterize a cease-and-desist order as punishment on the ground that it will be a matter of public record and therefore will "inflict severe long lasting consequences" on him, "thereby hampering any future activities he may have with respect to public companies." While the Johnson court indicated in dicta that a suspended broker's obligation to disclose the fact of a suspension on the Form ADV and the public availability of information on broker disciplinary actions "suggest[s] its punishment-like qualities," it went on to conclude that the collateral consequences of an administrative order are "not the central determinant in whether a sanction reaches penalty status." 87 F.3d at 489. The Johnson court also observed that, from the subjective perspective of a respondent, virtually every sanction, whether remedial or punitive, can "'carry the sting of punishment.'" Id. at 488 (quoting United States v. Halper, 490 U.S. 435, 447 n.7 (1989)).
68 The administrative law judge denied the Division's motion to admit into the record R. Moskowitz's indictment on the criminal charges described supra at note 17 and accompanying text, on the ground that the document was "irrelevant." The Division has renewed its motion to admit the indictment. Rule 320 of the Commission's Rules of Practice provides that law judges should exclude evidence that is irrelevant, immaterial or unduly repetitious." 17 C.F.R. § 201.320. We have directed our law judges to "be inclusive in making evidentiary determinations." See City of Anaheim, 71 SEC Docket 191, 193 n.7 (Nov. 16, 1999) (internal citation omitted) ("[W]e strongly advise administrative law judges: if in doubt, let it in."). Here, the law judge discussed, as background to her decision, the fact of the criminal proceedings against R. Moskowitz and the focus of the charges brought against him. We, too, in this decision, discuss that fact as background. Given this, the indictment itself cannot be said to be irrelevant, immaterial or unduly repetitious. Thus, we grant the Division's motion, while noting the limited relevance and utility of the indictment information to this matter before us.
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.