Securities and Exchange Commission
In the Matter of
OPINION OF THE COMMISSION
Grounds for Remedial Action
Failure to Comply With Reporting Requirements
Respondent violated requirements to report beneficial ownership of equity securities, and all material changes in that beneficial ownership, when he failed to include in a Schedule 13D filed with the Commission the purchase and sale of certain securities over which he had investment power. Held, it is in the public interest to order respondent to cease and desist from committing or causing any violation or future violation of the beneficial ownership of equity securities reporting provisions of the federal securities laws and rules promulgated thereunder.
Philip W. Horton and Richard B. Benenson, of Arnold & Porter, for Herbert Moskowitz.
William H. Kuehnle and Gautam Dutta, for the Division of Enforcement.
Appeal filed: June 19, 2000
Last brief received: September 20, 2000
The Division of Enforcement appeals from the decision of an administrative law judge. In the Order Instituting Proceedings ("OIP"), the Division charged that Herbert Moskowitz ("Moskowitz") violated Section 13(d) of the Securities ExchangeAct of 19341 and Rule 13d-1 thereunder2 by failing to file a Schedule 13D3 within ten days of June 5, 1991.4 On that date, according to the OIP, Moskowitz acquired beneficial ownership of more than five percent of the outstanding shares of Ferrofluidics Corporation ("Ferrofluidics"). The OIP specified that between May 24, 1991 and June 21, 1991, Moskowitz funded the purchase of 40,100 shares of Ferrofluidics stock (approximately 1.8% of its outstanding shares) in an account "owned by his daughter and son-in-law and over which he had trading authority." The OIP further specified that these shares, when added to certain warrants to purchase 105,000 Ferrofluidics shares (approximately 4.1% of its outstanding shares) that Moskowitz received on June 5, 1991, made him a 5.9% beneficial owner of Ferrofluidics, thus triggering an obligation to file a Schedule 13D that Moskowitz did not meet.
The OIP also charged that Moskowitz subsequently violated Section 13(d) of the Exchange Act and Rule 13d-2 thereunder5 by failing to file an amended Schedule 13D promptly after there was a material change in his beneficial ownership position. The OIP specified that the sale of 40,100 of these shares between July 10, 1991 and August 1, 1991 represented such a material change and should have been reported on a Schedule 13D filed with the Commission.6
The law judge concluded that the evidence did not support a finding of violation. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
The central issue is whether the evidence establishes that Moskowitz was the beneficial owner of certain securities purchased by his son-in-law, Kamrooz Abir ("Abir"). The facts are straightforward and establish unequivocally Moskowitz's beneficial ownership and, accordingly, his violation of Section 13(d). As we conclude below, they also support issuance of a cease-and-desist order.
Section 13(d) of the Exchange Act imposes "a simple and affirmative duty of reporting."7 It requires that any person who becomes, directly or indirectly, the "beneficial owner" of more than 5% of any class of equity securities registered under the Exchange Act file a statement with the Commission within 10 days of becoming such an owner.8 The beneficial owner is then required by Section 13(d)(2) to file another statement if material changes occur in the facts set forth in the prior filing.9 Under the rules promulgated under Section 13(d), statements of beneficial ownership and amendments thereto are tobe made on a Schedule 13D.10 The acquisition or disposition of more than 1% of a class of securities will be deemed a material change for Section 13(d)(2) purposes, and required amendments to the Schedule 13D must be filed "promptly."11
Under Exchange Act Rule 13d-3,12 a person will be deemed a "beneficial owner" of securities if he has direct or indirect "investment power" over the securities. "Investment power" under the rule includes the power to dispose, or to direct the disposition of, the securities.13 Beneficial ownership extends to any person who acquires direct or indirect investment power through any contract, arrangement, understanding, relationship or otherwise.14 Rule 13d-3 is crafted broadly and sweeps within its purview informal, even oral, arrangements that confer upon a person investment power.15
Moskowitz is an investor in, and promoter and founder of, numerous public companies in the science and medical fields.16 At issue here is an investment in Ferrofluidics, an industrial fluids producer. Moskowitz's brother, Ronald Moskowitz ("R. Moskowitz"), is a former chief executive officer ("CEO") of Ferrofluidics, and was convicted of securities fraud involving that company; Moskowitz himself did not participate in the management of Ferrofluidics and was not charged in that criminal case.17
Abir, who effected the stock transactions at issue, graduated from the Wharton School of Finance in 1988. Following a short period of employment as a registered representative of a broker-dealer, Abir began working for his father-in-law from a converted office in Moskowitz's home. Moskowitz paid Abir an annual salary of $30,000 for, among other responsibilities, assisting him in identifying future investment opportunities and placing securities trades based upon stock and commodities trading strategies that the two had discussed.
In 1991, R. Moskowitz approached Moskowitz for a loan to help him pay back loans he owed to Ferrofluidics arising out of certain real estate investments he had made. Moskowitz agreed to loan his brother up to $3 million. As part of the consideration for the loan, R. Moskowitz agreed to transfer to Moskowitz warrants to purchase 150,000 shares of Ferrofluidics stock.
The brothers discussed the timing for disclosing this transaction in a public filing. The brothers noted that, if Moskowitz were to receive warrants to purchase in excess of 120,000 shares, he would be required to disclose his receipt of the warrants on a Schedule 13D.18 Following their discussion, the brothers decided that the warrants would be transferred in two tranches: 105,000 warrants on June 5, 1991 and 45,000 warrants on August 14, 1991. Notes Moskowitz took during the meeting state, immediately after the notation that 150,000 warrants were to be transferred to Moskowitz, "HM cannot have more than 120,000 shares & warrants in his name" (emphasis added).
After Moskowitz agreed to lend his brother money in exchange for Ferrofluidics warrants, Moskowitz began purchasing Ferrofluidics shares for his own account. On April 2, 1991, Moskowitz purchased 400 shares in a newly-opened IRA account at Quick & Reilly funded by $2,000 contributions for both 1990 and 1991. A few days later, Moskowitz opened an account at Quick & Reilly and deposited $100,000 in the account. Between April 9, 1991 and April 30, 1991, he used this account to purchase 10,000 Ferrofluidics shares.19 In addition to these purchases for his own account, Moskowitz also purchased 200 Ferrofluidics shares on March 12, 1991 for his minor son's custodial account. On that same day, he caused his wife to purchase 700 Ferrofluidics shares for her account.
In an agreement between Moskowitz and Abir dated March 24, 1991, Moskowitz agreed to lend Abir money at a 7% interest rate for Abir to use either to finance the purchase of a home or to make investments. With regard to any investment loan, theagreement provided that all decisions to acquire securities for Abir's account with Moskowitz's capital were to be made "at [Moskowitz's] discretion" and all securities so acquired were to be "selected by [Moskowitz]."20 The agreement specified that, if the investments were profitable, Abir was to retain the profits for use toward a home downpayment. According to Moskowitz's testimony before the law judge, the timing and price of any securities purchase were to be at Abir's discretion.
Beginning in late May 1991, Moskowitz loaned Abir a total of $400,000 to buy Ferrofluidics stock. Abir opened an account at Quick & Reilly through which he planned to effect the Ferrofluidics purchases. In connection with the account opening, Abir, his wife (Moskowitz's daughter), and Moskowitz executed a Quick & Reilly trading authorization form that gave Moskowitz, "as [Abir's] agent and attorney in fact," the unconditional right "to buy, sell . . . and trade in stocks . . . for [Abir's] account and risk and in [Abir's] name." This authorization was not limited by anything in the written agreement. Nonetheless, Abir and Moskowitz testified before the law judge to the existence of an unwritten side agreement between them that the trading authorization was, in effect, provisional, and Moskowitz was to rely on it only in an emergency such as Abir's incapacity or death.21 It is undisputed that Moskowitz did not have trading authority with respect to other accounts in Abir's name.
Between May 24, 1991 and June 21, 1991, Abir purchased a total of 40,100 shares of Ferrofluidics stock through Abir's Quick & Reilly account. Abir kept a written record of all of his purchases in this account and labeled this record "Herb's Acct. 143-29329-1-9" (underlining in original). He also wrote on this account record that he had "[d]eposited $200,000 for Herb on May 31, 91 purchase" (emphasis added).22
In July 1991, Moskowitz called his loan to Abir to meet a draw on the loan Moskowitz had made to his brother, R. Moskowitz. Between July 10, 1991 and August 1, 1991, Abir sold all of the Ferrofluidics shares and remitted the proceeds, about $532,000, to Moskowitz.23 According to Moskowitz, the proceeds included trading profits above the interest at the rate of 7% on the $400,000 loan. Moskowitz testified that he intended to use those profits to help finance a house he was building for Abir. Abir never moved into this house, however, and Moskowitz, despite the terms of their agreement that called for payment of trading profits to Abir, never remitted these trading profits to Abir.24
On September 17, 1991, a month after he received the final installment of the warrants, Moskowitz filed a Schedule 13D with respect to Ferrofluidics stock. That filing was late even under Moskowitz's version of events, because our rules require filing within ten days of the triggering event,25 and, according to the filing, the trigger date was August 14, 1991.26
Moskowitz reported that his interest represented a 6.3% interest in Ferrofluidics. Moskowitz included in this report (1) the 150,000 warrants he received from his brother, (2) 9,400 of the 10,400 Ferrofluidics shares he held in his own name as of June 5, 1991,27 and (3) the 900 shares held in his wife's and minor son's accounts.28 Moskowitz did not include in this, orany other report, the Ferrofluidics shares in Abir's account purchased in May and June 1991. These 40,100 shares, together with the first tranche of warrants for 105,000 Ferrofluidics shares transferred to Moskowitz on June 5, 1991, and the additional shares held by Moskowitz and his wife and minor son in their respective accounts, amounted to more than 5% of the outstanding stock of the company.29 When Abir sold the shares in July and August 1991, the holdings dropped by more than 1% of the outstanding stock.
In February 1992, Moskowitz exercised all of his Ferrofluidics warrants and then sold the underlying shares in a private placement arranged for him by his brother, R. Moskowitz.30 Moskowitz waited a month after he sold 26,000 of his Ferrofluidics shares on February 6, 199231 to file anamended Schedule 13D reporting that his interest had decreased to less than 5% of the outstanding stock.32
Moskowitz does not dispute that, if he were deemed to have investment power over the Ferrofluidics shares in Abir's Quick & Reilly account, he would have been required to aggregate these shares along with the shares in accounts he concededly controlled, and to report them on a Schedule 13D when the aggregated shares exceeded 5% of Ferrofluidics shares outstanding. He also would have been required to amend that report after any material change in his percentage ownership. This case, then, turns on the question of his investment power with respect to Ferrofluidics shares in Abir's Quick & Reilly account.
Moskowitz contends that the law judge relying in large part on Moskowitz's and Abir's testimony that the written trading authorization Moskowitz held over the shares in Abir's Quick & Reilly account never came into effect ruled correctly that Moskowitz did not have investment power within the meaning of Rule 13d-3 and thus had no obligation to include the purchase or sale of the Ferrofluidics shares held in Abir's account in evaluating his disclosure obligations under Section 13(d). The Division contends, to the contrary, that Moskowitz clearly had investment power, based on the written trading authorization, other documentation, and the parties' course of dealing and was, therefore, a beneficial owner of the shares. As explained below, we find the evidence compelling that Moskowitz had investment power over the shares.
The Quick & Reilly trading authorization granted Moskowitz investment power with respect to all securities in Abir's account. The authorization could not be plainer in this regard. It directed Quick & Reilly to:
follow the instructions of . . . Moskowitz in every respect concerning the undersigned's [i.e. Abir's] account with you, and he is authorized to act for the undersigned and in the undersigned's behalf in the same manner and with the same forceand effect as the undersigned might or could do with respect to such purchases, sales or trades, as well as with respect to all other things necessary or incidental to the furtherance or conduct of such purchases, sales or trades.
Moskowitz argues that this trading authority was intended to be exercised only in emergency circumstances such as Abir's death or incapacity, and that, given the absence of emergency circumstances, he did not have the authority to dispose of Abir's securities, and thus cannot be deemed their beneficial owner. The law judge was persuaded by this argument.33 We are not. Based on several interrelated reasons, we conclude, consistent with the Quick & Reilly account documentation, that Moskowitz had investment power with respect to, and thus beneficial ownership of, the shares in Abir's Quick & Reilly account.
First, Moskowitz stated affirmatively and without qualification during his testimony before the Commission's staff that the Quick & Reilly authorization gave him the power to buy and sell the securities in that account.34 It was not until the hearing before the law judge that Moskowitz and Abir first asserted the existence of an emergency-only limitation on Moskowitz's trading authority.35
Further, even under Moskowitz's version of events, he had the ability to dispose of the stock and, accordingly, investment power with respect to it because Quick & Reilly was not informed that the trading authorization was (purportedly)provisional.36 Had Moskowitz at any time instructed Quick & Reilly to dispose of the stock, the broker-dealer would have followed Moskowitz's instructions, since the alleged oral agreement was not made part of the trading authorization.
Moreover, we cannot credit an unwritten side agreement as overriding unambiguous legal powers memorialized in a writing. To do so would permit a party subsequently to disclaim investment power by claiming the existence of an oral agreement that vitiates that power.37
Moskowitz nonetheless contends that we should defer to the law judge's determination that Moskowitz and Abir in fact had a subsequent oral agreement. However, we have held only that a factfinder's "explicit credibility determination[s][are to be] accorded considerable weight" and deference.38 We do not accept "blindly"39 but, rather, will disregard even explicit determinations of credibility "where the record contains 'substantial evidence' for [rejecting them]."40 In this proceeding, the self-serving hearing testimony regarding the existence of a subsequent oral agreement was the only evidence of such an agreement and flies in the face of the substantial, contradictory documentary evidence that Moskowitz had the unconditional authority to dispose of the Ferrofluidics shares in Abir's account. With all due deference to the law judge's finding, having taken into account all of the record evidence, we are not convinced that there was a subsequent oral agreement.
Alternatively, Moskowitz seeks to avoid liability under Section 13(d) on the basis that he never relied on the Quick & Reilly authorization to dispose of Abir's Ferrofluidics shares. Beneficial ownership under Rule 13d-3 requires only that one have, not actually exercise, investment power i.e. the right or power to dispose of or to direct the disposition of securities.41
Moreover, the fact that Abir retained authority under the Quick & Reilly authorization to dispose of the shares and, in fact, exercised this power, does not negate the conclusion that Moskowitz was a beneficial owner of the shares. A person who shares investment power is just as much a beneficial owner as one who has sole investment power.42
Assuming that the Quick & Reilly trading authorization is ambiguous (which it is not), other evidence establishes that Moskowitz had investment power with respect to the shares and accordingly was their beneficial owner. This conclusion is based on the loan agreement Moskowitz signed with Abir, among other things. That agreement specifically provided that all decisions to acquire securities for Abir's account with Moskowitz's capital were to be made "completely at [Moskowitz's] discretion" and all securities so acquired were to be "selected by [Moskowitz]." Moreover, Moskowitz both funded the purchases and caused the sale of the shares.43 Indeed, while it is not essential to our decision, we believe that "the true state of affairs here," as the Division puts it, is that the Ferrofluidics shares Abir purchased were in fact Moskowitz's shares.44 Clearly, Moskowitz had investment power over the shares. Notably, Abir's handwritten log of the Ferrofluidics purchases is labeled "Herb's account," and Abir recorded a sizeable cash transfer into theaccount as "Dep. $200,000 for Herb on May 31, 91" (second emphasis supplied).45
The Division argued before the law judge and reiterates to us a subsidiary theory that all of the events at issue were part of a premeditated, deliberate scheme, in violation of Rule 13d-3(b), to prop up the price of Ferrofluidics stock and to hide Moskowitz's interest in the Abir shares, in conscious disregard of Section 13(d).46 The Division also identifies as a motive for nondisclosure the fact that, by not including the Abir shares in any Schedule 13D filed with respect to Ferrofluidics, Moskowitz "got a delay of more than two months in disclosing his deal with his brother, the CEO of Ferrofluidics, for a $3 million loan and transfer of warrants for 150,000 shares."
Moskowitz, in turn, devotes a substantial portion of his brief to the claim that he had no reason to hide the shares in Abir's account. He relies on the law judge's statement that there was "no evidence in the record to show a motive for any delay in Moskowitz's disclosing his 5% ownership inFerrofluidics."47 He also contends that the fact that he filed a Schedule 13D in September 1991 indicates that he sought to comply with Section 13(d)'s requirements, and that he readily would have made the same disclosure regarding the Abir shares had he believed that beneficial ownership of such shares could be attributed to him.48
The evidence of both motive for non-disclosure and actual market impact of the Abir purchases and sales is not well-developed on this record, but such evidence is irrelevant to the central provisions charged and tried here Rule 13d-1 and the beneficial ownership rules set forth in Rule 13d-3(a). These rules do not require proof of motive or scienter. We make no findings premised on the Division's alternative theory that Moskowitz also violated Rule 13d-3(b).
* * * * *
In sum, we conclude that Moskowitz was the beneficial owner of the Ferrofluidics shares Abir purchased. We further conclude that Moskowitz was required to file timely the requisite Schedule 13D reports to disclose the acquisition and disposition of the holdings in Abir's Quick & Reilly account, since these holdings, when combined with Moskowitz's own Ferrofluidics purchases, constituted an interest in the company exceeding 5%, and their sale caused Moskowitz's beneficial ownership interest to decline materially. In failing to make these reports, Moskowitz violated Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder.
In making our findings, we reject Moskowitz's suggestion that there is no precedent supporting liability. Moskowitz endorses the law judge's notion that this proceeding is novel because, among other things, "there are no cases that hold a passive investor in violation of Schedule 13D requirements." There is, however, precedent for holding passive investors liable for Section 13(d) reporting violations.49 These settled cases reflect the Commission's view that the reporting requirements of Section 13(d) are not dependent upon the stockholders' reasons for acquiring or disposing of securities. By its terms, Section 13(d) applies to all covered equity securities holders.50
Having found violations, we now turn to the question of whether a remedial sanction is appropriate. The Division seeks a cease-and-desist order under Section 21C(a) of the Exchange Act.51 In KPMG Peat Marwick LLP,52 we stated that, in theordinary case and absent evidence to the contrary, a finding of past violation raises a risk of future violation sufficient to support our ordering a respondent to cease and desist. "To put it another way, evidence showing that a respondent violated the law once probably also shows a risk of repetition that merits our ordering him to cease and desist."53
While our inquiry focuses on the risk of future violations, in assessing whether a cease-and-desist order is an appropriate sanction based on the entire record we also consider the traditional factors we use in making sanctions determinations. Many of them are similar to those used by courts in determining whether there has been a showing of reasonable likelihood of future violations warranting injunctive relief.54 "This inquiry is a flexible one and no one factor is dispositive. This inquiry is undertaken not to determine whether there is a 'reasonable likelihood' of future violations but to guide our discretion."55
These traditional factors include the seriousness of the violation, the isolated or recurrent nature of the violation, the respondent's state of mind, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his or her conduct, and the respondent's opportunity to commit future violations. We also consider whether the violation is recent, the degree of harm to investors or the marketplace resulting from the violation, and the remedial function to be served by the cease-and-desist order in the context of any other sanctions being sought in the same proceeding.56 Finally, we may consider the function a cease-and-desist order serves in alerting the public that a respondent has violated the securities laws.57
The passage of time since Moskowitz's violative conduct militates against the issuance of a cease-and-desist order. The Division emphasizes that these proceedings were stayed at therequest of prosecutors responsible for the criminal prosecution of R. Moskowitz and others.58 We agree with the Division that relief in an administrative proceeding should not be withheld because we stayed the administrative proceeding. However, the stay of this matter accounted for only a portion of the time lag here, as the OIP did not issue until six years after the events in question.
The Division also emphasizes that "the delay did not stop Respondent from continuing to violate Section 13(d)" once the OIP issued, "further supporting the need for remedial relief." This is a compelling argument for issuance of a cease-and-desist order. Indeed, we consider there to be a real risk that Moskowitz will violate the beneficial ownership reporting provisions in the future. In reaching this conclusion, we have taken into account, among other things, the lateness of the (incomplete) Schedule 13D and amendment thereto with respect to Ferrofluidics that Moskowitz did file, and the fact established before the law judge that in March 1999, almost 18 months after this administrative proceeding was instituted, Moskowitz filed a Schedule 13D for Life Medical Sciences, Inc. ("LMSI") reporting a transaction that had occurred more than a full year earlier. We also have considered evidence introduced by Moskowitz that, subsequent to the period at issue, he has failed on various occasions to file timely and complete Schedules 13D with respect to his holdings in public companies he controlled.59
Moskowitz's explanations before the law judge for his repeated Section 13(d) compliance failures lacked substance and amounted to disclaimers of much of his responsibility for filing Schedules 13D. Indeed, Moskowitz's failures both to appreciate the seriousness of his violation and to file timely and complete Schedules 13D, even after we highlighted his obligations through the institution of this proceeding, counsel that we grant the requested relief.
Moskowitz contends that evidence regarding Schedule 13D compliance failures not charged in this proceeding cannot fairly be considered here but, as the Division points out, proving lack of current compliance is relevant to a determination of whether remedial sanctions are appropriate in the public interest. Moskowitz himself put the matter at issue when he asserted in his pretrial brief that "[t]he fact that Dr. Moskowitz has scrupulously obeyed the law for eight years since the incident in question does not show that he has a propensity for future violations," and offered as exhibits to support this claim the very Schedule 13D filings that the Division used to establish continuing noncompliance. Moskowitz, as the Division states, had ample time and opportunity to prepare for questions based on his own asserted defense and exhibits.
Moskowitz also suggests that we may not consider this evidence of Schedule 13D compliance failures because, as he testified before the law judge, he relied on a senior corporate securities lawyer at a major law firm, who was also a law professor, for guidance on Schedule 13D compliance with respect to these holdings.60 Any claimed reliance on counsel is, however, unavailing. Moskowitz has not satisfied the requisite elements for the defense of reliance on advice of counsel he did not testify, for example, that he kept this senior lawyer fully informed of his securities purchases in order to assure timely reporting under Schedule 13D.61 Further, Moskowitz'stestimony with respect to his relationship with this lawyer suggests that any advice given may not satisfy the "disinterestedness" element of the defense. For example, Moskowitz testified that the lawyer "has been a principal of . . . [and] on the board of directors" of LMSI and MLI for which Moskowitz filed Schedules 13D.62 Moskowitz admits in his brief to us that there may not be "a sufficient record for determining in this proceeding whether the elements of the defense of reliance on advise [sic] of others have been met with respect to these other alleged violations."63
With respect to the range of additional considerations that guide our discretion, we find that Moskowitz has made a career of founding and promoting public companies and accordingly likely will be presented with opportunities to violate the law in the future. Moreover, we do not view this as a technical violation. "Section 13(d) is not a mere 'technical' reporting provision; it is, rather, the 'pivot' of a regulatory scheme that may represent 'the only way that corporations, their shareholders and others can adequately evaluate . . . the possible effects of a change in substantial shareholdings.'"64 Further, Moskowitz is a sophisticated stock promoter with extensive experience in the filing of Schedules 13D, and had expressly discussed with his brother, in the context of structuring the loan-warrant transaction, that he could not receive more than 120,000 shares in his own name or he would be required to file a Schedule 13D. These discussions and arrangements demonstrate an awareness onMoskowitz's part of the requirements of Section 13(d). While it may have been appropriate for Moskowitz to structure the loan-warrant transaction with his brother in such a way as to delay the necessity for filing a Schedule 13D, it was another matter entirely for him to fail to comply with the reporting requirements of Section 13(d) with respect to shares over which he unequivocally had beneficial ownership.
This cease-and-desist proceeding was instituted six years after the unreported Abir purchases and subsequent stock sales. Moskowitz would have us conclude that it is barred by the five-year statute of limitations imposed by 28 U.S.C. § 2462 and Johnson v. SEC.65 It is not. Cease-and-desist proceedings are remedial in nature and not subject to Section 2462.
In Johnson, the court held that a Commission proceeding resulting in the censure and six-month disciplinary suspension of a securities industry supervisor was a "proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise," within the meaning of Section 2462. The court reasoned that the censure and suspension the Commission had imposed focused on the respondent's past conduct, were punitive, and therefore were time-barred. An order to cease and desist from committing or causing future violations of the federal securities laws, in contrast, focuses on a respondent's future conduct, and is a prospective remedy that the Johnson court specified "would less resemble punishment [within the meaning of Section 2462]."66
Moskowitz is mistaken in his contention that, here, nonetheless, a cease-and-desist order would constitute a penalty under 28 U.S.C. § 2462 because, like the censure and suspension in Johnson, it assertedly would not relate to his current competency or present risk to the public.67 As explained in Section IV.A., the Division has demonstrated Moskowitz's present risk to the public, and our cease-and-desist order will serve to remediate Moskowitz's continuing Exchange Act Section 13(d) violations. Thus, Section 2462 is no bar to cease-and-desist relief.
An appropriate order will issue.68
By the Commission (Chairman PITT and Commissioners HUNT and GLASSMAN).
Jonathan G. Katz
In the Matter of
ORDER IMPOSING REMEDIAL SANCTION
On the basis of the Commission's opinion issued this day, it
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
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)).
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.
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