SECURITIES AND EXCHANGE COMMISSION
In the Matter of
GEORGE J. KOLAR
OPINION OF THE COMMISSION
Ground for Remedial Action
Metropolitan area manager of registered broker-dealer failed to exercise reasonable supervision over registered representative who violated registration and antifraud provisions of the securities laws. Held, it is in the public interest to suspend manager for six months from association with any registered broker or dealer in a supervisory capacity, and to impose a money penalty of $20,000.
H. Nicholas Berberian, Robert J. Kuker, and Scott A. Meyers, of Neal, Gerber & Eisenberg, for George J. Kolar.
Peter K. M. Chan and Jerrold H. Kohn, for the Division of Enforcement.
Appeal filed: November 18, 1999
Briefing completed: February 23, 2000
Oral argument: June 13, 2002
George J. Kolar, who during the relevant period was Detroit metropolitan area manager for Dean Witter Reynolds, Inc., appealsfrom the decision of an administrative law judge. The law judge found that Kolar failed to exercise reasonable supervision over Dean C. Turner, a salesman in Dean Witter's Troy, Michigan branch office, who violated registration and antifraud provisions of the securities laws.
The law judge suspended Kolar for six months from acting in a supervisory capacity with any registered broker or dealer, and fined him $20,000. We base our findings on an independent review of the record, except for those findings of the law judge that are not challenged on appeal.
In August 1992, as more fully described below, Kolar received information that Turner was "selling away"; i.e., that, contrary to Dean Witter's prohibition and the rules of various self-regulatory organizations, Turner was receiving compensation for selling investments in Lease Equities Fund, Inc. ("LEF") outside the scope of his employment with Dean Witter. Following an interview of Turner and an examination of what Turner claimed was his 1991 tax return, Kolar and others concluded (incorrectly) that the allegations against Turner were unfounded. No further investigation of Turner was conducted during the period at issue.
The law judge found that, during a nearly three-year period following that interview, from September 1992 through June 1995 when Kolar left Detroit to take a similar position with Dean Witter in Cleveland, Turner willfully violated registration and antifraud provisions of the securities laws in connection with his offer and sale of LEF promissory notes.1 Kolar did notseek review of those findings, which may be summarized as follows.
In determining that Turner willfully violated the Securities Act's registration provisions, the law judge analyzed the factors cited by the Supreme Court in Reves v. Ernst & Young2 and concluded that the long-term LEF promissory notes offered and sold by Turner were securities. He found that no registration statement for those notes had ever been filed with the Commission, that Turner used the mails and the telephone in connection with his sales, and that, contrary to the claim made by Kolar, the "private offering" exemption from registration under Section 4(2) of the Securities Act was not available.
With respect to Turner's willful violations of antifraud provisions, the law judge found that, in connection with his offer and sale of LEF notes to customers, Turner made material misrepresentations and omissions. Turner repeatedly minimized the risk of loss and, contrary to his assurances that the notes were backed by collateral, many notes had no collateral, and some of the equipment leases that purportedly backed the notes were forged, altered, or multiply assigned as collateral. In connection with his resale of LEF notes held by a Pennsylvania bank, Turner told one customer "a blatant falsehood" to the effect that Dean Witter's accounting department had authorized margining the customer's retirement account to purchase the notes. He failed to tell other customers to whom he resold the bank's LEF notes that the bank had demanded immediate repayment.
The law judge found that Turner's scienter was "clearly established." Among other things, he noted that Turner recklessly failed to exercise due diligence in investigating LEF before recommending its notes to customers. He also noted that, in 1995, at a time when Turner was holding customers' LEF interest checks in his desk awaiting word from the company as to when cash would be available to cover them, he lied repeatedly to customers, assuring them that LEF was still a sound company and telling them that their interest checks were overdue because a storm had damaged LEF's computers.
As Detroit metropolitan area manager, Kolar had overall supervisory responsibility for the operations of four branchoffices and their registered representatives, including the Troy office and Dean Turner. Kolar himself also served as branch manager of one of those offices in Southfield, Michigan. Thomas C. O'Neil, Dean Witter's Midwest regional director who was located in Chicago, testified that the managers of the other three offices, including Troy, "reported to George [Kolar]... Period."
Kolar's supervisory activities involved all branch office areas, including sales, operations, and compliance. He also participated in hiring and disciplinary decisions with respect to brokers in the Troy office. Although Kolar did not have the final say in such determinations, O'Neil, who was Kolar's immediate supervisor, stated that he had a high regard for Kolar, and gave substantial weight to his recommendations.
On Friday, August 14, 1992, Kolar received a telephone call from Michael Czerny, a representative of CIGNA Financial Advisors, Inc., a company that marketed estate planning and insurance products to Dean Witter customers. Czerny informed Kolar that Turner had been "selling away" LEF investments, and identified three customers to whom Turner had sold these investments. Czerny claimed to have a copy of a Form 1099 from National Business Funding, Inc. ("NBF"), LEF's parent corporation, showing that Turner had received $57,000 in compensation in 1991.
Kolar promptly relayed Czerny's allegation to O'Neil. However, O'Neil had no recollection of Kolar telling him that Czerny had identified specific customers who had purchased LEF investments from Turner. Both Kolar and O'Neil took Czerny's allegation "very seriously," and neither questioned Czerny's credibility. O'Neil told Kolar that he would talk to Dean Witter's Legal Department and get back to him.
O'Neil then spoke with a Dean Witter attorney in San Francisco who thought that it would be "productive" if Turner were called in for an interview and told to bring in his tax return which could be examined to see if it showed any income from "selling away." O'Neil admitted that the attorney did not indicate in any way that nothing further needed to be done or that the suggested course of action was "legally sufficient." O'Neil called Kolar and told him to interview Turner and examine his tax return. He also requested that Raymond A. Basile, the Troy branch manager, be present at the Turner interview. O'Neil stated that he did not participate in the interview because he "had a high degree of confidence in the senior managers that didit for [him]." Thus, he did not feel it necessary to specify the questions that his managers should ask Turner.
According to O'Neil, his relationship with Kolar was more a matter of mutual discussion and consensus rather than his giving orders that Kolar had to obey. He testified that he relied on and trusted Kolar's judgment with respect to the Turner investigation, and reiterated that he took Kolar's recommendations very seriously and gave them substantial weight.
On Monday, August 17, Kolar contacted Basile, told him what had happened, and asked him to arrange an interview with Turner. Basile spoke to Turner and set up a meeting for August 18, telling Turner to bring a copy of his 1991 income tax return. At the August 18 meeting, which Kolar "pretty much chaired," Turner denied selling LEF notes to anyone. He stated that he was merely an investor in LEF as were members of his country club who were Dean Witter customers. Kolar and Basile did not ask Turner to identify the Dean Witter customers who were investing in LEF, or question him about the specific customers mentioned by Czerny.
Kolar and Basile also reviewed the purported 1991 tax return of Turner and his wife. They stated that they found no reported wages from NBF or LEF, and that the $57,000 cited by Czerny was reported as dividends or interest. David Disner, a certified public accountant who had prepared Turner's tax returns for more than ten years, testified in this proceeding and provided a copy of the 1991 return that he prepared for Turner. The return shows that in 1991 Turner received $34,282 in wages from NBF. In addition, a 1991 Form 1099-MISC in evidence shows that Turner also received $57,933.69 in miscellaneous income from that company. Disner included the latter amount in Schedule C of the return (Profit or Loss from Business) under "gross receipts or sales." The return reported total dividends and interest of only $28,927.
After the interview, Kolar and Basile called O'Neil, reported what had happened, and informed him of their conclusion that the charges against Turner were unfounded. They did not recommend any further action to investigate Czerny's allegations. O'Neil concurred in their judgment, and they collectively agreed to drop the matter. O'Neil then "closed the loop" by notifying the Law Department attorney of what had been decided.
Kolar argues that Turner's misconduct after August 1992 cannot serve as a predicate for imposing supervisory liability onhim. He asserts that his involvement with Turner was limited to one interview; that, after August 1992, he had no indication that Turner was engaging in improper conduct; and that he should not be held accountable "in perpetuity" for all of Turner's subsequent misconduct. He further contends that no supervisory liability can be imposed on him since, at the time he received the tip about Turner's conduct, Turner was engaged only in "selling away" which is not a violation of the securities laws.
Kolar's arguments would subvert the goal of the Exchange Act provisions that seek to remedy deficient supervision. As we have previously pointed out, those provisions are directed at preventing violations that have not yet occurred.3 Thus the question for determination in this case is whether, after being alerted to possible misconduct by Turner, Kolar took reasonable measures to prevent the violations that followed. We need not determine the extent to which Kolar might be held accountable for subsequent unrelated violations by Turner. Here the violations at issue arose from the same course of conduct to which Kolar was alerted in August 1992 -- Turner's unsupervised sale of LEF notes outside the scope of his employment with Dean Witter.
We have made it abundantly clear that supervisors must act decisively when an indication of irregularity is brought to their attention.4 That irregularity need not be a violation of the securities laws.5 Decisive action is necessary whenever supervisors are made aware of suspicious circumstances, particularly those that have an obvious potential for violations. That was certainly the case here. Kolar recognized the dangers inherent in a salesperson's "selling away." He testified thatsuch conduct is a "serious, serious violation," and that "his best guess" was that, if a salesperson were caught "selling away," the salesperson would be terminated.
Kolar further argues that he was not Turner's supervisor within the meaning of Section 15(b)(4()E) of the Exchange Act. Relying on the concurring opinion of two commissioners in Arthur James Huff,6 Kolar contends that control is the essence of supervision, and that he lacked that control because he never had the independent ability to hire, fire, reward, and punish. However, the views expressed in the Huff concurrence have never been adopted by the Commission. Instead, as we stated in John H. Gutfreund,7 "determining if a particular person is a 'supervisor' depends on whether, under the facts and circumstances of a particular case, that person has a requisite degree of responsibility, ability or authority to affect the conduct of the employee whose behavior is at issue."8
Kolar contends that our Gutfreund opinion is not authoritative because it was issued in a settled case. However, we may use an opinion issued in connection with a settlement to state views on the issues presented in that case that we would apply in other contexts.9 In fact, we have reiterated the Gutfreund formulation in subsequent decisions.10
Kolar further argues that he did not have fair notice of our position because Gutfreund was not issued until December 1992, more than three months after he interviewed Turner. He contends that, to the extent Gutfreund expanded liability as a supervisor beyond that articulated in Huff and our decision in Louis R.Trujillo,11 it cannot be applied to him retroactively. We reject these contentions. Kolar ignores the fact that the charges of deficient supervision against him extend to June 1995, more than two and one-half years after we issued the Gutfreund opinion.12 Of greater significance is the fact that Gutfreund did not expand the reach of supervisory liability beyond the scope of our 1989 decision in Trujillo. In fact, far from conflicting with Gutfreund, Trujillo is entirely consistent with that opinion.
In Trujillo, the respondent was an administrative assistant to a branch manager, and the manager "tightly controlled" his assistant's (Trujillo's) activities. We stated the facts as follows:
Only [the branch manager] had the power to discharge, suspend, or fine a salesperson, place a written censure in a salesperson's record, or restrict a salesperson's activities as a precautionary measure. Trujillo essentially performed a surveillance role. He served as the branch manager's 'eyes and ears,' providing information on the basis of which [the branch manager] might or might not choose to act.13
Despite the limited nature of Trujillo's authority, we did not find that he was not a "supervisor" within the meaning of Section 15(b)(4)(E) of the Exchange Act. On the contrary, we simply concluded that, under the circumstances of that case, Trujillo's supervision was reasonable.
There can be little doubt that Kolar had "the requisite degree of responsibility, ability, or authority" to affect Turner's conduct, and that he was therefore Turner's supervisor for purposes of Section 15(b)(4)(E). Indeed, even assuming that "control" was a necessary prerequisite (which it was not), Kolar satisfied that requirement as well. The fact that control isshared with others, or subject to countermand at a higher level, does not negate its existence.14
As Detroit metropolitan area manager, Kolar had direct supervisory authority over the personnel in the Troy office. He participated in disciplinary actions affecting that office, and his recommendations carried substantial weight with O'Neil. Over and above Kolar's normal supervisory responsibilities for the Detroit area, O'Neil entrusted Kolar with the specific responsibility of investigating the serious allegations that had been made against Turner. The law judge refused to credit Kolar's testimony seeking "to portray himself as nothing more that a fact finder" in the Turner investigation, and we fully concur in that assessment. As noted above, O'Neil relied on and trusted Kolar's judgment with respect to that investigation. Thus, in that instance, Kolar was specifically vested with supervisory authority.
Kolar argues that his supervision of Turner was reasonable. We do not agree. In our view, Kolar abdicated his supervisory responsibility. We have repeatedly emphasized that supervisors cannot rely on the unverified representations of their subordinates.15 Nor, under circumstances like those in this case, can they rely on purportedly exonerating documents supplied by those subordinates.16 Kolar had received a detailed allegation of wrongdoing from a person whose credibility he did not question. Yet he chose to content himself with Turner's denials rather than exploring obvious avenues of inquiry. Among other things, Czerny had identified three customers involved in the transactions at issue. We have frequently pointed out that it may be necessary for a supervisor to contact a salesman's customers after being alerted to possible misconduct on the partof the salesman.17 Kolar could also have interviewed Turner's sales assistant who had numerous contacts with LEF personnel. In addition, he could have spoken again with Czerny, who had stated to Kolar that he (Czerny) had a copy of a 1991 Form 1099 that supported his allegations. Kolar made no effort to obtain that document or any further information independently of Turner.18
Kolar argues that it was O'Neil's responsibility to take further action, not his. He asserts that he relied on the advice of the attorney consulted by O'Neil and "senior management," and that it would have been unreasonable for him to do more than what he was instructed to do. Kolar's efforts to minimize the importance of his role are not supported by the record. O'Neil entrusted Kolar with the Turner investigation, and relied on his judgment. As indicated above, O'Neil's relationship with Kolar was a matter of mutual discussion and consensus. It is highly unlikely that O'Neil would have rejected advice from Kolar that a further investigation must be conducted. In any event, reasonable supervision required that Kolar make that recommendation.
Kolar further argues that he qualifies for the statutory "safe harbor" contained in Exchange Act Section 15(b)(4)(E). He asserts that Dean Witter had "established procedures" in place that "would reasonably be expected to prevent" Turner's misconduct, and that he reasonably discharged the duties and responsibilities placed on him by those procedures. The Dean Witter procedures to which Kolar refers called for (1) educating brokers; (2) reviewing incoming and outgoing mail; (3) sending customers trade confirmations and monthly statements of their transactions through the firm; and (4) requiring brokers to fill out annual questionnaires disclosing their outside activities.
The routine surveillance measures cited by Kolar were clearly inapplicable to the situation that he confronted. Underthe circumstances they could not reasonably have been expected to prevent further misconduct by Turner since, if Czerny's allegations were true, they had proven wholly ineffective. Here, Kolar had received a specific, detailed allegation of "selling away," and was given direct responsibility for investigating that allegation. Clearly, he could no longer rely on Dean Witter's routine surveillance measures. The dictates of reasonable supervision required him to make a thorough investigation of Czerny's charges.
Kolar argues that the sanctions assessed by the law judge are too severe. He asserts, among other things, that he did not act intentionally to further Turner's misconduct or profit from it, and that his lengthy record in the securities business is otherwise unblemished. He also contends that the law judge failed to give proper weight to the impact of the proposed sanctions on his career, and that the sanctions are punitive since there is no realistic likelihood of his causing future harm to the investing public. Kolar further argues that the law judge erred in imposing a second-tier civil penalty under Section 21B of the Exchange Act based on the conclusion that Kolar's deficient supervision "involved fraud." He points out that the fraud was committed by Turner, not by him.
As the law judge observed, reasonable supervision by Kolar could have stopped Turner's misconduct early on. Instead, for nearly three years after being interviewed by Kolar, Turner participated in a scheme involving extensive violations of registration and antifraud provisions that resulted in investor losses of $10 - $14 million.19 We do not agree that there is no reasonable likelihood of Kolar causing further harm to the investing public. Kolar continues to insist that his supervision of Turner was reasonable. Thus there is every reason to believe that he may engage in a similar lapse in any supervisory position he may occupy. The law judge took Kolar's otherwise unblemished record into account in assessing relatively lenient sanctions. We do not believe that any modification of those sanctions is warranted. The suspension and fine will serve to impress uponKolar the seriousness of his lapse in supervision, and reduce the likelihood of any recurrence.
We have previously imposed second-tier civil penalties on deficient supervisors, finding that their supervisory lapses "involved fraud" where they "allowed and were responsible, in part, for the success and duration of [a registered representative's] fraudulent misconduct."20 The same is true with respect to Kolar.
An appropriate order will issue.21
By the Commission (Commissioners HUNT and GLASSMAN); Chairman PITT not participating.
Jonathan G. Katz
SECURITIES AND EXCHANGE COMMISSION
Admin. Proc. File No. 3-9570
In the Matter of
GEORGE J. KOLAR
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that George J. Kolar be, and he hereby is, suspended from association in a supervisory capacity with any registered broker or dealer for a period of six months, effective at the opening of business on July 15, 2002, and it is further
ORDERED that, within 30 days of the entry of this order, Kolar shall pay a civil money penalty in the amount of $20,000. 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 cover letter that identifies Kolar as a respondent in this proceeding and the file number of this proceeding. Copies of the cover letter and check shall be sent to Peter K. M. Chan, counsel for the Division of Enforcement, Securities and Exchange Commission, 175 West Jackson Blvd., Suite 900, Chicago, Illinois 60604.
By the Commission.
Jonathan G. Katz
|1||The law judge found that Turner willfully violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder (15 U.S.C. §§ 77e(a), 77e(c), 77q(a), and 78j(b), and 17 C.F.R. § 240.10b-5). He also found that Turner willfully violated Section 15(a)(1) of the Exchange Act (15 U.S.C. § 78o) by failing to register as a broker-dealer, and as such willfully violated Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder (15 U.S.C. § 78o and 17 C.F.R. § 240.15c1-2). The law judge concluded that Turner's failure to register as a broker-dealer was not a basis for sanctioning Kolar. Although the Division of Enforcement objects to that conclusion, it did not seek review of the law judge's decision. Thus, the issue is notbefore us on appeal.|
|2||494 U.S. 56 (1990).|
|3||Section 15b(4)(E) of the Exchange Act empowers us to discipline supervisors who fail "reasonably to supervise, with a view to preventing violations of the (securities laws)," persons subject to their supervision who violate those laws (emphasis supplied). See Louis R. Trujillo, 49 S.E.C. 1106, 1110 (1989).|
|4||See Consolidated Inv. Servs., Inc. ("Consolidated"), 52 S.E.C. 582, 588 (1996), and the cases cited in note 27 thereof.|
|5||See, e.g., Quest Capital Strategies, Inc., Securities Exchange Act Rel. No. 44935 (Oct. 15, 2001), 76 SEC Docket 131 (violation of firm policies); Consolidated, supra, 52 S.E.C. at 587-589 (NASD complaint not involving securities violations, violation of firm policy).|
|6||50 S.E.C. 524, 530 (1991).|
|7||51 S.E.C. 93 (1992).|
|8||Id. at 113.|
|9||See Carl L. Shipley, 45 S.E.C. 589, 591-592 n.6 (1974).|
|10||See Kirk Montgomery, Exchange Act Rel. No. 45161 (December 18, 2001), 76 SEC Docket 1394, 1402, 1408; Patricia Ann Bellows, Exchange Act Rel. No. 40411 (September 8, 1998), 67 SEC Docket 2910, 2912; Conrad C. Lysiak, 51 S.E.C. 841, 844 n.13 (1993), aff'd, 47 F.3d 1175 (9th Cir. 1995)(Table).|
|11||49 S.E.C. 1106 (1989).|
|12||In addition, the Huff concurrence was not an authoritative expression of the Commission's views.|
|13||49 S.E.C. at 1107.|
|14||See Kirk Montgomery, supra, 76 SEC Docket at 1408; James J. Pasztor, Exchange Act Rel. No. 42008 (Oct. 14, 1999), 70 SEC Docket 2611, 2621 n.28; Robert J. Check, 49 S.E.C. 1004, 1008 (1988).|
|15||See, e.g., John H. Gutfreund, supra, 51 S.E.C. at 108; Michael H. Hume, 52 S.E.C. 243, 248 (1995).|
|16||Cf. Consolidated, supra; 52 S.E.C. at 587 (1996) (Questionnaires filled out by registered representatives not a substitute for adequate supervision).|
|17||See, e.g., Quest Capital Strategies, Inc., supra, 76 SEC Docket at 140; James Harvey Thornton, 53 S.E.C. 1210, 1213 (1999); Consolidated, supra; Michael H. Hume, 52 S.E.C. 243, 247-248 (1995); Albert Vincent O'Neal, 51 S.E.C. 1128, 1132-1135 (1994).|
|18||As noted above, Turner told Kolar and Basile at the August 18 interview that he was an investor in LEF. As Kolar admitted, such an investment would have required Dean Witter's prior approval. However, Kolar made no effort to ascertain whether such approval had ever been given.|
|19||Contrary to Kolar's assertions, the record supports this figure, and the law judge did not find otherwise. The law judge merely determined that the evidence did not support a conclusion that Turner's customers alone suffered losses amounting to $10 million.|
|20||Consolidated, supra, 52 S.E.C. at 590.|
|21||We have considered all of the parties' contentions. We have rejected or accepted them to the extent that they are inconsistent or in accord with the views expressed in this opinion.|