Securities and Exchange Commission
In the Matter of the Application of
BARRY WAYNE BLANK
For Review of Disciplinary Action Taken by the
American Stock Exchange LLC
NATIONAL SECURITIES EXCHANGE REVIEW OF DISCIPLINARY PROCEEDING
Filing False Affidavit
Approved person of national securities exchange engaged in conduct inconsistent with just and equitable principles of trade in violation of exchange's constitution by filing false affidavit with stock transfer agent. Held, exchange disciplinary action sustained.
Charles R. Hoover, for Barry Wayne Blank.
David E. Rosenstein, for the American Stock Exchange LLC.
Appeal filed: January 3, 2002
Last brief received: April 18, 2002
Barry Wayne Blank, an approved person of the American Stock Exchange LLC ("Amex" or "Exchange"), appeals from the Amex's disciplinary action against him. The Exchange found that Blank engaged in conduct inconsistent with just and equitableprinciples of trade in violation of Article V, Section 4(h) of the Exchange's Constitution in that he filed a false affidavit with American Stock Transfer & Trust Company ("AST"), a stock transfer company. 1 The Amex Adjudicatory Council, affirming the decision of an Exchange Disciplinary Panel, censured Blank, fined him $50,000, and suspended him for 30 business days from regular, options principal, associate or allied membership, approved person or limited trading permit holder status, and employment or association in any capacity with an Exchange member or member organization. Blank appeals the Exchange's findings as well as the sanctions against him. We base our findings on an independent review of the record.
Barry Wayne Blank has been working in the securities industry for more than 30 years. Between February 1996 and April 1997, he was a registered representative of and branch office manager for Coleman & Company Securities, Inc. ("Coleman") in its Phoenix, Arizona office. He is now the branch office manager for Dirks & Company, a member firm of the National Association of Securities Dealers, Inc. ("NASD"), in its Phoenix office. Blank also owns seats on the Amex and the New York Stock Exchange.
In October 1995, in a private placement, Blank and his mother acquired, respectively, 40,000 and 5,000 shares of stock in Bentley Pharmaceuticals, Inc. The stock certificates bore a notation that they had not been registered and that they could not be transferred unless certain stated conditions were met. The shares were also subject to a one-year "lock-up" period, during which they could not be transferred. In early 1996, Blank sent the stock certificates representing the shares to Coleman so that Coleman could retain the certificates during the lock-up period.
In January 1997, Blank agreed to transfer ownership of the shares to Coleman to satisfy a $137,500 obligation. 2 Inconnection with the transfer, Blank and his mother provided Coleman with signed irrevocable stock powers for the shares. Coleman informed Blank that it could not find the stock certificates for the shares, so Blank and his mother executed affidavits to obtain replacement certificates, which they instructed AST, the stock transfer agent, to deliver to Coleman. A Coleman officer subsequently told Blank that he had the replacement certificates "in his hand."
Later that month, Coleman sold 45,000 shares of Bentley stock in the public market. Coleman intended that the shares sold be those transferred to Coleman by Blank and his mother, embodied by the certificates that AST had delivered to Coleman on Blank's instructions. When Coleman attempted to liquidate those shares, however, AST determined that the shares were still restricted and thus could not be transferred. 3 Coleman therefore bought an equivalent number of shares in the market at a cost of approximately $61,000 to cover the transaction.
On February 13, 1997, Coleman's attorney wrote Blank a letter recounting the attempt to liquidate the Bentley shares, the purchase of replacement shares, and the $61,000 loss. In the letter, Coleman demanded payment of the $137,500 note and reimbursement for the $61,000 loss and related expenses. Also on February 13, Coleman journaled 45,000 shares of Bentley stock into Blank's and his mother's accounts. The next day, however, Blank wrote to Coleman complaining that the stock was incorrectly journaled and should be removed "since it does not belong to [us]." The journal entry was reversed that day.
The dispute between Coleman and Blank over Coleman's $61,000 loss continued through February 1997 and into March. Blank also contended during this time that Coleman owed him back pay. On March 26, 1997, Blank resigned from Coleman, complaining that he never received a promised paycheck and threatening to "take whatever action is appropriate to recover all the money owed to me." Also on March 26, Blank wrote to AST stating that the stockcertificates for the 45,000 Bentley shares issued in his and his mother's names "are not in my possession and I do not know [their] whereabouts." 4 Blank asked AST to "institute procedures to send me replacement" certificates.
On March 27, Coleman and Blank signed an agreement resolving their differences. Coleman agreed to pay Blank earned commissions in the amount of $107,549.38. The agreement provided that Coleman "shall retain the Bentley [stock] transferred by [Blank] to Coleman in satisfaction of [Blank's] note in the amount of $137,500." The agreement noted that the shares would become "freely tradable in a public market in accordance with Rule 144" on or about April 29, 1997. 5 Blank also rescinded his resignation of March 26.
Shortly after the agreement was signed, new difficulties arose. In a letter dated April 18, 1997, Blank accused Coleman of being in default of its obligations to him and informed Coleman that he "would do what [he] had to do" to protect his interests and obtain the funds Coleman owed him.
On April 21, eight days before Blank expected the shares in question to become freely tradable, Blank filed an affidavit with AST. The affidavit was captioned, "Affidavit of Non-Receipt." In the affidavit, Blank stated that he was "the lawful owner" of the 40,000 Bentley shares represented by certificate number BE 0001954. 6 Blank further stated,
[that] neither the said securities nor the rights of the deponent in the said securities have, in whole or in part, been assigned, transferred,hypothecated, pledged or otherwise disposed of; [that] the deponent is entitled to the full and exclusive possession of the said securities; [and that] this affidavit is made for the purpose of inducing American Stock Transfer & Trust Company to issue new or duplicate securities in lieu of those alleged to have been lost or never received, or to pay the value thereof.
In a space provided for the deponent to "[d]escribe in detail the circumstances surrounding the non-receipt," Blank wrote, "security not received by me."
Upon receiving the affidavit (and one relating to the shares of Blank's mother), AST sent replacement certificates to Blank and his mother, and cancelled the previously issued certificates. Shortly thereafter, when Coleman attempted to have the restrictive legend removed from the certificates it was holding, it discovered that these certificates had been cancelled and new certificates issued to Blank and his mother. Coleman thereupon complained to AST. After investigation, AST cancelled the replacement certificates it had issued to Blank and his mother.
In signing the affidavit, Blank swore that the shares in question had not been transferred. This statement was false. Blank transferred the shares to Coleman in January 1997 to satisfy his $137,500 obligation to Coleman. When the shares were journaled back to his account on February 13, Blank complained to Coleman about the error and asserted that the shares did not belong to him. Blank signed the March 27 agreement, which provided for Coleman to "retain" the Bentley stock transferred to Coleman by Blank.
Blank concedes that, in late January and early February, he "wanted to transfer the shares, attempted to transfer the shares, believed that he had transferred the shares and took the position that he had transferred the shares." He argues, however, that by April 21, the date he signed the affidavit, the situation had changed. Blank contends that Coleman failed to pay him the amount due under the March 27 agreement, and that, upon Coleman's failure to perform, Blank terminated the contract. As a result of this termination, Blank argues, the contract should be treated as if it never existed, and the shares should be treated as if they were never transferred.
We reject Blank's argument. Even if Blank's decision to terminate the contract meant that the contract should be treated as if it did not exist, that would not undo the transfer of shares that occurred months before. The transfer of shares was not part of the March 27 agreement. It had already occurred, as indicated by the recital that Coleman "shall retain" the shares transferred. At best, Blank's argument would mean that the contractual provision calling for Coleman to retain the shares was rendered inoperable, in which case Coleman perhaps would have to transfer the shares back to Blank. Then, however, there would be two transfers, not, as Blank asserts, zero transfers.
Blank argues that "what may have happened historically" in terms of ownership of the shares does not matter. Instead, he contends, "it is the status at the time of the affidavit that is pertinent, that is relevant, that is material, that is controlling." He argues that the purpose of the affidavit is to establish rightful ownership and that, because Coleman's alleged breach of contract nullifies the agreement therein, Blank was the rightful owner at the time he signed the affidavit.
Blank's thesis is incorrect. The recital in the affidavit -- "That neither the said securities, nor the rights of the deponent in the said securities have, in whole or in part, been assigned, transferred, hypothecated, pledged or otherwise disposed of" -- is concerned with whether shares have been transferred. A separate recital -- "That the deponent is entitled to full and exclusive possession of the said securities" -- addresses the status of ownership of the shares at the time the affidavit is signed. Blank may or may not have been entitled to the possession of the shares. Any such entitlement, however, does not negate the fact that he had transferred the shares to Coleman. 7
Blank argues that focusing on the language regarding the transfer of the shares "takes a small part of [the affidavit] out of context." When "the true purpose and meaning" of the affidavit are considered, he contends, it becomes evident that "the affidavit really [is] true."
We disagree. The affidavit is captioned "Affidavit of Non-Receipt." By signing it, Blank alleged that his 40,000 Bentley shares "have been lost or never received." Blank added the avowal, "[S]ecurity not received by me." By combining the statement that he had not received the shares with the representation that he had not transferred them, Blank created an impression quite different from the facts. The affidavit as Blank completed it indicated that he never received a certificate representing the underlying shares, and never transferred them. But he did receive a certificate, and he did transfer the shares. Whether the focus is on the language regarding transfer or the affidavit as a whole, the affidavit is false.
As a securities professional, Blank knew as he admitted at the hearing that there could be only one certificate corresponding to particular shares at any given time. The purpose for the affidavit is not merely, as Blank argues, to establish rightful ownership, but to ensure that only one certificate exists for any given set of shares. The existence of two certificates could potentially harm the issuer because there would be two outstanding claims against the issuer's assets, with only one claim being legitimate. Accordingly, the transfer agent, operating as agent of the issuer, routinely cancels the original certificate on its records whenever it issues a replacement certificate at the request of a shareholder who claims the original certificate has been lost or stolen. The cancellation of the original certificate on the records of the transfer agent will protect the issuer against a duplicate claim, but if the original certificate is still physically in circulation it might be used for improper sale or collateralization to the detriment of other parties, including financial institutions or members of the general public.
No matter how strongly Blank believed that he was entitled to the shares, filing a false affidavit was not the way to establish that entitlement. 8 We agree with the Amex and find that this conduct was inconsistent with just and equitable principles of trade.
We review sanctions imposed by the Amex to determine whether those sanctions are excessive or oppressive, or whether they impose an unnecessary or inappropriate burden on competition. 9
In considering sanctions, the Amex looked to the 1998 NASD Sanction Guidelines ("Guidelines"). 10 The Panel found that the most applicable provisions of the Guidelines were those pertaining to falsification of records and negligent misrepresentation. For falsification of records, the Guidelines recommend fines of $5,000 to $100,000 and suspension for up to two years, or a bar in egregious cases. For negligent misrepresentations, the Guidelines recommend fines of $2,500 to $50,000 and suspension of up to 30 days. Concluding that "the appropriate sanction should be drawn from the high end of the ranges recommended," the Panel censured Blank, fined him $50,000, and suspended him for 30 days.
Under the circumstances, we find that the sanctions imposed are not excessive or oppressive. 11 Blank made false statements on the affidavit in an attempt to gain an unfair advantage over Coleman in their ongoing dispute. He induced the transfer agent to issue a stock certificate to him, although he knew that there should be only one certificate corresponding to the shares in question and had no reason to believe that Coleman did not have such a certificate in its possession. This attempt to manipulate the system to his own advantage merits a significant sanction.
An appropriate order will issue. 12
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, ATKINS and CAMPOS); Commissioner GOLDSCHMID not participating.
Jonathan G. Katz
In the Matter of the Application of
BARRY WAYNE BLANK
For Review of Disciplinary Action Taken by the
American Stock Exchange LLC
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES EXCHANGE
On the basis of the Commission's opinion issued this day it is
ORDERED that the disciplinary action taken by the American Stock Exchange LLC against Barry Wayne Blank be, and it hereby is, sustained.
By the Commission.
Jonathan G. Katz
1 The Amex also charged Blank with violating Article V, Section 4(b) of the Exchange's Constitution, which prohibits fraud or fraudulent acts, based on the filing of the same affidavit. The Exchange Disciplinary Panel found that the record did not support this charge because the record did not establish that Blank acted with scienter.
2 Blank had signed a promissory note in the amount of$137,500, payable to Coleman. The record contains conflicting explanations as to why Blank owed Coleman the money.
3 As noted, the stock certificates bore a restrictive legend. The record contains conflicting explanations as to why Coleman thought the shares could be sold on the market notwithstanding the restriction on them.
4 Because the Amex's charges against Blank were based solely on the filing of the affidavit, the veracity of the representations in Blank's letter to AST is not at issue.
5 Securities Act Rule 144, 17 C.F.R. § 230.144, in relevant part, provides a non-exclusive safe harbor from registration for resales of restricted securities. In February 1997, the Commission adopted amendments to Rule 144 that became effective April 29, 1997. See Securities Act Rel. No. 7390, 62 Fed. Reg. 9242 (Feb. 28, 1997) (adoption of final rule). We take no position as to whether Rule 144 permitted public trading of the shares on April 29.
6 Blank obtained the certificate numbers from AST so that he could complete the affidavit.
7 Blank poses a hypothetical example: suppose a shareholder transferred shares, then reacquired them, and all steps necessary to have them transferred back are taken. The transfer agent sends the certificate to the shareholder, who does not receive it. Under these circumstances, he argues, it would not be false for the shareholder to sign the affidavit in the form in question even though he had at one time transferred the shares.
In Blank's hypothetical, the transferee took all necessary steps to transfer the certificate back to the original shareholder, and the transfer agent in fact sent the certificate to the shareholder. The shareholder expected to receive a certificate, which never arrived. That did not happen here. Coleman did not take steps to have the certificate sent to Blank, AST did not send a certificate to Blank, and Blank had no expectation of receiving a certificate until he filed the affidavit.
8 We take no position as to whether Blank was indeed the rightful owner of the shares when he signed the affidavit.
9 See Section 19(e)(2) of the Exchange Act, 15 U.S.C. § 78s(e)(2). Blank does not argue, and the record does not show, that the sanctions impose a burden on competition.
10 The Amex does not have published sanction guidelines. By May 10, 2001, when the Panel issued its decision, the NASD had published revised Sanction Guidelines. Those revised Guidelines were effective as of April 10, 2001, and applied to all NASD disciplinary actions pending as of that date. NASD Notice to Members 01-27. The sanctions for falsification of records and negligent misrepresentation were not changed in any relevant respect in the 2001 revision.
11 We note that, although the panel expressed its view that the sanction should be drawn "from the high end" of the ranges recommended in the Guidelines, the monetary sanction is in the middle of the range recommended for falsification of records and the suspension is far shorter than the maximum recommended for such a violation.
12 We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed herein.
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