SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
For Review of Disciplinary Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDING
Failure to Pay Arbitration Award
Sale of Securities Pursuant to a Misleading IPO Prospectus
Failure to Comply with Contingency Requirements
Failure Properly to Establish Escrow Account
Former general securities representative, principal and president of a broker-dealer, a former member firm of registered securities association, who also served as chief executive officer and president of the broker-dealer's parent company, failed to honor an arbitration award entered against him; sold securities in the parent company's initial public offering pursuant to a materially misleading prospectus; failed to abide by the IPO contingency deadline specified in the prospectus; and failed properly to establish an escrow account for the IPO and thereby caused the broker-dealer to violate an Exchange Act rule. Held, association's findings of violation and sanctions imposed are sustained.
Robert Tretiak, pro se.
Jeffrey S. Holik, Norman Sue, Jr., Susan L. Beesley, and Carla J. Carloni, for NASD Regulation, Inc.
Appeal filed: February 13, 2001
Last brief received: September 17, 2001
This case involves two disciplinary proceedings against Robert Tretiak by the National Association of Securities Dealers, Inc. ("NASD") which were consolidated for hearing and decision by the NASD's National Adjudicatory Council ("NAC"). In the first of the two proceedings, the NASD found that Tretiak failed to satisfy a final arbitration award in violation of NASD Conduct Rule 2110. In the second, the NASD found that Tretiak fraudulently sold securities in an initial public offering ("IPO"), issued by a company he headed, pursuant to a materially misleading prospectus, in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and NASD Conduct Rules 2110 and 2120; 1 and that he did so in violation of the contingency requirements contained in the IPO prospectus, in violation of NASD Conduct Rule 2110 and Rule 10b-9 under the Exchange Act. 2 The NASD further found that Tretiak, inviolation of its Conduct Rule 2110, failed properly to establish an escrow account and thereby caused the broker-dealer firm through which he sold the securities to violate Rule 15c2-4 under the Exchange Act. 3
In the first matter, Tretiak was fined $10,000 and suspended until payment in full of the arbitration award plus an additional 30 days. In addition, the NAC ordered that if the award was not paid in full within 30 months of its decision Tretiak's suspension would convert to a bar in all capacities. In the second matter, Tretiak was barred as a principal, suspended in all capacities for two years and six months, fined $25,000, and assessed costs of $4,559.24. Tretiak appeals the findings and sanctions imposed in the two matters. 4 We base our findings on an independent review of the record.
Tretiak has worked in the securities industry since 1985. The arbitration award matter at issue arose during Tretiak's employment with former NASD member firm Osborne Stern & Co. and involved, among other things, Tretiak's recommendation of assertedly speculative securities to a retired couple. Since February 1993, Tretiak has been registered with NASD member firm RFCA Financial Services, Inc. ("RFCA") as a general securities representative and principal and has served as chairman of its Board of Directors. Tretiak also served as RFCA's compliance officer from 1992 through May 1995 and as RFCA's president for much of that period. RFCA is a wholly-owned broker-dealer subsidiary of Retirement Financial Centers of America, Inc. ("Retirement"). Tretiak founded Retirement -- the issuer of the IPO involved in this matter -- and served as its chief executive officer and president. A Tretiak family trust owned 88 percent of Retirement's stock prior to the IPO at issue.
A. The Arbitration Award Matter
On September 21, 1994, an NASD arbitration panel entered an arbitration award against Tretiak in the amount of $52,360.
Tretiak did not pay the award promptly, nor did he at any time move to vacate the award.
In October 1995, Tretiak and claimants' counsel began settlement discussions. On December 18, 1995, the arbitration claimants reduced the award to a judgment in California Superior Court in the amount of $52,360, plus 10 percent interest from September 21, 1994. In March 1996 Tretiak indicated to counsel that he would make the claimants a "reasonable settlement offer." In May 1996 Tretiak advised that he could "come up with" $8,000, but thereafter failed to pay that amount. In August 1996, Tretiak hired an attorney to negotiate with the claimants. Subsequently, in September 1996, Tretiak remitted to the claimants $1,000 with a cover letter indicating that it would be the "first of many monthly checks of $1,000 or more."
Tretiak next communicated with claimants in March 1998, after the NASD began investigating this matter. At that time Tretiak's counsel told the claimants that Tretiak could pay $1,000 per month, an offer he reduced to $500 per month in July 1998. In April 1999, almost a year later and subsequent to the deaths of the claimants, Tretiak and the claimants' heirs agreed upon a settlement reflecting that Tretiak already had paid a total of $2,000 prior to entering into the settlement, 5 and would pay $500 per month for the first year, $1,000 per month for the second year, and $1,500 per month thereafter until the award was satisfied in full.
Evidence Tretiak adduced before the NAC (eight negotiated checks dated July 1999 through March 2000 from Tretiak to the claimants' heirs) establishes that Tretiak subsequently paid an additional $3,750 toward satisfaction of the award. Thus, as of the summer of 2000, Tretiak had paid a total of $5,750 toward the award. 6
B. The IPO Matter
Tretiak testified before the NASD that he founded Retirement to provide a "unique, full-service, one-stop financial center catering to retired clients" who needed estate planning, financial planning, and tax planning. Retirement maintained four store-front offices and, through RFCA, offered insurance, investment services and discount stock trading.
1. The prospectus. Tretiak took Retirement public in late 1994 through the State of Nevada's Small Corporate Offering Registration Program ("SCOR"), which allows small companies to raise up to $1 million using a simplified registration and offering process, including a fill-in-the-blanks Form U-7 prospectus. Tretiak prepared a Form U-7 prospectus for the Retirement offering, registered the IPO with the Nevada Securities Division on September 23, 1994, and furnished the Form U-7 prospectus to investors he solicited.
In the IPO, Retirement offered a minimum of 38,461 shares and a maximum of 153,846 shares of Class A common stock at a price of $6.50 per share. Sales of the minimum amount were expected to raise $249,997, and sales of the maximum amount were expected to raise $999,999.
The Retirement prospectus specified that "the company has just committed to acquire a high profile, one acre building site on Lake Mead Boulevard and Summerland, Las Vegas, Nevada, at a price of $475,000. It is intended that the entire cost of acquisition be financed by the proceeds from this offering." The prospectus stated that financing had not yet been obtained and, in fact, might not be needed if the maximum number of shares was sold. According to the prospectus, if the IPO raised only the minimum, Retirement would secure financing for the purchase of the property ("the Lake Mead Property") through the issuance of a first deed of trust on the land in the amount of $380,000. The prospectus further indicated that Retirement also intended to use the offering proceeds to finance expansion through franchising beyond its then-existing four locations. 7
According to the prospectus, the offering was to be made on a "part or none" basis -- that is, if the minimum was sold within ninety days of the October 21, 1994 effective date (or January 19, 1995 8 ) sales would be permitted to continue until one year after the effective date. If the minimum proceeds were not raised by the required date, however, the escrow agent would return all of the subscribers' funds.
2. Financing arrangements for the Lake Mead Property. The prospectus representations regarding financing arrangements did not accurately describe the facts. By early November 1994, Retirement not only already had signed a purchase agreement for the Lake Mead Property, but also had amended the agreement to increase the purchase price to $480,000. Later in November, moreover, Retirement, through Tretiak, obtained bridge loans totaling $503,153 to purchase the Lake Mead Property. Tretiak issued a series of promissory notes in return for these loans. Two of the loans were secured by deeds of trust on the property, and two of the loans came from two of Retirement's directors. On November 22, 1994, while Tretiak continued his sales campaign,Retirement closed on the property. Subsequently, in May and June of 1995, Retirement borrowed more money from other lenders, paid off the bridge loans, and then refinanced the property, ending up with a $534,458 mortgage.
The instructions that accompanied Form U-7 specified that, if after the registration became effective and while the offering remained pending, any portion of the form required a change, "because of a material event concerning the Company or the offering to make it accurate," it should be changed, revised, or supplemented, and then recirculated to investors. 9 The Form U-7 also specifically required prospectus disclosure of business dealings between the corporation and its directors. Tretiak and Retirement made no changes to the Retirement prospectus after the offering went effective.
3. Tretiak's sales efforts. RFCA served as the exclusive selling agent for the IPO, and Tretiak, through RFCA, personally sold at least 80 percent of the offering, generating $44,000 in commissions. Most of these stock sales occurred after Retirement closed on the Lake Mead Property on November 22, 1994, and Tretiak used the original prospectus to sell all of these shares. The minimum sales requirement was not met by January 19, 1995, yet Tretiak continued to make sales through October 1995. The minimum was reached on February 14, 1995, about a month after the deadline, the offering proceeds at that time were released, and the funds were used to service the debt incurred in purchasing the Lake Mead Property. Retirement subsequently filed for bankruptcy protection and the Lake Mead Property was sold. Although the sale raised more than Retirement's outstandingindebtedness on the property, 10 Retirement shareholders ultimately lost their entire investment.
4. The inconsistency between the escrow agreement and the prospectus. The terms of the escrow agreement were inconsistent with the minimum proceeds deadline set forth in the prospectus. As a result, the escrow agent was not alerted to the prospectus contingency date of January 19, 1995, funds were not promptly refunded to investors at the deadline, and Tretiak, through RFCA, was able to continue to sell IPO securities beyond the deadline.
During preparations for the IPO, Tretiak planned to use a local office of Bank of America as escrow agent. Tretiak asked Joseph Kyle ("Kyle"), Retirement's part-time, in-house counsel, 11 to contact Bank of America and draft an escrow agreement listing Bank of America as escrow agent. Kyle prepared the draft using dates and dollar figures Tretiak provided. Critical dates in Kyle's draft agreement did not correspond to the dates in the prospectus. 12 Kyle testified that he did not consult the prospectus when he drafted the escrow agreement but instead relied on Tretiak's instructions, and that he then had no further involvement in preparation of the escrow agreement.
Ultimately, Tretiak decided to use another bank, First Security Trust Company of America ("First Security"), as the escrow agent. Tretiak oversaw the revision of Kyle's draft escrow agreement for this purpose. It is unclear who changed the escrow agreement to reflect the change from Bank of America toFirst Security. 13 The record contains two versions of the First Security escrow agreement, each signed by Tretiak and dated November 14, 1994. 14 Both contain some of the erroneous dates that appeared in Kyle's original escrow agreement. Both deviate from the Bank of America draft by citing to the correct termination date of October 21, 1995; both, however, introduce a further inconsistency, specifying that investor funds would be returned if the minimum was not raised "by such date" (October 21, 1995) rather than by the prospectus contingency date of January 19, 1995.
Tretiak testified that he did not recall the circumstances surrounding his signing both First Security agreements, and, indeed, claimed that he read neither of the agreements he signed. In response to further questioning, Tretiak recalled reviewing the First Security escrow agreement and noting that an addendum was necessary to adjust the price that First Security intended to charge for its services.
A. The Arbitration Award Matter
NASD Conduct Rule 2110 states that "[a] member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." The obligation to pay an arbitration award arises upon receipt of the award and associated persons are obligated to pay such awards promptly. As NASD Interpretive Release IM-10100 (Failure to Act Under Provisions of the Code of Arbitration Procedure) specifies, it may be deemed a violation of Rule 2110 for an associated person to fail to honor an arbitration award if the person has not made a timely motion to vacate or modify the award. 15
Tretiak filed an amended answer to the NASD's complaint admitting that he was subject to the award, had not moved to vacate it, and had not fully satisfied it. We find, as did the NASD, that Tretiak failed to satisfy the award in violation of NASD Conduct Rule 2110.
Tretiak has maintained throughout this proceeding that he is unable to pay the award. It is well settled that a respondent bears the burden of demonstrating his or her inability to pay,and that the NASD is entitled to make a searching inquiry into any such claim. 16 Here, Tretiak has not fulfilled this obligation. For example, Tretiak failed to provide any documentation for 1995 and 1996, so he has not shown what he could have paid in those years. For 1997 and 1998, he supplied completed IRS Forms 1040, but did not include any of the accompanying schedules. Tretiak himself describes what he has furnished as "approximate and estimated snapshots of his financial pictures at various points in time." His claim that the NASD unreasonably remains unsatisfied with this admittedly sketchy financial information is unavailing. 17
Tretiak seeks to attack the NASD's finding of violation on other grounds as well, none of which alters our conclusion that Tretiak violated Conduct Rule 2110. First, Tretiak addresses the substance of the underlying arbitration. As we have stated on numerous occasions, an applicant may not collaterally attack an arbitration award in a disciplinary proceeding for failure to pay that award. 18 To permit this tactic would subvert the NASD's procedures, which are designed to promote prompt payment of arbitration awards. 19
Second, Tretiak claims that he should not be held liable because he assertedly attempted in good faith to reach a settlement with the arbitration claimants. Tretiak's duty to satisfy the award was absolute, and the arbitration claimants had no obligation to settle. Moreover, we agree with the NASD that"rather than demonstrating Tretiak's 'good faith efforts,' the evidence paints a picture of Tretiak as a person who engaged in dilatory tactics to avoid paying the award."
Tretiak further claims that the NASD's finding was a result of bias on the part of the hearing officer, evidenced by the fact, among others, that she allowed the NASD to highlight in its case that in 1998 Tretiak tithed $5,000 to his church rather than pay a portion of the award. Our review of the record does not show any misconduct or bias on the part of the hearing officer. In any event, our de novo review of the record, following on the NAC's de novo review, dissipates the possibility of abuse. 20
B. The IPO Matter
1. Securities sales pursuant to a misleading IPO prospectus. We find, as did the NASD, that Tretiak violated Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and NASD Conduct Rules 2120 and 2110, when he sold Retirement shares pursuant to a misleading prospectus. The evidence demonstrates that the prospectus was materially misleading and that Tretiak acted with scienter. 21 A fact is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available. 22 Material facts include those that affect the probable future of a company and that may affect whether an investor will buy, sell or hold the company's securities. 23 This standard is objective --it asks what a reasonable investor would consider material under the circumstances. 24
The Retirement prospectus was materially misleading. The prospectus represented that Retirement's property acquisition and financing plans were contingent on the IPO's success. In reality, by early November 1994 (when Tretiak's first IPO sales occurred) Retirement not only already had signed a purchase agreement for the Lake Mead Property (without waiting to determine if subscribers would purchase the minimum number ofshares), but also had amended the agreement to increase the purchase price to $480,000. By the end of November 1994 (and before many of Tretiak's IPO sales took place), Retirement had closed on the Lake Mead Property. It funded the purchase not with IPO funds but by obtaining a series of bridge loans (also undisclosed in the prospectus), some of which were secured by first and second deeds of trust on the property. At that point, the prospectus misrepresented the status of the Lake Mead Property and failed to disclose that, in order to complete the purchase, Retirement had incurred substantial debt, some of which was owed to Retirement directors. 25 These misrepresentations and omissions were material. Potential investors were entitled to know that the company in fact had purchased the Lake Mead Property through a series of significant, undisclosed financial commitments to, among others, the company's directors. These undisclosed financial commitments materially affected the company's financial situation and reduced substantially the amount of money that it would have available to pursue its franchising plans.
We reject Tretiak's claim that these misrepresentations and omissions were not material because, among other reasons, investors bought shares in the IPO based on Retirement's franchising plan for expansion, not because of its plan to purchase the Lake Mead Property. Even if investors were interested in growth through franchising, they were entitled to know that the representations in the prospectus about the property purchase and the associated debt did not conform to the facts. 26
Tretiak also defends on the ground that "everyone was told" about the land purchase orally and knew about the bridge loans. Tretiak adds that there was "large signage on the high profile property, prominently displaying it as the future home of Retirement Centers of America, Inc." He would have us conclude that the "total mix" of information regarding the land purchase was fully disclosed, albeit not through a post-effectiveamendment to the prospectus. The record negates, rather than supports, Tretiak's claims. In testimony taken during the NASD's investigation, Tretiak admitted that he had not discussed with prospective IPO purchasers either the debt that Retirement had incurred for the Lake Mead Property purchase or any other aspect of the purchase. Nor has Tretiak established that the IPO purchasers were informed about the material changes.
Tretiak also insists that all who knew about the land purchase thought it was a positive event for the company, and posits that the property subsequently increased in value and IPO investors therefore benefitted from the purchase. These claims are irrelevant.
We find that Tretiak acted with scienter. Scienter is an "intent to deceive, manipulate or defraud," 27 and may be established through reckless conduct. 28 Under all the circumstances, given Tretiak's intimate familiarity with the offering (as selling agent for the issuer, acting through RFCA, and as a principal of the issuer), Tretiak was at least reckless in failing to ensure that the prospectus that he drafted, signed, 29 and used in his securities sales represented accurately critical information regarding the status of the Lake Mead Property, the property purchase, and the debt incurred by Retirement.
We reject Tretiak's claim that, because the instructions for the SCOR offering advised that it was intended for small companies, "the attorney and accountants for which are not necessarily specialists in securities regulation," a different, more forgiving standard should be applied to his assertedly "technical" violations resulting from his use of the SCOR prospectus. Our findings do not turn on technical application of the securities laws. As the NASD hearing panel concluded in this matter:
[T]his is a garden-variety misrepresentation case. Tretiak sold the Retirement offering using a prospectus that he knew contained out of date,erroneous information, and he failed to disclose significant changes in Retirement's financial circumstances. Investors in a SCOR offering are no less entitled to truthful and complete disclosures than investors in any other type of offering.
Tretiak also suggests that the NASD should not hold him responsible for any omissions and misrepresentations. Tretiak claims that his actions with respect to the Retirement IPO were taken solely on behalf of Retirement, which was not an NASD member, and further asserts that he relinquished his authority at NASD member firm RFCA during the IPO sales period at issue. The facts do not support these claims. 30 Tretiak is subject to NASD discipline for this fraud. 31
2. Violations relating to contingency deadline. Although the prospectus represented that investor subscription funds would be returned promptly to investors if the specified minimum numberof securities was not sold within ninety days of the offering's effective date (i.e., by January 15, 1995), Tretiak's actions were inconsistent with that representation. Tretiak offered and sold shares after the specified deadline when the minimum number of shares had not been sold. As the NASD concluded, this conduct violated Exchange Act Rule 10b-9, as well as Conduct Rule 2110. The NASD established the requisite scienter for a Rule 10b-9 violation -- Tretiak testified that he monitored how much money had been raised during the course of the offering, and others testified that Tretiak knew about every dollar that came in as a result of the IPO. And he was responsible for the failure to establish an escrow account that would provide for the prompt return of funds to investors if the specified minimum number of securities were not sold by the specified date. Tretiak's knowledge of the offering terms, his involvement with the escrow agent, and his monitoring of investor interest in the offering, among other things, establish that Tretiak acted knowingly or recklessly.
Tretiak, further, approved and signed an escrow agreement that failed to satisfy the requirements of Rule 15c2-4. The escrow agreement specified in the rule must accurately reflect the contingency event so that the bank escrow agent will properly and promptly dispose of the funds upon the occurrence of the contingency. Here, the First Security escrow agreement purportedly established pursuant to the rule did not satisfy this basic requirement -- it failed to specify the correct dates for the contingency event. RFCA's failure to obtain a written agreement whereby First Security would transmit or return escrowed funds when the appropriate contingency occurred (i.e., the sale of the minimum number of shares by January 19, 1995) violated Rule 15c2-4. 32
We agree with the NASD that Tretiak caused this violation and, accordingly, engaged in conduct inconsistent with just and equitable principles of trade in violation of NASD Rule 2110. 33 By approving and signing an escrow agreement that subjected investor funds to terms different from those included in the prospectus, Tretiak deprived Retirement investors of the protections that Rule 15c2-4 is designed to provide. These protections are materially important to investors in contingency offerings. The deposit of investors' funds in an escrow account with the appropriate terms provides a high level of assurance that their funds will be promptly returned if the contingency is not satisfied, irrespective of the financial condition of the broker-dealer conducting the offering. Moreover, Rule 15c2-4 is an important adjunct to Rule 10b-9 discussed above, because it assures investors that their funds are protected in the event that the offering fails to achieve the specified sales level within the specified time period. 34
Tretiak further challenges the NASD's action concerning the IPO matter on a number of legal and procedural grounds. Amongother claims, Tretiak asserts that the IPO matter is a "sham prosecution." Tretiak also asserts that he has been singled out for discipline by the NASD, which is assertedly pursuing a "regulatory vendetta calculated to run him out of business" on behalf of the State of Nevada. Tretiak also contends that the doctrine of res judicata serves to bar this case because the State of Nevada already has taken action against him.
We reject Tretiak's claims. The record reflects that the State of Nevada and the NASD both have pursued actions against Tretiak, and that the NASD's action is the result of a disciplinary referral from the State of Nevada. This does not make the NASD's action a "sham prosecution." Further, Tretiak has pointed to nothing to suggest that, in bringing this action, the NASD has not exercised appropriately its "independent statutory mandate to enforce the provisions of the Exchange Act, as well as its own rules." 35 In order to establish selective prosecution, Tretiak must show both that he was singled out for enforcement action while others similarly situated were not, and that the action was motivated by arbitrary or unjust considerations, such as race. 36 He has offered no evidence to substantiate this claim. Under res judicata principles, it must be established, among other things, that the causes of action in both the earlier and the later suit are identical, as are the parties or their privies. 37 This proceeding concerns Tretiak's liability for violation of NASD and Exchange Act rules --regulations Nevada authorities cannot enforce. Nor are the parties in privity. Res judicata principles are inapposite here.
Tretiak also contends that the IPO proceeding should be barred by the doctrine of laches or by a statute of limitations that Tretiak claims the NASD imposes on itself. In order to succeed with a defense of laches, Tretiak must demonstrate a lack of diligence by the NASD and that he has been prejudiced. 38 Tretiak has made neither showing. The misconduct at issue occurred in 1994 and 1995. The record indicates that the Nevada Securities Division made a referral to the NASD in late 1997 relating to Tretiak's involvement with the Retirement IPO, and that the NASD investigated the matter, initiated investigative testimony in February 1998, and filed a complaint in July 1999. Tretiak has not identified any additional, material evidence that he could have obtained and presented had the complaint been filed earlier.
With respect to his statute of limitations claim, Tretiak acknowledges that no formal statute of limitations applies, but contends that he has "found out" from an unnamed source that the NASD, as a matter of practice, does not file complaints on matters that it has been investigating for more than two years. The NASD responds that "[u]nder the NASD's own rules, the only limitation on the NASD's authority to commence a disciplinary action is the limitation contained in the NASD's By-Laws," which was not triggered here. 39 We consistently have held that no statute of limitations applies to the disciplinary actions of the NASD or other self-regulatory organizations. 40
Tretiak asserts that much of his conduct in the IPO proceeding, including his preparation of the Form U-7, occurred in reliance on a range of advisors, both attorneys and accountants, and seeks to invoke a reliance on counsel defense to the fraud charge. Tretiak has failed to establish the defense. 41 Tretiak asserts that he relied heavily on a securities lawyer in putting together the SCOR offering, and spent $20,000 having the prospectus reviewed by a law firm, but has offered little to support these assertions. In any event, even by Tretiak's account any advice these advisors provided came early in the process, during the Form U-7 drafting process --Tretiak does not suggest that he sought and received advice that he had no duty to update the Form U-7 disclosures once Retirement closed on the purchase of the Lake Mead Property and Retirementdirectors advanced funds. In any event, a reliance on counsel defense is inapplicable as no one in Tretiak's position would have needed a lawyer to tell him that he would be committing fraud if he used a prospectus to solicit investors that omitted disclosure of critical facts. An exercise of common sense would have made it clear that investors were entitled to notice of this material information. 42
Tretiak also asserts that he was prevented from presenting his entire defense because Tretiak assertedly was given just one-third of the time to present his case that was given NASD counsel to present its case. Tretiak did not object to the hearing officer's request, at the close of the three-day hearing, for closing arguments, nor did he advise the hearing officer that he required additional time to present his defense. Moreover, Tretiak has not specified how he could have been prejudiced and what, if any, evidence he would have sought to produce if provided with additional hearing time.
Tretiak also claims that the hearing officers in both matters were biased against him. Our review of the record leads us to conclude that the hearing officers acted fairly and objectively in their conduct of the proceedings. Further, we do not find, as Tretiak alleges, that counsel for the NASD made false and inflammatory remarks and displayed bias and prejudice against him in these two disciplinary cases. Counsel acted within the bounds of appropriate advocacy. In any event, the hearing panels and the NAC, not counsel, made the final decisions in both disciplinary matters, and our de novo review dissipates even the possibility of unfairness. 43
Tretiak asks that we set aside the sanctions imposed, and the costs assessed in the arbitration proceeding. Under Section 19(e)(2) of the Exchange Act, we affirm the NASD's sanctions determinations unless we find that they are excessive or oppressive or create an undue burden on competition. 44
A. The NASD's arbitration proceedings are designed to provide a mechanism for the speedy resolution of disputes among members, their employees, and the public. 45 Flouting that mechanism, since 1994 Tretiak has avoided paying the arbitration award against him. He has paid an insignificant portion of the award, failed to attempt in good faith to satisfy the award, and consistently has failed to abide by the terms of payment schedules he has proposed. We find that the sanctions the NASD has imposed for this misconduct are consistent with the relevant Sanction Guidelines, 46 are neither excessive nor oppressive, and do not create an undue burden on competition.
B. The sanctions imposed in the IPO proceeding also are within the relevant NASD Sanction Guidelines. 47 A review of the principal considerations listed in the relevant Guidelines demonstrates the aggravated nature of Tretiak's misconduct. 48 Among other things, Tretiak was affiliated with Retirement, the issuer of the IPO securities; he raised significant funds for the IPO issuer and generated for himself and his broker-dealer firm, RFCA, significant commissions from his IPO sales; and he exposed the funds of a substantial number of customers to significant risk.
Tretiak seeks to assure us that he now understands the rules regarding IPOs. He also suggests that, since Retirement was a small issuer, he should be given some latitude for what he refers to as "de minimus technical violations and typographical errors." Tretiak also contends that the sanctions should be reduced because of his lack of prior experience and training with respect to IPOs and because he was not alleged to have sold unsuitable investments to the senior citizens and other persons who bought IPO shares. Tretiak's suggestions that his fraud was merely technical, the result of clerical error, his own inexperience or poor training, or otherwise excusable, and that he is entitled to mitigation because he assertedly did not breach another securities industry rule -- the requirement to recommend suitable investments -- indicate to us that he fails to appreciate the seriousness of his misconduct and his own responsibility, as a securities principal and industry participant, for his compliance with essential regulatory requirements that serve to protect public investors. We find that the NASD's sanctions are neither excessive nor oppressive nor an undue burden on competition; we accordingly sustain them.
An appropriate order will issue. 49
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN and ATKINS); Commissioner GOLDSCHMID and CAMPOS not participating.
Jonathan G. Katz
Admin. Proc. File No. 3-10424
In the Matter of the Application of
For Review of Disciplinary Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Robert Tretiak, and the costs assessed, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
1 Section 10(b) of the Exchange Act prohibits both sellers and buyers of securities, using the mails or an instrumentality of interstate commerce or the facility of a national securities exchange, from employing "any manipulative or deceptive device or contrivance in contravention of [Commission] rules and regulations." 15 U.S.C. § 78j(b).
Rule 10b-5, promulgated under Section 10(b), makes it unlawful "to employ any device, scheme, or artifice to defraud, to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5.
NASD Conduct Rule 2120, the NASD's antifraud rule, states that "no member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance."
NASD Conduct Rule 2110 states that "a member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade."
2 As relevant here, Exchange Act Rule 10b-9, 17 C.F.R. § 240.10b-9, provides that it is a violation for any person, directly or indirectly, in connection with the offer or saleof any security, to make any representation to the effect that the security is being offered on a basis that the consideration will be promptly refunded to the purchaser if a specified number of units is not sold within a specified time, unless the offering is made on the condition that all or a specified part of the consideration paid will be promptly refunded to the purchaser unless the specified number of the securities are sold within a specified time.
3 As relevant here, Exchange Act Rule 15c2-4, 17 C.F.R. § 240.15c2-4, states that it shall constitute a "fraudulent, deceptive, or manipulative act or practice" as used in Section 15(c)(2) of the Exchange Act for any broker-dealer participating in a distribution of securities (other than a firm commitment underwriting) to accept any part of the sales price of a security unless, if the distribution contemplates that disbursement of funds will not occur until a contingency occurs, all funds promptly are transmitted to a bank which has agreed in writing to hold the funds in escrow for the persons who have the beneficial interests therein and to transmit or return the funds to the persons entitled to them when the contingency occurs.
4 Pending our disposition of this appeal, we granted Tretiak's request for a stay of the conversion-to-a-bar aspect of Tretiak's suspension. We denied Tretiak's request for a stay of the principal bar and indefinite suspension. We did not act with respect to the fines or the two-year and the six-month suspensions because, as a matter of customary practice, the NASD does not enforce sanctions of this type while an appeal is pending.
5 While the record establishes a $1,000 payment in September 1996, it does not reflect when Tretiak paid the additional $1,000.
6 The arbitration award also specified that Tretiak and a second respondent, First Montauk Securities, Inc. ("First Montauk"), were jointly and severally liable to the claimants for an additional sum of $5,640, and the award granted First Montauk's cross-claim for indemnification from Tretiak. In his appeal brief, Tretiak emphasizes that, in addition to paying $5,750 of the $52,360 award to the claimants, he also has paid $6,000 to First Montauk. Tretiak further represents that First Montauk has paid the $6,000 to the claimants.
Tretiak has filed with the Commission a request to adduce as additional evidence certain documentation reflecting a payment to Montauk in settlement of the cross-claim award. A party seeking to adduce additional evidence must show with particularity that such evidence is material and that there were reasonable grounds for failure to adduce such evidence previously. See Rule 452 of the Commission's Rules of Practice, 17 C.F.R. § 201.452. Any amount Tretiak paid to First Montauk would not reduce Tretiak's independent $52,360 financial obligation to the claimants. Accordingly, the documentation reflecting payments to First Montauk is not material and we decline to adduce it.
7 The prospectus stated that, if Retirement raised the minimum, it would use $95,000 toward the purchase of the Lake Mead Property, $100,000 for marketing franchise offices, and $26,497 for working capital and contingencies. It indicated that, if Retirement raised the maximum, it would use $475,000 to acquire the Lake Mead Property, $200,000 for marketing franchise offices, and $258,000 for working capital and contingencies.
8 The prospectus specified the window period -- ninety days --but not the specific date of January 19, 1995.
9 The Form U-7 instructions further specified:
If changed, revised or supplemented . . . the Form . . . , clearly marked to show changes from the previously filed version, should be filed and cleared with the administrator of this state before use. If any of the changes or revisions are of such significance that they are material to the making of an investment decision by an investor, and if the minimum proceeds have not been raised, after filing with and clearance by the administrator, the [revised document] should be recirculated to persons in this state that have previously subscribed, and they should be given the opportunity to rescind or reconfirm their investments.
10 Tretiak seeks to adduce assertedly "exculpatory" evidence showing that the Property appreciated in value during the IPO sales period. Given the immateriality of such evidence, we decline to adduce it under Rule 452 of our Rules of Practice. See 17 C.F.R. § 201.452.
11 Tretiak hired Kyle to assist with Retirement's trust work. Kyle described himself as having "a little experience with NASD rules," and "no experience with SEC laws." The Form U-7 indicates that Kyle, at the time of the IPO, served as Retirement's Corporate Counsel and Chief Operating Officer.
12 The signature page of Kyle's draft stated that, if the minimum was not raised by April 21, 1996, the money would be refunded to investors. Kyle's draft also indicated that the offering would terminate no later than November 21, 1995, unless extended to a date not later than April 21, 1996. According to the prospectus, in contrast, and, as noted supra, the offering was to terminate no later than October 21, 1995, and the IPO had to raise the minimum required amount by ninety days after the effective date, or by January 19, 1995.
13 Tretiak and Kyle each denied transforming Kyle's draft into the First Security agreement, and Kyle denied even having contact with First Security.
14 One he signed as President of Retirement, and the other he signed as President of both Retirement and RFCA.
15 See also Herbert Garrett Frey, 53 S.E.C. 146, 153 (1997); Richard J. Lanigan, 52 S.E.C. 375, 376 (1995).
16 See, e.g., Daniel Joseph Avant, 52 S.E.C. 442, 446 (1995) (citing Bruce M. Zipper, 51 S.E.C. 928, 931 (1993)). Tretiak complains that this puts him in the position of having to prove a negative. It does not. It simply places on him, as on all respondents asserting an inability to pay, the obligation to come forward with full documentation of his financial situation since issuance of an award.
17 Tretiak has asked that we consider newly submitted evidence of his insolvency, in the form of a foreclosure notice on his home that issued after the NAC's decision. The foreclosure notice could not have been adduced previously and is material to Tretiak's defense of inability to pay. Accordingly, we will adduce it under Rule 452 of our Rules of Practice. This evidence, however, does not explain Tretiak's failure, since 1994, to satisfy the arbitration award.
18 John G. Pearce, 52 S.E.C. 796, 798 (1996) (citations omitted); Frey, 53 S.E.C. at 150; see also Richard R. Pendleton, 53 S.E.C. 675, 678-9 (1998).
19 Frey, 53 S.E.C. at 150 (citing Stix & Co., 46 S.E.C. 578, 580 (1976)).
20 See Frank J. Custable, Jr., 51 S.E.C. 855, 862 (1993).
21 Scienter is not required to prove the violation of Rule 2110. DWS Sec. Corp., 51 S.E.C. 814 (1993).
22 See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
23 SEC v. Hasho, 784 F. Supp. 1059, 1108 (S.D.N.Y. 1992).
24 Id. (expectations of individual investors are not material, since the standard for materiality is objective, not subjective).
25 As noted supra, the Form U-7 specifically required prospectus disclosure of business dealings between the corporation and its directors. While Tretiak answered the Form U-7 question regarding director dealings by disclosing certain other, earlier transactions, these loans from Retirement's directors that facilitated the purchase of the Lake Mead Property were not disclosed in the IPO prospectus.
26 Further, as stated supra, the standard for materiality is objective, not subjective. SEC v. Hasho, 784 F. Supp. at 1108. Moreover, in a disciplinary proceeding, proof of investor reliance is not necessary to establish a violation of the antifraud provisions involving a material misrepresentation. Lester Kuznetz, 48 S.E.C. 551 (1986).
27 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).
28 Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990); Coastline Fin., Inc., Exchange Act Rel. No. 41989 (Oct. 7, 1999) 70 SEC Docket 2444.
29 Tretiak claims that, as far as his signature on the prospectus is concerned, he did not really read the form or its instructions -- he just filled in the blanks. We construe this claim as an admission of recklessness, not a defense.
30 Tretiak claims that another individual, Bradford Barker, was responsible. The record indicates that RFCA's board, with Tretiak as Chair, appointed Barker president effective October 24, 1994. Barker resigned shortly thereafter, when the NASD notified Barker that he did not have the appropriate registration as a principal. Tretiak then resumed the presidency until Barker obtained the requisite registration. As the NASD persuasively argues, "Barker assumed the position of president of RFCA in name only for a brief period beginning in late October, well after Tretiak had prepared the prospectus and bought the Lake Mead Property, and Barker relinquished the title well before the majority of the Retirement IPO sales occurred" through Tretiak's efforts.
We also reject Tretiak's attempts to foist responsibility for the omissions and material misstatements on a range of other RFCA employees. We likewise find no record support for Tretiak's accusations that, as a group and individually, these and other persons offered testimony crafted so as to assign Tretiak responsibility and push him to the brink of financial ruin.
31 Cf. DWS Sec. Corp., 51 S.E.C. 814 (1993) (firm vice president who also served as chief financial officer of one of the issuers held responsible for fraud when he participated in the preparation of private placement memoranda that described uses of proceeds that did not occur).
32 While the NASD did not address it, we note an additional basis on which the arrangement ran afoul of Rule 15c2-4. Under Rule 15c2-4, the requisite escrow agreement must be secured before the broker-dealer accepts any part of the consideration in connection with the contingency offering. The First Security escrow agreement did not satisfy this critical requirement. The Retirement prospectus became effective on October 21, 1994 and sales began in early November. However, the First Security escrow agreement was not signed until November 14, 1994. Accordingly, investor funds could have been received by RFCA before the First Security escrow agreement was in effect, thereby exposing such funds to risk of loss. (The record includes signed stock subscription agreements dated as early as November 4, 1994 but does not establish whether investor funds in fact were received by RFCA before the escrow agreement waseffective.) We have not considered the foregoing in assessing Tretiak's liability or in reviewing the NASD's sanctions.
33 Compare Lowell H. Listrom & Co., Inc., 48 S.E.C. 360, 362-63 (1985) (president of broker-dealer found to have engaged in conduct inconsistent with just and equitable principles of trade when he caused firm to subject customer funds to risks Rule 15c2-4 was designed to prevent).
Under the circumstances, Tretiak was responsible for ensuring consistency between the prospectus and the escrow agreement, and for his own and RFCA's compliance with that contingency date and RFCA's compliance with Rule 15c2-4, even if, as Tretiak contends, someone other than Tretiak prepared the final escrow agreement (a fact that is not established here). The NASD determined that Kyle, who prepared the draft agreement with Bank of America, had no involvement in preparing the First Security agreement and that, even if Tretiak did not make the revision to Kyle's Bank of America draft, Tretiak signed the final agreement without verifying its consistency with the prospectus terms.
34 Scrupulous attention to the requirements of Rule 15c2-4 is particularly important where, as here, the broker-dealer sales agent and the issuer are affiliated.
35 Kirk A. Knapp, 51 S.E.C. 115 (1992).
36 Maximo Justo Guevara, Exchange Act Rel. No. 42793 (May 18, 2000), 72 SEC Docket 1281, 1289-90, appeal dismissed, 29 Fed. Appx. 101 (3d Cir. 2002) (Table).
37 See Jones v. SEC, 115 F.3d 1173 (4th Cir. 1997) (discussing requirements for res judicata application).
38 Rafael Pinchas, Exchange Act Rel. No. 41816 (Sept. 1, 1999), 70 SEC Docket 1516, 1529.
39 The NASD cites to Article V, Sections 2 and 4 of its By-Laws, which specify that the NASD retains jurisdiction to commence an action against a registered and/or associated person for two years after the termination of the person's registration and/or association with a member firm. NASD Manual, Art. 5, Sec. 2, 4 at 1310-11 (April 1998 ed.).
40 See, e.g., Stephen J. Gluckman, Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 431 (statute of limitations does not apply to NASD proceedings, and to impose one would "impair the NASD's . . . duty to protect the public and discipline its members").
41 One invoking an "advice of counsel" defense must establish that he or she has (1) made a complete disclosure to the attorney of the intended action, (2) requested the attorney's advice regarding the legality of the intended action, (3) received counsel's advice that the conduct would be legal, and (4) relied in good faith on that advice. William H. Gerhauser, Sr., 53 S.E.C. 933, 943 n.25 (1998).
42 Cf. Coastline Fin., Inc., Exchange Act Rel. No. 41989 (Oct. 7, 1999), 70 SEC Docket 2444, 2450 ("[Respondent] did not need a lawyer to tell him that it was false to describe the notes as 'secured' when they were not.").
43 See Frank J. Custable, Jr., 51 S.E.C. 855 (1993) (concluding that bias on the part of an NASD staff member does not mean the NASD decision is biased).
Tretiak has requested that we supplement the record on appeal with a range of new evidence. The NASD opposes these requests, and includes in its brief a detailed analysis of the proffered evidence under our Rule 452 standards for admissibility. We agree with the NASD that the evidence does not meet our Rule 452 standards -- some of it is cumulative of evidence already in the record; anotherportion of it is immaterial; and Tretiak has not shown, as is required under Rule 452, that he reasonably could not have adduced most of it previously. Accordingly, we decline to adduce it.
44 15 U.S.C. § 78s(e)(2).
45 See, e.g., James M. Bowen, 51 S.E.C. 1152, 1153 (1994).
46 The NASD's Sanction Guidelines specify that violations of Conduct Rule 2110 based on a failure to honor an arbitration award call for a fine of at least $5,000, and a suspension in all capacities until the arbitration award is satisfied plus at least an additional 30 business days. The principal considerations specified in the Guidelines include: (1) whether any portion of the arbitration award has been paid; (2) whether a good-faith attempt has been made to satisfy the award in whole or in part, and the promptness of any such effort; and (3) whether any settlement or payment schedule that has been negotiated has been met. In egregious cases the Guidelines indicate that a bar should be considered. NASD Sanction Guidelines (1998 ed.) at 18 ("Arbitration Award -- Failure to Honor or Failure to Honor in a Timely Manner").
47 The Sanction Guidelines for intentional or reckless misrepresentations or material omissions of fact call for a fine of $10,000 to $100,000, and suspension for a period of 10 business days to two years, and the consideration of a bar in egregious cases. NASD Sanction Guidelines (1998 ed.) at 80 ("Misrepresentations or Material Omissions of Fact"). For escrow violations implicating Exchange Act Rule 10b-9, the Guidelines call for suspension of up to two years in egregious cases and a fine of $5,000 to $50,000. NASD Sanction Guidelines (1998 ed.) at 21 ("Escrow Violations --Prohibited Representations in Contingency Offerings; Transmission or Maintenance of Customer Funds in Underwritings").
48 NASD Sanction Guidelines at 8-9, 21 (listing, respectively, aggravating factors for the two types of offenses).
49 We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.