Securities and Exchange Commission
In the Matter of
ROBERT BRUCE LOHMANN
OPINION OF THE COMMISSION
INVESTMENT ADVISER PROCEEDING
Grounds for Remedial Action
Associated person of a registered broker-dealer and registered investment adviser tipped material non-public information to an individual who purchased securities. Held, it is in the public interest to bar respondent from association with a broker, dealer, or investment adviser, and to order him to cease and desist from committing or causing any violations or future violations of the applicable securities laws.
Martin J. Auerbach, for Robert Bruce Lohmann.
James A. Kidney and Valerie Szczepanik, for the Division of Enforcement.
Appeal filed: October 9, 2002
Last brief received: January 23, 2003
Robert Bruce Lohmann, a former associated person of Royal Alliance Associates, Inc. ("Royal Alliance"), a registered broker-dealer and registered investment adviser, appeals from an initial decision by an administrative law judge. The law judge found that Lohmann, in possession of material non-public information about the impending merger of MAPCO, Inc. ("MAPCO"),willfully violated Section 10(b) of the Securities Exchange Act of 19341 and Exchange Act Rule 10b-52 by tipping a co-worker, Jeffrey Sklar, who consequently traded in MAPCO securities. The law judge barred Lohmann from association with any broker, dealer, or investment adviser and imposed a cease-and-desist order. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
The facts regarding Lohmann's conduct, his receipt of material non-public information, and his sharing or tipping of that information are largely uncontested in this proceeding.
Lohmann was employed at Royal Alliance from December 1984 to April 1998. In November 1997, Lohmann held a salaried position as a supervisor or manager of Royal Alliance's trading room.
Both MAPCO and The Williams Company were public companies whose securities were traded on the New York Stock Exchange. Lohmann and the Division of Enforcement jointly stipulated that, as of the week of November 17, 1997, negotiations between MAPCO and The Williams Company regarding The Williams Company's acquisition of MAPCO reached a material stage. Among other things, the companies entered into a confidentiality agreement, exchanged confidential information, completed due diligence, and retained investment bankers who examined the proposed merger. On November 18, 1997, the senior officers of MAPCO and The Williams Company agreed to final terms of the merger proposal and agreed to present the proposal to their respective boards of directors. The merger became public on November 24, 1997, when MAPCO issued a press release announcing the merger.
In 1997, Patrick Joseph Danaher was a manager of crude oil supply and trading at a MAPCO subsidiary located in Houston, Texas. Between September and November 1997, prior to the November 24th announcement, Danaher suspected that MAPCO was involved in merger negotiations. For example, he learned that MAPCO had consulted an investment bank as well as an attorney specializing in mergers and acquisitions.
Between September and November 1997, when Danaher suspected that MAPCO was searching for a merger partner, Danaher relayed the information that he had gathered to a long-time business associate and personal friend, John Thomas Doherty, then employed as a physical crude oil trader at Syntex Energy Resources LLC. Danaher testified that Doherty and he often shared potentially valuable information with each other and that he gave information about MAPCO to Doherty because they were friends.
Doherty is a life-long friend of Lohmann. The two have known each other since childhood.3 Doherty kept Lohmann apprised of the information that he received from Danaher. The communications between Doherty and Lohmann were captured on recorded telephone lines at Royal Alliance. On November 20, 1997, at 10:06 a.m., Doherty called Lohmann and stated, "I'm giving you the tip of the day." He told Lohmann that MAPCO would be taken over and that the acquisition would be announced soon, possibly "next week, but it may be today." Shortly after this telephone conversation with Doherty, Lohmann purchased twenty MAPCO call option contracts.4
At approximately 10:32 a.m., Lohmann and Doherty spoke again by telephone. Doherty stated the potential price for the MAPCO stock would be $46 per share. Immediately after this call, Lohmann called Ed Mollica, a friend, and Ron Butler, a Royal Alliance employee. Lohmann indicated to them that a friend had information on a "takeover play" and recommended they purchase MAPCO stock.5 Later that day, at 3:46 p.m, Lohmann called Doherty and the following conversation, in pertinent part, occurred:
|Doherty:||$46 a share.|
|Lohmann:||I'd take $36 a share. The stock acts very good.|
|Lohmann:||Your stock acts pretty good.|
|Doherty:||Bob, it's a done deal. It's a done at $46. It's not public yet.|
|Doherty:||The stock is just going to open up at $46 at some point. Soon as the announcement comes out.|
|Lohmann:||You got a machine in front of you?|
|Doherty:||No. I basically [called?] one of the head guys at MAPCO. I said as long as this isn't inside information [laughter].|
|Lohmann:||Right, we didn't talk.|
|Doherty:||We didn't talk.|
Danaher's suspicions about the MAPCO merger were confirmed on the evening of November 20, 1997, at a meeting conducted by his supervisor. At this meeting, his supervisor told a few employees of the Houston office, including Danaher, that The Williams Company was going to acquire MAPCO and that the merger would be announced the following Monday morning. Danaher understood that the information relayed at this meeting was non-public. In fact, Danaher had a duty to keep such information confidential. MAPCO's Code of Business Conduct Handbook, Section IV., C. strictly prohibited employees from communicating material, nonpublic information.
Nevertheless, Danaher tipped Doherty. Danaher called Doherty at home that evening and informed him that the merger would be announced on Monday, November 24 at 8:00 a.m. and that the MAPCO shares would be priced at $46 per share.6
Doherty, after receiving information from Danaher about the impending MAPCO merger, tipped the information to Lohmann at approximately 10:25 a.m. the next morning, November 21.7 Doherty told Lohmann that Danaher had called him the previous night at home and told him that the acquisition of MAPCO would be announced the following Monday at 8:00 a.m. Doherty warned Lohmann that this was his last day to buy the stock. When Lohmann and Doherty spoke again by telephone later that day, Doherty wanted to confirm that he had given Lohmann the tip. After acknowledging receipt of the tip, Lohmann told Doherty, "Well, just get off the taped phone."
Also on November 21, Lohmann tipped Sklar, a marketing manager at Royal Alliance, about the merger.8 At the time, Sklar was twenty-five years old and knew very little about the brokerage business. Sklar testified that Lohmann and he had a "[f]riendly relationship, like with most people at the firm. Passing talk in the hall, friendly conversation." Sklar occasionally asked Lohmann questions about the brokerage business, and he found Lohmann to be "very friendly, very helpful."
On November 21, Lohmann and Sklar happened to meet in the hallway or at the water cooler at work. On this occasion, Sklar asked Lohmann what stocks he liked. Lohmann testified that he told Sklar that MAPCO "acts great" and that "a little birdie told me something good is going to happen" with it. Neither Sklar nor Lohmann could recall whether Lohmann provided any more details in this conversation, such as whether Lohmann explained that MAPCO was involved in an impending merger.
In any event, on November 21, Sklar purchased twenty shares of MAPCO stock at $37.8125 per share. Sklar testified that he had not heard of MAPCO prior to his conversation with Lohmann and purchased the stock because of Lohmann's recommendation. Sklar purchased the stock through Royal Alliance and Lohmann's handwriting appears on the order ticket. Sklar paid a commission of $25 to Royal Alliance.
On November 26, 1997, Sklar sold his MAPCO shares for $43.3125 per share. He paid another commission of $25 to Royal Alliance for the sale. As a result, Sklar's net profits on the MAPCO trades, after deducting the cost of the commissions, were $60. Lohmann did not share in these commissions and did not receive a direct financial benefit from Sklar in return for his tip.
When Division staff began investigating this matter in 1998, Lohmann was not truthful in responding to the staff's questions. In a telephonic interview with the staff on March 31, 1998, Lohmann claimed that he purchased MAPCO options because of stock option charts and graphs he had seen as well as the fact that energy stocks in general looked good at the time. Lohmann claimed he did not learn of the MAPCO merger until it was announced. Shortly after the interview, Lohmann contacted the staff and retracted his false statements. Lohmann testified that his lack of candor was due to his desire not "to be damaging a life-long friend of mine, Mr. Doherty."
Exchange Act Section 10(b) and Exchange Act Rule 10b-5 prohibit the use of any manipulative or deceptive device or contrivance in connection with the purchase or sale of securities. It is prohibited by these provisions to trade on the basis of material, nonpublic information or to disclose such information to others who trade if the trades or disclosures are made in breach of a fiduciary duty.9
Lohmann does not contest the findings that Danaher was a MAPCO insider who possessed material10 non-public information and who disclosed that information, in breach of his duty to MAPCO, to Doherty. Nor does Lohmann contest that he knew that the information he received from Doherty was from a MAPCO insider in violation of the insider's duty. Lohmann does not deny that he recommended MAPCO to Sklar, who traded in MAPCO, and does not challenge the finding that he acted with scienter.11
Lohmann's sole contention is that he did not violate Exchange Act Section 10(b) and Rule 10b-5 because he received no benefit from the tip he gave to Sklar, as required by Dirks v. SEC, 463 U.S. 646 (1983). Dirks holds that a tipper who does not trade on material, nonpublic information is liable if "the insider personally will benefit, directly or indirectly, from the disclosure."12 Dirks states that this benefit may be "a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings."13 Dirks further states that the benefit element is satisfied when an insider or tipper "makes a gift of confidential information to a trading relative or friend."14
Here, Lohmann received no economic benefit from the tip he provided to Sklar. Lohmann did not share in any commissionsassociated with Sklar's trades. Nor did Lohmann receive any reputational benefit that was likely to result in future earnings. Lohmann claims that Sklar was a mere acquaintance rather than a friend and that therefore their relationship was too attenuated for his tip to constitute a gift to a friend under the Dirks benefit test.
We reject Lohmann's contention and find that Lohmann's tip indeed constituted a gift to a trading friend under Dirks. It is sufficient, as the law judge found, that Lohmann and Sklar were "friendly, if casual, office acquaintances." Sklar sought Lohmann's advice and found Lohmann to be helpful. Lohmann offered the tip to help the young Sklar. In return, Lohmann received the personal satisfaction of his generosity and the admiration of Sklar.15 We believe this is one type of benefit envisioned by Dirks.16 We conclude that Lohmann willfully violated Exchange Act Section 10(b) and Rule 10b-5.
In determining whether a sanction is in the public interest, we consider the following factors:
the egregiousness of the [respondent's] actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the [respondent's] assurances against future violations,the [respondent's] recognition of the wrongful nature of his conduct, and the likelihood that the [respondent's] occupation will present opportunities for future violations.17
Applying these factors, the law judge imposed on Lohmann a bar from association with a broker, dealer, or investment adviser and ordered Lohmann to cease and desist from further violations of the applicable securities laws.18
Lohmann asserts that the bar imposed is excessive and unnecessarily harsh. Lohmann contends that the existence of rumors in the marketplace concerning a MAPCO merger somehow mitigates his conduct and, therefore, a lesser sanction should be imposed. Lohmann also stresses that he has no disciplinary history. In his appeal, Lohmann requests that, instead of a bar, we impose a program of enhanced supervision or that we order a bar of shorter duration with a right to reapply.
We agree that the conduct established on this record warrants the sanctions imposed by the law judge in the public interest. Lohmann's misconduct is serious. As we have stated, "Insider trading constitutes clear defiance and betrayal of basic responsibilities of honesty and fairness to the investing public."19 Lohmann's conduct was not isolated. He tipped three people, although only one tippee chose to trade on the basis of the tip.
Moreover, the recorded telephone conversations, as well as his misrepresentations to the staff, indicate Lohmann acted with a high degree of scienter. Although Lohmann is currently not employed in the securities industry, there is no assurance that he will not try to reenter the industry and have the opportunity to commit future violations. Accordingly, we find it in the public interest to bar Lohmann from association with a broker,dealer, or investment adviser.20 We also conclude, having considered the factors articulated above in our determination that a bar is appropriate, that Lohmann's violations raise a sufficient risk of future violation to warrant the imposition of a cease-and-desist order against him.21
An appropriate order shall issue.22
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID and CAMPOS); Commissioner ATKINS, not participating.
Jonathan G. Katz
In the Matter of
ROBERT BRUCE LOHMANN
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it
ORDERED that Robert Bruce Lohmann be, and he hereby is, barred from association with any broker, dealer, or investment adviser; and it is further
ORDERED that Robert Bruce Lohmann shall cease and desist from committing or causing any violations or any future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
1 15 U.S.C. § 78j(b).
2 17 C.F.R. § 240.10b-5.
3 Danaher did not know and had no connection with Lohmann at this time.
4 The Order Instituting Proceedings ("OIP") did not charge Lohmann with insider trading for his own purchase of MAPCO securities.
5 Butler consequently wrote MAPCO put options; Lohmann was not charged with insider trading liability for Butler's transaction.
6 Although the record does not contain a recording of this call, since it was placed to Doherty's home rather than to Lohmann's office at Royal Alliance, Doherty referred to the call in a subsequent, recorded telephone conversation described below.
7 Danaher and Doherty consented to the entry of injunctions against further violations of Exchange Act Section 10(b) and Rule 10b-5, and paid civil money penalties. Doherty also disgorged his trading profits.
8 Lohmann also tipped Nick Gianakouros and Joe Dattalo, two business associates. Neither Gianakouros nor Dattalo traded in MAPCO securities.
9 United States v. O'Hagan, 521 U.S. 642, 651-652 (1997);Chiarella v. United States, 445 U.S. 222, 228-230 (1980).
10 A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. See Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
11 See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976) (defining scienter as "a mental state embracing intent to deceive, manipulate, or defraud").
12 463 U.S. at 662.
The fiduciary duty of an insider not to disclose material, nonpublic information transfers to subsequent tippees who receive the information aware that it came from a source that breached the source's fiduciary duty. United States v. Teicher, 785 F. Supp. 1137, 1150 (S.D.N.Y. 1992), aff'd, 987 F.2d 112, 120 (2d Cir. 1993) and SEC v. Musella, 748 F. Supp. 1028, 1038 (S.D.N.Y. 1989), aff'd, 898 F.2d 138 (2d Cir. 1990).
13 463 U.S. at 663.
14 Id. at 664.
15 See, e.g., SEC v. Downe, 969 F. Supp. 149, 156 (S.D.N.Y. 1997), aff'd, SEC v. Warde, 151 F.3d 42 (2d Cir. 1998) (In a case in which the respondent testified "it was ego" that motivated him to invest friends' money without compensation, the court found that, "From this the jury could reasonably infer that Downe enjoyed the benefits of being viewed as a successful investor in the eyes of his peers--including Warde--as well as the gratification of bestowing the 'gift' of his investment expertise.").
See also SEC v. Yun, 327 F.3d 1263, 1280 (11th Cir. 2003) (finding evidence sufficient for a jury to conclude that a tipper expected a benefit where the tipper and tippee "were 'friendly,' worked together for several years, and split commissions on various real estate transactions over the years").
16 In light of our finding that Lohmann received a benefit, we need not reach the question of whether such a showing was necessary to establish his liability. We believe that such liability could be established solely on Lohmann's disclosure of material, non-public information that he knew had been disclosed by an insider in breach of the insider's duty.
17 Donald T. Sheldon, 51 S.E.C. 59, 86 (1992) (citations omitted), aff'd, 45 F.3d 1515 (11th Cir. 1995).
18 Section 21B(a) of the Exchange Act, 15 U.S.C. § 78u-2, and Section 203(i) of the Advisers Act, 15 U.S.C. § 80b-3(i), allow the Commission to impose a civil money penalty for willful violations of the federal securities laws where such penalty is in the public interest.
The law judge determined that it was not necessary in the public interest to impose the civil money penalty originally sought by the Division. The Division did not appeal the law judge's determination.
19 Sidney C. Eng, 53 S.E.C. 709, 722 (1998).
20 The Division contends that the law judge should have considered Lohmann's lies to staff during the investigation of this matter in assessing sanctions. The law judge felt foreclosed from considering this conduct since it was not charged in the OIP. The law judge found, and we agree, that a bar would be appropriate even without consideration of this factor.
However, we have considered such conduct in proceedings before us. See Joseph J. Barbato, 53 S.E.C. 1259, 1282 (1999) (finding that respondent's conduct in contacting former customers identified as Division witnesses to be indicative of potential of committing future violations and thus relevant to analysis in assessing sanctions). See also J. Stephen Stout, Exchange Act Rel. No. 43410 (Oct. 4, 2000), 73 SEC Docket 1441, 1467 n.64 (in a matter in which the respondent was found to have engaged in unsuitable and unauthorized trading, the Commission considered respondent's later misconduct, involving his creation of an arbitration scheme, to be relevant in determining that a bar was appropriate).
21 KPMG Peat Marwick, LLP, Exchange Act Rel. No. 43862 (Jan. 19, 2001), 74 SEC Docket 384, 429, motion for reconsideration denied, Exchange Act Rel. No. 44050 (Mar. 9, 2001), 74 SEC Docket 1351, petition denied, 289 F.3d 109 (D.C. Cir. 2002). In KPMG, we concluded that although there must be a showing of "some risk" of future violation, that risk need not be very great to warrant the issuance of a cease-and-desist order. In the ordinary case and absent evidence to the contrary, a finding of past violation raises a risk of future violation sufficient to support the issuance of a cease-and-desist order.
22 We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.
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