SECURITIES AND EXCHANGE COMMISSION
In the Matter of
NOLAN WAYNE WADE
OPINION OF THE COMMISSION
EXCHANGE ACT PROCEEDING
Ground for Remedial Action
Respondent was permanently enjoined from violating antifraud and broker-dealer registration provisions of the federal securities laws based on conduct undertaken during his participation in multiple offerings of "penny stock." Held, it is in the public interest to bar respondent from associating with any broker or dealer and from participating in any offering of "penny stock."
Wayne Hartke, of Hartke & Hartke, for Nolan W. Wade.
William P. Hicks and M. Graham Loomis, for the Division of Enforcement.
Appeal filed: July 12, 2002
Last brief received: October 25, 2002
Nolan Wayne Wade appeals from the decision of an administrative law judge in a proceeding brought under Section 15(b)(6)(A) of the Securities Exchange Act of 1934.1 As relevant here, that provision, among other things, authorizes the Commission to bar from association with a broker or dealer any person who has been enjoined by a court from engaging in or continuing to engage in conduct in connection with the purchase or sale of securities. It also authorizes the Commission to bar any person from participating in anoffering of "penny stock,"2 if the person, at the time of the misconduct alleged in the injunctive proceeding, was participating in an offering of "penny stock." The law judge found that, on February 2, 2000, Wade was permanently enjoined, with his consent, from violating the antifraud and broker-dealer registration provisions of the federal securities laws and that it is undisputed that these violations stemmed from Wade's conduct as an unregistered broker-dealer and involved his participation in the purchase or sale of"penny stocks."3 After a hearing, the law judge concluded that it was in the public interest to bar Wade from association with any broker or dealer and from participation in any offering of "penny stock." We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
A. Under our traditional policy, as recently reviewed in our opinion in Marshall E. Melton and Asset Management & Research, Inc.,4 the remedial disciplinary action required in the public interest as the result of an injunction is based on the particular circumstances and entire record of the case.5 Under that policy, the allegations in a complaint in an action settled by consent may, in a subsequent proceeding before us, be given considerable weight for purposes of assessing the public interest.
According to the allegations in the Commission's injunctive complaint in this matter, between early 1993 and mid-1997, Wade participated in the offer and sale of securities of three companies. There is no dispute that those securities constituted "penny stock" under the Exchange Act and the relevant rule. It also is undisputed that, in recommending these securities to public customers and in buying and selling these securities for his own account, Wade acted as a broker-dealer but was neither registered with the Commission nor associated with a broker or dealer registered with the Commission.
The injunctive complaint allegations reflect that Wade engaged in serial securities fraud and other violations over a four-year period. A summary of the allegations follows.
1. EarthNet. Wade was a director and shareholder of EarthNet Companies, Inc. ("EarthNet"). Over a two-year period, Wade offered and sold EarthNet securities to at least 90 investors at prices ranging between $0.50 and $1 per share. Wade represented to these investors, variously, that their funds would be used to take EarthNet public; would be used only to pay the legal and accounting fees necessary to take EarthNet public and not for his living expenses; and would be deposited into an escrow account specifically set up for EarthNet. Wade assured the investors that they could expect a 20% to 30% return on their investment, and that their capital would be refunded if EarthNet did not go public.
These representations were false and misleading. In reality, investor funds went to Wade and other individuals, and were used for their living expenses. Moreover, the account into which funds were deposited was not an escrow account for EarthNet. Wade had no reasonable basis for projecting the increase in stock value that he projected and in fact such increases did not occur. Wade also had no reasonable basis for stating that investor funds would be returned and, in fact, not all investors who requested refunds received their money back.
2. Motorplex. Mississippi Motorplex, Inc. ("Motorplex") hired Wade in 1993 to help it raise money and to take it public through a reverse acquisition with an existing public shell corporation. Wade served as a director and was a shareholder of Motorplex. From at least March 1993 through at least 1994, Wade offered and sold Motorplex securities to at least 27 investors at a price of $1 per share. From at least October 1994 through at least April 1995, Wade also sold his own shares of Motorplex stock to at least 12 investors, at a price of $3 per share, and deposited at least $433,000 into his own bank account. Wade represented to investors, variously, that Motorplex would be going public within 60 to 90 days through a reverse acquisition with a specified public shell company that purportedly already was trading on Nasdaq; the stock would trade at several multiples higher than the amount that investors paid to purchase the stock; investor funds would be deposited in an escrow account; and funds would be returned to investors from the escrow account if $1 million was not raised.
These representations were false and misleading. In reality, the shell company with which Motorplex was to merge was not listed on Nasdaq, and accordingly, the merged company would be required to apply for a listing and meet Nasdaq's minimum listing requirements. Wade had no reasonable basis to believe that the company would be able to accomplish these things within a 90-day window. Wade also had no reasonable basis for projecting the increase in stock value that he projected and in fact such increases did not occur. Further, a significant amount of investor funds went to Wade and others. Wade had no reasonable basis for stating that investor funds would be returned and, in fact, funds were not returned to all investors who requested refunds.
3. Bio-Solutions. During the relevant period, Wade also served as president and CEO of Bio-Solutions of Louisiana, Inc. ("Bio-Solutions"). From at least October 1995 through at least June 1997, Wade and another individual together raised over $150,000 from at least 11 investors in three states. These funds were deposited into a Bio-Solutions bank account that Wade controlled, and Wade ultimately received at least $131,700 of this amount. Wade represented to his investors, variously, that Bio-Solutions would go public within 90 days by merging with a public shell company that already was traded on an exchange; the value of their investment would increase by several multiples; and funds would be returned to investors on their request.
These representations were false and misleading - - Wade had no reasonable basis to believe that, within 90 days, the company would merge with another and meet the minimum listing requirements for Nasdaq or any stock exchange. Wade also had no reasonable basis for projecting, as he did, that Bio-Solutions stock would increase in value. He also had no reasonable basis for stating that investor funds would be refunded, and in fact funds were not returned to all investors who requested reimbursement. Although investor funds initially were deposited into a Bio-Solutions bank account controlledby Wade, Wade did not disclose to investors the material fact that he and others received a significant portion of those funds, some of which were withdrawn as cash.
4. Unregistered Broker-Dealer Activities. During the period covered by the injunctive complaint, Wade was not registered with the Commission as a broker or dealer nor was he associated with a broker or dealer registered with the Commission. By virtue of his conduct with respect to the offer and sale of the stock of EarthNet, Motorplex, and Bio-Solutions to public customers as described above, Wade engaged in the business of effecting transactions in securities for the account of others. By virtue of purchasing and selling the stock of EarthNet, Motorplex, and Bio-Solutions for his own account as described above, Wade engaged in the business of buying and selling securities for his own account. When Wade recommended, offered and sold the securities of EarthNet, Motorplex, and Bio-Solutions to public customers, and when he bought and sold those securities for his own account, Wade acted as a broker-dealer even though he was not registered with the Commission nor associated with a broker or dealer registered with the Commission.
B. After Wade consented to the issuance of the permanent injunction, the Commission instituted this administrative proceeding. At the hearing below, Wade testified that he currently works in a sales capacity for the successor company to Bio-Solutions (one of the three companies for which, as detailed above, he fraudulently sold securities).6 The successor company manufactures and sells waste treatment products, and sells franchises that market and sell the company's products. Wade is responsible for franchise sales and franchisee training. According to Wade, he resigned his positions as president and CEO of Bio-Solutions before the injunction was issued, and he no longer is involved in raising capital for the successor company. Wade claimed that he is "separate geographically and mentally as regards to the sale of securities." Nonetheless, he further testified that he would like to be able to serve as an officer of the company - - "such as COO" - - so that he could have responsibility for the company's operations. Wade further testified that he owns two stock certificates totaling 1,050,000 shares in Bio-Solutions' successor company.
When asked by his counsel about his state of mind with respect to any future participation in the sale of corporate securities for his employer, or for any other "penny stock" company, Wade, rather than expressing remorse or acknowledging his misconduct, testified that he was "paranoid" about the injunction. When asked by his counsel whether he could provide the law judge with any possible reason why the entry of the broker-dealer and "penny stock" bars requested by the Commission would be necessary or required here, Wade, rather than acknowledging his past misconduct, testified that he could think of none. Wade sought to assure the law judge that hehad no intention of engaging in the sale of securities, whether through affiliation with any broker or dealer, for his current employer, or for any other "penny stock" company, notwithstanding his ambition to serve as a high-level executive "such as COO" in charge of his current employer's operations.
We have determined that it is in the public interest to bar Wade from participating in any offering of "penny stock" and from associating with a broker or dealer. When Congress grants an agency the responsibility to impose sanctions to achieve the purposes of a statute, "'the relation of remedy to policy is peculiarly a matter for administrative competence.'"7 Consistent with our traditional approach, in determining sanctions, including whether to impose a broker-dealer or a "penny stock" bar in a remedial proceeding that follows an injunction, we consider a range of relevant factors, including: the seriousness of the violation; the isolated or recurrent nature of the violation; the respondent's state of mind; the sincerity of the respondent's assurances against future violations; the respondent's recognition of the wrongful nature of the misconduct; the respondent's opportunity to commit future violations; the age of the violation; and the degree of harm to investors and the marketplace resulting from the violation.8
The allegations supporting the consent injunction reflect that Wade engaged in serious misconduct - - serial securities fraud and other violations - - and that Wade acted with a high degree of scienter. For instance, it is alleged that Wade concealed from investors that he would use a substantial portion of their money for his own purposes and, in some instances, falsely claimed that none of their money would go to him. The record before us is devoid of evidence that Wade recognizes and acknowledges that his "penny stock" sales, accomplished through fraudulent and misleading statements and without benefit of broker-dealer registration or affiliation, were wrongful, or that he is remorseful for defrauding so many investors over a four-year period.9 The fact that Wade could think of no"possible reason" for a broker-dealer or "penny stock" bar suggests his disregard for the scores of investors he victimized.
Moreover, Wade has the opportunity to commit future violations.10 Wade offered assurances during his testimony that he would refrain from future misconduct because he is "paranoid" about the injunction. Wade, however, lied repeatedly to dozens and dozens of investors over a substantial time period. Wade remains employed by the successor company to Bio-Solutions, which, too, is a "penny stock" issuer.11 Moreover, the issuer's Form 10-KSB for the fiscal year ended June 30, 2001, which was made part of the record before the law judge, warns that the company's operating results "raise substantial doubt about the [c]ompany's ability to continue as a going concern," and that its ability to continue operations depends in part on its ability to "obtain additional capital and financing." The company has indicated that it may raise additionalcapital through private and/or public sales of securities in the future.
Under all of the facts and circumstances, we cannot take solace in Wade's hearing testimony that he is separated "geographically and mentally" from the sale of securities at Bio-Solutions' successor company, and that neither he nor his company intend to change the scope of his duties in the future. Wade's continued involvement with a "penny stock" issuer and expressed interest in running that company's operations present him with opportunity to engage in additional future misconduct.
The misconduct documented in the injunctive complaint is not recent. It did, however, result in significant losses to investors and the marketplace over a four-year period, amounting to the fraudulent sale of approximately $1.7 million worth of securities. Even if we were somehow to accept the notion that Wade is unlikely to engage in future violations (which we cannot), the egregious nature and breadth of the misconduct reflected in the allegations supporting the consent injunction mandate broker-dealer and "penny stock" bars "as a deterrent to others in the industry." We believe a misplaced leniency here would "pollute the ethical climate in the industry and encourage others to act irresponsibly."12
An appropriate order will issue.13
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, and ATKINS); Commissioner CAMPOS not participating.
Jonathan G. Katz
In the Matter of
NOLAN WAYNE WADE
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Nolan Wayne Wade be barred from association with any broker or dealer and from participating in any offering of "penny stock", including acting as a promoter, finder, consultant, or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any "penny stock", or inducing or attempting to induce the purchase or sale of any "penny stock."
By the Commission.
Jonathan G. Katz
|1||15 U.S.C. § 78o(b)(6)(A).|
|2|| The term "penny stock" is defined in Section 3(a)(51)(A) of the Exchange Act and in Rule 3a51-1. Section 3(a)(51)(A) states:
The term "penny stock" means any equity security other than a security that is--
(i) registered or approved for registration and traded on a national securities exchange that meets such criteria as the Commission shall prescribe by rule or regulation for purposes of this paragraph;
(ii) authorized for quotation on an automated quotation system sponsored by a registered securities association, if such system (I) was established and in operation before January 1, 1990, and (II) meets such criteria as the Commission shall prescribe by rule or regulation for purposes of this paragraph;
(iii) issued by an investment company registered under the Investment Company Act of 1940;
(iv) excluded, on the basis of exceeding a minimum price, net tangible assets of the issuer, or other relevant criteria, from the definition of such term by rule or regulation which the Commission shall prescribe for purposes of this paragraph; or
(v) exempted, in whole or part, conditionally or unconditionally, from the definition of such term by rule, regulation, or order prescribed by the Commission.
15 U.S.C. § 78c(a)(51)(A). In general, under Rule 3a51-1, certain equity securities -- including securities priced at five dollars or more, securities subject to last sale reporting and listed on a national securities exchange or quoted on Nasdaq, and securities of an issuer that meets either a minimum net tangible assets or revenues test -- are excluded from the definition of "penny stock." 17 C.F.R. § 240.3a51-1.
|3|| SEC v. Nolan W. Wade, et al., Civil Action No. 98-1857-S (W.D. La). The district court enjoined Wade from violating Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)), Section 10(b) of the Exchange Act and Rule 10b-5 (15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5), and Section 15(a) of the Exchange Act (15 U.S.C. § 78o(a)).
Section 17(a) of the Securities Act makes it unlawful for any person to "employ any device, scheme, or artifice to defraud; . . . to obtain money or property by means of any untrue statement of a material fact or any omission 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 transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser" in connection with the offer or sale of securities.
Section 10(b) of the Exchange Act makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of" the Commission's rules.
Rule 10b-5 makes it unlawful for any person to "employ any device, scheme, or artifice to defraud" 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."
Section 15(a) of the Exchange Act makes it unlawful for a person to act as a broker or dealer without being registered with the Commission.
Wade also was ordered to disgorge $600,000. The court waived payment of disgorgement and declined to impose a civil penalty, based upon Wade's demonstrated financial inability to pay. Lit. Rel. No. 17048 (June 22, 2001), 75 SEC Docket 986.
|4||Exchange Act Rel. No. 48228 (July 25, 2003), ___ SEC Docket ___.|
|5||Id. As we discuss further at n.10, infra, Wade is mistaken in suggesting that evidence of subsequent wrongdoing must be adduced by the Division of Enforcement in such a follow-on, remedial proceeding.|
|6||The successor company is known as Bio-Solutions International, Inc.|
|7||Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 185 (1973) (quoting American Power Co. v. SEC, 329 U.S. 90, 112 (1946)); Brian A. Schmidt, Exchange Act Rel. No. 45330 (Jan. 24, 2002), 76 SEC Docket 2255, 2272; Seaboard Inv. Advisers, Inc., 74 SEC Docket 201, 207.|
|8||See Marshall E. Melton, ___ SEC Docket at ___, n.3, and cases therein cited.|
|9||See Arthur Lipper Corp., 46 S.E.C. 78, 101 (1975) (respondent's failure to recognize magnitude of his misconduct can indicate likelihood of repeating it), rev'd on other grounds, 547 F.2d 171 (2d Cir. 1976).|
|10||Wade asserts that Steadman v. SEC , 603 F.2d 1126 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981), stands for the proposition that we may not base our sanctions on the consent injunction entered here and the underlying allegations, but must have before us extrinsic evidence of subsequent misconduct. Wade has read Steadman selectively. Wade focuses on Steadman's statement that "[t]o say that past misconduct gives rise to an inference of future misconduct is not enough." Id. at 1140. Wade does not include in his brief the next Steadman sentence: "What is required is a specific enumeration of the factors in Steadman's case that merit permanent exclusion." Id. Steadman teaches that the Commission must explain its reasoning in sufficient detail in order for a court to assess the reasonableness of its remedy. See Rizek v. SEC, 215 F.3d 157, 161 (1st Cir. 2000) (concluding that Steadman "articulate[s] . . . the well-established rule that agencies must sufficiently articulate the grounds of their decisions so that appellate courts are able to perform their function of judicial review meaningfully"). We have provided that detailed reasoning here.|
|11|| The Form 10-KSB states that Bio-Solutions International, Inc. stock is "penny stock" under the Commission's rules and is listed on the Over-The-Counter Bulletin Board.
Wade seems to believe that the Commission is precluded from considering these and related facts in determining whether to impose a "penny stock" bar, because the law judge did not recite them in support of his sanctions determination. Wade is mistaken - - he has appealed the law judge's bar order and, with respect to that appeal issue, under Rule 411 of our Rules of Practice, 17 C.F.R. § 201.411, we "may make any findings or conclusions that in [our] judgement are proper and on the basis of the record."
|12||Steadman, 603 F.2d at 1140.|
|13|| 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.