SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40387 / September 1, 1998 Admin. Proc. File No. 3-8642 : In the Matter of the Application of : : ALAN E. ROSENTHAL : : : OPINION OF THE COMMISSION BROKER-DEALER PROCEEDING Grounds for Remedial Action Conviction Practice and Procedure Collateral Bar Bar from Participation in Penny Stock Offering Associated person of registered broker-dealer was convicted of offering a gratuity to a pension fund manager with the intent to influence the pension fund manager's investment decisions. Held, it is in the public interest to bar respondent from association with a broker or dealer, with the proviso that, after three years, he may reapply to become so associated. A bar from participation in any penny stock offering is not required in the public interest because there is no indication that respondent previously has, or is likely to, promote, offer, or sell penny stocks. APPEARANCES: Eliot Lauer and Michael C. Quinn, of Curtis, Mallet-Prevost, Colt & Mosle, for Alan E. Rosenthal. Larry P. Ellsworth, for the Commission's Division of Enforcement. Appeal filed: July 1, 1996 Last brief received: September 20, 1996 I. Our Division of Enforcement ("Division") appeals from the decision of an administrative law judge. [1] Alan E. Rosenthal served as head of the convertible bond department at Drexel Burnham Lambert, Inc. ("Drexel"), a broker-dealer formerly registered with the Commission pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act"). The law judge found that Rosenthal was convicted in 1992 of offering a gratuity in connection with a pension plan investment, in violation of 18 U.S.C.  1954. [2] Following a hearing, the law judge determined that Rosenthal should be barred from association with any broker or dealer and from participating in any offering of penny stock. The Division, in its appeal, challenges only the law judge's failure also to impose a collateral, or industry-wide, bar. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. II. Section 15(b)(6) of the Exchange Act authorizes the Commission to institute a proceeding if, among other things, a person associated with a broker-dealer is convicted of a crime that involves the purchase or sale of a security. As described in detail below, Rosenthal's 1992 conviction is based upon his role in structuring and effectuating two securities transactions in order to curry favor with an investment adviser whose firm managed approximately $2 billion in corporate pension funds. The transactions at issue were designed to benefit David Solomon, the majority shareholder of Solomon Asset Management ("SAM"). As a money manager for SAM, Solomon had a close business relationship with Michael Milken, head of Drexel's high- yield bond department. The corporate pension funds managed by SAM were invested primarily in high-yield bonds, and SAM conducted between fifty and seventy percent of its overall business with Drexel. At the relevant time, however, Drexel faced increased competition for SAM's high-yield bond business. In December 1985, Solomon asked Milken to help him find a tax shelter to offset personal short-term capital gains that Solomon had realized during that year. Milken told Solomon that no tax shelters were available but that he could arrange for Drexel to sell securities to Solomon and, shortly thereafter, repurchase the securities at a lower price, thus generating losses that Solomon could claim on his 1985 tax return to offset his realized gains. Milken further promised to seek a favorable investment opportunity for Solomon in 1986 to make up for the losses that Solomon would incur from the sale/repurchase arrangement. Solomon testified at Rosenthal's criminal trial that Milken had instructed him to "tell Alan [Rosenthal] what you need and Alan will take care of it for you." Solomon thereupon called Rosenthal and explained the situation. Shortly thereafter, Rosenthal selected two securities that could generate the required losses and contacted Solomon with proposed prices and quantities for the sale and repurchase transactions. Acting on behalf of Drexel, Rosenthal sold Solomon the agreed-upon securities for approximately $4.1 million. About a week later, Rosenthal, again acting for Drexel, repurchased the securities from Solomon for approximately $2.5 million. Solomon claimed the resulting $1.6 million loss on his 1985 tax return, thereby reducing his tax liability by about $800,000. In 1986, Milken arranged for Solomon to purchase an interest in a limited partnership and then, nine months later, to sell that interest to Drexel. Solomon realized a profit of approximately $2.1 million. [3] Although Rosenthal did not assist in arranging the 1986 transactions, he was aware of Milken's promise to reimburse Solomon for the 1985 investment loss. In the criminal proceeding, Rosenthal was charged, among other things, with offering a gratuity -- a "thing of value" under  1954 -- in connection with a pension plan investment. Rosenthal moved for dismissal of the  1954 charge, which described the alleged gratuity as "false and fraudulent tax losses through the 1985 Tax Trades." The trial judge determined that there was insufficient evidence to indicate that the 1985 tax losses that Rosenthal had arranged for Solomon were fraudulent. [4] He nevertheless denied Rosenthal's motion to dismiss, concluding that the "thing of value" prohibited by  1954 need not be shown unlawful in order to make out a violation of the statute. The trial judge did, however, redact the indictment to remove the words "false and fraudulent" from all references to Solomon's 1985 tax losses. The trial judge submitted the redacted indictment to the jury, which convicted Rosenthal on the  1954 charge. [5] III. In determining what remedial action, if any, is appropriate in the public interest, we consider: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. [6] The Division requests that we impose upon Rosenthal a collateral bar. Recently, in Meyer Blinder, Securities Exchange Act Rel. No. 39180 (Oct. 1, 1997), 65 SEC Docket 1970, 1981, we held that the Commission has the authority, in appropriate circumstances, to exclude a respondent from serving in any capacity in the securities industry. We do not condone Rosenthal's serious misconduct. Nevertheless, based on the particular circumstances presented by this record, we do not believe that a collateral bar is appropriate. Rosenthal's conviction is based on a single incident of wrongdoing, the conduct underlying the conviction is twelve years old, and this record contains no evidence of either prior or subsequent disciplinary history. We further note that the trial judge imposed relatively lenient criminal sanctions. For these reasons, and under all the circumstances of this case, we also believe that it is appropriate to modify the permanent bar to grant Rosenthal the right to apply to reenter the securities industry after three years. The law judge also imposed on Rosenthal a bar from participation in any offering of penny stock. Based on the record before us, we conclude that such a bar would not serve a remedial purpose. The legislative history of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which granted the Commission the authority to impose so-called "penny stock bars," [7] reflects Congress' concern that persons barred from participation in the securities industry nonetheless could participate in the penny stock market through affiliations with broker-dealers or penny stock issuers as consultants, promoters or agents. [8] By enabling the Commission to bar individuals who operate "at the fringes of the penny stock market," [9] Congress intended to broaden the Commission's barring authority in order to improve our ability to "address patterns of reentry and recidivism in penny stock distributions." [10] Here, however, there is no indication that Rosenthal previously has been, or is likely to become, involved in activities related to the promotion, offering, or sale of penny stock. An appropriate order will issue. [11] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, and UNGER); Commissioner CAREY not participating. Jonathan G. Katz Secretary **FOOTNOTES** [1]: Alan E. Rosenthal, Initial Decision No. 91 (June 19, 1996), 62 SEC Docket 492. Rosenthal did not appeal the law judge's decision. [2]:United States v. Alan E. Rosenthal, 9 F.3d 1016 (2d Cir. 1993). The statute provides, in relevant part: Whoever being-- (1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any . . . employee pension benefit plan . . . receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of his actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined . . . or imprisoned not more than three years, or both . . . . 18 U.S.C.A.  1954 (1984) (amended 1994) (emphasis added). Rosenthal received a one-year suspended sentence and three years probation. As conditions of probation, Rosenthal was ordered to pay a fine of $250,000 and to perform 300 hours of community service. The court also imposed a special assessment of $50. [3]: Solomon paid approximately $320,000 in capital gains taxes on this investment. Taken as a whole, the 1985 and 1986 transactions arranged by Rosenthal and Milken afforded Solomon a net tax savings of approximately $480,000. [4]: The trial judge stated that Milken's promise to seek a favorable investment opportunity for Solomon in 1986 was "not certain enough" to support a finding that Solomon's 1985 tax losses were compensated for by "insurance or its equivalent" and therefore were fraudulent under the Internal Revenue Code. [5]: The jury acquitted Rosenthal on the other counts contained in the redacted indictment. [6]: Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). [7]: Pub. L. No. 101-429  504, 15 U.S.C.  78o(b)(6) (1990). [8]: H.R. Rep. No. 101-617, at 21-22, 28 (1990), reprinted in 1990 U.S.C.C.A.N. 1408, 1423-24, 1430. [9]: Id. at 26, reprinted in 1990 U.S.C.C.A.N. 1408, 1428. [10]: Id. at 28, reprinted in 1990 U.S.C.C.A.N. 1408, 1430. [11]:All of the contentions advanced by the parties have been considered. The contentions are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40387 / September 1, 1998 Admin. Proc. File No. 3-8642 : In the Matter of the Application of : : ALAN E. ROSENTHAL : : : ORDER IMPOSING REMEDIAL SANCTION On the basis of the Commission's opinion issued this day, it is ORDERED that Alan E. Rosenthal be, and he hereby is, barred from association with a broker or dealer, with the proviso that, after three years, he may reapply to become so associated. By the Commission. Jonathan G. Katz Secretary