SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40672/ November 12, 1998 Admin. Proc. File No. 3-9481 ------------------------------------------------- In the Matter of the Application of | | STEPHEN B. CARLSON | c/o Eric J. Peck, Esq. | Lindquist & Vennum P.L.L.P. | 4200 IDS Center | 80 South Eighth Street | Minneapolis, Minnesota 55402 | | For Review of Disciplinary Action Taken by the | | NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.| ------------------------------------------------- OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Violations of Rules of Fair Practice Conduct Inconsistent with Just and Equitable Principles of Trade Former general securities principal and president of former member firm violated just and equitable principles of trade when he used threats, coercion, and intimidation in an attempt to obtain stock at below-market prices. Held, association's findings of violation and sanctions are sustained. APPEARANCES: Terrence J. Fleming, and Eric J. Peck, of Lindquist & Vennum, P.L.L.P., for Stephen B. Carlson. Alden S. Adkins, Norman Sue, Jr., and Jeffrey S. Davis, for NASD Regulation, Inc. Appeal filed: October 21, 1997 Last brief received: January 29, 1998 I. Stephen B. Carlson, formerly the sole owner, general securities principal, and president of Aspen Capital Group, Inc. ("Aspen" or "firm"), a former member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. [1] The NASD found that Carlson attempted to obtain stock at below-market prices by using a combination of threats, coercion, and intimidation in violation of Article III, Section 1 of the NASD's Rules of Fair Practice (the "Rules"). [2] The NASD censured Carlson; fined him and Aspen $10,000, jointly and severally; assessed costs of $1,852.30 against Carlson and Aspen, jointly and severally; and barred Carlson from association in all capacities with any member. We base our findings on an independent review of the record. II. Carlson does not dispute that his conduct violated Article III, Section 1 of the Rules. Rather, he asks that we modify the sanctions imposed on him. Because his conduct is relevant to the issue of sanctions, we describe Carlson's conduct below. Carlson entered the securities industry in 1981. In 1985, Carlson founded Aspen. Carlson was Aspen's sole owner, general securities principal, and president during the time the misconduct at issue occurred. Aspen's primary business was short-selling stocks. [3] In March, April and May of 1994, Aspen took a short position in the stock of Teletek, Incorporated ("Teletek"). [4] On June 9, 1994, Carlson had a telephone conversation with Lawrence Erber. At that time, Carlson believed that Erber was a former member of the securities industry and a convicted felon. Erber had, in fact, pled guilty in February 1991 to the offenses of conspiracy to manipulate stock prices and wire fraud. [5] Carlson also believed that Erber was promoting and manipulating the price of Teletek stock. Erber, who had initiated the telephone call, taped the June 9, 1994 conversation. [6] During this conversation, Carlson threatened to take steps to have Teletek delisted from the Nasdaq stock market ("Nasdaq") unless he received discounted shares of the company. Carlson bolstered this threat by suggesting that he had previously been instrumental in the delisting of the securities of American Gladiator ("GLAD"). [7] Carlson stated: Let me tell ya, we were intimately involved in getting GLAD delisted. OK? I am going to do the same thing to Teletek -- unless I get some stock from you on a favorable basis. Carlson also threatened Erber with the exposure of his role as an undisclosed owner of Paramount Securities, a broker-dealer. Such ownership by Erber could have violated a federal court order restricting Erber's participation in the securities industry. [8] Carlson ended the conversation by stating that he would "go after" Teletek unless Erber complied with Carlson's demand for cheap stock. Both Erber and Carlson used profanity during the course of the conversation. [9] No further conversations occurred between Erber and Carlson. Aspen subsequently covered its short positions in Teletek stock in the open market and made a profit on its transactions. Despite his statements to Erber, Carlson did not take any actions against Teletek. After the hearing, the District Business Conduct Committee ("District Committee") determined that Carlson had violated Article III, Section 1 of its Rules during the June 9, 1994 telephone conversation. While Carlson's appeal was pending before the National Business Conduct Committee ("National Committee"), NASD staff made a motion to adduce additional evidence and to remand the matter to the District Committee for further proceedings. The motion was granted. On remand, NASD staff introduced another audio tape into evidence in an effort to show that Carlson's use of threats and intimidation had not been confined to the June 9, 1994 telephone conversation. The audio tape introduced by NASD staff at the remanded hearing contained a discussion between Carlson and Brett Bouchy (a broker at another firm) about the stock of Wholesome and Hearty. Bouchy, who initiated the call, asked Carlson to explain the basis of his opinion that Wholesome and Hearty stock, then trading at a high of $9 3/8, was actually worth only $3 to $4 per share. [10] Bouchy then told Carlson that he wanted to "work something out." Carlson replied that he would "leave you guys alone" if he obtained a block of 100,000 shares of stock at $6 per share. After receiving a noncommittal response from Bouchy, Carlson responded that he understood, but "that's where I'm coming from. . . . if you guys want an olive branch, that's the olive branch that I'm extending to you." [11] After considering the additional evidence, the District Committee nonetheless adhered to its earlier determination of sanctions and imposed on Carlson a censure, a $10,000 fine (jointly and severally with Aspen), a 30-day suspension, and costs (jointly and severally with Aspen). The District Committee stated that it had considered barring Carlson for his misconduct, but found that several mitigating factors weighed against a bar: Carlson did not carry out his threat to get Teletek delisted; Carlson did not have a disciplinary history of similar incidents; and Carlson had never received cheap stock from a promoter. The District Committee further credited Carlson's statement that he did not ordinarily conduct his business in this manner, and concluded that the use of coercion and intimidating tactics during the June 9, 1994 conversation was an isolated incident. The District Committee also stated that in concluding the misconduct was an isolated incident, it had reviewed the tape of Carlson's conversation with Bouchy. The National Committee affirmed the District Committee's findings but increased the suspension to a permanent bar. [12] Although the National Committee did not dispute the District Committee's findings of mitigating factors, the National Committee determined that the seriousness of Carlson's conduct merited a bar. The National Committee concluded, "Carlson's and Aspen's conduct so seriously undermined the fair and efficient operation of the market and so clearly threatened the public's confidence in those markets, that it cannot be tolerated, even as a first violation." We view Carlson's conduct as highly unethical and therefore actionable under NASD Rules. [13] It is evident from both the transcript of the June 9, 1994 conversation between Erber and Carlson, and the audio tape itself, that Carlson used threatening, coercive, and intimidating tactics in his attempt to obtain Teletek stock at below-market prices. As Carlson correctly concedes, this misconduct violates Article III, Section 1 of the NASD Rules. [14] III. As noted above, Carlson's sole contention on appeal is that NASD's decision to impose a permanent bar is overly severe. Section 19(e) of the Securities Exchange Act of 1934 governs our review of the sanctions imposed by a self-regulatory organization. [15] Consistent with that statutory provision, we find no basis for concluding that the sanctions imposed here, including the bar, are excessive, oppressive, or impose an unnecessary or inappropriate burden on competition. Carlson expresses regret for his misconduct during the June 9, 1994 conversation, characterizing it as an isolated event, and points out that he has no similar disciplinary history in fourteen years of participation in the securities industry. [16] Carlson represents that he will refrain from such activities in the future. Carlson, however, committed a serious breach of his ethical duties as a securities professional and violated the NASD Rules by using threatening, coercive, and intimidating tactics during his conversation with Erber on June 9, 1994. Moreover, Carlson implicitly threatened Bouchy with adverse consequences by stating that he would "leave you guys alone" if Carlson received a block of shares at a significant discount. Although Carlson did not use profanity in his conversation with Bouchy, the implied threat of unpleasant consequences demonstrates that Carlson's use of threatening, coercive, and intimidating tactics were not limited to the June 9, 1994 conversation. Under these circumstances, we share the National Committee's view that Carlson's conduct was unacceptable. We sustain the sanctions imposed by the NASD in their entirety as we do not find that they are excessive, oppressive, or impose an unnecessary or inappropriate burden on competition. An appropriate order will issue. [17] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, and CAREY); Commissioner UNGER concurring in the Commission's findings and dissenting as to the sanctions imposed. Jonathan G. Katz Secretary **FOOTNOTES** [1]: Aspen was a respondent in the proceeding below. In January 1996, Aspen filed a Uniform Request for Broker-Dealer Withdrawal. CRD reports that as of January 25, 1996, Aspen's registration was "Terminated - BDW FILED." CRD further reports that Aspen was expelled from NASD registration on January 29, 1998 for failure to pay "fines and/or costs." [2]:The NASD has revised and renumbered its rules but has made no substantive changes to the particular rule at issue here. Article III, Section 1 of the Rules (now Conduct Rule 2110) requires adherence to "high standards of commercial honor and just and equitable principles of trade." [3]:Generally, "[s]hort sellers sell a security they do not own by borrowing the security (often from a firm that holds it in street name as security for a margin account) and replacing it later with a security bought on the open market. The short seller anticipates that the market price of the security will fall between the time of the sale of the borrowed security and the date of purchase of the replacement security." Randolph K. Pace, 51 S.E.C. 361, 365 n. 19 (1993). [4]:On March 31, 1994, Aspen was short 3,000 shares of Teletek stock; on April 30, 1994, Aspen was short 27,000 shares of Teletek stock; and on May 30, 1994, Aspen was short 62,300 shares of Teletek stock. Aspen also took short positions in Teletek stock in late June and late July 1994. [5]:See United States v. Larry Erber, 89 CR 681 (S.D.N.Y. filed February 25, 1991) (order entering judgement of conviction). [6]:The Office of the United States Attorney in Los Angeles provided NASD staff with a copy of the audio tape in November 1994. The NASD entered a copy of the audio tape, as well as a transcribed version of the audio tape, into the record. [7]:Carlson mentioned the delisting of GLAD to Erber because he believed that Erber also had been involved in manipulating the stock of that company. [8]:See United States v. Larry Erber, 89 CR 681 (S.D.N.Y. February 20, 1991) (injunction restricting Erber's activities in the securities industry). [9]:Carlson stated that he used this "rough" language because Erber was a convicted felon who made his living "stealing money from old ladies and IRAs and pension plans. And I was trying to talk to him on his level." [10]:Carlson's opinion about the value of Wholesome and Hearty stock had apparently been published in "a couple ofarticles." [11]:NASD staff also presented testimony that GLAD had been delisted from Nasdaq because the minimum bid price of its stock, after a reverse merger, had dropped below $3 per share. NASD staff argued that this evidence demonstrated that Carlson had impliedly threatened to cause the delisting of Teletek by manipulating the company's stock price downward to below $3 a share. The District Committee was unpersuaded by this argument and concluded that Carlson had instead been threatening to bring Teletek to the attention of the NASD, as he had done with GLAD, by alleging that the company was engaged in stock fraud. The District Committee further noted that, had Carlson threatened price manipulation, it would have imposed more severe sanctions. [12]:The National Committee affirmed the other sanctions imposed by the District Committee. [13]:See Jay Frederick Keeton, 50 S.E.C. 1128, 1134 (1992) ("As we have long recognized, [the requirement that associated persons adhere to high standards of commercial honor and just and equitable principles of trade] is not limited to rules of legal conduct, but incorporates broad ethical principles); Timothy L. Burkes, 51 S.E.C. 356, aff'd mem., 29 F.3d 630 (9th Cir. 1994); Benjamin Werner, 44 S.E.C. 622 (1971). [14]:Keeton, 50 S.E.C. 1128 (salesman's pursuit of commissions by threatening to place a company's reputation and financial position at risk, even if the claim for such compensation was meritorious, violated NASD's requirement that associated persons observe high standards of commercial honor and just and equitable principles of trade); cf. Frank J. Custable Jr., 51 S.E.C. 643, 647 (1993) (sustaining NASD's finding that applicant, "an undisciplined salesman who would say or do whatever it took to make a sale, including using lies and threats" violated high standards of commercial honor and just and equitable principles of trade). [15]:15 U.S.C. 78s(e)(2) (1997). [16]:Carlson's prior disciplinary history consisted of a $1,000 fine for a net capital violation, imposed jointly and severally upon him and Aspen, in 1992. In October 1997, after issuing its decision here, the NASD accepted an offer of settlement in satisfaction of a complaint filed on July 10, 1996 alleging a net capital violation. Carlson and Aspen were censured; jointly and severally fined $2,500; and Carlson was further required to requalify by examination as a financial and operations principal should he apply in the future to become associated in that capacity with a member firm. [17]:We have considered all of the contentions advanced by the parties. We reject or sustain them 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. 40672 / November 12, 1998 Admin. Proc. File No. 3-9481 ------------------------------------------------- In the Matter of the Application of | | STEPHEN B. CARLSON | c/o Eric J. Peck, Esq. | Lindquist & Vennum P.L.L.P. | 4200 IDS Center | 80 South Eighth Street | Minneapolis, Minnesota 55402 | | 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 Stephen B. Carlson, and the Association's assessment of costs, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary