SECURITIES AND EXCHANGE COMMISSION
INVESTMENT ADVISERS ACT OF 1940
Rel. No. 1752
Admin. Proc. File No. 3-9105
In the Matter of
IRA WILLIAM SCOTT
OPINION OF THE COMMISSION
INVESTMENT ADVISER PROCEEDINGS
Ground for Remedial Action
Sole proprietor and consultant associated with a registered investment adviser was convicted in 1992 of thirteen felony counts (four counts of theft, three counts of sale of security by unregistered agent, three counts of sale of unregistered security, and three counts of fraud in connection with sale of a security) in Indiana state court. Held, it is in the public interest to bar respondent from associating with an investment adviser.
Ira W. Scott, pro se.
Peter K.M. Chan, for the Division of Enforcement.
Appeal filed: October 6, 1997
Last brief received: January 12, 1998
Ira William Scott, the sole proprietor of and a "consultant" associated with "Ira W. Scott," a registered investment adviser during the relevant time period, appeals from the decision of an administrative law judge. The law judge determined to bar Scott from association with any investment adviser on the basis of Scott's conviction for four counts of theft, three counts of sale of a security by an unregistered agent, three counts of sale of an unregistered security, and three counts of fraud in connection with the sale of a security, each a felony offense under Indiana state law, and in consideration of the public interest. We base our findings on an independent review of the record except for those findings not challenged on appeal.
Scott filed an application for registration on Form ADV with this Commission as a sole proprietorship investment adviser under the name of "Ira W. Scott." In the Form ADV, Scott also identified himself as a "consultant" to the adviser and represented that he would control "100%/100%" of both the authority and beneficial interest in the adviser. 1 On May 16, 1986, we issued an order pursuant to the provisions of the Investment Advisers Act of 1940 ("Advisers Act") granting Scott's application for registration as an investment adviser. 2
In May 1988, the State of Indiana charged Scott with four felony counts of exercising unauthorized control over the property of another with the intent to deprive the owner of the property's value or use. In June 1988, Scott was additionally charged with nine felony counts relating to the sale of securities. 3 After a jury trial, Scott was convicted of four counts of theft (three counts relating to investor funds and one count involving the property of a long-distance telephone carrier), three counts of sale of a security by an unregistered agent, three counts of sale of an unregistered security and three counts of fraud in connection with the sale of security. 4 The
Indiana Court of Appeals upheld Scott's conviction on appeal. 5
The factual background of Scott's criminal conviction, as set forth in the charging document, the opinion of the Indiana Court of Appeals, and Scott's testimony before the law judge, follows. On April 28, 1987, Scott opened an account with a long-distance telephone carrier for Global Finance Corporation ("Global"), a company in which he was the sole shareholder. The carrier activated the account on May 1, 1987 and issued eleven cards with access codes to Scott.
From May 1987 to November 1987, Scott sold unregistered securities of Value Plus + Communications, Inc. ("Value Plus") to the public. Scott, who formed and managed Value Plus, claimed to investors that Value Plus was in the business of purchasing long-distance time from telephone companies for resale to others. In fact, Value Plus had no on-going business. Scott was not a registered broker, dealer, agent or investment adviser with the State of Indiana.
On May 13, 1987, Scott told Thomas Sutherland that Sutherland would receive stock dividends equal to 30% to 35% of his investment if he purchased Value Plus stock. Scott also promised Sutherland free long-distance telephone service and provided him with an access code that had been issued to Global for making long-distance telephone calls. Sutherland entered into a stock subscription agreement with Scott and invested $5,000 in Value Plus for 500 shares of stock.
Scott also contacted Sutherland's daughter, Deborah Cristea, on May 13, 1987, and touted Value Plus stock. As with Sutherland, Scott told Cristea that she would receive free long-distance service and provided her with one of Global's access codes for use in making long-distance telephone calls. Cristea also entered into a stock subscription agreement with Scott and invested $1,500 for 150 shares of Value Plus stock.
On November 3, 1987, Scott told Charles and Lorraine Hroma that they would receive interest payments equal to 15 1/2% of their investment if they invested in Value Plus. The Hromas entered into a convertible debenture agreement with Scott and invested $1,000 in Value Plus. In addition to these representations, Scott told the Value Plus investors he would refund their money at any time, and that they would not suffer any losses from their investments. These representations were false.
By December 17, 1987, Global had accumulated an unpaid balance of over $42,000 with the long-distance telephone carrier. An investigation conducted by the carrier revealed that Scottpossessed 117 stolen access codes and that several Value Plus investors possessed access codes issued to Scott through Global. No payments were ever made on Global's account with the carrier despite repeated requests for payment.
A. Sections 203(e) and 203(f) of the Advisers Act, 6 as relevant here, permit us to impose sanctions on an investment adviser or a person associated with an investment adviser, who has been convicted of any felony or misdemeanor concerning the purchase or sale of any security, or involving the larceny of funds or securities, if we find such sanctions to be in the public interest. 7 On December 1, 1992, an Indiana Superior Court entered a judgment of conviction against Scott on nine felony counts involving the sale or purchase of a security, three felony counts relating to the theft of investor funds, and one felony count relating to the theft of the telephone carrier's property. 8
On September 27, 1996, we commenced this proceeding against Scott pursuant to the Advisers Act. After a hearing, the law judge determined that Scott's activities fell within the statutory definition of an investment adviser, that Scott was associated with a registered investment adviser during the relevant period, and that the public interest justified barring Scott from future association with any investment adviser.
Scott argues that he has been "wrongfully convicted" of these crimes and asks this Commission:
to take into consideration the extent and occurrences of prosecutorial misconduct, false testimony, suppression of favorable evidence, newly discovered evidence, improper instructions to jury (sic) sufficiency of evidence, trial counsel's failure to call witnesses, conflicting evidence, conflicting testimony, denial of due process and criminal acts on behalf of (the long-distance telephone carrier) during the investigation of this matter.
However, "(a) criminal conviction cannot be collaterally attacked in an administrative proceeding. This prohibition extends to issues relating to the validity of the conviction, including the credibility of the evidence presented at trial and any defenses to the criminal charge." 9 Thus, Scott is barred from attacking the merits of his conviction in this forum.
B. Scott disputes the law judge's finding that his activities came within the statutory definition of an investment adviser. Scott contends that he never received compensation as an investment adviser and that he did not conduct a business of advising the public on the value of, or the advisability of investing in, purchasing, or selling, securities. Scott further argues that he "never profited from investment advisory work" but concedes that he was "registered as an investment advisor at the time (he) was charged with the crimes involved."
Since Scott was registered as an investment adviser with the Commission during the relevant time period, he submitted himself to our jurisdiction pursuant to the Advisers Act. Furthermore, the information provided by Scott in the Form ADV filed with this Commission demonstrates that Scott intended to provide investment advisory services to the public for a fee. 10
Moreover, Scott's claim that he does not meet the functional definition of an investment adviser is without merit. To the extent relevant here, the Advisers Act defines "investment adviser" as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities . . . ." 11 The compensation element of the definition is satisfied by the diversion of investor funds for personal use. 12 Since Scott formed and managed Value Plus, and he was convicted of exercising unauthorized control of funds belonging to Value Plus investors with the intent to deprive them of those funds, he received compensation for providing investment advice within the meaning of the Advisers Act. 13 The circumstances of Scott's conviction indicate that he did, in fact, advise members of the public (i.e., Thomas Sutherland, Deborah Cristea, and the Hromas) as to the value and advisability of investing in and purchasing Value Plus securities.
Scott also argued before the law judge, in what appears to be another challenge to our jurisdiction, that his conviction involved the sale of securities to investors in his capacity "asan officer in a corporation and not as a registered investment advisor." Sections 203(e) and (f), however, do not limit our ability to impose sanctions to only those persons who commit the specified felonies in their capacity as an investment adviser. The crimes enumerated in the statute include convictions on securities-related and larceny-type felonies. Even if we were to accept Scott's assertion, which we do not, that he acted solely in his capacity as a corporate officer when he committed the crimes that were the subject of his conviction, we may, pursuant to Sections 203(e) and (f), impose any sanctions justified in the public interest.
The law judge concluded that it was in the public interest to impose a bar on Scott. The law judge noted that, although Scott had deliberately engaged in a course of fraudulent conduct "so serious and outrageous as to be criminal," Scott had not shown any remorse or appreciation that he had acted illegally or damaged investors. The law judge also observed that Scott had asserted that he had not been involved with individual investors. However, his felony conviction involved transactions with four natural persons. Based on evidence in the record and her observation of Scott's demeanor, the law judge concluded that "it is almost certain that Mr. Scott will commit future violations of the securities laws if he is allowed to participate in the securities industry in the future."
In considering whether an administrative sanction serves the public interest, we evaluate the egregiousness of a respondent's actions, the isolated or recurrent nature of the violation, the degree of scienter, the sincerity of a respondent's assurances against future violations, the respondent's recognition that the conduct was wrongful, and the likelihood of recurring violations. 14 We believe that it is in the public interest to bar Scott from association with any investment adviser.
Scott fraudulently induced four investors to purchase Value Plus securities. In addition, he accumulated an unpaid debt to a long-distance telephone carrier of more than $42,000. Scott engaged in this conduct for over half a year. He was stopped only by the intervention of state law enforcement authorities. At the hearing before the law judge, Scott characterized the State's intervention as an unjustified act that "jeopardized" his good name and character, and that forced Value Plus to go out of business. Scott's continued attacks on the validity of his conviction and insistence that the charges brought against him had no basis further demonstrate his inability to understand his obligations under the securities laws.
Scott stated his intent to re-enter the securities industry to the law judge, but offered no assurance that he would not commit future violations of the securities laws. While Scott claimed that he would limit his interactions to "accredited investors," such investors are also vulnerable to fraud.
Under these circumstances, an inference that Scott would commit future violations of the securities laws, if given the opportunity to do so, is warranted. For the foregoing reasons, we determine to bar Scott from association with any investment adviser in order to protect public investors.
An appropriate order will issue. 15
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, and CAREY); Commissioner UNGER not participating.
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT ADVISERS ACT OF 1940
Rel. No. 1752
Admin. Proc. File No. 3-9105
In the Matter of
IRA WILLIAM SCOTT
ORDER BARRING RESPONDENT FROM ASSOCIATION WITH
ANY INVESTMENT ADVISER
On the basis of the Commission's opinion issued this day, it is
ORDERED that Ira William Scott be, and hereby is, barred from association with any investment adviser.
By the Commission.
Jonathan G. Katz
-- Section 220(a)(17) of the Advisers Act defines, in relevant part, "person associated with an investment adviser" as any person "directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser . . . ." 15 U.S.C. õ 80b-2(a)(17) (1997). In the Form ADV filed with the Commission, Scott stated that he would exercise all of the authority and hold all of the beneficial interest in the investment adviser. We conclude that Scott was associated with the registered investment adviser.
-- Scott withdrew his registration as an investment adviser by filing a Form ADV-W with the Commission on June 12, 1988. The withdrawal became effective on August 12, 1988. See 17 C.F.R. õ 275.203-2(b) (1997).
-- State of Indiana v. Ira W. Scott , No. 64D01-8805-CF-76 (Porter Superior Court May 27, 1988 and June 8, 1988) (information charging Scott with thirteen felony offenses).
-- State of Indiana v. Ira W. Scott , No. 64D01-8805-CF-76 (Porter Superior Court Dec. 1, 1992) (sentencing order entering judgment of conviction).
-- Ira Scott v. State of Indiana , NO. 64A03-9303-CR-00098 (Ind. Ct. App. Sept. 29, 1994) (affirming Scott's conviction on all thirteen felony counts). Scott's petition seeking further review of his conviction by the Indiana Supreme Court was denied.
-- 15 U.S.C. õ 80b-3(e) and (f) (1997).
-- A person associated with an investment adviser may be sanctioned if convicted of a qualifying crime under the Advisers Act if the conviction (as specified in õ 80b-3(e)) has occurred within ten years of the commencement of proceedings to impose such sanctions. 15 U.S.C. õ 80b-3(f) (1997).
-- Scott now seeks postponement of a "final decision" from the Commission on his application for review pending resolution of a petition for post-conviction relief that he filed in Indiana Superior Court. We see no reason to await the outcome of Scott's request for post-conviction relief. The Advisers Act permits us to impose sanctions on the basis of a qualifying conviction. We need not await the outcome of any post-conviction proceeding in order to proceed. See Charles Phillip Elliott , 50 S.E.C. 1273, 1276-1277 (1992), aff'd. 36 F.3d 85 (11th Cir. 1994) (sanctions imposed despite pending appeal of underlying criminal conviction).
-- William F. Lincoln , Securities Exchange Act Rel. No. 39629 (February 9, 1998), 66 SEC Docket 1433, 1436-1437; see also , Elliott v. SEC , 36 F.3d 86, 87 (11th Cir. 1994); John Francis D'Acquisto , Investment Advisers Act Rel. No. 1697 (January 21, 1998), 66 SEC Docket 1094, 1098-1099; Benjamin G. Sprecher , Securities Exchange Act Rel. No. 38485 (April 8, 1997), 64 SEC Docket 720, 729.
-- Scott also testified before the law judge that he "was not dealing with the public and actually was dealing with accredited investors and major corporations," apparently arguing that he did not provide investment advice to natural persons. A person is not excluded from the definition of investment adviser merely because he or she limits advice to natural persons. We note further that the term "accredited investor" includes certain natural persons. 17 C.F.R. 230.215(e) and (f) (1997). Moreover, Scott entered an exhibit into evidence at the hearing purporting to be a client list of investors that contained the names of natural persons, and Scott's criminal conviction indicates that he provided investment advice to at least four natural persons.
-- 15 U.S.C. õ 80b-2(a)(11) (1997).
-- Alexander V. Stein , Investment Advisers Act Rel. No. 1497 (June 8, 1995), 59 SEC Docket 1493, 1498.
-- Scott also seeks a "copy of the findings of the investigators for the Securities and Exchange Commission's Midwest Division" in order to prove that he never was compensated as an investment adviser. That report (which was produced to Scott by the Division but not admitted into evidence below) states that Scott's advisory business was inactive. However, the circumstances leading to Scott's conviction indicate that he acted and received "compensation" as an investment advisor within the meaning of the Advisers Act. We deny Scott's request. Whether or not Scott otherwise had an investment adviser business that generated compensation is not relevant to our determination here.
-- Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd , 450 U.S. 91 (1981).
-- All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein.