Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-99-01167/USCOURTS-caDC-99-01167-0/pdf.json

Parties Involved:
Securities and Exchange Commission
Respondent
Jacob Wonsover
Petitioner

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

for the district of columbia circuit

Argued January 21, 2000 Decided March 14, 2000

No. 99-1167

Jacob Wonsover,

Petitioner

v.

Securities and Exchange Commission,

Respondent

On Petition for Review of an Order of the

Securities and Exchange Commission

Adam D. Cole argued the cause for the petitioner. Martin

E. Karlinsky, James W. Perkins and Frank C. Razzano were

on brief for the petitioner.

Randall W. Quinn, Assistant General Counsel, Securities

and Exchange Commission, argued the cause for the respondent. Jacob H. Stillman, Solicitor, David M. Becker, Deputy

General Counsel, and Nathan A. Forrester, Attorney, Securities and Exchange Commission, were on the brief for the

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 1 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

respondent. Rada L. Potts, Attorney, Securities and Exchange Commission, entered an appearance.

Before: Sentelle, Henderson and Rogers, Circuit Judges.

Opinion for the court filed by Circuit Judge Henderson.

Karen LeCraft Henderson, Circuit Judge:

Jacob Wonsover petitions for review of the Security and

Exchange Commission's (Commission) Order Imposing Remedial Sanction and the accompanying Opinion of the Commission (collectively, Sanction Order) suspending him "from

association with any broker or dealer for a period of six

months" and ordering him to cease and desist from committing or causing violations of sections 5(a) and 5(c) of the

Securities Act of 1933, 15 U.S.C. ss 77e(a), 77e(c) (1933 Act).

Joint Appendix (JA) 1, 2. Wonsover sold shares of Gil-Med

Industries, Inc. (Gil-Med) which he knew were not registered

and whose sale therefore violated the 1933 Act absent an

exemption from its registration requirements. Finding that

no exemption applied, the Commission determined that Wonsover violated sections 5(a) and 5(c). The Commission also

determined that Wonsover's inquiry into the sources of the

shares was inadequate under the circumstances and that his

violations were therefore "willful" under section 15(b)(4) of

the Securities Exchange Act of 1934, 15 U.S.C. s 78o(b)(4)

(Exchange Act), which authorized his suspension.

While he argues his sales of unregistered securities were

exempt from the 1933 Act's prohibition, Wonsover primarily

disputes the Commission's finding of willfulness, contending

his inquiry regarding the unregistered shares was adequate

to preclude such a finding. Wonsover also argues that the

sanction is draconian and that the public interest would be

better served by reducing it to a censure. He requests that

we vacate the Commission's Sanction Order or, in the alternative, reduce the sanction to censure.

Substantial evidence supports the Commission's conclusion

that Wonsover acted without adequate inquiry under the

circumstances, in violation of sections 5(a) and 5(c) of the 1933

Act, and we hold that the Commission did not err in deterUSCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 2 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

mining that the violations were willful. The sanction was not

the maximum the Commission could have imposed and we

defer to the Commission's discretionary determination. Accordingly, we deny Wonsover's petition for review.

I.

Wonsover began his career in the securities industry in

1981. Approximately five years later he met Shimon Gibori,

the founder and CEO of Gil-Med. Gil-Med made an initial

public offering in early 1998, registering with the Commission

1,050,000 shares (of 4,605,686 outstanding) for sale to the

public. This, the only stock Gil-Med registered, was traded

publicly on the NASDAQ System. On the whole, the stock

did not have much activity; its market was "thin." JA 841,

1103-06. Henry Vogel, a behavioral therapist and Gibori

associate who invested in and promoted Gil-Med, sold shares

to his friends, associates and patients during 1988 and 1989.

Informed of the difficulty shareholders were having in selling

the stock, Gibori and Vogel directed them to certain brokerage firms for help. The shareholders found less than complete success and Gibori ultimately referred them to Wonsover, who was working at Paine Webber, Inc.

Between August 1989 and October 1990 Wonsover opened

accounts for nineteen purported Gil-Med shareholders whose

names were supplied to him by Gibori.1 Some of the shareholders did not exist while others no longer owned the GilMed shares held (and later sold) in their names.2 Wonsover

sold a total of 924,000 shares of unregistered Gil-Med stock.

In light of the applicable statute of limitations, the Commission focused on the sale of 665,000 shares for seven of the

nineteen shareholders because the sales occurred within five

years of the Commission's institution of proceedings against

__________

1 Counsel for petitioner conceded at oral argument that Wonsover

had personally met none of the shareholders, with the possible

exception of Vogel.

2 Gibori and Vogel had earlier bought shares back from certain

investors who had experienced difficulty selling them.

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 3 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Wonsover.3 Sales from the seven shareholders' accounts

generated more than $300,000 in proceeds.

Wonsover understood that the clients held "restricted" GilMed stock.4 The sale of restricted stock generally is forbidden by 15 U.S.C. s 77e. Wonsover, however, asserts that the

sales were covered by the exemption found in section 4(4) of

the 1933 Act, 15 U.S.C. s 77d(4),5 or at least that he reasonably believed they were covered by the exemption.6 He

directed all potential sales of Gil-Med shares through Paine

Webber's Restricted Stock Department (RSD) for clearance

and contends that this, along with some less substantial

efforts, constituted adequate inquiry into the restricted na-

__________

3 In this opinion we refer to facts surrounding the sales of GilMed shares without distinguishing the seven shareholders from the

remaining twelve. The information available to Wonsover regarding sales and accounts for the twelve Gil-Med shareholders whose

accounts are not included among the seven accounts at issue is

relevant to his culpability for activity involving the seven Gil-Med

accounts the Commission reviewed inasmuch as they shed light

either on Wonsover's knowledge of and investigation into the background of the unregistered shares or on his sale of the shares

without knowing of their background or adequately investigating it.

4 "[R]estricted" stock is defined as "[s]ecurities acquired directly

or indirectly from the issuer, or from an affiliate of the issuer, in a

transaction or chain of transactions not involving any public offering." 17 C.F.R. s 230.144(a)(3)(i).

5 This section exempts "brokers' transactions executed upon customers' orders on any exchange or in the over-the-counter market

but not the solicitation of such orders." 15 U.S.C. s 77d(4). The

exempted "brokers' transactions" are further defined in the Commission's regulations and the portion Wonsover relies on covers

"transactions by a broker in which such broker ... [a]fter reasonable inquiry is not aware of circumstances indicating that the

person for whose account the securities are sold is an underwriter

with respect to the securities or that the transaction is a part of a

distribution of securities of the issuer." 17 C.F.R. s 230.144(g)(3).

6 Wonsover no longer argues that the transactions were covered

under various other exemptions, as he did before the Commission,

see JA 10-17.

ture of the stock. The referral to the RSD notwithstanding,

Wonsover did not show during the administrative proceedings

that he had acquired adequate background information on the

Gil-Med stock. Specifically, he could not produce investment

executive worksheets for any of the nineteen account-holders.

The worksheets, which he and other Paine Webber brokers

ordinarily complete when requesting clearance from the RSD,

reflect how and when the shareholders acquired the shares at

issue. Nevertheless, he claims the RSD contacted Gil-Med's

transfer agent, its lawyers and its auditors and ultimately

approved every sale of Gil-Med stock. Wonsover also cites

written confirmation he received from Gil-Med's transfer

agent and attorneys that the sales were legitimate. He

claims to have been duped by Vogel pretending to be one of

the listed, fictitious customers (Haim Cheap). In fact, WonsUSCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 4 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

over relies on how elaborate and effective Gibori and Vogel's

ruse was7 in arguing that his actions were not willful violations of the 1933 Act.

Early in the administrative proceedings Wonsover freely

admitted (but would later recant) that he made no inquiry

into how or when the Gil-Med shareholders acquired their

stock. See, e.g., JA 836, 846-48. Instead, he passed the duty

of inquiry to Paine Webber's RSD and lawyers. See JA 836.

The Commission demonstrates that several "red flags" should

have alerted Wonsover to the fact that Gibori in fact controlled the unregistered shares Wonsover was selling and,

therefore, no exemption was available.8 Those red flags

include Gibori's exercise of an unusual amount of control over

the nineteen accounts. He delivered account documentation,

picked up proceeds checks and held trading authorization for

at least two accounts. Some purported shareholders resided

__________

7 A separate civil action left Gibori permanently enjoined from

serving as an officer or director of a public company. Vogel

resolved the Commission's charges through settlement. See JA 5

n.7.

8 The Commission concluded that Gibori, as the founder and CEO

of Gil-Med who controlled the Gil-Med accounts, was in effect an

underwriter, making the exemption inapplicable. See supra note 5.

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 5 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

overseas. Fourteen of the nineteen listed Gil-Med headquarters as their official address and many listed Gil-Med's

telephone number too. Despite the foreign mailing addresses

of three account holders, Wonsover heeded Gibori's instructions and directed their checks to Gil-Med and their correspondence to Gil-Med to Gibori's attention. Similarly, many

of the accounts contained suspicious information. Some account forms represented U.S. citizenship while corresponding

W-8 forms certified foreign citizenship. Several had identical

personal addresses in Tel Aviv and identical bank references.

Some of the stock certificates forged by Gibori and Vogel,

which the Commission believes were amateurishly forged,

listed only a surname that, in one instance, was misspelled.

In addition to their relation to Gibori, the shareholders also

had an affiliation with Gil-Med. Some used Gil-Med headquarters as their personal mailing address and some even

identified their occupation as sales representatives for GilMed. Another red flag was that the nineteen shareholders,

collectively, sought to sell a substantial block of Gil-Med

(924,000 shares, nearly equaling the entire public float of

1,050,000), a stock Wonsover knew was not widely traded.

The Commission also notes that the S-18 registration statement of the 1998 offering reflected no ownership by any of

the nineteen shareholders and thus directly contradicted

Wonsover's stated belief that those shareholders acquired

their shares in 1986 or 1987 in private placements. See JA

1179-80. The last red flag the Commission identifies was the

difficulty in clearing the sales with the Gil-Med transfer

agent and the RSD, a difficulty Wonsover was aware of and

which he had not encountered in gaining approval for sale of

properly exempt, restricted stock in the past. In response to

the RSD's hesitation, he made repeated telephone calls to

push for its approval, including falsely claiming the shareholders were poor and needed the money immediately. See JA

982.

In a detailed opinion, the Commission affirmed the administrative law judge's (ALJ) conclusion that Wonsover violated

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 6 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

sections 5(a) and 5(c) of the 1933 Act, 15 U.S.C. s 77e,9 and

that the violations were willful under section 15(b)(4) of the

Exchange Act, 15 U.S.C. s 78o(b)(4),10 which grants the Com-

__________

9 s 77e. Prohibitions relating to interstate commerce and the

mails

(a) Sale or delivery after sale of unregistered securities

[Section 5(a)] Unless a registration statement is in effect as

to a security, it shall be unlawful for any person, directly or

indirectly--

(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to

sell such security through the use or medium of any prospectus

or otherwise; or

(2) to carry or cause to be carried through the mails or in

interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery

after sale.

. . .

(c) Necessity of filing registration statement

[Section 5(c)] It shall be unlawful for any person, directly or

indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the

mails to offer to sell or offer to buy through the use or medium

of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the

registration statement is the subject of a refusal order or stop

order or (prior to the effective date of the registration statement) any public proceeding or examination under section 77h

of this title.

15 U.S.C. s 77e.

10 Section 78o, entitled "Registration and regulation of brokers

and dealers," reads in pertinent part as follows:

(b) Manner of registration of brokers and dealers

. . .

(4) The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a

period not exceeding twelve months, or revoke the registration

of any broker or dealer if it finds, on the record after notice

and opportunity for hearing, that such censure, placing of

mission authority to suspend brokers for willful violations of

the 1933 Act. The Commission suspended Wonsover "from

association with any broker or dealer for a period of six

months" and, pursuant to 15 U.S.C. s 77h-1, ordered him to

cease and desist from committing or causing violations of

sections 5(a) and 5(c) of the 1933 Act. See JA 1, 2.

II.

We review the Commission's findings of fact for substantial

evidence. See Steadman v. SEC, 450 U.S. 91, 97 n.12 (1981)

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 7 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

("Commission findings of fact are conclusive for a reviewing

court 'if supported by substantial evidence.' ") (quoting 15

U.S.C. ss 78y, 80a-42, and 80b-13); 15 U.S.C. s 77i ("The

finding of the Commission as to the facts, if supported by

evidence, shall be conclusive."); see also Steadman, 450 U.S.

at 96 (securities laws provide scope of judicial review of

Commission disciplinary proceedings). As for the Commission's conclusions of law, we apply the standards set forth in

the Administrative Procedure Act (APA) and "will set aside

[its] legal conclusions only if 'arbitrary, capricious, an abuse

of discretion, or otherwise not in accordance with law,' 5

U.S.C. s 706(2)(A)." Proffitt v. FDIC, ___ F.3d ___, 2000 WL

19129, *3 (D.C. Cir. 2000). Our review of the Commission's

sanction is limited both by the APA and Supreme Court

precedent. See Norinsberg Corp. v. Department of Agric., 47

F.3d 1224, 1227 (D.C. Cir.), cert. denied, 516 U.S. 974 (1995).

The APA limits our inquiry to whether the Commission's

sanction was "arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law," 5 U.S.C. s 706(2)(A);

see Norinsberg Corp., 47 F.3d at 1227-28, and the Supreme

__________

limitations, suspension, or revocation is in the public interest

and that such broker or dealer, whether prior or subsequent to

becoming such, or any person associated with such broker or

dealer, whether prior or subsequent to becoming so associated--

. . .

(D) has willfully violated any provision of the Securities Act

of 1933....

Court has told us not to disturb the Commission's choice of

sanction unless it is either "unwarranted in law or ...

without justification in fact." Id. at 1228 (quoting Butz v.

Glover Livestock Comm'n Co., 411 U.S. 182, 185-86 (1973)

(ellipsis in original) (quoting American Power & Light Co. v.

SEC, 329 U.S. 90, 112-13 (1946))); accord Pharaon v. Board

of Governors of Fed. Reserve Sys., 135 F.3d 148, 155 (D.C.

Cir. 1998); Bluestone Energy Design, Inc. v. FERC, 74 F.3d

1288, 1294 (D.C. Cir. 1996). "The main point is that a court

should not second-guess the judgment of the Commission in

connection with the imposition of sanctions, unless the [Commission] has acted contrary to law, without basis in fact or in

abuse of discretion." Svalberg v. SEC, 876 F.2d 181, 185

(D.C. Cir. 1989).

Wonsover contends that the Commission applied the incorrect standard in determining willfulness and, in any event, his

conduct was not willful under either standard.11 He focuses

on the ALJ's articulation of the willfulness standard: "It is

well-settled that a finding of willfulness under [section

15(b)(4) of] the Exchange Act does not require an intent to

violate, but merely an intent to do the act which constitutes

the violation." JA 85. In his opening brief, Wonsover argued that the government must prove he acted with knowledge that his conduct was unlawful, see Brief of Petitioner at

21, but he subsequently changed the standard to reckless

disregard. See Reply Brief at 3-9. While the Commission

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 8 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

did not endorse the ALJ's standard, it expressly affirmed his

decision under either formulation of willfulness, to wit: intentional commission of the act constituting the violation or

__________

11 Although also arguing that the transactions were exempt under

section 4(4) of the 1933 Act, 15 U.S.C. s 77d(4), Wonsover does not

dispute that the accounts and sales involved a statutory underwriter, a factor which ordinarily forecloses the exemption. See 17

C.F.R. s 230.144(g). Rather, he claims he was ignorant of that fact

at the time of the transactions despite what he contends was

reasonable inquiry. If his contention were to hold, the exemption

might be available to him. See id. s 230.144(g)(3). Our resolution

of this issue, therefore, turns on whether Wonsover's inquiry was

reasonable under the circumstances.

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 9 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

knowledge of (or reckless disregard of) the fact that his

conduct violated the law. See JA 17-21.

Wonsover argues that to find willfulness where the actor

had no knowledge that his conduct was unlawful would extinguish the higher degree of culpability the willfulness requirement establishes in what Wonsover calls a two-tiered system

of broker liability exposing only willful violators to the more

severe sanctions of censure and suspension. In other words,

he claims the Commission applied a standard rendering the

Congress' use of "willfully" meaningless instead of a standard

requiring proof of the actor's knowledge that his conduct

violated the law or, at a minimum, that he acted in reckless

disregard of the law. Most of the cases Wonsover relies on,

however, apply to statutory schemes different from the 1933

Act and the Exchange Act, see Brief of Petitioner at 21-22

(citing, for example, Bryan v. United States, 524 U.S. 184

(1998) (statute prohibiting unlicensed dealing in firearms);

Ratzlaf v. United States, 510 U.S. 135 (1994) (antistructuring

laws for domestic banks); TransWorld Airlines, Inc. v. Thurston, 469 U.S. 111, 129 (1984) (ADEA)), and several involve

criminal prosecutions, see id. (citing, for example, Cheek v.

United States, 498 U.S. 192, 201 (1991) (income tax evasion)).

See generally United States v. O'Hagan, 139 F.3d 641, 647

(8th Cir. 1998) (distinguishing Ratzlaf and Cheek from securities cases). Wonsover does cite a Supreme Court opinion, as

well as the Eighth Circuit's opinion on remand, interpreting

section 10(b) of the Exchange Act. See, e.g., Brief of Petitioner at 22-23 (citing United States v. O'Hagan, 521 U.S. 642

(1997), on remand 139 F.3d 641 (8th Cir. 1998)). The Supreme Court rejected by implication Wonsover's assertion

that one must know of the relevant legal requirement for his

act to willfully violate that requirement. See O'Hagan, 521

U.S. at 665-66 (discussing "two sturdy safeguards Congress

has provided regarding scienter" first, that "Government

must prove that a person 'willfully' violated the provision" and

second (and independently), that "defendant may not be

imprisoned for violating Rule 10b-5 if he proves that he had

no knowledge of the rule") (emphasis added). On remand the

Eighth Circuit followed suit: "Courts that have interpreted

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 10 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

'willfully' in s 32 [of the Exchange Act] have reached the

same conclusion that we reach in this case: 'willfully' simply

requires the intentional doing of the wrongful acts--no knowledge of the rule or regulation is required." See O'Hagan, 139

F.3d at 647.

Willfulness is usually understood to be contextual. See

Ratzlaf, 510 U.S. at 141 ("Willful ... is a word of many

meanings, and its construction [is] often ... influenced by

its context.") (internal quotation marks omitted) (quoting

Spies v. United States, 317 U.S. 492, 497 (1943)). In the

context of the provision at issue here, we have rejected the

knowledge and the reckless disregard standards and defined

willfulness thus:

It is only in very few criminal cases that "willful" means

done with a bad purpose. Generally, it means no more

than that the person charged with the duty knows what

he is doing. It does not mean that, in addition, he must

suppose that he is breaking the law.

Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949) (internal

quotation marks omitted). In Gearhart & Otis, Inc. v. SEC,

348 F.2d 798 (D.C. Cir. 1965), we rejected the argument "that

specific intent to violate the law is an essential element of the

willfulness required to violate Section 15(b)" and noted that

the argument "ha[d] been rejected by this court, by the

Second Circuit, and by the Commission." 348 F.2d at 802-03.

We further stated that "[i]t has been uniformly held that

'willfully' in this context means intentionally committing the

act which constitutes the violation" and rejected the contention that "the actor [must] also be aware that he is violating

one of the Rules or Acts." Id. at 803.

In his reply brief and at oral argument, Wonsover seized on

our discussion of "willful misconduct" and "reckless disregard" in Saba v. Compagnie Nationale Air France, 78 F.3d

664 (D.C. Cir. 1996), a decision interpreting the Warsaw

Convention. Wonsover contends that Saba, which discussed

cases involving securities laws, demands application of a

subjective recklessness standard, a standard more demanding

than ordinary reckless disregard. In Saba we acknowledged

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 11 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

the two recklessness standards we have applied and distinguished the more demanding subjective standard from the

one more akin to gross negligence: "One meaning of recklessness, then, is simply a linear extension of gross negligence, a

palpable failure to meet the appropriate standard of care[,

and the] second, as we have recognized in other contexts, is a

legitimate substitution for intent to do the proscribed act

because, if shown, it is a proxy for that forbidden intent." 78

F.3d at 668 (citation omitted). One of the "other contexts"

the Saba court cited was the review of securities law violations. Describing that standard, the court said that either

the defendant must have known the risk of violation his action

presented or his action posed a risk "so obvious [he] must

have been aware of it." Id. at 668-69 (quoting SEC v.

Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992) (reversing

SEC's determination that appellants violated section 17(a)(1)

of 1933 Act, section 10(b) and Rule 10b-5 under Exchange

Act and section 206(1) of Investment Advisers Act)). In

other words, "if it can be shown that a defendant gazed upon

a specific and obvious danger, a court can infer that the

defendant was cognitively aware of the danger and therefore

had the requisite subjective intent." Id. at 669.

Here, the Commission based its determination of willfulness on Wonsover's failure to conduct sufficient inquiry into

the sources of the unregistered Gil-Med shares in the circumstances before him. The Commission's regulations permit a

broker's transaction if the broker "[a]fter reasonable inquiry

is not aware of circumstances indicating that the person for

whose account the securities are sold is an underwriter with

respect to the securities or that the transaction is a part of a

distribution of securities of the issuer." 17 C.F.R. s 230.144.

An oft-quoted paragraph of a Commission release clarifies

when a broker's inquiry can be considered reasonable:

The amount of inquiry called for necessarily varies with

the circumstances of particular cases. A dealer who is

offered a modest amount of a widely traded security by a

responsible customer, whose lack of relationship to the

issuer is well known to him, may ordinarily proceed with

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 12 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

considerable confidence. On the other hand, when a

dealer is offered a substantial block of a little-known

security, either by persons who appear reluctant to disclose exactly where the securities came from, or where

the surrounding circumstances raise a question as to

whether or not the ostensible sellers may be merely

intermediaries for controlling persons or statutory underwriters, then searching inquiry is called for.

Distribution by Broker-Dealers of Unregistered Securities,

Securities Act Rel. No. 33-4445 (Feb. 2, 1962). The circumstances facing Wonsover did not involve a modest offer, a

widely traded security or a customer with no relationship to

the issuer. Rather, the Gil-Med shareholders whose names

Gibori gave Wonsover offered him a substantial block of a

little-known and thinly traded security under circumstances

raising questions not only as to whether the ostensible sellers

may have been intermediaries for controlling persons or

statutory underwriters but also whether they even existed.

Clearly, a "searching inquiry" was called for.

Wonsover failed to investigate the Gil-Med accounts despite Gibori's unusual degree of control over the accounts,

many of the shareholders' apparent affiliation with Gil-Med,

the sheer amount of shares involved for a thinly traded stock

(nearly equaling the public float), the inconsistent account

documentation and his difficulty in securing RSD clearance.

We conclude that substantial evidence supports the Commission's finding that Wonsover's inquiry was not reasonable

under the circumstances and that the Commission did not err

in determining that his resulting violations were willful under

our traditional formulation of willfulness for the purpose of

section 15(b) or even under the subjective recklessness standard Wonsover presses.12 Precedent will not suffer Wonsover's argument that he justifiably relied on the clearance of

__________

12 Our decision upholding the Commission's finding of willfulness

leaves Wonsover no room to argue that he conducted a reasonable

inquiry (or was unaware of circumstances foreclosing the exemption) and that the sales were thus exempt under section 4(4) of the

1933 Act.

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 13 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

sales by the RSD, the transfer agent and counsel. See, e.g.,

O'Leary v. SEC, 424 F.2d 908, 912 (D.C. Cir. 1970) (reliance

on advice of counsel potentially mitigating but not exculpatory); Sorrell v. SEC, 679 F.2d 1323, 1327 (D.C. Cir. 1982)

(broker's reliance on counsel's advice did not excuse his own

lack of investigation); Stead v. SEC, 444 F.2d 713, 716 (10th

Cir. 1971) ("The act of ... calling the transfer agent is

obviously not a sufficient inquiry."); A.G. Becker Paribas

Inc., 48 S.E.C. 118, 121 (1985) ("If a broker relies on others to

make the inquiry called for in any particular circumstances, it

does so at its peril."). As Paine Webber's Rule 144 Manual

cautioned, "[a]n investment executive ... has the primary

responsibility to prevent illegal sales of restricted or control

stock." Brief of Commission at 18.

Wonsover's argument that the sanction should be reduced

also fails. The statute authorizing the Commission to suspend Wonsover limits when and how the sanction can be

imposed. The Commission must "find[], on the record after

notice and opportunity for hearing, that such ... suspension

... is in the public interest." 15 U.S.C. s 78o(b)(4). The

Commission complied with the statute's directives and expressly considered, among other aggravating and mitigating

factors, "the effect of Wonsover's misconduct on both the

securities industry as a profession and on the investing

public." JA 24-25. The sanction fell within the spectrum of

the Commission's statutory authority, see 15 U.S.C.

s 78o(b)(4); s 77h-1, and choosing a point on that spectrum

is a determination left to the Commission. See O'Leary, 424

F.2d at 912 ("[A]s to petitioners' protest that they 'were first

offenders,' acting in accord with advice of counsel, and causing no injury to the investing public, we concur with Chief

Judge Lumbard's statement in Tager v. SEC, 344 F.2d 5, 8

(2d Cir. 1965): 'While these factors might have warranted a

lighter sanction, they did not require one.' ").

For the foregoing reasons, we conclude that substantial

evidence supports the Commission's determination that

Wonsover failed to conduct reasonable inquiry into the

sources of the unregistered shares he sold and that his

inadequate inquiry in the face of several "red flags" justified

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 14 of 15
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

a finding of willfulness. In addition, we find no abuse of

discretion in the Commission's chosen sanction. Accordingly,

Wonsover's petition for review is

Denied.

USCA Case #99-1167 Document #503101 Filed: 03/14/2000 Page 15 of 15