United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 96-3293

___________ Everest Securities, Inc.; * Jeanne Alyce Kunkel, * * Petitioners, * *
v. * * Securities and Exchange Commission, * * Respondent. *

___________ Petition for Review of an No. 96-3737 Order of the Securities and

___________ Exchange Commission. Jeanne Alyce Kunkel, * * Petitioner, * *
v. * * Securities and Exchange Commission, * * Respondent. *

___________ Submitted: March 12, 1997 Filed: June 26, 1997

___________The HONORABLE NANETTE K. LAUGHR EY, United States District Judge 1 for the Eastern and Western Districts of Missouri, sitting by designation.
-2- Before WOLLMAN and BEAM, Circuit Judges, and LAUGHREY, District Judge. 1

___________ WOLLMAN, Circuit Judge.
Ev erest Securities, Inc. (Everest) and Jeanne Alyce Kunkel petition for review of a Securities and Exchange Commission (Commission) order affirming disciplinary action taken against Everest and Kunkel by the National Association of Securitie s D e alers, Inc. (NASD) for violating Article III, Sections 1, 18, and 21 of the NASD’s Rules of Fair Practice (Rules). We affirm in part and vacate in part.

I.
Everest is a general securities broker-dealer that became a registered member of the NASD in December of 1991 and began business on Januar y 31, 1992. Kunkel was the Pr esident, Financial and Operations Principal, and registered representative fo r Evere st. G.E.D. International, Inc. (GED) sought to purchase Midwest Tire Service, Inc. (Midwest Tire), a business that would collect, process, and dispose of waste tires,

an d later sell the tire-derived product as fuel, and planned a private stock offering i n order to fund the acquisition and capitalization of Midwest Tire. On February 5, 1992, Kunkel, on behalf of Everest, entered into an agreement with GED whereby Everes t agreed to provide “financial advisory and investment banking services to [GED] i n connection

with a proposed private placement (up to $45,000) and subsequent public offering (u p to $4,950,000) of [GED’s] Common Stock.” Everest was to act a s
ex clusive selling agent for the private placement, in exchange for which it woul d receive five percent of t

he aggregate proceeds, in addition to an expense allowance of $13,500 and a nonrefundable banking fee of $11,500.-3-

On F ebruary 11, 1992, GED provided Everest with an offering memorandu m stat ing that GED had been organized in 1988 for the purpose of operating a medica l wast e disposal facility in Watkins, Minnesota, and that GED owned a five-acr e unimproved site in Watkins on which it planned to build the disposal facility. Th e memorandum stated that the City of Watkins had already granted preliminary approval for the construction of the facility and that GED was at the time pursuing the issuance of permits from the Minnesota Pollution Control Agency and had engaged a lobbyist to seek chang es in state laws and regulations in order to allow the project to proceed.

The memorandum also stated that the offering was a ninety-day, best effort s offering of up to 600,000 shares at $.75 per sha re, with a minimum purchase of 20,000 shares. The memorandum stated that the proceeds from the sale would be used to fund the acquisition and capitalization of Midwest Tire. Although the combined busines s of GED and Midwest Tire would focus primarily on development of the waste tir e operation, the memorandum stated that GED would also c ontinue to pursue permits for its medical waste incineration business.

The memorandum cautioned that the shares offered were “highly speculative , involve a high degree of risk and may not be appropriate for investors who canno t afford to lose their entire investment,” and that prospective buyers should carefull y consider a numb er of risk factors, among which was the warning that “[t]here can be

no assurance that [GED] or [Midwest Tire] will be able to operate profitably in th e future,” and that “[GED] and [Midwest Tire] face all the risks inherent in a ne w business.” In addition, the memorandum stated that GED would possibly have to seek addition al financing in the future and that there were no guarantees that additiona l financing would be available. The memorandum also provided limited financial data on GED an d Midwest Tire, indicating that GED had $547,501 in assets, $546,500 of which represented the investment in the medical waste disposal facility.The NAS D also filed a second complaint alleging two causes: that Everest , 2 Monica Kimpling, Richard Andolshek, and Marc Eitzen conducted a securitie s business without adequate minimum required net capital, in violation of Article III , Section 1 of the Rules, and that they violated Article III, Sec tions 1 and 21 of the Rules by failing to accurately prepare and maintain certain books and records. The District Committee sustained the allegations against Everest and Kimp ling in both causes of the second complaint, but dismissed those charges against the oth er named parties. A joint and several fine of $2500 was imposed against E verest and Kimpling for the violations in the second complaint. The District Committee also assessed costs of $2868.1 0 against Everest. None of these findings are at issue in this appeal.
-4- Prior to distrib uting the memorandum to investors, Everest agreed to conduct a due diligence investigation of GED and hired Andolshek Management Group, Inc

. (Andolshek) for that purpose. The investigation commenced in late February of 1992, was completed on March 26, 1992, and noted only three observations:

1. Production cost

must be closely watched, with budget and job costing pro cedures put into place. 2. Sales prices may need to be adjusted t o increasegross margins. 3. Hiring of a Chief Financial Officer should be given top pr iority, this would take some of the load off of Pat Hart an d focu s the needed attention on financial needs of the company whil e allowing Pat the time for sales and marketing.

Bet ween February 11, 1992, and April 15, 1992, twenty-three people invested money in GED stock in t

wenty-four transactions. All 600,000 shares of GED’s stock

were ultimately sold, and a closing of the GED stock offering took place on April 9 , 1992. On April 22, 1993, the NASD District Business Conduct Committee (Distric t Committee) filed a complaint alleging four causes. The first cau se charged that Everest 2 and Kunkel violated A

rticle III, Sections 1 and 18 of the Rules by distributing offering materials which misrepresented the f inancial condition and status of GED’s investment in the proposed medical waste facility and which failed to disclose that an-5-

executive of GED had had previous complaints filed against him by the Commission

. The second cause charged that Everest and K unkel allowed one of Everest’s employees to functi on as a representative prior to his registration with the NASD, in violation o f Article III, Section 1 of the Rules. The third cause alleged that Everest and Monic a Kimpling (not a party to this proc eeding) failed to maintain adequate minimum required net capital, in violation of Article III, Section 1 of the Rules. The fourth cause alleged that Everest, Kunkel, and Kimpling failed to prepare and maintain certain books an d records in an accurate and/or timely manner and that Everest and Kunkel failed t o prepare and maintain adequate customer new account informati on, in violation of Article III, Sections 1, 2, and 21 of the Rules. With respect to the first cause, the District Committee found that Everest an d Kunk el violated Sections 1 and 18 of the Rules by misrepresenting the financia l conditi on and status of GED’s investment in the proposed medical waste facility an d violated Secti on 1 of the Rules by failing to disclose that one of GED’s executives had previously been disciplined by the Commission. The District Committee also sustained the allegatio ns in causes two and three. As to the fourth cause, the District Committee fo und that Everest and Kunkel failed to maintain adequate new customer accoun t information, in violation of Sections 1 and 21, but dismissed the other allegations. The Dist rict Committee imposed a joint and several fine of $15,000 agains t Everest and Kunkel, specifying that $5000 was attributable to the first cause, $5000 to the second cau se, and $5000 to the fourth cause. The District Committee also ordered Everes t and Kunkel to make restitution of $22,500 in commissions they had earned on the GED offering and suspended Kunkel f or five days from associating with any NASD member firm.

Everest and Kunkel appealed the District Committee’s decision to the NASD’s National Business Conduct Committee (National Committee), which affirmed th e District Committee’s decision and the monetary sanctions in their entirety. TheSection 1 of the Rules states, “[a] member, in the conduct of his business, shall 3 observe high standards of commercial honor and just and equitabl e principles of trade.” Section 18 provides that “[n]o member shall effect any transaction in, or induce th e purcha se or sale of, any security by means of any manipulative, deceptive or othe r fraudulent device or contrivance.”
-6- National Committee barred Kunkel from acting in any principal capacity and ordere d that she requalify as a general securities representative in lieu of her five-day suspension. Everest and Kunkel appealed the National Committee’s decision to the Commission , which affirmed the findings that Everest and Kunkel distributed offering materials that contained misrepresentations and th at they failed to prepare and maintain adequate new customer acc ount information. The Commission found insufficient evidence to sustain th e finding that Everest and Kunkel allowed an Everest employee to function as a rep resentative without first being registered with the NASD. Nevertheless, th e Commissi on affirmed all sanctions against Everest and Kunkel. Everest and Kunke l separately appeal the Commission’s decision and sanctions.

II.

We give t he Commission’s findings conclusive effect if they are supported b y substantial evidence

on the record as a whole. See Stephen Investment Securities, Inc. v. SEC , 27 F.3d 339, 341 (8th Cir. 1994); 15 U.S.C. § 78y(a)(4).
A. Misleading Disclosure

The Commission found that Everest and Kunkel vio lated Sections 1 and 18 of the Rules by usi ng misleading materials in their sale of the GED stocks. In particular, the 3 Commissionfound that the representations concerning the proposed medical wast e fa cility were misleading because the memorandum failed to disclose that GED ha d abandoned that project months before the stock offering.-7-

Everest argues that the memorandum provided by GED and distributed by Everest fully informed potential investors of the waste facility inasmuch as the memorandu m explained that GED had invested a substantial sum of money in the project, that such a facil ity was not licensed, and that it could take substantially more time and money t o pur sue the venture. Everest contends that the potential investors “realized that thei r entire investment was going to be used for a new prospective venture, completel y unrelated to an existing facility that was effectively defunct.” In addition, Everes t maintains that the information was not misleading because there was no evidence that GED knew that the waste disposal p roject was worthless nor any evidence that GED at the time of the offering considered the project abandoned.
These assertions however, are contradicted by competent evidence. GED’s own pro spectus for the publicly offered shares of the combined business of GED an d Midwest T ire (renamed National Tire Service) divulged that in the fall of 1991 GE D decided to discontinue seeking the necessary permits to operate the medical wast e facility and agreed to terminate the partnership which had been established for th e purpose of setting up the waste facility. In addition, a December 11, 1992, memorandum of a telephone conversation with the Minnesota Polluti on Control Agency stated that the file on the proposed medical waste disposal project was a dead file and had bee n inactive for over a year. Also disclosed in the prospectus, but not in the memorandum,

wa s that in July of 1992 GED agreed to pay $247,150 for accounts payable i n connection with the dissolution of waste facility partnership. Also undisclosed was that as of October 16, 19 91, ENDECO, Inc., a company with whom GED was working on the waste facility, considered GED to have breached their a greement and informed GED on that date that GED owed it over $180, 000, as well as $60,000 in unreimbursed costs sustained by ENDECO. It is true that the memor andum explained the financial difficulties attendant upon establishing the waste facility. Given GED’s actual intentions with regard to the facility, however, that information was not only irrelevant but also deceptive, as those-8-

statements could lead investors to bel ieve that plans for the facility were still underway. What was relevant and w hat should have been disclosed to potential investors was that the purpos e for which GED was established -- operating a medical waste disposa l facility -- was no longer being pursued and that a number of costs and liab ilities had been incu rred. Accordingly, we conclude that substantial evidence supports th e Commission’s finding that it was deceptive to not disclose those facts to the investors and therefore violative of Sections 1 and 18 of the Rules.
Everest argues that e ven if its actions were deceptive, it did not act with scienter becaus e its actions were neither reckless nor intentional in light of its timely an d adequate due diligence investigation. We disagree. Everest’s investigation of GED did not commence until late February of 1992, after the memorandum had been distributed and after a number of investors had already committed substantial funds towar d purchasing the securities. The investigation was not completed until March 26, 1992, after twe nty-two of the twenty-four investments had already been made. Furthermore, the investigation that was performed was itself insufficient, for even a cursor y investigation would have discl osed that the waste facility plan had been abandoned and that GED had incurred losses and liabilities as a result. Everest and Ku nkel argue, however, that they properly relied on the information containedin the memorandum because it was provided to them by GED and thei r attor neys. This argument is unpersuasive, for reliance on others does not excus e Everest’s and Kunkel’s own lack of investigation. See Sorrell v. SEC , 679 F.2d 1323, 1327 (9th C ir. 1982) (broker’s reliance on attorney’s advice did not excuse lack o f investi gation); Hanly v. SEC , 415 F.2d 589, 597 (2d Cir. 1969) (“A salesman may not rely blindly upon the issuer for information concerning a company.”). We conclude , therefore, that substantial evidence exists to sustain the Commission’s finding tha t Ev erest’s and Kunkel’s dilatory and remiss investigation, and their resultant failure t o disc over relevant information about the securities they were selling, amounted t o recklessness sufficient to establish the requisite scienter.Section 21 of the Rules provides in relevant part: 4 (a) Each member [of NASD] shall keep and preserve books, accounts , rec ords, memoranda, and correspondence in conformity with al l applicabl e laws, rules, regulations and statements of policy promulgated thereunder and with the rules of this Association.

-9- Everest and Kunkel argue that even if the memorandum was misleading, it wa s not “m aterially misleading.” We disagree, for we find no fault with the Commission’s conclusion that:

It would be material to an investor to know that the offering company’ s existing project had been abandoned, t hat none of its asset value was to be recoup ed, and that the project was actually worth less than nothing , beca use the surviving merged company would be left with partnershi p li abilities of approximately $273,000. There can be little doubt tha t reasonable investors would consid er such information “actually significant in their deliberations,” and therefore material.

Everest’s argument that it had less responsibility to the investors because the y were sophisticat ed and experienced is likewise unavailing. Cf. Hanly , 415 F.2d at 596 (the fact that investors may have be en sophisticated and knowledgeable did not warrant

a l ess stringent standard of investigation). No level of sophistication or experienc e would inform the investors that GED had abandoned plans to start a business i t professed to undertake or protect the investors from risks associated with t hat which they did not know.

B. New Account Records
The Commission also affirmed the National Committee’s findings that Ever est and Kunkel failed to prepare and maintain adequate customer new account records, i n violation of Sections 1 and 21 of the Rules. The Commission found that most of the 4. . . .

(c) Each member shall maintain accounts opene d after January 1, 1991 as follows: (1) for each account, each member shall maintain th e following information: (i) customer’s name and residence; (ii) whether customer is of legal age; (iii) signature of the registered representativ e intro ducing the account and signature of th e member or partner, officer, or manager wh o accepts the account . . . . (2) for each account . . . each member shall also mak e re asonable efforts to obtain, prior to the settlement of th e initial transaction in the account, the following information to the extent it is applicable to the account: (i) customer’s tax identification or Socia l Security number; (ii) occupation of customer and name an d address of employer; and (ii i) whether customer is an associated person of another member . . . .

-10- new account forms were never completed and that those that were had not bee n completed until after the April 9 closing. Everest contends that before the closing it had obtained all the required information and had made reasonable efforts to obtain all the

su ggested information and that it could not produce the new account forms in Ma y because Ku nkel had sent the forms to the investors for their verifications. Everest’ s cla im that it obtained all the required information, however, is contradicted by th e record, for only on e of the new account forms indicated the investor’s age, information that is required for each investor. In addition, only one of the new account form s contained information regarding the investor’s occupation and the name and address of the investor’s employer, a

nd only one new account form indicated whether the investor was associated with Everest, information which Everest was required to use-11-

reasonable efforts in obtaining. The evidence is therefore sufficient to sustain th e Commission’s findings that such omissions violated Sections 1 and 21 of the Rules.

C. Sanctions
“The Commission’s determination to impose a particular sanction upon a member of the securities industry will not be reversed unless shown to constitute a gross abuse of discretion .” Kane v. SEC , 842 F.2d 194, 201 (8th Cir. 1988). Although th e Commission did not find

sufficient evidence to sustain the second cause, which alleged that Eve rest and Kunkel had allowed one of Everest’s employees to function as a securities representative, it affirmed the entire san ction after concluding that the “NASD did not indicate how much weight it was giving to each of the th ree violations . . . .” We find this conclusion to be erroneous.

Inimposing a joint and several fine of $15,000 against Everest and Kunkel, the District Committee specifically apportioned $5000 for each of the thre e violations: “[t]he fine amount . . . has been arrived at as follows: First Cause of Complaint - $5,000 ; Second Cause of Complaint - $5,000; Fourth Cause of Complaint - $5,000. ” Accordingly, when the Commission set aside the finding as to the second cause, i t likewise should have set aside the portion of the fine imposed for that violation. W e
con clude that the remaining parts of the sanction are well within the Commission’ s discretion.

III. In he r separate pro se brief Kunkel makes a number of general assertions. Sh e argues tha t the evidence does not support the Commission’s findings, that th e Commiss ionand the NASD have not been consistent in enforcing the Rules an d sanctioning members, a

nd that her attorney was not acting on her behalf because of the conflicts inherent in representing Kunkel, Everest, and Andolshek at the same time.-12-

Having reviewed the record, we find Kunkel’s contentions to be without merit and, as explained above, concl ude that substantial evidence exists to sustain the Commission’s findings.

The Com mission’s findings are affirmed. The fine for the second cause i s vacated; the remaining portions of the sanction are affirmed.
A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.