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. LAUGHREY, United States District Judge 1

for the Eastern and Western Districts of Missouri, sitting by designation.

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Before WOLLMAN and BEAM, Circuit Judges, and LAUGHREY, District Judge. 1

___________

WOLLMAN, Circuit Judge.

Everest 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 Securities

Dealers, 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 January 31, 1992. Kunkel was

the President, Financial and Operations Principal, and registered representative for

Everest. 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,

and later sell the tire-derived product as fuel, and planned a private stock offering in

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 Everest

agreed to provide “financial advisory and investment banking services to [GED] in

connection with a proposed private placement (up to $45,000) and subsequent public

offering (up to $4,950,000) of [GED’s] Common Stock.” Everest was to act as

exclusive selling agent for the private placement, in exchange for which it would

receive five percent of the aggregate proceeds, in addition to an expense allowance of

$13,500 and a nonrefundable banking fee of $11,500. 
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On February 11, 1992, GED provided Everest with an offering memorandum

stating that GED had been organized in 1988 for the purpose of operating a medical

waste disposal facility in Watkins, Minnesota, and that GED owned a five-acre

unimproved site in Watkins on which it planned to build the disposal facility. The

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 changes 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 efforts

offering of up to 600,000 shares at $.75 per share, 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 business

of GED and Midwest Tire would focus primarily on development of the waste tire

operation, the memorandum stated that GED would also continue 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 cannot

afford to lose their entire investment,” and that prospective buyers should carefully

consider a number 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 the

future,” and that “[GED] and [Midwest Tire] face all the risks inherent in a new

business.” In addition, the memorandum stated that GED would possibly have to seek

additional financing in the future and that there were no guarantees that additional

financing would be available. The memorandum also provided limited financial data

on GED and Midwest Tire, indicating that GED had $547,501 in assets, $546,500 of

which represented the investment in the medical waste disposal facility. 
The NASD also filed a second complaint alleging two causes: that Everest,

2

Monica Kimpling, Richard Andolshek, and Marc Eitzen conducted a securities

business without adequate minimum required net capital, in violation of Article III,

Section 1 of the Rules, and that they violated Article III, Sections 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 Kimpling in both causes of the

second complaint, but dismissed those charges against the other named parties. A joint

and several fine of $2500 was imposed against Everest and Kimpling for the violations

in the second complaint. The District Committee also assessed costs of $2868.10

against Everest. None of these findings are at issue in this appeal.

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Prior to distributing 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

procedures put into place. 2. Sales prices may need to be adjusted to

increase gross margins. 3. Hiring of a Chief Financial Officer should be

given top priority, this would take some of the load off of Pat Hart and

focus the needed attention on financial needs of the company while

allowing Pat the time for sales and marketing.

Between February 11, 1992, and April 15, 1992, twenty-three people invested

money in GED stock in twenty-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 (District

Committee) filed a complaint alleging four causes. The first cause charged that Everest 2

and Kunkel violated Article III, Sections 1 and 18 of the Rules by distributing offering

materials which misrepresented the financial condition and status of GED’s investment

in the proposed medical waste facility and which failed to disclose that an
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executive of GED had had previous complaints filed against him by the Commission.

The second cause charged that Everest and Kunkel allowed one of Everest’s employees

to function as a representative prior to his registration with the NASD, in violation of

Article III, Section 1 of the Rules. The third cause alleged that Everest and Monica

Kimpling (not a party to this proceeding) 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 and

records in an accurate and/or timely manner and that Everest and Kunkel failed to

prepare and maintain adequate customer new account information, 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 and

Kunkel violated Sections 1 and 18 of the Rules by misrepresenting the financial

condition and status of GED’s investment in the proposed medical waste facility and

violated Section 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 allegations in causes two and three. As to the fourth cause, the District Committee

found that Everest and Kunkel failed to maintain adequate new customer account

information, in violation of Sections 1 and 21, but dismissed the other allegations. 

The District Committee imposed a joint and several fine of $15,000 against

Everest and Kunkel, specifying that $5000 was attributable to the first cause, $5000 to

the second cause, and $5000 to the fourth cause. The District Committee also ordered

Everest and Kunkel to make restitution of $22,500 in commissions they had earned on

the GED offering and suspended Kunkel for 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 the

District Committee’s decision and the monetary sanctions in their entirety. The
Section 1 of the Rules states, “[a] member, in the conduct of his business, shall 3

observe high standards of commercial honor and just and equitable principles of trade.”

Section 18 provides that “[n]o member shall effect any transaction in, or induce the

purchase or sale of, any security by means of any manipulative, deceptive or other

fraudulent device or contrivance.”

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National Committee barred Kunkel from acting in any principal capacity and ordered

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 that they failed to prepare and maintain adequate new

customer account information. The Commission found insufficient evidence to sustain

the finding that Everest and Kunkel allowed an Everest employee to function as a

representative without first being registered with the NASD. Nevertheless, the

Commission affirmed all sanctions against Everest and Kunkel. Everest and Kunkel

separately appeal the Commission’s decision and sanctions.

II.

We give the Commission’s findings conclusive effect if they are supported by

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 violated Sections 1 and 18 of the

Rules by using misleading materials in their sale of the GED stocks. In particular, the 3

Commission found that the representations concerning the proposed medical waste

facility were misleading because the memorandum failed to disclose that GED had

abandoned that project months before the stock offering. 
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Everest argues that the memorandum provided by GED and distributed by Everest

fully informed potential investors of the waste facility inasmuch as the memorandum

explained that GED had invested a substantial sum of money in the project, that such a

facility was not licensed, and that it could take substantially more time and money to

pursue the venture. Everest contends that the potential investors “realized that their

entire investment was going to be used for a new prospective venture, completely

unrelated to an existing facility that was effectively defunct.” In addition, Everest

maintains that the information was not misleading because there was no evidence that

GED knew that the waste disposal project 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

prospectus for the publicly offered shares of the combined business of GED and

Midwest Tire (renamed National Tire Service) divulged that in the fall of 1991 GED

decided to discontinue seeking the necessary permits to operate the medical waste

facility and agreed to terminate the partnership which had been established for the

purpose of setting up the waste facility. In addition, a December 11, 1992, memorandum

of a telephone conversation with the Minnesota Pollution Control Agency stated that the

file on the proposed medical waste disposal project was a dead file and had been

inactive for over a year. Also disclosed in the prospectus, but not in the memorandum,

was that in July of 1992 GED agreed to pay $247,150 for accounts payable in

connection with the dissolution of waste facility partnership. Also undisclosed was that

as of October 16, 1991, ENDECO, Inc., a company with whom GED was working on

the waste facility, considered GED to have breached their agreement 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 memorandum 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
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statements could lead investors to believe that plans for the facility were still underway.

What was relevant and what should have been disclosed to potential investors was that

the purpose for which GED was established -- operating a medical waste disposal

facility -- was no longer being pursued and that a number of costs and liabilities had been

incurred. Accordingly, we conclude that substantial evidence supports the

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 even if its actions were deceptive, it did not act with scienter

because its actions were neither reckless nor intentional in light of its timely and

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 toward

purchasing the securities. The investigation was not completed until March 26, 1992,

after twenty-two of the twenty-four investments had already been made. Furthermore,

the investigation that was performed was itself insufficient, for even a cursory

investigation would have disclosed that the waste facility plan had been abandoned and

that GED had incurred losses and liabilities as a result.

Everest and Kunkel argue, however, that they properly relied on the information

contained in the memorandum because it was provided to them by GED and their

attorneys. This argument is unpersuasive, for reliance on others does not excuse

Everest’s and Kunkel’s own lack of investigation. See Sorrell v. SEC, 679 F.2d 1323,

1327 (9th Cir. 1982) (broker’s reliance on attorney’s advice did not excuse lack of

investigation); 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 that

Everest’s and Kunkel’s dilatory and remiss investigation, and their resultant failure to

discover relevant information about the securities they were selling, amounted to

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,

records, memoranda, and correspondence in conformity with all

applicable laws, rules, regulations and statements of policy promulgated

thereunder and with the rules of this Association.

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Everest and Kunkel argue that even if the memorandum was misleading, it was

not “materially 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, that none of its asset value was to be

recouped, and that the project was actually worth less than nothing,

because the surviving merged company would be left with partnership

liabilities of approximately $273,000. There can be little doubt that

reasonable investors would consider such information “actually significant

in their deliberations,” and therefore material.

Everest’s argument that it had less responsibility to the investors because they

were sophisticated and experienced is likewise unavailing. Cf. Hanly, 415 F.2d at 596

(the fact that investors may have been sophisticated and knowledgeable did not warrant

a less stringent standard of investigation). No level of sophistication or experience

would inform the investors that GED had abandoned plans to start a business it

professed to undertake or protect the investors from risks associated with that which they

did not know.

B. New Account Records

The Commission also affirmed the National Committee’s findings that Everest and

Kunkel failed to prepare and maintain adequate customer new account records, in

violation of Sections 1 and 21 of the Rules. The Commission found that most of the 4
. . . .

(c) Each member shall maintain accounts opened after January 1, 1991 as

follows:

(1) for each account, each member shall maintain the

following information:

(i) customer’s name and residence;

(ii) whether customer is of legal age;

(iii) signature of the registered representative

introducing the account and signature of the

member or partner, officer, or manager who

accepts the account . . . .

(2) for each account . . . each member shall also make

reasonable efforts to obtain, prior to the settlement of the

initial transaction in the account, the following information

to the extent it is applicable to the account:

(i) customer’s tax identification or Social

Security number;

(ii) occupation of customer and name and

address of employer; and

(iii) whether customer is an associated person

of another member . . . .

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new account forms were never completed and that those that were had not been

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

suggested information and that it could not produce the new account forms in May

because Kunkel had sent the forms to the investors for their verifications. Everest’s

claim that it obtained all the required information, however, is contradicted by the

record, for only one 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 forms

contained information regarding the investor’s occupation and the name and address of

the investor’s employer, and only one new account form indicated whether the investor

was associated with Everest, information which Everest was required to use
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reasonable efforts in obtaining. The evidence is therefore sufficient to sustain the

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 the

Commission did not find sufficient evidence to sustain the second cause, which alleged

that Everest and Kunkel had allowed one of Everest’s employees to function as a

securities representative, it affirmed the entire sanction after concluding that the “NASD

did not indicate how much weight it was giving to each of the three violations . . . .” We

find this conclusion to be erroneous. 

In imposing a joint and several fine of $15,000 against Everest and Kunkel, the

District Committee specifically apportioned $5000 for each of the three 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, it

likewise should have set aside the portion of the fine imposed for that violation. We

conclude that the remaining parts of the sanction are well within the Commission’s

discretion. 

III.

In her separate pro se brief Kunkel makes a number of general assertions. She

argues that the evidence does not support the Commission’s findings, that the

Commission and the NASD have not been consistent in enforcing the Rules and

sanctioning members, and that her attorney was not acting on her behalf because of the

conflicts inherent in representing Kunkel, Everest, and Andolshek at the same time. 
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Having reviewed the record, we find Kunkel’s contentions to be without merit and, as

explained above, conclude that substantial evidence exists to sustain the Commission’s

findings.

The Commission’s findings are affirmed. The fine for the second cause is

vacated; the remaining portions of the sanction are affirmed.

A true copy.

Attest:

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