Source: https://law.justia.com/cases/federal/appellate-courts/cadc/99-1167/99-1167a-2011-03-24.html
Timestamp: 2019-04-25 22:29:03+00:00

Document:
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.
respondent. Rada L. Potts, Attorney, Securities and Ex- change Commission, entered an appearance.
Jacob Wonsover petitions for review of the Security and Exchange Commission's (Commission) Order Imposing Re- medial Sanction and the accompanying Opinion of the Com- mission (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 commit- ting 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 Wons- over 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 alterna- tive, reduce the sanction to censure.
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. Ac- cordingly, we deny Wonsover's petition for review.
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 broker- age firms for help. The shareholders found less than com- plete success and Gibori ultimately referred them to Wons- over, who was working at Paine Webber, Inc.
__________ 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.
Wonsover.3 Sales from the seven shareholders' accounts generated more than $300,000 in proceeds.
__________ 3 In this opinion we refer to facts surrounding the sales of Gil- Med shares without distinguishing the seven shareholders from the remaining twelve. The information available to Wonsover regard- ing 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 back- ground 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 offer- ing." 17 C.F.R. s 230.144(a)(3)(i).
5 This section exempts "brokers' transactions executed upon cus- tomers' 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 Com- mission's regulations and the portion Wonsover relies on covers "transactions by a broker in which such broker ... [a]fter reason- able 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, Wons- over relies on how elaborate and effective Gibori and Vogel's ruse was7 in arguing that his actions were not willful viola- tions of the 1933 Act.
__________ 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.
overseas. Fourteen of the nineteen listed Gil-Med headquar- ters 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 instruc- tions and directed their checks to Gil-Med and their corre- spondence to Gil-Med to Gibori's attention. Similarly, many of the accounts contained suspicious information. Some ac- count 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 head- quarters as their personal mailing address and some even identified their occupation as sales representatives for Gil- Med. 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 state- ment 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 sharehold- ers were poor and needed the money immediately. See JA 982.
(b) Manner of registration of brokers and dealers . . . (4) The Commission, by order, shall censure, place limita- tions 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.
__________ 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 associat- ed-- . . . (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 [Com- mission] 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).
__________ 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 underwrit- er, 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.
knowledge of (or reckless disregard of) the fact that his conduct violated the law. See JA 17-21.
'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 knowl- edge of the rule or regulation is required." See O'Hagan, 139 F.3d at 647.
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 conten- tion that "the actor [must] also be aware that he is violating one of the Rules or Acts." Id. at 803.
the two recklessness standards we have applied and distin- guished the more demanding subjective standard from the one more akin to gross negligence: "One meaning of reckless- ness, 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 viola- tions. 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.
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 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 dis- close 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 un- derwriters, then searching inquiry is called for. Distribution by Broker-Dealers of Unregistered Securities, Securities Act Rel. No. 33-4445 (Feb. 2, 1962). The circum- stances 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.
__________ 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 exemp- tion) and that the sales were thus exempt under section 4(4) of the 1933 Act.
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 exculpato- ry); 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 sus- pend 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 ex- pressly 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 caus- ing 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.' ").

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.