Re: 12/15/00 - John Westergaard's letter to SEC Chairman Arthur Leavitt re accusations against him of securities fraud
Note: John Westergaard was a pioneer in the effort to weed out dissent on message boards. The letter below is courtesy mary.cc.
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John Westergaard
560 West 43rd Street
New York, NY 10036
212-947-3853
December 15, 2000
Arthur Levitt, Chairman
U.S. Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549
Dear Arthur:
My counsel Bob Arnold advised me yesterday evening that he had received a call from the Commission advising that it intends to proceed next week with an action in federal court accusing me of securities fraud unless I agree to certain conditions. With regret, the conditions are unacceptable.
There were seven lawyers on the Commission's end of the line yesterday afternoon. I'm flattered. Does this put me up there with Mike Milken?
As our mutual friend, the senior senator from New York, has explained to you, the Enforcement Division initially threatened to bring an action against Westergaard.com, Inc. over an alleged violation of section 17(b) of the Securities Act of 1933. The genesis of the problem was that a newly hired CEO from Reuters changed our pricing policy from a fixed $48,000 annual fee to a negotiable rate. "At Reuters", he argued, "we never missed signing a client over price even if we had to give the service away for a year."
In the interest of accuracy, I removed the $48,000 figure from the disclaimer without giving it a second thought. That was my admittedly serious mistake for which I'm prepared to be held accountable. Since we no longer showed a specific number in the statement, we were then in technical violation of 17(b). It took five minutes to correct by inserting the phrase "up to $48,000".
Through a mystical process only known to your Enforcement Division, this "traffic ticket" level violation was ratcheted up to a section 10(b-5) case of securities fraud. As a consequence, a private placement underway was halted and $1.5 million returned to investors of which $500,000 went back to your friend, Ken Langone. Out of money and unable to raise more with the SEC cloud hanging over us, the business was shut down August 15th. 18 highly paid professionals lost employment. My entire net worth -- as of 1999 in low eight figures -- was blown away. I am now destitute, unemployable, and reduced to living off $1,500 monthly from SSA. A widowed sister resident in Washington is taking me in.
By its actions, the Commission has violated its obligation as defined in the Securities Act of 1933 to assure the integrity of capital markets. The law states that, "Whenever pursuant to this title the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation".
The Westergaard companies were engaged in an honest business designed to assist small companies to gain credibility in the securities markets by providing comprehensive research and thereby increasing the opportunity for them to raise capital on terms favorable to the businesses and their shareholders. At no point in the course of this matter has there been any sense that the Commission has even the semblance of a process for evaluating the implications of its actions on third parties and even on issues of importance to the SEC such as regulation of the Internet where Westergaard was its friend, not enemy. The Commission appears to have acted without consideration as to its own mandate as stated above -- it failed to consider whether the action (against Westergaard) helped promote efficiency, competition, and capital formation".
Furthermore, by its actions the Commission has caused irreparable damage and financial loss to public shareholders, institutional investors, employees, public users of the service, and to the corporations that invested in having proprietary Westergaard websites constructed and the research produced. These losses amount to many millions of dollars.
Arthur, you and I go back together 50 years and we know a lot of the same people in New York and Washington, including more than a few lawyers. This matter has been reviewed professionally or informally by friends of yours and mine and by others at various firms including, but not limited to, Shearman & Sterling; Cadwalader Wickersham & Taft; Wilmer, Cutler & Pickering; Kogan, Taubman & Neville; Verner Liipfert Bernhard McPherson & Hand; Wolf, and Block, Schorr and Solis Cohen.
No lawyer with whom I have spoken, or for that matter any other mutual friends or others who have reviewed this matter, believes that the Securities and Exchange Commission would maliciously destroy a respectable business over a few words in a disclosure statement.
There is no disagreement between ourselves and the Commission over facts. They are spelled out in a "Wells Submission" presented June 7th and accepted without issue by your staff other than to receive a compliment that the Commission had no complaint as to the quality of our research. It was followed with a meeting in Washington June 13th. Within two hours of that meeting we were advised that the Commission would proceed with a 10(b-5) action against the company.
At that meeting your staff also learned that I am terminally ill with prostate cancer that has metastasized to my spine. Two days after the meeting and of learning of my condition, the Commission stated it would not only bring an action against the Westergaard corporations as had been contemplated, but against me personally which is what the intended action next week is about.
I am told that such action is not atypical of the culture of the Securities and Exchange Commission. It has been explained that when the staff learned of my vulnerability, it assumed I would "roll over" by signing a consent decree and agreeing to a fine encompassing seven counts of fraud. "Rolling over", unfortunately, is not a dominant Westergaard gene.
Note, by the way, that the Commission does not allege that any investor or any other party was damaged by the removal of the $48,000 figure -- nor does it allege that substantive information about any security was incorrect, let alone intentionally false or that there was any reason to assume intent to deceive. How can there be fraud without intent?
Arthur, I have fought for civil rights all my life. You may recall my role at Williams as a founder of the eventually successful movement to overcome institutionalized anti-semitism in the form of a fraternity system replete with specific or implied restrictive covenants. Next came the army which I forced to court martial me over a civil rights issue. I won. Then came Martin Luther King with whom I marched. There are pictures to prove it and there are other examples of my commitment to civil rights of others.
Isn't it then ironic that now, in my 70th year, having lived a more or less exemplary life, that I should be treated as a common criminal with my own civil rights abused after 43 years of researching and publishing on small cap, speculative companies without once becoming the subject of a regulatory, legal or arbitration action?
You need to know that behind this brouhaha over removal of the $48,000 figure is a three year personal vendetta conducted by the Enforcement Division for my having invoked -- as a publisher -- a right of protection under the First Amendment when the Commission sought information about my business.
I retained Laura Handman, a specialist in First Amendment law, to advise the Commission of my position, backed up by case law. Rather than respond, the Commission initiated a formal investigation of me and my business. It was in effect saying, "Invoke your constitutional right under the First Amendment, Westergaard, and we’ll call you a crook rather than merely someone out of compliance."
So you see, Arthur, this matter may not be about a simple 17(b) violation. It may be about something bigger. It may be about my invoking First Amendment protection when the SEC came nosing about in November 1997 asking about disclosure issues -- to which we cooperated fully -- but then requesting information about the internal workings of the business to which we did not cooperate. We invoked protection under the First Amendment as an Internet publisher. Is that what this malicious attack on the Westergaard companies and on me personally is about?
My friendly constitutional scholar argues: "The proposed SEC complaint against Westergaard specifically alleges a deep factual nexus to the exercise of First Amendment rights of speech and the press. It is a well settled rule that statutes will be construed in a way to avoid any intrusion on fundamental constitutional rights.
"In view of this basic principle of construction, it seems most incorrect for an agency and a court to seek a fraud-related adjudication in a case which does not meet the language of the statute as to transaction or intent or to rely on an implied extension of a statute to an administrative regulation (Rule 10b-5). A statute (§ 17(b) of the 1933 Act) is available on which the SEC is acting. That will provide the same public protection by way of injunction.
"Considering that this problem had early in its genesis a dispute over the applicability of constitutional rights of transmission of information, the Commission’s action in unnecessarily loading on a fraud charge where none was needed is a classic act of intimidation of the press by government regulators intending to chill the free exercise of constitutional rights."
It was relayed to me last night that unless I agree to certain conditions by the close of business Monday, the Commission will file their case against me in the Southern District of New York. It would appear that the staff is in a hurry to obtain credit for a "score" before year-end and before a new administration takes over.
The conditions are that I sign a consent decree covering the 17(b) violation and that I agree to a phantom fine of $35,000 for committing fraud. I call it "phantom" because they say with a wink that I won't really have to pay it. It evidently goes on the books for scoring purposes. I wonder, Arthur, does the accounting department at the SEC carry a line item for phantom receivables?
I'll agree to signing the 17(b) consent decree on the condition that the Commission address a letter of apology to each of the 18 employees who lost employment last August 15th. I will not agree to any fine, phantom or otherwise.
Cordially,
John Westergaard
P.S. Arthur, you should know, by the way, that the Commission has proposed dropping the 10(b-5) charge against Westergaard.com, Inc. and Westergaard Broadcasting Network.com, Inc. on the proviso that they sign a consent decrees agreeing not to violate section 17(b). This I am prepared to do. What I am not prepared to do is agree to the proposed $35,000 fine by which I would admit to having committed fraud.
How can it be that the source of the alleged 17(b) violation -- which is the corporation -- gets a slap on the wrist while I, whose role in this matter was to transmit instructions to the Webmaster to make the disclosure statement conform to management policy, am accused of fraud? I wasn't even an officer of the corporation. Tell me, Arthur -- down deep in your heart -- you don't believe this is a personal vendetta against John Westergaard?
You should also know that the Enforcement Division has a letter from my doctor stating my condition as spinal carcinoma. The letter was written last summer. It describes my condition as "guarded". I regret to say that recent tests are less encouraging.
CC: U.S. Senator Daniel Patrick Moynihan, New York
U.S. Senator Charles Schumer, New York
U.S. Representative Carolyn B. Maloney, New York
Erich T. Schwartz, Staff Lawyer, Securities and Exchange Commission
SEC Commissioner Isaac C. Hunt, Jr.
SEC Commissioner Laura Simone Unger
SEC Commissioner Paul R. Carey
mary.cc |
