west bashing the SEC 1
Friday, May 26, 2000
A Federal Agency Plays GOTCHA!
The U.S. Securities and Exchange Commission phoned counsel for Internet publisher Westergaard Broadcasting Network.com, Inc. on Friday afternoon, May 26, 2000, alleging that its disclosure statement was out of compliance with section 17(b) of the Securities Act of 1933. While the statement clearly explained to readers -- as the law requires -- that the Westergaard service presented corporate sponsored research of a genre similar to the sponsored debt service ratings of Standard & Poor's and Moody's, reference to a set sponsor fee of $48,000 had been removed a few weeks earlier to reflect a change in marketing and pricing strategy.
The $48,000 fixed fee had been dropped in favor of a new marketing plan where up to fifty carefully selected smallcap companies would be selected and showcased at no fee in order to establish critical mass and research credibility. For the disclosure statement to say that a $48,000 fee was charged was inaccurate and misleading.
The SEC found the explanation unacceptable. Its position was that some dollar figure was technically required to be shown according to regulation 17(b) of the '33 Act. Whether the figure was accurate was not the issue. The law says there has to be a number -- no exceptions granted.
Violation of section 17(b) is the regulatory equivalent of jaywalking. No investor lost money or was otherwise misled or damaged by absence of the $48,000 figure. No nefarious intent was charged (indeed the SEC complimented Westergaard for the quality of its research). The alleged violation had existed for only a few weeks. There was no commercial gain to John Westergaard or the Westergaard companies by removal of the dollar figure.
Links to a site-wide disclosure statement clearly indicating that the research was corporate sponsored remained in effect on virtually every one of several thousand web site pages. There were additional specific dollar disclosure statements at each of the company sites called WBNcyberstations™.
Upon receipt of the SEC's phone call on May 26th the statement was changed to their satisfaction in a matter of minutes by inserting the words "up to $48,000". Not a big problem so it seemed.
So it seemed, but there was more…..
Yes, there was more -- a lot more! The SEC had a long standing agenda to put Westergaard Broadcasting Network.com and its parent, Westergaard.com, Inc. out of business. Having learned on May 17, 2000 from a regulatory filing that the parent company, Westergaard.com, Inc., was engaged in a $2 million private placement, the Commission seized the opportunity to allege the 17(b) violation, to issue subpoenas to Westergaard's clients and to place the company on notice that it would be charged with securities fraud.
The business became inoperable literally overnight. Clients were advised by counsel not to speak with Westergaard analysts. $1.5 million in private placement funds already deposited were returned to investors. The business was forced to shut down August 15, 2000.
Investors lost tens of millions of dollars, 18 professionals lost employment, a promising new paradigm of investment research designed to thwart stock manipulation was squelched, and John Westergaard -- an internationally respected investment analyst with a 43 year history of publishing research on smallcap companies without once becoming the subject of a regulatory action, a litigation or an arbitration -- was made destitute.
Why did this happen?
Why would a government agency arbitrarily and capriciously destroy a vibrant, honest, ethical business? No one reviewing the case -- including partners and associates of five major New York and Washington based law firms -- believed that the SEC would pursue such drastic action over a trivial 17(b) violation. Obviously the SEC's interest in Westergaard had to have been about something else.
That something else was John Westergaard's invocation two and a half years earlier of a publisher’s right to protection of free speech under the First Amendment of the U.S. Constitution.
The Commission had investigated Westergaard and the company he founded for two years prior to May 26, 2000 precipitated by a November 1997 SEC request for information about the company's operations. Westergaard had agreed then to fully co-operate on questions related to securities regulation -- but not to open operations to an SEC fishing expedition for information unrelated to regulatory issues.
Such was the genesis of the case of The SEC v. John Westergaard and the First Amendment.
The SEC is sensitive to claims of First Amendment protection. It suffered a critical defeat in a previous case in the 1970s, a precursor to the Westergaard matter. Richard Holman, publisher of The Wall Street Transcript, had issued several editorials critical of the SEC. The Commission retaliated by seeking to force the Transcript to register as an investment adviser, thus employing its regulatory authority to squelch a news publication.
Holman fought. The case dragged on in federal courts for 10 years (SEC v. Wall Street Transcript Corporation) with certain constitutional aspects being heard by the U. S. Supreme Court. Eventually, in 1978, a federal court judge decided in Mr. Holman's behalf, ruling that the Transcript was a news organization. The SEC was severely embarrassed. The case is frequently referenced in securities cases and in law schools as an egregious example of regulatory overreach.
The Westergaard case is a replay of the SEC v. Wall Street Transcript Corporation. Challenged by Westergaard on First Amendment grounds, the SEC retaliated as they did in the Holman matter not by addressing the constitutional issue of whether Westergaard was on sound footing in claiming First Amendment protection, but by applying its regulatory authority to squelch the business.
This time the Commission would not leave itself vulnerable to protracted litigation by challenging a viable business with resources to carry on an extended battle in federal court as occurred in The Wall Street Transcript case.
The SEC would first destroy the business by launching a preemptive strike and thereby cause John Westergaard to lose his entire personal wealth which was considerable.
In so doing, the SEC acted illegally in employing its regulatory mandate to violate the right of protection to a publisher accorded by the First Amendment. An authority on constitutional law noted as follows:
"Considering that this problem (the Westergaard case) 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. In sum, the Commission said, ‘Invoke your constitutional rights and we’ll call you a crook instead of merely a business out of compliance.”
That the SEC v. Westergaard and the First Amendment was not about securities regulation became evident for all to see when in October 2000 the SEC dropped fraud charges against the Westergaard companies (both parent and subsidiary) but continued to pursue John Westergaard personally for securities fraud.
The SEC v. Westergaard and the First Amendment was thus revealed for what it was -- a personal vendetta by an agency of the federal government pursued against a citizen in his 70th year who had lived his entire life by the rules and demonstrated on numerous occasions his concern for society and for persons less fortunate than he.
Westergaard had volunteered for service during the Korean War although he could have opted out, had fought for the rights of minorities as a Williams College student in the 1950s, had marched with Martin Luther King in support of civil rights for African Americans in the '60s, had worked pro-bono for 40 years as chief financial officer in support of Daniel Patrick Moynihan's career in public service and four terms in the U.S. Senate, and had supported environmental issues, corporate responsibility initiatives, technical schooling for poor immigrants, freedom for political prisoners, and numerous other worthwhile causes.
Evidence of good citizenship mattered nothing to the Securities and Exchange Commission. It was committed to destroying John Westergaard financially and emotionally. It would employ extreme and false pejorative language designed to destroy Westergaard's reputation.
Ironically, his unblemished 40 year history in the securities industry worked to his disfavor. A former senior official of the Commission explained:
"One has to understand that the SEC employs intimidation by example and John Westergaard was the perfect showcase -- clean record, international reputation, widely known and respected in financial circles plus there was the Moynihan relationship with the prospect that the tabloids in New York would pick the story up. MOYNIHAN FINANCE CHIEF ACCUSED OF SECURITIES FRAUD was the headline they were hoping for. If the SEC could destroy a man of high reputation such as John Westergaard, imagine the fear they could engender among the truly illegitimate yoyos out there? Showcasing Westergaard was right out of a freshman course in Police State I-II."
During a meeting at SEC offices in Washington on June 13, 2000 to discuss the charges against the companies (parent and subsidiary), the Commission learned that John Westergaard was terminally ill with prostate cancer which had metastasized to the spine. |
