BCSC target Hogan loses appeal
2005-02-04 20:52 ET - Street Wire
by Stockwatch Business Reporter
The British Columbia Court of Appeal has dismissed B.C. Securities Commission target Jesse Hogan's appeal of the commission's $25,000 (Canadian) fine. Mr. Hogan engaged in a Internet "pump and dump" scheme in the summer of 2000, involving five penny stocks traded on the OTC Bulletin Board. The commission went after the enterprising Mr. Hogan for his actions, ordering him to turn over his profit of $41,752 and to pay a fine. After the panel's 2002 ruling, Mr. Hogan headed off to court to complain that the commission had been unreasonable in its decision. The appeal court issued its decision on Jan. 28, 2005, four-and-a-half years after the original infringement. (All figures are in U.S. dollars unless otherwise stated.)
The pump and dump
The BCSC focused its sights on Mr. Hogan in an August, 2001, notice of hearing. Mr. Hogan agreed to a statement of facts in January, 2002, and the commission held its hearing on March 25, 2002. The commission panel, comprising Adrienne Salvail-Lopez, Joan L. Brockman and Roy Wares, delivered its decision on June 19, 2002.
Mr. Hogan, at the time in his mid-twenties, lived in Burnaby, B.C., a suburb of Vancouver. He was a salesman at a local tool store, and the commission states that he was never registered under the Securities Act.
During the summer of 2000, Mr. Hogan came up with a plan to buy shares, use various Internet aliases to spread rumours about impending deals with the OTC-BB companies in which he had invested, then sell the shares at a profit. The BCSC became suspicious of the activity Mr. Hogan generated, and froze his brokerage account and his bank account. The United States Securities and Exchange Commission imposed a permanent ban on Mr. Hogan on Jan. 15, 2002, for his actions.
In the January, 2002, statement of facts, Mr. Hogan stated that he knew what he posted on the Internet sites and e-mailed to people about the companies was false, written with the intent of generating trading activity in the companies' shares in order to boost the price so that he could sell his shares into the market at a profit.
Astrocom Corp.
The first of Mr. Hogan's investments, Astrocom Corp., which traded on the OTC-BB, designed and manufactured electronics. In the week ending July 14, 2000, the company's average trading price was 45.625 cents with daily trading volume of 18,660 shares. Between July 18 and July 20, Mr. Hogan bought 25,000 Astrocom shares at an average price of 45 cents, for a total investment of $11,260.16. On July 19 the stock closed at 43.75 cents on volume of 2,000 shares.
On July 20 and 21, Mr. Hogan posted 436 messages on hundreds of Internet message boards, including boards hosted by Yahoo.com, InternetPlays.com and siliconinvestor.com. These messages, posted under various pseudonyms, contained a number of lies, including that JDS Uniphase planned to acquire Astrocom at $7 per share. On July 20, Astrocom's shares closed at 49.25 cents on a volume of 62,000 shares. July 21 saw the company's shares spike to $1.5625 on volume of 1,647,200 shares, closing at 75 cents.
Mr. Hogan sold all of his Astrocom shares on July 21, making a profit of $12,158.85. After Mr. Hogan's sale, he posted no more false messages, and the price and volume of Astrocom dropped drastically. On July 28, Astrocom closed at 45 cents on a volume of 46,200 shares.
MicroTel International Inc.
MicroTel designed and manufactured items for the telecommunications industry. On July 24 and 25, 2000, Mr. Hogan purchased 20,000 shares for $10,800, at an average price of 54 cents per share. On July 26, MicroTel closed at 51.5625 cents on volume of 39,100 shares.
Once the market closed on July 26, Mr. Hogan set to work, posting 468 messages on numerous message boards by 1:43 a.m. the following morning. The messages contained more rubbish, similar in nature to the postings in the Astrocom situation. Mr. Hogan wrote that MicroTel was a likely takeover candidate, to be bought for more than $5 per share. The companies interested in the takeover were rumoured to be Lucent Technologies and FS Networks.
The nonesense drove MicroTel's shares up to a mid-day high of 87.5 cents on July 27, before closing at 62.5 cents on volume of 925,100 shares. During the trading frenzy, Mr. Hogan sold his 20,000 shares, profiting by $2,674.68. By Aug. 4, MicroTel traded back down at 68.75 cents per share on a daily volume of 12,700 shares.
AM Communications Inc.
AM Communications, involved in the television and broadband industry, was Mr. Hogan's next target. Between July 27 and July 31, Mr. Hogan bought 29,000 AM Communications shares at an average price of 64 cents, at a total cost of $18,444.47. On July 28, the company closed at 62.5 cent per share with a daily trading volume of 75,000 shares.
On July 30, a Sunday, and July 31, Mr. Hogan posted 422 messages on numerous Internet message boards, and also sent a number of e-mails to American residents. The rubbish contained in the AM Communications messages included hints that Motorola Inc. and Harmonic Inc. were likely to buy AM Communications for $8 per share. Mr. Hogan also wrote that AM Communications's share price was moving fast, and would likely trade at $2 at some point in the day.
Mr. Hogan's comments helped to spur trading activity, driving AM Communications's shares up to a daily high of $1.15625 before closing at $1.01 on volume of 619,200 shares. The Aug. 1 close was 85 cents, with volume at 172,100 shares. Mr. Hogan sold his AM Communications shares on July 31 and Aug. 1, profiting by $5,524.75. Over the following three days, AM Communications's price and volume dropped, to close on Aug. 4 at 81.25 cents on volume of 97,400 shares.
Mr. Hogan sent out similar nonesense for two additional stocks, Egan Systems Inc. and RSI Systems Inc., with similar results.
The BCSC steps in
On Sept. 14, 2000, the BCSC froze Mr. Hogan's brokerage and bank accounts at TD Bank, where he did all of his trading. At the March, 2002, BCSC hearing on the matter, BCSC staff tried to make the case that Mr. Hogan was acting as an adviser without being registered, but the panel did not find any evidence in that respect. The commission panel did decide that Mr. Hogan made misrepresentations when making his false message board postings and e-mails. Mr. Hogan's admission that the whole point of his scheme was to profit from the artificially high prices led the commission panel to decide that he manipulated the market in the five OTC-BB companies' shares.
The commission concluded that Mr. Hogan's activities were detrimental to the public interest. Mr. Hogan claimed that when he began his scheme, he did not know he was violating securities laws. In spite of that, the panel stated that Mr. Hogan's activities were seriously prejudicial to the confidence in the public securities markets, and required serious sanctions. In addition, the use of the Internet in the manipulation of the thinly traded junior companies, such as the five targeted by Mr. Hogan, required a "firm regulatory response." The commission banned Mr. Hogan for 10 years and fined him $25,000 (Canadian), as well as ordering him to disgorge his ill-gotten profits of $41,752.
Court of Appeal decision
The Court of Appeal allowed Mr. Hogan to appeal the BCSC's decision on the narrow question of whether the amount of the fine was reasonable. The court's decision was delivered on Jan. 28, 2005. Mr. Hogan, appearing on his own behalf, submitted that the BCSC penalty was unreasonable as it was disproportionate to other fines, imposed by the commission for more serious conduct. Mr. Hogan also claimed that the commission panel did not take his ability to pay into account.
Mr. Hogan is unable to pay the $25,000 (Canadian) fine, and cannot point to a time in the foreseeable future when he will be able to pay. He is currently a part-time student who has not worked in several years. Part of his debt includes $25,000 (Canadian) in unpaid taxes on past stock market earnings, as well as $7,700 (Canadian) in student loans.
In support of Mr. Hogan's stance that the fine in his case was disproportionate to those in more serious cases, he pointed to the $100,000 (Canadian) fine imposed by the BCSC on Frank Biller in the Eron Mortgage scandal. Mr. Biller's conduct in that case contributed to investor losses of $170-million (Canadian), and a profit to Mr. Biller of between $6-million (Canadian) to $7-million (Canadian).
The BCSC's lawyer stated that the commission panel did take Mr. Hogan's financial situation into account, "but that the paramount consideration in its decision was protection of the public through general deterrence."
In the appeal court's decision, Madam Justice Jo-Ann E. Prowe wrote: "Although I have some reservations about the amount of the administrative penalty imposed on Mr. Hogan, I am unable to conclude that it is unreasonable, given the nature of Mr. Hogan's conduct and the role of the Commission in protecting the integrity of the markets and the public interest. My reservations stem from the fact that Mr. Hogan is a relatively young man, with no history of prior offences under the Act or otherwise, and with limited financial means, who succumbed to the temptation presented to him over Internet chatlines to 'make a quick buck'. It is clear, however, that he chose a particularly clever and effective way of manipulating stocks with relative ease in a manner which the Commission concluded represented a considerable danger to the public and the need for a strong deterrent message."
While the judge agreed that the commission gave Mr. Hogan's financial situation little weight, she stated that it did not appear that the commission acted unreasonably. A BCSC fine is not analogous to a fine in a criminal case, which can result in jail time if not paid. Enforcement of the BCSC penalty at the civil level could only result in the commission becoming a creditor of Mr. Hogan.
In response to Mr. Hogan's comparison to Mr. Biller's $100,000 (Canadian) fine, the judge notes that Mr. Biller faces criminal charges for his role in Eron Mortgage, and so a direct comparison is not useful.
With those considerations in mind, the court dismissed Mr. Hogan's appeal. |
