INITIAL DECISION RELEASE NO. 85
ADMINISTRATIVE PROCEEDING
FILE NO. 3-8593
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
:
In the Matter of :
:
ROBIN RUSHING and HAROLD : INITIAL DECISION
("B.J.") GALLISON, JR. : January 26, 1996
:
:
APPEARANCES: Carl A. Tibbets for the Division of Enforcement,
Securities and Exchange Commission
Irving M. Einhorn, Attorney for the Respondents
BEFORE: Burton S. Kolko, Administrative Law Judge
This administrative proceeding was instituted pursuant to
Sections 15(b) and 21C of the Securities Exchange Act of 1934
("Exchange Act") to determine whether Respondents Robin Rushing
("Rushing") and Harold Gallison, Jr. ("Gallison") willfully aided
and abetted and caused Burnett Grey Inc. ("Burnett") to violate
Section 15(c)(2) of the Exchange Act and Rule 15c2-11 thereunder,
and what, if any, remedial sanctions are appropriate and in the
public interest.
A hearing was held in this matter on June 7 and June 8,
1995, in San Diego, California to determine whether the
allegations brought by the Division of Enforcement ("Division")
with regard to the Respondents were true and to afford them an
opportunity to establish any defense. The Division and the
Respondents filed their initial briefs and findings of fact and
conclusions of law on September 25, 1995. Reply briefs were
filed on October 31, 1995. The Division filed a Statement in
Reply to New Point Raised on November 7, 1995. The findings and
conclusions herein are based upon the preponderance of the
evidence as determined by the record and upon my observation of
the various witnesses who testified at the hearing, as well as
the briefs, and the proposals of facts and law of the Division
and Respondents.
Findings of Fact
During 1990, Respondents were employed by Burnett, a broker-
dealer registered with the Commission pursuant to Section 15(b)
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of the Exchange Act. Order Instituting Proceedings II.A.
During the time Rushing was employed at Burnett, she held
supervisory and financial principal licenses: Series 7 and 24.
Tr. 273-274.-[1]- Gallison was Rushing's immediate
supervisor. Gallison was in charge of compliance at Burnett and
supervised Rushing's market-making activities. He was
responsible for compliance with the federal securities laws and
the rules of the Securities and Exchange Commission, including
being responsible for insuring that the firm and its traders
complied with Section 15 of the Exchange Act and Rule 15c2-11
thereunder. Ex. 21B, 21C, Tr. 32-34. Gallison had the
responsibility and authority to approve all market-making,
trading, and billing of due diligence fees, as well as to
determine the extent of due diligence necessary to make a market
in a security at Burnett. Tr. 134-36, 189-90, 198-99.
Rushing made a market in the securities of Astro
Enterprises, Inc. ("Astro") at Burnett. Astro filed its
registration statement in January 1990. Ex. 7A. At that time,
12,000,000 shares of Astro common stock with a par value of $.001
were held by 400 shareholders. Ex. 7A. Astro reported that as
of September 30, 1989 (unaudited) $5,236,621 of its $5,960,692 in
assets were held by nine subsidiaries of a wholly owned Astro
subsidiary that allegedly had interests in ten pieces of property
---------FOOTNOTES----------
-[1]-References to the hearing transcript will be cited as
Tr. __. References to Exhibits will be cited as Ex. __.
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in the western United States, and reported $11,613 in total
revenues and an operating loss of $64,326. Ex. 7A.
Rushing was familiar with Astro and had made a market in its
securities prior to her employment with Burnett. Tr. 286.
Rushing had access to the person who ran Astro, Ernst Hiestand,
as well as to the president of Astro's public relations
consulting company. She obtained information about Astro and its
stock from them. Tr. 95-97. Astro was a publicly held company
filing reports with the SEC. Ex. 7A. Astro's stock was traded
over the counter and quoted in the National Daily Quotation
Service ("NQB") "pink sheets." Ex. 30.
The Commission issued an Order Suspending Trading in Astro's
securities on May 4, 1990 ("Trading Suspension Order"). Ex. 1A.
In its Trading Suspension Order, the Commission stopped trading
in Astro's securities for ten days and indicated that there was a
lack of adequate and accurate current information on Astro and
"that questions had been raised about the accuracy and adequacy
of Astro's financial statements and other disclosures,
developments in the market for its securities and sales of
securities in the United States." Ex. 1A. The Trading
Suspension Order and the reasons for the suspension were printed
and publicly disseminated in the SEC News Digest and the SEC
Docket. Ex. 1C and 1D. The Trading Suspension Order was sent to
and received by the Respondents. Ex. 1B.
After the ten day trading suspension expired, Astro, the
issuer, through Ernst Hiestand, contacted Rushing and asked her
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to make a market in Astro's securities. Tr. 206, 288. Rushing's
motivation for trading Astro was to make money by buying and
selling Astro at a profit. Tr. 284. She told Gallison that she
wanted to resume trading in Astro, and gathered all information
necessary to complete a due diligence file for Burnett so that
Burnett would have all documentation necessary to resume
quotations in Astro's securities. Tr. 289.
Gallison decided that Burnett would charge Astro a due
diligence fee before resuming its market-making. Tr. 369.
Rushing knew that she needed an audited annual report before
making a market in Astro's securities, and contacted Astro's
auditors to determine why they were delayed in releasing their
report on Astro's financial statements. The auditors told her
that they were having trouble verifying Astro's assets. Tr. 142-
43.
Respondents received Astro's due diligence fee on or about
June 20, 1990. Ex. 15B. Rushing obtained the current filings
for Astro. Astro's most recent Form 8-K, filed with the
Commission on June 21, 1990, contained updated audited financial
statements. Ex. 2A. The auditor's opinion attached to Astro's
financial statements was qualified because the auditor was unable
to verify the existence of a large portion of Astro's assets.
Ex. 2A.
In order to resume quotations in Astro, Rushing completed a
Form 211 to be filed with the NQB and signed the form on June 21,
1990. Ex. 8A. Gallison also signed the form on that date as an
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officer of Burnett approving the market-making. Ex. 8A. Rushing
failed to check a box on Form 211 that would have indicated that
Astro was an Exchange Act reporting company. Rushing admitted
that she made this mistake. Tr. 292-293. Rushing attached
Astro's Form 8-K containing the current, audited financial
statements to the Form 211 and filed them with the NQB.
The only Astro financial statement that Respondents had when
they submitted their market-making application was the 1989 pro
forma financial statement filed on Current Report Form 8-K. Ex.
2A, Tr. 139 and 321. Astro had not filed an annual report for
1989 on Form 10-K as required by Section 13 of the Exchange Act
and Rule 13a-1 thereunder. Ex. 2A. Respondents did not have
Astro's quarterly report on Form 10-Q for the first quarter of
1990 which was filed on May 31, 1990. Ex. 3A, Tr. 321.
Respondents also had none of Astro's business plans. Tr. 137.
Rushing traded in Astro stock after respondents caused a
market to be made in the stock, both wholesale and retail. Ex.
33L and M, and 31E. Gallison approved the trades. Tr. 226.
Conclusions of Law
The Order Instituting Proceedings in this matter alleges
that Respondents Rushing and Gallison willfully aided and abetted
and caused Burnett's violation of Section 15(c)(2) of the
Exchange Act and Rule 15c2-11 thereunder. Order Q. No other
violations are charged. Rule 15c2-11 details the requirements
that a broker-dealer must adhere to in order to resume quotations
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in the securities of an issuer after the expiration of a trading
suspension in that security.
The parties disagree about which subparagraph of Rule 15c2-
11 is applicable to this case. The Respondents argue, in
summary, that Astro is a reporting company and that brokers who
wish to resume quotations after a suspension has expired in a
security issued by a reporting company must meet the requirements
of 15c2-11(a)(3). Subsection 3 of Rule 15c2-11(a), as in effect
at the time, made it a fraudulent, manipulative, and deceptive
practice for any broker or dealer to submit any quotation for
publication unless:
. . . (3) the broker or dealer has a reasonable basis
for believing that the issuer is current in filing the
reports required to be filed at regular intervals
pursuant to Section 13 . . . and the broker or dealer
has in his records the issuer's most recent annual
report filed pursuant to Section 13 . . . together with
any other reports required to be filed at regular
intervals under such provisions of the [Exchange] Act
which have been filed by the issuer after such annual
report, if the issuer is required to file reports
pursuant to Section 13 of the Securities Exchange Act
of 1934 (15 U.S.C. 78m); or . . . .
The Respondents argue that Astro was current in its filings
and that Burnett maintained copies of Astro's filings and,
therefore, the requirements of Rule 15c2-11 were met. The
Division disagrees.
The Division argues that a broker-dealer must meet the
requirements of subsection 3 or subsection 5 of Rule 15c2-11(a).
If subsection 3 requirements are met, the broker-dealer may
resume quotations. However, if subsection 3 requirements are not
met, which the Division believes to be true in this case, then
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the requirements of subsection 5 must be met.-[2]- If
neither subsections 3 nor 5 requirements are met, there has been
a violation of the Rule. I agree with the Division's
interpretation of the Rule.
Respondents contend that when they resumed quotations in
Astro, Burnett had met the requirements of Rule 15c2-11(a)(3).
Respondents argue that Burnett had a reasonable belief that Astro
was current in its filings with the Commission since it had just
received Astro's Form 8-K report containing Astro's most recent
audited financial statements. Further, Respondents state that
Astro had filed all quarterly reports required by the Commission
after it had registered with the Commission by filing a Form 10
Registration Statement in January 1990.
The Division concurs that Respondents had a copy of a Form
8-K Current Report which is used to report on such matters as
change in control, acquisition or disposition of assets,
bankruptcy, changes in accountants and directors, and pro forma
financial statements or financial statements of acquired
businesses. Ex. 2A. However, the Division disagrees that
Respondents had all the documentation necessary under the rule to
make a market in Astro securities after the suspension. The
Division contends that Respondents did not have in their records
the annual report for 1989 required to be filed by Astro on Form
10-K pursuant to Section 13 of the Exchange Act and Rule 13a-1
---------FOOTNOTES----------
-[2]-Subsection 5 of Rule 15c2-11(a) is set out on page 8
infra.
==========================================START OF PAGE 8======
thereunder. Astro never filed the annual report required by
Section 13. The Division also asserts that the Respondents did
not have in their records the other reports required to be filed
at regular intervals by Section 13 and Rule 13a-13 thereunder.
Specifically, Respondents did not have Astro's first quarterly
report for 1990 required to be filed on Form 10-Q by May 15, 1990
and actually filed by Astro on May 31, 1990. Ex. 3A.
Respondents argue that Astro was not required to file its
first annual report under Rule 13a-1 under the Exchange Act
before Respondents applied to make a market in Astro securities
on June 21, 1990. Rule 13a-1 requires every issuer to "file an
annual report on the appropriate form authorized or prescribed
therefor for each fiscal year after the last full fiscal year for
which financial statements were filed in its registration
statement." The issuer here, Astro, filed audited financial
statements in its Form 10 registration statement only for the
full fiscal years ending November 30, 1988, December 31, 1987,
and December 31, 1986. Ex. 7A at 23-29. Astro did not file
financial statements with its registration or otherwise for
fiscal year 1989. Astro did include with its registration form
unaudited financial statements for the nine months ending
September 30, 1989, but those financial statements were not
purported to be for a full year, nor were they audited as
required and as the financial statements for Astro's prior years
were.
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Astro was required by Section 13 of the Exchange Act and
Rule 13a-1 thereunder to file an annual report with audited
financial statements for the fiscal year 1989 ending December 31,
1989 before a market was made by Respondents in June 1990. That
annual report was required by Rule 15c2-11(a) to be obtained by
Respondents before they made the market in Astro securities.
I find that the Respondents did not have in their records
Astro's 1989 Annual Report or Astro's First Quarterly Report for
1990, which are required to be filed pursuant to Section 13. I
further find that the Respondents had no reasonable basis for
believing that Astro was current in filing the reports required
to be filed by Section 13. Therefore, I conclude that the
Respondents did not meet the requirements set out in Rule 15c2-
11(a)(3) when they resumed making a market in Astro.
The supplementary information published along with the 1985
amendment to Rule 15c2-11 states that, "Only when the paragraph
(a)(3) information is not reasonably available may a broker-
dealer substitute the information required by paragraph(a)(5)."
Initiation or Resumption of Quotations Without Specified
Information, 31 SEC Docket 1041, 1046 (1984). Giving the
Respondents the benefit of the doubt that the information was not
reasonably available because it had not been filed with the
Commission, the Respondents may still resume the trading if they
meet the requirements set out in subsection 5 of the Rule. Rule
15c2-11(a)(5), as in effect at the time, made it a fraudulent,
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manipulative, and deceptive practice for any broker or dealer to
submit any quotation for publication unless:
(5) the broker or dealer has in his records, which he
had no reasonable basis for believing was not true and
correct, certain information including the issuer's
most recent balance sheet, profit and loss statement
and retained earnings statement, similar financial
information for the preceding two fiscal years . . . .
The Respondents have argued that they met the requirements
set out in subsection 3 and, therefore, did not need to meet the
requirements set out in subsection 5. The Division states that
regardless of this claim, the Respondents failed to meet the
requirements of either section. Indeed, the Respondents concede
in their post-hearing brief that if a broker-dealer had to "rely
upon Rule 15c2-11(a)(5) and its more stringent review
requirements [it] would have made it much more difficult, if not
impossible, for anyone to resume quotations in Astro."
Respondent's Brief at 13. Under subsection 5, Respondents were
required to have a reasonable basis for believing that the
financial statements they obtained were true and correct and that
there was no reasonable basis for doubting the truth and
correctness of the information. Respondents had clear reasons
for doubting that the assets shown in the pro forma financial
statements were accurate. Respondents had an auditor's report
stating that the accounting firm could not give an opinion on the
financial statements because of their inability to verify the
assets. Ex. 2A. Respondents had been forced to stop trading in
Astro's securities because of the Commission's findings of a lack
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of adequate current information and its doubts about the accuracy
and adequacy of Astro's financial statements and other
disclosures. Ex. 1A. Rushing had spoken to the auditors before
they refused to opine, and the auditors told her that they were
having trouble verifying the assets. Tr. 143. Respondents had
more than a reasonable basis; they had a compelling basis for
doubting the veracity and accuracy of the financial statements.
I conclude that the Respondents had no reasonable basis for
believing that the financial statements of Astro that they had in
their possession were true and correct. Further, the fact that
Astro, a reporting company required to file annual reports, had
not filed an annual report in 1989, should have raised red flags
to any broker-dealer that there was a potential problem in making
a market in Astro securities. The Respondents had a
responsibility after the May 4, 1990 Trading Suspension of Astro
securities to "conduct a careful review in a professional manner
of the basis for the trading suspension to determine whether
there is a reasonable basis for the broker-dealer to believe that
the information about the issuer in the broker-dealer's knowledge
or possession is true and correct." Initiation or Resumption of
Quotations Without Specified Information, 44 SEC Docket 1072,
1075-76 (1989).
The Commission indicated in the release adopting the 1985
amendment to Rule 15c2-11 that, "The Rule is intended to require
a broker-dealer to give some measure of attention to financial
and other information about the issuer of a security before it
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commences trading in that security". 31 SEC Docket at 1042. The
Respondents failed to give sufficient attention to the available
financial information concerning Astro, as well as the
unavailability of certain required financial information, before
they resumed quotations in Astro after the expiration of the
trading suspension. The Respondents' actions and omissions of
actions were willful within the meaning of the Rule. They had an
"awareness of the underlying facts, not the labels the law places
on those facts .... A knowledge of what one is doing and the
consequences of those actions suffices." SEC v. Falstaff Brewing
Corp., 629 F.2d 62, 77 (D.C. Cir. 1980), cert. denied, 449 U.S.
1012 (1980).
Accordingly, I find that the Respondents aided and abetted
and caused Burnett's violation of Section 15(c)(2) of the
Exchange Act and Rule 15c2-11 thereunder. The Division requests
that both Respondents be suspended for a period of at least
twelve months from association with a broker-dealer and from
participating in any offering of penny stock, and that they be
ordered to cease and desist from committing any violation or
causing any future violation of Section 15(c)(2) and Rule 15c2-11
thereunder.
Although I find that Respondents violated Rule 15c2-11 as
alleged, there were mitigating circumstances that merit a less
stringent sanction than the Division has requested. The
Commission has stated that, "Sanctions cannot be assessed
mechanistically. Due regard must be given 'to the facts and
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circumstances that differentiate one man's case from another's.'
We are not here to punish [the Respondent]." Leo Glassman, 46
S.E.C. 209, 211 (1975). In imposing administrative sanctions,
the Commission may take into account such factors as:
...the egregiousness of the defendant's actions, the
isolated or recurrent nature of the infraction, the
degree of scienter involved, the sincerity of the
defendant's assurances against future violations, the
defendant's recognition of the wrongful nature of his
conduct, and the likelihood that his occupation will
present opportunities for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir., 1979), aff'd on
other grounds, 450 U.S. 91 (1981).
The record has demonstrated that this is the first and only
time that the Respondents have been confronted with a situation
like this. This case involves one isolated infraction. Rushing
has been involved in no prior disciplinary matters. Gallison was
involved in one prior disciplinary action, but that sole
transgression occurred nearly a decade ago, soon after he first
entered the securities business. He testified that he was
required to disgorge $7,000 in commissions but received no
suspension whatsoever. Tr. 334-342. Furthermore, Gallison
stated that he is critical to the operations of his current firm,
La Jolla Capital, which has nearly 100 licensed brokers. Tr.
358-359, 372-373. The firm could easily go out of business if he
were suspended for any significant period of time. Tr. 358-363,
371-372. The Respondents clearly regret ever having gotten
involved with Astro and would never make the mistake again that
they made in this case. There has been no evidence introduced
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that their conduct, in resuming quotations in Astro, was part of
any nefarious plan.
Based on the foregoing, I conclude that a 12 month
suspension and a penny stock bar are too harsh a sanction and
that in this case a cease and desist order would best serve the
public interest.
ORDER
Based on the findings and conclusions set forth in this
decision, I ORDER that the Respondents Robin Rushing and Harold
Gallison, Jr. cease and desist from committing any violation or
causing any future violation of Section 15(c)(2) of the
Securities Exchange Act of 1934 and Rule 15c2-11 thereunder.
Pursuant to Commission Rule of Practice 17(f), this initial
decision shall become the final decision of the Commission as to
each party who has not, within fifteen days after service of this
initial decision upon him or her, filed a petition for review of
this initial decision pursuant to Rule 17(b), unless the
Commission, pursuant to Rule 17(c), determines on its own
initiative to review this initial decision. If a party timely
files a petition for review, or the Commission takes action to
review as to a party, the initial decision shall not become final
with respect to that party.
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Burton S. Kolko
Administrative Law Judge
Washington, D.C.
January 26, 1996 |
