==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 96 ADMINISTRATIVE PROCEEDING FILE NO. 3-8584 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION ------------------------------- : In the Matter of : : FREDERICK ENTMAN, : INITIAL DECISION NORMAN B. ROTHSTEIN, : August 20, 1996 FRANK LOUIS PALUMBO, : JACOB WONSOVER, : HOWARD RICHARD PERLES, : M. RIMSON & CO., INC., and : MOSHE RIMSON : : ------------------------------- APPEARANCES: Sarah A. Smith and Cory C. Kirchert for the Division of Enforcement, Securities and Exchange Commission Christopher J. Barber and Daniel P. Roy for Respondent Jacob Wonsover BEFORE: Burton S. Kolko, Administrative Law Judge Introduction The Securities and Exchange Commission ("Commission") instituted this proceeding on December 28, 1994, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b)(4), 15(b)(6), and 19(h)(3) of the Securities Exchange Act of 1934 ("Exchange Act"). In the Order Instituting Proceedings, the Division of Enforcement ("Division") alleged that Frederick Entman, Norman B. Rothstein, Frank Louis Palumbo, Jacob Wonsover, and Howard Richard Perles willfully violated Sections 5(a) and 5(c) of the Securities Act and that M. Rimson & Co., Inc., and Moshe Rimson failed reasonably to supervise Howard Richard Perles with a view to preventing violations of Sections 5(a) and 5(c) of the Securities Act. The Commission entered Orders Making Findings and Imposing Remedial Sanctions on Frederick Entman and Norman B. Rothstein,-[1]- Frank Louis Palumbo,-[2]- and Howard Richard Perles.-[3]- On July 3, 1995, I granted the Division's Motion to Adjourn the hearing as to M. Rimson & Co., Inc., and Moshe Rimson based on the Division's representation that the Commission planned to issue further charges against those Respondents and that all matters as to them should ---------FOOTNOTES---------- -[1]-Order of the Commission Making Findings and Imposing Remedial Sanctions Against Frederick Entman and Norman B. Rothstein, 59 SEC Docket 1937 (June 23, 1995). -[2]-Order of the Commission Making Findings and Imposing Remedial Sanctions, 58 SEC Docket 2506 (February 28, 1995). -[3]-Order of the Commission Making Findings and Imposing Remedial Sanctions Against Howard Richard Perles, 59 SEC Docket 0612 (May 2, 1995). ==========================================START OF PAGE 2====== therefore be consolidated. On August 3, 1995, these Respondents were named, along with ten others, in an Order Instituting Public Administrative and Cease and Desist Proceedings.-[4]- The Division made no further attempt to consolidate these proceedings. Since the Division did not present evidence of the alleged violations of M. Rimson & Co., Inc., and Moshe Rimson, the proceeding against these Respondents will be dismissed. Evidentiary hearings were held in this matter on May 18 and 19, and June 26 and 27, 1995, in Chicago, Illinois, to determine whether the allegations made by the Division against Respondent Jacob Wonsover are true, to afford the Respondent an opportunity to establish any defense, and to determine what, if any, remedial sanctions are appropriate and in the public interest and whether the Commission should enter an order requiring him to cease and desist from violating Sections 5(a) and 5(c) of the Securities Act.5 The Division and Mr. Wonsover filed initial briefs and proposed findings of fact and conclusions of law on October 17, 1995. Reply briefs were filed on October 31, 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 ---------FOOTNOTES---------- -[4]-M. Rimson & Co., Inc., et al., Order Instituting Public Administrative and Cease and Desist Proceedings and Notice of Hearing Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934, Admin. Proc. 3-8772 (August 3, 1995). 5Additionally, a final telephone conference was held on July 14, 1995, to consider admission of additional evidence, but no additional testimony or exhibits were offered. ==========================================START OF PAGE 3====== hearing, as well as the briefs and proposals of facts and law submitted by the parties. Findings of Fact and Law Respondent Jacob Wonsover Mr. Wonsover is a forty-two-year-old Israeli citizen who came to this country in 1976. (Ex. 97 at 9; Tr. 610.)6 He began his career in the securities industry in 1981. (Tr. 611.) From about June 1989 until he was terminated in May 1991, Mr. Wonsover was employed as a registered representative in the Northbrook, Illinois, branch office of PaineWebber, Inc.7 (Tr. 615; Ex. 97 at 12-14.) While at PaineWebber the Respondent serviced approximately 500 customer accounts. (Tr. 620.) Gil-Med Industries, Inc., and Shimon Gibori Gil-Med Industries, Inc. ("Gil-Med") was formed in January 1980 to produce plastic medical products. (Ex. 30 at 4.) According to Gil-Med's Amendment No. 2 to Form S-18 Registration Statement under the Securities Act, which was filed with the Commission on February 5, 1988, to register Gil-Med's initial public offering ("IPO") of common stock, the company "market[ed] disposable plastic containers with attached tubing for parenteral intravenous nutrient and drug administration and for enteral 6References to the hearing transcript will be cited as "(Tr. __.)." References to Division Exhibits will be cited as "(Ex. __.)." 7PaineWebber is a registered broker-dealer conducting business throughout the United States. In May or June 1989, PaineWebber acquired the Northbrook office of Drexel Burnham Lambert, Inc. (Ex. 97 at 14.) ==========================================START OF PAGE 4====== nutritional support." Id. Shimon Gibori founded Gil-Med and served at various times as the company's chief executive officer, chairman of the board, president, director of international marketing, and largest shareholder. Id. at 21, 25. Mr. Wonsover was introduced to Mr. Gibori in 1986 or 1987, while Mr. Wonsover was a broker at Bear Stearns. (Tr. 624.) He initially opened an Individual Retirement Account for Mr. Gibori. (Tr. 627.) During the period August 1989 to October 1990, Mr. Gibori referred the nineteen shareholders at issue to Mr. Wonsover at PaineWebber, Inc., to open accounts for the transfer of Gil-Med shares. (Tr. 266-67, 618, 642.) ==========================================START OF PAGE 5====== Charges Against Respondent Wonsover The Order Instituting Proceedings charges, inter alia, that Mr. Wonsover willfully violated Sections 5(a) and 5(c) of the Securities Act8 during the period August 1989 to August 1990, through use of jurisdictional means in offering to sell, selling, and receiving after sale, various shares of the common stock of Gil-Med at a time when no registration statement was filed or in effect as to such securities under the Securities Act. Wonsover's Violations of Sections 5(a) and 5(c) of the Securities Act To establish a prima facie case of a violation of Sections 5(a) and 5(c) of the Securities Act, the Division must prove that: (1) no registration was in effect as to the securities; (2) the Respondent sold or offered to sell these securities; and (3) interstate transportation or communication and the mails were used in connection with the sale or offer of sale. SEC v. Continental Tobacco Co. of South Carolina, 463 F.2d 137, 155 (5th Cir. 1972). The record establishes that during the period August 1989 through October 1990, Mr. Wonsover opened nineteen accounts in the names of nineteen purported Gil-Med shareholders. Mr. Wonsover facilitated deposits, and sales and payments of sales proceeds derived from such sales, into these nineteen accounts of 8As applicable here, Sections 5(a) and 5(c) make it unlawful to use instruments of interstate commerce or the mails to sell or deliver a security unless a registration statement is in effect as to such security, or to offer to sell a security unless a registration statement has been filed as to such security. ==========================================START OF PAGE 6====== a total of 924,000 shares of Gil-Med common stock, for which no registration statement under the Securities Act was filed or in effect at the time of the sales. The 924,000 Gil-Med shares were sold using instruments of interstate commerce or the mails. There is sufficient evidence to conclude, based on a preponderance of the evidence, that Mr. Wonsover violated Section 5 of the Securities Act. I further find that Mr. Wonsover's violations of Sections 5(a) and 5(c) of the Securities Act were willful. Respondent Wonsover's Contentions The Respondent contends that the Division failed to establish its prima facie case that he violated the Securities Act, that the securities involved were in fact exempt from registration under the Act, and that in any event he made appropriate inquiries regarding the status of the subject securities. I find the Respondent's arguments unconvincing and find his actions in violation of the Securities Act willful. 1. Division Failed to Establish Prima Facie Case Mr. Wonsover argues that the Division failed to prove that there was no registration statement under the Securities Act filed or in effect with respect to the Gil-Med stock at issue. While the testimony of several witnesses at the hearing suggests that shares of Gil-Med common stock were stolen and/or forged, no proof was offered that the shares at issue were registered. The Division submitted Gil-Med's Amendment No. 2 to Form S- 18 Registration Statement under the Securities Act ("Registration ==========================================START OF PAGE 7====== Statement") which was filed on February 5, 1988. (Ex. 30.) Mr. Wonsover testified that he did not know of any registration of Gil-Med shares other than the Registration Statement. (Tr. 705.) The Registration Statement does not name the nineteen shareholders at issue under the "Principal Shareholders" or "Certain Transactions" sections. The testimony of Michael Beckman, the attorney who prepared Gil-Med's Registration Statement, indicated that the shareholders would have been named if they owned Gil-Med common stock at the time of the filing of the Registration Statement. Additionally, the Division submitted an Attestation of the Commission's Records Officer which certified that no Gil-Med registration statement was filed between March 3, 1988, and March 6, 1995. (Ex. 36.) Accordingly, the shares in question were either issued as unregistered shares, or issued in the IPO. Substantial evidence was presented and is discussed below involving allegations of fraud and difficulties transferring shares, and the creation of bogus shares and shareholder lists. This evidence, combined with the inability of the Respondent to prove that the shares at issue were in fact registered, lead me to conclude that the shares involved were not registered. The names of the nineteen shareholders at issue in this case are as follows: Group 1 Group 2 Group 3 Peter Gomez Batia Edna Izak Derzie Mark Swerling Meriam Avram Eli See Robert Thornton B. Yarech Ram Kellmey Bruce Levy Mosher Natli David Sova ==========================================START OF PAGE 8====== Mark Lustig Saul Shmash Isac Asian Haim Cheap Moshe Chatz Gabriel Chava Ben Gigl Dr. Henry Vogel met Mr. Gibori in February 1988. (Tr. 229.) Dr. Vogel was impressed with the company and bought shares. (Tr. 230.) He further involved himself with the company by introducing Mr. Gibori to hospital staff who would use the product, and by attempting to recruit institutional and private investors. (Tr. 230-33.) He solicited his friends and acquaintances to purchase Gil-Med shares and handled the transactions for them. (Tr. 231, 233-34.) The investors included under Group 1 are among the investors solicited by Dr. Vogel. (Tr. 234-36, 306.) Dr. Vogel's testimony is replete with allegations of fraud in connection with the sale of Gil-Med shares. He testified that Gil-Med stock certificates were forged and possibly stolen, and raised substantial doubt as to whether the shares were registered. He admitted that he impersonated Mr. Cheap on the phone to Mr. Wonsover. (Tr. 310-11.) Dr. Vogel forged or had forged9 the signatures of Mr. Cheap, Mr. See, and possibly Mr. Derzie listed in Group 3 above on documentation supporting the transfer of Gil-Med shares. (Tr. 306-07, 310, 411-14.) He believed that Mr. Cheap, Mr. Derzie, and Mr. See did not in fact exist, and were created by Mr. Gibori. (Tr. 307, 316-18, 435.) 9Dr. Vogel testified that he asked "a girl at the bakery" who knew Hebrew to sign people's names on Gil-Med paperwork. (Tr. 307, 313, 332, 412.) ==========================================START OF PAGE 9====== Dr. Vogel also testified that both he and Mr. Gibori had unusual access to blank stock certificates, Seller Representation Letters10 and shareholder lists (Tr. 247-49, 252, 330-33, 362, 426-28), and that it appeared that Mr. Gibori issued more shares than were authorized to be outstanding. (Tr. 276-77.) Rule 144 of the Securities Act provides a set of conditions under which restricted securities and securities held by affiliates may be resold without registration.11 "The rule is designed to prohibit the creation of public markets in securities of issuers concerning which adequate current information is not available to the public." Preliminary Note to Securities Act Rule 144. The requirements of Rule 144(b) through (i) include provisions that: 1) current public information be available regarding the issuer of the securities; 2) at least two years elapse between the time the securities are acquired from an issuer or affiliate and the date the securities are resold under the rule; 3) the amount of securities able to be sold is limited, depending on whether the sale is by an affiliate or not; 4) the securities be sold in brokers' transactions or with a market maker; and 5) Commission Form 144 be filed depending on the size 10A Seller Representation Letter is a letter written by an account holder certifying that he or she meets the criteria to sell shares under Rule 144(k). 11Restricted securities include "[s]ecurities that are 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 offering." Securities Act Rule 144(a)(3). Control securities are securities owned by an affiliate of the issuer. An affiliate is "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer." Securities Act Rule 144(a)(1). ==========================================START OF PAGE 10====== of the transaction, and that the person filing the form has a bona fide intention to sell the securities within a reasonable time. Mr. Wonsover claims that it was not necessary to register the shares at issue because they were exempt from registration under Securities Act Rule 144(k). Rule 144(k) exempts holders from the Rule 144 conditions on the sale of restricted securities, provided that the shares have been held for at least three years, and that the holder has not been an affiliate of the issuing corporation for at least three months. Mr. Gibori sent letters as requested by the transfer agent representative, Theresa Conrad, certifying that the nineteen Gil-Med shareholders were not affiliates and that they held the shares to be sold for at least three years. PaineWebber's Standard Methods and Procedures publication required brokers to submit completed Seller's Representation Letters for all Rule 144 or Rule 144(k) transactions, and to complete the Investment Executive's Worksheet for Rule 144 Transactions. (Ex. 106 at 2, 4, 6, 10.) While the Seller's Representation Letter is a statement signed by the seller that he meets the requirements of Rule 144 or Rule 144(k), the Investment Executive's Worksheet requires the broker to ask the seller of Rule 144 or Rule 144(k) stock questions about how and when the shares were acquired and whether the shareholder is an affiliate of the company. One Forty Four & More, self-described as the "PaineWebber Broker's Worksheet and Compliance Manual [on] How Rule 144 Works," also requires the selling stockholder to ==========================================START OF PAGE 11====== complete and submit Commission Form 144. (Ex. 1 at 1.) Dr. Vogel admitted that he personally forged or had forged Gil-Med stock certificates, Seller Representation Letters for Mr. Cheap and Mr. See, and shareholder lists. (Tr. 276-77, 330-33, 413-14, Ex. 15, Ex. 17.) In the name of Mr. Cheap, and perhaps others, he forged a Commission Form 144, a W-8 Certificate of Foreign Status, and a letter authorizing the transfer of shares or proceeds from shares. (Tr. 306-07, Ex. 15.) Only two Seller's Representation Letters were produced at the hearing. (Ex. 15, Ex. 17.) No PaineWebber Investment Executive Worksheets for the investors at issue were produced. (Tr. 722-23.) Dr. Vogel also testified that the investors which he had recruited had difficulties selling their shares in 1988 and 1989. (Tr. 252-53, 264-67.) Mr. Gibori directed Dr. Vogel to direct his shareholders to Levco, one broker-dealer, and then to J.W. Gant, another broker-dealer, to sell their shares. (Tr. 264-66.) Both firms refused to sell the shares and Mr. Gibori then directed Dr. Vogel to take the shares and necessary paperwork to Mr. Wonsover at PaineWebber. (Tr. 264-67.) At PaineWebber, James McNulty in the Restricted Stock Department refused to clear one of Mr. Wonsover's Gil-Med sales transactions. (Tr. 185-87.) The inability to sell the shares indicates that the shares were not registered. According to Dr. Vogel, Mr. Wonsover did not ask him how or when the shares were acquired, or why Dr. Vogel was handling the transactions for the investors. In his investigative testimony ==========================================START OF PAGE 12====== Mr. Wonsover said he did not ask the customers how or when they acquired their shares, whereas at the hearing he claimed that he made a full inquiry or was told this information. While the credibility of Dr. Vogel may be questioned, his testimony should not wholly be discounted, particularly when his testimony parallels the testimony of other witnesses. These varying testimonies, along with the missing Investment Executive Worksheets, support the conclusion that Mr. Wonsover did not inquire whether the Gil-Med shares of the nineteen shareholders at issue were registered. The testimony of more credible witnesses such as Theresa Conrad, James McNulty, and Michael Beckman, as well as the testimonial and documentary discrepancies raised by the testimony of Mr. Wonsover, confirm that the origins of at least some of Gil-Med's stock are suspect. The names of the nineteen shareholders listed above did not appear in the Registration Statement, but did appear on some shareholder lists produced at trial. The accuracy of shareholder lists produced at the hearing generally are suspect, given the testimony of Ms. Conrad, Dr. Vogel, Mr. Beckman, and Mr. McNulty. For example, Ms. Conrad testified that the shareholder lists provided to her were not complete and in some cases did not incorporate the certificates for which she needed verification. In such a case, Mr. Gibori would send updating shareholder lists and Rule 144(k) letters certifying that the Gil-Med shareholders who wished to sell their shares were not affiliates and that they had held the shares to be sold for at least three years. ==========================================START OF PAGE 13====== Additionally, Mr. McNulty of PaineWebber's Restricted Stock Department testified that he wrote a note which stated: Per Theresa Conrad stock is not listed on her computer. She will require a letter from company saying shares are outstanding besides letter from attorney. Informed Jacob of this & told him I also need a copy of this letter. (Ex. 55, Tr. 36-37.) This evidence, along with the fact that the nineteen shareholders at issue were not listed on the Registration Statement, suggests that the shares were not registered or purchased in the 1985-87 period and so were not held for three years as suggested by Mr. Wonsover. The certificates of ten investors bore no restrictive legends. The certificates of Mr. Cheap and those investors listed in Group 3 carried legends that would have put the holder on notice of restrictions regarding transfer of the securities. The absence of a restrictive legend, however, does not "relieve a broker-dealer from his duty as a professional in the securities business to make reasonable inquiry to assure himself that he is not participating in an illegal sale of unregistered securities." Stone Summers & Co., 45 S.E.C. 105, 109 (1972); see also Quinn and Co., 44 S.E.C. 461, 470 (1971), aff'd, 452 F.2d 943 (10th Cir. 1971), cert. denied, 406 U.S. 957 (1972). Mr. Wonsover was not expected to discover that the certificates were forged, but rather that the securities were unregistered or otherwise restricted, and he should have declined to sell them on that basis. ==========================================START OF PAGE 14====== The evidence presented raises suspicion about how and when the shares at issue were acquired. The varying testimonies of Mr. Wonsover give reason to question the origins of the certificates. Gil-Med was a little-known company and its shares were thinly traded. Most of the nineteen account holders purchased at least 25,000 shares of Gil-Med, and the Gil-Med address was listed as the investor's address for the majority of the nineteen accounts. Mr. Gibori directed most of the trading in the nineteen accounts, and according to Dr. Vogel both he and Mr. Gibori engaged in fraud related to the transfer of shares. The Respondent does not dispute that he sold or offered to sell these securities and that interstate transportation or communication and the mails were used in connection with the sale or offer of sale. ==========================================START OF PAGE 15====== 2. Claimed Exemptions From Registration The Respondent argues in the alternative that the securities at issue were exempt from registration under Section 4 of the Securities Act. Section 4(3) of the Securities Act exempts transactions by a "dealer" from the Section 5 registration requirements.12 Section 4(4) exempts "brokers' transactions" executed upon customers' orders on any exchange or in the over- the-counter market, but not the solicitation of such orders. Mr. Wonsover argues that: 1) he is not an underwriter as defined in Section 2(11) of the Securities Act, which would disqualify him from either the Section 4(3) or the Section 4(4) exemption; and 2) he made all necessary inquiries into the sales of Gil-Med shares in order to qualify for the Section 4(4) exemption. It is well settled that the burden of proving entitlement to such exemptions rests with the person claiming it.13 Mr. Wonsover did not sustain his burden of proving an exemption, because he was in fact a statutory underwriter under Section 2(11), and further because he did not make the necessary inquiries to qualify for an exemption pursuant to Section 4(4). (a) Underwriter Status 12The term "dealer" is defined in Section 2(12) of the Securities Act as "any person who engages either for all or part of his time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another person." 13See SEC v. Ralston Purina Co., 346 U.S. 119 (1953); SEC v. Culpepper, 270 F.2d 241, 246 (2d Cir. 1959); Pennaluna & Co. v. SEC, 410 F.2d 861, 865 (9th Cir. 1969), cert. denied, 396 U.S. 1007 (1970); Quinn and Co. v. SEC, 452 F.2d at 946. ==========================================START OF PAGE 16====== Neither Section 4(3) nor 4(4) exempts from registration securities sold by an underwriter. "Underwriter" is defined in Securities Act Section 2(11) as follows: The term "underwriter" means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. As used in this paragraph the term "issuer" shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer. "The term underwriter is not limited to its common definition, but rather is a word of art." Quinn and Co. v. SEC, 452 F.2d at 946. "In view of the primary purpose of the Securities Act to protect investors through the registration provisions, the courts have given a broad interpretation to the term . . . ." Quinn and Co., 44 S.E.C. at 464. Section 4(3) does not exempt dealer transactions that involve an issuer or underwriter. See Quinn and Co. v. SEC, 452 F.2d at 946. Further, the Section 4(4) exemption is unavailable to any broker which sells unregistered securities when the broker knows or has reasonable grounds to believe that its principal is an underwriter. Paul L. Rice, 45 S.E.C. 959, 960-61 (1975); Merrill Lynch, Pierce, Fenner & Smith Inc., 45 S.E.C. 185, 188 (1973); Quinn and Co., 44 S.E.C. at 468. Mr. Gibori was a control person and statutory issuer of Gil- ==========================================START OF PAGE 17====== Med under Section 2(11). He founded Gil-Med, and was at various times chief executive officer, chairman of the board, president of the company, director of international marketing, and the largest shareholder. He controlled accounts through which Mr. Wonsover sold 924,000 Gil-Med shares. "Where . . . the critical factor determining the availability of an exemption is whether the shares in question emanated from a person in a control relationship with the issuer, one asserting the exemption must show the absence of control, at least where a secondary distribution of significant proportions is involved." Wittow & Co., 44 S.E.C. 666, 671 (1971). The weight of the evidence supports the finding that Mr. Gibori created and controlled shareholder lists, accounts and proceeds. As such, the Respondent's efforts to show that Mr. Gibori was not a control person are unpersuasive. While Mr. Gibori was the issuer for each of the nineteen accounts, Mr. Wonsover sold the 924,000 Gil-Med shares for Mr. Gibori in connection with the distribution of the shares, and was therefore a statutory underwriter. See SEC v. Culpepper, 270 F.2d 241, 247 (2d Cir. 1959); SEC v. Computronic Ind. Corp., 294 F.Supp. 1136, 1138-39 (N.D. Tex. 1968); Paul L. Rice, 45 S.E.C. at 960-61. In addition to the fact that Mr. Wonsover sold shares for an issuer in connection with the distribution of Gil-Med shares, which brings him under the definition of underwriter in Section 2(11), the customers themselves were statutory underwriters ==========================================START OF PAGE 18====== because they purchased the Gil-Med shares from Mr. Gibori, a statutory issuer, with a view towards distribution. Wittow & Company, 44 S.E.C. at 670; Owen V. Kane, 48 S.E.C. 617, 619 (1986), aff'd Kane v. SEC, 842 F.2d 194 (8th Cir. 1988). The term "distribution" includes "the entire process by which in the course of a public offering the block of securities is dispersed and ultimately comes to rest in the hands of the investing public." Oklahoma-Texas Trust, 2 S.E.C. 764, 769 (1937), aff'd 100 F.2d 888 (10th Cir. 1939). A distribution within a relatively short period after acquisition would be evidence of an original intent to distribute. Loss, Securities Regulation 552 (2d ed., 1961). Here, where for example the first group of shareholders bought shares in June 1988 and March 1989, and where Mr. Wonsover's sales occurred between August 1988 and August 1989, the intent to distribute among the nineteen shareholders can be inferred. Additionally, because the shareholders experienced difficulty selling their shares, I can infer that they were not held for the three-year period required by Rule 144(k), the rule under which Mr. Wonsover claimed he was not required to register the shares. Finally, it is reasonable to assume that if the shares had been bought in 1985-87 as Mr. Wonsover claimed, the names of the shareholders would have appeared on earlier lists and in the Registration Statement. Their absence from the early lists and the Registration Statement implies that they did not become shareholders until at least 1988. ==========================================START OF PAGE 19====== "[T]he underlying policy of the [Securities] Act, that of protecting the investing public through the disclosure of adequate information, would be seriously impaired if we held that a dealer must have conventional or contractual privity with the issuer in order to be an 'underwriter.'" SEC v. Culpepper, 270 F.2d at 246 (quoting SEC v. Chinese Consol. Benev. Ass'n, 120 F.2d 738 (2d Cir. 1941), cert. denied, 314 U.S. 618 (1941)). "[A] direct or indirect participation in the distribution brings a dealer within the definition of underwriter." Id. at 247. Mr. Wonsover's underwriter status derives from both his relationship with Mr. Gibori and with the investors themselves. Conversely, Mr. Wonsover's underwriter status does not hinge on the existence or lack of existence of the nineteen shareholders. (b) Requisite Inquiries "A broker relying on Section 4(4) cannot merely act as an order taker, but must make whatever inquiries are necessary under the circumstances to determine that the transaction is only a normal 'brokers' transaction' and not part of an unlawful distribution." Robert G. Leigh, 50 S.E.C. 189, 193 (1990). Specifically, Rule 144(g) provides that the Section 4(4) exemption: "include[s] transactions by a broker in which such broker . . . after reasonable 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." The Commission has made very clear the obligation imposed on broker-dealers to inquire when distributing unregistered ==========================================START OF PAGE 20====== securities: [A] dealer who offers to sell, or is asked to sell a substantial amount of securities must take whatever steps are necessary to be sure that this is a transaction not involving an issuer, person in a control relationship with an issuer or an underwriter. For this purpose, it is not sufficient for him merely to accept "self-serving statements of his sellers . . . without reasonably exploring the possibility of contrary facts." 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 a person who appears reluctant to disclose 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 underwriters, then searching inquiry is called for. Distribution by Broker-Dealers of Unregistered Securities, Exchange Act Release No. 4445 (February 2, 1962) (footnote omitted) (quoting SEC v. Culpepper, 270 F.2d 241, 251 (2d Cir. 1959))(cited in Kane v. SEC, 842 F.2d at 199). It was Mr. Wonsover's responsibility as the salesman for the accounts to ensure that the shares at issue met the applicable legal requirements. Mr. Wonsover had primary responsibility to inquire as to the source of the shares in order to determine whether they could properly be sold. Mr. Wonsover was "uniquely positioned to ask relevant questions, acquire material information, or disclose his findings." Wasson v. SEC, 558 F.2d 879, 886 (8th Cir. 1977). "Such liability encourages those parties who can most efficiently obtain information and disclose it, to do so, while not penalizing mere intermediaries who would ==========================================START OF PAGE 21====== not normally be expected to inquire or disclose." Kane v. SEC, 842 F.2d at 199. "Questions concerning the tradeability of a block of stock that is offered for sale are not esoteric but fundamental for any salesman in [Mr. Wonsover's] position, particularly when he is dealing with an officer of the issuer." Owen V. Kane, 48 S.E.C. at 623. Mr. Wonsover can not claim that he satisfied his Section 4(4) duty of inquiry by relying on in-house counsel at PaineWebber or on the transfer agent. While evidence of reliance on PaineWebber's Legal Department might be relevant in deciding what sanctions are appropriate in the public interest, his lack of complete candor with them diminishes significantly its value in mitigation. See Mark E. O'Leary, 43 S.E.C. 842, 848 (1968). Mr. Wonsover did not tell PaineWebber's compliance department that Mr. Gibori introduced the customers to him, and that some customers were relatives of Mr. Gibori. According to Mr. McNulty of PaineWebber's Restricted Stock Department, Mr. Wonsover on many occasions told Mr. McNulty that the shareholders were poor and needed the money from the sale of shares quickly. His objective appeared to be to sell the shares quickly, rather than to secure an unbiased opinion about the tradeability of the shares. Further, merely calling the transfer agent was "obviously not a sufficient inquiry." Stead v. SEC, 444 F.2d 713, 716 (10th Cir. 1971). Courts and this Commission have routinely held that the transfer agent's willingness to reissue the certificates ==========================================START OF PAGE 22====== without restrictive legends did not relieve Mr. Wonsover of his obligation to investigate. Butcher & Singer, 48 S.E.C. 640, 643 (1987), aff'd (3d Cir. 1987); Stone Summers & Co., 45 S.E.C. at 109; Paul L. Rice, 45 S.E.C. at 961. Instead of making appropriate inquiry, Mr. Wonsover was satisfied by the fact that the certificates presented by many of the nineteen account holders bore no restrictive legends and were accepted for transfer by the transfer agent. The transfer agent, however, is the agent of the issuer and willingness to transfer did not relieve Mr. Wonsover of responsibility. Testimony revealed that the transfer agent relies on the issuer for an accurate shareholder list. A dealer cannot close his eyes to obvious signals or red flags warning him to go slowly. SEC v. Mono- Kearsage Consol. Mining Co., 167 F.Supp. 248, 259 (D. Utah, 1958). Nor can Mr. Wonsover claim that he can not be held liable because he was defrauded by Mr. Gibori and others. "There is no exemption from the registration provisions of the [Securities] Act for a person otherwise subject thereto, on the ground that he was defrauded by the issuer. A person's status as an underwriter under the statutory definition is not changed thereby." Quinn and Co., 44 S.E.C. at 465. Mr. Wonsover claims that he made full and necessary inquiries into each of his sales of Gil-Med shares as warranted by the circumstances. Similar contentions were raised and rejected by the Commission in L.A. Frances, Ltd., where the ==========================================START OF PAGE 23====== respondents argued that they "acted with due diligence to satisfy themselves that the transactions were legal, that they were misled by the sellers, and that any violations by them were not willful." 44 S.E.C. 588, 590 (1971). The Commission held that "in light of the cardinal role occupied by broker-dealers in the securities distribution process, we cannot overemphasize the importance of [their] obligation to take all reasonable steps to avoid participation in distributions violative of [the registration] provisions. Respondent's conduct fell far short of meeting that obligation." L.A. Frances, Ltd., 44 S.E.C. at 593. I find that Mr. Wonsover failed to ask the customers pertinent questions about their acquisition of the stock, even though he: 1) was well aware that the customers had affiliations with Gil-Med and Mr. Gibori, and 2) initially encountered trouble selling shares of Gil-Med. In making this finding I credit Mr. Wonsover's investigative testimony, given closer in time to the events at issue, over his self-serving testimony at the hearing. In his investigative testimony Mr. Wonsover said he did not ask the customers how or when they acquired their shares, whereas at the hearing he claimed that he made a full inquiry or was told this information. In fact, in the investigative testimony he said that he thought it would offend a shareholder to make further inquiry. He said that there was no reason to find out how shares were acquired in his position as a broker and agent. I am not persuaded by the explanation offered for the significant ==========================================START OF PAGE 24====== difference between these testimonies.14 Further, while Dr. Vogel's activities reflect adversely on his credibility, there is no reason to discount his hearing testimony on this issue which is consistent with Mr. Wonsover's investigative testimony. Both stated that Mr. Wonsover did not inquire into how or when the sellers had acquired their stock. Even if I were to accept Mr. Wonsover's hearing testimony, there were numerous other red flags that should have caused him to further investigate the securities that he was asked to sell. "As [the Commission has] previously pointed out, while securities salesmen need not be 'finished scholars in the metaphysics of the Securities Act . . . familiarity with the rudiments is essential.'" Robert G. Leigh, 50 S.E.C. at 193 (quoting Paul L. Rice, 45 S.E.C. at 961). For example, two investors, Ms. Edna and Ms. Avram, were related to Mr. Gibori, listed the Gil-Med address as their own, and listed no telephone number. PaineWebber's One Forty Four & More asserts that the broker should be aware of control-person status if a relative lives in the same home as the control person.15 (Ex. 1 at 3.) Similarly Securities Act Rule 144(a)(2) states that "a person for whose account securities are to be sold in reliance upon [Rule 144] 14Mr. Wonsover testified that he was upset during the investigative testimony. He thought that he was testifying to assist in pointing to someone else as the "thief," but found fingers pointing at him. At the hearing he said he was relaxed and the "pain" was gone. (Tr. 646.) 15I note that the manual, while not definitive, does indicate facts which should cause a broker to make further inquiry. ==========================================START OF PAGE 25====== includes . . . [a]ny relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person." The investors' use of the company's address should have raised Rule 144 concerns in the mind of Mr. Wonsover. In addition, all investors, except for Mr. Cheap in the first group of investors and Mr. Asian in the third group, listed Gil-Med as their address, and in some cases listed Gil-Med's phone number as their own. This should have raised Mr. Wonsover's level of scrutiny during the sales process. See, e.g., Strathmore Securities, 43 S.E.C. 575, 584 (1967). Mr. Wonsover knew of the connection between the customers, Mr. Gibori and Gil-Med. The circumstances surrounding the transactions were such as to put Mr. Wonsover on notice of possible irregularities and called for more diligent investigation than he undertook. The transactions themselves involved a substantial amount of stock in a little-known company, being sold by persons previously unknown to him and whom he knew were associated with the issuer. Mr. Wonsover must have realized that there was a question as to the availability of an exemption when a sales transaction was refused, yet he did not seek legal counsel or consult the Commission staff before continuing with additional transactions.16 Quinn and Co., 44 S.E.C. at 469; cf. SEC v. Culpepper, 270 F.2d at 251. Mr. Wonsover then was 16Mr. McNulty testified that a broker who sent unlegended stock through PaineWebber's Restricted Stock Department either knew that the stock was restricted or was being overly cautious. This suggests guilty knowledge on the part of Mr. Wonsover. ==========================================START OF PAGE 26====== successful in selling the 924,000 Gil-Med shares for the nineteen investors, even though other brokers had refused to sell the shares.17 He was not alarmed by the fact that none of the nineteen investors who allegedly purchased shares from 1985-87 were listed in the Registration Statement (Ex. 30), which he had reviewed. The evidence presented by the Division indicates that sufficient red flags existed that should have caused Mr. Wonsover to make further inquiry. I need not speculate as to what reasonable inquiry would have disclosed where no such inquiry was made. See L.A. Frances, Ltd., 44 S.E.C. at 592. I conclude that Mr. Wonsover did not make the inquiries required for the transactions at issue to be exempt from registration under Section 4(4) of the Securities Act. 3. Willfulness of Violations "It is well settled that a finding of willfulness under [Section 15(b)(4) of] the Exchange Act does not require an intent to violate, but merely an intent to do the act which constitutes 17Evidence was presented at the hearing that Mr. Gibori approached two broker-dealer firms that refused to sell the restricted securities, and that Dr. Vogel's customers were unable to sell their shares through their own brokers. It is clear that other brokers were not willing to undertake these transactions, but it is not clear that Mr. Wonsover was aware of these previous sales attempts. Compare Merrill Lynch, Pierce, Fenner & Smith, 45 S.E.C. 185, 188 (1973) ("The dealer's exemption . . . is not available to a dealer selling unregistered securities for an underwriter, and neither is the broker's exemption when the broker knows or has reasonable grounds to believe that his principal is an underwriter. Here [the Respondent] not only knew that [a customer] was selling shares that he had recently acquired from the issuer, but also that another broker had refused to handle the sale."). ==========================================START OF PAGE 27====== the violation." Quinn and Co., 44 S.E.C. at 469. Mr. Wonsover obviously intended to offer and sell the securities purchased from the nineteen accounts, and no registration statement as to them was in effect. The reasonableness of Mr. Wonsover's belief that the Gil-Med shares at issue were exempt from registration is only relevant to the willfulness of his Section 5 violations, and to whether he properly discharged his obligation to inquire into the sources of the shares. Kane v. SEC, 842 F.2d at 198. Mr. Wonsover failed to make adequate inquiry into the sources of the shares in reckless disregard of his responsibilities as a securities salesman. Thus his actions were willful. The Respondent argues that his behavior was not willful enough to warrant sanctions. He cites the Commission's decision in International Shareholders Servs. Corp. for the proposition that a respondent's actions are not willful within the meaning of Section 15(b)(4) of the Exchange Act where he neither knows or has reason to know of the issuer's violative conduct which makes an exemption to the Securities Act registration provisions unavailable. 46 S.E.C. 378, 381-82 (1976). The Commission, however, also recognized in that decision that "a broker-dealer participating in an unregistered distribution of securities purportedly made in reliance on an exemption from the Securities Act registration requirements must exercise considerable care to see to it that the exemption is in fact available." International Shareholders, 46 S.E.C. at 382. ==========================================START OF PAGE 28====== Because I have found that Mr. Wonsover failed to make adequate inquiries concerning how and when the shares were acquired, Mr. Wonsover's argument that the loss of the exemption was solely caused by the actions of another person must fail. Mr. Wonsover could have discovered facts which should have caused him to refuse to sell the securities of the nineteen Gil-Med shareholders. By contrast, the Commission in International Shareholders found that the respondent broker could not have discovered that the issuing company was engaging in activities that made the exemption unavailable because of the company's "elaborate efforts to create an impression of compliance with the exemption." Id. In view of Mr. Wonsover's failure to make reasonable inquiry despite the existence of facts which should have alerted him to the need for such inquiry, I conclude that his violations were willful. 4. Statute of Limitations After briefs were filed in this case, the United States Court of Appeals for the District of Columbia Circuit held in Johnson v. SEC that a Commission "proceeding resulting in a censure and a six-month disciplinary suspension of a securities industry supervisor was a proceeding 'for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise,' within the meaning of [28 U.S.C.]  2462." No. 95-1340, 1996 U.S. App. LEXIS 14917, at *1-2 (D.C. Cir. June 21, 1996). As a result, the court found that the section's five-year statute of ==========================================START OF PAGE 29====== limitations "does apply to SEC proceedings under Section 15(b) of the Securities and Exchange Act of 1934 which seek to censure and suspend a securities supervisor." Id. at *23-24. Pursuant to Johnson v. SEC, I have considered only the actions of Mr. Wonsover within the five-year statute of limitations period in assessing whether he violated Section 5 of the Securities Act.18 I have considered the full record in deciding what sanctions to order in the public interest.19 Public Interest "The registration provisions are a keystone of the entire system of securities regulation, and set forth basic requirements for the protection of [public] investors." Sirianni v. SEC, 677 F.2d 1284, 1289 (9th Cir. 1982), aff'g 47 S.E.C. 355 (1980). Registered representatives play an important role in ensuring compliance with the registration requirements. Section 15(b)(4) of the Exchange Act authorizes the Commission to sanction Mr. Wonsover if it is in the public interest to do so, and if he is found to have willfully violated any provision of the Securities Act. The Commission has previously held that "brokers and dealers are under a duty to investigate, and a violation of that duty brings them within the 18Upon review of Division Exhibit 107 and the documentation supporting that exhibit, I conclude that at least seven of the nineteen investors, and a substantial amount of the overall number of transactions, fall within the statute of limitations period. 19See Benjamin G. Sprecher, Order Granting in Part and Denying in Part Motion to Dismiss, 58 SEC Docket 1375, 1376 n.5 (December 27, 1994). ==========================================START OF PAGE 30====== term 'willful' of the Securities Act." Quinn and Co. v. SEC, 452 F.2d at 947. "[W]illfulness can be found if a broker or dealer who is aware of several facts suggesting a suspicious transaction proceeds to facilitate the sale with reckless indifference to such facts, and ignores the obvious need for further inquiry and the duty to disclose all relevant information to his superiors." Kane v. SEC, 842 F.2d at 200 (citations omitted). Mr. Wonsover recklessly ignored suspicious facts suggesting that further inquiry about registration was required, and he failed to alert his branch manager or the legal department to the involvement of Mr. Gibori in the proposed sales. He instead took steps to move the sales through the approval process quickly. Owen V. Kane, 48 S.E.C. at 622. Thus Mr. Wonsover's violations of Section 5 of the Securities Act were willful, and make him subject to sanctions pursuant to Section 15(b) of the Exchange Act. The starting point for assessing what sanction is appropriate in the public interest is a review of the factors specified in Steadman v. SEC: [T]he 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. 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). Mr. Wonsover is currently a registered representative ==========================================START OF PAGE 31====== employed at Rodman & Renshaw. (Tr. 611.) Apart from this proceeding, Mr. Wonsover has not been charged by the Commission or any self-regulatory organizations with disciplinary violations. (Tr. 732.) He has never been the subject of a customer complaint. Id. Mr. Wonsover's conduct with respect to the purchase and sale of 924,000 unregistered shares of Gil-Med demonstrated a gross indifference to the "searching inquiry" called for under the circumstances present in this case and, in general, a deliberate disregard of the duties and responsibilities of a broker-dealer. The level of indifference in this case is magnified by the fact that PaineWebber issued in-house materials which gave strict guidelines and cautions on the issuance of restricted or control stock. These materials included: 1) One Forty Four & More, the "Broker's Worksheet and Compliance Manual [on] How Rule 144 Works", which required registered representatives to inquire into facts surrounding each order to determine whether stock being offered for sale was purchased directly from the issuer or was owned by an officer or significant shareholder of the issuer, and 2) the Standard Methods and Procedures manual, which required Seller's Representation Letters on all Rule 144 or Rule 144(k) trades, and which required use of the Investment Executive's Worksheet for Rule 144 Transactions. These procedures, if complied with, would have put Mr. Wonsover on notice as to when and where the shares at issue were acquired. As noted, Seller's Representation Letters were missing for all nineteen ==========================================START OF PAGE 32====== shareholders, and Investment Executive's Worksheets were missing for seventeen of the nineteen shareholders. Mr. Wonsover did not have to complete the sale if he could not satisfy his burden for searching inquiry. My analysis is also affected by the variance between Mr. Wonsover's investigative testimony and his hearing testimony. In the former testimony Mr. Wonsover stated that he did not make the necessary inquiries, whereas in the latter he stated that he did make the necessary inquiries. The former testimony was closer in time to the violations and was given without much preparation. Further, Dr. Vogel's testimony affirms that Mr. Wonsover did not follow appropriate procedures in the sale of the stock. I find that on the issue of inquiry, Mr. Wonsover's hearing testimony is not credible. Finally, Mr. Wonsover has not admitted any wrongdoing or offered significant mitigating factors in this matter. While he relied upon the transfer agent and legal counsel, but he did not disclose the relationship among Gil-Med, Mr. Gibori, and the shareholders. He claims that he made the requisite inquiries, yet he ignored many red flags which should have put him on notice that there was a problem with the transferability of the shares. The Division asks that Mr. Wonsover be barred from associating with any broker, dealer, municipal securities dealer, investment company, or investment adviser with a right to reapply ==========================================START OF PAGE 33====== after an appropriate period of time.20 In support of the sanction, the Division argues that "such an order is consistent with the precedents of the Commission in this area," citing an administrative law judge's initial decision in Paul L. Rice, 1973 SEC LEXIS 3477 (April 30, 1973), for the proposition that a "broker [who was] found to have willfully aided and abetted violations of Sections 5(a) and 5(c) in connection with the sale of 698,000 shares [was] barred with the right to reapply in one year."21 However, the sanction imposed by the administrative law judge in Paul L. Rice was reduced on appeal by the Commission to a thirty-day suspension. Paul L. Rice, 45 S.E.C. at 962. Accordingly, I conclude that the public interest requires that Mr. Wonsover be suspended from association with a broker or dealer for six months, based on the need to maintain high standards of honest dealing and compliance with the securities laws. Additionally, I find it appropriate to issue a cease and desist order against Mr. Wonsover because he violated Sections 5(a) and 5(c) of the Securities Act. 20I deny the Division's request that I collaterally bar Mr. Wonsover from association with any investment adviser, investment company, or municipal securities dealer because this proceeding was instituted pursuant to Section 15(b)(6) of the Exchange Act which does not provide for such sanctions. This issue is currently before the Commission. 21Division of Enforcement's Post-Trial Brief at 18. ==========================================START OF PAGE 34====== Order Based on the findings and conclusions set forth above, IT IS ORDERED that pursuant to Section 15(b) of the Securities Exchange Act of 1934, Jacob Wonsover is suspended from being associated with a broker or dealer for six months, and that pursuant to Section 8A of the Securities Act he is ordered to cease and desist from committing or causing violations of Sections 5(a) and 5(c) of the Securities Act and any future violations of Sections 5(a) and 5(c). IT IS FURTHER ORDERED that the allegations against M. Rimson & Co., Inc., and Moshe Rimson are dismissed. This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Commission's Rules of Practice. 17 C.F.R.  201.17(f) (1995). Pursuant to that rule, this initial decision shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 17(b) within fifteen days after service of the initial decision upon him or her, unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to a party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. Burton S. Kolko Administrative Law Judge ==========================================START OF PAGE 35====== August 20, 1996