SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 41123 / March 1, 1999 Admin. Proc. File No. 3-8584 : In the Matter of : : JACOB WONSOVER : 4711 Dempster : Skokie, Illinois 60076 : : : OPINION OF THE COMMISSION BROKER-DEALER PROCEEDING Grounds for Remedial Action Sale of Unregistered Securities Registered representative unlawfully sold unregistered securities. Held, it is in the public interest to suspend registered representative from association with any broker or dealer for a period of six months and to order him to cease and desist from committing or causing any violation or future violation of Sections 5(a) and 5(c) of the Securities Act of 1933. APPEARANCES: James W. Perkins and Adam D. Cole, of Cahmy Karlinsky & Stein LLP, for Jacob Wonsover. Yuri B. Zelinsky, for the Division of Enforcement. Appeal filed: September 4, 1996 Briefing completed: March 21, 1997 Oral argument: December 7, 1998 I. Jacob Wonsover, a registered representative, appeals from an administrative law judge's decision. [1] The law judge found that Wonsover violated Sections 5(a) and 5(c) of the Securities Act of 1933 [2] -- and that these violations were willful within the meaning of Section 15(b)(4) of the Securities Exchange Act of 1934 [3] -- when, as a salesman for PaineWebber, Inc. ("PaineWebber"), he sold unregistered shares of the common stock of Gil-Med Industries, Inc. ("Gil-Med"). [4] The law judge suspended Wonsover from association with a broker or dealer for six months and ordered him to cease and desist from committing or causing any violations or future violations of Sections 5(a) and 5(c). We base our findings on an independent review of the record, except with respect to those findings below not challenged on appeal. II. The Order Instituting Proceedings, dated December 28, 1994, charges Wonsover with selling unregistered securities on behalf of nineteen Gil-Med shareholders ("Nineteen Shareholders") who opened accounts with Wonsover during the period August 1989 through August 1990. Wonsover sold a total of 924,000 shares of Gil-Med on behalf of the Nineteen Shareholders. Of these shares, 665,000 were sold on or after December 28, 1989 -- within five years before the Commission instituted these proceedings -- on behalf of seven of the nineteen shareholders ("Seven Shareholders"). Wonsover does not dispute that the sales occurred, but argues that the transactions and his activities on behalf of the Seven Shareholders did not violate the federal securities laws. Because, among other things, Wonsover argues that the evidence fails to establish that he was on notice that the securities that he sold were neither registered nor exempt from registration, we recount the facts relevant to that issue in some detail. A. The Gil-Med Initial Public Offering. Gil-Med went public during 1988 in an initial public offering ("IPO") pursuant to which Gil-Med registered 1,050,000 shares of common stock on Form S-18. [5] This was Gil-Med's only registration of its shares with the Commission. According to Gil-Med's prospectus, 3,555,686 unregistered shares were outstanding before the IPO. The prospectus listed Gil-Med's officers, directors, and principal shareholders, including all beneficial owners known by the company to own five percent or more of the outstanding common stock. According to the prospectus, Shimon Gibori (Gil-Med's chairman, president, and founder) and Gibori's wife collectively owned 1,138,500 shares outstanding prior to the IPO, and the directors, officers, and principal shareholders named in the prospectus (which included the Giboris) owned in aggregate 2,522,477 shares. As a result, the prospectus accounted for the owners of all but 1,033,209 shares outstanding before the IPO. This figure shrinks to 597,500 shares after elimination of 435,709 shares that the prospectus reported were not issuable until conversion of certain then-outstanding promissory notes. At the time Gil-Med filed its Form S-18, Item 701 of Regulation S-K [6] required disclosure in the registration statement of all sales by the registrant of unregistered securities within the prior three years. In the "Certain Transactions" section of Gil-Med's Form S-18, a number of such transactions and the parties involved are discussed for the period from 1980 to 1987. B. Wonsover's Involvement with Subsequent Sales of Unregistered Securities. The record establishes that a massive fraud surrounded the issuance, subsequent to the IPO, of several hundred thousand unregistered Gil-Med shares. Gil-Med's chairman and president, Gibori, perpetrated the fraud with the assistance of an associate, Dr. Henry Vogel. [7] Vogel testified concerning this fraud at the hearing in this matter. Vogel admitted that he and Gibori had access to a number of blank stock certificates, that he sometimes issued certificates to himself and friends, and that he and Gibori prepared spurious letters purportedly executed by the selling Gil-Med shareholders representing the manner in which they acquired Gil-Med shares ("Representation Letters") and other documentation necessary to open trading accounts and sell the forged stock certificates. Vogel's testimony implicated Gibori in the fraud, including claims that Gibori had sent to Vogel a stock certificate issued in the name of Hiam Cheap, with the understanding that Vogel could trade the shares represented by the certificate and could keep the proceeds for his personal use. Wonsover's involvement with Gil-Med began in 1989. Vogel testified that, after certain Gil-Med shareholders complained to Vogel that brokers were refusing to sell their shares, Gibori told him to take the shares to Wonsover. Wonsover testified that Gibori contacted him and told Wonsover that Gibori was referring Gil-Med shareholders looking to sell their shares. When approached by Vogel, Wonsover agreed to open individual accounts for a number of Gil-Med shareholders and to trade the shares for these account-holders. Wonsover confirmed in testimony before the law judge that he had a general familiarity with Gil-Med when he opened accounts for the Nineteen Shareholders. In particular, Wonsover was aware of Gil-Med's public offering and that Gil-Med securities had been listed on Nasdaq. Wonsover acknowledged in his investigative testimony that Gil-Med stock was thinly traded during the period at issue. He confirmed that he had reviewed the Form S-18 and Gil-Med's filings with the Commission on Forms 10-K and 10-Q. Wonsover testified at the hearing that he knew prior to trading shares for the Nineteen Shareholders that much of the stock held in these accounts, including all of the shares of the Seven Shareholders, bore restrictive legends indicating that the shares were not freely transferable. Restricted securities are defined to 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." [8] Wonsover also acknowledged that PaineWebber had alerted him that, as a broker, he had "primary responsibility" for preventing the sale of restricted stock. None of the Nineteen Shareholders is named in the Gil-Med prospectus as a principal shareholder, officer, or director of the company. Although Wonsover claims that Gibori told him that the Nineteen Shareholders received their stock in private placements sometime between 1985 and 1987, none of these purported transactions is reported in the IPO registration document, the Form S-18. Yet, the lawyer who prepared the Form S-18 testified that the prospectus did name other Gil-Med shareholders who acquired their shares in private placements and owned similar amounts of stock to some of the Nineteen Shareholders. Evidence in the record and testimony before the law judge reflects Gibori's substantial involvement with the Seven Shareholders' accounts and Wonsover's knowledge of that involvement. Wonsover testified that the first two of the Nineteen Shareholders to open accounts through him were relatives of Gibori. Wonsover's records listed Gil-Med's phone number as the contact number for these two shareholders, and memorialized Gibori's authority to trade for their accounts. [9] Wonsover opened six of the Seven Shareholders' accounts, and seven of the remaining accounts of the Nineteen Shareholders, using Gil-Med's address for correspondence. Wonsover testified that, in the absence of additional instructions, any proceeds from sales for these accounts would be forwarded to Gil-Med. Similarly, Vogel testified that, when Wonsover asked him where to send the proceeds from certain accounts, Vogel instructed Wonsover to forward them to Gil-Med. Wonsover's assistant testified, with respect to the accounts generally, that Gibori would visit the office and bring in stock certificates and other documents. When one of the Nineteen Shareholders' accounts received a notice that a debit balance existed, Gibori became involved directly and immediately contacted Wonsover seeking to have the matter "taken care of." C. Wonsover's Absence of Effort to Determine Whether the Shares Were Registered or Exempt from Registration. Wonsover acknowledged before the law judge that a principal responsibility of registered representatives is to gather sufficient information under the circumstances to determine whether the proposed sale of stock would violate the securities laws. With respect to the amount of information he gathered from the Nineteen Shareholders prior to selling their Gil-Med stock, Wonsover offered testimony at the hearing that contradicted his investigative testimony. In his investigative testimony in 1991, Wonsover stated that he never asked any of the shareholders how or when they acquired their Gil-Med stock. [10] At the hearing, Wonsover testified that he spoke to each client and made a detailed inquiry in each case, particularly when the stock at issue was restricted. PaineWebber, Wonsover's firm, had specific procedures for the sale of restricted securities. These procedures required PaineWebber brokers to ascertain how and from whom a potential seller acquired restricted securities, and to memorialize this information in a Representation Letter and an Investment Executive's Worksheet ("Executive Worksheet") for each transaction in restricted securities. While Wonsover claims that Representation Letters and Executive Worksheets were created for each of the accounts of the Nineteen Shareholders, only two Representation Letters and no Executive Worksheets are in evidence. [11] Only one of the Representation Letters relates to one of the Seven Shareholders' accounts, even though Wonsover knew that all of their stock was restricted. There also is no dispute that Wonsover presented each stock certificate that he sold on behalf of the Nineteen Shareholders to PaineWebber's Restricted Stock Department. This included both the certificates tendered by the Seven Shareholders, which contained restrictive legends, and the certificates tendered by the rest of the Nineteen Shareholders, which included some certificates that did not bear a restrictive legend. Wonsover testified that he presented all the Gil-Med certificates because "you can never be too careful." James McNulty, the individual in PaineWebber's Restricted Stock Department who dealt with the Gil- Med transactions, testified that it was unusual for his department to receive an unlegended certificate. In McNulty's experience, this indicated that either the broker was being overly cautious or the broker had reason to believe that the stock was in fact restricted. McNulty also testified that on one occasion the transfer agent refused to clear a sale by one of the Nineteen Shareholders because the seller was not listed on the transfer agent's list of shareholders. The record reflects that Wonsover was informed of the agent's refusal. [12] The transfer agent cleared that sale when Gibori provided the first of several "updated" shareholder lists that included the names of various of the Nineteen Shareholders. Other Gil-Med stock sales by Wonsover were cleared after Gibori represented in a series of letters that all of the Seven Shareholders, and most of the rest of the Nineteen Shareholders, had held their stock for at least three years, as required by Rule 144(k) under the Securities Act. That rule, during the period at issue, permitted the sale of restricted securities without regard to certain volume limitations if such securities were held for more than three years by entities who were not affiliated with the issuer for at least three months prior to sale. [13] III. A. The Seven Shareholders' Stock Was Unregistered. Securities Act Section 5(a) prohibits any person, directly or indirectly, from selling a security in interstate commerce unless a registration statement is in effect as to that security or there is an applicable exemption from the registration requirements. Securities Act Section 5(c) prohibits the offer or sale of a security unless a registration statement as to such security has been filed with the Commission, or an exemption is available. We find, and Wonsover concedes, that Wonsover offered the securities sold on behalf of all Nineteen Shareholders and that those sales were effected using jurisdictional means. The record establishes that the Seven Shareholders' stock was not registered in the IPO -- the only registration of Gil-Med stock. All of the shares entered the accounts at issue as restricted securities. Gibori's and Vogel's elaborate efforts to secure, and according to Vogel sometimes to fabricate, the necessary documentation to remove restrictive legends and facilitate the sales are compelling evidence that the shares at issue were not registered with the Commission. The record also indicates that, before Gibori and Vogel approached Wonsover, they unsuccessfully tried to trade Gil-Med stock through two other brokers. Vogel testified that he was informed that the brokers were not clearing the certificates and were not able to trade the stock. Wonsover disputes the law judge's reliance on portions of Vogel's testimony, in part because Vogel appeared pursuant to a grant of immunity. The law judge had the opportunity to observe Vogel's demeanor and make credibility determinations concerning his testimony. Based in part on this evaluation, the law judge determined to credit Vogel's testimony when it was supported by documentary evidence or the evidence of other witnesses; we find no basis to question that determination. [14] Wonsover also criticizes the law judge for allegedly shifting to him the burden to show that the shares were registered. Wonsover's claim is not supported. The law judge properly considered the evidence showing that the shares were unregistered and then noted that respondent had not presented any contrary evidence. [15] We conclude, as did the law judge, that the shares sold for the Seven Shareholders were unregistered. B. The Transactions At Issue Were Not Exempt From Section 5. Once it is established that the shares were not registered, Wonsover must prove the availability of an exemption from registration. [16] Wonsover claims that his sales of Gil-Med stock were covered by the exemptions from the provisions of Section 5 set forth in Section 4 of the Securities Act -- in particular, the safe harbor provided by Rule 144. For the reasons set forth below, we find that the transactions at issue fall within none of the exemptions. 1. Rule 144(k) Safe Harbor Analysis. Securities Act Section 4(1) [17] exempts from Section 5's requirements transactions by persons other than an issuer, underwriter, or dealer. [18] Securities Act Section 4(3) [19] exempts certain transactions by a dealer that do not involve an issuer or underwriter. [20] Our Rule 144 under the Securities Act, in turn, provides a safe harbor pursuant to which a seller of securities who satisfies the conditions set forth in the rule will not be deemed to be making a distribution of securities and accordingly will not be considered an underwriter for Sections 4(1) or 4(3) purposes. Although Wonsover does not specifically invoke Rule 144(k) in his brief to the Commission, he claimed before the law judge that each of the sales of Gil-Med stock qualified under Rule 144(k). [21] At the time of the sales at issue, this rule provided that after a three-year holding period certain resale restrictions on restricted securities sold by non-affiliates of the issuer terminate. To have met the three-year holding requirement, the Seven Shareholders would have been required to have received their stock prior to February 1988 -- the filing date of the Form S-18. Had they done so, information about some of these holdings and the transactions through which the holdings were acquired would have been required to be reflected in the Form S-18. Gabriel Chava, with 200,000 shares, would have been required to be identified in the Form S-18 as a "Principal Shareholder." With respect to Wonsover's claim that a number of the Seven Shareholders acquired their Gil-Med stock in 1985-1987 private placements, none of these purported transactions was reported in the Form S-18, as required by Item 701 of Regulation S-K, as an unregistered stock sale occurring within three years of the Form S-18 filing. Indeed, according to the Form S-18, the number of Gil-Med securities outstanding prior to the initial public offering, excluding shares owned by entities named in the document, was less than the number of shares held by the Seven Shareholders. The Gil-Med records that were introduced before the law judge support a determination that Wonsover's sales for the Seven Shareholders did not fall within Rule 144(k)'s safe harbor. While the record before us includes letters written on Gil-Med stationery uniformly claiming that, by the time of Wonsover's 1990 sales for the Seven Shareholders, each shareholder owned the stock for at least three years, these claims, as discussed above, are not supported by Gil-Med's Form S-18. In addition, as noted, none of the Seven Shareholders (nor any of the rest of the Nineteen Shareholders) is included in the shareholder list that Gil-Med's counsel used in preparing the Form S-18 and contemporaneous shareholder resolutions. While various of the Nineteen Shareholders appear in later shareholder lists, the evidence indicates that those lists were prepared by Gibori and Vogel on an ad hoc basis in response to the transfer agent's requests for documentation. [22] The accuracy of these shareholder lists is open to question because the various lists are themselves inconsistent and contradictory. For example, Moshe Chatz, one of the Seven Shareholders, does not appear on the 1988 shareholder list, but does appear on the August 14, 1989 shareholder list as the owner of 10,000 shares purchased on January 8, 1986. By the November 13, 1989 shareholder list, Chatz had become the holder of 33,287 shares purchased on February 4, 1987. This evidence, combined with Vogel's testimony concerning the forging of stock certificates, Representation Letters, and other documentation necessary to consummate the sales, supports the same conclusion. The sale of these shares did not qualify under Rule 144(k) because the Gil-Med stock was not held for three years. Even if the Seven Shareholders had held their shares for the three years mandated by Rule 144(k), their sales still would not be covered by the safe harbor. As Wonsover knew: (1) Gibori actively managed each of the accounts at issue, (2) six of the Seven Shareholders' accounts were opened using Gil-Med's address, and (3) two accounts were opened on behalf of relatives of Gibori. The Division introduced evidence, uncontradicted by Wonsover, that nearly all of the proceeds from sales for the Nineteen Shareholders were deposited in bank accounts owned or controlled by Gibori. [23] Because the accounts of the Seven Shareholders (and, indeed, the accounts of all Nineteen Shareholders) were nominee accounts controlled by Gibori, the Seven Shareholders were "affiliates" of Gil-Med whose stock sales could not qualify under Rule 144(k). [24] 2. Statutory Exemption Analysis. a. Sections 4(1) and 4(3). On appropriate facts, the exemption afforded by Section 4(1) remains available for sales outside the Rule 144 safe harbor. The Section 4(1) exemption is not available, however, when, as here, the evidence indicates that the sales at issue were distributions by an issuer or underwriter. Similarly, the Section 4(3) exemption is unavailable, as Wonsover's trades for the Seven Shareholders were distributions by an issuer or underwriter. As we concluded immediately above, Gibori controlled all of the accounts at issue, including the Seven Shareholders' accounts. As a result, Wonsover's acts in furthering the sales made Wonsover a statutory underwriter under Section 2(11). [25] b. Section 4(4). Wonsover alternatively relies on Securities Act Section 4(4), [26] which exempts "brokers' transactions executed upon customers' orders on any exchange or in the over-the-counter market but not the solicitation of such orders." The Section 4(4) exemption, however, is unavailable to any broker-dealer acting as an agent when the broker knows or has reasonable grounds to believe that his principal is an underwriter. [27] As Wonsover's counsel correctly acknowledged to us at oral argument, a broker has a duty of inquiry into the facts surrounding a transaction. Here, Wonsover was faced with numerous "red flags" that the transactions at issue were part of an unlawful distribution by an underwriter. As noted, Wonsover plainly knew that Gibori actively managed each of the accounts at issue. Moreover, Wonsover reviewed the Form S-18, which indicated that the 665,000 shares could not have been held for the three-year period on which the Seven Shareholders purportedly relied, as the Form S-18 indicated that 597,500 shares was the maximum that these shareholders could have owned for that amount of time. The Form S-18 also did not disclose any of the private placements involving the Seven Shareholders that Gibori purportedly assured Wonsover had occurred between 1985 and 1987. Viewing the evidence in the light most favorable to Wonsover, at a minimum he acted recklessly when he sold stock in an obscure company for the Seven Shareholders totalling approximately 63 percent of Gil-Med's entire public float. [28] In addition, many of the blocks of Gil-Med stock sold for individual shareholders should themselves have aroused Wonsover's suspicions. For example, on September 7, 1990, Wonsover sold 200,000 shares in one day for Gabriel Chava. Knowing that Gil- Med was thinly-traded, Wonsover was obligated to make a "searching inquiry" into salability when he was approached by a shareholder offering such a large block of stock. To address precisely these concerns, the Commission has articulated the obligations of broker-dealers as follows: [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 underwriter. For this purpose, it is not sufficient for him merely to accept "self-serving statements of his sellers and their counsel without reasonably exploring the possibility of contrary facts." The amount of inquiry necessary varies with the circumstances of particular cases. . . . [W]hen a dealer is offered a substantial block of a little-known security, either by persons who appear 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 . . . statutory underwriters, then searching inquiry is called for. [29] Although Wonsover's counsel acknowledges that a broker must explore whether shares are freely tradeable, Wonsover unpersuasively cast himself in the role of a mere order taker. For instance, Wonsover explained to the law judge his involvement in the unlawful distribution as follows: [The stock] went through a process of going to my branch office, to my legal [department], to the attorneys, to the American transfer agent. They approved that . . . the only thing I technically do is the trade. We have rejected this truncated view of a broker-dealer's essential duties. [30] Despite all of the foregoing evidence known to Wonsover concerning Gibori's level of involvement with the accounts of the Nineteen Shareholders, and these shareholders' purported receipt of Gil-Med stock in private placements not reported in the Form S-18, Wonsover made essentially no inquiry. We see no reason to disturb the law judge's determination not to credit Wonsover's contradictory claim, at the administrative hearing, that he made a particularized inquiry into the facts surrounding each of the accounts referred to him by Gibori. We, like the law judge, believe Wonsover's less "self-serving" 1991 version of events, provided to our staff in investigative testimony, to the effect that Wonsover made no inquiries whatsoever. We are also skeptical that Executive Worksheets were created for the accounts at issue here, given that the record indicates that Wonsover did not conduct a sufficient personal inquiry into the shares' salability, and did not further investigate red-flags raised by the materials, such as the Form S-18, that Wonsover did review. Wonsover was not relieved of his obligations to inquire simply because the transfer agent and Restricted Stock Department eventually cleared the stock. [31] This is particularly true as Wonsover did not provide these entities with all of the information that he had available to him. The record before us reflects Wonsover's familiarity, during the period at issue, with Gibori's substantial involvement in the management of the Nineteen Shareholders' accounts. Wonsover did not tell the transfer agent or the Restricted Stock Department that Gibori -- among other things, Gil-Med's chairman, president, and largest stockholder -- had introduced the accounts to him, that at least two clients were relatives of Gibori, and that Gibori appeared to direct the accounts. In addition, McNulty testified that Wonsover called him on several occasions stating that the clients urgently needed to sell because they were "very poor." However, the new client forms for the Nineteen Shareholders listed the net worth of these clients, excluding residences, as ranging from a minimum of $50,000 to over $250,000. As the law judge stated, Wonsover's interest was in expediting the sales through the Restricted Stock Department, not in obtaining an unbiased opinion as to the tradeability of the shares. Contrary to Wonsover's assertions, the situation here is markedly different than that presented in International Shareholders Services Corp. [32] That proceeding involved an offering of unregistered securities pursuant to the intrastate exemption from registration contained in Securities Act Section 3(a)(11). [33] In that case, the issuer assured respondents that the offering would be conducted lawfully. Instead, the issuer conducted a parallel sales campaign to residents outside the state, which made the intrastate exemption unavailable with respect to the entire offering. We concluded that respondents did not willfully violate Securities Act Section 5, noting among other things, that respondents' sales did not make the exemption unavailable and that no reasonable investigation by respondents would have uncovered the out-of-state sales. Wonsover's sales, by contrast, were in violation of the federal securities laws. [34] His investigation had to go no further than the Form S-18 to uncover evidence that the Gil-Med shares he sold were not freely tradeable. Lastly, Wonsover's failure to satisfy his obligations to prevent illegal sales of stock repudiates Wonsover's claim that he was misled by Gibori and Vogel and could not have uncovered the truth concerning Gil-Med's unregistered securities. As we have held previously, 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 and prospectus provisions of the Securities Act]. Respondent's conduct fell far short of meeting that obligation. [35] * * * * * We conclude that the Gil-Med shares Wonsover traded on behalf of the Seven Shareholders were not registered under the Securities Act. We further conclude that the transactions at issue did not fall within any applicable exemption to the registration requirements. As a result, we find, as did the law judge, that Wonsover violated Securities Act Sections 5(a) and 5(c). IV. Wonsover claims that his violations of Securities Act Sections 5(a) and 5(c) were not "willful" within the meaning of Exchange Act Section 15(b)(4). Ignoring precedent under the federal securities laws, [36] Wonsover contends that he cannot have acted "willfully" unless he acted with knowledge that his conduct was unlawful. As support, he relies principally on two criminal cases, Cheek v. United States, [37] and Ratzlaf v. United States, [38] and on two recent civil cases not involving the federal securities laws, McLaughlin v. Richland Shoe Co. [39] and Hazen Paper Co. v. Biggins. [40] These cases do not counsel us to adopt an interpretation of "willfulness" under the federal securities laws that we have so far rejected. Generally, as the Supreme Court noted in the Cheek case, "the traditional rule [is] that ignorance of the law is no defense." [41] In some circumstances, the courts have found that Congress intended to carve out an exception to that rule by its use of the word "willful." The Supreme Court has warned, however, that the mere use of the word "willful" is not a sufficient basis to imply Congressional intent to do so. The Supreme Court has repeatedly admonished, as it did in Ratzlaf, that "`willful'... is a `word of many meanings,' and `its construction is often influenced by its context'." [42] Wonsover's proffered interpretation of "willful" in Exchange Act Section 15(b)(4) as requiring an actor's knowledge that his act was unlawful cannot be squared with its statutory context. The linguistic context alone is inconsistent with Wonsover's argument. Exchange Act Section 21B(a)(1), [43] which was added by Congress in 1990 pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, [44] authorizes the Commission to impose three tiers of civil money penalties in any proceeding under Section 15(b)(4) if it finds that a person has "willfully violated" certain laws. The first tier of penalties may be imposed for any "willful" violation. [45] The second and third tiers can be imposed only upon a person who acted willfully and with intent to defraud or with "deliberate or reckless disregard of a regulatory requirement." [46] Section 21B thus could not be more clear that, as used in the federal securities laws, "willful" means something other than involving "deliberate or reckless disregard of a regulatory requirement." [47] Wonsover also relies on the Remedies Act, pointing to the addition of Section 8A to the Securities Act [48] and Section 21B to the Exchange Act -- both of which granted us cease and desist authority with no requirement that the violations be "willful." In his view, Congress intended that we sanction "ordinary violations" of Sections 5(a) and 5(c) through cease and desist orders, and address more serious "willful" violations through our censure and suspension authority under Section 15(b). [49] That may be, but it would mean only that Congress intended that the cease and desist remedy can be imposed based on a lesser showing of culpability than is required by Section 15(b). It does not demonstrate -- as Wonsover argues -- that by giving the Commission additional remedial authority Congress intended (without any indication on the face of the statute or in its legislative history) to raise the culpability standard under Section 15(b). To the contrary, the Remedies Act, taken as a whole, shows that Congress knows how to include a requirement of "willfulness" when it so desires and that such a requirement in the federal securities laws denotes something other than conduct involving "deliberate or reckless disregard of a regulatory requirement." The meaning of "willful" as used in Section 15(b)(4) is further illuminated by the regulatory context in which it appears. Wonsover -- like anyone else subject to a Section 15(b)(4) proceeding -- is a registered professional in an industry suffused with regulation. Members of the securities industry agree to be subject to the statutes, rules, and regulations administered by the Commission and self-regulatory organizations, and, before entering the business, generally must apply for registration and pass examinations demonstrating their knowledge of the securities laws. [50] Thereafter, these professionals are subject to ongoing obligations to secure compliance with the law in order to protect public investors from illegality. [51] None of the cases on which Wonsover principally relies involved the meaning of "willful" as applied to registered professionals in a highly regulated industry. Rather, each of those cases involved whether to impose liability on persons who were not charged as regulated professionals with a duty to know the law, much less that their conduct was unlawful. [52] In contrast, securities professionals have a legal duty to inquire into the circumstances of sales such as Wonsover's -- as, indeed, Wonsover's counsel conceded at oral argument -- for the very purpose of determining whether the transactions are lawful. It would make no sense to conclude that, even though the federal securities laws require professionals to be familiar with the basic legal requirements governing their conduct, their ignorance is a complete defense in any administrative proceeding brought by the Commission. Accordingly, for the reasons discussed, we conclude that a culpability standard of knowledge or reckless disregard of the law does not control in this action brought under Section 15(b)(4). In any event, we find that Wonsover's conduct was willful under the culpability standard he suggests. As described above, Wonsover sold 665,000 shares of unregistered Gil-Med stock -- over 60 percent of Gil-Med's public float -- over ten months in utter disregard of the professional standards the Commission requires of broker-dealers. When presented with substantial blocks of a little known security by individuals who were plainly statutory underwriters, [53] Wonsover recklessly ignored these and other "red flags" relating to the shares' origin and transferability. [54] V. Wonsover, citing Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), contends that dismissal of these proceedings is warranted because the law judge made findings of fact with regard to conduct that occurred outside of the five-year general federal statute of limitations set forth in 28 U.S.C. § 2462. [55] The law judge, consistent with Johnson's holding, properly considered conduct outside the five-year period to "cast light upon the culpability of the activity during the ... [five-year] period." [56] As a matter of law and logic, evidence relating to information that Wonsover knew or that he reasonably should have discovered before the five-year period -- which would have alerted Wonsover to the need for searching inquiry regarding the source of the stock that he was selling -- properly may be considered in evaluating the culpability of Wonsover's actions within the five-year period. [57] Wonsover also claims that the Division's case "relies upon faded memories, lost witnesses and discarded documents." The burden is on a respondent to put forward evidence of actual prejudice. [58] Wonsover specifically claims prejudice from the Division's repeated use of prior testimony and documents for impeachment or memory refreshment of witnesses. We, however, find no merit in Wonsover's generalized assertion that he was prejudiced by these standard trial practices. [59] As the Ninth Circuit has held, "[n]ot every loss, and particularly not every loss of memory, will prejudice the defense of a case. The evidentiary doctrines of `past recollection refreshed' and `present recollection recorded' exemplify how insignificant a loss of memory can be." [60] Wonsover also points to the alleged disappearance of the Executive Worksheets and of a matrix prepared by Gil-Med's outside counsel purportedly showing every Gil-Med stock transaction known to counsel prior to the initial public offering ("Matrix"). There is no evidence that the passage of time had anything to do with the unavailability of these documents. Indeed, as noted above, we doubt whether the Executive Worksheets ever existed. The record also suggests that the Matrix would not have aided Wonsover's defense [61] and may have disappeared long before the sales of Gil-Med stock at issue in this case. [62] On these facts we cannot conclude that Wonsover was prejudiced by the absence of the Executive Worksheets and the Matrix. VI. We now describe the appropriate sanctions to be imposed. As an initial matter, the Division requests in its brief that we increase the sanctions imposed by the law judge. The Division, however, did not cross-appeal; accordingly, we have not considered this request. [63] Wonsover objects to the law judge's order imposing a six- month suspension and a requirement that Wonsover cease and desist from committing or causing violations of Sections 5(a) and 5(c). Wonsover claims, as an initial matter, that these sanctions are harsh. He also asserts that they are the result of the law judge's allegedly improper consideration of evidence relating to the accounts of all Nineteen Shareholders. In Wonsover's view -- which we do not find persuasive -- such consideration violates the rule enunciated in Johnson. The sanctions imposed by the law judge are an appropriate response, even when considering only that portion of Wonsover's conduct that occurred solely within the five-year period. In reaching this conclusion, we have considered the effect of Wonsover's misconduct on both the securities industry as a profession and on the investing public. [64] We also have considered that Wonsover has no prior disciplinary history. Wonsover engaged in egregious misconduct that facilitated a massive distribution of unregistered shares. He has admitted no culpability in this matter and remains a registered representative. Wonsover acknowledged before the law judge that he continued to handle transactions covered by Rule 144. [65] A six-month suspension and a cease and desist order are necessary in the public interest and to impress upon Wonsover the need to exercise appropriate caution in exercising his professional obligations as a broker. An appropriate order will issue. [66] By the Commission (Chairman LEVITT and Commissioners HUNT and CAREY); Commissioners JOHNSON and UNGER not participating. Jonathan G. Katz Secretary **FOOTNOTES** [1]: Frederick Entman, Initial Decision Rel. No. 96 (Aug. 20, 1996) 62 SEC Docket 1869. Wonsover is the sole remaining respondent in this action. The law judge dismissed the proceedings against Moshe Rimson and M. Rimson & Co., Inc. (Id.), and we declared these dismissals final. See Notice that Initial Decision Has Become Final, Securities Exchange Act Rel. No. 38381 (March 11, 1997), 64 SEC Docket 146. The remaining respondents settled the charges against them before the law judge issued his decision. See Frederick Entman and Norman B. Rothstein, Securities Act Rel. No. 7182 (June 23, 1995), 59 SEC Docket 1937; Frank Louis Palumbo, Securities Act Rel. No. 7147 (Feb. 28, 1995), 58 SEC Docket 2506; Howard Richard Perles, Securities Act Rel. No. 7167 (May 2, 1995), 59 SEC Docket 612. On July 24, 1995, revised Rules of Practice governing our administrative proceedings became effective. Because these proceedings were docketed before the revised Rules of Practice were promulgated, they have been conducted under the former Rules of Practice. See 60 Fed. Reg. 32,738 (1995). [2]:15 U.S.C. §§ 77e(a) and (c). [3]:15 U.S.C. § 78o(b)(4). [4]:Effective January 17, 1991, the Commission suspended trading in Gil-Med securities. Securities Exchange Act Rel. No. 28790 (Jan. 16, 1991) 47 SEC Docket 2239. On March 19, 1991, the State of Illinois involuntarily dissolved Gil-Med. [5]: The Form S-18 was filed with the Commission and declared effective on February 14, 1988. [6]:17 C.F.R. § 229.701. [7]:In a separate civil action predicated on this fraud, the United States District Court for the District of Columbia permanently enjoined Gibori from serving as an officer or director of a public company, and Vogel settled this Commission's charges. SEC v. Shimon Gibori and Henry Vogel, Civil Action No. 94-0607 (1996). Our findings with respect to Gibori and Vogel are made solely for the purpose of this action, to which Gibori and Vogel are not parties. Gibori did not testify in this matter. [8]:Securities Act Rule 144(a)(3) [17 C.F.R. § 230.144(a)(3)]. An "affiliate" of an issuer is defined in Rule 144(a)(1) as "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer." 17 C.F.R. § 230.144(a)(1). [9]:Gibori later deposited the sales proceeds from these two accounts in his personal bank account. The record does not establish whether Wonsover knew of this deposit by Gibori. [10]:When asked whether he inquired how one of the Seven Shareholders acquired his stock, Wonsover replied, "it would offend him by asking . . . I don't think its my business how one acquires stock." When asked whether he inquired into how a relative of Gibori acquired her stock, Wonsover answered, "No. That's what we have the legal system and the attorney and the transfer agent to prove and check on these." [11]:During oral argument, the Division's counsel incorrectly stated that two Executive Worksheets were in evidence. [12]:For example, McNulty indicated in a note that is included in the record: Per Theresa Conrad [transfer agent representative] stock is not listed on her computer. She will require 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. [13]:17 C.F.R. § 230.144. The amendments to Rule 144, including the reduction of the Rule 144(k) holding period to two years, do not apply to this action. 62 Fed. Reg. 9244 (February 28, 1997). [14]:See Universal Camera Corp. v. NLRB, 340 U.S. 474, 496 (1951); Litwin Securities, Inc., Securities Exchange Act Rel. No. 38673 (May 27, 1997), 64 SEC Docket 1772, 1777 n.13 (this Commission will reject initial fact-finder's determination as to credibility only when the record contains "substantial evidence" to the contrary); C. James Padgett, Securities Exchange Act Rel. No. 38423 (March 20, 1997), 64 SEC Docket 272 (credibility determination of the initial decision maker is entitled to considerable weight as it is based on hearing witnesses' testimony and observing their demeanor), aff'd sub nom Sullivan v. SEC, 159 F.3d 637 (D.C. Cir. 1998) (unpublished opinion). [15]: Cf. Robert D. Potts, Securities Exchange Act Rel. No. 39126 (Sept. 24, 1997), 65 SEC Docket 1376, 1400 (law judge's comments merely showed that the Division had presented a prima facie case; burden of persuasion always remained with the Division), aff'd, 151 F.3d 810 (8th Cir. 1998). [16]:SEC v. Murphy, 626 F.2d 633, 645 (9th Cir. 1980). [17]:15 U.S.C. § 77d(1). [18]:For the purposes of Section 4, an "underwriter" includes any person who "sells for an issuer in connection with the distribution of any security," and an "issuer" includes "any person directly or indirectly controlling . . . the issuer . . . ." Securities Act Section 2(11) [15 U.S.C. § 77b(11)]. Any accounts Gibori controlled would be considered "issuer" accounts. [19]:15 U.S.C. § 77d(3). [20]:Quinn and Company Inc., 44 S.E.C. 462, 468 (1971), aff'd, 452 F.2d 943 (10th Cir.), cert. denied, 406 U.S. 957 (1972). [21]:Wonsover offered no evidence that the Seven Shareholders acquired their shares by any other acquisition method that could satisfy Rule 144's holding period and other requirements. [22]:The McNulty note discussed in footnote 12, supra, is one such piece of evidence. [23]:We are unable to determine whether Wonsover knew that Gibori ultimately gained control of the funds. [24]:Pennaluna & Co. v. SEC, 410 F.2d 861, 867 (9th Cir. 1969), cert. denied, 396 U.S. 1007 (1970). [25]:15 U.S.C. § 77b(11); see e.g., Pennaluna & Co., 410 F.2d at 863 ("If any person . . . sells for a controlling person in connection with a distribution, this becomes a transaction by an underwriter which requires registration."). In the alternative, the law judge found that the Nineteen Shareholders were themselves underwriters as that term is defined in Section 2(11) because they purchased from Gibori, a statutory underwriter, with a view towards distribution. The term "distribution" refers to the entire process in a public offering through which a 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 is evidence of an original intent to distribute. 1 Louis Loss, Securities Regulation 552 (2d ed., 1961). Because we find that Gibori controlled the Nineteen Shareholders' accounts, and that Wonsover acted as an underwriter here, we need not consider the law judge's alternative holding. [26]:15 U.S.C. § 77d(4). [27]:Quinn and Company Inc., 44 S.E.C. at 468. [28]:This amount balloons to 924,000 shares, or 88 percent of the public float, when the sales for the rest of the Nineteen Shareholders are considered. [29]:Distribution By Broker-Dealers of Unregistered Securities, Securities Act Rel. No. 4445 (February 2, 1962) (footnote omitted) (quoting SEC v. Culpepper, 270 F.2d 241, 251 (2d Cir. 1959)); see also Kane v. SEC, 842 F.2d 194, 196 (8th Cir. 1988); Robert G. Leigh, 50 S.E.C. 189, 193 (1990) ("We have made it clear that the duty of inquiry extends to salesmen."). Broker-dealers have a responsibility to be aware of the requirements necessary to establish an exemption. Quinn and Company Inc., 44 S.E.C. at 469. [30]:Leigh, 50 S.E.C. at 193. [31]:See, e.g., Sorrell v. SEC, 679 F.2d 1323, 1327 (9th Cir. 1982) (reliance on counsel opinion does not excuse broker's lack of investigation); Stead v. SEC, 444 F.2d 713, 716 (10th Cir. 1971) (broker's call to transfer agent not sufficient inquiry), cert. denied, 404 U.S. 1059 (1972); see also One Forty Four & More, p. 9 (PaineWebber publication for its brokers) ("[Broker] has primary responsibility to prevent illegal sales of restricted or control stock. He should take steps to make sure that the securities [are tradeable] . . . . Verbal assurances by the transfer agent, seller or his counsel . . . are not sufficient."). Compare Everest Securities, Inc. v. SEC, 116 F.3d 1235, 1239 (8th Cir. 1997) (appeal of NASD action) (broker cannot claim proper reliance on information provided by issuer and its attorneys because reliance on others does not excuse brokers' own lack of investigation). [32]:46 S.E.C. 378 (1976). [33]:15 U.S.C. § 77c(11). [34]:International Shareholders, 46 S.E.C. at 382 (when sale of securities makes exemption from registration unavailable, no defense for seller of those securities to claim that it was unaware sale would violate registration requirements). [35]:L.A. Frances, Ltd., 44 S.E.C. 588, 593 (1971) (rejecting argument that respondents were misled by sellers and acted with due diligence to satisfy themselves that the transactions were legal). [36]:/In a recent consent order, we stated that, in considering willfulness, the Commission evaluates "whether the respondent knew or reasonably should have known under the particular facts and circumstances that his conduct was improper." Christopher LaPorte, Securities Exchange Act Rel. No. 39171 (September 30, 1997), 65 SEC Docket 1623, 1627 n.2. For judicial interpretation, see Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965) ("no requirement that the actor . . . be aware that he is violating one of the Rules or Acts"); Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965) (same). See also Arthur Lipper Corp. v. SEC, 547 F.2d 171 (2d Cir. 1976) ("knowing violation of the law" not required), cert. denied, 434 U.S. 1009 (1978); Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949) (citation omitted) (willfulness "does not mean that . . . [actor] must suppose that he is breaking the law"); see also, e.g., Nees v. SEC, 414 F.2d 211, 221 (9th Cir. 1969) ("evil intent" not required). [37]:498 U.S. 192 (1991). [38]:510 U.S. 135 (1994). [39]:486 U.S. 128, 133 (1988). [40]:507 U.S. 605, 617 (1993). [41]:Cheek, 498 U.S. at 200. [42]:/510 U.S. at 141 (internal brackets and ellipsis omitted) (quoting Spies v. United States, 317 U.S. 492, 497 (1943)). [43]:15 U.S.C. § 78u-2(a)(1). [44]: 104 Stat. 931 (1990). [45]: Exchange Act Section 21B(b)(1) [15 U.S.C. § 78u- 2(b)(1)]. [46]:Exchange Act Sections 21B(b)(2) and (3) [15 U.S.C. § 78u-2(b)(2) and (3)], respectively. [47]:It is an axiom of statutory construction that a term appearing in multiple provisions of the same act should be accorded a consistent meaning. See, e.g., Sullivan v. Stroop, 496 U.S. 478, 484 (1990). [48]:15 U.S.C. § 77h-1. [49]:/Wonsover concedes that we have authority to issue a cease and desist order (one of the sanctions imposed by the law judge) in the absence of what Wonsover contends is "willful" conduct. [50]:See generally, 6 Louis Loss & Joel Seligman, Securities Regulation, 2809-13, 2973-74 (3d ed. 1990). [51]:/ See, e.g., Quinn & Co. v. SEC, 452 F.2d 943, 947 (10th Cir. 1971); Hanley v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969). [52]:See, e.g., Ratzlaf, 510 U.S. at 143-46 (requiring proof defendant knew that structuring currency transactions was illegal because structuring might occur for benign reasons); Cheek, 498 U.S. at 200 (recognizing that criminal tax offenses receive "special treatment"). [53]:/Compare Everest Securities, 116 F.3d at 1239 (brokers' "dilatory and remiss investigation, and their resultant failure to discover relevant information about the securities they were selling, amounted to recklessness . . . ."); International Shareholders, 46 S.E.C. at 382 (noting that broker "must exercise considerable care" to determine that exemption is available). [54]:Wonsover cites to testimony that Vogel and Gibori took substantial actions to disguise their fraudulent scheme from Wonsover. Despite these actions, we conclude, for the reasons discussed above, that Wonsover had ample indicia that those securities were not registered or exempt from registration. [55]:Wonsover also challenges the general sufficiency of the law judge's findings; however, the cases he cites are inapposite. Armstrong v. CFTC, 12 F.3d 401 (3d Cir. 1993), involved a final order by the Commodity Futures Trading Commission, not an initial decision reviewable de novo. Unlike the findings reviewed by the court in Armstrong, we conclude that the law judge's findings are thorough and that the law judge carefully analyzed the public interest factors in ordering the sanctions imposed. Equally inapposite is Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979) ("When the Commission imposes [a permanent bar,] the most drastic sanctions at its disposal, it has a duty to articulate carefully the grounds for its decision, including any explanation of why lesser sanctions would not suffice."), aff'd, 450 U.S. 91 (1981). Here the sanctions the law judge imposed fall considerably short of a permanent bar. Compare Staten Securities Corp., 47 S.E.C. 766, 770 n.18 (1982) (Steadman prescribes standards for cases involving the drastic remedy of a total bar). [56]: Lambert v. Secretary of the Treasury, 354 F.2d 819, 822 (1st Cir. 1965) (citing Local Lodge No. 1424 v. NLRB, 362 U.S. 411, 416-17 (1962)); Richard D. Chema, Securities Exchange Act Rel. No. 40719 (November 30, 1998), --- SEC Docket ---, --- n.8 ("even assuming that the prior conduct is time-barred, it may be considered as evidence of motive, intent, or knowledge"); Terry T. Steen, Exchange Act Rel. No. 40055 (June 2, 1998), 67 SEC Docket 837, 843 n.16 (same). In determining liability, the law judge explicitly considered only Wonsover's actions within five years of December 28, 1994 -- the date of the Order Instituting Proceedings. The law judge expressly considered the entire record in determining what sanctions were in the public interest. [57]:Because Wonsover engaged in conduct within the five-year period, we do not need to reach the issue of whether a cease and desist order could be issued if all his conduct occurred outside that period. [58]:See e.g. United States v. Duncan, 763 F.2d 220, 222 (6th Cir. 1985) (citing United States v. Marion, 404 U.S. 307, 325-26 (1971)). [59]:Compare Federal Rules of Evidence 607 (use of impeachment); 612 (writing used to refresh memory); 613 (prior statements of witness). [60]:Nealey v. Transportacion Maritima Mexicana, S.A., 662 F.2d 1275, 1281 (1980). Compare United States v. Wiggins, 530 F.2d 1018, 1022 (D.C. Cir. 1976) ("[a]ppellant does not contend that he encountered any difficulty in locating his witnesses or in refreshing their memories or his memory as to the events"). [61]:Wonsover has not explained why the Matrix is likely to refer to the Nineteen Shareholders when the Form S-18, which was based on the information in the Matrix, does not mention these shareholders. [62]:Gil-Med's lawyer testified that he lost track of the Matrix after he changed firms in May 1988. [63]:See 17 C.F.R. § 201.17(b); International Shareholders, 46 S.E.C. at 380 n.1; cf. Ivan D. Jones, Jr., Securities Exchange Act Rel. No. 36355 (October 10, 1995), 60 SEC Docket 1377, 1381 n.10 (1995) (because Division did not appeal law judge's failure to make finding on an issue, the Commission would not consider that issue), aff'd, 115 F.3d 1173 (4th Cir. 1997). [64]:See Richard D. Earl, 48 S.E.C. 334, 335-36 (1985), aff'd, 798 F.2d 472 (9th Cir. 1986); Richard C. Spangler, 46 S.E.C. 238, 254 n.67 (1976). [65]:At oral argument, Wonsover's counsel represented that Wonsover no longer handles "restricted securities." Counsel was unable to state whether Wonsover currently offers or sells securities in private placements. [66]:All of the arguments advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 41123 / March 1, 1999 Admin. Proc. File No. 3-8584 : In the Matter of : : JACOB WONSOVER : 4711 Dempster : Skokie, Illinois 60076 : : : ORDER IMPOSING REMEDIAL SANCTION On the basis of the Commission's opinion issued this day, it is ORDERED that Jacob Wonsover be, and he hereby is, suspended from association with any broker or dealer for a period of six months, effective as of the opening of business on March 12, 1999; and it is further ORDERED that Jacob Wonsover shall cease and desist from committing or causing any violation or future violation of Sections 5(a) and 5(c) of the Securities Act of 1933. By the Commission. Jonathan G. Katz Secretary