Edward J. Mawod & Co. v. S.E.C.

• Decision Date: 24 January 1979
• Docket Number: No. 77-1495,77-1495
• Parties: Fed. Sec. L. Rep. P 96,753 EDWARD J. MAWOD & COMPANY and Edward J. Mawod, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 588

591 F.2d 588

Fed. Sec. L. Rep. P 96,753

EDWARD J. MAWOD & COMPANY and Edward J. Mawod, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 77-1495.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted Nov. 16, 1978.

Decided Jan. 24, 1979.

Richard J. Leedy, Salt Lake City, Utah, for petitioners-appellants.

Michael K. Wolensky, Asst. Gen. Counsel, Securities and Exchange Commission, Washington, D. C. (Harvey L. Pitt, Gen. Counsel, Paul Gonson, Associate Gen. Counsel and Willie M. Alexander, Atty., Securities and Exchange Commission, Washington Before HOLLOWAY and DOYLE, Circuit Judges, and STANLEY, ^* Senior District Judge.

D. C., on brief), for respondent-appellee.

WILLIAM E. DOYLE, Circuit Judge.

The appellants consist of Edward J. Mawod and Company together with Edward J. Mawod, individually, who was a principal of the Mawod brokerage firm. The cause is here on a petition for review of an order of the Securities and Exchange Commission issued May 6, 1977, which order suspended Mawod from association with any broker or dealer for one year and which revoked the broker-dealer registration of Mawod and Company. The request of the company to withdraw its registration as a broker-dealer was denied.

It was found that Mawod had willfully aided and abetted violations of the antifraud provisions of § 17(a) of the Securities Act of 1933 together with the Securities Exchange Act. The basic question here is whether there was sufficient evidence plus inferences to be drawn therefrom to justify the action which was taken by the Commission. We affirm the Commission order.

Proceedings before the Commission took place on August 29, 1974, pursuant to the applicable provisions of the Securities Act. Involved were alleged activities claimed to constitute a market manipulation of the common stock of Epoch Corporation. Following the evidentiary hearing before the administrative law judge, an opinion was issued which held that Mawod and Company and Mr. Mawod had willfully violated various provisions of the Securities Act and the Securities Exchange Act as charged. The petitioners obtained review by the Commission of the decision of the administrative law judge. That body issued its order imposing the sanctions which are here the subject of complaint.

There was evidence designed to show that Mr. Mawod was not a novice as far as the securities business was concerned. He started in the securities business in 1950, and from that time on worked for various firms as an assistant broker. The predecessor of the Mawod firm, Parker-Mawod & Company, was created in 1968. On September 11 of that year, Mawod became a broker-dealer. Sometime later, the firm changed its name to Mawod and Company. It ceased to do business in 1973, after the present investigation by the Securities and Exchange Commission was started.

Edward Mawod was at all times the controlling owner and the sole general partner. He was the principal trader and the active manager. He also made the policy decisions as to use of the company facilities and determined all day to day management matters, conferring with the employees in charge of particular operations.

The so-called Epoch account is the center of complaint. This was a real estate corporation which was incorporated in 1972. This company was not substantially funded. The owners contributed $1,000. They had office space contributed by a third person, one Yeaman, who became its financial adviser. The founders dropped out soon after it started, leaving the financial adviser in charge.

A Regulation A exemption was filed for the purpose of an exemption allowing the sale of stock to the public. The offer contained in the notification to the Commission called for the sale of the stock at $.20 a share. Transamerican Securities, Inc. was chosen as the underwriter for this public offering. All proceeds for the offering were to be escrowed until a minimum of $25,000 was received. To obtain this amount made it necessary to sell 125,000 shares, to be accomplished within six months or the money would be refunded to the purchasers. The offering started on July 28, 1972, and was closed on October 27, 1972. 187,000 shares were sold for $37,400. 125,000 shares were sold to a friend of Yeaman for $25,000. The president of Transamerican purchased 7,000 shares and an additional 5,000 shares were purchased In March 1973, Epoch answered an ad by an Osterloh & Durham Insurance Brokers of North America, Inc., seeking a merger. It wished to merge with a public company. Yeaman introduced a Mr. Martin of the Osterloh Company to Mr. Hale, who controlled the 125,000 shares of the block of Epoch stock. An arrangement was made for Hale to sell his shares to Mr. Martin on an installment basis at $.25 per share. After that, Martin introduced Yeaman to Joe C. O'Quinn and Michael Strand. Strand was introduced as the person who would pursue the merger. He and O'Quinn proceeded to complete this merger.

by the trader and the principal at another brokerage firm. As a result, 159,500 shares of the total were purchased by persons who were close to the promoters. Following the termination of the offering, Epoch was more or less inactive, and during the first several months there was not much trading in the stock. Nevertheless, Transamerican raised the price between November 1972 and January 1973, to $.75 a share.

Mawod had prior knowledge as to Strand's practices. He had theretofore prevented Strand from trading at Mawod and Company. Notwithstanding that previous experience, Mawod changed this policy and allowed Strand to resume active trading. Strand did not trade in his own name. Instead he used a nominee account in the name of Lois Linford. Mawod designated a Mr. Airsman to watch the Strand and O'Quinn activities. This fact has some significance in that it tends to indicate that Mawod had some concerns or apprehensions concerning the Strand and O'Quinn activities.

Strand and O'Quinn brought other brokers into the effort. Soon thereafter, O'Quinn sold 500 shares through Transamerican at 11/4. The quotes for that day were, however, 3/8-5/8 ask.

On April 19, O'Quinn sold 1,100 shares at $1.75 to a customer of Mawod and Company. As of that time there were six brokers quoting Epoch at prices up to 15/8 bid and 21/8 ask. The record does not disclose that there was any activity in the business that justified these relatively high figures. A number of trades were arranged by Strand and O'Quinn with other brokerage firms. These included "wash" sales and so-called "matched" orders. Strand and O'Quinn persuaded brokers to quote Epoch stock.

The evidence showed that there were special efforts on the part of O'Quinn and Strand to create a market for the Epoch stock by quoting it and by floating rumors as to a possible merger. The efforts of O'Quinn and Strand bore some fruit consisting of sales at prices which bore no particular relationship to the intrinsic value of the stock.

During all this time Strand was permitted to use the trading room at Mawod and Company and to use hand signals for trading in Epoch stock. Strand spent several hours a day for approximately five weeks at Mawod's office during that period. Evidence was offered from which an inference could be drawn that there were so-called directed sales.

During the period of April 1973 through most of June, there were 30 trades in Epoch stock all of which were executed by Mawod and Company. These were carried out by Strand and O'Quinn. In late June, Mawod decided not to continue business with Strand and O'Quinn because of apprehension that O'Quinn and Strand would be unable to pay their obligation. Mawod terminated their relationship with Mawod and Company. Almost immediately the stocks dropped and Mawod and Company ceased trading it. Mawod then reduced its quotes considerably and Epoch's market price dropped fast until finally Mawod's quotes of Epoch's stock on its so-called pink sheets were stopped altogether.

In August 1974, the present proceedings were commenced before the Commission. The complaint alleged that the petitioners (Mawod and Mawod and Company), along with several others, engaged in a scheme to defraud investors and inflate the market with respect to the stock of the Epoch Corporation. The charges included some 20 respondents including four registered broker-dealers. In addition to Mawod and The essence of the case against Mawod and Company consisted of the activities which caused the stock of Epoch to rise from $.20 to over $2.00. Following the merger with another corporation, the stock rose to $10.00 and finally returned to a low level. The Commission found that Epoch's only attraction for the purposes for which it was used was that it had public character. However, the stock had not previously had any trading. The company was a mere shell. Ordinarily it would not have had any market, much less the variations that it experienced. Frequently, the evidence showed, the seller and the buyer were one and the same. Sometimes there was an identical buyer and seller who were working together. The order to buy was contemporaneous with the order to sell. It was these trading practices which were found by the Commission to be manipulative in nature. These were so-called "matched" trades and "wash" sales. The Commission believed from the evidence that the entire scheme was orchestrated by Strand and O'Quinn trading through the offices of Mawod and Company.

Company, there was Continental Securities, Inc., Associated Underwriters, Inc. and Universal Underwriting Service. All of these respondents, with the exception of Mawod and Company, Mr. Mawod, John Airsman and three others, consented to findings and sanctions without admitting or denying guilt as to the violations. With respect to the other three individuals referred to but unnamed, the proceedings were discontinued. John Airsman did not seek review of the administrative law judge's...