Jones v. S.E.C.

• Decision Date: 16 June 1997
• Docket Number: No. 95-3119,95-3119
• Parties: Fed. Sec. L. Rep. P 99,481 Ivan D. JONES, Jr., Petitioner, v. SECURITIES & EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1173

115 F.3d 1173

Fed. Sec. L. Rep. P 99,481

Ivan D. JONES, Jr., Petitioner, v. SECURITIES & EXCHANGE COMMISSION, Respondent.

No. 95-3119.

United States Court of Appeals, Fourth Circuit.

Argued Jan. 29, 1997.

Decided June 16, 1997.

ARGUED: Jonathan Drew Sasser, Moore & Van Allen, P.L.L.C., Raleigh, NC, for Petitioner. Susan Ferris Wyderko, Senior Litigation Counsel, Securities and Exchange Commission, Washington, DC, for Respondent. ON BRIEF: Jeffrey M. Young, Moore & Van Allen, P.L.L.C., Raleigh, NC, for Petitioner. Paul Gonson, Solicitor, Richard H. Walker, General Counsel, Eric Summergrad, Principal Assistant General Counsel, Catherine A. Broderick, Counsel to the Assistant General Counsel, Securities and Exchange Commission, Washington, DC, for Respondent.

Before MURNAGHAN, NIEMEYER, and MOTZ, Circuit Judges.

Affirmed by published opinion. Judge NIEMEYER wrote the opinion, in which Judge MURNAGHAN and Judge DIANA GRIBBON MOTZ joined.

OPINION

NIEMEYER, Circuit Judge:

Ivan D. Jones, Jr., a stockbroker, was censured, suspended briefly, and fined in October 1992 by the National Association of Securities Dealers ("NASD") for illegal conduct in connection with two private offerings and various "back room" violations. Approximately six months later, the Securities and Exchange Commission ("SEC") instituted a broader administrative proceeding against Jones arising out of the same conduct. Finding that Jones violated various antifraud, recordkeeping, and reporting provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 ("Exchange Act"), and the Investment Advisers Act of 1940 ("Advisers Act"), the SEC suspended Jones from association with a broker-dealer or investment advisor for 12 months and thereafter from association in a proprietary, supervisory or managerial capacity with a right to reapply for such association after 18 months.

Petitioning for review of the SEC's order, Jones contends that the NASD's prior disciplinary action precludes the SEC from bringing this proceeding because to do so violated (1) principles of res judicata; (2) the Maloney Act of 1938, 15 U.S.C. § 78o-3; and (3) the Fifth Amendment's Double Jeopardy Clause. He also challenges the sufficiency of the evidence to support the SEC's order and the reasonableness of his 30-month suspension, contending it was "unduly harsh." For the reasons that follow, we affirm.

I

Jones became a stockbroker in 1968, and in 1989 he became an officer and director of Jones & Ward Securities, Inc. (previously Akers and Jones Securities, Inc.) (hereafter "Jones & Ward Securities"), a registered broker-dealer. Jones informed the NASD that he would be Jones & Ward Securities' "control person" who would handle all important responsibilities. A few years earlier he had also become an officer and director of Investment/Timing Systems, Inc. ("ITS"), a registered investment advisor.

In March 1989, Trask, Hunt, Hunt, Jones, Ltd. ("THHJ"), a corporation formed to invest in real estate, acquired an unimproved tract of land and an adjacent office building in Wilmington, North Carolina. Three of the THHJ owners, including Jones, formed Sidbury Land Company to raise money for the purchase of the unimproved THHJ tract by offering common stock to investors through a private placement ("Sidbury Offering"). The owners of THHJ likewise formed One Virginia Partners to raise money for the purchase of the adjacent office building by offering general partnership interests ("OVP Offering").

In April 1989, Jones and his attorney, L. Bruce McDaniel, drafted a circular for the Sidbury Offering, with Jones & Woods Securities acting as underwriter, to sell 38,400 shares of common stock at $10 per share. The shares were to be sold in 1,200-share units to not more than 32 purchasers with a fifty percent "part or none" proviso: if less than $192,000 were raised by August 10, 1989, investors would be refunded their money with interest. The circular provided that "the first $192,000 of sales proceeds will be escrowed with United Carolina Bank of Wilmington, North Carolina. After $192,000 in stock has been sold, those escrowed funds will be released to the Company." Investors were instructed to forward their subscription payment to "Sidbury Land Company Escrow Account."

Jones' attorney, McDaniel, later testified that he explained to Jones that the escrow account referred to in the circular would have to be set up so that the bank held the investors' money beyond Jones' control. He testified that he had explained to Jones that Jones should establish a "true escrow," an arrangement he described as requiring that "the bank hold[ ] money in trust, and [that] they cannot release it except in accordance with terms of the escrow agreement." When McDaniel and Jones had a discussion about who should draft the escrow agreement, Jones assured McDaniel that Jones would take care of it. McDaniel testified later that he also explained to Jones that if the $192,000 were not on deposit by August 10, 1989, the offering could not be extended. Rather, Jones would be required to refund the subscribers' money and "restart from scratch."

Instead of opening an escrow account beyond Jones' control, as McDaniel had advised, Jones opened a regular checking account labeled "Sidbury Land Co., Inc. Escrow Account" and deposited underwriting proceeds into the account subject to unrestricted withdrawal over his signature. On July 10, 1989, after Jones had agreements for the purchase of $192,000 worth of stock but when the escrow account had only $108,000 in it, Jones withdrew $9,600 from the escrow account to pay Jones & Ward Securities for underwriting commissions and $13,460 to pay THHJ for various fees and expenses incident to the offering. On July 28, 1989, Jones withdrew another $9,350 from the escrow account to pay interest on a loan that THHJ had taken out to finance the purchase of the undeveloped land that it owned. As of August 10, 1989, the last day of the offering, the escrow account did not have $192,000 as specified in the offering circular, although it would have had $192,000 in it had Jones not earlier withdrawn the $32,410 for various expenses. Rather than starting over from scratch, Jones extended the offering period, and ultimately, in March 1991, the Sidbury Land Company did purchase the unimproved property from THHJ.

In late May 1989, about a month after the Sidbury Offering began--when the offering "started to get a little sticky," as McDaniel stated--Jones began to offer certain investors, but not all, the right to have their shares repurchased at any time by THHJ at the offering price. Jones explained that he simply wanted to "enhance the offering over and above the private placement memorandum, by offering [some investors] some liquidity." THHJ, however, did not have sufficient assets to honor the repurchase agreements, although Jones later claimed that THHJ then had a sufficient line of credit with a bank.

Parallel with the Sidbury Offering, One Virginia Partners began the OVP Offering of partnership shares to investment advisory clients of ITS, as well as others, to raise $490,000 to purchase the THHJ-owned office building next to the undeveloped Sidbury Land Company property. The cost of the building was estimated at approximately $425,000. The offering materials used by Jones and ITS indicated that seven partnership interests would be sold at $70,000 each and that funds received from each investor prior to April 28, 1989, would be held in an escrow account. As he did with the Sidbury Offering, Jones opened a regular checking account under his control and deposited the offering's proceeds into that account. Without the prior consent of the partners, Jones withdrew $25,000 from the One Virginia Partners escrow account and paid it to THHJ to enable it to purchase an option on unrelated real estate known as Parkshore Estates. Similarly, he loaned $20,000 from the escrow account to Southeastern Car Care Center # 1, a company that went into bankruptcy soon thereafter. Jones used $60,000 of the One Virginia Partnership escrow funds to purchase 6,000 shares of Sidbury Land Company stock, thereby enabling Sidbury Land Company finally to acquire the unimproved property that was described in its offering circular. Finally, in the fall of 1989, Jones withdrew $20,000 from the One Virginia Partnership escrow account to lend it to Jones & Ward Securities for ongoing operations. About ten months later, Jones & Ward Securities issued a demand note to One Virginia Partnership for the $20,000 that it had borrowed, and later it repaid the loan. Jones personally also made good the loss of the funds invested in the bankrupt car-care center.

During the relevant period, April 1989 to April 1990, the SEC required broker-dealers to maintain net capital of at least $25,000 if they held customer funds or securities or owed money or securities to customers. If they did not hold customer funds or owe customers money, they could operate with a minimum net capital of $5,000. See Exchange Act Rule 15c3-1(a), 17 C.F.R. § 240.15c3-1(a). The same rule provides that a "$5,000 broker-dealer" could participate in a "part or none" offering only if the offering proceeds were held by an independent escrow agent. Throughout the April 1989-April 1990 period and thereafter, Jones & Ward Securities purported to operate as a $5,000 broker-dealer. When Jones failed, however, to place the Sidbury Offering proceeds into an independent escrow account, the firm's net capital requirement increased from $5,000 to $25,000, resulting in capital deficiencies for several months. In December 1989, an examiner from the NASD advised Jones & Ward Securities to report its net capital deficiencies to regulatory authorities as required by Exchange Act Rule 17a-11, 17 C.F.R. § 240.17a-11, but Jones refused to do so. And from December 1990 through February 1991 and from April 1991 through June 1991, Jones & Ward...