Shapiro v. State Bd. of Accountancy
| Decision Date | 26 July 2004 |
| Citation | 856 A.2d 864 |
| Parties | William SHAPIRO, Petitioner v. STATE BOARD OF ACCOUNTANCY, Respondent. Kenneth Steven Shapiro, Petitioner v. State Board of Accountancy, Respondent. |
| Court | Pennsylvania Commonwealth Court |
William Shapiro and Kenneth S. Shapiro, petitioners, pro se.
Steven Wennberg, Harrisburg, for respondent.
BEFORE: COLINS, President Judge, and SIMPSON, Judge, and JIULIANTE, Senior Judge.
OPINION BY Judge SIMPSON.
William Shapiro (William) and Kenneth Steven Shapiro (Kenneth) (collectively, Petitioners), professionals representing themselves, petition for review of an order of the State Board of Accountancy (Board) revoking the certificate of certified public accountant and biennial license of Kenneth and revoking the certificate of certified public accountant of William.
The Commonwealth Bureau of Professional and Occupational Affairs (Bureau) filed Amended Orders to Show Cause against Petitioners, seeking to have their licenses, certificates, registrations, or permits revoked or restricted under the CPA Law.1 Specifically, the Bureau asserted that, because Petitioners were barred from registration as broker-dealers, agents, or affiliates of any person registered under the Pennsylvania Securities Act of 1972,2 and also were barred from associating with any broker or dealer under the Securities Exchange Act of 1934,3 they were subject to discipline under Section 9.1 of the CPA Law.4 63 P.S. § 9.9a(a)(8).5 The Bureau also asserted Petitioners were subject to discipline under the CPA Law for, "[e]ngaging in unprofessional conduct," 63 P.S. § 9.9a(a)(16), because they failed to comply with standards promulgated by the Pennsylvania Securities Commission. 63 P.S. § 9.9a(c)(5).
Petitioners filed answers and requests for hearings. The Board held a hearing and issued its 38-page adjudication and order, finding Petitioners violated the CPA Law. The Board ordered Kenneth to surrender his certificate of certified public accountant and license documents, and ordered William to surrender his certificate of certified public accountant.
In doing so, the Board made the following Findings of Fact. The Board found William was sole shareholder, secretary/treasurer, and director of Welco Securities, Inc. (Welco) and Kenneth served as Welco's president and director. Board Finding of Fact (F.F.) No. 4. Petitioners also were controlling shareholders of Walnut Equipment Leasing Company, Inc. (Walnut) and its wholly owned subsidiary, Equipment Leasing Corporation of America (ELCOA), both of which financed leases of small business equipment. F.F. No. 5. William was chief executive officer, financial officer and accountant of both Walnut and ELCOA and president of ELCOA. Id. Kenneth served as vice-president of both companies. Id.
Welco registered with the Securities and Exchange Commission (SEC) as a broker-dealer in 1983. F.F. No. 6. Kenneth served as general securities principal, while William served as financial/operations principal and general securities principal. Id. Welco's primary function was to underwrite and sell securities issued by Walnut and ELCOA. F.F. No. 7.
Walnut and ELCOA experienced annual operating losses that grew larger each year. F.F. No. 8. Walnut and ELCOA generated funds to pay their expenses and interest payments to existing debenture-holders by selling new issues of debt securities as unsecured debentures. F.F. No. 9. Investors purchasing those unsecured debentures incurred substantial and immediate risk of losing their investment principals due to the precarious financial condition of Walnut and ELCOA. Id.
Petitioners, through Welco, marketed and distributed the unsecured debentures to their brokerage clients. F.F. No. 10. Welco also solicited investors through kiosks located in airports, bus stations, and other public places. F.F. No. 10. People who inquired at the kiosks were led to believe Welco would review their brokerage account applications to determine if investing in the unsecured debentures was suitable for them. F.F. No. 11. If Welco deemed the investment suitable, it would trade for the debentures through the new brokerage account. Id. Current investors were solicited from time to time to make additional purchases; again, those investors were led to believe Welco would review the suitability of the investment to each investor's needs. Id.
Welco's clients were generally unsophisticated and risk-averse investors for whom the highly speculative nature of the unsecured debentures made them an unsuitable investment. F.F. No. 12. However, Welco and Petitioners recommended and sold the unsecured debentures to all but a handful of their clients. Id.
Welco and Petitioners sold approximately $6 million worth of unsecured debentures in violation of state registration requirements. F.F. No. 13. Welco and Petitioners encouraged investors from states where the debentures were not registered to use an address in a state where the debentures were registered; this subjected Welco, Walnut, and ELCOA to penalties from state regulators that would have materially affected the companies' financial status. Id. Welco and Petitioners did not disclose these facts to investors. Id.
From October 1996 to August 1997, Welco and Kenneth failed to make and keep current books and records for Welco. F.F. No. 14. During that same time period, Welco and Kenneth concealed violations of state registration requirements by maintaining altered client account forms. F.F. No. 15. From December 1995 through August 1997, Welco and Petitioners aided and abetted a person, who was not registered with the SEC, to act as a broker-dealer by allowing him to place trades for debentures through Welco, use Welco's account forms and sales materials, and maintain customer accounts at Welco. F.F. No. 16. Welco also paid this unregistered broker-dealer commissions for his sales of debentures. Id.
Walnut and ELCOA filed for bankruptcy in 1997. F.F. No. 17. Based on that filing, it seemed likely most debenture-holders would lose most of their assets. Id.
From 1988 through 1997, Welco and Petitioners, pursuant to this fraudulent scheme and in violation of federal securities laws, sold approximately $60 million worth of the unsecured debentures to 7,000 investors nationwide. F.F. No. 18.
In August 1999, the SEC filed a four-count complaint against Welco and Petitioners in the United States District Court for the Eastern District of Pennsylvania, charging them with violating various federal securities laws. F.F. No. 20.6 That same date, the district court entered a final judgment and order of permanent injunction against Welco and Petitioners. F.F. No. 21. The SEC thereafter issued a consent order in which it revoked Welco's broker-dealer registration and barred Petitioners from association with any broker or dealer. F.F. No. 22.
Welco also registered as a broker-dealer with the Pennsylvania Securities Commission (PSC) in 1983, and Petitioners registered with PSC as agents of Welco. F.F. No. 23. Welco underwrote Walnut and ELCOA securities, and Petitioners were affiliates of Welco, Walnut, and ELCOA. F.F. Nos. 24-25.
Because they were not registered as securities with the SEC, Kenneth advised PSC no offers or sales of certain ELCOA and Walnut certificates would be made in Pennsylvania. F.F. No. 26. Nevertheless, those certificates were sold to Pennsylvania residents without being registered in Pennsylvania. F.F. Nos. 27, 30.
Welco's registered agents used material misrepresentations to induce people living in and outside Pennsylvania to purchase Walnut certificates and to give fake addresses in states other than Pennsylvania in order to execute the sales; Petitioners knew or should have known about this practice. F.F. No. 28. Additionally, Welco and Petitioners offered and sold Walnut certificates to investors without disclosing they were violating Pennsylvania securities law. F.F. No. 29. Some investors were not given a prospectus or any other meaningful disclosure documents. Id.
At least 26 ELCOA certificates were sold to at least 21 Pennsylvania residents, for an amount of at least $292,190. F.F. No. 30. None of those certificates was registered in Pennsylvania. Id. Twenty-one of those ELCOA certificates were sold by a person named John J. McGarry who was not a registered agent with Welco. F.F. No. 31.
Welco, Petitioners, and McGarry used a single fictitious address in New York as the address of those Pennsylvania residents who purchased ELCOA certificates. F.F. No. 32. In some cases, the investors' Pennsylvania addresses on their applications were concealed with typewriter correction strip. Id. Petitioners knew or should have known of this practice. Id. The ELCOA certificates were offered without disclosing they were being made in violation of Pennsylvania law, and some of the investors were not given a prospectus or other disclosure documents. F.F. No. 34.
Some of Welco's registered representatives, through misrepresentations and nondisclosures, induced investors either to not redeem or to delay redemption of Walnut and ELCOA certificates. F.F. No. 35. Welco and Petitioners knew or should have known of this practice. Id.
Welco, Petitioners, and Welco's registered representatives recommended their investors purchase Walnut and ELCOA certificates without having grounds to believe the certificates were suitable for each investor's needs. F.F. Nos. 36-37. Welco and Petitioners did not establish a system of procedures for detecting and preventing securities violations. F.F. No. 38. Welco and Petitioners did not fulfill their fiduciary duty to act primarily for the benefit of Pennsylvania customers, nor did they maintain high standards of commercial honor and just and equitable principles of trade. F.F. No. 39. Welco and Petitioners engaged in dishonest and unethical conduct in the securities business and took...
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