Wonsover v. Securities & Exchange Comm'n.

• Decision Date: 14 March 2000
• Docket Number: No. 99-1167,99-1167
• Citation: 205 F.3d 408
• Parties: (D.C. Cir. 2000) Jacob Wonsover, Petitioner v. Securities and Exchange Commission, Respondent
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 408

205 F.3d 408 (D.C. Cir. 2000)

Jacob Wonsover, Petitioner v. Securities and Exchange Commission, Respondent

No. 99-1167

United States Court of Appeals for the district of columbia circuit

Argued January 21, 2000

Decided March 14, 2000

On Petition for Review of an Order of the Securities and Exchange Commission

Adam D. Cole argued the cause for the petitioner. Martin E. Karlinsky, James W. Perkins and Frank C. Razzano were on brief for the petitioner.

Randall W. Quinn, Assistant General Counsel, Securities and Exchange Commission, argued the cause for the respondent. Jacob H. Stillman, Solicitor, David M. Becker, Deputy General Counsel, and Nathan A. Forrester, Attorney, Securities and Exchange Commission, were on the brief for the respondent. Rada L. Potts, Attorney, Securities and Exchange Commission, entered an appearance.

Before: Sentelle, Henderson and Rogers, Circuit Judges.

Opinion for the court filed by Circuit Judge Henderson.

Karen LeCraft Henderson, Circuit Judge:

Jacob Wonsover petitions for review of the Security and Exchange Commission's (Commission) Order Imposing Remedial Sanction and the accompanying Opinion of the Commission (collectively, Sanction Order) suspending him "from association with any broker or dealer for a period of six months" and ordering him to cease and desist from committing or causing violations of sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. 77e(a), 77e(c) (1933 Act).Joint Appendix (JA) 1, 2. Wonsover sold shares of Gil-Med Industries, Inc. (Gil-Med) which he knew were not registered and whose sale therefore violated the 1933 Act absent an exemption from its registration requirements. Finding that no exemption applied, the Commission determined that Wonsover violated sections 5(a) and 5(c). The Commission also determined that Wonsover's inquiry into the sources of the shares was inadequate under the circumstances and that his violations were therefore "willful" under section 15(b)(4) of the Securities Exchange Act of 1934, 15 U.S.C. 78o(b)(4) (Exchange Act), which authorized his suspension.

While he argues his sales of unregistered securities were exempt from the 1933 Act's prohibition, Wonsover primarily disputes the Commission's finding of willfulness, contending his inquiry regarding the unregistered shares was adequate to preclude such a finding. Wonsover also argues that the sanction is draconian and that the public interest would be better served by reducing it to a censure. He requests that we vacate the Commission's Sanction Order or, in the alternative, reduce the sanction to censure.

Substantial evidence supports the Commission's conclusion that Wonsover acted without adequate inquiry under the circumstances, in violation of sections 5(a) and 5(c) of the 1933 Act, and we hold that the Commission did not err in determining that the violations were willful. The sanction was not the maximum the Commission could have imposed and we defer to the Commission's discretionary determination. Accordingly, we deny Wonsover's petition for review.

I.

Wonsover began his career in the securities industry in 1981. Approximately five years later he met Shimon Gibori, the founder and CEO of Gil-Med. Gil-Med made an initial public offering in early 1998, registering with the Commission 1,050,000 shares (of 4,605,686 outstanding) for sale to the public. This, the only stock Gil-Med registered, was traded publicly on the NASDAQ System. On the whole, the stock did not have much activity; its market was "thin." JA 841, 1103-06. Henry Vogel, a behavioral therapist and Gibori associate who invested in and promoted Gil-Med, sold shares to his friends, associates and patients during 1988 and 1989.Informed of the difficulty shareholders were having in selling the stock, Gibori and Vogel directed them to certain brokerage firms for help. The shareholders found less than complete success and Gibori ultimately referred them to Wonsover, who was working at Paine Webber, Inc.

Between August 1989 and October 1990 Wonsover opened accounts for nineteen purported Gil-Med shareholders whose names were supplied to him by Gibori.¹ Some of the shareholders did not exist while others no longer owned the GilMed shares held (and later sold) in their names.² Wonsover sold a total of 924,000 shares of unregistered Gil-Med stock.In light of the applicable statute of limitations, the Commission focused on the sale of 665,000 shares for seven of the nineteen shareholders because the sales occurred within five years of the Commission's institution of proceedings against Wonsover.³ Sales from the seven shareholders' accounts generated more than $300,000 in proceeds.

Wonsover understood that the clients held "restricted" GilMed stock.⁴ The sale of restricted stock generally is forbidden by 15 U.S.C. 77e. Wonsover, however, asserts that the sales were covered by the exemption found in section 4(4) of the 1933 Act, 15 U.S.C. 77d(4),⁵ or at least that he reasonably believed they were covered by the exemption.⁶ He directed all potential sales of Gil-Med shares through Paine Webber's Restricted Stock Department (RSD) for clearance and contends that this, along with some less substantial efforts, constituted adequate inquiry into the restricted nature of the stock. The referral to the RSD notwithstanding, Wonsover did not show during the administrative proceedings that he had acquired adequate background information on the Gil-Med stock. Specifically, he could not produce investment executive worksheets for any of the nineteen account-holders. The worksheets, which he and other Paine Webber brokers ordinarily complete when requesting clearance from the RSD, reflect how and when the shareholders acquired the shares at issue. Nevertheless, he claims the RSD contacted Gil-Med's transfer agent, its lawyers and its auditors and ultimately approved every sale of Gil-Med stock. Wonsover also cites written confirmation he received from Gil-Med's transfer agent and attorneys that the sales were legitimate. He claims to have been duped by Vogel pretending to be one of the listed, fictitious customers (Haim Cheap). In fact, Wonsover relies on how elaborate and effective Gibori and Vogel's ruse was⁷ in arguing that his actions were not willful violations of the 1933 Act.

Early in the administrative proceedings Wonsover freely admitted (but would later recant) that he made no inquiry into how or when the Gil-Med shareholders acquired their stock. See, e.g., JA 836, 846-48. Instead, he passed the duty of inquiry to Paine Webber's RSD and lawyers. See JA 836.The Commission demonstrates that several "red flags" should have alerted Wonsover to the fact that Gibori in fact controlled the unregistered shares Wonsover was selling and, therefore, no exemption was available.⁸ Those red flags include Gibori's exercise of an unusual amount of control over the nineteen accounts. He delivered account documentation, picked up proceeds checks and held trading authorization for at least two accounts. Some purported shareholders resided overseas. Fourteen of the nineteen listed Gil-Med headquarters as their official address and many listed Gil-Med's telephone number too. Despite the foreign mailing addresses of three account holders, Wonsover heeded Gibori's instructions and directed their checks to Gil-Med and their correspondence to Gil-Med to Gibori's attention. Similarly, many of the accounts contained suspicious information. Some account forms represented U.S. citizenship while corresponding W-8 forms certified foreign citizenship. Several had identical personal addresses in Tel Aviv and identical bank references.Some of the stock certificates forged by Gibori and Vogel, which the Commission believes were amateurishly forged, listed only a surname that, in one instance, was misspelled.

In addition to their relation to Gibori, the shareholders also had an affiliation with Gil-Med. Some used Gil-Med headquarters as their personal mailing address and some even identified their occupation as sales representatives for GilMed. Another red flag was that the nineteen shareholders, collectively, sought to sell a substantial block of Gil-Med (924,000 shares, nearly equaling the entire public float of 1,050,000), a stock Wonsover knew was not widely traded.The Commission also notes that the S-18 registration statement of the 1998 offering reflected no ownership by any of the nineteen shareholders and thus directly contradicted Wonsover's stated belief that those shareholders acquired their shares in 1986 or 1987 in private placements. See JA 1179-80. The last red flag the Commission identifies was the difficulty in clearing the sales with the Gil-Med transfer agent and the RSD, a difficulty Wonsover was aware of and which he had not encountered in gaining approval for sale of properly exempt, restricted stock in the past. In response to the RSD's hesitation, he made repeated telephone calls to push for its approval, including falsely claiming the shareholders were poor and needed the money immediately. See JA 982.

In a detailed opinion, the Commission affirmed the administrative law judge's (ALJ) conclusion that Wonsover violated sections 5(a) and 5(c) of the 1933 Act, 15 U.S.C. 77e,⁹ and that the violations were willful under section 15(b)(4) of the Exchange Act, 15 U.S.C. 78o(b)(4),¹⁰ which grants the Commission authority to suspend brokers for willful violations of the 1933 Act. The Commission suspended Wonsover "from association with any broker or dealer for a period of six months" and, pursuant to 15 U.S.C. 77h-1, ordered him to cease and desist from committing or causing violations of sections 5(a) and 5(c) of the 1933 Act. See JA 1, 2.

II.

We review the Commission's findings of fact for substantial evidence. See Steadman v. SEC, 450 U.S. 91, 97 n.12 (1981) ("Commission findings of fact are conclusive for a reviewing court 'if supported by substantial evidence.' ") (quoting 15 U.S.C. 78y, 80a-42,...