INITIAL DECISION RELEASE NO. 120 ADMINISTRATIVE PROCEEDING FILE NO. 3-9355 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________ In the Matter of : : TED HAROLD WESTERFIELD : INITIAL DECISION : February 9, 1998 _______________________: APPEARANCES: Stephen J. Crimmins and Phil Gross for the Division of Enforcement, Securities and Exchange Commission Ted Harold Westerfield, pro se BEFORE: G. Marvin Bober, Administrative Law Judge The Securities and Exchange Commission ( Commission ) initiated this proceeding on August 6, 1997, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 ( Exchange Act ). As directed by the Commission s Order Instituting Proceedings ( OIP ), I held an administrative trial at the Eglin Air Force Base Federal Prison Camp in Eglin, Florida, on October 15, 1997. At the trial, the Division of Enforcement ( Division ) called no witnesses, but rested on its allegations in the OIP and on seven Division exhibits offered and admitted at the trial.<(1)> Respondent Westerfield testified on his own behalf; three of his tendered exhibits were admitted at the hearing, and a fourth was offered and accepted into evidence by me post-trial. Order Admitting Exhibit and Closing Record (Jan. 14, 1998). Both parties filed posthearing briefs, which were received in this office on December 15, 1997. My findings and conclusions are based on the record and my observation of the witnesses demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981); see <(1)> I will refer to Division exhibits as (Div. Ex. __) and to Respondent exhibits as (Resp. Ex. __). I will refer to the transcript as (Tr. __). ======END OF PAGE 1====== also Grogan v. Garner, 498 U.S. 279 (1991). Issues Purpose of Proceeding The proceeding was instituted to determine whether the Division s allegations contained in the OIP are true and to give the Respondent an opportunity to establish any defenses. Specifically, the Division alleges that the Respondent: a) was convicted of a felony or misdemeanor of the type specified in Exchange Act Section 15(b)(4)(C), and b) was enjoined from engaging in activities specified in Exchange Act Section 15(b)(4)(C). If I find that the allegations are true, the issue is what, if any, remedial action against the Respondent is necessary or appropriate in the public interest or for the protection of investors pursuant to Section 15(b)(6). Preliminary Issues At the administrative trial Respondent Westerfield again argued that his access to legal materials, witnesses, and other resources has been limited because he is in prison. (Tr. 15.) The Respondent raised this argument in his September 15, 1997, Motion to Reschedule Hearing. I denied the motion for reasons articulated in my Order Denying Postponement, dated September 25, 1997, and reaffirm that denial herein. Additionally, the Respondent argued that he was being denied due process because his trial was not open to the public. (Tr. 17.) The Respondent is presently incarcerated at the Federal Prison Camp located within Eglin Air Force Base in Florida. The administrative trial was conducted in a conference room at the prison. It is true that the prison rules restrict the movement of persons within the prison. Such restrictions are necessary in order to maintain order and safety; however, an individual with proper identification and a legitimate purpose could be admitted by prison officials to attend Mr. Westerfield s trial. Therefore, in my opinion, the Respondent s trial was open to the public and his motion is DENIED. Findings of Fact & Conclusions of Law<(2)> Respondent Westerfield Respondent Westerfield, 35 years old, graduated with honors from the University of Arkansas in 1984. (Resp. Pretrial Br. at 1.) He worked at E.F. Hutton & Co. in Little Rock, Arkansas, Thomson McKinnon Securities Inc., and then at Gruntal & Co. in New York beginning in April 1990. Id. In March 1991, the Respondent founded an investment management company in the South. Id. at 2. He liquidated the company in mid-1992 in order to pay legal fees. Id. <(2)> I have considered all the arguments and contentions and accept those that are consistent with this decision. ======END OF PAGE 2====== Criminal Conviction and Civil Injunction Respondent Westerfield admitted in his answer that the facts as alleged by the Division in the OIP are true.<(3)> (Answer I.) Specifically, he admits the following allegations: A. Westerfield was convicted on March 14, 1996, of violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, of aiding and abetting and causing G. Albert Griggs, Jr. ("Griggs") to violate Section 206 of the Investment Advisers Act of 1940 ("Advisers Act"), of conspiring to engage in fraudulent and deceptive business practices in violation of 18 U.S.C. 371 and of violating the mail fraud statutes, 18 U.S.C. 1341. See U.S. v. Westerfield, 95 CR 0219-001 (LMK) (S.D.N.Y.). On November 15, 1996, Westerfield was sentenced to fifteen months in prison, fined $l,050 and ordered to pay restitution in the amount of up to a total of $105,465.50. The judgment against Westerfield in the criminal case was entered on December 31, 1996. B. The United States District Court for the Southern District of New York, on June 3, 1997, entered a final judgment permanently enjoining Westerfield from violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, from violating, or aiding, abetting, counseling, commanding, inducing or procuring violations of Section 204 of the Advisers Act and Rule 204-1(b)(1), (2) and (3) thereunder, and from violating or conspiring to violate Section 17(e)(1) of the Investment Company Act of 1940. The Court ordered Westerfield to disgorge $210,931, the amount of the loss alleged to have resulted from Westerfield's violations, together with prejudgment interest in the amount of $133,896, for a total of $344,827, with the proviso that Westerfield may offset from such obligation any amounts he actually pays in satisfaction of the restitution in the criminal case against Westerfield. See SEC v. Ted Harold Westerfield, 94 Civ. 6997 (JSM) (S.D.N.Y. June 3, 1997). C. In convicting Westerfield in U.S. v. Westerfield, referred to above, the jury by necessity found the following allegations from the indictment to be true: 1. From approximately April 1990 through approximately April 1991, Westerfield was employed as an account executive with Gruntal, a securities brokerage firm located in New York City. Westerfield's responsibilities at Gruntal included executing orders for the purchase and sale of high yield bonds on behalf of Gruntal customers. 2. At the times relevant to this proceeding, Griggs was employed as a bond analyst and assistant portfolio manager in <(3)> In any event, the doctrine of collateral estoppel and Commission case law prevent Respondent from relitigating findings from a prior criminal conviction or a civil injunction. Meyer Blinder, 65 SEC Docket 1970, 1973 (Oct. 1, 1997); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979). ======END OF PAGE 3====== Massachusetts by Keystone Custodian Funds, Inc. ("Keystone Custodian"), an investment adviser to the Keystone mutual funds, ("Keystone Funds"), supervised by Keystone Group, Inc. ("Keystone Group"), (collectively "Keystone"). In that position, Griggs' principal responsibility was to analyze high yield bonds to locate profitable investment opportunities for the Keystone Funds. In the course of his duties, Griggs recommended that the Keystone Funds purchase and sell particular high yield bonds at specified prices. 3. In his position as a bond analyst, Griggs owed a fiduciary duty to Keystone and its shareholders. In particular, Griggs had an obligation to maximize the profits earned by Keystone and its shareholders. Both Westerfield and Griggs understood that, pursuant to Griggs' fiduciary obligations to Keystone, Griggs was (a) prohibited from accepting compensation from persons other than Keystone in connection with any securities transaction he recommended to the Keystone Funds; and (b) obligated to seek out the highest available prices for bonds sold by the Keystone Funds and the lowest available prices for bonds purchased by the Keystone Funds. 4. In or about early 1990, Westerfield and Griggs entered into a secret kickback scheme. Pursuant to their scheme, Griggs agreed to place orders for the purchase or sale of high yield bonds of Keystone with Westerfield, who would then execute those transactions through Gruntal. Each such transaction resulted in Westerfield obtaining a brokerage commission from Gruntal, the size of which depended upon Gruntal's profit for that transaction. Westerfield and Griggs agreed that Westerfield would keep his commissions on these transactions up to an amount equal to Griggs' gross annual compensation from Keystone, but that Westerfield would share equally with Griggs all commissions above that amount on an after-tax basis. Westerfield and Griggs further agreed to conceal this kickback arrangement from Gruntal and Keystone. 5. During the course of their scheme, Griggs failed to negotiate with Westerfield to obtain the best possible prices for Keystone from Gruntal, and surrendered opportunities to obtain better prices through firms other than Gruntal. Instead, Griggs recommended both Keystone's purchases of high yield bonds from Gruntal and sales of high yield bonds to Gruntal so as to maximize Westerfield's commissions, and in turn, his own kickbacks. Westerfield knew that his agreement to split portions of his commissions with Griggs compromised Griggs' decision- making on behalf of Keystone. 6. Pursuant to their scheme, during 1990 Griggs caused Keystone (i) to purchase from Westerfield and Gruntal approximately $15.85 million of various high yield bonds, at an aggregate price of approximately $8,157,750; and (ii) to sell to Westerfield and Gruntal approximately $16.25 million of various high yield bonds, at an aggregate price of approximately $6 million. In connection with these purchases and sales, ======END OF PAGE 4====== Westerfield received total commissions from Gruntal of approximately $209,687.50, which amounted to nearly all of the compensation Westerfield earned from Gruntal during 1990. Westerfield paid Griggs an aggregate of approximately $35,000 in cash from these fees in numerous installments by (i) traveling from New York to Massachusetts to deliver cash to Griggs; (ii) delivering cash to Griggs during Griggs' trips to New York; and (iii) sending cash to Griggs from New York to Massachusetts via Federal Express. (OIP at III.; see also Div. Exs. 1-5.) The United States Court of Appeals for the Second Circuit affirmed the Respondent s criminal conviction on June 24, 1997. (Div. Ex. 6.) Thus, the Respondent: 1) was associated with a broker or dealer pursuant to Exchange Act Section 15(b)(6)(A); 2) has been convicted of an offense specified in Exchange Act Section 15(b)(4)(B) within 10 years of the commencement of these proceedings, pursuant to Exchange Act Section 15(b)(6)(A)(ii); and 3) is enjoined from an action, conduct, or practice specified in Exchange Act 15(b)(4)(C), pursuant to Exchange Act Section 15(b)(6)(A)(iii). Public Interest The Division asks that the Respondent be permanently barred from association with any broker, dealer, investment adviser, investment company, or municipal securities dealer. The Respondent requests that he receive only a 12-month bar from association with a broker or dealer. Bar Section 15(b)(6) authorizes the Commission to censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar such person from being associated with a broker or dealer, or from participating in an offering of penny stock, if it is found in the public interest to do so. The Commission recently found that the place limitations language of Section 15(b) may be found to include a collateral bar from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company. Meyer Blinder, 65 SEC Docket 1970, 1974-81 (Oct. 1, 1997). The starting point for assessing what sanction is appropriate in the public interest requires consideration of many factors, including deterrence and: [t]he egregiousness of the defendant s actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant s assurances against future violations, the defendant s recognition of the wrongful nature of his conduct, and the likelihood that his occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), aff d on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the effect of a sanction in preventing a recurrence. Leo Glassman, 46 S.E.C. 209, 211 (1975); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 ======END OF PAGE 5====== (1976). Sanctions should demonstrate to the particular respondent, the industry, and the public generally that egregious conduct will merit a harsh response. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976). Respondent Westerfield willfully and knowingly planned and executed the kickback conspiracy, and in so doing was found to have criminally violated Exchange Act Section 10(b) and Rule 10b-5 thereunder, aided and abetted and caused Mr. Griggs to violate Advisers Act Section 206, conspired to engage in fraudulent and deceptive business practices in violation of 18 U.S.C. 371, and violated the mail fraud statutes, 18 U.S.C. 1341. Additionally, he was permanently enjoined from violating Exchange Act Section 10(b) and Rule 10b-5 thereunder, Advisers Act Section 204 and Rule 204-1(b)(1), (2) and (3) thereunder, and Investment Company Act Section 17(e)(1). He profited from the illegal scheme knowing that this would cause Mr. Griggs to breach his fiduciary duty to Keystone and its shareholders. During 1990 he executed multiple orders for the sale and purchase of high yield bonds by Keystone, and delivered cash payments to Mr. Griggs on numerous occasions in New York and Massachusetts, and via Federal Express. There is no evidence on the record that he has been disciplined prior to or since the violations at issue in this proceeding. Although Respondent Westerfield admitted the allegations in the OIP based on the doctrine of collateral estoppel, he has consistently denied the findings in the original, criminal case. (Answer I.; Resp. Pretrial Br. at 2; Div. Ex. 4 at 8; Div. Ex. 6 at 4-5.) He claims that his former friend and business associate attempted to entrap him. (Resp. Pretrial Br. at 2.) Further, in response to the civil action, he stated that the government has effectively destroyed my life and that he received five years of legal harassment from the government. (Div. Ex. 7 at 1-2.) He discounts the wrongful nature of his fraudulent conduct and sees himself as a victim of the legal system. He made no assurances against future violations, but recognizes that his criminal conviction may adversely affect his future employment opportunities. (Resp. Pretrial Br. at 2.) In addition to the fact that the Respondent s future efforts to find employment, and therefore any opportunities to commit future violations, will be hampered by his criminal record, the Respondent s behavior is mitigated somewhat by evidence from his November 15, 1996, sentencing hearing. At the hearing, United States District Court Judge McKenna stated that he felt that it was appropriate to sentence the Respondent at the bottom of the sentencing guideline range given his background and lack of criminal record. (Resp. Ex. D at 13.) He recommended that the Respondent be sent to a minimum security work camp or institution near his family, and waived the need for drug testing upon release. Id. at 13-14. Further, he said: I don t usually say very much at all in sentencing, but it strikes me that Mr. Westerfield is a very talented person, willing to work very hard, and I hope this experience behind him he will go on to do the things he is capable of. Id. at 14-15. The Respondent is currently serving a fifteen month prison ======END OF PAGE 6====== term; was fined $l,050 and ordered to pay restitution in the amount of up to a total of $105,465.50 in the criminal case; has been permanently enjoined from violations of Section 10(b) of the Exchange Act and Rule 10b- 5 thereunder, Section 204 of the Advisers Act and Rule 204-1(b)(1), (2) and (3) thereunder, and Section 17(e)(1) of the Investment Company Act; and was ordered to disgorge $210,931, in addition to prejudgment interest of $133,896, to be offset by amounts paid as restitution in the criminal case. The payment of restitution is graduated depending upon the income he earns in the future.<(4)> At the same time, it is important to consider the impact a sanction will have in deterring people from illegal actions which damage public investors and the integrity of the securities markets. See Steadman, 603 F.2d at 1142 n.22; Arthur Lipper Corp. v. SEC, 547 F.2d at 184; Richard C. Spangler, Inc., 46 S.E.C. at 254 n.67. Collateral Bar The Commission recently addressed the question of whether it had the authority under Section 15(b)(6) of the Exchange Act to bar respondents from securities activities other than those associated with a broker or dealer. In Meyer Blinder, 65 SEC Docket at 1974-75, the Commission concluded, [b]ased on that section and other related statutory provisions governing the admission and exclusion of certain securities professionals from other aspects of the securities business, relevant legislative history, and the animating purposes of the securities laws, we conclude that we have such authority. <(5)> The Commission reasoned, however, that [c]ollateral bars should be used in cases where it is contrary to the public interest to allow someone to serve in any capacity in the securities industry. Id. at 1981. The Commission stated: In determining whether to impose a collateral bar, we consider foremost whether the misconduct is of the type that, by its nature, flows across various securities professions and poses a risk of harm to the investing public in any such profession. We <(4)> As additional supervised release terms, the Respondent was ordered to pay restitution in the amount of up to a total of $105,465.50 to Keystone on the following schedule: 10% of gross income between $35,000.00 and $75,000.00; 15% of gross income above $75,000.00 up to $125,000.00; 20% of gross income in excess of $125,00.00 [sic]. Interest is waived. Div. Ex. 2 at 3a. <(5)> One Commissioner disagreed: [T]he starting point is whether, in a proceeding brought solely under Section 15(b)(6)(A) of [the Exchange Act], the Commission has the legal authority to bar or suspend Mr. Blinder from association in those areas of the securities industry in which he has not participated or sought participation. We do not. The plain meaning of Section 15(b)(6)(A) indicates that the Commission s jurisdiction extends to barring Mr. Blinder from the businesses he already had entered or one he sought to enter. We should impose those sanctions against him. I would bar him permanently from association with a broker or dealer, but I can not impose an industry-wide bar. 65 SEC Docket at 1982-83 (Hunt, Commissioner, concurring in part and dissenting in part) (emphasis in original) (footnote omitted). Commissioner Hunt noted that administrative law judges generally have not imposed industry-wide bars pursuant to 15(b)(6)(A) on the ground that there is no legal authority to do so. Id. at 1982-84 n.1. ======END OF PAGE 7====== also consider whether the egregiousness of respondent s misconduct demonstrates the need for a comprehensive response in order to protect the public. Id. Although the Commission, in Meyer Blinder, concluded that it was in the public interest to impose a collateral bar on the respondent in that case, it determined that it was not in the public interest to impose collateral bars on respondents in a case decided eight months earlier: Based on the record before us, we cannot conclude that the public interest requires such a collateral bar at this time. If either [respondent] were to apply to become registered as, or associated with, another class of securities professional, we would evaluate the public interest in permitting such status at that time. David Disner, 63 SEC Docket 2246, 2257 (Feb. 4, 1997). Based on the holding in Meyer Blinder, I do not consider the imposition of a collateral bar a perfunctory matter. It is necessary to consider the factors articulated by the Commission in order to determine whether it is contrary to the public interest to allow Respondnet Westerfield to serve in any capacity in the securities industry. Close scrutiny of the public interest criteria articulated in the Steadman case indicates that it is based, at least in part, upon the rationale found in SEC v. Blatt, 583 F.2d at 1334, wherein the Court stated: The *** court should consider several factors in deciding whether to issue an injunction in light of past violations. [Thereafter, the Court listed what have become known as the Steadman criteria.] The critical question in issuing the injunction and also the ultimate test *** is whether defendant s past conduct indicates that there is a reasonable likelihood of further violations in the future. To obtain injunctive relief the [U.S. Securities and Exchange] Commission must offer proof of the likelihood that the wrongdoing will recur. *** (Emphasis added.) Given the fact that the Respondent has already been sanctioned criminally and civilly, the comments of U.S. District Court Judge McKenna, and the fact the Respondent will face significant barriers should he again try to enter the securities industry, I am of the opinion that there is little likelihood of further violations in the future. Therefore, I decline to impose a collateral bar in this case. However, I find that it is in the public interest to bar Mr. Westerfield from being associated with any broker or dealer, with a right to reapply for such association five years after the date of this decision. Record Certification Pursuant to Rule 351(b) of the Commission s Rules of Practice, 17 C.F.R.  201.351(b) (1997), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on January 23, 1998. ======END OF PAGE 8====== Order Based on the findings and the conclusions set forth above, pursuant to Section 15(b)(6) of the Exchange Act, I ORDER that Ted Harold Westerfield is barred from association with any broker or dealer, with a right to reapply for such association five years after the date of this decision. It is Further ORDERED that Mr. Westerfield shall submit with any reapplication a copy of: (1) Judgment in United States v. Westerfield, 95 Cr. 219 (LLM) (U.S.D.C., S.D.N.Y.), (2) Final Judgment in SEC v. Westerfield, 94 Civ. 6997 (JSM) (U.S.D.C., S.D.N.Y.), dated May 23, 1997, and (3) this initial decision. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R.  201.360 (1997). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. ________________________ G. Marvin Bober Administrative Law Judge ======END OF PAGE 9======