RRBDLAW.COM -- 917-520-2836 -- YOU CAN WRITE BUT YOU CAN'T HIDE

YOU CAN WRITE BUT YOU CAN'T HIDE

As a registered representative you might be looking to earn a little extra cash, especially with the holiday season upon us, but beware of the costly pitfalls. Read about this recent case in which a barred broker got himself into even more trouble . . . and he didn't even sell one share of stock!

Background

From 1987 to 1990 Maynard Matt Smith ("Smith") had been a registered representative. In 1993, the National Association of Securities Dealers ("NASD") had censured Smith, fined him $50,000, barred him from association with any member of the NASD in any capacity, and ordered him to make restitution of $56,100 for violating the suitability provisions of the NASD Rules of Fair Practice.

In 1994, Smith and another individual (the "Publisher") began doing business as Katapult Consulting. From June 1997 through June 1998, Smith received approximately $4,500 per month from the Publisher for researching public companies and writing and editing articles for inclusion in the newsletters. Smith was not directly involved in the circulation or publication of the investment newsletters.

Bells, Whistles, and Red Lights

The Payment

In October 1997, following several months of negotiations, Autobond Acceptance Corp. ("Autobond") entered into a written agreement with Smith and the Publisher for consulting and public relations services. Under the agreement, Autobond agreed to pay each of them $2,500 per month for eighteen months.

Before you begin negotiations with a third party immediately seek professional counsel as to the ramifications of the proposed venture.

Never sign any written agreement involving a public company or consulting services without professional counsel. Remember, if you are registered, such dealings will likely need to be disclosed to your firm and its prior written approval obtained.

Payment from an issuer has serious ramifications and should be carefully considered before being accepted.

The Recommendation

Smith reviewed and edited one of the Publisher's investment newsletters, dated September 8, 1997, recommending Autobond's stock for purchase. The recommendation in this newsletter states, among other things, that "whether it's by internal growth or a takeover, we believe Autobond Acceptance Corp. represents an enormous investment opportunity to travel in the fast lane."

The Non-Disclosure

At the time Smith reviewed and edited the Publisher's September 8, 1997 newsletter, Smith and the Publisher anticipated that they would receive $2,500 per month in compensation from Autobond. This newsletter did not disclose that Smith and the Publisher anticipated compensation or the amount of anticipated compensation.

THE SEC PROCEEDINGS

On October 27, 1998, the Securities and Exchange Commission ("SEC") instituted Cease and Desist proceedings under Section 8A of the Securities Act of 1933 against Smith and in response to those proceedings, he submitted an Offer of Settlement, which the SEC accepted. (In the Matter of Maynard Matt Smith, Order Making Findings and Ordering Respondent to Cease and Desist, Rel. No. 33-7610, Admin. Proc. 3-9770, November 12, 1998).

The SEC determined that by reviewing and editing the Publisher's September 8, 1997 investment newsletter, Smith was a cause of the Publisher's violations of Section 17(b) of the Securities Act.

Section 17(b), in pertinent part,

makes it unlawful for any person to publish . . . or circulate any notice, circular, advertisement . . . or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer . . . without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

The Publisher violated Section 17(b) by publishing the September 8, 1997 newsletter without disclosing that Smith and the Publisher anticipated receiving compensation or the amount of the anticipated compensation from Autobond. Similarly, Smith was a cause of Section 17(b) violations, due to an act or omission that Smith knew or should have known would contribute to such violations. Accordingly, pursuant to Section 8A of the Securities Act Smith was ordered to cease and desist from committing or causing any violation and any future violation of Section 17(b) of the Securities Act.

One of the problems with SEC Orders accepting settlement proposals is that they are often vague and tend to leave out many details (which is frequently the result of negotiations or discussions between the Staff and the Respondent). Consequently, the reader is left with the task of divining the tea leaves.

Smith is not described as actually having published the newsletter. It is stated that the Publisher publishedthe newsletter and that Smith "was a cause of the Publisher's violations." However, the Order notes that both the Publisher and Smith had been in business since 1994 as Katapult Consulting. Further, there is no reference to any settlement offer from the Publisher, and one may assume that either the SEC is still pursuing that matter or that the charges were confined to Smith. Consequently, Smith's prompt cooperation may have resulted in his merely being subjected to a Cease and Desist, without any further sanctions.

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