Initial Decision Release No. 1392

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Administrative Proceeding

File No. 3-18061

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

In the Matter of

Retirement Surety LLC,

Crescendo Financial LLC,

Thomas Rose,

David Leeman, and

David Featherstone

Initial Decision

December 20, 2019

Appearances: Jennifer K. Vakiener, Steven Rawlings, and Jack

Kaufman for the Division of Enforcement,

Securities and Exchange Commission

Jeffrey J. Ansley and Troy (T.J.) Hales, Bell Nunnally &

Martin LLP, for Respondents Thomas Rose, David

Leeman, and David Featherstone

Before:

James E. Grimes, Administrative Law Judge

Summary

In this administrative proceeding, the Securities and Exchange

Commission alleged that Respondents David Featherstone, David Leeman,

and Thomas Rose sold securities in violation of the registration requirements

of the Securities Act of 1933 and the Securities Exchange Act of 1934. The

parties agreed to a partial settlement which included findings of fact and a

finding of liability on a no-admit, no-deny basis. I partially granted the

Division of Enforcement’s motion for summary disposition and found that

Featherstone, Leeman, and Rose should pay disgorgement and prejudgment

interest. This initial decision resolves the remaining issues. I conclude that

Featherstone, Leeman, and Rose did not act with scienter, first-tier civil

penalties are in public interest, and the disgorgement to be paid by

Featherstone and Leeman but not Rose should be reduced due to a

demonstrated inability to pay.

Procedural Background

The Commission initiated this proceeding in July 2017, when it issued an

order instituting proceedings alleging that Featherstone, Leeman, and Rose

(Respondents), together with Retirement Surety LLC and Crescendo Financial

LLC, violated Securities Act Section 5(a) and (c) by selling unregistered

securities and Exchange Act Section 15(a)(1) by acting as brokers without

registering with the Commission. In November 2017, the Commission entered

an order accepting Respondents’ settlement offer.1 The settlement order made

findings of fact and determined that they committed the charged violations.

The settlement order also resolved claims against Retirement Surety and

Crescendo based on their agreement to each be legally dissolved.2 As to

Featherstone, Leeman, and Rose, the settlement order provided for additional

proceedings to resolve whether they should be ordered to pay disgorgement,

prejudgment interest, and civil penalties.3 In these additional proceedings,

Respondents cannot contest that they violated Section 5 and Section 15 or the

settlement order’s factual findings, which must be accepted as true.4

Following issuance of the settlement order, the Division moved for

summary disposition. A previously assigned administrative law judge granted

that motion in April 2018 and issued an initial decision.5 In August 2018,

following the Supreme Court’s decision in Lucia v. SEC, the Commission

remanded all pending administrative proceedings on appeal from this office,

including this one; ordered that each proceeding must be reassigned to an

administrative law judge who did not previously participate in the matter,

Retirement Surety LLC, Securities Act Release No. 10436, 2017 WL

5437486 (Nov. 14, 2017) (Settlement Order).

Settlement Order § III.E.

Id. § IV.

Id.

Retirement Surety, Initial Decision Release No. 1250, 2018 WL 1872124

(ALJ Apr. 18, 2018).

unless the parties expressly agreed otherwise; and directed the newly assigned

judges to give each respondent the opportunity for a new hearing.6

After initial reassignment, this proceeding was reassigned to me in March

2019.7 The Division filed a new motion for summary disposition. Respondents

opposed the motion and asserted inability to pay as an affirmative defense. I

granted the Division’s motion in part.8 I determined, based on the violations

found in the settlement order, that Featherstone, Leeman, and Rose should

disgorge the commissions they received for selling the unregistered securities

and that prejudgment interest was appropriate.9 I concluded, however, that

factual disputes prevented me from deciding whether Featherstone, Leeman,

and Rose acted with scienter.10 Because scienter is a factor to be weighed in

determining civil penalties and whether disgorgement or penalties should be

reduced due to an inability to pay, I was unable to resolve those questions.11

I asked the parties to jointly propose a procedure and schedule for

resolving the remaining issues, and the parties proposed that I decide the

proceeding based on the existing written record, supplemented by additional

briefing and evidence, without an in-person hearing. Based on the parties’

agreement and the Commission’s order on the continuation of proceedings, I

adopted this proposal.12

Pending Admin. Proc., Securities Act Release No. 10536, 2018 WL

4003609, at *1, *6 (Aug. 22, 2018); see also Lucia v. SEC, 138 S. Ct. 2044 (2018).

Retirement Surety, Admin. Proc. Rulings Release No. 6475, 2019 SEC

LEXIS 294 (ALJ Mar. 4, 2019).

Retirement Surety, Admin. Proc. Rulings Release No. 6602, 2019 SEC

LEXIS 1385, at *45 (ALJ June 13, 2019).

Id. at *27–29.

Id. at *29–41.

Id. at *41, *44.

Retirement Surety, Admin. Proc. Rulings Release No. 6634, 2019 SEC

LEXIS 1794 (July 19, 2019); see Settlement Order § IV (“[T]he hearing officer

may, in his discretion, determine the issues raised in the additional

proceedings on the basis of the written record, without a hearing.”); Pending

Admin. Proc., 2018 WL 4003609, at *1 (ordering administrative law judges to

consider the parties’ “proposals for the conduct of further proceedings” in

remanded proceedings). The parties waived any claim on appeal that

In conducting this proceeding, I gave no weight to the opinions, orders, or

rulings of the administrative law judge who presided over this proceeding

before the Commission’s remand.13

Findings of Fact

The findings and conclusions in this initial decision are based on the

record and on facts officially noticed.14 After my summary disposition order,

Featherstone, Leeman, and Rose each submitted a new declaration regarding

his financial condition in support of the inability-to-pay defense. Otherwise,

the factual record is the same as the summary disposition record. For this

reason, the factual findings below are largely similar to those made in the order

on summary disposition.15 On summary disposition, however, I reviewed the

evidence in light most favorable to Respondents. In this decision, I resolve any

factual disputes by a preponderance of the evidence as the standard of proof.16

In a separate section, I make new findings about Respondents’ ability to pay.

Background

Respondents are in their 60s or 70s and at relevant times described

themselves as licensed insurance agents.17 None of them hold securities

licenses and none of them has ever been registered as a broker-dealer or

associated with a registered broker-dealer.18

The unregistered securities at issue in this proceeding were created by

William R. Schantz.19 Schantz was sanctioned and suspended in 2002 by the

National Association of Securities Dealers for brokering the sale of

determining the outcome on the basis of a written record without an in-person

hearing was error. Retirement Surety, 2019 SEC LEXIS 1794, at *1.

See Pending Admin. Proc., 2018 WL 4003609, at *1.

See 17 C.F.R. § 201.323.

See 2019 SEC LEXIS 1385, at *6–24 & nn.18–101.

See John Francis D’Acquisto, Investment Advisers Act of 1940 Release

No. 1696, 1998 WL 34300389, at *2 (Jan. 21, 1998).

Settlement Order ¶¶ 3–5. The Commission’s factual findings in Section III

of the Settlement Order are cited by paragraph number.

Id. ¶¶ 3–5, 29.

Id. ¶¶ 6, 12.

unregistered nine-month promissory notes guaranteed by insurance

companies without disclosing the sales to the NASD-member firm with which

he was associated.20 In 2006, he entered into a consent order with the New

Jersey Bureau of Securities for the same conduct.21 Schantz agreed to disgorge

$7,000 in commissions to New Jersey.22 Respondents were aware of the consent

order.23 In 2009, Schantz formed Verto Capital Management LLC.24

In late 2013, Verto began issuing 7% promissory notes that are central to

the findings and charges in the settlement order.25 From then until November

2015, Verto issued about $12.5 million of these notes.26

In May 2017, the Commission filed a civil complaint against Schantz and

Verto in the United States District Court for the District of New Jersey.27

Following settlement, the court entered judgment against Schantz and Verto,

permanently enjoining them from violating Securities Act Sections 5 and 17(a)

and, after amendment, ordering them to pay about $4.8 million in

Id. ¶ 6.

Id. I take official notice of Schantz’s consent order with the New Jersey

Bureau of Securities. See Clearing Servs. of Am., Inc., No. BOS 1796-02 (N.J.

Bureau of Sec. Jan. 18, 2006), http://www.njconsumeraffairs.gov/Actions

/20060117_ClearingServicesofAmericaIncschantz.pdf; 17 C.F.R. § 201.323.

Settlement Order ¶ 6.

Id. ¶ 27.

Id. ¶ 9.

Id. ¶¶ 9, 12.

Id. ¶12.

See Complaint, SEC v. Schantz, No. 1:17-cv-03115 (D.N.J. May 4, 2017),

ECF No. 1. I take official notice of the district court’s docket and its orders and

the parties’ filings, as reflected in the docket. See 17 C.F.R. § 201.323.

disgorgement, interest, and civil penalties.28 About $1.5 million remains due

to 36 investors, 32 of whom were Respondents’ clients.29

Respondents managed Retirement Surety from 2013 through 2015.30 It

described itself on its website as an organization “comprised of a group of ‘state

licensed partners,’ all from ‘career[s] outside of the financial services industry’

who provide investment advice for retirement planning.”31 Retirement Surety

has never been associated with a registered broker-dealer or registered as a

broker-dealer.32

Rose and Leeman also managed Crescendo, which was formed in June

2013 to broker the sale of Verto notes.33 Crescendo’s website described its

members as “licensed partners” using language almost identical to that found

on Retirement Surety’s website.34 It also has never been associated with a

registered broker-dealer or registered as a broker-dealer.35

Sales of Verto Notes

Turning to the events in this case, Schantz first contacted Leeman

sometime in 2012.36 Rose and Featherstone first met Schantz in late 2012.37

Schantz proposed to offer “a nine month note product … that caught

Settlement Agreement, Schantz (May 4, 2017), ECF No. 3; Final

Judgment as to Defendants William R. Schantz and Verto Capital

Management LLC at 1–4, Schantz (May 8, 2017), ECF No. 4; see Amended

Final Judgment as to Defendants William R. Schantz and Verto Capital

Management LLC 1, 4, Schantz (Feb. 27, 2018), ECF No. 13.

Vakiener Decl. ¶ 14.

Settlement Order ¶ 1.

Id. (alteration in original).

Id.

Id. ¶ 2.

Id. (alterations in original).

Id.

Vakiener Decl., Ex. D at 106; see Resp’ts’ App. 1509.

Resp’ts’ App. 1506, 1512; see Vakiener Decl., Ex. D. at 107.

[Respondents’] eyes, because [they] thought it was not a security.”38 And

Respondents knew that if the Verto notes were securities, they “should not be

selling” the notes because Respondents held no securities licenses.39

Respondents began selling Verto notes in November 2013.40 In order to

satisfy themselves that Verto notes were not securities, they took certain steps,

including conferring with Schantz and his attorney, John Pauciulo with the

firm Eckert Seamans Cherin & Mellott, LLC, who told Respondents that the

nine-month note “wasn’t a security because of [certain] exemptions.”41 Before

Respondents began selling Verto notes, Schantz told them that Pauciulo

opined that the notes were not securities.42 Rose testified that he, Leeman, and

Schantz also had “a couple of phone call conversations” with Pauciulo, and

“some” of those calls were before they started selling Verto notes.43

Respondents and Schantz participated in phone conference calls with Pauciulo,

during which Pauciulo told Respondents that the Verto notes were not

securities.44

As part of their “due diligence outside of the law firm” that Schantz

retained—meaning Pauciulo and Eckert Seamans—Respondents performed

internet research about what constitutes a security and exemptions from

Vakiener Decl., Ex. D. at 107.

Resp’ts’ App. 1430; see Vakiener Decl., Ex. D at 107.

Settlement Order ¶ 27.

Vakiener Decl., Ex. D. at 107; see Resp’ts’ App. 1513. During investigative

testimony, Schantz stated, “it’s pretty clear. I’ve read the code” and “it

specifically states that notes [that] would mature in nine months or less are

not … securities.” Resp’ts’ App. 1447.

Resp’ts’ App. 1431. And Leeman testified that he believed Schantz: “most

of all, we had the testimony of Mr. Schantz, who we believed would have never

engaged in selling” Verto notes “if his attorney had said you better not, it is a

security. He wouldn’t do that.” Vakiener Decl., Ex. E at 106.

Vakiener Decl., Ex. D at 137. Leeman testified that they had received

Pauciulo’s “view” that the Verto notes were not securities before sales started,

but he could not recall whether that view was expressed in a phone call or

email exchange. Vakiener Decl., Ex. E at 106; see Resp’ts’ App. 1513.

Vakiener Decl., Ex. D at 136–38.

registration, including the nine-month note exemption.45 Their research led

Respondents to conclude that a nine-month note “may or may not be a security”

depending on “different criteria.”46 When asked what criteria Respondents

found, Rose stated: “One, the fact that it is nine months; two, it said even if it

was longer than nine months, as long as the note is backed by assets of a

company, then it is not a security.”47 Based on their research, Respondents “felt

that [a Verto note] wasn’t a security.”48

Leeman emailed Schantz on November 15, 2013, to say that another

individual, Dave Valencia, told Leeman that he (Valencia) would “not

participate” because Valencia’s attorney believed the Verto notes were

securities.49 Leeman added, however, that his internet research revealed

nothing “that would call a 9 month note a security unless the laws are different

in California.”50 Schantz responded that “[w]e use very good and expensive

counsel to vet these issues and there is no problem at all with a 9 month note.

You may be correct that there is something in California …. I would be happy

to have [Valencia’s] counsel speak to ours ….”51

On November 19, 2013, Schantz emailed Leeman and attorney Thomas D.

Sherman, of Locke Lord LLP, in order to introduce the two to each other.52

Context shows that Sherman was the attorney who told Valencia that the

Verto notes were securities. Schantz said he would be “happy to discuss our 9

month note program” and added that Pauciulo, who “has an extensive

Vakiener Decl., Ex. D at 108; see id. at 110 (“[J]ust doing Google searches,

right, and trying to find SEC documents. We’re obviously not securities

licensed, so we wanted to make sure we weren’t, you know, doing anything

wrong.”); Vakiener Decl., Ex. E at 109; Vakiener Decl., Ex. F at 7917.

Vakiener Decl., Ex. D at 108, 110.

Id. at 109.

Id. at 108.

Vakiener Decl., Ex. F at 7917.

Id.

Vakiener Decl., Ex. G at 271.

securities background and is an ex investigator for the SEC,” was “[o]ur

counsel for the note program.”53

Sherman responded the next morning raising issues relating to whether

the Verto notes could qualify for certain registration exemptions.54 He also

noted that California does not have a commercial-paper exemption and asked

why the notes would not be securities under California law.55 Leeman

responded that he hoped “it’s all OK because I wrote up $75,000 today!”56 This

statement by Leeman is the earliest evidence of when an investor purchased a

Verto note brokered by Respondents. Based on a preponderance of the

evidence, November 20, 2013, was the first day Respondents sold Verto notes.

The next day, November 21, 2013, Leeman forwarded Sherman’s email to

Rose.57 Among other things, Leeman said that if Schantz and Pauciulo

convinced Sherman that “it’s OK” for them to sell the notes, “we’ve scored a big

win for future people who may question it.”58 He added that he “hope[d] it all

works out because I wrote about $85,000 yesterday.”59 There is no evidence

that Respondents had additional contact or discussions with Sherman.

At some point before November 21, 2013, Respondents also spoke to a

securities attorney in Dallas named David Shelmire.60 Leeman testified that

Respondents spoke to Shelmire before November 21, 2013, about whether

Verto notes were securities.61 And when asked whether Respondents

Id.

Id. at 269–70.

Id. at 270.

Id. at 269. He added, “Nice that we have an attorney vetting the company

for us on Dave Valencia’s nickel!!” Id.

Vakiener Decl., Ex. H at 31789.

Id.

Vakiener Decl., Ex. D at 108–10, Ex. E at 107–08.

Vakiener Decl., Ex. E at 107.

“consult[ed] any other attorney about” whether Verto notes were securities,

Rose responded that Respondents spoke to Shelmire.62

The Division asserts that Respondents did not speak to Shelmire about

whether the Verto notes were securities but instead consulted him on other

issues.63 Respondents did not disclose attorney-client communications with

Shelmire. For this reason, I will not give any weight to Respondents’

consultations with Shelmire in determining Respondents’ mental state when

selling the Verto notes.

In any event, as noted, Respondents began selling Verto notes in

November 2013.64 Over the next two years, Respondents sold 162 notes to 82

investors.65 Respondents received a 7% commission for each note they sold,

with 5% going to the individual seller and 2% to Crescendo.66

Respondents solicited investors, including their insurance clients; gave

investors offering materials; advised investors; and monitored and managed

investor repayments.67 Rose and Leeman advertised the notes on two radio

networks and directed listeners to Retirement Surety’s website.68 According to

the site, a Verto note was “A Nine Month, Short-Term Investment with

significantly higher returns than CDs or other safe money investments,” and

was “200% collateralized” by life settlement policies.69 Crescendo’s website

described an investment in the Verto notes as low risk and said the investment

was “not a speculative investment influenced by market performance or the

economy but rather an investment backed by 200% collateral with a known

value.”70

Vakiener Decl., Ex. D at 108–09.

Mot. at 8, 18.

Settlement Order ¶¶ 12, 27.

Id. ¶¶ 12, 20.

Id. ¶ 21.

Id. ¶¶ 13–20.

Id. ¶ 18.

Id.

Id. ¶ 19.

Respondents also provided investors with a brochure.71 In the brochure,

Respondents stated that investments were “fully collateralized and secured by

a collateral assignment and pledge agreement of the life settlements acquired

and owned by Verto.”72 They added that “life settlement assets will have a

minimum ratio of 2:1 or 200% (loan to face value) in life settlements acquired

and traded.”73 Respondents also stated that the investment was “not …

speculative” and “[a]ll the risk of a life settlement maturing at an accurately

determined life expectancy is born by the institutions that purchase them from

Verto.”74

In late June 2014, Leeman emailed Schantz to ask about “the difference

between” the notes that led to Schantz’s consent order “and what we have?”75

Leeman added that “it looks like” the notes Schantz previously sold “were also

9 month notes.”76

In early August 2014, Pauciulo responded to Leeman’s forwarded email

that the law in the area “is complex and can be confusing.”77 He said, however,

“We have drafted the documents with the intent to meet the requirements of

the 9 month note exemption.”78 Although Pauciulo thought the Commission or

a court would agree they are exempt, he wrote that it “would not be feasible”

to “provid[e] a formal legal opinion” on the subject.79 He also offered that they

could rely on the exemption in Securities Act “Section 4(2)” and “possibly,

Regulation D.”80 Finally, he suggested that rather than accepting commissions,

Vakiener Decl. ¶ 11.

Vakiener Decl., Ex. J at 3 (capitalization altered).

Id. (capitalization altered).

Id. at 4.

Settlement Order ¶ 27.

Id.

Vakiener Decl., Ex. I at 1.

Id.

Id. The reference to Section 4(2) is presumably a reference to Securities

Act Section 4(a)(2), which provides a registration exemption for issuer

transactions not involving any public offering. 15 U.S.C. § 77d(a)(2).

Regulation D under the Securities Act establishes exemptions for “limited

Respondents “could serve as a purchaser representative and be retained and

paid by the purchaser.”81

Verto was sometimes unable to pay investors under the terms of their

notes.82 When that happened, Respondents negotiated and arranged

“forbearance agreements” between Verto and the investors.83 Respondents

received an additional 4% commission for each forbearance agreement.84

Respondents received $565,419 in commissions for brokering Verto notes,

$89,279 for obtaining signed forbearance agreements, and an additional

$29,552 for obtaining second forbearance agreements.85 In total, this broke

down to $297,360 for Rose, $243,435 for Leeman, and $120,760 for

Featherstone.86

For purposes of this proceeding, it is established that the Verto notes were

securities and that no registration exemption applied to them.87 No

registration statement was ever filed for the offer and sale of the Verto notes.88

Respondents knew that at least five of their investors were unaccredited.89

Respondents did not provide investors with the financial information required

by Securities Act Rule 502(b)(2), and no one ever filed a Form D with the

offerings” and transactions deemed not to be public offerings. 17 C.F.R.

§§ 230.504(a), .506(a).

Vakiener Decl., Ex. I at 1.

Settlement Order ¶ 22.

Id. ¶¶ 16, 22.

Id. ¶ 22.

Id. ¶ 23.

Id. ¶ 24.

Id. ¶¶ 26, 28.

Id. ¶ 28.

Id. Rule 506 under Securities Act Regulation D deals with unregistered

offerings to accredited investors—those who meet certain income or

sophistication requirements found in Rule 501(a). 17 C.F.R. §§ 230.501(a),

.506.

Commission stating that Verto had complied with the exemptions in Securities

Act Rule 506.90

Financial Condition of Respondents

The facts concerning Respondents’ financial condition come from the

Respondents’ statements of financial condition and supporting documentation,

which were prepared in May 2017, and supplemented by Respondents’ August

2019 declarations.91

Featherstone

Featherstone is 72 years old.92 He is self-employed as a piano tuner and

rebuilder, which can be a physically demanding job and becomes more difficult

as he ages.93 A significant portion of his income comes from Social Security

benefits.94 Featherstone provides for two adult dependents who require

around-the-clock care.95 Caring for his dependents reduces the time he has to

work, although he relies on a friend to help when he needs to work or run

Settlement Order ¶ 28. Rule 502(b)(2) governs the information that must

be given to investors when securities are sold under Rule 506. 17 C.F.R.

§ 230.502(b)(2). Issuers that rely on Rule 504 or 506 use Form D to file notice

with the Commission of an offering. 17 C.F.R. § 230.503(a).

Pages 1 to 1425 of Respondents’ appendix are filed under seal. Retirement

Surety, Admin. Proc. Rulings Release No. 6526, 2019 SEC LEXIS 665 (ALJ

Mar. 28, 2019). For the same reasons, Respondents’ supplemental filings,

pages 1505 to 1514 of the appendix and accompanying exhibits, will be placed

under seal. Because Respondents’ ability to pay is one of the core issues in this

proceeding, however, I will discuss some high-level details from those

materials that do not reveal personally identifiable or otherwise sensitive

information. See Rules of Practice, 60 Fed. Reg. 32,738, 32,792–93 (June 23,

1995) (comment to adoption of 17 C.F.R. § 201.630(c)).

Resp’ts’ App. 1505.

Id. at 1506.

Id. at 1505.

Id. at 1505–06.

errands.96 Featherstone expects to incur “significant expenses” related to the

care of his dependents.97

In 2017, Featherstone’s monthly household income varied from month to

month and was approximately $11,000.98 His monthly household expenses

were about $8,600.99 Because of the need to devote additional time to the care

of his dependents, Featherstone’s household income decreased to

approximately $4,000 per month as of August 2019.100 He did not provide an

update to his monthly expenses. Featherstone reported assets of about

$1,500,000, including a home valued at $300,000, and liabilities of about

$140,000, by far the largest of which was his home mortgage, on his 2017

statement of financial condition.101

Leeman

Leeman is 70 years old.102 He is self-employed selling life insurance and a

self-published book.103 The vast majority of his household income comes from

his wife, but she is 71 years old and wishes to retire.104 Leeman has a

significant medical condition that requires expensive treatment and hinders

his ability to work.105 Since 2017, Leeman’s monthly household income has

been approximately $6,300 and his monthly expenses were about $8,000.106 In

Id.

Id. at 1506.

Id. at 1015–16.

Id. at 1016.

100

Id. at 1505–06.

101

Id. at 1012–13.

102

Id. at 6, 1508.

103

Id. at 1508.

104

Id. at 4–6, 1508.

105

Id. at 1508–09.

Id. at 1508. Leeman’s household income was substantially higher in 2016.

Id. at 5.

106

2017, his total assets were over $430,000, including a home, and liabilities

were about $200,000.107

Rose

Rose is 63 years old.108 He is a self-employed insurance salesperson.109 His

combined household income is about $6,000 per month, the majority of which

is Social Security benefits.110 Rose’s monthly expenses are about $9,200.111

Rose’s household income was significantly higher before 2017 due to changes

in his wife’s employment.112 Including two homes with a combined value of

about $650,000, Rose and his wife have over $1,000,000 in total assets and

about $320,000 in total liabilities.113

Conclusions of Law

Civil Penalties

I denied the Division’s motion for summary disposition with respect to civil

money penalties due to material questions of fact regarding whether

respondents acted recklessly. Reviewing the record again, I do not find

sufficient evidence to conclude that they were reckless. Applying the statutory

factors and considering the other sanctions imposed, I find that first-tier civil

money penalties are in the public interest.

Legal Standards

In this proceeding, the Commission may impose civil monetary penalties

if a respondent has willfully violated a provision of the Securities Act or

Exchange Act and the penalty is in the public interest.114 The settlement order

107

Id. at 1–3.

108

Id. at 1511.

109

Id.

110

Id.

111

Id. at 1512.

112

Id.

113

Id. at 420–22.

15 U.S.C. §§ 77h-1(g)(1), 78u-2(a)(1). Under Exchange Act Section

21B(a)(2), the Commission may also impose civil monetary penalties here

because this proceeding was instituted as a cease-and-desist proceeding and

114

conclusively resolves against Respondents the question of whether they

violated the Securities Act or Exchange Act and whether they acted willfully.115

That leaves the public interest and the penalty tier.

In determining whether civil penalties are in the public interest, the

Commission considers (1) whether the violation involved fraud, deceit,

manipulation, or deliberate or reckless disregard of a regulatory requirement;

(2) the harm to others; (3) any unjust enrichment; (4) the respondent’s history

of securities-law violations or criminal offenses; (5) the need for deterrence;

and (6) such other matters as justice requires.116 The maximum civil penalty

that may be imposed is based on the culpability of the respondent and is

divided into three tiers. A first-tier penalty for the period at issue in this

proceeding is limited to $7,500 and may be imposed for any violation.117 A

second-tier penalty, which has a maximum of $80,000, may be imposed if the

violation involved fraud, deceit, manipulation, or deliberate or reckless

disregard of a regulatory requirement.118 And a third-tier penalty, with a

maximum of $160,000, may be imposed if the requirements for second-tier

penalties are met and the violation resulted in either “substantial losses or

Respondents violated a provision of the Exchange Act. 15 U.S.C. § 78u-2(a)(2).

Section 21B(a)(2) does not explicitly require a finding that a Respondent acted

willfully or that the penalty be in the public interest. Id.

115

Settlement Order § III.D.

15 U.S.C. § 78u-2(c). Although the Securities Act does not contain a

statutory list of public-interest factors, the Commission considers the factors

listed under the other securities statutes when assessing the public interest

under the Securities Act. See Thomas C. Gonnella, Securities Act Release

No. 10119, 2016 WL 4233837, at *14 & n.70 (Aug. 10, 2016), pet. argued,

No. 16-3433 (2d Cir. Sept. 9, 2019); see generally 15 U.S.C. § 77h-1.

116

15 U.S.C. §§ 77h-1(g)(2)(A), 78u-2(b)(1); 17 C.F.R § 201.1001, tbl.I. Higher

maximum penalty amounts apply to conduct occurring after November 2, 2015.

See Adjustments to Civil Monetary Penalty Amounts, 84 Fed. Reg. 5122 (Feb.

20, 2019). Although the last Verto notes were sold in November 2015,

Settlement Order ¶ 12, and Respondents earned commissions on forbearance

agreements in 2016, id. ¶ 24, the vast majority of commissions were earned

before November 2, 2015. Because the Division did not make any argument to

the contrary, I will use the maximum civil penalty amounts in effect from

March 6, 2013, to November 2, 2015.

117

118

15 U.S.C. §§ 77h-1(g)(2)(B), 78u-2(b)(2); 17 C.F.R § 201.1001, tbl.I.

created a significant risk of substantial losses to other persons” or “substantial

pecuniary gain to the person who committed the act or omission.”119

There is no allegation that Respondents’ conduct involved fraud, deceit, or

manipulation. The parties dispute whether Respondents acted in reckless

disregard of a regulatory requirement. Recklessness is not a “heightened form

of ordinary negligence” but requires “an ‘extreme departure from the standards

of ordinary care … which presents a danger of misleading buyers … that is …

so obvious that the actor must have been aware of it.’”120 For example, the

“‘egregious refusal to see the obvious, or to investigate the doubtful’ … is strong

evidence of recklessness.”121

Parties’ Arguments

The Division argues that third-tier civil penalties should be imposed

because Respondents recklessly disregarded the registration requirements of

the Securities Act and Exchange Act.122 In support of this, the Division

contends that Respondents harbored concerns that the Verto notes could be

securities and were on notice after hearing from Valencia that he would not

participate due to his attorney’s opinion that the Verto notes were securities.123

The Division also argues that Respondents could not have reasonably relied on

the information they received from Schantz and Pauciulo—who, as Verto’s

attorney, was not a disinterested party.124 According to the Division,

Respondents began selling the notes before hearing from Pauciulo, and

Pauciulo stated that he could not provide a formal legal opinion.125 The

119

15 U.S.C. §§ 77h-1(g)(2)(C), 78u-2(b)(3); 17 C.F.R § 201.1001, tbl.I.

SEC v. Steadman, 967 F.2d 636, 641–42 (D.C. Cir. 1992) (quoting

Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)).

120

Bernerd E. Young, Securities Act Release No. 10060, 2016 WL 1168564,

at *17 (Mar. 24, 2016) (quoting Chill v. General Elec. Co., 101 F.3d 263, 269

(2d Cir. 1996)), argued, No. 16-1149 (D.C. Cir. Dec. 16, 2019).

121

122

Div. Supp. Reply at 2

123

Id. at 2–3; Settlement Order ¶ 27.

124

Div. Supp. Reply at 3.

125

Id.

Division further contends that Respondents’ sale of the notes created a

substantial risk of loss to investors.126

Respondents assert that they acted in good faith. Because they were

inexperienced in securities matters, they relied on others, including Schantz

and Pauciulo, who repeatedly told them that the Verto notes were not

securities.127

Recklessness

The evidence does not show that Respondents recklessly disregarded the

registration requirements of the securities laws. Respondents knew they could

not sell securities.128 And they were interested in the Verto notes because they

believed the notes were not securities under the nine-month exemption.129

Although Respondents did some research on their own, because they did not

have a securities background, they primarily relied on others’ advice.130 In this

126

Id. at 4–5.

127

Supp. Resp. at 7.

128

See Vakiener Decl., Ex. D. at 107.

129

See id.

One court has observed that because “securities laws are ‘complex and

often uncertain’” a “‘layman [i.e., a non-lawyer] has no real choice but to rely

on counsel.’” Howard v. SEC, 376 F.3d 1136, 1147 n.20 (D.C. Cir. 2004)

(quoting Douglas W. Hawes & Thomas J. Sherrard, Reliance on Advice of

Counsel as a Defense in Corporate and Securities Cases, 62 Va. L. Rev. 1, 36

(1976) (alteration in original)).

130

Although a securities attorney familiar with the history of the nine-month

exemption might think otherwise, the statute’s plain language could be read

to support a blanket exception for all nine-month notes. 15 U.S.C. §§ 77c(a)(3)

(listing as exempted securities any note “which has a maturity at the time of

issuance of not exceeding nine months”); 78c(a)(10) (“The term ‘security’ …

shall not include … any note … which has a maturity at the time of issuance

of not exceeding nine months ….”). But see Reves v. Ernst & Young, 494 U.S.

56, 63 (1990) (“[T]he phrase ‘any note’ should not be interpreted to mean

literally ‘any note,’ but must be understood against the backdrop of what

Congress was attempting to accomplish in enacting the Securities Acts.”); id.

at 73 (Stevens, J., concurring) (noting that the courts of appeals “have been

unanimous in rejecting a literal reading” of the nine-month-note exemption);

proceeding, Respondents did not assert a formal advice of counsel defense, but

“reliance on the advice of counsel need not be a formal defense; it is simply

evidence of good faith,” and therefore “a relevant consideration in evaluating

… scienter.”131

Given Schantz’s position and disciplinary background, if Respondents had

relied solely on his word that the Verto notes were not securities, their reliance

would have been misplaced and they consequently might have been reckless to

sell the notes. But the same is not true about Respondents’ reliance on

Pauciulo. Respondents knew that he was “from a very large and reputable law

firm in Philadelphia,”132 and that he had extensive securities experience.133

Rose and Leeman communicated with Pauciulo and received his assurance

that the Verto notes were exempt before starting sales.134 When Leeman raised

questions about the exemption in 2014, Pauciulo again advised that the notes

were created to meet the exemption’s requirements.135 It is true that Pauciulo

conditioned his analysis with the statement that “a formal legal opinion”

regarding the Verto notes was not “feasible.”136 Although this might have been

a red flag to experienced securities practitioners, Respondents were not

experienced. And while the Division remarks on Pauciulo’s statement that he

could not “provid[e] a formal legal opinion,” it has neither explained the

significance Respondents as laymen should have attached to this qualifier nor

denied that Pauciulo was, in fact, an experienced securities attorney.

Respondents were unwise and perhaps overly credulous, but relying on

Pauciulo’s advice was not an egregious refusal to investigate the doubtful.137

Interpretation of Section 3(a)(3), 26 Fed. Reg. 9158, 9159 (Sept. 20, 1961)

(explaining the reach of the nine-month exemption).

131

Howard, 376 F.3d at 1147.

132

Vakiener Decl., Ex. E. at 105.

133

Vakiener Decl., Ex. G at 271.

134

Vakiener Decl., Ex. D at 136–38; Ex. E at 106; Resp’ts’ App. 1513.

135

Vakiener Decl., Ex. I at 1.

136

Id.

Some securities professionals, including experienced registered

representatives, have a duty to investigate “‘where there are any unusual

factors’” and the failure to do so in the face of an “abundance of red flags” is

evidence of extreme recklessness despite the approval of a compliance officer.

See Graham v. SEC, 222 F.3d 994, 1005–06 (D.C. Cir. 2000) (quoting Sharon

137

Although there were some red flags, the evidence does not show that it was so

obvious the notes were securities that Respondents must have known it.

Respondents, therefore, did not act with scienter when they failed to register

as brokers and sold unregistered securities. The first public interest factor

weighs in Respondents’ favor.

Other Factors

Regarding harm to others, the Verto notes did not perform as advertised,

causing some investors to lose money. The fair fund established in SEC v.

Schantz is evidence of the significant overall harm caused by the Verto notes,

and as of April 2019 Schantz still owed $1.5 million to investors under the

terms of his judgment.138 Respondents’ conduct contributed to this harm,

although their role in selling the notes based on Schantz’s assertions was not

as significant as Schantz’s role in creating the notes and making unlikely

assertions about them. Twenty-three investor customers of Leeman and Rose,

who invested about $1.65 million or roughly 20% of the investments brokered

by Leeman and Rose, submitted declarations stating that they were “happy

M. Graham, Exchange Act Release No. 40727, 1998 WL 823072, at *6 n.30

(Nov. 30, 1998)). But Respondents were inexperienced and unregistered—a

violation of the securities laws for which they are liable. While they perhaps

should have known better, in their position not further investigating the notes

was not extremely reckless. Cf. id. at 1006. Indeed, in another case involving

the sale of unregistered securities, the Commission held that consulting with

others, including an attorney, “whom [the respondent] reasonably regarded as

more sophisticated … than … himself ” was a strong mitigating factor that

weighed in favor of a minor sanction. Charles C. Carlson, Exchange Act

Release No. 14246, 1977 SEC LEXIS 162, at *20 (Dec. 12, 1977).

Vakiener Decl. ¶ 14; Amended Final Judgment as to Defendants William

R. Schantz and Verto Capital Management LLC, Schantz (Feb. 27, 2018), ECF

No. 13. Schantz and the Commission have continued to litigate over the

unsatisfied balance of the consent judgment. See Order, Schantz (July 1, 2019),

ECF No. 28 (holding Schantz in contempt); Consent Order, Schantz (Sept. 23,

2019), ECF No. 45 (appointing an agent to sell a property).

138

with the services provided.”139 Of those 23 investors, 11 had received a full

return of principal and interest.140

Respondents received large commissions—7% on the original sales and 4%

on the forbearance agreements. These commissions constituted unjust

enrichment. On the other hand, Respondents do not have any history of

violations of the securities laws or prior disciplinary history. And given

Respondents’ age, current employment, suspensions from industry association,

and cease-and-desist order, the need for specific deterrence is minimal and the

need for general deterrence is adequately covered by the other sanctions

imposed.

As to “such other matters as justice requires,” Respondents’ liability

hinges on whether the Verto notes were securities. Although Respondents now

concede—and the settlement order confirms—that the notes were securities,

Respondents were not reckless in determining that the notes were not

securities.141 I cannot ignore, however, the fact that Respondents “held

themselves out as financial advisors providing specialized knowledge on

investments,” when they lacked any specialized knowledge.142 And although

they were aware of Schantz’s background, Respondents accepted his unlikely

assertions about Verto notes at face value without further investigation and

without supporting documentation.143 They therefore told prospective

investors that Verto notes were non-speculative, low risk and “200%

Resp’ts’ App. 1451–60, 63–78, 81–82, 1487–1504; see Settlement Order

¶ 24.

139

Resp’ts’ App. at 1451, 1453, 1455, 1457, 1471, 1473, 1477, 1489, 1493,

1495, 1497.

140

Respondents’ situation is similar to that in Carlson, where the

Commission held that although Carlson sold unregistered securities, his

liability was mitigated by the fact that he relied on the advice of others,

including an attorney, “whom he reasonably regarded as more sophisticated …

than he was.” 1977 SEC LEXIS 162, at *20; see id. at *20 n.40 (stating that

although “those assurances [were] incorrect[,] … we cannot shut our eyes to

the fact that some” authoritative sources “appear[ed] to have agreed with …

the assurances on which Carlson relied.”).

141

142

Settlement Order ¶ 25; Vakiener Decl., Ex. E at 112.

143

Vakiener Decl., Ex. D at 76, 89–90.

collateralized” based only on what Schantz told them.144 So, while Respondents

did not act with scienter in violating Section 5 and Section 15, their actions

leave much to be desired.

Conclusion

Because Respondents did not act with scienter, only first-tier civil

penalties may be imposed. Respondents’ misconduct led to serious harm to

investors and Respondents received hundreds of thousands in unjust

enrichment. Weighing Respondents’ conduct and the other statutory factors,

and Respondents’ ability to pay, which is addressed below, a civil penalty

within the first-tier range is appropriate and in the public interest. I will order

each Respondent to pay a $3,750 civil penalty.

Ability to Pay

In determining whether disgorgement, interest, or monetary penalties are

in the public interest, the Commission or its administrative law judges may

consider evidence concerning ability to pay.145 Considering this evidence is an

exercise of discretion, and even if the Commission considers ability to pay, it

“is only one factor … and is not dispositive.”146 Respondents bear the burden of

proving their inability to pay.147

The Commission has not provided extensive guidance concerning inability

to pay, but it has imposed penalties despite a demonstrated inability to pay

when the misconduct at issue is “sufficiently egregious.”148 I will apply a twopart inquiry in determining whether to reduce monetary sanctions due to an

inability to pay.149 First, I will consider whether any Respondent has

144

Settlement Order ¶¶ 18–19; Vakiener Decl., Ex. D at 76, 89–90.

17 C.F.R. § 201.630(a); see 15 U.S.C. §§ 77h-1(g)(3), 78u-2(d). Because the

Division has not disputed Respondents’ ability-to-pay evidence, I take it at face

value.

145

Thomas C. Bridge, Securities Act Release No. 9068, 2009 WL 3100582, at

*25 (Sept. 29, 2009), pet. denied sub nom. Robles v. SEC, 411 F. App’x 337 (D.C.

Cir. 2010).

146

Philip A. Lehman, Exchange Act Release No. 54660, 2006 WL 3054584, at

*4 & nn.29–30 (Oct. 27, 2006).

147

148

Bridge, 2009 WL 3100582, at *25; Lehman, 2006 WL 3054584, at *4.

149

See Retirement Surety, 2019 SEC LEXIS 1385, at *42–44.

demonstrated an inability to pay in whole or in part. Second, if a Respondent

has demonstrated an inability to pay, I will consider whether I should credit

that in view of the seriousness or egregiousness of the violation in relation to

the Commission’s mission of “‘protecting investors[,] … safeguarding the

integrity of the markets,’” and “making securities law violations

unprofitable.”150

Featherstone

Although Featherstone reported significant assets on his statement of

financial condition, review of that document shows that his net assets are not

as significant as they appear.151 Since he submitted that statement, his income

has decreased substantially and he has an additional adult dependent.

Featherstone’s income is now insufficient to cover his monthly expenses, and

his long-term earning potential is low.

I previously determined that Featherstone should disgorge $120,760.152

While I did not calculate prejudgment interest, it is likely to be significant—

more than $13,000.153 Comparing this amount to Featherstone’s current

financial condition, he has established an inability to pay the entire amount.

Turning to the second part of the inquiry, while the violations are serious,154

Gordon Brent Pierce, Securities Act Release No. 9555, 2014 WL 896757,

at *19 (Mar. 7, 2014) (quoting SEC v. Rind, 991 F.2d 1486, 1491 (9th Cir. 1993))

(describing the Commission’s mission in the course of explaining the purpose

of disgorgement), pet. denied, 786 F.3d 1027 (D.C. Cir. 2015).

150

In his May 2017 statement of financial condition, Featherstone declared

that his net worth exceeded $1 million. Resp’ts’ App. at 1012–13. His largest

asset, however, was identified as the “Cash Surrender Value of Insurance.” Id.

at 1012. But in his explanation of assets, Featherstone stated that his

insurance policies were “beneficial to [his] family as stated in the policy,” and

“[b]oth are term, not permanent life.” Id. at 1013. Featherstone’s next biggest

asset is his home, but it is partially encumbered by a mortgage and is the home

for two dependents who depend on him to provide constant care. Id. at 1012–

13. One of Featherstone’s dependents is also the beneficiary of a trust that, in

2017, provided annual income of about $3,000. Id. at 1419–20.

151

152

Retirement Surety, 2019 SEC LEXIS 1385, at *27.

153

See id. at *27 n.106.

The registration requirements in Securities Act Section 5 “are a keystone

of the entire system of securities regulation, and set forth basic requirements

for the protection of investors.” Sirianni v. SEC, 677 F.2d 1284, 1289 (9th Cir.

154

Featherstone’s conduct was not egregious. As discussed, he did not act with

scienter. It is appropriate to credit his inability to pay.

Because Featherstone’s monthly cash flow is negative and not likely to

increase in the future, and because of the economic challenges he faces

resulting from the fact he must provide long-term, continuous care for two

dependents, it is appropriate to discount his disgorgement amount. But

because of the importance of Section 5 and Section 15, and because of the

manner in which Respondents held themselves out as financial advisors and

accepted and repeated Schantz’s claims, I cannot waive the entire

disgorgement amount. I will discount it by half, for a final disgorgement figure

of $60,380, plus prejudgment interest.155

Leeman

Leeman reported a net worth of about $240,000, most of which is equity

in his home.156 His monthly household expenses exceed his monthly household

income, and this income is likely to decrease in the future considering his

significant medical condition and his and his wife’s age. I previously

determined that Leeman should disgorge $243,435, and prejudgment interest

is likely to exceed $26,000.157 I find that Leeman has established an inability

to pay. Leeman did not act with scienter, and his conduct was not otherwise

egregious. I will credit his inability to pay.

Leeman’s financial condition is precarious and unlikely to improve in the

future. Nevertheless, Leeman is not impecunious, and the seriousness of the

violations and his behavior requires that some monetary sanction be imposed.

Balancing these factors with Leeman’s health, income, and expenses, I reduce

1982). Similarly, the registration requirement in Exchange Act Section 15 “is

‘of the utmost importance in effecting the purposes of the Act’ because it

enables the SEC ‘to exercise discipline over those who may engage in the

securities business and it establishes necessary standards with respect to

training, experience, and records.’” SEC v. Benger, 697 F. Supp. 2d 932, 944

(N.D. Ill. 2010) (quoting Celsion Corp. v. Stearns Mgmt. Corp., 157 F. Supp. 2d

942, 947 (N.D. Ill. 2001)).

Prejudgment interest will be calculated from January 1, 2017, as

Respondents’ earned Commissions “through 2016.” Settlement Order ¶ 24.

155

156

Resp’ts’ App. at 1–3.

157

Retirement Surety, 2019 SEC LEXIS 1385, at *27 & n.106.

the disgorgement amount to $24,343.50, or 10% of the determined total, plus

prejudgment interest.

Rose

Rose is the youngest of the Respondents and in the best financial

condition. Although he reported that his expenses currently exceed his

household income, he has the highest prospects for increasing income in the

future. Rose owns two homes with a combined value of about $650,000, he and

his wife have over $1,000,000 in total assets and about $320,000 in total

liabilities.158 I previously determined that Rose should disgorge $297,360 and

prejudgment interest is likely to exceed $31,000.159 Comparing this amount to

Rose’s financial condition, I find that he has not demonstrated an inability to

pay.

Although Rose reported negative monthly cash flow, his net worth is

significant, and it appears likely that his household income will increase (or

his expenses will decrease) in the future. He and his wife have not yet reached

retirement age. For these reasons, I find that Rose can pay the amount of the

disgorgement ordered, plus prejudgment interest.160

Order

Under Rules of Practice 322 and 630(c), I ORDER that pages 1505 to 1514

of Respondents’ appendix and accompanying exhibits be maintained under

seal.

Under Section 8A(e) of the Securities Act of 1933 and Sections 21B(e) and

21C(e) of the Securities Exchange Act of 1934, David Featherstone must

DISGORGE $60,380; David Leeman must DISGORGE $24,343.50; and

Thomas Rose must DISGORGE $297,360. Respondents must pay prejudgment

interest on the amount of disgorgement imposed. The prejudgment interest

owed will be calculated from January 1, 2017, to the last day of the month

preceding the month in which payment of disgorgement is made. Prejudgment

interest will be computed at the underpayment rate of interest established

158

Resp’ts’ App. at 420–22.

159

Retirement Surety, 2019 SEC LEXIS 1385, at *27 & n.106.

Cf. Robert L. Burns, Advisers Act Release No. 3260, 2011 WL 3407859, at

*12 (Aug. 5, 2011) (holding that, where a respondent’s net worth exceeded the

total amount of disgorgement, penalties, and interest, the respondent had not

shown an inability to pay).

160

under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(2),

and compounded quarterly.

Under Section 8A(g) of the Securities Act of 1933 and Section 21B(a)(1)–

(2) of the Securities Exchange Act of 1934, David Featherstone, David Leeman,

and Thomas Rose must each PAY A CIVIL MONEY PENALTY of $3,750.

Under Rule of Practice 1100, I ORDER that any funds recovered by

disgorgement or civil penalties be placed in a fair fund for the benefit of

investors harmed by the violations.

Payment of civil money penalties, disgorgement, and interest must be

made no later than 21 days following the day this initial decision becomes final,

unless the Commission directs otherwise. Payment must be made in one of the

following ways: (1) transmitted electronically to the Commission, which will

provide detailed ACH transfer/Fedwire instructions upon request; (2) direct

payments from a bank account via Pay.gov through the SEC website at

http://www.sec.gov/ofm; or (3) by certified check, bank cashier’s check, bank

money order, or United States postal money order made payable to the

Securities and Exchange Commission and hand-delivered or mailed to the

following address alongside a cover letter identifying the Respondent and

Administrative Proceeding No. 3-18061: Enterprise Services Center, Accounts

Receivable Branch, HQ Bldg., Room 181, AMZ-341, 6500 South MacArthur

Blvd., Oklahoma City, Oklahoma 73169. A copy of the cover letter and

instrument of payment must be sent to the Commission’s Division of

Enforcement, directed to the attention of counsel of record.

This initial decision will become effective in accordance with and subject

to the provisions of Rule 360.161 Under that rule, a party may file a petition for

review of this initial decision within 21 days after service of the initial decision.

Under Rule of Practice 111, a party may also file a motion to correct a manifest

error of fact within ten days of the initial decision.162 If a motion to correct a

manifest error of fact is filed by a party, then a party has 21 days to file a

petition for review from the date of the order resolving such motion to correct

a manifest error of fact.

The initial decision will not become final until the Commission enters an

order of finality. The Commission will enter an order of finality unless a party

files a petition for review or motion to correct a manifest error of fact or the

Commission determines on its own initiative to review the initial decision as

161

See 17 C.F.R. § 201.360.

162

See 17 C.F.R. § 201.111.

to a party. If any of these events occur, the initial decision will not become final

as to that party.

_______________________________

James E. Grimes

Administrative Law Judge

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.