UPDATE: Working The SEC System From Prison

March 24, 2016

Today's BrokeAndBroker.com Blog is an update of "Working The SEC System From Prison" (BrokeAndBroker.com Blog, May 1, 2015).

You had your day in court. You lost. You didn't plead guilty to the criminal charges but chose to throw the dice at trial. Unfortunately, a jury convicted you. Now imagine that you were in the brokerage or investment advisory business and the underlying crimes involved frauds involving your advisory role and financial institutions. How difficult do you think it would be for the Securities and Exchange Commission to bar you from the biz? How long a process do you think would be involved?  Today's BrokeAndBroker.com Blog might surprise you.

Case in Point

From 1999 through August 2013, David R. Wulf was registered with Moloney Securities Company, Inc., which was both a broker-dealer and an SEC-only registered investment adviser. Starting in 1986 and running through August 2013, Wulf was also the Chief Executive Officer and an advisory representative for Wulf Bates & Murphy, Inc. In addition to the above affiliations, Wulf was registered in additional broker-dealer and/or investment adviser capacities with four other firms from 1978 through 1986.

Order Instituting Proceedings

For starters, consider the presentation by the Securities and Exchange Commission ("SEC") of the following facts as set forth in In the Matter of David R. Wulf (Order Instituting Administrative Proceedings and Notice of Hearing, '34 Act Rel. No. 74207; Investment Adv. Act Release No. 4020; Admin. Proc. File No. File No. 3-16374 / February 4, 2015):

B. RESPONDENT'S CRIMINAL CONVICTION 

1. On August 22, 2013, a federal jury found Wulf guilty of eighteen counts of mail fraud, wire fraud, conspiracy to commit mail fraud affecting a financial institution, and conspiracy to commit wire fraud affecting a financial institution in violation of 18 U.S.C. §§ 1343, 1344, and 1349 before the United States District Court for the Eastern District of Missouri in U.S. v. Sutton et al., Case No. 4:09-cr-00509-JCH-6. 

2. Wulf's conviction arose from his role as an investment adviser for National Prearranged Services, Inc. ("National Prearranged") through Wulf Bates. National Prearranged was in the business of selling contracts for prearranged funeral services. As National Prearranged's designated investment adviser, Wulf established trusts for these prearranged funeral services and maintained certain authority over the assets maintained in these trusts. The trustees were financial institutions and/or insurance companies.

3. The indictment against Wulf alleged, inter alia, that from approximately some time before 1992 and continuing until on or about May 14, 2008, Wulf conspired with his codefendants and others regarding a scheme to defraud purchasers and trustees of National Prearranged's contracts and trusts. Moreover, Wulf was Chief Executive Officer of a registered investment adviser and associated with a dually registered broker-dealer and investment adviser  during the period of his misconduct. The underlying conduct that gave rise to Wulf's conviction includes, but is not limited to: (i) Wulf's failure to serve as an independent investment adviser for National Prearranged as mandated under state law and a binding consent decree; and (ii) Wulf enabling National Prearranged, and related entities and individuals, to assume the full power to administer, manage, control, remove, and/or use the assets in the preneed funeral trusts established by National Prearranged for their own benefit. Consequently, Wulf knowingly allowed nearly $600,000,000 of the money invested by purchasers to be misdirected for the use by National Prearranged, and related entities and individuals, for their own benefit. The indictment further alleged that Wulf and his co-defendants committed various federal offenses incidental to the misconduct described above including, but not limited to, conspiracy, mail fraud and wire fraud.

4. On November 18, 2013, the Court entered the judgment against Wulf based on the jury verdict. The Court sentenced Wulf to a prison term of 120 months followed by five years of supervised release. The Court further ordered Wulf to make restitution in the amount of $435,515,234.

Scheduling the Hearing

All of which prompted the issuance of the OIP and set the stage for the SEC to determine whether it was "necessary and appropriate in the public interest" to ultimately bar Wulf, among other possible actions. Thereafter, on February 6, 2015, a hearing was scheduled for March 2, 2015. In the Matter of David R. Wulf (Order Scheduling Hearing, Admin Proc. Ruling Rel. No. 2289; Admin. Proc. File No. File No. 3-16374 / February 6, 2015).

Postponing the Hearing

Alas, on February 18, 2015, the wheels of justice grind to a halt and the Administrative Law Judge ("ALJ") handling the matter ordered the March 2nd hearing postponed and scheduled a prehearing conference for March 10, 2015.  In the Matter of David R. Wulf (Order Postponing Hearing and Scheduling Prehearing Conference, Admin Proc. Ruling Rel. No. 2325; Admin. Proc. File No. File No. 3-16374 / February 18, 2015).

Setting the Date for Briefs and Motions

On March 10, 2015, the ALJ confirmed the parties' briefing schedule for motions for summary disposition of the matter, with an end-date of May 19, 2015 for replies in opposition. In the Matter of David R. Wulf (Order Following Prehearing Conference, Admin Proc. Ruling Rel. No. 2396; Admin. Proc. File No. File No. 3-16374 / March 10, 2015). On April 6, 2015, the SEC's Division of Enforcement filed a Motion for Summary Disposition.

Denying Summary Disposition

All of which brings us to April 27, 2015, and yet another rung on the procedural ladder.  The ALJ's response to Enforcement's Motion for Summary Disposition was a denial without prejudice.  In the Matter of David R. Wulf (Order Denying Without Prejudice The Division's Motion For Summary Disposition, Admin Proc. Ruling Rel. No. 2590; Admin. Proc. File No. File No. 3-16374 / April 27, 2015). I call your attention to this explanation as set forth in the Order Denying:

[A]lthough a guilty plea constitutes an admission of the facts alleged in an indictment, see United States v. Broce, 488 U.S. 563, 569-70 (1989), United States v. Vong, 171 F.3d 648, 654 (8th Cir. 1999), a general jury verdict of guilt establishes only those "issues which were essential to the verdict," Emich Motors Corp. v. Gen. Motors Corp., 340 U.S. 558, 569 (1951). Consistent with the foregoing, the Commission has held that a jury verdict does not establish the facts alleged in an indictment. Gary L. McDuff, Exchange Act Release No. 74803, 2015 WL 1873119, at *3 (Apr. 23, 2015).

Given the degree to which to Division relies on Mr. Wulf's second superseding indictment, the Division's motion for summary disposition is DENIED without prejudice to renewal by May 11, 2015. If the Division renews its motion, it may supplement its motion with additional evidence, including the transcript of Mr. Wulf's sentencing hearing and the district court's explanation for the sentence it imposed. The deadline for Mr. Wulf to file an opposition to the Division's motion is extended to May 26, 2015. If Mr. Wulf files an opposition, the Division may file a reply by June 8, 2015.

In the event the Division foregoes the opportunity to renew its motion, a hearing will be held in this matter on June 8, 2015, in Washington, D.C. . . .

Bill Singer's Comment

Nearly two years ago, a federal jury found Wulf guilty of 18 counts of mail fraud, wire fraud, conspiracy to commit mail fraud affecting a financial institution, and conspiracy to commit wire fraud affecting a financial institution. As a result, he was sentenced to 120 months plus supervised release and further ordered to make over $435,000 in restitution. t. On February 4, 2014, Wulf was committed to the custody of the US Bureau of Prisons in Terre Haute, Indiana.

Starting in February 2015, a year after Wulf's incarceration, the SEC attempts to discharge its duty to protect the public and Enforcement seeks to bar Wulf from the industry, or so it would appear. It's difficult to make an argument that Wulf poses no risk to the public given his conviction. Moreover, since he's going to be cooling his heels for a ten-year-sentence in federal prison, I doubt that most rational folks would expect him to remain registered or to get registered -- but, perhaps, there is a chance that some firm would hire him or that he could set up such an operation from prison. Be that as it may, what the hell is taking the SEC so long to bang this guy out of the biz?

I'm not actually wagging a finger at any of the players mentioned in this article. I fully understand that Wulf wants to pursue and/or exploit every legal remedy available to him, and as a lawyer, I fully respect that the law gives him many such opportunities. Similarly, the ALJ is blameless here because he is simply interpreting and applying the law and the SEC's rules as he is required to do -- and his rulings conform to many years of similar, prior decisions. Finally, Enforcement would be remiss if it did not pursue a Summary Disposition and seek to preserve the already limited and taxed Staff resources.

Still . . .  Wulf had his day in court. He did't plead out. He was convicted after trial by a federal jury. He was sentenced to a hefty 120 months in prison. Given that resume, I can't fathom why there isn't a quicker way for the SEC to bang him out of the business. If he were convicted of felonies not involving frauds and not related to the very nature of his services in the brokerage and advisory business, that's one thing; however, that's not his case. We need a more efficient way to handle these administrative matters when a convicted felon is sitting in prison because the present system is wasting the SEC's limited resources and time and not timely protecting the public.

UPDATE March 2016

Initial Decision

On June 25, 2015, the ALJ granted Enforcement's Motion for Summary Disposition and barred Wulf from from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in an offering of penny stock. In the Matter of David R. Wulf (Initial Decision, Admin. Proc. File No. File No. 3-16374 / June 25, 2015). As explained in the Initial Decision:

Wulf's underlying conviction concerned prearranged funeral contracts. Because of the
potential for abuse presented by such contracts, see Anne Tergesen, When Prepaid Funeral Plans Are Wealth Killers, Wall St. J., May 22, 2010, available at http://on.wsj.com/1zDb9H8 (last visited June 23, 2014), their sale is subject to varying degrees of regulation by the states,see Judith A. Frank, Preneed Funeral Plans: The Case For Uniformity, 4 Elder L.J. 1, 2-4 (1996). Typically, "states expressly require the creation of a trust account in connection with the sale of a preneed funeral contract." Id. at 7. Because "[t]he trustee has a fiduciary duty to the beneficiary of the trust," it is thought that use of a trust will "protect the funds from abuse." Id. at 8.

Enter Wulf and his co-conspirators. As is discussed below, their scheme involved the
sale of prearranged funeral contracts through NPS. Funds received in exchange for funeral contracts were placed in a trust. The trust would then purchase whole life insurance policies from entities closely related to NPS. These transactions likely generated commissions for the related entities. Wulf would then authorize or permit loans against the whole life policies' cash surrender value and then surrender the policies for cash minus the amount of the loans against the policies. Once the policies were surrendered, he would purchase term life policies that were funded by later contract purchases. As with many fraudulent schemes, this one ultimately collapsed. The term policies were eventually cancelled due to non-payment of premiums and
NPS was placed in receivership. Wulf, who is currently imprisoned, is on the hook for over $435 million in losses.

Page 3 of the Initial Decision

ALJ Grimes offered compelling rationale as to why he believed that imposing a collateral Bar upon Wulf was mandated by the underlying facts and the public's interest:

By any measure, Wulf's conduct was recurrent. Indeed, saying that Wulf's fraud, which
lasted at least sixteen years, was recurrent does not adequately describe what he did. Cf. Gordon Brent Pierce, Securities Act Release No. 9555, 2014 SEC LEXIS 839, at *84 (Mar. 7, 2014) (characterizing as "recurrent and long-lasting," misconduct that occurred over an eight month period). The fact that Wulf's fraud continued for so long weighs in favor of a full collateral bar to protect the public interest. The continuing nature of Wulf's misconduct also shows that he is unsuited to remaining in the securities industry. Despite his years of experience and the prior legal actions against NPS and its affiliated entities, he did not desist and instead continued to participate in a fraudulent scheme.

Wulf's actions easily qualify as egregious. Wulf and his co-conspirators soaked up
money through NPS and Trust IV and then wrung hundreds of millions of dollars out of Trust IV until there was nothing left. That Wulf and his co-conspirators continued their fraud over a period of so many years only serves to reinforce the notion that Wulf's actions were egregious. Further, Wulf violated his fiduciary duty in a brazen fashion. There is thus no doubt that Wulf's conduct was egregious. See Gregory Bartko, Exchange Act Release No. 71666, 2014 SEC LEXIS 841, at *39 (Mar. 7, 2014) (noting that Bartko was guilty of "orchestrating a conspiracy that defrauded approximately two hundred investors out of hundreds of thousands of dollars over more than a year"); James C. Dawson, 2010 SEC LEXIS 2561, at *15-16 (concerning misconduct by a fiduciary).

Wulf acted with a high degree of scienter. In order to convict him, the jury was required to find that he "act[ed] with 'intent to defraud," which the jury was told meant that he "act[ed] knowingly and with the intent to deceive." Ex. I at 3388-91, 3393-94, 3396-97, 3399-4000. The very nature of Wulf's fraud belies any claim that he did not act with a high degree of scienter. Indeed, Wulf cannot seriously claim that he accidently participated in the looting of $435 million over a period of at least sixteen years.

Wulf has made no assurances against future violations or demonstrated that he recognizes the wrongfulness of his conduct. To the contrary, during his trial, he blamed the lapse of term policies on the Special Deputy Receiver who took over NPS, Lincoln, and Memorial. Ex. O at 8173, 8176-77. Of course, the Special Deputy Receiver's appointment was a direct result of the misconduct of Wulf and his co-conspirators. And, in his answer, he blamed his conviction on his counsel and on prosecutorial misconduct.

Based on Wulf's refusal to accept responsibility and the fact that his fraud lasted at least sixteen years, I infer that if he were given the opportunity, he would likely engage in similar conduct. Cf. Tzemach David Netzer Korem, 2013 SEC LEXIS 2155, at *23 n.50 ("'the existence of a violation raises an inference that'" the acts in question will recur) (quoting Geiger v. SEC, 363 F.3d 481, 489 (D.C. Cir. 2004)). Inasmuch as securities professionals "'routinely gain access to sensitive financial and investment information of investors and other market participants,'" Peter Siris, Exchange Act Release No. 71068, 2013 SEC LEXIS 3924, at *29 n.47 (Dec. 12, 2013) (quotation omitted), it is clear that Wulf's "occupation as an investment adviser presents opportunities for future illegal conduct in the securities industry," John W. Lawton, 2012 SEC LEXIS 3855, at *43.

Pages 9 - 10 of the Initial Decision

Motion To Correct Manifest Error

Not surprisingly, Wulf was not prepared to go quietly into that good night. On July 13, 2015, Wulf filed a motion to correct what he asserted were some 31 manifest errors of fact. In the Matter of David R. Wulf (Order Denying Motion to Correct a Manifest Error of Fact, Admin Proc. Ruling Rel. No. 2979; Admin. Proc. File No. File No. 3-16374 / July 28, 2015). In denying Wulf's motion, the ALJ shows little patience with the arguments and essentially shreds through each one. In one example, we are told:

In alleged error twenty-four, Wulf says that it is circular logic to say that "[t]he fact that the district court imposed a $435 million restitution award necessarily means that Wulf caused $435 million in losses." Mot. at 4; see David R. Wulf, 2015 SEC LEXIS 2603, at *16. This is not an allegation of manifest error. Furthermore, as the supporting citations in the Initial Decision reflect, "courts may award restitution 'only for the loss caused by the specific conduct that is the basis of the offense of conviction.'" United States v. Howard, 759 F.3d 886, 891 (8th Cir. 2014) (quoting Hughey v. United States, 495 U.S. 411, 413 (1990)) (emphasis added). In other words, absent a determination that Wulf caused $435 million in losses, the district court could not have ordered restitution in that amount. It is therefore the case that "[t]he fact that the district court imposed a $435 million restitution award necessarily means that Wulf caused $435 million in losses." David R. Wulf, 2015 SEC LEXIS 2603, at *16.

Page 3 of the Order Denying Motion to Correct Manifest Errors

SEC Opinion

Battling to the end, Wulf filed a petition seeking the review by the SEC of the Initial Decision. After granting the requested review, on March 21, 2016, the SEC found that it was in the public interest to impose upon Wulf a Bar from association with any broker, dealer, investment adviser, municipal securities dealer, transfer agent and from participating in a penny stock offering.  In the Matter of David R. Wulf (Opinion, '34 Act Rel. No. 77411; Investment Adv. Act Rel. No. 4356; Admin Proc. Ruling Rel. No. 2325; Admin. Proc. File No. File No. 3-16374 / March 23, 2016).

As explained in the Opinion, the SEC understood Wulf's defenses as advocating the following [Ed: footnotes omitted]:

Wulf's main argument on appeal is that, notwithstanding the conviction, he is innocent. According to Wulf, "[t]he losses of the corpus of the trust were due to the theft by [others]; not by any action on my part. I had no knowledge of the fraud nor did I take part in any of it." Wulf blames his conviction on the "horrid performance" of his attorney and "serious prosecutorial misconduct" which, he claims, included withholding exculpatory evidence, using "known forged letters as critical evidence" and "omit[ing] vital exculpatory facts pertinent to [his] innocence."

While a respondent in a follow-on proceeding may put forward mitigating evidence
concerning the circumstances surrounding the underlying misconduct, he is not permitted to contest the basis for the conviction.  Wulf's continued assertion that he was ignorant of the scheme, and innocent, are inconsistent with his conviction and the judgment entered against him. As we have long held, "follow-on proceedings based on a criminal conviction are not an appropriate forum to 'revisit the factual basis for,' or legal defenses to, the conviction."

Wulf further argues that he has "been denied due process." As support, he claims that
evidence "rebutting" the criminal charges "has been ignored" and that he "was not given any specific charges to which [he] could defend [himself]." To the contrary, we have not ignored his arguments that he is innocent but, as discussed, find that such arguments are impermissible collateral attacks on his underlying conviction, and therefore cannot be considered in evaluating whether to impose a bar. We also reject his claim that he was not given notice of the basis of this proceeding. The OIP was based on allegations that Wulf had been criminally convicted in connection with WBM's role as an investment adviser to NPS and its funeral trusts. The OIP further notified Wulf that the proceedings would determine whether "remedial action is appropriate" against Wulf if the allegations concerning the conviction were established. These are unquestionably the issues raised by this case; there is no basis for Wulf's claim that he lacked adequate notice to prepare a defense.

For well over a decade, Wulf, acting in a fiduciary capacity, conspired with others to
perpetrate a massive fraudulent scheme for which he was prosecuted criminally and convicted. The scheme resulted in huge losses to consumers, businesses, financial institutions, and others. Wulf's conduct reflects a total rejection of his legal and ethical duties as a securities professional, and demonstrates his risk to the public if he were to continue in such a professional capacity. In light of his conduct, and based on our consideration of all other relevant facts and circumstances, we conclude that it is in the public interest to bar Wulf from the securities industry and from participating in penny stock offerings. An appropriate order will issue.

Pages 7 - 9 of the Opinion

In explaining their rationale for imposing a Bar upon Wulf, Chair White and Commissioners Piwowar and Stein provide this:

Wulf's participation in a criminal conspiracy to defraud purchasers of prearranged funeral contracts, funeral homes, financial institutions, and others demonstrates that industry and penny stock bars are in the public interest. His conduct was egregious. A jury convicted him for his involvement in a fraudulent scheme that caused victims to lose over $435 million. His conduct occurred over approximately 16 years. And, as the fiduciary of an investment adviser that participated in a scheme that resulted in the misuse and/or misappropriation of hundreds of millions of dollar, he demonstrated a high degree of scienter. Moreover, he has not acknowledged any responsibility for his actions and has shown no remorse.

Based on the egregiousness and duration of his conduct, his lack of remorse or acknowledgment of wrongdoing, and his current status as a person associated with a broker dealer and investment adviser, there appears to be a high likelihood that he would have an opportunity to harm investors in the future unless subject to a bar.

Pages 6 of the Opinion

Have we heard the death rattle of SEC v. Wulf or is that just the sound of the grinding stone circling around as it sharpens yet another blade in Wulf's seemingly endless supply of tactics to extend and prolong his legal fight?  Who knows. Let's see if the next phase is an appeal to the federal courts. Regardless of where this matter next proceeds or where it ultimately comes to an overdue rest, compliments to the SEC staff, ALJ Grimes, and the commissioners on patiently grappling with a difficult case and providing us with impressive content and context along the way.

READ:
  • In the Matter of David R. Wulf (Order Instituting Administrative Proceedings and Notice of Hearing, '34 Act Rel. No. 74207; Investment Adv. Act Release No. 4020; Admin. Proc. File No. File No. 3-16374 / February 4, 2015
  • In the Matter of David R. Wulf (Order Scheduling Hearing, Admin Proc. Ruling Rel. No. 2289; Admin. Proc. File No. File No. 3-16374 / February 6, 2015)
  • In the Matter of David R. Wulf (Order Postponing Hearing and Scheduling Prehearing Conference, Admin Proc. Ruling Rel. No. 2325; Admin. Proc. File No. File No. 3-16374 / February 18, 2015)
  • In the Matter of David R. Wulf (Order Following Prehearing Conference, Admin Proc. Ruling Rel. No. 2396; Admin. Proc. File No. File No. 3-16374 / March 10, 2015).
  • In the Matter of David R. Wulf (Order Denying Without Prejudice The Division's Motion For Summary Disposition, Admin Proc. Ruling Rel. No. 2590; Admin. Proc. File No. File No. 3-16374 / April 27, 2015)
  • In the Matter of David R. Wulf (Initial Decision, Admin. Proc. File No. File No. 3-16374 / June 25, 2015).
  • In the Matter of David R. Wulf (Order Denying Motion to Correct a Manifest Error of Fact, Admin Proc. Ruling Rel. No. 2979; Admin. Proc. File No. File No. 3-16374 / July 28, 2015).
  • In the Matter of David R. Wulf (Opinion, '34 Act Rel. No. 77411; Investment Adv. Act Rel. No. 4356; Admin Proc. Ruling Rel. No. 2325; Admin. Proc. File No. File No. 3-16374 / March 23, 2016).