Today's featured regulatory case comes to the BrokeAndBroker.com Blog from the Securities and Exchange Commission. The analysis is admittedly somewhat superficial because the issues are, at best, still in flux and our focus is less on the nuts-and-bolts of the underlying allegations than on the procedural posture of the matter. Pointedly, we got a pro se Respondent who is representing himself against the full brunt of the federal regulator. Likely licking its chops, the SEC's Division of Enforcement feels like it has a classic open-and-shut case in which the facts pretty much speak for themselves in what looks like an undisputed fashion. Given that air of certainty, Enforcement sought the dreaded Summary Disposition. Apparently, Enforcement's cockiness was not without some validity because the Administrative Law Judge granted the motion. At this point, even armed with high-priced regulatory counsel, many respondents are simply going down in flames on their appeal to the full commission -- and handling such an appeal on your own bereft of lawyers, well, what can I say? Of course, as that sage securities regulator Forrest Gump so aptly noted: "Mama always said life was like a box of chocolates. You never know what you're gonna get."
Case In Point
An Initial Decision by a Securities and Exchange Commission ("SEC") Administrative Law Judge ("ALJ") granted summary disposition against Respondent Joseph P. Doxey. As set forth in the "Summary" preamble to the Initial Decision:
This Initial Decision grants the Motion for Summary Disposition (Motion) filed by the Division of Enforcement (Division); finds that Respondent Joseph P. Doxey (Doxey) willfully violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 10b-5, and Sections 5(a) and (c) and 17(a)(1), (2), and (3) of the Securities Act of 1933 (Securities Act); and finds that Respondent William J. Daniels (Daniels) violated Sections 5(a) and (c) of the Securities Act. It orders Doxey to cease and desist from violating Exchange Act Section 10(b), Exchange Act Rule 10b-5, and Securities Act Sections 5(a) and (c) and 17(a)(1), (2), and (3); and Daniels to cease and desist from violating Securities Act Sections 5(a) and (c). It orders disgorgement of $57,654 against Doxey and $16,246.46 against Daniels. It bars Doxey from serving as an officer or director of any issuer having a class of securities registered with the Securities and Exchange Commission (Commission) pursuant to Exchange Act Section 12 or that is required to file reports pursuant to Exchange Act Section 15(d), and orders penny-stock bars against both Respondents.
In the Matter of Joseph P. Doxey and William J. Daniels (Initial Decision, Initial Decision Rel. No. 598; Admin. Proc. File No. 3-15619 / May 5, 2016).
Pro Se Appeal
Representing himself in a pro se capacity, Doxey appealed the Initial Decision to the full SEC, and, in a somewhat rare outcome, the SEC remanded the matter back to the ALJ for further proceedings and a hearing. In the Matter of Joseph P. Doxey (Opinion, SEC, '33 Act Rel. No. 1077; '34 Act Rel. No. 77773; Admin Proc. File No. 3-15619 / May 5, 2016). As explained in the preamble portion of the SEC Opinion:
This matter concerns a series of press releases and offers and sales of securities by Pure H20 Bio-Technologies, Inc. ("Pure H20" or the "Company") and its chief executive officer, Joseph P. Doxey. The press releases concerned Pure H20's efforts to bring to market a water disinfection system, the Integrated Hospital Potable Water Disinfection System (the "System"), for use by hospitals and other medical facilities. Pure H20 sought certification for the System by NSF International, which had developed a protocol for certifying water purifiers. Although certification was not legally required to sell its System, the Company saw NSF certification as critical to marketing the System to hospitals. Pure H20, through Doxey, also offered and sold unregistered securities to raise capital for the development of the System.
The SEC's Division of Enforcement alleged, in part, that Pure H20 had issued six press releases:
about its efforts to obtain certification by NSF. The Division alleged that the press releases were false and misleading because they stated that NSF certification was expected in four months or less or was already "underway" when, in fact, "the NSF certification process never commenced" and the "time required to complete certification was beyond that referenced in the press releases." The Division also alleged that the press releases failed to disclose that the Company lacked the resources to obtain NSF certification.
In analyzing the issues on appeal, the SEC explained that:
With respect to the statements in the press releases, the following is undisputed. Pure H20 engaged an independent laboratory to conduct testing on the System it had developed. By early 2008, the laboratory's testing showed that the System met the NSF protocol for most types of contaminants. However, for cryptosporidium, a type of water-born parasite, test results showed that the Company's system did not achieve the level of purification required by the NSF protocol.
Thereafter, Doxey drafted and disseminated the six press releases issued between April 2008 and May 2009. All of these releases contained similar language regarding the prospect of obtaining NSF certification. The April 1, 2008 and October 22, 2008 press releases, for example, both stated that NSF certification was "expected to be completed within a few short months and has a high likelihood for success." Similarly, the January 29, 2009 and April 1, 2009 press releases stated that "[c]ertification of this system is expected to be completed within this 1st quarter and has a high likelihood for success." The March 3, 2009 press release stated that Pure H20 was "anxiously awaiting final certification," and the May 4, 2009 press release stated that NSF certification was "underway."
The Division contended that the statements about the possibility of obtaining NSF certification were materially false and misleading. The law judge agreed, finding that the certification work was not yet underway and Pure H20 could not have met certification requirements without additional funds, which it did not have.But our review of the evidence, in the light most favorable to Doxey, reveals that there are facts that suggest that these statements were not false. For example, Doxey testified during the investigation that all that had to be done to meet the required reduction threshold was to "increase the contact time"-i.e., increase the amount of time the disinfection agent is in contact with the water-which Doxey believed "was no big deal." In other portions of his testimony he indicated that Pure H20 could have easily modified the System (or modified the test performed) in order to meet the required level of cryptosporidium reduction for the NSF protocol. Doxey also testified about the ultimate cost and timeline for NSF certification, including that an unidentified NSF official told him that certification could be completed within 30 days and that NSF ultimately agreed to complete the certification process for $25,000, which was less than the proceeds from the Company's stock offering.