## Facts

- Austin E. Gatlin and Erma S. Gatlin were officers, directors, and principal stockholders of Capital Funds, Inc. (Capital), and exercised control over the firm’s activities.
- Capital applied to the SEC for registration as a broker-dealer.
- The SEC instituted administrative proceedings to determine whether Capital’s application should be denied (or whether Capital should be allowed to withdraw it) and whether the Gatlins should be found to have caused any denial order.
- A hearing examiner found that Capital, aided and abetted by the Gatlins, had willfully violated the federal securities laws and recommended denial of the application.
- Capital was a registered broker-dealer in Oklahoma and qualified as a securities dealer in Arkansas; Capital also shared office space in Arkansas with Peoples Loan and Investment Co., Inc. (Peoples).
- The Gatlins held a controlling interest in Peoples, linking Capital’s broker-dealer activities with Peoples’ financing and stock distribution.
- Capital underwrote a public offering of Peoples stock that was presented as limited to Arkansas residents, seeking to characterize the distribution as intrastate.
- A Capital salesman sold Peoples stock to two Oklahoma residents. The salesman claimed he subscribed for the shares himself and later transferred them to the Oklahoma purchasers after consulting Austin Gatlin when he could not pay.
- The SEC found the “salesman subscription then resale” explanation unsupported by the transaction records: the salesman did not sign a subscription form, did not pay for the stock, and did not receive stock certificates; instead, an Oklahoma purchaser signed a subscription form and the Oklahoma purchasers paid Peoples.
- The stock certificate said to have been issued to the salesman bore a higher certificate number than certificates later issued to nonresident purchasers, supporting an inference that the salesman’s story was created after the fact.
- The SEC also found other interstate activity by Capital, including sales to a Missouri resident and purchases from a Texas resident with resales to Oklahoma residents.

## Issues

1. Whether Capital willfully violated the federal securities laws in connection with the underwriting and sale of Peoples stock and other interstate transactions, such that Capital’s broker-dealer registration application should be denied as not in the public interest.
2. Whether Austin and Erma Gatlin, as controlling officers/directors and principal stockholders, aided and abetted or were otherwise responsible for the misconduct so as to be “a cause” of any denial order.

## Decision

- The SEC denied Capital’s application for registration as a broker-dealer.
- The SEC found Capital had willfully violated the federal securities laws based on its conduct surrounding the Peoples stock distribution and related interstate securities transactions.
- The SEC found Austin E. Gatlin and Erma S. Gatlin each to be a cause of the denial order because of their control roles and their participation in, or responsibility for, the conduct supporting denial.

## Legal Principles

- The SEC may deny a broker-dealer registration application when, after proceedings, it finds willful violations of the federal securities laws and determines denial is in the public interest.
- “Willful” in this setting generally means the respondent intentionally committed the acts that constitute the violation; the SEC need not show the respondent knew the acts were unlawful.
- A distribution described as intrastate may lose any intrastate character when securities are sold to out-of-state purchasers or when the facts show interstate offers or sales; documentary evidence and the flow of funds and certificates may be used to determine the true purchaser.
- Individuals who control a broker-dealer, or who aid and abet violations leading to a sanction, may be found to be “a cause” of the firm-level order based on their responsibility for, direction of, or participation in the misconduct.

## Conclusion

In the Matter of Capital Funds, Inc., File No. 8-10968 (1964) resulted in denial of Capital’s broker-dealer registration after the SEC found willful federal securities-law violations arising from an offering presented as intrastate but involving out-of-state purchasers and other interstate transactions, and the SEC separately found the firm’s controlling officers, Austin and Erma Gatlin, to be causes of the denial based on their control and involvement.
