## Facts

- Steven E. Muth was a securities salesperson who concentrated his recommendations in the stocks of Bonso Electronics International, Inc. and Creative Host Services, Inc. (Bonso/Creative), speculative securities suitable only for customers with sufficient financial resources and risk tolerance.
- Muth became associated with Schneider Securities, Inc. after his prior firm prohibited margin transactions in Bonso/Creative following customer complaints.
- During the period at issue (about December 2000 through April 2001), Muth recommended that multiple Schneider customers purchase Bonso/Creative, often using margin, despite their conservative circumstances and expressed preferences.
- Customer Gloria Poljanec was 75 years old, lived on Social Security and her husband’s pension, had very conservative goals due to nursing-home expenses for her husband, and was never asked for (and never provided) risk-tolerance information.
- Customer Robert Cassidy suffered from cardiac disease, was not asked for (and did not provide) risk-tolerance information, signed a margin agreement, but did not qualify for margin trading.
- Customer John Nabozniak was averse to risk, did not complete a new-account form, had a prior negative experience with margin, and was told by Muth that he could make money only if he traded on margin.
- Customer Paul Lundy was retired, did not want margin transactions, signed a blank new-account form, and did not execute a margin agreement.
- Risk-tolerance information placed on customers’ new-account forms was overstated, making the accounts appear more suitable for speculative margin trading than the customers’ actual profiles supported.
- Muth made material misstatements and omissions about the investments and the risks of margin trading, including assurances that the stock prices would rise and that customers would not be subject to margin calls.
- Lundy complained to the SEC, leading to an Order Instituting Proceedings; an administrative law judge found Muth engaged in fraudulent sales practices and that Richard J. Rouse—an owner, executive vice president, regional sales manager, and director of Schneider—failed reasonably to supervise Muth, and both respondents sought Commission review.

## Issues

1. Whether Muth willfully violated Securities Act § 17(a), Exchange Act § 10(b), and Exchange Act Rule 10b-5 by making material misstatements or omissions and engaging in deceptive sales practices, including unsuitable and unauthorized trading in Bonso/Creative on margin.
2. Whether Rouse failed reasonably to supervise Muth, within the meaning of Exchange Act § 15(b)(4)(E), with a view to preventing Muth’s violations.
3. Whether the sanctions ordered against Muth and Rouse were in the public interest.

## Decision

- The Commission found that Muth misrepresented and omitted material facts and engaged in unauthorized and unsuitable trading, and that he willfully violated Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
- The Commission found that Rouse failed to exercise reasonable supervision over Muth with a view toward preventing Muth’s antifraud violations, within the meaning of Exchange Act § 15(b)(4)(E).
- The Commission ordered, as to Muth, a cease-and-desist order from committing or causing future violations of Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5, along with disgorgement (plus interest) and a civil money penalty.
- The Commission ordered, as to Rouse, a nine-month suspension from association with any broker or dealer in any capacity and a bar from association with any broker or dealer in a supervisory capacity (with the right to reapply after one year), and also imposed a civil money penalty.
- The Commission determined that these remedies were in the public interest based on the seriousness of the misconduct, customer harm, and the need for deterrence and effective supervision.

## Legal Principles

- Antifraud provisions (Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5) are violated by material misstatements or omissions and deceptive practices in connection with securities transactions, including misleading assurances about margin risk and the likely performance of speculative securities.
- Sales practice fraud can be established where a representative recommends highly speculative, margin-financed trading to customers whose financial resources and investment objectives make such trading unsuitable, particularly when accompanied by misleading statements or concealment of risks.
- Unauthorized trading—effecting trades without the customer’s authorization or contrary to customer instructions—may constitute deceptive conduct supporting antifraud liability when tied to misrepresentations, concealment, or other fraud.
- A supervisor is liable under Exchange Act § 15(b)(4)(E) when the supervisor does not reasonably supervise with a view to preventing violations; adopting written conditions or heightened supervision is not enough without reasonable follow-through and monitoring.
- In determining sanctions in SEC administrative proceedings, the Commission applies a public-interest analysis that considers the nature of the violations, the respondent’s state of mind, investor harm, and the need for deterrence and accountability in supervisory controls.

## Conclusion

The SEC held that Steven E. Muth committed antifraud violations by steering customers—including elderly and risk-averse individuals—into speculative Bonso/Creative securities on margin while making material misstatements and failing to ensure the trading matched their true profiles and authorizations, and it also held that Richard J. Rouse, a senior Schneider executive, failed reasonably to supervise Muth; the Commission imposed cease-and-desist relief, disgorgement, and a civil penalty against Muth, and imposed an association suspension, a supervisory bar with reapplication rights, and a civil penalty against Rouse.


In the Matter of Steven E. Muth and Richard J. Rouse, Exchange Act Rel. No. 52551, 86 S.E.C. Docket 956 (2005)