On Petition for Review of an Order of the Securities & Exchange Commission SEC No. CRD1005905.
The opinion of the court was delivered by: Fisher, Circuit Judge
Submitted December 1, 2009*fn1 -- Pasadena, California.
Before: Harry Pregerson, Michael Daly Hawkins and Raymond C. Fisher, Circuit Judges.
Alvin W. and Donna T. Gebhart petition for review of an order by the Securities and Exchange Commission (SEC) sustaining a disciplinary action by the National Association of Securities Dealers (NASD).*fn2 The NASD found that the Gebharts, securities salespersons, committed securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by making false statements to clients in connection with the sale of promissory notes used to finance the conversion of mobile home parks to resident ownership. The SEC upheld the NASD's disciplinary action, concluding that the Gebharts acted with scienter because they made "representations to their clients despite not knowing whether they were true or false." We hold that the SEC applied the correct scienter standard and that substantial evidence supports the SEC's conclusion that the Gebharts acted with scienter. We therefore deny the petition for review.
Alvin Gebhart has been in the securities industry since 1983.*fn3
In 1994, he began working at Mutual of New York (MONY) in San Diego, where he sold annuities and mutual funds. While at MONY, Gebhart met Jack Archer, a fellow MONY salesperson. In 1995, Archer told Gebhart about a business venture, Community Service Group (CSG), run by James Scovie. CSG was in the business of converting mobile home parks to resident ownership. CSG purchased parks from the owners and then assisted residents in purchasing them. In late 1996, Scovie and another person, David Mounier, created MHP Conversions, LLC (MHP) to facilitate the conversion process. MHP issued promissory notes that were sold to individual investors to raise funds for CSG's purchase of the parks. The MHP notes had one-year terms with fixed interest rates of 18 percent for new investments and 14 percent for reinvested funds. Each note stated that it would "ultimately be secured by a deed of trust" on the particular park to be purchased with the funds, but that "[u]ntil such time as said deed of trust is recorded, the sole asset of [the issuer] will be a deed of trust for the property known as Eastern Trailer Park."
Archer told Gebhart about the MHP program and asked Gebhart whether any of his clients were interested in investing. Gebhart arranged for Archer to make a presentation of the MHP program to three of his clients, all of whom made investments in the program. Archer earned a sales commission, and paid half of the commission to Gebhart.
In early 1996, Gebhart moved from MONY to another financial services firm, Mutual Service Corporation (MSC), a broker-dealer and member of the NASD. His wife, Donna Gebhart, joined him at MSC and the two opened and operated a MSC branch in Rancho Bernardo, California, where they sold insurance and annuities and provided financial planning services to clients. In October 1996, Archer approached the Gebharts about selling MHP notes to their MSC clients. The Gebharts met with Archer for about 40 minutes. Archer told them that the MHP program had been approved by the compliance officer at Archer's firm, MONY. This was not true, however. Archer also told the Gebharts "that the parks were in good shape and he always assured us that they had a lot of equity in them. He said they [were] 45 to 55 percent leveraged."
The Gebharts conducted no independent investigation into the MHP program, either in 1996 or over the next four years, during which time they sold MHP notes to their clients. They failed to obtain any financial statements for CSG or MHP, ascertain who were the owners, officers or shareholders of CSG or MHP, determine what compensation would be paid to CSG or MHP or their officers, verify that trust deeds securing the notes were being recorded or obtain copies of recorded trust deeds. They visited two of the mobile home parks subject to the notes, but those visits do not appear to have served any useful purpose. When Archer would approach the Gebharts with the opportunity for clients to invest in a new park conversion, they conducted no independent analysis of the park in question. Rather, "[i]t was always our understanding that they wouldn't have done a conversion on a park that wasn't - had good cash flow and that would be a deal worth them doing." Although the Gebharts believed that their clients' loans would be secured by second trust deeds, they did not inquire why they were not first trust deeds or who held the first trust deeds. In lieu of an independent investigation, the Gebharts relied on Archer's representations. As Alvin Geb-hart explained:
Throughout our four-year relationship, Mr. Archer continually stressed the strength of this program. Even in February  when he spoke to Mr. Dave Mounier, the other principal [in MHP], he indicated that the parks were deep with equity. Donna and I had continuously interviewed Mr. Archer about the economics of this program. Initially, we were assured that the parks were financed only to 55% of value. Moreover, the monthly rents paid by the homeowners supplied working capital to Community Service Group. Indeed, we were assured that Community ...