| INTRODUCTION: A Federal Agency Plays GOTCHA! |
Friday afternoon, May 26, 2000: The U.S. Securities and Exchange Commission phoned counsel for Internet publisher Westergaard Broadcasting Network.com, Inc. alleging that the company's disclosure statement was out of compliance with section 17(b) of the Securities Act of 1933. While the Westergaard disclosure statement clearly explained to readers -- as the law requires -- that the Westergaard service presented client sponsored research of a genre similar to the client sponsored debt service ratings of Standard & Poor's and Moody's, reference to a set sponsor fee of $48,000 had been removed a few weeks earlier to reflect a change in marketing and pricing strategy.
The $48,000 fixed fee had been dropped in favor of a new marketing plan where up to fifty carefully selected smallcap companies would be showcased at no fee in order to establish critical mass for the Web site and research credibility. For the disclosure statement to say that a $48,000 fee was charged was inaccurate and misleading. Note that neither Standard & Poor's nor Moody's publicize fees at their Internet sites.
| The SEC found the explanation unacceptable. Its position was that some dollar figure was technically required to be shown according to regulation 17(b) of the '33 Act. Whether the figure was accurate was not the issue. The law says there has to be a dollar amount -- no exceptions granted!!! |
Violation of section 17(b) is the regulatory equivalent of jaywalking. No investor lost money or was otherwise misled or damaged by absence of the $48,000 figure. No nefarious intent was charged. According to Assistant Enforcement Director Erich T. Schwartz there was no issue over the quality of the research product published by Westergaard. The alleged violation had existed for only a few weeks. There was no commercial gain to the Westergaard companies, John Westergaard or anyone else by removal of the dollar figure. The change had been made strictly in the interest of accuracy.
Links to a site-wide disclosure statement clearly establishing that the research was client sponsored remained in effect on virtually every one of several thousand Web site pages. When appropriate there continued to be specific dollar disclosure references at each of 15 WBNcyberstations™ which were a proprietary Westergaard publishing format.
Upon receipt of the SEC's phone call on May 26th the statement was changed in a matter of minutes to their satisfaction by inserting the words "up to $48,000". Not a big problem so it seemed.
SO IT SEEMED, BUT THERE WAS MORE.....
| Yes, there was more -- a lot more! The SEC had a long standing agenda to put Westergaard Broadcasting Network.com and its parent, Westergaard.com, Inc. out of business. Having learned on May 17, 2000 from a regulatory filing that the parent company, Westergaard.com, Inc., was engaged in a $2 million private placement, the Commission seized the opportunity to allege the 17(b) violation, to issue subpoenas to Westergaard's clients and to place the company on notice that it would be charged with securities fraud. |
As a result of the SEC violating the privacy of Westergaard.com, Inc. and its publishing subsidiary in this manner, the business became inoperable literally overnight. Clients were advised not to speak with Westergaard analysts. $1.5 million in private placement funds already deposited were returned to investors. The business was forced to shut down August 15, 2000.
| Investors lost tens of millions of dollars, 18 professionals lost employment, a promising new paradigm of investment research designed to thwart stock manipulation was squelched, and John Westergaard -- an internationally respected investment analyst with a 43 year history of publishing research on smallcap companies without once becoming the subject of a regulatory action, a litigation or an arbitration -- was made destitute. |
WHY DID THIS HAPPEN?
Why would a government agency arbitrarily and capriciously destroy a vibrant, honest, ethical business? No one reviewing the case -- including former Enforcement Director William McLucas of Wilmer Cutler & Pickering (McLucas was recently appointed to lead the Enron investigation), who on initial perusal called the agency's actions "vindictive", and associates of four other major New York and Washington law firms -- believed that the SEC would pursue such drastic action over a trivial 17(b) violation. Obviously the SEC's interest in Westergaard had to have been about something else.
| That something else was John Westergaard's invocation two and a half years previously of a publisher's right to protection of free speech under the First Amendment of the U.S. Constitution. |
The Commission had investigated Westergaard and the company he founded for over two years prior to May 26, 2000 precipitated by a dispute over a November 1997 SEC request for information about the company's operations. Westergaard had agreed then to fully co-operate on questions relating to securities regulation -- but as a matter of priciple not to open itself to an SEC fishing expedition for information unrelated to regulatory issues and thereby violating its corporate right to privacy.
| Such was the genesis of the case of The SEC v. John Westergaard and the First Amendment. |
The SEC is sensitive to claims of First Amendment protection. It suffered a critical defeat in a previous case in the 1970s, a precursor to the Westergaard matter. Richard Holman, publisher of The Wall Street Transcript, had issued several editorials critical of the SEC. The Commission retaliated by seeking to force theTranscript to register as an investment adviser, thus employing its regulatory authority to squelch a news publication.
Holman fought. The case dragged on in federal courts for 10 years (SEC v. Wall Street Transcript Corporation) with certain constitutional aspects being heard by the U. S. Supreme Court. Eventually, in 1978, a federal judge decided in Mr. Holman's behalf, ruling that the Transcript was a news organization. The SEC was severely embarrassed. The case is frequently referenced in securities cases and in law schools as an egregious example of regulatory overreach.
The Westergaard case is a replay of SEC v. Wall Street Transcript Corporation.Challenged by Westergaard on First Amendment grounds, the SEC retaliated as they did in the Holman matter not by addressing the constitutional issue of whether Westergaard was on sound footing in claiming First Amendment protection, but by applying its regulatory authority to squelch the business.
This time the Commission would not leave itself open to protracted litigation by challenging a viable business with resources to carry on an extended battle in federal court as occurred in The Wall Street Transcript case.
| The SEC would first destroy the business by launching a preemptive strike and shut the business down and pursue John Westergaard personally. |
In so doing, the SEC acted illegally in employing its regulatory mandate to violate the right of protection to a publisher accorded by the First Amendment. A student of constitutional law noted as follows:
| "Considering that this problem (the Westergaard case) had early in its genesis a dispute over the applicability of constitutional rights of transmission of information, the Commission's action in unnecessarily loading on a fraud charge where none was needed is a classic act of intimidation of the press by government regulators intending to chill the free exercise of constitutional rights. In sum, the Commission said, 'Invoke your constitutional rights and we'll call you a crook instead of merely a business out of compliance." |
That the SEC v. Westergaard was not about securities regulation became transparent when in October 2000 the SEC dropped fraud charges against the Westergaard companies (both parent and subsidiary) but continued to pursue John Westergaard personally for fraud.
| The SEC v. Westergaard was thus revealed for what it was -- a personal vendetta by an agency of the federal government pursued against a citizen for invoking a constitutional right, incidentally a terminally ill man in his 70th year who had lived his entire life by the rules and demonstrated on numerous occasions his concern for matters of social importance and for persons less fortunate than he. |
Ironically, his unblemished 40 year history in the securities industry worked to his disfavor. A former senior official of the Commission explained: One has to understand that the SEC employs intimidation by example and John Westergaard was the perfect showcase -- clean record, international reputation, widely known and respected in financial circles plus there was the Moynihan relationship with the prospect that the tabloids in New York would pick thestory up. The headline they were hoping for was:
| "MOYNIHAN FINANCE CHIEF ACCUSED OF SECURITIES FRAUD" |
If the SEC could destroy a man of high reputation and high connections such as John Westergaard, imagine the fear they could engender among the truly illegitimate yoyos out there? The Chinese have been engaged in a crackdown against crime by executing people for minor crimes with a bullet to the head with local townspeople forced to watch. They call it "Kill the Chicken to Scare the Monkey".
Westergaard had enlisted during the Korean war for three years of military service although he could have opted out medically, had fought for the rights of minorities as a Williams College student in the 1950s, had marched with Martin Luther King in support of civil rights for African Americans in the '60s, had worked pro-bono for 40 years as chief financial officer in support of Daniel Patrick Moynihan's career in public service and four terms in the U.S. Senate, and had supported environmental issues, corporate responsibility initiatives, technical schooling for poor immigrants, freedom for political prisoners (Amnesty International), and numerous other publicly spirited causes.
Evidence of good citizenship mattered nothing to the Securities and Exchange Commission. It was committed to destroying John Westergaard financially, physically and emotionally. It would make bogus charges of fraud and employ extreme and false pejorative language designed to damage Westergaard's reputation.
During a meeting at SEC offices in Washington on June 13, 2000 to discuss the charges against the companies (parent and subsidiary), the Commission learned that John Westergaard was terminally ill with prostate cancer that had metastasized to the spine.
The Commission also learned that one of Wall Street's most highly respected executives, Bill Grant, former president of Smith Barney and Vice-Chairman of Smith Kline, was serving as chairman of Westergaard.com, Inc. Realizing that Grant had the resources for a protracted fight whereas Westergaard was in a weakened state, the Commission shifted gears and advised counsel two days later that it would pursue him personally -- he would be personally charged with securities fraud. The fraud charges against Westergaard Broadcasting Network.com and its parent would be later dropped.
Until the SEC learned about Westergaard's health condition there had not been even a hint that fraud charges would be brought against him personally. The alleged reason was that as a contributing editor Westergaard had relayed to the webmaster the decision to change Westergaard Broadcasting Network.com's marketing philosophy and therefore the need to alter the disclosure statement (A case of "kill the messenger" to borrow a phrase.)
| NOTE: The SEC did not claim that it was Westergaard's decision to change the marketing strategy which precipitated the alleged violation, only that he had passed on the decision to the webmaster. more here http://web.archive.org/web/20020609153011/http://westergaard.com/intro.html |
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