2004
CASE ANALYSIS

 In the Matter of the in the Matter of James F. Glaza, D/B/A Falcon Financial Services, Inc.  
Securities Exchange Act of 1933 Release No. 8498; Securities Exchange Act of 1934 Release No. 50474, September 30, 2004

http://sec.gov/litigation/opinions/33-8498.htm 

By Bill Singer

On January 21, 2003, the Securities and Exchange Commission (SEC) Division of Enforcement (Division) instituted proceedings in the Matter of James F. Glaza, D/B/A Falcon Financial Services, Inc. The Division alleged that registered representative Glaza sold non-exempt unregistered securities and made material misstatements or omissions in connection with their sale. Glaza was represented by Walter J. Baumgardner, Esq., who filed an Answer on April 2, 2003, that denied the Division's allegations. A hearing before an administrative law judge (ALJ) was scheduled for Monday, July 7, 2003.

Game Called

Yeeer Out!

On Thursday, July 3, 2003, the Stipulations (nearly 100 in number) and the legal briefs were submitted to the ALJ together with exhibits. In his September 8, 2003, initial decision, the ALJ ordered Glaza (1) to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (2) barred from association with any broker-dealer; (3) barred from participating in any offering of a penny stock; (4) to disgorge $780,131, plus prejudgment interest; and (5) to pay a $110,000 fine.

And now, what you thought was a fastball over the meat of the plate, drops down, hooks to the side, and backdoors over the plate - - - while you're left staring in awe and amazement.

Glaza Keeps Swinging

On October 3, 2003, Glaza's new lawyers (Anthony W. Djinis, Paul J. Bazil, and Peter E. McLeod, of Pickard & Djinis LLP) filed an appeal of the ALJ's initial decision, wherein he claims that he never intended to stipulate to the facts or the relief set forth in the Stipulations and always intended to vigorously defend against the charges. Specifically, Garza claims that during the June 30th teleconference, Baumgardner falsely stated to the ALJ that Glaza had authorized him to negotiate the Stipulations.

In an unnotarized affidavit that is signed and sworn under penalty of perjury, Glaza says he first saw the Stipulations on the afternoon of Tuesday, July 1, 2003, and that he had never previously discussed them with Baumgardner. Further, Glaza claims that his hearing attorney told him that the Stipulations merely set forth the Division's case and that he would have the opportunity to defend himself fully by means of written briefs. Glaza claims that, when he expressed hesitation about signing the Stipulations, Baumgardner yelled at him for delaying their filing and warned him ". . . he would only go . . . to the hearing if he absolutely had to, but was completely unprepared for trial and we'd get killed if he went."

Back to the Dugout for Another Bat

Before signing the Stipulations, Glaza attempted to contact two securities-law attorneys in an effort to obtain their advice about the Stipulations. Glaza asserts that neither attorney was available when he called and that he felt "browbeaten into signing the document immediately". Therefore, he claims he faxed his signed copy of the Stipulations to Baumgardner on the morning of July 2, 2003, before he succeeded in speaking to other lawyers.

Signed and sworn affidavits from the two attorneys, one of which is notarized, generally support Glaza's recollection that they spoke to him later in the day on July 2 and told him that the Stipulations appeared to foreclose the possibility of a defense. Glaza states that, after he spoke to the other attorneys, he immediately contacted Baumgardner to ask him not to submit the signed Stipulations or to withdraw them if they had already been sent. Glaza asserts that Baumgardner said the Stipulations had already been sent, could not be withdrawn, and that "signing the document was the correct thing to do in vigorously defending the case."

The Knockdown Pitch

On appeal, Glaza contends that the actual reason Baumgardner resorted to the Stipulations was because the attorney was not prepared for the hearing. Apparently the ALJ had denied his request for a delay of the hearing a few weeks earlier. Accordingly, Glaza argues that his hearing attorney was guilty of fraud on the tribunal by misrepresenting the authority that Glaza had given him to enter into and negotiate the Stipulations. Glaza also claims that the hearing attorney was guilty of fraud on Glaza personally, by misrepresenting to him the nature and legal effect of the Stipulations. Glaza argues that his hearing attorney's alleged render the Stipulations an unenforceable contract. Finally, Glaza argues that the negotiation and execution of the Stipulations did not follow SEC procedure. Because the ALJ's initial decision is based entirely on the Stipulations and the attendant exhibits, Glaza contends that the decision is unsupportable, must be vacated, and an evidentiary hearing be scheduled to determine whether the charges are true. The Division opposes the request to vacate the decision.

The Umpire Makes a Call

In considering Glaza's appeal, the SEC affirmed the importance of stipulated facts in promoting timely and efficient litigation and underscored that such agreements should not be set aside absent compelling circumstances. However, the SEC was mindful of its obligation to ensure the fairness and impartiality of its proceedings, and to underscore that the heart of the process is the search for truth. To the extent the Stipulations are tainted by fraudulent or improperly coercive conduct, the integrity of the SEC's proceedings could be undermined. Pointedly, the SEC recognized the gravity of a respondent's allegation that his lawyer committed fraud and believed it appropriate to give the parties an opportunity to fully brief the issues and legal standards involved. Accordingly, the SEC remanded the matter back to the ALJ to determine whether there is a basis for Glaza's allegations, to weigh their credibility, and to determine their impact on the overall fairness and integrity of proceeding.

The Box Score

Clearly, we haven't heard Baumgardner's version of events, and I suspect it will be vastly different from that of Glaza. Moreover, there are many attorney-client confidentiality issues that will come into play and may prevent the whole story from becoming public. Still, a few observations.

• Wasn't there any way to select a better hearing date than the Monday after the July 4th holiday? 
• Were the parties traveling on the July 4th weekend to the hearing locale? If so, when were they planning on making reservations?
• Were they planning on preparing for the hearing over the July 4th holiday?
• If you are a respondent in a regulatory matter you can't be a spectator or bystander --- it's your career at stake. Watch the calendar. Ask questions. Insist upon answers you understand. And never, ever sign anything you don't understand.