In the Matter of Steven E. Muth and Richard J. Rouse

Steven Muth (defendant) was a securities salesperson. Muth focused on the securities of Bonso Electronics International, Inc., and Creative Host Services, Inc. (Bonso/Creative), which were suitable only for investors with sufficient financial resources and risk tolerance for speculative investments. Muth became associated with Schneider Securities, Inc. (Schneider) after his prior firm prohibited margin transactions in Bonso/Creative because of customer complaints. Muth’s customers included (1) Gloria Poljanec, a 75-year-old whose only income was from Social Security and her husband’s pension and who had very conservative investment goals, did not want risk because of her husband’s nursing-home costs, and was never asked about and never provided risk-tolerance information; (2) Robert Cassidy, who had cardiac disease, was not asked about and did not provide risk-tolerance information, and signed a margin agreement but did not qualify for margin trading; (3) John Nabozniak, who was high-risk averse, did not complete a new-account form, and had a previous bad experience with margin but was convinced by Muth that he could make money only if he traded on margin; and (4) Paul Lundy, who was retired, did not want to engage in margin transactions, signed a blank new-account form, and did not execute a margin agreement. The risk-tolerance information Schneider inserted on the customers’ new-account forms was overstated. Muth recommended that these customers purchase Bonso/Creative securities on margin and assured them that the stock prices would rise or their accounts would not be subject to margin calls. After Lundy complained to the Securities and Exchange Commission (SEC) (plaintiff), the SEC filed an order instituting proceedings. An administrative-law judge found that Muth engaged in fraudulent sales practices and misrepresented material facts to customers. Muth appealed.