United States of America
In the Matter of
ROBERT A. PAPARIELLA
|ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND CEASE-AND-DESIST ORDER|
In these proceedings instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), and Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Respondent Robert A. Papariella ("Papariella") has submitted an Offer of Settlement which the Securities and Exchange Commission ("Commission") has determined to accept.1
Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Papariella consents to the entry of this Order Making Findings and Imposing Remedial Sanctions and Cease-and Desist Order pursuant to Section 8A of the Securities Act, and Sections 15(b) and 21C of the Securities Exchange as set forth below.
On the basis of this Order and Papariella's Offer of Settlement, the Commission finds that:
1. Papariella was employed as a registered representative at Harvest Financial Corporation ("Harvest") from May 1999 through March 2001. Papariella, age 53, was permitted to resign from Harvest. Papariella had been permitted to resign from two previous employers in 1992 and 1999, and was denied a license to sell securities in Ohio in 1999. He also withdrew a request for a license to sell securities in Texas in 2001 when that state's securities division represented that the license would be denied if the application were not withdrawn. Papariella is currently not associated with a broker-dealer.
2. Harvest Financial Corporation is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. It is a Pennsylvania corporation located in Pittsburgh, Pennsylvania, and has been registered as a broker-dealer since 1981. Harvest has no branch offices, and employed approximately 20 registered representatives, including 12 independent contractors, during the relevant time period. Harvest is a member of the National Association of Securities Dealers, Inc. ("NASD").
3. Frank D. Ruscetti ("Ruscetti"), age 52, is the president and treasurer of Harvest, where he also acts as a registered representative. Also, Ruscetti has been a registered principal of Harvest since 1984. Ruscetti supervised registered representatives at Harvest during the relevant time period, including Papariella, and was responsible for Harvest's supervisory policies and procedures. Ruscetti lives in Pittsburgh, Pennsylvania.
1. This matter arises from Papariella's recommendation and execution of an unsuitable investment strategy that involved frequent, aggressive trading in four customer accounts while he was employed at Harvest, and his churning of those four accounts in willful violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from Harvest's and Ruscetti's failure reasonably to supervise Papariella with a view to preventing violations of these provisions. Harvest also willfully violated Section 17(a) of the Exchange Act and Rule 17a-4 thereunder for failing to properly preserve certain books and records.
2. From approximately August 1999 through February 2001, Papariella disregarded the conservative investment objectives of four customers at Harvest, and instead recommenced an unsuitable, aggressive trading strategy which he executed in their accounts. He also misrepresented or omitted to disclose to them the risks inherent in this strategy. Furthermore, Papariella churned those four customer accounts. Papariella advanced his own interests to the detriment of his customers and generated gross commissions totaling $132,655 from his fraudulent trading activity in these accounts.
1. Beginning in at least August 1999 and continuing through February 2001, Papariella engaged in a scheme to defraud investors by recommending and executing an unsuitable investment strategy in four customer accounts at Harvest in contradiction of the customers' conservative objectives, and by churning the securities in those accounts. Papariella knew or was reckless in not knowing that he had recommended and executed securities transactions in his customers' accounts that were unsuitable and contrary to the customers' conservative investment objectives and their best interests. Furthermore, Papariella knew or was reckless in not knowing that he churned the securities in those customer accounts for the purpose of advancing his own interests by generating additional commissions for himself. Papariella controlled the activity in these four customer accounts either through oral discretionary authority given by the customer, or through de facto control exercised by Papariella by taking advantage of the customers' lack of investment experience and their trust in his investment recommendations, judgment and honesty.
2. To assist him in servicing his customers' accounts, Papariella employed a staff of approximately four people, whom Papariella collectively called "the Papariella Group." Papariella was aware of and controlled the activities of the Papariella Group. He knew about their contacts with customers and their actions regarding customer accounts because he directed such contacts or actions.
3. Sharon M. ("Sharon"), age 49, was Papariella's customer beginning in 1992, and had an account at Harvest during the relevant time period. She was a conservative investor, and indicated on her securities account agreement with Harvest that her objectives were conservative appreciation and long-term growth. Papariella or a member of the Papariella Group changed the agreement to indicate the riskier objectives of aggressive appreciation and aggressive income. Papariella did not discuss any aspect of his investment strategy with Sharon, including associated risks. A member of the Papariella Group told Sharon, in response to her complaint about the amount of trading in her account and the commissions paid, that the trading was necessary to keep up the value of the account. Sharon also signed the portion of the agreement designating the account as a margin account because she was directed to sign there by Papariella or a member of the Papariella Group. Papariella did not discuss any aspect of margin trading with her, including its associated risks, and she did not understand its implications or costs.
4. Sharon gave Papariella oral discretionary authority to trade in her Harvest account, and neither Papariella nor any member of the Papariella Group called her to obtain authority prior to the execution of any transactions in her account. During the relevant time period, Papariella recommended and executed unsuitable transactions in and churned Sharon's account, executing 279 trades and turning over the equity 11.48 times on an annual basis. Sharon, whose account had an average monthly equity of $73,362, paid $43,740 in commissions and $5,294 in margin interest. In order for Sharon's account to break even, it would have required a return on her investments of over 42%.
5. Richard S. ("Richard"), age 63, became Papariella's customer in November 1999 when he opened an account at Harvest for investment of his entire retirement savings. Richard told Papariella he wanted his money invested conservatively, and Papariella assured him that there was no risk involved in Papariella's investment strategy. Papariella or a member of the Papariella Group completed the investment objectives section of Richard's securities account agreement with Harvest, falsely indicating that Richard had the riskier objectives of aggressive appreciation and aggressive income.
6. Richard gave Papariella oral discretionary authority to trade in his account, but told Papariella to be careful with the money and not to make any risky investments without first consulting him. Neither Papariella nor any member of the Papariella Group called him to obtain authority prior to the execution of any transaction in his account. From January 2000 through February 2001, Papariella recommended and executed unsuitable transactions in and churned Richard's account, executing 130 trades and turning over the equity 5.17 times on an annual basis. Richard, whose account had an average monthly equity of $75,803, paid commission charges totaling $15,067. In order for Richard's account to break even, it would have required a return on his investments of over 17%.
7. Constance F. ("Constance"), age 53, became Papariella's customer in approximately 1989 and had an account at Harvest during the relevant time period. Her investment objectives were conservative, and she indicated on her securities account agreement with Harvest that her objectives were conservative income, safety of principal, conservative appreciation and long-term growth. Papariella did not tell Constance that his investment strategy involved the risk of losing most or all of her investment principal.
8. Papariella had de facto control over Constance's account. Papariella executed approximately 60-70% of the transactions in her account without first obtaining authority to execute the trade. Constance did not question Papariella's activities because she lacked knowledge about securities investing, and she trusted Papariella to make suitable investments for her. As to the remaining trades, Papariella contacted her to recommend trades and obtain her approval. Constance agreed to each trade because she trusted Papariella to make recommendations that were beneficial to her.
9. On several occasions, Constance complained to Papariella or a member of the Papariella Group about the amount of trading in her account and the commissions she paid for that trading. Papariella or a member of his staff told her that the trading executed in her account was necessary to increase and maintain its value. Papariella also told her at least once that the value of her account was higher than reflected in the monthly account statement due to recently executed transactions. Constance complained twice in writing to Harvest about the amount of trading in her account and the amount of commissions she paid for those trades. In approximately March 2000, Ruscetti directed Papariella to stop actively trading Constance's account. After three months with less trading, Papariella again began excessively trading Constance's account in September 2000.
10. From approximately August 1999 through February 2001, Papariella recommended and executed unsuitable transactions in and churned Constance's account, executing 295 trades and turning over the equity 3.59 times on an annual basis. Constance, whose account had an average monthly equity of $301,319, paid $57,107 in commission charges. In order for the account to break even, it would have required a return on her investment of 11.98%.
11. Kathryn A. ("Kathryn"), age 26, became Papariella's customer in 1997 when her mother, Constance, opened a custodial account for her. The securities account agreement completed by Constance for the account indicates investment objectives of conservative appreciation and long-term growth, which accurately reflected Kathryn's objectives.
12. Kathryn changed her account to her own name in November 2000, and met with Papariella at that time. She did not tell Papariella or anyone else at Harvest that her investment objectives had changed. Nevertheless, Papariella or a member of the Papariella Group altered her securities account agreement with Harvest to falsely reflect that her investment objectives were aggressive appreciation and aggressive income. Papariella also did not discuss with her the risks associated with his investment strategy.
13. Papariella had de facto control over Kathryn's account. When the account was custodial, Papariella did not contact Constance or Kathryn to obtain authority prior to execution of each trade in the account. Constance did not question Papariella's trades due to her lack of investment knowledge and experience, and her trust in Papariella to make suitable investments for the account. After November 2000, Papariella did not contact Kathryn to obtain authorization prior to execution of any trades in Kathryn's account. Kathryn did not complain because she lacked securities investment knowledge and she trusted Papariella to make suitable investments for her.
14. From August 1999 through January 2001, Papariella recommended and executed unsuitable transactions in and churned Kathryn's account, executing 90 trades and turning over the equity 3.31 times on an annual basis. Kathryn, whose account had an average monthly equity of $100,894, paid total commissions of $16,741, and would have required a return on her investment of over 11.06% in order for the account to break even.
15. Based upon the above-described conduct, Papariella willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that he, in the offer or sale of securities, or in connection with the purchase or sale of securities, by the use of the means or instruments or instrumentalities of transportation or communication in interstate commerce or by use of the mails, or of the facilities of a national securities exchange, directly or indirectly, employed devices, schemes or artifices to defraud; obtained money or property by means of, or otherwise made, untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, transactions, practices or courses of business which operated or would operate as a fraud or deceit upon any purchaser or other person.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Papariella's Offer of Settlement.
ACCORDINGLY, IT IS ORDERED :
A. Pursuant to Section 8A of the Securities Act, and Section 21C of the Exchange Act, that Papariella shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
B. Pursuant to Sections 15(b)(6) of the Exchange Act, Papariella shall be, and hereby is barred from association with any broker or dealer.
C. Papariella shall pay disgorgement plus prejudgment interest of $72,882, but that payment of such amount is waived based upon Respondent's sworn representations in his Statement of Financial Condition dated August 6, 2002 and other documents submitted to the Commission. In addition, based upon Respondent Papariella's sworn representations in his Statement of Financial Condition dated August 6, 2002 and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent Papariella.
D. The Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent Papariella provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of disgorgement and pre-judgment interest and the maximum civil penalty allowable under the law. No other issue shall be considered in connection with this petition other than whether the financial information provided by Respondent Papariella was fraudulent, misleading, inaccurate, or incomplete in any material respect. Respondent Papariella may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of disgorgement and interest and a penalty should not be ordered; (3) contest the amount of disgorgement and interest and penalties to be ordered; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense.
By the Commission.
Jonathan G. Katz
1 An Order Instituting Public Administrative and Cease-and Desist Proceedings against Harvest Financial Corporation, Frank D. Ruscetti and Robert A. Papariella was issued by the Commission on March 25, 2002.
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