United States of America
In the Matter of
DENNIS M. GAITO, CPA
|ORDER MAKING FINDINGS,|
ORDERING RESPONDENT TO
CEASE AND DESIST AND
IMPOSING REMEDIAL SANCTIONS
On May 19, 1999, the Securities and Exchange Commission ("Commission") instituted public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and the Commission's Rule of Practice 102(e)(1)(ii) and (iii) against Dennis M. Gaito, CPA ("Gaito" or "Respondent").
Gaito has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. 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 set forth herein, Gaito, by his Offer, consents to the entry of this Order Making Findings, Ordering Respondent to Cease and Desist and Imposing Remedial Sanctions ("Order").
On the basis of this Order and Respondent's Offer, the Commission finds:1
1. This auditor independence case arises from the failure of Dennis M. Gaito, a former principal of Moore Stephens, P.C., to comply with the established auditor independence standards in connection with Moore Stephens' audits of the financial statements of seven publicly traded issuers for varying periods between 1992 and 1998. Gaito's independence was impaired because: (i) Gaito acted as a trustee that directly or indirectly owned the securities of Moore Stephens audit clients; (ii) Gaito, as trustee, loaned millions of dollars to a director and principal shareholder of one of his audit clients, in that person's capacity as trustee of a separate trust; (iii) Gaito had material investment relationships with directors and principal shareholders of several of his audit clients; and (iv) Gaito knew or was reckless in not knowing that his conduct would impair the independence of Moore Stephens.
2. Dennis M. Gaito, a certified public accountant, was at all relevant times a principal of Moore Stephens, P.C., (formerly called Mortenson & Associates, P.C.), a public accounting firm with offices in New Jersey and New York.2
3. Gaito served on Moore Stephens' executive committee, and until January 1993 was also the firm's managing principal. Gaito was the engagement or concurring partner on certain of the audits discussed in this order.
4. Moore Stephens, P.C. was, at all relevant times, a member of Moore Stephens North America, Inc., a network of over 30 accounting firms, which in turn was a member of Moore Stephens International Limited, a network of over 165 accounting firms in 75 countries.3 Neither of these networks is a party to this proceeding.
5. Robert E. Brennan was the previous owner and operator of a brokerage firm known as First Jersey Securities, Inc.4 For over 15 years, Gaito and Moore Stephens were the auditors of First Jersey. Gaito also served Brennan in various other capacities as bank account signatory, registered agent or trustee for a variety of Brennan-related entities. Additionally, Gaito and Moore Stephens served as Brennan's personal accountants.5
6. On January 28, 1992, Brennan created three trusts, sometimes referred to as "the Children's Trusts," to benefit his three adult sons - the REB Trust for Robert E. Brennan, Jr., the KAB Trust for Kevin A. Brennan, and the Christopher Trust for Christopher Brennan. In the instruments creating the three trusts, Brennan appointed Gaito and Ronald Riccio as co-trustees for each of the three trusts. Brennan had another Moore Stephens principal (Charles E. Falk, a CPA and lawyer who provided legal services to Brennan, see note 3 supra) do the legal work to set up the trusts. Moore Stephens also maintained the accounting records for the trusts.
7. Although the trust instruments empowered the co-trustees to exercise their responsibilities independently, Brennan specifically looked to Gaito, his accountant, to manage the trusts and make investment decisions, and to Riccio, his long-time friend, for the human side - to be a friend and advisor to his sons. Gaito thereby assumed nearly complete responsibility for managing the trusts, with Brennan suggesting certain securities for purchase.
8. For example, shortly after the Children's Trusts were created, Gaito had them buy securities in two "blind pool" issuers. The blind pools then completed reverse acquisitions, and the market price of the securities rose dramatically. After only months, the Children's Trusts recognized millions in gains on the sale of these securities.6
9. Gaito reinvested the Children's Trusts' proceeds from the sale of these blind pool securities, and by August 1992, the trusts' portfolios held securities of Airshield Composites International Corp., Crescent Capital Inc. and Taft Capital Inc. Airshield was a Burlington, Ontario company that manufactured composite plastic truck body parts. Crescent was a Bethesda, Maryland company that operated a fast-food franchise in the United Kingdom. Taft was another blind pool incorporated in Delaware that was then in the process of trying to acquire a manufacturer of golf clubs and accessories. Moore Stephens was, during the relevant period, the auditor of each of these issuers.
10. In July or early August 1992, Gaito asked Angelo J. Coppolino, a Moore Stephens principal who chaired the accounting and auditing committee and was responsible for making judgments on audit independence, whether Gaito's position as trustee of trusts that invested in securities issued by audit clients would impair Moore Stephens' independence as to these clients. On August 6, 1992, Coppolino consulted the AICPA Ethics Division, which responded that independence would indeed be impaired if a member of an audit firm, acting as trustee, purchased even one share of the securities of one of the firm's audit clients. The AICPA Ethics Division stated that independence would be impaired in this situation even if the investment were not material, and even if the member of the firm who was the trustee signed a document formally stating that he would leave to his co-trustee all investment decisions regarding the securities of the firm's audit clients. A summary of this consultation with the AICPA Ethics Division was included in the firm's "consultation" file.
11. Gaito apprised Brennan of the problem, and less than a week following the AICPA Ethics Division's clear advice concerning impairment of independence, a plan emerged to evade Moore Stephens' independence obligations. The plan involved having Brennan create, on August 12, 1992, a new trust called the "Family Investment Trust," for the collective benefit of all three Brennan sons. The new trust would be what Brennan termed a "receptacle for stocks that created the conflict for" Moore Stephens.
12. Brennan appointed Riccio as trustee of the new trust, but Brennan could not recall ever consulting with Riccio about investments for the trust.7 In the instrument creating the Family Investment Trust, Brennan decreed that Gaito would be the successor trustee, who would automatically be asked to take over if Riccio died or resigned. And in a companion document executed that same day as the trust instrument, Riccio appointed Gaito as the signatory for the new trust's bank accounts.
13. Gaito discussed this new arrangement with Coppolino. Only days before, the AICPA Ethics Division had advised Coppolino that Gaito could not, as trustee, invest in the firm's audit clients. Yet notwithstanding this negative advice, neither Coppolino nor Gaito bothered to do another consultation with the AICPA and made no reasonable inquiry before proceeding with the Family Investment Trust arrangement.
14. Within weeks after creation of the Family Investment Trust, Gaito signed contracts on behalf of the three Children's Trusts to transfer their securities of Airshield, Crescent and Taft to the new Family Investment Trust. In the case of each of these transfers of securities, the Family Investment Trust did not actually pay the Children's Trusts for the securities. Instead, the contracts stipulated that payment would not be made for a year after the sale. Since the Family Investment Trust did not have the financial ability to repay the loans, the Children's Trusts' economic interest in the Airshield, Crescent and Taft securities remained essentially the same as before the purported transfers of the securities.
15. Around the same time that he made these arrangements for holding the Airshield, Crescent and Taft securities, Gaito as trustee of the Children's Trusts also agreed to the investment of substantial amounts of the Children's Trusts' funds in the securities of existing Moore Stephens audit clients - again using the vehicle of the Family Investment Trust as an intermediary. Instead of having the Children's Trusts invest directly in securities of existing Moore Stephens audit clients, the Children's Trusts loaned cash to the Family Investment Trust, which invested in the securities of Moore Stephens' audit clients.
16. On October 22, 1992, just two months after its formation, the Family Investment Trust made its initial purchases of securities issued by Moore Stephens audit clients International Thoroughbred Breeders, Inc. (ITB) (a New Jersey racetrack operator founded by Brennan) and Chefs International, Inc. (a New Jersey restaurant operator). Both Brennan and Riccio were directors of ITB; Brennan was also ITB's chairman and chief executive officer. And Brennan was principal shareholder of both ITB and Chefs.
17. Riccio, the Family Investment Trust's sole trustee, had only a token involvement in the purchases of ITB and Chefs securities. A broker made an unsolicited phone call to Riccio and advised that ITB and Chefs securities were available for purchase.8 Riccio then discussed with Gaito where the money would come from to purchase the securities. Gaito informed Riccio that he would loan money from the Children's Trusts to the Family Investment Trust to give it the money to purchase the securities. Gaito personally signed each of the checks making the loans from the Children's Trusts to the Family Investment Trust. Without these loans from the Children's Trusts, the Family Investment Trust would not have had the funds to buy the ITB and Chefs securities.
18. By October 1993, Brennan donated approximately 4 million warrants of Primedex Health Systems, Inc. to the Family Investment Trust. Primedex, based in Los Angeles, was a provider of services related to medical imaging. Primedex was an existing audit client of Moore Stephens. Brennan and his then-wife also donated securities of FJS Properties Fund LP to the Family Investment Trust. FJS Properties was a publicly held partnership that owned and operated an apartment complex in Florida. FJS Properties, too, was an existing audit client of Moore Stephens. During the time covered by this Order, Moore Stephens continued to audit both companies.
19. Between October 1992 and February 1993, the Children's Trusts loaned approximately $4.1 million of trust funds, without security, to the Family Investment Trust. During that same period, the Family Investment Trust used approximately $3.9 million of this amount to purchase ITB and Chefs securities, as well as additional Crescent securities. Gaito personally signed the Children's Trusts checks making the loans to the Family Investment Trust to pay for these securities. Gaito was thus fully aware that the funds loaned were actually being used to buy the securities of companies that were Moore Stephens audit clients.
20. Gaito's activities on behalf of the Family Investment Trust included the following:
21. On January 23, 1998, Gaito, as trustee of the Children's Trusts, forgave all debts of the Family Investment Trust to the Children's Trusts.9 At that time, the Family Investment Trust owed $1,000,000 to the Christopher Trust, $1,376,010 to the KAB Trust, and $1,550,000 to the REB Trust.
22. A material amount of the Children's Trusts' assets consisted of loan receivables from the Family Investment Trust. Those loans depended on the performance of the Family Investment Trust's securities holdings for repayment. For example, as of December 31, 1993, notes receivable from the Family Investment Trust represented approximately 59% of the Christopher Trust's assets, 39% of the KAB Trust's assets, and 46% of the REB Trust's assets. As of August 7, 1995, notes receivable from the Family Investment Trust represented approximately 40% of the Christopher Trust's assets, 42% of the KAB Trust's assets, and 49% of the REB Trust's assets.
23. A material amount of the Family Investment Trust's assets came from loans from the Children's Trusts. When the Family Investment Trust was first created, virtually all of its assets came from these loans. In the ensuing years, the loans continued to represent a material part of the Family Investment Trust's assets.
24. The Family Investment Trust's shareholdings were material to the audit clients of Moore Stephens. For example, the Family Investment Trust beneficially owned (i) approximately 10% of ITB's outstanding securities as of January 14, 1993; (ii) approximately 7% of Chefs' outstanding securities as of December 24, 1992; (iii) approximately 21.5% of Airshield's outstanding securities as of December 31, 1992; (iv) approximately 45% of Crescent's outstanding securities as of December 31, 1993; (v) approximately 13% of Taft's outstanding securities as of December 31, 1993; (vi) approximately 9% of Primedex's outstanding securities as of October 31, 1993; and (vii) approximately 9% of FJS Properties' outstanding securities as of December 31, 1995.
25. On several occasions, Gaito acted as de facto trustee of the Family Investment Trust. For example, on at least one occasion, Gaito entered into a written agreement to sell securities held by the Family Investment Trust (of which he was bank signatory, but not trustee) and two of the three Children's Trusts (of which he was trustee). In addition, in June of 1997, Gaito caused one of the Children's Trusts - the KAB Trust - to pay approximately $700,000 in cash to the Family Investment Trust in return for the worthless stock of Airshield, a company that had been defunct for approximately three years. Gaito initiated the transaction and determined the amount to be paid by the KAB Trust to the Family Investment Trust for this worthless stock. This transaction had the effect of moving assets held in a trust vehicle purportedly for one Brennan son into a different trust vehicle benefiting all three sons. As a result of this transaction, the KAB Trust, which was funding the support of one of the sons, ran out of money the following year.
26. Gaito directly participated in Moore Stephens' audits of the financial statements of ITB, Chefs and Crescent. For example, Gaito was the concurring partner on the audits of ITB's financial statements for ITB's fiscal years ended June 30, 1992, 1993, 1994, 1995 and 1996. Gaito was also the concurring partner for the audits of Chefs' financial statements for the fiscal years ended January 31, 1993 and 1996. He was also the engagement partner for the audits of Crescent's financial statements for the years ended December 31, 1993 and 1994, and the concurring partner for the audit of Crescent's financial statements for the year ended December 31, 1996.
27. Moore Stephens improperly issued audit opinions for issuers during the following periods while its independence was impaired because of Gaito's conduct:
(i) ITB's fiscal years ended June 30, 1992, 1993, 1994, 1995 and 1996;
(ii) Chefs' fiscal years ended January 31, 1993, 1994, 1995, 1996, and 1997;
(iii) Crescent's fiscal years ended December 31, 1993, 1994, 1995 and 1996;
(iv) Taft's fiscal years ended December 31, 1992 and 1993;
(v) Airshield's fiscal year ended December 31, 1992;
(vi) Primedex's fiscal years ended October 31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998; and
(vii) FJS Properties' fiscal years ended December 31, 1994, 1995, 1996 and 1997.
28. Gaito knew or was reckless in not knowing that his independence, and the independence of Moore Stephens, was impaired with respect to the above audits. For each of these companies, in each year in which Moore Stephens performed audit services, Gaito caused Moore Stephens to misrepresent to public shareholders and to the Commission that it was issuing a report as an "independent" auditor, when, in fact, it was not.
29. The Supreme Court has made clear that an independent auditor "assumes a public responsibility transcending any employment relationship with the client [and] owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This `public watchdog' function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust." United States v. Arthur Young & Co., 465 U.S. 805, 817-18 (1984).
30. The Commission, under Sections 12 and 13(a)(2) of the Exchange Act, requires that financial statements filed with the Commission be certified by independent accountants. During the relevant period, Regulation S-X (Rule 2-01) provided: (i) that "the Commission will not recognize any certified public accountant ... as independent who is not in fact independent"; and (ii) that, in assessing an auditor's independence, the Commission "will give appropriate consideration to all relevant circumstances, including evidence bearing on all relationships between" the auditor and audit client. Regulation S-X (Rule 2-02) also provides that the accountant's report must state whether the audit was conducted in accordance with GAAS (generally accepted auditing standards), which likewise requires that auditors be independent.
31. The Commission and GAAS view independence as impaired where an auditor has either a direct or a material indirect financial interest in a client. And the Commission and GAAS view both the fact and the appearance of auditor independence as essential for investors to have confidence that an audit represents a wholly unbiased examination of management's presentation of the corporate financial picture. GAAS specifically requires auditors to "avoid situations that may lead [others] to doubt their independence."
32. Gaito was aware of his independence obligations. Each year, he initialed Moore Stephens' "Independence Compliance Confirmation," representing that he was familiar with the firm's independence policies, and that, consistent with those policies, he had engaged in no prohibited investments, transactions or relationships with audit clients. He received and signed a memorandum listing Moore Stephens' public clients, including those involved in this proceeding.
33. The Commission's Regulation S-X (Rule 2-02(b)(1)) requires an auditor's reports on a public company's financial statements to state "whether the audit was made in accordance with generally accepted auditing standards." The second general standard of GAAS requires an auditor to be independent, and independence "shall be considered to be impaired" if, among other situations, during "the period of a professional engagement or at the time of expressing an opinion" the auditor or audit firm was "a trustee of any trust [that] had or was committed to acquire any direct or material indirect financial interest in" the audit client (AICPA Interpretation 101-1(A)(2)).
34. Gaito's position as a co-trustee of the Children's Trusts impaired Moore Stephens' independence because the Children's Trusts had a direct financial interest through the "receptacle" Family Investment Trust in Moore Stephens' audit clients.
35. During the period of Moore Stephens' professional engagements, the Children's Trusts continued to have an interest in Airshield, Crescent and Taft securities. Gaito's transfer of these securities from the Children's Trusts to the Family Investment Trust pursuant to contracts that deferred payment for the securities for a year, and that gave the Children's Trusts the right to assert a security interest in some of the securities, did not substantially alter the Children's Trusts' economic interest in these securities.
36. The Children's Trusts also had an interest in the ITB and Chefs securities (and additional Crescent securities) purchased in the name of the Family Investment Trust. Gaito financed the purchases of these securities with loans from the Children's Trusts that he had deposited in the Family Investment Trust's bank account, and wrote checks (as bank signatory of that trust) for its purchases of these securities. The Children's Trusts bore the risks involved in these investments, as the Family Investment Trust's ability to repay its loans to the Children's Trusts was largely dependent on the success of these investments. In short, the Family Investment Trust was nothing more than a conduit for the investment of Children's Trust assets in securities of Moore Stephens audit clients.
37. The Children's Trusts likewise had an interest in the Primedex and FJS securities purchased in the name of the Family Investment Trust. Nearly half of the corpus of the Children's Trusts was invested in loans to the Family Investment Trust, and virtually all of those funds were invested in securities of Moore Stephens audit clients. The substantial indebtedness between the trusts gave the Children's Trusts a material indirect interest in all of the Family Investment Trust's assets, and further impaired Moore Stephens' independence.
38. In addition, auditor independence "shall be considered impaired" if the auditor or audit firm had "any joint, closely held business investment ... with any officer, director, or principal stockholder" of the audit client that was "material" in relation to the net worth of the auditor or audit firm (AICPA Interpretation 101-1(A)(3)).
39. Gaito's independence was impaired by Gaito's investment relationship with Brennan, a director and/or principal shareholder of three audit clients of Moore Stephens and Gaito. Brennan was a director, chairman, chief executive officer, principal shareholder, founder, and member of the audit committee and executive committee of ITB, a principal shareholder of Chefs, and a director and controlling partner of the general partner of FJS Properties.
40. Gaito's investment relationship with Brennan was material and long-standing. Brennan appointed Gaito as trustee to manage the Children's Trusts' assets for Brennan's adult sons. Within months of his appointment as trustee, Gaito made millions for the trusts by investing their assets in Brennan-related blind pool offerings.
41. Brennan then established the Family Investment Trust as a receptacle to invest funds of the Children's Trusts in securities of Gaito's audit clients. Brennan appointed Gaito as successor trustee of the Family Investment Trust. Also serving as bank signatory, Gaito loaned millions of dollars from the Children's Trusts to fund the investments in the name of the Family Investment Trust. As events progressed, Gaito discussed investments with Brennan, and Gaito issued the checks for Family Investment Trust stock purchases.
42. Gaito's independence was further impaired by Gaito's investment relationship with Riccio, also a director of two audit clients. Riccio was a director of ITB. At various times, Riccio was also a member of ITB's audit committee, related party transactions committee, executive compensation committee, and litigation committee.
Separately, Riccio was a director of Primedex, another audit client of Moore Stephens. At various times, Riccio was also a member of Primedex's audit committee and compensation committee. Additionally, Riccio, as trustee of the Family Investment Trust, was a principal shareholder of several of Moore Stephens' audit clients.
43. Gaito and Riccio had a clear and material investment relationship. They were co-trustees of the Children's Trusts. In this capacity, they were jointly responsible for managing millions of dollars of trust investments. A substantial portion of these assets were invested in loans used to purchase securities of ITB and Primedex, companies of which Riccio was a director.
44. Further, auditor independence "shall be considered impaired" if the auditor or audit firm had "any loan to ... any officer, director, or principal stockholder" of the audit client (AICPA Interpretation 101-1(A)(4)). This absolute prohibition of loans is not subject to any materiality limitation. Gaito as trustee of the Children's Trusts loaned over $4 million to Riccio as trustee of the Family Investment Trust. Gaito personally signed the checks drawn on the Children's Trusts' accounts. Riccio was a director of ITB, an audit client of Gaito and Moore Stephens. Riccio was also a director of Primedex, another audit client of Gaito and Moore Stephens. Additionally, Riccio, as trustee of the Family Investment Trust, was a principal shareholder of several of Moore Stephens' audit clients.
45. Finally, Regulation S-X (Rule 2-01) states that, in determining whether an accountant is independent of a particular person, the Commission "will give appropriate consideration to all relevant circumstances, including evidence bearing on the relationships between the accountant and that person or any affiliate thereof, and will not confine itself to the relationships existing in connection with the filing of reports with the Commission."
46. In this connection, the particular prohibitions contained in Regulation S-X (Rule 2-01) are stated simply as "examples" of the kinds of relationships that will be found to impair auditor independence. AICPA Interpretation 101-1, dealing with auditor independence, likewise provides that the particular prohibitions there stated are simply "examples" and "are not intended to be all-inclusive." And, it is a cardinal principle of auditor independence that an auditor cannot do indirectly what he or she cannot do directly.
47. In this case, the long-standing and intertwined relationship that Moore Stephens and Gaito had with their audit clients through Brennan-created trusts and other ties involving Brennan created a situation in which Moore Stephens' independence in both fact and appearance was materially impaired.
48. Each of the audit reports identified above was materially false and misleading in representing that Moore Stephens was independent and that the audit accorded with GAAS. Gaito acted with scienter in engineering the scheme that resulted in the issuance of the false audit reports, thereby willfully violating Exchange Act Section 10(b) and Exchange Act Rule 10b-5.
49. The financial statements contained in the annual reports of Crescent, Taft, Airshield, Chefs, ITB, Primedex and FSJ Properties were not audited by independent accountants as required by Exchange Act Section 13(a)(2), which caused the issuers to violate Exchange Act Section 13(a) and Exchange Act Rule 13a-1. Gaito thereby willfully aided and abetted and caused violations of Exchange Act Section 13(a) and Exchange Act Rule 13a-1, and willfully violated Rule 2-02 of Regulation S-X, which requires auditors to be independent of their clients.
50. Based on the foregoing, Gaito engaged in improper professional conduct, and willfully violated, and aided and abetted the violation of, provisions of the federal securities laws and rules within the meaning of Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice.
Accordingly, IT IS HEREBY ORDERED that Gaito cease and desist from committing or causing any violation, or any future violation, of Exchange Act Section 10(b) and Exchange Act Rule 10b-5, and Rule 2-02 of Regulation S-X, and that Gaito cease and desist from causing any violation, or any future violation, of Exchange Act Section 13(a) and Exchange Act Rule 13a-1.
IT IS HEREBY FURTHER ORDERED, effective immediately, that Gaito is denied the privilege of appearing or practicing before the Commission as an accountant.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Gaito's Offer and are not binding on any other person or entity in this or any other proceeding.
2 Gaito resigned from Moore Stephens in late 1999 after being indicted in a case unrelated to this proceeding. In that unrelated case, on May 4, 2001, Gaito was convicted of money laundering, conspiracy to launder money and commit securities fraud, and witness tampering. On November 9, 2001, Gaito was sentenced to 120 months incarceration.
3 On, May 19, 1999, Moore Stephens and three of its principals consented to the issuance of an order censuring them and ordering them to cease and desist from future violations of the independence rules. In the Matter of Moore Stephens, P.C. et al., Accounting and Auditing Enforcement Release No. 1135 (May 19, 1999); In the Matter of Charles E. Falk, CPA, Accounting and Auditing Enforcement Release No. 1134 (May 19, 1999).
4 On June 19, 1995, a federal court ordered Brennan and First Jersey to pay over $70 million for their role in a massive and prolonged securities fraud. SEC v. First Jersey Securities, Inc., 890 F. Supp. 1185 (S.D.N.Y. 1995), aff'd, 101 F.3d 1450 (2d Cir. 1996), cert. denied, 118 S.Ct. 57 (1997). Shortly after the trial court's ruling, Brennan filed for bankruptcy protection, and the ensuing bankruptcy examination brought to the Division's attention the auditor independence violations described below. But for the Brennan bankruptcy, these independence violations would likely have escaped detection by law enforcement.
5 Brennan was himself a CPA. His license to practice public accountancy was revoked by the New Jersey Board of Accountancy on September 8, 1998, based on his violations of the federal securities laws. On April 16, 2001, Brennan was convicted of 7 counts of bankruptcy fraud and money laundering and was subsequently sentenced to 110 months' imprisonment.
6 During 1992, the SEC suspended trading of the stock of one of these issuers in view of questions about the adequacy and accuracy of publicly-disseminated information concerning, among other things, the identity of persons having control of the issuer and the beneficial ownership of that company's securities.
7 At various times, all or most of the trust's assets consisted of securities of companies that were Moore Stephens clients and that also had close ties to Brennan and his related entities.
8 The broker who phoned Riccio was Richard Brown (principal of Hibbard Brown & Co.), who shared his executive office suite in New York City with Brennan. Brennan was the principal shareholder of both ITB and Chefs - the issuers of the stock being offered to the trust and the creator of the trust. Hibbard Brown, ITB, Chefs, Brennan, and the trust were all clients of Moore Stephens.
9 At the time of the loan forgiveness, the SEC's investigation of Moore Stephens was well under way, and only a month earlier, Gaito had been questioned about the effect of the trust investments on his independence.
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