SECURITIES EXCHANGE ACT OF 1934
Release No. 40468 / September 24, 1998
File No. 3-9718
SECURITIES AND EXCHANGE COMMISSION
COMMISSION INSTITUTES ADMINISTRATIVE PROCEEDINGS AGAINST JOSEPH W. PELLECHIA FOR FAILING REASONABLY TO SUPERVISE IN CONNECTION WITH UNREGISTERED DISTRIBUTION OF MICROCAP STOCK
On September 24, 1998, the Securities and Exchange Commission ("Commission") instituted public administrative proceedings against Joseph W. Pellechia ("Pellechia"), a former branch manager of the Staten Island branch office of Datek Securities Corp. ("Datek"), to determine whether he failed reasonably to supervise Sheldon Maschler ("Maschler"), a Datek broker. In the Order Instituting Proceedings the Division of Enforcement ("Division") alleges that, while under Pellechias supervision, Maschler executed an unregistered distribution of the stock of Alter Sales Co., Inc. ("ASI"), a microcap issuer, in violation of Section 5 of the Securities Act of 1933. According to the Division, the circumstances of the trading in the account were such that they raised red flags suggesting a possible unregistered distribution, and that Pellechia failed to determine if Maschler had fulfilled his duty to investigate whether the sales required registration. The Division alleges that Pellechia thereby failed to assure that the responsibilities that the securities laws impose on brokers, as gatekeepers to the public markets to ascertain that they are not selling unregistered securities, were carried out. In particular, the Division alleged:
Pellechia was responsible for managing what Datek denominated its Staten Island branch office, which was located in the basement of Maschlers residence.
The ASI stock sold by Maschler was for a new account opened in the name of a Martin Clainey, a fictitious individual. Immediately after the account was opened Maschler began executing sell transactions in ASI stock, thereby creating a large short position in the account. A total of 1.4 million newly issued shares of ASI stock were delivered into that account, part of which covered the short positions. Substantially all of that stock was sold within a three week period. The proceeds of the sales were rapidly disbursed from the account, some to a bank account in the Isle of Jersey and some to a bank account held jointly by "Clainey" and Marc Osheroff, ASIs CEO and president. There was no other activity in the Clainey account.
Pellechia approved the new Clainey account based on a new account form that was missing much of the required information. In addition, Pellechia knew or should have known of the suspicious activity in the Clainey account, and that the ASI stock Maschler sold through the Clainey account was equivalent to more than 60% of the total outstanding according to ASIs most recent annual report.
A hearing will be held to determine whether the Divisions allegations are true and, if so, what sanctions, if any, are appropriate and in the public interest.
In a related action, the Commission has alleged that the sales executed through the Clainey account at Datek were part of a "pump and dump" market manipulation scheme involving ASI. On April 23, 1998, the Commission named five individuals, including Maschler, as defendants in an injunctive action filed in the Southern District of Florida. See SEC v. Marc A. Osheroff, et al.; Lit. Rel. No. 15719. On June 2, 1998, the Commission instituted a settled administrative proceeding against another broker who handled a Clainey account that was used in an unregistered distribution of ASI stock. See Robert M. Marcus, Securities Act Release No. 7545.