INITIAL DECISION RELEASE NO. 130 ADMINISTRATIVE PROCEEDING FILE NO. 3-9120 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ______________________________ : In the Matter of : : INITIAL DECISION STIRES & CO., INC. and : August 11, 1998 SIDNEY H. STIRES : : _____________________________: APPEARANCES: David L. Kornblau, Howard T. Carolan, Jr., and Mark W. Porter for the Division of Enforcement, Securities and Exchange Commission Robert A. Meister and Christina L. Nargolwala for the Respondents BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission's ("Commission") Order Instituting Public Administrative and Cease and Desist Proceedings ("Order") issued September 30, 1996, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 21C and 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") alleges that from mid-1993 to at least April 1994: (1) Stires & Co., Inc. ("Stires & Co.") and Mr. Stires willfully violated or caused and willfully aided and abetted violations of Section 17(a) of the Securities Act in connection with the offering of European Guaranteed Insurance Contracts ("Euro-GICs") by preparing a materially false and misleading private placement offering memorandum which was used to solicit prospective Euro-GIC investors; (2) Stires & Co. and Mr. Stires caused and willfully aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by providing perpetrators of the fraud access to brokerage and bank accounts which they used to receive and gain possession of investor funds; and (3) Stires & Co. and Mr. Stires caused and willfully aided and abetted violations of Section 15(a) of the Exchange Act in that they allowed unregistered persons to operate as brokers under the imprimatur of Stires & Co.'s broker-dealer registration. Respondents denied the allegations in the Order. (Answer dated October 23, 1996.) I held a prehearing conference on November 1, 1996, and a hearing in New York City on February 3, 4, and 5, 1997. The Division of Enforcement ("Division") called twelve witnesses, including one expert, and the Respondents called one witness, Mr. Stires. The record consists of two Counsel's Exhibits, two Joint Exhibits, 106 exhibits sponsored by the Division and twenty-two exhibits sponsored by the Respondents.[1] The Division and the Respondents filed their Posthearing Briefs and Proposed Findings of Fact and Conclusions of Law on March 31, 1997, and April 28, 1997, respectively. The Division filed a Posthearing Reply Brief on May 8, 1997. Findings of Fact[2] Mr. Stires graduated from Harvard College in 1951 and attended the New York Institute of Finance. Mr. Stires has been involved continuously in the securities industry since he joined Kidder Peabody & Co. ("Kidder Peabody") in 1954. (Tr. 492.) While with Kidder Peabody, Mr. Stires was corporate secretary and headed Webster Management, the firm's investment advisory arm. (Tr. 493.) After leaving Kidder Peabody, Mr. Stires worked with two other investment management firms and founded two mutual funds before he began Stires & Co. in 1975. (Tr. 494.) In 1993-94, Mr. Stires was an owner, the President, and the Chairman of the Board of Directors of Stires & Co., a New York based investment banking firm and member of the National Association of Securities Dealers ("NASD"). (Div. Ex. 1 at 1.) As an individual able to direct the actions of the firm, Mr. Stires was a control person and his actions are attributable to the firm. Mr. Stires characterized the firm as primarily a venture capital securities dealer. (Tr. 494.) Mr. Stires worked at Stires & Co.'s office at 432 Park Avenue South, New York, New York, as a registered representative and a registered principal. (Jt. Ex. 2.) Stires & Co. functioned as an introducing firm, meaning it introduced its clients to another firm, the Pershing Division of Donaldson, Lufkin & Jenrette Securities Corp. ("Pershing") which acted as Stires & Co.'s clearing broker.[3] (Tr. 188, 213.) Funds deposited into and securities purchased for or deposited into a Stires & Co. customer's account were held by Pershing in its accounts at Chase Manhattan Bank.[4] (Tr. 213, 453; Jt. Ex. 2.) When Pershing received funds wired to a customer's account, it notified Stires & Co. of the bank that transferred the funds but it did not identify the individual or entity that was the source of the funds. (Jt. Ex. 2.) Pershing did not deal with customers directly; it required a directive from Stires & Co. before it would disburse funds from a customer's account. (Tr. 213-14, 452.) Patricia Sheerin, who had worked with Mr. Stires since 1960, managed Stires & Co.'s small office of about seven people. (Div. Ex. 91 at 11-12.) Mr. Stires and Ms. Sheerin worked together almost every day. At the time of her death in 1996, Ms. Sheerin was a registered principal and a Stires & Co. owner, director, and corporate secretary. (Jt. Ex. 2.) In 1993-94, Ms. Sheerin was the firm's bookkeeper and trader, and she issued many of the directions to Pershing that are at issue here. (Tr. 495; Div. Ex. 91 at 12.) Guaranteed Insurance Contracts ("GICs") are securities issued by insurance and reinsurance companies when they enter contracts to guarantee the payment of principal and interest in the ordinary course of business.[5] (Jt. Ex. 2, para. 9; Tr. 74, 78, 398, 517-20.) In the late spring of 1993, Curtis Lynch, a Stires & Co. client, told Mr. Stires about M.T.L. International Finance, Inc. ("M.T.L."), a California corporation which was offering Euro-GICs issued by AAA-rated European insurance companies. (Tr. 297, 518; Div. Ex. 28.) Through Mr. Lynch, Mr. Stires met John K. Robinson and Leon Howard, (two of three "promoters") who represented themselves as officers of M.T.L., the authorized sub-agent for a syndicate of European insurance and reinsurance companies that issued Euro-GICs.[6] (Div. Ex. 28; Div. Ex. 91 at 25, 31-33; Tr. 267, 422, 498, 518, 525.) Mr. Robinson signed a single page document as M.T.L. president and chief executive officer on October 25, 1993, pursuant to a resolution passed by the M.T.L. Board of Directors at a meeting on June 23, 1993, empowering Stires & Co. to, among other things, offer and sell Standard & Poor's ("S&P") AAA-rated Euro-GICs on behalf of M.T.L. (Div. Ex. 28.) According to the resolution, M.T.L. is a sub-agent authorized to organize, offer, order, sell, buy and transact the purchase of the off-balance sheet "Guarantees" via private placement.[7] (Id.) The document does not identify the agent or the issuers. Mr. Stires communicated with the syndicate through M.T.L., which Mr. Robinson and Mr. Howard told him was represented by Peter Gardner in London. (Tr. 421, 436, 438-39, 525.) Mr. Stires did not know Mr. Robinson, Mr. Howard, or Mr. Gardner before 1993 and he had never heard of M.T.L. (Tr. 534-35.) Mr. Stires worked closely with M.T.L. from at least the middle of 1993 through January 1994, but he never met Mr. Robinson, who was his primary contact. (Tr. 422, 501, 525, 531.) Mr. Stires met Mr. Howard on two occasions and talked with him often. (Tr. 422-23, 525.) He talked with Mr. Gardner twice, but never met him. (Tr. 438-39.) From at least August 1993 through January 1994, Mr. Stires, Mr. Lynch and David Hollander, an attorney licensed in the state of New York, used Stires & Co.'s name, office, facilities, and letterhead as part of a concerted effort with M.T.L. to sell Euro-GICs.[8] Mr. Hollander worked on the potential sale of Euro-GICs in Stires & Co.'s offices for most of the day three to four days a week, and he showed Mr. Stires whatever he was doing. (Tr. 312, 332.) Mr. Lynch and Mr. Hollander were not Stires & Co. employees, licensed registered representatives, or registered broker- dealers. Neither received any compensation from Stires & Co., but they understood they would receive compensation from a successful Euro-GIC sale. (Tr. 316.) Stires & Co. and M.T.L. distributed to potential investors a Program Summary for Euro-GICs which Mr. Stires reviewed and approved and which was prepared primarily by Mr. Hollander with assistance from Stires & Co.'s law firm. (Tr. 318-21, 324-26, 540; Div. Ex. 91 at 21.) Stires & Co.'s name is prominently displayed throughout the document which describes the Euro-GICs, "available exclusively through Stires & Company," as instruments having a term of ten years, a face value of $10 million, and paying interest in U.S. dollars at the rate of 7.5%. (Div. Ex. 1 at 2-3; Tr. 433.) The Euro-GICs described in the Program Offering were securities as that term is used in Section 2 of the Securities Act and Section 3 of the Exchange Act. (Tr. 519.) The Program Offering stated: [Stires & Co.] has European Guaranteed Insurance Contracts ("Euro-GICs") available for private placement, subject to Confirmation at the time of Offer. These Euro-GICs are available exclusively through [Stires & Co.], as an NASD dealer. The Euro-GICs will be issued in registered form by an S&P AAA rated European insurance company through its prime bank (rated in the top 25 in the world) and reinsured by a syndicate of S&P AAA rated and ISI "A" rated European insurance companies.[9] The Issuer's prime bank will authenticate the validity of the numbered Instrument at the time of issue. . . . . This Instrument is being offered only to accredited investors meeting the requirements of Regulation D of the Securities Act . . . [Stires & Co.] and its counsel . . . have reviewed all of the documents related to these Euro-GICs . . . . . . . . The S&P AAA European insurance company Issuer and Guarantors consist of Wintherthur Swiss Insurance Company, Zurich Insurance Co., Munich Reinsurance Co. AG, Swiss Reinsurance Co.; Allianz Nederland, N.V. (ISI Rated A), and Assicurazioni Generali S.P.A. (ISI Rated A). Excerpts from S&P's and ISI's Rating Analysis for each member of the insurance syndicate are provided herein. (Div. Ex. 1 at 2-3, 10-15.) Stires also provided potential Euro-GIC investors with sample Purchase Agreements which stated that: [Stires & Co.], an NASD member broker/dealer has available for private placement, subject to proper confirmation as described herein Guaranteed Insurance Contracts (GICs) to be issued and reinsured by a syndicate of S&P "AAA" Rated European insurance companies. Stires and its counsel . . . have reviewed all documents and sample certificates related to these GIC instruments to ensure full compliance with U.S. Securities laws. These documents have been supplied to [Stires & Co.] in strict confidence by a U.S. agent, having authority to represent the issuing syndicate. We are pleased to propose the following pro forma offer for your acceptance. (Div. Ex. 52.) Mr. Stires allowed M.T.L. and a related company, Equity Action, Inc. ("Equity Action") to open accounts at Stires & Co. based on Mr. Robinson's claim that they wanted to buy U.S. Treasuries with their excess working capital. (Tr. 498-500.) Mr. Howard affirmed Mr. Robinson's representations. (Tr. 498-99, 525.) Even though Stires & Co.'s commission for buying and selling Treasury bills was very low, Mr. Stires opened these accounts because Mr. Robinson made the request and Stires & Co. was working "very closely with [M.T.L.] on the instructions of these GICs." (Tr. 500, 502-03.) Mr. Stires was the account executive on the M.T.L. account. (Tr. 434.) Mr. Stires was unaware that the promoters used both accounts to obtain funds they obtained from individual investors as part of a fraudulent scheme detailed later in this decision. (Jt. Ex. 2.) Mr. Robinson opened the M.T.L. account on October 20, 1993, with deposits of $30,000 and $50,000. (Div. Ex. 110; Tr. 501.) Based on instructions from representatives of M.T.L., Ms. Sheerin directed Pershing on October 21, October 22, November 1, and November 23, 1993, to send withdrawals of $60,000, $10,000, $5,000, and $4,991, respectively, from M.T.L.'s account at Stires & Co. to United Missouri Bank, Leon Howard account. (Jt. Ex. 2; Div. Ex. 110; Tr. 501.) Ms. Sheerin opened the Equity Action account on instructions from either Mr. Lynch, Mr. Stires, or Mr. Hollander based on a phone call from Harry Walker, an associate of Mr. Robinson and the third "promoter." (Jt. Ex. 2; Div. Ex. 91 at 30-33.) The account was opened on November 5, 1993, with a deposit of $5,000. (Div. Ex. 111.) Ms. Sheerin never met Mr. Walker but he called her several times and instructed her that money was coming in to "his" account, which Ms. Sheerin considered to be the Equity Action account, and she should wire money out to his bank. (Div. Ex. 91 at 30.) On November 18, 1993, the account received $100,000. On the same day, Ms. Sheerin directed Pershing to send $70,000 to Community Bank, Carmichaels, Pennsylvania, Equity Action account. (Div. Ex. 111.) On November 26, the Equity Action account received $40,000. Stires & Co. directed Pershing to send $50,000 and $15,000 on November 29 and December 2, respectively, to Community Bank, Equity Action account. On December 9, the Equity Action account at Stires & Co. received $500,000. On the following day, Stires & Co. directed Pershing to send $500,000 to the Community Bank, Equity Action account.[10] (Id.) Mr. Stires, Mr. Lynch, and Mr. Hollander conducted extensive negotiations with potential investors including Lescarden, Inc., a pharmaceutical company; Gilford Securities, Inc. ("Gilford Securities"), a registered broker-dealer; Clarion American Securities ("Clarion American"), a bond firm for institutional investors which also represented pension funds; Banco de Cochabamba located in Brazil; Dumbarton Group, Inc. and Maximillian Group, Ltd., two companies located offshore which traded bank instruments; and CSR Credit Subalpino Di Lugano S.A. ("CSR"), Lugano, Switzerland. (Div. Ex. 61; Tr. 59-64, 275- 77, 365-69.) Stires & Co. presented Euro-GICs as attractive investments because the yield was substantially better than domestic GICs or normal corporate investments, payment was in dollars, and the reserves of the large insurance company issuers made them safe investments.[11] (Tr. 519.) Several of these institutional investors came close to investing in Euro-GICs. (Tr. 338-39.) For example, in October 1993, purchases by Gilford Securities or Clarion American were imminent. (Tr. 338; Div. Exs. 15, 22.) In December 1993, CSR, which had set up an account at Cole Taylor Bank in Chicago ("Cole Taylor") with $8.35 million over which Mr. Stires had power of attorney for the purpose of buying and selling GICs, did not make the investment because Cole Taylor could not effectuate a "swift wire" or authenticated wire, an electronic process insuring that funds are sent and received as intended. (Tr. 282-84, 527-28.) Despite a great deal of effort, Stires & Co. was unsuccessful in its offer of Euro-GICs. The Commission's staff conducted an audit of Stires & Co. in November 1993. (Tr. 325.) A Commission staff member contacted Mr. Stires in January 1994, and expressed concern about the Euro-GIC offering. (Tr. 425; Div. Ex. 77; Resp. Exs. S, U.) Stires & Co. ended its relationship with M.T.L. and its attempts to sell Euro-GICs in February 1994. (Tr. 530; Div. Ex. 91 at 24.) Stires & Co. and Mr. Stires did not receive any compensation as a result of the above described activities in Euro-GICs. Mr. Hollander did not tell Mr. Stires that Equity Action paid him $12,500 directly and $20,000 indirectly in 1993. (Tr. 318.) Mr. Stires did not know that Mr. Hollander or Mr. Lynch received funds from M.T.L., Equity Action, or the promoters, but he knew in late 1993, that either Mr. Hollander or Mr. Lynch received a loan from Mr. Walker or Mr. Howard. (Jt. Ex. 2.) Conclusions of Law[12] 1. Violations of Section 17(a) of the Securities Act The Division alleges that Stires & Co. and Mr. Stires willfully violated Section 17(a) because, utilizing the means of interstate commerce and the mails, they offered or sold securities by means of false or misleading statements or omissions of material fact. (Division's Posthearing Brief at 31-32.) The Division does not distinguish among the provisions of Section 17(a). Section 17(a)(1) which makes it unlawful for any person in the offer of any security by the use of any means of communication in interstate commerce or the mails, directly or indirectly, to employ any device, scheme, or artifice to defraud is applicable to this situation.[13] Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 require a showing that the Respondents acted with scienter. Scienter is a mental state embracing intent to deceive, manipulate, or defraud. Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)). Reckless conduct is, at the least, conduct which is "highly unreasonable" and which represents "an extreme departure from the standards of ordinary care," and is sufficient to show scienter. Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir.) cert. denied, 434 U.S. 875 (1977); Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44-48 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023-24 (6th Cir. 1979). As Chairman of the Board and the person who controlled Stires & Co., Mr. Stires's scienter establishes scienter of the company for purposes of the antifraud provisions of the securities statutes. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972); see also, Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1573 (9th Cir. 1990). Stires & Co. acted with scienter when Mr. Stires reviewed, approved, and circulated the Program Summary for Euro-GICs. The Program Summary falsely represented that Stires, O'Donnell & Co. ("Stires, O'Donnell"), which was Stires & Co.'s institutional brokerage affiliate, specialized in Euro-GICs and "synthetic" GICs. (Div. Ex. 1 at 1; Div. Ex. 91 at 80.) Mr. Stires knew when he made this material misrepresentation that neither Stires & Co. nor Stires, O'Donnell had never engaged in transactions involving Euro-GICs or "synthetic" GICs.[14] (Tr. 186, 403- 04, 544; Div. Ex. 91 at 15-16.) A fact is material if there is a substantial likelihood that a reasonable investor would consider it significant in making an investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Basic Inc. v. Levinson, 485 U.S. 224, 231- 32 (1988). In addition to this deliberate misrepresentation about a material matter in the Euro-GIC Program Summary, Mr. Stires's conduct in connection with the Euro-GIC private placement was either knowingly or recklessly fraudulent because he recommended, by means of the Program Summary and in conversations, that investors purchase Euro-GICs using false information about material issues supplied to him by the promoters without any due diligence inquiry that would support his recommendation. Mr. Stires failed to demand critical information about the issuer or issuers, and he failed to resolve the numerous red flags raised by the information furnished to Stires & Co. by M.T.L. These red flags included the promoters' refusal to provide Stires & Co. with documents from the "issuers"; the promoters' refusal to allow Mr. Stires to talk with the "issuers"; the questionable "comfort" letters the promoters provided Stires & Co.; the promoters' failure to provide corporate resolutions for accounts they opened; the large cash withdrawals that occurred shortly after the accounts were opened; the lack of trading in the accounts; the requests by potential purchasers and banks for proof of Euro-GICs' authenticity; and one person's inexplicable order for a $500,000 "risk free" transaction. (Div. Ex. 108.) Mr. Stires continued to solicit investors knowing that certain institutional investors stopped considering these securities because the promoters would not furnish sufficient documentation to satisfy their due diligence and compliance concerns. (Tr. 373-78.) Section 2(a)(3) of the Securities Act defines "offer to sell," "offer for sale," or "offer" to "include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." Despite Mr. Stires's denial, the evidence is persuasive that Stires & Co. offered Euro-GICs for sale. (Tr. 418, 539-40.) Over a six month period in 1993-94, Stires & Co. and Mr. Stires used information set out in a Program Summary to offer GICs directly to potential purchasers in numerous conversations, in correspondence, and in the circulation of draft agreements to accomplish the investment, and indirectly through the activities of Mr. Lynch and Mr. Hollander. (Div. Ex. 91 at 22-24, 47; Tr. 264-311, 314-17, 401-02.) Almost all the representations in the Program Summary were false. The entire offering was bogus.[15] The Program Summary represented that Stires & Co. "has European [GICs] available for private placement, subject to Confirmation at the time of Offer." (Div. Ex. 1 at 2.) It stated that the Euro-GICs would be "issued in registered form by an S&P AAA rated European insurance company through its prime bank (ranked in the top 25 in the world) and reinsured by a syndicate of S&P AAA rated and ISI "A" rated European insurance companies." (Id.) None of this information was true. Stires & Co. did not have Euro-GICs available and the insurance companies named in the Program Summary were not part of a syndicate issuing Euro-GICs. (Div. Ex. 1 at 3, 10-15.) It is basic black letter law that broker-dealers have a duty to investigate and ensure that they have an adequate and reasonable basis for recommending any security, and a registered representative cannot recommend an investment without an adequate and reasonable basis for the recommendation. See SEC v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992); Hanly v. SEC, 415 F.2d 589, 595-97 (2d Cir. 1969). Moreover, "the mere fact that a security may allegedly be exempt from the registration requirements of the Securities Act `does not relieve a dealer of these obligations. On the contrary, it may increase his responsibilities, since neither he nor his customers receive the protection which registration under the Securities Act is designed to provide.'" Everest Securities, Inc., 62 SEC Docket 1914, 1920 & n.15 (Aug. 26, 1996), aff'd in part, vacated in part, 116 F.3d 1235 (8th Cir. 1997) (quoting Distribution by Broker-Dealers of Unregistered Securities, Securities Act Rel. No. 4445, 1962 SEC LEXIS 74 (Feb. 2, 1962)); see also Thomas J. Fittin, Jr., 50 S.E.C. 544, 548- 49 (1991). Mr. Stires represented that Stires & Co. had Euro-GICs available for private placement even though Mr. Robinson and Mr. Howard never gave him any documents to support their claim that M.T.L. was a sub-agent authorized to issue GICs for a syndicate of European insurance companies. In response to the request he made to these two promoters, Mr. Stires got a copy of a letter dated June 7, 1993, from Don Kelley, an attorney with no firm affiliation located in Ventura Harbor, California. Mr. Kelly, on behalf of M.T.L, declined to provide documentation authorizing M.T.L.'s sale of Euro-GICs because the information was confidential. (Div. Ex. 2; Tr. 414.) Mr. Stires knew that M.T.L. would not identify the issuers and provide documentation to prove that the offer was bona fide to two potential investors, Clarion American Securities and Gilford Securities. (Tr. 364-77.) This refusal to provide verifiable information was a bright red flag that would have caused a reasonable person to check further. However, Mr. Stires continued to offer GICs through January 1994, despite the promoters' added refusal to allow Stires & Co. to contact members of the insurance syndicate and their failure to identify the syndicate's agents. (Tr. 416-17, 419, 427.) In addition, Mr. Stires never knew the identity of the insurance and reinsurance companies that allegedly made up the syndicate, or the name of the syndicate's agent for whom M.T.L. was allegedly the sub-agent. (Tr. 419, 421, 427.) Stires & Co. was reckless in soliciting investors for private placement transactions that involved millions of dollars without validating information supplied by third party promoters who Mr. Stires did not know, and absent direct assurances from the insurance companies listed in the Program Summary as issuers and reissuers of GICs that they were ready, willing, and able to consummate the transactions. (Tr. 427.) This omission is compounded by the fact that it would have been easy for Mr. Stires to contact some of these companies through their affiliates in the United States and he knew at least one person who was affiliated with one of the alleged syndicate members.[16] (Tr. 68-71.) Considering his background, education, and experience, Mr. Stires's conduct was inexcusable and incomprehensible. Mr. Stires not only failed to perform a due diligence inquiry, he also failed to investigate and resolve the red flags raised by Mr. Kelley's June 7, 1993, letter which indicated that this was a suspicious, non-confirmable, non- transparent or not readily understood arrangement. For example, Mr. Kelley did not state his relationship to M.T.L., on whose behalf he wrote the letter. (Div. Ex. 2.) He claimed to have in his possession: (1) a copy of a fax from agents of insurance and reinsurance companies reflecting commitments by the insurers and their banks to issue GICs; (2) a copy of an affidavit by the insurers' agent that he was authorized to issue their GICs; and (3) copies of letters showing that a sub-agent of the agent assigned its authority to sell GICs to M.T.L. However, he did not furnish copies of any of these documents. Mr. Kelley represented further that the sub-agent/assignor represented to M.T.L. that he personally witnessed the commitment agreements but he did not identify the sub-agent or the agent. Furthermore, Mr. Kelley stated that he could not personally guarantee the documents or their execution. (Div. Ex. 2; Tr. 413-17.) For all the reasons stated, I find that Stires & Co. and Mr. Stires willfully violated Section 17(a) of the Securities Act because, using the mail and instruments of interstate commerce, they employed a scheme to defraud by making representations that they knew, or were reckless in not knowing, were false about material matters in the Euro- GIC offering. Aaron v. SEC, 446 U.S. 680 (1980); SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997); SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1967); SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982). 2. Causing and Aiding and Abetting Violations of Section 17(a) of the Securities Act The Order charges Respondents with willfully violating or causing and willfully aiding and abetting violations of Section 17(a). On brief, however, the Division charged Respondents with violating and with causing and aiding and abetting the fraudulent activities of the "promoters" that violated Section 17(a). (Division's Posthearing Brief at 36.) Generally, a primary violator is not also liable as an aider and abettor of the same statutory provision. That generality is inapplicable to this situation because certain of the Respondents' actions constitute a primary violation of Section 17(a)(1) in connection with the offering of Euro- GICs to institutional investors and additional actions by the Respondents aided and abetted the promoters' primary violations of Section 17(a)(1), (a)(2), and (a)(3) in connection with the offering and purchase of Euro-GICs by individual investors. Aiding and abetting liability requires a showing of a securities law violation by a primary party, scienter on the part of the aider and abettor, and substantial assistance by the aider and abettor in the achievement of the primary violation. Investors Research Corp. v. SEC, 628 F.2d 168, 178, cert. denied, 449 U.S. 919 (1980). Recklessness is sufficient to satisfy the scienter requirement. Dirks v. SEC, 681 F.2d 824, 845 (D.C. Cir. 1982), rev'd on other grounds, 463 U.S. 646 (1983). The evidence is persuasive that one of the promoters, Mr. Walker, violated Section 17 (a)(1) of the Securities Act by employing a device, scheme, or artifice to defraud in that he offered non-existent securities using false or misleading statements or omissions of material fact to individual investors. The persuasive evidence is that the promoters violated Section 17(a)(2) because they obtained money by means of untrue statements of material fact and they violated Section 17(a)(3) by engaging in a course of business which operated as a fraud or deceit on the purchasers. Mr. Stires provided substantial assistance to the promoters in accomplishing the violations in at least two ways: (1) by allowing them to establish and control accounts at Stires & Co. through which they obtained the funds of individual investors; and (2) by allowing Ms. Sheerin and Mr. Lynch to represent to an individual investor that Stires & Co., a reputable broker dealer, was a party to Mr. Walker's fraudulent scheme, and by transferring $500,000 from that customer's account at Stires & Co. when it was clear that he did not understand the nature of an account at a broker-dealer. The testimony of the Division's expert witness is persuasive that Stires & Co.'s own rules and industry standards required that it have documentation such as proof of the existence of the corporation, a resolution of the Board of Directors authorizing the account, and a designation of persons authorized to act for the corporation before it conducted any transactions in these accounts.[17] Stires & Co. had none of this information for the M.T.L. or Equity Action accounts. (Tr. 194-95, 200-01.) Ms. Sheerin established the M.T.L. and Equity Action accounts at Stires & Co. and she directed Pershing to transfer funds from these accounts even though Stires & Co. did not have the required documentation for the accounts. Ms. Sheerin established Mr. Green's account, accepted his check and transferred his $500,000 to a bank in Pennsylvania. Ms. Sheerin did all these thing at the promoters' request because she was directed to do so. Mr. Stires knew of all Ms. Sheerin's activities and approved of them. (Div. Ex. 91 at 12, 33, 38-43, 51-59.) I find that Stires & Co. and Mr. Stires were a cause of and willfully aided and abetted the violations of Section 17(a) of the Securities Act by Mr. Robinson, Mr. Howard, and Mr. Walker. 3. Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in the connection with the purchase or sale of a security using any means or instrumentality of interstate commerce or the mail. Rule 10b-5 prohibits the use of any device, scheme or artifice to defraud, any material untrue statement or omission, and any act, practice, or course of business which operates as a fraud or deceit upon any person under the same conditions. The Division alleges that Stires & Co. and Mr. Stires: (1) were a cause of the promoters' violations because they knew or should have known that their acts or omissions would contribute to the promoters' fraudulent sale of securities to individual investors; and (2) willfully aided and abetted the violations because they knew of or recklessly disregarded the promoters' violations and substantially assisted in their commission. (Division's Posthearing Brief at 37-39.) Stires & Co. and Mr. Stires did not violate Section 10(b) or Rule 10b-5 because their sales efforts were unsuccessful and institutional investors did not buy or sell Euro-GICs through Stires & Co. However, the promoters did violate Section 10(b) and Rule 10b-5 because by false representations and omissions about material matters as part of a course of business they defrauded at least five individuals in the purchase of securities using the means of interstate commerce and the mails.[18] These five individual investors lost approximately $700,000 when they followed Mr. Walker's instructions and deposited funds for the purchase of investments into accounts which they believed were held in their individual names at Chase Manhattan Bank, but which were deposited in the Equity Action or M.T.L. accounts that Pershing held for Stires & Co. at Chase Manhattan Bank. (Tr. 139-41; Jt. Ex. 2.) Respondents did not know that the M.T.L. and Equity Action accounts contained deposits from individual investors. Mr. Walker and the other promoters got custody of these funds because Ms. Sheerin followed their instructions and transferred funds to accounts that they controlled at other banks. (Jt. Ex. 2.) The individual investors had not heard of the Respondents before they invested funds with M.T.L. or Equity Action. (Tr. 151, 159.) Bruce A. Perhach, a New Jersey business owner, invested $50,000 pursuant to a written agreement he entered on October 18, 1993, with Equity Action "for investments in the purchase and resale of bankable negotiable credit instruments issued from World Prime Banks, to Include but not limited to Insurance Guaranties issued from top rated World Insurance Companies." (Div. Ex. 18.) The ninety day agreement specified a rate of return of 30%, payable at 10% per month. The agreement specified that 100% of Mr. Perhach's investment would remain in an account in his name at Chase Manhattan Bank for the duration. (Id.; Tr. 145, 147, 151-52.) Mr. Perhach believed that the promoters were borrowing money based on investors' pooled funds to trade GICs. (Tr. 146.) Mr. Walker assured Mr. Perhach that the investment was safe, he could not lose his principal, and that Stires & Co. would be trading the GICs. (Tr. 147.) Mr. Perhach's total return was a single check from Equity Action for $5,000 in December 1993. In October 1993, Richard Cyburt, whose family business is located across the street from Mr. Perhach's business, invested $30,000 with Equity Action based on false and misleading sales information from Mr. Walker. Mr. Cyburt signed the same written agreement with Equity Action that Mr. Perhach signed (Div. Ex. 13; Tr. 153-57.) Mr. Cyburt did not have the required $50,000 minimum so Mr. Walker said he would put up the difference. Mr. Cyburt understood that he had to act quickly to take advantage of the investment opportunity because phase one of the program which paid the highest return, 30% for the ninety day period, was about to close. Mr. Walker told Mr. Cyburt that his investment would be in a secured/safe account at Chase Manhattan Bank for ninety days at which time he could decide whether to invest in the next phase of the program. (Tr. 155-57; Div. Ex. 13.) Mr. Walker provided Mr. Cyburt with the information to accomplish the electronic transfer of his funds to Chase Manhattan Bank. Mr. Cyburt received one check for $3,000 and nothing thereafter. (Tr. 157.) On November 9, 1993, Dennis Kavanagh, a self-employed carpenter, initiated a $40,000 investment for his mother, Florence Kavanagh, with Mr. Walker. Mr. Kavanagh believed Mr. Walker was president of Equity Action and that Mr. Walker used that company to trade in GICs. (Tr. 135.) According to the signed agreement, Mrs. Kavanagh's funds were to be used to invest in the purchase and resale of "bankable negotiable credit instruments issued from World Prime Banks, to Include but not Limited to Insurance Guaranties issued from top rated World Insurance Companies." (Div. Ex. 36.) The agreement was for ninety days, and the rate of return was 22.5% for the period (90% a year). Mrs. Kavanagh's funds were deposited per Mr. Walker's instructions in an account in her name at Chase Manhattan. The agreement stated that they were to "remain 100 percent in the account for the duration." (Id.; Tr. 136) Mrs. Kavanagh has not received any return on her investment or the return of principal.[19] (Tr. 139.) On November 10, 1993, John Marino invested $100,000 pursuant to a written agreement he entered with Equity Action and/or M.T.L. (Div. Ex. 38.) Harry Walker signed for M.T.L. The agreement specified that the money would "not be used for, but will facilitate, certain purchases and resales to include, but not be limited to Insurance Guarantees issued by top rated Insurance Companies." (Div. Ex. 38.) The agreement was for ninety days, and the return was 15% for that period (60% annually). It specified that Equity Action would not have access to depositor's funds in the account at Chase Manhattan Bank which was a "secured depositor's account." (Id.; Tr. 128) Mr. Marino did not receive any return on his investment or any return of principal. (Tr. 129.) Joseph Green invested $500,000 pursuant to an agreement with Equity Action which was almost identical to those described above.[20] Mr. Green understood that his investment would earn a return of 1% for each trade or 15% a quarter (60% annually), whichever was higher. (Div. Ex. 66; Tr. 83.) Mr. Walker signed the agreement as president, Equity Action. Mr. Green did not want to give his money to Mr. Walker, who he did not know, so Mr. Walker referred him to Mr. Lynch at Stires & Co. who suggested that he deposit the money in a brokerage account in his name at Stires & Co. (Tr. 86-87, 113.) Mr. Green followed Mr. Lynch's advice after he obtained a copy of the NASD's report on Stires & Co. which stated that it had only minor regulatory infractions over a ten year period. (Tr. 88.) On November 24, 1993, Mr. Green visited Stires & Co.'s New York office and delivered a check for $500,000 to Mr. Lynch and Ms. Sheerin who established his account. (Tr. 88-89; Div. Ex. 91 at 39-42.) Based on conversations and a meeting with Mr. Lynch at Stires & Co.'s office, Mr. Green believed that Mr. Lynch was a bond trader associated with the firm. (Tr. 88- 89, 96-97.) Mr. Green never met Mr. Stires who is listed as his account executive. (Div. Ex. 91 at 42.) Mr. Green's account form lacked most of the required information. Over a five day period in early December 1993, Stires & Co. received at least three and possibly four faxes from Mr. Green that raised serious questions about what he wanted done with his funds.[21] (Div. Exs. 63, 67, 69; Resp. Ex. Z.) For example, one fax authorized a "risk free transaction" with the understanding that the balance in his account stay at $500,000 at all times. (Div. Ex. 63.) Another fax directed the transfer of $500,000 from his account to an Equity Action account for the purpose of participating in the trade. (Div. Ex. 67.) In another fax, Mr. Green stated that he wanted his funds transferred "to the account Stires & Co. at City Bank . . . for the purpose of participating in the trade of Equity Action." (Resp. Ex. Z.) In spite of the red flags raised by Mr. Green's communications, and lacking information from Mr. Green's account form as to his investment experience and investment objectives, Ms. Sheerin directed Pershing to transfer Mr. Green's $500,000 to Community Bank, Carmichaels, Pennsylvania, Equity Action account on December 9, 1998.[22] (Tr. 91-96; Div. Exs. 50, 73, 112; Div. Ex. 91 at 49-56.) Mr. Green has been unable to recover any of the funds he invested with Equity Action. (Tr. 108-09.) A broker-dealer can open an account with very little information so that Stires & Co. did not act improperly in opening the M.T.L. and Equity Action accounts even though the account forms were incomplete. (Div. Exs. 16, 33; Div. Ex. 91 at 28-29; Tr. 194-95, 225-26.) However, once an account is opened the broker-dealer has an obligation to the owner of the funds in the account. I find that Mr. Stires was reckless in allowing transfers from Mr. Green's account and from the M.T.L. and Equity Action accounts at Stires & Co. I reject Mr. Stires's defense that Stires & Co. acted appropriately because when it transferred the funds from the M.T.L. and Equity Action accounts at Stires & Co. to other banks he thought he was returning the money to its owners. Mr. Stires had been dealing with Mr. Robinson, Mr. Howard, and Mr. Walker for several months and by late October and early November 1993, he knew or was reckless in not knowing that the information provided to him by the promoters who established these accounts was incomplete, undocumented and highly questionable. For example, Mr. Stires knew the accounts were not being used to buy U.S. Treasuries which was allegedly their stated purpose. Stires & Co.'s Operating Manual required documents from the corporate secretary proving that the corporation existed, proving that the Board authorized the opening of the account, and providing the names of the people authorized to act for the corporation. (Div. Ex. 90 at 6; Tr. 194-95.) Stires & Co. never got any of this information for M.T.L. or Equity Action even though Mr. Stires sent forms to the promoters and he talked with them frequently. (Tr. 503-08.) The funds involved were significant. The accounts were opened, deposits were made, and withdrawals were requested all within a very limited time period. (Div. Ex. 91 at 54.) The many phone calls that Ms. Sheerin received from the promoters about the receipt of funds into the accounts, their many requests to transfer funds from the accounts, and the lack of any transactions in the accounts were suspicious circumstances. (Div. Ex. 91 at 37-40.) As an owner, president and chairman of Stires & Co. who was directly involved in these matters, Mr. Stires was required to have documentation for ownership of the funds in the accounts and he should have confirmed with the owners that they approved of the transfers before he allowed funds to be transferred from Mr. Green's account and the two undocumented corporate accounts in the name of M.T.L. and Equity Action. The expert witness's testimony is persuasive that Stires & Co.'s conduct in handing Mr. Green's account and in processing transfers in both corporate accounts was unacceptable by industry standards. (Tr. 202-249.) For all these reasons, I find that Mr. Stires, and through his actions Stires & Co., caused and willfully aided and abetted the promoters' violations of Section 10(b) and Rule 10b-5 because Mr. Stires knew or was reckless in not knowing that the promoters were part of an overall activity that was illegal, and that Stires & Co. and Mr. Stires provided substantial assistance to the principal violations through the use of Stires & Co. accounts and the directions it issued to its clearing broker, Pershing. 3. Violations of Section 15(a) of the Exchange Act Section 15(a) requires that persons acting as brokers or dealers who make use of the mails or any means of interstate commerce to effect transactions in securities or to attempt to induce the purchase of any security be registered with the Commission. The Division charges that Mr. Lynch and Mr. Hollander violated Section 15(a) and that Respondents caused and aided and abetted those violations. Section 3(a)(4) defines a broker as any person engaged in the business of effecting transactions in securities for the account of others.[23] Mr. Stires knew that Mr. Lynch and Mr. Hollander were not registered broker-dealers. Yet Mr. Stires allowed them to occupy assigned offices at Stires & Co. and to work daily for about a year attempting to solicit customers for Euro-GICs on behalf of Stires & Co. (Tr. 95-96, 111-12, 265-71, 305-11; Div. Ex. 114.) Mr. Hollander did not effect any transactions but Mr. Lynch acted as a broker with respect to Mr. Green's investment of $500,000 in fictitious securities. (Div. Ex. 113.) On these facts Mr. Lynch and Mr. Hollander violated Section 15(a) and Stires & Co. caused and aided and abetted the violations because Mr. Stires knew or was reckless in not knowing that they were engaged in an illegal activity, and that Stires & Co. substantially assisted in making the violations possible. Public Interest The applicable pubic interest standards in proceedings instituted pursuant to Section 15(b) of the Exchange Act include: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. at 254 n.67; Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Mr. Stires's conduct over at least a six month period was egregious but it was also out of character and bizarre - strikingly unconventional and far-fetched. Mr. Stires personally has not been the subject of any other disciplinary actions in the forty-four years he has been an active participant in the securities industry. In its twenty-four year existence, Stires & Co. has been the subject of one proceeding and that involved, not fraud, but undercapitalization. In this proceeding, Mr. Stires has not acknowledged wrongdoing but has maintained that his actions were reasonable. However, he was not defiant or contemptuous. Mr. Stires's retention of a law firm to assist Stires & Co. draft the Program Summary and devise procedures to assure that the purchase of Euro-GICs would safeguard investor funds is a significant mitigating factor. There is no indication that Mr. Stires withheld information from the law firm or failed to follow its advice. In addition, Ms. Sheerin, who observed Mr. Stires's professional conduct for over thirty years, gave investigative testimony without legal representation which appears frank and candid. Ms. Sheerin indicated that she held Mr. Stires in high regard: "I don't think that [Mr. Stires] would have done this if he thought that there was something in it that might not be proper." (Div. Ex. 91 at 47.) Finally, I have considered Mr. Stires's many years of volunteer service to the community and religious groups.[24] Based on all of these considerations, I find Mr. Stires conduct to be an aberration and that there is a very low probability that he will violate the statutes and regulations in the future. For all these reasons, I find it in the public interest to order Stires & Co. and Mr. Stires to cease and desist from any future violations of the applicable provisions of the securities statutes, to suspend Mr. Stires from association with a broker or dealer for ninety days, and to fine Stires & Co. and Mr. Stires $300,000 and $100,000, respectively. I reject the Division's recommendation that I bar Mr. Stires from association with a broker-dealer for a "substantial period," presumably a number of years, as too severe in these circumstances, and I have not censured Respondents because it seems superfluous in view of the sanction imposed. Civil penalties at the third tier are appropriate because the activities which violated the securities statutes involved fraud and recklessness, and resulted in substantial loss to five individual investors. Exchange Act Sections 21B(b) and (c). **FOOTNOTES** [1]: "Tr. __" refers to the transcript of the hearing and "PH Tr. __" refers to the transcript of the prehearing. Counsel's Exhibits 1 and 2 are lists of the parties' exhibits. Joint Exhibits 1 and 2 are stipulations as to admissibility and to certain facts. I will refer to the exhibits as "Jt. Ex. __," "Div. Ex. __," or "Resp. Ex. __." [2]: My findings are based on the record and my observation of the witnesses' demeanor. I applied preponderance of the evidence as the applicable standard of proof. [3]: Stires & Co. also had a clearing arrangement with Societe Generale Securities Corp. (Div. Ex. 91 at 17; Jt. Ex. 2.) [4]: Pershing acted as the clearing broker for about 600 brokerage firms and typically processed 700 to 800 wire transfers each day. (Jt. Ex. 2.) [5]: The acronym GIC is also used to refer to a guaranteed investment contract, an asset backed security that occurs where a bank or insurance company guarantees that funds invested with it will earn a stated rate of return. Coopers & Lybrand, The Financial Jungle - A Guide to Financial Instruments 166, 672 (2d ed. 1991). [6]: The Division's expert witness saw no documentation showing that Mr. Howard was affiliated with M.T.L. (Tr. 457.) [7]: Section 4(2) of the Securities Act exempts from registration "transactions by an issuer not involving any public offering" and is commonly referred to as the private placement exemption. It applies to offerings to institutional investors who are sufficiently sophisticated and have sufficiently strong bargaining positions such that they do not need the protections of federal registration and where the offering is to a limited number of qualified private individuals who are also sufficiently sophisticated and able to bear the investment's risk such that they do not need the Securities Act's registration protections. See Thomas Hazen, The Law of Securities Regulation 183-84 (2d ed. 1990). The antifraud provisions are applicable to securities that are exempt from registration. (Id. at 126.) [8]: On September 30, 1996, the Commission accepted offers of settlement from Mr. Lynch and Mr. Hollander in which it ordered: (1) Mr. Lynch to cease and desist from committing or causing any present or future violations of Section 17(a) of the Securities Act, Sections 10(b) and 15(a) of the Exchange Act, and Rule 10b-5 thereunder, and to disgorge $14,810 which it waived based on his statement of financial condition; and (2) Mr. Hollander to cease and desist from committing or causing any present or future violations of Section 17(a) of the Securities Act and Section 15(a) of the Exchange Act, and to disgorge $12,500 which it waived based on his statement of financial condition. (Div. Ex. 113, Curtis Lynch and David Hollander, Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 and Cease and Desist Order, 62 SEC Docket 2803 (Sept. 30, 1996).) [9]: ISI is an acronym for Insurance Solvency International, Ltd., which publishes ratings of European companies similar to what S&P does in the United States. (Div. Ex. 1 at 14-15; Tr. 326.) [10]: Stires & Co. directed Pershing to send $3,000 and $2,040, on January 7 and March 4, 1994, respectively, to Community Bank, Equity Action account. (Div. Ex. 111.) [11]: Return was over 7.5% on the purchase price. (Tr. 430-31.) [12]: I have considered all proposed findings and conclusions, and accept those that are consistent with this decision. [13]: As regards the Respondents, Section 17(a)(2) is inapplicable because they did not obtain money or property and Section 17(a)(3) is inapplicable because no purchases occurred. [14]: Stires & Co. changed its name to Stires, O'Donnell & Co., Inc. on July 15, 1996. (Jt. Ex. 2.) The relationship between the two firms in 1993 is confusing. Robert J. O'Donnell was a principal of Stires & Co. and the firms occupied adjacent offices. (Div. Ex. 90; Div. Ex. 91 at 15.) According to Mr. Stires, Stires & Co. had nine registered representatives, approximately 400 accounts and handled transactions totaling between $2.5 and $2.75 million in 1996. (Tr. 496.) Ms. Sheerin testified in 1995 that Stires & Co. had seven employees, including four registered representatives, and about sixty accounts, and Stires, O'Donnell had about six registered representatives and its own clients. (Div. Ex. 91 at 12, 15.) [15]: Respondents agreed to delay the start of the hearing for sixty days at the request of the U.S. Attorney in St. Louis, Missouri, who was concerned with the status of a pending grand jury investigation. (PH Tr. 4-5.) Mr. Stires was not the subject of the grand jury's deliberations. (PH Tr. 9.) At least one of the reinsurance companies falsely said to be a member of the syndicate had faced a similar situation in London. (Tr. 67.) [16]: A long-time Stires & Co. client who was on the board of Great Lakes Reinsurance Co. ("Great Lakes"), an American subsidiary of Munich Reinsurance, introduced Mr. Stires to Frank E. Berglass, Great Lakes's president and chief executive officer. (Tr. 68.) Mr. Stires did not ask either the client or Mr. Berglass to confirm that Munich Reinsurance was a member of a syndicate that issued GICs. The client, who Mr. Stires contacted as a potential Euro-GIC investor, learned from Mr. Berglass that Munich Reinsurance was not part of the syndicate but he did not relay this information on to Mr. Stires. (Tr. 67, 69.) [17]: I reject Mr. Stires's defense that he returned the funds to the owners as the expert advocated because these funds did not belong to the promoters. [18]: The individual investors only dealt with Mr. Walker but their funds went into M.T.L. and Equity Action accounts which appear to have been controlled by all the promoters. [19]: Mr. Walker urged Mr. Kavanagh to solicit others to invest in Euro- GICs. (Tr. 137.) According to his wife, Mr. Walker is in Switzerland. (Tr. 138-39.) [20]: Mr. Green learned about GICs from a newspaper advertisement at the end of 1993. (Tr. 80.) [21]: Mr. Stires was aware of the contents of the faxes. (Tr. 511.) [22]: On December 7, 1993, Ms. Sheerin had refused Mr. Walker's request to transfer the $500,000 to an M.T.L. account because she did not think Pershing would make the transfer since the money had just been put in the account. (Div. Ex. 91 at 52-56, 58-59.) Mr. Stires was completely knowledgeable about Ms. Sheerin's actions. [23]: The term dealer is inapplicable to this situation since it applies where someone engages in the business of buying and selling securities for his own account. Section 3(a)(5). [24]: Mr. Stires has been a trustee of the Boys Club of New York for thirty years, a senior warden of his church for twenty years, treasurer of the Episcopal Diocese in New York for ten years, and has served on the investment committees of these entities. (Tr. 492.) Record Certification Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R.  201.351(b) (1997), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on September 4, 1997. Order Based on the findings and conclusions set forth above, I ORDER, pursuant to Section 8A of the Securities Act and Sections 15(b), 21C, and 21B of the Exchange Act that: 1. Sidney H. Stires is suspended from being associated with a broker or dealer for ninety (90) days; 2. Stires & Co., Inc., now known as Stires, O'Donnell & Co., Inc., and Sidney H. Stires shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder; and 3. Stires & Co., Inc., now known as Stires, O'Donnell & Co., Inc., and Sidney H. Stires shall pay civil penalties of $300,000, and $100,000, respectively. Payment shall be made on the first day after this decision becomes final. Such payment shall be: (1) made by United States postal order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) delivered by hand or courier to the Office of the Secretary, Securities and Exchange Commission, 450 Fifth Street, Washington, D.C. 20549; and (4) submitted under cover which identifies Stires & Co., Inc., now known as Stires, O'Donnell & Co., Inc., and Sidney H. Stires as the Respondents in this proceeding, and the file number of this proceeding. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R.  201.360 (1997). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. ______________________________ Brenda P. Murray Chief Administrative Law Judge