UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16253 / August 17, 1999
Securities and Exchange Commission v. Welco Securities, Inc. William S. Shapiro and Kenneth S. Shapiro (E.D. Pa. Civil Action No. 99-4143)
The Securities and Exchange Commission ("Commission") announced the filing of a Complaint on August 17, 1999, in the United States District Court for the Eastern District of Pennsylvania against Welco Securities, Inc. ("Welco"), William S. Shapiro and Kenneth S. Shapiro (jointly the "Shapiros"). Welco and the Shapiros have consented, without admitting or denying the allegations in the complaint, to the entry of a permanent injunction and other relief.
The Commission's complaint alleges that from 1988 through August 1997, the Shapiros, through Welco, a registered broker-dealer which they owned and/or controlled, violated the federal securities laws in their sale to their brokerage customers of approximately $60 million of securities. These securities were in the form of unsecured debentures issued by Walnut Equipment Leasing Co. ("Walnut") and its wholly-owned subsidiary, Equipment Leasing Corporation of America ("ELCOA"). Walnut and ELCOA, which were also owned and/or controlled by the Shapiros, were engaged in the leasing of small business equipment. However, in every year since at least 1988, this leasing enterprise operated at a loss, but remained in business by selling ever-increasing amounts of these debentures. As a result of Walnut's and ELCOA's precarious financial condition, these debentures entailed substantial investment risk.
The Shapiros, through Welco, marketed, recommended and sold these debentures to their brokerage customers. Specifically, Welco solicited investors initially through an advertising campaign utilizing kiosks located in airports, bus stations and other public places. Welco also solicited subsequent sales from its existing customers by periodically mailing them sales literature and prospectuses from new offerings. Welco purportedly performed a suitability analysis for each original and subsequent sale to a customer.
However, Welco's customers were generally risk-adverse and inexperienced individuals who were seeking a secure source of income. Such investor profiles were wholly inconsistent with the substantial investment risks accompanying these debentures, a fact that the Shapiros either knew or were reckless in not knowing. Accordingly, these debentures were unsuitable investments for their customers.
Based on this and other alleged misconduct, the Complaint alleges that: (i) Welco and the Shapiros violated and/or aided and abetted violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), and 15(c) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 15c1-2, 17 C.F.R. 240.10b-5 and 240.15c1-2, promulgated thereunder; (ii) the Shapiros aided and abetted violations of Section 15(a) of the Exchange Act; and (iii) Welco violated and Kenneth Shapiro aided and abetted violations of Section 17(a) of the Exchange Act and Rule 17a-3, promulgated thereunder.
The Commission wishes to acknowledge the assistance provided by the Pennsylvania Securities Commission in this matter.