SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40046 / May 29, 1998 Admin. Proc. File No. 3-8533 : In the Matter of : : L.C. WEGARD & CO., INC. : 17 Battery Place : New York, New York : : LEONARD B. GREER : : OPINION OF THE COMMISSION BROKER-DEALER PROCEEDINGS Ground for Remedial Action Manipulation Registered broker-dealer and its president participated with two other brokerage firms in manipulation of market for a security. Held, it is in the public interest to revoke broker-dealer's registration, suspend president from association with any broker- dealer for one year and bar him from participation in any penny stock offering, order firm to disgorge profits, fine respondents, and issue a cease and desist order. APPEARANCES: Jerome M. Selvers and Chad N. Cagan, of Sonnenblick, Parker & Selvers, P.C., for L.C. Wegard & Co., Inc. and Leonard B. Greer. Mark R. Borrelli, Jonathan H. Stein, and James A. Davidson, for the Division of Enforcement. Appeal filed: January 25, 1996 Briefing completed: June 3, 1996 Oral argument: February 10, 1998 I. L.C. Wegard & Co., Inc., a registered broker-dealer, and Leonard B. Greer, its president and sole owner, appeal from the decision of an administrative law judge. The law judge found that, in November and December 1993, respondents acted in concert with the brokerage firms F.N. Wolf & Co., Inc. ("Wolf Co.") and Hibbard Brown & Co., Inc. to manipulate the market for securities of Of Counsel Enterprises, Inc., in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 15c1-2 thereunder. <(1)> The law judge concluded that Wegard's registration should be revoked, and Greer both suspended for one year from association with any broker or dealer and barred from participating in any offering of penny stock. He further concluded that Wegard should disgorge $158,375 plus prejudgment interest, and that the firm should be fined $1,000,000 and Greer $175,000. Finally, he ordered both respondents to cease and desist from committing or causing further violations of the provisions they were found to have violated. <(2)> We base our findings on an independent review of the record, except to the extent that the law judge's findings are not challenged on review. II. <(1)> The law judge also found that Wegard, Wolf Co., and Hibbard acted as a group in acquiring and disposing of Of Counsel common stock, and that respondents violated Section 13(d) of the Exchange Act by failing to file the required reports. <(2)> Wolf Co. and its president, Franklin N. Wolf ("F. Wolf"), and Hibbard and its president, Richard P. Brown, were also respondents in this proceeding. Wolf Co., which has filed for bankruptcy, did not appeal from the law judge's decision. The law judge revoked its broker-dealer registration, ordered it to disgorge $2,580,239 plus prejudgment interest, fined it $2,500,000, and ordered it to cease and desist from committing further violations. F. Wolf, Hibbard (which is also in bankruptcy), and Brown were sanctioned pursuant to offers of settlement. Hibbard's broker-dealer registration was revoked, and it was ordered to disgorge $3,163,272. F. Wolf and Brown were barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, and from participating in any offering of penny stock. F. Wolf was fined $125,000 and Brown $100,000. F. Wolf also undertook to deposit $425,000, and Brown $300,000, in interest-bearing escrow accounts for the benefit of claimants in their respective firms' bankruptcy proceedings. In addition, F. Wolf, Hibbard, and Brown were ordered to cease and desist from committing further violations. Exchange Act Release No. 36035 (July 31, 1995), 59 SEC Docket 2834, and Exchange Act Release No. 36579 (December 13, 1995), 60 SEC Docket 2686. ======END OF PAGE 2====== Beginning in June 1993, Franklin N. Wolf ("F. Wolf"), president of Wolf Co., began actively promoting a public offering of Of Counsel, a company that provided temporary attorneys and paralegals to law firms and the law departments of large corporations. F. Wolf suggested to Marshall Leeds, president of both J.W. Charles Securities, Inc. ("Charles"), Wolf Co.'s clearing firm, and Corporate Securities Group, Inc. ("CSG"), that he consider an Of Counsel underwriting. Charles and CSG, subsidiaries of J.W. Charles Financial Services, Inc., performed a due diligence investigation and, in July, formally agreed to a joint underwriting of Of Counsel securities. Leeds and F. Wolf agreed that Wolf Co. should not participate because F. Wolf's wife and daughter held Of Counsel notes convertible into common stock. On November 16, 1993, Charles/CSG and a nine broker-dealer selling group sold at a price of $3.25 per unit the total Of Counsel offering of 1,437,500 units, including an over-allotment option of 187,500 units. Each unit consisted of one share of common stock and one warrant. Each warrant entitled the holder to purchase one share of common stock for $3.75 beginning one year from the date of the prospectus. Although there were a total of 3,547,500 shares of Of Counsel common stock outstanding after the offering, only the 1,437,500 shares sold in the offering were freely tradeable. <(3)> F. Wolf was actively involved in all aspects of the offering, including finding an underwriter, working with the underwriters during the due diligence process to structure the underwriting, encouraging broker- dealers to become selling group members, and soliciting investors. In the immediate aftermarket, Wolf Co. became a market maker and consistently raised its NASDAQ bid for Of Counsel units although there were no favorable news reports and little retail demand. From November 23 through December 8, 1993, Wolf Co. caused the price of Of Counsel units to rise by constantly matching or establishing the high bid. It set new high bids four times during that two-week period. During the period of the alleged manipulation, from November 16 through December 8, 1993, the price of Of Counsel units rose from $3.25 to $8.00. Wolf Co. and Hibbard acquired huge inventories of those securities. Wolf Co. accumulated a total of 617,900 units, and Hibbard 650,500 units, more than 600,000 of which Hibbard purchased from Wolf Co. at the latter's cost. At the end of the relevant period, the two firms held 88% of Of Counsel's freely tradeable securities. <(4)> <(3)> That figure does not include the warrants that could be converted into common stock. <(4)> Reduction of the floating supply is characteristic of attempts by manipulators to raise the price of a security. SEC v. Resch-Cassin & Co., Inc., 362 F. Supp. 964, 977 (S.D.N.Y. 1973). ======END OF PAGE 3====== Between December 9 and December 31, 1993, Wolf Co. sold 690,135 shares of Of Counsel common stock and 696,740 Of Counsel warrants to its retail customers for a total profit of $2,580,239. From December 16 to December 31, 1993, Hibbard sold to its retail customers 743,995 shares of Of Counsel common stock and, from January 11 to January 20, 1994, 848,570 warrants, for a total profit of $3,192,724. Wolf Co. and Hibbard engaged in a classic manipulation. During the three-week period from November 16 through December 8, 1993, Wolf Co. played a substantial role in driving up Of Counsel's price from 3¬ to 8, a rise that occurred despite an almost total absence of retail demand and without any favorable news reports about the company. <(5)> Wolf Co. purchased most of Of Counsel's freely tradeable securities at ever- increasing prices, and resold about half of the securities to Hibbard at cost. Wolf Co. was also active in bidding up Of Counsel's price to the desired level. When the price of Of Counsel securities reached that level, Wolf Co. and Hibbard proceeded to unload their securities on public investors at inflated prices, earning themselves huge profits. III. The question now before us is whether Wegard and Greer participated in this manipulative scheme. Wegard began purchasing Of Counsel securities when the units held by Wolf Co. and Hibbard represented about 81% of the freely tradeable supply. <(6)> During the period from November 23 to December 7, when Of Counsel's price nearly doubled from 4 1/8 to 8 in just 10 trading days, Wegard became the major purchaser of Of Counsel securities. Its purchase of a total of 101,000 units amounted to 34.7% of the freely tradeable units remaining after Wolf Co.'s purchase on November 23. Wegard was not a market maker in Of Counsel. Greer placed all of Wegard's Of Counsel purchase orders with Bear, Stearns & Co., Inc., Wegard's clearing agent. Bear, Stearns executed most of Wegard's orders with Mayer & Schweitzer, Inc., an Of Counsel market maker. The following is a summary of Wegard's orders and purchases. 1. On November 23, Wegard placed an order with Bear, Stearns for 30,000 units of Of Counsel with a limit price of $4.50, the current low ask. Wegard purchased a total of 6,000 units at that price from Mayer in two separate transactions, and 24,000 units, <(5)> "[R]apidly rising prices in the absence of any demand are well known symptoms of [a manipulation]." Dlugash v. SEC, 373 F.2d 107, 109 (2d Cir. 1967). <(6)> After Wolf Co. s purchase of 118,000 Of Counsel units on November 23, that firm had acquired the equivalent of 1,166,000 units, 625,000 of which it resold to Hibbard at cost. ======END OF PAGE 4====== the remainder of its order, from a customer of Bear, Stearns at 4 7/16. 2. On November 24, Wegard placed a market order with Bear, Stearns for 1,000 units of Of Counsel and purchased the units from Mayer at a price of 5, the current low ask. 3. On November 29, Wegard placed an order with Bear, Stearns for 25,000 units of Of Counsel with a limit price of 5 1/8, the current low ask. Wegard was able to purchase only 6,000 units at that price from Mayer. Bear, Stearns informed Wegard that the remainder of its order could not be filled at 5 1/8. Wegard then raised its limit price to 5 1/4, the then current low ask, and secured an additional 6,000 units from Mayer at that price. After Bear, Stearns informed Wegard that the remainder of its order could not be filled at its new limit price, Wegard again raised its limit, this time to 5 3/8, the current low ask. It was then able to purchase from Mayer the remainder of its order, 13,000 units, at 5 3/8. 4. On December 3, Wegard placed an order with Bear, Stearns for 20,000 units of Of Counsel with a limit price of 8, the current low ask. Mayer filled the order at that price. 5. On both December 6 and 7, Bear, Stearns approached Wegard with offers to sell Of Counsel units owned by a Bear, Stearns customer. Wegard purchased a total of 25,000 units from the customer (10,000 units on December 6 and 15,000 units on December 7) at 7 3/4, the current high bid on both days. On December 28, 1993, Greer sold the common stock component of Wegard's Of Counsel units, 101,000 shares, to Wolf Co. at 4 3/4, earning a profit of $105,127. Wolf Co. promptly resold the stock at the same price to Hibbard, which at the time had a short position of approximately 57,000 shares. Although Wegard and Greer had an unrealized profit of $53,248 on their Of Counsel warrants at that time, Greer chose to retain the warrants in inventory. Wegard kept the warrants until early 1995, selling them (for the most part to Greer's wife) at a time when they were practically worthless. As a result, Wegard and Greer suffered a net loss on their Of Counsel investment. IV. Wegard's purchases of Of Counsel units and subsequent sale of Of Counsel common stock to Wolf Co. benefited the primary manipulators. In a market where the floating supply is relatively small (as was the case here when Wegard began to buy), purchases of securities at increasing prices have a particularly significant impact on the market price. <(7)> While Wolf Co. bears a substantial measure of responsibility for Of <(7)> See Harold T. White, 3 S.E.C. 466, 477 (1938). ======END OF PAGE 5====== Counsel's sharp rise in price, respondents' purchases were also a significant factor in causing that rise. As analyzed by expert witness Joseph Humenik, all of Wegard's purchases (with the exception of its 1,000 unit purchase on November 24) had an upward impact on Of Counsel's price. On three of the four days that Wegard entered purchase orders with Bear, Stearns, it paid the day's highest price for Of Counsel units, <(8)> and Wegard's purchase orders caused Mayer to set eight new high bids in order to buy the necessary securities to fill those orders. Moreover, Wegard's absorption of the securities it purchased into inventory prevented any sale of those securities from depressing the market price and further restricted the available supply. We agree with the law judge that the testimony of Humenik, based on 21 years' experience in securities trading in the over-the-counter market, was better reasoned and more convincing than the testimony of respondents' three expert witnesses from academia. The facts cited by respondents -- that Humenik had been out of the securities business for a few years, that he was never a financial analyst or retail broker, and that he did not consult books or "empirical research" prior to testifying -- do not detract from his credentials. In fact, respondents' counsel conceded Humenik's expertise in the workings of the over-the-counter market. <(9)> Respondents argue that they did not cause a rise in Of Counsel's price. They point out that Bear, Stearns had a duty of best execution; that (with one exception) the purchase orders they placed with that firm were limit orders assertedly designed to acquire Of Counsel units as cheaply as possible; and that, of the eight transactions resulting from those orders, five were executed between the inside bid and ask, <(10)> and three at the ask. Respondents' arguments are without merit. Despite Bear, Stearns' duty of best execution and respondents' use of limit orders, the effect of their purchases was to drive up Of Counsel's price. Moreover, although respondents' orders were executed within the then prevailing inside <(8)> That price was matched by two other dealers on one of those days. <(9)> As for respondents' claim that Humenik falsely stated that he had testified with respect to market manipulation in another proceeding, Humenik explained that he considered his testimony relating to trading patterns in that action relevant to the manipulation issue. We also find nothing deceitful in Humenik's equation of quotations for a security with trade prices for that security. Humenik clarified his usage in his testimony, and both terms are often used in discussing price movements. <(10)> The inside market for a security is the high bid and low ask at any given time. ======END OF PAGE 6====== quotations, filling those orders caused Mayer repeatedly to raise Of Counsel's high bid. The remaining question is whether Wegard and Greer acted with scienter, i.e., whether they deliberately assisted Wolf Co. and Hibbard in their manipulative scheme. We conclude that they did. As we have previously pointed out, proof of manipulation "almost always depends on inferences drawn from a mass of factual detail. Findings must be gleaned from patterns of behavior, from apparent irregularities, and from trading data." <(11)> We think that such inferences can appropriately be drawn here. As more fully discussed below, Wegard's pattern of trading did not make sense from an economic standpoint, i.e., it did not appear to have been designed with the objective of making a profit for Wegard and Greer in the ordinary course of business. Greer had extensive experience in the securities industry, having been in or associated with the industry since 1970. We consider it highly unlikely that an experienced securities professional such as Greer would have engaged in the pattern of trading shown by this record for legitimate business purposes. <(12)> According to Greer, F. Wolf brought Of Counsel to his attention sometime prior to the public offering, and Greer determined that Of Counsel would be a good security to recommend to Wegard's retail customers. Greer stated that he decided to use Bear, Stearns as his agent in accumulating an inventory because he felt that going directly to a market maker would cause an unwarranted rise in Of Counsel's price if it became known that Wegard, a retail broker, was accumulating a position for resale to its customers. When Of Counsel's price rose sharply in early December 1993, after Wegard had accumulated 56,000 units, Greer assertedly decided not to retail the security at the higher price level, but purchased an additional 45,000 units with the idea that he could use Wegard's inventory as a short-term trading opportunity. The law judge did not credit Greer's testimony about the reasons for his trades. And, according to Humenik, Greer's actions were inconsistent with his stated objectives. We agree with Humenik's analysis. A firm like Wegard seeking to accumulate a securities inventory without a major impact on price would not allow Bear, Stearns to place orders with a wholesale market maker like Mayer. Mayer had no internal retail flow in Of Counsel and simply filled orders by purchasing the <(11)> Pagel, Inc., 48 S.E.C. 223, 226 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986). <(12)> Cf. Edward J. Mawod & Co. v. SEC, 591 F.2d 588, 595 (10th Cir. 1979) ("Mawod . . . knew or had reason to know that [the] trading [in question] was economically irrational. The inference to be drawn is that [he] participated in the manipulation.") ======END OF PAGE 7====== security from other market makers. A firm that wanted to buy a security "quietly", as Wegard assertedly sought to do, would go to the underwriter or a market maker that had a sizable customer base owning the security, which it could draw on to fill orders. It is noteworthy in this regard that, although F. Wolf alerted Greer to Of Counsel, and painted an "extremely positive" picture, Greer never sought to acquire Of Counsel units from Wolf Co. although, under the circumstances, that firm would seemingly have been a likely source from which to acquire the securities without a substantial impact on price. We further note that, during the period May 1992 through October 1993, just prior to the manipulation at issue, Wegard purchased sizable amounts of 17 different securities for resale to its retail customers. In each instance, part or most of Wegard's inventory was acquired from Hibbard. It does not appear that Greer made any effort to acquire Of Counsel units from that firm. Wegard's actions were inconsistent with a firm that wanted to retail a security to customers. Although Wegard accumulated 56,000 units of Of Counsel before their sharp rise in price, it did not sell a single unit to any retail customer. Greer admitted that there was no minimum number of units that Wegard had to accumulate before beginning retail sales. He stated that his decision not to commence retail selling was simply a matter of "pure judgment" on his part. Wegard's trading in early December 1993 following Of Counsel's sharp rise was inconsistent with Greer's asserted new objective of seeking a trading profit. Greer's December purchases increased Wegard's average cost per Of Counsel unit from $4.83 to $6.18. A trader with a built-in profit would not support the new high price of a security by accumulating more units, thereby substantially increasing his firm's average cost. This is particularly true where, as here, the marketplace was made up primarily of sellers rather than buyers, the price of Of Counsel was increasing, and the volume of trading was decreasing. Instead, a trader would take his profit as quickly as possible. Particularly when Greer saw Of Counsel units begin to surface in the marketplace on December 6 and 7 (when Bear, Stearns offered Wegard 25,000 units of a customer's stock), a trader would, in Humenik s opinion, "make [his] sales and walk away from [the security]." Finally, we note Greer's decision to pay the high bid price (7 3/4) for the 25,000 Of Counsel units offered to Wegard on December 6 and 7 by Bear, Stearns on behalf of a customer. There is no indication in the record, and no claim made by respondents, that Greer sought to negotiate a lower price, as would normally be expected when another firm wants to sell large blocks of a security. Instead, Greer supported Of Counsel's high price and took the units off the market when their sale elsewhere could have lowered the market price just prior to the start of retail sales campaigns by Wolf Co. and Hibbard. Thus, we believe that the trading in which Wegard and Greer engaged fostered the manipulation of Of Counsel securities and was inconsistent with the purposes identified by Greer. We conclude that Wegard and Greer deliberately assisted Wolf Co. and Hibbard in manipulating Of Counsel securities. We accordingly find that respondents willfully violated ======END OF PAGE 8====== Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that Wegard, willfully aided and abetted by Greer, willfully violated Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder. V. Respondents complain that they were prejudiced by the law judge's failure to grant their request for an adjournment. The request was based on the fact that their counsel's father died two weeks before hearings herein were scheduled to begin on May 22, 1995, and counsel had to observe the traditional Jewish period of mourning. Respondents have not shown that they were prejudiced by the law judge's ruling. In denying their request, the law judge noted that he had already granted respondents' request for a month's postponement of the hearings; that counsel had had since October 1994 to prepare respondents' case; and that the mourning period expired some days before hearings were scheduled to begin. Moreover, the law judge gave respondents additional preparation time by granting their alternative request for an adjournment after the Division of Enforcement presented its case. Respondents further object to the admission of certain evidence relating to Greer's record in the securities business, Greer's alleged failure to disclose two liabilities in a personal financial statement, and his alleged failure to give a former employer written notice of his wife's brokerage account. The generally accepted view favors the liberal admission of evidence in administrative proceedings. <(13)> However, we have not relied on any of the challenged evidence in making our determinations herein. Nor (in response to the additional complaint of Wegard and Greer) have we drawn an adverse inference, as did the law judge, from the fact that Greer initially refused to testify in our staff's investigation. Greer subsequently testified fully both in the investigation and at the hearings herein. VI. Respondents argue that the law judge's order of disgorgement with respect to Wegard is improperly based on unrealized profits, when in fact the firm ultimately suffered a loss on its Of Counsel investment. They accordingly assert that the disgorgement ordered by the law judge is an unlawful penalty. We disagree. We consider that the amount of disgorgement was properly computed on the basis of Wegard's profits, realized and unrealized, at the time it completed its participation in the Of Counsel manipulation. Disgorgement is an equitable remedy. A manipulator is not relieved of its disgorgement obligation simply because it chooses, for whatever reason, to retain manipulated securities until <(13)> See, e.g., Charles P. Lawrence, 43 S.E.C. 607, 612-613 (1967), aff'd, 398 F.2d 276 (1st Cir. 1968), and the authorities therein cited. ======END OF PAGE 9====== their subsequent drop in price dissipates some or all of the manipulator's ill-gotten gains. <(14)> Respondents further contend that various associated expenses should be deducted from the amount of disgorgement. We can- not accept this contention. In our view, to permit such deductions would confer an unwarranted benefit on Wegard. <(15)> Moreover, respondents have not supplied any evidence of such expenses. Respondents also state that they are unable to pay the penalties and disgorgement that the law judge assessed. The record does not support this claim. Greer testified that his net worth was about $2.5 million. Respondents argue that the sanctions imposed by the law judge are "grossly excessive." We do not agree. Respondents' misconduct was very serious. Manipulation strikes at the heart of the pricing process on which all investors rely. It attacks the very foundation and integrity of the free market system. Thus, we consider that the sanctions assessed by the law judge in this matter are fully warranted. <(16)> They are appropriate in the public interest both to protect investors and to deter respondents from further misconduct. Since we find the sanctions imposed by the law judge justified by respondents' participation in the Of Counsel manipulation, we do not reach the issue of whether, as the law judge found, respondents also violated Section 13(d) of the Exchange Act. An appropriate order will issue. <(17)> By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, and UNGER); Commissioner CAREY not participating. <(14)> See SEC v. MacDonald, 699 F.2d 47, 52 (1st Cir. 1983); SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d Cir. 1978); SEC v. Shapiro, 494 F.2d 1301, 1309 (2d Cir. 1974). <(15)> See SEC v. Great Lakes Equities Co., 775 F.Supp. 211, 214-215 and n.22 (E.D. Mich. 1991), aff'd, 12 F.3d 214 (6th Cir. 1993) (Table). <(16)> Our Division of Enforcement did not seek the imposition of more severe sanctions by appealing from the law judge's decision. <(17)> Respondents' request to file a reply brief and the Division's request to file a surreply are granted, and the briefs are made part of the record herein. All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. ======END OF PAGE 10====== Jonathan G. Katz Secretary ======END OF PAGE 11====== UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40046 / May 29, 1998 Admin. Proc. File No. 3-8533 : In the Matter of : : L.C. WEGARD & CO., INC. : 17 Battery Place : New York, New York : : LEONARD B. GREER : : ORDER IMPOSING REMEDIAL SANCTIONS On the basis of the Commission's opinion issued this day it is ORDERED that the registration as a broker and dealer of L.C. Wegard & Co., Inc. be, and it hereby is, revoked; that Wegard disgorge $158,375 plus prejudgment interest; and that Wegard pay a penalty of $1,000,000; and it is further ORDERED that Leonard B. Greer be, and he hereby is, suspended for one year from association with any broker or dealer, effective at the opening of business on June 12, 1998; that Greer be, and he hereby is, barred from participating in any offering of penny stock; and that Greer pay a penalty of $175,000, and it is further ORDERED that Wegard and Greer cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act, and Sections 10(b) and 15(c) of the Securities Exchange Act and Rules 10b-5 and 15c1-2 thereunder; and it is further ORDERED that payment of the monetary amounts assessed herein shall be: (i) made, within 30 days of the entry of this order, by United States postal money order, certified check, bank cashier's check, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and (iv) submitted under cover letter which identifies the respondents and the file number of this proceeding. A copy of the cover letter and check shall be sent to Mark R. Borrelli, counsel for the Division of Enforcement, Securities and Exchange Commission, Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. By the Commission. Jonathan G. Katz Secretary