UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 7672 / April 28, 1999
SECURITIES EXCHANGE ACT OF 1934
Release No. 41340 / April 28, 1999
ADMINISTRATIVE PROCEEDING
File No. 3-9690
: ORDER MAKING FINDINGS
In the Matter of : AND IMPOSING REMEDIAL
: SANCTIONS
:
JOSEPH P. TUFO, :
:
Respondent. :
:
:
I.
The Securities and Exchange Commission ("Commission")
instituted public administrative and cease-and-desist proceedings
pursuant to Section 8A of the Securities Act of 1933 ("Securities
Act") and Sections 15(b), 19(h) and 21C of the Securities
Exchange Act of 1934 ("Exchange Act") against Joseph P. Tufo
("Tufo") on September 1, 1998.
II.
Respondent Tufo has submitted an Offer of Settlement
("Offer") to the Commission, which the Commission has determined
to accept. Solely for the purpose of this proceeding and any
other proceeding brought by or on behalf of the Commission, or in
which the Commission is a party, and without admitting or denying
the findings contained herein, except as to the jurisdiction of
the Commission over Respondent Tufo and over the subject matter
of this proceeding and as to Section III., paragraph 1., below,
which are admitted, Respondent Tufo by his Offer consents to the
entry of findings and remedial sanctions set forth below.
III.
On the basis of this Order and the Offer submitted by
Respondent Tufo, the Commission finds that:
1. At all relevant times, Respondent Tufo was associated
as a registered representative with SIFE, a broker-dealer
registered with the Commission.
The Fraudulent Offer and Sale of
Medco, Inc., Promissory Notes
2. From approximately September 1996 until October 1997,
Medco, Inc. ("Medco") fraudulently offered and sold securities to
the general public in the form of promissory notes ("Medco
notes"). Medco raised over $16 million from approximately 400
investors nationwide. Medco claimed that capital raised from
investors would be used to purchase medical equipment which would
serve as collateral for the investment. Investors and
prospective investors received offering materials which described
Medco and the investment program. Specifically, investors were
told that the investment was fully secured and collateralized by
medical equipment appraised at a 50% loan to value ratio (i.e.,
twice the value of the investor’s principal investment). The
offering package also included detailed biographies of its
principals, including its president. Medco did not provide
investors with any documents reflecting the purchase or lease of
the medical equipment. Medco promised investors returns of
between 12% and 16% per annum depending upon the maturity of the
note and the amount invested. Interest was paid monthly during
the term of the Medco notes and there was no minimum or maximum
investment. No registration statement was ever filed or was in
effect with the Commission in connection with the securities
offered by Medco.
3. Medco falsely represented to investors that it was
using investor funds to purchase and lease medical equipment. In
fact, of the $16 million raised from investors, less than
$500,000 was used to purchase and lease medical equipment. The
remaining investor proceeds were completely unsecured because,
contrary to what was represented, no other equipment was being
purchased or leased. Instead, a substantial portion of investor
funds were used to purchase aircraft, a home, cars and other
expenditures for the personal use and benefit of Medco’s
principals. In addition, Medco was operating a Ponzi scheme by
using new investor monies to pay interest to its existing
investors.
4. Medco’s offering materials misrepresented and omitted
material information concerning the background of Medco’s
president. For example, Medco’s offering materials falsely
represented that its president had a law degree, had worked for a
major securities brokerage firm, was a member of the board of
directors of a large metropolitan hospital, and implied that he
was registered as an investment adviser with the Commission.
None of this was true. Furthermore, the offering documents
failed to disclose that Medco’s president had been terminated by
a now defunct broker-dealer in 1986 for falsifying information on
his employment application and Form U-4.
5. Medco also misrepresented its operating history to
investors. In its offering materials, Medco stated that it had
"marshaled its depth of talent and long history in the medical
and financial fields to forge one of the most exciting low
risk/high return, stable products for the savvy investor." On
its Internet web page, Medco represented that it had been in
business for sixteen years. In fact, Medco first incorporated in
August 1996 and only became licensed to do business in Florida in
January 1997. Prior to forming the company, Medco’s president,
had no apparent connection to the medical equipment industry.
Tufo’s Participation in the Medco Offering
6. Tufo learned of Medco from a newspaper advertisement
that was soliciting sales agents to market the Medco investment.
After being recruited by Medco, from October 1996 through
September 1997, Tufo raised approximately $3.8 million in the
Medco notes from 87 investors, earning approximately $176,500 in
commissions. Tufo solicited prospective Medco investors through
newspaper and radio advertisements throughout California, as well
as through a web page on the Internet.
7. When contacted by a prospective investor in response to
an advertisement, Tufo would provide the investor with a brief
overview of the Medco program, and would arrange for Medco to
send the offering materials to the prospect. The Medco offering
materials contained false information about the investment. Tufo
would then send a follow up solicitation letter to the prospect
which reiterated the information contained in the offering
materials provided by Medco and scheduled a sales presentation
visit with the prospect.
8. In a typical sales presentation to a prospective
investor, Tufo would repeat the representations contained in
Medco’s offering materials which included the false statement
that each investment was insured and doubly collateralized.
During his sale presentation, Tufo would use a "comparison sheet"
showing the differences between an investment in the SIFE mutual
fund he also offered and the Medco notes. In this comparison
sheet, Tufo included false information provided to him by Medco
that Medco had been in business since 1980 and that it had $37
million in assets. He described the Medco notes to investors as
"totally safe" and "safe and secure" because, according to him,
the investments were secured by liens on the medical equipment.
Tufo told one prospective investor that the investment was "safer
than a certificate of deposit or a money market account". Tufo
told several others that he had performed due diligence on Medco.
9. In June 1997 and July 1997, the State of California
issued desist and refrain orders against Tufo for selling the
unregistered Medco securities and for acting as an unregistered
broker-dealer. In an attempt to evade the California desist and
refrain orders, Medco retained California securities counsel and
re-defined and restructured the offering in California as a
"joint venture" between Medco and the investor. Tufo then
continued to offer and sell the Medco notes through these "joint
ventures", raising $1.3 million from 8 investors. Tufo did
receive a copy of a written opinion from Medco’s California
securities counsel regarding the "joint venture" program, but not
until after he had sold the "joint ventures" to two investors.
10. In July 1997, during a deposition before California
regulators in connection with the desist and refrain orders, Tufo
admitted that he made no effort to check Medco’s president’s
background besides calling the references contained in the
offering materials. He stated that he called the National
Association of Securities Dealers, Inc. ("NASD") to inquire about
complaints against Medco’s president. Tufo did not attempt to
verify with the NASD or with prior employers, the prior
employment history of Medco’s president. However, an inquiry to
the NASD would have revealed that Medco’s president had been
terminated by a broker-dealer in 1986 for falsifying his
employment application. Tufo further admitted in the deposition,
that, other than speaking with an individual, a personal
acquaintance of 2 years, who told Tufo he was working for Medco
finding doctors and clinics, he did not undertake any efforts to
verify that Medco was purchasing medical equipment at a 50% loan
to value ratio and leasing them as represented to investors.
During this deposition, Tufo was made aware by California
regulators of the fraudulent representations regarding the
background of Medco’s president. He was also put on notice that
he had failed to obtain independent verification of many of the
representations contained in Medco’s offering materials. In
addition, Tufo admitted in this deposition that in June 1997, he
was aware that the State of Texas had issued a cease publication
order against Medco. Nonetheless, Tufo continued to offer and
sell the Medco notes to the public through the "joint ventures",
raising $1.3 million of the total $3.8 million he raised from
investors through the offering.
11. Due to the blatant nature of Medco’s misrepresentations
and fraudulent scheme, even a minimal amount of investigation by
Tufo would have revealed the fraud. For example, Tufo made no
attempt to independently verify that medical equipment was being
purchased and leased, and that they were appraised at a 50% loan
to value ratio by Medco as represented. Further, an inquiry into
any portion of the purported background and experience would have
revealed that Medco’s president did not have a law degree, never
worked for a major securities brokerage firm, was never a member
of the board of directors of a large metropolitan hospital, and
was never registered as an investment adviser with the
Commission.
12. Tufo was also confronted with a number of "red flags"
which should have alerted him to the fact that Medco was engaged
in a fraudulent offering. For example, Tufo was told by Medco’s
president early on that "[u]nder no circumstances would I allow
an investor to get a copy of an equipment lease on his or anyone
else’s equipment." This alone should have raised concerns on his
part about Medco’s representations that it was buying and leasing
equipment. In addition, despite being told by California
regulatory officials that Medco’s offering materials contained
false information regarding the background of Medco’s president,
Tufo continued with the Medco offering. Finally, it is noteworthy
that in November 1996, the month after he began selling Medco,
California had served Tufo with a desist and refrain order to
halt his unregistered offers and sales of promissory notes in
another securities offering. Notwithstanding this California
order, Tufo went on to sell the Medco notes.
13. Tufo recklessly distributed false and misleading
offering materials, flyers and other materials to investors and
prospective investors which included, among other things,
representations that the Medco notes were a low risk investment,
that investor proceeds would be used to acquire medical
equipment, that investor funds would be fully secured, and which
contained false statements and omissions about the background of
Medco’s president. These misrepresentations would be considered
important by any reasonable investor and are therefore material
under the standards enunciated in TSC Industries, Inc. v.
Northway, Inc., 426 U.S. 438 (1976).
Legal Findings
14. Based upon the aforesaid conduct, Respondent Tufo
willfully violated, and committed or caused violations of,
Sections 5(a) and 5(c) of the Securities Act, in that he,
directly and indirectly, made use of the means and instruments of
transportation and communication in interstate commerce and of
the mails, to offer to sell and to sell to members of the public
certain securities, namely the Medco notes issued by Medco, when
no registration statement was filed or in effect as to said
securities pursuant to the Securities Act.
15. Based upon the aforesaid conduct, Respondent Tufo
willfully violated, and committed or caused violations of,
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in
that, in connection with the purchase and sale of certain
securities, namely the Medco notes issued by Medco, by use of the
means and instrumentalities of interstate commerce and by use of
the mails, Respondent Tufo, directly and indirectly, employed
devices, schemes, and artifices to defraud; made untrue
statements of material facts and omitted to state material facts
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading; and
engaged in acts, practices and a course of business which would
and did operate as a fraud and deceit.
16. Based upon the aforesaid conduct, Respondent Tufo
willfully violated, and committed or caused violations of,
Section 17(a)(1) of the Securities Act, in that, in the offer and
sale of certain securities, namely the Medco notes issued by
Medco, by use of the means and instruments of transportation and
communication in interstate commerce and by use of the mails,
Respondent Tufo, directly and indirectly, employed devices,
schemes and artifices to defraud.
17. Based upon the aforesaid conduct, Respondent Tufo
willfully violated, and committed or caused violations of,
Sections 17(a)(2) and 17(a)(3) of the Securities Act, in that, in
the offer and sale of certain securities, namely the Medco notes
issued by Medco, by the use of the means and instruments of
transportation and communication in interstate commerce and by
use of the mails, Respondent Tufo directly and indirectly,
obtained money or property by means of untrue statements of
material facts and omissions to state material facts necessary in
order to make the statements made, in light of the circumstances
under which they were made, not misleading; and engaged in
transactions, practices and a course of business which would and
did operate as a fraud and deceit upon the purchasers and
prospective purchasers of such securities.
18. Respondent Tufo has submitted a sworn bankruptcy
petition and other evidence and has asserted his financial
inability to pay disgorgement plus prejudgment interest and a
civil penalty. The Commission has reviewed the sworn bankruptcy
petition and other evidence provided by Respondent Tufo and has
determined that Respondent Tufo does not have the financial
ability to pay disgorgement of $176,500 plus prejudgment interest
and a civil penalty.
IV.
Based on the foregoing, the Commission deems it appropriate
and in the public interest to impose the sanctions specified by
Respondent Tufo in his Offer.
Accordingly, IT IS ORDERED that:
1. Respondent Tufo be, and hereby is, barred from
association with any broker, dealer, municipal securities dealer,
investment adviser or investment company, with the right to
reapply for association after three (3) years to the appropriate
self-regulatory organization, or if there is none, to the
Commission.
2. Respondent Tufo cease and desist from committing or
causing any violations and any future violation of Sections 5(a),
5(c) and 17(a) of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b-5, promulgated thereunder.
3. Respondent Tufo shall pay disgorgement of $176,500 plus
prejudgment interest, but that payment of such amount be waived
based upon Respondent’s demonstrated financial inability to pay.
4. The Division of Enforcement may, at any time following
the entry of this Order, petition the Commission to: (1) reopen
this matter to consider whether Respondent Tufo provided accurate
and complete financial information at the time such
representations were made; (2) determine the amount of the civil
penalty to be imposed; and (3) seek any additional remedies that
the Commission would be authorized to impose in this proceeding
if Respondent’s Offer had not been accepted. No other issues
shall be considered in connection with this petition other than
whether the financial information provided by Respondent was
fraudulent, misleading, inaccurate or incomplete in any material
respect, the amount of civil penalty to be imposed and whether
any additional remedies should be imposed. Respondent may not,
by way of defense to any such petition, contest the findings in
this Order or the Commission’s authority to impose any additional
remedies that were available in the original proceeding.
By the Commission.
Jonathan G. Katz
Secretary