UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7381 / January 15, 1997 SECURITIES EXCHANGE ACT OF 1934 Release No. 38172 / January 15, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9221 _________________________ : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTION 8A OF THE Suppes Securities, Inc., : SECURITIES ACT OF 1933 AND : SECTIONS 15(b)(4), 19(h) AND : 21C OF THE SECURITIES Respondent. : EXCHANGE ACT OF 1934 AND _________________________: FINDINGS, CEASE-AND-DESIST ORDER, AND ORDER IMPOSING SANCTIONS I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b)(4), 19(h), and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Suppes Securities, Inc. ("Suppes Securities"), a broker-dealer registered with the Commission. II. In anticipation of the institution of this administrative proceeding, Suppes Securities has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R.  201.100 et seq., Suppes Securities, without admitting or denying any findings set forth herein, except as to paragraph III.A. below, which Suppes Securities admits, consents to the issuance of this Order Instituting Proceedings, and Findings, Cease-and-Desist Order, and Order Imposing Sanctions ("Order") pursuant to Section 8A of the Securities Act and Sections 15(b)(4), 19(h), ==========================================START OF PAGE 2====== and 21C of the Exchange Act and to the entry of findings and imposition of the remedial sanctions set forth below. III. On the basis of this Order and Suppes Securities' Offer, the Commission makes the following findings:-[1]- A. RESPONDENT Suppes Securities has been registered with the Commission as a broker-dealer since May 1991. At all relevant times, Suppes Securities principal place of business was in New York City. On October 31, 1995, the Commission filed a complaint in the United States District Court for the Southern District of New York, SEC v. Anthony Sarivola, et al., 95 Civ. 9270 (RPP) against, among others, Suppes Securities (the "District Court Action"). On October 31, 1996, Suppes Securities, without admitting or denying the allegations in the Commission's Complaint, consented to the entry of a final judgment which ordered Suppes Securities to pay disgorgement of $29,882, plus prejudgment interest thereon. B. SUMMARY This case involves violations by Suppes Securities of certain antifraud provisions of the Securities Act and Exchange Act in connection with the recommendation and sale of securities to retail customers and recommendations made to other brokers. Further, Suppes Securities sold securities in the public markets that were neither registered nor exempt from registration with the Commission. C. RELATED PARTIES 1. Michelle Suppes ("Suppes") was at all relevant times the president and registered principal of Suppes Securities. Suppes acquired the predecessor of Suppes Securities in April 1991. During the relevant time period, Suppes was the sole shareholder of Suppes Securities. During the relevant time period, Suppes possessed, directly or indirectly, the power to direct or control, or cause the direction or control of, and ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to the Offer of Suppes Securities and are not binding on any other person or entity in this or any other proceeding. ==========================================START OF PAGE 3====== directed or controlled, the management and policies of Suppes Securities. Suppes has also acted as a registered representative on several accounts at Suppes Securities. On October 31, 1996, without admitting or denying the allegations in the Commission's Complaint, Suppes consented to the entry of a final judgment of permanent injunction and other relief in the District Court Action. On December 12, 1996, the district court entered a final judgment that (i) permanently enjoined Suppes from future violations of Sections 5 and 17(a) of the Securities Act and Sections 10(b) and 15(c)(1) of the Exchange Act, and Rules 10b-3, 10b-5 and 15c1-2 thereunder; and (ii) ordered Suppes to pay disgorgement of $85,608.63 plus prejudgment interest thereon, plus a civil penalty of $25,000 pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 ("Remedies Act"). 2. Mark Anthony ("Anthony") was at all relevant times a registered representative at Suppes Securities. From the beginning of Anthony's employment at Suppes Securities to the present, Suppes has had supervisory responsibilities for Anthony. Anthony first met Suppes in 1986 after he hired Suppes to work at his broker-dealer, First American Capital Resources. On October 31, 1996, without admitting or denying the allegations in the Commission's Complaint, Anthony consented to the entry of a final judgment of permanent injunction and other relief in the District Court Action. On December 12, 1996, the district court entered a final judgment that (i) permanently enjoined Anthony from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and (ii) ordered Anthony to pay disgorgement of $85,608.63 plus prejudgment interest thereon, plus a civil penalty of $50,000 pursuant to the Remedies Act. 3. Anthony Sarivola ("Sarivola"), also known as Anthony Martelli and Anthony Steele, was from October 1991 onward the undisclosed owner and control person of Leona Enterprises, Inc. ("Leona") and its related companies, including, among others, Milan National Corporation, Milan International, Ltd. ("Milan International"), Standard Investment Holdings, Inc. and Eurobanc Ltd. (collectively, the "Sarivola Companies").-[2]- On August 28, 1996, without admitting or denying the allegations in ---------FOOTNOTES---------- -[2]- On May 29, 1996, final judgments by default were entered against the Sarivola Companies in the District Court Action. The final judgments permanently enjoined the Sarivola Companies from future violations of certain antifraud, registration and reporting provisions of the federal securities laws and assessed civil penalties pursuant to the Remedies Act. ==========================================START OF PAGE 4====== the Commission's complaint, Sarivola consented to the entry of a final judgment of permanent injunction and other relief in the District Court Action. On September 30, 1996, the district court entered a final judgment that (i) permanently enjoined Sarivola from future violations of certain antifraud, registration, and reporting provisions of the federal securities laws; and (ii) ordered Sarivola to pay disgorgement of $1,685,000 plus prejudgment interest thereon, and a civil penalty of $600,000 pursuant to the Remedies Act. 4. Leona, a blind pool formed in 1987, was incorporated in Delaware. Leona was at all relevant times a reporting company registered with the Commission pursuant to Section 15(d) of the Exchange Act, 15 U.S.C.  78o(d). Leona's common stock was traded over the counter and listed in the Pink Sheets. D. FACTS 1. Beginning in or about October 1991 and continuing until at least July 1992, Sarivola masterminded a scheme to inflate artificially the reported assets of Leona and the other Sarivola Companies that were secretly under his control, by more than $60 million dollars. Sarivola, together with officers and directors of the Sarivola Companies, claimed in various press releases and in filings with the Commission that the Sarivola Companies controlled assets worth tens of millions of dollars. In fact, the Sarivola Companies were essentially shell corporations and at all times they had little or no operations, assets or revenue. Moreover, at no time did the Sarivola Companies have assets greater than $400,000, most of which comprised the proceeds from illegal sales of stock. 2. In the fall of 1991, Suppes and Anthony agreed with Sarivola to promote the stock of Leona to other brokers. Suppes and Anthony, accompanied by an employee of Leona, made two trips to the western United States to promote Leona stock to other brokers. They did so without conducting an adequate inquiry into the financial representations made by Sarivola before the information was disseminated to the public. 3. Anthony received undisclosed compensation from Sarivola for promoting the stock. Anthony received Leona securities in the form of stock certificates issued in the name of his nominees. Anthony received a total of $55,726.63 in proceeds from the sale of this stock, and those proceeds benefitted him and Suppes. 4. During the relevant time period, Suppes and Anthony also recommended Leona stock to retail customers of Suppes Securities. These recommendations were made without conducting an adequate inquiry concerning Leona and without disclosing to clients the receipt of compensation from Sarivola as described in ==========================================START OF PAGE 5====== D.3., above. Additionally, Suppes and Anthony did not disclose the above-described compensation to the other brokers to whom they promoted Leona securities. 5. As a result of its sales of Leona securities to the public, Suppes Securities received $29,882 in commissions. 6. In or about the fall of 1991, Milan International opened an account at Suppes Securities and concurrently deposited 265,000 shares of Leona stock into the account. Milan International held a controlling block of Leona securities and identified itself as a controlling shareholder on its account opening documents with Suppes Securities. The 265,000 shares were not registered with the Commission. 7. Suppes Securities executed sales of Leona stock out of the Milan International account. The sales by Milan International through Suppes Securities constituted a distribution and were not exempt from the registration requirements of the Securities Act. E. LEGAL ANALYSIS 1. Violations of Section 17(a) of the Securities Act and Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-3, 10b-5 and 15c1-2 Thereunder a. Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder proscribe the use of material misrepresentations or omissions in the offer or sale or in connection with the purchase or sale of any security. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969). Scienter is a required element to prove violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. Aaron v. SEC, 446 U.S. 680, 691 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). b. Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder prohibit broker-dealers from inducing the purchase or sale of a security by means of any manipulative, deceptive, or fraudulent device or contrivance when effecting any transaction in any security otherwise than on a national securities exchange. See Gilman v. Shearson/American Express, Inc., 577 F. Supp. 492, 496 (D.N.H. 1983). Rule 10b-3 prohibits brokers and dealers from committing "any act, practice, or course of business defined by the Commission to be included within the term 'manipulative, deceptive, or other fraudulent device or contrivance', as such term is used in section 15(c)(1) of the [Exchange] Act." 17 C.F.R.  240.10b-3. See Beres v. Thomson McKinnon Sec., Inc., 1989 WL 105967, [1989-90 Transfer Binder] Fed. Sec. L. Rep. (CCH) 94,923, at 95,086 (S.D.N.Y. Sept. 1, 1989). ==========================================START OF PAGE 6====== c. Suppes Securities violated Section 17(a) of the Securities Act, Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-3, 10b-5 and 15c1-2 thereunder. Specifically, (i) Suppes Securities failed to disclose Suppes' and Anthony's financial interest in the sale of Leona stock, see Chasins v. Smith Barney, 438 F.2d 1167, 1169 (2d Cir. 1970) (broker-dealer violated Rule 10b-5 by failing to disclose that the broker-dealer was also a market maker); see also United States v. Blitz, 533 F.2d 1329, 1338 (2d Cir. 1976); and (ii) failed to make a reasonable investigation into the information provided to it by Leona before disseminating that information or making recommendations based on the information, see Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969); Barnett v. United States, 319 F.2d 340, 343 (8th Cir. 1963); SEC v. Great Lakes Equities Co., No. 89-CV-70601-DT, 1990 WL 260587, at *5, [1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) 95,685, at 98,206 (E.D. Mich. Sep. 4, 1990). 2. Violations of Section 5 of the Securities Act a. Sections 5(a) and 5(c) of the Securities Act provide that, absent any exemption from registration, it is unlawful for any person to sell or offer to sell a security to the public using the means or instruments of transportation or communication in interstate commerce or the mails unless a registration statement is in effect or has been filed for such a security. SEC v. Holschuh, 694 F.2d 130, 137 (7th Cir. 1982); SEC v. Hansen, 1984 Fed. Sec. L. Rep. (CCH) 91,426 at 98,115 (S.D.N.Y. Apr. 6, 1984). b. Section 2(11) of the Securities Act, 15 U.S.C.  77b(11), defines "underwriter" to include "any person who . . . offers or sells for an issuer in connection with, the distribution of any security." The definition provides further that "[a]s used in this paragraph the term `issuer' shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer." Milan International, as a controlling shareholder of Leona, was thus an issuer. Suppes Securities offered and sold Leona securities for Milan International, i.e., an issuer, in connection with the distribution. Thus, Suppes Securities acted as a statutory underwriter. United States v. Wolfson, 405 F.2d 779, 783 (2d Cir. 1968) (brokers who sell securities on behalf of controlling persons are underwriters within the meaning of Section 2(11)). c. Suppes Securities violated Section 5 of the Securities Act because the distribution of the 265,000 shares of Leona securities held in the account of Milan International at Suppes Securities was not registered under the Securities Act. ==========================================START OF PAGE 7====== IV. A. While engaged in the conduct described above, Suppes Securities, directly and indirectly, used the means or instrumentalities of interstate commerce, or of the mails. B. Based on the foregoing, the Commission finds that Suppes Securities willfully violated Sections 5 and 17(a) of the Securities Act, Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-3, 10b-5 and 15c1-2 thereunder. V. Accordingly, IT IS HEREBY ORDERED that: A. Suppes Securities shall, effectively immediately, cease and desist from committing or causing any violation, and from committing or causing any future violation, of Sections 5 and 17(a) of the Securities Act, Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-3, 10b-5 and 15c1-2 thereunder. B. Suppes Securities be, and hereby is, censured. C. Suppes Securities shall comply with its undertakings, as specified in its Offer of Settlement: 1. Suppes Securities shall retain an independent consultant ("Consultant"), not unacceptable to the Commission's staff, at Suppes Securities' expense, to conduct a review of Suppes Securities policies, practices, and procedures to determine the adequacy of such policies, practices, and procedures to reasonably detect and prevent the violations of the federal securities laws that gave rise to this proceeding, including, but not limited to, policies, practices and procedures to ensure (i) that an adequate inquiry is conducted concerning securities recommended to customers and (ii) that securities are not sold in violation of the registration requirements of the Securities Act. The Consultant shall make recommendations as to the adoption and implementation of any new and/or revised policies, practices, and procedures deemed necessary and appropriate in light of the violations of the federal securities laws that gave rise to this proceeding. 2. Suppes Securities shall adopt, implement, and maintain all policies, practices, and procedures recommended by the Consultant within the period of time prescribed in Paragraph V.C.3. below; provided, however, that as to any recommendation of the Consultant which Suppes Securities determines is, in whole or in part, unduly ==========================================START OF PAGE 8====== burdensome, Suppes Securities may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the Consultant. Suppes Securities shall set forth in an affidavit to be submitted to the Consultant pursuant to this Paragraph such alternative procedure, and a description of how such alternative procedure achieves the same objective or purpose as the Consultant's original recommendation. The Consultant shall evaluate the alternative procedure proposed by Suppes Securities and Suppes Securities will abide by the Consultant's determination with regard thereto and adopt those recommendations which the Consultant shall ultimately determine are appropriate. 3. Within 90 days of the issuance of this Order, Suppes Securities shall file an affidavit with the Commission's staff, setting forth the details of Suppes Securities' implementation of the Consultant's recommendations pursuant to Paragraph V.C.2. above. Suppes Securities may apply to the staff of the Commission for an extension of this deadline, and upon a showing of good cause by Suppes Securities, the Commission's staff may grant such extensions for whatever time period it deems appropriate, but in no ==========================================START OF PAGE 9====== event shall the affidavit be delivered to the staff more than 120 days from the date of this Order. By the Commission. Jonathan G. Katz Secretary