UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37831 / October 17, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9167 ------------------------------ : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTIONS 15(b)(4) A.R. BARON & CO., INC., : AND 19(h) OF THE SECURITIES : EXCHANGE ACT OF 1934, MAKING : FINDINGS AND IMPOSING REMEDIAL Respondent. : 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 Sections 15(b)(4) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether A.R. Baron & Co., Inc. ("Baron") willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 7(c), 9(a)(2), 9(a)(4), 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder and Regulation T promulgated by the Federal Reserve Board. In anticipation of the institution of these administrative proceedings, the Respondent has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, the Respondent, by its Offer, consents to the findings and the imposition of the remedial sanctions set forth below. Accordingly, IT IS ORDERED that proceedings against A.R. Baron & Co., Inc. be, and hereby are, instituted. ==========================================START OF PAGE 2====== II. FACTS The Commission finds the following:1 A. SUMMARY Jeffrey Weissman ("Weissman") and Andrew Bressman ("Bressman"), the top officers of Baron, and others, carried out through Baron a manipulation of the market for the common stock of Health Professionals, Inc. ("HPI") in May and June 1993. In 1995, Bressman and another Baron principal, Roman Okin ("Okin"), through Baron, manipulated the market for the common stock of Cypros Pharmaceutical, Inc. ("Cypros"). Weissman, Bressman, Okin and other Baron registered representatives engaged in egregious sales practice abuses through Baron, including rampant unauthorized trading in customer accounts, in connection with transactions in the securities of HPI, Cypros and other issues. B. RESPONDENT AND OTHER RELEVANT PEOPLE AND ENTITIES 1. Respondent A.R. Baron & Co., Inc. is a Delaware corporation with its principal place of business in New York, New York. At all relevant times after Baron began operations in 1992, Baron was registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. Baron has been inactive since June 1996. In July 1996, Baron was placed in liquidation under the Securities Investor Protection Act ("SIPA"). 2. Other Persons and Entities a. Andrew Bressman, age 32, resides in Alpine, New Jersey. Bressman was a registered representative with Blair from January 1990 through August 17, 1992. Bressman became a registered representative and president of Baron on August 21, 1992 and its chief executive officer in September 1993. Bressman became a registered principal with Baron in February 1993. Bressman ceased to have any position with Baron in July 1996, when Baron was placed in liquidation under the SIPA. b. Jeffrey Weissman, age 32, resides in New York, New York. Weissman was a registered representative with Blair from August 1985 through August 17, 1992, and with Baron from August 1 The findings herein are made pursuant to an Offer of Settlement submitted by A.R. Baron & Co., Inc. and are not binding on any other person or entity in this or any other proceeding. ==========================================START OF PAGE 3====== 21, 1992, through December 1993. Weissman was chairman and chief executive officer at Baron from August 21, 1992, through September 1993. Weissman was a registered principal with Baron from February 2, 1993 through December 1993. In August 1993, Weissman suffered severe head injuries as a result of a motorcycle accident. Weissman is not presently associated with any broker or dealer and is not engaged in any other employment. On September 9, 1996, an Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b)(6), 19(h) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions was entered against Weissman by consent. In the Matter of Jeffrey Weissman and Martin Weissman, Administrative Proceeding File No. 3-9072, in which the Commission found that Jeffrey Weissman had violated the antifraud provisions of the securities laws, among other things. c. Roman Okin, age 28, resides in Fort Lee, New Jersey. Okin was a registered representative with Blair from October 1990 through May 1992 and with Baron from May 1992 through August 1993, when he left Baron to become associated with another firm. In December 1993, Okin returned to Baron, where he worked until Baron went out of business in June 1996. Okin became a registered principal of Baron in September 1994. d. Health Professionals, Inc. is a Delaware corporation with its principal place of business in Fort Lauderdale, Florida. Prior to November 26, 1991, HPI was known as Professional Care, Inc. HPI has common stock registered with the Commission under Section 12(b) and warrants registered under Section 12(g) of the Exchange Act. At all relevant times, HPI common stock was listed and traded on both the American Stock Exchange ("Amex") and on Nasdaq. e. Cypros Pharmaceutical, Inc. is a California corporation with its principal place of business in Carlsbad, California. Cypros has common stock and warrants registered with the Commission pursuant to Section 12(g) of the Exchange Act. Cypros common stock and warrants are listed for trading on the Nasdaq. C. THE HPI MANIPULATION 1. Baron Absorbed Sell Volume In September 1991, Weissman founded Baron and in August 1992, Weissman and Bressman came to work at Baron as the chairman and president of the firm, respectively. By May 1993, Weissman and Bressman and other Baron brokers had been aggressively recommending HPI securities to their customers and many Baron customers had high concentrations of HPI securities in their accounts. On Saturday, May 22, 1993, Barron's magazine published ==========================================START OF PAGE 4====== a negative article about HPI. That weekend, Bressman and Weissman decided to place buy orders on the Amex through Baron to prevent a price decline. On Monday, May 24, 1993, before the opening of trading, Baron placed on the Amex a purchase order for 25,000 HPI shares. The Amex market opened at $11 7/8 per share, down $1/2 from the previous close, with Baron's purchase order absorbing most of the selling.2 Within the first five minutes of trading, Baron purchased over 60,000 shares. Despite Baron's purchases, HPI's stock price dropped to a low of $10 1/2 per share at 9:37 a.m. Baron continued to place purchase orders on the Amex, purchasing approximately 120,000 shares within the first 30 minutes of trading and a total of 300,000 shares for the day. That day Baron did not sell a single share on the Amex. By the end of trading on May 24, HPI stock closed at $12 per share, down $3/8 from the previous close but up from the day's low. Baron's Amex purchases, which amounted to 66% of the Amex volume, had offset heavy selling and had prevented HPI's stock price from falling much further. Over the next few weeks, Baron continued to purchase HPI shares on the Amex in the firm trading account. Between May 24, 1993, and June 9, 1993, Baron's trading account purchased on the Amex a total of approximately 780,000 HPI shares and sold on the Amex only 1,000 HPI shares. Baron's Amex purchases for the period constituted 64% of the Amex volume. These purchases absorbed much of the supply of HPI on the Amex and prevented the price of HPI from falling precipitously. 2. Baron Placed HPI Stock into Customer Accounts Baron placed its May 24, 1993 Amex purchases of HPI stock in the firm trading account. To prevent that concentration of shares from adversely affecting Baron's net capital, Weissman and Bressman caused the shares to be placed in customer accounts. That day, beginning around 3:00 p.m., when HPI stock was trading at approximately $12 per share, Weissman and Bressman engaged in and directed other Baron brokers to engage in massive unauthorized transactions that transferred or parked over 200,000 shares from Baron's inventory to customer accounts. Near the end of each trading day during this period, Weissman, Bressman and other Baron brokers moved HPI stock into customer accounts by placing unauthorized purchases, sometimes convincing customers to accept the trades after the fact. In addition, Weissman, Bressman and other Baron brokers aggressively solicited customers with unfounded optimistic claims about HPI's 2 HPI's stock split 2 for 1 in March 1992. The prices quoted for all time periods in 1993 reflect the split. ==========================================START OF PAGE 5====== short-term prospects,3 and did not tell their customers that Baron was making large purchases of HPI stock on the Amex to prevent its price from falling. Because Weissman, Bressman and others placed unauthorized purchases, they were faced with transactions that were not paid for by settlement date. In some cases, to pay for unauthorized purchases of HPI stock, Weissman, Bressman and others sold, without authority, other fully-paid securities in the customers' accounts. In other cases they delayed the liquidation of the unauthorized purchases by placing unauthorized requests for extension of payment. When a customer account's HPI stock position ultimately was liquidated because of nonpayment, Weissman, Bressman and others sold the position to the trading account and often resold the position to another customer account in another unauthorized transaction. The unauthorized trading by the Baron brokers caused some customer accounts in which shares were liquidated for nonpayment to be placed on 90-day restriction under Regulation T promulgated by the Federal Reserve Board. While an account is thus restricted, cash payment must be made at the time of any trade made in the account. Weissman, Bressman and others circumvented the restriction by opening and directing other Baron brokers to open unauthorized new accounts, called "priority" accounts, for customers that had their accounts restricted. Weissman, Bressman and other Baron brokers transacted securities purchases on credit for the new accounts. 3. Price Decline Despite Baron's buying efforts, HPI's stock price declined. By mid-June 1993, Baron had exhausted its capacity to purchase HPI stock on the Amex and subsequently place it in customer accounts. Baron's clearing firm refused to accept further requests for extension of payment and required Baron to deposit an additional $1 million in its deposit account. In order to raise the cash needed for its deposit, Baron became a net seller on the Amex, selling HPI shares that the trading account accumulated from in-house liquidation of customer accounts. On June 24, 1993, Baron sold about 750,000 shares on the Amex, at $4 1/2 per share. Because there was insufficient buying 3 A frequently-made false claim during the period was that HPI's stock price was about to go up because the company would be making an important announcement at the Berlin AIDS conference in early June 1993. Baron brokers also falsely told customers that a large pharmaceutical company was going to buy a large position in HPI and that this would increase HPI's stock price. ==========================================START OF PAGE 6====== interest on the Amex for HPI stock, Weissman, Bressman and others personally purchased an aggregate of 363,500 shares. On June 25, 1993, Baron liquidated over 500,000 shares on the Amex at an average price of $2.61 per share. On June 29, 1993, Baron ceased making a market in HPI stock. D. THE CYPROS MANIPULATION Bressman and Okin, through Baron, manipulated the price of Cypros common stock from at least January 2, 1995 through October 10, 1995. During this period, the price of Cypros common stock increased from $13 3/8 per share on January 3, 1995, to a high of $23 3/4 per share on June 21, 1995.4 Bressman accomplished the manipulation by dominating and controlling the market for Cypros stock, posting the high bid for Cypros stock, having another market maker advance the bid for Cypros stock and creating artificial volume based on unauthorized transactions. From January through October 10, 1995, Baron dominated the Cypros trading market, with a market share averaging almost 75%. In February 1995, 89% of the transactions in Cypros stock went through Baron. For most of each trading day during that period, Baron consistently posted the highest bid price on Nasdaq for Cypros stock of the approximately ten firms making a market in Cypros securities. In addition, Baron indirectly posted high bids for Cypros by having another market maker buy Cypros shares from the street for resale to Baron. This arrangement enabled Baron to advance the bid for Cypros stock without disclosing that it was Baron that was posting those high bids. Much of Baron's trading volume was generated by unauthorized trading and did not represent legitimate customer demand. E. SALES PRACTICE ABUSES Baron brokers engaged in extensive abusive sales practices through Baron from the time Baron began operations until it ceased doing business. The abusive sales practices involved the securities of HPI, Cypros and other speculative securities and occurred both during the periods of manipulation discussed above and at other times. Weissman, Bressman, Okin and others imposed and followed a no-net-sale rule with respect to HPI, Cypros and other speculative stock. To execute a sale order, a broker would have to obtain a purchase order for at least as much of the same stock. In accordance with the rule, Weissman, Bressman, Okin and others resisted customer orders to sell; often persuading 4 On May 9, 1995, Cypros split its stock by 2.5:1. For consistency, all prices cited in this memorandum are adjusted to reflect the pre-split prices. ==========================================START OF PAGE 7====== customers not to sell by making misrepresentations or baseless price predictions. If a customer insisted on selling, they would often ignore the order. It took some customers months to get sell orders executed. Needless to say, the Baron brokers did not tell their customers they were acting pursuant to this no-net- sale rule. The Baron brokers engaged in rampant unauthorized trading in the accounts of their customers. Often they would call the customer after the trade had been executed and try to persuade the customer to accept it, making misrepresentations in the process. At other times, they would sell other stock in the customers' accounts to pay for the unauthorized purchases, without prior notification to the customer of either transaction. To obtain additional time for unauthorized trades to remain in customer accounts, the Baron brokers, without the customers' knowledge or authorization, placed requests for extension of payment time under Regulation T promulgated by the Federal Reserve Board. Sometimes Baron brokers executed customer sale orders, but instead of remitting the proceeds of the sales to the customers, they placed unauthorized trades with those proceeds. Baron brokers also placed unauthorized margin transactions in customer accounts. The Baron brokers limited their recommendations to a few speculative securities, including HPI and Cypros, disregarding whether the investments they recommended were suitable for their customers. In order to persuade some customers to purchase HPI stock, Baron brokers falsely told them that their purchase orders would be accompanied by a stop-loss order that would cause the HPI stock to be sold if the price of HPI fell below a certain price. However, when the price of HPI stock fell, the purported stop-loss order was not carried out. The Baron brokers often opened up additional accounts for existing customers without authorization. The multiple accounts served to confuse the customers and enabled the brokers to trade in new accounts when other accounts were restricted due to failure to comply with Regulation T promulgated by the Federal Reserve Board. III. OPINION A. MARKET MANIPULATION Section 9(a)(2) of the Exchange Act, which prohibits the manipulation of the prices of securities listed for trading on a national exchange, makes it unlawful for a person to engage in a series of transactions that creates actual or apparent activity or raises or depresses the stock's price when done for the ==========================================START OF PAGE 8====== purpose of inducing others to buy or sell the security. Section 9(a)(4) of the Exchange Act prohibits a person purchasing or offering to purchase or selling or offering to sell securities registered on a national securities exchange from making false or misleading statements for the purpose of inducing the purchase or sale. These manipulative practices also violate Section 10(b) and Rule 10b-5 of the Exchange Act. Section 10(b) and Rule 10b-5, however, do not require a showing of manipulative purpose. Instead "[i]t is sufficient for the person to engage in a course of business which operates as a fraud or deceit as to the nature of the market for the security." In re Michael Batterman, 46 S.E.C. 304, 305 (1976). Accord United States v. Charnay, 537 F.2d 341, 350-51 (9th Cir. 1976). Furthermore, the manipulative conduct at issue in this case violates Section 17(a) of the Securities Act to the extent that such acts were committed in connection with the sale of or offer to sell the manipulated stocks. Baron violated Section 9(a)(2) of the Exchange Act when its top officers and many of its brokers carried out the HPI manipulation through Baron. Baron's brokers engaged in a series of transactions which artificially prevented the price of HPI shares from falling. The brokers aggressively marketed HPI stock and adhered to Baron's no-net-sale policy in furtherance of the manipulation. They failed to tell customers that the price of HPI stock was being manipulated and that the customers likely would have difficulty selling the stock. Baron also violated Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act when its top officers and brokers carried out the HPI manipulation through Baron. Baron violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder when its top officer and another principal of the firm manipulated through Baron the market for Cypros stock, which is not listed on any exchange. Conduct of a broker or dealer that is considered manipulative under Sections 9(a) and 10(b) also violates Section 15(c)(1) of the Exchange Act and Rule 15c1-2 promulgated thereunder with respect to securities not traded on an exchange. See e.g., In re Barrett & Co., 9 S.E.C. 319, 328 (1941). Baron violated these provisions with respect to the Cypros manipulation and the HPI manipulation to the extent that HPI was traded on the Nasdaq. B. ABUSIVE SALES PRACTICES Baron violated Section 9(a)(4) of the Exchange Act when its top officers and many of its brokers made false statements and omissions about HPI. Baron violated Section 17(a) of the Securities Act and Section and 10(b) of the Exchange Act and Rule ==========================================START OF PAGE 9====== 10b-5 thereunder when its top officers and other brokers made false statements and omissions in selling HPI, Cypros and other securities and placed unauthorized purchases in customer accounts. Baron violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder when its top officers and brokers refused to execute customer sell orders. C. CREDIT VIOLATIONS Section 7(c) of the Exchange Act prohibits a broker-dealer from extending or maintaining credit or arranging for the extension or maintenance of credit to or for any customer in contravention of the regulations promulgated by the Federal Reserve Board. Federal Reserve Board Regulation T, 12 C.F.R.  220.1 et seq., imposes payment rules on securities transactions and requires a broker to obtain full cash payment for customer purchases in a cash account within one payment period; before June 1995, this was seven business days. 12 C.F.R.  220.2(w) and 220.8(b)(1). If a customer has not paid for a stock purchase within the required time, then the broker must promptly cancel or otherwise liquidate the transaction or part of the transaction for which the customer has not made full cash payment. 12 C.F.R.  220.8(b)(4). Under certain circumstances, a broker may apply to its examining authority to extend the time for payment. Such extensions are legitimate for good-faith customer orders in which the customer has difficulty getting the payment to the broker on a timely basis, such as when a check is delayed in the mail. Baron violated the credit provisions when its top officers and brokers make numerous extension requests in bad faith. Weissman, Bressman, Okin and other Baron brokers placed extension requests on unauthorized transactions -- the customers had not timely paid because they had not authorized the purchase. Obtaining extensions of payment enabled the brokers to hold unauthorized purchases of HPI and other stock in customer accounts for an additional seven days until the stock could be moved to the account of another customer or the transaction liquidated. If a security is sold without having been previously paid for in full by the customer, the privilege of delaying payment beyond the trade date is withdrawn for 90 days following the date of sale of the security. 12 C.F.R.  220.8(c). Weissman, Bressman and other Baron brokers circumvented this provision by opening "priority" accounts for customers whose accounts were put on 90-day restriction. Thus Baron further violated the credit provisions. ==========================================START OF PAGE 10====== IV. FINDINGS Based on the above, the Commission finds that A.R. Baron & Co., Inc. willfully violated Section 17(a) of the Securities Act and Sections 7(c), 9(a)(2), 9(a)(4), 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder and Regulation T promulgated by the Federal Reserve Board. V. OFFERS OF SETTLEMENT The Respondent, through James W. Giddens, Trustee for the Liquidation of the Business of A.R. Baron & Co., Inc., has submitted an Offer of Settlement in which it, without admitting or denying the findings herein, consents to the Commission's issuance of this Order which makes findings, as set forth above, and orders that the registration of A.R. Baron & Co., Inc. pursuant to Section 15(b) of the Exchange Act be revoked. VI. ORDER Accordingly, IT IS HEREBY ORDERED that the registration of A.R. Baron & Co., Inc. pursuant to Section 15(b) of the Exchange Act is revoked. By the Commission. Jonathan G. Katz Secretary