SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39181 / October 1, 1997 Admin. Proc. File No. 3-8573 : In the Matter of : : RUSSO SECURITIES INC. : : and : : FERDINAND RUSSO : : : OPINION OF THE COMMISSION BROKER-DEALER PROCEEDING Grounds for Remedial Action Aiding and Abetting Fraud in the Purchase and Sale of Securities Being a Cause of Fraud in the Purchase and Sale of Securities Registered broker-dealer and its principal alleged to have assisted issuer of high-yield bonds in fraudulently avoiding interest rate reset obligation by providing issuer with a "sham" reset opinion stating that no reset was required and by arranging for another broker-dealer to provide a similar reset opinion. Held, allegations have not been established and, accordingly, proceeding is dismissed. APPEARANCES: Simon S. Kogan, for Ferdinand Russo and Russo Securities, Inc. Christian J. Mixter and Sarah A. Smith, for the Division of Enforcement. Appeal filed: December 26, 1995 Briefing completed: March 29, 1996 Oral argument: July 29, 1997 I. The Division of Enforcement ("Division") appeals from the decision of an administrative law judge dismissing a proceeding against Russo Securities, Inc. ("Russo Securities" or "the Firm") and Ferdinand Russo ("Russo"), a principal and part-owner of the Firm (collectively, "Respondents"). The Division alleges that Respondents willfully aided and abetted a fraudulent scheme by the Cooper Companies, Inc. ("Cooper" or the "Company") relating to Cooper's interest rate reset obligation on certain high-yield bonds issued by the Company, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Specifically, the Division contends that Respondents supplied Cooper with two "sham" reset opinions stating that no interest rate reset was necessary under the terms of the indenture governing the Company's bonds ("Indenture"), thus helping Cooper to avoid its obligation under the Indenture without having to disclose its noncompliance. <(1)> The Division further alleges that Respondents' actions were a cause of Cooper's fraud and thus are actionable under Section 21C of the Exchange Act. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. II. This case stems from a wide-ranging investigation by the Division into various fraudulent activities by Cooper and members of its senior management, including manipulation of the bonds' price by Cooper and Gary Singer, Co-Chairman of Cooper's Board of Directors. <(2)> The Division does not contend that Respondents aided and abetted, or were a <(1)> Respondents prepared one of the "sham" reset opinions and arranged with Lawrence Mascera and Mascera & Company to prepare the second one. The Commission's Order Instituting Proceedings contained similar allegations against Lawrence Mascera and Mascera & Company, who agreed to a settlement before this matter went to hearing. <(2)> Based on its findings, the Division brought an injunctive action against Cooper and Gary Singer for manipulating the bonds' price, in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. SEC v. Cooper Cos., Civ. Action 92-8166 (S.D.N.Y. Nov. 10, 1992). Cooper settled the injunctive action in late 1994. See Litigation Rel. No. 14351 (Dec. 12, 1994), 58 SEC Docket 800. Cooper and Gary Singer were also subject to federal criminal charges. United States v. Gary Singer and the Cooper Companies, Inc., 92 Cr. 964 (RJW) (S.D.N.Y.). We issued a report pursuant to Section 21(a) of the Exchange Act concerning the conduct of Cooper's Board of Directors. Exchange Act Rel. No. 35082 (Dec. 12, 1994), 58 SEC Docket 681. ======END OF PAGE 2====== cause of, the price manipulation scheme. In fact, there is insufficient evidence in the record to show that Respondents knew, or were reckless or negligent in not knowing, of Cooper's and Gary Singer's efforts to manipulate the bonds' price. Rather, the Division's theory in this proceeding relates to Cooper's alleged obligation under the Indenture to base its reset decision on opinions from two nationally recognized investment banking firms, and Respondents' alleged assistance in Cooper's efforts to avoid this obligation. The Indenture specified, in relevant part, that Cooper would reset the bonds' 10 5/8% interest rate if their market value was less than 75 on Saturday, June 15, 1991 ("reset date"). <(3)> In early 1991, a member of Cooper's senior management asked Schuyler Williams, the Company's outside bond counsel, whether the Cooper bonds had to be trading at or above 75 on the reset date or whether trading near 75 was sufficient for Cooper to avoid a reset. Williams responded that she did not know. Thereafter, Williams contacted an investment banker for "real world" advice on how reset decisions are made. The investment banker told her that reset decisions are not an "exact science." He further advised that, if a company's bonds are trading within plus or minus five percent of the reset level, he would recommend against paying for reset opinions and adjusting the bonds' interest rate. This information was relayed to Gary Singer and Steven Singer. <(4)> Gary Singer, and possibly Steven Singer, independently contacted other investment bankers, who agreed that it was standard practice to consider a range of trading prices in deciding whether a reset was required. According to investigative testimony by Marisa Jacobs, Cooper's Associate General Counsel, members of Cooper's senior management had several discussions in late May and early June 1991 concerning the upcoming reset date. Jacobs advised Gary Singer that she interpreted the Indenture <(3)> The Indenture provided: The Company will reset the interest rate on the Securities on June 15, 1991 . . . to a rate per annum, as determined by two nationally recognized investment banking firms selected by the Company . . . that the Debentures should bear in order to have a market value equal to 75% of their principal amount on the Reset Date. In no event shall the rate be reset to an annual interest rate which is less than 10 5/8% nor greater than 13 1/8%. <(4)> Steven Singer served as Cooper's Chief Operating Officer, Executive Vice President, Assistant General Counsel, and Assistant Secretary. ======END OF PAGE 3====== to require reset opinions only if the bonds' interest rate had to be revised, and the two discussed "whether there could be any possible other interpretation of this language so that somebody could argue that we had to have an investment banker." There was agreement among Cooper's senior management that it was appropriate to consider the range of prices at which the Company's bonds had been trading, "especially [since] June 15 was not even a trading date." Jacobs testified that, because the bonds had been trading within five percent of 75 since March 1991, "the conversations were always very general in terms of our belief that we were already within that range, and that a reset would not be required." She further testified that, at some time between June 10-12, 1991 (at least three days prior to the reset date), Cooper's senior management determined that the Company would not reset the interest rate on its bonds. Cooper's senior management also determined that the Company would not hire investment bankers. Gary Singer had contacted Citicorp Securities Markets, Inc. ("Citicorp") and Bankers Trust Company ("Bankers Trust") about obtaining reset opinions, and each of the firms had quoted him a fee of $100,000. Jacobs' investigative testimony indicates that "[t]he conclusion was reached by Gary [Singer] that weighing $200,000 which he considered to be a very large amount of money for something that we really didn't need against the possibility that a debenture holder would complain that we didn't hire an investment banker, was a risk that he thought was well-justified." In a memorandum to the files dated June 21, 1991, Jacobs documented Cooper's decisions not to reset the bonds' interest rate and not to hire investment bankers to prepare reset opinions. The memorandum stated that the bonds had been trading within five percent of 75 "for a while now" and that "this fact alone indicates that there is no need to reset the interest rate." It explained that, "[w]hile investment bankers could be retained to write an opinion stating such a conclusion," Cooper's senior management had determined that it was "imprudent to spend [$200,000] to obtain opinions stating the obvious." The memorandum further stated that Jacobs had informed Williams (the Company's outside bond counsel) of Cooper's decision not to obtain reset opinions and that Williams "endorsed it without reservation." Gary Singer testified during the investigation that, although he believed reset opinions were not needed if the Cooper bonds were trading within five percent of 75, the Company should have the reset opinions internally, if they could be obtained inexpensively, because "the [I]ndenture called for [them]." Accordingly, Gary Singer had instructed Mike Muffeletto, a consultant to Cooper on equity trading, to try to obtain two reset opinions at no cost to Cooper. There is nothing in the record to suggest that anyone else at Cooper knew about, or was involved in, Gary Singer's effort to secure free reset opinions. Muffeletto contacted his friend Patrick Russo, Russo's brother and majority owner of the Firm, and asked whether the Firm could "write a letter" regarding the Cooper bonds and find a second broker-dealer to write ======END OF PAGE 4====== a similar letter. <(5)> Patrick Russo agreed, and the Firm later arranged with Lawrence Mascera and Mascera & Company (collectively, "Mascera") to prepare the second reset opinion. The record does not indicate when Gary Singer became aware of Muffeletto's success in arranging for two reset opinions. Cooper supplied Respondents with a copy of the Indenture, a draft reset opinion, <(6)> and information about the Company's bonds from Bridge Data, a market data vendor. Russo testified that, in preparing the Firm's reset opinion, he consulted with others at the Firm, looked at newspapers and Standard & Poors for New York Stock Exchange, Inc. ("NYSE") price information on convertible bonds, and prepared an analysis comparing the current yield of the Cooper bonds to that of similarly-rated convertible bonds ("Bond Comparison"). <(7)> <(5)> Upon becoming associated with Cooper, Muffeletto had helped to forge a close business relationship between Cooper and Russo Securities. He directed a sizeable share of the Company's equity trades to Russo Securities, and he recently had assisted the Firm in securing from Cooper a $400,000 loan to cover a net capital deficiency. <(6)> On June 5, 1991, a member of Cooper's senior management sent a memorandum to Gary Singer regarding the upcoming reset date. Attached to the memorandum was a copy of the Indenture's reset provision, a summary of the bonds' trading activity from May 1-31, 1991, and a "draft of the proposed letter to be received from two investment banking firms" dated June 5, 1991. This draft reset opinion, which Cooper provided to Respondents, stated, in relevant part, that "[w]e are of the opinion that [the Cooper bonds] had a market value equal to 75% of their principal amount as of the reset date and no adjustment is necessary to the current stated interest rate." <(7)> The Division contends that Russo fabricated the Bond Comparison to mislead the Division during its investigation. In the Division's initial meeting with Russo on September 24, 1991, Russo said that he had prepared the Bond Comparison before signing the reset opinion in June 1991. During Russo's 1992 investigative testimony, however, a Division attorney observed that the prices cited in the Bond Comparison matched those that had been reported on September 20, 1991 -- four days before Russo's initial meeting with the Division. Russo then admitted that he may have "rewritten" the Bond Comparison before that meeting. Russo did not produce a copy of the purported original. The law judge, however, credited Russo's testimony at the hearing, (continued...) ======END OF PAGE 5====== Russo also relied on certain information obtained by Patrick Russo. Upon noticing increased NYSE trading in the Cooper bonds prior to the reset date, Patrick Russo called a bond trader on the NYSE floor, who faxed him "Fitch sheets" listing the price of each NYSE trade in the Cooper bonds for June 4-17, 1991. The Fitch sheets showed a closing price of 75 1/4 on Friday, June 14, 1991, the day before the reset date. Patrick Russo also contacted Muffeletto to determine whether this increased activity was due to Cooper's repurchase of its bonds. Muffeletto told Patrick Russo that Cooper was not the purchaser. <(8)> <(7)>(...continued) finding that the Bond Comparison was a sample of the analysis that Russo had prepared before signing the Firm's reset opinion. We normally give great weight to credibility determinations of the initial decision maker. See, e.g., Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992). <(8)> The Division presented evidence during the hearing from Thomas Shine, a former Division attorney who had participated in the Division's initial meeting with Patrick Russo on September 24, 1991. Shine testified that "there was a question posed to Pat[rick] Russo as to whether he had any knowledge or understanding whether Cooper Companies was purchasing its own debentures at or around the reset date." Shine further testified that Patrick Russo answered no and that at no time during the interview did Patrick Russo mention this purported exchange with Muffeletto. On cross examination, however, Shine admitted that the interview had not been transcribed, that he could not recall the exact wording of the question asked, and that neither he nor the other Division attorney present had probed Patrick Russo's response to the question in order to determine if Patrick Russo had any reason to believe that Cooper was not repurchasing its bonds. The law judge credited Patrick Russo's hearing testimony that he had checked with Muffeletto to see if Cooper was repurchasing its bonds. Again, we find no basis in the record to overturn this determination. See supra note 7. ======END OF PAGE 6====== Using the draft language that Cooper had provided, Russo prepared a reset opinion addressed to Gary Singer and dated June 20, 1991. The reset opinion stated that Singer had requested the Firm's services in connection with Cooper's obligations under the Indenture. It further stated that the Firm had examined the price range of the Cooper bonds from May 1, 1991 through the June 15, 1991 reset date and considered "the range of outside factors that influence the day-to-day fluctuations in the market value of convertible debt securities." <(9)> The Firm's reset opinion concluded that the market value of the Cooper bonds on the reset date was 75 and, "accordingly, it is unnecessary for Cooper to reset the interest rate on [its] Debentures." <(10)> Mascera also provided Cooper with a reset opinion stating that no reset was required. <(11)> Russo testified that he had read the Indenture before signing the reset opinion on behalf of the Firm. He testified that he considered Russo Securities to be a "nationally recognized investment banking firm," as required by the Indenture, because the Firm had done investment banking in a number of states, did business abroad, and was a member of both the NYSE and the National Association of Securities Dealers, Inc. <(9)> By comparison, the draft reset opinion states that it is "based upon our evaluation of the [bonds'] trading price range for approximately the last 30 trading days prior to the Reset Date . . . after consideration of trading values of similar debentures giving effect for the interest rate, maturity and financial strength of the issue . . . ." <(10)> As previously noted, there is no basis in the record for concluding that Respondents knew, or were reckless or negligent in not knowing, that Gary Singer was manipulating the bonds' price prior to the reset date. The law judge credited testimony that the Firm had asked Cooper if it was repurchasing its bonds. In addition, expert witnesses representing both Respondents and the Division testified that the identity of a securities purchaser is proprietary information, thus contradicting the Division's claim earlier in the hearing that Respondents could have ascertained that Cooper was buying its own bonds simply by contacting the NYSE. <(11)> Russo testified during the investigation that Respondents had shared with Mascera the information that they had regarding the Cooper bonds, including the draft reset opinion and the reset opinion that Russo prepared. It appears, however, that Mascera merely copied the draft reset opinion furnished by Cooper onto its own letterhead. ======END OF PAGE 7====== The Indenture required Cooper to notify Bankers Trust, which served as trustee, of its reset decision within five business days following the reset date, or by June 21, 1991. On June 21, 1991, Jacobs telephoned Linda Rakolta, the assistant vice president at Bankers Trust who administered the Cooper bond account, to inform her that the interest rate on the Cooper bonds would not be reset. <(12)> Rakolta did not ask about, and Jacobs did not offer, either the basis for Cooper's decision or whether Cooper had obtained reset opinions. Rakolta testified that Bankers Trust was not required to make such an inquiry and could rely on Cooper's certification that no reset was required. <(13)> There is no evidence in the record to suggest that Jacobs knew about Gary Singer's efforts to obtain free reset opinions when she placed the call to Rakolta. <(14)> At Rakolta's request, Jacobs confirmed Cooper's reset decision in a letter dated June 27, 1991. The letter stated that it was being written "in relation to" the Indenture and that, "[b]ecause the market value of the Debentures on June 15, 1991 was equal to 75% of their principal amount, no reset of the interest rate is required under [the Indenture]." The letter did not explain the basis for Cooper's decision, and it did not state that Cooper had complied with the Indenture. Attached to the letter was a chart showing that the bonds' closing bid price on Friday, June 14, 1991, the last trading day before the reset date, was 74 7/8. Bankers Trust later mailed a notice to all Cooper bondholders stating that, in accordance with Cooper's certification, the bonds' interest rate would not be <(12)> That same day, the NYSE issued a press release announcing that the interest rate on the Cooper bonds would remain at 10 5/8% until maturity. <(13)> Rakolta further testified that, had she known that no investment bankers' opinions had been obtained, she would have directed the matter to Bankers Trust's outside counsel because "the reset provision said that they had to have two nationally-recognized firms resetting it." <(14)> The record indicates that Jacobs' only communication with Gary Singer in the days prior to her call to Rakolta was a conversation about "the mechanics of advising people that there would not be a reset." Jacobs testified that she informed Gary Singer that she would notify the NYSE and Dow Jones that there would be no reset, and that she asked whether he wanted Cooper to mail a notice to the bondholders advising them of the Company's reset decision. She further testified that Gary Singer told her to do "whatever [she] thought was the appropriate thing to do." ======END OF PAGE 8====== reset. <(15)> III. To establish Respondents' liability as aiders and abettors, the Division must show that: (1) Cooper committed fraud in violation of the federal securities laws, (2) Respondents knew, or were aware generally, of their role in Cooper's wrongdoing, and (3) Respondents knowingly or recklessly rendered substantial assistance to Cooper. <(16)> In determining whether an alleged aider-abettor has provided "substantial assistance" to a primary violator, we consider the facts and circumstances of the particular case. <(17)> In the securities law context, courts have stated that the assistance provided by the alleged aider-abettor must have been a "proximate cause" of the harm upon which the claim for relief is based -- that is, the harm must be a direct and foreseeable result of <(15)> Rakolta testified that she did not notice the June 14, 1991 closing bid listed in the attachment and that she relied on the text of Jacobs' letter in notifying the bondholders that there would be no reset. <(16)> Courts use various formulations of the second two elements of the standard for aiding and abetting. See, First Interstate Bank v. Central Bank, 969 F. 2d 891, 897 (10th Cir. 1992), rev'd on other grounds sub nom. Central Bank v. First Interstate Bank, 511 U.S. 164 (1994) (stating standard for the second and third elements as "knowledge of the primary violation by the alleged aider-and-abettor" and "substantial assistance by the alleged aider-and-abettor in achieving the primary violation" and citing decisions in accord from the Tenth, Eighth, Fourth, and Second Circuit Courts of Appeal; but noting that other courts articulate the second and third elements as "a general awareness by the alleged aider-and-abettor that his or her role was part of an overall activity that was improper" and "the alleged aider-and-abettor knowingly and substantially assisted the primary violation," citing courts in accord with this formulation from the Fifth, Eleventh, Sixth, First and D.C. Circuits.) As a result, courts are not uniform as to the precise degree of intent required for each of these two elements. The formulation we have used here is intended as a synthesis of current case law, and reflects the spectrum of analyses. As our discussion, infra, explains, the precise contours of these two elements of the aiding and abetting test are not at issue in this case. <(17)> See, e.g., Woodward, 522 F.2d at 97 ("Substantiality is a function of all the circumstances."). ======END OF PAGE 9====== the alleged assistance. <(18)> To establish that Respondents were a cause of Cooper's alleged fraud, the Division must show that Respondents knew or should have known that their actions would contribute to Cooper's violation of the securities laws. <(19)> As discussed in detail below, the Division has not met its burden. With respect to the aiding and abetting charge, the principal difficulty in this case relates to the absence of proof that Respondents' conduct in preparing one reset opinion and arranging for Mascera to prepare a second one substantially assisted Cooper's alleged fraud. <(20)> Cooper never disseminated copies of the two reset opinions to the trustee, the NYSE, or the bondholders. The Company never even stated that it had obtained reset opinions. Further, it does not appear that anyone, including the trustee, ever asked Cooper if the Company had obtained reset opinions. Although the reset opinions prepared by Respondents and Mascera ultimately were maintained in Cooper's files, the record does not indicate whether Gary Singer received them, or whether he knew that Muffeletto had been successful in arranging for them, before Jacobs communicated Cooper's reset decision to the trustee and the NYSE. Nor does the record indicate when the existence of the two reset opinions became known to the other members of Cooper's senior management. The evidence, while not conclusive, seems to suggest that, during the period when Jacobs was informing the trustee and the NYSE of the Company's decision not to reset the bonds' interest rate, Gary Singer was the only member of Cooper's senior <(18)> E.g., First Interstate Bank of Nevada v. Chapman & Cutler, 837 F.2d 775, 779 (7th Cir. 1988); Metge v. Baehler, 762 F.2d 621, 624 (8th Cir. 1985), cert. denied, 474 U.S. 1057, 1072 (1986); Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985); Primavera Familienstiftung v. Askin, 173 F.R.D. 115, 126 (S.D.N.Y. 1997). While at least one court has determined that "but for" causation, a less stringent standard, is sufficient to support a finding of substantial assistance, Odette v. Shearson, Hammill & Co., 394 F.Supp. 946, 961 (S.D.N.Y. 1975), that is not the general rule. See, e.g., Bloor, 754 F.2d at 63 ("[a]llegations of a `but for' causal relationship are insufficient"). <(19)> Section 21C of the Exchange Act. <(20)> Our analysis of the record also leads us to conclude, for the same reasons we conclude Respondents did not substantially assist the alleged fraud, that Respondents' actions did not contribute to any violation of the securities laws by Cooper and thus are not actionable under Section 21C of the Exchange Act. ======END OF PAGE 10====== management who knew that efforts were underway to obtain two reset opinions at no cost to Cooper. <(21)> While acknowledging that Cooper never used the reset opinions prepared by Respondents and Mascera, the Division maintains that their very existence was an essential part of the alleged Cooper fraud because they provided the assurance that Cooper needed to proceed with its scheme. The Division argues that Cooper, with these "sham" reset opinions in hand, was able to "do an end run around the reset requirements" because the Company did not have to pay for legitimate reset opinions from nationally recognized investment banking firms, yet could foster the impression that it had fulfilled its obligation under the Indenture. <(22)> Cooper thus could announce with confidence that it was not resetting the bonds' interest rate, knowing that it could produce the "sham" reset opinions if the Company's reset decision were ever called into question. The theory articulated by the Division, if supported by the record, could provide a plausible claim that Respondents aided and abetted, and were a cause of, a violation of law. See Odette v. Shearson, Hammill & Co., 394 F.Supp. at 960-63. Nevertheless, the record does not support that theory. The record does not demonstrate that Cooper's "no reset" decision and announcement were dependent upon the Company having the reset opinions in its files. Cooper's outside bond counsel and members of Cooper's senior <(21)> An internal memorandum dated June 21, 1991 and addressed to certain members of Cooper's senior management stated that Jacobs had notified "the exchanges" and the trustee that Cooper would not reset the bonds' interest rate. A handwritten question on a copy of the memorandum asks, "Is that the end of it or are we still intent on getting (or do we already have) letters from investment bankers?" The handwritten response, dated June 24, 1991, states, in relevant part: "we have not engaged investment bankers as they were asking at least $100K apiece . . . although a technical violation of [the] Indenture has occurred, it won't be an issue now" (emphasis in original). <(22)> At oral argument, the Division argued that Jacobs' June 3, 1991 letter to the NYSE, which provided information on the upcoming reset date, created an expectation that Cooper would base its reset decision on opinions by two nationally recognized investment banking firms. The letter states, in part: "As soon as the investment bankers determine whether the interest rate needs to be reset and, if so, what that rate should be, I will notify you." The letter is insufficiently clear, however, to create such an expectation, since it also suggests that no reset opinion will be obtained if the bonds are valued at 75 on the reset date. ======END OF PAGE 11====== management solicited informal advice from various investment bankers concerning reset decisions. All of the investment bankers contacted agreed that, in making a reset decision, it is appropriate to consider a range of trading prices. At least one investment banker advised that the Company should not reset its interest rate or pay for reset opinions if its securities were trading within five percent of 75. Cooper's senior management had various discussions in anticipation of the upcoming reset date. They decided, based on the investment banking advice they had been given and their own interpretation of the Indenture, that no reset opinions were required under the Indenture given the bonds' trading level. Accordingly, they also determined that investment bankers would not be hired to prepare reset opinions. No member of Cooper's senior management, with the exception of Gary Singer, knew that Muffeletto was making efforts to obtain free reset opinions, and there is no evidence that Gary Singer had any knowledge whether Muffeletto had been successful in doing so as of June 21, 1991, the date by which notice of the Company's reset decision had to be given to the trustee. The attachment to Jacobs' June 27, 1991 letter to the trustee, which shows a closing bid price of 74 7/8 immediately prior to the reset date, suggests that Cooper's senior management believed the bonds' trading level was sufficient support for its decision not to reset the interest rate. In sum, the evidence of record suggests, if anything, that the decision by Cooper's senior management not to reset the bonds' interest rate was based upon factors independent of any knowledge of Respondents' activities. By contrast, there is insufficient evidence in the record to conclude that the existence of the reset opinions gave Cooper the confidence to proceed with its allegedly fraudulent scheme to avoid obtaining legitimate reset opinions in compliance with the Indenture. Essentially, the Division asks us to infer substantial assistance from the fact that Cooper requested the reset opinions and Respondents provided them in an effort to help Cooper. If there were sufficient evidence in the record, it could be reasonable to infer that the reset opinions were of potential value to Cooper. We do not believe, however, that there is sufficient evidence that Respondents in fact provided substantial assistance or contributed to any alleged fraud. Moreover, any permissible inferences we might draw are outweighed by the evidence suggesting that the decision not to reset was based on the advice of independent investment bankers and Cooper senior managers' internal deliberations, and was made before the reset opinions had been received and without knowledge by some that they had even been requested. Our determination that this record does not establish that Respondents provided substantial assistance or contributed to Cooper's alleged fraud is sufficient to sustain the dismissal of this proceeding. Nevertheless, we further conclude that the Division has not met its burden with respect to the second element of aiding and abetting liability, which requires that Respondents acted with at least a general awareness of their role in the alleged wrongdoing by Cooper. Most importantly, the evidence does not establish that Respondents' reset opinion was a sham or that it set forth a ======END OF PAGE 12====== false valuation of the bonds. <(23)> Robert Fitzpatrick, Respondents' expert witness, testified that the bonds' market value was 75 at the close of business on Friday, June 14, 1991, the day before the reset date. By contrast, Malcolm Stewart, a managing director in Citicorp's high-yield bond department who testified as the Division's expert, had not analyzed the Cooper bonds and thus had "no idea" what their market value was on the reset date. <(24)> The Division argues, however, that the Firm's reset opinion is a sham because Russo's methodology was inadequate and because the Firm is not a "nationally recognized investment banking firm." The law judge heard conflicting testimony from the two experts on the adequacy of Russo's method in valuing the Cooper bonds. Stewart, the Division's expert, compared Russo's methodology with the process used by Citicorp to value a security and stressed that an appropriate valuation of a high-yield bond is a lengthy, detailed, and complex process. Stewart criticized the Bond Comparison that Russo prepared because it was not based on yields to maturity, which Stewart asserted was the proper measure of comparison for high-yield bonds. While acknowledging that Citicorp might have considered some of the same comparables that Russo used in the Bond Comparison, Stewart asserted that Citicorp's analysis of those comparables would have been more detailed. <(25)> Testifying for Respondents, Fitzpatrick noted that the Indenture did not specify how the bonds' market value was to be determined and opined that Russo had used an "acceptable" method to determine the bonds' value. The law judge accepted Fitzpatrick's testimony. He also credited Russo's statement that the Firm had asked Cooper if it was repurchasing its bonds and Russo's description of the research he had done before signing the Firm's reset opinion. <(26)> With respect to whether the Firm was a "nationally recognized investment banking firm," the Indenture does not define the term, and <(23)> See supra note 10. <(24)> Citicorp had purchased Cooper bonds on Cooper's behalf at prices up to 75 1/8 net to Cooper in the two trading days immediately prior to the reset date. Under these circumstances, it would have been difficult to credit Stewart had he testified that the value of the bonds was less than 75. <(25)> We note that Cooper had rejected as too expensive the fee quoted by Citicorp, Stewart's employer, for preparation of a reset opinion. Under these circumstances, Stewart's testimony that Respondents' reset opinion reflected an inadequate analysis appears defensive of his employer's fee estimate. <(26)> See supra notes 7-8 and accompanying text. ======END OF PAGE 13====== neither expert witness proffered a generally-accepted definition. In any event, had Respondents' reset opinion been shown to anyone, its author would have been apparent, and the reader could then determine whether Russo Securities fit the reader's definition of a "nationally recognized investment banking firm." We recognize that both Respondents' close relationship to Cooper and the Firm's expectation that it might receive additional business from Cooper in return for its help in securing the two reset opinions could have provided sufficient motivation for Respondents to have assisted Cooper in its alleged fraud. <(27)> We conclude, however, that these facts alone are not enough to outweigh the evidence suggesting that Respondents <(27)> Russo testified during the investigation that he had asked Patrick Russo why the Firm had been asked to prepare a reset opinion for Cooper and that Patrick Russo in turn posed this question to Muffeletto. He further testified that Muffeletto had responded that Cooper directed a lot of its [equity] business to the Firm and might give the Firm its bond business as well. ======END OF PAGE 14====== did not act with the requisite awareness of their role in the alleged Cooper fraud. * * * * * For all the reasons discussed, we find that Respondents neither aided and abetted, nor were a cause of, the alleged Cooper fraud. An appropriate order will issue. <(28)> By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G.Katz Secretary <(28)> All of the contentions made by the parties have been considered. Their arguments are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. ======END OF PAGE 15====== UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39181 / October 1, 1997 Admin. Proc. File No. 3-8573 : In the Matter of : : RUSSO SECURITIES INC. : : and : : FERDINAND RUSSO : : : ORDER DISMISSING PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that this proceeding be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary