UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Securities Act of 1933
Release No. 8077 / March 25, 2002
Securities Exchange Act of 1934
Release No. 45637 / March 25, 2002
File No. 3-10739
PUBLIC PROCEEDINGS INSTITUTED AGAINST ROBERT A. PAPARIELLA, HARVEST FINANCIAL CORPORATION AND FRANK D. RUSCETTI
The United States Securities and Exchange Commission ("Commission") announced that it has instituted public administrative and cease-and-desist proceedings against Robert A. Papariella ("Papariella"), of Incline Village, Nevada, and public administrative proceedings against Harvest Financial Corporation ("Harvest") and its president, Frank D. Ruscetti ("Ruscetti"), of Pittsburgh, Pennsylvania. Papariella was a registered representative employed by Harvest from May 1999 through March 2001.
In the Order Instituting Public Administrative and Cease-and-Desist Proceedings ("Order"), the Division of Enforcement ("the Division") alleges that beginning in at least August 1999 and continuing through February 2001, Papariella engaged in a scheme to defraud investors by recommending and executing an unsuitable, aggressive trading strategy in four customer accounts at Harvest in contradiction of the customers' conservative investment objectives. He also misrepresented or omitted to disclose to them the risks inherent in this strategy. Papariella knew or was reckless in not knowing that he had recommended and executed securities transactions in his customers' accounts that were unsuitable and contrary to the customers' conservative investment objectives and their best interests.
Furthermore, Papariella churned the accounts of those four customers. He advanced his own interests to the detriment of his customers and generated gross commissions totaling over $132,600 from his fraudulent trading activity in these accounts. Papariella controlled the activity in these four customer accounts either through oral discretionary authority given by the customer, or through de facto control exercised by Papariella by taking advantage of the customers' lack of investment experience and their trust in his investment recommendations, judgment and honesty. Papariella knew or was reckless in not knowing that he churned the securities in those customer accounts for the purpose of advancing his own interests by generating additional commissions for himself.
The Division also alleges that Harvest and Ruscetti, as the president of Harvest, failed reasonably to supervise Papariella because they failed to establish written procedures, or a system for applying such procedures, which were reasonably designed to detect or prevent Papariella's violations of the securities laws. For instance, Harvest's written procedures did not delegate supervisory responsibilities among Harvest's principals, nor did they describe any of those supervisory responsibilities. The firm also had no written procedures regarding review of registered representatives' activities. Moreover, Harvest did not have any written procedures concerning the retention of correspondence and information pertinent to customer accounts.
The Division further alleges that Ruscetti failed reasonably to supervise Papariella because he failed to respond meaningfully to indications of questionable activity by Papariella. Ruscetti knew that four customer complaints had been previously filed against Papariella, that two of Papariella's previous employers had permitted him to resign, that the State of Ohio had denied his license to sell securities, and that three state securities agencies placed him on notice of possible irregularities in Papariella's employment history. Moreover, Ruscetti was aware that Papariella's investment strategy and philosophy was significantly different from Harvest's. He knew that Papariella employed frequent trading in customer accounts based on technical analysis indicators. Ruscetti was specifically aware of Papariella's frequent trading in 18-20 Harvest customer accounts, as well as the large amounts of commissions paid by the account holders, and at least one customer complaint stating that Papariella was trading too frequently in an account with conservative objectives. Yet, Ruscetti took no meaningful action to inquire into Papariella's trading activity or stop it until after he received a second complaint from the same customer. In March 2001, Ruscetti delivered to Papariella a letter of termination. Ruscetti later agreed to accept a letter of resignation from Papariella. However, the Form U-5, Uniform Termination Notice for Securities Industry Regulation, submitted to the National Association of Securities Dealers by Harvest, misstates that Papariella's departure was voluntary.
Based upon the above-described conduct, the Division alleges that Papariella willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Division further alleges that Harvest and Ruscetti failed reasonably to supervise Papariella within the meaning of Section 15(b)(4)(E) of the Exchange Act, with a view to preventing Papariella's violations of the federal securities laws and the rules thereunder, and that Harvest willfully violated the books and records requirements applicable to broker-dealers pursuant to Section 17(a) of the Exchange Act and Rule 17a-4 thereunder.
A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, and if so, to determine what sanctions, if any, are appropriate and in the public interest.