Hunter Adams, Jason A. Cohen, Steven M. Cohen, David Hirsch, Jonathan D. Winston, John J. Gremmo, III, James L. Bila, Christian W. Blake, Louis R. Facchini, Jr., Roberto A. Mangiarano, Joseph P. Mannino, David M. Margules, James J. Pellizzi, David M. Pesso, Michael Pugliese, Christopher J. Russo, Howard I. Weinstein, and Robert J. Winston
SECURITIES ACT OF 1933
Release No. 8282/September 8, 2003
SECURITIES EXCHANGE ACT OF 1934
Release No. 48457/September 8, 2003
ADMINISTRATIVE PROCEEDING
FILE NO. 3-10437
In the Matter of HUNTER ADAMS, |
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ORDER ON MOTION FOR PARTIAL SUMMARY DISPOSITION AND DEFAULT JUDGMENT AND REPORT FOLLOWING PREHEARING CONFERENCE |
Background
On March 8, 2001, the Securities and Exchange Commission ("Commission") initiated this proceeding pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b)(6) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"). The Order Instituting Proceedings ("OIP") alleges fraud in the offer and sale of microcap securities from August 1995 through at least October 1997, by eighteen persons associated with First United Equities Corporation ("First United"), at the time a registered broker-dealer. The OIP alleges that Respondents Adams, J. Cohen, S. Cohen, Hirsch, and J. Winston operated and controlled First United; Respondent Gremmo was the firm's trader; and Respondents Bila, Blake, Facchini, Mangiarano, Mannino, Margules, Pellizzi, Pesso, Pugliese, Russo, Weinstein, and R. Winston were registered representatives. (OIP at 2-4.)
On April 29, 2003, after all the Respondents submitted guilty pleas in a parallel criminal proceeding, United States v. Winston, 00 Cr. 1248 (E.D.N.Y. filed Mar. 8, 2001), I lifted a stay that I had imposed on April 12, 2001, at the request of the Division of Enforcement ("Division") and the U.S. Attorney for the Eastern District of New York ("USAO").1 I also ordered Respondents to file answers to the OIP by May 30, 2003, and I allowed the Division to move for summary disposition.
On August 7, 2003, the Division filed a Motion and Memorandum of Law In Support of the Division of Enforcement's Motion for Partial Summary Disposition and Default Judgment ("Motion and Memorandum"). The bases for the motion are Respondents' guilty pleas to conspiracy to commit securities fraud or committing securities fraud, or both, in 2001 and 2002, and the facts admitted in their guilty pleas. (Motion and Memorandum at 1-2.) The Motion and Memorandum is accompanied by two volumes that contain a declaration by Division counsel that exhibits A through LL are true and accurate copies of court documents from the parallel criminal proceeding.2 The exhibits to the Motion and Memorandum are all matters of public record and I take official notice of them.3See 17 C.F.R. § 201.323, see also 17 C.F.R. § 201.350.
Pursuant to Rules of Practice 154, 155, and 250; 17 C.F.R. §§ 201.154, .155, .250, the Division moves for:
(a) partial summary disposition against those respondents who have filed an answer in this action and certain others, and (b) partial default judgment against certain respondents who have not filed an answer in this action.4
(Motion and Memorandum at 1, 26.)
The Division represents that all the Respondents have (1) pled guilty to participating in a conspiracy to commit securities fraud with respect to Ashton Technology Group Inc. ("Ashton") and National Medical Financial Services Corp. ("NMFS") securities as set forth in the first Count of each of the Indictments, (2) admitted under oath that they participated in this conspiracy, and (3) signed plea agreements with the USAO. (Motion and Memorandum at 19.)
As of the date of this Order, Respondents Hirsch, Blake, Mannino, Pesso, Pugliese, Russo, and R. Winston have filed answers to the allegations in the OIP. (Motion and Memorandum at 2-3.)
Respondents J. Cohen, Pellizzi, and Russo were represented at the telephonic prehearing conference on September 4, 2003. These Respondents do not object to the relief that the Division requests in the Motion and Memorandum, but they expect to object to any subsequent Division requests for disgorgement and/or civil penalties.
Findings of Fact
Hunter Adams
The OIP charges that Respondent Adams willfully violated, and committed or caused the violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 6.)
Respondent Adams signed a Plea Agreement to enter a guilty plea with the USAO on November 27, 2002. (Motion and Memorandum, Exhibit F.) On the same day,5 Respondent Adams, a thirty-five-year-old high school graduate, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Sixteen, Conspiracy to Commit Money Laundering, of the Second Superseding Indictment.6 (Motion and Memorandum, Exhibits D at 28, 51, E at 4, 27-28.) When entering his guilty plea, Respondent Adams admitted that:
With respect to Count One . . . between approximately 1995 and March 2001, I knowingly and willfully participated in a scheme to manipulate the market price of certain stocks and stock warrants that traded on various exchanges by, among other things, gaining control over most of the buying and selling the house stocks, among others, [First United], thereby artificially inflating the price of the stock.
With respect to Count 16 . . . between 1995 and March 2001, I knowingly and willfully conspired with others to conduct financial transactions which involved proceeds of securities fraud by transferring proceeds of the fraud back into certain brokerage firms, including [Preston Langley], with the intent to promote the carrying on of the fraud.7
(Motion and Memorandum, Exhibit E at 28-29.)
Jason A. Cohen
The OIP alleges that Respondent J. Cohen willfully violated, and committed or caused the violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 6.)
In 2002, Respondent J. Cohen, a member of the Massachusetts bar, was fifty years of age. (Motion and Memorandum, Exhibit G at 3-6.) On November 14, 2002, Respondent J. Cohen signed a Cooperation Agreement with the USAO, and he pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Sixteen, Conspiracy to Commit Money Laundering, of the Second Superseding Indictment.8 (Motion and Memorandum, Exhibits D at 28, 51, G at 17-18, H.) When entering his guilty plea, Respondent J. Cohen stated that:
During the period from 1994 to early 1998, I was employed as an owner of record of [First United], a broker/dealer located in Garden City, New York. During my employment at First United, I agreed with others to commit securities fraud by, among other things, agreeing to accept cash payments and free stock from stock promoters and issuers in exchange for promoting their stocks and acquiescing in the fraudulent sale practices of First United sales force of securities brokers.
One example of the free stock that First United received from an issuer in exchange for promoting the stock was a stock of [IRT Industries, Inc.], which was given to First United to encourage First United to promote the stock. In addition, I agreed with others to launder the proceeds of our securities frauds by, among other things, reinvesting those proceeds in First United for the purpose of perpetuating First United's brokerage business.
(Motion and Memorandum, Exhibit G at 19-20.)
Steven M. Cohen
The OIP alleges that Respondent S. Cohen willfully violated, and committed or caused the violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7.)
On April 19, 2001, Respondent S. Cohen signed a Cooperation Agreement with the USAO in which he agreed to enter a guilty plea. (Motion and Memorandum, Exhibit J.) On April 18, 2001, Respondent S. Cohen, age forty-five with four years of college but no degree, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton, of the Indictment.9 (Motion and Memorandum, Exhibits D at 28, 38, I at 2-3, 17-18.)
When offering his guilty plea, Respondent S. Cohen acknowledged that he knowingly conspired with others to commit securities fraud by manipulating the price of securities, including the securities of Ashton. (Motion and Memorandum, Exhibit I at 18-20.)
David Hirsch
The OIP charges Respondent Hirsch with willfully violating, and committing or causing the violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7.)
Respondent Hirsch signed a Plea Agreement with the USAO on December 16, 2002. (Motion and Memorandum, Exhibit L.) On the same day, Respondent Hirsch, age forty-two and a college graduate, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton. (Motion and Memorandum, Exhibits D at 28, 38, K at 3, 18.) When he entered his guilty plea, Respondent Hirsch admitted that, as to Count One, he agreed with others to charge excessive commissions and did not disclose this fact to his customers. And, as to Count Two, he had charged clients excessive commissions on purchases and sales of Ashton securities without informing his clients. (Motion and Memorandum, Exhibit K at 19.)
On April 3, 2003, Respondent Hirsch was sentenced to three years probation, a special assessment of $200, and a restitution order to be issued later. In addition, Respondent Hirsh is to notify any potential employer who would employ him in the securities industry of his conviction. (Motion and Memorandum, Exhibit M.)
James L. Bila
The OIP alleges that Respondent Bila willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7.)
On November 1, 2002, Respondent Bila, age thirty-two and a high school graduate, signed a Plea Agreement with the USAO. (Motion and Memorandum, Exhibit O.) On the same date, Respondent Bila pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Six, Securities Fraud-Americom, of the Second Superseding Indictment.10 (Motion and Memorandum, Exhibits D at 28, 43, N at 30.) When he entered his guilty plea, Respondent Bila admitted that he conspired to, and did commit securities fraud by making false and misleading statements about securities to potential customers, including the securities of American Comstock.11 (Motion and Memorandum, Exhibit N at 30-31.)
Christian W. Blake
The OIP alleges that Respondent Blake willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7.)
Respondent Blake entered into a Plea Agreement with the USAO on November 1, 2002. (Motion and Memorandum, Exhibit P.) On the same day, Respondent Blake, age thirty-two with a high school equivalency degree, entered a guilty plea to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Six, Securities Fraud-Americom, of the Second Superseding Indictment.12 (Motion and Memorandum, Exhibits D at 28, 43, N at 5, 34.) When he entered his guilty plea, Respondent Blake admitted that:
[From] approximately May 1995 through March 2001, in the Eastern District of New York and - well, where I agreed, conspired with others to violate the law of the United States against security fraud and from, approximately, May [1995] to March 2001 in the Eastern District of New York and elsewhere I did violate the laws against security fraud when in my capacity as a stock broker I intentionally made false and misleading statements to my clients concerning the value of the stock I was attempting to induce them to purchase in order to manipulate the price of the stock.
(Motion and Memorandum, Exhibit N at 33.)
Louis R. Facchini, Jr.
The OIP alleges that Respondent Facchini willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7.)
On February 5, 2002, Respondent Facchini entered into a Cooperation Agreement with the USAO. (Motion and Memorandum, Exhibit R.) On the same day, Respondent Facchini, age thirty-six with a college degree in criminal justice, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton, of the Second Superseding Indictment.13 (Motion and Memorandum, Exhibits D at 28, 38, Q at 3-4, 17.) In connection with his guilty plea, Respondent Facchini stated that he was employed in the securities industry from the end of 1995 to June 1996, and that "[d]uring that period of time, I, with others, participated in a scheme to defraud by making misstatements to investors [and] by not disclosing commissions I earned on certain transactions in regards to stock. I also made unauthorized trades." (Motion and Memorandum, Exhibit Q at 18.)
John J. Gremmo, III
The OIP alleges that Respondent Gremmo willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7.)
On January 23, 2002, Respondent Gremmo entered a Cooperation Agreement with the USAO. (Motion and Memorandum, Exhibit T.) On the same date, Respondent Gremmo, age forty-six with a college degree, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton, of the Indictment.14 (Motion and Memorandum, Exhibits B at 16, 26, S at 3-4, 20.) When entering his guilty plea, Respondent Gremmo stated:
As a trader, I was in the position of taking part in the implementing, the artificial inflation and maintenance of the price of certain house stocks held by First United, which included Ashton stock. I hereby accept responsibility and plead guilty to Count 1 of the indictment, which is conspiracy to commit securities, mail and wire fraud.
I acknowledge my part in this count and that between February, 1994, through 1997, in the Eastern District and elsewhere, I and others took part in a common scheme or plan at First United by engaging in acts, practices and a course of business which operated as a fraud upon members of the investing public by artificially inflating and supporting the price of various stocks held by First United. Although I was not a retail salesman, as a trader, I was aware that stock confirmations were routinely sent to customers by either mail or wire.
I also accept responsibility and plead guilty to Count 2, which is securities fraud with respect to the Ashton stock, in that between February, 1994 and 1997, in the Eastern District and elsewhere, I knowingly took part in a scheme in which various stocks, specifically Ashton, which were held by First United, had their prices artificially supported and inflated, to the detriment of the investing public, and I am truly sorry for my involvement in this matter.15
(Motion and Memorandum, Exhibit S at 21-22.)
Roberto A. Mangiarano
The OIP charges that Respondent Mangiarano willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7.)
On December 3, 2002, Respondent Mangiarano entered into a Plea Agreement with the USAO. (Motion and Memorandum, Exhibit V.) On the same day, Respondent Mangiarano, age twenty-nine with several years of college, pled guilty to Count One, Conspiracy to Commit Securities, Mail and Wire Fraud, and Count Sixteen, Conspiracy to Commit Money Laundering, of the Second Superseding Indictment. (Motion and Memorandum, Exhibits D at 28, 51, U at 4, 30.) When entering his guilty plea, Respondent Mangiarano admitted that:
From April 1995 through March 2001, in the Eastern District of New York, while I worked at First United, Lexington Capital and Stockton Equities Group, I conspired with others to manipulate the market price of certain house stocks, such as Global Ecological Services, by, among other things, gaining control of most of the shares, thereby artificially inflating the price of the stock.
Additionally, I agreed with others that monies which were generated by the fraudulent scheme would be transferred back into the brokerage firms to promote the securities fraud.16
(Motion and Memorandum, Exhibit T at 31-32.)
Joseph P. Mannino
The OIP alleges that Respondent Mannino willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 7-8.)
Respondent Mannino entered into a Plea Agreement with the USAO on October 28, 2002. (Motion and Memorandum, Exhibit X.) On the same day, Respondent Mannino, age twenty-nine with two years of college, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Six, Mail Fraud-Americom, of the Second Superseding Indictment.17 (Motion and Memorandum, Exhibits D at 28, 43, W at 3-4, 29.) When entering his guilty plea, Respondent Mannino stated that:
In or about between February 1994, and March of 2000, within the Eastern District of New York, specifically in Long Island, I conspired with others to make untrue statements, material facts to the investing public in connection with the purchase and sales of securities in violation of federal law.
And Count Six. In or about between July of 1998 and August of 1999, within the Eastern District of New York, I knowingly caused a telephone call to be made to Lexington, to Capital, to a customer and induced him to purchase shares of American Com (ph) stock by deceptive means, including omitting material facts in violation of federal law.
(Motion and Memorandum, Exhibit W at 30.)
David M. Margules
The OIP charges that Respondent Margules willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 8.)
Respondent Margules entered into a Plea Agreement with the USAO on November 27, 2002. (Motion and Memorandum, Exhibit Z.) On the same day, Respondent Margules, age forty-six and a high school graduate, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Five, Securities Fraud-IRT Industries, of the Second Superseding Indictment.18 (Motion and Memorandum, Exhibits D at 28, 41, Y at 3, 17.) When entering his guilty plea, Respondent Margules admitted that:
I participated with Steve Cohen on recommendations to my clients and I did so with not having sufficient basis for making these recommendations . . . . I was told that these stocks were good stocks and I went along . . . . It was myself and Steve Cohen on a speakerphone . . . And also Steve Cohen made price predictions suggesting guarantees of profits.
(Motion and Memorandum, Exhibit Y at 18-19.) Respondent Margules acknowledged that one of the stocks was IRT Industries, Inc. (Motion and Memorandum, Exhibit Y at 18.)
James J. Pellizzi
The OIP charges that Respondent Pellizzi willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 8.)
On April 20, 2001, Respondent Pellizzi entered into a Cooperation Agreement with the USAO. (Motion and Memorandum, Exhibit BB.) On the same day, Respondent Pellizzi, age thirty-five with a year and a half of college, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Three, Securities Fraud-EquiMed, of the Indictment.19 (Motion and Memorandum, Exhibits B at 16, 27, AA at 3-4, 17.) When he pled guilty, Respondent Pellezzi admitted that:
I was employed as a stock broker by First United Corporation from May, 1995, through April, 1997 . . . While I was employed by First United, I committed securities fraud by, among other things, failing to disclose excessive commissions and sales credits I received in connection with the sale of certain house stocks, including Equimet. I knowingly and willfully conspired with certain individuals named in the indictment and others to commit securities fraud against customers of First United.
(Motion and Memorandum, Exhibit AA at 18.)
David M. Pesso
The OIP charges that Respondent Pesso willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 8.)
On October 2, 2002, Respondent Pesso entered into a Plea Agreement with the USAO. (Motion and Memorandum, Exhibit DD.) On October 20, 2002, Respondent Pesso, age thirty-four with two years of college, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton, of the Second Superseding Indictment.20 (Motion and Memorandum, Exhibits D at 28, 38, CC at 3-4, 19.) When he entered his plea, Respondent Pesso admitted that:
[F]rom May of 1995 through May of 1996, while employed at First United Equities, I and others conspired to inflate the worth of certain house stocks, such as Ashton Technologies, by making material misrepresentations to my clients.
The misrepresentations were essentially that I made false predictions about the stocks worth and future value.
(Motion and Memorandum, Exhibit CC at 19-20.)
Michael Pugliese
The OIP charges that Respondent Pugliese willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 8.)
On April 19, 2001, Respondent Pugliese entered into a Cooperation Agreement with the USAO. (Motion and Memorandum, Exhibit FF.) On the same date, Respondent Pugliese, age thirty-three with two years of college, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton, of the Indictment.21 (Motion and Memorandum Exhibits B at 16, 26, EE at 3, 16-17.) When he entered his guilty plea, Respondent Pugliese admitted that in 1996 and 1997 he knowingly acted illegally with defendants in this case at First United and Lexington Capital.
I misled my customers. I didn't allow them to sell when they wanted to sell stocks, together with other people. At [First United] I crossed stocks . . . . I took one stock and sold it . . . to another broker or another customer of the firm with another broker and he sold me the stock that he owned in one stock and I sold him a stock that I owned in another stock.
(Motion and Memorandum, Exhibit EE at 18.)
Christopher J. Russo
The OIP charges that Respondent Russo willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 8.)
On May 3, 2001, Respondent Russo signed a Cooperation Agreement with the USAO. (Motion and Memorandum, Exhibit HH.) On the same day, Respondent Russo, age thirty-six with several years of college, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton of the Superseding Indictment.22 (Motion and Memorandum, Exhibits C at 25, 32, GG at 4, 19.) In entering his guilty plea, Respondent Russo stated:
While working at [First United] and Lexington Capital, I, along with others, passed along false predictions to my clients, crossed Ashton stock or used my clients to be a buyer of the stock when another client wanted to sell the same stock.
I, along with others, also promised customers that they could participate in future private placements if they bought house stocks.
I failed to disclose these acts to my clients and by doing so, I know I violated the securities laws.
In addition, I knew that others employed at First United and Lexington Capital were crossing trades and made false price predictions and by engaging in this conduct, I tacitly agreed with them not to disclose these acts to the clients.
(Motion and Memorandum, Exhibit GG at 20.)
Howard I. Weinstein
The OIP alleges that Respondent Weinstein willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 8.)
On April 20, 2001, Respondent Weinstein entered into a Cooperation Agreement with the USAO. (Motion and Memorandum, Exhibit JJ.) On the same day Respondent Weinstein, age fifty-four with a college degree, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Two, Securities Fraud-Ashton, of the Indictment.23 (Motion and Memorandum, Exhibits B at 16, 26, II at 3-4, 17.) When entering his guilty plea, Respondent Weinstein admitted that:
From December, 1994 to December 31, 1997, I was employed as a stock broker at First United . . . Among my duties were opening accounts, assisting my clients in purchasing and selling stock, promoting IPOs. While at the firm, I also trained brokers and gave morning and afternoon meetings.
In furtherance of my agreement with my coconspirators, I promoted the sale of stocks and IPOs without fully disclosing my total commissions and on occasion conveyed false or misleading information of a material nature, which my clients relied upon and which resulted in a significant loss of money. I was also guilty of using high-pressure sales tactics to induce stock purchases.
Furthermore, clients directed me to sell their shares of stock and due to improper resistance by principals of First United, including but not limited to some of the defendants charged in the indictment, such sales were not promptly processed. I [and] my fellow brokers executed sell orders by engaging in a process called crossing. That process consists of finding a buyer in order to sell such stock and the sale not going through until a buyer was found, either from my own clientele or from the clientele of another broker.
There was also a tremendous amount of churning taking place, especially toward the end of each pay period, when I as well as all the stock brokers in my firm tried to increase our paychecks. The principals of First United profited greatly but the clients suffered significant losses in their investment accounts. Amongst the stocks we promoted were [NMFS], Ashton . . . and IRT Industries.
(Motion and Memorandum, Exhibit II at 18-19.)
Robert J. Winston
The OIP charges Respondent R. Winston with willfully violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (OIP at 8.)
On August 20, 2002, Respondent R. Winston entered into a Cooperation Agreement with the USAO. (Motion and Memorandum, Exhibit LL.) On the same day, Respondent R. Winston, age thirty-six and a law school graduate, pled guilty to Count One, Conspiracy to Commit Securities, Mail, and Wire Fraud, and Count Nine, Securities Fraud-Skynet, of the Second Superseding Indictment.24 (Motion and Memorandum, Exhibits D at 28, 46, KK at 3-4, 16.) When entering his plea, Respondent R. Winston admitted that:
From about April 1996 through November 1997 I was a stockbroker at First United Equities Corporation, a brokerage firm located in Garden City, New York . . . .
From December 1989 to February 2001, I was a stockbroker and an undisclosed principal in another firm Montrose Capital located in New York City.
At First United and Montrose I sold securities to investors.
While employed at First United Equities, I agreed with others to manipulate the prices of various stocks through a variety of illegal methods, including among them was making false and immaterial statements to clients to induce them to purchase stock, and my co-conspirators had an interest in. I and others used high pressure sales tactics to buy our house stock. I received excessive and undisclosed commissions, and I also received cash and other things of value to recommend the house stock to further this scheme. I also used the phones and the mails.
These are just some of the illegal sales practices I and others used as First United Equities.
From . . . . November 1998 through February 2001, one of the house stocks that I agreed to manipulate in this fashion was Skynet. I knew that my conduct was illegal and wrong when I recommended or committed it.
I have not detailed in this statement all of my illegal conduct or all of my illegal conduct committed with others.
(Motion and Memorandum, Exhibit KK at 17-19.)
Conclusions of Law
Rule 250. Motion For Partial Summary Disposition, 17 C.F.R. § 201.250
The Division's motion for partial summary disposition applies to Respondents S. Cohen, Hirsch, Blake, Mannino, Pellizzi, Pesso, Pugliese, Russo, Weinstein, and R. Winston. (Motion and Memorandum at 3.)
Rule 250 of the Commission's Rules of Practice allows motions for summary disposition of any or all allegations of the OIP after a respondent's answer has been filed, and the investigative file has been made available to the respondent. The maker of the motion should prevail where there is no genuine issue with regard to any material fact. 17 C.F.R. § 201.250.
Respondents Hirsch, Blake, Mannino, Pesso, Pugliese, Russo, and R. Winston have filed answers to the allegations in the OIP. (Motion and Memorandum at 2-3.) Not one of these Respondents has indicated that he was denied access to the Division's investigative file. There is nothing that indicates the Division did not follow customary practice and make the investigative file available for copying and inspection. 17 C.F.R. § 201.230.
Summary disposition is appropriate because there is no material fact at issue. Respondents' plea agreements, guilty pleas to state criminal charges based on the same activities alleged in the OIP, and acknowledgments that they knew they were acting illegally, establish that Respondents committed the willful violations alleged in the OIP. I therefore find that Respondents Hirsch, Blake, Mannino, Pesso, Pugliese, Russo and R. Winston willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.
As noted above, Rule 250 is only applicable where a Respondent has filed an answer. I deny the Division's request that I make summary disposition findings against Respondents S. Cohen, Pellizzi, and Weinstein because Rule 250 is inapplicable to these Respondents as these Respondents have not filed answers.25 (Motion and Memorandum at 3.)
Rule 155. Motion for Default, 17 C.F.R. § 201.155
The Division moves for partial default judgments against Respondents Adams, J. Cohen, Gremmo, Bila, Facchini, Mangiarano, and Margules. (Motion and Memorandum at 3.)
Rules 155 and 220 of the Commission's Rules of Practice specify that a party who fails to file an answer to the OIP or to respond to a dispositive motion may be deemed to be in default, and the administrative law judge may determine the proceeding against that party upon consideration of the record, including the OIP, the allegations of which may deemed to be true. 17 C.F.R §§ 201.155, .220.
Respondents Adams, Bila, Facchini, J. Cohen, S. Cohen, Gremmo, Mangiarano, Margules, Pellizzi, and Weinstein did not file answers in response to the OIP, or by May 30, 2003, as I directed. Furthermore, as of the date of this Order, they have not filed a reply to the Division's Motion and Memorandum.26 Accordingly, I find these Respondents to be in default, and I find the allegations in the OIP to be true that these Respondents willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.27
Sanctions
The Division seeks an order requiring all Respondents, except J. Winston, (a) to cease and desist from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, and (b) barring Respondents from association with any broker or dealer.28 At this time, however, the Division does not seek disgorgement or civil penalties because only Respondent Hirsch has been sentenced, and "the sentences imposed will likely impact the Division's determination of disgorgement and/or civil penalties."29 (Motion and Memorandum at 2.)
Cease and Desist
Section 8A of the Securities Act and Section 21C of the Exchange Act, authorize the Commission, after notice and opportunity for hearing, to order a person to cease and desist from committing or causing a violations of either the Securities Act or the Exchange Act and any future violations based on a finding that a violation has occurred.
The Commission has found the following considerations applicable in determining whether to impose a cease and desist order:
[A]long with the risk of future violations, we will continue to consider our traditional factors in determining whether a cease-and-desist order is an appropriate sanction based on the entire record. Many of these factors are akin to those used by courts in determining whether injunctions are appropriate, including the seriousness of the violation, the isolated or recurrent nature of the violation, the respondent's state of mind, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his or her conduct, and the respondent's opportunity to commit future violations. In addition, we consider whether the violation is recent, the degree of harm to investors or the marketplace resulting from the violation, and the remedial function to be served by the cease-and-desist order in the context of any other sanctions being sought in the proceeding.
KPMG Peat Marwick, LLP, 74 SEC Docket 384, 436 (2001); see also WHX Corp., Exchange Act Rel. No. 47980 (June 4, 2003).
Respondents' guilty pleas establish that they knowingly committed serious criminal violations and are a compelling indicator that issuing cease-and-desist orders is in the public interest. "It is well settled that a criminal conviction, whether by jury verdict or guilty plea, constitutes estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by judgment in the criminal case." United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978); see also Galluzzi, 78 SEC Docket 1125, 1128 n.15 (Aug. 23, 2002) (citing Brownson, 77 SEC Docket 3636 (July 3, 2002), pet. denied, No. 02-73194 (9th Cir. 2003) (absent extraordinary circumstances, an individual with a criminal conviction for participating in a criminal conspiracy cannot be permitted to remain in the securities industry)).
Respondents' conspiracy to commit securities, wire, and mail fraud was broad, and enduring. Several Respondents acknowledged that the conspiracy caused investors to lose substantial sums, and each of the indictments charges that the defendants and other participants in the fraudulent scheme obtained tens of millions of dollars in profits. (Motion and Memorandum, Exhibits B at 12, C at 18, and D at 20.) It is reasonable to conclude that a conspiracy of this size caused substantial harm to the marketplace for securities as well as individual investors. The Commission has noted that in the "ordinary case and absent evidence to the contrary, a finding of past violation raises a risk of future violation sufficient to support our ordering a respondent to cease and desist." WHX Corp., Exchange Act Rel. No. 47980 (June 4, 2003). The violations occurred in the mid-1990s, but the administrative proceeding was stayed for the two years before the parallel criminal case was resolved by Respondents' guilty pleas.
No Respondent filed a response in opposition to the Motion and Memorandum and at the prehearing conference on September 4, 2003; no Respondent offered any mitigating evidence addressing the public interest issues.
For all the reasons stated, I find that all Respondents, except Jonathan D. Winston, should be ordered to cease and desist from committing or causing any violations, or future violations, of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.
Bar From Association With Any Broker or Dealer
Section 15(b)(6) of the Exchange Act empowers the Commission to "censure, place limitations on the activities or functions of [persons associated with a broker or dealer at the time of the misconduct] or suspend for a period not exceeding 12 months, or bar such person from being associated with a broker or dealer" if the Commission finds after notice and opportunity for hearing that such a sanction is in the public interest.
In addition to deterrence, the criteria the Commission uses in making the public interest determination are:
[T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981); see also Joseph J. Barbato, 69 SEC Docket 178, 200 n.31 (Feb. 10, 1999); Donald T. Sheldon, 51 S.E.C. 59, 86 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
The reasons set forth above that support imposition of a cease-and-desist order are equally applicable here. Respondents' actions were egregious. They covered patently illegal activities and continued in most cases for extended periods of time. The continued participation by Respondents in the securities industry would allow an opportunity for future violations. See Galluzzi, 78 SEC Docket 1125, 1128 n.15 (Aug. 23, 2002) (citing Brownson, 77 SEC Docket 3636 (July 3, 2002), pet. denied, No. 02-73194 (9th Cir. 2003)).
None of the Respondents oppose the Motion and Memorandum and at the prehearing conference on September 4, 2003; no Respondent offered any mitigating evidence addressing the public interest issues.
For all the reasons stated, I find that all Respondents, except Jonathan D. Winston, should be barred from being associated with a broker or dealer.
Order
Based on the findings and conclusions set forth above:
I GRANT the Motion for Summary Disposition, pursuant to Rule 250 of the Commission's Rules of Practice, as to the allegations in the OIP against Respondents David Hirsch, Christian W. Blake, Joseph P. Mannino, David M. Pesso, Michael Pugliese, Christopher J. Russo, and Robert J. Winston;
I FIND that Respondents Hunter Adams, James L. Bila, Jason A. Cohen, Steven M. Cohen, Louis R. Facchini, Jr., John J. Gremmo, III, Roberto A. Mangiarano, David M. Margules, James J. Pellizzi, and Howard I. Weinstein are in default pursuant to Rule 155 of the Commission's Rules of Practice and that the allegations in the OIP are true as to them;
I ORDER, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, that Respondents Hunter Adams, James L. Bila, Christian W. Blake, Jason A. Cohen, Steven M. Cohen, John J. Gremmo, III, Louis R. Facchini, Jr., David Hirsch, Roberto A. Mangiarano, Joseph P. Mannino, David M. Margules, James J. Pellizzi, David M. Pesso, Michael Pugliese, Christopher J. Russo, Howard I. Weinstein, and Robert J. Winston to CEASE AND DESIST from committing or causing any violations, or future violations, of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
I FURTHER ORDER, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, that Respondents Hunter Adams, James L. Bila, Christian W. Blake, Jason A. Cohen, Steven M. Cohen, John J. Gremmo, III, Louis R. Facchini, Jr., David Hirsch, Roberto A. Mangiarano, Joseph P. Mannino, David M. Margules, James J. Pellizzi, David M. Pesso, Michael Pugliese, Christopher J. Russo, Howard I. Weinstein, and Robert J. Winston are BARRED from association with any broker or dealer; and
I FURTHER ORDER, that this proceeding will remain open for ninety days or until December 8, 2003, to allow the Division an opportunity to submit a request for additional sanctions against Respondents in the form of disgorgement or civil money penalties or both, pursuant to Section 8A of the Securities Act of 1933 and Sections 21B and 21C of the Securities Exchange Act of 1934. If the Division has not submitted a request at the end of ninety days, I will act to close this proceeding.
Brenda P. Murray
Chief Administrative Law Judge
1 A sealed indictment filed on December 7, 2000, was unsealed on March 8, 2001. A Superseding Indictment was filed on October 31, 2001, and a Second Superseding Indictment was filed on February 4, 2002. (Motion and Memorandum at 5.) The indictments all charge that Respondents and others obtained "tens of millions of dollars in profits" from a criminal conspiracy by controlling large blocks of publicly traded securities in thinly capitalized, start-up companies. (Motion and Memorandum at 20, Exhibits B at 12, C at 18, and D at 20.)
2 The two volumes are labeled (1) Declaration of Cynthia A. Matthews in Support of the Division of Enforcement's Motion for Partial Summary Disposition and Default Judgment, and (2) Matthews's Declaration and Exhibits, Volume II.
3 I will refer to these materials as Motion and Memorandum, Exhibit __.
4 On August 13, 2003, I received Christopher Russo's Response to the Division's Motion and Memorandum, which included a copy of Respondent Russo's answer filed May 29, 2003. The Division does not oppose Respondent Russo's request to convert its motion for partial default as to him to a motion for partial summary disposition.
5 The transcript of Respondent Adams's court appearance to change his plea to guilty is mistakenly dated 2003. (Motion and Memorandum, Exhibit E.)
6 The Division represents that Respondent Adams pled guilty to Counts One and Two of the Second Superseding Indictment, namely, knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and committing fraud with respect to NMFS securities. (Motion and Memorandum at 11.)
7 In 1997, a group of individuals associated with First United formed Lexington Capital, a registered broker-dealer, and in 1998 changed its name to Preston Langley Asset Management, Inc. ("Preston Langley"). (Motion and Memorandum, Exhibit D at 3-4.)
8 The transcript of Respondent J. Cohen's court appearance to change his plea to guilty is mistakenly dated 2003. (Motion and Memorandum, Exhibit G.) The Division maintains that Respondent J. Cohen pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including Ashton and NMFS securities. (Motion and Memorandum at 11-12.)
9 The Division states that Respondent S. Cohen pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and committing fraud with respect to NMFS securities. (Motion and Memorandum at 12.)
10 Americom was a publicly traded security, Americom Networks International, Inc. (Motion and Memorandum, Exhibit D at 15.)
11 The Division states that Respondent Bila pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to a substantive count of committing securities fraud. (Motion and Memorandum at 13.)
12 The Division represents that Respondent Blake pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to a substantive count of committing securities fraud. (Motion and Memorandum at 13.)
13 The Division states that Respondent Facchini pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to committing securities fraud with respect to Ashton securities. (Motion and Memorandum at 13.)
14 Respondent Gremmo's guilty plea on January 23, 2002, was to the charges in the Indictment although he was named in the Superseding Indictment, filed on October 31, 2001.
15 The Division states that Respondent Gremmo pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to committing securities fraud with respect to Ashton securities. (Motion and Memorandum at 14.)
16 According to the Division, Respondent Mangiarano pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to a substantive count of committing securities fraud. (Motion and Memorandum at 14.)
17 The Division represents that Respondent Mannino pled guilty to Counts One and Six of the Second Superseding Indictment, namely knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to a substantive count of committing securities fraud. (Motion and Memorandum at 14-15.)
18 The Division states that Respondent Margules pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to a substantive count of committing securities fraud. (Motion and Memorandum at 15.)
19 The Division states that Respondent Pellezzi pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to a substantive count of committing securities fraud. (Motion and Memorandum at 15.)
20 The Division states that Respondent Pesso pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to committing securities fraud with respect to Ashton securities. (Motion and Memorandum at 16.)
21 The Division represents that Respondent Pugliese pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to committing securities fraud with respect to Ashton securities. (Motion and Memorandum at 16.)
22 The Division represents that Respondent Russo pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and committing securities fraud with respect to Ashton securities. (Motion and Memorandum at 16-17.)
23 The Division represents that Respondent Weinstein pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to committing securities fraud with respect to Ashton securities. (Motion and Memorandum at 17.)
24 The Division represents that Respondent R. Winston pled guilty to knowingly and willfully conspiring to commit securities fraud with respect to securities, including the securities of Ashton and NMFS, and to a substantive count of committing securities fraud. (Motion and Memorandum at 17-18.)
25 I am not bound by agreements that the Division negotiates with Respondents.
26 The Division is in negotiations with Respondent J. Winston and is not requesting disposition of the allegations in the OIP as to him at this time. (Motion and Memorandum at 1 n1.)
27 Rule 155 of the Commission's Rules of Practice does not provide for partial defaults and the concept of default does not lend itself to a status that can exist in a partial state.
28 Respondent J. Winston has indicated that he will consent to the relief the Division requests in the Motion and Memorandum.
29 In A.S. Goldmen & Co., Ad. Proc. 3-9933, the Division thought it necessary to seek Commission modification of the OIP to forgo seeking disgorgement where the Supreme Court of the State of New York had issued an Order of Restitution that included the Respondent's profits from illegal activities. A.S. Goldmen & Co., Initial Decision Release No. 231 (June 27, 2003).