UNITED STATES OF AMERICA
|In the Matter of||: ORDER MAKING|
|: FINDINGS AND|
|LAWRENCE CAITO||: IMPOSING SANCTIONS|
ORDER INSTITUTING PROCEEDINGS
On July 23, 1998, the Securities and Exchange Commission deemed it appropriate and in the public interest to institute public administrative proceedings against the Respondent, Lawrence Caito ("Caito"), pursuant to Section 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act").
Caito has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this 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, except as to jurisdiction and the entry of the injunction issued by the United States
District Court, Southern District of New York, to which he admits, Caito has consented to the issuance of this Order Making Findings and Imposing Sanctions ("Order").
On the basis of the Order Instituting Proceedings and Caito's Offer of Settlement, the Commission finds that:
A. From 1973 through May 1995, Caito was the sole shareholder, president, head trader, and person associated with Capital Shares, a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. Capital Shares was a market maker in the securities of Big O Tires, Inc., Cliff Engle, Ltd., Digital Metcom, Inc., Flores de New Mexico, Inc., Fountain Powerboat, Inc., TS Industries, Inc., and Tunex International, Inc. During the relevant time periods, the stock of all these companies were traded on the NASDAQ, and the stock of three of these companies was also traded on the Boston Stock Exchange.
B. The Commission filed a Complaint on November 20, 1990, alleging that from July through October 1987, Caito participated in a scheme to manipulate the prices of six securities: Big O Tires, Inc., Cliff Engle Ltd., Digital Metcom, Inc., Fountain Powerboat Industries, Inc., TS Industries, Inc. and Tunex International, Inc. More specifically, the Commission's Complaint alleged that Caito participated in the manipulation scheme by dominating and controlling the markets for these stocks; by entering bid and asked quotations at prices not justified by legitimate supply and demand in order to increase and stabilize the prices of these stocks; by purchasing the stocks when they became available in the market in order to reduce the float in order to prevent price declines; by selling those stocks pursuant to a guaranteed profit arrangement with another broker-dealer without disclosing to the NASDAQ system the existence of such an arrangement and without disclosing the true beneficial owner of the securities; and by failing to maintain accurate books and records of these transactions, including his firm's securities positions and the true beneficial owner of the securities. These tactics were employed to increase or prevent the decline in the prices of the securities even during the Market Break of October 1987.
C. On February 28, 1995, after a trial in the United States District Court for the Southern District of New York, the Honorable Harold Baer, Jr. found that Caito had violated Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and had violated Sections 9(a)(2), 10(b) and Rule 10b-5 thereunder, 15(c)(1) and (2) and Rules 15c2-1 and 15c2-7, and 17(a)(3) and Rule 17a-4 of the Exchange Act. The Court ordered Caito to pay disgorgement (plus pre-judgment interest) and enjoined Caito from committing future violations of the securities laws. SEC v. Henry W. Lorin, 877 F. Supp. 192 (S.D.N.Y. 1995), aff'd, 76 F.3d 458 (2d Cir. 1996).
D. More specifically, the district court found that an undisclosed agreement existed between Capital Shares and Haas Securities Corporation, Inc. ("Haas"), whereby Caito engaged in manipulative conduct by raising quoted bid prices in order to increase or stabilize the prices of the stocks against "market overhang" and instances of heavy selling pressure. Pursuant to that agreement, Caito raised bid prices to buy stock to eliminated market overhang. Haas then acted as the "buyer of last resort" at the end of the trading day when Caito and Haas conducted a "recap" of all stocks Caito acquired as a market maker and was not able to dispose of to customer accounts. Pursuant to this arrangement, Caito purchased over $44 million of these stocks in the market and sold over $20 million worth back to Haas.
E. The District Court also found that Caito and Capital Shares failed to maintain proper books and records, including (a) those which would show securities positions carried by the broker-dealer for its own account and those of its customers, and (b) memoranda of each order for the purchase and sale of securities, whether such order were executed or not.
Based on the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions which are set forth herein.
ACCORDINGLY, IT IS HEREBY ORDERED THAT Caito be, and he hereby is permanently barred from association with any broker or dealer.
By the Commission.
Jonathan G. Katz
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