SECURITIES ACT OF 1933
Release No. 7795 / February 7, 2000
SECURITIES EXCHANGE ACT OF 1934
Release No. 42393 / February 7, 2000
Administrative Proceeding File No. 3-10140
COMMISSION STAFF CHARGES THAT H.J. MEYERS & CO., INC. AND OTHERS MANIPULATED PRICE OF MICROCAP STOCK
The Commission announced an Order Instituting Public Administrative and Cease-and-Desist Proceedings (Order) against H.J. Meyers & Co., Inc. (H.J. Meyers), Robert Setteducati (Setteducati), William Masucci (Masucci), Michael Vanechanos (Vanechanos), and James A. Villa (Villa).
The Order alleges that in June 1996, H.J. Meyers generated approximately $877,000 in illegal profits by manipulating the price of the common stock of Borealis Technology Corporation (Borealis). At the time of the alleged violations, H.J. Meyers was a national broker-dealer firm with 17 offices. The Order alleges that the manipulative scheme was orchestrated by Setteducati, H.J. Meyers' Executive Vice President, and Masucci, H.J. Meyers' Senior Vice President in charge of retail sales. The Order also alleges that Vanechanos, the firm's head trader, played a central role in the manipulative scheme. The Order further alleges that H.J. Meyers, through Vanechanos, sold Borealis stock to its customers at undisclosed excessively marked up prices. Villa, owner of H.J. Meyers, is alleged to have failed reasonably to supervise Vanechanos and Setteducati.
On June 24, 1996, H.J. Meyers underwrote the Borealis initial public offering (IPO) and sold approximately 1.9 million, or 80% of the IPO stock to its retail customers. The Order alleges that within minutes after the stock started trading in the aftermarket, H.J. Meyers, through its head trader Vanechanos, raised the price of Borealis from the IPO price of $5 to $8.49.
The Order alleges that weeks before the Borealis IPO, Setteducati and Masucci orchestrated the allocation of Borealis IPO shares. They allocated the majority of the IPO shares to several H.J. Meyers offices. This allocation was made for the purpose of enhancing the firm's control of the float in the aftermarket. It was based on the ability of the staff's sales in various offices to discourage customers from selling back their IPO shares while simultaneously selling customers additional shares in the aftermarket. Setteducati and Masucci also allegedly sought to create pent-up demand for Borealis during the first five days of aftermarket trading. H.J. Meyers' sales to its customers were based on purported aftermarket demand that had been created during the IPO solicitation period. According to the Order, there was no significant aftermarket demand outside of H.J. Meyers.
The Order further alleges that from June 24 through June 28, 1996, (the manipulative period), H.J. Meyers dominated and controlled the Borealis stock. During the manipulative period, H.J. Meyers reduced the floating supply of Borealis stock to control 75% of the float. Also, during the manipulative period, the firm was responsible for approximately 77% of all trades in the Borealis stock, which was substantially more than any other broker-dealer.
The Order also alleges that as part of the scheme, Setteducati and Masucci allocated 170,000 IPO shares to themselves and other H.J. Meyers office managers and registered representatives (H.J. Meyers Executives). The H.J. Meyers Executives in turn sold their allocated IPO shares to their own customers (favored accounts). The Order alleges that during the first two days of aftermarket trading, the favored accounts sold or "flipped" virtually all of their IPO shares back to H.J. Meyers at a profit. According to the Order, these "flipped" shares generated commissions for Setteducati and Masucci and the other H.J. Meyers Executives. The "flipped" shares also created a block of stock that H.J. Meyers sold to other customers during the manipulative period at inflated prices. Vanechanos, the firm's head trader, is alleged to have accumulated large quantities of Borealis from other broker-dealers and to have sold these shares to H.J. Meyers customers at excessively marked up prices. At the end of the manipulative period, the price of Borealis declined. It has continued on a long downward trend ever since.
A hearing before an administrative law judge will be scheduled to determine whether the allegations in the Order are true and to determine what remedial action, if any, is appropriate in the public interest.