UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 42737 \ May 1, 2000
File No. 3-10194
In the Matter of :
: ORDER INSTITUTING A
GENESIS TRADING : CEASE-AND-DESIST PROCEEDING,
and : MAKING FINDINGS, AND IMPOSING
ROBERT GARGANESE, : REMEDIAL SANCTIONS AND A
: CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a cease-and-desist proceeding pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") be instituted against Genesis Trading ("Genesis") and Robert Garganese ("Garganese").
In anticipation of the institution of this cease-and-desist proceeding, Genesis and Garganese have submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission´s Rules of Practice, 17 C.F.R. '201.100 et seq., and without admitting or denying the findings contained herein, except that Genesis and Garganese admit the jurisdiction of the Commission over them and over the subject matter of this proceeding, Genesis and Garganese each consent to the entry of this Order Instituting a Cease-and-Desist Proceeding, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order").
Accordingly, IT IS ORDERED that a proceeding pursuant to Section 21C of the Exchange Act be, and hereby is, instituted.
On the basis of this Order and the Offer submitted by Genesis and Garganese, the Commission finds that:
1. Genesis, a Las Vegas-based company, provides a stock recommendation service through its web site, www.genesistrading.com, in return for a subscription fee. Genesis is not registered with the Commission in any capacity.
2. Garganese, age 37, is Genesis´ President and Director of Operations. Garganese began serving a one year federal prison term in October 1999 for telemarketing and bank fraud. Prior to beginning his jail term, Garganese was Genesis´ sole employee, with the exception of two family members who provided administrative support. Garganese is not registered with the Commission in any capacity.
Since at least December 1998 to date, the Genesis web site, located on the world wide web at www.genesistrading.com, and Garganese, Genesis´ owner and operator, have violated the antifraud provisions of the Exchange Act by disseminating false and misleading statements. These statements are designed to entice day traders to sign up for and continue to use Genesis´ self-proclaimed expert stock picking services in return for a subscription fee.1
Genesis began operations in August 1998 under the sole control of Garganese. It offers a stock trading system to subscribers at the cost of $150 per month. Approximately 43 persons have subscribed to Genesis. Subscribers are promised, and have been provided, between six and ten stock recommendations daily. The false and misleading advertising used by Genesis to attract subscribers breaks down into two categories: (a) statements concerning the nature of Genesis´ stock selection system, and (b) statements concerning the returns to be expected from trading based on Genesis´ recommendations.
As to the nature of its system, for most of its existence, the web site prominently described Genesis as Aa company composed of professional traders" who have created a system called AStock Tracker Plus." According to the site, the system is designed to track institutional buying and selling. In truth, Genesis has been run by one person, Robert Garganese, who is not a professional trader. The Genesis picks are the product of commercially purchased software that does not specialize in tracking institutional buying and selling.
The Genesis web site also misrepresents the profit potential of its system. For example, the site boasts, without basis, that all the subscriber need do is "enter the trade and ride the wave of what is usually a $2-$10 price move within a few days." The site also claims that 81 percent of Genesis´ recommendations that hit their action price [i.e. the price at which Genesis recommends the stock be bought or sold short] become profitable.
2. Genesis Trading - As Advertised
a. Nature of the Genesis system
Genesis portrayed itself as a company employing a full-time staff with expertise in analyzing securities. Until at least May 1999, the Genesis web site described Genesis Trading as follows:
Genesis Trading is a company composed of professional traders ... who willingly pass their knowledge on to our subscribers. We are a stock trader´s dream team. Genesis is also the developerof the STOCK TRACKER PLUS stock trading program. After three years of research and development, this innovative system is now available to the public.... [W]hat the STOCK TRACKER PLUS program actually does is track ... SUDDEN NEW OR ACCELERATED INSTITUTIONAL BUYING OR SELLING.
Separately, the site similarly states, "We are educated traders ... who have designed this powerful money making system for the "little guy" in the market." The site adds that "most fund managers wish we didn´t pass this data on to our subscribers, because once in a while it forces the fund to pay higher prices for their purchases ...."
Another page on the site bolsters the perception that Genesis employed a sophisticated staff by adding, "Since we track about 1000 stocks with at least some institutional sponsorship ... our staff has to concentrate on a smaller field of stocks from our database in order to find the "hidden institutional buying and selling´ that we do look for each night to use for the nightly picks." The next sentence adds that each staff member has an "inherent methodical analyst´s nature." (Emphasis supplied).
b. Profit potential
The Genesis web site also features seductive advertising concerning the returns to be expected by use of its stock recommendations. These statements include, "[S]imply enter the trade and ride the wave of what is usually a $2 - $10 price move within a few days," and "[O]ur stocks regularly move $2-10.00 in a very short time frame (usually 1-5 days). How´s that for remarkable profits!" The site also states that "81% of our trades that hit our recommended action price move into profitable territory."
3. Genesis Trading C The Reality
a. Nature of the Genesis system
Genesis is not a company composed of professional traders. In fact, for its entire existence, Genesis has been run by only one person. Until he began his prison term in October 1999 for telemarketing and bank fraud, Garganese ran Genesis and was solely responsible for the content of its web site. Garganese is not a professional trader. He has not taken any securities industry qualification exams and his brokerage records show little trading experience.
Garganese´s stock recommendations were the product of commercially purchased software. This software was used by Genesis to purportedly track "SUDDEN NEW OR ACCELERATED INSTITUTIONAL BUYING OR SELLING." (Emphasis in original). In fact, the software is designed to track, among other things, accumulations in certain stocks - although not necessarily by institutions, as claimed by Genesis. Indeed, comparison of several of Genesis´ actual stock picks with the recommendations generated by the commercially purchased trading software shows that Genesis´ picks were not the result of unusual accumulation, as claimed by Genesis.
Garganese has also taken steps to lull actual subscribers into believing Genesis operated as advertised, replete with staff. Electronic mail messages to subscribers and other messages appearing on the Genesis site were regularly signed by "Robert Evans, " with the title, "cust. support rep.," apparently short for customer support representative. However, there is no Robert Evans employed by Genesis. This name is a pseudonym used by Garganese. In addition, a December 18, 1998 message to subscribers appearing on the site closes with, "HAPPY HOLIDAY! See you next week!!! Robert G, Robert E, Jenna M, Sandra G, Joiena M, Jerry Q, Rick H, John M, Jesse D." Other than the names of Garganese and his wife and mother, who provide administrative support to Genesis, the remaining six names were fabricated.
b. Profit potential
The statements concerning the returns to be expected were also exaggerated. Despite the promise of a regular $2 to $10 price move within five days, several Genesis clients either lost
money or had moderate success. In addition, the claim that 81 percent of Genesis´ recommendations that hit their action price become profitable is materially overstated. An analysis of 677 Genesis picks disclose that 51 percent were profitable while 49 percent lost money.
C. LEGAL ANALYSIS
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit material misrepresentations or omissions in connection with the purchase or sale of securities. Fraudulent
conduct prohibited by these provisions includes employing any device, scheme or artifice to defraud, making any untrue statement of material fact, or omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading.
Information is material if there is a substantial likelihood that a reasonable investor would consider it important to an investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Genesis´ misrepresentations concerning the nature of its stock selection system are material. See Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186 (3d Cir. 1990) (finding misrepresentation that a broker´s "research department" was recommending a stock to be material). In addition, the misrepresentations concerning the returns to be expected are material. See SEC v. Hasho, 784 F.Supp. 1059 (S.D.N.Y. 1992) (prediction of a substantial increase in the price of a security, without a reasonable basis for making such a prediction, is material).
The Supreme Court has held that the "in connection with" element is satisfied when the deception "touches" the purchase or sale of securities. Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6 (1971). The statements that Genesis is comprised of professional traders who have created a system to track institutional trading influence an investor´s subsequent trading decisions and therefore "touch" each resultant purchase and sale based on a Genesis recommendation.
Scienter is also a required element of a 10b-5 violation. Aaron v. SEC, 446 U.S. 680, 695 (1980). Recklessness is sufficient to satisfy the scienter requirement. See, e.g., Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990)(en banc)(as amended), cert. denied, 499 U.S. 976 (1991). Genesis, through Garganese, and Garganese acted with scienter. While acting as Genesis´ President, Director of Operations, and sole operator, Garganese drafted the entire content of the web site. Garganese either knew or was reckless in not knowing of the material misrepresentations and omissions on the Genesis web site. Accordingly, Genesis Trading and Garganese violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Genesis and Garganese and impose the sanctions specified in the Offer.
Accordingly, IT IS HEREBY ORDERED that:
3. pursuant to Section 21C of the Exchange Act, Genesis and Garganese cease-and-
desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and
B. Genesis provide a copy of the Commission Order to all current Genesis subscribers and all prospective subscribers for a period of one year.
By the Commission.
Jonathan G. Katz
1 While the Genesis site does not expressly state that it caters to day traders, the keywords found in its "META-tag" (terms selected by the site creator that direct an Internet user to the site when entered in a search engine) include "daytrading." In addition, Genesis´ "META-description" (a brief summary of the site prepared by the site´s creator and displayed in a list of search engine results) states, "Daytrade stocks to earn an incredible income with the help of Stock Tracker Plus." The web site itself states that it is geared more generally to "stock traders."