UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
On February 22, 2000, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against All-Tech Direct, Inc. f/k/a All-Tech Investment Group, Inc. ("All-Tech"), Harry Lefkowitz ("Lefkowitz"), Mark Shefts, Lisa Esposito ("Esposito"), Ralph Zulferino ("Zulferino"), David Waldman ("Waldman"), Adam Leeds ("Leeds"), and Barry Parish.
Esposito has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except for the jurisdiction of the Commission over her and over the subject matter of these proceedings, which are admitted, Esposito consents to the entry of the findings, a cease-and-desist order, and the imposition of the remedial sanctions set forth herein.
On the basis of the foregoing, Respondent Esposito hereby:
1. Admits the jurisdiction of the Commission over her and over the matters set forth in the Order Making Findings, Imposing Remedial Sanctions And Issuing Cease-And-Desist Order Against Lisa Esposito ("Order"); and
2. Solely for the purpose of the proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained in the Order, except with respect to Section III.1., above, and Section III.2.A, below, which are admitted, consents to the entry of the Order by the Commission containing the following findings and sanctions set forth below:1
A. Esposito, 34, is, and was during the relevant period, employed by All-Tech Direct, Inc. f/k/a All-Tech Investment Group, Inc. ("All-Tech") as a supervisor in its margin department at the firm's headquarters in Montvale, New Jersey. She resides in Garnerville, New York.
OTHER RELEVANT RESPONDENTS
B. All-Tech, is, and was during the relevant period, a broker-dealer registered with the Commission and incorporated under the laws of the State of Delaware. All-Tech offers day-trading services to customers through its principal office and twenty-one branches throughout the United States and through direct line electronic access similar to an internet connection.
C. Mark Shefts ("Shefts"), 42, is, and was during the relevant period, a registered representative and President of All-Tech. Shefts owns two percent of All-Tech directly and another 48 percent indirectly through his ownership of Rushmore Financial Services, Inc. Shefts works at All-Tech's headquarters in Montvale, New Jersey, and resides in Tuxedo Park, New York.
D. Harry Lefkowitz ("Lefkowitz"), 43, is, and was during the relevant period, Vice-President of Operations for All-Tech and supervises All-Tech's back office, including the margin department, and branch office operations. Lefkowitz works in All-Tech's headquarters in Montvale, New Jersey and resides in Goshen, New York.
E. Ralph Zulferino ("Zulferino"), 40, is, and was during the relevant period, an All-Tech registered representative, and the owner and manager of All-Tech's Edison, New Jersey, branch office. He resides in Marlboro, New Jersey.
F. David Waldman ("Waldman"), 58, resides in Monsey, New York and was employed by All-Tech from approximately February through August 14, 1998. During this period, Waldman was an associated person, although he did not have a formal title. Waldman is an attorney.
ALL-TECH'S UNLAWFUL EXTENSION OF MARGIN CREDIT AND FAILURE TO PROVIDE THE REQUISITE DISCLOSURE TO MARGIN CUSTOMERS
G. Throughout 1998, when the equity in certain margin accounts held by day-trading customers fell below the minimum required by Regulation T ("Regulation T") promulgated by the Board of Governors of the Federal Reserve ("Federal Reserve"), 12 C.F.R. §§ 220.1 - 220.12, All-Tech, directly or indirectly, extended uncollateralized loans from the accounts of associated persons to those customers. The customers who received these loans could not otherwise cover the margin calls issued by All-Tech's clearing firm, Southwest Securities, Inc. ("Southwest"). Regulation T prohibited All-Tech from supplying those customers with additional extensions of credit absent additional collateral.
H. The accounts held by associated persons from which All-Tech extended credit in contravention of Regulation T included: (1) an account in Waldman's name at All-Tech's Montvale headquarters office; and (2) an account at All-Tech's Edison, New Jersey branch in the name of Z-Tech Investments, Inc. ("Z-Tech"), which Zulferino controlled.
I. All-Tech's margin department effected the transactions necessary for All-Tech to make loans out of the Waldman and Zulferino accounts to day-trading customers of All-Tech. Esposito instructed Southwest to transfer sufficient funds from either the Waldman or Zulferino accounts to the account of the customer that had received the margin call by preparing and sending standard "journal forms" to Southwest. Esposito filled in the recipient's account number and the amount to be transferred on the journal form, and Lefkowitz approved the journal form for each such margin call loan. Esposito then faxed the journal form to Southwest, which executed the journal instructions in reliance on Lefkowitz's signature. Before making any loans from the Waldman or Z-Tech accounts, All-Tech required each customer to sign a journal form authorizing Southwest to transfer the borrowed money back to the Waldman or Z-Tech account the next day.
J. In effecting the transactions set forth above, All-Tech's margin department exercised discretion and control over the margin call loans made out of the Waldman and Zulferino accounts. While Waldman and Zulferino owned and/or controlled the funds in the accounts and were sometimes compensated by the customers who received the loans for making the loans, Waldman and Zulferino let All-Tech decide when, to whom and on what terms All-Tech could use their accounts to satisfy margin calls to customers. Waldman and Zulferino provided Esposito with pre-signed blank journal forms. Esposito photocopied the pre-signed forms and forwarded the photocopies to Southwest in the manner set forth above. Lefkowitz signed the journal forms authorizing the transfers even though they were obviously photocopies. Zulferino and Waldman thus did not authorize particular loans, learn the identities of borrowers, approve the creditworthiness of particular borrowers, or decide the amounts of any particular loans.
K. From in or about May through August 1998, while Waldman was employed by All-Tech, All-Tech loaned a total of $1,667,270 from Waldman's account to All-Tech customers to satisfy forty-eight margin calls issued under Regulation T. From August 14, through December 4, 1998, while Zulferino was a branch manager of All-Tech, All-Tech loaned a total of $1,941,155 from the Z-Tech account to All-Tech customers to satisfy forty-nine margin calls issued under Regulation T.
L. The uncollateralized loans that All-Tech made in 1998 from the Z-Tech and Waldman accounts contravened Regulation T and violated All-Tech's own internal written policies.
M. Esposito knew or was reckless in not knowing that: (1) the loans described above using the Waldman and Z-Tech accounts were intended to provide funds to satisfy Regulation T margin calls issued to day-trading customers of All-Tech; (2) the accounts that funded the loans were owned or controlled by associated persons; and (3) All-Tech decided whether and when to extend the loans and determined the terms of each loan. Accordingly, Esposito knew or was reckless in not knowing that these loans violated both All-Tech's own written procedures and Regulation T.
N. From in or about April through December 1998, All-Tech, while extending credit to customers in connection with securities transactions, failed to establish procedures to assure that for, each account in which credit was extended, the customer received a written statement or statements, at least quarterly, that complied with the requirements of Rule 10b-16 promulgated under the Exchange Act. As a supervisor in All-Tech's Margin Department, Esposito failed to take steps to assure that the disclosures required by Exchange Act Rule 10b-16 were provided to customers.
P. By reason of the foregoing, All-Tech willfully violated:
1. Regulation T and Section 7(c) of the Exchange Act in that it directly or indirectly extended uncollateralized margin call loans to customers in contravention Regulation T; and
2. Rule 10b-16 promulgated under the Exchange Act by directly or indirectly extending credit in connection with securities transactions without establishing procedures to assure that each customer is given or sent written statements, at least quarterly, that disclose, among other things:
a. the balance at the beginning of the period; the date, amount and a brief description of each debit and credit entered during such period; the closing balance; and, if interest is charged for a period different from the period covered by the statement, the balance as of the last day of the interest period;
b. the total interest charge for the period during which interest is charged (or, if interest is charged separately for separate accounts, the total interest charge for each such account), itemized to show the dates on which the interest period began and ended; the annual rate or rates of interest charged and the interest charge for each such different annual rate of interest; and either each different debit balance on which an interest calculation was based or the average debit balance for the interest period, except that if an average debit balance is used, a separate average debit balance must be disclosed for each interest rate applied; and
c. all other charges resulting from the extension of credit in that account.
Q. By reason of the foregoing, Esposito willfully aided and abetted, and was a cause of, All-Tech's violations of Section 7(c) of the Exchange Act, Regulation T and Exchange Act Rule 10b-16.
On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer submitted by Respondent Esposito.
ACCORDINGLY, IT IS ORDERED that:
A. Esposito be, and hereby is, censured.
B. Esposito cease and desist, pursuant to Section 21C of the Exchange Act, from causing any violations and any future violations of Regulation T, Section 7(c) of the Exchange Act and Exchange Act Rule 10b-16.
C. Esposito shall, within thirty days of the entry of this Order, pay a civil money penalty, pursuant to Section 21B of the Exchange Act, in the amount of $10,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (D) submitted under cover letter that identifies Esposito as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Zachary Brez, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, New York, NY 10048.
D. Esposito be, and hereby is, suspended from association with any broker or dealer for a period of three months, effective on the second Monday following the entry of the Order.
E. Esposito shall provide to the Commission, within thirty days after the end of the three-month suspension period described in paragraph IV.D. above, an affidavit that she has complied fully with the sanctions described in Section IV.
By the Commission.
1 The findings herein are made pursuant to the Offer submitted by Esposito and are not binding on any other person or entity in this or any other proceeding.