UNITED STATES OF AMERICA
In the Matter of
ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTION BY DEFAULT
The Securities and Exchange Commission (Commission or SEC) instituted this proceeding on September 30, 2003, pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). The Division of Enforcement (Division) has demonstrated that the Order Instituting Proceedings (OIP) was delivered to Respondent Shane Ferras (Ferras) at his residence in Brantford, Ontario, Canada, on November 10, 2003. Because delivery of the OIP in a foreign country was involved, the Division has also provided evidence that the law of Canada does not prohibit the method of service used. See Rule 141(a)(2)(iv) of the Commission's Rules of Practice.
By the terms of the OIP and Rule 220(b) of the Commission's Rules of Practice, Ferras's Answer was due by December 1, 2003. No Answer has been filed, and the time for filing has now expired. Accordingly, Ferras is in default within the meaning of Rules 155(a)(2) and 220(f) of the Commission's Rules of Practice, and an administrative law judge may determine the proceeding against him upon consideration of the record, including the OIP, the allegations of which may be deemed to be true.
I find the following allegations in the OIP to be true:
Ferras, age 38, is a resident of Brantford, Ontario, Canada. He was a registered representative employed by HGI, Inc. (HGI), a Wisconsin corporation formerly registered with the Commission as a broker and dealer, from 1992 to June 1997.
HGI was headquartered in Jerico, New York, until it ceased doing business in June 1997. The Commission terminated HGI's registration on September 24, 1997. The Commission's staff obtained a Default Judgment against HGI on September 27, 1999. The Default Judgment enjoined HGI from future violations of Sections 5(a) and 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 15(b)(7) of the Exchange Act, and Exchange Act Rules 10b-5 and 15b7-1 and Rules 101 and 102 of Regulation M. The Default Judgment also ordered HGI to pay $90,258,473.83 in disgorgement and prejudgment interest.
On May 27, 1999, the Commission filed a civil injunctive action against Ferras, HGI, and others. The Commission's complaint charged Ferras with violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. Those provisions prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities. The complaint alleged that from June 1994 through June 1997 (the relevant period), Ferras and others defrauded investors out of millions of dollars by using fraudulent "boiler-room" sales practices to induce investors to purchase certain highly speculative securities in initial public offerings (IPOs) underwritten by HGI.
The Commission's complaint alleged, among other things, that:
During the relevant period, the securities in question were speculative issues by companies that all sustained chronic financial losses before and after their respective IPOs. In addition, HGI made a market in, and induced customers to purchase, certain other highly speculative over-the-counter securities (house stocks).
Ferras trained HGI registered representatives and trainees to use misrepresentations to entice customers to open accounts and invest with HGI. HGI registered representatives were instructed initially to recommend well-known stocks to customers. Once customers invested with HGI, registered representatives were required to call customers and sell them shares of house stocks exclusively.
During the relevant period, HGI implemented a no-net selling policy in connection with trades in HGI house stocks. Ferras enforced this policy by refusing to approve sell-order tickets brought to him by HGI registered representatives and rebuking registered representatives who attempted to get such orders executed. HGI registered representatives were taught that the only way to have a customer's sell order approved at HGI was either to cross the sale of a house stock with the purchase of another house stock for that same customer's account or purchase the house stock being sold for one customer for the account of another customer. This policy led to the execution of unauthorized purchases in HGI customer accounts and Ferras himself engaged in a pattern of executing unauthorized transactions in his customers' accounts.
HGI registered representatives were taught that if customers called while the values of HGI house stocks were down, registered representatives should avoid the phone calls and not return them until after the market closed that day. Registered representatives were also taught that if the value of HGI house stocks were down, they should attempt to convince their customers that they were fortunate enough to be in the position to average down and purchase additional shares of the stock at a lower price. Ferras took over customer accounts of registered representatives who persisted in attempting to get their customers' sell orders executed and Ferras engaged in a pattern of failing to execute sell orders for house stocks placed by his customers.
On September 3, 2003, a Default Judgment was entered against Ferras, permanently enjoining him from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. The Default Judgment also ordered Ferras to pay $2,346,474 in disgorgement and prejudgment interest, and a civil penalty of $10,000. SEC v. HGI, Inc., 99 Civ. 3866 (DLC) (S.D.N.Y.).
In view of the foregoing, I find that it is in the public interest to bar Ferras from associating with any broker or dealer.
IT IS ORDERED THAT, pursuant to Section 15(b) of the Securities Exchange Act of 1934, Shane Ferras is barred from association with any broker or dealer.
James T. Kelly
Administrative Law Judge
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