Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
RICHARD P. CALLIPARI and
September 30, 2003
Ian D. Roffman and Ellen E. Bober for the Division of Enforcement, Securities and Exchange Commission
Martin P. Russo of Kurzman Eisenberg Corbin Lever & Goodman, LLP for Respondent Richard P. Callipari
|BEFORE:||Carol Fox Foelak, Administrative Law Judge|
This Initial Decision bars Richard P. Callipari from association with any broker-dealer. It is based on his 2003 conviction for fraud and for endeavoring to obstruct a Commission proceeding. He had engaged in a scheme with Thomas J. Connolly to free-ride in options. Callipari was accountable for $428,000 of the $2.39 million in losses to Fidelity Investments caused by Connolly's trading. Previously, Connolly defaulted.
The Securities and Exchange Commission (Commission or SEC) instituted this proceeding, pursuant to Sections 15(b) of the Securities Exchange Act of 1934 (Exchange Act), on August 5, 2003, with an Order Instituting Proceedings (OIP).1 Pursuant to leave granted at the September 11, 2003, prehearing conference and 17 C.F.R. § 201.250, the Division of Enforcement (Division) filed a Motion for Summary Disposition on September 18, 2003, as to Richard P. Callipari. Callipari filed an opposition on September 26, 2003 (Opposition). The administrative law judge is required by 17 C.F.R. § 201.250(b) to act "promptly" on a motion for summary disposition.
This Initial Decision is based on (1) the Division's Motion for Summary Disposition; (2) Callipari's Opposition; and (3) Callipari's September 3, 2003, Response to Order Instituting Proceedings (Answer). There is no genuine issue with regard to any fact that is material to this proceeding. All material facts that concern the activities for which Callipari was convicted were decided against him in the criminal case on which this proceeding is based. Any other facts in his pleadings have been taken as true, pursuant to 17 C.F.R. § 201.250(a). All arguments and proposed findings and conclusions that are inconsistent with this decision were considered and rejected.
The OIP alleges that Callipari was convicted of wire fraud and conspiracy to commit wire fraud arising out of his activities while an associated person of broker-dealers and of lying to Commission staff during its investigation of the fraudulent scheme. The Division urges that he be barred from association with any broker or dealer.
Callipari argues that summary disposition is inconsistent with due process and states various facts in mitigation. He stresses the attempts he made to stop Connolly's trading and the fact that, in determining the level of sentence imposed, the trial court judge found him accountable for only $428,000 of the losses caused by Connolly's trading. He suggests that the conduct for which he was convicted was an anomaly in his career in the securities industry. He also points to the fact that his conduct did not involve defrauding retail customers of the broker-dealer that employed him. Accordingly, he requests that the Division's motion for summary disposition be denied.
Official notice is taken of the following items included in the Division's Motion for Summary Disposition, at Exhibits A, B, C, and D:
July 30, 2002, Indictment of Callipari on one count of conspiracy to commit wire fraud (Count One), ten counts of wire fraud (Counts Two Through Eleven), and one count of endeavoring to obstruct an SEC proceeding (Count Twelve) (Div. Ex. A).
February 5, 2003, Jury Verdict Form finding Callipari guilty on all twelve counts (Div. Ex. B).
February 4, 2003, Transcript of Jury Instructions (Div. Ex. C).
April 29, 2003, Judgment indicating that Callipari was found guilty on Counts One through Twelve and the sentence imposed (Div. Ex. D).
Official notice is taken of the following items included in Callipari's Opposition, at Exhibits A, B, and C:
January 27, 2003, Transcript of trial, selected pages, United States v. Callipari (Resp. Ex. A).
January 28, 2003, Transcript of trial, selected pages, United States v. Callipari (Resp. Ex. B).
April 28, 2003, Transcript of sentencing hearing, selected pages, United States v. Callipari (Resp. Ex. C).
Callipari describes the facts underlying his conviction in a manner that emphasizes his efforts to restrain Connolly's misdeeds. Nonetheless, as found below in the Findings of Fact, Callipari was found guilty of conspiracy to commit wire fraud. Therefore, there was an agreement between Callipari, Connolly, and others to commit wire fraud, and Callipari willfully joined in that agreement. Div. Ex. A at 5, Div. Ex. B, Div. Ex. C at 85-90. Further, he was convicted of ten counts of wire fraud, by means of ten telephone calls to or from him on September 15, 17, 18, and 19, 1997. Div. Ex. A at 15-17, Div. Ex. B. Callipari is foreclosed from arguing that the facts concerning his involvement in the criminal wrongdoing are not proven. It is well established that the Commission does not permit criminal convictions to be collaterally attacked in its administrative proceedings. See Ira William Scott, 53 S.E.C. 862, 866 (1998); William F. Lincoln, 53 S.E.C. 452, 455-56 (1998). Even if Callipari is appealing his conviction, the pendency of an appeal does not preclude the Commission from action based on a conviction. See Joseph P. Galluzi, 78 SEC Docket 1125, 1130 n.21 (Aug. 23, 2002).
Callipari argues that summary disposition of this proceeding is inconsistent with due process. The Commission, however, considers summary disposition particularly appropriate in proceedings, such as this one, that are based on a respondent's conviction for fraud. Galluzzi, 78 SEC Docket at 1128 n.15; John S. Brownson, 77 SEC Docket 3636, 3640 (July 3, 2002), pet. denied, Brownson v. SEC, 66 Fed. Appx. 687 (9th Cir. 2003) (unpublished).
Callipari reasons that factors such as the egregiousness of his conduct and his scienter are questions of fact, noting that any sanction must accord with the sanction considerations set forth in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979). He argues that he will not receive due process without consideration of the facts adduced at his sentencing, and that he will be deprived of the opportunity for appellate review without a factual record concerning the egregiousness of his conduct. This argument is unavailing. Pursuant to 17 C.F.R § 201.250(a), the facts of Callipari's pleadings "shall be taken as true," and pursuant to 17 C.F.R § 201.250(b), summary disposition may be granted only "if there is no genuine issue with regard to any material fact." These provisions ensure that summary disposition will be granted only when consistent with due process.
Callipari argues that the Motion for Summary Disposition contradicts the OIP. He says that the OIP states that the offense for which the Division seeks to bar Callipari is described as a scheme to free-ride in options through an account that Connolly improperly opened, while Div. Ex. A, the indictment, alleges that Connolly was trading where there was no customer account. Callipari argues that this discrepancy should be explored in a hearing. Callipari's argument, however, misstates the basis for the OIP. The OIP is based on Callipari's conviction, not any particular description of the underlying misconduct.
On April 29, 2003, Callipari was convicted in the United States District Court for the District of Rhode Island following a jury verdict of guilty, of one count of conspiracy to commit wire fraud in violation of 18 U.S.C. § 371, ten counts of wire fraud and aiding and abetting in violation of 18 U.S.C. §§ 1343 and 2, and one count of endeavoring to obstruct an SEC proceeding in violation of 18 U.S.C. § 1505. Div. Exs. A, B, C, D. He was sentenced to thirty months imprisonment followed by two years supervised release, and was ordered to pay a fine of $7,500 and an assessment of $1,200. United States v. Callipari, 1:02CR00067-01ML (D.R.I. 2003); Div. Ex. D.
The violations occurred over a two-month period, during July through September 1997, and caused losses to National Financial Services Corporation (Fidelity), a broker-dealer subsidiary of Fidelity Investments, while Callipari realized profits. Div. Ex. A at 1-2, 5-6, 10. During that time, Callipari was employed as a trader at JAS Securities (JAS), a broker-dealer. Div. Ex. A at 2; Answer at 1. Connolly, whom Callipari knew from his previous employment at Fidelity, was employed on Fidelity's options trading desk. Div. Ex. A at 2-3.
Since August 1996, Connolly had been trading in stock index options, against the firm's rules, without prior authorization from a Fidelity customer for each trade, thus placing the firm's capital at risk. Div. Ex. A at 4. At first, Connolly was able to place the trades, which were generally profitable, after-the-fact with a customer who agreed to take them. Div. Ex. A at 4. This arrangement ended, and in July 1997, Callipari agreed to take Connolly's trades into a JAS account in which Callipari was entitled to fifty percent of profits. Div. Ex. A at 2, 6; Opposition at 3. Because of steps Connolly took to conceal the trading from Fidelity, he and Callipari avoided having to maintain large cash reserves, which Fidelity required of customers engaged in stock index options trading, to cover the potentially large downside risks. Div. Ex. A at 7-8. Callipari knew exactly what was going on. Resp. Ex. C at 17. At first the trading was profitable; almost all the money Callipari earned that summer came from the trades, which he knew Connolly was not authorized to make. Div. Ex. A at 8; Resp. Ex. C at 17. In mid-September 1997, the trading resulted in substantial losses. Div. Ex. A at 9. Connolly disappeared on September 18, after an all-night alcohol and crack binge, leaving large unhedged losing trades, ultimately resulting in a loss to Fidelity of $2.39 million. Div. Ex. A at 9; Resp. Ex. C at 17-18; Opposition at 9. As Callipari concedes, and as shown by his conviction for wire fraud on Counts Eight, Ten, and Eleven, he dissembled when Fidelity asked about Connolly's trades, and he encouraged others to do the same. Opposition at 10-11. On February 11, 1998, Callipari gave false testimony under oath to Commission staff by, among other things, denying that he had authorized Connolly's trading. Div. Ex. A at 18-24.
In mitigation, Callipari notes that he caused losses of $428,000, not the $2.39 million sum alleged in the OIP and in the Motion for Summary Disposition. Resp. Ex. C at 16-19. Callipari tried to keep Connolly's trades "small," but Connolly disobeyed his instructions, at times speculating wildly by taking huge unhedged positions, particularly while on alcohol, crack cocaine, and cocaine-fueled trading binges. Opposition at 3-10; Div. Ex. A at 10; Resp. Exs. A, B, passim, Resp. Ex. C at 16. Aside from his involvement in Connolly's trades, Callipari has executed hundreds of thousands of trades without incident during his twenty years in the securities industry. Resp. Ex. C at 16; Opposition at 13.
Callipari has been convicted, within ten years of the commencement of this proceeding, of a felony that "involves the purchase or sale of any security, the taking of a false oath, . . . conspiracy to commit any such offense," "arises out of the conduct of the business of a broker [or] dealer," and "involves the violation of [18 U.S.C. § 1343]" within the meaning of Sections 15(b)(4)(B) and 15(b)(6)(A)(ii) of the Exchange Act. He was convicted of wire fraud, in violation of 18 U.S.C. § 1343, and conspiracy to commit wire fraud in a scheme that involved the purchase and sale of securities while he was associated with a broker-dealer. Additionally, he was convicted of endeavoring to obstruct an SEC proceeding by lying under oath to the Commission during its investigation of his underlying wrongdoing.
The Division requests that Callipari be barred from association with any broker or dealer. This sanction will serve the public interest and the protection of investors, pursuant to Section 15(b) of the Exchange Act. It accords with Commission precedent and sanction considerations set forth in Steadman, 603 F.2d at 1140. When the Commission determines administrative sanctions, it considers:
the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.
Id. (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978), aff'd on other grounds, 450 U.S. 91 (1981)).
The unlawful conduct for which Callipari was convicted extended over a period of several weeks. He realized a profit and caused losses of $428,000 to Fidelity. Thus, his actions were recurring and egregious. A high degree of scienter is indicated by Callipari's conviction for fraud. Consistent with a vigorous defense of the criminal and administrative charges against him, he has not fully acknowledged the wrongful nature of his conduct. His occupation will present opportunities for future violations. Callipari does not disavow an intention to re-enter the securities industry, stating that he could do so only under strict supervision from a firm that was willing to hire a felon, which would make future violations unlikely. Nonetheless, a bar is essential to avoid the possibility of future violations.
Callipari notes that his association with JAS was as a trader and a customer of Connolly; he was not a registered representative selling securities to members of the public. The public interest, however, extends beyond protecting retail customers of broker-dealers. The antifraud provisions can also apply to fraud against broker-dealers. See United States v. Naftalin, 441 U.S. 768, 774-77 (1979); A. T. Brod & Co. v. Perlow, 375 F.2d 393, 396-97 (2d Cir. 1967). In those cases customers defrauded broker-dealers with "heads I win, tails you lose" schemes.2
Callipari argues that his conviction for endeavoring to obstruct a Commission proceeding is irrelevant to determining his degree of scienter in the trading. This argument is unavailing. The obstruction conviction is an aggravating factor to the conduct underlying the conspiracy and wire fraud convictions. In itself, the conviction, for endeavoring to obstruct a Commission proceeding by lying under oath, could form the basis of an administrative proceeding, as it "involves . . . the taking of a false oath" within the meaning of Sections 15(b)(4)(B) and 15(b)(6)(A)(ii) of the Exchange Act.
A bar is consistent with Commission precedent in litigated administrative proceedings based on a respondent's conviction involving fraud. See Galluzzi, 78 SEC Docket 1125; Brownson, 77 SEC Docket 3636; Ted Harold Westerfield, 69 SEC Docket 722 (Mar. 1, 1999); Scott, 53 S.E.C. 862; Victor Teicher, 53 S.E.C. 581 (1998), aff'd in part and rev'd in part, 177 F.3d 1016 (D.C. Cir. 1999), cert. denied, 529 U.S. 1003 (2000); Lincoln, 53 S.E.C. 452; Meyer Blinder, 53 S.E.C. 250 (1997); Benjamin G. Sprecher, 52 S.E.C. 1296 (1997); Ahmed M. Soliman, 52 S.E.C. 227 (1995). "Absent extraordinary mitigating circumstances, such an individual cannot be permitted to remain in the securities industry." Brownson, 77 SEC Docket at 3640. There are no extraordinary mitigating circumstances in this case to warrant a lesser sanction.
IT IS ORDERED that the prehearing conference scheduled for October 14, 2003, IS CANCELLED.
IT IS ORDERED that, pursuant to Section 15(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(b), RICHARD P. CALLIPARI IS BARRED from association with any broker or dealer.
This order shall become effective in accordance with and subject to the provisions of 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this Initial Decision may be filed within twenty-one days after service of the Decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to 17 C.F.R. § 201.360(d)(1) within twenty-one days after service of the Initial Decision upon him, unless the Commission, pursuant to 17 C.F.R. § 201.360(b)(1), determines on its own initiative to review this Initial Decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the Initial Decision shall not become final as to that party.
Carol Fox Foelak
Administrative Law Judge
1 The proceeding has ended as to Respondent Connolly. Richard P. Callipari, Order Making Findings and Imposing Sanction by Default against Thomas J. Connolly, Exch. Act Rel. No. 48487 (A.L.J. Sept. 12, 2003).
2 In Naftalin, the customer's fraudulent short sale scheme was to place sell orders with broker-dealers and not deliver the securities when the price moved against him. Naftalin, 441 U.S. at 770. In Perlow, the customers placed buy orders with broker-dealers with the fraudulent intent of paying only if the price moved in their favor by the settlement date. Perlow, 375 F.2d at 395.
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