IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MINNESOTA
SECURITIES AND EXCHANGE
MICHAEL J. RIVERS and
THOMAS E. HALL,
Plaintiff, United States Securities and Exchange Commission ("Commission"), alleges as follows:
NATURE OF THE CASE
- From as early as January 1998 through approximately September 2001, Defendants Michael J. Rivers ("Rivers") and Thomas E. Hall ("Hall") perpetrated a fraudulent scheme to artificially increase the closing price of First Federal Capital Corporation ("First Federal") common stock. The purpose of this "marking the close" scheme, among others, was to satisfy or to prevent, in whole or in part, numerous margin calls Rivers had received on his brokerage accounts at U.S. Bancorp Piper Jaffray ("Piper Jaffray"). Margin calls are often affected by the closing price of securities in a margin account, and often issued when a margin account has dropped below a certain value. As a result, Rivers and Hall, among other things, fraudulently distorted the market price of First Federal common stock.
- By engaging in this scheme, Rivers and Hall, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute and will constitute violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.
- The Commission brings this action to enjoin such acts, practices and courses of business pursuant to Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 78u-1(a)].
- The Court has jurisdiction over this action pursuant to Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa]. Venue is also proper in this court pursuant to Section 27 of the Exchange Act [15 U.S.C. §78aa].
- The acts, practices and courses of business constituting the violations herein occurred within the jurisdiction of the United States District Court for the District of Minnesota and elsewhere.
- The Defendants will, directly and indirectly, unless enjoined, have the opportunity to engage in the acts, practices and courses of business set forth in this Complaint and in acts, practices and courses of business of similar purport and object.
- The Defendants, directly and indirectly, have made use of the mails and of the means and instrumentalities of interstate commerce in connection with the acts, practices and courses of business alleged herein in the District of Minnesota and elsewhere.
- Rivers of Winona, Minnesota is 56 years old. Rivers is an entrepreneur in the construction and development business. He is also a member of the board of directors of a privately controlled bank in Wisconsin. Rivers holds a college degree in business. Rivers controlled nine brokerage accounts at Piper Jaffray and traded on margin on five of these accounts during the time at issue.
- Hall of Sioux Falls, South Dakota is 52 years old. From 1985 to May 31, 2002 Hall was employed as registered representative with Piper Jaffray, a broker-dealer registered with the Securities and Exchange Commission pursuant to Section 15(b) of the Exchange Act [15 U.S.C. §78(b)]. From 1995 through January 2001 Hall also served as the branch manager of the Sioux Falls office. In January 2001 Hall stepped down as branch manager. Hall was the primary broker for Rivers' trading accounts at Piper Jaffray during the time period at issue.
- This is a "marking the close" case in which, from at least January 1998 through September 2001, Rivers and his broker, Hall perpetrated a fraudulent scheme to artificially increase the closing price of First Federal common stock in an effort to satisfy or prevent, in whole or in part, numerous margin calls on Rivers' trading accounts at Piper Jaffray.
- In 1998 Rivers started receiving, with increased frequency, margin calls from Piper Jaffray, where he held a substantial number of First Federal shares on margin.
- During the time period at issue, Rivers made at least 136 purchases of First Federal common stock within the final 5 minutes of trading.
- Rivers made these end of the day purchases of First Federal at prices higher than the preceding transactions.
- Almost all of Rivers purchases of First Federal were executed in 100 share blocks.
- Hall executed these trades for Rivers in brokerage accounts Rivers controlled at Piper Jaffray.
- During the time period at issue, Hall also personally made at least nine purchases of First Federal common stock within the final 5 minutes of trading.
- Hall made these end of the day purchases of First Federal at prices higher than the preceding transactions.
- Hall's purchases of First Federal were all executed in 100 share lots.
- At least seven of Hall's personal trades had the effect of raising the closing price of First Federal. Hall made these purchases in his personal brokerage account at Piper Jaffray.
- Prior to these nine occasions Hall never owned First Federal.
- During the time period at issue, First Federal common stock was relatively thinly traded.
- During the time period at issue, Rivers and Hall's trades caused the closing price of First Federal to be higher than what the price would have been without these trades. In fact, the defendants trading activity raised the closing price of First Federal on at least 99 days.
- For instance, on February 28, 2000, a day Rivers received a house maintenance call from Piper Jaffray; Rivers executed a market order to purchase 100 shares of First Federal at $10.875, within three minutes of the market close. Immediately prior to Rivers' trade, the bid price for First Federal was $10.750. As a result of Rivers' trade the closing price was approximately $0.125 higher.
- Many of these trades made by Rivers and Hall also affected the opening price of First Federal common stock the following day. For instance, in regard to the trade discussed in Paragraph 22, the day after the trade, February 29, 2000, First Federal common stock opened at $10.875.
- Rivers and Hall colluded to manipulate the price of First Federal common stock. For instance, Rivers and Hall had detailed discussions during which they calculated the trades and execution prices necessary to boost the closing price of First Federal common stock to satisfy or to prevent, in whole or in part, numerous margin calls Rivers was receiving on his brokerage accounts.
- Rivers and Hall admitted to placing these day-end trades for the explicit purpose of boosting the closing price of First Federal.
Violation of Section 10(b) of the
Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5
[17 C.F.R. § 240.10b-5] Promulgated Thereunder
- Paragraphs 1 through 26 are hereby realleged and incorporated by reference herein.
- On or about January 1998 through September 2001, Rivers and Hall, in connection with the purchase of First Federal securities, namely common stock, by use of the means and instrumentalities of interstate commerce and of the mails, directly and indirectly: employed devices, schemes and artifices to defraud; made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and engaged in acts, practices and courses of business which operated as a fraud and deceit upon purchasers and sellers of such securities.
- Rivers and Hall knew or were reckless in not knowing the facts and circumstances described in paragraphs 1 through 25 above.
- By reason of the activities described in paragraphs 1 through 25 above, Rivers and Hall violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.
PRAYER FOR RELIEF
WHEREFORE, the Commission requests that the Court:
Find that Rivers committed the violations alleged above.
Find that Hall committed the violations alleged above.
Issue an order of permanent injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, enjoining Rivers and Hall their officers, agents, servants, employees, attorneys and those persons in active concert or participation with them who receive actual notice of the order of permanent injunction by personal service or otherwise, and each of them, from violating Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder, by directly or indirectly, in connection with the purchase or sale of the securities of any issuer, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any national securities exchange from:
A. employing any device, scheme or artifice to defraud;
B. making any untrue statement of a material fact or omitting to state a material fact necessary in order to make statements made, in the light of the circumstances under which they were made, not misleading; or
C. engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.
Grant an Order requiring Rivers to disgorge his ill-gotten gains from his violative conduct, including prejudgment interest on such disgorgement.
Grant an order requiring Rivers and Hall to pay an appropriate civil penalty pursuant to Section 21(d) of the Exchange Act [15 U.S.C. §§ 78u(d)].
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
Grant an Order for such further relief as the Court may deem appropriate.
Charles J. Kerstetter
PA State Bar No. 67088
Attorney for Plaintiff
Securities and Exchange Commission
175 W. Jackson Blvd., Suite 900
Chicago, Illinois 60604
DATED: October _____, 2002