Securities and Exchange Commission
Litigation Release No. 17828 / November 5, 2002
Securities and Exchange Commission v. Michael J. Rivers and Thomas E. Hall, 02-4213 JRT/FLN (U.S.D.C. Minn. 2002)
Commission Files Complaint Against
Michael J. Rivers and Thomas E. Hall in Alleged
"Marking the Close" Market Manipulation Scheme
Thomas E. Hall Consents To
Permanent Injunction and $50,000 Civil Penalty
U.S. Bancorp Piper Jaffray Inc. Consents
To Administrative Order Requiring Remedial
Undertakings and the Payment
of a $100,000 Civil Penalty
in Connection With Supervisory Failures
On October 31, 2002, the Commission filed a complaint in the United States District Court for the District of Minnesota against Thomas E. Hall ("Hall") and Michael J. Rivers ("Rivers") alleging that Hall and Rivers perpetrated a fraudulent scheme to artificially increase the closing price of First Federal Capital Corporation ("First Federal") common stock. Hall, of Sioux Falls, South Dakota, was employed as a registered representative and branch manager for U.S. Bancorp Piper Jaffray Inc. ("Piper Jaffray"). Rivers, of Winona, Minnesota, was a customer of Hall at Piper Jaffray. The Commission's complaint alleges that the purpose of this scheme was to prevent or reduce numerous margin calls Rivers received on his trading accounts at Piper Jaffray. The complaint also alleges that Hall and Rivers' scheme artificially increased the closing price of First Federal common stock, which constituted violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder.
Hall consented, without admitting or denying the allegations in the complaint, to the entry of an order of permanent injunction enjoining him from violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and imposing a civil penalty of $50,000. The litigation against Rivers is pending.
Separately, on November 5, 2002, the Commission entered an Order Instituting Proceedings Making Findings and Imposing Remedial Sanctions (Order) against U.S. Bancorp Piper Jaffray Inc. (Piper Jaffray). Piper Jaffray, while neither admitting nor denying the Order's findings, consented to the entry of the Order and the imposition of sanctions against it.
The Commission's Order found that from January 1998 through September 2001, Rivers and Hall engaged in a "marking the close" scheme. The Commission's Order found that Rivers and Hall placed day-end trades at artificially higher prices in this stock thereby increasing improperly the stock's closing price so as to satisfy or reduce margin calls on his brokerage accounts at Piper Jaffray.
The Commission's Order found that Piper Jaffray failed to supervise Hall and failed to have adequate systems in place to detect or prevent this marking the close scheme. Because of deficiencies with Piper Jaffray's surveillance procedures and with its structure for supervising "producing" branch managers, i.e., managers who also act as registered representatives for customers, the firm failed to detect and prevent Hall's misconduct. The Order found that there was one supervisor primarily responsible for the supervision of more than 70 "producing" branch managers. In addition, Piper Jaffray did not provide this supervisor with information regarding the time the trades were executed and thus was unable to detect marking the close violations. The Commission's Order also found that Piper Jaffray did not have an exception report capable of identifying end-of-the-day trades in its customer accounts; it instead relied on order ticket approval and/or review to detect possible marking the close violations.
The Order censures Piper Jaffray and requires it to maintain the following undertakings: creating a marking the close exception report, and the creation of at least eight District Sales Supervisors to replace the single position previously responsible for supervising "producing" branch managers. The Order also requires Piper Jaffray to pay a civil monetary penalty of $100,000.
The Commission would like to thank the National Association of Securities Dealers Regulation, Inc. ("NASDR") for its assistance in this matter.
SEC Complaint in this matter