SEC v. First Jersey Securities, Inc., 85 Civ. 8585 (RO).

• Decision Date: 19 June 1995
• Docket Number: No. 85 Civ. 8585 (RO).,85 Civ. 8585 (RO).
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiffs, v. FIRST JERSEY SECURITIES, INC., and Robert E. Brennan, Defendants.
• Court: U.S. District Court — Southern District of New York

890 F. Supp. 1185

SECURITIES AND EXCHANGE COMMISSION, Plaintiffs, v. FIRST JERSEY SECURITIES, INC., and Robert E. Brennan, Defendants.

No. 85 Civ. 8585 (RO).

United States District Court, S.D. New York.

June 19, 1995.

COPYRIGHT MATERIAL OMITTED

S.E.C., Washington, DC (John L. Hunter, Mark Kreitman, Christian J. Mixter, Thomas C. Newkirk, Mark S. Radke, of counsel), for plaintiff S.E.C.

Robinson, St. John & Wayne, W. Hunt Dumont, John B. Livelli, Claire C. Cecchi, Newark, NJ, for defendant First Jersey Securities, Inc.

Nixon, Hargrave, Devans & Doyle, Rochester, NY (David M. Schraver, Everardo A. Rodriguez, Maxine Yi Hwa Lee, of counsel), for defendant Robert E. Brennan.

OPINION AND ORDER

OWEN, District Judge.

This civil action instituted by the Securities and Exchange Commission in 1985 was tried before me without a jury over some forty days in 1994. The amended complaint alleges that defendant First Jersey Securities, Inc., owned, operated and controlled by defendant Robert E. Brennan, realized illegal profits from excessive markups on sales from its inventory to its customers of the securities of three companies, Sovereign Chemical and Petroleum Products, Inc., Rampart, Inc. and Quasar Microsystems, Inc. in the years 1982-83. The amended complaint seeks a permanent injunction against certain future violations of the securities laws and disgorgement of all profits, from such sales together with prejudgment interest thereon, and the appointment of a special agent of the Court to examine all of First Jersey Securities' records from November 1982 to the present to determine the existence, if any, of similar violations and empowering such agent to recommend further proceedings and appropriate disgorgement if required.

Further, starting with an exploratory order in November 1987, I thereafter permitted similar issues to be raised and tried as to First Jersey's transactions in three other securities, Transnet Corporation in 1983, Sequential Information, Inc. in 1984, and QT & T, Inc. in 1985 (formerly Quasar Microsystems, one of the issuers named in the amended complaint),¹ and with the same request for disgorgement of profits should the facts warrant.

First Jersey, a broker-dealer registered with the Securities and Exchange Commission, commenced business in 1974² and by the early 1980s was operating as many as 36 retail branch offices nation-wide from its main offices in New York, New York and Red Bank, New Jersey. At its high point, First Jersey had approximately 1,200 salesmen or "registered representatives" and a retail customer base of more than 500,000 accounts. The foregoing retail selling capabilities enabled First Jersey to gross as much as 95 million dollars a year, 80 to 90 percent of which came from transactions in which it was selling as a principal and income from underwriting. The securities in which First Jersey dealt were generally priced at three dollars or less and were traded in the over-the-counter market.³ Most of First Jersey's organization including research, compliance, operations, administrative and trading operated in New York City. Customers' statements, checks and securities were mailed from its main office in New York City. Branch offices did not perform operating functions. All mark-ups on First Jersey sales of securities were calculated in the trading department in First Jersey's New York office. First Jersey sought as salesmen in its branch offices individuals who had no prior experience in the securities field⁴ for reasons that become obvious hereafter, given its methods of operation. One salesman, curious as to this, testified as to the result of his inquiry:

Not one guy that I worked with had ever been with a brokerage firm ever.... the branch manager always made the comment that he would not hire a broker who had been with an existing brokerage firm, ... because they develop bad habits, work habits and that they just wouldn't hire them.

While First Jersey held itself out as being a full-service broker-dealer, its operations apart from underwriting and transactions into and out of inventory were very limited, the vast majority of its salesmen's efforts being to sell, under the direction of its branch managers, securities which First Jersey held in inventory as principal. This operation was typically on a monthly cycle and was quite rigidly controlled and supervised in whatever branch offices were selected to be involved in a given marketing situation. As is described infra, at times, basically certain branches would sell an underwriting to customers and then buy it back, and other branches would then sell the components from the repurchased instruments to their customers who were necessarily different from and ignorant of the customers involved in the underwriting and repurchase.

The duties of each of the 1200 salesmen were substantially the same, regardless of the location of the branch office. This was representatively described by a salesman formerly in the Houston, Texas office.

Q. Now, when you went to work for First Jersey, what if any, orientation were you provided?

A. Very little, if any. I just — it was a condition, first of all, it was just to pass my NASD Series 63 and just learn a script. That was it.

Q. What is the script that you're referring to?

A. Well, just prospecting. Once you get licensed, then you just get on the phone and you start prospecting. And the script from the branch manager, it was just a couple of paragraphs. You just get on the phone and just would say, hello, Mr. Jones, my name is John Nooney. I'm with First Jersey Securities. How are you today?

And I would just go, Mr. Jones, First Jersey Securities, we're full service investment brokers. And as such, we handle all buy-sell orders on the listed exchanges or the over-the-counter market. We also get involved with tax reinvestments, tax shelters, IRA's. But where we specialize in and where we're best on Wall Street is our timely recommendations of stocks usually trading between two, ten dollars, in that price range.

I'm not calling you with anything specific at this time. And I was just simply wondering if something exciting did present itself on the market, would you appreciate a call.

It's been a while since I've done that, but I did that for two years straight.

Q. Where do these scripts come from?

A. Well, from Tom. The office managers. They just provided it.

Virtually all of the twelve former First Jersey salesman who testified for the SEC described the "script". Representative is such testimony as that of Frederick E. Thyer from the Atlanta office:

We did have a script that we used and this was given to us by the manager.

Donald E. Strong from the Shawnee Mission, Missouri office stated:

The manager, would give us a presentation as to how we would present this particular opportunity to our clients.

Claude Ware of the New Orleans office testified:

Q. Was there a typical monthly pattern?

A. Yes, there was.... For the first three weeks we went through the phone book and, you know, called people to find out who would be interested, which we would call them our prospects. And then usually the Monday, Tuesday of the fourth week before our month ended we would go and sit down with people that would sit down with us. And then the last three days, usually Wednesday, Thursday and Friday, we would start selling. That's when the manager would come out and give us the stock, and we would sell the last three days of the month.

Q. How about research, was there any research being done at the New Orleans office while you were there?

A. No.

Q. And did you do any research while you were there?

A. No.

Q. Why was that?

A. Basically there was no access. You couldn't find the stocks they were recommending, so where could you go? The manager gave us a presentation to go by, and that's basically all we ever used.

Q. Now, what kind of information was actually provided to you about the recommended stocks?

A. It was everyone was basically the same. It was about a page and a half of a legal pad, maybe a page presentation. And they all started the same way. I mean, he gave us, you know, spectacular turnaround situation, was a line that was almost in every presentation.

Or Jeffrey Ingles of the Houston office:

Q. So that what you called a script which came out of the sales recommendation meeting was nothing more than the notes that you took at the meeting, correct?

A. No, it was a verbatim presentation.

Q. Why do you say that?

A. Because it was repeated several times until we had it correct in our notes.

Q. And you were expected to take down every word?

A. That's correct.

Q. Who told you that?

A. The manager.

Robert Holly of the Red Bank, New Jersey office stated:

We did have scripts which were handwritten in our own, and it was presented to us at a meeting with the, in meetings the information was presented to us in such a way that the branch manager, whether it was Egan, Dell or Hart, said, this is the way I would recommend, this is the way I would present this investment, and it was in our own handwriting, if that is a script. * * * I wrote down verbatim and adjusted it as to my liking.⁵

Or Gerard Doyle of the San Diego, California office:

The manager would come out of his office; he would tell us to clear the phones ... for the purpose of duplicating the script. I'm sure if you can memorize it, that would be fine, but in most cases everybody had to write the script down.

The process used by the salesmen goes by the description "cold-calling", and a registered representative in another First Jersey office apparently needed some coaching before going to work. He testified:

Q. Could you describe what the manager said to you and what, if any, instructions he gave you the first time you met him after passing the Series 63 Exam?

A. He told me to keep studying the information they had given me in the packet, primarily at that point the prospecting script, and he had me say the script to him once while

...