Securities and Exchange Com'n v. Hasho, 90 Civ. 7953.

• Citation: 784 F. Supp. 1059
• Decision Date: 13 February 1992
• Docket Number: No. 90 Civ. 7953.,90 Civ. 7953.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Robert HASHO, Benjamin M. Hasho, William X. Mecca, Robert B. Yule, Kevin B. Sullivan, David C. Dever, Richard A. Chennisi, Aurelio Vuono, Philip Falcone, and Michael F. Umbro, Defendants.
• Court: U.S. District Court — Southern District of New York

784 F. Supp. 1059

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Robert HASHO, Benjamin M. Hasho, William X. Mecca, Robert B. Yule, Kevin B. Sullivan, David C. Dever, Richard A. Chennisi, Aurelio Vuono, Philip Falcone, and Michael F. Umbro, Defendants.

No. 90 Civ. 7953.

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

February 13, 1992.

COPYRIGHT MATERIAL OMITTED

Edwin H. Nordlinger, Deputy Regional Adm'r, New York City, (Jeffrey Plotkin, Allen Meyer, David Miller, of counsel), for plaintiff Securities and Exchange Com'n.

Caruso & Caruso, Brooklyn, N.Y. (Steven B. Caruso, of counsel), for defendants Benjamin M. Hasho, William X. Mecca and Robert B. Yule.

Kurzman Karelson & Frank, New York City (Kenneth I. Wirfel, of counsel), for defendant Aurelio Vuono.

OPINION AND ORDER

EDELSTEIN, District Judge:

On December 13, 1990, the Securities and Exchange Commission (the "SEC") filed its complaint in this action alleging that defendants, ten registered representatives, engaged in unlawful high pressure sales of small highly speculative stocks, sometimes referred to in Wall Street parlance as "dogs," to unwary customers and caused trades to be entered in customer accounts without customer authorization. The SEC alleges that by such conduct, defendants violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (the "Securities Act"), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act"), and Rule 10b-5, 17 C.F.R. § 240.10b-5, thereunder (the "anti-fraud provisions"). In essence, the SEC alleges that defendants engaged in a "boiler room" operation, which the Second Circuit has described as:

a temporary operation established to sell a specific speculative security. Solicitation is by telephone to new customers, the salesman conveying favorable earnings projections, predictions of price rises and other optimistic prospects without a factual basis. The prospective buyer is not informed of known or readily ascertainable adverse information; he is not cautioned about the risks inherent in purchasing a speculative security; and he is left with a deliberately created expectation of gain without risk.

Hanly v. SEC, 415 F.2d 589, 597 n. 14 (2d Cir.1969). On December 13, 1990, the SEC also applied for an order to show cause and an order expediting discovery (the "Order") in connection with a motion for a preliminary injunction. This Court signed the Order and set a return date for a hearing on the SEC's motion for January 14, 1991.

On January 4, 1991, after a conference before this Court, the SEC and counsel for defendants Robert F. Hasho ("Robert Hasho"), Benjamin M. Hasho ("Ben Hasho"), William X. Mecca ("Mecca"), Robert B. Yule ("Yule") and Aurelio Vuono ("Vuono"), entered a stipulation and order maintaining the status quo. The January 14, 1991 hearing date was adjourned sine die.

On March 4, 1991, this Court: (1) issued a Final Judgment, on consent, permanently enjoining defendants David C. Dever, Michael F. Umbro, and Philip Falcone, from committing further violations of the anti-fraud provisions of the federal securities laws; (2) ordered that the preliminary injunction hearing be consolidated with the trial on the merits as to defendants Ben Hasho, Mecca, Yule and Vuono and further ordered that this trial commence on March 12, 1991; and (3) severed the case against defendants Robert Hasho,¹ Richard A. Chennisi and Kevin B. Sullivan and directed that it be tried at a later date. This Court subsequently issued Final Judgments, on consent, permanently enjoining defendants Robert Hasho, Richard A. Chennisi and Kevin B. Sullivan from committing further violations of the anti-fraud provisions of the federal securities laws.

On March 12, 1991, this Court commenced the trial of defendants Ben Hasho, Mecca, Yule, and Vuono. On March 15, 1991, defendants Ben Hasho, Mecca and Yule applied to this Court for an adjournment to retain new counsel. This Court granted the application and ordered that the trial of defendant Vuono continue. Defendant Vuono's trial ended with closing arguments on March 19, 1991.

On April 2, 1991, this Court proceeded to trial with defendants Ben Hasho, Mecca, and Yule. The trial ended on April 18, 1991, with closing arguments from the SEC and counsel for defendants Ben Hasho, Mecca, and Yule. The SEC offered the testimony of several customers of each defendant to support its allegations. These witnesses testified that defendants made several misstatements of fact, omitted certain information, and used other techniques to get them to invest in securities, including: (1) misleading statements by certain defendants about their past performances as registered representatives and unjustified predictions that their recommendations would produce future profits; (2) false statements by certain defendants that they possessed inside information; (3) false statements by certain defendants about the minimum amount of securities that customers were required to purchase; (4) omissions regarding risk factors, such as the speculative nature of securities and negative earnings of issuers; (5) baseless price predictions and profit guarantees; (6) misrepresentations about commissions; and (7) unauthorized trading in customer accounts. Defendants Ben Hasho, Mecca and Yule primarily contend that they did none of the wrongful conduct alleged in the SEC's complaint. Defendant Vuono argues, and the other defendants also each contend, that he is not responsible for the conduct alleged in the SEC's complaint because he acted at the direction of his employer and obtained the information passed on to his customers from his employer.

This case reveals an outrageous abuse of trust by registered representatives who consistently preyed upon unsophisticated and unsuspecting customers through a myriad of misrepresentations, omissions, and other fraudulent devices for personal profit. Defendants' conduct here is akin to dealers of "three card monte" who prey upon unwary individuals by holding out the promise of easy money. Defendants' conduct, however, is even more reprehensible because they had an inviolable duty to deal fairly with the public and their customers, and they had a relationship of trust with those they swindled. Defendants' contemptible conduct did more than harm their clients; their actions destroy investor confidence, pollute the environment for securities transactions, and bring disgrace and shame upon Wall Street.

Ben Hasho, Mecca, and Yule's contentions that they did none of the conduct alleged is incredible. Furthermore, while defendants' employers may have encouraged and fostered defendants' unlawful activities, this does not by any means give registered representatives license to ignore their duty of fair dealing to their clients and to violate the anti-fraud provisions of the securities laws. Registered representatives who engage in unlawful activity can not point the finger at their employers to insulate themselves from liability. Pursuant to Rule 52 of the Federal Rules of Civil Procedure, the following constitutes this Court's findings of fact and conclusions of law.²

FINDINGS OF FACT

I. Relevant Entities

Organized in November 1986, but now defunct, J.T. Moran & Co., Inc. ("J.T. Moran"), was a Delaware corporation that had its principal place of business in New York, New York. Pl.Exh. 1801 at p. 4 & 31. J.T. Moran was a wholly owned subsidiary of J.T. Moran Financial Corp. ("J.T. Moran Financial"). Pl.Exh. 1801 at p. 31. J.T. Moran was registered as a broker-dealer with the SEC, and, at all relevant times to this action, was a member of the National Association of Securities Dealers, Inc. Pl. Exh. 1801 at p. 4. J.T. Moran, which ceased operations in or about January 1990, employed approximately 600 registered representatives and maintained numerous branch offices in New York, including ones in Huntington and Garden City. Pl.Exh. 1303 at p. 10; Pl.Exh. 1801 at p. 9. In June 1989, the J.T. Moran Huntington office moved its operations to Garden City (hereinafter the "Long Island Office"). Pl.Exh. 1303 at p. 11.

In or about May 1988, J.T. Moran acquired its Long Island Office from the Sherwood Capital Group ("Sherwood"). In or about early 1987, Sherwood had acquired this same branch office from First Jersey Securities, Inc. ("First Jersey"). These acquisitions occurred as each predecessor firm ceased retail operations. Trial at p. 676. Defendants Ben Hasho, Mecca and Yule each moved to the successor firm as their branch office was acquired.

II. The Defendants

A. Ben Hasho

Ben Hasho, a high school graduate, is 26 years old. From in or about October 1986 to in or about January 1987, he worked in his first job in the securities industry as a registered representative at First Jersey. Pl.Exh. 1001 at p. 7, 11. He subsequently became a registered representative at Sherwood during the course of 1987 until early 1988, and then at J.T. Moran from the beginning of 1988 to in or about January 1990. Pl.Exh. 1001 at p. 19, 30. He worked at the Long Island branch offices of First Jersey, Sherwood, and J.T. Moran. From in or about June 1990 to in or about late November 1990, he was a registered representative at Stuart-James Co., Inc. ("Stuart-James").

Ben Hasho earned approximately $50,000 in 1987, $80,000 in 1988, and $25,000 in 1989, in commissions from his customers' transactions in securities. Pl.Exh. 1001 at p. 90. He concentrated in the sale of "extremely speculative" and "low priced equities." Pl.Exh. 1001 at p. 53. In selling securities to the public, he relied completely on the information provided by the firm with which he was associated. Pl. Exh. 1001 at pp. 15, 25, 52. While at J.T. Moran, he never recommended a stock based to his own research. Pl.Exh. 1001 at p. 52.

Ben Hasho "cold called"³ for customers and used a telephone directory as a source of names for potential customers. Pl.Exh. 1001 at pp. 13, 23, 37-38. He made from 50-150...