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S.E.C. v. WELLSHIRE SECURITIES

April 27, 1990

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
WELLSHIRE SECURITIES, INC., VENTURA INC., ENVIRONMENTAL LANDFILLS, INC., ROBERT EDWIN COHEN, CAROL CATHERINE MARTINO, JOSEPH JENKINS, JR., EDWARD DAVID BRAVERMAN, ALAN DIAMOND, PAUL V. WINTERS, JR., ROBERT BECK, RICHARD SANDS, DEFENDANTS.



The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:

  OPINION

Plaintiff Securities and Exchange Commission ("SEC") brings, by Order to Show Cause, this motion for a preliminary injunction and temporary restraining order ("TRO") against Defendants Wellshire Securities, Inc. ("Wellshire"), Environmental Landfills, Inc. ("Environmental Landfills"), Ventura, Inc. ("Ventura"), Robert Edwin Cohen, Carol Catherine Martino, Joseph Jenkins, Jr., Edward David Braverman, Alan Diamond, Paul V. Winters, Jr., Robert Beck, and Richard Sands for engaging in transactions, acts, practices, and courses of business which constitute violations of, or aiding and abetting violations of, § 17(a) of the Securities and Exchange Act of 1933 ("1933 Act"), 15 U.S.C. § 77q(a) (1980), § 10(b) of the Securities and Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b) (1980), and Rule 10b-5, 17 C.F.R. § 240.10b-5 promulgated thereunder.

This court has jurisdiction over this case because of the alleged federal securities statute and rule violations pursuant to § 22(a) of the 1933 Act and §§ 21 and 27 of the 1934 Act, 15 U.S.C. § 77v(a); 78u; 78aa.*fn1 After granting a TRO against all named and properly served defendants, a hearing in this matter was held on March 23, 26-29, 1990. Wellshire's assets were also frozen pursuant to that TRO. Because the SEC did not timely serve the Order to Show Cause on Braverman, the SEC is not moving for preliminary relief against Braverman. Tr. 5. Environmental Landfills and Winters, its chief executive officer, have consented to permanent injunctive relief. Tr. 4. The following constitutes my findings of fact and conclusions of law.

FACTS

Wellshire is a Florida corporation with its principal place of business located in Manhattan. Cohen Affid. at 2. Since May 20, 1986, Wellshire has been registered as a broker-dealer and it is a member of the National Association of Securities Dealers ("NASD"). Plaintiff's Trial Exh. 1 at 27. Wellshire is wholly owned by Magna Financial Services Group, Inc. ("Magna Financial"), which, in turn, is wholly owned by Cohen. Plaintiff's Trial Exh. 1 at 17-22; Tr. 322. Cohen is also Wellshire's President and responsible for its overall operations and day-to-day activities. Cohen Affid. at 1.

Martino is Wellshire's Executive Vice President and is responsible for coordinating Wellshire's retail sales and marketing, including recruitment of new representatives, supervision of Wellshire branch offices, and management of Wellshire's sales in New York. Cohen Affid. at 18-26. She has an unexercised option to become an owner of the firm. Plaintiff's Trial Exh. 2 at 9-11, 18. Cohen and Martino consider themselves to be Wellshire's two principals. Employed by Wellshire as the firm's trader, Diamond, and occasionally Martino, acted as the firm's compliance officers.

Diamond's tenure at Wellshire lasted from November 1987 to October 1989. Plaintiff's Trial Exh. at 50, 80. Previously, Diamond was employed in the securities brokerage industry roughly since 1961. Diamond Deposition at 10. Jenkins began working as a Wellshire registered representative in the spring of 1989. Plaintiff's Trial Exh. 3 at 63. Prior to that, Jenkins had worked for various broker-dealers since 1972. Jenkins Deposition at 10-17. Braverman was hired by Wellshire as a recruiter and trainer of new brokers; he subsequently acted as Jenkins' assistant in sales. Plaintiff's Trial Exh. 1 at 90-94. According to the SEC, Braverman's broker's license was suspended by, and he owed a $10,000 fine to, the NASD. The basis for these sanctions were allegations that Braverman engaged in unauthorized trading in customer accounts at another securities firm. See Plotkin Affid.in Support of Plaintiff's Order to Show Cause for a TRO and Preliminary Injunction ¶ 7 ("Plotkin Affid."); Tr. 366-70.

The charged violations emanate from a classic penny stock "boiler room" scheme operated by Wellshire. Tr. 5. Often "boiler room" tactics involve an intensive selling campaign, through numerous salesmen by telephone or through direct mail offering, for securities of either a certain type or from a specific issuer.*fn2 Such sales are usually made without regard to the financial stability or the needs of the customer. Fraudulent schemes, broad unfounded speculation, and stock manipulation is common to such boiler room operations.*fn3

In Wellshire's case, inadequately supervised and uninformed "registered representatives" were pressured and given various economic incentives to get on the phones and push the brokerage firm's house stocks to the public.*fn4 As the full record of the instant proceedings indicates, prospective investors were induced into investing by hard-sell techniques based on unfounded predictions made by a cadre of Wellshire registered representatives over the phone and by Wellshire's misleading market letters sent by it through the mails. Investors who purchased Wellshire's house stocks often experienced frustration at the instability of their investments and inability to get their brokers to timely process sell tickets. As a result, customers often forfeited gains or realized losses upon the eventual stock liquidation. See Tr. 135-39; 230-39.

Indeed, Wellshire's headquarters are set up like a typical boiler room operation. A few small cubicles surround one large conference room, which is crammed with telephones used for randomly "cold calling" massive numbers of prospective clients. For new brokers, a client base is developed either from already existing customer lists, consisting of people whose professions require great amounts of ready cash, or simply from telephone books. One of Wellshire's former brokers, Charles Marino, testified that he was encouraged to call prospective customers whose businesses require liquidity, such as contractors, bartenders who own their own bars, owners of "Mom and Pop" businesses, and carpenters. Tr. at 32-33.*fn5

New brokers or representatives were encouraged to sell primarily the house stocks. Wellshire's house stocks include: Environmental Landfills, Ventura, Greenleaf Capital ("Greenleaf"), and Nightwing Group Inc. ("Nightwing"). All of Wellshire's house stocks were comprised of developmental stage start-up companies and/or blind pools.*fn6 Because these house stocks are highly speculative and listed only in the "pink-sheets," their progress is difficult for investors to keep track of and follow.*fn7 Wellshire investors, therefore, rely heavily on the assertions, advice, and guidance of Wellshire's brokers, market newsletters, and press releases to assure the soundness and stability of their investment. The SEC's allegations in this case center on Wellshire's and individual defendants' boiler-room tactics in the handling of two house stocks in particular: Environmental Landfills, a start-up company, and Ventura, a blind pool, neither of which had demonstrated operations nor earning capacities.

DISCUSSION

In order for a preliminary injunction to issue, the SEC must establish: (1) a strong prima facie case of previous securities violations; and (2) a reasonable likelihood that wrongs will be repeated. SEC v. Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir. 1975); SEC v. Hansen, 726 F. Supp. 74, 75 n. 1 (S.D.N.Y. 1989). Specifically, the SEC must show a "reasonable and substantial likelihood that defendant, if not enjoined, would violate securities laws in the future." SEC v. Youmans, 729 F.2d 413 (6th Cir.), cert. denied, 469 U.S. 1034, 105 S.Ct. 507, 83 L.Ed.2d 398 (1984); accord SEC v. Aqua-Sonic Products Corp., 524 F. Supp. 866 (S.D.N.Y. 1981), aff'd, 687 F.2d 577 (2d Cir.), cert. denied, 459 U.S. 1086, 103 S.Ct. 568, 74 L.Ed.2d 931 (1982). In addition, the Supreme Court has held that the SEC is required to show that the defendants acted with knowledge or scienter of their wrongful acts in order to obtain preliminary injunctive relief; a showing of mere negligence is not enough under §§ 17(a)(1) and 10(b). Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980). A showing of recklessness may satisfy the scienter requirement. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 1380-81, 47 L.Ed.2d 668 ...


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