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S.E.C. v. THOMAS JAMES ASSOCIATES

May 25, 1990

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF.
v.
THOMAS JAMES ASSOCIATES, INC., BRIAN S. THOMAS, JAMES A. VILLA, GEORGE SALLOUM AND JOSEPH V. GIANNI, DEFENDANTS.



The opinion of the court was delivered by: Telesca, Chief Judge.

DECISION AND ORDER

INTRODUCTION

Plaintiff Securities and Exchange Commission (the "Commission" or the "SEC") commenced this action March 29, 1990, with the filing of a complaint alleging various violations of the federal securities laws against the defendants, Thomas James Associates, Inc. ("TJA"), Brian S. Thomas ("Thomas"), James A. Villa ("Villa") George Salloum ("Salloum"), and Joseph V. Gianni ("Gianni"). The complaint seeks permanent injunctive relief as well as various forms of ancillary relief, including the disgorgement of profits accruing to the defendants by virtue of those activities violative of federal securities laws.

Simultaneous with the filing of the complaint, the SEC applied for, and was granted, a temporary restraining order freezing the assets of defendants, enjoining violations of federal securities laws pending a final determination of this action, and appointing a special counsel for review of TJA's securities practices and its expenditures. By consent of the parties and in accordance with Fed.R.Civ.P. 65(a)(2), the trial of this action on the merits was advanced and consolidated with the hearing of the application for a preliminary injunction, and a hearing date set for May 23, 1990. A subsequent change in the Court's calendar permitted that date to be advanced to May 14, 1990.

On or before the first day of testimony, the parties had largely resolved the case. A stipulation of dismissal was entered as to defendant Gianni; a final judgment of permanent injunction was entered as to defendant Salloum; and final orders of permanent injunction were entered as to defendants TJA and Villa. Thus, the issues to be tried and determined were the liability for securities violations of defendant Brian S. Thomas and the amount of disgorgement, if any, to be assessed against defendants TJA, Villa, and Thomas. At the close of Mr. Thomas' direct examination by counsel, he consented to the entry of a permanent injunction and a life time bar from employment in the securities market as to himself. Therefore, the only issue remaining for the Court's determination is the appropriate amount of disgorgement to be assessed against defendants TJA, Villa, and Thomas.

For the reasons discussed below, I find that disgorgement in the amount of $1.5 million is proper; defendant Thomas James Associates, Inc. to pay disgorgement in the amount of $300,000; defendant Villa to pay disgorgement in the amount of $400,000; and defendant Thomas to pay disgorgement in the amount of $800,000.

I. FINDINGS

A. Background*fn1

This action arises from a series of four initial public offerings ("IPOs") which TJA underwrote during 1989 for the following companies: Sunrise Technologies, Inc., Phoenix Laser Systems, Inc., Megamation, Inc., and International Superconductor Corp. These IPOs were declared effective, respectively, in May, August, September, and December of 1989. The gist of the SEC's claim is that TJA, together with its two principals, Brian Thomas and James Villa, its head trader, George Salloum, and its director of sales, Joseph Gianni, participated in a scheme to manipulate the market for these stocks; that the scheme was effected by means of dominating and controlling the supply, the demand, and the price of these stocks in order to permit TJA to charge excessive markups in the initial aftermarket and thereby reap an illegal profit.

While variations existed among the IPOs, including the number and price of shares and warrants in the initial offerings and whether TJA acted as a market maker for a particular offering, the IPOs and their respective initial aftermarkets were remarkably similar.

TJA directed its registered representatives (or "sales reps") to take indications of interest for the "units" of each of these IPOs several days to several weeks before the anticipated effective date of their respective registration statements. These "units" were a predetermined number varying among the IPOs, of both shares of common stock and warrants. The registered representatives secured from customers a total dollar amount that such customers were willing to invest in both an IPO and its aftermarket. Using this dollar amount, the registered representatives computed the number of "units" to be recorded as each customer's indication of interest.

TJA, specifically through Brian Thomas, caused registered representatives to oversell each offering substantially above the number of securities units actually available in order to create an artificial demand for the securities in the aftermarket.

Customers were instructed to send checks immediately to TJA, prior to the effective date of the registration statement, in an amount equal to the dollar amount of the customer's indication of interest. At that time, TJA executives were well aware that the dollar amount far exceeded the price of the number of units the customer would be allocated in the IPO. Customers were strongly advised to permit their sales reps to invest in the immediate aftermarket the difference between the dollar amount of each customer's indication of interest and the cost of the number of units actually allocated to that customer in the IPO.

The actual allocation to customers of IPO units was determined solely by Brian Thomas. The "general masses" received far less than the amount of stock in which they had indicated an interest to purchase — on the average, less than $1,000 worth; a far more generous allocation, called the "sprinkle," was made to TJA management, including managers of branch offices which had been most active in the IPO. These units were allocated to accounts designated by Thomas, Villa, and other members of TJA's management and over which they exercised direct or indirect control.

Having secured control over virtually all of the securities units in an IPO, TJA directed its sales representatives to contact customers again in order to stir up even more interest in the issue based on the market for the initial offering. In reality, of course, that market was at all times entirely controlled by TJA itself. Before the effective date of the offering and before aftermarket trading had commenced, TJA's registered representatives accepted orders for aftermarket trades.

In each case, the aftermarket did not commence immediately after an IPO was declared effective. TJA used an additional period of time, ranging from a number of hours to two full days, to solicit and collect further market orders from its customers.

When aftermarket trading commenced, the common stock and warrants which comprised the securities units were traded separately. In each case, TJA caused shares and warrants to be sold back to it from the "sprinkle" accounts at a nominal profit (as little as ($0.125 per share or warrant). Since TJA had never actually relinquished dominion and control over the shares and warrants allocated to the "sprinkle" accounts, TJA's subsequent ...


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