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SEC v. HASHO

February 13, 1992

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.

EDELSTEIN


The opinion of the court was delivered by: DAVID N. EDELSTEIN

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, *fn1" 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.

 Third 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. *fn2"

 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, be 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" *fn3" 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 cold calls per day and used scripts when speaking to customers. [Pl. Exh. 1001 at pp. 14, 23, 37-38]. Often, he recommended the same stock to all customers and prospective customers on a given day. (Pl. Exh. 1001 at 46-47].

 B. Mecca

 Mecca, a graduate of the State University of New York at Oswego, is 28 years old. He was a registered representative at First Jersey from on or about May 1986 through early 1987, at Sherwood from in or about February 1987 through May 1988, and at J.T. Moran from in or about May 1988 through January 1990. Mecca worked at the Long Island branch office of First Jersey, Sherwood, and J.T. Moran. [Trial at pp. 675-676, 799-800; Pl. Exh. 1101 at pp. 40-41, 46-47]. From in or about June 1990 through November 1990, he was a registered representative at Stuart-James. Prior to entering the securities industry in May 1986, Mecca had no securities related employment or investing experience. [Trial at pp. 800-801].

 Mecca earned $ 240,000 in 1987, over $ 400,000 in 1988, $ 270,000 in 1989, and $ 102,000 in 1990. [Trial at pp. 801-803; Pl. Exh. 1101 at pp. 52, 187]. *fn4" Approximately 70% to 80% of his income was derived from commissions earned on his customers' securities transactions and approximately 20% to 30% of his income was derived from "overrides" on commissions earned by other registered representatives. [Trial at pp. 807-808; Pl. Exh. 1101 at pp. 52-52]. Mecca earned approximately 7 to 10% of the commissions earned by registered representatives on whom he received overrides. [Pl. Exh. 1101 at pp. 54-56]. He earned override income at both Sherwood and J.T. Moran. [Trial at pp. 807-808].

 He held various titles at J.T. Moran, including Vice-President, Senior Account Executive, Registered Principal, and Branch Manager. [Trial at pp. 803-807; Pl. Exh. 1101 at pp. 47-48; Pl. Exh. 3002]. He used business cards that identified him as either a Vice-President or Branch Manager, and he told customers that he "ran the office." [Pl. Exh. 1101 at pp. 47-48; Trial at p. 634]. Mecca, however, was not a licensed supervisor. In 1989, he failed the "Series 24" examination for the licensing of securities firm supervisors. [Trial at pp. 803-804, Pl. Exh. 1101 at pp. 42-43].

 Mecca knew that First Jersey, Sherwood and J.T. Moran specialized in recommending high risk speculative securities issues. [Trial at pp. 815-816]. While working at First Jersey, Sherwood and J.T. Moran, Mecca specialized in the recommendation of high risk speculative securities issues. [Trial at p. 816]. Mecca recommended only those securities brought to his attention by his employers' research departments. [Trial at pp. 792-793, 831, 832]. Mecca's employers provided him with information on these securities, which he then dispersed to his customers. [Trial at pp. 784-785). He never attempted to ascertain the accuracy of this information. [Trial at pp. 834-835]. Mecca obtained new customers by taking names from Dun & Bradstreet "lead" directories and cold calling up to 150 of these names per day. [Trial at pp. 813-815; Pl. Exh. 1101 at p. 82].

 C. Yule

 Yule, a graduate of Hofstra University with a bachelor's degree in business administration, is 26 years old. [Pl. Exh. 1201 at p. 5]). From in or about the end of 1987 to in or about May 1988, he worked in his first job in the securities industry as a registered representative at Sherwood's Long Island office. [Pl. Exh. 1201 at pp. 6-7]. From in or about May 1988 to in or about January 1990, Yule was a registered representative at J.T. Moran. [Pl. Exh. 1201 at p. 21]. Yule worked at the Long Island branch offices of Sherwood and J.T. Moran. [Pl. Exh. 1201 at pp. 8, 21-22]. From in or about June 1990 to in or about November 1990, he was a registered representative at Stuart-James. [Pl. Exh. 1201 at p. 72].

 Yule earned approximately $ 35,000 in 1988, $ 90,000 in 1989 and $ 50,000 in 1990, in commissions from his customers' securities transactions. [Trial at p. 1015; Pl. Exh. 1201 at p. 110]. He specialized in the sale of "small capitalization stocks that had a higher risk in the market." [Pl. Exh. 1201 at p. 35]. Yule primarily recommended securities to his customers that his employers had recommended to him. [Trial at pp. 933-935; Pl. Exh. 1201 at pp. 14, 27]. He received information about the securities he recommended to his customers from his employers, and then dispersed this information to customers without doing any research to verify its accuracy. [Pl. Exh. 1201 at pp. 16-17, 27, 29-30; Trial at pp. 935-36; but see Trial at pp. 997-1002]. While at J.T. Moran, Yule never recommended a stock based on his own research. [Pl. Exh. 1201 at p. 30].

 Using the telephone book as a source of leads for potential customers, Yule cold called for customers. [Pl. Exh. 1201 at pp. 10, 24]. He made approximately 150 cold calls a day to prospective customers and used scripts when speaking to customers. [Pl. Exh. 1201 at pp. 10, 12, 24, 31].

 Vuono, 25 years old, was employed as a registered representative at J.T. Moran's Long Island office from approximately December 1988 through January 1990. [Pl. Exh. 1301 at pp. 3-11]. Vuono had no stock market experience prior to working at J.T. Moran. [Pl. Exh. 1303 at p. 42]. He earned $ 75,000 in commission income in 1989. [Pl. Exh. 1301 at p. 13]. Vuono was subsequently employed as a registered representative at Prudential-Bache Securities, Inc., from in or about June 1990 to in or about January 1991.

 From in or about December 1988 to in or about January 1990, Vuono typically cold-called 300 prospective customers per day at J.T. Moran. He found names and telephone numbers of these prospective clients from telephone books. [Pl. Exh. 1301 at p. 61].

 During the first telephone call with any prospective customer, Vuono read from a script which described J.T. Moran. [Pl. Exh. 1303 at p. 7]. Vuono recommended that customers or prospective customers purchase only those securities that he was instructed to sell by J.T. Moran. [Pl. Exh. 1303 at pp. 17, 28, 56]. In this regard, he testified, "I was in the business for two months, I really didn't have a say of what I could recommend or what I could be doing. This is what I was told to do." [Pl. Exh. 1303 at p. 28]. He further testified, "I was in the business . . . four months, I wasn't going to second-guess an analyst, that was his job. My job was to sell stock based on information provided to me by the analyst." [Pl. Exh. 1303 at p. 69].

 Vuono learned about securities through J.T. Moran supervisors, the J.T. Moran research department, or through representatives of issuers of the securities recommended. J.T. Moran supervisors or the J.T. Moran research department passed out sales scripts to registered representatives with respect to particular issuers of securities. [Pl. Exh. 1303 at pp. 17, 26, 47, 50, 72]. Vuono used these sales scripts in presenting securities recommendations to customers. [Pl. Exh. 1303 at pp 17, 26, 47, 50, 72]. *fn5"

 Vuono did no independent research or analysis of the securities he recommended to customers. He based his recommendations solely on information received from J.T. Moran supervisors, from the J.T. Moran research department, and from representatives of issuers. [Pl. Exh. 1303 at pp. 26-28].

 Vuono testified that, while at J.T. Moran, he determined a potential customer's financial condition, by inquiring how much he or she had available to invest. [Pl. Exh. 1303 at p. 13]. He testified that it was up to his customers to decide whether the purchase of a particular security comported with that customer's investment objectives. [Pl. Exh. 1303 at p. 52]. Vuono stated that, "if a client likes what I'm talking about, then he's going to get involved with it." [Pl. Exh. 1302 at p. 16]. He further stated that he did not make suitability determinations and that a customer's financial information "was filled out on the new account card, and once that went into operations and they executed the order, obviously they felt it was suitable because everything was on the account form." [Pl. Exh. 1302 at pp. 16-17].

 Vuono testified that he was not aware of suitability requirements for clients who wished to trade on margin. He further testified that he was not involved in the determination of customer suitability for margin trading. Vuono stated that, "Everything was made in the back office. I mean, the client would not apply to be on margin, so if it was approved, it was approved. If it wasn't, then it wasn't. And I'm not sure who made the determination. It was all sent to New York." [Pl. Exh. 1302 at pp. 17-18].

 III. Customer Witnesses

 A. Ben Hasho's Customers

 1. Benjamin Tate

 Benjamin Tate ("Tate"), a high school graduate, is 69 years old. [Trial at p. 648, 650]. Tate is the President of a music publishing company and assists in managing a shopping mall in Newark, New Jersey. [Trial at p. 648]. He earns between $ 18,000 and $ 22,000 per year. [Trial at p. 649].

 In or about August 1989, Tate was called by Ben Hasho. Tate, who had no knowledge of Ben Hasho prior to this call, had no investing experience prior to investing with Ben Hasho at J.T. Moran, and informed Ben Hasho of this fact. [Trial at p. 650-51]. In their first telephone conversation, Ben Hasho told Tate that J.T. Moran "had been in business for over 52 years." [Trial at p. p. 651]. While Tate lost approximately $ 2,000 through investing with Ben Hasho, Ben Hasho earned approximately $ 262.50 in commission income through trading in Tate's account. [Trial at p. 661; Pl. Exh. 2801 at para. 10.b.3].

 2. Dixon Leatherbury

 Dixon Leatherbury ("Leatherbury") is a resident of Machipongo, Virginia. [Pl. Exh. 1002 at p. 4]. He is 40 years old and is the President of a farm equipment sales business. [Pl. Exh. 1002 at pp. 6-7]. Leatherbury was first called by Ben Hasho in or about July 1989. [Pl. Exh. 1002 at pp. 6-7]. Leatherbury lost approximately $ 10,000 through investing with Ben Hasho. [Pl. Exh. 1002 at pp. 25-26]. Ben Hasho earned approximately $ 1,450 in commission income through trading in Leatherbury's account. [Pl. Exh. 2801 at para. 10.b.1]

 3. Richard Poff

 Richard Poff ("Poff"), a resident of Salem, Virginia, is the part-owner of a gasoline station. [Pl. Exh. 1003 at p. 4]. Poff, who has a high school equivalency degree, earned approximately $ 54,000 in 1989. [Pl. Exh. 1003 at p. 5]. In or about April 1989, Poff received his first phone call from Ben Hasho. Poff had no knowledge of Ben Hasho prior to this phone call. [Pl. Exh. 1003 at p. 7].

 Poff borrowed $ 45,000 from a bank to finance stock purchases through Ben Hasho. [Pl. Exh. 1003 at p. 21]. When Poff told Ben Hasho that he had to borrow money to finance securities purchases, Ben Hasho assured Poff that borrowing was a "good move" because the recommended securities would increase in price. [Pl. Exh. 1003 at p. 21]. At times, Ben Hasho recommended that Poff borrow additional money to finance securities purchases. Ben Hasho stated that, "if you don't have the money, this stock is so good, its so great, borrow the money. Go borrow the money. If you have to borrow the money, do what you have to do to get this stock because its goirg through the roof." [Pl. Exh. 1003 at p. 22].

 Poff lost approximately $ 70,000 through investing with Ben Hasho. [Pl. Exh. 1003 at p. 35]. Ben Hasho earned approximately $ 15,610.50 in commission through trading in Poff's account. [Pl. Exh. 2801 at para. 10.b.6].

 4. Frank Cardillo

 Frank Cardillo ("Cardillo") is 40 years old and a resident of North Babylon, New York. [Trial at p. 123]. As President of Ace Canvas and Tent Corp., a party tent manufacturer, Cardillo earns approximately $ 40,000 per year. [Trial at p. 124]. In 1988, Ben Hasho became Cardillo's registered representative at J.T. Moran. [Trial at p. 125]. Cardillo lost approximately $ 6,500 through investing with Ben Hasho, who earned approximately $ 1,003.75 in commission income from trades in Cardillo's accouiit. [Trial at p.131; Pl. Exh. 2801 at para. 10.b.2.].

 5. Leonard Tlusty

 Leonard Tlusty ("Tlusty") is 65 years old and a resident of Alexandria, Virginia. [Pl. Exh. 1005 at p. 4]. He is a retired school teacher. [Pl. Exh. 1005 at p. 4]. Ben Hasho first called Tlusty on or about September 28, 1989. Tlusty had no knowledge of Ben Hasho prior to this telephone call. [Pl. Exh. 1005 at p. 4]. Tlusty lost approximately $ 6,000 through investing with Ben Hasho, while Ben Hasho earned approximately $ 953.50 in commission income from trades in Tlusty's account. [Pl. Exh. 1005 at p. 28; Pl. Exh. 2801 at para. 10.b.5].

 6. Rosario Como

 Rosario Como ("Como") is 26 years old and a resident of Port Charlotte, Florida. [Pl. Exh. 1004 at p. 3]. Como was born in Italy and arrived in this country in 1971. [Pl. Exh. 1004 at p. 5]. Como has a high school education. [Pl. Exh. 1004 at p. 5]. Although Como currently earns approximately $ 300 a week, Como was earning approximately $ 400 when Ben Hasho became Como's registered representative. [Pl. Exh. 1004 at pp. 6, 8]. Ben Hasho first called Como in or about October 1986, while working as a registered representative at First Jersey. [Pl. Exh. 1004 at pp. 7-8].

 Ben Hasho indicated on Como's new account form that Como earned $ 60,000 per year even though Como told Ben Hasho that he earned far less. [Pl. Exh. 1004 at p. 11]. During one of their first conversations, Como told Ben Hasho that he "wanted a safe portfolio." [Pl. Exh. 1004 at p. 10]. Ben Hasho earned approximately $ 1,043.12 in commission income from trades in Como's account during the period of September 1987 to mid-January 1990, while Como lost approximately $ 25,000 through investing with Ben Hasho. [Pl. Exh. 280l at para. 10.b.4; Pl. Exh. 1004 at 41].

 7. Francesco Piteo

 B. Mecca's Customers

 1. Ronald Costa

 Ronald Costa ("Costa"), 29 years old, is a resident of Westbury, New York, and works as an engineer for Grumman Aircraft Systems. [Trial at p. 24]. From in or about 1986 through 1990, Costa's yearly income has ranged from $ 27,000 to $ 35,000 per year. [Trial at p. 241]. From in or about mid-1986 to in or about mid-1987, Costa maintained an account at First Jersey. During this period, Costa's account was serviced by a registered representative other than Mecca. [Trial at p. 242]. Costa had no investment experience prior to the opening of his First Jersey account. [Trial at p. 242]. He found his account statements confusing. [Trial at p. 267].

 In or about 1987, Mecca called Costa and informed him that he was replacing Costa's previous registered representative. [Trial at p. 243]. During their first conversation, Mecca did not ask Costa about his investment objectives. [Trial at. p. 243]. Mecca never asked Costa about his investment background. [Trial at p. 243].

 While Costa lost approximately $ 40,000 through investing with Mecca, Mecca earned approximately $ 12,462.83 in commission income through trading in Costa's account at Sherwood and J.T. Moran. [Trial at p. 258; Pl. Exh. 2801 at para. 10.c.1].

 2. Ralph Lambiase, Jr.

 Ralph Lambiase, Jr. ("Lambiase"), age 35, is a resident of Bayshore, New York, and is the owner of Call Me Electric, Inc. [Trial at p. 559]. Lambiase, a high school graduate, is an electrician who runs a business from his home. [Trial at p. 560]. His annual income since 1988 has been $ 28,000. [Trial at p. 560]. Lambiase opened an account at Sherwood in or about 1988 through a registered representative other than Mecca. [Trial at pp. 560-562]. Before opening an account at Sherwood, Lambiase had no prior investing experience. [Trial at pp. 560-562].

 In or about February 1989, Mecca became Lambiase's registered representative at J.T. Moran. [Trial at pp. 561-562, 696-697]. Lambiase testified that he had trusted Mecca because he "figured he was my broker and that he would do the right thing for me. . . I trusted him to do what he thought was right." [Trial at p. 577]. During their first telephone conversation, Mecca never asked Lambiase about his investment experience, educational background or investment objectives. [Trial at p. 563]. However, during this telephone conversation, Mecca did tell Lambiase that he had "hot" stocks for Lambiase to invest in. [Trial at p. 564]. Mecca earned approximately $ 1,077.51 in commission income from trades in Lambiase's account. [Pl. Exh. 2801 at P 10.c.4].

 3. Albert Natoli

 Albert Natoli ("Natoli"), age 41, is an attorney who resides in Brooklyn, New York. [Trial at p. 609]. In or about mid-1988, Natoli was cold called by a J.T. Moran employee who introduced the firm to Natoli. [Trial at p. 610]. Several weeks later, Mecca called Natoli to introduce himself. [Trial at p. 610]. During this conversation, Mecca told Natoli that "J.T. Moran had a very good track record with small stocks." [Trial at p. 610]. Mecca also told Natoli that J.T. Moran had "a record of doing better for its clients than the rest of the brokerage houses around," and that he would make a lot of money. [Trial at pp. 610-611].

 While Natoli lost approximately $ 3,700 through investing with Mecca, Mecca earned approximately $ 1,077.51 in commission income through trading in Natoli's account. [Trial at p. 623; Pl. Exh. 2801 at para. 10.c.3.].

 4. Harry Alexander

 Harry Alexander, Jr. ("Alexander"), age 44, lives in Harrisburg, Pennsylvania, and owns AR Tooling & Precision Machining. He graduated from high school and has two years of college education. [Pl. Exh. 1102 at p. 5]. In 1989, he earned approximately $ 30,000. [Pl. Exh. 1102 at p. 6].

 In or about April 1989, Alexander was contacted by Mecca and, soon thereafter, opened an account at J.T. Moran. [Pl. Exh. 1102 at pp. 9-10]. At this time, Mecca told Alexander that J.T. Moran had a good track record and that in seven or eight years in the business he had never been involved in stocks that performed poorly. [Pl. Exh. 1102 at p. 10].

 During this first conversation, Alexander told Mecca that he had no prior investment history. [Pl. Exh. at 1101 at p. 11]. On a number of occasions, Mecca told Alexander, "Let me worry about the market. I know what's going on and you don't." [Pl. Et. 1102 at p. 221. When Alexander expressed concern over fluctuations in the price of his American Network holding purchased on Mecca's recommendation, Mecca said, "don't worry about it . . . What you saw . . was . . . an older price, and . . . the price today is higher than that." [Pl. Exh. 1102 at p. 22].

 While Alexander lost approximately $ 9,000 through investing with Mecca, Mecca earned approximately $ 1,655.79 in commission income from trades in Alexander's account. [Pl. Exh. 1101 at p 41; Pl. Exh. 2810 at para. 10.c.2.].

 5. Peter Cherouvis

 Peter Cherouvis ("Cherouvis"), age 34, resides in Rocky Point, New York, where he is a mechanic and owns an auto repair shop. [Trial at pp. 163-164]. Cherouvis has a high school education. [Trial at p. 164]. In or about September 1986, Cherouvis was contacted by Mecca and soon thereafter opened an account at First Jersey. [Trial at pp. 166-167]. Prior to investing through Mecca, Cherouvis' only investment experience had been in the silver market in 1980. [Trial at 164].

 During their first telephone conversation, Mecca told Cherouvis that First Jersey was a reputable stockbroker that did a lot of research and made excellent recommendations. [Trial at p. 167]. During this conversation, Mecca also told Cherouvis that he could recommend securities on which Cherouvis' could make returns of 100% to 200%. Subsequently, Cherouvis' account was transferred to Sherwood and then to J.T. Moran. Cherouvis put his faith in Mecca. [Trial at p. 181].

 Mecca's statements about the value of Cherouvis' securities did not reflect the securities values contained on Cherouvis' customer statements. [Trial at p. 187]. in addition, Mecca assured Cherouvis that the prices of his holdings were actually higher than any values reflected on Cherouvis' customer statements. [Trial at p 236].

 Cherouvis lost approximately $ 80,000 through investing with Mecca, and owes $ 42,000 for loans he obtained to finance securities purchases through Mecca. As a result of losses on investments recommended by Mecca, Cherouvis also lost a service station business because he became unable to pay the station's bills. [Trial at p. 189]. Mecca earned approximately $ 6,640.56 in commission income from trades in Cherouvis' account while at Sherwood and J.T. Moran. [Pl. Exh. 2801 at para. 10.c.5.].

 6. Carroll J. Bryla

 Carroll J. Bryla ("Bryla"), age 40, is an attorney who resides in Fredericksburg, Texas. [Pl. Exh. 1103 at p. 5]. In or about mid-1990, Mecca cold called Bryla and introduced himself as a registered representative for Stuart-James. [Pl. Exh. 1103 at p. 16]. In or about July 1990, Bryla opened an account at Stuart-James. [Pl. Exh. 1103 at p. 21].

 C. Yule's Customers

 1. John Meyers

 John Meyers ("Meyers"), age 43, is a resident of Silver Spring, Maryland, and is the President of a home improvement company. [Trial at p. 56]. He approximate annual income is about $ 40,000. [Trial at p. 56]. Yule first called Meyers in or about August 1989. [Trial at p. 57]. Meyers had no investing history prior to investing with Yule at J.T. Moran. [Trial at p. 56]. Meyers explained his lack of investing experience to Yule. [Pl. Exh. 1202 at p. 6]. Yule never asked Meyers about his investment goals, assets or income. [Pl. Exh. 1202 at pp. 13-14].

 Meyers lost approximately $ 6,000 through investing with Yule. [Trial at p. 70]. Yule earned approximately $ 890 in commission income from trades in Meyers' account. [Pl. Exh. 2801 at para. 10.d.6].

 2. Rodney Sensibaugh

 Rodney Sensibaugh ("Sensibaugh") is a resident of Fairfax Station, Virginia. [Pl. Exh. 1203 at p. 5]. He is a branch manager for Thomas Summerville, a plumbing supply wholesaler. [Pl. Exh. 1203 at pp. 7-8]. Yule first called Sensibaugh in or about July 1989. [Pl. Exh. 1203 at p. 8]. During the first telephone call, Yule told Sensibaugh that he worked for J.T. Moran, "a leading Wall Street firm and one of the leading investment companies." [Pl. Exh. 1203 at p. 8]. Sensibaugh had no knowledge of Yule prior to this phone call. [Pl. Exh. 1203 at p. 8].

 Prior to investing with Yule at J.T. Moran, Sensibaugh had only invested in IRAs and mutual funds. [Pl. Exh. 1203 at p. 9]. Sensibaugh informed Yule about his limited investing history. [Pl. Exh. 1203 at p. 10]. Sensibaugh also informed Yule that he would have to borrow money from a credit line against his house to finance stock purchases. [Pl. Exh. 1203 at pp. 10, 13, 32].

 Sensibaugh lost approximately $ 20,000 through investing with Yule. [Pl. Exh. 1203 at p. 29]. Yule earned approximately $ 4,067.51 in commission income from trades in Sensibaugh's account. [Pl. Exh. 2801 at para. 10.d.3.].

 3. J. Lawrence Hirsch

  J. Lawrence Hirsch ("Hirsch"), age 36, resides in Alexandria, Virginia, and owns a firm that designs and builds homes. [Pl. Exh. 1204 at p. 4, 7]. Yule cold called Hirsch in or about January 1989. [Pl. Exh. 1204 at p. 9].

  Hirsch informed Yule that he would have to borrow money to buy securities, and ultimately borrowed money on a home equity loan for this purpose. [Pl. Exh. 1204 at p. 12]. While Hirsch lost approximately $ 40,000 through investing with Yule, Yule earned approximately $ 8,180.77 in commission income from trades in Hirsch's account. [Pl. Exh. 1204 at p. 20; Pl. Exh. 2801 at para. 10.d.4].

  4. Lyle Garrette, Jr.

  Lyle Garrette, Jr. ("Garrette"), age 48, resides in Amherst, Virginia, and works as a civil engineer. [Pl. Et. 1205 at p. 5, 6]. Yule first contacted Garrette in or about July 1989. [Pl. Exh. 1205 at p. 7]. Garrette borrowed money to finance some of his stock purchases through Yule, and he informed Yule that he was borrowing money to finance his securities purchases at J.T. Moran. [Pl. Exh. 1205 at p. 17]. Yule told Garrette that he was making a six digit salary based on his stock recommendations to customers, even though Yule never made a six digit salary as a registered representative. [Pl. Exh. 1205 at pp. 18-19; Trial at p. 1015; Pl. Exh. 1201 at p. 110].

  While Garrette lost approximately $ 12,000 through investing with Yule, Yule earned approximately $ 1,687.50 in commission income from trades in Garrette's account. [Pl. Exh. 1205 at p. 28; Pl. Exh. 2801 at para. 10.d.5].

  5. Anthony Caulfield

  6. Andrew Steel

  Andrew Steel ("Steel"), a resident of Winchester, Virginia, is a restaurant owner. [Pl. Exh. 1206 at p. 5]. In 1989, Steel made approximately $ 30,000. [Pl. Exh. 1206 at p. 5]. Yule first called Steel on or about December 21, 1989. [Pl. Exh. 1205 at p. 8]. Yule never asked Steel about his previous investing history, his income or investing goals. [Pl. Exh. 1206 at pp. 10-13]. Steel's only prior investment experience was in "bank stocks" given to him by his father-in-law. [Pl. Exh. 1206 at p. 10]. While Steel lost approximately $ 13,000 through investing with Yule, Yule earned approximately $ 2,430 in commission income from trades in Steel's account. [Pl. Exh. 1206 at pp. 25-26; Pl. Exh. 2801 at para. 10.d.1].

  7. Conrad Snedegar

  Conrad Snedegar ("Snedegar"), age 63, is a resident of Baltimore, Maryland. [Pl. Exh. 1207 at p. 3]. Snedegar is a masonry worker who earned an income of approximately $ 35,000 in 1990. [Pl. Exh. 1207 at p. 4]. Yule first called Snedegar in or about July or August 1990. [Pl. Exh. 1207 at p. 4]. During this call, Yule requested that Snedegar transfer his account from J.T. Moran to Stuart-James where Yule then worked. [Pl. Exh. 1207 at p. 5]. When Snedegar mentioned to Yule that he had a negative investing experience at J.T. Moran, Yule spoke badly of J.T. Moran and told Snedegar that Stuart-James was a much better company. [Pl. Exh. 1207 at p. 7]. Snedegar also told Yule that he had lost approximately $ 300,000 investing at J.T. Moran. [Pl. Exh. 1207 at pp. 8-9]. Yule replied that Snedegar could recoup these losses by investing through Yule at Stuart-James. Snedegar informed Yule that he only had a twelfth grade education. [Pl. Exh. 1207 at p. 8]. [Pl. Exh. 1207 at p. 9]. Snedegar had to ask Yule several times whether he worked at J.T. Moran before Yule would admit it. [Pl. Exh. 1207 at p. 9]. Snedegar lost approximately $ 30,400 through investing with Yule. [Pl. Exh. 1207 at pp. 31-32].

  D. Vuono's Customers

  1. Timothy W. St. Clair

  Timothy W. St. Clair ("St. Clair"), a resident of Blue point, New York, owns a boat repair service. [Pl. Exh. 1304 at p. 10]. Vuono cold called St. Clair in or about February 1989 and soon thereafter St. Clair opened an account at J.T. Moran. [Trial at pp. 403, 457]. St. Clair is not a college graduate. [Pl. Exh. 1304 at p. 10].

  Prior to investing through Vuono, St. Clair had invested only several thousand dollars in securities through Prudential-Bache. [Pl. Exh. 1304 at pp. 10-11, 199]. Prior to investing through Vuono, St. Clair did not know the meaning of an "over-the-counter security," a "market maker," or a "bid or ask price." [Trial at pp. 403-404]. St. Clair's investment objective was "slow secure growth." [Trial at p. 405]. St. Clair trusted Vuono to provide him with accurate information about securities, and relied upon Vuono because he considered Vuono to be a "licensed professional." [Trial at pp. 409, 427; Pl. Exh. 1304 at pp. 37, 44, 174-75]. St. Clair had trouble understanding his customer account statement and relied upon Vuono to decipher them "honestly." [Trial at pp. 418, 492-494; Pl. Exh. 1304 at pp. 92-95, 99-100, 196].

  While St. Clair lost approximately $ 30,000 to $ 40,000 through investing with Vuono, Vuono earned approximately $ 18,690.63 in commission income through trading in St. Clair's account. [Trial at p. 433; Pl. Exh. 2801 at para. 10.h.].

  Jeffrey Conte ("Conte"), a resident of Huntington Station, New York, is a technical writer. Vuono cold called Conte in or about March 1989 and soon thereafter Conte opened an account at J.T. Moran. [Pl. Exh. 1305 at p. 1-10]. Vuono never asked Conte about his investment objectives. [Pl. Exh. 1305 at pp. 15-16]. Conte lost approximately $ 3,500 through investing with Vuono. [Pl. Exh. 1305 at p. 31]. Vuono earned approximately $ 1,137.84 in commission income from trades in Conte's account. [Pl. Exh. 2801 at para. 10.h.3.].

  3. Italo Guggino

  Italo Guggino ("Guggino"), a resident of Merrick, New York, owns a pizzeria. Vuono cold called Guggino in or about January 1989 and soon thereafter Guggino opened an account at J.T. Moran. [Pl. Exh. 1306 at pp. 11-12]. Guggino had attended one semester of college. [Pl. Exh. 1306 at p. 6].

  Guggino had no experience in the stock market prior to investing through Vuono. [Pl. Exh. 1306 at p. 11]. In this regard, Guggino testified that before investing with Vuono was "illiterate to the whole thing, and I still am." [Pl. Exh. 1306 at p. 11]. Guggino testified that he trusted Vuono because he was Italian. [Pl. Exh. 1305 at p. 17]. Guggino also testified that when he looked at the literature Vuono provided about issuers, "I was trying to read it, but I couldn't make any heads or tails out of it. You know, I still don't. Give me a prospective (sic) now, I still ain't going to tell you what's going on there." [Pl. Exh. 1306 at pp. 22-23]. Guggino relied upon Vuono to decipher his customer statements. [Pl. Exh. 1306 at pp. 56-57].

  While Guggino lost approximately $ 1,300 through investing with Vuono, Vuono earned approximately $ 460.94 in commission income from trades in Guggino's account. [Pl. Exh. 1306 at pp. 32-33; Pl. Exh. 2801 at 10.h.4.].

  4. Jonathan Treat

  Jonathan Treat ("Treat"), a resident of Bolton, Connecticut, is a farmer. [Trial at p. 292; Pl. Exh. at p. 292]. In or about the summer of 1989, Vuono became Treat's registered representative at J.T. Moran, replacing Treat's previous J.T. Moran broker. [Trial at p. 297; Pl. Et. 1307 at p. 26]. Treat had limited investment experience prior to investing through Vuono. [Trial at p. 293; Pl. Et. 1307 at pp. 5-16]. Prior to investing through Vuono, Treat did not know the meaning of a market maker or a bid and ask price.

  Treat lost approximately $ 140,000 through investing with Vuono. [Trial at p. 325]. Vuono earned approximately $ 25,153:60 in commission income from trades in Treat's account. [Pl. Exh. 2801 at para. 10.h.1.].

  5. Kenneth C. Beck

  Kenneth C. Beck ("Beck"), a resident of Cherry Hill, New Jersey, is a salesman. Vuono cold called Beck in or about August 1989 and soon thereafter Beck opened an account at J.T. Moran. [Pl. Exh. 1308 at p. 8]. Beck lost approximately $ 440 through investing with Vuono. [Pl. Exh. 1308 at p. 19]. Vuono earned approximately $ 156.25 in commission income from trades in Beck's account. [Pl. Exh. 2801 at para. 10.h.2.].

  IV. House Stocks

  While working for First Jersey, Sherwood and/or J.T. Moran, Ben Hasho, Mecca, Yule and Vuono recommended to numerous customers, and potential customers, that they purchase certain over-the-counter securities issued by unseasoned companies with low revenues and negative earnings. These securities were "house stocks."

  J.T. Moran and Sherwood split with its registered representatives an average gross commission of 24% of the purchase price of these stocks. *fn6" Therefore, Sherwood and J.T. Moran registered representatives received an average of 12% of the customer's purchase price as net commission on Sherwood and J.T. Moran house stock sales. [Pl. Exh. 2801 at para. 4-211]. However, such commissions ranged as high as 25%. [Trial at pp. 847-848, 1017].

  With one exception, the SEC profiled only J.T. Moran house stocks because these securities constitute the bulk of the securities recommended to the customer witnesses in this case. The house stocks recommended by J.T. Moran registered representatives included the following, [Trial at pp. 816-817; Pl. Exh. 1101 at pp. 65-67]:

  1. J.T. Moran Financial

  J.T. Moran Financial, a Delaware corporation, went public in or about August 1987. [Pl. Exh. 1801 at p. 9]. In a prospectus dated October 1988, J.T. Moran Financial disclosed that its securities "involve a high degree of risk." [Pl. Exh. 1801 at p. 1]. J.T. Moran Financial lost $ 4,865,320 and $ 4,160,446, on revenues of $ 9,238,396 and $ 38 million in 1988 and 1989, respectively. [Pl. Exh. 1801 at p. 23; Pl. Exh. 1806 at p. 41]. J.T. Moran Financial securities were traded over-the-counter and quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). [Pl. Exh. 2601 at pp. 1155-1156]. In the following time periods, the highest bid price for J.T. Moran Financial common stock was:

  (1) $ 6 1/4 during 1987;

  (2) $ 6 during 1988;

  (3) $ 5 1/4 during 1989;

  (4) $ 2 1/8 from January 1, 1990 to July 1, 1990; and

  (5) As of October 2, 1990, the highest bid listed for this stock was $ .01 per share. [Pl. Exh. 2601 at pp. ...


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