Such conduct also supports an inference that he had an agreement to buy the Haas stock and, in order not to disclose the beneficial interest, used nominee accounts. Ruggiero's transactions during the period of the alleged Agreement support an inference that he acted pursuant to the Agreement. For example, on July 20 Ruggiero sold 55,000 shares of TS stock at a cost of nearly $ 1.7 million from Frank Steinberger's account at E.F. Hutton. Aslanian repurchased the stock on that date in Steinberger's account. Prior to this, Ruggiero planned for the transfer of $ 725,000 from Steinberger's E.F. Hutton account to his Haas account. SEC's Exhibits 179, 181.
These actions support Aslanian's testimony that in early July he and Ruggiero met at a restaurant and discussed the sale of TS stock. Ruggiero does not dispute that they discussed the sale of TS stock at this meeting. According to Aslanian, Ruggiero agreed to sell shares of TS stock held in his customers accounts at E.F. Hutton. Ct. Ex. A at 110-13 (Aslanian). This was pursuant to an agreement between the defendants to effect a "short squeeze" of the TS stock. By Ruggiero removing these shares, E.F. Hutton would not be able to settle its obligations to buyers of the TS stock, to whom it had sold the stock "short." By buying up the TS stock, Ruggiero and the other defendants thus inflated the price of the TS stock. E.F. Hutton would have to purchase at the higher price to cover its obligations. Taken together, these actions on the part of Ruggiero belie his claim that he was not a knowing participant in the scheme to manipulate the market for the Haas stocks.
However, even in the absence of these inferences, the law allows a showing of recklessness to meet the scienter requirement for violations of section 17(a) of the Securities Act and section 10(b) of the Exchange Act. Oleck v. Fischer, 623 F.2d 791, 794 (2d Cir. 1980); Lanza v. Drexel & Co., 479 F.2d 1277, 1306 (2d Cir. 1973) (en banc). While the Court finds ample evidence to conclude that Ruggiero was a primary violator of these sections, it is certainly established that he acted recklessly in advising his clients to purchase the Haas stocks and in buying the Haas stocks for their accounts without authorization. As discussed above, by his own admission, Ruggiero was aware that the stocks were overvalued, yet repeatedly compromised his customers' positions in pursuit of the guaranteed-profit Agreement. This recklessness was a breach of his duty to his customers and supports the scienter requirement of Section 17(a) of the Act of 1933 and Section 10(b) of the Exchange Act.
Based on the trial evidence and the law above, I find that, as alleged, all defendants violated sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and section 9(a)(2) of the Exchange Act. I also find that Caito and Capital Shares violated sections 15(c)(1) and 15(c)(2) of the Exchange Act and Rules 15c1-2 and 15c2-7 thereunder, and section 17(a)(1) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder.
Disgorgement is an equitable remedy that does not compensate investors but rather is "designed to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws." SEC v. First City Fin. Corp., Ltd., 281 U.S. App. D.C. 410, 890 F.2d 1215, 1230 (D.C. Cir. 1989) (citations omitted). See also SEC v. Materia, 745 F.2d 197, 201 (2d Cir. 1984), cert. denied, 471 U.S. 1053, 85 L. Ed. 2d 477, 105 S. Ct. 2112 (1985); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972) ("The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable."). In view of the fact that the Court has found Capital Shares, Caito, and Ruggiero to have violated Sections 17(a) of the Act of 1933 and Section 10(b) of the Exchange Act, disgorgement is an appropriate remedy to preclude the unjust enrichment of these defendants, as well as to serve both specific and general deterrence purposes.
The law provides that the amount of disgorgement ordered "need only be a reasonable approximation of profits causally connected to the violation." First City Financial Corp., 890 F.2d at 1231. The underlying policy is that a wrongdoer violates the securities laws at his or her own peril. It is therefore not an issue that some of the funds ordered to be disgorged might actually have been derived from lawful trades. See, e.g., SEC v. MacDonald, 699 F.2d 47, 55 (1st Cir. 1983); Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 171 (2d Cir. 1980). In the face of such a vast number of trades that were made in furtherance of manipulation of the market, it is difficult to ascertain precisely the amount of money that is subject to disgorgement. There is, however, sufficient evidence to support a finding that Capital Shares should be ordered to disgorge $ 983,867.00. This sum reflects profits made by Capital Shares from the trading of Flores stock from March 1, 1987 through October 28, 1987, and from trading Big O, Cliff, Fountain and TS stocks from July 1, 1987 through October 28, 1987. Exhibit 101. Ruggiero is ordered to disgorge $ 72,000.00, which sum represents the commissions he received from trading in various Haas stocks while at E.F. Hutton. Exhibit 127.
The SEC has requested that pre-judgment interest be applied to the sums owed by Capital Shares, Caito, and Ruggiero. Pre-judgment interest, like the remedy of disgorgement itself, is meant to deprive wrongdoers of the fruits of their ill-gotten gains from violating securities laws. It is in the Court's discretion to award pre-judgment interest on the disgorged funds. Rolf v. Blyth, Eastman Dillon & Co., Inc., 637 F.2d 77, 86 (2d Cir. 1980); SEC v. Stephenson, 732 F. Supp. 438, 439 (S.D.N.Y. 1990). Consequently, the Court finds that the awarding of pre-judgment interest is an appropriate remedy and will be ordered against Capital Shares, Caito, and Ruggiero.
The calculation of pre-judgment interest follows the delinquent tax rate determined by the Internal Revenue Service, Internal Revenue Code, Section 6621(a)(2) [ 26 U.S.C. § 6621(a)(2)], and is assessed on a quarterly basis. According to these calculations, the Court orders that the pre-judgment interest to be paid by Capital Shares and Caito is $ 937,223.00. For Ruggiero, the interest to be paid on the disgorged funds is $ 67,481.00.
B. INJUNCTIVE RELIEF
It is in the discretion of the Court to grant a permanent injunction against violators of securities laws where there is a reasonable likelihood that the wrong will be repeated. Manor Nursing Homes, 458 F.2d at 1100 (2d Cir. 1972); accord SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99 (2d Cir. 1978). Factors that the court may consider in determining the likelihood of future wrongs include the egregiousness of the violations, isolated or recurrent nature of the violations, defendant's recognition of the wrongful nature of his or her conduct, and the likelihood that defendant's occupation will present opportunities for future violations. SEC v. Management Dynamics, Inc., 515 F.2d 801, 807-08 (2d Cir. 1975); SEC v. Spectrum, Ltd., 489 F.2d 535, 542 (2d Cir. 1973); SEC v. First City Fin. Corp., Ltd., 281 U.S. App. D.C. 410, 890 F.2d 1215, 1228 (D.C. Cir. 1989) ("No single factor is determinative; instead, the district court should determine the propensity for future violations based on the totality of the circumstances." (citations omitted)).
Neither Capital Shares, through Caito, nor Ruggiero have admitted any wrongdoing in relation to the allegations. This makes it rather dubious that they are likely to avoid such violations of the securities laws in the future. Further, both Caito and Ruggiero still trade securities. This presents an easy opportunity for future wrongdoing. Where "the same circumstances . . . with the same enticements may well crop up again. . . . the admonition of an injunction" is appropriate. SEC v. Shapiro, 494 F.2d 1301, 1308 (2d Cir. 1974).
Moreover, the egregiousness of the offenses and the frequency with which they were executed belies any notion that the violations were isolated. For example, Ruggiero, breaching his fiduciary duties to his customers pursuant to the Agreement, caused his customers' accounts at E.F. Hutton to have a negative net worth of $ 1.8 million by November 1987, just after the collapse of the scheme. Ex. 125. These defendants engaged in manipulative practices almost daily between the period of March 1987 through October 1987 (Ruggiero since at least July 1987). Therefore, in view of all of these factors, which indicate a likelihood that the defendants will engage in further violations of the securities laws if not enjoined, a permanent injunction is hereby ordered against Caito and Ruggiero.
February 28, 1995
HAROLD BAER, JR.
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