The opinion of the court was delivered by: KEENAN
JOHN F. KEENAN, United States District Judge:
The United States Securities and Exchange Commission ("SEC") seeks to permanently enjoin the defendant Robert Sayegh ("Sayegh") from further alleged violations of Section 10(b) of the Securities Exchange Act ("Exchange Act") of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5). It also seeks an accounting to determine if Sayegh earned any profits from the alleged violations. A non-jury trial was held on the Commission's application for a permanent injunction for several days in November, 1994.
The SEC's complaint alleging trading violations in connection with the securities of Chase Medical was originally filed in this matter in early 1989. It was subsequently amended to add, among others, Sayegh, as a defendant and to include allegations of transactions in the shares, called American Depository Receipts ("ADRs") of the Institute of Clinical Pharmacology, PLC ("ICP"). The Chase scheme, in which Sayegh was not involved, was a major event in causing the demise of Moore & Schley. (Tr. 180). Between $ 9 to $ 10 million was lost on the Chase transaction. Chase stock was manipulated by Militano, Sonneberg, Cranley and Core. (Tr. 744-745).
Essentially, the SEC alleges that Mr. Sayegh committed a series of fraudulent acts from approximately September, 1987 to March, 1989, the period at issue in this case. Among the alleged acts are that he:
1. artificially supported the price and controlled the supply of ICP, cf. p. 11-14 infra;
2. refused to accept sell orders in the stock, cf. p. 15 infra;
3. crossed trades in ICP for customers lacking margin, made unauthorized trades and promulgated false information, cf. p. 15-16 infra;
4. directed other broker-dealers to buy stock on Moore & Schley Cameron and Co's. ("Moore & Schley") behalf, cf. p. 17, 18 infra; and
5. parked shares of ICP in customer accounts of Vincent Militano ("Militano") and Milton Sonneberg ("Sonneberg") to avoid a capital charge on the firm's inventory, cf. p. 18 infra.
The defendant, Robert Sayegh ("Sayegh"), has held various jobs in the securities industry for 35 years. He had staff and supervisory positions with the NASD between 1959 and 1969. He resigned from the NASD in 1969 when he was an assistant secretary. (Tr. 894-95). Sayegh was a general partner of Moore & Schley during the period at issue. He was responsible for Moore & Schley's over-the-counter ("OTC") proprietary account and knew about trades in this account. Sayegh was at his desk from 7:00 a.m. to 5:00 p.m. each day, only leaving it for three or four minutes at a time. (Tr. 1039-40). Until the alleged violations by defendant in this case, his record was clean.
Mr. Sayegh had two trading assistants, Jim Dyer ("Dyer") and Rick Jones ("Jones") between whom he sat at the trading desk. (Tr. 283, 465). Mr. Sayegh is currently employed by Stuart, Coleman & Co., a broker-dealer in the capacity of account executive servicing retail clients. (P 1 of Pretrial Order).
John J. Cranley Jr., ("Cranley") was, at all relevant times, the managing general partner of Moore & Schley and chairman of Moore & Schley's management committee. (Stipulated Facts P 3, p. 8). Thomas Core, ("Core") was a general partner of Moore & Schley and was the branch manager of Moore & Schley's 45 Broadway, New York, New York office. (Stipulated Facts P 4, p. 8; Tr. 464). Vincent Militano ("Militano") and Milton Sonneberg ("Sonneberg") were registered representatives employed by Moore & Schley at its principal office, 45 Broadway, New York City. They shared registered representative number 056. Militano and Sonneberg, collectively referred to as the 056 Group, pooled and divided their brokerage commissions.
Moore & Schley was a New York limited Partnership. It was a broker-dealer registered with the SEC pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act"), [ 15 U.S.C. § 78o(b)] and was a member of the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX"), the National Association of Securities Dealers ("NASD") and the Philadelphia Stock Exchange.
Institute of Clinical Pharmacology, ("ICP") was an Irish corporation whose ordinary shares were not registered in the United States. The shares were held primarily by corporate insiders. ICP ADRs were traded through the NASD's inter-dealer quotation system, NASDAQ. ICP conducted clinical tests of pharmaceutical substances and collected data in studies done to investigate the effects of the substances on human beings. (Stipulated Facts P 7, pp. 9-10).
In November 1984, Moore & Schley co-underwrote with Stephens, Inc. ("Stephens"), an initial public offering of 1,000,000 ICP ADRs, with an option for an additional 150,000 ADRs to cover over-allotments. The ADRs were priced at $ 7.75 each and as part of the initial public offering, Moore & Schley placed approximately 500,000 ICP ADRs with its retail accounts. (Stipulated Facts PP 9-10, pp. 9-11; Tr. 27, 28). In addition to the ADRs offered in the initial public offering, ICP insiders, Dr. Austin Darragh, John Murphy and Dr. Ian Brick ("Brick"), owned four million Irish ordinary shares. (Tr. 31). Following the initial public offering, Moore & Schley and Stephens became the primary market makers for the ICP ADRs, and Cranley became a director of ICP. (Stipulated Facts P 11, p. 11; Tr. 95). Stephens terminated its role as an active market maker in ICP ADRs in July 1986. (Stipulated Facts P 79, p. 21).
Moore & Schley hired Messrs. Militano and Sonneberg in 1986. (Stipulated Facts P 92, p. 23, Tr. 89-90). By this time, Moore & Schley already had a significant position in ICP. (Tr. 467).
Militano and Sonneberg were hired to operate as cold callers. A cold caller seeks to get business from people he does not know. Cold calling has certain risks associated with it including that (i) customers may buy securities and never pay for them, (ii) cold callers might execute unauthorized transactions to support the price of a stock, (iii) cold callers might churn accounts to generate commissions, and (iv) cold callers could give payment extensions if their customers do not pay for trades placed in their accounts. (Tr. 467-68, 526, 528-29). When Militano and Sonneberg were hired, Moore & Schley took measures to guard against the risks associated with cold calling including appointing the then in-house counsel to supervise them. (Tr. 468-556). Besides ICP, Moore & Schley had problems with the stock of another company, Chase Medical (supra, p. 2).
Militano, Sonneberg, Cranley and Core were formally charged with manipulating the shares of Chase Medical ("Chase") an American Stock Exchange ("AMEX") listed security. None of them contested the SEC's civil allegations and Militano and Sonneberg pleaded guilty in Federal Court to securities laws violations involving Chase. The Court concludes that the Chase manipulation was key to the demise of Moore & Schley (Tr. 180). Between $ 9 to $ 10 million was lost on Chase. Chase stock was manipulated by Militano, Sonneberg, Cranley and Core. There is no proof that Sayegh had anything to do with the Chase manipulation. (Tr. 744-745). In connection with the Chase scheme, Sonneberg and Militano consented to the entry of final judgments of permanent injunction as did Core and Cranley. Both Militano and Sonneberg pleaded guilty to criminal violations of law in connection with the Chase/ICP scheme. Militano also pleaded guilty to obstruction of justice charges and both he and Sonneberg agreed to cooperate with the Government and to be truthful in the hope of receiving a lighter sentence. (Tr. 661-663, 678, 697, 723, 776, 777).
Moore & Schley was required by Rule 15c3-1 [17 C.F.R. § 240.15c3-1], to maintain a level of net capital above an applicable minimum, (Stipulated Facts P 94, p. 23; Tr. 388) to ensure that sufficient liquid assets were available to meet obligations to customers and other dealers. (Tr. 436-37). When a broker-dealer's net capital falls below the applicable minimum, the firm is required to cease operating its business. (Tr. 388). Net capital is defined in Rule 15c3-1 as net worth after certain prescribed adjustments. Among the adjustments to net worth required to compute net capital, a broker-dealer must deduct a percentage, known as a "haircut," from the market value of securities held as assets in its proprietary account. (Stipulated Facts P 95; p. 23). A haircut is a net capital charge assessed on a firm's proprietary position due to market risk. As a firm's position in a security increases, the haircut will increase. (Tr. 403; 423). If the equity in a customer margin account becomes deficient, the amount of the deficit is charged against the firm's net capital. (Stipulated Facts P 23, p. 13). A broker-dealer must also deduct from its net worth the value of all assets, including securities in its proprietary account, which are not readily convertible into cash. (Stipulated Facts P 96, p. 24).
Moore & Schley filed "FOCUS" reports with the NYSE on a monthly basis. (Stipulated Facts PP 24-25, 98 pp. 13, 24; Tr. 385). In preparing the monthly FOCUS report, Moore & Schley was required to calculate its net capital position. (Stipulated Facts P 26, p. 13). During 1987 and 1988, Moore & Schley experienced net capital problems, often maintaining a level of net capital that was very close to the minimum amount required to stay in business. (Tr. 386). The firm's net capital was discussed at Monday night partnership meetings which Sayegh attended in 1987 and 1988. FOCUS reports and other data relating to the firm's financial condition and performance were distributed and discussed at these meetings. (Tr. 83-84, 163-64).
Sayegh knew of Moore & Schley's weak financial condition, and he made a $ 100,000 capital contribution to Moore & Schley in 1987 to eliminate the deficit in his capital account arising from significant losses experienced by the firm. (Stipulated Facts P 20, p. 13).
From October 1987 through August 1988, Moore & Schley maintained a large position in ICP ADRs in its proprietary account. This consumed a significant portion of the firm's capital. (Stipulated Facts P 99(a), p. 24; Tr. 416-17); Sayegh 3/24/92 Deposition, PX 563 at p. 97). At month's end, between August 1987 and December 1988, Moore & Schley customer accounts held between 457,038 and 685,863 ICP ADRs. (PX 322). From October 1987 through the end of 1988, the size of the ICP position at Moore & Schley was a continuing problem for the firm. The partners, including Sayegh, attempted to broaden the interest in ICP in an effort to reduce the firm's position in the ICP ADRs. (Tr. 124, 161, 196-98; Plaintiff Exhibit 563 at pp. 92-94, 114-115; Tr. 1068; Stipulated Facts PP 15, 103, pp. 11, 25). These efforts were not successful. (Tr. 100).
From August 1987 to December 1988, ICP was thinly traded. There was little interest in ICP outside Moore & Schley. (Deposition of Cuyler Kline ("Kline Deposition"), PX 533 at pp. 21-27; Tr. 223; 613; 35; 1138-40). Moore & Schley was the only active market maker in ICP (Tr. 512-13) once Stephens dropped out.
Moore & Schley overstated its net capital in its FOCUS reports when it failed to deduct from its net capital that portion of its ICP position that was not readily convertible into cash. (Tr. 418, 428). Between January and April 1988, inclusive, Moore & Schley's net capital position, adjusted for that portion of the firm's ICP position that was not readily convertible into cash, reflected net capital deficits ranging from approximately $ 500,000 to $ 780,000. (Tr. 424-28; PX 330-333). During that period, because of its ongoing net capital problems, Moore & Schley requested, and Securities Settlement Corp. ("SSC") agreed to defer Moore & Schley's ticket charges, of approximately $ 10 to $ 15 per stock transaction cleared by SSC. (Tr. 398, 470; PX 527, p. 52). SSC was a broker-dealer registered with the SEC pursuant to Section 15(b) of the Exchange Act which cleared and settled securities ...