Sayegh's bearding arrangements with Hill Thompson and Baird Patrick constituted an improper attempt to influence artificially the price of ICP. (Tr. 1223-24, 1228-30).
In August 1988, Sayegh and Cranley asked Militano and Sonneberg to warehouse 210,000 ICP shares in 056 Group customer accounts. This transaction was to be a temporary measure while Moore & Schley sought legitimate buyers for ICP. (Tr. 130-31, 318-19, 684-85). Sayegh knew that Militano's customers were unlikely to pay for these ICP shares. (Tr. 498-99).
Moore & Schley sold these ADRs from its proprietary accounts at $ 11 per ADR to 056 Group customers without crediting any sales commissions to the 056 Group. (Stipulated Facts P 69, p. 19; PX 318). Militano and Sonneberg received no commission on these transactions in an effort to offset losses sustained from the February cancel/rebill and the purchase of the Brick ADRs at a discount. (Tr. 308-09, 314, 685, 687).
By engaging in the activities described above and participating with Cranley, Core, Militano and Sonneberg, Sayegh maintained the price of ICP ADRs at artificially high levels from the fall of 1987 through early 1989.
Conclusions of Law
The facts lead to the inescapable conclusion that Sayegh violated § 10(b) of the Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5). Section 10(b) and Rule 10b-5 prohibit fraudulent conduct "by the use of any means or instrumentality of interstate commerce or of the mails," and prohibits, in connection with the purchase or sale of any security, the use of "any manipulative or deceptive device or contrivance." Sayegh's activities used "the means" and "instrumentalit(ies) of interstate commerce," and "of the mails."
Section 9(a)(2) of the Exchange Act [ 15 U.S.C. § 78i(a)] makes it unlawful to engage in manipulative activities with respect to securities registered on a national securities exchange. When manipulative conduct is engaged in with respect to an OTC security, that conduct violates § 10(b) of the Exchange Act and Rule 10b-5 thereunder. SEC v. Resch-Cassin & Co., 362 F. Supp. 964, 975 (S.D.N.Y. 1973). The S.E.C. has proven by a preponderance of the evidence that Sayegh by using the means or instrumentalities of interstate commerce and the mails, in connection with the purchase or sale of a security traded in the OTC market, with scienter, effected a series of transactions that created actual or apparent active trading in the security, or raised or depressed the price of the security, and that these transactions operated as a fraud or deception on the market for the security at issue, the ICP ADRs. Aaron v. SEC, 446 U.S. 680, 695-96, 64 L. Ed. 2d 611, 100 S. Ct. 1945 (1980); SEC v. C.M. Joiner Leasing Corporation, 320 U.S. 344, 355, 88 L. Ed. 88, 64 S. Ct. 120 (1943); Crane v. Westinghouse Air Brake Co., 419 F.2d 787, 795-96 (2d Cir. 1969), cert. denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41 (1970); United States v. Charnay, 537 F.2d 341, 350 (9th Cir.), cert. denied, 429 U.S. 1000 (1976); SEC v. Graystone Nash Inc., 820 F. Supp. 863, 870-72 (D.N.J. 1993), rev'd on other grounds, 25 F.3d 187 (3d Cir. 1994); Resch-Cassin, 362 F. Supp. at 975. In re Michael Batterman, 46 S.E.C. 304 (1976) sets forth the elements of a § 9(a) violation which have been met here.
Sayegh set Moore & Schley's bids and offers for ICP, executed ICP ADR purchase and sale transactions for both Moore & Schley firm and customer accounts and set Hill Thompson's and Baird Patrick's bids for ICP, as well as directed their purchases of ICP on Moore & Schley's behalf. At the relevant times, ICP ADRs were traded in the OTC market through the NASD's NASDAQ system. Thus, Sayegh's conduct occurred in connection with the purchase or sale of ICP ADRs.
Scienter involves an "intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976); Aaron, 446 U.S. at 695-96. Scienter may be established by proving conduct that was knowing, intentional, or reckless, as opposed to merely negligent. Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994); SEC v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992). The evidence is most persuasive that Sayegh knowingly or recklessly participated in the manipulation of ICP ADRs. He was aware that a decline in the price of ICP would have had a substantial negative effect on Moore & Schley's net capital position. He knowingly took affirmative steps to maintain the price of ICP. Sayegh posted high bids for, and aggressively purchased, ICP ADRs on behalf of Moore & Schley from October 1987 through December 1988. This was despite knowledge that these bids and purchases were not based on any true firm or customer demand. Sayegh executed cross trades to avoid liquidations of ICP resulting from Reg T violations. Sayegh requested Militano and Sonneberg to place ICP in their customers' accounts, knowing that the customers were not going to pay for the trades. He used other market makers to post bids and make purchases on behalf of Moore & Schley to create the appearance in the open market that there was a demand for ICP. Sayegh discouraged ICP sales into the open market by Moore & Schley brokers and by Brick. Sayegh was fully aware of the consequences of his actions. He acted with scienter.
There is no question but that Sayegh's conduct between September 1987 and the beginning of 1989 involved a series of transactions in ICP ADRs which included the following:
(1) placing Moore & Schley's bids and offers for ICP;
(2) buying and selling ICP ADRs for both Moore & Schley's firm and customer accounts;