sheet designating the allocation of Liberty stock to Moran Asset clients. This document, which was reviewed by Moran Sr., clearly indicated that several accounts would not receive any Liberty stock. Even assuming that at this point Moran Sr. did not know the reason why those accounts were not receiving Liberty stock, the fact that he made no inquiry as to why there was to be no allocation is further evidence of negligence. The allocation sheet for Liberty Stocks makes it plain that Moran Asset had "under bought" Liberty stocks (Exh. 52).
Finally, Moran Sr. offers no plausible explanation as to why he did not reallocate shares from the personal and family account and provide those shares to his clients, rather than purchase additional shares of stocks for his clients accounts at a higher price. Clients for whom Moran Asset purchased the additional 34,000 shares of Liberty stock on October 12 paid an average price of $ 26.875, which was 0.619 more per share than if Moran Asset had allocated to them shares that had been purchased on October 11 (Exh. 52). Other than calling this action "one isolated incident," Moran Sr. offers no explanation as to why one incident can be considered one incident of negligence
See Moran Sr. Post-Trial Brief p. 38. Indeed, all of the evidence indicates that this one incident was negligence. Thus, the court finds that by allocating Liberty shares to Moran Sr.'s personal and family accounts under these circumstances, Moran Sr. and Moran Asset negligently placed their own interests ahead of their clients, thereby breaching the fiduciary duty owed to the clients in violation of Section 206(2) of the Advisers act.
The final two claims relate to omissions on Moran Asset's Form ADV and Moran Brokerage's Form BD. The SEC alleges that Moran Asset and Moran Sr. violated Section 207 of the Advisers Act
and that Moran Asset, aided and abetted by Moran Sr., violated Section 204 of the Advisers Act and Rule 204(b)(1)(17 C.F.R. § 275.204(b)(1)) promulgated thereunder, by failing to timely amend its Form ADV to reflect the fact that Moran Sr.'s wife and two sons were made directors of Moran Asset. Similarly, the SEC maintains that Moran Brokerage and Moran Sr. violated Section 15b (15 U.S.C. § 78ob)
of the Exchange Act and Rule 15b3-1 (17 C.F.R. § 240.15b3-1) thereunder by failing to amend Moran Brokerage Form BD to disclose that Moran Jr. and his brother had been made directors. The facts surrounding these charges are not really in dispute. Defendants admit that on both the Form ADV and the Form BD neither Moran Sr.'s wife Joan, and two sons Clayton and Fred Jr. were listed as directors when in fact all three had been established as directors for Moran Asset. Also, despite the fact that they had been elected, Clayton and Fred Jr. were never listed as directors of Moran Brokerage. It is further uncontested that although the Form ADV was amended in March 1994 to include Joan Moran as a director, Moran Jr. and Clayton were not added until two months later.
The SEC maintains that these omissions were made willfully and constituted material information, and therefore the omissions are violations of law. In addition to the liability of the corporations, the SEC argues that Moran Sr. is a control person of each of these corporations and therefore also liable for their omissions. Further, the SEC argues that since it was Moran Sr. who signed off on the forms, he is subject to aiding and abetting liability. Defendants respond that the omissions do not constitute a violation of the securities law because the omissions were neither material nor willful. For the following reasons the court finds that Moran Sr.'s, Moran Asset's and Moran Brokerage's omissions constituted violations of the applicable securities law.
Since it is uncontested that the forms were improperly filed with the Commission in that the directors were not disclosed, there are only two issues which must be addressed. The court's initial determination is whether the omitted information was material. If so, the court must then decide if the evidence shows that Moran Sr. acted willfully in withholding the names of the directors. In the context of the securities laws, for a fact to be material "there must be a substantial likelihood that the disclosure of the omitted fact, would have been viewed by the reasonable investor as having significantly altered the 'total' mix of information available." TSC Indus v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976); Nelson v. Paramount Communications, Inc., 872 F. Supp. 1242, 1245 (S.D.N.Y. 1994). The Supreme Court has noted that the materiality of information will greatly dependant on the facts of the particular case. Basic, Inc. v. Levinson, 485 U.S. 224, 239-40, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988). Here, the evidence shows that the identities of Moran Asset's and Moran Brokerage's directors were material.
Moran Sr. argues that even "assuming Moran Asset and Moran Brokerage's clients reviewed the Form ADV and Form BD, the total mix of facts available to them was not substantially altered by the technical failure to list three individuals on a multi-page government registration form, none of whom played any role in the management or operations of the business." See, Moran Sr.'s Post-Trial Brief at 43. The court finds this characterization to understate the importance of the information. The "three individuals" were directors of the corporations. There can be no question that the identity of the directors will in many cases be material since their disclosure reveals such significant issues as; who has corporate control and influence on the management of the firm, whether there is director independence, and whether the directors bring any potential conflict of interest to the firm. Considering that Moran Jr. was affiliated with another regulated entity, it is likely that potential investors would consider that fact. However, because the information was not disclosed, any potential investor was unable to do so. Significantly, even Moran Sr. testified that he believed disclosure that his sons were directors would have added to his firms credibility (R. 1561). In making this statement, Moran Sr. virtually admits that the identities of a company's directors constitutes important information that will be used by a potential client when deciding whether become a client of the company. That Moran Sr. believes potential investors would take into account a director's background when assessing Moran Asset demonstrates that the information is material.
Moreover, the court disagrees with Moran Sr.'s over-simplified description of the Forms ADV and BD as merely "a multi-paged government registration form." In point of fact, the SEC has stated that Form ADV and amendments to it are:
a basic and vital part in our administration of the Act, and it is essential in the public interest that the information required by the application form be supplied completely and accurately. The application form obligates the applicant to verify that all statements contained in it are true, correct and complete to the best knowledge of the person executing the form.
In the Matter of Justin Federman Stone, 41 S.E.C. 717, 723 (1963). The court agrees with this view of the Forms as it certainly furthers the interest of public disclosure, informed decision making, and allows the SEC to monitor securities transactions in order to fulfill the legislative mandate behind the establishment of the securities acts at issue.
Of particular importance are the specific facts about Moran Asset and Brokerage that illustrate the importance of the information contained in the Forms ADV and Form BD. Moran Sr. described his company's use of the Forms ADV. He testified:
What we did with our ADV is we gave it to clients before they became clients. Frankly, I don't even like the term promotional material because we never promoted our business. We never went out and aggressively solicited clients. The bulk of our clients came to us because of my reputation, and we always gave the clients the ADV before they have became (sic) clients. We generally gave them the ADV and our brochure.
(R. 1596). In addition, Moran Sr.'s brochure would refer prospective clients to his Form ADV for a more complete explanation of his firm (R. 1596-97). In its literature, Moran Asset advertised itself as an employee-owned business, despite the fact that his sons, who were not employees were directors (Exhs. 87-88).
Therefore, considering the important nature of the identities of corporate directors, Moran Sr.'s testimony that potential clients would have been favorably influenced if they knew the background of the directors, Moran Asset's and Brokerage's use of the Forms as promotional material, Moran Asset's and Brokerage's invitation for potential clients to review the forms, and the relevance of the Forms relating to whether Moran Asset was an "employee owned" business, the court concludes that the omitted information was material within the meaning of the statutes.
Next, the court turns to the question of whether the omissions were "willful" as set forth in the Advisor and Exchange Acts. Moran argues that "the SEC points to no evidence to support a finding that the omissions were intentional" (Moran Sr. Reply brief p. 27)(emphasis in the original). To have acted willfully requires "intentionally committing the act which constitutes the violation. There is no requirement that the actor also be aware that he is violating one of the Rules or Acts." Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also, In the Matter of Frank Humpherys, 48 S.E.C. 161, 164 (1985). Thus, the actors merely had to intend to engage in the action alleged regardless of his knowledge that the act constituted a violation of the securities law.
In the case of the Forms ADV, investment advisers are required to disclose information about their corporate directors. Moran Asset's Form ADV became inaccurate on December 1, 1991, when Moran Jr., Clayton Moran, and Joan Moran became directors. From that date until May 1994, after the SEC during the course of the investigation uncovered the omissions, Moran Asset failed to disclose that Moran Sr.'s sons were directors of the company and it was only March 1994 when it was disclosed that Moran Sr.'s wife was disclosed. With respect to the Form BD, Rule 15b3-1 was adopted to ensure that a registered broker dealer promptly files an amendment to its application. Moran Jr. and Clayton Moran became directors of Moran Brokerage in December 1991 and no correcting amendment was filed until nearly two and one half years later. By any standard, Moran Sr. and Moran Brokerage cannot be considered to have promptly amended the form BD.
The proof in this case reveals that Moran Sr. acted willfully in withholding this information. Initially there can be no doubt that Moran Sr. had an obligation to file a current, accurate, and complete Form ADV and Form BD, which included a duty to make reasonable inquiry in order to ensure that the information correct. Here, even accepting Moran Sr.'s claim of oversight, he nonetheless swore that the information contained in the forms was accurate and complete when he had no idea whether this was true. By signing the form without even a cursory check of its validity, Moran Sr. actions can be determined to be willful. He certainly intended to sign the forms and thus give the underlying assurances.
Beyond this however, the evidence at trial leads to the conclusion that Moran Sr. acted with knowledge and intended to conceal that his sons were directors. Moran Sr. did not even tell his sons that he made them directors. Certainly this is an indication that he was acting surreptitiously. In addition, the entire testimony regarding Moran Sr. and his demeanor before the court demonstrates that he is a person who is very much in control of his business. Moran Sr. testified that Squeo, who had filled out the Form ADVs made several errors and as a result, Moran Sr. emphasized to Squeo that the errors in the forms must not be repeated. The court finds it entirely unbelievable that Moran Sr. would not have looked over the forms to assure the accuracy of the forms. Incredibly, Moran Sr. testified that he never learned from Squeo why the names of the directors were not included in the forms (R. 1235). Moreover, the Form ADV was corrected with respect to Moran Sr.'s wife, but not to his sons. The fact that the sons were still omitted even though the form was supposedly corrected, leads to the unmistakable conclusion that the omissions were intentional. Even more troubling was that Moran Jr.'s signature was forged
on documents that Moran Sr. signed as a director. The court simply cannot accept that Moran Sr. was unaware of the fact that his son did not actually sign the corporate documents. Although Moran Sr. testified that he had no idea how the forgeries came to appear on the cooperate resolutions, the court finds it mystifying that Moran Sr. could not explain why his son, who Moran Sr. had appointed as a director, did not actually sign the resolutions. The only reasonable inference from this evidence is that Moran Sr. intended to omit reference to Moran Jr. and Clayton as directors.
Although he testified that he believed it would have been beneficial to include his sons as directors on the forms, the court finds this argument to be unavailing. If it would have been as beneficial as claimed by Moran Sr., considering the input Moran Sr. has in the business, he would have made it his business to ensure that his sons were listed on the forms. In addition to not making certain that his sons were included, Moran Sr. also signed other filings claiming that his sons were not directors. In a Schedule 13D filed on December 11, 1992, over a year after he had made his sons directors, Moran Sr. stated "Mr. Moran is the President, sole director and sole stockholder of both Moran Asset Management and Moran & Associates" (Exh. 31 at 4). Finally, in Moran Asset promotional material, the company was described as employee owned, however, if Moran Jr. and his brother were listed as directors for all potential clients to see, Moran Asset could not have made such a claim. In light of this overwhelming evidence, the court concludes that Moran Sr. acted "willfully" within the meaning of the statutes.
Moran Sr., a control person of Moran Asset and Moran Brokerage, signed the amendments to the form ADV on behalf of Moran Asset and the Form BD on behalf of Moran Brokerage. See, Index Fund, Inc. v. Hagopian, 609 F. Supp. 499, 506 (S.D.N.Y. 1985)(to be a control person the defendant must have "the power to exercise control over the primary violator, based on a special relationship such as agency or stock ownership."). Because Moran Asset failed to promptly file amendments to the Form ADV to correct the listing of its directors and in the amendments that were filed, Moran Asset and Moran Sr. willfully omitted to state material facts that were required, it violated Sections 204 and 207 of the Advisors Act and Rule 204-1(b)(1) thereunder. Similarly, because of the failure to promptly file amendments to its Form BD when its application became inaccurate, Moran Brokerage and Moran Sr., as a control person, violated Section 15(b) of the Exchange Act and Rule 15b3-1 thereunder.
The court finds that:
(1) Frederick W. Moran, Frederick A. Moran, Moran Asset Management, and Moran & Associates Securities Brokerage did not violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder [ 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5] and therefore the court dismisses that claim with prejudice;
(2) Frederick A. Moran and Moran Asset Management did not violate Section 206(1) of the Advisers Act [ 15 U.S.C. § 80b-6(1)] and therefore the court dismisses that claim with prejudice;
(3) Frederick A. Moran and Moran Asset Management did violate Section 206(2) of the Advisers Act [ 15 U.S.C. § 80b-6(2)] and therefore finds for the Securities and Exchange Commission on that claim;
(4) Frederick A. Moran and Moran Asset Management did violate Section 204 of the Advisers Act and Rule 204-1(b)(1) thereunder [ 15 U.S.C. § 80b-4; 17 C.F.R. § 275.204-1(b)(1)] and therefore finds for the Securities and Exchange Commission on that claim; and
(5) Frederick A Moran and Moran & Associates Securities Brokerage did violate Section 15(b) of the Exchange Act and Rule 15b3-1 thereunder [ 15 U.S.C. § 78o(b); 17 C.F.R. § 240.15b3-1] and therefore finds for the Securities and Exchange Commission on that claim.
Pursuant to the court's October 30, 1995 order, the plaintiff and the remaining defendants are to contact the court within thirty (30) days of this decision to establish a date for a hearing on the penalty portion of this trial.
IT IS SO ORDERED
Dated: April 2, 1996
New York, New York
Bernard Newman, U.S.D.J., by designation