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SECURITIES & EXCH. COMMISION v. MORAN

November 1, 1996

SECURITIES AND EXCHANGE COMMISION, Plaintiff, against FREDRICK AUGUSTUS MORAN, FREDRICK WINSTON MORAN, MORAN ASSET MANAGEMENT INC., and MORAN & ASSOCIATES, INC., SECURITIES BROKERAGE, Defendants.


The opinion of the court was delivered by: NEWMAN

BERNARD NEWMAN, Senior Judge : *fn1"

This matter represents the penalty phase of the civil securities fraud enforcement action brought against Frederick Augustus Moran ("Moran Sr."), Frederick Winston Moran ("Moran Jr."), Moran Asset Management Inc. ("Moran Asset"), and Moran & Associates, Inc., Securities Brokerage ("Moran Brokerage"). In a previous decision, the court dismissed the insider trading claims brought against each of the defendants, but found Moran Sr., Moran Asset, and Moran Brokerage liable for other violations of federal securities laws. SEC v. Moran, 922 F. Supp. 867, 900-02 (S.D.N.Y. 1996)(" Moran I "). Moran Sr. and Moran Asset were found liable for violating §§ 206(2), 204, and 207 of the Investment Advisors Act of 1940 in addition to Rule 204-1(b)(1). Moran Sr. and Moran Brokerage were found liable for violating § 15(b) of the Securities and Exchange Act of 1934 and Rule 15b3-1 thereunder.

 Pursuant to the court's order of October 30, 1995 and with the consent of all parties, the court bifurcated the liability phase of the case from the penalty phase. Accordingly, the sole issue presented to the court at this juncture is fashioning an appropriate penalty for the violations. Additional evidence was presented to the court on July 18, 1996. In conformity with F.R.C.P. Rule 52(a), the following constitutes the court's findings of fact and conclusions of law.

 THE RECORD2

 Defendants presented two witnesses: defendant Frederick Augustus Moran, president of Moran Asset and Moran Brokerage and Richard G. Brodrick, partner of Kelley Drye & Warren who practices in the general area of corporate law with a sub-specialty of representing brokerage and investment advisor firms. Plaintiff offered one witness, Daniel Wong, a supervisory securities compliance examiner for the Securities and Exchange Commission. *fn3"

 CONTENTION OF THE PARTIES

 Plaintiff asks the court to enjoin each defendant from any further violation of the specific laws under which they have been found liable. Further, plaintiff requests that the court order Moran Sr. to disgorge $ 9551 plus prejudgment interest which it claims constitutes the amount of money lost by defendants' investors as a result of the violation of section 206(2) of the Adviser's Act. Finally, plaintiff seeks the imposition of civil penalties, pursuant to sections 21(d)(3) and 209(3) of the Exchange and Advisers Acts respectively, in the amount of $ 175,000. Specifically, plaintiff argues that Moran Sr.'s violation of six separate statutory and rule violations warrants the imposition of penalties totaling $ 100,000 against him personally. In addition, plaintiff contends that Moran Asset and Moran Brokerage should be assessed penalties in the amounts of $ 50,000 and $ 25,000 respectively for their violations.

 Defendants respond that the plaintiff's demand constitutes an unfair burden placed upon them. While Moran Sr. concedes that he should reimburse his clients who lost money as a result of his illegal acts, defendants maintain that reimbursement alone is an adequate remedy. Defendants submit that because their acts were not perpetrated with any malevolent intent, that they have already suffered both mentally and economically, and that they pose no further threat to the investment community as a whole, and consequently the court should not award any civil penalties or injunctive relief.

 ADDITIONAL FACTUAL FINDINGS4

 Moran Sr. is the president and principal portfolio manager of Moran Asset as well as the president and director of research for Moran Brokerage. Moran Sr. has never been convicted of a crime or previously found in violation of federal securities laws. Prior to this action, neither Moran Sr. nor any of his firms had been named as defendants where civil fraud was alleged. The court makes the following findings regarding Moran Sr.'s claims.

 Moran Sr.'s Losses

 The court finds that Moran Sr. and his firms have unquestionably suffered large financial losses. In making this determination, the court finds Moran Sr.'s testimony regarding the amount of losses and effect on his two businesses to be credible. Moran Sr. testified that he has suffered great losses as a result of what he termed as the SEC's "vendetta" against him (R. 113). Specifically, he recounted to the court that in October, 1993 Moran Asset and Moran Brokerage had been earning $ 300 million and $ 2.5 million respectively. Today, Moran Sr. estimated the firms business as $ 5 million and $ 350,000. Further, Moran Sr. states that underwriting decreased after the investigation.

 In addition to major financial losses, Moran Sr. testified that he believed that he would likely be disqualified from the National Association of Securities Dealers ("NASD"). Although Moran Sr. conceded on cross-examination that the disqualification is potentially appealable, because of his financial situation as a result of this case, Moran Sr. claimed that he would be unable to pursue an appeal *fn5" Moran Sr. asserted that his business was further damaged because he and his employees were so distracted during the course of the SEC investigation that they were not able to meet the needs of his remaining clients. With respect to his employees, Moran Sr. represented that his total number of employees has been reduced from twenty-six in October 1993 to the current number of four. Finally, Moran Sr. indicated that his intention was to close Moran Brokerage because of the losses sustained in the business *fn6" In short, the court accepts Moran Sr.'s representations that his businesses have suffered a great deal as a result of this action.

 The SEC's Investigation

 Moran Sr. alleges that the SEC somehow acted improperly by virtue of the way this case was litigated. Specifically, Moran Sr. argues that the SEC harassed his staff and family, refused to "respond rationally" (R. 40), and pursued a "vendetta" against him The court rejects Moran Sr.'s analysis. The evidence reveals clearly and unequivocally that the SEC acted well within legal and appropriate bounds.

 In support of Moran Sr.'s claim, Richard G. Brodrick, an attorney at the firm retained by Moran Sr., testified that the SEC acted in an unusual manner by not disclosing audit reports and launching a second inquiry after the an insider trading investigation had begun. While the court does not doubt the sincerity, credibility, and experience of Brodrick, it finds his testimony to shed little light on this matter. Initially, Brodrick is hardly a disinterested witness. In addition to being a partner at the firm representing Moran Sr., he was an officer of Moran Asset. More problematic however, is Brodrick's statement that he "didn't really know a bunch about what had happened at Moran Asset Management" (R.65). Considering his lack of specific knowledge of the current situation, it is difficult to accept Brodrick's assertion that the SEC acted in an unusual manner.

 The court further disagrees with Moran Sr.'s assessment that the SEC acted inappropriately in conducting its investigation and pursuing its claims. Moran Sr., himself, concedes that he believed "that the SEC's investigation was the proper thing to do. The coincidence of events that occurred with my son and I in our situation, as Bob Horowitz said, cried out for an investigation, and it was very appropriate that they did that" (R. 117). Therefore, by all accounts, the SEC properly initiated its investigation. Moran Sr. complains that the SEC then went too far. Based on the record before the court, there is no evidence to support this claim.

 Without a doubt, an SEC investigation is generally a long and often arduous process; it is nonetheless necessary when suspicions of wrongdoing abound. Moran Sr. maintains that the SEC disrupted his business. In particular, he states:

 
We totally lost our concentration. We couldn't function. The amount of time it took preparing and providing endless thousands, literally thousands of documents, everybody wondering when they were going to come walking into our office again and arrest us or do who knows what. It was just a nightmare for everybody and people were just resigning left and right, just trying to get away from it.

 (R. 26). As previously noted, the investigation surely had a negative impact on Moran Sr.'s business, but such an effect does not render the investigation unjustified. Naturally, the SEC deposed Moran Sr.'s employees and requested numerous documents. The court is puzzled as to what Moran Sr. believes the SEC should have been doing. Similarly, employees of Bell Atlantic and Salomon Brothers would necessarily be deposed so the SEC could discover what information was non-public and what guidelines existed regarding disclosure. Considering the effect and outcome of the investigations, the court understands Moran Sr.'s feelings towards the SEC, but plainly the evidence does not demonstrate any impropriety.

 Moran Sr. also complains that the SEC deposed his family members. Surely, the involvement of any person's family into an investigation such as the one undertaken is painful and unpleasant. However, simply because something is distasteful does not render it unnecessary. In this case, one of Moran Sr.'s sons was believed to be involved in illegal activity. Further, Moran Sr.'s two eldest sons and wife were the named directors of his firms, a fact that was very relevant to the investigation. Again, while the involvement of outside individuals in any investigation of this nature is sure to create heartache, the court sees no evidence to support Moran Sr.'s claim that the SEC engaged in any improper activity. Moran Sr.'s family potentially had information which might have shed light upon the matters before the SEC.

 Moran Sr.'s final reason for asking the court for leniency is that he believes that the SEC would not listen to reason and is pursuing a "vendetta" against him. The court finds Moran Sr.'s claims to be completely unsupported by the facts. Moran Sr., on several occasions during the course of the trial, stated that he believed the SEC "was trying to destroy me, my business and my son and his business activities" (R. 39). With ...


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