==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 80 ADMINISTRATIVE PROCEEDING FILE NO. 3-8573 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION : In the Matter of : : FERDINAND RUSSO, : INITIAL DECISION RUSSO SECURITIES, INC., : DECEMBER 11, 1995 LAWRENCE I. MASCERA, and : MASCERA & COMPANY, INC. : : APPEARANCES: Sarah A. Smith for the Division of Enforcement, Securities and Exchange Commission Simon S. Kogan for Respondents Ferdinand Russo and Russo Securities, Inc. BEFORE: Glenn Robert Lawrence, Administrative Law Judge This public proceeding was instituted by an order (Order) of the Securities and Exchange Commission (Commission) dated December 12, 1994, pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 (Exchange Act) to determine whether allegations of misconduct against the respondents are true and what if, any, remedial action would be appropriate in the public interest. The Division of Enforcement charged that the conduct of Respondents Ferdinand Russo and Russo Securities, Inc.,-[1]- in furnishing Cooper Companies, Inc. with certain opinion letters regarding the interest rate reset provision in the Cooper Indenture aided and abetted Cooper's violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Division also charged that the same conduct was a cause of Cooper's violation due to acts or omissions respondents knew or should have known would contribute to the violation. See Section 21C of the Exchange Act. The findings and conclusions herein are based upon the preponderance of the evidence as determined from the record and upon my observation of the various witnesses as well as my review of the parties submissions. Findings of Fact and Conclusions of Law The Order provides that Russo Securities, Inc. (Russo Securities) is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act since July 1979. ---------FOOTNOTES---------- -[1]-The Commission entered an Order Making Findings and Imposing Remedial Sanctions on Lawrence I. Mascera and Mascera & Company, Inc. on July 17, 1995 (59 SEC Docket 2483). ==========================================START OF PAGE 2====== Russo Securities maintains its only office on Staten Island, New York, and has at all relevant times been a member of the New York Stock Exchange (NYSE) and the National Association of Security Dealers (NASD). Russo Securities' main source of income was through the execution of institutional and retail transactions in equity securities. Ferdinand Russo (Fred Russo) and his two brothers (Patrick and Richard Russo) owned 95% of the stock of Russo Securities. The Cooper Companies, Inc. (Cooper) is a Delaware corporation headquartered in New York City. Cooper manufactures contact lens products as well as a range of health care products. Its common stock and 10 5/8% Convertible Subordinated Reset Debentures due 2005 (the "debentures" or "bonds") are traded on the NYSE and the Pacific Stock Exchange. The debentures are registered with the Commission pursuant to Section 12(b) of the Exchange Act. The debentures were issued on March 1, 1985. The indenture relating to the debentures is a public document. It required Cooper to reset the interest rate on June 15, 1991, if the market value of the debentures was not at least equal to 75% of their principal amount.-[2]- The Division alleges that in early 1991, Cooper sought ways to avoid the reset obligation. Gary Alan Singer, co-chairman of ---------FOOTNOTES---------- -[2]-The reset provision of the indenture provides that "[t]he Company will reset the interest rate on the securities on June 15, 1991 (the "Reset Date") to a rate per annum, as selected by two nationally recognized investment banking firms, ... that the Debentures should bear in order to have a market value equal to 75% of their principal amount on the Reset Date." Respondent Exhibit (Res. Ex.) 501. ==========================================START OF PAGE 3====== the Board of Directors of Cooper, contacted two investment banking firms for the opinions required by the reset provision. Both of these firms indicated that they charged approximately $100,000 for such an opinion. Singer thereafter sought opinions from Russo Securities and Mascera & Company, another broker. The Division contends that these opinions, as issued, were shams. With respect to the Russo Securities' opinion letter, the Division claims that it contained numerous false and misleading statements and material omissions, including that it: (a) falsely claimed that a study of factors influencing the market for the convertible debt securities had been conducted prior to its opinion; (b) failed to disclose that Cooper loaned Russo Securities $400,000; (c) failed to show that Russo Securities investigated whether Cooper was purchasing its own bonds; and (d) was printed on Russo Securities stationary but did not indicate that the text was drafted by an employee of Cooper. The parties stipulated that on June 13 and 14, 1991, the last two trading days before the reset date, Cooper repurchased a block of the debentures in the over the counter (OTC) market and also brought 98% of all debentures traded on the NYSE on those two days. Specifically, on June 13, 1993, Cooper, at the direction of Singer, purchased 3,386 debentures in the OTC market at a price of 75. At the same time, Singer placed with Cooper's broker a good-until- cancelled order to purchase an unlimited number of the debentures at prices up to 75 1/8 net to Cooper. Pursuant to this order the firm purchased 100 debentures on the ==========================================START OF PAGE 4====== NYSE on June 13, 1991, at prices between 74 1/2 and 74 7/8. This purchase accounted for all but eighteen of the debentures traded on the NYSE that day. On June 14, 1991, Cooper purchased 833 of 834 debentures traded on the NYSE. The Division alleges that the purpose of Cooper's purchases was to cause the market value of the debentures on the reset date to appear to be 75% of their principal amount. The debentures closed for trading on the NYSE on June 13, 1991, at 74 7/8, up from the prior day's closing price of 74 1/2. Cooper was the only purchaser to pay 75 for the debentures on June 14, 1991. On June 14, 1991, the debentures closed for trading at 74 7/8. On June 21, 1991, Cooper advised the NYSE there would be no reset and the NYSE advised its members that the interest rate for the period June 15, 1991, through maturity, March 1, 2005, on the debentures would remain unchanged at the rate of 10 5/8%. On June 27, 1991, Cooper advised the trustee along the same lines, predicated on the fact that the market value of the debentures on June 15, 1991, was equal to 75% of their principle amount. On July 8, 1991, the trustee advised the debenture holders to the same effect. The Division contends that the notices that Cooper caused the trustee and the NYSE to issue were materially false and misleading in that: (1) Cooper had not complied with the terms of the debenture in that it had not secured the opinion of two "nationally recognized investment banking firms" and (2) Cooper relied on the trading price of the debentures on the two trading ==========================================START OF PAGE 5====== days immediately preceding the reset date, when Cooper purchased 98% of all the debentures traded on the NYSE. The Division further alleges that Cooper, by its fraudulent acts, avoided paying investment banking fees of $200,000 as well as additional debenture interest expenses of $250,000-[3]- that would have resulted from a reset of the interest rate. The transaction management group of Bankers Trust is part of the corporate trust and agency department. This group essentially deals with bonds. Linda Rakolta testified in her capacity as vice president of this group. She has been employed by the department for ten years. In June 1991, she was an assistant vice president administering the Cooper bond account.-[4]- Bankers Trust was acting as a trustee and reset agent for the Cooper debentures. Hearing Transcript (Tr.) 17-20. As reset agent, she discussed the fact that a reset of the rate was required with Marisa Jacobs of Cooper, who later advised her that no reset was required. Tr. 24-26. Jacobs provided Rakolta with written notices on June 27, 1991, confirming that no reset was required inasmuch as the daily prices on June 14, 1991, were high ask 75, low bid 74, and close bid 74 7/8. On June 17, 1991, they were 75 7/8 high ask, 74 low bid, and 75 7/8 close bid. Division Exhibits (Div. Exs.) 12, 13, ---------FOOTNOTES---------- -[3]-See Pretrial Memorandum of the Division at n. 9. -[4]-The Cooper Bond account included, among others, the 10 5/8% Convertible Subordinated Reset Debentures due 2005. ==========================================START OF PAGE 6====== 14; Tr. 21.-[5]- There was no certification by Coopers that a "nationally recognized investment banking firm,"-[6]- or any other firm, had issued an opinion letter-[7]- with respect to the reset. Tr. 30. Rakolta was not required, according to her testimony, to look in to the circumstances underlying Cooper's determination that no reset was required. Tr. 39. However, she testified that with a closing bid of 74 7/8, a reset was required but she placed principal reliance on the certification that the debentures had a market value equal to 75% of their principal amount on June 15, 1991.-[8]- Div. Ex. 12; Tr. 41-42. Fred Russo, vice president, compliance and financial officer, and general securities principal of Russo Securities, ---------FOOTNOTES---------- -[5]-The record reflects that Jacobs's analysis was further documented by a June 21, 1991, memo to the file reflecting her view that no opinion letter was required inasmuch as the bonds closed at $748.75 [74 7/8] on June 14, 1991, and at $758.75 [75 7/8] on June 17, 1991, and that deviations of plus or minus 5% are to be ignored. Resp. Ex. 502. -[6]-Robert Fitzpatrick, respondents' expert, testified that he had never heard the term "nationally recognized investment banking firm" defined. Tr. 249. Malcolm Stewart, the Division's expert, indicated that the definition of "nationally recognized investment banking firm" means one thing to him but is fuzzy as set out in the indenture itself. Tr. 355. -[7]-The Division has argued that Cooper maintained in its file the opinion letter issued by Russo Securities. However, direct evidence of this fact was not offered or received in evidence. At best, there is only a representation in the record that Jacobs, in a deposition, indicated that the opinion letter was in Cooper's files. However, the deposition was not admitted in evidence. Tr. 297. -[8]-Apparently, there was no consideration given by this witness to the closing bid of 74 7/8 on June 14, 1991. ==========================================START OF PAGE 7====== testified that from 80 to 98%-[9]- of the business of Russo Securities was in the nature of agency equity trades. Cooper was a shareholder with a large brokerage account with Russo Securities and loaned the firm $400,000 in February 1991. Tr. 56-57, 99. In response to the question as to whether Russo Securities was a "nationally recognized investment banking firm,"-[10]- Fred Russo indicated that the firm was registered and performed investment banking in a number of states and did business in Europe. He also stated that the firm was a member of the NYSE and the NASD. Tr. 57-58. Fred and Patrick Russo knew Mike Muffoletto, an investment consultant to Cooper, for a substantial number of years and they entered into an arrangement to act as stock broker for Cooper. Tr. 92-93. Muffoletto asked Russo Securities for an opinion letter on the reset provisions of Cooper debentures. Commenting on the Russo Securities' opinion letter, Fred Russo indicated that Russo Securities had given quotes on the value of stocks and bonds before but had not given opinions on reset provisions. Div. Ex. 9; Tr. 109. The letter states: We have examined the price range of the Debentures since May 1, 1991 through and including the Reset Date, taking into account the ranges of bid and ask prices, and the closing bid prices on each of those dates. We have also considered the range of outside factors that influence the day-to-day fluctuations in the market ---------FOOTNOTES---------- -[9]-The witness varied in his estimate compared to the testimony taken during the investigation phase. Tr. 48, 52; Div. Ex. 45A at 29-30. -[10]-The parties did not offer proof as to the definition of the term "nationally recognized investment banking firm." ==========================================START OF PAGE 8====== value of convertible debt securities, such as interest rate trends, Federal Reserve Board actions, stock and bond market performance, general economic conditions and the market value of other high yield instruments, to identify items other than the financial condition of Cooper that impact the market value of the Debentures, and which accordingly limit Cooper's ability to force the market to trade Debentures at a market value of Cooper's Choosing. Upon completion of the foregoing analysis, we determined that on the Reset date the market value of the Debentures was $750 per $1000 principal amount. Accordingly, it is unnecessary for Cooper to reset the interest rate on the Debentures. Div. Ex. 9. Fred Russo indicated that since they were essentially asked for a quote and they were not making a market in the debentures, it was not a conflict of interest for Russo Securities to issue the opinion letter. Tr. 118. Fred Russo testified that Russo Securities did not charge a fee for the letter. Tr. 119. Additionally, he indicated that the wording for the letter was largely obtained from Muffoletto at Cooper.-[11]- Tr. 125, 131, 147. Fred Russo testified that, prior to issuing the opinion letter, he obtained bond market information from his brother, Patrick Russo, who used to be a bond broker on the NYSE and obtained the information from the NYSE. This information came from a Jay Franco who faxed the material. Further, there was material furnished from Standard & Poors and Bridge Data. Tr. 141-143. He also determined that someone was buying Cooper bonds on June 14, 1991. However, on inquiry of his brother Patrick, ---------FOOTNOTES---------- -[11]-The investigative testimony suggests that the witness may have had some conversations about the opinion letter with other Cooper personnel. Tr. 135. ==========================================START OF PAGE 9====== Fred Russo was advised that Cooper was not buying their own bonds.-[12]- Tr. 151. He also, in June 1991, made a comparative study of bid and ask prices as well as the closing price of the Cooper debentures and other debentures and their ratings to determine if the Cooper debentures were fairly valued by the market.-[13]- Tr. 154-160. In performing the study, Fred Russo opined that the Cooper debentures had a greater current yield than the comparison debentures. Tr. 177. Further, he discussed the valuation with his brothers Richard and Patrick, as well as Bill Brown. Tr. 177-78. Finally, it should be noted that Fred Russo appeared to place the most reliance on the market value of the bond at 75 based on the bid. Tr. 160-171. Patrick Russo was at all relevant times president of Russo Securities and a personal owner of a seat on the NYSE.-[14]- Patrick Russo testified that he tracked price ---------FOOTNOTES---------- -[12]-The Division has conceded that the Russos had no knowledge of the bond purchases by Cooper. Tr. 192, 203. -[13]-There is some question as to when the analysis was performed. Fred Russo seemed to suggest that a sample was prepared to show what analysis had originally been performed rather than producing the original analysis. Tr. 157-170. -[14]-The Division argues that Patrick Russo's testimony was not credible because he invoked the Fifth Amendment during the Division's investigation of the case. According to the cases cited by respondents, it is proper to consider Patrick Russo's invocation of the privilege as circumstantial evidence. FTC v. Kitco of Nevada, Inc., 612 F.Supp. 1282, 1291 (D.Minn. 1985). I also could infer that the later responses at the hearing were a recent fabrication. Penfield v. Venuti, 589 F.Supp. 250, 256 (D.Conn. 1984). While I have taken into account the fact that Patrick Russo invoked the privilege during the Division's (continued...) ==========================================START OF PAGE 10====== quotes on the NYSE for the Cooper debentures in mid June 1991, as reflected on the Fitch sheet that he acquired from a bond broker on the floor of the NYSE.-[15]- The Fitch Sheet reflected closing quotes on June 14, 1991 of 75 bid and 75 1/4 offer. Similarly, the NYSE Bond Reports shows closing quotes for the debentures on June 14, 1991, of 75 bid and 75 1/4 offer. Resp. Ex. 503; Tr. 223-225. Patrick Russo indicated that it would be unethical for a brokerage firm to inquire as to the identity of a customer purchasing bonds on the floor of the NYSE. When he noticed that someone was buying the Cooper bonds, he called Mike Muffoletto to determine if Cooper was buying their own bonds. Muffoletto responded in the negative and indicated that Mabon Nugent & Company, a broker-dealer, was buying the bonds. Tr. 226-227. Robert Fitzpatrick testified on behalf of the respondents and qualified as an expert. Tr. 250.-[16]- He has extensive background in the securities industry from 1976 to at least 1994. He held a series 7 license, is a member of the bar, and was a compliance officer. He had ten years experience in valuing corporate bonds including municipal bonds with reset ---------FOOTNOTES---------- -[14]-(...continued) investigation, I decline to reject his testimony in its entirety as not credible. -[15]-According to Patrick Russo, Fitch Sheets are compilations of every single trade in a particular security, including the exact time and price. Tr. 224. -[16]- The Division conceded that Fitzpatrick was qualified to give a valuation of the bonds but objected to further testimony. Tr. 250. ==========================================START OF PAGE 11====== provisions. Tr. 248-251. Fitzpatrick opined that the market value of the Cooper bonds in issue on June 14, 1991, was 75. Tr. 252. His opinion was based on the NYSE trading at the time in question as well as the Commission's settlement with Lawrence Mascera and Mascera & Company-[17]- where it was stated that Cooper had put out a 75 1/8 net OTC bid for all the bonds it could buy and through that bid only bought odd lots. Tr. 252-54. Additionally, Fitzpatrick looked at and approved Russo's methodology of reviewing the prices for comparable bonds in valuing the Cooper bond. He explained that valuation is established where a buyer and seller would come together. Tr. 259. He also examined trading in U.S. Treasury bonds during the time period at issue. Tr. 263. Fitzpatrick further testified that it is not possible to secure information from another brokerage house as to the identify of a customer buying a particular bond.-[18]- As part of its rebuttal case, the Division offered the testimony of Thomas Shine, an attorney, and Malcolm Stewart, an expert. Shine was an attorney with the Commission for seven years and was involved in the investigation of trading in the debentures of Cooper at the time of the June 15, 1991, reset ---------FOOTNOTES---------- -[17]-See supra note 1. -[18]- The Division argues that Russo was obliged to find out who was buying the Russo bonds during the period at issue. However, there is no evidence that the information could have been obtained. To the contrary, the Division's own witness, Malcolm Stewart, said that the information would not be furnished as it is proprietary. Tr. 353. ==========================================START OF PAGE 12====== date. Tr. 306. Shine testified that he had questioned Patrick Russo, who indicated he had no knowledge or understanding whether Cooper was purchasing its own bonds at or around the reset date. At that interview, Patrick Russo did not indicate that he contacted Muffoletto inquiring whether Cooper was purchasing its own bonds at the time. According to Shine, Patrick Russo appeared to be busy with trading activities at the time of the interview. Tr. 314, 319. Malcolm Stewart has been the managing director of the high yield bond department at Citicorp Securities since 1989. He testified that he had been working with bonds since 1982 and was involved in valuation of hundreds of bond offerings totaling $40 billion during the last five years. He held securities licenses 7 and 24. Tr. 325-328. At the time of the rest, Stewart was approached by a salesman at Citicorp to value the Cooper bonds. In response, he quoted a fee of $100,000 to make the valuation. Cooper was a customer of Citicorp and this was known to Stewart. He claimed that he did not recall the extent of the Citicorp activities with respect to trading in the Cooper bonds in early 1991 and at about reset time.-[19]- Tr. 347-348. ---------FOOTNOTES---------- -[19]-It appears that Cooper placed an order above the reset with Citicorp at the time of the reset. Stewart testified that he would not have accepted the trade from Cooper if he had the assignment to value the bond. Tr. 350; Resp. Ex. 529. Respondents, by their counsel, charged Citicorp with a major assistance in furthering the fraud. Tr. 365. Aside from whether there is any truth in the assertion, some question has been raised inferentially by this contention of respondents as to whether there is some conflict of interest for Stewart, an executive of Citicorp, to provide expert adversarial testimony in (continued...) ==========================================START OF PAGE 13====== In order to make a valuation, Stewart indicated that one had to understand the underlying company, its merits and liabilities, and its competitive position in the market. Additionally, it is necessary to perform a comparative credit analysis to identify the most comparable companies that have non-investment grade debt securities outstanding. Thereafter, the comparable companies would be priced and force rank the company in question. The objective of the process is to ascertain the right yield to maturity of the subject security in relationship to the securities of the comparable companies. Tr. 334-336. Stewart reviewed the Russo Securities analysis and found it was inadequate inasmuch as the NYSE trading level was not indicative of real market value for high yield bonds. Further, he found that the comparative analysis by Russo and Fitzpatrick was flawed inasmuch as the comparables were not in the same industry.-[20]- Additionally, he opined that high yield bonds such as those at issue are not closely correlated to the equity market, the government bond market or the investment grade bond market and, consequently, their value is more closely ---------FOOTNOTES---------- -[19]-(...continued) this case. This conflict, in my view, reduces the weight that maybe assigned to Stewart's testimony. Further, I am concerned that the Citicorp relationship with Cooper was not adduced until Stewart was asked directly about it during cross examination by respondents. -[20]-Stewart had not evaluated the comparables used by Fitzpatrick and Russo. He indicated he may have considered them to be comparables or he may not have. When asked, in substance, if anything short of a $100,000 bond evaluation would have been acceptable under the requirements of the indenture, his view was that it could not. Tr. 360-63. ==========================================START OF PAGE 14====== correlated to the value of comparable bonds in the high yield market. Tr. 328-29. However, he did not know the liquidity of the Cooper bond. This, in his view, would have an effect on whether market prices equate to the value of the bonds. Stewart further indicated that he had never seen an indenture provision that allowed a deviation in value of plus or minus five percent to be ignored when a bond is supposed to trade at certain value, as was suggested in Ms. Jacob's memorandum to the files. Resp. Ex. 502; Tr. 344-47. It was Stewart's belief that if the Cooper bond was at 74 7/8, the interest rate should have been reset to achieve a value of 75 by increasing the coupon rate of interest. Tr. 344. Stewart did not determine what the market value was at the time of reset of the Cooper bond. Tr. 347. Conclusion The Division alleges that Russo and Russo Securities were a cause of violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, due to acts or omissions that they knew or should have known would have contributed to the violations. It is further contended that Russo and Russo Securities knew, or were reckless in not knowing, that the actions of Singer and Cooper were unlawful, violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that they substantially assisted in the commission of those violations. It is further claimed that Russo and Russo Securities wilfully aided and abetted violations of Section 10(b) and Rule 10b-5 thereunder. ==========================================START OF PAGE 15====== In the course of the hearing, the Division conceded that Russo Securities and Russo did not know that Singer and Cooper were buying the bonds prior to the at reset date to increase the price. This raises the question as to whether they were reckless in not knowing. I think not. The Division premises its argument of recklessness largely on the notion that when, in the course of Russo writing the opinion letter, respondents discovered that someone was buying the Cooper bonds, they should have determined who was buying the bonds. Not having made that determination, the Division argues, the respondents were reckless. However, several witnesses testified, including respondents' expert, that such information could not have been obtained as it was proprietary and confidential. In other words, for one broker to disclose to another broker the identify of his customer would invite ruinous competitive practices. Further, the evidence is that an inquiry was made by Russo to Cooper's Muffoletto, who lied that Cooper was not buying its own bonds but someone else was. I find Russo's testimony credible and that a reasonable effort was made, through the only vehicle available,-[21]- to find out the information. The Division's argument, through its witness attorney Shine, that Russo disclaimed, in the course of the investigatory testimony, that he knew whether Cooper was buying its own bonds, suggests an inconsistency but does not rule out the conclusion that Russo made the inquiry and was in fact ---------FOOTNOTES---------- -[21]-Stewart testified he had a database showing ownership of bonds but this was not available to others. ==========================================START OF PAGE 16====== lied to by the Cooper representative. Further, the Division's concession that Russo had no knowledge of Cooper's purchases at reset actually supports Russo's version of the events. I find that Russo did not substantially assist Cooper in its fraud. In the first instance, the Division has conceded, as indicated, that Russo had no knowledge of the underlying fraud which was Cooper's purchase of the bonds at reset for manipulatory purposes. Second, I find the letter Russo Securities issued regarding the reset was not fraudulent. It was primarily an opinion of value premised on the price in the market place for the Cooper debentures plus some comparative studies. Fitzpatrick, the respondents' expert, credibly testified that using current market price was one methodology that may be used in arriving at value. Further, he indicated that a comparative study should be made. The study that the respondents made was produced after the fact and was testified to be a sample of such a study that was made before the fact. The Division claims that the study was manufactured and no study was ever used in arriving at the original opinion. However, the Division has not produced proof that Russo's testimony was untrue. More significantly, the Division has not produced any evidence that the market price of the bond at reset was not an indication of its value. Further, Stewart testified, in effect, that he could not state that the market price was not the value of the bond. It is considered that the Division has not shown the value of the bond on the ==========================================START OF PAGE 17====== reset date whereas the credible testimony of Russo and Fitzpatrick supports the value set out in the opinion letter. The Division argues in substance that further indicia of fraud was that Russo Securities issued an opinion letter whereas it should have been a nationally recognized investment banking firm in accordance with the tenor of the language set out in the indenture.-[22]- In the first place, there is no evidence that the letter was ever used or even referred in correspondence to bond holders, the trustee or the NYSE. The testimony of Rakolta representing the trustee indicated she never saw the letter or was aware of its existence. There was no evidence adduced that the NYSE saw the letter. Essentially, Cooper's position was that no reset was required based on the market value of the stock, not on the opinion letter. Second, there is no evidence that the conclusion of the opinion letter was wrong. Stewart, the Division's expert, said he would use a different technique at arriving at value but he stopped short, as indicated, from saying that the value stated was wrong. Last, the Division raises the argument that the opinion letter was inherently fraudulent because Russo Securities was not a ---------FOOTNOTES---------- -[22]-The Division argues that respondents should have been alert to the fraud because it was atypical for them to issue such an opinion letter. It appears to me that the letter was largely a market quote which was a typical activity of the respondents. Because it had the reset language does not make it an exotic instrument as argued by the Division. That draft language was furnished by Cooper does not change the situation since the market quotes were not in error. ==========================================START OF PAGE 18====== nationally recognized investment banking firm.-[23]- Russo testified that Russo Securities is a member of the NYSE and the NASD and held licenses in several states as well as operated in Europe. The term "nationally recognized investment banking firm" has, as indicated by the Division's own expert Stewart, no specific meaning. The Division argues that the respondents aided and abetted Cooper in its fraud. In order to establish an aiding and abetting violation under Sections 15(b) and 19(h) of the Exchange Act, the Division must establish: (1) the commission of a securities law violation by a primary violator; (2) the aider and abettor's awareness or knowledge that his role was part of an activity that was improper; and (3) the rendering of substantial assistance to the primary violator in the commission of the violation. Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980), cert. denied, 449 U.S. 919 (1980). The second element may be satisfied by a showing of recklessness. William R. Carter, 47 S.E.C. 471 (1981); O'Connor & Assoc. v. Dean Witter Reynolds, 529 F. Supp. 1179, 1194-95 (S.D.N.Y. 1981). The amount and type of assistance required will vary depending on respondents' degree of knowledge of the impropriety. Woodward v. Metro Bank of Dallas, 522 F.2d 84, 95 (5th Cir. 1975). ---------FOOTNOTES---------- -[23]-I do not agree with the Division that the mere requirement that nationally recognized investment banking firms be used for the two opinion letters was evidence of a fraudulent intent by Cooper. Nor do I agree that the mere requirement of a reset was evidence of probable fraud. ==========================================START OF PAGE 19====== The parties stipulated that Cooper violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by fraudulently avoiding an interest rate reset obligation on the debentures and by so informing the NYSE and the trustee under the indenture. Joint Stipulation Dated January 30, 1995. However, the Division has conceded that there is nothing in the record that shows that Russo and Russo Securities knew of the underlying violation, which was the purchase of debentures prior to the reset date. Further, there is no evidence that the respondents rendered substantial assistance to the primary violator in the commission of the violation since there is no evidence that respondents' opinion letter was ever used, published, or referred to by Cooper. The Division relies heavily on the court's opinion in Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004 (11th Cr. 1985) to support its contention that the respondents aided and abetted Cooper's fraud. There are two elements, however, that clearly distinguish Woods from the present case. Most significantly, the opinion letter in Woods written by a bank employee was in fact provided to the trustee in a stock offering which resulted in a premature release of offering proceeds in violation of the trust agreement. Id. at 1008. In addition, the trial court in Woods determined that the opinion letter itself was fraudulent. Id. at 1009. These two items are sufficient to distinguish Woods from this case. The Division cites no further cases to support is assertion that the respondents aided and abetted Cooper's fraud. ==========================================START OF PAGE 20====== The Division also argues that the respondents were a cause, with the meaning of Section 21C of the Exchange Act, of Cooper's violations and should therefore be ordered to cease and desist from future violations of the securities laws. According to the Division, Section 21C of the Exchange Act embodies a negligence standard. I do not agree that respondents knew or should have known that their conduct would contribute to Cooper's fraud. Based on the foregoing, I have concluded that the Division has not proven the allegations of misconduct. Order IT IS HEREBY ORDERED THAT this administrative proceeding is dismissed. This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Rules of Practice. Pursuant to Rule 17(f) of the Rules of Practice, this initial decision shall become the final decision of the Commission as to each party who has not, within fifteen days after service of this initial decision upon him, filed a petition for review of this initial decision pursuant to Rule 17(b), unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to him. If a party timely files a petition for review, or the Commission takes action to review as to a party, the initial decision shall not become final with respect to that party. ==========================================START OF PAGE 21====== ______________________________________ Glenn Robert Lawrence Administrative Law Judge Washington, D.C. December 11, 1995