INITIAL DECISION RELEASE NO. 83 ADMINISTRATIVE PROCEEDING FILE NO. 3-8533 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION : In the Matter of : : F.N. WOLF & CO., INC., : INITIAL DECISION HIBBARD BROWN & CO., INC., : JANUARY 3, 1996 L.C. WEGARD & CO., INC., : FRANKLIN N. WOLF, : RICHARD P. BROWN, and : LEONARD B. GREER : : APPEARANCES: Mark H. Borrelli, Jonathan H. Stein and James A. Davidson, for the Division of Enforcement, Securities and Exchange Commission Jerome M. Selvers and Chad N. Cagan for Respondents L.C. Wegard & Co., Inc., and Leonard B. Greer BEFORE: Glenn Robert Lawrence, Administrative Law Judge The Securities and Exchange Commission (Commission) initiated this proceeding on October 25, 1994, pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 (Exchange Act). The Order Instituting Proceedings (Order) alleges that Respondents-[1]- F.N. Wolf & Co., Inc.-[2]- (Wolf & Co.), L.C. Wegard & Co., Inc. (Wegard), and Leonard B. Greer willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, that Wegard and Wolf & Co. willfully violated Sections 13(d)(1), 13(d)(2) and 15(c) of the Exchange Act and Rules 13d-1(a), 13d-2(a) and 15c1-2 thereunder, that Wolf & Co. willfully violated Section 16(a) of the Exchange Act and Rule 16a-3(f)(1)(ii) thereunder, and that Greer willfully aided and abetted and caused Wegard's violations of Sections 13(d)(1), 13(d)(2) and 15(c) of the Exchange Act and Rules 13d-1(a), 13d- 2(a) and 15c1-2 thereunder. The Division of Enforcement (Division) alleges that Wegard, at Greer's direction, participated with Wolf & Co. and Hibbard Brown & Co., Inc. (Hibbard) in a scheme to manipulate the price of the units of Of ---------FOOTNOTES---------- -[1]-The Commission entered an Order Making Findings and Imposing Remedial Sanctions on Hibbard Brown & Co., Inc., and Richard P. Brown on December 13, 1995. (SA 7247; SEA 36579). Similarly, the Commission entered an Order Making Findings and Imposing Remedial Sanctions as to Franklin N. Wolf on July 31, 1995. 59 SEC Docket 2834 (1995). -[2]-Respondent Wolf & Co. did not appear at or participate in the pretrial conference held on May 5, 1995. At the hearing, the Division asked that the evidence to be presented be received against Wolf & Co. even though no representative for Wolf & Co. appeared at the hearing. I granted that request. Tr. 3. ==========================================START OF PAGE 2====== Counsel Enterprises, Inc. (Of Counsel) from $3.25 per unit to $8.00 per unit, and failed to make required filings reflecting the acquisition of the units by the three firms and changes in the firms' ownership of the units. Answers largely setting out general denials of the alleged misconduct were filed by the respondents. I conducted hearings on May 22 through May 25, 1995, and July 17 and 18, 1995, to determine: whether the allegations contained in the Order are true and to afford the respondents an opportunity to establish any defenses; what, if any, remedial action is appropriate in the public interest pursuant to Sections 15(b) and 19(h) of the Exchange Act, including, but not limited to, disgorgement and penalties pursuant to Section 21B of the Exchange Act; and whether, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, the respondents should be ordered to cease and desist from committing or causing any violations and any future violations of any or all of the Sections or Rules set forth above. As part of the post-hearing procedures, there were successive filings of proposed findings and conclusions as well as supporting briefs. My findings and conclusions are based upon the preponderance of the evidence as determined from the record and upon observation of the various witnesses. FINDINGS OF FACT ==========================================START OF PAGE 3====== Wegard & Co. is a broker-dealer registered with the Commission pursuant to Section 15 of the Exchange Act. Stip. 12; Order I.C.; Greer/Wegard Answer I.C.-[3]- Wegard & Co. is a New Jersey corporation headquartered in New York, New York. Stip 11. At all relevant times, Wegard cleared its transactions through Bear Stearns & Co., Inc. (Bear Stearns). Stip. 13. At all relevant times, Wegard had 6 branch offices in 5 states with approximately 160 registered representatives. Stip. 14; Tr. 385-386 (Schwartz). Greer is 57 years old and a resident of Rye, New York. Tr. 667 (Greer). Since September 1991, Greer has been the president and sole owner of Wegard & Co. Order II.C.; Greer/Wegard Answer II.C; Tr. 675 (Greer), 718-720 (Greer). Greer is responsible for all activities at Wegard & Co. Tr. 694-695 (Greer), 417 (Crisai). Greer is the head trader of Wegard & Co. and also makes decisions as to whether Wegard & Co. will make recommendations to clients in a particular stock. Tr. 694-695 (Greer), 417-418 (Crisai). Prior to purchasing Wegard & Co., Greer was a registered representative at PaineWebber, beginning in May 1987, but he never worked in PaineWebber's trading ---------FOOTNOTES---------- -[3]-The following abbreviations will be used in this decision: "Greer/Wegard Answer" refers to the Answer of Respondents Greer and Wegard; "Stip." refers to the Division's proposed "Stipulations of the Parties," portions of which have been agreed to by Wegard and Greer in their Response thereto; "Div. Ex." refers to exhibits offered into evidence by the Division and admitted during trial; "Resp. Ex." refers to exhibits offered into evidence by respondents; "Tr. ( )" refers to the trial transcript and indicates parenthetically the name of the witnesses testifying. ==========================================START OF PAGE 4====== department. Tr. 695 (Greer). Before working at PaineWebber, Greer was president of a firm called Greer Software Associates. Tr. 696 (Greer). Wolf & Co. is a New York corporation headquartered in New York, New York, and has been a broker-dealer registered with the Commission pursuant to Section 15 of the Exchange Act since 1982. Div. Ex. 94 at 2, 4, 18. Wolf & Co. is the wholly-owned subsidiary of Wolf Financial Group, Inc., a publicly traded company. Div. Exs. 119 at 3, 97 at 2. Prior to June 30, 1994, Wolf & Co.'s accounts were cleared on a fully disclosed basis through J.W. Charles Securities, Inc. (J.W. Charles). Tr. 59 (Leeds). Of Counsel is a Texas corporation located in Houston, Texas, that provides temporary attorneys and paralegals to law departments of large companies and law firms. Stip. 26. Of Counsel's units, common stock and warrants are registered pursuant to Section 12(b) of the Exchange Act and are listed on National Association of Securities Dealers Automated Quotation (NASDAQ) system and the Boston Stock Exchange (BSE). Div. Exs. 87 at 5, 89 at 4. At all times relevant herein Of Counsel's common stock was traded on the NASDAQ market. Div. Exs. 35, 4 at 1. Franklin N. Wolf is 58 years old and was, at all relevant times, the president of Wolf & Co. Div. Ex. 94 at 3, 10. Richard P. Brown was, at all relevant times, the president of Hibbard. Div. Ex. 101 at 7. J.W. Charles was the co-underwriter ==========================================START OF PAGE 5====== of Of Counsel's initial public offering (IPO). J.W. Charles and Corporate Securities Group, Inc. (CSG) are both subsidiaries of Corporate Management Group. Div. Ex. 137 at 1.-[4]- Of Counsel Initial Public Offering In May or June 1993, Wolf expressed his enthusiasm for Of Counsel to Rochelle Wohl, a managing director at Ladenburg Thailmann & Co., Inc. (Ladenburg). Div. Ex. 142 at 1. The two discussed the company and the temporary placement industry. Id. at 1-2. Wohl spoke to Marshall Leeds (Leeds), the president of J.W. Charles and CSG, on occasion about Of Counsel and Wolf's financial interest in the company. Div. Ex. 142 at 2. In June 1993, Wolf called Leeds, and told him that J.W. Charles should consider underwriting an offering for Of Counsel. Tr. 61 (Leeds); ALJ Ex. 1 at 1. After the call from Wolf, J.W. Charles/CSG performed its due diligence investigation. Tr. 61 (Leeds). On June 11, 1993, Donna Wolf, the director of corporate finance at Wolf & Co. and Wolf's daughter, sent an Of Counsel business plan to Leeds. Div. Ex. 1; ALJ Ex. 1 at 1. On June 14, 1993, Donna Wolf sent an internal Wolf & Co. memorandum regarding Of Counsel that she had prepared to Leeds. Div. Ex. 2. During the course of J.W. Charles/CSG's due diligence investigation, Leeds had numerous discussions with Wolf on issues such as the structure of the transaction, the pricing of the transaction, and the timing of the offering. Tr. 63-64 (Leeds). ---------FOOTNOTES---------- -[4]-The abbreviation "J.W. Charles/CSG" will be used in situations in which the firms acted as a single entity. ==========================================START OF PAGE 6====== On July 2, 1993, Marie Wolf, Wolf's wife, purchased a $48,700 subordinated note from Of Counsel which was convertible into common shares of Of Counsel. Div. Ex. 8 at 004592, 004643, 004644, 004646. Shortly thereafter, Donna Wolf, received a $1,950 convertible note as a gift from Joseph Pagano. Div. Ex. 9, 11. In July 1993, Leeds had a discussion with Wolf in which Wolf told him that Wolf's wife and daughter owned a small percentage of stock that might affect the compensation to J.W. Charles/CSG in the underwriting. Tr. 62-63 (Leeds). During this discussion, Leeds and Wolf agreed that Wolf should "stay out" of the offering and that J.W. Charles/CSG would do the offering without him. Id. J.W. Charles/CSG put together a selling group for the Of Counsel IPO, which consisted of other broker-dealers who would sell units in the IPO to investors. Div. Ex. 137 at 2; Div. Ex. 18; Tr. 71 (Leeds). In preparation for the IPO, Coletta Dorado, an executive vice-president of J.W. Charles/CSG, Dorothy Dachinger, J.W. Charles's syndicate manager and Ken Nathan, J.W. Charles's retail coordinator, collected "indications of interest" from J.W. Charles and CSG retail offices and from other broker- dealers. Div. Exs. 15, 18, 137 at 1, 2. After these indications of interest were reviewed, a final allocation was made, and was approved by Leeds. Div. Exs. 18 at 3,4; 19; 137 at 2. Under the agreement between J.W. Charles/CSG and Of Counsel, J.W. Charles/CSG was granted an option to purchase an additional ==========================================START OF PAGE 7====== 187,500 units to cover any over-allotments (over-allotment option). Id. The complete IPO of 1,437,500 units, which included an over-allotment option of 187,500 units, was sold on November 16, 1993, at a price of $3.25 per unit. Div. Ex. 4; Tr. 72 (Leeds). J.W. Charles sold 68,000 units and CSG sold 512,000 units to retail customers, with the remaining 857,500 units sold through a selling group consisting of nine registered broker- dealers. Div. Exs. 4, 16; Tr. 73 (Leeds). Ladenburg received an allocation of 475,000 units in the IPO, which Wohl sold to her customers. Id.; Div. Ex. 18 at 4. The issuance of the IPO shares resulted in a total of 3,547,500 common shares of Of Counsel outstanding, not including shares which would be issued as the result of the exercise of the outstanding warrants. Div. Ex. 4 at 32. Of these shares, 1,437,500 were freely tradeable, and the remaining 2,110,000 were restricted. Id.; Tr. 265-266 (Whitten). Austin Marxe, manager of a mutual fund called Special Situations Fund, has known Wolf for about ten years. Div. Ex. 138 at 1. Marxe bought a total of 50,000 units in the Of Counsel IPO, placing an order for 25,000 units at Prudential and a second order for 25,000 units at Ladenburg, at Wolf's suggestion. Div. Exs. 31, 32 at 1; Tr. 199-202 (Marxe). Charles Feldman has known Wolf for about 30 years, both professionally and socially, and for about the past 10 years, has purchased, through Wolf, IPOs and other securities recommended by Wolf. Div. Ex. 139 at 1. A few days before secondary trading in ==========================================START OF PAGE 8====== Of Counsel began, Wolf recommended Of Counsel to Feldman, for himself or his parents, as an "interesting situation" and indicated that Of Counsel securities were likely to increase in value. Id. Based upon Wolf's recommendation, Feldman bought 50,000 units in the IPO in an account at Ladenburg that he opened for his parents shortly before the Of Counsel purchase, through Wohl. Id.; Div. Ex. 34. Richard Rosenstock is a partner and the senior managing director at Gaines Berland, Inc. (Gaines Berland), where he has worked since 1986. Div. Ex. 141 at 1. Rosenstock first learned of the Of Counsel IPO from either Wolf or Kenneth Lissak, who called Rosenstock a couple weeks before the November 16, 1993 IPO, and told him that Lissak would be buying 150,000 units in the IPO and that the order was to go through Gaines Berland. Div. Ex. 141 at 1. Wolf later called Rosenstock and said there was a "political problem" over J.W. Charles directing an order of the size of Lissak's, and that he did not know if he would be able to work the problem out. Tr. 329-330 (Rosenstock). Wolf said, however, that he might be able to direct some shares or units of the deal to Gaines Berland. Tr. 330 (Rosenstock). Wolf indicated to Rosenstock that Wolf & Co. would probably be a buyer at a quarter to a half point premium in the aftermarket. Tr. 330-331 (Rosenstock). Gaines Berland indicated an interest in the Of Counsel IPO by calling the syndicate department at J.W. Charles. Div. Ex. 141 at 2; Tr. 331 (Rosenstock). On November 15, 1993, when ==========================================START OF PAGE 9====== Gaines Berland received a wire from J.W. Charles confirming an allocation of 100,000 units, Rosenstock discussed the allocation with his partner Joseph Berland. Div. Exs. 19, 141 at 2; Tr. 333-334 (Rosenstock). Gaines Berland's customers purchased a total of 100,000 units in the IPO. Div. Exs. 19, 20, 55, 56. Kenton Wood, the chairman and chief executive officer of D. H. Blair & Co. (Blair & Co.), has known Wolf since 1985. Tr. 118 (Wood). In early November 1993, Wolf called Wood and asked him if Blair & Co. would, as a favor, participate in the Of Counsel selling group as an accommodation to Wolf's friend, Dr. Steven Greenbaum, who wanted to purchase 25,000 units in the Of Counsel IPO. ALJ Ex. 1 at 3; Tr. 121-122 (Wood). Wood then asked Wolf why Wolf & Co. could not buy units for Greenbaum, and Wolf responded that it could not do so because he or the firm held an ownership interest in Of Counsel. ALJ Ex. 1 at 3. On November 16, 1993, Blair bought 25,000 units in the Of Counsel IPO and sold those units to Greenbaum. Id. The Of Counsel IPO closed and aftermarket trading in the units began on November 16, 1993. Trading by Wolf & Co., Hibbard, and Wegard of Of Counsel During the period November 16 through December 8, 1993, Wolf & Co. was a market maker for Of Counsel securities. Div. Ex. 36. During this period, as a market maker, Wolf & Co. entered quotes in the NASDAQ system for Of Counsel securities. Id. Only three firms during this period were accumulating a significant quantity of units -- Wolf & Co., Hibbard, and Wegard. Div. Ex. 45. November 16 ==========================================START OF PAGE 10====== The inside market-[5]- for Of Counsel units opened at $3 bid, $4 ask, and closed at $3-3/4 bid, $4 ask. Div. Ex. 36 LEGLU 11/16/93 at 4, 23. Trading was very thin and demand from retail customers and brokerage firms was very light. Tr. 143 (Dorado). After speaking with Wolf, Feldman sold the 50,000 units to Ladenburg at $3-5/8 that he had purchased in the IPO earlier that day. Div. Exs. 34 at 3, 45 at 1. November 17 The inside market for Of Counsel units opened at $3-3/4 bid, $4 ask, and closed at $3-1/2 bid, $3-7/8 ask. Div. Ex. 36 LEGLU 11/17/93 at 2, 4. Gaines Berland sold 100,000 units at $3.50 per unit to Wolf & Co, which constituted Gaines Berland's entire allotment in the IPO. Tr. 333, 335-336 (Rosenstock); Div. Exs. 19, 57, 45 at 1. Less than five minutes later, Wolf & Co. sold 100,000 units to Hibbard at $3.50 per unit. Div. Ex. 45 at 1. Total reported volume for Of Counsel units was 296,000 units, of which 89.5% was attributable to purchases by Wolf & Co. (100,000), Hibbard (100,000), and Gaines Berland (65,000). Wolf & Co.'s purchase alone accounted for 33.8%. Div. Exs. 40, 45 at 1-2. November 18 The inside market for Of Counsel units opened at $3-1/2 bid, $3-7/8 ask, and closed at $3-5/8 bid, $3-7/8 ask. Div. Ex. 36 LEGLU 11/18/93 at 2, 8. Wolf called Leeds and expressed Wolf & ---------FOOTNOTES---------- -[5]-The inside market for a security is defined as the high bid and the low ask at any given time. Tr. 249 (Whitten). ==========================================START OF PAGE 11====== Co.'s interest in purchasing blocks of 50,000 or 100,000 Of Counsel units. Tr. 74-75 (Leeds), 144, 147 (Dorado). After Wolf called Leeds, Leeds called Dorado and told her that Wolf & Co. had possible interest in a block of 50,000 to 100,000 Of Counsel units. Tr. 144 (Dorado). Approximately one or two hours after Dorado spoke to some of J.W. Charles/CSG's retail brokers, Wolf & Co. traders called Dorado to place three purchase orders for Of Counsel units, which CSG and J.W. Charles filled by purchasing units from their IPO customers. Div. Ex. 45 at 2-3; Tr. 146-149 (Dorado). Within ten minutes of each of Wolf & Co.'s Of Counsel unit purchases from CSG, Wolf & Co. sold all of the units it had purchased from CSG, totaling 250,000 units, to Hibbard at $3.625 per unit. Div. Ex. 45 at 2-3. Ladenburg sold 175,000 Of Counsel units at $3.50 per unit to Wolf & Co. Div. Exs. 45 at 3, 142 at 2. Within thirty minutes of this purchase, Wolf & Co. sold 175,000 Of Counsel units to Hibbard at $3.50 per unit. Div. Ex. 45 at 3. Hibbard then sold 20,000 units to Wien Securities. Id. At the end of trading, Wolf & Co. owned the equivalent of 15,000 units and Hibbard owned 505,000 units, in total representing 36.2% of the Of Counsel tradeable units. Div Exs. 44, 45. The reported volume for Of Counsel units was 1,124,930 units, 57% of which was attributable to purchases by Wolf & Co. (425,000), CSG (191,000) and J.W. Charles (25,500). Wolf & Co.'s purchase alone accounted for 37.8%. Div. Ex. 45 at 3. November 19 ==========================================START OF PAGE 12====== The inside market for Of Counsel units opened at $3-5/8 bid, $3-7/8 ask, and closed at $3-3/4 bid, $4 ask. Div. Ex. 36 LEGLU 11/19/93 at 1, 4. Ladenburg, CSG and J.W. Charles purchased Of Counsel units from their IPO customers to cover their sales to Wolf & Co. on the previous day. Div. Exs. 45 at 3-4, 142 at 2. The total reported volume for Of Counsel units was 267,000 units, of which 91% was attributable to purchases by CSG (45,000), J.W. Charles (23,000) and Ladenburg (175,000). Div. Ex. 45 at 3-4. November 22 The inside market for Of Counsel units opened at $3-3/4 bid, $4 ask, and closed at $4-1/8 bid, $4-1/2 ask. Div. Ex. 36 LEGLU 11/22/93 at 1, 14. Wolf & Co. bought Of Counsel units as follows: 100,000 at $3.625 per unit from Starr Securities, Inc. (Starr); 30,000 at $3.5625 per unit from R.G. Dickinson & Co., Inc. (Dickinson); and 25,000 at $3.75 per unit from Blair & Co. Div. Ex. 45 at 4. These sales represented the total number of units each had been allocated in the IPO. Id.; Div. Ex. 18 at 4. Wolf & Co. then sold 100,000 units to Hibbard at $3.625 per unit. Div. Ex. 45 at 4. Wolf & Co. bought 50,000 Of Counsel units at $3.75 per unit, and 150,000 Of Counsel units at $3.625 per unit, from CSG. Tr. 150, 155-156 (Dorado); Div. Ex. 45 at 4. J.W. Charles and CSG covered these sales with purchases on the same day of 2,000 units and 175,500, respectively. Div. Ex. 45 at 4-5. Marxe placed an order to sell all 50,000 Of Counsel units he had purchased for Special Situations Fund in the IPO, with Herzog, Heine, Geduld, ==========================================START OF PAGE 13====== Inc. (Herzog). Tr. 203 (Marxe). Herzog purchased 5,000 of these units but had difficulty selling the remainder, which it sold to Ladenburg. Tr. 201, 203-204 (Marxe); Div. Exs. 31, 32 at 2-3. Wolf & Co. bought 150,000 Of Counsel units at $3.5625 per unit from Ladenburg. Div. Ex. 45 at 4. Ladenburg then bought Of Counsel units from its IPO customers, including Special Situations Fund, to cover Wolf & Co.'s purchase. Div. Exs. 45 at 5, 142 at 2. Later, Wolf & Co. bought 3,000 Of Counsel units at $4.00 per unit from Herzog. Div. Ex. 45 at 4. At the end of trading, Wolf & Co. owned the equivalent of 423,000 Of Counsel units, representing 29.4% of the outstanding units, and 7,000 shares of Of Counsel common stock. Div. Exs. 45 at 1-5, 46 at 1, 47 at 1. Total reported volume for Of Counsel units was 1,065,800 units, 78.9% of which was attributable to purchases by Wolf & Co. (508,000), Herzog (5,000), Ladenburg (150,000), J.W. Charles (2,000) and CSG (175,500). Wolf & Co.'s purchases alone accounted for 47.7%. Div. Ex. 45 at 4-5. November 23 The inside market for Of Counsel units opened at $4-1/8 bid, $4-1/2 ask, and closed at $4-5/8 bid, $5 ask. Div. Ex. 36 LEGLU 11/23/93 at 1, 15. At the opening of trading, there were 409,500 units which were not owned by Wolf & Co. or Hibbard. Div. Exs. 45-47. Wolf & Co. purchased 118,000 Of Counsel units at $4.25 per unit, then entered a bid quotation of $4.50 for Of Counsel units, thereby establishing a new inside bid quotation. Div. Exs. 45 at 5, 36 LEGLU 11/23/93 at 9-10. Wolf & Co. purchased ==========================================START OF PAGE 14====== 4,000 units at $4.8125 per unit from Paragon Capital Corp. (Paragon). Div. Ex. 45 at 6. Paragon purchased 4,000 Of Counsel units in order to cover its sale to Wolf & Co. Id. At 12:26 p.m., Wegard entered a purchase order for 30,000 Of Counsel units at $4.50 per unit, which was the current inside ask quotation. Tr. 809-810 (Humenik); Div. Exs. 153, 66, 36 LEGLU 11/23/93 at 1. This purchase represented approximately 7.3% of the units which were not already owned by Wolf & Co. or Hibbard. Div. Exs. 45-47. Bear Stearns-[6]- presented Wegard's 30,000 Of Counsel purchase order to Mayer and, at 12:33, Kevin McKeon (McKeon), Mayer's trader, raised Mayer's bid from $4 to $4-1/4 in order to purchase units for sale to Wegard. Div. Exs. 36 LEGLU 12/23/93 at 4, 144, 66; Tr. 449-452 (McKeon). The $4- 1/4 bid matched the inside bid quotation. Div. Ex. 36 LEGLU 12/23/93 at 4. Twenty six seconds later, Mayer purchased 1,000 Of Counsel units from Herzog at $4-1/2, Herzog's offer, which was the current inside offer and, two seconds later, Herzog raised ---------FOOTNOTES---------- -[6]-During the period of November 23, 1993 through December 7, 1993, Bear Stearns was Wegard's clearing agent. As the clearing agent for Wegard, Bear Stearns was solely an executing agent for Wegard's transactions in Of Counsel securities, whose role it was to execute transactions at Wegard's direction. Tr. 801, 940-941 (Humenik). Wegard was not required to place its orders with Bear Stearns and if Wegard was not satisfied with Bear Stearns's execution, it could have gone to any one of the 15 firms that were making a market in Of Counsel securities. Tr. 802 (Humenik), 732-733 (Greer). Wegard had control over the purchase price that Bear Stearns paid on its behalf for Of Counsel units, because Bear Stearns only entered the orders on Wegard's behalf, and Wegard, as the customer, had the final say on the price, by its instructions to Bear Stearns. Tr. 801, 940- 941 (Humenik), 752-753 (Greer). ==========================================START OF PAGE 15====== its offer quotation to $5, which left a new inside offer of $4/3- 8. Div. Exs. 36 LEGLU 12/23/93 at 4-5, 45 at 5. At 12:34 p.m., McKeon raised Mayer's bid from $4-1/4 to $4- 3/8, which set a new high bid at $4-3/8. Div. Ex. 36 LEGLU 11/23/93 at 5; Tr. 449-452 (McKeon). At 12:35 p.m., Wegard purchased 3,000 Of Counsel units from Mayer at $4.50 per unit. Div. Exs. 45 at 5, 66 at 2. After execution of that order, the inside market for Of Counsel units was $4-3/8 bid, $4-5/8 ask. Div. Exs. 153, 36 LEGLU 11/23/93 at 6-7. At 12:48:17 p.m., Mayer purchased 4,000 units from Bear Stearns's IPO customers at Mayer's bid of $4-3/8. Div. Ex. 81 at 7; Div. Ex. 45 at 5. At 12:48:34 p.m., Wegard purchased 3,000 Of Counsel units at $4.50 per unit from Mayer. Div. Exs. 45 at 5, 66 at 2. After execution of that order, the inside market for Of Counsel units was $4-3/8 bid, $4-3/4 ask. Div. Exs. 153, 36 LEGLU 11/23/93 at 7. At 1:28 p.m., Wegard bought 24,000 units at $4-7/16 per unit from an IPO customer at Bear Stearns, completing Wegard's purchase order for 30,000 Of Counsel units. Div. Exs. 67, 45 at 5. After execution of that order, the inside market for Of Counsel units was $4-3/8 bid, $4-7/8 offer. Div. Ex. 36 LEGLU 11/23/93 at 9. At 1:29 p.m., Mayer purchased 1,000 units from a Bear Stearns IPO customer at Mayer's bid of $4-3/8. Div. Ex. 45 at 5. At the end of trading, Wolf & Co. had accumulated the equivalent of 545,000 Of Counsel units, representing 37.9% of the ==========================================START OF PAGE 16====== freely tradeable units. Total reported volume for Of Counsel units was 172,000 units, 73.3% of which was attributable to purchases made by Wolf & Co. (122,000) and Paragon (4,000), Wolf & Co.'s purchases alone accounting for 70.9%. Div. Ex. 45 at 5- 6. Similarly, 20.9% of the volume was attributable to purchases by Wegard (30,000) and Mayer (6,000), Wegard's purchase alone accounting for 17.4%. Div. Ex. 45 at 5-6. November 24 The inside market for Of Counsel units opened at $4-5/8 bid, $5 ask, and closed at $4-7/8 bid, $5-1/8 ask. Div. Ex. 36 LEGLU 11/24/93 at 2, 15. Fahnestock & Co., Inc. (Fahnestock) purchased 5,000 Of Counsel units in order to cover its sale of 5,000 shares of Of Counsel stock to Wolf & Co. Div. Ex. 45 at 6-7. J.W. Charles also purchased 1,000 units and CSG purchased a total of 2,500 units, both to cover sales to Wolf & Co. Div. Ex. 45 at 6- 7. Wegard purchased 1,000 Of Counsel units at $5 per unit from Mayer, which was the first transaction of the day and was executed at the inside offer. Div. Exs. 45 at 6, 36 LEGLU 11/24/94 at 2. Mayer purchased 1,000 Of Counsel units to cover its sale to Wegard. Div. Ex. 45 at 6. Less than twenty minutes before the close of trading, Wolf & Co. set a new high bid quotation for Of Counsel units by entering a bid quotation of $4- 5/8. Div. Ex. 36 LEGLU 11/24/93 at 8. Total reported volume for Of Counsel units was 53,500 units, of which 15.9% was attributable to purchases by CSG (2,500), J.W. Charles (1,000) and Fahnestock (5,000) made to cover sales to ==========================================START OF PAGE 17====== Wolf & Co. Div Ex. 45 at 6-7. Total reported volume for Of Counsel common stock was 20,000, which Wolf & Co.'s purchase of 5,000 shares at $3.50 per share accounted for 25%. Div. Ex. 46 at 2. November 26 The inside market for Of Counsel units opened at $4-7/8 bid, $5-1/8 ask, and closed with no change in the bid or ask. Div. Ex. 36 LEGLU 11/26/93 at 1-3. Wolf & Co.'s bid for Of Counsel units was the high bid quotation, unmatched by any other firms, for the entire trading day. Id. Wolf & Co. purchased 5,900 Of Counsel units from Cohig & Associates, Inc. (Cohig) at $4.875 per unit and Cohig purchased 5,900 units to complete the sale to Wolf & Co. Div. Ex. 45 at 7. At the end of trading, Wolf & Co. held the equivalent of 550,900 units. Total reported volume for Of Counsel units was 13,300 units, of which 88.7% was attributable to purchases by Wolf & Co. (5,900) and Cohig (5,900), Wolf & Co.'s purchase alone accounting for 44.4%. Div Ex. 45 at 7. Wegard held 31,000 units at an average cost of $4.47 per unit. Div. Exs. 45 at 3-6, 154A. November 29 At the opening of trading, there were only 250,600 units of Of Counsel available that were not already owned by Wolf & Co., Hibbard and Wegard. Div. Exs. 45-47. The inside market for Of Counsel units opened at $4-7/8 bid, $5-1/8 ask, and closed at $5- 1/8 bid, $5-3/8 ask. Div. Ex. 36 LEGLU 11/29/93 at 1, 8. ==========================================START OF PAGE 18====== At 11:11 a.m., Wegard entered an order for 25,000 Of Counsel units at $5-1/8, the inside ask. Div. Exs. 153, 69, 36 LEGLU 11/29/93 at 3-4. Bear Stearns presented Wegard's 25,000 unit order to Mayer. Tr. 452 ln. 10-12 (McKeon). McKeon subsequently raised Mayer's bid three times that day, at 11:15 a.m., 11:16 a.m. and 2:52 p.m., in order to purchase the required number of units. Div. Exs. 36 LEGLU 11/29/93 at 4-5, 45 at 8; Tr. 449-452 (McKeon). Mayer's third increase of its bid price for Of Counsel units set a new high bid of $5. Div. Ex. 36 LEGLU 11/29/93 at 5. Shortly thereafter, at 3:08 p.m., Mayer made its first purchase of the day, buying 6,000 units from Cohig at $5-1/8. Div. Ex. 45 at 8. Twenty three seconds later, Cohig bought 5,900 units at $5 from one of its customers. Id. Five minutes later, at 3:13 p.m., Mayer sold its 6,000 units to Wegard at $5-1/8. Id. One minute after Mayer's sale of 6,000 units to Wegard, at 3:14 p.m., after Bear Stearns informed Wegard that it could not fill Wegard's entire 25,000 unit order at Wegard's limit of $5- 1/8, Greer raised Wegard's limit price to the inside ask of $5- 1/4. Div. Exs. 70 at 1, 69 at 2, 36 LEGLU 11/29/93 at 5-6; Tr. 748, 752-753 (Greer). At 3:20 p.m., Mayer again raised its quotes, once again setting a new high bid, at $5-1/8. Div. Ex. 36 LEGLU 11/29/93 at 6. At 3:21 p.m., Mayer bought 2,000 units from T.R. Winston (Winston) at $5-1/4. Div. Ex. 45 at 8. Winston covered that sale thirty-nine seconds later by purchasing 2,000 units from Ladenburg at $5-1/8. Id. At 3:22 p.m., Mayer bought 3,500 units from John Dawson (Dawson) at $5-1/8. Id. ==========================================START OF PAGE 19====== Dawson covered that sale by purchasing 8,500 units from Ladenburg, in a transaction reported late, at 4:18 p.m. Id. After Mayer's purchase from Winston, Winston, which had been the lone seller at the inside ask of $5-1/4, raised its quotes by $1/4, raising the inside ask to $5-3/8. Tr. 812 (Humenik); Div. Exs. 36 LEGLU 11/29/93 at 6-7, 151 at 3. At 3:23 p.m., Mayer sold 6,000 units to Wegard at $5-1/4. Div. Ex. 45 at 8. Shortly thereafter, at 3:44 p.m., after being informed by Bear Stearns that it could not fill the remainder of its order at $5-1/4, Wegard once again raised its price, this time to the inside ask of $5-3/8. Div. Exs. 71, 36 LEGLU 11/29/93 at 7. Eight minutes later, at 3:51 p.m., Mayer sold 13,000 units to Wegard at $5-3/8, completing Wegard's 25,000 unit buy order. Div. Ex. 45 at 8. Wegard's purchase of 13,000 units at $5-3/8 set a new high price for Of Counsel units. Div. Ex. 45 at 1-8. Mayer was short 13,600 units so, at 3:53 p.m., Mayer purchased 2,300 units from CSG at $5-1/8, leaving it short 11,300 units for the day. Div. Ex. 45 at 7-8. At the close of trading, Wegard, Wolf & Co. and Hibbard controlled 1,232,400 Of Counsel units, or 85.7% of the float. Div. Ex. 45-47. Total reported volume was 66,200 units, of which 75.8% was attributable to purchases by Wegard (25,000), Mayer (13,800), Cohig (5,900), Winston (2,000), and Dawson (3,500), Wegard's purchases alone accounting 37.8%.-[7]- Div. Ex. 45 ---------FOOTNOTES---------- -[7]-Only 3,500 of the 8,500 units purchased by Dawson were included in this calculation because only 3,500 were used to cover the sale to Mayer. ==========================================START OF PAGE 20====== at 7-8. Wegard purchased 25,000 units, or 10% of the available units, which increased its total units accumulated to 56,000 units and increased its average cost to $4.83 per unit. Div. Exs. 154A; 45 at 7-8. Neither Wolf & Co. nor Hibbard purchased any units on November 29. Div. Ex. 45 at 7-8. November 30 The inside market for Of Counsel units opened at $5-1/8 bid, $5-3/8 ask, and closed at $5-1/2 bid, $6 ask. Div. Ex. 36 LEGLU 11/30/93 at 1, 18. At the opening of trading, there were only 205,100 units available that were not already owned by Wolf & Co., Hibbard, and Wegard. Div. Exs. 45-47. At 9:47:28 a.m., Cohig raised its quotes by $1/8, raising the inside ask to $5-1/2 from the opening of $5-3/8. Fifteen seconds later, at 9:47:43, Cohig raised its quotes by another $1/8. Div. Ex. 36 LEGLU 11/30/93 at 4-5. Twenty-five seconds later, at 9:48:08 a.m., Wolf & Co. purchased 1,000 Of Counsel units from Cohig at $5-3/8. Div. Ex. 45 at 8. The inside bid for Of Counsel units was raised three times, from $5-1/8 to $5-1/2. Div. Ex. 36 LEGLU 11/30/93 at 8, 13 and 15. Wolf & Co. raised the inside bid for Of Counsel units on two of those three occasions, from $5-1/8 to $5-1/4 and from $5-1/4 to $5-3/8, at 9:59 a.m and 11:56 a.m., respectively. Id. At 3:51 p.m., Hibbard purchased 8,000 units from Wien Securities at the inside ask of $5-3/4, which set a new high price for the units. Div. Ex. 45 at 8-9. Six minutes later, Hibbard set another new high price by purchasing 2,000 units from ==========================================START OF PAGE 21====== Cohig for $5-7/8. Id. At 3:57:28 p.m., Hibbard made its final purchase of the day, buying 3,000 units from Cohig at $5-3/4. Id. These purchases totaled 13,000 units and represented 6.3% of the available units. Id. At 3:48 p.m., Wien Securities purchased 8,000 units from Dawson for $5-5/8, covering its sale of 8,000 units to Hibbard. Div. Ex. 45 at 9. Dawson, in turn, covered that sale by purchasing 12,000 units from Ladenburg at $5.55, in a transaction reported at 4:08 p.m. Id. Cohig covered its sale of 5,000 units to Hibbard at 3:56 p.m., when it purchased 5,700 units from a customer at $5-1/2. Id. Mayer continued to buy on November 30 to partially cover its 11,300 unit short position remaining from November 29. Div. Ex. 45 at 8-9. Mayer purchased 2,700 units from CSG at $5-3/8 at 10:29 a.m. on November 30. Div. Ex. 45 at 8. CSG covered 3 minutes later, purchasing 5,000 units from one of its customers at $5-1/4. Id. At 12:29 p.m., Mayer raised its bid from the inside bid of $5-3/8 to a new high bid of $5-1/2. Div. Ex. 36 LEGLU 11/30/93 at 15. Thirty-eight minutes later, at 1:07 p.m., Mayer purchased 2,000 units from CSG at $5-5/8. Div. Ex. 45 at 9. Finally, Mayer purchased another 2,000 units from CSG at 3:56 p.m., also at $5-5/8. Id. CSG was short 1,700 units on the day's transactions. Id. at 8-9. Total reported volume was 80,830, of which 42% was attributable to purchases by Hibbard (13,000), Wien Securities (8,000), Cohig (5,000) and Dawson (8,000), Hibbard's purchase ==========================================START OF PAGE 22====== alone accounting for 16.1%. Div. Ex. 45 at 8-9. Similarly, 14.5% of the volume was attributable to purchases by Mayer (6,700) and CSG (5,000). At the close of trading, Wegard, Wolf & Co. and Hibbard controlled 1,269,400 Of Counsel units, or 88.3% of the float. Div. Ex. 45-47. December 1 The inside market for Of Counsel units opened at $5-1/2 bid, $6 ask, and closed at $6-1/4 bid, $6-1/2 ask. Div. Ex. 36 LEGLU 12/01/93 at 3, 17. At the opening of trading, there were only 168,100 units available that were not already owned by Wolf & Co., Hibbard and Wegard. Div. Exs. 45-47. At 12:35 p.m., Hibbard purchased 1,000 units from Ladenburg at $6-1/8 and Ladenburg covered that sale with the purchase of 45,000 units from a customer at $5-1/2, reported at 4:40 p.m. Div. Ex. 45 at 9. Wolf & Co. purchased a total of 4,500 Of Counsel units, including 3,500 at $6 and 1,000 at $6-1/4. Div. Ex. 45 at 9-10. Each purchase set a new high price for Of Counsel units. Id. Wolf & Co. raised the inside bid twice that day, from $5-3/4 to $6 and from $6 to $6-1/4. Div. Ex. 36 LEGLU 12/1/93 at 10, 13- 14. CSG purchased 500 units from one of its customers at $5-3/4 at 10:30 a.m. on December 1, partially reducing its short position from the prior day. Div. Ex. 45 at 9. Mayer purchased 4,000 units from Ladenburg at $6-1/8 at 12:29 p.m., 3,500 of which are attributable to Mayer's transactions with Wegard ==========================================START OF PAGE 23====== because Mayer sold 500 units to Princeton Securities on that day. Div. Ex. 45 at 9-10. This left Mayer with a 1,100 unit short position from November 29. Id. at 7-10. Ladenburg covered its 4,000 unit sale to Mayer by purchasing 45,000 units from its customers at $5-1/2, in a transaction reported after hours, at 4:40 p.m. Id. Total reported volume for Of Counsel units was 65,000, of which 11.5% was attributable to purchases by Mayer (3,500), Ladenburg (3,500), and CSG (500).-[8]- Similarly, Hibbard's purchases alone accounted for 1.5% of the total reported volume and the purchases by Hibbard (1,000) and Ladenburg (1,000) accounted for 3.1%. Div. Ex. 45 at 9-10.-[9]- At the close of trading, Wegard, Wolf & Co. and Hibbard controlled 1,280,900 Of Counsel units, or 89.1% of the float. Div. Ex. 45-47. December 2 The inside market for Of Counsel units opened at $6-1/4 bid, $6-1/2 ask, and closed at $6-3/4 bid, $7-1/4 ask. Div. Ex. 36 LEGLU 12/2/93 at 1, 11. Mayer accounted for all of the increases in the inside bid, advancing it three times. Id. at 5, 7, 11. Mayer made two 1,000 unit purchases which covered its 1,100 unit ---------FOOTNOTES---------- -[8]-Only 3,500 units of the 45,000 purchased by Ladenburg were included in this calculation because only 3,500 were needed to cover that portion of Mayer's short position attributable to transactions with Wegard. -[9]-Only 1,000 of the 45,000 units purchased by Ladenburg were included in this calculation because only 1,000 were used to cover the sale to Hibbard. ==========================================START OF PAGE 24====== short position remaining from December 1.-[10]- Div. Ex. 45 at 10. Mayer made its second purchase of the day from Wolf & Co., at $7.25, which established a new high price for the units. Div. Ex. 45 at 10. Mayer's trader advanced Mayer's bid because of buying pressure from Wegard. Tr. 449-452 (McKeon). At the close of trading, Wegard, Wolf & Co. and Hibbard controlled 1,279,900 Of Counsel units, or 89% of the float. Div. Exs. 45-47. December 3 The inside market for the Of Counsel units opened at $6-3/4 bid, $7-1/4 ask, and closed at $7-1/2 bid, $8 ask. Div. Ex. 36 LEGLU 12/03/93 at 1, 13. At the opening of trading, there were only 157,600 units available that were not already owned by Wolf & Co., Hibbard, and Wegard. Div. Exs. 45-47. Wegard purchased 20,000 units, or 12.7% of the available units, increasing Wegard's accumulation to 76,000 units and increasing its average cost to $5.67 per unit. Div. Exs. 154A, 45 at 10-11. Hibbard made four purchases of Of Counsel units for a total of 14,500 units, or 9.2% of the units not already owned by Wolf & Co., Hibbard, and Wegard. Div. Ex. 45 at 10-12. Hibbard purchased 3,800 units from Wien Securities-[11]- at 12:41 p.m., setting a new high price of ---------FOOTNOTES---------- -[10]-Therefore, 1,100 of the units purchased by Mayer are attributable to Wegard. -[11]-Between December 1 and December 10, 1993, Stephen Wien (Wien) was the trader in Of Counsel securities for his firm, Wien Securities. Div. Ex. 143 at 1. Wien Securities was, during that (continued...) ==========================================START OF PAGE 25====== $7-3/8. Div. Ex. 45 at 11. Hibbard purchased 2,000 more units at $7-3/8 from Wien Securities at 2:21 p.m. Id. At 3:35 p.m., Hibbard purchased 3,500 units from Wien Securities at $7-5/8, and at 3:48 p.m., purchased 5,000 units from Ladenburg, also at $7- 5/8. Id. At 12:43 p.m., two minutes after it had sold 3,800 units to Hibbard at $7-3/8, Wien Securities covered that sale by purchasing 3,800 units from Dawson at $7-1/4. Div. Ex. 45 at 11. Wien Securities covered the sale of 2,200 units to Hibbard at 2:21 p.m. by purchasing an additional 2,200 units from Dawson at $7-1/4. Id. Dawson covered those two sales to Wien Securities, totaling 6,000 units, by purchasing 6,000 units from Ladenburg at $7-1/8 in a transaction reported at 4:14 p.m. Id. at 12. Ladenburg covered its sale of 6,000 units to Dawson and its sale of 5,000 units to Hibbard with its purchase of 24,500 units from a customer at $6-3/4, in a transaction reported at 4:45 p.m. Id. Wien Securities covered its sale of 3,500 units to Hibbard by purchasing 3,500 units from Fahnestock at $7-1/2. Id. at 11. When the prevailing inside bid was $7, Hibbard placed an order with Wien Securities to purchase units at $7-3/8. Because ---------FOOTNOTES---------- -[11]-(...continued) period, a market maker in Of Counsel securities. Id. On several occasions during the period from December 1 through December 10, 1993, Wien set new high bids for Of Counsel units by raising Wien Securities's bid quotations. Id. He did so because Hibbard, through its trader, Anthony Nadino, with whom Wien had a prior trading relationship, placed orders for Of Counsel units with Wien Securities above the inside bid. Id. at 1-2. Tr. 369 (Wien). Because Wien was unable to acquire Of Counsel units at the inside bid, he was required to raise Wien Securities' bid to new highs in order to purchase units to fill Hibbard's orders. Id. at 2. ==========================================START OF PAGE 26====== Wien was unable to buy units at $7 to fill that order, he paid $7-1/4 for two blocks of units, and raised his inside bid to a new high of $7-1/4 to reflect his position. Tr. 370-371 (Wien). Later that same day, after Hibbard placed an order to purchase Of Counsel units from Wien at $7-5/8, Wien immediately raised his inside bid from $7-1/4 to $7-1/2 in order to purchase units to fill that order. Tr. 371 (Wien). Wegard entered its order to purchase 20,000 Of Counsel units at the inside ask of $8 at 2:05 p.m. Div. Exs. 72, 36 LEGLU 12/03/95 at 9. Greer made the decision to enter the order at a limit at the inside ask of $8. Tr. 754 (Greer). Mayer filled that order at 2:43 p.m., selling 20,000 units to Wegard at $8. Div. Ex. 45 at 11. At that time, the inside ask was $8, and Wegard's purchase set a new high price for the units. Div. Ex. 45 at 10-11. To partially cover this sale, Mayer bought 4,000 units from Winston at $7 at 2:33 p.m., 8,000 units from Ladenburg at $7-1/2 at 2:43 p.m., 1,500 units from Fahnestock at $7-3/4 at 3:37 p.m. and 1,000 units from Cohig at $7-7/8 at 3:38 p.m. Div. Ex. 45 at 11. Mayer was then short 5,500 units on the day's trading. Div. Ex. 45 at 10-12. To cover their sales to Mayer, Winston bought 4,000 units from Ladenburg at $6.95 at 4:14 p.m. and Fahnestock bought 2,900 units from Kidder Peabody at $7-1/2 at 3:51 p.m. Div. Ex. 45 at 11-12. Cohig sold Mayer 1,000 units that it had purchased from its customer at $7-1/2 at 2:40 p.m. Id. Ladenburg bought 24,500 units from its customers at $7-1/8, reported at 4:45 p.m., which covered both Ladenburg's sale of ==========================================START OF PAGE 27====== 8,000 units to Mayer and its subsequent sale of 4,000 units to Winston. Id. The inside bid for Of Counsel units increased three times: Mayer raised the inside bid once, from $6-3/4 to $7, and Wien Securities raised the inside bid twice, from $7 to $7-1/4 and from $7-1/4 to $7-1/2. Div. Ex. 36 LEGLU 12/03/93 at 4, 9-10 and 11. At the close of trading, Wegard, Wolf & Co., and Hibbard controlled 1,314,400 Of Counsel units, or 91.4% of the float. Div. Exs. 45-47. Total reported volume was 111,000 units, of which 47.7% was attributable to purchases by Wegard (20,000), Mayer (14,500), Cohig (1,000), Winston (4,000), Fahnestock (1,500), and Ladenburg (12,000), Wegard's purchases alone accounting for 18%.-[12]- Similarly, the purchases by Hibbard (14,500), Wien Securities (9,500), Dawson (6,000) and Ladenburg (11,000) accounted for 36.9% of the volume. Div. Ex. 45 at 10-12.-[13]- December 6 The inside market for Of Counsel units opened at $7-1/2 bid, $8 ask, and closed at $7-3/4 bid, $8-1/4 ask. Div. Ex. 36 LEGLU 12/06/93 at 1, 9. At the opening of trading, there were 123,100 units available that were not already owned by Wolf & Co., ---------FOOTNOTES---------- -[12]-Only 1,500 units of Fahnestock's purchases were included in this calculation because only 1,500 were used to cover Mayer's sale to Wegard. -[13]-Only 11,000 units of Ladenburg's 24,500 unit purchase were included in this calculation because only 11,000 were used to cover the sales to Hibbard and Dawson. ==========================================START OF PAGE 28====== Hibbard, and Wegard. Div. Exs. 45-47. Wegard purchased 10,000 units, or 8.1% of the available units, increasing Wegard's accumulation to 86,000 units and increasing its average cost to $5.91 per unit. Div. Exs. 45 at 12, 154A. Wolf & Co. purchased 2,200 units from CSG at $7-1/2 and 1,000 units from Herzog at $8. Div. Ex. 45 at 12. Hibbard made one purchase of 5,000 Of Counsel units from Wien Securities at $7-7/8 in a transaction reported at 4:02 p.m. Div. Ex. 45 at 12 Wien Securities covered its sale of 5,000 units to Hibbard by purchasing 5,000 units from Dawson at $7-3/4 at 3:24 p.m. Div. Ex. 45 at 12. Dawson covered its sale of 5,000 units to Wien Securities by purchasing 5,000 units from Ladenburg at $7.70, which in turn purchased 5,000 units from a customer at $7-1/2. Id. These last two transactions were reported at 4:10 p.m. and 4:11 p.m., respectively. Id. Hibbard placed an order with Wien to purchase Of Counsel units at $7-13/16. Tr. 371-372 (Wien). Wien Securities' bid at the time was, along with Mayer's and Wolf & Co.'s, at the inside bid of $7-1/2. Tr. 372 (Wien); Div. Ex. 36 LEGLU 12/6/93 at 4-5. Because Wien could not buy units at his bid of $7-1/2, he raised his bid to $7-3/4, which set a new high bid for Of Counsel units. Tr. 372 (Wien); Div. Ex. 36 LEGLU 12/6/93 at 5. He was then able to purchase units at $7-3/4 and fill Hibbard's order at $7-13/16. Tr. 372 (Wien). At 3:20 p.m., Mayer bought 3,000 units from Fahnestock at $8 to partially cover its 5,500 unit short position from the ==========================================START OF PAGE 29====== previous trading day. Div. Ex. 45 at 12. At 3:57 p.m., Wegard bought 10,000 Of Counsel units at $7-3/4 from a Bear Stearns IPO customer. Div. Ex. 45 at 12.-[14]- Total reported volume for Of Counsel units was 36,200, of which 35.9% was attributable to purchases by Wegard (10,000) and Mayer (3,000), Wegard's purchases alone accounting for 27.6%. Div. Ex. 45 at 12. Similarly, 55.2% of the volume was attributable to purchases by Hibbard (5,000), Wien Securities (5,000), Dawson (5,000), and Ladenburg (5,000), Hibbard's purchase alone accounting for 13.8%. Id. At the close of trading, Wegard, Wolf & Co. and Hibbard controlled 1,337,600 Of Counsel units, or 93.1% of the float. Div. Ex. 45-47. December 7 The inside market for Of Counsel units opened at $7-3/4 bid, $8-1/4 ask, and closed at $8 bid, $8-1/2 ask. Div. Ex. 36 LEGLU 12/07/93 at 1, 10. At the opening of trading, there were only 99,900 units available that were not already owned by Wolf & Co., Hibbard, and Wegard. Div. Exs. 45-47. Wegard purchased 15,000 Of Counsel units at $7-3/4 from a Bear Stearns customer. Div. Ex. 45 at 12.-[15]- ---------FOOTNOTES---------- -[14]-Wegard's order ticket for that transaction, which is not time-stamped, has the following words written in the "Special Instructions" box: "Bear phoned us with an order they had a cust that wanted to sell and they knew we had an interest." Div. Ex. 73. -[15]-Wegard's order ticket for this transaction has the following words written in the "Special Instructions" box: "Todd at Bear called us with an order to Buy." Div. Ex. 74. ==========================================START OF PAGE 30====== At the close of trading, Wegard, Wolf & Co., and Hibbard controlled 1,352,600 Of Counsel units, or 94.1% of the float. Wegard's purchase of 15,000 units represented 15% of the available units, increasing Wegard's accumulation to 101,000 units and increasing its average cost to $6.18 per unit. Div. Exs. 45 at 12-13, 154A. Total volume was 54,700 units, of which 27.4% was accounted for by Wegard's purchase. Div. Exs. 45 at 12-13, 45-47. These purchases reduced the available supply to 84,900 units not already owned by Wolf & Co., Hibbard and Wegard. Div. Exs. 45-47. December 8 The inside market for Of Counsel units opened and closed at $8 bid, $8-1/2 ask. Div. Ex. 36 LEGLU 12/08/93 at 1, 5. Hibbard purchased 12,000 units, or 14.1% of the available units. Div. Ex. 45 at 13. Hibbard bought 1,500 units from Ladenburg at $8- 1/8 at 9:53 a.m., and 3,500 units from Ladenburg, also at $8-1/8, at 10:03 a.m. Div. Ex. 45 at 13. Hibbard bought 7,000 units from Wien Securities at $8-1/8 at 10:04 a.m., which Wien covered with two purchases from Dawson totalling 7,000 units, at $8, at 9:42 a.m. and 10:02 a.m. Id. Finally, Dawson covered that sale with the purchase of 7,000 units from Ladenburg at $7.99, which was reported at 4:07 p.m. Id. Wolf & Co. purchased 800 units from J.W. Charles at $8 and 4,000 units from Herzog at $8. Div. Ex. 45 at 13. Total reported volume was 41,200 units, of which 63.1% was attributable to purchases by Hibbard (12,000), Wien Securities ==========================================START OF PAGE 31====== (7,000), and Dawson (7,000), Hibbard's purchases alone accounting for 29.1%. Div. Ex. 45 at 13. As of the close of trading, Wolf & Co. held 617,900 Of Counsel units in inventory, including units, common stock, and warrants purchased separately; Hibbard held 650,500 Of Counsel units in inventory, and Wegard held 101,000 units of Of Counsel in its inventory.-[16]- Div. Ex. 45-47. Jointly, the three firms held 1,369,400 units, or 95.3% of Of Counsel's 1,437,500 freely tradable shares. CONCLUSIONS OF LAW Sales of securities by broker-dealers to their customers carry the implied representation that the prices charged in those transactions are reasonably related to prices prevailing in a free, open and competitive market. SEC v. Resch-Cassin & Co., 362 F. Supp. 964, 978 (S.D.N.Y. 1973); see S.T. Jackson & Co., 36 S.E.C. 631, 654 (1950). The basic goal of the Exchange Act is to prevent persons from rigging the market for a security by ensuring that the price of the security is determined through the free forces of supply and demand. See United States v. Stein, 456 F.2d 844, 850 (2d Cir.), cert. denied, 408 U.S. 922 (1972). A free and open market is "built upon the theory that competing judgments of buyers and sellers as to the fair price of the ---------FOOTNOTES---------- -[16]-At Greer's direction, in February and March 1995, Wegard sold the 101,000 Of Counsel warrants that remained in its inventory, at a loss. Resp. Exs. 19-22; Tr. 673 (Greer). These sales consisted of 150 warrants sold on February 23, 1995 for $3/32, 95,850 warrants sold to Ruth Greer, Greer's wife, for 1 cent each on March 23, 1995, and 5,000 warrants sold for $1/32 each on March 23, 1995. Resp. Exs. 19-22. ==========================================START OF PAGE 32====== security brings about a situation where the market price reflects as nearly as possible a just price." United States v. Charnay, 537 F.2d 341, 347 n.8 (9th Cir.), cert denied, 429 U.S. 1000 (1976) (quoting House Report on the Securities Exchange Act, H.R.Rep. No. 1383, 73rd Cong., 2d Sess., p. 11 (1934)). Section 17(a)(1) of the Securities Act makes it unlawful, in the offer or sale of securities, to employ devices, schemes or artifices to defraud. Section 17(a)(2) of the Securities Act prohibits material misstatements or omissions of material fact, and Section 17(a)(3) prohibits transactions, practices, or course of business which operate as a fraud or deceit upon the purchaser. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder similarly prohibit fraudulent schemes in connection with the purchase or sale of securities. Section 15(c) of the Exchange Act and Rule 15c1-2 promulgated thereunder contain virtually the same provisions as Section 10(b) and Rule 10b-5, but apply specifically to broker-dealers. Scienter is an element of violations of Section 17(a)(1) of the Securities Act and Sections 10(b) and 15(c) of the Exchange Act.-[17]- The Supreme Court has defined scienter as "a mental state embracing intent to deceive, manipulate or defraud ...." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Recklessness is sufficient to satisfy the scienter ---------FOOTNOTES---------- -[17]-No scienter requirement exists for violations of Sections 17(a)(2) or 17(a)(3) of the Securities Act. Aaron v. SEC, 446 U.S. 680, 702 (1980). ==========================================START OF PAGE 33====== requirement. Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1044 (7th Cir.), cert. denied, 434 U.S. 875 (1977). Section 9(a)(2) of the Exchange Act makes it unlawful, with respect to a security listed on a national exchange, to effect: (1) a series of security transactions, alone or with one or more persons; (2) which create actual or apparent active trading in such security or which raise or depress the price of such security; (3) for the purpose of inducing others to buy or sell the security. Manipulative activities of the type prohibited by Section 9(a)(2) of the Exchange Act are also violations of Section 17(a) of the Securities Act and Sections 10(b) and 15(c) of the Exchange Act. Accordingly, Section 17(a) of the Securities Act and Sections 10(b) and 15(c) of the Exchange Act are deemed to prohibit manipulative activities with respect to over-the-counter securities. Resch-Cassin, 362 F. Supp. at 975; Halsey, Stuart & Co., Inc., 30 S.E.C. 106, 111 (1949); Barrett & Co., 9 S.E.C. 319, 328 (1941). When the basis of liability rests on Section 10(b) and Rule 10b-5, however, it is not necessary to show a manipulative purpose. Instead, it is sufficient to show that the person engaged in a fraud or deceit as to the nature of the market for the security. Michael Batterman, 46 S.E.C. 304, 305 (1976); see also Charnay, 537 F.2d 341 at 350. Manipulation The court in Resch-Cassin listed various factors which characterize attempts by manipulators to raise the price of a security. Among them are price leadership by the manipulator, ==========================================START OF PAGE 34====== domination and control of the market, and restricting the "floating supply of stock." 362 F. Supp. at 976-77. However, an infinite variety of manipulative devices are encompassed within Section 10(b) and Rule 10b-5. See Herpich v. Wallace, 430 F.2d 792, 802 (5th Cir. 1970). A finding of manipulation is not dependent upon the presence of any particular device usually associated with a manipulative scheme. Swartwood, Hesse, Inc., 50 S.E.C. 1301, 1307 (1992). The proof in a manipulation case "almost always depends on inferences drawn from a mass of factual detail. Findings must be gleaned from patterns of behavior, from apparent irregularities, and from trading data." Pagel, Inc., 48 S.E.C. 223, 226 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986) (footnote omitted). A series of transactions in a manipulative scheme may consist of actual purchases or sales of securities or bid quotations entered for securities. Resch-Cassin, 362 F. Supp. at 975. "Rapidly rising prices in the absence of any demand" for securities are "well-known symptoms" of manipulative transactions. Dlugash v. SEC, 373 F.2d 107, 109 (2d Cir. 1967); see Resch-Cassin, 362 F. Supp. at 970-971. In Todd & Co., the Commission, in determining that a market had been manipulated, emphasized that there was little retail demand for the securities in question. Todd & Co., Inc., 46 S.E.C. 314, 319 (1976), vacated and remanded on other grounds sub. nom., Todd & Co., Inc. v. SEC, 557 F.2d 1008 (3d Cir. 1977). A lack of public information which could justify a price increase for a security ==========================================START OF PAGE 35====== is also evidence that a series of manipulative transactions caused the price of the securities to rise. See Mawod & Co. v. SEC, 591 F.2d 588, 591-92 (10th Cir. 1979). Wolf & Co. entered into a series of transactions in Of Counsel units, stock and warrants by purchasing units, common stock and warrants. Wolf & Co.'s bids for Of Counsel securities also constitute a series of transactions. The series of transactions in Of Counsel securities caused an increase in the price for Of Counsel units. Two factors in particular indicate that Wolf & Co., Hibbard, and Wegard artificially inflated the price of Of Counsel securities. First, there was virtually no retail demand for Of Counsel securities during the rapid price rise. During the entire period from November 16, 1993 through December 8, 1993, only 1.9% of the Of Counsel units volume involved retail customers. And second, there was no publicly- disseminated information regarding Of Counsel to account for the price increase from the $3.25 IPO price to the high price of $8.-[18]- Reduction of Floating Supply The reduction of the floating supply of a security is one "factor which characterizes attempts by manipulators to raise the price of an over-the-counter security." Resch-Cassin, 362 F. ---------FOOTNOTES---------- -[18]-During the period of November 1, 1993 through December 8, 1993, an Of Counsel press release dated November 17, 1993, and the Of Counsel prospectus were the only public information issued concerning Of Counsel. Div. Ex. 140. While two news articles were published during this time, they provided no additional information concerning Of Counsel. Div. Ex. 140. ==========================================START OF PAGE 36====== Supp. at 977. A reduced floating supply makes the market more susceptible to manipulation. See Harold T. White, 3 S.E.C. 466, 477 (1938) and Halsey, Stuart & Co., 30 S.E.C. at 128. Evidence of a reduction in floating supply is particularly persuasive of manipulation where the amount taken off of the market is substantial. See, e.g., Gob Shops of America, Inc., 39 S.E.C. 92, 100 (1959) (broker-dealer bought 98,611 of 252,000 outstanding, unrestricted shares). The Commission has defined the floating supply of a stock as "that part of the issue which is outstanding and which is held by dealers and the public with a view to resale for a trading profit, as distinguished from that part of the stock held for investment." Barrett & Co., 9 S.E.C. at 327 n.8. The floating supply does not include securities held by persons who agree not to sell the securities during the period in question. See Gob Shops, 39 S.E.C. at 97, 100. In Barrett & Co., one of the respondent broker-dealers found to have engaged in a manipulation accumulated 35% of the floating supply prior to the beginning of "the actual price-raising program," during which three broker-dealers, together, accumulated an additional 48% of the float. Barrett & Co., 9 S.E.C. at 327-8. Wolf & Co., Hibbard, and Wegard reduced the floating supply of Of Counsel securities. Wolf & Co. accumulated a substantial amount of the outstanding units shortly after the IPO. Wolf had been actively involved in preparation for the underwriting, choosing the underwriter, encouraging broker-dealers such as Ladenburg, Gaines Berland and D.H. Blair to become selling group ==========================================START OF PAGE 37====== members, and soliciting investors for the Of Counsel IPO. During the course of these activities, Wolf informed various individuals that Wolf & Co. was interested in the offering, and specifically told Rosenstock that Wolf & Co. would probably be buying Of Counsel securities at a premium in the aftermarket. Thus, Wolf set the stage for the acquisition of the vast majority of the Of Counsel units by Wolf & Co., Hibbard, and Wegard. Within the first six days of aftermarket trading, Wolf & Co. began to reduce the float. Wolf contacted those individuals and broker-dealers that he had previously brought into the IPO and directed Wolf & Co.'s purchase of large blocks of units from Gaines Berland, CSG, and D.H. Blair, among others. At the same time, blocks of units owned by Ladenburg customers were being quickly offered to Wolf & Co. by Wohl, who knew that Wolf was keenly interested in Of Counsel. The overwhelming majority of IPO customers were selling Of Counsel units to Wolf & Co., while almost no retail customers were buying. Wolf & Co.'s reduction in the float caused the price of Of Counsel units to rise from $3.25 to $4.125 by the end of trading on November 22, 1993, despite the lack of retail demand. Div. Exs. 45-47. After Wolf & Co.'s purchase of 118,000 units on November 23, 1993, Wolf & Co. had purchased the equivalent of 1,166,000 units, representing 81% of the floating supply. Of those units, Wolf had sold 625,000 units to Hibbard Brown at exactly the same price it had paid. Div. Ex. 45 at 1-5. Wegard did not sell any of the units it purchased between November 23 and December 8. Div. Ex. 45. ==========================================START OF PAGE 38====== Wolf & Co., Hibbard, and Wegard continued to reduce the supply of units through December 8, 1993. After Wolf & Co.'s 118,000 unit purchase on November 23, 1993, the float not controlled by Wolf & Co. or Hibbard consisted of only 291,500 units. Wolf & Co. then purchased the equivalent of 76,900 of the remaining units, while Hibbard acquired 45,500 units and Wegard accumulated 101,000 units. These firms thus obtained control over 26.4%, 15.6% and 34.7% of the remaining float, respectively. Domination and Control Domination and control of the market for a security by a broker-dealer supports a finding that the broker-dealer manipulated the market for that security. See, e.g., Floyd A. Allen & Co., Inc., 35 S.E.C. 176, 183 (1953); Resch-Cassin, 362 F. Supp. at 977. In Resch-Cassin, the manipulators established their domination and control of the market by purchasing approximately two-thirds of the float during the manipulative period. Resch-Cassin, 362 F. Supp. at 977. In Floyd A. Allen & Co., the Commission found that a market was dominated and controlled by a firm which regularly entered bids which were higher than those of other broker-dealers. 35 S.E.C. at 182-183. Domination and control of the market in a security does not necessarily produce a manipulation, but it enables parties to control pricing so as to preclude an independent, competitive market from arising. Pagel, Inc., 48 S.E.C. at 226. From November 16, 1993 through November 23, 1993, Wolf & Co. purchased over 80% of the Of Counsel units, establishing its ==========================================START OF PAGE 39====== dominant position in the market. During that period, Wolf & Co. sold over half of those units to Hibbard. Wolf & Co., in dominating the market, created the appearance of substantial demand for Of Counsel units. In addition to its own purchases, Wolf & Co. created additional volume by causing other broker- dealers to execute numerous transactions covering Wolf & Co.'s purchases. From November 23, 1993 through December 8, 1993, Wolf & Co. continued to dominate the market. Wolf & Co. controlled the market price for Of Counsel units by consistently matching or establishing the inside bid quotation for Of Counsel units. Div. Ex. 37. Wolf & Co.'s bid was the high bid for nearly the entire trading day on seven days during this period. On November 26, Wolf & Co. controlled the high bid the entire day. Div. Ex. 36 LEGLU 11/16/93 at 1 through LEGLU 11/23/93 at 10. On November 29 through December 2 and again on December 7 and 8, Wolf & Co. matched or controlled the high bid over 80% of the time. Wegard also dominated and controlled the market for Of Counsel units during this period through large block transactions in Of Counsel units on November 23, November 29, December 3, December 6 and December 7. On November 29, Wegard purchased 25,000, or 37.8% of the units traded that day. On December 3, Wegard's purchase of 20,000 units directly accounted for 18% of that day's volume. Finally, on December 7, Wegard's large block purchase directly accounted for 27.4% of that day's volume. Price Leadership ==========================================START OF PAGE 40====== Price leadership is another factor which indicates that a broker-dealer is manipulating the market for a security. Resch- Cassin, 362 F. Supp. at 976. Paying increasingly higher prices for a security, and bidding up a stock or causing it to be bid up are well-established manipulative techniques. Charles C. Wright, 3 S.E.C. 190, 199 (1938), rev'd and remanded on other grounds, 112 F.2d 89 (2d Cir. 1940); Barrett & Co., 9 S.E.C. at 329; Resch-Cassin, 362 F. Supp. at 977, 978. In Wright, the respondent "reached" for stock by not waiting for his broker to get a better price placing large orders at the high end of or above the market when smaller amounts were available at lower prices. Wright, 3 S.E.C. at 198. In Resch-Cassin, one of the defendants bid up the price of the stock by continually paying higher prices than other market-makers and, on one day, paying $17 for the stock although the market was $16 the day before and there was no competitive buying. Resch-Cassin, 362 F.Supp. at 977. Bidding up prices is particularly effective when carried out in conjunction with a reduction in the floating supply of a security. See, e.g., R.L. Emacio & Co., Inc., 35 S.E.C. 191, 199 (1953); Halsey, Stuart & Co.,Inc., 30 S.E.C. at 128. Price leadership can be shown by the insertion of higher bids or by purchases at increasingly higher prices. Id. The insertion of increasingly higher bids is a device which is used to create a false appearance of activity in the over-the-counter market and to support the prices of securities at inflated levels. Gob Shops, 39 S.E.C. at 101. The Commission has found ==========================================START OF PAGE 41====== that purchases at increasing prices have the effect of causing the price for the securities to rise by stimulating activity by others in the market at those levels. See Halsey Stuart & Co., Inc., 30 S.E.C. at 121, 128. In a market where the floating supply is small, purchases of securities at increasing prices have an especially significant impact on price. See Harold T. White, 3 S.E.C. at 477. Wolf & Co.'s purchases at increasing price levels compels the conclusion that Wolf & Co. manipulated the price for Of Counsel units upwards. During the period of November 16, 1993 through December 8, 1993, Wolf & Co., with little exception, purchased Of Counsel units at increasing prices, ranging from $3.50 to $8.00 per unit. Notably, the bulk of the price increase in the units occurred after Wolf & Co. completed its largest block purchases. After Wolf & Co. had acquired a substantial inventory of units, Wegard entered the market, making purchases of units at increasing prices along with Hibbard. Wolf also continued to purchase units, common stock and warrants at higher prices, but in smaller quantities. These later purchases by Wolf, Hibbard, and Wegard had an even greater impact on the price for Of Counsel securities because the floating supply was severely limited. Wolf & Co. also engaged in price leadership by consistently raising its bid for Of Counsel units. Moreover, from November 23, 1993 through December 8, 1993, Wolf & Co. caused the price for Of Counsel units to rise dramatically by constantly matching ==========================================START OF PAGE 42====== or establishing the inside bid. Wolf & Co. set new high bids four times during this period. Wolf & Co., in dominating and controlling the bid, thus misled the market by creating an appearance of strong demand for Of Counsel securities. During this period, virtually all other broker-dealers who moved their bids up did so only in order to fill purchase orders by Wolf & Co., Hibbard, or Wegard. Through its price leadership, Wolf & Co. was thus able to bid up the price for Of Counsel units. Although it was not a market maker, Wegard employed price leadership by putting in large block orders at the inside ask and purchasing large block orders at the inside bid. Every order placed by Wegard for Of Counsel units was at the inside ask, which put upward pressure on the price of Of Counsel units. Wegard also exercised price leadership by "reaching" for the Of Counsel units, just as the respondent did in Charles A. Wright. Wegard reached for the units by placing a series of large orders at the inside ask which, not surprisingly, caused it to repeatedly pay the highest prices on the days it traded. See Charles A. Wright, 3 S.E.C. at 198. Moreover, on November 29 Wegard "chased" the Of Counsel units, and bid up the price, by placing a large order at the inside ask and twice raising its limit rather than waiting for a better execution. Finally, just as the defendant in Resch-Cassin did, Wegard frequently paid higher prices than other broker-dealers and bought on the high end of the market even when there were few buyers in the market. ==========================================START OF PAGE 43====== Wegard's continuing purchases of Of Counsel securities after November 29, 1993 were not consistent with a firm purchasing those securities for a trading profit. Tr. 818-819 (Humenik). Wegard's last three purchases, on December 3, 6 and 7, increased its average cost dramatically at a time when the marketplace was made up primarily of sellers rather than buyers, the price was increasing and the volume was decreasing Tr. 820-822 (Humenik); Div. Ex. 154A. At that time, particularly on December 6 and 7, an experienced trader who is in the security for a trading profit would sell the security and take his built-in profit, not buy and support the new, high price of the security. Tr. 821 (Humenik). With the exception of a 1,000 unit purchase transaction on November 24, 1993, each of Wegard's nine other purchases of Of Counsel units, between November 23 and December 7, 1993, had an upward impact on the price of Of Counsel securities. Tr. 802 (Humenik); Div. Exs. 151 at 2, 153. Wegard did not obtain the best possible prices when it purchased Of Counsel units between November 23 and December 7, 1993. Tr. 940 (Humenik). On those days that Wegard was purchasing Of Counsel units, neither Wolf & Co. nor Hibbard was active in the market. Tr. 901 (Humenik); Div. Ex. 45. Other Indications Further evidence of the existence of a manipulative scheme is found when a person who purchases securities in a series of transactions and raises the price of the securities sells those securities at the artificially inflated price. Thornton & Co., ==========================================START OF PAGE 44====== 28 S.E.C. 208, 223 (1948), aff'd per curium sub nom. Thornton v. SEC, 171 F.2d 702 (2d Cir. 1948). In the present case, after Wolf & Co., Hibbard, and Wegard bid up the price for Of Counsel units to $8, Wolf & Co. immediately began selling the Of Counsel common stock and warrants to its customers at the artificially inflated prices. On November 9, 1993, Wolf & Co. began selling Of Counsel common stock at $5 per share and warrants for $3 per warrant. It is settled Commission law that "one who accumulates at rising prices and sells out at prices created by his buying efforts will be presumed to have raised prices for the purpose of inducing other to buy. Only the strongest countervailing evidence will be sufficient to outweigh this presumption." Halsey, Stuart & Co., 30 S.E.C. at 124 n.28, citing Opinion of General Counsel, Sec. Ex. Act Rel. No. 3056 (1941); see also VIII L. Loss & J. Seligman, Securities Regulation, 3974-75 (3d ed. 1991). Scienter "Rapidly rising prices in the absence of any demand are well-known symptoms of . . . unlawful market operations." Dlugash v. SEC, 373 F.2d at 109. In this case, the price of Of Counsel units rose dramatically despite an almost total absence of demand. Between November 23 and December 8, over only 11 trading days, the price of Of Counsel units almost doubled, from $4-1/8 to $8. This rapid increase occurred in the absence of any significant retail demand for the securities, and in the absence ==========================================START OF PAGE 45====== of any news about the company. This price increase, which cannot be attributable to any normal market forces, is a clear basis for me to infer the necessary scienter in connection with a finding that Wolf & Co., Hibbard and Wegard illegally manipulated the market for Of Counsel securities. Wolf, who controlled Wolf & Co., was actively involved in the IPO from its inception, including helping to find an underwriter, working with the underwriters during the due diligence process to structure the deal, and finding buyers for the IPO. Wolf also interested Greer in Of Counsel. Once the IPO went effective, Wolf & Co. purchased 1,166,000 units in the first six days of aftermarket trading and sold 625,000 of those units to Hibbard at the same prices it paid for them. I can infer scienter from this drastic reduction in the floating supply of Of Counsel units. See Barrett & Co., 9 S.E.C. at 327. After November 23, Wolf & Co. was aggressive in bidding for the units, and, on seven out of the eleven trading days between November 23 and December 8, either alone or with others, was the high bid over 80% of the time. This aggressive bidding was similar to the bidding of the respondent in Halsey, Stuart & Co., Inc., 30 S.E.C. at 121 n.26. In addition, between November 23 and December 8, Wolf & Co. set new high prices three times, and set new high bids four times, both of which are indicative of scienter. See R.L. Emacio & Co., Inc., 35 S.E.C. at 197. Finally, after Wolf & Co., Hibbard, and Wegard had bid up the price of Of Counsel units to $8, Wolf & Co. began selling the ==========================================START OF PAGE 46====== common stock and warrants the next day to its retail customers at the inflated prices. Wolf & Co. made a profit of approximately $2.5 million on those sales. This is strong evidence from which I can infer scienter. Halsey, Stuart & Co., 30 S.E.C. at 124 n.28; VIII L. Loss & J. Seligman, Securities Regulation, at 3974- 75. Wolf's entire scope of activity, including finding an underwriter, assisting in the due diligence, finding IPO buyers, initially buying over 1 million units and selling 605,500 of those units to Hibbard at its cost, bidding up the price of the units after it had substantially reduced the float and selling the common stock and warrants to his retail customers at manipulated prices for a profit of over $2.5 million, provides a compelling argument for me to find that Wolf & Co. willfully and intentionally engaged in a scheme to manipulate the price of Of Counsel securities. Wegard's conduct included reducing the floating supply while simultaneously causing market makers to increase their bid, and buying at increasingly higher prices. Furthermore, I can infer Wegard's scienter from its trading, which resulted in purchases at new high prices and caused market makers to set new inside bids and asks. This pattern of trading is similar to that of one of the defendants in Resch Cassin, 362 F. Supp. at 978. In fact, between November 23 and December 8, Wegard set three new high prices for Of Counsel units, and Wegard's purchases caused Mayer to set eight new high bids in order to purchase securities to ==========================================START OF PAGE 47====== fill Wegard's orders. In addition, Wegard's purchases caused two market makers to raise their quotes and to establish new high ask quotes. Hibbard's purchases had a similar effect on the market. As noted above, Wegard only traded between November 23 and December 8, after Wolf & Co. and Hibbard had acquired most of their units and during which the most dramatic price increase in Of Counsel units occurred. Wegard was not buying and driving up the price during the time that Wolf & Co. and Hibbard were accumulating units, and Wegard stopped buying once the price reached the $8 level and Wolf & Co. and Hibbard were ready to sell the common and the warrants to their customers. Hibbard's trading pattern was similar. Purchasing stock to prevent the sale of that stock on the open market and resulting in a reduction of the price can be a manipulative device. See Pagel, Inc., 48 S.E.C. at 226. Wegard's large block purchases on December 6 and 7, in a market when others were selling, cannot be justified by Greer's explanation that he was buying for a trading profit. Rather, the explanation is that Wegard was buying out sellers to keep the units off the market and maintain the already manipulated price. Like the respondent in Pagel, Greer was making these purchases to keep them away from legitimate market makers and avoid the possibility that these large block sales would depress the price the respondents had artificially created. I can infer scienter from these purchases. ==========================================START OF PAGE 48====== The evidence further suggests that Greer knew that the 101,000 shares Wegard sold to Wolf & Co. on December 28 were, in fact, going to Hibbard. Greer mistakenly instructed Crisai, his order clerk, to make out the ticket to Hibbard in the first instance. Crisai wrote the trading symbol "HIBB" in the "Tag Number" box on the order ticket for the sale of 101,000 shares of Of Counsel common stock. Tr. 431 (Crisai), 472-474; Div. Exs. 77B, 77E. The "HIBB" notation was subsequently obliterated by Crisai and "FNWO" written below the obliteration of "HIBB," indicating that the sale was to Wolf & Co. Div. Exs. 76, 77B, 77E; Tr. 432-33 (Crisai), 472-474 (Boese). Crisai's normal practice is to cross out, not obliterate, mistakes on order tickets. Tr. 425-426, 440 (Crisai). I infer from this transaction that Wegard and Greer were attempting to conceal evidence of manipulation. Respondents' Defenses Respondents presented three experts to support their argument that no manipulation occurred in this case: Edwin J. Elton, Ronald W. Filante and W. Gerard Adams. I find the testimony of the Division's expert, Joseph Humenik, better reasoned than respondents' experts and fully supportive of the charge that respondents manipulated Of Counsel securities. Further, I find his experience more relevant to the issues in this case than the experience of respondents' experts. I disagree with the respondents' argument, in substance, that the Division's case is based on weak inferences and speculation. ==========================================START OF PAGE 49====== Respondents' Brief at 25. Rather, it is my belief that the series of transactions discussed in detail above betray the respondents' scheme to manipulate the price of Of Counsel securities and that their scheme, and no other events, had the effect of substantially increasing the prices for Of Counsel securities. Elton, in substance, placed his main reliance on the theory that the market price is set by large investors representing l/2% to 1% of the float. I do not find this testimony realistic inasmuch as Elton did not identify such investors in this case. Tr. 523. Further, even accepting Elton's concept, he should have considered that, between November 23 and December 9, Wegard purchased 34.7% of the float that was not at that time controlled by Wolf & Co. or Hibbard. He also failed to consider the magnitude of Wegard's 1,000 unit purchase that accounted for 7.3% and 15% of the float not controlled by Wolf & Co. and Hibbard. Elton, given the issues in this case, should have substantially discussed the price impact of Wegard's purchases. Filante's testimony relies heavily on the report of the projected future of Of Counsel that was prepared by Donna Wolf. He appears to indicate that the report itself would have encouraged the substantial price rise that Of Counsel securities experienced. However, Filante made no showing that the report received the distribution that would have caused the large price increase in Of Counsel securities. Filante also predicated the price rise based on the Initial Public Offering (IPO) effect ==========================================START OF PAGE 50====== which indicates that prices surge after an IPO. If one compares the price advance in Of Counsel to the IPO effect, it is noted that the IPO effect occurs in the first day of trading and thereafter there is little price rise. Tr. 583-586. Filante conceded that this concept did not analogize to the actual performance of Of Counsel. Filante opined that "bad news" effects stock prices in a day or two. These are not the facts in this case. Of Counsel took two weeks to experience a price drop after the so called bad news. The likelihood is that the respondents buoyed up the price until Wolf & Co. reduced its bids. Filante also failed to answer the Division's charge that Wegard's buy orders had been a form of price leadership that induced market maker Mayer to increase its bids. Tr. 594. Respondents' expert Adams testified that the alleged manipulation did not meet the standard of Resch-Cassin, 362 F.Supp. 964, opining that Wegard did not control the trading of Of Counsel. Conspicuous by its absence is any discussion by Adams of the concerted action of Wolf & Co. and Hibbard with Wegard to manipulate prices. Further, he does not provide any substantial analysis of Wegard's buy orders from November 23 to December 3 as they may have impacted the market. Greer's credibility was severely damaged by the incident involving a credit application to The Bank of New York. In that instance, Greer filed a false financial statement leaving out substantial debt. There is no explanation in the record for this conduct. ==========================================START OF PAGE 51====== Respondent Wegard purchased securities on November 23 and 29, and December 3, 6 and 7-[19]-. These transactions were illegal price manipulations. Kidder Peabody & Co., 18 S.E.C. 559, 568 (1945). These trades caused the price to rise, reduced the floating supply, dominated and controlled the market, exhibited price leadership. Resch Cassin, 362 F. Supp. at 976- 77. Respondent argues that the motive for the trades has not been shown, therefore it cannot be charged with manipulation. To the contrary, the motive is clear in the substantial profit Wegard made in the sale of stock. Assuming arguendo that it made no profit, that does not save it from a violation under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The argument is raised by respondents that there is no scienter shown. However, it may be inferred from the $158,375 realized and unrealized profit it made on December 23, 1993. It may be further inferred from the price rise from $4-1/8 to $8 after Wegard entered the market when Wolf & Co. and Hibbard acquired their inventory. All of Wegard's purchases were made for the obvious purpose of advancing the price of Of Counsel stocks. Between December 9 and December 24, 1993, following the completion of the manipulation, Wolf & Co. sold 690,135 shares of Of Counsel common stock and 696,740 Of Counsel warrants to its customers at the artificially inflated prices, for a profit of ---------FOOTNOTES---------- -[19]-This activity accounted for 17.4%, 37.8%, 18%, 27.6% and 27.4% of the float. ==========================================START OF PAGE 52====== $2,580,239.-[20]- In engaging in the above-described conduct, Wolf & Co. violated Section 17(a) of the Securities Act, Sections 10(b) and 15(c) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder. On December 28, 1993, following the completion of the manipulation, Wegard sold 101,000 shares of Of Counsel common stock to Wolf & Co. for a profit of $105,127, and retained 101,000 Of Counsel warrants for an unrealized profit of $53,248, for a total profit of $158,357.-[21]- Wegard violated Section 17(a) of the Securities Act, Sections 10(b) and 15(c) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder. Failure to Make Required Filings Section 13(d)(1) of the Exchange Act and Rule 13d-1(a) require any person who acquires more than five percent of a class of any equity security registered with the Commission pursuant to Section 12 of the Exchange Act to, within 10 days after such ---------FOOTNOTES---------- -[20]-Wolf & Co. sold 614,000 shares of Of Counsel common stock to its retail customers between December 9 and December 16, 1994, at $5 per share. Div. Exs. 35, 52. Wolf & Co.'s total cost of these shares was $1,941,854, for a profit of $1,551,929. Id. Wolf & Co. sold 660,000 Of Counsel warrants to its retail customers between December 9 and December 20, 1994, at $3 per warrant. Id. Wolf & Co.'s total cost of these warrants was $1,145,473, for a profit of $1,028,310. Id. -[21]-On December 28, 1993, Wegard sold 101,000 shares of Of Counsel common stock to Wolf & Co. at $4-3/4 per share, for total proceeds of $479,750. Div. Exs. 51, 76; Tr. 275-277 (Whitten). Wegard's cost of those shares was $374,623, for a profit of $105,127. Div. Ex. 51. As of December 28, Wegard held 101,000 warrants, which, valued at that day's closing price of $3 per warrant, were worth $303,000. Id. Wegard's cost of those warrants was $249,752, for an unrealized profit on those warrants of $53,248. Id. ==========================================START OF PAGE 53====== acquisition, send a statement containing the information required by Schedule 13D to the issuer and to each exchange where the security is traded, and to file such a statement with the Commission. Section 13(d)(3) provides that, when two or more persons act as a syndicate or group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a "person" for the purposes of Section 13(d). Rule 13d-1(f)(2) provides that a group's filing obligation may be satisfied either by a single joint filing or by each of the group's members making an individual filing. Wolf & Co.'s, Hibbard's, and Wegard's trading activities demonstrate that the firms were acting as a group for purposes of acquiring, holding and disposing of Of Counsel common stock, which was registered with the Commission pursuant to Section 12 of the Exchange Act. As of November 18, 1993, Wolf & Co. was required to file a Schedule 13D with the Commission by November 28, disclosing its and Hibbard's holdings of Of Counsel common stock.-[22]- Wolf & Co. never filed a Schedule 13D with the Commission. As of November 23, 1993, Wegard was required to file a Schedule 13D with the Commission, disclosing its, Wolf & Co.'s, and Hibbard's holding of Of Counsel common stock.-[23]- It never filed a ---------FOOTNOTES---------- -[22]-By November 18, 1993, Hibbard held 525,000 shares of common stock and Wolf & Co. held 20,000 shares of common stock. -[23]-On November 22, 1993, Wolf & Co. acquired an additional 510,000 Of Counsel common shares, 508,000 through unit purchases, and sold 100,000 common shares, through units sales to (continued...) ==========================================START OF PAGE 54====== Schedule 13D with the Commission. Greer, as the sole owner and president of Wegard, who was responsible for and controlled all of its activities, is responsible for Wegard having failed to file any Schedules 13D. Accordingly, I find that Wolf & Co. and Wegard willfully violated, and Greer willfully aided and abetted and caused Wegard to violate, Section 13(d)(1) of the Exchange Act and Rule 13d- 1(a) thereunder, in that Wolf & Co. and Wegard, after becoming directly and indirectly the beneficial owners of more than five percent of the outstanding common stock of Of Counsel, within ten days after such acquisition, or at any time, failed to send to Of Counsel at its principal executive office, by registered or certified mail, and to the Boston Stock Exchange, and failed to file with the Commission, a statement containing the information required by Schedule 13D. Section 13(d)(2) of the Exchange Act and Rule 13d-2(a) thereunder require persons who were required to file Schedules 13D to promptly file with the Commission, and mail to the issuer and to each exchange where the security is traded, an amendment to Schedule 13D upon the occurrence of any material change, including the acquisition or disposition of one percent or more of the relevant securities. Both Wolf & Co. and Hibbard acquired more than one percent of the Of Counsel shares between November ---------FOOTNOTES---------- -[23]-(...continued) Hibbard. Thus, on November 22, Wolf & Co. held 430,000 shares of common stock, and Hibbard, who had sold 20,000 units, held 605,000 shares. Wegard entered the market on November 23, 1993, acquiring 30,000 units. ==========================================START OF PAGE 55====== 18 and December 8, and Wegard acquired more than one percent of the Of Counsel shares between November 23 and December 8, yet none of them filed an amendment to Schedule 13D with the Commission. Furthermore, between December 9 and December 21, Wolf & Co., Hibbard, and Wegard made several sales of Of Counsel common stock,-[24]- but neither Wolf & Co. nor Wegard filed an amendment. Greer, as the sole owner and president of Wegard, who was responsible for and controlled all of its activities, is responsible for Wegard having failed to file any amendments to any Schedules 13D. Accordingly, I find that Wolf & Co. and Wegard willfully violated, and Greer willfully aided and abetted and caused Wegard to violate, Section 13(d)(2) of the Exchange Act and Rule 13d- 2(a) thereunder in that Wolf & Co. and Wegard failed to promptly file or cause to be filed with the Commission and failed to send or cause to be sent to Of Counsel at its principal executive office, by registered or certified mail, and to the Boston Stock Exchange, amendments to Schedule 13D disclosing any material increases or decreases in the percentage of Of Counsel common stock beneficially owned by Wolf & Co., Hibbard, and Wegard. Section 16(a) of the Exchange Act and Rule 16a-3 thereunder requires every person who becomes the beneficial owner of more than ten percent of any class of any equity security registered with the Commission pursuant to Section 12 of the Exchange Act ---------FOOTNOTES---------- -[24]-Wolf & Co. disposed of 690,135 shares, Hibbard disposed of 743,995 shares, and Wegard disposed of 101,000 shares. ==========================================START OF PAGE 56====== to, within ten days, file a statement on Form 3 with the Commission and with any national securities exchange where the security is registered, of the amount of all equity securities of that issuer of which he is the beneficial owner, and within ten days after the close of each calendar month thereafter, if there has been a change in such ownership during that month, to file with the Commission and with any national securities exchange where the security is registered, a statement on Form 4 indicating his ownership at the close of that month and such changes in his ownership as have occurred during that month. Wolf & Co. held more than 10% of Of Counsel common stock on November 22. The amount of that holding changed in November, increasing to 602,600 by November 30, and changed in December, increasing to 628,600 by December 8, and decreasing dramatically, because of Wolf & Co.'s retail sales, by December 31. Despite meeting the Section 16 reporting requirements, Wolf & Co. did not file a Form 3 with the Commission or the BSE by December 2, 1993 or at any other time, and did not file any Forms 4 with the Commission or with the BSE by December 10, 1993 or by January 10, 1994, or at any other time. Rule 16a-3(f)(1)(ii) requires that a Form 5 shall be filed, within 45 days of the end of an issuer's fiscal year, by any person who at any time during an issuer's fiscal year was subject to Section 16, disclosing all holdings and transactions that should have been reported on Forms 3 and 4 during the most recent fiscal year, but were not. Of Counsel's fiscal year ended ==========================================START OF PAGE 57====== December 31, 1993. Despite having not filed its required Forms 3 and 4 with the Commission or with the BSE during the fiscal year ended December 31, 1993, Wolf & Co. did not file a Form 5 with Commission or with the BSE, by February 14, 1994, or at any other time. Accordingly, I find that Wolf & Co. willfully violated Section 16(a) of the Exchange Act and Rule 16a-3(f)(1)(ii) thereunder. Public Interest Once a respondent has been found to have violated the federal securities laws, it becomes necessary to consider what sanctions, if any, would be in the public interest. In assessing a sanction, due regard must be given to the facts and circumstances of each particular case, since sanctions are not intended to punish a respondent but to protect the public interest from future harm. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211 (1975). Sanctions also should serve as a deterrent to others. Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). In imposing administrative sanctions, the Commission may take into account such factors as: ...the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that his occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir., 1979), aff'd on other grounds, 450 U.S. 91 (1981). ==========================================START OF PAGE 58====== Respondent Wolf & Co.'s conduct was egregious. It manipulated Of Counsel securities and caused losses to the public of over $2.5 million in profits it earned on sales at artificially inflated prices. Wolf & Co. engaged in stage- managed trading in purchasing over 80% of the floating supply of Of Counsel units at successively higher prices, dominating and controlling the market, and bidding up the price of the units through its quotations. Wolf & Co. executed this scheme in total disregard of the harm it inflicted upon the public. Moreover, Wolf & Co. was subjected to sanctions eight times between 1987 and 1995. Wolf & Co.'s previous conduct necessitating sanctions demonstrates that its participation in this manipulation was not an isolated incident, but was part of a continuous pattern of fraudulent conduct. Wolf & Co.'s disciplinary record includes the following: on September 30, 1987 the Commission entered an order against Wolf & Co., by consent, finding that Wolf & Co. violated Sections 5(a) and 5(c) of the Securities Act and failed to adequately supervise a person under its supervision who participated in a market manipulation. Div. Ex. 112. Wolf & Co. also has been sanctioned by the State of Florida Department of Banking and Finance and the Alabama Securities Commission, as well as twice each by the National Association of Securities Dealers (NASD) and the Virginia State Corporation Commission. Div. Exs. 113, 115, 116, 117, 118. As recently as 1994, the NASD found that Wolf & Co. violated Section ==========================================START OF PAGE 59====== 15(c) of the Exchange Act and Rule 15c2-6 thereunder. Div. Ex. 119. Wegard's conduct in the manipulative scheme also was egregious. It played a critical role after the initial accumulation, acquiring over 30% of the remaining float at increasing prices, placing block purchase orders at the ask to increase the price of the units, causing other broker-dealers to raise their bids, and assisting Hibbard's fraudulent sales to the public by covering Hibbard's short position. Wegard has previously demonstrated a disregard for its obligation to maintain records for inspection by regulatory authorities as evidenced by an action by the State of Connecticut. Div. Ex. 129; Tr. 759-761 (Greer). While Greer has not been the subject of prior disciplinary proceedings, his record is not unblemished. In connection with a loan from the Bank of New York used to purchase Wegard & Co., Greer completed a personal financial statement that failed to disclose two liabilities--one of $1,000,000 and another of $190,000. Div. Ex. 148; Tr. 718-721 (Greer). Greer also failed to provide written notification to PaineWebber concerning the existence of a securities account owned by his wife, Ruth Greer, as required by PaineWebber policy. Tr. 697-706 (Greer); Div. Ex. 147 at 3.3, 3.4. Also of note was Greer's invocation of the Fifth Amendment when questioned during the investigatory phase as to Wegard's trading in Of Counsel securities. I infer from his action that the answer would have ==========================================START OF PAGE 60====== exposed the manipulatory scheme that he entered into with Wolf & Co. and Hibbard. Pagel Inc., 48 S.E.C. at 226. The Division requested that the broker-dealer registrations with the Commission of Respondents Wolf & Co. and Wegard be revoked. Such sanctions are consistent with prior Commission decisions. For example, in Pagel, Inc., the Commission found that the respondent broker-dealer had engaged in a manipulation of the price of stock during the first eight days of trading after its IPO, and during a subsequent period. 48 S.E.C. at 223. The Commission noted that the broker-dealer abused its control of the supply of the security and caused a "sharp and totally unwarranted" rise in the price of the stock and accordingly affirmed the administrative law judge decision to revoke the registration of the broker-dealer. Id. at 224, 226, 321-32. Similarly, in J.A.B. Securities Co., Inc., the Commission affirmed the administrative law judge's finding of manipulation and the decision to revoke the registrant's broker-dealer registration in the public interest. 47 S.E.C. 86, 94 (1979). See also Collins Securities Corp., 46 S.E.C. 20 (1975). Greer's participation in the manipulation also was egregious. During the second phase of the manipulation, in which the price of Of Counsel was bid up from $4-1/8 to $8, Greer's orders for Of Counsel had more of an effect on the price of Of Counsel than even Wolf & Co.'s or Hibbard's. In addition, as noted above, Greer acted with a high degree of scienter, and has made no assurances against future violations. To the contrary, ==========================================START OF PAGE 61====== he has persisted in denying not only participation in the manipulation, but also even discussing trading in Of Counsel with Wolf and Brown. I find it appropriate that Greer be sanctioned by a suspension from associating with any broker or dealer for one year and a bar from participating in any offering of penny stock. The Division's request for a bar from associating with broker or dealers is too harsh considering that Greer played a lesser role in the scheme than Wolf & Co. and Hibbard.-[25]- This sanction is consistent with previous Commission decisions. For example, in Edward J. Mawod & Co., the Commission upheld the one year suspension of the general partner of a broker-dealer found to have engaged in manipulation in order to impress him "and other professionals in the securities business with the importance of their duty to exercise due care when confronted by indicia of manipulative activity." 46 S.E.C. 865, 876 (1975). Section 21B of the Exchange Act authorizes orders of disgorgement in, among others, cases involving willful violations ---------FOOTNOTES---------- -[25]-The Division requested that Greer be barred from associating with any municipal securities dealer, investment adviser or investment company, as well as any broker or dealer. Although the Commission has imposed such sanctions in cases where a respondent consents to the sanction, there is no precedent for imposing such a sanction in a litigated administrative proceeding. Indeed, the plain language of the statute under which this proceeding was instituted, Section 15(b)(6) of the Exchange Act, authorizes the Commission "to bar such person from being associated with a broker or dealer, or from participating in offering of penny stock." Respondent Greer therefore had no notice that the sanction imposed could be a bar of such scope. Accordingly, I decline to order such a bar. ==========================================START OF PAGE 62====== of provisions of the Securities Act or Exchange Act. Disgorgement serves to deprive violators of the federal securities laws of their ill-gotten gains. See SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307-8 (2d Cir. 1971), cert. denied, 404 U.S. 1005 (1971), rehearing denied, 404 U.S. 1064 (1972). An order requiring Wegard to disgorge its ill-gotten gains of $158,375, plus prejudgment interest, and establishing disgorgement against Wolf & Co. in the amount of $2,580,239, plus prejudgment interest, but not ordering payment, is appropriate in the public interest.-[26]- Section 21B also authorizes imposition of penalties in, among others, cases involving willful violations of provisions of the Securities Act or Exchange Act. An order imposing penalties against Wegard and Greer is appropriate in the public interest based upon their willful violations of the securities laws. See Chatfield Dean & Co., Inc. et al., 55 SEC Docket 3197, 3200 (February 2, 1994). Similarly, an order establishing penalties against Wolf & Co., but not ordering payment, is appropriate. Three tiers of penalties are available under Section 21B. The maximum third-tier penalty under Section 21B is $100,000 for each violation by a natural person, and $500,000 for each violation by any other person. The third-tier limits apply to violations which both: (1) involved fraud, deceit, manipulation ---------FOOTNOTES---------- -[26]-Due to Wolf & Co.'s pending bankruptcy, the Division requested that a disgorgement amount be set but not ordered to be paid against Wolf & Co. since the Division believes that a disgorgement order against the firm would violate the automatic stay under bankruptcy law. ==========================================START OF PAGE 63====== or deliberate or reckless disregard of a regulatory requirement; and (2) directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in a substantial pecuniary gain to the person who committed the violation. Second-tier limits apply to violations which meet the first, but not the second, requirement for third- tier violations. The maximum second-tier penalty is $50,000 for each violation by any other person. Wolf & Co.'s violations involved fraudulent and manipulative conduct. The firm intentionally manipulated the price of Of Counsel units in order to illicitly gain substantial profits at the expense of the unsuspecting investing public. Wolf & Co. directly caused losses to the public of approximately $2.5 million in profits it earned on sales of Of Counsel units at artificially inflated prices. In an effort to conceal the manipulative scheme, Wolf & Co. failed to make required filings with the Commission which would have disclosed its ownership of Of Counsel securities. Accordingly, a penalty of $2,500,000 against Wolf & Co. is appropriate. Wegard's violations also involved fraudulent and manipulative conduct. Wegard played a leading role in causing the dramatic artificial price rise in Of Counsel units. This violative conduct resulted in Wegard receiving $158,375 in realized and unrealized profits. Wegard also failed to file statements with the Commission disclosing its ownership of Of Counsel securities. Greer, as president of Wegard, controlled ==========================================START OF PAGE 64====== Wegard and directed all of Wegard's violative conduct. Accordingly, penalties of $1,000,000 against Wegard and $175,000 against Greer are appropriate. Section 8A of the Securities Act and Section 21C of the Exchange Act provide for the entry of cease and desist orders when it is found that a respondent is violating, has violated, or is about to violate any provision of the Securities Act or Exchange Act, respectively. I have found that Wolf & Co., Wegard, and Greer have committed numerous violations of both the Securities Act and the Exchange Act. Accordingly, Wolf & Co., Wegard, and Greer will be ordered to cease and desist from committing or causing violations of the Securities Act and the Exchange Act they have been found to have violated or caused violations. ORDER Based on the findings and conclusions set forth above, I order that the registrations with the Commission as broker- dealers of F.N. Wolf & Co., Inc., and L.C. Wegard & Co., Inc., be revoked. Leonard B. Greer is suspended for one year from associating with any broker or dealer and barred from participating in any offering of penny stock. Disgorgement of $2,580,239 plus prejudgment interest and a penalty of $2,500,000 are assessed against F.N. Wolf & Co., Inc., but not ordered to be paid. L.C. Wegard & Co., Inc., is ordered to disgorge $158,375 plus prejudgment interest and to pay a ==========================================START OF PAGE 65====== penalty of $1,000,000. Leonard B. Greer is ordered to pay a penalty of $175,000. The Division of Enforcement shall submit a plan of disgorgement no later than sixty days after disgorgement funds are received from Wolf & Co. or Wegard. F.N. Wolf & Co., Inc., is ordered to cease and desist from committing or causing violations of Section 17(a) of the Securities Act, Sections 10(b), 13(d)(1), 13(d)(2), 15(c) and 16(a) of the Exchange Act and Rules 10b-5, 13d-1(a), 13d-2(a), 15c1-2, and 16a-3(f)(1)(ii) thereunder. L.C. Wegard & Co., Inc., is ordered to cease and desist from committing or causing violations of Section 17(a) of the Securities Act, Sections 10(b), 13(d)(1), 13(d)(2), and 15(c) of the Exchange Act and Rules 10b-5, 13d-1(a), 13d-2(a) and 15c1-2 thereunder. Leonard B. Greer is ordered to cease and desist from committing or causing violations of Section 17(a) of the Securities Act, Sections 10(b), 13(d)(1), 13(d)(2) and 15(c) of the Exchange Act and Rules 10b-5, 13d-1(a), 13d-2(a), and 15c1-2 thereunder. All payments ordered to be paid shall be made on the first day following the day this initial decision becomes final. All payments required to be paid by this decision must be made by certified check, U.S. Postal money order, bank cashier's check, or bank money order payable to the United States Securities and Exchange Commission, and shall be directed to the Comptroller, Securities and Exchange Commission, Room 2067, Stop 2-5, 450 Fifth Street, N.W., Washington, D.C., 20549, with a cover letter bearing the legend "In the matter of F.N. Wolf & Co., Inc., ==========================================START OF PAGE 66====== Hibbard Brown & Co., Inc., L.C. Wegard & Co., Inc., Franklin N. Wolf, Richard P. Brown, and Leonard B. Greer, Administrative Proceeding File No. 3-8533." 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 or it, 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 or it. 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. Glenn Robert Lawrence Administrative Law Judge Washington, D.C. January 3, 1996