==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 92 ADMINISTRATIVE PROCEEDING FILE NO. 3-8327 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION __________________________________ In the Matter of ) ) GRAYSTONE NASH, INCORPORATED, ) INITIAL DECISION THOMAS V. ACKERLY, ) June 27, 1996 RICHARD J. ADAMS, ) VINCENT R. ACKERLY, JR. and ) DENNIS M. WILLIAMS ) ___________________________________ APPEARANCES: Bruce M. Bettigole and James G. Mann for the Division of Enforcement, Securities and Exchange Commission Mark B. Dorfman and Arthur M. Schwartzstein for Respondent Richard J. Adams BEFORE: Lillian A. McEwen, Administrative Law Judge PROCEDURAL HISTORY The United States Securities and Exchange Commission ("Commission") instituted these proceedings pursuant to Sections 15(b)(4) and (6) of the Securities Exchange Act of 1934 ("Exchange Act"). The Order Instituting Proceedings ("OIP") was filed on May 2, 1994. On June 9, 1994, the Administrative Law Judge ("ALJ") assigned to the case issued an order granting the Motion of the Division of Enforcement ("Division") for a Stay of the Proceedings in light of a remand by the United States Court of Appeals for the Third Circuit. In a statement dated February 10, 1995, the Division represented that settlements as to the other Respondents were likely and further proceedings would be necessary only as to Respondent Richard J. Adams ("Respondent" or "Adams"). The United States District Court to which the case had been remanded postponed the matter indefinitely. Thus the Division planned to amend the OIP to eliminate allegations as to the United States District Court judgment and to focus exclusively on Mr. Adams. On June 28, 1995, the Commission issued an Order Granting In Part And Denying In Part Motion to Dismiss, 59 SEC Docket 2044 (1995), pursuant to Respondent Adams's Motion to Dismiss and pursuant to the Division's Motion to Amend the OIP. Specifically the Commission granted the Motion to Dismiss solely to the extent that the proceedings no longer may be based on entry of an injunction against Adams and it ruled that the proceeding was not barred by a statute of limitations. The Commission declined to ==========================================START OF PAGE 2====== rule on the Division's Motion to Amend the OIP. It reasoned that amendment was not required, in light of the allegation in the alternative in the OIP that Adams willfully engaged in violative conduct enumerated in Section 15(b)(6) of the Exchange Act. ==========================================START OF PAGE 3====== THE HEARING On September 5, 1995, the Chief ALJ issued an Order Redesignating Presiding Judge, and on September 11, 1995, a public hearing commenced before me in Washington, D.C. It ended on September 14, 1995, as to Respondent Richard J. Adams. On August 31, 1995, the Commission had issued its Order Dismissing Graystone Nash, Incorporated, from the Proceedings. 60 SEC Docket 0244 (1995). On August 9, 1995, the Commission issued two orders, the first an Order Dismissing Thomas V. Ackerly from These Proceedings, and another Order Instituting Proceedings Pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions. 59 SEC Docket 3021 and 3023 (1995). Pursuant to Respondent Dennis Williams's Offer of Settlement, the Commission's Order Making Findings And Imposing Remedial Sanctions as to Williams was dated August 9, 1995. 59 SEC Docket 3026 (1995). Further, on August 1, 1995, the Commission had issued an Order Making Findings and Imposing Remedial Sanctions by Default against Respondent Vincent R. Ackerly, Jr. 59 SEC Docket 2875 (1995). The hearing record consists of the testimony of nine witnesses, contained in 890 transcript pages. Seven witnesses testified in the Division's case and two witnesses testified in the Respondent's case, including the Respondent. The Division submitted fifty-eight exhibits; the Respondent submitted twelve exhibits. During the hearing, I admitted into evidence thirty- seven Division exhibits and seven Respondent exhibits. ==========================================START OF PAGE 4====== ISSUES The general issue before me is whether Adams violated the Securities Act of 1933 ("Securities Act") or the Exchange Act. More specifically, the issue is whether the allegations of the Division are established by a preponderance of the evidence. The Division alleges that: During the period from on or about January 1, 1987, through December 20, 1988, Adams willfully violated Sections 17(a) of the Securities Act and 10(b) and 15(c) of the Exchange Act and Rules 10b-5 and 15c1- 2 thereunder in that he, directly or indirectly, by the use of means or instrumentalities of interstate commerce or of the mails, in the offer and in connection with the purchase or sale of securities, employed devices, schemes or artifices to defraud, obtained money or property by means of and made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and engaged in transactions, acts, practices and courses of business which have operated and would operate as a fraud or deceit upon persons, including persons effecting transactions in such securities. As a part thereof, Adams enforced and participated in schemes to defraud pursuant to which securities were offered and sold by or through Graystone [Nash, Inc.] in initial public offerings and otherwise by means of misstatements or omissions and other manipulative and deceptive practices and the aftermarkets in such securities were established at artificial prices and thereafter maintained, dominated, controlled and manipulated. . . . . During the period from on or about January 1, 1987 through December 20, 1988, Adams willfully violated Section 5 of the Securities Act in that he, directly or indirectly: (a) made use of means or instruments of transportation or communication in interstate commerce or of the mails to sell securities and carried or caused to be carried through the mails or in interstate commerce by means or instruments of transportation such securities for the purpose of sale or for delivery after sale, when no registration statement was in ==========================================START OF PAGE 5====== effect as to such securities; and (b) made use of means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell securities, when no registration statement had been filed as to such securities. As a part thereof, and in connection with the initial public offerings referred to . . . above, Adams directly or through others, including branch management and brokers, solicited customers to purchase common stocks in addition to the units and collected the sums due for both prior to the effective dates of the registration statement and, following the sale of the units and their repurchase by Graystone, offered and sold the common stocks to customers at the tick prices when no registration statements had been filed or were in effect as to such securities. During the period from on or about January 1, 1987 through December 20, 1988, Adams willfully violated Section 10(b) of the Exchange Act and Rule 10b-6 thereunder in that, while Graystone was an underwriter or prospective underwriter in particular distributions, he, directly or indirectly, by the use of means or instrumentalities of interstate commerce or of the mails, alone or with other persons, caused Graystone to purchase for accounts in which it had a beneficial interest, securities which were the subjects of such distributions or securities of the same classes and series, or rights to purchase such securities, and attempted to induce persons to purchase such securities or rights prior to the completion of Graystone's participation in such distributions. Division's Motion to Amend Order Instituting Proceedings and Opposition to Motion to Dismiss Filed by Richard Adams, attachment, Proposed Amended Order Instituting Public Proceedings and Notice of Hearing Pursuant to Section 15(b)(6) of the Exchange Act, filed May 31, 1995. After the hearing, the Division filed its Proposed Findings of Fact and Conclusions of Law, and Brief in Support on November 14, 1995; Respondent filed his Post-Hearing Brief the same day. Reply Briefs from both parties were dated December 14, ==========================================START OF PAGE 6====== 1995.-[1]- The Respondent's Reply Brief was actually filed on December 19, 1995, but no request to strike was submitted by the Division, and the Respondent's Reply Brief is hereby accepted for consideration in this matter. I have carefully considered the entire record and all the papers filed by the parties after the hearing. I have also considered and evaluated the sworn testimony of John F. Mather taken February 4, 1992, (Div. Ex. 22),-[2]- and of Sean Boyle taken February 20, 1992, (Div. Ex. 23), for the Division, which I had ruled inadmissible at the hearing. In the interest of justice, I have additionally admitted these transcripts into evidence. The findings and conclusions herein are based on the entire record and on my observation of the demeanor of the witnesses at the hearing. I applied preponderance of the evidence as the applicable standard of proof for the Division's case. FINDINGS OF FACT I find that the following facts were established by a preponderance of the evidence in the record: ---------FOOTNOTES---------- -[1]- The Division's Proposed Findings of Fact and Conclusions of Law is referred to by page number as "(Div. Pr. Findings)"; the Division's Brief in Support is referred to as "(Div. Br.)"; the Respondent's Brief is referred to as "(Resp. Br.)"; and the parties' Reply Briefs are referred to, respectively, as "(Div. Reply)" and "(Resp. Reply)." -[2]- Each Division exhibit is referred to by number as "(Div. Ex. __)"; each Respondent exhibit is referred to by number as "(Resp. Ex. __)." ==========================================START OF PAGE 7====== 1. Adams graduated from high school, and he was drafted into the United States Army in 1966. He served in Vietnam, where his performance earned him three bronze stars and a Purple Heart. (Tr. 758-60.)-[3]- Upon his discharge in 1968, Adams worked for the firm of Francis I. DuPont in stock transaction confirmations. DuPont went out of business and Adams worked at F.O. Baroff & Company in the areas of stock delivery and bank reconciliation until that firm went out of business. (Tr. 762- 63.) In 1973, Adams joined Hoppin Watson, Inc., where he became assistant cashier, overseeing the "receive and deliver area" for securities transactions. (Tr. 763-65.) That firm was acquired by Janney Montgomery Scott, and Adams remained as cashier in the bookkeeping and accounting office. (Tr. 766-67.) Adams left Janney Montgomery Scott in 1983 and became licensed in the securities industry in 1985. (Tr. 771.) 2. He joined the firm of J.W. Weller when Thomas Ackerly bought it. He performed the same functions at J.W. Weller, where he "oversaw the operations of the back office." (Tr. 772.) Thomas Ackerly was in charge of J.W. Weller with no number-two man. (Tr. 773-74.) Adams became associated with Graystone Nash, Incorporated ("Graystone"), where he remained until December 1988. (Tr. 774-6.) 3. Adams had no ownership interest in Graystone. He was "the financial principal and operations manager with the title of ---------FOOTNOTES---------- -[3]- "(Tr.__.)" refers to the page of the hearing transcript from September 11 to 14, 1995. ==========================================START OF PAGE 8====== vice president" in Bloomfield, New Jersey. (Tr. 776-78.) Outwater & Wells ("Outwater"), in Livingston, New Jersey, was the clearing agent for Graystone, but it also had independent sales operations that remained in place after its acquisition by Graystone. Adams did not supervise Outwater. (Tr. 746-47, 778- 79.) At its peak, Graystone had 1,100 stockbrokers employed at 35 branches, each of which was incorporated and owned by a separate franchise owner. Adams had no supervisory responsibility over the registered representatives. (Tr. 781-82, 120-21; Resp. Exs. 4 and 13.) However, he did handle bookkeeping problems by telephone. (Tr. 135.) Adams also received the trade execution blotters and passed them to key punchers for generation of confirmations. (Tr. 168-69.) He prepared financial statements and focus reports required by the National Association of Securities Dealers ("NASD") and handled customer complaints. (Tr. 169-70, 746-47.) The registered representatives and office overhead for each branch were paid with the funds which Adams monitored. (Tr. 598-99, 631-40, 781- 82.) 4. Adams did not prepare the prospectuses for the four underwritten offerings of W.I.N.E., Inc. ("Wine"); ATC Environmental, Inc. ("ATC"); Advanciers Group, Inc. ("Advanciers"); or Alfa International, Inc. ("Alfa"); participate in underwriting negotiations; nor obtain or receive any of the warrants given to anyone in connection with the underwritings. (Tr. 784-86.) He did not communicate with registered ==========================================START OF PAGE 9====== representatives or managers on the subject of repurchasing units offered in any of the four offerings; and he did not give multiple ticks nor hear anyone giving multiple ticks. (Tr. 786- 87.) Thomas Ackerly groomed Joseph Gentile to be his number-two man, and Adams was not the number-two man in the organization, nor did he set prices or have authority to change prices. (Tr. 718-19, 724, 788-89.) Adams did receive the daily price sheet from Thomas Ackerly or Dave Springer and faxed it to the branches. (Tr. 789; Div. Ex. 21.) 5. There were about fifty other vice presidents at Graystone Nash. (Tr. 791.) Adams used the buy-sell formula as a payroll schedule for the branches. (Tr. 792.) The contests and promotions required him to compile lists from the order sheets for accurate tabulations. (Tr. 793-94, 845-49; Div. Exs. 8-18.) As for allocations, Adams never made his customers give or sell units back to Graystone, but he regularly brought monthly branch production figures to Thomas Ackerly, who determined the allocations that Adams disseminated. (Div. Ex. 2.) He was not aware of nor involved in suppression of sell orders or refusals to execute sell orders. (Tr. 795-96.) 6. In 1987 and 1988, Graystone conducted twelve to fifteen initial public offerings ("IPO") in the form of shares of common stock and purchase warrants. (Tr. 603.) An aftermarket developed in each initial offering in 1987 and 1988. The price of the stock increased. (Tr. 612, 617, 625-26.) Thomas Ackerly's brother, Vincent Ackerly, was the trader in the firm ==========================================START OF PAGE 10====== and both Ackerly brothers set prices for which they would buy stock as market makers. (Tr. 221-24.) 7. Adams's desk was not located in the front near or in Thomas Ackerly's office or in the "bull pen area," but rather "was in the back portion of the offices where all the filing and the execution machines were, the customer data base was for the clearing firm." (Tr. 225-26.) The trades were sent to the area where Adams worked so that they could be executed. The procedure was usually carried out by the personnel in the operations section. (Tr. 226-27.) Adams did not influence quotations from other brokerage firms for the four underwritten offerings or influence Graystone's quotations. (Tr. 795-96.) However, Adams did handle the paperwork for rescinding transactions of registered representatives who were identified as selling securities in states where they were not registered. (Tr. 798- 800.) Adams did not set the commission rates, but he disseminated commissions that were "already set upon the trade." (Tr. 841.) He also faxed or caused someone else to fax to the branches memoranda as to bonus winners. (Tr. 845-49.) 8. Adams was the subject of an NASD decision whereby he was fined $2,000 for a client's complaint against Graystone. (Tr. 803-04.) Graystone went out of business as result of its inability to pay for all the securities it purchased from its clients. (Tr. 804-06.) Adams notified the NASD and the Securities and Exchange Commission of the shortage of net capital. (Tr. 227-28, 804-05.) In 1991, Adams became financial ==========================================START OF PAGE 11====== principal and operations manager and then a clerk for Berkeley Securities, minus several licenses which were surrendered pursuant to an NASD ruling. (Tr. 806-07; Resp. Exs. 5-7.) At the time of the hearing in the instant case, Adams was working for Commonwealth Associates as an originator, researching backgrounds of companies that might go public or need private financing. (Tr. 862-63.) The NASD decision that Adams could remain in the securities industry pending the outcome of appellate and administrative proceedings reflects no position by NASD on the merits of the case against Adams. (Tr. 874.) ==========================================START OF PAGE 12====== CONCLUSIONS OF LAW Contentions of the Parties I. The Division The Division contends that the testimony of Stephen Ware, Jose Gallego, David Torrey, and Joseph McGowan establishes that Adams enforced Graystone's "manipulative and deceptive policies . . . ." The witnesses were credible because none of them "had any motive to lie, unlike Adams." (Div. Br. at 2, 8.) The Division cites SEC v. Graystone Nash, Inc., 820 F. Supp. 68, 87-94 (D.N.J. 1993), rev'd on other grounds, 25 F.3d 187 (3d Cir. 1994), as "entirely on point as to the legal issues." (Div. Br. at 4.) It cites "ten Graystone decisions" for the proposition that enforcing Graystone's practices constituted violations of the securities laws by Richard D. De Maio, Dennis Williams, Thomas V. Ackerly, Vincent Ackerly, James Copley, James Ricketts, Shawn Crane, Robert L. Rock, and Michael Burko, and points out that like those of First Jersey Securities and Stuart James Associates, Graystone's practices were manipulative. (Div. Br. at 3-6; Div. Pr. Findings at 21-25.) The Division contends that Adams assisted Thomas Ackerly in allocating units in Graystone's initial public offerings of stock in several companies, (Div. Br. at 7-9; Div. Pr. Findings at 3- 6), and that he enforced the resale of units to Graystone by its customers at preset prices. (Div. Br. at 10-13; Div. Pr. Findings at 6-8.) It cites the testimony of the three branch managers--Torrey, Ware, and Gallego; testimony of registered ==========================================START OF PAGE 13====== representative Henry Aselton, trading records, and testimony of McGowan to establish Adams's knowledge and the activities of the company. It also contends that Adams knew of and enforced a requirement that the common stock in the immediate aftermarket of the initial public offerings in several companies be sold by Graystone at artificial, tiered prices. The same witnesses and the trading data are cited in support of this contention. (Div. Br. at 14-17; Div. Pr. Findings at 8-14.) The Division contends that Adams was actively involved in misleading prospectuses being shipped to branch offices and that he implemented a buy/sell formula that caused branch offices to delay or refuse customer orders to sell their house stocks. (Div. Br. at 17-20; Div. Pr. Findings at 14-17.) It contends that the distributions of common stock were not registered and that they should have been because the plan was to repurchase the units and break them up, and credit balances were created before the effective dates for the registration statement. (Div. Pr. Findings at 25-28.) It also contends that as an underwriter, Graystone was obligated to complete the offering before it could repurchase units. (Div. Pr. Findings at 27-29.) The Division seeks to bar Adams permanently from the securities industry. As the financial and operations principal, Adams had "full knowledge of what he was doing and the likely consequence . . . . He was a significant officer of Graystone with important responsibilities," according to his own testimony. (Div. Br. at 21.) He had been in the securities business for 27 ==========================================START OF PAGE 14====== years and he "carried out his role in the scheme with gusto as he engaged in outrageous conduct in enforcing a massive penny stock fraud over a two year period" which resulted in the loss of "many millions of dollars" that the public had invested in Graystone house stocks whose value "dropped to zero when Graystone ceased its illegal operations." (Div. Br. at 22; Div. Pr. Findings at 30.) It characterizes Adams as a stock promotor who is "directly engaged in IPOs in his present job," who has expressed no remorse, has refused to admit any wrongdoing, and who should be treated like the other participants in the same scheme who have already been permanently barred by the Commission. (Div. Br. at 23.) The Division does not allege that the artificial tick prices continued to be used after the first few days. (Div. Reply at 5.) The Division does not allege that Adams failed to supervise, but rather that he engaged in substantive violations. (Div. Reply at 8.) Finally, the Division contends that there was no evidence that the trading data was not authentic and reliable. It points out that Adams's contention that he was ignorant of the overall trading practices of Graystone is undercut by his acknowledgment of the fact that he detected that large volumes of Graystone purchases of common stock had caused Graystone to be undercapitalized in violation of the regulations. (Div. Br. at 15-16.) According to the Division, Adams had to be aware of the purchase of 90.5 percent of the IPO units by Graystone within three days. Adams's testimony that he was unaware of the common ==========================================START OF PAGE 15====== stock sales at preset prices is contradicted by four witnesses, and Adams conveyed more than one tick at a time to three of them. II. The Respondent Adams contends that the testimony of the witnesses and many of the exhibits establish that Adams was merely "performing his functions as a Graystone employee . . . ." (Resp. Br. at 3, 30.) The prospectuses included in the exhibits "were not connected to Mr. Adams by any witness," nor do they contain "a single fraudulent material misstatement." (Resp. Br. at 4-7.) Division exhibits 24 and 25 relate to trading records for Graystone and are not competent or complete, says Respondent. (Resp. Br. at 7- 9.) On the other hand, Adams contends that the exhibits admitted in his case establish that Graystone's policies and procedures placed no sales or trading personnel under Adams's supervision; that he had an unblemished record in the industry as of March 1992; and that he has been in "regulatory purgatory" as a result of the instant case against him. (Resp. Br. at 9-11, 30.) Adams also contends that the failure to call as witnesses Thomas Ackerly, Shawn Crane, and Robert Rock creates the presumption that their testimony would be unfavorable to the Division. (Resp. Br. at 27-29.) Finally, Adams describes exhibits 24 and 25 as "the heart of the Division's case," but contends that there was no testimony "that any transaction on exhibit 24 was not the result of normal market forces, of willing buyers and sellers agreeing to trade securities, and the ==========================================START OF PAGE 16====== balancing of investment demand with investment supply." (Resp. Br. at 33.) As to the judgments entered against other parties, Adams views reliance on those cases as evidence of wrongdoing by him to be a violation of due process. (Resp. Br. at 42.) Adams denies that the Division has proved any wrongdoing: "No proof was adduced in the proceeding that Graystone's practices violated any law or regulation or that Graystone was not a bona fide underwriter and market maker." (Resp. Reply at 6.) Evaluation of the Evidence Adams did not violate Sections 5 and 17(a) of the Securities Act, nor Sections 10(b) and 15(c) of Exchange Act, nor Rules 10b-5, 10b-6, and 15c1-2 thereunder. Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10-5 thereunder, prohibit the employment of a fraudulent scheme or the making of material misrepresentations and omissions in and in connection with the offer, purchase, or sale of any security. To prove a violation of these provisions, the Division must show: (1) that a misrepresented or omitted fact was made in an offer, attempt to induce a purchase or sale, or an actual purchase or sale of security; (2) that the misrepresented or omitted fact was "material"; and (3) that the respondent acted with the requisite "scienter." Basic, Inc. v. Levinson, 485 U.S. 224, 240 (1988); Aaron v. SEC, 446 U.S. 680, 701-702 (1980). "[M]ateriality depends on the significance the reasonable investor would place on the withheld or misrepresented ==========================================START OF PAGE 17====== information." Basic, Inc., 485 U.S. at 240. Information is deemed material upon a showing that there is a substantial likelihood that the omitted facts would have assumed actual significance in the investment deliberations of a reasonable investor. A statement is misleading if the information disclosed does not accurately describe the facts, or if insufficient data is revealed. Basic, Inc., 485 U.S. at 232; see also United States v. Koening, 388 F. Supp. 670, 700 (S.D.N.Y 1974). A showing of scienter is required to prove violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. Aaron, 446 U.S. at 701- 02. Scienter has been described as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is established by a showing that the defendant acted intentionally or with severe recklessness. Raymond L. Dirks, 47 S.E.C. 434, 447 n.47 (1981), rev'd on other grounds, Dirks v. SEC, 463 U.S. 646 (1983); see Broad v. Rockwell Int'l Corp., 642 F.2nd 929 (5th Cir.), cert. denied, 454 U.S. 965 (1981); see also Warren v. Reserve Fund, Inc., 728 F.2d 741, 745 (5th Cir. 1984); Hackbart v. Holmes, 675 F.2d 1114, 1118 (10th Cir. 1982); Sunstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1039 (7th Cir.) cert. denied, 434 U.S. 875 (1977). Recklessness has been defined as highly unreasonable conduct involving not merely simple or excusable negligence, but an extreme departure from the standards of ordinary care. SEC. v. Carriba Air, Inc., 681 F.2d 1318, 1324 ==========================================START OF PAGE 18====== (11th Cir. 1982); SEC v. Tome,. 638 F. Supp. 596, 622 (S.D.N.Y. 1986). Proof of recklessness may be inferred from circumstantial evidence. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir.) cert. denied, 439 U.S. 1039 (1978). In SEC v. American Commodity Exchange, 546 F.2d 1361, 1365 (10th Cir. 1976), the court indicated that actual sales by the defendant were not necessary to establish a violation of the antifraud provision of Section 17(a) of the Securities Act. To the same effect see United States v. Dukow, 330 F. Supp. 360 (D.C. Pa. 1971) and Fund of Funds Ltd. v. Arthur Anderson, 545 F. Supp. 1314 (1982). The Dukow court held that even though defendant was not a party to sales made by brokerage personnel, he was part of the scheme and was not exonerated from charges of securities fraud: "The securities laws include as a seller entities which proximately cause the sale . . . or whose conduct is a 'substantial factor in causing a purchaser to buy a security.'" Fund of Funds Ltd., 545 F. Supp. at 1353, citing Lawler v. Gilliam, 569 F.2d 1283, 1287 (4th Cir. 1978). Thus, fraud or intentional misconduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities must be proven by the Division against Adams. See Ernst & Ernst, 425 U.S. at 194. The Division's reliance on the testimony of Stephen Ware to establish intentional misconduct by Adams is misplaced. Ware had worked at Graystone as a stockbroker in San Francisco for six months in 1987. Then he had become operations manager in Newport ==========================================START OF PAGE 19====== Beach where he remained until January 1989, when the office closed. (Tr. 50-52, 121-32.) Robert Foley, Crane, and Williams owned the Graystone franchise where Ware worked. (Tr. 121.) He testified on direct examination that Adams gave him multiple prices and multiple numbers of shares in a single phone call, (Tr. 70), and that Adams pressured Ware to sell stock back to Graystone and engaged in other fraudulent activity. (Tr. 72-74.) The inference to be drawn was that Adams was the only source for this information. However, on cross examination, he testified that Foley and Crane gave him the prices for shares and that they allocated shares. (Tr. 120-21.) Thus, he contradicted his own testimony. Ware had never met Adams in person and did not recognize him at the hearing. His testimony about conversations with Adams was based on approximately 100 telephone calls from a person who identified himself as "Mr. Adams." (Tr. 52, 61, 87.) Ware had never visited the New Jersey office where Adams and the administrative offices were located. (Tr. 132, 135.) Thus, he had little basis for concluding that the Respondent was actually the person who talked with him on the telephone, and he had never observed Adams interacting with any of the men whom the Division contends were involved in a fraudulent scheme. He did not provide dates for any of the conversations or notes for them. His testimony that Michael Burko and Joe Dedios filled garbage bags with shredded faxes and records from his office in December 1988, (Tr. 71-2, 140-42), is obviously intended to account for ==========================================START OF PAGE 20====== this lack of corroboration for the telephone conversations with the Respondent. The Division introduced its exhibits 3 and 8 to 18 through Ware. (Tr. 75-76, 82.) The exhibits demonstrate recordkeeping and payroll duties that Adams carried out. The Respondent's name does not appear on exhibit 3. Division exhibit 3 is a memorandum dated August 12, 1988, to "All Managers and Corporate Officers" from "T.V.A. [Thomas V. Ackerly] " that alludes to a new telephone system; a new sales bonus program; a new pay schedule; the fact that "the formula is now at an end"; congratulations; and dates for managers meetings. On the second page, "formula" is handprinted with a bracket in the margin beside the sales payout figures. Division exhibits 8 through 11 are one-page memoranda to managers with Adams's name typed on them. Each is dated September 19, 1988, and they each list names in the categories of top producers, bonus winners, and new winners, respectively, for August 1988. Division exhibit 12 is a one-page memorandum to "All Managers" from "Richie Adams." It is dated October 6, 1988, and it requests a list of all names for "stock bonus winners for September 1988, for verification purposes." ATC, VINO, and IEIB are listed under the heading "Bonus Stocks." Division exhibits 13 through 16 are one-page memoranda to branch managers with Adams's name typed on them. Each is dated October 18, 1988, and they list names in the categories of stock bonus winners 9-88; new account winners under 90 days; new account winners over 90 ==========================================START OF PAGE 21====== days, and top 10 producers September 1988, respectively. Division exhibit 17 is a one-page memorandum dated October 24, 1988, to branch manager from "Rich Adams." It requests "lists of bonus winners this last pay period," with abbreviations for the applicable stocks. Division exhibit 18 is a one-page memorandum with the same date and headings. However, it corrects one of the bonus stock designations listed in exhibit 17. The exhibits introduced through Ware corroborate the theory of the Respondent and are consistent with the findings of fact in this decision. On cross examination, Ware additionally conceded that Merrill Lynch, where he had worked in the past, also gave bonuses. (Tr. 109-10.) There were no bonus programs running at Graystone when Ware was employed there as a stockbroker and he never received a bonus, although he had 75 to 100 clients. (Tr. 118-19.) The exhibits demonstrate clearly that Adams handled bookkeeping problems and that he was responsible for payroll. In fact, the exhibits describe no manipulative or deceptive policies. On the other hand, Ware's direct testimony shows that Ware may have been a willing participant in an effort to sell shares at artificially set prices and to manipulate client accounts. Jose Gallego was the second witness called by the Division. Like Ware, he testified to mostly undated, unmemorialized conversations with Respondent. Also like Ware, he contradicted the damaging direct testimony when he was cross-examined. On direct examination, Gallego testified that he had worked for ==========================================START OF PAGE 22====== Graystone as operations manager in Boca Raton from September 1986 through December 1987, and as executive vice president in Chicago from January 1988 through December 1988. (Tr. 164-65.) Through conversations and visits with Adams in New Jersey, Gallego understood Adams to be "managing the operation" and acting as a "financial officer." (Tr. 167.) Adams was number two in charge and he ran the firm in the absence of Thomas Ackerly. (Tr. 168.) Adams received the trade execution blotters and passed them to key punchers for generation of confirmations. (Tr. 168-69.) He also prepared financial statements and reports required by the NASD and handled customer complaints. (Tr. 169-70.) He identified Division exhibit 21 as a quote sheet generated from Graystone in New Jersey "describing . . . the bid price . . . the offering price [and] . . . concessions" for securities that Graystone had underwritten and made a market in, including Advisors Capital (ADC), Alfa, and ATC. (Tr. 171-73.) For house stocks, Graystone was on "the other side of all customer transactions in house stocks." (Tr. 174-75.) Activity in house stocks constituted "95 or better percent of all the transactions done" in the branch office. (Tr. 176-77.) The largest commission Gallego was aware of was the "60 percent on the dollar" commission paid on Baba stocks. (Tr. 178-79.) In 1987 and 1988, IPOs were done by Graystone acting as "investment banker" for several companies. (Tr. 180-81.) Adams called Gallego in reference to Wine in September 1987 and stated "the more units we put back, the more common stock we would ==========================================START OF PAGE 23====== receive in the aftermarket." (Tr. 182.) Adams gave him a price of $17.50 a unit of Wine shares as the price at which they "were to be sold back . . . ." Adams also stated that he expected to get the units back. (Tr. 183.) Adams also told him on the telephone "that the more units that were given back, the more aftermarket we could receive." (Tr. 184-85.) Dennis Williams also spoke with Gallego and after conversations with Adams and Williams, Gallego "reversed all the buy of the units of Wine and reversed them to sells to submit our sell blotters and changed the price to 17 and a half" without order tickets at the time. (Tr. 185-86.) "Adams and [Gallego] had discussed in the past" the fact that the branch office "would not receive additional units in the future for other IPOs" if the units were not returned "when it was required." (Tr. 188-89.) Gallego testified that for the Wine aftermarket, Adams gave him multiple ticks and sale quotas. (Tr. 191-210.) On cross-examination, Gallego contradicted most of his direct testimony. He conceded that he never had a conversation with Adams about requiring customers to sell shares back to Graystone or about the procedure of raising the prices of stock after the initial sale. (Tr. 214.) Thomas Ackerly, as president of Graystone, set policies from the corporate office in New Jersey. Gallego also testified that it was common practice in the industry to have "house stocks" in which a brokerage firm may take a particular interest; to have different commission schedules for various products; to have great differences between ==========================================START OF PAGE 24====== bid and ask prices; and to set limits on numbers of shares allocated for IPOs. (Tr. 214-21.) Thomas Ackerly's brother, Vincent Ackerly, was the trader in the firm and both Ackerly brothers set prices for which they would buy stock as market makers. (Tr. 221-24.) Gallego visited the Bloomfield office of Graystone and saw that Adams's desk was not located in the front near or in Thomas Ackerly's office or in the "bull pen area," but rather "was in the back portion of the offices where all the filing and the execution machines were, the customer data base was for the clearing firm." (Tr. 225-26.) The trades were sent to the area where Adams worked so that they could be executed. The procedure was usually carried out by the personnel in the operations section. (Tr. 226-27.) Shortly after Gallego reversed some buy orders into sell orders, "Graystone ceased to exist" because "they were liquid [sic] markets that they made positions in." (Tr. 227-28.) On redirect examination, Gallego recalled that Adams had stated "that the way you get aftermarket tickets depends on what you do with getting the units back." (Tr. 239-40.) He also testified that Adams provided him "with ticks from time to time and the amounts of volume to be done at ticks." (Tr. 241.) Thus, on redirect, the witness contradicted his own testimony on cross-examination as to the setting of prices and the requirement for customer sells at various points in time. Gallego's description of the physical location of Respondent's desk in New ==========================================START OF PAGE 25====== Jersey corroborates the Respondent's contention that his work was centered around purely bookkeeping and ministerial duties, rather than policy making or execution of policies that he had reason to know were manipulative or fraudulent. Gallego's testimony on direct examination that Adams managed the operation and ran the office in the absence of Ackerly is contradicted by his description of the physical layout in New Jersey. Reliance by the Division on the testimony of Gallego is misplaced. Although he described a scheme at Graystone that was probably manipulative and fraudulent, it would be impossible to conclude from a fair examination of his entire testimony that Adams was aware of it or that he assisted in its execution intentionally or recklessly. Division exhibit 21 was introduced through Gallego. It is a "Graystone Nash Price sheet" containing abbreviations and "Bid," "Ask," and "Concession" columns with handwritten percentage figures under the handwritten column "Gross." No testimony connected Adams to the document and it does not demonstrate that Graystone or anyone else engaged in any illegal activity. David Torrey was the third Graystone manager who testified. He had met Adams three times in person, but he also testified about undated and unmemorialized telephone conversations with the Respondent. (Tr. 663.) Torrey testified that he worked for Graystone as a registered representative and then manager in 1986, with the title of regional vice president, in Florida. (Tr. 596-97.) Adams's function was to "keep track of what each ==========================================START OF PAGE 26====== office was due - of what our office was due" in the monthly wire. The registered representatives and office overhead were paid with the money transmitted with the help of Adams. (Tr. 598-99.) In telephone conversations, Adams questioned account numbers, "amount of shares," or "why the client was selling." (Tr. 602.) In 1987 and 1988, Graystone conducted 12 to 15 IPOs in the form of units of common shares and purchase warrants. (Tr. 603.) Adams discussed "getting the units back from our clients that had purchased them in the initial public offering," and told Torrey to get the units back on two to three occasions in 1987 and 1988. (Tr. 610-11.) Adams also told him to "be on the look-out for new issue holders." (Tr. 612.) An aftermarket developed in each initial offering in 1987 and 1988. Instructions were given by Adams and by Thomas and Vincent Ackerly as to the prices of the units up to the third tick for all of the initial public offerings in 1987 and 1988. As for the definition of a "tick," Torrey testified: What I mean is, we were given an amount of stock, of common stock, that we could sell at, say, one dollar and then a higher amount of stock that we could sell at a dollar and a quarter, and then the next level might be a dollar and three-eights or a dollar and a half. But it would be leveled out. And the amount of stock was always -- continued to get higher as the price got higher -- our allotment. (Tr. 616.) Furthermore, "when we first started trading the aftermarket stock, the first two or three ticks would be given to us in the first phone call." (Tr. 617.) Torrey believed that the price of the stock increased as a result of buying pressure from other ==========================================START OF PAGE 27====== clients and other offices. ( Tr. 625-26.) He could not recall talking to Adams about his goal of purchasing stock "at a lower price the remaining part of the day" before the stock might go up. (Tr. 626.) Adams told him that "having a client sell out of a position that he held in his portfolio was often times discouraged." It was frowned upon because it could result in "anything from hurting our participation in public offerings to affecting our wire [commission] that was due each month." (Tr. 629.) Adams "kept track of" the "office's performance" as to commissions and "holding back of money from the wire [commissions]" occurred depending on the ratio of in-house stocks that were bought or sold during the month. (Tr. 631-32.) He also told Adams that he did not like trying to meet the goals for the in-house stocks that might result in cash bonuses, and Adams told him that he was "missing a good opportunity" by not doing so. The winners of sales contests and bonuses were sent out by Adams over the fax machines. (Tr. 633-40.) On cross-examination, Torrey testified that he "never knew what the tick prices would be before billing of the IPO" at Graystone. (Tr. 661.) I am unable to conclude from these undated conversations that Adams or anyone else at Graystone acted illegally. There is certainly no basis for a conclusion that Graystone repurchased units before the offering had been completed for a particular IPO or that Adams was involved in a scheme to manipulate the market as prohibited in Rules 10b-5 and ==========================================START OF PAGE 28====== 10b-6. Indeed, the activities and concerns attributed to Adams by this witness corroborate his contention that he was a bookkeeper who was responsible for managing disbursement to many employees scattered throughout the country. Division exhibits 4 through 7 are prospectuses for Graystone stocks Wine, Alfa, ATC, and Advancier, respectively. These were introduced through Torrey. (Tr. 605-07.) The quality of the testimony of the three managers does not rise to the level of substantial evidence of wrongdoing or recklessness by Adams, mainly because the conversations they describe are not detailed, are not dated, and are not corroborated by any memoranda or notes. Thus, I am unable to conclude that the conversations occurred before the offerings were completed for each of the IPOs or that credit balances were created before the registration dates. I am also unable to conclude that Graystone was on the other side of customer transactions alleged by Ware, (Tr. 72-74), and Gallego. (Tr. 191-210.) Their testimony in this regard is contradicted by Torrey, who testified that the price of the stock increased as a result of buying pressure from other clients and other offices. (Tr. 625-26.) The testimony of the managers is also contradicted by the Division witness Henry Aselton. Aselton testified that he worked at Graystone from April 1987 until December 1988 as a registered representative in the Boca Raton, Florida, office. (Tr. 249-50.) "Virtually all" of Graystone's business was in the house stocks. ==========================================START OF PAGE 29====== The company was the underwriter for the Wine, ATC, Alfa, and Advanciers offerings. (Tr. 251.) Williams and Rickerts instructed Aselton to sell the shares "when they go to a profit." (Tr. 254-58.) The incentive for the brokers consisted of commissions that varied from 10 to 60 percent. (Tr. 260-61, 274.) Williams, at management meetings, encouraged the registered representatives to sell the stock that carried the highest commissions reflected on the "chop sheets" that showed tick prices with higher broker commissions for stocks sold at the highest prices to clients. (Tr. 267-69.) Aselton asked Rickerts, his manager, to submit tickets that Aselton had written in advance for stocks selling at different tick prices, while Aselton was in South Carolina, and Rickerts did it. (Tr. 270-72.) Management told the brokers to hide the quote sheets "when the regulators come" to the office. (Tr. 274-75.) Rick DeMaio signed off on the sell tickets, which were done pursuant to a buy/sell formula set by management. (Tr. 277-79.) DeMaio refused to allow a "sell ticket" to be processed when Aselton put it in because Aselton "didn't have a buy" ticket to match it. (Tr. 280-81.) Aselton did not attribute any illegal conduct to Adams. On the contrary, Williams, Ricketts, and Rick DeMaio may have acted illegally or unethically in the branch office to implement policies set by "management." The Division witness Joseph McGowan also contradicts the testimony of the three managers. McGowan testified that he acquired the Outwater firm in March 1976. It was terminated in ==========================================START OF PAGE 30====== 1988 or 1989, and he was president and then chairman of the board of the company. (Tr. 343-44.) His firm cleared securities for Graystone, "would do the paperwork for them, the accounting, operational work . . . prepare confirmations, deliver them to the customers, and . . . receive and pay out monies and securities on behalf of Graystone" from 1985 through 1988. (Tr. 344.) Phase 3 System Inc. maintained "the books and records required by law" for Outwater. (Tr. 346.) The Graystone data was submitted to Phase 3 System Inc. along with Outwater data, but was "coded differently to distinguish them from us" for input. (Tr. 348.) McGowan described exhibit 24 as appearing "to be a compilation of activity in various securities" and he denied ever having "requested the blue [sheet report] run." (Tr. 350.) McGowan worked in the same building with Adams at some point, perhaps in May 1988, and he described Adams as "probably acting like the cashier - in charge of the operations and the financial aspects of the firm," (Tr. 352), and was "the principle manager of Graystone Nash when Mr. Ackerly was away in 1988." (Tr. 353.) Adams worked in the area "where they maintained all of the firm's records, the bookkeeping and accounting areas." (Tr. 354.) He heard Adams make reports to Ackerly as to the number of units that were still outstanding; which offices were not sending units back; and repurchased units. (Tr. 361-62.) He also heard Adams talking to managers on the telephone about pricing on a ticket; the size of a ticket; and the number of shares on a ticket. (Tr. 362.) As for conversation about "sell tickets," Adams had a ==========================================START OF PAGE 31====== conversation with a manager in which Adams "was wondering why there were more sell tickets emanating from that office as opposed to buy tickets." (Tr. 363.) McGowan defined the buy/sell formula as the calculation "as to the business done during that month, and a number was derived and that was the pay-out to that office for the business that they had submitted during the period of time. And that formula was used in calculating the monies due to the branch manager and the respective salespeople." (Tr. 367.) Adams used the formula "in doing his calculation to determine the amount of money that was to be paid to each office." (Tr. 367-68.) Graystone controlled the markets in its house stocks because they were the only firm that had the customers that actually owned securities. Thus, "if a person wanted to sell the securities, it would be much easier and more efficient to sell through Graystone Nash than to go through a competing or another broker/dealer." (Tr. 369-70.) He heard "Mr. Ackerly instruct Adams that 'we'll say two o'clock, this price was to be changed and the bid was to be raised' and the offer was to be raised. He [Ackerly] then left the office [in Bloomfield]." (Tr. 374.) On cross-examination, McGowan acknowledged that his description of exhibit 24 as blue sheet responses was based on the SEC attorney's description and that he had never asked that the documents be created or seen blue sheet responses before. (Tr. 387.) Although it is his belief that they "are a summation of the activities of the firm in these respective securities" of ==========================================START OF PAGE 32====== Advanciers, Wine, or ATC, he cannot determine why those particular stocks were chosen for the document; he has no way of determining whether they are complete; and his handwriting does not appear on the exhibit. (Tr. 387-91.) He conceded on cross-examination that Ackerly acquired Outwater and that Joseph Gentile replaced McGowan as chairman in January 1988. (Tr. 404-05.) McGowan subsequently moved to the Bloomfield, New Jersey office and became executive vice president of Graystone. (Tr. 411.) Although compliance was controlled by Thomas Ackerly at all times, McGowan was placed in charge of the problem of unlicensed registered representatives who were working for the company in several states. (Tr. 411-13.) By November 1988, the sales force from Outwater had transferred to Graystone and were given Graystone record code numbers for reporting purposes, rather than Outwater numbers. (Tr. 440.) McGowan testified that exhibit 24 also contains Outwater trades involving Outwater clients. (Tr. 442-43, 451-52.) However, where the account is labelled a suspense account in exhibit 24, the profits and losses belong to Graystone. "The Outwater, Wells's suspense account is not to be confused with Outwater & Wells's trading accounts and the way it does business." (Tr. 450.) The suspense account is used "to resolve differences, balances, temporary things . . ." and thus to correct errors. (Tr. 450-51.) McGowan corroborates Respondent's characterization of the buy/sell formula as a means of calculating payroll figures for Adams, who essentially acted as a cashier. He contradicts the ==========================================START OF PAGE 33====== image of Graystone as the sole purchaser of the IPO shares, and he explains Graystone's activity as a market maker rather than a manipulator. Again, conversations are not placed in time and are not noted, and thus lose significance. Most importantly, McGowan destroys the evidentiary value of exhibit 24, which forms the basis for the Division's expert's exhibits. Exhibit 24 contains trading data from another company, Outwater. He does not vouch for the completeness of the document, and because McGowan did not decipher the codes and disavowed the handwriting on the sheets, it is impossible to determine whether the codes have been accurately interpreted or how the labels were placed on the data. He also drew a distinction between the suspense accounts and the trading accounts that is not apparent on the face of the data. Thus, his testimony requires that very little probative value can be attached to the exhibit. Karen Gella also testified about exhibit 24. She was vice president of data center operations at Phase 3 Systems from 1984 through March 1994. Sunguard Financial Systems acquired the company in 1990. (Tr. 302-04.) She received a request for information regarding Outwater, a customer of Phase 3, in 1989. (Tr. 307-08.) She supervised the generation of a report from off-site storage tapes to execute the program in 1989. (Tr. 308.) The documents from the computer run were shipped out or sent to Gary Morgan. (Tr. 309-10.) Exhibit 24 contains "410A" reports for Outwater that were produced by Phase 3 Systems. (Tr. 310.) ==========================================START OF PAGE 34====== On cross-examination, she admitted that she recognized the format of the documents in exhibit 24, but that she did not recall having seen the documents themselves before the date of her testimony, and that she did not recognize the documents themselves. (Tr. 313-14.) The handwriting on the documents is not hers, and she does not know whose handwriting it is. (Tr. 314.) She did not see the subpoena that called for the production of the exhibit, and she did not know what several of the codes meant that appeared on the columns. (Tr. 314-16.) She did not know the name of the person who ran the program or who generated the report and she agreed that in order to determine what the data in the exhibit was supposed to be, one would "have to see the request that came in," and she did not have a copy of the request. (Tr. 317-18.) Division exhibit 24 is a computer generated record from Outwater that includes over 2,500 pages. There are approximately 407 pages (for 6-1-88 to 8-1-88) for ATC; 491 pages (for 6-1-88 to 8-1-88) for ATC, including many of the same customers from the earlier lists, and additional trades that occurred during the same period of 6-1-88 to 8-1-88; 282 pages (for 2-24-88 to 4-24- 88) for Alfa units, including many of the customers from the above lists, and other trades; 626 pages (for 2-24-88 to 4-24-88) for Alfa with some scattered handwritten notes on them; 362 pages (for 10-5-88 to 12-22-88) for Advancier; and 988 pages (for 8-26- 87 to 10-26-87) for Wine. I cannot conclude from the exhibit that Graystone purchased securities from the customers listed, ==========================================START OF PAGE 35====== because no evidence identified the Graystone proprietary or house accounts and nobody vouched for the accuracy of the data. Thus, although the exhibit is voluminous and complex, its probative value is minimal. Joseph Cella was qualified as an expert in the area of market surveillance. (Tr. 480-81.) He testified for the Division that, in his opinion, exhibit 24 was a "typical" blue sheet response to a request for information by a regulatory body. (Tr. 482.) However, he had no personal knowledge of how the exhibit was generated. (Tr. 501.) For his computations, which are contained in exhibits 25 A through H, Cella excluded accounts from exhibits 24 that were labelled syndicate accounts. (Tr. 495.) He included accounts that were in his opinion proprietary accounts. (Tr. 494-98.) Cella testified that the format for exhibits 25 A through H was a result of "a collaboration between myself, Mr.Bettigole, and the secretary who typed it." (Tr. 509.) Mr. Cella on cross-examination testified that it is not unusual for small brokerage firms to specialize in house stocks, and the proceeds from the underwriting of an IPO "are divided between the underwriter and the issuer, depending on the underwriting agreement." (Tr. 542.) Cella had not seen the underwriting agreement for Wine. (Tr. 542.) Thus, for the units sold for the syndicate account in exhibit 25A, he did not know how much "went to Wine Inc. and how much went to Graystone . . . ." (Tr. 543.) exhibit 25A shows that on September 3 and 4, ==========================================START OF PAGE 36====== individuals bought shares for $10 and sold them for $ 17.50 to $54. (Tr. 545.) Cella conceded that there were transactions on Exhibit 24 that were conducted subsequent to the dates shown on the charts he prepared. (Tr. 546.) The Division contends in its Proposed Findings and Conclusions that the trading records as revealed in Cella's schedules verify the sale of 100% of the units at the price in the prospectus, the repurchase at substantially higher prices, and the distribution of common stock at predetermined prices. (Div. Pr. Findings at 10-11.) It contends that the data presented in exhibit 24 are reliable as representative of all the sales of units by Graystone as reflected in the prospectuses for Wine, Alfa, Advanciers, and ATC, (Div. Pr. Findings at 13), and that the computer sheets also show that Graystone repurchased most of the units within days of the opening of the aftermarket trading and then sold hundreds of thousands of shares of common stock at increasingly higher prices. It points out that the proprietary account trades are cross-referenced to offsetting customer transactions. According to the Division, the fund prospectuses were false and misleading because they stated that units of common stock and warrants were to be offered to the public at a stated price and that Graystone's compensation as underwriter consisted of "a commission or discount from the offering price, expenses and long term warrants." However, it contends that the hearing established that "the true nature of the offerings were distributions of common stock at multiple ==========================================START OF PAGE 37====== escalating tick prices in controlled markets." (Div. Pr. Findings at 15.) I agree with the Division's contention in its Proposed Findings that Rule 10b-5 prohibits manipulation of securities prices and Rule 10b-5 should be construed flexibly to effectuate the remedial purposes of the Exchange Act. (Div. Pr. Findings at 19-20.) The Division contends that the transactions violated Rule 10b-5 because they persuaded the public that activity in the securities was the reflection of a genuine demand instead of a mirage, (Div. Pr. Findings at 20), and that the manipulation operates as a deceit on the market place and is an omission of a material fact. Because the demand comes from the planned purpose to stimulate buyers' interest rather than free market forces, Section 17(a) of the Securities Act and Sections 10(b) and 15(c) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder, proscribe this kind of misconduct by brokers or dealers. (Div. Pr. Findings at 21.) It contends that Adams's fraudulent conduct is established by his enforcement of repurchases of the units; the sales of the common stock at a series of artificially preset prices; and the buy/sell formula restrictions on customers' ability to sell their stock. These practices are condemned as fraudulent in ten earlier Graystone opinions and in cases that involved the infamous penny stock firms of First Jersey Securities, Stuart James, and others. (Div. Pr. Findings at 22.) Thus, the Division places great weight on the Cella computations. The computations of the expert Cella are contained ==========================================START OF PAGE 38====== in exhibits 25 A through H. However, they in turn are based on data in exhibit 24. Since the testimony of the Division witnesses requires me to find that the data in exhibit 24 are likely to be inaccurate or incomplete, I do not attach great weight to the computations that Cella generated from them. Furthermore, Cella's testimony corroborates the theory of Respondent that Graystone engaged in no illegal conduct as a result of specialization in house stocks that was described by the managers. There is no evidence that any "proprietary account" trades were generally executed in an illegal manner or that Graystone alone controlled those accounts. There is no evidence that the prices at which the units and warrants were sold were artificially manipulated by anyone. Therefore, the prospectuses are not inaccurate according to exhibits 24 and 25 and Section 5 of the Securities Act was not violated. As for prior Graystone decisions, they cannot bind Adams and I cannot adopt their findings. There are no dates or notes for the conversations that Mather and Boyle testified about having with Adams. (Div. Exs. 22, 23.) I cannot conclude from them, even assuming that they are accurate, that Adams was aware of any manipulation or that he knowingly participated in any illegal scheme. His responsibility for the physical allocation of stock to the branch offices does not per se make him privy to the strategy behind the decision to allocate. Finally, there is no proof that Graystone purchased stock illegally. Both depositions establish that Williams, who ==========================================START OF PAGE 39====== did not testify, was actively involved in the formulation of policy, not Adams. (Div. Exs. 22 at 41; 23 at 31-32.) Thus, both depositions, on the whole, exculpate Adams. Lester Morse, an attorney who represented Graystone in 1987 and 1988, and the Respondent both testified in the Respondent's case. Their testimony was exculpatory and is consistent with the findings of facts. They were both credible witnesses, based on their demeanor and appearance and the content of their responses to questions on direct and cross examination. Furthermore, their testimony was corroborated by the majority of the Respondent's exhibits, including Respondent's exhibits 4, 5, 8, 9, and 13. Summary Proof of scienter in manipulation cases need not be direct, but rather may be inferred from circumstantial evidence, including evidence of price movement, trading activity, and other factors. See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91 n.30 (1983); Santa Fe Industries v. Green, 430 U.S. 462, 475 (1977); Pagel Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986); Mawod & Co., 591 F. 2d 588, 596 (10th Cir. 1979). Further, proof of manipulation is generally not based on a single activity, but rather on a course of conduct showing an intentional interference with the normal functioning of the market for a security. Indeed, manipulation is usually the result of acts, practices, and courses of conduct that deceive the marketplace: Proof of a manipulation almost always depends on inferences drawn from a mass of factual data. Findings ==========================================START OF PAGE 40====== must be gleaned from patterns of behavior, from apparent irregularities, and from trading data. When all of these are considered together, they can emerge as ingredients in a manipulative scheme designed to tamper with free market forces. Pagel, Inc., 48 S.E.C. 223, 226 (1985). Moreover, it is not necessary to rely on direct evidence that a respondent willfully manipulated the market. Instead, I may rely on inferences drawn from the evidence adduced at the hearing to reach the conclusion that an illegal manipulation occurred. Collins Securities Corp. v. SEC, 562 F.2d 820, 822-23 (D.C. Cir. 1977). I cannot conclude that Adams enforced, encouraged, participated in, or had knowledge of the "boiler-room tactics" in derogation of Sections 15(b) and 15A(b)(4) of the Exchange Act, as described in A.J. Caradean & Co., Inc., 41 S.E.C. 234 (1962). Section 5 of the Securities Act prohibits offers to sell and offers to buy a security before a registration statement is filed. Section 2(3) of the Securities Act, however, exempts preliminary negotiations or agreements between the issuer or other person on whose behalf the distribution is to be made and any underwriter or among underwriters. I cannot conclude that Adams assisted in these kinds of offers or negotiations prohibited by this section, either. Adams did not establish the prices that are described in the testimony and they cannot be attributed to him. Because of the evidentiary problems with the trading data and with the testimony of the three managers, the Division has ==========================================START OF PAGE 41====== not proved that Graystone as the underwriter purchased securities while still participating in their distribution. See R.A. Holman & Co. v. SEC, 366 F.2d 446, 449 (2nd Cir. 1966), cert. denied 389 U.S. 991 (1967); United States v. Charnay, 537 F.2d 341, 351 (9th Cir.), cert. denied 429 U.S. 1000 (1976). The Division has not sustained its burden of proving that an independent wrong existed; that Adams knew of the existence of the wrong; and that he rendered substantial assistance in effecting the wrong. Thus, he cannot be held responsible for violations of the securities laws. Like the defendants in Walck v. American Stock Exchange, 687 F.2d 778, 790 (3rd Cir. 1982), cert. denied 461 U.S. 94 (1983), Adams had duties that did not involve setting policy or monitoring the individuals who might have concocted a scheme to manipulate the market in the four IPOs. The numbers of transactions also would have made it impossible for him to notice any patterns. As in O'Neill v. Maytag, 339 F.2d 764, 768 (2nd Cir. 1964), the facts in the instant case do not establish a deception. Adams concedes that he performed payroll functions that used the buy/sell formula established by the corporate owners. However, carrying out his accounting duties, Adams never "acted other than in good faith," Ernst & Ernst, 425 U.S. at 206, and no deceptive or manipulative scheme underlying the purchasing of stock was established that he could have enforced. "While an exemplary life up to the moment of wrongdoing will not excuse criminal or fraudulent conduct, such a life will stand ==========================================START OF PAGE 42====== a man in good stead when he is accused of shabby or criminal conduct which he denies, and when he is cast in a contest against accusers whose own lives present nothing special to support assertions of integrity." Klopp v. SEC, 427 F.2d 455, 460 (6th Cir. 1970). Even if I assume that Graystone broke the law, I find it significant that no prior bad acts were alleged against the Respondent and that the Graystone employees who testified for the Division were not models of professional responsibility themselves. Adams's testimony demonstrated that he was not actively assisting a scheme and that he was not negligent. It was also consistent and reasonable in light of other credible evidence, such as the memoranda introduced by the Division in its case. Most importantly, Respondent's professional duties as the only financial and operations limited principal at Graystone were staggering. They included: a. final approval and responsibility for the accuracy of financial reports submitted to any duly established securities industry regulatory body; b. final preparation of such reports; c. supervision of individuals who assist in the preparation of such reports; d. supervision of and responsibility for individuals who are involved in the actual maintenance of the member's books and records from which such reports are derived; e. supervision and/or performance of the member's responsibilities under all financial responsibility rules promulgated pursuant to the provisions of the Securities Exchange Act of 1934; f. overall supervision of and responsibility for the individuals who are involved in the administration and maintenance of the member's back office operations; or g. any other matter involving the financial and operational management of the member. Schedule C, CCH NASD Manual, 1784, p. 1537 (1994). ==========================================START OF PAGE 43====== It would be unreasonable for me to hold him responsible for any illegal trading practices described in the Division's proof, especially in light of the number of branches and employees that Graystone controlled. See Billings Associates, Inc., 43 S.E.C. 641, 646-49 (1967). Likewise, there is no credible evidence that Respondent assisted in or profited from sales before effective registration dates, which are prohibited by Section 5(a) of the Securities Act. See Franklin, Meyer & Barnett, 37 S.E.C. 47, 51-52 (1956). The Division alleges that the trading strategy of Graystone was manipulative as in the following facts: The insertion of increasingly higher bids in the sheets is the most universally employed device to create a false appearance of activity in the OTC [over the counter] market and tends to support the price at its inflated level. . . . . It is significant that when [the underwriter] withdrew its support, the price of GOB stock rapidly dropped. GOB Shops of America, Inc., 39 S.E.C. 92, 101 (1959). The problem in the instant case, of course, is that this pattern of trading was not established and that it cannot be attributed to Graystone. The Division contends that related cases such as the Order Making Findings and Imposing Remedial Sanctions as to Thomas Ackerly, 59 SEC Docket 3023 (August 9, 1995), should be taken into account. In this consent order, Ackerly neither admitted nor denied that, "As a part thereof arrangements were made with other firms to publish quotations at prices specified by Graystone and to acquire positions in the securities for later resale to Graystone. The firm regularly ==========================================START OF PAGE 44====== sought to control the supply of securities, including through purchases from other market makers." Id. at 3024-25. The Commission's order sanctioning Ackerly is not binding on any other respondent. Id. at 3023, n.1. However, it exculpates Adams in that the complexity of the trading strategy renders it unlikely to be noticed by him as the sole financial and operations principal, and it also appears to be the brainchild of the men who would profit most from it. Since Adams had no financial stake in the company, he would be unlikely to participate in such an enterprise or to have knowledge of its machinations. Unlike the respondent chief financial officer in Kevin Upton, 58 SEC Docket 1993, 2001 (1995), who should have discovered the illegal paydown practice during the course of his duties and should have requested information about it, Adams's responsibilities did not include awareness of trading strategies that were intentionally camouflaged on the books. Therefore, I find that he was not negligent in failing to correct any irregularities in the marketing of the IPOs. The record does not reveal specifically how he discovered the net capital problem, but I cannot assume that any other red flags should have caused him to act differently. In assessing Adams's culpability, I am clearly unable to use proceedings as to other Graystone employees or owners to draw inferences. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 (1979); Goldberg v. Kelly, 397 U.S. 254, 266 (1970). However, Jeffrey J. Heet, 51 S.E.C. 979 (1994), is discussed by both ==========================================START OF PAGE 45====== parties in their post-hearing submissions. I am also persuaded by the analysis in Heet that Adams should not be held accountable for possible wrongdoing of others. In Heet, the Commission set aside the NASD's findings that the financial and operations principal and executive vice president was responsible for unfair markups and commissions. The decision was based on the size of the firm, his lack of oversight responsibility, and his other duties. Adams did not engage in a course of business which operated as a fraud or deceit in the market. Therefore, he did not violate Section 10(b) of the Exchange Act or Rule 10b-5 thereunder or other related sections of the securities laws. The record establishes that the illegal acts are alleged to have occurred from January 1987 and up to December 1988, when Graystone went out of business. The OIP was filed on May 2, 1994. I conclude that the holding in Johnson v. SEC, No. 95- 1340, slip op. at 17 (D.C. Cir. June 21, 1996), "that the five- year statute of limitations set forth in  2462 does apply to SEC proceedings under section 15(b) of the Securities and [sic] Exchange Act of 1934," also applies to the instant case. It requires dismissal of the charges against the Respondent. In the alternative, I find that the Division has not proved that the Respondent violated any section of the securities laws and accordingly the case must be dismissed on that basis also. ORDER ==========================================START OF PAGE 46====== IT IS ORDERED that the proceeding against Respondent Richard J. Adams be, and it hereby is, dismissed. This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Rules of Practice. Pursuant to Rule 17(f) of the Rules of Practice, this initial decision shall become the final decision of the Commission as to each party who has not, within fifteen days after service of this initial decision upon him, filed a petition for review of this initial decision pursuant to Rule 17(b), unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to him. If a party timely files a petition for review, or the Commission takes action to review as to a party, the initial decision shall not become final with respect to that party. Lillian A. McEwen Administrative Law Judge Washington, D.C. June 27, 1996