Securities And Exchange Commission v. First Jersey Securities, Inc.

101 F.3d 1450 (2nd Cir. 1996)

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Nature of the Case

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Facts

Beginning in November 1982 and continuing into 1985, Ds employed a massive and coordinated system of fraudulent practices to induce its customers to buy certain securities at excessive prices unrelated to prevailing market prices, resulting in Ds' gaining more than $ 27 million in illegal profits from their fraudulent scheme. The vast majority of securities traded by First Jersey were sold primarily in the over-the-counter market and not listed on any national exchange. By 1985, D operated 32 branch offices throughout the United States and 36 offices in foreign countries and had more than 500,000 retail-customer accounts. It employed approximately 1,200 salespersons or 'registered representatives.' In hiring such sales personnel, D typically sought individuals who had no prior experience in the securities business. Ds operated a well oiled and fraudulent operation. They cold-called customers then set them up for a sale and made the sale with nothing but scripted blue sky prognostications. Everything was scripted, and salespersons were discouraged from conducting independent research on Firm-recommended securities and were not even permitted to contact the Firm's research department about a security without getting permission from the branch manager. The salespersons at any given branch were prohibited from discussing the Firm's recommendations for their branch with salespersons from other D branches. D received the vast majority of its revenues from trading securities for its own accounts, including securities that it had underwritten. In November 1982, D was the underwriter for 1,100,000 units of Sovereign Chemical and Petroleum Products, Inc. (Sovereign). Each unit consisted of three shares of common stock and one warrant; the units were not to be split prior to May 1, 1993, except at D's option. On November 9, 1982, the first day of the offering, D oversold, selling to customers of certain of its branches approximately 1,700,000 units at the offering price of $3 per unit, for a total price of $5,100,000. Within days, D bought back more than 1,300,000 units, paying $3.50 per unit; it immediately split the units into their components and priced each of the three shares of stock at $2.25-$ 2.50 and the warrant at $1. Thus, a unit purchased by D for $3.50 could be promptly resold, after the unbundling of the components, for a total of approximately $8. D immediately resold more than 3,000,000 shares of Sovereign common stock and 1,000,000 Sovereign warrants to customers of Firm branches other than the branches that had originally sold and repurchased the units. D's profit on the resale of the Sovereign securities totaled $ 5,172,292. Ds had a rinse and repeat operation. At all relevant times, Brennan (D) was a director and the 100% owner of D. P alleging that the above practices constituted illegal markups and frauds in violation of § 17(a) of the 1933 Act, § 10(b) of the 1934 Act, and Rule 10b-5. P sought disgorgement of the profits gained from those practices, as well as injunctive and other equitable relief. The court concluded that P had overwhelmingly proven its case. The court ordered that Ds disgorge the profits gained. The court ordered Ds to disgorge $22,288,099 in unlawful profits and to pay prejudgment interest in the total amount of $52,689,894. The district court permanently enjoined Ds from further violations of the securities laws, finding that it was 'highly likely' that such future violations would occur. The court also appointed a Special Agent to determine whether in 1982-1987 there had been other violations as well and to recommend to the court further disgorgements. The court premised this order on its general equity powers. Ds appealed.