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SEC ISSUES THREE MAJOR DECISIONS ON AIDING AND ABETTING BY REGISTERED PERSONS:
PART THREE: CHEMA'S DEFENSES
On November 30, 1998, the Securities and Exchange Commission
("SEC") issued three separate Opinions addressing the appeals of three cases
involving four registered persons and their liability for aiding and abetting a customer's
manipulative scheme. Readers should review Part One: The Broumas Scheme
for
information about the customer's conduct.
This installment describes registered representative Chema's defenses to SEC
charges of aiding and abetting. For prior details, review Part Two: Chema's
Involvement. Upcoming installments will similarly review the
conduct of the other salespersons.
Aiding and Abetting
The three elements necessary
to find aiding and abetting are:
(1) securities law violations by another party;
(2) substantial assistanceby the aider and abettor in the conduct constituting
those violations; and
(3) general awareness or knowledge by the aider and abettor that his actions are
part of an overall course of conduct that is illegal or improper.
See, Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff'd, 45 F.3d 1515 (11th
Cir. 1995) |
Attacking Findings of Broumas' Violations
Chema attacked the first prong of Aiding and Abetting, i.e., that
Broumas violated the antifraud provisions of Section 10(b) of the Exchange Act and Rule
10b-5 in connection with his wash trades. Chema asserted the SEC failed to prove that
Broumas intended his trades to mislead investors by creating the false appearance
of market activity.
The SEC stated that Broumas' manipulative intent need not be proven, only that
he engaged in a course of conduct that operated as a fraud or deceit as to the nature of
the market for JML. See. United States v. Charnay, 537 F.2d 341, 350-351
(9th Cir.), cert. denied, 429 U.S. 1000 (1976). The SEC cited several examples of Broumas'
fraudulent and deceitful conduct:
- The reported JML wash trades substantially
distorted investors' perception of the market, creating a false appearance of enhanced
activity.
- Broumas deliberately defrauded the firms that paid him for sales when in fact the
ownership of the securities never changed.
- Broumas' marking-the-close transactions were "patently
manipulative" and were designed to increase the equity in his margin accounts, to
preserve the marginability of JML stock by raising the stock's price, and to induce the
public's purchases.
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No Harm, No Foul?
Chema sought to demonstrate that since Broumas' trades did not
noticeably affect JML's market price, there was no harm to the investing public.
Consequently, he urged that absent harm, there could be no fraud. The SEC handily
dismissed this defense by noting that its proceeding was not a private action for damages
but an action brought to redress the public interest. Thus, no proof of loss by investors
is required.
| "when
investors and prospective investors see activity, they are entitled to assume that it is
real activity." Even if no investor is injured, "[t]he vice is that the market
has been distorted and made into a `stage managed performance.'" Edward J. Mawod
& Co., 46 S.E.C. 865, 871-872 (1977), aff'd, 591 F.2d 588 (10th Cir. 1979). |
Chema's Knowledge
Chema also argued that he was not an aider and abettor because he lacked
the requisite knowledge of Broumas' misconduct. The SEC analyzed the record and concluded
that Chema knew or should have known that Broumas' overall course of conduct was illegal
or improper.
Chema
admitted that he
- considered Broumas' trading "most bizarre," and might be manipulating
JML stock;
- considered the possibility that Broumas might be engaging in wash trades;
- knew Broumas was having financial problems and when Broumas sold stock, he often
asked for immediate payment because he needed the cash; and
- did not know how to report Broumas' cross-trades and made no effort to find out
the requirements from the NASD or anyone else.
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The SEC concluded that Chema recklessly abdicated his
responsibility to investigate Broumas' trading.
| "The importance of a
broker-dealer's responsibility to use diligence where there are any unusual factors is
highlighted by the fact that violations of the antifraud and other provisions of the
securities laws frequently depend for their consummation ... on the activities of
broker-dealers who fail to make diligent inquiry to obtain sufficient information to
justify their activity in [a] security." Alessandrini & Co., Inc., 45
S.E.C. 399, 406 (1973). |
SEC ORDER
In finding Chema guilty, the SEC ordered that Chema be suspended from
association with any broker or dealer for a period of one year (thus increasing the
suspension from the 8 months imposed by the ALJ); and cease and desist from committing or
causing any violation and committing or causing any future violation of Sections 9(a)(2)
and 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.
For Future Reference:
In the Matter of Richard D. Chema, 34-40719, Admin. Proc. 3-8508 (November 30, 1998)
In the Matter of Adrian C. Havill, 34-40726, Admin. Proc. 3-8510 (November 30, 1998)
In the Matter of Sharon M. Graham and Stephen C. Voss, 34-40727, Admin. Proc. 3-8511 (November 30, 1998).
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