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SECURITIES AND EXCHANGE COMMISSION
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In the Matter of FU-SUNG PETER WU
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OPINION OF THE COMMISSION
BROKER-DEALER PROCEEDING
CEASE-AND-DESIST PROCEEDING
Grounds for Remedial Action
Violation of Antifraud Provisions in Connection with the Offer and Sale of Securities
Associated person of a broker-dealer engaged in fraudulent conduct in connection with the offer and sale of securities. Held, it is in the public interest to order respondent to cease and desist from committing or causing any violation or future violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5, and to bar respondent from association with a broker or dealer, with a right to reapply after two years.
APPEARANCES:
Jonathan A. Pace, of Pace & Rickey, L.L.P., for Fu-Sung Peter Wu.
Stephen Webster and Karen L. Cook, for the Division of Enforcement.
Appeal filed: August 12, 1999
Last brief received: November 15, 1999
I.
The Division of Enforcement appeals from the decision of an administrative law judge. The law judge found that Fu-Sung Peter Wu willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 19331 by negligently making misrepresenta-tions and omissions of material facts regarding the price at which investors could purchase Netscape Communications Corporation ("Netscape") common stock following the company's initial public offering ("IPO").2 The law judge also found that Wu defrauded a broker-dealer, GVR Corporation ("GVR"), by representing that his customers would pay for all of the Netscape shares that Wu ordered on their behalf when Wu knew there was a substantial risk that customers could not pay for all of the shares. The law judge further found that Wu did not act with scienter and, therefore, did not willfully violate Section 17(a)(1) of the Securities Act3 or Section 10(b) of the Securities Exchange Act of 19344 and Exchange Act Rule 10b-5.5 The law judge ordered Wu to cease and desist from committing or causing future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. The Division appeals both the merits of the law judge's decision and the sanction imposed. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
II.
In 1995, Fu-Sung Peter Wu was the sole registered representative and a 50% owner of AAA Stockbrokers, Inc. ("AAA"), a broker-dealer located in Richardson, Texas and registered with the Commission.6 AAA did not perform clearing functions for its accounts. Rather, Private Brokers Clearing Corporation ("PBC"), located in Dallas, Texas, cleared AAA's securitiestrades and maintained its customer accounts. The contractual arrangement between AAA and PBC required that AAA ascertain basic information concerning the customers whose accounts it maintained and that AAA be liable to PBC for losses resulting from a customer's failure to pay for a trade or margin deficit. AAA also contracted with GVR, a market maker located in Chicago, Illinois, to execute certain trades on behalf of AAA. PBC cleared trades that AAA executed through outside brokers, such as GVR, but requested that AAA promptly inform it of these outside trades within twenty minutes of their execution.7
In the summer of 1995, Netscape, a maker of Internet browsing software, announced that it would offer 3.5 million shares of its common stock in an IPO. The preliminary prospectus, dated July 17, 1995, estimated the price of Netscape stock would be $12 to $14 per share. The prospectus stated that Netscape's initial offering "involve[d] a high degree of risk" and devoted eight pages to discussing the "risk factors" for prospective investors to consider. Wu testified that he knew that the Netscape IPO was a "highly speculative investment."
In June 1995, Wu began soliciting orders to purchase Netscape stock. Wu recommended that investors place market orders to purchase Netscape in the immediate aftermarket. In July 1995, Wu conducted two investment seminars at a local bookstore in which he mentioned Netscape as an investment opportunity. Wu also promoted Netscape in a series of advertisements that he placed in the Dallas Chinese News, a Chinese language newspaper.
As a result of Wu's recommendations, several investors, including the four who testified at the hearing, placed market orders to purchase Netscape at the opening of the secondary market for Netscape. One of Wu's customers, Maomian Fan, first learned about Netscape from the advertisement that Wu placed in the Dallas Chinese News describing Netscape stock as a "must buy" at $14 per share. Fan and his wife, Yuanzhen Tong, subsequently attended one of the investment seminars Wu conducted that summer.8 After the seminar, Wu stated to Fan and Tong that the underwriting price of Netscape was $14 per share and that, ultimately, the price of Netscape would triple.
On August 1, 1995, Fan and his wife went to Wu's office to open an account. They brought a $16,000 check, which they explained was post-dated because they were waiting for authorization of a $10,000 bank loan against a $10,000 certificate of deposit. They also explained to Wu that they had never invested in the stock market.
Fan testified that, during the office visit, Wu told Fan and Tong that Netscape would open in the aftermarket at $28 to $30 per share. Satisfied with the anticipated $30 price, Tong proceeded to fill out the New Account Approval Form, the document Wu used to elicit the basic information needed to open a new customer account. On this New Account Approval Form, in the section labeled "Special Instructions," Wu wrote the notation "500 s. ÷ 30."9 Wu then forwarded the New Account Approval Form to PBC.
The remaining customer witnesses, with one exception,10 testified that they also heard about the Netscape offering from Wu's advertisements in the Dallas Chinese News or through Wu's investment seminars. Wu transmitted by facsimile copies of a Washington Post article about Netscape to several of the customers who were witnesses. Wu wrote on the accompanying coversheets variously "must buy"11 in Chinese, "MUST BUY!!!"12 in English, and "Netscape triple"13 in English.
Wu also represented to these customers that their market orders for Netscape would be filled in the aftermarket at less than $35 per share. Yuan (Rose) Chang testified that, around August 1, Wu told her that Netscape could be purchased between $24-$35. Kwok Fong (Betty) Siu testified that, around August 2, Wu told her that Netscape would open in the range of $21 to $28 per share.
On August 4, 1995, GVR faxed to Wu a Dow Jones News Service article quoting a market analyst's statement that the Netscape IPO was "'high risk'" and concluding that investment in Netscape "could burn [the] small investor."14 The article reported that the Netscape IPO was at least 60 times over-subscribed, indicating that it was a "hot issue"15 and would open in the aftermarket at a high premium. However, an August 4, 1995, Dallas Chinese News advertisement placed by Wu touted Netscape as a "must buy" at $14 per share and suggested, in essence, that Netscape would contribute to the investor's financial security.16 The advertisement failed to explain that $14 was the underwriting price for Netscape and that the opening price of the stock in the secondary market could be substantially higher than $14. In addition, the advertisement failed to disclose the risk involved in investing in an IPO.
On August 7, two days before secondary trading in Netscape began, Wu learned that the IPO underwriting price for Netscape had increased from $14 to $28 per share due to the sizable demand for the stock. At the hearing, Wu claimed that, by August 7, 1995, he calculated Netscape would open at a price as high as $55 per share. Nonetheless, on August 7, Wu told customer Tong Sheu Li that Li could purchase Netscape at no more than $32 per share. Wu also did not disclose his alleged projection of a $55 opening when customer Erza Wang told Wu, on August 8, 1995, that Prodigy projected that Netscape would open at $28. Wang testified that Wu then told Wang there was a 95% probability that Wang could buy Netscape at between $28 and $32 per share. Wu admitted that he "suspected" that some of his customers might not be able to pay for the shares that he ordered on their behalf and that he was jeopardizing his customers by placing a large market order for Netscape.
Between August 7 and August 9, 1995, Wu placed "block" orders in AAA's name with PBC to purchase a total of 3,155 shares of Netscape stock at the opening market price. In addition, on August 8, Wu placed a block market order for AAA with GVR for 21,290 shares. Wu failed to inform PBC of the GVR order as PBC policy required.
On August 9, before the market opened, PBC warned Wu that Netscape would begin trading in the $70s. Steven F. Roy, head trader for GVR's Nasdaq market-making operation, told Wu that Netscape stock would open between $60 and $65 per share. During this call, Roy asked Wu to "please make sure that [the customers] wanted to execute" the orders for Netscape. Wu knew that hecould reduce his order without penalty; however, Wu told Roy to execute the orders as planned.17
Wu then contacted three of his customers to determine whether they still intended to purchase Netscape at the predicted higher market price. One of the customers canceled his trade, and two others reduced the number of shares they had ordered. When three other customers heard about the increased price projection, they also contacted Wu to reduce their orders. Despite his awareness that these customers had changed their orders, Wu did not reduce his block order with GVR.
On the morning of August 9, 1995, Netscape began trading at $71 per share. Pursuant to Wu's orders, PBC purchased 3,155 shares, and GVR purchased 21,290 shares of Netscape stock at the market price of $71 per share. The price of Netscape initially rose that day to $74 per share but ultimately began a steady decline to close at $56 per share.
PBC first learned of AAA's purchase of Netscape shares through GVR when the purchase appeared on the Automated Confirmation Transaction ("ACT") service.18 PBC's trading room immediately called Wu and demanded to know the account allocation for the shares purchased through GVR. Because of the urgency of the situation, PBC did not require Wu to prepare and send order tickets. Instead, PBC requested that Wu fax a listing of customer accounts and the number of shares to be distributed to each (the "Customer List").
After the Netscape opening, Fan called Wu to check on the status of the order placed by his wife, Tong. Wu informed Fan that he had purchased on Tong's behalf 500 shares of Netscape at $71 per share. Fan immediately objected to the purchase as unauthorized at the stated price and instructed Wu to sell the stock immediately. Fan, distraught over the situation and anxious to ensure its resolution, went to Wu's office. Wu explained that he was simply too busy to talk with Fan because he had to prepare the Customer List. Fan agreed to assist Wu in preparing the Customer List by totaling the shares allocated to each customer account. According to Fan's calculations, approximately 4,000 of the purchased shares had not been allocated to customers' accounts. Wu struggled to find accounts to absorb the unallocated shares. Eventually, Wu allocated to 39 customer accounts approximately 19,295 of the 24,445 shares that he had ordered. Wu was unable to allocate approximately 5,150 shares to customer accounts. Because PBC was unable to place these remaining shares in any customer accounts and because Wu did not agree to purchase them, GVR was forced to sell the stock the following morning at $55 per share.19 GVR lost over $90,000 as a result of Wu's nonpayment.20 Of the 39 customers to whom Wu allocated Netscape shares, fifteen refused to pay for the purchase. PBC was forced to close these fifteen accounts. The accounts were liquidated at a loss of approximately $65,000, which PBC charged both to Wu's personal account and AAA's firm account.
Approximately one week after the Netscape purchases, PBC requested by letter that Fan and Tong make up a deficiency in Tong's margin account caused by the Netscape shares. Confused about this correspondence, Fan and Tong did not send the funds requested, and PBC was forced to sell 110 of the Netscape shares at approximately $50.50 per share. When Fan contacted Wu to get copies of the account documents his wife had signed, Wu directed Fan to PBC, where the original brokerage agreements were kept on file. On August 18, 1995, Fan and his wife went to PBC to obtaincopies of their agreements. Initially, PBC was unable to locate the agreements and placed two telephone calls to Wu to have him fax copies of the relevant agreements. PBC ultimately located the Tong file with the original signed agreements. The file included the New Account Approval Form that contained the "500 s. ÷ 30" notation. In contrast, the New Account Approval Form that Wu faxed to PBC stated merely "500 s."21
III.
On the basis of this conduct, the Division alleges that Wu violated Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5.22 These sections generally make it unlawful for any person to employ any device, scheme, or artifice to defraud; to make any untrue statement of material fact or to omit to state any material fact; or to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
We have long held that price predictions made by associated persons of broker-dealers to their customers without a reasonable basis are fraudulent.23 Here, Wu urged his customers to place market orders for Netscape stock at the August 9 opening of the aftermarket, based on his representations predicting that Netscape's aftermarket opening price would be in a range of $24 to $35 per share. However, as the date of the offering approached, Wu received information from several sources that the opening price would be significantly higher than he had predicted. Wu knew by August 7 that the Netscape offering was at least 60-times over-subscribed and that the underwriting pricehad doubled to $28 per share, factors that indicated that the opening market price of Netscape would be higher than he had previously stated.24 Nonetheless, he continued to represent on August 7 that his customers could purchase Netscape at $32 per share. Moreover, Wu was contacted the morning before Netscape began trading both by PBC, to inform him that the opening price of Netscape would be in the $70s, and by GVR, to inform him that the opening price would be between $60 to $65 per share.25 Wu also knew that these aftermarket orders were not final and could be canceled without penalty.
Regardless of whether Wu's representations as to the opening price of Netscape were reasonable when made, they clearly were reckless by August 7 and became increasingly so as the opening of trading approached. As underscored by the consistent reactions of the only three customers Wu contacted before trading opened, Wu's customers regarded Wu's price predictions as ongoing representations upon which they relied in determining, in two instances, the size of their orders, and in one instance, whether to invest at all. In the face of information demonstrating that Netscape would open at a price far in excess of the price Wu had told his customers they would have to pay for their shares, Wu recklessly continued to recommend that customers enter market orders for Netscape at the opening of the aftermarket without disclosing this information to the bulk of his customers.26
Wu's statements to his customers about the price of Netscape were material.27 As Wu knew, his customers' orders were based, at least in part, on Wu's representations of the aftermarket trading price. Wu also knew that the majority of the testifying customers had very little investment experience and were unfamiliar with American securities markets. Wu further knew that many of his customers had limited financial means. For example, one customer, Tong, had taken a $10,000 loan against a certificate of deposit to purchase Netscape. Wu also knew that, of the three customers that he informed about the increased price of Netscape, one of these customers canceled his order and the other two reduced their orders. Three other customers who learned from another source of the projected price increase contacted Wu to reduce their orders.
Wu maintains that he believed in good faith that Netscape would be a sound investment for his customers. This may be true, but it is irrelevant. Wu's belief about Netscape does not alter the fact that, in the face of increasing evidence, Wu recklessly misled his customers about the price that they would have to pay to purchase Netscape at the opening of the aftermarket.
Wu's conduct also defrauded GVR. GVR specifically requested that Wu verify his customers' orders because of its concern thatsome customers might renege at such "ridiculous prices."28 A broker-dealer that submits an order on behalf of a customer implicitly represents that, to the best of its knowledge, the customer is ready, willing, and able to settle the trade.29 Here, Wu knew that this was not true with respect to the six customers to whom he had spoken. Nonetheless, he failed to disclose that information to GVR and further represented, in effect, that his customers stood ready to pay for their trades. Wu thus misled GVR into effecting the trades, believing that Wu had customers willing to pay for the Netscape shares.30 As a result, GVR incurred a substantial financial loss when it had to liquidate the unallocated shares.
Wu argues that, with respect to his misrepresentations to both his customers and GVR, he was merely negligent in not contacting his customers before trading began. He asserts that, as the "sole employee of AAA," he simply did not have the capacity to contact all of his customers prior to the market opening. He argues that, at most, he misunderstood the intentions of his customers regarding their orders. However, GVR directly asked Wu to determine whether his customers were willing to pay for Netscape at substantially escalated prices. Wu had clear evidence from the limited number of customers he contacted and from other information about his customers and theirfinancial situation that they were not willing to pay the expected prices. Moreover, Wu had sufficient time, between August 7 and 9, to inform his customers about his information about Netscape prices and permit them to act on the accurate information. The customers' orders were not effective until the aftermarket opened and were based on what Wu knew were false representations about the market price for Netscape.
Accordingly, we conclude that Wu exhibited the requisite scienter and, therefore, willfully violated Exchange Act Section 10(b) and Rule 10b-5 and Securities Act Section 17(a) by engaging in the conduct described above.31
V.
We turn now to the issue of what sanctions are appropriate in the public interest. The Division asks that we impose upon Wu a bar from associating with any broker or dealer with a right to apply in four years; a cease-and-desist order; and a civil penalty of $50,000.
Agencies have considerable discretion in assessing administrative sanctions.32 In determining whether such sanctions are in the public interest, the Commission is guided by the following factors: the egregiousness of the defendant's actions; the isolated or recurrent nature of the infraction; the degree of scienter involved; the sincerity of defendant's assurances against future violations; the defendant's recognition of the wrongful nature of his conduct; and the likelihood that the defendant's occupation will present opportunities for future violations.33
We have considered Wu's conduct and have found it to be reckless and egregious. He had repeated notice about the increased price of Netscape stock. Wu knew that customerscanceled or reduced their orders when they were informed of the increase. However, he failed to disclose these facts to his remaining customers, many of whom had limited financial resources, or to GVR, when it had specifically asked him to make inquiry of these customers.
Although the activity at issue occurred over a relatively short period of time, Wu's conduct was directed at and threatened the financial well-being of several customers and a broker-dealer. His testimony before the law judge in which he describes his views about the "art" of trading shows a lack of appreciation of his obligations to his customers and his responsibilities as a securities professional. Moreover, it appears that Wu will continue to pursue a career as a broker-dealer and, as such, would have the opportunity to commit future violations.
We conclude that, under all the circumstances and on the record before us, a bar from associating with any broker or dealer with a right to apply in two years is appropriate in the public interest and that it is appropriate to order Wu to cease and desist from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. We further conclude that the public interest warrants the imposition of a second tier civil money penalty of $50,000 against Wu, having found that Wu's conduct involved "fraud . . . or deli-berate or reckless disregard of a regulatory requirement."34 We note that Wu is subject to outstanding arbitration awards to GVR and to customers.35 We believe it is important that these arbitration awards be paid. Therefore, we order that the penalty amount we impose will be reduced by $1.00 for every $2.50 that Wu pays in satisfaction of these arbitration awards.
An appropriate order will issue.36
By the Commission (Chairman PITT and Commissioners HUNT and GLASSMAN).
Jonathan G. Katz
Secretary
Admin. Proc. File No. 3-9024
In the Matter of FU-SUNG PETER WU
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ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED, that Fu-Sung Peter Wu cease and desist from committing or causing any violation of or future violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder; and it is further
ORDERED that Fu-Sung Peter Wu be, and he hereby is, barred from association with a broker or dealer, provided that he can reapply for association after two years; and it is further
ORDERED that Fu-Sung Peter Wu pay a civil money penalty of $50,000, provided that the amount of this civil money penalty will be reduced by $1.00 for every $2.50 that Wu pays in satisfaction of the outstanding arbitration awards to GVR Company and to customers Yuanzhen Tong and Tong Shu Li.
Wu's payment of the civil money penalty shall be: (i) made by United States postal money order, certified check, bank cashier's check, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549 within thirty days of the date of this order; and (iv) submitted under cover letter which identifies Wu as the respondent in this proceeding, and the file number of this proceeding. A copy of this cover letter and check shall be sent to Stephen Webster, Counsel for the Division of Enforcement, Securities and Exchange Commission Fort Worth District Office, Burnett Plaza, Suite 1900, 801 Cherry Street, Fort Worth, Texas 76102.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | 15 U.S.C. §§ 77q(a)(2) and (a)(3). |
| 2 | Fu-Sung Peter Wu, Initial Decision Rel. No. 144 (July 22, 1999), 70 SEC Docket 513. |
| 3 | 15 U.S.C. § 77q(a)(1). |
| 4 | 15 U.S.C. § 78(j)(b). |
| 5 | 17 C.F.R. § 240.10b-5. |
| 6 | On September 19, 1995, AAA withdrew its registration by filing a Form BD-W with the Commission. The withdrawal became effective on November 19, 1995. |
| 7 | Robert Roberts of PBC testified that Wu had failed, in prior instances, to report some of AAA's outside trades. As a result, PBC issued a warning to Wu that an extra charge would be assessed on future outside trades not reported in a timely fashion. |
| 8 | Maomian Fan was employed as a research associate at Southern Methodist University, and Yuanzhen Tong was employed as a waitress at a Chinese restaurant. The couple was acquainted with Wu through the church they attended, but had no prior business dealings with him. |
| 9 | In explaining this notation, Wu testified that, "I use a 16,000 divided by 30." The Division, in order to clarify Wu's statement, asked, "...so you took the amount of money you knew they wanted to spend, divided by 30 and came up with 500 shares." Wu agreed. Thus, we conclude that the notation indicates that Tong agreed to buy 500 shares of Netscape at $30 per share. |
| 10 | Erza Wang testified that he initially learned of the Netscape IPO from reading a business magazine. |
| 11 | Wu wrote this notation on an article faxed to Wang. |
| 12 | Wu wrote this notation on a cover sheet faxed to Kwok Fong (Betty) Siu. Yuan (Rose) Chang testified that Wu wrote a similar notation on materials faxed to her. |
| 13 | Wu also wrote this notation on the article faxed to Wang. |
| 14 | The article explained that shareholders receiving the initial allocation of Netscape shares were likely to flip the stock for a quick profit but suggested other investors choosing to hold the stock were less likely to achieve such success because of the volatility and uncertainty in the field of software development. |
| 15 | See, e.g., Personal Investment Activities of Investment Company Personnel, Securities Act Rel. No. 7728 (Aug. 27, 1999), 70 SEC Docket 1191, 1195, n.50 (defining a hot issue IPO to mean "an IPO in which the securities trade in the aftermarket at a premium over the offering price"). Cf. Sherman, Fitzpatrick & Co., 51 S.E.C. 1048, 1054 (1994), appeal filed, No. 02-4010 (2d Cir. 2002). |
| 16 | The translation offered by the Division of the advertisement, which was written in Chinese, states that Netscape "will make you rich." However, Wu, as well as the translator present at the hearing, provided this more abstract translation: "This premier special offering of stock will take you together to a different deal at the Sierra [mountains] and beautiful land." Wu did agree that he meant investing in Netscape would put his customers in a better place; we conclude that he meant that the investor would improve his or her financial condition. |
| 17 | After trading began on August 9 and after GVR had purchased the stock, Wu called Roy in an attempt to reduce his block order. One of Wu's customers had refused to purchase a portion of the Netscape stock that Wu had ordered. Roy, in refusing to reduce Wu's block order, stated:
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| 18 | ACT is an automated system operated by Nasdaq, among other things, to transmit trading information to ACT participants for clearance and settlement purposes and to disseminate such information to the public. See NASD Systems and Programs Rule 6110. |
| 19 | Wu testified that he tried to pay for the shares and asserted that he had a copy of a facsimile transmission to prove it. The facsimile is not in the record. Robert Roberts of PBC testified that the firm was never instructed to put the remaining shares in Wu's or AAA's account. |
| 20 | GVR brought an arbitration claim against AAA. The arbitrators' determination awarded GVR $91,581.54 in actual damages. (GVR v. AAA Stockbrokers, Inc., 1996 WL 520118 (N.A.S.D. 1996)). At the time of the hearing, Wu had not paid the claim. |
| 21 | On or about August 24, 1995, Fan received a letter from Wu informing him that the Netscape shares remaining in Tong's AAA account would have to be transferred to another broker or sold. Fan sold the remaining 319 shares at a substantial loss. Tong brought an arbitration claim against AAA and Wu. The arbitration awarded her over $10,000 in damages. (Yuanzhen Tong v. AAA Stockbrokers, Inc., 1996 WL 704910 (N.A.S.D. 1996) (Whitaker et al., Arbs.)).
Another customer, Tong Shu Li, filed an arbitration against Wu, which awarded Li approximately $26,000 in damages. (Tong Shu Li v. AAA Stockbrokers, Inc., 1996 WL 779371 (N.A.S.D.) (Kimball et. al., Arbs.)). Wu sued the remaining three customer witnesses for failure to pay. The results of these suits are not in the record. |
| 22 | The Division also appealed the law judge's dismissal of the remaining charges in the Order Instituting Proceedings. Her dismissal was based on various credibility determinations. We have held that, without substantial evidence in the record to the contrary, we cannot depart from the fact finder's determination of credibility. See, e.g., Martin Kaiden, Securities Exchange Act Rel. No. 41629 (July 20, 1999), 70 SEC Docket 439, 450 n. 32. While the customers' testimony appears credible and consistent with the record, we did not observe their or Wu's demeanor. Given the nature of the allegations, the bulk of the evidence is the competing testimony of the witnesses and Wu. We therefore conclude that we are constrained to dismiss the allegations that the customers who testified did not authorize Wu to purchase Netscape on their behalf and that Wu altered customer account documents in connection with executing transactions in customer accounts. |
| 23 | See Joseph J. Barbato, 53 S.E.C. 1259, 1273 (1999); Donald A. Roche, 53 S.E.C. 16, 19 (1997); Lester Kuznetz, 48 S.E.C. 551, 553 (1986), petition for review denied, 828 F.2d 844 (D.C. Cir. 1987)(table). Cf. First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1997)(finding an opinion or prediction is actionable if there is a gross disparity between prediction and fact). |
| 24 | As discussed above, Wu testified that, based on this information, he revised his price projection to $55 per share. Other than Wu's testimony, the record does not reflect when and under what circumstances he made this purported calculation. In any event, Wu did not share the purported $55 projection with his customers. |
| 25 | Wu maintains that the high opening price of Netscape surprised the industry as a whole and that the unusual circumstances surrounding the IPO, rather than his conduct, caused the losses suffered by his customers. As discussed above, the evidence in the record belies Wu's assertions. |
| 26 | The courts have defined recklessness in this context as "'an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.'" Sunstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977) (quoting Franke v. Midwestern Okla. Dev. Auth., 428 F.Supp. 719, 725 (W.D.Okl. 1976)). Proof of scienter is not required to establish a violation of Sections 17(a)(2) or 17(a)(3) of the Securities Act. Aaron v. SEC, 446 U.S. 680, 701-2 (1980).
Wu's scienter is further demonstrated by his attempt to alter the "500 s. ÷ 30" notation on Tong's New Account Approval Form. We believe this activity demonstrates an attempt to hide from PBC the misrepresentations that he made to his customers. Based on these circumstances, Wu's failure to correct his prior misrepresentations regarding the price of Netscape was at least reckless. |
| 27 | A misstatement or omission is material if there is a substantial likelihood that a reasonable investor would consider the misstated or omitted information to be important in making an investment decision. See Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988) (citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). |
| 28 | See supra note 14. |
| 29 | Michael J. Boylan, 47 S.E.C. 680, 685 (1981), aff'd, SEC v. Boylan, 703 F.2d 573 (9th Cir. 1983)(Table)(finding customer's likely inability to pay for trades to be material and broker-dealer's withholding of this information from clearing brokers to be fraudulent).
See also A.T. Brod & Co. v. Perlow, 375 F.2d 393, 395, 397 (2d Cir. 1967) (Allegation that customers placed orders with brokers with fraudulent intent to pay only if securities' market value increased stated a claim of action for violation of antifraud provisions.). |
| 30 | United States v. Naftalin, 441 U.S. 768, 770, 775-77 (1979) (clarifying that Section 17(a)(1) prohibits frauds against brokers as well as investors and therefore finding fraud occurred when respondent placed orders with brokers to sell stock which he fraudulently represented that he owned). See also United States v. Naftalin, 579 F.2d 444, 446 (8th Cir. 1978)(explaining that Naftalin placed these orders without disclosing that he did not own the stock or by affirmatively misrepresenting that he did own the stock). |
| 31 | Courts have determined that "willfully" in this context does not require proof that the actor knew that his conduct violated the law. Wonsover v. SEC, 205 F.3d 408, 415 (D.C. Cir. 2000) and cases cited therein (finding that a broker acted willfully when he failed to conduct sufficient inquiry into the securities he sold to customers). |
| 32 | Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 185 (1973). |
| 33 | Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). |
| 34 | 15 U.S.C. § 78u-2(a). |
| 35 | See supra note 21. |
| 36 | We have considered all of the contentions made by the parties. We have rejected or sustained their arguments to the extent that they are inconsistent or in accord with the views expressed herein. |
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Modified: 04/02/2002