In addition, the Defendants are charged with a "bribery"
scheme, whereby they bought the securities of LCI, Toxic Waste
and High Tech at minimal cost during the initial public
offering and during the first few days of public trading. The
Defendants are charged with buying such securities with the
expectation that the price of such securities would rise as a
result of the purchase of large blocks of these securities by
the M & I Fund and Bullock Fund portfolio managers and the
Hallswell research analyst. The Superseding Indictment charges
that the Defendants then "bribed" the M & I Fund and Bullock
Fund portfolio managers and the Hallswell research analyst to
induce them to buy large blocks of shares in such companies
through the use of Nominee Brokerage Accounts. It charges the
Defendants then sold their stock at a profit.
As to the Solar Age Scheme, the Defendants are charged with
scalping in addition to engaging in an illegal stock transfer.
This illegal stock transfer involved the transfer of 200,000
shares of Solar Age stock to High Tech, as to which the
Defendants were undisclosed beneficial owners of a majority of
High Tech's restricted stock, in exchange for the dissemination
of a favorable research report written by Cannistraro.
The Superseding Indictment states the conduct of the
Defendants amounted to violations, inter alia,*fn60 of the
mail fraud statute, 18 U.S.C. § 1341,*fn61 the wire fraud
statute, 18 U.S.C. § 1343,*fn62 Section
10(b)*fn63 and Rule 10b-5.*fn64 The Government and Bertoli
agree that "[b]ecause these schemes are basically securities
fraud schemes, . . . the critical inquiry, as recognized by the
[D]efendants, is to determine whether they violate Section
10(b) and Rule 10b-5." Government Brief at 123. See also
Bertoli Dismissal Brief at 16-28. Because mail and wire fraud
violations are premised on use of the mails and wires to
execute a scheme to defraud, the parties appear to be correct
in their contention that the most important question is whether
the Defendants' conduct constituted fraud within the meaning of
the securities laws.
Section 10(b) and Rule 10b-5 prohibit the misrepresentation
or omission of material facts in connection with the purchase
or sale of a securities. In addition, Section 10(b) makes
illegal any "manipulative or deceptive devise," which term has
come to be defined as "intentional or willful conduct designed
to deceive or defraud investors by controlling or artificially
affecting the price of securities." Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1384, 47 L.Ed.2d
668 reh'g denied, 425 U.S. 986, 96 S.Ct. 2194, 48 L.Ed.2d 811
(1976). See also Basic, Inc. v. Levinson, 485 U.S. 224, 230,
108 S.Ct. 978, 982, 99 L.Ed.2d 194 (1988) ("The [Exchange] Act
was designed to protect investors against manipulation of stock
prices."); Santa Fe Industries, Inc. v. Green, 430 U.S. 462,
473, 97 S.Ct. 1292, 1301, 51 L.Ed.2d 480 (1977) ("The language
of [Section] 10(b) gives no indication that Congress meant to
prohibit any conduct not involving manipulation or
In addition, as has been stated, these rules are violated by
non-disclosure when there is a duty to make disclosure. See
Chiarella, 445 U.S. at 230, 100 S.Ct. at 1115. Alternatively,
in the absence of a duty to disclose, the securities laws are
violated when a public statement is made which is false or
misleading or is so incomplete as to be rendered false or
misleading. Greenfield v. Heublein, Inc., 742 F.2d 751, 756 (3d
Cir. 1984), cert. denied, 469 U.S. 1215, 105 S.Ct. 1189, 84
L.Ed.2d 336 (1985). See also Basic, Inc., 485 U.S. at 235 n.
13, 108 S.Ct. at 985 n. 13 ("`Rule 10b-5 is violated whenever
assertions are made . . . in a manner reasonably calculated to
influence the investing public . . . if such assertions are
false or misleading or so incomplete as to mislead.'").
The purpose of Section 10(b) and Rule 10b-5 is to ensure that
"investors obtain disclosure of material facts in connection
with their investment decisions regarding the purchase or sale
of securities." Angelastro v. Prudential-Bache Securities,
Inc., 764 F.2d 939, 942 (3d Cir.) (citing Affiliated Ute
Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456,
1471, 31 L.Ed.2d 741 (1972)), cert. denied, 474 U.S. 935, 106
S.Ct. 267, 88 L.Ed.2d 274 (1985).
An omitted fact is material if there is a substantial
likelihood the investor would consider it important in making
an investment decision. See Basic, Inc., 485 U.S. at 231, 108
S.Ct. at 983; Cannistraro, 734 F. Supp. at 1125; cf. T.S.C.
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct.
2126, 2132, 48 L.Ed.2d 757 (1976) (setting forth definition of
materiality in context of section 14(a) of the Exchange Act);
Bolger v. First State Financial Services, 759 F. Supp. 182, 193
(D.N.J. 1991) (same).
Section 10(b) and Rule 10b-5 "must be read `flexibly, not
technically and restrictively.'" Angelastro, 764 F.2d at 942
(quoting Superintendent of Insurance v. Bankers Life and
Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128
(1971)). Thus, a wide variety of fraudulent schemes have been
found to come within the purview of these sections. For
example, allegations of churning, by which a securities broker
buys and sells securities for the purpose of generating
commissions and without regard to the customer's investment
objectives, has been found to state a claim under Rule 10b-5.
See, e.g., Costello v. Oppenheimer & Co., 711 F.2d 1361, 1368
(7th Cir. 1983); Thompson v. Smith Barney, Harris Upham & Co.,
709 F.2d 1413 (11th Cir. 1983); In re Catanella and E.F. Hutton
and Co., Securities Litigation, 583 F. Supp. 1388, 1405, 1410-11
Most significantly, the practice known as "scalping" has been
found to violate these provisions of the securities laws. In
Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979), the
parties to a corporate merger sued a newspaper columnist under
Section 10(b). The columnist had purchased stock in a company
and had then written a favorable article about the company. The
plaintiffs asserted the columnist violated Section 10(b)
because he had a duty to disclose to his readers his financial
interest in the stock and failed to make such disclosure.
While the continued vitality of Zweig's holding concerning
the columnist's duty is unclear in light of Chiarella, the
reasoning of the court remains persuasive. In reversing the
trial court's dismissal of the action, the Ninth Circuit stated
that a conflict of interest by the columnist was a material
fact which his readers were entitled to know: "While Rule 10b-5
should not be extended to require every financial columnist or
reporter to disclose his or her portfolio to all of his
readers, it does cover the activities of one who uses a column
as part of a scheme to manipulate the market and deceive the
investing public." Id. at 1271. Thus, the court's holding was
premised in part on its conclusion that the columnist made
affirmative representations which were rendered misleading by
virtue of omissions of material facts.
In SEC v. Blavin, 557 F. Supp. 1304 (E. D. Mich. 1983), aff'd,
760 F.2d 706 (6th Cir. 1985), the SEC filed an action against
the defendant alleging violations of Section 10(b), Rule 10b-5
and various provisions of the Investment Advisers Act of 1940.
The SEC alleged the defendant was an unregistered investment
adviser who had purchased large amounts of securities in
certain companies, touted the securities in materially false
and misleading terms through a newsletter mailed to
approximately 5,500 subscribers or potential subscribers and
then sold the securities at a substantial profit. In granting
summary judgment for the SEC on its Section 10(b) claim, the
court found that the defendant's failure to disclose his
financial interest in the touted securities was a material
omission. Id. at 1311. The court stated:
[The defendant] did not reveal his scalping
scheme, and it is clear to the court that it was a
scheme that should have been disclosed to those to
whom he sent his investment newsletter. It is
obvious, of course, that if he revealed his
scalping scheme to those receiving the newsletter,
those parties would not have bought the stock.
It is undisputed that Blavin purchased large
amounts of securities in companies and then touted
those companies in glowing terms to other
prospective investors. . . .
There can be no doubt that this conflict of
interest was material to the readers of Blavin's
newsletters and that the defendant failed to
inform his readers of the
conflict. The protection of the securities laws
would be shallow indeed if such "scalping" schemes
were permitted. Courts have uniformly held that
such schemes violate the securities [laws] and
that a failure to disclose such a "scalping"
scheme is a material omission prohibited by §
Id. at 1311 (citing Zweig, 594 F.2d at 1261; Capital Gains
Research Bureau, 375 U.S. at 197, 84 S.Ct. at 285).