The opinion of the court was delivered by: ALFRED M. WOLIN
Before the court is the motion of plaintiff, the Securities and Exchange Commission ("SEC" or "Commission"), for summary judgment on Counts One to Four of the Complaint
and for an order of preclusion against defendants Thomas Ackerly, Richard Adams, and Vincent Ackerly (collectively the "New Jersey defendants"). Plaintiff seeks disgorgement of trading gains and a permanent injunction.
Having reviewed the written submissions of the parties and heard oral argument, for the reasons set forth below, the Court will grant plaintiff's motion for an order of preclusion and summary judgment.
A. The New Jersey Defendants' Trading Activities3
Graystone Nash, Incorporated, ("Graystone"), is a corporation formed under the laws of New Jersey and registered with the SEC as a broker-dealer. Mann October 22, 1992 Declaration, P 2. Based in New Jersey, Graystone maintained approximately thirty-five franchised branch offices across the United States, primarily in California and Florida. Thomas Ackerly served as Graystone's President and Chairman of the Board, while Richard Adams was the firm's Vice President. Vincent Ackerly, Thomas Ackerly's brother, was actively involved in Graystone's trading practices, although he held no titled position.
Graystone traded corporate securities in the over-the-counter market, creating markets for securities it previously had underwritten in public offerings. Examples of initial and secondary public offerings Graystone underwrote during the time the alleged securities violations occurred include W.I.N.E., Inc. ("WINE"), Alfa International, Inc. ("Alfa"), ATC Environmental, Inc. ("ATC") and Advanciers Group, Inc. ("Advanciers"), all newly organized companies with no established businesses. Id. PP 2-4. In these offerings Graystone sold units comprised of shares of common stock and warrants for future common stock purchases. See T. Ackerly Answer, PP 10, 12; V. Ackerly Answer, PP 10, 12; Adams Answer, PP 10, 12; Torrey at 11; Ware at 9.
Almost immediately after these units were sold to customers, the branch offices solicited their return at a fixed price set by Graystone. See Gallego at 8-10; Torrey at 11-12, 16; Ware at 10-11. Upon receipt of the units Graystone would strip the common stock of the warrants and retail the common stock at predetermined, successively higher prices known as ticks. Gallego at 11-13; Torrey at 32-33; Ware at 12-15.
During each stage of the offering the New Jersey defendants adopted strict measures designed to ensure its success. First, to guarantee a healthy subscription Graystone allocated units of the initial offering to its branch offices based on their expected sales of common stock in the aftermarket, Boyle at 24-25, 31; Torrey at 22; Ware at 20-21, enforcing such ratios with threats. Torrey at 23-24. These defendants also required customers to pay in advance of the effective dates of the registration statement for the units and the aftermarket stock by cash or certified check. Boyle at 31; McGowan at 59; Torrey at 24-27; Ware at 15. To build a stockpile of customer funds to feed the aftermarket, Graystone delayed the offerings to collect more money and routinely promised branches more units than they ultimately were assigned. Boyle at 25, 26; Gallego at 51-52; Torrey at 28 (New Jersey defendants monitored money held in customer accounts to determine when to declare offering effective), 31-32; Ware at 18-19 (defendants told branches to devote excess funds generated for initial offering unit purchases to aftermarket). Finally, in carrying out their role in the offering, brokers were required to support the stock in the aftermarket by discouraging clients from selling common. Ware at 21-22.
The New Jersey defendants structured the common stock trading to generate interest in the aftermarket. Specifically, as they increased tick prices, they allocated greater blocks of stock for sale, thereby creating the impression, albeit false, that normal market forces were driving prices higher on increasing volume. Boyle at 29-30 (commissions rose as tick prices increased so brokers would sell customers stock at higher prices); Gallego at 11, 12; Torrey at 32-34; Ware at 22-23.
The New Jersey defendants, ever interested in keeping a tight rein on house stocks and generating market confidence in their stocks, continued their aggressive trading practices well after the unit offerings had been placed. They attempted to shut out brokers associated with other firms, either excluding them from the offerings or marking them as targets of Graystone's efforts to "clean up the Street" through purchases of house stock held by other market makers. Gallego at 24-25; McGowan at 87-88. Broker-dealers who purchased house stocks in the open market for resale to Graystone received a small premium. McGowan at 88-92.
The New Jersey defendants directed attempts to stimulate purchases toward their own customers and brokers. To aid their solicitation of sales, Graystone's brokers received material non-public information including confidential business plans and the news of an upcoming acquisition. Gallego at 42-44; McGowan at 45-47; Torrey at 50-54, 56-60; Ware at 38-41. In addition, Thomas Ackerly provided information regarding a company involved in an upcoming offering to an investors magazine and forwarded the resultant article to customers. Torrey at 47. To alleviate excess inventory, branch offices were require to sell blocks of securities upon penalty of reduced commissions, Boyle at 55-57; Gallego at 31; McGowan at 64-65, while incentives in the form of bonuses and special commissions encouraged brokers to push these stocks. Gallego at 30; Torrey at 92-93; Ware at 23-24.
Graystone also attempted to control the markets in which their house stocks traded by discouraging and offsetting customer sales of house stocks, again relying on threats. Ware at 25-27. The New Jersey defendants formalized this pressure by instituting a "buy-sell formula" under which a branch office's commissions would be reduced if its customers did not make net purchases of house stocks. Gallego at 34; McGowan at 18-19; Torrey at 62-64; Ware at 27-28. As a result, on numerous occasions defendants refused to accept sell tickets for house stocks. Gallego at 35; Torrey at 95; Mather Deposition at 34-35. To further discourage such sales, defendants removed commissions earned on buy orders for house stocks if customers subsequently sold the stock, Ware at 32-33, and denied brokers any commission on sell orders.
Boyle at 40; Torrey at 69-69; Ware at 28-29. Defendants also delayed execution of sell orders until they could be matched with buy tickets from other customers. Gallego at 100; McGowan at 105-06.
House securities were kept in street name rather than the purchaser's name and retained by the clearing house. McGowan at 20-22; Torrey at 39; Ware at 30.
Despite these efforts, Graystone faltered. Thomas Ackerly closed the Boca Raton office, a net seller of house stocks, in December 1988. Two weeks later, Graystone ceased operations. From April 1, 1987 to September 30, 1988 Graystone's trading gains totaled $ 60,565,581.
B. Securities Fraud Allegations
Based on these activities, on September 30, 1991, plaintiff filed this action, alleging that defendants engaged in the fraudulent offer and sale at artificial prices of securities in initial public offerings and manipulated the aftermarkets in such securities in violation of the federal securities laws during the period from January 1, 1987 to December 20, 1988. The Commission seeks injunctive relief and disgorgement of all trading gains defendants realized.
Plaintiff's first cause of action charges defendants with violations of section 17(a) of the Securities Act of 1933 (the "Securities Act") and sections 10(b) and 15(c) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5 and 15cl-2 promulgated thereunder arising from their allegedly fraudulent activity. Its second cause of action sets out a claim under sections 5(a) and 5(c) of the securities Act for the offering and sale of unregistered securities. The third cause of action rests on section 5(b) prospectus violations, while the final charge seeks to hold defendants for improper purchases during distributions contrary to section 10(b) of the Exchange Act and Rule 10b-6 promulgated thereunder.
A. The Standard For Granting Summary Judgment
Summary judgment shall be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); Hersh v. Allen Prods. Co., 789 F.2d 230, 232 (3d Cir. 1986). In making this determination, a court must draw all reasonable inferences in favor of the nonmovant. Meyer v. Riegel Prods. Corp., 720 F.2d 303, 307 n.2 (3d Cir. 1983), cert. dismissed, 465 U.S. 1091, 104 S. Ct. 2144 (1984). "At the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 2511 (1986). Summary judgment must be granted if no reasonable trier of fact could find for the nonmoving party. Id.; Radich v. Goode, 886 F.2d 1391, 1395 (3d Cir. 1989).
When the nonmoving party will bear the burden of proof at trial the moving party's burden can be "discharged by 'showing'--that is, pointing out to the District Court--that there is an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986). If the moving party has carried its burden of establishing the absence of a genuine issue of material fact, the burden shifts to the nonmoving party to "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356 (1986). When the nonmoving party's evidence in opposition to a properly-supported motion for summary judgment is merely "colorable" or "not significantly probative," the Court may grant summary judgment. Anderson, 477 U.S. at 249-50, 106 S. Ct. at 2511; Radich, 886 F.2d at 1395. Thus, a party opposing summary judgment must set forth specific facts showing a genuine issue for trial and may not rest upon mere allegations, general denials, or . . . vague statements." Quiroga v. Hasbro, Inc., 934 F.2d 497 (3d Cir. 1991). Whether a fact is material is determined by substantive law. Anderson, 477 U.S. at 248, 106 S. Ct. at 2510; United States v. 225 Cartons, 871F.2d 409, 410 (3d Cir. 1989).
An affidavit in opposition to a properly-supported motion for summary judgment must: (1) show affirmatively that the affiant "is competent to testify to the matters stated therein;" (2) be based on "personal knowledge;" and (3) establish facts that "would be admissible at trial." Fed. R. Civ. P. 56(e); see Hlinka v. Bethlehem Steel Corp., 863 F.2d 279, 282 (3d Cir. 1988). In sum, an affidavit offered in opposition to a motion for summary judgment must establish a proper foundation for the facts stated within it. Williams v. West Chester, 891 F.2d 458, 471 (3d Cir. 1989) (Garth, J., ...