Securities and Exchange Commission v. Lorin

The Securities and Exchange Commission (SEC) (plaintiff) alleged that Capital Shares, Inc.; Lawrence Caito (its sole shareholder and control person) (collectively, Capital); and Rosario Russell Ruggerio (defendants) and others violated the Securities Act of 1933 and the Securities Exchange Act of 1934 by manipulating the market for the stock of the Haas Securities Corporation (Haas). At trial, the SEC presented evidence that (1) Capital bought large quantities of Haas stock with the understanding that Haas would buy much of the stock back in order to create the appearance that Haas’s stock was more widely traded than it really was and (2) Haas in fact did buy back a significant portion of Capital’s purchases of Haas stock. Specifically, Capital purchased $44 million in Haas stock in 1987 and sold $20 million of that stock back to Haas. Moreover, Capital and Haas regularly engaged in end-of-day recapping calls, which the SEC’s expert witness opined occurred with unusual frequency and were consistent with the SEC’s view that Capital was confirming that Haas would buy the stock back. The SEC also presented evidence that Ruggiero (who was a broker at Haas and before that at another brokerage) manipulated the market for Haas stock by, for example, (1) advising clients to buy Haas stock despite his recognition that the stock was overvalued, (2) opening a brokerage account in his wife’s name to buy Haas stock, and (3) buying Haas stock on behalf of his clients without their authorization. Capital responded that it acted as a lawful, high-risk market-maker and that it saw an opportunity to make money by buying what it professed to believe was undervalued Haas stock. However, Capital did not explain why it purchased such a large amount of a risky stock or why it immediately sold most of the stock back to Haas.