## Facts

- The Securities and Exchange Commission (SEC) brought a civil enforcement action seeking permanent injunctions and disgorgement against, among others, Capital Shares, Inc. (a registered broker-dealer), its president/sole shareholder Lawrence Caito, and broker Rosario Russell Ruggiero.
- The SEC alleged an unwritten agreement among participants to manipulate the market for Haas Securities Corporation stock and related securities by creating artificial price levels and trading activity.
- As to Capital and Caito, the SEC alleged they artificially increased Haas stock prices by quoting excessive prices and effecting transactions including wash sales and other trades lacking genuine market purpose.
- Evidence showed Capital accumulated very large Haas positions and then sold substantial amounts back to Haas pursuant to an understanding that Haas would repurchase, supporting the appearance of market demand and stabilizing price.
- The SEC presented evidence of frequent end-of-day “recap” calls between Capital and Haas; expert testimony characterized the unusual frequency as consistent with a protected buy-back arrangement rather than ordinary market-making.
- Capital and Caito asserted they were legitimately market-making in an undervalued security and engaging in high-risk trading, but they did not credibly explain the economic logic of acquiring large positions and promptly selling significant portions back to Haas.
- As to Ruggiero, the SEC showed he recommended Haas securities while believing they were overvalued, used nominee or family accounts (including an account in his wife’s name), and executed unauthorized customer purchases that increased apparent demand.
- After a bench trial, the district court found violations and awarded equitable relief.

## Issues

1. Whether defendants engaged in a manipulative scheme to defraud in connection with the offer, purchase, or sale of securities, in violation of Securities Act § 17(a), Exchange Act § 10(b) and Rule 10b-5, and Exchange Act § 9(a)(2).
2. Whether the SEC proved the required state of mind (scienter) for § 10(b)/Rule 10b-5 and Securities Act § 17(a)(1).
3. Whether Capital and Caito violated broker-dealer fraud/manipulation provisions and Exchange Act recordkeeping requirements, and whether Caito was liable as a control person for Capital’s violations.
4. Whether permanent injunctions, disgorgement, and prejudgment interest were warranted and, if so, on what standards.

## Decision

- The court found Capital, Caito, and Ruggiero liable for market manipulation and fraud in violation of Securities Act § 17(a), Exchange Act § 10(b) and Rule 10b-5, and Exchange Act § 9(a)(2).
- The court found Capital and Caito additionally liable for broker-dealer related violations under Exchange Act §§ 15(c)(1) and 15(c)(2) and related rules, and for recordkeeping violations under Exchange Act § 17(a) and Rules 17a-3 and 17a-4.
- The court inferred manipulative purpose and scienter from circumstantial evidence, including trading patterns, coordinated repurchases, and the implausibility of defendants’ benign explanations.
- The court entered permanent injunctions against future violations.
- The court ordered disgorgement of ill-gotten gains and awarded prejudgment interest as equitable relief.

## Legal Principles

- Federal antifraud and manipulation provisions prohibit conduct that distorts genuine market forces of supply and demand, including coordinated trading designed to create artificial price and volume.
- Manipulative purpose and scienter may be proven through circumstantial evidence; a sustained course of trading with manipulative effects, coupled with economic irrationality and corroborating communications, can support an inference of intent or recklessness.
- A broker’s promotional recommendations, use of nominee accounts, and unauthorized customer transactions may support an inference of knowing participation in a manipulative scheme.
- Control-person responsibility may attach where an individual has power over a broker-dealer’s policies and trading practices and the firm commits securities-law violations.
- Permanent injunctive relief in SEC actions turns on a reasonable likelihood of future violations, assessed by factors such as egregiousness, duration, and degree of scienter.
- For disgorgement, the SEC must provide a reasonable approximation of profits causally connected to the wrongdoing; the burden then shifts to defendants to show the figure is not reasonable.
- Prejudgment interest may be awarded in equity to prevent retention of the time value of unlawfully obtained proceeds.

## Conclusion

The court held that a broker-dealer, its controlling principal, and an associated broker engaged in a coordinated manipulation of Haas securities, violating core antifraud and market-manipulation provisions and (as to the broker-dealer and principal) additional broker-dealer and recordkeeping rules, and it imposed forward-looking injunctions plus disgorgement and prejudgment interest to prevent recurrence and strip unlawful gains.


Securities & Exchange Commission v. Lorin, 877 F. Supp. 192 (S.D.N.Y. 1995)