## Facts

- The Securities and Exchange Commission sued ten registered representatives employed at J.T. Moran & Co. for fraud in the offer and sale of securities.
- The SEC alleged defendants operated a “boiler room” that cold-called unsophisticated customers to sell highly speculative low-priced stocks using high-pressure tactics.
- Defendants made optimistic price predictions and profit assurances without a factual basis and failed to disclose known or readily ascertainable adverse information (including negative earnings and historical losses).
- Several defendants claimed or implied “inside information” to induce purchases and urged customers to buy immediately to obtain a better price.
- Defendants discouraged customers from selling through aggressive tactics designed to keep customers invested in the recommended securities.
- Defendants also caused trades to be placed in customer accounts without customer authorization.
- The action sought injunctive relief under Securities Act § 17(a), Exchange Act § 10(b), and SEC Rule 10b-5; the remaining claims proceeded to an evidentiary hearing/bench trial consolidated with the preliminary-injunction proceeding.

## Issues

1. Whether defendants’ high-pressure “boiler room” sales practices, including exaggerated predictions, misleading half-truths, and omissions of adverse facts, constituted violations of Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
2. Whether unauthorized trading in customer accounts constituted a deceptive practice prohibited by the federal antifraud provisions.
3. What state of mind the SEC had to prove for liability under § 10(b) and Rule 10b-5 (and the related antifraud provisions) in this enforcement action.
4. Whether the SEC established entitlement to permanent injunctions against the remaining defendants.

## Decision

- The court found the SEC proved defendants violated Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
- The court held defendants engaged in a fraudulent scheme through boiler-room tactics, including material misrepresentations, misleading omissions, and unauthorized trading.
- The court entered permanent injunctions enjoining the remaining defendants from future violations of the antifraud provisions.

## Legal Principles

- Boiler-room practices—systematic high-pressure solicitation of speculative securities coupled with unfounded profit predictions and suppression of adverse information—can constitute a fraudulent “scheme” under Securities Act § 17(a) and Exchange Act § 10(b)/Rule 10b-5.
- Statements guaranteeing profits or minimizing risk, and claims of inside information, are materially misleading when used to sell speculative securities without an adequate factual basis and risk disclosure.
- Omitting known or readily ascertainable adverse facts (such as negative earnings or substantial losses) can be a material omission where a reasonable investor would consider the information important to an investment decision.
- Liability under § 10(b) and Rule 10b-5 requires scienter, which may be shown by intentional misconduct or recklessness; a repeated pattern of deceptive sales practices can support an inference of at least recklessness.
- Unauthorized trading is deceptive because it misrepresents customer consent and deprives customers of control over account decisions, and it may independently violate the antifraud provisions.
- Permanent injunctive relief in SEC actions is warranted where past violations, their recurrent character, and the circumstances support a reasonable likelihood of future violations absent an injunction.

## Conclusion

The court concluded that the defendants’ coordinated boiler-room sales campaign—marked by material misstatements, misleading omissions, high-pressure efforts to prevent customer sales, and unauthorized trading—constituted securities fraud under § 17(a), § 10(b), and Rule 10b-5, and justified permanent injunctions to prevent future violations.


Securities & Exchange Comm'n v. Hasho, 784 F. Supp. 1059 (S.D.N.Y. 1992)