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Stanford University Law School - Securities Class Action Clearinghouse

     


 

UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

RONALD GOLDBERGER, CRAIG BIER, DOMINIC POETA, JOSEPH WINCELOWITZ, MATT JENKINS, ALAN BOOTH, JOHN CALLAHAN, HERMAN DICKENS, STEVE ENDRES, WILLIAM FRASER, STEVEN FULLER, EDWARD R. TOZZI, ROBERT WIERSCHEM, LORENZO MICELI, and SHELDON PRENOVITZ, on behalf of themselves and all others similarly situated,

Plaintiffs,

v.

BEAR, STEARNS & CO., INC., BEAR, STEARNS SECURITIES CORP., and RICHARD HARRITON,

Defendants.







Civil Action No. 98 Civ. 8677 (JSM)


JURY TRIAL DEMANDED



FIRST AMENDED AND CONSOLIDATED CLASS ACTION COMPLAINT


WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP

Daniel W. Krasner (DK 6381)

Jeffrey G. Smith (JS 2431)

Robert B. Weintraub (RW 2897)

Gregory Mark Nespole (GN 6820)

270 Madison Avenue

New York, New York 10016

(T) 212 545-4657

(F) 212 545-4653



CHIMICLES & TIKELLIS LLP

Nicholas E. Chimicles

Denise Davis Schwartzman

Candice L.H. Hegedus

361 West Lancaster Avenue

Haverford, PA 19041-0100

(T) 610 642-8500

(F) 610 649-3633



Co-Lead Counsel for Plaintiffs

Plaintiffs allege this first amended and consolidated class action complaint ("Complaint") based upon the investigation of their counsel, except as to the allegations specifically pertaining to plaintiffs and their counsel. Counsels' investigation conducted on plaintiffs' behalf, included, among other things: (i) an analysis of publicly-available news articles and reports; (ii) a review and analysis of public filings, including but not limited to, the corporate defendant's annual and fiscal quarterly reports; (iii) press releases issued by defendants; and (iv) other matters of public record.

A. JURISDICTION AND VENUE

  1. Plaintiffs bring this action pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78t, and the rules and regulations promulgated thereunder (including Rule 10b-5, 17 C.F.R. § 240.10b-5), and the common law of the State of New York. Jurisdiction over the federal claims alleged herein is based upon section 27 of the Exchange Act and this Court has supplemental jurisdiction over the state claims pursuant to 28 U.S.C. § 1367(a).
  2. Venue is proper in this district since defendant Bear, Stearns & Co., Inc. ("Bear, Stearns & Co.") has its corporate headquarters and principal place of business in this district, defendant Richard Harriton's principal place of business is in this district, defendant Bear, Stearns Securities Corp. ("Bear, Stearns Securities") has its corporate headquarters in this district, and/or many of the acts charged herein occurred in or emanated from this district.
  3. In connection with the acts, conduct, and other wrongs complained of herein, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce and the United States mails, and the facilities of the national securities markets.

B. NATURE OF THE ACTION

  1. Plaintiffs seek redress for defendants' wrongful conduct, including violations of the federal securities laws and the common law of the State of New York, committed by Bear, Stearns & Co. and Bear, Stearns Securities (together "Bear Stearns") and Richard Harriton, a managing director at Bear Stearns. Bear Stearns and Mr. Harriton engaged in a continuing course of conduct that was intended to, and in fact did, manipulate the market for certain securities (the "Manipulated Securities").
  2. Plaintiffs purchased the Manipulated Securities, most of which were sold to the investing public in initial public offerings ("IPOs") by a group of brokerage houses (the "Introducing Brokers" defined in paragraph 11 below) that also made markets in the Manipulated Securities after they were initially sold to the public and that cleared their clients' securities transactions through Bear Stearns. Plaintiffs and members of the Class defined below purchased the Manipulated Securities through the Introducing Brokers as well as through other brokerage houses that did not clear their transactions through Bear Stearns. Regardless of whether plaintiffs cleared their purchases of Manipulated Securities through Bear Stearns, the conduct described below was deceitful and caused substantial losses to plaintiffs and the members of the Class.
  3. Bear Stearns is a full service investment firm engaged in investment banking, proprietary trading, retail brokerage, stock-loan operations, financial planning, and processing securities transactions on behalf of other firms, a practice known in the securities industry as "clearing for introducing brokers."
  4. The practice of clearing for introducing brokers is based upon a contractual relationship between a clearing broker (like Bear Stearns) that provides various services for the introducing broker, including clearing customer trades, record keeping, mailing and maintaining monthly customer account statements, processing trade confirmations, processing dividend distributions, supplying proxy materials, and providing financing for margin accounts maintained by the introducing brokers' customers.
  5. The clearing function is a very lucrative back-office operation that receives little notice by the media even though it has been a major catalyst driving Wall Street's recent profits, as will be described below in detail.
  6. According to an article published in the February 24, 1997, edition of Forbes magazine (the "February 24 Forbes Article"), Bear Stearns is a prominent, perhaps the largest, member of the clearing industry, servicing over 2,000 introducing brokers, up from 725 in 1987, and reportedly processing nearly 12% of the New York Stock Exchange's (NYSE) daily volume of traded shares. As reported in a Wall Street Journal article dated August 5, 1999, clearing accounted for approximately 25% of Bear Stearns's fourth quarter 1998 income of $269 million. This line of business yields substantial profits even when engaged in lawfully.
  7. During the Class Period, defined below, Bear Stearns combined with each of the Introducing Brokers, a group of disreputable brokerage houses and, instead of simply performing ministerial clearing functions for a contractual fee, embarked on a concerted course of conduct with the Introducing Brokers that had the intended effect of affecting the market for the Manipulated Securities in ways that harmed plaintiffs and the Class. In this way, Bear Stearns generated substantial illegal profits from exploiting plaintiffs and the Class by perpetuating a pervasive fraud with the Introducing Brokers.
  8. Bear Stearns's relationship with some of the introducing brokers commenced as early as December 1992. The Introducing Brokers, as of the time they associated themselves with Bear Stearns, were sometimes known in the securities industry as "bucket shops" or "chop shops." The Introducing Brokers included, but were not limited to: Corporate Securities Inc.; First Cambridge Securities Corp. (defunct); Hillcrest Financial Corp., a/k/a HFC Capital Corp. (defunct); Josephthal, Lyon & Ross, Inc.; Kensington Wells Incorporated (defunct); Lew Lieberbaum & Co. (defunct); Meyers Pollock Robbins, Inc. (defunct); Noble International Investments, Inc.; Paragon Capital; PCM Securities (defunct); A.R. Baron & Co., Inc. (defunct); D. Blech & Co. (defunct); Rooney-Pace Inc. (defunct); Stratton-Oakmont, Inc. (defunct); and Sterling Foster & Co. (defunct)(collectively, the "Introducing Brokers").
  9. The Introducing Brokers engaged in a pattern of fraudulent conduct with regard to the Manipulated Securities. Bear Stearns, as clearing broker to the Introducing Brokers, knew or recklessly disregarded that the Introducing Brokers were engaged in a concerted course of conduct designed to defraud investors and violate the federal securities laws. Bear Stearns recklessly or consciously joined with each of the Introducing Brokers in defrauding plaintiffs and the Class in order to collect huge fees for performing clearing services for the Introducing Brokers as well as to gain enormous profits from transactions with the Introducing Brokers as more fully set out below.
  10. This massive fraud focused on the Manipulated Securities, which included, but were not limited to:  Advanced Surgical Inc.; Advanced Voice Technologies, Inc.; Applewoods Inc.; Apogee Robotics, Inc.; Aquanatural Pharmaceuticals Corp.; Ariad Pharmaceuticals Corp.; BioSepra, Inc.; Bristol Technology Systems, Inc.; Chemex Pharmaceuticals Inc.; Children's Wonderland, Inc.; Com/Tech Communication Technologies Inc.; Cypros Pharmaceuticals Corp.; Dollar Time Group, Inc.; DNA Plant Technology Inc.; Ecogen, Inc.; Embryo Development Corporation; Envirogen Corp.; Envro, Inc.; Eastco Industrial Safety, Co.; First Team Sports Inc.; Genemedicine, Inc.; Globus Group, Inc.; Guilford Pharmaceuticals Inc.; Gum Tech International Inc.; Hauppauge Digital Inc.; Help At Home Inc.; HemaSure, Inc.; ICOS Corp.; IFS International Inc.; Innovir Laboratories, Inc.; Intelligent Surgical Lasers, Inc.; Iatros Health Network Inc.; Krantor, Corp.; Kushner- Locke, Company; Kitchen Bazaar, Inc.; LaJolla Pharmaceutical Co.; Lasergate Systems, Inc.; Liposome Technology Inc.; LXR Biotechnology Corp.; ML Direct Inc.; Microprobe Corp.; Ministor Peripherals, Inc.; Neoprobe Corp.; NeoRx Corp.; Neurogen Corp.; New Vision Technology Corp.; Nu-tech Bio-Med Inc.; Pacific Animation Imaging Corp., later known as Strategic Solutions Group; Paperclip Imaging Software Inc.; Paramark Enterprises, Inc.; Symbollin, Inc.; Pharmos Corp.; Procept Inc.; Retrospettvia Inc.; Texas Biotechnology Corp.; Universal Automotive Industries, Inc.; Voxtel Advanced Mammography Systems Inc.; Videolan Technologies, Inc.; XeChem International, Inc.; and Xybernaut Corporation (collectively referred to as the "Manipulated Securities").
  11. Defendants did not merely perform the ministerial task of clearing transactions for the Introducing Brokers in the Manipulated Securities. Instead, defendants were direct participants in the unlawful conduct alleged in this complaint. Plaintiffs were unaware of this fraud, and they purchased the Manipulated Securities in reliance on the integrity of the market with the reasonable belief that the prices being paid were fair and reflected the actual values of the securities. Had plaintiffs known of defendants' conduct, they would not have purchased the Manipulated Securities, or would not have purchased them at the prices they paid, and Bear Stearns would not have earned the illegal profits described below.
  12. In committing the wrongful acts alleged herein, defendants have pursued a course of conduct and have acted in concert with and conspired with one another and with the Introducing Brokers in furtherance of the common plan, scheme, or design as alleged in this complaint. During all times relevant hereto, defendants, and each of them, initiated and/or joined in a course of conduct that was designed to and did: (a) artificially inflate the market prices of the Manipulated Securities during the Class Period; (b) fraudulently induce the investing public, including plaintiffs and the members of the Class, to purchase Manipulated Securities at artificially inflated prices; (c) manipulate the market for these securities through parking or sham transactions to maintain the "market" at the artificially inflated prices; (d) provide plaintiffs and the members of the Class with margin loans and financing, thereby encouraging and making it possible for them to purchase Manipulated Securities; and (e) make it possible for the Introducing Brokers to operate and participate in the frauds by extending margin credit to facilitate the IPOs and other manipulative activities and by contributing capital and legitimacy to their operations.
  13. Defendants and the Introducing Brokers engaged in a conspiracy, common enterprise, or common course of conduct, in violation of the anti-fraud provisions of the federal securities laws and the common law. Each defendant benefitted, directly or indirectly, from the illegal course of conduct. Each defendant was a direct, necessary, and substantial participant in the conspiracy, common enterprise, or common course of conduct complained of herein.
  14. Each defendant either knew or recklessly disregarded the fact that the illegal acts and practices described herein would manipulate, artificially inflate, and maintain, for at least some period of time, the prices of the Manipulated Securities. Each defendant acted knowingly or in such a reckless manner as to constitute a fraud and deceit upon plaintiffs.

C. THE PARTIES

Plaintiffs

  1. Plaintiffs Ronald Goldberger, Craig Bier, Dominic Poeta, Joseph Wincelowitz, Matt Jenkins, Alan Booth, John Callahan, Herman Dickens, Steve Endres, William Fraser, Steven Fuller, Robert Wierschem, Edward R. Tozzi, Lorenzo Miceli, and Sheldon Prenovitz purchased Manipulated Securities during the Class Period and were damaged as indicated on their certifications attached to the original complaints filed herein.(1) Additional plaintiffs herein are the class member movants whose certificates were annexed as Exhibit D to the affidavit of Gregory M. Nespole, Esq., dated February 8, 1999, offered in support of the Goldberger Plaintiffs Group's Motion for Appointment of Lead Plaintiffs and Lead Counsel as well as Jefferson B. Ruttledge, Stephen J. Gladis, Sandra Aronberg, Kenneth McCewen, Peter Chardron, Lam K. and Maxine Lim, Allan G. Loeffler, Marvin Hartman, Gerald and Wendy Korman, Linda Spitz, Roy Strawn, Rosemary and Randolph Towle, Joseph L. Stanley, Sam and Adriana Chiaro, and H. James Gray whose certificates are annexed hereto as Exhibit A.

Defendants

  1. At all relevant times hereto, Bear, Stearns & Co. was a New York City based corporation organized and existing under the laws of the State of Delaware, engaged in the business of investment banking, securities underwriting, retail sale of securities and, through its wholly owned subsidiary, Bear, Stearns Securities, providing back-office services, clearing services, and financing to other retail brokers. Bear, Stearns & Co. is registered and a member of the National Association of Securities Dealers ("NASD").
  2. Defendant Richard Harriton, a resident of the State of New York, was at all relevant times president of Bear, Stearns Securities and head of its clearing operations; Mr Harriton was also a senior managing director of Bear, Stearns & Co. and a member of its management and compensation committees.

D. PLAINTIFFS' CLASS ACTION ALLEGATIONS

Class and Subclass Definitions

  1. The Class consists of all persons who purchased any Manipulated Security during the period December 8, 1992, through December 8, 1998, inclusive (the "Class Period"), at a time when the Introducing Broker who brought the Manipulated Security public in an IPO and/or who made a market in the Manipulated Security cleared through Bear Stearns, and who was injured by the wrongful conduct alleged herein (the "Class"). The Class is represented by all plaintiffs.
  2. Excluded from the Class are defendants, officers, and directors of Bear Stearns, members of their immediate families, their legal representatives, heirs, successors or assigns, and any entity in which any of the defendants or any excluded person has a controlling interest.
  3. Also excluded from the Class are all persons who purchased Manipulated Securities brought public, or with respect to which markets were made, by A.R. Baron, Inc. and/or D. Blech & Co. to the extent such persons' purchases of the Manipulated Securities are subject to and subsumed by pending class action lawsuits against A.R. Baron & Co., Inc.(2) and/or D. Blech & Co(3).
  4. The Federal Claim Subclass includes all members of the Class who purchased Manipulated Securities during the period December 8, 1995, through December 8, 1998, inclusive (the "Federal Claim Subclass Period"). The Federal Claim Subclass is represented by plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz.
  5. The Contract Claim Subclass includes all members of the Class who cleared their purchases of Manipulated Securities through Bear Stearns during the Class Period. The Contract Claim Subclass is represented by plaintiffs Jenkins, Booth, Tozzi, Callahan, Dickens, Endres, Fraser, Fuller, and Wierschem.
  6. The members of each of the Class, the Federal Claim Subclass, and the Contract Claim Subclass are so numerous that joinder of all members is impracticable. At least millions of shares of the Manipulated Securities were sold by the Introducing Brokers and/or cleared by Bear Stearns during the Class Period and the Federal Claim Subclass Period and were purchased by members of the Class and each subclass during such periods. While the precise numbers of members of the Class and each subclass are unknown at this time, each is believed to number in the thousands.
  7. Plaintiffs will fairly and adequately protect the interests of the members of the Class and the subclasses and have no interests which are contrary to or are in conflict with those of the Class and the subclasses they seek to represent. The subclasses are plead and separately represented because the federal and contract claims have differing but overlapping and non-conflicting elements and/or statutes of limitations. Plaintiffs have retained competent counsel experienced in class action litigation of this type to further ensure protection of the Class and to prosecute this action vigorously.
  8. Plaintiffs' claims are typical of the claims of the other members of the Class and subclasses since all of their damages arise from and were caused by the same illegal conduct engaged in by defendants.
  9. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all members of the Class and each subclass is impracticable. Furthermore, as the damages suffered by individual members of the Class and subclasses may be relatively small, the expense and burden of individual litigation make it impossible for the members of the Class and subclasses individually to redress the wrongs done to them. Plaintiffs know of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action.
  10. Common questions of law and fact exist as to all members of the Class and each subclass and predominate over any questions affecting solely individual members of the Class or subclasses. Among the common questions of law and fact are as follows:
    1. whether defendants violated the federal securities laws through the acts alleged herein and harmed the members of the Federal Claim Subclass;
    2. whether defendants participated in the course of conduct complained of;
    3. whether defendants profited by the wrongful conduct alleged herein;
    4. whether Bear Stearns breached contracts with and duties owed to Contract Claim Subclass members;
    5. whether Bear Stearns breached contracts with the Introducing Brokers and thereby damaged the Contract Claim Subclass members who were the intended third party beneficiaries of the contracts;
    6. whether defendants manipulated the price of and the market for the Manipulated Securities; and
    7. the extent of injuries sustained by the members of the Class and each subclass and the appropriate measure of damages.
  11. The names and addresses of the members of the Class and each subclass can be ascertained from the books and records of Bear Stearns or its agents and/or of each of the companies whose securities constituted Manipulated Securities. Notice can be provided via first class mail and publication in investor media using techniques and a form of notice similar to those employed in other class actions arising under the federal securities laws.

E. APPLICABILITY OF PRESUMPTION OF RELIANCE:

FRAUD-ON-THE-MARKET DOCTRINE

  1. At all relevant times, the Manipulated Securities traded in an efficient, albeit manipulated, market for the following reasons, among others:
    1. the Manipulated Securities met the requirements for listing, and were listed and actively traded on the NASDAQ/National Market System, a highly efficient and automated market;
    2. as regulated issuers, the Introducing Brokers and Bear Stearns filed periodic public reports with the Securities and Exchange Commission ("SEC") and the NASD; and
    3. the Introducing Brokers and Bear Stearns communicated with public investors via established market communication mechanisms, including through disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services.
  2. Under these circumstances, all purchasers of the Manipulated Securities were entitled to rely on a presumption that the market set fair prices for the Manipulated Securities and they suffered injury through their purchases of these securities at artificially-inflated prices.

F. SUBSTANTIVE ALLEGATIONS

1. Introduction

  1. During the 1990's, a massive fraud was perpetrated on the investing public by de facto joint ventures formed between the Introducing Brokers and their clearing broker, Bear Stearns. The fraud was accomplished through an ongoing course of conduct by the Introducing Brokers, Bear Stearns, and Mr. Harriton, which included acts that were intended to artificially manipulate, inflate, and maintain markets and prices for the Manipulated Securities and to cause class members to purchase Manipulated Securities at artificial and artificially inflated prices. The purpose of the fraud was to reap enormous profits for defendants from the sale and financing of the Manipulated Securities. These profits were realized because plaintiffs and the markets did not know about the wrongful conduct alleged herein.
  2. Bear Stearns, throughout the Class Period, engaged in the enormously profitable practice of leasing its widely recognized name to the Introducing Brokers in connection with Bear Stearns's sale of its clearing services to the Introducing Brokers. The Bear Stearns name on the Introducing Brokers' customers' monthly statements and trade confirmations afforded the Introducing Brokers credibility and respectability. It has been widely reported that many low-end brokerage houses contracted with Bear Stearns because their management had direct or indirect long-standing relationships with Mr. Harriton.
  3. In an article entitled "Did Bear Stearns Ignore a Stock Swindle? The Feds Probe Ties Between the Brokerage and a Small Firm Charged with Massive Fraud," published in the November 23, 1998, edition of Business Week (the "Business Week Article"), it was reported:

Did Randy Pace, the subject of numerous regulatory sanctions over the years, have a relationship with Bear Stearns that he was able to exploit on behalf of Sterling Foster? Was Bear Stearns, as Sterling Foster's clearing firm, aware of the alleged stock fraud scheme? These and other disturbing questions are being probed by the Securities & Exchange Commission and the Manhattan District Attorney's office. They are said to be exploring links between Mr. Pace, Bear Stearns clearing chief, Richard Harriton, and Harriton's son Matthew -- who heads Embryo Development Corp., one of the allegedly Pace-manipulated firms.

  1. Bear Stearns's activities were further described in the December 1998 edition of Harper's Magazine, in an article entitled "Up In Smoke -- The Suckers Bring the Money; Wall Street Supplies the Matches":

Penny-stock firms and their shills, for example, need to "clear," or process, their trades through bigger firms . . . Big Wall Street firms fight hard to defend these relationships with small, troublesome brokers because they generate huge volume and handsome fees. But sometimes the relationship goes beyond clearing trades. Consider Sterling Foster & Company, a firm whose most sterling attribute was to foster a criminal culture that law-enforcement authorizes say bred "every species of micro-cap fraud." Bear Stearns cleared the firm's business and, regulators alleged, helped bankroll a market manipulation that netted $20 million, involving the sale by Sterling Foster of more than 2 million shares in a company that had only 1 million shares outstanding.

  1. The above description of Bear Stearns's and Mr. Harriton's relationship with Sterling Foster & Co., ("Sterling Foster") and its principals was not unique. Bear Stearns and Mr. Harriton followed a pattern of such relationships with the Introducing Brokers, who were thinly capitalized retail brokerages that depended on Bear Stearns to finance their customers' margin accounts as well as their own trading or inventory accounts. The core, as defendants knew, of the Introducing Brokers' illegal operations required the use of a variety of fraudulent, deceptive, and deceitful devices to sell Manipulated Securities to the public at artificially inflated prices and create the illusion of genuine demand or a genuine market for the Manipulated Securities. The Introducing Brokers then reaped exorbitant profits through the sale of the Manipulated Securities to their retail customers, including plaintiffs and other members of the Class, from their inventory or trading accounts (both short and long), as well as through excessive commissions and fees on the sales transactions.
  1. Frequently, as defendants knew, the Introducing Brokers were nothing more than "boiler room" selling operations that employed hard-sell tactics to push the Manipulated Securities. Introducing Brokers' sales forces fraudulently misrepresented to investors the short-term prospects of the Manipulated Securities to push up the prices and used sham transactions such as parking transactions, or trades at prearranged times and prices, to create the illusion of demand and a genuine market to support that price.
  2. Introducing Brokers' customers were pressured to purchase more and more stock, usually borrowing against margin accounts financed by Bear Stearns. Frequently, early in the trading in a particular Manipulated Security, shares of the stock were gifted to insiders or made available to insiders at very low prices. These free or cheap shares were later sold at artificially high price levels, generating huge profits for these insiders. The Introducing Brokers had financial interests in maintaining the price of the Manipulated Securities for a number of reasons, not only for their own profits earned through sales at inflated prices and commissions on customer sales, but also to maintain the value of the Introducing Brokers' own inventory accounts and thus their net capital positions.
  1. The Introducing Brokers each needed a mere $250,000 of capital to comply with NASD regulations. The Introducing Brokers parlayed this minimal capital by entering into arrangements with Bear Stearns to clear trades in the Manipulated Securities and to finance their customers' margin accounts and their own inventory accounts. Bear Stearns fueled the Introducing Brokers and placed its vast capital resources behind their fraudulent marketing of the Manipulated Securities.
  2. Bear Stearns, as a clearing broker and a member of all of the national exchanges, had a duty to deal fairly with plaintiffs, including the duty not to engage in conduct to artificially inflate and manipulate the markets for the Manipulated Securities that were purchased by plaintiffs, and, further, to disclose to plaintiffs all material facts relating to the manipulation and inflation of the markets for the Manipulated Securities. This duty arose from at least the following:
    1. customer account agreements between Bear Stearns and members of the Class, which include, among other things, the covenant that all transactions were subject to all applicable laws, rules, regulations, and the covenants of good faith and fair dealing;
    2. clearing agreements between Bear Stearns and the Introducing Brokers, of which Contract Claim Subclass members were intended third party beneficiaries, which, among other things, provided that Bear Stearns would: (i) regularly receive information relating to the Introducing Brokers and their financial integrity; (ii) issue confirmations, statements, and notices to members of the Class; and (iii) as a creditor, have the right and sole discretion to restrict trading in inventory or customer accounts, or prohibit certain trading strategies or trading in certain types of securities;
    3. the federal securities laws, rules, regulations, and the rules and regulations of securities exchanges, including the "fundamental duty of fair dealing," (NASD Rule IM 2310-2(a)(1)), which both the SEC and NASD recognize are based "on the principle that when a securities dealer conducts business it is, in effect, representing that it will deal fairly with the public," (NASD Rule IM 2310-2(d)); and
    4. common law principles of trust and fair dealing including the principle set forth in the Restatement (Second) of Torts § 552 (1977), that:

One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for the pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

  1. Defendants are liable, jointly and severally, as direct participants and/or as co-conspirators in the wrongs complained of. Defendants had a duty not to manipulate the market and not to artificially inflate the prices of Manipulated Securities and to disseminate promptly accurate and truthful information about the true value of the Manipulated Securities.

2. The Typical Roles Of The Clearing

Broker And The Introducing Broker

  1. Typical securities transactions involve a number of tasks, including: opening, approving, and monitoring customer accounts; soliciting or accepting customer orders; executing customer orders; extending credit in customer margin accounts; valuing customer accounts for conformity with existing margin regulations; confirming executed orders to customers; receiving or delivering funds or securities to or from customers; maintaining books and records reflecting securities transactions, such as monthly customer account statements; safeguarding funds and securities in customer accounts; and clearing and settling customer transactions.
  1. Many securities transactions are carried out through a cooperative arrangement between introducing brokers and clearing brokers. The introducing broker enters into an agreement with the clearing broker to provide back-office, clearing services, margin financing for customer accounts, and financing for the introducing brokers' own inventory accounts. While the functions of the clearing broker vary somewhat, introducing brokers typically retain the functions that relate to direct customer contacts, such as soliciting accounts, determining customer investment objectives, making recommendations for securities to purchase or sell, and accepting purchase and sale orders from customers. Clearing brokers typically provide the back office services, such as: the maintenance of books and records; the receipt, custody and delivery of customer securities and funds; the extension of credit in customer margin accounts; the execution of transactions; and the payment for and delivery of the securities. The clearing broker typically has a written contract with the introducing broker that defines the division of tasks and obligations.
  2. The capital threshold for entry into the securities brokerage business is designed to protect the investing public. Conformity with these minimum net capital requirements is intended to protect investors should a brokerage house fail. The NASD requires that the broker cease trading immediately if its capital falls below the minimum net capital requirements. Should an introducing broker fail to meet its minimum capital requirements, it could prove to be very damaging to the clearing broker for a number of reasons, as detailed below.

3. Bucket Shop Operations and Bear Stearns's Role

  1. Agreements for Bear Stearns's clearing services provided, among other things: that the Introducing Broker would provide Bear Stearns with all financial information and reports filed with the national securities exchanges and other financial information on at least a monthly basis; that Bear Stearns would issue confirmations, statements, and notices directly to customers on Bear Stearns's forms; and Bear Stearns, in performing its role as a creditor under the customer margin agreements, had the right in its sole discretion to restrict trading in customer accounts or in the Introducing Broker's inventory accounts (also called proprietary accounts or trading accounts) or to prohibit certain trading practices.
  1. The fact that the Introducing Brokers and Bear Stearns contractually divided the responsibilities relating to the securities transactions does not relieve either from the proscriptions of the federal securities laws. A February 19, 1982, SEC release with respect to a then-proposed change to the rules governing the responsibilities of broker-dealers relative to handling customer accounts that are introduced by one broker to another under a fully disclosed clearing agreement, noted, among other things, that, "[b]roker-dealers are, of course, cautioned to carefully weigh the capital and other regulatory and practical consequences of the assumption of functions detailed in NYSE Rules 382 and 405 as amended," and that "[t]he Commission notes that no contractual arrangement for the allocation of functions between an introducing and carrying [clearing] organization can operate to relieve either organization from their respective responsibilities under the federal securities laws and applicable [Self Regulatory Organization "SRO"] rules."
  1. The SEC rules do not relieve Bear Stearns, as a clearing broker, from duties with respect to the integrity of the transactions it clears for the Introducing Brokers. Further, Bear Stearns's financial interest also dictated that it closely monitor the Introducing Brokers.
  1. The Manipulated Securities were traded on the NASDAQ rather than on auction markets such as the NYSE or the AMEX. Introducing Brokers, therefore, bought or held the Manipulated Securities in their own trading or inventory accounts in order to act as market- makers. Bear Stearns had a direct pecuniary interest in maintaining the artificially inflated price of the Manipulated Securities in the Introducing Brokers' inventory accounts to minimize its risk of loss should an Introducing Broker fail to meet the regulatory net capital requirements. Bear Stearns provided infusions of capital to the Introducing Brokers' accounts through loans that also served to protect Bear Stearns's position while generating substantial interest payments to Bear Stearns. Bear Stearns, thus, had a vested interest in supporting the Introducing Brokers and assisting them in remaining open because Bear Stearns had a substantial investment in the Introducing Brokers through the outstanding debt, and earned substantial income on the financing transactions as well as from transaction fees generated each time an Introducing Broker executed a trade.
  2. Bear Stearns entered into lending agreements with the Introducing Brokers pursuant to which Bear Stearns required substantial cash or securities as a deposit to secure Bear Stearns against losses incurred by the Introducing Brokers' trading practices. Because of these lending agreements and Bear Stearns's concern regarding exposure to trading losses, Bear Stearns demanded, and received, detailed financial information from the Introducing Brokers prior to doing business with them and throughout, at least monthly and sometimes more often, the course of the relationship.
  3. Bear Stearns demanded that the Introducing Brokers provide assessments of the value of their assets and trading accounts, including the actual value of Manipulated Securities held in the margin accounts. Introducing Brokers were also required to provide all the details surrounding their banking relationships, including the extent of their lines of credit. Bear Stearns had a powerful incentive to stay current with this information, and to do so, Bear Stearns regularly, and at least monthly, received Net Capital Reports and Focus Reports from the Introducing Brokers. Bear Stearns could, and did, demand detailed non-public financial information more frequently and the deposit demanded by Bear Stearns to secure the lending agreement was based on Bear Stearns's analyses of the risks of loss inherent in the Introducing Brokers' trading accounts. The deposits were reviewed weekly with the Introducing Brokers. To the extent that the Introducing Brokers were trading in risky and/or thinly capitalized stocks, Bear Stearns could and did demand higher deposits. Bear Stearns had available to it and regularly reviewed the value of the Manipulated Securities and the capital structures of the Introducing Brokers and endeavored to secure its investments in the Introducing Brokers so that it could continue to clear trades, many of which were on margin and generating substantial additional interest income for Bear Stearns.
  4. During the Class Period, Bear Stearns required customers of the Introducing Brokers to execute customer agreements with Bear Stearns and required Introducing Brokers to include the Bear Stearns's name on customer account statements. Bear Stearns purposefully permitted the Introducing Brokers to pass themselves off to their customers as affiliates of a brokerage industry giant. This practice had the effect of creating and maintaining the markets for the Manipulated Securities by giving the Introducing Brokers' customers confidence to buy Manipulated Securities and the necessary credit to buy them at inflated prices. Accordingly, Bear Stearns earned millions in interest income on the customers' margin trades. The Introducing Brokers' high-pressure sales tactics induced investors to purchase the speculative Manipulated Securities by promising that the investments would generate spectacular returns because investments were made with borrowed money. The money was borrowed from Bear Stearns and Bear Stearns's profits depended on the customers' continuing to borrow. Investors were injured when the value of the Manipulated Securities fell and Bear Stearns (already collecting margin interest) demanded additional margin payments to secure these highly leveraged accounts and satisfy account debits.
  5. The Introducing Brokers engaged in high-risk transactions. They routinely obtained shares in small, start-up, or even sham companies at very low prices and unloaded them onto their customers at vastly inflated prices. Many of the brokers employed by these bucket shops had long-standing and well-documented histories of wrongful conduct with other failed bucket shop operations. Bear Stearns demanded and received U-4s on the principals of, and the brokers employed by, these bucket shops. Accordingly, defendants knew that bucket shop staffs included disreputable brokers and management, but disregarded those facts because these same disreputable individuals generated enormous profits for Bear Stearns.

4. Clearing Trades In Restricted Securities

  1. Among the tactics used by Introducing Brokers and Bear Stearns to generate illegal profits was the purchase of restricted securities at steep discounts and the resale of the securities in violation of the trading restrictions. An Introducing Broker acquired a restricted security at a low price because the security could not be legally sold to the public, i.e., a security trading legally at $6 per share was purchased for $3 per share due to a transferability restriction. The Introducing Broker would acquire the security at $3 and, almost immediately, sell it to another Introducing Broker for a small profit. Since the security was unregistered, the trade was not reported on a national exchange like the NASDAQ. The Introducing Broker who acquired the security would, in turn, sell it to an unsuspecting member of the investing public at $6 per share. Of course, this unsuspecting buyer did not know that the security was restricted and worth, at best, the $3 paid by the first Introducing Broker.
  2. Bear Stearns knew that this scheme was widespread among the Introducing Brokers. Bear Stearns, like all clearing firms, was obligated to exercise certain precautions when clearing trades in restricted securities and it had to assure that "lettered" stock was not traded prior to its registration. Bear Stearns's compliance department failed to exercise these controls because defendants knew that this practice created large transaction fees for Bear Stearns and afforded the Introducing Brokers much-needed cash which was in turn used to repay the Introducing Brokers' debts to Bear Stearns.

5. Clearing For The Pump And Dump

  1. Another typical tactic was for the Introducing Brokers to hype and aggressively promote an IPO with fraudulent marketing tactics that artificially inflated the price. In the so-called "pump and dump" strategy, markets for the Manipulated Securities were propped up through the use of fraudulent sales tactics or parking transactions until the insiders could dump their holdings at the inflated price. The Introducing Brokers, and their favored customers, collected their profits and the stock price fell dramatically, with insiders often selling short in anticipation of the stock price collapse.
  2. Bear Stearns benefitted from the practice as well. In most instances, where a thinly capitalized Introducing Broker engaged in an underwriting, Bear Stearns extended substantial, subordinate loans to collateralize or "float" the offering. Absent this financing, the offering would not have been consummated. Accordingly, Bear Stearns had a vested interest in these underwritings. Bear Stearns deliberately or recklessly disregarded any unusual trading practices observed by its compliance department in these new issues in order not to jeopardize Bear Stearns's receipt of interest payments on the subordinated loans. Moreover, Bear Stearns earned substantial transaction fees during the distribution of the offering and substantial fees associated with the processing of after-market transactions including reaping the benefits of the excessive volume generated by the "hype" and the volume thereafter generated during the stock's sharp decline.
  3. Bear Stearns also exercised discretionary control over whether an Introducing Broker could conduct a particular underwriting. Generally, an Introducing Broker would have to obtain Mr. Harriton's personal"sign off" on the transaction. In many instances, Bear Stearns would demand that the Introducing Broker post additional security before it would permit the offering to occur and prior to Bear Stearns extending the subordinated loans employed to finance the offering.

6. Phony Nominee Accounts From Which Bear Stearns And Harriton Each Profited

  1. Bear Stearns's operations were also intertwined with the bucket shops in a manner that generated Mr. Harriton substantial personal profits. For example, as stated above, the Introducing Brokers generally engaged in underwriting thinly capitalized companies. Bear Stearns would extend subordinated loans to the Introducing Brokers to facilitate the financing prior to distribution to the marketplace. As an incentive to obtain financing from Bear Stearns, on the day the offering commenced, the Introducing Brokers would secretly place a number of the IPO shares into phony nominee accounts in offshore banks or brokerage houses. (A phony nominee account is a brokerage account opened under a fictitious name and fraudulent social security or other identification number.) According to the February 24 Forbes article, as many units or shares as were needed to generate $100,000 in short-term trading profits were secretly deposited into these phony nominee accounts for each IPO financed by Bear Stearns. According to the February 24 Forbes article, Mr. Harriton was the secret beneficiary of many of these phony nominee accounts. The $100,000 profit limit was selected because it was a number that might well go unnoticed given Mr. Harriton's wealth and trading activity.

7. Phony Nominee Accounts As Part Of Fraudulent Underwriting Schemes

  1. An Introducing Broker would also use phony nominee accounts as part of fraudulent underwriting schemes in order to gain control of and manipulate the market for a Manipulated Security. For example, in such a scheme, the Introducing Broker would be the managing underwriter of a particular IPO. The IPO would be inherently fraudulent because the distribution of the IPO stock in the market to customers was a sham distribution whereby the shares were "distributed" to "friendly customers" of the Introducing Broker with the pre-arranged agreement that those customers would sell or "flip" their shares back to the Introducing Broker on the first day of trading. In this way, the Introducing Broker that was the managing underwriter of the IPO was able to gain control over the vast majority of the available shares in the IPO stock. The consolidation of the majority of the available shares in the IPO stock was a manipulative device in that the supply of the stock was artificially restricted and controlled by the Introducing Brokers. After the Introducing Broker that managed the IPO artificially consolidated control over the supply of the IPO stock, it would artificially inflate the price of the shares through a number of fraudulent, manipulative, deceptive, and misleading practices. Such conduct would generate enormous profits for the Introducing Broker that managed the IPO.
  2. As the clearing broker for the Introducing Broker that was the managing underwriter for the IPO, Bear Stearns cleared each of the order tickets generated by the initial distribution of the IPO and the Introducing Broker's repurchase of the IPO shares. Therefore, Bear Stearns knew or was reckless in not knowing that most of the shares in each of the fraudulent IPOs were sold back to the Introducing Broker on the first day of trading. A criminal indictment was handed down in July 1999 and is presently pending before the United States District Court for the Eastern District of New York and involves a similar scheme perpetrated by Introducing Broker Kensington Wells Incorporated. This indictment and its relevance to the Complaint are discussed in detail below. In addition, this practice was employed with respect to other IPOs, including those by Sterling Foster.

8. Stock-Loan And Short Sales

  1. Bear Stearns's clearing operations also generated substantial profits through the use of its stock-loan department. Selling stock short, while potentially risky, is a common practice employed by sophisticated traders. In essence, a short sale is the sale of borrowed stock to a third party (taking in the money generated from that sale) and then looking to repurchase the same stock from another party in the future at a lower price than that received on the initial sale. In this way, a short seller profits from the difference between the amount received on the initial (short) sale of the stock and the lesser amount paid to repurchase the stock.
  2. The Introducing Brokers' customers were urged to engage in short sales even though the practice is risky and generally reserved for sophisticated traders. The Introducing Brokers borrowed Manipulated Securities on behalf of their customers from Bear Stearns and the customers paid Bear Stearns interest on the borrowed stock, much like interest on a loan. The Introducing Brokers then repurchased the Manipulated Securities on behalf of their customers to cover the short positions, often directly from Bear Stearns. These transactions were always cleared by Bear Stearns. In this way, Bear Stearns received profits from interest income and clearing fees on both the short sale and repurchase of the shorted stock.
  1. As the clearing broker, Bear Stearns's compliance department continually monitored the short positions maintained in the Introducing Brokers' trading accounts and knew, or was reckless in not knowing, that the Introducing Brokers were engaged in excessive short sales on behalf of customers. Bear Stearns received substantial profits from these transactions and, accordingly, failed to act. Instead, Bear Stearns made credit readily available to the Introducing Brokers' customers so that they could continue to execute short sales.
  2. Since many of these short sales were in Manipulated Securities that had artificially inflated and maintained prices, customers would be forced to repurchase the Manipulated Securities at higher (rather than lower) prices incurring substantial losses.

9. Bear Stearns's Clearing Operations

  1. Until Mr. Harriton's recent resignation following an agreement between Bear Stearns and the SEC to settle charges that Bear Stearns improperly cleared for Introducing Broker A.R. Baron & Co., Inc. (discussed below in detail), Mr. Harriton ran Bear Stearns's lucrative clearing operations. Reportedly, Mr. Harriton's clearing operation was one of Bear Stearns's biggest profit centers. As reported in the February 24 Forbes article, Mr. Harriton reportedly introduced himself to prospective clearing customers by stating that, "I run the most profitable division of Bear Stearns and I'm the most powerful man on Wall Street in clearing."
  2. As reported in the February 24 Forbes article, most other clearing brokers also have sophisticated clearing systems, but charge less than Bear Stearns for clearing services. "What Harriton is selling [in addition to clearing services] -- especially to the small and dubious firms -- is respectability. If Bear Stearns's famous name appears on the trade confirmation or monthly statement as the clearing firm, who can doubt that his money is in safe hands?" When asked to be interviewed on the subject, Bear Stearns officials repeatedly declined, and company spokesperson Hannah Burns was quoted as stating that "[c]learing is a very, very proprietary business for us, and we don't want the public knowing about it."
  3. The February 24 Forbes article quoted a veteran of the clearing business as stating, "[a] clearing firm looks at its [Introducing Brokers'] numbers every day. The first time trouble shows its head, you stop it immediately." The article also stated that the financial risk to the clearing broker is far outweighed by the financial rewards of the clearing business. The financial rewards include the earnings by the clearing broker on the Introducing Brokers' deposit, which the clearing broker can use since the deposit is interest free; fees that the clearing broker charges on every transaction an introducing broker makes, which can be anywhere from $10 to $30 per trade; and interest charged on customer debit balances carried on the clearing broker's books, typically 1% per month, accruing the day the trade is made. The February 24 Forbes article notes that the interest on customer debit balances is "where the real money in clearing is made," and that clearing firms like Bear Stearns have free use of the customer's credit balances, and demand that an Introducing Brokers' listed equity business ( i.e., trades in the NYSE and AMEX) be funneled through its trading desks, a perk for which other firms would pay two or three cents per share.
  4. Bear Stearns prepared the trade confirmations for customer trades and kept track of all of the trades at the Introducing Brokers on a daily basis. Any transaction in the bucket shops' trading rooms went immediately to Bear Stearns. Bear Stearns generated the daily exception reports, which reflected any irregularities in the Introducing Brokers' trading accounts or in their customers' margin accounts, including trade debit reports and money due reports reflecting the amounts customers had not paid for their margin purchases.
  5. Bear Stearns purposely sought out business from disreputable broker-dealers. During the past decade, Bear Stearns aggressively advertised its clearing business to prospective brokerage firms, like the Introducing Brokers, through a nationwide advertising campaign that appeared in Standard & Poor's Security Dealers Digest that stated in pertinent part:
    1. "We Clear Just About Everything For Just About Everybody;"
    1. "Throw Our Weight Around. For over 23 years, Bear Stearns has been committed to helping broker dealers and hedge funds who are just starting up. You can leverage our expertise and buying power. Our network of regional offices and a full-time Relationship Manager support your operations. You can become a heavyweight when you've got someone else's weight to throw around";
    1. "More powerful than the will to win, is the courage to begin. Let Bear Stearns help you get your firm started. Opening your own brokerage firm can be a daunting experience. But there is help. From clearing services and technology to the expertise of a world-class financial organization, why not consider becoming part of the Bear Stearns family. We even provide you with a full-time relationship manager to get your firm up and running and help keep it running smoothly";
    1. "One Of The Many Specialized Services We Provide To Brokers Going Out On Their Own. In fact, we've helped get firms operating in a matter of weeks. And Bear Stearns does more than help you make money. We can actually save you money. As a member of the Bear Stearns family, you'll have the advantage of our buying power when getting necessities like computers and communication equipment, including telephones, or office supplies and courier services. Even when making travel arrangements. We also assign you a full-time Correspondent Liaison. After helping you get your firm up and running, they'll help you keep it running smoothly. We'd be happy to put you in touch with companies, big and small, who have already put themselves in our hands".
  1. In this way, Bear Stearns knew that it was dealing with poorly capitalized brokerage houses that, in most instances, would require Bear Stearns to initially finance and help financially stabilize their businesses. In effect, Bear Stearns's method providing financial support and clearing services was calculated to permit thinly capitalized brokerage houses to operate and perpetuate fraud on unsuspecting investors.

10. Margin Accounts

  1. Bear Stearns was bound to the Introducing Brokers through the customer margin accounts. Bear Stearns had a vested interest in maintaining the Manipulated Securities at the artificially inflated prices and in processing fraudulent transactions designed to manipulate and maintain the market for Manipulated Securities in order to minimize its own risk of loss if the stock price collapsed and margin calls were not met.
  2. Bear Stearns charged very high interest rates on margin accounts and generated daily margin reports for the Introducing Brokers. Bear Stearns had the means and the incentive to monitor the value of the Manipulated Securities in the Introducing Brokers' inventory accounts. If there were no market for the stock, margin calls would increase. If customers did not meet the margin calls, the Introducing Brokers would have to pay. If, in turn, the Introducing Brokers could not cover the debits, Bear Stearns was the loser because it had the ultimate financial risk.
  3. Bear Stearns had the right, under its clearing agreements with the Introducing Brokers, to restrict trading in customer accounts or in the Introducing Brokers' inventory accounts. It could also liquidate orders and prohibit trading strategies for both. Bear Stearns could and would restrict trading in Manipulated Securities if it felt its own capital was at risk.

11. Compliance Reports

  1. Bear Stearns knew, or was reckless in not knowing at all relevant times, that the Introducing Brokers were engaged in fraudulent practices. Moreover, Bear Stearns, as alleged herein, was a participant in these practices. Bear Stearns, as a clearing broker, reviewed daily reports generated by its internal audit and compliance departments detailing margin transactions, short sales, underwriting activities, transactions in restricted stock, transactions in thinly-traded securities, accounts in violation of margin requirements, transactions in securities involved in investment banking deals or the subject of recent "buy" recommendations issued by Bear Stearns, cash/margin reports detailing individual customers' margin positions, trade debit reports, and inventory or portfolio reports sharing daily trading in the Introducing Brokers' inventory accounts (collectively, the "Compliance Reports").
  1. The Compliance Reports afforded Bear Stearns the opportunity to immediately identify suspicious transactions in the Introducing Brokers' or the customers' accounts. Nevertheless, Bear Stearns failed to exercise the necessary oversight responsibility and disregarded the information contained in the Compliance Reports. Bear Stearns, though armed with the Compliance Reports, did not want to terminate its relationships with the Introducing Brokers because, to do so, would have resulted in the loss of its huge illegal profits.

12. Manipulation Of Securities With Low Average Trading Volumes

  1. Market manipulation is easier to effectuate and more likely to occur when a security trades on low average daily volume ("ADV"), has a price per share less than $5.00, is not listed on the NASDAQ National Market System, and/or is generally purchased by retail customers. Many of the Manipulated Securities named in the Complaint satisfy one or more of these criteria.
  2. It is generally accepted that securities with ADV's that do not exceed 200,000 shares per day are more prone to manipulation than securities that trade on higher ADV's. Most of the Manipulated Securities recorded low ADVs for a material part of the Class Period.
  3. The SEC and NASD consider these "low priced" securities substantially riskier than other types of investments and have enacted special rules to insure that these "low priced" or "penny" stocks are not manipulated and cause retail customers harm. See 18 C.F.R. §240.3a51-1 and §240.15g-9-NASD Notice to Members No. 95-55 ("SEC Amends and Clarifies Penny Stock Rules").
  4. Most NASDAQ Securities trade on the NASDAQ National Market System (the "NASDAQ/NMS"). However, while NASDAQ/NMS companies are generally smaller than companies that trade on the NYSE, they are considerably larger than those that trade on the NASDAQ/Small Cap Market or the NASDAQ Over-the Counter Bulletin Board ("OTC/Bulletin Board").
  5. Given that securities traded on the OTC/Bulletin Board and/or the NASDAQ Small Cap Market trade on low ADVs and with few market-makers, they are susceptible to market manipulation, especially where the security is a "house stock" and one broker/deal dominates trading in the security.
  1. A substantial proportion of the Manipulated Securities were OTC/Bulletin Board Securities or NASDAQ Small Cap Stocks during at least a material part of the Class Period.
  2. Bear Stearns knew that the SEC and NASDAQ considered "low priced" securities riskier than higher priced securities with high ADVs. Accordingly, Bear Stearns, as the clearing broker, knew that the Introducing Brokers were engaging in risky transactions in "low priced" securities on behalf of retail customers. Many of the Manipulated Securities were house stocks, dominated by one or a few Introducing Brokers, and are discussed below with respect to specific Introducing Brokers' misconduct.
  3. Additionally, Bear Stearns had access to each Individual Brokers' confidential, non-public financial information. Thus, Bear Stearns knew of the thin capitalization and precarious financial position of each Introducing Broker. In fact, eleven of the fifteen Introducing Brokers ultimately went out of business.
  4. Bear Stearns accordingly knew the importance of maintaining the market price of the Manipulated Securities' because significant declines in value would negatively impact the already thinly capitalized condition of the Introducing Brokers and, in turn, would jeopardize Bear Stearns' investment in the business of Introducing Brokers.
  5. To avoid this, Bear Stearns allowed the Introducing Brokers to satisfy regulatory net capital requirements by unlawfully inflating the value of their proprietary holdings of Manipulated Securities.
  6. Additionally, Bear Stearns directed and permitted the Introducing Brokers to liquidate large positions in Manipulated Securities (many of which were "low price" stocks with low ADVs) to raise cash to satisfy regulatory capital requirements. This had the effect of depressing the price of the Manipulated Securities and damaging retail customers who were unaware that the security was being sold in large quantities in order to raise cash for the Introducing Brokers and to benefit Bear Stearns and would inevitably decline in value.

13. The Indictments of Introducing

Brokers For Which Bear Stearns

Performed Clearing Broker Services

Raise a Reasonable Inference That

Defendants Committed Securities Fraud

  1. Bear Stearns has a history of clearing for Introducing Brokers that have had significant regulatory and criminal problems. These regulatory/criminal problems date back to 1986 when the SEC suspended Randolph Pace from association with any broker dealer for violating federal securities laws. The indictments of the Introducing Brokers (several of which have resulted in guilty pleas and convictions) constitute, under Rule 404(b) of the Federal Rules of Evidence and as to Bear Stearns and Mr. Harriton, facts that will provide "proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident…" to commit securities law violations.
  1. Several of the Introducing Brokers and their principals have been indicted by federal and state authorities for securities fraud and other related criminal conduct. The following chart indicates when and where these indictments were issued:


Introducing Broker Date of Indictment Jurisdiction Issuing Indictment
Stratton Oakmont, Inc.

Jordan Ross Belfort*/

Daniel Mark Porush */

09/01/08

(disclosed 9/99)

U.S.D.C.

E.D.N.Y.

CR. 98-859

Sterling Foster & Co.

Randolph Pace*/

Alan Novich*/

11/98 U.S.D.C.

S.D.N.Y.

No. CR. 98 Crim. 1247

Kensington Wells, Inc.

15 individuals

07/21/99 U.S.D.C.

E.D.N.Y.

CR. 98-859

A.R. Baron, Co., Inc.

Andrew Bressman*

Roman Okin*

11 others

07/97 U.S.D.C.

E.D.N.Y.

D. Blech & Co. Guilty Plea

1997

U.S.D.C.

S.D.N.Y.

First Cambridge Securities Corp. Guilty Plea

08/19/99

U.S.D.C.

E.D.N.Y. and

Manhattan D.A.

Meyers Pollock Robbins, Inc. Guilty Pleas U.S.D.C.

S.D.N.Y.

*/ Actual named defendants

  1. Paragraphs 15 through 18 of the Pace/Sterling Foster Indictment set out Mr. Pace's long history of SEC suspensions and prohibitions between 1986 and 1993, which govern and restrict Mr. Pace's activities in the securities industry through the year 2000. All of those actions were publicly known; therefore, they were known to Bear Stearns and Mr. Harriton. Moreover, Mr. Pace and Mr. Harriton were close friends.
  2. Paragraph 19 of the Pace/Sterling Foster Indictment states that Mr. Pace entered into a "secret unlawful agreement with Adam Lieberman concerning the formation, operation, and control of a securities broker-dealer, incorporated under the name 'Sterling Foster'." As part of the illegal agreement, "Mr. Pace would secretly assist Lieberman [to] establish Sterling Foster as a securities broker-dealer by… assisting Lieberman [to] obtain a securities clearing agreement for Sterling Foster with Bear, Stearns Securities Corp." The Sterling Foster Indictment's pertinence to Bear Stearns is multifold:
    1. In the list of six things Mr. Pace did to assist Mr. Lieberman in effectuating this "secret, unlawful agreement," the second (the first being providing Mr. Lieberman with capital) is the clearing arrangement with Bear Stearns. This highlights the significance of the clearing agreement with Bear Stearns and its essential to the effectuation of the Sterling Foster "boiler room" operation.
    1. In light of Mr. Pace's personal relationship with Mr. Harriton, the circumstances indicate that clearing agreement between Bear Stearns and Sterling Foster was personally arranged between Messrs. Harriton and Pace.
    1. The fact that Mr. Harriton (and Bear Stearns) would deal with and provide clearing operations for Mr. Pace (even if Sterling Foster was an otherwise "legitimate"entity) demonstrates that Mr. Harriton/Bear Stearns were willing to participate in business operations that circumvented long-standing and explicit regulatory suspensions/prohibitions that governed Mr. Pace.
    1. Without Mr. Pace's involvement in arranging the securities clearing agreement, Sterling Foster would not have been able to enter into such an agreement with Bear Stearns.
    1. Sterling Foster was not a legitimate business. It is reasonable to infer that the reason it was so critical for Mr. Pace to arrange Sterling Foster's clearing agreement with Bear Stearns was that Sterling Foster needed a clearing broker with the "right stuff" in order to carry out its wrongdoing.
  1. The next critical indictment is the one involving A.R. Baron Co., Inc. ("Baron"). The May 19, 1997, indictment against Andrew Bressman, Roman Okin and eleven other former Baron officers and employees is riddled with securities law violations that permeated every aspect of Baron's operations.
  1. Importantly, the Baron situation is the first one in which Bear Stearns has been found to have violated federal securities laws as set forth in the SEC Cease and Desist Order dated August 5, 1999. The Cease and Desist Order completely debunks Bear Stearns's assertion that it was a mere clearing broker and that its duties were ministerial. On the contrary, it was found to have committed primary and secondary (aiding and abetting) violations of the securities laws. In summary, the SEC found that during its clearing relationship with Baron, Bear Stearns "was the cause of certain of Baron's violations of Section 17(A) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, aided and abetted and was a cause of Baron's violations of the Commission's rules governing net capital and the treatment of subscribers' funds and contingency offerings, and violated the laws and regulations governing credit extensions and record keeping." (See Cease and Desist Order at ¶ 2, annexed hereto as Exhibit B).
  1. The Pace/Sterling Foster and Baron indictments directly implicate Bear Stearns. In addition, an arbitration involving Hillcrest Financial Corp., discussed below, lends further support that an arbitration panel found that (as in Baron) Bear Stearns had not performed the mere ministerial tasks of a clearing broker. As a group, the indictments support the reasonable inference that Bear Stearns and Mr. Harriton had the "motive, opportunity, intent, preparation, plan, knowledge, identity or absence of mistake or accident" to commit securities fraud as alleged herein. In support thereof, plaintiffs assert:
    1. The other indictments (Stratton Oakmont, Kensington Wells, Meyers Pollock) allege securities law violations committed by the other Introducing Brokers similar to those committed by Sterling Foster and Baron.
    1. Bear Stearns provided clearing services for these indicted Introducing Brokers "on a fully disclosed basis" which means that Bear Stearns "provided back office services… such as maintaining books and records relating to the accounts of [the Introducing Brokers'] customers, clearing securities transactions, safekeeping [the Introducing Brokers'] customers' securities and cash balances, and providing credit to [the Introducing Brokers'] customers who traded on margin." (See SEC Cease and Desist Order at p. 5). In its position as the clearing broker, Bear Stearns' employees were in a position to observe "signs" of the Introducing Brokers' "engaging in fraudulent practices." According to the Cease and Desist Order, such signs included "classic indications of unauthorized trading and parking--a high incidence of failures to pay for trades, excessive trade cancellations, corrections and credit extensions, numerous customer complaints against Baron and a pattern of stock being sold to customers from Baron's inventory and then purchased back into the inventory by Baron close to settlement at a loss…"
    1. According to the Cease and Desist Order, Mr. Bressman (President of Baron) and others established Baron in 1992 to underwrite the issuance of securities of small issuers trading in the over-the counter markets, and to carry on market-making and retail sales of such securities. Baron operated in "classic boiler-room fashion." Cheap securities were placed into the hands of family members, favorite customers and nominees, primarily through public offerings and private placements of the securities that it controlled, Baron's "so-called house stocks." "Baron's retail sales force then ran up the prices of these securities by aggressively marketing them through the use of fraudulent, high-pressure sales tactics. Baron was able to control the overall market for each security through its market making activities."
    2. Generally, Baron customers bought shares of Baron house stocks out of Baron's inventory. Any customer who was permitted to sell shares of the house stocks sold them back into the Baron's inventory. Any profits made by a customer selling Baron house stock was at the expense of another customer who later bought the stock out of Baron's inventory at a manipulated price.
    1. Baron enforced a number of formal and informal policies to support the prices of Baron house stocks. The principals maintained a "no net selling rule," pursuant to which Baron brokers usually were not permitted to sell a house stock unless it was accompanied by a "crossing order," i.e., an order from another customer to purchase the same position. Baron brokers discouraged their customers from seeking to sell shares in the house stocks, often by misrepresenting anticipated market forces and company announcements, and were frequently penalized if they permitted their customers to sell.
    1. To generate additional demands for house stocks and to represent the appearance of liquidity, Baron brokers frequently purchased shares of house stocks for customer accounts without prior authorization. While many customers complained of unauthorized trading, Baron sometimes persuaded customers to accept unauthorized trades either by applying high-pressure sales tactics or by manipulating the price of the stock up by the time payment was due.
    1. The unauthorized trading described above was one means by which Baron sought to mask its true net capital position. If it could trick the customer into ratifying and unauthorized trade, Baron improved its net capital position by replacing a discounted security with cash. If the customer refused to accept the trades, Baron often cancelled the trades after several days and then placed an unauthorized transaction in another customer's account, so that when net capital was reported, it could at least temporarily claim to have replaced volatile securities with cash. According to the Cease and Desist Order, Bear Stearns was aware of these tactics and noted that Baron's tactics included unauthorized transactions and the "parking" of house stocks with customers and other broker dealers. Bear Stearns ultimately "prohibited Baron from maintaining high unpaid customer balances and pressured Baron to sell its inventory to single 'the street' - that, is to other broker dealers, rather than to its retail customers. This directive forced Baron to reduce its unauthorized trading and parking in customer accounts, but led it to increase its parking in accounts at other broker-dealers."
    1. According to the Cease and Desist Order, Baron often moved stock out of its inventory through parking arrangements and unauthorized trades close to the end of the business day so that it could end each day appearing to be in compliance with Bear Stearns' requirement to maintain a specified level of cash on deposit at Bear Stearns, and with the Commission's net capital rule. Baron would then take stock back into its inventory the next morning and, to the extent necessary, repeat the exercise the next afternoon. During the period Bear Stearns cleared for Baron, customers failed to pay for over 80% of all purchases after 5:00 p.m.
  1. A critical aspect of the Cease and Desist Order was the following description of how a clearing broker is intimately familiar with the trading practices of the introducing brokers:

"When a clearing firm clears a purchase transaction, the clearing firm commits to pay for the securities purchased and delivers the securities to be sold into the account introduced to them by the introducing firm. With respect to some cash transactions, there is a period of time before the customer actually pays for the trade when the clearing broker has already committed to pay for the trade. If the customer has not paid for the trade at settlement, then the clearing firm advances the funds for the trade. If the customer delays payment or ultimately fails to pay, the introducing firm may be responsible for payment if it has agreed to do so under the clearing agreement. Under those circumstances, the introducing firm becomes a debtor of the clearing firm. When a customer has failed to pay for securities, the clearing firm, who has sought the extension of credit, must sell those securities from the customer's account. This transaction is frequently referred to as 'selling out the securities.' If the securities are sold for a price that is equal to or greater than the original purchase price, the clearing firm is paid in full for the initial transaction, and there is no loss on the trade. If, however, the securities are sold out at a price less than the initial purchase price, there is a loss on the trade for which the customer, and possible, the introducing firm may be responsible. When such a loss is created from selling out a purchase, the customer agreement typically provides the clearing firm a secured interest in cash and fully paid-for securities in the customer's account. Therefore, the clearing firm, or the introducing firm on its own initiative or at the direction of the clearing firm, can sell (or 'liquidate') other securities in the account to cover the loss. If there are not cash or securities in the customer's account to cover the loss, the loss is unsecured and the introducing firm or clearing firm must pursue other remedies against the customer."

  1. In its capacity as the clearing broker, Bear Stearns "provided back office services to Baron, such as maintaining books and records relating to the accounts of Baron's customers, clearing securities transactions, safekeeping Baron's customers' securities and cash balances, and providing credit to Baron customers who traded on margin." Bear Stearns also "sent confirmations, monthly statements and dividends directly to Baron customers." Bear Stearns conduct with respect to Baron, however, "extended well beyond these routine clearing functions, and included approving and disapproving trades, providing working capital and, at times, preventing Baron from rescinding certain unauthorized trades."
  1. Additionally, in an effort to artificially inflate and manipulate the price of its "house stocks," Baron:
    1. Bought from the street large positions of its house stocks;
    2. Made unauthorized purchases of these house stocks for its customers accounts;
    3. Initially purchased the house stocks in its proprietary accounts, but was immediately forced to move the stock out of its proprietary account in order to comply with Bear Stearns' deposit requirements (which prohibited too much concentration of the illiquid house stocks in Baron's inventory), and with the Commission's net capital rule; and
    4. In order to remove the illiquid house stocks from Baron's proprietary accounts and to increase the cash in those accounts, Baron routinely engaged in unauthorized transactions and parking of stock; when, despite the high pressure tactics of Baron's sales people, certain people refused to pay for unauthorized trades, the securities had to be sold out usually at a loss, which created a debit in the customer's account.
  1. Critical to the Cease and Desist Order was the Commission's finding that Bear Stearns "became aware of classic indications of unauthorized trading and parking - - a high incidence of failures to pay for trades, excessive trade cancellations, corrections and credit extensions, numerous customer complaints against Baron and a pattern of stock being sold to customers from Baron's inventory and then purchased back into the inventory by Baron close to settlement at a loss."
  2. The significance of these findings in the Cease and Desist Order cannot be overstated. Unauthorized trading and parking characterized the conduct of virtually every other Introducing Broker that is the subject of this lawsuit. If Bear Stearns employees were able "within the first two months of the clearing relationship" with Baron to observe "signs of fraudulent practices" and became aware of "classic indications of unauthorized trading and parking," it is reasonable to infer that Bear Stearns employees observed, or were deliberately reckless in their indifference to the very same signs and the very same "classic indications" of fraud among the other Introducing Brokers.
  3. The indictments against the other Introducing Brokers include similar types of misconduct similar to that detailed in the Cease and Desist Order. For example, in the recently disclosed Stratton-Oakmont Indictment, the following paragraph appears:

"It was further a part of the conspiracy that the defendants Jordan Ross Belfort and Daniel Mark Porush caused offshore entities they controlled to sell securities back to Stratton at prices that were lower than the prices at which these offshore entities had previously purchased the same securities from Stratton, as a means to transfer profits from the offshore entities to Stratton."

  1. Similarly, virtually all of the indictments (and the Cease and Desist Order) detail Introducing Brokers "purchasing securities for customers in the aftermarket (i) without receiving any authorization from those customers, (ii) in amounts and prices well above what the customers authorized, or (iii) in direct contravention of a customer's refusal to buy those securities."
  2. The Kensington Wells Indictment recites:
    1. 26 "overt acts" of Kensington Wells registered representatives making unauthorized trades, refusing to honor customer sell instructions, and using manipulative tactics with respect to XeChem stock between April 1994 and January 1996.
    2. 23 "overt acts" of Kensington Wells representatives making unauthorized trades, refusing to honor customer sell instructions, and using manipulative tactics with respect to Universal Automotive Industries, Inc. stock between December 1994 and August 1995.
    3. 45 "overt acts" of Kensington Wells representatives making unauthorized trades, refusing to honor customer sell instructions, and using manipulative tactics with respect to Videolan Technologies, Inc. between July 1995 and November 1995.
  3. It is reasonable to infer that Bear Stearns, in its role as clearing broker, was in a position to observe the clear and repeated pattern of unauthorized trades and other manipulative practices described in detail in the Kensington Wells Indictment and other criminals actions including the Cease and Desist Order.

14. Bear Stearns's Violations of Regulation T

  1. The Cease and Desist Order also found, among other things, that Bear, Stearns Securities violated Section 7 of the Exchange Act and Regulation T.(4) Regulation T, among other things, requires that a broker-dealer promptly cancel or otherwise liquidate assets obtained in the transaction or other assets in the customer's account when a customer does not pay for the purchased security within the five-day period.
  2. Under certain circumstances, a broker may apply to its designated examining authority to extend the time for payment. Such extensions are legitimate when made in good faith due to difficulty in sending the payment to the creditor on a timely basis, such as when a check is delayed in the mail. Extension requests are not made in good faith, however, when the broker-dealer requesting the extensions knows, or should know, that the extensions are being made to facilitate a fraud namely in an instance where the customer did not direct the purchase of security and the broker is simply trying to "buy time" and secure funds to pay for the trade from the customer or another source. In an introducing-clearing relationship, the broker extending credit is the clearing broker, and thus, the clearing broker is obligated to abide by the applicable law, and accordingly, is in a position to violate Regulation T.
  3. The Cease and Desist Order details how Baron requested that Bear, Stearns Securities obtain from the SEC credit extensions so that Baron and its customers' accounts would not violate Regulation T. In this way, Bear, Stearns Securities facilitated Baron's fraudulent conduct with regard to the unauthorized purchase of stocks by Baron brokers for which Baron customers refused to remit payment.
  4. Accordingly, while Baron engaged in unauthorized trades and was illegally parking the securities in a concerted effort to manipulate the market, Bear, Stearns Securities obtained numerous bad faith Regulation T extensions that provided Baron with the necessary time and credit to engage in these unlawful acts. Under these circumstances, Bear Stearns knew, or should have known, that Baron was violating the law and said violations were done in conjunction with Bear, Stearns Securities violation of Regulation T. Moreover, it was imperative that Bear Stearns secure Regulation T extensions for the other Introducing Brokers, who were performing unauthorized trades. Thus, but for Bear Stearns' direct violation of Regulation T, the Introducing Brokers could not have perpetuated their concerted practice of executing unauthorized transactions, pressuring customers to accept the trades and, if the customer refused, the unjustified liquidation of customers' assets to pay for the unwanted securities.

15. Mr. Harriton's Micro-Management

Of Bucket Shop Operations

  1. The Cease and Desist Order made the additional findings, that are contained in this subsection.
  2. In July 1995, when Bear Stearns began clearing for Baron, Baron was in a precarious financial situation, which deteriorated rapidly. Despite tight Bear Stearns' credit restrictions and other risk management efforts, it quickly became Baron's most substantial creditor. To protect Bear Stearns from suffering large losses, Bear Stearns, at Mr. Harriton's direction, charged unauthorized trades to Baron customers, repeatedly requested and obtained credit extensions without any inquiry sufficient to establish good faith, liquidated property in customer accounts to pay for unauthorized trades, refused to return customer property that had been liquidated to pay for unauthorized trades and disregarded customer instructions. These actions temporarily forestalled Baron's collapse and enabled it to operate despite its violation of the net capital requirements.
  3. Seeing significant credit exposure from Baron's trading activity, Mr. Harriton assigned a co-manager of Bear Stearns's Relationship Management Group to monitor on a daily basis unpaid purchases and Baron's compliance with Bear Stearns's equity requirements. The manager also performed detailed analyses of Baron's trading patterns which indicated Baron was executing unauthorized trades and parking securities and parking securities. He reported his analyses to his supervisor, who in turn reported them to Mr. Harriton.
  4. Large unauthorized trades: Mr. Harriton was aware of Baron's propensity to execute large unauthorized transactions. On September 1995, he became personally involved in Baron's fraud.
  5. Adler Coleman, another brokerage house, had gone out of business and declared bankruptcy. The United States Bankruptcy Court appointed a trustee to liquidate Adler Coleman's remaining assets, including securities the defunct brokerage house still held in its proprietary accounts. Two of these securities, Voxtel Advanced Mammography Systems, Inc. and Cypros Pharmaceuticals, Inc., were Manipulated Securities that Baron also owned in large quantities.
  6. In accordance with the bankruptcy proceedings, the trustee sold large amounts of these two securities The liquidation placed immediate downside pressure on the securities and caused their collapse.
  7. Baron needed to remove the declining securities from its proprietary accounts or it would violate Bear Stearns's minimum net capital requirements. Baron, however, could not find bona fide purchasers for the declining securities and, instead, placed large blocks in customers' accounts absent their authorization.
  8. Specifically, Baron placed large blocks of Voxtel Advanced Mammography in the accounts of customers who, once they learned of the transfer, refused to pay for the securities.
  9. Once a customer refused to pay for the stock, Baron would cancel or sell out the position causing severe losses to the customers while avoiding any harm to Baron or Bear Stearns.
  10. By September 1, 1995, Baron cancelled 72 Voxtel Advanced Mammography "purchases".
  11. These fictitious transfers and liquidations occurred on a massive in the accounts of Diversified Investment Fund, Inc., Diaward Steel Works, Ltd., and Fiduciary Management Services, Ltd.
  12. Mr. Harriton also required that each retail trade ticket be telefaxed to Bear Stearns. Bear Stearns then determined whether the trade would be allowed based on whether the trade increased Bear Stearns's credit exposure by making Baron a net buyer of its house stocks on that day. If the trade was allowed, the trade ticket was sent to Bear Stearns's order desk for processing.
  13. In addition, from October 3-10, Mr. Harriton sent two Bear Stearns employees to Baron's premises to stop trades that increased Bear Stearns's credit exposure -- generally, customer sales to Baron's proprietary account. Bear Stearns held such customer sell orders until the end of the trading day and only permitted them to be executed if they did not adversely affect Bear Stearns's credit exposure. Bear Stearns rejected at least 30 trades that Baron already had accepted from its retail customers. Neither Baron nor Bear Stearns told customers that Bear Stearns had placed conditions on the execution of trades in their accounts, or that Bear Stearns had blocked execution of sales of their securities to their broker.
  14. On October 11, 1995, Bear Stearns temporarily terminated its clearing agreement with Baron. Late in October 1995, Baron asked Bear Stearns to resume the clearing relationship. Bear Stearns agreed to do so.
  15. Before Baron could resume trading, however, it had to satisfy the NASD that its net capital position was stable. Because of Baron's history of net capital violations, the NASD set various limitations on Baron on November 8, 1995, including a requirement that it maintain $720,000 in excess of its minimum net capital requirement of approximately $250,000. When Baron subsequently experienced difficulty in assuring the NASD that it was in compliance with this requirement, Mr. Harriton again personally intervened with the NASD. After being told by the NASD that Baron needed additional capital to resume business, Mr. Harriton agreed, on behalf of Bear Stearns, to convert $176,000 that Baron owed Bear, Stearns Securities into a subordinated loan of $176,000. Mr. Harriton did so knowing that Baron still had not disclosed at least $1 million in liabilities stemming from unauthorized trades, which should have been reflected in Baron's net capital calculations.
  16. The Cease and Desist Order found that Mr. Harriton's was so deeply involved that he personally approved the drafts of individual letters which Bear, Stearns Securities sent to the customers of its Introducing Brokers, such as the letter it sent to Diaward on October 6, 1995.
  17. Mr. Harriton also directed Bear Stearns employees to destroy documents in direct violation of numerous regulations.
  18. Section 17(a) of the Exchange Act and Rule 17a-4 promulgated thereunder require all broker-dealers to make and keep certain documents for a specified period of time. The policy underlying the record-keeping provisions is to ensure that the SEC has access to certain basic information about securities transactions to allow it adequately to police the securities markets. Bear Stearns did not maintain a document retention policy and, instead, discarded documents relating to its clearing relationship with Baron, including those concerning its monitoring of Baron trades, original customer complaints, reports concerning Baron's trading activity, and a box of Baron's handwritten order tickets.

BEAR STEARNS'S RELATIONSHIP

WITH SPECIFIC INTRODUCING BROKERS

Kensington Wells Incorporated

  1. Kensington Wells Incorporated ("Kensington Wells"), one of the Introducing Brokers, commenced operations in or about October 1992, was a registered broker-dealer licensed by the NASD, and cleared its transactions through Bear Stearns during the relevant time period until it filed for bankruptcy in 1997. Like the other Introducing Brokers that cleared their transactions through Bear Stearns, Kensington Wells was engaged in substantial illegality during the Class Period to the detriment of plaintiffs. A criminal indictment of two of the principals and eleven other employees of Kensington Wells (plus two other individuals) was filed in July1999 and remains pending in the United States District Court for the Eastern District of New York (the "Kensington Wells Indictment")(5) .
  1. As the Kensington Wells clearing broker, Bear Stearns had: (a) access to confidential, non-public information concerning Kensington Wells' financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to Kensington Wells based upon the value of securities it held as collateral; and (c) the authority to determine whether Kensington Wells could execute transactions on behalf of its customers. During the relationship, Bear Stearns used its reputation, capital, and resources to facilitate the fraudulent operations of Kensington Wells and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities. In this way, Bear Stearns earned substantial profits from its relationship with Kensington Wells and, accordingly, failed to terminate its clearing relationship even after Bear Stearns knew, or was reckless in disregarding, that Kensington Wells was involved in substantial illegal conduct.
  2. During the Class Period, Kensington Wells was the managing underwriter for at least the following five IPOs, all of which were Manipulated Securities:

XeChem International, Inc. ("XeChem"), which was declared effective on or about April 26, 1994;


Universal Automotive Industries, Inc. ("Universal"), which was declared effective on or about December 15, 1994;



VideoLan Technologies, Inc. ("VideoLan"), which was declared effective on or about August 10, 1995;



Gum Tech International, Inc. ("Gum Tech"), which was declared effective on or about April 24, 1996, and



Retrospettvia, Inc. ("Retrospettvia"), which was declared effective on or about September 23, 1997.

  1. During the Class Period, Kensington Wells was a market-maker in at least the following securities, all of which were Manipulated Securities:

First Team Sports Inc.



Gum Tech



Iatros Health Network, Inc.



Retrospettvia (delisted)



Universal (classified as a fraudulent IPO in the Kensington Wells Indictment)



VideoLan (delisted; classified as a fraudulent IPO in the Kensington Wells Indictment)



XeChem (OTC/Bulletin Board listing; classified as a fraudulent IPO in the Kensington Wells Indictment)



Xybernaut Corporation (NASDAQ small cap listing)



  1. First Team's ADV was below 70,000 shares per day and its price was below $5.00 per share during a material part of the Class Period. First Team traded at $1.312 per share on December 7, 1998.
  2. Gum Tech's ADV was below 90,000 shares per day during a material part of the Class Period.
  3. Iatros' ADV was below 100,000 shares per day during a material part of the Class Period. The security traded at $.09 per share on December 7, 1998.
  4. Retrospettvia's ADV was below 35,000 shares per day during much of the Class Period. The security traded at less than $8.00 per share and as low as $1.50 per share during a material part of the Class Period and at $1.875 per share on December 7, 1998.
  5. Universal's ADV was below 50,000 shares per day and traded at less than $4.00 per share during a material part of the Class Period. The security traded at $1.125 on December 8, 1998.
  6. VideoLan traded at below $2.00 per share during a material part of the Class Period. VideoLan traded at $.84 per share on December 24, 1998.
  7. XeChem's ADV was below 80,000 shares per day and traded below $5.00 per share during a material part of the Class Period. In fact, it traded below $1.00 per share during at least part of the Class Period and at $.09 per share on December 7, 1998.
  8. Xybernaut's ADV was less than 100,000 shares per day during part of the Class Period and traded below $2.00 per share during a material part of the Class Period. Xybernaut traded at $5.00 per share on December 8, 1998.
  9. As the Kensington Wells Indictment alleges, from in or about April 1994 through January 1997, the defendants therein devised, oversaw, and implemented a fraudulent underwriting scheme pursuant to which Kensington Wells was the managing underwriter for the fraudulent IPOs of three securities: XeChem, Universal, and VideoLan.
  10. As the Kensington Wells Indictment alleges, each of the XeChem, Universal, and VideoLan IPOs was inherently fraudulent because in each instance the distribution of IPO stock in the market to customers was a sham distribution whereby the shares were "distributed" to "friendly customers" of Kensington Wells with the pre-arranged agreement that those customers would sell their shares back to Kensington Wells on the first day of trading.
  11. The pre-arranged scheme to sell back shares of each of the XeChem, Universal, and VideoLan IPOs to Kensington Wells was a material fact that was concealed from the investing public.
  12. Kensington Wells' consolidation and restriction of the shares of these three securities allowed it to manipulate both their prices and markets.
  13. Kensington Wells then artificially inflated the price of the shares of the three securities by employing a number of fraudulent, manipulative, deceptive, and misleading sales practices, thus generating enormous profits for Kensington Wells.
  14. The fraudulent, manipulative, deceptive, and misleading sales practices used by Kensington Wells included promoting each of these three fraudulent IPO securities with misleading and improper predictions of price increases and false representations about its business and purchasing securities of each for customers in the aftermarket (a) without receiving any authorization from those customers, (b) in amounts and prices well above what the customers authorized, or (c) in direct contravention of a customer's refusal to buy those securities.
  15. Mr. Harriton, as stated above, was personally involved in each of XeChem, Universal, and VideoLan IPOs, approved Bear Stearns's involvement, and approved the extensions of credit and subordinated bridge loans necessary to finance the underwriting of the Manipulated Securities, including XeChem, Universal, and VideoLan.
  16. Bear Stearns, as Kensington Wells' clearing broker, cleared each of the order tickets generated by Kensington Wells' initial distributions and its repurchases of the shares of each of the fraudulent IPOs. As a function of its transactional and operational responsibilities as the clearing broker, Bear Stearns knew or was reckless in not knowing that most of the shares in each of the fraudulent IPOs were immediately repurchased by Kensington Wells on the first day of trading.
  17. During the time Kensington Wells was manipulating the price of XeChem securities, the common stock traded as high as $12.75 per share. After the above-described scheme ceased, the price of the common stock fell to below $5.00 per share and XeChem was delisted from NASDAQ on February 5, 1997. XeChem now trades on the OTC/ Bulletin Board at approximately $.09 per share.
  18. Concerning the Universal IPO, in addition, Ruben Levy, who was named in the Kensington Wells Indictment, also participated in the operation of Kensington Wells and was responsible for much of the firm's day to day finances.
  19. Mr. Levy was a registered person in the securities industry and, therefore was subject to industry rules and regulations.
  20. As part of the fraudulent scheme to sell Universal shares back to Kensington Wells, Mr. Levy established a nominee account at Kensington Wells for the illegal benefit of Elias Tacher and another person.
  21. Using the account, Mr. Levy purchased 60,000 units of Universal with money provided by Mr. Tacher and the other person. On the first day of trading, Mr. Levy separated the units in that account into shares of common stock and warrants, and sold back to Kensington Wells 60,000 shares of Universal common stock at $9.00 per share, and the Universal warrants at $3.50 per warrant, for a total approximate profit of $450,000.
  22. Mr. Levy, because he was a registered person in the securities industry, was subject to the "hot issue" restriction which prohibit an individual connected with the securities industry from purchasing IPO shares directly from the underwriters in those instances when the IPO is highly sought after from the outset of public trading.
  23. Bear Stearns, as the clearing broker for Kensington Wells, knew or was reckless in not knowing that Mr. Levy was a registered person in the securities industry and was thus prohibited from purchasing Universal IPO shares.
  24. Bear Stearns, as the clearing broker for Kensington Wells which cleared each of the order tickets generated by Kensington Wells' initial distribution and its illegal repurchase of Universal shares, knew or was reckless in not knowing that Mr. Levy purchased Universal IPO shares as part of the IPO distribution in violation of the "hot issue" restriction.
  25. Bear Stearns, as the clearing broker for Kensington Wells, which cleared each of the order tickets generated by Kensington Wells' initial distribution and its repurchase of Universal shares, knew or was reckless in not knowing that Mr. Levy sold the Universal IPO shares which he had purchased back to Kensington Wells on the first day of trading.
  26. As of August 23, 1999, Universal traded at approximately $1.00 per share on extremely low volume.
  27. Concerning the VideoLan IPO, Mr. Tacher established a nominee account at Kensington Wells in the name of Ruben Levy, which was for the benefit of Elias Tacher, Salvador Tacher, and another person.
  28. Mr. Levy deposited into that account 950,000 shares of VideoLan common stock, which he had purchased directly from VideoLan for $47,500, or approximately $.05 per share. 400,000 of those shares were registered at the time of the VideoLan IPO.
  29. Pursuant to the scheme, Mr. Levy flipped his 400,000 registered share of VideoLan common stock back to Kensington Wells on the first day of trading at over $10.00 per share, generating profits of approximately $4 million. Mr. Levy additionally laundered approximately $2.7 million of these proceeds by transferring them to Biscayne Insurance Company in Hollywood, Florida to be held for the benefit of Elias Tacher, Salvador Tacher and another person. In or about and between December 1995 and October 1996, the $2.7 million was returned by Biscayne to Elias Tacher and Kensington Wells.
  30. The prospectus for the VideoLan IPO fraudulently represented that the 400,000 shares of VideoLan common stock belonged to Mr. Levy when, in truth, they belonged to Elias Tacher, Salvador Tacher, and another unnamed person.
  31. During the time Kensington Wells was manipulating the price of VideoLan securities, the common stock traded as high as $44.875 per share. After the above-described scheme ceased, the price of the common stock fell to below $5 per share and VideoLan was delisted from NASDAQ.
  32. Concerning its market-making activities, Kensington Wells also engaged in a pattern of fraudulent conduct involving the sales of the Manipulated Securities at grossly inflated prices.
  33. Bear Stearns, as the clearing broker for Kensington Wells, knew or was reckless in not knowing from its clearing of all Kensington Wells' transactions in the ordinary course of business that Kensington Wells was engaging in unlawful, fraudulent, manipulative, deceptive and misleading conduct, including the fraudulent XeChem, Universal, and VideoLan IPOs.
  34. Bear Stearns's relationship with Kensington Wells was typical of its bucket shop relationships, and the sale of XeChem, Universal, and VideoLan to the plaintiffs was typical of thousands of similar improper transactions effected and facilitated by Bear Stearns with members of the Class during the Class Period.

Hillcrest Financial Corp.

  1. Hillcrest Financial Corp. ("Hillcrest"), one of the Introducing Brokers, is a registered broker-dealer licensed by the NASD and cleared its securities transactions through Bear Stearns during the relevant time period.
  2. As the clearing broker for Hillcrest, Bear Stearns had: (a) access to confidential, non-public information concerning Hillcrest's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to Hillcrest based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of Hillcrest and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of Hillcrest, and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.
  3. In August 1998, in NASD Arbitration No. 97-02167, Thomsen v. Hillcrest Financial Corp., Bear, Stearns & Co. Inc. et al., the arbitration panel found Bear Stearns and Hillcrest jointly and severally liable, having rejected Bear Stearns's defense that it was merely a clearing broker.
  4. The arbitration claimant alleged he was the victim of a fraud in connection with the purchases of one of the Manipulated Securities, Globus Group, Inc. ("Globus"), an OTC/ Bulletin Board stock in which Hillcrest made a market. The claimant alleged that Hillcrest and Bear Stearns violated NASD and NYSE rules in connection with the sale of Globus and that Bear Stearns committed fraud by inducing him to sign a customer agreement with Bear Stearns without disclosing Hillcrest's thin capitalization. The claimant alleged further that Globus was a shell company without bona fide assets or operations and that the price of Globus stock was artificially inflated at relatively stable price levels only to suddenly decline without any intervening trading activity.
  5. Bear Stearns argued in defense that it merely performed ministerial, back-office clearing functions pursuant to its clearing arrangement with Hillcrest. Bear Stearns further argued that Hillcrest was solely responsible for hiring, training, and supervising its account executives and solely responsible for compliance oversight in its customers' accounts.
  6. The arbitration panel rejected Bear Stearns's defense and, in awarding claimant $150,000, found Bear Stearns and Hillcrest jointly and severally liable on the grounds that each had engaged in fraudulent conduct, violated the Colorado Securities Act, failed to supervise, and violated Rule 2110 of the NASD Rules of Fair Practice.
  7. Globus' ADV was less than 25,000 shares per day during a material part of the Class Period. The security traded at less than $5.00 per share and below $1.00 per share during a material part of the Class Period. The security has not actively traded since January, 1999.
  8. Bear Stearns's relationship with Hillcrest was typical of its bucket shop relationships, and the sale of Globus to the claimant was typical of thousands of similar, improper trades effected and facilitated by Bear Stearns with members of the Class during the Class Period.

D. Blech & Co.

  1. Some of the information set forth below is set forth in the Second Amended Class Action Complaint filed in In re Blech Securities Litigation, Master File No.: 94 Civ 7696 (RWS), which is pending in the United States District Court for the Southern District of New York. The action was brought on behalf of a class of persons (the "Blech Class") who purchased certain of the Manipulated Securities, naming various persons as defendants including D. Blech & Co. ("Blech") and Bear, Stearns & Co. The claims against Bear Stearns for violations of section 10(b) and common law fraud have been sustained by the Court against a motion to dismiss by Bear, Stearns & Co. See 961 F. Supp. 569 (S.D.N.Y. 1997).
  2. As clearing broker for Blech, Bear Stearns had: (a) access to confidential, non-public information concerning Blech's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to Blech based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of Blech and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of Blech, and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities, including the following (in which it made a market for the NASDAQ securities):

Advanced Surgical Inc.

Ariad Pharmaceuticals Corp.

Chemex Pharmaceuticals Inc.

DNA Plant Technology Inc.

Ecogen, Inc.

Envirogen Corp. (NASDAQ small cap)

Genemedicine, Inc.

Guilford Pharmaceuticals Inc.

HemaSure, Inc. (OTC/Bulletin Board)

ICOS Corp.

Intelligent Surgical Lasers, Inc.

LaJolla Pharmaceutical Co.

Liposome Technology Inc.

LXR Biotechnology Corp. (OTC/Bulletin Board)

Microprobe Corp.

Ministor Peripherals, Inc.

Neoprobe Corp. (OTC/Bulletin Board)

NeoRx Corp.; BioSepra, Inc.

Neurogen Corp.

New Vision Technology Corp. (OTC/Bulletin Board)

Pharmos Corp. (NASDAQ small cap)

Procept Inc. (NASDAQ small cap)

Texas Biotechnology Corp.



  1. Advanced Surgical, Inc. had a price of $.56 per share in December, 1995. The security apparently is not actively traded at this time.
  2. BioSepra's ADV was below 70,000 shares per day during a material part of the Class Period. The security traded at $1.00 per share on December 7, 1998.
  3. Chemex Pharmaceuticals Inc.'s ADV was below 50,000 share per day during a material part of the Class Period. The security had a price of $.56 per share in November, 1995. The security apparently is not actively traded at this time.
  4. DNA Plant Technology's ADV was below 50,000 shares per day during a material part of the Class Period. The security traded at below $3.50 per share and even traded at a price less than $1.00 per share during a material part of the Class Period. DNA Plant Technology's price per share was $3.50 on December 7, 1998.
  5. Genemedicine's ADV was below 100,000 shares per day and traded at less than $3.50 per share during a material part of the Class Period. The price of Genemedicine was $2.187 per share on December 7, 1998.
  6. ICOS's ADV was below 100,000 shares per day and traded below $5.00 per share during a material part of the Class Period.
  7. LXR's ADV was below 100,000 share per day, and less than 60,000 shares per day during a material part of the Class Period. The price of LXR was $1.375 per share on December 7, 1998.
  8. Blech was a market-maker in Ministor Peripherals. The price of the security was 1/64th in December, 1998.
  9. New Vision's ADV was below 30,000 shares per day and below $.0625 during a material part of the Class Period.
  10. Ariad's ADV was below 100,000 shares per day and traded below $5.00 per share during a material part of the Class Period. Ariad traded at $1.875 on December 7, 1998.
  11. Ecogen's ADV was below 50,000 shares per day and traded below $5.00 per share during a material part of the Class Period. Ecogen traded at $1.50 on December 7, 1998.
  12. Envirogen's ADV was below 40,000 shares per day and traded below $2.00 during a material part of the Class Period. Envirogen traded below $.50 per share on November 9, 1998.
  13. Guilford's ADV was below approximately 90,000 shares per day and traded below $5.00 per share during a material part of the Class Period.
  14. HemaSure's ADV was below 100,000 shares per day and, at times, below 45,000 shares per day, during a material part of the Class Period. The security traded below $5.00 per day during a material part of the Class Period. HemaSure traded at $2.719 on December 7, 1998.
  15. LaJolla's ADV was below 100,000 shares per day and traded below $5.00 per share during a material part of the Class Period. LaJolla traded at $4.31 per share on December 11, 1998.
  16. Neoprobe's ADV was below 100,000 shares per day during a material part of the Class Period and traded below $5.00 per share during part of the Class Period. Neoprobe traded below $1.00 per share on December 7, 1998.
  17. NeoRx's ADV was below 100,000 shares per day during part of the Class Period and below than 50,000 shares per day during another part of the Class Period. The price of the security was less than $5.00 per share during much of the Class Period. The security traded at $1.375 on December 7, 1998.
  18. Pharmos' ADV was less than 100,000 shares per day during part of the Class Period. The price of the security was less than $4.00 per share during much of the Class Period. The security traded at $1.719 on December 7, 1998.
  19. Procept's ADV was less than 80,000 shares per day and traded below $5.00 per share during a material part of the Class Period.
  20. Blech, certain officers of Blech, including Blech's founder David Blech, and certain affiliates of Blech, including certain trusts formed by Mr. Blech, engaged in conduct and employed devices, schemes, and artifices to defraud and engaged in acts, practices, and courses of business which operated as a fraud upon members of the Blech Class. These practices included unlawful "sham" transactions in which Blech, Mr. Blech, and his confederates participated in sales transactions involving Manipulated Securities which were not bona fide, where certain persons were on both the purchase and the sale sides, or where the sale was made with the express understanding that the shares purchased would be immediately sold back to the original seller. In addition, these sales involved undisclosed "incentives" to fund managers and others to induce them to purchase such securities. This conduct was intended to and did make it possible to artificially manipulate and inflate the prices at which the Manipulated Securities were sold to the investing public. These sham transactions made it appear to the public and the markets that there were major buyers and sellers in the markets for these securities.
  21. On September 22, 1994, Blech was forced to cease operations for failure to comply with applicable minimum net capital requirements. After this collapse, the price of the Manipulated Securities sold to the investing public by Blech and Bear Stearns, which had been the subject of the market manipulation, fell dramatically. Since then, civil and criminal investigations were commenced by the federal government.
  22. Blech engaged in a pattern of fraudulent conduct involving the sales of the Manipulated Securities at grossly inflated prices. During the Blech class period, Bear Stearns's upper management, including Mr. Harriton, became increasingly concerned about its risk of loss due to Mr. Blech's mounting leverage and concentration in small illiquid, proprietary biotechnology securities, many of which (including, among others, Ecogen, Inc.; Texas Biotechnology Corp.; Intelligent Surgical Lasers, Inc.; and Advanced Surgical, Inc.) were classified by Bear Stearns as "not acceptable" collateral due to their illiquidity and inflated price levels.
  23. By June 8, 1994, when the aggregate debit balance of Mr. Blech's Bear Stearns's margin accounts had risen to $15.9 million, Bear Stearns's Senior Managing Director, Michael Zackman, advised Mr. Blech in writing that Bear Stearns intended to "entirely eliminate" the debit balance in Mr. Blech's personal accounts over time and to establish interim debit limits to gradually reduce Mr. Blech's debit toward its elimination. Bear Stearns's letter to Mr. Blech added, "[p]lease be advised that if you cannot comply with these guidelines, we will have to consider whether we will continue our current clearance relationship." Thereafter, Bear Stearns increasingly exercised significant control over Blech's affairs in demanding that Blech sell securities at its direction in order to reduce Mr. Blech's debit balance at Bear Stearns.
  24. Bear Stearns knew that the market prices of the securities had to be maintained at artificially high levels in order for Mr. Blech to realize sufficient proceeds from the sale of those securities to eliminate his debit balance outstanding at Bear Stearns. To this end, Bear Stearns knowingly or recklessly executed manipulative sham transactions that caused the artificial inflation of both the market prices and trading volumes of the securities, and induced Blech Class members to purchase the securities based upon the false representations of market value, demand and liquidity for the securities on national securities markets made by Blech brokers.
  25. Bear Stearns's knowledge that it was executing unlawful manipulative transactions in the securities derived from, among other things: (a) the close daily personal contact between Bear Stearns's upper management and Mr. Blech concerning the sale of Manipulated Securities to reduce the aforementioned debit balance; (b) the intimate knowledge of the markets for these securities gained by Bear Stearns's hourly monitoring of Blech's trading and all major transactions at Blech involving the securities; (c) the scrutiny by Bear Stearns's margin department of the value and liquidity of the securities to determine their eligibility for margin trading; and (d) Bear Stearns's daily analysis of key Blech accounts that were commonly and systematically utilized to transact manipulative trades in Manipulated Securities.
  26. Bear Stearns, in order to prop up the price of the Manipulated Securities and maintain the artificially inflated prices at which the securities were trading during the relationship with Blech, knowingly or recklessly executed numerous "parking" transactions between Mr. Blech and his affiliates (i.e., the Blech trusts) where Bear Stearns knew that the putative securities purchasers were not genuine, but rather, were dependent upon Mr. Blech to ultimately fund their sham purchases. Bear Stearns's participation in executing the parking transactions also provided Mr. Blech with a means to: (a) defraud the securities markets and regulatory system by falsely showing that Blech had the necessary net capital and liquidity to remain a viable securities broker-dealer, underwriter and market-maker; (b) attract and induce Blech's customers and to invest in Manipulated Securities based upon false value, demand, and liquidity (thereby reducing Blech's and Mr. Blech's inventory of illiquid speculative securities and the corresponding debit balance in Mr. Blech's margin accounts at Bear Stearns); (c) continue to underwrite new initial public offerings of new Manipulated Securities; and (d) maintain the value of the securities held in custodial accounts as collateral for Mr. Blech's loans.
  27. For example, Bear Stearns knew that Ecogen, Inc. represented a substantial portion of Blech's holdings. Bear Stearns also knew that Mr. Blech was actively trading Ecogen, Inc. stock with what Bear Stearns knew to be parking accounts. Nonetheless, pursuant to this scheme, Bear Stearns entered into twenty four manipulative transactions between Mr. Blech and/or Blech and parking accounts involving the common stock of Ecogen, Inc. during the period of July 13, 1994, through August 9, 1994.
  28. Bear Stearns's upper management discussed with Mr. Blech on an ongoing basis during the summer of 1994 the inadvisability of continuing to engage in unlawful parking transactions between Mr. Blech and the parking accounts. Despite Bear Stearns's knowledge of the bogus nature of these trades, and its directives to Mr. Blech, Bear Stearns otherwise continued to engage in the manipulative parking transactions with the parking accounts in the absence of bona fide market demand and liquidity for these securities. In this way, Bear Stearns generated substantial revenues from processing transactions, earned interest income generated by the margin accounts, and protected itself from losses that would have occurred if Blech's accounts had defaulted.
  29. For example, on August 2, 1994, Bear Stearns management advised Mr. Blech in a telephone call that the increase in his debit balance to $17 million had reduced his total equity to 45% of the market value of his securities at Bear Stearns, and that he had to sell securities from his accounts in order to reduce his outstanding debit balance and increase his equity. Bear Stearns also advised Mr. Blech at that time that he should engage in "no more parking" of his securities for these purposes. Nonetheless, Bear Stearns knowingly continued to execute parking transactions for Mr. Blech thereafter, including certain of the transactions, described above.
  30. Further, on August 23, 1994, Bear Stearns management again advised Mr. Blech that he had to sell securities from his account in order to reduce his debit balance (which had increased to $18.1 million). Mr. Blech then advised Bear Stearns to sell $1.7 million of the securities to what Bear Stearns knew to be parking accounts, which sales Bear Stearns agreed to and executed. Again on August 30, 1994, when Bear Stearns again advised Mr. Blech to sell securities to reduce his debit balance, he told Bear Stearns to sell $1.5 million of the securities to what Bear Stearns knew to be parking accounts, and Bear Stearns proceeded to execute the sales.
  31. Bear Stearns knowingly or recklessly continued to execute sham transactions for Mr. Blech during September 1994 in situations where Bear Stearns determined that Mr. Blech could not otherwise reduce his debit balance to prescribed levels through genuine securities transactions. For example, on September 12, 1994, when Bear Stearns executed $1.25 million in aggregate sales of the securities to what Bear Stearns knew to be parking accounts, Bear Stearns's management made a written notation not to process the trades until the next day, after Bear Stearns had determined whether Mr. Blech's debit balances remained above prescribed interim limits so that processing the sham trades was not necessary.
  32. Notwithstanding Bear Stearns's knowledge of Mr. Blech's and Blech's perilous financial status, and daily communications between Bear Stearns's upper management and Mr. Blech regarding the need to eliminate his huge debit balances, Allan "Ace" Greenberg, the Chairman and CEO of Bear Stearns, publicly stated on or about September 14, 1994 - only eight days before Bear Stearns refused to clear any further trades for Blech, that Blech was not in any financial difficulty.
  33. As Bear Stearns became increasingly concerned about its risk of loss due to Mr. Blech's and Blech's over-leveraged accounts, Bear Stearns exercised significant control over the affairs of Mr. Blech and Blech in demanding that each sell Manipulated Securities in order to reduce the debit balances at Bear Stearns. On July 5, 1994, Bear Stearns agreed to fund the planned sale of $3.2 million in securities that were not eligible for margin trading, from Mr. Blech's and Blech's accounts to affiliate accounts controlled by Mr. Blech. In this way, Bear Stearns reduced the credit risks associated with carrying Mr. Blech's and Blech's highly leveraged accounts and earned substantial transactional fees and interest income generated in the affiliates' accounts, which also contained highly leveraged balances.
  34. Although Bear Stearns knew that the purchasers were affiliates and nominees of Mr. Blech, Bear Stearns executed the sales of the securities to the affiliated accounts so that they appeared to the investing public to be the product of independent market forces. In doing so, Bear Stearns executed and reported transactions that were not genuine, were funded by the use of margin on securities deemed unacceptable for margin by Bear Stearns, and further created the illusion of value, demand, and liquidity for the securities on national securities markets.
  35. Bear Stearns knew or recklessly disregarded that Mr. Blech and Blech were involved in the illegal scheme to engage in sham transactions and artificially inflate and maintain trading volumes and market prices described above. Among other things, at least one of the confederates with whom Mr. Blech engaged in sham transactions used a Depository Trust Corporation ("DTC") account number. On several days between July and September 1994, the sham trades between Blech and this individual accounted for the overwhelming majority of the trading volume in certain of these securities. Moreover, during this same period, Bear Stearns was closely monitoring Blech trades, as the result of concerns regarding Blech's net capital position. Indeed, by this time Bear Stearns had, on at least one occasion, already threatened to stop clearing trades for Blech.
  36. Thus, Bear Stearns's compliance officers knew or recklessly disregarded that the same DTC numbers appeared on both sides (i.e., as both purchaser in one trade and seller in another) of very large trades involving hundreds of thousands of shares of the same securities. In this way, among others, Bear Stearns knew or was reckless in knowing of this scheme, and yet it continued to clear trades and extend credit for Blech because it was very profitable for Bear Stearns to do so. Bear Stearns only ceased clearing trades and extending credit for Blech when Blech could no longer meet its regulatory net capital requirements and Bear Stearns, itself, was at risk of losing money.
  37. On several occasions during the summer of 1994, Mr. Blech did not place enough cash into the bank accounts designated to cover the fraudulent transactions described above. Because, in these instances there was not enough money in the accounts to pay for the securities on the settlement date (even taking into account available margins), the banks declined to confirm and pay for the securities.
  38. Several times when this occurred, the individual nominees whose accounts were involved received telephone calls from John Todona, a Bear Stearns representative, asking why the banks had refused to affirm the trades. Mr. Todona was told, in words or substance, to "speak to Blech." In this way, too, Bear Stearns was directly advised that Mr. Blech was funding purchases by others of the very securities he was selling.
  39. Bear Stearns did not need to ask why or how Mr. Blech was personally involved because it knew. A typical response from a Bear Stearns representative in Mr. Todona's position, rather was "I'll" get back to you. Minutes later, the individual whose bank had declined to pay for the trade would receive a telephone call from Mr. Blech. Even though the individual whose account was involved in the transaction had not informed Mr. Blech that the trades would be declined, during those calls Mr. Blech typically stated, in words or substance, that he "couldn't have any Dk'd"(6) and that he would wire additional funds. Thus, in addition to the matters alleged above, Bear Stearns knowingly or recklessly participated in the scheme by directly contacting Mr. Blech whenever Blech needed to put more money into accounts in which these sham transactions were effected.
  40. As a direct result of Bear Stearns's conduct, the price of the Manipulated Securities purchased by Blech Class members was artificially inflated and maintained at levels above that at which they would have traded in the absence of said conduct, and Bear Stearns profited at the expense of Blech Class members.
  41. Especially during the summer of 1994, Mr. Blech, through Blech, refused to accept sell orders from investors who wished to dispose of Manipulated Securities. Moreover, at times, Mr. Blech and Blech would refuse to execute sale transactions on behalf of customers in securities in which Blech made markets unless the customers agreed to purchase other securities promoted by Blech. The purpose and effect of this conduct was to maintain the inflated market prices of the securities sold to the public.
  42. This scheme presupposed that the fraudulent sales and purchases of the Manipulated Securities would continue indefinitely. A constant stream of transactions was necessary because: (a) if the sham purchases ceased, Blech's inventory would increase and the price for the securities that had been artificially inflated would fall causing substantial losses to Mr. Blech, his trusts and Blech; and (b) Mr. Blech's confederates needed to use the proceeds of the arranged "sales" in order to pay for each new purchase pursuant to the scheme.
  43. The entire scheme collapsed on September 22, 1994, when Blech failed to meet the applicable net capital requirements of the SEC and NASD. Bear Stearns also began to dishonor trades made by Blech's confederates. Bear Stearns's refusal to accept, and pay for, securities purchased by Mr. Blech through Blech, produced a domino effect, as trades involving millions of dollars of Manipulated Securities, supposedly purchased by third parties, but many of which were in fact part of the illegal and manipulative conduct, could not settle.
  44. As a direct result of the collapse of the scheme, the price of the affected Manipulated Securities fell to levels which would have prevailed in the absence of the fraudulent and manipulative conduct alleged herein. The collapse reportedly left over $200 million in investor losses.

Sterling Foster & Company, Inc.

  1. Bear Stearns cleared for Sterling Foster, Inc. ("Sterling Foster") during the Class Period. On or about September 18, 1996, the NASD Market Surveillance Committee filed a complaint (the "NASD Complaint") against Sterling Foster and certain Sterling Foster officials, charging that Sterling Foster had made millions of dollars in illegal profits in connection with, among other things, an initial public offering of stock of Advanced Voice Technologies, Inc. News of the complaint was reported on October 8, 1996, on the Bloomberg news wire. On October 9, 1996, the Wall Street Journal published an article regarding wrongdoings by Sterling Foster. On February 13, 1997, the FBI raided Sterling Foster's headquarters, as reported by Newsday on February 14, 1997, and Bloomberg on February 13, 1997. On February 14, 1997, the SEC filed a complaint in the Southern District of New York against Sterling Foster and certain of its officers for, among other things, defrauding investors out of at least $75 million by manipulating the price of Manipulated Securities, including securities, in which it was a market-maker, of Advanced Voice Technologies, Inc.; Com/Tech Communication Technologies, Inc. (OTC/Bulletin Board); Embryo Development Corporation (OTC/Bulletin Board); Applewoods Inc.; Lasergate Systems, Inc. (OTC/ Bulletin Board); and ML Direct Inc. (OTC/Bulletin Board) ("Sterling Foster Issuers").
  2. Advanced Voice's ADV was below 40,000 shares per day during at least a material part of the Class Period. The security traded at a price of $.06 or less during much of 1998.
  3. Applewoods' ADV was below 10,000 shares per day during a material part of the Class Period. The security traded at a price of $.19 on October 23 1998.
  4. Com/Tech's ADV was below 25,000 shares per day during a material part of the Class Period. The security traded at below $4.00 per share since mid-1996 and below $1.00 since late 1996.
  5. Embryo's ADV was below 25,000 shares per day during a material part of the Class Period. The security traded at $.05 per share on December 8, 1998.
  6. Lasergate's ADV was below 90,000 shares per day during most of the Class Period. The security traded at below $5.00 per share and below $1.00 per share during a portion of the Class Period.
  7. ML Direct's ADV was below 100,000 shares per day during most of the Class Period. The security went public at $17 per share and, within six months, collapsed to below $1.00 per share.
  8. In December 1998, the SEC settled the civil action charging Sterling Foster, its president, and three other related parties with securities fraud in obtaining approximately $75 million from its retail customers in the sale of Manipulated Securities. The firm and its president, Adam Lieberman, agreed to pay approximately $11.5 million of the money received from the alleged fraud. The related parties pled guilty to felony charges and agreed to disgorge profits totaling approximately $32 million.
  9. In or about November 1998, Randolph Pace, the former owner of Rooney-Pace Inc., and Alan Novich, an attorney, were indicted in this district on charges of conspiracy to commit securities fraud, mail fraud, and wire fraud and making false statements in public offerings involving Sterling Foster, resulting in an alleged $100 million in illegal profits to the defendants and their co-conspirators.
  10. Beginning in or about October 1986, the SEC suspended Mr. Pace from association with any broker-dealer for violations of the federal securities laws and the rules and regulations of the SEC. Subsequent securities law violations led to additional, lengthier, and broader suspensions of Mr. Pace. During one of these suspensions, in or about late 1993 and early 1994, Messrs. Pace and Novich entered into a secret, unlawful agreement with a co-conspirator, Adam Lieberman, concerning the formation, operation, and control of Sterling Foster. Mr. Lieberman served as the President and nominal 100% shareholder of Sterling Foster. As part of the illegal agreement, Mr. Pace was charged in the indictment with "assisting [Mr.] Lieberman [to] obtain a securities clearing agreement for Sterling Foster with Bear, Stearns Securities Corp." as well as indirectly providing Mr. Lieberman with capital for Sterling Foster, determining the public offerings of securities in which Sterling Foster would participate as an underwriter, determining the terms and conditions of those public offerings, exercising supervisory control over Sterling Foster's business activities, including the amount of Mr. Lieberman's compensation, and secretly having the right to receive Sterling Foster's net profits.
  11. The indictment charges Messrs. Pace and Novich with acquiring significant equity positions in the "Sterling Foster Issuers" as a condition of arranging public offerings of securities on behalf of these corporations, and then obtaining registration rights for the securities beneficially owned and controlled by Messrs. Pace and Novich, and influencing the market price of the securities after the public offerings of the securities by, among other things, controlling the supply of securities of those corporations. To control the market for the securities of the Sterling Foster Issuers, Messrs. Pace and Novich secretly reached agreements with certain selling security holders to sell their holdings at pre-arranged prices (that were substantially below the offering price and then current market prices) to Sterling Foster at the direction of Messrs. Pace and Novich, despite the existence of so-called "lock-up" agreements. The lock-up agreements, detailed in the relevant prospectuses, were purported restrictions on insiders and certain other purchasers preventing them from selling their securities for a fixed period of time. This was a device designed to engender public confidence in the Manipulated Securities. Sterling Foster would sell to its retail customers the securities registered on behalf of certain selling security holders in connection with the public offerings of securities on behalf of the Sterling Foster Issuers. Pursuant to this secret understanding, in connection with the Sterling Foster Issuers' public offerings, Mr. Pace, Novich, and others caused Sterling Foster to confirm sales of securities to its retail customers in amounts substantially greater than Sterling Foster maintained in its proprietary trading accounts. Sterling Foster thereby created a short position in these securities that it would cover with securities registered on behalf of certain selling security holders. To effectuate this scheme, Sterling Foster caused certain selling security holders to be released improperly by pre-arrangement from the lock-up agreements shortly after the effective date of the public offerings. Sterling Foster then used these restricted securities to cover its short positions, thereby earning millions of dollars of trading profits.
  12. The indictment charges Messrs. Pace and Novich with securities law violations in connection with each of the public offerings and other financing transactions with respect to the Sterling Foster Issuers including among other things: (a) the registration of the Issuers' securities under terms and conditions dictated by Messrs. Pace and Novich; (b) the conveyance of significant equity positions in the Issuers to Messrs. Pace and Novich and others for bogus consulting services; (c) orchestrating sham lock-up agreements; (d) generating interest in and a market for the Sterling Foster securities through a pattern of material misrepresentations and omissions of material facts to retail customers; and (e) the sale of securities issued by the Sterling Foster Issuers at inflated prices with profits flowing to Sterling Foster, Mr. Pace, and Novich. These activities occurred in connection with public offerings of the Sterling Foster Issuers between mid-1984 and late-1996, and the securities law violations continued until September 1998.
  13. The securities law violations alleged in the indictment could not have been committed absent the existence of a securities clearing agreement. Mr. Pace is reportedly a close friend of Mr. Harriton. Rooney-Pace had been a clearing customer of Bear Stearns until it was shut down by regulators in 1987. Mr. Pace funneled clearing customers to Mr. Harriton. In addition, "New York state investigators have been interested in the relationship between Mr. Pace and Matthew Harriton, the son of [Richard Harriton]." The indictment expressly charges that one of the key acts Mr. Pace undertook in connection with illegally forming and operating Sterling Foster was to arrange for the securities clearing agreement with Bear Stearns. Bear Stearns could not perform its duties as the clearing broker for Sterling Foster without knowledge or reckless disregard of the illegal activities charged in the Pace Indictment.
  14. The ML Direct IPO is typical of Bear Stearns's concerted effort to engage in a scheme with the Introducing Brokers to defraud investors.
  15. On September 3, 1996, Patterson Travis, Inc. ("Patterson") underwrote an IPO for 1.1 million shares of ML Direct common stock (including over allotment) and 485,000 warrants, which were originally offered in units of two shares of stock plus one warrant at $15 per unit. Sterling Foster immediately acquired the majority of this stock at prices ranging from $13.25 to $15 per share, even though the IPO price was approximately $7.50 per share (each unit of two shares was offered at $15 per unit). The market closed on September 4, at $15.25 per share.
  16. Approximately 2.4 million shares of ML Direct common stock were also registered as a shelf registration and were distributed to inside shareholders. According to the prospectus filed in connection with the registration, these inside shareholders agreed to a lock-up that prohibited selling these shares before the end of a twelve-month period commencing on the effective date of the offering unless the restriction was waived by Patterson.
  17. During the next two days of trading, Sterling Foster sold 3.375 million shares of ML Direct. As a result, its short position exceeded the total amount of shares issued in the IPO. Given the number of shares shorted by Sterling Foster, it was impossible for Sterling Foster to cover this massive short position. Thus, on September 9, 1996 (the settlement date for the shares sold on September 4, 1996), Sterling Foster failed to deliver shares to Bear Stearns's stock-loan department to cover the short position.
  18. As stated above, it was common for the Introducing Brokers to borrow stock from Bear Stearns's stock-loan department to cover short positions on the settlement date. Here, however, Bear Stearns had no ML Direct stock. Instead, Sterling Foster had entered into a series of secret purchase agreements with the ML Direct inside shareholders who owned the previously shelved stock and who were forbidden to sell the stock absent a waiver from Patterson. Accordingly, and in violation of the lock-up provisions, Sterling Foster purchased the 2.4 million shares of restricted securities. Sterling Foster then delivered the 2.4 million shares to Bear Stearns after Patterson released the twelve-month restriction.
  19. Sterling Foster purchased the restricted securities from the inside shareholders at approximately $3.25 per share. Thus, Sterling Foster covered its short position (after short sales to the public at $13 to $14 per share) with stock acquired at $3.25 per share. Given these circumstances, Sterling Foster's profit exceeded $24,000,000.
  20. Sterling Foster guaranteed itself this profit because prior to the September 4, 1996, offering, Sterling Foster entered into a series of undisclosed agreements with the ML Direct inside shareholders (who were to own the restricted stock after the IPO) whereby Sterling Foster would acquire whatever stock was needed to cover its massive short position at $3.25. This agreement was never disclosed to ML Direct shareholders who purchased on the IPO and was in direct contradiction to the prospectus that stated the 2.4 million shares were subject to a twelve month lock-up and that there was "no agreement or understanding with any Selling Security holders with respect to the release of the securities prior to the respective periods" and that there was "no present intention of releasing any or such securities prior to such periods".
  21. The price of ML Direct common stock plummeted following Sterling Foster's purchase of the restricted stock at $3.25 and its use of the restricted stock to cover short positions incurred at $13 to $14.
  22. Bear Stearns knew prior to the effective date of the IPO that Sterling Foster was involved in this scheme. First, Bear Stearns required all Introducing Brokers to prearrange underwriting loan commitments with it prior to the effective date. Sterling Foster's involvement with the inside selling shareholders who owned the restricted stock and its plan to purchase the restricted stock at $3.25 required Bear Stearns's loan commitments which received Mr. Harriton's approval. Second, Bear Stearns was also told by Sterling Foster that it intended to sell a substantial number of shares short following the IPOs effective date and that Sterling Foster intended to cover this short position through the purchase of the 2.4 million shares of restricted stock.
  23. In connection with Sterling Foster's plan to acquire the 2.4 million shares of restricted stock, Bear Stearns requested and received from Sterling Foster a copy of the preliminary prospectus distributed in connection with the IPO of the 1.1 million shares of common stock. Accordingly, Bear Stearns knew that this registration statement and prospectus contained a series of covenants barring the sale of the restricted stock.
  24. After learning about Sterling Foster's illegal plan and that the preliminary prospectus and registration statement contained false and misleading statements regarding the restricted stock's transferability, Bear Stearns, instead of requiring disclosure of these alleged acts, demanded that Sterling Foster deposit $3 million in Bear Stearns's account as security. Also, Bear Stearns requested that Mr. Lieberman give a personal guarantee for any losses Bear Stearns might incur in the ML Direct transaction.
  25. Bear Stearns also knew, at least on or before September 12, 1996, of the approximately 400% profit made by Sterling Foster on the short sales and coverage by restricted shares from the inside selling shareholders because Bear Stearns paid the selling shareholders from the Sterling Foster trading account. Officials at Bear Stearns also received documents disclosing the number of shares being delivered and the price to be paid for those shares.
  26. After the effective date for the ML Direct IPO and the commencement of the short sales by Sterling Foster (September 4, 1996), Bear Stearns monitored the matter carefully and e-mail was delivered to Mr. Harriton before 8:30 a.m. regarding Bear Stearns's credit risk with respect to Sterling Foster.
  27. Bear Stearns, knowing of the fraud, joined in, permitted, and facilitated said fraud and market manipulation by:
    1. giving Sterling Foster permission to do the underwriting and agreeing to act as clearing broker for the underwriting;
    2. extending credit to Sterling Foster during the period that Sterling Foster's trading account and overall accounts maintained short positions, including a $23 million margin call that was not satisfied prior to the delivery of the shares from the selling shareholders, thereby making Bear Stearns, in effect, an unsecured creditor of Sterling Foster for over $23 million during that period of time;
    3. sending out false confirmations to purchasers of ML Direct stating that Sterling Foster, with respect to these transactions was acting as principal and making a market in ML Direct thereby implying that the purchases were market transactions rather than, as Bear Stearns knew, disclosing that the public had purchased from an underwriting in which Sterling Foster was making a profit of over 400%; and
    4. receiving $23 for each trade of ML Direct by Sterling Foster.
  28. The NASD Complaint details several other fraudulent IPOs conducted by Sterling Foster for which Bear Stearns provided clearing services and earned substantial fees. The circumstances of each, detailed below, clearly show that Bear Stearns, as the clearing broker involved in each transaction, was aware of the fraud, participated in it, and profited substantially as a result of the transaction fees generated during the IPO and in after market-trading.
  29. Specifically, on or about November 9, 1994, a registration statement was filed with the SEC concerning the Advanced Voice IPO. The IPO called for the registration of one million units of Advanced Voice. Additionally, pursuant to SEC Rule 415, a separate "shelf" offering was registered, to be sold "from time to time," consisting of 1,519,756 shares of common stock owned by certain affiliated and non-affiliated people or entities (including the shares owned by Mr. Novich), collectively referred to as the "Selling Securityholders." The company's registration statement included a prospectus dated February 6, 1995, for use in the IPO (the "Offering Prospectus"), and an "alternate" prospectus for use in connection with any underwriting or distribution of the Selling Securityholders' securities. Many of the same Selling Securityholders appear with shelf-registered securities in connection with other IPOs conducted by Sterling Foster, as described below.
  30. According to the offering prospectus, all of the Selling Securityholders had agreed in writing not to sell any of their shares without Sterling Foster's prior written consent for "lock-up" periods ranging from thirteen months (for bridge lenders) to twenty-four months (for all others) from the effective date of the IPO, all subject to earlier release at any time at the sole discretion of Sterling Foster. The offering prospectus also specifically stated that "[t]he resale of the securities of the Selling Securityholders are [sic] subject to Prospectus delivery and other requirements of the Securities Act of 1933, as amended."
  31. On February 6, 1995, the SEC declared effective the registration statement filed in connection with the Advanced Voice IPO and on February 7, 1995, Sterling Foster successfully completed the Advanced Voice IPO by distributing all 1,000,000 units to customers at a price of $5.50 per unit.
  32. According to the NASD Complaint, Sterling Foster's sales manager instructed the firm's sales force to solicit customers to commit to aftermarket purchases of Advanced Voice common stock after the company's registration statement was declared effective, but before aftermarket trading had begun. Moreover, in many instances, registered representatives had already solicited aftermarket purchases during the offering period and before the registration statement was declared effective.
  1. As detailed in the NASD Complaint, Advanced Voice units, common stock, and Class A warrants all were approved for listing on the Nasdaq Small Cap Market, and trading began on February 7, 1995. Sterling Foster, acting through Mr. Kellerman, the firm's Head Trader, entered its first quotation in Advanced Voice units at 11:59:09, immediately before the market opened for trading, and crossed the market with a bid of $12.00 and offer of $13.50. The inside bid had been $15.00 per unit. As a result, four other market-makers were forced to significantly reduce their bids in order to uncross the posted quotations, and the inside prices were established at 12:01:03 p.m. with a bid of $13.00 and an offer of $13.50 per unit.
  2. Two hours before the market opened, Sterling Foster purchased back a total of approximately 200,000 units, or 66% of the 301,500 total units allocated to the selling group, from four of its members. As discovered by the NASD during its investigation and detailed in the NASD Complaint, the order tickets for the four purchase transactions were time stamped between 9:58 a.m. and 10:37 a.m., and all were executed by Sterling Foster management at 12:03 p.m., immediately after the market opened, at a price of $13.00 per unit. As a result of these purchases, Sterling Foster controlled approximately 1,048,500 Advanced Voice units, or 91% of the 1,150,000 total units distributed in the IPO, prior to the opening of aftermarket trading.
  3. Bear Stearns was aware of this at the time of the IPO by virtue of the fact that it cleared each of the order tickets generated by both Sterling Foster's initial distribution and the repurchase of the stock by Sterling Foster in an effort to control the market for Advanced Voice. In this way, Bear Stearns earned substantial transactional fees and other clearing related fees on both the distribution and repurchase.
  4. Lieberman personally sold Advanced Voice units to thirty-five customers during the IPO, thirty-three of whom "flipped" or immediately sold back their units to Sterling Foster in the first five minutes of aftermarket trading, all at a price of $12.875 per unit, more than twice the $5.50 public offering price. In another instance, Lieberman had sold 45,000 IPO units (4% of the entire offering) to Carico, Inc. ("Carico"), another corporation wholly owned by attorney Alan Novich. One week later, on February 14, 1995, Carico/Novich sold the same 45,000 units back to Sterling Foster at $16.50 per unit, triple the public offering price, resulting in an immediate net profit of approximately $495,000. In total, the firm purchased back approximately 278,250 IPO units (24% of the public float) from its own retail customers on the first day of aftermarket trading, a fact known to Bear Stearns by virtue of the fact that it cleared each of these trades and collected enormous transactional fees.
  5. When trading began in Advanced Voice common stock, neither Sterling Foster nor any member of the IPO selling group, was listed as a market-maker, a fact known to Bear Stearns at the time the IPO became effective. Nevertheless, Sterling Foster, entered its first quotation at 12:02:17 p.m. with a bid of $12.00 and an offer of $13.00 per share and illegally served as a market-maker. When the firm entered its initial quotation, it shared the inside offer with three other market-makers. However, by 12:05:21 p.m., the other dealers all had substantially raised their offers, leaving Sterling Foster with the sole inside offer at $13.00, which the firm maintained until 12:08:18 p.m., when it increased its offer to $13.50 per share, where the firm remained with the sole inside offer. During that three minute period, the firm's inside offer of $13.00 was $.75 to $1.50 below the next lowest offer quoted by any of the other market-makers. At 12:08:33 p.m., only fifteen seconds after up-ticking to $13.50, Sterling Foster raised its offer to $14.00 per share. The next lowest offer at the time was $14.25.
  6. According to the NASD Complaint, during the ten minute period between 12:01 p.m. and 12:10 p.m. when Sterling Foster maintained the inside offer for Advanced Voice common stock at $13.00 per share, Sterling Foster time-stamped and executed approximately 958 order tickets for retail customers of the firm who purchased a total of approximately 2,355,085 shares of Advanced Voice common stock (more than double the number of units sold in the IPO) in principal transactions at prices ranging from $12.25 to $12.75 per share. Many of these retail customer purchases were solicited through "cold calls" by Sterling Foster's sales force prior to the opening of aftermarket trading in the stock. Most of these retail customers were subjected to high pressure, "boiler room" type sales tactics, which included, but were not limited to, the following: "tie-ins" (requiring aftermarket purchases as a condition of receiving units in the IPO); "wooden tickets" (unauthorized purchases); and fraudulent and deceptive misrepresentations and omissions of material fact, including baseless predictions of a substantial and immediate rise in the aftermarket price of the securities. Again, Bear Stearns cleared each one of these trade tickets and intentionally ignored or recklessly disregarded Sterling Foster's conduct and continued to earn huge transactional revenues. Moreover, many of these customers purchased shares of Advanced Voice on margin and Bear Stearns supplied the necessary credit to make this possible.
  7. At the close of the market on February 7, 1995, following the first afternoon of public trading in the securities of Advanced Voice, Sterling Foster's proprietary trading account maintained an enormous short position of approximately 2,120,560 shares of common stock, an amount almost double the company's public float. At the day's closing price of $13.50, the firm's short position was valued at approximately $28,627,560. According to the NASD Complaint, the amount was more than ten times the firm's net capital. Bear Stearns extended the necessary credit to finance this huge margin debit and charged Sterling Foster an unusually high interest rate. Under normal circumstances, the size of the margin debt would have been a risky undertaking for Bear Stearns, and it would have immediately compelled Sterling Foster to post additional capital as security or lighten the debit. Bear Stearns, however, was not concerned with the magnitude of the debt as it was part of a preconceived scheme to manipulate the price of Advanced Voice. Accordingly, Bear Stearns was not at risk and, instead, profited.
  8. In fact, according to the NASD Complaint, Sterling Foster had concocted a scheme to release the lock-up agreements in conjunction with the firm's purchase of all the Selling Securityholder stock at a substantial discount to the prevailing market price. In this way, Bear Stearns was never at risk and Sterling Foster was assured that the scheme would generate huge profits.
  9. Specifically, Sterling Foster covered its enormous short position in Advanced Voice common stock by purchasing all 1,519,756 restricted shares owned by the twenty four Selling Securityholders at a price of $2.00 per share, an amount that represented a tremendous discount to the prevailing market price for the securities. The purchase of the 1,519,756 restricted shares at the $2.00 level placed tremendous downside pressure on Advanced Voice and caused it to collapse. Sterling Foster, however, was able to cover its substantial short position and earn millions. Bear Stearns was aware and participated in this fraud because it cleared each transaction, earned tremendous profits from the transactions, and had extended the margin credit necessary to perpetuate this fraud. Bear Stearns's involvement was critical; absent its willingness to float the margin debt long enough for Sterling Foster to short the market for Advanced Voice and then cover the short sales with the repurchase of restricted stock, Sterling Foster could not have engaged in this scheme. Bear Stearns as a willing and active participant earned millions in interest income and fees as it cleared these fraudulent trades. Moreover, Bear Stearns, as the clearing broker, knew that restricted stock was used to cover this huge short position but, nevertheless, cleared the trades regardless of the prohibitions printed on the face of the securities.
  10. Mr. Harriton was personally involved in the Advanced Voice IPO, approved Bear Stearns's involvement, and approved the extensions of the necessary credit and subordinated bridge loans necessary to finance the underwriting. Mr. Harriton knew that Sterling Foster had shorted the market for Advanced Voice but, instead of confronting Sterling Foster, he participated in the scheme by approving the extension of the necessary credit and clearing services. In return, Bear Stearns earned millions in profits.
  1. Bear Stearns knew that Sterling Foster was involved in the scheme prior to the effective date of the IPO. First, Bear Stearns required all Introducing Brokers, including Sterling Foster, to prearrange underwriting loan commitments with it prior to the effective date. Sterling Foster's involvement with the Selling Securityholder shareholders who owned the restricted stock as well as its plan to purchase the restricted stock at a materially below market price required Bear Stearns loan commitments and Mr. Harriton's approval. Second, Bear Stearns was also told by Sterling Foster that it intended to sell a substantial number of shares short following the IPOs effective date and that Sterling Foster intended to cover this short position through the purchase of the restricted stock. Bear Stearns and Mr. Harriton would not have permitted Sterling Foster to incur such a huge margin debit unless they knew Sterling Foster had conceived of a plan to guarantee its repayment and, in the process, make Bear Stearns an enormous amount of money.
  2. In connection with the Advanced Voice IPO, Sterling Foster delivered to Bear Stearns a copy of the preliminary prospectus distributed in connection with the IPO. Accordingly, Bear Stearns knew that this registration statement and prospectus contained a series of covenants barring the sale of the restricted stock.
  1. Sterling Foster's commission of fraud in connection with other underwritings is also detailed in the NASD Complaint and Bear Stearns's participation is clearly evident given the circumstances.
  2. On or about August 23, 1995, Sterling Foster agreed to act as managing underwriter of a firm commitment IPO consisting of one million shares of Com/Tech common stock at an offering price of $5.00 per share, and on or about August 23, 1995, a registration statement was filed with the SEC in connection with the Com/Tech IPO. In addition to the one million IPO shares, Com/Tech registered, pursuant to SEC Rule 415, a separate "shelf" offering, to be sold "from time to time," consisting of 1,760,000 shares of common stock owned by certain affiliated and non-affiliated people or entities, collectively referred to as the "Com/Tech Selling Securityholders." The company's registration statement included a prospectus for use in the IPO, and an "alternate" prospectus for use in connection with any underwriting or distribution of the Selling Securityholders' securities.
  3. According to the Com/Tech offering prospectus dated August 23, 1995, all of the Selling Securityholders had agreed in writing not to sell any of their shares without Sterling Foster's prior written consent for "lock-up" periods ranging from thirteen months (for bridge lenders) to twenty four months (for all others) from the effective date of the IPO, all subject to earlier release at any time at the sole discretion of Sterling Foster. The offering prospectus also specifically stated that "[t]he resale of the securities by the Selling Securityholders are [sic] subject to Prospectus delivery and other requirements of the [Securities Act of 1933]....[and] Com/Tech Selling Securityholders and intermediaries through whom such securities are sold may be deemed 'underwriters' within the meaning of the Act with respect to the securities offered, and any profits realized or commissions received may be deemed underwriting compensation."
  4. According to the NASD Complaint, on August 23, 1995, the SEC declared effective the registration statement filed in connection with the Com/Tech IPO, and Sterling Foster completed the Com/Tech IPO by distributing all 1,000,000 shares to customers at a price of $5.00 per share.
  5. As detailed in the NASD Complaint, Com/Tech common stock was approved for listing on Nasdaq and trading began on August 24, 1995. At the conclusion of trading on that day, Sterling Foster held a net short position of approximately 2,000,000 shares - a short position nearly double the company's public float. At the day's closing price of $10.125, Sterling Foster's short position was valued at over $20,000,000, an amount that under normal circumstances, would have represented a tremendous financial risk to the firm and to Bear Stearns.
  6. This risk was actually nonexistent because, according to the NASD Complaint, Sterling Foster's enormous short position was to be covered by the release of the lock-up agreements and the purchase of all 1,760,000 shares owned by the thirteen Com/Tech Selling Securityholders at a price of $1.50 per share (except for one person who received $2.00 per share). The $1.50 per share amount represented a tremendous discount to the prevailing market price for the securities and guaranteed Sterling Foster an enormous trading profit. Additionally, this placed tremendous down side pressure on the price of Com/Tech and eventually caused it to collapse.
  7. Bear Stearns earned substantial revenues from interest income generated on the financing of Sterling Foster's huge margin debit balance. Additionally, Mr. Harriton approved the issuance of the subordinated bridge loans necessary to finance the underwriting and approved Bear Stearns's extension of the credit necessary to finance the margin debit balance. Moreover, Mr Harriton and Bear Stearns were delivered copies of the preliminary prospectus and, as a result, knew that Sterling Foster had covered its huge short position with shares of restricted stock that had been acquired in violation of the restrictions imposed on it by the covenants contained in the Prospectus. As a result, Bear Stearns earned substantial fees and generated substantial profits on the Com/Tech IPO and, through its direct involvement, perpetrated this scheme with Sterling Foster.
  1. The NASD Complaint details an additional scheme perpetrated by Sterling Foster and Bear Stearns's involvement and direct participation is evident from the circumstances.
  2. In November 17, 1995, Sterling Foster agreed to act as managing underwriter of a firm commitment IPO consisting of one million shares of Embryo common stock at an offering price of $5.00 per share, including selling compensation to the firm of $.50 (10%).
  3. On or about November 17, 1995, a registration statement was filed with the SEC in connection with the Embryo IPO. In addition to the one million IPO shares, Embryo registered, pursuant to SEC Rule 415, a separate "shelf" offering, to be sold "from time to time," consisting of 3,030,000 shares of common stock owned by certain affiliated and non-affiliated people or entities, collectively referred to as the "Embryo Selling Securityholders." The company's registration statement included a prospectus for use in connection with any underwriting or distribution of the Selling Securityholders' securities.
  4. According to the Embryo offering prospectus dated November 17, 1995, all of the Selling Securityholders had agreed in writing not to sell any of their shares without Sterling Foster's prior written consent for "lock-up" periods ranging from thirteen months (for bridge lenders) to twenty four months (for all others) from the effective date of the IPO, all subject to earlier release at any time at the sole discretion of Sterling Foster. The offering prospectus also specifically stated that "[t]he resale of the securities of the Selling Securityholders is subject to Prospectus delivery and other requirements of the [Securities Act of 1933]....[and] Selling Securityholders and intermediaries through whom such securities are sold may be deemed 'underwriters' within the meaning of the Act with respect to the securities offered, and any profits realized or commissions received may be deemed underwriting compensation."
  5. As detailed in the NASD Complaint, on November 17, 1995, the SEC declared effective the registration statement filed in connection with the Embryo IPO, and Sterling Foster and a "selling group" that comprised six other broker-dealers successfully completed the Embryo IPO by distributing all 1,000,000 shares to customers at a price of $5.00 per share. By the end of trading on that day, Sterling Foster's short position was valued at over $27,000,000, an amount that under normal circumstances, would have represented a tremendous financial risk to the firm and Bear Stearns which had undertaken the commitment to finance the margin debit balance.
  6. Bear Stearns financed Sterling Foster's margin debt and earned substantial interest income as a result. Moreover, Mr. Harriton approved Bear Sterns's involvement in the IPO, the extension of the necessary financing, and the clearing of the trade tickets even though it was apparent that Sterling Foster had substantially shorted the stock of Embryo within hours of taking it public.
  7. In order to cover Sterling Foster's enormous short positions in Embryo common stock, Sterling Foster again arranged for the firm to release the lock-up agreements and purchase all 3,030,000 shares owned by the eleven Embryo Selling Securityholders all at a price of $2.00 per share, an amount that represented a tremendous discount to the prevailing market price for the securities.
  8. As in the prior occasions, Bear Stearns profited and directly participated in this fraudulent scheme in order to generate huge fees and interest revenue. First, both Bear Stearns and Mr. Harriton were aware of the covenants contained in the preliminary prospectus that forbade the Embryo Selling Securityholders from selling their positions prior to the expiration of the lock-up agreements. As in all other offerings, Mr. Harriton approved Bear Stearns's involvement and was delivered a copy of the prospectus. Moreover, Mr. Harriton and Bear Stearns, knew, by virtue of processing the trade tickets, that Sterling Foster had manipulated the market for Embryo in a way that allowed Sterling Foster to short twice its float and cover the short sales at a tremendous discount. Additionally, Bear Stearns provided the financing required to float the tremendous margin debt, which, under normal circumstances, would have placed both Bear Stearns and Sterling Foster at substantial risk.

A.R. Baron & Co., Inc.

  1. A further example of the massive fraud perpetrated upon the investing public by the association or joint venture of bucket shops and clearing broker is illustrated in Bear Stearns's clearing of stocks sold by Baron. Between June 1995 and July 1996, Bear Stearns acted as clearing broker for Baron. During this period, Baron manipulated the price of Baron's house securities in which it made markets. Defendants knew or recklessly disregarded Baron's illegal activities but continued to support Baron in its sale of house securities at artificially inflated prices. In addition Bear Stearns knew or was reckless in not knowing that Baron charged excessive mark-ups, engaged in unauthorized trading and parking of securities, issued forged and fictitious Bear Stearns confirmations in furtherance of the frauds, and was in regular capital deficiency. Bear Stearns facilitated the operations of Baron during the time that the public was defrauded by continuing to clear and extend margin credit for purchase of house securities. Bear Stearns even directed certain trades.
  2. Baron was a market-maker in Innovir Laboratories, Inc., an OTC/Bulletin Board listing.
  3. Innovir's ADV was below 100,000 shares per day during much of the Class Period and below $5.00 per share during much of the Class Period. The security traded at $.03 per share on December 8, 1998.
  4. Baron was a market-maker in Paperclip Imaging Software Inc., an OTC/ Bulletin Board listing.
  5. Paperclip's ADV was below 100,000 shares per day during much of the Class Period and below $5.00 per share (reaching a low of $1.00 per share) during much of the Class Period.
  6. Baron was a market-maker in Symbollin, Inc., a NASDAQ/small cap listing. Symbollin's ADV was below 100,000 shares per day and traded at $1.625 on December 7, 1998.
  7. Baron was a market-maker in Voxtel Advanced Mammography Systems Inc., a NASDAQ/small cap listing. Voxtel's ADV was below 100,000 shares per day during a material part of the Class Period and traded at $.84 on June 5, 1998.
  8. Some of the following allegations are substantially set forth in the class action complaint filed in Berwecky et al. v. Bear Stearns & Co., Inc., et al., 97 Civ. 5318, pending in the United States District Court for the Southern District of New York. The action is brought by investors in certain Manipulated Securities, against Bear Stearns and Mr. Harriton. In October 1998, a motion to dismiss the Bear Stearns defendants was denied.
  9. As clearing broker for Baron, Bear Stearns had access to confidential, non-public information such as Focus Reports and Compliance Reports concerning the financial condition of Baron and Bear Stearns received a substantial number of customer complaints directly from Baron's customers regarding, among other things, unauthorized trading in their accounts.
  10. Bear Stearns, pursuant to its contract with Baron, had the authority and discretion to determine whether or not to execute certain customer trades or exclude certain strategies, and in fact often exercised that control.
  11. Baron employees had traditionally executed trades directly on Bear Stearns's computer system, without the direct participation of Bear Stearns employees. However, in or about November 1995, Bear Stearns directed that Baron employees could no longer execute customer trades directly on the Bear Stearns computer system. Instead, Baron employees were directed to fax every trade order to Bear Stearns, which in turn would review every order and, at its discretion, determine whether to execute the trades.
  12. In certain instances Bear Stearns refused to execute a trade if, for example, it believed the trade would significantly affect the value of a Manipulated Security despite the fact that a customer believed, based on conversations with a Baron broker, that the trade had been executed. Bear Stearns set the rules as to which trades would in fact be executed in order to reduce the risk that the value of Manipulated Securities would significantly drop, which threaten the viability of Baron and increase Bear Stearns's financial exposure.
  13. Moreover, Bear Stearns insisted that its employees be present at Baron's offices in order to monitor Baron's net capital position and, as a result, Bear Stearns employees were continuously present at Baron's offices to monitor operations and trades.
  14. Bear Stearns also directly participated in the unauthorized purchase and sale of securities. For example, in the summer of 1995, Baron served as an underwriter in connection with the IPO of one of the Manipulated Securities, Paperclip Imaging Software, Inc. ("Paperclip") Paperclip was a start-up company seeking financing through the sale of securities and Baron acted as the underwriter.
  15. The terms of the offering provided that the underwriting would not go forward unless at least $7,981,500 was raised and that there would be a "maximum offering" of $9,178,725. Prospective buyers of Paperclip securities, referred to as subscribers, were to send their money to an escrow account at Citibank. The shares were to be allocated to subscribers and any money for shares sought that were not allocated was to be returned.
  16. Baron and others, however, agreed that they would oversell Paperclip securities -- that is, they would raise money and obtain subscriptions far in excess of the maximum offering and rather than return the excess money, use it to support the price of the manipulated securities.
  17. In fact, by September 1995, approximately $20 million had been raised in the Paperclip IPO. Rather than directing Citibank to return the excess amount to subscribers, representatives of Baron and Bear Stearns unlawfully agreed to transfer over $3 million of such excess amount to Bear Stearns, which funds were subsequently used to make unauthorized purchases of Manipulated Securities and to cover customer debits, thereby further reducing Bear Stearns's financial exposure.
  18. Bear Stearns was motivated to inflate the market prices for the Paperclip Securities to decrease its own risk of loss in the event that the securities declined in value. Bear Stearns's upper management became increasingly concerned about its risk of loss due to Baron's over-concentration in small, illiquid proprietary securities, many of which Bear Stearns viewed as unacceptable.
  19. Bear Stearns knew that it had to maintain the market prices of the Manipulated Securities at artificially high levels, at least temporarily to protect itself. This allowed Baron to liquidate sufficient amounts of the Manipulated Securities so that it could continue to reduce or eliminate the debit balance outstanding at Bear Stearns. Thus, inflating the value of the Manipulated Securities avoided or at least postponed Baron's financial collapse, which collapse would otherwise impose significant financial liability on Bear Stearns. To this end, Bear Stearns knowingly or recklessly executed fraudulent and manipulative sham transactions which caused the artificial inflation of both the market prices and trading volume of the Manipulated Securities.
  20. Bear Stearns's knowledge that it was executing unlawful transactions in the Manipulated Securities derived from, among other things, as described above:  (a) the close daily personal contact between Bear Stearns's upper management and Baron concerning the sale of the securities; and (b) the intimate knowledge of the market for the Manipulated Securities gained by Bear Stearns's hourly monitoring of Baron's trading and all major transactions at Baron involving the securities.
  21. Baron and Bear Stearns ignored the customer complaints they received concerning alleged improprieties at Baron and continued to provide clearing and financial services to Baron even after knowing that Baron was headed to bankruptcy. Bear Stearns extended credit to Baron and Baron's customers and provided the clearing services that kept Baron operating and out of bankruptcy long after it otherwise would have failed. In or about July 1996, Baron filed for bankruptcy.
  22. In May 1997 Baron and its two senior officers, Andrew Bressman and Roman Okin, as well as eleven other former Baron officers and employees, were indicted by a New York County grand jury in a 173-count indictment. The indictment named Baron, Andrew Bressman, Roman Okin, Richard Acosta, Glenn O'Hare, Joseph Scanni, Brett Hirsch, Richard Simone, Charles Plaia, Mark Goldman, John McAndris, and Jack Wolynez.
  23. The indictment is notable for the array of criminal activity that was used to victimize unwitting investors including: (a) lying to investors to induce them to buy securities; (b) manipulating the markets in certain securities to benefit themselves and certain favored customers; (c) making unauthorized trades; (d) refusing to follow customer instructions to sell securities; (e) outright stealing from investors; (f) ignoring or inducing clients to retract complaints; and (g) forging documents to prevent the discovery of their crimes. The indictment further charged, among other things, that the defendants named therein: (i) intentionally engaged in a scheme constituting an ongoing course of conduct with the intent to defraud and to obtain property by false and fraudulent pretenses, representations, and promises while engaged in inducing distribution, exchange, sale, negotiation, and purchase of securities; (ii) induced members of the investing public to open brokerage accounts at Baron and to purchase securities by misrepresenting the nature of the value of the securities; (iii) misrepresented and failed to disclose material facts concerning the business, profitability, financial stability, and existence of research as well as the true market, liquidity, safety and suitability of the house securities; and (iv) misrepresented and failed to make material disclosures to the investing public regarding Baron's liquidity, profitability and financial stability and the extent to which the prices of the securities were dependent on the financial condition and continued existence of Baron.
  24. Twelve Baron employees pled guilty and admitting to participating in the huge stock manipulation scheme of Baron; three were sentenced to prison terms. Only one of the indicted persons, John McAndris, Baron's former chief financial officer, contested the charges. He was convicted after a jury trial and sentenced to a minimum of five and to a maximum of fifteen years in prison.
  25. In addition, in or about March 1997, NASD filed a complaint against eighteen registered representatives of Baron alleging violations of Association Conduct Rules, based, in part, on the registered representatives' failure to execute requested trades and unauthorized trading.
  26. Reportedly, the Manhattan grand jury impaneled for the Baron matter is investigating the links between the indicted and convicted executives of Baron and Bear Stearns. Bear Stearns's chief counsel reportedly has acknowledged that the district attorney is investigating Bear Stearns's role in the Baron matter. In Bear Stearns's 1996 Annual Report filed on Form 10-K, on September 29, 1997, Bear Stearns acknowledged that it had received various inquiries from regulatory and governmental agencies, and noted that Bear Stearns was cooperating with the inquiries. A week later, Bear Stearns amended the filing to delete the statement that it was cooperating with the inquiries.
  27. A February 9, 1998, article in Business Week regarding a trial in New York County Supreme Court of an action brought against Baron by investors reported an anonymous source (allegedly a senior law enforcement official) as stating that he understood that Baron's former CEO, Andrew Bressman, was cooperating with the Manhattan District Attorney's office in a probe of possible links between Mr. Harriton and Baron.
  28. Further, on June 30, 1997, The New York Times reported that Bear Stearns had revealed that one of its employees had indicated that a managing director of Bear Stearns told him to destroy documents that were sought by investigators who were examining the relationship between Baron and Bear Stearns, and that Bear Stearns's in-house counsel may not have adequately complied with requests for information. The Manhattan District Attorney has publicly stated that his office is investigating these contentions.
  29. The SEC has also been pursuing an investigation of Bear, Stearns Securities and Mr. Harriton concerning their involvement with Baron and potentially illegal actions with other Introducing Brokers.(7)
  30. On August 5, 1999, the SEC issued a press release entitled "Bear Stearns to Settle SEC Charges Re: Fraud at Baron: Corporation to pay $35 million in Settlement; Bear Stearns President Richard Harriton Charged With Fraud" that announced that the administrative proceedings had yielded a finding that Bear Stearns had violated numerous anti-fraud provisions of the federal securities laws. The Cease and Desist order, as discussed above, stated that Bear Stearns would "cease and desist" from violating the federal securities laws and recounted a series of egregious violations, detailed below:
    1. Bear Stearns liquidated $1 million worth of securities in a customer's account to pay for an unauthorized trade even though Bear Stearns was presented with "irrefutable" evidence that the trade was fictitious and Baron employees forged the confirmation slips;
    1. Even though Baron admitted to Bear Stearns that it executed a series of unauthorized trades in customers' accounts, Bear Stearns still seized the customers' assets to pay for the trades and refused to return the assets despite knowledge that the seizure was unjustified and that Baron was involved in illegality;
    1. Bear Stearns prevented Baron from repurchasing $2 million worth of securities from a customer that Baron had purchased for the customer absent authorization, even though Baron acknowledged its illegal conduct to Bear Stearns and the customer and had promised the customer that he would be made whole;
    1. Bear Stearns accepted, without authorization, excess funds generated in the Paper Clip IPO, as discussed above, even though it knew, or was reckless in not knowing, that the funds were misdirected to Bear Stearns by Baron in an effort to conduct a fraudulent IPO that netted millions of dollars from the sale of securities that were never actually in existence and Baron never intended to deliver to the purchasers; and
    1. Bear Stearns provided Baron with $1.6 million in working capital even after the SEC commenced an emergency action to halt Baron's fraudulent activity, and absent the capital, Baron would have permanently ceased operations.
  1. The order further stated that an independent consultant would be named to review Bear Stearns's supervisory and compliance procedures and recommend improvements. Additionally, Bear Stearns will pay a $5 million fine and $30 million into an investor restitution fund on account of its fraudulent activity regarding Baron. The order also stated that Bear Stearns failed to implement an adequate document retention policy and this failure promoted fraud.
  2. While Bear Stearns has agreed to these terms and to cease and desist from future illegality, Mr. Harriton declined to settle the dispute. In response, the SEC, also on August 5, 1999, in the context of administrative proceeding, File No. 3-9963, filed an "order instituting proceedings pursuant to section 8a of the Securities Act of 1933 and sections 15(b), 19(h) and 21(c) of the Securities Exchange Act of 1934." (See Exhibit C). Within days of filing the order, Mr. Harriton resigned all of his positions with Bear Stearns and has, according to numerous new stories, retired from the securities industry.
  3. The SEC's order initiating formal proceedings against Mr. Harriton contains a series of averments detailing Mr. Harriton's direct participation in the fraud and how he personally orchestrated Bear Stearns's illegal conduct in connection with Baron. The order, annexed hereto as Exhibit C, recounts how Mr. Harriton, in order to protect Bear Stearns from huge losses and generate tremendous fees, was a direct participant in the illegality and also personally benefitted therefrom.
  4. First, according to the SEC, "[a]t Harriton's direction... [Bear Stearns's] conduct ... involved it deeply in Baron's operations... [and the] conduct included approving and disapproving trades, and, at times, actually preventing Baron from rescinding certain unauthorized trades."
  5. Mr. Harriton intervened on behalf of Baron with the NASD and used his substantial reputation and influence in the securities industry to persuade the NASD to allow Baron to operate even though its net capital capacity was in serious jeopardy.
  6. Mr. Harriton was aware that his staff was spending an inordinate amount of time responding to customer complaints that alleged Baron's sales force was executing unauthorized trades. In fact, Mr. Harriton acknowledged that Baron's brokers were violating numerous compliance regulations and personally assigned a member of his staff to oversee Baron's daily compliance and trading activity. During the first three months of Baron's clearing relationship with Bear Stearns, Bear Stearns received over fifty customer complaints concerning sales practice abuses even though Baron's sales force consisted of approximately twelve brokers at the time. Nevertheless, Mr. Harriton continued the relationship.
  7. Mr. Harriton was also personally involved in Baron's unauthorized trading. Specifically, Mr. Harriton directed Baron to reduce its inventory of Advanced Mammagraphy stock. To comply, Baron effected a series of unauthorized sales of Voxtel Advanced Mammography stock to Baron customers and incredulously, directed them to pay for the purchase even though these customers had never requested the transaction. When the customers refused to pay for the stock, Baron was forced to liquidate the positions out of the customers' accounts at large losses. Specifically, the fraud generated huge debits in the accounts of Diversified Investment Fund, Inc. and Diamond Steel Works, Ltd. and both customers immediately complained to Bear Stearns and Mr. Harriton that they had not authorized the purchase and would not pay for the stock. In both instances, the customers provided evidence that the confirmation slips were fraudulent.
  8. Mr. Harriton, however, in spite of his own personal knowledge that the trades were fraudulent, directed his subordinates to liquidate shares of fully paid for securities in the accounts to satisfy the debit balances. Regardless of the fact that both customers protested, Mr. Harriton refused to rescind the decision to liquidate the securities and both accounts suffered huge losses and remain the subject of arbitrations.
  9. As stated above, Bear Stearns and Mr. Harriton directly participated in a series of fraudulent IPOs. Specifically, as discussed above, in September 1995, Baron underwrote the Paperclip IPO. According to the SEC, Mr. Harriton and Baron structured the IPO so that it would be 100% oversubscribed, as discussed above. Bear Stearns was not involved in the IPO; nonetheless, Mr. Harriton arranged for the excess subscription funds to be wired to Bear Stearns where they were used to satisfy existing debits in Baron customers' accounts at Bear Stearns and to be held in reserve to satisfy future debits when Baron customers refused to pay for unauthorized trades. As part of the scheme, nearly $1.7 million was illegally wired to Bear Stearns and the Paperclip securities have since collapsed in value.
  10. The Cease and Desist order also detailed how Mr. Harriton was to be personally rewarded for his assistance. In December 1995, Baron principals, at Mr. Harriton's direction, contacted Mr. Harriton's long time friend Mr. Pace. Messrs. Pace and Bressman then schemed to siphon profits from an IPO to Mr. Harriton and arranged for a nominee account to receive 50,000 shares of a Baron IPO. Mr. Harriton was the beneficiary of the account and stood to earn millions on the transaction. The fraud, however, was not completely consummated because, shortly thereafter, Baron filed for bankruptcy and the IPO went uncompleted.

Meyers Pollock Robbins, Inc.

  1. Meyers Pollock Robbins, Inc. ("MPR"), one of the Introducing Brokers, was a registered broker-dealer licensed by the NASD, and cleared its securities transactions through Bear Stearns at relevant times during the Class Period.
  2. As clearing broker for MPR, Bear Stearns had: (a) access to confidential, non-public information concerning MPR's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to MPR based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of MPR and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of MPR and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities. MPR was a market-maker in several Manipulated Securities including, but not limited to, Ecogen, Inc. and Innovir, Inc.
  3. Bear Stearns knew that MPR often refused to execute requests to sell positions in customers' accounts and had engaged in a plethora of unauthorized trades. In an arbitration styled Strode v. Meyers Pollock Robbins, Inc., et al., 98-00377, claimants complained to Bear Stearns that MPR refused to execute transactions and that a series of unauthorized trades had occurred in the account.
  4. Bear Stearns, though informed that there were illegal activities going on in the account, told Claimants to contact MPR's compliance department and took no further action. Following a hearing, the arbitration panel awarded Claimants $65,677 in compensatory damages and $10,000 in punitive damages.
  5. In other instances concerning MPR, Bear Stearns was named as a respondent, and although Bear Stearns may have been dismissed on the grounds that as a clearing broker it was shielded from liability, it was clearly on notice, by virtue of those claims that MPR was engaged in illegal conduct but it took no substantive steps that would have jeopardized its continued receipt of fees and margin debit interest income. In an arbitration styled Jacobson v. Meyers Pollock Robbins, Inc., et al., 97-0538, Mr. Jacobson asserted that MPR brokers effected unauthorized purchases and engaged in coercive tactics. Following a hearing, Mr. Jacobson was awarded $47,182.00 in compensatory damages.
  6. The severity of Bear Stearns's failure to act in the face of MPR's misconduct so as to not jeopardize its receipt of fees from MPR is further evidenced by the facts in an arbitration styled Zuber v. Meyers Pollock Robbins, Inc., 97-0240. In Zuber, the claimant asserted that MPR's brokers executed unauthorized, discretionary transactions on margin in his account. MPR then contacted the claimant and demanded that he pay for the purchases so as to avoid a "margin call" on the account and the need to liquidate other equity positions to satisfy the debit.
  7. Mr. Zuber did not provide MPR with discretionary trading authority nor had he signed a margin agreement. Bear Stearns was aware of the margin related problems in his account by virtue of the fact, that as a clearing broker, it financed the margin loans and approved whether a particular client was financially able to execute trades on margin. Moreover, Bear Stearns, in its capacity as a clearing broker, would send notices pursuant to Exchange Act rules (Regulation T) notifying clients that their accounts were over-extended. In this way, Bear Stearns knew, or had reason to know, that Mr. Zuber's account was being mishandled and was subject to excessive margin debits. The arbitration panel awarded Mr. Zuber over $250,000 in compensatory and $250,000 in punitive damages.
  8. In an arbitration styled Burns v. Meyers Pollock Robbins, Inc. et al., 97-0244, Mr. Burns asserted that MPR's brokers, without his consent, bought and sold securities in his account from October 1996 through January 1997. On January 31, 1997, Mr. Burns contacted Bear Stearns and notified it that MPR had engaged in numerous unauthorized trades and requested that Bear Stearns assume custody of the account. Following Mr. Burns's request, Bear Stearns did, in fact, accept the account and its assets were transferred from the MPR account to a Bear Stearns account. Following a hearing before the arbitration panel, Mr. Burns was awarded $28,000.
  9. In Ougheltree v. Meyers Pollock Robbins, Inc., et al., 97-02639, claimant asserted allegations against Bear Stearns and MPR for unauthorized trading, suitability, and coercion. Prior to the commencement of the hearing before the arbitration panel, Bear Stearns settled the claim for an undisclosed amount.
  10. On September 15, 1998, the NASD expelled MPR after having suspended it in July 1998 for failing to pay substantial arbitration awards to defrauded customers. Notwithstanding the expulsion, MPR remains the focus of numerous investigations including an indictment pending in this district before Judge Denny Chin.
  11. The indictment, discussed above, to which two individuals including a MPR principal have plead guilty, charges that in 1997 MPR brokers and reputed members of the Bonanno organized crime family conspired to manipulate the price of MPR house securities. According to a report published over the Dow Jones News Service, the scheme netted $1.3 million in illegal profits and six MPR employees were indicted as a result of the fraud. Moreover, Bear Stearns cleared the fraudulent transactions and earned substantial profits during the time period MPR engaged in these illegal acts notwithstanding numerous customer complaints and mounting evidence that MPR was both influenced by organized crime and perpetrating manipulative securities practices.

Paragon Capital, Inc.

  1. Paragon Capital, Inc. ("Paragon"), an Introducing Broker, is a registered broker-dealer licensed by the NASD and cleared its transactions through Bear Stearns during the relevant time period.
  2. As clearing broker for Paragon, Bear Stearns had: (a) access to confidential, non-public information concerning Paragon's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to Paragon based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of Paragon and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of Paragon, and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.
  3. According to the December 15, 1997, Business Week article, federal investigators are examining allegations of massive overcharges at Paragon and 1994 internal Paragon trading records, submitted to authorities in connection with the investigation, show massive commission markups, some of which were as high as 25% or more. It was further reported that two former Paragon officials have stated to federal investigators and the NASD that Bear Stearns routinely examined Paragon's trading records, the records clearly showed the magnitude of the excessive commissions, and their irregularity was so facially obvious that Bear Stearns's compliance staff in the routine course of business would have known, or was reckless in the failure to detect, Paragon's excessive markups. It is also reported that the trading records provided to the SEC evidence that customers were routinely overcharged in various stocks including: Evro, Paramark Enterprises, Apogee Robotics, La-Man, Eco2, and First Standard Ventures.
  4. Apogee Robotics went into bankruptcy in or about December, 1994.
  5. Eco2 had an ADV below 20,000 shares per day during a material part of the Class Period and traded at $.01 per share in November, 1998.
  6. First Standard Ventures had an ADV below 100,000 shares per day during a material part of the Class Period and traded at $.75 per share in September, 1995.
  7. La-Man had an ADV below 50,000 shares per day during most of the Class Period and traded below $5.00 per share on October 30, 1998.
  8. Paramark Enterprises had an ADV below 20,000 shares per day during a material part of the Class Period. The security traded below $5.00 per share (dropping below $2.00 per share) during most of the Class Period. Paramark traded at $.25 per share on December 7, 1998.

Lew Lieberbaum & Co.

  1. Lew Lieberbaum & Co. ("Lieberbaum") was a registered broker-dealer licensed by the NASD. The firm has been dissolved and is now known as First Asset Management, Inc.
  2. Lieberbaum cleared its transactions through Bear Stearns during the relevant time period.
  3. As clearing broker for Lieberbaum, Bear Stearns had: (a) access to confidential, non-public information concerning Lieberbaum's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to Lieberbaum based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of Lieberbaum and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of Lieberbaum, and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.
  4. On or about February 7, 1995, Lieberbaum (without admitting or denying the allegations) agreed to pay $1.1 million in fines and restitution (approximately $800,000 in fines and $300,000 in restitution) to settle NASD charges that the firm, three senior managers, and a trader manipulated the market and charged excessive prices in the shares of Kitchen Bazaar. Each of the four individuals was suspended from the industry for between one and three months.
  5. On or about March 26, 1996, without admitting or denying the allegations, a branch manager of Lieberbaum was fined $15,000 and suspended from the securities industry for thirty days for several rule violations including selling stock to customers at a 21% percent markup.
  6. During the Class Period, Lieberbaum was the managing underwriter for at least the following IPOs, all of which were Manipulated Securities:

U.S. Medical Products, Inc. ("USMP"), which was declared effective on or about May 11, 1994;



Hauppauge Digital, Inc. ("Hauppauge"), which was declared effective on or about January 10, 1995;



Help at Home, Inc. ("HAH"), which was declared effective on or about December 5, 1995;



The Kushner-Locke Company which was declared effective on or about July 24, 1996.



Eastco Industrial Safety Corp.



Krantor Corp.

  1. Mr. Harriton was personally involved in each of the above IPOs, approved Bear Stearns's involvement, and approved the extensions of credit and subordinated bridge loans necessary to finance the underwriting of the Manipulated Securities.
  2. During the Class Period, Lieberbaum was a market-maker in at least the following securities, all of which were Manipulated Securities:

Eastco Industrial Safety Corp. (no longer trading)



Hauppauge Digital, Inc.



Help at Home, Inc. (no longer trading)



The Kushner-Locke Company



Krantor Corp. (no longer trading)



U.S. Medical Products, Inc. (no longer trading)

  1. The securities which Lieberbaum brought public in IPOs and the stocks in which it was a market-maker were sometimes referred to as the Lieberbaum "house stocks."
  2. Eastco's ADV was below 10,000 shares per day during a material part of the Class Period and traded at $1.875 per share on November 12, 1997.
  3. Hauppauge's ADV was below 80,000 shares per day during a material part of the Class Period and traded below $5.00 per share for much of the Class Period.
  4. Help at Home's ADV was below 35,000 shares per day and traded below $5.00 per share during a material part of the Class Period.
  5. Krantor's ADV was below 50,000 shares per day during most of the Class Period and traded at $1.66 per share on June 26, 1998.
  6. Kushner's ADV was less than 100,000 shares per day during a material part of the Class Period and traded below $5.00 per share during much of the Class Period. Kushner traded at $4.938 per share on December 7, 1998.
  7. U.S. Medical's ADV was less than 25,000 shares per day during a material part of the Class Period and traded below $1.00 per share during much of the Class Period. U.S. Medical recently traded below $.05 per share.
  8. According to a June 23, 1997, article published in the Cleveland Plain Dealer, a standard part of the Lieberbaum cold-calling script, read during telephone calls by brokers to potential customers, addressed customer fears about never having heard of the Lieberbaum firm. The Lieberbaum script directed its brokers to use Bear Stearns's reputation to try to convince the customer that the Lieberbaum firm was reputable. The script stated: "You'll receive a standard confirmation from our bank clearing agent Bear Stearns of who [sic] the federal government does their banking with."
  9. Bear Stearns, because of its NYSE and NASD membership and the requirement that it follow their rules and regulations, knew or was reckless in disregarding that the use of and permitting the use of the Bear Stearns name in this manner was a violation of NYSE and NASD rules.

Noble International Investments, Inc.

  1. Noble International Investments, Inc. ("Noble") is a registered broker-dealer licensed by the NASD and cleared its transactions through Bear Stearns during the relevant time period.
  2. As clearing broker for Noble, Bear Stearns had: (a) access to confidential, non-public information concerning Noble's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to Noble based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of Noble and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of Noble, and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.
  3. During the Class Period, Noble was a market-maker in and was the managing underwriter for the IPO of Manipulated Security Visual Data Corporation that was declared effective on or about July 29, 1997.
  4. Visual Data's ADV was below 100,000 shares per day during a material part of the Class Period and traded below $4.00 per share during the Class Period.

Josephthal, Lyon & Ross, Inc.

  1. Josephthal, Lyon & Ross, Inc. ("Josephthal") is a registered broker-dealer licensed by the NASD, cleared its transactions through Bear Stearns during the relevant time period, and is still in business.
  1. As clearing broker for Josephthal, Bear Stearns had: (a) access to confidential, non-public information concerning Josephthal's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to Josephthal based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of Josephthal and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of

Josephthal, and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.

  1. During the Class Period, Josephthal was the managing underwriter for at least the following IPO's, all of which were Manipulated Securities:

Alexion Pharmaceuticals, Inc., which was declared effective on or about February 28, 1996;



Brunswick Technologies, Inc., which was declared effective on or about February 5, 1997;



Eltek, Inc., which was declared effective on or about January 22, 1997;



Equity Marketing, Inc., which was declared effective on or about February 2, 1994;



Ibis Technology Corporation, which was declared effective on or about May 20, 1994;



InfoCure Corporation, which was declared effective on or about July 10 1997;



InterVU, Inc., which was declared effective on or about November 19, 1997;



NetSpeak Corporation, which was declared effective on or about May 29, 1997;



Nur Advanced Technologies Ltd., which was declared effective on or about October 6, 1995;



SkyMall, Inc., which was declared effective on or about December 11, 1996;



Target Technologies, Inc., which was declared effective on or about August 19, 1994;



Vacation Break U.S.A., Inc., which was declared effective on or about December 21, 1995;



Victormaxx Technologies, Inc., which was declared effective on or about August 10, 1995;



Weitzer Homebuilders Incorporated, which was declared effective on or about April 26, 1995.



  1. Mr. Harriton was personally involved in each IPO, approved Bear Stearns's involvement, and approved the extensions of credit and subordinated bridge loans necessary to finance the underwriting of the Manipulated Securities.
  2. During the Class Period, Josephthal was a market-maker in at least the following securities, all of which were Manipulated Securities:

Alexion Pharmaceuticals, Inc.

Ariad Pharmaceuticals Corp.

Brunswick Technologies, Inc.

Ecogen, Inc.

Eltek, Inc. (NASDAQ small cap)

Envirogen Corp. (NASDAQ small cap; delisted by the NASDAQ on 10/14/98)

Equity Marketing, Inc.

Guilford Pharmaceuticals Inc.

HemaSure, Inc. (OTC/Bulletin Board; delisted by the NASDAQ on 1/14/98)

Ibis Technology Corporation

InfoCure Corporation

InterVU, Inc.

LaJolla Pharmaceutical Co. (delisted by the NASDAQ)

Neoprobe Corp. (OTC/Bulletin Board)

NeoRx Corp.

NetSpeak Corporation

Nur Advanced Technologies Ltd. (no longer trading)

Pharmos Corp. (NASDAQ small cap)

Procept Inc. (NASDAQ small cap)

SkyMall, Inc.

Target Technologies, Inc. (no longer trading)

Vacation Break U.S.A., Inc. (no longer trading)

Victormaxx Technologies, Inc. (OTC/Bulletin Board)

Weitzer Homebuilders Incorporated (OTC/Bulletin Board)

  1. Some of the securities which Josephthal brought public in IPOs and the stocks in which it was a market-maker were sometimes referred to as the Josephthal "house stocks."
  2. Alexion's ADV was below 65,000 shares per day and traded below $10.00 per share during most of the Class Period.
  3. Brunswick's ADV was below 50,000 shares per day and traded at approximately $5.00 per share during much of the Class Period, which was down 75% from its IPO price. The security traded at $5.75 per share on December 7, 1998.
  4. Eltek's ADV was below 30,000 shares per day and traded below $1.00 per share during a material part of the Class Period.
  5. Equity Marketing's ADV was below 50,000 shares per day during a material part of the Class Period and traded below $5.00 per share for at least part of the Class Period.
  6. Ibis Technology's ADV was below 100,000 shares per day during a material part of the Class Period.
  7. InfoCure's ADV was below 100,000 shares per day during a material part of the Class Period and traded below $5.00 per share for at least part of the Class Period.
  8. NetSpeak's ADV was below 100,000 shares per day for a material part of the Class Period, traded below 30,000 shares per day.
  9. Nur's ADV was below 40,000 shares per day during much of the Class Period and traded below $5.00 per share for at least a material part of the Class Period. The security traded at $2.50 per share on December 7, 1998.
  10. SkyMall's ADV was below 100,000 shares per day and, for a material part of the Class Period, traded below 50,000 shares per day. The security traded at less than $5.00 per share for much of the Class Period and at $4.00 per share on December 7, 1998.
  11. Target's ADV was below 100,000 shares per day during much of the Class Period and traded below $5.00 per share during part of the Class Period. Target traded at $3.062 per share on December 7, 1998.
  12. Vacation Break's ADV was below 50,000 shares per day during much of the Class Period.
  13. Victormaxx's ADV was below 50,000 shares per day during much of the Class Period. Additionally, the security traded below $5.00 per share (reaching a low of $1.00 per share) during part of the Class Period. The security traded at $.125 on December 8, 1998.
  14. Weitzer's ADV was below 50,000 shares per day during at least a material part of the Class Period. Additionally, the security traded below $5.00 per share (reaching a low of $1.00 per share) during the Class Period. The security traded at $.385 per share on December 7, 1998.

First Cambridge Securities Corp.

  1. First Cambridge Securities Corp. ("First Cambridge") is one of the Introducing Brokers, a registered broker-dealer licensed by the NASD, and cleared its securities transactions through Bear Stearns at relevant times during the Class Period.
  2. As clearing broker for First Cambridge, Bear Stearns had: (a) access to confidential, non-public information concerning First Cambridge's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to First Cambridge based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of First Cambridge and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of First Cambridge and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.
  3. During the Class Period, First Cambridge engaged in a pattern of fraudulent conduct involving the sales of the Manipulated Securities at grossly inflated prices. Specifically, First Cambridge was one of the managing underwriters for the Bristol Technologies Systems, Inc. IPO, a Manipulated Security. Bristol Technologies Inc. has since been delisted and is the subject of numerous litigations surrounding the issuance of its securities.
  4. Bristol's IPO also has been classified as a fraudulent IPO by the United States Attorney for the Eastern District of New York and the Manhattan District Attorney's Office and a criminal investigation has yielded both a federal and state indictment with several individuals pleading guilty as recently as August 19, 1999. The same investigation and indictment has classified IFS International Inc., a Manipulated Security and another First Cambridge house stock, in which it was a market-maker, a fraudulent IPO.
  5. IFS's ADV was below 20,000 shares per day during a material part of the Class Period and traded below $5.00 per share during much of the Class Period. IFS traded at $2.75 per share on December 7, 1998.
  6. First Cambridge was as an underwriter in connection with the Children's Wonderland, Inc. IPO, a Manipulated Security, and later was a market-maker in the security. Children's Wonderland ADV was below 75,000 shares per day during a material part of the Class Period. Additionally, Children's Wonderland price on its IPO was $9.00 per share in early 1996; within one year, the security had fallen below $1.00 per share. Children's Wonderland, Inc. was suspended from trading by the NASDAQ on April 29, 1997 and, as of August 11, 1999, trades on the OTC/Bulletin Board at approximately $.12 per share on extremely low volume. Investors, accordingly, have lost millions of dollars.
  7. First Cambridge was also an underwriter and market-maker in the securities of Nu-Tech Bio Med, Inc., a Manipulated Security, which is presently in bankruptcy following a series of litigations concerning illegal short sales in its common stock by its market- makers, including First Cambridge. Nu-Tech's ADV was below 90,000 shares per day during a material part of the Class Period.
  8. Finally, First Cambridge was a market-maker in Pacific Animation Imaging Corp., now known as Strategic Solutions Group, Inc., that was delisted from NASDAQ on September 2, 1998, and presently trades on the OTC/Bulletin Board. at l/32 per share as of August 21, 1999.
  9. Strategic's ADV was below 70,000 shares per day during a material part of the Class Period and traded below $5.00 per share (dropping below $1.00 per share) during a material part of the Class Period.
  1. As stated above, in the context of First Cambridge's role as an underwriter, Mr. Harriton was personally involved in each transaction, approved Bear Stearns's involvement, and approved the extensions of credit and subordinated bridge loans necessary to finance the underwriting of these Manipulated Securities and earn Bear Stearns huge transaction fees.

Corporate Securities Group, Inc.

  1. Corporate Securities Group, Inc., ("CSG") one of the Introducing Brokers, is a registered broker-dealer licensed by the NASD and cleared its securities transactions through Bear Stearns at relevant times during the Class Period.
  2. As clearing broker for CSG, Bear Stearns had: (a) access to confidential, non-public information concerning PCM's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to CSG based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of CSG and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of CSG and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.
  3. CSG was fined and censured by the NASD in 1995 concerning unauthorized trading in customers' accounts and the use of high pressure sales practices.
  4. CSG was also the subject of a state of Missouri investigation and subsequent cease and desist order dated October 27, 1998, concerning "unsolicited cold calls" by CSG brokers. Missouri Secretary of State Rebecca Cook in a May 30, 1997, news report published in the St. Louis Dispatch categorized CSG as "...swindlers [who] persuade people to purchase stock in little-known companies that insiders will sell when the price is driven high enough." Bear Stearns was aware of these illegalities or was reckless in its failure to recognize them and earned substantial fees as a result.

Stratton Oakmont Inc.

  1. Stratton Oakmont, Inc. ("SOI") was a broker-dealer licensed with the NASD, with its main office located at 1979 Marcus Avenue, Lake Success, New York, and with a branch office located in Bethesda, Maryland.
  2. According to a Bloomberg news story carried on October 25, 1999, Mr. Harriton's activities at Bear Stearns are under investigation by prosecutors at the U.S. Attorneys offices in Manhattan and Brooklyn, and that these agencies and the Manhattan District Attorney's office have been investigating whether Mr. Harriton secretly assisted Sterling Foster, Baron, and Stratton Oakmont Inc. by helping get Bear Stearns to clear their trades.
  3. The investigation of this link in the relationship between and among SOI, Mr. Harriton and Bear Stearns is significant. SOI executives Jordan Ross Belfort and Daniel Mark Porush were the subject of an indictment in the U.S. District Court, Eastern District of New York in September 1998 ("SOI Indictment"). The indictment became public for the first time in September 1999.
  4. Some of the specific allegations in the SOI Indictment are pertinent to Bear Stearns and its clearing services:
    1. SOI executives are charged with having conspired to acquire "control over the business affairs of Dollar Time and Aquanatural, including the decision-making authority regarding the issuance of stock, the election of directors and the appointment of officers." (SOI Indictment at ¶13);
    2. The SOI executives were also charged with having traveled overseas (Switzerland) to establish bank accounts in which to deposit funds to finance elicit securities transactions. (SOI Indictment at ¶14);
    1. The SOI executives were charged with "arranging with other individuals to provide them with control of and access to offshore entities through which they could secretly purchase and sell United States securities." (SOI Indictment at ¶15);
    1. The SOI executives are charged with recruiting "other individuals to smuggle large amounts of cash for them out of the United States to Switzerland and to deposit the cash into a Swiss bank account. The defendants thereafter used these fund to secretly purchase United States securities." (SOI Indictment at ¶17);
    2. The SOI executives are charged with having caused "millions of shares of Dollar Time and Aquanatural stock to be issued, purportedly under Regulation S, at prices that were considerably below the market prices for Dollar Time and Aquanatural stock at the time. In order to appear to qualify for Regulation S exemptions, the defendants caused the stock issuances to be made to foreign entities that appeared to by controlled and owned by individuals who were non-U.S. persons for purposes of Regulation S, when in fact, as the defendants then and there well knew and believed, the foreign entities were controlled and owned by the defendants." (SOI Indictment at ¶18);
    3. The SOI executives "caused the foreign entities they controlled to sell their Dollar Time shares back into the United States marketplace, they caused brokers at SOI and at affiliated broker-dealers in New York State and Florida to encourage their customers to purchase Dollar Time stock, in order to generate inflated market demand for such stock." (SOI Indictment at ¶20);
    1. SOI executives also caused Stratton brokerage trading accounts to be established in the names of offshore entities they controlled;
    2. SOI executives "reaped substantial profits from the sale of Dollar Time and Aquanatural shares that had been issued under Regulation S to offshore entities." (SOI Indictment at ¶22);
    3. SOI executives took charge with using "proceeds generated by the sale of Dollar Time and Aquanatural shares issued under Regulation S to purchase additional shares of Dollar Time, Aquanatural and other securities." (SOI Indictment at ¶23); and
    4. SOI executives "caused offshore entities they controlled to sell securities back to Stratton at prices that were lower than the prices at which these offshore entities had previously purchased the same securities from Stratton, as a means to transfer profits from the offshore entities to Stratton." (SOI Indictment at ¶24).
  1. The fraudulent scheme that entailed SOI's wrongful use of offshore entities was reprised by other Introducing Brokers. For example, the Kensington Wells Indictment recites:

"29. The architect of a new plan to flip stock back to Kensington Wells in the VideoLan IPO was the defendant MICHELLE SARIAN. MICHELLE SARIAN devised a plan to sell over 1,270,000 units of VideoLan to offshore entities that would act as nominees for ELIAS TACHER, SALVADORE TACHER, and another person, and that would flip VideoLan securities back to Kensington Wells on the first day of trading. The purpose of using offshore nominees was to conceal the true ownership of the 1,270,000 units of VideoLan, to generate large, secret profits for ELIAS TACHER, SALVADORE TACHER, and a co-conspirator, and to make the tracing of the true ownership of the stock more difficult.

30. Pursuant to that plan, MICHELLE SARIAN arranged for approximately 695,000 units of VideoLan to be distributed to two Barbadian corporations named Bayhill Capital, Ltd. and Camargo Capital, Corp., both of which were controlled by the defendant DANIEL E. CONNOR.

31. MICHELLE SARIAN further arranged for approximately 227,500 VideoLan units to be distributed to six Nether-lands Antilles corporations named Flatford Co., N.V.; Lowdry Corp., N.V.; and Cosytown, N.V. These six Netherlands Antilles corporations established brokerage accounts at Fahnestock.

32. MICHELLE SARIAN arranged for approximately 319,750 units of VideoLan to be distributed to Connor & Associates, a Swiss corporation, of which Daniel E. Connor was the President".

  1. Such fraudulent schemes entailing the use of offshore entities and the resulting garnering of huge profits by the Introducing Brokers cannot be effected without the knowledge and complicity of the clearing broker. Thus, it is reasonable to infer that such activity was known to or recklessly disregarded by defendants and constitutes a primary violation of the securities laws.

PCM Securities, Ltd.

  1. PCM Securities, Ltd.("PCM"), now known as Royal Palm Investments, Ltd.) is one of the Introducing Brokers, was a registered broker-dealer licensed by the NASD and cleared its securities transactions through Bear Stearns at relevant times during the Class Period.
  2. As clearing broker for PCM, Bear Stearns had: (a) access to confidential, non-public information concerning PCM's financial condition, liquidity, and net capital position; (b) the power to extend or deny credit to PCM based upon the value of securities held as collateral; and (c) the power and control to determine whether or not to execute securities transactions on behalf of PCM and its customers. During the relationship, Bear Stearns used its reputation, capital and resources to facilitate the fraudulent operations of PCM and directly participated in the fraudulent and manipulative scheme to artificially inflate and maintain the market prices for certain of the Manipulated Securities.
  3. PCM has been reported to have substantial ties with organized crime. A December 16, 1996, Business Week article entitled "The Mob On Wall Street" stated that, "[a] three month investigation by BUSINESS WEEK reveals that substantial elements of the small-cap markets have been turned into veritable Mob franchises, under the very noses of regulators and law enforcement." Business Week reported that PCM manipulated the price of First Colonial Ventures, Ltd. through the use of traditional mob pressure tactics, including physically threatening and beating other market-makers who refused to acquiesce to PCM's efforts to manipulate First Colonial Ventures, Ltd.
  4. The Business Week investigation uncovered substantial evidence that numerous firms on Wall Street, including PCM, through Roy Ageloff (a reputed organize crime figure that controlled the firm in 1996) had engaged in concerted mob-like practices, including the following activities:
    1. The mob has established a network of stock promoters, securities dealers, and boiler rooms that sell stocks nationwide through hard-sell cold-calling, with the highest concentration of these operators in the New York area and Florida;
    2. Four organized-crime families as well as elements of the Russian mob directly own or control, through front men, perhaps two dozen brokerages;
    3. Traders and brokers have been subjected to increasingly violent persuasion and punishment;
    4. Through offshore accounts in the Bahamas and elsewhere, the mob has engineered lucrative schemes involving low-priced stock and exploiting a loophole in securities laws; and
    5. Mob-related activities on Wall Street are the subject of inquiries by the FBI and Manhattan district attorney's office.
  5. Regardless of these substantial allegations concerning the use of violence and intimidation to manipulate the price of securities, Bear Stearns continued to clear PCM's trades and earned substantial fees.

Additional Scienter Allegations

  1. Bear Stearns and the senior officials in charge of Bear Stearns, including Mr. Harriton, knew that Bear Stearns was subject to and must obey the applicable laws, rules, and regulations under the federal securities laws of the United States, and the rules and regulations of the SEC, NASD, and other self-regulatory organizations.
  2. Bear Stearns and the senior officials in charge of Bear Stearns, including Mr. Harriton, knew that each Introducing Broker, that cleared through Bear Stearns, was subject to and must obey all applicable laws, rules, and regulations.
  3. Bear Stearns also has compliance, operational, and other manuals which state that the firm and its employees are subject to and must obey all applicable laws, rules and regulations.
  4. All employees of Bear Stearns, including, but not limited to, Mr. Harriton, are given a copy of Bear Stearns's compliance and operational manuals.
  5. Bear Stearns's compliance, operational, and other manuals each require all Bear Stearns employees including but not limited to Mr. Harriton, to read the manual and to follow the rules contained therein.
  6. As a senior executive officer of Bear Stearns, Mr. Harriton is required to be a registered person including a registered principal in the securities industry.
  7. In order to become a registered person and registered principal in the securities industry, an individual must take and pass certain industry examinations.
  8. Mr. Harriton has taken and passed the Series 7 and Series 24 examinations, making him a registered principal in the industry.
  9. As a senior executive officer of Bear Stearns, and as a registered person and registered principal in the securities industry who has passed the required examinations, Mr. Harriton knew that:
    1. he and Bear Stearns were subject to and must obey all applicable laws, rules, and regulations; and
    2. he and Bear Stearns were required to follow all rules contained in Bear Stearns's compliance, operational, regulatory, and other manuals.

FIRST CLAIM FOR RELIEF


On Behalf of the Federal Claim Subclass

Against All Defendants for Violations of

Section 10(b) of the Exchange Act and Rule 10b-5

  1. Plaintiffs repeat and reallege each and every allegation set forth above as if fully set forth herein.
  2. This claim is brought by plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz on behalf of the Federal Claim Subclass against all defendants.
  3. Defendants knew or recklessly disregarded that the Introducing Brokers were engaging in stock manipulation and other fraudulent activities. Defendants' knowledge that Bear Stearns was executing unlawful manipulative transactions in the Manipulated Securities, and that the markets for these Manipulated Securities were artificially inflated, derived from, among other things: (a) close daily personal contact between Bear Stearns's upper management and the Introducing Brokers; (b) the intimate knowledge of the markets for the Manipulated Securities, including the characteristic pervasive pattern of conduct by the Introducing Brokers and their employees and knowledge of customer and regulatory complaints and inquiries regarding the Introducing Brokers; (c) access to confidential, non-public information regarding the Introducing Brokers' financial condition, liquidity, and net capital position; (d) the ability to extend or deny credit to Introducing Brokers based upon the value of securities held as collateral and their actions with respect to monitoring markets and accounts to exercise this power; and (e) the power and control over whether to execute transactions or prohibit trading strategies.
  4. By reason of the foregoing, defendants individually and in concert violated section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) engaged in market manipulation of the Manipulated Securities and employed devices, schemes, and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices, and a course of conduct which operated as a fraud
    and deceit upon the members of the Federal Claim Subclass in connection with their purchases of Manipulated Securities during the Federal Claim Subclass Period.
  1. Defendants, individually and in concert, directly and indirectly, by the use of means or instrumentalities of interstate commerce and/or the mails, engaged and participated in a continuous course of conduct to artificially manipulate the market prices of Manipulated Securities during the Federal Claim Subclass Period Class Period. Defendants employed devices, schemes, and artifices to defraud and engaged in acts, practices, and a course of conduct, as alleged herein, which operated as a fraud and deceit upon the members of the Federal Claim Subclass in connection with their purchases of Manipulated Securities during the Federal Claim Subclass Period.
  2. At the time of the course of conduct alleged above, the members of the Federal Claim Subclass were ignorant of the nature of the scheme and could not in the exercise of reasonable diligence have known the actual facts. In reliance on the integrity of the market price of the Manipulated Securities, the members of the Federal Claim Subclass were induced to and did purchase the Manipulated Securities at artificially inflated prices. Had plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz and the other members of the Federal Claim Subclass known the truth, they would not have taken such action.
  3. Plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz did not know or were not in a position to know the circumstances and facts underlying this claim prior to December 9, 1997. Accordingly, this claim is brought within one year of the discovery of the underlying facts giving rise to the claim and within three years of the actions complained of, and is, thus, brought in a timely manner.
  4. By virtue of the foregoing, defendants have violated section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
  5. Plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz and the members of the Federal Claim Subclass have been damaged by defendants' violations as described and seek recovery for the damages caused thereby.

SECOND CLAIM FOR RELIEF


On Behalf of the Federal Claim Subclass

Against Bear, Stearns & Co. and Mr. Harriton

for Violations of Section 20(a) of The Exchange Act



  1. Plaintiffs repeat and reallege the allegations set forth above as if set forth fully herein.
  2. This claim is brought by plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz on behalf of the Federal Claim Subclass against Bear, Stearns & Co., and Mr. Harriton.
  3. Defendants Bear, Stearns & Co. by virtue of its ownership of defendant Bear, Stearns Securities, and Mr. Harriton, by virtue of his position of control and authority over defendant Bear, Stearns Securities, had the power to influence and control and did influence and control, directly or indirectly, the decision-making and conduct of Bear, Stearns Securities.
  4. By virtue of his position and power to control and influence Bear, Stearns Securities, Mr. Harriton was a "controlling person" of defendant Bear, Stearns Securities within the meaning of section 20(a) of the Exchange Act and had the power and influence to direct the management and activities of Bear, Stearns Securities and to cause Bear, Stearns Securities to engage in the unlawful conduct complained of herein.
  5. Defendant Bear, Stearns & Co., through its position of ownership, control, and authority as the parent company of Bear, Stearns Securities, had the power to, and did, select the Board of Directors of defendant Bear, Stearns Securities, appoint its senior management, and influence and control, directly or indirectly, the decision-making and conduct of Bear, Stearns Securities. By virtue of its position and power to control and influence Bear, Stearns Securities, Bear, Stearns & Co. was a "controlling person" of Bear, Stearns Securities within the meaning of section 20(a) of the Exchange Act and had the power and influence to direct the management of activities at Bear, Stearns Securities and to cause it to engage in the unlawful conduct complained of herein.
  6. By reason of the conduct alleged herein, Bear, Stearns & Co. and Mr. Harriton are liable for the aforesaid wrongful conduct, and are liable to plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz and to the other members of the Federal Claim Subclass for the substantial damages suffered in connection with their purchases of the securities during the Federal Claim Subclass Period.

THIRD CLAIM FOR RELIEF

On Behalf of the Contract Claim Subclass

Against Bear Stearns for Breach of Contract



  1. Plaintiffs repeat and reallege the allegations set forth above as if set forth fully herein.
  1. This claim is brought by plaintiffs Jenkins, Booth, Callahan, Dickens, Endres, Fraser, Fuller, Tozzi, and Weirschem on behalf of the Contract Claim Subclass against Bear Stearns.
  2. Bear Stearns agreed in customer agreements to conduct itself in accordance with all applicable securities and laws, rules, regulations, exchange rules, and SRO rules and regulations, and to deal fairly and in good faith with Class members.
  3. Bear Stearns breached the terms of this contract.
  4. As a result thereof, Plaintiffs Jenkins, Booth, Callahan, Dickens, Endres, Fraser, Fuller, Tozzi, and Weirschem and the other members of the Contract Claim Subclass have been damaged.

FOURTH CLAIM FOR RELIEF

On Behalf of the Contract Claim Subclass

as Intended Third Party Beneficiaries

Against Bear Stearns for Breach of Contract

  1. Plaintiffs repeat and reallege the allegations above as if fully set forth herein.
  2. This claim is brought by plaintiffs Jenkins, Booth, Callahan, Dickens Endres, Fraser, Fuller, Tozzi, and Weirschem on behalf of the Contract Claim Subclass against Bear Stearns.
  3. The Contract Claim Subclass members, as third party beneficiaries of the clearing contracts between the Introducing Brokers and Bear Stearns, are entitled to a claim against Bear Stearns for breach of those contracts.
  4. Bear Stearns contracted with the Introducing Brokers to provide clearing and other services for the Introducing Brokers' clients in accordance with all applicable securities and laws, rules, regulations, exchange rules, and SRO rules and regulations, and to deal fairly and in good faith with Class members and breached those contracts as alleged herein.
  5. Plaintiffs Jenkins, Booth, Callahan, Dickens, Endres, Fraser, Fuller, and Weirschem and the other members of the Contract Claim Subclass, as clients of the Introducing Brokers, were the intended beneficiaries of the Clearing Contracts, and were damaged as a result of breaches of contract complained of herein.

FIFTH CLAIM FOR RELIEF

On Behalf of the Class Against

All Defendants for Common Law Fraud and Deceit

  1. Plaintiffs repeat and reallege each and every allegation set forth above as if fully set forth herein.
  2. All plaintiffs bring this claim on behalf of the Class against all defendants based on common law claims for fraud and deceit, pursuant to the Court's supplemental jurisdiction, and the claims asserted herein arise out of the same nucleus of operative facts as those alleged herein.
  3. For the purpose of inducing plaintiffs to purchase the Manipulated Securities, and with intent to deceive plaintiffs, defendants employed a scheme and course of conduct to defraud as alleged herein.
  4. Plaintiffs and other members of the Class, at the time of said unlawful and fraudulent conduct, were ignorant of the nature of these actions and of this conduct, and believed them to be bona fide. In reliance upon the integrity of the markets and securities offering process, and in ignorance of the true facts, plaintiffs and members of the Class were induced to and did purchase Manipulated Securities at inflated and artificial prices. Had plaintiffs known the true facts, they would not have taken such action.
  5. By reason of the foregoing conduct, all named plaintiffs and each of the members of the Class have suffered damages.


SIXTH CLAIM FOR RELIEF


On Behalf of the Class Against

Bear Stearns for Negligent Misrepresentation



  1. Plaintiffs repeat and reallege the paragraphs above as if fully set forth herein.
  2. This claim is asserted by all plaintiffs on behalf of the Class against Bear Stearns.
  3. Bear Stearns, in the course of its business and in transactions with plaintiffs in which it had a pecuniary interest, supplied false and misleading information for the guidance of the plaintiffs.
  4. All plaintiffs and other members of the Class members justifiably relied upon said information, and were damaged thereby.
  5. Bear Stearns is liable for the damage caused to plaintiffs.

WHEREFORE, plaintiffs demand judgment individually and on behalf of the Class as follows:

  1. A determination that the instant action is a proper class action maintainable under Rule 23 of the Federal Rules of Civil Procedure;
  2. Awarding plaintiffs Goldberger, Bier, Poeta, Wincelowitz, Miceli, and Prenovitz and the members of the Federal Claim Subclass against all defendants, jointly and severally, under the First and Second Claims for Relief, damages sustained as a result of the wrongdoings of defendants, together with interest thereon; and
  3. Awarding plaintiffs Booth, Callahan, Dickens, Endres, Fraser, Fuller, Jenkins, Tozzi, and Weirschem and the Contract Claim Subclass against all defendants, jointly and severally, under the Third and Fourth Claims for Relief, compensating and punitive damages sustained as a result of the wrongdoings of defendants, together with interest thereon;
  4. Awarding all plaintiffs and members of the Class against all defendants jointly and severally, under the Fifth and Sixth Claims for Relief, damages sustained as a result of the wrongdoings of defendants, together with interest thereon;
  5. Awarding plaintiffs and the Class against all defendants jointly and severally their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
  1. Granting such other and further relief as the Court may deem just and proper.

DATED: November 8, 1999



WOLF HALDENSTEIN ADLER

FREEMAN & HERZ LLP





____________________________________

Daniel W. Krasner (DK 6381)

Jeffrey G. Smith (JS-2431)

Robert B. Weintraub (RW 2897)

Gregory Mark Nespole (GN-6820)

270 Madison Avenue

New York, New York 10016

(P) 212-545-4657

(F) 212-545-4653



Nicholas E. Chimicles

Denise Davis Schwartzman

Candice L.H. Hegedus

CHIMICLES & TIKELLIS LLP

361 West Lancaster Avenue

Haverford, PA 19041-0100

(P) 610-642-8500

(F) 610-649-3633



Robert J. Kriner, Jr.

CHIMICLES & TIKELLIS LLP

One Rodney Square

Wilmington, DE 19899-1035

(P) 302-656-2500

(F) 302-656-9053



Thomas G. Shapiro

SHAPIRO HABER & URMY LLP

75 State Street

Boston, MA 02109

(P) 617-439-3939

(F) 617-439-0134



Oren Giskan

Law Offices of James V. Bashian, P.C.

500 Fifth Avenue, Suite 2700

New York, New York 10110

(P) 212-921-4110

(F) 212-921-4249



Marc S. Henzel

Law Offices of Marc S. Henzel

210 West Washington Square

Third Floor

Philadelphia, PA 19106-3514

(P) 215-625-9999

(F) 215-440-9475



/169500



TABLE OF CONTENTS



Page

 

A. JURISDICTION AND VENUE 1

 

B. NATURE OF THE ACTION 1

 

C. THE PARTIES 5



Plaintiffs 5



Defendants 6

 

D. PLAINTIFFS' CLASS ACTION ALLEGATIONS 6

 

Class and Subclass Definitions 6

 

E. APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE 9

 

F. SUBSTANTIVE ALLEGATIONS 9

 

1. Introduction 9



2. The Typical Roles Of The Clearing

Broker And The Introducing Broker 13



3. Bucket Shop Operations and Bear Stearns's Role 14

 

4. Clearing Trades In Restricted Securities 17

 

5. Clearing For The Pump And Dump 18

 

6. Phony Nominee Accounts From Which Bear

Stearns And Harriton Each Profited 19

 

7. Phony Nominee Accounts As Part Of

Fraudulent Underwriting Schemes 19

 

8. Stock-Loan And Short Sales 20

 

9. Bear Stearns's Clearing Operations 21

 

10. Margin Accounts 24

 

11. Compliance Reports 24

 

12. Manipulation Of Securities With

Low Average Trading Volumes 25

 

13. The Indictments of Introducing Brokers
for Which Bear Stearns Performed
Clearing Broker Services Raise a
Reasonable Inference That Defendants
Committed Securities Fraud 27

 

14. Bear Stearns's Violations of Regulation T 36



15. Mr. Harriton's Micro-Management

Of Bucket Shop Operations 37

 

BEAR STEARNS'S RELATIONSHIP

WITH SPECIFIC INTRODUCING BROKERS 40

 

Kensington Wells Incorporated 40

 

Hillcrest Financial Corp 47

 

D. Blech & Co. 48

 

Sterling Foster & Company, Inc. 58

 

A.R. Baron & Co., Inc. 75

 

Meyers Pollock Robbins, Inc. 84

 

Paragon Capital, Inc. 87

 

Lew Lieberbaum & Co. 88

 

Noble International Investments, Inc. 91

 

Josephthal, Lyon & Ross, Inc. 91

 

First Cambridge Securities Corp. 95

 

Corporate Securities Group, Inc. 97

 

Stratton Oakmont Inc. 98

 

PCM Securities, Ltd. 101

 

Additional Scienter Allegations 102

 

FIRST CLAIM FOR RELIEF

 

On Behalf of the Federal Claim Subclass

Against All Defendants for Violations of

Section 10(b) of the Exchange Act and Rule 10b-5 103





SECOND CLAIM FOR RELIEF
On Behalf of the Federal Claim Subclass
Against Bear, Stearns & Co. and Mr. Harriton
for Violations of Section 20(a) of The Exchange Act 105

 

THIRD CLAIM FOR RELIEF
On Behalf of the Contract Claim Subclass
Against Bear Stearns for Breach of Contract 107

 

FOURTH CLAIM FOR RELIEF
On Behalf of the Contract Claim Subclass
as Intended Third Party Beneficiaries
Against Bear Stearns for Breach of Contract 107

 

FIFTH CLAIM FOR RELIEF
On Behalf of the Class Against
All Defendants for Common Law Fraud and Deceit 108

 

SIXTH CLAIM FOR RELIEF
On Behalf of the Class Against
Bear Stearns for Negligent Misrepresentation 109



1.

1See Goldberger v. Bear Stearns & Company, Inc., et al. No. 98 Civ. 8677 (JSM) (S.D.N.Y., filed December 7, 1998); and Bier v. Bear Stearns & Company, et al., No. 99 Civ. 0963 (JSM) (S.D.N.Y., filed February 8, 1999).

2.

2Berwecky et al. v. Bear Stearns & Co., et al., 97 Civ. 5318 (S.D.N.Y.)

 

3.

3In re Blech Securities Litigation, 94 Civ. 7696 (S.D.N.Y.)

 

4. Section 7 of the Exchange Act prohibits a broker-dealer from extending credit to a customer in contravention of Federal Reserve Board Regulation T, 12 C.F.R. §§220-1 et. sec. Regulation T requires a broker-dealer to obtain full cash payment for customer purchases in a cash account within five business days of the purchase.

5. See United States v. Elias Tacher et al., Indictment CR 99-697 (Elias Tacher and Salvador Tacher, defendants in the Indictment, were two of Kensington Wells' principals.)

6. DK'd is a securities industry expression meaning that the trade is rejected or unknown by either the customer or broker.

7. The SEC's investigation of Bear, Stearns Securities is in the context of an administrative proceeding pending before the SEC styled In the Matter of Bear, Stearns Securities Corp., File No. 3-9962 and the investigation of Mr. Harriton, also pending before the SEC, is styled In the Matter of Richard Harriton, File No. 3-9963.