About eight months after stockbroker Gregg M.S. Berger was indicted for conspiracy to commit securities fraud and wire fraud for his role in an international pump and dump stock scheme, the Securities and Exchange Commission, or SEC, has settled failure to supervise charges against Berger’s former employer, Gilford Securities Inc. of New York.

Berger, 47, of Yonkers, N.Y., worked from 2002 through May 2006 as a retail broker at Gilford. He was indicted by the U.S. Department of Justice in February in the U.S. District Court for the Eastern District of Michigan for his role in a scheme that used spam emails to fraudulently pump up the potential of thinly-traded Chinese, Israeli and Canadian microcap stocks, according to public disclosure records kept by the Financial Industry Regulatory Authority, or FINRA.

After the email recipients bought the stock, Berger and his alleged co-conspirators “dumped” their shares at the newly inflated prices, the public disclosure records said. Berger’s alleged co-conspirators included Alan Ralsky, Francis Tribble, How Wai, John Hui and Scott Bradley.

The indictment was preceded by a multi-year FBI investigation. The FBI was assisted by the U.S. Postal Service and the IRS.

The pump-and-dump scheme, which went on from January 2005 through December 2007, resulted in the unregistered sale of 30 million shares that netted about $33 million for Berger’s co-conspirators and more than $600,000 in commissions for Berger, the public disclosure records said. The SEC also charged Berger back in February for violations of federal securities laws.

SEC Enforces Fines

In April, Berger pleaded guilty to the conspiracy charge, and the SEC turned its attention to Gilford, his employer at the time. In an order dated Sept. 30, the SEC directed Gilford to disgorge $275,000, pay prejudgment interest of $77,113, and a civil penalty of $260,000 to the U.S. Treasury.

In addition, David S. Kaplan, Berger’s supervisor and the sales manager of the New York office of Gilford, was directed to disgorge $225,000, pay prejudgment interest of $63,092, and a civil penalty of $30,000. Kaplan was suspended for one year from any association with a broker-dealer in a supervisory capacity, the SEC order said.

Ralph Worthington, co-founder, CEO and chairman of Gilford, was directed to pay a civil penalty of $45,000, and also suspended for one year, the SEC order said. The company’s chief compliance officer, Richard W. Granahan, was hit with a $20,000 civil penalty.

Gilford and the other respondents agreed to the terms of the order without admitting or denying its contents for any purpose beyond the SEC administrative proceeding. Gilford is incorporated in New York and has its headquarters there. The firm has been registered as a broker-dealer with the SEC since 1979. During the period relevant to the pump and dump scheme, Gilford employed about 113 stockbrokers, and had branch offices in New York, New Jersey, California and Texas, the SEC order said.

Berger resold the 30 million “pumped” shares through about 20 customer accounts at Gilford. No resale registration statements were on file for the shares, nor in effect with the SEC. According to the SEC order, the unregistered sales were not detected by Gilford because of its failure to put reasonable systems in place to supervise stockbrokers regarding customers’ unregistered sales of securities. The SEC requires such supervisory policies and procedures.

During the time the pump and dump was happening, Worthington was responsible for developing Gilford’s supervisory policies and procedures, as well as for their implementation, the SEC order said. Kaplan bore the ultimate responsibility for supervising Berger. Both failed to reasonably supervise Berger’s unregistered sales of securities.

Moreover, Gilford violated federal securities laws by permitting millions of shares of stock to be sold through customers’ accounts without the stockbrokers and officers at the firm conducting reasonable inquiry into the source of the stock being publicly traded, the SEC order said. Gilford also failed to meet its obligations to file Suspicious Activity Reports, or SARs, per the Bank Secrecy Act of 1970.

The SEC order stated that Gilford allowed employees to improperly execute customer orders without the required trading licenses, and failed to keep proper records on employees. The firm also violated an SEC regulation by sharing nonpublic customer information with unauthorized third parties. Worthington and Kaplan aided and abetted some of Gilford’s violations, and Granahan, the compliance officer, aided and abetted Gilford’s SAR violations.

Berger’s record contained a few red flags, as shown by the FINRA public disclosure records. In 2000 he was fined $5,000 and suspended for two months for recommending an unsuitable investment, as well as for unauthorized trading and failure to notify Salomon Smith Barney Inc., his employer at the time, that he was engaging in an outside business.

In 1997, Berger settled a dispute with a customer for roughly $100,000. The customer alleged that Berger engaged in misrepresentation, excessive trading in the customer’s account, and that he recommended unsuitable investments. His employer at the time was Salomon Smith Barney.

The public disclosure records do not show that Berger is employed at this time. He was fired from Newbridge Securities Corp. shortly after he was indicted in Michigan.

As noted, Gilford settled the SEC’s charges of failure to supervise. Claims for failure to supervise are cognizable under the broad construction of the antifraud provisions of SEC Rule 10(b)(5).

In addition, a brokerage firm’s liability for the conduct of its registered representatives not only arises from its lack of effective supervision but also from the familiar principles of an employer’s vicarious liability. In addition to vicarious liability under the common law, Section 20(a) of the Exchange Act of 1934 provides for joint and several liability with the controlled person, or stockbroker, unless the controlling person, or broker-dealer firm, acted in good faith and did not directly or indirectly induce the cause of action.

The practice of The Guiliano Law Firm is limited to the representation of investors in claims against stockbrokers, brokerage firms, and other financial professionals for fraud in connection with the sale of securities, the sale of unregistered securities, breach of fiduciary duty, and the failure to supervise. We also offer our representation on a contingent fee basis, meaning there is no cost unless we are able to make a recovery.

Guiliano Law Firm

The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

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