Henry Salzhauer and Michael Salzhauer

SECURITIES EXCHANGE ACT OF 1934
Release No. 45005 / October 31, 2001

ADMINISTRATIVE PROCEEDING
File No. 3-10629

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be instituted against Henry Salzhauer and Michael Salzhauer (collectively the "Respondents") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").

II.

In anticipation of the institution of these cease-and-desist proceedings, Henry Salzhauer and Michael Salzhauer have each submitted an Offer of Settlement (the "Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings set forth herein, except the jurisdiction of the Commission over them and the subject matter set forth in this Order, which the Respondents admit, the Respondents consent to the entry of the findings and to the imposition of the sanctions set forth below and to the issuance of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Orders ("Order").

III.

On the basis of this Order and the Respondents' Offers, the Commission finds the following:¹

A. Summary

1. This matter concerns a fraudulent course of conduct that involved material misrepresentations to certain savings banks in connection with their conversion from mutual to stock ownership. From October 1997 through March 1998, Henry and Michael Salzhauer (the "Salzhauers") and Vito Valentini ("Valentini") took numerous actions to profit from the subscription rights of other persons who were depositors of these savings banks, and who purchased stock in the initial public offerings of these savings banks.

2. Mutual banks are owned by their depositors. When a mutual bank converts to stock ownership, federal and state banking regulations require that depositors receive non-transferable subscription rights entitling them to purchase conversion stock before the general public. The Salzhauers and Valentini entered into agreements with certain depositors pursuant to which the Salzhauers provided funds to pay for the depositors' exercise of their subscription rights. Pursuant to these agreements, the depositors gave Henry Salzhauer exclusive discretion to sell their conversion stock, and the depositors, the Salzhauers and Valentini then shared the resulting profits from the sale of that conversion stock. Despite these agreements, the depositors represented to the converting banks that they were purchasing the conversion stock for their own account, and that they had not entered into any agreement or understanding regarding any further sale or transfer of their shares. These representations were false. By engaging in this course of conduct, the Salzhauers violated the antifraud provisions of the Exchange Act. The Salzhauers unlawfully realized profits of $1,207,019.

B. Respondents

1. Henry Salzhauer, age 65, resides in Sands Point, New York. Henry Salzhauer controls his family's real estate and investment businesses, including a hedge fund, the assets of which are invested almost exclusively in bank stocks.

2. Michael Salzhauer, age 38, resides in New York, New York. Michael Salzhauer is Henry Salzhauer's son and he works along with his father managing the family's real estate and securities investments.

C. Other Relevant Entities

1. Staten Island Bancorp ("SIB"), a Delaware corporation, was incorporated in 1997 to be the holding company for Staten Island Savings Bank ("SISB"). SIB acquired all of SISB's capital stock at the time of its conversion to a publicly traded company. At the time of the bank's conversion, SISB operated seventeen branches and was the largest depository institution in the New York City borough of Staten Island.

2. Richmond County Financial Corporation ("RCFC"), a Delaware Corporation, was incorporated in 1997 to be the holding company for Richmond County Savings Bank ("RCSB"). RCFC acquired all of RCSB's capital stock at the time of its conversion to a publicly traded company. At the time of the bank's conversion, RCSB operated eleven branches in Staten Island and one branch in Brooklyn, New York.

3. Independence Community Bank Corporation ("ICBC"), a Delaware Corporation, was incorporated in 1997 to be the holding company for Independence Savings Bank ("ISB"). ICBC acquired all of ISB's capital stock at the time of the bank's conversion to a publicly traded company. Headquartered in Brooklyn, ISB operated 34 branches in the New York metropolitan area at the time of the conversion.

D. Facts

1. Federal and State Regulations Govern the Conversion of Mutual Banks to Stock Ownership

Saving and loan associations are either mutual associations ("mutual banks"), owned by their depositors and borrowers, or stock associations owned by their stockholders ("stock banks"). A mutual bank can convert to a stock bank by issuing and selling shares of stock. Rules and regulations concerning the conversion process ensure that conversions will benefit the converting association, its members, and the general public. These federal and state regulations, in place during all times relevant to this action, govern conversion procedures. An Office of Thrift Supervision ("OTS") regulation, 12 C.F.R. §563b.3(c), requires, among other things, that eligible account holders be given non-transferable subscription rights entitling them to purchase conversion stock before the general public. OTS and New York Banking Department ("NYBD") regulations prohibit transfer of, or agreements or understandings to transfer, the legal or beneficial ownership of subscription rights or the underlying stock prior to the completion of a conversion. 12 C.F.R. §563.3(i) and N.Y. Comp. Codes R. & Regs., tit. 3 §86.4(j).

2. Purchases of Stock in Staten Island Bancorp

a. In or about September 1997, SISB, headquartered in Staten Island, New York, mailed to its depositors a prospectus, a stock order form and other information concerning the conversion of the bank from mutual to stock ownership. As explained in the documents sent to SISB's depositors, each depositor, in accordance with OTS regulations, received non-transferable subscription rights granting a preference in purchasing stock in the offering.

b. The Salzhauers and Valentini reviewed the SIB prospectus, which in at least two different places warned that OTS regulations prohibited the transfer, or an agreement or understanding to transfer, the legal or beneficial ownership of subscription rights or stock. The Salzhauers and Valentini also reviewed subscription forms for SIB stock. The SIB subscription form contained an acknowledgment by which the depositor certified "that this stock order is for my own account and there is no agreement or understanding regarding any further sale or transfer of my shares. Federal regulations prohibit persons from transferring or entering into any agreement directly or indirectly to transfer the legal or beneficial ownership of conversion subscription rights or the underlying securities to the account of another person. Staten Island Savings Bank will pursue any and all legal and equitable remedies in the event it becomes aware of the transfer of subscription rights and will not honor orders known by it to involve such transfer."

c. Valentini spoke to a number of SISB depositors about the offering. Most of the depositors to whom Valentini spoke were reluctant to use their own money to purchase stock in the SISB conversion because they did not understand the stock market and feared the risks associated with it. Therefore, Valentini looked for a way to provide SISB depositors with money to purchase stock and exercise their subscription rights.

d. On or about October 9, 1997, Valentini and the Salzhauers met to discuss the SISB conversion and possible funding. At this meeting, Valentini introduced himself to the Salzhauers as the accountant for several SISB depositors who wanted to borrow money in connection with the SISB public offering. Henry Salzhauer told Valentini that the depositors should borrow funds from a bank or other sources. Valentini told the Salzhauers what the depositors had told him, namely, that they were reluctant to use their own funds and that they feared the risks associated with the stock market. The Salzhauers then agreed to provide money to the SISB depositors to subscribe to the SIB stock offering.

e. During the October 9, 1997 meeting, Henry Salzhauer and Valentini wrote an agreement to be used with each depositor ("the Agreement"). The most important terms of the Agreement were:

• Henry Salzhauer or entities over which he exercised substantial control and discretion would provide money to each depositor. The money was to be used only to subscribe to the bank's initial public offering.

• The depositors would open custody accounts at a bank (the "Bank"). All shares purchased under the Agreement were to be registered in the borrowers' name and deposited into the custody accounts. The depositors gave Henry Salzhauer "sole discretion" to sell the stock.

• If the stock sold for less than the amount of money provided to the depositor by Henry Salzhauer, the depositor was only liable to pay him the net proceeds of the sale.

• If the stock sold for more than the issue price, the depositor and Henry Salzhauer split the profits from the sale evenly, except the depositor was responsible to pay the interest on the money Henry Salzhauer had borrowed to provide to the depositor.

f. The Agreement gave Henry Salzhauer a beneficial ownership interest in the SIB stock allocated to the SISB depositors who entered into the Agreement.

g. Michael Salzhauer played an integral role in providing funds to the depositors to subscribe in the SIB offering, and carrying out the terms of the Agreement. He determined with his father that they should enter into the Agreement with the SIB depositors and provide funds to these depositors. He also exercised substantial control and discretion over the various entities that were providing funds to the depositors, and determined how much money each entity would provide. He oversaw the mechanics of the transactions with the depositors. He also shared in the profits from the sale of the SIB stock with Henry Salzhauer.

h. Valentini was compensated by entering into a separate agreement with the SISB depositors that granted Valentini's corporation, Paradox Advisors, Inc., between ten and fifty percent of the depositors' share of the profits after satisfying the Agreement.

i. In or about October 1997, Valentini contacted fifteen individual and corporate depositors in Staten Island to enter into the Agreement. Valentini met personally with each account holder, and Valentini completed a subscription agreement form for each depositor, filled in the number of shares requested based on an estimate arrived at by the Salzhauers, and then had the depositor sign the agreement. In addition to the subscription agreements, Valentini had the depositors sign the Agreement, and a Bank custody account agreement.

j. After obtaining signatures on these documents, Valentini took them back to the Salzhauers, who retained copies of them. A Salzhauer employee wrote checks to SIB to pay for the number of shares being purchased in each depositor's name. The checks were drawn on a personal account of Henry Salzhauer. Michael Salzhauer, who had power of attorney for the account, signed the checks. Valentini hand delivered the checks and subscription forms to SISB's conversion center.²

k. The SIB subscription forms contained untrue statements of material fact. Contrary to the depositors' certification that they were ordering the stock for their own account, and that there was no agreement or understanding regarding any further sale or transfer of the shares, each depositor was, in fact, purchasing stock for the account of third parties and had entered into an agreement with the Salzhauers regarding "further sale or transfer" of the SIB shares.

l. The Salzhauers provided more than $2,000,000 to the SISB depositors to purchase SIB stock, and these depositors received more than 219,000 shares of stock ("the SIB Stock").

m. SIB issued stock on December 22, 1997. On that day, Henry Salzhauer instructed his broker to sell the SIB Stock. From on or about December 22, 1997, until on or about December 31, 1997, Henry Salzhauer sold all of the SIB Stock at a profit. The proceeds from the sale of the SIB Stock were distributed among the Salzhauers, Valentini and the SISB depositors.

n. The Salzhauers realized approximately $631,512 in profit from the sale of the SIB Stock.

o. Valentini realized approximately $238,000 in profit from the sale of the SIB Stock.

p. The depositors realized approximately $578,706 in profit from the sale of the SIB Stock.

3. Purchases of Stock in Richmond County Financial Corporation

a. In or about December 1997, RCSB sent its depositors information about its conversion to stock ownership. These documents explained that each depositor, in accordance with NYBD regulations, received non-transferable subscription rights granting a preference in purchasing stock in the offering.

b. After Valentini learned about the RCSB conversion, in or about December 1997 or January 1998, he contacted Michael Salzhauer to discuss the conversion. After a conversation with Valentini, Michael Salzhauer contacted his father and then agreed to provide money to RCSB depositors under the same terms used for SISB.

c. In or about January 1998, Valentini contacted thirty individual and corporate RCSB account holders to purchase stock in the conversion using money provided by the Salzhauers ("the RCFC Stock"). Valentini met with the RCSB depositors and filled out the subscription forms, which the depositors signed in his presence. Valentini also obtained the depositors' signatures on the Agreement and the Bank custody account documents. Valentini gave the agreements to the Salzhauers and the custody account documents to the Bank.

d. The Salzhauers and Valentini also obtained copies of the subscription forms. Each RCFC subscription form contained an acknowledgment by which the depositor certified, that "I am purchasing solely for my own account and that there is no agreement or understanding regarding the sale or transfer of such shares or my right to subscribe to shares herewith . . . Applicable regulations prohibit any person from transferring or entering into any agreement, directly or indirectly, to transfer the legal or beneficial ownership of subscription rights or the underlying securities to the account of another. Richmond County Savings Bank and Richmond County Financial Corp. will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve such transfer."

e. The Salzhauers arranged for checks drawn on their accounts at the Bank to be provided to the RCSB conversion center for each depositor to pay for the RCFC Stock. Valentini delivered each depositor's subscription form directly to the RCSB conversion center.

f. The subscription forms delivered to the RCSB conversion center contained untrue statements of material fact. Contrary to the certification in the subscription form, each depositor was, in fact, purchasing stock for the account of third parties, and had entered into an agreement with the Salzhauers regarding "further sale or transfer" of the shares.

g. RCFC issued stock on or about February 18, 1998. Henry Salzhauer instructed his broker to sell the RCFC Stock. From on or about February 18 until on or about February 20, 1998, Henry Salzhauer sold the RCFC Stock for a profit. The proceeds of the sale were then distributed among the Salzhauers, Valentini and the RCSB depositors.

h. The Salzhauers realized approximately $299,959 in profit from the sale of the RCFC Stock.

i. Valentini realized approximately $178,000 in profit from the sale of the RCFC Stock.

j. The depositors realized approximately $221,339 in profit from the sale of the RCFC Stock.

4. Purchases of Stock in Independence Community Bank Corporation

a. In or about January 1998, ISB sent its depositors notice of its intent to convert to stock ownership in the form of a bank holding corporation called ICBC. Once again, Valentini contacted Michael Salzhauer who agreed to provide ISB depositors money under the same agreement used for SISB and RCSB. Valentini contacted twenty ISB depositors to enter into the Agreement. Valentini proceeded in the same manner as he had in the two prior conversions, obtaining the ISB depositors' signatures on the Agreement, subscription forms, and the Bank custody account documents. Valentini gave the Agreements to the Salzhauers and the custody account documents to the Bank. The Salzhauers arranged for checks to be drawn on their bank accounts for each depositor to pay for the ICBC stock ("the ICBC Stock"). Valentini delivered each depositor's subscription forms, along with the checks, directly to the ISB conversion center.

b. The Salzhauers and Valentini obtained ICBC subscription forms. Each subscription form contained an acknowledgment by which the depositor certified, that "I am purchasing solely for my own account and that there is no agreement or understanding regarding the sale or transfer of such shares or my right to subscribe to shares herewith . . . . Applicable regulations prohibit any person from transferring or entering into any agreement, directly or indirectly, to transfer the legal or beneficial ownership of subscription rights or the underlying securities to the account of another. Independence Savings Bank and Independence Community Bank Corp. will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve such transfer."

c. The ICBC subscription forms contained untrue statements of material fact. Contrary to the certification in the subscription form, each depositor was, in fact, purchasing stock for the account of a third party, and had entered into an agreement with the Salzhauers regarding "further sale or transfer" of the ICBC Stock.

d. ICBC issued stock on or about March 17, 1998. Henry Salzhauer instructed his broker to sell the ICBC Stock. On or about March 18, Henry Salzhauer sold the ICBC Stock at a profit. The proceeds of the sale of the ICBC Stock were distributed among the Salzhauers, Valentini and the depositors.

e. The Salzhauers realized approximately $275,548 in profit from the sale of the ICBC Stock.

f. Valentini realized approximately $170,000 in profit from the sale of the ICBC Stock.

g. The depositors realized approximately $241,532 in profit from the sale of the ICBC Stock.

E. Legal Analysis

1. Violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, make it unlawful for any person, directly or indirectly to (1) employ any device, scheme, or artifice to defraud; (2) make any untrue statement of material fact or omission; or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. In an action pursuant to Section 10(b) of the Exchange Act and Rule 10b-5, the Commission must prove that the defendant acted with scienter. Aaron v. SEC, 446 U.S. 680, 695 (1980). Scienter has been defined as "a mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). Knowing or reckless conduct satisfies the element of scienter. See Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 44-48 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); see also SEC v. U.S. Environmental, 155 F.3d 107, 111 (2d Cir. 1998).

2. Misstatements on the Bank Stock Subscription Forms

The Salzhauers participated in a fraudulent course of conduct that involved material misrepresentations of fact in connection with the purchase and sale of securities. As set forth above, the Salzhauers entered into the Agreements with depositors pursuant to which the Salzhauers provided depositors with funds to purchase conversion stock. Pursuant to the Agreement, Henry Salzhauer then sold the conversion stock, and the Salzhauers split the profit from the sale of the stock with the depositors. Depositors purchasing the conversion stock were required to sign subscription forms that were submitted to the converting bank. Each subscription form submitted to the converting banks contained untrue statements of material fact. Contrary to the certification that depositors were ordering the stock for their own account, and had not entered into an agreement or understanding regarding any further sale or transfer of the shares, each depositor was, in fact, purchasing stock for the account of third parties, and had entered into the Agreement with the Salzhauers. The Agreement transferred beneficial ownership of the conversion stock to Henry Salzhauer, and was an agreement or understanding regarding further sale or transfer of the issuing bank's shares. Accordingly, by engaging in this course of conduct, the Salzhauers committed violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

3. Materiality

a. Under Section 10(b) of the Exchange Act, a fact is material if there is "a substantial likelihood that the disclosure of the omitted fact would be viewed by the reasonable investor as having significantly altered the `total mix' of information made available." TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976) (construing Section 14(a) of the Exchange Act). A statement is material if it "reasonably could have been expected to influence [the sellers'] decision to sell." Affiliated Ute Citizens v. United States, 406 U.S. 128, 151-153 (1972); accord Basic Inc. v. Levinson, 485 U.S. 224, 238-240 (1988).

b. "The identity of a purchaser can be material if a reasonable investor would find it significant." SEC v. Jakubowski, 1997 U.S. Dist. LEXIS 4000, *23 (N.D. Ill), aff'd 150 F.3d 675 (7^th Cir. 1998), cert. denied, 525 U.S. 1103 (1999). Federal and state banking regulations restricted the sale of the conversion stock to qualified account holders. Each subscription form contained a certification that the applicant was purchasing the stock for his own account, and that he had not entered into an agreement or understanding regarding further sale or transfer of his shares, and a warning that the banks would not honor orders from unqualified persons and would pursue legal remedies against those found to have transferred their rights. Had the banks known about the Agreement with the Salzhauers, the banks would not have sold the stock because to have done so would have, among other things, violated the prohibition against transferring subscription rights contained in OTS regulation § 563b.3(i) and NYBD regulations §§ 86.4(j) and 86.4k(1), and constituted an agreement or understanding regarding further sale or transfer of the issuing bank's shares. The subscription forms thus "made the identity of the purchaser a sine qua non of these transactions." Jakubowski, 150 F.3d at 681. Moreover, selling stock to the Salzhauers deprived qualified account holders of the opportunity to buy shares.

4. In Connection With

Section 10(b) of the Exchange Act and Rule 10b-5 make it unlawful to use a deceptive device or make a misstatement of material fact "in connection with" the purchase or sale of a security. A deception occurs "in connection with" the sale of a security when it "touches" the sale. Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 30 (1971). Here, the fraudulent course of conduct involved material misrepresentations directly to the issuer of the securities to induce the issuer to sell the stock. As noted by the Seventh Circuit in Jakubowski, "[t]he offer was accepted and the shares issued. How could there be a closer `connection' between statements and `the purchase or sale of any security'?" 150 F.3d at 679. Accordingly, the misrepresentations that the account holders were purchasing the stock for their own account, and that there were no agreements to transfer subscription rights or the stock, directly induced the sale of the securities by the banks, and were therefore in connection with the purchase or sale of a security.

5. The Respondents' Scienter

The Salzhauers acted knowingly or recklessly with regard to the bank conversions. The Salzhauers knew that stock subscription rights in a mutual bank conversion were not transferable, and they knew that depositors seeking to exercise those rights must sign subscription forms. Knowing this, the Salzhauers still engaged in a fraudulent course of conduct that involved making material misstatements of fact to the banks.

IV.

In view of the foregoing, the Commission deems it appropriate to accept the Offers of Settlement submitted by the Respondents and to impose the sanctions specified in the Offers of Settlement.

Accordingly, IT IS HEREBY ORDERED that:

A. Effective immediately, pursuant to Section 21C of the Exchange Act, Henry Salzhauer and Michael Salzhauer cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

B. Henry and Michael Salzhauer shall within thirty (30) days of the date of this Order jointly and severally disgorge $1,207,019, and prejudgment interest of $312,425. Payment shall be: (i) made by United States postal money order, certified check, bank cashier's check or bank money order; (ii) made payable to the "United States Securities and Exchange Commission;" (iii) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (iv) submitted under cover letter that identifies the name and number of this administrative proceeding and the Respondent, and specifying that the payment is disgorgement and prejudgment interest. A copy of the cover letter and payment shall be simultaneously transmitted to Kay L. Lackey, Assistant Regional Director, Securities and Exchange Commission, 233 Broadway, New York, New York 10279.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes