Robert J. Setteducati

Securities Act of 1933
Rel. No.8334 / November 7, 2003

Securities Exchange Act of 1934
Rel. No.48759/November 7, 2003

Admin. Proc. File No. 3-10140

In the Matter of ROBERT J. SETTEDUCATI Brick, NJ 08723

ORDER DISMISSING PROCEEDINGS

On the basis of the Commission's opinion issued this day, it is

ORDERED that proceedings instituted February 7, 2000 against Robert J. Setteducati be, and they hereby are, dismissed.

By the Commission.

Endnotes

¹ HJM terminated operations in September 1998.

In addition to Setteducati, HJM, HJM's president, James Villa, HJM's sales manager, William Masucci, and HJM's head trader, Michael Vanechanos, were named as respondents in the Order Instituting Proceedings (the "OIP") in this matter. In addition to charges related to the manipulation at issue here, the OIP's allegations against HJM, Vanechanos, and Villa involved related claims of fraudulent markups by HJM in sales of securities to retail customers. These markup allegations were not made against Setteducati, who was charged only with manipulation. Each of the other respondents named in the OIP reached a settlement with the Commission. See H.J. Meyers & Co., Inc., Exchange Act Rel. No. 43579 (Nov. 17, 2000), 73 SEC Docket 2594; H.J. Meyers & Co., Inc., Exchange Act Rel. No. 43844 (Jan. 16, 2001), 74 SEC Docket 239; and H.J. Meyers & Co., Inc., Exchange Act Rel. Nos. 43945 and 43946 (Feb. 9, 2001), 74 SEC Docket 949 and 953.

² 15 U.S.C. § 77q(a), 15 U.S.C. § 78j(b), and 17 C.F.R. § 240.10b-5. These provisions prohibit fraud in connection with the purchase or sale of securities.

³ 15 U.S.C. §§ 78o(c)(1) and 78o-4(c)(1); 17 C.F.R. § 240.15c1-2. Section 15(c)(1) and Rules 15c1-2 and 15c1-8 prohibit a broker-dealer in over-the-counter transactions from inducing the purchase or sale of securities by means of any manipulative, deceptive, or other fraudulent device or contrivance, including representations that a security isbeing offered "'at the market' or at a price related to the market price," unless the broker-dealer has reasonable grounds to believe that a market for such security exists other than that "made, created or controlled by him . . . ."

⁴ Rule of Practice 451(d), 17 C.F.R. § 201.451(d), permits a member of the Commission who was not present at oral argument to participate in the decision of the proceeding if that member has reviewed the oral argument transcript prior to such participation. Commissioner Atkins, who was not present at the oral argument, performed the requisite review.

⁵ The Division stated, at the start of the hearing (after all the respondents but Setteducati and Masucci had settled), "[t]he excessive markup violations are no longer part of the case . . . what remains are the manipulation charges against the two respondents . . . ."

⁶ Despite these revenues, the Company disclosed that it had "experienced significant operating losses in each of fiscal 1994 and 1995 and for the first three months ended March 31, 1996 and expect[ed] to incur significant losses for the foreseeable future." As a result of these recurring losses, Borealis' independent auditor, Ernst & Young LLP, expressed "substantial doubt about its ability to continue as a going concern."

⁷ According to its prospectus, the Company's objective in developing Arsenal was "to become the leading supplier of sales automation development tools . . . ."

⁸ The circumstances surrounding HJM's selection as underwriter for the Borealis IPO are not clear from the record.

⁹ These witnesses, like all the witnesses discussed herein, were called by the Division. Setteducati, who gave direct testimony in defense, called no witnesses.

¹⁰ Steele added that he believed Borealis' Arsenal product was "at least as good if not better than" the competition, andthat the stock's "price was fair." According to Steele, Borealis was "competing with Siebel Systems sales force automation software and the market they were addressing was Fortune 500 companies that had a vast disparate sales force that did not as of yet have any form of automation to their sales force."

¹¹ Faith paid $8.25 and $8.75 per share for his Borealis stock, which he purchased in two blocks.

¹² The Company also issued, in May 1996, a warrant to purchase Borealis stock, exercisable for four years at $5 per share, to its counsel, Wilson Sonsini Goodrich & Rosati.

¹³ Although these firms were part of the selling group, they were not identified as underwriters of the offering in the prospectus. HJM's Underwriting and Syndicate Procedures required that it "allocate at least 20% of each offering to [a] selling group."

¹⁴ Most of the institutional customers apparently took delivery of their Borealis stock through "agent banks," usually based overseas, which acted as nominees or custodians of the stock on the customers' behalf. As a result of this arrangement, HJM had no way of knowing the extent to which these institutional clients sold or retained their shares after the IPO.

¹⁵ The exhibits conflict regarding when trading began. Division exhibits 38 and 50 indicate that HJM led or shared the inside bid beginning at 10:20 a.m., while Division exhibit 57 states that quotations were first entered at 10:16 a.m. when, the exhibit indicates, HJM entered a bid quotation of $7.25. This conflict does not affect our analysis.

¹⁶ The identities of other Borealis market makers are unclear from the record, as are other relevant market trading data. We also note that the Division did not call the Firm's trader or other senior Firm officials (except Setteducati, the Firm's sales manager Masucci, and Theodore Colby, who joined the Firm after the period at issue) as witnesses at the hearing.

As the law judge found, the "record shows nothing about the parties and counter parties to transactions during [theearly minutes of the aftermarket], the volume of shares changing hands . . . and whether retail customers, institutional customers, or interdealer trades were involved." In light of the lack of trading data, the law judge concluded that it would require a "leap of faith to conclude that any overpricing between 10:20 a.m. and 10:28 a.m. was the result of scienter-based fraud, rather than honest misjudgements in the price discovery process."

¹⁷ The Firm led or shared the inside bid except for roughly 10 minutes on June 26, 29 minutes on June 27, and 1 hour 16 minutes on June 28.

¹⁸ According to the Division's expert witness, HJM led or shared the inside ask between June 24 and June 28 "only 2% of the time."

¹⁹ Salespersons were paid a portion of the spread between the bid and ask quotes.

²⁰ Despite this customer interest away from HJM, other firms appear to have been net sellers, i.e., they sold more Borealis stock than they purchased during the early aftermarket.

²¹ The record contains little information about Setteducati's role in the Borealis IPO, other than that he was involved in determining the allocation of stock to the Firm's branch offices and that, generally speaking, he played a role in motivating the Firm's salespersons to market offerings underwritten by the Firm to their customers. We discuss these matters further below.

²² Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).

²³ Pagel, Inc., 48 S.E.C. 223, 228 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986).

²⁴ Pagel, Inc., 48 S.E.C. at 226. We note in this connection that, "[w]hile profit is the normal goal of manipulators, their actions are not rendered innocent simply because they fail to achieve the desired result." Michael J. Markowski, Exchange Act Rel. No. 43259 (Sept. 7, 2000), 73 SEC Docket 625, 630, aff'd, 274 F.3d 525 (D.C. Cir. 2001), cert. denied, 537 U.S. 819 (2002).

²⁵ Pagel, 48 S.E.C. at 226.

²⁶ Patten Securities Corp., 51 S.E.C. 568, 573 (1993) (citations omitted). See also Jay Michael Fertman, 51 S.E.C. 943, 948 (1994) ("classic factors" of a manipulation include "a rapid surge in a security's price that is driven by control of the security's supply and that occurs despite scant investor interest in the security and in the absence of any known prospects for or favorable developments affecting the issuer") (citations omitted).

²⁷ Swartwood, Hesse, Inc., 50 S.E.C. 1301, 1307 (1992). See also Herpich v. Wallace, 430 F.2d 792, 802 (5th Cir. 1970) (antifraud provisions designed to "encompass the infinite variety of devices that are alien to the 'climate of fair dealing' . . . that Congress sought to create and maintain") (citations omitted).

²⁸ See n.14, supra. Professor Jay Ritter, testifying as an expert on behalf of the Division, conceded that selling to institutional customers who held their shares in overseas accounts (as was the case for most of the institutional investors here) could make it more difficult for HJM to control trading unless the Firm were "in cahoots" with the customers. The record does not establish the existence of any such improper relationship between HJM and its institutional customers.

²⁹ 53 S.E.C. 406 (1998).

³⁰ Castle Secs. Corp., 53 S.E.C. at 410.

³¹ See SEC v. Resch-Cassin & Co., Inc., 362 F.Supp. 964, 976 (S.D.N.Y. 1973) (identifying "the collapse of the market for the security when the manipulator ceases his activity" as indicative of a manipulation).

³² See n.27, supra.

³³ See Barrett & Co., 9 S.E.C. 319, 327 n.8 (1941) ("The 'floating supply' of a stock is that part of the issue which is outstanding and which is held by dealers and the public with a view to resale for a trading profit, as distinguished from that part of the stock held for investment.").

³⁴ See Pagel, Inc., 48 S.E.C. 223, 226 (1985) (because "an underwriter is in a position to dominate and control the trading market does not necessarily produce a manipula-tion"), affd, 803 F.2d 942 (8th Cir. 1986).

³⁵ Pagel, 48 S.E.C. at 226.

³⁶ The Division asserts that Setteducati did not "wait[] to see how, and whether, customer demand developed," but instead allocated "set numbers of shares to various offices and then demanded that those offices sell the shares they had been allocated." The Division further asserts that theseallocations violated the Firm's Underwriting Procedures because they were made prior to the receipt of indications of interest from the Firm's customers. The cited portion of those procedures, however, states merely that the "final allocation of an offering will not be confirmed until on or after the effective date" of the offering. The evidence indicates that the June 6 allocation was a preliminary rather than the final allocation, although the two were not significantly different in terms of the number of shares distributed to the Firm's branch offices.

³⁷ HJM had sixteen branch offices.

The San Francisco office, which received 33.9% of the Borealis allocation, generated 15.9% of total Firm revenues between January and June 1996. The Chicago office, which received 7.41% of the allocation, generated 11.11% of total Firm revenues during that period.

³⁸ As noted earlier, see n.14, supra, the evidence indicates that HJM did not control the stock held by most of its institutional customers, and thus a large allocation to such customers would seem to be inconsistent with the alleged manipulation.

³⁹ The Division claims that its evidence regarding HJM's high pressure sales tactics "explains why only customers of H.J. Meyers were interested in buying Borealis." However, as noted above, the Division's own exhibits show that interest in Borealis was not limited to HJM's retail customers, but also extended to institutional customers and customers of other firms.

⁴⁰ Another customer testified that when she tried to sell she was told that it "would be a really bad mistake [because HJM was] trying to support the stock. It was a company that was going to have a big future, and that if [she] ultimately did attempt to sell the stock, that she would get a lousy execution on the sale." The law judge, however, found this witness to be "unreliable," and we have found no basis for rejecting that determination. See, e.g., Anthony Tricarico, 51 S.E.C. 457, 460 (1993) ("credibility determinations of an initial fact finder are entitled to considerable weight because they are based on hearing the witnesses' testimony and observing their demeanor").

⁴¹ The Division cites Setteducati's disciplinary history to support its allegations, including that he acted with scienter in pressuring HJM personnel to sell Borealis in the IPO and aftermarket. For example, the Division referred at oral argument to a proceeding brought against Setteducati and others at the Firm by the Florida Department of Banking and Finance in 1990 on the "basis of very similar conduct" to that alleged here. Setteducati settled the Florida proceeding, however, and no final findings of violation weremade. See Thomas James Associates, Inc., Admin. No. 1223-S-2/90 (Apr. 19, 1991), 1991 Fla. Sec. LEXIS 82. Under the circumstances, we agree with the law judge that the Florida proceeding and the other disciplinary matters raised by the Division are not probative regarding the allegations in this case.

⁴² Bartelt further testified that his reaction to Setteducati's statement was that he "[k]ind of laughed at it at the time" because he did not take Setteducati's warning seriously.

⁴³ When the Division asked Bartelt whether his branch manager told Bartelt what he meant by "upper management," Bartelt answered: "no."

⁴⁴ The law judge found that Bartelt was "not a very believable witness" and credited his testimony only to the extent that it was corroborated by others or by documentary evidence. Much of Bartelt's testimony was not corroborated. Nor would we attach much significance to Bartelt's testimony if it had been fully credited because it failed to support the Division's claim of manipulation or to link Setteducati to that alleged manipulation.

⁴⁵ It does not appear that Bartelt was penalized because of his decisions not to participate.

⁴⁶ Another HJM salesman, from a different branch, who declined to participate in the Borealis offering without apparent penalty, also testified that Setteducati stated during Firm conference calls that salespersons could sell whatever securities they wanted to sell, including mutual funds and bonds. According to this salesperson, Setteducati expected only that a salesperson work hard and generate revenue for the Firm.

⁴⁷ Additionally, Ritter acknowledged that underwriters whose offerings "routinely tank after the opening" are not likely to win future offerings.

⁴⁸ Battaglia admittedly had little recollection of circumstances surrounding the Borealis offering, and testified about the Firm's and Setteducati's general practices.

⁴⁹ When Setteducati persuaded Colby that his analysis was wrong, Colby would generally agree to "watch" trading in the stock a bit longer before making a determination of whether HJM dominated and controlled the market. Colby added that, "in most cases Bob went along with [his] decision" regarding domination and control.

⁵⁰ The testifying official was not associated with the Firm during the Borealis offering. We note that his testimony indicates that penalty bids were enforced at HJM generally following IPOs.

⁵¹ The Division stated at the hearing that it was "not alleging anything is wrong with the penalty bid, but rather that it was used here for manipulative purposes."

In a 1996 release declining to regulate penalty bids and similar aftermarket practices, the Commission recognized that "[o]ne of the primary objectives of a penalty bid is to encourage syndicate participants to sell the securities to those persons who intend to hold them rather than to engage in short term profit-taking, i.e., to combat flipping." Trading Practice Rules Concerning Securities Offerings, Securities Act Rel. No, 7282 (April 18, 1996), 61 SEC Docket 2021, 2037-38. The Commission added that such "aftermarket activities . . . are not uncommon and may act to support the price of the offered security in the aftermarket." Id. at 2038. See generally Friedman v. Saloman/Smith Barney, Inc., 2000 WL 1804719 at * 9 (S.D.N.Y.) (discussing regulation of penalty bids and other market stabilizing practices), aff'd, Friedman v. Saloman/Smith Barney, Inc., 313 F.3d 796 (2d Cir. 2002).

⁵² Twenty-one of Setteducati's customers flipped Borealis stock they received in the IPO, generating total profits to those customers of $65,875 and total commissions to Setteducati of $15,325.

⁵³ While the selective use of penalty bids could be a means whereby a dealer distributes trading profits (generated by a manipulation or otherwise) to certain of its employees, there is no explanation as to why HJM would employ such a means here rather than some other means that would not have tended to act against the alleged manipulation.

⁵⁴ As discussed, Borealis's Arsenal product was still in development at the time of the IPO.

⁵⁵ Ritter conducted no investigation into the reasons for this institutional interest, or the identities of theinstitutions involved.

⁵⁶ See n.16, supra. Among other gaps, it is not clear that Professor Ritter's analysis fully reflected all quotations for Borealis stock during the period at issue.

⁵⁷ Although HJM controlled the bid side of the market, the inside ask generally was set by firms other than HJM, and there is no evidence that HJM was responsible for the quotations of those other dealers. We note, however, that, because a manipulating firm seeks to drive the price upward, such a firm typically will not enter the inside, i.e., lowest, ask quotation, unless, for example, it does so by default when it dominates the market to such an extent that other firms are unwilling to make a market in the security. HJM did not dominate the Borealis market to this extent. Where, however, the bid side of the market has been artificially inflated, dealers may compete to sell stock at the inflated price by entering competitively attractive ask quotations, and thereby narrow the spread. Such narrowing, apparently, did not happen here.

⁵⁸ Among other things, Ritter failed to provide a proper foundation for his conclusions.

⁵⁹ We recognize that "reputation," as that term is used by economists, is a valid and frequently employed means of grouping securities firms based on certain objective criteria. See, e.g., Laurie Krigman, Why Do Firms Switch Underwriters?, 60 Journal of Financial Economics 245 (2001). We simply do not consider Professor Ritter's conclusions, based only on his perceptions concerning HJM's and other firms' reputation, to be persuasive evidence regarding the legal issues in this case.

⁶⁰ Among other things, we are perplexed by the Division's failure to provide more detailed evidence regarding trading during the initial aftermarket. Although the rapid rise in Borealis' stock price raises questions, there was insufficient evidence to establish that that rise was unrelated to prevailing market dynamics. Another gap in the case, in our view, concerns the role of the institutional customers. Without evidence that they were involved in some way with the manipulation, the magnitude of their holdings away from HJM's control seems inconsistent with a manipulation. In addition, the record contains very little information about the actions of Setteducati, or other senior HJM officials, in connection with the Borealis offering. As a result, we, like the law judge, would have had difficulty holding Setteducati liable in the event the evidence supported a finding of manipulation.

⁶¹ We have considered all of the arguments advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed inthis opinion.