UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7672 / April 28, 1999 SECURITIES EXCHANGE ACT OF 1934 Release No. 41340 / April 28, 1999 ADMINISTRATIVE PROCEEDING File No. 3-9690 : ORDER MAKING FINDINGS In the Matter of : AND IMPOSING REMEDIAL : SANCTIONS : JOSEPH P. TUFO, : : Respondent. : : : I. The Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Joseph P. Tufo ("Tufo") on September 1, 1998. II. Respondent Tufo has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the jurisdiction of the Commission over Respondent Tufo and over the subject matter of this proceeding and as to Section III., paragraph 1., below, which are admitted, Respondent Tufo by his Offer consents to the entry of findings and remedial sanctions set forth below. III. On the basis of this Order and the Offer submitted by Respondent Tufo, the Commission finds that: 1. At all relevant times, Respondent Tufo was associated as a registered representative with SIFE, a broker-dealer registered with the Commission. The Fraudulent Offer and Sale of Medco, Inc., Promissory Notes 2. From approximately September 1996 until October 1997, Medco, Inc. ("Medco") fraudulently offered and sold securities to the general public in the form of promissory notes ("Medco notes"). Medco raised over $16 million from approximately 400 investors nationwide. Medco claimed that capital raised from investors would be used to purchase medical equipment which would serve as collateral for the investment. Investors and prospective investors received offering materials which described Medco and the investment program. Specifically, investors were told that the investment was fully secured and collateralized by medical equipment appraised at a 50% loan to value ratio (i.e., twice the value of the investor’s principal investment). The offering package also included detailed biographies of its principals, including its president. Medco did not provide investors with any documents reflecting the purchase or lease of the medical equipment. Medco promised investors returns of between 12% and 16% per annum depending upon the maturity of the note and the amount invested. Interest was paid monthly during the term of the Medco notes and there was no minimum or maximum investment. No registration statement was ever filed or was in effect with the Commission in connection with the securities offered by Medco. 3. Medco falsely represented to investors that it was using investor funds to purchase and lease medical equipment. In fact, of the $16 million raised from investors, less than $500,000 was used to purchase and lease medical equipment. The remaining investor proceeds were completely unsecured because, contrary to what was represented, no other equipment was being purchased or leased. Instead, a substantial portion of investor funds were used to purchase aircraft, a home, cars and other expenditures for the personal use and benefit of Medco’s principals. In addition, Medco was operating a Ponzi scheme by using new investor monies to pay interest to its existing investors. 4. Medco’s offering materials misrepresented and omitted material information concerning the background of Medco’s president. For example, Medco’s offering materials falsely represented that its president had a law degree, had worked for a major securities brokerage firm, was a member of the board of directors of a large metropolitan hospital, and implied that he was registered as an investment adviser with the Commission. None of this was true. Furthermore, the offering documents failed to disclose that Medco’s president had been terminated by a now defunct broker-dealer in 1986 for falsifying information on his employment application and Form U-4. 5. Medco also misrepresented its operating history to investors. In its offering materials, Medco stated that it had "marshaled its depth of talent and long history in the medical and financial fields to forge one of the most exciting low risk/high return, stable products for the savvy investor." On its Internet web page, Medco represented that it had been in business for sixteen years. In fact, Medco first incorporated in August 1996 and only became licensed to do business in Florida in January 1997. Prior to forming the company, Medco’s president, had no apparent connection to the medical equipment industry. Tufo’s Participation in the Medco Offering 6. Tufo learned of Medco from a newspaper advertisement that was soliciting sales agents to market the Medco investment. After being recruited by Medco, from October 1996 through September 1997, Tufo raised approximately $3.8 million in the Medco notes from 87 investors, earning approximately $176,500 in commissions. Tufo solicited prospective Medco investors through newspaper and radio advertisements throughout California, as well as through a web page on the Internet. 7. When contacted by a prospective investor in response to an advertisement, Tufo would provide the investor with a brief overview of the Medco program, and would arrange for Medco to send the offering materials to the prospect. The Medco offering materials contained false information about the investment. Tufo would then send a follow up solicitation letter to the prospect which reiterated the information contained in the offering materials provided by Medco and scheduled a sales presentation visit with the prospect. 8. In a typical sales presentation to a prospective investor, Tufo would repeat the representations contained in Medco’s offering materials which included the false statement that each investment was insured and doubly collateralized. During his sale presentation, Tufo would use a "comparison sheet" showing the differences between an investment in the SIFE mutual fund he also offered and the Medco notes. In this comparison sheet, Tufo included false information provided to him by Medco that Medco had been in business since 1980 and that it had $37 million in assets. He described the Medco notes to investors as "totally safe" and "safe and secure" because, according to him, the investments were secured by liens on the medical equipment. Tufo told one prospective investor that the investment was "safer than a certificate of deposit or a money market account". Tufo told several others that he had performed due diligence on Medco. 9. In June 1997 and July 1997, the State of California issued desist and refrain orders against Tufo for selling the unregistered Medco securities and for acting as an unregistered broker-dealer. In an attempt to evade the California desist and refrain orders, Medco retained California securities counsel and re-defined and restructured the offering in California as a "joint venture" between Medco and the investor. Tufo then continued to offer and sell the Medco notes through these "joint ventures", raising $1.3 million from 8 investors. Tufo did receive a copy of a written opinion from Medco’s California securities counsel regarding the "joint venture" program, but not until after he had sold the "joint ventures" to two investors. 10. In July 1997, during a deposition before California regulators in connection with the desist and refrain orders, Tufo admitted that he made no effort to check Medco’s president’s background besides calling the references contained in the offering materials. He stated that he called the National Association of Securities Dealers, Inc. ("NASD") to inquire about complaints against Medco’s president. Tufo did not attempt to verify with the NASD or with prior employers, the prior employment history of Medco’s president. However, an inquiry to the NASD would have revealed that Medco’s president had been terminated by a broker-dealer in 1986 for falsifying his employment application. Tufo further admitted in the deposition, that, other than speaking with an individual, a personal acquaintance of 2 years, who told Tufo he was working for Medco finding doctors and clinics, he did not undertake any efforts to verify that Medco was purchasing medical equipment at a 50% loan to value ratio and leasing them as represented to investors. During this deposition, Tufo was made aware by California regulators of the fraudulent representations regarding the background of Medco’s president. He was also put on notice that he had failed to obtain independent verification of many of the representations contained in Medco’s offering materials. In addition, Tufo admitted in this deposition that in June 1997, he was aware that the State of Texas had issued a cease publication order against Medco. Nonetheless, Tufo continued to offer and sell the Medco notes to the public through the "joint ventures", raising $1.3 million of the total $3.8 million he raised from investors through the offering. 11. Due to the blatant nature of Medco’s misrepresentations and fraudulent scheme, even a minimal amount of investigation by Tufo would have revealed the fraud. For example, Tufo made no attempt to independently verify that medical equipment was being purchased and leased, and that they were appraised at a 50% loan to value ratio by Medco as represented. Further, an inquiry into any portion of the purported background and experience would have revealed that Medco’s president did not have a law degree, never worked for a major securities brokerage firm, was never a member of the board of directors of a large metropolitan hospital, and was never registered as an investment adviser with the Commission. 12. Tufo was also confronted with a number of "red flags" which should have alerted him to the fact that Medco was engaged in a fraudulent offering. For example, Tufo was told by Medco’s president early on that "[u]nder no circumstances would I allow an investor to get a copy of an equipment lease on his or anyone else’s equipment." This alone should have raised concerns on his part about Medco’s representations that it was buying and leasing equipment. In addition, despite being told by California regulatory officials that Medco’s offering materials contained false information regarding the background of Medco’s president, Tufo continued with the Medco offering. Finally, it is noteworthy that in November 1996, the month after he began selling Medco, California had served Tufo with a desist and refrain order to halt his unregistered offers and sales of promissory notes in another securities offering. Notwithstanding this California order, Tufo went on to sell the Medco notes. 13. Tufo recklessly distributed false and misleading offering materials, flyers and other materials to investors and prospective investors which included, among other things, representations that the Medco notes were a low risk investment, that investor proceeds would be used to acquire medical equipment, that investor funds would be fully secured, and which contained false statements and omissions about the background of Medco’s president. These misrepresentations would be considered important by any reasonable investor and are therefore material under the standards enunciated in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). Legal Findings 14. Based upon the aforesaid conduct, Respondent Tufo willfully violated, and committed or caused violations of, Sections 5(a) and 5(c) of the Securities Act, in that he, directly and indirectly, made use of the means and instruments of transportation and communication in interstate commerce and of the mails, to offer to sell and to sell to members of the public certain securities, namely the Medco notes issued by Medco, when no registration statement was filed or in effect as to said securities pursuant to the Securities Act. 15. Based upon the aforesaid conduct, Respondent Tufo willfully violated, and committed or caused violations of, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that, in connection with the purchase and sale of certain securities, namely the Medco notes issued by Medco, by use of the means and instrumentalities of interstate commerce and by use of the mails, Respondent Tufo, directly and indirectly, employed devices, schemes, and artifices to defraud; made untrue statements of material facts and 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; and engaged in acts, practices and a course of business which would and did operate as a fraud and deceit. 16. Based upon the aforesaid conduct, Respondent Tufo willfully violated, and committed or caused violations of, Section 17(a)(1) of the Securities Act, in that, in the offer and sale of certain securities, namely the Medco notes issued by Medco, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, Respondent Tufo, directly and indirectly, employed devices, schemes and artifices to defraud. 17. Based upon the aforesaid conduct, Respondent Tufo willfully violated, and committed or caused violations of, Sections 17(a)(2) and 17(a)(3) of the Securities Act, in that, in the offer and sale of certain securities, namely the Medco notes issued by Medco, by the use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, Respondent Tufo directly and indirectly, obtained money or property by means of untrue statements of material facts and omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in transactions, practices and a course of business which would and did operate as a fraud and deceit upon the purchasers and prospective purchasers of such securities. 18. Respondent Tufo has submitted a sworn bankruptcy petition and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest and a civil penalty. The Commission has reviewed the sworn bankruptcy petition and other evidence provided by Respondent Tufo and has determined that Respondent Tufo does not have the financial ability to pay disgorgement of $176,500 plus prejudgment interest and a civil penalty. IV. Based on the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified by Respondent Tufo in his Offer. Accordingly, IT IS ORDERED that: 1. Respondent Tufo be, and hereby is, barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, with the right to reapply for association after three (3) years to the appropriate self-regulatory organization, or if there is none, to the Commission. 2. Respondent Tufo cease and desist from committing or causing any violations and any future violation of Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, promulgated thereunder. 3. Respondent Tufo shall pay disgorgement of $176,500 plus prejudgment interest, but that payment of such amount be waived based upon Respondent’s demonstrated financial inability to pay. 4. The Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent Tufo provided accurate and complete financial information at the time such representations were made; (2) determine the amount of the civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent’s Offer had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Respondent was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed and whether any additional remedies should be imposed. Respondent may not, by way of defense to any such petition, contest the findings in this Order or the Commission’s authority to impose any additional remedies that were available in the original proceeding. By the Commission. Jonathan G. Katz Secretary