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SEC v. STRATTON OAKMONT

February 28, 1995

SECURITIES AND EXCHANGE COMMISSION, Plaintiff
v.
STRATTON OAKMONT, INC., Defendant.



The opinion of the court was delivered by: JOYCE HENS GREEN

 On March 17, 1994, plaintiff, the Securities and Exchange Commission ("SEC"), issued an Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions in In the Matter of Stratton Oakmont, Inc., et al., A.P. File No. 3-8321 ("SEC Order"). The SEC Order, inter alia, mandated that an Independent Consultant ("IC") prepare a Report detailing policies, practices and procedures to be adopted by defendant, Stratton Oakmont, Inc. ("Stratton"), by a specified date.

 The IC issued the Report on August 18, 1994. Stratton had to adopt the recommended policies, practices and procedures on or before November 18, 1994. It failed to comply. Stratton took the position that the Report exceeds the scope of the IC's authority and that Stratton was therefore relieved of its obligations.

 On December 14, 1995, the SEC instituted this action to enjoin Stratton from further violations of the SEC Order. The SEC also sought to have a Special Compliance Monitor appointed to ensure that Stratton did not violate the SEC Order in the future. This Court granted the SEC's requests for a temporary restraining order ("TRO") on December 19, 1994, and for a preliminary injunction ("PI") on January 11, 1995. Both of these orders required Stratton to comply fully with the SEC Order. Each time, however, the Court denied the SEC's requests for a Special Compliance Monitor.

 Presently pending is the SEC's motion for a permanent injunction. In response, Stratton asserts that the motion is moot because Stratton has complied with the Report. It also asserts that the section of the Report entitled "Findings" should be stricken because it is not authorized by the SEC Order. For the reasons expressed below, the SEC's motion is granted, but portions of the Report will be stricken.

 I. Background

 In March 1992, the SEC charged Stratton and its principals with various fraudulent acts and practices in connection with the offer and sale of securities to members of the investing public and with manipulation of one of those securities. SEC v. Stratton Oakmont, Inc., 1992 U.S. Dist. LEXIS 13329, 92-Civ-1993 (JES) (S.D.N.Y.). Almost two years later, Final Judgment by Consent was entered against Stratton which, inter alia, required the firm to pay over $ 2 million into a disgorgement fund and $ 500,000 as a civil penalty.

 To settle this earlier case and a related administrative proceeding (In the Matter of Stratton Oakmont, Inc., Jordan Belfort, Kenneth Greene and Daniel Porush, A.P. File No. 3-8321), Stratton consented to the terms of the SEC Order, which was issued on March 17, 1994. The SEC made findings and imposed sanctions with regard to Stratton and several of its principals. *fn1" As to Stratton, the SEC found that Stratton willfully violated federal securities law in that it:

 
engaged in fraudulent sales practices, made baseless price predictions with regard to Stratton-recommended over-the-counter securities, made material misrepresentations and omissions concerning those securities and Stratton's experience and expertise in the securities industry, engaged in, encouraged and/or permitted unauthorized trading in Stratton customer accounts, and . . . knowingly or recklessly manipulated the market price of the securities of Nova Capital, Inc. . . . by dominating and controlling the market for Nova common stock and engaging in fraudulent sales practices.

 SEC Order at 2. Stratton neither admitted nor denied these findings. Id. at 1.

 After making its findings, the SEC ordered the appointment of the IC, who was to have "experience in broker-dealer compliance". Id. at 4. The staff of the SEC's Northeast Regional Office ("NERO") was to appoint the IC "upon advice and consultation with Stratton". Id. Stratton was to pay all of the IC's fees and expenses. Id. The SEC Order mandated that within thirty days, unless extended by the parties, the IC shall:

 
a. complete a review of Stratton's policies, practices and procedures, including, but not limited to those policies, practices and procedures relating to *fn2" ;]
 
c. prepare a report which details the policies, practices and procedures specified in [b.] above (the "Report") [.]

 Id. at 4-5.

 The IC was to deliver the Report to the President of Stratton and the NERO. The SEC Order directed that "within thirty (30) days of Stratton's receipt of the Report Stratton shall adopt, implement and maintain any and all policies, practices and procedures set forth in the Report, or alternatives acceptable to the [IC] or the staff of the NERO". *fn3" Id. at 5. Stratton was also compelled to "retain an Independent Auditor to conduct four special reviews of its policies, practices and procedures" every six months for two years beginning six months after the Report issued. Id. at 5-6.

 Carl H. Loewenson, Jr., Esq., was appointed as the IC on May 11, 1994. Mr. Loewenson, a partner in the law firm of Morrison & Foerster, was assisted by one of that firm's partners and two associates, as well as Mr. Allan H. Pessin of Securities Compliance Consultants, Inc., a man Mr. Loewenson considers an expert in broker-dealer compliance matters. The IC also consulted Judith Belash, who works with the compliance department at Goldman, Sachs, and ...


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