UNITED STATES OF AMERICA 

before the 

SECURITIES AND EXCHANGE COMMISSION 

June 8, 2004 

ADMINISTRATIVE PROCEEDING 

File No. 3-11515 

In the Matter of 

 CHARLES W. CROUSE and 

 NORMAN R. HESS, 

Respondents. 

ORDER INSTITUTING 

ADMINISTRATIVE AND CEASE-ANDDESIST PROCEEDINGS PURSUANT 

TO SECTION 8A OF THE SECURITIES 

ACT OF 1933 AND SECTIONS 15(b) 

AND 21C OF THE SECURITIES 

EXCHANGE ACT OF 1934 

I. 

The Securities and Exchange Commission (“Commission”) deems it appropriate and in 

the public interest that public administrative and cease-and-desist proceedings be, and hereby 

are, instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and 

Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against 

Charles W. Crouse (“Crouse”) and Norman R. Hess (“Hess”) (collectively referred to as 

“Respondents.”). 

 

II. 

 After an investigation, the Division of Enforcement alleges that: 

A. RESPONDENTS

1. Crouse, 43, resides in Marietta, Georgia. He has been a registered 

representative since May 1992. During the time period of the events discussed herein, Crouse 

was a registered representative at a broker-dealer (the “Broker-Dealer”) and holds Series 7 and 

63 securities licenses. Crouse left the Broker-Dealer in March 2001 and is currently associated 

with another broker-dealer. 

2. Hess, 67, resides in Atlanta, Georgia. Hess was president of the BrokerDealer from 1994 through July 2000 and had overall responsibility for compliance and

supervision at the firm. Hess holds Series 7, 8, 23, 27 and 63 securities licenses and has over 

thirty years of experience in the brokerage industry working at many large brokerage firms. 
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Hess voluntarily left the Broker-Dealer in March 2001 and is currently employed at another 

brokerage firm. 

B. MARK DRUCKER’S PONZI SCHEME

 1. In December 1997, Mark Drucker (“Drucker”) opened a brokerage 

account (“the Account”) at the Broker-Dealer. His registered representative at the Broker-Dealer 

was Crouse. During the relevant period, Drucker operated a Ponzi scheme in which he deposited 

approximately $6.3 million of investor funds into the Account. 

 2. From at least June 1998 through September 1999, Drucker obtained funds 

from investors by representing that he would use their funds to buy and sell securities through an 

account at the Broker-Dealer in his name and under his management. Drucker’s investment 

strategy consisted of day-trading options and equities in the Account using a momentum 

computer program. Drucker told Crouse that he was a dot.com millionaire who had sold 

“something to NASA” and had sold a product or concept to Microsoft Corporation. 

 3. Most of Drucker’s investors signed management agreements provided by 

Drucker allowing him to have “full and complete discretion to invest, trade and make 

transactions associated with the Account.” While the terms of the investments varied from 

investor to investor, in most cases, Drucker promised guaranteed returns of up to fifty percent 

(50%) in ninety days or less. In some instances, Drucker provided investors with agreements 

rolling over the original investment and purported profit. These agreements indicated a higher 

value of their investments than actually existed. 

 4. Contrary to his representations to investors, Drucker was consistently 

losing money from his trading. For the thirteen-month period from December 2, 1997 through 

December 31, 1998, Drucker lost $225,660 in the Account. 

 5. Drucker’s trading, and his trading losses, increased substantially in 1999. 

For the nine-month period from January 1, 1999 through September 30, 1999, net losses in the 

Account amounted to $634,453. With the exceptions of January and March, the Account lost 

money every month in 1999. 

 6. Drucker’s trading program was a Ponzi scheme. Drucker’s payments to 

investors were funded from deposits into the Account that came from new investors. Drucker 

was dependent on money from new investors to keep his scheme operating. 

C. CROUSE’S ASSISTANCE IN FURTHERANCE OF DRUCKER’S PONZI 

SCHEME

 1. Crouse knew, among other things, of the Account’s high activity level and 

substantial losses. He also knew or was reckless in not knowing that almost all the money 

deposited into the Account was coming from checks written by other people to Drucker because

he received copies of all checks deposited into the Drucker Account. Twenty of these checks, 

totaling in excess of $500,000, specifically had references to either a “loan,” “investment,” 
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“p’pship invest,” “stock,” or “agreement.” Crouse also knew that Drucker wrote checks out of 

the Account to some of the same persons whose checks had been previously deposited into the 

Account despite massive losses. Crouse also knew that Drucker was managing the accounts of 

other Broker-Dealer customers and that he had lost large amounts of money in some of those 

accounts as well. Additionally, Crouse received letters from two of his other customer accounts 

at the Broker-Dealer in June 1999 telling him to transfer money into the Account; one letter 

stated “He [Drucker] will manage this money from his account.” During that same week, Crouse 

assisted Drucker in convincing two people to invest money in the Account. Taken together these 

facts showed a scheme by Drucker to defraud investors that Crouse facilitated by either knowing 

and permitting it or actively assisting in it. 

 2. Crouse substantially assisted Drucker in furtherance of his Ponzi scheme 

by executing all trades in the Account and assisting Drucker in convincing at least two investors 

to invest in the Account. Crouse knew or was reckless in not knowing that Drucker, his largest 

customer, was operating a Ponzi scheme out of the Account. 

D. HESS’S FAILURE TO SUPERVISE CROUSE

 1. Hess was the Broker-Dealer’s President and General Securities Principal. He 

was also the immediate and only supervisor of Crouse. The Broker-Dealer’s Supervisory 

Procedures and Compliance Manual states that the “General Securities Principal” is responsible “for 

the supervision of all general securities representatives and their activities” and “for the daily 

review of order tickets and quarterly review of all trading activity.” 

 2. Hess reviewed exception reports, which flagged the high level of trading in 

the Account, and signed five “active account” letters sent to Drucker regarding the activity in the 

Account. Hess also examined the Account’s order tickets on a daily basis, reviewed Crouse’s 

commission runs on a monthly basis and active account compliance reports at least three times a 

year. As a result of this review, Hess was aware of the Account’s large losses. 

3. In accordance with firm procedure, Hess reviewed monthly statements that 

showed checks were being paid to third parties who had previously put money into the Account 

despite massive losses. As Crouse’s immediate and direct supervisor, Hess was responsible for 

conducting further investigation into whether Crouse was facilitating a violation of the securities 

laws. Hess did not discharge his supervisory duties and failed to investigate these “red flags.” 

4. Commissions from the Account were approximately eight percent of the total 

commissions received by the Broker-Dealer during the period from October 1998 to September 

1999. During this time, the Broker-Dealer served between 2,800 and 3,000 accounts. Commissions 

from the Account during this time amounted to one-third of Crouse’s income from the BrokerDealer. Hess also knew that the Account was the Broker-Dealer’s most active during the relevant 

time period. During its existence, Hess received an override on the Account of $5,828 

 5. Although Hess was aware of the Account’s heavy trading, large losses and 

large commissions and knew or was reckless in not knowing of the third-party checks deposited into 

the Account, the funds provided to Drucker by third parties for deposit into the Account as well as 
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checks issued out of the Account to third parties who had previously deposited money into the 

Account despite massive losses, he did not investigate Crouse’s conduct or take any reasonable 

steps to determine whether any illegal activity was occurring in the Account. 

 6. In addition, as president of the Broker-Dealer, Hess was ultimately and solely 

responsible for establishing supervisory procedures and a system to effectively implement those 

procedures. Hess failed to establish a system for implementing the Broker-Dealer’s procedures that 

called for review of (a) incoming customer correspondence regarding customer accounts; and (b) 

review and approval of third-party checks for deposit into accounts. 

 7. Because Hess failed to establish a system to implement these procedures, 

Hess and others at the Broker-Dealer failed to detect a pattern of unusual deposits and other unusual 

activity such as (a) that virtually none of the deposits into the Account were Drucker’s money; (b) 

that several third-party checks were deposited into the Account without appropriate approval as 

required by the Broker-Dealer’s policies and procedures; (c) that numerous checks containing 

notations such as “loan,” “investment,” “stock” or “agreement” were deposited into the Account; 

and (d) that Drucker wrote a number of checks from the Account to third parties who previously 

had written checks that were deposited into the Account despite massive losses. In addition, Hess 

failed to take action despite the Broker-Dealer receiving, during the first week of June 1999, 

correspondence from two of its customers instructing the firm to transfer all assets in their accounts 

at the Broker-Dealer to the Account. One of the letters stated that the purpose of the transfer was to 

have Drucker manage the customer’s funds. Had Hess implemented an adequate system to review 

this correspondence, in light of other red flags concerning this Account, this suspicious pattern of 

activity could have been detected and follow up taken, to uncover Drucker’s Ponzi scheme and 

Crouse’s facilitation of such scheme. 

8. Had Hess ensured that the Broker-Dealer had a system in place to detect and 

take follow-up action in these areas, he could have detected and prevented violations of the 

securities laws. Hess’s supervision was deficient as the Broker-Dealer’s supervisory procedures did 

not provide for a meaningful review of records that would have alerted Hess and the Broker-Dealer 

to potential violations of the securities laws. Because Hess and the Broker-Dealer failed to establish 

adequate procedures and a system to implement these procedures, requiring an effective review of 

these records and/or an effective system to investigate and address the results of such a review, Hess 

and the Broker-Dealer failed to detect that Crouse was facilitating Drucker’s violation of the 

securities laws. 

9. Hess did not reasonably delegate responsibility for seeing that the BrokerDealer’s procedures were implemented. As president of the Broker-Dealer, Hess was responsible 

for ensuring that the firm had a system in place to implement procedures and that all the procedures 

were followed unless and until he reasonably delegated particular functions to another person in the 

Broker-Dealer, and neither knew nor had reason to know that such person’s performance was 

deficient. Consol. Inv. Serv., Inc., 1994 SEC LEXIS 4045 (Dec. 12, 1994) initial decision has 

become final, 52 S.E.C. 582 (1996). Hess never delegated supervisory responsibility to see that 

compliance procedures were implemented. 

 
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E. VIOLATIONS

As a result of the conduct described above, Crouse willfully aided and abetted and caused 

Drucker’s violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act 

and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities 

and in connection with the purchase or sale of securities. 

As a result of the conduct described above, Hess failed reasonably to supervise Crouse, 

within the meaning of Section 15(b)(4)(E) of the Exchange Act, with a view toward preventing 

his willful aiding and abetting violations of Section 17(a) of the Securities Act, Section 10(b) of 

the Exchange Act and Rule 10b-5 thereunder. 

III. 

In view of the allegations made by the Division of Enforcement, the Commission deems 

it necessary and appropriate in the public interest that public administrative and cease-and-desist 

proceedings be instituted to determine: 

A. Whether the allegations set forth in Section II above are true and, in connection 

therewith, to accord Respondents with the opportunity to establish defenses to such allegations;

B. What, if any, remedial action is appropriate in the public interest against Respondents 

pursuant to Section 8A of the Securities Act and Section 15(b) of the Exchange Act including, 

but not limited to, disgorgement and civil penalties pursuant to Section 21C of the Exchange Act; 

and 

C. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange 

Act, Crouse should be ordered to cease and desist from committing or causing violations of and 

any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act 

and Rule 10b-5 thereunder. 

IV. 

 IT IS ORDERED that a public hearing for the purpose of taking evidence on the 

questions set forth in Section III hereof shall be convened not earlier than 30 days and not later 

than 60 days from service of this Order at a time and place to be fixed and before an 

Administrative Law Judge to be designated by further order as provided by Rule 200 of the 

Commission’s Rules of Practice, 17 C.F.R. 

 IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations 

contained in this Order within twenty (20) days after service of this Order, as provided by Rule 

220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. 

If either Crouse or Hess fails to file an answer, or fails to appear at a hearing after being 

duly notified, they may be deemed in default and the proceedings may be determined against 

them upon consideration of this Order, the allegations of which may be deemed to be true as 
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provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 

C.F.R. §§ 201.155(a), 201.220(f), 221(f) and 201.310. 

 This Order shall be served upon Respondents personally or by certified mail. 

IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial 

decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of 

the Commission’s Rules of Practice. 

 In the absence of an appropriate waiver, no officer or employee of the Commission 

engaged in the performance of investigative or prosecuting functions in this or any factually 

related proceeding will be permitted to participate or advise in the decision upon this matter, 

except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not 

“rule making” within the meaning of Section 551 of the Administrative Procedure Act, it is not 

deemed to be subject to the provisions of Section 553 delaying the effective date of any final 

Commission action. 

 

By the Commission. 

 Jonathan G. Katz

 Secretary