Source: http://www.sec.gov/litigation/complaints/complr17369.htm
Timestamp: 2015-01-30 02:38:22
Document Index: 10323781

Matched Legal Cases: ['§77', '§78', '§240', '§77', '§ 78', '§77', '§78', '§1331', '§ 78']

Complaint: SEC v. Frank D. Gruttadauria, et al. Home | Previous Page
NORTHERN DISTRICT OF OHIO, EASTERN DIVISION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FRANK D. GRUTTADAURIA, DH STRATEGIC PARTNERS, INC.,
JYM TRADING TRUST, Defendants, SARAH Z. EMAMY, CHARLIE WHISKEY LLC, LAURENE U. ENGLISH, a.k.a. LAURENE U. KACLUDIS, Relief Defendants. :::::::::::
No. 1:02CV324
Plaintiff, the United States Securities and Exchange Commission ("the Commission"), alleges as follows: PRELIMINARY STATEMENT
1. Stockbroker defendant Frank D. Gruttadauria, through defendants DH Strategic Partners, Inc., and JYM Trading Trust, perpetrated a massive fraud on more than 50 customers and misappropriated millions of dollars over a 15-year period starting in 1987, with amounts exceeding $40 million in the last seven years alone. Gruttadauria lied to these customers about the holdings in their accounts, overstating the value of their accounts by over $275 million as of the end of 2001. He falsely told customers that he used the funds that they deposited into their accounts to buy securities. He misrepresented that he had bought and sold other securities in their accounts. He told customers that they had returns on what were non-existent holdings. He misrepresented that the funds used to cover withdrawal requests came from their brokerage accounts when those accounts, in fact, had insufficient remaining funds to satisfy those requests. He told some customers that he had opened accounts for them when, in fact, he simply took their money. To conceal his misrepresentations and misappropriations, he created and sent these clients fraudulent account statements. Gruttadauria also engaged in an elaborate scheme of making unauthorized transfers out of some of these accounts and into others, often through intermediary bank and brokerage accounts, to make it appear that the clients had sufficient assets to cover withdrawal requests.
2. Gruttadauria, DH Strategic Partners, Inc., and JYM Trading Trust, directly and indirectly, have engaged, and will engage in transactions, acts, practices and courses of business which constitute violations of Section 17(a) of the Securities Act of 1933 (Securities Act) [15 U.S.C. §77q(a)], and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. §§78j(b)] and Rule 10b-5 [17 C.F.R. §§240.10b-5] promulgated thereunder.
3. The Commission brings this action to restrain and enjoin such transactions, acts, practices, and course of business pursuant to Section 20(b) of the Securities Act [15 U.S.C. §77t(b)] and Sections 21(d) and 21(e) of the Exchange Act. [15 U.S.C. §§ 78u(d) and 78u(e)]. There is a reasonable likelihood that the defendants will, unless enjoined, continue to engage in the transactions, acts, practices and courses of business set forth in this complaint, and transactions, acts, practices and courses of business of similar purport and object.
4. The Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77v(a)] and Section 27 of the Exchange Act [15 U.S.C. §78aa] and 28 U.S.C. §1331. Venue is proper in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa].
5. Upon information and belief, defendant Gruttadauria's last known residence was in the Northern District of Ohio. Defendant DH Strategic Partners, Inc. has its mailing addresses and that of its registered agent within the Northern District of Ohio. JYM Trading Trust has a mailing address in the Northern District of Ohio. Relief defendant Sarah Z. Emamy maintains a residence within the Northern District of Ohio. One of the mailing addresses of relief defendant Charlie Whiskey LLC is within the Northern District of Ohio. Relief defendant Laurene U. English maintains a residence within the Northern District of Ohio. The transactions, acts, practices, and courses of business constituting the violations alleged herein have occurred within the jurisdiction of the United States District Court for the Northern District of Ohio and elsewhere.
6. The defendants, directly and indirectly, have made, and are making, use of the means and instrumentalities of interstate commerce and of the mails in connection with the transactions, acts, practices, and courses of business alleged herein in the Northern District of Ohio and elsewhere.
7. From at least October 2000 through January 2002, Gruttadauria, age 44, was a registered representative and managing director of the Cleveland, Ohio branch of Lehman Brothers, Inc., a broker-dealer registered with the Commission. From January 1984 through November 1987, Gruttadauria was employed as a registered representative of L.F. Rothschild & Co., Inc. From November 1987 through May 1989, Gruttadauria was employed as a registered representative of Hambrecht & Quist, Inc. From May 1989, through October 2000, Gruttadauria was employed as a registered representative of Cowen & Co. and SG Cowen Securities Corporation (hereinafter "SG Cowen"). Gruttadauria resided in Gates Mills, Ohio from about October 1993 through the present. From about September 1989 through about October 1993, Gruttadauria resided in Solon, Ohio.
8. DH Strategic Partners, Inc. is a corporation organized on or about May 16, 1996, under the laws of the State of Ohio. Upon information and belief, its mailing addresses include: 1375 E. 9th Street, Suite 2300, Cleveland, OHIO 44114-1790, which was Gruttadauria's office address and 1829 Berkshire Rd, Gates Mills, Ohio 44040-9748, which has been a residential address for Gruttadauria. DH Strategic Partners, Inc. has at least two bank accounts at National City Bank, for which Gruttadauria is the sole authorized signor. As alleged herein, Gruttadauria used these bank accounts to effect certain parts of his scheme to defraud his customers. DH Strategic Partners, Inc. also had a brokerage account at SG Cowen and has an account at Lehman Brothers.
9. Upon information and belief, the JYM Trading Trust was created by an agreement dated January 7, 1996. The stated purposes of the trust are unknown. On or about March 29, 1996, an account was opened in the name "JYM Trading Trust" at SG Cowen, with Gruttadauria as the registered representative. The named trustee on the account was Robert Johnston, one of Gruttadauria's customers. Upon information and belief, Mr. Johnston had no knowledge that he was named a trustee of the JYM Trading Trust and was not aware of the existence of the trust. As alleged herein, Gruttadauria used the brokerage account at SG Cowen in the name of JYM Trading Trust to effect certain parts of his scheme to defraud his customers. Upon information and belief, Mr. Johnson had no role in or knowledge of Gruttadauria's activities in this regard.
10. Upon information and belief, Sarah Z. Emamy, age 31, has resided from time to time at 1829 Berkshire Road, Gates Mills, Ohio, since at least January 2001. On or about February 27, 2001, Gruttadauria purported to execute a general warranty deed for that property to Emamy, which he had previously bought with the direct or indirect proceeds of his illegal conduct. Upon information and belief, Gruttadauria and Emamy have joint title in the entireties to a condominium located in New York City. Informational records from the Ohio Department of Motor Vehicle Registration reflect that Emamy is the owner of a 2000 Mercedes S Class automobile as to which Gruttadauria is the registrant and as to which there was a transfer of title on or about August 17, 2001. Upon informational and belief, Gruttadauria may have transferred title to this automobile to Emamy at that time.
11. Upon information and belief, Charlie Whiskey, LLC is a limited liability company formed on or about April 12, 1999, existing under Registration No. 302148, according to the Delaware Secretary of State record information. Gruttadauria is a 50% owner of Charlie Whiskey. Its primary business purpose is to own and maintain a Gates Lear Jet 35A bearing Serial No. 35A-386 and Tail No. 99FA. Its mailing addresses are: 1601 N. Marginal Road, Cleveland, Ohio 44114 and c/o Delaware Registry, Registered Agent, 3511 Silverside Road, Wilmington, Delaware 19810-4902.
12. Laurene U. English was employed as a sales assistant to Gruttadauria from about 1989 through 2001. Upon information and belief, English received substantial monies and other items of value from Gruttadauria in addition to the compensation that she received from SG Cowen and Lehman Brothers. Upon information and belief, these monies and other items of value may have amounted to as much as $700,000 and were directly or indirectly the proceeds of Gruttadauria's illegal conduct.
13. On or about January 11, 2002, Gruttadauria sent a letter to the Federal Bureau of Investigation in which he stated: "During the course of the past 15 years I have caused misappropriation through various methods which resulted in other violations. It has occurred at Lehman Brothers, SG Cowen Securities Corp. Cowen & Co., Hambrecht & Quist, Inc. and LF Rothschild Inc." He continued: "It is a complicated and substantial interwoven fabric of digressions [, which] . . . . began as an attempt to make up lost monies for customers and mushroomed over the course of time." After he sent his letter, Gruttadauria disappeared. On January 25, 2002, the Office of the U.S. Attorney for the Northern District of Ohio obtained an arrest warrant against Gruttadauria. On February 9, 2002, Gruttadauria surrendered and is in federal custody.
14. Upon learning of Gruttadauria's letter, Lehman Brothers downloaded the data contained on the computers that Gruttadauria maintained at his Cleveland, Ohio office. Lehman Brothers discovered hundreds of downloaded account statements ("the Gruttadauria-created account statements") for the accounts of at least 50 of Gruttadauria's customers. Some of these Gruttadauria-created account statements purported to be SG Cowen account statements and others purported to be Lehman Brothers account statements. However, neither Lehman Brothers nor SG Cowen had authorized Gruttadauria to generate these account statements.
15. In most instances, the customer had an account at Lehman Brothers with the account number reflected on the Gruttadauria-created account statements. A comparison of the account values reflected on the Gruttadauria-created Lehman Brothers account statements with those reflected on the actual statements for the same accounts disclosed huge disparities. In some instances, Lehman Brothers was unable to identify accounts with a number corresponding to that reflected on the Gruttadauria-created account statement. On information and belief, similar disparities exist regarding the Gruttadauria-created SG Cowen account statements and the actual SG Cowen account statements.
16. For example, as of the last quarter of 2000, the aggregate total value reflected on the Gruttadauria-created account statements for both the overstated and non-existent accounts was about $297 million. In comparison, the actual value of the overstated accounts for the same period was about $8.8 million. The most recently Gruttadauria-created account statements for both the overstated and non-existent accounts reflected an aggregate value of about $278 million, whereas the actual value of the overstated accounts was about $1.8 million.
17. The Gruttadauria-created account statements were but one part of a much larger and more elaborate fraudulent scheme executed by Gruttadauria. Over a period of many years, Gruttadauria told customers that he had bought or sold securities for their accounts when, in fact, he had misappropriated their funds for his own purposes. He also materially misrepresented the value of and the positions held in customer accounts, often telling customers that their accounts contained a wide variety of holdings worth millions of dollars when, in fact, the accounts contained only a few thousand dol