Broker-Dealer Litigation - Greenberg Traurig LLP

Exchange Act and Section 17(a) of the Securities Act because there was an abundance of
evidence that the defendants intentionally made deceptive contributions to the fraudulent
scheme, despite the fact that the defendants did not actually prepare the financial statements or
help to prepare the SEC filings. Alternatively, the court concluded that the defendants would be
liable under an aiding and abetting theory of liability because their role in providing fake
invoices in support of overstated revenue was integral to the fraudulent scheme.
SEC v. Betta, Jr., 2011 WL 4369012 (S.D. Fla. Sept. 19, 2011).
The SEC moved for summary judgment against defendant Gagliardi on its claims that he
violated Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act. Gagliardi
was a registered representative with Brookstreet Securities Corp. (“Brookstreet”), a broker-dealer
and investment adviser that collapsed in June of 2007. The SEC alleged that Gagliardi
recommended and sold collateralized mortgage obligations (“CMOs”) to customers even though
he knew, or should have known, that the highly risky CMOs were unsuitable for these customers
and he failed to disclose these risks. The court concluded that viewing the undisputed facts in a
light most favorable to Gagliardi, there were genuine issues of material fact regarding whether
Gagliardi acted with scienter and therefore, summary judgment was not appropriate.
The SEC argued that Gagliardi’s failure to understand and adequately investigate the
Program CMOs was an extreme departure from the standards of ordinary care to which brokers
are held and that Gagliardi’s deviation from these standards of care presented such a clear danger
of misleading his customers that he must have been aware of it. Gagliardi told his customers that
CMOs were appropriate for retirees and that they were well-suited for the conservative segment
of their investment portfolio because they were so safe. According to Gagliardi, he believed all
of these representations because it was his understanding that the SEC and FINRA had “vetted
and reviewed” Brookstreet’s CMO Program in the past and took no action. The court concluded
that there were plausible opposing inferences that could be made from the evidence that did not
lead to the conclusion, as a matter of law, that Gagliardi either knew or it was so obvious that he
must have known that the Program CMOs were too risky and complex for certain investors. In
light of the evidence presented regarding Brookstreet’s forms, training and approach to selling
Program CMOs, the court concluded that as a matter of law, that it was not an extreme departure
from the standard of ordinary care for Gagliardi to recommend CMOs as he had been trained.
Additionally, Gagliardi submitted evidence that suggests that the risks associated with CMOs at
the time was not so clearly established. Thus, the court denied the SEC’s motion for summary
judgment on their Section 10(b) and Section 17(a)(1) claims.
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