SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934

Rel. No. 38742 \ June 17, 1997

Admin. Proc. File No. 3-8370

________________________________________________

In the Matter of :

DONALD A. ROCHE :

6822 22nd Avenue North #137 :

St. Petersburg, Florida 33710 :

________________________________________________:

OPINION OF THE COMMISSION

BROKER-DEALER PROCEEDINGS

Grounds for Remedial Action

Fraud in Offer and Sale of Securities

Former salesman of former registered broker-dealer made fraudulent

price predictions, made a materially misleading statement concerning

the existence of a stop/loss order, and churned the accounts of

customers. Held, it is in the public interest to: bar salesman from

association with any broker or dealer; order salesman to cease and

desist from committing or causing any violation or future violation of

Section 17(a) of the Securities Act of 1933 or Section 10(b) of the

Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and order

salesman to disgorge $102,182, plus prejudgment interest.

APPEARANCES:

Donald A. Roche, pro se.

Maureen Maguire Bailey and Stephen J. Korotash, for the Division of

Enforcement.

Appeal filed: August 14, 1995

Last brief received: No separate briefs filed on appeal.

Donald A. Roche, formerly a registered representative and manager of

the Clearwater, Florida branch office of The Stuart-James Co., Inc.

("Stuart-James"), a former registered broker-dealer, appeals from the

decision of an administrative law judge. The law judge found that Roche

used various fraudulent sales tactics, made unauthorized trades, and

churned customer accounts in violation of Section 17(a) of the Securities

======END OF PAGE 1======

Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange

Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The law judge

barred Roche from association with any broker or dealer; ordered Roche to

cease and desist from committing or causing any violation of, and from

committing or causing any future violation of, Section 17(a) of the

Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5

thereunder; and ordered him to disgorge $102,182, plus prejudgment

interest. Our findings are based on an independent review of the

record. <(1)>

II.

During the period from approximately June 1989, to March 1990, Roche

made price predictions in conjunction with recommendations of a number of

speculative securities.

CM Communications, Inc.

CM Communications, Inc. ("CM") was a risky enterprise engaged in the

distribution of cellular phone equipment and accessories. In early 1990,

Roche recommended CM stock to at least three of his customers.

In January, Roche recommended that his client Steven Johnson purchase

CM stock. Roche told Johnson that CM would increase in price to "the

neighborhood of $20 to $25 a share" within thirty to sixty days. On

January 22, 1990, Johnson purchased 700 shares of CM for $7.35 a share. CM

later fell to under $1.00 per share.

Similarly, Roche recommended CM to his client Robert Maegerle. Roche

indicated that CM "potentially could recapture [] losses" in Maegerle's

account. In late March or early April of 1990, Roche faxed materials to

Maegerle stating that CM had an expected price "in excess of" $13 per share

over the next six to nine months and $26 per share over the next fifteen to

eighteen months. Maegerle purchased 1000 shares of CM for $8.25 per

share. Maegerle later sold his CM holdings for $1.1875 per share.

<(1)> On July 24, 1995, new Rules of Practice governing

Commission administrative proceedings became effective.

Because this proceeding was docketed prior to that

date, it has been conducted under the former Rules of

Practice. See 60 Fed. Reg. 32,738 (1995).

Our review of this proceeding has been complicated by the

parties' failure to brief fully the case on appeal. Roche

filed a petition for review, but neither Roche nor the

Division of Enforcement ("Division") filed a brief on

appeal.

======END OF PAGE 2======

Roche also touted CM to his customer Kenneth Gregory. In March 1990,

Roche solicited Gregory to purchase CM stock. Roche predicted to Gregory

that CM would increase to $15 per share "fast." Gregory then purchased 350

shares on March 26, 1990 for $7.875 per share.

Europa Cruises Corp.

Stuart-James underwrote the initial public offering of the securities

of Europa Cruises Corp. ("Europa") in 1989. The prospectus described the

offering as "speculative," entailing substantial risk of loss. In June

1989, Roche solicited his customer Fred Scheidker to purchase Europa stock.

Roche represented to Scheidker that Europa, which sold for $1.00 per share,

would double to $2.00 per share "pretty fast." On June 29, 1989, Scheidker

purchased 1500 shares of Europa at $1.00 per share. Scheidker sold Europa

the next month for a $215 profit.

The Meadow Group, Inc.

In 1989, Roche also had recommended the stock of The Meadow Group,

Inc. ("Meadow"). Meadow was formed the previous year as a blind pool

company engaged in the acquisition of operating companies. In November

1989, Roche recommended that his customer Theodore Boe purchase stock in

Meadow. By this time, Boe had suffered losses in his account, and Roche

had told Boe that his goal "was to get [Boe] back even by Christmas."

Roche represented to Boe that Meadow would "recoup losses" in Boe's account

of $11,000. On November 16, 1989, Boe purchased 20,000 shares of Meadow at

$.28 per share, and on November 29, 1989, he purchased an additional 10,000

shares at $.27 per share. Boe sold 30,000 shares of Meadow in May, 1990,

for $.0325 per share.

* * *

We long have held that predictions of specific and substantial

increases in the price of a speculative security within a relatively short

period of time are fraudulent. <(2)> We also have held that

predictions of specific and substantial increases in the price of any

security that are made without a reasonable basis are fraudulent.

<(3)>

<(2)> Irving Friedman, 43 S.E.C. 314, 320 (1967); Alfred

Miller, 43 S.E.C. 233, 235 (1966)(such predictions "are

a `hallmark' of fraud").

<(3)> Lester Kuznetz, 48 S.E.C. 551, 553 (1986). In her

initial decision in this case, the law judge also

addressed the adequacy of Roche's basis for

recommending the purchase of all the above securities.

In this regard, she cited Hanly v. SEC, 415 F.2d 589

(2d Cir. 1969). Hanly dealt with the necessity that

every salesman have a reasonable basis for recommending

a security. While this is a related concept, the

(continued...)

======END OF PAGE 3======

Roche committed fraud when he made price predictions to his customers.

CM was a very risky investment, yet Roche made explicit predictions of

rapid price increases to Johnson, Maegerle, and Gregory. Similarly, Roche

predicted to Scheidker that Europa, a speculative stock, rapidly would

double in price. Roche told Boe that investing in Meadow, a highly

speculative investment, would rapidly recoup $11,000 in losses in Boe's

account. Given the speculative nature of the securities, there could be no

reasonable basis for these predictions, and they

were fraudulent. Even if the securities were less speculative, the record

does not indicate that Roche had a basis to support such predictions.

Roche acted recklessly, at a minimum, when he made such

predictions. <(4)>

We therefore conclude that Roche wilfully violated Section 17(a) of

the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5

thereunder by making price predictions which lacked a reasonable basis.

III.

As discussed above, Roche recommended in March 1990 that his customer

Kenneth Gregory purchase CM stock, which at the time was quoted on Nasdaq.

Gregory was hesitant, as he was "getting down to hardly anything in the

account." The stock was trading at $7.875 per share at the time. Roche

volunteered to put a "stop/loss order" to sell the stock at $7 per share on

Gregory's purchase if he agreed to the transaction. Gregory agreed,

because he felt that, if the share price declined, he could get out of the

stock before he "lost it all." Gregory purchased 350 shares. Roche did

not place any formal stop/loss order on the securities but rather made a

"mental stop" to sell Gregory's securities at $7 per share.

Not long thereafter, CM began to drop in price. Roche was not in the

office when Gregory telephoned regarding the decline. Gregory instead

spoke to Roche's sales assistant and told the assistant that Roche had

placed a "stop/loss order" on CM. After two or three telephone calls to

the assistant, the assistant told Gregory that stop/loss orders could not

<(3)>(...continued)

charges in this case alleged only that Roche made

fraudulent specific price predictions and did not

address the broader basis for his recommendations. At

the hearing, the Division sought only to prove, as

alleged, that there was no basis for Roche's price

predictions.

<(4)> The law judge also found that Roche made a fraudulent

price prediction to another customer, Paresh Doshi.

The evidence concerning the prediction is more

equivocal than those discussed above. Given the number

and severity of Roche's violations, we need not reach

this allegation.

======END OF PAGE 4======

be placed on issues quoted on Nasdaq. <(5)> Gregory lost most of his

investment in CM.

Roche's statement that he would place a stop/loss order on the stock

was materially misleading in that Roche intentionally gave Gregory the

impression that his investment in CM would be protected automatically from

a sharp decrease in price, whether or not Roche was in the office. Roche's

conduct induced Gregory to make an investment which he was otherwise

reluctant to make. We therefore find that Roche wilfully violated Section

17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule

10b-5 thereunder.

IV.

The law judge also found that Roche churned the accounts of three of

his customers: Kenneth Gregory, Robert Novak, and Fred Scheidker.

None of the three customers had speculation as an account objective or

had an expectation of rapid turnover. Gregory explained to Roche that his

investment represented his savings and that he did not want to risk his

savings. Novak was not willing to risk the loss of his entire investment

and would have been satisfied with a 10% return. His employer did not have

a retirement plan, and Novak intended his investing to provide for

retirement. Scheidker hoped for "appreciation" in investing with Stuart-

James. He rolled over an Individual Retirement Account from another broker

and used the funds to invest at Stuart-James.

Roche made all the investments in Gregory's account, frequently

telling Gregory about the transactions after the fact. Gregory believed

what Roche told him, and when Gregory sold an investment, he usually rolled

the money over into another investment pursuant to Roche's direction.

Similarly, the ideas for the investments in Novak's account originated with

Roche. Novak accepted Roche's investment decisions, only turning down

investments when he did not have the necessary money. On those occasions

when Novak had no money available, Roche suggested selling specific stocks

to finance the recommended purchases. Roche recommended all of the

transactions in Scheidker's account. Roche also controlled the trading in

Scheidker's account, sometimes making purchases and then calling Scheidker,

who would visit the office and bring money to pay for the transactions.

During the period April 1988, through April 1990, Gregory's account

had an average monthly equity value of $7,221. On an annualized basis, the

account turnover rate was 3.3, <(6)> and the average holding period

<(5)> There is no legal impediment to placing such orders on

Nasdaq securities. It is undisputed, however, that

Roche did not arrange for such an order with his firm.

<(6)> The turnover rate represents the number of times in one

year that a portfolio of securities is exchanged for

(continued...)

======END OF PAGE 5======

was 103 days. The account had a cost- equity maintenance factor of 107.8%,

meaning that, due to the transaction costs related to trading, the account

would need to appreciate that amount to break even. <(7)> Gregory

suffered nearly $10,000 in net losses, approximately 78% of the funds he

invested during the time period. The trading in Gregory's account

generated $15,571 in total commissions.

During the period March 1988, through May 1990, Novak's account had an

average monthly equity value of $12,335. On an annualized basis, the

account turnover rate was 4.6, and the average holding period was 123 days.

The account had a cost-equity maintenance factor of 138.8%. Novak suffered

nearly $39,000 in net losses, approximately 75% of the funds he invested

during the time period. The trading in Novak's account generated $37,107

in total commissions.

During the period April 1988, through June 1990, Scheidker's account

had an average monthly equity value of $16,398. On an annualized basis,

the account turnover rate was 7.2, and the average holding period was 92

days. The account had a cost-equity maintenance factor of 258.8%.

Scheidker suffered nearly $54,000 in net losses, approximately 95% of the

funds he invested during the time period. The trading in Scheidker's

account generated $49,504 in total commissions.

* * *

Churning "occurs when a securities broker enters into transactions and

manages a client's account for the purpose of generating commissions and in

disregard of his client's interests." <(8)> Churning has been found

where: (1) trading in an account was excessive in light of the investment

objectives; (2) the broker exercised control over the account; and (3) the

<(6)>(...continued)

another portfolio of securities. The Division's expert

calculated the turnover rate by dividing the total

purchases by the average account equity and annualizing

the number.

<(7)> While the Division's expert used the term "break-even

cost factor," he noted that the calculation is also

referred to as a "commission to equity ratio" and a

"cost-equity maintenance factor." The expert noted

that the phrases refer to identical calculations.

<(8)> Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir.

1981); Mihara v. Dean Witter & Co., 619 F.2d 814, 820-

21 (9th Cir. 1980).

======END OF PAGE 6======

broker acted with the intent to defraud or with reckless disregard for the

interests of the client. <(9)>

Churning, "in essence, involves a conflict of interest in which a

broker or dealer seeks to maximize his or her remuneration in disregard of

the interests of the customer." <(10)> This motivation creates the

element of scienter necessary for a violation of the antifraud provisions

of the securities laws. <(11)> Scienter, in turn, is what separates

"churning" from "excessive trading."

In the proceedings below, the term "churning" was used interchangeably

with "excessive trading." As we have noted in a previous case, the

violation's normal designation in a fraud context is "churning."

<(12)> "Excessive trading," without more, is a type of violation of

broad "suitability" rules promulgated by self-regulatory organizations,

which are not antifraud provisions. <(13)>

We find that Roche churned the accounts of Gregory, Novak, and

Scheidker. The frequent turnover in the accounts conflicted with the

customers' expressed investment objectives. This is illustrated clearly

by, for example, the transaction costs associated with the level of trading

in the accounts. Those costs made it extremely unlikely that any of the

customers would be able to break even, much less earn any profit. Under

the circumstances presented in this case, Roche abused his control over the

trading in the accounts of Gregory, Novak, and Scheidker to make numerous

trades that placed his compensation ahead of the customers' best

interests. <(14)>

The fact that Roche's clients were sustaining large losses while he

was generating substantial commission income for himself was readily

<(9)> See, e.g., Miley, 637 F.2d at 324; Mihara, 619 F.2d at

821. See also Albert V. O'Neal, 51 S.E.C. 1128, 1130

(1994).

<(10)> Loss & Seligman, Securities Regulation, 3877 (1991).

<(11)> See, e.g., Mihara, 619 F.2d at 820.

<(12)> O'Neal, 51 S.E.C. at 1130 n.8.

<(13)> See, e.g., Paul Kettler, 51 S.E.C. 30, 32 (1992); John

Reynolds, 50 S.E.C. 805, 806 (1992).

<(14)> De facto control of an account may be established where

the client habitually follows the advice of the broker.

E.g., Mihara, 619 F.2d at 821. The evidence strongly

shows Roche exercised de facto control of trading in

all three accounts, as the customers routinely followed

his recommendations. Roche also frequently made

unauthorized trades in Scheidker's account.

======END OF PAGE 7======

apparent. At the least, Roche acted in reckless disregard of his

customers' interests and account objectives, and in favor of his own

interests.

Accordingly, we find that Roche wilfully violated Section 17(a) of the

Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5

thereunder, by churning the accounts as alleged.

A. The law judge found that Roche made additional material

misrepresentations and omissions of fact to his customers Johnson and

Gregory. <(15)> The Amended More Definite Statement alleged that

Roche made a material misrepresentation or omitted material information to

Johnson involving one particular stock. It omitted detail as to what Roche

said or failed to say to Gregory.

The testimony of Johnson and Gregory provides few additional details.

Johnson testified that, when Roche took over his account, Roche stated that

many of Roche's clients had made 25-40% returns and that Roche felt that,

if given the opportunity, he could do the same for Johnson. Johnson also

testified that Roche generally indicated that companies he was recommending

were on the verge of making discoveries or major changes "that were not

particularly public knowledge." Gregory's testimony was of similar brevity

and generality. Gregory testified that Roche once told him to ignore the

language relating to risk factors in an unidentified prospectus.

<(15)> The law judge made similar findings with respect to

other customers. The Division's Amended More Definite

Statement, however, alleged that Roche made material

misrepresentations and omissions to only Johnson and

Gregory. The Division's post-hearing brief addressed

only the allegations in its Amended More Definite

Statement. Fairness requires that we set aside those

findings against Roche that were not charged or

litigated.

======END OF PAGE 8======

While we have not hesitated to hold, upon a proper showing, that

similar statements violate the antifraud provisions if they are false when

made, there is nothing in this record that establishes that these

statements were actually fraudulent. There is no evidence at all

concerning Roche's success rate with clients other than those discussed

here. Because the companies to which Johnson's testimony refers are not

identified, it is not possible to determine if Roche's statements about

them are false. Because the prospectus discussed by Gregory is not

identified, it is not possible to determine the materiality of any language

in that document relating to risk. We therefore reverse the law judge's

findings that Roche made material misrepresentations and omitted material

facts, apart from those previously discussed relating to price predictions

and the stop/loss order, in regard to Johnson and Gregory.

B. The law judge also found that Roche violated the antifraud

provisions by making unauthorized trades in the accounts of Paresh Doshi

and Scheidker. <(16)> In general, unauthorized trading violates the

antifraud provisions when accompanied by deceptive conduct. <(17)>

This requirement is satisfied by the respondent's omission to inform the

customer

of the materially significant fact of the trade before it is made. We

therefore affirm the law judge's findings that Roche violated the antifraud

provisions by making unauthorized trades in these two accounts.

VI.

Roche argued in his Petition for Review that this proceeding is barred

by the "applicable statute of limitations," without specifying any

statutory provision. The only possibly applicable statute of limitations

is the five-year limit contained in 28 U.S.C. Section 2462 on

administrative proceedings seeking to enforce a "penalty." <(18)>

<(16)> The law judge made similar findings with respect to two

other accounts. The Division's allegations pertained

only to the accounts of Doshi and Scheidker. As

discussed, supra, fairness compels us to set aside

findings of violations that were not charged.

<(17)> See Messer v. E.F. Hutton & Co., 847 F.2d 673, 678

(11th Cir. 1987); Brophy v. Redivo, 725 F.2d 1218,

1220-21 (9th Cir. 1984); SEC v. Hasho, 784 F.Supp 1059,

1110 (S.D.N.Y. 1992)(unauthorized trades are actionable

under Rule 10b-5 "when accompanied with deception,

misrepresentation, or non-disclosure").

<(18)> See Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996).

======END OF PAGE 9======

A portion of the trading covered by the churning claims occurred more

than five years before the order instituting proceedings. "Churning is a

unified offense [and] a finding of churning, by the very nature of the

offense, can only be based on a hindsight analysis of the entire history of

a broker's management of an account and of his pattern of trading that

portfolio." <(19)> Thus, the offense was not complete until the end

of the review period, which here occurred within five years of the order

instituting proceedings. Moreover, even if we were not to consider the

churning violations in assessing the sanctions, we think the sanctions are

justified by the other violations that Roche committed.

We have found that Roche committed serious antifraud violations. He

repeatedly made fraudulent price predictions to customers, made a

materially misleading statement in order to make a sale to a reluctant

customer, and churned three customers' accounts in complete disregard of

the customers' best interests. Roche's conduct was not isolated, but

extended over a period of time. His actions demonstrate a pattern of sales

abuse that we cannot tolerate from anyone involved in the securities

industry. Under these circumstances, the public interest warrants an order

that Roche be barred from association with any broker or dealer and that he

cease and desist from violating the charged antifraud provisions of the

securities laws.

The law judge also ordered that Roche disgorge $102,182, plus

prejudgment interest, representing commissions earned on the accounts that

Roche churned. Disgorgement is not a penalty within the meaning of Section

2462. <(20)> We agree that Roche should disgorge the ill-gotten

gains from his churning.

The testimony of the Division of Enforcement's expert witness, which

Roche did not dispute, indicated that the trading in Gregory's account

generated $15,571 in total commissions, that the trading in Novak's account

generated $37,107 in total commissions, and that the trading in Scheidker's

account generated $49,504 in total commissions. <(21)> While termed

total "commissions," these figures appear to include markups and markdowns,

traditional commissions, and other transaction costs associated with the

trading. The record does not indicate what percentage of the total

commissions Roche received. This figure, however, under the circumstances,

represents a reasonable approximation of profits directly related to the

churning. Prejudgment interest also is appropriate.

<(19)> Miley, 637 F.2d at 327 (discussing nature of violation

in the context of assessing damages).

<(20)> Johnson, 87 F.3d at 488.

<(21)> See SEC v. First City Financial Corp., Ltd., 890 F.2d

1215, 1231 (D.C. Cir. 1989).

======END OF PAGE 10======

An appropriate order will issue. <(22)>

By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON,

and HUNT).

Jonathan G. Katz

Secretary

<(22)> All of the contentions advanced by the parties have

been considered. They are rejected or sustained to the

extent that they are inconsistent or in accord with the

views expressed herein.

======END OF PAGE 11======

UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Rel. No.

Admin. Proc. File No. 3-8370

________________________________________________

In the Matter of :

DONALD A. ROCHE :

6822 22nd Avenue North #137 :

St. Petersburg, Florida 33710 :

________________________________________________:

ORDER IMPOSING REMEDIAL SANCTIONS

On the basis of the Commission's opinion issued this day, it is

ORDERED that Donald A. Roche be, and he hereby is, barred from

association with any broker or dealer; and it is

ORDERED that Donald A. Roche cease and desist from committing or

causing any violation of or future violation of Section 17(a) of the

Securities Act of 1933, Section 10(b) of the Securities Exchange Act of

1934, and Rule 10b-5 thereunder; and

it is further

ORDERED that Donald A. Roche disgorge ill-gotten gains, plus

prejudgment interest thereon, as set forth below: <(1)>

Roche shall disgorge a total of $102,182.00, representing profits

earned from his churning of customer accounts, which we deem to have

occurred as of May 8, 1990. Roche also shall pay prejudgment interest

in the amount of $80,513.08, calculated in accordance with Commission

Rule 600(b) and due from June 1, 1990 through June 17, 1997. Interest

shall continue to accrue on all funds owed until they are paid.

By the Commission.

Jonathan G. Katz

Secretary

<(1)> Although the Commission's new Rules of Practice were

not applicable to this proceeding, we see no reason not

to issue this disgorgement order according to the

format prescribed by Commission Rule 600.