SEC v. LNB Bancorp, Inc.; Gary C. Smith; Thomas P. Ryan; Gerald S. Falcon; and Thomas H. Eschke, Northern District of Ohio (May 19, 2004) — Complaint

 
 
 
 
 
 
 
 
 
 
 
 
 
 IN THE UNITED STATES DISTRICT COURT 
FOR THE NORTHERN DISTRICT OF OHIO 
 EASTERN DIVISION 
  
        
 
       : 
UNITED            STATES                                                            :            
SECURITIES AND EXCHANGE    : 
COMMISSION,                                                            :            CIVIL            ACTION            
                                                                                    :            FILE            NO.            04            CV            0933            
                                                                                                Plaintiff,                        :            
       : 
    v.   : 
       : 
LNB BANCORP, INC., GARY C. SMITH, : 
THOMAS P. RYAN,  GERALD S. FALCON,  : 
and            THOMAS            H.            ESCHKE,                                    :                                                                                    
       : 
                                                                                                Defendants.            :            
       :
 
 
 
                                                                  COMPLAINT
 
 
 Plaintiff, United States Securities and Exchange Commission (“Commission”), alleges as 
follows: 
NATURE OF THE CASE
 
 1. Beginning as early as February 11, 2000 and continuing through July 16, 2001, 
LNB Bancorp, Inc. (“LNB Bancorp”), through, Gary C. Smith (“Smith”), Thomas P. Ryan 

 
2 
(“Ryan”), Gerald S. Falcon (“Falcon”) and Thomas H. Eschke (“Eschke”) (hereinafter 
collectively referred to as the “Defendants”) perpetrated a market manipulation scheme to 
artificially increase and stabilize the price of LNB Bancorp common stock on the Nasdaq 
National Market (“Nasdaq”).  Specifically, on 285 separate days, at or near the close of the 
trading day, Defendants Ryan, Falcon and Eschke placed purchase orders for 100 or 200 shares 
of LNB Bancorp common stock during the last half-hour of the trading day for the Lorain 
National Bank employee benefit plans in an attempt to mark the close of trading in the stock with 
a purchase order.  Of these 285 purchases, Ryan, Falcon and Eschke succeeded in placing the 
last trade of the day for LNB Bancorp stock on 232 days.  This manipulative trading practice is 
known as “marking the close”.  Defendant Smith maintained supervisory roles over Ryan, 
Falcon and Eschke and knew, or was reckless in not knowing of the marking the close scheme 
and failed to take timely action to stop the scheme.  By marking the close, the Defendants 
artificially supported the price of LNB Bancorp common stock on Nasdaq.  As a result, the 
Defendants fraudulently manipulated the closing price of LNB Bancorp common stock. 
 2. By engaging in this scheme, the Defendants, directly and indirectly, have engaged 
in and, unless enjoined, will continue to engage in acts, practices and courses of business which 
constitute and will constitute violations of 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 enjoin such acts, practices and courses of 
business pursuant to Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 
78u-1(a)]. 
JURISDICTION
 

 
3 
 4. The Court has jurisdiction over this action pursuant to Sections 21 and 27 of the 
Exchange Act [15 U.S.C. §§ 78u and 78aa].  Venue is also proper in this court pursuant to 
Section 27 of the Exchange Act [15 U.S.C. §78aa]. 
 5. The acts, practices and courses of business constituting the violations herein 
occurred within the jurisdiction of the United States District Court for the Northern District of 
Ohio and elsewhere. 
 6. The Defendants will, directly and indirectly, unless enjoined, have the 
opportunity to engage in the acts, practices and courses of business set forth in this Complaint 
and in acts, practices and courses of business of similar purport and object. 
 7. The Defendants, directly and indirectly, have made use of the mails and of the 
means and instrumentalities of interstate commerce in connection with the acts, practices and 
courses of business alleged herein in the Northern District of Ohio and elsewhere. 
                        THE            DEFENDANTS
 
 8. LNB Bancorp is a $715 million financial holding company with its headquarters 
located in Lorain, Ohio.  LNB Bancorp, incorporated on October 11, 1983, has two wholly 
owned subsidiaries: Charleston Insurance Agency, Inc. and Lorain National Bank.  Lorain 
National Bank is the primary subsidiary of LNB Bancorp.  The common stock of LNB Bancorp 
is listed on the Nasdaq and registered with the Commission pursuant to Section 12(g) of the 
Exchange Act [15 U.S.C. §78l].    
 9.  Smith, age 56, is a resident of Avon Lake, Ohio.  During the time period at issue, 
Smith was the President and Chief Executive Officer (“CEO”) of LNB Bancorp, President and 
CEO of Lorain National Bank, and a Director of LNB Bancorp.  Smith was also the Plan 
Administrator for the various Lorain National Bank employee benefit plans.  Smith resigned 

 
4 
from LNB Bancorp and Lorain National Bank on December 10, 2003, after approximately five 
years of employment.  His retirement from LNB Bancorp and Lorain National Bank became 
effective on March 10, 2004.  During the relevant periods at issue, Smith owned approximately 
3,600 shares of LNB Bancorp common stock. 
 10. Ryan, age 65, is a resident of Vermilion, Ohio.  During the time period at issue, 
Ryan was the Executive Vice President, Secretary and Treasurer of LNB Bancorp and the 
Executive Vice President and Secretary of Lorain National Bank and a Director of LNB 
Bancorp.  Ryan retired from LNB Bancorp and Lorain National on December 31, 2001, after 
approximately forty years of employment.  During the time period at issue, Ryan owned 
approximately 37,000 shares of LNB Bancorp common stock. 
 11. Falcon, age 54, is a resident of Solon, Ohio.  Falcon has been employed at Lorain 
National Bank for approximately twelve years.  Falcon was the Vice President of the Operations 
Unit of the Investment and Trust Services Division of Lorain National Bank until approximately  
June 2000, when he was promoted to Senior Employees Benefits Officer of the Investment and 
Trust Services Division of Lorain National Bank. 
 12. Eschke, age 41, is a resident of Elyria, Ohio.  Eschke has been employed at 
Lorain National Bank for approximately twelve years.  Eschke was Falcon’s assistant until 
approximately June 2000 when he replaced Falcon as the Assistant Vice President and Trust 
Operations Officer of the Operations Unit of the Investment and Trust Services Division of 
Lorain National Bank.   
 FACTS
  
 13. Prior to the commencement of the Defendants’ marking the close scheme, the 
Lorain National Bank Investment and Trust Services Division had the responsibility of 

 
5 
purchasing stock for the individual accounts that it managed, such as self-directed and managed 
trust accounts, agency accounts and individual retirement plans, as well as for the Lorain 
National Bank employee benefit plans.  As part of this process, Lorain National Bank was 
responsible for purchasing a variety of securities for these accounts, including LNB Bancorp 
common stock.  Lorain National Bank established an internal procedure so as to place its daily 
securities trades with brokerage firms at approximately 11:00 a.m. and at 3:00 p.m. Eastern 
Standard Time.   
 14. During the relevant periods, Smith was the Plan Administrator of the Lorain 
National Bank employee benefit plans.  Smith delegated the operational duties of these plans to 
Ryan, who in turn, delegated the day-to-day operations to Falcon and Eschke.  Smith retained 
supervisory authority over Ryan, Falcon and Eschke.  
 15. Prior to LNB Bancorp’s listing on Nasdaq, purchases of LNB Bancorp common 
stock for the Lorain National employee benefit plans were restricted by the availability of the 
stock on the OTC Bulletin Board. 
 16. During the time that LNB Bancorp was being considered for listing on Nasdaq, 
Smith and Ryan made numerous presentations to investment groups to promote LNB Bancorp 
common stock.  On February 9, 2000, LNB Bancorp common stock became listed on Nasdaq.   
At that time, LNB Bancorp common stock was a thinly traded stock.  Smith and Ryan decided 
that it would be beneficial for LNB Bancorp common stock to gain a “regular presence” on 
Nasdaq.  To achieve this regular presence, Smith and Ryan decided to make a daily purchase of 
200 shares of LNB Bancorp common stock for the Lorain National Bank employee benefit plans 
(the “Regular Presence Plan”). 

 
6 
 17. Smith, Plan Administrator of the Lorain National bank employee benefit plans, 
gave Ryan the authority to determine the timing of the daily purchase of 200 shares of LNB 
Bancorp common stock in furtherance of the regular presence plan. 
 18. Shortly after LNB Bancorp common stock became listed on Nasdaq, Smith and 
Ryan became aware that LNB Bancorp common stock was being sold late in the trading day.  
Ryan believed that an individual who was attempting to gain control over LNB Bancorp was 
driving down the closing price for LNB Bancorp common stock by selling LNB Bancorp 
common stock late in the day and then capitalizing on the lower closing price by making early 
morning purchases of LNB Bancorp common stock the next day.   
 19. Ryan informed Falcon of his concerns about the late day sales and early morning 
purchases of LNB Bancorp common stock.  Falcon and Ryan decided to make the daily purchase 
of 200 shares of LNB Bancorp common stock for the Lorain National Bank employee benefit 
plans at or near the close of the trading day in order to counteract the effect of the late day sales 
on LNB Bancorp’s stock price.  Based on Falcon’s suggestion, Ryan directed Falcon to deviate 
from Lorain National Bank’s internal procedure of placing its securities trades with brokerage 
firms and to place the daily purchases of 200 shares of LNB Bancorp common stock for the 
Lorain National Bank employee benefit plans at or near the close of the trading day. 
 20. Falcon was responsible for the day-to-day implementation of Ryan’s directive to 
purchase LNB Bancorp common stock at or near the close of the trading day.  To ensure that the 
marking the close scheme was executed, Falcon immediately informed Eschke, his subordinate, 
about Ryan’s directive to purchase the daily 200 shares of LNB Bancorp common stock for the 
Lorain National Bank employee benefit plans at or near the close of the trading day.  Eschke 
knew that this trading plan was contrary to Lorain National Bank’s established internal 

 
7 
procedure of placing securities trades with brokerage firms at approximately 11:00 a.m. and 3:00 
p.m., but did not object to the plan.   
 21. The initial implementation of the Defendants’ marking the close scheme resulted 
in LNB Bancorp stock closing the trading day with a purchase order.  By closing the day with a 
purchase, the Defendants artificially increased the closing price of LNB Bancorp common stock 
and counteracted any late day sales.  For example, on March 13, 2000, at 3:31 p.m. there was a 
sale of 200 shares of LNB Bancorp common stock.  This late day sale resulted in lowering the 
LNB Bancorp common stock price from $20.00 per share to $18.75 per share.  To counteract this 
sale, at 3:36 p.m. on the same day, the Defendants placed a purchase order for 200 shares of 
LNB Bancorp common stock at a price of $20.00 per share.  This purchase of LNB Bancorp 
common stock at the close of the trading day increased the bid price of LNB Bancorp common 
stock to $20.00 per share. 
  22. Anticipating a continual need for the marking the close scheme, on or about April 
20, 2000, Ryan and Falcon changed the quantity of the daily purchase of LNB Bancorp common 
stock purchase for the Lorain National Bank employee benefit plans from 200 shares to 100 
shares.  The Lorain National Bank employee benefit plans had defined amounts of LNB Bancorp 
common stock that Lorain National Bank was required to purchase for these plans.  By 
purchasing 100 shares a day instead of 200 shares, LNB Bancorp could continue to execute its 
marking the close scheme for an indefinite period of time. 
 23. On or about May 2000, Ryan informed Smith that the daily purchases of LNB 
Bancorp common stock was occurring late in the trading day.  At that time, Smith had an 
understanding of how purchases or sales placed at or near the close of the market impacted the 
closing price of stock.  Ryan also informed Smith that the daily purchase of LNB  

 
8 
Bancorp common stock had changed from 200 shares to 100 shares.  Smith acquiesced in Ryan’s 
purchasing plan of LNB Bancorp common stock. 
 24. On or about June 2000, Falcon was promoted to Senior Employee Benefits 
Officer and Eschke replaced Falcon as the Assistant Vice President and Trust Operations Officer 
of Lorain National Bank.  At this time, Eschke took over the day-to-day responsibilities of 
making sure that a daily order to purchase 100 shares of LNB Bancorp common stock for the 
Lorain National Bank employee benefit plans was placed at or near the close of the of the trading 
day. 
 25. On a few occasions, after Eschke and the Lorain National Bank trade clerk forgot 
to place the daily purchase of 100 shares of LNB Bancorp common stock, Ryan informed Eschke 
that it was important to place the purchases of LNB Bancorp common stock at or near the close 
of the day so that the stock would close with a purchase order.  Eschke informed Ryan that it 
appeared that LNB Bancorp was trying to control the price of its own stock by purchasing shares 
at the end of day.  Nevertheless, Ryan directed Eschke and others to continue the purchases of 
LNB Bancorp common stock at the close of trading each day.   Eschke then devised a method to 
ensure that the daily purchase of LNB Bancorp common stock was executed.   
 26. Throughout this time period, Ryan maintained regular oversight of the daily 
purchases of LNB Bancorp common stock by continuously monitoring the LNB Bancorp stock 
activity and frequently contacting Eschke and the Lorain National Bank trade clerk to verify that 
the purchases of LNB Bancorp stock were placed at or near the close of the trading day.   
 27.       The Defendants’ scheme succeeded in setting the closing price of LNB Bancorp 
common stock on Nasdaq for 232 different days.  All 232 trades placed at or near the close of the 
day were the last transactions in the trading day for the LNB Bancorp common stock.  Of these 

 
9 
232 trades, 42 of the trades were the only trade of the day for LNB Bancorp common stock.  As 
a result, during the time period at issue, numerous purchases of LNB Bancorp common stock 
placed for the Lorain National Bank employee benefit plans caused the closing price of LNB 
Bancorp common stock to be higher than what the price would have been without these trades.  
In fact, the Defendants’ trading activity raised the closing price of LNB Bancorp common stock 
on at least 142 days.  On the other 90 days, the Defendant’s trading activity stabilized the price 
of LNB Bancorp common stock. 
 28. For instance, on January 16, 2001, the Defendants placed a purchase of 100 
shares of LNB Bancorp common stock at $22.50 per share within fifteen minutes of the market 
close.  Prior to Defendants’ trade, the bid price for LNB Bancorp common stock was $21.50 per 
share.  As a result of Defendants’ purchase the closing price for LNB Bancorp common stock 
increased to $22.75 per share. 
 29. As a result of the Defendants’ daily purchases of LNB Bancorp common stock at 
or near the close of the trading day, the closing price of LNB Bancorp common stock was 
artificially increased or stabilized.  As a result of these marking the close activities, the 
Defendants believed that they successfully fended off a takeover bid of LNB Bancorp and the 
possible change in control and management that they feared would result.  In addition, these 
marking the close activities had the effect of preserving the value of the personal investments in 
LNB Bancorp common stock for Ryan and Smith. 
 
 COUNT I
 
 Violation of Section 10(b) of the  
 Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5  
 [17 C.F.R. § 240.10b-5] Promulgated Thereunder 

 
10 
 
 30. Paragraphs 1 through 29 are hereby realleged and incorporated by reference 
herein. 
 31. On or about February 11, 2000 through July 16, 2001, the Defendants, in 
connection with the purchase of LNB Bancorp securities, namely common stock, by use of the 
means and instrumentalities of interstate commerce and of the mails, directly and indirectly: 
employed devices, schemes and artifices to defraud; made untrue statements of material fact and 
omitted to state material facts necessary in order to make the statements made, in the light of the 
circumstances under which they were made, not misleading; and engaged in acts, practices and 
courses of business which operated as a fraud and deceit upon purchasers and sellers of such 
securities.   
 32. The Defendants knew or were reckless in not knowing the facts and 
circumstances described in paragraphs 1 through 31 above. 
 33. By reason of the activities described in paragraphs 1 through 32 above, the 
Defendants violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 
C.F.R. § 240.10b-5] promulgated thereunder. 
 
PRAYER FOR RELIEF
 
            WHEREFORE, the Commission requests that the Court: 
 
                                                                             I. 
 Find that the Defendants committed the violations alleged above. 
 

 
11 
II. 
 Issue an order of permanent injunction, in a form consistent with Rule 65(d) of the 
Federal Rules of Civil Procedure, enjoining LNB Bancorp, Smith, Ryan, Falcon and Eschke, 
their officers, agents, servants, employees, attorneys and those persons in active concert or 
participation with them who receive actual notice of the order of permanent injunction by 
personal service or otherwise, and each of them, from violating Section 10(b) of the Exchange 
Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder, by 
directly or indirectly, in connection with the purchase or sale of the securities of any issuer, by 
the use of any means or instrumentality of interstate commerce, or of the mails, or of any 
national securities exchange from: 
A. employing any device, scheme or artifice to defraud; 
B. making any untrue statement of a material fact or omitting to state a material fact 
necessary in order to make statements made, in the light of the circumstances 
under which they were made, not misleading; or  
C. engaging in any act, practice or course of business which operates or would 
operate as a fraud or deceit upon any person. 
 
                                                                           III. 
         Grant an order requiring Defendants to pay civil penalties pursuant to Section 21(d) of the 
Exchange Act [15 U.S.C. §§ 78u(d)]. 
 
IV. 

 
12 
           Grant an order permanently prohibiting Ryan from acting as an officer or director of any 
issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that 
is required to file reports pursuant to Section 15(d) of the Exchange Act pursuant to Section 
21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)] and the Court's equitable jurisdiction. 
 
                                                                            V. 
 Retain jurisdiction of this action in accordance with the principles of equity and the 
Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and  
decrees that may be entered or to entertain any suitable application or motion for additional relief 
within the jurisdiction of this Court. 
 
VI. 
 Grant an Order for such further relief as the Court may deem appropriate. 
                                                            Respectfully            submitted,            
 
                                                            ___________________________            
                                                            Dee            A.            O’Hair                        
                                                            Ohio            Bar            No.            0063523            
                                                            o’[email protected]
 
     Susan M. Weis 
                                                            Illinois            Bar            No.            6211578            
                                                            [email protected]
 
     Attorneys for Plaintiff  
                                                            Securities            and            Exchange            Commission            
                                                            175            W.            Jackson            Blvd.,            Suite            900            
                                                            Chicago,            Illinois            60604            
                                                            Telephone:                        312/353-7390            
                                                            Facsimile:   (312) 353-7398 
 
DATED:  May 19, 2004 
 
  

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF OHIO 
 EASTERN DIVISION 

  
         
       : 
UNITED STATES     : 
SECURITIES AND EXCHANGE    : 
COMMISSION,     : CIVIL ACTION 
       : FILE NO. 04 CV 0933 
        Plaintiff,  : 
       : 
    v.   : 
       : 
LNB BANCORP, INC., GARY C. SMITH, : 
THOMAS P. RYAN,  GERALD S. FALCON,  : 
and THOMAS H. ESCHKE,   :       
       : 
        Defendants. : 
       : 
 
 
 COMPLAINT 
 
 Plaintiff, United States Securities and Exchange Commission (“Commission”), alleges as 

follows: 

NATURE OF THE CASE 

 1. Beginning as early as February 11, 2000 and continuing through July 16, 2001, 

LNB Bancorp, Inc. (“LNB Bancorp”), through, Gary C. Smith (“Smith”), Thomas P. Ryan 



 2  

(“Ryan”), Gerald S. Falcon (“Falcon”) and Thomas H. Eschke (“Eschke”) (hereinafter 

collectively referred to as the “Defendants”) perpetrated a market manipulation scheme to 

artificially increase and stabilize the price of LNB Bancorp common stock on the Nasdaq 

National Market (“Nasdaq”).  Specifically, on 285 separate days, at or near the close of the 

trading day, Defendants Ryan, Falcon and Eschke placed purchase orders for 100 or 200 shares 

of LNB Bancorp common stock during the last half-hour of the trading day for the Lorain 

National Bank employee benefit plans in an attempt to mark the close of trading in the stock with 

a purchase order.  Of these 285 purchases, Ryan, Falcon and Eschke succeeded in placing the 

last trade of the day for LNB Bancorp stock on 232 days.  This manipulative trading practice is 

known as “marking the close”.  Defendant Smith maintained supervisory roles over Ryan, 

Falcon and Eschke and knew, or was reckless in not knowing of the marking the close scheme 

and failed to take timely action to stop the scheme.  By marking the close, the Defendants 

artificially supported the price of LNB Bancorp common stock on Nasdaq.  As a result, the 

Defendants fraudulently manipulated the closing price of LNB Bancorp common stock. 

 2. By engaging in this scheme, the Defendants, directly and indirectly, have engaged 

in and, unless enjoined, will continue to engage in acts, practices and courses of business which 

constitute and will constitute violations of 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 enjoin such acts, practices and courses of 

business pursuant to Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 

78u-1(a)]. 

JURISDICTION 



 3  

 4. The Court has jurisdiction over this action pursuant to Sections 21 and 27 of the 

Exchange Act [15 U.S.C. §§ 78u and 78aa].  Venue is also proper in this court pursuant to 

Section 27 of the Exchange Act [15 U.S.C. §78aa]. 

 5. The acts, practices and courses of business constituting the violations herein 

occurred within the jurisdiction of the United States District Court for the Northern District of 

Ohio and elsewhere. 

 6. The Defendants will, directly and indirectly, unless enjoined, have the 

opportunity to engage in the acts, practices and courses of business set forth in this Complaint 

and in acts, practices and courses of business of similar purport and object. 

 7. The Defendants, directly and indirectly, have made use of the mails and of the 

means and instrumentalities of interstate commerce in connection with the acts, practices and 

courses of business alleged herein in the Northern District of Ohio and elsewhere. 

  THE DEFENDANTS 

 8. LNB Bancorp is a $715 million financial holding company with its headquarters 

located in Lorain, Ohio.  LNB Bancorp, incorporated on October 11, 1983, has two wholly 

owned subsidiaries: Charleston Insurance Agency, Inc. and Lorain National Bank.  Lorain 

National Bank is the primary subsidiary of LNB Bancorp.  The common stock of LNB Bancorp 

is listed on the Nasdaq and registered with the Commission pursuant to Section 12(g) of the 

Exchange Act [15 U.S.C. §78l].    

 9.  Smith, age 56, is a resident of Avon Lake, Ohio.  During the time period at issue, 

Smith was the President and Chief Executive Officer (“CEO”) of LNB Bancorp, President and 

CEO of Lorain National Bank, and a Director of LNB Bancorp.  Smith was also the Plan 

Administrator for the various Lorain National Bank employee benefit plans.  Smith resigned 



 4  

from LNB Bancorp and Lorain National Bank on December 10, 2003, after approximately five 

years of employment.  His retirement from LNB Bancorp and Lorain National Bank became 

effective on March 10, 2004.  During the relevant periods at issue, Smith owned approximately 

3,600 shares of LNB Bancorp common stock. 

 10. Ryan, age 65, is a resident of Vermilion, Ohio.  During the time period at issue, 

Ryan was the Executive Vice President, Secretary and Treasurer of LNB Bancorp and the 

Executive Vice President and Secretary of Lorain National Bank and a Director of LNB 

Bancorp.  Ryan retired from LNB Bancorp and Lorain National on December 31, 2001, after 

approximately forty years of employment.  During the time period at issue, Ryan owned 

approximately 37,000 shares of LNB Bancorp common stock. 

 11. Falcon, age 54, is a resident of Solon, Ohio.  Falcon has been employed at Lorain 

National Bank for approximately twelve years.  Falcon was the Vice President of the Operations 

Unit of the Investment and Trust Services Division of Lorain National Bank until approximately  

June 2000, when he was promoted to Senior Employees Benefits Officer of the Investment and 

Trust Services Division of Lorain National Bank. 

 12. Eschke, age 41, is a resident of Elyria, Ohio.  Eschke has been employed at 

Lorain National Bank for approximately twelve years.  Eschke was Falcon’s assistant until 

approximately June 2000 when he replaced Falcon as the Assistant Vice President and Trust 

Operations Officer of the Operations Unit of the Investment and Trust Services Division of 

Lorain National Bank.   

 FACTS  

 13. Prior to the commencement of the Defendants’ marking the close scheme, the 

Lorain National Bank Investment and Trust Services Division had the responsibility of 



 5  

purchasing stock for the individual accounts that it managed, such as self-directed and managed 

trust accounts, agency accounts and individual retirement plans, as well as for the Lorain 

National Bank employee benefit plans.  As part of this process, Lorain National Bank was 

responsible for purchasing a variety of securities for these accounts, including LNB Bancorp 

common stock.  Lorain National Bank established an internal procedure so as to place its daily 

securities trades with brokerage firms at approximately 11:00 a.m. and at 3:00 p.m. Eastern 

Standard Time.   

 14. During the relevant periods, Smith was the Plan Administrator of the Lorain 

National Bank employee benefit plans.  Smith delegated the operational duties of these plans to 

Ryan, who in turn, delegated the day-to-day operations to Falcon and Eschke.  Smith retained 

supervisory authority over Ryan, Falcon and Eschke.  

 15. Prior to LNB Bancorp’s listing on Nasdaq, purchases of LNB Bancorp common 

stock for the Lorain National employee benefit plans were restricted by the availability of the 

stock on the OTC Bulletin Board. 

 16. During the time that LNB Bancorp was being considered for listing on Nasdaq, 

Smith and Ryan made numerous presentations to investment groups to promote LNB Bancorp 

common stock.  On February 9, 2000, LNB Bancorp common stock became listed on Nasdaq.   

At that time, LNB Bancorp common stock was a thinly traded stock.  Smith and Ryan decided 

that it would be beneficial for LNB Bancorp common stock to gain a “regular presence” on 

Nasdaq.  To achieve this regular presence, Smith and Ryan decided to make a daily purchase of 

200 shares of LNB Bancorp common stock for the Lorain National Bank employee benefit plans 

(the “Regular Presence Plan”). 



 6  

 17. Smith, Plan Administrator of the Lorain National bank employee benefit plans, 

gave Ryan the authority to determine the timing of the daily purchase of 200 shares of LNB 

Bancorp common stock in furtherance of the regular presence plan. 

 18. Shortly after LNB Bancorp common stock became listed on Nasdaq, Smith and 

Ryan became aware that LNB Bancorp common stock was being sold late in the trading day.  

Ryan believed that an individual who was attempting to gain control over LNB Bancorp was 

driving down the closing price for LNB Bancorp common stock by selling LNB Bancorp 

common stock late in the day and then capitalizing on the lower closing price by making early 

morning purchases of LNB Bancorp common stock the next day.   

 19. Ryan informed Falcon of his concerns about the late day sales and early morning 

purchases of LNB Bancorp common stock.  Falcon and Ryan decided to make the daily purchase 

of 200 shares of LNB Bancorp common stock for the Lorain National Bank employee benefit 

plans at or near the close of the trading day in order to counteract the effect of the late day sales 

on LNB Bancorp’s stock price.  Based on Falcon’s suggestion, Ryan directed Falcon to deviate 

from Lorain National Bank’s internal procedure of placing its securities trades with brokerage 

firms and to place the daily purchases of 200 shares of LNB Bancorp common stock for the 

Lorain National Bank employee benefit plans at or near the close of the trading day. 

 20. Falcon was responsible for the day-to-day implementation of Ryan’s directive to 

purchase LNB Bancorp common stock at or near the close of the trading day.  To ensure that the 

marking the close scheme was executed, Falcon immediately informed Eschke, his subordinate, 

about Ryan’s directive to purchase the daily 200 shares of LNB Bancorp common stock for the 

Lorain National Bank employee benefit plans at or near the close of the trading day.  Eschke 

knew that this trading plan was contrary to Lorain National Bank’s established internal 



 7  

procedure of placing securities trades with brokerage firms at approximately 11:00 a.m. and 3:00 

p.m., but did not object to the plan.   

 21. The initial implementation of the Defendants’ marking the close scheme resulted 

in LNB Bancorp stock closing the trading day with a purchase order.  By closing the day with a 

purchase, the Defendants artificially increased the closing price of LNB Bancorp common stock 

and counteracted any late day sales.  For example, on March 13, 2000, at 3:31 p.m. there was a 

sale of 200 shares of LNB Bancorp common stock.  This late day sale resulted in lowering the 

LNB Bancorp common stock price from $20.00 per share to $18.75 per share.  To counteract this 

sale, at 3:36 p.m. on the same day, the Defendants placed a purchase order for 200 shares of 

LNB Bancorp common stock at a price of $20.00 per share.  This purchase of LNB Bancorp 

common stock at the close of the trading day increased the bid price of LNB Bancorp common 

stock to $20.00 per share. 

  22. Anticipating a continual need for the marking the close scheme, on or about April 

20, 2000, Ryan and Falcon changed the quantity of the daily purchase of LNB Bancorp common 

stock purchase for the Lorain National Bank employee benefit plans from 200 shares to 100 

shares.  The Lorain National Bank employee benefit plans had defined amounts of LNB Bancorp 

common stock that Lorain National Bank was required to purchase for these plans.  By 

purchasing 100 shares a day instead of 200 shares, LNB Bancorp could continue to execute its 

marking the close scheme for an indefinite period of time. 

 23. On or about May 2000, Ryan informed Smith that the daily purchases of LNB 

Bancorp common stock was occurring late in the trading day.  At that time, Smith had an 

understanding of how purchases or sales placed at or near the close of the market impacted the 

closing price of stock.  Ryan also informed Smith that the daily purchase of LNB  



 8  

Bancorp common stock had changed from 200 shares to 100 shares.  Smith acquiesced in Ryan’s 

purchasing plan of LNB Bancorp common stock. 

 24. On or about June 2000, Falcon was promoted to Senior Employee Benefits 

Officer and Eschke replaced Falcon as the Assistant Vice President and Trust Operations Officer 

of Lorain National Bank.  At this time, Eschke took over the day-to-day responsibilities of 

making sure that a daily order to purchase 100 shares of LNB Bancorp common stock for the 

Lorain National Bank employee benefit plans was placed at or near the close of the of the trading 

day. 

 25. On a few occasions, after Eschke and the Lorain National Bank trade clerk forgot 

to place the daily purchase of 100 shares of LNB Bancorp common stock, Ryan informed Eschke 

that it was important to place the purchases of LNB Bancorp common stock at or near the close 

of the day so that the stock would close with a purchase order.  Eschke informed Ryan that it 

appeared that LNB Bancorp was trying to control the price of its own stock by purchasing shares 

at the end of day.  Nevertheless, Ryan directed Eschke and others to continue the purchases of 

LNB Bancorp common stock at the close of trading each day.   Eschke then devised a method to 

ensure that the daily purchase of LNB Bancorp common stock was executed.   

 26. Throughout this time period, Ryan maintained regular oversight of the daily 

purchases of LNB Bancorp common stock by continuously monitoring the LNB Bancorp stock 

activity and frequently contacting Eschke and the Lorain National Bank trade clerk to verify that 

the purchases of LNB Bancorp stock were placed at or near the close of the trading day.   

 27.   The Defendants’ scheme succeeded in setting the closing price of LNB Bancorp 

common stock on Nasdaq for 232 different days.  All 232 trades placed at or near the close of the 

day were the last transactions in the trading day for the LNB Bancorp common stock.  Of these 



 9  

232 trades, 42 of the trades were the only trade of the day for LNB Bancorp common stock.  As 

a result, during the time period at issue, numerous purchases of LNB Bancorp common stock 

placed for the Lorain National Bank employee benefit plans caused the closing price of LNB 

Bancorp common stock to be higher than what the price would have been without these trades.  

In fact, the Defendants’ trading activity raised the closing price of LNB Bancorp common stock 

on at least 142 days.  On the other 90 days, the Defendant’s trading activity stabilized the price 

of LNB Bancorp common stock. 

 28. For instance, on January 16, 2001, the Defendants placed a purchase of 100 

shares of LNB Bancorp common stock at $22.50 per share within fifteen minutes of the market 

close.  Prior to Defendants’ trade, the bid price for LNB Bancorp common stock was $21.50 per 

share.  As a result of Defendants’ purchase the closing price for LNB Bancorp common stock 

increased to $22.75 per share. 

 29. As a result of the Defendants’ daily purchases of LNB Bancorp common stock at 

or near the close of the trading day, the closing price of LNB Bancorp common stock was 

artificially increased or stabilized.  As a result of these marking the close activities, the 

Defendants believed that they successfully fended off a takeover bid of LNB Bancorp and the 

possible change in control and management that they feared would result.  In addition, these 

marking the close activities had the effect of preserving the value of the personal investments in 

LNB Bancorp common stock for Ryan and Smith. 

 

 COUNT I 

 Violation of Section 10(b) of the  
 Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5  
 [17 C.F.R. § 240.10b-5] Promulgated Thereunder 



 10  

 
 30. Paragraphs 1 through 29 are hereby realleged and incorporated by reference 

herein. 

 31. On or about February 11, 2000 through July 16, 2001, the Defendants, in 

connection with the purchase of LNB Bancorp securities, namely common stock, by use of the 

means and instrumentalities of interstate commerce and of the mails, directly and indirectly: 

employed devices, schemes and artifices to defraud; made untrue statements of material fact and 

omitted to state material facts necessary in order to make the statements made, in the light of the 

circumstances under which they were made, not misleading; and engaged in acts, practices and 

courses of business which operated as a fraud and deceit upon purchasers and sellers of such 

securities.   

 32. The Defendants knew or were reckless in not knowing the facts and 

circumstances described in paragraphs 1 through 31 above. 

 33. By reason of the activities described in paragraphs 1 through 32 above, the 

Defendants violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 

C.F.R. § 240.10b-5] promulgated thereunder. 

 

PRAYER FOR RELIEF 

 WHEREFORE, the Commission requests that the Court: 

 

 I. 

 Find that the Defendants committed the violations alleged above. 

 



 11  

II. 

 Issue an order of permanent injunction, in a form consistent with Rule 65(d) of the 

Federal Rules of Civil Procedure, enjoining LNB Bancorp, Smith, Ryan, Falcon and Eschke, 

their officers, agents, servants, employees, attorneys and those persons in active concert or 

participation with them who receive actual notice of the order of permanent injunction by 

personal service or otherwise, and each of them, from violating Section 10(b) of the Exchange 

Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder, by 

directly or indirectly, in connection with the purchase or sale of the securities of any issuer, by 

the use of any means or instrumentality of interstate commerce, or of the mails, or of any 

national securities exchange from: 

A. employing any device, scheme or artifice to defraud; 

B. making any untrue statement of a material fact or omitting to state a material fact 

necessary in order to make statements made, in the light of the circumstances 

under which they were made, not misleading; or  

C. engaging in any act, practice or course of business which operates or would 

operate as a fraud or deceit upon any person. 

 

 III. 

       Grant an order requiring Defendants to pay civil penalties pursuant to Section 21(d) of the 

Exchange Act [15 U.S.C. §§ 78u(d)]. 

 

IV. 



 12  

         Grant an order permanently prohibiting Ryan from acting as an officer or director of any 

issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that 

is required to file reports pursuant to Section 15(d) of the Exchange Act pursuant to Section 

21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)] and the Court's equitable jurisdiction. 

 

 V. 

 Retain jurisdiction of this action in accordance with the principles of equity and the 

Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and  

decrees that may be entered or to entertain any suitable application or motion for additional relief 

within the jurisdiction of this Court. 

 

VI. 

 Grant an Order for such further relief as the Court may deem appropriate. 

     Respectfully submitted, 
 
     ___________________________ 
     Dee A. O’Hair  
     Ohio Bar No. 0063523 
     o’[email protected] 
     Susan M. Weis 
     Illinois Bar No. 6211578 
     [email protected] 
     Attorneys for Plaintiff  
     Securities and Exchange Commission 
     175 W. Jackson Blvd., Suite 900 
     Chicago, Illinois 60604 
     Telephone:  312/353-7390 
                                                            Facsimile:   (312) 353-7398 
 
DATED:  May 19, 2004