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NOTE: Stipulation of Facts and Consent to Penalty (SFC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.

2004
NYSE CASES OF NOTE 

DEUTSCHE BANK SECURITIES INC.
(SFC/HPD 04-128/August 2004)

Read this important decision touching on research conflicts, failure to supervise, and email production.  Deutsche Bank Securities Inc.
DEUTSCHE BANK SECURITIES INC.

Censure;  total payment of $87,500,000, as specified in the Final Judgment ordered in a related action filed by the Securities and Exchange Commission (“Final Judgment”) the payment provisions of which are incorporated by reference herein, as follows: 

1. $25,000,000, as a penalty; 

2. $25,000,000, as disgorgement of commissions, fees and other monies;

3. $25,000,000, to be used for the procurement of Independent Research, as described in Addendum A: Undertaking to the Final Judgment (“Addendum A”), incorporated by reference herein; 

4. $5,000,000, to be used for investor education, as described in Section IX of the Final Judgment; and 

5. $7,500,000, as a penalty for violating Exchange Rule 476(a)(11). In addition, the Firm shall complete an undertaking to ensure compliance with the terms provided in Addendum A, including an undertaking to inform the Exchange in writing that it has policies, systems, and procedures reasonably designed to ensure compliance with the provisions of Addendum A.

 

 

CHRISTOPHER T. NORMAN
(SFC/HPD 04-126/July 2004)

While in the employ of Gruntal & Co., LLC (the “Firm”), registered representative Norman learned about a company engaged in a pay telephone lease program (the “Company”) by reading a magazine. Norman was interested in pursuing this business outside the Firm, and, accordingly, began to solicit Firm customers without receiving prior approval from the Firm.  He solicited two customers to invest in the pay phone equipment lease program. While employed at the Firm, Norman was required to complete an annual compliance questionnaire which asked if the employee currently received any compensation outside of the Firm or its subsidiaries. Norman responded “No,” which constitutes a misstatement to the Firm. 

In a complaint filed on September 30, 2000, the SEC sought a permanent injunction against the Company and its president for engaging in fraud in the offer and sales of unregistered securities in the form of investment contracts.  The two customers subsequently sustained losses in their investments. 

 Customer M opened an IRA account with the Firm and Norman in approximately April 1998. In 1998, Customer M was 42 years old, married, and listed growth as his investment objective. In February 2000, Norman recommended that Customer M invest in pay telephones. He informed Customer M that such an investment would be conservative and guaranteed Customer M a 14% return on his $154,000 investment, as the sales literature represented. 

Acting upon Norman’s recommendations and representations, Customer M liquidated certain positions in his Firm IRA account at the Firm in the amount of $154,050.50 3 and, on March 9, 2000, re-invested the proceeds for the purchase of 22 payphones units at $7,000 per unit for a total amount of $154,000 through a payphone equipment lease program offered by the Company. Of the options available, Customer M chose to receive $82 per month from each of his units purchased.  Norman facilitated Customer M’s purchase and earned a commission from the sale.  Customer M received payments from the Company until it filed for bankruptcy in December 2000, at which time his fixed monthly payments of 14% ceased and the remainder of his $154,000 investment was frozen.
Customer K opened an account with Norman at the Firm in September 1998. Customer K was retired, 86 years old, earned less than $24,999 per year and was an inexperienced investor.  In approximately November 1999, Norman recommended that Customer K invest in the pay telephone industry. Norman recommended and Customer K bought 44 pay telephones for a total of $308,000 from the Company. Customer K funded the investment by withdrawing the money from an annuity he had at the Firm. Customer K received payments until December 2000 when the Company filed for bankruptcy, at which time his fixed monthly payments of 14% ceased and the remainder of his $308,000 investment was frozen. 

The NYSE found that Norman:

I. Violated Exchange Rule 346 (b) by engaging in an outside business activity without making a written request and receiving the prior written consent of his member organization employer; and

II. Engaged in conduct inconsistent with just and equitable principles of trade in that he: solicited customers to participate in an investment strategy which was later found to be part of a fraudulent scheme involving the sale of unregistered securities in the form of investment contracts without his member organization employer’s knowledge; solicited customers to invest in an unapproved business away from his member organization employer; effected transactions in the account of one customer of his member organization employer which was unsuitable in view of the customer’s investment objectives and financial circumstances; and made misstatements to his member organization employer.

CHRISTOPHER T. NORMAN

Censure; Bar for 12 months in all capacities

Bill Singer's Comment:

Frankly, I'm surprised the NYSE only imposed a 12 month bar.  Nonetheless, a word to the wise.  One, don't get involved in any investment based solely upon what you read in a magazine.  Two, it's rarely advisable to put an 86 year old retiree into any investment funded by an annuity.

 

 

 

ROBERT THOMAS MORTIMER JR.
(SFC/HPD 04-124/July 2004)

At all relevant times, Robert Thomas Mortimer, Jr., was the branch office manager of the Oakbrook Terrace, Illinois office (the Branch) of RBC Dain Rausher Inc (the Firm).  During the period 1999-2000, Mortimer was responsible for the supervision of Russell, an RR employed by the Firm. 

At all relevant times, Mortimer was required as a supervisor, in accordance with Firm procedures, to review monthly account activity for all employees, including Russell, who were under his supervision. During the period relevant herein, Mortimer failed to adequately review, in a manner adequate for supervisory purposes, Russell’s account statements and the checks coming into and going out of his accounts for the period referred to above. As a result, Mortimer did not detect that Russell had received customer funds and commingled such funds with his own funds in accounts at the Firm. Additionally, after learning that Russell was engaged in an outside business that was not approved, Mortimer did not subsequently follow-up in order to assure that Russell ceased work on the unapproved outside business. 

Mortimer violated Exchange Rule 342 by failing to reasonably discharge his duties and obligations in connection with the supervision and control of an employee who was subject to his control.

In the Matter of Ralph William Russell 
(NYSE Hearing Panel Decision 04-77 May 12, 2004)

During the Fall of 1999, without the knowledge or approval of the Firm, Russell began work on an outside business involving the creation of an investing/finance website. By early 2000, he had discussed the proposed website with various friends and customers of the Firm, a number of which had expressed interest in investing. Soon thereafter, investors sent Russell checks payable to him (ranging in amounts between $5,000 and $50,000 each), which he deposited into certain personal securities accounts that he and/or his wife maintained at the Firm. 

In or about early August 2000, Russell advised Mortimer about his work on the website project and then sought approval from the Firm to engage in that outside business. The request was not approved but Russell continued to work on the website venture and continued to solicit funds for the venture from customers of the Firm. 

Russell was found, on consent, to have violated NYSE Rule 346(b) during 1999-2000 by engaging in an outside business activity without making a written request to, and obtaining the prior written consent of, his member firm employer. He also engaged in conduct inconsistent with just and equitable principles of trade by commingling customer funds obtained in connection with such outside business activity with his own funds, wrongfully spending such funds for purposes other than such outside business, and making a misstatement to his member firm employer in connection with his participation in the aforementioned outside business activity. 


Russell received a censure and a five year bar.  

 
ROBERT THOMAS MORTIMER JR.

Censure; Supervisory bar for 3 months

Bill Singer's Comment:

A fascinating case that perfectly highlights the cascade effect of in-house supervisory lapses.  We start off with the seemingly benign desire to develop a website.  In and of itself that might not have been sufficient to be deemed an outside business, but the simple fact that a registered person is putting investment-related content on the Internet should have put Russell on notice that he was treading on thin ice.  Talking to outside parties and customers about "investing" should have set off another round of alarms.  Not only is he moving into an outside business activity but also into a private securities transaction.  Further, you should almost never commingle funds from a business with any personal accounts.  Finally, putting the cart before the horse, Russell waits until the end to get approval for the outside venture and proceeds with it despite being denied approval by his firm.

Frankly, what was Mortimer supposed to do and know --- I'm not sure the NYSE has made its case in persuading me.  If one carefully reads the NYSE's report, the Staff suggests that he should have detected the commingling of business and personal funds.  I'm not sure that's a fair burden to place on any branch manager.  If the NYSE alleged that there was some clear indication of funds coming from customers, that's another issue (and one which the decision should have noted).  However, the mere fact that there are deposits coming into accounts owned by Russell and/or his wife wouldn't necessarily send up flares.  On the other hand, Mortimer certainly should have ensured that Russell had ceased engaging in the website business after he requested permission to maintain the business.  

 

In the Matter of X FORMER REGISTERED REPRESENTATIVE
(HPD 04-121 /July 15, 2004)

NYSE charges Trader with extortion arising from renovations to his home bathroom.
X FORMER REGISTERED REPRESENTATIVE

Dismissed

Bill Singer's Comment:

An absolute must read!!!  Visit this link X Former Registered Representative

 

FIRST UNION SECURITIES, INC.
n/k/a WACHOVIA SECURITIES, LLC
(SFC/HPD 04-115/July 2004)

First Union Securities, Inc. (the Firm) became a NYSE member organization in October 2000 following its acquisition of Everen Securities, Inc. (“Everen”), a member organization. Everen had been the successor to Kemper Securities, Inc., also a member organization. During 2000 to 2001, the Firm was primarily engaged in securities brokerage, trading and investment advice. In 2001 First Union Securities, Inc. merged with Wachovia Securities, Inc. In 2003, Wachovia Securities, Inc. became Wachovia Securities LLC.  

Previously, in NYSE Hearing Panel Decision 01-232, the Firm consented to a censure and $145,000 fine for violating Exchange Rules 410 and 440 and SEC Regulations 240.17a-3 and 17a-4 by failing to make and preserve required records; violating Rule 351 by failing to promptly report certain customer complaints; and violating Rule 342 by failing to reasonably supervise and provide appropriate procedures of supervision and control with respect to, among other things, assuring compliance with NYSE Rules to promptly and accurately report customer complaints and/or settlements to the NYSE. 

NYSE Rule 345(a) requires registered persons to fulfill a Continuing Education program, consisting of two elements:
  1. Regulatory Element, which requires registered persons to periodically complete a computer-based training program, and
  2. Firm Element, which requires registered persons to complete ongoing training, provided by their member firms, tailored to their specific business.

Any registered person in non-compliance with this section shall have his or her registration deemed inactive and must cease all activities as a registered person, and is prohibited from performing any duties and functions requiring registration.

NYSE Rule 345(a)
 “no member or member organization shall permit any natural person to perform regularly the duties customarily performed by a registered representative … unless such person shall have been registered with, qualified by and is acceptable to the Exchange.”

NYSE Information Memorandum 96-35
 (November 11, 1996)
While a person’s license has been suspended for non-compliance with NYSE 345(a), a member firm may not pay him or her compensation, including commissions or salary, for activities requiring a securities registration.

 
During 1999 to 2000, the Firm employed five “inactive” employees, who acted in a registered capacity and/or had not completed their Regulatory Element requirements within the prescribed time frames and each of whom had generated commissions during their inactive period.  During 1999 to 2001, the Firm failed to ensure that its employees were in compliance with their continuing education requirements and permitted a Retail Compliance Manager to supervise ten or more individuals who acted in a compliance capacity even though the Retail Compliance Manager was not Series 14 qualified.  In addition, in several instances, the Firm failed to promptly and accurately report customer complaints, failed to maintain accurate books and records relating to customer complaints and reporting requirements, failed to properly review certain communications with the public, failed to properly supervise customer accounts and failed to provide for appropriate procedures of supervision and control of the business activities detailed above. 

NYSE Rule 345.17(a) requires member organizations to submit a Uniform Termination Notice for Securities Industry Registration (“Form U-5”) to the Exchange within 30 days of the termination of employment of any registered person.

A review of sales practices complaints and Forms U-5 and RE-3 filings for the period March 2000 to July 2001 disclosed that:

• Nine complaints were not reported;

• Ten complaints were reported late;

• Three complaints were misreported;

• 15 Forms U-5 were not promptly reported; and

• One Form RE-3 was not filed as required.

 
NYSE Rule 351(a) requires each member organization to promptly report to the Exchange any matter reportable under that Rule. 
NYSE Information Memo 90-17, dated April 30, 1990 defines “prompt” filing as occurring within 30 days of the reportable event. 
NYSE Rule 440 requires every member organization to make and preserve books and records as the Exchange may prescribe, and as prescribed by SEC Regulations 240.17a-3 and 240.17a-4. 15

Exchange Rule 405, in pertinent part, requires every member or member organization to 

“exercise due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization…” 

  A review of accounts serviced by a registered representative of the Firm’s Carlsbad office for the period August 2000 to July 2001 disclosed that nine accounts had engaged in inappropriate short term trading of mutual funds which included switching between different mutual fund families and classes. 19. The holding periods for these mutual funds ranged from two months to nine months with most of the accounts sustaining losses as a result of fees incurred by switching mutual find investments.  Although switch letters were sent to the customers, they were form letters and not explicit as to the individual fees that would be incurred. These fees incurred by the customers ranged from $7,377 to $129,532. 
Where a customer liquidates one mutual fund to purchase another in a different family of funds or in an investment similar to a mutual fund, such as an annuity or closed-end fund, the customer may incur additional costs or fees. In those instances, the Firm requires the client to complete a Mutual Fund/Annuity Switch Form or switch letter, in which the additional charges, if any, are disclosed and the client acknowledges that he or she may have been able to switch within the existing mutual fund family. 

Exchange Rule 342 requires in pertinent part that a member organization 

(a) provide for appropriate procedures of supervision and control; 

(b) delegate to qualified individuals responsibility and authority for supervision and control of each office, department and business activity and provide for appropriate procedures of supervision and control; and 

(c) establish a separate system of follow-up and review to determine that the delegated authority and responsibility is being properly exercised.

During 2000, a registered representative of the Old Greenwich branch office was found to have placed personal and/or family related trading in front of customers trading in the same security on 31 occasions out of 65 trading days reviewed. In 19 instances, the registered representatives or his family received better executions than his other customers. 

During 2000, 21 discretionary accounts at the Firm’s Boston branch office were not receiving appropriate supervisory review. One account was not approved for discretion and one account failed to list the registered representative as agent on the trading authorization. Further, all of the 21 discretionary accounts were not on the Firm’s master discretionary account list.

During 2000, three research reports did not contain a disclosure in clear, positive language in securities in which the Firm was making a market. The securities were: one in which the Firm acted as a market maker as of July 21, 2000; one in which the Firm acted as a market maker as of August 17, 2000; and another in which the Firm acted as a market maker as of August 17, 2000. 

As set forth in detail above, the Firm failed to reasonably supervise and control certain of its business activities and failed to reasonably supervise and provide appropriate procedures of supervision and control. In addition, the Firm failed to establish a system of follow-up and review with respect to assuring compliance with Exchange Rules regarding continuing education and registration, reporting requirements, books and records, review of certain customer accounts and research reports so as to prevent the violative conduct described above and remedy it in a timely manner.  

 

NYSE Rule 342.16 provides, in pertinent part, that supervision of registered representatives

 “[w]ould ordinarily include… reasonable procedures for review of registered representatives’ communications with the public relating to their business…. Such policies and procedures should be in writing and be designed to reasonably supervise each registered representative. Evidence that these supervisory policies and procedures have been implemented and carried out must be maintained and made available to the Exchange upon request.”

NYSE Rule 342.21 requires that each member review trades in Exchange listed securities and related financial instruments effected for the accounts of his or her employees to identify trades that may involve insider trading or other manipulative or deceptive devices.

NYSE Rule 472 governs communications with the public, including requirements relating to research communications and research reports. 

Accordingly, the NYSE found that the Firm:

I. Violated Exchange Rule 345A and 345(a) by permitting employees to act in a registered capacity and generate commissions while their registration status was inactive; and permitting a Retail Compliance Manager to supervise ten or more individuals who acted in a compliance capacity even though the manager did not possess the required qualification; 

II. Violated Exchange Rules 345 and 351 by failing to report, and/or promptly and accurately report, customer complaints as required; and failing to file, and/or promptly file, Forms U-5 and a Form RE-3 with the Exchange; 

III. Violated Exchange Rule 440 and SEC Rules 240.17a-3 and 17a-4 by failing to maintain accurate books and records in connection with the reporting of customers’ complaints and filing of Forms U-5 and a Form RE-3;

IV. Violated Exchange Rule 405 by failing to ensure that customers received mutual fund switch letters disclosing specific fees incurred by customers;and 

V. Violated Exchange Rules 342 and 472 in that the Firm failed to reasonably supervise and control and provide appropriate procedures of supervision and control and establish a system of follow–up and review with respect to: assuring compliance with Exchange Rules regarding continuing education and registration requirements; assuring compliance with Exchange Rules to promptly and accurately report customer complaints and file Forms U-5 and a Form RE-3; assuring that certain discretionary accounts were receiving the appropriate supervisory review; monitoring customer accounts to ensure that customers received better execution prices than registered representatives; and ensuring that research reports contained clear, positive language in securities in which the Firm was making a market.

FIRST UNION SECURITIES, INC.
n/k/a WACHOVIA SECURITIES, LLC

Censure; Fined $250,000

Bill Singer's Comment:

The first thing that strikes me about the Wachovia case is that it largely involves conduct that is now at least three years old, and in some cases older.  Whatever shortcomings may be rightfully placed at the firm's doorstep, one must legitimately wonder as to what took NYSE so long?  More to the point, isn't this type of case a fair indictment of the entire system of self regulation?  The violations are breath taking in their scope and longevity --- they involve  continuing education, trading, discretionary accounts, research, and supervision.  Frankly, what's left?  Further, if a firm with the financial resources and manpower of Wachovia can't get it right, what hope is there for smaller firms"  Finally, spare me --- a fine of $250,000 is hardly going to cause Wachovia to flinch.  

 

 

CHARLES SCHWAB & CO. INCORPORATED 
(SFC/HPD 04-114/July 2004)

Charles Schwab & Co. Incorporated (the Firm) is primarily a discount securities brokerage employing approximately 20,000 employees and operating almost 400 branches nationwide. In 2002 and 2003, the Firm hired approximately 2,000 fulltime employees and approximately 4,000 independent contractors and temporary workers. 
NYSE Rule 346(f) prohibits member firms from associating with any person that it knows, or through the exercise of reasonable care should know, to be statutorily disqualified. The same rule provides that a member firm can associate with a statutorily disqualified individual if it has sought and been given permission by the Exchange. 

Sections 3(a)(39) and 15(b)(4) of the Securities Exchange Act of 1934 (“SEA”) define the types of conduct that constitute statutory disqualification; such disqualifying conduct includes any felony convictions within the past ten years and certain enumerated misdemeanor convictions for specific offenses such as burglary, theft of funds and securities, forgery, and false report.

NYSE Information Memo 02-29, issued July 8, 2002, stated that all independent contractors and temporary workers are subject to statutory disqualification restrictions identified in Exchange Rule 346(f) and to criminal reporting requirements identified in NYSE Rule 351. Information Memo 02-29 states:

 “The same criminal record reporting rules apply for a firm’s independent contractors and temporary workers…Firms must make clear to temporary workers and the employment agencies that provide workers to the firm, the rules concerning statutory disqualification and Exchange criminal record reporting as well as the obligation to disclose criminal events to the firm.”

From February 1997 to September 2003 (the “Relevant Period"), the Firm violated NYSE Rule 346 (f) in that it had persons associated with it without permission of the Exchange who were statutorily disqualified (“SD”); and NYSE Rule 351(a)(5) in that it failed to promptly report to the Exchange certain events related to criminal matters involving employees, independent contractors and /or temporary workers.   Furthermore, the Firm failed to establish and maintain adequate supervisory procedures and controls to ensure its compliance with federal securities laws and Exchange rules relating to association with individuals with criminal convictions and the reporting to the Exchange of events related to employee criminal matters. Finally, the Firm associated with persons who were statutorily disqualified.

During the Relevant Period, the Firm had associated with it 55 persons who were SDs in violation of Exchange Rule 346(f): 
  • 9 were employees 
  • 46 were either independent contractors or temporary workers who provided services to the Firm and had access to the Firm’s facilities.

 

 During the period February 1997 through June 2001, 9 employees were employed at the Firm while they were SDs:
  • 4 were registered representatives (“RRs”); 
  • 2 were RR trainees; and 
  • 3 were administrative staff. These employees worked at the Firm at various offices for a minimum of one month to a maximum of more than three years while they were SDs. 
 During the period November 1999 through September 2003, 46 temporary employees who were SDs worked on the Firm's premises at various offices:
  • 20 of them were placed at the Firm by a temporary placement agency, and most of them performed administrative tasks. These employees worked at the Firm for a minimum of one day to a maximum of 1 year and 3 months. 
NYSE Rule 351(a)(5), applicable in 2000, required that all criminal offenses be reported by the Firm to the Exchange through a Form RE-3. Convictions for driving under the influence and other misdemeanors were included in the reporting requirement. In 2002, NYSE Rule 351(a)(5) was changed to exclude driving under the influence from the Form RE-3 reporting requirements. During the Relevant Period, the Firm failed to promptly report to the Exchange via a Form RE-3 certain arrests, arraignments, indictments, convictions, guilty pleas and/or no contest pleas of employees.  This failure was caused in 30 instances by the Firm's decision during the year 2000 not to submit Form RE-3s reporting convictions for driving under the influence, and in 46 instances by the Firm’s failure to timely gather information from its employees regarding certain criminal events reportable to the Exchange. 

 
During the Relevant Period, the Firm’s procedures to detect and prevent its association with SD individuals were not adequate to ensure compliance with the federal securities laws and Exchange rules. The Firm’s supervision relating to employees who were SDs was inadequate. For example, some employees disclosed their SD status to the Firm, but the Firm employed them nevertheless; some employees failed to disclose their criminal histories and the Firm’s pre-hire screening process failed to discover their SD status (a number of SD individuals were hired because the background check failed to search for criminal records at a previous residential address or employer’s address, which the Firm had in its possession); when the Firm had in its possession information which identified some employee’s SD status, the Firm took several months before terminating those employees’ employment; the Firm did not follow-up to make sure that it received court records for some individuals who were fingerprinted or who had disclosed criminal events to their line supervisors.  The Firm’s supervision relating to individuals who were SDs referred by contractors and vendors was inadequate in that: 
  • the Firm did not follow up with the contractors and vendors to prevent the repeated placement at the Firm of individuals who were SDs (one employment agency alone placed 22 individuals at the Firm who were SDs); and 
  • the number of temporary employees with SDs should have alerted the Firm that its contractor/vendor program was not properly preventing SDs from being employed by the Firm or on the Firm’s premises. 

The Firm failed to have in place adequate procedures to gather information from employees regarding reportable criminal events. Prior to the Exchange's investigation, the Firm did not require its employees to annually disclose in writing reportable criminal events. Also, there was no formal procedure to sanction or admonish employees who reported their criminal events late. In January 2000, the Firm stopped filing RE-3s for driving under the influence arrests. Then, in September or October of the same year, the Firm resumed submitting RE-3s for driving under the influence convictions. No action was taken by the Firm, however, for those previous driving under the influence convictions that had not been reported. In July 2002, after the Firm was notified of the Exchange's investigation into late RE-3 filings, the Firm submitted the RE-3s it withheld during 2000. The Firm’s supervisory procedures with respect to reporting to the Exchange criminal events were inadequate to prevent the foregoing reporting violations. 

NYSE found that Charles Schwab & Co. Incorporated:

I. Violated Exchange Rule 346(f) by having persons associated with it, without permission of the Exchange, that the Firm knew, or through the exercise of reasonable care should have known, were subject to statutory disqualification;

II. Violated Exchange Rule 351(a)(5) by failing to promptly report to the Exchange certain arrests, arraignments, indictments, convictions, guilty pleas, and/or no contest pleas to criminal offenses, other than minor traffic violations of employees; and

III. Violated Exchange Rule 342 by failing to reasonably supervise its business in order to ensure compliance with federal securities laws and Exchange Rules relating to associations with statutorily disqualified individuals and reporting to the Exchange of events related to employee criminal matters. 

CHARLES SCHWAB & CO. INCORPORATED 

Censure; Fined $250,000; and 

a. Within 30 days from the date that the decision becomes final, the Firm shall retain an outside consultant (the “Consultant”), not unacceptable to the Exchange, to perform areview and prepare a report (the “Report”) of the Firm’s systems, policies or procedures, including recommendations for different or additional systems, policies or procedures, if necessary, relating to the hiring of individuals who are subject to statutory disqualification, including those who are hired through contractors; 

b. Within 120 days from the date that the decision becomes final, the Consultant shall provide the Firm’s Board of Directors and the Exchange’s Division of Enforcement with a copy of the Report;

c. The Firm shall adopt and implement all policies, procedures, and practices recommended in the Report; and 

d. Within 60 days of delivery of the Report to its Board of Directors, the Firm shall submit to Enforcement a written representation, signed by the Chief Executive Officer, setting forth the details of the Firm’s implementation of the recommendations contained in the Report.

Bill Singer's Comment:

Notwithstanding the now non-reportable DUIs (non-felony matters), this case is still troubling in that it reveals a hidden side of Wall Street.  One would think that member firms would have a vested interest in timely uncovering relevant criminal histories, and in promptly addressing those that warrant attention.  However this is not an isolated matter.  See the previously reported Edward Jones case.

 

 

 

ARNOLD ALAN WINTERS
(SFC/HPD 04-112/July 2004)

During the period July 3 to July 12, 2002, Arnold Alan Winters, then a registered representative with Merrill Lynch, Pierce, Fenner & Smith, Inc. (the “Firm”), sent five e-mails to approximately 100 members of the public. Those e-mails discussed services such as cash management, corporate lending, and stock ownership trusts which the Firm offered to companies, thereby constituting sales literature which was required to be approved in advance before being distributed to the public. Additionally, the Firm had a written policy that, among other things, prohibited the use of e-mail to establish initial contact with leads and the use of electronic communications for prospecting for new clients or soliciting business. However, Winters failed to have those e-mails approved prior to distributing them. 
NYSE Rule 472(a) provides, in part, that each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member organization to the public shall be approved in advance by a member, allied member, supervisory analyst or person designated under the provisions of NYSE Rule 342 (b)(1).

 

July 3, 2002 (to 20 individuals):

I am sending a letter to you via USPS explaining how Employee stock ownership trusts can help your company, your employees and both you and family members who own stock or you wish to be successors in management. Best Regards, Arnie 

 July 11, 2002(to 20 individuals):

Subject: Business Life In RE: our discussions of cash management, business services and lending, I would like to share with you a June 2002 issue of a magazine called “Business Life” which is placed with our [Firm] client statements. Please look at one of my clients who was featured nationally. Thanks. Best Regards, Arnie 

July 11, 2002 (to 12 individuals):, 

In reference to asset management, business services and lending, I would like to share with you a June 2002 issue of a magazine called “Business Life” which is placed with our [Firm] client statements. Please look at one of my clients who was featured nationally (see page 2). Thanks. Best Regards, Arnie 

 On July 11, 2002 (to 75 individuals):

Subject: Interest In Cash Management and Lending Please refer this to your CFO. I am interested in talking with your company about cash management and corporate lending. [Firm] Business Financial Services, Inc. is the 7th largest corporate lender in the U.S. I have enclosed a “Business Life” [a Firm publication] June issue in “pdf” file format featuring one of my corporate clients for your review. Please call me so that we can set up a telephone conference call and a meeting. Best Regards, Arnie  

On July 12, 2002 (to same 75 individuals as above):

Subject: Cash Management Suggestion re: ACH ("Automated Clearing House)" debits The [Firm] WCMA (Working Capital Management Account) has a feature (called “WCMA Cash Manager”) that can be used to electronically debit your receivables accounts per agreement at no additional charge per ACH debit. That’s correct, no charge. Also, sub-accounts can be set up nationally tied into your main account to track states and regions. Furthermore, the “WCMA Cash Manager” can be used from your workstations at your central office without having to contact the bank. There is in-depth reporting and levels of “permission” allowing a division of operational usage to personnel regardless of levels of authority. Please call me so that I can explain. Also if you would like to see for yourself how this works, please look at http://www.businesscenter.xyz.com and go to “TestDrive” (an interactive demo) and look at “Collect Accounts Receivables”. I would be happy to arrange a conference call with our Cash Management specialist Ms. JL, who has experience with other large cash management projects. I look forward to speaking with you soon. Best Regards, Arnie 

All of the above e-mails list Winters’ phone and facsimile numbers and his office and web page addresses. These e-mails constituted sales literature because they discussed services such as cash management, corporate lending, and stock ownership trusts that the Firm offered to companies. Winters’ failure to have the above-referenced e-mails approved prior to distributing them was contrary to the requirements of Exchange Rule 472(a). On August 16, 2002, the Exchange received a Form U-5 “Uniform Termination Notice for Securities Industry Registration” from the Firm stating that it had terminated Winters’ employment for violating its policies regarding electronic mail(“e- mail”).

The NYSE found that Winters violated Exchange Rule 472(a) by distributing sales literature to the public via his member organization employer’s e-mail system without its approval.

ARNOLD ALAN WINTERS

Censured; Suspended 2 months in all capacities.

Bill Singer's Comment:

A somewhat amazing case --- if not a bit sad.  Doesn't seem as if there were really much substantively wrong with the emails; but, that isn't the point of the decision.  The point is that they should have been submitted to the Firm prior to distribution.  Moreover, what the RR might have perceived was merely a bland communication to potential clients was actually sales materials, which is subject to a very exacting set of SRO rules.  I would urge compliance departments to send this case around to the salesforce.

 

GEORGE EDWIN SMITH
(SFC/HPD 04-111/July 2004)

In 1999, S and VF (the “Fs”) opened a joint account with the Firm (the “F Account”), which was serviced by RR Smith during all relevant times. By letter dated August 31, 2002 (and received by Smith on or about September 3, 2002) SF alleged that  Smith made three unauthorized purchases in the F Account in June 2002.  Contrary to Firm policy and procedures, Smith failed to forward the letter to his Complex Supervisor, and did not notify anyone else at the firm about the letter or the allegations. In or around September 2002, Smith, without the Firm’s knowledge, agreed to pay the Fs $3,700 to compensate them for the losses incurred in the alleged unauthorized transactions. Accordingly, on September 27, 2002, Smith deposited $200 of his own funds in the F Account; and thereafter, on October 8, 2002, Smith deposited an additional $500 of his own funds into the F Account. 

On or about October 4, 2002, SF sent an e-mail to Smith’s Firm e-mail address, in which he raised a number of issues regarding the activity in the F Account. Smith responded on or about October 6, 2002, using his personal e-mail account from his home computer. In his response, Smith requested that SF address all future e-mails to Smith at Smith’s personal e-mail address. Thereafter, Smith and F exchanged several business e-mails using Smith’s personal e-mail account. These messages were not reviewed by the Firm. Smith maintained a personal e-mail account with Yahoo, which he accessed from his home. The Firm was unable to review and supervise messages sent to and/or transmitted from Smith’s personal e-mail account.

On or about November 7, 2002, the Exchange received Form RE-3 (“Submission of Required Information Pertaining to Members, Member Organizations, Allied Members, Registered and Non-Registered Employees and Approved Persons”)(“Form RE-3”) from the Firm reporting that it had settled a sales practice complaint against Smith by his customers S and VF. The Firm settled the Fs’ complaint for $80,000. Smith reimbursed the Firm the $80,000. 

The NYSE found Smith violated

 I. Violated Exchange Rule 351(b) by failing to report a customer complaint to his member organization employer;

 II. Violated Exchange Rule 352(c) by agreeing to share, and sharing in, losses in a customer account; and

 III. Caused a violation of Exchange Rule 342.16 by receiving and sending correspondence without subjecting it to review by his member organization employer. 

GEORGE EDWIN SMITH

Censured; Suspended 2 months in all capacities.

Bill Singer's Comment:

The 2 month suspension seems a bit on the light side given the nature of the violations --- undisclosed settlement with a client and use of a personal e-mail outside of firm oversight.

 

In the Matter of FIDELITY BROKERAGE SERVICES, LLC. 
ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934
 Securities Exchange Act of 1934 Release No. 50138, August 3, 2004 http://sec.gov/litigation/admin/34-50138.htm

In the Matter of Fidelity Brokerage Service, LLC. 
NEW YORK STOCK EXCHANGE HEARING PANEL DECISION 04-110 July 8, 2004
 http://www.nyse.com/pdfs/04-110.pdf

In the Matters of 

ROBERT LARRY LOCKWOOD SFC/HPD 04-107/July 7, 2004 TYLER WAYNE OBRAY SFC/HPD 04-109/July 7, 2004 STEPHANIE ARPIN-MEIER SFC/HPD 04-103/July 7, 2004 ROBERT MICHAEL BIERMAN SFC/HPD 04-104/July 7, 2004 ROBERT JUSTIN McDONALD SFC/HPD 04-108/July 7, 2004 BRADLEY KEMP FISHER SFC/HPD 04-105/July 7, 2004 JOHN A. LEONARD SFC/HPD 04-106/July 7, 2004

The NYSE accepted a Stipulation of Facts and Consent to Penalty from Fidelity and found the member violated  NYSE Rule 342 in that, in connection with its annual branch inspection process and the creation and maintenance of its books and records, the Firm failed to provide for appropriate supervisory control to comply with the federal securities laws and NYSE rules, including a separate system of follow-up and review; and NYSE Rule 440 and Section 17(a) of the Securities Exchange Act of 1934,and SEC Rule 17a-4 thereunder, by failing to preserve certain books and records and failing to preserve other books and records accurately. The NYSE imposed a censure and a penalty in the amount of $2,000,000. The amount to be paid to the NYSE as a fine to equal $1 million and $1 million to be paid to the U.S. Treasury as a civil monetary penalty. Against Fidelity Employees: The NYSE also found that seven Fidelity employees altered firm records by adding false information after the fact; and caused a violation of NYSE Rule 440 and Section 17(a) of the '34 Act, and Rule 17a-4 thereunder by causing the firm to preserve inaccurate books and records

 

Read the in-depth analysis of the SEC and NYSE cases in Fidelity
 

 

THOMAS E. KAPLAN 
(SFC/HPD 04-84/May 2004)
Thomas E. Kaplan was the Director of Institutional Sales at H.D. Brous & Co. Inc (the “Firm”). In July 2002, the Firm filed a Form RE-3 reporting that it had issued Kaplan a Letter of Reprimand, removed him from his position as the Firm’s Director of Institutional Sales, and fined him $10,000 for: posting comments to an Internet message board with regard to a security in which his clients held short positions, sending an e-mail which violated the Firm’s “Anti-Harassment Policy” to a fellow employee, sending out research reports that were not approved by a supervisory analyst, and misrepresenting himself as an analyst in an e-mail. In December 2002, Kaplan voluntarily terminated his employment at the Firm to become a buy-side analyst at a private investment firm.
NYSE Rule 472:

Research reports shall be prepared or approved, in advance, by a supervisory analyst acceptable to the Exchange under the provisions of Rule 344.

During the relevant period, Kaplan, who was not an approved supervisory analyst, analyzed issuers and based on his analysis prepared research reports which included, among other things, information about the subject company’s business and industry, financial models, projections, discussions of management, and recommendations. He further prepared and issued approximately 60 research reports regarding approximately 30 separate issuers, which he disseminated to approximately 100 institutional clients of the Firm and prospects without prior supervisory analyst approval. 

NYSE Rule 472:
  • The name of the preparer of a research report must be ascertainable from the retained records
  • A recommendation for purchase/sale must indicate the market price at the time of the recommendation
  • All communications must be appropriately dated

Many of the research reports Kaplan prepared and disseminated did not include the market price of the security at the time of the recommendation and were not dated. In addition, Kaplan’s name did not appear on the reports as preparer. 

NYSE Rule 472(a):

Each advertisement, market letter, sales literature or other similar communication which is generally distributed or made available by a member organization to customers or the public shall be approved in advance by a member, allied member, supervisory analyst or person designated under the provisions of Exchange Rule 342(b)(1).


Kaplan had a 20/80 commission sharing arrangement with an institutional salesman with a large client base. Kaplan’s primary role in the partnership was to produce research that the institutional salesman could use to solicit transactions. Among the research reports which Kaplan prepared and issued without supervisory approval, as discussed above, were reports on the common stock of XYZ, a full line distributor of industrial supplies including fasteners and other varied products. In mid-January 2001, Kaplan initiated coverage, of XYZ with a short sale recommendation. (During 2001, XYZ was covered by at least 2 other broker-dealer analysts). From mid-January through early March 2001, Kaplan issued multiple, unapproved research reports on XYZ in which he recommended the establishment of a short position in the stock. 

On March 5, 2001, Kaplan issued via e-mail an unapproved research report to actual and prospective clients of the Firm reiterating his short sale recommendation on XYZ. 

On March 7, 2001 at 12:33 PM, from his home computer, using the Internet account of a former institutional salesman at the Firm, without that person’s knowledge or consent, Kaplan made a posting to a Finance Message Board regarding XYZ  Subject: [XYZ] – sell before you’re crushed [indicating the former institutional salesman as the author]. It’s amazing to me that this stock – [XYZ] – is at $60.00 – has anyone looked at the balance sheet? Hello! Inventory up, sales growth decelerating, estimate cuts and a “recession” in industrial America – this is a fastener company not a software firm – it should have an auto parts multiple, not a premium on the S&P P/E. The SHORTS are right on this one!!! Sell before it’s too late!!!
On March 8, 2001 at 2:30 PM, from his office computer at the Firm, using the former institutional salesman’s Internet account without that person’s knowledge or consent, Kaplan again made a posting to the same Finance Message Board regarding XYZ which stated:  As was the case with many of the tech titans (now former titans) everyone was looking backwards instead of forwards. Stock prices are determined by discounting the value of FUTURE CASH FLOWS. Historical performance doesn’t help [XYZ] when it is faced with a contracting industrial economy, a saturated market, bad news coming out of its competitors…, a massive build in inventory and a meaningful slow-down in top-line growth. Fair value is, at best, in the low $40’s given the outlook for the next 12- 18 months. 

At the time he made the postings Kaplan was aware that the salesman with whom he had a commission sharing arrangement and his institutional clients had short positions in XYZ that had been established based on Kaplan’s research. Unfortunately for Kaplan, XYZ opened successively higher on March 8 and 9, 2001, the trading days immediately following each of Kaplan’s Internet postings regarding the stock.  Kaplan’s Internet postings regarding XYZ were improper in that: (i) they lacked supervisory approval, (ii) they were in the name of another person, without that person’s knowledge or consent, and (iii) they contained negative comments regarding a security on which Kaplan had issued short sale recommendations and in which his clients held short positions.

NYSE found that Kaplan:

I. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he issued public communications via the Internet without prior supervisory approval. 

II. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he prepared and distributed research reports without supervisory analyst approval. 

III. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he prepared and distributed research reports on which his name was not indicated as the preparer. 

IV. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he prepared and distributed research reports that: did not indicate the market price of the 2 security at the time the recommendation was made; and/or were not appropriately dated. 

V. Engaged in conduct inconsistent with just and equitable principles of trade by using an Internet account in the name of a former registered representative of his member organization employer to post negative messages on the Internet with respect to a security on which he had issued research reports advocating a short position and in which his clients held short positions. 

THOMAS E. KAPLAN 

Censure; a 6 month Bar in all capacities; and an undertaking to testify fully and truthfully in any Exchange disciplinary proceeding in connection with which the Exchange deems his testimony necessary. 

Bill Singer's Comment

Wow!  The lengths to which some folks will go.  Here is an individual with a senior-level position who is actually using his home computer and a former colleague's Internet account to trash a stock.  On one level, this case exposes Wall Street to yet another round of questions concerning its ethics.  On the other hand, it also goes to show you why Internet forums and chat rooms are full of sound and fury, but little else.  Again, this seems like a fairly light sanction under the circumstances.

 

PETER JOHN CARUSO 
(SFC/HPD 04-83/May 2004)

Peter John Caruso was a Senior Analyst at Merrill Lynch, Pierce, Fenner & Smith, Inc. (the “Firm”) until terminated on August 20, 2002.   As a Senior Analyst for the Firm, he covered Hard-Line Retail stocks such as XYZ and UVM. Caruso was an influential analyst with a well-known reputation in the stocks that he covered. Institutional Investor magazine had rated him the number one analyst in the retailing/hard-goods category for a period of six years. 

Prior to July 11, 2002 and as far back as September 1997, Caruso's rating on XYZ had been a “Strong Buy” for the Intermediate (12 months) and Long-Term (3 year).  The range of investment ratings for both were: “Strong Buy” (minimum 20% price appreciation plus yield), “Buy”, “Neutral” (0 to 10% appreciation/yield) and “Reduce/Sell”.

On the morning of July 11, 2002, after speaking with representatives from XYZ and UVM and discussions with his colleagues, X began the process of causing the Firm to downgrade its Intermediate-Term rating of XYZ by two levels, from a “Strong Buy”(by-passing “Buy”) to “Neutral," and also reduced his estimates on XYZ’s earnings per share for 2002 from $1.60 to $1.57 and for 2003 from $2.00 to $1.90.  Between 10:30 and 11:00 a.m. that same morning, Caruso received appral for the downgrade. Pursuant to Firm policy, his downgrade and reduced earnings estimate would not be released until after midnight, July 11, 2002. 

At approximately 12:30 p.m. on July 11, Caruso arrived at the offices of ABC Bank in New York City to participate in a lunch meeting arranged by  registered representative Janina Alexandra Casey. Casey had arranged the meeting at ABC Bank approximately four weeks in advance. The meeting was attended by Casey, two ABC Bank portfolio managers and two research analysts from ABC Bank. The purpose of this lunch meeting was for X to provide an update regarding the various stocks he covered in the hard-line retail industry, including XYZ. The meeting lasted approximately one hour, during which Caruso disclosed information leading some or all of the attendees to believe that he was going to downgrade his rating on XYZ (that decision was material, non-public information). 

At 3:00 p.m. on July 11, after the lunch meeting, Caruso participated in a conference call to discuss sales results of companies in the retail sector. On this call, several Firm analysts spoke. At various times, the call reached a total of approximately fifty-five listeners, which included institutional clients and Firm employees.  During the call, Caruso was asked: “Peter, just following up on your update on XYZ and UVW, you’ve got, I think, the highest estimates on the street for XYZ and I’m curious, in light of your most recent update, whether you think you’d be lowering them?” Caruso responded: “Yes, you should expect to see me lowering them very shortly...”At the time Caruso made that statement, the Firm had not released the research report with a downgrade and reduced earnings estimate nor had the research report been approved by a supervisory analyst. At the time Caruso made that statement, the change in his earnings estimates for XYZ constituted material, non-public information that Caruso had a duty to maintain in confidence until appropriately disseminated. 

Promptly after the lunch meeting, Casey went to an empty cubicle at ABC Bank and called four institutional clients, and informed each person that she had just come from a meeting with the Firm’s hard-lines analyst, Caruso, and she believed that he “very well could” downgrade his rating on XYZ. At various times on the afternoon of July 11, after being in touch with Casey, Firm clients sold several million shares of XYZ stock prior to release of the research report.  Caruso’s research report was submitted to the Firm Compliance Department at 5:42 P.M. on July 11, thereafter approved by a supervisory analyst and was released at 12:04 A.M. on July 12. The sales on July 11 were at approximately two dollars per share more than the prices at which the stock traded on July 12. The trading volume in XYZ on July 11, 2002 was approximately 23 million shares, more than twice the average daily volume on a composite basis of approximately 8.5 million shares in 2002. On July 12, 2002 (after the report was released) the volume of shares traded was approximately 46 million shares. XYZ shares closed at $31.40 on July 11 --- down $1.85 or 5.6%, from the day before. On July 12, XYZ stock opened at $29.36 and closed at $29.09, down $2.31, or 7.4% from the July 11 close. 

The Firm’s procedures failed to specifically address what was appropriate for an analyst to discuss at speaking engagements.  

At all relevant times, the Firm had the following policies to prevent the misuse of market-sensitive information relating to research reports by any person associated with it:

 “Knowledge of a pending recommendation or change in opinion or estimates is considered to be ‘market-sensitive information.’ Pending initial opinions, estimate or opinion changes, and decisions to issue research reports or comments may not be disclosed by any means to anyone, either inside or outside of the Firm, until the information is disseminated in the appropriately prescribed manner…This prohibition is intended to avoid the misuse of market sensitive information and the appearance of impropriety.” (Merrill Lynch Research Policy and Procedures Manual, Section III, paragraph C) 

“If a Research Analyst’s change in views or opinions were revealed to a salesperson prior to the public dissemination, the salesperson should not communicate the change to anyone other than his or her manager for the purpose of contacting Research management or Compliance to ensure the change is publicly disseminated by the Research Analyst per established policies and procedures.” (Merrill Lynch Memorandum to all Global Research Sales Personnel dated March 1, 2002, Attachment 1, Section II) 

At all relevant times, Caruso was subject to and required to abide by these policies.  Pursuant to the Firm’s policy, Caruso had a duty to maintain in confidence information about a pending change in an analyst’s rating and/or estimates until that information was disseminated in the appropriately prescribed manner. At all relevant times, Casey was subject to and required to abide by these policies and had a duty to maintain in confidence information about a pending change in an analyst’s rating or earnings estimate until it was disseminated in the appropriately prescribed manner. Pursuant to the Firm’s policy, Casey was allowed to communicate the change to her manager, for the purpose of contacting Research management, or Compliance, but was prohibited from communicating the change to anyone else.

The NYSE found that Caruso engaged in conduct inconsistent with just and equitable principles of trade by disclosing material information to third parties that he planned to downgrade his rating and lower his estimates on a stock, prior to the public dissemination of that information. 

PETER JOHN CARUSO

Censured; Fined $25,000; Suspended 4 month in all capacities.

Bill Singer's Comment:

Also see the Casey case and Merrill Lynch case.

 

 

JANINA ALEXANDRA CASEY
(SFC/HPD 04-73/May 2004)

X was a Senior Analyst at Merrill Lynch, Pierce, Fenner & Smith, Inc. (the “Firm”) until terminated on August 20, 2002. (X is the subject of a separate NYSE disciplinary action. In addition, the Firm is the subject of a separate Exchange disciplinary action. See Hearing Panel Decision 04-30.)  As a Senior Analyst for the Firm, X covered Hard-Line Retail stocks such as XYZ and UVM. X was an influential analyst with a well-known reputation in the stocks that he covered. Institutional Investor magazine had rated X the number one analyst in the retailing/hard-goods category for a period of six years. 

Prior to July 11, 2002 and as far back as September 1997, X’s rating on XYZ had been a “Strong Buy” for the Intermediate (12 months) and Long-Term (3 year).  The range of investment ratings for both were: “Strong Buy” (minimum 20% price appreciation plus yield), “Buy”, “Neutral” (0 to 10% appreciation/yield) and “Reduce/Sell”.

On the morning of July 11, 2002, after speaking with representatives from XYZ and UVM and discussions with his colleagues, X began the process of causing the Firm to downgrade its Intermediate-Term rating of XYZ by two levels, from a “Strong Buy”(by-passing “Buy”) to “Neutral," and also reduced his estimates on XYZ’s earnings per share for 2002 from $1.60 to $1.57 and for 2003 from $2.00 to $1.90.  Between 10:30 and 11:00 a.m. that same morning, X received appral for the downgrade. Pursuant to Firm policy, X’s downgrade and reduced earnings estimate would not be released until after midnight, July 11, 2002. 

At approximately 12:30 p.m. on July 11, X arrived at the offices of ABC Bank in New York City to participate in a lunch meeting arranged by  registered representative Janina Alexandra Casey. Casey had arranged the meeting at ABC Bank approximately four weeks in advance. The meeting was attended by Casey, two ABC Bank portfolio managers and two research analysts from ABC Bank. The purpose of this lunch meeting was for X to provide an update regarding the various stocks he covered in the hard-line retail industry, including XYZ. The meeting lasted approximately one hour, during which X disclosed information leading some or all of the attendees to believe that he was going to downgrade his rating on XYZ (that decision was material, non-public information). 

Promptly after this meeting, Casey went to an empty cubicle at ABC Bank and called four institutional clients, and informed each person that she had just come from a meeting with the Firm’s hard-lines analyst, X, and she believed that X “very well could” downgrade his rating on XYZ. At various times on the afternoon of July 11, after being in touch with Casey, Firm clients sold several million shares of XYZ stock prior to release of the research report at 12:04 a.m. on July 12. The sales on July 11 were at approximately two dollars per share more than the prices at which the stock traded on July 12. The trading volume in XYZ on July 11, 2002 was approximately 23 million shares, more than twice the average daily volume on a composite basis of approximately 8.5 million shares in 2002. On July 12, 2002 (after the report was released) the volume of shares traded was approximately 46 million shares. XYZ shares closed at $31.40 on July 11 --- down $1.85 or 5.6%, from the day before. On July 12, XYZ stock opened at $29.36 and closed at $29.09, down $2.31, or 7.4% from the July 11 close. 

At all relevant times, the Firm had the following policies to prevent the misuse of market-sensitive information relating to research reports by any person associated with it:

 “Knowledge of a pending recommendation or change in opinion or estimates is considered to be ‘market-sensitive information.’ Pending initial opinions, estimate or opinion changes, and decisions to issue research reports or comments may not be disclosed by any means to anyone, either inside or outside of the Firm, until the information is disseminated in the appropriately prescribed manner…This prohibition is intended to avoid the misuse of market sensitive information and the appearance of impropriety.” (Merrill Lynch Research Policy and Procedures Manual, Section III, paragraph C) 

“If a Research Analyst’s change in views or opinions were revealed to a salesperson prior to the public dissemination, the salesperson should not communicate the change to anyone other than his or her manager for the purpose of contacting Research management or Compliance to ensure the change is publicly disseminated by the Research Analyst per established policies and procedures.” (Merrill Lynch Memorandum to all Global Research Sales Personnel dated March 1, 2002, Attachment 1, Section II) 

At all relevant times, Casey was subject to and required to abide by these policies and had a duty to maintain in confidence information about a pending change in an analyst’s rating or earnings estimate until it was disseminated in the appropriately prescribed manner. Pursuant to the Firm’s policy, Casey was allowed to communicate the change to her manager, for the purpose of contacting Research management, or Compliance, but was prohibited from communicating the change to anyone else. 

The NYSE found that Casey had engaged in conduct inconsistent with just and equitable principles of trade by disclosing information to third parties, that an analyst planned to downgrade his rating on a stock, prior to the public dissemination of that information. 

JANINA ALEXANDRA CASEY

Censured; Fined $150,000; Suspended 1 month in all capacities.

Bill Singer's Comment:

Given the fairly egregious nature of this violation, it's somewhat surprising that Casey only got a 1 month sit down.  One would think this violation was fairly clear to everyone by now.

 

 

Merrill Lynch, Pierce, Fenner & Smith Incorporated
(SFC/HPD 04-30/March 2004)

SA was a Senior Analyst at the Firm until terminated on August 20, 2002.  IS joined the Firm in 2000 as an institutional salesperson and is currently employed as a Director in Equity Institutional Sales. 

On July 11, 2002, after receiving approval for a ratings change, but prior to the public release of the report by the Firm, SA disclosed information to clients of the Firm (at a meeting and on a conference call) to the effect that he was planning to downgrade his rating (had been a "Strong Buy" since September 1997) and/or lower his estimates on XYZ. After the meeting, IS informed several institutional clients that she believed that SA was going to downgrade his rating on XYZ. These institutional clients sold XYZ stock prior to the release of the ratings change. SA’s research report was published after midnight on July 12, 2002. During all relevant times, the Firm had the following policies in effect:

“Knowledge of a pending recommendation or change in opinion or estimates is considered to be ‘market-sensitive information.’ Pending initial opinions, estimate or opinion changes, and decisions to issue research reports or comments may not be disclosed by any means to anyone, either inside or outside of the Firm, until the information is disseminated in the appropriately prescribed manner… This prohibition is intended to avoid the misuse of market sensitive information and the appearance of impropriety.” (Firm Research Policy and Procedures Manual, Section III, paragraph C) 

“If a Research Analyst’s change in views or opinions were revealed to a salesperson prior to the public dissemination, the salesperson should not communicate the change to anyone other than his or her manager for the purpose of contacting Research management or Compliance to ensure the change is publicly disseminated by the Research Analyst per established policies and procedures.” (Firm Memorandum to all Global Research Sales Personnel dated March 1, 2002, Attachment 1, Section II) 

The Firm failed:

  • to have or implement specific procedures to prevent a violation of the policies requiring IS to maintain in confidence information about a pending change in an analyst’s rating or earnings estimate until it was disseminated in the appropriately prescribed manner; 
  • to have and reasonably implement procedures of supervision and control to ensure compliance by its employees with federal securities laws, Exchange Rules and Firm policies and to provide a separate system of follow-up and review with respect to the dissemination of “market sensitive information,” a term which the Firm used to include material non-public information, as that relates to changes in pending research report ratings and/or earnings estimates;
  • to adhere to the principles of good business practices in that it failed to prevent the premature dissemination by its employees of an analyst’s changes in ratings and earnings estimates; 
  • to specifically address what discussions analysts and supervisors should have, if any, about what was appropriate to be discussed at speaking engagements or whether a meeting might best be cancelled. Although the Firm had a policy which stated that such disclosures were prohibited, the Firm’s procedures failed to specifically address what was appropriate for an analyst to discuss at speaking engagements or whether a meeting might best be cancelled;
  • to specifically address what was appropriate for an analyst to discuss at speaking engagements; and 
  • to specifically address the situation described above; they did not expressly address what discussions, if any, analysts and supervisors should have about what was appropriate to be discussed at speaking engagements or whether a meeting might best be cancelled. In addition, the policies and procedures did not specifically address the responsibilities of supervisors of research analysts in the above-described situations.

In considering sanctions, the Panel noted that the Firm 

  • had reported this situation to the Exchange promptly upon its occurrence.

  • had undertaken the following measures, to prevent the reoccurrence of these events

    • introduced a process that minimizes the time between a change in analyst opinion and the dissemination of that change; t

    • implemented educational programs on this issue with members of the Firm Research and Equity Sales Departments; and 

    • made additions to its Research Compliance and Supervisory Manuals which give guidance to both analysts and supervisors as to how to conduct themselves in the future in order to prevent a reoccurrence of the above events. 

Accordingly, the Firm was found to have: 

 I. Violated Exchange Rule 342 in that it failed to have and reasonably implement appropriate procedures of supervision and control to ensure compliance by its employees with federal securities laws, Exchange Rules and Firm policies and to provide a separate system of follow-up and review with respect to the dissemination of material non-public information as it relates to changes in pending research report ratings and/or earnings estimates. 

II. Violated Exchange Rule 401 in that the Firm failed to adhere to the principles of good business practices in that it failed to prevent the premature dissemination by its employees of an analyst’s changes in ratings and earnings estimates. 
Merrill Lynch, Pierce, Fenner & Smith Incorporated

Censure and a $625,000 fine. 

Bill Singer's Comment

A well-written decision that fully sets forth the various duties and obligations imposed upon analysts and salespersons.  Still . . . one wonders if a smaller BD would have gotten away with the scope of these failures for nothing more than a fine.  I suspect that Merrill could well afford a $625,000 fine.

 

 

ROBIN RAFFO SCHMERLER
(SFC/HPD 04-75/May 2004)
Customer A, 53, is self-employed as the President and CEO of a chain of movie theaters, and in 1991 opened an account with  Robin Raffo Schmerler as his broker. Over the years, Customer A and Schmerler discussed general trading strategies relating to stocks and bonds. In addition, during the period from September 2000 to December 2000, Customer A allowed his assistant to discuss with Schmerler approximately 24 transactions involving approximately 13 securities. While Customer A was aware of transactions that Schmerler effected in his accounts through his assistant, his assistant served as liaison between Customer A and Schmerler and often authorized these transactions for Customer A’s accounts. 

By receiving authorization to effect transactions in Customer A’s account from his assistant, Schmerler violated Exchange Rule 408(a), in that she exercised discretionary power in Customer A’s account without the requisite written authorization and accepted orders from a person other than Customer A without specific written authorization. 

Customer B, 59, a former flight attendant, opened an individual account at Salomon Smith Barney (“Salomon”) in 1991. She subsequently opened custodial accounts for her two children in 1995 and two additional individual accounts in 1996. From approximately 1991 to June 2000, while Schmerler was her broker at Salomon, Customer B invested only in bonds. In approximately July 2000, Schmerler advised Customer B that she needed to diversify her individual accounts and suggested that she purchase stocks. Subsequently, Schmerler and Customer B discussed various trading strategies but did not discuss the purchase of any specific stocks for Customer B’s accounts. As a result of these conversations and pursuant to the trading strategies discussed, between July 2000 to December 2000, Schmerler, without obtaining specific oral or written permission to exercise discretionary authority, effected at least 191 transactions involving 38 different securities in Customer B’s two individual accounts. 

In light of the foregoing, Schmerler violated Exchange Rule 408(a), in that she exercised discretionary power in Customer B’s individual accounts without specific written authorization.

Customer C, a computers sales representative in New York, was one of Schmerler’s customers UBS PaineWebber (UBS) in the firm’s Atlanta, Ga. branch office. In or about May 2002, Customer C received a letter from UBS advising her of a margin call in her account in the amount of $2,000. Customer C contacted Schmerler who stated that she was dealing with the situation and that UBS would credit the money in Customer C’s account. Over the next few weeks, Customer C received additional notices of margin calls that totaled approximately $78,000. On June 10, 2002, in an attempt to cover the margin call in Customer C’s account, Schmerler used her personal funds to purchase five money orders, in denominations of $1,000 each, for a total of $5,000. The money orders were drawn on a local bank in Atlanta where Schmerler had an account. Schmerler printed Customer C’s brokerage account number at UBS on the back of each money order.  Upon the branch office manager’s investigation of the matter, Schmerler acknowledged that she intended to deposit the money orders into Customer C’s account to cover the margin call. 

Schmerler’s conduct as described above constituted a violation of Exchange Rule352 (c), in that she attempted to reimburse Customer C for losses associated with a margin call in her account.

Salomon filed an amended Uniform Termination Notice for Securities Industry Registration (“Form U-5A”), dated February 1, 2001, reporting five customer complaints against Schmerler. Thereafter, Salomon submitted several filings to the Exchange, reporting settlements of two of the customer complaints. 

The NYSE found that Schmerler:

I. Violated Exchange Rule 408(a) in that she exercised discretionary power in the account of one customer of her member organization employer and by accepting orders from a person other than the customer without first obtaining written discretionary authorization of the customer, and exercised discretionary power in the account of another customer of her member organization employer without first obtaining written discretionary authorization of the customer. 

II. Violated Exchange Rule 352(c) in that she attempted to reimburse a customer of her member organization employer for losses associated with a margin call in the customer’s account.

ROBIN RAFFO SCHMERLER

Censure and a 3 month Bar in all capacities. 

Bill Singer's Comment

Customer A presents an interesting case.  One could argue that "awareness" of a third party's entering orders on your behalf could be deemed a ratification of that conduct.  That scenario could raise interesting issues but overall regulators would still view it as unauthorized third-party trading.  Customer B is more clear-cut and, frankly, a bit over the top:  191 trades!  At some point, it would behoove an RR to suggest and obtain a written discretionary power.  Certainly, once you find yourself with a situation such as Customer C where you're digging into your bank account to cover margin call --- well, you have to figure that you've dug yourself quite a hole.  

 

RALPH WILLIAM RUSSELL
 (SFC/HPD 04-77/May 2004)
During the Fall of 1999,  Ralph William Russell (“Russell”)  without the knowledge or approval of RBC Dain Rauscher Inc. (the “Firm”), began working on the creation of a website relating to investing and finance. Income from the website was to come from, among other things, subscription fees and advertising sales.  By early 2000, Russell had discussed the proposed website with various friends and customers of the Firm, a number of which had expressed interest in investing. He had also mailed the business plan to a number of such individuals.

Soon thereafter, Russell received funds in checks payable to Russell (ranging in amounts between $5,000 and $50,000 each) from a number of investors. Upon receipt of the funds from the investors, Russell deposited such funds into certain personal securities accounts that he and/or his wife maintained at the Firm, thereby commingling investor funds with his personal funds.

On June 8, 2000, Russell formed a corporation whose purpose was to own and operate the business of ralphrussell.com. Russell subsequently opened an account at the Firm in the name of his corporation. On or about June 16, 2000, Russell made the first of what would be four payments totaling $45,000 to his website designer.  

On or about August 8, 2000, Russell sought approval from the Firm to engage in an outside business venture involving the website, but the request was never approved. Nonetheless, Russell continued to work on the website venture and continued to solicit funds from customers of the Firm. 

On or about September 11, 2000, Russell completed and signed a Firm compliance questionnaire,which asked, among other things, whether Russell had conducted any non-Firm activities from the Firm’s offices or raised capital for any entity outside the scope of the Firm’s business. Russell falsely answered "no." By October 2000, nine individuals (8 of whom were Firm customers) invested with Russell a total of $133,000 in the website venture. On one or more occasions, Russell expended funds raised from the investors for purposes other than the website venture. In or about October 2000, the Firm discovered Russell’s misconduct as set forth above and terminated him on November 10, 2000. 

During 2001, Russell reimbursed the investors with respect to all of the funds that they had invested with him.

The NYSE found that Russell:

I. Violated Exchange Rule 346(b) by engaging in an outside business activity without making a written request and obtaining the prior written consent of his member firm employer. 

II. Engaged in conduct inconsistent with just and equitable principles of trade by commingling customer funds obtained in connection with an unauthorized outside business activity with his own funds; wrongfully spending funds obtained in connection with an unauthorized outside business activity for purposes other than such outside business; and making a misstatement to his member firm employer in connection with his participation in an unauthorized outside business activity.

RALPH WILLIAM RUSSELL

Censure and 5 year Bar in all capacities. 

Bill Singer's Comments

A very harsh sanction but one likely resulting more from the "No" answer on the questionnaire than the private securities trades or commingling.

 

MARK DAVID LEAVITT
(SFC/HPD 04-72/May 2004)
Mark David Leavitt a former registered representative with Merrill Lynch, Pierce, Fenner and Smith, Inc. (the “Firm”) recommended to customers at the Firm unsuitable investments in two over-the-counter billboard stocks, XYZ and UVM, and made untrue statements of fact to customer, with regard to these two securities. 

At all relevant times, UVM was traded on the pick sheets and the OTC bulletin board. For the fiscal year ended December 31, 1999, UVM reported a net operating loss of $1.67 million. For the first quarter of 2000, UVM reported a net operating loss of approximately $500,000, UVM has not filed any financial reports subsequent to the period ending March 2000. As of March 2000, there were approximately 13.2 million shares of UVM issued and outstanding. During the period 1999-2000, there was no rating for UVM. 

At all relevant times, XYZ was traded on the pink sheets and the OTC bulletin board.  At all relevant times, XYZ was a company that engaged in direct merchandising of American themed collectibles, gifts and memorabilia.  From March 1999 through fiscal year ending December 31, 2000, XYZ reported cumulative revenues of $3,045,467, a cumulative operating loss of $901,139 and cumulative net loss of $549,635. XYZ has not filed any financial reports subsequent to the period ending December 2001. The XYZ prospectus stated that there were risks associated with investments in XYZ, including its limited operating history, and the difficulties in the early stages of business development. The prospectus also stated that because of the unpredictability of future revenues, fluctuations in operating results, rapid technological changes and other reasons, investors should consider all risks carefully prior to investing. 

Customers B and LR (the “Rs”) opened accounts with Leavitt at the Firm some time in 1995.  The new account form (“NAF”) for the Rs joint account stated that they had investment objective of growth, with a “moderate” risk tolerance. The NAF for the R joint account also indicated a net worth of between $250,000 and $500,000.  Leavitt misrepresented the risks associated with the XYZ and UVM transactions to the Rs. Leavitt never informed them of the speculative nature of the securities, and based on statements made to them by Leavitt, the Rs believed that the investments were without significant risk.  In total, 6,000 shares of UVM were purchased in the Rs accounts, in April and September 1999, at a cost to the account of approximately $100,000. In addition, 25,000 shares of XYZ were purchased away from the Firm, and were transferred into the Rs account, resulting in losses to the Rs of approximately $32,000. 
Customer JT transferred his Individual Retirement Account (“IRA”) to Leavitt and the Firm, some time in August 1998. The NAF for the JT IRA state investment objectives of  growth with a risk tolerance of moderate, and an annual income of $125,000.  Leavitt never informed JT of the speculative nature of the UVM and XYZ purchases, and consistently assured JT of the safety of the investments.  At Leavitt’s request, at a meeting with representatives of the Firm some time in early 2001, JT informed the Firm that purchases were “unsolicited”, when in fact they were not. Leavitt asked JT to do this, because he was concerned that his job would be in jeopardy.  During the period June 1999 through December 2000, 10,000 shares of UVM were purchased in the JT IRA, at a total cost of $162,288. More than half of these purchases were done by Leavitt on an “unsolicited” basis.  During the period of December 1999 through August 2000, Leavitt purchased 7,000 shares of RST in the JT IRA, at a total cost of $84,785. More than half of these purchases were allegedly done on an “unsolicited” basis.
Customer JL, a dentist, maintained two accounts with Leavitt at the Firm, a regular securities account and an IRA. 26. The NAF for the JL personal account stated investment objectives of  growth, with a risk tolerance of moderate. The customer’s annual income was listed as $150,000+, and a total liquid net worth was listed as $250,000+.  Leavitt never informed JL of the speculative nature of the investments in UVM or XYZ and based on statements made to him by Leavitt, he believed that these investments were without significant risk.  During the period April 1999 through December 2000 the JL personal account purchased 2,000 shares of UVM at a cost to the account of approximately $37,000. Some time in 2000, at the recommendation of Leavitt, JL engaged in a private securities purchase of 25,000 shares of XYZ. These shares were never transferred into either of JL’s accounts at the Firm.  
Customers J and PB (the “B’s”) opened accounts with Leavitt at the Firm, after they transferred their accounts from another broker at the Firm. In addition to personal accounts, the B’s also opened an account in the name of C Financial, JB’s business.  The NAF for the B’s joint account indicated that they had an investment objective of “total return”, with a risk tolerance of “moderate”. The NAF for the account also indicated that they had an annual income of $100,000 to $150,000, and a total liquid net worth of $250,000 to $500,000.Leavitt never informed the B’s of the speculative nature of the investments, and consistently encouraged them to hold on to the positions.  In April 1999, a purchase of 1,000 shares of UVM was made in the B’s’ joint account, at a cost to the account of $17,346. In September 1999, an additional purchase of 1,000 shares of UVM was made for the C Financial account. In addition, there were two purchases of UVM in JB’s IRA in April 1999, one purchase of 1,000 shares at a cost to the account of $17,346, and a second purchase of 750 shares at a total cost to the account of $13,889. 
RE is a retired anesthesiologist. The NAF for the RE account stated that he had an investment objective of growth, with a risk tolerance of moderate. The NAF for the RE account also stated that he had an annual income of $220,000 and a net worth of $3,503,704, which roughly equated to the value of his holdings with the Firm.  At no time did Leavitt ever tell RE about the speculative nature of the UVM and XYZ investments, and based on statements made to him by Leavitt, he believed that they were investments without significant risk. During the period April 1999 through December 2000, the RE account purchased 16,000 shares of UVM at a cost to the account of approximately $316,000. In addition, in June and July 2000, the RE account purchased 75,000 shares of XYZ, at a cost to the account of $850,612. Additional shares of XYZ were purchased by RE in private securities transactions, away from the Firm. 

In August 1999, Leavitt solicited and sold to Customer AR 45,000 shares of XYZ in private securities transactions. This position was never transferred into any of AR’s accounts at the Firm. In approximately August 1999, Leavitt solicited and sold to customer PT 25,000 shares of XYZ in private securities transactions. These shares were transferred into PJ’s account at the Firm in November 1999. In approximately August 1999, Leavitt solicited and sold to customer GS 50,000 shares of XYZ in one or more private securities transactions. These shares were never transferred into one of GS’s accounts at the Firm. In approximately August 1999, Leavitt solicited and sold to customer RC 50,000 shares of XYZ in one or more private securities transactions. These shares of XYZ were never transferred into one of RC’s accounts at the Firm. In approximately August 1999, Leavitt solicited and sold to customer RB 50,000 shares of XYZ in one or more private securities transactions. These shares were transferred into one or RB’s accounts at the Firm in October 1999..

Leavitt also failed to comply with written requests by the Exchange that he appear and testify concerning matter under investigation by the Exchange.

The NYSE found that Leavitt:

I. Engaged in conduct inconsistent with just and equitable principles of trade in that he:
A. Engaged in trading which was unsuitable in light of the customers’ investment objectives.
B. On one or more occasions, made untrue statements of fact to one or more customers, in connection with the solicitation, purchase or sale of a stock.
II. Violated Exchange Rule 346(b) in that he engaged in an outside business activity by recommending investments in a private entity to customers, without making a written request and receiving the prior written consent of his member organization employer.
III. Violated SEC Rule 17a-3 and 17a-4 and Exchange Rule 440 in that he mismarked order tickets as unsolicited when the transactions were solicited.
IV. Violated Exchange Rule 477 in that he failed to comply with or respond to written requests by the Exchange that he appears and testify.

MARK DAVID LEAVITT

Censure and 4 year Bar in all capacities. 

Bill Singer's Comments

This case is almost a primer of what not to do and how not to do it --- unsuitable trades, mismarked "unsolicited" orders, telling clients to lie about nature of trades, undisclosed private securities trades, and topped off with a failure to cooperate.  Oddly, though, he only gets a 4 year Bar.  One suspects there would have been a far different result if this case were handled by NASD.

 

 

FRANCISCO PEREZ 
(SFC/HPD 04-71/May 2004)

Francisco Perez, a former non-registered employee with Salomon Smith Barney, Inc. (the “Firm”) was terminated by the firm on March 3, 2003. A Form RE-3 filed by the Firm advised that on or about February 13, 2003, the Firm received a shipment of computers and discovered that one was missing and initiated an investigation into the matter.  When questioned, Perez admitted to misappropriating a computer, which had an estimated value of $1,000.  Perez ultimately returned the computer to the Firm. 

When notified by the NYSE of its investigation and request for information, Perez stated that he had previously submitted a written statement to the Firm and that he would not respond to Enforcement’s request. Perez failed to further respond, file an Answer, or appear at the hearing. 

The NYSE found that Perez:

I. Engaged in conduct inconsistent with just and equitable principles of trade in that he misappropriated a computer belonging to his member firm employer. 

II. Violated Exchange Rule 477 in that he failed to comply with the Exchange’s written requests for information concerning matters that occurred prior to his termination of employment with a member organization. 
FRANCISCO PEREZ 

Censure and a permanent Bar in all capacities. 

Bill Singer's Comment

Also see the February 2003, NASD case involving Elizabeth Virginia Revelle, NASD CASE #C9B020068, discussing the same general issues and also imposing a bar.
 

 

Sandro Corio Flores
(SFC/HPD 04-71/May 2004)

During the year 2000, Sandro Corio Flores (“Flores”)  was employed at Prudential Securities (the "Firm") Sao Palo, Brazil office, and he arranged for certain mail, including trade confirmations and monthly account statements for approximately eight of his customers to be sent to a United States Post Office Box in Coral Gables, Florida. Flores did not disclose and the Firm was unaware that the Coral Gables Post Office Box to which his customers had requested that their mail be sent was under his control. Furthermore, at various times he retrieved and destroyed the mail sent to these customers.  NYSE Rule 409(b)(2) states in pertinent part that no member organization shall address confirmations, statements or other communications to a non-member customer at the address of any employee of any member organization. Accordingly, Flores  caused the Firm's books and records to be inaccurate. 

On or about August 14, 2000, the Firm filed a Uniform Termination Notice for Securities Industry Registration (“Form U5”) in which it informed the New York Stock NYSE (the “NYSE”) that Flores  had been discharged on July 17, 2000, because of the mail issue. 

By letter dated June 22, 2001 (the “June 22nd Letter”), sent to Flores at his last known address on the Central Record Depository (the “CRD”), the NYSE advised Flores that he was under investigation regarding the post office box issue and the complaints of six customers; and he was requested to provide detailed written responses. Thereafter, Flores, through his counsel, provided certain responses.  He was also asked to appear and provide oral testimony, which he did not.  On January 16, 2004, a Charge Memorandum was issued in this matter. 

Flores was found to have:

I. Caused a violation of Exchange Rule 409(b)(2) in that he caused customer confirmations and account statements and other communications to be sent to a post office box under his control without the knowledge of his former employer. 

II. Engaged in conduct inconsistent with just and equitable principles of trade in that he caused confirmations and account statements to be sent to a post office box under his control without the knowledge of his former member firm employer, and subsequently destroyed some of these documents. 

III. Caused a violation of Regulation 240.17a-3 and 240.17a-4 of the Securities Exchange Act of 1934 and Exchange Rule 440 in that he caused the Firm’s books and records to be inaccurate. 

IV. Failed to comply with a written request by the Exchange that he appear and testify. 
Sandro Corio Flores

Censure and a Bar in all capacities until he testifies and for an additional period of six months from the time he fully complies. 

Bill Singer's Comment

This problem of RRs intercepting and redirecting customers' mail is a recurrent theme on Wall Street.  One would think that, by now, firms had developed more sophisticated ways to detect such misconduct, but the practice continues to recur.

 

William Matthew Lelich
(SFC/HPD 04-62/April 2004)
William Matthew Lelich a former registered representative with Merrill Lynch, Pierce, Fenner & Smith, Inc. (the “Firm”) serviced, among others, eight accounts for which he obtained verbal discretionary authority from each of the above-mentioned customers. 

 

Exchange Rule 408(a) states, in part, that no employee of a member organization shall exercise any discretionary power in any customer’s account without first obtaining written authorization of the customer. 
Exchange Rule 408(b) states, in part, that no employee of a member organization shall exercise any discretionary power in any customer’s account, without first notifying and obtaining the approval of another person delegated under Rule 342(b)(1) with authority to approve the handling of such accounts.

The discretionary authority Lelich obtained was not reduced to writing and he did not inform the Firm of the arrangement. From on or about April 1999 to on or about January 18, 2001, on more than one occasion, he utilized his discretionary authority to effect one or more transactions in the accounts of each of the eight customers. 

BJ and MM are the divorced parents of LJ. On or about December 14, 1999, BJ and GJ (the “Js”) opened a joint account at the Firm. On or about April 13, 2000, MM and MM (the “Ms”) opened a joint account at the Firm. Lelich was the account representative for both accounts.  The Js and the Ms verbally authorized Lelich to accept orders for their accounts from LJ.  The Firm had no power of attorney on file allowing Lelich to accept instructions from LJ in the Js’ Account.From on or about December 14, 1999 to on or about January 18, 2001, Lelich, without B or GJ’s written authorization, effected some of the transactions in the Js’ Account pursuant to LJ’s instruction. 

From on or about April 13, 2000 to on or about January 18, 2001, Lelich, without M or MM’s written authorization, effected some of the transactions in the Ms’ Account pursuant to LJ’s instruction. The Firm had no power of attorney on file allowing Lelich to accept instructions from LJ in the Ms’ Account. 

Accordingly, Lelich exercised discretionary power in the account of one or more customers without first obtaining the written authorization of the customer and without first notifying and obtaining the approval of another person at the Firm delegated with the proper authority to approve the handling of such accounts. In addition, Lelich accepted orders in the account of one or more customers from a third party without obtaining the written authorization of the customer. 

NYSE found that Lelich:

I.   Violated Exchange Rule 408(a) in that he exercised discretionary power without first obtaining the written authorization of the customer;

II.  Violated Exchange Rule 408(b) in that he exercised discretionary power without first notifying and obtaining the approval of another person delegated under Rule 342(b)(1) with authority to approve the handling of such accounts; and 

III. Violated Exchange Rule 408(a) in that he accepted orders in the account of one or more customers from a third party without obtaining the written authorization of the customer 

William Matthew Lelich

Censure and a 5 month bar in all capacities

Bill Singer's Comment

Okay, look, I fully appreciate the issue involved and the potential for disaster they pose.  Moreover, I understand that Lelich did not have prior written authorization to undertake discretion on behalf of eight accounts.  Nonetheless, and solely for the purpose of addressing the issue of LJ's trading, geez!!!  I mean the two sets of parents instructed Lelich to accept orders from LJ, their child, and apparently they ratified those trades.  It seems that five months is a bit steep under those circumstances; however, I fully appreciate the principle here and can't criticize the sanction.  RRs would be well advised to read this case and follow its admonition.

 

Richard H. Levy
(SFC/HPD 04-61/April 2004)
From June 2000 through July 2001 Richard H. Levy Levy was the head trader and managing director of CIBC World Markets Corp's ( the " Firm’s") block trading desk.  At the time, Firm procedures with respect to block trading required the block trader to simultaneously complete an order ticket for each order he placed with a floor broker via intercom. The order ticket completed by the block trader was then sent to the operations department. However, Levy entered trades without having customer orders and convinced three institutional customers and one Firm proprietary trader to accept the losing transactions into their respective accounts. By accepting these trades, the four customers suffered an immediate loss of a total of approximately $270,000. Levy also attempted to share in the losses in three of the customer accounts by telling the customers that he, personally, would make them whole. Levy additionally created inaccurate order entries when he placed the orders without completing order tickets and then completed “as of” order tickets after trade execution for customers who had not ordered the positions.

On July 19, 2001, Levy placed an order for 50,000 shares of XYZ Group (“XYZ”) with the floor broker without having a customer order for the position or completing the requisite order ticket for submission to the operations department. The price of XYZ declined significantly.  On July 24, 2001, Levy called ABC Asset Management, an unregistered investment advisor customer and spoke to C (“C”), stating that he needed C do him a favor by purchasing 50,000 shares of XYZ or else Levy would get fired that afternoon. Levy told C the loss of the position was then currently about $120,000 and he would pay C out of his bonus if he could not make it up to C via another trade. C agreed. Levy completed an order ticket allocating a purchase of 50,000 shares of XYZ for a total of $1,653,000 to the ABC Asset Management account and on settlement date July 25, 2001, the trade was placed in the account “as of” July 19, 2001. 

On July 20, 2001, Levy placed an order for 20,000 shares of UVW Energy Group (“UVW”) with the floor broker without having a customer order for the position or completing the requisite order ticket for submission to the operations department. The price of XYZ declined significantly.  

  • On July 24, 2001, Levy called DEF Capital Management, an unregistered investment advisor customer and spoke to a trader named KH ("KH"), stating that he needed a favor, that he had an error and needed KH to purchase 15,000 shares of UVW. Levy also told KH that if he purchased the shares, Levy would make it up to him. KH agreed to take 5,000 shares.  On settlement date July 26, 2001, a purchase of 5,000 shares of UVW for a total of $178,750 was placed in the DEF Capital Management account “as of” July 25, 2001. The trade was sold the same day for an approximate $25,000 loss. 
  • On July 24, 2001, Levy had conversations with traders PH (“PH”) and DC (“DC”) of GHI Capital Management. Levy told PH that he needed a favor since he had a problematical error. He said that he had bought shares of UVW at 35.75 and sold them at 30.75 and needed PH’s help by taking some of the trade. Levy said that if he could not make it up to PH through other trades, he would give PH cash out of his bonus. PH said that he would have to get DC’s approval before he could agree. Levy then called DC, telling DC that it would save his job if DC took the UVW position and that he would make it up to DC within a week to make him whole. DC agreed to take 15,000 shares of UVW. A purchase of 15,000 shares of UVW for a total of $537,000 was placed in the GHI Capital Management account on settlement date July 25, 2001 “as of” July 20, 2001 resulting in an immediate loss to GHI Capital Management of approximately $75,000.

On July 20, 2001, Levy placed an order for 30,000 shares of RST Corp. (“RST”) with the floor broker without having a customer order for the position or completing the requisite order ticket for submission to the operations department. The price of RST declined significantly. CIBC World Market JKL Account, a proprietary account, was a portfolio focused on valuation arbitrage in utility and energy stocks. The portfolio was managed by SK (“SK”). On July 23, 2001, Levy called SK asking him to help him out with a problem, that he had purchased 30,000 shares of RST on July 20, 2001 and the price of RST had significantly dropped. Levy asked SK to take some of the shares. SK told Levy that as a favor, he would take 10,000 shares. 10,000 shares of RST for a total of $624,500 was purchased for the Firm account on settlement date July 25, 2001 “as of” July 20, 2001. SK’s acceptance of the 10,000 RST shares resulted in an immediate loss to the Firm of approximately $50,000.

The NYSE received a Uniform Termination Notice (“Form U-5”) from the Firm dated August 24, 2001 reporting that Levy was permitted to resign on July 30, 2001 while under internal review for failing to promptly record certain trades and for obtaining the permission of clients to accept certain unprofitable trades with an understanding that he would make it up to them.

NYSE found that Levy

I. Engaged in conduct inconsistent with just and equitable principles of trade in that he entered trades without having customer orders and thereafter placed the losing transactions in four customer accounts with their permission;

II. Violated Exchange Rule 352(c) in that he attempted to share in the losses in the accounts of three customers of his member organization employer; and

III. Caused a violation of SEC Regulations 240.17a-3 and 17a-4 and Exchange Rules 410 and 440 in that he created inaccurate order entries by failing to create order tickets at the time of the orders and by creating “as of” order tickets after trade execution for customers who had not ordered the positions. 
Richard H. Levy

Censure and a 8 month Bar in all capacities

Bill Singer's Comment

Self-help is always a dangerous route to resolve a problem.  As we all too often see, an initial violation is frequently compounded by efforts (well-intentioned, or otherwise) to trade out of the error.

 

 

Luis A. Delacruz
(SFC/HPD 04-40/March 2004)

During his approximate 23-year career in the securities industry, Luis A. Delacruz had been employed in a nonregistered capacity. His last position was with Salomon Smith Barney Inc.(n/k/a Citigroup Global Markets Inc.)( the "Firm"), where he was employed as an assistant vice president in the Firm’s  fixed income operations department from October 3, 1988 to July 16, 2002, the date the Firm terminated his employment. On or about April 27, 1997, while employed as a non-registered employee with  (“the Firm”), Luis A. Delacruz was arrested in Bergen County, New Jersey and charged with Causing or Attempting to Cause Bodily Injury and Resisting Arrest. On or about July 23, 1997, in the Superior Court of Bergen County, New Jersey, Delacruz was convicted of one count of Causing or Attempting to Cause Bodily Injury, a felony, and received a sentence of 18 months probation and was assessed a fine of $125. 

Delacruz failed to advise the Firm of his arrest, felony conviction and status as a statutorily disqualified individual. On or about June 13, 2002, the Firm submitted Delacruz’s fingerprints to the United States Department of Justice in an attempt for Delacruz to obtain his Series 7 registration. On or about June 13, 2002, Delacruz completed a Form U-4 to be electronically submitted. 

Question 14A.(1): “ever been convicted of or pled guilty…to any felony.” 

Question 14A.(2): “ever been charged with a felony.” 

Delacruz falsely responded to both questions by electronically checking the adjacent boxes marked “No."  The Firm’s Compliance Department was notified of Delacruz’s criminal record on or about July 15, 2002, and promptly terminated Delacruz’s employment on or about July 16, 2002. 

The NYSE found that Delacruz:

I. Engaged in conduct inconsistent with just and equitable principles of trade by failing to disclose, on a Form U-4 submitted to his member firm employer, a prior criminal conviction which made him subject to a statutory disqualification. 

II. Caused a violation of Exchange Rule 345.12 by submitting a Form U-4 containing false information. 

III. Violated Exchange Rule 476(a)(10) by making a misstatement and/or omission of fact on his application for registration filed with the Exchange.

Luis A. Delacruz

Censure and a 6 year Bar in all capacities.

Bill Singer's Comment

This one sort of takes your breath away.  A 23 year career on the Street is trashed.  One wonders whether the prompt and immediate disclosure of the criminal event might have had a substantially different result.  Yes, he was a convicted felon, but he wasn't sentenced to serve any actual time (sentence was probation) and his fine was $125.  Depending on the facts, this may well have been one of those cases in which an application for his continuance might well have been granted --- or, if not, perhaps the next employer would have been given acceptance to hire him.  As things now stand, it's at least six years before he's likely to get any consideration on a statutory disqualification application and, given the facts, I doubt such a ruling will be favorable.

 

Edward D. Jones & Co., L.P.
(SFC/HPD 04-32/March 2004)

Edward D. Jones & Co., L.P. (the "Firm") is a  retail securities business presently conducted by approximately 8,669 registered representatives occupying approximately 8,340 branch offices. The Firm's branch offices are not staffed with branch office managers. Instead, supervision of the Firm’s registered representatives is carried out by the Firm's field supervision directors and the Firm's compliance and oversight departments. In the years 1999-2001, the Firm employed an average of approximately 27,000 employees.

This matter was opened by Enforcement as a result of several referrals from the Exchange’s Division of Member Firm Registration’s Qualifications & Registrations department (“Q&R”). These referrals indicated that the Firm employed a number of individuals who were subject to statutory disqualifications and possibly subject to statutory disqualifications, even though they had disclosed the existence of criminal convictions on employment applications to the Firm at the time they were hired.  By letter dated December 14, 2001, the Exchange notified the Firm that it was conducting a formal investigation of the matters set forth above. 

Consequently, between 1999 and 2002, (“the relevant period”) the Firm employed individuals whom it knew or should have known were subject to statutory disqualification based on the criminal history they disclosed on their employment applications. The Firm’s inadequate procedures also resulted in its failure to reasonably and promptly investigate employees whom it should have reasonably known were potentially statutorily disqualified. 

Section 3(a)(39) of the Securities Exchange Act of 1934 (“SEA”):

persons convicted of any felony or other crimes delineated in Section 15(b)(4) of the SEA, within the previous ten years of the filing of an application for employment or association with a broker or dealer, are subject to statutory disqualification
Exchange Rule 346(f):

a member organization is prohibited, except as otherwise permitted by the Exchange, from having associated with it any person who is known, or in the exercise of reasonable care, should be known, to be subject to a statutory disqualification
Exchange Rule 351(a)(9):

member organizations are required to promptly report to the Exchange its association in any business or financial activity with any person subject to a statutory disqualification
 Exchange Rule 351(a)(5):

member organizations must promptly report an employee’s arrest or conviction to the Exchange

During the relevant period, the Firm employed at least four individuals each of whom was statutorily disqualified as the result of a criminal conviction (for felony narcotics possession, forgery, filing a false instrument, and conversion of U.S. government property, respectively) prior to being hired by the Firm. These four individuals were hired in 2000. 

During the relevant period, Firm procedures required job applicants to complete, among others documents, an employment application, which inquired whether the applicant had ever been arrested or convicted of a crime. At or about the time of hire, some individuals disclosed to the Firm the existence of a criminal conviction. Notwithstanding, the Firm employed such individuals but did not timely initiate an investigation and did not timely terminated. Pointedly, the Exchange noted that some investigations were only initiated after inquiries by the Exchange. The Firm also failed to promptly report to the Exchange its association with these statutorily disqualified employees once it was aware of these convictions, and failed to timely report certain convictions. 

Prior to January 2002, the Firm had separate procedures for evaluating the statutory disqualification status of registered and non-registered employment applicants. The Firm allocated various responsibilities concerning the background investigations of applicants and employees to different divisions of the Firm’s human resource and compliance departments. These departments within the Firm did not coordinate their efforts or effectively communicate with one another in performing these background investigations. By failing to have a centralized procedure for evaluating the statutory disqualification status of applicants and employees, on various occasions the Firm was unaware of the complete status of individuals’ background investigations and consequently did not reasonably investigate individuals who were potentially statutorily disqualified. During the relevant period, the Firm failed to reasonably investigate at least seven individuals who were potentially statutorily disqualified, and employed them for an unreasonable period of time.  In some instances, the Firm failed to timely investigate employment applications on which applicants revealed the existence of arrests and or convictions that should have raised concerns that these employees were possibly statutorily disqualified. In addition, some applicants were permitted to begin employment before they completed an employment application or answered any questions concerning criminal history. Further, several months frequently lapsed between the initial notice of these employees’ potential statutory disqualification and their termination, as a result of the Firm affording unreasonable leeway to employees who were slow in complying with the Firm’s requests for information concerning their criminal history. 

In considering sanction, the Panel noted that the Exchange’s investigation did not reveal that there was any harm to customers as a result of the employment of individuals who were statutorily disqualified or potentially statutorily disqualified. Further, the Firm had advised the Exchange that in January 2002 it implemented new procedures that centralized background review for all employees within the Background Review Unit of the Firm’s Compliance Division. These enhanced procedures provide for, among other things, the more prompt resolution of issues occasioned by potentially statutorily disqualified individuals. 

The Firm was found to have violated:

I. Exchange Rule 346(f), by employing individuals, whom the Firm knew, or in the exercise of reasonable care, should have known, were subject to statutory disqualification. 

II. Exchange Rule 351(a)(9), by failing to promptly report its association with persons subject to statutory disqualification. 

III. Exchange Rule 351(a)(5), by failing to promptly report an employee’s arrest or conviction to the Exchange. 

IV. Exchange Rule 342, by failing to provide for, establish, and maintain adequate procedures and controls, including a system of follow-up and review of its business activities, to ensure compliance with Exchange Rules and federal securities laws relating to employment of statutory disqualified individuals.
Edward D. Jones & Co., L.P.

Censure and a $100,000 fine. 

Bill Singer's Comment

Another concise decision from NYSE.  Compliance staff should note the emphasis on not only timely investigating the backgrounds of new hires, but also the need to promptly terminate such individuals when it is discovered that they have problematic criminal histories.  However, I again find myself wondering if a smaller firm would have gotten off with merely paying a paltry fine (relative to revenues, that is).  See what happens six months after this case with Charles Schwab

 

 

Shawn R. Blankenship
(SFC/HPD 04-35/March 2004)
Shawn R. Blankenship, a registered representative formerly with Morgan Stanley Dean Witter (“MSDW”) and Legg Mason Wood Walker, Inc. (“Legg Mason”), entered the securities industry in September 1998 and was employed as a registered representative with MSDW from April 1999 to June 2001, and by Legg Mason from June 2001 to April 2002. Blankenship has been employed by Firm A since May 2002. 

On March 26, 2001, Blankenship attempted to allocate 5,300 shares of XYZ's IPO offering (a "hot issue") at a price of $6 per share to the account of his father-in-law, FL. MSDW’s policies restricted employee and employee-related accounts, including the account of a parent-in-law, from trading in “hot issue” allocations.  Blankenship did not identify the FL account as “employee-related” when it was opened, but MSDW subsequently did so designate the FL account after Blankenship submitted an annual compliance questionnaire that indicated that the account was owned by his father-in-law. Blankenship enlisted the assistance of his unregistered sales assistant, who disabled the “employee-related” account designation and placed the order for IPO shares in FL’s account.  Blankenship’s branch manager became aware of the order and cancelled the allocation of shares to FL’s account. 

In February 2002, Legg Mason discovered that Blankenship had forwarded certain e-mail from his office computer to an outside personal e-mail account.  Legg Mason supervisory personnel met with Blankenship to inform him that all electronic correspondence with clients must be done via Legg Mason’s internal email system. Blankenship denied that he ever solicited or conducted securities-related business using his outside e-mail account. On or about March 25, 2002, Blankenship informed Legg Mason that he had “completely closed” the outside e-mail account to avoid any appearance of any impropriety. However, during April 2002, Blankenship continued to access his personal e-mail account from his office computer at Legg Mason on at least six occasions and did not close his outside e-mail account until some time after his employment at Legg Mason terminated. 

On or about June 27, 2001, Enforcement received notice via a Form U-5 filed by MSDW that Blankenship had been permitted to resign due to a “violation of firm syndicate policy.” On or about April 22, 2002,NYSE Enforcement received notice via a Form U-5 filed by Legg Mason that Blankenship had been permitted to resign for a “violation of firm policy.” 

Blankenship was found to have:

I. Engaged in conduct inconsistent with just and equitable principles of trade by attempting to allocated IPO shares to his family member’s account. 

II. Caused a violation of Exchange Rule 440 and Securities Exchange Act Rules 17a-3 and 17a-4 by causing his member firm’s books and records to be inaccurate. 

III. Engaged in conduct inconsistent with just and equitable principles of trade by making a misstatement to his member firm employer concerning an outside e-mail account. 

Shawn R. Blankenship

Censure and a $10,000 fine. 

Bill Singer's Comment

Hey, Toto, this ain't Kansas anymore --- and we're certainly not at the NASD.  A Censure and a $10,000 fine for the three violations noted above?  It really does pay to work at a NYSE member if you're an RR.

 

Gary Duane Steiner
(SFC/HPD 04-36/March 2004)
Gary Duane Steiner, a former registered representative with Dain Rauscher Incorporated (the “Firm”) entered the securities industry in January 1987, and in or about February 1998, Steiner moved to the Firm, where he continued to work as a registered representative until terminated on or about November 23, 1999. 

From in or about June 1999 through November 1999, with regard to orders entered by telephone calls to his firm’s block trading desk, Steiner caused late allocation of trades and routinely allocated trades to customer accounts only after the trades had been executed; improperly used delayed allocations to favor certain clients; denied his customers the most favorable executions; included orders for his own account among customer orders which he had bunched together to make up block desk orders; and, for one or more customer accounts, used his own discretion to enter and/or allocate orders, in violation of Exchange Rule 408(a). 

SEC Regulation 240.17a-3 (a)(6) and (7), promulgated pursuant to the Securities and Exchange Act of 1934 (“the Exchange Act”) requires, in relevant part, that a memorandum of each brokerage order be made which includes the time of entry and the account for which entered. The regulations state that 

“The time of entry shall be deemed to mean when such member, broker or dealer transmits the order or instruction for execution or, if not so transmitted, the time received.” 

In addition, the regulations require “a memorandum of each order received, showing the time of receipt, the terms and conditions of the order, and the account in which it was entered.” 

 
Exchange Rule 440 requires that member firm organizations make and preserve books and records as the Exchange may prescribe and as prescribed by SEC Regulations 17a-3 and 17a-4. Books-and-Records Violations. 

The delay in allocating executed orders to individual accounts gave Steiner the ability to grant preferential treatment to certain customers. Steiner used this ability to allocate trades which had become profitable to favored customers – most frequently, to customers with whom he had personal and/or family relationships: Steiner’s uncle A, Steiner’s friend B, and Steiner’s most active customer, C. 

As of September 30, 1999, the Firm forbade the inclusion of orders for registered representatives’ own accounts among bunched customer orders phoned to the block desk. This prohibition reflected the Firm’s policy that brokers should not compete with and/or get better executions than their customers. Steiner disregarded the Firm’s policy.

Exchange Rule 408(a) provides, in relevant part, that no employee of a member organization shall exercise any discretionary power in any customer’s account, without first obtaining written authorization from the customer. 

Without prior authorization from the customers, and improperly using his own discretion, Steiner also included customer accounts in allocations which he made of trades executed through the block desk, in violation of Exchange Rule 408(a).  

Accordingly, the NYSE found that Steiner had:

I. Engaged in conduct inconsistent with just and equitable principles of trade in that he failed to make timely records relating to the designation and execution of customer orders which resulted in the ability to grant preferential treatment to certain customers. 

II. Engaged in conduct inconsistent with just and equitable principles of trade in that he engaged in a course of conduct whereby he effected improper post – execution allocation of trades in customer accounts which resulted in the ability to grant preferential treatment to certain customers and did in fact exercise this ability to favor certain customers. 

III. Caused a violation of Exchange Rule 401 in that he engaged in a course of conduct whereby he effected improper post –execution allocation of trades which thereby resulted in his granting preferential treatment to certain customers. 

IV. Violated Exchange Rule 408(a) by exercising discretion in on or more customer accounts without first obtaining written authorization of the customer. V. Caused violations of Exchange Rule 440, Section 17(a) of the Exchange Act, and SEC Regs. 240.17a-3 and 17a-4 by failing to preserve required records to receipt and execution of customer orders. 

Gary Duane Steiner

Censure and Bar for 18 months in all capacities. 

Bill Singer's Comment

Sitting on an order . . . hmm . . . for some brokers it almost seems to be a way of life.  There's always some character (the so-called big producer or "old hand") who always seems to be placing blocks and everyone in the office knows what's going on but nothing ever seems to get done about it.  Well, at least that's not the case here.  Of course the other aspect to this case is how many times can you place such orders before compliance notices a red flag and begins asking questions?

 

Geraldine Larae Tyes 
(SFC/HPD 04-24/February 2004)

Tyes entered the securities industry in March 1999 as an unregistered cashier for a branch office of UBS PaineWebber (the "Firm"). In an effort to purchase a condominium, Tyes attempted to secure a mortgage loan from XYZ Financial Service, and, on or about November 15, 2000, she submitted a verification of deposit form to XYZ bearing the signature of her co-worker, A.  Not only had Tyes signed A's name to the form without authorization or consent, but the form falsely identified customer B's account as belonging to Tyes, when, in fact, she had no ownership interest in that account.

When XYZ discovered that the B Account was not Tyes', she then prepared a letter dated November 27, 2000, in which she claimed that the November 15 verification form resulted from an error caused by the merger of her securities account with the B Account, which she now represented belonged to her mother. However, Tyes was not related to B (that's right --- B was not her mother) and the two accounts were never merged. Tyes asked a co-worker, Firm registered representative C, to sign the November 27 letter, which she did. 

On or about November 27, 2000, Tyes prepared a second verification of deposit form which falsely stated that “another [securities] account had to be opened because the Firm was not aware that Tyes name was not on the [B] account.” Tyes signed C’s name to the November 27 verification form, without C’s authorization or consent.  

Thereafter, in November 2000, the Firm discovered the false statements and forged signatures described above and terminated the employment of Tyes, C and A.  After A’s employment with the Firm was terminated, A filed criminal charges against Tyes for forging her signature on the November 15 verification form.

In January 2002, Tyes entered a plea of no contest and was convicted of a felony, forgery of a document, which makes her subject to a ten-year statutory disqualification until January 2012. On or about June 15, 2001, the Firm filed a Form RE-3 reporting that Tyes was terminated in November 2000 after the branch manager discovered that Tyes had falsified information about her accounts at the Firm on a bank loan application. 

Tyes has not been employed in the securities industry in any capacity since leaving her employment with the Firm. Tyes failed to provide  information requested by the Exchange in connection with its investigation of the circumstances detailed above. Tyes engaged in acts detrimental to the interest or welfare of the Exchange in violation of Exchange Rule 476(a)(7) in that she was convicted of a felony offense of forgery of a document, which conduct occurred during the course of her employment at her member organization employer. Additionally, she violated Exchange Rule 477 in that she failed to comply with requests by the Exchange to provide information with respect to activities occurring prior to the termination of her employment with a member organization.

Geraldine Larae Tyes

Censure and 9 year bar in all capacities.

Bill Singer's Comment

I had to read the fact pattern of this case several times before I could clearly understand who was who and what they did or didn't do.  It never ceases to amaze me as to what lengths some folks will go to perpetrate a fraud --- and then cover it up.  Of course, I'm still trying to figure out why A got fired --- my best guess is that the Firm thought she was in cahoots with Tyes (which might explain why she the filed criminal charges; perhaps in an effort to clear her name). I'd love to find out if the Firm re-hired A.

 

Jacob H. Loeffler
(SFC/HPD 04-13/January 2004)

Jacob H. Loeffler (“Loeffler”) entered the securities industry in March 1999 when he became employed by CMJ Partners, LLC ("CMJ") as a trading assistant on the Floor of the Exchange. He continued his employment with CMJ and its successor, Wagner Stott Mercator, LLC ("Wagner Stott") until July 17, 2000. Thereafter, Loeffler was employed by Ingalls & Snyder, LLC ("Ingalls & Snyder") from September 29, 2000 to February 9, 2001. In or around February 2001, the Exchange received a Form RE-3, dated February 16, 2001, from Ingalls & Snyder, reporting that it terminated Loeffler's employment on February 9, 2001 in response to Loeffler’s posting securities recommendations on the Internet without approval.

Posting Communications Concerning Securities on the Internet Without Firm Approval

While employed by Ingalls and Snyder (in an unregistered capacity), Loeffler researched a development-stage pharmaceutical company (the “Company”), which traded on the Nasdaq National Market. Beginning in November 2000 and continuing through August 2002, Loeffler bought and sold shares of the Company on several occasions. On February 7, 2001, officers of the Company conducted a  road shows at Ingalls & Snyder that Loeffler attended. From February 6 to February 9, 2001, during the time frame in which Loeffler purchased the Company shares and attended the Company’s presentation at Ingalls & Snyder, he participated on an Internet message board devoted to the Company’s stock. Under the screen name "madriverglen_2000," Loeffler posted at least ten messages, stating, inter alia, that he attended a meeting with the management of the Company that was part of a series of presentations to investment banks in New York City. Loeffler’s messages discussed the Company’s stock and the progress the Company allegedly made in its development of certain drugs.

Loeffler's postings violated Ingalls & Snyder’s policy against posting securities recommendations on the Internet, as set forth in its compliance manual, which Loeffler received. On or around February 9, 2001, through routine supervisory reviews, Ingalls & Snyder detected Loeffler's Internet postings and terminated his employment. By posting unapproved electronic communications to the public and posting unapproved communications containing speculative statements on securities in which he held an interest, Loeffler violated Exchange Rule 472(a).

Loeffler’s Failure to Disclose his Criminal History

On March 2, 1993, Loeffler was arrested and charged in the State of Colorado with two felonies (subsequently dismissed) and one misdemeanor for marijuana possession (to which he plead guilty). On March 23, 1993, Loeffler was sentenced to probation and fined $400.

On or about March 21, 1993, Loeffler was arrested for larceny, under $50, in connection with his misappropriation of funds, a violation of the Municipal Code of the Town of Vail, section 9.22.020 (larceny was not categorized thereunder as a felony or misdemeanor). Loeffler pleaded guilty and served two days in the Eagle County jail from April 8 to April 10, 1993.

Loeffler became employed by CMJ as a trading assistant on the Floor and accordingly completed a Form U-4, dated March 8, 1999 ("the March 1999 Form U-4"), on which he failed to disclose his criminal history. Subsequently, Loeffler submitted an amended Form U-4 dated June 14, 1999 (the "June 1999 Form U-4") on which he disclosed that he was criminally charged in 1993 with cultivation of marijuana, but failed to disclose that he was charged with two felonies; he indicated only that the disposition of the charge was the following: "Possession of marijuana, 1 year probation, $300-400 fine, misdemeanor." In October 1999, as part of CMJ's merger into Wagner Stott, Loeffler completed a Wagner Stott employment application, dated October 8, 1999, which asked, "Have you been convicted of any law violation (except a minor traffic violation)? If yes, please explain." Loeffler checked "yes" and wrote, "misdemeanor 18 years old." He failed, however, to disclose the larceny conviction. Loeffler failed to disclose his larceny conviction to Wagner Stott until April 2000. In July 2000, Wagner Stott terminated his employment.

Loeffler engaged in conduct inconsistent with just and equitable principles of trade and violated Exchange Rules 345.12 and 476(a)(10) by making misstatements and omissions about his prior criminal history on an employment application and several Forms U-4 (Uniform Application for Securities Registration and Transfer).

Jacob H. Loeffler  

Censure and two year bar.

 

 

Daniel Izhaky
(SFC/HPD 04-19/February 2004)

Daniel Izhaky ("Izhaky") entered the securities industry in June 1991 as an analyst and remained with his first securities industry employer until June 1999. During his time at his first securities industry employer Izhaky became a Vice President and sales trader on the trading desk where he traded equities. In June 1999, he became employed with Morgan Stanley & Co. Inc. (the "Firm"). where he worked on the program trading desk. The Firm filed a Uniform Termination Notice for Securities Industry Registration (Form U-5) with the Exchange, reporting that Izhaky's employment had been terminated on October 14, 2003.

UNINTENDED TRADE IMBALANCE

On December 21, 2000, the Firm reported to the Exchange that Izhaky was responsible for a large trade imbalance in a basket of pharmaceutical stocks which caused a significant order imbalance. Thereafter, the Firm and Izhaky were notified that the Exchange was investigating the circumstances under which the imbalance occurred. Subsequently, the Exchange's Division of Market Surveillance ("MKS") referred findings of the investigation to the Division of Enforcement.

On December 21, 2000, Izhaky attempted to enter three orders for shares from a pharmaceutical index with a total market value of $1 million each by utilizing the Firm's Execution Manager system. These stocks were to be purchased by utilizing a computer model named PPH1MM. Izhaky utilized the Firm's Execution Manager system, entering three orders for one million shares each of the PPH1MM pharmaceutical index believing he had entered three orders for $1 million each of that PPH1MM index. These orders were entered within 45 seconds of each other, between 3:35 and 3:40 p.m. and in fact had a market value totaling $300 million.  During the course of entering the three erroneous trades on December 21, 2000, Izhaky disregarded the red warning screen indicator that on each of the three occasions warned him that each trade was exceeding $100 million. When the red warning flashed on the screen, Izhaky ignored this warning signal and overrode the red warning indicator on the screen at least three more times in order to confirm the order and complete the transaction.

At approximately 3:50, Izhaky noticed a published market-on-close ("MOC") imbalance and believed the three orders he had executed had created this imbalance. Subsequently, he enlisted the assistance of two other traders and a supervisor for the index options trading desk in an attempt to rectify the situation and liquidate these positions by selling the securities before the market closed. After the market closed, the net position for these trades was a short position valued at approximately $70 million. This net short position resulted from Izhaky's attempts to sell $300 million of the shares purchased on the belief that he had purchased shares at that value. However, in fact, he had only purchased shares valued at $200 million, because a third order for shares valued at $100 million had been rejected because it was entered after the MOC order cut-off time of 3:40 p.m.

This error created significant order imbalances in eight of the PPH component stocks and prompted inquiries concerning the imbalance from the public, the trading Floor, the media and an international NYSE listed company.This matter resulted in other violations and losses to the Firm of approximately $700,000. Izhaky violated Exchange Rule 401 in that he caused order imbalances in eight Exchange listed securities as a result of the improper use of a Firm trading system.

SHORT-SALE TICK VIOLATIONS

Securities and Exchange Commission ("SEC") Rule 10a-1, promulgated under the Securities Exchange Act of 1934 ("Short Sale Rule"), prohibits short sales, on a national securities exchange, of any security below the price at which the last sale thereof, regular way, was reported or at such price unless such price is above the next preceding different price at which a sale of such security was reported, regular way. Specifically, the short sale rule prohibits an investor from selling a security short unless the sale was to occur on a "plus tick" (at a price above the price at which the immediately preceding sale was effected) or a "zero plus tick" (at the last sale price if it was higher than the last different price). A "short sale" is defined in SEC Rule 3b- 3, in pertinent part as "any sale of a security which the seller does not own". During the course of the liquidation transactions of the stocks that were over purchased stemming from Izhaky's trading, the Firm violated short sale rules related to one AMEX stock. Specifically, the Firm was short 4,800 shares of the stock at the open on December 21, 2000. The Firm was short 7,300 shares of the stock at the end of the day. Based on a review of the AMEX audit trail, certain of the trades in the stock were executed on minus ticks when they should have been entered on sell plus ticks. Specifically, order tickets revealed that Izhaky placed two sell orders for 15,000 shares of the stock at the market that should have been entered as "sell short" orders. As a result of not entering the orders as "sell short" orders, these orders were executed on minus ticks when they should have been executed on sell plus ticks. Izhaky violated Section 10(a)-1 of the Securities Exchange Act in that on numerous occasions he executed a sell order, on a national securities exchange, on a minus tick in a non-Exchange listed security in which he held a short position.

ON-CLOSE VIOLATIONS

Further, Izhaky, in his attempt to rectify the errors that he caused through his trading, violated market-on-close and limit-on-close order handling procedures. Pursuant to Exchange Information Memorandum 99-51, dated November 22, 1999, cancellation or reduction in size of market-on-close/limit-on-close (MOC/LOC) orders after 3:50 p.m. is not permitted for any reason including legitimate errors or orders entered to comply with the provisions of Exchange Rule 80A. 20. On December 21, 2000, Izhaky tried to cancel his market-on-close purchase order at 3:57:19 but the cancellation order was rejected by the system pursuant to market-on-close rules. 5 21. At 3:59:34 however, at the direction of Izhaky, a co-worker cancelled and replaced the 17 market-on-close sell short orders with market sell orders which were executed at the closing price. Izhaky caused a violation of Exchange market-on-close and limit-on-close order handling policies and procedures.

Daniel Izhaky

Censure and Fined $45,000.

 

 


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