MARSHALL LEWIS BRASS
(SFC/HPD 04-166/October 2004)

During the period 1998 through 2002, Marshall Lewis Brass, a former registered representative with Merrill Lynch, Pierce, Fenner & Smith Inc. (the “Firm”), exercised discretionary authority in the accounts of eleven customers without written authorization, recommended unsuitable transactions in one customer’s account from 1999 through 2002 and shared in the losses of a customer’s account.

In August 1998, Customer W transferred the assets of a joint account ($26,116.28) into an account in her name only. After opening her account, Customer W gave Brass verbal authority to exercise discretion in her account.  Brass did not obtain the necessary written authorization to use discretionary power in Customer W’s account. From 1998 to 2002, Brass used this orally-granted discretionary power to enter all of the trades in Customer W’s account. Throughout 1998, 1999 and 2000, Customer W made additional deposits into her account, adding $11,000 more in principal for a total of approximately $36,000. After peaking at over $80,000 in February 2000, Customer W’s account began to decline sharply and by August 2002, Customer W closed the account when it had a debit balance of $73.00. 

During the period 1998 through 2002, Brass received verbal authority to exercise at least some discretion in the accounts of Customer S, and Customers SG, WM, ET, DP, BO, DC, PP, DM and GP. Brass did not obtain the necessary written authorization to use discretionary power in these accounts.  In each of these accounts Brass exercised such discretion on some occasions. In Customer GP’s account, Brass exercised discretion for all of the transactions in the account. 

In July 2002, Brass informed Customer W that he would be sending her a check from his personal funds to compensate her for the substantial losses she sustained. On July 6, 2002, Customer W received a personal check for $3,000 from Brass and a note explaining that the money “will hopefully provide you with a little base to work from.” The note also stated that Brass wanted to make Customer W “whole and beyond.” Brass instructed Customer W to deposit the check into her personal checking account with the Firm. Customer W did not cash the check and returned the check to Brass’ personal post office box. On July 24, 2002, Customer W received a second personal check from Brass in the amount of $1,073. Brass requested in the letter that Customer W send back $73 in order to clear the debit that remained in the account. Customer W never deposited the second check and promptly notified the Firm’s Compliance Department.

Customer W’s account profile disclosed an investment objective of “growth” and a risk tolerance of “moderate.” Customer W intended to use the account for retirement. Customer W had no previous experience with margin and limited experience in trading stock. Customer W’s account was set up as a margin account. When Customer W opened her individual account in August 1998, Customer W had 53% of her money in mutual funds and 47% in equities. The value of the account was $21,453. 

Beginning in mid-1999, Brass recommended purchases of stock that were inconsistent with Customer W’s objectives and risk tolerance. Most of these recommendations were in speculative technology stocks, which were either not listed, not rated or rated below average in the Standards and Poor’s Stock Guides (“S&P”). Brass also engaged in short-term trading of several stocks, including a not listed and a not rated stock. 

By late December 1999, the account had grown to a gross value of $131,550 and a net value of $76,518. The percentage of equity had grown to 72%, while the percentage in mutual funds had dropped to 28%.  During 2000, the technology markets collapsed. Customer W, with extensive positions in this sector, suffered heavy losses. By November 2000, Customer W’s account had a gross value of $73,264 and a margin balance of $44,751. The stocks that Brass had purchased for Customer W had lost over half of their value. Between January 1, 2000 and November 3, 2000, Customer W’s account sustained a loss of $34,552 and generated over $5,000 in commissions. In July 2001, Customer W’s account had a gross value of $51,143 which included a margin balance of over $34,000. Brass continued to hold on to technology stocks that were dropping in value rapidly. By the end of February 2002, the account had declined to a net value of $2,761.02. In June 2002, Customer W began receiving  maintenance calls for her account and Brass had to sell her remaining stocks in order to meet these calls. Customer W closed the account in August 2002, owing $73.26. 

On July 24, 2002 the Exchange received a Form RE-3 from the Firm reporting a complaint by Customer S against Brass alleging unauthorized trading. Subsequently, the Exchange was notified of another customer complaint by Customer W alleging trading in her account without prior authorization and indicating sharing in the losses. The Firm settled with Customer S for $56,000 and Customer W for $45,000. Brass is not currently employed in the securities industry.

The NYSE found that Brass:
I. Violated Exchange Rule 408(a) in that, on one or more occasions, he exercised discretionary authority in the accounts of customers of his member organization employer without prior written authorization from the customer;

II. Violated Exchange Rule 352(c) in that he shared in the losses in the account of a customer of his member organization employer; and

III. Engaged in conduct inconsistent with just and equitable principles of trade in that, on one or more occasions, he made recommendations and effected trades that were unsuitable in light of the customer’s investment objectives, risk tolerance and circumstances.

Censured; Barred 7 months in all capacities.

Bill Singer's Comment:

Frankly, I'm puzzled.  To be honest, I must have re-read the sanction a few times after I finished digesting the fact pattern.  What?  Only a 7 month bar?  As I often say, either a case of great lawyering by the respondent's counsel or the NYSE loaded up this fact pattern to make the case seem far worse than it apparently was.  

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

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. 

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.