Harris Nesbitt Corp., f/k/a BMO Nesbitt Burns Corp.
(AWC/CAF040074/December 2004)

Censured; Fined $125,000

American Express Financial Advisors, Inc.
(AWC/CAF040072/November 2004)

• to file with NASD’s Advertising Regulation Department within 10 days of publication or first use, advertising and sales literature it used with the investing public. 
• to obtain the written approval by a principal of pieces of advertising and sales literature prior to use with the investing public. 
• to establish, maintain, and enforce a supervisory system and procedures reasonable designed to achieve compliance with federal securities laws and NASD rules; and 
• to monitor consistently and to enforce policies and procedures relating to advertising and sales literature. 

Censured; Fined $400,000

Sumner Harrington, Ltd. , Kim Edward Elverud , and William Eugene Casey 
(AWC/CAF040069/November 2004)

• its advertising revenue (in the offering materials distributed to the investing public);
• that the firm was to receive commissions for its underwriting efforts and its advertising material, and that credit agencies had downgraded an issuer’s credit rating or that the company’s notes carried more risk. (in the firm’s investment kits and advertisements); and 
• consideration (i.e., failed to adequately disclose consideration) received from securities issuers (in notices, circulars, and advertisements distributed to the investing public). 

Moreover, the Firm’s written supervisory procedures failed to address adequately suitability determinations for compliance with NASD Rule 2310. Furthermore, through Elverud, the Firm failed to establish and maintain adequate procedures for the supervision of suitability determinations and to supervise adequately and monitor Casey’s suitability determinations. Casey, in turn, failed to supervise adequately and monitor suitability determinations made by another employee under his charge. 

• submit all advertisements/sales literature relating to the specific products or services prepared by or for the firm or its affiliates to NASD’s Advertising Regulation Department for approval prior to distribution to the public for a period of 9 months;
• notify each current holder of renewable unsecured subordinated notes of a securities issuer of the outcome of this AWC by first class mail and shall, at a minimum, include a copy of this AWC or press release; and
• retain an outside consultant to review and make recommendations concerning the adequacy of the firm’s current suitability policies and procedures.

Fined $60,000, jointly and severally with firm; Suspended 20 days in all capacities; Suspended 9 months. from acting in any supervisory capacity or as a trainer of personnel with any NASD member (after completing 20 day all-capacity suspension); Required to requalify as a Series 24 principal before the completion of the 9-month supervisory suspension (or he will be prohibited from serving in a principal capacity until he requalifies).

Fined $5,000, Suspended from association for 20 days in all capacities; Required to requalify as a Series 24 principal within 3 months after the acceptance of this AWC or cease serving in that capacity.  

Sterling Financial Investment Group, Inc. 
(AWC/CAF040064/October 2004)

Sterling published and distributed a research report on a biopharmaceutical company with a sell/sell short recommendation on the company's common stock that contained substantive errors and other statements that made the report exaggerated, unwarranted, or misleading. The firm failed to make disclosures required by NASD Rule 2711(h) in a clear and prominent manner. Despite the fact the firm had potential errors in the report brought to its attention, it published a "morning note" that repeated errors in the report and failed to disclose in the note that it made a market in the securities at the time the report was published.

Additionally, the firm had no effective system in place to save e- mails or other electronic messages and failed to retain e-mails for three years or for the first two years in an accessible place. Furthermore, although the firm's research department director had been suspended in a principal or supervisory capacity, he performed acts that were principal or supervisory in nature during his suspension. Moreover, NASD found that the firm had no system or procedures in place to ensure compliance with regulatory suspensions generally or with the director's suspension specifically. 

Bill Singer's Comment:

Seems like the sanctions was quite modest in consideration of the allegations.  Not only does NASD seem to allege that the firm knew it had errors in its research report --- but the firm repeated those errors in another report.  Then, the NASD notes that the report failed to disclose the market making capacity of the firm.  However, what seems a bit glossed over is that the firm allowed a suspended individual to engage in activity for which he was suspended.  I'm not sure that the sanctions fit the violations as described by the NASD . . . or else, someone did a great job of lawyering.

Gary Patrick Duffy 
(OS/C3A040034/September 2004)

Fined $7,500; Suspended 10 days in all capacities.

Bill Singer's Comment:

We tend to fall easy prey to the belief that if something's posted on the Internet it must be accurate --- but there's a lot of accurate material on the Net that doesn't necessarily fully satisfy the NASD's more demanding advertising/marketing material standards.  This is a good case for compliance staff to circulate among BDs to warn the salesforce of the dangers of sending unapproved material to customers.

Westpark Capital Corporation  and Richard Alyn Rappaport 
(OS/CAF030062/September 2004)

Censured; Fined $50,000 jointly and severally with Rappaport; Suspended from issuing research report for 6 months; and Required to retain an independent consultant, not unacceptable to NASD, to review and make recommendations concerning the adequacy of its current supervisory and operating procedures.

Bill Singer's Comment:

This case has a few differences from the recent spate of research report suspensions.  First, it was settled as an Offer of Settlement and not as an Acceptance, Waiver & Consent.  Additionally, the prior suspensions were for the writing and contributing to the preparation of research reports for 6 months --- this sanction seems far more severe:  The member cannot issue research reports for 6 months.  

Compare the severity of these sanctions with the Vertical and First Geneva cases.

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

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.

Vertical Capital Partners, Inc. , Ronald Mark Heineman and David Bruce Morris 
(AWC/CAF040050/August 2004)

Acting through Heineman, Vertical Capital Parnters, Inc. 

1. failed to adequately supervise the preparation of research reports disclosures regarding the amount of consideration received by the firm, Heineman, and Morris from the issuers; and

2. did not adequately supervise Morris' preparation of a report, in that Heineman knew of the nature of the Securities and Exchange Commission (SEC) action against a company, but failed to ensure that the SEC action and its resolution were adequately described in the text of the report.

Censured; Fined $22,500; Suspended from writing/contributing to the preparation of any research report for 6 months; and following the suspension, the firm is required to submit any research reports prepared by or for the firm to NASD's Advertising Department for approval prior to any report's distribution to the public for a period of 2 years.

Bill Singer's Comment:

Once again we see that NASD is honing in on failures to fully disclose compensation --- be that cash or stock.  Moreover, here we see that efforts to white-wash or downplay regulatory action against an issuer will be dealt with severly.  In a sense, research reports are no longer going to be viewed as if they were just another example of advertising or marketing materials transmitted by a BD.  We are now in the age that research reports will be scrutinized to ensure that the public is not only fully informed of all material facts, but that there is no effort to cover up blemishes.  Frankly, the age of cheerleading for a covered company is over.

Compare the severity of these sanctions with the First Geneva and Westpark cases.

First Geneva Securities, Inc. and Roland Lee Chapin
(AWC/CAF040048/August 2004)

• Acting through Chapin, First Geneva Securities, Inc., 

1. knew, or should have known, of omitted facts in research reports, and, at a minimum, was reckless in failing to include them in research reports; and

2. failed to establish and maintain a system to supervise the activities of the firm with respect to research reports. 

• Chapin knew, or should have known, that a disclaimer in a research report failed to mention that the firm held shares for the co- author of the report. 

• No one at the firm was given the responsibility to supervise Chapin's preparation of the reports or to review the reports to ensure that they complied with NASD rules and federal securities laws. There was no system in place at the firm with regard to research reports generally, and no one at the firm supervised adequately Chapin's preparation of the reports or reviewed Chapin's work for compliance. 

Censured; Fined $100,000 jointly and severally with Chapin; Suspended from writing/contributing to the preparation of any research report for 6 months; and following the suspension, the firm is required to submit any research reports prepared by or for the firm to NASD's Advertising Department for approval prior to any report's distribution to the public for a period of 2 years.

Bill Singer's Comment:

An interesting aspect of this case is that the firm apparently held shares for the report's co-author.  I'm assuming that the NASD deemed that some form of undisclosed or hidden compensation.  The NASD isn't kidding around with these sanctions.  Not only is there a six-figure fine imposed upon the firm and the individual, but both are suspended for 6 months from writing or contributing to the preparation of any research report.  One wonders if such a sanction will ever be imposed on a major firm.  Compare the severity of these sanctions with the Vertical Capital and Westpark cases.

Mark J. Schoenebaum 
(AWC/CAF040038/July 2004)

Schoenebaum attempted to obtain confidential information about the safety and effectiveness of a medication that was not publicly available by sending e-mails that he knew contained untrue statements.

Fined $10,000; Suspended 2 weeks in all capacities

Bill Singer's Comment:

Recall that in 2003, NASD issued a decision in the Matter of JONATHAN MATTHEW ASCHOFF, ( AWC/CAF030003/MARCH 2003), wherein Aschoff wanted to issue a research report about a public company for which his member firm was an issuer. Using an assumed name and misrepresenting himself as a medical doctor, he spoke with members of the medical profession in an effort to obtain confidential information about the effect of a drug under development by the company. After being confronted about his deception, he never used the information in a report. Fined $10,000 Suspended 2 weeks in all capacities

Wunderlich Securities, Inc. , Philip Richard Zanone, Jr.,Patricia Diana Hester, Patrick James Forkin, III  and Joel Christopher Rolla 
 (AWC/CAF040034/July 2004)

The firm, acting through Rolla, traded ahead of the dissemination of a research report to the public and sold shares of the common stock prior to the release of Forkin's sell recommendation. In addition, Forkin failed to

•  disclose the firm's market making status in the reports, and 
•  provide written disclosure to public customers that it was a market maker in securities traded by its customers on transaction confirmations, causing the firm's books and records to be inaccurate.

Furthermore, a branch office of the firm failed to maintain copies of e-mails and keep copies readily accessible for two years. Also, the firm, Zanone, and Hester failed to establish reasonable supervisory systems and procedures tailored to the firm's activities at a branch office. 

In addition, Zanone and Hester failed to fulfill their responsibilities for integrating new activities into the firm's compliance and supervisory policies and procedures or systems so that the firm could comply with securities laws, regulations, and NASD rules regarding research reports, disclosure of the firm's market maker status, and retention of e-mails. Hester was assigned to review e-mails, yet e-mails for a three-month period were lost and some employees used another terminal for e-mails for over a year without Hester's knowledge.

Censured; fined $50,000 ($30,000 joint/several with Zanone and Hester; $10,000 joint/several with Forkin; $10,000 joint/several with Rolla)

Fined $30,000 joint/several with Hester and Wunderlich Securities; Suspended 15 business days in principal capacity; Requalify as principal

Fined $30,000 joint/several with Zanone and Wunderlich Securities; Suspended 15 business days in principal capacity; Requalify as principal

Censured; Fined $10,000 joint/several with Wunderlich Securities

Censured; Fined $10,000 joint/several with Wunderlich Securities

Bill Singer's Comment:

Among the more common questions I'm asked, is where is the NASD heading with its enforcement agenda.  This case represents a fairly good template with which to answer that question: Research and email.  Many firms are experiencing trouble digesting the myriad of new rules and regulations pertaining to research, and then implementing the necessary policies and procedures.  This case suggests some key areas with which you might want to ensure current compliance.  I'd urge you to investigate for all evidence of "leakage."  Are the analysts getting head's ups to others at the firm or select clients?  Is the firm uncanny in its ability to "anticipate" changed recommendation and essentially trading ahead?  A notable issue for NASD is whether your reports are disclosing conflicts such as whether you make markets in the stocks followed --- and are you also disclosing that on your confirms.

Separately, emails continue to be a fertile source of regulatory actions.  Not only must someone be reading these communications, but you have to have them available to produce to the NASD when its staff is on site --- and that means "readily accessible" for at least two years.  You can't tell them they're boxed up at some archive and it's going to take about a month to get the boxes, go through them, and find what they want.

THOMAS E. KAPLAN 
(SFC/HPD 04-84/May 2004)

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. 

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. 

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. 

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. 

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, 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. 

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

Bill Singer's Comment:

Also see the Casey case and Merrill Lynch case.