In 2003 NASD's Department of Market Regulation ("Market Regulation") filed a complaint against Sponsoring Firm 1 that alleged the following:
from September 1999, through June 2000 Sponsoring Firm 1 failed to submit required information to the Order Audit Trail System ("OATS") on 191 consecutive business days; and
from October 2000 through December 2000, Firm 1 failed to submit required information to OATS on 35 consecutive business days, in violation of NASD Marketplace Rule 6955(a) and Conduct Rule 2110;
failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the applicable securities laws and regulations concerning OATS data submission in violation of NASD Conduct Rules 2110 and 3010; and
failed to accept or decline in the Automated Confirmation Transaction Service ("ACT") 1,399 transactions in eligible securities within 20 minutes after execution from October 2001 through December 2001 in violation of NASD Marketplace Rule 6130(b) and Conduct Rule 2110.
The Hearing Panel for this matter held a hearing that concluded in 2003, but the Hearing Panel has not yet issued a final decision.
In 2003, an NASD Hearing Panel found that
- Sponsoring Firm 1 violated Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and NASD Rules 2510, 2120, and 2110 by churning the account of a customer, as well as, violated Rules 3010 and 2110 by failing to reasonably supervise trading in this customer's account;
- X failed to supervise the trading in the customer's account, in violation of NASD rules.
This matter is currently on appeal to the NAC.
In 2003, NASD issued Sponsoring Firm 1 a Letter of Caution ("LOC") for failure to provide NASD with a hard copy response to the information requested in a breakpoint survey letter.
In 1997, NASD issued Sponsoring Firm 1 an LOC for violations of NASD Conduct Rule 3380. NASD staff had reviewed preferenced SelectNet orders submitted by Sponsoring Firm 1 to a market maker or an ECN and subsequent cancellation of the orders prior to the minimum ten second time period. Sponsoring Firm 1 was not required to submit a letter in response to the LOC because the Nasdaq system was modified to inhibit the cancellation of SelectNet orders within ten seconds of entry.
In 1996, Sponsoring Firm 1 and X were censured, fined $25,000, jointly and severally, and required to make restitution to customers in the amount of $13,686.05, plus interest and costs of $1,750, jointly and severally. NASD found that Sponsoring Firm 1 manipulated the market in the common stock of an over-the-counter "Pink Sheets" company, in violation of NASD rules and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. NASD further found that Sponsoring Firm 1 charged excessive and fraudulent markups in violation of NASD rules, and Exchange Act Section 10(b) and Exchange Act Rule 10b-5. NASD also found that X and Sponsoring Firm 1 failed to establish, implement and enforce reasonable supervisory procedures designed to prevent the manipulation and markup violations, in violation of NASD rules. X was suspended in all capacities for 30 days and required to requalify by examination as a general securities principal within 90 days of the decision or be suspended in all principal capacities until requalified. The matter was appealed to the SEC. In 1998, the SEC affirmed NASD's decision.
In 1995, NASD issued Sponsoring Firm 1 an LOC as a result of the firm entering approximately 137 orders in SelectNet to sell Company D shares at a price above the inside bid, the majority of which were equal to or above the inside ask price. This practice was alleged to have been a possible abuse of the SelectNet System, causing legitimate orders to scroll off the SelectNet screen sooner than normal.
In 1994, Sponsoring Firm 1 submitted a Letter of Acceptance Waiver and Consent ("AWC") to NASD. NASD alleged that Sponsoring Firm 1, acting through its principals and representatives, failed to comply with Exchange Act Rule 15c2-6 in that Sponsoring Firm 1 sold shares of Company E to non-established and non-accredited public customers in contravention of the rule's compliance requirements. In addition, the sales literature that was distributed to public customers was misleading and Sponsoring Firm 1, acting through its principals, failed to supervise a registered representative so as to ensure compliance with Exchange Act Rule 15c2-6.
In 1990, an NASD District Business Conduct Committee issued a decision and Order of Acceptance of Respondentsí Offer of Settlement. NASD had alleged that Sponsoring Firm 1, acting through X, failed to comply with Schedule C of NASD's By-Laws in that Sponsoring Firm 1, in violation of its restriction agreement with NASD, failed to obtain NASD's written approval prior to changing its method or system of clearance. Sponsoring Firm 1 had self-cleared at least 10 securities transactions for customers, and did not clear these transactions through its clearing agent as required. In addition, NASD alleged that for the periods ending October 1988 and November 1988, Sponsoring Firm 1, acting through X, failed to comply with Exchange Act Rule 15c3-3 in that Sponsoring Firm 1 failed to establish a Special Reserve Account for the Exclusive Benefit of Customers ("Special Reserve Account") as required, failed to calculate the amount required to be deposited in the Special Reserve Account and failed to make the required deposit to the Special Reserve Account. Sponsoring Firm 1 and X were censured and fined $2,000, jointly and severally.
In 1990, NASD's National Business Conduct Committee ("NBCC") accepted an AWC from Sponsoring Firm 1. The AWC alleged violations of Part IV, Section 4(a) of Schedule D of NASD's By-Laws, because the firm failed to report its Nasdaq volume. Sponsoring Firm 1 was fined $250.
The State 2 Commissioner of Securities issued an Order against Sponsoring Firm 1 and X in 1991. The Commissioner found that Sponsoring Firm 1 and X were selling unregistered securities to residents in State 2. Sponsoring Firm 1 was ordered (1) to cease and desist all violations of the State 2 Securities Act of 1973, (2) to file with the Commissioner within 30 days of its receipt of the Final Order acceptable supervision guidelines setting forth a written plan of supervision of its employees, agents, and salespersons, and (3) to pay a civil penalty in the amount of $25,000. X, in the Final Order, was ordered to cease and desist all violations of the State 2 Securities Act, and to pay a civil penalty in the amount of $10,000. In 1991, the State 3 Securities Division issued a Cease and Desist Order against Sponsoring Firm 1 for offering unregistered securities to State 3 residents. The Cease and Desist Order was vacated in 1992.
In 2003, Sponsoring Firm 2 submitted an AWC to NASD and consented to a monetary fine of $2,000. NASD had alleged that Sponsoring Firm 2 reported transactions in OTC Equity Securities to ACT and failed to append the "S" modifier identifying the transaction as a short sale.