PLAYING HARDBALL CAN GET YOU THROWN OUT OF THE GAME

The popular image of the stockbroker/trader is the tough-talking, arm twister -- whether the twistee is a public customer or a contra-side trader. And if you're going to be honest about it, certainly there have been times in your career when you too issued an ultimatum, if not an outright threat. Sometimes your language may be seen as part of the colorful tapestry that makes Wall Street the zany place it is, but, sometimes, you may have crossed the line.

Stephen B. Carlson ("Carlson") entered the securities industry in 1981 and founded Aspen Capital Group, Inc. ("Aspen") in 1985. Carlson was the sole owner, general securities principal, and president of Aspen [Aspen has since been expelled from the NASD for failure to pay fines and/or costs]. Aspen's primary business was short selling stocks. The NASD found that Carlson attempted to obtain stock at below-market prices by using threats, coercion, and intimidation in violation of Article III, Section 1 of the NASD's Rules of Fair Practice (the "Rules")(now Conduct Rule 2110), which requires adherence to "high standards of commercial honor and just and equitable principles of trade." The NASD censured Carlson; fined him and Aspen $10,000, jointly and severally; assessed costs of $1,852.30 against Carlson and Aspen, jointly and severally; and barred Carlson from association in all capacities with any member. In his appeal to the SEC, Carlson did not dispute the NASD's findings of violation but sought a modification of the sanctions.

On June 9, 1994, Lawrence Erber ("Erber") initiated and taped a telephone call to Carlson. As of that date, Aspen had accumulated a short position of 62,300 shares in the stock of Teletek, Incorporated ("Teletek"). In February 1991 Erber had pled guilty to federal charges of conspiracy to manipulate stock prices and wire fraud. At the time of Erber's telephone call, Carlson believed Erber was a:

• former member of the securities industry,
• convicted felon,
• promoter/manipulator of the price of Teletek stock, and
• promoter/manipulator of the price of American Gladiator ("GLAD") stock.

Carlson threatened to take steps to have Teletek delisted from the Nasdaq stock market unless he received discounted shares of the company. Carlson bolstered this threat by suggesting that he had previously been instrumental in the delisting of GLAD. Carlson stated:

Carlson also threatened Erber with the exposure of his role as an undisclosed owner of Paramount Securities, a broker-dealer. Such ownership by Erber could have violated a federal court order restricting Erber's participation in the securities industry. Carlson ended the conversation by stating that he would "go after" Teletek unless Erber complied with Carlson's demand for cheap stock. Both Erber and Carlson used profanity during the course of the conversation. Carlson stated that he used this "rough" language because Erber was a convicted felon who made his living "stealing money from old ladies and IRAs and pension plans. And I was trying to talk to him on his level." No further conversations occurred between Erber and Carlson.

Aspen subsequently covered its short positions in Teletek stock in the open market and made a profit on its transactions. Despite his statements to Erber, Carlson did not take any actions against Teletek.

Following his hearing before an NASD District Business Conduct Committee ("DBCC"), where Carlson was found guilty of violating Article III, Section 1 of the Rules during the Erber telephone conversation, Carlson appealed to the NASD National Business Conduct Committee ("NBCC"). During the pendency of the NBCC appeal, NASD staff made a motion to adduce additional evidence and to remand the matter back to the DBCC for further proceedings. The motion was granted.

On remand, NASD staff introduced another audiotape into evidence in an effort to show that Carlson's use of threats and intimidation had not been confined to the June 9, 1994 Erber telephone conversation. The audiotape introduced by NASD staff at the remanded DBCC hearing contained a discussion between Carlson and Brett Bouchy ("Bouchy")(a broker at another firm) about the stock of Wholesome and Hearty. Bouchy, who initiated the call, asked Carlson to explain the basis of his opinion (which had been published in some articles) that Wholesome and Hearty stock, then trading at a high of $9 3/8, was actually worth only $3 to $4 per share. Bouchy then told Carlson that he wanted to "work something out." Carlson replied that he would "leave you guys alone" if he obtained a block of 100,000 shares of stock at $6 per share.

The DBCC was unpersuaded by NASD staff's presentation that Carlson had threatened to cause the delisting of Teletek by manipulating the company's stock price downward to below $3 a share. The DBCC concluded that Carlson had instead been threatening to bring Teletek to the attention of the NASD, as he had done with GLAD, by alleging that the company was engaged in stock fraud. The DBCC further noted that, had Carlson threatened price manipulation, it would have imposed more severe sanctions. After considering the additional evidence, the DBCC nonetheless adhered to its earlier determination of sanctions and imposed on Carlson a censure, a $10,000 fine (jointly and severally with Aspen), a 30-day suspension, and costs (jointly and severally with Aspen). The DBCC stated that it had considered barring Carlson for his misconduct, but found that several mitigating factors weighed against a bar:

• Carlson did not carry out his threat to get Teletek delisted;
• Carlson did not have a disciplinary history of similar incidents; and
• Carlson had never received cheap stock from a promoter.

The DBCC further credited Carlson's statement that he did not ordinarily conduct his business in this manner, and concluded that the use of coercion and intimidating tactics during the June 9, 1994 conversation was an isolated incident. The DBCC also stated that in concluding the misconduct was an isolated incident, it had considered the tape of Carlson's conversation with Bouchy.

The NBCC affirmed the DBCC's findings but increased Carlson's suspension from 30 days to a permanent bar. Keep in mind that the DBCC rendered the 30-day suspension not once, but twice. Although the NBCC did not dispute the DBCC's findings of mitigating factors, the NBCC determined that the seriousness of Carlson's conduct merited a bar. The NBCC concluded,

Noting its basis for review of Carlson's appeal was limited to determining whether the NASD's sanction was excessive, oppressive, or imposed an unnecessary or inappropriate burden on competition, the SEC declined to reverse and affirmed. Nonetheless, the SEC noted that Carlson committed a serious breach of his ethical duties as a securities professional and that his threats, even if for a meritorious purpose, were not in keeping with "high standards of commercial honor and just and equitable principles of trade."