SEC SENDS SALES PRACTICES MESSAGE TO INDUSTRY
OLDE PART 4

The SEC found that Olde's policies, practices and procedures created an environment in which a variety of violative sales practices occurred, exacerbated by the pressure to meet production goals. Without any qualification, the SEC found "The pressure to sell at Olde was overt."

A significant number of Olde RRs concentrated their selling efforts on those special venture stocks that carried a high sales credit, a practice known as credit shopping. RRs who engaged in this practice aggressively solicited their customers to purchase stocks with large sales credits without consideration as to the suitability of such securities for the customers being solicited.

To maximize their compensation, meet production quotas and avoid losing customer accounts through the application of Olde's six-month rule, certain Olde RRs in various branch offices churned customer accounts and engaged in unsuitable and unauthorized trading in customer accounts and utilized high pressure sales techniques accompanied by misrepresentations and omissions of material facts to induce customer transactions in special venture stocks.  

The SEC provided detailed case histories of 17 accounts serviced by Olde. Below are three of those sampled accounts.

A couple in their forties with five children, the oldest of whom suffered from Downs Syndrome, opened an account at Olde. The wife received a settlement in connection with an automobile accident, which disabled her. The couple told the Olde RR who opened their account that they did not have any investment experience and they wanted to invest the net proceeds of the settlement in a mutual fund and a money market account. The RR was aware that the couple wanted to preserve their capital and assured them that their funds would not be put at risk.

• During the account's first month, the RR executed 50 trades utilizing margin and their initial equity declined from $38,000 to $13,880.
• Upon receiving their account statement, the couple questioned the RR about the equity summary appearing on the statement. He falsely told them not to worry about it, that it was an error that would be corrected on the following month's statement.
• Many of the confirmations the couple received were incorrectly marked unsolicited and the couple was unaware that they were trading on margin until they received their first margin call.
• During the first four months of account activity, while controlling the account, their RR executed more than 200 trades in special venture stocks generating an annualized turnover rate of 103.15.

A 51-year-old woman opened an account with $200,000 from her divorce settlement. Her only investing experience consisted of one year's investing in mutual funds, and she had no experience buying stock on margin. She told her RR that this was her only money, that she needed safe income investments, that she did not understand the stock market, and that she did not want to invest in common stocks. She also told the RR that her primary objective was to invest in low-risk investments to generate enough income to make monthly mortgage payments on a house she planned to purchase later that year. The RR told her he understood her investment objectives and he drew up a conservative investment plan for her.

• Before leaving on an overseas trip, the customer instructed the RR not to trade in her account while she was gone and to mail her monthly statements to a friend. Despite this woman's instructions, the RR ignored the investment plan and instead used her money to trade in special venture stocks, which were unsuitable for this customer. When the customer returned to the United States she did not directly return home, but she called the RR to check on her account balance and told him to transfer $88,000 into the money market fund. 
• The RR never told the customer that he had not followed the investment plan and he provided her with inflated account balances.
• Before the customer returned home, the RR picked up the statements from the customer's friend and mailed them to another address, thereby delaying the customer's receipt of the statements.
• RR executed approximately 110 unauthorized trades in the woman's account creating a loss of approximately $70,000. The RR's trading during that period generated an annualized turnover rate of 13.88.

An 83-year-old woman opened an account at a time when her husband was suffering from the late stages of Alzheimer's disease and he required almost around-the-clock attention. This elderly woman told the branch office manager about her husband's medical condition and that she and her husband maintained a portfolio of nonvolatile investments, including money market funds, other mutual funds, and blue chip equities. The customer also told the branch office manager that she required safe, high-dividend investments that would yield a steady income. In addition, the woman told the branch office manager that she did not want a margin account.

• The branch office manager opened a margin account for this woman and immediately began pressuring her to deposit her blue chip stock certificates. Although she and her husband had always held their stock certificates themselves, she ultimately deposited them into her Olde account. Subsequent to the depositing of the certificates, the customer's husband died.
• The account was transferred to another RR took over the handling of this woman's account, befriended her and won her trust to the extent that she even gave him gifts. Among other things, the customer gave the RR $5,000 because he falsely told her he was an orphan and needed money to find his real mother. 
• The branch office manager and the RR repeatedly purchased and sold special venture stocks in the customer's account without her prior knowledge, consent or authorization. These stocks were unsuitable for this customer. During a one-month period, the branch office manager and the RR executed 243 trades in the customer's account, generating an annualized turnover rate of 5.09 and a loss of approximately $147,000.
• Many of the 243 trades were unauthorized and not until months later did the customer discover that she was on margin. Once she learned that she was on margin, she repeatedly told the RR to end her margin trading, but her instructions were ignored. In addition to paying over $29,000 in commissions, she incurred over $13,600 in margin interest. At one point, her margin debit balance reached $440,000.

The Olde case will likely serve as a template for pervasive sales practice abuses during the next several years. Some would argue that this case is about inappropriate government interference: the SEC simply doesn't like so-called house stocks and is trying to outlaw the practice. Others would argue that there's nothing wrong with selling special venture type stocks, but you can't engage in misrepresentation and unauthorized trading as a means to the end. Regardless of where you line up, the simple fact is that Olde dug its own grave by utilizing hiring practices, training practices, sales quotas, and sales incentives that all pointed the SEC in one, and only one, direction. In the final analysis, there was very little about Olde that wasn't about selling special venture stock. And the firm left itself virtually defenseless. Too many things went wrong. Too little evidence of adequate compliance and supervision.