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SEC ISSUES THREE MAJOR DECISIONS ON
AIDING AND ABETTING BY REGISTERED PERSONS:
PART TWO: CHEMA'S INVOLVEMENT
On November 30, 1998, the Securities and Exchange Commission
("SEC") issued three separate Opinions addressing the appeals of three cases
involving four registered persons and their liability for aiding and abetting a customer's
manipulative scheme. Readers should review Part One: The Broumas Scheme for
information about the customer's conduct.
This installment describes one registered representative's involvement with the
scheme, and the next installment will analyze his defenses and the SEC's findings.
Upcoming installments will similarly review the conduct of the other salespersons.
Initial SEC Proceeding
Richard D. Chema ("Chema") was a registered representative
employed by H. Beck, Inc. ("Beck"), a registered broker-dealer. A Securities and
Exchange Commission ("SEC") administrative law judge ("ALJ") found
that Chema aided, abetted, and caused violations of anti-manipulative and antifraud
provisions of the Securities Exchange Act of 1934 committed by John G. Broumas
("Broumas"), one of Chema's customers. Chema appealed the decision, which
concluded that he should be suspended for eight months from association with any
broker or dealer, and ordered to cease and desist from committing or causing any further
violations of the provisions he was found to have violated. Additionally, the SEC's
Division of Enforcement ("DOE") appealed both the length of Chema's exclusion
from the brokerage business, and the ALJ's failure to impose a collateral bar excluding
Chema from other aspects of the securities industry.
The Broumas Accounts
Chema handled seven separate accounts for Broumas at Beck, four of which
were opened by Broumas' nominees. Broumas called in all of the orders for six of the
accounts and most of the orders for the seventh. All of the transactions in two of the
accounts and most of the transactions in the others were in JML stock.
The three
accounts opened by Broumas were
(1) a joint account with his wife,
(2) the "Les Girls" account, ostensibly belonging to Broumas' wife and daughter,
and
(3) the "BC Theaters" account, which Broumas, as a partner, opened on behalf of
a partnership that ran movie theaters.Three of the nominees, Michael J.
Connolly, Kevin K. Lemmon, and Matthew R. Johnson (Broumas' grandson), were employees of
Madison National Bank of Virginia ("MNBV") [Broumas was Chairman of the Board of
MNBV] The fourth nominee, L. Lawton Rogers, was a Broumas business associate and attorney. |
Chema believed that the nominees opened their accounts to
provide Broumas with additional credit to assist him in his effort to maintain his JML
stock ownership. Chema maintained "posting sheets" for each account that
reflected all of that account's trading.
| WORD TO
THE WISE: Regulators examine activity in nominee accounts. You cannot simply insulate
yourself from trouble by turning a deaf ear and a blind eye to your clients' activity. If
something looks suspicious, regulators will argue that you were "on notice" and
had "a duty to inquire." This is the so-called knew or should have known
legal standard. LESSON #1:
Clients who open multiple accounts must be monitored for questionable trading.
Broker's Lament: How are we supposed
to know that accounts are "nominees" or "related" if they don't share
the same last name?
LESSON #2: Review your firm's New Account Forms. Often, clients are asked to
indicate whether they have a beneficial interest in any other accounts, or if there is a
family relationship. "No" answers may lessen your liability. However, in the
case of Chema, even without any last name similarity, he was on notice of some
relationship among the accounts because Broumas was calling in the orders, and those
orders largely involved the same stock. Further, Broumas was a Director of the issuer and
Chairmanof the Board of the employer of three of the nominees.
Broker's Lament:How am I supposed to
know that nominee accounts are engaged in an illegal trading scheme?
LESSON #3:The regulators will review your holding pages for a pattern of
offsetting buys and sells a) among accounts, or b) involving a given security. You will be
deemed on notice and held accountable. |
The Trading Mechanics
During the period October 2, 1989 through June 21, 1990, Chema effected
73 wash trades for Broumas covering 608,575 shares of JML stock.
| After these
proceedings were instituted on September 30, 1994, a federal Circuit Court held that
certain SEC proceedings are subject to a five-year statute of limitations. Johnson v. SEC,
87 F.3d 484 (D.C. Cir. 1996). Consequently, the SEC considered only those transactions
effected by Chema within five years of the institution of proceedings in determining
whether he committed violations. Notwithstanding the limitations, prior conduct may be
considered as evidence of motive, intent, or knowledge. |
Typically, Broumas would call Chema and tell him that he
wanted to buy or sell a certain quantity of JML stock in a particular account. After Chema
checked the bid and ask prices on a terminal that reported AMEX prices, Broumas would set
a price and tell Chema that he would try to find a seller or buyer. Broumas would then
call back and direct Chema to buy or sell a specific number of shares at a stated price
from or to another broker-dealer. Sometimes, Broumas would provide Chema with all the
necessary information in a single telephone call.
On seven occasions, Chema executed trades between two of Broumas' accounts at
Beck ("cross-trades"). These cross-trades were either between two of the nominee
accounts or between a nominee and one of Broumas' other accounts. According to Chema,
Broumas would tell him that one of the nominees needed money and had to sell JML stock,
and that Broumas would try to find a buyer. Later, Broumas would call back and say that he
could not find a buyer but had persuaded another nominee to take the shares or was buying
them himself.
Reporting Requirement
Broumas' sales of JML had to be reported. Another broker had informed
Chema of the reporting requirement in September 1989. At that time, Chema contacted the
NASD and was instructed on how to report such trades.
| Of the 73
Broumas wash trades that Chema effected during the relevant period, only 34 (covering
303,050 shares of JML) were reported, (14 by Chema and the remainder by contra-brokers).
Chema did not report any of the cross-trades. |
At the Close
During the five-month period November 27, 1989 through April 30, 1990,
Chema executed 15 Broumas JML purchase orders on the AMEX during the last seven minutes of
the trading day. Broumas placed the orders shortly before execution "at the
market":
The 15 trades
involved the purchase of 500 or fewer shares;
13 were the last trade of the day;
10 were executed on an uptick; and
5 on a zero plus tick. |
For Future Reference:
In the Matter of Richard D. Chema, 34-40719, Admin. Proc. 3-8508 (November 30, 1998)
In the Matter of Adrian C. Havill, 34-40726, Admin. Proc. 3-8510 (November 30, 1998)
In the Matter of Sharon M. Graham and Stephen C. Voss, 34-40727, Admin. Proc. 3-8511 (November 30, 1998.
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