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 and Part Two: Chema's Involvement, Part Three: Chema's Defenses, and Part Four: Havill's Defenses for details concerning salespersons' roles in the scheme. This final installment analyses the SEC's consideration of an RR's aiding and abetting liability and her supervisor's conduct.

Sharon M. Graham ("Graham"), a registered representative with Voss & Co., Inc. ("VCI"), and Stephen C. Voss ("Voss"), the president and sole shareholder of VCI, appeal from the initial decision of an SEC administrative law judge ("ALJ"). The ALJ found that, from January 1989 to May 1990, Graham willfully aided, abetted, and caused certain violations of Sections 9(a)(1) and 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder by executing 60 wash trades for John G. Broumas ("Broumas"), one of Havill’s VCI customers. The ALJ also found that Voss failed reasonably to supervise Graham with a view to preventing her violations.

The ALJ suspended Graham and Voss from association with any broker or dealer for two and three months, respectively. He also ordered Graham to cease and desist from committing or causing any future violations of Sections 9(a)(1) and 10(b) and Rule 10b-5.

The SEC's Division of Enforcement appealed the sanctions imposed by the ALJ and asked for

• longer suspensions,
• the suspension of Graham and Voss from association with any municipal securities dealer, investment adviser, or investment company; and
• the permanent bar of Voss from all supervisory or proprietary positions.

At the time of the events at issue, VCI was a single-office discount broker, primarily handling unsolicited customer orders. Graham began working in the securities industry in 1982 and started at VCI in 1984. She was a registered representative, as well as VCI’s cashier and back office assistant. She was also VCI’s primary "house" broker, handling "house" accounts on a non-commission basis, as well as her own accounts for commissions. In 1989 and 1990, Graham’s cashiering and back office duties consumed approximately 70 percent of her time. Graham obtained her principal’s license in February 1990 and served as a manager when no other manager was in the office.

James J. Pasztor ("Pasztor") was VCI’s vice president, general manager, and compliance officer through March 1992. The SEC's findings with respect to Pasztor were solely for the purpose of determining the liability of Graham and Voss and were not binding on Pasztor.

The SEC concluded that Graham, Pasztor, and Voss were all aware that Broumas was an officer of MNBV and a director of JML. Broumas had an existing joint margin account at VCI in the names of Broumas and his wife, which was held as a "house account." Broumas began to direct trades in JML Class A common stock through this joint account as early as 1988. At the beginning of 1989, Broumas held 37,500 shares of JML Class A common stock in his joint account. From at least January 23, 1989 through May 24, 1990, Broumas directed VCI to execute 76 trades in JML Class A common stock, totaling 644,800 shares. Graham executed approximately 60 of these directed trades.

Graham was also aware that, during this period, Broumas was trading almost exclusively in JML Class A common stock. She considered his trading "peculiar" and described the transactions as "big money trades," involving thousands of shares of JML Class A common stock. Broumas was buying and selling repeatedly, and she knew that he was not making money on the trades. In addition, Broumas was directing the trades. Broumas was the only customer that Graham had who specified the contra-broker with which he wanted the trade effected. He did not use VCI’s "third market maker," and Graham knew that Broumas placed the bulk of these trades with a "relatively few" firms.

Graham argued that she did not pay attention to the pattern of trading, because Broumas was a house account, and she did not have any responsibility to monitor such activity. The SEC disagreed with that explanation and noted that Broumas asked for Graham when he called, and, consequently, as the person most often in contact with Broumas, Graham was the person at VCI who was in the best position to know the nature and extent of his activities. Moreover, she was monitoring Broumas’ account.

Graham admitted that she did not normally consult Pasztor about a trade in a house account unless there was a particular problem, but, nonetheless, Graham and Pasztor undertook extraordinary efforts to check Broumas’ credit almost every time that VCI effected a Broumas trade. By early 1989, moreover, Graham knew that Broumas was having cash flow problems, that he had been given several extensions to pay, and, ultimately, his account was restricted. Graham also received Broumas’ orders directing JML trades through the Lawton Rogers’ account (a nominee), although Broumas did not have a power of attorney over that account. The trades in the Rogers account, in particular, exhibit a classic pattern of wash trades.

Graham argued that Pasztor told her that Broumas’ directed trades were "fine." She also noted that Pasztor and Voss also effected these trades for Broumas, as further evidence that she did not believe that these trades were unlawful. The SEC dismissed this position and countered that even if such advice had been give, it was wrong.

The SEC concluded that given the information that Graham had, she was, at a minimum, reckless in failing to realize that Broumas’ trades were violative. She knew that a director of JML was directing transactions in JML Class A common stock to a handful of firms with which Broumas likely had "connections" and that the transactions were large and "peculiar." She knew about the various credit problems with Broumas’ accounts and reported Broumas’ own statement reflecting cash flow problems. She also knew that Broumas began directing JML trades through a friend’s account. The SEC concluded that she willfully aided and abetted Broumas’ violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. We further conclude, pursuant to Section 21C of the Act, that Graham was a cause of those violations.

Voss argued that he retained the title of president merely because he was the sole shareholder of VCI. He claimed that he was rarely at VCI because he was occupied with the business affairs of another company, of which he was a director, and had delegated the operation of VCI to Pasztor. Voss further argued that he had no reason to question Pasztor’s performance.

The SEC questioned Voss' professed minimal role at VCI. The SEC cited Pasztor's testimony that he spoke to Voss daily. While Voss denied that they spoke that frequently, he admited that Pasztor kept him informed about a wide range of issues with respect to VCI’s operations, including revenues, commissions, "customers, recruiting new brokers, advertising, office facilities, equipment to buy, contracts with clearing firms and that sort of thing." Voss also testified that Pasztor consulted him about hiring and firing decisions. Voss testified that, before a personnel action, Pasztor "would generally consult with me in advance. He wouldn’t just take unilateral action." In response to a question whether he had the power to veto any of Pasztor’s decisions, Voss stated, "I could fire Mr. Pasztor if I wanted to."

The SEC further concluded that Voss was well aware of Broumas’ activities. Voss had been in the securities industry over 20 years. Voss knew that Broumas, a JML director and MNBV officer, was trading JML Class A common stock, and was trading those securities actively. Voss was aware of Broumas’ practice because Voss admits that he accepted a directed trade from Broumas. When Pasztor reported to Voss that Broumas was directing trades, Voss told Pasztor such trades were "fine." Voss did not inquire of Broumas, or ask Graham or Pasztor to inquire, about the nature of Broumas’ trading or why he was directing trades.

Pasztor also informed Voss about the extensions that had been granted in the Broumas joint account, as well as its restriction. Voss permitted Broumas to open an additional account under the title of "Les Girls," even though he thought Broumas would provide advice with respect to the trades in that account. He did not contact either Broumas’ wife or daughter, the purported owners of Les Girls. In April 1990, when Pasztor attempted to restrict Broumas’ account after Broumas gave VCI a check for insufficient funds, Voss overruled Pasztor and permitted Broumas to continue to trade.

Notwithstanding the warning signs cited by the SEC, Voss authorized Graham and others at the firm to accept Broumas’ directed trades and never directed that any inquiry be made of the trading. He also overruled Pasztor’s attempts to restrict Broumas’ accounts. Consequently, the SEC concluded Voss exercised supervisory authority over VCI and that he failed to supervise reasonably Graham’s activities.

In determining Graham's sanction, the SEC noted that she had no prior disciplinary history. The SEC noted that Broumas’ scheme was of substantial duration, but that Graham’s participation was limited. Nonetheless, Broumas’ activities exhibited so many indicia of wash trades and matched orders that Graham as an experienced securities professional should have recognized and attempted to stop the conduct. AS a result, the SEC affirmed the ALJ's decision that Graham be suspended for two months, and ordered to cease and desist from violating or causing violations of Section 10(b) or Exchange Act Rule 10b-5.

In determining Voss' sanction, the SEC noted that he was not charged as a direct violator or an aider or abettor. Nonetheless, the SEC described Voss as experienced and sophisticated and believed that he recognized Broumas’ directed trades for what they were. The SEC concluded that Voss' supervisory failures permitted VCI to be used as part of that scheme. Consequently, the SEC affirmed the ALJ's decision to suspend Voss for for three months.

Finally, the SEC rejected its Division of Enforcement's appeal to bar Graham and Voss from association with any municipal securities dealer, investment adviser, or investment company.

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).