In
Part I and Part II of this article, we
examined how one of twelve respondents in an NASDR disciplinary proceeding defended himself against one customer's charges of unauthorized trading and
related misconduct. In this installment we analyze the respondent's
defense against a second client's allegations of improper price predictions.
Roll
the Tape
In
the case of Department of Enforcement vs. Unidentified Registered
Representative(NASDR # CAF980031, Hearing Officer Jerome Nelson, February
11, 2000), customer R.Y. is described in the decision as "a successful
entrepreneur, who owns his own trucking company." R.Y. alleged that
Respondent purchased 1,500 shares of Xechem International, Inc. at $8 3/4
without prior authorization. In his defense, Respondent introduced a ten to
fifteen minute tape-recorded telephone conversation between him and R.Y. to
demonstrate the customer's knowledge of and consent to the questioned trade.
As
played before the Panel, the tape contained three representations by
Respondent that R.Y. had purchased the Xechem position at $8 3/4 and that the
current market value of the stock was $7. Also, Respondent is
recorded as urging R.Y. to dollar-cost-average his 1,500 share position by
purchasing additional shares. However, R.Y.'s taped
responses were largely of the nature of taking a wait-and-see attitude before
increasing his holdings. Similarly, the Panel characterized the
customer's demeanor as "cordial" and "polite"; noting that
such was not consistent with that of a irate customer talking to a broker whom
he described at the hearing as the equivalent of a "low life" who
"would lie to me and steal from me."
When
the Panel confronted R.Y. with their reservations about the contrast between
his professed anger at Respondent's conduct and his courteous interaction with
that broker during the taped conversation, his explanation was that he had
already complained to the firm and the discussion with R.Y. "didn't
really matter." Further, R.Y. indicated that he had been
"brought up to be polite . . . there was no need to be disrespectful . .
. "
In
fairly blunt language, the decision concluded that R.Y. "never said a
word which remotely suggested that it [Xechem] had been acquired without
authority." Worse, the Panel described R.Y.'s taped remarks as
"utterly inconsistent with what would be expected from a customer
claiming to be the victim of an unauthorized purchase." Consequently, the
Panel dismissed DOE's allegations pertaining to the unauthorized trade portion
of R.Y.'s account.
If It's Not
Guaranteed Is It Still A Prediction?
DOE
also charged Respondent with fraudulent price predications. The
taped phone conversation supports the factual allegations because Respondent did indeed urge R.Y. to buy additional
shares of Xechem and clearly stated he expected the stock to go up four to six
dollars because
many shares had been sold short. However,
Respondent added that he “couldn’t guarantee anything.”
Respondent apparently believed that this
qualifying 
language
rendered his comments a mere opinion. However, the Panel ruled that
couching a prediction "as a statement of opinion, rather than a
guarantee, does not cure it." So, Respondent was determined to have
made a price prediction.
Two-Prong Test:
Reasonable and Speculative
Having
concluded that Respondent did make a price predication, the Panel next
analyzed whether the representation was a violation. In considering the
issue, the Panel formulated the inquiry as follows:
A
price-prediction is a violation if DOE proves one of two facts:
-
no
reasonable basis for the prediction, or
-
the
prediction was improper because it concerned a “speculative” security.
The
decision suggests that the staff failed to put into evidence anything
questioning the reasonableness of Respondent's prediction. As such, those
explanations advanced by Respondent went unchallenged and were accepted by the
Panel. The first prong of the test --- did Respondent have a reasonable
basis for his prediction --- was not satisfied by DOE.
Consequently,
DOE was required to prove that notwithstanding the reasonableness of
Respondent's prediction, such conduct was still improper because Xechem was a
speculative security. The Panel conceded that Xechem was listed on the
NASDAQ SmallCap Market, but rejected any suggestion that such a listing was
conclusive proof of a security's speculative character. Further, the
purchase and current market prices during the relevant times placed Xechem in
the $7 to $8.75 range. The Panel compared that range to the $5 exclusion
within the SEC's definition of the prototypical speculative security: a penny
stock (SEC Rule 3a51-1).
Having
failed to relate the stock's price or listing status to a speculative status,
the Panel then reviewed the record of evidence about the company itself.
In fairly stark and blunt language, the
Panel concluded that DOE failed to introduce any evidence about the company
"which might enable the Panel to conclude that Xechem was a speculative
security." As a consequence, the
Panel dismissed the improper price prediction charges.
Final
Observations
At
the outset we had a registered representative charged with misconduct
involving the same stock and similar acts of sales practice violation in the
accounts of two different customers. What
happened in this case? What lessons can be learned? Well, first
off, that regardless of the rumors and truths concerning the anti-RR bias of
the self-regulatory process, it's still possible to win . . . even if only
once in a while. Second, that there are some Hearing Officers, in this
case Jerome Nelson, who bring integrity to the system and are not prepared to
merely rubber stamp a Complaint in favor of DOE. Third, that DOE's trial
staff doesn't always do a great job.
The
most critical decision the Respondent made was to go forward and contest the
charges before an NASDR Hearing Panel, especially in light of the fact that
originally 12 respondents were named.Sometimes
cases are won and sometimes they are lost. This case was a mixed
bag. The Respondent did a lot to help his case. He apparently
demolished his accusers' credibility through a combination of old-fashioned hard work
in gathering background information and
introducing a damaging tape recording. However, to the trained eye, the
decision expresses tremendous frustration; one senses that the Panel believed
the staff had taken far too much for granted and failed to prepare a
persuasive case. Respondent may have won the unauthorized trading
aspects of the case, but DOE clearly lost the price prediction component.
