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NOTE: Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.

2004
NASD CASES OF NOTE 

 

Jeffrey Mark Winik 
(AWC/C05040077/December 2004)

Winik sold shares of a new issue that traded at a premium in the immediate aftermarket to a restricted person. Winik knew that the restricted person had a financial interest in an existing account at his member firm and failed to notify the restricted personís member firm in writing prior to the execution of further transactions in the account or of the restricted personís intent to maintain the account. 
Jeffrey Mark Winik 

Censured; Fined $15,000

 

 


Barbara Newman OíShields aka Barbara Newman Leslie aka Barbara Newman 
(AWC/C07040087/December 2004)

O'Shields signed the names of public customers on non-solicitation letters required by her member firm in connection with sales of low-priced securities without the customersí prior knowledge. 
Barbara Newman OíShields aka Barbara Newman Leslie aka Barbara Newman 

Fined $5,000; Suspended 10 business days

Bill Singer's Comment:

I don't get the sanction in this case.  NASD regularly comes down hard on folks who forge, fabricate, or duplicate signatures on a whole host of documents.  Here the sanction is a measly 10 business days.  Perhaps more explanation from NASD would be helpful to understand this apparently lenient sanction.

 

Neal Moskowitz 
(AWC/CMS040171/December 2004)

While registered with a member firm, Moskowitz failed to disclose: 
  • his association to other member firms with whom he maintained securities accounts in which he had a financial interest or for whom he had discretionary authority, and 
  • to his member firm that he maintained securities accounts at other member firms

While acting as an investment banker at a firm and while registered with a broker dealer, purchased securities from an investment firm through an account he maintained at another firm and failed to disclose the transactions to his member firm. In addition, he failed to notify member firms with which he maintained securities accounts and in which he had a financial interest, or for which he had discretionary authority, that he was associated with other member firms. 

Neal Moskowitz

Fined $5,000; Suspended 1 year

 

 

Raj Indrajit Mehta 
(AWC/C10040105/December 2004)

Mehta falsified records and documents to willfully misrepresent the current value of positions maintained in the proprietary trading portfolio of his member firm, and fabricated records and documents related to the positions maintained in the portfolio to prevent detection of the misrepresented positions valuations. 
Raj Indrajit Mehta 

Barred

 


Gregory Martin Jensen
(AWC/CAF040076/December 2004)

In connection with an arbitration proceeding filed by a public customer against him, Jensen altered his handwritten notes to remove a personal comment he had made about the customer, subsequently provided the altered notes to his member firm during discovery in the arbitration, and failed to notify his firm that the notes had been altered until a later time.
Gregory Martin Jensen

Fined $5,000; Suspended 6 weeks in all capacities

Bill Singer's Comment:

Just not a good idea to alter evidence.

 

Hugh Robert Hunsinger, Jr.
(AWC/C9B040094/December 2004)

Hunsinger ordered and used business stationery containing professional designations he did not possess. 
Hugh Robert Hunsinger, Jr.

Fined $5,000; Suspended 30 business days in all capacities

Bill Singer's Comment:

For a variation of this theme, see the Miramar case below.

 

Justin Wallace Herman 
(AWC/C07040083/December 2004)

Herman 

  1. established securities accounts with an NASD member, but failed to promptly advise the member firm that he became associated with another NASD member firm;

  2. participated in a private securities transaction through the sale of $293,000 in equity securities to investors without giving his member firm prior written notice of his intent to engage in such transactions and without receiving approval for his participation in these transactions; and

  3. drew a check from a customer account of a family member that was made payable to another family member and caused the check to be deposited in the second family memberís bank account without the knowledge or authorization of the customer (first family member). 

Justin Wallace Herman 

No fine because of financial status; Suspended 12 months in all capacities; Ordered to pay $100,000 (plus interest) restitution to public customers

 

 

Miramar Securities, LLC. 
 (AWC/CAF040080/December 2004)

The Firm, through its Web site, stated that they created a premier investment bank and that a corporate finance division was created to provide strategic advice and capital-raising services to its clients when, in fact, the firm was not and had never been an investment bank, and had never been approved for corporate financing and did not have a corporate finance division. The Firm allowed a broker who prepared and distributed research reports for another firm to brokers, investment company personnel, and investors to have discretionary authority for customers who purchased shares in companies on which his other firm released research reports; this broker made transactions in these companies 30 days before and five calendar days after the publication of research reports on the companies. The Firm failed to enforce its written supervisory procedures concerning the handling of discretionary accounts and review of all incoming and outgoing electronic correspondence by a principal.
Miramar Securities, LLC. 
Censured; Fined $10,000; Required to implement within 90 days its written supervisory procedures with respect to the handling of discretionary accounts and retention of all electronic correspondence

Bill Singer's Comment:

Here we have an ongoing problem for many BDs --- knowing the difference between "puffery" and potentially fraudulent misrepresentations.  Among the more common "exaggerations" we see on Wall Street are business cards proclaiming someone to be a "Managing Director" or "Senior Vice President," when such titles neither exist and if they do, the newly entitled individual is not reflected on the Form BD.  In the NASD case cited above we see the other line of cases:  Firms proclaiming divisions or services that don't exist.  The existence of a "world-class research department" and "one of Wall Street's leading Investment Banking Divisions" are examples that I often come across in my practice.  In-house Compliance pros would do well to be on the lookout for such indulgent language.  See the Hunsinger case above.

 

Hunter, Keith, Marshall & Co. and Henry C. Marshall, Jr.
 (AWC/C10040102/December 2004)

Acting through Marshall, the Firm 

  • maintained registrations for employees who were not active in the firmís securities and investment banking business and who ceased to function as principals and/or representatives; and 

  • permitted an individual to perform in a capacity requiring registration while he was deemed inactive due to his failure to complete timely the Regulatory Element of NASDís Continuing Education Requirements

Hunter, Keith, Marshall & Co. and Henry C. Marshall, Jr.

Censured; Fined $12,500 jointly and severally
 

 

John Troy Morrison 
 (AWC/C9B040072/November 2004)

Morrison failed to supervise a registered representative who recommended and effected transactions in the accounts of public customers without having reasonable grounds for believing that the transactions were suitable, or that using margin was suitable. Also, he failed to take appropriate action to supervise the registered representative to prevent violations and achieve compliance with applicable securities laws, regulations, and NASD rules. 

John Troy Morrison 

Fined $5,000; Suspended 10 business days in principal/supervisory capacity.

 

 

Gary Scott Lochansky
 (OS/C9B040072/November 2004)

Lochansky submitted, or caused to be submitted, an application for a $1,000,000 deferred variable annuity to an insurance company in the name of a fictitious person. 

Additionally,  Lochansky entered into an agreement with his sales manager to participate jointly in a financial trade show and to split the costs between them.  Subsequently, he falsely represented to his sales manager that he had paid $3,750 of the costs, and provided him a copy of an invoice falsely marked to indicate such payment. Accordingly, Lochanskyís sales manager gave him a $1,775 check that Lochansky deposited into his personal bank account.  However, Lochansky failed to make any payment on the trade show invoice, failed to use the proceeds of the check to make any payment on the invoice, and failed to refund or repay the money to his sales manager. 

Gary Scott Lochansky

Barred 

 

 

Karl Emil Keirstead 
 (AWC/C10040096/November 2004)

Keirstead violated NASDís free-riding and withholdings interpretation when he knowingly purchased and sold shares of a hot issue through his girlfriend while he was registered as a general securities representative through his member firm. 
Karl Emil Keirstead 

Fined $21,000 (includes after-tax profits disgorgement); Suspended 60 days in all capacities 

 

 

Rolf Willy Brunner
 (AWC/C10040098/November 2004)

Pursuant to his employment agreement with his member firm, in the event that his customer account assets totaled more than $30 million, Brunner would be paid a forgivable loan of 30 basis points for each dollar under management. Because Brunnerís assets would not have entitled him to the forgivable loan before the expiration time to qualify, other registered representatives at Brunnerís member firm permitted several of their joint customer accounts to be temporarily transferred to Brunner so that he could reach a qualifying level of account assets and thereby obtain a forgivable loan of $138,974.16 from his member firm and shared a portion of the proceeds with the registered representatives. 
Rolf Willy Brunner

Fined $10,000; Suspended 1 year in all capacities 

See Schneider case

 

Bruce George Boyle
 (AWC/C10040095/November 2004)

While employed as the operations manager for his member firm, and without his firmís knowledge or approval, Boyle produced order tickets that, while not inaccurate, were not made at the time of the transaction and were created by Boyle in response to NASD staff requests. 
Bruce George Boyle

Fined $5,000; Suspended 30 days in all capacities (given full credit for 30-day suspension in all capacities imposed by his firm); Suspended 15 days in principal capacity .

See Balfour, McKamy

 

Edward D. Jones & Co., L.P. 
 (AWC/C07040079/November 2004)

The Firm encouraged its representatives to recommend the use of margin loans to public customers and failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to deter and prevent its representatives from making unsuitable recommendations regarding the use of margin loans in client accounts as a result of its bonus plan. 
Edward D. Jones & Co., L.P. 

Censured; Fined $200,000

 

 

Trautman Wasserman & Company, Inc. and Gregory Owen Trautman
 (OS/C3A030049/November 2004)

Acting through Trautman, the Firm offered a special sales credit to its registered representatives for selling a security and, either intentionally or recklessly failed to disclose or to take any steps to cause the disclosure of the credit to public customers (depriving the customers of the knowledge that the registered representatives might be recommending stock based upon the their own financial interest rather than the investment value of the security). 

Firm failed to report to NASDAQ principal purchases and sales of the security. Firm inaccurately reported securities transactions, failed to identify the report as an aggregate transaction, and reported the times of securities purchases to NASDAQ for which the corresponding order memoranda reflected a later time. 

Firm was a market maker in penny stocks and effected transactions with public customers in the stocks although the stocks did not qualify for a transactional exemption from the SEC's penny stock rules. The firm also failed to 

  • furnish the customers with the requisite penny-stock risk disclosure document;  

  • disclose the inside bid/outside offer quotations; 

  • disclose the amount of compensation received by the firm and registered representatives; 

  • give purchasing customers the requisite written statement relating to price determinations and market and price information for the penny stocks; and 

  • properly approve the accounts for transactions in penny stocks for non-established customers and to receive the required purchase agreement. 

Moreover, NASD found that the firmís written supervisory procedures were not reasonably designed to achieve compliance with Regulation M of the Securities Exchange Act of 1934. 

Trautman Wasserman & Company, Inc. 

Fined $100,000


 

Gregory Owen Trautman

Fined $200,000 (including disgorgement of $135,000 of commissions in partial restitution to public customers); Suspended 31 days in all capacities, Suspended 6 months as a Series 24; Barred as a Series 55 equity trader. 

 

 

Ronald Dean Wightman
(OS/C02040016/October 2004)

Wightman failed to supervise a registered representative in a manner reasonably designed to achieve compliance with NASD Rule 3040 (Private Securities Transaction).

Ronald Dean Wightman


Fined $10,000; Suspended 30 business days in all capacities.  

 

 

Carlos Julio Penaloza
(AWC/C10040091/October 2004)

Penaloza permitted another individual of his member firm to act in the capacity of a general securities representative by effecting securities transactions without being registered as a general securities representative and to act in the capacity of a general securities principal by acting as a branch manager without being registered as a general securities principal.

Carlos Julio Penaloza


Fined $7,500; Suspended 30 business days in all capacities.  

 

 

Steven Paul Mednick 
(AWC/C10040093/October 2004)

Mednick recommended that public customers purchase municipal bonds primarily based on statements by his member firm and failed to perform his own independent research or investigation relating to the bonds. He did not have reasonable grounds for believing that his recommendations and resultant transactions were suitable for the financial situation, investment objectives, and needs of the customers.

Steven Paul Mednick 


Fined $9,500; Ordered to ordered to disgorge $1,418, plus interest, in partial restitution to a public customer; Suspended 10 business days in all capacities.  

Bill Singer's Comment:

This one sort of bothers me because I'm not sure if the NASD means exactly what it said in this decision --- but if it did . . . hmmm.  It appears that a BD recommended the sale of certain municipal bonds and that its registered employees then adopted those investment ideas and proposed them to their clients.  Is the NASD really suggesting that RRs must independently research and investigate the same bonds that the firm is recommending?  Does the NASD really believe that RRs at major firms undertake the same rigorous independent research and investigations of all the stocks and bonds on their firm's recommended list?  I don't have any issue with the second part of this case; namely, that suitability must be undertaken independently by the RR.

 

Archie William Foor, III
(AWC/C9A040037/October 2004)

Without the prior knowledge or authorization of public customers, Foor completed change of broker-dealer forms and new account forms for certain customers, signed their names on the forms, and submitted the forms to his new member firm, which acted on the forms believing they were genuine.

Archie William Foor, III


Fined $10,000; Suspended 3 months in all capacities.  

Bill Singer's Comment:

Well, it certainly is an easier and more convenient way of opening an account.

 

Robert Paul Arnold 
(AWC/C11040032/October 2004)

Arnold billed $44,646 of personal expenses to his corporate credit card without the knowledge or consent of his member firm. 

Robert Paul Arnold 


Barred  

 

 

Sterling Financial Investment Group, Inc. 
(AWC/CAF040064/October 2004)

Sterling published and distributed a research report on a biopharmaceutical company with a sell/sell short recommendation on the company's common stock that contained substantive errors and other statements that made the report exaggerated, unwarranted, or misleading. The firm failed to make disclosures required by NASD Rule 2711(h) in a clear and prominent manner. Despite the fact the firm had potential errors in the report brought to its attention, it published a "morning note" that repeated errors in the report and failed to disclose in the note that it made a market in the securities at the time the report was published.

Additionally, the firm had no effective system in place to save e- mails or other electronic messages and failed to retain e-mails for three years or for the first two years in an accessible place. Furthermore, although the firm's research department director had been suspended in a principal or supervisory capacity, he performed acts that were principal or supervisory in nature during his suspension. Moreover, NASD found that the firm had no system or procedures in place to ensure compliance with regulatory suspensions generally or with the director's suspension specifically. 

Sterling Financial Investment Group, Inc. 

Censured; Fined $175,000; Required to retain, within 60 days of acceptance of the AWC, an outside consultant to review and make recommendations concerning the adequacy of the firm's current policies and procedures as they relate to the firm's research department and e-mail retention practices.  

Bill Singer's Comment:

Seems like the sanctions was quite modest in consideration of the allegations.  Not only does NASD seem to allege that the firm knew it had errors in its research report --- but the firm repeated those errors in another report.  Then, the NASD notes that the report failed to disclose the market making capacity of the firm.  However, what seems a bit glossed over is that the firm allowed a suspended individual to engage in activity for which he was suspended.  I'm not sure that the sanctions fit the violations as described by the NASD . . . or else, someone did a great job of lawyering.

 

FEA, Inc.  and John Herman Cox
(AWC/C8A040075/October 2004)

FEA used the mails or other means or instrumentalities of interstate commerce to effect transactions in securities, or received and held customer funds or securities while the firm failed to maintain the minimum required net capital. The firm failed to comply with the terms of its membership agreement when it received funds from public customers for the purchase of interests in securities and held the funds in a bank account controlled by Cox while pursuant to the Membership Agreement, the firm and Cox agreed that it would not hold customer funds and operate pursuant to the exemptive provisions of SEC Rule 15c3-3(k)(2)(i).A

Acting through Cox, the firm received and held public customer funds in bank accounts while failing to open and use a special reserve bank account for the exclusive benefit of customers and failed to compute the firm's special reserve requirement pursuant to SEC Rule 15c3-3 as of month-end and withdrawal dates. 

The firm commenced an offering of limited partnership interests through the use of private placement memorandum at a price of $50,000 per unit. The memorandum represented that the offering was contingent upon the number of subscription units by the termination of the offering with the right to extend the offering for an additional 30 days or "all subscriptions received will be promptly refunded to subscribers without interest, charge or deduction". The memorandum further represented that payments received from subscribers would be held in a demand deposit escrow account and would not be commingled with any other funds. 

  • Acting through Cox, the firm failed to promptly return the subscribers' funds or obtain written reconfirmations of the offerings from the existing subscribers by the due date; such failure rendered the representation in the Memorandum and Subscription Agreement false and misleading. 
  • Although the memorandum disclosed the fact that Cox could purchase units of securities, it failed to disclose the total amount of units that the general partner and its affiliates could purchase and that the purchases would be for investment, not resale, rendering the Memorandum as false and misleading. 
FEA, Inc.  and John Herman Cox

Censured; FEA Fined $2,500; FEA and Cox Fined $12,500 joint/several with an undisclosed party(s) and $12,500 of which is jt/sev with Sweeney 

Bill Singer's Comment:

Among the signs that Wall Street may finally be coming back to life is an increase in corporate finance activity.  Unfortunately, a lot of folks apparently need to dust off their old compliance books when it comes to private placements.  Once again, if you are going to accept funds/securities from customers you better make sure that the terms of your membership agreement permit it --- otherwise you will be charged with a higher net capital requirement and be deemed to be out of compliance during the period the deal is in play.

 

Cardinal Capital Management, Inc., and Christopher Alan Sweeney
(AWC/C07040073/October 2004)

Acting through Sweeney, the Cardinal 

  • failed to prepare a written needs analysis and training plan for the calendar year 2000;
  • permitted at least two representatives to act in registered capacities while their registrations were inactive due to their failures to satisfy the Regulatory Element of their Continuing Education Requirements; and
  • filed five quarterly reports in an untimely manner.

Cardinal failed to maintain correspondence of its registered representatives relating to its investment banking or securities business. The Firm conducted a securities business while it failed to maintain its required net capital, inaccurately calculated its net capital, maintained inaccurate books and records, and filed inaccurate FOCUS reports. 

Cardinal Capital Management, Inc., and Christopher Alan Sweeney

Censured; Cardinal Fined $18,500 joint/several with an undisclosed party(s) and $12,500 of which is jt/sev with Sweeney 

Bill Singer's Comment:

Hard to believe that in this day and age a firm would miss such basic compliance obligations.  Once again, folks, make sure you prepare your written needs analysis and training plan. If you haven't figure it out by now, that's one of the things the NASD routinely seeks.  Also, the NASD will check to see that everyone has satisifed their CE requirements.  Finally, you have to have a correspondence file.

 

Brookstreet Securities Corporation and Stanley Clifton Brooks 
(AWC/C02040031/October 2004)

Acting through Brooks, the firm had sufficient information to raise concerns about whether a registered representative's activities were in compliance with NASD rules pertaining to private securities transactions, but Brooks failed to supervise the representative in a manner reasonably calculated to prevent violation of NASD rules.
Brookstreet Securities Corporation and Stanley Clifton Brooks 

Censured; Fined $10,000 joint/several; Brookstreet required to demonstrate to NASD within 90 days of acceptance of the AWC that it had established procedures for the review and investigation by a designated principal of all information reflected on the Uniform Application for Securities Industry Registration or Transfer (Form U4) submitted by each applicant to the firm for association as a registered or associated person. 

Bill Singer's Comment:

An interesting fact pattern:  The U4 apparently disclosed some issue that implied that an RR was engaged in a private securities transaction.

 

Bossio Financial Group, Inc, and Alan John Bossio
(AWC/C8A040074/October 2004)

Bossio Financial Group commenced an offering of 2,000,000 shares of series C convertible preferred stock (Share) through the use of a private placement memorandum, which represented that the closing of the offering was contingent upon the subscription of a minimum number of Shares.  Pending said closing, all subscription funds would be held in a "segregated, interest bearing escrow account" by the firm and "will not be released to the company (or any selling commissions or finder's fees paid) until at least $500,000 of the Shares are sold." The document further stated that "unless at least $500,000 of Shares are sold by the Offering Termination Date, all of the investors' funds and interest earned thereon while they were deposited into that escrow account will be returned to them" by the firm. However,  funds were deposited into a bank account in the name of the company and the signators on the segregated account were Bossio and another individual.

Acting through Bossio, the firm

  • permitted the release of $130,000 before collecting $500,000 from investors;
  • rendered false and misleading representations in the memorandum and subscription agreement that the purchaser's funds would be held in a segregated, interest-bearing escrow account and would not be released to a company (or any selling commissions or finder's fees paid) until at least $500,000 of Shares were sold;
  • failed to properly escrow purchasers' funds in a segregated account from June 28, 2002 to July 11, 2002;
  • improperly forwarded the funds to the company prior to the collection of the required minimum purchases; and
  • received and held customer funds in a bank account while failing to open and use a special reserve bank account for the exclusive benefit of customers that meets the requirements of SEC Rule 15c3-3(f), and failed to compute the member's special reserve requirement pursuant to SEC Rule 15c3-3.

The firm used the mails or other means or instrumentalities of interstate commerce to effect transactions in securities, or received and held customer funds or securities, while the firm failed to maintain the minimum required net capital.  Further, the firm filed with NASD a FOCUS Part IIA Report that was inaccurate in that, among other things, the report overstated the firm's net capital. The firm received funds from public customers for the purchase of shares of securities and held the funds in a bank account that was, in part, controlled by Bossio; while pursuant to the membership agreement, the firm agreed that it would not hold customer funds and operate pursuant to the exemptive provisions of SEC Rule 15c3-3(k)(2)(i).

Bossio Financial Group, Inc, and Alan John Bossio

Censured; Bossio Financial Group Fined $2,500; Bossio Financial and Alan John Bossio Fined $13,000 joint/several

Bill Singer's Comment:

This is all pretty basic stuff but folks continue to screw up segregation and escrow requirements --- and then are shocked to find out that it has a nast Net Capital impact.  Given the circumstances, the sanctions were quite reasonable.

 

American National Municipal Corporation and John Thomas Ford
(AWC/C02040034/October 2004)

Acting through Ford, the firm failed to report timely statistical and summary information concerning customer complaints to NASD pursuant to NASD Rule 3070c.
American National Municipal Corporation and John Thomas Ford

Fined $10,000 joint/several

Bill Singer's Comment:

Another in a growing line of cases starting to hold individuals liable for failure to timely report 3070 matters.

 

Kirlin Securities, Incorporated , Anthony Joseph Kirincic , AiLin Khoo Dorsey , 
Paul Thomas Garvey , and Brian Francis McEnery
 (AWC/CAF040063/October 2004)

Acting through its employees, Kirlin Securities 
  • participated, directly or indirectly, in undertakings involving the sale of, and interest in, Brady Bonds with a view to the distribution of such securities and acted as underwriters of the securities in violation of Section 5 of the Securities Act of 1933;
  • developed and disseminated to the public advertising materials that failed to disclose material facts regarding the Brady Bonds and included exaggerated, unwarranted, or misleading statements or claims about the Brady Bonds;
  • failed to determine markups on the basis of the firm's contemporaneous costs, thereby charging its retail customers fraudulently excessive markups; and
  • obtained undisclosed profits in transactions with public customers by taking positions to match customer orders and then executing the customer orders as principal transactions later in the same day, taking the intra-day profits from the transactions for itself. 
  • failed to enforce the firm's procedures relating to its review of corporate debt, municipal transactions, and equity securities transactions.

Brady Bonds are named for former Treasury Secretary Nicholas Brady, who in the 1980s helped institute a debt-reduction program whereby defaulted emerging nation loans were converted into bonds with U.S. zero-coupon Treasury bonds as collateral (thus insuring repayment of principal.) The Brady bonds are coupon-bearing bonds with varying rate options offering  maturities between 10 and 30 years. They often include warrants for raw materials available in the country of origin or other options.

Acting through Kirincic, the firm failed to 

  • establish and maintain an adequate supervisory system in connection with the advertising, sale, and distribution of Brady Bonds. (The written procedures failed to identify how the firm's principals were to review transactions for excessive pricing and markups, when such a review should take place, and how to determine markups if the firm was dominating and controlling the trading of a security.); and 
  • maintain either hard or electronic copies of Brady Bond inventory sheets and discarded the sheets on a daily basis. 

Also, Kirincic failed to enforce or delegate the responsibility of enforcing the firm's procedures relating to review of equity securities transactions.

The firm and its employees failed to give public customers best execution on trades when it took "trading profits" and when it executed principal transactions at prices less favorable than the prevailing inter-dealer price at the time of the trade. 

The firm, Garvey, and McEnery charged excessive amounts on principal transactions and failed to take into account factors identified in NASD Rule IM-2440 (The Mark-Up Policy) that should be considered in determining the fairness of charges. Dorsey, as a registered principal, reviewed and approved the amount charged on each of the transactions.

Dorsey failed in her supervisory duties in her review of documents and knew, or should have known, that the majority of customer trades involved large undisclosed concessions taken by the firm in addition to commissions, markups, or markdowns, and failed to make reasonable inquiry into the transactions or conduct adequate follow-up.  As the registered principal responsible for reviewing and approving the amount charged on transactions, Dorsey failed to take appropriate action to ensure that the firm's charges to customers were reasonable.

The firm failed to 

  • maintain books and records; 
  • maintain trading tickets of customer's transactions; 
  • maintain accurate records of the time of receipt of the customer's orders and the instructions the customer gave in making the orders; 
  • make and keep memoranda of each order;
  • mark limit orders and market orders with restrictions and the conditions of each order and trading tickets; 
  • accurately record the terms and conditions on the customer's limit orders; 
  • keep identifiable contemporaneous records showing whether an order was a market order or a limit order;
  • establish and maintain a supervisory system reasonably designed to achieve compliance with NASD rules relating to charges to customers;

  • reflect how the factors enumerated in NASD Rule IM-2440 should be taken into account;

  • conduct an annual review of an Office of Supervisory Jurisdiction;

  • failed to report, and to report timely, statistical and summary information regarding written customer complaints pursuant to NASD Rule 3070;
  • properly notate whether a sale was "long" or "short" on order memoranda for sell transactions;
  • report properly certain equity security transactions in a timely manner with all correct modifiers;
  • report correctly the price at which transactions were executed; and
  • report transactions reviewed to the Fixed Income Pricing (FIPS) reporting system.

The firm's records failed to reflect unsolicited orders.  Additionally, time stamps on orders failed to reflect the time the customer placed the order; and the firm reported transactions before it time-stamped order tickets and executed the transactions before it time-stamped the orders as received.  The firm sent confirmations to public customers that failed to disclose profits the firm received. 

  • Trades with customers in which the firm  did not take secret profits were treated as riskless principal transactions but  the customers were given confirmations inaccurately describing the trades as principal transactions. 
  • Also, in agency cross trades, the firm sent customers confirmations that failed to disclose the amount of all commission or remuneration and either the name of the person from whom the security was purchased, to whom it was sold, or the fact that such information would be furnished upon request. The firm reported or confirmed the trades as principal transactions and did not submit either a clearing-only report or a non-tape, non-clearing report in principal trades with public customers in which the firm did not take undisclosed profits; reported trades as principal transactions even though the trades were riskless cross trades; failed to submit or confirm trades with customers to ACT; and reported one transaction more than 90 seconds after execution.

The firm failed to establish and maintain supervisory procedures reasonably designed to achieve compliance with federal securities laws and NASD rules relating to interpositioning, front-running, best execution, books and records, and trade reporting requirements. Further, the firm failed to designate principals with supervisory responsibility for interpositioning and for implementing procedures when front-running was detected. 

Kirlin Securities, Incorporated 

Censured; Fined $155,800; 

Ordered to 

  • pay $1,044,732.35 in restitution to public customers, $26,185.39 jointly and severally with Garvey, and $48,107.99 jointly and severally with McEnery; 
  • file all sales literature and advertising with NASD's Advertising Regulation Department at least 10 days prior to their first use for one year from the date of acceptance by the National Adjudicatory Council (NAC) of the Letter of Acceptance, Waiver, and Consent (AWC); and 
  • retain an independent consultant to review and make recommendations concerning the adequacy of the firm's supervisory and operating procedures as they relate to review of advertising and sales literature, books and recordkeeping, corporate debt, municipal securities, and equity transactions, including markups, markdowns, and commissions charged. 
Anthony Joseph Kirincic 

Fined $25,000; Suspended 30 days in a Series 24 capacity. 

AiLin Khoo Dorsey

Fined $15,000; Suspended 20 business days in a principal or supervisory capacity. 

Paul Thomas Garvey

Censured; Fined $10,000; Ordered to disgorge $26,185.39 jointly and severally with Kirlin Securities; Suspended for 14 days in all capacities.

Brian Francis McEnery

Censured; Fined $10,000; Ordered to disgorge $48,107.99 jointly and severally with Kirlin Securities

Bill Singer's Comment:

Certainly a sweeping action that goes to the core of charges to customers.  In-house compliance staff should set up a checklist of the items noted in this case and apply them to their own firm's practices. 

 

William Scott Prendergast 
(OS/C07030038/September 2004)

A U.S. District Court issued an order finding Prendergast in violation of a temporary restraining order filed against him by a member firm.  Prendergast also made certain materially false statements and representations to the Court. In reaching its ruling, the Court drew "adverse inferences" based on Prendergast's assertion of his Fifth Amendment privilege to refuse to testify in the proceeding. Finally, Prendergast failed to respond in a timely manner to NASD requests to testify.
William Scott Prendergast 

Fined $25,000; Suspended 45 days in all capacities; Required to complete an ethics course acceptable to NASD staff within 90 days of the acceptance of this offer.

Bill Singer's Comment:

Another decision that is of little educational value because it fails to provide meaningful information.  What was the violation of the TRO?  Is NASD now sanctioning individuals for asserting their Fifth Amendment rights in court?   

 

Eric Lee Miller
(AWC/CLI040021/September 2004)

Director of Compliance Miller failed to reasonably discharge his supervisory duties, in that, upon learning that an eavesdropping device had been installed in the firm office, failed to make an appropriate inquiry and/or direct that an inquiry be undertaken regarding this device.
Eric Lee Miller

Fined $5,000; Suspended 15 business days in principal capacity

Bill Singer's Comment:

Well, this one raises more questions than it answers.  Did NASD ever learn who installed the device?  Why it was installed?  Further, once Miller learned of the device what exactly did he do?  

 

Gary Patrick Duffy 
(OS/C3A040034/September 2004)

Duffy distributed sales literature to public customers concerning covered call writing strategies that he downloaded from a third party's Web site. The sales literature failed to present a balanced picture of the risks and merits of investing in options as required by NASD's advertising standards.
Gary Patrick Duffy 

Fined $7,500; Suspended 10 days in all capacities.

Bill Singer's Comment:

We tend to fall easy prey to the belief that if something's posted on the Internet it must be accurate --- but there's a lot of accurate material on the Net that doesn't necessarily fully satisfy the NASD's more demanding advertising/marketing material standards.  This is a good case for compliance staff to circulate among BDs to warn the salesforce of the dangers of sending unapproved material to customers.

 

Duane Allen Darling 
(AWC/C9B040070/September 2004)

Darling executed transactions in the account of a Colorado resident, although Darling was not registered in that state. In order to circumvent Colorado registration requirements, Darling falsified the customer's account documentation to make it appear that the customer was a New York resident. Also, Darling exercised discretion in the account of a public customer by effecting transactions in the customer's account without obtaining prior written authorization from the customer or written acceptance of the account as discretionary by his member firm that, in fact, prohibited discretionary accounts.
Duane Allen Darling

Barred

 

 

Domitilo Correa 
(AWC/C9B040063/September 2004)

Correa participated in an arrangement to misappropriate public customer information by attempting to sell customer contact worksheets containing addresses, telephone numbers, and social security numbers outside of his member firm for a profit; and he subsequently failed to respond to NASD requests to appear for on-the-record interviews. 
Domitilo Correa 
Barred

Bill Singer's Comment:

See Botticelli 

 

 

Cara Ann Botticelli 
(AWC/C9B040067/September 2004)

Botticelli participated in an arrangement to misappropriate customer information outside of her member firm for a profit; and then failed to respond to an NASD request to appear for an on-the- record interview. 
Cara Ann Botticelli 
Barred

Bill Singer's Comment:

See Correa 

 

 

Karim El Din Amiry
(AWC/C9B040079/September 2004)

Amiry failed to adequately and properly supervise the annuity sales desk personnel of his member firm to assure compliance with New York State Insurance Regulation 60 and applicable NASD rules.
Karim El Din Amiry

Fined $5,000 and Barred in principal/supervisory capacities.

Bill Singer's Comment:

See the Duffy and McGlynn cases.

 

The GMS Group, LLC
(AWC/C9B040065/September 2004)

GMS Group maintained the registration of a general securities representative  even though the individual was not active in the firm's investment banking or securities business and was not functioning as a representative. The firm also permitted representatives associated with the firm to effect, or failed to prevent each from effecting, transactions in U.S. Government securities when they were not registered in a capacity that qualified them to effect such transactions. The firm failed to establish and maintain written supervisory procedures reasonably designed to achieve compliance with NASD rules relating to the registration of associated persons.
The GMS Group, LLC

Censured and Fined $10,000
 

 

Banc of America Securities LLC
(AWC/C05040057/September 2004)

Based on the bids provided by a broker's broker, Banc of America Securities LLC purchased a municipal security from a public customer for its own account and then sold the security to the broker's broker at a nominal gain. The price paid to the customer, and received by the firm, was below the fair market value of the security in an amount equal to 11.34 percent. By relying solely on the bids provided by the broker's broker to determine the fair market value of the security, the firm failed to ensure that the transaction was executed at an aggregate price that was fair and reasonable.
Banc of America Securities LLC

Censured; Fined $7,500; and Required to pay $7,163.10, plus interest in restitution to a public customer. In addition, the firm will update its written supervisory procedures as they relate to the determination of the fair market value of municipal securities being bought or sold from a public customer.

 

 

Salomon Grey Financial Corporation and Kyle Browning Rowe
(OS/CAF030043/September 2004)

Acting through Rowe and others, Salomon Grey Financial Corporation purchased 1 million shares of a common stock at varying prices substantially discounted from the current market price; and after each block purchase, sold the stock to its retail customers through payment of substantial concessions to its brokers that constituted over 33 percent of the public float of the stock.The firm's purchase and sales of the stock constituted a distribution under the terms of Securities and Exchange Commisssion (SEC) Regulation M and that while conducting the distribution, the firm acted as a market maker and bid for, purchased, and induced others to bid for or purchase shares of the stock. In addition, the firm failed to make any filings with the Corporate Finance Department of NASD regarding the distribution and received unfair and excessive compensation of $686,000 from the offerings, and arrangements before commencing the distribution.
Salomon Grey Financial Corporation

Censured; Fined $100,000 jointly and severally with Rowe

Kyle Browning Rowe

Fined  Fined $100,000 jointly and severally with Salomon Grey Financial; Suspended 2 weeks in all capacities.

Bill Singer's Comment:

It's always a good idea for compliance staffs to monitor their firms' purchases of blocks when accompanied by a strong "solicited" sales push  --- and particularly when said push is motivated by "substantial concessions."  These factors often indicate a "distribution" of securities and will almost certainly attract regulatory scrutiny.


  

Westpark Capital Corporation  and Richard Alyn Rappaport 
(OS/CAF030062/September 2004)

Westpark Capital and Rappaport did not have a reasonable basis for recommending certain stocks as a "strong buy" or "buy" and did not have a principal initial the research reports as evidence of supervisory review before releasing the reports. Westpark issued research reports that omitted material facts and qualifications about the stocks. Rappaport knew or had reason to know that the statements and claims were unwarranted, exaggerated, false or misleading. The firm had not adopted and implemented written supervisory procedures reasonably designed to ensure compliance with the provisions of Rule 2711.
Westpark Capital Corporation 

Censured; Fined $50,000 jointly and severally with Rappaport; Suspended from issuing research report for 6 months; and Required to retain an independent consultant, not unacceptable to NASD, to review and make recommendations concerning the adequacy of its current supervisory and operating procedures.

Richard Alyn Rappaport 

Fined  Fined $50,000 jointly and severally with Westpark; Suspended 30 days in Series 24 capacity; and Required to requalify as a Series 24.

Bill Singer's Comment:

This case has a few differences from the recent spate of research report suspensions.  First, it was settled as an Offer of Settlement and not as an Acceptance, Waiver & Consent.  Additionally, the prior suspensions were for the writing and contributing to the preparation of research reports for 6 months --- this sanction seems far more severe:  The member cannot issue research reports for 6 months.  

Compare the severity of these sanctions with the Vertical and First Geneva cases.

 

Brooke Sasha Toribio
(AWC/C07040060/August 2004)

During the course of a Series 7 examination, Toribio was in possession of a small sheet of paper containing notes relevant to the Series 7 examination which is prohibited. 
Brooke Sasha Toribio

Fined $5,000; Suspended 1 year in all capacities.

Bill Singer's Comment

This is an odd case --- not because of the facts but because of the sanction.  In the earlier Gascot-Jiminez case, on what appear to be similar facts, the respondent was Barred.  How is it possible for such different results?  Again, I as so often lament, I wish NASD would give us just a bit more guidance.

See the Gascot-Jimenez case.

 

Samson Su 
(AWC/C02040020/August 2004)

Su provided a public customer a business card that reflected false and misleading information that he was a vice president of a member firm. Without the knowledge or consent of his member firm, Su entered into a written agreement to pay $75,000 to a public customer whose investment portfolio had sustained losses and to secure payment of the settlement agreement, Su provided the customer with an assignment of a deed of trust on Su's residence. 
Samson Su 

Fined $12,500; Suspended 225 days in all capacities

 

 

Steven Walter Schaefer 
 (C3A030053/August 2004)

Schaefer recommended and sold shares of a security to public customers and made fraudulent omissions of material fact and baseless price predictions. He failed to tell the customers that he could or would receive compensation that exceeded the markup disclosed on the trade confirmations. 
Steven Walter Schaefer 

Barred; Ordered to pay $64,396 plus interest in restitution to public customers.
 

 

Jhoanny E. Pena
 (C10030135/August 2004)

Pena had access to confidential public customer information, including customer account numbers and improperly divulged customer account numbers to a third party not associated with her member firm; and then failed to respond to NASD requests to provide testimony. 
Jhoanny E. Pena 

Barred

 

 

Benjamin Agleham Pangilinan 
(AWC/C9B040062/August 2004)

Ben John U. Pangilinan, Jr.
(AWC/C9B040058/August 2004)

Benjamin Agleham Pangilinan, a RR,  created false documents in connection with the purchase and sale of variable annuity transactions for public customers that were made in violation of his member firm's policy. Subsequently, he made false statements to firm management when questioned about such transactions to avoid detection of his violation of firm policy. 

Ben John U. Pangilinan, Jr., a Registered Principal, failed to take appropriate action to supervise an individual that was reasonably designed to detect and prevent the creation of false documents in connection with variable annuity transactions for public customers in violation of firm policy and to achieve compliance with applicable securities laws and regulations.

Benjamin Agleham Pangilinan 

Barred

Ben John U. Pangilinan, Jr.

Fined $5,000; Barrend in principal/supervisory capacity

 

Bill Singer's Comment:

The NASD continues to drive me crazy with some aspects of their monthly reporting.  Here we have two cases --- separately numbered and reported --- which I am assuming are related.  I mean, come on, the last names and the 4 number separation in the docket would compel that inference.  Nonetheless, NASD provides no indication of any relationship.  I think this lessens the value of the reports and makes the educative process all that more difficult.

These cases are interesting on several levels.  First, we have yet another example of the pervasive nature of document fabrication on Wall Street.  See the Trading.com and Morris cases.  Second, we are beginning to see efforts by regulators to get member firms' attention by not only holding the fabricator responsible, but in this case also sanctioning the supervisor.  The more interesting question I wish NASD had answered, is what steps can a supervisor take to reasonably detect and prevent the fabrication of documents when the fabricator is resorting to subterfuge?  We have no idea from the Pangilinan cases as to what was done and how it could have been detected.

 

Suzanne J. Morris
 (AWC/C8A030107/August 2004)

Morris scanned a Client General Account Agreement Signature Page into a computer and then cut and pasted signatures of clients from applications previously signed by the clients onto forms without the customers' knowledge or consent. 
Suzanne J. Morris

Fined $5,000; Suspended 6 months all capacities 

Bill Singer's Comment:

In the old days folks would hold a blank sheet of paper over a signature and put the two on a pane of glass through which the sun shone --- when I first started on Wall Street the practice was so prevalent it had a name:  Window Paning.  Then some ingenious souls began to photocopy signatures.  Now, in the computer age, we can scan and paste.  Amazing progress.  See the Trading.com case.

 

Clayton Dale Farrell
 (AWC/C05040048/August 2004)

Farrell improperly obtained $9,000 from his member firm and another employer by requesting payment of expenses for which he had already been reimbursed. He also engaged in outside business activities without providing prior written notice to his member firm.
Clayton Dale Farrell

Barred 

 

 

Pan-American Financial Advisers
 (AWC/C05040034/August 2004)

Pan-American Financial Advisers, acting through individuals, failed to establish and maintain
  • an adequate system to supervise the activities of each registered representative, and 
  • a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations, and NASD rules regarding 
    • review of exception reports, 
    • the sale of variable annuity and variable life contracts, 
    • annual compliance conferences with registered representatives, and 
    • the prevention of abuse of the firm's proprietary trading account in a branch office. 

The firm, acting through an individual, failed to 

  • supervise adequately certain principals of the firm; 
  • establish and maintain a reasonable system for imposing heightened supervision upon registered representatives with a history of complaints; 
  • provide an Office of Supervisory Jurisdiction principal with the necessary training or support to properly carry out his supervisory function by failing to provide him with access to the customer account database system and appropriate training concerning the trading activity and systems he was required to supervise; and
  • maintain an internal record of the names of all persons designated as supervisory personnel and the dates for which such designation was effective. 
Pan-American Financial Advisers
Censured; Fined $225,000; R
equired to retain an outside consultant to prepare a report to the firm and NASD containing recommendations for the adoption of policies and procedures by the firm regarding firm supervision. The firm will provide NASD with a report attesting to the firm's implementation of the consultant's recommendations within 90 days after issuance of the report. 

Bill Singer's Comment:

This is the type of case that compliance officers would do well to read and use as an in-house template.  Initially, we see what's on the regulator's agenda this year: annuities, compliance conferences, proprietary trading accounts; and problem RRs.  Nothing profound in deducing those punchlist items --- but note what the NASD examined.  Are principals of the firm being supervised?  This is a perennial problem spot.  No one wants to watch the boss, and the boss usually doesn't like to be watched.  What are you doing with the bad boys?  You say they're being subjected to enhanced supervision.  But your say-so won't be the end-all of that conversation.  Be prepared to show that you are staying on top of these tarnished angels.  

Another interesting aspect of this case is the focus on the nuts and bolts of in-house supervision.  There's nothing more likely to send up regulatory warning flares then a supervisor who is supposed to be monitoring OSJ-level activity and doesn't have access to the customer account database.  I mean --- jeez --- come on!  And don't laugh; this isn't so rare a scenario.  Often the supervisor isn't given a password to the system or is some industry veteran who doesn't really understand how to use the computer system to access the database.  Of course, there's also the ever-popular explanation that there's only one computer screen on which to view the information and that's in the boss' office --- and I can't always get in there because it's a private office and he has a temper.

 

Trading.com, Inc. f/k/a Gold Country Securities and Charles Vaccarro
 (OS/C10030046/August 2004)

Acting through Vaccarro, the firm failed to
  • supervise adequately the inter-customer lending practices of the firm by permitting 
    • non-principal associated persons of the firm to review customer cash journal request forms and sign Vaccarro's initials to those forms to memorialize his purported review when he had not reviewed such forms; and
    • the use of cash journal forms containing photocopied signatures of the borrowing and/or lending customer and/or photocopied signatures of the notary public to facilitate inter-customer loans to meet day trading margin requirements or calls;
  • establish, maintain, and enforce special procedures for supervising the telemarketing activities of all its registered representatives as required by the Taping Rule, and failed to ensure that all tape recordings made pursuant to the Taping Rule were retained for not less than three years from the date the tape was created, the first two in an easily accessible place;
  • register an associated person, who was required to be registered as a general securities representative;
  • file any reports, including an arbitration settlement that was required to be reported through the NASD Rule 3070 reporting system. 
  • maintain the required minimum net capital while conducting a securities business; 
  • prepare and keep current, accurate books and records, including its general ledger, trail balance, balance sheet, and computations of net capital and aggregate indebtedness;
  • prepare and file an accurate Financial and Operation Combined Uniform Single Report (FOCUS) Report Part IIA;
  • employ an independent auditor to prepare the firm's 2001 Annual Audit as required by SEC Rule 17a-5(f)(3); and
  • file an Annual Audit in a timely manner. 
Trading.com, Inc. f/k/a Gold Country Securities 

Censured; Fined $30,000 jointly and severally with Vaccarro
Charles Vaccarro

Fined $30,000 jointly and severally with Trading.com;
Suspended 30 business days in principal capacity

Bill Singer's Comment:

In some sense this is a truly amazing litany of violations --- if nothing else, an instructive case study.  When facilitating lending among customers, you should make sure that the appropriate principal is actually reviewing the forms and signing his own name.  You really don't want to be designating supervisory initialing to a third party.  Moreover, given the NASD's historic distrust of inter-customer lending practices, I would highly recommend that you not maintain folders with photocopied signatures . . . and one would think it fairly common sense not to use photocopies of a notary's signature.  The Taping Rule must be carefully observed; you must retain the tapes for 3 years and be able to provide them quickly from an accessible location for the first 2 years.  Finally, all compliance professionals would do well to familiarize themselves with what is required to be reported under NASD Rule 3070.  See the Morris case.

 

Vertical Capital Partners, Inc. , Ronald Mark Heineman and David Bruce Morris 
(AWC/CAF040050/August 2004)

Acting through Heineman, Vertical Capital Parnters, Inc. 

  1. failed to adequately supervise the preparation of research reports disclosures regarding the amount of consideration received by the firm, Heineman, and Morris from the issuers; and

  2. did not adequately supervise Morris' preparation of a report, in that Heineman knew of the nature of the Securities and Exchange Commission (SEC) action against a company, but failed to ensure that the SEC action and its resolution were adequately described in the text of the report.

Vertical Capital Partners 

Censured; Fined $22,500; Suspended from writing/contributing to the preparation of any research report for 6 months; and following the suspension, the firm is required to submit any research reports prepared by or for the firm to NASD's Advertising Department for approval prior to any report's distribution to the public for a period of 2 years.

Ronald Mark Heineman

Fined $22,500; Suspended 30 days in all capacities; Suspended from writing/contributing to the preparation of any research report for 6 months
David Bruce Morris 

Fined $30,000; Suspended from writing/contributing to the preparation of any research report for 3 months. 

Bill Singer's Comment:

Once again we see that NASD is honing in on failures to fully disclose compensation --- be that cash or stock.  Moreover, here we see that efforts to white-wash or downplay regulatory action against an issuer will be dealt with severly.  In a sense, research reports are no longer going to be viewed as if they were just another example of advertising or marketing materials transmitted by a BD.  We are now in the age that research reports will be scrutinized to ensure that the public is not only fully informed of all material facts, but that there is no effort to cover up blemishes.  Frankly, the age of cheerleading for a covered company is over.

Compare the severity of these sanctions with the First Geneva case.

 

First Geneva Securities, Inc. and Roland Lee Chapin
(AWC/CAF040048/August 2004)

  • Acting through Chapin, First Geneva Securities, Inc., 

  1. knew, or should have known, of omitted facts in research reports, and, at a minimum, was reckless in failing to include them in research reports; and

  2. failed to establish and maintain a system to supervise the activities of the firm with respect to research reports. 

  • Chapin knew, or should have known, that a disclaimer in a research report failed to mention that the firm held shares for the co- author of the report. 

  • No one at the firm was given the responsibility to supervise Chapin's preparation of the reports or to review the reports to ensure that they complied with NASD rules and federal securities laws. There was no system in place at the firm with regard to research reports generally, and no one at the firm supervised adequately Chapin's preparation of the reports or reviewed Chapin's work for compliance. 

First Geneva Securities, Inc. 

Censured; Fined $100,000 jointly and severally with Chapin; Suspended from writing/contributing to the preparation of any research report for 6 months; and following the suspension, the firm is required to submit any research reports prepared by or for the firm to NASD's Advertising Department for approval prior to any report's distribution to the public for a period of two years.

Roland Lee Chapin

Fined $100,000 jointly and severally with First Geneva Securities, Inc.; Suspended 60 days in all capacities; Suspended from writing/contributing to the preparation of any research report for 6 months

Bill Singer's Comment:

An interesting aspect of this case is that the firm apparently held shares for the report's co-author.  I'm assuming that the NASD deemed that some form of undisclosed or hidden compensation.  The NASD isn't kidding around with these sanctions.  Not only is there a six-figure fine imposed upon the firm and the individual, but both are suspended for 6 months from writing or contributing to the preparation of any research report.  One wonders if such a sanction will ever be imposed on a major firm.  

 

Rosanne Stevens Horan
(AWC/C04040027/July 2004)

On behalf of her member firm, Horan failed to file disclosure events, customer complaints, and written customer grievances in its quarterly statistical and summary information, and failed to file written customer grievances on a timely basis in accordance with NASD Conduct Rule 3070. 

Rosanne Stevens Horan

Censured and Fined $15,000

Bill Singer's Comment:

I am often asked by Compliance Officers what exposure they could personally have for Rule 3070 violations.  Well, here's a timely answer.  Although in years past the NASD typically was satisfied with solely charging the broker-dealer entity for such "books and records" miscues, we are beginning to see evidence that the regulatory trend is to hold individuals liable.  Sure, the sanction here isn't much --- $15,000 is paltry by most measures --- but remember that some poor soul may now be on the hook for the payment.  As we all know, many times these filing issues come up because a subordinate was supposed to timely file an event, never told you that they didn't, when asked if they did--they often lie and say "yes", and so on and so forth.  Regardless, you are now forewarned that the game is changing and individuals are in the NASD's crosshairs.

 

Jim Jun Xu
(AWC/C05040032/July 2004)

Xu was a trader in his firm's the Latin American Equity Derivatives desk (LAEQD), where he participated in three types of securities transactions in violation of the anti-money laundering procedures and other written supervisory procedures of his member firm.  He engaged in the following misconduct:

  1. he effected transactions that had no business or apparent lawful purpose
  2. failed to observe all applicable regulations while operating in a foreign market;
  3. failed to obtain approval from designated senior management personnel prior to effecting transactions that were executed at prices that were off-market
  4. failed to contact senior management to ascertain reasons for off-market transactions and exchange correspondence documenting such reasons; 
  5. failed to ensure that confirmations sent contained the legend "This transaction was effected at a non- standard settlement price at the customer's request. The market price at the time of dealing was xxx"; and 
  6. failed to have new products or structures of products validated and approved prior to trading and to confine trading to firm-approved products.
Jim Jun Xu

Fined $10,000; Suspended 1 year in all capacities

Bill Singer's Comment:

Am I missing something here or is the NASD overstating the importance of this case?  In this day and age of heightened AML and PATRIOT act concerns, the above violations get a $10,000 fine and a 1 year suspension?  Look at the case immediately below.  Two RRs get fined a total of $22,500 for ostensibly helping out an office buddy work off his forgivable loan (and one of them gets a 90 day suspension), and here the fine is a mere $10,000 and the sit-down only 1 year.  As I said, either this is a bit of a light sanction or the NASD is way over-selling the seriousness of the violations.

 

Jeffrey Schneider  and NAME REDACTED BY RRBDLAW.com
(AWC/C3B040016/July 2004)

Schneider and NAME REDACTED permitted some of their joint customer accounts to be temporarily transferred to another representative so that the representative could reach a qualifying level of account assets and thereby obtain a forgivable loan from the firm; Schneider and NAME REDACTED received a portion of the forgivable loan proceeds.

Jeffrey Schneider 

Fined $15,000; Suspended 90 days in all capacities

NAME REDACTED BY RRBDLAW.com

Fined $7,500; Suspended 60 days in all capacities

See Brunner case

 

Mark J. Schoenebaum 
(AWC/CAF040038/July 2004)

Schoenebaum attempted to obtain confidential information about the safety and effectiveness of a medication that was not publicly available by sending e-mails that he knew contained untrue statements.

Mark J. Schoenebaum 

Fined $10,000; Suspended 2 weeks in all capacities

Bill Singer's Comment:

Recall that in 2003, NASD issued a decision in the Matter of JONATHAN MATTHEW ASCHOFF, ( AWC/CAF030003/MARCH 2003), wherein Aschoff wanted to issue a research report about a public company for which his member firm was an issuer. Using an assumed name and misrepresenting himself as a medical doctor, he spoke with members of the medical profession in an effort to obtain confidential information about the effect of a drug under development by the company. After being confronted about his deception, he never used the information in a report. Fined $10,000 Suspended 2 weeks in all capacities

 

Ronald Lee Rechter
(AWC/C8A040032/July 2004)

Rechter failed to properly qualify and/or register in the appropriate capacity prior to effecting equity orders in the securities account of a public customer; and while effecting the equity orders, held himself out to be an associated person of his member firm who was registered as a general securities representative and who was qualified and registered to effect the equity orders.

Ronald Lee Rechter

Fined $5,000; Suspended 1 month all capacities

 

 

Michael Henry Pigott  and Travis Michael Pigott
(AWC/C3B040016/July 2004)

The Piggotts engaged in private securities transactions and shared, directly or indirectly, in the profits or losses in the accounts of public customers without prior written authorization from their member firm. They opened securities accounts at other member firms and placed orders with the firms for the purchase and sale of securities and, prior to the opening of the accounts or placing initial orders with the firms, they failed to notify their member firm in writing regarding the accounts.
Michael Henry Pigott  

Barred in all capacities

Travis Michael Pigott

No fine in light of financial status; Suspended 1 year in all capacities

 

 

David Kyle Pace
(AWC/CLI040011/July 2004)

Pace shared in the losses in the account of a public customer by transferring $5,000 from his wife's bank account to the customer's account to cover margin calls, without prior written authorization from his member firm. He churned the accounts of a public customer and  falsified firm account opening documentation for a public customer concerning the customer's securities experience, income, relationship to Pace, and listed his own address rather than the customer's in order to route all confirmations and account statements to him rather than the customer.

David Kyle Pace

Barred

 

 

Michael Paul Monson 
(AWC/C8A040039/July 2004)

Monson improperly formed and maintained a partnership in a securities account with a public customer of a firm by failing to

  • memorialize the partnership agreement in writing; 
  • have a specific agreement or understanding as to the capital contributions to be made by the partners, how and when capital contributions would be withdrawn, and how profits and losses were to be shared; and 
  • provide the partner with complete periodic statements as to the complete cost to the partnership of each securities transaction. 

He also misused a member firm's assets by withdrawing approximately $6,946 from the firm's account above and beyond his partnership interest in the account and using the funds for his own use and or benefit.

Michael Paul Monson 

Barred in principal capacity; Suspended 2 years in all capacities

Bill Singer's Comment:

I am not a big fan of permitting RRs to partner with any public customer.  Just too much to monitor and the downside is frightening.  Nonetheless, if you're going to permit it, the Monson case pretty much sets out the paperwork requirements:

  1. Partnership agreement in writing;

  2. Specify how capital contributions are to be withdrawn and profits (losses) allocated: and

  3. Maintain and disseminate detailed statements as to the transactions.

 

Danny Elston Ford
(AWC/C3A030047/July 2004)

Ford failed to 
  • file an application for approval of change of ownership and conducted a securities business without membership approval;
  • maintain accurate books and records; and 
  • respond completely to NASD requests for information and documentation. 
Danny Elston Ford

Barred

 

 

Karen Lee McGlynn
 
(AWC/C9B040041/July 2004)

McGlynn participated in a process to circumvent New York State Insurance Regulation 60, which requires a financial adviser involved in an annuity replacement transaction to, among other things, meet with a customer on at least two separate occasions. Notwithstanding, Duffy had only one meeting with the client but placed dates on Regulation 60 documents that gave the false impression that two meetings had occurred .
Karen Lee McGlynn 

Barred

Bill Singer's Comment:

See the Duffy case.

 

 

Donald Paul Duffy
(AWC/C9B040040/July 2004)

Duffy participated in a process to circumvent New York State Insurance Regulation 60, which requires a financial adviser involved in an annuity replacement transaction to, among other things, meet with a customer on at least two separate occasions. Notwithstanding, Duffy had only one meeting with the client but placed dates on Regulation 60 documents that gave the false impression that two meetings had occurred .
Donald Paul Duffy

Barred

Bill Singer's Comment:

See the McGlynn case.

 

 

James Albert Allen and Richard Gabriel Sarkisian
 
(OS/CAF030038/July 2004)

Allen and Sarkisian 

  • exercised discretion in the accounts of public customers without prior written authorization from the customers and prior written acceptance of the accounts as discretionary by their member firm; and
  • prepared and maintained inaccurate new account forms, order tickets, and confirmations for public customers. 

Allen

  • failed to ensure that all of the firm's branch offices were properly registered with NASD
  • permitted salespersons in branch offices to engage in the securities business of the firm and function as representatives of his member firm without properly qualifying or registering in the appropriate capacity. 
  • failed to establish, maintain, or enforce a supervisory system or written supervisory procedures at his member firm to address the handling and supervision of "off-market" transactions and the handling of customer orders placed by third person or discretionary trading.
James Albert Allen 

Fined $50,000; Suspended 2 years in all capacities 

Richard Gabriel Sarkisian 

Fined $15,000; Suspended 9 months in all capacities; Required to Series 7 requalify within 30 business days after reassociating with a member firm. 

Bill Singer's Comment:

Within the scheme of things, these are heavy-duty sanctions.  It would have been helpful if NASD better defined the nature of the inaccuracies in the new account forms, order tickets, and confirms.  Nonetheless, it would appear that there was some fairly extensive failure to properly register branch offices and individuals.  This phenomenon seems to be occurring a bit more frequently in recent months and I suspect it has to do, in some measure, with the historic tension within many firms between management seeking to aggressively take advantage of opportunities to expand and pick-up production, and the perception that regulatory approvals are unnecessarily time-consuming and will cost the firm revenue.  As such, the regulators have an obligation to streamline the registration process --- which they have still not gotten in order; and the industry must still play by the rules.

 

Lloyd, Scott, and Valenti Ltd 
 
(AWC/C06040015/July 2004)

The firm, acting through principals, 

  • permitted an individual to actively engage in the investment banking and securities business of the firm without being registered in any capacity,
  • failed to amend its Form BD to disclose the individual's role at the firm, and
  • failed to adequately disclose on customer order confirmations the difference in the price securities were purchased from and sold to customers and the firm's contemporaneous offsetting purchase or sale price. 

Additionally, the firm effected sales of securities to public customers in riskless principal transactions and charged its customers more than a fair markup. Also, the firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations, and NASD rules regarding excessive markups. 

Lloyd, Scott, and Valenti Ltd 

Censured; Fined $50,000; Required to pay $22,657.40 in restitution to public customers; and Required to complete an ownership change through NASD's Membership Continuance process no later than 60 days after the acceptance of the AWC. If the firm fails to complete an ownership change within the prescribed time period, its NASD membership will be suspended until an ownership change is effected.

Bill Singer's Comment:

Every so often we wind up with a "boiling frog" problem.  To put that into English, the legend is that if you put a frog in a cold pot of water and slowly turn the heat up to boiling, that the frog will sit in the pot until it's boiled to death.  Nope, never tried it and can't confirm. Nonetheless, sometimes individuals visit firms and then the visits get longer and then they start helping out and then . . . whammo, one day they're actually involved in activities requiring their registration.  In this case, it would seem that someone apparently crossed over yet another line and actually became a de facto control person of the BD, but that fact was not properly reflected on the Form BD or pursuant to a modification request.

 

Huntleigh Securities Corporation 
 
(AWC/C04040023/July 2004)

The firm failed to enforce its written supervisory procedures, in that the firm failed to report suspicious transactions to the Internal Revenue Service (IRS) or other federal law enforcement authorities in the account of a public customer that was just below the $10,000 government reporting threshold. 
Huntleigh Securities Corporation 

Fined $15,000

Bill Singer's Comment:

So now we've gone out and deputized all NASD member firms as IRS agents?  In theory this makes sense --- we certainly don't want Al Qaida and other terrorist groups to use our securities markets as a place to hold and launder their money.  On the other hand, how many Compliance officers have the time or the acuity to review every day's transactions and determine what's suspicious and what's not . . . and then make the critical decision to report their concerns to the IRS.  More likely than not, what happened here is that the firm had specific written procedures requiring it to do X and Y, and didn't.  Nonetheless, this case is a warning to all in-house supervisory staff.  You will be required to report suspicious transactions to the IRS or the feds.

 

CIBC World Markets Corp. 
 
(AWC/CAF040030/July 2004)

The firm, through two retail brokers and a retail liaison, executed convertible bond trades with retail customers by interpositioning a hedge fund between firm and retail branch customers, and charging the customers unlawfully high prices for the purchase of convertible debentures. Moreover, the firm, through the retail brokers and a retail liaison (who firm failed to register as a Series 55 equity trader and improperly permitted to act as a trader), engaged in an unlawful interpositioning in a series of trades and generated over $500,000 in revenue by effecting purchases of over $9.1 million par value of convertible bonds by retail branch customers. Finally, the firm failed to supervise its trading desk, retail brokers, and a retail liaison with respect to convertible bond trading.

CIBC World Markets Corp. 

Censured; Fined $75,000; Required to reimburse $154,700, plus interest of $50,600, to public customers

Bill Singer's Comment:

Firms often fall into interpositioning violations because they don't carefully think through the ramifications of certain trades.  Moreover, there's often some individual enmeshed within the transaction who's trying to find a way to make a few more dollars go into his/her pocket and in pressing for the trade tends to force the transaction before someone in Compliance has had a chance to think it through.  At a minimum, whenever there's someone or some entity between the firm and a customer, stop for however long it takes to make sure that the intermediate party is necessary and not being used to improperly jack-up the cost of the trade.  

 

Morgan Wilshire Securities, Inc.  and Barry Francis Cassese
 
(OS/CAF030030/July 2004)

The firm, acting through Cassese and other representatives, charged excessive markups, markdowns, and commissions on principal or agent transactions involving highly liquid securities. The firm's markups, markdowns, and commissions were excessive in light of the type of securities involved, the availability of the securities in the market, the price of the securities, the amount of money involved in the transactions, disclosures to the customers, the pattern of charges, and the nature of the firm's business. The firm and Cassese failed to maintain and enforce a supervisory system with regard to customers that was reasonably designed to achieve compliance with NASD rules; and, in addition,  Cassese failed to implement the firm's written procedures regarding factors enumerated in NASD Conduct Rule IM-2440 to be considered when determining whether a charge was fair and reasonable.
Morgan Wilshire Securities, Inc. 

Censured; Ordered to pay $175,000 in restitution to public customers

Barry Francis Cassese 

Censured; Fined $25,000; Ordered to pay $140,000 in restitution to public customers; Suspended 3 months all capacities;

Bill Singer's Comment:

Mark-up/-down cases have been NASD's bread and butter for years, but it's not every day that we see an allegation that commissions are excessive.  That one often leaves me a bit uncomfortable because it raises many troubling issues.  For example, if discount brokers are able to charge $9.99 a trade and make a profit, then where and how does one draw a line as to what is an excessive commission?  I mean, let's get serious and fair here, for years the so-called major, first tier BDs were charging higher commissions and no one said anything.  Will the regulatory community soon examine the commission charges of the big boys and charge them with over-charging an often unsuspecting public?  An interesting and provocative question --- when's enough, enough?  What's fair and who get's to say so?

In any event, this case provides me with an opportunity to set forth some of the basic "fair pricing" issues that often come up.  Please visit this link to review the applicable NASD pricing rules and interpretations: PRICING

 

 

Wunderlich Securities, Inc. , Philip Richard Zanone, Jr.,Patricia Diana Hester, Patrick James Forkin, III  and Joel Christopher Rolla 
 
(AWC/CAF040034/July 2004)

Wunderlich Securities, acting through Forkin, provided an unfair advantage to institutional clients when it selectively shared research and sell recommendations to institutional clients before disseminating the information to the public.  By providing the report early to institutional clients, Forkin improperly gave the clients incentive to trade through the firm and potentially profit from increased trade activity because his compensation was, in part, commission-based. 

The firm, acting through Rolla, traded ahead of the dissemination of a research report to the public and sold shares of the common stock prior to the release of Forkin's sell recommendation. In addition, Forkin failed to

  •  disclose the firm's market making status in the reports, and 
  •  provide written disclosure to public customers that it was a market maker in securities traded by its customers on transaction confirmations, causing the firm's books and records to be inaccurate.

Furthermore, a branch office of the firm failed to maintain copies of e-mails and keep copies readily accessible for two years. Also, the firm, Zanone, and Hester failed to establish reasonable supervisory systems and procedures tailored to the firm's activities at a branch office. 

In addition, Zanone and Hester failed to fulfill their responsibilities for integrating new activities into the firm's compliance and supervisory policies and procedures or systems so that the firm could comply with securities laws, regulations, and NASD rules regarding research reports, disclosure of the firm's market maker status, and retention of e-mails. Hester was assigned to review e-mails, yet e-mails for a three-month period were lost and some employees used another terminal for e-mails for over a year without Hester's knowledge.

Wunderlich Securities,Inc. 

Censured; fined $50,000 ($30,000 joint/several with Zanone and Hester; $10,000 joint/several with Forkin; $10,000 joint/several with Rolla)

Philip Richard Zanone, Jr. 

Fined $30,000 joint/several with Hester and Wunderlich Securities; Suspended 15 business days in principal capacity; Requalify as principal

Patricia Diana Hester 

Fined $30,000 joint/several with Zanone and Wunderlich Securities; Suspended 15 business days in principal capacity; Requalify as principal

Patrick James Forkin, III

Censured; Fined $10,000 joint/several with Wunderlich Securities

Joel Christopher Rolla

Censured; Fined $10,000 joint/several with Wunderlich Securities

Bill Singer's Comment:

Among the more common questions I'm asked, is where is the NASD heading with its enforcement agenda.  This case represents a fairly good template with which to answer that question: Research and email.  Many firms are experiencing trouble digesting the myriad of new rules and regulations pertaining to research, and then implementing the necessary policies and procedures.  This case suggests some key areas with which you might want to ensure current compliance.  I'd urge you to investigate for all evidence of "leakage."  Are the analysts getting head's ups to others at the firm or select clients?  Is the firm uncanny in its ability to "anticipate" changed recommendation and essentially trading ahead?  A notable issue for NASD is whether your reports are disclosing conflicts such as whether you make markets in the stocks followed --- and are you also disclosing that on your confirms.

Separately, emails continue to be a fertile source of regulatory actions.  Not only must someone be reading these communications, but you have to have them available to produce to the NASD when its staff is on site --- and that means "readily accessible" for at least two years.  You can't tell them they're boxed up at some archive and it's going to take about a month to get the boxes, go through them, and find what they want.

 

 

Legend Merchant Group, Inc.  and Edward A. Sita
 
(OS/C10030058/July 2004)

Legend, acting through Sita, made a misrepresentation in a Private Placement Memorandum (PPM), failed to disclose material facts in the PPM, or failed to disseminate supplements to the PPM disclosing material facts. The findings also stated that the firm, acting through Sita, failed to disclose material facts in a PPM Supplement and participated in the private offerings, even though the firm's Membership Agreement with NASD did not permit the firm to engage in such activity.
Legend Merchant Group

Censured; fined $25,000

Edward A. Sita

Fined $30,000; Suspended 30 business days in all capacities and 6 months in Principal capacity.

Bill Singer's Comment:

With the market showing some signs of coming out of its long stupor, Compliance officers would be well-advised to dust off some of their older materials and refresh their recollections about the PPM policies and procedures.  More importantly, re-read your NASD Membership Agreements and make certain your firm has approval to engage in whatever form of investment banking is contemplated.

 

MMS Securities, Inc. and Michael Lawrence Garivaglia 
(AWC/C8A040019/June2004)

Garivaglia, on behalf of MMS, sent a letter to its customers informing them that the firm intended to cease its stock purchase program and was transferring its business to another firm.  The letter further advised that if the customers wanted to transfer their securities accounts to another member firm, the customers had to complete various forms; however, if they did not return the  account forms or instruct the firm, in writing, to transfer their account to the other member firm, all of the customer's account holdings would be sold by the firm and a check would be mailed to the customer. In essence, MMS intended to liquidate the accounts in the absence of express written instructions to transfer the clients to another firm.

The firm, acting through Garivaglia, executed sales transactions in the accounts of public customers who requested that the securities in their account be transferred to another firm, without the customers' knowledge, authorization, or consent. The firm failed to prepare and maintain an accurate securities record or ledger and also failed to evidence possession and control of customer fully paid securities based on the failure to maintain accurate records of the location of these securities. In addition, Garivaglia, acting through the firm, failed to employ two general securities principals, in violation of NASD Membership and Registration Rule 1021. Furthermore,  the firm received complaints, expressing grievances involving the firm or persons associated with the firm from customers with whom the firm had engaged or had sought to engage in securities activities, and failed to report timely such customers grievances to NASD as statistical and summary information. 

MMS Securities, Inc.

Censured; Fined $45,000

Michael Lawrence Garivaglia 

Fined $5,000; Suspended 30 days in managerial/supervisory capacity

Bill Singer's Comment:

Closing down a business isn't always the simplest thing to do.  Nonetheless, you should always be careful about undertaking to liquidate positions in clients' accounts when shutting down or transferring to another firm.  Although it may seem a simple, clean way to sever the relationship with a customer, in fact, it could result in the exact mess we see here.  Additionally, you should ensure that you are providing customers with ample time to consider their options and to notify you of same.  A good idea might be to speak with your clearing firm.  They will usually be more than happy to serve as a caretaker for your abandoned accounts --- they'll likely sell them to another firm.  Also, familiarize yourself with NASD's policies about bulk transfers of accounts when ceasing business and the use of negative consent letters.  Bottom line, you can't just walk away from your clients or give them unreasonably short notice.   

 

Grayson Financial LLC , Joseph LaRocca  and Joseph William Hagan 
(AWC/C9B040029/June2004)

Grayson Financial, acting through LaRocca and Hagan, failed to

  • enforce adequately its written supervisory procedures regarding the review of cancelled/rebilled transactions in public customer accounts. 

  • document properly the supervisory review of cancels/rebills and utilize "Cancel/Rebill Forms" as required by firm written supervisory procedures. 

  • establish, maintain, and enforce written supervisory procedures reasonably designed to ensure compliance with NASD Conduct Rule 3070.

LaRocca and Hagan failed to contact firm customers in sufficient numbers when a pattern of cancels/rebills appeared in customer accounts to determine if the trades had been properly authorized. In addition, NASD found that the firm failed to report complaints to NASD pursuant to NASD Conduct Rule 3070(c). 

Grayson Financial LLC 

Censured; Fined $15,000

Joseph LaRocca

Fined $5,000; Suspended 30 business days in principal/supervisory capacity

Joseph William Hagan 

Fined $5,000; Suspended 10 business days in principal/supervisory capacity

Bill Singer's Comment:

Cancellations and Rebills, or C&Rs as they have come to be known in the biz, are a bellwether indicator for regulators.  Large numbers of C&Rs may indicate systemic problems and widespread unauthorized trading.  Pointedly, NASD notes that supervisors must contact customers "in sufficient numbers" when a "pattern" of C&Rs appear.  Of course, what leads many industry compliance officers to pull their hair out is just what constitutes "sufficient" and a "pattern."  

 

Samuel Kouchin Wang
(AWC/C05040026/June2004)

Wang exercised discretion in the account of a public customer without prior written authorization from the customer and 
prior written acceptance of the account as discretionary by his member firm. He also sent electronic mail messages from public customers from a computer located in his personal residence without first submitting the correspondence for approval by a principal of the firm.

Samuel Kouchin Wang

Fined $20,000; Suspended 6 months in all capacities.

Bill Singer's Comment:

The unauthorized transaction aspect of this case aside, I'm more interested in the NASD position that RRs should not be communicating with public customers from home computers without prior correspondence approval by their firm's principal.  Given the difficulties compliance departments have convincing RRs not to communicate with clients from home, this decision will likely help firms get the message out to their salesforce.  Nonetheless, I suspect that a lot of RRs communicate with clients once they get home or over the weekend --- this decision will certainly force brokers to think twice before working from home.

 

Gregory Allen Eastman
(C3A030012/June2004)

Eastman falsely represented his commissions and assets under management at his member firm in order to obtain employment with another member firm.

Gregory Allen Eastman

Fined $20,000; Suspended 2 years in all capacities.

Bill Singer's Comment:

This has the potential to become a fairly significant case.  I would urge you to read my analysis of the SEC's decision affirming the NASD's decision.  Visit:  In the Matter of Gregory A. Eastman at http://www.rrbdlaw.com/2004/0405eastman.htm 


Raymond Louis Dirks 
(OS/CAF030063/June2004)

Dirks wrote research reports that contained "Strong Buy" recommendations that did not define what was meant by a "Strong Buy," and did not disclose any risks that could impede the achievement of targets or estimates. He failed to disclose in a report that company auditors had issued a going concern on the company before the issuance of the report. In another report Dirks failed to disclose that his member firm was a market maker in the company's securities at the time the report was published. Reports omitted material facts and included price target projections and revenue estimates that were exaggerated, unwarranted, misleading, and without a legitimate basis, and forecast events that were unwarranted in light of the speculative nature of the company's business. 

Raymond Louis Dirks 

Fined $25,000; Suspended 30 days in all capacities.

Bill Singer's Comment:

NASD has certainly picked up the research ball and run with it.  We're seeing more indications that the regulator will hone in on failures to disclose risks that could reasonably impede the realization of price targets or estimates.  As such, analysts are losing some comfort that they are simply making so-called guesstimates.  No, it still may be more of an art than a science, but if you point to some goal you now better make sure that you also warn of the reasonable obstacles on that path.  Frankly, a "going concern" opinion isn't as much an obstacle as it is an insurmountable barrier.  Consequently, NASD is correct in chastising the failure to disclose that fact to the public.  Moreover, it's hard to imagine that anyone hasn't gotten the message, by now, that you must disclose such conflicts as member firm's engaged in market making.  

 

Robert Williams Crowther, III 
(AWC/C9B040025/June2004)

Crowther failed to reasonably and properly supervise a registered representative who made unsuitable recommendations to a public customer to purchase securities on margin.

Robert Williams Crowther, III 

Fined $5,000; Suspended 30 business days in all capacities.

Bill Singer's Comment:

One of the rare cases in which a supervisor (Registered Principal) gets sanctioned for failing to supervise.  Here, the failure involves unsuitability and margin --- always a volatile mixture.

 

Randall Todd Becker 
(AWC/C3B040012/June2004)

Without the knowledge or consent of his member firm, Becker entered into an agreement whereby he would open new accounts and would be paid $100 per account by a third party not associated with his BD.  Becker received $14,200 (presumably for opening 142 accounts) and  subsequently repaid $2,000 to the individual (perhaps he got caught and decided to refund the payments).  

Randall Todd Becker 

Fined $17,200 (includes $12,200 disgorgement); Suspended 15 business days in all capacities.

Bill Singer's Comment:

The reported decision is a bit confusing but the good folks at NASD provided me with some clarification.  If nothing else, Becker appears to have belatedly figured it all out because he likely contemplated repaying the full $14,200 in fees.  Not a problem, though.  NASD took the unpaid fees as a disgorgement and then tacked on a few thousand for good measure.

 

Alan Wayne Barksdale
(AWC/C05040019/June2004)

Barksdale solicited an attorney to make contributions to public officials so that the attorney might receive favorable consideration as bond counsel on future issues of municipal securities while Barksdale's member firm was engaging in municipal securities business with the issuer.

Alan Wayne Barksdale

Fined $5,000; Suspended 31 days in all capacities.

Bill Singer's Comment:

Sounds like a Wall Street version of pea game:  Barksdale asked a lawyer to make a contribution to public officials so that the lawyer would hopefully become bond counsel on some munie offerings, and those deals might just happen to come Barksdale's way.  It would also be interesting to see what happened to those upright public officials.  Now which shell is the cash under?

 

Dmitry Verkhovsky  
(AWC/
C10040018/May 2004)

Verkhovsky arranged for an impostor to take the Series 6 and Series 63 qualification exams on his behalf. 

Dmitry Verkhovsky

Barred

 

 

James Harold McKamy  
(OS/
C06030035/May 2004)

At the direction of another individual, he prepared, signed, and backdated his member firm's management agreement for the purpose of furthering an attempt to mislead NASD concerning its investigation of an individual's principal related activities.
  See Balfour/GoldFarb and Ehrenstein

James Harold McKamy 

Fined $10,000; Suspended 6 months in all capacities

Bill Singer's Comment

I often read cases like this and hear my mother saying "So, if Tommy told you to jump off the Brooklyn Bridge . . ."  And the odd thing is that no matter how often I report these cases, I just know that somewhere out there is another individual undertaking the exact same deed.

 

Richard Scott Jacobson 
C3A030024/May 2004)

Jacobson exercised discretion in the account of a public customer without written authorization, and when confronted with losses, falsely represented to his member firm that he had failed to effect a sell order placed by the public customer in order to induce the firm to restore value to the customer's account.

Richard Scott Jacobson 

Barred

Bill Singer's Comment

Read a detailed analysis of this case at Jacobson

 

Byron Groo Hathaway
(AWC/
C9B040018/May 2004)

Hathaway created a fictitious letter, requested that a co-worker forge the name of a deceased former customer of his member firm on the letter, and submitted the letter to his firm in an attempt to obtain reimbursement for tuition-related expenses.  See Welsh

Byron Groo Hathaway

Barred

Bill Singer's Comment

As I said previously, you've got to wonder what some folks are thinking.

 

First Montauk Securities Corporation and Paul Lieberman 
(AWC/C3A040014/May 2004)

First Montauk failed to 

  • promptly amend Forms U4 and U5 for representatives after becoming aware of information that triggered an obligation to amend the forms;
  • comply with NASD Rule 3070 in that the firm failed to timely report arbitration awards and/or settlements; and
  • report terminations for cause. 

In addition, NASD determined that the firm's written supervisory procedures were not reasonably designed to achieve compliance with Form U4 and Form U5 amendments, 3070 disclosure reporting, and the identification of responsible principals.

First Montauk Securities Corporation 

Censured; Fined $45,000

 

 

First Montauk Securities Corporation and Paul Lieberman 
(AWC/CAF040026/May 2004)

First Montauk Securities issued a research report on a stock issuer that made exaggerated, unwarranted, and misleading statements and failed to 

  • disclose material facts; 
  • disclose important risks; 
  • provide a sound basis for evaluating facts regarding the issuer 
  • disclose the source for the statistical tables, charts, graphs, and illustrations in the report. 
  • disclose in the research report that it 
  • owned warrants to purchase stock from the issuer or that the firm had received compensation for investment banking services in the past 12 months or that it expected to receive, or intended to seek, compensation for investment banking services in the next three months. 

Furthermore, the research report did not have a reasonable basis for the projected revenue; failed to contain an adequate disclosure of the risks associated with, or that might impede achievement of, the price target, including that the price projection was predicated on the issuer implementing a new untried business model; and did not make certain disclosures in a prominent manner. 

First Montauk did not have a principal review or initial the research report as evidence of supervisory review before the firm released the report or maintain copies of the research report in a separate file with a record of the names of the persons who prepared the report or approved its use.  Moreover, the firm failed to adopt and implement written supervisory procedures reasonably designed to ensure compliance with the provisions of NASD Rule 2711 or to ensure that research reports issued by the firm that were prepared by associated persons complied with NASD rules and applicable securities laws and regulations. The firm's written procedures failed to set forth a procedure for the review of research reports prepared by outside consultants and failed to outline steps to be taken to achieve compliance with the review, filing, and approval requirements of NASD Rule 2210 for such reports. 

Lieberman failed to supervise adequately the preparation of the research report to prevent violations of NASD Rules 2210 and 2711, and he actively engaged in the management of the firm without registering as a principal with the firm.

First Montauk Securities Corporation 

Censured, fined $75,000, Suspended from the activity of issuing research reports for three months; Required to retain an independent consultant to review and make recommendations concerning the adequacy of the firm's current supervisory and operating procedures (written and otherwise), including the adequacy of its supervisory procedures relating to the issuance of research reports. 

Paul Lieberman 

Fined $15,000; Suspended 30 days in a supervisory capacity. 

Bill Singer's Comment

In this age of enhanced scrutiny of research reports, you would do well to consider the shortcomings of this member firm.  Clearly, "risk disclosure" is a key NASD focus --- and BDs must make certain that they include "adequate dislcosure of the risks" associated with their projections.  Undoubtedly, when a research report raises "new untried business model(s)" or contains any unusual presentations of fact/opinion/projection, the firm must be prepared to substantiate not only the underlying assumptions, but also to show that it has fully and fairly warned the public of the risks inherent in such cutting-edge commentary.

 

Peregrine Financials & Securities, Inc and Thomas Eugene Pearson
AWC/C8A040015/May 2004)

Peregrine had no preservation system to store electronic mail communications records in a non-rewritable, non-erasable manner for the required time period as required by SEC Rule 17a-4(f). Also, the firm engaged in activities that required it to be registered as a municipal securities dealer, while it failed to employ any individual who was registered as a municipal securities principal. Moreover,the firm permitted registered persons employed by the firm to perform duties as general securities representatives while their registration status with NASD was inactive due to their failure to complete timely the Regulatory Element of NASD's Continuing Education Rule. 

Peregrine failed to 

  • adequately and properly supervise the transactions in that they permitted the charging of unfair and excessive commissions.

  • preserve copies of some electronic mail communications for the required three-year period and/or to maintain electronic communications for two years in an accessible place. 

Peregrine, acting through Pearson:

  • charged public customers excessive and unfair commissions for listed options transactions;

  • entered into an agreement with a foreign broker to pay a finder's fee for opening option contracts for listed options transactions and failed to satisfy all of the conditions of NASD Membership and Registration Rule 1060(b).

Peregrine Financials & Securities, Inc.

Peregrine was censured and fined $251,100, including disgorgement of $211,022.48 in 
commissions retained. 

Thomas Eugene Pearson

Pearson was censured and fined $25,000. 

Bill Singer's Comment

An interesting reminder.  You must store email records in a manner that does not permit them to be altered or deleted.  The attendant registration issues are also a wake-up call to all member firms to make certain that your business segments are properly overseen by registered principals and CE compliant staff.

 

Metro Trading, Inc. 
(CMS030047)/May 2004)

Metro traded ahead of research and failed to 

  • mark and annotate affirmative determinations for short sale transactions;

  • establish, maintain, and enforce a supervisory system and to implement supervisory procedures reasonably designed to achieve compliance with NASD conduct rules relating to trading ahead of research, affirmative determinations for short sale transactions, and the duty of registered representatives to notify firms with whom they have an account of their association with another firm; and

  • provide for the establishment and maintenance of written procedures, the designation of an appropriately registered principal without authority to carry out the supervisory responsibilities for each type of business in which the firm engages, the assignment of each registered person to an appropriately registered representative and/or principal to supervise that person's activities, and the designation of one or more principals to review the firm's supervisory system, procedures, and inspections implemented by the firm. 

Metro Trading, Inc. 

Censured, fined $222,743, and expelled from NASD membership.  

Bill Singer's Comment

Expulsions of member firms are serious sanctions.  Once again, we see a BD running afoul of research (trading ahead) and short-selling (affirmative determination) regulations. Take notice before you fall under scrutiny next  

 

Sandra Marie Welsh
(AWC/
C9B040015/April 2004)

Welsh forged the name of a former public customer of her member firm on a fictitious letter created by a co-worker for the purpose of the co-worker obtaining reimbursement from the firm for tuition-related expenses. See Hathaway

Sandra Marie Welsh

Barred

Bill Singer's Comment

What???  The barred person forged a customer's signature on a fictitious letter to help the co-worker get tuition reimbursement?  You got to wonder what some folks are thinking.

 

Vincent John Glinski, Howard Francis Curd and Joseph Patrick Shanahan
(OS/
CAF030056/April 2004)

Glinski prepared research reports on a company traded on the NNM that were disseminated through his firm's Web site, blast faxes, and mailing lists and, in each report, he failed to disclose the true financial condition of the company and other material information about the company. His research reports contained exaggerated, unwarranted, and misleading statements about the company, including favorable recommendations and target price projections. 

Curd and Shanahan failed to 

  • obtain the signature or initials of a firm principal indicating approval of the research reports it disseminated;

  • file any of the research reports and the actual or anticipated date of first use with NASD's Advertising Regulation Department; and

  • failed to review  research reports prior to distribution and knew, or should have known, of red  flags in that the reports failed to disclose material facts and contained material  misrepresentations.
     

Curd failed to 

  • establish, maintain,  and enforce written supervisory procedures and systems to supervise the activities of registered representatives and associates reasonably designed to  achieve compliance with applicable securities laws, regulations, and NASD rules;

  • report shares of the security held in which he was a beneficial owner (pursuant to his filing of an SEC Form 5);

  • file an SEC Form 4 disclosing changes in beneficial ownership of securities of the issuer; and

  • ensure that e-mails, order tickets, new account forms, and corporate resolutions were preserved. 

Further, by the use of any  means or instrumentality of interstate commerce or of the mails, Curd knowingly or  recklessly engaged in manipulative or deceptive devices or contrivances in  connection with the purchase or sale of securities and knowingly or recklessly  effected transactions in, or induced the purchase or sale of, securities by means  of manipulative, deceptive, or other fraudulent devices or contrivances. 

Vincent John Glinski,  and 

Fined $20,000; Suspended 6 months all capacities.

Howard Francis Curd

Fined $50,000; Suspended 1 year in all capacities; Required to requalify by exam for the Series 24 license before acting 
again in a principal capacity. 

Joseph Patrick Shanahan

Fined $7,500; Suspended 25 business days in a general securities principal capacity; and Required to requalify by exam for the Series 24 license before acting again in a principal capacity. 

Bill Singer's Comment

As if any Wall Street compliance pro hasn't already guessed, research is going to be a hot button for regulators for the near future.  This case is quite instructive as to virtually everything you shouldn't do.  First, if you're going to put your research out on the Internet --- yet alone do a full-court press of distribution through faxes and mailings --- you have to carefully check to content and verify the underlying facts and assumptions.  I often urge clients to undertake what's called a "cold review."  Have someone outside the loop tick off every material statement and ask to see the supports.  I particularly like this cold reviewer to NOT have seen any prior drafts of the subject report but to be called in for what's known as the "final" version.  You'd be surprised what often gets caught; particularly because the prior reviewers "assumed" facts from their familiarity with the prior drafts.  

 

Yury Shapiro
(AWC/
C10040006/April 2004)

Shapiro arranged for an impostor to take the Series 6 and Series 63 qualification exams on his behalf.

Yury Shapiro

Barred 

 

 

Juan Gascot-Jimenez
(OS/
C07020018/April 2004)

Gascot-Jimenez took the Series 7 exam while in possession of a piece of paper containing information relevant to the exam that he failed to turn over to the testing center staff and reviewed several times during the exam. 

Juan Gascot-Jimenez

Barred

Bill Singer's Comment

See the Toribio case.

 

Kathleen Ann Fisler 
(AWC/
C04040006/April 2004)

Fisher gave  public customers checks totaling $275,900 in an attempt to prevent them from  complaining due to losses in their securities accounts and/or to reimburse them  for losses and/or margin debt.

Kathleen Ann Fisler 

No fine in light of financial status; Suspended 1 year in all capacities.

 

 

Joseph Donald Columbo 
(OS/
CAF030011 and C10030017/April 2004)

A member firm, acting through Columbo, participated, directly or indirectly, in undertakings involving the sale of Brady Bonds and interests in Brady Bonds with a view to the distribution of the securities, thereby acting as underwriters in the sale of unregistered securities, and knowingly or recklessly charged fraudulently excessive markups on the sale of Brady Bonds. Columbo failed to enforce the firm's procedures related to its review of corporate debt and municipal securities transactions.

Joseph Donald Columbo 

Fined $50,000; Suspended 6 months as an equity trader and as a general securities principal; Required to requalify as an equity trader.

 

 

Craig Alan Brandwein
(AWC/
CAF040018/April 2004)

Brandwein failed to 

  • supervise adequately registered representatives in the sale of unregistered stock to the investing public,

  • conduct adequate due diligence of the stock, 

  • discover that there were no registration statements filed or in effect pursuant to the Securities Act of 1933 

  • detect or follow up on certain red flags including a dramatic increase in the sales volume of the stock by his 
    registered representatives, and

  • respond to an NASD request to appear and give testimony.

Craig Alan Brandwein

Barred 

 

 

Isaac Charles Grossman 
(AWC/C07040022/April 2004)


Grossman opened two accounts for the children of a public customer and, pursuant to instructions from the customer, executed transactions in the accounts without the authorization of the account holders to accept instructions from the public customer.

Isaac Charles Grossman 

Fined $5,000 and Suspended 5 business days in all capacities.

See Borgo case

Bill Singer's Comments

This is a fairly frequent mistake that RRs make.  A spouse or parent will ask you to open an account for their spouse/child, but that account is not a joint account with the "introducing client."  Instead to maintaining the appropriate arm's length relationship with the introducer, RRs often accept buy/sell orders from that party instead of from the client of record.  You just wouldn't think that children or spouses would complain --- yeah, right.

 

Christopher John Borgo 
(AWC/C07040021/April 2004)

Borgo opened accounts for the children of a public customer and, pursuant to instructions from the customer, executed transactions in the accounts without the authorization of the account holders to accept instructions from the public customer. Borgo also testified falsely under oath in an NASD on-the-record interview.

Christopher John Borgo 

Fined $30,000; Suspended 20 business days in all capacities.

See Grossman case

Bill Singer's Comments

This is a fairly frequent mistake that RRs make.  A spouse or parent will ask you to open an account for their spouse/child, but that account is not a joint account with the "introducing client."  Instead to maintaining the appropriate arm's length relationship with the introducer, RRs often accept buy/sell orders from that party instead of from the client of record.  You just wouldn't think that children or spouses would complain --- yeah, right.

 

North Coast Securities Corp.
(AWC/
CAF040019/April 2004)

Firm executed sales of unregistered securities on behalf of a public customer and failed to ascertain whether the stock was freely tradable. Firm failed to have adequate supervisory procedures in place relating to the prevention of the sale of unregistered securities, and allowed a registered representative to engage in sales away from the firm, for compensation, without properly supervising his participation in those sales that entailed fraudulent omissions and the sale of unregistered securities. 

North Coast Securities Corp.

Censured; Fined $10,000.

 

 

AXA Advisors, LLC  
(AWC/
C10040012/April 2004)

Firm allowed an individual, while not registered with NASD as a principal, to act in that capacity by actively engaging in the management of the firm. 

AXA Advisors, LLC

Censured; Fined$15,000 ($7,500 jointly and severally with unnamed party).

 

 

Sterling Financial Investment Group, Inc.
and  Brian Frederick Gimelson
(AWC/
C07040018/April 2004)

Gimelson recklessly and/or  intentionally effected agency cross transactions in a stock at or near the close of the trading day at prices higher than the prevailing national best offer, causing  market appreciation in the margin accounts of several of his customers at his  member firm, and, by virtue of the manner in which Sterling's clearing firm  calculated margin liabilities, decreased the amount of margin exposure in those  accounts. Firm failed to establish a supervisory  system reasonably designed to achieve compliance with applicable securities laws and regulations concerning quotation and trading activity at or near the  close of the trading day. Firm was unable to provide  order tickets and/or confirmations for transactions in response to NASD requests; and  order tickets did not indicate the  account for which the trade was entered and several were not properly stamped  with the time of receipt or the time of execution.

Sterling Financial Investment Group, Inc.

Censured; fined $7,500 ($5,000 joint/several)

 

Brian Frederick Gimelson

Fined $5,000, jointly and severally; Suspended 20 business days all capacities.

Bill Singer's Comments

These so-called NBBO cases are popping up with increasing frequency.  Visit RRBDLAW.com's page covering these actions for more details. http://rrbdlaw.com/RegulatoryLinks/NBBO/index.htm

 

 

The Buckingham Research Group Incorporated 
(AWC/
C05040005/February 2004)

  • Permitted a research analyst to act as a general securities representative of the firm by allowing him to generate research reports that identified him by name while failing to be registered in such capacity. 

  • Allowed individuals to act in the capacity of registered representatives while their registrations were deemed inactive due to their failure to satisfy the Regulatory Element of NASD's Continuing Education Requirement.

  • Reported proprietary short sale transactions through ACT without a short sale modifier and one long sale transaction was reported as short. 

  • Failed to report to ACT the correct symbol indicating that the firm executed transactions in eligible securities in an agency capacity. 

  • Failed to preserve e-mail communications sent to institutional investors for three years, the first two years in an easily accessible place.

The Buckingham Research Group Incorporated 

Censured; Fined $29,000 (includes $10,000 jointly and severally with undisclosed party)

Bill Singer's Comment

Another instructive enforcement case.  First, in this new day and age of research scrutiny be careful to ensure that your analysts are appropriately registered.  New rules require at least a refresher course in who's supposed to be registered.  Also, make sure that you're preserving e-mails --- even if they're going to an institutional investor rather than a mere individual customer.

 

Paramount Capital, Inc.
(AWC/
C9B040003/February 2004)

Without admitting or denying the allegations, the firm consented to the described allegations and to the entry of findings that, acting under the direction and control of an individual, it was a participating broker in a contingency offering of securities, and investor 
funds raised in the offering were not transmitted to a separate bank escrow account meeting the requirements of Rule 15c2-4. The firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with SEC Rule 15c2-4. 

Paramount Capital, Inc.

Censured; Fined $10,000 (includes $5,000 joint and several with undisclosed party)

Bill Singer's Comments

With the market showing some signs of recovering from a long bearish sleep, we will likely see an increase in deal making.  Remember to abide by the terms of the escrow agreement.

 

Cary Edwin Grant
(OS/
C8A030013/February 2004)

Grant performed duties as a general securities principal and was the president of his member firm while his registration status with NASD was inactive due to his failure to timely complete the Regulatory Element of NASD's Continuing Education Rule. In contravention of his member firm's NASD membership agreement:

  • Grant failed to file timely a written application for change in ownership of his member firm, and

  • Acting through Grant, his member firm opened a branch office and failed to properly notify NASD of its intent.

Grant failed to establish and maintain a supervisory system over the activities of a branch office of his member firm reasonably designed to achieve compliance with applicable securities laws, regulations, and NASD rules in that Grant permitted his NASD Electronic Signature and password to be used by an individual at the firm who was not a registered principal and permitted new accounts to be opened and orders executed without the approval of a firm principal. Finally,Grant failed to respond promptly to NASD requests for information and documentation.

Cary Edwin Grant

In light of the financial status of Grant, no monetary sanction has been imposed. Suspended 3 months all capacities and for 6 months thereafter suspended in principal/supervisory capacities.

Bill Singer's Comment

So many violations and so little time.  Wow . . . where to begin?  This is almost a classic case-study for Compliance professionals.  First, make sure that your CE program is up to date.  Second, ownership changes likely require a formal modification of your NASD Membership Agreement.  Third, under the Safe Harbor provisions of the NASD's membership rules you may be able to open a branch office without approval but you should also double-check your membership agreement before embarking upon such a prospect.  Fourth, generally, when NASD gives you a password, the regulator expects you to guard it with your life.  And finally, the ever-popular make sure you respond (or at least timely respond) to all regulatory requests.

 

Berry-Shino Securities, Inc. and
Ralph Matthew Shino
(
C3A030001/February 2004)

Acting through Shino, the firm

  • charged public customers excessive and unfair commissions on listed option transactions. The commissions were greater than the amount of commission warranted by market conditions, the cost of executing the transactions, the value of services rendered to the customer by the firm, and other pertinent factors; and

  • accepted and executed, or caused the execution of, orders to purchase listed options in customer accounts without having obtained required information and documentation from the customers as required by NASD Conduct Rule 2860(B)(16)(A).

Berry-Shino Securities, Inc.

Fined $52,500, jointly and severally

Ralph Matthew Shino

Fined $52,500, jointly and severally; Suspended 10 business days in principal capacity.

Bill Singer's Comment

An interesting issue --- what constitutes an "excessive" commission, and keep in mind that we're not talking about a mark-up/mark-down (which, at least, is subject to the 5% Guideline).  

 

Timothy Daniel Skelly
(AWC/
C11040004/February 2004)

Skelly purchased various municipal bonds for public customers and prepared "fact sheets" that provided specific details about the bonds being purchased, including their creditworthiness, as requested by the customers; however, certain municipal bonds purchased by the customers were inaccurately represented as "county guaranteed" or "moral obligation bonds" when in fact the bonds contained neither guarantees nor pledges.

Timothy Daniel Skelly

Fined $5,000; Suspended 10 business days in all capacities.

 

 

James Robert Snyder
(AWC/
C8B040002/February 2004)

Snyder settled a customer complaint that had been filed against him and entered into written agreements with the plaintiffs that included improper confidentiality provisions in each settlement agreement that effectively prohibited the customers from disclosing the underlying facts of their complaints and the settlement terms to anyone, including NASD. Snyder failed to respond to NASD requests for information.

James Robert Snyder

Barred

Bill Singer's Comments

SEC held that it is a violation for a settlement agreement to prevent BD customers from cooperating with an NASD investigation. Read In the Matter of the Application of Stratton Oakmont, Inc. For Review of Disciplinary Action Taken by NASD (Securities and Exchange Act of 1934 Rel. No. 38390 / March 12, 1997 at http://www.sec.gov/litigation/opinions/3438390.txt

NASD Notice to Members 86-36, dated May 14, 1986, states that settlement agreements that preclude customers from testifying in NASD proceedings may violate applicable Rules.

 

John Philip Warner
(AWC/
C05040001/March 2004)

Warner borrowed $31,219.17 from a public customer and recommended and executed the liquidation of mutual funds in the account of the customer for the purpose of funding the loan to himself. Warner had persuaded the customer to loan him the funds by offering a nine percent return, thereby replacing the customer's original investment with an unsecured loan.  NASD charged that the recommendation/transactions were not suitable.

John Philip Warner 

Fined $10,000; Suspended 90 days in all capacities.

Bill Singer's Comments

Yet another in a long line of cases involving RRs lending/borrowing money from customers.  Compliance officers would be well advised to discuss recently revised NASD Rule 2370, which prohibits registered persons from borrowing money from or lending money to a customer unless 

  1. the member has written procedures allowing such lending arrangements consistent with the rule; 

  2. the loan falls within one of five prescribed permissible types of lending arrangements set forth in the rule; and 

  3. the member pre-approves the loan in writing

Exempt from the rule's notice and approval requirements are lending arrangements involving a registered person where the customer (Rule 2370 limits the scope of the rule to lending arrangements between registered persons and their customers, rather than any customer of the firm) is: 

  1. a member of the RR's immediate family (as defined in the rule); or 

  2. a financial institution regularly engaged in the business of providing credit, financing, or loans (or other entity or person that regularly arranges or extends credit in the ordinary course of business), provided the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose, and creditworthiness. 

 

Scott Alan Webster
(
C07030050/March 2004)

Webster

  • opened securities accounts at other member firms while he was associated with a member firm,

  • failed to provide written notice to his member firm, and

  • failed to advise the other member firms that he was a representative prior to opening the accounts or placing initial orders in the accounts.

Scott Alan Webster

Fined $5,000; Suspended 10 business days in all capacities

 

 

Victor O. Zevallos 
(AWC/C11030040/February 2004)

Without his firm's knowledge, using firm letterhead, Zevallos created fictitious undated documents that he sent to a public customer that misrepresented that he had made a partial repayment of a personal loan from the customer by depositing funds in the customer's brokerage account at his member firm when, in fact, he had made no such payments. 

Victor O. Zevallos

Barred

 

 

Pietro Joseph Passalacqua 
(AWC/
C9B030082/February 2004)

Without authorization from his member firm, Passalacqua paid a total of $215,000 in commissions to a registered representative based on referred variable annuity transactions. 

Pietro Joseph Passalacqua 

Fined $7,500; Suspended 10 business days all capacities

Bill Singer's Comment

See the Berardi case immediately below.  Seems you can't pay referral fees to unregistered entities or registered persons.  I think it's time the industry called for the scrapping of this policy and permitted the payment of referral fees provided that they are 1) fully disclosed to the effected customers, and 2) undertaken pursuant to a written fee agreement approved by the member firm prior to any payment.

 

Michael Stewart Berardi 
(AWC/
C9B030079/February 2004)

Berardi paid $526,250 to unregistered entities in connection with securities business referrals that he received.

Michael Stewart Berardi 

Fined $5,000; Suspended 15 business days all capacities

Bill Singer's Comment

Prospecting is the lifeblood of RRs, but you can't pay some fees to certain types of entities.  Generally, if you've been asked to pay a percentage of any commissions/transactions, it's going to be a no-no.  Before you enter into any referral fee deals, speak with a lawyer and make certain your BD approves the proposal in writing.  However, for the record, I don't approve of this prohibition.  I believe that as long as any type of referral is fully disclosed to customers and the underlying arrangement is in writing that the practice is acceptable.  I know of few businesses that prohibit referral fees for forwarded prospects.  See the Passalacqua case above for a variation on this theme.

 

 

Michael Nelson Barnett 
(OS/
C9A030029/February 2004)

Registered Supervisor Barnett failed to reasonably and properly supervise an individual so as to detect and prevent violations of NASD rules regarding discretionary power. 

Michael Nelson Barnett 

Fined $5,000; Suspended 10 business days all capacities

Bill Singer's Comment

That's a hefty suspension --- 10 business days --- merely for failing to detect/prevent discretionary power tradings.  Nonetheless, improper discretion, whether resulting from the failure to get prior written authorization or to abide by the terms of the power, exposes a firm to significant liability.  Frankly, it's not often a simple thing to detect.  After all, if an RR is engaged in unauthorized discretion and there are no customer complaints, how are you supposed to spot the signs?  Things to look out for:  sudden increases in trading and increased short-term trading (particularly when the account's history is more stable).  Also, one of the reasons you should make a point of becoming aware of RRs' personal financial condition is to keep an eye out for brokers trying to fix their cash woes by unauthorized trading designed to generate commissions.

 

 

World Financial Capital Markets, Inc. and Frank Richard Bell
(AWC/CAF030057/February 2004)

World sold shares of a security to foreign customers through unregistered persons; there was no prior customer contact by the firm's RRs and no prior authorization to accept orders from unregistered third parties.  BD acting through Bell, knowingly accepted and recorded such orders, improperly exercised discretion, and created/ maintained inaccurate books and records. Further, at the direction of Bell, BD posted research reports on issuers that contained exaggerated, unwarranted, or misleading statements and failed to disclose material facts. BD's systems/procedures were inadequate regarding publishing/distributing research, the handling of customer orders by third persons, and discretionary trading. Furthermore, the respondents failed to establish and implement adequate policies/procedures (and training) pertaining to suspicious transactions and the Bank Secrecy Act.

World Financial Capital Markets, Inc.

Censured; Fined $100,000 ($40,000 jt/sev with Bell); Required

  • not to post any research reports on its Web site for 2 years;
  • to revise Anti-Money Laundering Compliance Procedures within 30 days of AWC effectiveness;
  • to hire an outside consultant within 60 days of AWC effectiveness to independently test AML procedures (and implement consultant's recommendations within 30 days of his/her findings/recommendations.
Frank Richard Bell

Fined $40,000 (jt/sev); Barred in principal capacity; and Suspended for 8 months in all capacities.

 

Bill Singer's Comment

As U.S. BDs seek new customers, more efforts are being made to find foreign customers. As this case demonstrates, many domestic securities laws/regulations apply regardless of where the customer is located --- here, the BD wrongly sold through unregistered persons.  The decision suggests that one possibl cure would have been for the foreign customer to grant a discretionary power to the unregistered third party, and for the BD to file that power and deal with the intermediary.  Similarly, there is a worthwhile better-practices pointer that all new accounts (including foreign) should likely preliminarily pass through at least one RR before initiating any activity.  Additionally, in this post-9/11 world, U.S. regulators will show no flexibility with Anti-Money Laundering noncompliance. Separately, the sanction prohibiting the posting of any research reports on the firm's website for 2 years is a likely harbinger of things to come. If you're starting to attract increasing numbers of offshore accounts and/or your marketing efforts include a website, you'd be well advised to hire an outside consultant to audit your applicable policies and procedures. Otherwise, you might have an 8-month vacation to think about your shortcomings.

 

Balfour Investors, Inc. and Carl Goldfarb (AWC/ C10030103/February 2004)

Paul Samuel Ehrenstein (AWC/ C10030104/February 2004)

During an NASD examination, the Staff asked for new account forms. For reasons not explained, Balfour couldn't locate originals of everything requested and acting through Goldfarb prepared substitute replacements for those forms missing.  Those substitutes were provided to NASD without affirmatively indicating that the forms were not original, that the names on the "preparer" signature lines had been added to some of the forms without authorization or consent of those whose names were added, and the firm and its personnel lacked documentary confirmation that the substitute forms contained the same customer information, investment objectives, and risk exposure information as contained on the missing forms. Ehrenstein advised his BD to prepare substitute new account forms for missing account forms requested by NASD during an examination. The new forms were "furnished to NASD without Ehrenstein's participation" and without affirmatively indicating that the forms were not original, the names on the "preparer" signature lines had been added without authorization or consent of those whose names were added, the forms were backdated, and that the firm and its personnel lacked documentary confirmation that the substitute forms contained the same information. Ehrenstein failed to ensure that the firm would advise NASD that the forms were not originals and of the manner in which the forms had been prepared prior to the production of the substitute forms.  

Additionally, the BD allowed unregistered individuals to act as limited representative-equity traders and to execute transactions. Also, the BD failed to preserve for not less than three years, the first two in an accessible place, brokerage order memoranda and their confirmations. Finally, the BD failed to report to NASD's Fixed Income Pricing SystemSM (FIPSSM) the firm's sell transactions in high-yield securities to public customers.  

Balfour Investors, Inc. 

Censured; Fined $37,000 ($15,000 jt/sev with Goldfarb) 

 

Carl Goldfarb

Fined $15,000 (jt/sev); Suspended 9 months all capacities 

Paul Samuel Ehrenstein

 Fined $7,500; Suspended 10 business days in all capacities.

 

Bill Singer's Comment

Although the index numbers in Balfour/Goldfarb and Ehrenstein are sequentially 103 and 104 and the allegations are remarkably similar, there's nothing in the respective NASD official reports cross-referencing the cases. I'm going to go out on a limb here and guess that the matters are related. Consequently, readers (whether public customers, industry professionals, or  regulators) may miss the connections between and among various cases and parties.  The mechanics of pleadings aside, I see little reason for NASD not to provide a minimal indication of commonality when reporting a settlement or decision.  For another example see the MSDW and Rogers cases below. Further, in many reported cases the explanations are so terse as to raise troubling questions as to the meaning of a case --- what is it that happened here and what "lesson" does NASD seek to teach?   

It's an oft-quoted lament that on any given day there's at least one mismarked order ticket (and that's the one the regulators always seem to ask for). Nonetheless, there's a right way and a wrong way to deal with such deficiencies. If you have the ability to "recreate" a document (that is, legitimately fill-in a form based upon existing information at your disposal), it's sounder practice to inform the NASD of the missing original, provide the recreation by prominently disclosing such status, and to submit the supporting documentation upon which you relied --- otherwise, you look like you're trying to pull a fast one.  

Finally, as charged, Ehrenstein seems to have merely "advised" his firm to substitute the recreated forms, but apparently Goldfarb "furnished [the forms] to NASD without Ehrenstein's participation." What was the overt, violative act Ehrenstein committed? The NASD's report is unsatisfactory in that it fails to note Ehrenstein's capacity (Director of Compliance?) and doesn't really indicate what act he committed.  Was he aware that Goldfarb prepared all the forms without adequate supports?  Did he know that Goldfarb had submitted the recreations without prior explanation to the NASD of that status?  Did Ehrenstein believe that it was acceptable to prepare the recreations because they incorporated data that he felt was either available on other documents or easily inferred? Or, is Wall Street now hiring Thought Police to prosecute registered persons for giving advice and opinions?


Morgan Stanley DW, Inc. (AWC/ CAF030066/February 2004)

Brian James Rogers (AWC/CAF030065/February 2004)

RRs in a Morgan Stanley DW branch solicited public customers to purchase shares in a start-up technology company for which the BD did not provide research, and falsely recorded the solicited trades as "unsolicited" in the books and records (also causing inaccurate books and records). 

Rogers was unaware of the solicitation by RRs at a branch for a start-up technology company not covered by his firm, and failed to take reasonable action to assure they had a reasonable basis for the recommendation. Accordingly, he failed to enforce the firm's solicitation policies and failed to take reasonable steps to prevent and detect the falsification of firm records. Moreover, Rogers orally delegated supervisory responsibilities over inexperienced RRs to an RR engaged in the solicitation of the stock, but failed to act reasonably to ensure that those delegated responsibilities were carried out.

Morgan Stanley DW, Inc.

Fined $25,000: (jt/sev); Required to prepare/implement procedures and computer exception reports reasonably designed to detect and prevent the mis-marking of order tickets regarding the solicitation of securities transactions with public customers where the firm did not provide research for the securities (and provide NASD with a copy of its written supervisory procedures within 30 days after they are implemented, together with a certification of same).  In the interim, the BD shall reiterate to its RRs the importance of its policies regarding solicited and unsolicited trades.

 

Brian James Rogers

Fined $20,000; Suspended 30 days in principal capacity.

Bill Singer's Comment

Once again (as in Balfour/Godlfarb and Ehrenstein) we have sequential docket numbers 065 and 066, remarkably similar allegations, but nothing in the respective NASD official reports cross-referencing the cases. Again, Iím going to go out on a limb here and guess that the matters are related. Nonetheless, why isnít Rogers named as a respondent in the MSDW case --- when Bell is named in the World case and Goldfarb in the Balfour matter . . . worse, how come Ehrenstein wasnít named with Goldfarb and Balfour? Still, NASD makes a very valid point in the MSDW/Rogers cases. If you have a number of RRs at one branch entering purchases for the same start-up tech company, then someone should notice the warning flares --- and certainly should be troubled by the non-research-coverage aspect and the ďunsolicitedĒ tickets. You just canít go through the motions and expect that to constitute a defense.

 

Thomas Jayson Feight (AWC/CMS030261/February 2004)

Feight used high-pressure sales practices; made repeated telephone calls; knowingly and recklessly employed fraudulent misrepresentations, including baseless price predictions and guarantees; and omitted to state material facts about the precarious financial condition of a company with questionable business operations, virtually no assets, and little or no revenue. He failed to research the company's financial condition and knew virtually nothing about the company (including the fact that its most recent SEC filing showed its total cash-on-hand was only $356 and contained a "going concern" clause.) Nonetheless, he claimed that respected institutions were investing in the company, that he had attended meetings with bankers who would obtain financing for the company and, that its per-share value would rise to $5.00 in six months and double in a year.

Thomas Jayson Feight

Barred in all capacities

Bill Singer's Comment

RRs must be careful about getting carried away with the puffery of selling.  The old expression is still quite apt:  Never write a check your body can't cash.  Before you start pumping a stock it's always a good idea to check the most recent SEC filings.

 

 

Mark Warren Lamb and David Scott Cacchione (OS/CAF020053/February 2004)

Respondents sold unregistered (non-exempt) securities to public customers while the firm acted as an underwriter (an unauthorized third party was involved in the sale and pricing).  Lamb failed to promptly inform his firm's trading department of his receipt of order tickets so that the trades could be reported within 90 seconds of execution. In addition, he failed to disclose that the prices given to certain purchasers were materially different from prices given to others who purchased at virtually the same time, and that his firm delayed for several hours the inputting and trade reporting of the sales.

 

Mark Warren Lamb

Fined $50,000; Suspended 30 days in all capacities.

David Scott Cacchione

Fined $35,000; Suspended 30 days in all capacities.

 





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