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

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.

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)

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)

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

Steven Walter Schaefer 
 (C3A030053/August 2004)

Jhoanny E. Pena
 (C10030135/August 2004)

Barred

Benjamin Agleham Pangilinan 
(AWC/C9B040062/August 2004)

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

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.

Barred

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)

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)

Barred 

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

• 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. 

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)

• 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. 

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.

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.

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. 

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.

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. 

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.

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.

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

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

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.

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.

Fined $5,000; Suspended 1 month all capacities

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

Barred in all capacities

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.

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.

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)

• 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. 

Barred

Karen Lee McGlynn
 (AWC/C9B040041/July 2004)

Barred

Bill Singer's Comment:

See the Duffy case.

Donald Paul Duffy
(AWC/C9B040040/July 2004)

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.

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

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. 

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)

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.

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)

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

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)

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.

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

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

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

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

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)

Censured; fined $25,000

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)

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. 

Censured; Fined $45,000

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). 

Censured; Fined $15,000

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

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.

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.

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. 

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.

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).  

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.