Statutory Disqualification Index
SEC and FINRA
CASES OF NOTE
SD03006
NOTE: Stipulations of Fact and Consent to Penalty (SFC); 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 & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.

In the Matter of the Continued Membership of Sponsoring Firm 1

In the Matter of the Continued Association of X as a General Securities Representative, General Securities Principal, and Financial and Operations Principal with Sponsoring Firm 2

In the Matter of the Continued Association of X as a General Securities Representative, Equity Trader, General Securities Principal, Municipal Securities Principal, and Financial and Operations Principal with Sponsoring Firm 1

MC-400: August 6, 2002

Redacted SD Decision
No. 03006

DENIED by Hearing Panel of the NASD's Statutory Disqualification Committee/ National Adjudicatory Council

April 2003, a subcommittee ("Hearing Panel") of NASD's Statutory Disqualification Committee held a hearing. 

Sponsoring Firm 2 filed an application for review of this decision with the SEC. The SEC dismissed the appeal.

Filed Under: Permanent Injunction, Recency, Sponsor's Regulatory History, Denial
SD Event
In 2003, a U.S. District Court for State 1("District Court")  found that Sponsoring Firm 1 and X, along with other individuals ("Group A"), conducted a fraudulent blind pool offering, subsequent market manipulation, and fraudulent sale of the securities of Company A. Sponsoring Firm 1 and X are both subject to a statutory disqualification as a result of a judgment rendered against them by , in which the Court permanently enjoined Sponsoring Firm 1 and X from: (1) committing fraud in the offer or sale of securities in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act"); (2) committing fraud in connection with the purchase or sale of any security in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"); (3) committing fraud as a control person in violation of Section 10(b) and 15(c)(1) of the Exchange Act; (4) committing fraud in connection with a distribution of securities in violation of Section 10(b) of the Exchange Act and Rule 10b-6 thereunder, and; (5) selling unregistered securities in violation of Section 5 of the Securities Act. The District Court ordered Sponsoring Firm 1 and X to disgorge $134,224, plus prejudgment interest, which represented the joint profits gained as a result of Sponsoring Firm 1 and X's illegal activities. The District Court ordered that X was jointly and severally liable for the disgorgement because "[X] did play an intimate role in the fraudulent transactions."
Sentence Expiration
N/A
Prior Industry Activity
X has worked in the securities business since 1980. He is qualified as a general securities representative, financial and operations principal ("FINOP"), general securities principal, municipal securities principal, limited representative Ė equity trader, general securities principal, and uniform securities agent state law. X is the President, Treasurer and FINOP of Sponsoring Firm 1. He is also the President, Treasurer and FINOP of Sponsoring Firm 2X is President and a Director of Company C. X controls or owns between 20 and 33 percent of Company C. X, therefore, has both a substantial indirect ownership interest in Sponsoring Firm 1 and Sponsoring Firm 2, and he is the most senior executive at both firms.
Background

In 2003 NASD's Department of Market Regulation ("Market Regulation") filed a complaint against Sponsoring Firm 1 that alleged the following: 

  • from September 1999, through June 2000 Sponsoring Firm 1 failed to submit required information to the Order Audit Trail System ("OATS") on 191 consecutive business days; and 

  • from October 2000 through December 2000, Firm 1 failed to submit required information to OATS on 35 consecutive business days, in violation of NASD Marketplace Rule 6955(a) and Conduct Rule 2110;

  • failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the applicable securities laws and regulations concerning OATS data submission in violation of NASD Conduct Rules 2110 and 3010; and

  • failed to accept or decline in the Automated Confirmation Transaction Service ("ACT") 1,399 transactions in eligible securities within 20 minutes after execution from October 2001 through December 2001 in violation of NASD Marketplace Rule 6130(b) and Conduct Rule 2110. 

The Hearing Panel for this matter held a hearing that concluded in 2003, but the Hearing Panel has not yet issued a final decision. 

In 2003, an NASD Hearing Panel found that 

  • Sponsoring Firm 1 violated Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and NASD Rules 2510, 2120, and 2110 by churning the account of a customer, as well as, violated Rules 3010 and 2110 by failing to reasonably supervise trading in this customer's account;
  • X failed to supervise the trading in the customer's account, in violation of NASD rules. 

This matter is currently on appeal to the NAC

In 2003, NASD issued Sponsoring Firm 1 a Letter of Caution ("LOC") for failure to provide NASD with a hard copy response to the information requested in a breakpoint survey letter. 

In 1997, NASD issued Sponsoring Firm 1 an LOC for violations of NASD Conduct Rule 3380. NASD staff had reviewed preferenced SelectNet orders submitted by Sponsoring Firm 1 to a market maker or an ECN and subsequent cancellation of the orders prior to the minimum ten second time period. Sponsoring Firm 1 was not required to submit a letter in response to the LOC because the Nasdaq system was modified to inhibit the cancellation of SelectNet orders within ten seconds of entry. 

In 1996, Sponsoring Firm 1 and X were censured, fined $25,000, jointly and severally, and required to make restitution to customers in the amount of $13,686.05, plus interest and costs of $1,750, jointly and severally. NASD found that Sponsoring Firm 1 manipulated the market in the common stock of an over-the-counter "Pink Sheets" company, in violation of NASD rules and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. NASD further found that Sponsoring Firm 1 charged excessive and fraudulent markups in violation of NASD rules, and Exchange Act Section 10(b) and Exchange Act Rule 10b-5. NASD also found that X and Sponsoring Firm 1 failed to establish, implement and enforce reasonable supervisory procedures designed to prevent the manipulation and markup violations, in violation of NASD rules. X was suspended in all capacities for 30 days and required to requalify by examination as a general securities principal within 90 days of the decision or be suspended in all principal capacities until requalified. The matter was appealed to the SEC. In 1998, the SEC affirmed NASD's decision. 

In 1995, NASD issued Sponsoring Firm 1 an LOC as a result of the firm entering approximately 137 orders in SelectNet to sell Company D shares at a price above the inside bid, the majority of which were equal to or above the inside ask price. This practice was alleged to have been a possible abuse of the SelectNet System, causing legitimate orders to scroll off the SelectNet screen sooner than normal. 

In 1994, Sponsoring Firm 1 submitted a Letter of Acceptance Waiver and Consent ("AWC") to NASD. NASD alleged that Sponsoring Firm 1, acting through its principals and representatives, failed to comply with Exchange Act Rule 15c2-6 in that Sponsoring Firm 1 sold shares of Company E to non-established and non-accredited public customers in contravention of the rule's compliance requirements. In addition, the sales literature that was distributed to public customers was misleading and Sponsoring Firm 1, acting through its principals, failed to supervise a registered representative so as to ensure compliance with Exchange Act Rule 15c2-6. 

In 1990, an NASD District Business Conduct Committee issued a decision and Order of Acceptance of Respondentsí Offer of Settlement. NASD had alleged that Sponsoring Firm 1, acting through X, failed to comply with Schedule C of NASD's By-Laws in that Sponsoring Firm 1, in violation of its restriction agreement with NASD, failed to obtain NASD's written approval prior to changing its method or system of clearance. Sponsoring Firm 1 had self-cleared at least 10 securities transactions for customers, and did not clear these transactions through its clearing agent as required. In addition, NASD alleged that for the periods ending October 1988 and November 1988, Sponsoring Firm 1, acting through X, failed to comply with Exchange Act Rule 15c3-3 in that Sponsoring Firm 1 failed to establish a Special Reserve Account for the Exclusive Benefit of Customers ("Special Reserve Account") as required, failed to calculate the amount required to be deposited in the Special Reserve Account and failed to make the required deposit to the Special Reserve Account. Sponsoring Firm 1 and X were censured and fined $2,000, jointly and severally.

In 1990, NASD's National Business Conduct Committee ("NBCC") accepted an AWC from Sponsoring Firm 1. The AWC alleged violations of Part IV, Section 4(a) of Schedule D of NASD's By-Laws, because the firm failed to report its Nasdaq volume. Sponsoring Firm 1 was fined $250. 

The State 2 Commissioner of Securities issued an Order against Sponsoring Firm 1 and X in 1991. The Commissioner found that Sponsoring Firm 1 and X were selling unregistered securities to residents in State 2. Sponsoring Firm 1 was ordered (1) to cease and desist all violations of the State 2 Securities Act of 1973, (2) to file with the Commissioner within 30 days of its receipt of the Final Order acceptable supervision guidelines setting forth a written plan of supervision of its employees, agents, and salespersons, and (3) to pay a civil penalty in the amount of $25,000. X, in the Final Order, was ordered to cease and desist all violations of the State 2 Securities Act, and to pay a civil penalty in the amount of $10,000. In 1991, the State 3 Securities Division issued a Cease and Desist Order against Sponsoring Firm 1 for offering unregistered securities to State 3 residents. The Cease and Desist Order was vacated in 1992.

In 2003, Sponsoring Firm 2 submitted an AWC to NASD and consented to a monetary fine of $2,000. NASD had alleged that Sponsoring Firm 2 reported transactions in OTC Equity Securities to ACT and failed to append the "S" modifier identifying the transaction as a short sale.

Sponsoring Firm
Sponsoring Firm 1 (a State 1 corporation with its principal place of business in State 1) was formed in 1984, and became a member of NASD in 1985. In 2003, Sponsoring Firm 1 informed NASD that it was ceasing operations as a broker-dealer because its net capital was below the minimum amount required pursuant to Exchange Act Rule 15c3-1. According to Sponsoring Firm 1ís MC-400 Application and related documents, as a result of the fact that Sponsoring Firm 1 is not currently conducting a securities business (it had engaged in retailing mutual funds and over-the-counter corporate equities, selling corporate debt securities, underwriting corporate securities or participating in underwritings as a selling group member, and selling private placements, tax shelters and limited partnerships). it presently has no Offices of Supervisory jurisdiction, and no branch offices. The firm's only office is located in State 1. Sponsoring Firm 1 maintains that it employs one salaried employee (who is also a registered principal), 11 registered principals, and seven registered representatives. 

Sponsoring Firm 2 (a State 1 corporation with its principal place of business in State 1) was formed in 1991, and has been a member of NASD since 1995. Sponsoring Firm 2 presently has no Offices of Supervisory jurisdiction, and no branch offices. Sponsoring Firm 2 maintains that it employs four registered principals and one registered representative. Sponsoring Firm 2 represents that it is engaged in over-the-counter market making in corporate securities, proprietary trading, and acting as a municipal securities dealer. 

Sponsoring Firm 1 and Sponsoring Firm 2 are "sister" corporations and they share the same address. Company C, which is not a broker-dealer, owns 100 percent of both Sponsoring Firm 1 and Sponsoring Firm 2.

Proposed Activity
N/A
Proposed Supervisor
N/A
Member Regulation Recommendation
In two letters dated September 2003, Member Regulation made the following recommendations:
  1. deny Sponsoring Firm 1's Application to continue its membership in NASD. 
  2. assuming that NASD allowed Sponsoring Firm 1 to remain a member, that NASD deny X's Application to remain associated with Sponsoring Firm 1. T
  3. deny X's Application to remain associated with Sponsoring Firm 2.
Considerations
The NAC denied each of the three applications.

Sponsoring Firm 1ís Application

  • Key factors to be: (1) the nature, gravity, and recency of the permanent injunction; (2) Sponsoring Firm 1ís substantial disciplinary history; and (3) Sponsoring Firm 1ís failure to present a plan which demonstrated that the firm could maintain the high standards of compliance that we require of NASD members. 

X's Association with Sponsoring Firm 1 

  • No weight to NASD disciplinary actions that are pending before a Hearing Panel. 
  • Because Sponsoring Firm 1ís Application to remain an NASD member was denied, the NAC also denied X's Application to remain associated with Sponsoring Firm 1. 
  • Sponsoring Firm 1 may not sponsor X or any other statutorily disqualified individual to associate with it. 

X's Association with Sponsoring Firm 2

Sponsoring Firm 2 proposes to continue X's association with the firm as a FINOP. In evaluating Sponsoring Firm 2's Application to continue to employ X, we consider the key factors to be: (1) the nature, gravity, and recency of the permanent injunction against X; (2) X's serious disciplinary history; and (3) Sponsoring Firm 2's failure to demonstrate that X would be effectively supervised.

Citations
Dep't of Market Regulation v. Elgindy, Complaint No. CMS000015, 2003 Discip. LEXIS 14, appeal pending, Amr "Tony" Elgindy, Admin. Proceeding File No. 3-11145 (SEC filed June 2, 2003). ("[M]arket manipulation is one of the most serious violations that a respondent can commit.")
 
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