NOTE: Stipulation of Facts and Consent to Penalty (SFC) 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.
Jason Andrew Bander
Hearing Panel Decision 05-119/October 20, 2005
Jason Andrew Bander (“Bander”), a former stock loan trader with Dresdner Kleinwort Benson North America (the “Firm”) was terminated on August 5, 2003 pursuant to his resignation. The Form U5 submitted by the Firm disclosed that “A review of Mr. Bander’s conduct relating to certain stock loan transactions is being undertaken following a significant billing dispute with a counterparty relating to those transactions. Mr. Bander resigned from the Firm during the course of the review.”
REFUSAL TO COOPERATE/TESTIFY
By letter dated October 1, 2003, the NYSE notified Bander of its investigation of the above matter and requested that he appear and provide on-the-record testimony on October 16, 2003. On or about October 7, 2003, Bander requested and was granted an adjournment to October 22, 2003. On October 9th, Bander contacted the NYSE and stated that he was going to be away on vacation, that he was seeking counsel, and would re-schedule his testimony after he had consulted with his attorney. On or about November 20, 2003, Bander’s counsel contacted the NYSE and stated that Bander would not cooperate. On or about September 22, 2004 and May 19, 2005, the NYSE reiterated its requests for Bander's testimony and through counsel he reiterated his unwillingness to cooperate or testify.
Bander was charged with having violated Exchange Rule 477 by failing to comply with one or more requests to appear and testify. He submitted an Answer to the Charge Memorandum by letter of his counsel dated June 27, 2005. By motion dated July 28, 2005, Enforcement asked that all factual allegations made in the Charge Memorandum be deemed admitted. At the hearing, (which neither Bander nor his counsel appeared) paragraphs 4 through 12 of the Complaint were deemed admitted.
US ATTORNEY INVESTIGATION
Apparently, the US Attorney's Office (which one is not noted) was conducting some investigation (what is not noted). Bander was apparently cooperating with the US Attorney in some investigation and in a letter to the NYSE dated September 30,2005, his attorney claimed this circumstance "debar[red] him from giving testimony under oath in the Exchange's investigation." The Panel noted taht Bander never provided any specific explanation of why he was “debar[red]” from cooperating with the Exchange, and Enforcement was not aware of any formal legal impediment to Bander’s ability to provide testimony to the Exchange. It was also noted that the U.S. Attorney was aware of the Exchange’s investigation and hearing and did not request the Exchange to stay its proceedings.
In imposing sanctions, the Panel considered:
In each of the above cited cases, the respondent had declined to cooperate with at least one request from Enforcement for information, and the penalty imposed was a temporary bar, which would become permanent if the respondent did not cooperate within three months. The Panel rejected Bander's proposed penalty because it would leave the duration of the bar effectively indeterminate. Noting the holding in Magaraci, the Panel was troubled by the fact that more than two years have already passed since Enforcement’s first request for testimony, and there is no indication that the U.S. Attorney’s investigation will end at any point in the near future. However, the Panel did not that unlike a party who simply does not respond in any way to an investigation or an issuance of charges, Bander was engaged in the proceeding through counsel, and had filed an Answer and the offer of other oral and written submissions to Enforcement or the Hearing Panel.
Censure; Barred in all capacities until he complies with NYSE requests--- if he does not so comply within 3 months, the Bar becomes permanent
Comment: I would urge you to read this case --- and tell me if you too
don't find it to be poorly drafted. It's as if there were several
writers and yet another editor who cut and pasted various drafts together.
Frankly, this isn't that complex a case. Bander apparently refused to fully cooperate because he was involved in an ongoing US Attorney investigation of some criminal conduct involving a stock loan scheme. Unfortunately, that's sort of buried at the end of the NYSE's decision. It really sort of pops up at you from the blue.
Moreover, there is significant merit --- even if not necessarily justification --- in arguing that until such time as the US Attorney advises a cooperator to talk to third-parties about the matters under investigation, that the party would be ill-advised to do so. It seems to me that the NYSE isn't being totally candid in discussing the underlying facts in this matter; perhaps they raised unsettling issues about NYSE member firms? Hey, I'm entitled to ask that question when the Decision is so facetious.
Seems to me that the NYSE could have telephoned the Assistant US Attorney handling the case and inquired --- in direct language --- whether that office preferred for Bander not to give testimony under oath at the NYSE (in a non-criminal and relatively lesser matter than a federal criminal investigation). Trust me, I used to be a regulatory lawyer with both the AMEX and the NASD --- those types of telephone calls happen and you get very clear indications from the feds of what's ultimately in the public's best interest.
Ultimately, I have no problem with the sanction imposed here. No, you can't let folks arbitrarily decide when and whether they will cooperate. Moreover, this decision sends a clear message to the US Attorney's office that Bander is being pressured to testify or lose his right to work on Wall Street (and that may compel one of those friendly phone calls to the NYSE). However, I think the disingenuous nature of this Decision works as a disservice to the public and the industry.
Suzanne Marie Forcher
SFC/Hearing Panel Decision 05-117/October 19, 2005
At all relevant times, Forcher was an unregistered sales assistant in Citigroup Global Markets, Inc.'s (the “Firm”) McKinney, Texas branch office. As a sales assistant, Forcher had access to customers' personal information of the Firm’s customers, and she used the information to establish accounts in their name with Paypal, Inc. (“Paypal”), an on-line payment service. Forcher linked each of these accounts with other Paypal accounts she controlled.
Upon notification from Paypal of the $14,098 in above transfers, the Firm conducted an internal investigation, which resulted in Forcher’s termination. To date Forcher has failed to provide the Exchange with a written explanation regarding her activities prior to her termination of employment with the Firm.
NYSE found that Forcher:
I. Engaged in conduct inconsistent with just and equitable principles of trade in that on one or more occasions she misappropriated funds from customers of her member firm employer; and
II. Violated Exchange Rule 477 in that she failed to comply with written requests by the Exchange for information concerning matters which occurred prior to her termination of employment with a member organization.
In imposing sanctions, the Panel considered:
Censure and Permanent Bar in all capacities
|Bill Singer's Comment: Human ingenuity is a remarkable thing. Make an arrow, and someone invents armor. Make a sword, and someone invents a shield. Rob a bank, and someone invents an alarm --- and then someone circumvents the alarm, and then someone invents a way to detect . . . and, well, you get the idea. Parry and thrust. All of which leads us to Ms. Forcher. Just a lowly sales assistant. But, my, what a clever scheme that she managed to steal a tidy sum right under the nose of one of the world's largest financial services conglomerates. Of course, not that clever. Paypal and Citigroup eventually figured it out. Now if only someone had hired this woman as a broker trainee rather than a sales assistant. Who knows what she might have accomplished?|
SFC/NYSE Hearing Panel Decision 05-115/October 19, 2005
On March 18, 2004, Raymond Burton was arrested and charged with one felony count of “Possession Narcotic/Cocaine,” one misdemeanor count of “Possession of Marijuana,” and one count of misdemeanor “Operating Intoxicated/Impaired/ Controlled Substance.”
THE HIRING PROCESS
On April 26, 2004, Burton completed an Application for Employment with Morgan Stanley DW Inc. (the “Firm”). Question 5(a) of the application asked, “Have you ever been arrested, charged with, convicted of or plead no contest to any FELONY?” After Question 5(a), Burton placed an “X” in the "No" box. 7. Burton was required to place an “X” in the Yes box in response to Question 5(a) based on his felony arrest and charge for cocaine possession. The footnote to Question 5 stated “[a]rrests or indictments are not considered by Morgan Stanley in any employment decisions but records of such are required, by regulatory bodies, to be maintained. Further, in your response to Question No. 5, please include any arrests, charges or convictions which have been dismissed or expunged.”
On April 27, 2004, Burton completed a Background Information Authorization Form. Question 6 of the authorization form asked, “Have you ever been charged with or convicted of a: Felony? Misdemeanor?” After both questions, Burton falsely placed an “X” in the "No" box. Based on the felony drug possession, misdemeanor drug possession and the misdemeanor driving while impaired charges, Burton was required to answer Yes in response to Question 6.
July 9, 2004, Burton completed the Form U-4. Question 14A asked, “Have you ever: … (b) been charged with any felony?” In response to Question 14A, Burton falsely checked the "No" box. Based upon his March 2004 felony cocaine possession charge, Burton was required to answer Yes to the question.
The Firm hired Burton on June 28, 2004 as a Financial Adviser Trainee. The initial background search conducted on April 29, 2004 failed to disclose Burton’s criminal history.
On July 15, 2004, the Firm received the results of a United States Department of Justice, Federal Bureau of Investigation, Criminal Justice Information Services Division fingerprint report (“DOJ report”), which disclosed that Burton had been arrested and charged with two dangerous drug charges and one traffic offense. After receiving the DOJ Report, the Firm ordered the relevant court documents and requested a written statement from Burton, which Burton supplied. The Firm ultimately terminated Burton’s employment on September 8, 2004 for failing to disclose his criminal history.
On December 2, 2004, Burton entered a plea agreement covering all three counts, whereby guilt was deferred pending the completion by Burton of probation and ninety days of incarceration.
Sections 3(a)(39) and 15(b)(4)(B) of the Securities Exchange Act of 1934 provide that an individual is subject to a statutory disqualification for a period of ten years if convicted of any felony and certain specified misdemeanors. Burton became statutorily disqualified upon entering his deferred guilty plea, but the statutory disqualification did not go into effect until after Burton had already been terminated from the Firm. Burton will remain subject to a statutory disqualification until the successful completion of his probationary period.
The NYSE found that Burton
I. Violated Exchange Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade in that he failed to disclose his criminal history on an employment application he submitted to his member firm employer;
II. Violated Exchange Rule 476(a)(10) by making one or more misstatements and/or omissions of fact on his application for registration filed with the Exchange; and
III. Caused a violation of Exchange Rule 345.12 by submitting a Form U-4 containing false information.
The NYSE considered the following in determining penalties:
In an interesting and commendable analysis, the Hearing Panel noted that Burton failed to disclose his arrest/charges for a felony and misdemeanors --- however, he did NOT fail to disclose any conviction (because his plea was entered AFTER he interviewed and was hired by the Firm). Notwithstanding that he failed to disclosed the arrest/charge, Burton's subsequent conviction per guilty plea does not render him guilty of the potentially more serious charge of failing to disclose a conviction. That he was subsequently convicted of those crimes through a guilty plea does not raise the initial misstatement to the level of a failure to disclose an actual conviction.
Censure; 12 month Bar in all capacities beyond the period of statutory disqualification
|Bill Singer's Comment: Kudos to this NYSE Hearing Panel. A beautifully reasoned decision that avoided a number of pitfalls. This Panel did not go for the cheap shot and made a point of noting that there is a difference (if only in degree) between failing to disclose an arrest/charge and failing to disclose a conviction.|
Maria Adriana Cordova
SFC/NYSE Hearing Panel Decision 05-116/ October 19, 2005
Maria Adriana Cordova was found guilty of
The June 20, 2002 petty theft resulted in a three-strikes felony conviction under California law.
Under Sections 3(a)(39)(F) and 15(b)(4)(B) of the Securities Exchange Act of 1934 (the “1934 Act”), a person is subject to a statutory disqualification for a period of ten years upon conviction if such person has been convicted of, among other things, any felony.
SEEKING EMPLOYMENT IN 2004
While seeking a position with Morgan Stanley DW, Inc. (the “Firm”), Cordova completed the Firm’s employment application on or about March 9, 2004. The Personal Data section of the employment application asked whether Cordova had ever been convicted of a crime. Question 5(a) of the Personal Data section asked, “Have you ever been arrested, charged with, convicted of or plead no contest to any FELONY?” In response to the question, Cordova falsely answered “NO.” Question 5(b)(i) of the Personal Data section asked, “Have you ever been arrested, charged with, convicted of or plead no contest to any MISDEMEANOR involving . . . theft . . . .” In response to the question, Cordova falsely answered “NO.”
STATUTORILY DISQUALIFIED SINCE JUNE 2002
As Cordova’s June 20, 2002 conviction for petty theft in violation of California Penal Code § 666 constitutes a felony conviction, under Section 15(b)(4)(B) of the 1934 Act, Cordova was statutorily disqualified from employment with an Exchange member organization at the time that she applied for the position with the Firm.
HIRED MARCH 2004
On or about March 31, 2004, Cordova began working at the Firm as a receptionist in the Firm’s Los Angeles, California branch office.
SEPTEMBER 2004 DOJ REPORT
On or about September 1, 2004, the Firm received a United States Department of Justice, Federal Bureau of Investigation, Criminal Justice Information Services Division fingerprint report (“DOJ Report”) which reflected that Cordova had been arrested nine times from 1993 to 2004, though only four of those arrests resulted in charges. She was terminated shortly thereafter.
STATUTORY DISQUALIFICATION STATUS REMOVED OCTOBER 2004
In October 2004, Cordova’s felony conviction for petty theft was reduced to a misdemeanor; therefore, Cordova is no longer statutorily disqualified.
NYSE found that Cordova violated Exchange Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade in that she failed to disclose her criminal history on her employment application submitted to her member firm employer, which, at the time, subjected her to a statutory disqualification.
The NYSE considered the following in determining penalties:
In Cordova's case, the Hearing Panel noted that she failed to disclose one felony and two misdemeanor convictions. The fact that the felony conviction consisted of a misdemeanor act that only became a felony because of the California three-strikes law and was converted back to a misdemeanor does not negate its serious nature.
Censure; 18 month Bar in all capacities
Kimberly A. Vonduhn
HPD 05-107/September 19, 2005
From December 2002 to January 2004, Vonduhn, a non-registered Senior Sales Assistant with Citigroup Global Markets, Inc. (the “Firm”) forged approximately $56,000 in checks on the account of another employee (a financial consultant) to pay her own expenses. On or about January 15, 2004, the financial consultant discovered the forged checks, and the Firm terminated Vonduhn.
The financial consultant filed a criminal complaint and on November 5, 2004, in the Court of Common Pleas in Cuyahoga County, Ohio, Respondent pled guilty to, and was convicted of, one count of Theft with Elderly Specification, a felony, and one count of Forgery, also a felony. On December 14, 2004, the Court sentenced Respondent to five years probation and ordered her to pay restitution in the amount of $2,205.
Letters sent to Vonduhn by the NYSE requesting her cooperation in its investigation were returned marked “not deliverable as addressed” and “moved left no address, unable to forward, return to sender.” To date, Respondent has failed to respond to the requests for information concerning the matter reported in the Form RE-3. Neither she nor any person on her behalf appeared at the hearing in this matter.
In response to Enforcement's motion pursuant to NYSE Rule 476(d), the Hearing Officer deemed the facts in the Charge Memorandum admitted, but denied the motion to the extent that it asked for the charges to be admitted, insofar as Exchange Rule 476(d) does not authorize a Hearing Officer to grant such a dispositive motion. On the basis of the above, the Hearing Panel found as follows:
NYSE found that Vonduhn:
I. Engaged in acts detrimental to the interest or welfare of the Exchange in that she was convicted of Forgery and Theft with Elderly Specification, which involved the misappropriation of funds belonging to another employee of the Firm during the course of her employment, and she is, therefore, subject to discipline pursuant to Exchange Rules 476(a)(7) and 477; and
II. Violated Exchange Rule 477 in that she failed to comply with the Exchange’s requests for information concerning matters that occurred prior to the termination of her employment with a member organization, and she is, therefore, subject to discipline pursuant to Exchange Rules 476(a) and 477.
In support of the penalty, NYSE considered that the felony crimes of forgery and theft with elderly specification to which Vonduhn pled guilty are very serious. Moreover, the NYSE considered Vonduhn's failure to cooperate and:
Censured; Permanently Barred in all capacities
Mitchell Allan Romano
SFC/HPD 05-106/September 19, 2005
Mitchell Allan Romano was born in July 1977, and entered the securities industry in February 2000 as a non-registered wire operator with the Miami, Florida office of UBS PaineWebber, Inc. (the “Firm”) and remained in that position until his discharge in May 2002. Romano joined Morgan Stanley DW, Inc. as a non-registered fingerprint person in July 2002, and he remains in that position to date.
In or about August 2000, Romano began posting electronic communications devoted to the securities industry in chat rooms maintained by Internet service providers Yahoo!, Lycos, Stockhouse and Agoracom. Romano was able to access these chat rooms through his computer terminal at the Firm and via his home computer. He used various screen names in such chat rooms. Romano posted more than 1,000 electronic communications in the chat rooms, without the Firm’s knowledge or approval. Romano’s postings contained, among other things, his opinion of NASDAQ-listed securities of JDS Uniphase Corporation (stock symbol “JDSU”), Sun Microsystems, Biofiltration Systems, Incorporated, and Peregrine Systems, Incorporated, as well as Unique Broadband Systems (stock symbol “UBS”) – a company listed on the TSX Venture Exchange.
Romano identified himself as an employee of the Firm in several postings and misrepresented himself as a trader with the Firm on at least one occasion. Romano, who maintained a securities account at the Firm, purchased shares in some of the securities that were the subject of his postings.
On several occasions, Romano used optimistic language to predict a positive future for the company and the price of its stock. Those postings included language such as, “[t]ake advantage of the situation. JDSU is a great company . . . BUY NOW . . .” and, in a different posting, “[o]nce again it makes no sense to sell NOW . . . They (stock symbol UBS) may sell a portion of the company (Russia) IMO. But I still see a merger and I also see the BOD being very open with investors.” A review and comparison of Romano’s monthly account statements and a sampling of the Internet communications posted in the above-listed securities revealed no apparent attempt by Romano to influence the price of the securities or to benefit himself.
During the period of Romano’s employment with the Firm, he electronically completed an Annual Employee Certification of Compliance (“Compliance Certification”) for the years 2000 and 2001. The 2000 and 2001 Compliance Certifications attached the Firm’s Code of Conduct and Guide to Electronic Communications for employee reference and required employees to attest that they were in compliance with the policies contained therein. The Firm’s Code of Conduct provided, among other things, that e-mail and the Internet were to be used primarily for business purposes. The Firm’s Electronic Communications Guide prohibited participation in chat rooms in connection with Firm business or through Firm systems without prior Firm authorization and prohibited the use of the Firm name on personal home pages, web sites or in chat rooms. A section of the 2000 and 2001 Compliance Certifications required employees to attest that they “. . . [had] not participate[d] in any ‘chatroom,’ ‘on-line forum,’ ‘bulletin board’ or similar environment for reasons related directly or indirectly, to [Firm] business.” On or about January 4, 2001, and again on or about January 31, 2002, Romano made misrepresentations to the Firm by submitting an electronic Compliance Certification to the Firm certifying that he was in compliance with the Firm’s Code of Conduct and Guide to Electronic Communications and had not participated in any chat room, on-line forum or bulletin board during the previous year, which was untrue.
On or about June 6, 2002, the Firm filed a Form RE-3 with the Exchange reporting the termination of Respondent’s employment for violating Firm policies regarding electronic communications by posting messages on electronic message boards without obtaining the Firm’s approval.
The NYSE found that Romano
I. Violated Exchange Rule 472(a) by posting electronic communications concerning securities on Internet chat rooms without the knowledge and approval of his member firm employer; and
II. Engaged in conduct inconsistent with just and equitable principles of trade by:
In support of the penalty, NYSE considered prior NYSE Rule 472(a) cases and noted that the penalties imposed were often a Censure and a 1 to 2 month bar/suspension depending upon
In this case, the Panel found a number of mitigating factors weighed in favor of a penalty in the lower end of the range.
First, at the time of the violations, Romano was very young (only 22 years old) and inexperienced, and his choice of screen names—“ zombiedude” and “moonshine69”—further demonstrated his immaturity. Like the respondent in Olerio, Romano lacked experience and familiarity with his firm’s policies at the time of the violations; this was his first job in the industry and, indeed, his first job after college. Unlike the respondent in Olerio, however, Romano never purported to be conveying the views of his Firm. He also cooperated fully with Enforcement’s investigation, turning over hard copies of the postings at issue, which comprised a large portion of the evidence that Enforcement reviewed. Moreover, Romano was a non-registered employee and was, therefore, unable to affect customers’ accounts. There was also no evidence that Romano’s postings affected the price of the stock or that he intended to benefit—let alone, actually benefited—from his unapproved communications; rather, Enforcement acknowledged at the Hearing that Romano had made very few trades in the relevant securities, that the value of the assets in Romano’s account had never amounted to more than $5,000 at any given point during the Relevant Period, and that he had actually lost money over the course of that period.
Rather, Romano's trades were consistent with his comments, and only a small proportion of those comments could reasonably be considered speculative in any event. Finally, Enforcement noted that Romano is currently employed in the industry and would, therefore, be sufficiently penalized by a suspension of one month, since he would be without income during that time, unlike someone who is no longer employed in the industry.
Censure; Suspended 1 month in all capacities.
NOTE: One member of the Hearing Panel dissented from the penalty decision. That member would have modified the penalty such that the censure and one-month suspension be treated as already having been served during the approximately two months between May and July 2002 when Respondent was unemployed. The reason for this proposed modification was a concern that a prospective one-month suspension was too severe, under the facts and circumstances of this case, for a young person who has already been terminated from his previous job and would now be losing a relatively large amount of income, in addition to facing the possibility of losing his current employment.
Comment: I hate this case on so many levels.
First, it disgusts me that every Wall Street employee is now denied basic First Amendment rights. Why can't Romano or any other individual express an opinion about a stock? Why do you now need your firm's permission to use your personal computer on the Internet (assuming that you're not contacting public customers for purposes of soliciting business)? If Romano made a fraudulent statement. go ahead and throw him in jail and toss away the key. But before we lose sight of the issue here, he simply expressed his favorable opinion about stocks he owned. He wasn't seeking clients for UBS. He was simply expressing his opinion. Jim Cramer touts and bashes stocks and they give him his own television program. Yeah, Bill --- you say --- but Jim's not registered. Hey, neither was Romano!
Second, okay, you're right, his online posts said he worked for UBS PaineWebber. Still . . . you do understand that's the truth. Right? Okay, yeah, he also told a lie about being a trader, but it was a material misstatement in furtherance of fraud. Gee, no one ever puffs themselves up online.
Third, this is a 23 year old kid. Do you remember being young and stupid? Do you really think this kid knew or thought that what he was doing was illegal or even wrong? Again, think back to when you were about a year or two out of college. After you get done cringing at your stupidity, then ask yourself what you might have done if the Internet even existed then.
Fourth, you think it's all so different because he allegedly lied on two annual compliance certifications? Let me ask you a question: Were his postings clearly firm "business"? Isn't it possible that this kid who grew up with e-mail and the Internet just didn't really think that his employer's annual compliance certification was asking about something as mundane as his personal online postings? Okay, so maybe he should have known better. I'll suggest another possibility --- maybe he should have been trained better or taught better or warned better. How about the system failed to educate him?
Finally, that's one hell of a sieve the folks at the NYSE are using to strain the quality of mercy these days. They drag a 23-year-old kid before the power and glory that once was NYSE (okay, fine, so he's a few years older now that the NYSE finally got around to prosecuting him) and suspend him for one month. That's compassion for you. I mean, geez, couldn't they have just called the kid in and given him a tongue lashing? No, now someone has to pay something everytime a mistake is made. No more simple errors of judgment. No more warnings. Line 'em all up and shoot 'em. Teach everyone a lesson. And as the one dissenting panelist noted, we've likely screwed this kid's life up beyond repair. For what? For me the answer is always simple. For the little guys, there's always slam 'em and bang 'em justice. For the big guys, there are always extenuating circumstances.
Joseph Edward Herndon
SFC/HPD 05-97/August 29, 2005
In or about November 1996, CB, who was elderly, retired, and mentally disabled, opened an account at UBS PaineWebber Inc. now known as UBS Financial Services Inc. (the “Firm”). Joseph Edward Herndon, who worked as a registered representative at the Firm’s St. Petersburg, Florida, Branch office, regularly went to CB’s home to assist CB with his financial affairs, including paying CB’s household bills and opening his mail. Herndon had CB sign checks, and Herndon wrote to whom the check was payable. Checks were being written from CB’s bank account at First Bank and CB’s account at the Firm. Many of the checks Herndon had CB sign were actually being used to pay for Herndon’s own expenses or being paid to directly to Herndon. In this way, he diverted approximately $800,000 of CB’s funds between 1997 and 2003. Most of the checks that Herndon converted to his own benefit came from CB’s bank account at First Bank. Many of the checks drawn on CB’s Firm account were payable to CB himself and deposited into CB’s First Bank account. Thus, CB’s funds were being moved from his Firm account to his First Bank account, from which Herndon then diverted CB’s funds to his own use. To effectuate his misappropriation scheme, Herndon told CB that CB was signing checks to invest in stocks and/or mutual funds, when in fact these checks were actually being used to pay Herndon’s creditors. To maintain the ruse, Herndon bought a few shares of a stock with a name similar to the name of Herndon’s creditor for CB’s account. Thus, he had CB sign a check payable to Delta Aircraft to make a payment on the airplane that Herndon owned, and he bought 100 shares of Delta Airlines Co. for CB’s account. For other checks, Herndon persuaded CB to sign checks that were made payable directly to Herndon. When asked by the Firm, Herndon characterized these payments as “loans.” In January 2003, CB, through his attorney, complained to the Firm about Herndon misappropriating funds from CB’s account. After initially claiming CB made loans to him, Herndon plead guilty to elder exploitation in November 2003. The Firm settled with CB for $300,000.
On June 9, 2003, the Firm received a complaint from CL’s Estate alleging unauthorized withdrawals and trading by Herndon. Herndon misappropriated approximately $145,000 from CL’s account at the Firm through checks or other withdrawals. After CL died on April 23, 2002, a check dated April 30, 2002, in the amount of $20,000, made payable to CB, was drawn on her account. Herndon used CB’s account to siphon money from CL to himself. The Firm reached a settlement with CL’s Estate, reimbursing it $90,000 for the losses.
On November 20, 2003, Herndon pleaded guilty to and was convicted of the criminal offense of exploitation of an elderly person (Fla. Stat. Ch. 825.103). Because of the amount of money involved, his conviction was a first degree felony. The Hillsborough County, Florida Court (the “Court”) sentenced him to eight years probation, to perform 250 hours of community service, to pay $313,000 in restitution to CB, and to pay $8,559 in other fines and costs. Herndon’s sentence also required that he have “[n]o employment managing other persons [sic] monies.” (Herndon had already paid CB approximately $187,000 in restitution.)
NYSE found that Herndon:
I. Engaged in conduct inconsistent with just and equitable principles of trade in that he misappropriated funds belonging to two customers of his member firm employer; and
II. Engaged in acts detrimental to the interest or welfare of the Exchange in violation of Exchange Rule 476(a)(7) in that he was convicted of the criminal offense of exploitation of an elderly person, a felony, which involved the theft of customer funds which occurred during the course of his employment at a member firm.
In support of the penalty, NYSE considered:
Thomas Gerard McNamara
SFC/HPD 05-05/August 29, 2005
In 1991, MS received life insurance proceeds of approximately $1 million upon the death of her husband, who passed away after a long illness. At that time, MS was 34 years old and the mother of two children, ages 8 and 10. Other than the life insurance proceeds referenced above, MS had no other source of income. MS deposited the life insurance proceeds into a brokerage account to be managed by her brother, registered representative Thomas Gerard McNamara. MS's goal, at that time, was to retain the ability to stay at home with her children. MS expected that her account would be managed in a fashion which would allow her the ability to fund her children’s private high school 3 and college educations and generate sufficient income to cover her family’s living expenses. For approximately the next 10 years, MS allowed McNamara to exercise discretion in her account and to select the investments for her portfolio.
In June 2001, after McNamara became employed at Sterne, Agee & Leach, Inc. (the “Firm”), MS transferred her brokerage account to the Firm. McNamara completed most entries on the new account form for MS and then provided it to her for signature. McNamara prioritized MS’ investment objectives on her Firm new account form as (a) capital gains (2) trading profits (3) income and (4) speculation. Additionally, McNamara checked both “cash” and “margin” on the new account form, which led to MS’ account obtaining authorization to trade on margin. He continued to exercise discretion when she opened her account at the Firm.
During the Relevant Period of June 2001 through June 2002, McNamara effected approximately 112 discretionary transactions in MS’ account at the Firm. He did not obtain written authorization from MS to exercise discretion with respect to the transactions in her Firm account. McNamara also did not indicate his exercise of discretion on any order tickets for transactions that he effected for MS’ account. During the Relevant Period, the Firm had a written policy prohibiting “acceptance of discretionary authority by its registered representatives.” McNamara never sought or obtained an exception to this policy, nor did he obtain Firm approval to exercise discretion in her account.
During the Relevant Period, which spanned 13 months, the net portfolio value of MS’ account decreased by approximately $563,280, or 63%. McNamara effected approximately 112 discretionary transactions in common and preferred stocks in her account, a majority of them utilizing margin. During the Relevant Period, he engaged in short-term stock trades in her account on margin, consisting monthly of trades in high-risk technology and biopharmaceutical securities. During the Relevant Period, the annualized turnover rate in MS’ account was approximately In light of her investment objectives and goals, this turnover rate was high and indicative of excessive trading. During the Relevant Period, the account incurred commission charges of approximately $166,731, of which approximately $67,503 was paid to McNamara.
In November 2001, and again in February 2002, his branch office manager (“BOM”) told him that discounted commissions were available at the Firm for family members. However, McNamara did not charge MS discounted commissions. During much of the Relevant Period, MS’ account carried a substantial margin balance. The use of margin, totaling approximately $18,235 in interest charges, was not suitable for MS in light of her investment objectives and goals. As a result of the losses, the margin interest charges and commission charges incurred in the account during the Relevant Period, MS was compelled to return to work to cover her family’s living expenses.
In Spring 2002, McNamara told his BOM that MS was very active in making her own decisions with respect to her account and was aware of everything that was going on with her account and about each trade. In fact, she had little to no knowledge of the transactions in her account as she relied on McNamara and did not review her monthly account statements. The false statements he made to his BOM served to conceal his exercise of discretion in MS’ account.
NYSE found that :
I. Violated Exchange Rules 408(a), (b) and (c) in that he exercised discretion in the account of a customer without written authorization and without first notifying and obtaining the approval of his member firm employer, and engaged in excessive trading in a discretionary account;
II. Violated Exchange Rules 408(b) and 440 and Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-4 thereunder, in that he failed to identify, as discretionary, orders entered on a discretionary basis upon order entry; and
III. Violated Exchange Rule 476(a), in that he engaged in conduct inconsistent with just and equitable principles of trade by: (a) engaging in the unsuitable use of margin in a customer account; (b) engaging in excessive trading in a customer account; and (c) making one or more material misstatements to his member firm employer.
In support of the penalty, NYSE relied upon:
Censure; Suspended 1 year in all capacities.
Robert Lynn Cramer (Director of Compliance/General Counsel)
SFC/HPD 05-94/August 25, 2005
REGULATORS ACT 1998 - 1999
A 1998 SEC examination of David A. Noyes & Co., Inc. (the “Firm”) resulted in a letter being sent to the Firm by the SEC concerning the Firm’s lack of certain written procedures governing annuity switches, as well as an uncorrected exception from a prior examination by the National Association of Securities Dealers (the “NASD”) that related to the fact that Wausau, Wisconsin branch office (the Branch) Branch Office Manager (BOM) was not reviewing customer annuity applications submitted by other registered representatives in the Branch.
In January 1998, the NYSE conducted an examination of David A. Noyes & Co., Inc. (the “Firm”) and the NYSE and the Firm agreed to settle the findings of violation, and a NYSE Hearing Panel found that the Firm violated NYSE Rule 342:Offices—Approval, Supervision and Control by failing to, among other things:
Robert Lynn Cram, the Firm's Director of Compliance and General Counsel appeared on behalf of the Firm during this proceeding. The Hearing Panel imposed a censure, a fine of $60,000 and an undertaking relating to certain other matters in the case. In the Matter of David A. Noyes & Co. (SFC/HPD 99-132/September 22, 1999) http://www.nyse.com/pdfs/99-132.pdf
NEW FIRM PROCEDURES 2000
In March of 2000, in response to the aforementioned NYSE disciplinary action, the Firm created certain written procedures regarding annuity switches (the “March 2000 Procedures”). The March 2000 Procedures mandate:
REGULATORS ACT AGAIN 2001
On or about February 16, 2001, the SEC sent a letter to the Firm following an examination of the Firm’s books and records. The SEC stated in this letter that improper annuity switches were continuing and that the Firm was not adequately supervising such switches. The SEC also stated in this letter that many customer files at the Branch did not contain information concerning such customers sufficient to assess whether the annuity switches at issue were suitable.
In February 2001, NYSE and the NASD conducted a joint examination of the Firm’s compliance with financial and operational requirements. In a report issued on April 2, 2001, NYSE found, among other things, that the Firm violated NYSE Rule 342 by failing to adhere to its own annuity approval process. In May of 2001, the NYSE commenced the Special Examination, which determined that improper annuity switches were occurring at the Branch and that the Firm was inadequately supervising such switches. Thereafter, the Firm responded and certain of its employees and officers provided testimony concerning the NYSE's investigation into annuities sales and supervision at the Firm. On March 19, 2003, Cram appeared with counsel and provided certain testimony concerning the NYSEs investigation into annuities sales and supervision at the Firm, including testimony involving his role at the Firm and his knowledge concerning the execution of annuities switches at the Branch.
FIRM'S DIRECTOR OF COMPLIANCE/GENERAL COUNSEL HELD RESPONSIBLE
The NYSE found that Cram:
I. Engaged in conduct inconsistent with just and equitable principles of trade in that he permitted the recommendation and sale of variable annuities to customers that were unsuitable in view of the customers’ investment objectives, investment experience, and financial resources; and
II. Violated NYSE Rule 342 in that he failed to reasonably discharge his supervisory responsibilities:
In support of the penalty, NYSE relied upon
The NYSE noted that Cram was not disciplined simply because he held the title of Compliance Director or General Counsel. Holding such a title does not automatically make one a supervisor under NYSE Rule 342. Rather he was named and properly disciplined because he had lapses of personal responsibility. Whether a Compliance Director or General Counsel is or becomes a supervisor is a fact based analysis. Here Cram undertook certain specific responsibilities concerning BOM and failed to perform them. He also was personally and specifically put on notice by IM of problems for which he had undertaken an oversight relationship. He is therefore before the Hearing Board because he had become, as to specific problems, a failed supervisor.
Censure; Suspended 6 months in supervisor capacity
|Bill Singer's Comment: This case is surely destined to become a "seminal" decision for years to come, on a whole host of issues. First off, we have the rare situation of an attorney --- the firm's General Counsel, no less --- sanctioned with a six month suspension. Although the decision goes to some pains to note that Cram wasn't disciplined because he "held the title" of Compliance Director or General Counsel, the fact remains that we rarely see a General Counsel sanctioned. Personally, I have always warned firms and lawyers against employing a lawyer in any registered in-house capacity, if that lawyer will also be serving as a legal counsel. The other interesting aspect of this case is its stinging rebuke of annuity switching practices. The industry is clearly on notice --- as it has been for some time.|
Marcus D. Braden
SFC/HPD 05-93/August 25, 2005
In September 1999, Marcus D. Braden began working as an investment specialist at Charles Schwab & Co., Inc. (the “Firm”). As an investment specialist, his duties included opening new accounts, encouraging customers to bring new or additional assets, recommending money management firms, following up with customers on a quarterly basis, and advising customers on overall portfolio strategy. His job duties did not include and did not permit disseminating specific stock recommendations and advice for short term trading.
In or about December 2000 or January 2001, Braden met with his personal friend T, who informed Braden that he wanted to trade some portion of his assets and he wanted Braden to act as his broker. Because as an "investment specialist" he could not serve as T’s broker, Braden and T discussed the idea of opening an investment account outside of the Firm at an online brokerage. Following his meeting with T, Braden met with two of his Schwab customers, Y and K, and spoke to them about participating in the investment club account, and both agreed to do so. Both Y and K understood that this account, and Braden’s participation in it, was not permitted by the Firm.
All the parties signed an investment club agreement for the "M.B. Partners Fund," the terms of which were that
On or about January 31, 2001, Braden completed and signed an application to open an Investment Club Account at XYZ (not a NYSE member firm). Braden understood at the time he opened the XYZ Account that
Page one of the application asked, “Are you or a relation (or partner, if partnership) associated with securities firm, exchange, insurance company or investment advisor?” Braden answered “no”, which was untrue.
Around the first week of February 2001, each of the investors gave Braden a check for $100,000 made out to “M.B. Partners Fund,” and signed the new account documentation. Despite his agreement to do so and without the knowledge of the XYZ Investors, Braden did not deposit his $100,000 share into the XYZ Account.
About February 14, 2001, $300,000 was deposited into the XYZ account and Braden began trading. By March 30, 2001, the value of the XYZ Account had dropped to approximately $87,700. Braden continued to trade the XYZ Account, and the account continued to suffer losses. Braden informed the XYZ Investors that the XYZ Account “was down,” however he never revealed to them the extent of the losses. On or about May 30, 2001, Braden transferred $1,000 from the XYZ Account to a bank account at Fifth Third Bank in the name of MB Partners Fund, and then withdrew the $1,000 for his personal use (without authorization). Between June 12, 2001 and August 29, 2001, Braden made five additional transfers totaling $22,000 from the XYZ Account to the Fifth Third Bank, all without authorization and for his personal use.
On September 30, 2001, following Braden’s withdrawals trading losses, the market value of the XYZ Account was $5,477. In or around November 2001, T informed Braden that he wanted to discontinue his participation in the XYZ Account. Braden informed T of the losses in the account and told him that he could provide T with a check for the remainder of the account. On or about November 20, 2001, Braden sold the remaining securities in the XYZ Account, and on or about November 27, 2001, a check for $6,938 was issued from the XYZ Account and given to T. Braden never told T that he had misappropriated approximately $23,000 from the account. On April 30, 2002, without the knowledge of the XYZ Investors, the XYZ Account was closed for inactivity.
At some point in approximately late 2002 to early 2003, Y informed Braden that he needed to withdraw some money from the XYZ Account. Braden informed Y of the losses in the account and gave Y online access to the account activity. Y calculated that approximately $30,000 had been withdrawn and distributed from the account. Braden agreed to pay Y $10,000, his share of the $30,000, by the end of 2003, and Y was satisfied with this agreement. However, it seems that Braden left the Firm in September 2003 to work for his next employer in Sarasota, Florida, and did not inform Y --- which I guess also means that he never paid Y the promised $10,000 as of that date.
In or around July or August 2003, after Braden informed Y of the losses in the XYZ Account, Braden met with K and informed him of the losses in the XYZ Account. K never saw the account activity and was not told about Braden’s withdrawals or the monies that were given to T. K did not receive any money from the XYZ Account and he has not made any complaints against Braden.
About October 16, 2003, upon learning that Braden was no longer employed by the Firm, Y made an oral complaint to the Firm revealing Braden’s involvement in the XYZ Account. The Firm settled with Y for $10,000.
The Firm terminated Braden on September 12, 2003 and amended his Form U5 to disclose the above circumstance on December 5, 2003. Upon learning of the allegations in the amended Form U5, Braden's new employer terminated him on December 18, 2003.
The NYSE found that
I. Engaged in conduct inconsistent with just and equitable principles of trade in that he misappropriated funds from customers of his member firm employer;
II. Violated NYSE Rule 346(b) by engaging in outside business activities without prior written consent of his member firm employer; and
III. Violated NYSE Rule 407(b) in that he maintained a securities account at a domestic non-member broker-dealer for himself and three customers of his member firm employer without the prior written consent of another person designated by his member organization to sign such consents; and failed to arrange for duplicate confirmations and monthly statements to be sent to another person designated by his member organization to review such documents.
In support of the penalty, NYSE relied upon
Censure; Permanent bar in all capacities.
Comment: A fascinating case on so many levels. First, the RR
engages in a prohibited outside business activity --- but his customers
are all apparently aware of this. Second, notwithstanding that the
customers know Braden is prepared to violate industry rules, they all give
him $100,000 to invest . . . but they never notice that he hasn't
kicked-in his $100,000. Third, despite their sizable investments,
apparently none of the investors check the monthly account statements to
discover that there are huge losses and unexplained withdrawals.
Okay, as if all that weren't bad enough, Braden cooly quiets one client
with a mere $7,000 payment and somehow --- and I've got to give him
partial props on this --- convinces a second client to take a paltry
$10,000 by year's end.
Frankly, he may well have been able to pull this all off but he seems to have reneged on the $10,000 payment, and when that client complained, the house of cards collapsed. It's interesting that Schwab paid the $10,000 to Y. At first glimpse, one might think that Schwab had no liability whatsoever and should have told Y to take a flying you know what. However, Schwab's decision here appears to have been quite smart. Apparently, for a mere $10,000 they seem to have put out a potential conflagration involving three customers with nearly $300,000 in losses and a vulnerable, renegade RR.
Susan Jean Elvendahl
SFC/HPD 05-91/August 22, 2005
Elvendahl was a registered representative with Morgan Stanley Dean Witter & Co. (the “Firm”), where she handled the
In April 2002, without the clients' knowledge or authorization, Elvendahl requested the branch office cashier to draw two checks on the BW Account and made payable to BL, one for $4,000 and one for $1,000. On or about April 9, 2002, Elvendahl told the cashier that BL was in her office (he was not), and without authority or permission, Elvendahl signed BL’s name on each of the disbursement vouchers and returned them to the cashier. On the back of each check, without authority or permission, Elvendahl made the check payable to herself by signing BL’s name as the endorser and putting her name as the payee. Elvendahl deposited the two checks into her personal checking account for her own benefit.
First, Elvendahl transfers $5,000 from the BW account. That leaves the BW account short $5,000 and Elvendahl up $5,000.
In May 2002, BL received his April 2002 account statement for the BW Account showing that two checks totaling $5,000 had been issued on the account. BL asked Evendahl to clear up the matter. Elvendahl requested (again without authorization) that another $4,000 check be drawn on the BW Account, and be made payable to BL and W. On or about May 31, 2002, Elvendahl told the cashier that BL was in her office (he was not); and she signed BL’s name on the disbursement voucher and returned it to the cashier. On the back of the check, without authority or permission, Elvendahl made the check payable to herself by signing BL and W’s names as the endorsers and putting her name as the payee. She deposited the check for $4,000 into her personal checking account for her own benefit.
Second, Elvendahl withdraws $4,000 from the BW account and deposits the checks into her personal account. That leaves the BW account short $9,000 and Elvendahl up $9,000.
In June 2002, BL received his May 2002 account statement showing that a third check had been drawn on the BL Account. BL called Elvendahl for an explanation; she assured him she would take care of it. After that conversation, Elvendahl signed C’s name without permission or authority 4 on a letter (the “C Letter”) that purported to authorize the transfer of $4,000 from the C Account and $5,000 from the C IRA to the BW Account. 20. Without permission or authority, Elvendahl also signed C’s name on a required IRA distribution form for the purpose of authorizing the withdrawal of funds from the IRA. Elvendahl submitted the C Letter and the IRA distribution form to the Firm.
Fourth, Elvendahl transfers $9,000 from the C and C IRA Accounts to the BW Account. That leaves the BW account flat; the C and C IRA Accounts short $9,000; and Elvendahl still ahead $9,000.
The NYSE found that
I. Engaged in conduct inconsistent with just and equitable principles of trade in that she:
II. Violated Exchange Rule 440 and Securities Exchange Act Rule 17a-4 by, on one or more occasions, causing her member firm employer to maintain inaccurate books and records.
In support of the penalty, NYSE relied upon:
Censure; Permanent Bar in all capacities
Howard A. Rosencrans
SFC/HPD 05-90/August 22, 2005
In July 1988 Howard A. Rosencrans joined HD Brous & Co., Inc. (the “Firm”) and became qualified as a Supervisory Analyst in December 1989, and was the Firm’s Supervisory Analyst and Head of Research until the termination of his employment at the Firm in February 2003. During the relevant period pf January 2001 through July 2002, Rosencrans selectively pre-released or caused to be pre-released, via e-mail and/or other means, research reports, which disclosed the rating, target price and estimates he planned to assign the stock and/or the projected date of publication of the report. Rosencrans selectively pre-released (or caused the pre-release) between 30 minutes to 13 days prior to the public dissemination of the reports, and provided said reports to
The pre-released research reports provided the recipients with the potential to use the information contained therein in their trading decisions. However, the NYSE’s investigation found no trading based upon the pre-released reports with the exception of one trade, possibly based on such information, which was detected and cancelled on the trade date.
Certain members of the Firm’s senior management were aware of Rosencrans’s selective pre-release of research reports outside the research department, and did not prohibit or discourage the release of those reports. In many instances, senior management was copied on the reports. The NYSE considered Rosencrans’s contention that he pre-released certain of the research reports to solicit comments for the purposes of fact verification and improvement of report quality. The pre-release of reports to Brous employees, was to allow these parties to better familiarize themselves with the reports in anticipation of questions from clients once the reports had been publicly disseminated. In approximately one-quarter of the instances, the pre-release occurred after the close of regular trading in the stock’s primary trading market and the research report was publicly disseminated prior to the resumption of regular trading in that market. In certain instances, the cover e-mails and/or pre-released research reports were marked “draft” and/or “confidential.”
In July 2002, certain amendments to NYSE Rule 472 were enacted which specifically dealt with the pre-release of research reports. Rosencrans conduct occurred prior to these amendments.
The NYSE found that Rosencrans:
I. Engaged in conduct inconsistent with just and equitable principles of trade in that, on one or more occasions, he selectively pre-released or caused to be pre-released research reports to various parties including the Subject Companies, their competitors, and clients and employees of his member organization employer prior to the reports’ public dissemination; and
II. Caused a violation of Exchange Rule 401 in that, on one or more occasions, he selectively pre-released or caused to be pre-released research reports to various parties including the Subject Companies, their competitors, and clients and employees of his member organization employer prior to the reports’ public dissemination.
In support of the penalty, NYSE's Enforcement relied on
Censure; Barred for 3 months in all capacities
|Bill Singer's Comment: I can't stress this issue enough to many of my clients. It's playing with fire any time you pre-release any disclosure document, and it often doesn't matter whether you stamp "Draft" or "Do Not Distribute". Clearly, I would urge that any report you contemplate sending to an outside third-party is first transmitted to your Legal/Compliance Department --- and only transmitted by that department. That's a sound way to avoid any number of miscues. To its credit, the NYSE admits that Rosencrans' conduct occurred before the enactment of certain amendments to NYSE Rule 472, and he seems to have gotten some consideration for that timing, but, overall, his conduct would largely have been proscribed by the prior version of the Rule and industry regulatory policies.|
SFC/HPD 05-80/July 6, 2005
Raj Singhal (“Respondent”) entered the securities industry in August 2000 as a registered associate with member firm J.P. Morgan Securities Inc. (the “Firm”) until his termination on February 13, 2005.
Between 2002 and February 2004, in his capacity as a registered associate and vice president, Singhal was issued a JP MorganChase Corporate Card (“Corporate Card”) during his employment. The Firm’s written policies and procedures limited employees to submitting expenses for business purposes and prohibited using the card for personal expenses. Between 2002 and February 2004, Singhal charged unauthorized personal purchases to the Corporate Card and received reimbursement for unauthorized yellow taxicab usage that totaled $67,243; and charged the Firm’s car service account a total of $19,040, for trips that were unauthorized. After being fired, Singhal reimbursed the Firm in the amount of $39,084.39 out of a total of $86,283.
By letter dated July 23, 2004, sent via first class and certified mail return receipt requested, NYSE Enforcement requested that Singhal submit, within 20 days of the letter, a detailed written explanation of the allegations that he received reimbursements from the Firm for unauthorized expenses. By fax dated August 2, 2004, Singhal’s attorney submitted a letter to the Enforcement Division stating that his client does not wish to make a written explanation answering the allegations outlined in the Form U-5. During a telephone conversation on August 2, 2004 Singhal’s counsel confirmed that he would not comply with the NYSE's request and stated that Singhal would not cooperate with the investigation into this matter by the NYSE. 15. By letter dated February 14, 2005, Singhal's attorney confirmed that he declines to cooperate in the NYSE investigation, declines to provide the NYSE with a detailed written explanation of his conduct as requested by Enforcement’s July 23, 2004 letter sent to Respondent, and declines to provide the NYSE with any oral testimony concerning his employment and conduct at the Firm.
The NYSE found that Singhal engaged in conduct inconsistent with just and equitable principles of trade by misappropriating funds from his member Firm employer in the amount of $86,283, and violated Exchange Rule 477 by failing to cooperate with the NYSE’s investigation.
Censure; Permanent Bar
Stephen Peter Luscko
SFC/HPD 05-79/July 6, 2005
NYSE Rule 352(c) states in pertinent part, “No…registered representative…shall, directly or indirectly,…(ii) share or agree to share in any losses, in any customer’s account or of any transaction effected therein…”
NYSE Rule 408(a) provides, in relevant part, that “[n]o…employee of a member organization shall exercise any discretionary power in any customer’s account or accept orders for an account from a person other than the customer without first obtaining written authorization of the customer.”
NYSE Rule 440 requires that member organizations make and preserve books and records as the NYSE may prescribe and as prescribed by Regulations 240.17a-3 and 240.17a-4 promulgated under the Securities Exchange Act of 1934. Regulations 240.17a-3 and 240.17a-4 require, among other things, every Broker/Dealer or member of a national securities exchange to make and preserve books and records associated with its business, including books and records associated with its financial and operational activities.
Stephen Peter Luscko (“Luscko”) began his industry career in 1989 and in November 2001 he became a registered representative at the Red Bank, New Jersey office of Janney Montgomery Scott LLC (the “Firm”) until his termination on July 18, 2002. Luscko was responsible for managing investment portfolios for approximately 40 retail accounts and approximately 16 institutional accounts. One of the retail accounts Luscko serviced was the account of the G’s. Mr. G directed all the activity in the G Account. In or about December 2001, Luscko obtained verbal authorization to exercise discretion in the G Account. The verbal agreement between Luscko and Mr. G allowed Luscko to purchase investments that Luscko considered good investment opportunities. Luscko and Mr. G further agreed that Luscko would inform Mr. G of the purchases at a later time.
Between November 2001 and July 2002, the G Account was very heavily traded. Luscko knew that by exercising discretion in the G Account without written authority, he was in violation of NYSE Rules. Nevertheless, he failed to obtain the requisite written authorization in an attempt to avoid heightened supervision of the G Account or any potential restriction on his ability to effect transactions in the account. During the servicing of the G Account, Mr. G informed Luscko that he did not want any losing trades in the G Account. Mr. G further informed Luscko that should there be a trade in the G Account that resulted in a loss, Mr. G wanted the losing transaction “out of the account.” At that time, Mr. G told Luscko that in the event the G Account sustained losses as a result of trading activity, Mr. G would inform the Firm of Luscko’s exercising discretion in the G Account without the requisite written authorization.
In order to prevent Mr. G from informing the Firm about his unauthorized use of discretion without the requisite written authority, Luscko used the Firm’s cancel and rebill system to cancel trades from the G Account that resulted in losses. Luscko then rebilled the losing transactions to other customer accounts without their knowledge or authorization. Between December 2001 and June 7, 2002, Luscko cancelled a total of approximately ten transactions that resulted in losses from the G Account and rebilled certain losing transactions to the accounts of the A’s and B’s, two other pairs of customers, without the authorization of either account.
The NYSE found that Luscko:
I. Engaged in conduct inconsistent with just and equitable principles of trade in that he rebilled losing trades from a customer account to the accounts of two customers without the authorization from those two customers;
II. Violated Exchange Rule 408(a) in that, on one or more occasions, he exercised discretion in the account of a customer without first obtaining written authorization from the customer;
III. Caused a violation of Exchange Rule 440 and Regulations 240.17a-3 and 240.17a-4 promulgated under the Securities Exchange Act of 1934 in that he prepared inaccurate Firm documents that related to cancel and rebill of transactions; and
IV. Caused a violation of Exchange Rule 352 (c) by agreeing to share in a loss in the account of a customer of his member organization employer.
Censure; 5 year Bar in all capacities
Kari Marie Lindsey
SFC/NYSE Hearing Panel Decision 05-78/July 6, 2005
Kari Marie Lindsey was hired on June 7, 2004 as a non-registered Mutual Funds Advisory Review Clerk with member firm A.G. Edwards & Son, Inc. (the “Firm”). During her employment, she requested that the Firm cash personal checks on June 8, 2004 ($30); June 10, 2005 ($25); and July 31, 2004 ($500). All three checks were returned for insufficient funds ("NSF"). After the June 10th check was returned, Lindsey's supervisor sent her a June 18th email notifying her of the NSF check, that said funds would be deducted from her next paycheck, that she was suspended for 90 days from further check cashing, and that future check-cashing privileges would be permanently barred if the third check came back NSF.
After cashing the July 31st check, Lindsey informed the Firm’s Cash Control Department that her debit card had been stolen and used, that she was working with the bank in order to recover the money, and that there were insufficient funds in her account to cover the check that she had written the previous week. She asked that the Firm not process the check until she had retrieved the stolen funds. In response, the Firm notified her that although the funds would be deducted from her next paycheck , the returned check would not be counted as a return on her record. Subsequently, the Firm requested a letter from her bank verifying the theft of her debit card and its unauthorized use.
On August 3, 2004, Lindsey submitted a letter to her supervisor that purported to be on her bank’s letterhead. The letter, dated July 28, 2004, stated that Lindsey had notified the bank that her debit card had been stolen and funds had been withdrawn. It was signed by “ST”. On or about August 3, 2004, Lindsey's supervisor called the bank to verify the letter. On August 4, 2004, an individual from the Bookkeeping Department of the bank notified the supervisor that “ST” was not an employee of the bank, that Lindsey had not notified them of a stolen debit card or fraudulent activity in the account, and that the bank letter submitted to the Firm by her was not authentic. Based on this information, Lindsey was terminated from employment on August 6, 2004.
NYSE found that violated Exchange Rule 476 (a)(6) by engaging in conduct inconsistent with just and equitable principles of trade in that she made a misstatement to her member firm employer regarding a personal check she submitted drawn on insufficient funds and submitted a forged letter that purported to be from a bank to support her misstatement.
Censure; 2 year Bar
Thomas Mitchell Forbes
SFC/NYSE Hearing Panel Decision 05-71/June 6, 2005
In November 2001, while Forbes was employed as a registered representative at McDonald Investments, Inc. (the “Firm”), he was referred to a technology company (the "Company") which was interested in having the Firm’s parent (the “Bank”), become its investment-banker. The Company opened an account at the Firm and, over the next few months, Forbes attempted, without success, to have the Bank become the Company’s investment-banker. On or about June 11, 2002, the Firm’s compliance department advised Forbes to cease doing business or having any further contacts with the Company because the Bank was not interested in extending financing to the Company.
After Forbes had been instructed by the Firm to cease contact with the Company, on July 10, 2002, the Firm received a copy of an e-mail dated June 21, 2002, that Forbes had sent to a potential investor of the Company from his home computer. The e-mail related to the Company’s efforts to obtain financing for its business. The Firm’s policy prohibited employees from sending e-mails from personal or home computers for business purposes. The Firm’s policies also required that all correspondence with the public be pre-approved by the Firm. In addition, Exchange Rule 342.16 requires member firms to review registered representatives’ communications with the public. On July 17, 2002 the Firm terminated Forbes for “violation of firm policy relating to electronic communication with the public.”
NYSE found that Forbes:
I. Caused a violation of Exchange Rule 342.16 in that, without the required review and approval of his member organization employer, he issued written communications to the public.
II. Engaged in conduct inconsistent with just and equitable principles of trade in that he continued to assist a customer in obtaining outside financing for a business venture and provided investment advice contrary to the Firm’s directive to have no further contacts with the customer.
Censure; 1 year Bar in all capacities.
Mercer Cook, III
SFC/NYSE Hearing Panel Decision 05-68/June 13, 2005
In July 2000, Cook, a registered representative with a Division of Citigroup Global Markets, Inc. (the “Firm”) was appointed as the acting head of the North American Institutional Sales Team ("Sales Team"), a group of approximately 14 institutional investment management sales people that primarily offered and sold investment advisory services to institutional customers. A relatively small portion of the Sales Team’s activities involved the offer and sale of securities, including institutional share classes of registered mutual funds. In January 2001, Cook was named Head of the Sales Team, and his primary duties involved supervising both the investment advisory activities and the occasional securities activities of the team. At the time that Cook was named acting head of the Sales Team, the Sales Team was under the direct supervision of the then Chief Operating Officer (“COO”) of the Firm’s Institutional Asset Management business who was also a Series 40 registered principal of the Firm. This person continued to have the ultimate supervision of the Sales Team after Cook was appointed its Head in 2001.
In March 2002, the Firm requested that Cook take the Series 24 examination to assist the COO in the supervision of the occasional securities activities of the Sales Team. Immediately after June 28, 2002, he represented to the Firm that he had sat for and passed the Series 24 examination on June 28, 2002. As of that date, Cook reviewed and signed-off as registered principal on two pieces of institutional sales literature and on 11 pieces of correspondence that discussed institutional funds. After June 28, 2002, when asked several times by the Compliance department for the Division for evidence that he had passed the Series 24 exam, Cook informed them on several occasions that he had a copy of the certificate evidencing that he passed the Series 24 exam but that he had forgotten to bring it into the office. In early September 2003, Cook, through his assistant, contacted Compliance and requested that a Series 24 exam window be opened for him. He explained that he had decided to re-take the Series 24 exam since he was unable to find the certificate evidencing his passing the exam in June 2002. A few days earlier, Cook, on his own, ceased signing off as registered principal on some institutional fund sales literature.
The Firm filed with the NYSE a Form RE-3 (“RE-3”) dated November 26, 2003, reporting that in September 2003, the Firm had reason to suspect that Cook had not taken or passed the Series 24 Examination despite assertions from Cook that he had. The Firm reported that the Division began an internal investigation which was completed on October 24, 2003. As a result, on October 28, 2003, the Division suspended Cook from all of his supervisory duties. The Firm further reported that effective November 18, 2003, the Division demoted Cook to a position that had no supervisory duties and required Cook to pay a fine in the amount of $50,000 as well as imposing on him a probationary status. Cook voluntarily resigned from the Division in February 2004 to take a job with the Firm’s Human Resource Department. Cook left the employ of the Firm’s Human Resource Department in on or about November 2004.
NYSE found that Cook:
I. Caused his firm to violate Exchange Rule 345(a) in that he performed the duties of a supervisor without being properly qualified; and
II. Engaged in a conduct inconsistent with just and equitable principles of trade in that he made a material misrepresentation to his member firm employer.
Censured; 2 year Bar in all capacities
SFC/NYSE Hearing Panel Decision 05-64/May 23, 2005
In April 1990, Pelham became employed as a registered representative and institutional salesman at the San Francisco office of Gruntal & Co. LLC (the “Firm”). Since May 2002, when that office was among the assets sold by the Firm to the non-member firm of Ryan, Beck & Co. LLC, Pelham has been employed there as an institutional salesman.
While employed at the Firm, Pelham provided month-end price evaluations for collateralized mortgage obligations (“CMO’s”) and other mortgage-backed securities in the portfolio maintained at a foreign-owned bank (the “Bank”). This account was managed for the Bank by a portfolio manager (“Portfolio Manager’). Pelham was a former business associate of the Portfolio Manager and the two had maintained a professional and friendly relationship. The Bank required the Portfolio Manager to
The Firm was one of the independent pricing sources for the positions in the Bank’s portfolio. At the end of each month, from in or about March 2001 through October 2001, the Bank faxed to Pelham a list of positions for which the Portfolio Manager needed prices. At all relevant times, the Firm allowed sales personnel such as Pelham to derive prices for securities and communicate them to customers who requested them.
During the period from June 2001 through October 2001, the Portfolio Manager suggested to Pelham the prices which she wanted to have submitted to the Bank. By supplying to the Bank prices consistent with the prices suggested to him by the Portfolio Manager, Pelham provided the Portfolio Manager with opportunities to improperly influence the valuation of her portfolio. For the months from June through October 2001, Pelham discussed with the Portfolio Manager prices which she wanted to be stated on the pricing requests to be returned to the Bank. On these occasions, the Portfolio Manager stated to Pelham either the prices which she wished to have reported to the Bank for positions in her portfolio, or suggested a limited range within which Pelham should supply prices. For each of these months, the Bank pricing requests which Pelham subsequently returned to the Bank bore securities valuations closely consistent with the prices which the Portfolio Manager had suggested that Pelham supply. During the summer and fall of 2001, the month-end prices for one of the positions in the portfolio managed by the Portfolio Manager, which Pelham supplied to the Bank following discussions with the Portfolio Manager, increasingly diverged from a commonly available pricing source available on Bloomberg.
The NYSE found that Pelham engaged in conduct inconsistent with just and equitable principles of trade in that on one or more occasions he furnished an inaccurate price on a security in a customer’s account
Censured; 6 month Bar in all capacities
|Bill Singer's Comment: Also read Haas|
Kenneth Harley Hass
SFC/NYSE Hearing Panel Decision 05-63/May 23, 2005
Eric P. Steffens
SFC/NYSE Hearing Panel Decision 05-61/May 24, 2005
Steffens, a former non-registered employee with UBS Financial Services Inc. (the “Firm”), was hired as an employee in the Human Resources Department at the Firm’s Weehawken, New Jersey branch office, and remained with the Firm until his employment was terminated on June 25, 2004. During the period from approximately March 2001 to April 2004 (the “relevant period”), Steffens misappropriated funds on five different occasions totaling approximately $11,824.67.
In June 2004, the Firm conducted an internal investigation of Steffens and became aware that he had misappropriated these refund checks.
The NYSE found that Steffens engaged in conduct inconsistent with just and equitable principles of trade in that he misappropriated funds belonging to the Firm
Censured; Permanent Bar in all capacities.
|Bill Singer's Comment: These conversion cases are far more common than you might expect. This case is interesting because there were five separate dips into the pot. Perhaps the best thing you can do to try and stop these types of violations (and let's face it, you're never going to totally prevent this type of criminal activity) is to 1. publicize the decisions and send them to your employees; and 2. make sure you don't take your annual audits as a mere exercise.|
William Walter Jackson, IV
SFC/NYSE Hearing Panel Decision 05-60/May 24, 2005
John B.Hoffman (former Research Analyst)
SFC/NYSE Hearing Panel Decision 05-57/May 5, 2005
Kevin J. McCaffrey
Hoffmann entered the securities industry in 1964 as a research analyst with Smith Barney, in 1988 became director of U.S. Equity Research, and in 1995 became director of Global Research. After Smith Barney merged with Salomon Brothers in 1997 to form Salomon Smith Barney, Inc. (now Citigroup Global Markets, Inc.) (“SSB” or the “Firm”), Hoffmann was director of Global Equity Research of SSB until February 2003. He was a member of the executive committee at SSB. He retired from Citigroup Global Markets in May 2003.
McCaffrey entered the securities industry in 1988 as a general securities representative. He joined Smith Barney as head of New York Institutional Equity Sales in 1994 and became deputy director of U.S. Equity Research in 1995. When Smith Barney merged with Salomon Brothers, McCaffrey became director of U.S. Equity Research and held that position until October 2002.
In 2000 and 2001 (the “relevant period”), Hoffmann, as the director of Global Equity Research, and McCaffrey, as director of U.S. Equity Research at SSB, were supervisors of Jack Grubman, once one of the most prominent research analysts at SSB and on Wall Street. Hoffmann and McCaffrey failed to supervise Grubman adequately with a view to preventing him from publishing fraudulent research on “ABC” and “DEF”, and from publishing research on “GHI,” “JKL,” “MNO,” “PQR,” and “STU, that violated NYSE Rule 472 relating to communications with the public. Each of these companies was an SSB investment banking client. In particular, with respect to these companies, Hoffmann and McCaffrey failed to respond adequately to red flags that Grubman made unreasonable research assumptions that led him to publish unrealistically bullish ratings and price targets. During the relevant period, Hoffmann and McCaffrey were aware of potential conflicts of interest posed by Grubman’s involvement in the Firm’s telecommunications (“telecom”) investment banking activities and were aware of Grubman’s importance to the Firm’s telecom investment banking franchise. Hoffmann and McCaffrey failed to respond adequately to red flags concerning investment banking pressure on Grubman not to downgrade the Firm’s banking clients.
The NYSE found that Hoffman and McCaffrey violated NYSE Rules 342 and 476(a)(6) by failing to supervise the activities of a firm analyst during the period in which he published fraudulent and misleading research on certain telecommunications companies.
Hoffmann: Censure, a total penalty of $120,0011; Suspension of 15 months from acting in any supervisory capacity. The penalty will also include an additional $1.00 in disgorgement. Such payment shall be made into the interest bearing Distribution Fund account as specified in the SEC’s order in this matter.
McCaffrey: Censure, a total penalty of $120,0011; Suspension of 15 months from acting in any supervisory capacity. The penalty will also include an additional $1.00 in disgorgement. Such payment shall be made into the interest bearing Distribution Fund account as specified in the SEC’s order in this matter.
Michael John Einersen
SFC/NYSE Hearing Panel Decision 05-56/April 28, 2005
The NYSE found that Einersen violated Exchange Rule 627(g) in that he failed to timely pay an arbitration award.
Censure; 10 week bar in all capacities.
|Bill Singer's Comment: Let me see if I got this. The Award was required to be paid within 30 days of receipt unless there's a Motion to Vacate. Okay, so Einersen loses his Motion February 1998. Let's be generous and give him until April 1998 to make payment. How can we even begin to understand what the NYSE was doing during the ensuing 7 years --- until he finally paid April 22, 2005? And it's odd that the NYSE doesn't even mention whether the two Claimants filed any complaints during the ensuring 7 years (I'm guessing they didn't). Frankly, I can understand why Einersen would have thought the Claimants had abandoned their demands for repayment. If I were owed the Award you can bet for sure that I would have been yelling and screaming to the NYSE to bar Einersen if he doesn't pay me tomorrow.|
Steven James Zellers
SFC/NYSE Hearing Panel Decision 05-50/May 9, 2005
NYSE Enforcement commenced its investigation on February 11, 2002 after receiving a Uniform Termination Notice for Securities Industry Representatives (“Form U-5”) from the Firm, that notified the NYSE that a co-worker of Zellers was discharged on April 19, 2001, based upon the Firm’s determination that he engaged in outside employment without prior written employer consent, and as a result of his refusal to cooperate with the Firm’s internal investigation. Enforcement concurrently investigated the conduct of Zellers and others, all of whom worked with the terminated employee, to determine whether they also engaged in an outside business activity without prior written Firm consent. Zellers voluntarily left the Firm prior to the completion of the Firm’s internal investigation.
The NYSE found that Zellers violated NYSE Rule 346(b) by engaging in an outside business activity without written employer consent.
Censure; Bar for 6 months in all capacities.
Eric Matthew Winokur a/k/a Eric Matthew Wiener
SFC/NYSE Hearing Panel Decision 05-49/May 9, 2005
Seth Andrew Wiener
NYSE Enforcement commenced its investigation on February 11, 2002 after receiving a Uniform Termination Notice for Securities Industry Representatives (“Form U-5”) from the Firm, that notified the NYSE that a co-worker of Seth and Eric Weiner was discharged on April 19, 2001, based upon the Firm’s determination that he engaged in outside employment without prior written employer consent, and as a result of his refusal to cooperate with the Firm’s internal investigation. Enforcement concurrently investigated the conduct of Seth and Eric Weiner and others, all of whom worked with the terminated employee, to determine whether they also engaged in an outside business activity without prior written Firm consent. Seth and Eric Weiner voluntarily left the Firm prior to the completion of the Firm’s internal investigation.
The NYSE found that Seth and Eric Weiner violated NYSE Rule 346(b) by engaging in an outside business activity without written employer consent.
Censure; Bar for 6 months in all capacities.
Daniel Christopher McDonald
SFC/NYSE Hearing Panel Decision 05-47/May 9, 2005
MH, a customer, filed an arbitration against McDonald and others alleging various sales practice violations. The complaint arose out of a sale by MH of various mutual fund investments including various International Fund B shares, Mid Cap Growth B shares, Tax Managed Growth Fund B shares and Select Growth B shares. MH contended that McDonald failed to sell her mutual funds after she specifically instructed him to do so during a telephone conversation. McDonald conceded his failure to execute this sale, but explained that there were mitigating circumstances for the delay, specifically, that the delay was the result of McDonald’s attempt to forestall MH’s sale, as it would have resulted in significant penalties resulting from an early sale of the mutual funds.
NYSE Enforcement commenced its investigation on February 11, 2002 after receiving a Uniform Termination Notice for Securities Industry Representatives (“Form U-5”) from the Firm, that notified the NYSE that a co-worker of McDonald was discharged on April 19, 2001, based upon the Firm’s determination that he engaged in outside employment without prior written employer consent, and as a result of his refusal to cooperate with the Firm’s internal investigation. Enforcement concurrently investigated the conduct of McDonald and others, all of whom worked with the terminated employee, to determine whether they also engaged in an outside business activity without prior written Firm consent. McDonald voluntarily left the Firm prior to the completion of the Firm’s internal investigation. In addition, the NYSE also investigated McDonald after being notified by the Firm that a customer arbitration was commenced against McDonald and others, and which included allegations of misrepresentations, unsuitable investments and the failure to execute a sale order when instructed to do so.
The NYSE found that McDonald violated NYSE Rule 346(b) by engaging in an outside business activity without written employer consent.
Censure; Bar for 6 months in all capacities.
Comment: This is a troubling case on two
levels. One, it's one of those cases that irritates me because firms
are always pushing their RRs to network and develop leads. Which is
essentially what McDonald did here. Two, I always fall victim to
that American ethic against tattling on your colleagues, especially if you
too were engaged in wrongdoing.
Having raised points one and two, I must also be fair and offer the following observations. I think we need to liberalize the outside business activities and private securities transactions violations at both NYSE and NASD because far too many RRs fall afoul of those restrictions. The sheer numbers of violations in these areas indicate to me that the missteps are frequently out of ignorance and not with an intention to violate. As such, we need to re-examine the reasons for these prohibitions, better communicate them to the salesforce, and also question why RRs aren't entitled to finder's fees (provided --- and I say this with NO reservation --- that full disclosure is made to the customer and the firm). Which finally brings me to the requirement that McDonald testify against his colleagues and cooperate with the NYSE in their prosecution. There is likely no more potent arrow in the regulator's quiver than compelling cooperation from a co-conspirator or an accessory. Tasteful or otherwise, it is a necessary option. Moreover, the mere threat that someone engaged with you in misconduct could be induced to turn you in, is often a potent issue that may preclude some schemes. True, there's something in the American grain that is rankled by such cooperation, but it's often a necessary evil for the system to work. Notwithstanding, I wish we could dispense with the charade that McDonald somehow simply "agreed to cooperate." We all know that this was the NYSE's idea and I'm sure there was some prodding on the regulator's part. Why even play this game?
Willam M. Scott (former Branch Manager)
SFC/NYSE Hearing Panel Decision 05-44/April 14, 2005
Scott was employed in the securities industry since September 1989 and joined Prudential Securities, Inc. (the "Firm" [subsequently purchased by Wachovia]) in March 2001 as the Dayton, Ohio Branch Office Manager (“BOM”). In September 2002, Scott became Complex Manager of the newly joined Cincinnati and Dayton offices (the “Complex”). He was terminated by Wachovia on February 2, 2004
In January 2003, the Firm hired two new employees through a referral by AM. Scott believed AM was entitled to receive a finder’s fee from the Firm. However, prior to AM sending the January 22nd e-mail, one or both of Scott’s supervisors orally told Scott that AM did not qualify for the referral fee. Subsequently to that discussion, on January 22, 2003, while working at Scott’s computer, AM sent an e-mail under Scott's signature to two of Scott’s supervisors at the Firm, from Scott’s e-mail account, with regard to obtaining authorization for a finder’s fee for two new employees. After receiving the January 22nd e-mail, one or both of Scott’s supervisors contacted Scott, who informed one or both of his supervisors that he did not write the e-mail. Scott further told one or both of his supervisors that AM wrote the e-mail under Scott’s signature and that he did not authorize AM to do so. Scott later told the Firm that he did not ever allow AM to use his workstation and did not ever give AM his password. Scott subsequently received a directive to terminate AM’s employment based on Scott’s assertion that AM had accessed Scott’s computer without Scott’s authorization for monetary gain. Scott terminated AM’s employment on February 7, 2003.
NYSE found that Scott:
I. Violated Exchange Rule 342(a) by failing to reasonably discharge his duties and obligations in connection with his supervisory responsibilities as a branch office and complex manager;
II. Engaged in conduct inconsistent with just and equitable principles of trade in that he made misstatements to his member organization employer in violation of Exchange Rule 476(a)(6);and
III. Violated Exchange Rule 476(a)(4) by making material misstatements to the Exchange.
Censure; 8 month bar in all capacities; Required to retake the Series 9 (General Securities Sales Supervisor Options Module) and 10 (General Securities Sales Supervisor General Module) examinations.
Comment: This is a fascinating
case. On the one hand, Scott really comes off as a stand-up guy ---
he reaches out to the former office manager, makes him the Admin. Mgr.,
and goes to bat for him when he thinks he's owed a finder's fee. All
those things strike me as someone who's a class act. Of course, that
crown quickly fell from his head when he apparently felt cornered and
denied that AM had his prior permission to use his email account, which
apparently is what got AM fired.
Frankly, I'm not that impressed with the basic case here. It's sort of like jaywalking . . . we all know it's a violation but everyone (and I mean everyone) does it. More to the point, the police who are charged with enforcing that misconduct will literally watch jaywalkers and rarely, if ever, do anything. Nonetheless, as with all rules, regulations, and laws that strike us as silly, they often have a valid point. Jaywalkers often become traffic accident fatalities. Further, we all teach children not to cross without the green light. However, Scott clearly exacerbated things here. He failed to step up to the plate and take some responsibility for AM's finder's fee email. He lied to his firm about his email practices. He lied to the NYSE in both a letter and under oath --- and apparently only recanted when confronted with proof of his fabrications.
In the final analysis, this remains an odd case. I was very surprised to see only an 8-month bar and a requalification. Clearly, the misstatements to the employer and regulator could have supported a multi-year bar, if not a permanent one, and the loss of the right to ever act in any supervisory capacity. As such, the NYSE showed great restraint in fashioning the sanction. One must wonder whether Scott would have gotten an even lighter sanction if he had merely fessed up from day one. That's the interesting question with this case. How much of a difference would coming clean from day one have made?
Glenn Albert Hamler
SFC/NYSE Hearing Panel Decision 05-43/April 14, 2005
By letter dated June 5, 2002, Customer 2, the executor of his brother’s estate, advised Hamler to liquidate the estate account on June 17, 2002, and to issue a check as the estate planned to make a final distribution of assets. Hamler failed to follow the customer’s instructions to liquidate the estate account on June 17, 2002. When the customer complained about the delay, Hamler liquidated the account in transactions effected June 27 through July 2, 2002.
The Firm reimbursed the customer for the loss that had occurred as a result of Hamler’s conduct. Hamler contributed the entire amount of the settlement, $2,279.
On May 1, 2003, NYSE Enforcement received a Form RE-3, Submission of Required Information Pertaining To Members, Member Organizations, Allied Members, Registered and Non-Registered Employees (“Form RE-3”) from the Firm reporting Customer 1 matter. During the course of Enforcement’s investigation, the Firm advised the NYSE of Customer 2's complaint.
The NYSE found that Hamler:
I. Violated Exchange Rule 408(a) in that he accepted orders for an account of a customer of his member organization employer from a person other than the customer without first obtaining written authorization of the customer.
II. Engaged in conduct inconsistent with just and equitable principles of trade in that he:
Censure; 1 month suspension in all capacities.
Comment: These spousal cases aren't that rare and always pose
a tremendous problem for brokers and their firms. Clearly, the
Customer 1 custodial account had been at Advest for over three years when
the husband called Hamler. Under such circumstances it's
understandable that an RR isn't thinking that the marriage is on the rocks
and he should call the wife to confirm --- but the wife was the account's
custodian of record and MUST be called. I also suspect there's
frequently a bit of sexism (intentional or otherwise) going on with this
matters because if the husband were the custodian and the wife had placed
the call, I believe most RRs would have confirmed the transactions with
Separately, I'm not really sure I understand the need for such a hard sanction as a one-month suspension. This doesn't appear to be a case of anything other than Customer 1's husband duping and defrauding Hamler. Without question the custodian (the wife) should have been contacted, but, come on, this lapse doesn't strike me as intending to violate the rules. As to the Customer 2 matte,, given the fact that Advest apparently never even reported the matter and given the NYSE's failure to explain why there was a delay in liquidation, it almost seems as if everyone agreed to simply toss it into the mix and provide for a global closure of Hamler's disciplinary action.
All in all, I understand the one month suspension, and given the totality of circumstances it isn't truly excessive. However, sometimes the regulatory community fails to discern between silly lapses in judgment and intentional violations. Nonetheless, the road to hell is paved with good intentions and I fully appreciate any regulator's position that the suspension in this case was imposed to ensure that Hamler fully appreciates how disastrous his error could have been. Finally, by imposing the sanction the case does get noticed by publications such as RRBDLAW.com and hopefully we can prevent others from similar miscues.
Marley Kay Burchfield
NYSE Hearing Panel Decision 05-41/April 11, 2005
Marley Kay Burchfield, a former registered representative with Morgan Keegan & Company, Inc. (the “Firm”),engaged in the following conduct involving accounts she serviced:
The Firm reimbursed all three customers and terminated Burchfield in April 2004.
Burchfield did not submit an Answer to the Charge Memorandum, and neither Burchfield nor any person on her behalf appeared at the hearing in this matter. At the hearing, the Division of Enforcement moved, pursuant to Exchange Rule 476, to have the facts alleged in the Charge Memorandum deemed admitted, since Burchfield did not submit an Answer. The motion was granted and the NYSE found that Burchfield:
I. Engaged in conduct inconsistent with just and equitable principles of trade in that she misappropriated funds belonging to customers of her member organization.
II. Violated Exchange Rule 477 in that she failed to comply with a request by the Exchange to appear and testify in connection with an Exchange investigation regarding matters occurring prior to the termination of her employment with a member organization.
Censured and permanently barred in all capacities
Seth Wilhelm Chadbourne
SFC/NYSE Hearing Panel Decision 05-31/March 15, 2005
Seth Wilhelm Chadbourne, a former registered representative with Nomura Securities International, Inc. (the “Firm”), entered the securities industry in 1995 as a telecommunications analyst with Nomura Corporate Research and Asset Management Group ("NCRAM), which managed several asset management funds in its capacity as a subsidiary of the Firm. In May 2000, Chadbourne became a vice president and portfolio manager with NCRAM and until his discharge from the Firm in April 2002, he was co-manager of several of the funds managed by NCRAM and was an analyst for the XYZ Fund, which was managed by NCRAM (the "Fund"). From July 2003 to the present, Chadbourne has been working as an investment advisor for his own company.
In his capacity as the Fund's analyst, Chadbourne attended a meeting with the Fund on April 5, 2002 at approximately 9:00 a.m. (the “morning meeting”), where he learned that the Fund intended to transact short sales that day in three equity securities: ABC, DEF, and GHI. Following the morning meeting, Chadbourne completed an application which sought approval from the Firm to sell, in his personal securities account maintained at another firm, 1,000 shares of ABC, 1,000 shares of DEF, 2,000 shares of GHI, and 1,000 shares of JKL. Chadbourne’s application did not disclose that he intended to sell short the securities, and did not disclose that the Fund intended to transact short sales that same day in ABC, DEF and GHI. At all times relevant, under Firm policy, Chadbourne was required to complete a two-step approval process before orders for personal trades could be entered in his personal securities account:
On April 5, 2002, Chadbourne obtained the approval of a manager at the Firm to sell ABC, DEF, GHI and JKL in his personal securities account, but he never sought approval for short sales of these securities. At approximately 12:26 p.m. on April 5, 2002, Chadbourne sent an electronic communication to CDP of the Firm’s compliance department advising him that Chadbourne was approved to sell ABC, DEF, GHI and JKL in his personal account. Chadbourne then forwarded at 12:50 p.m. the same communication to CDD, also of the compliance department.
April 5th transactions:
The Exchange’s Division of Enforcement (“Enforcement”) initiated an investigation following receipt from the Firm of a Uniform Termination Notice for Securities Industry Registration (“Form U-5”), dated May 13, 2002, reporting the termination of Chadbourne’s employment for conduct inconsistent with Firm policy.
The NYSE found that Chadbourne:
Engaged in conduct inconsistent with just and equitable principles of trade in that he sold short securities from his personal securities account prior to the execution of an order to sell short such securities by an asset management fund managed by his member firm employer, when he knew or was reckless in not knowing that the fund’s order had not been executed.
Censure and Bar in all capacities for 2 1/2 months
|Bill Singer's Comment: There are two distinct issues afoot in this case: 1. Chadbourne traded ahead of his fund for his personal advantage; and 2. he failed to follow disclosure rules pertaining to trading in his personal account --- albeit in this case, he did disclose his intended long sales but not his intended short sales. If you maintain (or supervise) outside accounts, make sure you are aware of the firm's protocols for notifying and obtain approval to trade. Too often, industry employees believe the obligation is merely to notify and not to also wait for the firm's approval.|
P. Campell Hillstrom
SFC/NYSE Hearing Panel Decision 05-17/January 28, 2005
On June 20, 2000, P. Campbell Hillstrom, a registered representative with Citigroup Global Markets Inc. (the “Firm”), and an equity analyst (“analyst”) for the Firm specializing in the apparel, footwear and textile industries, met at a client meeting in Chicago. After the meeting, Hillstrom and the analyst discussed three or four apparel companies, including a particular listed company (the "Company"). In response to a request by Hillstrom for ideas of issuers to short, the analyst told Hillstrom that there was concern in the industry relating to the inventory levels and backlog numbers of the Company; however, she told Hillstrom that she did not cover or prepare market analyses relating to the Company.
Upon returning to his office at the Firm’s Chicago, Illinois branch, Hillstrom researched the companies discussed with the analyst, including the Company. He then wrote an e-mail about short ideas related to these companies. Some of the information contained in the e-mail came from his discussions with the analyst; however, Hillstrom did not verify or confirm the information in the e-mail with the analyst. Hillstrom sent the e-mail in the early afternoon of June 20, 2000. In addition to the Company, Hillstrom’s e-mail referenced three other companies. The subject line of the e-mail was “Short ideas in Apparel Names.” In his opening comments, Hillstrom wrote,
Referring to the Company, Hillstrom wrote the following in his e-mail:
Without discussing or confirming the content of the e-mail with the analyst, Hillstrom sent the e-mail to two of his clients who had previously expressed interest in short ideas, particularly relating to the apparel industry. He also sent the e-mail to several other salesmen in the Firm and to his direct supervisor, the Firm’s Illinois branch office manager, who was on vacation. One of the salesman to whom Hillstrom sent the e-mail thereafter forwarded Hillstrom’s e-mail to approximately 13 clients at seven financial services companies interested in retail stocks.
Hillstrom’s e-mail contained certain inaccurate and misleading information related to the Company. For example, Hillstrom asserted in his e-mail that the Company was “adding more than 30 retail stores…after not adding any for several years.” The company, however, had opened many stores over the past few years. Further, Hillstrom’s assertion that the Company’s “jeans are not nearly as hot as they once were,” was misleading in that, according to the analyst, during 2000 the jeans were selling very well in status denim. Moreover, in the e-mail, Hillstrom stated that the Company’s sales backlog was “grossly inflated,” whereas the analyst had stated that there was some confusion as to what the company included in its backlog numbers.
On June 20, 2000, the Company opened at a price of 15 15/16. After Hillstrom sent the e-mail, the price of the Company began to decline and closed at 15 14/16, or .625 cents lower than its opening price. On the morning of June 21, 2000, the price of the Company opened at 15 10/16, or .25 cents lower than its closing price on June 20, 2000. Thereafter, during the day on June 21, the Company’s stock fell $5.625 before beginning a recovery. The stock traded at a low of 11 2/16 and closed at a price of 13 8/16, or $2.375 lower than its opening price. The volume of the stock on the Exchange was approximately ten times its average volume for the two-week period immediately preceding June 21, 2000.
Hillstrom’s e-mail resulted in a misperception in the market that the analyst had downgraded the stock. On June 21, 2000, Dow Jones news service issued a news report quoting analysts and a Company spokesperson, each of whom had received Hillstrom’s e-mail. Each attributed the activity in the Company’s stock to Hillstrom’s e-mail.
Under “General Standards for All Communications,” as specified in Exchange Rule 472.30(i), which was in force and effect in June 2000, “[n]o member or member organization shall utilize any communication which contains any untrue statement or omission of a material fact or is otherwise false or misleading.” (In the Exchange’s Constitution and Rules, as revised in August 2003, Exchange Rule 472.30(i) was redesignated as Exchange Rule 472(i), under a section titled, “General Standards for All Communications.”).
Exchange Rule 472.10, defines “communication” to “include, but is not limited to advertisements, market letters, research reports, sales literature, electronic communications, communications in and with the press and wires and memoranda to branch offices or corBrill firms which are shown or distributed to customers or the public.”
Exchange Rule 476(a)(6) prohibits member organizations and employees of member organizations from engaging in practices that constitute conduct inconsistent with just and equitable principles of trade.
The NYSE found that Hillstrom:
I. He caused a violation of Exchange Rule 472, in that he disseminated an electronic communication concerning securities which caused misleading information to reach the marketplace.
II. He violated Exchange Rule 476(a)(6), in that he engaged in conduct inconsistent with just and equitable principles of trade by disseminating an electronic communication without verifying the information contained in the e-mail, and which had a negative market impact.
Censure; Fined $40,000; Suspended 9 weeks in all capacities.
William Allen Zimmer
SFC/NYSE Hearing Panel Decision 05-10/January 24, 2005
Commencing in the early 1990s, Salomon Smith Barney Inc. (and its predecessors in interest, herein, the “Firm”) required purchases of securities selling for $1.00 and under to be approved and initialed by a Branch Office Manager ("BOM") on an order ticket and given to a wire operator, who was to note the BOM's approval when entering the order. In 1996, the threshold was raised to $3.00 and in 1998, it was raised to $5.00.
From at least April 1999 through January 2003, Zimmer, a former registered representative at the Firm's Beverly Hills, California branch office, placed various manager's initials on numerous order tickets without those managers’ knowledge or authorization, thereby causing his member organization employer to make and maintain inaccurate books and records.
On January 27, 2003, during a routine order ticket review, a branch ABM detected what were purportedly PK's initials signifying approval of three order tickets written by Zimmer. When questioned, Zimmer admitted that he had placed PK’s initials on 3 those order tickets. Further inquiry by the Firm disclosed that Zimmer had placed JM's initials on 19 order tickets. The NYSE determined that no customer complaints had arisen as a result of the above orders.
The NYSE found that Zimmer violated Rules 17a-3 and 17a-4 promulgated under the Securities Exchange Act of 1934 and Exchange Rule 440 by causing his member organization employer to make and maintain inaccurate books and records.
Censure and 4 month Bar
|Bill Singer's Comment: This strikes me as a fairly light sanction for a circumvention of a supervisory policy for a period of approximately four years and involving 179 orders. Look at the Lacey case immediately below and try to explain to me why one RR got a 3 year bar (Lacey) but another got a 4 month bar (Zimmer). It also shows how porous such supervisory policies are if it took the firm until 2003 to discover the misconduct.|
SFC/NYSE Hearing Panel Decision 05-9/January 24, 2005
In April 2001, Lacey a former RR with Merrill Lynch, PIerce, Fenner & Smith, Inc. (the "Firm"), applied for a Residential Loan through XYZ, a mortgage company. In connection with this loan application, XYZ sent a Verification of Deposit form ("VOD") to the Firm to verify the current balance of the account Lacey maintained there.
The VOD dated April 3, 2001, submitted on behalf of Lacey to XYZ, indicated that the account Lacey maintained at the Firm had a current balance of $9,000.00, was signed by “J Lacey” under the signature of the applicant, and contained the name and signature of “Assistant Administrative Manager [TM]” as the Firm representative. Lacey submitted his March 2001 account statement for the account he maintained at the Firm as part of the VOD application.
During the course of a random independent audit of the lender, the Firm received a request for verification of the VOD. The Firm determined that it did not have an employee named TM, but discovered that TM was a client of one of Lacey’s colleagues, Financial Advisor JF. The Firm also discovered that over ten alterations had been made to the account statement sent with the VOD so that it would reflect a balance of $9,996.73 as compared with the official Firm statement, which showed a balance of $996.73. Lacey signed the name “[TM]” on the VOD in order to secure a mortgage.
Censure and 3 year Bar
|Bill Singer's Comment: Please consider the Zimmer case immediately above. Explain to me why Lacey, who fabricated a signature on one document for a personal mortgage, got a 3 year bar; but Zimmer who essentially forged 179 supervisory initials on order tickets for public customers got 4 month. I'm not excusing Lacey's conduct ---I'm just trying to make sense out of the severity of the sanction (or the comparable lightness of Zimmer's).|
Avery Marc Meizner
SFC/NYSE Hearing Panel Decision 04-6/January 19, 2005
From May 1985 to May 2003, Meizner was employed as in a non-registered capacity as an internal auditor at the Firm. Around July 2000, Meizner began taking educational courses with a division of a non-member firm. In late 2001, the non-member firm contacted Meizner and asked him to provide his opinion about its services to potential customers and answer their questions. In exchange for his services, the non-member firm agreed to pay Meizner 5% of the amount paid by each customer who signed up for a seminar or who purchased any of its products as a result of their discussions with Meizner. Thereafter, on or about March 1, 2002, Meizner began receiving compensation from the non-member firm for his services while he was employed by the Firm. During 2002, Meizner received a total of approximately $226 in compensation from the nonmember firm for his services. During 2003, prior to the termination of his employment from the Firm, Meizner received a total of approximately $1,212 from the non-member firm for his services. Meizner neither requested nor received the Firm’s written consent to engage in business activity with the non-member firm while he was employed by the Firm. On January 30, 2002, Meizner signed a Firm document entitled Principles of Employee Conduct, in which he acknowledged that he received a copy of Firm policies prohibiting employees from engaging in outside business activities without the prior written consent of the Firm and agreed to comply with those provisions throughout the year. Nevertheless, Meizner failed to disclose when he began engaging in outside business activities with a non-member firm on or about March 1, 2002. On January 23, 2003 and February 12, 2003, while Meizner was employed by the Firm and receiving compensation from the non-member firm, he signed two additional Principles of Employee Conduct forms issued by the Firm, in which he acknowledged that he would comply with the Firm’s compliance rules regarding employee outside business activities throughout 2003. When he signed these forms, Meizner failed to disclose to the Firm that he was engaged in outside business activities with the non-member firm.
Around November 2002, while employed by the Firm, Meizner opened a securities account with another securities firm (“the Account”). On the application Meizner completed to open the Account, Meizner stated that he was self-employed with a company called Tech Equities 2003. Meizner described himself as the owner of Tech Equities 2003 and described the nature of his business as Finance-Investing. Meizner listed the address for Tech Equities 2003 as his home address. In response to the following questions on the application to open the Account: “Are you currently affiliated or employed by a member of a stock exchange or the NASD” and “Do you have an affiliation with, or work for a securities firm, bank, trust or insurance company,” Meizner responded “No,” which was not true. Meizner did not request or obtain the Firm’s approval for opening the Account and he did not request duplicate copies of his Account statements to be sent to the Firm, as required by Exchange Rule 407(b). On or about March 11, 2003, while Meizner was employed by the Firm and maintained the Account, Meizner signed a Firm document entitled Brokerage Accounts Outside the Firm, which required each employee to disclose all outside brokerage accounts. Meizner signed the document without disclosing the Account.
The NYSE found that Meizner
I. Violated Exchange Rule 346(b) in that, without making a written request and receiving the prior written approval of his member organization employer, he engaged in outside business activity.
II. Violated Exchange Rule 407(b) by maintaining a securities account at another securities firm without the prior written consent of his member firm employer, and without arranging duplicate confirmations and monthly statements of such account to be sent to his member firm employer.
III. Engaged in conduct inconsistent with just and equitable principles of trade in that he made misstatements to his member firm employer concerning his outside business activities and his securities account maintained outside his member firm employer.
Censure and a 1 year Bar
J.P. Morgan Securities, Inc.
SFC/NYSE Hearing Panel Decision 05-01/January 5, 2005
In 1999, the J.P. Morgan Securities, Inc. (the "Firm") was a subsidiary of J.P. Morgan & Co. Incorporated (“JPM”), and Chase Securities Inc. (“CSI”) was a subsidiary of The Chase Manhattan Corporation (“Chase”). That year, Chase acquired Hambrecht & Quist LLC (“H&Q”), which engaged in research and investment banking activities. H&Q was merged into CSI, which operated under the name CSI and the trade name Chase H&Q until the merger of the Firm and CSI. In December 2000, Chase acquired JPM, creating the combined entity JPMC. In May 2001, CSI and JPMSI merged and assumed the name J.P. Morgan Securities Inc. H&Q, CSI, and JPMSI (collectively, individually, or in any combination, as “the Firm.”)
During the period of July 1, 1999 to June 30, 2001 (the “Phase I inquiry”), employees at the Firm used electronic communications to conduct business for the Firm as a broker, dealer, and member of an exchange. Pursuant to the Phase I inquiry, the the NYSE, the SEC, and NASD (collectively, the “regulators”) made multiple requests to the Firm for electronic mail (“e-mail”) of research analysts and investment bankers. The Firm produced e-mail in response to these requests and subsequently indicated that e-mail production had been completed for certain individuals. The communications and other information contained in this e-mail provided evidence that, among other things, the Firm had engaged in acts and practices that imposed conflicts of interest on research analysts. In April 2003, the regulators initiated and settled enforcement actions against the Firm and other broker dealers subject to the Phase I inquiry for various violations involving their research and IB activities. See J.P. Morgan Securities Inc., Hearing Panel Decision 03-68 (Apr. 22, 2003); SEC v. J.P. Morgan Securities Inc., 04 Civ. 2939 (S.D.N.Y. Apr. 28, 2003); J.P. Morgan Securities Inc., NASD Letter of Acceptance Waiver and Consent No. CAF 030019 (April 24, 2003).
For the period of July 1, 1999 to June 30, 2002 (the “Phase II inquiry”), the regulators requested that the Firm produce e-mail for various supervisory personnel and other employees. The Firm produced certain email in response to these requests. In August 2003, in response to requests by regulators, the Firm indicated that e-mail productions for certain individuals were complete. The Firm stated that it had conducted a thorough review of internal logs to identify relevant “backup tapes” used to preserve e-mail responsive to the regulators’ requests for information and that email for certain individuals identified in the letter had been produced.
In November 2003, the regulators requested that the Firm provide information regarding its ability to locate and restore backup tapes containing e-mail responsive to the regulators’ requests during the Phase I and Phase II inquiries. The Firm subsequently advised the regulators that it had failed to retain, locate and/or restore all responsive e-mail requested during those inquiries. The Firm identified the following reasons for its failure to retain, locate and/or restore all responsive e-mail: certain backup tapes containing responsive e-mail could not be located in the storage facilities; e-mail on certain backup tapes was corrupted and unreadable; certain backup tapes were damaged, contained data or media errors, or otherwise could not be restored; the negligence or shortcomings of certain technical employees resulted in the failure to create or properly maintain backup tapes for certain time periods; and e-mail could have been deleted by employees intra-day and prior to the scheduled backup that would have captured those e-mails. In addition, the Firm was unable to determine whether backup tapes containing e-mail for certain time periods had been created. Prior to November 2003, the Firm did not inform the regulators of these reasons for failing to retain, locate and/or restore responsive email.
The NYSE determined that the Firm had
J.P. Morgan Securities,Inc.
Censured; Fined $2,100,000 (amount paid to NYSE to be reduced by $700,000 civil money penalty paid to U.S. Treasury and $700,000 paid as a fine to NASD, in related proceedings); and an Undertaking to review its procedures regarding the preservation of electronic mail communications for compliance with Exchange rules and the federal securities laws.