NOTE: Stipulations of Fact 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.

2008

FINANCIAL INDUSTRY REGULATORY AUTHORITY
FINRA
NEW YORK STOCK EXCHANGE CASES OF NOTE 

VISIT WALL STREET'S LEADING ONLINE COMMUNITY
BrokeAndBroker.com

DEVELOPING ENFORCEMENT TRENDS AS NOTED BY BILL SINGER

• NYSE Rule 472(a)(1) requires that “[e]ach advertisement, market letter, sales literature, or other similar type of communication which is generally distributed or made available by a member or member organization to customers or the public” is to be approved in advance by appropriate supervisory personnel at the member firm. 
  
• NYSE Rule 472.10(1) defines “communication” to include “electronic communications.” Sales literature is defined by NYSE Rule 472.10(5) as, among other things, “telemarketing scripts, performance reports or summaries, form letters . . . discussing or promoting the products, services, and facilities offered by a member or member organization . . .”
  
• NYSE Rule 476(a)(6) prohibits, in pertinent part, registered and unregistered employees of a member and member organizations from engaging in conduct inconsistent with just and equitable principles of trade.

Eliades, an institutional equity sales trader with about 60 accounts, established an e-mail distribution list, which included approximately 79 e-mail addresses related to approximately 45 client accounts. Eliades utilized this list to send electronic communications to a group of individuals via a single e-mail. 

In 2005, the Firm’s Equity Syndicate Desk typically distributed internal use only documents via e-mail to its sales force in connection with developing equity transactions, for educational purposes. To prevent external distribution, these e-mails were marked “INTERNAL USE ONLY” and the Firm’s e-mails systems prevented such e-mails from being forwarded (the “no-forwarding block”). On or about April 26, 2005, Eliades circumvented the no-forwarding block on an April 18, 2005 internal-use-only E-mail (from his firm's syndicate desk involving a pending XYZ IPO launch)  by cutting and pasting portions of that communication, including the attachments, into a new electronic document that he then forwarded to the persons on his Accounts Distribution List (the “April 26, 2005 E-Mail”). 

On or about April 27, 2005, the Firm’s e-mail technology surveillance group detected the April 26, 2005 E-Mail which Eliades sent based on a routine keyword search of Firm e-mails. Efforts by the technology surveillance group, assisted by Eliades to recall the April 26, 2005 E-Mail were unsuccessful.  As a consequence of Eliades’ actions, counsel for XYZ as well as for the Firm communicated Eliades’ conduct to staff of the Securities and Exchange Commission, who permitted the parties to proceed with the XYZ offering. However, recipients of Eliades’ April 26, 2005 E-Mail were not permitted to participate in the XYZ IPO allocation.

Eliades violated 

• NYSE Rule 472(a)(1) by sending electronic communication similar to sales literature to numerous Firm customers without knowledge or approval of member-firm employer; and
• NYSE Rule 476(a)(6) by sending electronic communication containing proprietary Firm information to customers without knowledge or approval of member-firm employer. 

Peter Vassos Eliades: Censure and 60-day suspension.

During the period of November 2001 through July 2005, former H&R Block Financial Advisors, Inc.'s (the Firm) RR Wolf operated websites that advertised certain investment products to the public, without prior approval of member firm employer, and disseminated correspondence containing sales literature to prospective Firm customers, without approval of member firm employer. 

By email, dated April 28, 2005 (and not approved by the Firm), Wolf advised one prospective client to visit his investment related website and provided the web address. Wolf disseminated a second objectionable email that contained three attachments of sales literature, which had also not been approved by the Firm. 

Wolf violated NYSE Rule 472(a)(1) when he operated certain unauthorized websites that advertised investment products and disseminated emails to prospective Firm customers, without the prior approval of his member firm employer. 

James Joseph Wolf: Censure; Suspended 4 months

While employed as a registered representative at UBS Financial Services, Inc., Tart serviced two individual trust accounts owned by customers IJ and AJ (collectively, the “Js”). The Js, an elderly married couple, also maintained an irrevocable charitable remainder trust account (“CRUT”) at the Firm and appointed a financial institution Trustee as the trustee. The Js gave Trustee authorization to make trading decisions in the CRUT. 

Between 2004 and 2005, Tart mismarked order tickets for solicited orders as “unsolicited.” Additionally, Tart improperly accepted orders in the AJ account from IJ without first obtaining the written discretionary authority authorization of AJ (AJ never provided IJ with authority to place trades on her behalf). In 2005, Tart also engaged in unauthorized trading in the CRUT by liquidating and acquiring mutual fund positions, without first obtaining prior authorization from the trustee.

Tart violated 

• NYSE Rule 476(a)(6) by mismarking order tickets to reflect that solicited trades were unsolicited and engaging in unauthorized trading in customer’s account; 
• Section 17(a) of Securities Exchange Act of 1934 and Rules 17a-3 and 17a-4 thereunder, and NYSE Rule 440 by causing employer to make and preserve inaccurate books and records; and
• NYSE Rule 408(a) by accepting orders for customer’s account from person other than customer without first obtaining written authorization of customer. Consent to censure and five-month bar.

Robert Jonas Tart: Censured; Barred 5 months

On May 24, 2005,Credit Suisse Research Analyst Galeon obtained certain information from the CEO of XYZ relating to XYZ’s expected updated earnings guidance. That was the day before the official public release of the company’s updated earnings guidance. Galeon selectively disseminated emails to 17 Firm clients and 31 Firm sales personnel, conveying the information the CEO had disclosed to him. All but one email contained an admonition to keep the information confidential. Subsequently, Credit Suisse and two clients of Credit Suisse who received the information in Galeon’s email traded in shares of XYZ, prior to the public release of such information. 

On August 5, 2005, a Uniform Termination Notice for Securities Industry Registration (“Form U-5”) was filed noting that Galeon was permitted to resign on July 7, 2005, and had violated Firm policy and demonstrated poor judgment in sending emails to Firm colleagues and clients. 

By selectively disseminating the information he obtained from the CEO, Galeon engaged in conduct inconsistent with just and equitable principles of trade in violation of NYSE Rule 476(a)(6).

Adam Galeon: Censure; $50,000 fine; 4 month Bar

Hahn violated NYSE Rules 476(a)(6) and 477 by misappropriating approximately $525.87 from a co-worker at her member firm by using the Co-worker's credit card to make purchases of goods and/or services. Respondent made these credit card purchases for Respondent's own uses and purposes, and without permission or authority of the Co-worker. Also, Hahn violated NYSE Rules 476(a)(11) and 477 by failing to comply with written requests for information. 

Jason N. Slezak
NYSE Hearing Board Decision: 07-156 January 9, 2008 

Slezak was charged with having:
I. Caused a violation of NYSE Rule 405(1) in that he failed to use due diligence to learn the essential facts about his customer.
II. Caused a violation of NYSE Rule 440 and Rules 17a-3 and 17a-4 under the Securities and Exchange Act of 1934 (the “Exchange Act”) by assisting his customer in opening fictitious accounts, thereby causing the books and records maintained by the Firm to be inaccurate.
III. Caused a violation of NYSE Rule 342.16 by failing to get prior approval before sending a letter soliciting a potential customer’s market timing business.
IV. Engaged in conduct inconsistent with just and equitable principles of trade by assisting a customer in opening one or more fictitious trust accounts, purchasing numerous variable annuity contracts with which the customer improperly timed the market, and opening fee-based accounts in which the customer timed the market by investing in international mutual funds.

NYSE found that Slezak caused a violation of NYSE Rule 342.16 by failing to get prior approval before sending a letter soliciting a potential customer’s market timing business.

JASON N. SLEZAK: NOT GUILTY on Charges I,II,and IV; Charge III: Censure.  

X Former Assistant Branch Office Manager
NYSE Hearing Board Decision: 07-157 January 9, 2008 

Charged with having: violated NYSE Rule 405(1) and (2) by failing to use due diligence to learn essential facts about customer and failing to diligently supervise registered representative’s handling of his customer’s accounts; violated NYSE Rule 342 by failing to appropriately supervise and control business activity of registered representative and his customer to ensure that they were in compliance with NYSE Rules and firm’s internal policies; caused violation of NYSE Rule 440 and Rules 17a-3 and 17a-4 under Securities Exchange Act of 1934 by approving customer’s fictitious new account documents, thereby causing books and records maintained by firm to be inaccurate.

X: NOT GUILTY

Y Compliance Manager 
NYSE Hearing Board Decision: 07-158 January 9, 2008 
Charged with having: violated NYSE Rule 405(1) and (2) by failing to use due diligence to learn essential facts about customer and failing to diligently supervise registered representative’s handling of his customer’s accounts; violated NYSE Rule 342 by failing to appropriately supervise and control business activity of registered representative and his customer to ensure that they were in compliance with NYSE Rules and firm’s internal policies; caused violation of NYSE Rule 440 and Rules 17a-3 and 17a-4 under Securities Exchange Act of 1934 by approving customer’s fictitious new account documents, thereby causing books and records maintained by firm to be inaccurate.

Y:  NOT GUILTY

Consider some of these helpful and incisive comments from the Hearing Board.

On the issue of what constitutes due diligence for Know Your Customer for a trust account:

Enforcement alleged that Slezak knowingly, or with reckless disregard for the truth, ignored the truth about Customer and his accounts. In reality, however, the evidence showed that Slezak did make diligent efforts to know his customer and confirm that he was engaged in a legitimate business. First, Slezak visited Customer at the latter’s office, which was within walking distance of the Wacker Branch, and verified that Customer and his corporation had a physical place of business, that the corporation had numerous employees, and that it was engaged in what appeared to be a legitimate, on-going money-management business. Slezak also confirmed that Customer’s corporation had a working telephone number. Slezak testified that he even contacted a former mentor of his from a previous company, who had gone on to open his own investment firm; according to Slezak, his former mentor said that he knew Customer, having met him “at a couple of … banking conferences,” that Customer was “a reputable person” and “a bright guy” who had “attended Harvard” and was “active in the community.” 

On the issue of whether Slezak acted in accordance with just and equitable principles::

The burden of proving the Charge rested with Enforcement. Enforcement did not submit direct proof that Slezak acted knowingly to assist Customer; rather, Enforcement relied on a circumstantial case that Slezak acted in bad faith or unethically in assisting Customer to open accounts and execute variable annuity purchases. That circumstantial evidence included Slezak’s motive to act improperly—namely, the significant financial compensation he received in commissions from Customer’s business—and the various “red flags” outlined above. However, hindsight is 20-20. Having observed Slezak testify, the Panel is not convinced that Slezak knew what Customer was doing, nor do we find that Slezak acted unethically in failing to make sense of the so-called “red flags” and thereby detect the fraudulent nature of Customer’s activity. NYSE Rule 476(a)(6) requires a registered representative to act ethically; it does not require him or her to a be a human lie detector or a regulatory investigator. Taking all of the evidence together, on balance, we find that it is more likely than not that Slezak acted ethically

Finally, consider this gem as applied to X and Y:

In an ideal world, perhaps X and Y would have uncovered Customer’s questionable activity sooner. Indeed, their supervision was not perfect. However, that does not mean they were in violation of NYSE Rule 342. The Rule does not impose a standard of perfection; rather, it requires that a supervisor "reasonably discharge his duties and obligations…."