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

2004
Research and Advertising

 

Harris Nesbitt Corp., f/k/a BMO Nesbitt Burns Corp.
(AWC/CAF040074/December 2004)

Firm implemented a procedure for investment banking to review research reports, but failed to establish and maintain adequate systems and safeguards to prevent investment bankers from making inappropriate comments regarding research reports. 
Harris Nesbitt Corp., f/k/a BMO Nesbitt Burns Corp.

Censured; Fined $125,000

 

 

American Express Financial Advisors, Inc.
(AWC/CAF040072/November 2004)

Firm failed 
  • to file with NASD’s Advertising Regulation Department within 10 days of publication or first use, advertising and sales literature it used with the investing public. 
  • to obtain the written approval by a principal of pieces of advertising and sales literature prior to use with the investing public. 
  • to establish, maintain, and enforce a supervisory system and procedures reasonable designed to achieve compliance with federal securities laws and NASD rules; and 
  • to monitor consistently and to enforce policies and procedures relating to advertising and sales literature. 
American Express Financial Advisors, Inc.

Censured; Fined $400,000

 

 

Sumner Harrington, Ltd. , Kim Edward Elverud , and William Eugene Casey 
(AWC/CAF040069/November 2004)

Acting through Elverud and Casey, the Firm made unsuitable recommendations to public customers regarding securities offerings The Firm received compensation in connection with the offerings and failed to provide any explanation or documentation to NASD describing changes in the firm’s underwriting compensation. In addition, the Firm failed to disclose:
  • its advertising revenue (in the offering materials distributed to the investing public);
  • that the firm was to receive commissions for its underwriting efforts and its advertising material, and that credit agencies had downgraded an issuer’s credit rating or that the company’s notes carried more risk. (in the firm’s investment kits and advertisements); and 
  • consideration (i.e., failed to adequately disclose consideration) received from securities issuers (in notices, circulars, and advertisements distributed to the investing public). 

Moreover, the Firm’s written supervisory procedures failed to address adequately suitability determinations for compliance with NASD Rule 2310. Furthermore, through Elverud, the Firm failed to establish and maintain adequate procedures for the supervision of suitability determinations and to supervise adequately and monitor Casey’s suitability determinations. Casey, in turn, failed to supervise adequately and monitor suitability determinations made by another employee under his charge. 

Sumner Harrington, Ltd. 

Censured; Fined $60,000, jointly and severally with Elverud; Required to 
  • submit all advertisements/sales literature relating to the specific products or services prepared by or for the firm or its affiliates to NASD’s Advertising Regulation Department for approval prior to distribution to the public for a period of 9 months;
  • notify each current holder of renewable unsecured subordinated notes of a securities issuer of the outcome of this AWC by first class mail and shall, at a minimum, include a copy of this AWC or press release; and
  • retain an outside consultant to review and make recommendations concerning the adequacy of the firm’s current suitability policies and procedures.
Kim Edward Elverud  

Fined $60,000, jointly and severally with firm; Suspended 20 days in all capacities; Suspended 9 months. from acting in any supervisory capacity or as a trainer of personnel with any NASD member (after completing 20 day all-capacity suspension); Required to requalify as a Series 24 principal before the completion of the 9-month supervisory suspension (or he will be prohibited from serving in a principal capacity until he requalifies).

William Eugene Casey

Fined $5,000, Suspended from association for 20 days in all capacities; Required to requalify as a Series 24 principal within 3 months after the acceptance of this AWC or cease serving in that capacity.  

 

 

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

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

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

Sterling Financial Investment Group, Inc. 

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

Bill Singer's Comment:

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

 

Gary Patrick Duffy 
(OS/C3A040034/September 2004)

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

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

Bill Singer's Comment:

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

 

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

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

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

Richard Alyn Rappaport 

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

Bill Singer's Comment:

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

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

 

DEUTSCHE BANK SECURITIES INC.
(SFC/HPD 04-128/August 2004)

Read this important decision touching on research conflicts, failure to supervise, and email production.  Deutsche Bank Securities Inc.
DEUTSCHE BANK SECURITIES INC.

Censure;  total payment of $87,500,000, as specified in the Final Judgment ordered in a related action filed by the Securities and Exchange Commission (“Final Judgment”) the payment provisions of which are incorporated by reference herein, as follows: 

1. $25,000,000, as a penalty; 

2. $25,000,000, as disgorgement of commissions, fees and other monies;

3. $25,000,000, to be used for the procurement of Independent Research, as described in Addendum A: Undertaking to the Final Judgment (“Addendum A”), incorporated by reference herein; 

4. $5,000,000, to be used for investor education, as described in Section IX of the Final Judgment; and 

5. $7,500,000, as a penalty for violating Exchange Rule 476(a)(11). In addition, the Firm shall complete an undertaking to ensure compliance with the terms provided in Addendum A, including an undertaking to inform the Exchange in writing that it has policies, systems, and procedures reasonably designed to ensure compliance with the provisions of Addendum A.

 

 

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

Acting through Heineman, Vertical Capital Parnters, Inc. 

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

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

Vertical Capital Partners 

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

Ronald Mark Heineman

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

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

Bill Singer's Comment:

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

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

 

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

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

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

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

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

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

First Geneva Securities, Inc. 

Censured; Fined $100,000 jointly and severally with Chapin; Suspended from writing/contributing to the preparation of any research report for 6 months; and following the suspension, the firm is required to submit any research reports prepared by or for the firm to NASD's Advertising Department for approval prior to any report's distribution to the public for a period of 2 years.

Roland Lee Chapin

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

Bill Singer's Comment:

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

 

ARNOLD ALAN WINTERS
(SFC/HPD 04-112/July 2004)

During the period July 3 to July 12, 2002, Arnold Alan Winters, then a registered representative with Merrill Lynch, Pierce, Fenner & Smith, Inc. (the “Firm”), sent five e-mails to approximately 100 members of the public. Those e-mails discussed services such as cash management, corporate lending, and stock ownership trusts which the Firm offered to companies, thereby constituting sales literature which was required to be approved in advance before being distributed to the public. Additionally, the Firm had a written policy that, among other things, prohibited the use of e-mail to establish initial contact with leads and the use of electronic communications for prospecting for new clients or soliciting business. However, Winters failed to have those e-mails approved prior to distributing them. 
NYSE Rule 472(a) provides, in part, that each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member organization to the public shall be approved in advance by a member, allied member, supervisory analyst or person designated under the provisions of NYSE Rule 342 (b)(1).

 

July 3, 2002 (to 20 individuals):

I am sending a letter to you via USPS explaining how Employee stock ownership trusts can help your company, your employees and both you and family members who own stock or you wish to be successors in management. Best Regards, Arnie 

July 11, 2002(to 20 individuals):

Subject: Business Life In RE: our discussions of cash management, business services and lending, I would like to share with you a June 2002 issue of a magazine called “Business Life” which is placed with our [Firm] client statements. Please look at one of my clients who was featured nationally. Thanks. Best Regards, Arnie 

July 11, 2002 (to 12 individuals):, 

In reference to asset management, business services and lending, I would like to share with you a June 2002 issue of a magazine called “Business Life” which is placed with our [Firm] client statements. Please look at one of my clients who was featured nationally (see page 2). Thanks. Best Regards, Arnie 

On July 11, 2002 (to 75 individuals):

Subject: Interest In Cash Management and Lending Please refer this to your CFO. I am interested in talking with your company about cash management and corporate lending. [Firm] Business Financial Services, Inc. is the 7th largest corporate lender in the U.S. I have enclosed a “Business Life” [a Firm publication] June issue in “pdf” file format featuring one of my corporate clients for your review. Please call me so that we can set up a telephone conference call and a meeting. Best Regards, Arnie  

On July 12, 2002 (to same 75 individuals as above):

Subject: Cash Management Suggestion re: ACH ("Automated Clearing House)" debits The [Firm] WCMA (Working Capital Management Account) has a feature (called “WCMA Cash Manager”) that can be used to electronically debit your receivables accounts per agreement at no additional charge per ACH debit. That’s correct, no charge. Also, sub-accounts can be set up nationally tied into your main account to track states and regions. Furthermore, the “WCMA Cash Manager” can be used from your workstations at your central office without having to contact the bank. There is in-depth reporting and levels of “permission” allowing a division of operational usage to personnel regardless of levels of authority. Please call me so that I can explain. Also if you would like to see for yourself how this works, please look at http://www.businesscenter.xyz.com and go to “TestDrive” (an interactive demo) and look at “Collect Accounts Receivables”. I would be happy to arrange a conference call with our Cash Management specialist Ms. JL, who has experience with other large cash management projects. I look forward to speaking with you soon. Best Regards, Arnie 

All of the above e-mails list Winters’ phone and facsimile numbers and his office and web page addresses. These e-mails constituted sales literature because they discussed services such as cash management, corporate lending, and stock ownership trusts that the Firm offered to companies. Winters’ failure to have the above-referenced e-mails approved prior to distributing them was contrary to the requirements of Exchange Rule 472(a). On August 16, 2002, the Exchange received a Form U-5 “Uniform Termination Notice for Securities Industry Registration” from the Firm stating that it had terminated Winters’ employment for violating its policies regarding electronic mail(“e- mail”).

The NYSE found that Winters violated Exchange Rule 472(a) by distributing sales literature to the public via his member organization employer’s e-mail system without its approval.

ARNOLD ALAN WINTERS

Censured; Suspended 2 months in all capacities.

Bill Singer's Comment:

A somewhat amazing case --- if not a bit sad.  Doesn't seem as if there were really much substantively wrong with the emails; but, that isn't the point of the decision.  The point is that they should have been submitted to the Firm prior to distribution.  Moreover, what the RR might have perceived was merely a bland communication to potential clients was actually sales materials, which is subject to a very exacting set of SRO rules.  I would urge compliance departments to send this case around to the salesforce.

 

 

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

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

Mark J. Schoenebaum 

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

Bill Singer's Comment:

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

 

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

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

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

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

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

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

Wunderlich Securities,Inc. 

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

Philip Richard Zanone, Jr. 

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

Patricia Diana Hester 

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

Patrick James Forkin, III

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

Joel Christopher Rolla

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

Bill Singer's Comment:

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

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

 

 

THOMAS E. KAPLAN 
(SFC/HPD 04-84/May 2004)

Thomas E. Kaplan was the Director of Institutional Sales at H.D. Brous & Co. Inc (the “Firm”). In July 2002, the Firm filed a Form RE-3 reporting that it had issued Kaplan a Letter of Reprimand, removed him from his position as the Firm’s Director of Institutional Sales, and fined him $10,000 for: posting comments to an Internet message board with regard to a security in which his clients held short positions, sending an e-mail which violated the Firm’s “Anti-Harassment Policy” to a fellow employee, sending out research reports that were not approved by a supervisory analyst, and misrepresenting himself as an analyst in an e-mail. In December 2002, Kaplan voluntarily terminated his employment at the Firm to become a buy-side analyst at a private investment firm.
NYSE Rule 472:

Research reports shall be prepared or approved, in advance, by a supervisory analyst acceptable to the Exchange under the provisions of Rule 344.

During the relevant period, Kaplan, who was not an approved supervisory analyst, analyzed issuers and based on his analysis prepared research reports which included, among other things, information about the subject company’s business and industry, financial models, projections, discussions of management, and recommendations. He further prepared and issued approximately 60 research reports regarding approximately 30 separate issuers, which he disseminated to approximately 100 institutional clients of the Firm and prospects without prior supervisory analyst approval. 

NYSE Rule 472:
  • The name of the preparer of a research report must be ascertainable from the retained records
  • A recommendation for purchase/sale must indicate the market price at the time of the recommendation
  • All communications must be appropriately dated

Many of the research reports Kaplan prepared and disseminated did not include the market price of the security at the time of the recommendation and were not dated. In addition, Kaplan’s name did not appear on the reports as preparer. 

NYSE Rule 472(a):

Each advertisement, market letter, sales literature or other similar communication which is generally distributed or made available by a member organization to customers or the public shall be approved in advance by a member, allied member, supervisory analyst or person designated under the provisions of Exchange Rule 342(b)(1).


Kaplan had a 20/80 commission sharing arrangement with an institutional salesman with a large client base. Kaplan’s primary role in the partnership was to produce research that the institutional salesman could use to solicit transactions. Among the research reports which Kaplan prepared and issued without supervisory approval, as discussed above, were reports on the common stock of XYZ, a full line distributor of industrial supplies including fasteners and other varied products. In mid-January 2001, Kaplan initiated coverage, of XYZ with a short sale recommendation. (During 2001, XYZ was covered by at least 2 other broker-dealer analysts). From mid-January through early March 2001, Kaplan issued multiple, unapproved research reports on XYZ in which he recommended the establishment of a short position in the stock. 

On March 5, 2001, Kaplan issued via e-mail an unapproved research report to actual and prospective clients of the Firm reiterating his short sale recommendation on XYZ. 

On March 7, 2001 at 12:33 PM, from his home computer, using the Internet account of a former institutional salesman at the Firm, without that person’s knowledge or consent, Kaplan made a posting to a Finance Message Board regarding XYZ  Subject: [XYZ] – sell before you’re crushed [indicating the former institutional salesman as the author]. It’s amazing to me that this stock – [XYZ] – is at $60.00 – has anyone looked at the balance sheet? Hello! Inventory up, sales growth decelerating, estimate cuts and a “recession” in industrial America – this is a fastener company not a software firm – it should have an auto parts multiple, not a premium on the S&P P/E. The SHORTS are right on this one!!! Sell before it’s too late!!!
On March 8, 2001 at 2:30 PM, from his office computer at the Firm, using the former institutional salesman’s Internet account without that person’s knowledge or consent, Kaplan again made a posting to the same Finance Message Board regarding XYZ which stated:  As was the case with many of the tech titans (now former titans) everyone was looking backwards instead of forwards. Stock prices are determined by discounting the value of FUTURE CASH FLOWS. Historical performance doesn’t help [XYZ] when it is faced with a contracting industrial economy, a saturated market, bad news coming out of its competitors…, a massive build in inventory and a meaningful slow-down in top-line growth. Fair value is, at best, in the low $40’s given the outlook for the next 12- 18 months. 

At the time he made the postings Kaplan was aware that the salesman with whom he had a commission sharing arrangement and his institutional clients had short positions in XYZ that had been established based on Kaplan’s research. Unfortunately for Kaplan, XYZ opened successively higher on March 8 and 9, 2001, the trading days immediately following each of Kaplan’s Internet postings regarding the stock.  Kaplan’s Internet postings regarding XYZ were improper in that: (i) they lacked supervisory approval, (ii) they were in the name of another person, without that person’s knowledge or consent, and (iii) they contained negative comments regarding a security on which Kaplan had issued short sale recommendations and in which his clients held short positions.

NYSE found that Kaplan:

I. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he issued public communications via the Internet without prior supervisory approval. 

II. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he prepared and distributed research reports without supervisory analyst approval. 

III. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he prepared and distributed research reports on which his name was not indicated as the preparer. 

IV. Caused a violation of Exchange Rule 472 in that, on one or more occasions, he prepared and distributed research reports that: did not indicate the market price of the 2 security at the time the recommendation was made; and/or were not appropriately dated. 

V. Engaged in conduct inconsistent with just and equitable principles of trade by using an Internet account in the name of a former registered representative of his member organization employer to post negative messages on the Internet with respect to a security on which he had issued research reports advocating a short position and in which his clients held short positions. 

THOMAS E. KAPLAN 

Censure; a 6 month Bar in all capacities; and an undertaking to testify fully and truthfully in any Exchange disciplinary proceeding in connection with which the Exchange deems his testimony necessary. 

Bill Singer's Comment

Wow!  The lengths to which some folks will go.  Here is an individual with a senior-level position who is actually using his home computer and a former colleague's Internet account to trash a stock.  On one level, this case exposes Wall Street to yet another round of questions concerning its ethics.  On the other hand, it also goes to show you why Internet forums and chat rooms are full of sound and fury, but little else.  Again, this seems like a fairly light sanction under the circumstances.

 

PETER JOHN CARUSO 
(SFC/HPD 04-83/May 2004)

Peter John Caruso was a Senior Analyst at Merrill Lynch, Pierce, Fenner & Smith, Inc. (the “Firm”) until terminated on August 20, 2002.   As a Senior Analyst for the Firm, he covered Hard-Line Retail stocks such as XYZ and UVM. Caruso was an influential analyst with a well-known reputation in the stocks that he covered. Institutional Investor magazine had rated him the number one analyst in the retailing/hard-goods category for a period of six years. 

Prior to July 11, 2002 and as far back as September 1997, Caruso's rating on XYZ had been a “Strong Buy” for the Intermediate (12 months) and Long-Term (3 year).  The range of investment ratings for both were: “Strong Buy” (minimum 20% price appreciation plus yield), “Buy”, “Neutral” (0 to 10% appreciation/yield) and “Reduce/Sell”.

On the morning of July 11, 2002, after speaking with representatives from XYZ and UVM and discussions with his colleagues, X began the process of causing the Firm to downgrade its Intermediate-Term rating of XYZ by two levels, from a “Strong Buy”(by-passing “Buy”) to “Neutral," and also reduced his estimates on XYZ’s earnings per share for 2002 from $1.60 to $1.57 and for 2003 from $2.00 to $1.90.  Between 10:30 and 11:00 a.m. that same morning, Caruso received appral for the downgrade. Pursuant to Firm policy, his downgrade and reduced earnings estimate would not be released until after midnight, July 11, 2002. 

At approximately 12:30 p.m. on July 11, Caruso arrived at the offices of ABC Bank in New York City to participate in a lunch meeting arranged by  registered representative Janina Alexandra Casey. Casey had arranged the meeting at ABC Bank approximately four weeks in advance. The meeting was attended by Casey, two ABC Bank portfolio managers and two research analysts from ABC Bank. The purpose of this lunch meeting was for X to provide an update regarding the various stocks he covered in the hard-line retail industry, including XYZ. The meeting lasted approximately one hour, during which Caruso disclosed information leading some or all of the attendees to believe that he was going to downgrade his rating on XYZ (that decision was material, non-public information). 

At 3:00 p.m. on July 11, after the lunch meeting, Caruso participated in a conference call to discuss sales results of companies in the retail sector. On this call, several Firm analysts spoke. At various times, the call reached a total of approximately fifty-five listeners, which included institutional clients and Firm employees.  During the call, Caruso was asked: “Peter, just following up on your update on XYZ and UVW, you’ve got, I think, the highest estimates on the street for XYZ and I’m curious, in light of your most recent update, whether you think you’d be lowering them?” Caruso responded: “Yes, you should expect to see me lowering them very shortly...”At the time Caruso made that statement, the Firm had not released the research report with a downgrade and reduced earnings estimate nor had the research report been approved by a supervisory analyst. At the time Caruso made that statement, the change in his earnings estimates for XYZ constituted material, non-public information that Caruso had a duty to maintain in confidence until appropriately disseminated. 

Promptly after the lunch meeting, Casey went to an empty cubicle at ABC Bank and called four institutional clients, and informed each person that she had just come from a meeting with the Firm’s hard-lines analyst, Caruso, and she believed that he “very well could” downgrade his rating on XYZ. At various times on the afternoon of July 11, after being in touch with Casey, Firm clients sold several million shares of XYZ stock prior to release of the research report.  Caruso’s research report was submitted to the Firm Compliance Department at 5:42 P.M. on July 11, thereafter approved by a supervisory analyst and was released at 12:04 A.M. on July 12. The sales on July 11 were at approximately two dollars per share more than the prices at which the stock traded on July 12. The trading volume in XYZ on July 11, 2002 was approximately 23 million shares, more than twice the average daily volume on a composite basis of approximately 8.5 million shares in 2002. On July 12, 2002 (after the report was released) the volume of shares traded was approximately 46 million shares. XYZ shares closed at $31.40 on July 11 --- down $1.85 or 5.6%, from the day before. On July 12, XYZ stock opened at $29.36 and closed at $29.09, down $2.31, or 7.4% from the July 11 close. 

The Firm’s procedures failed to specifically address what was appropriate for an analyst to discuss at speaking engagements.  

At all relevant times, the Firm had the following policies to prevent the misuse of market-sensitive information relating to research reports by any person associated with it:

 “Knowledge of a pending recommendation or change in opinion or estimates is considered to be ‘market-sensitive information.’ Pending initial opinions, estimate or opinion changes, and decisions to issue research reports or comments may not be disclosed by any means to anyone, either inside or outside of the Firm, until the information is disseminated in the appropriately prescribed manner…This prohibition is intended to avoid the misuse of market sensitive information and the appearance of impropriety.” (Merrill Lynch Research Policy and Procedures Manual, Section III, paragraph C) 

“If a Research Analyst’s change in views or opinions were revealed to a salesperson prior to the public dissemination, the salesperson should not communicate the change to anyone other than his or her manager for the purpose of contacting Research management or Compliance to ensure the change is publicly disseminated by the Research Analyst per established policies and procedures.” (Merrill Lynch Memorandum to all Global Research Sales Personnel dated March 1, 2002, Attachment 1, Section II) 

At all relevant times, Caruso was subject to and required to abide by these policies.  Pursuant to the Firm’s policy, Caruso had a duty to maintain in confidence information about a pending change in an analyst’s rating and/or estimates until that information was disseminated in the appropriately prescribed manner. At all relevant times, Casey was subject to and required to abide by these policies and had a duty to maintain in confidence information about a pending change in an analyst’s rating or earnings estimate until it was disseminated in the appropriately prescribed manner. Pursuant to the Firm’s policy, Casey was allowed to communicate the change to her manager, for the purpose of contacting Research management, or Compliance, but was prohibited from communicating the change to anyone else.

The NYSE found that Caruso engaged in conduct inconsistent with just and equitable principles of trade by disclosing material information to third parties that he planned to downgrade his rating and lower his estimates on a stock, prior to the public dissemination of that information. 

PETER JOHN CARUSO

Censured; Fined $25,000; Suspended 4 month in all capacities.

Bill Singer's Comment:

Also see the Casey case and Merrill Lynch case.

 

 

JANINA ALEXANDRA CASEY
(SFC/HPD 04-73/May 2004)

X was a Senior Analyst at Merrill Lynch, Pierce, Fenner & Smith, Inc. (the “Firm”) until terminated on August 20, 2002. (X is the subject of a separate NYSE disciplinary action. In addition, the Firm is the subject of a separate Exchange disciplinary action. See Hearing Panel Decision 04-30.)  As a Senior Analyst for the Firm, X covered Hard-Line Retail stocks such as XYZ and UVM. X was an influential analyst with a well-known reputation in the stocks that he covered. Institutional Investor magazine had rated X the number one analyst in the retailing/hard-goods category for a period of six years. 

Prior to July 11, 2002 and as far back as September 1997, X’s rating on XYZ had been a “Strong Buy” for the Intermediate (12 months) and Long-Term (3 year).  The range of investment ratings for both were: “Strong Buy” (minimum 20% price appreciation plus yield), “Buy”, “Neutral” (0 to 10% appreciation/yield) and “Reduce/Sell”.

On the morning of July 11, 2002, after speaking with representatives from XYZ and UVM and discussions with his colleagues, X began the process of causing the Firm to downgrade its Intermediate-Term rating of XYZ by two levels, from a “Strong Buy”(by-passing “Buy”) to “Neutral," and also reduced his estimates on XYZ’s earnings per share for 2002 from $1.60 to $1.57 and for 2003 from $2.00 to $1.90.  Between 10:30 and 11:00 a.m. that same morning, X received appral for the downgrade. Pursuant to Firm policy, X’s downgrade and reduced earnings estimate would not be released until after midnight, July 11, 2002. 

At approximately 12:30 p.m. on July 11, X arrived at the offices of ABC Bank in New York City to participate in a lunch meeting arranged by  registered representative Janina Alexandra Casey. Casey had arranged the meeting at ABC Bank approximately four weeks in advance. The meeting was attended by Casey, two ABC Bank portfolio managers and two research analysts from ABC Bank. The purpose of this lunch meeting was for X to provide an update regarding the various stocks he covered in the hard-line retail industry, including XYZ. The meeting lasted approximately one hour, during which X disclosed information leading some or all of the attendees to believe that he was going to downgrade his rating on XYZ (that decision was material, non-public information). 

Promptly after this meeting, Casey went to an empty cubicle at ABC Bank and called four institutional clients, and informed each person that she had just come from a meeting with the Firm’s hard-lines analyst, X, and she believed that X “very well could” downgrade his rating on XYZ. At various times on the afternoon of July 11, after being in touch with Casey, Firm clients sold several million shares of XYZ stock prior to release of the research report at 12:04 a.m. on July 12. The sales on July 11 were at approximately two dollars per share more than the prices at which the stock traded on July 12. The trading volume in XYZ on July 11, 2002 was approximately 23 million shares, more than twice the average daily volume on a composite basis of approximately 8.5 million shares in 2002. On July 12, 2002 (after the report was released) the volume of shares traded was approximately 46 million shares. XYZ shares closed at $31.40 on July 11 --- down $1.85 or 5.6%, from the day before. On July 12, XYZ stock opened at $29.36 and closed at $29.09, down $2.31, or 7.4% from the July 11 close. 

At all relevant times, the Firm had the following policies to prevent the misuse of market-sensitive information relating to research reports by any person associated with it:

 “Knowledge of a pending recommendation or change in opinion or estimates is considered to be ‘market-sensitive information.’ Pending initial opinions, estimate or opinion changes, and decisions to issue research reports or comments may not be disclosed by any means to anyone, either inside or outside of the Firm, until the information is disseminated in the appropriately prescribed manner…This prohibition is intended to avoid the misuse of market sensitive information and the appearance of impropriety.” (Merrill Lynch Research Policy and Procedures Manual, Section III, paragraph C) 

“If a Research Analyst’s change in views or opinions were revealed to a salesperson prior to the public dissemination, the salesperson should not communicate the change to anyone other than his or her manager for the purpose of contacting Research management or Compliance to ensure the change is publicly disseminated by the Research Analyst per established policies and procedures.” (Merrill Lynch Memorandum to all Global Research Sales Personnel dated March 1, 2002, Attachment 1, Section II) 

At all relevant times, Casey was subject to and required to abide by these policies and had a duty to maintain in confidence information about a pending change in an analyst’s rating or earnings estimate until it was disseminated in the appropriately prescribed manner. Pursuant to the Firm’s policy, Casey was allowed to communicate the change to her manager, for the purpose of contacting Research management, or Compliance, but was prohibited from communicating the change to anyone else. 

The NYSE found that Casey had engaged in conduct inconsistent with just and equitable principles of trade by disclosing information to third parties, that an analyst planned to downgrade his rating on a stock, prior to the public dissemination of that information. 

JANINA ALEXANDRA CASEY

Censured; Fined $150,000; Suspended 1 month in all capacities.

Bill Singer's Comment:

Given the fairly egregious nature of this violation, it's somewhat surprising that Casey only got a 1 month sit down.  One would think this violation was fairly clear to everyone by now.

 

 

Sally Ann Yanchus 
(AWC/CAF040028/JUNE 2004)

Yanchus wrote a research report on a company with a sell/sell short recommendation on the company's common stock that was distributed to customers of her member firm and other members of the public that contained substantive errors and statements that were exaggerated, unwarranted, or misleading. She wrote a "morning note" about the company that repeated errors or misleading information even though the errors in the report had been brought to her attention. She also failed to disclose in the "morning note" that her member firm made a market in the company's securities at the time the report was published.

Sally Ann Yanchus 

Fined $15,000; Suspended 2 weeks in all capacities.

Bill Singer's Comment:

May seems like NASD's month to warn analysts about toeing the line.  Here we see one of those things that drive regulators crazy --- Yanchus was apparently warned about errors in her report but still published them in the morning note.  And, again, as noted in the Dirks case below, you have to disclose the conflict of your firm making a market in the securities being reported on.

 

Timothy Angelo Rassias
(AWC/C11040013/JUNE 2004)

Rassias employed advertising, in the form of an internet Web site, to promote his investment business that failed to provide a sound basis for evaluating services being offered and included, among other things, exaggerated and unwarranted statements.

Timothy Angelo Rassias

No fine in light of financial status; Suspended 20 days in all capacities.

 

 

Gerald Nelson Kieft, II
(OS/CAF040029/JUNE 2004)

Kleft prepared a Web site for an investment advisory firm he formed for the purpose of distributing research reports to investors and brokers, and it contained numerous references to his member firm and its brokerage services that presented exaggerated and unbalanced statements. He prepared a research report on a company, which was released on the Web site, that was unbalanced and misleading because it failed to mention the company's auditors' reservations about the company's ability to survive as a going concern. In addition, he purchased and sold shares of securities in the discretionary accounts of public customers during a period beginning 30 days before and ending five days after the publication of a research report on the company.

Gerald Nelson Kieft, II

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

Bill Singer's Comment:

NASD seems to be on a run here.  See the Dirks case below.  Again, be on the look-out when you have a "going concern' report issued by an auditor.  You better make certain that the concern is noted in the report.  

 

Raymond Louis Dirks 
(OS/CAF030063/JUNE 2004)

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

Raymond Louis Dirks 

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

Bill Singer's Comment:

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

 

Merrill Lynch, Pierce, Fenner & Smith Incorporated
(
SFC/HPD 04-30/March 2004)

SA was a Senior Analyst at the Firm until terminated on August 20, 2002.  IS joined the Firm in 2000 as an institutional salesperson and is currently employed as a Director in Equity Institutional Sales. 

On July 11, 2002, after receiving approval for a ratings change, but prior to the public release of the report by the Firm, SA disclosed information to clients of the Firm (at a meeting and on a conference call) to the effect that he was planning to downgrade his rating (had been a "Strong Buy" since September 1997) and/or lower his estimates on XYZ. After the meeting, IS informed several institutional clients that she believed that SA was going to downgrade his rating on XYZ. These institutional clients sold XYZ stock prior to the release of the ratings change. SA’s research report was published after midnight on July 12, 2002. During all relevant times, the Firm had the following policies in effect:

“Knowledge of a pending recommendation or change in opinion or estimates is considered to be ‘market-sensitive information.’ Pending initial opinions, estimate or opinion changes, and decisions to issue research reports or comments may not be disclosed by any means to anyone, either inside or outside of the Firm, until the information is disseminated in the appropriately prescribed manner… This prohibition is intended to avoid the misuse of market sensitive information and the appearance of impropriety.” (Firm Research Policy and Procedures Manual, Section III, paragraph C) 

“If a Research Analyst’s change in views or opinions were revealed to a salesperson prior to the public dissemination, the salesperson should not communicate the change to anyone other than his or her manager for the purpose of contacting Research management or Compliance to ensure the change is publicly disseminated by the Research Analyst per established policies and procedures.” (Firm Memorandum to all Global Research Sales Personnel dated March 1, 2002, Attachment 1, Section II) 

The Firm failed:

  • to have or implement specific procedures to prevent a violation of the policies requiring IS to maintain in confidence information about a pending change in an analyst’s rating or earnings estimate until it was disseminated in the appropriately prescribed manner; 
  • to have and reasonably implement procedures of supervision and control to ensure compliance by its employees with federal securities laws, Exchange Rules and Firm policies and to provide a separate system of follow-up and review with respect to the dissemination of “market sensitive information,” a term which the Firm used to include material non-public information, as that relates to changes in pending research report ratings and/or earnings estimates;
  • to adhere to the principles of good business practices in that it failed to prevent the premature dissemination by its employees of an analyst’s changes in ratings and earnings estimates; 
  • to specifically address what discussions analysts and supervisors should have, if any, about what was appropriate to be discussed at speaking engagements or whether a meeting might best be cancelled. Although the Firm had a policy which stated that such disclosures were prohibited, the Firm’s procedures failed to specifically address what was appropriate for an analyst to discuss at speaking engagements or whether a meeting might best be cancelled;
  • to specifically address what was appropriate for an analyst to discuss at speaking engagements; and 
  • to specifically address the situation described above; they did not expressly address what discussions, if any, analysts and supervisors should have about what was appropriate to be discussed at speaking engagements or whether a meeting might best be cancelled. In addition, the policies and procedures did not specifically address the responsibilities of supervisors of research analysts in the above-described situations.

In considering sanctions, the Panel noted that the Firm 

  • had reported this situation to the Exchange promptly upon its occurrence.

  • had undertaken the following measures, to prevent the reoccurrence of these events

    • introduced a process that minimizes the time between a change in analyst opinion and the dissemination of that change; t

    • implemented educational programs on this issue with members of the Firm Research and Equity Sales Departments; and 

    • made additions to its Research Compliance and Supervisory Manuals which give guidance to both analysts and supervisors as to how to conduct themselves in the future in order to prevent a reoccurrence of the above events. 

Accordingly, the Firm was found to have: 

 I. Violated Exchange Rule 342 in that it failed to have and reasonably implement appropriate procedures of supervision and control to ensure compliance by its employees with federal securities laws, Exchange Rules and Firm policies and to provide a separate system of follow-up and review with respect to the dissemination of material non-public information as it relates to changes in pending research report ratings and/or earnings estimates. 

II. Violated Exchange Rule 401 in that the Firm failed to adhere to the principles of good business practices in that it failed to prevent the premature dissemination by its employees of an analyst’s changes in ratings and earnings estimates. 

Merrill Lynch, Pierce, Fenner & Smith Incorporated

Censure and a $625,000 fine. 

Bill Singer's Comment

A well-written decision that fully sets forth the various duties and obligations imposed upon analysts and salespersons.  Still . . . one wonders if a smaller BD would have gotten away with the scope of these failures for nothing more than a fine.  I suspect that Merrill could well afford a $625,000 fine.

 

Jessy Lilly Dirks and Sal Nuccio
(OS/
CAF030063/May 2004)

A member firm, acting through Dirks, failed to adopt and implement written supervisory procedures reasonably designed to ensure that the firm and its employees complied with NASD Rule 2711. 

Dirks failed to exercise adequately or reasonably her supervisory responsibilities to supervise research analysts and to ensure that their research reports complied with NASD Rules 2210 and 2711. 

Nuccio wrote research reports distributed to public customers that contained "Strong Buy" or "Buy" recommendations but failed to define what was meant by a "Strong Buy" or "Buy" recommendation and did not disclose any risks that could impede the achievement of those targets. In addition, he wrote research reports that failed to disclose the dependence of an issuer on a limited number of customers, the impact that dependence had on potential earnings, that the firm was a market maker in one of the issuers, and included target price projections for which he failed to have a reasonable basis and omitted material information that made them misleading in light of the company's actual financial condition.

Jessy Lilly Dirks 

Fined $15,000; Suspended 6 months in a principal or supervisory capacity for six months.  

Sal Nuccio  

Fined $15,000; Suspended 30 days in all capacities

Bill Singer's Comment

Once again, NASD is coming down hard on those who do not comply with the letter of 2711.  Moreover, we continue to see the odd and unusual circumstances come under scrutiny (as well they should); here, we have an issue dealing with a small number of customers but the analyst fails to disclose the relevance of such circumstances.  Someone should have done a cold review of the draft before it went out.  Fact check. Fact check. FACT CHECK!!! 

 

NFP Securities, Inc. 
(AWC/CAF040024/May 2004)

The Firm failed to file advertisements and pieces of sales literature concerning registered investment companies with NASD's Advertising Regulation Department.  The firm approved for use, published, and distributed advertisements and sales literature that were misleading because they suggested that individuals purchasing variable annuities would pay no fees when, in fact, they would. Also, the firm approved for use and distribution to public customers and prospects pieces of sales literature that described the benefits of a variable annuity but failed to present a balanced discussion of the product and omitted information regarding costs, risks, and restrictions. The sales literature failed to disclose that certain benefits were available only if the customer paid an extra cost and that there were surrender charges and reductions in benefits if certain withdrawals were made from the product. Finally,the newsletters failed to identify that the product being discussed was a variable annuity.  

NFP Securities, Inc. 

Censured; Fined $25,000

Bill Singer's Comments

More and more firms are running afoul of disclosures about variable annuities.  Before NASD cites your BD, do a thorough review of your present ad copy and make sure your in compliance.

 

Fulcrum Global Partners LLC
(AWC/CMS040046/May 2004)

The Firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with applicable securities laws, regulations, and NASD rules concerning the treatment of rumors by firm research analysts, the trading of securities by the firm's employees, and the avoidance of conflicts of interest by the firm's employees. 

Fulcrum Global Partners LLC

Censured; Fined $75,000; Required to revise within 30 business days its written supervisory procedures with respect to applicable securities laws, regulations, and NASD rules concerning the treatment of rumors by firm research analysts, the trading of securities by the firm's employees, and the avoidance of conflicts of interest by the firm's employees. 

Bill Singer's Comments

The "treatment of rumors?"  How intriguing and how absolutely useless this NASD disciplinary report is.  Perhaps the regulators would like to share with us exactly what type of rumors were involved, what the firm and its employees did wrong, and how such issues should be handled in the future.  This is a perfect example of useless regulation --- we learn nothing and don't even have a reasonable basis upon which to hazard an educated guess . . . but I did hear this rumor about this case . . .

 

FFP Securities, Inc.
(AWC/CAF040023/May 2004)

Firm failed to file advertisements and pieces of sales literature with NASD's Advertising Regulation Department. Firm approved for use, and distributed sales literature

  • regarding variable annuities that were misleading, failed to present balanced discussions, and omitted material information regarding dollar-cost averaging. 
  • that compared aspects of mutual funds and variable annuities but failed to present a balanced discussion and omitted information about costs, risks, and restrictions when making that comparison. 
FFP Securities, Inc.

Censured; Fined $25,000

 

 

First Montauk Securities Corporation and Paul Lieberman 
(AWC/CAF040026/May2004)

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

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

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

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

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

First Montauk Securities Corporation 

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

Paul Lieberman 

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

Bill Singer's Comment

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

 

Metro Trading, Inc. 
(CMS030047)/May2004)

Metro traded ahead of research and failed to 

  • mark and annotate affirmative determinations for short sale transactions;

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

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

Metro Trading, Inc. 

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

Bill Singer's Comment

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

 

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

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

Curd and Shanahan failed to 

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

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

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

Curd failed to 

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

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

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

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

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

Vincent John Glinski,  and 

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

Howard Francis Curd

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

Joseph Patrick Shanahan

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

Bill Singer's Comment

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

 

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

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

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

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

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

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

The Buckingham Research Group Incorporated 

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

Bill Singer's Comment

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

 

Leaudria Maria Polk
(AWC/
C05040006/March 2004)

Polk recommended and effected a series of unsuitable transactions, and sent communications to public customers in connection with the sale of equities and mutual funds that failed to present the risks of the security in a balanced manner, contained unwarranted and misleading statements, omitted material facts, and included exaggerated statements and claims. In addition, NASD found that the communications contained annual rates of return and projections of returns that appeared to predict investment results.

Leaudria Maria Polk

Fined $15,000 (including disgorgement of $2,798.92); Suspended 4 months all capacities

Bill Singer's Comment

It's one thing to "project" the direct of a stock based upon technical or quantitative analyses but it's quite another to "predict," the latter implication amounts to a no-no.  No market pundit, regardless of his or her expertise, can guarantee the price movement of any stock --- there are just too many possible contingencies to factor in.  

 

Pacific On-Line Trading & Securities, Inc. and Timothy Alan McAdams
(
C01000037/February 2004)

The Securities and Exchange Commission affirmed NASD sanctions following an appeal of a National Adjudicatory Council (NAC) decision. BD, acting through McAdams, maintained a Web site advertisement without filing the Web site with NASD; and said site was false and misleading because it omitted material information concerning the risks of day trading, and contained exaggerated, unwarranted, and false statements. 
Pacific On-Line Trading & Securities, Inc. and Timothy Alan McAdams

Censured; Fined $22,500 joint and several; McAdams required to requalify as General Securities Principal

Bill Singer's Comment

Many industry participants fail to see a website as an advertisement and frequently do not afford the review of such content with the same focus as would normally be given to more typical ads.  All too frequently --- usually because of the expertise required to upload content or use HTML --- compliance departments tend to defer the preparation of online material to an information technology department or a so-called "computer geek."  Be careful.  This is a growing area of regulatory scrutiny.  Regardless of the arcana involved in composing web pages, compliance must review the content and ensure the material remains accurate over time.

 

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

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

World Financial Capital Markets, Inc.

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

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

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

 

Bill Singer's Comment

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





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