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.  

2005
Research and Advertising

 

Avalon Research Group, Inc. 
AWC/E072004009801/November 2005

The Firm issued research reports that failed to 

  • adequately disclose the valuation method used to determine price targets;
  • adequately disclose the risks that may have impeded achievement of the price targets;
  • contain disclosures on the front page of each report; and 
  • prominently display the reference to the pages on which the disclosures were located.

In consideration of the above lapses, the Firm failed to present the required disclosures in a clear, comprehensive and prominent manner. 

Censure; Fined $10,000

Bill Singer's Comment:  One of the big pains for supervisors dealing with research analysts, is that the analyst tend to whine about why they have to do "this" and have to do "that."  Well, here, in fairly terse language, the NASD provides a checklist for the use of price targets.  Next time an analyst complains about your editing of his/her report --- show 'em what the NASD says has to be in there.
Glen Joseph Santangelo
AWC/E1020031690-01/Ocotber 2005

Santangelo disseminated, by email, material confidential and non-public information to different institutional customers concerning stock preferences and trading for other large institutional customers. Santangelo improperly disseminated, by email, draft research reports to institutional customers without the prior approval of a registered principal of his member firm. 

Fined $50,000; Suspended 60 business days in all capacities

David Lerner Associates (DLA), SSH Securities, Inc (DLA Affiliate), David Lerner(Principal), and John Dempsey (Principal)
October 2005

Without admitting or denying the allegations, the firms and individuals consented to NASD's findings of advertising and supervisory failures and agreed to the imposed sanctions.

In a September 2004 complaint, NASD charged DLA and David Lerner with using 11 radio advertisements and other communications between May 2001 and May 2003 that contained numerous statements and claims that were misleading, exaggerated or unwarranted. The firm advertised heavily on New York metropolitan area radio stations with 60-second spots that ran several days a week, frequently throughout the day. DLA spent $2.3 million during the review period on radio ads, which represented 71 percent of its total marketing expenditures. As the spokesman for the firm, David Lerner narrated all of the ads. A recurring theme of the radio advertisements was the concept of “providing returns of 10 percent and more” to “tens of thousands” of customers. 

  • “For 25 years, we at David Lerner Associates have provided tens of thousands of people with investments that, even in these turbulent times, continue to pay over 10%.” 
  • “We are currently providing returns of 10 percent and more in investments that have nothing to do with the stock market.” 

The firm’s advertisements also suggested that individuals who invested with DLA would retain the value of their assets regardless of market conditions, or would regain prior losses sustained in the stock market downturn in 2000. 

  • “While past performance can never be a guarantee of future results, we at David Lerner Associates are proud and pleased that for 26 years, tens of thousands of our investors have been receiving high income and solid returns regardless of whether interest rates or the stock market went up or down.” 
  • “By counseling them to select value-oriented investments, our clients have not only weathered the financial storm, they have actually seen their income grow and their assets more than hold their value.” 

Like radio advertising, investment seminars were also important to the firm’s marketing efforts. During the relevant period, the firm conducted approximately 70 to 80 seminars for the public, with Lerner appearing as the principal speaker at each seminar. As with the radio ads, the firm did not have factual support for many of the claims and also failed to disclose material information. 

SSH Securities, Inc. prepared inaccurate fact sheets distributed by DLA to promote its Spirit of America proprietary family of mutual funds. 

Dempsey, the principal of DLA responsible for approving advertisements, failed to discharge his supervisory responsibilities. 


David Lerner Associates: Fined $115,000; Ordered not to conduct any public seminar for 30 days; Ordered to pre-file all sales literature and advertisements with NASD's Advertising Regulation Department for at least 10 days prior to their first use for a period of 6 months

SSH Securities, Inc.: Fined $10,000

David Lerner: Fined $25,000

John Dempsey: Fined $25,000; Suspended for 30 days in principal/supervisory capacity

Bill Singer's Comment:  I dunno --- maybe I'm just too demanding, but the timeframes for the NASD's actions seem a bit excessive.  I mean, come on, the "misleading, exaggerated or unwarranted" advertisements (what...they couldn't find any more adjectives???) first ran in May 2001.  In case you don't have a calendar handy, that's about four and a half years before the date the NASD announced the settlement of this case. And of course that's also about 13 months from the date of the issuance of the Complaint.  Frankly, these are somewhat iconic radio spots in the NYC market.  I've been listening to Lerner's radio ads for years.  I never thought they were over the top and if NASD objected to "pay over 10%," I'm wondering why they couldn't have contacted the firm, raised that pointed concern, and "jawboned" a change rather than filing charges.  Additionally, it would be nice if the NASD press release made just a bit more of an effort to note that Lerner's radio ads promoted investments in bonds --- hence, the repeated references to the poorly performing "stock" market and stock market's conditions.  

Alas, there's so much we don't know from those fairly circumspect NASD press releases.  Hey guys, maybe spend a bit less time looking up synonyms and a bit more time on improving your response times.  

Gary Lynn Craig (Principal) 
AWC/E3B2003026801/October 2005 

Craig participated in the preparation and distribution of sales literature that contained unwarranted and misleading information to prospective investors on behalf of his member firm. He also sent a letter on behalf of his member firm to its existing investors that failed to state material facts.

Fined $10,000; Suspended 4 months in all capacities

Janco Partners, Inc.
AWC/E3A2004002201/October 2005

Acting through individuals, the Firm caused draft research reports to be sent to the companies that were the subjects of the reports. The reports contained statements of opinion, prediction and commentary, in addition to factual matters for verification, which should not have been included in the draft reports sent to the subject companies. A firm research analyst purchased securities issued by a company that he covered and issued a research report concerning that company. The firm’s written supervisory procedures were not reasonably designed to achieve compliance in that they recited the rule provisions, but did not include procedures to monitor and achieve compliance with the rule. The firm did not submit to NASD a written attestation that the firm had adopted and implemented written supervisory procedures reasonably designed to achieve compliance. The firm also failed to make a notation of the time of entry and necessary terms and conditions in the memoranda of purchases and sale of securities for the firm’s account and each brokerage order. 

Censured; Fined $30,000

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 companies that were the subject of the research reports, 
  • competitors of the companies that were the subject of the research reports, 
  • institutional clients of the Firm, 
  • a former employee of the Firm, and 
  • various Firm employees including registered representatives.

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 support of the penalty, NYSE's Enforcement relied on 

  • In the Matter of David W. Jonsson, HPD 87-53 (“October 1, 1987”) http://www.nyse.com/pdfs/87-053.pdf, in which Johnsson disclosed to a customer that he was preparing a favorable report on a stock (Respondent consented to a censure, a $5,000 fine and a six-month suspension as an analyst);
  • In the Matter of Peter John Caruso, HPD 04-83 (“May 19, 2004”) http://www.nyse.com/pdfs/04-083.pdf,  in which Caruso disclosed information to clients prior to the pubic release of his report, leading some to believe that he was going to downgrade his rating, lower his estimates of earnings per share (Respondent consented to a censure, a four month bar and a $25,000 fine). 

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.

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.
CJS Securities, Inc. 
AWC/C3A050031/August 2005

CJS Securities, Inc. permitted its analysts to sell securities issued by companies for which the analysts were primarily responsible for research coverage at times when the firm’s recommendation was to buy or hold the security. The firm’s analysts bought or sold securities issued by companies for which the analysts were primarily responsible for research coverage during a period of time prior to or after the issuance of research reports concerning those companies. Also the firm issued research reports covering companies from which the firm had received, or expected to receive, compensation for investment banking services in connection with participation in public offerings of the companies’ securities. The firm did not have written supervisory procedures reasonably designed to achieve compliance with NASD Rule 2711. 

Censured; Fined $40,000

David A. Noyes & Company and Anthony Michael Quirini (Principal) 
AWC/C8A050058/August 2005

Quirini created and distributed sales literature in the manner of form letters to the public, which the firm failed to file with NASD’s Advertising Regulation Department. These form letters contained statements that 

  • exaggerated the safety of the products
  • failed to reflect the risks of fluctuating prices and the uncertainty of rates of return and the yield of investments;
  • failed to provide balanced presentations of the risks and rewards of the products offered
  • failed to disclose material information regarding the risks of each proposed investment, and 
  • failed to provide a sound basis for evaluating the recommendations contained in the letters. 

The firm failed to adequately and properly supervise the use of these form letters and failed to establish, maintain, and enforce adequate written supervisory procedures designed to achieve compliance with applicable securities laws and regulations. 

David A. Noyes & Company: Censured; Fined $10,000 (jointly and severally with Quirini) and fined an additional $30,000; Must obtain a “no objection” letter from the NASD Advertising Regulation Department on any proposed sales literature or advertising prior to its use for one year.

Anthony Michael Quirini: Fined $10,000 (jointly and severally with firm); suspended 10 business days all capacities

Bill Singer's Comment: The interesting aspect of this case is the imposition of a 1 year requirement to obtain a "no objection" letter from NASD Advertising.  
Steven Charles Kirsch (Principal)
CAF040025/July 2005

Kirsch provided false testimony about his activities at an NASD on-the-record interview. Also, he performed supervisory duties while subject to a 30-day suspension and failed to reasonably supervise his research department prior to his 30-day suspension to ensure that a research report issued by his member firm was accurate. 

Barred

Bill Singer's Comment: Yet another bit of Street wisdom --- if you're suspended , the regulators will never know if you're back in the office.  Oh yeah?  So, here, instead of a 30 day supervisory suspension, the Principal is Barred in all capacities.  Barred --- as in a lot more time than 30 days in supervisory capacities only.
John Baldwin Hoffmann (Principal) Kevin Johnson McCaffrey (Principal) 
AWC/CE4050006/July 2005 

Hoffman and McCaffrey failed to 

  • adequately supervise a representative with a view to prevent him from publishing fraudulent research reports; and
  • respond adequately to red flags that the representative made unreasonable research assumptions that led him to publish unrealistically bullish ratings and price targets. 

John Baldwin Hoffman
Censured; Fined $120,001 (includes $1 disgorgement)[fines to be reduced by the amounts paid pursuant to an SEC Order]; Suspended 15 months in all capacities

Kevin Johnson McCaffrey
Censured; Fined $120,001 (includes $1 disgorgement)[fines to be reduced by the amounts paid pursuant to an SEC Order]; Suspended 15 months in all capacities

Bill Singer's Comment: Yet further proof that NASD is holding Principals accountable for research lapses.  But would someone please explain the $1 disgorgement.
A. Gary Shilling & Co., Inc. and Albert Gary Shilling (Principal) 
AWC/C9B050036/July 2005

Shilling purchased and sold securities in a manner inconsistent with recommendations made in his research reports, and sold common stock shares in two insurance companies that were restricted prior to the publication of the report. The Firm and Shilling issued research reports that failed to provide distribution of ratings and price chart information. Acting through Shilling,the Firm failed to adopt and implement any written supervisory procedures reasonably designed to ensure compliance with NASD Conduct Rule 2711: Research Analysts and Research Reports

A. Gary Shilling & Co., Inc.
Censured; Fined $15,000 jointly and severally with Shiling

Albert Gary Shilling
Censured; Fined $30,000 ($15,000 jointly and severally with A. Gary Shlling & Co.)

Bill Singer's Comment: Unquestionably, the NASD intends to hold Principals more accountable (than in years past) for their oversight of their firm's research area.
The Lugano Group Incorporated, Harold Emanuel Doley, III (Principal), and Amir Mireskandari (Principal) 
AWC/C05050027/July 2005 

The Firm permitted Doley and Mireskandari to perform duties as registered persons when they failed to complete the Regulatory Element of NASD’s Continuing Education Requirement. 

Acting through Doley, the Firm failed to 

  • develop and implement a written anti-money laundering (AML) program reasonably designed to achieve and monitor the firm’s compliance with the requirements of the Bank Secrecy Act and the implementing regulations promulgated by the U.S. Department of Treasury; and 
  • establish adequate supervisory procedures. 

Acting through Doley and Mireskandari, the Firm failed to make required disclosures and certifications in a research report that reported on a publicly traded entity. 

The Lugano Group Incorporate
Fined $25,000 ($20,000 joint and several with Doley and $5,000 joint and several with Mireskandari); Firm will provide no research services to its clients for two years and will retain an outside consultant to review and make recommendations concerning the adequacy of the firm’s current polices and procedures. 
Harold Emanuel Doley, III
Fined $20,000 joint and several with Lugano Group; Suspended 10 business days in all capacities; Suspended 2 months in principal capacity 
Amir Mireskandari
Fined $5,000 joint and several with Lugano Group); Suspended 10 business days in all capacities 
Bill Singer's Comment: The sanction of no research services for 2 years is a restriction I suspect we'll be seeing more and more of in months to come. Still --- how come we didn't see such teeth when the NASD when after the Big Boys for their research lapses? Anyone recall a major BD being prohibited from issuing research for 2 years?
Dennis Leslie Marlow
OS/CAF040071/June 2005

Marlow created and distributed sales literature and advertisements without prior written approval from his member firm that omitted material facts and was misleading. 

Barred

Wachovia Securities, LLC,  Larry Michael Phillips and Richard James DiCenso 
AWC/CE2050007/June 2005

Acting throught Phillips,  Wachovia created and distributed written communications that failed to disclose adequately material facts regarding investment products and strategies, or made exaggerated, unwarranted, or misleading statements or claims regarding those products, or both. 

Acting primarily through DiCenso, Wachovia failed to 

  • reasonably supervise a registered representative’s written communications activities in connection with correspondences and sales literature
  • failed to file Phillips’ sales literature with NASD; and
  • failed to establish and maintain procedures that were reasonably designed to achieve compliance with NASD’s requirement for filing sales literature within 10 days of first use

Wachovia’s written supervisory procedures improperly instructed the firm’s managerial personnel on when written communication qualified as sales literature that needed to be filed with NASD. 

Wachovia Securities: Censured; Fined $25,000

Phillips: Fined $20,000; Suspended 10 business days:

DiCenso: Censured; Fined $15,000.

John B.Hoffman (former Research Analyst)
SFC/NYSE Hearing Panel Decision 05-57/May 5, 2005

Kevin J. McCaffrey
SFC/NYSE Hearing Panel Decision 05-58/May 5, 2005

(“Enforcement”) and John B. Hoffmann (“Hoffmann”), a former research analyst with Salomon Smith Barney, Inc. and Kevin J. McCaffrey (“McCaffrey”), a registered representative with the Firm. 

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.

Christopher Cosme Tavares (Principal)  
OS/CAF040083/May 2005

Tavares apparently published/wrote some kind of research report {As initially published in May 2005, this NASD report appears to be grammatically incorrect and may be missing some information} and failed to include a disclosure concerning the risks that might impede the achievement of the price target contained in the report.  He also failed to make certain NASD Rule 2210 disclosures. The disclosures Tavares did make was not presented in a clear, comprehensive, and prominent fashion. NASD concluded that the research report omitted material facts, which causes it to be misleading; contained exaggerated, unwarranted, or misleading statements; and failed to provide a sound basis for evaluating the facts. Tavares failed to have his member firm adopt and implement written supervisory procedures reasonably designed to ensure that the firm and its employees complied with the provision of Rule 2711. 

Fined $20,000; Suspended 90 days in all capacities; Required to requalify in any capacity.

Sturdivant & Co., Inc. 
AWC/C9B050017/May 2005

Sturdivant & Co. issued research reports that failed to 

  • disclose the percentage of all securities rated by the firm as “buy,” “hold/neutral,” or “sell,” and the percentage of companies within each of those rating categories for whom the firm provided investment banking services preceding issuance of the reports;
  • contain a statement attesting that no part or that part or all of the research analyst’s compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed by the research analyst in the research report and a statement identifying the source, amount, and purpose of such compensation and further disclosing that the compensation could influence the recommendations or views expressed in the research report; and
  • adopt and implement written supervisory procedures that were reasonably designed to ensure compliance with the provisions of NASD Rule 2711.

Censured; Fined $15,000

Legacy Financial Services, Inc. 
AWC/CE2050006/May 2005

Legacy Financial Services 

  • created and distributed sales literature and advertisements that failed to disclose adequately material facts regarding various investment products and strategies, and made exaggerated or unwarranted statements or claims;
  • failed to file sales literature and advertisements concerning registered investment companies with NASD (and didn't ensure that a registered principal approved them prior to use, or retain copies of sales literature and advertisements reflecting approval by a registered principal); and
  • failed to establish and maintain supervisory procedures reasonably designed to achieve compliance with NASD’s Rule on Communications with the Public by failing to prevent a registered representative from distributing unbalanced sales literature and advertisements to the public. 

Censure; Fined $35,000; Required to file with NASD’s Advertising Regulation Department all sales literature and advertisements at least 10 days prior to their first use for six months from the date of this AWC. 

Citigroup Global Markets, Inc.
AWC/#CE3050006/May 2005

Citigroup Global Markets ran a national advertising campaign regarding certain mutual funds that emphasized the more recent favorable performance and de-emphasized the negative one-year performance of the funds in a manner that was unbalanced. Firm failed to file with NASD advertising and sales literature concerning registered investment companies.

Censured; Fined $50,000

Dennis Roy Roth
OS/CMS040016/April 2005

Roth issued a research report in which he recommended the purchase of an OTC Bulletin Board-traded company, which contained baseless and exaggerated sales projections, price predictions, and an unsupported claim that the company would achieve profitability. Also, he failed to disclose that he was being paid by the company in cash and securities to promote the company and to solicit investors to purchase its securities at the time of the issuance of the research report.

Barred

Suk Hun “John” Ko 
AWC/C02050011/April 2005

Ko sent reports and letters to public customers that contained improper predictions of returns with respect to stocks and mutual fund investments, and other misleading and exaggerated statements.

Fined $5,000; Suspended 1 year

Peter T. Antipatis
AWC/CMS040204/April 2005

Antipatis circulated false and misleading investment opinions and research reports, which included fraudulent and deceptive representations and omissions of material facts about speculative, low-priced securities that were promoted by a stock promotion and public relations firm for which he worked and from which he received a salary. In furtherance of said violations he:

  • did not include financial information about companies he covered in his investment opinions;
  • failed to disclose material negative information about the companies that he covered; 
  • did not base his investment opinions on principals of fair dealing and good faith (they were not fair and balanced, and did not provide a sound basis for evaluating the facts in regard to any particular security or type of security);  
  • omitted material facts or qualifications that, in light of the context of the material presented, caused the communications to be misleading;
  • made false, exaggerated, unwarranted, or misleading statements or claims in his communications with the public;
  • published, circulated, or distributed public communications (or caused same), that he knew or had reason to know contained untrue statements of material fact or were otherwise false or misleading;
  • predicted or projected performance, implied that past performance will recur, or made exaggerated or unwarranted claims, opinions, or forecasts; and
  • issued investment opinions or research reports, which contained only favorable research, opinions, or news about the companies he covered and the directly or indirectly offered the favorable research report and a specific rating as consideration or inducement for the receipt by him of business or compensation.

Antipatis was registered with a member firm for the sole purpose of avoiding a lapse in his registration and re-examination requirements. Antipatis failed to provide prompt written disclosure to his member firm that he was working for, and being compensated by, a company for writing investment opinions and research reports. Antipatis did not disclose the true nature of his work and deceived his member firm into believing that his outside employment was not investment related.  Antipatis failed to notify his member firm, in writing, of his securities accounts at another member firm, and failed to notify a member firm of his associated status with another member firm.

Barred

Bill Singer's Comment: When the regulators drafted and enacted during the past couple of years so-called research reforms, they apparently thought they would be paving the way for better research.  Most Wall Street pros knew otherwise --- and this case likely underscores that it's a lot more difficult to eliminate the scourge of garbage research.  Stock promoters have been around for a long time, and they show no signs of disappearing.  Compliance staffs would be well advised to inquire as to whether any registered reps are circulating opinions or reports.  You should also inquire as to the nature of any promoters or PR firms involved with such communications.  Moreover, once you determine that a salary is being paid (or any compensation) to your employee/contractor, you should insist upon a prior review of any proposed materials to be disseminated.  You don't think it's worth the time and effort?  That's fine.  The regulators will do the work for you, and then you can explain your actions (or lack thereof) during an on-the-record, under oath interview.  
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: 

  1. the written approval of their group head or supervisor; and
  2. the approval of the Firm’s compliance department

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:

  • At 12:35 p.m., the Fund entered and executed its order to sell short 5,000 shares of ABC. 
  • At approximately 1:13pm, before receiving approval from the compliance department for his personal trades, Chadbourne entered and executed his order to sell short 1,000 shares of ABC in his personal securities account away from the Firm. 
  • At approximately 1:46 p.m., CDD responded to Chadbourne’s electronic communication by requesting more information about the ABC transaction. Chadbourne responded by electronic communication at 2:09 p.m. At or about 2:11 p.m., the Firm’s compliance department responded affirmatively to Chadbourne’s request for approval, based on the information provided by Chadbourne. 
  • At 12:38 p.m., the Fund entered its order to sell short 5,000 shares of DEF. The order was executed at 12:39 p.m. 
  • At approximately 1:18 p.m., before receiving approval from the compliance department for his personal trades, Chadbourne entered and executed his order to sell short 1,000 shares of DEF in his personal securities account away from the Firm. 
  • At approximately 1:14 p.m., before receiving approval from the compliance department for his personal trades, Chadbourne entered his order to sell short 1,000 shares of GHI in his personal securities account away from the Firm.  Chadbourne’s order to short sell GHI was executed at approximately 1:29 p.m. at a price of $7.47 per share.  
  • At 1:36 p.m., the Fund entered its order to sell short 15,000 shares of GHI. The Fund’s order to sell short GHI was entered after Chadbourne’s GHI order was executed. The Fund’s order in GHI was executed at 1:57 p.m., at a price of $7.49 per share. 
  • Chadbourne traded ahead of the Fund’s short sale of GHI. Chadbourne knew or was reckless in not knowing that the Fund’s short sale trades of GHI had not been executed prior to entering his personal trades in the same securities. 

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.  
Robert Jerome Toohey (Principal)
OS/CMS040016/March 2005

Toohey failed to supervise adequately the activities of a registered representative in connection with the publication of a press release and a summary buy recommendation that contained certain misleading, exaggerated, and unwarranted claims and omissions of material fact.

Fined $5,000; Suspended 5 business days in all capacities; Barred in supervisory capacities as a General Securities Principal

Bill Singer's Comment:  This is an interesting extension of the typical charge --- here the supervisor is also charged with permitting the dissemination of fraudulent statements.  The sanction is interesting in that he was suspended for 5 business days but barred as a GSP.  If a lawyer handled that bifurcation it was well done.  At least the client didn't wind up taking a multi-month or multi-year suspension.  I also suspect the fine was reduced in consideration of the bar.
Ding Ho Wang
AWC/C02050003/February 2005

Wang placed advertisements in a Chinese language newspaper and distributed sales literature in the form of a booklet without prior approval from his member firm. The advertisements and sales literature were variously misleading and contained exaggerated or unwarranted statements and claims. The advertisements discussed and promoted Wang’s securities business but failed to identify his member firm as the broker-dealer that offered the securities.The sales literature provided incomplete and oversimplified comparisons and contained investment company performance not in accordance with the requirements set forth in SEC Rule 482 with regard to the inclusion of standardized average annual total returns, specific disclosure language, and prospectus offer. 

Wang was Fined $5,000 and Suspended 30 business days in all capacities.

Bill Singer's Comment: This case offers an excellent opportunity to underscore the importance for BDs to scrutinize advertising/sales literature directed at ethnic markets.  I always urge my clients to have all foreign language copy translated by an independent translation service (charge the RR if necessary) and to maintain on file the foreign language copy attached to the translation.  Additionally, it is critical to undertake the same rigorous oversight of all public communications in foreign languages, with particular emphasis on business cards, Internet postings, and even letterhead.
CIBC World Markets Corp.
AWC/CAF040114/February 2005

CIBC used various types of sales literature in the marketing of hedge funds and funds of hedge funds that contained inadequate risk disclosure and improper comparisons. Many of the materials contained generalized risk disclosure but failed to address the specific risk attributed to the investments offered. The advertising materials failed to contain a fair and balanced presentation of the risks as well as the benefits of a particular investment or strategy being promoted. Sales presentations made improper comparisons that failed to include any material differences between the subjects of comparison. In addition, NASD found that the firm failed to maintain evidence of approval by a registered principal for pieces of sales material for three years. 

CIBC was Censured, Fined $75,500, and—if the firm begins marketing or selling hedge funds—Required to File all advertising materials relating to hedge funds with NASD’s Advertising Department at least 10 business days prior to use for three years from the date of acceptance of this AWC. 

Harrison Securities, Inc., Frederick Clark Blumer (GSP), and Raymond Alan Leventhal (GSP)
AWC/CLI040039, CLI040040, CLI040042/February 2005

Acting through Blumer and Leventhal, Harrison Securities failed to 

  • establish and maintain a system to supervise the activities of each registered representative and associated person reasonably designed to achieve compliance with applicable securities laws, regulations, and NASD rules; 
  • develop an adequate supervisory system for review of customer accounts to detect and prevent excessive trading or churning;
  • respond to “red flags” indicating that excessive trading or churning was occurring in the customer accounts of certain registered representatives, including excessive account activity, excessive commissions earned, and customer complaints; 
  • timely amend Forms U4 (Uniform Applications for Securities Industry Registration or Transfer) or Forms U5 (Uniform Termination Notices for Securities Industry Registration) and the firm’s Form BD (Uniform Application for Broker-Dealer Registration) to disclose reportable events. 
  • register properly the firm’s office of supervisory jurisdiction (OSJ) with NASD; 
  • conduct an annual inspection of the firm’s businesses and supervisory systems, including a periodic examination of customer accounts to detect and prevent irregularities or abuses, an annual inspection of each OSJ, and the maintenance of a written record of each such review and inspection;
  • operate with a properly registered financial and operations principal (FINOP); 
  • establish and maintain an adequate antimoney laundering (AML) compliance program; 
  • file an application, pursuant to NASD Membership and Registration Rule 1017, for approval of a change in ownership, control, or business operations upon the direct or indirect acquisition of substantially all of the firm’s assets by another member firm; and 
  • make or keep current its arbitration, correspondence, and financial books and records, or to preserve such records, in a readily accessible place. 

Harrison Securities and Blumer: 

  • permitted advertisements and sales literature to be disseminated to the investing public that contained material misstatements and omissions and contravened NASD’s rules relating to communications with the public;
  • permitted individuals to maintain registrations with NASD through the firm while the individuals were not actively engaged, or to be engaged, in the investment banking business or securities business of the firm; and
  • failed to comply with SEC Rule 17a-5(a)(2)(iii), in that the firm failed to file its quarterly FOCUS report

Additionally, Blumer failed to respond to NASD requests for information and or documents. 

Harrison Securities and Leventhal permitted a registered representative to continue to conduct a securities business while his registration was inactive due to his failure to complete the Regulatory Element of the Continuing Education Requirement, and they failed:

  • enforce the firm’s written supervisory procedures (WSPs) related to options transactions by failing to conduct, and memorialize, periodic reviews of options activities in customer accounts;
  • report, and to report timely customer complaints in violation of NASD Conduct Rule 3070; 
  • enforce the firm’s WSPs related to compliance with NASD Conduct Rule 3050 dealing with transactions for or by associated persons; and 
  • establish and maintain adequate procedures to ensure compliance with NASD Rule 2711 dealing with research analyst and research reports. 

Harrison Securities, Inc. was expelled from NASD membership. 
Blumer was Barred
Leventhal was fined $40,000, Suspended 1 year in principal/supervisory capacities and Required to Requalify as a Registered Principal (Series 24)

Bill Singer's Comment: I'm into my third decade on Wall Street and, frankly, I'm not sure I can recall too many regulatory cases that presented a more panoramic range of violations.  To that extent, this decision is impressive.  
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, 

Just spent some time with [the analyst], our Apparel & Footwear analyst, and she had several ideas for shorts, listed below in order of urgency. [Another specified company] is the only name we have under coverage.

Referring to the Company, Hillstrom wrote the following in his e-mail: 

The high-end jeans maker is rapidly trying to grow – adding 30 retail stores by year-end after not adding any for several years. Its jeans are not nearly as hot as they once were, yet they are expanding more rapidly than years past. [She] is confident the two brothers who run the company cannot manage their way during down times. Its sales backlog is grossly inflated because it sends products to its retail stores and books it as backlog. [She] tells me this is unheard of in the industry, and that by definition backlog must come from outside vendors. She thinks it is not unlikely that they miss numbers in the months ahead, and that they will have big problems down the road. She passed on the banking business, as did other major houses, when they were looking to do a secondary this spring, that they later pulled because of market conditions. Stock has fallen a lot, but she thinks it can go a lot lower, as earnings quality further deteriorates. 

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 correspondent 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.

Emmett A. Larkin & Co., and Melvin Lee Peterson (GSP)
AWC/C01040027/January 2005

Acting through Peterson, the firm failed to file timely disclosures for reportable events to NASD within 10 days and to update promptly Forms U4 (Uniform Application for Securities Industry Registration or Transfer) and U5 (Uniform Termination Notice for Securities Industry Registration) for events requiring regulatory disclosure. Firm had inadequate written procedures for the firm’s supervision relating to the prompt reporting of events requiring regulatory disclosure filings. 

Firm fined $37,000 of which $32,000 was joint and several with Peterson.


Email Bill Singer Connect with Bill Singer on Facebook Follow Bill Singer on Twitter Link up with Bill Singer on LinkedIn Join Bill Singer on Google+