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.  

Research and Advertising


Track Data Securities Corporation 
AWC/#ELI2005004702/December 2006

While engaging in option trading, the Firm failed to 

  • assign and identify to NASD its senior registered option principal and its compliance registered options principal;
  • maintain a separate file or log for complaints received involving options securities;  and 
  • promptly report statistical and summary information regarding customer complaints to NASD. 

Also, the Firm published newspaper advertisements and did not retain evidence of principal approval. 

Track Data Securities Corporation : Censured; Fined $12,500

Friedman, Billings, Ramsey & Co. Inc. 
AWC/#E9A2005004702/ December 2006 

The Firm failed in certain respects to enforce its written supervisory procedures relating to securities transactions by its research analysts and other associated persons that required the firm’s compliance department to obtain duplicate confirmations and statements for all securities accounts maintained by those associated persons at other firms. As a result of its failure to enforce those provisions with respect to the research analyst, the firm failed to detect and prevent the research analyst’s violations of NASD rules. 

Friedman, Billings, Ramsey & Co. Inc.: Censured; Fined $15,000

Samuel Conant Parks 
AWC/#E3B2004021902/November 2006 

Parks intentionally or recklessly, failed to disclose that he had received compensation from the issuer for his recommendations and sales of a stock to public customers. Parks failed to disclose conflict of interest and compensation to customers in that he knew, or had reason to know, that the agreement to compensate him for the sale of the stock and subsequent payments to him created an actual material conflict of interest at the time of he published research reports regarding the stock. Parks participated in private securities transactions, for compensation, without providing prior notice to, and receiving approval from, his member firm. Parks opened an account with another firm without providing prior notification to his member firm or of his association with the other member firm, and falsely stated that no NASD registered person had an interest in the account on a new account signature card.  

Samuel Conant Parks: Barred

Claude Eugene Crump (Principal) 
AWC/#2005003350801/November 2006 

Crump engaged in an outside business activity from which he received compensation and failed to provide prompt written notice to his member firm. The findings stated that Crump disseminated sales literature to public customers without his member firm’s written approval. 

Claude Eugene Crump : Fined $8,000; Suspended 30 business days in all capacities

Sharebuilder Securities Corporation 
AWC/# 2006003887001/November 2006

The Firm committed several violations of NASD’s advertising rules by means of various false and misleading statements regarding its services, including predictions of performance, incomplete and unbalanced comparisons with its Web site and Internet advertising. These misleading advertisements were available for widespread use by the investing public, not only for those who were the firm’s customers. The Firm failed to file Exchange Traded Funds (EFT) related communications with NASD as it was required to do. 

Sharebuilder Securities Corporation : Censured; Fined $140,000; Required to file all advertisements used on the firm’s Web site or on the Internet with NASD at least 10 days prior to their first use for one year

Feldman Securities Group, L.L.C.
AWC/#E8A2005007601/November 2006

The Firm’s written supervisory procedures were incomplete in certain respects and the firm did not fully implement other procedures with regard to its dissemination of research reports containing disclosure deficiencies. The Firm did not balance favorable discussions of securities identified in research reports with sufficient disclosures of risks associated with an investment in the securities. The Firm did not fully ensure compliance with SEC Regulation AC, in that some research reports did not include an Analyst Certification. 

Feldman Securities Group, L.L.C.: Censured; Fined $22,000

David Matthew Garrity (Principal)
AWC/#20050017487-01/October 2006

Garrity purchased and/or sold securities of companies that he was covering as a research analyst, but he failed to

  • disclose in a research report that he had a financial interest in the securities of the company;
  • notify his member firms, promptly and in writing, that he had opened accounts at other member firms; and 
  • notify these firms when he became associated with his member firms. 

David Matthew Garrity : Fined $10,000; Suspended 45 days in all capacities.

Merriman Curhan Ford & Co. 
AWC/#E0120050054-01/October 2006

The Firm issued research reports concerning companies for which the firm managed or co-managed public offerings, and failed to include the disclosures NASD required in the reports. The Firm’s supervisory procedures were not reasonably designed to achieve compliance with NASD rules concerning the allocation of required disclosures clearly and effectively, and did not include provisions for a retrospective review of previously issued reports to monitor the firm’s compliance. 

Merriman Curhan Ford & Co. : Censured; Fined $20,000

Asensio Brokerage Services, Inc. nka Integral Securities, Inc. and Manuel Peter Asensio (Principal)

Acting through Asensio, the Firm 

  • issued research reports that failed to define the meaning of each rating and that failed to disclose the distribution of the firm’s ratings; and
  • made statements in research reports that were unwarranted or misleading. 

Also, Asensio failed to fully respond to NASD requests for information during an on-the-record interview. 

Asensio Brokerage Services, Inc. nka Integral Securities, Inc.: Fined $20,000

Manuel Peter Asensio (Principal): Barred

XXXXX (Principal) [name deleted at the discretion of RRBDLAW.com]

AWC/#E9A2005004701/September 2006

On numerous occasions, a member of XXXXX’s household effected a purchase or sale of securities issued by a company XXXXX followed in their personal account in contravention of the restrictions against trading during periods before and after the issuance of a research report set forth in NASD Rule 2711(g)(2).  Some of the transactions were inconsistent with XXXXX’s recommendation as reflected in the most recent research report that she prepared concerning the respective company. XXXXX purchased and sold shares of a company’s common stock in a securities account she owned individually at another member firm that was inconsistent with the recommendation reflected in her published research report. 

XXXXX prepared research reports that failed to disclose that a member of her household owned shares of the company’s common stock. In addition, XXXXX maintained a personal securities account at two other NASD member firms and failed to promptly notify those firms in writing of her association with her member firm, and failed to promptly notify her member firm in writing about a personal securities account she maintained. 

XXXXX: Fined $30,000; Suspended 30 days as a research analyst

Feltl & Company
AWC/#E0420050042-02/September 2006 

The Firm failed to adopt and implement written supervisory procedures reasonably designed to achieve compliance concerning research reports. The Firrm published research reports that contained misleading statements. 

Feltl & Company: Censured; Fined $10,000

Credit Suisse Securities (USA) LLC
AWC/#EAF0401490001/September 2006 

Credit Suisse Securities (USA) LLC published research reports that failed to clearly and prominently disclose the valuation methods used to determine price target valuation methods and the risks that might impede achievement of the price target. The Firm’s disclosures concerning risks that might impede achievement of the price target were comparably deficient. The Firm failed to establish, maintain and enforce its written supervisory procedures reasonably designed to ensure compliance with NASD rules concerning price target disclosures. 

Credit Suisse Securities (USA) LLC: Censured; Fined $225,000; "Required to review a meaningful sample of its research reports, and describe the methodology used to review this sample of reports and certify in writing to NASD that the firm is in compliance with NASD Rules 2711(h)(7) and 2711(h)(10) with respect to such sample, including the requirement that price target valuation methods and risks that might impede achievement of the price target be disclosed in a clear, comprehensive and prominent manner. "

Citigroup Global Markets Inc.
AWC/#2005000792101/September 2006 

Citigroup Global Markets Inc failed to include in its tech/quant research reports whether the analyst or a member of his household held a position as officer or director or whether the firm acted as a market maker for the stock. The reports also failed to include whether the firm or the analyst had 

  • an ownership interest in the company, 
  • a material conflict of interest, or
  • received income from investment banking transactions with the company

None of the firm’s tech/quant research reports included 

  • a description of the ratings used, 
  • a distribution of the ratings, or 
  • a price chart illustrating closing prices for particular stocks. 

The Firm failed to establish and maintain a supervisory system reasonably designed to detect and prevent the firm’s violations of Rule 2711(h) and failed to implement the Rule in a timely manner. 

Citigroup Global Markets Inc.: Censured; Fined $350,000; Required to undertake a comprehensive review of its disclosure in its technical and quantitative (tech/quant) research reports. 

Bear Stearns & Co. Inc.
AWC/#E1020040050-01/August 2006 

Bear Stearns & Co. Inc. failed to submit options communications for review by a Compliance Registered Options Principal or an appropriate designee, and the firm’s educational material was not submitted to NASD or another self-regulator for review and approval at least 10 days prior to the firm’s use, as NASD Rule 2220 requires. 

The Firm’s options communications omitted material facts that made them false and/or misleading, suggested a certainty of future performance, used hedge clauses or disclaimers that attempted to disclaim responsibility for the communications, and included discussion of the advantages and opportunities presented by option investments without the proper disclosure of risks. The communications failed to include the required warning that options are not suitable for all investors, potential risks associated with options, the name and address of a person who could provide an Options Disclosure Document, relevant costs and a statement that supporting documentation for any claims made in the communication would be supplied upon request. 

The Firm’s research report failed to 

  • define the meaning of the ratings used in the report, 
  • disclose the distribution of ratings used in the firm’s rating system and f
  • provide required disclosures or references to where the disclosures could be found on the front page of the research report. 

The Firm failed to establish, maintain and enforce a supervisory system and procedures reasonably designed to achieve compliance with certain federal securities laws and NASD rules regarding content standards and principal approval of options communications with the public. 

Bear Stearns & Co. Inc.: Censured; Fined $150,000

Bill Singer's Comment: First off, for those of you who forgot, under NASD Rule 2220(a)(2), the term "educational material" means any explanatory material distributed or made generally available to customers or the public that is limited to information describing the general nature of the standardized options markets or one or more strategies.  And for those of you who are really forgetful, NASD RUle 2220 (b) states:  Association Approval Requirements and Review Procedures (1) In addition to the approval required by paragraph (b) of this Rule, every advertisement and all educational material of a member or member organization pertaining to options shall be submitted to the Advertising/Investment Companies Regulation Department of the Association* ("Department") at least ten days prior to use (or such shorter period as the Association may allow in particular instances) for approval . . .

Secondly, the NASD is really scrutinizing research reports.  We have seen a number of recent cases citing failures to define/disclose ratings.  

The Shemano Group, Inc., William David Corbett, Michael Keith McDonough (Principal) and Gary Jay Shemano (Principal) 
AWC/20050001727-01/20050001727- 02/20050001727-03/August 2006

Shemano sold Corbett’s shares of a publicly traded company while Corbett was reviewing drafts of a pending research report on the company that contained mismanagement allegations, and Corbett, as lead banker, and McDonough, as Chief Compliance Officer, failed to detect and prevent the sales. 

The firm, Shemano and McDonough failed to establish, maintain and enforce a system of supervision and written supervisory procedures reasonably designed to prevent the misuse of material and nonpublic information.


  • provided knowing and substantial assistance to his firm in violation of its written supervisory procedures; and
  • knowingly hired, and the firm made payments to, an individual for consulting services relating to the issuance of research reports and investment banking activities who they knew to be statutorily disqualified from association with any NASD member, and failed to report the association to NASD.

The Firm 

  • published research reports the barred individual wrote that deleted material risk disclosures and failed to disclose material facts, and McDonough failed to supervise the preparation of the research reports; and
  • failed to reasonably supervise the firm’s research and investment banking departments and the barred consultant in connection with their activities relating to the issuance of research reports. 

The Shemano Group, Inc.: Fined $425,000 (jt/several with Gary Jay Shemano); Barred from publishing research reports as the term is defined in NASD Rule 2711(a); Required to hire an independent consultant to review the adequacy of the firm’s policies, systems, procedures and training

William David Corbett: Fined $150,000; Suspended 60 days in all capacities

Michael Keith McDonough (Principal): Fined $20,000; Suspended 9 months as a general securities principal

Gary Jay Shemano (Principal): Fined $425,000 (jt/sev with The Shemano Group); Suspended 90 days in all capacities; Barred from publishing research reports as the term is defined in NASD Rule 2711(a)

Bill Singer's Comment: Hats off to NASD with this case.  For once, we have a concise explanation of what could have been a difficult fact pattern to understand (given the range of violations and their seriousness).  This is an excellent case for Compliance Dept's to read and incorporate into a year-end checklist.  Also a super case to discuss with your Research Dept.  
Jerome Louis Galant
AWC/#E062004003003/July 2006 

As a member firm’s research analyst, Galant prepared and issued research reports covering common stocks in which he held positions, and maintained buy recommendations in his reports even though he was selling the securities as they continued to increase in value. Galant prepared research reports for a member firm that failed to comply with the Regulation Analyst Certification Rule and failed to include the meaning of each rating the firm used in it is rating system, the distribution of its ratings and a price chart.

Jerome Louis Galant:Fined $35,000 (includes $25,000 disgorgement); Suspended 30 business days in all capacities

Capital Growth Financial, LLC and Michael Scott Jacobs (Principal)
AWC/# E072005004301/July 2006 

The Firm failed to 

  • conduct independent testing for compliance with its anti-money laundering (AML) procedures, and
  • designate independent individuals to conduct testing and failed to maintain evidence that it had filed one suspicious activity report (SAR). 

The Firm issued research reports that failed to 

  • provide sound bases for evaluating the company as a potential investment by failing to discuss risk factors associated with the company, 
  • disclose the time periods for the price targets indicated in the reports and 
  • disclose the percentage of securities the firm rated as “buy,” “sell” or “hold.” 

Acting throug Jacobs, the Firm reduced the minimum for a private placement offering and provided for the offering to close when the reduced minimum was met, and after modifying the offering, the firm failed to afford existing investors the opportunity to withdraw their investments based on the offering’s modification. 

Capital Growth Financial, LLC: Censured; Fined $55,000 ($10,000 of which jt/several with Jacobs)

Michael Scott Jacobs (Principal): Fined $10,000 (jt/several with Capital Growth Financial)

Johnson Rice & Company L.L.C.
AWC/#E052005004702/June 2006

The Firm

  • submitted to a subject company a draft of a research report interspersed with the firm’s opinions, estimates and conclusions, and failed to provide evidence that the draft report had been provided to legal or compliance personnel before it was submitted to the subject company;
  • terminated its research coverage of a subject company and failed to make a final research report of that subject company available;
  • issued research reports for subject companies and failed to disclose that one household member of a firm research analyst had a financial interest in the subject firm’s securities;
  • issued research reports that failed to disclose that the firm expected to receive or intended to seek compensation for investment banking services from the subject company in the three months following issuance of the research reports, and did participate in the company’s secondary securities offerings within three months after publication;
  • failed to disclose that it was making a market in the subject company’s securities in a research report at the time it was published; and
  • failed to indicate the specific page of the research report that contained the required disclosures, and the reference the firm provided to the location of the disclosures was not printed in a font larger than the body text of the research report, as NASD Rule 2711 requires. 

Johnson Rice & Company L.L.C.: Censured; Fined $30,000

Donner Corporation International nka National Capital Securities, Inc., Jeffrey Lyle Baclet (Principal), Paul Alan Runyon (Principal)and Vincent Michael Uberti (Principal)
#CAF020048/June 2006 NAC Decision

Baclet and Uberti 

  • issued research reports on reporting companies that failed to disclose material information and contained misleading, exaggerated and false statements, and
  • intentionally or recklessly failed to disclose material information on research reports issued to the public, and failed to disclose that the firm had received compensation for preparing and disseminating them. 

The Firm and Baclet failed to

  • obtain signed approval of research reports prior to their dissemination;
  • establish, maintain and enforce adequate written supervisory procedures reasonably designed to achieve compliance with applicable securities laws and NASD rules concerning research reports. 

Uberti and Runyon fraudulently failed to disclose material negative financial information, and included exaggerated and misleading information in their research reports. 

Donner Corporation International nka National Capital Securities, Inc : Expelled

Jeffrey Lyle Baclet (Principal): Barred 

Paul Alan Runyon (Principal): Fined $20,000; Suspended 6 months in all capacities; Requalify as General Securities Representative and General Securities Principal

Vincent Michael Uberti (Principal): Barred

Tyler McClintock Kerrigan
OS/#C05050008/E052003035504/May 2006

Kerrigan recommended and effected securities transactions to public customers without having reasonable basis for believing the transactions were suitable based upon the customers’ investment objectives, financial situations and needs. He used sales literature without obtaining prior approval from a registered principal, and failed to maintain a copy of the literature for his files. 

Tyler McClintock Kerrigan: Fined $10,000 (includes $1,912 disgorgement); Suspended 15 business days in all capacities

Capital Growth Financial, LLC, Michael Barry Falken (Principal), and Michael Scott Jacobs (Principal)
AWC/#E072003099001/April 2006

Acting through Jacobs, Capital Growth Financial sold securities that were not registered with the SEC. In connection with the securities offering, the firm used general solicitation sales techniques and sold the securities to non-accredited investors, thereby eliminating the offering from any registration exemption. 

Acting through Falken, Capital Growth approved the use of letters and invitations to seminars to be sent to prospective clients of the firm that failed to disclose that the referenced securities were subject to a high degree of risk, failed to disclose risks specific to the securities, were misleading by being promissory of successful investment results, and otherwise made exaggerated, unwarranted or misleading statements. 

Jacobs prepared and approved a PowerPoint presentation that was misleading and inconsistent with the private placement memorandum, and made other statements concerning market conditions that were without a reasonable basis. Acting through Jacobs, Capital failed to establish, maintain and enforce an adequate supervisory system, including written procedures, reasonably designed to achieve compliance with applicable rules and regulations related to the sale of private offerings. 

Finally, the firm failed to establish anti-money laundering (AML) procedures reasonably designed to achieve compliance with the US Patriot Act and the Bank Secrecy Act. 

Capital Growth Financial, LLC: Censured: Fined $45,000 ($10,000 joint/several with Falken); Required to 

  • file all NASD Conduct Rule 2210(a) sales literature and advertisements with NASD (except for PowerPoint presentations used by the firm in public seminars) at least 10 days to their first use
  • provide a copy of its proposed PowerPoint presentations to NASD at least 30 days prior to conducting any such seminar, so as to allow NASD sufficient time to review and approve the proposed public communication; and

Agrees not to conduct any public seminar for 30 days from the date of acceptance of this AWC. 

Michael Barry Falken (Principal): Fined $10,000 joint/several with Capital Growth Financial; Suspended  10 business days in principal capacities  

Michael Scott Jacobs (Principal): Fined $10,000; Suspended 45 days in principal capacities  

Bill Singer's Comment:  Interesting case.  Among the more basic warnings lawyers give BD clients is to be careful not to compromise a private placement offering through general sales to the public (when such should be limited to accredited investors only) or by actual sales to non-accredited investors (hence the use of pre-qualification questionnaires).  Obviously, there was something went terribly awry here.  Also, we see an interesting problem caused by the prevalence of new software --- here, the popular PowerPoint.  When you have a formal offering document, such as a private placement memorandum, be careful that you are not inadvertently modifying or altering representations in the offering document.  In this case, it appears that "slides" on the PowerPoint may well have contradicted some express statements in the PPM.  

The NASD sanctions in this case are interesting in that they are somewhat tailored to the unique nature of the violation.  Not only must the firm submit all sales lit and ads to NASD at least 10 days before their use, but their is a specific embargo of 30 days on the use of PowerPoint presentations.  Note that the requirement is to "file" all Rule 2210(a) materials (which apparently doesn't require waiting for the Staff to approve) but the PowerPoint sanction imposes an obligation to allow NASD time to "review and approve."  Also note that the firm cannot conduct any public seminar for 30 days after the acceptance of the AWC.

James Ronald Parker
AWC/#E0120040345-01/April 2006 

Parker distributed, or caused to be distributed, sales literature to public customers that did not conform to the applicable standards for communications with the public NASD requires. 

James Ronald Parker: No fine in light of financial status; Suspended 1 month in all capacities

Bill Singer's Comment:  Compare this case to the Capital Growth Financial and the MacDuff cases.  Clearly, NASD is looking for questionable sales literature. 
Richard Lawrence MacDuff 
OS/#2005000920402/April 2006 

MacDuff engaged in private securities transactions outside the regular course of his employment with a member firm, failed to provide prior notice to his firm describing in detail his proposed transactions and his role therein, and failed to receive written approval from his firm. Also, he prepared and distributed sales literature in the form of newsletters to public customers without the knowledge or consent of registered principals of his member firms, and some of these materials contained statements that were unwarranted and misleading, and failed to name the member firm with which he was associated, and failed to file the sales literature with NASD’s Advertising Department. 

Richard Lawrence MacDuff: Barred

Bill Singer's Comment:  Compare this case to the Capital Growth Financial and Parker in which a PowerPoint presentation and non-conforming sales literature came under scrutiny.  It might be a timely move for Compliance Departments to remind their salesforce that you just can't prepare written materials and send them out to the public without prior approval from the BD.  In this age of word processing and laptops, it's so easy (if not tempting) for many RRs (well-intentioned and otherwise) to prepare their own marketing materials.  That also poses a challenge for Compliance officers to stay ahead of the curve.
William Hall Formy-Duval (Principal)
AWC/#E072004000301/April 2006


  • allowed an individual to function as a registered person with his member firm without the benefit of registration, despite the fact that the individual was serving an NASD suspension;
  • failed to ensure that his member firm maintained its required minimum net capital;
  • caused his firm to prepare inaccurate net capital computations and to file inaccurate FOCUS reports;
  • failed to use a proper escrow account in connection with a securities offering;
  • failed to close the offering and return funds to customers at the offering’s expiration when the minimum contingency had not been met
  • failed to reasonably supervise his member firm and its representatives to prevent and detect sales practice violations; 
  • failed to enforce his firm’s supervisory procedures; and
  • failed to establish and enforce an adequate supervisory system in that he failed to ensure that all covered employees attended annual compliance meetings, failed to ensure that the principal of the firm reviewed correspondence, advertising and sales literature, and failed to establish any written procedures for sales of private placements. 

William Hall Formy-Duval: Barred in principal/supervisory capacities; No monetary sanction in light of financial status

James Geoffrey Morris (CRD #3075047, Registered Representative, Wyckoff, New Jersey)
AWC/#E1020020590-01/March 2006

Morris prepared and submitted research reports containing price targets, research ratings and/or research summaries to companies whose equity securities were the subjects of the respective research reports, before publication of the reports and without providing complete drafts of them to his member firm. Morris published research reports he had prepared and that did not disclose the valuation methods used to determine price targets contained within. 

James Geoffrey Morris: Censured: Fined $15,000

Scott Martin Zimmerman (Principal)
AWC/#2005000880301/February 2006

Zimmerman knowingly or recklessly prepared and disseminated misleading offering materials, monthly statements and newsletters to investors in that he made exaggerated, unwarranted and/or misleading statements concerning, among other things, the performance of a private limited partnership compared to the S&P 500, the accuracy of market predictions, the purchasing of insiders compared to sales, the effectiveness and understanding of trading strategies, and indicators of market peaks. Finally, Zimmerman failed to fully testify at an NASD on-the-record interview. 

Scott Martin Zimmerman; Barred

Cynthia Mary Couyoumjian (Principal)
AWC/#E0220030761-01/February 2006

Couyoumjian disseminated advertising and sales literature without prior approval from a registered principal, and failed to file the advertising and sales literature with NASD's Advertising Regulation Department within 10 business days of first use or publication. Couyoumjian's advertising and sales literature presented oversimplified claims that omitted material information, or failed to provide a sound basis for evaluating the facts, and contained exaggerated, unwarranted or misleading statements or claims. 

Cynthia Mary Couyoumjian: Fined $20,000; Suspended 31 days in all capacities

UBS Securities, LLC
AWC/E112004018901/February 2006

UBS Securities LLC disseminated research reports that failed to contain required disclosures to its clients. 

UBS Securities, LLC: Censured; Fined $10,000

Tejas Securities Group, Inc. and Arnold Reed Durant (Principal)
AWC/E062004010901/February 2006

Acting through Durant, Tejas 

  • provided a copy of a research report to an issuer without redacting all necessary information, including analyst’s opinions, estimates and other nonfactual information; and
  • allowed an analyst to purchase warrants, at a discount, from an issuer Durant covered within two days following the issuance of a research report on that issuer 

Acting through Durant, Tejas failed to 

  • disclose its ratings distribution and the meaning of those ratings on research reports; 
  • include a required price chart on research reports; 
  • disclose the receipt of investment banking compensation on a research report; 
  • disclose its market making status on research reports; 
  • ensure that research reports contained analyst certifications;
  • ensure that all principals were appropriately registered;
  • establish a system to maintain and preserve all emails;
  • maintain emails, and failed to implement a system to monitor, archive and retrieve instant messages;
  • evidence email reviews, and failed to provide notification of retention of electronic correspondence by means of electronic storage media; and
  • maintain records evidencing that the firm prepared a written needs analysis and training plan for the firm element of the continuing education program. 

In addition, Tejas failed to 

  • report corporate bond trades through TRACE
  • accurately report the execution time and/or quantity or price; 
  • timestamp municipal trade order tickets with the receipt time, entry and execution; and
  • maintain municipal trade order tickets; and failed to reflect all required information on order tickets. 

Tejas Securities Group, Inc.: Censured; Fined $225,000

Arnold Reed Durant: Fined $10,000; Barred in principal/supervisory capacities

Daniel Thomas Lemaitre
SFC/Hearing Panel Decision 05-179/February 8, 2006

In April 1999, Daniel Thomas Lemaitre joined Merrill Lynch, Pierce, Fenner and Smith Incorporated (the “Firm”) as a First Vice President and Senior Analyst, and also as the head of the firm’s Medical Technology Research Group.  On or about September 15, 2003, two of the companies followed by the Firm’s Medical Technology Research Group were XYZ and ABC. At such time, both companies were developers, manufacturers and marketers of medical devices, including cardiovascular drug-eluting stents.  ABC had  just published data from the clinical program for its cardiovascular stent reporting, among other things, an 8.9% in-segment restenosis rate. Prior to this disclosure, Lemaitre had published research reports that opined that the Clinical Trial Results to be reported by XYZ on September 15 would be at least equal to the data that had been published by ABC and that there was a high likelihood that XYZ’s results would be better than such data.

Confidential 11AM Press-only Conference

On or about September 15, Lemaitre attended a medical conference in Washington, D.c. where XYZ publicly presented clinical trial results (the “Clinical Trial Results”) concerning a drug-eluting stent that it was developing.  At an 11:00 a.m. briefing held at the conference, XYZ confidentially released the Clinical Trial Results to the press (who were prohibited from disclosing such results to any third party prior to the public release of such information later that afternoon).  

The Crowd Outside the Press-only Conference Room

During the press briefing, a number of analysts, including Lemaitre, assembled in a crowd outside of the conference’s press room, and certain rumors concerning the results were discussed among the crowd.  While in the crowd, Lemaitre heard reports and/or rumors concerning at least a portion of the Clinical Trial Results prior to the public release of such information by XYZ. At such time, he also received a telephone call from a reporter who was not present at the conference, and she advised Lemaitre that she had heard that the Clinical Trial Results compared favorably to ABC’s published data.   At approximately 11:30 a.m., Lemaitre observed that the XYZ officials who were leaving the press room appeared, both from their facial expressions and their physical conduct, to be very happy.

11:35 Squawk Box

At approximately 11:35 a.m., Lemaitre, who was still at the conference, conducted a telephonic “squawk box” broadcast, which was approved in advance by a Firm compliance officer. During this broadcast, Lemaitre stated:

We do not have the ability to give you the specifics yet, but we can tell you that that in fact the data is better than [ABC’s] data . . . . . The in-segment restenosis rate actually was below [ABC’s] 8.9%. Also, the target mean revascularization . was better. The diabetic numbers were dramatically better . . .. But at this point what I think you should just understand that in fact the data on a number of scores was in fact better than [ABC’s] numbers. (Emphasis added.)

E-Mail Exchanges

At approximately 11:44 p.m., an institutional salesperson at the Firm sent an e-mail to Lemaitre, stating 

“how do you get confirmation that the data is better (in-segment, etc.) if the actual data is not out yet?”

At approximately 12:13 p.m., Lemaitre responded to the aforementioned e-mail, stating 

“My job.”

At approximately 12:18 p.m., the salesperson again e-mailed Le Maitre. In this e-mail, the salesperson stated 

“[you] are good at it. Heard in-stent restenosis rate is 7.9% v. 26% control arm. . . in-segment should be better?”

At approximately 12:26 p.m., Lemaitre sent an e-mail to the salesperson stating 

“7.9 is the in-segment. In-stent was [a] tad north of 5 but below 6.”

Flash Note Research Report

At approximately 12.32 p.m., Lemaitre caused a research report (the “Flash Note”) to be issued to certain of the Firm’s customers concerning the Clinical Trial Results. The Flash Note, which was approved in advance by a Firm compliance officer, began by stating that the “[f]inal results from [XYZ’s] . . . pivotal U.S. study were presented to the press this morning.” It thereafter went on to state, among other things:

a. “The details of the study results will not be available until later today, but our checks at [the conference] indicate that the data compare favorably to [ABC’s] pivotal U.S. study . . ..”

b. “Although it looks like in-stent restenosis rates . . . were higher in [XYZP] versus [ABC’s] product, the in-segment rates . . .
were lower.”

c. “Additionally, the [XYZP] data were superior with respect to total lesion revascularization rates….”

Trading Halt

Trading in XYZ stock was halted by the NYSE from the opening of trading on September 15 until approximately 2:27 p.m. on that day.  The NYSE did not halt trading in ABC stock on September 15. Between 11:30 a.m. and 2:00 p.m. on that day, ABC shares fell approximately 2.5%.
At 2:00 p.m. on September 15, the Clinical Trial Results were released by XYZ to the public via the issuance of a press release. The release reported, among other things, a 7.9% in-segment restenosis rate, which compared favorably to the trial results published by ABC for its competing product.  

Lemaitre’s employment with the Firm terminated in January of 2005. He is not currently employed in the securities industry.

NYSE Discilplinary Rule 435(5): Circulation of rumors

(5) Circulate in any manner rumors of a sensational character which might reasonably be expected to affect market conditions on the Exchange. Discussion of unsubstantiated information published by a widely circulated public media is not prohibited when its source and unsubstantiated nature are also disclosed. Report shall be promptly made to the Exchange of any circumstance which gives reason to believe that any rumor or unsubstantiated information might have been originated or circulated for the purpose of influencing prices in listed securities.

The Hearing Panel found that Lemaitre:

I. Engaged in conduct inconsistent with just and equitable principles of trade in that he obtained material information concerning a NYSE listed security and publicly disseminated such information prior to its official public release in internal communications at his member firm employer and in a written research note that was provided to certain customers of such firm; and

II. Violated NYSE Rule 435(5) in that, on one or more occasions, he circulated rumors of a sensational character concerning an Exchange listed security which were sensational in character and might reasonably be expected to affect market conditions.

Daniel Thomas Lemaitre: Censure; Fined $50,000; Barred 2 months in all capacities

Howe Barnes Investment, Inc. 
AWC/E8A2004017001/January 2006

The Firm failed to make a bona fide public offering of 20,000 shares at the announced public offering price of $15, and later sold the shares and realized a profit of $48,077. Also, failed to disclose, in four separate research reports, that it had received compensation for investment banking services from two subject companies in the past 12 months. 

Howard Barnes Invst. Inc: Censured; Fined $58,077 (includes $48,077 disgorgement)

Cabrera Capital Markets, Inc.
AWC/E8A20040071-01/January 2006

The Firm failed to 

  • timely report municipal securities transactions, or inaccurately reported their execution times, to the Municipal Securities Rulemaking Board (MSRB);
  • prepare adequate written supervisory procedures addressing the reporting requirements under MSRB G-14;
  • implement an adequate supervisory system reasonably designed to monitor accurate reporting; and
  • adopt and implement written supervisory procedures reasonably designed to ensure its research activities were conducted in compliance with NASD rules. 

The findings also stated that the research reports the firm disseminated failed to include the required analyst certification from its research analyst. (NASD Case #)

Cabrera Capital Markets, Inc.: Censured; Fined $22,500

John Graydon Coghlan
SFC/NYSE Hearing Panel 05-129/January 31, 2006

John Graydon Coghlan specialized in the area of retirement planning, essentially conducting seminars for employees of various corporations. He also solicited business from corporate employees by mail and phone. Coghlan was the head of the Coghlan Group, a group of registered representatives and sales assistants that worked together at Merrill Lynch, Pierce, Fenner & Smith Incorporated (“the Firm”) at its downtown San Diego, California office (the "SD Office") in developing this business. However, the employees affiliated with the Coghlan Group were firm employees over whom Coghlan did not have supervisory authority. 

At all pertinent times NYSE Rule 472(a) read as follows: 

Each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member or member organization to customers or the public must be approved in advance by a member, allied member, supervisory analyst or qualified person designated under the provisions of [Exchange] Rule 342(b)(1)2. 

In January 2002, during the course of an internal audit of the SD Office by the Firm's compliance department, the auditor reviewed a group of marketing materials which Coghlan used in his mail solicitations and seminars (“Self-Authored Materials”). The Self-Authored Materials had been approved locally by Coghlan's Branch Office management and submitted to Merrill Lynch’s New York office for approval. Coghlan had been permitted by the local management to distribute his Self-Authored Materials to the public pending approval by Merrill Lynch's New York office. 

A meeting was held at the Firm’s New York offices on February 8, 2002, to discuss, among other things, the Self-Authored Materials. In addition to Coghlan, a number of Firm employees who were affiliated with the SD Office, the Firm’s Compliance Department and Office of General Counsel were present. Another Firm employee, Vice President, Retirement Services, participated by telephone. During the meeting, Coghlan’s Self-Authored Materials were reviewed and a number of changes were discussed, including changes to a document entitled “Questions and Answers on Your ‘Company’ Lump Sum Distribution” (the “Q&A”), as well as changes to other Self-Authored Materials that related to style and Firm protocol. Coghlan was advised that he would need to make the requested changes in the Self-Authored Materials and that, although he could continue to conduct seminars, he could not use any of the Self-Authored Materials in his seminars, to solicit potential clients, or otherwise until the changes had been made and approved by the Firm’s Marketing and Legal Departments. 

Thereafter, both the Branch Administrator of the Involved Office and the District Administrative Manager reiterated to Coghlan that only Firm-approved marketing materials could be used in Coghlan’s seminars and other marketing activities. Following the New York meeting, a Firm registered representative and member of Coghlan’s working group made changes to the Self-Authored Materials based on the New York meeting and reviewed them with the Branch Administrator. Thereafter, Coghlan distributed or made available the revised Self-Authored Materials at a single seminar on March 14, 2002, which was attended by approximately 15 members of the public. The Q&A was not used at that seminar or otherwise following the New York meeting. The revised Self-Authored Materials had not been approved by Merrill Lynch’s Marketing and Legal Departments prior to their distribution at the March 14, 2002 seminar. 

The Hearing Panel found that Coghlan violated NYSE Rule 472(a) in that he caused his then-member organization employer to distribute marketing letters and sales literature to the public which had not been approved in advance by a member, allied member, supervisory analyst or person designated under the provisions of NYSE Rule 342(b)(1).  Apparently, in submitting his settlement offer per the SFC, Coghlan had agreed to a Censure and a $50,000 fine.  In a rare and laudable action, the Panel reduced the fine to $25,000.The Hearing Panel found that the consented-to penalty was not supported by the precedents cited or by the facts of this case. 

The precedents cited were: 

  • In re Eddie Shu Fung, Decision 99-147 (NYSE Hearing Panel Oct. 28, 1999) (consent to censure and $25,000 fine)

The conduct in Fung included a registered representative’s agreeing in writing to share in a customer’s loss to the extent of $10,000, preparing inaccurate memoranda of brokerage orders, placing securities purchased for customers in his personal account, changing account designation of an order without authorization, placing a disputed transaction in his personal account and delivering documentation to a customer without his firm’s approval. 

  • In re Harvey P. Cook, Decision 02-47 (NYSE Hearing Panel Mar. 8, 2002) (consent to censure and $25,000 fine); 

The conduct in Cook involved the acceptance of approximately 78 orders for approximately 19 customers accounts from a spouse or relative of the customer involved, without that customer’s prior written authorization. The conduct extended over a period of four years.  

  • In re William Paul Van Oosterhout, Decision 02-231, (NYSE Hearing Panel Nov. 20, 2002) (consent to censure and $25,000)

The conduct in Oosterhout involved the exercise of discretionary power in customer accounts with oral, but not written, authorization. A minimum of 73 of these trades occurred in four customer accounts. 

The Hearing Panel noted that Coghlan's violation involved one meeting at which he distributed revised material to 15 members of the public. The original version of the material distributed had issues relating only to style and firm protocol. Changes were made locally to the material based on the discussions at a meeting in New York with Legal, Compliance and others; although, admittedly, said changes had not yet been approved by the Firm’s marketing and legal departments. Finally, the Panel found the conduct in the precedent cases to be significantly more serious than Coghlan’s. 

John Graydon Coghlan: Censure; Fined $25,000

Bill Singer's Comment: As I noted in some NYSE cases reported in 2005, the NYSE Panels seem to wrestle with the "fairness" of sanctions to a far greater degree than NASD. Last year we saw a rare dissenting opinion filed by one panelist against imposing a non-retroactive sanction upon a young man charged with inappropriate online postings. (Mitchell Allan Romano SFC/HPD 05-106/September 19, 2005--- NYSE 2005 Cases of Note) We've also seen a number of well-reasoned Panel decisions that pointedly note where requested sanctions were excessive in reference to prior decisions. Here we see a similar exercise in jurisprudence. 

Nonetheless, Coghlan raises the ever provocative question. Must every wrong result in a fine? What additional benefit was gained in this case by imposing a $25,000 fine --- and let's not forget that the Staff was seeking a $50,000 fine, which the Panel reduced.