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N E W Y O R K S T O C K E X C H A N G E, I N C.
EXCHANGE HEARING PANEL DECISION 91-192 November 15, 1991
PAINEWEBBER INCORPORATED
MEMBER ORGANIZATION
* * *
Permitted or failed to prevent solicitation and
recommendation by one or more registered
representatives of customer purchases of one or more
securities unsuitable for the customers; violated
Exchange Rule 723 by permitting or failing to
prevent the recommendation by one or more of its
registered representatives of unsuitable options
transactions for customers; violated Exchange Rule
431(f) (7), (8) and (9) and Regulation T by
permitting customers and employees to engage in
practices, or failing to cancel or otherwise
liquidate transactions, in their accounts,
prohibited by such rule and regulation; violated
Exchange Rule 351 by failing to make timely reportsof certain events; violated Exchange Rule 342 by
failing to conduct annual supervisory branch office
inspections, failing to maintain adequate written
tables of supervision, and failing to maintain
appropriate procedures for supervision and control
of sales practice activities -- Consent to censure,
fines totalling $900,000, and special internal
review of sales practice policies and procedures.
* * *
EXCHANGE HEARING PANEL DECISION 91-193
LEE HAROLD LOVEJOY
FORMER BRANCH OFFICE MANAGER
EXCHANGE HEARING PANEL DECISION 91-194
ROBERT BRADLEY FULLER
FORMER BRANCH OFFICE MANAGER
EXCHANGE HEARING PANEL DECISION 91-195
DAVID WARD STANGER
BRANCH OFFICE MANAGER
Violated Exchange Rule 342(a) with respect to
supervisory duties and obligations -- Consent to
censure, $15,000 fine, and three week supervisory
suspension.
* * *
EXCHANGE HEARING PANEL DECISION 91-196
SHELDON ALAN CHAIKEN
FORMER DIVISION MANAGER
EXCHANGE HEARING PANEL DECISION 91-197
GARY PRICE EVANS
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DIVISION MANAGER
EXCHANGE HEARING PANEL DECISION 91-198
JOHN ARNOLD McFERRAN
FORMER BRANCH OFFICE MANAGER
EXCHANGE HEARING PANEL DECISION 91-199
DONALD DELIA DEST
FORMER BRANCH OFFICE MANAGER
Violated Exchange Rule 342(a) with respect to
supervisory duties and obligations -- Consent to
censure, $10,000 fine, and two week supervisory
suspension.
* * *
EXCHANGE HEARING PANEL DECISION 91-200
BURGESS ASKEW DAVISFORMER BRANCH OFFICE MANAGER
Violated Exchange Rule 342(a) with respect to
supervisory duties and obligations -- Consent to
censure, $10,000 fine, and one week supervisory
suspension.
* * *
EXCHANGE HEARING PANEL DECISION 91-201
WILLIAM OGRAM WEBSTER, JR.
FORMER BRANCH OFFICE MANAGER
Violated Exchange Rule 342(a) with respect to
supervisory duties and obligations -- Consent to
censure, $5,000 fine, and one week supervisory
suspension.
* * *
Appearances:
For the Division of Enforcement For the Respondents
Regina C. Mysliwiec, Esq. Robert M. Berson, Esq.
Rex W. Mixon, Jr., Esq. (For PaineWebber)
Susan J. Meltzer, Esq. John F. X. Peloso, Esq.
Howard A. Grinsberg, Esq. Jane M. Knight, Esq.Henry A. Harrison, Esq. (For PaineWebber, Lovejoy, Chaiken,
Evans, McFerran, Dest, Davis, Webster
John R. Loftus, Esq.
(Fuller, Stanger, Evans)
Timothy A. Baker, Esq.
(McFerran, Dest)
An Exchange Hearing Panel met to consider a Stipulation of Facts
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and Consent to Penalty entered into between the Exchange's
Division of Enforcement and PaineWebber Incorporated (the
"Firm"), a member organization, and Lee Harold Lovejoy, Sheldon
Alan Chaiken, Robert Bradley Fuller, David Ward Stanger,
Gary Price Evans, John Arnold McFerran, Donald Delia Dest,
Burgess Askew Davis, and William Ogram Webster, Jr. During the
relevant periods discussed in this Stipulation and Consent,
Messrs. Lovejoy, Fuller, Stanger, McFerran, Dest, Davis and
Webster were branch office managers with the Firm; Messrs.
Chaiken and Evans were Division Managers with the Firm.
For the sole purpose of settling this disciplinary proceeding,
prior to a hearing or adjudication of any issue of law or fact,
and without admitting or denying any allegations, facts,
conclusions or findings set forth herein, the Firm consents to a
finding by the Hearing Panel that it:
I. Engaged in conduct inconsistent with just and equitableprinciples of trade in that, on various occasions during
1984-1987, it permitted or failed to prevent the
solicitation and recommendation by one or more of its
registered representatives of customer purchases of one
or more securities where such securities were unsuitable
for the customers.
II. Violated Exchange Rule 723 in that, on various occasions
during 1984-1987, it permitted or failed to prevent the
recommendation by one or more of its registered
representatives of opening transactions in option
contracts for customers where the person making the
recommendation did not have a reasonable basis for
believing, at the time of making the recommendation, that
the customers had such knowledge and experience in
financial matters that such customers could reasonably be
expected to be capable of evaluating the risks of the
recommended transactions and financially able to bear the
risks of the recommended positions in the option
contracts.
III. Violated Exchange Rule 431(f)(7), (8) and (9), and
section 220.8 of Regulation T of the Board of Governors
of the Federal Reserve System in that, on various
occasions during 1984-1987, it permitted customers and
employees to engage in practices, or failed to cancel or
otherwise liquidate transactions, in their accountsprohibited by such rule and regulation.
IV. Violated Exchange Rule 351 in that, during the period
1987-1990, it failed to report to the Exchange in a
timely manner certain events as required by such rule.
V. Violated Exchange Rule 342(a) and (b) in that, during the
period 1985-1988, it failed to conduct supervisory
inspections of certain branch offices at least annually.
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VI. Violated Exchange Rule 342(a) and (b) in that, during the
period 1984-1988, it failed to maintain written tables of
supervision identifying the person with overall
responsibility for internal supervision and control of
the Firm and compliance with securities laws and
regulations, as well as identifying the supervisory
responsibility for each area of the Firm's business
activities.
VII. Violated Exchange Rule 342(a) and (b) in that, during the
period 1984-1988, it failed to provide for, establish,
and maintain appropriate procedures of supervision and
control, including a separate system of follow-up and
review, with respect to its sales practice activities to
prevent the foregoing violations.
For the sole purpose of settling this disciplinary proceeding,
prior to a hearing or adjudication of any issue of law or fact,
and without admitting or denying any allegations, facts,
conclusions or findings set forth herein:
Mr. Lovejoy consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative of his
member organization employer subject to his supervision and
control.
Mr. Chaiken consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative, and of
Mr. Lovejoy, a branch office manager, of his member organization
employer subject to his supervision and control.
Mr. Fuller consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative of his
member organization employer subject to his supervision and
control.
Mr. Stanger consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative of his
member organization employer subject to his supervision andcontrol.
Mr. Evans consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of two registered representatives, and of
Mr. Fuller and Mr. Stanger, branch office managers, of his member
organization employer subject to his supervision and control.
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Mr. McFerran consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative of his
member organization employer subject to his supervision and
control.
Mr. Dest consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative of his
member organization employer subject to his supervision and
control.
Mr. Davis consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative of his
member organization employer subject to his supervision and
control.
Mr. Webster consents to a finding by the Hearing Panel that he
violated Exchange Rule 342(a) in that he failed to reasonably
discharge his duties and obligations in connection with the
supervision and control of a registered representative of his
member organization employer subject to his supervision and
control.
For the sole purpose of settling this disciplinary proceeding,
prior to a hearing or adjudication of any issue of law or fact,
and without admitting or denying any allegations, facts,
conclusions or findings set forth herein, the Firm and Messrs.
Lovejoy, Chaiken, Fuller, Stanger, Evans, McFerran, Dest, Davis
and Webster consent to the Hearing Panel adopting certain
findings of fact, the substance of which follows:
Background and Jurisdiction
The Firm
1. The Firm is a subsidiary corporation of PaineWebber Group
Inc., a holding company whose securities are listed on
the Exchange.
2. The Firm is the successor to a business founded in 1879
and is currently one of the largest national full-service
securities firms in the United States. The Firm is a
major broker in securities, options, and commodities.The Firm also acts as a dealer in corporate, municipal
and U.S. Government securities and is a distributor of
mutual funds, tax shelters, life insurance and annuity
products.
3. The Firm is a member organization of the Exchange, which
is the Firm's designated examining authority and
principal regulator. The Firm is also a member of
various domestic and foreign securities and commodities
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exchanges, and the National Association of Securities
Dealers, Inc.
4. At December 31, 1990, the Firm had approximately 4,500
registered representatives in 272 branch offices in the
United States.
5. The Exchange's Division of Member Firm Regulation
conducted sales practice examinations of the supervisory
standards and sales practice procedures established and
maintained at the Firm for the period 1985-1988, and set
forth their findings in three reports. The sales
practice examinations covered visits and reviews at the
Firm's main office and 49 different branch offices. A
copy of each report was provided to the Firm at the
conclusion of each examination. Thereafter, the Division
of Enforcement conducted an extensive investigation of
firm-wide systems and procedures and ten branch offices.
Lovejoy - Branch Office Manager Philadelphia (Eastern Division)
6. Lovejoy was born on July 19, 1936. He entered the
securities industry in 1965 as a registered
representative with the Firm. During the period 1984-
1988, Lovejoy was the manager of the Firm's branch office
in Philadelphia, Pennsylvania. In April 1988, Lovejoy
left the Firm and joined another securities firm, where
he is currently employed as a branch office manager.
7. During the period when Lovejoy was the manager of the
Firm's branch office in Philadelphia, Lovejoy was
responsible for the supervision and control of the sales
practice activities of employees in that office,
including the activities of registered representative A.
Chaiken - Division Manager (Eastern Division)
8. Chaiken was born on September 23, 1934. He entered the
securities industry in 1959 as a registered
representative with the Firm. During the period 1984-
1987, Chaiken was the Division Manager of the Firm's
Eastern Division. Chaiken is currently employed by the
Firm.
9. During the period when Chaiken was the Division Manager
of the Firm's Eastern Division, Chaiken was responsiblefor the supervision and control of the sales practice
activities of various branch offices in the Eastern
Division, including the activities of the Philadelphia
branch office.
10. During the period when Chaiken was the Division Manager
of the Firm's Eastern Division, Lovejoy reported to
Chaiken.
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Fuller - Branch Office Manager Pasadena (Southern Pacific
Division)
11. Fuller was born on January 15, 1938. He entered the
securities industry in 1964 as a registered
representative with another firm. In 1973, Fuller joined
the Firm. During the period 1983 - 1987, Fuller was the
manager of the Firm's branch office in Pasadena,
California. In May 1987, Fuller left the Firm. Fuller
is currently employed by another securities firm.
12. During the period when Fuller was the manager of the
Firm's branch office in Pasadena, Fuller was responsible
for the supervision and control of the sales practice
activities of employees of that office, including the
activities of registered representative B.
Stanger - Branch Office Manager Santa Barbara (Southern Pacific
Division)
13. Stanger was born on October 23, 1947. He entered thesecurities industry in 1968 as a registered
representative with another firm. In 1976, Stanger
joined the Firm. During the period 1984 to date, Stanger
was the manager of the Firm's branch office in Santa
Barbara, California. Stanger is currently employed by
the Firm.
14. During the period when Stanger was the manager of the
Firm's branch office in Santa Barbara, Stanger was
responsible for the supervision and control of the sales
practice activities of employees in that office,
including the activities of registered representative C.
Evans - Division Manager (Southern Pacific Division)
15. Evans was born on October 10, 1938. He entered the
securities industry in 1962 as a registered
representative with the Firm. During the period 1982 to
date, Evans was the Division Manager of the Firm's
Southern Pacific Division. Evans is currently employed
by the Firm.
16. During the period when Evans was the Division Manager of
the Firm's Southern Pacific Division, Evans was
responsible for the supervision and control of the sales
practice activities of various branch offices in the
Southern Pacific Division, including the activities ofthe Pasadena and Santa Barbara branch offices.
17. During the period when Evans was the Division Manager of
the Firm's Southern Pacific Division, Fuller and Stanger
reported to Evans.
McFerran - Branch Office Manager Boulder (Central Southwest
Division)
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18. McFerran was born on February 26, 1940. He entered the
securities industry in 1977 as a registered
representative with another firm. In 1983, McFerran
joined the Firm. During the period 1983 to July 1990,
McFerran was the manager of the Firm's branch office in
Boulder, Colorado. McFerran is currently employed by the
Firm.
19. During the period when McFerran was the manager of the
Firm's branch office in Boulder, McFerran was responsible
for the supervision and control of the sales practice
activities of employees in that office, including the
activities of registered representative D.
Dest - Branch Office Manager New Haven (New England Division)
20. Dest was born on June 2, 1925. He entered the securities
industry in 1960 as a registered representative with
another firm. In June 1978, he joined Blyth Eastman
Dillon Co. which was acquired in 1980 by the Firm.
During the period 1985 to January 1991, Dest was themanager of the Firm's branch office in New Haven,
Connecticut. Dest is currently employed by the Firm.
21. During the period when Dest was the manager of the Firm's
branch office in New Haven, Dest was responsible for the
supervision and control of the sales practice activities
of employees in that office, including the activities of
registered representative E.
Davis - Branch Office Manager Louisville (Southeast Division)
22. Davis was born on December 13, 1948. He entered the
securities industry in 1970 as a registered
representative with another firm. In July 1976, Davis
joined the Firm. During the period 1984-August 1987,
Davis was the manager of the Firm's branch office in
Louisville, Kentucky. Davis is currently employed by the
Firm.
23. During the period when Davis was the manager of the
Firm's branch office in Louisville, Davis was responsible
for the supervision and control of the sales practice
activities of employees in that office, including the
activities of registered representative F.
Webster - Branch Office Manager Fairfield (New England Division)
24. Webster was born on July 5, 1943. He entered the
securities industry in June 1972 as a registered
representative with Blyth Eastman Dillon & Co. which was
acquired in 1980 by the Firm. During the period May
1985-May 1991, Webster was the manager of the Firm's
branch office in Fairfield, Connecticut. Webster is
currently employed by the Firm.
25. During the period when Webster was the manager of the
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Firm's branch office in Fairfield, Webster was
responsible for the supervision and control of the sales
practice activities of employees in that office,
including the activities of registered representative G.
Summary
26. The Exchange's sales practice examinations brought to the
attention of the Firm the existence of recurring sales
practice deficiencies. During the period 1984-1987,
there were a number of indications (internal memoranda,
active account reports, etc.) which alerted supervisory
personnel to deficiencies. However, inadequate
corrective action was taken by supervisory personnel,
including two Division Managers and seven Branch Office
Managers. Moreover, the Firm failed to take adequate
steps during that time period to adopt or enforce
existing procedures designed to prevent such sales
practice deficiencies.
27. The Firm's inadequate supervision and control during thistime period resulted, in part, from its failure to
establish a separate system of follow-up and review to
determine whether existing procedures were being enforced
with respect to several areas, for example, active
account review and concentration reports. In some
instances, the Firm failed to delineate clearly
supervisory authority for an area of its business
activities, for example, the enforcement of trading
restrictions. In other cases, the Firm's supervision of
certain of its largest producers was inadequate to
prevent continuing misconduct over long periods of time.
28. In certain instances, sales practice violations and
supervisory deficiencies resulted in hundreds of customer
complaints and millions of dollars in settlements with
customers.
Failure to Comply With Sales Practice Requirements
at Different Branch Offices
Philadelphia Branch Office
29. During the period 1984-1987, A, a salesman in the Firm's
branch office in Philadelphia, solicited customers to
purchase the securities of XYZ, a company engaged in the
manufacture and sale of electronic technology. The
common stock of XYZ was listed on another stock exchange.
30. During the period 1984-1987, A recommended and effected
purchase transactions in XYZ for customers at a time when
there were already concentrated positions in XYZ of more
than 10% of the outstanding shares held in existing
customer accounts of A. During the period January 1984-
August 1985, 50% to 75% of the total XYZ positions held
by A's customers were held on margin, and during the
period September 1985-December 1987, 25% to 50% of such
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XYZ positions were held on margin.
31. During the period 1984-1987, monthly concentration
reports were prepared and distributed to various managers
at the Firm, including Lovejoy and Chaiken, which showed
that during this four year period, 75 to 150 customer
accounts of A held from 11% to 17% of the outstanding
shares of XYZ. The monthly concentration reports also indicated
that during the period January 1984-August 1985, 50% to 75% of
the total XYZ positions held by A's customers were held
on margin; and that during the period September 1985-
December 1987, 25% to 50% of such XYZ positions were held
on margin.
32. For example, as of October 4, 1986, 121 customer accounts
of A held 583,367 shares or more than 15% of the
outstanding shares of XYZ. During 1986, the average
daily trading volume of XYZ was approximately 10,500
shares per day. At that time, XYZ traded in a price
range of $13 to $14 per share.
33. A year later, the concentration of XYZ in customer
accounts of A had increased. The October 1987 monthly
concentration report stated that 158 customer accounts of
A held 697,324 shares or more than 17% of the outstanding
shares of XYZ. During 1987, the average daily trading
volume of XYZ was approximately 10,000 shares per day.
At the end of October 1987, XYZ traded at a price of $11
per share.
34. During 1984-1987, the Firm's policy and procedures
required that in response to each monthly concentration
report on XYZ, the accounts holding XYZ should have been
reviewed to determine whether XYZ was suitable for each
customer.
35. Reviews conducted to determine whether concentrated
positions in XYZ were suitable for the customers were
inadequate.
36. During the period 1984-1987, active account reports for
customer accounts of A were prepared and distributed to
various managers at the Firm, including Lovejoy, to
identify accounts with 10 or more trades or commissions
of $1,000 or more for the prior month. The active
account reports showed the number and dollar value of all
transactions, indicated the amount of commissions, and
attached a copy of the monthly statement for the account.
37. The Firm's procedures and the active account reports
required that the activity in such accounts "be reviewed
in conjunction with the client's statement and the
financial resources and investment objectives as shown on
this report." Reviews conducted to determine whether the
trading in XYZ was suitable for the customers were
inadequate.
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38. During the period 1984-1987, reports were prepared and
distributed to various managers at the Firm, including
Lovejoy and Chaiken, which showed a large number of trade
corrections and account number changes for purchases of
XYZ in customer accounts of A. Reviews conducted to
determine whether the trading in XYZ identified by such
reports was authorized by the customers were inadequate.
39. During 1984-1987, the continued solicitation and
recommendation of purchases of XYZ by A were unsuitable
for various customers in view of their financial
resources, investment experience, and investment
objectives. The purchases of XYZ were also unsuitable in
view of the concentrated positions of XYZ then held in
customer accounts at the Firm and the illiquid nature of
such positions.
40. During 1984-1987, the Firm permitted or failed to prevent
the solicitation and recommendation by A of purchases of
XYZ which were unsuitable for the customers.
41. During the period 1984-1987, A was the largest producer
in the Philadelphia branch office and one of the largest
producers in the Firm.
42. In late 1987, numerous customers of the Firm complained
to the Firm regarding the way A handled their accounts
during 1984-1987, claiming that unauthorized and
unsuitable purchases of XYZ were made in their accounts.
The Firm reviewed such complaints and contacted customers
regarding trading of XYZ in their accounts. During
December 1987, the price of XYZ had fallen as low as $5
1/2 per share.
43. On December 7, 1987, the Firm terminated A's employment.
44. As of March 1991, the Firm had received complaints from
approximately 93 customers of A regarding the trading in
their accounts at the Philadelphia branch office. As of
March 1991, the Firm had paid a total of more than $3
million to resolve customer complaints.
Branch Office Manager for Philadelphia
45. During 1984-1987, Lovejoy, the branch office manager for
the office in Philadelphia, did not provide reasonable
supervision and control of the activity of A describedabove, including:
a. Lovejoy received and reviewed on a daily basis order
tickets for transactions in the customer accounts of
A.
b. Lovejoy received and approved reports showing a large
number of trade corrections and account number changes
for purchases of XYZ in customer accounts of A, but
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Lovejoy failed to take adequate steps to determine
whether A was transferring unauthorized trades in XYZ
from customer accounts and to prevent such activity.
c. Lovejoy received and reviewed active account reports
for customer accounts of A.
d. After receiving one or more such active account
reports, Lovejoy failed to conduct adequate reviews of
the activity in such customer accounts or take
adequate steps to determine whether such trading was
authorized and suitable for the customers.
e. Lovejoy received monthly concentration reports during
1984-1987 which showed that customer accounts of A
held concentrated positions in XYZ. The monthly
concentration reports also indicated that during the
period January 1984-August 1985, 50% to 75% of the
total XYZ positions held by A's customers were held on
margin; and that during the period September 1985-
December 1987, 25% to 50% of such XYZ positions wereheld on margin.
f. After receiving one or more such monthly concentration
reports, Lovejoy failed to follow the Firm's
procedures with respect to concentrated security
positions in that, among other things, he did not
conduct adequate reviews of customer accounts holding
XYZ to determine whether XYZ was suitable for such
customers, and did not prepare a statement confirming
the suitability of XYZ for such customers.
g. After receiving one or more such monthly concentration
reports, Lovejoy failed to take adequate steps to
prevent A's continued solicitation and recommendation
of purchases of XYZ.
h. Lovejoy failed to take appropriate action to prevent
the unsuitable trading in XYZ which occurred in
customer accounts of A.
Division Manager for Philadelphia
46. During 1984-1987, Chaiken, the division manager for the
Firm's Eastern Division, which included the branch office
in Philadelphia, did not provide reasonable supervision
and control of the activity of Lovejoy and of A described
above, including:
a. Chaiken failed to take adequate steps to ensure that
the Firm's procedures were followed with respect to
the review of active accounts. For example, Chaiken
failed to cause Lovejoy to review customer accounts of
A identified by active account reports to determine
whether such trading was authorized and suitable for
the customers.
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b. Chaiken received monthly concentration reports during
1984-1987 which showed that customer accounts of A
held concentrated positions in XYZ. The monthly
concentration reports also indicated that during the
period January 1984-August 1985, 50% to 75% of the
total XYZ positions held by A's customers were held on
margin; and that during the period September 1985-
December 1987, 25% to 50% of such XYZ positions were
held on margin.
c. After receiving one or more such monthly concentration
reports, Chaiken failed to take adequate steps to
ensure that the Firm's procedures were followed with
respect to the review of concentrated security
positions. For example, Chaiken failed to cause
Lovejoy to review customer accounts holding XYZ to
determine whether XYZ was suitable for the customers
and prepare a statement confirming the suitability of
XYZ for the customers.
d. After receiving one or more such monthly concentrationreports, Chaiken failed to take adequate steps to
prevent A's continued solicitation and recommendation
of purchases of XYZ.
e. Chaiken failed to take appropriate action to prevent
the unsuitable trading in XYZ which occurred in
customer accounts of A.
Pasadena Branch Office
47. During 1985-1986, B, a salesman in the Firm's branch
office in Pasadena, engaged in unsuitable options trading
in various customer accounts.
48. During 1985-1986, B recommended opening transactions in
options contracts for numerous customers who had limited
financial resources and virtually no prior experience
trading options. B recommended to such customers that
they participate in an options strategy which involved
primarily short-term uncovered option writing and
required the customers to authorize B to act with
discretionary power in their accounts.
49. The Firm's procedures required that "Discretionary
accounts must be the subject of frequent and appropriate
reviews by branch office managers. In reviewing
discretionary accounts it is the responsibility of thebranch office manager to ensure that transactions are not
excessive in size or frequency in view of the financial
resources and character of such accounts." Reviews
conducted to determine whether the trading was excessive
or unsuitable in discretionary accounts of B's customers
were inadequate.
50. During 1985-1986, active account reports for customer
accounts of B were prepared and distributed to various
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managers at the Firm, including Fuller and Evans, to
identify accounts with 10 or more trades or commissions
of $1,000 or more for the prior month. The active
account reports showed the number and dollar value of all
transactions, indicated the amount of commissions, and
attached a copy of the monthly statement for the account.
51. The Firm's procedures and the active account reports
required that the activity in such accounts "be reviewed
in conjunction with the client's statement and the
financial resources and investment objectives as shown on
this report." Reviews conducted to determine whether the
options trading identified by such active account reports
was suitable for the customers of B were inadequate.
52. During 1985-1986, error reports for customer accounts of
B were prepared and distributed to various managers at
the Firm, including Fuller and Evans. The error reports
showed a large number of trade corrections and account
number changes for purchases of uncovered options
contracts in customer accounts of B.
53. During 1985-1986, the recommendation of purchases of
options contracts by B were unsuitable for various
customers, in view of their financial resources, prior
investment experience, and investment objectives.
54. During 1985-1986, the Firm permitted or failed to prevent
the solicitation and recommendation by B of opening
positions in options contracts which were unsuitable for
various customers.
55. During the period 1985-1986, B was the largest producer
in the Pasadena branch office and one of the largest
producers in the division.
56. On April 29, 1986, the Firm permitted B to resign.
57. Shortly thereafter, numerous customers of the Firm
complained to the Firm regarding the way B handled their
accounts, claiming that unsuitable options trading
occurred in their accounts.
58. As of April 1991, the Firm had received complaints from
52 customers of B regarding the options trading in their
accounts at the Pasadena branch office. As of April
1991, the Firm had paid a total of $1.5 million to
resolve 51 of the customer complaints.
Branch Office Manager for Pasadena
59. During 1985-1986, Fuller, the branch office manager for
the office in Pasadena, did not provide reasonable
supervision and control of the activity of B described
above, including:
a. B worked for the Firm during 1983-1984 and left in
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October 1984 to join another securities firm. In
January 1985, when B returned to the Firm as a
salesman at its branch office in Pasadena, Fuller was
aware that B had just been terminated by the other
securities firm because it was unwilling, in view of
its policy, to permit B to continue in an options
strategy which involved low-priced options.
b. Fuller received and reviewed on a daily basis order
tickets for transactions in the customer accounts of
B.
c. The Firm's procedures required that "Discretionary
accounts must be the subject of frequent and
appropriate reviews by branch office managers. In
reviewing discretionary accounts it is the
responsibility of the branch office manager to ensure
that transactions are not excessive in size or
frequency in view of the financial resources and
character of such accounts." Fuller failed to conduct
adequate reviews or take adequate steps to determinewhether the trading was excessive or unsuitable in
discretionary accounts of B's customers.
d. Fuller received and approved a large number of error
reports for trade corrections and requests for change
of account number for options transactions in customer
accounts of B.
e. Fuller received and reviewed active account reports
for customer accounts of B.
f. After receiving one or more such active account
reports, Fuller failed to take adequate steps to
review the activity in such customer accounts or
follow the Firm's procedures to determine whether such
trading was unsuitable or excessive for the customers.
g. During 1985-1986, on various occasions the Firm's
Senior Registered Options Principal, and Director of
Compliance, each inquired and expressed concerns to
Fuller about the options trading in the customer
accounts of B. For example, by memorandum dated
August 23, 1985, Compliance expressed concerns to
Fuller that B's strategy of selling uncovered options
was not appropriate for his customer accounts and that
such trading had generated excessive commissions for
B. Compliance advised Fuller of the need for closermonitoring of B's activities. Although he replied to
Compliance by memorandum dated October 3, 1985,
thereafter, Fuller failed to take adequate steps to
prevent B's solicitation and recommendation of
purchases and sales of options contracts which were
unsuitable and excessive.
h. Fuller failed to take appropriate action to prevent
the unsuitable and excessive trading in options which
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occurred in customer accounts of B.
Santa Barbara Branch Office
60. In January 1987, Customer H opened an account at the Firm
with C, a salesman in the Firm's branch office in Santa
Barbara. At that time, Customer H requested and received
approval from the Firm for a credit line of $1 million
for his account.
61. In connection with approving Customer H's request for a
$1 million credit line for his account, the Firm learned
that in 1975 customer H had been barred by the SEC from
association with any broker-dealer because he
participated in a fraudulent and manipulative stock
scheme, and that in 1979 Customer H had been convicted of
a felony for federal income tax violations.
62. In February 1987, Customer H began to purchase for his
account shares of UVW, a company engaged in oil and gas
exploration and oil field trucking business. Thereafter,Customer H accumulated on margin a large position in UVW,
which was the only security he purchased for his account.
By December 31, 1987, Customer H held 293,300 shares of
UVW in his account at the Firm, having a market value of
$1.7 million with a margin debit of more than $1 million.
63. During 1987, Customer H urged C to purchase and solicit
others to purchase UVW, and two other low-priced
speculative securities, RST, a company engaged in the
development of a process and technology to produce gold
from heavy, black or volcanic sand; and OPQ, a company
engaged in the business of salvaging platinum contained
in used catalytic converters. During 1987, the common
stock of UVW was listed on the NASDAQ and the common
stocks of RST and OPQ were quoted in the NASD pink
sheets.
64. During 1987, C solicited customers to purchase UVW, RST,
and OPQ.
65. By May 1987, C's customers held a concentrated position
in UVW. UVW traded during April-May 1987 in a price
range of $5 to $6 per share. In May 1987, a monthly
concentration report was prepared and distributed to
various managers at the Firm, including Stanger and
Evans, which showed that 22 customer accounts of C held
306,000 shares or 4.37% of the outstanding shares of UVW,and that Customer H's account held 233,300 shares. The
May 1987 concentration report also indicated that more
than 84% of all positions in UVW held by C's customers
were held on margin, with Customer H holding 227,000
shares on margin and 15 other customers holding an
additional 31,200 shares on margin.
66. In response to the May 1987 concentration report on UVW,
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each account holding UVW should have been reviewed in
accordance with the Firm's procedures to determine (a)
whether UVW was suitable for each customer, and (b)
whether the recommendation to purchase UVW for such
accounts was documented in a due diligence file for such
stock containing fundamental research material rather
than sales literature or information provided solely by
the issuer or Customer H.
67. Reviews for suitability of concentrated positions in UVW
conducted during 1987 were inadequate.
68. After May 1987, C continued to solicit and recommend
purchase transactions in UVW for customers on various
occasions when concentrated positions in UVW were already
held in existing customer accounts of C, that is,
positions of at least 5% of the outstanding shares.
69. The concentration of UVW in customer accounts of C
increased. The September 1987 concentration report
stated that 44 customer accounts of C held 355,670 sharesof UVW or more than 5% of the outstanding shares of UVW,
including 243,300 shares in Customer H's account. The
September 1987 concentration report also indicated that
more than 80% of all such positions in UVW held by C's
customers were held on margin, with Customer H holding
237,200 shares on margin and 18 other customers holding
an additional 46,500 shares on margin. During September
1987, UVW traded in a price range of $8 per share.
70. In or about September 1987, C requested the Firm to
become a market maker for UVW, RST, and OPQ and consider
a banking relationship with such companies. In a
memorandum dated September 4, 1987, distributed to senior
managers at the Firm, including Stanger and Evans, C
described Customer H as the "venture capitalist behind"
UVW, RST, and OPQ, and stated that Customer H "provides
the wherewithal in capital, contributes to the
management, and promotes the companies in a variety of
ways."
71. In October 1987, the Firm began to act as a market maker
in UVW. At that time, the Firm knew or should have known
that the businesses of UVW, RST, and OPQ were risky and
speculative; that Customer H, who was represented by C to
be the "venture capitalist" and promoter for such
companies, had been barred in 1975 by the SEC from
association with any broker-dealer because heparticipated in a fraudulent and manipulative stock
scheme, and had been convicted in 1979 of a felony for
federal income tax violations; that C and the Santa
Barbara branch office were relying entirely on Customer H
and the issuers for information about UVW, RST, and OPQ
without having conducted an independent investigation;
that the securities of UVW, RST and OPQ were not
registered for sale to residents of California; and that
C's customers held concentrated positions of UVW on
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margin which would be difficult to liquidate.
72. After October 1987, C continued to solicit and recommend
purchase transactions in UVW. The concentration of UVW
in customer accounts of C increased. The December 1987
concentration report stated that 81 customer accounts of
C held 446,711 shares or more than 6% of the outstanding
shares of UVW, including 293,300 shares in Customer H's
account. The December 1987 concentration report also
indicated that more than 83% of all such positions in UVW
held by C's customers were held on margin, with Customer
H holding 287,200 shares on margin and 12 other customers
holding an additional 43,100 shares on margin.
73. During 1987, C's solicitation and recommendation of
purchases of UVW, RST, and OPQ were unsuitable for
various customers in view of their financial resources,
prior investment experience, and investment objectives.
The purchases of UVW were also unsuitable in view of the
concentrated positions of UVW then held in customer
accounts at the Firm and the illiquid nature of suchpositions.
74. During 1987, the Firm permitted or failed to prevent the
solicitation and recommendation by C of purchases of UVW,
RST, and OPQ which were unsuitable for various customers.
75. During 1987, C was the largest producer in the Santa
Barbara branch office and one of the largest producers in
the Firm.
76. Numerous customers of the Firm complained to the Firm
regarding the way C handled their accounts during 1987,
claiming that unsuitable purchases of UVW, RST, and OPQ
were made in their accounts. By June 1988, the price of
UVW had fallen to less than $1 per share.
77. On October 20, 1988, the Firm terminated C's employment.
78. As of March 1991, the Firm had received complaints from
90 customers regarding the trading of UVW, RST, and OPQ
in their accounts at the Santa Barbara branch office. As
of March 1991, the Firm had paid a total of $1 million to
resolve customer complaints.
Branch Office Manager for Santa Barbara
79. During 1987, Stanger, the branch office manager for theoffice in Santa Barbara, did not provide reasonable
supervision and control of the activity of C described
above, including:
a. Stanger received monthly concentration reports during
1987 which showed that customer accounts of C held
concentrated positions in UVW and that 80% or more of
all such positions in UVW were held on margin.
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b. After receiving one or more such monthly concentration
reports, Stanger failed to follow the Firm's
procedures with respect to concentrated security
positions in that, among other things, he failed to
conduct adequate reviews of customer accounts holding
UVW or take adequate steps to determine whether UVW
was suitable for the customers and did not prepare a
statement confirming the suitability of UVW for such
customers.
c. After receiving one or more such monthly concentration
reports, Stanger failed to take adequate steps to
prevent C's continued solicitation and recommendation
of purchases of UVW.
d. Stanger failed to take appropriate action to prevent
the unsuitable trading in UVW which occurred in
customer accounts of C.
e. Stanger received and reviewed on a daily basis order
tickets for transactions in the customer accounts ofC.
f. Stanger failed to supervise C's activities in
soliciting and recommending to customers purchases of
securities promoted by Customer H, even though he
learned in January 1987 when Customer H opened his
account and was approved for a $1 million line of
credit that Customer H had been barred in 1975 by the
SEC from association with any broker-dealer.
g. Stanger learned in April 1987 that C had opened a
securities account away from the Firm without prior
approval and held a large position of UVW in that
account, but thereafter Stanger failed to follow the
Firm's procedures and Exchange Rule 407 with respect
to monitoring C's trading activities in such account.
Division Manager for Pasadena and Santa Barbara
80. During 1985-1987, Evans, the division manager for the
Firm's Southern Pacific Division, which included the
branch offices in Pasadena and Santa Barbara, did not
provide reasonable supervision and control of the
activity of B and C described above, including:
a. Evans received and reviewed active account reports
during 1985-1986 for customer accounts of B.
b. After receiving one or more such active account
reports, Evans failed to take adequate steps to ensure
that the Firm's procedures were followed with respect
to the review of active accounts. For example, Evans
failed to cause Fuller to review customer accounts of
B identified by active account reports to determine
whether such trading was suitable for the customers.
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c. During 1985-1986, on various occasions the Firm's
Senior Registered Options Principal, and Director of
Compliance, each inquired and expressed concerns to
Evans about the options trading in the customer
accounts of B. For example, by memorandum dated
August 23, 1985, Compliance expressed concerns to
Fuller with a copy to Evans that B's strategy of
selling uncovered options was not appropriate for his
customer accounts and that such trading had generated
excessive commissions for B. Compliance advised
Fuller and Evans of the need for closer monitoring of
B's activities. Although Fuller replied to Compliance
by memorandum dated October 3, 1985, with a copy to
Evans, thereafter, Evans failed to take adequate steps
to ensure that Fuller monitored B's activities to
prevent solicitation and recommendation of purchases
and sales of options contracts which were unsuitable
and excessive.
d. Evans failed to take appropriate action to prevent the
unsuitable trading in options which occurred incustomer accounts of B.
e. Evans received monthly concentration reports during
1987 which showed that customer accounts of C held
concentrated positions in UVW and that 80% or more of
all such positions in UVW were held on margin.
f. After receiving one or more such monthly concentration
reports, Evans failed to take adequate steps to ensure
that the Firm's procedures were followed with respect
to the review of concentrated security positions. For
example, Evans failed to cause Stanger to review
customer accounts holding UVW to determine whether UVW
was suitable for the customers and prepare a statement
confirming the suitability of UVW for the customers.
g. Evans failed to take appropriate action to prevent the
unsuitable trading in UVW which occurred in customer
accounts of C.
Boulder Branch Office
81. During the period October 1983-March 1986, D, a salesman
in the Firm's branch office in Boulder, engaged in
unsuitable and excessive trading in various customer
accounts.
82. In summary, D recommended and effected purchase
transactions on margin in five accounts for customers who
were retired, with limited financial resources and
conservative investment objectives, as follows:
Period Number Average Total Gross Margin
CustomerMonths Trades Equity Purchases Commissions Charges
I 23 170 $270,832 $5,282,800 $80,600 $32,215
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I 24 77 54,701 1,841,200 31,700 9,205
J 30 166 282,509 5,341,200 76,700 38,445
K 18 96 238,996 3,329,400 52,000 23,342
L 29 157 131,968 3,818,900 60,000 28,680
83. In July 1985, D began to solicit customers to purchase
the securities of LMN, a company engaged in the
development and sale of computer programs. The common
stock of LMN was listed on the Exchange. During July
1985, LMN traded in a price range of $25 to $27 per
share.
84. As of March 1986, the accounts of the five customers held
large positions of LMN which exceeded more than one half
of the total dollar value of their accounts. Four of the
customer accounts each held positions of 14,000 shares or
more of LMN. Purchases of such large positions of LMNwere not in accordance with the conservative investment
objectives indicated by the customers. For three of the
customers, the LMN positions in their accounts exceeded
95% of the total value of their accounts. In March 1986,
the five accounts had combined LMN positions of $769,250
out of a total combined value of $1 million. By the end
of March 1986, the price of LMN had fallen to $11 per
share.
85. During the period October 1983-March 1986, active account
reports were prepared and distributed to various managers
at the Firm, including McFerran, to identify those
accounts with 10 or more trades or commissions of $1,000
or more for the prior month. The active account reports
stated the number and dollar value of all transactions,
indicated the amount of commissions, and attached a copy
of the monthly statement for the account. During the
same period, monthly commission detail reports were
prepared and distributed at the Firm which showed for
each account all trading activity and commissions for the
prior month.
86. The Firm's procedures and the active account reports
required that the activity in such accounts "be reviewed
in conjunction with the client's statement and the
financial resources and investment objectives as shown on
this report." Reviews conducted to determine whether thetrading in the accounts of the five customers listed
above was suitable for such customers were inadequate.
87. During the period October 1983-March 1986, active account
reports prepared and distributed at the Firm contained
information which disclosed that unsuitable and excessive
trading on margin was occurring during this period in the
five customer accounts.
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88. During October 1983-March 1986, D's solicitation and
recommendation of LMN and other securities were
unsuitable for the customers in view of their financial
resources, investment experience, and investment
objectives, and also in view of the large positions of
LMN then held in the customers' accounts at the Firm.
89. During October 1983-March 1986, the Firm permitted or
failed to prevent the solicitation and recommendation by
D of purchases of securities described above which were
unsuitable for such customers.
90. In March 1986, D became the manager of another branch
office of the Firm and his customer accounts were
transferred to that office.
91. Four customers of the Firm complained to the Firm
regarding the way D handled their accounts during 1983-
1986, claiming that unsuitable and excessive purchases
were made in their accounts.
92. On August 19, 1988, the Firm terminated D's employment.
93. As of March 1991, the Firm had paid $350,000 to resolve
complaints from four customers regarding the unsuitable
and excessive trading in their accounts at the Boulder
branch office.
Branch Office Manager for Boulder
94. During the period October 1983-March 1986, McFerran, the
branch office manager for the office in Boulder, did not
provide reasonable supervision and control of the
activity of D described above, including:
a. McFerran was aware of the age, retired status, limited
financial resources, and conservative investment
objectives of the five customers listed above.
b. McFerran received and reviewed on a daily basis order
tickets for transactions in the accounts of D's
customers.
c. McFerran received and reviewed active account reports
for the customers of D.
d. After receiving one or more such active account
reports, McFerran failed to conduct adequate reviewsof the activity in such customer accounts or follow
the Firm's procedures to determine whether such
trading was authorized and suitable for the customers.
e. McFerran failed to take appropriate action to prevent
the unsuitable and excessive trading which occurred
during two years in customer accounts of D.
Louisville Branch Office
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95. During 1985-1987, F, a salesman in the Firm's branch
office in Louisville, violated margin requirements in his
personal accounts at the Firm and engaged in conduct
inconsistent with just and equitable principles of trade.
96. During 1985-1986, F engaged in a practice in his personal
accounts at the Firm of purchasing options without
sufficient equity to cover the purchases and paying for
the purchases with the proceeds of the sales of the same
options contracts.
97. During 1986, on numerous occasions F issued checks drawn
on his personal accounts at the Firm which F knew or
should have known were drawn upon insufficient and/or
encumbered funds. The checks generated "Bounced Check
Alerts" at the Firm which indicated that there were not
sufficient available funds to cover the checks issued
by F.
98. During March-May 1986, the Firm's Compliance and CreditControl departments recommended that certain limits and
conditions be imposed on F's accounts as a result of the
foregoing activities. Davis chose not to implement such
limits or conditions.
99. Thereafter, F continued during 1986-1987 to purchase and
sell options using the proceeds of such sales to pay for
the purchases when his account lacked sufficient equity
to cover the purchases, and to issue checks against his
personal accounts at the Firm which were drawn upon
insufficient and/or encumbered funds.
100. During 1986, on various occasions F traded the same
options on the same day as his customers and received
more favorable execution prices than his customers.
101. During 1986, on several occasions F entered orders to
trade options without designating a customer's account
and thereafter F assigned such trades which resulted in
more favorable execution prices to his personal account
and the trades with less favorable prices to his
customers.
102. Four customers of the Firm complained to the Firm
regarding the way F handled their accounts during 1986-
1987, claiming that unauthorized and unsuitable trading
occurred in their accounts.
103. On August 10, 1987, the Firm terminated F's employment.
Branch Office Manager for Louisville
104. During 1985-1987, Davis, the branch office manager for
the office in Louisville, did not provide reasonable
supervision and control of the activity of F described
above, including:
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a. During 1985, Davis was advised that F engaged in a
practice in his personal account of purchasing options
without sufficient equity to cover the purchases and
paying for the purchases with the proceeds of the
sales of the same options contracts.
b. During 1986, on several occasions the Firm's Senior
Registered Options Principal, and Credit Control
Department, notified Davis by wire that F had issued
checks drawn on his personal account at the Firm which
were drawn upon insufficient and/or encumbered funds,
and recommended that certain limits and conditions be
imposed on F's accounts. Davis chose not to implement
such limits or conditions.
c. Thereafter, Davis failed to take adequate steps to
prevent F from continuing to purchase and sell options
using the proceeds of such sales to pay for the
purchases when his account lacked sufficient equity to
cover the purchases, and to issue checks against hispersonal account at the Firm which were drawn upon
insufficient and/or encumbered funds.
d. Davis received and reviewed on a daily basis order
tickets for transactions in the customer and personal
accounts of F.
As part of his daily review of order tickets, Davis
was obliged by the Firm's procedures to direct his
review to possible conflicts of interest to determine
if transactions in a salesman's account were executed
at better prices than customer orders in the same
security on the same day.
f. Davis failed to detect and take adequate steps to
prevent F from trading the same options as his
customers on the same day and receiving more favorable
prices than his customers.
g. During 1986, Davis also received and reviewed on
several occasions allocation notices from the Firm's
Block Desk which showed that F had entered orders to
trade options without designating a customer's account
and such orders had been executed "open customer."
Under Exchange Rule 410 and the Firm's procedures, the
customer account designation was required on all order
tickets before the orders were entered for execution.
h. Davis failed to take adequate steps to prevent F from
entering orders without first designating customer
accounts on such order tickets.
i. Davis failed to take appropriate steps to provide
reasonable supervision of F with a view to preventing
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111. During 1986, Webster, the branch office manager for the
office in Fairfield, did not provide reasonable
supervision and control of the activity of G described
above, including:
a. In March 1986, the Firm's Senior Registered Options
Principal advised Webster by memorandum dated March 6,
1986 that a recent review of the option accounts
serviced by G had disclosed a large number of
deficiencies. The memorandum listed, among other
things, free riding violations, extensions,
liquidations, bounced checks, violation reports filed,
trading without final New York options approval, and
purchasing short term options without funds on
deposit. The memorandum recommended that certain
limits and conditions be imposed on option accounts
serviced by G. Webster failed to take adequate steps
to impose such limits or conditions.
b. In April 1986, G opened an account in his wife's name
and a joint account with his wife. Thereafter, duringthe period May-December 1986, numerous margin
violations occurred in both accounts when G purchased
options without funds on deposit, used proceeds from
sales to pay for purchases, and engaged in a practice
of liquidating positions to meet open calls.
c. During 1986, on numerous occasions G issued checks
drawn on his personal account at the Firm which
generated "Bounced Check Alerts" at the Firm
indicating that there were not sufficient available
funds to cover the checks. In many instances, Webster
approved an override to honor the checks based on G
liquidating various positions, receiving cash
advances, or transferring funds from other personal
accounts to cover the checks.
d. During 1986, Webster failed to take adequate steps to
prevent the margin violations by G in his customer and
personal accounts.
e. Webster failed to take appropriate steps to provide
reasonable supervision of G with a view to preventing
the foregoing violations by G.
New Haven Branch Office
112. During the period July 1985-April 1988, E, a registeredrepresentative in the New Haven branch office,
misappropriated 18 checks in a total amount of $400,000
from 12 customers. The Firm has reimbursed the customers
for the stolen funds plus interest.
113. E used two methods to misappropriate customer checks. On
five occasions, E requested checks be mailed to
customers. In each instance, the customer had not
requested the check. When the customers received the
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provide reasonable supervision and control of the
activity of E described above, including:
a. Contrary to Firm procedures, Dest approved routinely
E's requests for hand delivery by him of checks to
customers without inquiring or determining whether
extraordinary circumstances existed for such delivery.
b. Contrary to Firm procedures, Dest failed to ensure
that all checks received by E for hand delivery to
customers were entered on the branch office check
log.
c. Contrary to Firm procedures, Dest failed to maintain
at the branch office copies of all letters sent to and
received from customers confirming their receipt of
checks received by E for hand delivery to them.
d. Dest failed to take adequate steps to ascertain that
each customer had in fact received the check given toE for hand delivery to each such customer.
e. Dest failed to take appropriate steps to provide
reasonable supervision of E with a view to preventing
the foregoing violations by E.
Springfield Branch Office
121. During the period August 1985-October 1986, M, a
registered representative in the Springfield branch
office, and N, M's sales assistant, misappropriated
numerous checks in a total amount of $1.3 million from 39
customers. The Firm has reimbursed the customers for the
stolen funds plus interest.
122. During the period August 1985-October 1986, on numerous
occasions M or N requested checks be issued to customers
and picked them up from the branch office cashier
allegedly for delivery to the customers. In each
instance, the customer had not requested the check and
was not alerted to the alleged delivery by M or N.
Thereafter, M or N deposited such checks into their
personal bank accounts.
123. During this period, under the Firm's procedures the
delivery of checks to customers by registered
representatives was permitted only under extraordinarycircumstances and only with the prior written approval of
the branch office manager.
124. The Firm's procedures also required that the branch
office receive from the customer a letter acknowledging
that the check was received. A copy of the customer's
confirming letter was to be retained at the branch
office. The registered representative delivering the
check was required to sign a check log book acknowledging
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receipt of the customer check, which was maintained in
the operations area at the branch office. The branch
office manager was required to review the log each month.
125. For the period August 1985-October 1986, the Firm could
not locate the branch office check log for the
Springfield branch office or any letters from customers
confirming that they had received the checks issued for
hand delivery. The branch office had no records with
respect to the issuance of checks for hand delivery to
customers.
126. During 1986, the Firm's Senior Registered Options
Principal notified the Branch Office Manager for
Springfield by wire that he had reviewed accounts
serviced by M and found more than 100 deficiencies for
the period November 1985-February 1986. The memorandum
listed, among other things, free-riding violations,
extensions, liquidations, bounced checks, violation
reports filed, trading without final New York options
approval, and purchasing short term options without fundson deposit. The memorandum recommended that certain
limits and conditions be imposed on option accounts
serviced by M, but no such limits or conditions were ever
imposed.
127. Thereafter, during the period May-October 1986, numerous
margin violations occurred in option accounts serviced by
M and N.
128. On November 6, 1986, the Firm terminated M's and N's
employment.
129. The March 6, 1986 memorandum was also sent to the
Division Manager for the Springfield branch office and
the Regional Compliance Administrator. Shortly
thereafter, in April 1986, the Regional Compliance
Administrator requested that the Firm conduct an internal
audit of Springfield. A year later, in May 1987, an
internal audit of Springfield was done for the first time
since 1984.
Failure to Comply With Margin Requirements
130. During 1984-1987, violations of margin requirements and
Regulation T occurred at various branch offices,
including Philadelphia, Pasadena, Louisville, Fairfield,
Springfield, Boston, and San Francisco.
131. During 1984-1987, the Firm failed to comply with Exchange
Rule 431(f)(7) in that on numerous occasions it permitted
customers in various branch offices to make a practice of
either deferring the deposit of cash or securities beyond
the time when such transactions would ordinarily be
settled or cleared, or meeting the margin required by the
liquidation of the same or other commitments in the
account.
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132. During 1984-1987, the Firm failed to comply with Exchange
Rule 431(f)(8) and Section 220.8(b) of Regulation T in
that on numerous occasions it permitted or failed to
cancel or otherwise liquidate transactions or obtain
extensions in customer accounts at various branch offices
when the equity in such accounts was not sufficient to
meet initial and maintenance margin requirements or when
a customer did not make full cash payment within the
required time.
133. During 1984-1987, the Firm failed to comply with Exchange
Rule 431(f)(9) and Section 220.8(c) of Regulation T in
that on numerous occasions it permitted customers at
various branch offices to make a practice of effecting
transactions in customer cash accounts where the cost of
the securities purchased was met by the sale of the same
securities, and failed to restrict such accounts for 90
days.
134. During 1984-1987, the Firm failed to comply with Section220.8 of Regulation T of the Board of Governors of the
Federal Reserve System in that on numerous occasions it
failed to cancel promptly purchase transactions in
customer cash accounts which were on a 90 day
restriction.
Failure to Report Events Timely to the Exchange
135. Exchange Rule 351 requires that a member organization
report promptly to the Exchange certain events.
136. During the period January 1987 through December 1990, the
Firm failed to make timely filings with the Exchange for
at least 175 events required to be reported under
Exchange Rule 351 relating to the disposition of customer
complaints.
137. The Firm reported at least 175 events to the Exchange
late, from approximately two months to two years or more
after the reportable event dates as follows:
Filed Late Number of Events
2-5 months 72
6-11 months 48
1-2 years 44
2 or more years 11Total 175
138. During the period January 1987-December 1990, the Firm
reported more than one year late numerous dispositions of
customer complaints in excess of $100,000. For example,
the Firm reported in July 1990, that is, 26 months late,
that a customer had obtained an award in April 1988 for
$399,000; the Firm reported in April 1989, that is, 24
months late, that it had settled a customer complaint in
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March 1987 for $350,000.
139. In addition to the late reporting described above, the
Firm failed to make any filings with respect to the
existence or disposition of numerous customer complaints
at various branch offices. For example, the Firm did not
make filings for virtually all settlements of customer
complaints relating to C in the Santa Barbara branch
office described above.
140. During 1989 and 1990, the Firm failed to amend prior Form
U-5 filings for terminated employees to disclose customer
complaints and/or settlements which occurred at or about
the time of termination or thereafter.
141. The Firm's failure during 1987-1990 to report timely to
the Exchange events relating to the existence or
disposition of customer complaints delayed the Exchange's
review of such matters and hindered the Exchange in
performing its regulatory obligations under the federal
securities laws with respect to the investigation andprosecution of sales practice and other violations.
The Firm's Lack of Adequate Supervision and Control
142. During the period 1985-1988, the Firm failed to comply
with Exchange Rule 342(a) and (b) in that it failed to
conduct supervisory inspections of certain branch offices
at least annually as required by Exchange Interpretation
Handbook, Rule 342(a) and (b) (03):
a. As of September 1985, 42 of the Firm's branch offices
were not visited during the prior 18 months; 8 branch
offices were not visited during the prior 25 months;
and 14 branch offices had never been visited in
accordance with the Exchange's requirement for annual
branch office visits;
b. As of February 1986-1987, 136 of the Firm's branch
offices were not visited during the prior 18 months in
accordance with the Exchange's requirement for annual
branch office visits; and four branch offices,
including Fairfield and Springfield, had not been
visited for periods ranging from 28 to 44 months;
c. As of February 1988, 41 of the Firm's branch offices
were not visited during the prior 14 months in
accordance with the Exchange's requirement for annualbranch office visits; and
d. The sales practice examination reports for the period
1985-1988 notified the Firm of its foregoing violation
of Exchange Rule 342 in failing to conduct annual
supervisory inspections of certain branch offices.
143. During the period 1984-1988, the Firm violated Exchange
Rule 342(a) and (b) in that it failed to maintain written
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tables of supervision identifying the person with overall
responsibility for internal supervision and control of
the Firm and compliance with securities laws and
regulations, as well as identifying the supervisory
responsibility for each area of the Firm's business
activities:
a. The Firm failed to delineate supervisory authority to
enforce trading restrictions.
b. The Compliance and Margin Departments viewed their
functions as solely advisory, and notified the branch
offices when accounts traded in violation of
restrictions. However, on numerous occasions branch
offices did not take adequate steps to enforce
restrictions prior to the execution of violative
orders. The Firm failed to clarify for Compliance,
Margin, Division and Branch Office Managers what
responsibility each had for enforcing trading
restrictions. As a result of the Firm's failure to
delineate this responsibility, accounts traded throughrestrictions.
144. During the period 1984-1988, the Firm failed to provide
for, establish, and maintain appropriate procedures of
supervision and control, including a separate system of
follow-up and review, with respect to its sales practice
activities designed to prevent the foregoing violations,
including:
a. the implementation of compliance department
directives, interpretations and advice;
b. the enforcement of trading restrictions;
c. the prevention of violations of Regulation T in
customer and employee accounts;
d. the review of active customer accounts for excessive
and/or unsuitable trading;
e. monitoring of trading by employees in their personal
accounts;
f. ensuring that before orders were executed, the name or
customer's account were designated on the order
tickets for such orders;
g. monitoring sales activities of registered
representatives to prevent their making sales of
securities in states where the salesmen were not
licensed or the securities were not registered;
h. ensuring that procedures for delivery of checks to
customers by registered representatives were followed;
and
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ensuring that deficiencies with respect to sales
practice activities noted by the Exchange's sales
practice examination reports and by the Firm's own
internal reviews were corrected.
145. The Exchange's sales practice examination reports for the
period 1985-1988 brought to the attention of the Firm the
existence of recurring sales practice deficiencies in a
number of branch offices. The Firm failed to take steps
to adopt or enforce existing procedures designed to
prevent such deficiencies.
146. The Firm has informed the Division, and the Division has
considered, the following circumstances relating to the
matters covered in the Stipulation and Consent:
Beginning in 1986 and continuing over the period of
time subsequent to receipt of the Exchange's
examination reports which were critical of the Firm's
sales practice systems and procedures, the Firm hasmade major investments of time, money and other
resources resulting in significant improvements to its
supervisory systems, including:
a. The reorganization and substantial budgetary increases
of the Firm's compliance department;
b. The revamping of the surveillance methods,
particularly computer systems and exception reports;
c. Significant improvements to the department carrying
out the internal audit function, including budgetary
increases, personnel increases and the implementation
of essential computer systems needed to enhance
auditing procedures which, according to the Firm,
resulted in annual inspections of virtually all retail
branch offices in 1989 and 1990;
d. The implementation of new computer systems designed to
strengthen the Firm's ability to monitor risk, enforce
margin requirements and generally supervise activity
in the accounts of public customers;
e. The commission of a study by an independent accounting
firm in 1987 to review the Firm's sales practices,
particularly with respect to the adequacy of
procedures;
f. The publication of new procedure manuals in 1988 and
1989 and the redevelopment of training programs; and
g. The development of other data base systems to enhance
the accuracy and availability of information available
to the Firm's supervisors.
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Furthermore, the Chief Executive Officer of the Firm
has directed that a review shall be performed under the
overall supervision of the General Counsel of the Firm,
to evaluate whether further improvements to sales
practices policies and procedures are appropriate. A
written report of that review and any resulting
recommendations will be submitted to the Audit
Committee of the Board of Directors of the Firm's
parent corporation. The Audit Committee may adopt and
implement any such recommendations as it deems
appropriate.
DECISION
The Hearing Panel, in accepting the Stipulation of Facts and
Consent to Penalty, found the Firm and Messrs. Lovejoy, Chaiken,
Fuller, Stanger, Evans, McFerran, Dest, Davis and Webster guilty
as set forth above by unanimous vote.
PENALTY
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by the Firm of a censure;
fines totalling $900,000 consisting of (a) a fine assessed
against the Firm in the amount of $800,000, and (b) a
contribution of $100,000 toward fines imposed upon the present
and former supervisory personnel as set forth below; and that the
Firm shall complete the review, described in paragraph 146 above,
that has been directed by the Chief Executive Officer of the Firm
under the overall supervision of the General Counsel of the Firm,
to evaluate whether further improvements to sales practices
policies and procedures are appropriate at this time. A written
report of that review and any resulting recommendations will be
submitted to the Audit Committee of the Board of Directors of the
Firm's parent corporation. The Audit Committee may adopt and
implement any such recommendations as it deems appropriate. The
Firm further shall implement all recommendations of the Audit
Committee resulting from the aforementioned report, and submit a
copy of such report, Audit Committee recommendations, and a
written representation to the Division that all recommendations
have been implemented, within six months from the date this
decision of the Hearing Panel accepting this Stipulation and
Consent becomes final.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Lovejoy of a
censure; a fine of $15,000; and a suspension from membership,
allied membership, approved person status and employment orassociation with a member or member organization in a supervisory
capacity for a period of three weeks.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Chaiken of a
censure; a fine of $10,000; and a suspension from membership,
allied membership, approved person status and employment or
association with a member or member organization in a supervisory
capacity for a period of two weeks.
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In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Fuller of a
censure; a fine of $15,000; and a suspension from membership,
allied membership, approved person status and employment or
association with a member or member organization in a supervisory
capacity for a period of three weeks.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Stanger of a
censure; a fine of $15,000; and a suspension from membership,
allied membership, approved person status and employment or
association with a member or member organization in a supervisory
capacity for a period of three weeks.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Evans of a censure;
a fine of $10,000; and a suspension from membership, allied
membership, approved person status and employment or association
with a member or member organization in a supervisory capacity
for a period of two weeks.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. McFerran of a
censure; a fine of $10,000; and a suspension from membership,
allied membership, approved person status and employment or
association with a member or member organization in a supervisory
capacity for a period of two weeks.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Dest of a censure;
a fine of $10,000; and a suspension from membership, allied
membership, approved person status and employment or association
with a member or member organization in a supervisory capacity
for a period of two weeks.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Davis of a censure;
a fine of $10,000; and a suspension from membership, allied
membership, approved person status and employment or association
with a member or member organization in a supervisory capacity
for a period of one week.
In view of the above findings, the Hearing Panel, by unanimous
vote, imposed the penalty consented to by Mr. Webster of a
censure; a fine of $5,000; and a suspension from membership,
allied membership, approved person status and employment or
association with a member or member organization in a supervisorycapacity for a period of one week.
For the Hearing Panel
Milton M. Stein
Hearing Officer
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