NASD Regulatory & Compliance ALERT National Association of Securities Dealers, Inc. Volume 11, Number 2 June 1997

NASD Spring Securities Conference Calls REGULATION, For Building Investor Confidence INC. NASD Regulation, Inc. (NASD remarks, Robinson echoed this year’s 1997 SPRING RegulationSM) held its annual Spring theme by saying that the goal of the con- SECURITIES Securities Conference from May 21Ð23, ference was to help compliance person- 1997, in Washington, D.C. This year’s nel help their firms. Following his CONFERENCE theme was “Building Investor welcome, NASD Regulation President Confidence Through Member Mary Schapiro addressed the audience. Compliance.” The conference provided BUILDING INVESTOR securities professionals with practical, Schapiro addressed several initiatives CONFIDENCE up-to-date information to comply with that occurred during her first year as THROUGH MEMBER industry rules and regulations. NASD Regulation President. COMPLIANCE Specifically, Schapiro commented that The conference opened with remarks by the organization’s obligations to the Todd Robinson, Chairman, NASD public are three-fold: to ensure market Regulation, Board of Directors, and integrity through effective market sur- Chairman and Chief Executive Officer of Linsco/Private Ledger Corp. In his (Continued on page 2) SEC Approves Move To Nasdaq Quotes In 1/16s On May 28, 1997, the SEC approved a Nasdaq believes the narrower quote proposal by The Nasdaq Stock MarketSM increment will enhance market to reduce the minimum quotation incre- transparency and provide investors with ment from 1/8 of a dollar (12.5 cents) to improved opportunity for best 1/16 of a dollar (6.25 cents) for all secu- execution. The change also makes it rities listed on Nasdaq¨ whose bid price possible for Nasdaq to accommodate is $10 or above. Stocks under $10 are and reflect orders entered into Electronic already quoted in increments as small as Communication Networks (ECNs) that 1/32. The new quoting system was are priced narrower than the minimum implemented for all Nasdaq stocks on quotation increment currently allowed Monday, June 2.

(Continued on page 3) CONTENTS

1 Cover Stories Issues Firm Element Advisory Non-Member Names In Spring Securities Conference Regulatory And Firm Element Members’ Communications Calls For Building Investor Examinations Confidence Firms Need Heightened 16 Arbitration SEC Approves Move To Supervision Of Aggressive NASD Board Acts To Improve Nasdaq Quotes In 1/16s Cold-Calling And Service And Submit Task Telemarketing Activities Force Proposals To SEC 3 Regulation Supervision Of Off-Site Series 8 Or 24 Qualified Sweep Report Memorandum Salespersons 18 Violations Provides Guidance On Compliance Short Takes Smith Barney And Lehman Heightened Supervision Brothers Censured And Fined Proposed Changes Would $250,000 Each; Customers Allow Firms To Use Electronic 12 Municipal Securities Receive $5.6 Million Refund Mail NASD Regulation Appoints NASD Regulation Fines And Members Alerted To Bogus Municipal Securities Censures First Albany Treasury Securities Compliance Regulator Compliance Questions & NASD Regulation Exams 19 Corporate News Answers Focus On Yield Burning NASD Board Of Governors NASD Regulation Reminds Elects Frank G. Zarb Chairman Members Of Margin 14 Advertising Requirements New Rule Applies to 19 NASD Disciplinary Actions SEC Issues No-Action Letter Telemarketing Scripts On Haircuts For Mortgage- Actions from December 1996, Backed Securities “Ask The Analyst” and January, February, and Continuing Education Council NASD Permits Broader Use Of March 1997

Spring Securities Conference, from page 1 veillance, to ensure that members are in She mentioned that, during NASD Zarb commented on issues from the per- full compliance with rules and regula- Regulation’s examination process, some spective of both a regulator and an tions through a thorough examination of areas that will receive special emphasis industry professional. His comments their business practices and dealings include sales practice activity in centered around the word “trust.” Zarb with customers, and to equip investors SmallCapSM securities, suitability said that trust drives the markets, and with the means to make informed deci- requirements for speculative and low- that what’s good for the investor sions. priced securities, telemarketing activi- ultimately results in being good for the ties, and compliance with continuing industry. In speaking about the redesign of the education rules. Central Registration Depository He noted that the quality of the markets (CRDSM) system, Schapiro said that, by Schapiro then introduced Frank Zarb, has grown and that the percentage of year-end, the system will be enhanced NASD Chairman, CEO, and President. “bad guys” is small. However, he further to give the public even easier Zarb joined the NASD after a notable emphasized that there can be no relax- access to disclosure information. Instead career in both the private and public sec- ation in getting these individuals out of of waiting for a written response, the tors, including senior leadership the industry. Regarding the question of public will have the information avail- positions with several major financial de-regulation, Zarb stressed that any able to them electronically through the services firms. changes should be founded on investor NASD Regulation Web site. protection.

National Association of Securities Dealers, Inc. June 1997

2 The morning session continued with Finance and Hazardous Materials. panel of knowledgeable and two panel discussions. NASD Congressman Oxley, who is a proponent experienced industry leaders moderated Regulation Executive Vice President of common sense stock pricing and the by senior NASD Regulation staff. and Chief Operating Officer, Elisse switch from fractions to decimals, Walter, led the first panel on the inner praised the NASD for its proposed The panelists provided straightforward workings of the NASD enforcement and move to quote prices in 1/16s rather information and practical examples on disciplinary process, which included a than 1/8s. such topics as advertising regulation, discussion of the role of the new hearing bank broker/dealer regulatory issues, officers. Oxley noted that the U.S. markets are handling customer complaints, indepen- the only significant world markets that dent contractors and financial planners, The second panel was “Capital still trade in fractions. He believes and MSRB Rules. Formation on the Internet: Challenges & strongly that decimal pricing will result Pitfalls.” It included a lively, multi- in savings for the individual investor. To The next national conference will be the media slide presentation on the quell industry concerns, Oxley pointed 1997 Fall Securities Conference from Securities and Exchange Commission’s out that proposed legislation calls for November 5-7 in Phoenix, AZ. For (SEC) enforcement efforts by John R. allowing the SEC to decide how to more information on the conference or Stark, Special Counsel at the SEC for implement the change and the time other future programs, please visit Internet Projects. frame to accomplish it. NASD Regulation’s Web site (www.nasdr.com), or contact Susan The keynote speaker at luncheon was Following the general session, the con- Fallon, Manager, NASD Public the Honorable Michael G. Oxley, ference offered a total of 18 workshops Relations & Conferences, at United States House of Representatives, addressing key issues in the area of (202) 728-6900. ❐ Chairman of the Subcommittee on compliance. Each workshop featured a

SEC Approves Quotes in 1/16s, from page 1 for Nasdaq securities quoted at or and price discovery by allowing orders Questions concerning this action may be above $10. and quotes in smaller increments to be directed to Cameron Brown, NASD displayed publicly to the market,” said Media Relations, at (202) 728-8379, or “We’re delighted the SEC moved Frank G. Zarb, Chairman, CEO and Reid Walker, NASD Media Relations, quickly to approve our proposal to quote President of the NASD, parent corpora- at (202) 728-8243. ❐ in 1/16. This will enhance transparency tion of The Nasdaq Stock Market.

Regulation Sweep Report Memorandum Provides Guidance On Heightened Supervision

As a follow-up to the Joint Regulatory and describes actions that could consti- findings and recommendations Sales Practice Sweep (Sweep)1, NASD tute heightened supervision. published in the Sweep report. (See Regulation and the New York Stock related story on the Sweep in April Exchange (NYSE) issued a joint memo- Sweep Report 1996, NASD Regulatory & Compliance randum. The memorandum discusses NASD Notice to Members 97-19 Alert.) A significant Sweep report firms’ responsibilities to supervise contains the joint NASD Regulation/ recommendation concerns firms that closely certain registered representatives NYSE memorandum, describing the hire registered representatives with a

NASD Regulatory & Compliance Alert June 1997

3 history of repeated customer complaints, Registered Representative Activities: Customer Account Activity disciplinary actions, or arbitrations. It is If the registered representative’s Monitoring: A firm should consider recommended that firms develop and misconduct involved a particular securi- generating special exception reports to implement special supervisory ties product, customer type, or activity, detect unusual trading activity in a cus- procedures for these registered represen- the firm should tailor supervision to tomer account or reviewing a problem tatives. limit the risk of similar recurring registered representative’s customer behavior. contacts. The memorandum also provides guid- ance to firms that decide to hire a regis- Training: A firm should consider estab- Suggestions For Standard tered representative with a history of lishing a training plan, as part of its Firm Supervisory Procedures customer complaints, disciplinary Element Continuing Education In addition, the memorandum reminds actions, or arbitrations. In particular, the Program, that specifically addresses the firms to pay particularly close attention memorandum discusses a registered- needs of registered representatives with to compliance by registered representa- representative profile that should war- a history of customer complaints, disci- tives under special supervision with the rant heightened supervision and offers plinary actions, or arbitrations about a standard supervisory procedures examples of specifically designed super- particular securities product or activity. concerning the following: visory procedures to use for that Firms also should track customer com- scrutiny. plaints and provide appropriate training ¥ Trade Corrections, Extensions, and programs to avoid future complaints. Liquidations The following is a summary of the memorandum’s guidance on special New Account Procedures: A firm ¥ Communications with the Public supervision. should consider exercising closer than ¥ Outgoing Correspondence, normal supervisory control over open- Advertising, and Sales Literature Disciplinary History ing new customer accounts or submit- ¥ Incoming Correspondence and The principal means of identifying reg- ting revised customer account Customer Complaints istered representatives for special super- information forms. Also, firms should vision is a review of their CRD report. be cautious in allowing individuals who Members are encouraged to review Heightened supervision may be appro- warrant special supervision to handle NASD Notice to Members 97-19 and priate if Forms U-4 and U-5 disclose a certain types of accounts (i.e., give careful consideration to its findings, history of customer complaints, discipli- discretionary accounts; margin, futures, recommendations, and suggestions. nary actions, or arbitrations. This also and options accounts; employee, Questions may be directed to Mary applies to registered representatives who employee-related, and retirement Revell, Assistant General Counsel, develop such history while employed by accounts; accounts that contain low- NASD Regulation, at (202) 728-8203, the firm. priced, speculative securities; other or to Daniel M. Sibears, Vice President, accounts engaged in high-risk strategies; Member Regulation, NASD Regulation, Development And Implementation or any accounts where any of the con- at (202) 728-6911. Copies of the Sweep Of Special Supervision duct leading to the previous regulatory report may be obtained from Reid Once a registered representative is iden- problems might be an issue). Walker, NASD Media Relations, at tified for special supervision, a firm (202) 728-8243. ❐ should develop and implement Specific Transactions: A firm should procedures that address the sales prac- consider establishing special review pro- tice concerns raised by the individual’s cedures for the types of transactions that 1 history, as well as the nature of the led to a registered representative’s prior The Joint Regulatory Sales Practice firm’s business and its size and problems. The memorandum cites Sweep was an initiative by the NASD, the NYSE, the SEC, and structure. The firm should designate an examples of transactions that may pose representatives of the North American appropriate supervisor to oversee the potential harm, such as orders in discre- Securities Administrators Association, registered representative’s activities. It tionary accounts; orders in low-priced, Inc. (NASAA), to review sales practice is important for firms to document, speculative securities; orders of an activities of selected registered repre- monitor, and enforce the terms of each unusual size or frequency considering sentatives and the hiring, retention, and special supervisory arrangement. the particular account’s trading pattern; supervisory practices of the firms deep out-of-the-money and uncovered employing them. In devising tailored supervisory options orders; or mutual fund switches. programs, some typical factors to con- sider are as follows:

National Association of Securities Dealers, Inc. June 1997

4 Proposed Changes Would Allow Firms To Use Electronic Mail

NASD Regulation recently filed a pro- designed to provide reasonable super- governing correspondence; document posed rule change with the SEC to vision of each registered representa- this education and training; and moni- revise NASD supervision rules. The tive and to demonstrate clearly tor implementation and compliance change would give firms flexibility in implementation and execution of with the procedures. developing procedures for reviewing these procedures. ¥ Retention of Correspondence: written and electronic correspondence. ¥ Procedures for Review of Broker/dealer firms must retain corre- Key areas of the proposal include: Correspondence: Every firm must spondence as prescribed by all applic- develop written procedures to able rules, including the SEC’s books ¥ Supervision of Registered review incoming and outgoing corre- and records rules. Representatives: As proposed, each spondence with the public relating to firm must establish written procedures its investment banking or securities The proposal appeared in the May 2, that require a registered principal business that are tailored to its struc- 1997, Federal Register (62 F.R. 24147). to review each registered representa- ture and the nature and size of its Questions may be directed to Mary tive’s outgoing and incoming written business and customer base. Any Revell, Assistant General Counsel, ❐ and electronic correspondence with firm that does not review all NASD Regulation, at (202) 728-8203. the public relating to the member’s correspondence prior to use must: investment banking or securities busi- regularly educate and train associated ness. The procedures must be persons about the firm’s procedures

Members Alerted To Bogus Treasury Securities

The Department of the Treasury ¥ 10-year term. Treasury plays in the original sale and (Treasury) recently informed the NASD issuance of securities. that certain foreign individuals and ¥ 6 percent annual interest rate. groups are attempting to defraud ¥ $100 million minimum purchase Members beware: There is no such broker/dealers and other entities by amount. security as a “Limited Edition” offering to sell and structure ¥ Unspecified offering amount (i.e., the Treasury security. transactions in non-existent United securities are represented as being States Treasury securities. Broker/deal- available for sale until “exhausted”). If domestic members are approached by ers have been approached to act as fidu- individuals offering such a transaction, ciaries in transactions that purchase and ¥ Initial price of 57 percent of the face they should immediately contact Mr. resell a fictitious instrument referred to value. Jim Kramer-Wilt of Treasury’s legal as “Limited Edition” U.S. Treasury ¥ Issued in physical (paper) form. staff at (304) 480-5190. If contact is securities. made at the member’s foreign affiliate, In addition, the proposal makes numer- the appropriate local law enforcement ❐ The bogus securities are represented as ous other misrepresentations about the authority should be notified. having the following features: way marketable U.S. Treasury securities may be bought or sold, and the role that

NASD Regulatory & Compliance Alert June 1997

5 Compliance Questions & Answers

The Compliance Department frequently the NASD. These procedures require deposit is required by the first-tier bro- receives inquiries from members. To member firms to enter a separate exten- ker/dealer’s clearing firm (rather than keep members informed on matters of sion request for each trade. the first-tier broker/dealer) and that common interest, the Compliance amount is on deposit at the first-tier bro- Department provides this question-and- Q. In an initial public offering, if a ker/dealer’s clearing firm in the name of answer feature through the NASD broker/dealer is short shares that are the second-tier correspondent (with no Regulatory & Compliance Alert. covered by a “green shoe,” must the benefit to the first-tier broker/dealer), firm take a haircut on the short then the deposit would receive Q. Is a fully disclosed broker/dealer position? allowable asset treatment by the second- with a $5,000 minimum net capital tier correspondent. requirement permitted to enter into A. A green shoe is a clause in an repurchase agreement transactions underwriting agreement that states the Q. If a broker/dealer guarantees an (repos) with customers on a principal issuer will authorize additional shares obligation of an individual or other basis? for distribution by the syndicate in the entity, is there a net capital charge for event of exceptional public demand. the guarantee? Is the guarantee consid- A. No. A fully disclosed broker/dealer The number of shares covered by the ered Aggregate Indebtedness (AI)? with a $5,000 minimum net capital green shoe is stated in the underwriting requirement is not permitted to enter agreement. If a broker/dealer is short A. Yes. An example of this is where into repo transactions with customers on that number of shares, or any portion of the owner of a firm personally borrows a principal basis. However, such a firm that number, its short position is money from a bank, and the member may enter into repo trades in the capac- protected by the additional issuance firm guarantees repayment should the ity of agent, because then the firm under the green shoe. Therefore, no owner default. The member’s balance would only be involved in the arrange- haircut is required on the short position. sheet treatment depends on Generally ment of the transaction. The firm would Accepted Accounting Principles be required to maintain an agreement Q. The NASD Guide to Rule (GAAP), and the firm should be referred with the customer stating that it would Interpretations states that when an to its accountant for that determination. be operating as agent in any repo trans- introducing broker/dealer (first tier) Regardless of the balance sheet actions. If the firm enters into repo reintroduces, on a fully disclosed basis, treatment, however, the amount that is trades as principal with other the accounts of another nonclearing guaranteed must be included in the com- broker/dealers and customers, its mini- broker/dealer (second tier) to its clear- putation of aggregate indebtedness and mum net capital requirement would be ing firm, and the first-tier broker/dealer included as a charge in the computation $100,000 and $250,000, respectively. requires a clearing deposit from the sec- of net capital. ond-tier correspondent, the second-tier Q. If trades are executed on the same correspondent must treat the deposit as Q. If a broker/dealer permits its debt to day, for the same customer, and have a nonallowable asset. May a second-tier debt-equity ratio to exceed 70 percent the same reason for requiring extension, correspondent obtain allowable asset for more than 90 days, must the may a member firm enter one Reg. T treatment for a deposit required by the broker/dealer cease conducting a secu- extension request for the multiple first-tier broker/dealer by maintaining rities business? trades? the deposit at the first-tier broker/dealer’s clearing firm? A. Yes. The member firm should be A. No. Self-regulatory organizations, advised that continuing to conduct a such as the NASD, grant extensions A. No. If a deposit is required by the securities business while the debt to under authority delegated to them by the first-tier broker/dealer; is maintained for debt-equity ratio is above 70 percent Board of Governors of the Federal the benefit of the first-tier broker/dealer; would be a violation of the Net Capital Reserve Board pursuant to Section or, is in the name of the first-tier broker/ Rule. The firm should cease conducting 220.8(d) of Regulation T (Reg T) of the dealer, the deposit still must be treated a securities business until the ratio is Securities Exchange Act of 1934. The as a nonallowable asset in the net capital brought down to 70 percent or lower. NASD developed an automated computation by the second-tier firm The debt to debt-equity ratio is defined Extension Request System to handle despite the fact that it is being in SEC Rule 15c3-1(d). such requests and established maintained at the first-tier broker/ procedures for submitting requests to dealer’s clearing firm. However, if a

National Association of Securities Dealers, Inc. June 1997

6 Q. Should monthly investments into a investment of $1,000 or less into an A. Yes. Generally it is permissible for mutual fund by a member firm be established mutual fund account for the a subordinated loan to have a variable counted in determining whether the firm firm may exclude these transactions as interest rate. However, if the loan agree- has exceeded the “ten transactions in dealer activities. Therefore, these trans- ment calls for subordination of accrued any one calendar year for its own actions do not count toward the ten- interest (which can be done by using the investment account” specified in the transaction limit. This interpretation was relevant optional paragraphs of minimum net capital requirements for published in NASD Notice to Members standardized forms SL-1, SL-3, SL-5, dealers (SEC Rule 15c3-1(a)(2)(iii))? 93-46. and SL-6), the interest rate cannot be variable. ❐ A. The SEC staff has advised that a Q. May a subordinated loan have a firm making a single monthly variable interest rate?

NASD Regulation Reminds Members Of Margin Requirements NASD Regulation reminds members requires a charge to capital equal to in full and the investor has held the that they are not permitted to extend the amount of the maintenance call fund for 30 days, the fund will be con- credit beyond what is allowed by Reg T, once the call has been outstanding sidered to have loan value. That is, the NASD Rule 2520 and/or SEC Rule more than five business days. For value of the mutual fund shares can 11(d)(1). Member firms are cautioned, whatever reason, if a broker/dealer be used as collateral in purchasing as follows: does not issue a maintenance call, the additional securities which ARE mar- firm is still required to take the charge gin eligible. ¥ Margin maintenance calls must be as if the call had been issued. Questions may be directed to Samuel issued as required by NASD Rule ¥ Open-end mutual funds can NEVER Luque, Jr., Associate Director, 2520, and the broker/dealer must, in be purchased on margin. Section Compliance Department, at (202) 728- computing its net capital, take the 11(d)(1) of the Securities Exchange 8472, or Susan DeMando, District appropriate deduction from capital, if Act of 1934 (the Exchange Act) pro- Coordinator, Compliance Department at ❐ the customer does not meet the mar- hibits purchasing open-end mutual (202) 728-8411. gin maintenance call and the fund shares on margin. Once an broker/dealer does not choose to sell investor has purchased an open-end out the customer. SEC Rule 15c3-1 mutual fund, which has been paid for

SEC Issues No-Action Letter On Haircuts For Mortgage-Backed Securities

In December 1996, the SEC Division of The alternative method uses the gage-backed security trading at $108 Market Regulation issued a no-action relationship between a security’s market with a par value of $100 generally has a letter that allows broker/dealers to use price and its par value to determine the duration equal to a government security the alternative method in the Net Capital maturity of the security for computing with nine to twelve months remaining Rule (SEC Rule 15c3-1) when calculat- net capital net haircuts under SEC Rule maturity.” ing proprietary haircut charges on cer- 15c3-1(c)(2)(vi)(A). It is based on the tain pass-through mortgage-backed theory that “ a mortgage-backed security Members should note that, if they securities sponsored by U.S. with a high coupon rate will experience choose to use this alternative method, government agencies. The letter also a significant amount of prepayment of they must apply the alternative method addresses charges for these securities principal and, consequently, will tend to to all pass-through mortgage-backed under various hedging scenarios. have a short duration.” As an example, securities covered under the no-action the letter cites that “a thirty-year mort- letter. These include any security spon-

NASD Regulatory & Compliance Alert June 1997

7 sored by a U.S. government agency that five- and seven-year mortgage loans securities in their proprietary and other represents a pro rata interest or partici- with balloon payments at maturity. The accounts should read the SEC’s letter in pation in the principal and interest cash letter excludes multifamily, adjustable- its entirety. Requests for copies of the flows generated by a pool of mortgage rate, commercial, and mobile-home letter may be directed to Samuel L. loans of which at least 95 percent of the mortgage loans. Luque, Jr., Associate Director, aggregate principal is composed of Compliance Department at (202) 728- fixed-rate residential mortgage loans on Members intending to apply these hair- 8472 or Robert Broughton, District one-to-four family homes, including cuts to pass-through mortgage-backed Coordinator, at (202) 728-8361. ❐

Continuing Education Council Issues Firm Element Advisory

The Securities Industry/Regulatory Each firm was encouraged to review the contracts; recent amendments to options Council (Council) on Continuing list vis a vis: (1) the financial products position and exercise limits; new SEC Education identified pertinent regulation and services it offers to investors, and order execution rules; speculative secu- and sales practice issues for inclusion in (2) its performance in the Regulatory rities - best practices; supervisory oblig- Firm Element training plans. A list of Element. A Firm has discretion in decid- ations related to the use of electronic these issues was distributed in March by ing the relevancy of the topics to its media (e.g. the Internet); and reporting the Council in its first annual Firm lines of business and training needs, but obligations under MSRB Rules G-37 Element Advisory (Advisory). also have the obligation to include top- and G-38. ics not listed in the Advisory but identi- Topics listed in the Advisory were fied by its Firm Element Needs The complete Firm Element Advisory chosen after a review of the Analysis. was published in NASD Notice to performance of registered persons in the Members 97-9, in March 1997. Regulatory Element computer-based The Advisory list included the suggested Questions concerning the Advisory may training, and regulatory advisories training topics along with a series of rel- be directed to John Linnehan, Member issued by industry SROs during the pre- evant training points and references to Regulation, at (301) 208-2932. ❐ vious 18 months. The Council stressed applicable SRO rules, regulations and that it is not mandatory for firms to interpretations. Some of the training top- address each and every topic in their ics mentioned in the Advisory were: Firm Element training. telemarketing; mutual funds; variable

Regulatory And Firm Element Examinations

The Securities Industry Continuing NASD Sanction Guidelines when con- within the time frame of the rule Education Program has been in effect sidering formal disciplinary proceedings continue to operate in a registered for nearly two full years. Members are for firms that have failed to perform a capacity. reminded that all routine cycle examina- needs analysis and develop a written tions by NASD Regulation include training plan as required under the Questions concerning the conduct of reviews of the firm’s Regulatory and Continuing Education rules. Similarly, these examinations may be directed to Firm Element compliance. disciplinary action will be considered your local NASD Regulation District and the Sanction Guidelines applied Office. ❐ Where non-compliance is discovered, where inactive persons who have failed NASD Regulation will follow the to undergo Regulatory Element training

National Association of Securities Dealers, Inc. June 1997

8 NASD Benefits By Association® Programs In today’s competitive environment, every advantage counts. So take advantage of the benefits that your NASD membership provides. Tell us what other products and services you’d like to see us offer. Call the NASD Member Benefits Department at (301) 590-6525.

NASD Group Fidelity Bond Program Guaranteed to meet the NASD fidelity bond requirement with more coverage than what’s offered by the standard bond contract. Call (800) 978-NASD (6273) or (202) 296-9640.

The Securities Dealers Errors and Omissions Insurance Program Safeguard your business against the repercussions of an error or oversight with the E&O program that’s becoming an industry “must have.” Call (800) 978-NASD (6273) or (202) 296-9640.

Investment Advisor Programs for Surety, Fidelity, and ERISA Bonds Protect your firm and your clients’ assets from losses resulting from fraud and noncompliance with governmental statutes. Call (800) 978-NASD (6273) or (202) 296-9640.

NASD Member Firm Insurance Program Attract and retain the best employees in the industry by providing competitive employee benefits. Call (800) 321-1998 or (202) 457-6820.

NASD Insurance Program For Registered Representatives Apply for supplemental or stand-alone medical, life, disability, or AD&D for you and your family. Call (800) 424-9883 or (202) 457-6820.

NASD Air Express Program Check out Airborne Express’ Flight-ReadySM shipping—convenient, prepaid, and no weight limits apply—new for members. Call (800) MEMBERS (636-2377).

NASD Mail Insurance Program Obtain greater than standard mail insurance coverage and features. Call (800) 978-NASD (6273) or (202) 296-9640.

NASD State Surety Bond Program Build your clients’ trust while complying with state surety bond requirements. Call (800) 978-NASD (6273) or (202) 296-9640.

NASD Telecommunications Program Offer your clients and employees the latest MCI telecommunications technology. Call the NASD Member Benefits Department (301) 590-6525. Firms Need Heightened Supervision Of Aggressive Cold-Calling and Telemarketing Activities

Recent NASD Regulation examinations vention by senior management or com- unwarranted claims during telephone or detected evidence of serious sales-prac- pliance officials. Others do not incorpo- electronic solicitations. Firms should tice violations by firms using aggressive rate into their written supervisory initiate internal inquiries and take appro- cold calling and telemarketing procedures any reference to the priate action when customer contact dis- strategies. Typical aggressive strategies firm’s obligation to supervise cancella- closes evidence of unauthorized include widespread use of high- tions/sellouts. In more egregious situa- transactions or other wrongdoing. pressure, cold-calling techniques in an tions, broker/dealer managers seem to attempt to get prospects across the coun- tolerate activity that results in unautho- NASD Regulation strongly urges all try to open securities accounts and rized transactions that are subsequently firms to incorporate heightened supervi- place orders to purchase securities rec- sold out when payment is not received. sion of cold-calling and telemarketing ommended by the firm. activities into their written supervisory Failure to supervise cancellation/sellouts procedures. To comply with Rule 3010, Often the initially recommended secu- in an environment of aggressive sales written supervisory procedures must rity is a widely followed, well-known, practices may result in significant disci- explain in sufficient detail the supervi- large-cap security with which the plinary sanctions for failure to prevent sory system established to prevent prospect is familiar. However, once and detect unauthorized transactions, and/or detect violations by associated an account is established, recommenda- among other potential violations. A persons. For example, firms must tions may switch to low-priced, high- firm’s failure to address this aspect of its explain the methods they use to fulfill risk securities. Firms that use such business in its written supervisory pro- their supervisory responsibilities, and strategies to open customer accounts cedures, in and of itself, could be they must note the persons assigned to face a number of issues including the viewed as a violation of NASD Rule enforce those responsibilities. need for full disclosure, the question of 3010. Moreover, the supervisory system must fair dealings, and the requirement for be fully implemented. effective supervision of these activities. Another serious violation of Rule 3010 would be a failure by any individual Member firms, particularly those firms NASD Regulation urges senior manage- who has the authority, responsibility, using aggressive telemarketing ment and compliance officials at such and obligation for the business conduct strategies, should review NASD Notice firms to take special measures to fulfill of a member broker/dealer to investigate to Members 96-90 (Clarification Of their statutory obligations under NASD fully the circumstances surrounding Member’s Suitability Responsibilities Rules and other applicable securities repetitive instances of cancellations/sell- With Emphasis On Member Activities laws. For example, firms should be alert outs. To supervise this type of activity, In Speculative and Low-Priced to large numbers of cancellations/sell- adequate written supervisory procedures Securities), 97-1 (Telemarketing outs. Evidence gathered during recent need to be developed, implemented, and Amendments), and 97-19 (Heightened examinations indicate that many enforced. For example, these procedures Supervision Responsibilities). cancellations/sellouts resulting from generally call for contacting customers customers’ failures to pay for with cancellations/sellouts to determine Questions regarding this matter may be transactions actually represent unautho- the cause of the cancellation/sellout and directed to your local NASD Regulation rized transactions. whether the customer authorized the District Office. ❐ transaction. Some firms erroneously view cancella- tion/sellouts as an operational matter Contacting customers also may disclose that does not require oversight and inter- that salespersons made exaggerated and

National Association of Securities Dealers, Inc. June 1997

10 Supervision Of Off-Site Series 8 Or 24 Qualified Salespersons

Recent examinations conducted by Conduct Rule 3010 requires that each OSJ inspections conducted by member NASD Regulation have identified registered person (including registered firms that maintain a network of numer- instances of serious deficiencies in the principals) must be assigned to another ous small OSJ offices. Members are way that certain firms supervise single- appropriately registered person respon- reminded that audit procedures should person or small branch offices that have sible for supervising that person’s activ- be well-defined and should address sub- been designated as Offices of ities. From a practical standpoint, this stantive issues, including an in-depth Supervisory Jurisdiction (OSJs). Many means that one or more persons identi- review of problematic customer times, the largest producer in such OSJ fied by the firm must take direct respon- accounts that have exceeded certain offices are Series 8 or 24 qualified per- sibility for the supervision of all established parameters in term of risk sons who have been assigned by the bro- producing salespersons, whether they and/or activity. Also, all operational ker/dealer to supervise all transactions are Series 8 or 24 qualified or not. This bank accounts maintained in audited emanating from that office, including supervision would include, but not be branches should be reviewed to guard transactions placed by the branch man- limited to, evidencing the review of against the possible receipt and misuse ager for his or her own customers. transactions on both a daily as well as a of investor funds and other improper periodic basis. activities. Member firms that maintain a large number of geographically dispersed, It is strongly recommended that firms Additional guidance on these and other small OSJ branches must establish a with numerous small OSJ offices review supervisory issues can be obtained from system that provides for supervision, on their written supervisory procedures to the Exchange Act Release No. 34- both a daily and periodic basis, of secu- make sure they establish a system that 38174, January 15, 1997, in the matter rities transactions effected by all regis- adequately addresses all salespersons, of Royal Alliance Associates, Inc. tered persons, including transactions by including Series 8 or 24 qualified registered principals. Some firms have persons. Series 8 or 24 qualified persons Please contact your local NASD even gone so far as to designate branch are no more capable to supervise them- Regulation District Office in the event offices as OSJ offices, even though they selves than a Series 7 qualified you have any questions concerning are occupied by a single registered prin- registered representative. these matters. ❐ cipal with no one else to supervise. There is no such thing as an OSJ that Recent examinations have also shown can supervise itself. weaknesses in the quality of internal

Compliance Short Takes

NASD Publishes DPP Directory registering limited partnership interests. NASD Manual, on behalf of the mem- In May, the NASD published a direct Also, they will identify limited partner- ber. Any changes to the executive repre- participation program (DPP or limited ship interests for customer account sentative must be submitted in writing to partnership) directory in anticipation of transfers, and members will use them the NASD Corporate Secretary. DPP securities being quoted on the OTC when complying with NASD trade- Members may use the form in NASD Bulletin Board¨ and trade reporting of reporting requirements. Notice to Members 97-20. transaction beginning on May 15, 1997. The DPP Directory was published in Members Reminded To Report NASD Regulation Proposes NASD Notice to Members 97-23. The Executive Representative Changes Change To Rule 8210 directory contains a list of DPPs and NASD By-Laws require members to In April, NASD Regulation submitted a their NASD-assigned symbols. The appoint one “executive representative” proposed change to Rule 8210, Reports assigned symbols do not have an alpha- that will represent, vote, and act in all and Inspection of Books for Purpose of betical resemblance to the name of the NASD affairs and receive NASD mail- Investigating Complaints. The amend- partnership. The symbols will be used ings, including NASD Notices to ment would require members to provide by broker/dealers, transfer agents, and Members, NASD Regulatory & regulatory information in electronic general partners when transferring and Compliance Alert, and updates to the form, provided the information is kept

NASD Regulatory & Compliance Alert June 1997

11 in electronic form by the member. Also, use electronic storage media to maintain this change, secondary market transac- it would allow NASD Regulation to records required by the Rule. Members tions in restricted securities that are not establish electronic submission should review the SEC’s adopting in a depository will be required to com- programs for regularly filed information. release in its entirety. It was published ply with the Code’s operational proce- in the February 12, 1997, Federal dures. It also clarifies that securities sold SEC Adopts Final Rule Register. offshore under a Regulation S exemp- For Electronic Storage tion are considered subject to the Effective April 14, 1997, the SEC SEC Approves UPC Change requirements of the Code when those amended Rule 17a-4, its books and The SEC recently approved an amend- securities are traded in the U.S. after the records preservation rule to allow bro- ment expanding the scope of the NASD restricted period expires. ❐ ker/dealers, in certain circumstances, to Uniform Practice Code. As a result of

Municipal Securities NASD Regulation Appoints Municipal Securities Compliance Regulator

NASD Regulation recently appointed national policy. While encompassing the NASD Regulation and the MSRB work Malcolm P. Northam, a veteran regula- entire fixed income area, Mac’s role will cooperatively to create a successful tor and analyst, as the organization’s be clearly focused on the regulation of structure for regulating the municipal first Director of Fixed Income Securities all aspects of municipal securities activi- securities activities of broker/dealer Regulation. Northam joined the ties by broker/dealer firms,” Walter said. firms. The MSRB writes and interprets Member Regulation Department on municipal securities rules and, as the May 5. “Given the breadth and scope of the industry’s sole self-regulator in this NASD Regulation examination policy area, NASD Regulation examines for, With more than 25 years of experience and member education responsibilities, and enforces, compliance with them. as a regulator and financial services con- it was absolutely essential that we posi- sultant, Northam has a broad range of tion a single person at the center of these To support NASD Regulation’s preven- experience in the private sector and issues,” Walter added. “Mac will also tive compliance program, Northam will spent more than two decades with the play a key role in NASD Regulation’s draw on his extensive experience con- Comptroller of the Currency as Deputy expanded examination program to ducting training sessions for bankers, Director of the Investment Services ensure that the nation’s broker/dealers regulators, auditors, and compliance Division and as a bank examiner. comply with our new rules on govern- professionals to develop and conduct ment securities sales practice.” educational sessions on municipal, gov- “We are delighted to have someone of ernment, and derivative securities issues Mac’s caliber and experience on board,” In this new position, Northam will be for broker/dealer firms. said NASD Regulation Chief Operating NASD Regulation’s primary liaison on Officer Elisse B. Walter. “Compliance municipal securities matters with the Also, he will work closely with NASD in the municipal securities sector is one Municipal Securities Rulemaking Board Regulation’s District Offices to provide of NASD Regulation’s top priorities, (MSRB), the SEC, and an array of training and other instruction on munici- and Mac will help us maintain and industry and investor groups. pal and government securities examina- improve a vigorous and uniform tion practices. ❐

National Association of Securities Dealers, Inc. June 1997

12 NASD Regulation Exams Focus On Yield Burning

Due to concerns over members’ Treasury securities than that which they $1,000,000 of debt (12-year bonds) at involvement in “yield-burning” are required to pay to holders of the new 10 percent with interest payable annu- practices, NASD Regulation examiners tax exempt debt (an arbitrage situation). ally, and a 10-year call provision. are focusing on this area during on-site This is because it considers the munici- examinations of firms that act as under- palities’ ability to issue tax-free debt a On 1/1/96, interest rates decline so that writers or escrow agents in advance form of subsidy or a privilege, and they the municipality can now borrow at 5 refunding municipal issues. Generally, are not permitted to profit from this spe- percent, but it is locked into the original examiners are concentrating their cial provision. 10 percent interest rate for at least 10 review on members’ pricing practices, years from issue date (one more year recordkeeping, and markup policies For these situations, the dealer may from 1/1/96) due to the call feature. when Treasury securities are used in request Treasury to issue special securi- escrowed bond transactions. ties. These special, lower-yielding debt The municipality issues $1,047,000 of securities, called State and Local new debt at 5 percent, and escrows the In addition, special “sweep” investiga- Government Series (SLGS) bonds, or proceeds. These proceeds are invested tions are being conducted by the New “Slugs,” are specifically designed for in Treasury bonds paying 5.05 percent Orleans District Office and the these municipalities’ escrow investment and maturing on 1/1/97. (This is referred Enforcement Department. These investi- needs. SLGS are sold to match exactly to as an advance refunding of the 1/87 gations include a more intense review of the yield of the new municipal issue. bonds). Within a year, the escrow firms that are most actively involved in However, it is estimated that SLGS are account will earn about $53,000 in inter- underwriting advance refunding issues. used in less than 50 percent of these est, leaving $1,100,000 to pay the old escrow arrangements. There is currently bonds, with the 1/1/97 interest payment What Is Yield Burning? no requirement to invest escrow funds of $100,000. Yield burning is a term that describes in SLGS. the process of pricing a Treasury bond The municipality now only pays 5 per- in order to generate an artificially lower Yield burning occurs when, in an effort cent interest on the new tax exempt yield. Yield burning results in munici- to satisfy the IRS arbitrage limitations, bonds. The escrow account investments palities paying inflated prices for gov- the dealer sells treasury securities to are designed to defease, or retire the old ernment securities used in refinancing advance refunding escrow accounts at debt according to a schedule. The net more expensive older debt. Sometimes, prices that are above market, “burning” effect of the reissuance of the new debt the older debt cannot immediately be the yield down to a level at which there in this example is that, by 1/1/97, the retired. This is because, due to restric- is no arbitrage. In some cases, the issuer will have effectively lowered its tive provisions, certain municipal bonds municipality may be given assurances interest cost to 5 percent, and in the cannot be replaced immediately and by the Treasury bond dealer that the mean time, it earns 5 basis points of may only be called, or refunded, at a bonds were sold at market prices. arbitrage on the escrow account spread. later date. In these cases, municipalities sell new debt and invest the escrowed Recently the IRS has pressured issuers If an issuer earns the restricted arbitrage proceeds of that debt in U.S. Treasury to pay penalties on some advance profits, the entire bond issue can lose its securities while waiting to retire the refunding issues because there was an tax exempt status. In a yield-burning sit- older debt legally. arbitrage spread when the excess uation, to ensure that the offering and markups were factored out. In some escrow investments meet the arbitrage Special escrow accounts comprised of cases, issuers have taken the position restrictions, the bond dealer may sell the Treasury securities and other that they relied on the bond dealers to Treasury bonds to the escrow account at government bonds are created that give obtain a fair market price, and that they a higher than market price, “burning” state and local governments the ability should not be penalized by the IRS, as the yield on the escrow investments to wait until their bonds can be called they were not aware that the prices of from 5.05 percent to 5 percent. Hence and then replace the old debt with the the bonds were above the then-current the municipality is in apparent compli- escrow fund. market price. ance with IRS arbitrage restrictions. By 1/1/97, the municipality will have effec- Federal law prohibits municipalities Yield Burning Example tively lowered its interest cost to 5 per- from earning more interest on the On 1/1/87, a municipality issues cent.

NASD Regulatory & Compliance Alert June 1997

13 Helpful Documentation In The use of SLGS instead of open market examinations. Questions concerning this Underwriting Files/Use Of SLGS Treasury securities can limit the possi- activity may be directed to your local Advance refunding underwriting files bility of a yield-burning situation. District Office. ❐ should contain evidence that the dealer obtained three reliable quotes for Members should note that reviews for Treasury securities prior to their sale to yield-burning activity will remain an the advance escrow account. ongoing focus of NASD Regulation

Advertising New Rule Applies To Telemarketing Scripts

In December 1996, the NASD adopted ¥ That the purpose of the call is to Similarly, telemarketing scripts Conduct Rule 2211 to further protect solicit interest in a security. are exempt from the disclosure require- customers from improper telephone ments when used by unregistered sales solicitations regarding securities. The To comply, these disclosures should assistants, at the direction of a registered rule imposes time limitations and disclo- appear at the beginning or in the intro- representative, to maintain and service sures for brokers/dealers who use tele- ductory portion of the script and prior to certain existing accounts. Such accounts marketing (see “Tougher NASD any detailed discussion of the security must be both active and under the con- Telemarketing Rules Take Effect” in the being offered. trol of the registered representative who March 1997, NASD Regulatory & is directing the calls to be made. Of Compliance Alert). The new rule applies The address information must be suffi- course, the unregistered person may not to both extemporaneous telemarketing ciently specific that the customer would solicit the sale of securities in any fash- efforts and situations where callers use a be able to contact the caller. Members ion during the call. script. may use either the telephone number or the exact street address. Location spe- Also, the disclosure requirements may Since the adoption of this standard, cific language such as, “I’m calling from be waived from a script when a members have raised several questions ABC Brokerage at the corner of Main registered representative directs a regis- with respect to telemarketing scripts. and Columbus Streets downtown,” is tered sales assistant to call existing Questions have generally fallen into also acceptable. clients who have active accounts under three categories: 1) what must be the control of the directing representa- disclosed, 2) where the disclosures The caller must state that the product tive for the purpose of soliciting sales. should appear, and 3) when the rule being offered is a security or that the applies. purpose of the call is to discuss securi- The NASD reminds its members that ties. This disclosure helps prevent con- telemarketing scripts are sales literature Prompt, Clear, And fusion as to the nature of the product or and must also meet the approval, Conspicuous Identification service being offered. record keeping, filing, and content Scripts must provide prompt, clear and requirements of Conduct Rule 2210. conspicuous identification by the caller Exemptions May Apply Members with questions regarding tele- of the following information: The disclosure requirements of Rule marketing scripts are invited to call the 2211 do not apply to a script used by Advertising Regulation Department at ❐ ¥ Their identity, a registered representative to call exist- (202) 728-8330. ing clients who have active accounts ¥ The NASD member firm name, under his or her control to solicit more ¥ The address or phone number of the sales of the same security or of a differ- branch office or OSJ in which the ent security. caller may be contacted, and

National Association of Securities Dealers, Inc. June 1997

14 “ASK THE ANALYST”

“Ask the Analyst” ner” advertisement to hyperlink to our However, if the banner advertisement provides member firms a homepage. Can we simply include our includes language or graphics which forum to pose questions to the name in the banner advertisement relate to the desirability of owning a NASD Regulation’s without further disclosure? fund or funds, additional disclosure Advertising/Investment Companies may be required. For example, a state- Regulation Department on a variety of A. Yes. Typically, a banner ment such as “ABC Funds - topics. Please note that we cannot advertisement consists of a single word Outstanding Performance and Expert guarantee all questions will be or phrase, often graphically depicted as Money Management” would require a answered in this publication. However, a button, which directly links the prospectus offer. In addition, NASD we will respond to all questions we Internet user to a specific homepage. Conduct Rules would require that the receive either here or by contacting An Internet banner advertisement “Outstanding Performance” claim be you directly. If you have any questions functions much like an envelope in a both true and substantiated in the or comments, please contact the paper communication. In the case of a homepage itself in order to provide the department at (202) 728-8330. banner advertisement that does no reader with a sound basis for evaluat- more than disclose a member firm ing the facts regarding the ABC Funds. Electronic Communications name and enable the user to link to the The NASD Conduct Rules would also Q. What is the NASD’s position with member firm’s homepage, there is no prohibit the use of language or graph- respect to language such as “you can need to include additional disclosure in ics which were promissory of the suc- trade on-line” or “you get direct the communication. However, if the cess, or exaggerated the past access to the markets from your advertisement offers specific products performance, of a mutual fund (e.g., a home”? or services, additional disclosure may line graph with an unwavering, upward be required to comply with applicable trajectory) in a banner advertisement. A. We are concerned about commu- standards. nications that imply an investor can Mutual Funds trade securities without using a broker. Electronic Communications Q. With respect to seminar presenta- Investors cannot directly access the And Mutual Funds tions by mutual fund wholesalers, does markets or execute trades. The Internet Q. Our firm would like to advertise the sales material used (i.e., story or other electronic means enable a cus- using an Internet banner boards, scripts, handouts, etc.) need to tomer to place an order electronically advertisement that would hyper-link to be approved by a principal of the for execution by a member firm. our mutual fund Web site. Must we NASD member firm and filed with the Language describing electronic trading include a prospectus offer or other dis- Advertising Regulation Department? must accurately reflect how the trans- closure in the banner advertisement actions are handled. itself? A. Yes. If the wholesaler presents the seminar to the general public, then the Some communications improperly cre- A. In this case the disclosures sales material must be approved ate the impression that every investor depend on the content of the banner internally by a registered principal and can trade for less electronically. advertisement. For instance, if the filed with the Advertising Regulation Members must disclose any advertisement contains only a mutual Department within 10 days of first use. restrictions on a quoted discount or fund or fund family name, such as the trade cost such as trade size, security “ABC Funds,” and if the Bank Broker/Dealers type, etc. Unqualified statements about advertisement links directly to a home- Q. Why are some firms allowed to savings by trading electronically will page which contains properly have all their representatives operat- mislead unless all trades made through disclosed prospectus offering ing from “non-branch” business loca- the electronic medium receive the language, then there is no need for the tions, but any broker dealer doing stated savings. banner advertisement itself to offer a occasional business in a bank must prospectus or to include other disclo- register that location as a branch? Q. Our firm would like to advertise sure language. on the Internet using a so-called “ban- A. With few exemptions, members

NASD Regulatory & Compliance Alert June 1997

15 must register as a branch any location advertisement for securities includes hold themselves out to the public as identified by any means to the public the street address of a location, then being places where a member conducts or customers as a place where the that location must be registered, a securities business. In particular, the member conducts an investment bank- regardless of what amount of securities Notice indicates, “Any office location ing or securities business (see NASD business occurs at the location. that operates...from public areas of Conduct Rule 3010(g)(2) and Article buildings, such as bank branches, even III, Section 8 of the NASD By-Laws). The business conducted at the location when such locations are temporarily Thus, the requirement to register a may also, in certain instances, trigger staffed...would still be required to reg- location as a branch depends primarily the requirement to register as stated in ister as a branch office.” ❐ upon whether the branch is identified NASD Notice to Members 92-18, dated to the public as a place where securi- April 1992. The Notice details several ties business occurs. For example, if an location types that, by their nature,

NASD Permits Broader Use Of Non-Member Names In Members’ Communications

NASD Regulation will permit the that the relationship between the mem- to identify branch offices when only a names of non-member entities to be ber and any non-member identified in securities-related business was used in member communications with the communication be clear and not conducted at that location. Since that the public, regardless of whether such confusing. If different products are time, NASD Regulation has determined entity conducts a securities business offered by the member and non-mem- that members should have the flexibility only. NASD Regulation has determined ber, it must be easy to determine which to use non-member names in communi- to allow greater flexibility regarding the products are offered by each. Since reg- cations, consistent with Rule 2210(f), use of non-member names in member istered individuals are often identified in regardless of whether a non-securities communications with the public. communications, the rule requires that business is conducted at the location the relationship between the registered identified in the communication. To respond to concerns that investors individual and each of the firms named may be confused by certain member be clear. Questions concerning this matter may communications that include non-mem- be directed to the Advertising ber names without adequately disclosing In a December 1992 NASD Regulatory Regulation Department at (202) 728- the member name, Rule 2210(f) requires & Compliance Alert article, NASD 8330. ❐ that the NASD member name be shown Regulation interpreted the rule to clearly and prominently. It also requires prohibit the use of non-member names

Arbitration NASD Board Acts To Improve Service And Submit Task Force Proposals To SEC In July 1996, the NASD Board also approved an initiative to accelerate by the fourth quarter of 1997. approved increases in staff to support a appointment of arbitrators to resolve number of proposed initiatives. Staff discovery and other preliminary The NASD Board of Governors and the increases were approved for case admin- motions, as well as schedule evidentiary NASD Regulation Board of Directors istration, recruitment and training of hearings. This initiative is being phased have acted on five important proposals arbitrators, and mediation. The Board in geographically and will be completed concerning arbitration — a punitive

National Association of Securities Dealers, Inc. June 1997

16 damages rule, an amendment of the eli- gibility rule (NASD Rule 10304, Changes Filed With SEC formerly Section 15), list selection rule for the appointment of arbitrators, and Amendment to Rule 10304 will make business days to exercise these chal- extension of the large and complex case various changes about the eligibility of lenges. procedures. All rules have been or will claims for arbitration. (See accompa- be filed with the SEC shortly for notice, nying article for more detailed discus- Amendment to Rule 10313 will comment, and approval. These actions sion.) extend the time that a party may result from the January 1996 recommen- peremptorily challenge a replacement dations of the NASD Arbitration Policy Amendment to Rule 10310 will arbitrator from within 5 to within 10 Task Force (Task Force), chaired by for- increase the time for notice of the business days of notice of the replace- mer SEC Chairman David S. Ruder, and selection of arbitrators to parties from ment’s identity. consultations with the NASD 8 to 15 days prior to the first hearing Regulation National Arbitration and date. Amendment to NASD Rule 10330 Mediation Committee, the Securities (formerly Section 41) will conform Industry Conference on Arbitration Amendment to Rule 10311 will clarify the rule to present practice by specify- (SICA), and interested forum the Director’s authority to grant addi- ing that awards may be served by fac- constituents. tional peremptory challenges to parties simile transmission or other electronic and will extend the time from 5 to 10 means. Punitive Damages At their January 1997 meetings, the NASD Regulation Board of Directors gible unless challenged; tration, preclude any eligibility chal- and the NASD Board of Governors ¥ establish bright line transaction and lenges; approved a rule authorizing arbitrators non-transaction dates from which the ¥ permit member firms to challenge to award punitive damages in public NASD Regulation Director of claim eligibility where the court com- customer arbitrations, provided the party Arbitration (Director) will measure pels the arbitration of the claims on seeking such damages is, at the time the and make final eligibility decisions; request of the investor plaintiffs; and arbitration claim is filed, a citizen of a state in which a court could award puni- ¥ permit investor claimants the option ¥ permit member firms to request court tive damages for the same type of claim. of taking all of their claims to court in dismissal of investor-plaintiff claims The rule would apply to claims filed on the event any claim is determined to on substantive statute of limitation and after the rule’s effective date. be ineligible; grounds. ¥ establish that ineligible investor List Selection This rule would cap or limit the claims are not barred from filing in In September, 1996, the NASD amount of punitive damages that can court under the election of remedies Regulation Board endorsed the list be awarded to up to two times compen- doctrine or because investors signed selection method for appointment of satory damages or $750,000, whichever predispute agreements to arbitrate arbitrators. The rule will give parties is less. In addition, the rule provides that such claims; and more involvement in the selection of arbitrators also will look to the state law ¥ apply prospectively, meaning that the arbitrators who will decide their cases. (of which the claimant is a citizen) for rule will apply only to claims filed the standard of conduct to be used to after the rule’s effective date. Large And Complex Case Rule determine whether an award of punitive In May 1997, the NASD Regulation damages is warranted. Board approved a recommendation to In situations where investors have make the large and complex case proce- Eligibility signed predispute arbitration dures a permanent part of the Code of In March 1997 and in April 1997, the agreements, but file their claims in court Arbitration Procedure. All provisions of NASD Regulation Board and the NASD first, the rule will: the rule will be voluntary for parties. Board approved, respectively, an The rule applies to claims where the amended eligibility rule. If approved, ¥ permit member firms to request that amount in controversy exceeds $1 mil- the amended rule will: the court compel arbitration provided lion or the case is complex. all claims, ineligible and eligible, are ¥ retain the current six-year eligibility sought to be compelled to arbitration Other Board Actions rule, but consider all filed claims eli- and, once all claims are filed in arbi- Other arbitration rule changes resulting

NASD Regulatory & Compliance Alert June 1997

17 from the Task Force recommendations include amendments to NASD Rules Force initiatives relating to the discov- have been approved by the Board and 10302 (formerly Section 9) and 10308 ery process, collateral litigation, filed with the SEC. These include (formerly Section 19) that will raise the required disclosures in customer predis- Amendments to NASD Rules 10302 dollar ceiling, from $30,000 to $50,000, pute arbitration agreements, and the (formerly Section 13) and 10203 (for- for claims to be decided by a sole arbi- arbitration of employment merly Section 10) that will increase the trator with a hearing unless any party controversies, including statutory dollar ceiling of public and industry asks for a panel of three arbitrators. discrimination claims. ❐ claims to be decided by a sole arbitrator on the papers filed from $10,000 to During 1997, the NASD Regulation $25,000. In addition, these changes Board will continue to act on other Task

Violations Smith Barney And Lehman Brothers Censured And Fined $250,000 Each; Customers Receive $5.6 Million Refund

On March 12, 1997, NASD Regulation Barney, thereby causing NASD the need for customers to inspect their censured and fined Smith Barney and Regulation to expand its probe to trading confirmations closely and to Lehman Brothers $250,000 each and include Lehman Brothers. report any suspected problems immedi- ordered the two firms to pay a combined ately.” total of more than $5.6 million in More than 15,700 accounts were refunds, including interest, to customers affected by the improper practice of Payments to Smith Barney’s customers who were overcharged when they charging commissions where none were have already been made. Existing redeemed non-proprietary mutual funds. allowed. This practice began in October clients have received credits to their 1990 at Shearson Lehman Brothers and accounts and former clients were issued NASD Regulation became aware of the continued until 1995, through Smith checks. Lehman Brothers will make overcharging after discovering and Barney’s acquisition of the bulk of payments to its customers over a period investigating a single customer Shearson’s retail operations. As a result, of 180 days commencing March 12, complaint against Smith Barney. The the settlement includes customers of 1997, and will provide NASD commissions were disclosed on the cus- both firms, who in some cases held Regulation with satisfactory proof of the tomer’s confirmation ticket. more than one account. payments.

NASD Regulation expanded its investi- “Today’s settlement is important for Questions concerning this action may be gation, which revealed additional prob- investors and an excellent directed to Michael Robinson, NASD lems in the firm’s mutual fund demonstration of the value customer Media Relations, at (202) 728-8411. ❐ redemption practices. Further NASD complaints play in NASD Regulation’s Regulation scrutiny disclosed that the disciplinary process,” said NASD problem existed prior to the August Regulation President Mary L. Schapiro. 1993 acquisition of Shearson by Smith Schapiro added, “This case underscores

National Association of Securities Dealers, Inc. June 1997

18 NASD Regulation Fines And Censures First Albany

On May 16, 1997, NASD Regulation principal of Armacon—primarily about NASD Regulation also found that First announced that it fined First Albany how to become designated as an eligible Albany failed to create or maintain any Corporation $10,000 for recordkeeping bond underwriter by the New Jersey records that recorded the services actu- violations arising from payments made Health Care Financing Facilities ally provided by Armacon. to Armacon Securities, Inc. NASD Authority. Regulation also announced it censured In recording the payments in this fash- the Bond Department Manager, a princi- NASD Regulation discovered, however, ion, NASD Regulation found that First pal of the firm, for the same violations. that First Albany recorded the payments Albany violated Section 17(a) of the Both disciplinary actions resulted from as expenses of two specific offerings of Securities Exchange Act of 1934 and an offer of settlement in which the municipal securities conducted by the Rule 17a-3 thereunder and Municipal respondents neither admitted nor denied firm, though Armacon had not provided Securities Rulemaking Board Rule G-8. the allegations. any services in connection with either offering. First Albany did not charge the Questions concerning these actions may NASD Regulation found that First expenses to the issuers involved or to be directed to Michael Robinson, NASD Albany made two $10,000 payments to other parties. Media Relations, at (202) 728-8411. ❐ Armacon in return for advice—from a

Corporate News NASD Board Of Governors Elects Frank G. Zarb Chairman

In April 1997, NASD, the parent organi- Zarb replaces Daniel P. Tully, who con- “I’m honored to serve as Chairman of zation of NASD Regulation, Inc., and cluded his term as NASD Chairman and the Board at this critical time in the The Nasdaq Stock Market, Inc., elected who recently retired as Chairman and organization’s history,” said Zarb. Frank G. Zarb, as the first executive CEO of Merrill Lynch & Co. Tully will “There is a considerable amount of Chairman of the NASD Board of remain on the NASD Board. “Frank work currently underway at the NASD Governors. Zarb is a capable and effective leader,” to perfect our market mechanisms. We said Tully. “The Board of Governors are committed to strengthening our reg- In addition to his role of Chairman, Zarb believes that this additional position will ulatory programs and further improving also serves as the President and Chief enhance his role as President and CEO the fairness, efficiency, and liquidity of Executive Officer of the NASD, and provide the organization with the the markets we operate. These steps will positions to which he was elected in vision and management continuity nec- benefit all who participate in our January of this year. (See related article essary for its continued growth. The markets, particularly individual in the March 1997, NASD Regulatory & Board and I look forward to working investors, and I am pleased that the Compliance Alert.) with him,” Tully said. Board has elected me to lead this vital organization through the next phase of its ongoing development.” ❐

NASD DISCIPLINARY ACTIONS In December 1996 and January, February, and March District 1—Northern California (the counties of December Actions 1997, the NASD announced the following disciplinary Monterey, San Benito, Fresno, and Inyo, and the actions against these firms and individuals. Publication of remainder of the state north or west of such counties), Samuel Allen Goldsmith (Registered Representative, these sanctions alerts members and their associated per- northern Nevada (the counties of Esmeralda and Nye, San Francisco, California) submitted a Letter of sons to actionable behavior and the penalties that may and the remainder of the state north or west of such Acceptance, Waiver and Consent pursuant to which he result. counties) and Hawaii was fined $100,000 and barred from association with any NASD member in any capacity. Without admitting or denying the allegations, Goldsmith consented to the

NASD Regulatory & Compliance Alert June 1997

19 described sanctions and to the entry of findings that he from association with any NASD member in any capacity with any NASD member in any capacity. The sanctions effected the improper transfer of customer funds and there- for two years, required to pay restitution to customers, and were based on findings that Gurfink failed to respond to by caused the misuse of the funds. The findings also stated required to requalify by exam. The sanctions were based NASD requests for information. that Goldsmith failed to respond to NASD requests for on findings that Johnson received checks totaling information. $179,370.03 from public customers for investment purpos- March Actions es, deposited $112,241.80 of the funds in other customer Lynn B. Hall (Registered Representative, San accounts, and retained $24,400 until a later date. None Francisco, California) submitted a Letter of Acceptance, Waiver and Consent pursuant to which she was fined $50,000 and barred from association with any NASD District 2—Southern California (that part of the state District 3—Alaska, Arizona, Colorado, Idaho, Montana, member in any capacity. Without admitting or denying the south or east of the counties of Monterey, San Benito, New Mexico, Oregon , Utah, Washington, and Wyoming allegations, Hall consented to the described sanctions and Fresno, and Inyo) and southern Nevada (that part of the to the entry of findings that she signed customer names to state south or east of the counties of Esmeralda and December Actions life insurance policies and to a request for policy cancela- Nye), and the former U.S. Trust territories. tion form without the customers’ knowledge or consent. Lester H. Lane (Registered Principal, Englewood, Colorado) was fined $10,000 and suspended from associa- Karen Shaolin Hsieh (Registered Representative, December Actions tion with any NASD member in any principal capacity for Hercules, California) submitted a Letter of Acceptance, one year. The sanctions were based on findings that Lane Waiver and Consent pursuant to which she was fined Maureen Galligan (Registered Representative, San Diego, California), Gerald Seroy (Registered caused and permitted his member firm to violate its restric- $500,000 and barred from association with any NASD tion agreement. member in any capacity. Without admitting or denying the Representative, Basking Ridge, New Jersey), and allegations, Hsieh consented to the described sanctions and Jeffrey K. Trilling (Registered Representative, Paul M. Spear (Registered Principal, Redondo Beach, to the entry of findings that she effected the improper Rockville, Maryland) submitted Offers of Settlement California) was fined $15,000, suspended from associa- transfer of customer funds and thereby caused the misuse pursuant to which Galligan was fined $6,567.15 and sus- tion with any NASD member in any capacity for one year, of the funds. pended from recommending any transactions in penny barred from association with any NASD member in any stocks for one year. Seroy was fined $2,552.94 and sus- principal capacity with the right to re-apply after two January Actions pended from recommending any transactions in penny years, and required to requalify by exam. The sanctions stocks for one year, and Trilling was fined $2,812 and were based on findings that Spear permitted unregistered Wilfred Alexander Soucy, Jr. (Registered suspended from recommending any transactions in penny persons to solicit business for his member firms and com- Representative, Yardley, Pennsylvania) was fined stocks for one year. Without admitting or denying the alle- pensated them for the transactions that resulted from their $25,000, suspended from association with any NASD gations, the respondents consented to the described sanc- efforts. Furthermore, Spear shared securities commissions member in any capacity for 30 days, and required to tions and to the entry of findings that Galligan, Seroy, and with an unregistered entity and solicited members of the requalify by exam. The sanctions were based on findings Trilling effected $54,480 in penny stock transactions for public to become customers and place orders to purchase that Soucy participated in private securities transactions public customers in contravention of Section 15(g) of the securities by misrepresenting that certain transactions without giving prior written notification to his member Exchange Act. would be executed without charge to the customers when firm. Edward Milman (Associated Person, Granada Hills, he knew that the price to the customer would include a February Actions California) submitted an Offer of Settlement pursuant to markup. Spear also induced a customer to purchase stock which he was fined $20,000 and barred from association by projecting and promising future prices in excess of the Larry Ira Klein (Registered Representative, Oakland, with any NASD member in any capacity. Without admit- customer’s purchase prices without a reasonable basis and California) was fined $150,000, suspended from associa- ting or denying the allegations, Milman consented to the by failing to disclose to the customer the risks associated tion with any NASD member in any capacity for six described sanctions and to the entry of findings that he with the purchase of stock. months, and required to requalify by exam. The SEC arranged to have an imposter take the Series 7 exam for Michael A. Wynn (Registered Representative, affirmed the sanctions following appeal of a June 1995 him. The findings also stated that Milman failed to respond Scottsdale, Arizona) was fined $18,400, suspended from National Business Conduct Committee (NBCC) decision. to NASD requests for information. association with any NASD member in any capacity for 20 The sanctions were based on findings that Klein, in con- business days, required to pay $30,000 plus interest in nection with the sale of stock, omitted material facts and January Actions restitution to a customer, and required to requalify by made material misstatements of fact to the customers. None exam. The sanctions were based on findings that Wynn Furthermore, Klein made unsuitable recommendations to recommended to a public customer the purchase of stock customers regarding the purchase of stock without having February Actions that was unsuitable for the customer in light of her invest- reasonable grounds for believing that the investment was ment objectives, financial situation, and needs. Wynn also suitable for the customers in light of the customers’ other Jack A. Alexander (Registered Principal, Poway, exercised discretion in the account of a public customer security holdings, financial situation, and needs. California) submitted an Offer of Settlement pursuant to without obtaining written authorization from the customer Marc A. Nichols (Registered Representative, San which he was suspended from association with any NASD or written acceptance by his member firm. Bruno, California) was fined $10,000 and barred from member in any capacity for five days. Without admitting association with any NASD member in any capacity. The or denying the allegations, Alexander consented to the January Actions described sanctions and to the entry of findings that he NBCC affirmed the sanctions following appeal of a San Edwin Andrew Bayne (Registered Representative, Francisco District Business Conduct Committee (DBCC) purchased shares of a new issue that traded at a premium in the immediate aftermarket, in contravention of the Laurel, Montana) was fined $2,500, suspended from decision. The sanctions were based on findings that association with any NASD member in any capacity for 10 Nichols forged the signatures of public customers on NASD Board of Governors Free-Riding and Withholding Interpretation. business days, and required to requalify by exam. The forms and submitted them to his member firm. In addition, sanctions were based on findings that Bayne received com- Nichols persuaded a customer to sign a false notarized Robert A. Grunburg (Registered Principal, Marina Del mission checks made payable to a former registered per- statement and submitted it to his member firm. Rey, California) was fined $5,000, suspended from asso- son, signed the individual’s name to the checks, and Robert Charles Stamsos (Registered Principal, Walnut ciation with any NASD member as a general securities deposited them into bank accounts over which he had con- Creek, California) was fined $62,000, suspended from principal for one month, and required to requalify by exam trol. association with any NASD member in any capacity for 30 as a principal. The SEC affirmed the sanctions following appeal of a March 1996 NBCC decision. The sanctions Laurence G. Epstein (Registered Representative, days, and barred from association with any NASD member Mercer Island, Washington) submitted a Letter of in any principal capacity. In addition, Stamsos is required were based on findings that Grunburg approved two news- paper advertisements that contained misleading or exag- Acceptance, Waiver and Consent pursuant to which he to requalify by exam as a representative. The sanctions was fined $75,000, barred from association with any were based on findings that Stamsos exercised effective gerated statements concerning the ranking of mutual funds. Grunburg also failed to file the advertisements with the NASD member in any capacity, and required to pay control over the account of a public customer and recom- $170,000 in restitution to a customer. Without admitting or mended to the customer the purchase and sale of securities NASD within 10 days of the first use of the advertisements as required. Furthermore, Grunburg entered into a special denying the allegations, Epstein consented to the described that were not suitable for the customer in light of the size sanctions and to the entry of findings that he exercised and frequency of the trading and in light of the facts dis- sales concession arrangement (a sales contest) with a member firm related to the sale of mutual funds on an oral discretion in the account of a public customer without closed by the customer as to her other security holdings, obtaining prior written discretionary authorization from the financial situation, and needs. basis with no written agreement executed and without proper disclosure of the arrangement in the prospectuses customer and without written acceptance of such account March Actions for each fund. In addition, Grunburg failed to establish and by his member firm. The findings also stated that Epstein maintain adequate written supervisory procedures. recommended the purchase of securities to a public cus- Darlene Dottie Johnson (Registered Representative, tomer without having reasonable grounds for believing Sacramento, California) was fined $22,000, suspended Felix Gurfink (Registered Representative, Brooklyn, that such recommendations were suitable for the customer New York) was fined $20,000 and barred from association based upon the nature of the investment, the size and fre-

National Association of Securities Dealers, Inc. June 1997

20 quency of the recommended transactions, and the This action has been appealed to the SEC and the sanc- ten discretionary authorization from the customers and customer’s financial situation, circumstances, and needs. tions are not in effect pending consideration of the appeal. without written acceptance of such account by his member Furthermore, the NASD found that Epstein effected trans- firm. actions in the account of a deceased public customer with- February Actions out the knowledge or authorization of the customer’s Kevin J. Stelter (Registered Representative, estate, personal representative, or executrix. Mathew William Baker (Registered Representative, Englewood, Colorado) was fined $5,000, suspended from Des Moines, Washington) submitted a Letter of association with any NASD member in any capacity for Thomas L. Gottschalk (Registered Principal, Arvada, Acceptance, Waiver and Consent pursuant to which he three months, required to requalify by exam in any capaci- Colorado) submitted an Offer of Settlement pursuant to was fined $49,000 and barred from association with any ty, and ordered to disgorge $3,900 in commissions to the which he was fined $40,000, barred from association with NASD member in any capacity. Without admitting or NASD. The sanctions were based on findings that Stelter any NASD member in any principal capacity, and denying the allegations, Mathew consented to the provided to a public customer a statement concerning suspended from association with any NASD member in described sanctions and to the entry of findings that he recently purchased products that contained material mis- any capacity for two years. Without admitting or denying participated in private securities transactions while failing representations about the products in the form of projected the allegations, Gottschalk consented to the described to provide prior written notice of such activities to his and guaranteed returns that were inaccurate and mislead- sanctions and to the entry of findings that he approved member firm. ing. advertising and business cards that did not conform to NASD rules. The findings also stated that Gottschalk per- Jeffrey T. Burrows (Registered Representative, Cave March Actions mitted his member firm to conduct a securities business Creek, Arizona) was barred from association with any while failing to maintain required net capital and filed NASD member in any capacity. The sanction was based Todd Congrove (Registered Representative, Confer, inaccurate FOCUS reports. Furthermore, the NASD deter- on findings that Burrows misappropriated $155,000 from Colorado) submitted an Offer of Settlement pursuant to mined that Gottschalk participated as a selling agent in a public customers by inducing them to send him funds pur- which he was barred from association with any NASD private placement of securities wherein the offering was portedly for investment and then converting such funds to member in any capacity. Without admitting or denying the subject to minimum sales contingency and, in connection his own use and benefit. Burrows also failed to respond to allegations, Congrove consented to the described sanctions with the offering, his member firm’s books and records NASD requests for information. and to the entry of findings that, while taking the Series 6 were inadequate and failed to evidence principal review of exam, he was found with unauthorized material relating to Excel Financial, Inc. (Salt Lake City, Utah), Gary R. the exam in his possession. the transactions. The NASD also found that Gottschalk Beynon (Registered Principal, Salt Lake City, Utah) permitted his member firm to violate its restriction agree- and Robert Lamont Sperry (Registered Principal, Salt William Leonard England (Registered Representative, ment with the NASD. Lake City, Utah) were fined $25,000, jointly and several- Nampa, Idaho) was fined $75,000 and barred from asso- Terrence L. Hansen, Jr. (Registered Representative, ly. In addition, Beynon and Sperry were suspended from ciation with any NASD member in any capacity. The sanc- Salt Lake City, Utah) was fined $100,000, barred from association with any NASD member in any principal tions were based on findings that England obtained association with any NASD member in any capacity, and capacity for one month. The sanctions were based on find- possession of insurance disbursement checks totaling ordered to pay $219,999.97 in restitution to public cus- ings that the firm, acting through Beynon and Sperry, $21,107.48 made payable to insurance clients, signed the tomers. The sanctions were based on findings that Hansen failed to return investor funds when the terms of the con- payee’s names to the checks, and deposited the checks at a failed to invest customers’ funds totaling $219,999.97 as tingency were not satisfied. The firm, acting through bank to be credited to his credit card account. England also directed. Furthermore, Hansen provided false statements to Beynon and Sperry, also made non-bona fide sales of secu- failed to respond to NASD requests for information. public customers that purported to show that the customers rities in an offering in that a percentage of the offering was had securities positions at a member firm, when in fact the acquired for resale by a corporation that was affiliated with Clinton Hugh Holland, Jr. (Registered Principal, firm did not carry any securities positions for the benefit of the issuer and counted such sales towards the satisfaction Salem, Oregon) was fined $5,000, suspended from associ- of the minimum sales contingency. ation with any NASD member in any capacity for five the customers. Hansen also failed to respond to an NASD business days, and required to requalify by exam as a reg- request for information. This matter has been appealed to the SEC. istered principal. The U.S. Court of Appeals for the Ninth Shannon Akira Hayashi (Registered Principal, Fort Circuit affirmed the sanctions following appeal of a Collins, Colorado) was fined $26,750, barred from associ- Michael R. French (Registered Representative, December 1995 SEC decision. The sanctions were based ation with any NASD member in any capacity, and Scottsdale, Arizona) was fined $1,000, suspended from on findings that Holland recommended to a public cus- required to pay $1,050 in restitution to a customer. The association with any NASD member in any capacity for tomer the purchase of speculative or high-risk securities NBCC imposed the sanctions following appeal of a three months, and required to requalify by exam. The sanc- without having reasonable grounds for believing that such Denver DBCC decision. The sanctions were based on find- tions were based on findings that French failed to disclose recommendations were suitable for the customer consider- ings that Hayashi made improper use of customer funds a criminal conviction on his Form U-4. ing the size and nature of the transactions, the concentra- totaling $5,350. tion of speculative securities in the account, and the Daniel R. Lehl (Registered Representative, Littleton, customer’s financial situation, circumstances, needs, and Aaron Lee Johnson (Registered Representative, Colorado) and Thomas P. Meehan (Registered objectives. Tempe, Arizona) was fined $20,000 and barred from Representative, Thornton, Colorado). Meehan was fined association with any NASD member in any capacity. The $45,000 and barred from association with any NASD Howard David Liebriech (Registered Representative, sanctions were based on findings that Johnson failed to member in any capacity and Lehl was fined $10,000 and Beaverton, Oregon) was fined $210,724, suspended from disclose a criminal conviction on a Form U-4. Johnson suspended from association with any NASD member in association with any NASD member in any capacity for 60 also failed to respond to NASD requests for information. any capacity for five business days. The sanctions were business days, and required to requalify by exam. The based on findings that Meehan and Lehl failed to follow sanctions were based on findings that Liebriech effected Terence J. Murphy (Registered Representative, customer instructions to sell securities from their accounts. transactions in the accounts of public customers without Clancy, Montana) submitted an Offer of Settlement pur- Lehl also made misrepresentations to a public customer in obtaining written discretionary authority from the suant to which he was fined $12,000 and required to connection with the customer’s request that his stock be customers and without obtaining acceptance of the requalify by exam. Without admitting or denying the alle- sold. Furthermore, Meehan induced customers to purchase accounts by his member firm. Furthermore, Liebriech gations, Murphy consented to the described sanctions and stock by representing that he would refund the purchase made recommendations to a public customer without hav- to the entry of findings that he engaged in the solicitation price if the customers lost money and engaged in unautho- ing reasonable grounds for believing that the transactions of customers on behalf of two firms and received compen- rized transactions in customer accounts. In addition, were suitable for the customer given the number of trans- sation for his efforts without disclosing promptly to his Meehan failed to respond to NASD requests for informa- actions effected, the frequency of the transactions, the con- member firm his outside association with or employment tion and obtained from a public customer an agreement to centrated positions held in the account, and the customer’s by the firms. settle the customer’s complaint that contained undertak- investment objectives, circumstances, and needs. Liebriech ings by the customer not to initiate or pursue any regulato- also attempted to guarantee a customer against losses in Robert A. Quiel (Registered Principal, Bermuda ry complaint. his account. Dunes, California) was fined $12,500, suspended from association with any NASD member in any capacity for 30 Tibor Robert Komoroczy (Registered Representative, Maurice Fredric Re, III (Registered Representative, days, and required to requalify by exam as a general secu- Laguna Niguel, California) submitted a Letter of Pompano Beach, Florida) was fined $10,000 and barred rities principal and general securities representative. The Acceptance, Waiver and Consent pursuant to which he from association with any NASD member in any capacity. NBCC imposed the sanctions following appeal of a was fined $40,000, barred from association with any The sanctions were based on findings that Re obtained a Denver DBCC decision. The sanctions were based on find- NASD member in any capacity, and required to pay check from his manager’s personal check book, made out ings that Quiel effected principal retail transactions with $168,000 in restitution to a member firm. Without admit- the check for $975, signed his manager’s name to the customers involving securities at prices that were unfair ting or denying the allegations, Komoroczy consented to check without authorization, and used the funds for his and excessive with markups ranging from eight to 40 per- the described sanctions and to the entry of findings that he own benefit. Re also failed to respond to NASD requests cent above the prevailing market price. Quiel also failed to executed transactions in the accounts of public customers for information. respond completely to NASD requests for information. without their prior authorization or consent. The findings also stated that Komoroczy exercised discretion in the Dan Scott Taylor (Registered Representative, accounts of public customers without obtaining prior writ- Corvallis, Oregon) was fined $5,000, suspended from

NASD Regulatory & Compliance Alert June 1997

21 association with any NASD member in any capacity for 18 $5,000 and suspended from association with any NASD tions were based on findings that, in connection with pur- months, and required to requalify by exam. The sanctions member in any capacity for one year. Without admitting or chase and sale transactions of United States government were based on findings that Taylor obtained a $923 check denying the allegations, Love consented to the described agency securities, Pierson knowingly or recklessly failed issued erroneously by his member firm, signed the check, sanctions and to the entry of findings that he signed the to independently determine the market price for the trans- and attempted to negotiate the check. names of public customers on forms requesting loans or actions, and in so doing, Pierson participated in, and fur- other disbursements from the customers’ insurance poli- thered, an “adjusted trading” scheme. Furthermore, cies without their knowledge or consent. Pierson failed to reflect on his member firm’s books and District 4—Iowa, Kansas, Minnesota, Missouri, records that these transactions were not effected at the then Nebraska, North Dakota, and South Dakota Robert Eugene Nixon (Registered Representative, current market prices. Lincoln, Nebraska) submitted a Letter of Acceptance, Waiver and Consent pursuant to which he was fined The Trading Desk, Inc. (Englewood, Colorado) and December Actions $5,000 and suspended from association with any NASD Jerry W. Manning (Registered Principal, Englewood, Everest Securities, Inc. (Minneapolis, Minnesota) and member in any capacity for five days. Without admitting Colorado). The firm was fined $75,000 and Manning was Jeanne Alyce Kunkel (Registered Principal, or denying the allegations, Nixon consented to the fined $10,000. The sanctions were based on findings that Minneapolis, Minnesota). The firm and Kunkel were described sanctions and to the entry of findings that he the firm engaged in a series of purchases and sales transac- fined $15,000, jointly and severally and required to pay engaged in a pattern of recommending the sales of cus- tions involving margin trading of government securities $22,500 in restitution. Kunkel was barred from association tomers’ mutual funds within the same mutual fund family derivatives with institutional customers that were specula- with any NASD member in a principal capacity and without recommending that customers take advantage of a tive and excessive in size and frequency and were unsuit- required to requalify by exam as a registered representa- free exchange privilege. able for the customers on the basis of their investment objectives, financial situations, and needs. Furthermore, tive. The SEC affirmed the sanctions following appeal of a Thomas Allyn Williams (Registered Representative, St. September 1994 NBCC decision. The sanctions were the firm, acting through Manning, failed to properly super- Charles, Missouri) submitted a Letter of Acceptance, vise the activities of a registered representative. based on findings that the firm and Kunkel offered and Waiver and Consent pursuant to which he was suspended sold securities using documents that were misleading. The from association with any NASD member in any capacity. January Actions firm, acting through Kunkel, also failed to maintain accu- Without admitting or denying the allegations, Williams rate books and records. consented to the described sanction and to the entry of Hattier, Sanford & Reynoir (New Orleans, Louisiana), This action has been appealed to a United States Court of findings that he made untrue statements of material facts or Gus A. Reynoir (Registered Principal, New Orleans, Appeals, and the sanctions, other than the bar, are not in omitted to state material facts necessary to make the state- Louisiana) and Vance G. Reynoir (Registered effect pending consideration of the appeal. ment not misleading in light of the circumstances in which Principal, New Orleans, Louisiana) were fined $60,000, they were made in connection with the sale of securities. jointly and severally. In addition, the firm must retain an Stacy Gene Nettinga (Registered Representative, The findings also stated that Williams recommended the independent auditor to review its books and records and Mitchell, South Dakota) submitted an Offer of Settlement purchase of securities to public customers by means of supervisory procedures and to implement the auditor’s pursuant to which he was fined $100,000, barred from baseless performance predictions and without having a recommendations in a manner satisfactory to the NASD association with any NASD member in any capacity, and reasonable basis for the recommendations. Regulation staff. G. Reynoir was suspended from associa- required to pay $18,500 in restitution. Without admitting tion with any NASD member in any capacity for 30 days or denying the allegations, Nettinga consented to the March Actions and required to requalify by exam as a general securities described sanctions and to the entry of findings that he principal. V. Reynoir was suspended from association with failed to respond to NASD requests for information. The None any NASD member in any capacity for 30 days and findings also stated that, without the knowledge or consent required to requalify as a municipal securities principal. of public customers, Nettinga misused customer funds The NBCC imposed the sanctions following appeal of a District 5—Alabama, Arkansas, Kentucky, Louisiana, New Orleans DBCC decision. The sanctions were based totaling $22,000 by changing their address to a post office Mississippi, Oklahoma, and Tennessee box and either sending checks to that address or transfer- on findings that the firm, acting through G. Reynoir and V. ring funds between customer accounts. Reynoir, issued trade tickets to a customer that misstated December Actions the firm’s capacity on the transactions at issue as being January Actions “agent” rather than “principal.” Jeffrey N. Boone (Registered Representative, Mt. Timothy John Shipley (Registered Principal, Grover, Juliet, Tennessee) submitted a Letter of Acceptance, This action has been appealed to the SEC and the sanc- Missouri) submitted an Offer of Settlement pursuant to Waiver and Consent pursuant to which he was fined tions are not in effect pending consideration of the appeal. which he was fined $50,000 and barred from association $3,740 and suspended from association with any NASD with any NASD member in any capacity. Without admit- member in any capacity for one month. Without admitting Shelia P. Smith (Registered Representative, Mobile, ting or denying the allegations, Shipley consented to the or denying the allegations, Boone consented to the Alabama) submitted a Letter of Acceptance, Waiver and described sanctions and to the entry of findings that, by use described sanctions and to the entry of findings that he Consent pursuant to which she was fined $20,000. Without of instrumentalities of interstate commerce or the mail, he recommended and engaged in purchase transactions for admitting or denying the allegations, Smith consented to intentionally or recklessly employed devices to defraud public customers without receiving an acknowledgement the described sanction and to the entry of findings that, in customers by making untrue statements of material facts or in writing from the customers that they understood that connection with the offer and sale of interests in govern- omitting material facts necessary to make the statements such purchases could have been executed at a reduced ment funds, she failed and neglected to have an adequate by him not misleading. The findings also stated that sales charge at certain breakpoint levels. The NASD found basis on which to recommend the sale of such interests to Shipley engaged in a course of business that operated as a that Boone did not have reasonable grounds for believing public customers based on the customers’ investment fraud or deceit upon customers in that he recommended to that these recommendations and resultant transactions objectives, financial situations, and needs. the customers the purchase of securities without a reason- were suitable for the customers based on their financial Michael J. Siegel (Registered Representative, able basis. situation, investment objectives, and needs. The findings Louisville, Kentucky) and Dennis C. Moore (Registered also stated that Boone sent correspondence to public cus- Representative, Louisville, Kentucky) submitted a Letter February Actions tomers before obtaining written supervisory approval of of Acceptance, Waiver and Consent pursuant to which the correspondence from a principal of his member firm. James A. Goetz (Registered Representative, Dickinson, they were each fined $10,000, suspended from association North Dakota) was fined $2,500 and barred from associa- Dennis F. Nuss (Registered Representative, Maspeth, with any NASD member in any capacity for six months, tion with any NASD member in any capacity. The NBCC New York) submitted a Letter of Acceptance, Waiver and and required to requalify by exam as investment company imposed the sanctions following appeal of a Kansas City Consent pursuant to which he was fined $100,000, barred and variable contracts products representatives. Without DBCC decision. The sanctions were based on findings that from association with any NASD member in any capacity, admitting or denying the allegations, the respondents con- Goetz submitted applications to his member firm’s match- and required to pay restitution. Without admitting or deny- sented to the described sanctions and to the entry of find- ing gifts program requesting that $1,600 be donated to a ing the allegations, Nuss consented to the described sanc- ings that they engaged in the sale of unregistered securities school and thereafter failed to contribute an equivalent tions and to the entry of findings that he misappropriated in that they solicited public customers to invest in a com- amount of cash or property. Goetz knew or should have and converted customer funds totaling $350,000 for his pany in which they held ownership interests. The findings known that the funds were used to offset the tuition of his own use and benefit without the knowledge or consent of also stated that Siegel and Moore engaged in private secu- daughter at the designated school. the customers. The findings also stated that in an effort to rities transactions without prior written notice to and conceal his activity, Nuss prepared and sent fictitious con- approval from their member firm. Goetz has appealed this action to the SEC and the sanc- firmations, monthly account statements, and Internal Stephens Inc. (Little Rock, Arkansas) submitted an tions, other than the bar, are not in effect pending consider- Revenue Service forms to public customers from whom he ation of the appeal. Offer of Settlement pursuant to which the firm was fined misappropriated the funds. $25,000. Without admitting or denying the allegations, the Steven Wayne Love (Registered Representative, Rick E. Pierson (Registered Principal, Houston, Texas) firm consented to the described sanction and the entry of Eldorado, Kansas) submitted a Letter of Acceptance, was fined $5,000 and suspended from association with any findings that it allowed an individual to act as a general Waiver and Consent pursuant to which he was fined NASD member in any capacity for one week. The sanc- securities representative without being registered as such

National Association of Securities Dealers, Inc. June 1997

22 with the NASD. The findings stated that the firm failed to al securities representative. The sanctions were based on customer’s financial situation, investment objectives, and exercise reasonable and proper supervision over individu- findings that McCall executed unauthorized transactions in needs. In addition, the NASD found that Samples failed to als in connection with their recommendations and misrep- the account of a public customer without the knowledge or make reasonable efforts to obtain accurate information resentations. The NASD found that the firm failed and consent of the customer. McCall also exercised discretion regarding the financial status, tax status, and investment neglected to establish, maintain, and enforce proper super- in a public customer’s account without having obtained objectives of a public customer in that the new account visory procedures governing communications between prior written authorization from the customer and prior form he completed contained inaccurate financial informa- unregistered securities analysts and public customers. written acceptance of the account as discretionary by his tion for the customer. Furthermore, the NASD determined that the firm allowed member firm. individuals to make misrepresentations to public Sentra Securities Corporation (San Diego, California), customers regarding the details of a merger and lawsuit Karl M. Meeks (Registered Representative, Lakewood, Joseph J. Hoenigman (Registered Principal, Lacosta, settlement. California) submitted a Letter of Acceptance, Waiver and California) and Vaughn L. Woods (Registered Consent pursuant to which he was fined $7,500 and barred Principal, San Diego, California) submitted a Letter of Timothy R. Strong (Registered Representative, from association with any NASD member in any capacity. Acceptance, Waiver and Consent pursuant to which the Memphis, Tennessee) submitted an Offer of Settlement Without admitting or denying the allegations, Meeks con- firm was fined $13,500. Hoenigman and Woods were each pursuant to which he was fined $120,000, barred from sented to the described sanctions and to the entry of find- fined $5,000 and suspended from association with any association with any NASD member in any capacity, and ings that he caused a $1,510 check to be issued from the NASD member in any principal capacity for one week. required to pay $218,292 in restitution. Without admitting bank account of an affiliate of his former member firm and Without admitting or denying the allegations, the respon- or denying the allegations, Strong consented to the converted the funds for his own use and benefit without dents consented to the described sanctions and to the entry described sanctions and to the entry of findings that he the affiliate’s knowledge or consent. of findings that the firm recommended and engaged in received $218,291.53 from public customers for invest- certain purchase and sale transactions in the account of a ment purposes, failed to submit the funds to his member Raymond P. Nauts (Registered Representative, Ocean public customer without having reasonable grounds for firm and, instead, endorsed the checks, and deposited them Springs, Mississippi) submitted a Letter of Acceptance, believing that such recommendations were suitable for the into his personal bank accounts, without the public cus- Waiver and Consent pursuant to which he was fined customer on the basis of the customer’s financial situation, tomers’ knowledge or consent. The findings also stated $100,000 and barred from association with any NASD investment objectives, and needs. The findings also stated that Strong failed to respond to NASD requests for infor- member in any capacity. Without admitting or denying the that the firm, acting through Hoenigman and Woods, failed mation. allegations, Nauts consented to the described sanctions and to exercise reasonable and proper supervision over an indi- to the entry of findings that he disbursed five checks total- vidual and failed to establish, maintain, and enforce proper Gregory T. Watkins (Registered Representative, Little ing $17,863.31 from the accounts of a deceased public supervisory procedures governing the review of options Rock, Arkansas) submitted a Letter of Acceptance, customer and converted these funds for his own use and and equity transactions and the review of municipal securi- Waiver and Consent pursuant to which he was fined benefit without the knowledge or consent of the ties transactions. $25,000, suspended from association with any NASD customer’s estate. Furthermore, the NASD found that member in any capacity for one month, and required to Nauts forged the signature of the customer to four of the Timothy L. Voss (Registered Representative, requalify by exam as a general securities representative. checks in order to facilitate the redemption of these funds. Versailles, Kentucky) submitted an Offer of Settlement Without admitting or denying the allegations, Watkins The findings also stated that Nauts failed and neglected to pursuant to which he was fined $30,000. Without admit- consented to the described sanctions and to the entry of respond timely to NASD requests for information and ting or denying the allegations, Voss consented to the findings that he recommended and engaged in purchase failed to update his Form U-4 with his correct address of described sanction and to the entry of findings that he exer- and sale transactions in the accounts of public customers record. cised discretion in the account of a public customer with- without having reasonable grounds for believing that the out having obtained prior written authorization from the transactions were suitable for the customers on the basis of R. M. Duncan Securities, Inc. (Little Rock, Arkansas) customer and prior written acceptance of the account as their age, financial situations, investment objectives, and and Randall M. Duncan (Registered Principal, Little discretionary by his member firm. The findings also stated needs. The findings also stated that Watkins exercised Rock, Arkansas) submitted a Letter of Acceptance, that Voss falsified trade order tickets to reflect that the discretion in the account of an institutional customer with- Waiver and Consent pursuant to which they were fined trades were discussed with a public customer prior to exe- out having obtained prior written authorization from the $10,000, jointly and severally. Without admitting or deny- cution, when in fact they were not, and marked order tick- customer and prior written acceptance of the account as ing the allegations, the respondents consented to the ets to reflect that such trades were unsolicited, when in fact discretionary by his member firm. Furthermore, the NASD described sanctions and to the entry of findings that the they were not, thus causing his member firm’s books and determined that Watkins executed transactions in the firm, acting through Duncan, allowed a registered repre- records to be inaccurate. Furthermore, the NASD found accounts of public customers without obtaining a written sentative to recommend and engage in a purchase transac- that Voss executed options trades in the account of a pub- third party trading authorization from the customers. tion of a limited partnership in the account of public lic customer prior to approval of such trades by his mem- customers without having reasonable grounds for believ- ber firm. February Actions ing that such recommendation and resultant transactions were suitable for the customers on the basis of their finan- March Actions Timothy W. Fowler (Registered Representative, cial situation, investment objectives, and needs. The find- Metairie, Louisiana) was fined $30,000 and barred from ings also stated that the firm, acting through Duncan, failed Blount Parrish & Roton, Inc. (Montgomery, Alabama) association with any NASD member in any capacity. The to exercise reasonable and proper supervision over a regis- and William B. Blount (Registered Principal, sanctions were based on findings that Fowler made tered representative in that they approved the aforemen- Montgomery, Alabama) submitted an Offer of Settlement improper use of customer funds by forging a public cus- tioned transaction before ascertaining that the investment pursuant to which they were fined $55,000, jointly and tomer’s name to five documents without the customer’s was suitable for the customers. severally. In addition, the firm must hire an independent knowledge or consent. counsel to review the firm’s procedures with respect to its Mark T. Samples (Registered Representative, Orlando, adherence to certain MSRB Rules and to implement any Walter Y. Hooper (Registered Representative, Florida) submitted an Offer of Settlement pursuant to recommendations made by the counsel. The respondents Montgomery, Alabama) submitted a Letter of which he was fined $50,000 and barred from association also agreed to make no contributions to any political action Acceptance, Waiver and Consent pursuant to which he with any NASD member in any capacity. Without admit- committee and to refrain from doing business with any was fined $25,000. Without admitting or denying the alle- ting or denying the allegations, Samples consented to the lobbyist that controls or operates a political action commit- gations, Hooper consented to the described sanction and to described sanctions and to the entry of findings that he tee. Without admitting or denying the allegations, the the entry of findings that, in connection with the offer and included false financial information on the new account respondents consented to the described sanctions and to sale of interests in a mutual fund, Hooper made or caused form of a public customer. The NASD also found that the entry of findings that the firm, acting through Blount, to be made inaccurate statements about the fund in sales Samples failed to execute purchase orders for a public in its role as underwriter, failed to accurately reflect the literature distributed to public customers. The NASD also customer and misrepresented to the customer that the pur- redemption feature of $6,500,000 in industrial develop- found that Hooper failed to obtain prior written approval chase orders had been made, when in fact, no such pur- ment revenue bonds for the Industrial Development Board of sales literature by a firm principal and failed to submit chase had been executed. Furthermore, the findings stated of the City of Birmingham, Alabama. Specifically, the the sales literature to the NASD. Furthermore, the NASD that Samples shared directly or indirectly in the profits and NASD found that the firm offered and sold the bonds by determined that Hooper failed and neglected to demon- losses in the account of a public customer and failed to means of an offering statement that failed to adequately strate an adequate basis on which to recommend the sale of obtain written authorization from his member firm prior to disclose the redemption provisions of the bonds. The such interests to public customers based on the customers’ sharing in a customer account. The findings also stated that NASD also determined that the firm recorded an incorrect investment objectives, financial situations, and needs. The Samples delivered a handwritten letter to a public call feature on its confirmations of sale for the bonds and findings also stated that Hooper failed to demonstrate that customer without obtaining prior written approval of the failed to disclose that the terms of the redemption feature he disclosed adequately the risks of investment in the correspondence from a principal of his member firm. had been omitted from the official statement, when the funds. The NASD also determined that Samples recommended firm knew or should have known of such omission. Grover C. McCall, III (Registered Representative, and engaged in securities trading in the account of a public Eric Darrisaw (Registered Principal, Jersey City, New Kingsport, Tennessee) was fined $7,651.84, suspended customer without having reasonable grounds for believing Jersey) and Toni Hacket-Antrum (Registered from association with any NASD member in any capacity that these recommendations and resultant transactions Principal, Perry, Florida) submitted an Offer of for five days, and required to requalify by exam as a gener- were suitable for the customer on the basis of the

NASD Regulatory & Compliance Alert June 1997

23 Settlement pursuant to which they were fined $10,000, pany. Specifically, Douglas falsely represented that his any NASD member in any capacity for two years. Without jointly and severally. Without admitting or denying the company was registered with the SEC as a broker/dealer, admitting or denying the allegations, Reaves consented to allegations, the respondents consented to the described was a full-service broker/dealer, had Securities Investor the described sanction and to the entry of findings that he sanction and to the entry of findings that a member firm, Protection Corporation coverage, and had never been the disseminated to prospective investors documents relating acting through Darrisaw and Hacket-Antrum, failed to subject of any complaint or investigation by a self-regula- to an offering of securities that reflected misleading state- establish, maintain, and enforce proper supervisory proce- tory organization. Douglas also falsely represented that all ments and omissions of material facts without providing to dures. The findings also stated that a member firm, acting of the transactions effected by the firm were guaranteed by his member firm written notice of the proposed transac- through Darrisaw and Hacket-Antrum, provided to a pub- his member firm. In addition, Douglas made misrepresen- tions. lic customer a written proposal containing misleading tations in connection with the sale of inverse floater notes information and failed to maintain a continuing and current in that he failed to disclose that the notes’ yield would Jorge Eduardo Villalba (Registered Principal, education program for its covered registered persons. fluctuate inversely to prevailing interest rates. Ducanville, Texas) submitted an Offer of Settlement pur- suant to which he was fined $15,000 and suspended from Randolph N. Strickland (Registered Representative, Henry Edward Vail (Registered Representative, association with any NASD member in any capacity for Birmingham, Alabama) was fined $120,000 and barred Houston, Texas) was fined $20,000 and barred from asso- five business days. Without admitting or denying the alle- from association with any NASD member in any capacity. ciation with any NASD member in any capacity. The U.S. gations, Villalba consented to the described sanctions and The sanctions were based on findings that Strickland Court of Appeals for the Fifth Circuit affirmed the sanc- to the entry of findings that he engaged in excessive trad- caused three checks totaling $8,050 to be withdrawn from tions following appeal of a June 1995 SEC decision. The ing in customer accounts. the IRA account of a public customer and converted the sanctions were based on findings that Vail made improper funds for his own use and benefit by forging the use of funds of a local political club by converting $11,000 James W. Winter (Registered Representative, Houston, customer’s signature on the checks and depositing them to his own use and benefit. Texas) submitted a Letter of Acceptance, Waiver and into his personal checking account without the customer’s Consent pursuant to which he was fined $100,000 and knowledge or consent. In addition, Strickland received two Richard T. Clark, Jr. (Registered Representative, barred from association with any NASD member in any checks totaling $4,770 that had been drawn on a public Tulsa, Oklahoma) submitted an Offer of Settlement pur- capacity. Without admitting or denying the allegations, customer’s IRA account and converted the monies for his suant to which he was barred from association with any Winter consented to the described sanctions and to the own use and benefit without the customer’s knowledge or NASD member in any capacity. Without admitting or entry of findings that he recommended and sold mortgage- consent. Furthermore, Strickland engaged in outside busi- denying the allegations, Clark consented to the described backed derivative products to public customers without ness activities without giving prior written notice to or sanctions and to the entry of findings that he failed and disclosing the nature and risks of these products and that approval from his member firm and recommended to a neglected to notify his member firms in writing of his per- the products might not have been suitable for the public customer the transfer of funds when such recom- sonal securities accounts that he opened at other member customers. mendation and the resultant transactions were unsuitable firms. The findings also stated that Clark failed to provide for the customer on the basis of his financial situation, written notification to the other member firms of his investment objectives, and needs. Strickland also failed to employment with his member firms. District 7—Florida, Georgia, North Carolina, South respond to NASD requests for information. Carolina, Puerto Rico and the Canal Zone, and the March Actions Virgin Islands District 6—Texas Donald Sherman Becker (Registered Representative, Carrollton, Texas) submitted a Letter of Acceptance, December Actions Waiver and Consent pursuant to which he was fined Charles E. Anderson, Jr. (Registered Representative, December Actions $5,000 and suspended from association with any NASD Seneca, South Carolina) was fined $20,000 and barred member in any capacity for two weeks. Without admitting None from association with any NASD member in any capacity. or denying the allegations, Becker consented to the The sanctions were based on findings that Anderson failed January Actions described sanctions and to the entry of findings that he to respond to NASD requests for information about his solicited securities transactions without being registered termination from a member firm. Joe Dwayne Baugus (Registered Representative, with a member firm. Charles T. Birdsong (Registered Representative, Spring, Texas) was fined $50,000 and barred from associ- Larry Valton Davis (Registered Principal, Dallas, ation with any NASD member in any capacity. The sanc- Tampa, Florida) was fined $5,000 and suspended from Texas) submitted a Letter of Acceptance, Waiver and association with any NASD member in any capacity for 30 tions were based on findings that Baugus participated in a Consent pursuant to which he was fined $20,000, barred private securities transaction without providing prior writ- days. The sanctions were based on findings that Birdsong from association with any NASD member in any capacity, promised two public customers that he would reimburse ten notice to his member firm. Baugus also failed to and required to pay $52,000. Without admitting or denying respond to NASD requests for information. them for the losses they incurred in their securities the allegations, Davis consented to the described sanctions accounts and sent checks totaling $11,350 to the customers Glenn Ray Dean (Registered Representative, Port and to the entry of findings that he prepared a confidential to cover margin calls in their accounts. Isabel, Texas) submitted an Offer of Settlement pursuant private offering memorandum and thereafter disseminated to which he was barred from association with any NASD or caused the dissemination of that offering memorandum Birdsong’s suspension began November 18, 1996, and member in any capacity. Without admitting or denying the to potential investors knowing that it contained false infor- concluded December 17, 1996. allegations, Dean consented to the described sanction and mation. The findings also stated that Davis participated in to the entry of findings that he effected a private securities a private securities transaction and failed to provide writ- John S. Brownson, Jr. (Registered Representative, ten notice to his member firm. North Miami Beach, Florida) was fined $30,000 and transaction without providing prior written notice to his barred from association with any NASD member in any member firm. The findings also stated that Dean failed to Nationwide Securities Corporation (Fort Worth, capacity. The sanctions were based on findings that respond timely and completely to NASD requests for Texas) and Kevin Bryan Williams (Registered Brownson opened a securities account with his member information. Principal, Fort Worth, Texas) submitted a Letter of firm under a false customer name and failed to disclose Bruce William Irvine (Registered Representative, Acceptance, Waiver and Consent pursuant to which they that the address and telephone number on the account card Temple, Texas) was fined $50,000 and barred from asso- were fined $15,000, jointly and severally and Williams was the old office address and telephone of another indi- ciation with any NASD member in any capacity. The sanc- was suspended from association with any NASD member vidual who controlled the account. tions were based on findings that Irvine received checks in any capacity for two years. Without admitting or deny- made payable to public customers on which he forged the ing the allegations, the respondents consented to the James Henry Jones, Jr. (Registered Representative, St. signatures of such customers and converted the funds to described sanctions and to the entry of findings that the Petersburg, Florida) was fined $20,000 and barred from his own use and benefit. Irvine also failed to respond to firm, acting through Williams, effected securities transac- association with any NASD member in any capacity. The NASD requests for information. tions while failing to maintain its minimum required net sanctions were based on findings that Jones failed to capital and failed to maintain accurate books and records. respond to NASD requests for information about customer February Actions The NASD determined that the firm, acting through complaints. Williams, failed to enforce its written supervisory proce- Micah C. Douglas (Registered Representative, dures and permitted individuals to engage in the invest- James A. Madorma (Registered Representative, Kingwood, Texas) was fined $7,500 and suspended from ment banking or securities business of the firm without Wellington, Florida) was fined $30,000 and barred from association with any NASD member in any capacity for 45 being properly registered with the NASD. The findings association with any NASD member in any capacity. The days. The SEC affirmed the sanctions following appeal of also stated that the firm, acting through Williams, reported sanctions were based on findings that Madorma effected or a September 1995 NBCC decision. The sanctions were 20 of 200 transactions reviewed as late, but failed to desig- caused to be effected purchase transactions in the account based on findings that Douglas failed to give his member nate the transactions as late. of a public customer without the customer’s prior knowl- firm prior written notice of outside business activities that edge or authorization. Madorma also failed to respond to consisted of securities transactions conducted in the name John Daniel Reaves (Registered Representative, an NASD request for information. of a company with his name. Douglas also made misrepre- Houston, Texas) submitted an Offer of Settlement pur- sentations to a public customer about himself and his com- suant to which he was suspended from association with

National Association of Securities Dealers, Inc. June 1997

24 Russell Charles Martin (Registered Representative, Phillip L. Mosley (Registered Representative, Atlanta, endorsed the check, cashed it or caused it to be cashed Miami Beach, Florida) was fined $10,000, suspended Georgia) was fined $20,000 and barred from association through an account in which he had a beneficial interest, from association with any NASD member in any capacity with any NASD member in any capacity. The sanctions and used the funds for some purpose other than for the for 30 days, and ordered to requalify by exam as a general were based on findings that Mosley failed to respond to benefit of the customer. securities sales representative. The sanctions were based NASD requests for information about his termination from on findings that Martin effected or caused to be effected a member firm. Dianne Baum (Associated Person, Staten Island, New the purchase of warrants in the joint account of public cus- York) submitted an Offer of Settlement pursuant to which tomers without their prior knowledge or authorization. Richard T. Sullivan, Jr. (Registered Representative, she was fined $10,000 and barred from association with Staten Island, New York) submitted an Offer of any NASD member in any capacity. Without admitting or Rothschild Global Investments, Inc. (Tampa, Florida) Settlement pursuant to which he was fined $5,000, sus- denying the allegations, Baum consented to the described was fined $25,000 and expelled from membership in the pended from association with any NASD member in any sanctions and to the entry of findings that she failed to NASD. The sanctions were based on findings that the firm principal or supervisory capacity for one year, prohibited respond to NASD requests to appear for an on-the-record conducted a securities business while failing to maintain from serving as a director of compliance for a member interview. its minimum required net capital and filed inaccurate firm for two years following his reemployment by any FOCUS Part I and IIA reports with the NASD. The firm NASD member firm, and required to requalify by exam in Dina L. Casanova (Associated Person, Brooklyn, New also prepared an inaccurate general ledger, trial balance, any principal capacity. Without admitting or denying the York) was fined $10,000 and barred from association with and net capital computation and failed to give telegraphic allegations, Sullivan consented to the described sanctions any NASD member in any capacity. The sanctions were notice of its net capital deficiency. and to the entry of findings that he failed to establish, based on findings that Casanova failed to appear at the maintain, and enforce reasonable supervisory procedures NASD for an on-the-record interview. Ira Weiner (Registered Representative, Sunrise, to prevent his member firm’s retail customers from being Jerome H. Kowalski (Registered Representative, Florida) submitted a Letter of Acceptance, Waiver and charged fraudulently excessive markups. Consent pursuant to which he was fined $145,000 and Dayton, Ohio) and John F. Rebolt (Registered barred from association with any NASD member in any Anthony J. Toscano (Registered Representative, Representative, Fairborn, Ohio). Kowalski was fined capacity. Without admitting or denying the allegations, Clearwater, Florida) was fined $10,000 and required to $7,500, suspended from association with any NASD mem- Weiner consented to the described sanctions and to the requalify by exam as a general securities representative. ber in any capacity for 60 days, required to requalify by entry of findings that he obtained from a public customer The sanctions were based on findings that Toscano effect- exam as a general securities representative, and ordered to checks totaling $29,000 intended for the purchase of ed the purchase of securities in the account of a public pay $5,740 in restitution. Rebolt was fined $12,500, sus- shares of a common stock, deposited the checks in the customer without the customer’s knowledge or authoriza- pended from association with any NASD member in any bank account of an entity over which he exercised control, tion. capacity for 60 days, ordered to requalify by exam as a and converted the funds for his own use and benefit. general securities representative, and ordered to pay Francisco S. Velez (Registered Representative, San $9,785 in restitution. The NBCC affirmed the sanctions January Actions Juan, Puerto Rico) was fined $25,000 and barred from following appeal of a Cleveland DBCC decision. The association with any NASD member in any capacity. The sanctions were based on findings that Kowalski and Rebolt None sanctions were based on findings that Velez engaged in used the means or instruments of interstate commerce or business activities outside the scope of his employment the mail to sell securities when there was no registration February Actions with his member firm and failed to disclose to the firm his statement filed with the SEC or in effect for such securi- involvement in such activities. ties. Kowalski and Rebolt also participated in private secu- Donald G. Brown (Registered Representative, Naples, rities transactions by selling presubscription shares of Florida) was fined $35,000 and barred from association Deborah A. Woodard (Registered Representative, stock to public customers and failed to give prior written with any NASD member in any capacity. The sanctions Navarre, Florida) was fined $20,000 and barred from notice to and obtain prior written authorization from their were based on findings that Brown sold a $5,000 munici- association with any NASD member in any capacity. The member firm to engage in such activities. Furthermore, pal bond to a public customer outside the scope of his sanctions were based on findings that Woodard failed to Rebolt failed to respond to NASD requests for informa- employment with his member firm without giving prior respond to an NASD request for information about her tion. written notice to or receiving prior written permission from termination from a member firm. his member firm to engage in the transaction. Moreover, Pierce & Company L.P. (Chicago, Illinois), Wayne L. Brown failed to return the customer’s funds in a timely Craig James Zavada (Associated Person, Boynton Pierce (Registered Principal, Oak Park, Illinois), and manner after he was unable to obtain delivery of the Beach, Florida) was fined $20,000 and barred from asso- Carol J. Berberich (Registered Principal, Bartlett, bonds. ciation with any NASD member in any capacity. The sanc- Illinois) submitted a Letter of Acceptance, Waiver and tions were based on findings that Zavada failed to respond Consent pursuant to which they were fined $20,000, joint- Richard K. Frazier (Registered Representative, to an NASD request for information about his termination ly and severally. Without admitting or denying the allega- Tampa, Florida) was fined $20,000 and barred from asso- from a member firm. tions, the respondents consented to the described sanction ciation with any NASD member in any capacity. The sanc- and to the entry of findings that the firm, acting through tions were based on findings that Frazier failed to respond March Actions Pierce and Berberich, conducted a securities business to an NASD request for information about his termination while failing to maintain its minimum required net capital. from a member firm. None The NASD also found that the firm, acting through Pierce and Berberich, prepared inaccurate trial balances and net Jeffrey L. Greene (Registered Principal, Greenville, District 8—Illinois, Indiana, Michigan, part of upstate capital computation and filed inaccurate FOCUS Part I and South Carolina) submitted an Offer of Settlement pur- IIA reports with the NASD. suant to which he was fined $50,000 and barred from asso- New York (the counties of Livingston, Monroe, and ciation with any NASD member in any capacity. Without Steuben, and the remainder of the state west of such Brian L. Plescher (Registered Representative, Grand admitting or denying the allegations, Greene consented to counties), Ohio, and Wisconsin Rapids, Michigan) submitted an Offer of Settlement pur- the described sanctions and to the entry of findings that he suant to which he was barred from association with any received a $10,000 check from a public customer for December Actions NASD member in any capacity. The sanction was based investment purposes and instead, converted the proceeds on findings that Plescher exercised discretion in the for his own use and benefit. Furthermore, the NASD deter- None accounts of public customers without obtaining written mined that, to conceal his misconduct, Greene gave the authorization from the customers and written acceptance customer a false confirmation statement showing that the January Actions of the discretionary authority by his member firm. customer’s funds had been invested. Roberto Gabriel Anker (Registered Representative, Mark J. Pruss (Registered Representative, Plainfield, Donald E. James (Registered Representative, Athens, Rochester Hills, Michigan) was barred from association Illinois) was fined $355,000, barred from association with Georgia) was fined $20,000 and barred from association with any NASD member in any capacity. The sanction any NASD member in any capacity, and ordered to pay with any NASD member in any capacity. The sanctions was based on findings that Anker engaged in private secu- $66,742.68 in restitution to a customer. The sanctions were were based on findings that James failed to respond to rities transactions without providing prior written notice to based on findings that Pruss obtained from a public cus- NASD requests for information about his termination from or obtaining prior written authorization from his member tomer checks totaling $66,742.68 with instructions to use a member firm. firm to engage in such activities. Anker also failed to the funds to purchase securities. Pruss failed to follow said respond to NASD requests for information. instructions and used the funds for some purpose other Kenneth N. Kleid (Registered Representative, than for the benefit of the customer. Pruss also failed to Parkland, Florida) was fined $20,000 and barred from John F. Cooper (Registered Representative, Mesa, respond to NASD requests for information. association with any NASD member in any capacity. The Arizona) was fined $15,000, barred from association with sanctions were based on findings that Kleid failed to any NASD member in any capacity, and required to pay Richard L. Sladek (Registered Representative, respond to NASD requests for information about his termi- $3,099.80 in restitution to a member firm. The sanctions Cuyahoga Falls, Ohio) was fined $92,000, barred from nation from a member firm. were based on findings that Cooper obtained a dividend association with any NASD member in any capacity, and withdrawal check made payable to an insurance customer, required to pay $12,000 in restitution to a member firm.

NASD Regulatory & Compliance Alert June 1997

25 The sanctions were based on findings that Sladek received he was fined $36,156, suspended from association with failed to give prior written notice of such sales to his mem- a $12,000 check from a public customer for investment in any NASD member in any capacity for five business days, ber firm, and to obtain prior written authorization from his a mutual fund. Without the customer’s consent, Sladek and required to requalify by exam as a general securities member firm to engage in such activities. failed to use the funds for their intended purpose and used representative. Without admitting or denying the allega- the funds for some other purpose other than for the benefit tions, Leytze consented to the described sanctions and to Jacqueline Marie Freeze (Registered Representative, of the customer. Sladek also failed to respond to NASD the entry of findings that he participated in the solicitation Huntington Woods, Michigan) submitted an Offer of requests for information. and sale of preferred stock to public customers on a private Settlement pursuant to which she was fined $25,000 and basis and failed to give prior written notice to and obtain barred from association with any NASD member in any Craig D. Sterling (Registered Representative, Chicago, prior written authorization from his member firm to capacity. Without admitting or denying the allegations, Illinois) submitted a Letter of Acceptance, Waiver and engage in such activities. Freeze consented to the described sanctions and to the Consent pursuant to which he was fined $2,500 and sus- entry of findings that she participated in the offer and sale pended from association with any NASD member in any Elmer G. Schuchmann, Jr. (Registered Representative, of securities to public customers on a private basis and capacity for two business days. Without admitting or deny- Red Bud, Illinois) submitted an Offer of Settlement pur- failed to give prior written notice of, and to obtain prior ing the allegations, Sterling consented to the described suant to which he was fined $100,000 and barred from written authorization from her member firm, to engage in sanctions and to the entry of findings that he charged retail association with any NASD member in any capacity. such activities. customers unfair prices, including excessive gross com- Without admitting or denying the allegations, Schuchmann missions, in the sale of securities. consented to the described sanctions and to the entry of Richard Geiger (Registered Representative, Peoria, findings that he participated in private securities transac- Illinois) submitted an Offer of Settlement pursuant to James C. Turchiarilli (Registered Representative, tions without giving written notice to and receiving written which he was fined $10,000, suspended from association Williamsville, New York) was fined $25,000, suspended approval from his member firms to engage in such activi- with any NASD member in any capacity for 10 business from association with any NASD member in any capacity ties. days, and prohibited for one year from qualifying and/or for 30 days, and required to requalify by exam as a general acting in any principal capacity with any NASD member securities representative and general securities principal. Kevin Todd Smith (Registered Representative, Dixon, firm. Without admitting or denying the allegations, Geiger The sanctions were based on findings that Turchiarilli par- Illinois) submitted a Letter of Acceptance, Waiver and consented to the described sanctions and to the entry of ticipated in private securities transactions and failed to Consent pursuant to which he was fined $8,000 and barred findings that he was associated with a member firm as its give prior written notice to or obtain prior written autho- from association with any NASD member in any capacity. president, while failing to properly qualify and/or register rization from his member firm to engage in such activities. Without admitting or denying the allegations, Smith con- in the appropriate capacity prior to engaging in such sented to the described sanctions and to the entry of find- capacity with the firm. The findings stated that Geiger, John J. Weber (Registered Representative, Newport ings that he obtained a $3,000 check from a public acting on behalf of his member firm, effected securities Beach, California) submitted a Letter of Acceptance, customer with instructions to use the funds to pay a loan transactions while failing to timely and accurately report Waiver and Consent pursuant to which he was fined against the customer’s life insurance policy. The NASD the transactions and while failing to disclose accurate $5,000 and suspended from association with any NASD found that Smith failed to follow the customer’s instruc- information on customer confirmations. The NASD also member in any capacity for three business days. Without tions and used the funds for some purpose other than for found that Geiger, acting on behalf of his member firm, admitting or denying the allegations, Weber consented to the benefit of the customer. permitted an individual to engage in the investment bank- the described sanctions and to the entry of findings that he ing or securities business as a representative with his mem- charged retail customers unfair prices including excessive State First Financial, Inc. (Lansing, Michigan), Jerry ber firm, while the individual failed to properly qualify and gross commissions in sales of securities. G. Sutton (Registered Principal, East Lansing, register in the appropriate capacity. Michigan), and Karen S. Smelker (Registered February Actions Representative, Lansing, Michigan) submitted a Letter Charles William Maniaci (Registered Representative, of Acceptance, Waiver and Consent pursuant to which the Detroit, Michigan) submitted an Offer of Settlement pur- J. Richard Allison (Registered Representative, Palm firm and Sutton were fined $13,500, jointly and severally suant to which he was fined $83,000 and barred from asso- Beach, Florida) submitted an Offer of Settlement pur- and Smelker was fined $16,000. Without admitting or ciation with any NASD member in any capacity. Without suant to which he was fined $2,500 and suspended from denying the allegations, the respondents consented to the admitting or denying the allegations, Maniaci consented to association with any NASD member in any capacity for 30 described sanctions and to the entry of findings that the the described sanctions and to the entry of findings that he days. Without admitting or denying the allegations, firm, acting through Sutton, permitted Smelker to engage participated in the offer and sale of securities to public Allison consented to the described sanctions and to the in the investment banking or securities business and func- customers on a private basis and failed to give prior writ- entry of findings that he signed two customers’ names to tion as a representative when she was barred and subject to ten notice of, and to obtain prior written authorization annuity change request forms that changed the disqualification. from, his member firm to engage in such activities. The broker/dealer and representative of record for the findings also stated that Maniaci failed to respond to customers and submitted the forms without the knowledge March Actions NASD requests for information. or consent of the customers. Mark Antonio Allwood (Registered Representative, Michael W. McGhee (Registered Representative, Anthony Joseph Amaradio (Registered Representative, Bronx, New York) was fined $48,519.75 and barred from Columbus, Ohio) submitted a Letter of Acceptance, Laguna Hills, California) submitted an Offer of association with any NASD member in any capacity. The Waiver and Consent pursuant to which he was fined Settlement pursuant to which he was fined $75,000, sus- sanctions were based on findings that Allwood obtained $20,000 and barred from association with any NASD pended from association with any NASD member in any checks totaling $8,024.82 issued by his member firm and member in any capacity. Without admitting or denying the capacity for 90 days, required to pay $13,805.43 in restitu- made payable to public customers, cashed the checks, and allegations, McGhee consented to the described sanctions tion to customers, and must requalify by exam. Without used the funds for some purpose other than for the benefit and to the entry of findings that he obtained unauthorized admitting or denying the allegations, Amaradio consented of the customers without their knowledge or consent. loans and dividend withdrawals from public customers by to the described sanctions and to the entry of findings that Allwood also obtained a public customer’s signature on a signing their names to service request forms for their he recommended to public customers the purchase of policyowner service request form under the pretense that insurance policies without their permission. insurance products without having reasonable grounds for the form would be used to change the beneficiary on the believing that such recommendations were suitable for the customer’s variable life policy. Furthermore, Allwood Mark Walter Promack (Registered Representative, customers based upon their investment objectives, finan- failed to respond to NASD requests for information. Clinton Township, Michigan) submitted an Offer of cial situations, and needs. Settlement pursuant to which he was fined $10,000 and Richard W. Bosley (Registered Representative, barred from association with any NASD member in any Amaradio’s suspension began February 1, 1997. Cincinnati, Ohio) was fined $38,000 and barred from capacity. Without admitting or denying the allegations, association with any NASD member in any capacity. The Promack consented to the described sanctions and to the Robert J. Gilbert (Registered Principal, New York, sanctions were based on findings that Bosley received a entry of findings that he participated in the offer and sale New York) submitted a Letter of Acceptance, Waiver and $2,970 check from a public customer for the purchase of a of securities to public customers on a private basis and Consent pursuant to which he was fined $40,000 and mutual fund and without the customer’s knowledge or failed to give prior written notice of, and to obtain prior barred from association with any NASD member in any consent, used the funds for some purpose other than for the written authorization from, his member firm to engage in capacity. Without admitting or denying the allegations, benefit of the customer. Bosley also failed to respond to such activities. Gilbert consented to the described sanctions and to the NASD requests for information. entry of findings that he purchased and sold securities for Angel B. Rivas (Registered Representative, Madrid, the accounts of public customers without the customers’ Simone Joseph DiBella (Registered Representative, Spain) submitted an Offer of Settlement pursuant to which knowledge or consent and in the absence of written or oral Clinton Township, Michigan) submitted an Offer of he was fined $260,000, barred from association with any authorization to exercise discretion in said accounts. The Settlement pursuant to which he was fined $50,000 and NASD member in any capacity, and required to pay findings also stated that Gilbert failed to respond to NASD barred from association with any NASD member in any $52,000 in restitution to his member firm. Without admit- requests to appear for an on-the-record interview. capacity. Without admitting or denying the allegations, ting or denying the allegations, Rivas consented to the DiBella consented to the described sanctions and to the described sanctions and to the entry of findings that he David J. Leytze (Registered Representative, Cincinnati, entry of findings that he participated in the offer and sale transferred $39,000 to his personal bank account from the Ohio) submitted an Offer of Settlement pursuant to which of securities to public customers on a private basis and operation account of his member firm without the firm’s

National Association of Securities Dealers, Inc. June 1997

26 knowledge or consent and in the absence of any entitle- Raymond L. Stekloff (Registered Representative, December Actions ment of such funds. The findings also stated that Rivas Rochester, New York) was fined $30,000 and barred issued checks totaling $3,500 to an attorney who rendered from association with any NASD member in any capacity. Terrance L. Areford (Registered Representative, no services to his member firm but instead rendered ser- The sanctions were based on findings that Stekloff provid- Morgantown, West Virginia) submitted an Offer of vices to Rivas personally without the knowledge or con- ed a letter to a public customer that was intended to induce Settlement pursuant to which he was fined $10,000 and sent of his member firm. Furthermore, the NASD the customer to transfer an individual’s retirement account barred from association with any NASD member in any determined that Rivas issued a $20,000 bonus check to back to his member firm from another firm by offering the capacity. Without admitting or denying the allegations, himself and failed to deduct amounts required to be with- customer $15,000 to compensate him for previous losses Areford consented to the described sanctions and to the held, and thereafter, submitted a false invoice when the while the account was handled by his member firm, or a entry of findings that he affixed the signature of a public payment was questioned by his member firm’s auditors. guarantee that this account would be worth $125,000 on a customer to an application for a variable annuity and sub- The NASD found that Rivas failed to respond to NASD certain date. The letter, written by Stekloff, falsely purport- mitted the application to his member firm without the requests for information. ed to be from a regional vice president of his member firm. authorization or consent of the customer. Stekloff also failed to respond to NASD requests for infor- Patrick Lee Roese (Registered Representative, mation. Charles H. Boyd (Registered Principal, Baltimore, Columbus, Ohio) submitted a Letter of Acceptance, Maryland) was fined $50,000 and barred from association Waiver and Consent pursuant to which he was barred from George Arthur Stemple (Registered Representative, with any NASD member in any capacity. The sanctions association with any NASD member in any capacity. Crete, Illinois) was fined $75,000, barred from association were based on findings that Boyd affixed the endorsements Without admitting or denying the allegations, Roese con- with any NASD member in any capacity, and required to of public customers on a $25,000 check and deposited the sented to the described sanction and to the entry of find- pay $5,000 in restitution. The sanctions were based on check to a bank account of a corporation in which he had ings that he accepted $11,000 from public customers for findings that Stemple obtained a $5,000 check that repre- an ownership interest without the prior authorization of the the purchase of security and insurance products, deposited sented a partial surrender of an insurance policy owned by customers. Boyd also failed to respond to NASD requests the funds into the account of a financial planning company a public customer, endorsed the check, and used the pro- for information. he created as a sole proprietorship, disbursed $5,000 for a ceeds for some purpose other than for the benefit of the customer’s securities purchases, and used the remaining customer. Furthermore, Stemple signed a Form U-4 that Edwin G. Carpenter, II (Registered Representative, $6,000 for his own benefit. failed to disclose a final order permanently revoking his Philadelphia, Pennsylvania) submitted an Offer of Indiana insurance license. Stemple also failed to respond Settlement pursuant to which he was fined $20,000 and Richard W. Rohde (Registered Representative, Rocky to NASD requests for information. barred from association with any NASD member in any River, Ohio) submitted a Letter of Acceptance, Waiver capacity. Without admitting or denying the allegations, and Consent pursuant to which he was fined $100,000, Steven Richard Wilmoth (Registered Representative, Carpenter consented to the described sanctions and to the barred from association with any NASD member in any East Pointe, Michigan) submitted an Offer of Settlement entry of findings that he failed to respond to NASD capacity, and required to pay $42,857.31 in restitution to a pursuant to which he was fined $10,000 and barred from requests to appear and provide testimony in connection member firm. Without admitting or denying the allega- association with any NASD member in any capacity. with an investigation. tions, Rohde consented to the described sanctions and to Without admitting or denying the allegations, Wilmoth the entry of findings that he received accumulated divi- consented to the described sanctions and to the entry of Christopher C. Chaney (Registered Representative, dends, cash surrender values, and policy loans from insur- findings that he participated in the offer and sale of securi- Jessup, Maryland) was fined $25,000 and barred from ance policies or annuities maintained by public customers ties to public customers on a private basis and failed to association with any NASD member in any capacity. The totaling $46,996.59, applied $4,142.28 of the funds to pre- give prior written notice of, and to obtain prior written sanctions were based on findings that Chaney purchased mium payments, and retained the remaining $42,857.31 authorization from, his member firm to engage in such shares of stock for the account of a public customer with- for his own use and benefit. activities. out the customer’s knowledge or consent. Chaney also failed to respond to NASD requests for information. David D. Ryan (Registered Representative, Chicago, Michael Francis Zapytowski (Registered Illinois) was fined $20,000 and barred from association Representative, Roseville, Michigan) submitted an Offer Michael G. Cohen (Registered Principal, Philadelphia, with any NASD member in any capacity. The sanctions of Settlement pursuant to which he was fined $15,000 and Pennsylvania) submitted an Offer of Settlement pursuant were based on findings that Ryan failed to respond to barred from association with any NASD member in any to which he was fined $20,000 and barred from association NASD requests for information. capacity. Without admitting or denying the allegations, with any NASD member in any capacity. Without admit- Zapytowski consented to the described sanctions and to ting or denying the allegations, Cohen consented to the Kenneth Lawrence Schmidt (Registered the entry of findings that he engaged in private securities described sanctions and to the entry of findings that he Representative, Grosse Pointe Farms, Michigan) sub- transactions while failing to give prior written notice of, failed to respond to NASD requests to provide testimony. mitted an Offer of Settlement pursuant to which he was and obtain prior written authorization from, his member Francis P. Collins (Registered Representative, Drexel fined $45,000 and barred from association with any NASD firm to engage in such activities. member in any capacity. Without admitting or denying the Hill, Pennsylvania) submitted a Letter of Acceptance, allegations, Schmidt consented to the described sanctions Gus Neno Zoppi, Jr. (Registered Representative, Waiver and Consent pursuant to which he was fined and to the entry of findings that he participated in the offer Rochester Hills, Michigan) submitted an Offer of $250,000 and barred from association with any NASD and sale of securities to public customers on a private basis Settlement pursuant to which he was fined $115,000 and member in any capacity. Without admitting or denying the and failed to give prior written notice of, and to obtain barred from association with any NASD member in any allegations, Collins consented to the described sanctions prior written authorization from, his member firm to capacity. Without admitting or denying the allegations, and to the entry of findings that he distributed internal engage in such activities. Zoppi consented to the described sanctions and to the entry summaries to registered representatives regarding recom- of findings that he participated in the offer and sale of mended stocks that failed to disclose material risks and Timothy J. Smith (Associated Person, Plymouth, securities to public customers on a private basis and failed material adverse financial information about the stocks. Michigan) submitted an Offer of Settlement pursuant to to give prior written notice of, and to obtain prior written The findings also stated that Collins discouraged registered which he was fined $80,000 and barred from association authorization from, his member firm to engage in such representatives from doing their own research into recom- with any NASD member in any capacity. Without admit- activities. The findings also stated that Zoppi failed to mended stocks and gave scripts to registered representa- ting or denying the allegations, Smith consented to the respond to NASD requests for information. tives about stocks for use in their sales presentations to described sanctions and to the entry of findings that he public customers containing price predications, material participated in the offer and sale of securities to public Gus Neno Zoppi, III (Registered Representative, Oak omissions, and material misrepresentations. Furthermore, customers on a private basis and failed to give prior writ- Park, Michigan) submitted an Offer of Settlement pur- the NASD found that Collins discouraged registered repre- ten notice of, and to obtain prior written authorization suant to which he was fined $50,000 and barred from asso- sentatives from processing unsolicited sell orders from from, his member firm to engage in such activities. ciation with any NASD member in any capacity. Without customers and encouraged or permitted registered repre- admitting or denying the allegations, Zoppi consented to sentatives he supervised to execute unauthorized trades in Scott Michael Sowles (Registered Representative, the described sanctions and to the entry of findings that he customer accounts to purchase recommended stocks. Clarkston, Michigan) submitted an Offer of Settlement participated in the offer and sale of securities to public pursuant to which he was fined $165,000 and barred from customers on a private basis and failed to give prior writ- John R. Cox (Registered Representative, Unionville, association with any NASD member in any capacity. ten notice of, and to obtain prior written authorization Pennsylvania) was fined $20,000 and barred from associ- Without admitting or denying the allegations, Sowles con- from, his member firm to engage in such activities. The ation with any NASD member in any capacity. The sanc- sented to the described sanctions and to the entry of find- findings also stated that Zoppi failed to respond to NASD tions were based on findings that Cox failed to respond to ings that he participated in the offer and sale of securities requests for information. NASD requests for information about allegations by poli- to public customers on a private basis and failed to give cyholders of misrepresentation and unauthorized loan prior written notice of, and to obtain prior written autho- transactions. rization from, his member firm to engage in such activities. District 9—Delaware, District of Columbia, Maryland, The findings also stated that Sowles failed to respond to southern New Jersey (the counties of Atlantic, Michael F. Fuoco (Registered Representative, Cherry NASD requests for information. Burlington, Camden, Cape May, Cumberland, Hill, New Jersey) was fined $20,000 and barred from Gloucester, Mercer, Ocean, and Salem), Pennsylvania, association with any NASD member in any capacity. The Virginia, and West Virginia

NASD Regulatory & Compliance Alert June 1997

27 sanctions were based on findings that Fuoco failed to tives he supervised to engage in unauthorized trading as checks from public customers for investment purposes and respond to NASD requests for information. well. Furthermore, the NASD determined that Rubin and instead, deposited the checks and converted the funds for Chester failed to establish, implement, and enforce reason- his own use. Furthermore, Hayes prepared and provided to Anthony D. Hammond (Registered Representative, able procedures to deter or prevent the above violations. public customers statements misrepresenting that $30,000 Owings Mills, Maryland) was fined $20,000 and barred had been used to purchase shares in a fund. Hayes also from association with any NASD member in any capacity. William T. Weiss (Registered Representative, failed to respond to NASD requests for information. The sanctions were based on findings that Hammond Orangeville, Pennsylvania) submitted an Offer of failed to respond to NASD requests for information about Settlement pursuant to which he was fined $50,000 and Francis M. Kalitsi (Registered Representative, customer complaints. barred from association with any NASD member in any Washington, DC) submitted a Letter of Acceptance, capacity. Without admitting or denying the allegations, Waiver and Consent pursuant to which he was fined Robert C. Intrieri (Registered Representative, North Weiss consented to the described sanctions and to the $7,500 and suspended from association with any NASD Wales, Pennsylvania) submitted an Offer of Settlement entry of findings that without the authorization or consent member in any capacity for 10 business days. Without pursuant to which he was fined $10,000 and barred from of public customers, he affixed or caused to be affixed to admitting or denying the allegations, Kalitsi consented to association with any NASD member in any capacity. checks and a disbursement request form the endorsements the described sanctions and to the entry of findings that he Without admitting or denying the allegations, Intrieri con- of public customers, negotiated the checks, and deposited mistakenly put in an order ticket to purchase 10,000 shares sented to the described sanctions and to the entry of find- one of the checks in his bank account. of stock for a public customer instead of 1,000 shares. ings that, without the prior authorization or consent of According to the findings, rather than change the order to public customers, he affixed signatures purporting to be January Actions 1,000 shares, Kalitsi contacted seven other clients and those of the customers to insurance forms and thereafter recommended that they purchase the stock. The NASD submitted them to his member firm. Peter Caruso (Associated Person, Brooklyn, New York) found that by this time, the price had dropped and Kalitsi was fined $20,000 and barred from association with any failed to advise his customers of this. John T. Jarvis (Registered Representative, Pittsburgh, NASD member in any capacity. The sanctions were based Pennsylvania) was fined $20,000 and barred from associ- on findings that Caruso arranged and conspired to have an Oscar J. Leon (Registered Representative, Centreville, ation with any NASD member in any capacity. The sanc- imposter take the Series 7 qualification exam for him. Virginia) submitted a Letter of Acceptance, Waiver and tions were based on findings that Jarvis failed to respond to Caruso also failed to respond to NASD requests for infor- Consent pursuant to which he was fined $50,000 and NASD requests for information about customer mation. barred from association with any NASD member in any complaints. capacity. Without admitting or denying the allegations, Dominick M. Schina (Registered Representative, Leon consented to the described sanctions and to the entry Robert R. McMurtrie (Associated Person, Voorhees, Jobstown, New Jersey) submitted an Offer of Settlement of findings that he failed to respond to NASD requests for New Jersey) was fined $250,000 and barred from associa- pursuant to which he was fined $15,000, barred from asso- information. The findings also stated that Leon forged the tion with any NASD member in any capacity. The sanc- ciation with any NASD member in any capacity, and signature of a public customer on 21 checks totaling tions were based on findings that McMurtrie engaged in a required to pay a $6,513.99 arbitration award. Without $19,300 and negotiated and converted $7,600 of the pro- fraudulent scheme to misstate his member firm’s reported admitting or denying the allegations, Schina consented to ceeds for his own use and benefit. assets, capital, and net capital, thereby concealing its actu- the described sanctions and to the entry of findings that he al financial condition. McMurtrie’s aforementioned con- failed to respond to NASD requests for information. The Norman L. Patterson (Registered Representative, duct enabled his member firm to effect securities NASD also found that Schina failed to pay an arbitration Pittsburgh, Pennsylvania) submitted a Letter of transactions while failing to maintain its required level of award. Acceptance, Waiver and Consent pursuant to which he net capital. McMurtrie also failed to respond to NASD was fined $5,000 and barred from association with any requests for information. Ronald G. Zimmerman Jr. (Registered Representative, NASD member in any capacity. Without admitting or Arlington, Texas) was fined $10,000 and barred from denying the allegations, Patterson consented to the Anthony W. Palma (Registered Principal, Ft. association with any NASD member in any capacity. The described sanctions and to the entry of findings that he Lauderdale, Florida) was fined $20,000 and barred from sanctions were based on findings that Zimmerman, acting received $1,008.47 from public customers in payment of association with any NASD member in any capacity. The without the authorization or consent of a policyholder, insurance premiums and failed to remit the funds promptly sanctions were based on findings that Palma submitted affixed a signature purporting to be that of the policyholder to his member firm. false information to the NASD in connection with an to a request form for a $2,166 policy loan and submitted investigation. the form to his member firm. Rodney M. Phillips (Registered Representative, Morgantown, West Virginia) submitted a Letter of Joseph A. Panasiuk (Registered Representative, February Actions Acceptance, Waiver and Consent pursuant to which he Ardsley, Pennsylvania) was fined $20,000 and barred was fined $175,000 and barred from association with any from association with any NASD member in any capacity. James W. Gaskins, Jr. (Registered Representative, NASD member in any capacity. Without admitting or The sanctions were based on findings that Panasiuk failed Wilmington, Delaware) was fined $60,000 and barred denying the allegations, Phillips consented to the described to respond to NASD requests for information. from association with any NASD member in any capacity. sanctions and to the entry of findings that he sought and The sanctions were based on findings that Gaskins David J. Pawlicki (Registered Representative, obtained the issuance of loans by his member firm against received a $7,462.10 redemption check from the account the insurance policies of public customers. The NASD also Pittsburgh, Pennsylvania) submitted an Offer of of a public customer, negotiated the check, and failed to Settlement pursuant to which he was fined $15,000 and found that Phillips obtained possession of the loan checks remit the funds for their intended purpose. Gaskins also totaling $36,236 and converted the funds for his own use barred from association with any NASD member in any failed to respond to NASD requests for information. capacity. Without admitting or denying the allegations, and benefit without the knowledge or consent of the cus- tomers. Pawlicki consented to the described sanctions and to the Stephen Gritzan (Registered Representative, entry of findings that he affixed a customer’s signature to a Washington, DC) was barred from association with any Cecil W. Piper (Registered Representative, life insurance policy application, a policy delivery receipt, NASD member in any capacity. The sanction was based Washington, DC) was fined $26,750, barred from associ- and related documents and submitted the applications to on findings that Gritzan recommended and sold securities ation with any NASD member in any capacity, and his member firm without the customer’s authorization or to public customers when he knew of negative material required to pay $25,000 plus interest in restitution to a consent. The findings also stated that Pawlicki, in connec- information as to the risks of the securities or was reckless customer. The sanctions were based on findings that Piper tion with the submission of the aforesaid application, in not knowing and omitted to disclose the negative infor- participated in a private securities transaction while failing caused $302.90 to be withdrawn from another policy mation to the customers. Gritzan also recommended the to provide written notice of such transaction to his member owned by the customer and applied to pay the initial annu- purchase and sale of securities to public customers without firm. Piper also recommended the purchase of securities to al premium on the new application. having reasonable grounds for believing that such recom- a public customer without having reasonable grounds for mendations were suitable for them in light of the size and believing such recommendation was suitable for the cus- Roy Allan Rubin (Registered Principal, Collegeville, frequency of the transactions, the nature of the securities, Pennsylvania) and Joseph Francis Chester, Jr. tomer in light of the customer’s financial circumstances, and their financial situation, needs, and investment objec- needs, and objectives. (Registered Principal, Princeton, New Jersey) submitted tives. Furthermore, Gritzan exercised discretionary power Offers of Settlement pursuant to which Rubin was fined over the accounts of public customers and used such Frederick W. Slaughter (Registered Representative, $250,000 and barred from association with any NASD authority to effect discretionary securities transactions in Westminster, Maryland) was fined $20,000 and barred member in any capacity. Chester was fined $150,000 and these accounts without first having such discretionary from association with any NASD member in any capacity. barred from association with any NASD member in any power reduced to writing and accepted by his member The sanctions were based on findings that Slaughter failed capacity. Without admitting or denying the allegations, the firms. Gritzan also executed unauthorized transactions in to respond to NASD requests for information. respondents consented to the described sanctions and to customer accounts. the entry of findings that Rubin and Chester engaged in Salvatore J. Spena (Registered Representative, McKee abusive sales practices and directed, fostered, or induced James M. Hayes (Registered Representative, Suffolk, City, New Jersey) was fined $5,000 and barred from asso- registered representatives to also engage in abusive sales Virginia) was fined $200,000 and barred from association ciation with any NASD member in any capacity. The practices. The findings also stated that Chester engaged in with any NASD member in any capacity. The sanctions NBCC affirmed the sanctions following appeal of a unauthorized trading and directed registered representa- were based on findings that Hayes received $35,000 in Philadelphia DBCC decision. The sanctions were based on

National Association of Securities Dealers, Inc. June 1997

28 findings that Spena completed, signed, and submitted to his member firm’s knowledge or consent. DiAngelo also to induce the customer to purchase shares of a stock. his member firm applications for life insurance policies failed to respond to NASD requests for information. Furthermore, Scully purchased shares of common stock in without the knowledge or consent of the applicants. Spena the account of public customers without their prior knowl- also received from insurance customers $1,437.88 for Danilo Dario Diaz (Registered Representative, Deer edge, authorization, or consent. In addition, Scully pur- automobile insurance coverage and failed to submit the Park, New York) was fined $5,277 and barred from asso- chased or effected the purchase of shares of stock in his funds to the proper entities. ciation with any NASD member in any capacity. Without securities account at his member firm and failed to pay for admitting or denying the allegations, Diaz consented to the the purchase. Scully also failed to respond to NASD Matthew Telesca (Registered Representative, described sanctions and to the entry of findings that he requests for information. Allentown, Pennsylvania) was fined $20,000 and barred altered a money order that was submitted by a public cus- from association with any NASD member in any capacity. tomer for insurance payment and, instead, used the money George C. Vafias (Registered Representative, The sanctions were based on findings that Telesca failed to order to reinstate a lapsed policy for another customer. Brooklyn, New York) submitted a Letter of Acceptance, respond to NASD requests to appear for an on-the-record Waiver and Consent pursuant to which he was fined interview concerning a customer complaint. Rafael Diaz (Associated Person, Bronx, New York) was $15,000, suspended from association with any NASD fined $28,628.10 and barred from association with any member in any capacity for three months, and required to March Actions NASD member in any capacity. The sanctions were based pay $3,607.14 in restitution to a public customer. Vafias on findings that Diaz caused checks totaling $1,150 to be also must disgorge $815.55 plus interest and is required to Richard N. Morello (Registered Representative, drawn on the insurance policies of public customers, requalify by exam. Without admitting or denying the alle- Oakland, New Jersey) submitted a Letter of Acceptance, wrongfully obtained possession of the checks, forged the gations, Vafias consented to the described sanctions and to Waiver and Consent pursuant to which he was fined customers’ signatures, cashed the checks, and converted the entry of findings that he purchased and sold shares of $400,000 and barred from association with any NASD the funds to his own personal use. Diaz also received from stock in the accounts of public customers without their member in any capacity. Without admitting or denying the public customers $575.62 in life insurance policy premi- prior knowledge or consent. allegations, Morello consented to the described sanctions ums, failed to submit the premiums, and converted the and to the entry of findings that he forged customer signa- funds to his own personal use. Furthermore, Diaz failed to Brian S. Walker (Registered Representative, Wanaque, tures on various forms submitted to his member firm, respond to NASD requests for information. New Jersey) submitted an Offer of Settlement pursuant to obtained possession of checks issued by his member firm which he was fined $455,600 and barred from association payable to the customers, forged the customers’ signatures Lev George Fedyniak (Registered Representative, with any NASD member in any capacity. Without admit- on the checks, and converted the funds for his own use and Poughkeepsie, New York) was fined $170,000 and barred ting or denying the allegations, Walker consented to the benefit. The findings also stated that Morello received from association with any NASD member in any capacity. described sanctions and to the entry of findings that he funds from customers in payment of insurance premiums The sanctions were based on findings that Fedyniak received funds from public customers for investment pur- or for other purposes and failed to apply the funds as received $30,000 from public customers for purchasing poses and, instead, converted the funds for his own use directed. According to the findings, Morello, instead, con- investments on their behalf and instead, invested these without the customers’ knowledge, consent, or authoriza- verted the funds for his own use and benefit or caused the monies with a non-member firm and failed to return any of tion. The findings also stated that Walker failed to respond funds to be used or applied on behalf of or for the benefit the customers’ money at their request. Fedyniak also failed to NASD requests for information. of other customers. to respond to NASD requests for information. Willis White, III (Registered Representative, Gilmore Securities & Company (Fair Lawn, New Hempstead, New York) was fined $10,000, suspended District 10—the five boroughs of New York City and the Jersey) and Brian K. Gilmore (Registered Principal, from association with any NASD member in any capacity adjacent counties in New York (the counties of Nassau, Westwood, New Jersey) submitted an Offer of Settlement for two months, required to requalify by exam, ordered to Orange, Putnam, Rockland, Suffolk, Westchester) and pursuant to which they were fined $10,000, jointly and pay $3,503.12 in restitution to customers, and ordered to northern New Jersey (the state of New Jersey, except severally. Without admitting or denying the allegations, disgorge $504.25. The sanctions were based on findings for the counties of Atlantic, Burlington, Camden, Cape the respondents consented to the described sanctions and that White effected unauthorized transactions in customer May, Cumberland, Gloucester, Mercer, Ocean, and to the entry of findings that the firm, acting through accounts without the knowledge, authorization, or consent Salem) Gilmore, permitted the total outstanding principal amounts of the customers. of its satisfactory subordinated agreements to exceed 70 percent of its debt-equity total in contravention of SEC February Actions December Actions Rule 15c3-1(d). Alan Bruce Dustal (Registered Representative, South None Keith D. Hall (Associated Person, Montclair, New River, New Jersey) was fined $100,000, barred from asso- Jersey) was fined $20,000 and barred from association ciation with any NASD member in any capacity, and January Actions with any NASD member in any capacity. The sanctions required to pay restitution. The sanctions were based on were based on findings that Hall failed to appear at the findings that Dustal misappropriated customer funds total- Mitchell Aguirre (Registered Representative, NASD for an on-the-record interview. Woodhaven, New York) was fined $20,000 and barred ing over $600,000 for his own use and benefit. Dustal also from association with any NASD member in any capacity. Felix A. Rodriguez (Registered Representative, New failed to respond to NASD requests for information. The sanctions were based on findings that Aguirre failed to York, New York) submitted a Letter of Acceptance, Paul D. Evanko (Registered Principal, Glen Gardner, respond to NASD requests for information about a cus- Waiver and Consent pursuant to which he was fined New Jersey) submitted a Letter of Acceptance, Waiver tomer complaint. $25,000 and barred from association with any NASD and Consent pursuant to which he was fined $150,000 and member in any capacity. Without admitting or denying the Eddie Harrison Artis (Registered Representative, barred from association with any NASD member in any allegations, Rodriguez consented to the described sanc- capacity. Without admitting or denying the allegations, Jersey City, New Jersey) submitted an Offer of tions and to the entry of findings that he effected the pur- Settlement pursuant to which he was fined $45,000 and Evanko consented to the described sanctions and to the chase of securities in the accounts of public customers entry of findings that he gave or dictated scripts about rec- barred from association with any NASD member in any without their knowledge or authorization. capacity. Without admitting or denying the allegations, ommended stocks to registered representatives for use in Artis consented to the described sanctions and to the entry Shawn C. Ruffin (Registered Representative, Jersey their sales presentations to customers that contained price of findings that he received $5,000 from a public customer City, New Jersey) was fined $220,000 and barred from predictions, material omissions, and material misrepresen- for investment purposes and instead, converted the funds association with any NASD member in any capacity. The tations. to his own use without the customer’s knowledge, autho- sanctions were based on findings that Ruffin executed Merrill Lynch, Pierce, Fenner & Smith Incorporated rization, or consent. Artis also failed to respond to NASD unauthorized transactions in customer accounts without (New York, New York) submitted a Letter of Acceptance, requests for information. their knowledge, authorization, or consent. Ruffin also Waiver and Consent pursuant to which the firm was fined executed unsuitable options transactions in a customer’s John D’Esposito (Associated Person, Staten Island, $20,000. Without admitting or denying the allegations, the account without having a reasonable basis to believe that firm consented to the described sanction and to the entry of New York) was fined $25,000 and barred from association the transactions were suitable for the customer and made with any NASD member in any capacity. The sanctions findings that it allowed officers to act in the capacity of a misrepresentations to the customer regarding the transac- general securities principal and/or representative without were based on findings that D’Esposito had an imposter tions. Furthermore, Ruffin submitted a false new account take the Series 7 exam on his behalf. appropriate registration. The findings also stated that the form to his member firm and failed to respond to NASD firm failed to establish, maintain, and enforce written James C. DiAngelo (Registered Representative, Kings requests for information. supervisory procedures and failed to supervise adequately Park, New York) was fined $25,000 and barred from Thomas M. Scully (Registered Representative, the registration status of individuals acting in the capacity association with any NASD member in any capacity. The Franklin Square, New York) was fined $120,000, barred of a general securities principal. NBCC affirmed the sanctions following appeal of a New from association with any NASD member in any capacity, Ronald A. Perez (Registered Representative, East York DBCC decision. The sanctions were based on find- and ordered to pay $682.50 in restitution to a member ings that DiAngelo, as a result of a customer’s complaint Brunswick, New Jersey) was fined $30,000 and barred firm. The sanctions were based on findings that Scully from association with any NASD member in any capacity. about an alleged unauthorized trade executed in the cus- made misrepresentations to a public customer in an effort tomer’s account, paid the customer $450 for losses without The NBCC affirmed the sanctions following appeal of a

NASD Regulatory & Compliance Alert June 1997

29 New York DBCC decision. The sanctions were based on net capital. The findings also stated that the firm, acting Labeck participated in private securities transactions and findings that Perez failed to disclose criminal charges on a through McKay, did not abide by the terms and conditions caused a falsified new account form to become a part of Form U-4 and failed to respond to NASD requests for agreed to in its restrictive agreement with the NASD. his member firm’s books and records. Labeck also failed information. to respond to NASD requests for information. John Joseph Cummins (Registered Representative, This action has been appealed to the SEC and the sanc- New York, New York) was fined $155,000, barred from Patrice Lambert (Registered Representative, Staten tions, other than the bar, are not in effect pending consider- association with any NASD member in any capacity, and Island, New York) was fined $30,000 and barred from ation of the appeal. ordered to pay $50,000 in restitution to a customer. The association with any NASD member in any capacity. The sanctions were based on findings that Cummins engaged in sanctions were based on findings that Lambert signed and John Romano (Registered Representative, Fort private securities transactions without giving prior written filed with the NASD a Form U-4 that failed to disclose that Salonga, New York) submitted an Offer of Settlement notice to or obtaining approval from his member firm to he had been arrested and convicted of three crimes. pursuant to which he was fined $25,000, suspended from participate in such transactions. Furthermore, Cummins Lambert also failed to respond to NASD requests for infor- association with any NASD member in any capacity for obtained $25,000 from a public customer under false pre- mation. 105 days, required to requalify by exam in all capacities, tenses and converted the funds for his own use and benefit. and must refrain from opening a brokerage account, either Cummins also failed to respond to NASD requests for Dmitry A. Levitsky (Registered Representative, for himself or his spouse, at a firm other than that of his information. Philadelphia, Pennsylvania) was fined $80,000, barred employer for five years. Without admitting or denying the from association with any NASD member in any capacity, allegations, Romano consented to the described sanctions Rick Fertel (Associated Person, Brooklyn, New York) and ordered to pay $14,504.50 in restitution to customers. and to the entry of findings that he opened a securities was fined $50,000 and barred from association with any The sanctions were based on findings that Levitsky effect- account in his wife’s name at another member firm and NASD member in any capacity. The sanctions were based ed unauthorized transactions in customer accounts. neither notified his member firm in writing that he had on findings that Fertel arranged to have an impostor take Levitsky also distributed business cards to customers rep- opened the account nor advised the other firm of his asso- the Series 7 exam on his behalf. Fertel also failed to resenting that he was the president of his member firm ciation with his member firm. The findings also stated that respond to NASD requests to appear for an on-the-record without the firm’s authorization. Furthermore, Levitsky Romano placed orders for the same account without giving interview. failed to respond to NASD requests for information. prior written notice to his member firm of his intention to execute these transactions. Furthermore, the NASD found Frederick Fusco (Registered Representative, Staten Steven Markov (Registered Principal, New York, New that Romano, with an intent to defraud his member firm, Island, New York) was fined $20,000 and barred from York) was fined $20,000 and barred from association with knowingly or recklessly sold securities from his member association with any NASD member in any capacity. The any NASD member in any capacity. The sanctions were firm’s proprietary trading account at prices substantially sanctions were based on findings that Fusco failed to based on findings that Markov failed to respond to NASD below the prevailing market price, to the detriment of his respond to NASD requests for information. requests for information about his termination from a member firm. member firm. Peter B. Harman (Registered Representative, Peter Kitti Usamanont (Associated Person, New York, Cronpond, New York) was fined $29,939.50 and barred Gilbert Ramos (Registered Representative, Staten New York) submitted an Offer of Settlement pursuant to from association with any NASD member in any capacity. Island, New York) was fined $70,000 and barred from which he was fined $20,000 and barred from association The sanctions were based on findings that Harman association with any NASD member in any capacity. The with any NASD member in any capacity. Without admit- received $823.25 from a public customer as insurance sanctions were based on findings that Ramos executed the ting or denying the allegations, Usamanont consented to premium payments, failed to credit the customer’s insur- purchase and sale of securities in the accounts of public the described sanctions and to the entry of findings that he ance policy and, instead, converted the funds for his own customers without their knowledge, authorization, or con- failed to respond to NASD requests for information about use. Harman also failed to respond to NASD requests for sent. Ramos also failed to respond to NASD requests to his termination from a member firm. information. appear for an on-the-record interview. Michael Anthony Valenoti (Registered Representative, Fredric A. Hickson (Associated Person, Staten Island, Lake Ariel, Pennsylvania) submitted a Letter of New York) was fined $72,949 and barred from association District 11—Connecticut, Maine, Massachusetts, New Acceptance, Waiver and Consent pursuant to which he with any NASD member in any capacity. The sanctions Hampshire, Rhode Island, Vermont, and New York was fined $10,000 and suspended from association with were based on findings that Hickson filed a Form U-4 that (except for the counties of Nassau, Orange, Putnam, any NASD member in a principal capacity for 30 days. failed to disclose his association with a member firm and a Rockland, Suffolk, Westchester; the counties of Without admitting or denying the allegations, Valenoti criminal arrest. Furthermore, Hickson executed securities Livingston, Monroe, and Steuben; the remainder of the consented to the described sanctions and to the entry of transactions in customer accounts while unregistered and state west of such counties; and the five boroughs of findings that he failed to establish, maintain, and enforce took steps to conceal his misconduct from regulatory New York City) adequate supervisory procedures. authorities. Hickson also failed to respond to NASD requests for information. Barry C. Wilson (Registered Principal, Bloomfield, December Actions New Jersey) was fined $10,000, suspended from associa- Jeffrey Peter Ihm (Registered Representative, Farmingdale, New York) was fined $98,832.50, barred Clayton L. Chamberlain (Registered Representative, tion with any NASD member in any capacity for six Fulton, New York) was fined $20,000 and barred from months, and required to requalify by exam as a financial from association with any NASD member in any capacity, and ordered to pay $13,262.07 in restitution to a customer. association with any NASD member in any capacity. The and operations principal. The SEC affirmed the sanctions sanctions were based on findings that Chamberlain failed following appeal of a January 1996 NBCC decision. The The sanctions were based on findings that Ihm received checks totaling $15,766.50 from a public customer for to respond to NASD requests for information about cus- sanctions were based on findings that Wilson failed to tomer complaints. respond completely and timely to NASD requests for investment purposes and, instead, endorsed the checks and information regarding an investigation of his member firm. converted the funds for his own use and benefit. Ihm also Dean R. Jennings (Registered Representative, Tolland, failed to respond to NASD requests for information and to Connecticut) submitted a Letter of Acceptance, Waiver March Actions appear for an on-the-record interview. and Consent pursuant to which he was fined $25,000 and barred from association with any NASD member in any John F. Bald (Registered Representative, Carmel, New Ashwin S. Kumar (Registered Representative, Forest Hills, New York) was fined $70,000, barred from associa- capacity. Without admitting or denying the allegations, York) was fined $1,270,000, barred from association with Jennings consented to the described sanctions and to the any NASD member in any capacity, and required to pay tion with any NASD member in any capacity, and ordered to pay $10,000 in restitution. The sanctions were based on entry of findings that he facilitated loan distributions from restitution. The sanctions were based on findings that Bald insurance and annuity policies of public customers totaling converted for his own use more than $250,000 from the findings that Kumar received a $10,000 check from a pub- lic customer for investment purposes, endorsed and cashed $5,316.39 and caused the checks to be cashed or deposited accounts of a bank customer. Bald also failed to respond to to his account for his personal use and benefit without the NASD requests for information. the check, and converted the funds for his own use. Kumar also failed to respond to NASD requests for information. knowledge or consent of the customers. Buttonwood Securities, Inc. (New York, New York) John J. Labeck (Registered Representative, Valley Joseph K. McCusker (Registered Representative, and Edward A. McKay, Jr. (Registered Principal, New Center Conway, New Hampshire) submitted a Letter of York, New York) submitted a Letter of Acceptance, Stream, New York) was fined $204,125, barred from association with any NASD member in any capacity, and Acceptance, Waiver and Consent pursuant to which he Waiver and Consent pursuant to which they were fined was fined $5,000 and barred from association with any $20,000, jointly and severally. McKay was suspended ordered to pay $10,825 in restitution to a customer. The sanctions were based on findings that, in a scheme to NASD member in any capacity. Without admitting or from association with any NASD member as a general denying the allegations, McCusker consented to the securities principal for 30 days and required to requalify defraud his member firm and a public customer, Labeck executed unauthorized trades, forged a customer’s signa- described sanctions and to the entry of findings that he by exam as a general securities principal. Without admit- forged customer signatures on insurance policy dividend ting or denying the allegations, the respondents consented ture, and misused customer funds. In addition, Labeck executed the sale and purchase of shares of common stock checks totaling $505.46 without the customers’ knowledge to the described sanctions and to the entry of findings that or consent. the firm, acting through McKay, conducted a securities in the accounts of public customers without the customers’ business while failing to maintain its minimum required prior knowledge, authorization, or consent. Furthermore,

National Association of Securities Dealers, Inc. June 1997

30 January Actions and Consent pursuant to which he was fined $6,000 and Susan Baker Head (Registered Principal, Princeton, barred from association with any NASD member in any Texas) submitted a Letter of Acceptance, Waiver and Klaus Foetzsch (Registered Principal, Dusseldorf, capacity. Without admitting or denying the allegations, Consent pursuant to which she was fined $3,750, suspend- Germany) submitted an Offer of Settlement pursuant to Nathman consented to the described sanctions and to the ed from association with any NASD member in any capac- which he was fined $50,000 and required to requalify by entry of findings that he received $1,080 from a public ity for two weeks, and suspended from association with exam. Without admitting or denying the allegations, customer intended for an investment in mutual funds. The any NASD member in any principal capacity for two Foetzsch consented to the described sanctions and to the NASD found that Nathman never invested the funds as months. Without admitting or denying the allegations, entry of findings that, on behalf of his member firm, he intended and misused the funds. Head consented to the described sanctions and to the entry created and controlled a fictitious discretionary account of findings that she failed to detect the manipulative pat- through which he effected various securities transactions. Prime Capital Services, Inc. (Poughkeepsie, New tern of trading by her member firm. The NASD found that, in connection with the aforemen- York), Michael P. Ryan (Registered Principal, tioned activities, Foetzsch knowingly prepared and estab- Poughkeepsie, New York) and Ralph A. Porpora Peter Dennis Mathews (Registered Principal, Edina, lished various books and records under the fictitious (Registered Principal, Copake, New York) submitted a Minnesota), James Gus Oliver (Registered Principal, account. The findings also stated that Foetzsch knowingly Letter of Acceptance, Waiver and Consent pursuant to Grapevile, Texas), Robert Alan Williky (Registered submitted a false and misleading Form U-5 to the NASD which they were fined $20,000, jointly and severally. Representative, Colleyville, Texas) Mark Joseph Vanyo regarding the termination of a registered representative. Without admitting or denying the allegations, the respon- (Registered Representative, Eagan, Minnesota), Lyle dents consented to the described sanctions and to the entry Emery Bettenhausen, Sr. (Registered Representative, Oftring & Co., Inc. (Worcester, Massachusetts) and of findings that the firm, acting through Ryan and Porpora, Tampa, Florida) and Gloria Ann Williams (Registered Robert J. Oftring (Registered Principal, Worcester, failed to establish and enforce written supervisory proce- Representative, Plano, Texas). Mathews, Oliver, Williky, Massachusetts) submitted a Letter of Acceptance, Waiver dures. The findings also stated that the firm, acting through Vanyo, and Bettenhausen submitted an Offer of Settlement and Consent pursuant to which the respondents were fined Ryan and Porpora, misrepresented to investors the use of pursuant to which Mathews was fined $400,000 and barred $15,000, jointly and severally. In addition, Oftring must the proceeds from an intrastate best-efforts offering. from association with any NASD member in any capacity requalify by exam as a general securities principal. and Oliver was fined $25,000, suspended from association Without admitting or denying the allegations, the respon- David A. Stevenson (Registered Representative, with any NASD member in any capacity for 90 days, and dents consented to the described sanctions and to the entry Farmington, Connecticut) submitted a Letter of required to requalify by exam. Williky was fined $10,000 of findings that the firm, acting through Oftring, failed to Acceptance, Waiver and Consent pursuant to which he and suspended from association with any NASD member establish and maintain a supervisory system to supervise was fined $1,000,000 and barred from association with any in any capacity for 30 days and Vanyo was fined $50,000, the activities of each registered representative and associ- NASD member in any capacity. Without admitting or suspended from association with any NASD member in ated person of the firm adequately and failed to enforce denying the allegations, Stevenson consented to the any capacity, and required to requalify by exam. compliance with its written supervisory procedures. The described sanctions and to the entry of findings that he Bettenhausen was fined $25,000, suspended from associa- findings also stated that the firm, acting through Oftring, received customer funds intended for mutual fund invest- tion with any NASD member in any capacity for 90 days, allowed a former registered representative of the firm to ments and caused the unauthorized disbursement of liqui- and required to requalify by exam. In a separate decision solicit new business from customers and receive securities dation checks from existing mutual fund accounts totaling Williams was fined $50,000 and barred from association sales commission compensation when the individual was $700,000 that he converted for his own use and benefit with any NASD member in any capacity. not registered with the firm. without the customer’s knowledge or consent. Without admitting or denying the allegations, Mathews, February Actions Market Regulation Committee Oliver, Williky, Vanyo, and Bettenhausen consented to the described sanctions and to the entry of findings that, in None December Actions connection with a public offering, Mathews and Williky knowingly effected transactions that they knew or should March Actions None have known, or were reckless in not knowing, were non- bona fide and designed to create the appearance of a suc- Ralph W. Grant (Registered Representative, Shelton, January Actions cessful completion of the offering. The findings also stated Connecticut) submitted a Letter of Acceptance, Waiver that Mathews and Williky knowingly or recklessly bid for and Consent pursuant to which he was fined $100,000 and Castle Securities Corporation (Freeport, New York) and purchased, induced orders to bid for and purchase, and barred from association with any NASD member in any and Michael T. Studer (Registered Principal, Rockville sold or resold, 20 percent of the offering while the distrib- capacity. Without admitting or denying the allegations, Centre, New York) were fined $25,000, jointly and sever- ution continued after its purported closing. Furthermore, Grant consented to the described sanctions and to the entry ally and required to pay $19,373.56 plus interest in restitu- the NASD determined that Mathews, Oliver, and Vanyo, of findings that he withheld and misappropriated tion to customers. In addition, Studer was suspended from by means of manipulative, deceptive, and other fraudulent $23,496.29 representing premium payments on insurance association with any NASD member in any capacity for 30 devices and contrivances, effected a series of transactions policies and variable annuity contracts for public days and required to requalify by exam as a general securi- that created actual and apparent trading in a stock, artifi- customers. ties principal. The NBCC imposed the sanctions following cially supported the price, and were effected for the pur- appeal of a Market Regulation Committee Decision. The Michael J. Ireland (Registered Representative, pose of inducing the purchase or sale of the stock to others. sanctions were based on findings that the firm manipulated The NASD found that Mathews, Oliver, and Bettenhausen Madison, Maine) submitted a Letter of Acceptance, the price of a common stock in that it used its dominant Waiver and Consent pursuant to which he was fined made statements of material fact that they knew, had rea- and controlling position in the market to establish and son to know, or were reckless in not knowing, were false $25,000 and barred from association with any NASD maintain an artificial and inflated price of the stock and member in any capacity. Without admitting or denying the to induce retail customers to make investment decisions. arbitrarily increased that price when it was known there The NASD also determined that Mathews executed trans- allegations, Ireland consented to the described sanctions was little or no investor or dealer interest in the stock and and to the entry of findings that he submitted fictitious actions in the accounts of public customers that were not no favorable news or developments concerning the stock. authorized and were made in order to support a stock insurance policy disbursement request forms for public Furthermore, the firm charged its retail customers unfair customers wherein he received two checks totaling price, further the aforementioned manipulative scheme, and fraudulently excessive mark-ups ranging from 16 to and avoid net capital deficiencies by lowering his member $3,877.67. The findings also stated that Ireland forged the 66 percent over the prevailing market price for the com- customers’ signatures, double endorsed the checks, and firm’s inventory. The findings stated that Mathews also mon stock. The firm, acting through Studer, also failed to allowed an individual, who was precluded from function- deposited them into his personal account for his own use establish, implement, and enforce reasonable supervisory and benefit. ing as a registered representative, to direct trading, update procedures designed to prevent the firm’s customers from quotations, direct unauthorized transactions in customer being charged manipulated prices and unfair and fraudu- accounts, and participate in selling group and retail sales Richard B. McCulloch (Registered Representative, lently excessive markups in a common stock.The firm and Westerly, Rhode Island) submitted an Offer of efforts at his member firm. The individual also failed to Studer have appealed this action to the SEC and the sanc- establish, maintain, and enforce supervisory procedures to Settlement pursuant to which he was fined $5,000 and tions are not in effect pending consideration of the appeal. barred from association with any NASD member in any assure compliance with applicable rules, misused customer capacity. Without admitting or denying the allegations, Richard E. Gregory (Registered Representative, funds, and engaged in private securities transactions. McCulloch consented to the described sanctions and to the Irving, Texas) submitted an Offer of Settlement pursuant In addition, Williams failed to inform her member firm in entry of findings that he engaged in a private securities to which he was fined $5,000 and suspended from associa- transaction outside the regular course or scope of his writing concerning accounts and transactions she had at tion with any NASD member in any capacity for 16 another member firm or inform the executing firm of her employment with his member firm without giving prior months. Without admitting or denying the allegations, written notice to his member firm describing in detail the status with her member firm. Williams also failed to Gregory consented to the described sanctions and to the respond to NASD requests for information. proposed transaction, his role therein, and whether he entry of findings that he induced a public customer to pur- received or was to receive any selling compensation in chase a security by making predictions that he had reason Dominick M. Schina (Registered Representative, connection with the transaction. to know, or was reckless in not knowing, lacked a reason- Voorhees, New Jersey) submitted a Letter of Acceptance, able or adequate basis in fact. Richard N. Nathman (Registered Representative, Boca Waiver and Consent pursuant to which he was fined Raton, Florida) submitted a Letter of Acceptance, Waiver $25,000 and barred from association with any NASD

NASD Regulatory & Compliance Alert June 1997

31 member in any capacity. Without admitting or denying the mation and testimony requested by the NASD in connec- (Registered Principal, New York, New York), and allegations, Schina consented to the described sanctions tion with an ongoing investigation. Peter Anthony Cardillo (Registered Representative, and to the entry of findings that he entered into oral and Marlton, New Jersey) submitted a Letter of Acceptance, written agreements with a company in which he received Knight Securities, L.P. (Jersey City, New Jersey) sub- Waiver and Consent pursuant to which they were fined compensation without disclosing to his member firm or mitted a Letter of Acceptance, Waiver and Consent pur- $100,000, jointly and severally and required to pay customers that he had entered into the agreements. suant to which the firm was fined $50,000 and required to $70,453 plus interest in restitution to customers, jointly pay $166,230 in restitution to customers. Without admit- and severally. Without admitting or denying the allega- Frank P. Zitkevitz (Registered Representative, Laurel ting or denying the allegations, the firm consented to the tions, the respondents consented to the described sanctions Springs, New Jersey) submitted an Offer of Settlement described sanctions and to the entry of findings that it exe- and to the entry of findings that, in connection with the pursuant to which he was fined $20,000 and barred from cuted day limit orders after such orders had expired. recommendation and sale of a common stock, the firm, association with any NASD member in any capacity. Furthermore, the NASD determined that the firm failed to Trautman, and Kramer, failed to ensure that the firm’s Without admitting or denying the allegations, Zitkevitz establish, maintain, and enforce supervisory procedures registered representatives disclosed that Trautman and consented to the described sanctions and to the entry of that would detect and deter the above conduct. Kramer were selling the stock. The findings also stated that findings that he participated in private securities transac- the firm, Trautman, Kramer, and Cardillo failed to ensure tions and exercised discretion in the accounts of public Guy G. Mockbee (Registered Representative, that the firm’s registered representatives were aware of and customers without informing the customers of such trans- Rochester, New York) was fined $20,000 and barred disclosed material information about the stock to their actions. from association with any NASD member in any capacity. customers. Furthermore, the NASD determined that the The sanctions were based on findings that Mockbee failed firm, acting through Trautman and Cardillo, failed to February Actions to respond to NASD requests for information. establish, maintain, and enforce written supervisory proce- Kevin T. Cabell (Registered Principal, Peachtree, March Actions dures. Georgia) was fined $20,000 and barred from association Trautman Kramer & Co. (New York, New York), with any NASD member in any capacity. The sanctions Gregory Owen Trautman (Registered Principal, were based on findings that Cabell failed to provide infor- Brooklyn, New York), Robert Joseph Kramer

NASD Regulatory & Compliance Alert Information

Regarding Any Items In This Publication changes, call NASD Member Services at Regulation is a service mark of If you have further questions or (301) 590-6500. For additional copies NASD Regulation, Inc. CRD is a reg- comments, please contact either the indi- ($25 per issue, $80 per year), please istered service mark of NASD vidual listed at the conclusion of an item contact NASD MediaSourceSM at Regulation, Inc. and the North or Susan Lang, Editor, NASD (301) 590-6142. American Securities Administrators Regulatory & Compliance Alert, 1735 K Subscribers Association, Inc. (NASAA). NAqcess, Street, NW, Washington, DC 20006- Nasdaq, Nasdaq National Market, 1500, (202) 728-6969. To subscribe to RCA, please send a check OTC Bulletin Board, and Nasdaq or money order, payable to the National Regarding NASD Disciplinary Actions & Workstation are registered service Association of Securities Dealers, Inc., to marks of The Nasdaq Stock Market, Histories NASD MediaSourceSM, P.O. Box 9403, If you are a member of the media, please Inc. PORTAL, SOES, FIPS, Gaithersburg, MD 20898-9403 or, for SelectNet, The Nasdaq Stock contact NASD Media Relations at credit card orders, call NASD Media- (202) 728-8884. To investigate the disci- Market, The Nasdaq SmallCap Source at (301) 590-6142. The cost is Market, and Nasdaq Workstation II plinary history of any NASD-licensed $25 per issue or $80 per year. RCA representative or principal, call our toll- are service marks of The Nasdaq subscribers with subscription problems Stock Market, Inc. free NASD Disciplinary Hot Line at or changes may contact NASD at (800) 289-9999. (202) 728-8302. No portion of this publication may be photocopied or duplicated in any Regarding Subscriptions Questions, Other Recipients Problems, Or Changes form or by any means except as Other recipients of RCA who wish to described below without prior written Member Firms make an address change can send in consent from the NASD. Members of Please note that the compliance director writing your correct address with a label the NASD are authorized to photo- at each NASD member firm receives a (or copy of a label) from our mailing that copy or otherwise duplicate any part complimentary copy of the RCA, as does shows the current name, address, and of this publication without charge only each branch office manager. To change label code. Send your request to: NASD, for internal use by the member and your mailing address for receiving either Administrative Services, 1735 K Street, its associated persons. Nonmembers of these complimentary copies of RCA, NW, Washington, DC 20006-1500. of the NASD may obtain permission members need to file an amended Page 1 to photocopy for internal use only ©1997, National Association of of Form BD for a main office change or through the Copyright Clearance Securities Dealers, Inc. (NASD). All Schedule E of Form BD for branch Center (CCC) for a $5-per-page fee rights reserved. NASD and NASD offices. Please be aware, however, that to be paid directly to CCC, 222 MediaSource are registered service every NASD mailing will be sent to the Rosewood Drive, Danvers, MA marks of the National Association of new address. To receive a blank Form 01923. Securities Dealers, Inc. NASD BD or additional information on address

National Association of Securities Dealers, Inc. June 1997

32