Monthly Disciplinary Actions - May 2007

• An NYSE hearing officer found that from January through June 2003, the firm was not in complete compliance with the requirements for establishment of an anti-money laundering ("AML") program.
• The firm's anti-money laundering program was deficient in that it did not include written procedures detailing the process utilized and the time requirements for filing Suspicious Activity Reports ("SAR"). Additionally, the procedures did not identify the process for determining when an item reviewed by the firm became suspicious so as to warrant an SAR filing.
• The firm did not establish an adequate review for structuring transactions designed to evade reporting requirements under the Bank Secrecy Act; nor did the firm's AML department conduct any reviews for cash equivalent deposits and the firm's system did not have the ability to adequately identify cash equivalent deposits out of other types of deposits, such as checks, in order to facilitate a structuring review.
• The firm did not have an adequate system for follow-up and review for the AML exceptions it accumulated. After its AML department flagged accounts that required additional follow-up, there was inadequate record-keeping to determine the status of the follow-up review. 
• Additionally, the firm failed to make timely reports to the NYSE of its settlement of certain customer complaints.
• The NYSE hearing officer also noted the firm's improvements to its AML program, implementation of supervisory procedures to ensure timely filings of Form RE-3 reportable events, and cooperation in the investigation by the Division of Enforcement.

The NYSE imposed a penalty of a censure and a $90,000 fine. RBC Dain Rauscher, Inc. consented to the penalty.

• An NYSE hearing officer found that on July 29, 2005, just before the opening bell, Haggerty was working in his trading booth on the NYSE Floor, preparing for the commencement of trading. Employees of other Floor brokerage firms were nearby in the adjoining trading booths. Haggerty was engaged at that time in a non-business related conversation with one of his clerks, and another clerk, who was located in one of the nearby booths, overheard part of the conversation.  During this conversation, Haggerty used offensive language that personally offended the clerk who had overheard the conversation. That same morning, via a telephone system used for conducting business on the NYSE Floor, Haggerty engaged in a conversation with a clerk in his booth.  In that conversation, Haggerty again used the same offensive language.

The NYSE imposed a penalty of a censure, a $20,000 fine and an undertaking to take a sensitivity course approved by NYSE Regulation. Haggerty consented to the penalty.

• An NYSE hearing officer found that on at least 47 occasions during 2004 and 2005, August failed to properly execute CAP-DI orders in certain of her stocks in which she acted as a specialist. August would buy (sell) a security for the firm’s dealer account on parity with a CAP-DI order at a price lower (higher) than the last sale. Then, within seconds, without an independent electing transaction, she converted the same CAP-DI order and sold to (bought from) the CAP-DI order for the firm’s dealer account at a higher (lower) price. There was no change in market conditions to warrant these transactions which advantaged the firm’s dealer account. Accordingly, August engaged in conduct inconsistent with just and equitable principles of trade and violated NYSE Rule 104(a) by engaging in a course of dealings for the firm’s dealer account that were not reasonably necessary to the maintenance of a fair and orderly market and violated NYSE Rule 104.10 by failing to effectively represent orders entrusted to her.
• In arriving at the agreed upon penalty, the Division of Enforcement considered additional factors including the sporadic nature of the violative trades, the minimal benefit to the firm's dealer account, and the internal discipline imposed by the firm on August, which included significant financial loss and demotion.  

The NYSE imposed a penalty of a censure and a two-month suspension. August consented to the penalty.

• An NYSE hearing officer found that from approximately November 1997 through April 2005, Allen exercised discretion in the accounts of 15 customers of her member organization employer without prior written authorization of the customers or prior supervisory approval.
• Allen obtained verbal discretionary approval from each of the 15 customers but none executed a written authorization permitting Allen to exercise discretion in their accounts.
• In addition, Allen did not notify or seek approval from her branch office manager or any supervisor prior to her exercise of discretion in these customer accounts.
• Allen also engaged in conduct inconsistent with just and equitable principles of trade in that, in January 2005, she effected five unauthorized transactions in one other customer account after the customer, who was solicited by Allen to purchase several securities, had declined to make any of the solicited purchases.

The NYSE imposed a penalty of a censure and a six-month bar. Allen consented to the penalty.

• An NYSE hearing officer found that Brickhaus, in February 2004, without his firm’s consent, solicited three customers to pay for and exercise another customer’s non-transferable warrants to purchase restricted common shares of a company known as XYZ Corporation (“XYZ”), a company not followed by the firm.
• Brickhaus also invested his personal funds in the transaction. He and the customers were to receive the XYZ shares from the owner of the XYZ warrants upon the expiration of the two-year restriction period on the common shares.
• In connection with the transaction, Brickhaus commingled customers’ funds with his personal funds and he made misstatements to the customers.
• In August 2004, the restricted securities were deposited into the original owner’s firm account and Brickhaus failed to disclose his ownership interest in these securities to the firm.
• Thereafter, Brickhaus concealed the XYZ transaction by making material misstatements in response to direct questions from the firm’s Compliance Department and on firm questionnaires.

The NYSE imposed a penalty of a censure, a six-month bar and a $5,000 fine.  Brickhaus consented to the penalty.

• An NYSE hearing officer found that Nee, along with certain other branch office employees who acted at his direction, in preparation for internal firm audits during the period 1996 through 2001 altered certain firm documents. Information was added to the documents without proper authority, thereby causing such documents to improperly indicate timely supervisory review.
• Nee also failed to adequately supervise the activities of his subordinate employees at the branch office with whom he engaged in the improper conduct and failed to adhere to the firm's policies and procedures that required daily supervisory review of certain firm documents.
• The alterations to the firm documents by Nee, along with certain other branch office employees who acted at his direction, caused the firm to preserve inaccurate books and records.

The NYSE imposed a penalty of a censure, an eight-month bar, and a $15,000 fine. Nee consented to the penalty. See  Citigroup Global Markets, Inc., Decision 06-15 (NYSE Hearing Panel May 10, 2006) (member firm disciplined for books and records violations and supervisory deficiencies).  See also Kim A. Mastel, Decision 06-25 (NYSE Hearing Panel May 10, 2006); Patricia C. Fanella, Decision 06-26 (NYSE Hearing Panel May 10, 2006); Olivia Bowles-Kymer, Decision 06-27 (NYSE Hearing Panel May 10, 2006); Richard A. Walsh, 06-28 (NYSE Hearing Panel May 10, 2006); Constance R. Reseigh, Decision 06-29 (NYSE Hearing Panel May 10, 2006); Madeleine M. McBride, Decision 06-30 (NYSE Hearing Panel May 10, 2006) and William R. West, Decision 06-31 (NYSE Hearing Panel May 10, 2006) (discipline of individuals; sanctions commensurate with misconduct).

• An NYSE hearing officer found that during the period from approximately the fall of 2003 through March 2004, Levine, while head of his firm's whole loan desk, failed to reasonably supervise a trader subject to Levine’s supervision and control.
• The trader mismarked the value of mortgage loans and securities involved in certain forward contracts between the firm and affiliates, in order to hide the extent of, and to artificially, reduce significant losses incurred by a former trader at the firm.
• Levine was aware that the trader was hiding losses.
• During a meeting at Levine’s home, Levine’s supervisor at the firm indicated he had instructed the trader to “bleed out” the losses incurred by the former trader.
• The supervisor's indication to Levine that he had instructed the trader to "bleed out" losses constituted a "red flag" that should not have been ignored. Levine, however, did not take steps to follow up to determine what the trader was doing, based upon the instructions that the supervisor had given, and did not reasonably carry out his supervisory responsibilities.

The NYSE imposed a penalty of a censure, a nine-month bar, and a requirement to retake the applicable supervisory exam prior to reassuming any position involving supervisory responsibilities. Levine consented to the penalty.  See also Matthew Ruppel , Decision 07-18 (NYSE Hearing Board Feb. 1, 2007) (Individual disciplined for failure to timely cooperate). In addition, a disciplinary action has been commenced against Michael Flannelly, the trader, for mismarking, concealing losses and causing inaccurate books and records.

• An NYSE hearing officer granted a motion for a default determination of guilt and found that Melendez failed to comply with one or more written requests by the NYSE for information concerning a matter that occurred prior to the termination of his employment with his member firm employer.

The NYSE imposed a penalty of a censure and a bar until he cooperates, the bar to become permanent if he fails to cooperate within three months.

• An NYSE hearing officer granted a motion for a default determination of guilt and found that Sutton failed to disclose his prior criminal history on his application for employment submitted to his member firm employer and failed to comply with one or more written requests by NYSE Regulation for information concerning a matter that occurred prior to the termination of his employment with his member firm employer.

The NYSE imposed a penalty of a censure and a permanent bar.

• An NYSE hearing officer granted a motion for a default determination of guilt and found that LeBaron was convicted of Grand Theft in the Second Degree, a felony, for misappropriating funds belonging to a customer of her member firm and failed to comply with one or more written requests by NYSE Regulation for information concerning a matter that occurred prior to the termination of his employment with his member firm employer.

The NYSE imposed a penalty of a censure and a permanent bar. 

• An NYSE hearing officer found that Brown misappropriated a total of over $299,000 of the retirement money of two elderly customers during the period November 2002 to October 2006.
• Brown concealed the misappropriation from his firm by having the customers make out the checks to a bank, so that they would look like legitimate payments to a local bank. Brown then deposited the checks in his personal account at the bank.
• Brown also misrepresented to the two customers that their money was destined for legitimate investments, when in fact, he deposited the money into his own account and used it to pay his bills and expenses.
• Brown also created a false account statement to conceal his misappropriation from one of the elderly customers.
• The firm has reimbursed both customers in the full amount of the money misappropriated plus interest. 

The NYSE imposed a penalty of a censure and a permanent bar.  Brown consented to the penalty.

• An NYSE hearing panel found that Koch violated NYSE Rule 476(a)(6) in that on one or more occasions, he recommended transactions in the account of one or more customers of his member organization employer that were unsuitable in light of the customer's age, investment objectives, investment experience and financial resources.
• One customer, who was nearly 84 years old at the time he met Koch, was not a sophisticated investor. Based on Koch's recommendation, the customer took a loan against cash value and then cashed in a fully funded life insurance policy valued at approximately $187,000 and applied the proceeds to the purchase of two variable annuities. The customer did not understand the complexities of variable annuities, and Koch did not advise him with respect to the risks associated with the purchases. Koch was aware of the source of the funds for the variable annuity purchases, but did not disclose it on the purchase ticket as his firm required. Koch increased the customer's exposure to market risk from $0 to approximately $192,000.
• Another customer, a widow who was 80 years old at the time she opened her account with Koch at the firm, was not sophisticated with respect to financial matters. Her investment experience was limited to investing in mutual funds and CDs. On Koch's recommendation, the customer liquidated her mutual funds and CDs, paid the associated fees, and invested in variable annuities. Her assets were allocated among subaccounts that invested substantially in common stocks.
• The hearing panel found that "Koch was selling a complex product to unsophisticated investors who had no real knowledge about this product."  Therefore, "[h]e had an obligation to ensure that they understood the product and could make informed decisions" but did not do so.

         The NYSE imposed a penalty of a censure and a one-year bar.

On appeal, the NYSE Regulation Board of Directors affirmed the decision of the hearing panel in all respects.