Monthly Disciplinary Actions - July 2007

Member Firm Disciplined for Improper Market Timing of Mutual Funds by Brokers
Citigroup Global Markets Inc.
Hearing Board Decision: 07-105
24 Jul 2007
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Case Note
Violated NYSE Rule 342 by failing to reasonably supervise certain business activities and to establish and maintain appropriate procedures for supervision and control with respect to trading of mutual funds and mutual fund-like sub-accounts of variable annuities; violated NYSE Rules 401(a) and 476(a) by failing to prevent certain brokers from engaging in violative market timing of mutual funds, including use of deceptive practices related to market timing of mutual funds; violated Section 17(a) of Securities Exchange Act of 1934, Rules 17a-3 and 17a-4 thereunder, and NYSE Rule 440 by failing to make or preserve accurate books and records reflecting or relating to order communication and entry time for mutual fund shares, rejection or cancellation of trades related to market timing, and orders or confirmations for transactions executed by firm employees in variable annuity products sub-accounts held away from firm – Consent to censure, total payment of $50,000,000 to be distributed as follows: (a) $35,000,000 as disgorgement shall be placed into distribution fund; (b) penalty of $10,000,000 shall be paid as follows: $5,000,000 directly to NYSE Regulation and $5,000,000 directly to distribution fund; and (c) penalty of $5,000,000 shall be paid to State of New Jersey; and undertakings.
Case Summary
For Case Summary See News Release Link Below.
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Decision Affirmed On Appeal
Schon-Ex, LLC
Hearing Board Decision: 06-167
11 Jul 2007
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Case Note
Violated NYSE Rule 410A by failing to submit accurate trading information through submission of electronic blue sheets in response to requests for such information. Violated NYSE Rule 401 by submitting inaccurate trading information on electronic Blue Sheets in response to request for such information. Violated NYSE Rule 342 by failing to establish and maintain appropriate systems and procedures for supervision and control of areas responsible for complying with electronic blue sheet reporting requirements and by failing to establish separate system of follow-up and review to reasonably ensure compliance with NYSE Rules relating to preparation and submission of electronic blue sheets. Censure and $300,000 fine.
Case Summary
Schon-Ex, LLC of Jericho, New York,  a member firm, was found guilty, upon summary judgment, of operational and supervisory violations in connection with the submission of inaccurate "Blue Sheets" submissions.  A contested hearing was held to determine the penalty.
  • The Chief Hearing Officer, in a matter of first impression, determined that NYSE Rule 476(c), as amended, includes the authority for a hearing officer to "consider and, if warranted, grant a motion for summary judgment."  Further, "a moving party is entitled to summary judgment if it can demonstrate that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law."
  • Based upon this authority, the Chief Hearing Officer found that the firm violated NYSE Rule 410A by failing to submit accurate trading information through the submission of electronic blue sheets in response to one or more requests for such information by the NYSE; violated NYSE Rule 401 by failing to adhere to the principles of good business practice; and violated NYSE Rule 342 by failing to establish and maintain appropriate systems and procedures for supervision and control of areas responsible for complying with blue sheet reporting requirements and by failing to establish a separate system of follow-up and review to reasonably ensure compliance with NYSE Rules relating to the preparation and submission of blue sheets.
  • The firm's blue sheet systems caused certain short sale transactions to be erroneously identified as long sale transactions in its blue sheet submissions to the NYSE.  The inaccurate information submitted by the firm undermined the integrity of the information utilized by the NYSE during the course of investigations into questionable trading activity.
  • The systemic deficiencies in the firm's blue sheet systems occurred from approximately June 2002 through October 2004.  During that time period, at least 84 blue sheets containing inaccurate information were submitted to the NYSE.
  • The blue sheet system deficiencies repeatedly caused short sale transactions in certain proprietary accounts to be erroneously identified as long sale transactions.
  • The Market Surveillance Division of NYSE Regulation notified the firm about the problems in its blue sheet submissions in or about April 2004.  Nevertheless, between May and October 2004, the firm submitted to the NYSE 20 blue sheets that contained inaccurate information, despite its knowledge that they were incorrect.
  • It was not until February 2005 that the firm's vendor implemented corrective action to rectify these systemic deficiencies, which were completely corrected in May 2005.

In connection with the contested penalty hearing, the firm argued that settled cases should be excluded from consideration as precedent by the Hearing Panel.  The Chief Hearing Officer rejected this argument and determined that a "Hearing Panel may rely on settled cases in deciding a contested matter to the extent that they have any persuasive weight."  Following the contested hearing, and in consideration of the relevant precedents, including settled cases, the NYSE imposed a penalty of a censure and a $300,000 fine.

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

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Decision Affirmed On Appeal
James Gerard O'Callaghan
Hearing Board Decision: 05-074
11 Jul 2007
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Case Note
Violated Section 11(a)(1) of the Securities Exchange Act of 1934, as amended, and Rule 11a-1(a) promulgated thereunder, in that, on one or more occasions, while on the Floor of the Exchange, he improperly initiated, effected or executed a transaction for an account with respect to which he exercised investment discretion without meeting the requirements of a statutory exemption; engaged in conduct inconsistent with just and equitable principles of trade in that on one or more occasions, while on the Floor of the Exchange, he improperly initiated, effected or executed one or more transactions for an account with respect to which he exercised investment discretion; violated Exchange Rule 90(a) in that, on one or more occasions, he improperly initiated, effected or executed transactions on the Floor of the Exchange for an account with respect to which he exercised investment discretion; violated Exchange Rule 95(a) in that, on one or more occasions, he initiated, effected or executed transactions on the Floor of the Exchange for the purchase or sale of securities with respect to which he was vested with investment discretion – Censure, three-month suspension, and $30,000 fine.
Case Summary
James Gerard O’Callaghan of New York, New York, an Exchange member, after a contested hearing was found guilty of having improperly initiated, effected or executed one or more transactions on the Floor for an account with respect to which he exercised investment discretion.
  • An NYSE hearing panel found that from at least December 2000 through approximately October 2001 O'Callaghan, as an independent or $2 Floor broker, while on the Floor initiated and executed transactions for his father-in-law's account at another member organization ("ABC Discount"), over which account O'Callaghan exercised investment discretion pursuant to written authority.  
  • The NYSE hearing panel found, after an analysis of the order tickets, "that the trades were initiated on the Trading Floor and not on an upstairs trading desk. In almost all cases, the decision to trade was made on the Floor and then reported to the trading desk."
  • The NYSE hearing panel concluded that "[t]he account was essentially a day trading account. . .  [O'Callaghan] used ABC Discount to create a paper trail. . .   Stamping a ticket upstairs as was done here does not create a customer order. There is no credible evidence that [his father-in-law] entered the orders in the account. These orders came from the Trading Floor, from [O'Callaghan]. This was not permitted."
  • The NYSE hearing panel further found that "[t]his account was not a major part of [O'Callaghan's] business.  It was an accommodation for [his father-in-law]" and "[m]ost of the money that was deposited into the account was loaned by [O'Callaghan]." 

The NYSE imposed a penalty of a censure, a three-month suspension and a $30,000 fine.

On appeal, the NYSE Regulation Board of Directors affirmed the decision of the hearing panel in all respects.  O'Callaghan has appealed the NYSE decision to the Securities and Exchange Commission.

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Member Firm Disciplined for Violations of SEC Rule on Short Sales and Operational and Supervisory Violations
Piper Jaffray & Co.
Hearing Board Decision: 07-082
11 Jul 2007
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Case Note
Violated Rule 203(b)(1) of Regulation SHO by effecting short sale orders in securities without having borrowed security, without entering into arrangement to borrow security or without having reasonable grounds to believe that securities could be borrowed; violated Rule 200(g) of Regulation SHO by failing to mark certain short sell orders as “short exempt;” violated Rule 203(b)(3)(1) of Regulation SHO by failing to timely close out fail to deliver positions in threshold securities by purchasing securities of like kind and quantity; violated Section 15(c) of Securities Exchange Act of 1934 and Rule 15c3-3 thereunder, as interpreted by paragraph 15c3-3(c)(1)/07 of NYSE Interpretation Handbook, by inaccurately treating non-settled, non-delivered securities as if in possession and control; violated NYSE Rule 342 by failing to establish adequate policies and procedures, including system of follow up and review, for compliance with Regulation SHO and for compliance with “Anticipated Delivery Program” of National Securities Clearing Corp. – Consent to censure and $150,000 fine.
Case Summary
Piper Jaffray & Co. of Minneapolis, Minnesota,  a member firm, consented without admitting or denying guilt to findings violations of Regulation SHO and operational and supervisory violations.
  • An NYSE hearing officer found that from January 3, 2005, through May 31, 2005, the firm violated Rules 200(g) and 203(b) of Regulation SHO in that, on more than one occasion, it effected short sale orders in securities without having borrowed the security, without entering into an arrangement to borrow the security or without having reasonable grounds to believe that the securities could be borrowed.
  • The firm further violated Regulation SHO in that, on one or more occasions, it failed to mark certain short sell orders as “short exempt” and failed to timely close out fail to deliver positions in threshold securities by purchasing securities of a like kind and quantity.
  • In addition, the firm violated Section 15(c) of the Securities Exchange Act of 1934 and Rule 15c3-3(c)(1) thereunder, in that it failed to maintain possession and control of fully paid securities under the “Anticipated Delivery Program” of the National Securities Clearing Corp.
  • The firm also failed to establish adequate policies and procedures to comply with Regulation SHO and the “Anticipated Delivery Program” of the National Securities Clearing Corp.

The NYSE imposed a penalty of a censure and a $150,000 fine. Piper Jaffray & Co. consented to the penalty.

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Member Firm Disciplined for Violations of NYSE Order, Trade Reporting and Supervisory Rules
SG Americas Securities LLC
Hearing Board Decision: 07-083
11 Jul 2007
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Case Note
Violated NYSE Rule 80A by introducing for execution on NYSE baskets of index arbitrage orders without appropriate tick restriction when NYSE Rule 80A collar was in effect; violated NYSE Rule 476(a)(10) by failing to submit to NYSE accurate Daily Program Trade Reports; violated NYSE Rule 123C by failing to comply with requirements governing entry of market-on-the-close and limit-on-the-close orders; violated NYSE Rule 342(a) by failing to reasonably supervise its business activities in that it failed to assure compliance with index arbitrage, program trade reporting, and market-on-close and limit-on-close orders – Consent to censure and $75,000 fine.
Case Summary
SG Americas Securities LLC of New York, New York, a member firm, consented without admitting or denying guilt to findings of violations of NYSE order, trade reporting, and supervisory rules.
  • An NYSE hearing officer found that between in or about March and October 2003, the firm entered trades of index arbitrage baskets in violation of NYSE Rule 80A.  The trades of the securities comprising those baskets were executed without the “tick” instructions appropriate when the trading collar provided for by Rule 80A was in effect.
  • On nine trades dates between March 21, 2003 and May 30, 2003, the firm transmitted a total of 846,800 shares in 31 baskets without appropriate tick instructions, due to programming deficiencies that caused tick instructions that had originally been transmitted properly to be deleted when basket orders were modified. 
  • In addition, the firm supplied Daily Program Trading Reports ("DPTRs") that were inaccurate.
  • On 13 dates between March 21, 2003 and October 1, 2003, the firm's DPTRs were inaccurate in that they erroneously reported original and modified index arbitrage orders as limit orders.  These inaccuracies arose from a programming deficiency.  The program used by the firm to generate DPTRs disregarded buy-minus and sell-plus tick instructions on all index arbitrage orders (both original and modified) and inaccurately reported these as limit orders.
  • Furthermore, on four trade dates – December 2, 2005, June 22, 2005, and August 8 and 9, 2005 – the firm improperly entered or canceled a total of 30 Market-on-Close and Limit-on-Close orders, involving 154,267 shares, after the relevant cut-off time and without qualifying for exceptions.
  • Supervisory deficiencies contributed to these violations.

The NYSE imposed a penalty of a censure and a $75,000 fine.   SG Americas Securities LLC consented to the penalty.

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Member Firm Disciplined for Trading and Reporting Violations
Lehman Brothers, Inc.
Hearing Board Decision: 07-079
11 Jul 2007
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Case Note
Violated NYSE Rule 97 by purchasing for proprietary account security on plus tick within last 20 minutes of trading on same day that firm acquired and held long position in security, where that position resulted from block transaction effected with customer and where Firm knew of block position; violated NYSE Rule 440G.10 by filing with NYSE inaccurate Form 121 reports – Consent to censure and $140,000 fine.
Case Summary
Lehman Brothers, Inc. of New York, New York, a member firm, consented without admitting or denying guilt to findings of trading and reporting violations.
  • An NYSE hearing officer found that on five dates, from January 2004 through January 2006, the firm, while holding long positions in certain securities acquired earlier that day in block trading with customers, purchased additional amounts of those same securities during the last 20 minutes of trading, on a plus tick, and at a price higher than the lowest price paid for the block.
  • NYSE Rule 97 expressly prohibits such late-day purchases, if the person responsible for the entry of the late-day purchase knows of the block position.
  • The firm engaged in nine transactions that violated this rule on five different days, purchasing different securities on each day.   
  • In addition, from mid-December 2003 through June 20, 2004, due to a system error, the firm filed with the NYSE approximately 28 inaccurate Form 121 Reports.  The Form 121 Report, entitled “Transactions in Stocks/Warrants on the NYSE for the Accounts of Members, Allied Members, and Member Organizations,” is designed to provide the NYSE with the number of the member organization’s round lot purchases, sales and short sales effected on the NYSE Floor on a weekly basis. Member organizations must submit a Form 121 Report weekly.
  • The NYSE Hearing Officer also noted that the firm took remedial steps in connection with the NYSE Rule 97 violative trades, including additional training for traders, the institution of a new surveillance model, and system enhancements.  

The NYSE imposed a penalty of a censure and a $140,000 fine.  Lehman Brothers, Inc. consented to the penalty.

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Former Member Firm Disciplined for Order, Books and Records, Reporting and Supervisory Violations
J.P. Dalton & Associates, Inc.
Hearing Board Decision: 07-074
11 Jul 2007
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Case Note
Violated NYSE Rules 134(d)(ii) and (iii) by processing certain non-bona-fide errors through its error account, improperly treating certain erroneous reporting of transactions on NYSE Floor for member customers as bona-fide errors, and not preserving for at least three years required records relating to certain error accounts; violated Section 17(a) of Securities Exchange Act of 1934 and Rule 17a-3(a)(6)(i) thereunder and NYSE Rules 123(b) and 440 by failing to create and maintain for at least three years memoranda containing required elements of each brokerage order received for purchase or sale of securities and required records relating to certain error accounts; violated NYSE Rule 351(e) by failing to submit accurate quarterly attestations to NYSE in order to confirm that firm reviewed employees’ outside securities accounts; violated NYSE Rule 407(b) in that duplicate confirmations and statements for certain outside securities accounts were not sent to or reviewed by designated person pursuant to NYSE Rule 342(b)(1); violated NYSE Rule 345.17 by failing to timely submit Form U-5 for one of its terminated employees; violated NYSE Rules 342(a) and (b) by failing to reasonably discharge its duties and obligations in connection with supervision and control of and providing separate systems of follow-up and review with respect to certain of its business activities. This was due to a failure to establish and maintain appropriate procedures and systems necessary to adequately supervise certain aspects of its business operations, including creating and maintaining records relating to floor brokerage activities – Consent to censure and joint and several $25,000 fine.
Case Summary
J.P. Dalton & Associates, Inc., of Bay Head, New Jersey, a former member firm, consented without admitting or denying guilt to findings of order, books and records, reporting, and supervisory violations.
  • An NYSE hearing officer found that from October through December 2003 the firm processed non-bona-fide errors through the firm’s error account, committed books and records violations, and created improper Floor order tickets and reports, including failing to properly time stamp Floor order tickets. The firm’s failure to properly time stamp Floor order tickets was a repeat finding cited in the firm’s 2002 Regular Examination.
  • In addition, the firm’s compliance officer failed to review a number of duplicate account statements and confirmations for employee and employee-related accounts held at other broker-dealers.
  • The firm also submitted inaccurate quarterly attestations in connection with its review of its employees’ outside securities accounts for any transaction of insider trading and manipulative and deceptive devices.
  • In addition, the firm failed to report timely the termination of a Floor clerk’s employment and, with respect to the same employee, failed to submit timely a Uniform Termination Notice for Securities Industry Registration (“Form U-5”).
  • Lastly, on one occasion in August 2005 and on another occasion in October 2005, the firm violated NYSE Rule 134(d)(ii), in that it processed non-bona-fide error transactions through the firm’s error account.  

The NYSE imposed a penalty of a censure and a $25,000 fine to be applied jointly and severally against the former member firm and a former registered representative. J.P. Dalton & Associates, Inc. consented to the penalty.  See James P. Dalton , Decision 07-75 (NYSE Hearing Board May 22, 2007) (former member disciplined for supervisory violations).

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Former Member Disciplined for Supervisory Violations
James P. Dalton
Hearing Board Decision: 07-075
11 Jul 2007
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Case Note
Violated NYSE Rules 342(a) and (b) by failing to reasonably discharge his duties and obligations in connection with supervision and control of and providing separate systems of follow-up and review with respect to certain of his firm’s business activities. Failed to establish and maintain appropriate procedures and systems necessary to adequately supervise certain aspects of its business operations, including creating and maintaining records relating to floor brokerage activities – Consent to censure and joint and several $25,000 fine.
Case Summary
James P. Dalton of Bay Head, New Jersey, a former member, consented without admitting or denying guilt to findings of supervisory violations.
  • An NYSE Hearing Officer found that Dalton, the compliance officer of a member organization, failed to reasonably discharge his required duties and obligations in connection with the supervision and control of and providing separate systems of follow-up and review with respect to certain business activities.
  • Dalton failed to establish and maintain appropriate procedures and systems necessary to adequately supervise certain business operations, including, among other things, supervising an employee subject to special supervision and creating and maintaining records relating to floor brokerage activities.
  • In addition, Dalton failed to review a number of duplicate account statements and confirmations for employee and employee-related accounts held at other broker-dealers.

The NYSE imposed a penalty of a censure and a $25,000 fine to be applied jointly and severally against the former representative and a former member firm. Dalton consented to the penalty.  See J. P. Dalton & Associates, Inc., Decision 07-74 (NYSE Hearing Board May 22, 2007) (former member firm disciplined for order, books and records, reporting and supervisory violations).

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Individual Disciplined for Sales Practice Violations
Leonard Joseph Silvester
Hearing Board Decision: 07-087
11 Jul 2007
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Case Note
Violated NYSE Rule 352(c)(ii) by sharing in losses in customer account – Consent to censure and one-month suspension.
Case Summary
Leonard Joseph Silvester of Wexford, Pennsylvania, a registered representative, consented without admitting or denying guilt to a finding that he agreed to and directly shared in losses in a customer's account.
  • An NYSE hearing officer found that while employed with a member firm, Silvester entered into a written agreement with a customer, whereby Silvester personally guaranteed bonds purchased by the customer against default.
  • Silvester, knowing that his written agreement with the customer violated NYSE rules, did not disclose to his member firm employer his written agreement to cover his client’s potential losses.
  • By the close of January 2000, some of the client’s bonds substantially decreased in value and in time defaulted.
  • Silvester honored his written agreement and began making payments to the client.
  • When Silvester left to work at another member firm, the client transferred his accounts to the new member firm and continued to receive payments from Silvester.
  • Between 2000 and 2002, Silvester paid the customer nearly $120,000 in five installments.
  • Silvester never disclosed these payments to either of his member firm employers.

The NYSE imposed a penalty of a censure and a one-month suspension. Silvester consented to the penalty.

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Individual Disciplined for Sales Practice Violations
Thomas M. Ruddy
Hearing Board Decision: 07-089
11 Jul 2007
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Case Note
Violated NYSE Rule 476(a)(6) by recommending and effecting transactions in customer account that were unsuitable and excessive in light of customer’s age, investment objectives, investment experience, and financial circumstances; violated NYSE Rule 408(a) by exercising discretionary power in customer accounts without first obtaining written authorization from customers; violated NYSE Rule 408(b) by exercising discretionary power in customer accounts without first notifying and obtaining the approval of another person delegated under NYSE Rule 342(b)(1) with authority to approve handling of such accounts – Consent to censure and seven-month bar.
Case Summary
Thomas M. Ruddy of Glenview, Illinois, a former registered representative, consented without admitting or denying guilt to findings of sales practice violations.
  • An NYSE hearing officer found that from May 2003 through May 2005, Ruddy recommended and effected transactions in the account of a customer that were unsuitable and excessive in light of the customer’s age, investment objectives, investment experience, and financial circumstances.
  • Ruddy served as the registered representative for Customer A, a widowed and retired "homemaker" born in 1926, whose standard brokerage account identified "current income" as her primary investment objective. The purpose was to generate monthly income to supplement her social security benefits and distributions from her IRA account, and to make gifts to her children.
  • During this time period, Customer A's account went from being diversified in stocks, bonds, mutual funds, and certificates of deposit to heavily concentrated in stocks, including positions that, based upon the risk ratings assigned to them by Ruddy's member firm on Customer A's account statement, were not consistent with her investment objective and her risk tolerance.
  • Ruddy's investment strategy of concentration in high-risk and speculative stocks that produced little income, together with his heavy use of margin and regular participation in New Issues, were unsuitable.
  • In addition, Ruddy's high turnover and short-term trading in Customer A's account resulted in account activity that was excessive.
  • Ruddy also exercised discretionary power in the accounts of two customers without first obtaining the written authorization of the customers or without first notifying and obtaining the approval of the firm.

The NYSE imposed a penalty of a censure and a seven-month bar. Ruddy consented to the penalty.

 

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Branch Office Manager Disciplined for Supervisory Violations
Morton E. Wolverton
Hearing Board Decision: 07-076
11 Jul 2007
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Case Note
Violated NYSE Rule 342 by failing to reasonably supervise and control activities of a registered representative; violated NYSE Rule 405(2) by failing to supervise diligently accounts serviced by registered representative - Consent to censure and two-month supervisory suspension.
Case Summary
Morton E. Wolverton of Longboat Key, Florida, a branch office manager, consented without admitting or denying guilt to findings of supervisory violations.
  • An NYSE hearing officer found that from June 1999 to December 2002, while Wolverton was employed as a branch office manager by a member firm, he failed to reasonably discharge his duties and obligations in connection with the supervision of a registered representative subject to his control by failing to take adequate steps to prevent and detect a pattern of egregious sales practice abuses, including unauthorized, excessive, unsuitable, and discretionary trading committed by the employee in varying combinations in the accounts of at least eight unsophisticated customers, seven of whom were elderly.
  • All eight customers had the same stated investment objective, “appreciation with acceptance of risk,” listed on their firm new account document and the problematic trading in the accounts at issue involved a similar universe of technology and pharmaceutical stocks.
  • Despite the procedures and supervisory tools available to Wolverton, as well as being put on notice about questionable activity in certain of the registered representative's customer accounts, including receiving reports from the Compliance Department and a complaint from a customer, Wolverton failed to make appropriate inquiry of the trading activity in the customer accounts.
  • Had Wolverton carried out his supervisory responsibilities, he would have discovered the registered representative's violative conduct in the customer accounts.
  • Based on the information available to Wolverton, it was evident that further action and inquiry was needed in order to reasonably and diligently discharge his supervisory responsibilities.   

The NYSE imposed a penalty of a censure and a two-month supervisory suspension.  Wolverton consented to the penalty.  See Kenneth Edward Stephens, Decision 06-216 (NYSE Hearing Board December 13, 2006) (former registered representative disciplined for sales practice violations).

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Individual Barred for Felony Conviction and Misappropriation
Shane Golden
Hearing Board Decision: 07-085
11 Jul 2007
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Case Note
Violated NYSE Rule 476(a)(7) in that he was convicted of felony involving theft of computer equipment belonging to member firm employer; violated NYSE Rule 476(a)(6) by misappropriating computer equipment belonging to member firm employer – Consent to censure and permanent bar.
Case Summary
Shane Golden of Bethalto, Illinois, a former non-registered employee, consented without admitting or denying guilt to findings of a felony conviction and misappropriation.
  • An NYSE hearing officer found that while employed by a member firm, and with the assistance of another firm employee, Golden stole approximately 66 laptop computers and other pieces of computer hardware, and sold them online for approximately $40,000.
  • On June 2, 2006, in connection with his theft of computer equipment, Golden pled guilty in the United States District Court for the Eastern District of Missouri to the felony charge of Transportation of Stolen Goods.  

The NYSE imposed a penalty of a censure and permanent bar. Golden consented to the penalty.  See William Hueffmann, Decision 07-059 (NYSE Hearing Board April 26, 2007) (former non-registered employee barred for felony conviction and misappropriation).

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Former Member Barred for Failure to Cooperate
Randolph H. Post
Hearing Board Decision: 07-086
11 Jul 2007
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Case Note
Violated NYSE Rules 476(a)(11) and 477 by failing to comply with requests to appear and provide testimony concerning matters that occurred prior to termination of his and Firm’s NYSE membership – Consent to censure and permanent bar.
Case Summary
Randoph H. Post of New York, New York, a former member, consented without admitting or denying guilt to findings of failing to cooperate in an investigation by NYSE Regulation’s Division of Enforcement.
  • An NYSE hearing officer found that Post failed to comply with one or more requests by NYSE Regulation to appear and provide testimony concerning matters that occurred prior to termination of his and firm’s NYSE membership.

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

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On Summary Judgment, Individual Barred for Misappropriation and Failure to Cooperate
Anthony W. Landrum
Hearing Board Decision: 07-081
11 Jul 2007
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Case Note
Violated NYSE Rule 476(a)(6) by misappropriating items from mailroom of his member organization; violated NYSE Rules 476(a)(11) and Rule 477 by failing to comply with written requests by the NYSE for information concerning matters that occurred prior to termination as employee of member organization – Censure and permanent bar.
Case Summary
Anthony W. Landrum of Brooklyn, New York, a former non-registered employee, after an order granting the Division of Enforcement's motion for summary judgment, was found guilty of misappropriation and failing to cooperate in an investigation by NYSE Regulation’s Division of Enforcement.
  • An NYSE hearing officer granted a motion for summary judgment and found that Landrum, a mailroom employee, opened packages (including a decoy package) left in the firm's mailroom for delivery, misappropriated the contents and then resealed the package, and failed to comply with one or more written requests by the NYSE for information concerning one or more matters that occurred prior to termination of his status as an employee of member organization.

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

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On Default Motion, Individual Barred for Failure to Disclose Prior Criminal History, Misstatements and Failure to Cooperate
Raul Garcia
Hearing Board Decision: 07-084
11 Jul 2007
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Case Note
Violated NYSE Rule 476(a)(6) by failing to disclose on employment application his prior criminal history, which subjected him to statutory disqualification; violated NYSE Rule 476(a)(10) by making misstatement or omission of fact on Forms U-4 that he prepared and submitted to NYSE Regulation; violated NYSE Rules 476(a)(11) and 477 by failing to comply with written requests for information – Censure and permanent bar.
Case Summary
Raul Garcia of El Paso, Texas,  a former non-registered employee, was found guilty by default of failure to disclose his prior criminal history, making misstatements and failing to cooperate in an investigation by NYSE Regulation’s Division of Enforcement.
  • An NYSE hearing officer granted a motion for a default determination of guilt and found that Garcia failed to disclose on his employment application his prior criminal history, which subjected him to statutory disqualification, made a misstatement or omitted a fact on a Form U-4 that he prepared and submitted to NYSE Regulation, and failed to comply with written requests by the NYSE for information.

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

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Former Specialist Barred for Interpositioning and Trading Ahead
Michael J. Sherman
Hearing Board Decision: 07-080
11 Jul 2007
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Case Note
Violated NYSE Rules 92, 476(a)(6), and 476(a)(7) by interpositioning and trading ahead in securities for his member firm’s dealer account while there were unexecuted customer orders to buy or sell such securities that could have been executed at same price; violated NYSE Rule 104 by effecting trades for his member firm’s dealer account that were not reasonably necessary to maintain fair and orderly market and failing to effectively represent and execute agency orders; violated NYSE Rule 123B(d) by failing to execute customer orders in accordance with NYSE auction market rules and procedures, including requirements to cross and execute customer orders against each other before buying or selling for firm’s dealer account – Consent to censure and permanent bar.
Case Summary
Michael J. Sherman of Holmdel, New Jersey, a former specialist, consented without admitting or denying guilt to findings of interpositioning and trading ahead.
  • An NYSE hearing officer found that from January 2000 through April 30, 2003, Sherman violated his fundamental agency obligations as a specialist to hold the interest of public customer orders entrusted to him above the proprietary interests of his member firm and himself, and to match executable customer orders at the best possible price.
  • On approximately 900 occasions, instead of pairing buy and sell orders, Sherman “interpositioned” the firm’s dealer account between such orders, locking in a profit of approximately $90,000 for the firm’s dealer account.
  • In addition, on approximately 2,200 occasions, instead of pairing buy and sell orders, Sherman “traded ahead” of such orders, causing approximately $600,000 in customer harm.

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

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Individual Disciplined for Mismarking and Causing Books and Records Violations
Michael Flannelly
Hearing Board Decision: 07-088
11 Jul 2007
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Case Note
Violated NYSE Rule 476(a)(6) by marking value of securities in trading accounts in manner which did not accurately reflect market value of those securities and improperly concealed losses in such accounts; violated Rules 17a-3 and 17a-4 under Securities Exchange Act of 1934 and NYSE Rule 440 by causing false or inaccurate entries to be made to books and records of member firm employer – Consent to censure and eighteen-month bar.
Case Summary
Michael Flannelly of Franklin Square, New York, a former registered representative, consented without admitting or denying guilt to findings of mismarking and causing books and records violations.
  • An NYSE hearing officer found that from approximately the fall of 2003 through March 2004, Flannelly, in order to hide the extent of and to artificially reduce significant losses incurred by a former trader at his member firm, mismarked the value of mortgage loans and securities involved in certain forward contracts between the member firm and its affiliates.
  • Flannelly’s conduct resulted in an overstatement of the firm’s profit by approximately $12.2 million as of March 2004.
  • In addition, from approximately December 2003 through March 2004, Flannelly mismarked certain interest rate swap positions in a firm proprietary account which resulted in the firm overstating its profits by an additional $11.4 million.

The NYSE imposed a penalty of a censure and an eighteen-month bar.  Flannelly consented to the penalty.  See also Mitchell Levine, Decision 07-037 (NYSE Hearing Board March 19, 2007) (former head of trading desk disciplined for supervisory violations) and  Matthew Ruppel, Decision 07-18 (NYSE Hearing Board Feb. 1, 2007) (former managing director disciplined for failure to timely cooperate).

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On Default Motion, Individual Barred for Failure to Cooperate
Christian Lovera
Hearing Board Decision: 07-078
11 Jul 2007
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Case Note
Violated NYSE Rules 476(a)(11) and 477 by failing to comply with written requests for information – Censure and bar until he cooperates, such bar to become permanent if he does not comply within three months.
Case Summary
Christian Lovera of Biscayne, Florida, a former registered representative, was found guilty by default of failing to cooperate in an investigation by NYSE Regulation’s Division of Enforcement.
  • An NYSE hearing officer granted a motion for a default determination of guilt and found that Lovera failed to comply with one or more written requests for information regarding activities that occurred during his employment at a member firm.

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.

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On Default Motion, Individual Barred for Failure to Cooperate
Timothy Brennan Calley
Hearing Board Decision: 07-077
11 Jul 2007
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Case Note
Violated NYSE Rules 476(a)(11) and 477 by failing to comply with written requests for information – Censure and bar until he cooperates, such bar to become permanent if he does not comply within three months.
Case Summary
Timothy Brennan Calley of Laguna Niguel, California, a former registered representative, was found guilty by default of failing to cooperate in an investigation by NYSE Regulation’s Division of Enforcement.
  • An NYSE hearing officer granted a motion for a default determination of guilt and found that Calley failed to comply with one or more written requests by the NYSE for information regarding activities that occurred during his employment at a member firm.

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.

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After Contested Hearing, Former Member Firm Disciplined for Sales Practice and Supervisory Violations
Bishop Rosen & Co., Inc.
Hearing Board Decision: 06-095
11 Jul 2007
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Case Note
Violated NYSE Rule 352(c) by sharing in losses in customer accounts; violated NYSE Rule 342 by failing to provide for appropriate supervision and control of its business activities with regard to monitoring of trading by all employees who maintain accounts away from firm – Censure and $7,500 fine.
Case Summary
Bishop Rosen & Co., Inc. of New York, New York, a former member firm, after a contested hearing was found guilty of sales practice and supervisory violations.
  • An NYSE hearing panel unanimously found that the firm violated NYSE Rule 352(c) by sharing in losses in customer accounts.
  • In 2000, numerous customers of a registered representative of the firm ("RR") sustained losses from securities transactions in their accounts. These were active trading accounts and most, if not all, of the trades were solicited by the RR.
  • The NYSE hearing panel found that "[t]he idea for the payments to customers originated with RR and not with the customers or the Firm. RR discussed it with his superior, who brought it to the Firm's management committee. They had some concerns and asked [the Vice President for Compliance] to research the matter. The Firm made a good faith effort, but reached the wrong decision."
  • The NYSE hearing panel further found that "[t]he Firm had no commission rebate plan. The Firm did not review the commissions paid, nor did it apply any objective factors to them. Rather, RR came up with specific rebate amounts for specific customers. He did not pay a rebate to all customers, but rather made payments only to a few. While RR did not repay a specific percentage of the losses, it was indisputably those losses that motivated his actions.  Absent the losses, there would have been no payments to the customers. Since the losses caused the payments to the customers, the Panel found that the Firm shared in the losses."
  • The NYSE hearing panel by majority vote also found that the firm violated NYSE Rule 342 by failing to provide for appropriate supervision and control of its business activities with regard to the monitoring of trading by all employees--including non-registered employees--who maintained accounts away from the firm.
  • In arriving at the penalty, the NYSE hearing panel noted that it "looked to several factors, including the relatively small size of the Firm, its demonstration of good faith in attempting to comply with the Rules, the absence of any customer harm, and the fact that none of the violations were repeat incidents." 

The NYSE imposed a penalty of a censure and a $7,500 fine.

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