Monthly Disciplinary Actions - September 2006

• An NYSE hearing officer found that from 2001 to 2005 the firm failed to comply with NYSE Rules and, for part of this period, the requirements of Regulation SHO as a result of numerous deficiencies in the firm’s technological, operational, compliance and supervisory systems and procedures.
• Specifically, the firm had a number of programming and other systems errors, which caused the firm to: incorrectly designate transactions; improperly enter orders, thereby failing to adhere to the “up tick” rule on numerous occasions over a nearly five-year period; fail to report trades as short sales; and to have inconsistencies regarding the computation of positions arising out of various aggregation units.
• After January 3, 2005, the date of compliance with Reg. SHO, in addition to NYSE Rules, these errors also constituted a violation of the provisions of that regulation.
• For example, from July 2003 through January 2004, the firm had a system programming error involving several of the firm's equity desks that caused approximately 63,000 short sales orders, with an aggregate volume of over 52 million shares, to be improperly entered as long sales orders through the NYSE's DOT system. The trades were not properly designated as short, the up-tick rule was not followed, and the trades were not reported as short sales to the NYSE.
• In addition, because of inconsistencies in the manner in which the firm's systems defined aggregation units, traders were mapped to additional desks beyond the traders' particular aggregation units. These inconsistencies had the potential to cause inaccurate position calculations and possible errors in marking a sale as long or short.
• The firm also violated NYSE requirements governing entry and cancellation of Market "At-The-Close" and Limit "At-The-Close" orders because of technological deficiencies and trader errors; and failed to submit complete and accurate program trading data on the firm’s Daily Program Trade Report.
• The NYSE hearing officer noted that the firm had provided substantial and meaningful cooperation with the Division of Enforcement's investigation and self-reported nearly all of the initial violations. In addition, the firm hired an outside consulting firm to conduct an audit of the trade reporting systems and procedures used by the firm's equity desks, which audit revealed additional violations. The firm has also made siginificant changes to its systems and procedures, including the creation of a new compliance technology department.  

The NYSE imposed the penalty of a censure and a $400,000 fine. J.P. Morgan Securities Inc. consented to the penalty.

• An NYSE hearing officer found that from January 2002 through January 2003, Gail Edmonds, the firm’s sole precious metals trader, engaged in proprietary trading in physical precious metals, precious metals futures, forwards and futures options in excess of her authorized limits. This trading resulted in unrealized losses for the firm. Edmonds concealed her unauthorized trading and losses from the firm by concealing some of her forward positions, mismarking the value of her precious metals positions, and causing the net exposure resulting from her futures options positions to be miscalculated.
• A 2000 internal audit and risk review report identified certain control weaknesses with respect to the firm’s precious metals trading desk where Edmonds was employed, including failure to have an adequate price verification mechanism.
• Although management responded to the report by implementing certain control procedures and initiating arrangements for periodic independent price verification, the control procedures implemented were not adequate to reasonably supervise the precious metals trading desk’s activities and the periodic independent price verifications were not performed. Further, control and operations staff failed to note and report evidence of misconduct on the precious metals trading desk, such as the receipt of contra party confirmations for transactions Edmonds had not submitted to trade entry and the mismarking of precious metals positions. As a result, the firm failed to discover Edmonds’ misconduct for almost one year, until after it received a second customer inquiry regarding precious metals prices.
• The firm failed to reasonably supervise or control Edmonds and failed to establish a separate system of follow-up and review to supervise its precious metals trading desk.  As a result, during this period the firm inaccurately marked-to-market certain proprietary and customer precious metals positions; entered into precious metals forward transactions that were not timely recorded on the firm’s books and records; inaccurately accounted for precious metals futures options positions; and issued monthly account statements to customers that overvalued certain precious metals positions. In addition, the firm’s books and records did not accurately reflect its assets and liabilities and unrealized profits and losses with regard to its precious metals positions.
• In early January 2003, the firm learned that it had overstated the value of certain customer precious metals positions during several months of 2002. The firm did not, however, notify affected customers that the value of certain of their precious metals positions had been overstated in the monthly account statements provided to them by the Firm for several months of 2002. The firm corrected the valuation of the customer positions in the affected customers' February 2003 account statements.

The NYSE imposed the penalty of a censure and a $500,000 fine. Citigroup Global Markets, Inc. consented to the penalty. See also Gail A. Edmonds , Decision 06-77 (NYSE Hearing Board May 30, 2006) (former non-registered employee disciplined).

• An NYSE hearing officer found that from January 1999 through April 2006, and in certain subsequent periods, the firm and/or its predecessor corporate entities and/or related subsidiaries of its parent corporation which are or were member organizations of the NYSE, failed to provide for the review and/or retention of certain e-mail communications as required by NYSE Rules and the federal securities laws, on both operational and supervisory levels. The firm failed to retain certain e-mail by carrying out appropriate back-ups of files on the computer servers on which their communications systems ran, to appropriately monitor or supervise the back-up process, and/or to take due care to ensure that certain records could be retrieved. With regard to certain e-mail and instant messaging systems, the firm failed to review such electronic communications. 

The NYSE imposed a penalty of a censure, a $2,250,000 fine (imposed jointly on the firm and related entities) and an undertaking to take all necessary and appropriate steps to bring the firm's policies, procedures and practices into compliance with NYSE Rules and the federal securities laws, and to prevent recurrence of these violations. In addition, collection of $1,650,000 of the fine will be waived in recognition of the payment by the firm of that amount pursuant to a regulatory settlement concluded under the auspices of NASAA relating to e-mail communications. Wachovia Capital Markets, LLC consented to the penalty.  See also Wachovia Securities, LLC, Decision 06-151 (NYSE Hearing Board August 1, 2006) and First Clearing, LLC , Decision 06-152 (NYSE Hearing Board August 1, 2006).

• An NYSE hearing officer found that from January 1999 through April 2006, and in certain subsequent periods, the firm and/or its predecessor corporate entities and/or related subsidiaries of its parent corporation which are or were member organizations of the NYSE, failed to provide for the review and/or retention of certain e-mail communications as required by NYSE Rules and the federal securities laws, on both operational and supervisory levels. The firm failed to retain certain e-mail by carrying out appropriate back-ups of files on the computer servers on which their communications systems ran, to appropriately monitor or supervise the back-up process, and/or to take due care to ensure that certain records could be retrieved. With regard to certain e-mail and instant messaging systems, the firm failed to review such electronic communications.

The NYSE imposed a penalty of a censure, a $2,250,000 fine (imposed jointly on the firm and related entities) and an undertaking to take all necessary and appropriate steps to bring the firm's policies, procedures and practices into compliance with NYSE Rules and the federal securities laws, and to prevent recurrence of these violations. In addition, collection of $1,650,000 of the fine will be waived in recognition of the payment by a related subsidiary of the parent of that amount pursuant to a regulatory settlement concluded under the auspices of NASAA relating to e-mail communications. Wachovia Securities, LLC consented to the penalty.  See also Wachovia Capital Markets, LLC , Decision 06-150 (NYSE Hearing Board August 1, 2006) and First Clearing, LLC, Decision 06-152 (NYSE Hearing Board August 1, 2006).

• An NYSE hearing officer found that from January 1999 through April 2006, and in certain subsequent periods, the firm and/or its predecessor corporate entities and/or related subsidiaries of its parent corporation which are or were member organizations of the NYSE, failed to provide for the review and/or retention of certain e-mail communications as required by NYSE Rules and the federal securities laws, on both operational and supervisory levels. With regard to certain e-mail and instant messaging systems, the firm lacked appropriate procedures for the retention of certain employee e-mails.

The NYSE imposed a penalty of a censure, a $2,250,000 fine (imposed jointly on the firm and related entities) and an undertaking to take all necessary and appropriate steps to bring the firm's policies, procedures and practices into compliance with NYSE Rules and the federal securities laws, and to prevent recurrence of these violations.  In addition, collection of $1,650,000 of the fine will be waived in recognition of the payment by a related subsidiary of the parent of that amount pursuant to a regulatory settlement concluded under the auspices of NASAA relating to e-mail communications.  First Clearing, LLC consented to the penalty.  See also Wachovia Capital Markets, LLC, Decision 06-150 (NYSE Hearing Board August 1, 2006) and Wachovia Securities, LLC, Decision 06-151 (NYSE Hearing Board August 1, 2006).

• An NYSE hearing officer found that from July 2003 through December 2004, Grabel effected unauthorized trades in a customer account and mismarked order tickets as unsolicited when they were, in fact, solicited. Grabel also effected trades in a customer account that were unsuitable and excessive in light of the customer’s investment experience, objectives, and financial resources. In addition, Grabel failed to follow a customer’s instructions on two occasions.

The NYSE imposed a penalty of a censure and a 12-month bar. Grabel consented to the penalty.

• An NYSE hearing officer found that from December 2003 through August 2004, Mitchell misappropriated funds from two customers of his member firm employer by falsely representing they were enrolled in "fee based" accounts and wrongly obtaining from these customers fees for services they did not receive and that the firm did not authorize or allow.  In addition, Mitchell borrowed funds from another customer of his member firm employer without his member firm’s knowledge or approval.

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

• An NYSE hearing officer found that from June 2004 to June 2005, Roberts misappropriated funds from two customers of his member firm employer, signed customers’ names on Letters of Authorization, and made or caused to be made false entries on the books and records of his member firm employer.  Moreover, Roberts has failed to cooperate with the Division of Enforcement’s investigation.

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