Monthly Disciplinary Actions - October 2006

• On April 14, 2004 the NYSE pursuant to NYSE Rule 475(b) (ii) summarily suspended the firm and on April 30, 2004 the firm withdrew from NYSE membership and ceased doing business as a broker-dealer. Previously, the firm was notified of deficiencies found in an NYSE 2002 annual supervisory standards and sale practice review examination, an NYSE 2002 financial, operational and supervisory standards and procedural examination, an SEC 2002 broker-dealer examination, and of deficiencies in the FOCUS Report filed for the month ended August 31, 2003 and in the firm's audited financial statements filed for the year ending December 31, 2002.

• The Division of Enforcement commenced a disciplinary action in May 2005 and the firm failed to file an answer. An NYSE hearing officer granted a motion for a default determination of guilt and found that the firm failed to maintain sufficient funds on deposit in its Special Reserve Bank Account for the Exclusive Benefit of Customers; failed to immediately notify the NYSE of its failure to make a required deposit in the firm’s Special Reserve Bank account for the Exclusive Benefit of customers; failed to maintain net capital at required levels and failed to compute net capital as required; filed an inaccurate FOCUS Report; failed to make or maintain financial records and net capital computations and records memorializing the receipt of customer funds and securities; failed to preserve e-mail communications in the required format and for the required retention period, updated copies of customer agreements, and copies of prime brokerage account agreements; failed to use due diligence to learn essential facts relative to institutional or option customers; allowed employees to engage in outside business activities without written consents; shared office space with another entity without obtaining NYSE approval; failed to ensure that a principal officer of the firm was registered as an Allied Member; failed to obtain NYSE’s permission for a principal officer of the firm to devote less than her entire time during business hours to the assigned or delegated supervisory responsibilities; failed to provide for, establish, and maintain adequate procedures and controls, including a system of follow-up and review relating to the handling and recording of customer funds and securities, employee outside business activities, review and approval of new account and option account documentation; failed to adequately evidence supervisory review of offices, retail accounts, option accounts, and discretionary accounts; established a branch office without obtaining the prior NYSE consent; permitted registered representatives to operate from their homes without prior NYSE approval; and failed to reasonably review the correspondence of a registered representative.

The NYSE imposed the penalty of a censure and a $150,000 fine.  See also, Eniko Henits, Decision 06-166 (NYSE Hearing Board September 12, 2006 ) (former Allied Member disciplined after discharge in bankruptcy).

• An NYSE hearing officer found that Henits, in her capacity as the President and CEO of Direct Brokerage, Inc., failed to reasonably discharge her duties and obligations in connection with the supervision and control of certain firm and employee activities. Specifically, Henits failed to reasonably discharge her supervisory duties and obligations relating to: the maintenance of firm financial records and net capital computations; preparation and filing of FOCUS Reports; retention of e-mail communications; review of correspondence; the establishment of branch offices; permitting registered representatives to operate from their homes; sharing office space with firms engaged in securities business; registration of principal officers; and employment of firm principals.

The NYSE imposed the penalty of a censure and a three-month bar.  Henits consented to the penalty.  See also, Direct Brokerage, Inc. , Decision 05-171 (NYSE Heaing Panel September 12, 2006) (former member firm disciplined).

• An NYSE hearing officer found that the firm failed to preserve electronic communications in a non-rewritable, non-erasable format; make and preserve certain required records relating to account changes and order errors; and establish and maintain appropriate procedures of supervision and control including a system of follow-up and review, with respect to: (a) the retention of electronic communications; (b) annual inspections of branch offices; and (c) employees’ outside business activities.
• The firm also failed to have reasonable procedures for the review of order tickets, order errors and account changes, and failed to adequately review registered representatives’ communications with the public.

The NYSE imposed a penalty of a censure and a $50,000 fine. Bernard Herold & Co., Inc. consented to the penalty.

• An NYSE hearing officer found that from March 2002 through March 2003, the firm introduced for execution on the NYSE numerous odd-lot, partial round-lot and NYSE Direct+ orders in violation of NYSE rules and policies, failed to use due diligence to learn essential facts concerning its customer’s orders, and failed to reasonably supervise and control the activity that occurred over its SuperDOT connection.
• In addition, the firm failed to create and/or maintain accurate books and records, filed an inaccurate FOCUS Report with the NYSE, and failed to adequately supervise its accounting practices and employee securities accounts maintained outside the irm.

The NYSE imposed the penalty of a censure and a $200,000 fine.  Pioneer Capital Corp. (N/K/A EWT, LLC) consented to the penalty.       

• An NYSE hearing officer found that from October 10, 2003 through December 5, 2003, the firm failed to properly reconcile a particular government clearance account. As a result, certain aged security differences were left undetected and therefore were not comprehended in the firm’s reserve formula and net capital computations. This failure caused hindsight deficiencies in the firm’s customer reserve accounts during that time period ranging from $14,150,934 to $19,309,401. Similarly, the failure reduced the firm’s net capital and excess capital by $14,895,017, or 13 percent, but did not cause a net capital deficiency.  For one week in October 2003, due to inaccurately accounting for a repurchase transaction with an affiliate, the firm inaccurately increased the debit balances of its reserve formula computation for that week by $39.8 million. Furthermore, the firm failed to exercise reasonable supervision and create and maintain records with respect to certain required financial reporting calculations.

The NYSE imposed the penalty of a censure and a $55,000 fine. Banca IMI Securities consented to the penalty.

• An NYSE hearing officer found that the firm failed to supervise customer orders placed over the firm’s electronic access systems and the concomitant underlying violations that occurred. Specifically, from March 2003 through August 2005, the firm had a total of 142 improper entries of market-on-the-close (“MOC”) and limit-on-the-close (“LOC”) orders and five improper cancellations on its electronic systems or through use of its mnemonic. The firm also failed to use due diligence to learn the essential facts relative to customer MOC/LOC orders accepted for execution. In addition, on two trade dates, orders for less than a round lot were placed that could have been aggregated into round lots. The firm also failed to supervise for erroneous orders placed in November 2005, and from March 2003 through October 2003, failed to maintain records of orders placed on its electronic systems in accordance with applicable rules. 

The NYSE imposed a penalty of a censure, a $200,000 fine and an undertaking to retain an outside consultant to conduct a review of the firm's supervisory, compliance and other policies and procedures relating to orders placed and executions via the firm's electronic systems, or through another electronic system under the firm's mnemonic.  Sungard Global Execution Services LLC consented to the penalty.

• An NYSE Hearing Officer found that, from at least July 2002 through September 2003, the firm failed to reasonably supervise certain activity in its Command Asset Program accounts (“CAP Accounts”). CAP accounts are securities accounts linked to customer bank accounts. A registered representative was able to misappropriate funds from five customer CAP accounts by withdrawing funds from CAP accounts using bank tellers, and redepositing the funds to the account of his father. In some instances there was insufficient cash in the account. This resulted in the margining of securities held in the CAP accounts. The registered representative stole a total of $630,000. Of this amount, the registered representative retained $280,000, and returned the rest to customers from which he stole funds.
• In some instances, the registered representative changed customer addresses for CAP accounts, using the bank computer system. Firm procedures required that changes of customer address be requested in writing. Address changes were reflected on firm exception reports and reviewed by firm management. The firm also mailed a notification of change of address to the customer at the old address. Changes of address for CAP accounts which were effected through the bank computer system, however, were not subject to firm procedures.  Accordingly, any change of address initiated through the bank system was not reflected on firm exception reports, not reviewed by any firm supervisor and no notification was sent to the customer. The firm was unaware that the registered representative had effected any change of address for these customer accounts, and unaware that he had misappropriated funds from these accounts, at times utilizing margin.

The NYSE imposed a penalty of a censure and a $300,000 fine. Wachovia Securities, LLC consented to the penalty.

• An NYSE hearing officer found that on three separate trade dates in 2003, Kavanagh did not provide adequate price continuity to the market by executing transactions in an NYSE-listed thinly-traded convertible preferred security at significant price dislocations from the last sale that were not justified by market conditions. In addition, on one occasion, Kavanagh failed to honor the firm quote by executing an order at a price less favorable than the current published bid or offer. Kavanagh also priced this security significantly lower than the previous sales, with the effect of electing stop orders on the Display Book that he purchased at the reduced price.

The NYSE imposed a penalty of a censure and a $60,000 fine. Kavanagh consented to the penalty.

• An NYSE hearing officer found that in 2005, Cullen failed to comply with net capital requirements and to timely notify the SEC and the NYSE of net capital deficiencies; failed to properly accrue for business income and expenses and adjust net capital computations for aged floor brokerage receivables and other expenses; failed to maintain adequate books and records and to report books and records inaccuracies; failed to create and maintain copies of accurate compensation agreements and written documents explaining differences between bills and receipts; and charged commission fees that were not consistent with the compensation agreements maintained by Cullen.

The NYSE imposed a penalty of a censure and a $15,000 fine. Cullen consented to the penalty.

• An NYSE hearing officer found that Yim, while serving as a registered representative in a member firm’s Reno, Nevada branch office from September 1998 through May 2004, on two different occasions, involving three different customers, wrote checks from his personal checking account to firm customers which were subsequently returned for insufficient funds. When asked about two of those checks, Yim misrepresented to the firm and again during sworn testimony to NYSE Regulation's Division of Enforcement, that he had deposited money to cover those checks but the deposit did not clear in time. In fact, Yim did not make any such deposit. Additionally, in or about July 2001, Yim recommended that a customer invest in an unapproved investment away from the firm and issued unapproved correspondence to such customer.

The NYSE imposed a penalty of a censure and a nine-month bar. Yim consented to the penalty.

• An NYSE hearing officer granted a motion of default determination of guilt and found that Thomas violated NYSE Rule 476(a)(6) by failing to disclose prior criminal conviction on employment application submitted to his member firm employer and violated NYSE Rules 476(a)(11) and 477 by failing to respond in a timely manner to NYSE requests for a written statement concerning one or more matters that occurred prior to termination of his status as an employee of a member firm.

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

• An NYSE hearing officer found that Connor violated NYSE Rules 476(a)(11) and 477 by failing to comply with requests by the NYSE for a detailed written explanation concerning matters that occurred prior to her termination as an employee of a member firm.

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

• An NYSE hearing officer granted a motion for a default determination of guilt and found Gaetano violated NYSE Rule 476(a)(11) and 477 by failing to comply with written requests by NYSE for information concerning matters that occurred prior to termination of his status as employee of a member firm.

The NYSE imposed a censure and a bar until he cooperates, the bar to become permanent if he does not comply within three months.

• An NYSE hearing officer found that In December 2003, Zilkowski recommended and sold to customers of his member firm employer a $452,000 purchase of a REIT that was illiquid, over-concentrated in the customer account, and caused an imminent tax consequence, and, therefore, was unsuitable in light of the customers’ investment experience, investment objectives, financial resources, and age.

The NYSE imposed a penalty of a censure, a 45 day suspension and a $7,500 fine. Zilkowski consented to the penalty.

• An NYSE hearing officer found that from May 2003 through July 2005, Copenny misappropriated funds from a customer of her member firm employer; engaged in one or more unapproved outside businesses and signed a customer’s name to documents related to Copenny’s outside business. Copenny also failed to comply with a request from NYSE Regulation's Division of Enforcement for her on-the-record testimony.

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