Monthly Disciplinary Actions - October 2007

• An NYSE hearing officer granted a motion of default and found that Roberts violated NYSE Rule 476(a)(6) by failing to disclose criminal history on employment application submitted to member firm employer; violated NYSE Rules 476(a)(11) and 477 in that he failed to comply with requests for information.

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

• An NYSE hearing officer granted a motion of default and found that Zelaya violated NYSE Rule 476(a)(6) by working in securities industry while subject to bar; violated NYSE Rules 476(a)(11) and 477 by failing to comply with written requests for information concerning activities that occurred while employed by member firm.

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

• An NYSE hearing officer found that during a period ending in May 2005 and possibly extending back to April 1995, in violation of NYSE Rule 421, Citigroup Global Markets, Inc. (“CGMI”) inaccurately reported or failed to report certain short interest positions to the NYSE. During a similar timeframe, CGMI also submitted inaccurate short interest reports to NASD. Although the Firm maintained procedures and systems of supervision and control, these procedures and systems were inadequate to detect the misreporting.
• Moreover, the Firm failed to implement an adequate separate system of follow-up and review over its business activities relating to its regulatory obligation to accurately report short interest.

The NYSE imposed a penalty of a censure and $300,000 fine, to be paid jointly to NYSE and FINRA in two equal payments of $150,000 to each. Citigroup consented to the penalty.

• An NYSE hearing officer found that Merrill Lynch violated NYSE Rule 123C on approximately 480 occasions during the time period January 2005 through December 2006 by entering or canceling MOC or LOC orders in various securities after the requisite cutoff times.
• In addition, the firm violated NYSE Rule 342 by failing to reasonably supervise and implement adequate supervisory procedures, including a separate system of follow-up and review, reasonably designed to achieve compliance with the requirements for MOC and LOC orders set forth in NYSE Rule 123C.

The NYSE imposed a penalty of censure and $100,000 fine. Merrill Lynch consented to the penalty.

• An NYSE hearing panel found that Nasdaq Execution Services, LLC F/K/A Brut, LLC (“NEC”), violated the following NYSE Rules in connection with its odd-lot trading activity.
• First, NES violated Exchange Rules 411(b)(1) and 476(a)(6) by introducing for execution on the NYSE odd-lot orders that aggregated 100 shares or more without, as far as possible, consolidating them into round-lots.
• Second, NES violated NYSE Rule 342 by failing to establish and maintain adequate supervisory procedures and controls reasonably designed to detect and prevent improper odd-lot trading by its broker-dealer subscribers.
• Third, NES violated NYSE Rule 405 by failing to use due diligence to learn essential facts relative to its broker-dealer subscribers and their odd-lot orders that were introduced by NES to the NYSE for execution.

The NYSE imposed a penalty of a censure and $190,000 fine. Nasdaq Execution Services, LLC, consented to the penalty.

• An NYSE hearing panel found that during certain months between April 2004 and May 2006, UBS Securities LLC failed to update its records regarding relationships with certain issuers for the purpose of including complete and accurate disclosures in research reports. As a result, during the period April 2004 and May 2006, the Firm published numerous research reports that failed to include certain required disclosures in violation of NYSE Rule 472(k)(1). Specifically, for six months in 2004 and January 2005 and between May 2005 and May 2006, certain of the Firm's research reports failed to disclose that: (i) the company was, or within the past 12 months had been, a client of the Firm and non-investment banking securities-related services were, or had been, provided; and/or (ii) the company was, or within the past 12 months had been, a client of the Firm, and non-securities services were, or had been, provided; and/or (iii) within the past 12 months, the Firm had received compensation for products and services other than investment banking services from the subject company.
• Moreover, where the Firm initiated or re-initiated coverage of a company during certain months of the relevant period, its research reports failed to disclose that the subject company was, or within the prior 12 months had been, a client of Firm, and investment banking services were, or had been provided.

The NYSE imposed a penalty of a censure and $150,000 fine. UBS consented to the penalty.

• An NYSE hearing officer found that during the period of December 2002 to January 2003, certain Susquehanna Brokerage, L.P (“SBLP”) Floor brokers effected numerous transactions on the NYSE Floor on behalf of the Associated Person. The subject transactions, which took place over a two-week period, violated Section 11(a) of the Exchange Act and NYSE Rule 90(a) in that the Associated Person entered proprietary orders from off the Floor for execution by the SBLP Floor brokers on the NYSE Floor, which did not qualify for any of the enumerated exceptions contained in Section 11(a)(1)(A) through (H) of the Exchange Act. In addition, with respect to the conduct described above, SBLP violated NYSE Rule 342 for failing to adequately supervise and control its Floor trading activities and have in place a system for follow-up and review to ensure compliance with Section 11(a) and NYSE Rule 90(a) regarding proprietary orders of affiliates executed on the NYSE Floor by associated persons.

The NYSE imposed a penalty of a censure and $75,000 fine. SIG consented to the penalty.

• An NYSE hearing officer found that during the period March 2000 through June 2003, on thousands of occasions DeBoer knowingly or recklessly engaged in fraudulent trading on the Floor of the NYSE and 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. The public customer orders were transmitted to the Floor of the NYSE electronically using the NYSE’s Super Designated Order Turnaround System (“Super DOT”). Instead of pairing buy and sell DOT orders, DeBoer intentionally “interpositioned” the Firm’s dealer account between those orders or DeBoer intentionally “traded ahead” of those orders thereby disadvantaging customer orders.

The NYSE imposed a penalty of a censure, a permanent bar, and a $300,000 fine. DeBoer consented to the penalty.

• An NYSE hearing officer found that from approximately February 2003 to approximately January 2007, Choulet, a sales assistant, and his supervisor, a managing director in the institutional sales group, altered certain Firm documentation containing trade information they sent to certain Firm institutional customers. Choulet also failed to cooperate with NYSE Regulation in the investigation of the matter.

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

• An NYSE hearing officer found that Mara violated NYSE Rule 476(a)(7) by engaging in a physical altercation with another Floor broker on December 19, 2006 while on the NYSE Trading Floor.

The NYSE imposed a penalty of a censure and a two-week suspension. Mara consented to the penalty.

• An NYSE hearing officer found that during the period January 9, 2004 through March 5, 2004, Mesirow violated NYSE Rules and the federal securities laws in that it did not exercise reasonable supervision and control over the Firm’s Special Reserve Bank Account for the Exclusive Benefit of Proprietary Accounts Introducing Brokers (“PAIB Reserve Account”) and Special Reserve Account for the Exclusive Benefit of Customers (“Customer Reserve Account”), and failed to both adequately fund its PAIB and Customer Reserve Accounts and to properly compute its weekly Customer Reserve Account Formula. Moreover, during other time periods discussed below, the Firm violated NYSE Rules when it did not exercise reasonable supervision and control over proxy voting, communications to customers, customer changes of address, and aspects of the Firm’s Anti-Money Laundering (“AML”) program. 

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

• An NYSE hearing officer found that during the period from April 2003 through September 2003 and March 2006 (“the First Relevant Period”) the Firm: (i) violated NYSE Rule 431(f)(8)(B)(iv) by permitting pattern day trader accounts to effect up to three day trades when their accounts did not have the required minimum equity of $25,000; (ii) violated Section 15(c) of the Exchange Act and Rule 15c3-3(e) thereunder by causing intra-day deficiencies on one or more occasions in the customer reserve account in connection with (a) the early withdrawal of securities and (b) a non-bona fide deposit in the reserve account caused by employee errors; (iii) violated Section 17(a) of the Exchange Act and Rule 17a-13(b) thereunder and NYSE Rule 440 by failing to record the quarterly securities count process and failing to record names of treasury employees who performed the count and employees who reviewed the count; (iv) violated Section 17(a) of the Exchange Act and Rule 17a-3(a)(5) thereunder and NYSE Rule 440 by failing to maintain a separate record or ledger for each security held in the Firm’s possession or under its control for customer accounts and for proprietary accounts by failing to ensure that certain securities (non-DTC and buy-ins) were properly recorded in separate accounts; (v) violated NYSE Rule 401 by failing to accurately report all retail commissions earned on a Form 600TC; and (vi) violated then NYSE Rule 132.30(10) by failing to ensure compliance with Audit Trail requirements by erroneously coding one or more  transactions on one trade date with an incorrect account type indicator.
• In addition, during the period March 2003 through August 2003 (“the Second Relevant Period”), Interactive introduced for execution on the NYSE thousands of odd-lot orders that aggregated 100 shares or more without having those orders consolidated into round-lots as far as possible.  Specifically, five of Interactive’s customers entered odd-lot market orders in the same security on the same side of the market in quick succession, the majority of which were entered within the same second, thereby circumventing the round-lot market.
• During the First Relevant Period, Interactive failed to establish and maintain appropriate procedures for supervision and control including a separate system of follow-up and review relating to: (i) pattern day trader accounts effecting up to three day trades when their accounts did not have the required minimum equity of $25,000; (ii) intra-day deficiencies in the customer reserve account caused by Firm personnel in connection with (a) the early withdrawal of securities and (b) a non-bona fide deposit in the reserve account caused by employee errors; (iii) recording the quarterly securities count process and recording the names of the treasury employees who performed the count and employees who reviewed the count; (iv) maintaining a separate record or ledger for each security held in the Firm’s possession or under its control for customer accounts and for proprietary accounts by failing to ensure that certain securities (non-DTC and buy-ins) were properly recorded in separate accounts; (v) accurately reporting all retail commissions earned on a Form 600 TC; (vi) failing to ensure compliance with Audit Trail requirements by coding transactions with  incorrect account type indicators.
• During the Second Relevant Period, Interactive had inadequate procedures in place to monitor for improper odd-lot trading activity, including a separate system of follow-up and review, reasonably designed to achieve compliance with NYSE rules and policies governing odd-lot trading activity.

The NYSE imposed a penalty of a censure and $250,000 fine. Interactive Brokers LLC consented to the penalty.

• An NYSE hearing officer granted a motion of default and found that Atwood violated NYSE Rule 476(a)(6) by misappropriating funds belonging to employee of member organization by obtaining funds from employee of member organization without permission or authority and by endorsing signature of employee of member organization on Firm reimbursement checks without permission or authority.
• Atwood was also found to have violated NYSE Rules 476 (a)(11) and 477 by failing to comply with written requests for information.

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

• An NYSE hearing officer found that between June 2001 and December 2003, Lazarus engaged in a pattern of unauthorized and unsuitable short-term purchases and sales in the accounts of four customers. The transactions were unsuitable given the customers’ investment experience and objectives, lack of sophistication, age, and financial resources.
• Lazarus also entered unauthorized transactions in the accounts of two other customers and accepted third party orders from a person who did not have written discretionary authority over another customer account.
• In addition, Lazarus failed to follow trading instructions and failed to inform Morgan Stanley of complaints from four of those customers regarding trading activity in their accounts. 
• This case is related to four other matters arising out of the 330 Madison Avenue , New York , NY, branch of Morgan Stanley in which other registered representatives employed the same strategy of short-term trading of fixed income products. While Lazarus engaged in unsuitable and unauthorized trading in the accounts of some customers who were sick and elderly, other registered representatives did so in guardian accounts established for the long-term care of children injured at birth or childhood and they did so under the supervision of their Branch Office Manager.  See Morgan Stanley & Co. Inc.,HPD 07-66,  Arunabha Sengupta, HPD 07-99, Anthony Coniglio, HPD 07-54 and John Steigerwald, HPD 06-231. 

The NYSE imposed a penalty of a censure and a 30-month bar. Lazarus consented to the penalty.

• An NYSE hearing officer found that from approximately February 2003 to approximately January 2007, Cohen, a managing director in the institutional sales group, and his sales assistant altered certain Firm documentation containing trade information they sent to certain Firm institutional customers. Cohen also failed to cooperate with NYSE Regulation in the investigation of the matter.

• An NYSE hearing officer found that between 2002 and 2005, HSBC sold approximately 124 different LIBOR CD products issued by HSBC Bank USA, N.A. (“HSBC Bank”) to many customers for whom such investment was unsuitable.
• Specifically, the Firm sold approximately 2,900 LIBOR CDs to approximately 1,900 customers, with some customers purchasing successive issues of the LIBOR CDs. The Firm sold LIBOR CDs principally to retail customers, a significant number of whom were older and/or conservative investors. 
• HSBC Bank began issuing the LIBOR CDs, which offered investors the opportunity to earn 7% to 9% interest, at a time when conventional CDs were paying interest in the range of 1% to 2%. 
• LIBOR CDs are unsuitable for many retail investors.  While they offer an investor the potential to earn a greater return (than a conventional CD) if LIBOR fixes within specified ranges, LIBOR CDs also come with the risk that the investor's principal could be committed for 10 -12 years with no interest being earned on that principal for substantial time periods.
• Some of the Firm’s customers began to complain in late 2005 and early 2006 about their LIBOR CD purchases when certain of the LIBOR CDs, pursuant to their terms, did not pay interest. As of July 27, 2007 , the Firm had received approximately 140 complaints from LIBOR CD investors. These customers either did not understand that the LIBOR CDs they purchased might not pay interest for certain periods or believed, based on misrepresentations made by the Firm’s financial advisors, that HSBC Bank would call the product if it stopped paying interest for some period of time.
• The Firm did not establish and maintain appropriate procedures to reasonably supervise whether the sale of callable LIBOR CDs was suitable for its customers.  Further, the Firm did not reasonably supervise its personnel with respect to communications made to their customers regarding the risks associated with investing in LIBOR CDs.
• The Firm is no longer offering LIBOR CDs to its retail brokerage clients.
• In selling LIBOR CDs to customers for whom the product was unsuitable, the Firm engaged in conduct inconsistent with just and equitable principles of trade in violation of NYSE Rule 476(a)(6). The Firm also engaged in conduct inconsistent with just and equitable principles of trade by not fully and accurately advising certain of its customers about the risks associated with these LIBOR CDs, and by making misrepresentations regarding the manner in which the LIBOR CDs were likely to perform.
• The Firm did not adhere to principles of good business practice in violation of NYSE Rule 401 by recommending and selling LIBOR CDs to certain clients for whom they were unsuitable.
• The Firm further violated NYSE Rule 342(a) and (b) by not having reasonable policies and procedures in place to supervise whether the sale of the LIBOR CDs were suitable for its customers and the attendant risks of these products were fully and accurately explained.
• In addition to the imposition of a $500,000 fine for this conduct, HSBC consented to an undertaking that requires the Firm to offer to repurchase certain customers' LIBOR CDs at full principal value, along with the right to retain any earned interest.

• An NYSE hearing officer found that from June 2003 through January 2006, RBC Capital Markets Corporation inaccurately reported its short interest positions to the NYSE in violation of NYSE Rule 421. During the that period, the Firm also submitted inaccurate short interest reports to NASD and AMEX.
• In addition, the Firm failed to establish and maintain appropriate systems and procedures, including a separate system of follow up and review, for complying with NYSE short interest reporting requirements. Since the NYSE relied upon the Firm’s inaccurate reports of short interest in calculating overall short interest in securities listed on the NYSE, the NYSE’s own published calculations of overall short interest, during the Relevant Period, were inaccurate.
• The NYSE imposed a penalty of a censure and $225,000 fine to be paid jointly, in three equal payments of $75,000, to each of the NYSE, FINRA, and Amex. RBC Capital Markets Corporation consented to the penalty.