Monthly Disciplinary Actions - December 2006

• An NYSE hearing officer found that between March and September 2003, a registered representative ("RR") at the firm defrauded mutual funds and fund shareholders by engaging in deceptive practices designed to circumvent mutual funds’ restrictions on market timing. After various mutual funds identified the RR’s customers as market timers and rejected those customers’ trades, the RR opened new accounts for the customers to conceal the true identity of his customers and to mislead the mutual funds into believing that the trades were from other customers.
• In total, the RR executed more than 2,100 market timing trades with an aggregate value of approximately $1 billion. The mutual funds would have rejected these trades had they known the RR’s customers’ true identities or trading strategies. The firm earned approximately $200,000 in fees from the RR's market timing customers.
• In addition, the RR entered late trades for at least one customer. The RR received and entered orders to purchase, redeem, or exchange mutual fund shares after the 4:00 p.m. Eastern Time market close, but entered the orders as if they had been received prior to 4:00 p.m. This enabled the customer to receive the share price based on the prior net asset value already determined as of 4:00 p.m.  The RR entered the late trades on occasions when fund companies identified the customer as a market timer and blocked the customer’s original orders. On more than 55 occasions, the firm and the RR received substitute orders after 4:00 p.m. but treated them as though they had been received at the time of the original rejected orders. This conduct violated Rule 22c-1(a) adopted pursuant to Section 22(c) of the Investment Company Act of 1940.
• The firm had inadequate policies, procedures, and systems in place to monitor market timing and late trading so as to detect and prevent the RR’s fraudulent conduct.
• As a result of this conduct, the firm violated NYSE Rules 401 and 476(a) by failing to adhere to the principles of good business practice and engaging in conduct inconsistent with just and equitable principles of trade in connection with having violated Rule 22c-1. In addition, the firm 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 certain business activities involving the trading of mutual funds.

The NYSE imposed a censure and a total payment of $442,954 consisting of a penalty, disgorgement and prejudgment interest.  Deutsche Bank Securities Inc. consented to the penalty. Payment of this amount pursuant to an order issued in a related SEC proceeding shall be deemed payment in satisfaction of this decision. The terms of the payment and the distribution of the penalty and disgorgement amounts are set forth in the SEC’s Order.  See also Michael G. Velasco Decision 06-219 (NYSE Hearing Board December 18, 2006) (former registered representative disciplined for market timing of mutual fund shares). 

• An NYSE hearing officer found that between March and September 2003, Velasco actively facilitated deceptive mutual fund trading by knowingly processing numerous improper trades for two market timing customers and by helping these customers evade detection by mutual funds that did not want market timing business.
• Velasco took affirmative steps to hide from mutual funds the identity of these customers by, for example, assigning multiple account numbers so that the mutual funds could not identify the customers whose trades they had previously blocked, and journaling funds from a blocked account to a new account so the customers could continue to trade the same mutual funds.

The NYSE imposed a censure and a two-year bar from membership, allied membership, approved person status, and from employment or association in any capacity with any member or member organization. Velasco consented to the penalty.  See also Deutsche Bank Securities Inc. Decision 06-157 (NYSE Hearing Board December 18, 2006) (member firm disciplined for violations in connection with market timing and late trading of mutual fund shares).

• An NYSE hearing officer found that from October 2000 to November 2002, pursuant to a course of trading by Morgan Stanley & Co., Inc. (“MS&Co.”) using SIG Brokerage, L.P. (“SBLP”) floor brokers to represent its orders, several SBLP floor brokers simultaneously held MS&Co. proprietary Not Held orders on both sides of the market.
• The purpose of the MS&Co. strategy was to profit from intra-day price movements for MS&Co.’s proprietary account. The SBLP floor brokers at times exercised discretion by first effecting partial executions of buy orders, and then switching to sell order tickets that were marked as “contingent upon purchase” to effect partial executions without MS&Co.’s first canceling the unexecuted portion of the buy order. Although the compliance staff of both firms were consulted about this strategy, the orders were implemented in a manner that was not approved by each firm's respective compliance staff. 
• As a result of operating in this agreed upon manner, the MS&Co. upstairs equity traders in effect vested the SBLP floor brokers with discretion by not canceling the unexecuted shares related to the initial buy order, and the SBLP floor brokers in effect exercised discretion by not completing the entire buy order before switching to the sell side. 
• Accordingly, MS&Co., through its upstairs equity traders, caused a violation of NYSE Rule 95(a) and engaged in conduct inconsistent with just and equitable principles of trade.
• SBLP also received verbal instructions from MS&Co. to buy and sell based upon the order tickets, both of which failed to record such instructions. MS&Co. failed to properly make and maintain certain required records, in violation of Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-4 thereunder, and NYSE Rule 440.
• In addition, MS&Co. failed to reasonably supervise, control, follow-up and review the trading activities of its employees.

The NYSE imposed a penalty of a censure and a $200,000 fine. Morgan Stanley & Co., Inc. and consented to the penalty. See also Susquehanna Brokerage, L.P. n/k/a SIG Brokerage, L.P. Decision 06-191 (NYSE Hearing Board October 20, 2006).

• An NYSE hearing officer found that from October 2000 to November 2002, pursuant to a course of trading by Morgan Stanley & Co., Inc. (“MS&Co.”) using SIG Brokerage, L.P. (“SBLP”) Floor brokers to represent its orders, several SBLP Floor brokers simultaneously held MS&Co. proprietary Not Held orders on both sides of the market.
• The purpose of the MS&Co. strategy was to profit from intra-day price movements for MS&Co.’s proprietary account. The SBLP Floor brokers at times exercised discretion by first effecting partial executions of buy orders, and then switching to sell order tickets that were marked as “contingent upon purchase” to effect partial executions without MS&Co.’s first canceling the unexecuted portion of the buy order. Although the compliance staff of both firms were consulted about this strategy, the orders were implemented in a manner that was not approved by each firm's respective compliance staff.  
• As a result of operating in this agreed upon manner, the MS&Co. upstairs equity traders in effect vested the SBLP Floor brokers with discretion by not canceling the unexecuted shares related to the initial buy order, and the SBLP Floor brokers in effect exercised discretion by not completing the entire buy order before switching to the sell side.
• Accordingly, SBLP, through its Floor brokers, violated NYSE Rule 95(a) and engaged in conduct inconsistent with just and equitable principles of trade.
• SBLP also received verbal instructions from MS&Co. to buy and sell based upon the order tickets, both of which failed to record such instructions. SBLP failed to properly make and maintain certain required records, in violation of Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-4 thereunder, and NYSE Rule 440. SBLP also violated NYSE Rule 123(b).
• In addition, SBLP failed to reasonably supervise, control, follow-up and review the trading activities of its employees.

The NYSE imposed a penalty of a censure and a $200,000 fine. Susquehanna Brokerage, L.P. n/k/a SIG Brokerage, L.P. consented to the penalty.  See also Morgan Stanley & Co., Inc. Decision 06-190 (NYSE Hearing Board October 20, 2006).

• An NYSE hearing officer granted a motion for a default determination of guilt and found that Starr failed to promptly report a felony arrest to her member firm employer, caused her member firm employer to fail to report to the NYSE that one of its employees was arrested, and failed to comply with one or more written requests by Enforcement for information.

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 Brand violated NYSE Rule 476(a)(6) by causing excessive commissions to be charged in customer accounts in connection with the purchase of no-load mutual funds, and failed to comply with one or more requests by Enforcement to appear and testify concerning matters that occurred prior to the termination of his employment with a member organization.

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 Swisher misappropriated approximately $41,586 in customer funds and signed customer names on one or more letters of authorization, caused false entries in the books and records of his member firm organization and failed to comply with one or more written requests by Enforcement for information.

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 Martinez, a mailroom employee, opened parcels (included decoy parcels delivered by the U.S. Postal Service) and misappropriated various gift cards addressed to the firm or its employees, and failed to comply with one or more written requests by Enforcement for information. 

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

• An NYSE hearing officer found that the firm failed to implement adequate supervisory procedures reasonably designed to achieve compliance with NYSE rules and policies pertaining to electronic order activity, including odd-lot trading activity. 
• Between October 2003 and March 2004, the firm provided access to its SuperDOT lines to certain nonmember customers. On multiple occasions during that period, on behalf of these customers, the firm introduced to the NYSE through SuperDOT sequences of odd-lot market orders that should have been aggregated. In each sequence, the odd-lot orders were entered in quick succession -- within the same second --on the same side of the market, for the same security, and for the same customer's account. The firm should have consolidated the orders on its own, required its broker-dealer client, or customer, to aggregate the orders before sending them, or rejected them.  
• The firm also failed to follow through on its representation, given as a condition of the NYSE’s approval of the firm’s application to grant access to SuperDOT to third parties, that it would enter into certain agreements with those third parties outlining services and responsibilities between each of the entities.
• In addition, the firm failed to comply with Know Your Customer requirements and submitted inaccurate account type indicators for comparison and clearance.
• The NYSE hearing officer also noted that Enforcement considered certain mitigating factors and remedial steps taken by the firm to enhance compliance with its obligations to establish and enforce appropriate systems to monitor electronic order flow and odd-lot activity. 

The NYSE imposed a penalty of a censure and a $200,000 fine.  Harborview, LLC consented to the penalty.

• An NYSE hearing officer found that the firm submitted program trades without appropriate tick restrictions. During 2005, the tick restrictions of NYSE Rule 80A were triggered on only one trading day, October 20, 2005, between 3:29 p.m. and 4:00 p.m. The firm transmitted for execution on the Floor over the firm's SuperDOT connection 16 baskets of index arbitrage sell orders it received from an affiliated broker-dealer customer for S&P component stocks without designating the orders "sell plus". In addition, the firm did not have in place adequate policies and procedures, including a separate system of follow-up and review, reasonably designed to comply with the requirements of NYSE Rule 80A.  
• The firm also failed to submit accurate and timely Daily Program Trading Reports ("DPTRs") and did not have in place adequate policies and procedures, including a separate system of follow-up and review, reasonably designed to comply with the requirement to properly report to the NYSE program trading activity on its DPTRs for all non-NYSE members who submitted program trades over the firm's SuperDOT connection. 
• The NYSE hearing officer also noted that Enforcement considered certain remedial steps taken by the firm to enhance compliance with NYSE Rules and policies regarding program trading.  

The NYSE imposed a penalty of a censure and a $50,000 fine. Harborview, LLC consented to the penalty.

• An NYSE hearing officer found that the firm failed to have reasonable procedures for supervision and control of certain business activities, including: the transmission of electronic orders, the review of employee-related accounts maintained outside the firm, the development and implementation of written procedures regarding certain business activities, the accurate reporting of certain market values to the NYSE, the preservation of electronic communications, and the review of electronic communications.
• In addition to the supervisory failures, the firm failed to accurately report certain market values to the NYSE, failed to properly preserve all electronic communications, and failed to establish and implement written procedures for the review of electronic communications between the firm’s employees and the public relating to the firm’s business.

The NYSE imposed a penalty of censure and a $55,000 fine. Bear Hunter Structured Products LLC consented to the penalty.

• An NYSE hearing officer found that the firm failed to have reasonable procedures for supervision and control of certain business activities, including the review of employee-related accounts maintained outside the firm, and the review of electronic communications.
• In addition to the supervisory violations, the firm failed to obtain and review account statements for all employee-related accounts maintained outside the firm, and failed to establish and implement written procedures for the review of electronic communications between the firm’s employees and the public relating to the firm’s business.

The NYSE imposed a penalty of a censure and a $35,000 fine. Bear Wagner Specialists LLC consented to the penalty.

• An NYSE hearing officer granted a motion for a default determination of guilt and found that from approximately April 1998 through March 2005, Clark, while working as an unregistered sales assistant and assuming certain operational duties, misappropriated funds from at least 40 customer accounts totaling in excess of $3 million. Clark allocated customer deposits in whole or in part to the personal joint securities account that she maintained with her husband, without the knowledge or authorization of the customers.

The NYSE imposed a penalty of a censure and a permanent bar. See also Steven John MacDonald Decision 06-201 (NYSE Hearing Board Nov. 13, 2006) (former branch office manager and registered representative disciplined for supervisory violations).

• An NYSE hearing officer granted a motion for a default determination of guilt and found that Ortiz misappropriated customer funds by failing to promptly open a New York State 529 College Savings Plan Account as requested by the customer who gave Ortiz $3,000 to open the account. Ortiz used the customer funds to pay his personal mortgage, and made one or more material misstatements to Division of Enforcement.

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

• An NYSE hearing officer found that the firm failed to promptly obtain and thereafter maintain the physical possession or control of certain fully-paid and excess margin securities that it carried for the accounts of customers.
• The firm utilized two separate Depository Trust Company accounts, one for its customer borrow/loan business ("Customer Account") and one for its conduit borrow/loan business. A review of 10 deficits in the Customer Account, for the period February 13, 2004 through March 11, 2004, revealed one instance in which the deficit was not satisfied in a timely manner.  
• The firm also failed to preserve electronic communications relating to its business in a non-rewritable, non-erasable format.
• In addition the firm failed to provide for, establish and maintain appropriate procedures of supervision and control, including a system of follow-up and review with respect to: (a) the possession or control of fully-paid and excess margin securities that it carried for the accounts of customers; (b) the retention and review of electronic communications; and (c) the monitoring of employee accounts held away from the firm.

The NYSE imposed a censure and a $125,000 fine. National Financial Services, LLC consented to the penalty.

• A hearing officer found that from August 1998 through August 2005, the firm failed to establish and maintain adequate policies, procedures and controls for compliance with NYSE Rules and federal securities laws relating to the identification of, and association with, individuals subject to statutory disqualification.
• The firm did not have adequate policies or procedures designed to detect individuals who were subject to statutory disqualification during the hiring process and during employment.
• During the relevant period the firm employed individuals whom it knew, or in the exercise of reasonable care, should have known, were subject to statutory disqualification. At no point did the firm establish and maintain adequate policies and procedures requiring its current employees to disclose any criminal history which may have occurred after they were hired. In addition, although the firm required job applicants to be fingerprinted during the relevant period, the firm, during the hiring process, did not specifically ask potential employees to disclose events such as arrests, no-contest pleas, or misdemeanor convictions which could indicate an applicant was subject to statutory disqualification.  
• In addition, the firm failed to establish adequate policies, procedures and controls with respect to the prompt reporting to the NYSE of the existence of certain events required to be reported under NYSE Rules and it did not maintain sufficient controls so that the firm could promptly report required events, including the association with any person subject to statutory disqualification.

The NYSE imposed a censure and a $170,000 fine. Brown Brothers Harriman & Co. consented to the penalty. 

• An NYSE hearing officer found that from approximately April 1998 through March 2005, MacDonald, a former producing branch office manager, failed to reasonably discharge his duties and responsibilities in connection with the supervision of an unregistered sales assistant who misappropriated customer funds in excess of $3 million from at least 40 customers over a period of approximately seven years. Among other things, MacDonald failed to adequately review customer deposits, failed to follow firm procedures for changes of customer address, and failed to conduct any follow-up with respect to at least one complaint of unauthorized disbursement of funds from a customer securities account.

The NYSE imposed a penalty of a censure and a three-month supervisory suspension.  MacDonald consented to the penalty. See also  Kristal Ann Clark Decision 06-197 (NYSE Hearing Board Nov. 9, 2006) (non-registered employee barred for misappropriation).

• An NYSE hearing officer found that from August 1999 through March 2001, Bursten effected discretionary transactions without written authorization in the securities account he serviced for a 74 year-old widow, who had limited financial resources. Notwithstanding his lack of written authorization, Bursten effected approximately 900 discretionary transactions in the customer's account, relying on her general grant of oral discretion over the account.
• In August 1999, the customer deposited $616,452 in her account, which represented the proceeds from the sale of her home and her entire life savings.  $100,000 was withdrawn as a gift for her daughter and the remainder was invested with Bursten.
• Burstein engaged in excessive short-term trading in the account. For example, from September 1999 to April 2001 the account had an annual turnover rate of 11.03% and an annualized cost-to-equity ratio of 46.74%. Thus the customer would have had to achieve a 46.74% return in order to cover the cost of commissions and margin charges.
• During this period the account had approximately 540 purchases totaling $6,700,723 and approximately 479 sales totaling $6,072,186.  The account had an out-of-pocket loss of $343,413.
• Based upon the customer's investment objectives, financial resources and investment experience the short-term trading effected by Bursten in the account was unsuitable.

The NYSE imposed a penalty of a censure and one-year suspension.  Bursten consented to the penalty.