News Releases

NEW YORK, October 29, 2003  – The New York Stock Exchange has taken disciplinary actions against five member firms and 10 individuals for violations of NYSE rules and federal securities laws.  The cases, prosecuted by the NYSE Division of Enforcement, may be subject to review by the Securities and Exchange Commission and, thereafter, federal courts.

In that regard, the SEC recently issued a decision affirming the disciplinary action imposed by the NYSE on Edward John McCarthy.   In a separate decision, the SEC also affirmed the disciplinary actions imposed by the NYSE on Anthony A. Adonnino and Thomas Cannizzaro.  A summary of those decisions appears at the end of this news release.

             Citigroup Global Markets Inc. of New York City, a member firm, consented without admitting or denying guilt to findings relating to the firm’s failure to ensure that certain activities of a group of registered representatives in one of the firm’s Atlanta, Ga. branch offices were reasonably supervised.  The group of RRs handled stock-option exercises and related transactions by certain employees of WorldCom, Inc.     The firm consented to a penalty of a censure and the imposition of a $1 million fine.

                 In a related case, Michael J. Grace of Marietta, Ga., a former branch office manager of the aforementioned branch office, consented without admitting or denying guilt to findings that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of certain activities of a group of brokers in his branch.  Grace also consented to a penalty of a censure and three-month supervisory suspension.

• An NYSE hearing panel found that, between 1998-2001, some of the RRs in the group recommended to certain employees of WorldCom that they should exercise their employee stock options and hold the resulting company shares on margin.Before the employees contacted Citigroup, the panel found that, as a result of their employment at the company (or its predecessors), the employees held concentrated positions in company options and that, after they exercised their options, they held concentrated and leveraged positions in the company stock.The panel found that the recommendations to exercise the options and hold the stock on margin were made despite those customers’ varying risk profiles, investment experience or investment objectives.
  
• The hearing panel found that, when the value of the shares declined, the RRs recommended that certain customers facing margin calls maintain their margined positions, even if they had to sell other assets to do so.In connection with the exercise-and-hold-on-margin recommendations, the panel found that the RRs gave certain customers written analyses that focused on the potential advantages of this strategy but did not adequately describe the risks inherent in holding a concentrated position of volatile shares on margin.
  
• The panel found that, during the relevant period, the RRs were not adequately supervised by the firm and Grace and that, as a result, some of the RRs’ communications with customers were not adequately reviewed and approved.The panel found that Grace and the firm were aware, either before or shortly after its installation, that the RRs had installed and were using an independent e-mail system in the branch.The panel found that, while Grace later learned of improper use of the system, he did not, for a significant period of time, shut it down, discipline the RRs for using it, or take sufficient steps to supervise the use of the system.The panel also found that some accounts opened for company option plan participants were not adequately reviewed or monitored in the branch.
  
• The hearing panel found that, during the relevant period, the RRs were marketed by the firm as being “extensively trained” in handling employee stock option plans generally and in advising telecommunications company employees about the company specifically, even though they did not receive specific training on such matters.

[NYSE disciplinary proceedings are currently pending with respect to a number of RRs in the group.]

                McDonald Investments Inc. of Cleveland, Ohio, a member firm, consented without admitting or denying guilt to findings of supervisory, books-and-records and operational deficiencies.

• An NYSE hearing panel found that, during September-October 1999, the firm failed to reasonably supervise and control the activities of its employees, including but not limited to two registered representatives, Kevin Cusack and Andrew Wilson, who engaged in improper post-execution allocation of trades of a listed security in numerous customer accounts.In connection with this trading, the panel found that the firm failed to ensure that Cusack and Wilson made and preserved required books and records relating to account designation and execution of customer orders.The hearing panel also found that the firm failed to ensure that Richard Leist, a branch-office manager, discharged his supervisory obligations with respect to order handling procedures in the branch office, which resulted in books and records violations and delayed allocations of customer trades.

[The NYSE previously announced the disciplinary actions taken against Cusack, Wilson and Leist.  See NYSE News Release dated Sept. 24, 2003 and hearing panel decisions 03-151, -152 and –150, respectively.]

• The hearing panel found that, between October 1998-August 2000, the firm failed to provide reasonable supervision of certain BOMs who handled their own customer accounts and reviewed and approved their own account designation changes and order errors.The panel found that the firm also failed to adequately supervise the reporting structure of personnel in its compliance department and failed to obtain approvals for supervisory personnel, allied members and approved persons, and that it failed to establish policies and procedures for the adequate supervision of its continuing education program, annual compliance reviews, and review of order corrections and account designation changes.
  
• The panel found that on July 17, 1997, in one of its branch offices, the firm failed to make and preserve accurate books and records with respect to upstairs equity trading desk and floor order tickets, reports of execution and account-type information in connection with a firm syndicate order and other customer orders in an Exchange-listed security.

The NYSE imposed a penalty of a censure and $250,000 fine.  McDonald Investments consented to the penalty.

Southwest Securities, Inc. Disciplined for Supervisory, Books-and-Records, and Financial and Operational Violations During Software System Conversion

Southwest Securities, Inc. of Dallas, Texas, a member firm, consented without admitting or denying guilt to findings of supervisory, books-and-records and financial and operational deficiencies.

• An NYSE hearing panel found that, during January 2000-January 2001, the firm experienced operational problems arising out of a comprehensive software system conversion.The panel found that the firm failed to establish and maintain appropriate procedures for supervision and control over its books-and-records obligations during the conversion.
  
• The hearing panel found that, during the conversion, the firm also violated certain books- and-records requirements and failed to properly compute its net capital and that, during the relevant period, the firm also failed to comply with its supervisory obligations concerning its floor-brokerage activities and failed to comply with certain continuing education requirements.

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

Wilshire Associates Incorporated Disciplined for Supervisory and Operational Violations

             Wilshire Associates Incorporated of Santa Monica, Calif., a member firm, consented without admitting or denying guilt to findings of supervisory and operational deficiencies.

• An NYSE hearing panel found that, during 1999-2000, the firm failed to provide reasonable supervision of certain business activities, including the qualification and registration of various firm employees, the approval and review of employee-related accounts maintained outside the firm, and the review of electronic communications.
  
• The panel also found that, between April 1995-April 2000, the firm failed to provide the Exchange with written notice of material changes in the stockholdings of certain of the firm’s allied members, and to furnish the Exchange with an opinion of counsel in form and substance satisfactory to the Exchange with respect to the issuance of its corporate stock.

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

Strasbourger, Pearson, Tulcin, Wolff, Inc. Disciplined for Supervisory, Books and Records and Operational Violations

             Strasbourger, Pearson, Tulcin, Wolff, Inc. of New York City, a member firm, consented without admitting or denying guilt to findings of supervisory, books-and-records and operational deficiencies.

• An NYSE hearing panel found that, during the period 2000-2002, the firm failed to provide appropriate procedures of supervision and control and failed to establish a system of follow-up and review with respect to: the establishment of written procedures adequate to supervise the firm’s business operations on the trading floor; recording of floor-broker error trades; certain financial reporting requirements; and documentation required for prime-brokerage arrangements.
  
• The panel also found that the firm: failed to make and preserve adequate entries in the firm’s books and records; failed to adequately record floor-broker error trades on the firm’s books and records; failed to notify the Exchange that its net capital was below 150% of its net capital minimum dollar amount required; filed an inaccurate FOCUS report with the Exchange; and failed to obtain and/or maintain customer agreements in its capacity as executing broker and have appropriate provisions in its clearing agreement for clearance of prime-brokerage transactions.

The NYSE imposed a penalty of a censure, $25,000 fine and a requirement to comply with its undertaking that it will employ a Series 14 licensed compliance officer acceptable to the Exchange.  Strasbourger Pearson consented to the penalty.

Member Disciplined for On-Floor Trading and Other Violations

             William J. Blum of Garden City, N.Y., an Exchange member and independent floor broker, consented without admitting or denying guilt to findings that he engaged in on-floor trading in violation of Section 11(a) of the Securities Exchange Act of 1934, among other violations.

• An NYSE hearing panel found that, from approximately 1995-1999, Blum initiated, effected or caused to be executed on the floor of the Exchange orders for his personal securities account without meeting the requirements of a statutory exemption.
  
• The panel found that: during 1999, Blum made and maintained inaccurate books and records and filed inaccurate FOCUS reports with the Exchange; in December 2000, Blum failed to notify the SEC that his books and records were inaccurate; and, in September 1999, Blum failed to preserve a memorandum of each brokerage order received for the purchase or sale of securities that was in turn given to a specialist for execution.The panel found that by virtue of his executing orders on the floor for a non-broker/dealer from approximately the mid-1990s through December 1999, Blum had conducted a business with a public customer without complying with the applicable rules.The panel also found that he did not properly calculate the amounts reportable on his Form 600TC as the result of his execution of orders for a public customer.

• The hearing panel found that Blum also failed to reasonably supervise activities of his employees in that, as of December 1999, he failed to review trades in Exchange-listed securities and related financial instruments effected for the accounts of his employees; failed to have his employees fingerprinted; failed to submit applications for registration for his employees for admission to the floor; employed and compensated two employees of another member without having obtained the required written approval; and did not provide the required written approval for his employee to be employed with three other employers.

 The NYSE imposed a penalty of a censure and $40,000 fine.  Blum consented to the penalty.

Branch-Office Manager Disciplined for Supervisory Deficiencies

       David Alexander Hertl of Pickertington, Ohio, consented without admitting or denying guilt to findings relating to his failure to supervise the activities of a registered representative of his member-firm employer subject to his control.

• An NYSE hearing panel found that, from approximately December 1999-July 2000, Hertl failed to conduct adequate supervisory reviews and failed to supervise diligently the activities in customer accounts by a registered representative who worked in the branch under his supervision.The NYSE previously took disciplinary action against the registered representative, Todd Allen Simmons [see NYSE hearing panel decision 01-191 in which Simmons consented to findings that he misappropriated customer funds, among other violations, and to the imposition of a censure and permanent bar].
  
• The panel found that with respect to Simmons activities, Hertl failed to review and approve trade corrections, failed to review trade confirmations and new accounts and failed to adequately supervise the transfer of customer funds out of a customer account.
  The NYSE imposed a penalty of a censure and one-year supervisory suspension.  Hertl consented to the penalty.

Individuals Disciplined for Sales-Practice Misconduct and Other Violations

John B. Hoff III of Reading, Pa., a former registered representative, consented without admitting or denying guilt to findings that he engaged in sales practice misconduct in the accounts of two customers.

• An NYSE hearing panel found that, during October-November 2000, Hoff made misstatements about the value of a customer’s account and issued three personal checks to the customer, each drawn on insufficient funds and each intended to mislead the customer into believing that the check was for the proceeds of the customer’s account.The panel found that Hoff created a fictitious check for $500,000 and forged three letters ostensibly from an attorney to facilitate the deception of the customer’s wife about the purported sale of the customer’s business.

The panel found that Hoff also entered an unauthorized trade in the account of another customer.

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

                 Michael Hill of Sarasota, Fla., a former registered representative, consented without admitting or denying guilt to findings that he engaged in sales practice misconduct in the accounts of seven customers.

• An NYSE hearing panel found that, during the period April 1998-April 2001, Hill effected unauthorized trades in the accounts of six customers and, concerning two of them, he either also effected unsuitable trades or accepted orders without third party authorization.The panel found that Hill also effected unsuitable trades in the account of a seventh customer.

The NYSE imposed a penalty of a censure and 18-month bar.  Hill consented to the penalty.

Individual Disciplined for Unauthorized Internet and E-Mail Communications and Other Violations

                     Preston Gerard Galarneau, Jr. of Boxford, Mass., a former registered representative, consented without admitting or denying guilt to findings relating to his unauthorized communications to customers over the Internet and via e-mail, among other violations.

• An NYSE hearing panel found that, during May 1999 to mid-June 2000, Galarneau posted numerous electronic communications to customers and to other members of the public via Internet chat rooms and the firm’s e-mail system without the knowledge and approval of his member-firm employer.The panel found that Galarneau’s messages contained speculative statements concerning securities that might reasonably be expected to affect investor interest in the securities.
  
• The hearing panel also found that Galarneau also failed to comply with an Exchange request that he appear and testify in connection with an investigation by the NYSE Division of Enforcement.

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

Individual Disciplined for Misappropriation and Other Violations

             Joseph Brad Arave of San Clemente, Calif., a former registered representative, consented without admitting or denying guilt to findings that he misappropriated funds belonging to a customer of his member-firm employer, among other violations.

• An NYSE hearing panel found that in September 2000 Arave transferred shares of stock worth approximately $13,000 from a client’s account into his own account without the client’s knowledge and that he concealed his misappropriation by making false statements to his member-firm employer.
  
• The panel also found that, during the period March-December 2000, Arave recommended the purchase of low-rated speculative stocks to a customer and that the recommendations and the level of concentration in the stocks were unsuitable in light of the customer’s investment objectives, risk tolerance and circumstances.

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

Individuals Disciplined for Failure to Disclose Criminal History

             Ghassan Akeeh Talhami of Milwaukee, Wis., a former non-registered employee of a member firm, consented without admitting or denying guilt to findings that he failed to disclose his criminal history to his member firm employer and to the Exchange.

• An NYSE hearing panel found that Talhami failed to disclose on an employment application submitted to his member firm employer a 1996 misdemeanor conviction for theft, which conviction subjected him to a statutory disqualification.The panel found that Talhami also submitted a Form U-4 that contained false information and made misstatements and/or omissions of fact on his application for registration filed with the Exchange.

The NYSE imposed a penalty of a censure and seven-year bar.  Talhami consented to the penalty.

             Patricia Reynoso of Goleta, Cal., a former non-registered employee of a member firm, consented without admitting or denying guilt to findings that she failed to disclose her criminal history to her member firm employer.

• An NYSE hearing panel found that Reynoso failed to disclose on an employment application submitted to her member firm employer a 1995 felony conviction for commercial burglary, which conviction subjected her to a statutory disqualification.

The NYSE imposed a penalty of a censure and four-year bar.  Reynoso consented to the penalty.

Individual Disciplined for Failure to Cooperate

                 Neil John Scarfuto, Jr. of Monroe, N.Y., a former registered representative, was found guilty of failing to cooperate in an investigation by the NYSE Division of Enforcement.

• An NYSE hearing panel found that Scarfuto failed to appear and testify before the Exchange as requested in connection with an Exchange investigation.

The NYSE imposed a penalty on Scarfuto of a censure and bar until he complies with the Exchange’s requests, which will become a permanent bar if he does not comply within three months.

*****

SEC Sustains NYSE Disciplinary Actions

Edward John McCarthy for Illegal On-Floor Trading

On Sept. 26, 2003, the SEC issued its decision sustaining the Exchange disciplinary action against Edward John McCarthy of Colts Neck, N.J., an Exchange member and a floor broker.   In this regard, following two appeals to the NYSE Board of Directors, McCarthy was found guilty of engaging in illegal on-floor trading -- including violations of Section 11(a) of the Securities Exchange Act of 1934 -- as well as other violations, and was censured, fined $75,000 and barred for two years from membership and employment in any capacity on the floor of the Exchange.

After a contested hearing, McCarthy had been found guilty by an NYSE hearing panel of failing to make and maintain certain required records, and of creating or causing the preparation of inaccurate commission bills and order tickets. However, the panel (which had, on the basis of the above findings, imposed a penalty on McCarthy of a censure and $7,500 fine) found him not guilty of other charges brought by the NYSE Division of Enforcement, including allegations that McCarthy engaged in illegal on-floor trading.

On appeal by the Division of Enforcement, the NYSE Board of Directors sustained the findings of guilt concerning the books-and-records charges, but reversed the not-guilty findings of the panel with respect to six other charges that were the subject of Enforcement's appeal.  In that regard, the Board of Directors determined that McCarthy was guilty of executing orders while on the floor for an account in which he had an interest and/or over which he exercised investment discretion; purchasing securities for an account in which he was directly or indirectly interested while holding unexecuted market orders to buy such securities (and/or the converse); and accepting customer orders and then filling all or part of such orders by selling or buying the securities for an account in which he had a direct or indirect interest.

Following that determination, the Board remanded the matter to the hearing panel for the imposition of an appropriate penalty. The panel, on remand, determined to impose a penalty on McCarthy of a censure and $75,000 fine.

Following an appeal by the Division of Enforcement of the panel's sanction determination, the NYSE Board of Directors affirmed the censure and $75,000 fine, and modified the penalty to include a two-year bar from membership and employment in any capacity on the floor of the Exchange.

In sustaining the Exchange’s disciplinary action against McCarthy, the SEC noted that, among other things:

• the undisputed evidence in the record established that McCarthy’s compensation was calculated based on a percentage of the net profits generated by his trades for the account, and that any compensation arrangement that results in the Exchange member sharing in the trading performance of an account, however structured, makes the account that member’s “own account”.
  
• McCarthy exercised discretion over that account’s trading activity, and accorded the account preferential treatment.
  
• McCarthy’s assertion of lack of experience as a floor broker did not relieve him from the requirements of federal securities laws and Exchange rules, especially where his violations go to the heart of the duties that a floor broker owes a customer.
  
• The SEC noted that the sanctions imposed were justified by McCarthy’s violation of “the principles of commercial honor and trust that are the hallmark of the exchange auction market system.His violations go to the heart of the duties a floor broker owes a customer.”

In response to McCarthy’s request of the SEC for a stay of the sanctions imposed against him in view of his stated intention to seek judicial review of the Commission’s decision, the SEC also issued an order staying the penalty in the NYSE disciplinary action for 60 days from Sept. 26, 2003.

[See NYSE hearing panel decision 01-106 and SEC Rel. No. 48554.]

Anthony A. Adonnino and Thomas Cannizzaro for Illegal On-Floor Trading.

On Oct. 9, 2003, the SEC issued its decision sustaining the Exchange disciplinary actions against Anthony A. Adonnino of Brooklyn, N.Y., a former Exchange member and a former principal of his firm and a floor broker, and Thomas Cannizzaro of New Rochelle, N.Y., an Exchange member, floor broker and a former employee of the firm. 

In this regard, following an appeal to the NYSE Board of Directors, Adonnino and Cannizzaro were found guilty of on-floor trading—including violations of Section 11(a) of the Securities Exchange Act of 1934—as well as other violations.   Adonnino was censured, suspended for 18 months and fined $200,000.  Cannizzaro was censured and suspended for six months. 

As found by the NYSE following a contested hearing and affirmed by the SEC, from approximately August 1993 through May 1997, Adonnino and Cannizaro had an interest in two accounts at two non-member firms.  Adonnino and Cannizaro entered trades for these accounts and shared in the profits and losses resulting from those trades, thus having an impermissible ownership interest in the accounts.  Further, it was found that Adonnino and Cannizzaro exercised discretion with respect to the trades made for the accounts.  The NYSE and the SEC also found that Adonnino and Cannizzaro failed to create and maintain accurate books and records, including commission bills, and facilitated the creation of inaccurate order tickets.  It was also found that Adonnino and Cannizzaro made material misstatements to the Exchange during the course of its investigation into these matters.

The NYSE and the SEC also found that Adonnino, in his capacity as the individual at the firm with overall authority and responsibility for internal supervision and control of the firm’s activities and its employees, failed to supervise the firm and its employees with respect to profit sharing arrangements.  Additionally, it was found that Adonnino failed to supervise the trading in the personal account of a public customer to which favorable allocations were made by the firm.

In sustaining the Exchange’s disciplinary actions against Adonnino and Cannizzaro, the SEC noted that, among other things:

• the evidence clearly established that the payments made by the non-member firms exemplified a profit sharing arrangement:  payments of 50-60% of profits, with no payments during periods when the account was operating at a net loss.  Minor variances from the target percentages did not detract from the pattern established.
  
• the existence of the arrangement established the violations and it was not required to prove the parties’ respective motivations for the arrangement.   
  
• having an interest in a customer account was prohibited conduct and consequently it would not be unexpected for such an arrangement to be oral and for parties to avoid creation of a paper trail to the extent possible.

[See NYSE hearing panel decisions 02-13 and 02-14 and SEC Rel. No. 48618.]

About NYSE Regulation: The New York Stock Exchange is the designated examining authority for the major securities firms in the United States, including more than 250 member firms that deal with the public and account for more than 85 percent of the public customer accounts carried by broker-dealers.   These firms service 93 million customer accounts, operate from more than 21,000 branch offices around the world and employ approximately 157,000 registered personnel.  The NYSE is committed to strong and effective regulation of its members and member firms to protect investors, the health of the financial system, and the integrity of the capital-formation process.  While self regulation in the U.S. securities industry begins with the broker-dealer, the NYSE plays a critical role by maintaining an extensive system for monitoring and regulating the activities of its membership.  The Securities and Exchange Commission oversees these activities.

NYSE Regulation consists of three divisions: Member Firm Regulation, responsible for the financial, operational and sales-practice regulation of member organizations; Market Surveillance, responsible for surveillance of all trading activities at the Exchange; and Enforcement, which investigates and prosecutes violators of NYSE rules and federal securities laws.  There are approximately 560 people in NYSE Regulation, representing approximately one-third of the Exchange’s staff.