Member Firm Disciplined for Supervisory and Books and Records Deficiencies Relating to the Receipt, Execution, Allocation and Preservation of Customer Orders
Goldman, Sachs & Co. of New York City, a member firm, consented without admitting or denying guilt to findings of supervisory and books and records deficiencies relating to the receipt, execution, allocation and preservation of customer orders.
- This disciplinary action against Goldman Sachs stems from misconduct by a registered representative at the firm, Karl Zachar, who entered orders for various quantities of securities without timely identifying the accounts for which the securities would be allocated. For example, in three instances, Zachar failed to submit to the firm's service desk a time-stamped order ticket or spreadsheet identifying customer account allocations until over five hours had passed from the time he first telephoned the desk to enter the trades. The delays in allocation of executed orders gave Zachar the opportunity to place trades in customer accounts or his own accounts depending on market performance and the ability to grant preferential treatment to his account to the detriment of customer accounts. [See NYSE hearing panel decision 04-93, dated June 16, 2004, in which Zachar was censured and barred for 15 months, on consent.]
- In the member firm case, the panel found that, for the period January-May 2001, Goldman Sachs failed to reasonably supervise and control Zachar's activities. The firm also failed to ensure that its employees made and preserved required and timely books and records concerning account designations and execution of customer orders. The firm compensated all customers potentially affected by Zachar’s misconduct in the total amount of $875,000 on its own volition, even though there were no customer complaints to the firm or specific evidence of economic injury to customers.
The NYSE imposed a penalty of a censure and $175,000 fine. Goldman Sachs consented to the penalty.
Member Firm Disciplined for Circumventing the Round-Lot Auction Market and for Related Supervisory Deficiencies
After a contested hearing, Westminster Securities Corporation of New York City, a member firm – and a registered representative who acted as a floor clerk for the firm during the relevant period – were found guilty of breaking up customer round-lot orders into odd- lot orders (less than 100 shares) in circumvention of the Exchange’s round-lot auction market.
An NYSE hearing panel – which imposed a penalty on the firm of a censure and $50,000 fine – found that, by breaking up customer round-lot orders into odd-lot orders, the firm and registered representative advanced the firm’s customer orders ahead of other round-lot orders in the market waiting their turn for execution. The registered representative, who is also a former director of the firm, has appealed the decision against him to the NYSE Board of Directors and that appeal is pending.
- Specifically, the panel found that, during July-October 2002 on numerous occasions, the registered representative, upon the firm’s receipt of a customer round-lot order, effected all or part of the execution of such order outside the Exchange’s auction market by breaking up the order, wholly or partially, into odd-lot orders and transmitting the odd-lot orders to the NYSE’s SuperDot system for execution. During the relevant period, 59 round-lot orders were unbundled into 971 odd-lot orders, resulting in over 71,000 shares being traded as odd-lots on behalf of the registered representative’s large-scale institutional customers.
- The firm did not have any written procedures or policies, during this time, concerning odd-lot trading; did not have a system to monitor such trading by its employees that was adequate for supervisory purposes; relied solely on the registered representative to supervise the firm’s floor operations, including reviews of floor tickets to ensure compliance with Exchange rules; and, after its compliance department became aware of the registered representative’s practice, the firm failed to stop his continuing use of the Exchange’s odd-lot order system to effect the execution of customer round-lot orders.
- The Exchange’s odd-lot trading system is intended to provide an efficient and inexpensive order execution system for investors with bona-fide odd-lot orders. Pursuant to the Exchange’s odd-lot order system, odd-lot orders do not enter the Exchange’s round-lot auction market. Rather, SuperDot systemically executes odd-lot orders in accordance with pricing procedures specified in Exchange Rule 124 and automatically assigns the designated Exchange specialist in the security to be the contra side of an odd-lot trade. The Exchange requires member firms to establish and enforce appropriate systems to monitor odd-lot trading activity, in order to ensure that the Exchange’s odd-lot system is not used to circumvent the round-lot market or is otherwise used as a professional trading vehicle.
[Note: The text of the decisions in this matter will be available when final, following resolution of the appeal to the Board by the registered representative.]
Member Firms Disciplined for Financial, Operational, Books and Records and Supervisory Deficiencies
RBC Dain Rauscher Inc. of Minneapolis, Minn., a member firm, consented without admitting or denying guilt to findings of financial, operational, books and records and supervisory deficiencies, including certain deficiencies relating to proprietary trading.
An NYSE hearing panel found that, during the period February-October 2002, the firm: failed to fund its proprietary account for introducing brokers, which resulted in hindsight deficiencies; entered proprietary orders while representing customer orders that could be executed at the same price, without using separate proprietary facilitation accounts for such trades; failed to make, maintain and preserve certain required records of customer orders; and failed to provide for appropriate procedures of supervision and control and to establish a separate system of follow-up and review to prevent the foregoing violations.
The NYSE imposed a penalty of a censure and $80,000 fine. RBC Dain Rauscher consented to the penalty.
Natexis Bleichroeder, Inc. of New York City, a member firm, consented without admitting or denying guilt to findings of financial, operational, books and records and supervisory deficiencies.
- An NYSE hearing panel found that, during the period April-December 2002, the firm on one or more occasions withdrew funds from its special reserve account for the exclusive benefit of customers leaving less than the amount required to be on deposit, thereby causing hindsight deficiencies; failed to make, maintain and preserve certain required records of customer orders and errors; processed transactions through an error account that were not related to errors; and failed to provide for appropriate procedures of follow-up and review to prevent the aforementioned violations.
The NYSE imposed a penalty of a censure and $60,000 fine. Natexis Bleichroeder consented to the penalty.
Exchange Member Disciplined for Books and Records Deficiencies
Ralph Steven Parilla of Tuckahoe, N.Y., an Exchange member acting as an independent broker on the trading floor, consented without admitting or denying guilt to findings of books and records deficiencies.
- An NYSE hearing panel found that, during the period from January 2000-August 2003, Parilla failed to maintain his books and records in the manner required by the record-keeping rules governing members of the Exchange who transact business on the Exchange’s trading floor. Specifically, Parilla did not keep floor work (order tickets and execution reports) for the required full three years. Further, he did not keep copies of the commission bills that he sent to customers, and he did not maintain order tickets and a detailed log for his error trades. Also, he treated a trade as an error, when it was not an error, and he failed to create and maintain records of order cancellations.
The NYSE imposed a penalty of a censure, $30,000 fine and a requirement that Parilla comply with an undertaking to retain a consultant to perform services related to his compliance with books and records requirements. Parilla consented to the penalty.
Individual Disciplined for Violations Relating to Trading in Personal Securities Account
Gregory Shane Harris of Omaha, Neb., a former registered representative, consented without admitting or denying guilt to findings relating to trading in his personal account at the firm.
- An NYSE hearing panel found that, in September 2001, Harris purchased stock for his securities account at his firm for a total price of over $863,000 when the net equity in his margin account was approximately $5,000 and his net worth was approximately $70,000. More than a week later, after he had failed to pay for the trade and the price of the stock had declined, he cancelled and re-billed the transaction to an account of a high net worth customer without the customer’s authorization. Harris deposited a check for $400,000 in his personal account at the firm to cover the initial margin requirement for the purchase, when he knew or should have known that the funds in his personal bank account were insufficient to cover the check.
The NYSE imposed a penalty of a censure and three-year bar, taking into account that Harris has not been employed in the securities industry in the past three years and that the penalty is prospective from the time this decision becomes final. Harris consented to the penalty.
Branch Office Manager Disciplined for Supervisory Deficiencies and Sales Practice Misconduct
Michael Fasciglione of Dix Hills, N.Y., a former “producing” branch office manager at a member firm, consented without admitting or denying guilt to findings of supervisory deficiencies and sales practice misconduct.
- An NYSE hearing panel found that, during the period 2000-2001, Fasciglione failed to adequately review a customer’s active account that was serviced by a registered representative under his supervision. Among other things, Fasciglione did not speak with the customer, verify that the margin balance in the customer’s account was understood by and suitable for the customer, or otherwise ensure that adequate supervisory attention was given to the review of the account activity despite the fact that the customer’s account appeared six times on the monthly active account exception report, and that Fasciglione initialed his review of the April 1, 2000 report on the account. The NYSE previously completed disciplinary action against the registered representative, Bryan Geoffrey Patrice, for failing to cooperate in the Exchange’s investigation – see NYSE hearing panel decision 02-7 dated January 10, 2002, pursuant to which Patrice was censured and barred.
- Fasciglione also committed sales practice violations in two customer accounts that he serviced by failing to ensure that account designation changes were properly approved and by causing reimbursement of losses in the accounts and, with respect to one of the customers, failed to report to the firm the customer’s verbal complaint. He also approved his own work as branch office manager by signing correction notices and error reports without proper supervisory review.
The NYSE imposed a penalty of a censure, two-month bar and a requirement to re-take qualifying examinations before undertaking any securities supervisory position in the future.
Registered Representative Disciplined for Sales Practice Misconduct
James Fallin Tate of Alexandria, Va., a registered representative, consented without admitting or denying guilt to findings that he engaged is sales practice misconduct in the account of three customers.
- An NYSE hearing panel found that, at various times during the period June 1999-February 2003, Tate used discretion to effect equity and options trades in the securities accounts of three customers pursuant to orally granted discretionary authorization. Tate did not obtain the required written discretionary authorization from the customers nor did he obtain the approval of his firm to use discretion.
The NYSE imposed a penalty of a censure, two-month suspension and a $20,000 fine. Tate consented to the penalty.
Individuals Barred for Failure to Cooperate
In separate but related cases, Carmine Milo and Thomas Hunt, both of Brooklyn, N.Y., former non-registered employees of a member firm, were found guilty of failing to cooperate in an investigation by the NYSE Division of Enforcement.
- An NYSE hearing panel found that Milo and Hunt failed to comply with written requests by the Exchange for information concerning allegations that Milo conducted improper transactions in his personal firm account and that Hunt facilitated the misconduct.
The NYSE imposed a penalty on Milo of a censure and bar until he complies with the Exchange requests, which will become a permanent bar if he fails to comply within three months. The panel imposed the same penalty on Hunt.
George Pettrospour Avakian of Campbell, Cal., 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 Avakian failed to comply with a request by the Exchange that he appear and testify concerning alleged sales practice misconduct involving complaints by approximately 100 customers.
The NYSE imposed a penalty on Avakian of a censure and bar until he complies with the Exchange’s request, which will become a permanent bar if he fails to comply within three months.
Richard Spinale of Miami, Fla., 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 Spinale failed to comply with written requests by the Exchange for information concerning allegations of possible misappropriation.
The NYSE imposed a penalty on Spinale of a censure and bar until he complies with the Exchange’s requests, which will become a permanent bar if he fails to comply within three months.
Wayman N. Lockhart of Tempe, AZ, a former non-registered employee of a member firm, was found guilty of failing to cooperate in an investigation by the NYSE Division of Enforcement.
- An NYSE hearing panel found that Lockhart failed to comply with the Exchange’s written requests for information concerning alleged misconduct involving transactions by Lockhart in his personal account at the firm and his outside personal bank account.
The NYSE imposed a penalty on Lockhart of a censure and bar until he complies with the Exchange’s requests, which will become a permanent bar if he fails to comply within six months.
Marlene Hart of Lake Forest, Fla., 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 Hart failed to comply with written requests by the Exchange that she provide testimony concerning alleged misconduct involving the acceptance of cash from a customer for a securities purchase, contrary to firm policy.
The NYSE imposed a penalty on Hart of a censure and bar until she complies with the Exchange’s requests.
About NYSE Regulation:
On December 17, 2003, a new governance structure for the NYSE was approved by the SEC. Under the new design, the NYSE Board of Directors is comprised solely of independent directors, except for the chief executive officer, with no affiliation with any regulated member firm. Operation of the regulatory organization is separate from the business side. A new position of chief regulatory officer reports directly to the board of directors through a new regulatory oversight committee. As a result, NYSE Regulation is insulated from potential influence from NYSE members and member firms and is independent in its decision-making.
NYSE Regulation plays a critical role in monitoring and regulating the activities of its members, member firms and listed companies, as well as enforcing compliance with NYSE rules and federal securities laws. Nearly 400 of the largest securities firms in America are members of the New York Stock Exchange. These firms service 92 million customer accounts, or 90 percent of the total public customer accounts handled by broker-dealers, with total assets of over $3 trillion. They operate from 19,000 branch offices around the world and employ 146,000 registered personnel. Nearly 700 employees, or more than 40 percent of the Exchange’s staff, work for NYSE Regulation, which consists of four divisions: Market Surveillance, Member Firm Regulation and Enforcement and Listed Company Compliance.
