Six Member Firms Disciplined
Morgan Stanley DW Inc. and Morgan Stanley & Co. Incorporated of New York City, member firms (collectively, the “firm”), consented without admitting or denying guilt to findings of operational and supervisory failures.
- An NYSE hearing panel found that, between February 2002-September 2004, as a result of numerous supervisory, operational and technological deficiencies, the firm failed to ensure compliance with certain Exchange rules and federal securities laws. The firm failed to have systems in place reasonably designed to ensure that it complied with its regulatory obligations and failed to monitor the operational and administrative areas responsible for the violations cited. Specifically, the firm failed to:
- deliver prospectuses to approximately 156,000 accounts, impacting approximately 141,000 customers, in connection with certain sales of registered securities;
- provide, in certain instances, accurate daily program trading reports to the Exchange and to report certain program trades that resulted in violations of the short sale rules;
- submit in a timely manner approximately 490 required filings;
- process fingerprints and maintain adequate records of background checks for approximately 23% of its newly hired non-registered employees;
- adequately review and monitor certain incoming and/or outgoing correspondence, including e-mails and faxes, of registered representatives and/or branch managers;
- adequately implement written policies and procedures and evidence supervisory monitoring and review of certain communications with the public; and
- comply with requirements governing the entry and cancellation of approximately 204 market-on-close and limit-on-close orders.
Separately, Morgan Stanley DW Inc. and Morgan Stanley & Co. Incorporated of New York City, member firms (collectively, the “firm”) consented without admitting or denying guilt to findings of supervisory and books and records deficiencies. This enforcement action stems from the fraudulent activities of Carlos Soto of Guaynabo, Puerto Rico, a former registered representative with Morgan Stanley DW Inc., who was permanently barred by the Exchange (see NYSE hearing panel decision 04-92) in August 2004 for, among other things, misappropriating more than $56 million from firm customers.
- An NYSE hearing panel found that the firm failed to reasonably supervise Soto to prevent and detect his violations of Exchange rules and federal securities laws over a 13-year period. Beginning in approximately 1991, Soto engaged in a deceptive scheme to defraud the firm’s customers by lying about purchases and sales of securities by sending falsified account documents. The firm also failed to supervise a non-registered employee of the firm’s fixed income operations area (who was sentenced in criminal proceedings in federal court to 26 months of incarceration) to prevent and detect his violations over a four-year period, during which time he misappropriated approximately $5.5 million in funds from both the firm and its customers.
- The firm also failed to use due diligence to learn essential facts relative to certain customer accounts and to supervise diligently accounts handled by two employees. The NYSE imposed a penalty of a censure and $6 million fine. Morgan Stanley DW Inc. and Morgan Stanley & Co. Incorporated consented to the penalty.
- An NYSE hearing panel found that, during early 2000-September 2002, the firm failed to retain internal e-mails for a three-year period as required. In addition, prior to April 2001, the firm retained external e-mails on back-up tapes but failed to retain the tapes for the required three-year period. Upon learning of the problem, the firm failed to promptly report the matters to the Exchange.
Advest, Inc. of Hartford, Conn., a member firm, consented without admitting or denying guilt to findings of financial, operational, reporting, books and records, sales practice and supervisory deficiencies.
- An NYSE hearing panel found that between January 2000-March 2003 the firm:
- failed to properly compute its net capital by overstating its net capital by more than $47 million when, in fact, there was a deficiency of more than $5 million;
- failed to have sufficient funds in its special reserve bank account and failed to compute its customer reserve formula properly;
- filed an inaccurate FOCUS report;
- allowed employees to improperly communicate with the public and failed to review employee communications with the public;
- failed to learn the essential facts relative to several customers and failed to provide diligent supervision of all accounts handled by its registered representatives;
- failed to review customer accounts with post office box addresses and for customer accounts for which the addresses were the same as the address of the registered representative;
- failed to properly report various customer complaints to the Exchange;
- failed to comply with margin regulations;
- failed to properly record customer securities in its possession;
- failed to properly register various officers and directors of the firm;
- failed to place several securities involved in secondary offerings on the firm’s restricted list
- failed to make and preserve accurate books and records; and
- occupied an office with a corporation conducting a securities business without Exchange permission.
- The firm also failed to reasonably supervise and control the actions of its employees, and establish and maintain appropriate procedures for supervision and control, including a separate system of follow-up and review, to ensure compliance with NYSE rules and federal securities laws with respect to most of the foregoing violations and with respect to certain other activities set forth in the Exchange hearing panel decision.
HD Brous & Co, Inc. of Great Neck, N.Y., a member firm, and Howard D. Brous of Kings Point, N.Y., an owner, director and a registered representative of the firm, consented without admitting or denying guilt to findings of deficiencies in disseminating research and in supervision, among other things. The NYSE completed disciplinary action against the firm and Brous in 2001 for deficiencies that occurred during 1996-2000 (see NYSE hearing panel decisions 01-149 and 01-150). Some of the deficiencies that are the subject of the actions being announced today are repeat findings from the prior discipline.
- An NYSE hearing panel found that, during the period January 2001-July 2002, the director of the firm’s research department pre-released certain research reports on numerous occasions – prior to the public distribution of those reports – to certain subject companies and/or competitors of those companies, institutional clients of the firm, then- current firm registered representatives, and a former registered representative of the firm. In addition, the name of the preparer did not appear on at least three reports that the firm distributed during the relevant period.
- In addition, the firm’s head of institutional sales distributed research without supervisory approval on numerous occasions. The distributed research was not dated, did not indicate the market price of the security, and did not indicate the preparer’s name as required by Exchange rules. The institutional sales head, without the firm’s knowledge or consent, also made an Internet posting reiterating his then-current short sale recommendation of a security in which his clients held short positions.
- During the period 1999-2003, the firm failed to preserve certain electronic communications as required, and failed to provide for reasonable procedures for supervision and control, and a separate system of follow-up and review with respect to its research activities, electronic communications and use of the Internet. The firm also provided inaccurate information to the Exchange with respect to its implementation of corrective action regarding previously cited violations involving research.
- During the January-October 2001 time period, Howard Brous failed to adequately supervise the departments and individuals who engaged in the above referenced misconduct. He also did not timely comply with part of a requirement imposed on him by a hearing panel in 2001.
Piper Jaffray & Co. (formerly known as U.S. Bancorp Piper Jaffray Inc.) of Minneapolis, Minn., consented without admitting or denying guilt to findings of deficiencies in the areas of books and records, communications with the public, regulatory reporting and supervision.
- An NYSE hearing panel found that, during certain times in 2001-2003, the firm failed to exercise reasonable supervision and control with respect to certain business activities, including:
- Producing branch office managers when acting in the capacity of registered representatives;
- Records of customer addresses;
- Trade corrections;
- Employee use of personal computers that operated outside of the firm’s systems;
- Communications with the public;
- Review of discretionary accounts; and
- Special supervision of a registered representative.
- The firm also failed to make and preserve required records relating to customer orders executed on the floor of the Exchange, issued communications that were not approved in advance by an appropriate supervisor or failed to make required disclosures, failed to accurately and promptly report to the Exchange information regarding customer complaints and failed to give discretionary accounts frequent appropriate supervisory review as required.
Samuel Weiss & Co., Inc. of New York City, a member firm, consented without admitting or denying guilt to findings of books of records and supervisory deficiencies.
- An NYSE hearing panel found that, during 1999-2001, the firm failed to make and/or preserve certain required books and records. The firm also failed to provide reasonable supervision of certain business activities, namely, compliance with books and records requirements, the business activities of employees engaged in floor brokerage activities, and outside accounts maintained away from the firm by firm employees or their family members.
Former Specialist Member Barred for Failure to Cooperate
Robert William Luckow of Wyckoff, N.J., a former Exchange member, specialist and CEO of a specialist firm, consented without admitting or denying guilt to a finding that he failed to cooperate in an investigation by the NYSE Division of Enforcement.
- An NYSE hearing panel found that Luckow failed to comply with a written request by the Exchange that he appear and testify concerning allegations that he may have violated Exchange rules and federal securities laws in connection with his trading as specialist, by executing trades for the firm’s dealer account ahead of executable customer orders in two NYSE-listed securities during the period January 1999-December 2000. (Luckow resigned from the firm in December 2000.) This disciplinary proceeding is an outgrowth of the continuing investigation by the Exchange of individual responsibility for breaching the specialists’ duty as agent to public orders, which was the focus of major enforcement actions taken in 2004 against NYSE specialist firms.
Former Floor Clerk Barred for Frontrunning and Other Misconduct
Stephen Badalamente of Bronx, N.Y., a former floor clerk for a floor brokerage firm, was found guilty of violating the fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 by, among other things, engaging in frontrunning of unexecuted customer orders. The Exchange permanently barred Badalamente in this action.
- An NYSE hearing panel found that, during the period from October-November 2001, Badalamente caused a third party account, in which he had an interest, to trade in the same stock and on the same day as block orders received from customers of the firm, ahead of or along with the execution of the block orders, without the customers’ consent, occasionally receiving for the third party account a more favorable price than the customer. Badalamente, as a floor clerk and not a member, was not authorized to make or accept bids or offers or consummate trades on the floor. Nevertheless, on 17 occasions, he misallocated shares from trades executed for other customers of the firm to the third party account. In some instances, he also traded back or “crossed” to the original customer, at an inferior price, trades initially executed for that customer that he had initially allocated to the third party account. These cross trades were not exposed to the auction market. For example, on Nov. 8, Badalamente’s firm received an order from a customer to buy 40,000 shares of a stock at the market, which was subsequently entrusted to and executed by the specialist. Badalamente then allocated the 10,000 shares of the stock that were executed for the customer at a price of $22.31 to the third party account instead, and then caused the entry of a sale of 10,000 shares from the third party account to the customer at the inferior price of $22.39.
- Badalamente engaged in frontrunning when he took advantage of material nonpublic information, such as an imminent order, which reasonably could be expected to have an immediate, favorable impact in relation to such transactions. On one or more occasions, he telephoned the third party promptly after receiving a block order from a customer of 10,000 or more and advised the third party to trade in the same stock as the customer’s block order, without obtaining the consent of the customer to disclose the customer’s order information to the third party. On one occasion, Badalamente gave an order (which was unauthorized) to an independent floor broker to buy 2,000 shares of a stock for the third party account, after receiving an order from a customer for 20,000 shares in the stock, which he gave to a firm broker for execution.
- Badalamente also caused violations of the books and records requirements, made misstatements to the Exchange and failed to comply with Exchange requests for information and testimony regarding this matter.
Individuals Disciplined for Sales Practice Misconduct
Alex Alfred Collins of Columbus, Ohio, a former registered representative, consented without admitting or denying guilt to findings that he engaged in sales practice misconduct in 15 customer accounts.
- An NYSE hearing panel found that, during the period May 2000-March 2001, Collins engaged in unsuitable trading, including recommending unsuitable options transactions, in the accounts of 15 customers, all of whom were retired, elderly individuals. Collins recommended a covered call strategy to the customers and concentrated the accounts in large positions of technology stocks and then sold covered calls against those stocks to realize cash premiums for the particular needs of his customers. However, Collins trading was unsuitable in light of the customers’ investment objectives, investment experience and financial resources.
Donald A. Douglas of Boynton Beach, Fla., 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 the period June 2000-February 2001, Douglas sent unapproved correspondence via e-mail to a customer and agreed to share in gains or losses in the customer’s account; exercised numerous discretionary, unsuitable and excessive trades in the account of a second customer; and mismarked numerous orders for the accounts in the firm’s order entry system as “unsolicited” orders, when the vast majority of orders were solicited.
Individual Disciplined for Unapproved Communications with the Public
Jerry Kersz of Tel Aviv, Israel, a former registered representative, consented without admitting or denying guilt to findings that he communicated with the public via e-mail without approval and made material misstatements to his member firm employer and to the Exchange.
- An NYSE hearing panel found that on Nov. 2, 2002, Kersz sent an e-mail solicitation to the public without the prior approval of his firm. The e-mail solicitation was misleading and contained an untrue statement. In the course of the firm’s investigation of a complaint from a recipient of the solicitation, Kersz made a number of material misstatements. He also made material misstatements to the Exchange during the course of its investigation of allegations concerning electronic communications.
Individuals Barred for Misappropriation and Other Violations
Martin P. Maxwell of Olympia, Wash., a former non-registered employee of a member firm, was found guilty of misappropriating customer funds and failing to cooperate in an investigation of this matter by the NYSE Division of Enforcement.
- An NYSE hearing panel found that, during the period February 2001-September 2002, Maxwell effected wire transfers of funds, totaling approximately $792,000, from approximately 30 institutional customer accounts to his own bank account, his wife’s two bank accounts and his brother-in-law’s two bank accounts by manually overriding clients’ standing wire transfer instructions. Maxwell also failed to comply with a written request by the Exchange for information concerning this matter.
Andrew Nelson Finder of Tampa, Fla., a former registered representative, consented without admitting or denying guilt to a finding that he misappropriated customer funds.
- An NYSE hearing panel found that, during the period March-August 2002, without the knowledge or authorization of his customer, Finder caused seven checks totaling approximately $29,000 to be issued from the customer’s securities account, obtained each check, endorsed or caused to be endorsed the customer’s name on each check, deposited each check into his wife’s business account and converted the proceeds to his own use and benefit.
Carlos Pereyra of Brooklyn, N.Y., a former non-registered employee of a member firm, was found guilty of misappropriating firm funds and failing to cooperate in an investigation of this matter by the NYSE Division of Enforcement.
- An NYSE hearing panel found that in February 2003 Pereyra admitting to misappropriating nine checks, issued during August-September 2002 and totaling approximately $23,000, to payees as reimbursements for business expenses and for vendor services provided to the firm.
- Pereyra also failed to comply with written requests by the Exchange for information concerning the circumstances surrounding the termination of his employment with the firm.
Individual Disciplined for Check Kiting and Related Violations
Heather A. Lorenz of West Fargo, N.D., a former non-registered branch office administrator at a member firm, consented without admitting or denying guilt to findings that she engaged in a pattern of check kiting and related violations.
- An NYSE hearing panel found that, during the period Apr. 23-Aug. 21, 2002, Lorenz engaged in a pattern of check kiting on at least 19 occasions by crediting her firm personal account with checks from her outside checking account that she then failed to timely deposit into the firm’s account at the local bank. However, the same day she credited the funds to her firm’s personal account, she drew checks totaling approximately $3,300 on that account to her outside checking account when she knew or should have known that there were insufficient funds to cover such checks. Lorenz also failed to timely deposit customer funds she had credited to their accounts at the firm and caused the books and records of her member firm employer to be inaccurate.
Individual Disciplined for Engaging in Unapproved Outside Business and Related Violations
Lovell Kent Densley of Matlacha, Fla., a former registered representative, consented without admitting or denying guilt to findings that he engaged in an unapproved outside business and made misstatements to his employer concerning that business.
- An NYSE hearing panel found that, during the period of about October 2002-November 2003, Densley engaged in outside business activities without the approval of his member firm employer. Densley worked on a project involving the proposed construction of a liquid natural gas terminal and he was involved in three real estate development projects. When the firm began investigating allegations that he was engaged in outside business activities, Densley made misstatements to the firm in order to conceal those activities.
Gregory Leonard Williams of Old Bridge, N.J., a former registered representative, consented without admitting or denying guilt to findings that he failed to disclose his criminal history to his member firm employer.
Omischa C. Shannon of Missouri City, Texas, a former non-registered employee of a member firm, consented without admitting or denying guilt to a finding that she failed to disclose her criminal history to her member firm employer.
Individuals Disciplined for Failure to Cooperate
William Edward Glass of Austin, Texas, a former registered representative, consented without admitting or denying guilt to a finding that he failed to cooperate in an investigation by the NYSE Division of Enforcement of allegations of misappropriation, among other matters.
Larry Andrew Tipton of Seminole, Fla., a former registered representative, was found guilty of failing to cooperate in an investigation by the NYSE Division of Enforcement of allegations of sales practice misconduct.
All cases, prosecuted by the NYSE Division of Enforcement, may be subject to review by the Securities and Exchange Commission and, thereafter, federal courts.
The NYSE imposed a penalty of a censure and 11-year bar. Williams consented to the penalty.
The NYSE imposed a penalty of a censure and eight-year bar. Shannon consented to the penalty.
The NYSE imposed a penalty on Tipton of a censure and bar until he complies with the Exchange requests.
