NEW YORK, March 21, 2006 – NYSE Regulation, Inc., (“NYSE”) announced today that, as the result of a contested hearing, an NYSE Hearing Panel found former NYSE Member Howard Rosen of Monmouth Beach, New Jersey, guilty of misconduct. Rosen received a penalty of a censure, a fine of $100,000, a five year membership bar and a nine month suspension from allied membership, approved person status, employment or association in any capacity with a member or member organization, for, among other things, initiating transactions on the NYSE Floor without customer orders in an error account in which he had an interest in an attempt to recoup losses.
There is zero tolerance on the NYSE Floor for illegitimate orders,” said Susan L. Merrill, chief of enforcement, NYSE Regulation. “The penalty imposed by the Hearing Panel in this contested case is a clear warning to those who would attempt to abuse this marketplace.
This disciplinary action concerned violations of Section 11(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 11a-1(a) thereunder, Exchange Act Rules 17a-3 and 17a-4, and NYSE Rules 90(a), 123, 410, 440 and 476(a)(6).
Rosen, who was first hired as a floor clerk for a member organization and then became a lessee member and Floor Broker, became the Senior Floor Broker for his firm in late 2000. In that capacity, he was delegated the responsibilities of staffing, as well as creating, maintaining, and reviewing order tickets and error account logs and sending them to his firm’s main office for further review.
On or about July 11, 2001, a floor clerk, who had been hired after being recommended by Rosen and who reported to Rosen, misreported a buy order, which resulted in the double purchase of shares of a stock for the account of a firm customer.
The floor clerk never notified the firm of the error, which resulted in a loss of approximately $300,000 to $400,000. The firm and its clearing entity agreed to share the loss. The floor clerk’s employment was terminated.
Rosen’s compensation was based primarily on the profitability of the group for which he was responsible, including the error account. He was aware that his compensation was tied to the profit and losses in, among other things, the error account.
From January to early May 2002, Rosen placed trades in the firm’s error account for which he had no legitimate customer order. He claimed that he did so with the intention of recouping the loss caused by floor clerk’s error. Rosen admitted that he executed these trades, at least in part, to prevent a possible reduction in his compensation that could result from that loss.
Further, the error logs for these trades were incomplete. Most of the error logs prepared and preserved by Rosen were also inaccurate insofar as they had one or more of the following deficiencies: a lack of required supporting documentation (such as order tickets and execution reports); the lack of a detailed description of the transaction (such as the number of shares, price per share and reasons for the error); a false indication that the customer had initiated the trades described in the error log; and mathematically inaccurate calculations. From January to April 2002, there were approximately 352 buys and sells of the effected securities in the error account. As a result of Rosen’s failure to keep complete and accurate error logs, it is impossible to quantify precisely the number of trades he initiated on the Floor in the firm’s error account without customer orders. Nevertheless, Rosen acknowledged that he initiated at least 14 trades without having received customer orders.
Overall, Rosen’s wrongful trading resulted in losses of approximately $200,000 in the firm’s error account for the period of January to April 2002. As a result of losses from bona fide errors and Rosen’s wrongful trading, he forfeited in excess of approximately $177,000 of compensation and gained approximately in excess of $10,000 of compensation during the period January to May 2002.
Rosen’s superior was aware as early as March 2002 that Rosen was using the firm’s error account to initiate trades. Rosen was directed to cease using the error account in this way, but he continued to do so. Rosen’s employment was terminated in May 2002.
According to the Hearing Panel, “[b]y entering transactions that were not prompted by customer orders, [Rosen] illegitimately affected the price of the stocks in which he was trading and thereby undermined the stability of the market. Moreover, by exploiting, for personal advantage, the privileges entrusted to him by the investing community, [Rosen] has impeded the smooth functioning of the market by introducing an element of doubt into the system.”
Rosen’s firm previously consented to a violation of NYSE Rule 342(a) and (b), failure to supervise, arising out of these facts. See Moors and Cabot, Inc. , Decision 05-83 (NYSE Hearing Panel August 5, 2005).
About NYSE Regulation, Inc.
NYSE Regulation, Inc., is a not-for-profit corporation dedicated to strengthening market integrity and investor protection. A subsidiary of NYSE Group, Inc., NYSE Regulation’s board of directors is comprised of a majority of directors unaffiliated with any other NYSE board. Each director must also be independent from member organizations and listed companies. As a result, NYSE Regulation is independent in its decision-making.
NYSE Regulation protects investors by regulating the activities of member organizations through the enforcement of marketplace rules and federal securities laws. NYSE member organizations hold 98 million customer accounts or 84 percent of the total public customer accounts handled by broker-dealers. Total assets of NYSE member organizations are over $4 trillion. They operate from 20,000 branch offices around the world and employ 195,000 registered personnel. NYSE Regulation also ensures that companies listed on the NYSE and on NYSE Arca meet their financial and corporate governance listing standards.
NYSE Regulation consists of four divisions: Market Surveillance, Member Firm Regulation, Enforcement and Listed Company Compliance, as well as a Risk Assessment Unit and Dispute Resolution/Arbitration. For more information, visit our website at www.nyseregulation.com.
View Hearing Panel Decision #05-167 (pdf).
