SECURITIES EXCHANGE ACT OF 1934
Rel. No. 51047 / January 14, 2005

Admin. Proc. File No. 3-11522



In the Matter of the Application of

GUANG LU
7 Silver Kettle Court
Gaithersburg, MD 20878

For Review of Disciplinary Action Taken by

NASD


ORDER SUSTAINING IN PART AND DISMISSING IN PART DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION

On the basis of the Commission's opinion issued this day, it is

ORDERED that the sanctions imposed by NASD on Guang Lu for his failure to give notice to New York Life Securities, Inc. and Charles Schwab and Co. Inc., his failure to obtain written authorization before transacting trades in discretionary accounts, and providing a false answer on his Form U-4, and NASD's assessment of costs, be, and they hereby are, sustained.

By the Commission.

Jonathan G. Katz
Secretary


Endnotes

1 Conduct Rule 3050(c) prohibits a person employed by one member firm from making trades in an account maintained by another member firm without notifying both firms in writing prior to making those trades. NASD Manual at 4861 (Jan. 1999). Conduct Rule 2110 requires the observance of "high standards of commercial honor and just and equitable principles of trade." NASD Manual at 4111.

2 Conduct Rule 2510(b) generally prohibits a registered representative from exercising discretion in a customer's account without the customer's prior written authorization and the member firm's written acceptance. NASD Manual at 4411.

3 Membership Rule IM-1000-1 prohibits the filing of misleading information in connection with membership or registration as a registered representative. NASD Manual at 3111.

4 Conduct Rule 2860(b)(19) requires that a recommended options transaction not be unsuitable for a customer, based on the customer's investment objectives, financial situation and needs, and any other relevant information about the customer. NASD Manual at 4728.

5 NASD also assessed costs.

6 Dr. Hu, a medical doctor, was then an unpaid volunteer at the National Institutes of Health ("NIH"). In July 2000, Dr. Hu obtained a paid position at NIH, and in July 2001, obtained a permanent position at another institution.

7 Dr. Hu testified that Lu asked her to open a NYLIFE brokerage account because he was more familiar with NYLIFE's online format. Lu, however, asserted that Dr. Hu opened a NYLIFE account because the trading commissions were lower than those at Schwab.

8 In her April 22, 2002 testimony before the Maryland Securities Division, Dr. Hu admitted that, in completing her NYLIFE application, "[t]he numbers I just made up because . . . if I don't put some number you couldn't get approved for options." Lu testified before the Hearing Panel that he checked several boxes on the form before giving it to Dr. Hu to complete.

9 As her losses mounted, Dr. Hu communicated her frustration in a series of electronic mail messages to Lu. In a June 15, 2000 message to Dr. Hu, Lu described his trading strategy for her NYLIFE account as "mainly . . . 'writing covered calls'" and assured her that he was "still trying to make quick money on this acc." On June 21, 2000, Dr. Hu complained that she "still [had] over thirty thousands magin [sic] debt" that forced her "to rely on borrowing money to live." On July 11, 2000, Dr. Hu wrote, "[y]ou have lost [] over $80,000" and "I told you so many times I want to close this account you insist in trading I said please don't trade option except covered call but you will not listen."

10 Adkins testified that Lu's proficiency with the English language was "[v]ery good" and that he and Lu "never had any problems communicating" with each other. Lu testified that his completion of the compliance form was "like routine work just check, check, check, yes, yes, yes, and no, no, no. I don't really specifically remember which rule is which, what is what."

11 Adkins also testified that NYLIFE's rules and regulations generally were "more restrictive than even [NASD's] rules." Immediately before his termination, Lu submitted to Adkins a second letter, dated October 9, 2000, that denied Dr. Hu's allegations against Lu and sought to withdraw the October 2 Letter. That second letter did not affect NYLIFE's decision to terminate Lu's employment.

Lu accuses Adkins of perjury because Adkins filed a supplemental declaration on December 7, 2001 clarifying that, when he referred to "'Dr. Hu's complaint'" in his November 16, 2001 affidavit in a Maryland Securities Division proceeding, he was in fact referring to the AG's letter summarizing Dr. Hu's allegations rather than to the actual complaint letter that Dr. Hu sent to the AG's office. This inaccuracy is immaterial. The AG's letter fully described Dr. Hu's complaint.

12 NYLIFE did not file a Form U-5 until October 30, 2000. Lu testified before NASD's National Adjudicatory Council (the "NAC") that he disclosed the nature of his termination from NYLIFE to the president of Globalink, who, Lu stated, advised Lu not to disclose the information on the Form U-4 because the matter was pending. Lu subsequently left Globalink because his production was insufficient.

13 NASD Manual at 4861.

14 Id.

15 See Section 3(a)(35) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(35), which provides that "[a] person exercises 'investment discretion' with respect to an account if" such person ". . . is authorized to determine what securities or other property shall be purchased or sold by or for the account," or "makes decisions as to what securities or other property" to buy or sell for the account, "even though some other person may have responsibility for such investment decisions," or "otherwise exercises such influence with respect to the purchase and sale of securities or other property by or for the account . . . ."; Scott E. Wiard, Securities Exchange Act Rel. No. 50393 (Sept. 16, 2004), __ SEC Docket ___ (citing Hotmar v. Lowell H. Listrom & Co., 808 F.2d 1384, 1385 (10th Cir. 1987) (comparing discretionary and non-discretionary accounts)).

16 We have previously held that ignorance of NASD rules does not excuse an associated person from compliance with those rules. See, e.g., Gilbert M. Hair, 51 S.E.C. 374, 378 (1993) (stating that ignorance of the rules is not an excuse for engaging in misconduct); Jay Frederick Keeton, 50 S.E.C. 1128, 1137 (1992) (charging associated person with knowledge of NASD's rules); Philip S. Sirianni, 47 S.E.C. 355, 359 (1980) (finding ignorance of obligation to report securities transactions to member firm was no excuse for failing to satisfy such obligation), aff'd, Sirianni v. SEC, 677 F.2d 1284, 1288 (9th Cir. 1982).

17 See Brian Prendergast, Exchange Act Rel. No. 44632 (Aug. 1, 2001), 75 SEC Docket 1525, 1540. NASD's finding that Lu violated Conduct Rule 2110 along with other NASD rules is based on the recognized policy that a violation of another NASD rule constitutes a violation of just and equitable principles of trade. See, e.g., Frank Thomas Devine, Exchange Act Rel. No. 46746 (Oct. 30, 2002), 78 SEC Docket 2528, 2538 n.30 (holding that a violation of another NASD rule is also a violation of Conduct Rule 2110); Stephen J. Gluckman, Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 428 (same); Steven B. Theys, 51 S.E.C. 473, 480 (1993) (same); Sirianni v. SEC, 677 F.2d 1284, 1288 (9th Cir. 1982) (ruling that failure to provide notice of private securities transactions was inconsistent with just and equitable principles of trade).

18 NASD Manual at 4411.

19 See Protective Group Sec. Corp., 51 S.E.C. 1233, 1240 (1994).

20 See James Carlton McLamb, 50 S.E.C. 607, 609 (1991) (finding that respondent's confessions to his employer established that he knew he was violating his firm's procedures).

21 Protective Group Sec. Corp., 51 S.E.C. 1233, 1236.

22 See Michael F. Flannigan, Exchange Act Rel. No. 47142 (Jan. 8, 2003), 79 SEC Docket 1132, 1141 (finding that, by violating Conduct Rule 2510(b), respondent also violated Conduct Rule 2110).

23 NASD Manual at 3111.

24 See, e.g., Daniel Richard Howard, Exchange Act Rel. No. 46269 (July 26, 2002), 78 SEC Docket 427, 431; Rosario R. Ruggiero, 52 S.E.C. 725, 728 (1996); Thomas R. Alton, 52 S.E.C. 380, 382 (1995).

25 Id; see also Robert E. Kauffman, 51 S.E.C. 838, 840 (1993) (asserting that "[e]very person submitting registration documents has the obligation to ensure that the information printed therein is true and accurate").

26 Lu states he answered Question 23J(1) in the negative because he was not "voluntarily discharged" but rather, was "terminated" by NYLIFE. Lu states that he has difficulty understanding the English language and claims that the word "terminate" is defined differently from the word "discharge" in his Chinese dictionary. Lu reasons that, because his termination letter from NYLIFE stated that his contract was terminated, he was not discharged. However, Adkins testified Lu's proficiency in English was "[v]ery good" and that he and Lu "never had any problems communicating" with each other.

Lu also claims that an affirmative answer is warranted only when all subparts of Question 23J(1) are true. We are not persuaded by this interpretation of the question since its various terms are separated by the word "or."

27 See Roy Ray Seaton, 47 S.E.C. 131, 134 (1979) (rejecting applicant's contention that Form U-4 question regarding whether he was the subject of any investigation was so ambiguous that he could not properly respond to it).

28 Rafael Pinchas, Exchange Act Rel. No. 41816 (Sept. 1, 1999), 70 SEC Docket 1516, 1522.

29 NASD Manual at 4728; see also Arthur Joseph Lewis, 50 S.E.C. 747, 748-49 (1991).

30 NASD dismissed the allegations that Lu had encouraged Dr. Hu to falsify this information, finding Dr. Hu's testimony on this point not credible. NASD also dismissed allegations that the trading was excessive.

31 See, e.g., United States v. Huff, 959 F.2d 731, 735 (8th Cir. 1992); Barry C. Wilson, 52 S.E.C. 1070, 1074 (1996); Brian Prendergast, 75 SEC Docket at 1542.

32 Generally, Lu sought all documents relating to: (1) Adkins' "false" affidavit; (2) all of NYLIFE's communications with Dr. Hu and NASD concerning Lu and NASD's accusations against him; (3) NYLIFE's settlement of a racial discrimination lawsuit purportedly filed by a Chinese-American former NYLIFE partner; (4) Dr. Hu; (5) NYLIFE's settlement with Dr. Hu; (6) NYLIFE's pursuit of restitution from Lu for the settlement amount; (7) NYLIFE's payment of the settlement with professional liability insurance proceeds; and (8) documents relating to the AG's investigation.

33 15 U.S.C. § 78o-3(b)(8).

34 NASD Manual at 7344.

35 When the Hearing Officer asked Lu whether Lu had any reason to think NASD Enforcement had failed to produce any information that it should have produced, Lu responded that "every document that [NASD Enforcement] send to me I already have" and that he "need[ed] to discover some kind of - - there's - - they have something behind the table or something like that."

36 NASD Manual at 7346.

37 At a prehearing conference, Lu claimed only that Adkins "must have some reason" for filing the affidavit and asserted that "I need to find out how it goes." He did not identify any particular documents related to the affidavit.

38 Lu also sought documents from Dr. Hu. Under NASD Rule 8210, NASD can compel production only from members, such as NYLIFE, and their associated persons. Because Dr. Hu was not an NASD member and therefore beyond NASD's jurisdiction, NASD could not compel her to produce documents relating to her.

39 Lu requests that we appoint an attorney to represent him in this matter. While our Rule of Practice 102(b), 17 C.F.R. § 201.102(b), authorizes an individual to appear through counsel, there is no statutory or constitutional right to counsel in these proceedings. Sheen Fin. Res., Inc., 52 S.E.C. 185, 192 (1995); Richard R. Perkins, 51 S.E.C. 380, 386 n.35 (1993).

40 15 U.S.C. § 78s(e)(2).

41 Id. Lu does not claim, and the record does not show, that NASD's action imposed an undue burden on competition.

42 NASD also determined that Lu's offenses of unsuitable trading and exercising discretion without written authority, when taken together, merited a bar. However, as noted above, we did not reach the charge of unsuitable trading.

43 For violations of Conduct Rules 2110 and 3050, the Guidelines recommend a monetary sanction of between $1,000 and $25,000, and in egregious cases, a suspension or bar. NASD Sanction Guidelines (2001 ed.) at 21. For violations of Conduct Rules 2110 and 2510, the Guidelines recommend a fine of between $2,500 and $10,000, and in egregious cases, a suspension. Id. at 94. For the filing of a misleading or inaccurate Form U-4, the Guidelines recommend a fine of between $2,500 and $50,000 and a suspension, and in egregious cases, a longer suspension or a bar. Id. at 77-78.

44 On November 11, 2004, Lu submitted to us a letter enclosing an unpublished decision, dated November 10, 2004, of the United States Court of Appeals for the Fourth Circuit relating to an insurance dispute between Lu and his Errors and Omissions insurance carrier. In his letter, Lu requested that we suspend this appeal proceeding pending the resolution of his insurance litigation. NASD moved to strike Lu's letter and the unpublished decision as additional evidence, and opposed Lu's request to suspend this appeal proceeding.

Rule 452 of our Rules of Practice, 17 C.F.R. § 201.452, requires a showing that there were reasonable grounds for failure to adduce such evidence previously and that the additional evidence is material. Because the Fourth Circuit decision was handed down on November 10, 2004, Lu is able to show that there were reasonable grounds for his failure to adduce that decision previously. However, Lu has not shown how the unpublished Fourth Circuit decision, which deals with an insurance dispute between Lu and his Errors and Omissions insurance carrier, is material. Accordingly, we deny both his motion to adduce such evidence and his request to suspend our consideration of his appeal.

45 Lu states he is unable to pay the costs assessed by NASD. The NAC imposed on Lu appeal costs of $1,413.62 on top of the $2,400.98 in hearing costs assessed by the Hearing Panel. NASD Rule 8330, as relevant here, requires the disciplined person to bear such costs of the proceeding as are fair and appropriate under the circumstances. NASD Manual at 7274. Lu, who had the burden of demonstrating inability to pay, has offered no proof of his inability to pay. We do not find the assessments unreasonable and sustain NASD's imposition of costs.

46 We have considered all of the arguments advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed herein.