David Wong
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45426 / February 8, 2002
Admin. Proc. File No. 3-10360
In the Matter of the Application of David Wong
For Review of Disciplinary Action Taken by the AMERICAN STOCK EXCHANGE, LLC | : |
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES EXCHANGE
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the American Stock Exchange, LLC against David Wong, be, and it hereby is, sustained.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
| 1 | Associate membership is one category of Exchange membership. See Article IV, Section 1(d) of the AMEX Constitution. |
| 2 | Exchange Rule 411 (the "know your customer rule") requires members and member organizations, among other things, to use "due diligence to learn the essential facts relative to every customer." |
| 3 | Exchange Rule 921(c) requires members and member organizations to "exercise due diligence to learn the essential facts as to the customer and his investment objectives and financial situation" in approving a customer's account for options transactions. |
| 4 | Exchange rules and Article V, Section 4(i) of the AMEX Constitution are made applicable to employees of members and member organizations pursuant to Rule 345(a)(4), which also authorizes the AMEX to discipline employees of member organizations who engage in conduct inconsistent with just and equitable principles of trade. Article V, Section 4(i) provides that a member or member organization adjudged guilty in an AMEX proceeding of a willful violation of any provision of the Exchange Act, or any rule or regulation thereunder, shall be deemed to have engaged in conduct inconsistent with just and equitable principles of trade and may be suspended or expelled. |
| 5 | Exchange Rules 421 and 924(a) prohibit an employee of a member organization from exercising any discretionary power,including such power in trading of options contracts, in a customer's account without the prior written authorization of the customer. |
| 6 | Section 10(b) of the Exchange Act makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of" the Commission's rules. 15 U.S.C. § 78j(b). |
| 7 | Rule 10b-5 makes it unlawful for any person to "employ any device, scheme, or artifice to defraud" or to "engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5. |
| 8 | See n.4 supra. |
| 9 | Under Exchange Rule 923, a registered employee of a member organization must not recommend any options transaction to a customer unless the employee has reasonable grounds to believe that the recommended transaction is suitable for the customer on the basis of information furnished by the customer, after reasonable inquiry concerning the customer's investment objectives, financial situation and needs. The rule further directs that, before recommending any opening transaction in an options contract, the employee must have a reasonable basis for believing that the customer has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of the recommended transaction, and the financial wherewithal to be able to bear the risks of the recommended position in the options contract. |
| 10 | In accordance with Alongi's instructions, Wong used the remaining approximately $40,000 to establish accounts at Walsh Manning for Alongi's four grandchildren. |
| 11 | As Wong acknowledged during his investigative testimony, "she didn't have any prior experience . . . I would have to be the person to show her . . . how to make money, or to earn money. I guess I was her first broker." Wong testified that, when he attempted to discuss covered call writing with Alongi, he found it difficult to get her to understand the concept: "I tried. . . . [She was] someone who has no idea of calls or concept of options . . . it was over her head." |
| 12 | Wong testified: "[I]f it was profitable by the end of the day, then we would go into cash and just sell it. . . . If it was, you know, a closer possibility or if it was down a little bit, then we would hold it. You know, maybe for a day or two." |
| 13 | "The term 'in and out' trading denotes the sale of all orpart of a customer's portfolio, with the money reinvested in other securities, followed by the sale of the newly acquired securities." Costello v. Oppenheimer & Co., Inc., 711 F.2d 1361, 1369 n.9 (7th Cir. 1983). |
| 14 | For example, between August 11 and October 12, 1995, Wong effected 6 trades in Network Express Inc. (3 buys and 3 sells), for a net loss of $12,680 (including commissions). Between March and June 1995, Wong effected 9 trades in the stock of Cheyenne Software, Inc. (5 purchases and 4 sales), which generated $3,500 in commissions but only $2,600 in after-commission profits. |
| 15 | An opening transaction adds to the net position of an investor. An opening purchase transaction creates or increases a long position in a given series of options, while an opening sale transaction creates or increases a short position in a given series of options. |
| 16 | Turnover rate is calculated by dividing the total purchases in an account by the account's average monthly investment. The average monthly investment is the cumulative total of the net investment in the account at the end of each month, exclusive of loans, divided by the number of months under consideration. Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 n.10 (1989). |
| 17 | De facto control is established when a customer relies, as did Alongi, on a broker's advice because the customer is unable to evaluate the broker's recommendations and exercise independent judgment. See Tiernan v. Blyth, Eastman, Dillon & Co., 719 F.2d 1, 3 (1st Cir. 1983); Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 676-77 (9th Cir. 1982); Harry Gliksman, Exchange Act Rel. No. 42255 (Dec. 21, 1999), 71 SEC Docket 892, 895. |
| 18 | Turnover rate is one means of determining whether an account has been excessively traded. Although no turnover rate is universally recognized as determinative of churning, an annual rate in excess of 6 is generally presumed to reflect excessive trading. See, e.g., Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498, 1502 (11th Cir. 1985); Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th Cir. 1980); Harry Gliksman, 71 SEC Docket at 897-98. See also Donald A. Roche, 53 S.E.C. 16, 21 (1997) (turnover rate of 3.3 found to be excessive); In re Frederick C. Heller, 51 S.E.C. 275, 277 (1993) (turnover rate of 6.4 found to be excessive). Here, the turnover rate was 7.3. "In and out" trading, in which Wong freely engaged, is also evidence of excessive trading (see Costello, 711 F.2d at 1369; Harry Gliksman, 71 SEC Docket at 898), as is the short-term trading of equity securities that Wong effected here (see Reynolds, 50 S.E.C. 805, 808 n.12 (1991)). |
| 19 | See Rivera v. Clark Melvin Securities Corp., 59 F.Supp.2d 280, 289 (D.P.R. 1999); Sheldon Company Profit Sharing Plan and Trust, 828 F.Supp. 1262, 1273 (W.D. Mich. 1993). |
| 20 | "Churning claims arise when a broker, exercising control over an account, abuses a customer's confidence for personal gain by initiating transactions that are excessive in view of the character of the account." Krull v. SEC, 248 F.3d 907, 913 n.7 (9th Cir. 2001). See also Craighead v. E.F. Hutton & Company, Inc., 899 F.2d 485, 489 (6th Cir. 1990) ("'Churning' is a shorthand expression for a type of fraudulent conduct in a broker-customer relationship where the broker 'overtrades' a relying customer's account to generate inflated sales commissions."); Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981) (churning "occurs when a securities broker enters into transactions and manages a client's account for the purpose of generating commissions and in disregard of his client's interests"); Donald A. Roche, 53 S.E.C. at 22 ("[c]hurning, 'in essence involves a conflict of interest in which a broker or dealer seeks to maximize his or her remuneration in disregard of the interests of the customer,'" quoting Loss & Seligman, Securities Regulation 3877 (1991)). Churning has been recognized as a manipulative and deceptive device within the meaning of Section 10(b) and Rule 10b-5, "the scienter required . . . being implicit in the nature of the conduct." Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983). |
| 21 | 15 U.S.C. § 78s(e)(2). |
| 22 | Id. Wong does not claim, and the record does not show, that the AMEX's action imposed an undue burden on competition. |
| 23 | The AMEX reasonably calculated the amount of the fine by subtracting the amount ($15,000) Wong had paid Alongi in settlement of her NASD arbitration claim from the total commissions Wong earned from his trading activities in Alongi's accounts ($28,076). The AMEX determined that "the underlying goals of remediation and deterrence are adequately served by 'fining away' Wong's ill-gotten gains." |
| 24 | Wong argues that the AMEX should be required to produce the "findings of fact" underlying these three disciplinary decisions that were furnished to the disciplinary panel as relevant precedent on sanctions. We disagree. As the AMEX observes, Wong "had ample opportunity to obtain the information he now seeks." Two weeks prior to the disciplinary hearing the AMEX prosecutorial staff provided Wong and the disciplinary panel with a precedent memorandum containing the texts of these AMEX decisions. Wong and his counsel did not object to this submission or request to see the underlying "findings of fact," nor did they object at the hearing to the admission of the precedent memorandum or proffer an alternative memo. |
| 25 | See, e.g., Butz v. Glover Livestock Commission Co. Inc., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970); Pasquale Schettino, Exchange Act Rel. No. 44329 (May 21, 2001), 75 SEC Docket 71, 82; Robert A. Grunburg, 52 S.E.C. 1081, 1083 (1996); Jeffrey D. Field, 51 S.E.C. 1074, 1077 (1994); Robert A. Amato, 51 S.E.C. 316, 321 n.25 (1993), aff'd, 18 F.3d 1281 (5th Cir. 1994); J.V. Ace & Co., Inc., 50 S.E.C. 461, 467 (1990). |
| 26 | See, e.g., Pasquale Schettino at 82 n.24; Justine Susan Fischer, 53 S.E.C. 734, 741 n.4 (1998). |
| 27 | AMEX Decision 97-D-01 (April 8, 1997). |
| 28 | In Herold, the AMEX censured and barred a broker for similarly failing to use due diligence in the opening of his customer's account, effecting unsuitable and excessive options transactions for his customer, and disclosing misleading information on his customer's new account form. As is detailed in the AMEX disciplinary decision brought against the broker's supervisor, the broker had permitted another broker from a different firm to make numerous unauthorized trades and withdrawals from the account of an 82-year-old widow who was confined to a nursing home. Richard DeCastro, AMEX No. 97-D-01, 1998 WL 295513 (April 6, 1998). Wong would have us distinguish in a meaningful way his conduct from that of the Herold respondent. According to Wong, the Herold respondent engaged in more egregious misconduct than did Wong when the Herold respondent took advantage of his customer's confinement by facilitating another broker's improper withdrawals of cash and securities from the customer's account. Wong correctly points out that, here, unlike in Herold, third parties were not helped to defraud an institutionalized person. Wong, however, acted alone and was solely responsible for defrauding his client, Alongi. The fact differences Wong highlights do not counsel imposing a time-limited bar. |
| 29 | See NASD Sanction Guidelines at 74 and 83 (1998 ed.). |
| 30 | We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion. |