UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 41145 \ March 8, 1999 ADMINISTRATIVE PROCEEDING File No. 3-9686 _____________________________ ) ORDER MAKING FINDINGS In the Matter of ) AND IMPOSING REMEDIAL ) SANCTIONS AGAINST DEAN WITTER REYNOLDS INC., ) HENRY L. AUWINGER HENRY L. AUWINGER, and ) DENNIS W. PETERSON, ) ) Respondents. ) ____________________________ ) I. On August 26, 1998, the Securities and Exchange Commission ("Commission") instituted public administrative proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Henry L. Auwinger ("Auwinger") to determine whether he failed reasonably to supervise a registered representative with a view to preventing violations of the federal securities laws, and, if so, what remedial actions or sanctions, if any, were appropriate. In response to the institution of administrative proceedings, Auwinger has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except as to the jurisdiction of the Commission over him and the subject matter of the proceeding, which are admitted, Respondent Auwinger consents to the entry of the findings and remedial sanctions set forth below. II. On the basis of this Order and the Offer, the Commission makes the following findings:[1]/ A. Nature of Proceeding This matter involves Auwinger’s failure reasonably to supervise a registered representative whose largest accounts included single, elderly women. Over a more than four-year period, the broker recommended unsuitable investments, churned the accounts to generate enormous commissions, and had the customers invest on margin. As a result of this activity the customers lost at least $320,000 -- and generated commissions of about $277,000 -- in the accounts of four elderly women. Auwinger improperly failed to respond to significant warning signs about the broker’s conduct from at least October 1992 until September 12, 1994. B. Respondent Auwinger, age 50, was the branch manager of the Hayward branch of Dean Witter Reynolds Inc. ("Dean Witter") from November 1990 until on or about September 12, 1994. As the branch manager, Auwinger was the direct supervisor of the registered representatives in that office. Auwinger has been the branch manager of Dean Witter's Sacramento, California, office since he left the Hayward office. C. Other Relevant Persons and Entities 1. Dean Witter engages in a general securities business and is a Delaware corporation with its principal place of business located in New York, New York, and approximately 350 branch offices located throughout the United States. Dean Witter is the wholly-owned subsidiary of Morgan Stanley, Dean Witter & Co. Dean Witter is a respondent in this proceeding. 2. Michael J. Oberholzer ("Oberholzer") was a registered representative in Dean Witter's Hayward branch from January 1989 until September 1995. As a result of the conduct alleged herein and other conduct, Oberholzer consented, without admitting or denying the allegations of the Commission's complaint, to the entry of a permanent injunction against him and an order imposing but waiving disgorgement based on his demonstrated inability to pay, SEC v. Oberholzer, No. C 97-3320 (N.D. Cal. Sept. 19, 1997), and the entry of an order by the Commission barring him from association with any regulated entity. 3. Ruth B. is a single, eighty-four year old retired nurse who resides in a small house in Hayward, California. After being cold called by Oberholzer in 1989, Ruth B. opened an account with Oberholzer and eventually invested approximately $200,000 with Dean Witter. That amount represented nearly two-thirds of her assets. Ruth B. lent $2,500 to Oberholzer in March 1991 so that he could purchase an automobile. Oberholzer repaid that amount without interest. Under Oberholzer’s mismanagement, Ruth B.’s account declined $7,638 in value. 4. Pearl H. is a single, eighty-one year old retired doctor who resided with her long-time friend, Ruth B. Pearl H. invested $125,000 with Dean Witter through Oberholzer. That amount represented nearly all of her liquid assets. Pearl H. lent $2,500 in March 1991 and $9,000 in November 1992 to Oberholzer so that he could purchase an automobile. Oberholzer repaid that amount without interest. Under Oberholzer’s mismanagement, Pearl H.’s account declined about $77,732 in value. She and Ruth B. together paid $66,419 in commissions and $6,872 in margin interest to Dean Witter. 5. Leona S. is a widowed, seventy-one year old retired housewife who resided in a trailer home in Livermore, California. With only a tenth grade education, Leona S. relied upon her husband, until his death in 1988, for all of her financial decisions. After being cold called by Oberholzer, Leona S. eventually invested $400,000 with Dean Witter, which represented more than 75% of her net worth. She also lent $90,000 on an unsecured and interest-free basis to Oberholzer so that he could purchase a house. Oberholzer repaid only $15,000 of that amount. Not including the loan, Leona S. experienced a $171,379 decline in the value of her accounts. She paid $201,362 in commissions and $1,695 in margin interest to Dean Witter. 6. Anne O. is a widowed, eighty-two year old retired clerk who resides in a modest Palm Springs, California house. With only a tenth grade education, Anne O. had relied upon her late husband to manage her financial affairs. Anne O. invested $100,000 with Oberholzer, which represented most of her liquid assets. Under Oberholzer’s mismanagement, Anne O.’s account suffered a $64,127 decline in value. She paid $23,482 in commissions and $9,253 in margin interest to Dean Witter. D. The Registered Representative’s Misconduct 1. From approximately September 1989 through May 1995, Oberholzer willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by engaging in fraudulent conduct in the accounts of elderly customers, including, but not limited to, Ruth B., Pearl H., Leona S., and Anne O. Each of these customers was financially unsophisticated, entrusted Oberholzer with a substantial amount of her life savings, and had a conservative investment objective, which was the preservation of her assets. As a result of Oberholzer's actions, these four customers lost at least $320,000, not including unrepaid loans. These losses included at least $275,000 that these customers paid in brokerage commissions. 2. Oberholzer managed those accounts as if he had discretionary authority by buying and selling securities without normally discussing the trades with the customers. Each woman signed a document requesting margin privileges, but did not know what margin was and was not aware she was agreeing to open a margin account. Oberholzer checked off the box requesting margin privileges on an account application, and the customer simply signed the application without reading or understanding it. 3. After gaining de facto control over his elderly customers' accounts, Oberholzer churned them with the objective of generating commissions and without regard to his clients' best interests or their conservative investment objectives. The high turnover ratios and cost to equity ratios demonstrate that Oberholzer excessively traded the women’s accounts. 4. Oberholzer engaged in unsuitable trading by investing a substantial portion of each of these elderly investors' accounts in speculative securities. He exposed his customers to further risk by purchasing these securities on margin. 5. Oberholzer made materially false and misleading statements and failed to state material facts to his elderly customers on a regular basis. From the time Oberholzer first met them, he misled them into believing that their assets would be secure under his management at Dean Witter. Oberholzer not only failed to provide important information to his customers about the trading in their accounts, when they did ask questions he made affirmative misrepresentations to them to prevent them from understanding the extent of their exposure and trading losses. He told Anne O., for example, that the margin notices she was receiving were "mistakes" and that she should disregard them. 6. Oberholzer willfully aided and abetted Dean Witter’s violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder because he regularly falsified information on Dean Witter's books and records, including the following: (1) account documentation containing untrue and exaggerated information about customer investment objectives, investment experience, assets, and occupations; (2) order tickets falsely recording unauthorized trades as "unsolicited;" and (3) forged signatures on letters of authorization and other documents pertaining to the transfer of assets between accounts. E. Auwinger’s Failure to Supervise the Registered Representative 1. Auwinger was Oberholzer's direct supervisor from November 1990 to September 1994. At Dean Witter, branch managers have primary responsibility for ensuring that brokers comply with the firm's procedures and the securities laws. Branch managers have the authority to sanction, suspend, or terminate brokers who fail to do so. 2. Because he reviewed all of the branch’s order tickets each day, and regularly received exception reports, Auwinger always knew the type and volume of trading activity, and the extensive use of margin, in the accounts of the four elderly women. The compliance department regularly brought to Auwinger’s attention the accounts of these customers. Among other things, the compliance department questioned Oberholzer’s marking of order tickets as "unsolicited" when many of his customers were trading the same securities. Auwinger received warnings from his assistant branch manager and operations manager about the way Oberholzer was conducting his business in other accounts, which did not relate to the trading or activity that took place in any of the accounts of the elderly women at issue in this proceeding. The assistant branch manager told Auwinger that Oberholzer was a "compliance time bomb." 3. As this activity continued over several years, Auwinger’s contacts with the customers were limited to a series of form "activity" letters that are used by the branch managers. While some of these activity letters generally called the clients’ attention to the commissions being generated and the level of activity in their accounts and suggested they contact him directly or arrange for a meeting to discuss their accounts with him, Auwinger did not personally meet with any of these customers, send them personalized activity letters, or otherwise directly bring to their attention the amount of commissions, margin interest, and risk they were incurring. Auwinger did personally call three of these customers and spoke directly with them and received a letter from one of them referencing their prior communication and reiterating her satisfaction with her broker’s performance and her awareness of the activity taking place in her account. For the most part, however, Auwinger simply obtained assurances from Oberholzer that the customers were actively managing their accounts. Auwinger’s response was insufficient and consisted of inadequate follow-up. 4. From no later than October 1992 until on or about September 12, 1994, Auwinger failed reasonably to supervise Oberholzer with a view to preventing Oberholzer's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aiding and abetting violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. As part of his failure to supervise, Auwinger did not adequately investigate Oberholzer's activities, and never suspended, terminated, or otherwise disciplined Oberholzer. A branch manager must respond reasonably when confronted with indications suggesting that a registered representative may be engaging in improper activity. In re Nicholas A. Boccella, Exchange Act Release No. 26,574 (Feb. 27, 1989). "Even where the knowledge of supervisors is limited to 'red flags' or 'suggestions' of irregularity, they cannot discharge their supervisory obligations simply by relying on the unverified representations of employees." In the Matter of John H. Gutfreund, Exchange Act Release No. 31554 (Dec. 3, 1992). A supervisor must conduct "adequate follow-up and review" whenever he or she detects unusual trading activity or other irregularities. Id. Auwinger’s contacts with the customers did not constitute such follow-up. III. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified by Auwinger in the Offer. Accordingly, IT IS ORDERED that Auwinger be, and hereby is, suspended from association with any broker or dealer for a period of three months, effective on the second Monday following the entry of this Order. Auwinger shall provide to the Commission, within ten days after the end of the three month suspension period described above, an affidavit that he has complied with the terms of the suspension. IT IS FURTHER ORDERED that Auwinger be, and hereby is, suspended from association in a supervisory and proprietary capacity with any broker or dealer for a period of nine months immediately following the period of his suspension from association. Auwinger shall provide to the Commission, within ten days after the end of the nine month suspension period described above, an affidavit that he has complied fully with the terms of the suspension. IT IS FURTHER ORDERED that Auwinger shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $10,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier’s check, or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand- delivered or mailed to the Comptroller, Securities and Exchange Commission, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Auwinger as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to David B. Bayless, District Administrator, San Francisco District Office, Securities and Exchange Commission, 44 Montgomery Street, Suite 1100, San Francisco, California 94104. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]:/ The findings herein are not binding on anyone other than Respondent Auwinger.