UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 40450 / September 18, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9708 :ORDER INSTITUTING ADMINISTRATIVE In the Matter of :PROCEEDINGS PURSUANT TO :SECTIONS 15(b) and 19(h) OF BRIAN M. COHEN, :THE SECURITIES EXCHANGE :ACT OF 1934, MAKING FINDINGS, Respondent. :AND IMPOSING REMEDIAL SANCTIONS : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Brian M. Cohen ("Cohen" or "Respondent"). II. In anticipation of the institution of these proceedings, Cohen 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 contained herein, except as to the jurisdiction of the Commission over Respondent and over the subject matter of this proceeding, and except as to paragraphs III.A. and III.B., below, which are admitted, Respondent Cohen, by his Offer, consents to the entry of findings and remedial sanctions set forth below. Accordingly, it is ordered that proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and, they hereby are, instituted. III. On the basis of this Order Instituting Administrative Proceedings Pursuant To Sections 15(b) and 19(h) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions ("Order") and Respondent's Offer, the Commission finds[1] that: A.First Montauk Securities Corp. ("First Montauk") is, and at all relevant times was, a broker-dealer registered with the Commission, with approximately 125 branch offices and 75 offices of supervisory jurisdiction. B.Cohen at all relevant times was a registered principal of First Montauk in its main office in Red Bank, New Jersey. Cohen is a resident of Tom's River, New Jersey. C.First Montauk's Houston office was opened by certain individuals with prior experience trading government securities (hereafter the "Houston traders") in October 1990. The Houston office was established to sell fixed-income products, primarily REMICs and other mortgage-backed securities, to institutional clients. Prior to the opening of the Houston office, fixed- income products were a minor part of the First Montauk's business, and the firm had relatively few institutional clients. By opening the Houston branch to sell REMICs and other mortgage- backed securities, First Montauk was expanding into an area in which the firm previously had very limited experience. The Houston office was one of only three First Montauk branches that was allowed to execute their own trades. This distinct trading activity required stringent home office supervision, but First Montauk did not have procedures in place to review the Houston office's trading activity. D.Cohen, at all relevant times a principal in First Montauk's main office in New Jersey, by reason of his greater experience in mortgage-backed securities, was delegated responsibility for supervising certain of the Houston office's operations, including the branch's trading activity. E.At all relevant times, the Houston office had the authority to execute riskless principal transactions. The procedure required the Houston traders, who directed the Houston office's activities, to arrange and confirm both sides of each transaction, and then call the details directly in to Cohen in New Jersey. Cohen then would write an order ticket for each transaction, and provide that information to First Montauk's clearing firm. Parking, Excessive Markups and Net Capital and Books and Records Violations F.First Montauk did not allow the Houston office to hold positions in securities unless they received approval from the main office. In order to circumvent Respondent First Montauk's restriction on holding positions, the Houston traders engaged in a parking scheme which enabled them to purchase bonds and secretly hold them "off their books," while still maintaining control of the securities. From October 1992 through March 1994, the Houston traders parked government agency securities on at least seventeen occasions, including every month from March 1993 through March 1994. G.The parking scheme was conceived and carried out by the Houston traders in the following manner. Whenever the Houston traders wanted to park securities, they entered into an arrangement with two other broker dealers (Dealers One and Two) whereby First Montauk would sell the bonds to Dealer One for settlement that month. Dealer One would then sell the bonds to Dealer Two for a fraction higher than it had purchased them from First Montauk. The Houston traders then caused First Montauk to repurchase the bonds from Dealer Two for settlement the next month, with Dealer Two earning a small profit on the transaction. The Houston traders used the time between settlement dates to find a customer for the bonds. The parking scheme essentially allowed the Houston traders an extra month to find a customer for securities over which they maintained control. H.Each time the Houston traders executed a parking transaction, they filled out tickets for the sale and the repurchase from the other dealers. These trades were then called in to Cohen in New Jersey, who wrote tickets for processing by First Montauk's clearing agent. Cohen never saw the order tickets which were prepared in the Houston office. For each of the parking transactions, however, one or more of the order tickets written by Cohen contained trade dates different than the trade dates on the Houston tickets. These order tickets depicted each of the parking transactions as two separate riskless principal trades, thereby enabling the scheme to go undetected. I.On at least seven occasions, the Houston traders used the parking scheme to manipulate the price of certain government agency securities and conceal from First Montauk and others undisclosed excessive markups charged to First Montauk customers. The excessive markups on the seven transactions alone amounted to approximately $1.85 million, of which approximately $1.66 million was paid directly to the Houston traders, while the remainder, less clearing fees, was retained by First Montauk. J.In those instances, the Houston traders purchased bonds and marked them up significantly on the sale to Dealer One. Dealer One then marked up the securities another 1/32 or 2/32 when selling them to Dealer Two. The Houston traders would then mark up the securities another 4% - 5% when selling them to First Montauk customers. K.As a result, the Houston traders 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. L.In response to regulatory inquiries in April 1994, the firm undertook an investigation of trading activity in the Houston office. M.As a result of the parking scheme carried out by the Houston traders, the Houston traders aided and abetted First Montauk's violations of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a-11, thereunder, by causing the firm to maintain inaccurate books and records, insofar as, the firm's books and records did not reflect the liabilities arising from the Houston traders' commitments to repurchase the securities involved, and contained incorrect valuations of the firm's positions. This conduct also caused the firm to compute its net capital inaccurately. N.The parking scheme of the Houston traders also caused First Montauk to file inaccurate FOCUS reports with the NASD, thereby presenting to regulators a misleading picture of the firm's net worth. Furthermore, the Houston trader's scheme caused First Montauk to fail to disclose to the Commission that the firm was in net capital violation on numerous occasions. [2] Cohen's Failure to Supervise O.Cohen failed reasonably to supervise the trading activity of the Houston branch office, which was subject to his supervision. Cohen wrote the order ticket for each transaction executed by the Houston office. Despite his responsibility for supervising the trading activity of the Houston office, Cohen failed to check the accuracy of the information he was given, failed to review the Houston office's trade blotter, failed to review the monthly or quarterly trade run or the proprietary trading account, and otherwise failed to perform a review. If he had conducted such reviews of the office's activity, he would have discovered the unusual trading patterns. Cohen also failed to act in response to other red flags. By July 1993, for example, the Houston office had repeatedly asked for permission to engage in "repurchase" transactions with other dealers and had, in fact, engaged in transactions of nearly identical blocks of bonds on numerous occasions. Despite this notice, Cohen failed to conduct a review calculated to prevent the parking scheme from continuing for another eight months. P.Cohen also failed to perform compliance exams in accordance with First Montauk's own procedures. First Montauk's procedures state that someone from First Montauk's main office shall conduct a branch office examination at least once annually. Cohen, however, allegedly performed only one examination during the violative period. Moreover, when Cohen did perform a branch office examination, he failed to review the Houston office's trading operations. Q.As a result of the conduct described above, Cohen failed reasonably to supervise the Houston traders who were subject to his supervision within the meaning of Section 15(b) of the Exchange Act with a view to preventing their violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, thereunder, and their aiding and abetting violations of 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a-11, thereunder. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Cohen and impose the sanctions specified therein. Accordingly, IT IS ORDERED that: A.Cohen be, and hereby is, suspended from association with any broker or dealer for a period of four (4) months, effective on the second Monday following entry of this Order. Cohen shall provide an affidavit of compliance to the Securities and Exchange Commission, Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, FL 33131, within ten (10) days following the suspension period stating that he has complied fully with the terms of the suspension. B.IT IS FURTHER ORDERED that following the period of his suspension from association, Cohen be, and hereby is, barred from association in a supervisory capacity with any broker or dealer with a right to reapply after one year to become so associated with the appropriate self-regulatory organization or, where there is none, to the Commission. C.IT IS FURTHER ORDERED Cohen shall, within thirty (30) days of the entry of the Order, pay a civil money penalty in the amount of $5,000 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, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Cohen as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to David Nelson, Southeast Regional Office, Securities and Exchange Commission, 1401 Brickell Avenue, Suite 200, Miami, FL 33131. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]:The findings contained in the Order are not binding on any other person or entity in this or any other proceeding. [2]:On June 25, 1997, the Commission issued an Order, by consent, which found that First Montauk: (a) violated Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a- 11; (b) ordered First Montauk to cease-and-desist from committing and/or causing any violation or future violation of the aforementioned sections and rules, and (c) found that First Montauk failed reasonably to supervise one or more individuals subject to its supervision within the meaning of Section 15(b) of the Exchange Act. First Montauk was also ordered to comply with various undertakings, pay disgorgement and prejudgment interest and a civil penalty.