SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37091 / April 10, 1996 Admin. Proc. File No. 3-8721 _________________________________________________ : In the Matter of the Application of : : JONATHAN FEINS : P.O. Box 1139 : New London, NH 03257 : : For Review of Disciplinary Action Taken by the : : AMERICAN STOCK EXCHANGE, INC. : _________________________________________________: OPINION OF THE COMMISSION NATIONAL SECURITIES EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDINGS Procedure Decision of Exchange Where national securities exchange disciplined former registered representative of exchange member for conduct inconsistent with just and equitable principles of trade and for conduct determined to be detrimental to the interest or welfare of the exchange, but failed to articulate adequately its findings, held, remanded for more complete statement of its findings. APPEARANCES: Allan H. Carlin, for Jonathan Feins. Steven L. Lister, Phillip J. Axelrod, and Suzanne E. Auletta, for the American Stock Exchange, Inc. Appeal filed: June 14, 1995 Last brief filed: October 2, 1995 I. Jonathan Feins, a former regular member of the American Stock Exchange, Inc. ("AMEX" or the "Exchange") and a two-dollar broker, appeals from AMEX disciplinary action. The AMEX found that Feins engaged in conduct inconsistent with just and ==========================================START OF PAGE 2====== equitable principles of trade in three ways. First, the AMEX found that Feins engaged in a device, scheme, or artifice to defraud his two dollar brokerage customers other than John Rizzuto by trading ahead of their orders for Rizzuto's firm's (Catania & Co. ("Catania")) account and by switching profitable trades, belonging to other customers, into Catania's account, in violation of Article V, Section 4(b) of the Exchange's Constitution. Second, the AMEX found that Feins, by deliberately concealing trades, violated Article V, Section 4(h) of the Exchange's Constitution. Third, the AMEX found that Feins, by executing trades in a secret, non-competitive manner and failing to report such transactions for dissemination through the Options Price Reporting System ("OPRA") in order to conceal such trades from other market participants, violated AMEX Rules 123 and 151 and Part 3, C.1 of the Floor Transactions Handbook. The AMEX further found that Feins engaged in conduct detrimental to the interest or welfare of the Exchange by failing to capture accurate time of trade information, in violation of Article V, Section 4(j) of the Exchange's Constitution. Finally, the AMEX found that Feins had exercised control over Catania's account, in violation of AMEX Rule 103(c). The AMEX censured Feins, barred him for three years from membership or association in any capacity with any AMEX member or member organization, and fined him $50,000. For the reasons stated in Part III below, we have made no independent findings of fact. II. The AMEX claims the following version of events. From April to September 1989, Rizzuto permitted Feins to exercise trading discretion over the Catania account. While trading for Catania, Feins crossed options orders for Rizzuto against orders for his other agency customers without publicly announcing the bids, offers, or trades, or reporting the transactions for dissemination on OPRA in order to conceal these activities from other market participants and to avoid detection of his activities by the Exchange. In addition, Feins either traded ahead of his other customers' agency orders for Rizzuto's account or he switched trades that belonged to his other customers into Rizzuto's account. Rizzuto's account profited as a result of Feins' activity. Feins also frequently failed to record accurate time of trade information on his order tickets in violation of the Exchange's audit trail policies, which failure he knew, or reasonably should have known, would have an adverse impact on the Exchange's market surveillance activities. III. Section 6(d)(1) of the Securities Exchange Act of 1934 ("Exchange Act") requires the AMEX to supply a statement in support of any disciplinary action against an Exchange member or a person associated with an AMEX member. That statement must set ==========================================START OF PAGE 3====== forth: the conduct found to be violative; the specific section of the Exchange Act, the rule or regulation thereunder, or AMEX Rule found to be violated; and the sanctions imposed and the reasons therefor. Accordingly, it is important that a self- regulatory organization clearly explain the bases for its conclusions. If it fails to do so, we cannot discharge properly our review function. -[1]- The decision of the AMEX consists of a letter issued to Feins stating, summarily, that the Board of Governors unanimously affirmed the disciplinary action taken below by the Disciplinary Panel (the "Panel"). Thus, we look to the Panel's decision for the reasoning applicable in this matter. The Panel, however, in making its findings against Feins, does not adequately set forth the conduct found to be violative or apply the relevant law to the facts. We are unable to discern from the Panel's decision why the AMEX found violations and therefore cannot determine if the sanctions imposed on Feins are justified. We therefore remand this proceeding for a more complete statement of the Exchange's findings. -[2]- In making the decision to remand, we express no view concerning the adequacy of the existing record evidence to support the charges alleged. -[3]- Nor do we express a view as to the appropriateness of sanctions in the event the AMEX makes the same findings on remand. We note, however, that the charges alleged are serious and deterrence of the type of conduct described is worthy of attention by the Exchange's disciplinary program. The decision finds Feins guilty "in that he engaged in a device, scheme or artifice to defraud his two dollar brokerage customers other than Rizzuto, by trading ahead of their orders for Catania & Co.'s account and by switching profitable trades belonging to those customers into Catania & Co.'s account resulting in profits to the firm's account." We expect the AMEX, in making a more complete statement of its decision, to recite the elements of these charges, identify the trades involved in ---------FOOTNOTES---------- -[1]- See Donald R. Gates, Securities Exchange Act Rel. No. 36109 (Aug. 16, 1995), 59 SEC Docket 3148, 3151 (discussing the Exchange Act's requirement, in the context of a registered securities association, that disciplinary actions taken against a member contain a clear explanation of the basis for its conclusions). -[2]- See Thomas Blanton, 51 S.E.C. 1254, 1257 (1994). -[3]- The size of the record suggests that the Exchange in fact conducted an extensive investigation. ==========================================START OF PAGE 4====== each charge, and describe the violative conduct. -[4]- The AMEX should identify relevant portions of the trade journals and order tickets and explain how the evidence revealed trading ahead or switching trades by Feins. With respect to the element of scienter necessary for a finding of fraud, we note that, in dismissing similar charges against two other respondents, the Panel determined that "there was no motive established for them to engage in misconduct to benefit Rizzuto" because there was no financial benefit to those respondents. The AMEX should identify the evidence that supports a finding that Feins benefited from the alleged fraudulent conduct or that otherwise supports the scienter element for a finding of fraud. The Panel concludes that "Feins exercised discretion over Rizzuto's Catania and Co. account" based on its review of "the trading of Feins and Rizzuto." The mere fact that Feins executed trades for Catania, however, is insufficient to establish that Feins had discretion in doing so. The Exchange needs to explain what evidence leads to the conclusion that Feins exercised discretion and the reasons therefor. ---------FOOTNOTES---------- -[4]- The Statement of Charges in this proceeding states that "on approximately 13 occasions, Feins either traded ahead of his other customers' agency orders for Rizzuto's account or he switched trades belonging to his other customers into Rizzuto's account. Rizzuto's profits from these 13 trades were approximately $3,000" (emphasis in original). Exhibit A of the Statement of Charges itemizes more than 13 trades of Feins. Nothing in the decision clarifies which 13 trades were violative. The decision also responds to an argument by Feins that he did not have adequate notice of transactions not included in Schedule A by saying those additional transactions were "cumulative in nature as to the proof of the basic fraud charge." The additional transactions, however, are not identified in the decision. The decision mentions one transaction, a "situation involving U.S. Steel options which Feins added to the Catania & Co. account (Rizzuto was a Limited Trading Permit Holder and, therefore, was not permitted to trade equity options.)," but does not explain how this transaction illustrates that Feins defrauded his customers by trading ahead, or switching trades. The Amex has not demonstrated that this one transaction, which is the only one involving equity options, illustrates either the pattern of trading ahead or switching trades charged. ==========================================START OF PAGE 5====== The decision declares that Feins "execut[ed] trades in a secret manner" and "fail[ed] to report such transactions in order to conceal them from other market participants." These conclusions should be supported by an explanation of the evidence in the trade journals, order tickets, and other documentation that indicates that Feins intentionally concealed these transactions. 5/ The decision also declares that Feins "fail[ed] to capture accurate time of trade information." The AMEX should identify the order tickets and other documentation in which this is evident. The Panel states that "[w]ritten documentary evidence shows that Feins crossed orders for Catania & Co.'s account against orders for his other agency customers without publicly announcing the bids, offers or trades and that Rizzuto benefited from such efforts." The AMEX should identify the trades and explain how the written documentary evidence led to this conclusion. The Panel "finds Feins' testimony, his explanation of the disputed trades and his general denial of the charges to be not credible in the face of the strong documentary evidence against him." The Exchange should, in making such a finding, explain more fully what evidence it relied upon in reaching this conclusion. An appropriate order will issue. By the Commission (Commissioners WALLMAN, JOHNSON, and HUNT); Chairman LEVITT not participating. Jonathan G. Katz Secretary 5/ We note that, with respect to two other respondents, the Amex concluded that their unreported trades may have been due to lack of reporters on the floor. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37091 / April 10, 1996 Admin. Proc. File No. 3-8721 _________________________________________________ : In the Matter of the Application of : : JONATHAN FEINS : P.O. Box 1139 : New London, NH 03257 : : For Review of Disciplinary Action Taken by the : : AMERICAN STOCK EXCHANGE, INC. : _________________________________________________: ORDER REMANDING PROCEEDING TO NATIONAL SECURITIES EXCHANGE On the basis of the Commission's opinion issued this day, it is ORDERED that this proceeding be, and it hereby is, remanded to the American Stock Exchange, Inc., for further action in accordance with such opinion. By the Commission. Jonathan G. Katz Secretary