SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37866 / October 25, 1996 Admin. Proc. File No. 3-8926 _______________________________________________ : In the Matter of the Application of : : TIGER OPTIONS : c/o Rockrimmon Securities : New York, New York 10271 : : For Review of Disciplinary Action Taken by the : : AMERICAN STOCK EXCHANGE, INC. : _______________________________________________: OPINION OF THE COMMISSION NATIONAL SECURITIES EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDINGS Violations of the Constitution and Rules of the American Stock Exchange Failure to Comply with Recordkeeping and Reporting Requirements Failure to Prepare and Maintain Accurate Books and Records Failure to Submit Changes to Partnership Agreement Where member firm of national securities exchange failed to comply with recordkeeping and reporting requirements and failed to promptly submit an amendment to the partnership agreement, held, Exchange's findings of violations and the sanctions it imposed sustained. APPEARANCES: Allan S. Sexter and Judith V. Scherzer, of Sexter & Warmflash, P.C., for Tiger Options. Philip J. Axelrod and David E. Rosenstein, for the American Stock Exchange, Inc. Appeal filed: January 17, 1996 Last brief filed: April 24, 1996 ==========================================START OF PAGE 2====== I. Tiger Options (or the "Firm"), a regular member organization and options principal member organization of the American Stock Exchange, Inc. ("AMEX" or "Exchange"), appeals from AMEX disciplinary action. The AMEX found that Tiger Options violated reporting, books, and recordkeeping requirements of the AMEX and this Commission by filing a materially inaccurate 1992 Financial and Operational Combined Uniform Single Report ("FOCUS Report"); by failing to make and keep current true and complete books of account and records; by filing a materially inaccurate year-end monthly equity report, trial balance, and balance sheet; -[1]- and by failing to give immediate telegraphic notice to the Exchange and this Commission of these material recordkeeping deficiencies and of the action taken to correct them. -[2]- The Exchange also found that Tiger Options failed promptly to submit to the Exchange for consideration and approval an amendment to its partnership agreement and other information related to changes to the partnership agreement -[3]- and failed promptly to file an amended Form BD reporting the August 1993 withdrawal of two partners of the Firm. -[4]- The AMEX censured Tiger Options and imposed a $50,000 fine. Our findings are based on an independent review of the record. II. Background The Firm does not contest the Exchange's determination that it violated these reporting and books and recordkeeping requirements. Rather, it appeals only the amount of the fine, which it contends is excessive given the nature of the violations found. In order to assess the appropriateness of the sanctions, we set forth the factual basis underlying these violations, as ---------FOOTNOTES---------- -[1]- Article V, Section 4(i) and Article XI, Section 3 of the AMEX Constitution and AMEX Rule 30 and Section 17(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 17a-3, 17a-5, and 17a-10 thereunder. -[2]- Article V, Section 4(i) and Article XI, Section 3 of the AMEX Constitution, Section 17(a) of the Exchange Act and Rules 17a-11(c) and (d) thereunder. -[3]- Article IV, Section 2(q) of the AMEX Constitution and AMEX Rule 301. -[4]- Article V, Section 4(i) of the AMEX Constitution and Commission Rule 15b3-1. ==========================================START OF PAGE 3====== well as information concerning the Firm's history as an AMEX member. Tiger Options became a member organization of AMEX and a registered broker-dealer in January 1988. It is primarily engaged in options market making activity on the floor of the Exchange and, during the relevant period, operated as a limited partnership. Because the Firm had no public customers, it was exempt from our net capital requirements. -[5]- It was required, however, to maintain a minimum net capital pursuant to AMEX Rule 110, which requires that a member maintain a minimum net capital of $15,000 for each registered trader. -[6]- Initially, Neil Silverman was the general partner and his wife the sole limited partner of Tiger Options. Effective May 1, 1991, the partnership purported to add Jeffrey Wilson as a general partner -[7]-. The record reveals that, from its inception, Tiger Options' principals maintained residences in Florida. -[8]- The books, recordkeeping, and reporting functions were performed by an outside accountant, Richard Eisenberg, who was located in New York City. -[9]- ---------FOOTNOTES---------- -[5]- Rule 15c3-1(b)(1) exempts specialists "(i) whose securities business . . . is limited to that of acting as an options market maker on a national securities exchange." -[6]- AMEX Rule 110(c) requires that a member shall maintain minimum net capital, initially of $25,000, for each registered trader not subject to the Commission's net capital rule, "and at all times thereafter shall meet the minimum capital maintenance requirement of $15,000." -[7]- Despite AMEX's requirements (see note 20, infra), the amendment to the partnership agreement to add Wilson was not executed until October 31, 1991, five months after it was purportedly implemented, and the Exchange did not report in its Weekly Bulletin that the amendment was effective until February 5, 1992. -[8]- The tax returns filed by the partnership report Florida addresses for Silverman and Wilson. Wilson testified, however, that he was on the floor of the Exchange every day. -[9]- Eisenberg testified that Silverman and Wilson relied on him and his expertise in keeping their books and records and filing the reports. ==========================================START OF PAGE 4====== The financial rules at issue here require, among other things, that members keep ledgers reflecting assets, liabilities, income, expenses, capital, a trial balance, and record of aggregate indebtedness and net capital as of the trial balance date. The data contained in the broker-dealer's year-end FOCUS Report should agree with items on its year-end monthly equity report, trial balance, and balance sheet. In 1988, 1990, and 1991, the Exchange conducted routine inspections in Eisenberg's office of Tiger Options' financial reporting, books and records, and recordkeeping practices and procedures. These inspections revealed deficiencies in the Firm's compliance with the financial requirements, although no disciplinary action was taken. -[10]- By August 1988 Tiger Options had fallen into negative equity ($1,670), resulting in a Rule 110 deficiency of $26,670. Its membership was terminated. The 1988 examination noted that the accounting records did not reflect a Firm bank account, that bank statements had not been made available to the accountant, and that no reconciliations had been performed. The examiner also noted that the balance sheet included a so-called "Transfer" account with a debit balance, reflecting disbursements from the Firm's clearing firm to a bank account that proved to be the Silvermans' personal account. The examiner reported that Tiger Options failed to provide Eisenberg either with details to determine the purpose of these disbursements or documentation of "purported partnership capital contributions." Finally, the examiner indicated that Silverman had failed to comply with the examiner's requests for a termination FOCUS Report or documentation for the accounting books. -[11]- The Firm was subsequently reinstated, but compliance problems continued. The report of the 1989 examination reiterated the earlier complaint that the Firm's ledger failed to provide subsidiary data on the amounts of the individual partners' capital contributions and draws, and noted that a Firm bank account opened in November 1989 was not reflected on the books. The Firm was suspended in mid-1990 for failure to meet Rule 110 maintenance requirements, but again was later reinstated. The 1991 examination disclosed that the Firm had changed its clearing broker without notice to the Exchange. The general ---------FOOTNOTES---------- -[10]- The AMEX's Statement of Charges instituting this proceeding described these inspections and the problems the examiner identified with the Firm's financial reporting, books and records, and recordkeeping practices and procedures. -[11]- See Exchange Act Rule 17a-5(b) and AMEX Rule 30. ==========================================START OF PAGE 5====== ledger had not been updated to reflect the positions maintained at the new clearing broker. The examiner further stated that the new clearing broker's surveillance reports revealed that the Firm had again fallen below Rule 110 maintenance requirements. A review of the monthly equity computations noted that the financial reports were based on materially incomplete accounting books and records. Moreover, certain Tiger Options' accounts that were in deficiency had been improperly combined with those of S&S Securities, another partnership in which Neil Silverman was general partner. As a result, Tiger Options' equity was overstated, thereby concealing the Firm's failure to meet Rule 110 maintenance requirements. -[12]- The examiner also reported that the Firm had failed to file Securities Investors Protection Corporation ("SIPC") Forms 6 and 7 for 1990 and 1991, and that we cancelled the Firm's broker- dealer registration in August 1991 for failure to make the required SIPC contributions. Although the Firm's registration was reinstated in December 1991, the Firm had not given AMEX notice of the cancellation and continued to conduct its operations on the floor of the Exchange during the period its registration was cancelled. III. Violations In March 1993, the Exchange again conducted a routine financial examination in Eisenberg's office of the Firm's records for the year ending December 31, 1992 and found the financial recordkeeping and reporting deficiencies that are the subject of this proceeding. A. FOCUS Reports The examiner determined that, as of December 31, 1992 the Firm had net capital of $102,848, although, because it had seven registered traders, it was required by Rule 110 to maintain $105,000. -[13]- The examiner testified that the Firm should have been prohibited from conducting business as an options market making firm for falling below the Rule 110 maintenance requirements. ---------FOOTNOTES---------- -[12]- Several of these accounts were in material deficit conditions, resulting in $52,000 in unbooked deficits to Tiger Options and a resulting $3,500 Rule 110 deficiency. -[13]- The AMEX Statement of Charges did not charge the Firm with violations of Rule 110. ==========================================START OF PAGE 6====== The true state of the Firm's financial status was in fact much worse than reported. The 1992 FOCUS Report, dated February 26, 1993, was inaccurate. -[14]- The year-end FOCUS Report had been prepared using a cash-basis method of accounting although the FOCUS instructions require accruals. -[15]- Eisenberg testified that he used a cash-based method of accounting in keeping the books and records during the year and for the year-end FOCUS Reports. He claimed that the original 1992 FOCUS Report reflected the only information available to him at the time of preparation. However, Eisenberg used an accrual method of accounting for preparation of the Tiger Options' partnership and partners' tax returns. -[16]- Accordingly, Tiger Options' 1992 tax return, which was filed sometime later in 1993, reported a substantially reduced partnership equity of $44,036. In November 1994, Eisenberg filed an amended 1992 FOCUS Report, -[17]- correcting the amount reported as ---------FOOTNOTES---------- -[14]- The FOCUS Report indicated ownership equity of $343,259 and non-allowable assets of $240,449, equalling $102,810, below the $105,000 required by Rule 110. -[15]- The general instructions for completing FOCUS Reports specify that "[f]inancial statements shall be prepared in conformity with generally accepted accounting principles" and further that "all data [be reported] after proper accruals have been made for income and expense not recorded in the books of account and adequate reserves have been provided for deficits in customer or broker accounts, unrecorded liabilities, security differences, dividends and similar items." Emphasis supplied. -[16]- Eisenberg testified that he generally obtained extensions for Tiger Options' tax returns and that they were not filed until September or October of the succeeding year. -[17]- At the same time, Eisenberg also filed amended FOCUS Reports for 1988, 1989, 1990, and 1991 correcting similar deficiencies. In the original 1988, 1989, 1990, and 1991 year-end FOCUS Reports, the Firm reported as equity, respectively, $144,923, $120,000, $1,163, and $175,982. In the tax returns and amended FOCUS Reports for those years the equity was reported as, respectively, zero, $94,583, ($71,356), and $60,066. As a (continued...) ==========================================START OF PAGE 7====== partnership equity from $343,259 to $44,036 -- $60,964 below that required by Rule 110. -[18]- All of the original and amended FOCUS Reports prepared by Eisenberg were signed by Neil Silverman. B. Recordkeeping The 1992 examination also showed that, as in prior years, Eisenberg had failed properly to allocate accounts between S&S Securities and Tiger Options. Eisenberg had access to certain clearing firm reports that reflected that Tiger Options' accounts may have been recorded on the books of S&S Securities. The general ledger for the partnership's capital and draw accounts continued to fail to maintain individual capital accounts for the Firm's partners and did not account for the individual capital contributions and draws. -[19]- Tiger Options' cash receipts and disbursement activity were not posted on a monthly basis on the Firm's general ledger, and the Firm failed to reconcile on a monthly basis the cash receipts and disbursements paid through its checking account. The year-end monthly equity report, trial balance, and balance sheets were also inadequate. The initial year-end trial balance for 1992 had shown a negative balance because of a $121,000 item described as "manager's fee payable." When the AMEX examiner asked Eisenberg about this item, that payable was backed out without explanation and recorded as "-0-" in an amended trial balance. C. Partnership Agreement The AMEX Constitution and Rule 301 require that a member obtain prior approval from the Exchange of changes in its partnership agreement. -[20]- On August 30, 1993, the ---------FOOTNOTES---------- -[17]-(...continued) consequence, for each of these years, the Firm was below the Exchange's minimum Rule 110 maintenance requirements. -[18]- Eisenberg admitted these discrepancies in investigatory testimony taken by the AMEX staff in October 1993. -[19]- Rule 17a-3(a)(2) requires that the books and records identify capital contributions to the firm. -[20]- Article IV, Section 2(q) of the AMEX Constitution provides "[i]f a member intends to enter into a partnership agreement or to alter the terms of an existing partnership agreement, or if a member (continued...) ==========================================START OF PAGE 8====== Silvermans and Wilson notified the Exchange that effective the next day, August 31, 1993, the Silvermans would withdraw as partners and have no further interest in Tiger Options. The AMEX admissions representative informed the Firm that it would have to submit an amended partnership agreement for approval. Despite repeated requests, -[21]- an amended partnership agreement, which was dated September 19, 1994, was not submitted to the AMEX until September 28, 1994. At this time the Firm also filed a Form BD reporting the August 1993 partnership changes. The amended agreement was not adequate since it did not include a schedule of the capital contributions by the partners. The AMEX staff informed Tiger Options' attorney of the deficiency. In January 1995, the attorney told the staff to disregard the amendment because the Firm was converting to a limited liability company ("LLC"). -[22]- As of the date of the hearing, June 28, 1995, the Firm had not satisfied the ---------FOOTNOTES---------- -[20]-(...continued) corporation with which a member is associated intends to amend its certificate of incorporation or its by-laws, such member shall submit such papers and information relating to such agreement or changes as the Exchange may require." AMEX Rule 301 requires that "[e]very amendment to the partnership agreement of a member firm shall be submitted to the Exchange for its consideration and approval." -[21]- While Wilson testified that he did not recall being told that the Firm needed to submit an amended Agreement to AMEX, the AMEX admissions representative testified that she made numerous requests regarding obtaining the partnership agreement amendment. She testified that she informed Wilson that the August 30 letter of notification was not sufficient to effect a valid change to the partners of Tiger Options. She further told Wilson that the Firm needed to file an amended partnership agreement. She made contemporaneous notations of these conversations. There is ample basis in the record to support the panel's conclusion that Tiger Options violated the regulatory provisions regarding advance reporting of structural changes of a member firm. -[22]- The paperwork necessary to convert from a limited partnership to a LLC was not filed with the Exchange until May 1995. ==========================================START OF PAGE 9====== requirements of AMEX's Rule 301 concerning the 1993 and subsequent amendments. -[23]- IV. Tiger Options acknowledges that it has the ultimate responsibility for these violations. -[24]- The Firm asserts, however, that the fine is excessive and oppressive because it relied on the expertise of its accountant. Tiger Options also contends that the AMEX did not give adequate notice of the deficiencies to its partners because the examinations were conducted in the accountant's office and the Firm's principals were not informed of the examinations' outcome by either the staff or the accountant. The Firm also argues that the fine is excessive compared to sanctions in similar disciplinary actions. A. Tiger Options claims it discovered that Eisenberg was not a competent accountant only recently, and hypothesizes that the accountant hid AMEX's criticisms from the Firm's principals to avoid losing the Firm's account. It is clear, however, that while a broker-dealer can use outside accountants, the firm cannot shift the obligation to comply with its recordkeeping and reporting responsibilities. -[25]- Silverman signed all the FOCUS Reports as general partner, including the five amended Reports filed in November 1994. Wilson testified that he was not aware of any deficiencies found by the Exchange. However, we cannot conclude that, at a minimum, Wilson was unaware of the inaccuracies in the Firm's FOCUS Reports. Eisenberg prepared tax returns for Tiger Options, as well as for Silverman and Wilson. As discussed, the tax returns reflected much lower partnership equity. This should have put ---------FOOTNOTES---------- -[23]- Inasmuch as Tiger Options was not subject to our net capital rule, it also was not subject to the notification requirement in Exchange Act Rule 17a- 11(c). Accordingly, we set aside the findings of violation relating to failure to give telegraphic notice of net capital deficiencies. -[24]- Tiger Options is responsible for the acts of its principals and nominees. Article V, Section 4(r) of the Exchange's Constitution. -[25]- See Cost Containment Services, Inc., Exchange Act Rel. No. 35730 (May 18, 1995), 59 SEC Docket 1060; James Michael Brown, 50 S.E.C. 1322 (1992), aff'd without opinion, No. 92-9165 (11th Cir. Apr. 19, 1994). ==========================================START OF PAGE 10====== the principals on notice that the earlier FOCUS Reports were materially in error. -[26]- B. Tiger Options also asserts as a basis for reducing the sanction that its principals were not given notice by the AMEX examiners of the recordkeeping and reporting deficiencies. -[27]- While the record contains conflicting testimony as to whether the principals -[28]- and Eisenberg were informed by the Exchange of the deficiencies at issue, -[29]- we emphasize that it is the Firm's responsibility to comply with the law. ---------FOOTNOTES---------- -[26]- Even after filing the amended FOCUS Reports in November 1994, Eisenberg continued to be the Firm's accountant. At the 1995 hearing before the AMEX Board, the Firm's counsel stated that Eisenberg would be terminated after the end of the year. -[27]- The AMEX staff stated that, by the time of these proceedings, they had implemented a procedure to conduct exit interviews with the member firm and advise the firm in writing of deficiencies uncovered. -[28]- Wilson testified that the examiner never discussed the 1992 findings with him or the fact that there was a problem with the way Eisenberg was keeping the books and records. He stated he was not advised by Eisenberg that, based on the 1992 FOCUS Reports, the Firm was in violation of the Rule 110 requirements. -[29]- Eisenberg testified that neither of the AMEX examiners apprised him of the results of the examinations or of any deficiencies. However, both examiners testified that they discussed their findings with Eisenberg. The written report of the 1991 examination specifically notes that the recordkeeping and reporting problems were discussed with Eisenberg. The examiner who conducted the 1992 examination testified that he communicated with Eisenberg concerning the discrepancies between the tax return and the original 1992 FOCUS Report a number of times. The panel expressly found that Eisenberg's testimony was not credible. ==========================================START OF PAGE 11====== -[30]- Moreover, we believe that there was ample information that should have put Tiger Options on notice of the problems found by the Exchange. The examiner in the 1988, 1989, and 1991 inspections testified that it was his practice to talk to principals of broker-dealers about the results of his examinations. His 1988 compliance report specifically notes that Silverman failed to provide the termination FOCUS Report in spite of repeated requests. In addition, the record reflects other events that should have put the Firm's principals on notice that their financial and recordkeeping compliance was weak: the 1988 and 1990 suspensions of the Firm for failure to meet the Rule 110 requirements; withdrawals of funds from the clearing broker directly into Silverman's personal checking account without adequate documentation; -[31]- and the failure in 1990 and 1991 to file required SIPC Forms and make contributions and our resulting cancellation of Tiger Options' registration. -[32]- Tiger Options argues that the fine imposed for these violations is excessive when compared to other cases. However, as we have repeatedly stated, determining the appropriate sanctions depends upon the particular circumstances of each ---------FOOTNOTES---------- -[30]- See, e.g., Frank L. Palumbo, Exchange Act Rel. No. 36427 (Oct. 26, 1995), 60 SEC Docket 1736, 1753 n.60, and cases cited therein (broker-dealer may not shift its responsibility for compliance to regulators). -[31]- Eisenberg reported on several occasions that the Firm failed to provide him with documentation that he needed to complete his analysis, such as the documentation for the transfer account disbursements and bank statements. -[32]- We reject the Firm's contention that the AMEX panel improperly relied on evidence of the Firm's recordkeeping in 1988, 1990, and 1991 examinations when the violations found in these examinations were not also charged. As noted supra, the AMEX's Statement of Charges instituting this proceeding refers to these three examinations. The Firm had ample opportunity to cross-examine AMEX staff and introduce other evidence, which we have considered above. ==========================================START OF PAGE 12====== case. -[33]- The reporting and recordkeeping provisions are important. -[34]- They permit the Exchange to monitor a member's finances and to make determinations about the sufficiency and quality of information before a member approaches financial difficulty. -[35]- Here, Tiger Options' actions made it difficult for the Exchange accurately to assess the Firm's financial situation. Had, for example, the AMEX been aware of Tiger Options' failures to meet the Rule 110 requirements, it could have prevented the Firm from continued trading unless additional capital were injected. -[36]- Accordingly, under the circumstances, we do not find the sanctions imposed by the Exchange either excessive or oppressive. An appropriate order will issue. -[37]- By the Commission (Commissioners WALLMAN, JOHNSON, and HUNT); Chairman LEVITT not participating. ---------FOOTNOTES---------- -[33]- See Hibbard, Brown & Company, Inc., Exchange Act Rel. No. 35476 (March 13, 1995), 58 SEC Docket 2769, 2789 n.67, aff'd, No. 95-3270 (3d Cir. 1996) (unpublished opinion) (Nadino). -[34]- Mark James Hankoff, 48 S.E.C. 705, 709 (1987) (Commission rules, including recordkeeping and reporting requirements, "are not merely technical, but involve fundamental requirements imposed on those who wish to engage in the securities business."); Olds & Co., 37 S.E.C. 23, 26 (1956) (bookkeeping and reporting requirements are an important "keystone for the surveillance of registrants . . . ."). -[35]- See, e.g., Cost Containment Services, Inc., supra; Samson, Roberts & Co., Inc., 42 S.E.C. 612, 613 (1065). -[36]- Article V Section 3(a) of the Exchange's Constitution provides for the automatic suspension of a member "in such financial or operating condition that he or it cannot be permitted to continue in business with safety to investors, his or its creditors, other members of the Exchange . . . until and unless such member or member organization has been reinstated . . . ." -[37]- All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. ==========================================START OF PAGE 13====== Jonathan G. Katz Secretary UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37866 / October 25, 1996 Admin. Proc. File No. 3-8926 _______________________________________________ : In the Matter of the Application of : : TIGER OPTIONS : c/o Rockrimmon Securities : New York, New York 10271 : : For Review of Disciplinary Action Taken by the : : AMERICAN STOCK EXCHANGE, INC. : _______________________________________________: ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY NATIONAL 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, Inc. against Tiger Options be, and it hereby is, sustained. By the Commission. Jonathan G. Katz Secretary