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Municipal Bond Participants: Sales Practices Injunctive Proceedings Securities and Exchange Commission v. First California Capital Markets Group, Inc., H. Michael Richardson and Derrick Dumont , Civ. No. 97-2761-SI (N.D. Cal.), Litigation Release No. 15423 (July 28, 1997) (complaint); Litigation Release No. 16107 (April 7, 1999) (settled final orders). See "The Underwriter" section. To Contents    SEC v. J.B. Hanauer & Co., Civ. Action No. 82-407 (D. N.J.), Litigation Release No. 9582 (February 11, 1982) (settled final order). The Commission announced today that the United State District Court for the District of New Jersey permanently enjoined J. B. Hanauer & Co. ("Hanauer") from violating the antifraud, recordkeeping and certain other provisions of the Securities Exchange Act of 1934, the anti-fraud provisions of the Securities Act of 1933, Rules of the Municipal Securities Rulemaking Board concerning customer account information, delivery of confirmations, and supervision of employees and the filing and recordkeeping requirements of the Currency and Foreign Transactions Reporting Act and regulations thereunder. J.B. Hanauer & Co. is a municipal bond dealer with headquarters in Livingston, New Jersey. Hanauer consented to the entry of the Final Judgment of Permanent Injunction without admitting or denying the allegations in the Commission's Complaint, which was also filed today. n1 The Commission's Complaint alleges that Hanauer engaged in a course of conduct in which it encouraged its salesmen to solicit business of persons who, for income tax avoidance or other reasons, sought anonymity and paid for bond purchases with currency. As a part of this course of conduct and to accommodate these persons by concealing their identity, according to the Complaint, Hanauer opened and maintained accounts in fictitious names and addresses, made false entries in its books and records, failed to deliver customer confirmations of securities transactions and failed to file Currency Transaction Reports with the Internal Revenue Service which it was required to file upon the receipt of currency in excess of $10,000. The Complaint further alleges that Hanauer, through certain of its officers and employees, overcharged or permitted customers to be overcharged and made or caused false statements to be made to such customers concerning the prices charged for such purchases. In connection therewith, such persons overstated the offering prices for municipal securities and failed to deliver customer confirmations indicating the purchase price or delivered confirmations which they prepared indicating a higher purchase price, received the greater amount in currency from the customer and remitted the actual amount owed to the firm, diverting the excess to their own use. The Complaint also alleges that one Hanauer employee made or caused false statements to be made to a customer concerning the prices of certain municipal securities in order to conceal a market loss from this customer. Footnotes -[n1]-The Commission today also issued an order instituting proceedings, making findings and imposing remedial sanctions in administrative proceedings against Hanauer and eighteen past and present associated persons. See Securities Exchange Act of 1934 Release No. / February 11, 1982. To Contents    SEC v. Shelby Bond Service Corporation, et al. Civ. Action No. C-77-2236 (W.D. Tenn.), Litigation Release No. 7888 (April 27, 1977) (complaint); Litigation Release No. 7965 (June 9, 1977) (settled final orders); Litigation Release No. 8578 (October 27, 1978) (settled final order). See "The Underwriter" section. To Contents    SEC v. Bertsil L. Smith and Robert W. Bradford and Jon R. Walls , Civ. Action No. C-76-497 (W.D. Tenn.), Litigation Release No. 7652 (November 16, 1976) (complaint). Jule B. Greene, Administrator of the Atlanta Regional Office of the Securities and Exchange Commission, today announced that on November 5, 1976 the Honorable Bailey Brown, Chief Judge of the United States District Court for the Western District of Tennessee at Memphis, after a hearing on motions filed by the Commission, entered an Order of Preliminary Injunction and an Order Barring Disposal of Assets against Bertsil L. Smith ("Smith"), individually and d/b/a Smith-Walls, Inc. ("Smith-Walls") and Jon R. Walls ("Walls"), all of Memphis. The defendants were preliminarily enjoined from further violations of the antifraud provisions of the federal securities laws. The complaint on which the Commission's motions were based alleged that Smith and Robert W. Bradford ("Bradford"), a co-defendant, aided and abetted by Walls, defrauded a Georgia investor by inducing him to sell municipal bonds and then converting the proceeds to their personal use. Smith induced the investor to sell his bonds on the misrepresentations that they were in imminent danger of default and that the investor would be paid within one week of delivery of the bonds. Bradford picked up the investor's bonds and returned to Memphis. Smith contracted Walls, who was then employed as a salesman with a Memphis municipal securities firm, and offered them to Walls at a price substantially less than Walls knew the bonds could be sold for. Walls told Smith that his employer had forbidden any employees from effecting securities transactions with Smith. Walls then arranged for Smith to sell the bonds to one of Walls' customers and for Walls to purchase them from the customer, thereby hiding Smith's identity as the true seller of the bonds. In addition to receiving a commission on the transaction, Walls was paid additional monies by Smith. The investor never received any proceeds from the sale of his bonds. To Contents    SEC v. Bertsil L. Smith and Robert W. Bradford and Jon R. Walls, Litigation Release No. 7764 (January 31, 1977) (defaults entered). Jule B. Greene, Administrator of the Atlanta Regional Office of the Securities and Exchange Commission, announced that on January 21, 1977, Honorable Bailey Brown, Chief Judge of the United States District Court for the Western District of Tennessee, at Memphis, entered default judgments permanently enjoining Bertsil L. Smith and Robert W. Bradford, both of Memphis, individually and doing business as Smith-Walls, Inc., from violations of the anti-fraud provisions of the Securities Exchange Act of 1934 in the purchase or sale of any security, including but not limited to municipal securities. Smith and Bradford were further ordered to disgorge proceeds from the sale of securities fraudulently obtained from customers to the registry of the Court. (For further information see Litigation Release Nos. 7615 and 7652). To Contents    SEC v. C. Norman Driscoll, et al., Civ. Action No. 76-1520 (D. N.J.), Litigation Release No. 7515 (August 6, 1976) (settled final orders). William D. Moran, Administrator of the New York Regional Office of the Securities and Exchange Commission, announced that on August 3, 1976, a Complaint was filed in the U.S. District Court for the District of New Jersey seeking to enjoin C. Norman Driscoll ("Driscoll'), Lyle Hatch ("Hatch"), Stephen Skubina ("Skubina"), and Richard L. Tecott ("Tecott") from engaging in further violations of the reporting and anti-fraud provisions of the federal securities laws. The Commission's Complaint alleges that between August 1973 and September 1974, Driscoll, Hatch, and Skubina, while employed by Fidelity Union Trust Co. ("Fidelity Bank"), a wholly-owned subsidiary of Fidelity Union Bancorporation ("Holding Company"), along with Tecott, a partner in a now defunct municipal securities dealer, engaged in a series of pre-arranged purchases and sales of municipal securities, at prices unrelated to their fair market value, which were designed to cover up losses sustained in Fidelity Bank's municipal securities portfolio. Following the discovery of these prearranged transactions, an analysis was conducted to determine the impact of this wrongful conduct on the financial condition of Fidelity Bank. This analysis disclosed that Fidelity Bank had sustained a realized loss of $2,003,921.85 and an unrealized loss of $1,305,795.81. The Complaint further alleges that Driscoll, Hatch, Skubina, and Tecott hid the true nature of their transactions, and the actual losses sustained as a result thereof, from the senior management of Fidelity Bank and the Holding Company. Accordingly, the books and records of Fidelity Bank failed to accurately state Fidelity Bank's financial condition, and accordingly, caused the Holding Company to file a false and misleading Form 10-Q for the six month period ending June 30, 1974. Skubina and Tecott consented, without admitting or denying the allegations contained in the Commission's Complaint, to the entry of Final Judgments of Permanent Injunction, prohibiting further violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5 and 13a-13 thereunder. To Contents    SEC v. C. Norman Driscoll, et al., Litigation Release No. 7588 (September 28, 1976) (settled final order). William D. Moran, Administrator of the New York Regional Office, announced that on August 27, 1976, the Honorable Vincent P. Biunno, United States District Judge for the District of New Jersey, signed a Final Judgement of Permanent Injunction by Consent of Lyle Hatch enjoining Lyle Hatch ("Hatch") of Emerson, New Jersey, from engaging in further violations of the reporting and anti-fraud provisions of the federal securities laws. The Commission, in its complaint filed on August 3, 1976, alleged that between August 1973 and September 1974, Hatch, while employed by Fidelity Union Trust Co. ("Fidelity Bank"), a wholly-owned subsidiary of Fidelity Union Bancorporation ("Holding Company"), along with two other employees of Fidelity Bank and a partner in a now defunct municipal securities dealer, who were also named in the complaint, engaged in a series of prearranged purchases and sales of municipal securities, at prices unrelated to their fair market value, which were designed to cover up losses sustained in Fidelity Bank's municipal securities portfolio. Following the discovery of these prearranged transactions, an analysis was conducted to determine the impact of this wrongful conduct on the financial condition of Fidelity Bank. This analysis disclosed that Fidelity Bank had sustained a realized loss of $2,003,921.85 and an unrealized loss of $1,305,795.81. The Complaint further alleged that Hatch, and the other three defendants, concealed the true nature of their transactions, and the actual losses suffered as a result thereof, from the senior management of Fidelity Bank and the Holding Company. As a result, the books and records of Fidelity Bank failed to accurately state Fidelity Bank's financial condition, and, accordingly, caused the Holding Company to file a false and misleading Form 10-Q for the six month period ending June 30, 1974. Hatch consented to the entry of the injunction without admitting or denying the allegations contained in the Commission's complaint. For further information, see Litigation Release No. 7515. To Contents    SEC v. C. Norman Driscoll, et al., Litigation Release No. 7612 (October 20, 1976) (settled final order). William D. Moran, Administrator of the New York Regional Office, announced that on September 23, 1976, the Honorable Vincent P. Biunno, United States District Judge for the District of New Jersey, signed a Final Judgment of Permanent Injunction by Consent of C. Norman Driscoll enjoining C. Norman Driscoll ("Driscoll") of Chatham, New Jersey, from engaging in further violations of the reporting and antifraud provisions of the federal securities laws. The Commission, in its complaint filed on August 3, 1976, alleged that between August 1973 and September 1974, Driscoll, while employed by Fidelity Union Trust Co. ("Fidelity Bank"), a wholly-owned subsidiary of Fidelity Union Bancorporation ("Holding Company"), along with two other employees of Fidelity Bank and a partner in a now defunct municipal securities dealer, who were also named in the complaint, engaged in a series of prearranged purchases and sales of municipal securities, at prices unrelated to their fair market value, which were designed to cover up losses sustained in Fidelity Bank's municipal securities portfolio. Following the discovery of these prearranged transactions, an analysis was conducted to determine the impact of this wrongful conduct on the financial condition of Fidelity Bank. This analysis disclosed that Fidelity Bank had sustained a realized loss of $2,003,921.85 and an unrealized loss of $1,305,795.81. The complaint further alleged that Driscoll, and the other three defendants, concealed the true nature of their transactions, and the actual losses suffered as a result thereof, from the senior management of Fidelity Bank and the Holding Company. As a result, the books and records of Fidelity Bank failed to accurately state Fidelity Bank's financial condition, and, accordingly, caused the Holding Company to file a false and misleading Form 10-Q for the six month period ending June 30, 1974. Driscoll consented to the entry of the injunction without admitting or denying the allegations contained in the Commission's complaint. For further information, see Litigation Release No. 7515. To Contents    SEC v. Irvin D. Kaplan Civ. Action No. ___ (S.D. Tex.), Litigation Release No. 7051 (August 22, 1975) (settled final order). Richard M. Hewitt, Administrator of the Fort Worth Regional Office of the Securities and Exchange Commission, announced that on August 19, 1975 Federal District Judge Allen B. Hannay at Houston, Texas entered an order of permanent injunction enjoining Irvin. D. Kaplan, Houston, from further violations of the antifraud provisions of the Securities Exchange Act of 1934 in the purchase and sale of various bonds. Kaplan consented to the entry of the order without admitting or denying the allegations in the Commission's complaint. The Commission's complaint was filed contemporaneously with the entry of the order of permanent injunction. The Commission's complaint alleges that during the period from November 1974 to April 10, 1975 Kaplan engaged in a securities trading and check manipulation scheme wherein he sold corporate, government and municipal bonds valued at $93,000,000 and purchased bonds worth approximately $111,000,000, through ten brokerage firms and one bank bond department. The complaint further alleges Kaplan made payment for the purchases with checks drawn on accounts at five banks when the accounts had insufficient funds to cover the checks. During the second week of April 1975 Kaplan, according to the complaint, issued checks in payment for the purchase of securities which were dishonored and returned by the banks. The losses from the sales of securities and from the returned checks given in payment for the securities were more than $2.7 million. In connection with the securities purchases, the complaint charges that Kaplan made misrepresentation of material facts concerning his true financial condition and the sources and availability of funds used to purchase securities. To Contents    SEC v. R.J. Allen & Associates, Inc., et al., Civ. Action No. 74-1273-Civ-CF (S.D. Fla.), 386 F. Supp. 866 (S.D. Fla. 1974). See Federal Reporter. To Contents    SEC v. R.J. Allen & Associates, Inc., et al., Litigation Release No. 6653 (December 7, 1974) (settled final orders). Jule B. Greene, Administrator, and Michael J. Stewart, Associate Administrator of the Atlanta Regional Office of the Securities and Exchange Commission, announced today that on November 27, 1974, the Honorable Charles B. Fulton, Chief Judge for the Southern District of Florida, issued a Memorandum Opinion permanently enjoining R.J. Allen & Associates, Inc., Robert J. Allen, Howard W. Alexander, Charles J. Diaz, and Thomas A. Preston, all of Ft. Lauderdale, Florida, from further violations of the anti-fraud provisions of the Securities Act of 1933 [Section 17(a)] and the Securities Exchange Act of 1934 [Section 10(b) and Rule 10b-5 thereunder]. Chief Judge Fulton's Opinion, which was entered following an extensive hearing on the merits of the Commission's Complaint, was twenty-five pages in length. Labeling the defendants' operation "a horrible fraud," "vicious and brutal," and "a diabolical scheme," Chief Judge Fulton, equating the Commission's request for disgorgement with restitution, ordered the defendants to disgorge to the Court-appointed Receiver the full amount received from all investors who purchased Industrial Development Revenue Bonds ("IDR's") from the firm of R.J. Allen & Associates, Inc. ("R. J. Allen"). The total to be disgorged, which is not definitely known at this time, is to be restored in the following fashion: R. J. Allen plus the individual defendants Robert J. Allen and Howard W. Alexander must jointly and severally restore to the Receiver "the full amount received from all of those investors who purchased IDR's," while Charles J. Diaz ("Diaz"), Executive Vice President of the firm, and Thomas A. Preston ("Preston"), a salesman, must return the aggregate sum received by each as a result of such sales. In order to determine exactly how much money must be disgorged, the Court's Opinion continues the appointment of David Hughes as Receiver for the corporation and directs him to prepare an accounting showing the sums received by the defendants as a result of the bond sales; it also directs Diaz and Preston to account to the Receiver for all monies or property received by them directly or indirectly from such sales. The Court also directed Receiver Hughes to ascertain the names and addresses of all IDR purchasers from R. J. Allen and to then circularize those purchasers and allow them to file verified claims with him. Any correspondence in this matter should be directed to Mr. Hughes at P.O. Box 397, Airport Branch, Miami, Florida 33148. Concluding that it would be appropriate and necessary to prevent waste and dissipation of any assets available for restitution and disgorgement, the Court responded affirmatively to the Commission's motion for a temporary trust over the assets of all the defendants. The Order prohibits each and every defendant from directly or indirectly "dissipating, concealing, or disposing of in any manner, any assets, choses in action, or other property . . ." until further Order of the Court. On the same day that the Memorandum Opinion was entered, the Court issued an Order denying various motions by the defendants for modification and/or to vacate previous orders of the Court. (For further information see Litigation Release 6575). To Contents    SEC v. Investors Associates of America, et al., Civ. Action No. (W.D. Tenn.), Litigation Release No. 6164 (December 4, 1973) (settled final orders). The Securities and Exchange Commission today announced the entry of orders of permanent injunction in the United States District Court for the Western District of Tennessee against Investors Associates of America, Inc., (Investors), a Memphis, Tennessee municipal bond dealer (formerly known as Hamilton Securities, Inc., Liberty National Securities, Inc. and Harper Investment Company); Investors Associates of America, an Arizona partnership; Investors Associates of Mississippi, Inc.; Clarence H. Hamilton, Jerry R. Hamilton and Bill H. Harper, officers, directors and partners of Investors and its Affiliates; and Edward J. Blumenfeld, a former sales and branch office manager for Investors, from engaging in further violations of certain anti-fraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, in connection with transactions in municipal bonds by, among other things, the employment of "boiler room" sales techniques, fraudulent interpositioning in securities transactions, and excessive mark-ups. The defendant Blumenfeld, in his consent to a permanent injunction, agreed to disgorge the sum of $2,500 representing the gross profit realized by Investors' Arizona Office on specific transactions alleged in the Commission's complaint to be improper and illegal. Investors Associates of America, Inc., an Arizona partnership, Investors Associates of Mississippi, Inc., Clarence H. Hamilton, Jerry R. Hamilton, and Bill H. Harper, in their consents to permanent injunctions, agreed to disgorge under certain conditions the sum of $196,715.58 representing the gross profit realized by these defendants on specific transactions alleged in the Commission's complaint to be improper and illegal, and further agreed (1) that the judgment of permanent injunction providing for disgorgment of profits would survive any decree of bankruptcy against the defendants and (2) that the judgment of permanent injunction would not preclude any individual investors from filing or prosecuting any claim against the defendants. To Contents    SEC v. Jackson Municipals Inc., et al., Civ. Action No. ___ (W.D. Tenn.), Litigation Release No. 5763 (February 28, 1973) (settled final orders). The Securities and Exchange Commission today announced the entry of an order of permanent injunction in the United States District Court for the Western District of Tennessee against Jackson Municipals, Inc. (Jackson) a municipal bond dealer located in Jackson, Mississippi, and Cecil Lamberson, an officer and director of Jackson from engaging in further violations of certain anti-fraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, in connection with transactions in municipal bonds. Also announced was the entry of orders of preliminary injunction by the same court against Investors Associates of America, Inc. (Investors), a Memphis, Tennessee municipal bond dealer (formerly known as Hamilton Securities, Inc., Liberty National Securities, Inc. and Harper Investment Company); Investors Associates of America, an Arizona partnership; Investors Associates of Mississippi, Inc.; Clarence H. Hamilton, Jerry R. Hamilton and Bill H. Harper, officers, directors and partners of Investors and its affiliates; and Edward J. Blumenfeld, a former sales and branch office manager for Investors from engaging in further violations of certain anti-fraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, in connection with transactions in municipal bonds. By their consents to permanent (Jackson and Lamberson) and preliminary (all others) injunctions, each defendant, without admitting or denying the allegations of the Commission's complaint, agreed to injunctions against, among other things, the employment of "boiler room" sales techniques, fraudulent interpositioning of persons in securities transactions, and excessive mark-ups by: (a) employing any device, scheme or artifice to defraud, or (b) engaging in any transactions, practices or course of business which operates or would operate as fraud or deceit upon any person, by, among other things: paying and charging such persons prices not reasonably related to the current prevailing market price for such securities; sending confirmations of sale to customers who have not agreed to purchase securities; causing customers to "trade in," purchase, and sell securities without regard to the character of the security sold and the investment objectives of the customer; employing high pressure sales tactics which require hasty investment decisions by investors; interpositioning any other securities dealer or person between itself and the best market in the security, therefore increasing the price of the security as sold to the ultimate purchaser; receiving as a kickback from any person, monies previously paid to that person as part of an interpositioning arrangement employed to defraud others; maintaining and keeping inaccurate and incomplete books and records which, among other things, reflect transactions in securities involving fictitious prices and secret rebates in a manner aimed at concealing the true nature of such transactions; or other acts and practices of similar purport and object; or (c) obtaining money or property by means of untrue statements of material facts or omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, concerning among other things: the current market price of the securities offered; the purchase or sale price of the securities offered; the financial condition of the issuer of the securities offered; the available supply of the securities offered for sale at bargain prices; the source from which the securities were obtained which are being offered for sale at bargain prices; the investment rating and quality of the securities being offered; the amount of securities required to be purchased in order to obtain a bargain or discount price; the prospects of an increase of decrease in the market price or value of the securities offered; the speculative nature of the securities offered; the likelihood of default on payment of interest or principal of bonds offered; the "call" features of the bonds being offered; the cost of acquisition by the dealer of such securities; the repurchase by a dealer of such securities from the customer and the price to the customer to which such repurchase would occur; prospective aid or assistance to be received by the issuer of the securities being offered; the potential income or gain realizable from such securities; the tax treatment to owners of such securities; the date of maturity of bonds; the rate of interest of bonds; the capacity in which the dealer is acting toward the investor; the current market price of securities being purchased from customers; the suitability of a security to the investor's needs in light of his financial condition and investment objectives; the interpositioning any other securities dealer or person between itself and the best market in the securities therefore increasing the price of the security as sold to the ultimate purchaser; the receiving as a kickback from any firm, monies previously paid to that firm as reflected by false confirmations which were employed as a device to defraud others; the maintaining and keeping inaccurate and incomplete books and records which, among other things, reflect transactions in securities involving fictitious prices and secret rebates in a manner aimed at concealing the true nature of such transactions; or other statements of similar object and purport. (Section 17(a) of the Securities Act, 15 U.S.C. 77a(a); and Section 10(B) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 CFR 240.10b-5.) In addition, the defendant Jackson, in its consent to a permanent injunction, agreed to pay to the court the sum of $6,275 with interest thereon, representing the gross profit realized by the firm on the specific transactions alleged in the Commission's complaint to be improper and illegal. To Contents    SEC v. Charles A. Morris & Associates, Inc., et al. , Civ. Action No. ___ (W.D. Tenn.), Litigation Release No. 5584 (October 26, 1972) (complaint). The Securities and Exchange Commission today announced the filing of a complaint in the United States District Court for the Western District of TennesSee king a preliminary and a permanent injunction against Charles A. Morris & Associates, Inc. formerly known as Morris-Darley and Associates, Inc. and Tax Free Bonds, Inc. ("Tax Free"), Charles A. Morris ("Charles Morris"), Michael Patrick McTighe ("McTighe"), Claude Dean Dillard ("Dillard"), Edward Disbrow Morris ("E. Morris"), Ray Thomas Bauman, Charles T. Chicorelli, Jim Walker Cunningham, Jr., Ted L. Cutshaw, Ronald Lee Epperson, John William Ferrell, Gary Crizer Hottum, Steven Adams Lancaster, Roy G. Lovelace, Robert J. Phillips, Malcolm E. Ratliff, Roger Charles Russell, Donald Bryan Smith, and Roy Langston White from engaging in further violations of certain of the anti-fraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder) in connection with transactions in certain securities commonly referred to as municipal bonds. In its complaint the Commission alleges that Tax Free is a securities dealer in Memphis, Tennessee, specializing in municipal bonds and is not registered with the Commission as a broker-dealer; that defendants Charles Morris, McTighe, E. Morris, and Dillard, were all officers of Tax Free; and the remaining fourteen defendants were all employed as securities salesmen for Tax Free. It is further alleged that the defendants employed "boiler room" sales techniques and, among other things, conducted high pressure sales campaigns through the concentrated use of long distance telephone calls to individuals whose names were obtained from various sources such as telephone books; employed salesmen with little or no experience or training; mailed confirmations of sales to customers who had not agreed to purchase securities; and pressed potential customers to make quick investment decisions based on misrepresentations and omissions of material facts concerning, among other things: (a) the current market price of the securities offered, (b) the financial condition of the issuer of the securities offered, (c) the source and available supply of such securities, (d) the speculative nature of such securities, (e) the likelihood of default on payment of interest and principal of bonds offered, and (f) the availability of securities at "bargain" prices. It is also alleged that Tax Free as part of the violative conduct failed to keep accurate and timely records of its transactions and transactions for its customers. The complaint further alleges that the defendants have been buying from and selling to customers, bonds at prices not reasonably related to the current market price for such securities and in connection with transactions in three specific issues of securities, the mark-ups charged by Tax Free averaged approximately 35%, 45% and 75%, respectively, over the current prevailing market prices for such securities. To Contents    SEC v. Charles A. Morris & Associates, Inc., et al. , Litigation Release No. 5728 (February 7, 1973) (orders of preliminary injunction). The Securities and Exchange Commission today announced the entry of an order of preliminary injunction in the United States District Court for the Western District of Tennessee against Charles A. Morris & Associates, Inc. formerly known as Morris-Darley and Associates, Inc. and Tax Free Bonds, Inc. ("Tax Free"), Charles A. Morris ("Charles Morris"), Michael Patrick McTighe ("McTighe"), Claude Dean Dillard ("Dillard"), Edward Disbrow Morris ("E. Morris"), Ray Thomas Bauman, Charles T. Chicorelli, Jim Walker Cunningham, Jr., Ronald Lee Epperson, John William Ferrell, Steven Adams Lancaster, Roy G. Lovelace, Malcolm E. Ratliff, Donald Bryan Smith, and Roy Langston White enjoining them from engaging in further violations of certain of the anti-fraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder) in connection with transactions in certain securities commonly referred to as municipal bonds. Earlier, the defendants Ted L. Cutshaw, Roger Charles Russell and Gary Crizer Hottum had consented to similar injunctions. After a five day hearing on the Commission's motion for preliminary injunction, the Court in its opinion found that Tax Free was a securities dealer in Memphis, Tennessee, specializing in municipal bonds; that defendants Charles Morris, McTighe, E. Morris, and Dillard, were all officers of Tax Free; and the remaining fourteen defendants were all employed as securities salesmen for Tax Free. The Court further found that the defendants employed "boiler room" sales techniques and, among other things, conducted high pressure sales campaigns through the concentrated use of long distance telephone calls to individuals; employed salesmen with little or no experience or training; and pressed potential customers to make quick investment decisions based on misrepresentations and omissions of material facts concerning, among other things, the following: that certain bonds were being offered by persons needing to sell the bonds to establish a tax loss or raise money to pay taxes when, in fact, such was not the case; that there was available only a limited supply of bonds sought to be sold when, in fact, the supply was abundant; that certain bonds were general obligation bonds when, in fact, they were revenue bonds; that the payment of interest and principal of certain bonds was guaranteed by the state and federal governments when, in fact, payment was not so guaranteed, that certain securities were presently rated "BBB" by Standard and Poor's Corporation when, in fact, the rating had been withdrawn; that the financial condition of certain issuers was good when, in fact, the issuers were experiencing severe financial difficulties; that a purchase of bonds offered would be a safe investment when, in fact, the investment was highly speculative; that certain bonds were revenue bonds; that certain bonds had been given a very low "B" rating by Standard and Poor's; that a purchase of certain bonds was a speculative investment; that Tax Free was selling to the customer securities for its own account rather than acting as an agent for the customer; that the bonds matured at a date in the distant future; and that the issuers of certain bonds were experiencing severe financial difficulties adversely affecting the likelihood of their continued payment of interest and principal. The Court found that Tax Free maintained few of the records traditionally maintained by securities broker-dealers and that certain of the records that it did maintain were grossly inaccurate. Finally, the Court found that the defendants have been selling to customers bonds at prices not reasonably related to the current market price for such securities and in connection with transactions in three specific issues of securities, the majority of markups charged ranged between 25% and 100% over Tax Free's contemporaneous cost. To Contents    SEC v. Charles A. Morris & Associates, Inc., et al. , Litigation Release No. 6264 (February 28, 1974) (settled final orders and defaults entered). The Securities and Exchange Commission announced the entry of orders of permanent injunction in the United States District Court for the Western District of Tennessee against Charles A. Morris & Associates, Inc., formerly known as Morris-Darley and Associates, Inc. and Tax Free Bonds, Inc., Charles A. Morris, Michael Patrick McTighe, Claude Dean Dillard, Edward Disbrow Morris, Ray Thomas Bauman, Charles T. Chicorelli, Jim Walker Cunningham, Jr., Ted L. Cutshaw, Ronald Lee Epperson, John William Ferrell, Steven Adams Lancaster, Roy G. Lovelace, Malcolm E. Ratliff, Donald Bryan Smith, and Roy Langston White from engaging in further violations of certain of the anti-fraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder) in connection with transactions in certain securities commonly referred to as municipal bonds. Each of the above defendants, with the exception of Smith and Ferrell, without admitting or denying the allegations of the Commission's complaint consented to the entry of an injunctive decree which enjoined them from, among other things, employing "boiler room" sales techniques and selling bonds at prices not reasonably related to the current market price for such securities. The Court issued similar decrees with respect to defendants Smith and Ferrell by default. In addition, pursuant to the Commission's prayer for disgorgement in its complaint, the Court ordered certain defendants to pay into the Court funds which they had received as a result of their alleged unlawful conduct. A trustee has been appointed to administer the disgorged funds. To Contents    Administrative Proceedings - Commission Decisions In re Donald T. Sheldon, et al., Exchange Act Release No. 31475, A.P. File No. 3-6626 (November 18, 1992). TEXT: OPINION OF THE COMMISSION Initial Decision. Donald T. Sheldon, Bruce W. Reid, and Gregory L. Pattison appeal from the decision of an administrative law judge. The law judge found that Sheldon aided and abetted violations of the Commission's net capital, hypothecation, and customer protection rules and violated, or aided and abetted violations of, the Municipal Securities Rulemaking Board's ("MSRB") advertising rule. The law judge further found that Sheldon and Reid violated, or aided and abetted violations of, the antifraud provisions of the securities laws and failed reasonably to supervise, as well as violated, or aided and abetted violations of, the MSRB fair dealing, markup, and supervisory rules and, in the case of Reid, the MSRB suitability rule. He further found that Pattison violated the antifraud provisions of the securities laws and the MSRB fair dealing rule. The law judge barred both Sheldon and Reid from association with any broker, dealer, or municipal securities dealer, although he permitted Reid to apply after two years to become associated in a non-supervisory and non-proprietary capacity upon a satisfactory showing of adequate supervision. Pattison was suspended from association with any broker, dealer, or municipal securities dealer for 45 days. The Division of Enforcement appeals the sanction imposed on Reid, asking that an unqualified bar be imposed against him. Our findings are based on an independent review of the record, except to the extent that respondents do not challenge particular findings of fact on review. n1 Where such reconstruction was not possible, we have in certain instances assumed the fact or facts that the exhibits were intended to establish, as discussed more specifically below. In other instances, we have declined to rely on Division exhibits because corresponding respondents' exhibits are missing. For example, the Division introduced redacted versions of certain investigatory transcripts, including Exhibits 237, 239, 240, 242, and 248. In lieu of making cross-designations of these transcripts, Sheldon successfully moved that the transcripts be admitted in their entirety. These transcripts, including Sheldon Exhibits J, K, W, O, V and Q, were transmitted by the Division to the law judge (the letter, dated March 29, 1988, from the Division to the law judge transmitting these exhibits, is hereby admitted as an addition to the record), and the law judge retained them until he rendered his decision. They are now missing. Sheldon did not rely below, and does not rely on appeal, on particular portions of these transcripts. However, we have also excluded the Division's redacted transcripts from our consideration of this matter. II. Introduction Donald Sheldon was president of Donald Sheldon & Co., Inc. ("DSC"), formerly a registered broker-dealer engaged in the sale of municipal securities and a member of the Securities Investor Protection Corporation ("SIPC"), and Donald Sheldon Government Securities, Inc. ("GSI" and, collectively with DSC, the "Firms"), formerly an unregistered dealer in United States government-backed securities. Reid, a registered principal of DSC, was branch manager of the Firms' Houston office, and Pattison was a registered representative in that office. n2 The Firms were wholly-owned subsidiaries of Donald Sheldon Group Inc. ("Group"), of which Sheldon was also president. In addition to DSC and GSI, Group owned other ventures, including an investment advisern3 and Data Station Systems, Inc. ("Systems"), which was organized in the early 1980s and developed and marketed computer applications. Increasingly during the last year of their existence, Sheldon ignored the operations of the Firms and the numerous indications that violations were occurring under his supervision. He was largely concerned with the pursuit of new business ventures (particularly with respect to Systems) which proved to be a significant drain on the financial and management resources of the Firms. Faced with a shortage of cash, the Firms misused customers' securities. Ultimately, the financial drain on Sheldon's enterprises produced a net capital deficiency at DSC. Sheldon aided and abetted these violations. n4 The Firms maintained joint offices in Houston, New York, Los Angeles, and Pompano Beach and Miami Beach, Florida.n5 Sheldon staffed his far-flung operations with inexperienced salesmen, and, because the Firms did not pay well, the turnover among those salesmen was high. Sheldon designated branch managers to supervise his sales force who nonetheless did not play a strong supervisory role.n6 Many of these managers were unqualified, n7 and there were no internal controls to determine whether the branch managers were fulfilling their responsibilities. The Firms conducted little formal research with respect to the securities they offered and sold, but instead relied on their salesmen to ferret out and provide any material facts about the issuers and the securities. Sheldon and Reid failed to ensure that the salesmen were obtaining these facts or that such facts were being conveyed to customers. The Firms' salesmen, including Pattison, misrepresented and failed to disclose material information. Moreover, DSC undertook a series of misleading advertisements and engaged in excessive and fraudulent markups. Sheldon and Reid's failures to supervise resulted in widespread violations of the antifraud and markup provisions, as well as, in the case of Sheldon, misappropriation of customer securities. III. Financial Mismanagement. The customers of GSI and DSC depended on the Firms' sound operation for the safety of their cash and securities. For a time preceding their demise, the Firms grossly abused this trust. In addition to operating DSC with inadequate net capital, the Firms' back office n8 repeatedly defrauded customers, especially those whose securities were pledged to secure financing for the Firms.n9 As is well recognized, once a customer makes full payment for a security, the security must be removed from pledge and treated as the customer's sole property.n10 The Firms, however, used customers' fully-paid securities as collateral to obtain financing without disclosing that fact and the further fact that DSC's business depended on that practice. Trade custom requires a dealer to consummate transactions with customers promptly . . . [and a dealer may not] divert the proceeds of payments to his other business activities. . . Additionally, for the same basic reasons, it is a fraudulent and deceptive act, practice, and course of business, which operates as a fraud and deceit on a customer, for a broker-dealer to hypothecate or otherwise convert to his own use customers' funds or fully-paid for securities of customers held by the broker-dealer for safe-keeping. E. Weiss Registration and Regulation of Brokers and Dealers 181 (1965) (citations omitted). See also SEC v. Scott, Gorman Municipal, Inc., 407 F. Supp. 1383, 1387 (S.D.N.Y. 1975); Edward C. Jaegerman, 46 S.E.C. 706 (1976). The above practices violated the general antifraud provisionsn11 as well as securities law requirements regarding customer protectionn12 and net capital.n13 Sheldon was given early and repeated notice of the Firms' deteriorating condition and the need for decisive action. The pertinent facts are as follows. As mentioned, Sheldon launched a new computer business, Systems, in the early 1980's. To provide cash for Systems, Sheldon had GSI lend Group about $2 million, which Group in turn transferred to Systems. Beyond its substantial demand on GSI's financial resources,n14 Systems drew Sheldon's attention away from the Firms. His lack of involvement with the Firms repeatedly evoked criticism from his bankers. By summer 1984, officials at Chase Manhattan Bank, which was then providing financing to DSC, warned Sheldon that he was "spread too thin"; that Chase had no confidence in the firm's backup management; and that the credit relationship would end in six months unless changes were made. These pleas went unheeded by Sheldon and, in early 1985, Chase terminated the relationship. n15 Sheldon also received warnings from the National Association of Securities Dealers, Inc. (the "NASD"). The NASD, which in 1978 had disciplined Sheldon, DSC, and the Firms' financial officer, Mary Schad, for certain back office violations, conducted an examination of DSC in late 1983 and early 1984. Among the numerous back office problems discovered was a failure by DSC in four instances to reduce customer fully-paid securities to its possession or control.n16 In an October 31, 1984 letter to Sheldon, the NASD described these problems and directed Sheldon to set up a meeting to discuss them. Sheldon failed to respond either to this letter or a follow-up letter in February 1985.n17 Finally, in late July 1985, DSC's compliance officer responded to the NASD's October letter. As the financial pressure increased, the Firms repeatedly failed to redeem the pledge of customers' securities. Increasingly, during the fall of 1984 and the spring of 1985, GSI, with a large debt outstanding to its clearing agent, Security Pacific Clearing & Services Corp. ("SEPAC"), kept securities under pledge even after customer payment had been made.n18 As of October 31, 1984, GSI was using roughly $1.7 million of fully-paid customer securities to collateralize its SEPAC loan. It also pledged customer securities to another brokerage firm after they had been fully paid.n19 By May 1985, DSC's financial position had deteriorated to the point that it, too, was unable to redeem customer securities that it had pledged to SEPAC.n20 The value of customer securities pledged by DSC during this period ranged as high as $2 million. These practices came to the attention of James Neill, one of the Firms' auditors, while he was auditing the Firms.n21 In a May 9, 1985 letter, Neill told Sheldon of GSI's poor financial condition and improper practices. Neill noted that GSI's loss for the 1984 fiscal year would approximate $500,000 and that its $2 million receivable from Group was uncollectible. Moreover, Neill expressed concern over his discovery of GSI's pledging of customer securities: Fully paid customer government securities, on deposit at Security Pacific Clearing, are not being delivered to the customers or placed in safekeeping on a timely basis. To the extent that this problem exists, the Company is borrowing money against customer fully paid securities. A review of the April 30, 1985 stock record indicates that this condition is worse than at October 31, 1984. We urge you to review this condition immediately. Sheldon's only response to the accountants' letter was to have a brief conversation with Schad, the Firms' financial officer.n22 On July 9, 1985, Neill and his colleagues resigned upon learning that GSI had not merely failed to redeem fully-paid customer securities, but had deliberately pledged customer securities, pursuant to repurchase agreements, after customer payment had been received by the firm.n23 Sheldon feared the repercussions of the accountants' resignation on a planned public offering of Systems stock and tried to dissuade them. At a meeting on July 10, the accountants confronted Sheldon with their discovery of GSI's collateralizing of repurchase agreements with fully-paid securities. Sheldon admitted that he had not responded to their earlier instruction to redeem fully paid securities on a timely basis. He assured them, however, that he would do so in the future. In addition, and notwithstanding the accountants' advice to Sheldon that, given GSI's financial condition, repayment was impossible, Sheldon announced to the accountants that all the repurchase agreements had been paid off or would be within the next day or so. n24 At the time, the Firms' collapse was all but complete. n25 Sometime in June or July 1985, SEPAC notified Sheldon it was terminating its line of credit with GSI. n26 As a result, between July 9 and 12, 1985, DSC advanced $4.25 million to GSI's SEPAC account to pay GSI's debt. That measure placed DSC in a net capital deficiency which, by July 15, totaled $1 million. DSC remained in business for two additional weeks despite this deficiency. It appears that, immediately prior to the Firms' collapse, NASD staff members were on the premises, reviewing DSC's books and records. The prospective purchaser testified that he discussed his interest in the Firms with the NASD and, by phone, with the staff of this Commission. While these regulators may have overstated the Firms' liabilities, they also told the prospective purchaser that their estimate was qualified because, given the large volume of business involved, it was impossible to make an accurate assessment at that time. Indeed, it was the prospective purchaser's impression that no one, not even the Firms' personnel, "really had any confidence in any particular number" concerning the size of the liabilities. In any event, by the time that these conversations occurred, "a day or two before" the Firms closed, the violations at issue had already occurred. On July 26, 1985, NASD examiners discovered the fund transfers from DSC to GSI and asked DSC for a net capital computation. On July 29, Sheldon reported DSC's net capital deficiency to the NASD and did not reopen the Firms for business. At that point, roughly $1 million in fully-paid customer securities were still collateralizing an outstanding repurchase agreement. Those securities ultimately were liquidated by the lender under the repurchase agreement. Shortly after they closed, the Firms were placed in liquidation.n27 Sheldon claims that a Division staff member working on this proceeding vindictively persuaded the Commission to deny IPM's exemption. As noted, however, the necessity for the exemption proceeding concerning IPM arose automatically pursuant to provisions of the Investment Company Act by virtue of the temporary restraining order. In any event, no member of the trial staff participated in consideration of IPM's exemption request. See n. 4, supra. We agree with the law judge that Sheldon willfully aided and abetted an array of back office misconduct. The record establishes the three elements courts have associated with aiding and abetting: (1) violations by the Firms; (2) Sheldon's knowing and substantial assistance of those violations; and (3) Sheldon's general awareness that his actions were part of an overall course of conduct that was illegal or improper.n28 The Firms' violations are clear. The facts show not only DSC's violations of customer protection requirementsn29 and our net capital rule, but also a scheme by both Firms to deceive customers as to the use the Firms were making of fully-paid securities. Customers were not told that the Firms were using customers' securities to secure the Firms' financing, and that DSC's cash was so scarce that it could not conduct business any other way.n30 Fraudulent intent with respect to the schemes by the Firms is demonstrated by the repeated and prolonged retention of customers' securities under pledge, and by GSI's willingness to pledge fully-paid securities. Sheldon's assertion that government securities firms were not subject to any requirements is simply wrong.n31 Nor is the result affected by Sheldon's assertion that repurchase agreements were widely used within the industry.n32 Sheldon notes that owners of securities that had been redeemed received no better settlement in bankruptcy than those whose securities had remained under pledge, and further claims that all repurchase agreements had been paid off by the time of the Firms' bankruptcy. However, in determining whether the Firms violated antifraud provisions the issue is not what ultimately happened to their customers, but rather whether their failure to disclose their hypothecation of customer fully-paid securities was material. It is clear that, at the time the Firms were dealing with customers, their pledge of fully-paid securities was a fact that would have assumed actual significance in the deliberations of the reasonable investor, and as such was material. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1979) See also, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969). It also is clear that Sheldon substantially assisted these violations and acted with the requisite knowledge. Sheldon's focus, as well as the Firms' financial resources, was diverted to other projects, setting the stage for the problems to follow. n33 Sheldon was, at a minimum, recklessly indifferent to serious problems in the Firms' back office. Not only did he thoroughly dominate the Firms and insist on knowing their most important affairs, but, at critical points, his bank and the NASD warned him of an ever worsening situation. Sheldon, however, did nothing. Even when, in May 1985, he was directly confronted with Neill's revelations of serious irregularities, Sheldon merely held a perfunctory consultation with his financial officer. At the hearing, Sheldon claimed he could not recall what the financial officer told him, except that she somehow allayed his concerns. n34 In our view, even allowing for the possibility that that official misled Sheldon, it is not credible that Sheldon saw no need to take strong independent action or even to confer with Neill. Only in July, to impress his auditors and to meet SEPAC's demands, did Sheldon attempt to respond. Juggling funds from one troubled firm to another, Sheldon plunged DSC into a severe net capital deficiency, and, thereafter, kept dealing with customers for two additional weeks. Moreover, during that time, despite the disclosure from Neill that back office misconduct included the pledge of already paid-for securities, Sheldon still did not eliminate the serious deficiencies in his back office operations. The picture that emerges is that of an entrepreneur bent on staying in business regardless of the effect on public investors. We conclude that Sheldon was culpably aware with respect to the violations that were occurring. He either fully knew about, or, in bad faith, intentionally ignored indications of, the Firms' fraudulent and improper practices regarding customer securities and, later, DSC's deception regarding its financial condition, and that firm's net capital deficiency. Such conduct, which was at the very least reckless, amply supports a finding that Sheldon willfully aided and abetted those violations. n35 IV. Antifraud Violations and Related Misconduct. All three respondents, in connection with transactions in municipal securities, willfully violated, or willfully aided and abetted violations of, Section 17(a) of the Securities Act, Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder and MSRB Rule G-17. Sheldon and Reid also failed reasonably to supervise to prevent violations of the securities laws and violated MSRB Rules as set forth below. A. Misconduct in the Offer and Sale of WPPSS 4 and 5 Bonds. 1. Events of 1982 through 1983. Between 1982 and 1983, a series of adverse events culminated in the default of certain bonds ("WPPSS 4 and 5 Bonds") issued by the Washington Public Power Supply System ("WPPSS"). In the face of these rapidly deteriorating conditions, Sheldon and DSC salesmen, including Pattison, offered and sold WPPSS 4 and 5 Bonds to the public without adequate disclosure. In the early 1970s, WPPSS began construction of several nuclear power plants to generate electricity for the Pacific Northwest, and, over the next several years, issued bonds to fund their construction. WPPSS 4 and 5 Bonds were issued to fund construction of two of those plants, projects 4 and 5. However, those projects were delayed by labor problems, environmental requirements, and mismanagement which, coupled with rising inflation, resulted in a tripling of their projected costs. In January 1982, construction on projects 4 and 5 was terminated because of cost overruns and a decline in the projected need for power in the region. However, 88 municipal and cooperative utilities (the "Participants") had executed agreements (the "Participants' Agreements") to pay the debt service on the WPPSS 4 and 5 Bonds even if projects 4 and 5 were never completed. Notwithstanding the requirements of the Participants' Agreements, Standard & Poor's ("S&P") lowered its rating on WPPSS 4 and 5 Bonds to its lowest investment grade, BBB+, following the projects' termination.n36 In early October 1982, an Oregon trial court gave a preliminary indication of concern regarding the enforceability of the Participants' Agreements against Oregon Participants. This action caused S&P to place the WPPSS 4 and 5 Bonds on its "Credit Watch" list (an indication of a potential rating change). Later in October, Pattison discussed generally WPPSS 4 and 5 Bonds with a customer, Joseph MacInerney, and sent him a prospectus. He then sold MacInerney WPPSS 4 and 5 Bonds without disclosing that construction on projects 4 and 5 had been terminated, that there was ongoing litigation regarding the bonds' backing, that Moody's had suspended its ratings on the bonds, or that S&P had just placed the bonds on Credit Watch. In November, S&P lowered its rating on the bonds from "BBB+" to "B" (a speculative grade) -- and retained them on Credit Watch. S&P noted that judicial decisions in both Oregon and Idaho raised "serious questions" concerning whether WPPSS could meet its debt payments. Moreover, Washington state Participants were unwilling to make their contributions to pay the debt service until an appeal was heard from a Washington state court decision holding that Washington state Participants were bound by the terms of the Participants' Agreements. Nonetheless, beginning in November 1982, Sheldon authorized DSC radio advertisements in Houston and Los Angeles, and television advertisements in Florida. In those advertisements, Sheldon reassured an investor who was concerned about a possible WPPSS default, explaining that Sheldon owned WPPSS 4 and 5 Bonds, which, he stated, were his most recent purchase in the tax exempt market. The advertisement minimized the possibility of default and omitted any adverse information which would suggest caution, including any reference to the adverse judicial decisions. At the end of January 1983, 86 of the 88 Participants failed to make their contributions to the bond fund, based on litigation in all three states questioning the enforceability of the Participants' Agreements. Nonetheless, in February, DSC distributed to its customers an "Editorial by Donald Sheldon, President, Donald Sheldon & Co., Inc.," in which Sheldon claimed that unspecified news "this week" about WPPSS 4 and 5 Bonds continued "to remain encouraging." Sheldon also asserted his "strongly" felt view that "the cases currently before the court . . . will protect the investor and that the utility companies in Washington will pay their just debts." The editorial did not describe the status of the litigation, and, before the law judge, Sheldon was unable to recall which news he found encouraging. At the end of February, S&P lowered its rating on WPPSS 4 and 5 Bonds to "CC," the lowest rating above default, because it found that there was a "significant likelihood of actual payment default by January 1984." S&P attributed this possible default to the legal challenges to the Participants' Agreements, as well as "the absence of cooperation required for any resolution of this problem. . . ." When, in April 1983, a tentative agreement was reached between government and power industry leaders to avoid default, Sheldon issued an advertisement hailing this "substantial agreement in principle," and asserting that, "[t]he capacity of these utilities to repay the people that had loaned them this money was never in doubt." n37 The tentative agreement quickly collapsed. Nonetheless, in late May, Sheldon authorized, on DSC's behalf, the issuance of an "Economic Commentary: By Dr. Lance Brofman," an economist affiliated with DSC. In it, Brofman opined that "even WPPSS bonds have a significant probability of full payment." The commentary concluded that "[t]he mathematics of the situation suggests that those who do not presently include WPPSS bonds in their portfolio should do so now, and those who hold them should add to those positions." A DSC press release was issued, stating: Rejecting dire warnings of possible default and bankruptcy for . . . WPPSS, Dr. Lance Brofman . . . sees the current steep price declines and yield run-ups as a not-to-be-missed opportunity for even the most prudent investor. (Emphasis added.) In May 1983, Pattison sold WPPSS 4 and 5 Bonds to Charles Reass. Pattison reassured Reass that, notwithstanding the pending litigation and termination of construction, WPPSS would not default on the bonds. Pattison further told Reass that the WPPSS 4 and 5 Bonds were backed by the Bonneville Power Administration, which was not true, and that the State of Washington would not permit them to default. In June 1983, the Washington Supreme Court ruled that the Participants' Agreements were unenforceable. Later that summer, when WPPSS failed to meet an accelerated demand for payment of principal and accrued interest, S&P lowered the rating for the bonds to "D" -- default. We find that Sheldon and Pattison willfully violated or willfully aided and abetted violations of Section 17(a) of the Securities Act and Section 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder.n38 We further find that Reid, as branch manager, failed reasonably to supervise the Houston office with respect to violations of the antifraud provisions in the sale of WPPSS 4 and 5 Bonds. 2. Sheldon. Sheldon authorized and, in certain instances, prepared and participated in, DSC advertisements that presented the WPPSS situation in a wholly misleading manner and minimized the increasingly significant risks of WPPSS 4 and 5 Bonds.n39 He distributed these advertisements to the Firms' sales representatives for use in their solicitations. Sheldon knew of many of the adverse developments relating to WPPSS and was, at best, reckless, in causing DSC to use these advertisements.n40 Sheldon claims that it is improper to hold him liable for these violations, which he claims are based on his inability to predict the adverse decision of the Washington Supreme Court. In this he is mistaken. As is clear from the discussion above, his liability is predicated on his repeated misleading descriptions in DSC advertisements of material adverse facts related to WPPSS 4 and 5 Bonds. Sheldon's personal belief that the bonds would not default did not diminish his obligation to disclose to DSC customers contrary material facts, including the termination of the projects, adverse legal decisions, and declining ratings. n41 3. Pattison. Pattison conceded before the law judge not only that he omitted to disclose information to MacInerney but that the information was material.n42 Pattison also made misrepresentations to Reass regarding the safety and creditworthiness of WPPSS 4 and 5 Bonds.n43 Pattison claims that DSC provided him and other salesmen "only the most positive" information on WPPSS, and he was pressured to sell WPPSS 4 and 5 Bonds because they comprised the bulk of DSC's inventory at the time. However, Pattison, as a registered representative, had a duty to his customers to have a reasonable basis for his recommendations and to avoid "recklessly stat[ing] facts about matters of which he is ignorant." n44 Pattison asserts that the law judge gave insufficient weight to the fact that the bonds were rated BBB+ at the time of the sale to MacInerney, which indicated their safety. Pattison misunderstands the objective of the federal securities laws, which is not to ensure that investors make only "safe" investments but, rather, to ensure that they invest based upon full disclosure. Once Pattison began offering WPPSS 4 and 5 Bonds to MacInerney, he could not present a partial picture of the WPPSS situation and thereby mislead MacInerney as to the attendant risks. Pattison also asserts that he must have made proper disclosure to Reass, whom he characterizes as "yield aggressive," because another of his customers testified that he, the customer, had received full disclosure. Pattison's disclosures to other customers and Reass' interest in speculation are irrelevant to the issue of whether Reass received appropriate disclosure. William L. Kicklighter, Jr., Securities Exchange Act Rel. No. 30096, 50 SEC Docket 826 at 831, 833; James F. Novak, 47 S.E.C. at 895. 4. Reid's Failure to Supervise. Several Houston office salesmen violated the antifraud provisions of the securities laws in connection with the sale of WPPSS 4 and 5 Bonds.n45 Reid concedes that this misconduct occurred. He contends, however, that DSC's staff in New York -- not Reid -- was responsible for supervising the Houston salesmen. n46 However, the record, including both Sheldon's testimony and DSC's procedures manual, demonstrates that Reid, as Houston branch manager, was responsible for supervising the Houston office.n47 He hired and fired personnel and handled customer complaints. He also received a sales override commission for exercising that authority. Reid admits that he never instructed any DSC salesman to inform customers about WPPSS' adverse financial, litigation, credit, or business status.n48 Reid's only efforts with respect to WPPSS disclosures involved his attempts, from time to time, to circulate written and oral information about WPPSS. He had no procedure to provide accurate information to Houston salesmen or to maintain that information for reference.n49 Thus, new salesmen were dependent on "more senior" salesmen to obtain the information. Reid essentially relied on Houston salesmen to inform themselves concerning the material facts about WPPSS 4 and 5 Bonds, a practice not commensurate with his supervisory obligations.n50 Reid had notice of these deficiencies. He received customer complaints that various Houston salesmen had failed to disclose material facts in connection with sales of WPPSS 4 and 5 Bonds, which should have alerted him that DSC's procedures were inappropriate. Notwithstanding these complaints, Reid took no effective steps to ensure that his salesmen had and conveyed adequate information concerning WPPSS and WPPSS 4 and 5 Bonds. Given the general inexperience of the salesmenn51 and the complicated, rapidly changing conditions surrounding WPPSS 4 and 5 Bonds, Reid was unreasonable in assuming that novice salesmen, with little or no assistance, could obtain and understand the material information about WPPSS 4 and 5 Bonds. Moreover, he was aware that material information was not being conveyed to DSC customers.n52 Thus, under Section 15(b)(6) of the Exchange Act and MSRB Rule G-27, we find that he failed reasonably to supervise Houston salesmen with respect to WPPSS 4 and 5 Bonds. While the prevailing view at DSC regarding WPPSS may have been positive, we believe someone with Reid's experience should have recognized the significant negative factors present and the need for their disclosure. Edward J. Blumenfeld 47 S.E.C. 189, 190-1 (1979); Willard G. Berge 46 S.E.C. 690, 694 (1976), aff'd sub nom., Feeney v. SEC, 564 F.2d 260 (8th Cir. 1977). B. Other Antifraud Violations by Reid with Respect to Municipal Securities. At Reid's instigation, DSC -- particularly its Houston office -- offered and sold to the public Cheneyville revenue bonds and Vanceburg bond anticipation notes. Both were obscure, thinly-traded securities. As set forth below, we find that Reid willfully violated, or willfully aided and abetted violations of, Section 17(a) of the Securities Act and Section 10(b), 15(c)(1) and 17(a) of the Exchange Act and Rules 10b-5, 15c1-2 and 17a-3 thereunder and MSRB Rules G-8, G-17 and G-19 in connection with the sale of these securities. 1. Cheneyville Revenue Bonds. In April 1982, the Westside Habilitation Center, located in Cheneyville, Louisiana, issued $13.55 million in revenue bonds, bearing interest rates ranging from 14 percent to 16-1/2 percent, to construct a facility for the mentally retarded. The project experienced immediate difficulties. In October 1983, Cheneyville's developer sued the bond trustee to determine whether the next bond interest payment would be made from the debt reserve fund or the construction reserve fund. If the developer were successful in preventing the use of the construction reserve fund to pay interest on the bonds, over $1 million in reserves would no longer be available to service the bonds. Moreover, once the debt reserve fund was depleted (which would occur after two additional -- for a total of three -- interest payments) Cheneyville would be completely dependent on operating income to meet its interest obligations. However, the Cheneyville facility was not meeting its occupancy or revenue forecasts.n53 By the fall of 1984, Cheneyville could not service the bonds. Cheneyville defaulted on the October 1984 interest payment and filed for bankruptcy in 1985. n54 Reid claims that he was unaware of the problems surrounding Cheneyville and relied on information provided by other DSC salesmen that the facility was doing well and able to meet its financial obligations.n55 However, the law judge credited Larry Greenfield, one of Reid's customers, who began liquidating his Cheneyville holdings through Reid in August 1983. Greenfield testified that, in the summer and fall of 1983, he and Reid discussed rumors that Greenfield had heard about Cheneyville's problems, as well as an October 1983 written update from the co-manager of the initial Cheneyville underwriting, describing the litigation. Greenfield and Reid also discussed why the price of Cheneyville bonds, which bore an interest rate of 16 1/2 percent, was falling during a period of low inflation.n56 According to Greenfield, Reid blamed the price decline on the pending litigation.n57 Knowing this information, in May 1984, Reid nonetheless bought the bonds for the account of Louis Loeser, over which he exercised de facto discretionary authority. Reid made the purchase without first discussing it with Loeser. In June 1984, Reid sold Cheneyville bonds to Jimmy Bird who purchased the bonds at par. Reid did not disclose Cheneyville's problems, and, when Bird expressed concern about the safety of the bonds in light of their high rate of interest, Reid told Bird falsely that the issuer had an "entire city block" of real estate that was "more than enough" to secure its obligations to the bondholders. When Cheneyville defaulted on its October 1984 interest payment, Reid continued to mislead Bird and, toward this end, caused DSC to pay Bird's interest coupon (which the issuer had returned unpaid), assuring Bird that the problem had been caused by a change of trustees.n58 In light of Cheneyville's precarious financial situation, these bonds were unsuitable for Loeser and Bird, both of whom had told Reid that they wanted safe investments.n59 2. Vanceburg (Kentucky) Bond Anticipation Notes. In 1979, the City of Vanceburg, Kentucky issued bonds to construct an electric power plant, to be repaid from the sale of electric power to the plant's customers. Because of cost overruns, the project could not be completed with the proceeds of the original bond issue. In June 1982, Vanceburg issued bond anticipation notes bearing 10-1/2 percent interest, due June 1, 1984, by which time Vanceburg anticipated issuing a second bond offering. The City of Hamilton, Ohio, which was the chief prospective customer for the plant's power, had agreed to be liable for 90 percent of the debt service on the anticipated 1984 offering (although it was not liable on the notes). However, in January 1984, Hamilton sued Vanceburg, alleging fraud and mismanagement and seeking to void its contract with Vanceburg and $10 million in damages. As a result, Moody's, which had initially assigned the notes its second highest grade for securities of this type, suspended the ratings of both the notes and the bonds, pending clarification of the suit's impact on the credit quality of the issuer's debt. S&P, which had not rated the notes, lowered the bonds' rating to a speculative grade. Both actions were reported in municipal bond publications. The suit hampered Vanceburg's efforts to issue additional bonds to pay off the notes. In March 1984, Reid purchased Vanceburg notes for a DSC customer at 97-3/4, which he admitted was a low price for notes due to mature in less than three months. Reid claims that the trader he purchased the notes from told him that there was nothing wrong with the notes and that the notes were rated investment grade by both S&P and Moody's.n60 A day or so after this purchase, several salesmen asked Reid to add the notes to DSC's inventory. Without further investigation of the financial condition of the notes, Reid added them to the inventory with a notation that the notes were rated investment grade by Moody's. When another DSC trader told Reid that he was unable to verify that rating, Reid removed the reference to the rating but made no effort to determine the then-current rating. Separately, three Houston salesmen contacted the Vanceburg fiscal agent who told them that the notes were "fully funded." Without further inquiry, the salesmen assumed, incorrectly, that this statement meant that the money to pay off the notes had been raised and was on deposit in the bank. One of these salesmen, Joseph Stafford, then sold $450,000 worth of the notes to Charles Epps, conditioned on Epps' verifying that funds to pay off the notes were on deposit. Epps cancelled the purchase when he determined that the funds were not on deposit. Reid spoke directly to Epps who confirmed that the money had not yet been raised. Following the cancellation, Sheldon ordered Reid to liquidate the notes. Instead, Reid gave Stafford "a few days" to resell the notes and offset the loss which DSC would otherwise require Stafford to bear. Reid also directed Stafford to determine the status of the Vanceburg bond offering. According to Reid, Stafford informed him that, although the money was not then on deposit, a new issue would be sold within two weeks (the time that the notes were due), to pay the principal and interest.n61 The efforts to refinance the notes, however, proved to be unsuccessful, and the notes went into default on June 1, 1984. n62 In May 1984, Reid sold to Loeser's account $50,000 worth of the notes returned by Epps, without consulting with Loeser before the transaction. Thus, Reid effectively recommended the notes to Loeser without informing him of the issuer's troubles. In mid-June after the default, Reid purchased an additional $25,000 in notes for Loeser's account.n63 Given Loeser's conservative investment goals, these purchases were unsuitable for his account. Moreover, Reid backdated the second purchase to make it appear that the purchase occurred in May, prior to the default.n64 Reid also encouraged other Houston salesmen to offer Vanceburg notes to customers, and the salesmen offered these notes to customers seeking safe investments. Houston salesman represented to customers that the money to repay the Vanceburg notes was on deposit and failed to disclose the pending litigation, the rating suspension, or any other negative information. In the face of these facts, Reid claims that he acted properly. He contends that the Houston office was in "regular" contact with Vanceburg officials and others associated with the notes, and received from them encouraging, albeit misleading, information. The record does not support this version of events. Although Reid testified in another context that bond ratings "are the most important ingredient in the bond business," he did not ascertain the publicly available information about the status of Vanceburg's ratings. He claimed to rely instead on the information provided by the selling trader, information that had been questioned by another DSC trader.n65 Reid was clearly reckless in assigning Stafford, who was being made responsible for DSC's loss as a result of the broken Epps trade, the task of DSC's further investigation of Vanceburg. Not only was Stafford not sufficiently disinterested in the result of the research since he would be held responsible for DSC's loss, he was inexperienced. Significantly, even after Reid knew that Epps had cancelled his purchase because the money to pay the notes was not on deposit, Reid willfully encouraged DSC salesmen to continue to sell Vanceburg notes to any customer without full disclosure of both the problems with the issue and the difficulty in obtaining accurate information -- and regardless of suitability.n66 C. Unfair Pricing of Municipal Securities. As described below, Reid charged, and/or aided and abetted the charging of, excessive markups on the sale of WPPSS 4 and 5 Bonds and Cheneyville bonds. 1. WPPSS 4 and 5 Bonds. Between October 1982 and June 1983, DSC charged undisclosed markups ranging from 6 percent to as high as 15 percent in 109 transactions in WPPSS 4 and 5 Bonds. These excessive markups violated Rules G-17 and G-30 of the MSRB. n67 The law judge also found that, to the extent these markups exceeded 8 percent, they violated Section 17(a) of the Securities Act, and Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder.n68 We affirm these findings.n69 We have consistently held that, at the least, markups of more than 10% are fraudulent in the sale of equity securities. And we have found markups in excess of 7% fraudulent in connection with such sales. Markups on municipal bonds are generally lower than those for equity securities (emphasis in original). Id. at 192. Reid argues that, because DSC was a market maker in WPPSS 4 and 5 Bonds, DSC's contemporaneous costs were not the appropriate bases to use in calculating its markups. However, the law judge found that DSC was not a market maker in WPPSS 4 and 5 Bonds, and this finding is supported by the record, including the testimony of DSC's head trader. Thus, calculations based on DSC's contemporaneous costs were appropriate. Reid complains that the law judge improperly placed the burden of proof on him to demonstrate that DSC's markups in WPPSS 4 and 5 Bonds were not excessive. The Administrative Procedure Act (the "APA") expressly places the burden of proof -- that is the burden of presenting some evidence -- on the proponent of an issue, in this case the Division with respect to the excessiveness of markups. Once the Division presented evidence of these markups, the burden shifted to Reid to refute that evidence.n70 Reid did not introduce any countervailing evidence either that other factors should be considered in evaluating DSC's markups or that contemporaneous costs were not a valid basis for calculating DSC's markups. We are satisfied that the record establishes excessive markups by a preponderance of the evidence.n71 Reid also contends that he cannot be held accountable for the resulting markups because the prices were set by traders in DSC's New York office. However, Reid purchased many of the WPPSS 4 and 5 Bonds for the Houston office, and most of these bonds were sold by Houston salesmen on the same or next day. Reid further admitted that, since he purchased the bonds, he knew what the markup on them was. Nevertheless, Reid admitted that he did not challenge any of the New York trading desk's prices.n72 Reid was an experienced principal, trader, and branch manager. DSC's procedures manual, which Reid admitted reviewing, notes: It is the practice in the municipal bond industry to charge a retail customer a price which is no more than one quarter of one percent to five percent over the current market price for a bond.n73 Thus, Reid knowingly and substantially assisted conduct that he knew, or was reckless in not knowing, was violative of the markup restrictions. 2. Cheneyville. Between January and November 1984, DSC charged markups of between 5 and 9 percent on over 70 sales of Cheneyville bonds. The finding of the law judge that Reid traded Cheneyville bonds for DSC and set their markups "in concert with . . . the salesmen" is fully supported by the record. n74 These markups were clearly excessive in violation of MSRB markup restrictions and, in several instances, fraudulent.n75 In addition, Reid sold Cheneyville bonds to the accounts of favored customers at prices close to DSC's contemporaneous costs. He repurchased the bonds from the favored accounts at a profit to those accounts. He then sold these same bonds to non-favored customers at a still higher price.n76 Reid's interpositioning of favored accounts between the dealer market and non-favored accounts resulted in fraudulent, effective markups of as much as 10 percent. This interpositioning on Reid's part demonstrates clear scienter and, in our view, was particularly egregious.n77 In other instances he sold the bonds short to non-favored customers and covered the resulting short position by repurchasing the bonds from the favored account at a profit to that account but at a price below that charged the non-favored customers. V. Sheldon's Failures of Supervision. We have made clear that it is critical for investor protection that a broker establish and enforce effective procedures to supervise its employees.n78 Ultimately, it is the broker-dealer's president who is responsible for compliance with all of the requirements imposed on his firm unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person's performance is deficient.n79 As detailed below, we find that, under Section 15(b)(4)(E) and 15(b)(6) of the Exchange Act and MSRB Rule G-27, Sheldon failed repeatedly to discharge this obligation. A. Sales of Cheneyville and Vanceburg Securities. As described above, DSC sold Cheneyville and Vanceburg securities to persons for whom they were not suitable and on the basis of material misrepresentations and omissions. Sheldon admitted responsibility for supervising the branch offices, although he also asserts that he delegated the duty to supervise sales to the branch managers, including Reid. We have repeatedly warned that "supervisory procedures which rely solely on supervision by branch managers" are not sufficient.n80 Nonetheless, Sheldon neither monitored, nor established procedures to monitor, DSC branch managers to determine whether they were carrying out their supervisory responsibilities. n81 Sheldon also neither identified nor corrected weaknesses in DSC's sales procedures and suitability standards. As noted, DSC placed the entire burden of investigating and evaluating the appropriate disclosure for a security on DSC's registered representatives, but provided no guidance through its procedures manual, training, its supervisory staff, or otherwise to the salesmen as to the manner in which they should comply with these regulatory requirements. This policy was inappropriate. It raises particular concerns with respect to troubled securities, such as Cheneyville and Vanceburg, especially since many of DSC's salesmen were novices. At a minimum, Sheldon had an obligation to ensure that DSC provided its salesmen with the means to obtain adequate information about these securities and with effective direction for its appropriate disclosure.n82 Sheldon ignored repeated indications of irregular conduct which should have alerted him to the problems in the Houston office. He received several customer complaints that DSC salesmen had failed to inform customers of the most fundamental information about securities DSC recommended, including ratings and financial information about, and litigation involving, the issuer. He had specific knowledge that Epps had cancelled his Vanceburg transaction because the Houston office had provided Epps with erroneous information. Nonetheless, although he ordered Reid to liquidate the notes into the market, he did not even ascertain whether this order was followed or whether Houston salesmen, including Reid, were continuing to market Vanceburg notes without adequate disclosure. B. Markups in Municipal Securities. Sheldon admits responsibility for supervising DSC's traders and ensuring that markups were not unfair or fraudulent. Sheldon contends that DSC's markups were not unfair or fraudulent.n83 However, as discussed in Section IV, C, supra, we affirm the law judge's finding that these markups were excessive and, in many instances, fraudulent. The DSC procedure manual stated that the appropriate markup for municipal bonds sold to retail customers was between 1/4 to five percent above the market price of the bond and warned DSC employees that excessive markups could be fraudulent.n84 Sheldon nonetheless failed to provide a mechanism to review DSC's pricing of municipal bonds to achieve compliance with even this internal guideline or to detect interpositioning.n85 Sheldon further contends that penalizing DSC and him for charging markups above specific percentages amounts to price fixing and, as such, violates the federal antitrust laws. However, neither the MSRB rules governing markups nor this Commission's markup cases set prices for securities. Instead, they seek to ensure that these prices are fair by providing guidance as to what prices are unfair.n86 In any event, the Supreme Court has recognized that the antitrust laws are deemed repealed to the extent necessary to permit the securities laws to function in the manner envisioned by Congress, n87 and this Commission has held that this implicit repeal applies in the context of markups.n88 Sheldon asserts that the markup policy violates the prohibition against restraints on interstate commerce. The interstate commerce clause prohibits the several states, not the Federal government, from imposing restraints on interstate commerce. See generally, J. Nowak, Constitutional Law (2d ed.) 266-291 (1983). C. Misrepresentation of SIPC Coverage of GSI. Customer accounts at DSC -- but not GSI -- were insured by SIPC.n89 However, the Firms shared office space and sales personnel, creating the potential for confusion among customers about whether particular securities transactions were covered by SIPC. Sheldon failed to take measures to prevent this confusion, resulting in violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. Sloppy office procedures exacerbated this problem by further blurring the distinctions between the Firms. Salesmen sent SIPC brochures to government securities customers. The Firms also used DSC business cards and DSC stationery, both noting SIPC membership, when sending correspondence concerning GSI government securities transactions. In the Los Angeles office, a SIPC decal was affixed on the Firms' front door.n90 Customers testified that they understood that their investments through GSI were protected by SIPC.n91 In response to the Division's introduction of a photograph taken after the Firms had closed showing such a sign on the entrance to the Los Angeles office, Sheldon introduced a SIPC sticker, Sheldon Exhibit B (which is missing from the record, see n. 1, supra), to demonstrate that the sticker was capable of being moved. Sheldon did not, however, adduce any evidence indicating that the sticker had in fact been moved. Our conclusion that the sign was displayed prominently by the Firms' Los Angeles office is confirmed by the record. Reid introduced a check made payable to GSI, Reid Exhibit B (which is one of the exhibits missing from the record, see n. 1, supra), to refute a customer's testimony that he believed his purchase of a government security was covered by SIPC. While this check shows that the customer knew that there were two firms, it does not undermine his testimony that he was confused about the differences between GSI and DSC. Reid also introduced a letter written to this customer by a Houston salesman shortly after the Firms closed, Reid Exhibit C (which is also missing from the record), to demonstrate that he had no control over the misrepresentations made to this customer. However, our findings as to Reid's violations concerning representations of GSI's SIPC membership are based on Reid's testimony. Sheldon notes that the Firms' procedures manual stated that "[e]ach new customer is to be informed by his representative. . . of the difference between Donald Sheldon & Co., Inc. and its subsidiary Donald Sheldon Government Securities Inc." However, this statement does not explain to a salesperson what those differences are or their import.n92 And aside from a single meeting in the Los Angeles office, there appears to have been no effort made to inform salesmen of the importance of the distinction between the Firms.n93 Sheldon thus failed to exercise reasonable supervision.n94 D. Salesman's Misappropriation. In 1982, a salesman in the Firms' New York office, Jonathan Smith, purchased large numbers of bonds for non-existent customers. Although the scheme cost the Firms approximately $60,000 and required DSC to reimburse a customer, the incident was not reported to the NASD, and Smith was permitted to retain his position. Sheldon, who was aware of this scheme, was on notice that Smith could not be trusted and required the strictest scrutiny. Sheldon required Smith to sit next to the New York sales manager, who, in turn, was instructed to observe Smith and answer his questions. Sheldon delegated responsibility for overall supervision to Jack Manion, a principal of the firm. However, this oversight lapsed after Manion's death in the spring of 1983. And, beginning about December 1982 (almost immediately following the discovery of his first scheme), Smith began to steal customer funds and securities. Smith confessed his misappropriation in October 1984 and was terminated.n95 Sheldon claims that DSC had procedures in place to prevent access by salesmen, including Smith, to customer funds and securities, and that the operations supervisor failed to enforce these procedures, making Smith's theft possible.n96 Even if DSC's procedures were adequate for a typical salesman, however, Sheldon was on notice that Smith required extraordinary supervision and failed to provide sufficient measures.n97 VI. Markups of Government Securities. The Commission has observed that "mark-ups on government securities, like mark-ups on corporate and municipal debt securities, usually are smaller than those on equity securities."n98 Similarly, the Division's expert witness noted that it was industry practice to charge markups of no more than four percent on government securities.n99 Sheldon admitted that it was GSI's policy to charge an undisclosed markup of five basis points over the market price on discount mortgage-backed government securities "across the board." As a result, customers were defrauded in that they purchased securities at prices that bore no reasonable relationship to the prevailing market price. n100 Sheldon challenges the competence of the Division's expert, claiming that he had limited experience and was personally hostile to Sheldon, based on past personal disputes. However, the law judge concluded the expert's testimony was not tainted by bias. In any event, our findings are based on Sheldon's admitted markup policy. GSI's markup policy necessarily produced markups in excess of five percent -- and often of eight percent or above -- on discount mortgage-backed government securities.n101 Indeed, GSI's inalterable policy of a five point markup precluded pricing these securities based on the particular circumstances of the sale or the market for the securities. We therefore hold that Sheldon, through this markup policy, willfully violated or willfully aided and abetted violations of Section 17(a) of the Securities Act and Sections 10(b) and 15(c)(1) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder.n102 VII. Miscellaneous Procedural Issues. Sheldon and Reid raise a variety of issues, which they contend rendered these proceedings defective. For the reasons set forth below, we conclude that none of these contentions is meritorious. A. Sheldon asserts that the financial problems of the Firms were due not to his mismanagement but, rather, to the disruption of the Firms' operations caused by the Division's investigation.n103 Scrutiny from inspections and investigations is an aspect of doing business in a regulated industry.n104 Securities firms are not excused from compliance with regulatory requirements because they are being examined and/or inspected.n105 B. Sheldon claims that the Division withheld exculpatory information, misled witnesses, and even encouraged their lying. He charges that the law judge improperly excluded testimony regarding this alleged intimidation and ignored its presence. Although the law judge gave him numerous opportunities to make and support his allegations, Sheldon cited, in the most general terms, only a few instances of alleged misconduct.n106 For example, Sheldon claims that a GSI customer misrepresented the amount she expected to recover from the GSI bankruptcy. However, when the witness testified on redirect, she made clear that her estimate of her recovery had been based on information she had received from the bankruptcy trustee and the custodian of GSI's funds, not the Division.n107 Sheldon similarly complains that one witness testified that his plans to retire "fell through" since his funds were not available because of GSI's bankruptcy. Sheldon claims that this statement is untrue because ultimately the GSI customers recovered most of their funds in bankruptcy. We fail to see how this eventual recovery makes the witness' statement that his retirement was delayed a lie.n108 Sheldon also claims that certain of his witnesses were intimidated by the Divisionn109 and, as a result, slanted their testimony or declined to testify. n110 Sheldon called Donald Wheeler, owner and principal of a municipal securities firm. Wheeler, who is an attorney, testified that he had second thoughts about testifying on Sheldon's behalf after he was contacted by the Division. However, Wheeler did testify and stated unequivocally that his testimony was unaffected by this contact, and the law judge credited this testimony.n111 Sheldon's two other allegations of intimidation are also not supported by the record.n112 A second witness asked Sheldon not to call him as a witness because he wanted to avoid "an adversarial position with the SEC staff." A witness' independent desire not to testify is not evidence of improper staff conduct. In addition, Sheldon did not cross-examine this witness when he testified for the Division. C. Sheldon and Reid claim that they are the victims of selective prosecution with respect to the sale of WPPSS securities. They rely on a 1988 statement accompanying the transmission to Congress of a staff report on the collapse of WPPSS, n113 that the Commission had determined to "close its investigation into transactions in WPPSS securities without initiating any enforcement actions."n114 Thus, Sheldon and Reid claim that charging them with securities violations for the WPPSS 4 and 5 bonds transactions demonstrates selective prosecution by the Commission. The Transmittal Letter, however, clearly related to the "participants in offerings of WPPSS securities," and not, as in this case, to any activity in the secondary market in those securities.n115 In any event, to demonstrate selective prosecution, Sheldon and Reid must establish both that they were singled out for enforcement action while others who were similarly situated were not, and that the action was motivated by arbitrary or unjust considerations, such as race, religion or the desire to prevent exercise of a constitutionally-protected right.n116 They have failed to do so. Given the scope of the violations we have found and the variety of securities in which those violations occurred, the Commission's prosecution of these respondents is amply justified. D. Sheldon also charges that the attorneys he retained during the investigation phase of this matter were adversely influenced in assisting him because Rule 2(e) of our Rules of Practice authorizes this Commission to discipline professionals who appear or practice before it. He asserts that this in terrorem effect forced him to proceed pro se at the hearing stage of these proceedings and therefore deprived him of effective assistance of counsel. Nevertheless, none of Sheldon's three former attorneys, two of whom testified in these proceedings, even hinted that possible disciplinary action by this Commission influenced their representation.n117 There is nothing in the record to indicate that Sheldon's relationship with his lawyers was improperly affected by this Commission, our staff or by any authority conferred on it.n118 VIII. Public Interest. Respondents contend that the sanctions assessed by the law judge are too severe. The Division of Enforcement maintains that the sanctions imposed by the law judge on Sheldon (a bar) and Pattison (a 45-day suspension) are appropriate, but that, in light of Reid's serious misconduct, those assessed against him (a bar with the right to reapply in two years to become associated in a non-supervisory capacity) are too lenient. Reid, the Division argues, should receive an unqualified bar.n119 We agree with the staff. Accordingly, we shall affirm the sanctions imposed on Sheldon and Pattison. We further conclude that the public interest requires that Reid be barred from association with any broker or dealer. In assessing sanctions, we are guided by the factors cited by the court in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981):n120 [T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. A. Sheldon. Given Sheldon's serious individual misconduct and his total abdication of the responsibility that his position at the Firms imposed, an unqualified bar of Sheldon from association with any broker, dealer or municipal securities dealer is amply justified.n121 Sheldon willfully aided and abetted violations of antifraud and customer protection provisions (in connection with the Firms' use of fully-paid securities), as well as of net capital requirements, exposing the Firms' customers to financial risk. He further propounded misleading and irresponsible advertising which failed to disclose or downplayed material adverse information. This case also graphically demonstrates the mischief that can be wrought on the investing public when there is a total failure to establish or abide by the supervisory requirements imposed on the securities industry.n122 It is difficult to envision a more pervasive supervisory vacuum -- failure to establish and enforce adequate supervisory procedures, hiring inexperienced sales representatives while failing to provide them with adequate information concerning the securities in which the Firms specialized and discouraging them from performing any independent investigation of the issuers. In addition, Sheldon purposefully determined not to establish any compliance procedures at GSI. This structure allowed and effectively encouraged the broad range of serious violations found in this case. n123 While each customer ultimately received the full value of his "net equity claim" (as defined in 11 U.S.C. § 741 (6)), the customers had to wait almost a year to receive 92 percent of such claims and almost 4 years to receive the balance, and received no interest during this period. Sheldon also refuses to concede that the trustee's ability to pay out these amounts was in part due to the fact that SIPC made a $500,000 contribution to settle claims by GSI customers against SIPC. Significantly, Sheldon does not acknowledge the gravity of what his Firms did in using customers fully-paid securities to finance his operations.n124 This attitude compounds our concerns about any possible future role he might have in the securities industry. We consider the sanction imposed on Sheldon by the law judge to be fully warranted as a means of protecting public investors from any repetition of his misconduct.n125 Sheldon contends, in connection with a similar observation by the law judge, that this amounts to penalizing him for not confessing and suggests a lack of impartiality. We disagree. It is not Sheldon's refusal to concede misconduct during the course of these proceedings, but his fundamental lack of appreciation for the importance of the provisions at issue that, among other things, leads us to conclude that a bar is appropriate. Arthur Lipper Corp., 46 S.E.C. 78, 101 (1975) (failure of a respondent to recognize the magnitude of his misconduct can indicate likelihood of repeating it), rev'd on other grounds, 547 F.2d 171, 184 (2d Cir. 1976), cert. denied, 434 U.S. 1009 (1978). B. Reid. Reid asserts that his sanction should be lessened in light of his record in the securities business and claims that sanctions for markups are generally less severe and that his supervisory violations were not extreme.n126 Reid's effort to portray his numerous instances of misconduct as relatively insignificant and an aberration from an otherwise unblemished career is unpersuasive. Reid engaged in serious fraud upon his own customers in connection with sales of Cheneyville and Vanceburg securities. He compounded this fraud by attempting to disguise his actions by, in at least one instance, backdating firm records.n127 He disguised the amount of Cheneyville markups by interpositioning the accounts of favored customers between the market and the accounts of less favored customers. In addition, salesmen in the Houston office, which he was charged with supervising, repeatedly violated the antifraud and suitability provisions. As manager of that office, he encouraged salesmen on several occasions to sell securities without adequate information. He also admits that he never instructed his salesmen on their duties of disclosure. Finally, he was responsible for the charging of excessive markups by DSC. This is not the first time Reid has engaged in such misconduct. In 1979, we sanctioned Reid for charging an institutional customer excessive prices in bond transactions.n128 Yet at DSC he continued to charge excessive markups in municipal securities. Given the gravity of Reid's offenses, and particularly the fact that many of his own customers were victims of this misconduct, we believe that the protection of public investors necessitates Reid's total bar from association with any broker, dealer or municipal securities dealer.n129 Our determination of the appropriateness of Reid's sanction is based on our review of the record before the law judge (except as noted in n. 1, 49 and 91). The Division's motion to adduce additional evidence under Rule 21(d) of our Rules of Practice in the form of investigative testimony given by Reid in an unrelated matter is hereby denied in all respects. C. Pattison. Pattison violated antifraud provisions in connection with the sale of WPPSS 4 and 5 Bonds to two customers. He points to his lack of experience and inadequate supervision as reasons for reducing his sanction.n130 While his misconduct was far less significant than that of the other two respondents, it nevertheless warrants the 45-day suspension imposed by the law judge. An appropriate order will issue.n131 By the Commission (Commissioners SCHAPIRO, ROBERTS, and BEESE); Chairman BREEDEN not participating. ORDER IMPOSING REMEDIAL SANCTIONS On the basis of the Commission's opinion issued this day, it is ORDERED that Donald T. Sheldon and Bruce W. Reid be, and they hereby are, barred from association with any broker, dealer or municipal securities dealer; and it is further ORDERED that Gregory L. Pattison be, and he hereby is, suspended from being associated with a broker, dealer or municipal securities dealer for a period of 45 days. The suspension shall be effective as of the opening of business on November 30, 1992. By the Commission. To Contents    Footnotes -[n1]- Following issuance of the initial decision by the law judge, certain of the exhibits in this case were misplaced, and, despite an exhaustive search, have not been located. Consequently, we have, to the extent possible, reconstructed the missing exhibits, and hereby admit as additions to the record these reconstructed exhibits: Sheldon Exhibits D, F, I, L, M, N, P, R, S, T, U; Reid Exhibits A, D, F; and Pattison Exhibit A. -[n2]- The Commission brought proceedings against several other persons associated with the Firms. These proceedings were concluded on the basis of settlement offers accepted by the Commission and, in one case, by default. See Donald T. Sheldon (Melvin Feldman), Securities Exchange Act Rel. No. 24129 (February 24, 1987), 37 SEC Docket 1294; Donald T. Sheldon (Gary Himber), Securities Exchange Act Rel. No. 24128 (February 24, 1987), 37 SEC Docket 1292; Jonathan Smith, Securities Exchange Act Rel. No. 23375 (June 26, 1986), 35 SEC Docket 1709; Joseph H. Stafford, Securities Exchange Act Rel. No. 23366 (June 23, 1986), 35 SEC Docket 1693; Douglas J. Ebbitt, Securities Exchange Act Rel. No. 23270 (May 23, 1986), 35 SEC Docket 1313; Paul A. Steets, Securities Exchange Act Rel. No. 23271 (May 23, 1986), 35 SEC Docket 1315; Mary A. Schad, Joseph A. Jennings, Securities Exchange Act Rel. No. 23057 (March 24, 1986), Securities Investor Protection Act Rel. No. 130 (March 24, 1986), 35 SEC Docket 551. -[n3]- See n. 27, infra. -[n4]- DSC and GSI ceased retail operations at the close of business on July 26, 1985. On July 30, 1985, the Commission brought an injunctive action against the Firms and, on that date, obtained a temporary restraining order and the appointment of a temporary receiver. Subsequently, the Firms were permanently enjoined from further violations of the securities laws and a trustee was appointed for each. -[n5]- DSC also maintained an office in Honolulu. Reid briefly operated a branch office of the Firms in Memphis, Tennessee. -[n6]- Following the departure in June 1983 of the Los Angeles branch manager, Sheldon failed to appoint a successor. Eventually, a group of three salesmen took charge of the day-to-day operation of the office, but all important decisions had to be made by Sheldon who was rarely present in that office. -[n7]- For example, Sheldon admitted that, at various times, the managers of the Firms' Pompano Beach, Los Angeles, and Hawaii offices were not registered principals. -[n8]- Although some personnel appear to have been specifically assigned to DSC or GSI, the back office of both Firms was essentially a joint operation headed by Mary Schad, the Firms' financial officer, who reported to Sheldon. -[n9]- The securities were pledged to collateralize both ordinary lines of credit and "repurchase agreements." Although a repurchase agreement or "repo" is structured as a sale and repurchase of securities, it is economically equivalent to a collateralized loan. A firm, in this case GSI, receives cash in exchange for securities, subject to an agreement to repurchase the securities, by repaying subsequently an amount that exceeds the original amount. In effect the lender uses these securities as collateral for its loan. -[n10]- According to a leading commentator: -[n11]- The Firms violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder, which prohibit broker-dealers from effecting transactions in, or inducing or attempting to induce the purchase or sale of, securities by fraudulent means. DSC further violated MSRB Rule G-17 which prohibits, in the conduct of a municipal securities business, unfair dealing with customers, and deceptive, dishonest or unfair practices. -[n12]- Under Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder, DSC was required promptly to obtain and thereafter maintain the physical possession or control of all fully-paid securities. -[n13]- Under Section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-1 thereunder, DSC was required to maintain "net capital," i.e., assets less certain deductions or "haircuts," of the greater of 6 2/3 percent of the firm's aggregate indebtedness, or $25,000. -[n14]- As of the end of its fiscal year, GSI had total assets of about five million dollars, including its roughly two million dollar receivable from Group. It also owed, at such time, approximately four million dollars in bank loans. -[n15]- Sheldon claims that Chase terminated its relationship with the Firms because of Chase's concerns about a pending Commission investigation, not the Firms' operations. While a memorandum prepared by a junior Chase employee lists the investigation as a factor to be considered by Chase in its determination whether to continue the relationship, a Chase vice president who was instrumental in making this determination did not allude to the investigation in his testimony and Sheldon did not cross-examine him on this point. -[n16]- Other failures noted by the NASD included incorrect computation of the Customer Reserve Formula and a corresponding reserve account deficiency of over half a million dollars, routine late filings of financial reports, and failure to complete customer account cards. -[n17]- We do not credit Sheldon's statement that he could not recall receiving the October 1984 NASD letter. The letter was properly addressed to Sheldon, was received by DSC in New York and its contents were important. Moreover, Sheldon indicated in testimony that he was operating out of the New York office at about the time the letter was received. He further observed that, if mail were received by an office in which he was then located, "it would be delivered to me for sure." Moreover, Sheldon did not deny receiving the February 1985 follow-up letter. -[n18]- We would disagree with Sheldon to the extent he suggests that the reason for this failure was a difficulty in removing the lien on a portion of a government security that had been pledged when customer payment was received for that portion. This explanation is not supported by the record. According to the GSI trustee's accountant, GSI "did segregate [fully-paid] securities" and it was "only from time to time that they did not segregate the securities." The facts of this case strongly suggest that it was a lack of cash, and not technical difficulties related to the handling of certificates, that caused the securities to remain under lien. Moreover, in any case where redemption of government securities after customer payment would not be feasible, it then would be improper for a firm to sell the securities to customers -- at least where no disclosure to customers was made. -[n19]- This latter case, relating to the pledge of securities pursuant to repurchase agreements, did not involve the failure to remove securities from pledge once they had become fully-paid. Instead, it involved the active step of selecting fully-paid securities as collateral for a new round of financing for the firm. -[n20]- Sheldon states that DSC instructed SEPAC to segregate customer fully-paid securities, and suggests that the failure to do so may have been the result of SEPAC's error. The record indicates, however, that the failure to segregate DSC customer securities was not the result of SEPAC's failure to follow instructions, but rather the result of DSC's lack of funds. -[n21]- Sheldon claims that the law judge gave excessive weight to the testimony of Neill who, according to Sheldon, had no experience with any government securities firm except GSI, and did not understand the mechanics of repurchase agreements. However, we find no support for the suggestion that Neill lacked the competence to assess adequately the situation. -[n22]- Sheldon also testified that around this time his operations manager, Mort Wasserman, approached him to discuss concerns Neill had raised with Wasserman over GSI's failure to segregate customer securities that had been fully paid. Sheldon claims that Wasserman told him that such segregation was not possible. Testimony by other witnesses, however, indicates that Wasserman recognized that the failure to segregate was a problem that needed to be addressed. Moreover, the record establishes -- and we conclude Sheldon must have known -- that it was not technical impediments but a lack of cash that prevented segregation of fully paid securities. -[n23]- n23 See n. 19, supra. -[n24]- However, as Sheldon later indicated, he "never even gave it a thought" as to where the money would come from. -[n25]- Sheldon contends that unnamed "Washington Regulators" discouraged a prospective purchaser for the Firms by overstating the extent of the Firms' liabilities, thereby precipitating their collapse. Our review of the record, however, indicates that nothing improper occurred. -[n26]- According to testimony by a SEPAC official, SEPAC terminated its relationship because Group and GSI had failed to furnish timely 1984 financial statements. We find this testimony more plausible than Sheldon's claim that SEPAC was motivated by apprehension over financing government securities firms generally. -[n27]- Sheldon blames Group's financial problems on the Commission's denial of an exemption under Section 9(a) of the Investment Company Act of 1940 to Investors Portfolio Management, Inc. ("IPM"), another Sheldon affiliate. However, IPM's disqualification, which resulted from the injunctive action against the Firms, became effective over a month after the Firms had ceased doing business and been placed into a receivership. The disqualification therefore did not -- and, indeed, could not -- create or contribute to the Firms' financial troubles. -[n28]- See Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir.), cert. denied, 449 U.S. 919 (1980); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94-95 (5th Cir. 1975). See also Kirk A. Knapp, Securities Exchange Act Rel. No. 30391 (February 21, 1992), 50 SEC Docket 1840, 1842. -[n29]- The law judge further found that DSC violated the Commission's hypothecation rule, Rule 15c2-1 under Section 15(c)(2) of the Exchange Act, which differs to some extent from the customer protection requirements. In light of DSC's numerous other violations in this area, we see no need to reach the question of whether the evidence satisfies the elements of a Rule 15c2-1 violation. -[n30]- Cf. C.D. Beal & Co., Ltd., 46 S.E.C. 395, 398 (1976). No similar charge was made with regard to non-disclosure of the financial position of GSI. Hence we do not address that issue. -[n31]- The violations occurred prior to the enactment of the Government Securities Act of 1986. That Act made government securities firms subject for the first time to net capital and other back office requirements, including rules specifically governing the segregation of fully-paid securities. Contrary to Sheldon's contention, however, government securities firms like GSI were at the time subject to antifraud provisions. See Loss, Securities Regulation 1428-1429 (1961); Blyth & Company, Inc., 43 S.E.C. 1037, 1039-1040, n. 4 (1969). The use of customer fully-paid securities to collateralize firm loans without customers' knowledge and consent clearly violates these provisions. Scott, Gorman Municipal, Inc., supra; Edward C. Jaegerman, supra. -[n32]- It is not the use of repurchase agreements that is violative, but the improper use of customer fully-paid securities. Moreover, even if Sheldon had established that other firms also misused customer fully-paid securities, that would not have exonerated him. See C.A. Benson & Co., Inc., 42 S.E.C. 107, 111 (1964). -[n33]- See generally IIT, an Intern. Inv. Trust v. Cornfeld, 619 F.2d 909, 927 (2d Cir. 1980) (violation of an independent duty to act can establish element of substantial assistance). See also Hochfelder v. Midwest Stock Exchange, 503 F.2d 364, 374 (7th Cir.), cert. denied, 419 U.S. 875 (1974). -[n34]- The financial officer, invoking her privilege against self-incrimination, declined to testify. -[n35]- IIT, 619 F.2d at 927. See also Woodward, 522 F.2d at 96. -[n36]- Moody's Investors Service ("Moody's) had suspended its rating a few days prior to the construction termination. -[n37]- The issue in the litigation, however, was the Participants' legal obligation to pay, not their ability to do so. -[n38]- We also find that Sheldon violated, or willfully aided and abetted violations of, MSRB Rule G-21(c) (governing advertising) with respect to the WPPSS advertisements, and that Pattison violated, or willfully aided and abetted violations of, MSRB Rule G-17 (requiring fair dealing with customers) in connection with his sales of WPPSS 4 and 5 Bonds. -[n39]- See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224, 241 n. 18 (1988) (Those who make affirmative representations have an "ever-present duty not to mislead."); SEC v. Texas Gulf Sulphur Co., 401 F.2d at 862. -[n40]- Drexel Burnham Lambert v. Commodities Futures Trading Commission, 850 F.2d 742, 748 (D.C. Cir. 1988); see also Hollanger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) (en banc), cert. denied, 111 S.Ct. 1621 (1991); Nelson v. Serwold, 576 F.2d 1332, 1337-8 (9th Cir. 1978), cert. denied, 439 U.S. 970 (1978). -[n41]- An "honest belief in an issuer's prospects does not in itself give [one] a reasonable basis for recommending the stock to others." Gilbert F. Tuffli, 46 S.E.C. 401, 405 (1976). See also James E. Cavallo, Securities Exchange Act Rel. No. 26639 (March 17, 1989), 43 SEC Docket 749, 752. -[n42]- Pattison argues, however, that MacInerney's testimony was not credible. Because our findings of material omissions with respect to the MacInerney sale are based on Pattison's own admission and not on the testimony of MacInerney, the latter's credibility is not at issue. Pattison further claims that he advised MacInerney on a strategy to eliminate his loss on the bonds, which, Pattison asserts, establishes his lack of scienter. However, any effort by Pattison after the fact to minimize MacInerney's loss is without relevance to the question of whether he made misrepresentations in connection with the sale. -[n43]- Although Pattison challenges Reass' testimony, the law judge credited Reass. -[n44]- Hanly v. SEC, 415 F.2d 589, 595-6, 597 (2d Cir. 1969). -[n45]- For example, Houston salesmen recommended WPPSS 4 and 5 Bonds to customers without informing them about the termination of the construction of projects 4 and 5, the litigation challenging the Participants' Agreements, the creditworthiness of the bonds, or the downgrading of their ratings. In addition, customers were told that the State of Washington, the Federal government and/or the Bonneville Power Authority would back the bonds. Houston salesmen also violated MSRB suitability requirements by selling the bonds, after they had been downgraded in November 1982 to a speculative rating, to persons seeking secure investments. -[n46]- Reid also argues that he cannot be held liable for failure to supervise because the Houston office was not an "office of supervisory jurisdiction" ("OSJ") under the NASD Rules of Fair Practice and only the responsible persons in an OSJ can be held responsible for a failure to supervise. However, Reid was in fact the branch manager charged under the Firms' procedures with responsibility for the Houston office. He therefore had an obligation to supervise the salesmen in his office. See Sections 15(b)(4)(E) and 15(b)(6) of the Exchange Act. -[n47]- Reid's complaint that he did not have time during the day to supervise salesmen because he had his own customers does not mitigate his obligations in this regard. -[n48]- Similarly, Reid could not recall ever reprimanding a salesman for an unsuitable trade. In particular, he failed to impress upon salesmen that, when WPPSS 4 and 5 Bonds fell below investment grade in November 1982, they were no longer suitable for persons seeking non-speculative investments. -[n49]- Reid Exhibit E (which is one of the exhibits missing from the record, see n. 1, supra) was introduced to demonstrate that customers could have obtained information about Brofman's analysis from national publications. While we concede this possibility, several customers testified regarding the representations made directly to them by Houston salesmen. -[n50]- In addition, some of the Houston salesmen testified that Reid discouraged them from taking time from their telephone solicitations to perform research. -[n51]- As noted, the Houston office generally hired inexperienced salesmen, and the office suffered from a high turnover rate. -[n52]- Reid's claim -- that the WPPSS situation was too complex for him to instruct Houston salesmen on what facts to disclose to customers and that, as a consequence, he relied on the optimistic assessments of Sheldon and Brofman -- makes his delegation of the obligation to obtain relevant information about the securities to novice salesmen all the more irresponsible. -[n53]- Actual occupancy fell far below the issuer's projected average occupancy rate of 90 percent for the first year of operation. Cheneyville's problems were compounded because the facility was almost wholly dependent on Medicaid reimbursement, and, in 1983, Louisiana reduced the Medicaid reimbursement for which Cheneyville could be eligible. -[n54]- As a result of the bankruptcy proceedings, the interest rate on the bonds ultimately was lowered to 10 percent. -[n55]- We reject Reid's further contention that, because, consistent with DSC policy, DSC salesmen were responsible for informing themselves about a security, he cannot be held liable as an aider and abetter of fraudulent sales made by Houston salesmen. See Section IV, A, 4, supra. -[n56]- Greenfield experienced a 13 basis point drop in the price of the bonds he held, from 106 to 93. -[n57]- Although denying knowledge of the problems plaguing Cheneyville, Reid admitted in testimony that, given the prevailing economic climate, prices for high interest rate bonds should have been rising -- not dropping -- unless there was "something wrong." In addition, Swink & Company, Cheneyville's principal underwriter and one of the few dealers trading in the issue, stopped trading Cheneyville in the spring of 1984. Reid acknowledged that Swink was one of a small group of brokers trading the bonds and that he became aware of Swink's decision. Under all the circumstances, we think that Reid knew that Cheneyville was troubled. -[n58]- Only after the next coupon was returned unpaid to Bird in April 1985 did Reid tell Bird about Cheneyville's financial difficulties. -[n59]- As we have held, the broker has a duty to satisfy himself that speculative investments are suitable for the customer and that the customer understands and is willing to undertake the risks. Arthur Joseph Lewis, Securities Exchange Act Rel. No. 29794 (October 8, 1991), 49 SEC Docket 1803, 1806. See also Wedbush Securities, Inc., 48 S.E.C. 963, 970 (1988) (Bond recommendation "unwarranted" under MSRB Rule G-19(c) where salesman lacked "reasonable grounds for believing them suitable in light of [customer's] investment objectives."). -[n60]- The trader was unable to remember whether he discussed the rating with Reid. He did state, however, that, had he known such fact, he would not necessarily have told Reid that the rating had been suspended. He further stated that he never indicated to Reid that there was anything wrong with the notes, but added that it is not the practice of traders to highlight the negatives of a security they are trying to sell. -[n61]- Stafford's actual assessment was not so favorable. In a memorandum written to Sheldon and reviewed by Reid after the default, Stafford stated that he had contacted Vanceburg's underwriters in early May who told him "that there was [sic] some possible problems in funding the notes at their due date on 6/01/84 . . . ." -[n62]- On the maturity date, June 1, 1984, Vanceburg defaulted on payment of the principal. Eventually, the notes were paid in full from the proceeds of a bond sale several months following the default. -[n63]- Reid claims that he purchased these notes only after obtaining Loeser's express consent. However, the law judge credited Loeser's testimony that Loeser had not given prior consent to the transaction. As mentioned supra, Reid exercised de facto discretionary authority over Loeser's account. -[n64]- By falsifying DSC's records to hide the fact that he bought the notes for Loeser after the default, Reid willfully aided and abetted violations by DSC of Section 17(a) of the Exchange Act, Rule 17a-3 thereunder, and MSRB Rule G-8. -[n65]- Moreover, while the fiscal agent's "fully funded" statement was ambiguous, it was clearly within Reid's powers to obtain accurate information, as did Stafford's customer Epps. -[n66]- See, e.g., Willard G. Berge, 46 S.E.C. 690, 693 (1976), aff'd. sub nom, Feeney v. SEC, 564 F.2d 260 (8th Cir. 1977) (noting that a professional who recommends the unknown securities of obscure issuers must investigate those securities and determine that the recommendation has a reasonable basis). See also Edward J. Blumenfeld, 47 S.E.C. 189, 190-191 (1979). -[n67]- Staten Securities Corp., 47 S.E.C. 766, 768 (1982) (finding markups on municipal bonds ranging from 5.1 to 6.7 percent excessive and violative of MSRB Rules G-17 and G-30). -[n68]- Edward J. Blumenfeld, 47 S.E.C. 189, 191-192 (1979) (finding markups ranging from 8 to 25.3 percent on municipal bonds fraudulent). We disagree with Reid's assertion that "the more usual standard cited [for findings of antifraud violations] is ten percent." As we noted in Blumenfeld: -[n69]- Our Division of Enforcement did not appeal the law judge's finding that only those markups exceeding eight percent were fraudulent. We note that markups below this level have been found fraudulent as well. See, e.g., Century Securities Company, 43 S.E.C. 371, 379 (1967). -[n70]- See Environmental Defense Fund, Inc. v. E.P.A., 548 F.2d 998, 1004 (D.C.Cir. 1976). We also reject Reid's claim that, in presenting such evidence, the Division failed to satisfy the requirement of the APA that it produce "reliable, probative and substantial evidence." 5 U.S.C. § 556(d). -[n71]- See DMR Securities, Inc., 47 S.E.C. 180, 182 (1979). See also S. Doc. No. 248, 79th Cong., 2d Sess. 208, 270 (1946) ("[W]here a party having the burden of proceeding has come forward with a prima facie and substantial case, he will prevail unless his evidence is discredited or rebutted"). -[n72]- Reid also asserts that the law judge failed to specify "the number of mark-ups, if any, attributable to Houston office sales." However, the law judge in fact found "that, with one or two exceptions, the sales. . . were all effected by Houston salesmen." -[n73]- Reid also admitted receiving a memorandum from Sheldon in the early 1980s describing the markup standard set forth by the Commission in Blumenfeld. In addition, Reid has previously been sanctioned for excessive markups. See n. 128 infra. -[n74]- At oral argument, Reid's counsel referred to Reid's challenge of a markup schedule submitted by the Division. However, in his proposed findings of fact, Reid challenged only entries concerning 1983 Cheneyville transactions which had already been excluded by the law judge. -[n75]- See Staten Securities, supra. -[n76]- On September 13, 1984, for example, Reid acquired 135 Cheneyville bonds for DSC at 89 1/8, which he immediately sold to three favored accounts at 91 1/8 and 93. On that same day and the next, Reid bought bonds from these accounts at 94 and 95. Two business days thereafter, DSC sold Cheneyville bonds to three non-favored customers at 100. -[n77]- See Edward Sinclair, 44 S.E.C. 523, 527 (1971). -[n78]- Dean Witter Reynolds, Inc., Securities Exchange Act Release No. 26144 (September 30, 1988), 41 SEC Docket 1680, 1684 ("Dean Witter"). -[n79]- Universal Heritage Investments Corporation, 47 S.E.C. 839, 845 (1982) ("Universal Heritage"). -[n80]- Dean Witter, 41 SEC Docket at 1685. -[n81]- For example, other than Sheldon's assisting in training salesmen when the Houston office first opened and a few brief visits to that office, Sheldon was unable to identify any efforts undertaken by either him or any other DSC employee at his direction to ensure that Reid was providing the requisite level of supervision. -[n82]- Universal Heritage, 47 S.E.C. at 845, citing Reynolds & Co., 39 SEC 902, 916 (1960). -[n83]- Sheldon asserts these markups were not excessive, noting that the MSRB, unlike the NASD, has not adopted a five percent markup policy. The Division called, as an expert witness, a former chairman of the MSRB, who explained that the MSRB rejected the NASD's five percent policy: Because we did not want to set any numerical standard which might . . . induce people to do transactions at higher spreads than they were doing them at the time. There was strong concern that whatever the figures we set - say 2 1/2 percent, the people who were doing bonds for 1 point or 2 points would then say its okay to do 2 1/2. Although Reid and Sheldon now question this witness' views because he lacked "market experience" with the WPPSS and Cheneyville securities at issue, at the hearing both Sheldon and Reid expressly acknowledged the witness' expertise. -[n84]- See text accompanying n. 73. -[n85]- Sheldon also incorrectly claims that he has been subjected to "selective prosecution" because none of the traders directly pricing WPPSS 4 and 5 Bonds was "accused of any wrong-doing." As noted, Reid violated the antifraud and MSRB markup provisions with respect to his trades in WPPSS 4 and 5 Bonds and Cheneyville. Another trader, Ebbitt, was also charged but consented to sanctions by the Commission, without admitting or denying the allegations. See n. 2, supra. -[n86]- In reviewing the NASD's analogous markup policy, Congress has noted that this policy properly serves "to protect investors against 'gouging'" and promotes just and equitable principles of trade. S. Rep. No. 75, 94th Cong. 1st Sess. 28, n.45, reprinted in 1975 U.S. Code Cong. & Admin. News 179, 226. -[n87]- Silver v. New York Stock Exchange, 373 U.S. 341 (1963); United States v. NASD, 422 U.S. 694 (1975); Gordon v. New York Stock Exchange, 422 U.S. 659, 688-691 (1975). -[n88]- In re Meyer Blinder, et al., Securities Exchange Act Release No. 31095 (August 26, 1992), 52 SEC Docket 1437, 1455. -[n89]- Government securities firms, like GSI, which are not registered under Section 15(b) of the Exchange Act, are not eligible for SIPC membership. -[n90]- A SIPC decal was also affixed to a window at the Firms' Pompano Beach office. -[n91]- SIPC ultimately contributed $500,000 to a settlement with GSI customers. See n. 122 infra. -[n92]- Sheldon claims that the Los Angeles office's clerical staff, which mailed information to customers, "sought to send out only appropriate material." However, the Firms' salesmen were uncertain about the distinction. For the most part, it appears that the clerical staff sent the information requested by the salesmen. In any event, it was inappropriate for Sheldon to rely on unsupervised clerical personnel to make this distinction. -[n93]- Reid, among other salesmen, sent a form introduction letter to customers of both Firms, stating, "We are members of the . . . Securities Investor Protection Corporation," leaving the clear impression that both firms were SIPC insured. Reid testified that the form letter was produced by the Firms' New York office and that all salesmen were directed to use it. -[n94]- In addition to the letters described in n. 93, supra., Reid also admitted that he was not "very concerned" whether GSI or DSC stationery was used in GSI correspondence because "[i]t didn't seem that important." He did not instruct anyone under his supervision to make this distinction. Because we find that Reid's conduct was negligent, we hold him liable, in connection with customers being misled about SIPC coverage, for violating Sections 17(a)(2) and (3) of the Securities Act. See Aaron v. SEC, 446 U.S. 680, 695-700 (1980). -[n95]- Smith subsequently pleaded guilty to grand larceny in the second degree in connection with this activity and was sentenced to one to three years in prison. See also n. 2. -[n96]- However, the record reflects that DSC rules restricting its salesmen's access to customer funds and securities were not rigorously enforced. -[n97]- Michael E. Tannenbaum, 47 S.E.C. 703, 712 (1982) (A broker's system of internal control must be adequate and effective and those in authority must exercise the utmost vigilance where an indication of irregularity reaches their attention.) -[n98]- Securities Exchange Act Release No. 24368 (April 21, 1987), 38 SEC Docket 234, 235. Sheldon admitted that, while municipal securities "have a credit as well as market potential for fluctuation," government securities largely fluctuate in response to changes in interest rates. -[n99]- We note in this connection, however, that even a four percent -- or smaller -- markup on government securities may be excessive. -[n100]- Duker & Duker, 6 S.E.C. 386, 388-9 (1939). -[n101]- We have observed that "markups calculated based upon the face amount at maturity may be excessive in relation to the discounted price of the security." Securities Exchange Act Release No. 24368 (April 21, 1987), 38 SEC Docket 234, 235. For example, if a security cost $60, charging five points would result in a markup in excess of eight percent. -[n102]- As we have noted Sheldon does not dispute the amount of the markups, but rather asserts his view that government securities were unregulated and therefore not subject to the antifraud provisions. However, since 1933, transactions in government securities have been subject to the antifraud provisions of the securities laws. -[n103]- The law judge generally declined to permit Sheldon to explore matters arising during the investigation because, in his view, they were not encompassed by the order instituting the proceeding, and Sheldon could pursue these claims in another forum. Nevertheless, he did permit Sheldon limited latitude to develop testimony concerning whether the investigation inhibited the Firms' compliance with particular regulatory requirements. -[n104]- See Section 17(b) of the Exchange Act and Article IV of the Rules of Fair Practice, Section 5, NASD Manual P2205 (CCH). -[n105]- As we have noted, it is of "overriding importance" that firms cooperate with regulatory authorities during investigations. Wedbush Securities, Inc., 48 S.E.C. 963, 971-2 (1988). If a firm is ill-equipped to provide the full degree of cooperation necessitated by such an investigation and also comply with its routine regulatory requirements, it has the obligation to act to correct that situation by, for example, hiring additional employees. Id. Failure to do so is certainly no defense. -[n106]- The record in this case is extensive. Our review of this record has been handicapped due to Sheldon's failure to include citations to the record to support his charges. Moreover, one instance was mentioned for the first time during oral argument. Despite these obstacles, we are satisfied that these charges are unfounded. -[n107]- Sheldon also complains that he was denied the ability to "expose further slanderous remarks" by this witness. When the witness was recalled solely to state the basis of her estimate, the law judge properly limited Sheldon's cross-examination to the matters covered in her redirect. Sheldon had previously had an opportunity to cross-examine the witness when she had testified on direct. -[n108]- We note that this testimony is, in any event, irrelevant to the Division's case. There is no requirement in a Commission enforcement action to demonstrate that the complained of conduct caused injury or damage to the investors. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985). -[n109]- At oral argument, Sheldon requested the appointment of a special outside investigator to look into these allegations. For the reasons stated herein, our review of these allegations convinces us that they do not warrant such extraordinary action. -[n110]- We reject Sheldon's additional claim that, as a result of this intimidation -- and the law judge's attitude towards it -- he declined to call any customers as witnesses on his behalf. He neither identified these customers nor made any proffer of any sort to support this claim. -[n111]- Sheldon's further assertion -- that the Division penalized Wheeler for his testimony by initiating an investigation of Wheeler's firm after his appearance -- is without basis and would not, in any event, demonstrate that Wheeler was intimidated when he testified before the law judge. Sheldon cites no other evidence of impropriety regarding this investigation, and we are aware of no such impropriety. -[n112]- Sheldon complained that one of his potential witnesses had refused to appear absent a subpoena. While the witness initially testified that the Division had suggested he insist on a subpoena, the witness admitted upon further questioning that the Division staff member had stated he did not want to influence the witness' decision and that the witness' lawyer and co-workers had advised him to insist on a subpoena. -[n113]- Staff Report on the Investigation in the Matter of Transactions in Washington Public Power Supply System Securities (the "Staff Report"). -[n114]- Letter dated September 22, 1988, from then-Commission Chairman David S. Ruder to Congressman John Dingell, Chairman of the House Subcommittee on Oversight and Investigations, transmitting the Staff Report (the "Transmittal Letter"). -[n115]- The offers and sales of WPPSS 4 and 5 Bonds which are the subject of this proceeding occurred more than one to two years after the events described in the Staff Report. Moreover, the Staff Report was issued some two years after the complaint in this matter. -[n116]- U.S. v. Huff, 959 F.2d 731 (8th Cir. 1992); C.E. Carlson, Inc. v. S.E.C., 859 F.2d 1429, 1437 (10th Cir. 1988); Baltimore Gas & Elec. Co. v. Heintz, 760 F.2d 1408, 1419 (4th Cir. 1985), cert. denied, 474 U.S. 847 (1985) ("So long as an agency is not determining whether to enforce its regulations on the basis of some impermissible constitutional criterion, it is not violating the dictates of due process."). -[n117]- We note that the trial staff expressed displeasure when Sheldon's third attorney, who apparently disposed of all the exhibits the Division had provided the attorney on Sheldon's behalf, resigned immediately before the hearing. A member of the staff wondered, on the record, whether disciplinary action was appropriate for this type of conduct. However, this interchange occurred well after the attorney had resigned. -[n118]- Sheldon also argues that Rule 2(e) caused the Firms' accountant to act to protect himself, deserting the Firms and leaving their financial records in shambles. The record is clear, however, that the accountant attempted to obtain the cooperation of the Firms' management to correct substantial violations. Having no success and after consultation with counsel, he felt compelled to resign. See Section III, supra. -[n119]- We note that the Division sought a bar only from association with a broker, dealer, or municipal securities dealer. -[n120]- See, e.g., In the Matter of Blinder, Robinson & Co., et al., 48 SEC 624, 632 (1986), rev'd on other grounds, 837 F.2d 1099 (D.C. Cir. 1988). -[n121]- We note that this is not the first time Sheldon has been disciplined. In 1978, the NASD, by consent, censured Sheldon, among others, and fined him $400, jointly and severally with the other individual respondents, for violating net capital and recordkeeping requirements. -[n122]- Sheldon argues that GSI customers were ultimately made whole. Because Sheldon has raised this issue, we hereby admit as an addition to the record a declaration by Jonathan Kibbe, an attorney who advised the GSI trustee, dated April 27, 1989, which is attached to the brief of the Division. -[n123]- The law judge additionally found that Sheldon violated the antifraud provisions with respect to certain representations made in connection with the offer and sale of government securities. He further found that Sheldon had violated MSRB rules because some of his branch managers were not properly qualified. However, because we consider the bar imposed by the law judge fully warranted by the violations we have sustained, we see no need to reach these additional findings. -[n124]- Indeed, throughout these proceedings, Sheldon has refused to recognize the importance of the various regulatory provisions he violated. -[n125]- Sheldon contends that the law judge erred in failing to credit the beneficial contribution of DSC to the "communities of the nation and to the investors that it served." Sheldon, in particular, stresses DSC's willingness to continue to make a market in New York municipal bonds during that city's crisis in the 1970's, and introduced four exhibits, including Sheldon exhibits D and G (which are missing from the record, see n. 1, supra), documenting his commendations from the city. Even if Sheldon's activities were valuable to the City of New York during this period, these activities do not mitigate the extensive, serious and protracted nature of Sheldon's misconduct which is the subject of this proceeding. -[n126]- Reid notes that, over a 25-year career in the securities industry, during which he developed a "positive record with his customers," he was disciplined on just one other occasion. He asserts that the securities involved in this case represented a small fraction of the securities sold out of the Houston office, and that no allegations of wrongdoing were made with regard to the vast majority of the securities sold. He further asserts that whatever misconduct he engaged in it was not "extreme." He also claims that any misconduct on his part was far less serious than that engaged in by Sheldon. As discussed, infra, we disagree. -[n127]- Reid's argument that customers Loeser and Bird could not have been defrauded because both continued to deal with Reid after their Cheneyville investment is without merit. The fact that a customer continues to trust a salesman even after he has been defrauded, while perhaps inexplicable, does not affect the question of whether fraud occurred. -[n128]- Reid was suspended from association with any broker or dealer or investment adviser for 30 days and from association with any broker or dealer in any supervisory capacity for 1 year. This case was settled with Reid neither admitting nor denying the allegations or findings. In the Matter of UMIC, Inc., Securities Exchange Act Rel. 16110 (August 16, 1979), 18 SEC Docket 103. -[n129]- Reid refers to various instances in which we have imposed lesser sanctions on persons whose misconduct, in Reid's view, was more serious. It is, however, well recognized that the question of whether disciplinary action is excessive depends on the particular facts and circumstances of each case, and cannot be determined by comparison with the action in other cases. See, e.g., Michael David Sweeney, Securities Exchange Act Rel. No. 29884 (Oct. 30, 1991), 50 SEC Docket 59, 68; Donald William Collins, 46 S.E.C. 642, 647 (1976). -[n130]- Although, as Pattison contends, there were serious deficiencies in the supervision he and other of the Firms' salesmen received, this does not exonerate him. As a registered securities professional, he had an obligation to inform himself of the material facts about any securities he recommended. Hanly v. SEC, 415 F.2d at 589. That obligation could not be abridged by a failure on the part of his supervisors. Such a fact properly can be, and in this case was, considered in assessing Pattison's sanction. -[n131]- All of he 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 in this opinion. In re Edward J. Blumenfeld, Exchange Act Release No. 16437, A.P. File No. 3-5282 (December 19, 1979). OPINION OF THE COMMISSION I. Edward J. Blumenfeld, who was a salesman for Shelby Bond Service Corporation, formerly a municipal bond dealer,n1 appeals from the adverse decision of an administrative law judge. The law judge found that, during the period from about January to June 1975, Blumenfeld violated antifraud provisions in connection with the sale of various municipal bonds. In addition, the law judge found that Blumenfeld had been permanently enjoined from violations of those provisions. n2 He concluded that Blumenfeld should be barred from association with any broker or dealer. On the basis of an independent review of the record, we make the following findings.n3 II. Blumenfeld made fraudulent representations in connection with his recommendation and sale to a customer of Washington County (Tennessee) Utility District ("WCUD") bonds in March 1975. He told the customer that the bonds were "a good buy" and a safe investment, and assured him that the bonds would eventually be paid in full since "people had to have utilities." Blumenfeld did not give the customer any current financial information. There was no reasonable basis for Blumenfeld's representations. An audit report then on file with the State of Tennessee disclosed that WCUD was in serious financial difficulties. For the fiscal year ended June 30, 1974, it had incurred a net loss (before depreciation and amortization) of about $107,000, thereby increasing its total deficit to more then $337,000. The report also disclosed that WCUD had not always used the proceeds of its various bond issues for the purposes stated in its bond resolutions, and that, not only had it failed to comply with sinking fund requirements, it was unable to do so.n4 Blumenfeld testified that he talked with both WCUD's operations manager and its paying agent who assured him that "everything was fine" and that WCUD had no problems. However, despite Blumenfeld's repeated requests for current financial statements from the operations manager, Blumenfeld never received any such statements. Nevertheless, he continued to recommend and sell WCUD bonds. Blumenfeld also recommended the purchase of certain Alabama industrial revenue bonds although he had no financial information concerning the issuer. He testified that Shelby's president had informed all of the salesmen, "If anybody can sell these bonds, I will give you a watch of your choice." The salesmen were told the amount of bonds available, the interest they paid, and their type, price and maturity date. Shelby's president also stated that he had called the paying agent who told him that the bonds had never been in default. Solely on the basis of this information, Blumenfeld recommended and sold the bonds in question. Every salesman who recommends securities, particularly those of little known issuers, is under a duty to investigate in order to make sure that his recommendations have a reasonable basis.n5 As we have previously pointed out: "[O]ral assurances . . . [can] not be used as a substitute for the concrete financial data called for in situations such as this . . . . Each salesman has an obligation to deal fairly with his customers. Hence no salesman can recommend an unknown or little known security unless he has himself seen reliable financial data that supply him with a reasonable basis for his recommendation. This is especially true of debt securities." n6 (Emphasis supplied.) Lacking current financial information, Blumenfeld had no reasonable basis for the recommendations and representations that he made.n7 We accordingly conclude, as did the administrative law judge, that Blumenfeld willfully violated the antifraud provisions of Section 17(a) of the Securities act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. n8 Blumenfeld complains that the administrative law judge unfairly held him responsible for Shelby's high pressure sales operations, and improperly relied on the allegations in a 1973 Commission injunctive complaint, and on a court opinion issued in connection with a preliminary injunction entered against him in another action. However, we have not held Blumenfeld responsible for Shelby's operations. Nor have we based any of our findings on either the allegations or the opinion in question. III. The record establishes that, in eight sales of municipal bonds effected by Blumenfeld during the period January to June 1975, the undisclosed markups charged customers ranged from 8% to 25.3% above the contemporaneous prices that Shelby paid other dealers for the securities in question.n9 In one additional transaction, the markup was 50% over Shelby's same-day cost. We agree with the administrative law judge that Blumenfeld charged customers excessive markups in these transactions. Blumenfeld argues that there is no evidence that the bonds contemporaneously purchased by Shelby were the same bonds he sold, and that markups should not be computed solely on the basis of the seller's contemporaneous cost.n10 These contentions are without merit. It is irrelevant whether or not the bonds Blumenfeld sold were those which Shelby purchased at the same time. Even if Shelby had a prior position in the bonds, Blumenfeld was only entitled to charge a fair markup over current market prices.n11 And we have repeatedly pointed out that, in the absence of countervailing evidence, a dealer's contemporaneous cost is the best evidence of those prices,n12 a standard that has been accorded judicial approval. n13 Blumenfeld further argues that no expert testimony was offered as to what markup would be considered excessive in the industry. However, no such testimony was necessary. We have consistently held that, at the least, markups of more than 10% are fraudulent in the sale of equity securities.n14 And we have found markups in excess of 7% fraudulent in connection with such sales.n15 Markups on municipal bonds are generally lower than those for equity securities.n16 As one court has noted, "[I]t is the practice in the municipal bond industry to charge a retail customer a price which is no more than one quarter of one per cent to five per cent over the then current market price for a bond."n17 We conclude that the markups Blumenfeld charged in the above transactions were clearly excessive. We accordingly find that, in connection therewith, he willfully violated the above-cited antifraud provisions.n18 IV. On September 13, 1973, in an action which was based on Blumenfeld's activities while employed by another dealer in municipal bonds, a permanent injunction was entered against him. With his consent, and without his admitting or denying the charges in this Commission's complaint, Blumenfeld was enjoined from violating the above antifraud provisions by, among other things, making material misstatements and charging unfair prices in connection with the purchase or sale of securities. n19 We agree with the administrative law judge that Blumenfeld should be barred from association with any broker or dealer. Respondent's actions cannot be attributed to mere negligence, inexperience or innocent overreaching. Just a year and a half earlier, he had been permanently enjoined from engaging in the very same illegal practices. Even a novice in the securities business should have realized that a salesman cannot recommend highly speculative debt securities without first obtaining the most basis and important information concerning the issuer -- its current financial situation. To have made such recommendations, and to have assured a customer of the safety of his investment without that information, were egregious violations. In addition, Blumenfeld was fully cognizant of the excessive prices that he charged customers. He could hardly be oblivious to the fraudulent nature of markups ranging as high as 50% above the contemporaneous prices he paid for the securities in question on Shelby's behalf. Under the circumstances, respondent's actions manifested a blatant indifference to the obligation of fair dealing borne by those in the securities business. We recognize the serious effect of the imposition of a bar. Yet we are convinced that a lesser remedy will not suffice. We do not seek to punish Blumenfeld, but to protect the public from further harm at his hands. Indeed, as one court has observed in a case involving unfair markups, "[t]he essential objective of securities legislation is to protect those who do not know market conditions from the overreachings of those who do."n20 On the basis of his callous disregard for the securities laws, there is little reason to expect that Blumenfeld will refrain from future misconduct. Finally, when we deal with the public interest requirements in a particular case, we must also weigh the effect of our decision on the welfare of investors as a class and on standards of conduct in the securities business generally. If these proceedings are to be truly remedial, they must have a deterrent effect not only on the respondent before us but also on others who may be tempted to engage in similar violations.n21 Under all the circumstances, including the prior injunction issued against Blumenfeld which failed to have any deterrent effect, we are convinced that the public interest requires that Blumenfeld be barred from further association with any broker or dealer. An appropriate order will issue.n22 By the Commission (Chairman WILLIAMS and Commissioners LOOMIS, EVANS, POLLACK and KARMEL). ORDER IMPOSING REMEDIAL SANCTION On the basis of the Commission's opinion issued this day, it is ORDERED that Edward J. Blumenfeld be, and he hereby is, barred from association with any broker or dealer. By the Commission. To Contents    Footnotes -[n1]- Shelby went out of business in December 1975. -[n2]- Subsequent to the issuance of the initial decision herein, Blumenfeld consented to the entry of another permanent injunction in an action arising out of his activities at Shelby, without admitting or denying the allegations of this Commission's complaint. S.E.C. v. Shelby Bond Service Corporation, et al., Civil Action No. C-77-2236 (W.D. Tenn.). See Litigation Release No. 8822 (July 17, 1979), 17 SEC Docket 1362. -[n3]- Our findings are based on a clear and convincing standard of proof. -[n4]- About a year after Blumenfeld's sale to the customer, WCUD defaulted in making interest payments. -[n5]- In Hanly v. S.E.C., 415 F.2d 589 (C.A. 2, 1969), the Court of Appeals for the Second Circuit stated, at p. 597: "In summary, the standards . . . are strict. [A salesman] cannot recommend a security unless there is an adequate and reasonable basis for such recommendation. He must disclose facts which he knows and those which are reasonably ascertainable. By his recommendation he implies that a reasonable investigation has been made and that his recommendation rests on the conclusions based on such investigation." -[n6]- Willard G. Berge, Securities Exchange Act Release No. 12846 (September 30, 1976), 10 SEC Docket 600, 602, aff'd sub nom. Feeney v. S.E.C., 564 F.2d 260 (C.A. 8, 1977). See also Richard C. Spangler, Inc., Securities Exchange Act Release No. 12104 (February 12, 1976) 8 SEC Docket 1257, 1264; Cortlandt Investing Corporation, 44 S.E.C. 45, 52 (1969); Crow, Brourman & Chatkin, Inc., 42 S.E.C. 938, 947-948 (1966). -[n7]- In Charles Michael West, Securities Exchange Act Release No. 15454 (January 2, 1979), 16 SEC Docket 592, we stated at p. 595: "[T]here [is] no reasonable basis for recommending speculative debt securities to customers [without] the requisite financial information." -[n8]- Assuming that the Supreme Court's decision in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), is applicable to proceedings of this sort, a position with which we disagree, we find that Blumenfeld had the requisite scienter. We note, however, that Hochfelder has no bearing on Sections 17(a)(2) and 17(a)(3) of the Securities Act, and all of our findings of fraud are made under both those sections. Our findings that Blumenfeld also violated Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder are merely cumulative, and the sanction we are imposing would be the same even if we had made no findings under those provisions and had made findings solely under either Section 17(a)(2) or Section 17(a)(3). -[n9]- In seven instances, the markup is based on Shelby's same-day cost. In one instance, a markup of 17.6%, it is based on the price which Shelby paid within one day of the sale in question. -[n10]- Blumenfeld also claims that a staff witness indicated that markups as high as 100% might be permissible in some circumstances. However, the record does not support that claim, and there are no circumstances that would justify markups of that amount. -[n11]- See Charles Michael West, supra, 16 SEC Docket at 594 and the authorities there cited. -[n12]- Id. -[n13]- Barnett v. S.E.C., 319 F.2d 340, 344 (C.A. 8, 1963). -[n14]- See, e.g., J.A. Winston & Co., Inc., 42 S.E.C. 62, 69 (1964); Robert M. Garrard, Securities Exchange Act Release No. 12219 (March 17, 1976), 9 SEC Docket 210, 211 n. 5. -[n15]- Century Securities Company, 43 S.E.C. 371, 379 (1967). -[n16]- See Charles Michael West, supra, 16 SEC Docket at 594 n. 12. -[n17]- S.E.C. v. Charles A. Morris & Associates, Inc., 386 F. Supp. 1327, 1334 n. 5 (W.D. Tenn. 1973). -[n18]- Our discussion in n. 8, supra, is also applicable to our findings of antifraud violations in connection with the unfair markups that Blumenfeld charged customers. -[n19]- S.E.C. v. Investors Asociates of America, Inc., et al., Civil Action No. C-72-367 (W.D. Tenn.). Blumenfeld was also ordered, pursuant to his consent, to pay $2500 "for the purpose of disgorging the gross profit realized . . . on the transactions alleged by the plaintiff to be improper and illegal . . . ." -[n20]- Charles Hughes & Co. v. S.E.C., 130 F.2d 434, 437 (C.A. 2, 1943), cert. denied, 321 U.S. 786 (1944). -[n21]- See Arthur Lipper Corporation v. S.E.C., 547 F.2d 171, 184 (C.A. 2, 1976): "The purpose of such severe sanctions must be to demonstrate not only to petitioners but to others that the Commission will deal harshly with egregious cases." -[n22]- Blumenfeld's exceptions are overruled or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. In re Charles Michael West , Exchange Act Release No. 15454, A.P. File No. 3-5255 (January 2, 1979). OPINION OF THE COMMISSION TEXT: I. Charles Michael West, who was a salesman for Shelby Bond Service Corporation, formerly a municipal bond dealer,n1 appeals from certain conclusions of an administrative law judge. The law judge found that, in connection with the offer and sale of various municipal bonds, West willfully violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder in that he made false and misleading statements to customers and charge excessive prices.n2 The law judge barred West from association with any broker or dealer with the proviso that, after six months, he could apply to become so associated in a non-supervisory capacity, upon a satisfactory showing of adequate supervision. II. West does not challenge the law judge's findings that he made fraudulent representations to customers. Those findings may be summarized as follows. During the period October 1974 through December 1975, West was an active participant in a "boiler-room" operation conducted by Shelby. He engaged in a high pressure sales campaign, involving the use of repeated phone calls, to induce persons previously unknown to him to buy highly speculative municipal bonds about whose underlying value "[h]e knew nothing and apparently cared little."n3 In the course of these sales efforts, he made material misrepresentations about the value of the bonds and the financial stability of the issuers. Illustrative of West's "boiler-room" activities were his dealings with the following two customers. West persuaded Dr. B., an unsophisticated investor with whom West had not previously done business, to exchange a $5,000 industrial development revenue bond for a utility district bond of the same denomination and $504 in cash. In effecting the transaction, West represented the he had "a good utility bond" which was more secure than the bond held by Dr. B. Dr. B. was given no information about the utility district's financial condition. Nor did West inform him that the district had not filed certified financial statements as required by state law, that it was unable to comply with sinking fund requirements, and that, despite the promise given West by the utility district's operations manager, West had not obtained any financial information from the district. Shortly after Dr. B. acquired the bond, the issuer defaulted in making payments. On November 26, 1974, after several telephone calls, West induced another customer, Mr. W., to purchase $20,000 worth of bonds issued by the Gallaway (Tenn.) Industrial Development Board. The bonds were issued to finance the construction of a plant to be lease to Precision Optical Laboratory, Inc., and principal and interest on the bonds were to be paid from rental income. In making the sale, West advised Mr. W. that the Gallaway bonds were "the best thing going in a bond issue," that they would sell at a premium, and that West would see to it that Mr. W. made money on them. A week later, Mr. W. bought another $5,000 Gallaway bond from West and, in September 1975, after several more telephone calls, Mr. W. purchased additional Gallaway bonds in the face amount of $15,000. West did not tell Mr. W. that Shelby was the majority stockholder of Precision. Nor was there any reasonable basis for West's optimistic representations. Although he assertedly requested Precision's financial statements, he was never able to obtain them. In fact, Precision was losing money. It suffered losses of $77,364 for the seven months ending July 31, 1975, and Gallaway subsequently defaulted in making payments on the bonds. In April 1975, West sold Mr. W. $11,250 worth of Anderson County, Tennessee industrial development revenue bonds. Payments of principal and interest on the bonds were to come from the rents paid by the lessee of a building. West assured Mr. W. that he could make money on his purchase, and that the bond issue was secured by the New York parent company of the building's lessee. However, the parent company was not obligated on the bonds. And, after the Tennessee subsidiary ceased doing business, the issuer of the bonds defaulted. III. West challenges the administrative law judge's finding that he charged customers excessive markups in the sale of municipal bonds. In 13 sales effected by West during 1975, the markups ranged from 11% to 28% over the contemporaneous prices that Shelby paid other dealers for the securities in question. In one additional transaction, the markup was 50% over Shelby's same-day cost. The law judge found the Shelby's contemporaneous costs were reflective of the prevailing wholesale market prices. West argues that it is erroneous to compute markups simply by comparing Shelby's cost with its sales prices. He contends that "expert testimony" is necessary to establish prevailing market prices and excessive markups based thereon. He further asserts that "in many instances" the wholesale offering prices listed in The Blue List of Current Municipal Offerings ("Blue List") were close to the retail prices that he charged customers. These contentions are without merit. Markups are generally computed on the basis of the prevailing inter-dealer price, that is, the price at which transactions take place among dealers.n4 We have repeatedly pointed out that, in the absence of countervailing evidence, a dealer's contemporaneous cost is the best evidence of the current market,n5 and that standard has been accorded judicial approval.n6 It reflects a recognition of the fact that the prices paid for a security by a dealer in actual transactions closely related in time to his sales are normally a highly reliable indication of the prevailing market price. The burden is on the dealer to establish the contrary.n7 West has failed to meet that burden here. We have generally refused to accept published quotations in lieu of contemporaneous cost as the best evidence of market price.n8 Quotations for securities with limited inter-dealer trading activity, such as those involved here, are likely to be subject to negotiation and may have little value as evidence of the current market.n9 In any event, the quotations in the Blue List do not aid West. In 13 instances, there were no published quotations contemporaneous with the retail sales at issue. And, in the remaining instance, the markup exceeded 10% even when computed on the basis of the quoted offer.n10 Finally, West asserts that Shelby had positions in the securities in question and was therefore entitled to more profit to compensate for the risk. The record does not show that Shelby had positions in all of the securities involved here. But even if it did, West was not entitled to charge customers excessive markups because Shelby was in a risk position.n11 We find in 14 transactions West charged customers unfair markups ranging from 11% to 50%.n12 Accordingly, we conclude that West willfully violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. n13 West argues that the sanction imposed on him by the administrative law judge is unduly severe. He states that, during the period in question, he did not have much experience in the securities business and relied on his superiors at Shelby; that he is presently employed under close supervision by a registered broker-dealer; that he has not been named in any regulatory complaint except for these proceedings and the related injunctive action; and that he has "learned his lesson." We see no basis for any reduction in the sanction imposed by the administrative law judge. West engaged in a high-pressure "boiler-room" sales campaign characterized by fraudulent representations. Even though he may have been inexperienced, he should have realized that there was no reasonable basis for recommending speculative debt securities to customers when he lacked the requisite financial information.n14 Moreover, in a number of transactions he charged customers patently excessive markups. West's high pressure selling of obscure securities by false representations and excessive markups cannot be countenanced. Under the circumstances, we are not disposed to be lenient. An appropriate order will issue.n15 By the Commission (Commissioners LOOMIS, EVANS and POLLACK); Chairman WILLIAMS and Commissioner KARMEL not participating. ORDER IMPOSING REMEDIAL SANCTION On the basis of the Commission's opinion issued this day, it is ORDERED that Charles Michael West be, and he hereby is, barred from association with any broker or dealer with the proviso that, after six months, he may apply to the Commission for permission to become so associated in a non-supervisory capacity, upon a satisfactory showing of adequate supervision. Footnotes -[n1]- Shelby went out of business in December 1975. -[n2]- The law Judge also found that, on May 20, 1977, the United States District Court for the Western District of Tennessee permanently enjoined West, with his consent, from engaging in fraudulent activities in connection with securities transactions. Civil Action No. C-77-2236. West does not dispute this finding. -[n3]- West was "top man" of the 14 salesman employed by Shelby at various time during 1975. -[n4]- Naftalin & Co., Inc., 41 S.E.C. 823, 825 (1964); Kenneth B. Stucker Investment Securities, 42 S.E.C. 910, 911 (1966). -[n5]- See, e.g., William Harrison Keller, Jr., 38 S.E.C. 900, 905 (1959); Naftalin & Co., Inc., supra, 41 S.E.C. at 826-27; J.A. Winston & Co., Inc., 42 S.E.C. 62, 68-69 (1964); Costello, Russotto & Co., 42 S.E.C. 798, 801 (1965); Crow, Brourman & Chatkin, Inc., 42 S.E.C. 938, 949 n. 23 (1966). -[n6]- Barnett v. S.E.C., 319 F.2d 340, 344 (C.A. 8, 1963). -[n7]- See Naftalin & Co., Inc., supra, 41 S.E.C. at 827. -[n8]- See, e.g., J.A. Winston & Co., Inc., 42 S.E.C. 49, 55 (1964); Gateway Stock and Bond, Inc., 43 S.E.C. 191, 192-93 (1966); Waldron & Co., Inc., Securities Exchange Act Release No. 12872 (October 6, 1976), 10 SEC Docket 663, 664. -[n9]- See Naftalin & Co., Inc., supra, 41 S.E.C. at 828. -[n10]- West cited one contemporaneous quotation for an issue with a maturity date different from that of the issue he sold. Hence the cited quotation has no bearing on the reasonableness of the price West charged. -[n11]- See Naftalin & Co., Inc., supra, 41 S.E.C. at 826-827; Waldron & Co., Inc., supra, 10 SEC Docket at 664; Financial Estate Planning, Securities Exchange Act Release No. 14984 (July 21, 1978), 15 SEC Docket 352, 354. -[n12]- At the least, markups of more than 10% are fraudulent. See J.A. Winston & Co., Inc., supra, 42 S.E.C. at 68-9; Century Securities Company, 43 S.E.C. 371 (1967). Although prior makeup cases cited in this opinion dealt with equity, not municipal, securities, the applicable principles are the same. In fact, markups for municipal securities are generally lower than for equity securities. See S.E.C. v. Charles A. Morris & Associates, Inc., 386F. Supp. 1327, 1334 and n.5 (W.D. Tenn. 1973). -[n13]- We agree that the administrative law judge that the evidence with respect to West's violations is clear and convincing. And assuming that the Supreme Court's interpretation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), is applicable to proceedings of this sort, a position with which we disagree, we find that West had the requisite scienter. We note, however, that the references to Section 10(b) and Rule 10b-5 in our findings are merely cumulative. Hochfelder has no bearing on Section 17(a) of the Securities Act. And all of our findings of fraud are made not only under Section 10(b) and Rule 10b-5 but also under Section 17(a). The sanction we are imposing would be the same even if we made no findings under Section 10(b) and Rule 10b-5. -[n14]- See Willard G. Berge, Securities Exchange Act Release No. 12846 (September 30, 1976), 10 SEC Docket 600, 602, aff'd sub nom. Feeney v. S.E.C., 564 F.2d 260 (C.A. 8, 1977). -[n15]- West's exceptions to the initial decision are overruled or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. To Contents    Commission Orders – Settled Administrative Proceedings In re Howe, Solomon, Hall, Exchange Act Release No. 40038, A.P. File No. 3-9613 (May 28, 1998). I. The Securities and Exchange Commission deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted against Howe, Solomon & Hall ("HSH") and Christopher J. Hall ("Hall") (collectively "Respondents"), pursuant to Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 ("Exchange Act"). In anticipation of the institution of these proceedings, Respondents have submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying any of the findings contained herein, except as to the jurisdiction of the Commission over them and over the subject matter of these proceedings, and as to the findings contained in Section II., paragraphs A. and B., which are admitted, Respondents consent to the entry by the Commission of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b), 19(h), and 21C of the Exchange Act, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order"). Accordingly, IT IS HEREBY ORDERED that proceedings against Respondents hereby are instituted. II. On the basis of this Order and the Offer, the Commission finds that: A. HSH has been registered with the Commission as a broker-dealer since June 1983. B. At all relevant times, Hall was the Chief Financial Officer, the registered financial operations principal and a fifty percent shareholder of HSH. HSH's Restructuring of Defaulted Municipal Bonds C. HSH operates primarily as a municipal securities broker-dealer. Approximately fifty percent (50%) of HSH's business relates to the purchase and sale of non-rated municipal bonds. Of that fifty percent, approximately ten percent (10%) consists of transactions involving defaulted or technically defaulted bonds.n1 HSH researches and performs due diligence of municipal bond issues that are at or near the point of technical default to determine their restructuring potential. Duval County, Florida Housing Authority Multifamily Magnolia Arms Apartment Bonds D. The municipal bonds at issue in this matter (the "Bonds") were issued on August 7, 1987 by the Duval County, Florida Housing Finance Authority (the "Authority"). The Bonds were issued to finance the acquisition, rehabilitation and permanent financing of a multifamily residential rental housing development located in Jacksonville, Florida, known as Magnolia Arms Apartment Project (the "Project"). Through an Indenture of Trust ("Indenture"), revenues from the Project are used to finance repayment of the Bonds. Financial Condition of the Bond Issue and Underlying Project Prior to Restructuring E. The Bonds originally carried a 9.5% coupon requiring semi-annual interest payments on February 15 and August 15 of each year. In December 1993, the Trustee for the Indenture ("Trustee") declared an event of default and advised the bondholders that no further interest payments would be made from revenues because the Project would be generating insufficient revenues. Indeed, the February and August 15, 1994, interest payments were made to bondholders by drawing on a then existing letter of credit. HSH's Restructuring of the Duval County Bonds F. As a result of the above-described financial predicament and the declaration of technical default, the Bonds traded at a substantial discount. Following a preliminary analysis of the feasibility of restructuring the Bonds, on September 7, 1994 HSH purchased 5,460 of the Bonds for $51 per bond (face par value $5,460,000). HSH's purchase represented 66.3% of the then outstanding Bonds. G. Hall and others at HSH performed a more complete financial analysis of the Project and determined that the Bonds could be restructured and support a 5% coupon with semi-annual payments. As part of a successful restructuring, HSH needed to obtain the cooperation of the Trustee and secure the consent of the outstanding bondholders to the restructuring terms. H. Among other things, HSH: (a) negotiated with the developer of the Magnolia Arms Apartments to spend an additional $210,000 on the project; and (b) spent at least $45,000 and expended approximately $112,000 worth of labor hours restructuring the bonds. n2 I. Prior to the restructuring of the Bonds, the debt service expense for 1996 would have been $735,360. Subsequent to the restructuring, with the lower coupon, the 1996 debt service expense was $337,625. As a result of HSH's actions, bankruptcy of a municipal bond issue was avoided and the apartment complex was enhanced, although the coupon payments were reduced. Excessive Mark-Ups J. From September 7, 1994 through October 12, 1994, HSH sold 4,520 of the Bonds to a small group of sophisticated investors, who for the most part were pre-existing clients of HSH, at prices between $61 and $61.46 per Bond (face par value $4,520,000). Hall was personally responsible for setting the sale price. Based on this price, the Commission finds that HSH charged undisclosed excessive markups between 19% and 21% to its customers.n3 Legal Findings K. The Commission finds that HSH charged undisclosed excessive markups in the amount of $117,417. L. From September 7 to October 12, 1994, HSH willfully violated Section 15B(c)(1) of the Exchange Act and Rules G-17 and G-30 promulgated by the Municipal Securities Rulemaking Board, in that it, through the use of the mails or the means and instrumentalities of interstate commerce, taking into consideration all relevant factors, sold municipal securities from HSH's own account to customers at aggregate prices (including markups) that were unfair and unreasonable, as more fully described in paragraphs II.A. - II.J. herein. M. From September 7 to October 12, 1994, Hall willfully aided and abetted and caused HSH's violations of Section 15B(c)(1) of the Exchange Act and Rules G-17 and G-30 promulgated by the Municipal Securities Rulemaking Board, in that HSH, aided and abetted by Hall, through the use of the mails or the means and instrumentalities of interstate commerce, taking into consideration all relevant factors, sold municipal securities from HSH's own account to customers at aggregate prices (including markups) that were unfair and unreasonable, as more fully described in paragraphs II.A. - II.J. herein. III. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the remedial sanctions and cease-and-desist order specified in the Offer. Accordingly, IT IS ORDERED THAT: A. Respondent HSH cease and desist from committing or causing any violation or future violation of Section 15B(c)(1) of the Exchange Act and Rules G-17 and G-30 promulgated by the Municipal Securities Rulemaking Board; B. Respondent Hall cease and desist from committing or causing any violation or future violation by a broker-dealer of Section 15B(c)(1) of the Exchange Act and Rules G-17 and G-30 promulgated by the Municipal Securities Rulemaking Board; C. Respondent Hall is censured; D. Respondent HSH, within fifteen (15) days from the entry of this Order, pursuant to Section 21B of the Exchange Act, shall pay a civil penalty in the amount of twenty-five thousand dollars ($25,000.00) to the United States Treasury. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check, or bank money order; (2) made payable to the Securities and Exchange Commission; (3) transmitted to the Comptroller, Securities and Exchange Commission, Mail Stop 0-3, 450 Fifth Street, N.W., Washington, D.C. 20549; and (4) submitted under cover letter that identifies HSH and Hall as Respondents in this proceeding, and the file number of these proceedings (3-9613), a copy of which cover letter and money order or check shall be sent to Frederick M. Lehrer, Esq., Securities and Exchange Commission, Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131; and E. Respondent HSH, within fifteen (15) days from the entry of this Order, pursuant to Sections 21B(e) and 21C of the Exchange Act, shall pay disgorgement and prejudgment interest in the amount of $135,412 to the United States Treasury. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check, or bank money order; (2) made payable to the Securities and Exchange Commission; (3) transmitted to the Comptroller, Securities and Exchange Commission, Mail Stop 0-3, 450 Fifth Street, N.W., Washington, D.C. 20549; and (4) submitted under cover letter that identifies HSH and Hall as Respondents in this proceeding, and the file number of these proceedings (3-9613), a copy of which cover letter and money order or check shall be sent to Frederick M. Lehrer, Esq., Securities and Exchange Commission, Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131. By the Commission. Footnotes -[n1]- Generally, technical default denotes that some event has occurred which causes non-compliance with a trust indenture agreement (i.e. failure to make coupon payments). A technical default may be monetary or non-monetary. -[n2]- The expense items described in paragraph H do not reflect all expenses HSH incurred in the restructuring. -[n3]- In calculating the markups charged by HSH, HSH's purchase price of $51 per bond was determined to be the fair market value of the securities at time of subsequent sale in light of the short passage of time (approximately 38 days from first until final sale), and the lack of any significant intervening event. To Contents    In re Kent T. Black, Joel L. Hurst, David E. Lynch, Larry E. Muller, and Robert L. McCook, Exchange Act Release No. 39134, A.P. File No. 3-9440 (September 26, 1997). The Commission instituted public administrative proceedings against Kent T. Black, Joel L. Hurst, David E. Lynch, Larry E. Muller and Robert L. McCook. The Order alleges that Hurst, Lynch and Muller, operating out of a broker-dealer's now-defunct Houston office, engaged in a scheme to "park" complex mortgage-backed derivative securities with other dealers in order to move the securities off the firm's books. Further, it is alleged that these individuals utilized this scheme to manipulate the price of the derivative securities, thereby charging excessive markups to the firm's customers amounting to over $1.85 million. As a result of this parking scheme, the broker-dealer failed to maintain accurate books and records and incurred numerous net-capital deficiencies. The Order also alleges that Black made numerous misrepresentations and omissions in connection with the sale of mortgage-backed derivative securities to Escambia County, Florida. Specifically, Black failed to disclose the risks associated with extremely highly risky and volatile securities known as "inverse floaters" and "inverse interest onlys," which he sold to the county. It is also alleged that Black sold certain derivatives to Escambia County with the misrepresentation that the broker-dealer would buy the securities back at a guaranteed profit to the county, and that Black later refused to repurchase those securities. Escambia County lost over $3 million on the securities purchased from Black. The Order alleges that Black, Hurst, Lynch and Muller willfully violated Section 17(a) of the Securities Act of 1933 and Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, thereunder. Additionally, it alleges Hurst, Lynch, Muller and McCook willfully aided and abetted the broker-dealer's violations of Sections 15(c) and 17(a) of the Securities Exchange Act of 1934. A hearing will be held to determine whether the staff's allegations are true, and if so, to determine what relief is appropriate and in the public interest. I. As a result of an investigation, the Division of Enforcement alleges that: A. Kent T. Black ("Black") at all relevant times was a registered representative formerly associated with a certain broker-dealer (the "Broker-Dealer") in its Houston office. Black is a resident of Spring, Texas. B. Joel L. Hurst ("Hurst") at all relevant times was a registered representative and trader associated with the Broker-Dealer in its Houston office. Hurst is a resident of Spring, Texas. C. David E. Lynch ("Lynch") at all relevant times was a registered representative and trader associated with the Broker-Dealer in its Houston office. Lynch is a resident of Spring, Texas. D. Larry E. Muller ("Muller") at all relevant times was a registered representative and trader associated with the Broker-Dealer in its Houston office. Muller is a resident of Houston, Texas. E. Robert L. McCook ("McCook") at all relevant times was a registered representative associated with another registered broker-dealer. McCook is a resident of Midlothian, Virginia. Background F. The Broker-Dealer's Houston office was opened by Hurst and Lynch in October 1990. The Houston office was established to sell fixed-income products, primarily mortgage-backed securities, to institutional clients. G. At all relevant times, the Houston office had the authority to execute riskless principal transactions. The procedure required Respondents Hurst, Lynch and Muller to arrange and confirm both sides of each transaction, and then call the details directly in to a principal in the Broker-Dealer's main office. The principal then would write an order ticket for each transaction, and provide that information to the Broker-Dealer's clearing firm. Parking, Excessive Markups and Net Capital and Books and Records Violations H. The Broker-Dealer did not allow the Houston office to hold positions in securities unless they received approval from the main office. In order to circumvent the Broker-Dealer's restriction on holding positions, Respondents Hurst, Lynch and Muller 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. I. The parking scheme began in approximately October 1992. On at least two occasions, Respondents Hurst, Lynch and Muller parked securities directly with Respondent McCook, a registered representative with another broker-dealer. Following those transactions, the scheme changed slightly. From that point forward, whenever Respondents Hurst, Lynch and Muller wanted to park securities, they entered into an arrangement with Respondent McCook whereby the Broker-Dealer would sell the bonds to another dealer for settlement that month. That dealer would then sell the bonds to McCook's firm for a fraction higher than it had purchased them from the Broker-Dealer. The Broker-Dealer would then repurchase the bonds from McCook's firm for settlement the next month, with McCook's firm earning a small profit on the transaction. Respondents Hurst, Lynch and Muller used the time between settlement dates to find a customer for the bonds. The parking scheme essentially allowed Respondents Hurst, Lynch and Muller an extra month to find a customer for securities over which they maintained control. J. Each time Respondents Hurst, Lynch and Muller 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 the Broker-Dealer's principal in the main office, who wrote his own tickets. For each of the parking transactions, however, one or more of the order tickets written by the principal contained trade dates different than the trade dates on the Houston tickets. K. The inaccurate order tickets written in the main office depicted each of the parking transactions as two separate riskless principal trades, thereby enabling the scheme to go undetected. L. On at least seven occasions Respondents Hurst, Lynch and Muller used the parking scheme to manipulate the price of certain government agency securities and conceal undisclosed excessive markups charged to the Broker-Dealer customers. The excessive markups on the seven transactions alone amounted to approximately $1.85 million. M. In those instances, Respondents Hurst, Lynch and Muller purchased bonds and marked them up considerably on the sale to the other dealers. These dealers then marked up the securities another 1/32 or 2/32 when selling them to McCook's firm. McCook's firm then marked up the securities another 2/32 when selling them back to the Broker-Dealer. The Broker-Dealer, through Respondents Hurst, Lynch and Muller, would then mark up the securities another 4%-5% when selling them to innocent, bona fide customers. N. Respondents Hurst, Lynch and Muller dictated the prices on the parking transactions. The other firms acquiesced in these price setting transactions. Therefore, the trades involving the other dealers were fictitious, non-bona fide transactions, and did not indicate or reflect the actual market value of those securities. O. As a result of the parking scheme described above, the Broker-Dealer maintained inaccurate books and records, insofar as, among other things, the firm's books and records did not reflect the liabilities arising from Respondents Hurst, Lynch and Muller's commitments to repurchase the securities involved, and contained incorrect valuations of the firm's positions. The firm also computed its net capital inaccurately. During the scheme, Respondents Hurst, Lynch, Muller and McCook knew that the parking of these securities caused the Broker-Dealer's books and records and net capital computations to be inaccurate. P. Properly recording these transactions on the Broker-Dealer's books and records would have adversely affected the Broker-Dealer's computation of net capital and, in some instances, resulted in undisclosed net capital deficiencies as follows: Report Adjusted Excess Net Excess(Deficit) Capital Per Net Capital Date the Broker-Dealer Per SEC April 1993 $ 533,000 $( 77,735) May 1993 $ 818,000 $ 627,250 June 1993 $ 874,000 $ 431,460 July 1993 $ 677,000 $ 416,430 August 1993 $ 791,000 $ (49,484) September 1993 $ 758,000 $ 465,873 October 1993 $ 627,000 $ (69,834) November 1993 $ 538,000 $(1,249,542 December 1993 $ 577,000 $( 69,834) January 1994 $ 634,000 $ 11,269 February 1994 $1,075,000 $ 477,160 January 1994 $ 1,035,000 $ 348,270 Q. The parking scheme also caused the Broker-Dealer to file inaccurate FOCUS reports with the NASD, thereby presenting to regulators a misleading picture of the firm's net worth. Furthermore, the scheme caused the Broker-Dealer to fail to disclose to the Commission that the firm was in net capital violation on numerous occasions. Misrepresentations to Escambia County, Florida R. Escambia County (the "county") began doing business with Respondent Black and the Broker-Dealer in December 1990. Prior to that time, the county had invested almost exclusively in conservative instruments such as treasury securities and certificates of deposit. In September 1991, on Respondent Black's advice, the county began regularly buying and selling complex mortgage-backed derivative securities known as REMICs. S. Due to their sensitivity to interest rates, certain risks are generally associated with investments in REMICs, including, among others, market, extension, prepayment and liquidity risks. The REMICs sold to Escambia County by Respondent Black were Support Class Inverse Floaters and Inverse Interest Onlys, which are some of the riskiest and most volatile REMICs. T. Respondent Black misrepresented the market, liquidity, extension and/or prepayment risks of the REMICs he offered and sold to Escambia County. Such information would have enabled Escambia County to appreciate fully the risks attendant to any investment in Inverse Floater and Inverse Interest Only REMICs. U. Respondent Black also made misrepresentations regarding the returns that the county would receive. Furthermore, the REMICs sold to Escambia County were inconsistent with the county's stated investment objectives (of which Respondent Black was aware), yet Respondent Black never disclosed this to the county. V. Additionally, Respondent Black offered certain REMICs to Escambia County as "short-term paper, i.e., 30 days, 60 days, 90 days," which the county could purchase and which the Broker-Dealer promised to buy back at a later date at a price that guaranteed a profit to the county. Respondent Black sold securities to Escambia County in this manner on a number of occasions in 1993, and each time the Broker-Dealer repurchased the securities as Respondent Black had promised. These transactions, nevertheless, were falsely described to the county because Respondent Black represented them as simultaneous transactions yet, on at least one occasion, he processed the trades separately. By processing the trades separately, Respondent Black allowed the Broker-Dealer the option of failing to honor the allegedly guaranteed repurchase at a profit to Escambia County. This possibility was not disclosed to Escambia County. W. In March 1994, Respondent Black again offered REMICs to the county with the promise that he would "take back" the securities in two months. In connection with these trades, Respondent Black misrepresented to Escambia County that the Broker-Dealer would repurchase these securities within a range of prices that guaranteed a positive return for the county. This time, however, Respondent Black refused to repurchase the securities, and Escambia County was forced to hold the securities. The county eventually sold them over a year later at a price approximately sixty percent lower than the price they paid. Violations X. As a result of the conduct described above, Respondents Black, Hurst, Lynch and Muller willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Y. As a result of the conduct described above, Respondents Hurst, Lynch, Muller and McCook willfully aided and abetted violations of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a-11, thereunder. II. In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate in the public interest and for the protection of investors that public proceedings be instituted to determine: A. Whether the allegations set forth in Section I hereof are true and, in connection therewith, to afford the Respondents an opportunity to establish any defense to such allegations; and B. Whether the entry of a cease and desist order against Respondents Black, Hurst, Lynch, Muller, and/or McCook is appropriate pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act; and C. What, if any, remedial sanctions are appropriate in the public interest against Respondents Black, Hurst, Lynch, Muller and/or McCook; and D. Whether a civil money penalty should be imposed against Respondents Black, Hurst, Lynch, Muller and/or McCook. III. IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section II hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed and before an Administrative Law Judge to be designated by further order as provided by Rule 6 of the Commission's Rules of Practice (17 C.F.R. § 201.6). IT IS FURTHER ORDERED that each respondent file an answer to the allegations contained in this order for proceedings within 15 days after service upon him of said order, as provided by Rule 7 of the Commission's Rules of Practice (17 C.F.R. § 201.7). If any respondent fails to file the directed answer, or fails to appear at a hearing after being duly notified, he shall be deemed in default and the proceedings may be determined against him upon consideration of this Order for Proceedings, the allegations of which may be deemed to be true as provided by Rules 6(e) and 7(e) of the Commission's Rules of Practice (17 C.F.R. § 201.6(e) and § 201.7(e)). This Order shall be served upon the respondents personally or by certified mail forthwith. In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecuting functions in this or any factually related proceedings will be permitted to participate or advise in the decision upon this matter, except as witnesses or counsel in proceedings held pursuant to notice. Since this proceeding is not "rule-making" within the meaning of Section 4(c) of the Administrative Procedure Act, it is not deemed subject to the Provisions of that Section delaying the effective date of any final Commission action. By the Commission. To Contents    In re Kent T. Black, Exchange Act Release No. 40218, A.P. File No. 3-9440 (July 16, 1998). I. The Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Kent T. Black ("Black") on September 26, 1997. II. Respondent Black has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding 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 Respondent and over the subject matter of this proceeding and as to Section III.A., which is admitted, Respondent Black by his Offer consents to the entry of findings and remedial sanctions set forth below. III. On the basis of this Order Making Findings and Imposing Remedial Sanctions And A Cease-And-Desist Order ("Order") and the Offer submitted by Respondent Black the Commission findsn1 that: A. Kent T. Black ("Black") at all relevant times was a registered representative formerly associated with a certain broker-dealer (the "Broker-Dealer") in its Houston office. B. Escambia County (the "County") began doing business with Respondent Black and the Broker-Dealer in December 1990. Prior to that time, the County had invested almost exclusively in conservative instruments such as treasury securities and certificates of deposit. In September 1991, on Respondent Black's advice, the County began regularly buying and selling complex mortgage-backed derivative securities known as REMICs. C. Due to their sensitivity to interest rates, certain risks are generally associated with investments in REMICs, including, among others, market, extension, prepayment and liquidity risks. The REMICs sold to the County by Respondent Black were Support Class Inverse Floaters and Inverse Interest Onlys, which are some of the riskiest and most volatile REMICs. D. Respondent Black misrepresented the market, liquidity, extension and/or prepayment risks of the REMICs he offered and sold to the County. Such information would have enabled the County to appreciate fully the risks attendant to any investment in Inverse Floater and Inverse Interest Only REMICs. E. Respondent Black also made misrepresentations regarding the returns that the County would receive. Furthermore, the REMICs sold to the County were inconsistent with the County's stated investment objectives (of which Respondent Black was aware), yet Respondent Black never disclosed this to the County. F. Additionally, Respondent Black offered certain REMICs to the County as "short-term paper, i.e., 30 days, 60 days, 90 days," which the County could purchase and which the Broker-Dealer promised to buy back at a later date at a price that guaranteed a profit to the County. Respondent Black sold securities to the County in this manner on a number of occasions in 1993, and each time the Broker-Dealer repurchased the securities as Respondent Black had promised. These transactions, nevertheless, were falsely described to the County because Respondent Black represented them as simultaneous transactions yet, on at least one occasion, he processed the trades separately. By processing the trades separately, Respondent Black allowed the Broker-Dealer the option of failing to honor the allegedly guaranteed repurchase at a profit to the County. This possibility was not disclosed to the County. G. In March 1994, Respondent Black again offered REMICs to the County with the promise that he would "take back" the securities in two months. In connection with these trades, Respondent Black misrepresented to the County that the Broker-Dealer would repurchase these securities within a range of prices that guaranteed a positive return for the County. This time, however, Respondent Black refused to repurchase the securities, and the County was forced to hold the securities. The County eventually sold them over a year later at a price approximately sixty percent lower than the price they paid. H. Respondent Black has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest or a civil money penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Black and has determined that Black does not have the financial ability to pay disgorgement of $231,726.00 plus prejudgment interest or a civil money penalty. I. As a result of the conduct described above, Respondent Black willfully violated Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Black and impose the remedial sanctions specified therein. Accordingly, IT IS ORDERED that Black is hereby barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company; IT IS FURTHER ORDERED that Black shall cease and desist from committing or causing any violations of, and any future violation of, Sections 17(a)(1), 17(a)(2) or 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; IT IS FURTHER ORDERED that Black shall pay disgorgement of $231,726 plus prejudgment interest, but that payment of such amount be waived, and civil money penalties not be imposed against Black, based on Black's demonstrated financial inability to pay; and IT IS FURTHER ORDERED that the Division of Enforcement ("Division") may, at any time following entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent provided accurate and complete financial information at the time such representations were made; (2) determine the amount of disgorgement and civil penalties to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by the Respondent was fraudulent, misleading, inaccurate or incomplete in any material respect and whether additional remedies should be imposed. Respondent may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. Footnotes -[n1]- The findings contained herein are not binding on any other person or entity in this or any other proceeding. To Contents    In re Larry E. Muller, Securities Act Release No. 7655, Exchange Act Release No. 41166, A.P. File No. 3-9440 (March 12, 1999). I. The Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Larry E. Muller ("Muller") on September 26, 1997. II. Respondent Muller has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding 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 Respondent and over the subject matter of this proceeding and as to Section III.A., which is admitted, Respondent Muller by his Offer consents to the entry of findings and remedial sanctions set forth below. III. On the basis of this Order Making Findings and Imposing Remedial Sanctions And A Cease-And-Desist Order ("Order") and the Offer submitted by Respondent Muller the Commission findsn1 that: A. Larry E. Muller ("Muller") at all relevant times was a registered representative and trader associated with a certain broker-dealer (the "Broker-Dealer") in its Houston office. B. The Broker-Dealer's Houston office was opened in October 1990. The Houston office was established to sell fixed-income products, primarily mortgage-backed securities, to institutional clients. C. At all relevant times, the Houston office had the authority to execute riskless principal transactions. However, the Broker-Dealer did not allow the Houston office to hold positions in securities unless they received approval from the main office. D. Muller began a parking scheme in approximately October 1992. Initially, Muller parked securities directly with a registered representative with another broker-dealer (the "Parking Firm"). Following those transactions, the scheme changed slightly. From that point forward, whenever Respondent Muller wanted to park securities, he entered into an arrangement with the Parking Firm whereby the Broker-Dealer would sell the bonds to another dealer for settlement that month. That dealer would then sell the bonds to the Parking Firm for a fraction higher than it had purchased them from the Broker-Dealer. The Broker-Dealer would then repurchase the bonds from the Parking Firm for settlement the next month, with the Parking Firm earning a small profit on the transaction. Muller used the time between settlement dates to find a customer for the bonds. The parking scheme essentially allowed Muller an extra month to find a customer for securities over which he maintained control. E. On at least several occasions Muller used the parking scheme to manipulate the price of certain government agency securities and conceal undisclosed excessive markups charged to the Broker-Dealer customers. The excessive markups amounted to approximately $1.85 million. Muller received excessive compensation from these transactions of $225,148. F. In those instances, Muller purchased bonds and marked them up considerably on the sale to the other dealers. These dealers then marked up the securities another 1/32 or 2/32 when selling them to the Parking Firm. The Parking Firm then marked up the securities another 2/32 when selling them back to the Broker-Dealer. The Broker-Dealer, through Respondent Muller would then mark up the securities another 4%-5% when selling them to innocent, bona fide customers. G. Muller dictated the prices on the parking transactions. The other firms acquiesced in these price setting transactions. Therefore, the trades involving the other dealers were fictitious, non-bona fide transactions, and did not indicate or reflect the actual market value of those securities. H. As a result of the parking scheme described above, the Broker-Dealer maintained inaccurate books and records, insofar as, among other things, the firm's books and records did not reflect the liabilities arising from Muller's commitments to repurchase the securities involved, and contained incorrect valuations of the firm's positions. The firm also computed its net capital inaccurately and, in some instances, had undisclosed net capital deficiencies. Muller knowingly and substantially aided the Broker-Dealer's books and records and net capital violations by entering into the parking transactions. I. The parking scheme also caused the Broker-Dealer to file inaccurate FOCUS reports with the NASD, thereby presenting to regulators a misleading picture of the firm's net worth. Furthermore, the scheme caused the Broker-Dealer to fail to disclose to the Commission that the firm was in net capital violation on numerous occasions. J. Respondent Muller has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest or a civil money penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Muller and has determined that Muller does not have the financial ability to pay disgorgement of $225,148 plus prejudgment interest or a civil money penalty. K. As a result of the conduct described above, Muller willfully violated and committed violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and willfully aided and abetted and was a cause of the violations of Sections 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 Muller and impose the remedial sanctions specified therein. Accordingly, IT IS ORDERED that Muller be and hereby is barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company; IT IS FURTHER ORDERED that Muller shall cease and desist from committing or causing any violations of, and any future violation of, Sections 17(a)(1), 17(a)(2) or 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violation and any future violation of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a-11, thereunder. IT IS FURTHER ORDERED that Muller shall pay disgorgement of $225,148 plus prejudgment interest, but that payment of such amount be waived, and civil money penalties not be imposed against Muller, based on Muller's demonstrated financial inability to pay; and IT IS FURTHER ORDERED that the Division of Enforcement ("Division") may, at any time following entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent provided accurate and complete financial information at the time such representations were made; (2) determine the amount of disgorgement and prejudgment interest to be imposed; (3) determine the amount of civil penalties to be imposed; and (4) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by the Respondent was fraudulent, misleading, inaccurate or incomplete in any material respect and whether additional remedies should be imposed. Respondent may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. Footnotes -[n1]- The findings herein are not binding on anyone other than Muller. To Contents    In re Joel L. Hurst, Securities Act Release No. 7654, Exchange Act Release No. 41165, A.P. File No. 3-9440 (March 12, 1999). I. The Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Joel L. Hurst ("Hurst") on September 26, 1997. II. Respondent Hurst has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding 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 Respondent and over the subject matter of this proceeding and as to Section III.A., which is admitted, Respondent Hurst by his Offer consents to the entry of findings and remedial sanctions set forth below. III. On the basis of this Order Making Findings and Imposing Remedial Sanctions And A Cease-And-Desist Order ("Order") and the Offer submitted by Respondent Hurst the Commission findsn1 that: A. Joel L. Hurst ("Hurst") at all relevant times was a registered representative and trader associated with a certain broker-dealer (the "Broker-Dealer") in its Houston office. B. The Broker-Dealer's Houston office was opened in October 1990. The Houston office was established to sell fixed-income products, primarily mortgage-backed securities, to institutional clients. C. At all relevant times, the Houston office had the authority to execute riskless principal transactions. However, the Broker-Dealer did not allow the Houston office to hold positions in securities unless they received approval from the main office. D. Hurst began a parking scheme in approximately October 1992. Initially, Hurst parked securities directly with a registered representative with another broker-dealer (the "Parking Firm"). Following those transactions, the scheme changed slightly. From that point forward, whenever Respondent Hurst wanted to park securities, he entered into an arrangement with the Parking Firm whereby the Broker-Dealer would sell the bonds to another dealer for settlement that month. That dealer would then sell the bonds to the Parking Firm for a fraction higher than it had purchased them from the Broker-Dealer. The Broker-Dealer would then repurchase the bonds from the Parking Firm for settlement the next month, with the Parking Firm earning a small profit on the transaction. Hurst used the time between settlement dates to find a customer for the bonds. The parking scheme essentially allowed Hurst an extra month to find a customer for securities over which he maintained control. E. On at least several occasions Hurst used the parking scheme to manipulate the price of certain government agency securities and conceal undisclosed excessive markups charged to the Broker-Dealer customers. The excessive markups amounted to approximately $1.85 million. Hurst received excessive compensation from these transactions of $658,822. F. In those instances, Hurst purchased bonds and marked them up considerably on the sale to the other dealers. These dealers then marked up the securities another 1/32 or 2/32 when selling them to the Parking Firm. The Parking Firm then marked up the securities another 2/32 when selling them back to the Broker-Dealer. The Broker-Dealer, through Respondent Hurst would then mark up the securities another 4%-5% when selling them to innocent, bona fide customers. G. Hurst dictated the prices on the parking transactions. The other firms acquiesced in these price setting transactions. Therefore, the trades involving the other dealers were fictitious, non-bona fide transactions, and did not indicate or reflect the actual market value of those securities. H. As a result of the parking scheme described above, the Broker-Dealer maintained inaccurate books and records, insofar as, among other things, the firm's books and records did not reflect the liabilities arising from Hurst's commitments to repurchase the securities involved, and contained incorrect valuations of the firm's positions. The firm also computed its net capital inaccurately and, in some instances, had undisclosed net capital deficiencies. Hurst knowingly and substantially aided the Broker-Dealer's books and records and net capital violations by entering into the parking transactions. I. The parking scheme also caused the Broker-Dealer to file inaccurate FOCUS reports with the NASD, thereby presenting to regulators a misleading picture of the firm's net worth. Furthermore, the scheme caused the Broker-Dealer to fail to disclose to the Commission that the firm was in net capital violation on numerous occasions. J. Respondent Hurst has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest or a civil money penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Hurst and has determined that Hurst does not have the financial ability to pay disgorgement of $658,822 plus prejudgment interest or a civil money penalty. K. As a result of the conduct described above, Hurst willfully violated and committed violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and willfully aided and abetted and was a cause of the violations of Sections 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 Hurst and impose the remedial sanctions specified therein. Accordingly, IT IS ORDERED that Hurst be and hereby is barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company; IT IS FURTHER ORDERED that Hurst shall cease and desist from committing or causing any violations of, and any future violation of, Sections 17(a)(1), 17(a)(2) or 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violation and any future violation of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a-11, thereunder. IT IS FURTHER ORDERED that Hurst shall pay disgorgement of $658,822 plus prejudgment interest, but that payment of such amount be waived, and civil money penalties not be imposed against Hurst, based on Hurst's demonstrated financial inability to pay; and IT IS FURTHER ORDERED that the Division of Enforcement ("Division") may, at any time following entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent provided accurate and complete financial information at the time such representations were made; (2) determine the amount of disgorgement and prejudgment interest to be imposed; (3) determine the amount of civil penalty to be imposed; and (4) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by the Respondent was fraudulent, misleading, inaccurate or incomplete in any material respect and whether additional remedies should be imposed. Respondent may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. Footnotes -[n1]- The findings herein are not binding on anyone other than Hurst. To Contents    In re Kenneth J. Schulte, Exchange Act Release No. 37494, A.P. File No. 3-9051 (July 30, 1996). The Securities and Exchange Commission (Commission) instituted public administrative proceedings against Kenneth J. Schulte (Schulte), who is alleged to have been employed from Spring 1990 to the present as a registered representative by three broker-dealers. The Order Instituting Public Administrative Proceedings (Order) alleges that, throughout his career Schulte sold volatile and risky mortgage-backed derivatives to at least fourteen Ohio cities, counties and school districts while a registered representative at the three broker-dealers. The Order further alleges that two NASD arbitration Judgments have been entered against Schulte arising from these sales. The Order also alleges that on April 16, 1996, the United States District Court for the Northern District of Ohio, in the case of Securities and Exchange Commission v. Kenneth J. Schulte (94-CV-2657), entered by default a Final Judgment of Permanent Injunction and Disgorgement (Final Judgment) against Schulte, which Final Judgment permanently enjoins Schulte from further violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and ordered Schulte to pay $398,787.62 in disgorgement. The Commission's complaint in this injunctive action alleged that from the Spring of 1990 to April 1994, Schulte offered and sold several million dollars in mortgage-backed derivatives to at least fourteen Ohio municipalities and school districts. The Commission further alleged that Schulte violated 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, in connection with the offer and sale of the derivatives by making material misrepresentations and omissions concerning, among other things, the nature of derivative securities, the risks involved in derivative securities and the government guarantee of derivative securities. A hearing will be scheduled to determine what, if any, remedial action would be appropriate against Schulte. ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTIONS 15(b) AND 19(h) OF THE SECURITIES EXCHANGE ACT OF 1934 I. As a result of an investigation, the Division of Enforcement alleges that: A. Kenneth J. Schulte ("Schulte"), 37, currently a resident of Delray Beach, Florida, has been employed from the Spring of 1990 to the present as a registered representative by three broker-dealers. B. The United States District Court for the Northern District of Ohio, in an action captioned SEC v. Kenneth Schulte, Civil Action No. 94 CV 2657, entered by default a Final Judgment of Permanent Injunction and Disgorgement against Schulte on April 16, 1996, which the Court amended on April 22, 1996, which permanently enjoins Schulte from further violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Court ordered Schulte to pay $398,787.62 in disgorgement. C. In the complaint in the injunctive action, the Commission alleged that from the Spring of 1990 to April 1994, Schulte offered and sold several million dollars in mortgage-backed derivatives to at least 14 Ohio municipalities and school districts. The Commission alleged that Schulte violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, in connection with the offer and sale of the derivatives by making material misrepresentations and omissions concerning, among other things, the nature of derivative securities, the risks involved in derivative securities and the government guarantee of derivative securities. II. In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate in the public interest and for the protection of investors that public proceedings be instituted to determine: A. Whether the allegations set forth in Section I. hereof are true, and in connection therewith, to afford the Respondent an opportunity to establish any defenses to such allegations; and B. What, if any, remedial sanction is appropriate in the public interest pursuant to Sections 15(b) and 19(h) of the Exchange Act. III. ACCORDINGLY, IT IS HEREBY ORDERED that proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and they hereby are, instituted. IT IS FURTHER ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section II. hereof shall be convened at a time and place to be fixed and before an Administrative Law Judge to be designated by further order as provided by Rule 200 of the Commission's Rules of Practice [17 C.F.R. § 201.200]. IT IS FURTHER ORDERED that the respondent file an answer to the allegations contained in this order instituting public administrative proceedings within twenty days after service of this order, as provided by Rule 220 of the Commission's Rules of Practice [17 C.F.R. § 201.220]. If the respondent fails to file an answer or fails to appear at a hearing after being duly notified, he may be deemed in default and the proceedings my be determined against him upon consideration of this order instituting public administrative proceedings, the allegations of which may be deemed to be true as provided by Rules 310 and 220 of the Commission's Rules of Practice [17 C.F.R. § 201.310 and 201.220]. This order instituting public administrative proceedings shall be served upon the respondent personally or by certified mail forthwith. In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecuting functions in this or any factually related proceeding will be permitted to participate or advise in the decision of this matter, except as witness or counsel in proceedings held pursuant to notice. Because this proceeding does not constitute "rule making" within the meaning of Section 4(c) of the Administrative Procedure Act, it is not deemed subject to the provisions of that section delaying the effective date of any Commission action. By the Commission. To Contents    In re Kenneth J. Schulte, Initial Decision Release No. 110, A. P. File No. 3-9051 (April 10, 1997). TEXT: INITIAL DECISION BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission ("Commission") initiated this proceeding on July 30, 1996, pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"). I held a hearing in Cleveland, Ohio, on November 4, 1996.n1 The Division of Enforcement ("Division") did not call any witnesses but introduced nineteen exhibits. Mr. Schulte was present at the hearing but chose not to testify and did not call any witnesses or introduce any exhibits.n2 On December 5, 1996, I accepted into evidence five late-filed exhibits offered by Respondent, and on January 6, 1997, I accepted two late-filed exhibits offered by the Division. (Tr. 62-64.) There was a three month delay in the start of the hearing. At a prehearing conference on August 28, 1996, I moved the hearing to Florida and ordered procedures to accommodate the parties since Mr. Schulte, appearing pro se, had relocated to Florida, and claimed he could not afford to return to Ohio for a hearing.n3 At a prehearing on October 11, 1996, I postponed the hearing and moved it to Ohio because in early October Mr. Schulte retained an attorney located in Ohio who was familiar with his situation.n4 I postponed the scheduled start of the hearing based on the attorney's request that he needed additional time because of his pre-existing trial schedule and a serious family illness. I received the following post hearing pleadings: (i) Division of Enforcement's Post-Trial Brief, dated December 19, 1996; (ii) Respondent's Reply to the Division of Enforcement's Post-Trial Brief, dated January 14, 1997; and (iii) Division of Enforcement's Rebuttal Reply Brief, dated February 8, 1997. Allegations The Division alleges that from the spring of 1990 to April 1994, Mr. Schulte, while a registered representative, violated the antifraud provisions of the federal securities statutes, in connection with the offer and sale of mortgage backed derivatives, in interstate commerce by making material misrepresentations and omissions concerning, among other things, the nature, the risks, and the government guarantees of derivatives, and that a Final Judgment of Permanent Injunction and Disgorgement was entered by default against Mr. Schulte on April 16, 1996, and amended on April 22, 1996.n5 Findings of Fact My findings and conclusions are based on the record. I applied preponderance of the evidence as the applicable standard of proof. I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision. Kenneth J. Schulte From the spring of 1990 to April 1994, Mr. Schulte, who held himself out to the investing public as a specialist in mortgage backed securities and their derivatives, was a registered representative with Murchison Investments Bankers, Inc. ("Murchison"), Hart Securities, Inc. ("Hart"), and Comprehensive Capital Corporation ("Comprehensive Capital"). (Exs. 1 at 7; 19 at 7-9, 55-58.) In 1989, when Mr. Schulte began his employment at Murchison in Houston, Texas, he was part of the firm's boiler room operation where thirty or so salespeople stood making continuous telephone calls in which they read from a script to whomever would listen urging them to buy bonds immediately or else they would lose a wonderful investment opportunity. The firm urged its salespeople to "smile and dial," and referred to its procedures as "slamming bonds." (Ex. 20 at 16-24.) In 1991, Mr. Schulte and other salespeople at Hart worked together in a room in Houston, Texas, from which they made continuous phone calls to small financial institutions in various states soliciting sales of Government National Mortgage Association ("Ginnie Mae") and Federal National Mortgage Association ("Fannie Mae") derivative securities which Hart's management had selected. Hart management monitored sales calls and told the sales force what to say. The solicitation calls did not cover the risk or suitability of the investments. (Ex. 22 at 11-24.) From the spring of 1990 through April 1994, Mr. Schulte sold over 39.4 million dollars worth of derivative securities, including interest only securities ("strips" or "IOs"), inverse IOs, and inverse floaters, to at least thirteen municipalities and school districts in the State of Ohio (the "Ohio Investors").n6 (Ex. 1 at 7-9.) Purchasers of IOs are entitled only to the interest stream generated when a government agency, such as Fannie Mae, pools thousands of mortgages together and offers investors different ownership interests in that pool. If interest rates decline, the prepayment of mortgages generally increases and the purchaser of an IO receives interest from a smaller pool of mortgages. (Ex. 1 at 8.) Mr. Schulte's sworn testimony demonstrates a detailed knowledge of sophisticated financial instruments, and leaves no doubt that he knew that IOs are risky investments in that the entire amount of an investor's principal is at risk and the interest stream is not guaranteed. (Ex. 19 at 127-29, 136-37.) In September 1991, Mr. Schulte signed a letter sent to prospective clients in Ohio, including the Ohio Investors, on Hart letterhead stationery that falsely represented "we have chosen to view the quest for high yields subordinate to a product's liquidity and the safety of our clients' investment capital." (Exs. 6 at 46-47; 19 at 61-62, 139.) The Ohio Investors were not sophisticated investors and did not understand derivatives. (Exs. 12 at 4-10; 13 at 4-9; 21 at 25, 93-94.) They informed Mr. Schulte that they had conservative investment policies and maintained essentially risk-free investment portfolios. (Exs. 1 at 9-10; 6 at 26-34; 12 at 34-39; 19 at 58-60, 121-22; 21 at 49-53.) Mr. Schulte knew that the Ohio Investors investment policies dictated that the securities they purchased had to be guaranteed by the United States government or its agencies, that their main investment objective was the safety and preservation of principal, and that principal was never to be placed at risk. (Exs. 1 at 9-10; 6 at 34-35; 12 at 36-42; 13 at 13-17, 20, 26, 69-72; 19 at 58-59; 21 at 52-53.) Mr. Schulte represented that he understood these investment policies and that he would follow them. (Ex. 1 at 10.) Mr. Schulte used aggressive and intimidating sales tactics, and conducted all his activities by telephone. He threatened to recommend that the City of Euclid, Ohio, fire Kenneth R. Kentosh, an investment advisor specializing in municipalities, in August or September 1990 because Mr. Kentosh believed IOs were unsuitable investments for public bodies and would not recommend that the city buy IOs from Mr. Schulte. (Ex. 8 at 75-76.) He criticized government officials for not doing their jobs in getting the highest return available on risk-free investments when they hesitated in purchasing IOs. (Ex. 12 at 14, 47-48.) He falsely represented that Richard C. Simpson, an attorney in Columbus, Ohio, with an extensive municipal bond practice, supported his representations. (Ex. 11 at 11 and attachment.) On December 2, 1991, Attorney Simpson informed Mr. Schulte that (1) he would take action against him and Hart if Mr. Schulte used him as a reference in soliciting clients, and (2) he considered the investments Mr. Schulte was selling "far too speculative for investment of public funds, even if they comply with Ohio statutory requirements, which is questionable." (Exs. 11 at 11-17 and attachment; 19 at 66-69.) Using persistent phone calls, Mr. Schulte pressured the Ohio Investors to purchase derivative securities. (Ex. 21 at 13-14, 98-100.) They relied on his false representations that the IOs were essentially risk-free investments guaranteed by the United States government or a government agency; that their investment principal would not be placed at risk; that the yield was far greater than on certificates of deposit; and that they had to invest quickly because the opportunity was limited. (Exs. 1 at 9-11; 6 at 50-54; 12 at 12-15, 23-24, 32-33; 21 at 21-24, 50-51; 22 at 25-26.) Mr. Schulte knew that the statements he made to the Ohio Investors were false when he made them, and he persuaded these investors to purchase derivative securities regardless of whether the investment was appropriate for their investment objectives.n7 (Exs. 1 at 9-10; 19 at 61-66.) Mr. Schulte did not provide Ohio Investors with written materials which described the derivative securities he offered; he failed to disclose or discuss the substantial risks involved in these investments or that the IOs were sensitive to interest rate fluctuations in that an increase in mortgage prepayments could potentially wipe out their entire investment; and he rarely used the term "interest only strips" to describe the investments and failed to inform some investors of the type of securities they had purchased.n8 (Exs. 1 at 9-11; 12 at 21; 13 at 23-25, 47-52, 74-75; 21 at 24-25, 45.) In 1991, the Ohio Investors began to suffer losses from their purchases of IOs from Mr. Schulte. Nevertheless, Mr. Schulte continued to solicit additional sales of IOs in 1992 when he left Hart and became associated with Comprehensive Capital in Boca Raton, Florida. (Ex. 6 at 62.) As a result of Mr. Schulte's material misrepresentations and omissions in the offer and sale of these Securities, the Ohio Investors sustained losses in excess of $8.2 million. When interest rates declined dramatically beginning in 1991, many consumers refinanced their mortgages so that there were fewer mortgages in the pool and interest payments were reduced to virtually nothing. (Ex. 1 at 8-11.) Mr. Schulte earned almost $400,000 in commissions from the sales of derivative securities to the Ohio Investors. (Exs. 1 at 11; 19 at 34.) On May 30, 1996, Mr. Schulte had been employed as a registered representative with Comprehensive Capital for almost four and a half years. (Ex. 19 at 8.) His earnings from commissions was $125,987 and $54,500 in 1994 and 1995, respectively. (Id. at 14-16.) On November 4, 1996, Mr. Schulte was an active participant in the securities industry. (Tr. 21.) Permanent Injunction The Commission initiated a civil action against Mr. Schulte on December 27, 1994. On April 16, 1996, the United States District Court for the Northern District of Ohio, entered by default an order permanently enjoining Mr. Schulte from violating the antifraud provisions of the federal securities laws, and ordering him to disgorge approximately $400,000 in commissions that he obtained through fraudulent means. SEC v. Schulte, No. 1:94 CV 2657 (N.D. Ohio April 16, 1996)(amended on April 22, 1996). According to the district court: Schulte's conduct is egregious. Schulte did not disclose the nature of these securities and misrepresented the risks inherent in derivatives including the prepayment risks, the risk to principal and their lack of a government guarantee. Schulte repeatedly violated the antifraud provisions of the federal securities laws. Over a four-year period, Schulte sold over $39.4 million . . . of derivatives in Ohio alone. Schulte's sales were based on cold calling finance directors and treasurers throughout the state. . . . Schulte was aware that these investors held virtually riskless investments in their portfolio prior to purchasing the IOs and other derivative securities. Schulte knew the nature of the derivative securities and the risks involved in their purchase, but failed to disclose these risks to investors and misrepresented the structure of derivative securities. Schulte also falsely represented these securities to be guaranteed by the government. (Ex. 1 at 15.) The district court concluded: In connection with the offers and sales of derivative securities, including IOs, Schulte engaged in a massive fraud which cost Ohio municipalities and school districts millions of dollars in losses. Consequently, in view of his fraudulent scheme, Schulte violated the antifraud provisions of the federal securities laws. Schulte violated these provisions by making material misrepresentations and omitting to state material facts to investors regarding the nature, risks, and lack of government guarantees associated with derivative securities such as IOs, Inverse IOs and Inverse Floaters. (Ex. 1 at 11-12.) The district court found that Mr. Schulte willfully violated the antifraud provisions of the securities statutes; that he had full knowledge of the inappropriateness of his behavior, yet he continued to make material misrepresentations to investors which he knew, or was reckless in not knowing, were false; that his employment in the securities industry presented him with "daily opportunities to commit future violations"; and that it was likely that Mr. Schulte "would continue to solicit investors using the same techniques he used in Ohio." (Ex. 1 at 13-15.) Bankruptcy On March 20, 1996, Mr. Schulte filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Kenneth J. Schulte, No. 96-31108-BKC-SHF (Bankr. S.D. Fla. March 20, 1996). When he was examined by the bankruptcy trustee on May 30, 1996, Mr. Schulte was living in a house in Delray Beach, Florida, that he had purchased with his wife for $320,000. (Ex. 19 at 6.) In a Final Judgment and Order dated December 9, 1996, the United States Bankruptcy Court for the Southern District of Florida ruled that: Kenneth J. Schulte, is collaterally estopped from denying that he defrauded Ohio investors based on the judgment entered against him by the United States District Court for the Northern District of Ohio in Securities and Exchange Commission v. Kenneth J. Schulte, Case No. 1:94 CV 2657 (N.D. Ohio, April 16, 1996). The Court accordingly GRANTS the Commission's motion for summary judgment and finds that Schulte's $387,787.62 disgorgement debt to the Commission is not dischargeable under Section 523(a)(2)(a) [sic] of the Bankruptcy Code because Schulte obtained that money by false pretenses, false representations and actual fraud. (Ex. 26, Kenneth J. Schulte, No. 96-31108-BKC-SHF (Bankr. S.D. Fla. December 9, 1996).) Other Regulatory Authorities In 1994 and 1995, the National Association of Securities Dealers ("NASD") made two awards in arbitration matters on claims against Mr. Schulte based on the allegations that are the subject of this proceeding. It found Mr. Schulte liable and ordered him to pay the sum of $4,500, interest specifically excluded, in City of Englewood v. Murchison Investment Bankers, Ltd. and Kenneth Schulte, No. 93-03625 (July 27, 1994), and it found him liable and ordered him to pay $169,320, inclusive of interest, in Harrison Hills School District v. Hart Securities, Inc. and Kenneth Schulte, No. 94-00235 (December 5, 1995). (Exs. 14, 15, 16.) In 1995, the Ohio Commissioner of Securities found that Mr. Schulte was not of "good business repute" as that term is used in the Ohio Code and revoked Mr. Schulte's securities salesman license. Kenneth James Schulte, Final Order of Revocation, Order No. 95-071 (October 6, 1995). Mr. Schulte consented to the order and agreed to a permanent bar from ever reapplying for a license to sell securities in Ohio. (Ex. 5.) Criminal On February 11, 1997, a jury found Mr. Schulte guilty of wire fraud, mail fraud, and securities fraud in connection with the same factual allegations set out in the Order Instituting Proceedings ("Order"). United States v. Kenneth J. Schulte, No. 1:96CR305 (N.D. Ohio February 14, 1997). Mr. Schulte had not been sentenced when I issued this decision. The Order does not refer to the criminal case because Mr. Schulte's indictment was returned after the Commission issued the Order.n9 (Ex. 4.) Public Interest Section 15(b) of the Exchange Act requires that the Commission sanction Mr. Schulte if it is in the public interest to do so on several independent bases: because he was associated with a broker-dealer when he willfully violated the securities statutes and regulations; he has been permanently enjoined from further violations of those provisions; and he has been convicted of a felony involving the purchase or sale of a security within ten years of the institution of the administrative proceeding. To determine the public interest involves consideration of die following factors as well as the need to deter Mr. Schulte and others from similar conduct: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). In granting the permanent injunction and ordering disgorgement against Mr. Schulte, Judge Oliver considered his actions as measured against the factors the Sixth Circuit considers relevant in determining the likelihood of future violations as set out in SEC v. Washington Utility District, 676 F.2d 218, 277 & n.19 (6th Cir. 1982).n10 The district court found Mr. Schulte's actions egregious, willful, and committed with scienter over a four year period. All of these determinations involve factors as set out in Steadman. SEC v. Schulte, No. 1:94 CV 2657 (N.D. Ohio April 16, 1996)(amended on April 22, 1996). Mr. Schulte's criminal conviction, based on the same facts that are at issue here, demonstrates that Mr. Schulte engaged in intentional wrongdoing of major significance to defraud investors and supports a determination that a bar is required. Elliott v. SEC, 36 F.3d 86, 87 (11th Cir. 1994); Alexander V. Stein, 59 SEC Docket 1493, 1500-02 (June 8, 1995). This record leaves no doubt that Mr. Schulte was a willing and knowing participant in a very successful scheme to defraud a specific group of vulnerable investors. The Ohio Investors were small public entities with financially unsophisticated investing officials lacking the expert investment advice available to larger public bodies. Using high pressure, aggressive sales tactics, lies, and deception, Mr. Schulte took advantage of their lack of knowledge and their need to replace income that was no longer available because of falling interest rates on certificates of deposits to cause them to invest public money in unsuitable investments. Mr. Schulte's outrageous business threats to Mr. Kentosh, his unauthorized use of Attorney Simpson as a reference, and his dismissal of advice that he was offering unsuitable and probably illegal investments all demonstrate his determination to defraud investors and his complete lack of business honor. It is disquieting, and the record does not explain how under the statutory disqualification process administered by the NASD, that Mr. Schulte was able to be active in the securities industry on August 28, 1996, and November 4, 1996, when he had been the subject of a permanent injunction on April 16, 1996. (Tr. 21; Aug. Tr. 7-8.) In issuing the permanent injunction, Judge Oliver found that Mr. Schulte's participation in the industry gave him "daily opportunities to commit future violations." SEC v. Schulte, No. 1:94 CV 2657 (N.D. Ohio April 16, 1996)(amended on April 22, 1996). As a government agency this Commission has a legitimate interest and obligation, to take strong action to prevent fraud of taxpayers' funds. Mr. Schulte's blatant acts of fraud and deception continued over a four year period and caused losses of over $8 million in public funds, much of which was earmarked for public education. Mr. Schulte received $398,787.62 from these fraudulent activities. The City of Englewood was unable to collect on its arbitration award because Mr. Schulte and Murchison filed for bankruptcy. (Ex. 12 at 51.) The record does not reveal whether the Harrison Hills School District was able to collect its arbitration award, because Hart filed under Chapter 11 of the United States Bankruptcy Code on March 3, 1995. (Ex. 14 at 10.) At least one of the persons who purchased IOs from Mr. Schulte lost his employment in 1993 because of the investments. (Ex. 6 at 68.) Finally, I postponed the hearing so that Mr. Schulte could attend and be represented but Mr. Schulte did not testify, did not call any witnesses, and the only evidence he offered was complete copies of depositions where the Division had offered partial versions. The Division proved the allegations in the Order with its exhibits. Mr. Schulte did not establish any defenses to the allegations or any evidence on the public interest issue. n11 The clear implication is that Mr. Schulte acted to delay a final determination in this proceeding and in the civil injunctive action so as to remain active in the securities industry for as long as possible. n12 (Ex. 1 at 6-7.) I reject as false his counsel's argument that he has not had a chance fully to defend himself. (Resp. Reply Brief at 8.) It is necessary in the public interest to impose the severest possible sanction for all the reasons stated, and to prevent Mr. Schulte, who has neither recognized that he has committed any wrong nor provided any assurance that he will not commit illegal actions in the future, and other persons who might be inclined to follow his example from future illegal acts. Record Certification Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b) (1996), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on February 6, 1997, and corrected on March 4, 1997. Order Based on the findings and conclusions set forth above, I ORDER, pursuant to Sections 15(b) and 19(h) of the Exchange Act, that Kenneth J. Schulte is barred from being associated with a broker, dealer, a member of a national securities exchange, or registered securities association, and from participating in an offering of penny stock. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360 (1996). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. Brenda P. Murray Chief Administrative Law Judge Footnotes -[n1]- I will refer to specific pages of the hearing transcript as "(Tr. )," the August 28, 1996, prehearing conference transcript as "(Aug. Tr. )," and the October 11, 1996, prehearing conference transcript as "(Oct. Tr. )." -[n2]- I will refer to the exhibits, which are numbered consecutively, as "(Ex. )." The only sworn testimony from Mr. Schulte in evidence is the transcript of the bankruptcy hearing where he was questioned by Division counsel. (Ex. 19 at 63-64.) -[n3]- When I moved the hearing to Florida so Mr. Schulte could attend, I ruled pursuant to Rule 235(a)(5) of the Commission's Rules of Practice, 17 C.F.R. § 201.235(a)(5) (1996), that the Division could introduce in evidence in lieu of oral testimony the transcripts of sworn testimony of persons taken at depositions where Mr. Schulte was represented by counsel. I did this because the Division's public witnesses were scattered throughout Ohio. (Aug. Tr. 14-30.) I affirmed that ruling when the hearing was moved to Cleveland, Ohio. At the hearing, Respondent's counsel objected on grounds that the Division was offering only partial depositions and that the complete depositions should be admitted. I granted his request. (Tr. 50-63.) -[n4]- The law firm had represented Mr. Schulte in the civil case but had withdrawn when Mr. Schulte claimed he had no funds to pay for their legal services. Mr. Schulte retained the firm for his criminal case and the attorneys decided to participate in this proceeding on his behalf. (Oct. Tr. 4-5.) -[n5]- The term derivative is short for derivative instrument, "a contract whose value is based on the performance of an underlying financial asset, index, or other investment." Barron's Dictionary of Financial and Investment Terms 136 (4th ed. 1995). -[n6]- All the products Mr. Schulte sold to Ohio Investors were securities. (Exs. 1 at 7-8; 16 at 2.) According to Mr. Schulte, the sales occurred primarily in 1990-91, and the big losses occurred in 1994. (Ex. 19 at 37.) The customers are not specified in the record but it appears likely that they included the cities of Ashland, Mansfield, Jackson, Hilliard, Englewood, and Painesville; the counties of Preble and Mercer; and the school districts of the Harrison Hills, Shadyside, Strongsville, Vermilion, and Danbarry. (Exs. 8 at 19; 19 at 57-58.) -[n7]- Part of Mr. Schulte's job responsibilities was to "qualify investors," which was to gather information as to an investor's prior investment history, investment objectives, liquidity requirements, and risk tolerance. (Ex. 19 at 104-05.) -[n8]- In October 1993, the Attorney General of Ohio issued an opinion that IOs and certain other investments were illegal because they were not "redeemable" within two years as required by Ohio law. (Ex. 6 at 88-89.) -[n9]- I took official notice of the conviction on March 4, 1997. Rule 323 of the Commission's Rules of Practice, 17 C.F.R. § 210.323 (1996). -[n10]- The factors are: 1. the egregiousness of the violations, 2. the isolated or repeated nature of the violations, 3. the degree of scienter involved, 4. the sincerity of the defendant's assurances, if any, against future violations, 5. the defendant's recognition of the wrongful nature of his conduct, 6. the likelihood that the defendant's occupation will present opportunities (or lack thereof) for future violations, and 7. the defendant's age and health. (Ex. 1 at 14.) -[n11]- An adverse inference can be drawn from Mr. Schulte's failure to offer testimony on matters at issue of which he had personal knowledge. Strathmore Securities, Inc., 43 S.E.C. 575, 590 (1967), petition for rev. denied, 407 F.2d 722 (D.C. Cir. 1969). I did not rely on the adverse inference in reaching my decision. -[n12]- In the civil action, Mr. Schulte hired and withdrew two sets of counsel. Judge Oliver found that Mr. Schulte had been dilatory in his defense and that his failure to attend the trial was willful. (Ex. 1 at 6.) To Contents    In re Kenneth J. Schulte, Exchange Act Release No. 38583 (May 8, 1997). ACTION: NOTICE THAT INITIAL DECISION HAS BECOME FINAL TEXT: The time for filing a petition for review of the initial decision in this proceeding has expired. No such petition has been filed, and the Commission has not chosen to review the decision on its own initiative. Accordingly, notice is hereby given, pursuant to Rule 360(e) of the Commission's Rules of Practice, that the initial decision of the administrative law judge* has become the final decision of the Commission. The order contained in that decision bars Schulte from association with a broker, dealer, member of a national securities exchange or registered securities association, and from participation in any offering of penny stock. That order is hereby declared effective. For the Commission by the Office of the General Counsel, pursuant to delegated authority. Footnotes -[*]- Kenneth J. Schulte, Initial Decision Release No. 110 (April 10, 1997). To Contents    In re Richard Taylor Securities Act Release No. 7150, Exchange Act Release No. 35522, Investment Advisors Act Release No. 1480, A.P. File No. 3-8408 (March 22, 1995). I. The Securities and Exchange Commission ("Commission") has instituted administrative proceedings pursuant to Section 15B(c) of the Securities Exchange Act of 1934 ("Exchange Act"), and Cease and Desist Proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Exchange Act and Section 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Richard T. Taylor ("Taylor"). The Commission finds that it has jurisdiction over Taylor and over the subject matter of these administrative proceedings. In these proceedings, Taylor 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 to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.1 et seq., and, without admitting or denying the matter set forth herein, with the exception of the jurisdiction of the Commission over him and this matter, which he admits, Taylor consents to the findings and sanctions set forth below. II. On the basis of the Order Instituting Public Proceedings and the Offer submitted by Taylor, the Commission finds: A. Synovus Securities, Inc. ("Synovus" or "Synovus Securities") is a registered broker-dealer and registered investment adviser headquartered in Columbus, Georgia. It is a wholly-owned subsidiary of Synovus Financial Corp., a New York Stock Exchange traded bank holding company also headquartered in Columbus, Georgia. Synovus Securities has five branch offices in Georgia and Tennessee. B. Clark L. Reed, Jr. ("Reed") was, until November 1993, the president, the financial and operations principal and a director of Synovus Securities. C. Reed was one of six persons employed by the firm as traders. D. Taylor resides in Ketchum, Idaho. At the time of the conduct alleged herein, Taylor lived in Atlanta, Georgia and earned his living buying and selling securities for his own account under the name Taylor Investments. E. Reed and Taylor had had a long-standing personal as well as business relationship prior to the violative conduct found herein. They knew each other for over fifteen years. Reed and Taylor participated jointly in several business ventures throughout the 1980s and early 1990s. In addition, Taylor loaned Reed monies which Reed repaid. F. From 1988 through 1991, Reed interpositioned Taylor or caused Taylor to be interpositioned in 153 municipal bond transactions involving customers of Synovus Securities. In 1988 and 1989, Taylor was interpositioned in thirty-seven trades at prices totalling $15 million; in 1990 Taylor was interpositioned in eighty-seven trades at prices totalling $29 million; and in 1991 Taylor was interpositioned in twenty-nine trades at prices totalling $11 million. Reed placed the trades or caused the trades to be placed with Taylor, who was able, in connection with sales of bonds by customers of Synovus, to sell the bonds, in most instances on the same day, through other broker-dealers at a profit. When Synovus's customers were buying bonds, Taylor was able to purchase the bonds from other broker-dealers and sell them to Synovus at a profit. G. All of the trades in which Taylor was interpositioned were riskless principal transactions. Of the 153 trades in which Taylor was interpositioned, 123 were sales of bonds by Synovus's customers. The remaining thirty transactions were purchases by Synovus's customers. H. The trades in which Taylor was interpositioned involved a wide variety of bonds. The bonds were issued by state and local governments from several different states for numerous different purposes. The bonds carried a wide range of maturities and interests rates, including zero-coupon bonds. The transactions in question involved general obligation bonds, revenue bonds and industrial development bonds. I. Some of the customers defrauded by the interpositioning scheme were investment advisory clients of Synovus Securities at the time of the interpositioning. J. Synovus's customers were not informed that Taylor had been interpositioned in their transactions or that Taylor was making same-day profits from almost all their trades. The customers were not told of Reed's close relationship and numerous business dealings with Taylor. Taylor was aware, or was reckless in not being aware, that such information was not being disclosed to Synovus's clients. K. During the period from in or about September 1988 through in or about December 1991, Taylor, as more particularly described in Paragraphs II.A. through II.J. above, willfully aided and abetted and caused violations: (1) by Synovus Securities and Reed of Section 17(a) of the Securities Act in that Synovus Securities and Reed, aided and abetted by Taylor, directly and indirectly, using the means and instrumentalities of transportation and communication in interstate commerce and the mails, (a) employed devices, schemes, and artifices to defraud; (b) obtained money and property by means of untrue statements of material facts and omissions to state material facts necessary in order to make the statements made in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, practices, and a course of business which operated or would have operated as a fraud and deceit upon purchasers, in the offer and sale of securities; (2) by Synovus Securities and Reed of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that Synovus Securities and Reed, aided and abetted by Taylor, directly and indirectly, using the means and instrumentalities of interstate commerce and the mails, (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and (c) engaged in acts, practices, and a course of business which operated or would have operated as a fraud and deceit upon persons, in connection with the purchase and sale of municipal securities; (3) by Synovus Securities of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder, in that Synovus Securities, aided and abetted by Taylor, made use of the mails and means and instrumentalities of interstate commerce to effect transactions in, and to induce and attempt to induce the purchase and sale of, municipal securities, by means of manipulative, deceptive and other fraudulent devices and contrivances, including acts, practices and courses of business which operated or would have operated as a fraud or deceit on any person, and untrue statements of material facts and omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, which statements and omissions were made with knowledge or reasonable grounds to believe that they were untrue or misleading; (4) by Synovus Securities of Section 15B(c)(1) of the Exchange Act, and Rules G-17 and G-30 of the Municipal Securities Rulemaking Board, in that Synovus Securities, aided and abetted by Taylor, in the conduct of the municipal securities business of Synovus Securities, failed to deal fairly with other persons and engaged in deceptive, dishonest and unfair practices, and purchased municipal securities for the account of Synovus Securities from customers and sold municipal securities for the account of Synovus Securities to customers at aggregate prices that were not fair and reasonable, taking into consideration all relevant factors; and (5) by Synovus Securities of Sections 206(1) and 206(2) of the Advisers Act, in that Synovus Securities, aided and abetted by Taylor, by use of the mails and means and instrumentalities of interstate commerce, directly and indirectly, employed devices, schemes and artifices to defraud and engaged in transactions, practices, and a course of business which operated as a fraud and deceit upon clients and prospective clients. L. From on or about January 1, 1989 through at least December 31, 1991, Taylor engaged in activities of a municipal securities dealer as alleged in the order instituting these proceedings, made use of the mails and means or instrumentalities of interstate commerce to effect transactions in, and to induce and attempt to induce the purchase or sale of municipal securities, without being registered in accordance with Section 15B of the Exchange Act thereby willfully violating Section 15B(a)(1) of the Exchange Act. M. Taylor does not have the financial ability to pay a civil penalty. This determination is based upon the Commission's review of the information concerning Taylor's financial condition contained in his Statement of Financial Condition executed under oath on January 27, 1995 and submitted to the Commission thereafter. The determination not to impose a civil penalty is contingent upon the accuracy and completeness of Taylor's Statement of Financial Condition. If at any time following the date of this Order the staff obtains information indicating that Taylor's representations concerning his assets, income, liabilities, expenses, or net worth were fraudulent, misleading, inaccurate or incomplete in any material respect as of the time such representations were made, the staff may petition the Administrative Law Judge ("ALJ") for an order imposing a civil penalty. In connection with any such petition, the only issues shall be whether the financial information provided by Taylor was fraudulent, misleading, inaccurate or incomplete in any material respect as of the time such representations were made, and the amount of civil penalty to be imposed. Taylor may not, by way of defense of such petition, challenge the validity of his consent, contest the allegations in the Order Instituting Proceedings in this matter, or assert that payment of a civil penalty should not be ordered. III. In view of the foregoing, the Commission finds that it is appropriate and in the public interest to impose the sanctions which are set forth in the Offer submitted by Taylor. Accordingly, IT IS HEREBY ORDERED THAT: (1) effective immediately, Richard T. Taylor, be and hereby is barred from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company with a right to reapply after fifteen (15) months, but only if the disgorgement imposed under paragraph III (3) herein has been paid, such application to be made to the appropriate self-regulatory organization, or if there is none to the Commission; (2) Richard T. Taylor cease and desist from committing or causing any violations, or future violations of Section 17(a) of the Securities Act, Sections 10(b), 15(c)(1), 15B(a)(1) and 15B(c)(1) of the Exchange Act, Rules 10b-5 and 15c1-2 thereunder, Rules G-17 and G-30 of the Municipal Securities Rulemaking Board and Sections 206(1) and 206(2) of the Advisers Act; and (3) Richard T. Taylor disgorge $325,000 representing profits derived from customers through the conduct set forth above, and pay interest dating from the dates of the transactions to the date of the order, at the prejudgment interest rate, provided, however, that the payment of all but $40,000, which shall be paid in two installments of $20,000 each, the first installment within thirty (30) days of the receipt of this order and the second within six (6) months from the date of receipt of this order, is waived based upon Taylor's inability to pay. This waiver is conditioned upon Taylor having stated fully and truthfully in all material respects about the information concerning his financial condition contained in his Statement of Financial Condition described above. The staff, at any time following the entry of this Order, may petition the ALJ to reopen this matter to reconsider Taylor's inability to disgorge funds if the staff obtains information from any source indicating that Taylor's Statement of Financial Condition was inaccurate or incomplete in any material respect. In connection with any such petition, the ALJ may consider ordering Taylor to pay the balance of $285,000 plus interest. The $285,000 is predicated upon Taylor having paid the $40,000 above. If he has not paid the $40,000 in full, the balance may be added to the $285,000. Taylor may not, by way of a defense to such petition, challenge the validity of his consent or contest the allegations of the Order Instituting Proceedings in this matter or the appropriateness or amount of disgorgement. The two payments of $20,000 described above 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 to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W. Washington, D.C. 20549; and (d) submitted under cover letter which identifies Richard T. Taylor 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 Joseph L. Grant, District Counsel, Securities and Exchange Commission, 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326-1232. By the Commission. To Contents    In re Synovus Securities, Inc., and Clark L. Reed, Jr., Securities Act Release No. 7070, Exchange Act Release No. 34313, Investment Advisers Act Release No. 1423, A.P. File No. 3-8407 (July 5, 1994). I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") and Sections 203(e) and 203(f) of the Investment Advisers Act of 1940 ("Advisers Act"), and Cease-and-Desist Proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Exchange Act and Section 203(k) of the Advisers Act be and hereby are instituted against Synovus Securities, Inc., and Clark L. Reed, Jr. II. In anticipation of the institution of these proceedings, Synovus Securities, Inc. and Clark L. Reed, Jr. have submitted Offers of Settlement which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, without admitting or denying the factual statements and findings contained herein, except that they admit paragraphs III.A and III.B herein, Synovus Securities, Inc. and Clark L. Reed, Jr., admit the jurisdiction of the Commission over them and the subject matter of this proceeding and consent to the entry of this Order instituting this proceeding, making findings and imposing remedial sanctions. III. On the basis of this Order and the Offers of Settlement submitted by Synovus Securities, Inc. and Clark L. Reed, Jr., the Commission finds n1 that: A. Synovus Securities, Inc., ("Synovus") is registered with the Commission and has been registered as an investment adviser since September 1, 1983, and is registered with the Commission as a broker-dealer and has been registered since October 21, 1986. n1 The findings and conclusions herein and the entry of this Order are solely for the purposes of this proceeding and shall not be binding on any person or entity named in any other proceeding. B. Clark L. Reed, Jr., ("Reed") was president and a director of Synovus from at least in or about August 1985 until in or about November 1993. C. From in or about September 1988 through in or about December 1991, in over 120 municipal bond transactions involving Synovus dealing as a principal with certain of its customers, some of whom were investment advisory clients of Synovus, Synovus, acting through Reed, did not get the best market price for the customers, but instead Reed and Synovus placed the transactions with an individual who was able to promptly sell the bonds to or buy the bonds from other brokers at a profit. The practice was not always disclosed to Synovus' customers. D. During the period from in or about September 1988 through in or about December 1991, Synovus and Reed, in the offer and sale of securities, willfully violated Section 17(a) of the Securities Act by using the means and instruments of transportation and communication in interstate commerce and the mails to, directly and indirectly, employ devices, schemes, and artifices to defraud; obtain money and property by means of untrue statements of material facts and omissions to state material facts necessary in order to make the statements made in light of the circumstances under which they were made, not misleading, and engage in transactions, practices, and a course of business which operated or would have operated as a fraud and deceit upon purchasers, as more particularly described in Paragraph C. above. E. During the period from in or about September 1988 through in or about December 1991, Synovus and Reed, in connection with the purchase and sale of securities, willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by using the means and instrumentalities of interstate commerce and the mails to, directly and indirectly: (1) employ devices, schemes and artifices to defraud, (2) make untrue statements of material facts and omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and (3) engage in acts, practices, and a course of business which operated or would have operated as a fraud and deceit upon persons, as more particularly described in Paragraph C. above. F. During the period from in or about September 1988 through in or about December 1991, Synovus willfully violated and Reed willfully aided and abetted and caused violations of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder, by making use of the mails and means and instrumentalities of interstate commerce to effect transactions in, and to induce and attempt to induce the purchase and sale of, securities, by means of manipulative, deceptive and other fraudulent devices and contrivances, including acts, practices and courses of business which operated or would have operated as a fraud or deceit on any person, and untrue statements of material facts and omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, which statements and omissions were made with knowledge or reasonable grounds to believe that they were untrue or misleading, as more particularly described in Paragraph C. above. G. During the period from in or about September 1988 through in or about December 1991, Synovus willfully violated and Reed willfully aided and abetted and caused violations of Section 15B(c)(1) of the Exchange Act, and Rules G-17 and G-30 of the Municipal Securities Rulemaking Board in the conduct of the municipal securities business of Synovus by not dealing fairly with other persons and engaging in deceptive, dishonest and unfair practices, and by purchasing municipal securities for the account of Synovus from customers and selling municipal securities for the account of Synovus Securities to customers at aggregate prices that were not fair and reasonable, taking into consideration all relevant factors, as more particularly described in Paragraph C. above. H. During the period from in or about September 1988 through in or about December 1991, Synovus willfully violated and Reed willfully aided and abetted and caused violations of Sections 206(1) and 206(2) of the Advisers Act, in that Synovus, by use of the mails and means and instrumentalities of interstate commerce, directly and indirectly, employed devices, schemes and artifices to defraud and engaged in transactions, practices, and a course of business which operated as a fraud and deceit upon clients and prospective clients as more particularly described in Paragraph C. above. IV. Based upon the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers of Settlement of Synovus Securities, Inc. and Clark L. Reed, Jr. Accordingly, IT IS ORDERED THAT: (1) Effective immediately, Synovus Securities, Inc. be and hereby is censured; (2) Synovus Securities, Inc. pay a civil money penalty in the amount of $200,000 within thirty (30) days of the receipt of this order. 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 to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W. Washington, D.C. 20549; and (d) submitted under cover letter which identifies Synovus Securities, Inc., 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 William P. Hicks, District Trial Counsel, Securities and Exchange Commission, 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326-1232; (3) Synovus Securities, Inc. comply with its undertakings: (a) to maintain a compliance officer and to adopt procedures reasonably designed to prevent officers or agents of Synovus Securities, Inc., from interpositioning anyone between its customers and/or clients and the market thereby preventing the customer or client from obtaining a higher price for a security sold or a lower price for a security purchased; and (b) at its own expense, to engage a consultant, within two months, who is not unacceptable to the staff to conduct a review of its procedures referred to above and to adopt and implement any recommendations or suggestions to improve such procedures; provided, however, that as to any of the consultant's recommendations that Synovus determines is unduly burdensome or impractical, Synovus may suggest an alternative procedure designed to obtain the same objective, submitted in writing to the consultant and to the staff of the Commission. The consultant shall reasonably evaluate Synovus' alternative procedure and approve the alternative if it is not unreasonable. Synovus will abide by the consultant's determination with regard thereto and adopt those recommendations deemed appropriate by the consultant. Synovus shall, within six months, report in a letter to the staff of the Commission, attest to, and set forth the details of its implementation of the recommendations contained in the report. (4) effective immediately, Clark L. Reed, Jr., be and hereby is barred from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company with a right to reapply after eighteen (18) months, such application to be made to the appropriate self-regulatory organization, or if there is none to the Commission; (5) Clark L. Reed, Jr. pay a civil penalty in the amount of $50,000 within thirty (30) days of the receipt of this order. 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 to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W. Washington, D.C. 20549; and (d) submitted under cover letter which identifies Clark L. Reed, Jr., 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 William P. Hicks, District Trial Counsel, Securities and Exchange Commission, 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326-1232; and (6) Synovus Securities, Inc. and Clark L. Reed, Jr. cease and desist from committing or causing any violation, or future violations of Section 17(a) of the Securities Act, Sections 10(b), 15(c)(1) and 15B(c)(1) of the Exchange Act, Rules 10b-5 and 15c1-2 thereunder, Rules G-17 and G-30 of the Municipal Securities Rulemaking Board and Sections 206(1) and 206(2) of the Advisers Act. By the Commission. To Contents    In re Joseph H. Stafford, Exchange Act Release No. 23366, A.P. File No. 3-6626 (June 22, 1986). I. In these proceedings, instituted on March 24, 1986 pursuant to Sections 15(b), 15B(c) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"), n1 Respondent Joseph H. Stafford ("Stafford") has submitted an Offer of Settlement which the Commission has determined to accept. Without admitting or denying the allegations contained in the Order for Proceedings or the findings in this Order, Stafford consents to the entry of the findings and sanctions contained in this Order.n2 II. On the basis of the Order for Proceedings and the Offer of Settlement submitted by Stafford, the Commission makes the following findings: A. Respondent Joseph H. Stafford was employed as a salesman in the Houston, Texas office of Donald Sheldon & Co., Inc., a registered broker-dealer, from January 1983 until in or about July 1984. From October 1984 until March 1985, Stafford was employed at another registered broker-dealer located in Austin, Texas. Stafford is, and has been at all times relevant herein, registered with the National Association of Securities Dealers as a registered representative. B. During the period from in or about December 1983 to in or about March 1985, Stafford, in connection with the offer, purchase and sale of securities, including municipal securities in the form of Cheneyville Louisiana Westside Habilitation Center Revenue Bonds ("C-Bonds") and Vanceburg Kentucky Bond Anticipation Notes ("V-Bonds") and by use of the mails and the means and instrumentalities of interstate commerce, 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, in that, he, directly and indirectly, employed manipulative and deceptive devices and contrivances, employed devices, schemes and artifices to defraud, obtained money and property by means of and otherwise made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and engaged in acts, transactions, practices and a course of business which operated and would operate as a fraud and deceit upon the purchasers of such securities. As a part of the aforesaid conduct, Stafford, among other things, made untrue statements of material facts and omitted to state material facts concerning, among other things: 1. the safety of investments in C-Bonds and V-Bonds; 2. financial factors affecting the value of C-Bonds and V-Bonds, including future revenues expected to be received by the issuers; 3. the existence of litigation adversely affecting the issuers of the C-Bonds and V-Bonds; 4. the rate of return to be earned on the C-Bonds and V-Bonds; 5. the probability of payment of principal and interest on the C-Bonds and V-Bonds; and 6. the rating or lack of rating of the C-Bonds and V-Bonds. C. During the period from in or about December 1983 to in or about March 1985, Stafford willfully violated and/or willfully aided and abetted violations of Section 15B(c)(1) of the Exchange Act and Rule G-17 of the Municipal Securities Rulemaking Board ("MSRB") promulgated under the Exchange Act. As a part of the aforesaid conduct, Stafford, among other things, engaged in the acts and practices described in paragraph B above. D. During the period from in or about December 1983 to in or about March 1985, Stafford willfully violated and/or willfully aided and abetted violations of Section 17(a) of the Securities Act and Sections 10(b) and 15B(c)(1) of the Exchange Act and Rule 10b-5 and MSRB Rule G-19(c) thereunder, in that, in connection with the purchase of C-Bonds and V-Bonds, he recommended that his customers purchase these securities even though he lacked reasonable grounds, based upon information available from the issuers of such securities or otherwise, for recommending such purchases and lacked reasonable grounds to believe that his recommendations concerning such purchases were suitable for his customers in light of their financial background and investment objectives. III. In view of the foregoing, it is in the public interest to impose the sanctions specified in Stafford's Offer of Settlement. Accordingly, IT IS ORDERED that Stafford be and hereby is: 1. Censured; 2. Suspended from association with any broker or dealer, investment adviser, investment company or municipal securities dealer for a period of 75 Calendar days, said suspension to commence at the opening of business on the first Monday following the date of this Order; and 3. Barred from association with any broker or dealer, investment adviser, investment company or municipal securities dealer in a supervisory or proprietary capacity, provided that after a period of one year, Stafford may make application to the appropriate self-regulatory organization or, where there is no appropriate self-regulatory organization, to the Commission, to become associated in a supervisory or proprietary capacity. IT IS FURTHER ORDERED that Stafford shall comply with his undertaking to file with the Houston Branch Office of the Commission, within fifteen days after the expiration of the suspension period, an affidavit affirming that he has complied with the terms of the suspension contained in this Order. By the Commission. Footnotes -[n1]- In the Matter of Donald T. Sheldon, et al., Exchange Act Release No. 23058 (March 24, 1986), 35 SEC Docket 557. -[n2]- The findings herein are not binding on any other respondents named in these proceedings. To Contents    In re Hanauer, Stern & Co., Inc., et al., Exchange Act Release No. 21313; A.P. File No. 3-6408 (September 11, 1984). I. The Commission deems it appropriate that public administrative proceedings be instituted pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act) with respect to Hanauer, Stern & Co., Inc., (Registrant), Robert E. DeMary (DeMary), Paul R. Konsig (Konsig) and Eugene L. Stern (Stern). In anticipation of these proceedings, the Respondents have submitted Offers of Settlement which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the allegations and findings contained herein, Respondents consent to entry of the findings and imposition of the remedial sanctions set forth below. II. Accordingly, it is ordered that proceedings pursuant to Section 15(b) and 19(h) of the Exchange Act be, and they hereby are, instituted. III. On the basis of this Order Instituting Proceedings and Imposing Remedial Sanctions and the Offers of Settlement submitted by the Respondents, the Commission finds that: A. Registrant has been registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act since December 1, 1975. Registrant is a member of the National Association of Securities Dealers, Inc., a national securities association registered pursuant to Section 15A of the Exchange Act. B. At all times relevant hereto, DeMary was senior vice-president of Registrant. C. At all times relevant hereto, Konsig was executive vice-president of Registrant. D. At all times relevant hereto, Stern was president of Registrant. E. During the period from in or about January 1979 to in or about December 1981, Registrant, DeMary, Konsig and Stern willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Registrant willfully violated and DeMary, Konsig and Stern willfully aided and abetted violations of Rule G-30 promulgated by the Municipal Securities Rulemaking Board (MSRB) pursuant to Section 15B(b)(2) of the Exchange Act, in that, in the offer or sale and in connection with the purchase or sale of securities said respondents directly and indirectly engaged in acts, practices and courses of business which would and did operate as a fraud and deceit upon various persons. As part of the aforesaid conduct: 1. DeMary, Konsig and Stern caused Registrant to engage in adjusted trading with a bank, thereby enabling an official of the bank to conceal from bank shareholders and others material losses in the value of the bank's securities portfolio. At the request of the bank official, Registrant purchased municipal bonds and other securities from the bank at prices materially higher than the market value of such securities. In offsetting transactions, Registrant sold municipal bonds and other securities to the bank at prices materially higher than market prices. 2. Registrant charged excessive markups on municipal securities in eleven transactions with various customers. F. During the period from in or about January 1979 to in or about December 1981, Registrant willfully violated and DeMary, Konsig and Stern willfully aided and abetted violations of Section 17(a) of the Exchange Act, Rule 17a-3 thereunder and MSRB Rule G-8 in that Registrant failed to accurately make and keep current certain of its reguired books and records, including memoranda showing the terms and conditions of the adjusted trading with the bank. In addition, Registrant's required books and records failed to reflect agreements by at least two customers to repurchase certain municipal bonds from Registrant at predetermined prices thirty days after the customers sold such bonds to Registrant. IV. In view of the foregoing, it is in the public interest to impose the remedial sanctions and to order compliance with the undertakings set forth in the Respondents' Offers of Settlement. Accordingly, IT IS ORDERED that effective on the date of this Order: A. Registrant be, and hereby is, censured; B. Respondent DeMary be, and hereby is, suspended from association with any broker, dealer, or municipal securities dealer for a period of thirty (30) days; C. Respondent Konsig be, and hereby is, suspended from association with any broker, dealer, or municipal securities dealer for a period of thirty (30) days; D. Respondent Stern be, and hereby is, suspended from association with any broker, dealer, or municipal securities dealer for a period of thirty (30) days; and E. Within thirty (30) days after completion of the above suspensions, Respondents DeMary, Konsig and Stern shall each deliver to the Commission's Washington Regional Office an affidavit stating that he has complied with the sanction imposed by the Commission. By the Commission. To Contents    In re Robert D. Peterson, et al., Exchange Act Release No. 19764, A.P. File No. 3-6249 (May 13, 1983). William D. Goldsberry, Administrator, Chicago Regional Office, announced that the Commission has ordered public administrative proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act) against Channer-Newman Securities Company (Channer-Newman), a registered broker-dealer engaged in the trading and underwriting of municipal securities with its principal place of business in Chicago, Illinois; Frederick W. Channer (Channer), the firm's chief operating officer; Michael J. Wyvill (Wyvill), a former president and officer of Channer-Newman; and Robert D. Peterson (Peterson), an account executive formerly employed at Channer-Newman. The Order for Proceedings alleges that from in or about December 1978 to on or about December 31, 1979, Peterson willfully violated the antifraud provisions of the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934 (Exchange Act), and the rules of the Municipal Securities Rulemaking Board (MSRB) which were promulgated pursuant to the Exchange Act. The Order also charges that Peterson aided and abetted violations of Commission and MSRB rules relating to books and records, customer confirmations and required deposits in a "Special Reserve Account for the Exclusive Benefit of Customers" (Reserve Bank Account). Specifically, the Order alleges that from in or about December 1978 through on or about December 31, 1979, Peterson caused municipal bonds and confirmations of sales of municipal bonds to be sent to customers who had not ordered the securities. In addition, Peterson is charged with inducing and attempting to induce customers to purchase unordered municipal securities by agreeing that Channer-Newman would repurchase the securities either at a profit or no loss to the customer, while failing to disclose that Channer-Newman's sales policies strictly prohibited such repurchase agreements. The Order also alleges that Peterson caused Channer-Newman to keep inaccurate books and records including, among other things, order tickets and confirmations reflecting apparent sales of municipal bonds to customers who had not ordered them, as well as ledgers, trial balances, and other records reflecting assets, liabilities, income and capital. Peterson is also charged with causing Channer-Newman to make insufficient deposits to its Reserve Bank Account. Channer, Wyvill and Channer-Newman are charged with a failure reasonably to supervise Peterson. with a view toward preventing his violations, as alleged in the Order. Without admitting or denying these allegations, Channer, Wyvill and Channer-Newman submitted offers of settlement which have been accepted by the Commission. In their offers of settlement, Channer, Wyvill and Channer-Newman each consented to findings that he or it failed reasonably to supervise Peterson as alleged in the Order and to sanctions in which each respondent was censured. Channer-Newman also consented to undertakings requiring it to review and revise, if appropriate, its procedures respecting extensions of settlement date and cancellation of orders. A hearing will be scheduled to take evidence against the remaining respondent, Robert D. Peterson. The purpose of the hearing is to determine whether or not the allegations against Peterson are true, and if so, what if any remedial sanction is necessary in the public interest. To Contents    In re Robert D. Peterson, et al., Exchange Act Release No. 20293, A.P. File No. 3-6249 (October 17, 1983). In these proceedings ordered pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act), Respondent Robert D. Peterson (Peterson) has submitted an Offer of Settlement which the Commission has determined to accept.N1 Solely for the purpose of settling these proceedings and without admitting or denying the allegations contained in the Order for Proceedings, Respondent Peterson consents to the findings of violations and sanctions contained in this Order.n2 On the basis of the Order for Public Proceedings and the Offer of Settlement, the Commission finds that from in or about December 1978 until in or about August 1980, Peterson willfully violated Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 15B(c)(1) of the Exchange Act, Rule 10b-5 thereunder, and Rules G-17 and G-25(b) of the Municipal Securities Rulemaking Board (MSRB); and, that Peterson willfully aided and abetted violations of Sections 15(c)(3), 17(a), and 15B(c)(1) of the Exchange Act, Rules 15c3-3 and 17a-3 thereunder, and MSRB Rules G-8 and G-15, all as alleged in the Order for Proceedings. In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer of Settlement. Accordingly, IT IS ORDERED THAT: Peterson be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser, investment company or affiliate thereof, for a period of 90 days. IT IS FURTHER ORDERED THAT: The Commission having accepted Respondent Peterson's Offer of Settlement on September 7, 1983, but, through inadvertence, no Findings and Order Imposing Remedial Sanctions having been issued; nunc pro tunc this Findings and Order Imposing Remedial Sanctions is effective as of opening of business on September 8, 1983. By the Commission. Footnotes -[n1]- In the Matter of Robert D. Peterson, et al., instituted May 13, 1983. (See Order for Public Proceedings, Exchange Act Release No. 19764 (May 13, 1983), 27 SEC Docket 1620 (May 13, 1983) -[n2]- The findings herein are not binding on any other respondent named in these proceedings. To Contents    In re J.B. Hanauer & Co., et al., Securities Act Release No. 6381, Exchange Act Release No. 18483, A.P. File No. 3-6095 (February 11, 1982). The Commission deems it appropriate and in the public interest that proceedings be instituted against J.B. Hanauer & Co. ("Hanauer"), Elliot Friedman ("Friedman"), Melvin Frank ("Frank"), John Palumbo ("Palumbo"), Charles W. Tomasheski ("Tomasheski"), Eugene H. Goodman ("Goodman"), Robert H. Wolfson ("Wolfson"), Melvin A. Glucksman ("Glucksman"), Michael Jacobson ("Jacobson"), Alfred J. Marcus ("Marcus"), Alan Z. Appelbaum ("Appelbaum"), Sheldon S. Stein ("Stein"), Alexander Altman ("Altman"), Bruce A. Heller ("Heller"), Neil Cohen ("Cohen"), Ronald N. Cookler ("Cookler"), Fred Tessler ("Tessler"), Michael Ehrlich ("Ehrlich") and Mitchell L. Silverman ("Silverman"), pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (the "Exchange Act"). The proceedings are to determine whether such persons have willfully violated or willfully aided and abetted violations of provisions of the Securities Act of 1933 (the "Securities Act") and the Exchange Act and Rules thereunder and Rules of the Municipal Securities Rulemaking Board (the "MSRB") and whether, in addition, Hanauer, Friedman, Glucksman, Frank, Jacobson, Marcus, and Silverman have failed to reasonably supervise persons subject to their supervision with a view to preventing violations of the provisions and Rules referred to above.n1 Simultaneous with the institution of these proceedings, the Respondents have submitted Offers of Settlement for the purpose of disposing of the issues raised in these proceedings. Under the terms of their Offers of Settlement, the Respondents, solely for the purposes of these proceedings and without admitting or denying any of the findings set forth herein, have consented to the issuance of this Order by the Commission. The Commission has deemed it appropriate and in the public interest to accept the Offers of Settlement of the Respondents and accordingly issues this Order. I. FACTS The Respondents 1. Hanauer is a New Jersey corporation with headquarters in Livingston, New Jersey and branch offices in North Miami Beach, Palm Beach and West Palm Beach, Florida. The firm is registered with the Commission as a broker-dealer pursuant to Section 15 of the Exchange Act. Hanauer is also a member of the National Association of Securities Dealers, Inc. The firm specializes in selling municipal securities to retail customers. 2. Friedman served as President of Hanauer until January 1980 and as the Chairman of the Board of Directors of Hanauer from January 1980 until March 31, 1981 when he relinquished that position. From March 31, 1981 through the present, Friedman has served as a consultant and a commission salesman. He was the largest shareholder in Hanauer. 3. Glucksman served as an Executive Vice-President until January 1980. Glucksman served as president of Hanauer from January 1980 until December 31, 1981 at which point he became Chairman of the Board. Glucksman is also a shareholder. 4. Frank is an Executive Vice-President, a director and shareholder and also was the Senior Sales Manager of Hanauer. 5. Jacobson is a Vice-President of Hanauer, a director and a shareholder. 6. Marcus is the Secretary and Treasurer of Hanauer, a director and a shareholder. 7. Appelbaum is a Senior Vice-President of Hanauer, a director and shareholder and manages the firm's North Miami Beach office. 8. Silverman is a Vice-President and manager of Hanauer's Palm Beach and West Palm Beach offices. 9. Altman is a Vice-President of Hanauer. 10. Cookler is an Assistant Vice-President of Hanauer. 11. Palumbo is a registered representative with Hanauer. 12. Tomasheski is a registered representative with Hanauer. 13. Goodman is a registered representative with Hanauer. 14. Wolfson is a registered representative with Hanauer. 15. Stein was a registered representative with Hanauer. 16. Heller is a registered representative with Hanauer. 17. Cohen is a registered representaive with Hanauer. 18. Tessler is a registered representative with Hanauer. 19. Ehrlich is a registered representative with Hanauer. Hanauer's Customers Hanauer encouraged its salesmen to seek the business of persons, who, for income tax or other reasons, sought anonymity in purchasing municipal bonds. Such customers generally paid for bond purchases with currency. New cash customers frequently inquired concerning the types of records generated by Hanauer in the purchase and sale of municipal securities and whether governmental authorities had access to those records. Certain of the cash customers advised Hanauer's salesmen that they wanted to purchase municipal securities but did not want any records identifying them as the purchasers. Hanauer's registered representatives accommodated their customers' requests for anonymity. The salesmen opened accounts in the real names of certain of the purchasers, executed transactions for such customers in the new accounts but prevented the delivery of any documents to such customers identifying them as the purchasers. For other persons, the registered representatives opened accounts in names and addresses which they knew or had reason to know were fictitious. Hanauer's registered representatives sometimes supplied the fictitious names and addresses from telephone directories and other sources. In addition, Hanauer took other steps to facilitate its customers' requests for anonymity, including failing to file reports of large transactions in currency as required pursuant to the Currency and Foreign Transactions Reporting Act (the "Currency Act") and arranging for bank deposits to be made in such a manner that the banks would not file such reports. Hanauer also engaged in certain activities to prevent the detection of its illegal activities by other persons. Hanauer's Policies and Procedures Hanauer's Books and Records Under Hanauer's policies and procedures, registered representatives were permitted to open customer accounts without complying with rules governing new account information. Hanauer's registered representatives accepted the information provided by new customers and neither they nor the Hanauer supervisory staff attempted to independently verify any of the information furnished by customers. Frequently, new accounts were opened by registered representatives and approved by Hanauer's senior personnel where the only customer information known by Hanauer was the names and addresses provided by the customer, which in some instances were not the actual names and addresses of the customers. Hanauer's registered representatives did not obtain customer telephone numbers, occupations, names of employers or tax identification or social security numbers. Purchase and sale orders for municipal securities were placed by certain of Hanauer's customers who requested anonymity. Hanauer, through its registered representatives, prepared order tickets for these transactions in the fictitious names supplied by its customers or in the fictitious names selected by the registered representatives. A confirmation identifying the customer and describing municipal securities purchased or sold, price, trade date, settlement date and quantity was prepared by Hanauer for each customer transaction. Confirmations for municipal securities transactions by Hanauer's customers who requested anonymity were prepared in the fictitious names supplied by the customers or in the fictitious names selected by Hanauer's registered representatives. Hanauer recorded the purchases and sales of municipal securities by its customers who requested anonymity on its blotter in the fictitious names. Hanauer carried these accounts in fictitious names and addresses on its customer account ledger and recorded transactions in these accounts. Delivery of Customer Confirmations The confirmations were prepared by a computer service, under contract to Hanauer, and delivered to Hanauer's back office personnel. Until mid-1980, the confirmations were sorted and distributed to the registered representatives for delivery to their customers. Until recently,n2 Hanauer did not have an established policy with respect to the method of delivery of confirmations to customers. Hanauer's registered representatives were free to hand deliver confirmations to customers or to mail them. This made possible the use of fictitious names and addresses for customer accounts and other violative activity described below. Methods of Payment and Delivery of Bonds There were several forms of payment for municipal securities acceptable to Hanauer and a variety of means by which Hanauer delivered bonds to its customers. Purchasers of municipal securities made payment with currency, personal checks, cashier's checks, certified checks, coupons, or other bonds. Municipal bonds were sent by registered mail to the customer, delivered by messenger or by mail from Hanauer's clearing bank to the customer's bank, or delivered by Hanauer's registered representative to the customer. Due to the fact that most of the municipal securities sold by Hanauer were bearer instruments, payment was generally required prior to the delivery of the bonds to the customer. Where Hanauer's customers remitted in currency, the bonds often were exchanged for the currency in face-to-face transactions. Such transactions have been termed "hand deliveries" by Hanauer's personnel. Hand deliveries took place at Hanauer's offices, the customers' places of business, customers' residences, restaurants, bars and, on one occasion, in an airport parking lot. Hanauer's Procedures for Currency Hanauer received a substantial amount of currency from its customers, and these receipts were often in amounts greater than $10,000.n3 The firm adopted a policy of depositing currency only in amounts under $10,000, thereby attempting to conceal the fact that they were receiving these large amounts of cash from the Treasury Department. In light of the volume of cash business in which Hanauer's account executives engaged, this required the preparation of numerous deposit tickets. Accordingly, Hanauer's management adopted a policy whereby each registered representative in Hanauer's New Jersey office was responsible for depositing currency received from his customers. Hanauer's Cashier processed currency received by the firm's principals. The administrative office managers of Hanauer's Florida offices, pursuant to instructions by Marcus, the Secretary and Treasurer, instituted a practice whereby currency received from customers in amounts greater than $10,000 was divided into amounts less than $10,000, and separate deposit tickets were prepared for each such amount. This practice was adopted in order to prevent the depository bank from filing Currency Transaction Reports with the Internal Revenue Service which Hanuaer employees believed the bank would be required to file. Moreover, Hanauer also broke down the receipt of cash in a similar manner on its own books, and did not file the required reports. Overcharges Hanauer's policies and procedures including the acceptance of currency and the delivery of confirmations afforded an opportunity for certain of its registered representatives to overcharge customers. In connection with cash transactions certain of the individual respondents overstated the firm's offering price for municipal securities to customers. They then failed to deliver customer confirmations or prepared confirmations themselves showing the higher prices, received the inflated amount from the customer and remitted the actual amount due to the firm, misappropriating the excess funds. Fictitious Accounts and Failure to Deliver Confirmations Tomasheski Tomasheski had four customers who purchased municipal bonds with currency, requested anonymity and who advised him that they did not want documents concerning transactions sent to their residences or places of business. In order to accommodate these customer requests, Tomasheski opened accounts at Hanauer in at least ten fictitious names. Tomasheski prepared new account cards with fictitious names and addresses and other false information for each account. Transactions were affected and confirmations prepared for the accounts opened in each of these fictitious names. The purchases and sales for Tomasheski's customers were recorded on Hanauer's blotter and customer account ledger in the fictitious names. Tomasheski acceded to his customers' requests concerning records by destroying the customer copies of the confirmations. Wolfson Wolfson had a customer who maintained an account in his own name and also directed purchases and sales in an account maintained in the name of a corporation which he owned. This customer subsequently requested that transactions be executed through accounts in different names. Wolfson accomodated this request by opening accounts in fictitious names provided by the customer and purchasing municipal securities for the accounts. Confirmations were prepared in false names and addresses. The purchases were recorded on Hanauer's blotter and customer account ledger in the fictitious names. Wolfson delivered the bonds purchased and received payment from the same customer for transactions in all of these accounts. Wolfson delivered customer copies of confirmations for transactions in these accounts only to this person. On other occasions, Wolfson was asked to execute transactions for this same customer in accounts to be opened in fictitious names selected by Wolfson. Wolfson created fictitious addresses, occupations and telephone numbers for each of these accounts. Customer confirmations for transactions in these fictitious accounts were prepared and delivered to the same customer. The purchases were recorded on Hanauer's blotter and customer account ledger in the fictitious names. Stein Stein had a number of customers who purchased municipal securities with currency. Certain of his cash customers requested anonymity with respect to their transactions. Stein accommodated these requests by opening and executing securities transactions for at least twelve accounts in names which he created, or selected from telephone directories. Confirmations for these transactions were prepared in the fictitious names. The purchases were recorded on Hanauer's blotter and customer account ledger in fictitious names. As discussed above, following the initiation of the Commission's investigation, Hanauer implemented new procedures with respect to the handling of customer confirmations. Under the revised procedures, confirmations were no longer distributed to registered representatives for delivery to the customer. In order to circumvent the revised procedures, Stein inquired of Palumbo, who was then employed in the Palm Beach office, if he knew of an address that Stein might use to send a confirmation. Palumbo provided Stein with such an address that he had received from another Hanauer registered representative in the Palm Beach office. The confirmation for a transaction in a fictitious account opened by Stein was sent by Hanauer to the address provided by Palumbo. The confirmation was never delivered to the customer. Jacobson Jacobson opened four accounts in fictitious names at the request of one person. Jacobson never met or spoke to anyone other than this person in connection with transactions in these accounts. All orders for transactions in such accounts were placed by that person, payment for the bonds was made by that person in currency and Jacobson delivered the bonds and customer copies of the confirmations and a check issued by Hanauer in the amount of $40,411.25 made payable to one of the fictitious persons to the individual who requested the opening of fictitious accounts. Jacobson also complied with a request by this person not to mail any conformations or other materials to any of the purported customers. Jacobson had at least three customer accounts which had been opened in the names and with addresses of persons who had no interests in or knowledge of the accounts in their names at Hanauer. Transactions were executed in each account. Confirmations for these transactions were prepared in the names of persons who did not actually maintain accounts at Hanauer. Purchases were recorded on Hanauer's blotter and customer account ledger in these names. Only one of the three persons listed as customers had any contact with Hanauer. This person had asked in the past that his name be put on a mailing list in response to a newspaper advertisement. Jacobson had other customers who requested confidentiality with respect to their bond transactions. The only new account information provided by such customers were names and addresses. They did not provide telephone numbers and specifically requested that correspondence or documents not be sent to them by mail. Jacobson executed municipal securities transactions in these names. Confirmations for these transactions were prepared in the names supplied and the transactions were recorded on Hanauer's blotter and customer account ledger in these same names. Goodman Goodman opened six accounts in fictitious names and addresses provided by persons who in each instance refused to provide telephone numbers and told him that no attempt should be made to contact them and that payment would be made in currency. These persons explicitly told Goodman that they did not want any records concerning their transactions. Goodman made no attempt to obtain the required new account information. Goodman executed transactions for these persons in the fictitious names provided to him. Confirmations for these transactions were prepared in the names. Hanauer recorded these transactions in fictitious names on its blotter and customer account ledger. At least four persons listed as accounts of Goodman were found by the Commission's staff to have never had a beneficial interest in any account at Hanauer. In order to accommodate requests of his cash customers, Goodman destroyed the customer copies of confirmations that were given to him for delivery. After Hanauer adopted new procedures for the mailing of confirmations to customers, Goodman listed his brother's residence as the address of certain of his cash customers on Hanauer's records. As a result, the confirmations were sent to Goodman's brother's address and his brother, upon receipt, forwarded them to Goodman who destroyed them. Altman Altman opened accounts in the names of two persons who had no interests in such accounts and who never transacted business with Hanauer. Altman also opened at least five accounts in which the persons in whose names the accounts were opened did not reside at the addresses indicated. Altman executed transactions for customers in the names provided to him. Confirmations for these transactions were prepared in the fictitious names. Hanauer recorded these transactions on its blotter and customer account ledger in the fictitious names. Palumbo Palumbo opened at least three accounts in fictitious names. Palumbo executed a transaction in one of the fictitious accounts for a person who also maintained an account at Hanauer in his true name. The address indicated for this fictitious account was an address over which Palumbo exercised control. The customer confirmation for this transaction was prepared in the fictitious name and was sent to this address and obtained and destroyed by Palumbo. The account was opened by Palumbo in the fictitious name and address on his own initiative. Palumbo did this to circumvent the firm's revised policy of mailing confirmations directly to the customer and also to conceal from the principals at Hanauer that he was transacting business with the customer of another registered representative. Palumbo also opened accounts on his own initiative in the two other fictitious names for similar reasons. Confirmations for transactions in these two accounts were prepared in fictitious names and obtained and destroyed by Palumbo. These transactions were recorded by Hanauer on its blotter and customer account ledger in the fictitious names. In connection with simultaneous purchase and sale transactions in one of the fictitious accounts Palumbo obtained a check issued by Hanauer, endorsed the check in the fictitious name and negotiated the check. Cookler A number of Cookler's customers requested confidentiality with respect to their transactions. Cookler accommodated these requests by opening accounts in the names of two persons who had no interests in the accounts. Transactions were executed in both accounts. Confirmations for these transactions were prepared in the fictitious names. Hanauer recorded these transactions on its blotter and customer account ledger in the false names. In accordance with his customers' requests, Cookler obtained and destroyed confirmations for transactions in the two accounts. He also destroyed customer confirmations for transactions in an account of another customer. Heller Heller opened a number of fictitious accounts for cash customers who sought anonymity. Heller opened these accounts with no new account information other than names and addresses. He executed transactions for these persons in false names. Confirmations for the transactions were prepared in false names and Hanauer recorded these transactions on its blotter and customer account ledger in the fictitious names. He complied with requests not to mail any documents concerning transactions to the addresses provided. Heller personally delivered municipal bonds to these purchasers in restaurants and bars. One account was opened in the name of a person who had never maintained an account with Hanauer or transacted business with Hanauer. Nine other purported customers of Heller were found not to reside at the addresses indicated on Hanauer's books and records. Appelbaum Appelbaum accommodated the confidentiality requests of eight cash customers. Each customer requested that Appelbaum not send documents to them concerning their transactions. Appelbaum opened new accounts for these customers indicating 304 Lucerne Avenue, Lake Worth, Florida as the address for each account. The 304 Lucerne Avenue address is occupied by an answering service, used by another Hanauer registered representative, Tessler, as a mail drop. Customer confirmations for transactions in Appelbaum's accounts requesting confidentiality were mailed to this address. The confirmations were thereafter picked up by Tessler who either personally destroyed them or gave them to Appelbaum who destroyed them. Cohen Cohen also accommodated the requests of certain cash customers for confidentiality. Cohen opened six accounts in fictitious names provided by an individual with whom Cohen had transacted business prior to becoming associated with Hanauer. All orders for municipal securities transactions were placed by that individual but executed in accounts in fictitious names which he provided. Confirmations for these transactions were prepared in fictitious names. Hanauer recorded these transactions on its blotter and customer account ledger in the fictitious names. Bonds and confirmations were delivered to that person by Cohen, in exchange for payment in currency. One such account opened by Cohen was in the name of a person who had no interest in the account and who never transacted business with Hanauer. At least the addresses of the five other persons in whose name Cohen opened accounts were fictitious. Cohen opened five other accounts in fictitious names and addresses provided by a single individual. Orders were placed in these accounts, bonds and confirmations were received and payment was made by one or two individuals. Friedman Friedman opened at least six accounts in fictitious names and addresses and he executed municipal securities transactions in these accounts. Confirmations for these transactions were prepared in fictitious names and Hanauer recorded these transactions on its blotter and customer account ledger in the false names. Frank Frank opened at least five accounts in fictitious names and addresses. Frank executed municipal securities transactions in these accounts. Confirmations for these transactions were prepared in false names and Hanauer recorded these transactions on its blotter and customer account ledger in fictitious names. Tessler Hanauer's customer account cards and customer account ledgers indicate that a significant number of Tessler's accounts have the same address: 304 Lucerne Avenue, Lake Worth, Florida. As discussed above, this is the address of an answering service used by Tessler as a mail drop for confirmations and other customer mailings by Hanauer. Customer confirmations for transactions in these accounts were sent to this address and obtained by Tessler who destroyed them. Overcharges Friedman Friedman was the designated registered representative for the account of a resident of Shreveport, Louisiana. During 1978, this customer purchased municipal securities through Friedman on four separate occasions. In each instance, Friedman delivered the bonds along with a document referred to as a "portfolio page" which purported to describe the transactions. The customer never received a customer confirmation for any of his transactions. With respect to the fourth transaction the purchase price on the portfolio page and the amount the customer remitted to Friedman in currency is $9,000 greater than the corresponding entries on Hanauer's blotter and customer account ledger. Friedman diverted this amount to his own use. In a similar manner, Friedman overcharged the same customer $5,500 in connection with the purchase of additional municipal bonds in February 1979. Frank A Hanauer customer from Jamaica, New York, purchased municipal securities from Hanauer on two occasions in 1979. Both transactions were executed by Frank. Frank overcharged the customer by $7,503.97 on these transactions, which amount he diverted to his own use. Upon receipt of a subpoena, issued by the Commission's staff in the investigation preceding this action, the customer and her husband contacted Frank and inquired why the subpoena had been issued. Frank advised them that the subpoena was issued in the course of a routine inquiry. Frank suggested that they return to him their records concerning their transactions in order to be certain that everything was proper. As a result of this conversation they met with Frank several days later. At their meeting they gave Frank what they then believed to be all their records. Frank took the documents and gave them four new documents which described their bond transactions and four photostats of salesmen copies of confirmations for delivery to the Commission in response to the subpoena. The customer's original documents indicated a total purchase price of $70,771.92, the amount actually paid by the customer to Frank. The confirmations which Frank gave them indicated a total purchase price of $63,267.95, a difference of $7,503.97, which amount Frank misappropriated and diverted to his own use. Tomasheski As discussed above, Tomasheski was the registered representative for several customers who requested anonymity and Tomasheski accommodated these requests by opening accounts in fictitious names and destroying confirmations. Two customers of Tomasheski who made such requests were New Jersey residents. They purchased municipal securities through a joint account with currency and asked not to receive any documents concerning their transactions. Relying upon the fact that the customers did not receive confirmations and that their remittance was in the form of currency, Tomasheski overcharged them at least $700 on a municipal securities transaction in February 1978. Palumbo In April 1980, Palumbo solicited Friedman's customer who resided in Shreveport, Louisiana. The customer subsequently placed an order with Palumbo to purchase certain municipal securities. As discussed above, Palumbo opened a new account in a fictitious name and executed the order in this account. The customer's transaction with Palumbo was handled in substantially the same manner as his transactions with Friedman. Palumbo, like Friedman, gave the customer a portfolio page rather than a confirmation. The price listed on the portfolio page and the amount of currency which the customer paid to Palumbo is $2,000 greater than the corresponding entry on Hanauer's records. Palumbo converted this money to his own use. As indicated above, Palumbo opened several accounts in fictitious names and did not provide customer confirmations for transactions in these accounts. Palumbo executed municipal securities transactions for a resident of Margate, New Jersey, in two fictitious accounts. In connection with several transactions in which the customer exchanged with Hanauer certain bonds which he owned for other bonds, Palumbo provided him with portfolio pages for these transactions which indicate municipal bond prices totalling $9,231.05 more than the corresponding entries on Hanauer's records. Palumbo misrepresented the price of the bonds in order to conceal from the customer a market loss in the bonds he had exchanged. Goodman Goodman was the registered representative for several cash customers who did not receive confirmations. Certain of Goodman's cash customers refused to provide Goodman with a telephone number or other means by which they might be contacted. Goodman arranged for the exchange of the municipal securities and currency with such customers. Goodman overcharged certain of his cash customers who did not receive customer confirmations, in order to reimburse himself for expenses incurred in connection with those customers' transactions. In connection with several municipal securities transactions checks were issued by Hanauer in the names of certain of Goodman's purported customers. Goodman obtained these checks and endorsed the checks with the fictitious names and converted the funds to his own. Wolfson Wolfson had a number of customers that were habitually late in making payment for municipal securities. Due to this fact Wolfson was occasionally charged with interest expenses. Wolfson overcharged certain of his customers on subsequent transactions to compensate him for the interest expenses he paid when they had failed to remit by settlement date. Ehrlich Several of Ehrlich's customers purchased municipal securities with currency. One cash customer with whom Ehrlich had previously transacted business contacted Ehrlich in late 1979 and stated that he had a certain amount of money to invest and asked Ehrlich to select bonds within certain parameters. Ehrlich subsequently contacted this customer and informed him that he had selected bonds meeting the customer's criteria and quoted him a price for the particular municipal securities. Shortly thereafter, Ehrlich contacted the customer again and stated that the price for the same municipal securities would be $2,000 more than the original quote. Ehrlich's attempt to overcharge the customer was unsuccessful due to an inquiry made by the customer to the branch manager of the Hanauer office to which Ehrlich was assigned. Failure to Supervise The Respondents Hanauer, Friedman, Glucksman, Frank, Jacobson, Marcus and Silverman failed reasonably to supervise persons subject to their supervision with a view to preventing violations of various provisions of the Securities Act, the Exchange Act and Rules of the Commission and of the MSRB. Hanauer and persons in its management responsible for supervision not only neglected their responsibilities under existing procedures but failed to impose even elementary new procedures to prevent violations, even after learning of violative conduct by persons under their supervision. Hanauer, Friedman, Glucksman, Frank, Jacobson and Marcus failed to establish procedures for obtaining and verifying even required customer information before effecting transactions in new accounts. As a result, accounts were opened without required information, and in fictitious names. Further, confirmations were prepared in fictitious names and addresses and such names and addresses were entered on Hanauer's blotter and customer account ledger. The firm also lacked reasonable procedures and failed to enforce existing procedures for the delivery of confirmations to customers. Hanauer's registered representatives were given access to customer confirmations. As a result, Hanauer's registered representatives destroyed or failed to deliver customer confirmations to Hanauer's customers in connection with their transactions in municipal securities. Hanauer also lacked procedures designed to prevent registered representatives from handling customer confirmations and currency received from customers in payment for municipal securities. As a result, Hanauer's customers were unable to verify salesmen's representations on the costs of transactions and Hanauer had no control over the customer funds received by its salesmen. This enabled certain of Hanauer's registered representatives to overcharge customers. On those occasions when Hanauer's senior personnel became aware of improper conduct and violations they failed to impose any sanctions upon the responsible persons or to institute procedures adequate to prevent and detect recurrences of the violative conduct. In one instance, Friedman and Glucksman became aware of a rumor that a salesmen had overcharged a customer as discussed above. Friedman subsequently called a meeting of the sales staff. He informed the sales staff that he had learned of an instance in which a customer was overcharged and suggested that the responsible registered representative should come forward and identify himself. Tomasheski, however, did not come forward at that time. Several days after the meeting, Tomasheski approached Glucksman, who was then an Executive Vice President and who had hired Tomasheski, and advised him that he had overcharged a customer. Glucksman then told Tomasheski that he should see Friedman at once. Glucksman escorted Tomasheski to Friedman's office. Friedman told Tomasheski that he had learned of the overcharge after the customer contacted the firm to verify the price of the bonds purchased. Friedman further told Tomasheski that his conduct was unlawful and that the could be barred from the securities industry for such actions. At Friedman's request, Tomasheski gave him the difference between the amount received on the transaction and the purchase price recorded on Hanauer's records. Friedman did not return the money to the customer because he did not know which of Tomasheski's customers had been overcharged. He has advised our staff that he made a charitable donation of the money but the purported donation was made in such a manner that there is no documentary evidence of the contribution. Neither Friedman nor any other Hanauer supervisory official took any action against Tomasheski or imposed any restrictions upon his activities. Further, no federal, state, local or self-regulatory authority was informed of the overcharge. In another instance, a new account was opened by Wolfson at Hanauer in the name of a New York City attorney who had no interest in or knowledge of the account. The attorney subsequently received a confirmation for a municipal securities transaction from Hanauer. The attorney then wrote a letter to the National Association of Securities Dealers, Inc. and the New York Attorney General's Office to complain that he had received a securities confirmation for a transaction with a firm with which he did not maintain an account and had never transacted any business. He also sent a complaint letter to Glucksman, Hanauer's President. Glucksman responded to the attorney's complaint by sending him a letter indicating that the transaction described in the confirmation had been cancelled and that his name had been removed from Hanauer's customer records. Glucksman did not seek an explanation from Wolfson or take any other action. In another instance, Silverman, while the Branch Manager of Hanauer's Palm Beach office was informed by a registered representative in that office that one of his customers had requested that he open an account in a fictitious name. The registered representative told Silverman that he had opened the account in a name provided by the customer and that he had executed a transaction for his customer in that account. Silverman responded to this disclosure by telling the salesmen not to say anything further and that he did not want to know about it. II. FINDINGS Based upon the foregoing, we find that: (a) Hanauer, Friedman, Frank, Palumbo, Tomasheski, Goodman and Wolfson willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (b) Ehrlich willfully violated Section 17(a) of the Securities Act; (c) Hanauer willfully violated and Friedman, Glucksman, Frank, Jacobson, Marcus, Palumbo, Tomasheski, Goodman, Wolfson, Appelbaum, Stein, Altman, Heller, Cohen, Cookler and Tessler willfully aided and abetted violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder; (d) Hanauer willfully violated and Friedman, Frank, Palumbo, Tomasheski, Goodman and Wolfson willfully aided and abetted violations of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder; (e) Hanauer willfully violated and Friedman, Glucksman, Frank, Jacobson, Marcus, Palumbo, Tomasheski, Goodman, Wolfson, Appelbaum, Stein, Altman, Heller, Cohen, Cookler and Tessler willfully aided and abetted violations of Rules G-8, G-15 and G-26 of the MSRB and Section 15B(c)(1) of the Exchange Act; and (f) Hanauer, Friedman, Glucksman, Frank, Jacobson, Marcus and Silverman failed reasonably to supervise, with a view to preventing the foregoing violations, persons who committed such violations while subject to their supervision. III. OFFERS OF SETTLEMENT The Respondents have submitted offers of Settlement in which, without admitting or denying the findings herein, they consent to the issuance of this Order containing the Findings and remedial sanctions set forth herein. IV. ORDER In view of the foregoing, the Commission deems it appropriate and in the public interest that administrative proceedings pursuant to Sections 15(b)(4) and (6) and 19(h) of the Exchange Act be instituted. Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Sections 15(b)(4) and (6) and 19(h) of the Exchange Act be and they are hereby instituted and that the Respondents' Offers of Settlement are accepted. IT IS FURTHER ORDERED that the registration of Hanauer as a broker-dealer be, and it hereby is, suspended for a period of one hundred twenty (120) days; PROVIDED HOWEVER, that during the period of the suspension ordered herein, Hanauer shall be permitted to engage in the following activities and only those activities: government or municipal bond dealer, mutual fund underwriter or sponsor, mutual fund retailer, solicitor of savings and loan accounts, and broker or dealer selling oil and gas interests; IT IS FURTHER ORDERED that Hanauer comply with its undertakings in its Offer of Settlement to adopt, implement and maintain the following procedure, policies and controls by March 1, 1982: A. To require independent periodic review of all new accounts by a senior officer of Hanauer other than the approving municipal securities principal; B. To designate an officer of the firm who, for a period of two years, will contact, in person or by telephone, each person for whom a new customer account is opened and verify the information obtained by the Hanauer registered representative who opened the account and certify in writing to the Compliance Officer that to the best of his knowledge the information contained on the new account form is accurate and complete. C. To provide to each customer written notification within five days after the time of opening the account or, in the case of existing accounts for a period of 18 months, within five days after the execution of the next securities transaction following entry of this Order, that the rules of the Securities and Exchange Commission and the Municipal Securities Rulemaking Board require Hanauer to give or send to each customer a written confirmation of each transaction containing specified information; D. To establish, implement and maintain policies and procedures restricting access to blank customer confirmations to firm personnel not engaged in sales (other than Branch managers) to cause all customer confirmations to be delivered to customers by mail, and to prohibit physical delivery of confirmations by firm personnel, except after obtaining written authorization to do so from Hanauer's President or Compliance Officer; E. To restrict access to blank confirmations to Branch Managers, compliance personnel and personnel responsible for preparation of confirmations; F. To appoint a person who will devote substantially all of his working time at Hanauer to compliance and related recordkeeping and administrative work; G. To establish, implement and maintain a policy and procedure requiring the notification and written approval of one or more designated senior officers of the firm prior to the execution of a municipal securities transaction in which the registered representative knows or has reason to believe that payment is to be made in currency in an amount in excess of $5,000; H. To establish, implement and maintain a policy and procedure that all currency received from customers in payment for municipal securities is to be given to the senior officer approving the transaction who shall verify the amount received and who shall deliver the currency to Hanauer's Treasurer, Cashier, Assistant Cashiers, or Compliance Officer. At the time that currency in an amount in excess of $10,000 is delivered to the senior officer approving the transaction the responsible registered representative shall provide in writing the information required by Internal Revenue Service Form 4789; I. To identify currency as the form of payment with respect to customer purchase transactions paid for with currency on all records required to be made and kept including the blotter, credit memoranda and the customer account ledger; J. To restrict access to deposit tickets for Hanauer's bank accounts to Hanauer's Branch Managers, Treasurer, Cashier, Assistant Cashiers and Compliance Officer; K. To establish and implement a policy that currency received by Hanauer in payment for municipal Securities shall be prepared for deposit to Hanauer's bank accounts only by Hanauer's Cashier or Assistant Cashiers or Compliance Officer and that such person shall initial each deposit ticket prepared by him; L. To designate senior officers to prepare, file and maintain copies of, in Hanauer records, Currency Transaction Reports on Form 4789 or other prescribed form to the extent, at the time and for the time required by applicable law; M. To designate a senior officer, for a period of one year from the date of entry of this Order, to review and initial all orders relating to the purchase, sale or redemption of municipal securities executed by employees of Hanauer named as Respondents in this Order; N. Not later than one month after the date of this Order, to contribute a sum equal to the amount of all overcharges specifically alleged by the Commission in the Findings and Order to have occurred to the United States Treasury; O. Not later than seven months after the date of the entry of this Order, to contribute to the United States Treasury an amount equal to that portion of Hanauer's net income after taxes for the four calendar months next after the date of the entry of this Order which is attributable to new customers, namely those customer accounts not listed as customer accounts on Hanauer's customer account ledger as of the first day of the month immediately following the date of the entry of this Order; P. To retain an independent public accounting firm, other than the accounting firm which performed the most recent audit of Hanauer's financial statements, to conduct a special audit to confirm the existence and identity of each customer account of Hanauer, as of March 31, 1982, and to verify the customers' addresses indicated on Hanauer's records as the actual residence or principal business address. Such audit is to be completed by June 30, 1982. The independent public accounting firm will prepare a report of the audit and Hanauer will furnish a copy of the report to the Commission; and Q. To permit the Commission to conduct such special examinations as are necessary to ensure compliance by Hanauer with the terms of this Order. IT IS FURTHER ORDERED that Frank shall not become associated with any broker, dealer or municipal securities dealer without first obtaining the prior written permission of the Commission. IT IS FURTHER ORDERED that Friedman shall not become associated with any broker, dealer or municipal securities dealer without first obtaining the prior written permission of the Commission. IT IS FURTHER ORDERED that Palumbo be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of one hundred and twenty days commencing on March 1, 1982, and he shall not act in a supervisory capacity for a period of three years without the prior written permission of the Commission; PROVIDED HOWEVER that an order shall be entered barring Palumbo from being associated with any broker, dealer or municipal securities dealer, to which Palumbo consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, that he has willfully violated or willfully aided and abetted the violation of any provision of the Securities Act, the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board. IT IS FURTHER ORDERED that Goodman be, and he hereby is, suspended from being associated with any broker, dealer, or municipal securities dealer, for a period of one year commencing on March 1, 1982; PROVIDED HOWEVER that an order shall be entered barring Goodman from being associated with any broker, dealer or municipal securities dealer, to which Goodman consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, he has willfully violated or willfully aided and abetted the violation of any provision of the Securities Act, the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board. IT IS FURTHER ORDERED that Jacobson be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of one hundred and twenty days commencing on May 1, 1982, and shall not, except after first obtaining the written permission of the Commission, assume responsibility for or supervise the person or persons at Hanauer who are charged with the responsibility for compliance by Hanauer or its employees with the requirements of the Federal securities laws, or the rules and regulations of the National Association of Securities Dealers, Inc. or the Municipal Securities Rulemaking Board. IT IS FURTHER ORDERED that Marcus be, and he hereby is, suspended from being associated with any broker, dealer, or municipal securities dealer, for a period of ninety days commencing on September 1, 1982, and shall not, except after first obtaining the written permission of the Commission, assume the responsibility for or supervise the person or person at Hanauer who are charged with the responsibility for compliance by Hanauer or its employees with the requirements of the Federal securities laws, or the rules and regulations of the National Association of Securities Dealers, Inc. or the Municipal Securities Rulemaking Board. IT IS FURTHER ORDERED that Glucksman be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of sixty days commencing on March 1, 1982, and shall not, except after first obtaining written permission of the Commission, assume the responsibility for or supervise the person or persons at Hanauer who are charged with the responsibility for compliance by Hanauer or its employees with the requirements of the Federal securities laws, or the rules and regulations of the National Association of Securities Dealers, Inc. or the Municipal Securities Rulemaking Board. IT IS FURTHER ORDERED that Erhlich be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of sixty days commencing on March 1, 1982; PROVIDED HOWEVER that an order shall be entered barring Erhlich from being associated with any broker, dealer or municipal securities dealer, to which Erhlich consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, he has willfully violated or willfully aided and abetted the violation of any provision of the Securities Act, the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board; IT IS FURTHER ORDERED that Stein be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of sixty days commencing on March 1, 1982; IT IS FURTHER ORDERED that Wolfson be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities for a period of forty-five days commencing March 1, 1982; PROVIDED HOWEVER that an order shall be entered barring Wolfson from being associated with any broker, dealer or municipal securities dealer, to which Wolfson consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, he has willfully violated or willfully aided and abetted the violation of any provision of the Securities Act, the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board; IT IS FURTHER ORDERED that Tomasheski be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of forty-five days commencing on March 1, 1982; PROVIDED HOWEVER that an order shall be entered barring Tomasheski from being associated with any broker, dealer or municipal securities dealer, to which Tomasheski consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, he has willfully violated or has willfully aided and abetted the violation of any provision of the Securities Act, the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board; IT IS FURTHER ORDERED that Cookler be, and he hereby is, suspended from being associated with any broker, dealer, or municipal securities dealer, for a period of forty-five days commencing March 1, 1982; PROVIDED HOWEVER that an order shall be entered barring Cookler from being associated with any broker, dealer or municipal securities dealer, to which Cookler consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, he has willfully violated or willfully aided and abetted the violation of any provision of the Securities Act or the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board; IT IS FURTHER ORDERED that Altman be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of forty-five days commencing on March 1, 1982; PROVIDED HOWEVER that an order shall be entered barring Altman from being associated with any broker, dealer or municipal securities dealer, to which Altman consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, he has willfully violated or willfully aided and abetted the violation of any provision of the Securities Act, the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board; IT IS FURTHER ORDERED that Heller be, and he hereby is, suspended from being associated with any broker, dealer, or municipal securities dealer, for a period of forty-five days commencing on March 1, 1982; PROVIDED HOWEVER that an order shall be entered barring Heller from being associated with any broker, dealer or municipal securities dealer, to which Heller consents in his offer of settlement submitted herein, upon any finding by the Commission that, after the entry of the Order herein, he has willfully violated or willfully aided and abetted the violation of any provision of the Securities Act or the Exchange Act or rules promulgated thereunder or the rules of the Municipal Securities Rulemaking Board; IT IS FURTHER ORDERED that Cohen be, and he hereby is, suspended from being associated with any broker, dealer or municipal securities dealer for a period of twenty days commencing on March 1, 1982; IT IS FURTHER ORDERED that Tessler be, and he hereby is, censured; IT IS FURTHER ORDERED that Silverman be, and he hereby is, censured; and IT IS FURTHER ORDERED that Appelbaum be, and he hereby is, censured. By the Commission. Footnotes -[n1]- On February 11, 1982, the United States District Court for the District of New Jersey entered a Final Judgment against Hanauer in a Commission enforcement action. The District Court enjoined Hanauer from violating provisions of the Federal securities laws and Rules of the Commission and of the Municipal Securities Rulemaking Board. The defendant was also enjoined from violating provisions of the Currency and Foreign Transactions Reporting Act and Regulations of the Department of the Treasury thereunder. Hanauer consented to entry of the Final Judgment without admitting or denying the allegations in the Complaint. -[n2]- In mid-1980, after the initiation of the Commission's investigation, Hanauer changed its procedure for the delivery of confirmations to customers. Under the revised procedure, customer copies of confirmations were not distributed to the registered representatives. Confirmations were instead routed from the back office to a senior Hanauer officer, Jacobson, for his review and then to Hanauer clerical personnel for mailing to the customer. -[n3]- Section 221 of the Currency Act and Treasury Regulation 103.22 requires financial institutions to file a report upon receipt of cash in amounts in excess of $10,000. Hanauer, a financial institution for purposes of the Currency and Foreign Transactions Reporting Act, did not file any Currency Transaction Reports until after the inception of the investigation. To Contents    In re Richard C. Flick, Exchange Act Release No. 13777 (July 20, 1977). The Securities and Exchange Commission has ordered public administrative proceedings under the Securities Exchange Act of 1934, as amended ("Exchange Act"), against Richard C. Flick of Memphis, Tennessee. The proceedings are based upon allegations of the Commission's staff that Flick has violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 in the offer and sale of municipal bonds, and the fact that Flick has been enjoined from further violations of these sections of the securities laws in the case of SEC v. Shelby Bond Service Corporation, et al., which was brought in Memphis, Tennessee. A hearing will be scheduled by further order to take evidence on the staff allegations and to afford the respondent an opportunity to offer any defenses thereto, for the purpose of determining whether the allegations are true and, if so, whether any action of a remedial nature is necessary or appropriate in the public interest. To Contents    In re Richard C. Flick, Exchange Act Release No. 14629, A.P. File No. 3-5256 (April 3, 1978). In these broker-dealer proceedings instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 -[n1]- ("Exchange Act") Richard C. Flick ("Flick") has submitted an Offer of Settlement, without admitting or denying the allegations contained in the Order for Public Proceedings, which the Commission has determined to accept. On the basis of the Order for Public Proceedings and the Offer of Settlement, it is found that Flick willfully violated, and was permanently enjoined by consent from further violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in connection with the offer and sale of municipal securities as alleged in the Order. The Commission further finds that it is in the public interest to impose the sanctions specified in the Offer of Settlement. ACCORDINGLY IT IS ORDERED that, effective the first Monday after the date of this order: Flick be, and hereby is, suspended for a period of 150 days from association with any broker or dealer; Flick be, and hereby is, barred from association with any broker or dealer in a supervisory capacity; provided, however, that he may apply to become associated with a broker or dealer in a supervisory capacity after the expiration of one year from the effective date of this order. By the Commission, by its Secretary, pursuant to delegated authority. Footnotes -[n1]- In the Matter of Richard C. Flick, instituted June 28, 1977. To Contents    In re First Mississippi Securities, Inc., et al., Exchange Act Release No. 13779 (July 20, 1977). The Securities and Exchange Commission has ordered public administrative proceedings under the Securities Exchange Act of 1934, as amended, ("Exchange Act") against First Mississippi Securities, Inc. ("Registrant"), a Pearl, Mississippi, municipal securities broker-dealer, Ralph K. Hall, the president, treasurer, and a principal stockholder of Registrant, Larry K. Klos, the vice-president, secretary, and a principal stockholder of Registrant, and Sam Stalvey, a vice-president and salesman of Registrant. The proceedings are based upon allegations of the Commission's staff that, during the period of February 10, 1977, to the present, Registrant, Hall, Klos, and Stalvey violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in the offer and sale of municipal bonds. A hearing will be scheduled by further order to take evidence on the staff allegations and to afford the respondents an opportunity to offer any defenses thereto, for the purpose of determining whether the allegations are true and, if so, whether any action of a remedial nature is necessary or appropriate in the public interest. To Contents    In re First Mississippi Securities, Inc., et al., Exchange Act Release No. 14230, A.P. File No. 3-5257 (December 5, 1977). In these proceedings pursuant to the Securities Exchange Act of 1934 ("Exchange Act"), n1 First Mississippi Securities, Inc. ("Registrant"), Ralph K. Hall, Larry K. Klos, and Sam Stalvey have submitted an offer of settlement which the Commission has determined to accept. Solely for the purpose of these proceedings and without admitting or denying the findings herein, respondents consent to the findings and sanctions set forth below. On the basis of the Order for Proceedings and the offer of Settlement, it is found that Registrant, Hall, Klos, and Stalvey willfully violated and willfully aided and abetted violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Respondents make the following undertakings in connection with their Offer of Settlement: (1) To refrain from publishing or otherwise disseminating to the general public any information or literature about the financial status of municipal securities or of a corporation or other entity being financed through the issuance of securities without first obtaining financial statements for the most recent period available, and any other information necessary in order to assure that the statements disseminated are accurate and complete; (2) Hall, Klos, and Stalvey undertake to contact purchasers of certain municipal securities, make certain disclosures about the securities, and offer to rescind the transactions as set forth in the Amended Offer of Settlement; and (3) Hall, Klos and Stalvey undertake to enroll in and successfully complete a course of continuing education for broker-dealers and securities salesmen. In view of the foregoing, it is in the public interest to accept the offer of settlement by the Respondents and to impose the sanctions specified in the offer of settlement Settlement. ACCORDINGLY, IT IS ORDERED that: (1) The registration of First Mississippi Securities, Inc., be, and hereby is, suspended for a period of 20 calendar days, effective at the opening of business on the second Monday after the date of this Order; (2) Ralph K. Hall, Larry K. Klos, and Sam Stalvey be, and hereby are, suspended from association with any broker or dealer for a period of 20 calendar days, effective at the opening of business on the second Monday after the date of this order, except as may be necessary to complete the undertakings contained in the offer of settlement and (3) The Respondents comply with the undertakings set forth in the offer of settlement. Footnotes -[n1]- In the Matter of First Mississippi Securities, Inc. instituted June 23, 1977. To Contents    In re James L. Cody, Inc., James L. Cody, Exchange Act Release No. 10505, A.P. File No. 3-4389 (November 16, 1973). In these proceedings pursuant to Sections 15(b) and 15A of the Securities Exchange Act, offers of settlement were submitted by James L. Cody, Inc. ("Cody Inc."), formerly a registered broker-dealer, and James L. Cody, its president. Solely for the purpose of these proceedings, and without admitting or denying the allegations in the order for proceedings, respondents consented to findings of misconduct as alleged in that order and to the imposition of certain remedial sanctions. Upon the recommendation of its staff, the Commission determined to accept the offers of settlement. On the basis of the order for proceedings and the offers, it is found that: -[n2]- 1. During the period from about June 1, 1971 to March 31, 1973, Cody Inc., willfully aided and abetted by Cody, willfully violated Section 15(c) (3) of the Exchange Act and Rule 15c3-1 thereunder, in that Cody Inc. effected securities transactions when its aggregate indebtedness to all other persons exceeded 2,000 per centum of its net capital and it did not have and maintain net capital of not less than $5,000. 2. During the period from about September 15, 1971 to March 31, 1973, Cody Inc., willfully aided and abetted by Cody, willfully violated Section 17(a) of the Exchange Act and Rule 17a-11 thereunder in that Cody Inc. failed to file required reports concerning its net capital condition. 3. In connection with the offer, sale and purchase of certain municipal bonds during the period from about March 1, 1972 to March 31, 1973, respondents willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that, among other things, they induced customers to purchase such bonds from or sell them to Cody Inc. at prices which were unreasonable in relation to Cody Inc.'s contemporaneous cost or to the prices at which other dealers were quoting them contemporaneously. In addition, respondents failed reasonably to supervise persons under their supervision with a view to preventing the above violations. 4. Cody Inc., willfully aided and abetted by Cody, willfully violated Section 15(b) of the Exchange Act and Rule 15b3-1 thereunder by failing properly to file an amendment to Cody Inc.'s registration form reflecting the fact that a 50% stockholder of Cody Inc. was permanently enjoined on July 26, 1972 from violating certain provisions of the Exchange Act. The settlement offers provide that Cody Inc. and Cody may be barred from association with any broker-dealer, provided that after seven months Cody may apply to the Commission to become so associated upon showing that he will be adequately supervised. In view of the foregoing, it is in the public interest to impose the specified sanctions. Accordingly, IT IS ORDERED that James L. Cody, Inc. and James L. Cody be, and they hereby are, barred from association with any broker or dealer, provided, however, that after seven months from the date of this Order Cody may apply to the Commission to become associated with a broker-dealer upon showing that he will be adequately supervised. For the Commission, by the Office of Opinions and Review, pursuant to delegated authority. Footnotes -[n1]- The firm's broker-dealer registration was withdrawn effective June 23, 1973. -[n2]- The findings herein are binding only upon the above-captioned respondents. To Contents    Administrative Law Judge Decision In re Lawrence A. Luebbe, A.P. File No. 3-5175 (September 23, 1977). BEFORE: Max O. Regensteiner, Administrative Law Judge TEXT: INITIAL DECISION In these public proceedings instituted by the Commission pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) and (f) of the Investment Advisers Act of 1940, the issues to be considered are (1) whether Lawrence A. Luebbe ("respondent") engaged in misconduct as alleged by the Division of Enforcement and (2) what if any remedial action is appropriate in the public interest in the light of an injunction which has been entered against respondent and such misconduct as may be found herein.n1 The allegations as well as the injunction pertain to the offer and sale, during the period from July through October 1975, of general obligation bond anticipation notes issued by Reclamation District No. 2090, a California public agency. Respondent, who was then president of a registered broker-dealer, is charged with willfully violating and willfully aiding and abetting violations of antifraud provisions of the securities laws by recommending and selling such notes without having made a reasonable and diligent inquiry into the District's financial condition and in disregard of information regarding such condition and by making false and misleading statements concerning specified matters. On November 9, 1976, respondent was permanently enjoined, with his consent, from violating antifraud provisions in the offer or sale of the notes or any other security. n2 Following hearings, at which respondent represented himself, the parties filed proposed findings and conclusions and supporting briefs, and the Division filed a reply brief. The findings and conclusions herein are based on the record and on observation of the witnesses' demeanor. Clear and convincing evidence is the standard of proof applied. n3 The Respondent Respondent, who is 56 years old, has worked in the securities business since 1959, for the last 16 years on a full-time basis. After serving as branch manager of a broker-dealer for several years, he founded his own firm, MFAI Associates, in 1966 and has at all times been its president and sole shareholder. MFAI was registered as a broker-dealer from 1966 until the end of 1976, when it withdrew its registration. At the present time, MFAI is a "division" of another registered broker-dealer. The office out of which respondent operates is in his home, and his wife is the office supervisor. Respondent was also for a number of years president and a director of a registered investment company. He was forced to resign from those positions in late 1976 because of the injunction against him. In addition, he has been secretary and a director of the investment company's management company and principal underwriter, which is registered both as an investment adviser and broker-dealer.n4 The District The District, which was apparently created in 1955, n5n5 encompasses about 983 acres in the Sacramento River Delta, some 55 miles east of San Francisco. It was formed by the owners of that land, pursuant to California's Water Code, with a view to raising funds for and engaging in reclamation and other projects. As of 1975, the District itself owned all but about 200 acres of the land within its boundaries. Thus, while it had the power to assess taxes on privately-owned land, its tax base was negligible. In January 1975, the District authorized the issuance of $50 million in bond anticipation notes. As its name indicates, a bond anticipation note is a short-term note issued in anticipation of a bond issue. Such notes are normally retired with the proceeds of the bond issue. Alternatively, the bonds may be offered to the noteholders in exchange for the notes. The District's notes, which carried interest at the rate of eight percent, were payable on April 1, 1976. By their terms, stated on the face of the notes, they were secured by revenues to be received or accrued by the District during the fiscal year ended June 30, 1975 and were to be paid from the proceeds of bonds to be issued by the District in accordance with an offer to purchase the bonds on file with the District's secretary. The notes further stated that notwithstanding the specified provisions for payment, they constituted a general obligation of the District and to the extent not paid from revenues or bonds would be paid from other available monies. n6 It appears that out of the $50 million in notes which were authorized, only $5 million was actually issued. Those notes were issued to one James Dondich in exchange for property in Colombia, South America. About $1.22 million of the notes were sold to public investors. Dondich sold $400,000 face amount of notes at substantial discounts to National Municipal Bond Company ("National"), a municipal securities dealer of which one Roger Osness was a principal. National, which as a dealer exclusively in municipal securities was at that time not subject to registration under the Exchange Act, n7 in turn marketed $55,000 of the notes through MFAI.n8 In or about May 1975, the District also authorized the issuance of $1 million in general obligation negotiable promissory notes; these were subsequently sold, apparently to public investors. The financial reports of the District to the State Controller for the fiscal years ended June 30, 1974 and 1975 (the latter filed on August 1, 1975) and its certified financial statements for the 1974 fiscal year showed, among other things, that the District had no revenues from taxes or assessments in either year; that in the earlier year, its total revenues were about $437,000, consisting almost entirely of a non-recurring prepaid rental item, and net revenues over expenditures amounted to about $174,000; and that in fiscal 1975 revenues totalled only about $43,000 and the District lost over $154,000 on operations. When the notes and interest thereon became due in April 1976, the District defaulted. And the bond issue referred to in the notes never materialized. In June 1976, the District filed a petition under Chapter IX of the Bankruptcy Act, n9 alleging that it was unable to pay its debts as they matured. For reasons which do not appear in the record, the petition was dismissed in April 1977. n10 Violations in Sale of Notes During the period from July 10 to October 28, 1975, MFAI sold bond anticipation notes in the total amount of $55,000 to eight customers. Respondent personally sold notes totalling $20,000 to three customers during July. He knew that those persons were principally concerned with the safety of their investments. Yet he recommended these securities to them despite the fact that he had little information of a reliable nature about the District and in particular had no reliable financial data. Two of respondent's customers testified at the hearing. Their testimony, which is undisputed, is credited. One of them advised respondent that he planned to retire in two years from his job as proofreader, had a maximum of $5,000 to invest, and wanted an investment that was secure. Respondent recommended a $5,000 note to him and stressed that it was a safe investment. The customer thereupon purchased the note. The other investor-witness and her husband, who together also invested $5,000 in a note, are both employed by the U.S. Postal Service, she as a clerk and he as a carrier. She testified that they advised respondent they were interested in investing for their retirement and needed a secure investment. Respondent assured them the note was a good and safe investment. MFAI distributed to these customers and to others a flyer, under National's name, which contained some general information about the notes, but none about the District. The contents of the flyer are described in more detail below. As of the time of the hearing in April 1977, more than a year beyond the maturity date of the notes, the investors had not received any payment of interest or principal. Such information as respondent had concerning the District came almost entirely from National and Osness. The latter had made a "cold" call on MFAI in late 1974 to interest that firm in selling municipal securities distributed by National. Discussions culminated in a contract between National and MFAI in December 1974 under which the latter would sell municipal bonds made available to it by National in return for an eight percent commission. Notwithstanding the extent of his reliance on Osness, respondent did not inquire into Osness's experience with the securities regulatory agencies and thus was not aware that Osness had been sanctioned by the Commission. n11 While National made several municipal securities available to MFAI, the latter offered only two to its customers: an industrial revenue bond and the District notes. In the case of the revenue bonds, respondent arranged through Osness to have sales cancelled and money refunded to MFAI customers who had bought the bonds, when respondent ascertained that as a result of weather-related problems there would be a delay in moving the industrial enterprise in question into the municipally-owned facility. With respect to the District notes, Osness and an associate furnished respondent with three items of written information. One was a specimen copy of the note. The second item, which was furnished in quantity and as noted was distributed by MFAI to prospective purchasers, was the above-mentioned flyer. It stated that the notes were tax-exempt, were due on April 1, 1976, and were to be redeemed by full payment plus accrued interest or by the issuance of ten-year general obligation bonds bearing eight percent interest. It listed the name and address of the District's counsel, and it stated that the offering was subject to approval of legality by named bond counsel and that only $5 million of notes, out of the total $50 million issue, had been issued. The balance of the flyer consisted of a reproduction of the text on the face of the note. Thus, as noted by the Division, the flyer said nothing about the District's financial condition or tax base, the background of its management, its existing debt structure or other matters of a material nature. The final item which National provided to respondent was a one-page sheet entitled "Background Information." Osness informed respondent that this sheet had not been cleared for customer use. The sheet stated, among other things, that the District was engaged primarily in developing innovative concepts of aquaculture which were receiving world-wide attention and secondarily in developing recreational and educational facilities. Prior to the time MFAI began to sell the notes, Osness, in answer to respondent's questions, orally gave him certain additional information concerning the District. Some of the information pertained to the District's present and proposed operations and the identity of its management. The financial information conveyed was, in respondent's words, "only general." Osness told respondent that the District's books, which he said he had seen, showed that its assets exceeded $100 million, including a substantial interest in land in South America, and its liabilities were less than $10 million. When respondent asked Osness to get him copies of "this," Osness said he would attempt to do so, but respondent received no copies before the sales began. Later Osness advised respondent that he had received "additional statements, the written ones," but that District officials had asked him not to divulge those and had indicated they would give them to respondent directly. Osness said that, pursuant to respondent's request, he would arrange for a visit by respondent to the District and see to it that respondent received financial statements at that time. As it happened, respondent did not see the District until about October 1976. Beginning in early July 1975, respondent had some telephone conversations with the District's general manager concerning a visit. The latter at first promised to arrange for a prompt visit, but thereafter interposed a series of delays. Respondent obtained no written financial data until August 1976, when Osness furnished him with unaudited material purportedly emanating from the District. At or about the time MFAI began selling the notes, respondent also contacted the District's counsel and bond counsel. The record does not indicate the nature of his discussions with the latter. Respondent asked district counsel whether the District had financial problems, and the latter responded that any organization can have financial problems. Counsel also informed respondent that the District was having problems with the county in which it was located regarding the intended land use, but further stated that "if that didn't work out they had alternate methods of operation." (Tr. 232) Respondent did not ask counsel how much money the District had made in the past year. The crux of the case against respondent is that he recommended the District notes to his customers, caused MFAI salesmen to recommend them to their customers and assured customers these were safe investments even though he had failed to make a diligent and reasonable inquiry into the material facts concerning the District, in particular its financial condition, and thus had no adequate basis for such recommendations and representations. As the Court of Appeals for the Second Circuit pointed out in an oft-quoted statement, a securities salesman ". . . cannot recommend a security unless there is an adequate and reasonable basis for such recommendation. He must disclose facts which he knows and those which are reasonably ascertainable. By his recommendation he implies that a reasonable investigation has been made and that his recommendation rests on the conclusions based on such investigation."n12 While there may be significant differences under the securities laws in the treatment to be accorded transactions in municipal as distinguished from corporate securities,n12a the Commission made clear many years ago that the duty of diligent inquiry encompasses dealers who recommend the purchase of municipal securities to their customers.n13 That duty is particularly apparent and important where the issuing agency is as obscure as the one involved here. In one of its recent decisions, the Commission, dealing with a situation closely analagous to that presented here, said: "A professional who recommends the unknown securities of obscure issuers is under a duty to investigate and to see to it that his recommendations have a reasonable basis. In prior cases we pointed out that a salesman cannot recommend the equity securities of such issuers without reliable financial data. This proposition is even more compelling when we deal, as here, with debt securities." (Footnotes omitted)n14 Addressing itself to the contention of respondents in that case that they properly relied on the advice of the presidents of their respective broker-dealer firms that the issuer's financial condition was satisfactory, the Commission went on to state: ". . . oral assurances . . . could not be used as a substitute for the concrete financial data called for in situations such as this . . . no salesman can recommend an unknown or little known security unless he has himself seen reliable financial data that supply him with a reasonable basis for his recommendation. This is especially true of debt securities. Having no current financial data, respondents could not possibly have had an adequate basis for recommending [the] notes." (Footnote omitted) n15 Respondent contends that at the time he began to sell the notes, he did have financial information concerning the District, in the form of Osness's statements regarding the District's assets and liabilities. He urges that it was only a technicality that he did not have at that time copies of the written financial material on which those statements were based, and that when he received such material in August 1976 it bore out the accuracy of Osness's statements. These arguments are without merit. Even aside from the propriety of respondent's almost exclusive reliance for information on National and Osness, about whom he knew very little,n16 oral information regarding an issuer's financial situation is, as noted above, not a substitute for review of reliable written financial data. Indeed, respondent's inability to obtain such data should have served as a "red flag." Moreover, the oral information which respondent received from Osness amounted at best to the bottom lines of a balance sheet. It revealed nothing concerning the District's revenues, income (or loss) from operations, or its tax base. Respondent's assertion that in the case of a general obligation note or bond, the public agency's total assets, not only its taxing capacities, are subject to the security holders' claims appears to be unfounded.n17 Moreover, the little information which respondent had concerning the District's assets should have served as a "red flag" rather than satisfying him that the notes represented sound investments for his customers. Osness told him that the District had substantial land holdings in South America. The nature of this purported asset should have raised questions in respondent's mind regarding the legitimacy of the District's operations or at least the quality of its management.n18 "While in an appropriate case an employee may be entitled to rely upon his own employer for information respecting a security he undertakes to sell, a higher standard of care is required of those engaged in the securities business who would place reliance upon market letters or other materials or information respecting a security which was prepared or supplied by another broker-dealer." Respondent also argues that at the time MFAI began to sell the notes, it was not yet possible to get a current audited financial report for the District since the District's fiscal year had ended only a short time before then. The argument misses the point, which is that it was respondent's obligation not to offer or sell the notes in the absence of reliable financial information. The fact that under the terms of the notes they were payable from the proceeds of bonds to be issued by the District does not affect the conclusions expressed above.n19 The District's financial condition and particularly its ability to service any bonds issued were of course critical to its ability to sell a bond issue. Respondent had no reliable information bearing on these basic matters. The order for proceedings alleges, and the Division contends, that respondent, in addition to his failure to make a diligent investigation, made false and misleading statements of material facts. Aside from stressing the safety of the investment, respondent said little to his customers about the District or its notes. He did, however, distribute the flyer. And that contained some materially misleading statements. n20 In particular, it was misleading to state that the notes were secured by revenues to be received or accrued during the 1975 fiscal year when, at the time MFAI and respondent sold the notes, that year had already been completed and the District had had only minimal revenues and had lost over $150,000 on its operations. Further, the representation that the notes, as general obligations of the District, would be paid from any other available monies if not paid from revenues or bonds, was misleading in the absence of disclosure concerning the District's financial condition and its negligible tax base. Based on the above findings, it is concluded that respondent willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. n21 The remaining issue concerns the remedial action which is appropriate in the public interest. The Division, stressing the seriousness of respondent's misconduct and his "misbegotten notion" of his responsibilities to customers as reflected in his testimony, recommends that he be barred from association with any broker-dealer, with the proviso that after one year he be permitted to return to the securities business in a non-supervisory capacity upon a showing of adequate supervision.n22 For the reasons discussed below, I conclude that a somewhat less stringent and more discriminating sanction will adequately protect the public interest. Both the Division and respondent place some emphasis on respondent's actions in connection with termination of MFAI's sales of the notes and subsequent thereto. As indicated previously, MFAI's last sale of District notes took place on October 28, 1975. The Division asserts that the termination of sales was due to the fact that National went out of business in November 1975. However, I credit respondent's testimony that it was attributable rather to his increasing concern about the legitimacy of the District's operations. That concern was fueled by the fact that the visit to the District which had been promised him and the related furnishing of financial statements to him were continually put off. The final straw was that respondent was advised that the District's general manager was away on an extended trip and that no one else at the District could answer his questions. In early November 1975, respondent wrote to both the county attorney's office and the state attorney general's office seeking information about the District. In addition, he contacted the Commission's San Francisco office to express his concern. Respondent's recognition, albeit belated, that sales should not continue, and his communications to the authorities, are entitled to some consideration as mitigating factors. On the other hand, that effect is largely dissipated by respondent's failure to advise the customers who had purchased the notes of the fact that he had terminated sales because of his serious concern about the District. Moreover, his communications to those persons after the District had already defaulted on its obligations smack of obfuscation, to put the best face on them. In early April 1976 he requested certain information from each customer on behalf of the District and added that "on receipt of this information from you, the District should be sending your interest payments and the anticipated 10-year General Obligation Bond." When he wrote this, respondent knew that the District was in default. And he had no basis, except apparently a further representation by Osness, for making such a statement. Respondent's argument that he was merely advising the customers of the District's obligations under the terms of the notes and not that it "would" take the indicated action can only be characterized as disingenuous. Moreover, even if the communications could be read that way, they would still have been misleading since there was no disclosure that respondent had no reasonable basis for believing that the District could or would belatedly comply with its obligations. The concern expressed by the Division regarding respondent's understanding of his responsibilities to customers in connection with the recommendation of securities seems well founded. Even today, respondent continues to insist that he had an adequate basis for recommending the notes. And he testified that he had not considered making restitution to the note-purchasers, because "these were the risks involved in securities." (Tr. 331) Respondent went on to explain that if he reimbursed those customers, he would also have to reimburse others whose investments had declined in value. These statements reflect a fundamental misconception of the principles involved here. While every securities investor assumes the risk of a decline in the value of his investment, the securities laws were designed in part to relieve him of the risk that his broker would recommend an investment without a reasonable basis for doing so. Finally, in the assessment of the action that is appropriate and necessary in the public interest and for the protection of investors, certain factors that weigh in respondent's favor need to be considered. Thus, his actions to make customers whole in connection with the revenue bonds were commendable. Moreover, in his 18 years in the securities business, during which his experience has been confined largely to the retail sale of mutual fund shares, he has not been the subject of any other disciplinary action. The rather impressive character testimony presented in his behalf is also entitled to some consideration. Giving due regard to all pertinent facts and circumstances, I conclude that a relatively brief suspension of respondent from the mutual fund business, coupled with exclusion for at least nine months from other areas of the securities business, will appropriately protect the public interest from future harm.n23 Accordingly, IT IS ORDERED that Lawrence A. Luebbe is hereby barred from being associated with a broker or dealer, provided that (1) After three months he may become so associated for the sole purpose of engaging in the offer and sale at retail of redeemable securities issued by investment companies registered under the Investment Company Act of 1940; and (2) After nine months he may apply to the Commission for permission to become so associated on a basis not so restricted, but only in a non-supervisory position and upon a showing of adequate supervision.n24 This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Commission's Rules of Practice. Pursuant to that rule, this initial decision shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 17(a) within fifteen days after service of the initial decision upon him, unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to him. If a party timely files a petition for review, or the Commission takes action to review as to a party, the initial decision shall not become final with respect to that party. Footnotes -[n1]- The order instituting the proceedings named three other respondents. The proceedings as to them have been disposed of on the basis of settlement offers accepted by the Commission and a default, respectively. -[n2]- S.E.C. v. Reclamation District No. 2090, Civil Action No. C-76-1231 RHS (N.D. Cal.). Respondent neither admitted nor denied the allegations of the complaint. -[n3]- The Commission has traditionally employed the "preponderance of the evidence" standard of proof. However, in its recent decision in Collins Securities Corporation v. S.E.C., C.A.D.C., August 12, 1977, the Court held that at least in cases involving alleged fraud and potentially severe sanctions, the higher "clear and convincing evidence" standard must be met. In the instant case, where there are no factual disputes of substance, the application of either standard yields the same results. -[n4]- Respondent, who was also a shareholder of that company, states in his proposed findings that its ownership has recently been sold, but does not indicate whether he is still an officer or director. Section 9(a) of the Investment Company Act would appear to preclude such affiliation because of the injunction to the same extent it compelled him to resign his positions with the investment company. -[n5]- The information in the record concerning the District's history, operations and management is rather skimpy. -[n6]- The opinion of bond counsel attached to each note stated the basis for payment somewhat differently. It stated that the notes were payable out of revenues to be received or accrued by the District during its 1975 fiscal year, "and more specifically" from the proceeds of bonds for whose purchase the District had a commitment, and that if "such revenues" were insufficient, the notes were payable from all available monies and constituted general obligations for which the District's full faith and credit was pledged. -[n7]- The provisions of the Securities Acts Amendments of 1975 requiring the registration of broker-dealers dealing in municipal securities did not become effective until December 1, 1975. -[n8]- The record does not indicate how the balance of the $1.22 million face amount of the notes reached public investors. -[n9]- Chapter IX provides for the adjustment of debts of political subdivisions and public agencies. -[n10]- According to the Division's reply brief, on June 26, 1977 the Court reopened the Chapter IX proceeding upon the District's petition. -[n11]- In 1973 Osness, who had been an officer of a registered broker-dealer, was barred by the Commission from association with any broker-dealer, provided that after seven months he could apply for re-entry into the securities business in a supervised capacity on condition that he would handle only certain types of securities. Securities Exchange Act Release No. 10263 (July 3, 1973), 2 SEC Docket No. 3, p. 88. The Commission's order was based on a settlement offer submitted by Osness. In those proceedings, Osness was charged, among other things, with violations of antifraud provisions of the securities laws. -[n12]- Hanly v. S.E.C., 415 F.2d 589, 597 (C.A. 2, 1969). -[n12a]- See, e.g., Doty and Peterson, The Federal Securities Laws and Transactions in Municipal Securities, 71 Northwestern University Law Review 283 (1976). -[n13]- Walston & Co., Inc., 43 S.E.C. 508 (1967). -[n14]- Willard G. Berge, Securities Exchange Act Release No. 12846 (September 30, 1976), 10 S.E.C. Docket 600, 602. -[n15]- Ibid. -[n16]- See Cortlandt Investing Corporation, 44 S.E.C. 45, 51 (1969): -[n17]- The District's notes by their terms subjected only the District's "available monies," not its assets, to the claims of noteholders. -[n18]- The Division maintains that the District never obtained title to the South American property. There is no evidence in the record to that effect. The record does, however, raise serious questions as to the legitimacy and value of this asset. According to the financial data which Osness furnished to respondent in August 1976, the District's total assets at June 30, 1975 were almost $108 million, including a 350,000-acre ranch in Colombia valued at $ 96 million. A footnote to the list of assets stated, however, that the ranch was "not listed in capital assets on accountant's report as it was not recorded as of June 30, 1975," but that it would be included in the 1976 accounting period. The financial report for fiscal 1975 filed by the District with the State of California showed total assets at June 30, 1975 of only $3.4 million, including land carried at $927,321. Among the obvious questions which come to mind are: why would Dondich exchange land with a $96 million value for $5 million in notes? And why would a California reclamation district want to own land in far-away South America? -[n19]- The flyer, somewhat inconsistently with the terms of the notes, stated that the notes were to be redeemed by full payment plus accrued interest from the date of purchase or by the issuance of ten-year general obligation bonds. -[n20]- Certain of the alleged misrepresentations are not clearly established by the record which contains little or no information about such matters as the District's operations and the reason why the proposed issue of general obligation bonds never materialized. -[n21]- The term "willfully" within the meaning of Section 15(b) of the Exchange Act and Section 203(f) of the Investment Advisers Act means intentionally committing the acts which constitute the violations. It does not require an awareness that the law is being violated. See Tager v. S.E.C., 344 F.2d 5, 8 (C.A. 2, 1965); Lipper v. S.E.C., 547 F.2d 171, 180 (C.A. 2, 1976); Roman S. Gorski, 43 S.E.C. 618, 621 (1967). -[n22]- The Division's proposed sanction would also bar respondent from association with a municipal securities dealer. Such a sanction cannot be imposed in these proceedings, however, since the order for proceedings did not encompass Section 15B of the Exchange Act relating to municipal securities dealers. The Division did not recommend the imposition of any sanctions under the Investment Advisers Act. -[n23]- Cf. Bruce W. Zimmerman, Securities Exchange Act Release No. 12690 (August 5, 1976), 10 SEC Docket 175, rehearing denied, Securities Exchange Act Release No. 12790 (September 13, 1976), 10 SEC Docket 458. -[n24]- All proposed findings and conclusions submitted by the parties have been considered, as have their contentions. To the extent such proposals and contentions are consistent with this initial decision they are accepted. To Contents    http://www.sec.gov/info/municipal/mbonds/sp.htm Home | Previous Page Modified:09/21/1999