SEC Tea Party™

FINRA Denial of Membership Application Upheld

2012-12-22T07:45:00.000-07:00

Asensio & Co., Inc., Exchange Act Rel. 68505, December 20, 2012

Asensio & Co. appealed from a Finra decision to deny its membership application. This wasn't surprising as it was controlled by Manual Asensio, who was barred in 2006 from associating with a Finra member for failure to provide information in a Finra investigation.

Exchange Act § 19(f) requires the Commission to dismiss such appeals if it finds that the Finra decision is factually sound, Finra acted in accordance with its rules, and the rules were applied consistently with the purposes of the Exchange Act.

In an unsurprising conclusion, the Commission found that the Finra denial was appropriate and dismissed the appeal.

CPA Suspended for 6 Months

2012-12-22T07:34:00.000-07:00

Wendy McNeeley, CPA, Exchange Act Rel. 68431, December 13, 2012

McNeeley was charged with improper conduct while an audit manager for an investment adviser and a mutual fund. The ALJ found that she violated GAAS and suspended her from practicing before the Commission for one year.

This is a red flag case. At heart the Commission alleged that the auditors failed to follow-up sufficiently based on information about certain potentially irregular transactions. Ultimately it turned out that the insufficiently investigated transactions were part of a scheme whereby $10 million of investor funds were misappropriated by a fund manager who was criminally convicted.

The opinion in this case highlights the need for auditors to exercise appropriate skepticism and presents a good summary of the investigative standards in GAAS. Here, the decision was founded on the Commission's conclusion that McNeeley relied too heavily on assurances from the client without attempting to verify them. The primary evidence was the lack of any documentation in the work papers of investigation.

Despite finding that McNeeley's conduct was "highly unreasonable" and indicated "a risk that she will commit future violations", the Commission lowered the suspension from the one year imposed by the ALJ to six months. The Commission explained that it was doing so because McNeeley was relatively inexperienced and had relied on a supervisor who had failed to comply with his own auditing duties.

Muni Adviser and Rating Agency Bars Not Retroactive Under Landgraf

2012-12-22T07:13:00.005-07:00

John W. Lawton, IA Act Rel. 3513, December 13, 2012

Lawton was associated with an investment adviser and was enjoined and criminally convicted based on anti-fraud violations.

The ALJ barred him from associating with any adviser, broker, dealer, muni dealer, or transfer agent. The trial judge declined to enter bars from associating with a muni adviser or rating organization ruling that those bars were impermissibly retroactive under Landgraf v USI Film Products. Those sanctions were created by Dodd-Frank which was enacted after Lawton's conduct occurred.

The Division appealed and the Commission majority agreed that under Landgraf the muni adviser and rating agency bars were not retroactive. This was a 3-2 ruling. The dissenters promised to file opinions at a later date.

SEC Bars Enjoined Accountant

2012-09-22T10:23:00.003-06:00

Michael C. Pattison, CPA, Exchange Act Rel. 67900, September 20, 2012.

This case involved a Rule 102(e) proceeding against a CPA who had previously been enjoined in federal court from violating internal accounting controls and books and records provisions of the law when he was the controller of a public company from 2000 to 2005.

As is standard practice in such matters based on injunctive actions, the administrative law judge ruled on motions for summary disposition. Pattison was found after a jury trial to have committed his violations in connection with backdating of stock options in September 2010. He was enjoined and ordered to disgorge $74,000 and pay a civil penalty of $50,000. His appeal to the Ninth Circuit is pending.

The district court found that Pattison:

Systematically backdated stock option grants on a regular basis,
Misrepresented the dates of actual approval by the company's CEO,
Failed to affirmatively disclose the practice to the Board and auditors,
Failed to insure that an accounting expense was taken for the in-the-money option grants he facilitated
In doing so he circumvented internal controls against backdated options.

The Commission's opinion reiterates its long held policy of using administrative rule 102(e) against :

[P]rofessionals who do not possess the requisite qualifications to represent others, lack character or integrity, engage in unethical or improper professional conduct, have violated or have been enjoined from violating or aiding and abetting the violation of the federal securities laws, have had their license to practice revoked or suspended, or have been convicted of a felony or misdemeanor involving moral turpitude.

Given the injunctive order and findings of the district court, the Commission noted that the only substantive issue in the case was whether Pattison could show that he should not be sanctioned, and if not, what sanction is appropriate.

Pattison's primary argument was that it was improper for the Commission to base its proceeding solely on the injunction under Rule 102(e)(3) without any showing of mens rea as required under Rule 102(e)(1) and (2). The Commission rejected this argument. It noted that "a finding by a court of competent jurisdiction that a respondent has violated securities laws, or that an injunction against future violations is warranted, is a sufficient standard of unfitness for practice before the Commission that we 'will afford a hearing only to consider mitigating or other factors why neither censure nor temporary or permanent disqualification should be imposed.'"

The Commission found that Pattison acted with a high degree of scienter and therefore barred him from appearing or practicing before the Commission.

This opinion is useful not so much for the entirely expected conclusion it reached, but for its comprehensive summary of Commission Rule 102(e) decisions.

Another 12j Revocation Imposed

2012-06-29T08:36:00.002-06:00

Citizens Capital Corp., Exchange Act Rel. 67313, June 29, 2012

In another blockbuster opinion the SEC has spilled nineteen pages of ink and significant staff resources (two SEC staff are listed as counsel for the Division of Enforcement) upholding an ALJ's decision to revoke the registration of a company for delinquent filings. The company made no periodic filings from late 2001 until May 2011. Concluding the blindingly obvious - the Commission concluded that this constituted a "serious" violation of the reporting provisions. When the company attempted to file complaint reports after the proceedings were instituted those reports had serious faults and were not compliant.

Is it really necessary for the Commission to issue a nineteen page decision when a company has been delinquent in its periodic filings for ten years? Is there any meaningful reason why the Division doesn't move for summary affirmance of the ALJ's initial decision in cases like this?

It's Been Too Long - 12j Suspension Imposed

2012-06-29T08:24:00.003-06:00

Calais Resources Inc., Exchange Act Rel. 34-67312, June 29, 2012

The Commission has awakened from a long sleep and entered its first substantive ruling in many months. This is clearly a monumentally important decision - to the shock and surprise of all it has upheld an ALJ's revocation of the registration of a company for failing to file periodic reports since 2003. The company failed to file nineteen quarterly reports and six annual reports over a six year period. Finally, when it did make filings, the company admitted that several were not in technical compliance with SEC rules. Yes KPMG the company's prior auditors refused permission for the company to republish its prior audits, rendering certain of its filings non-complaint. This, the Commission ruled means that financials could not be deemed audited under Reg S-X.

There is nothing to see here, this is purely routine. One has to ask though, why the SEC didn't simply summarily affirm the ALJ's decision. Were there any unique or important issues of law or fact that required the Commission enter into the fray? No. Did the opinion modify any previous Commission doctrine? No. Was there a significant issue of fact that required resolution? No. Have there been numerous similar opinions by the Commission in the past years with the same predictable result? Yes. The company, as is often the case in these situations repeatedly promised that it would soon be in compliance but was never able to achieve this goal.

DTC Action Reversed and Remanded

2012-03-16T07:34:00.003-06:00

International Power Group, Ltd., Exchange Act Rel. 66611, March 15, 2012

Depository Trust suspended clearing and settlement of International Power Group's stock. It did so because the Commission had previously brought a civil action in federal court alleging that various defendants had issued unregistered shares of International Power. Neither International Power, nor its officers or directors were defendants in that case.

The Commission ruled that it has the authority to consider International Power's appeal of DTC's action. DTC had argued that the Commission had no jurisdiction.

The Commission also found that DTC's procedures were deficient. It remanded the the matter to the DTC and instructed that DTC should provide appropriate procedural safeguards and develop a record. It also ordered DTC to develop uniform procedures for suspensions that will be applied to future cases involving issuers.

Bar Vacated

2012-03-08T15:13:00.001-07:00

Robert Hardee Quarles, Exchange Act Rel. 66530, March 7, 2012

The Commission vacated the bar order entered against Quarles in 1985 upon his motion. He was suspended by the Commission from associating with a broker or dealer for six months and barred from association in a supervisory or proprietary capacity.

Since 1987 (with a brief hiatus) he has been associated with various firms in a non-supervisory capacity. He has been with his current employer for 20 years. His supervisory bar has been in place for 26 years. He has had no disciplinary issues since the 1987 order. The Division of Enforcement did not oppose Quarles motion for relief.

The Commission has previously taken the position that bars will remain in place absent "compelling circumstances." The Commission, as is unfortunately often its fashion then simply concluded (can you spell ipsi dixit?) that it is appropriate to grant Quarles' motion. It offered no explanation or analysis for this conclusion and simply cited Quarles age (70), his clean employment history and the fact that the bar was imposed 26 years ago.

Commission Lowers Penalties From Third to Second Tier

2012-02-29T08:05:00.000-07:00

Eric J. Brown, Matthew J. Collins, Kevin J. Walsh, Mark W. Wells, Exchange Act Rel. 66469, February 27, 2012

The Commission upheld sanctions against three respondents in connection with sales or supervision of sales of variable annuities. It dismissed the case against one individual.

The Commission concluded that Brown fraudulently sold variable annuities after having lost his state license to sell insurance products and to have effected unauthorized transactions in customer accounts. In doing so he aided and abetted violations of the books and records provisions by falsifying customer account forms. He was barred from broker, dealer or adviser association and ordered to: cease and desist, pay disgorgement, and a penalty of $560,000.

Collins was found to have failed to supervise Brown and aided and abetted books and records violations by falsifying customer account forms. He was barred from broker, dealer, or adviser association with a right to reapply after two years and ordered to: cease and desist, pay disgorgement, and a penalty of $310,000.

Walsh was found to have committed fraud in connection with variable annuity sales. He too was barred from broker, dealer, or adviser association and ordered to: cease and desist; pay disgorgement, and a penalty of $255,000.

Respondent Wells was successful in his appeal. Although the ALJ found that Wells had engaged in fraudulent variable annuity sales the Commission disagreed and dismissed the case against him.

The ALJ's initial decision is here.

The discussion of penalties in this decision is of interest. First, the penalties were applied on a per customer basis rather than for each individual misrepresentation. Second, no penalties were imposed for conduct that occurred before the five year statute of limitations. The Commission rejected the Division of Enforcement's argument that such sales were part of a continuing course of conduct. Third, the Commission lowered the penalties from third to second tier as the actual customer losses were relatively small. This last matter is of great significance as it appears that the the Commission now will impose third tier penalties only when customers actually suffer significant economic loss. The statute of course authorizes third tier penalties when there are substantial investor losses or "significant risk of substantial losses." The Commission seems to base its conclusion on the fact that there were no substantial investor losses here and simply conflates that with significant risk of loss. The opinion never explains why there was no risk of greater loss by the customers – it simply concludes that this was so without any meaningful discussion of the issue.

Finra Sanctions Upheld - Mitigating and Aggravating Factors Discussed

2012-02-25T07:42:00.000-07:00

Howard Braff, Exchange Act Rel. 66467, February 24, 2012

Finra fined Braff $25,000 and suspended from all associations for two years. He was found to have failed to provide written notice to three employers of outside brokerage accounts and falsely claimed in writing to have no outside accounts. The Commission upheld the sanctions.

Braff was no rookie, he had been a rep since 1983. The Commission used Braff's extensive industry experience to justify its finding that his concealment was intentional. In upholding the sanctions the Commission noted that the following are not mitigating factors when assessing the appropriateness of sanctions:

lack of disciplinary history;
cooperation with the investigation;
absence of monetary gain;
absence of customer harm; and
absence of aggravating factors.

Unfortunately, the Commission continues to punish people for defending themselves. Braff claimed that he relied on the advice of an compliance officer at one firm. The Commission found this an aggravating factor characterizing this as an attempt to "shift blame... to others" and a "failure to appreciate ... [his] duty...." It truly is wrong for the Commission to continue to uphold sanctions for purportedly failing to recognize wrongdoing when respondents defend themselves. The Commission can appropriately justify sanctions based on the actual conduct that has occurred. It need not insist on penalizing people for defending themselves.

Finra Sanctions Partially Upheld

2012-02-12T08:17:00.004-07:00

John Edward Mullins, Kathleen Maria Mullins, Exchange Act Rel. 66373, February 10, 2012

John Mullins was sanctioned by Finra for converting customer property, misusing customer funds, borrowing from a customer without firm authorization, and failing to disclose outside activities to his firm. His wife was found to have failed to disclose outside activities and borrowed funds from a customer without firm approval. The violations arose in the Mullins' handling of funds held by a charitable foundation established by a client.

John Mullins was barred. Kathleen Mullins was suspended for six months and fined $15,000 for failing to disclose outside activities to her firm. She was suspended for an additional three months and fined $5,000 for borrowing funds from a customer. The suspensions were consecutive.

The Commission sustained the sanctions against John Mullins. It lowered Kathleen Mullins' sanction for failing to disclose outside activities to her firm to four months suspension and a $10,000 fine. The Commission set aside one of the rule violations found by Finra (but upheld another) in connection with disclosure of outside activities to the firm. It also noted a "mitigating" factor of her cooperation with Finra during its investigation. It rejected her claim that a clean disciplinary record was a mitigating factor because "an associated person should not be rewarded for acting in accordance with his duties as a securities professional." Similarly the fact that violative behavior is not repeated is not considered mitigating.

The fact that the Commission viewed cooperation during the investigation as a mitigating factor while rejecting the claim that a clean disciplinary record is not seems inconsistent. Reps are required to cooperate with Finra investigations and therefore the same rational for rejecting the "clean record" mitigation argument would seem to apply to the cooperation claim. The opinion does not explain this apparent contradiction.

Finra Sanctions For Unregistered Distribution Upheld

2012-01-28T07:22:00.000-07:00

Midas Securities, Jay S. Lee, Exchange Act Rel. 66200, January 20, 2012

This case is significant for two reasons. It restates clearly the duty that brokerage firms have to investigate sales of large amounts of stock of little known issuers. Most important, from a supervisory standpoint, it finds supervisory procedures inadequate that require reasonable inquiry, but do not specify the type of inquiry that must be undertaken. Vague boilerplate written supervisory procedures will are not adequate.

Finra sanctioned Midas Securities and its president, Lee. The Commission upheld the sanctions. The sanctions here resulted from Midas' unregistered sale of securities on behalf of a Bulgarian customer who it knew to be involved in stock promotions. The customer had been sued by the SEC in a still pending case for his role in Spam promotions of another stock. Further, Lee and Midas had previously been sanctioned by Finra for the sale of unregistered securities.

The Commission rejected the defense that the firm could rely on the fact that the certificates had no restrictive legend. When a customer seeks to sell a large block of a little known stock the broker is required to undertake a searching inquiry to determine whether the customer is engaged in a distribution. Reliance on lack of a restrictive legend on the certificates is insufficient. Also, the issuer here had been the subject of a reverse merger only weeks before, often a red flag that a distribution may be taking place. Further exacerbating the situation was the fact that Midas reps knew the customer was a stock promoter who received stock directly from issuers in payment for his activities.

The Commission also rejected the defense claim that the broker could escape liability as the trades were unsolicited. The Commission has never recognized this as a defense as "a broker [relying on the Section 4(4) defense cannot merely act as an order taker." The Commission also rejected the defense claim that Finra had not established the existence of an unregistered distribution. It reiterated long standing precedent that any person relying on an exemption from the registration requirements must establish that exemption as an affirmative defense when the stock has not been registered as was the case here.

The Commission also found the firms supervisory procedures inadequate. Midas' procedures required it to conduct a "reasonable inquiry"into unregistered sales of large amounts of little known securities. However, the Commission characterized those procedures as "minimal" and found them to be deficient because they did not specify the type of inquiry that was required.

PCAOB Revocation and Fine For Failure To Produce Records Upheld on Appeal

2012-01-11T09:32:00.004-07:00

R.E. Bassie & Co., R. Everett Bassie, CPA, AAER 3354, January 10, 2012

PCAOB revoked Bassie & Co's registration and barred Bassie from associating with a registered public accounting firm and fined him $75,000. It found that the firm and Bassie failed to cooperate with a PCAOB investigation.

In late 2006 PCAOB staff required the firm to produce work papers relating to work done for a client in connection with an investigation. The documents were never produced and disciplinary proceedings were finally instituted in early 2009. In the intervening period the firm and counsel repeatedly asked for extensions of time to produce the documents, but never did so.

The PCAOB investigation involved Bassie's independence in connection with the audit of Calypso Wireless. The documents related to work Bassie did for entities that were involved in a law suit with Calypso.

Since PCAOB may demand any documents its staff deems relevant to an investigation its jurisdiction is not limited to work done only in connection with the audit of a public company. Because the issue in the investigation was Bassie's independence, any facts reasonably related to that issue were relevant to the PCAOB investigation.

The Commission also rejected respondents' claim that it was improper for the PCAOB hearing officer to proceed through summary disposition without trial. It found Bassie had not produced sufficient evidence of an actual advice of counsel defense to justify a hearing. Finally, the Commission upheld the sanctions, noting that PCAOB's ability to investigate is critical to its function and the fact that respondents had over an extended period never produced the documents.

Finra Supervision and Unregistered Sale Sanctions Upheld

2012-01-07T12:15:00.002-07:00

World Trade Financial Corp., et. al., Exchange Act Rel. 66114, January 6, 2012

World Trade, its president Rodney Michel, its supervisor of trading Jason Adams and Frank Brickell a rep appealed Finra sanctions. Finra found World Trade and Brickell sold unregistered stock and that Michel and Adams failed to supervise Brickell. It also found that World Trade had inadequate supervisory procedures.

World Trade was fined $45,000, Brickell $15,000, Michael $30,000 and Adams $20,000. Brickell was suspended for 30 days, Michel for 45 days, and Adams for 30 days.

The Commission upheld the sanctions.

Over a three month period World Trade sold 2.3 million shares of a thinly traded penny stock on behalf of three customers for proceeds totaling $295,000. Brickell received about $9,200 in commissions. This distribution was not registered with the Commission.

In assessing whether or not stock sold by customers was "free trading" the firm relied heavily on whether or not certificates had restrictive legends. The stock in question was subject to a spam based email campaign.

This was a classic penny stock pump and dump scheme. Brickell admitted that he knew "or should have known" that the company had recently undergone a reverse merger and that it had only begun to publicly trade just before his customers initiated their sales.

World Trade, Brickell, Michel, and Adams all claimed that they relied on the transfer agent to make sure that the shares were not part of an unregistered distribution.

This is a significant case. It reiterates the long standing requirement that broker-dealers have an independent duty to investigate and ascertain that in connection with customer sales of little known thinly traded stocks an unregistered distribution is not taking place. The "broker" registration exemption in Exchange Act Section 4(4) is not available "if the broker knows or has reasonable grounds to believe that the selling customer's part of the transaction is not exempt [from registration].... when a dealer is offered a substantial block of a little-known security ... where the surrounding circumstances raise a question as to whether or not the ostensible sellers may be mere intermediaries for controlling persons or statutory underwriters, then searching inquiry [by the broker-dealer] is called for."

Finra Sanctions Against Rep For Misappropriating Customer Information Upheld

2012-01-07T11:51:00.001-07:00

Dante J. DiFrancesco, Exchange Act Rel. 66113, January 6, 2012

DiFrancesco was suspended for ten days and fined $10,000 by Finra. It found that he violated Finra's Rule 2110 ("high standards of commercial honor and just and equitable principles of trade").

DiFrancesco was planning to leave his firm and moving to another. He attempted to download data regarding his 200 personal clients. In fact, he downloaded and removed from the firm confidential personal information for 36,000 additional clients of his firm. He then provided that data file to his new firm. He did this after a manager at his firm told him to leave the firm immediately after blocking an email that contained the client list.

At the hearing DiFrancesco acknowledged his understanding that his firm considered all client information proprietary to the firm and that he intentionally violated firm policy.

The Commission upheld Finra's finding that DiFrancesco had violated Rule 2110. It noted that there is a duty to maintain the confidentiality of client information that "is grounded in fundamental fiduciary principles…." As to DiFrancesco's claim that he only intended to take information relating to his own clients, the Commission noted that intent is not required to establish a violation of Rule 2110.

NASDAQ Delisting Stay Pending Appeal Denied

2011-12-29T09:21:00.000-07:00

Cleantech Innovations, Inc., Exchange Act Rel. 66064, December 28, 2011

Cleantech's securities were delisted by Nasdaq after the exchange concluded the company had intentionally withheld documents from its staff. Cleantech sought a stay of the delisting pending resolution of its appeal on the merits.

In ruling on these matters the Commission considers: 1) whether there is a strong likelihood the company will prevail on appeal; 2) whether absent a stay there will be irreparable injury; 3) whether there will be substantial harm to the public; and 4) whether a stay is in the public interest.

Under Exchange Act Section 19(f) the Commission must dismiss an application to review a delisting if it finds "the specific grounds on which [the delisting] … is based exist in fact, that [delisting] … is in accordance with the rules [of the exchange] and such rules are, and were applied in a manner, consistent with the purposes of [the Exchange Act]."

The Commission opinion notes that stay applicants have the burden of establishing each of the four factors noted above. It found that Cleantech had not established a strong likelihood of succeeding on appeal as the company admitted that it had not furnished all the information sought by the exchange. Because the stock was still quoted in the pink sheets if found no irreparable injury or substantial harm to the public. The Commission found that when considering the public interest disadvantages to shareholders must be weighed against the ability of Nasdaq to regulate its markets and obtain accurate information from issuers. Thus "[the detriment to shareholders] is outweighed by the public interest in the exchange's obtaining full responses from the company to the exchange's requests for information."

Cleantech also moved for discovery concerning its claim on appeal that Nasdaq had failed to follow its own procedures in delisting the stock. The Commission denied this request noting that under its Rules of Practice no discovery is permitted in appellate proceedings under Section 19(f).

Finra Sanctions Inconsistent with Sanction Guidelines Remanded by Commission

2011-12-02T12:51:00.000-07:00

Kent M. Houston, Exchange Act Rel 34-66014, December 20, 2011

Finra barred Houston for his purported failure to "respond in any manner" to a Finra investigation.

Although Houston failed to appear for testimony before the investigators the record showed that he had apparently responded appropriately to Finra requests to produce documents. The Commission found that Finra had not sufficiently articulated why a bar was appropriate since Finra sanction guidelines establish a bar as the presumptive sanction only when there has been a total failure to cooperate. The opinion noted that while Finra may deviate from its sanction guidelines it must fully articulate why it is doing so.

While Finra found that Houston had also failed to notify his broker-dealer employer of outside employment, the sanctions were based solely on his failure to cooperate with the investigation.

The Commission remanded the matter to Finra due to the fact that it appeared he had in fact not been totally uncooperative during the investigation and because it found Finra's explanation for the bar was insufficient. It also noted that Finra might wish to reconsider its determination not to include Houston's failure to notify his employer of outside employment on reconsideration of the matter.

Commission Denies Interlocutory Appeal Based on Dodd-Frank Deadlines

2011-11-09T19:16:00.002-07:00

Montford & Co., Inc., IA Act Rel. 3311, November 9, 2011

Montford Co. and its Ernest Montford were charged administratively with IA act violations. They allege that the charges were not brought within the 180 day time limit following their receipt of a Wells notice as required by Dodd-Frank.

Section 4E of the Exchange Act requires that proceedings be brought within 180 days of a Wells notice unless the Division of Enforcement's Director extends the deadline and notifies the Chairman of his decision. The Division argued that it had complied with this requirement and provided emails and a declaration by its staff to demonstrate this. The ALJ denied respondent's motion to dismiss that was based on their claimed violation of Section 4E.

The Commission denied this interlocutory appeal. It noted that such appeals are disfavored and that the ALJ had refused to certify the issue for such an appeal. Under Commission rules such certification is required. It ruled that respondents' disagreement with the ALJ's ruling that Section 4E had not been violated was not a proper basis for an interlocutory appeal.

It noted "once the Commission exercises its prosecutorial discretion to institute a proceeding, 'the appropriate remedy for any challenge to that exercise of discretion is to litigate the proceeding to a final decision.'"

Finra Bar of Rep Who Failed To Disclose Disbarment As Attorney Upheld

2011-10-24T19:23:00.003-06:00

Richard A. Neaton, Exchange Act Rel. 65598, October 20, 2011

Finra barred Neaton for failing to disclose disciplinary actions on his Form U4 application. The commission upheld the sanction on appeal.

Finra sanctioned Neaton for failing to amend his U4 to disclose two suspensions and the later revocation of his license to practice law. The revocation was based on findings that Neaton had misappropriated client funds held in his trust account. Form U4 specifically requires disclosure of the suspension or revocation of the authority to act as an attorney.

The Commission found Neaton acted willfully. This conclusion was based on the fact that he also falsely answered annual written inquiries from his firm asking about any sanctions entered against him by any regulatory body. The Commission noted that "willfully" under the securities laws requires only that the actor intentionally committed the act that constitutes the violation. There is no requirement that the person be subjectively aware that he is violating the law.

Neaton claimed he relied on the advice of his supervisors in filling out the U4. The Commission rejected this argument noting that individuals "must take responsibility for compliance . . . ."
This is another case of the Commission employing the "grandmother rule." This is a "test" frequently employed by the Commission in these situations – would you want this person handling your grandmother's money?

Exchange Bar Lifted For Failure To Prove Service

2011-10-15T07:32:00.001-06:00

Michael Picozzi III, Exchange Act Rel. 65569, October 14, 2011

Picozzi was barred by PCX for failing to provide information during an exchange investigation. PCX's successor, NYSE did not oppose the appeal due to the existence of an incomplete evidentiary record. Apparently it had no evidence that Picozzi was served with process in connection with the disciplinary proceeding. Accordingly the Commission set aside the findings of violations and sanctions.

Picozzi had sold his firm by the time PCX sent notice of the complaint to him at his former firm's address. He claimed that it was not forwarded to him. A bar was entered by default against him in 2004. Picozzi claims he never learned of the bar until he attempted to re-enter the industry following the expiration of a non-compete agreement in 2010.

There record included Picozzi's claims about not receiving notice. NYSE admitted there is virtually nothing in the record concerning service of process on Picozzi. It also admitted that due to passage of time it cannot determine whether Picozzi engaged in any improper conduct in connection with the PCX investigation. As a result it did not oppose Picozzi's petition.

In granting the petition the Commission noted that by doing so it was relying on NYSE's unique stance and the lack of information in the record about service of process on Picozzi. It stated that its ruling "in no way diminishes established precedent that a respondent's lack of awareness of official regulatory correspondence is not a defense where evidence shows that the regulatory entity properly sent correspondence to the address that the respondent provided to the regulatory agency."

Such cases include Dennis A. Pearson, Jr., Securities Exchange Act Rel. No. 54913 (Dec. 11, 2006), 89 SEC Docket 1627, 1638 (noting that "[i]t is the responsibility of NASD members and their associated persons to keep NASD apprised of any changes in their addresses, and a failure to respond to NASD in connection with an investigation . . . is not excused by that person's having temporarily moved from the address listed in the CRD"); Warren B. Minton, Jr., 55 S.E.C. 1170, 1177 n.15 (noting that associated persons have "a continuing duty to notify the [NASD] ... of [their] current address, and to receive and read mail sent to [them] at that address" (quotation omitted)).

Finra Findings and Costs Not Sanctions Subject to SEC Appellate Jurisdiction

2011-10-15T07:06:00.001-06:00

Sharemaster, Exchange Act Rel. 65570, October 14, 2011

This case is of interest to those who need to understand the SEC's interpretation of its jurisdiction over Finra disciplinary actions.

Finra sanctioned Sharemaster for failing to file an annual audit by a firm registered with PCAOB. At issue was whether or not an exemption from that requirement applied to Sharemaster. Finra's hearing panel found that Sharemaster was not subject to the exemption, ordered it suspended until it filed a compliant report and imposed costs of $1,785. Sharemaster appealed the Finra sanction to the SEC. It did not request a stay of the decision under Commission Rule 401(d).

While the appeal was pending Sharemaster filed a compliant annual report and the suspension was lifted.

Under Exchange Act Section 19(d) the Commission has jurisdiction over Finra action that: 1) imposes a final disciplinary sanction; 2) denies membership or participation of an applicant; 3) prohibits or limits any person's access to Finra services; or 4) bars any person from associating with a Finra member.

The Commission dismissed Sharemaster's appeal. It ruled that the Finra imposed suspension was not a final sanction as the suspension was contingent and had been lifted by Finra. It dismissed Sharemaster's argument that the finding of a violation and assessment of costs were final rulings.

The Commission opinion concluded that the only sanction potentially subject to appeal was the suspension. Because it had been lifted there was no jurisdiction. It found the costs not an appealable sanction as under Finra rules costs are not deemed sanctions. In ruling that the finding of violation was not an appealable sanction the Commission analogized to civil contempt actions in federal court. Once the civil contempt is purged by compliance with the order appellate jurisdiction is moot.

Failure To Supervise Sanctions Upheld

2011-09-17T07:33:00.000-06:00

Dennis S. Kaminski, Exchange Act Rel. 65347, September 16, 2011

NASD sanctioned Kaminski for failure to supervise sales of variable annuities. He was suspended for eighteen months, fined $50,000 and ordered to requalify before acting in any capacity requiring qualification. The Commission rejected Kaminski's appeal.

Kaminsky supervised his firm's compliance department. He was also responsible oversight of operations and the firm's legal department.

In 2001 the firm consented to NASD sanctions related to supervisory procedures for variable annuity sales. That settlement required the firm to overhaul its compliance procedures as to annuity sales. As a result the firm established a formal review procedure for any "flagged" variable annuity transactions. In 2004 Kaminski received numerous memos and emails from a subordinate complaining that the compliance department was understaffed and that immediate action was required to remedy this. Kaminski also learned that the flagged annuity transactions were not in fact being reviewed promptly. In fact, for some period the firm simply stopped reviewing the flagged transactions. Kaminski admitted that he knew of staffing problems in the compliance department and the failure to promptly review flagged annuity transactions. There was conflicting testimony about whether Kaminski ordered that the flagged transactions not be reviewed.

The opinion focused on red flags indicating Kaminski's knowledge of the breakdown of supervisory procedures. Oddly enough, it did not stress, nor did it cite cases holding firm executives liable for supervisory failures unless they can establish an affirmative defense of both effective delegation and verification that the delegate is effective.

Commission Continues 35 Year Old Administrative Bar

2011-09-17T06:57:00.001-06:00

Mark S. Parnass, Exchange Act Rel. 65261, September 2, 2011

Parnass moved to vacate a Commission order issued in 1975 that barred him from association with any broker, dealer, investment company or investment adviser. He was allowed to associate with a broker-dealer in a non-supervisory non-proprietary capacity after eighteen months and in a supervisory or proprietary capacity after three and one-half years. The Commission vacated that part of the order barring him from investment adviser or investment company association but kept the remainder of the bar order in place. Since 1980 Parnass has been associated with broker-dealers in a supervised capacity.

Parnass consented to the 1975 order which followed an injunction based on his firm's violation of the net capital rule. He was also suspended from association with a broker-dealer for sixty days in a 1986 action charging him with sales of unregistered securities.

In 2004 Parnass sought relief from the 1975 bar order arguing that it subjected him to onerous application procedures and fees. The Commission denied that petition.

The Commission uses an extremely high bar (couldn't resist the pun) in determining whether to vacate previous disciplinary orders. In fact, administrative sanctions will "remain in place in the usual case and be removed only in compelling circumstances." The bar is even higher in Commission orders entered by consent as in the Commission's view violators receive significant benefits from settlement.

The Commission rejected Parnass' argument that the passage of thirty five years since the entry of the order alone constituted a compelling reason to vacate the order. His cause certainly was not helped by the 1986 registration violations. However the language used by the Commission made it clear that the passage of time argument standing alone would have failed under any circumstances.

The Commission did lift the investment company/investment adviser bars as it no longer imposes such collateral sanctions when the individual was not at the time of the violation associated with an adviser or investment company.

Commission Continues to Waste Resources Issuing Opinions Barring Convicted Felons

2011-08-30T18:23:00.000-06:00

Eric S. Butler, Exchange Act Rel. 65204, August 26, 2011

Butler was convicted of conspiracy to commit wire and securities fraud. His convictions for were overturned on appeal. The Commission barred him from association with any broker, dealer, or investment adviser.

Butler was charged with unauthorized purchases in accounts of his customers at Credit Suisse of auction rate securities. He touted government guaranteed student loan backed securities to his customers. However, some customers were placed into uninsured mortgage backed securities. Emails were sent to customers that falsified the names of the products actually purchased to make it appear that the customers had in fact bought guaranteed student loan backed instruments.

Jury instructions required that the jury find that Butler voluntarily, deliberately, and purposefully joined the conspiracy.

On appeal the appellate court dismissed the substantive wire and securities fraud counts on venue grounds but upheld the conspiracy convictions.

As one would expect the administrative law judge barred Butler based on his conviction without holding an evidentiary hearing.

The statute allows sanctions if the conviction involves the purchase or sale of a security or arises out of the conduct of a broker or dealer. Since he was associated with a firm that was both a broker-dealer and an investment adviser when the conduct occurred there is administrative jurisdiction under both the Exchange Act and Advisers Act.

Unsurprisingly the Commission concluded that the bars imposed by the ALJ were "amply warranted."

The Commission's treatment of these kind of cases is an enduring mystery. It approved of the ALJ's summary disposition without trial of the matter. Yet it does not summarily affirm the ALJ's imposition of clearly warranted sanctions. It wasted the time of its staff and its scarce monetary resources by issuing a thirteen page opinion replete with 39 footnotes. There was nothing in this case of particular interest or difficulty. When will the Commission begin to make wiser and more appropriate use of its limited human and monetary resources?

Motions for Reconsideration Rejected

2011-08-14T07:32:00.000-06:00

Kent D. Sweat and Intermountain Financial Securities, Inc., Exchange Act Rel. 34-65117 (August 11, 2011)

Cobalis Corp., Exchange Act Rel. 34-65118 (August 12, 2011)

Sweat's appeal of Finra sanctions was dismissed for failure to timely file his brief. He sought reconsideration on the grounds that he had been ill. The Commission rejected his motion for reconsideration noting that the motion did not specify the nature of the illness or explain why this made it impossible for him to file his brief.

Cobalis' Exchange Act registration was revoked despite repeated claims that it would soon file its delinquent periodic reports. Its motion to reconsider was based on claims that it had hired a CPA and would soon be able to file its delinquent reports. The Commission rejected the motion viewing it as simply a rehash of previous arguments about its attempts to become current with its filings.

The lessons here are obvious folks. Motions for reconsideration are granted only under exceptional circumstances. They must be supported by argument and explanation. Rehashing arguments rejected the first time around won't do.