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N E W

Y O R K

S T O C K

E X C H A N G E,

I N C.

EXCHANGE HEARING PANEL DECISION 91-192 PAINEWEBBER INCORPORATED MEMBER ORGANIZATION * * *

November 15, 1991

Permitted or failed to prevent solicitation and recommendation by one or more registered representatives of customer purchases of one or more securities unsuitable for the customers; violated Exchange Rule 723 by permitting or failing to prevent the recommendation by one or more of its registered representatives of unsuitable options transactions for customers; violated Exchange Rule 431(f) (7), (8) and (9) and Regulation T by permitting customers and employees to engage in practices, or failing to cancel or otherwise liquidate transactions, in their accounts, prohibited by such rule and regulation; violated Exchange Rule 351 by failing to make timely reports of certain events; violated Exchange Rule 342 by failing to conduct annual supervisory branch office inspections, failing to maintain adequate written tables of supervision, and failing to maintain appropriate procedures for supervision and control of sales practice activities -- Consent to censure, fines totalling $900,000, and special internal review of sales practice policies and procedures. * * *

EXCHANGE HEARING PANEL DECISION 91-193 LEE HAROLD LOVEJOY FORMER BRANCH OFFICE MANAGER EXCHANGE HEARING PANEL DECISION 91-194 ROBERT BRADLEY FULLER FORMER BRANCH OFFICE MANAGER EXCHANGE HEARING PANEL DECISION 91-195 DAVID WARD STANGER BRANCH OFFICE MANAGER Violated Exchange Rule 342(a) with respect to supervisory duties and obligations -- Consent to censure, $15,000 fine, and three week supervisory suspension. * * *

EXCHANGE HEARING PANEL DECISION 91-196 SHELDON ALAN CHAIKEN FORMER DIVISION MANAGER EXCHANGE HEARING PANEL DECISION 91-197 GARY PRICE EVANS

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DIVISION MANAGER

EXCHANGE HEARING PANEL DECISION 91-198 JOHN ARNOLD McFERRAN FORMER BRANCH OFFICE MANAGER EXCHANGE HEARING PANEL DECISION 91-199 DONALD DELIA DEST FORMER BRANCH OFFICE MANAGER Violated Exchange Rule 342(a) with respect to supervisory duties and obligations -- Consent to censure, $10,000 fine, and two week supervisory suspension. * * *

EXCHANGE HEARING PANEL DECISION 91-200 BURGESS ASKEW DAVIS FORMER BRANCH OFFICE MANAGER Violated Exchange Rule 342(a) with respect to supervisory duties and obligations -- Consent to censure, $10,000 fine, and one week supervisory suspension. * * *

EXCHANGE HEARING PANEL DECISION 91-201 WILLIAM OGRAM WEBSTER, JR. FORMER BRANCH OFFICE MANAGER Violated Exchange Rule 342(a) with respect to supervisory duties and obligations -- Consent to censure, $5,000 fine, and one week supervisory suspension. * Appearances: For the Division of Enforcement Regina C. Mysliwiec, Esq. Rex W. Mixon, Jr., Esq. Susan J. Meltzer, Esq. Howard A. Grinsberg, Esq. Henry A. Harrison, Esq. For the Respondents Robert M. Berson, Esq. (For PaineWebber) John F. X. Peloso, Esq. Jane M. Knight, Esq. (For PaineWebber, Lovejoy, Chaiken, Evans, McFerran, Dest, Davis, Webster John R. Loftus, Esq. (Fuller, Stanger, Evans) Timothy A. Baker, Esq. (McFerran, Dest) * *

An Exchange Hearing Panel met to consider a Stipulation of Facts

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and Consent to Penalty entered into between the Exchange's Division of Enforcement and PaineWebber Incorporated (the "Firm"), a member organization, and Lee Harold Lovejoy, Sheldon Alan Chaiken, Robert Bradley Fuller, David Ward Stanger,

Gary Price Evans, John Arnold McFerran, Donald Delia Dest, Burgess Askew Davis, and William Ogram Webster, Jr. During the relevant periods discussed in this Stipulation and Consent, Messrs. Lovejoy, Fuller, Stanger, McFerran, Dest, Davis and Webster were branch office managers with the Firm; Messrs. Chaiken and Evans were Division Managers with the Firm. For the sole purpose of settling this disciplinary proceeding, prior to a hearing or adjudication of any issue of law or fact, and without admitting or denying any allegations, facts, conclusions or findings set forth herein, the Firm consents to a finding by the Hearing Panel that it: I. Engaged in conduct inconsistent with just and equitable principles of trade in that, on various occasions during 1984-1987, it permitted or failed to prevent the solicitation and recommendation by one or more of its registered representatives of customer purchases of one or more securities where such securities were unsuitable for the customers. Violated Exchange Rule 723 in that, on various occasions during 1984-1987, it permitted or failed to prevent the recommendation by one or more of its registered representatives of opening transactions in option contracts for customers where the person making the recommendation did not have a reasonable basis for believing, at the time of making the recommendation, that the customers had such knowledge and experience in financial matters that such customers could reasonably be expected to be capable of evaluating the risks of the recommended transactions and financially able to bear the risks of the recommended positions in the option contracts. Violated Exchange Rule 431(f)(7), (8) and (9), and section 220.8 of Regulation T of the Board of Governors of the Federal Reserve System in that, on various occasions during 1984-1987, it permitted customers and employees to engage in practices, or failed to cancel or otherwise liquidate transactions, in their accounts prohibited by such rule and regulation. Violated Exchange Rule 351 in that, during the period 1987-1990, it failed to report to the Exchange in a timely manner certain events as required by such rule. Violated Exchange Rule 342(a) and (b) in that, during the period 1985-1988, it failed to conduct supervisory inspections of certain branch offices at least annually.

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Violated Exchange Rule 342(a) and (b) in that, during the period 1984-1988, it failed to maintain written tables of supervision identifying the person with overall responsibility for internal supervision and control of the Firm and compliance with securities laws and regulations, as well as identifying the supervisory responsibility for each area of the Firm's business activities. Violated Exchange Rule 342(a) and (b) in that, during the period 1984-1988, it failed to provide for, establish, and maintain appropriate procedures of supervision and control, including a separate system of follow-up and review, with respect to its sales practice activities to prevent the foregoing violations.

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For the sole purpose of settling this disciplinary proceeding, prior to a hearing or adjudication of any issue of law or fact, and without admitting or denying any allegations, facts, conclusions or findings set forth herein: Mr. Lovejoy consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative of his member organization employer subject to his supervision and control. Mr. Chaiken consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative, and of Mr. Lovejoy, a branch office manager, of his member organization employer subject to his supervision and control. Mr. Fuller consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative of his member organization employer subject to his supervision and control. Mr. Stanger consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative of his member organization employer subject to his supervision and control. Mr. Evans consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of two registered representatives, and of Mr. Fuller and Mr. Stanger, branch office managers, of his member organization employer subject to his supervision and control.

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Mr. McFerran consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative of his member organization employer subject to his supervision and control. Mr. Dest consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative of his member organization employer subject to his supervision and control. Mr. Davis consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative of his member organization employer subject to his supervision and control. Mr. Webster consents to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with the supervision and control of a registered representative of his member organization employer subject to his supervision and control. For the sole purpose of settling this disciplinary proceeding, prior to a hearing or adjudication of any issue of law or fact, and without admitting or denying any allegations, facts, conclusions or findings set forth herein, the Firm and Messrs. Lovejoy, Chaiken, Fuller, Stanger, Evans, McFerran, Dest, Davis and Webster consent to the Hearing Panel adopting certain findings of fact, the substance of which follows: Background and Jurisdiction The Firm 1. The Firm is a subsidiary corporation of PaineWebber Group Inc., a holding company whose securities are listed on the Exchange. The Firm is the successor to a business founded in 1879 and is currently one of the largest national full-service securities firms in the United States. The Firm is a major broker in securities, options, and commodities. The Firm also acts as a dealer in corporate, municipal and U.S. Government securities and is a distributor of mutual funds, tax shelters, life insurance and annuity products. The Firm is a member organization of the Exchange, which is the Firm's designated examining authority and principal regulator. The Firm is also a member of various domestic and foreign securities and commodities

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exchanges, and the National Association of Securities Dealers, Inc. 4. At December 31, 1990, the Firm had approximately 4,500 registered representatives in 272 branch offices in the United States. The Exchange's Division of Member Firm Regulation conducted sales practice examinations of the supervisory standards and sales practice procedures established and maintained at the Firm for the period 1985-1988, and set forth their findings in three reports. The sales practice examinations covered visits and reviews at the Firm's main office and 49 different branch offices. A copy of each report was provided to the Firm at the conclusion of each examination. Thereafter, the Division of Enforcement conducted an extensive investigation of firm-wide systems and procedures and ten branch offices.

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Lovejoy - Branch Office Manager Philadelphia (Eastern Division) 6. Lovejoy was born on July 19, 1936. He entered the securities industry in 1965 as a registered representative with the Firm. During the period 19841988, Lovejoy was the manager of the Firm's branch office in Philadelphia, Pennsylvania. In April 1988, Lovejoy left the Firm and joined another securities firm, where he is currently employed as a branch office manager. During the period when Lovejoy was the manager of the Firm's branch office in Philadelphia, Lovejoy was responsible for the supervision and control of the sales practice activities of employees in that office, including the activities of registered representative A.

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Chaiken - Division Manager (Eastern Division) 8. Chaiken was born on September 23, 1934. He entered the securities industry in 1959 as a registered representative with the Firm. During the period 19841987, Chaiken was the Division Manager of the Firm's Eastern Division. Chaiken is currently employed by the Firm. During the period when Chaiken was the Division Manager of the Firm's Eastern Division, Chaiken was responsible for the supervision and control of the sales practice activities of various branch offices in the Eastern Division, including the activities of the Philadelphia branch office. During the period when Chaiken was the Division Manager of the Firm's Eastern Division, Lovejoy reported to Chaiken.

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Fuller - Branch Office Manager Pasadena (Southern Pacific Division) 11. Fuller was born on January 15, 1938. He entered the securities industry in 1964 as a registered representative with another firm. In 1973, Fuller joined the Firm. During the period 1983 - 1987, Fuller was the manager of the Firm's branch office in Pasadena, California. In May 1987, Fuller left the Firm. Fuller is currently employed by another securities firm. During the period when Fuller was the manager of the Firm's branch office in Pasadena, Fuller was responsible for the supervision and control of the sales practice activities of employees of that office, including the activities of registered representative B.

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Stanger - Branch Office Manager Santa Barbara (Southern Pacific Division) 13. Stanger was born on October 23, 1947. He entered the securities industry in 1968 as a registered representative with another firm. In 1976, Stanger joined the Firm. During the period 1984 to date, Stanger was the manager of the Firm's branch office in Santa Barbara, California. Stanger is currently employed by the Firm. During the period when Stanger was the manager of the Firm's branch office in Santa Barbara, Stanger was responsible for the supervision and control of the sales practice activities of employees in that office, including the activities of registered representative C.

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Evans - Division Manager (Southern Pacific Division) 15. Evans was born on October 10, 1938. He entered the securities industry in 1962 as a registered representative with the Firm. During the period 1982 to date, Evans was the Division Manager of the Firm's Southern Pacific Division. Evans is currently employed by the Firm. During the period when Evans was the Division Manager of the Firm's Southern Pacific Division, Evans was responsible for the supervision and control of the sales practice activities of various branch offices in the Southern Pacific Division, including the activities of the Pasadena and Santa Barbara branch offices. During the period when Evans was the Division Manager of the Firm's Southern Pacific Division, Fuller and Stanger reported to Evans.

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McFerran - Branch Office Manager Boulder (Central Southwest Division)

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18. McFerran was born on February 26, 1940. He entered the securities industry in 1977 as a registered representative with another firm. In 1983, McFerran joined the Firm. During the period 1983 to July 1990, McFerran was the manager of the Firm's branch office in Boulder, Colorado. McFerran is currently employed by the Firm. During the period when McFerran was the manager of the Firm's branch office in Boulder, McFerran was responsible for the supervision and control of the sales practice activities of employees in that office, including the activities of registered representative D.

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Dest - Branch Office Manager New Haven (New England Division) 20. Dest was born on June 2, 1925. He entered the securities industry in 1960 as a registered representative with another firm. In June 1978, he joined Blyth Eastman Dillon Co. which was acquired in 1980 by the Firm. During the period 1985 to January 1991, Dest was the manager of the Firm's branch office in New Haven, Connecticut. Dest is currently employed by the Firm. During the period when Dest was the manager of the Firm's branch office in New Haven, Dest was responsible for the supervision and control of the sales practice activities of employees in that office, including the activities of registered representative E.

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Davis - Branch Office Manager Louisville (Southeast Division) 22. Davis was born on December 13, 1948. He entered the securities industry in 1970 as a registered representative with another firm. In July 1976, Davis joined the Firm. During the period 1984-August 1987, Davis was the manager of the Firm's branch office in Louisville, Kentucky. Davis is currently employed by the Firm. During the period when Davis was the manager of the Firm's branch office in Louisville, Davis was responsible for the supervision and control of the sales practice activities of employees in that office, including the activities of registered representative F.

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Webster - Branch Office Manager Fairfield (New England Division) 24. Webster was born on July 5, 1943. He entered the securities industry in June 1972 as a registered representative with Blyth Eastman Dillon & Co. which was acquired in 1980 by the Firm. During the period May 1985-May 1991, Webster was the manager of the Firm's branch office in Fairfield, Connecticut. Webster is currently employed by the Firm. During the period when Webster was the manager of the

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Firm's branch office in Fairfield, Webster was responsible for the supervision and control of the sales practice activities of employees in that office, including the activities of registered representative G. Summary 26. The Exchange's sales practice examinations brought to the attention of the Firm the existence of recurring sales practice deficiencies. During the period 1984-1987, there were a number of indications (internal memoranda, active account reports, etc.) which alerted supervisory personnel to deficiencies. However, inadequate corrective action was taken by supervisory personnel, including two Division Managers and seven Branch Office Managers. Moreover, the Firm failed to take adequate steps during that time period to adopt or enforce existing procedures designed to prevent such sales practice deficiencies. The Firm's inadequate supervision and control during this time period resulted, in part, from its failure to establish a separate system of follow-up and review to determine whether existing procedures were being enforced with respect to several areas, for example, active account review and concentration reports. In some instances, the Firm failed to delineate clearly supervisory authority for an area of its business activities, for example, the enforcement of trading restrictions. In other cases, the Firm's supervision of certain of its largest producers was inadequate to prevent continuing misconduct over long periods of time. In certain instances, sales practice violations and supervisory deficiencies resulted in hundreds of customer complaints and millions of dollars in settlements with customers. Failure to Comply With Sales Practice Requirements at Different Branch Offices Philadelphia Branch Office 29. During the period 1984-1987, A, a salesman in the Firm's branch office in Philadelphia, solicited customers to purchase the securities of XYZ, a company engaged in the manufacture and sale of electronic technology. The common stock of XYZ was listed on another stock exchange. During the period 1984-1987, A recommended and effected purchase transactions in XYZ for customers at a time when there were already concentrated positions in XYZ of more than 10% of the outstanding shares held in existing customer accounts of A. During the period January 1984August 1985, 50% to 75% of the total XYZ positions held by A's customers were held on margin, and during the period September 1985-December 1987, 25% to 50% of such

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XYZ positions were held on margin. 31. During the period 1984-1987, monthly concentration reports were prepared and distributed to various managers at the Firm, including Lovejoy and Chaiken, which showed that during this four year period, 75 to 150 customer accounts of A held from 11% to 17% of the outstanding shares of XYZ. The monthly concentration reports also indicated that during the period January 1984-August 1985, 50% to 75% of the total XYZ positions held by A's customers were held on margin; and that during the period September 1985December 1987, 25% to 50% of such XYZ positions were held on margin. For example, as of October 4, 1986, 121 customer accounts of A held 583,367 shares or more than 15% of the outstanding shares of XYZ. During 1986, the average daily trading volume of XYZ was approximately 10,500 shares per day. At that time, XYZ traded in a price range of $13 to $14 per share. A year later, the concentration of XYZ in customer accounts of A had increased. The October 1987 monthly concentration report stated that 158 customer accounts of A held 697,324 shares or more than 17% of the outstanding shares of XYZ. During 1987, the average daily trading volume of XYZ was approximately 10,000 shares per day. At the end of October 1987, XYZ traded at a price of $11 per share. During 1984-1987, the Firm's policy and procedures required that in response to each monthly concentration report on XYZ, the accounts holding XYZ should have been reviewed to determine whether XYZ was suitable for each customer. Reviews conducted to determine whether concentrated positions in XYZ were suitable for the customers were inadequate. During the period 1984-1987, active account reports for customer accounts of A were prepared and distributed to various managers at the Firm, including Lovejoy, to identify accounts with 10 or more trades or commissions of $1,000 or more for the prior month. The active account reports showed the number and dollar value of all transactions, indicated the amount of commissions, and attached a copy of the monthly statement for the account. The Firm's procedures and the active account reports required that the activity in such accounts "be reviewed in conjunction with the client's statement and the financial resources and investment objectives as shown on this report." Reviews conducted to determine whether the trading in XYZ was suitable for the customers were inadequate.

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38. During the period 1984-1987, reports were prepared and distributed to various managers at the Firm, including Lovejoy and Chaiken, which showed a large number of trade corrections and account number changes for purchases of XYZ in customer accounts of A. Reviews conducted to determine whether the trading in XYZ identified by such reports was authorized by the customers were inadequate. During 1984-1987, the continued solicitation and recommendation of purchases of XYZ by A were unsuitable for various customers in view of their financial resources, investment experience, and investment objectives. The purchases of XYZ were also unsuitable in view of the concentrated positions of XYZ then held in customer accounts at the Firm and the illiquid nature of such positions.

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During 1984-1987, the Firm permitted or failed to prevent the solicitation and recommendation by A of purchases of XYZ which were unsuitable for the customers. During the period 1984-1987, A was the largest producer in the Philadelphia branch office and one of the largest producers in the Firm. In late 1987, numerous customers of the Firm complained to the Firm regarding the way A handled their accounts during 1984-1987, claiming that unauthorized and unsuitable purchases of XYZ were made in their accounts. The Firm reviewed such complaints and contacted customers regarding trading of XYZ in their accounts. During December 1987, the price of XYZ had fallen as low as $5 1/2 per share. On December 7, 1987, the Firm terminated A's employment. As of March 1991, the Firm had received complaints from approximately 93 customers of A regarding the trading in their accounts at the Philadelphia branch office. As of March 1991, the Firm had paid a total of more than $3 million to resolve customer complaints.

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Branch Office Manager for Philadelphia 45. During 1984-1987, Lovejoy, the branch office manager for the office in Philadelphia, did not provide reasonable supervision and control of the activity of A described above, including: a. Lovejoy received and reviewed on a daily basis order tickets for transactions in the customer accounts of A. b. Lovejoy received and approved reports showing a large number of trade corrections and account number changes for purchases of XYZ in customer accounts of A, but

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Lovejoy failed to take adequate steps to determine whether A was transferring unauthorized trades in XYZ from customer accounts and to prevent such activity. c. Lovejoy received and reviewed active account reports for customer accounts of A. d. After receiving one or more such active account reports, Lovejoy failed to conduct adequate reviews of the activity in such customer accounts or take adequate steps to determine whether such trading was authorized and suitable for the customers. e. Lovejoy received monthly concentration reports during 1984-1987 which showed that customer accounts of A held concentrated positions in XYZ. The monthly concentration reports also indicated that during the period January 1984-August 1985, 50% to 75% of the total XYZ positions held by A's customers were held on margin; and that during the period September 1985December 1987, 25% to 50% of such XYZ positions were held on margin. f. After receiving one or more such monthly concentration reports, Lovejoy failed to follow the Firm's procedures with respect to concentrated security positions in that, among other things, he did not conduct adequate reviews of customer accounts holding XYZ to determine whether XYZ was suitable for such customers, and did not prepare a statement confirming the suitability of XYZ for such customers. g. After receiving one or more such monthly concentration reports, Lovejoy failed to take adequate steps to prevent A's continued solicitation and recommendation of purchases of XYZ. h. Lovejoy failed to take appropriate action to prevent the unsuitable trading in XYZ which occurred in customer accounts of A. Division Manager for Philadelphia 46. During 1984-1987, Chaiken, the division manager for the Firm's Eastern Division, which included the branch office in Philadelphia, did not provide reasonable supervision and control of the activity of Lovejoy and of A described above, including: a. Chaiken failed to take adequate steps to ensure that the Firm's procedures were followed with respect to the review of active accounts. For example, Chaiken failed to cause Lovejoy to review customer accounts of A identified by active account reports to determine whether such trading was authorized and suitable for the customers.

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b. Chaiken received monthly concentration reports during 1984-1987 which showed that customer accounts of A held concentrated positions in XYZ. The monthly concentration reports also indicated that during the period January 1984-August 1985, 50% to 75% of the total XYZ positions held by A's customers were held on margin; and that during the period September 1985December 1987, 25% to 50% of such XYZ positions were held on margin. c. After receiving one or more such monthly concentration reports, Chaiken failed to take adequate steps to ensure that the Firm's procedures were followed with respect to the review of concentrated security positions. For example, Chaiken failed to cause Lovejoy to review customer accounts holding XYZ to determine whether XYZ was suitable for the customers and prepare a statement confirming the suitability of XYZ for the customers. d. After receiving one or more such monthly concentration reports, Chaiken failed to take adequate steps to prevent A's continued solicitation and recommendation of purchases of XYZ. e. Chaiken failed to take appropriate action to prevent the unsuitable trading in XYZ which occurred in customer accounts of A. Pasadena Branch Office 47. During 1985-1986, B, a salesman in the Firm's branch office in Pasadena, engaged in unsuitable options trading in various customer accounts. During 1985-1986, B recommended opening transactions in options contracts for numerous customers who had limited financial resources and virtually no prior experience trading options. B recommended to such customers that they participate in an options strategy which involved primarily short-term uncovered option writing and required the customers to authorize B to act with discretionary power in their accounts. The Firm's procedures required that "Discretionary accounts must be the subject of frequent and appropriate reviews by branch office managers. In reviewing discretionary accounts it is the responsibility of the branch office manager to ensure that transactions are not excessive in size or frequency in view of the financial resources and character of such accounts." Reviews conducted to determine whether the trading was excessive or unsuitable in discretionary accounts of B's customers were inadequate. During 1985-1986, active account reports for customer accounts of B were prepared and distributed to various

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managers at the Firm, including Fuller and Evans, to identify accounts with 10 or more trades or commissions of $1,000 or more for the prior month. The active account reports showed the number and dollar value of all transactions, indicated the amount of commissions, and attached a copy of the monthly statement for the account. 51. The Firm's procedures and the active account reports required that the activity in such accounts "be reviewed in conjunction with the client's statement and the financial resources and investment objectives as shown on this report." Reviews conducted to determine whether the options trading identified by such active account reports was suitable for the customers of B were inadequate. During 1985-1986, error reports for customer accounts of B were prepared and distributed to various managers at the Firm, including Fuller and Evans. The error reports showed a large number of trade corrections and account number changes for purchases of uncovered options contracts in customer accounts of B. During 1985-1986, the recommendation of purchases of options contracts by B were unsuitable for various customers, in view of their financial resources, prior investment experience, and investment objectives. During 1985-1986, the Firm permitted or failed to prevent the solicitation and recommendation by B of opening positions in options contracts which were unsuitable for various customers. During the period 1985-1986, B was the largest producer in the Pasadena branch office and one of the largest producers in the division. On April 29, 1986, the Firm permitted B to resign. Shortly thereafter, numerous customers of the Firm complained to the Firm regarding the way B handled their accounts, claiming that unsuitable options trading occurred in their accounts. As of April 1991, the Firm had received complaints from 52 customers of B regarding the options trading in their accounts at the Pasadena branch office. As of April 1991, the Firm had paid a total of $1.5 million to resolve 51 of the customer complaints.

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Branch Office Manager for Pasadena 59. During 1985-1986, Fuller, the branch office manager for the office in Pasadena, did not provide reasonable supervision and control of the activity of B described above, including: a. B worked for the Firm during 1983-1984 and left in

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October 1984 to join another securities firm. In January 1985, when B returned to the Firm as a salesman at its branch office in Pasadena, Fuller was aware that B had just been terminated by the other securities firm because it was unwilling, in view of its policy, to permit B to continue in an options strategy which involved low-priced options. b. Fuller received and reviewed on a daily basis order tickets for transactions in the customer accounts of B. c. The Firm's procedures required that "Discretionary accounts must be the subject of frequent and appropriate reviews by branch office managers. In reviewing discretionary accounts it is the responsibility of the branch office manager to ensure that transactions are not excessive in size or frequency in view of the financial resources and character of such accounts." Fuller failed to conduct adequate reviews or take adequate steps to determine whether the trading was excessive or unsuitable in discretionary accounts of B's customers. d. Fuller received and approved a large number of error reports for trade corrections and requests for change of account number for options transactions in customer accounts of B. e. Fuller received and reviewed active account reports for customer accounts of B. f. After receiving one or more such active account reports, Fuller failed to take adequate steps to review the activity in such customer accounts or follow the Firm's procedures to determine whether such trading was unsuitable or excessive for the customers. g. During 1985-1986, on various occasions the Firm's Senior Registered Options Principal, and Director of Compliance, each inquired and expressed concerns to Fuller about the options trading in the customer accounts of B. For example, by memorandum dated August 23, 1985, Compliance expressed concerns to Fuller that B's strategy of selling uncovered options was not appropriate for his customer accounts and that such trading had generated excessive commissions for B. Compliance advised Fuller of the need for closer monitoring of B's activities. Although he replied to Compliance by memorandum dated October 3, 1985, thereafter, Fuller failed to take adequate steps to prevent B's solicitation and recommendation of purchases and sales of options contracts which were unsuitable and excessive. h. Fuller failed to take appropriate action to prevent the unsuitable and excessive trading in options which

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occurred in customer accounts of B. Santa Barbara Branch Office 60. In January 1987, Customer H opened an account at the Firm with C, a salesman in the Firm's branch office in Santa Barbara. At that time, Customer H requested and received approval from the Firm for a credit line of $1 million for his account. In connection with approving Customer H's request for a $1 million credit line for his account, the Firm learned that in 1975 customer H had been barred by the SEC from association with any broker-dealer because he participated in a fraudulent and manipulative stock scheme, and that in 1979 Customer H had been convicted of a felony for federal income tax violations. In February 1987, Customer H began to purchase for his account shares of UVW, a company engaged in oil and gas exploration and oil field trucking business. Thereafter, Customer H accumulated on margin a large position in UVW, which was the only security he purchased for his account. By December 31, 1987, Customer H held 293,300 shares of UVW in his account at the Firm, having a market value of $1.7 million with a margin debit of more than $1 million. During 1987, Customer H urged C to purchase and solicit others to purchase UVW, and two other low-priced speculative securities, RST, a company engaged in the development of a process and technology to produce gold from heavy, black or volcanic sand; and OPQ, a company engaged in the business of salvaging platinum contained in used catalytic converters. During 1987, the common stock of UVW was listed on the NASDAQ and the common stocks of RST and OPQ were quoted in the NASD pink sheets. During 1987, C solicited customers to purchase UVW, RST, and OPQ. By May 1987, C's customers held a concentrated position in UVW. UVW traded during April-May 1987 in a price range of $5 to $6 per share. In May 1987, a monthly concentration report was prepared and distributed to various managers at the Firm, including Stanger and Evans, which showed that 22 customer accounts of C held 306,000 shares or 4.37% of the outstanding shares of UVW, and that Customer H's account held 233,300 shares. The May 1987 concentration report also indicated that more than 84% of all positions in UVW held by C's customers were held on margin, with Customer H holding 227,000 shares on margin and 15 other customers holding an additional 31,200 shares on margin.

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In response to the May 1987 concentration report on UVW,

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each account holding UVW should have been reviewed in accordance with the Firm's procedures to determine (a) whether UVW was suitable for each customer, and (b) whether the recommendation to purchase UVW for such accounts was documented in a due diligence file for such stock containing fundamental research material rather than sales literature or information provided solely by the issuer or Customer H. 67. Reviews for suitability of concentrated positions in UVW conducted during 1987 were inadequate. After May 1987, C continued to solicit and recommend purchase transactions in UVW for customers on various occasions when concentrated positions in UVW were already held in existing customer accounts of C, that is, positions of at least 5% of the outstanding shares. The concentration of UVW in customer accounts of C increased. The September 1987 concentration report stated that 44 customer accounts of C held 355,670 shares of UVW or more than 5% of the outstanding shares of UVW, including 243,300 shares in Customer H's account. The September 1987 concentration report also indicated that more than 80% of all such positions in UVW held by C's customers were held on margin, with Customer H holding 237,200 shares on margin and 18 other customers holding an additional 46,500 shares on margin. During September 1987, UVW traded in a price range of $8 per share. In or about September 1987, C requested the Firm to become a market maker for UVW, RST, and OPQ and consider a banking relationship with such companies. In a memorandum dated September 4, 1987, distributed to senior managers at the Firm, including Stanger and Evans, C described Customer H as the "venture capitalist behind" UVW, RST, and OPQ, and stated that Customer H "provides the wherewithal in capital, contributes to the management, and promotes the companies in a variety of ways." In October 1987, the Firm began to act as a market maker in UVW. At that time, the Firm knew or should have known that the businesses of UVW, RST, and OPQ were risky and speculative; that Customer H, who was represented by C to be the "venture capitalist" and promoter for such companies, had been barred in 1975 by the SEC from association with any broker-dealer because he participated in a fraudulent and manipulative stock scheme, and had been convicted in 1979 of a felony for federal income tax violations; that C and the Santa Barbara branch office were relying entirely on Customer H and the issuers for information about UVW, RST, and OPQ without having conducted an independent investigation; that the securities of UVW, RST and OPQ were not registered for sale to residents of California; and that C's customers held concentrated positions of UVW on

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71.

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margin which would be difficult to liquidate. 72. After October 1987, C continued to solicit and recommend purchase transactions in UVW. The concentration of UVW in customer accounts of C increased. The December 1987 concentration report stated that 81 customer accounts of C held 446,711 shares or more than 6% of the outstanding shares of UVW, including 293,300 shares in Customer H's account. The December 1987 concentration report also indicated that more than 83% of all such positions in UVW held by C's customers were held on margin, with Customer H holding 287,200 shares on margin and 12 other customers holding an additional 43,100 shares on margin. During 1987, C's solicitation and recommendation of purchases of UVW, RST, and OPQ were unsuitable for various customers in view of their financial resources, prior investment experience, and investment objectives. The purchases of UVW were also unsuitable in view of the concentrated positions of UVW then held in customer accounts at the Firm and the illiquid nature of such positions. During 1987, the Firm permitted or failed to prevent the solicitation and recommendation by C of purchases of UVW, RST, and OPQ which were unsuitable for various customers. During 1987, C was the largest producer in the Santa Barbara branch office and one of the largest producers in the Firm. Numerous customers of the Firm complained to the Firm regarding the way C handled their accounts during 1987, claiming that unsuitable purchases of UVW, RST, and OPQ were made in their accounts. By June 1988, the price of UVW had fallen to less than $1 per share. On October 20, 1988, the Firm terminated C's employment. As of March 1991, the Firm had received complaints from 90 customers regarding the trading of UVW, RST, and OPQ in their accounts at the Santa Barbara branch office. As of March 1991, the Firm had paid a total of $1 million to resolve customer complaints.

73.

74.

75.

76.

77. 78.

Branch Office Manager for Santa Barbara 79. During 1987, Stanger, the branch office manager for the office in Santa Barbara, did not provide reasonable supervision and control of the activity of C described above, including: a. Stanger received monthly concentration reports during 1987 which showed that customer accounts of C held concentrated positions in UVW and that 80% or more of all such positions in UVW were held on margin.

19
b. After receiving one or more such monthly concentration reports, Stanger failed to follow the Firm's procedures with respect to concentrated security positions in that, among other things, he failed to conduct adequate reviews of customer accounts holding UVW or take adequate steps to determine whether UVW was suitable for the customers and did not prepare a statement confirming the suitability of UVW for such customers. c. After receiving one or more such monthly concentration reports, Stanger failed to take adequate steps to prevent C's continued solicitation and recommendation of purchases of UVW. d. Stanger failed to take appropriate action to prevent the unsuitable trading in UVW which occurred in customer accounts of C. e. Stanger received and reviewed on a daily basis order tickets for transactions in the customer accounts of C. f. Stanger failed to supervise C's activities in soliciting and recommending to customers purchases of securities promoted by Customer H, even though he learned in January 1987 when Customer H opened his account and was approved for a $1 million line of credit that Customer H had been barred in 1975 by the SEC from association with any broker-dealer. g. Stanger learned in April 1987 that C had opened a securities account away from the Firm without prior approval and held a large position of UVW in that account, but thereafter Stanger failed to follow the Firm's procedures and Exchange Rule 407 with respect to monitoring C's trading activities in such account. Division Manager for Pasadena and Santa Barbara 80. During 1985-1987, Evans, the division manager for the Firm's Southern Pacific Division, which included the branch offices in Pasadena and Santa Barbara, did not provide reasonable supervision and control of the activity of B and C described above, including: a. Evans received and reviewed active account reports during 1985-1986 for customer accounts of B. b. After receiving one or more such active account reports, Evans failed to take adequate steps to ensure that the Firm's procedures were followed with respect to the review of active accounts. For example, Evans failed to cause Fuller to review customer accounts of B identified by active account reports to determine whether such trading was suitable for the customers.

20
c. During 1985-1986, on various occasions the Firm's Senior Registered Options Principal, and Director of Compliance, each inquired and expressed concerns to Evans about the options trading in the customer accounts of B. For example, by memorandum dated August 23, 1985, Compliance expressed concerns to Fuller with a copy to Evans that B's strategy of selling uncovered options was not appropriate for his customer accounts and that such trading had generated excessive commissions for B. Compliance advised Fuller and Evans of the need for closer monitoring of B's activities. Although Fuller replied to Compliance by memorandum dated October 3, 1985, with a copy to Evans, thereafter, Evans failed to take adequate steps to ensure that Fuller monitored B's activities to prevent solicitation and recommendation of purchases and sales of options contracts which were unsuitable and excessive. d. Evans failed to take appropriate action to prevent the unsuitable trading in options which occurred in customer accounts of B. e. Evans received monthly concentration reports during 1987 which showed that customer accounts of C held concentrated positions in UVW and that 80% or more of all such positions in UVW were held on margin. f. After receiving one or more such monthly concentration reports, Evans failed to take adequate steps to ensure that the Firm's procedures were followed with respect to the review of concentrated security positions. For example, Evans failed to cause Stanger to review customer accounts holding UVW to determine whether UVW was suitable for the customers and prepare a statement confirming the suitability of UVW for the customers. g. Evans failed to take appropriate action to prevent the unsuitable trading in UVW which occurred in customer accounts of C. Boulder Branch Office 81. During the period October 1983-March 1986, D, a salesman in the Firm's branch office in Boulder, engaged in unsuitable and excessive trading in various customer accounts. In summary, D recommended and effected purchase transactions on margin in five accounts for customers who were retired, with limited financial resources and conservative investment objectives, as follows: Average Equity Total Gross Margin Purchases Commissions Charges $80,600 $32,215

82.

Period Number CustomerMonths Trades I 23 170

$270,832 $5,282,800

21

I J K L 83.

24 30 18 29

77 166 96 157

54,701 282,509 238,996 131,968

1,841,200 5,341,200 3,329,400 3,818,900

31,700 76,700 52,000 60,000

9,205 38,445 23,342 28,680

In July 1985, D began to solicit customers to purchase the securities of LMN, a company engaged in the development and sale of computer programs. The common stock of LMN was listed on the Exchange. During July 1985, LMN traded in a price range of $25 to $27 per share. As of March 1986, the accounts of the five customers held large positions of LMN which exceeded more than one half of the total dollar value of their accounts. Four of the customer accounts each held positions of 14,000 shares or more of LMN. Purchases of such large positions of LMN were not in accordance with the conservative investment objectives indicated by the customers. For three of the customers, the LMN positions in their accounts exceeded 95% of the total value of their accounts. In March 1986, the five accounts had combined LMN positions of $769,250 out of a total combined value of $1 million. By the end of March 1986, the price of LMN had fallen to $11 per share. During the period October 1983-March 1986, active account reports were prepared and distributed to various managers at the Firm, including McFerran, to identify those accounts with 10 or more trades or commissions of $1,000 or more for the prior month. The active account reports stated the number and dollar value of all transactions, indicated the amount of commissions, and attached a copy of the monthly statement for the account. During the same period, monthly commission detail reports were prepared and distributed at the Firm which showed for each account all trading activity and commissions for the prior month. The Firm's procedures and the active account reports required that the activity in such accounts "be reviewed in conjunction with the client's statement and the financial resources and investment objectives as shown on this report." Reviews conducted to determine whether the trading in the accounts of the five customers listed above was suitable for such customers were inadequate. During the period October 1983-March 1986, active account reports prepared and distributed at the Firm contained information which disclosed that unsuitable and excessive trading on margin was occurring during this period in the five customer accounts.

84.

85.

86.

87.

22
88. During October 1983-March 1986, D's solicitation and recommendation of LMN and other securities were unsuitable for the customers in view of their financial resources, investment experience, and investment objectives, and also in view of the large positions of LMN then held in the customers' accounts at the Firm. During October 1983-March 1986, the Firm permitted or failed to prevent the solicitation and recommendation by D of purchases of securities described above which were unsuitable for such customers. In March 1986, D became the manager of another branch office of the Firm and his customer accounts were transferred to that office. Four customers of the Firm complained to the Firm regarding the way D handled their accounts during 19831986, claiming that unsuitable and excessive purchases were made in their accounts. On August 19, 1988, the Firm terminated D's employment. As of March 1991, the Firm had paid $350,000 to resolve complaints from four customers regarding the unsuitable and excessive trading in their accounts at the Boulder branch office.

89.

90.

91.

92. 93.

Branch Office Manager for Boulder 94. During the period October 1983-March 1986, McFerran, the branch office manager for the office in Boulder, did not provide reasonable supervision and control of the activity of D described above, including: a. McFerran was aware of the age, retired status, limited financial resources, and conservative investment objectives of the five customers listed above. b. McFerran received and reviewed on a daily basis order tickets for transactions in the accounts of D's customers. c. McFerran received and reviewed active account reports for the customers of D. d. After receiving one or more such active account reports, McFerran failed to conduct adequate reviews of the activity in such customer accounts or follow the Firm's procedures to determine whether such trading was authorized and suitable for the customers. e. McFerran failed to take appropriate action to prevent the unsuitable and excessive trading which occurred during two years in customer accounts of D. Louisville Branch Office

23

95.

During 1985-1987, F, a salesman in the Firm's branch office in Louisville, violated margin requirements in his personal accounts at the Firm and engaged in conduct inconsistent with just and equitable principles of trade. During 1985-1986, F engaged in a practice in his personal accounts at the Firm of purchasing options without sufficient equity to cover the purchases and paying for the purchases with the proceeds of the sales of the same options contracts. During 1986, on numerous occasions F issued checks drawn on his personal accounts at the Firm which F knew or should have known were drawn upon insufficient and/or encumbered funds. The checks generated "Bounced Check Alerts" at the Firm which indicated that there were not sufficient available funds to cover the checks issued by F. During March-May 1986, the Firm's Compliance and Credit Control departments recommended that certain limits and conditions be imposed on F's accounts as a result of the foregoing activities. Davis chose not to implement such limits or conditions. Thereafter, F continued during 1986-1987 to purchase and sell options using the proceeds of such sales to pay for the purchases when his account lacked sufficient equity to cover the purchases, and to issue checks against his personal accounts at the Firm which were drawn upon insufficient and/or encumbered funds. During 1986, on various occasions F traded the same options on the same day as his customers and received more favorable execution prices than his customers. During 1986, on several occasions F entered orders to trade options without designating a customer's account and thereafter F assigned such trades which resulted in more favorable execution prices to his personal account and the trades with less favorable prices to his customers. Four customers of the Firm complained to the Firm regarding the way F handled their accounts during 19861987, claiming that unauthorized and unsuitable trading occurred in their accounts. On August 10, 1987, the Firm terminated F's employment.

96.

97.

98.

99.

100.

101.

102.

103.

Branch Office Manager for Louisville 104. During 1985-1987, Davis, the branch office manager for the office in Louisville, did not provide reasonable supervision and control of the activity of F described above, including:

24

a. During 1985, Davis was advised that F engaged in a practice in his personal account of purchasing options without sufficient equity to cover the purchases and paying for the purchases with the proceeds of the sales of the same options contracts. b. During 1986, on several occasions the Firm's Senior Registered Options Principal, and Credit Control Department, notified Davis by wire that F had issued checks drawn on his personal account at the Firm which were drawn upon insufficient and/or encumbered funds, and recommended that certain limits and conditions be imposed on F's accounts. Davis chose not to implement such limits or conditions. c. Thereafter, Davis failed to take adequate steps to prevent F from continuing to purchase and sell options using the proceeds of such sales to pay for the purchases when his account lacked sufficient equity to cover the purchases, and to issue checks against his personal account at the Firm which were drawn upon insufficient and/or encumbered funds. d. Davis received and reviewed on a daily basis order tickets for transactions in the customer and personal accounts of F. As part of his daily review of order tickets, Davis was obliged by the Firm's procedures to direct his review to possible conflicts of interest to determine if transactions in a salesman's account were executed at better prices than customer orders in the same security on the same day. f. Davis failed to detect and take adequate steps to prevent F from trading the same options as his customers on the same day and receiving more favorable prices than his customers. g. During 1986, Davis also received and reviewed on several occasions allocation notices from the Firm's Block Desk which showed that F had entered orders to trade options without designating a customer's account and such orders had been executed "open customer." Under Exchange Rule 410 and the Firm's procedures, the customer account designation was required on all order tickets before the orders were entered for execution.

h. Davis failed to take adequate steps to prevent F from entering orders without first designating customer accounts on such order tickets. i. Davis failed to take appropriate steps to provide reasonable supervision of F with a view to preventing

25
the foregoing violations by F. Fairfield Branch Office 105. During 1985-1986, G, a salesman in the Firm's branch office in Fairfield, committed numerous margin violations in his customer and personal accounts at the Firm. In a memorandum dated March 6, 1986, the Firm's Senior Registered Options Principal advised the Fairfield branch office that he had reviewed 24 option accounts serviced by G and found more than 75 deficiencies for the period October 1985-February 1986. The memorandum listed, among other things, free-riding violations, extensions, liquidations, bounced checks, violation reports filed, trading without final New York options approval, and purchasing short term options without funds on deposit. The memorandum recommended that certain limits and conditions be imposed on option accounts serviced by G. Steps taken to impose such limits or conditions were inadequate. In April 1986, G opened an account in his wife's name and a joint account with his wife. Thereafter, during the period May-December 1986, numerous margin violations occurred in both accounts when G purchased options without funds on deposit, used proceeds from sales to pay for purchases, and engaged in a practice of liquidating positions to meet open calls. During 1986, on numerous occasions G issued checks drawn on his personal account at the Firm which G knew or should have known were drawn upon insufficient and/or encumbered funds. The checks generated "Bounced Check Alerts" at the Firm which indicated that there were not sufficient available funds to cover the checks issued by G. In many instances, the checks were honored because the branch office manager approved an override based on G liquidating various positions, receiving cash advances, or transferring funds from other personal accounts. In December 1986, G issued a check in the amount of $21,000 drawn on his account at a savings bank and deposited it in his account at the Firm to pay for securities transactions. In January 1987, the check was returned unpaid on two occasions because of insufficient funds in G's bank account. This resulted in an unsecured debit balance of $21,000 in G's securities account at the Firm. On February 6, 1987, the Firm terminated G's employment.

106.

107.

108.

109.

110.

Branch Office Manager for Fairfield

26
111. During 1986, Webster, the branch office manager for the office in Fairfield, did not provide reasonable supervision and control of the activity of G described above, including: a. In March 1986, the Firm's Senior Registered Options Principal advised Webster by memorandum dated March 6, 1986 that a recent review of the option accounts serviced by G had disclosed a large number of deficiencies. The memorandum listed, among other things, free riding violations, extensions, liquidations, bounced checks, violation reports filed, trading without final New York options approval, and purchasing short term options without funds on deposit. The memorandum recommended that certain limits and conditions be imposed on option accounts serviced by G. Webster failed to take adequate steps to impose such limits or conditions. b. In April 1986, G opened an account in his wife's name and a joint account with his wife. Thereafter, during the period May-December 1986, numerous margin violations occurred in both accounts when G purchased options without funds on deposit, used proceeds from sales to pay for purchases, and engaged in a practice of liquidating positions to meet open calls. c. During 1986, on numerous occasions G issued checks drawn on his personal account at the Firm which generated "Bounced Check Alerts" at the Firm indicating that there were not sufficient available funds to cover the checks. In many instances, Webster approved an override to honor the checks based on G liquidating various positions, receiving cash advances, or transferring funds from other personal accounts to cover the checks. d. During 1986, Webster failed to take adequate steps to prevent the margin violations by G in his customer and personal accounts. e. Webster failed to take appropriate steps to provide reasonable supervision of G with a view to preventing the foregoing violations by G. New Haven Branch Office 112. During the period July 1985-April 1988, E, a registered representative in the New Haven branch office, misappropriated 18 checks in a total amount of $400,000 from 12 customers. The Firm has reimbursed the customers for the stolen funds plus interest. E used two methods to misappropriate customer checks. five occasions, E requested checks be mailed to customers. In each instance, the customer had not requested the check. When the customers received the On

113.

27
checks and called to inquire why such checks were issued, E said it was an error and that the customers should endorse the checks and return them to him for deposit into their accounts at the Firm. When E received such checks from the customers, he deposited them into his personal bank account at a savings bank. 114. On approximately 13 other occasions, E requested checks be issued to customers and picked them up from the branch office cashier allegedly for delivery to the customers. In each instance, the customer had not requested the check and was not alerted to the alleged delivery by E. E deposited the checks into his personal bank account at the savings bank. During this period, under the Firm's procedures the delivery of checks to customers by registered representatives was permitted only under extraordinary circumstances and only with the prior written approval of the branch office manager. The Firm's procedures also required that the branch office receive from the customer a letter acknowledging that the check was received. A copy of the customer's confirming letter was to be retained at the branch office. The registered representative delivering the check was required to sign a check log book acknowledging receipt of the customer check, which was maintained in the operations area at the branch office. The branch office manager was required to review the log each month. For the period July 1985-April 1988, the Firm could not locate letters from customers confirming that they had received the thirteen checks issued for hand delivery. The branch office records with respect to the issuance of checks for hand delivery to customers failed to indicate whether the Firm had requested confirmation of delivery from the customers, received such confirmations, or taken any other steps to confirm delivery. Moreover, the Firm's branch office check log for New Haven did not have entries by E for four of the thirteen checks he picked up for hand delivery. For the period, there was no evidence that the branch office manager had reviewed the branch office check log. In May 1988, a customer complained to the New Haven branch office that funds were missing from her account. On May 16, 1988, after the branch office manager investigated the customer's complaint, the Firm terminated E's employment.

115.

116.

117.

118.

119.

Branch Office Manager for New Haven 120. During the period July 1985-April 1988, Dest, the branch office manager for the office in New Haven, did not

28
provide reasonable supervision and control of the activity of E described above, including: a. Contrary to Firm procedures, Dest approved routinely E's requests for hand delivery by him of checks to customers without inquiring or determining whether extraordinary circumstances existed for such delivery. b. Contrary to Firm procedures, Dest failed to ensure that all checks received by E for hand delivery to customers were entered on the branch office check log.

c. Contrary to Firm procedures, Dest failed to maintain at the branch office copies of all letters sent to and received from customers confirming their receipt of checks received by E for hand delivery to them. d. Dest failed to take adequate steps to ascertain that each customer had in fact received the check given to E for hand delivery to each such customer. e. Dest failed to take appropriate steps to provide reasonable supervision of E with a view to preventing the foregoing violations by E. Springfield Branch Office 121. During the period August 1985-October 1986, M, a registered representative in the Springfield branch office, and N, M's sales assistant, misappropriated numerous checks in a total amount of $1.3 million from 39 customers. The Firm has reimbursed the customers for the stolen funds plus interest. During the period August 1985-October 1986, on numerous occasions M or N requested checks be issued to customers and picked them up from the branch office cashier allegedly for delivery to the customers. In each instance, the customer had not requested the check and was not alerted to the alleged delivery by M or N. Thereafter, M or N deposited such checks into their personal bank accounts. During this period, under the Firm's procedures the delivery of checks to customers by registered representatives was permitted only under extraordinary circumstances and only with the prior written approval of the branch office manager. The Firm's procedures also required that the branch office receive from the customer a letter acknowledging that the check was received. A copy of the customer's confirming letter was to be retained at the branch office. The registered representative delivering the check was required to sign a check log book acknowledging

122.

123.

124.

29
receipt of the customer check, which was maintained in the operations area at the branch office. The branch office manager was required to review the log each month. 125. For the period August 1985-October 1986, the Firm could not locate the branch office check log for the Springfield branch office or any letters from customers confirming that they had received the checks issued for hand delivery. The branch office had no records with respect to the issuance of checks for hand delivery to customers. During 1986, the Firm's Senior Registered Options Principal notified the Branch Office Manager for Springfield by wire that he had reviewed accounts serviced by M and found more than 100 deficiencies for the period November 1985-February 1986. The memorandum listed, among other things, free-riding violations, extensions, liquidations, bounced checks, violation reports filed, trading without final New York options approval, and purchasing short term options without funds on deposit. The memorandum recommended that certain limits and conditions be imposed on option accounts serviced by M, but no such limits or conditions were ever imposed. Thereafter, during the period May-October 1986, numerous margin violations occurred in option accounts serviced by M and N. On November 6, 1986, the Firm terminated M's and N's employment. The March 6, 1986 memorandum was also sent to the Division Manager for the Springfield branch office and the Regional Compliance Administrator. Shortly thereafter, in April 1986, the Regional Compliance Administrator requested that the Firm conduct an internal audit of Springfield. A year later, in May 1987, an internal audit of Springfield was done for the first time since 1984.

126.

127.

128.

129.

Failure to Comply With Margin Requirements 130. During 1984-1987, violations of margin requirements and Regulation T occurred at various branch offices, including Philadelphia, Pasadena, Louisville, Fairfield, Springfield, Boston, and San Francisco. During 1984-1987, the Firm failed to comply with Exchange Rule 431(f)(7) in that on numerous occasions it permitted customers in various branch offices to make a practice of either deferring the deposit of cash or securities beyond the time when such transactions would ordinarily be settled or cleared, or meeting the margin required by the liquidation of the same or other commitments in the account.

131.

30

132.

During 1984-1987, the Firm failed to comply with Exchange Rule 431(f)(8) and Section 220.8(b) of Regulation T in that on numerous occasions it permitted or failed to cancel or otherwise liquidate transactions or obtain extensions in customer accounts at various branch offices when the equity in such accounts was not sufficient to meet initial and maintenance margin requirements or when a customer did not make full cash payment within the required time. During 1984-1987, the Firm failed to comply with Exchange Rule 431(f)(9) and Section 220.8(c) of Regulation T in that on numerous occasions it permitted customers at various branch offices to make a practice of effecting transactions in customer cash accounts where the cost of the securities purchased was met by the sale of the same securities, and failed to restrict such accounts for 90 days. During 1984-1987, the Firm failed to comply with Section 220.8 of Regulation T of the Board of Governors of the Federal Reserve System in that on numerous occasions it failed to cancel promptly purchase transactions in customer cash accounts which were on a 90 day restriction.

133.

134.

Failure to Report Events Timely to the Exchange 135. Exchange Rule 351 requires that a member organization report promptly to the Exchange certain events. During the period January 1987 through December 1990, the Firm failed to make timely filings with the Exchange for at least 175 events required to be reported under Exchange Rule 351 relating to the disposition of customer complaints. The Firm reported at least 175 events to the Exchange late, from approximately two months to two years or more after the reportable event dates as follows: Filed Late 2-5 months 6-11 months 1-2 years 2 or more years Total 138. Number of Events 72 48 44 11 175

136.

137.

During the period January 1987-December 1990, the Firm reported more than one year late numerous dispositions of customer complaints in excess of $100,000. For example, the Firm reported in July 1990, that is, 26 months late, that a customer had obtained an award in April 1988 for $399,000; the Firm reported in April 1989, that is, 24 months late, that it had settled a customer complaint in

31
March 1987 for $350,000. 139. In addition to the late reporting described above, the Firm failed to make any filings with respect to the existence or disposition of numerous customer complaints at various branch offices. For example, the Firm did not make filings for virtually all settlements of customer complaints relating to C in the Santa Barbara branch office described above. During 1989 and 1990, the Firm failed to amend prior Form U-5 filings for terminated employees to disclose customer complaints and/or settlements which occurred at or about the time of termination or thereafter. The Firm's failure during 1987-1990 to report timely to the Exchange events relating to the existence or disposition of customer complaints delayed the Exchange's review of such matters and hindered the Exchange in performing its regulatory obligations under the federal securities laws with respect to the investigation and prosecution of sales practice and other violations.

140.

141.

The Firm's Lack of Adequate Supervision and Control 142. During the period 1985-1988, the Firm failed to comply with Exchange Rule 342(a) and (b) in that it failed to conduct supervisory inspections of certain branch offices at least annually as required by Exchange Interpretation Handbook, Rule 342(a) and (b) (03): a. As of September 1985, 42 of the Firm's branch offices were not visited during the prior 18 months; 8 branch offices were not visited during the prior 25 months; and 14 branch offices had never been visited in accordance with the Exchange's requirement for annual branch office visits; b. As of February 1986-1987, 136 of the Firm's branch offices were not visited during the prior 18 months in accordance with the Exchange's requirement for annual branch office visits; and four branch offices, including Fairfield and Springfield, had not been visited for periods ranging from 28 to 44 months; c. As of February 1988, 41 of the Firm's branch offices were not visited during the prior 14 months in accordance with the Exchange's requirement for annual branch office visits; and d. The sales practice examination reports for the period 1985-1988 notified the Firm of its foregoing violation of Exchange Rule 342 in failing to conduct annual supervisory inspections of certain branch offices. 143. During the period 1984-1988, the Firm violated Exchange Rule 342(a) and (b) in that it failed to maintain written

32
tables of supervision identifying the person with overall responsibility for internal supervision and control of the Firm and compliance with securities laws and regulations, as well as identifying the supervisory responsibility for each area of the Firm's business activities: a. The Firm failed to delineate supervisory authority to enforce trading restrictions. b. The Compliance and Margin Departments viewed their functions as solely advisory, and notified the branch offices when accounts traded in violation of restrictions. However, on numerous occasions branch offices did not take adequate steps to enforce restrictions prior to the execution of violative orders. The Firm failed to clarify for Compliance, Margin, Division and Branch Office Managers what responsibility each had for enforcing trading restrictions. As a result of the Firm's failure to delineate this responsibility, accounts traded through restrictions. 144. During the period 1984-1988, the Firm failed to provide for, establish, and maintain appropriate procedures of supervision and control, including a separate system of follow-up and review, with respect to its sales practice activities designed to prevent the foregoing violations, including: a. the implementation of compliance department directives, interpretations and advice; b. the enforcement of trading restrictions; c. the prevention of violations of Regulation T in customer and employee accounts; d. the review of active customer accounts for excessive and/or unsuitable trading; e. monitoring of trading by employees in their personal accounts;

f. ensuring that before orders were executed, the name or customer's account were designated on the order tickets for such orders; g. monitoring sales activities of registered representatives to prevent their making sales of securities in states where the salesmen were not licensed or the securities were not registered; h. ensuring that procedures for delivery of checks to customers by registered representatives were followed; and

33

ensuring practice practice internal 145.

that deficiencies with respect to sales activities noted by the Exchange's sales examination reports and by the Firm's own reviews were corrected.

The Exchange's sales practice examination reports for the period 1985-1988 brought to the attention of the Firm the existence of recurring sales practice deficiencies in a number of branch offices. The Firm failed to take steps to adopt or enforce existing procedures designed to prevent such deficiencies. The Firm has informed the Division, and the Division has considered, the following circumstances relating to the matters covered in the Stipulation and Consent: Beginning in 1986 and continuing over the period of time subsequent to receipt of the Exchange's examination reports which were critical of the Firm's sales practice systems and procedures, the Firm has made major investments of time, money and other resources resulting in significant improvements to its supervisory systems, including: a. The reorganization and substantial budgetary increases of the Firm's compliance department; b. The revamping of the surveillance methods, particularly computer systems and exception reports; c. Significant improvements to the department carrying out the internal audit function, including budgetary increases, personnel increases and the implementation of essential computer systems needed to enhance auditing procedures which, according to the Firm, resulted in annual inspections of virtually all retail branch offices in 1989 and 1990; d. The implementation of new computer systems designed to strengthen the Firm's ability to monitor risk, enforce margin requirements and generally supervise activity in the accounts of public customers; e. The commission of a study by an independent accounting firm in 1987 to review the Firm's sales practices, particularly with respect to the adequacy of procedures; f. The publication of new procedure manuals in 1988 and 1989 and the redevelopment of training programs; and

146.

g. The development of other data base systems to enhance the accuracy and availability of information available to the Firm's supervisors.

34
Furthermore, the Chief Executive Officer of the Firm has directed that a review shall be performed under the overall supervision of the General Counsel of the Firm, to evaluate whether further improvements to sales practices policies and procedures are appropriate. A written report of that review and any resulting recommendations will be submitted to the Audit Committee of the Board of Directors of the Firm's parent corporation. The Audit Committee may adopt and implement any such recommendations as it deems appropriate. DECISION The Hearing Panel, in accepting the Stipulation of Facts and Consent to Penalty, found the Firm and Messrs. Lovejoy, Chaiken, Fuller, Stanger, Evans, McFerran, Dest, Davis and Webster guilty as set forth above by unanimous vote. PENALTY In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by the Firm of a censure; fines totalling $900,000 consisting of (a) a fine assessed against the Firm in the amount of $800,000, and (b) a contribution of $100,000 toward fines imposed upon the present and former supervisory personnel as set forth below; and that the Firm shall complete the review, described in paragraph 146 above, that has been directed by the Chief Executive Officer of the Firm under the overall supervision of the General Counsel of the Firm, to evaluate whether further improvements to sales practices policies and procedures are appropriate at this time. A written report of that review and any resulting recommendations will be submitted to the Audit Committee of the Board of Directors of the Firm's parent corporation. The Audit Committee may adopt and implement any such recommendations as it deems appropriate. The Firm further shall implement all recommendations of the Audit Committee resulting from the aforementioned report, and submit a copy of such report, Audit Committee recommendations, and a written representation to the Division that all recommendations have been implemented, within six months from the date this decision of the Hearing Panel accepting this Stipulation and Consent becomes final. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Lovejoy of a censure; a fine of $15,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of three weeks. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Chaiken of a censure; a fine of $10,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of two weeks.

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In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Fuller of a censure; a fine of $15,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of three weeks. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Stanger of a censure; a fine of $15,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of three weeks. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Evans of a censure; a fine of $10,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of two weeks. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. McFerran of a censure; a fine of $10,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of two weeks. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Dest of a censure; a fine of $10,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of two weeks. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Davis of a censure; a fine of $10,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of one week. In view of the above findings, the Hearing Panel, by unanimous vote, imposed the penalty consented to by Mr. Webster of a censure; a fine of $5,000; and a suspension from membership, allied membership, approved person status and employment or association with a member or member organization in a supervisory capacity for a period of one week. For the Hearing Panel

Milton M. Stein Hearing Officer