The Securities and Exchange Commission

[thepennyking]

NOTE: Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.

2004
NASD CASES OF NOTE



The Buckingham Research Group Incorporated
(AWC/C05040005/February 2004)

Permitted a research analyst to act as a general securities representative of the firm by allowing him to generate research reports that identified him by name while failing to be registered in such capacity.

Allowed individuals to act in the capacity of registered representatives while their registrations were deemed inactive due to their failure to satisfy the Regulatory Element of NASD's Continuing Education Requirement.

Reported proprietary short sale transactions through ACT without a short sale modifier and one long sale transaction was reported as short.

Failed to report to ACT the correct symbol indicating that the firm executed transactions in eligible securities in an agency capacity.

Failed to preserve e-mail communications sent to institutional investors for three years, the first two years in an easily accessible place.

The Buckingham Research Group Incorporated
Censured; Fined $29,000 (includes $10,000 jointly and severally with undisclosed party)

Bill Singer's Comment

Another instructive enforcement case. First, in this new day and age of research scrutiny be careful to ensure that your analysts are appropriately registered. New rules require at least a refresher course in who's supposed to be registered. Also, make sure that you're preserving e-mails --- even if they're going to an institutional investor rather than a mere individual customer.




Paramount Capital, Inc.
(AWC/C9B040003/February 2004)

Without admitting or denying the allegations, the firm consented to the described allegations and to the entry of findings that, acting under the direction and control of an individual, it was a participating broker in a contingency offering of securities, and investor
funds raised in the offering were not transmitted to a separate bank escrow account meeting the requirements of Rule 15c2-4. The firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with SEC Rule 15c2-4.

Paramount Capital, Inc.
Censured; Fined $10,000 (includes $5,000 joint and several with undisclosed party)

Bill Singer's Comments

With the market showing some signs of recovering from a long bearish sleep, we will likely see an increase in deal making. Remember to abide by the terms of the escrow agreement.




Cary Edwin Grant
(OS/C8A030013/February 2004)

Grant performed duties as a general securities principal and was the president of his member firm while his registration status with NASD was inactive due to his failure to timely complete the Regulatory Element of NASD's Continuing Education Rule. In contravention of his member firm's NASD membership agreement:

Grant failed to file timely a written application for change in ownership of his member firm, and

Acting through Grant, his member firm opened a branch office and failed to properly notify NASD of its intent.

Grant failed to establish and maintain a supervisory system over the activities of a branch office of his member firm reasonably designed to achieve compliance with applicable securities laws, regulations, and NASD rules in that Grant permitted his NASD Electronic Signature and password to be used by an individual at the firm who was not a registered principal and permitted new accounts to be opened and orders executed without the approval of a firm principal. Finally,Grant failed to respond promptly to NASD requests for information and documentation.

Cary Edwin Grant
In light of the financial status of Grant, no monetary sanction has been imposed. Suspended 3 months all capacities and for 6 months thereafter suspended in principal/supervisory capacities.

Bill Singer's Comment

So many violations and so little time. Wow . . . where to begin? This is almost a classic case-study for Compliance professionals. First, make sure that your CE program is up to date. Second, ownership changes likely require a formal modification of your NASD Membership Agreement. Third, under the Safe Harbor provisions of the NASD's membership rules you may be able to open a branch office without approval but you should also double-check your membership agreement before embarking upon such a prospect. Fourth, generally, when NASD gives you a password, the regulator expects you to guard it with your life. And finally, the ever-popular make sure you respond (or at least timely respond) to all regulatory requests.



Berry-Shino Securities, Inc. and
Ralph Matthew Shino
(C3A030001/February 2004)

Acting through Shino, the firm

charged public customers excessive and unfair commissions on listed option transactions. The commissions were greater than the amount of commission warranted by market conditions, the cost of executing the transactions, the value of services rendered to the customer by the firm, and other pertinent factors; and


accepted and executed, or caused the execution of, orders to purchase listed options in customer accounts without having obtained required information and documentation from the customers as required by NASD Conduct Rule 2860(B)(16)(A).

Berry-Shino Securities, Inc.
Fined $52,500, jointly and severally
Ralph Matthew Shino
Fined $52,500, jointly and severally; Suspended 10 business days in principal capacity.

Bill Singer's Comment

An interesting issue --- what constitutes an "excessive" commission, and keep in mind that we're not talking about a mark-up/mark-down (which, at least, is subject to the 5% Guideline).



Timothy Daniel Skelly
(AWC/C11040004/February 2004)

Skelly purchased various municipal bonds for public customers and prepared "fact sheets" that provided specific details about the bonds being purchased, including their creditworthiness, as requested by the customers; however, certain municipal bonds purchased by the customers were inaccurately represented as "county guaranteed" or "moral obligation bonds" when in fact the bonds contained neither guarantees nor pledges.

Timothy Daniel Skelly
Fined $5,000; Suspended 10 business days in all capacities.





James Robert Snyder
(AWC/C8B040002/February 2004)

Snyder settled a customer complaint that had been filed against him and entered into written agreements with the plaintiffs that included improper confidentiality provisions in each settlement agreement that effectively prohibited the customers from disclosing the underlying facts of their complaints and the settlement terms to anyone, including NASD. Snyder failed to respond to NASD requests for information.


James Robert Snyder
Barred

Bill Singer's Comments

SEC held that it is a violation for a settlement agreement to prevent BD customers from cooperating with an NASD investigation. Read In the Matter of the Application of Stratton Oakmont, Inc. For Review of Disciplinary Action Taken by NASD (Securities and Exchange Act of 1934 Rel. No. 38390 / March 12, 1997 at http://www.sec.gov/litigation/opinions/3438390.txt

NASD Notice to Members 86-36, dated May 14, 1986, states that settlement agreements that preclude customers from testifying in NASD proceedings may violate applicable Rules.



John Philip Warner
(AWC/C05040001/February 2004)

Warner borrowed $31,219.17 from a public customer and recommended and executed the liquidation of mutual funds in the account of the customer for the purpose of funding the loan to himself. Warner had persuaded the customer to loan him the funds by offering a nine percent return, thereby replacing the customer's original investment with an unsecured loan. NASD charged that the recommendation/transactions were not suitable.

John Philip Warner
Fined $10,000; Suspended 90 days in all capacities.

Bill Singer's Comments

Yet another in a long line of cases involving RRs lending/borrowing money from customers. Compliance officers would be well advised to discuss recently revised NASD Rule 2370, which prohibits registered persons from borrowing money from or lending money to a customer unless

the member has written procedures allowing such lending arrangements consistent with the rule;

the loan falls within one of five prescribed permissible types of lending arrangements set forth in the rule; and

the member pre-approves the loan in writing

Exempt from the rule's notice and approval requirements are lending arrangements involving a registered person where the customer (Rule 2370 limits the scope of the rule to lending arrangements between registered persons and their customers, rather than any customer of the firm) is:

a member of the RR's immediate family (as defined in the rule); or

a financial institution regularly engaged in the business of providing credit, financing, or loans (or other entity or person that regularly arranges or extends credit in the ordinary course of business), provided the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose, and creditworthiness.



Scott Alan Webster
(C07030050/February 2004)

Webster

opened securities accounts at other member firms while he was associated with a member firm,

failed to provide written notice to his member firm, and

failed to advise the other member firms that he was a representative prior to opening the accounts or placing initial orders in the accounts.

Scott Alan Webster
Fined $5,000; Suspended 10 business days in all capacities





Victor O. Zevallos
(AWC/C11030040/January 2004)

Without his firm's knowledge, using firm letterhead, Zevallos created fictitious undated documents that he sent to a public customer that misrepresented that he had made a partial repayment of a personal loan from the customer by depositing funds in the customer's brokerage account at his member firm when, in fact, he had made no such payments.

Victor O. Zevallos
Barred





Pietro Joseph Passalacqua
(AWC/C9B030082/January 2004)

Without authorization from his member firm, Passalacqua paid a total of $215,000 in commissions to a registered representative based on referred variable annuity transactions.

Pietro Joseph Passalacqua
Fined $7,500; Suspended 10 business days all capacities

Bill Singer's Comment

See the Berardi case immediately below. Seems you can't pay referral fees to unregistered entities or registered persons. I think it's time the industry called for the scrapping of this policy and permitted the payment of referral fees provided that they are 1) fully disclosed to the effected customers, and 2) undertaken pursuant to a written fee agreement approved by the member firm prior to any payment.




Michael Stewart Berardi
(AWC/C9B030079/January 2004)

Berardi paid $526,250 to unregistered entities in connection with securities business referrals that he received.

Michael Stewart Berardi
Fined $5,000; Suspended 15 business days all capacities

Bill Singer's Comment

Prospecting is the lifeblood of RRs, but you can't pay some fees to certain types of entities. Generally, if you've been asked to pay a percentage of any commissions/transactions, it's going to be a no-no. Before you enter into any referral fee deals, speak with a lawyer and make certain your BD approves the proposal in writing. However, for the record, I don't approve of this prohibition. I believe that as long as any type of referral is fully disclosed to customers and the underlying arrangement is in writing that the practice is acceptable. I know of few businesses that prohibit referral fees for forwarded prospects. See the Passalacqua case above for a variation on this theme.






Michael Nelson Barnett
(OS/C9A030029/January 2004)

Registered Supervisor Barnett failed to reasonably and properly supervise an individual so as to detect and prevent violations of NASD rules regarding discretionary power.

Michael Nelson Barnett
Fined $5,000; Suspended 10 business days all capacities

Bill Singer's Comment

That's a hefty suspension --- 10 business days --- merely for failing to detect/prevent discretionary power tradings. Nonetheless, improper discretion, whether resulting from the failure to get prior written authorization or to abide by the terms of the power, exposes a firm to significant liability. Frankly, it's not often a simple thing to detect. After all, if an RR is engaged in unauthorized discretion and there are no customer complaints, how are you supposed to spot the signs? Things to look out for: sudden increases in trading and increased short-term trading (particularly when the account's history is more stable). Also, one of the reasons you should make a point of becoming aware of RRs' personal financial condition is to keep an eye out for brokers trying to fix their cash woes by unauthorized trading designed to generate commissions.






World Financial Capital Markets, Inc. and Frank Richard Bell
(AWC/CAF030057/January 2004)

World sold shares of a security to foreign customers through unregistered persons; there was no prior customer contact by the firm's RRs and no prior authorization to accept orders from unregistered third parties. BD acting through Bell, knowingly accepted and recorded such orders, improperly exercised discretion, and created/ maintained inaccurate books and records. Further, at the direction of Bell, BD posted research reports on issuers that contained exaggerated, unwarranted, or misleading statements and failed to disclose material facts. BD's systems/procedures were inadequate regarding publishing/distributing research, the handling of customer orders by third persons, and discretionary trading. Furthermore, the respondents failed to establish and implement adequate policies/procedures (and training) pertaining to suspicious transactions and the Bank Secrecy Act.

World Financial Capital Markets, Inc.
Censured; Fined $100,000 ($40,000 jt/sev with Bell); Required

not to post any research reports on its Web site for 2 years;
to revise Anti-Money Laundering Compliance Procedures within 30 days of AWC effectiveness;
to hire an outside consultant within 60 days of AWC effectiveness to independently test AML procedures (and implement consultant's recommendations within 30 days of his/her findings/recommendations.
Frank Richard Bell

Fined $40,000 (jt/sev); Barred in principal capacity; and Suspended for 8 months in all capacities.


Bill Singer's Comment

As U.S. BDs seek new customers, more efforts are being made to find foreign customers. As this case demonstrates, many domestic securities laws/regulations apply regardless of where the customer is located --- here, the BD wrongly sold through unregistered persons. The decision suggests that one possibl cure would have been for the foreign customer to grant a discretionary power to the unregistered third party, and for the BD to file that power and deal with the intermediary. Similarly, there is a worthwhile better-practices pointer that all new accounts (including foreign) should likely preliminarily pass through at least one RR before initiating any activity. Additionally, in this post-9/11 world, U.S. regulators will show no flexibility with Anti-Money Laundering noncompliance. Separately, the sanction prohibiting the posting of any research reports on the firm's website for 2 years is a likely harbinger of things to come. If you're starting to attract increasing numbers of offshore accounts and/or your marketing efforts include a website, you'd be well advised to hire an outside consultant to audit your applicable policies and procedures. Otherwise, you might have an 8-month vacation to think about your shortcomings.




Balfour Investors, Inc. and Carl Goldfarb (AWC/ C10030103/January 2004)

Paul Samuel Ehrenstein (AWC/ C10030104/January 2004)

During an NASD examination, the Staff asked for new account forms. For reasons not explained, Balfour couldn't locate originals of everything requested and acting through Goldfarb prepared substitute replacements for those forms missing. Those substitutes were provided to NASD without affirmatively indicating that the forms were not original, that the names on the "preparer" signature lines had been added to some of the forms without authorization or consent of those whose names were added, and the firm and its personnel lacked documentary confirmation that the substitute forms contained the same customer information, investment objectives, and risk exposure information as contained on the missing forms. Ehrenstein advised his BD to prepare substitute new account forms for missing account forms requested by NASD during an examination. The new forms were "furnished to NASD without Ehrenstein's participation" and without affirmatively indicating that the forms were not original, the names on the "preparer" signature lines had been added without authorization or consent of those whose names were added, the forms were backdated, and that the firm and its personnel lacked documentary confirmation that the substitute forms contained the same information. Ehrenstein failed to ensure that the firm would advise NASD that the forms were not originals and of the manner in which the forms had been prepared prior to the production of the substitute forms.

Additionally, the BD allowed unregistered individuals to act as limited representative-equity traders and to execute transactions. Also, the BD failed to preserve for not less than three years, the first two in an accessible place, brokerage order memoranda and their confirmations. Finally, the BD failed to report to NASD's Fixed Income Pricing SystemSM (FIPSSM) the firm's sell transactions in high-yield securities to public customers.

Balfour Investors, Inc.
Censured; Fined $37,000 ($15,000 jt/sev with Goldfarb)


Carl Goldfarb
Fined $15,000 (jt/sev); Suspended 9 months all capacities
Paul Samuel Ehrenstein
Fined $7,500; Suspended 10 business days in all capacities.



Bill Singer's Comment

Although the index numbers in Balfour/Goldfarb and Ehrenstein are sequentially 103 and 104 and the allegations are remarkably similar, there's nothing in the respective NASD official reports cross-referencing the cases. I'm going to go out on a limb here and guess that the matters are related. Consequently, readers (whether public customers, industry professionals, or regulators) may miss the connections between and among various cases and parties. The mechanics of pleadings aside, I see little reason for NASD not to provide a minimal indication of commonality when reporting a settlement or decision. For another example see the MSDW and Rogers cases below. Further, in many reported cases the explanations are so terse as to raise troubling questions as to the meaning of a case --- what is it that happened here and what "lesson" does NASD seek to teach?

It's an oft-quoted lament that on any given day there's at least one mismarked order ticket (and that's the one the regulators always seem to ask for). Nonetheless, there's a right way and a wrong way to deal with such deficiencies. If you have the ability to "recreate" a document (that is, legitimately fill-in a form based upon existing information at your disposal), it's sounder practice to inform the NASD of the missing original, provide the recreation by prominently disclosing such status, and to submit the supporting documentation upon which you relied --- otherwise, you look like you're trying to pull a fast one.

Finally, as charged, Ehrenstein seems to have merely "advised" his firm to substitute the recreated forms, but apparently Goldfarb "furnished [the forms] to NASD without Ehrenstein's participation." What was the overt, violative act Ehrenstein committed? The NASD's report is unsatisfactory in that it fails to note Ehrenstein's capacity (Director of Compliance?) and doesn't really indicate what act he committed. Was he aware that Goldfarb prepared all the forms without adequate supports? Did he know that Goldfarb had submitted the recreations without prior explanation to the NASD of that status? Did Ehrenstein believe that it was acceptable to prepare the recreations because they incorporated data that he felt was either available on other documents or easily inferred? Or, is Wall Street now hiring Thought Police to prosecute registered persons for giving advice and opinions?





Morgan Stanley DW, Inc. (AWC/ CAF030066/January 2004)

Brian James Rogers (AWC/CAF030065/January 2004)

RRs in a Morgan Stanley DW branch solicited public customers to purchase shares in a start-up technology company for which the BD did not provide research, and falsely recorded the solicited trades as "unsolicited" in the books and records (also causing inaccurate books and records).

Rogers was unaware of the solicitation by RRs at a branch for a start-up technology company not covered by his firm, and failed to take reasonable action to assure they had a reasonable basis for the recommendation. Accordingly, he failed to enforce the firm's solicitation policies and failed to take reasonable steps to prevent and detect the falsification of firm records. Moreover, Rogers orally delegated supervisory responsibilities over inexperienced RRs to an RR engaged in the solicitation of the stock, but failed to act reasonably to ensure that those delegated responsibilities were carried out.

Morgan Stanley DW, Inc.
Fined $25,000: (jt/sev); Required to prepare/implement procedures and computer exception reports reasonably designed to detect and prevent the mis-marking of order tickets regarding the solicitation of securities transactions with public customers where the firm did not provide research for the securities (and provide NASD with a copy of its written supervisory procedures within 30 days after they are implemented, together with a certification of same). In the interim, the BD shall reiterate to its RRs the importance of its policies regarding solicited and unsolicited trades.


Brian James Rogers

Fined $20,000; Suspended 30 days in principal capacity.

Bill Singer's Comment

Once again (as in Balfour/Godlfarb and Ehrenstein) we have sequential docket numbers 065 and 066, remarkably similar allegations, but nothing in the respective NASD official reports cross-referencing the cases. Again, I’m going to go out on a limb here and guess that the matters are related. Nonetheless, why isn’t Rogers named as a respondent in the MSDW case --- when Bell is named in the World case and Goldfarb in the Balfour matter . . . worse, how come Ehrenstein wasn’t named with Goldfarb and Balfour? Still, NASD makes a very valid point in the MSDW/Rogers cases. If you have a number of RRs at one branch entering purchases for the same start-up tech company, then someone should notice the warning flares --- and certainly should be troubled by the non-research-coverage aspect and the “unsolicited” tickets. You just can’t go through the motions and expect that to constitute a defense.




Thomas Jayson Feight (AWC/CMS030261/January 2004)

Feight used high-pressure sales practices; made repeated telephone calls; knowingly and recklessly employed fraudulent misrepresentations, including baseless price predictions and guarantees; and omitted to state material facts about the precarious financial condition of a company with questionable business operations, virtually no assets, and little or no revenue. He failed to research the company's financial condition and knew virtually nothing about the company (including the fact that its most recent SEC filing showed its total cash-on-hand was only $356 and contained a "going concern" clause.) Nonetheless, he claimed that respected institutions were investing in the company, that he had attended meetings with bankers who would obtain financing for the company and, that its per-share value would rise to $5.00 in six months and double in a year.

Thomas Jayson Feight

Barred in all capacities

Bill Singer's Comment

RRs must be careful about getting carried away with the puffery of selling. The old expression is still quite apt: Never write a check your body can't cash. Before you start pumping a stock it's always a good idea to check the most recent SEC filings.






Mark Warren Lamb and David Scott Cacchione (OS/CAF020053/January 2004)

Respondents sold unregistered (non-exempt) securities to public customers while the firm acted as an underwriter (an unauthorized third party was involved in the sale and pricing). Lamb failed to promptly inform his firm's trading department of his receipt of order tickets so that the trades could be reported within 90 seconds of execution. In addition, he failed to disclose that the prices given to certain purchasers were materially different from prices given to others who purchased at virtually the same time, and that his firm delayed for several hours the inputting and trade reporting of the sales.



Mark Warren Lamb

Fined $50,000; Suspended 30 days in all capacities.
David Scott Cacchione

Fined $35,000; Suspended 30 days in all capacities.








RRBDLAW.COM AND SECURITIES INDUSTRY COMMENTATOR™ © 2004 BILL SINGER

THE ARTICLES PUBLISHED HERE REPRESENT THE PERSONAL VIEWS OF THE AUTHOR, AND NOT NECESSARILY THE VIEWS OF ANY LAW FIRM OR ORGANIZATION WITH WHICH HE MAY BE AFFILIATED. ALL STATEMENTS MADE IN THESE ARTICLES ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE, NOR SHOULD THEY BE RELIED ON AS, LEGAL ADVICE. READERS MUST CONSULT WITH QUALIFIED LEGAL COUNSEL BEFORE RELYING UPON ANY CONTENT CONTAINED HEREIN. STATEMENTS MADE IN THESE ARTICLES MAY BE INCORRECT FOR YOUR JURISDICTION OR AT THE TIME WHEN YOU READ SUCH STATEMENTS THE UNDERLYING RULES, REGULATIONS AND/OR DECISIONS MAY NO LONGER BE CONTROLLING OR PERSUASIVE AS A MATTER OF LAW OR INTERPRETATION.

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