CLEARING HOUSE PRACTICES
"We Clear Everything For Everybody"
"Throw Our Weight Around."
-- Bear Stearns Advertisements(102)
Small brokerage firms "clear" their transactions (i.e., process their trades and other paperwork) through a "clearing house."(103) Many of the investor complaints received by the Attorney General's Office cite the clearing firms as accountable as either accomplices in the fraud by their brokerage firm or as knowing lubricants that handled their business and as such, responsible.(104) The most frequent and inexplicable complaint is the refusal by clearing firms to halt unauthorized trades in customer accounts. These investors usually only receive a "Dear John" letter referring the investor back to the introducing, micro-cap broker (who, most likely has already been unresponsive to the investor) and to the boiler plate contained in their new account form that purports to set forth that the clearing firm is not responsible for anything and need not take instructions from the owner of the account.
Some investors even believe, mistakenly, that the clearing firm itself is, in actuality, their brokerage firm. This misapprehension is often planted by the brokers of the introducing firm who, in their scripted "spiel," emphasize their relationship to the clearing firm while omitting their own less-prestigious firm. For example, a Stratton broker stated, "You may not know the name of my firm, but we're backed up by some of the best firms on Wall Street -- like Bear Stearns."(105) Similarly, in the Bear Stearns approved welcome letter that was sent to customers of A.R. Baron & Co., Inc. ("Baron") in July, 1995, the public was told that Bear Stearns has $5.8 billion in capital, has been in business since 1923, and provides clearing clients with "$25 million insurance protection" for their accounts and that Baron was "confident that this relationship will provide you with a deep feeling of security."
Unquestionably, firms providing clearing services realize that they lend prestige to their introducing brokers and, indeed, frequently promote this aspect of their service.(106) As detailed in this report, this luster fades when the actual conduct of the clearing firms is examined. By contrast, the emerging, best practice is to avoid lending the name of the major firm to the activities of the introducing broker. Hence, Donaldson, Lufkin & Jenrette, Inc. (Pershing), Merrill Lynch (Broadcourt Capital Corp.) and Prudential Securities (Wexford) offer clearing services via dissimilarly named subsidiaries.
Yet clearing firms claim that since they are not violating any law and claim to have no affirmative duty to inquire about the complaints they receive concerning introducing brokers, they bear no responsibility for them. Bear Stearns -- a leader in providing clearing services to micro-cap introducing brokers, for example, has repeatedly stated that, "clearing brokers have no legal responsibilities to introducing-brokers' customers."(107) Further, Bear Stearns asserts that, "The relatively small number of introducing firms that have experienced problems should not taint the clearing business itself."(108)
This response, however, should not be satisfactory to securities regulators, legislators and certainly not to the thousands upon thousands of investors who are defrauded out of billions of dollars each year.(109) Indeed, Bear Stearns is currently named as a defendant in numerous lawsuits and arbitrations that allege that it was providing more than "a simple, albeit necessary accounting function"(110) to the bucket shops that it cleared.(111) While it is beyond the scope of this report to assess the conduct of Bear Stearns or other clearing brokers in specific cases now before the courts, it is necessary to examine the public policy implications of such alleged conduct. Indeed, Mark Griffin of NASAA has stated that, "t seems to me that clearing firms have some responsibility, even if they're not obligated right now, to look at misconduct or in some way exercise some supervision."(112)
Dimensions of the Problem
A growing series of lawsuits and pending regulatory inquiries attest to the increasing perception that the conduct of clearing brokers is a prime contributor to the explosion in micro-cap stock fraud. As demonstrated by the following instances alleging or inferring misconduct by clearing firms, increased regulatory scrutiny of clearing firms is amply justified.
J.B. Oxford Search Warrant
J. B. Oxford ("Oxford") is a licensed broker-dealer based in Beverly Hills, California that provides clearing for penny stock firms. Irving Kott, a convicted Canadian securities swindler, has long been identified as the unregistered control person of the firm.(113) Oxford was the clearing firm for the notorious Stratton Oakmont when the NASDR forced it to cease operations.(114) On August 19, 1997 federal law enforcement agents made Oxford its target, executing a search warrant at both its headquarters in California and its Basel, Switzerland office.(115) The alleged presence of an undisclosed criminal element in the clearing business demonstrates some of the difficulties faced by law enforcement in connection with the micro-cap stock industry.
Collapse of Clearing Firms
In the world of levitating house stocks a clearing broker that will extend credit and execute trades when a micro-cap brokerage firm has no capital is a great ally. Such activities can also put the firm out of business if it doesn't have $5.8 billion in capital. That is the story of Adler Coleman & Co. ("Adler"), which once cleared simultaneously for Stratton, Baron and Hanover Sterling & Co. ("Hanover") -- all now defunct brokerage firms facing a series of fraud allegations. It was Adler's accommodating trading for Hanover that turned out the lights for Adler.(116)
Hanover agreed to purchase thousands of shares of its house stocks in unsuccessful efforts to prop up their value -- allegedly shares that were "naked shorts" (i.e., sold by a person who had no shares to deliver).(117) Adler filed for bankruptcy the day after the NASD shuttered Hanover for exhausting its net capital.(118) Adler's liquidation -- it cleared for 40 firms at the time of its demise -- is reported to be one of the largest ever of a broker-dealer and may wind up costing the Securities Investor Protection Corporation $40 million.(119) When Adler stumbled, house stocks of Stratton, Hanover and Baron all tumbled. Adler's collapse became a business opportunity, however, for other clearing firms. Baron, after a short, unsatisfactory stay with Hanifen Imhoff, re-established a clearing relationship with Bear Stearns (see Due Diligence, infra).
A more recent but similar case in point is the shutdown of W.S. Clearing of Glendale, California. At the time of its closing on March 6, 1997 it cleared for 18 firms and carried 15,000 customer accounts. The SEC is reported to be investigating the role of two of W.S. Clearing's client firms, Euro-Atlantic Securities and Cygnet Securities, in its collapse.(120) More disturbing, after this clearing firm shut down, the SEC charged that the reserve account, required to protect customers, had a $2.1 million deficit(121) and that the owner of the firm had transferred $1.9 million from a clearing account to his personal bank account. Further, to conceal this deficit W.S. Clearing executed unauthorized trades in customers accounts. In sum, it appears that the clearing firm stole customer property, billed them for trades they did not make and took money or other securities from their accounts to pay for the phony trades.
Sterling Foster & Co., Inc. ("Sterling") was a Long Island-based broker-dealer engaged in every species of micro-cap fraud from its inception in 1994 until a September, 1996 NASDR complaint(122) sent brokers scurrying for other, lower- profile employers. Bear Stearns was Sterling's clearing firm. The facts charged in the NASDR Sterling Foster complaint, while not naming Bear Stearns -- whose primary examining authority is the NYSE -- clearly illustrates the role a clearing firm can play in aiding an introducing broker.
Sterling completed the public offering of 1,000,000 shares of Advanced Voice Technologies, Inc., ("AVTI") on February 7, 1995 and opened the stock for trading on the NASDAQ Small Cap market at noon. By the end of the day Sterling was short 2,120,560 AVTI -- thus, they were obligated to deliver shares they did not own in an amount almost double the company's public float. Nevertheless, the 958 public customers received confirmations(issued by and payable to Bear Stearns) that their orders were "filled" on February 7th at prices of $12.25 to $12.75 per share. At the day's closing price of $13.50 per AVTI share the firm's short position was valued at $28,627,560. The firm's net capital as of January 31, 1995 was only $2,666,000.
The NASDR charged that the president and owner of Sterling had "a prearrangement or preconceived scheme to release the lock-up agreements" on shares of AVTI insiders to cover this short position, as the firm subsequently purchased 2,014,756 shares @ $2.00 per share from such insiders. Sterling Foster thus obtained a profit of over $20,000,000. Could this profit have been obtained without the knowledge and forbearance of Bear Stearns that the $28.6 million short position would be satisfied in the manner described?
Further, Bear Stearns is reported to have "put up $1.1 million of its own capital to float Baron back up to minimum levels," in the fall of 1995.(123) Bear Stearns maintains that this mischaracterizes the transaction.(124)
Participating in Manipulation
Blech & Co. ("Blech") was a New York registered broker-dealer that underwrote and made markets in biotechnology start-ups. Bear Stearns was Blech's clearing broker when it ceased operations on September 22, 1994, reportedly causing $200 million in investor losses.(125) Investors, in a class action suit against Bear Stearns, allege that Bear Stearns "caused Blech or his confederates to fraudulently trade, and that Bear Stearns itself engaged in conduct aimed at artificially inflating or maintaining the price of the Blech securities".(126) As of June 8, 1994 Blech's margin debt to Bear Stearns stood at $15.9 million. To reduce this exposure Bear Stearns, it is alleged, knowingly "directed" certain sham trades in manipulative parking transactions. The federal court earlier this year sustained the legal sufficiency of these allegations by refusing to dismiss the allegations.(127)
Subsequent to the federal court decision, Blech himself was charged and sought to enter a guilty plea to engaging in a series of "sham, unauthorized and fictitious" sales in 1994 to maintain his firm's access to margin credit and clearing services provided by Bear Stearns.(128)
Clearing Firm Conduct
Three areas of clearing firm conduct must be examined: what due diligence should be done when a clearing firm initially enters into an agreement to clear for an introducing broker, [ii] what procedures are appropriate once that relationship is established and possible fraudulent conduct is detected or reported, and [iii] what rules should apply to advances of credit or capital to introducing firms by clearing firms.
Due Diligence on Introducing Brokers
Although Merrill Lynch clears for firms that conduct institutional business and does not clear for firms on the retail side, they have established diligence procedures that address both commencing and maintaining a clearing relationship. Merrill Lynch testified at the public hearings that before they enter into an agreement to clear for a firm they have a "regular systematic review where [they] look at the firm's prior practices." In addition, they look at the firm's principals, check on the firm's disciplinary history and review any regulatory examinations.(129) Further, Barry Mandell stated that:
Once [Merrill Lynch] become[s] a clearing broker we continue to monitor the firm's business on an ongoing basis to make sure that the business, as it was described to us, is the business which it continues to operate. There is a regular committee made up of Legal and Compliance personnel, audit, credit and business people, and there is, as I say, regular review. If we find that a firm's business has begun to change from the way it was originally represented, and the basis upon which we originally agreed to act as a clearing member, we have on occasion, in the past, terminated it because that was not the basis upon which we agreed to act as a clearing member.(130)
In two recent instances, micro-cap introducing brokers were terminated by their clearing broker. Investors Associates, Inc., a target of a proceeding by the New York Attorney General and other regulators,(131) was told by Prudential Securities, d/b/a Wexford Clearing Services, at the beginning of this year to move its business. The transfer of the accounts was completed in early September. Prudential legal officials had only a handful of complaints directly from customers, but didn't like what they saw and what they learned from regulators, including the NASD, Indiana and New Jersey securities regulators and the SEC. Similarly, Oppenheimer reportedly moved to terminate L.T. Lawrence & Co., after four states announced enforcement proceedings on May 29, 1997 as part of a crack down on abusive micro-cap firms.(132)
Such positive, "self-regulatory" steps should be applauded.(133) These measures illustrate that clearing firms possess the market savvy to ascertain and monitor both the nature of the business and persons at introducing firms and can take appropriate steps if they are found to be violating the law.(134)
Unfortunately, these best practices are not universally followed. The relationship between Baron and Bear Stearns well illustrates the other, all too common reality. Bear Stearns initially served as Baron's clearing broker from May 1992 to Novemebr 1992, when it exercised its contractual right to terminate carrying their trading. Bear representatives state that, at the time, they did not like the risk profile because Baron's trading was concentrated in just two stocks.
Nevertheless, on June 13, 1995 Bear Stearns once again agreed to carry Baron's trades, actually commencing trading on or about July 23, 1995, one day before a wire service reported that the NASD had imposed $1.5 million in fines and restitution against Baron in its largest enforcement action that year.(135) The NASD action also included fines and suspensions against Andrew Bressman, Baron's then 31-year-old president, Mark Goldman, 48, chief financial officer and Burton Blank, 59, chief operating officer. Bear Stearns publicly maintains that they were unaware of Baron's pending problem when they agreed to perform clearing operations for the firm. This, however, raises several questions: Why didn't Bear Stearns terminate Baron immediately for withholding such information? From where did the money come to pay the NASD? How much capital did Baron have at this time?
Bear Stearns professes not to have obtained Baron's relevant financial reports before agreeing to carry their trading on Bear Stearns' books. Nor did it check Baron's credit standing.(136) Richard Harriton, the head of Bear Stearn's clearing operation, maintains that such reports pale in comparison to the importance of obtaining a sufficient cash deposit to be maintained by the introducing broker at Bear Stearns. Indeed, Baron did agree to post and maintain a $5 million cash deposit with Bear Stearns. In calculating this deposit, Bear Stearns did, in fact, obtain and review a list of Baron's trading positions.
In the defense of clearing firms, no rule of the SEC, NYSE, NASD, or other rule requires that clearing firms conduct any due diligence regarding prospective introducing brokers, [ii] provide any regulatory notice or obtain any approval before commencing or when terminating a clearing relationship, [iii] determine the capital adequacy of its introducing firms or [iv] apply or enforce any capital standards or leverage limits upon an introducing broker.
However, like a party that has gotten out-of-hand, there are consequences that follow from a persistent disregard of prudence and a culture of assuming uncalibrated risks. Clearing firms now face numerous governmental inquiries, lawsuits and arbitrations.(137) As stated in a commentary in Business Week, "Clearing firms must be goaded into more vigorous self-policing. They must cease lending their names to unsavory firms."(138)
Financial Responsibility and Introducing Brokers
The SEC has responsibility for setting financial responsibility standards and safeguards for broker-dealers.(139) These rules are enforced primarily by the NYSE and NASDR. The states are barred from making any law or rule relating to "capital, ... financial responsibility, ... bonding, or financial or operational reporting requirements for brokers, [or] dealers" that supplement those enacted by the SEC.(140) Pursuant to SEC net capital rules, a broker-dealer that does not receive or hold customer funds or securities (thus clears its customer transactions through another dealer) and yet engages in market-making activities of OTC stocks needs to maintain a minimum net capital of only $100,000.(141)
As a consequence of such low entry requirements there are now 4,124 broker-dealers whose transactions are cleared by others.(142) Such total includes many legitimate firms that, for reasons of cost and efficiency, have chosen to contract out to a clearing broker their back-office trade and account processing functions. Yet experience has shown that this number also includes many firms that are no more than massive cold-calling mills with no raison d'etre beyond harvesting the savings of unsuspecting members of the public via solicitations for the house stock of the month.
Under the SEC's financial responsibility rules the introduced customer accounts are the responsibility of the carrying firm.(143) Accordingly, when a customer does not make timely payment for a purchase order in their account -- which will frequently occur when the trade was unauthorized -- it is the clearing firm that both first learns of the nonpayment and must take action. By law, the unpaid customer order is an extension of credit to the customer, even if the underlying purchase is for a non-marginable penny stock. Clearing firms must either obtain instructions from the introducing broker to cancel the trade or secure approval from the NYSE, or the NASD if not an NYSE member firm, for maintaining such unsettled transactions and do so via a computer interface between the clearing broker and the NYSE. The SRO must determine that the clearing broker is "acting in good faith in making such request" and that "exceptional circumstances warrant such action."(144)
The NYSE has developed standards and procedures for evaluating, granting, denying and monitoring extension requests. It has developed a rule of thumb that where the requests for settlement extensions exceed 2% of the total monthly transactions by the correspondent firm the expectation of prompt payment is no longer reasonable.(145) Since October 1994 NYSE member clearing brokers make monthly reports of their correspondents who have exceeded the 2% threshold. After gaining experience with the data the NYSE wrote clearing firms in June 1995, requiring that the introducing brokers whose ratio exceeded 5% must submit a written plan to the clearing firm for obtaining compliance with the 2% ratio cap. The NYSE correspondence also reiterated the responsibility of clearing firms:
"Clearing organizations should also maintain procedures/policies that will allow for the monitoring and control of the overall incidence of [extension] requests made for accounts introduced by correspondents, as well as compliance with their responsibility to take appropriate action should customers fail to remit payment or securities within the prescribed timeframes."
Where correspondents have exceeded the 5% threshold in any two of the three most recent months, the NYSE has ceased granting any further extension requests made on behalf of customers of these correspondents for 90 day period.(146)
Moreover, in the past five years the NYSE has taken a number of significant actions against clearing brokers arising out of examinations focused upon "protecting the customers securities, properly reserving for customer liabilities, adequately margining customer transactions, and meeting the record keeping requirements of the Commission and the Exchange."(147) These actions include:
Imposed a censure and $200,000 fine on Edward A. Viner & Co., Inc. (now known as Fahnestock & Co., Inc.) for, among other things, entering into a clearing agreement when it lacked the capacity to clear the additional business and permitted certain customers to engage in OTC transactions at prices not reasonably related to prevailing markets.(148)
Imposed a censure and $75,000 fine on Adler Coleman Clearing Corp. for, among other things, failing to keep current books and records and failing to comply with time periods for obtaining full cash payment for customer purchases.(149)
Imposed a censure and $60,000 fine on the Chicago Corporation for, among other things, failing to establish and maintain appropriate supervisory proceedings in its margin department.(150)
In sum, the tell-tale signs of micro-cap securities fraud are plainly visible to clearing brokers and are within the area of financial responsibility that the clearing firm must police. Unauthorized trades, high-pressure sales, parking of securities, and no-net-selling policies all manifest themselves on the records maintained by the clearing broker. A pattern of canceled transactions and unpaid-for purchases are hallmarks of underlying fraud. The prime engine for this activity, and usually the chief asset of the introducing broker, are their trading accounts with the clearing broker.
At some point the frequency and magnitude of these unabated transactions necessarily negates the clearing firm's right to assume that prompt payment can be expected on newly invoiced customer confirmations of purchase from the introducing firm's trading account. The assumption that the introducing firm is solvent is no longer operable. Clearing firms that, nonetheless, continue to give full credit to the introducing firm for unpaid, disputed or suspect trades after having reached a materiality threshold placing them under a duty of inquiry as to solvency become, wittingly or not, participants in fraud. Both the public and regulators have a right to expect, under existing financial responsibility rules, that clearing firms halt the trading of insolvent introducing brokers.
Remedial Measures - - Industry Proposals
Increased public attention via the Attorney General's hearings, litigation and press accounts have already begun to stimulate a number of proposals from the securities industry to reform clearing practices. The NYSE(151) has recently approved, and will seek SEC approval, of proposals for changes to Exchange Rules to accomplish the following:
Forward Customer Complaints: Require that the clearing firm furnish copies of all complaints that it receives against one of its introducing brokers to that firm's designated examining authority ("DEA"). Since most of the 4,100 introducing brokers maintain only NASD membership, the NASD would automatically be entitled to copies of complaints. Compliance by clearing firms with the rule would be monitored by the NYSE and NASD, depending on the firm.
Address Operational Complaints: Require that complaints of an operational nature be dealt with by the clearing firm. This certainly is reflective of the best practice. Careful considerations should be given to defining an operational complaint.(152)
Provide Analytical Reports: Require that clearing firms provide introducing firms with a list of all the analytical reports that it can provide to the firm to assist in supervising its employees and monitoring compliance issues. Further, clearing firms will be required to maintain copies of reports that it actually provides to the introducing brokers. All exception reports used by the clearing firm in the supervision of its own accounts should be provided to the introducing broker. This simply means putting a terminal on the desk of the introducing broker's compliance officer for on-line access to such reports.
Clearing powerhouse Bear Stearns has proposed the following measures:(153)
Notice of Investigation Requirement: Contracts between clearing brokers and introducing brokers should (i) require notice to the clearing firm by the introducing broker of any regulatory inquiry and (ii) permit the clearing broker to terminate such a relationship based upon the outcome. No regulatory action is necessary as clearing firms presently retain broad rights to terminate agreements and to refuse to process trades. In the exercise of their own self-interest they should utilize such clauses.
Further Clarify the Role of Clearing Brokers to Customers of Introducing Brokers: Plain English documents should emphasize to customers the "purely ministerial role played by clearing brokers ...[and] explain to customers that clearing brokers have no regulatory oversight or supervisory responsibilities over introducing brokers." Such documents might also identify places where investors can complain , provide the NASD's complaint hotline, and explain how to close or transfer their accounts. The voluntary and self-interested actions of clearing brokers can institute such measures, but such contractual provisions do not take precedence over customers' rights under the securities laws.(154)
Forward Customer Complaints to the introducing broker and appropriate regulatory authorities. If clearing brokers are not doing at least the former they are failing to deal fairly and responsibly with the public.
Forward Notice of Termination of Clearing Agreements by the clearing broker to the NASD. Presently, introducing brokers are required to inform the NASD of their clearing relationships. It would be valuable for all regulators to have access to a statement of the basis for terminating a clearing agreement.
Clearing Broker Review Committees should evaluate an introducing firm's regulatory record and complaint history in determining whether to enter into a clearing agreement. Presumably those clearing firms that want to safeguard their blue chip reputations are already conducting such due diligence examinations and thereby avoiding the situation Bear Stearns now finds itself in.
While recognition of the need for additional measures aimed at safeguarding customers of introducing brokers is to be commended, much more can be done. Recommendations for enhancing investor protection appear in Chapter 13, PROPOSALS AND RECOMMENDATIONS TO COMBAT MICRO-CAP STOCK FRAUD, infra.
As the amount of fraud has increased, so too has the number of investigations and enforcement actions brought by the New York Attorney General's Office and other securities regulators. In 1996, the New York Attorney General's Investor Protection and Securities Bureau assessed a record amount of fines, costs and penalties -- more in one year than in the previous five years combined.
The states play an essential role in the investigation and prosecution of securities fraud. As SEC Chairman Arthur Levitt stated earlier this year, "[t]he securities industry has traditionally been regulated at both the state and federal levels. This has worked fairly well, because even though the SEC can act against wrongdoing in any state, state regulators are closer to the scene and can uncover problems that are hard for us to see all the way from Washington."(155)
Listed below is a sampling of actions brought by the New York Attorney General's Office, other state securities regulators and the NASD Regulation, Inc.
New York State Attorney General's Office
People v. Concorde Capital, et al.
In late July and early August 1997, the Attorney General arrested five individuals charged with engaging in a securities fraud that allegedly defrauded 53 investors of $500,000. The arrests resulted from a 17-count New York County indictment charging the President of Concorde Capital Group Inc. ("Concorde"), Robert James Laws and four of Concorde's salespeople, Bruce Winfield, William Yale Dick, Loretta Hanbury and Isaac Davis, with Scheme to Defraud in the First Degree and related offenses of Grand Larceny, and Fraud in the Sale of Securities.
The investigation into Concorde was initiated after the Attorney General's Investor Protection and Securities Bureau received a complaint from a member of the public who claimed to have been defrauded in the purchase of securities by the defendants.
Concorde, located at 3 Hanover Square in New York City, was an unregistered securities boiler room that operated from Robert Laws' one bedroom apartment. Concorde also used another New York County address, 1 New York Plaza, Suite 270, that was, unbeknownst to investors, merely a mail drop.
Utilizing cold calls and high-pressure sales tactics, Concorde promoted Pink Sheet and Bulletin Board stocks that were highly speculative investments. The defendants misrepresented these stocks to unwary investors, touting them as low-risk. The defendants primarily targeted elderly investors and falsely claimed that no commissions would be charged. The vast majority of stocks sold to investors, however, were never actually purchased by Concorde.
Monthly statements on Concorde letterhead routinely sent to investors listed fictitious transactions that had, in fact, never been executed. Instead, investor funds were primarily used to pay large undisclosed commissions to the defendants and to pay for the daily operations of the firm. Neither Concorde, its president, nor its salespersons were registered to sell securities. The alleged scheme occurred between January 1996 and July 1997.
Robert James Laws (a/k/a Russ Adams, Mr. Nighthawk), had once held a Series 7 broker license that had lapsed after several disciplinary problems; William Yale Dick is a convicted felon (Scheme to Defraud in the First Degree) resulting from a prosecution for participating in a charities scheme prosecuted by the Attorney General in 1982; Loretta Hanbury had held a Series 7 license but it lapsed in 1991; and Isaac Davis (a/k/a James Robinson, Dr. Davis), is a convicted felon (Scheme to Defraud in the First Degree) as a result of a 1982 prosecution by the Attorney General's Office of another securities boiler room, Mineral Resources Corporation, that sold a "strategic metal" Tantalum, as an investment to the public.
All the defendants have been arrested and arraigned and are now awaiting trial. If convicted, the defendants face a maximum sentence of seven years in prison. Defendant Loretta Hanbury has already pleaded guilty to six felonies and awaits sentencing.
At the public hearings the Attorney General commented on Concorde's unregistered boiler room operation stating that it, "pointedly underscore[s] the need for these hearings and hopefully the types of conclusions that will come from them."(156)
People v. Edward McKay
On June 23, 1997, Edward McKay ("McKay"), the President of a nationwide broker-dealer, Buttonwood Securities Inc. (a/k/a Securities Planners Inc.) pleaded guilty to engaging in securities fraud. The plea was the result of a lengthy investigation by the Attorney General's Office that uncovered that McKay was promoting and selling phony limited partnerships.
The Attorney General charged that McKay committed grand larceny and engaged in a scheme to defraud investors by offering and selling limited partnerships. McKay obtained in excess of $500,000 from more than 30 investors by selling interests in these partnerships, known as the Capital Income Fund, Venture Partners I and Venture Partners II, promising investors that their investment was in AAA-rated United States Government and corporate bonds. In fact, the defendant used the money for his own benefit and purposes. McKay was also charged with engaging in fictitious trading and parking of public company securities, including Inovir Laboratories, Inc. ("Inovir"), with A.R. Baron & Co., now a defunct brokerage firm.
McKay, through his company's trading department, pretended to purchase large quantities of stock, thereby creating the appearance of demand for the securities. This was done to reduce Baron's inventory and it assisted in manipulating the price of Inovir. This scheme also enabled Baron to meet minimum net capital requirements.
McKay pleaded guilty to the Grand Larceny in the Second Degree, a class C felony, after agreeing to cooperate with the investigation of Baron. McKay faces up to 15 years in prison.
In the Matter of Investors Associates, Inc. and First United Equities Corp., et al.
On May 29, 1997, the New York Attorney General filed enforcement actions against two brokerage firms and nine individuals as part of the biggest-ever nationwide crackdown by state securities regulators against telemarketers that sell micro-cap stocks to investors over the phone. The actions, filed in state Supreme Court in Manhattan, alleged that Investors Associates, Inc., First United Equities Corporation, Jason Cohen, Jonathan Winston, Douglas Traynor, Robert Drake, Robert Mangiarano, Lawrence J. Penna, Herman Epstein, Vincent Grieco and Mark Blonder, duped investors -- many of them elderly -- by hawking low-quality, high-risk securities and lying about the risks.
As a result of the actions, the court enjoined the respondents from engaging in manipulative practices, enjoined "cold calling" by unregistered brokers unless and until the Attorney General received written notification identifying each cold caller and required that the respondents maintain information about customer complaints and establish a person and location for such purpose. The court also ordered the respondents to provide the Attorney General with documents and information and ordered the respondents to testify before the court.
The actions represented the first phase of a coordinated national campaign by state securities regulators against the enormous rise in fraudulent practices by many micro-cap brokerage firms. Twenty states filed more than 35 actions in this effort, targeting problem firms with offices in the New York Metropolitan area. (See Chapter 10, ENFORCEMENT ACTIONS, Other State Actions, Nationwide Crackdown on Fraudulent Telemarketing of Micro-Cap Stocks, infra).
People v. Campbell and Prudential Corp., et al.
In July 1996, the Attorney General's Office filed a lawsuit against six corporations and twelve individuals accused of fleecing hundreds of senior citizens and other investors out of more than $1 million. A six month long investigation uncovered an extensive telemarketing campaign, conducted out of New York City, selling stock of an out-of-business New Jersey company whose operations had ceased after a serious chemical explosion in a neighboring facility.
The defendant, Securities Planners, Inc. ("Securities Planners"), a registered broker-dealer, solicited investors in 26 states with presentations and materials containing grandiose predictions and representations regarding Mugs Plus stock that were completely false. Securities Planners perpetrated this scheme through the following additional defendants: Hubert Roche, Ltd. (Securities Planners' franchise "branch office;" Campbell and Prudential (an unregistered brokerage firm); Mugs Plus, Inc.; Mugs Plus International, Inc. and Tri-State Auto Market Inc.; and 12 employees and principals. Investors were falsely told that Mugs Plus, as well as Campbell and Prudential and all of the brokers, were registered with several governmental agencies, including the NASD and the New York Attorney General's Office. Others were falsely told that Mugs Plus was a publicly traded company, had multi-million dollar revenues and was merging with Hallmark. Misleading "business plans" that grossly exaggerated current and future earnings, including representations that Mugs Plus was seeking to purchase a $5 million manufacturing plant, were sent out.
After obtaining initial investments, the brokers re-solicited investors by reporting false "new developments," such as a new contract with the 1996 Olympic Committee, which "guaranteed" an increase in the stock price. Investors were then given an opportunity to purchase more shares at prices less than that at which the stock was purportedly "trading." The defendants took the money raised and put it into a shell company, Tri-State Auto Marketing Corp., a used-car parts dealership located in an apartment building in Queens. The shell company, in turn, funneled the money out of its account with checks made payable to "cash."
In October 1996, the Attorney General settled the matter by obtaining agreements for 100% restitution for all of the investors and barring all of the participants from the securities business.
Other State Actions
State enforcement activity from July 1995 to July 1996 has increased approximately 25%.(157) During that time period the states (excluding Louisiana) initiated 6,840 investigations, collected over $7 million in fines and obtained over $85 million in restitution.
Nationwide Crackdown on Fraudulent Telemarketing of Micro-Cap Stocks
NASAA's board of directors authorized a special project to address the problem of fraudulent sales practices in the micro-cap marketplace in late fall 1996. In January 1997, a strike force comprised of representatives from 12 states, including New York, was created. Other states scheduled coordinated audits. In late February, the teams struck without warning.
As a result of the February sweep, 20 state securities agencies filed 36 actions against 14 broker-dealers in the first-round which was announced at a press conference at the New York Attorney General's Office on May 29, 1997. (See Supra). Other actions continue to follow as a result of this special project.
The 20 states that participated included Alabama, Connecticut, Delaware, Illinois, Indiana, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Texas, Utah, Vermont, Washington, and Wisconsin. Sixteen states took action against Investors Associates; four states took action against L.T. Lawrence & Co., Meyers Pollock Robbins; two states brought actions against First United Equities Corp. And individual states brought actions against Kensington Wells, Biltmore Securities, Capital Securities/W.B. McKee, National Securities, R.D. White, Sterling Foster, Toluca Pacific, Euro-Atlantic, State Capital Markets, and William Scott & Co.
Massachusetts: H.J. Meyers & Co.
In August 1997, the Massachusetts Securities Division filed a civil complaint against H.J. Meyers & Co. ("HJM") and nine of its principals alleging that during 1996 and 1997 the firm operated as an illegal micro-cap boiler room. The complaint claimed that HJM, a New York-based brokerage firm, used dishonest and unethical means to persuade investors to buy risky stocks. By employing high pressure sales tactics, misleading information and other fraudulent measures, HJM sold stock, usually from its own inventory, for the purpose of increasing its own profits.
The complaint, which seeks to revoke the brokerage license of HJM and the nine principals, as well as disgorgement of "ill-gotten profits," further alleged that the firm used inexperienced stock brokers to telemarket stocks and read from "fraudulent scripts." HJM had ceased operations in Massachusetts and left the state in June of 1997. The Securities Division proceeded with their investigation and filing of the complaint in order to assist other states that have similar investigations of HJM, since many jurisdictions have the authority to revoke licenses based on the successful revocation in another jurisdiction. In recognition of multi-state cooperation, Secretary of the Commonwealth William F. Galvin stated that, "We owe something to the other jurisdictions to provide them with our research," and although it may be cost effective to drop a case once a firm leaves a particular jurisdiction, "you almost become a participant in the coverup if you do that."(158) Secretary Galvin further stated that, "It's a very, very fluid group ... and it doesn't take long for them to reappear in other jurisdictions."(159)
Indiana: Sterling Foster & Company, Inc. and Biltmore Securities
On April 17, 1997, the Indiana Securities Division summarily suspended the Indiana license of Sterling Foster & Company, Inc. ("Sterling Foster"), a New York securities firm. According to the administrative complaint filed by the Securities Division, the firm failed to respond appropriately to a subpoena issued by the Securities Commissioner ordering Sterling Foster to produce documents in connection with an investigation and failed to maintain routine books and records required under federal and state securities laws. The Securities Division's ability to seek the emergency remedy of a summary suspension on behalf of Indiana investors is a direct result of a change to the Indiana Securities Act contained in Secretary of State Gilroy's 1996 legislative package. This case represents the first time the Securities Division relied on the new provision.
In April 1997, the Securities Division also entered into a consent agreement with Biltmore Securities, Inc. ("Biltmore"), a Florida-based securities firm that has been the subject of numerous complaints regarding abusive sales practices. According to the Securities Division, Biltmore engaged in a pattern of dishonest and unethical sales practices, sold unregistered securities to Indiana residents, violated the anti-fraud provisions of the Indiana Securities Act, and failed to properly supervise the conduct of its agents.
Under the terms of the consent agreement, Biltmore was ordered to pay fines and costs totaling $175,000 and to reimburse five Indiana investors over $495,000 for losses they sustained. As part of the settlement, Biltmore agreed that Indiana residents who feel they have been victimized by the firm will be permitted, for a period of two years, to file a claim through the NASD- sponsored mediation process to settle any claims they may have against the firm. Biltmore will bear all the costs associated with the mediation, excluding private attorneys' fees. In addition, the firm is barred for a period of two years from selling Indiana residents any stocks that are not listed on one of the nation's three major exchanges or for which it serves as an underwriter or market maker.
NASD Regulation, Inc.
Stratton Oakmont, Inc.
At the end of 1996, NASD Regulation, Inc. ("NASDR"), permanently expelled the New York-based brokerage firm Stratton Oakmont, Inc. from the securities industry. In addition, both Daniel Porush, the president, and Steven Sanders, the head trader, were barred, censured and fined $25,000 each. The firm was censured and ordered to pay $416,528 in restitution and $500,000 in fines.
"With this expulsion, NASD Regulation has rid the securities industry of one of its worst actors," said NASDR President Mary L. Schapiro. She further stated: "With Stratton Oakmont's extensive and serious regulatory history, and an obvious disregard for all rules of fair practice, today's actions make the securities industry a better place for investors." Barry Goldsmith, NASDR's Executive Vice President of Enforcement added:
In less than a decade, Stratton Oakmont amassed one of the worst regulatory records of any broker/dealer firm. The firm has been the subject of numerous disciplinary actions brought by the NASD, the Securities and Exchange Commission (SEC), and state regulators involving fraud, market manipulation, sales practice abuses, and failures to adequately supervise its employees.
The SEC and a number of state securities regulators also sanctioned Stratton. In early 1994, the SEC settled an enforcement action against Stratton and Porush, after alleging that the firm engaged in securities fraud through its "boiler room" sales operation. By late 1994, the SEC had charged Stratton with violating the settlement agreement and obtained a permanent injunction against the firm requiring future compliance.
The expulsion resulted from a complaint filed by NASDR in late 1995 charging that from October 1993 through November 1993, Stratton, acting through Sanders, effected more than 150 principal retail sales of Class A and Class B warrants for the initial public offering of Master Glazier's Karate International Inc. ("Master Glazier") that were marked-up excessively or fraudulently (greater than 10% above the prevailing market price). During the period and activity in question, Stratton and Porush failed to establish, maintain, and enforce a supervisory system to prevent the violations in question.
Stratton -- which underwrote the offering -- was found to have controlled the market for Master Glazier, since no other broker-dealer made even a single purchase or sale of Class A or Class B warrants on a principal basis during the review period. Thus, Stratton, through Sanders, intentionally structured and participated in an IPO with a view toward retaining a high-percentage market share for the purpose of economic gain. In addition, the firm also engaged in abusive pricing and discouraged the sales force from allowing customers to sell their securities back to the firm, thus reducing the firm's risk and enhancing its ability to dictate prices arbitrarily.
GKN Securities Corp.
In August 1997, NASDR fined GKN Securities Corp. ("GKN") as well as 29 brokers and supervisors $725,000 and ordered them to repay more than $1.4 million to investors who were overcharged as the result of a two-year-long program of excessive mark-ups in eight securities. Three of the firm's top officials also received significant fines and suspensions. All of the violations occurred at GKN's offices in New York City; Stanford, Connecticut; and Boca Raton, Florida.
From December 1993 through April 1996, GKN dominated and controlled the immediate after-market trading in eight securities it underwrote so that there was no competitive market for them. As a result, GKN was able to charge excessive markups, ranging from 6 % to as much as 67% over the prevailing market price, in more than 1,500 transactions. At least 90% of these transactions were fraudulent because the markup exceeded 10%.
As part of the settlement, GKN must pay a $250,000 fine to NASDR, and hire an independent consultant to review the firm's trading policies and procedures for 18 months.
In separate settlements, 22 brokers were fined from $3,000 to $25,000 each, and suspended. NASDR found that these individuals were also responsible for overcharging investors because they accepted excessive gross commissions of 10% to 40%.
D.H. Blair & Co.
In August 1997, NASDR fined D.H. Blair & Co. Inc. $2 million, and ordered them to repay almost $2.4 million to investors who were overcharged as a result of excessive mark-ups and other fraudulent conduct. D.H. Blair's Chief Executive Officer and Head Trader were also fined a combined $525,000.
More than 3,100 retail customers from 43 states including the District of Columbia will receive restitution payments from D.H. Blair.
From June 1993 through May 1995 the firm charged excessive markups in 16 NASDAQ Small Cap securities whose IPOs were underwritten by D.H. Blair Investment Banking Corp. NASDR found markups in excess of 10%. D.H. Blair, rather than making a bona fide public distribution, placed virtually all of the offerings with its own customers. In addition, the firm dominated and controlled the after-market trading in all 16 securities, in some cases for up to four and a half months after the effective date of the IPO.
NASDR also found that D.H. Blair fraudulently increased the price of two of the 16 securities (Skyline Multimedia and Video Update) shortly after trading began without sufficient purchase orders to support those increases. As a result, D.H. Blair created an artificial "profit" in the securities that allowed the preferred customers of one of the firm's senior managers to benefit by selling their stock back to the firm. Thereafter, D.H. Blair's brokers used the artificial increase to solicit new investors to purchase these securities, without disclosing the circumstances of the price increase.
D.H. Blair's Chief Executive Officer Kenton E. Wood was fined $225,000 and suspended in all capacities for 60 days and Head Trader, Vito Capotorto, was fined $300,000 and suspended in all capacities for 90 days. Following their suspensions, Wood must retake his supervisory exam and Capotorto must retake his general qualification exam. Wood and Capotorto are still employed at the firm. D.H. Blair and Wood were cited for inadequate supervision.
As part of the settlement, D.H. Blair is also required to hire an independent consultant to review and monitor the firm's trading, sales, supervision, and other compliance-related policies and practices for two years. This consultant will also recommend necessary improvements, which the firm must implement. For the next year, the firm also agreed not to sell to its own clients more than 60% of a securities offering in which it participates.
La Jolla Capital Corp.
In September 1997, NASDR ordered that La Jolla Capital Corp. ("La Jolla"), based in San Diego, be permanently barred from selling penny stocks and that five of its senior officials be sanctioned for allegedly circumventing the penny stock rules. In addition, the company and the five officials were ordered to pay a total of more than $950,000 in fines and restitution.
La Jolla and its president, Harold B.J. Gallison, were fined more than $400,000 for allegedly designing a system to circumvent the Securities and Exchange Commission's penny stock rules.
From January 1994 through May 1995, La Jolla and certain senior officials circumvented investor protection laws in numerous transactions involving 15 separate securities. All of the transactions involved penny stocks. La Jolla circumvented SEC penny stock rules by requiring investors to sign a misleading document that purported to exempt the transactions from the penny stock rule requirements. The letters were portrayed as a "formality." NASDR also charged that "in some cases investors' signatures were forged." La Jolla was also charged with having "implemented misleading and deficient supervisory policies and procedures" in connection with the alleged scheme.
Top of Page
102. Diana B. Henriques, Peter Truell, Should a Clearinghouse Be Its Broker's Keeper?, N.Y. Times (April 23, 1997), D.1.
103. The small firms that clear through a clearing house are called "introducing brokers." Customers receive trade confirmations and account statements directly from the clearing firm. The introducing broker is freed from maintaining back office staff and is permitted to operate with very slim net capital requirements (i.e., cash reserves). Public customers pay ticket charges to the clearing house, which are usually highly profitable because the introducing firms' customers usually trade only with each other in an artificial market dominated and controlled by the introducing broker.
104. Federal law no longer permits a private litigant's claim of aiding and abetting liability under §10b or Rule 10b-5 of the Securities Act. Central Bank of Denver v. First Interstate Bank of Denver, 114 S.Ct. 1439 (1994).
105. Susan Antilla, Did Bear Stearns Let Wolf Bite Unwary Investors?, New York Observer (Feb. 17, 1997). After years of scrutiny Stratton was expelled from the securities industry by the NASDR (see Chapter 10, ENFORCEMENT ACTIONS, infra).
106. Gretchen Morgenson, Wall Street Sleeze: Bear Stearns & the Bucket Shops, Forbes (Feb.4, 1997) [hereinafter Wall Street Sleeze] (Bear Stearns is selling "respectability;" it presently clears for "15 brokerages that are, if not full-fledged bucket shops, close to it.")
107. Bear Stearns, "Comments on the Role And Obligations of Clearing And Introducing Brokers in Securities Markets," September 10, 1997, p. 13 (Submission to the NYSE).
108. Letter from Bear Stearns Executive Committee to Forbes Magazine (February 11, 1997) [hereinafter Forbes Response].
109. The clearing brokers' claim of virtual immunity should be regarded with suspicion. They maintain that this outcome follows from SEC approval of changes in NYSE Rules 382 and 405 effected in 1982. 24 SEC Docket 964, 1982 WL 32196 (SEC). It seems doubtful, however, that the two-paragraph SEC release is entitled to the scope of exculpative relief that is sought to be attributed to this action or that this was the intent of the SEC approved changes. Indeed, the release actually warns clearing brokers to "carefully weigh the capital and the other regulatory and practical consequences of the assumption of the functions detailed" in the amended rules. See also Matter of D.H. Blair & Co., Inc., 44 SEC 320 (1970), holding that it was both reasonable and in the public interest to impose an obligation of inquiry and prompt action upon a clearing broker to terminate any participation in activity violative of securities laws.
110. Carlson v. Bear Stearns & Co., Inc., 906 F.2d 315, 317 (7th Cir. 1990).
111. Bear Stearns is also the plaintiff in a lawsuit, counter-suing the lawyers that have filed suits against them. Bear claims that they may not base their lawsuits on the information that they obtain from their roles in the A.R. Baron bankruptcy court proceedings. Securities Week (July 28, 1997), p. 4.
112. Michael Siconolfi, Heat Rises on Wall Street 'Clearing' Operations, Wall St. J. (June 17, 1997), C1.
113. L. Gurwin, The Secret Life of JB Oxford, Time (Dec. 9, 1996). While Kott professes to have severed his ties with Oxford, his son, Ian, is chief operating officer and a reported long-time Irving Kott business associate is the national sales manager. See JB Oxford, Financial Times (London Ed.) (Sept. 18, 1997).
114. Oxford cleared for 34 firms including two populated with former Stratton Oakmont brokers, namely, Biltmore Securities and Windsor Reynolds Securities, Inc.
115. A. Pasztor, FBI Raids JB Oxford in California, Carting Away Brokerage Documents, Wall St. J. (Aug. 20, 1997), A4.
116. It has been reported that the power behind Hanover, Roy Ageloff, is linked to the Genovese crime family. Gary Weise, The Mob On Wall Street, Business Week (Dec. 16, 1996), pp. 92, 95, 110.
117. F. Norris, Price Surge Seen in Penny Stocks Underwritten By Failed Firm, N.Y.Times (March 17, 1995), D1; F. Norris, Marketplace: Short-Selling Penny Stocks Can Prove a Far From Simple Move, N.Y.Times (March 23, 1995), D10.
118. W. Getler, Adler Coleman Files for Bankruptcy Following Hanover Sterling Shutdown," Wall St. J. (Feb. 28, 1995), B14.
119. Diana B. Henriques, And They All Came Tumbling Down, N.Y. Times, D1.
120. T. Petruno, Trustee Oks W.S. Clearing Transfer, L.A. Times (March 20, 1997), D2.
121. SEC Sues Glendale Brokerage, L.A. Times (March 8, 1997), D2.; Brokerage Owner's Assets Frozen, L.A. Times (March 14, 1997), D2.
122. Market Surveillance Committee v. Sterling Foster & Co., Inc., et al., No. CMS 960174 (September 18, 1996).
123. Wall Street Sleeze, supra note 105.
124. Forbes Response, supra note 108.
125. Wall Street Sleeze, supra note 105.
126. In re Blech Securities Litigation, CCH Fed. Sec. L. Rptr. ¶99,472, at p. 97, 170, (SDNY No.94 CIV 7696) (RWS), (April 1, 1997).
127. Id. at p.97, 171. The court, however, dismissed a separate theory of Bear Stearns liability based on its being a "control person" of the Blech firm.
128. U.S. Charges Biotech Financier Blech with Securities Fraud in 1994 Scheme, Wall St. J. (April 28, 1997) C18. Blech's history of manic depression at the time of his alleged criminal acts has prevented the federal court from yet accepting his guilty plea. G. Wirth, Judge Delays Blech Case, Orders New Evaluation, Investment Dealers Digest (July 7, 1997), p.10.
129. New York Public Hearings (Aug. 12, 1997) supra note 2, at 44 (testimony of Barry J. Mandel).
130. Id., at 44-45.
131. See Chapter 10, ENFORCEMENT ACTIONS, infra.
132. Michael Siconolfi, Heat Rises on Wall Street 'Clearing' Operations, Wall St. J. (June 17, 1997), C1.
133. Even more significant has been the role of the NYSE's diligent surveiling of its members who offer clearing services and their preventive actions that may have avoided potential harm to investors. In the past five years the NYSE has:
Required a clearing broker to monitor and provide periodic information on any correspondents that dominate activity in their market-making stocks.
Conducted an extensive review of the disciplinary history of the principals of a potential purchaser of a clearing member firm that resulted in the potential suitor's inability to complete the transaction.
Prevented a self-clearing firm from taking on correspondents due to its having significant operational problems, and not being able to demonstrate that it could handle the additional customer accounts.
134. Oppenheimer was invited to testify at the New York Public Hearings to discuss their clearing procedures and the decision to terminate their clearing relationship with L.T. Lawrence. While they initially indicated that a representative of the firm would testify, they later declined without explanation.
135. A.R. Baron, Officers to Pay $1.5 Million for Markups, Bloomberg (July 27, 1995). The report also observes that Baron was forced to close temporarily in June because of insufficient capital and was charged with dominating and controlling, i.e., manipulating, the prices of the securities involved.
136. Dun & Bradstreet at the time reported that the firm had a negative net worth and G.E. Capital Corp. reportedly denied it an Exxon credit card. Susan Antilla, Did Bear Stearns Let Wolf Bite Unwary Investors?, New York Observer (Feb.17, 1997).
137. See Gretchen Morgenson, Waiting for the other shoe to drop, Forbes (Nov. 3, 1997), p. 145.
138. Gary Weise, Commentary: Clearing Firm, Clear Thyself, Business Week (July 7, 1997), p.120.
139. Securities & Exchange Act of 1934, section 15(c)(3), 15 U.S.A. § 780(c)(3).
140. Id., § 15(h)(1), 15 U.S.C. § 780(h)(1), as added by the National Securities Markets Improvements Act of 1996, PL 104-290, sect. 103(a).
141. 17 CFR § 240.15c3-1(a)(2)(iii).
142. New York Public Hearings ( July 29, 1997) supra note 2, at 64 (testimony of Edward A. Kwalwasser, Group Executive Vice President - Regulation, New York Stock Exchange, Inc).
143. SEC Release No. 34-31511, Net Capital Rule, 57 F.R. 56973, December 2, 1992, section II, C, (iii); Letter from Richard G. Ketchum, Dir, SEC Div. Of Market Regulation to David Marcus, NYSE, January 14, 1985.
144. NYSE Notice to Members, No. 94-22, "New Rule 434-Required Submission to NYSE of Requests for Extensions of time for Payment/Delivery of Securities transactions for Customers and Reporting of Excessive Extension of Time Requests By Correspondents," June 10, 1994, p. 2.
145. New York Public Hearings (July 29, 1997) supra note 2, at 84 (testimony of Edward A. Kwalwasser).
146. Letter of Edward Kwalwasser, NYSE to the Investor Protection and Securities Bureau (October 24, 1997).
148. NYSE Hearing Panel Decision 92-68 (April 29, 1992).
149. NYSE Hearing Panel Decision 94-165 (December 19, 1994).
150. NYSE Hearing Panel Decision 94-22 (February 9, 1995).
151. NASDR supports and, in fact, worked with the NYSE on these proposals. See New York Public Hearings (Aug. 12, 1997) supra note 2, (testimony of Barry J. Goldsmith).
152. RPR Clearing v. Glass, 1997 WL 460717 (SDNY) is illustrative of clearing brokers' overly restrictive view of what complaints they must respond to. The Court upheld a $400,000 arbitration award where the clearing firm neither responded to a customer's claim that a change of address (which thereupon permitted the looting of an account) was forged, nor to a request that the account be frozen.
153. Letter from James E. Cayne, President & CEO of Bear, Stearns, to Richard Grasso, Chairman, New York Stock Exchange (September 9, 1997) at pp.5-6.
154. Both the 1933 and 1934 Securities Acts contain non-waiver provisions. 15 U.S.C. § 77n (§ 14 of the '33 Act); 15 U.S.C. § 78cc(a) (§ 29(a) of the '34 Act). See Richards v. Lloyd's of London, 107 F.3d 1422, 1997 WL 94054 (9th Cir.).
155. Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, Values Add Value, Remarks at Trinity Church Tercentenary (March 18, 1997) (transcript available on the SEC Internet website).
156. New York Public Hearings (July 29, 1997) supra note 2, at 22 (testimony of New York State Attorney General Dennis C. Vacco).
157. North American Securities Administrators Association, Inc./U.S. Securities and Exchange Commission 1997 Conference on Federal-State Securities Regulation, Final Report (August 1997).
158. Deborah Lohse, Massachusetts Seeks to Revoke License of H.J. Meyers in Bid to Aid Other States, Wall St. J.(Aug. 22, 1997), A4.