It has been said there are few things more dangerous than a wounded beast; the New York Stock Exchange seems hellbent on proving that rule.
The NYSE has had its fair share of black eyes recently, with most of its troubles related to problems policing itself and its members. But as the dust kicked up by those problems settles, the NYSE is turning downright aggressive, and firms subject to its regulation would do well to stay out of its path.
What follows is a smattering of cases recently settled by the NYSE. None of the respondents got off lightly — and given the age of these matters (between two and four years old), it seems that the intrepid NYSE is willing to stay the course. Please note, the NYSE Hearing Panel Decisions (HPD) issued pursuant to a Stipulation of Facts and Consent to Penalty (SFC) 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.
The Costly Series 7 Application
During his 23-year career in the securities industry, Luis Delacruz had always been employed in an unregistered capacity. He ran into trouble when trying to get his Series 7 in 2002.
Five years prior (on or about April 27, 1997, while an unregistered employee with Salomon Smith Barney), Delacruz was arrested in Bergen County, N.J., and charged with causing or attempting to cause bodily injury and resisting arrest. In July of that year, in the Superior Court of Bergen County, Delacruz was convicted on one count of causing or attempting to cause bodily injury, a felony, and received a sentence of 18 months probation and was assessed a fine of $125. He failed to promptly advise his firm of the arrest, felony conviction and status as a statutorily disqualified individual. Hiding those facts would prove to be costly.
The firm submitted Delacruz's fingerprints to the Department of Justice in June 2002 as part of his Series 7 registration process. In connection with this application, Delacruz completed a U4 and falsely responded to two pivotal questions: Has the applicant “ever been convicted of or pled guilty…to any felony,” and has he “ever been charged with a felony.”
The firm's compliance department was notified of Delacruz's criminal record on or about July 15, 2002, and the firm promptly terminated him. Nearly two years later, in March of this year, the NYSE censured and barred him for six years in all capacities. [See Luis A. Delacruz (SFC/HPD 04-40/March 2004).]
This case takes one's breath away: Nearly a quarter-of-a-century career is trashed unnecessarily. This may well have been one of those fact patterns where a continuance application to overcome the statutory disqualification might have been favorably entertained by a regulator. However, failing to voluntarily disclose the felony is an additional strike and, as things now stand, it's at least six years before Delacruz is likely to get any consideration on a statutory disqualification application.
A Forwarding Address
During 2000, while Sandro Corio Flores was employed at Prudential Securities' Sao Paulo, Brazil office, he arranged for certain mail, including trade confirmations and monthly account statements for approximately eight of his customers, to be sent to a U.S. PO Box in Coral Gables, Fla.
Flores did not disclose this fact, and his firm was unaware that the mailbox was under his control. Furthermore, at various times he retrieved and destroyed the mail sent to these customers. He also failed to comply with a written request to appear and testify at the NYSE. In May, Flores was censured and barred in all capacities until he testifies and for an additional period of six months from the time he fully complies. [See Sandro Corio Flores (SFC/HPD 04-71/May 2004).]
This problem — reps intercepting and redirecting customers' mail — is a persistent one. Given the compliance happy environment, one would think that firms would be developing more sophisticated ways to detect such misconduct, but the practice continues to plague the industry, to the chagrin of the NYSE and other regulators.
Disabling and Denying
In 2001, Morgan Stanley Dean Witter registered rep Shawn Blankenship attempted to allocate 5,300 shares of an IPO offering (a “hot issue”) at a price of $6 per share to the account of his father-in-law, notwithstanding that the firm's policies restricted employee-related accounts from trading in “hot issue” allocations.
Blankenship initially did not identify the account as employee-related, but after he submitted an annual compliance questionnaire disclosing the account's ownership by his father-in-law, the firm designated the account as employee-related.
In response, Blankenship enlisted the assistance of his unregistered sales assistant, who disabled the “employee-related” account designation and placed the order for IPO shares in the father-in-law's account. Blankenship's branch manager became aware of the order and canceled the allocation. In June 2001, a NYSE U5 filed by the firm showed that Blankenship had been permitted to resign due to a “violation of firm syndicate policy.”
When Blankenship moved to Legg Mason, he apparently continued his rule-skirting ways. In February 2002, the firm discovered he had forwarded certain email from his office computer to a personal email account. Legg Mason supervisory personnel warned Blankenship that all electronic correspondence with clients must be done via Legg Mason's internal email system. Blankenship denied that he ever solicited or conducted securities-related business using his outside email account. Then, on or about March 25, 2002, Blankenship informed Legg Mason that he had “completely closed” the outside email account to avoid any appearance of any impropriety.
However, during April 2002, Blankenship continued to access his personal email account from his office computer at Legg Mason on at least six occasions and did not close his outside email account until some time after his employment at Legg Mason was terminated. On or about April 22, 2002, a NYSE U5 filed by Legg Mason shows that Blankenship had been permitted to resign for a “violation of firm policy.”
He was censured and fined $10,000. [See Shawn R. Blankenship (SFC/HPD 04-35/March 2004).]
This is a case spanning a period of three years of misconduct at two firms. Seems that the NYSE was quite generous in imposing only a censure and a $10,000 fine.
Writer's BIO: Bill Singer
is a partner with the law firm of Gusrae, Kaplan & Bruno. rrbdlaw.com
