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U.S. Securities and Exchange Commission

United States of America
Before the
Securities and Exchange Commission

Securities Act of 1933
Release No. 8006 / September 24, 2001

Securities Exchange Act of 1934
Release No. 44833 / September 24, 2001

Administrative Proceeding

File No. 3-10582


In the Matter of

W.J. Nolan & Co.
and
William J. Nolan
 
Respondents.

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:
:
:
:
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ORDER INSTITUTING PROCEEDINGS,
MAKING FINDINGS AND IMPOSING
REMEDIAL SANCTIONS AND A CEASE-AND
DESIST ORDER PURSUANT TO
SECTION 8A OF THE SECURITIES ACT OF
1933 AND SECTIONS 15(b) AND 21C OF
THE SECURITIES EXCHANGE ACT OF 1934

I.

The Securities and Exhange Commission ("Commission") deems it appropriate in the public interest that public administrative proceedings be instituted against W.J. Nolan & Co. ("W.J. Nolan" or the "Firm") and William J. Nolan ("Nolan") pursuant to Section 15(b) of 1934 ("Exchange Act"), and cease-and-desist proceedings be instituted against W.J. Nolan pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and 21C of the Exchange Act.

II.

In anticipation of the institution of these proceedings, W.J. Nolan and Nolan have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the Commission's findings contained herein, except the jurisdiction of the Commission over them and over the subject matter herein, and the Commission's findings set forth in Paragraphs III.1 and 2, which are admitted, W.J. Nolan and Nolan hereby consent to the entry of this Order Instituting Proceedings, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of the Exchange Act ("Order").

Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of the Exchange Act be and hereby are instituted.

III.

On the basis of this Order and W.J. Nolan's and Nolan's Offers, the Commission finds that:

Respondents

  1. W.J. Nolan is, and all relevant times was, a broker-dealer registered with the Commission. Its principal place of business is in New York.
     
  2. Nolan is, and at all relevant times was, the majority owner, Chief Executive Officer, and a registered principal, of the Firm.
     
  3. Prior to 1996, the Firm was primarily involved in bond trading. In 1996, the Firm focused on expanding its business by hiring equities traders and additional registered representatives. As part of its efforts to expand its business, the Firm offered registered representatives with little equities experience the opportunity to open their own independent branch offices of the Firm. Each independent branch office was responsible for its own expenses and hired its own registered representatives subject to Nolan's approval. The Firm received a percentage of the revenues generated by each of the offices.

Introduction

  1. The Firm and Nolan failed reasonably to supervise the registered representatives at the Chicago and Park Avenue offices who engaged in churning, and unauthorized and unsuitable trades in customers' accounts. The Firm did not have procedures reasonably designed to prevent and detect sales practice violations in these branch offices. Nolan, as head of the Firm, was responsible for establishing the Firm's procedures. He failed to set up the procedures and did not delegate the responsibility to another person. Nolan also failed to respond to red flags that might have indicated sales practices abuses by the registered representatives.
     
  2. The Firm and Nolan also failed reasonably to supervise the equities traders who charged undisclosed, excessive markups on principal transactions in one microcap stock, causing losses to the investors and generating profits for the firm. The Firm did not have a system reasonably designed to prevent and detect the charging of undisclosed, excessive markups. Nolan was responsible for establishing the Firm's procedures and failed to establish the procedures or delegate that responsibility. In addition, Nolan failed to respond to red flags indicating the possibility of excessive markups in the trading of this stock.
     
  3. Further, during the relevant time period, the Firm traded in one penny stock but did not provide customers with risk disclosure documents in violation of the penny stock disclosure rules.

Pattern of Sales Practice Violations by the Registered Representatives in the Chicago and Park Avenue offices

  1. Between April and November 1997, ten registered representatives at the Chicago and Park Avenue offices of the Firm churned customer accounts and made unauthorized and unsuitable trades in a number of microcap securities, including shares of Globalnet Systems Ltd. ("Globalnet"). These registered representatives preyed on elderly customers, and earned over $250,000 in commissions while causing over $800,000 in losses to the customers. These registered representatives engaged in aggressive cold calling efforts to obtain new customers and open new accounts. Two of the registered representatives directed unregistered persons to use their names to contact potential customers and open new accounts by offering and selling stock to those customers. In many instances neither the unregistered cold callers, nor the registered representatives ever asked their new customers about risk tolerance or investment objectives. Further, despite the diversity of the new customers, the new account forms for these registered representatives' customers uniformly indicated the same risk tolerance and objective, and the new account forms contained other inaccuracies, including false net worth, annual income or date of birth. In addition, the Firm and Nolan allowed two individuals in the branch offices to perform functions of registered representatives without proper qualifications and proper registration with the appropriate self-regulatory organization, in violation of the registration provisions of the federal securities laws.
     
  2. These registered representatives also made unsuitable recommendations to their customers. In most accounts, shortly after an initial purchase of a blue chip stock, the registered representatives sold that stock and, thereafter, purchased highly speculative microcap stocks in which the Firm made a market. These purchases were unsuitable for many of the customers in light of their true age, investment objectives, risk tolerance, annual income and net worth. In addition, these registered representatives churned many of the accounts for which they exercised control. Most of the customers were unsophisticated and unable to manage their accounts, but instead relied exclusively on the recommendations of the registered representatives when determining which stocks to buy and sell and the timing of these transactions. The registered representatives solicited nearly all of the transactions done in these accounts, and once a customer opened an account at the Firm, the registered representatives contacted them frequently to recommend that the customers sell the stocks in their accounts whether or not they would incur a loss on such sale. While these customers were losing money, the registered representatives were earning commissions on their accounts. Finally, these registered representatives also engaged in unauthorized transactions in customers' accounts. Unauthorized purchases were commonly paid for by unauthorized sales of securities in customers' accounts, or by the unauthorized use of margin.
     
  3. This pattern of sales practice abuses began in or about April 1997 and continued throughout the employment of the registered representatives at the Firm. In November 1997, the Firm voluntarily closed the Chicago and Park Avenue offices and fired all of the registered representatives.

The Firm's Traders Charged Excessive, Undisclosed Markups

  1. During the relevant time period, the Firm's customers paid approximately $227,153.21 in excessive, undisclosed markups on sales of Globalnet, a microcap, penny stock. During the time period April 1997 through October 1997 there was no real customer demand for Globalnet outside of the Firm. In fact, during that time period, the Firm and its customers were responsible for almost 75% of the total trade volume in Globalnet. This coincides with the time period that the Park Avenue and Chicago offices were open, and consequently, with the time period in which certain of the registered representatives at those offices churned their customers' accounts and made unauthorized trades in customer accounts, including trades in Globalnet.
     
  2. From April through October 1997, the Firm's customers purchased 1,020,430 shares of Globalnet, which constituted 93.8% of all retail customer purchases of Globalnet during that period. The Firm also purchased 267,006 shares of Globalnet for its inventory account, equaling almost 40% of all inventory account purchases. Further, between August and October 1997, the Firm held the inside bid for Globalnet 98% of the time. Also, the Firm only made one sale to another market maker during that period. Thus, there was no actual demand for Globalnet outside of the Firm. Rather, the Firm was the demand for Globalnet. Therefore, there was no active, competitive market for Globalnet from April through October 1997, but instead, the Firm dominated and controlled the market during that period.
     
  3. During this period, the Firm's traders calculated markups using the price at which it offered Globalnet to other market makers as the prevailing market price. However, because there was no active, competitive market for Globalnet, but rather the Firm dominated and controlled the market, the traders should have used the firm's contemporaneous cost as the prevailing market price when calculating markups. The Firm's traders executed 163 retail sales of Globalnet between April and October 1997 at various markups. Calculating markups using the Firm's contemporaneous cost as the prevailing market price, 85% of the trades were executed at markups greater than 10%, and 41% were executed at markups over 25%. Accordingly, the traders charged excessive markups and did not disclose these excessive markups to the Firm's customers.

Failure to Follow Penny Stock Disclosure Procedure

  1. Between April and November 1997, the Firm actively sold one penny stock, Globalnet, to its retail customers, but did not provide its customers with risk disclosure documents as required by the federal securities laws. During the relevant period Nolan knew Globalnet was a penny stock, but did not provide the firm's customers with penny stock disclosure forms.

The Firm's Violation of Registration Provisions

  1. Unregistered persons at the Firm's Chicago and Park Office offices opened new accounts for customers by identifying themselves as actual registered representatives, and recommended and effected securities transactions. These unregistered persons concealed their true identity and licensing status by pretending to be actual registered representatives, when contacting customers. As a result, the Firm violated the registration provisions of the federal securities laws.

Nolan's Failure to Supervise

  1. Nolan failed reasonably to supervise the registered representatives of the Chicago and Park Avenue offices and the Firm's equity traders who were subject to his supervision. As the majority owner of the Firm and its Chief Executive officer, he had the responsibility to establish procedures for the firm reasonably designed to prevent and detect sales practices abuses and markup violations. He failed to do so and failed to delegate such responsibilities to another.
     
  2. Nolan also failed to respond to red flags indicating possible misconduct by the registered representatives in the Chicago and Park Avenue offices and the Firm's equity traders. Nolan reviewed trade confirmations and tickets from the Chicago and Park Avenue offices and was aware of large numbers of sellouts and cancellations. Nolan also reviewed the trading activity of the Firm on an almost daily basis and was aware of large concentrations of Globalnet in the Firm's customers' accounts and the Firm's trading accounts. Nolan failed to respond to these red flags and take corrective action.

The Firm's Failure to Supervise

  1. The Firm did not have a system of supervision reasonably designed to prevent and detect sales practices violations by the registered representatives of the Chicago and Park Avenue offices and the markup violations by the Firm's equity traders. The Firm also had no system of follow-up and review if red flags were detected.

Violations

  1. As a result of the conduct described above, W.J. Nolan failed reasonably to supervise individuals subject to its supervision within the meaning of the Section 15(b)(4) of the Exchange Act.
     
  2. As a result of the conduct described above, W.J. Nolan willfully violated Section 15(g) of the Exchange Act and Rules 15g-2, 15g-3 and 15g-6 promulgated thereunder.
     
  3. As a result of the conduct described above, W.J. Nolan willfully violated Section 15(b)(7) of the Exchange Act and Rule 15b7-1 promulgated thereunder.
     
  4. As a result of the conduct described above, Nolan failed reasonably to supervise one or more individuals subject to his supervision within the meaning of the Section 15(b)(4) and 15(b)(6) of the Exchange Act.

IV.

In light of the foregoing, it is appropriate and in the public interest to impose the sanctions specified in the Offers submitted by W.J. Nolan and Nolan. In accepting the Offer, the Commission has taken into consideration W.J. Nolan's undertaking, contained in the Offer, as follows:

  1. W.J. Nolan shall retain, within 30 days of the date of this Order, at its expense, an Independent Consultant not unacceptable to the Commission's staff. The Independent Consultant shall conduct a review of W.J. Nolan's supervisory, compliance, and other policies and procedures designed to prevent and detect federal securities law violations of the nature involved in this matter. The Firm shall cooperate fully with the Independent Consultant and shall provide the Independent Consultant with access to its files, books, records, and personnel as reasonably requested for the review.
     
  2. At the conclusion of that review, which in no event shall be more than 120 days after the date of the Independent Consultant's retention, the Independent Consultant shall simultaneously submit to W. J. Nolan and to the Commission's staff an Initial Report. The Initial Report shall address the adequacy of Nolan's policies and procedures to detect and prevent federal securities law violations of the nature involved in this matter, and shall include the Independent Consultant's recommendations thereon.
     
  3. Within 30 days of transmittal of the Independent Consultant's Initial Report, the Firm shall in writing advise the Independent Consultant of the recommendations that it has determined to accept and the recommendations that it considers to be unduly burdensome. With respect to any recommendation that the Firm deems unduly burdensome, it may propose an alternative policy or procedure designed to achieve the same objective or purpose.
     
  4. With respect to any recommendation or proposal with which W. J. Nolan and the Independent Consultant do not agree, W. J. Nolan and the Independent Consultant shall attempt in good faith to reach an agreement. In the event the Independent Consultant and W. J. Nolan are unable to agree on an alternative proposal, W. J. Nolan shall abide by the recommendation of the Independent Consultant.
     
  5. Within 60 days of transmittal of the Independent Consultant's Initial Report, W. J. Nolan shall in writing advise the Independent Consultant and the Commission of the recommendations and proposals that it is adopting.
     
  6. The Independent Consultant shall complete the aforementioned review and submit a written Final Report thereon to W. J. Nolan and to the Commission's staff within 270 days after the date of this Order. The Final Report shall recite the efforts the Independent Consultant undertook to review W. J. Nolan's supervisory functions, compliance mechanisms, and other policies and procedures, set forth the Independent Consultant's recommendations and W. J. Nolan's proposals, and describe how W. J. Nolan is implementing those recommendations and proposals.
     
  7. The Firm shall take all necessary and appropriate steps to adopt and implement all recommendations contained in the Independent Consultant's Final Report.
     
  8. No later than one year after the date of this Order, unless extended pursuant to paragraph i below, the Firm shall submit to the Commission's staff an Affidavit setting forth the details of its efforts to implement the recommendations contained in the Independent Consultant's Final Report and stating whether it has achieved compliance.
     
  9. For good cause shown, and upon receipt of a timely application from the Independent Consultant or W. J. Nolan, the Commission's staff may extend any of the procedural dates set forth above.
     
  10. To ensure the independence of the Independent Consultant, W. J. Nolan: (i) shall not have the authority to terminate the Independent Consultant, without the prior written approval of the Commission's staff; (ii) shall compensate the Independent Consultant, and persons engaged to assist the Independent Consultant, for services rendered pursuant to this Order at their reasonable and customary rates; (iii) shall not be in and shall not have an attorney-client or any other doctrine or privilege to prevent the independent Consultant from transmitting any information, reports, or documents to the Commission or its staff.
     
  11. To further ensure the independence of the Independent Consultant, for the period of the engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with W.J. Nolan, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. Any firm with which the Independent Consultant is affiliated in performance of his/her duties under this Order shall not, without prior written consent of the Commission's staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with W. J. Nolan, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.

Accordingly, IT IS HEREBY ORDERED that

  1. W.J. Nolan shall be, and hereby is, censured; and
     
  2. W.J. Nolan shall within thirty (30) days of the entry of the Order, pay disgorgement and prejudgment interest in the total amount of $192,028.29 to the United States Treasury. Such payment shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the Securities and Exchange Commission; (c) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (d) submitted under cover letter which identifies W.J. Nolan & Co. as a respondent in this proceeding, the file number of this proceeding, a copy of which cover letter and money order or check shall be sent to James L. Kopecky, Midwest Regional Office, Securities and Exhange Commission, 500 W. Madison, Suite 1400, Chicago, Illinois, 60661; and
     
  3. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, W.J. Nolan shall cease and desist from committing or causing any violation and any future violation of Sections 15(b)(7) and 15(g) of the Exchange Act, and Rules 15b7-1, 15g-2, 15g-3 and 15g-6 promulgated thereunder.
     
  4. Nolan shall be suspended from acting in a supervisory and proprietary capacity with any broker or dealer for a period of nine (9) months; and
     
  5. Nolan shall, within thirty (30) days of the entry of the Order, pay a civil money penalty in the amount of $10,000 to the United States Treasury. Such payment shall be (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the Securities and Exchange Commission; (c) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (d) submitted under cover letter which identifies William J. Nolan as a respondent in this proceeding, the file number of this proceeding, a copy of which cover letter and money order or check shall be sent to James L. Kopecky, Midwest Regional Office, Securities and Exhange Commission, 500 W. Madison, Suite 1400, Chicago, Illinois, 60661.

By the Commission.

Jonathan G. Katz
Secretary

 

http://www.sec.gov/litigation/admin/33-8006.htm


Modified: 09/26/2001