UNITED STATES OF AMERICA
In the Matter of
ABN AMRO INCORPORATED,
|ORDER INSTITUTING PUBLIC
MAKING FINDINGS AND
IMPOSING REMEDIAL SANCTIONS
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") against ABN AMRO Incorporated.1
In anticipation of the institution of these administrative proceedings, ABN AMRO Incorporated has submitted an Offer of Settlement that the Commission has determined to accept.2 Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and prior to a hearing and without admitting or denying the findings set forth herein, except as to jurisdiction over ABN AMRO Incorporated, and over the subject matter of these proceedings, which it admits, ABN AMRO Incorporated consents to the entry of this Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions. 3 The Commission has determined that it is appropriate and in the public interest to accept the Offer of Settlement from ABN AMRO Incorporated, and accordingly is issuing this Order.
Based on the foregoing, the Commission finds that:
ABN AMRO Incorporated ("AAI"), headquartered in Chicago with offices in New York, is a registered broker-dealer pursuant to Section 15 of the Exchange Act and maintains an international equities sales trading desk at its New York location.
B. Other Parties
Oechsle International Advisors, L.L.C. ("Oechsle") is a registered investment adviser headquartered in Boston with approximately $11.8 billion under management as of December 31, 1998. Oechsle services institutional investors and high net worth individuals through a series of separate client accounts and commingled investment vehicles.
Andrew S. Parlin, age 39, lives in Massachusetts. During the relevant time, Parlin had primary responsibility for managing a number of client accounts including those managed pursuant to Oechsle's Select management approach. He was also one of seven managing principals and served on Oechsle's five-member executive committee.
Angelo Iannone, age 38, lives in Old Westbury, New York. During the relevant period, Iannone was head of AAI's international equities sales trading desk in New York, and had a long-standing client relationship with Oechsle and Parlin, pre-dating his employment with AAI. In addition, Iannone was responsible for hiring and supervising other sales traders on AAI's international equities sales trading desk.
On several occasions during 1998, Andrew Parlin, then a principal and portfolio manager at Oechsle, and Angelo Iannone, then the head of international equities sales trading at AAI, placed purchase orders on behalf of Oechsle in five securities heavily owned by Parlin's advisory clients shortly before the close of the market for the purpose of increasing the closing price of those securities, a practice known as "marking the close." At the time of the trading, the client accounts under Parlin's supervision maintained substantial portfolio positions in the involved securities. By intentionally paying a higher price to buy securities at the end of the day and the end of the reporting period, Parlin sought to cause, and, in some cases caused a short-term increase in the overall value of certain securities held in the accounts under his management. In certain instances the closing price increases coincided with the fiscal period ends. In accepting these orders from Parlin, Iannone violated AAI's policies and procedures prohibiting such conduct. Nevertheless, AAI had inadequate systems to implement the policies and procedures in place to detect and prevent Iannone's violations.
D. Trading in Question
Telephone conversations from AAI's telephone lines at the international equities sales trading desk in New York contain explicit discussions - between Parlin and Iannone and between Iannone and others - about moving up the prices of foreign equity securities prices at or near market close. Many of these conversations and related trades occurred on or near the last trading days of Oechsle's fiscal quarters ended June 30 and September 30, 1998. The conversations identify five securities in which Parlin and Iannone discussed moving up the price of the security by marking the close. Those securities are: (1) British Biotech plc, a U.K. pharmaceutical concern primarily traded on the London Stock Exchange; (2) Volkswagen A.G., the German automaker whose primary trading market is the Frankfurt Exchange; (3) Banca di Roma SpA, the Italian financial services firm whose securities are traded on the Milan Stock Exchange; (4) the ADRs of Pohang Iron and Steel, a Korean steel manufacturer, which are traded on the NYSE; and (5) Renault, a French automaker whose primary market is the Paris Stock Exchange. As mentioned above, these securities were among the largest positions in the portfolios Parlin managed.
Over a three-day period, Iannone and Parlin had numerous conversations regarding how to implement Parlin's instruction of September 28, 1998 to close the price of British Biotech plc higher by the end of the quarter, with 40 pence being the desired target. On September 29, 1998, Iannone asked Oechsle's head trader ". . . what the price target is of BBG." Later, Iannone was reminded by Oechsle's trader that "the main objective is the end of the month. . . ." In addition, Parlin reminded Iannone "my strategy on BBG, it's a two day, it's a two day 40 strategy." To which Iannone responded ". . . the longer we wait, the better we're gonna be." Finally, on September 30, 1998, Iannone informed Parlin "I bought a hundred early on just so someone wouldn't open it down low." Later in the morning, Iannone and Parlin discussed how many shares it would take to get BBG to 40. During the three-day period, many of these conversations included detailed discussions of the amount of Oechsle's clients' funds and number of shares necessary to fulfill this strategy.
Regarding Pohang Iron and Steel, Iannone and Parlin's intent to move the price is revealed in a discussion where Parlin asked Iannone "should I nudge it a bit?" To which, Iannone answered, "At this point in time, you've got so much stock under your belt. . . . . When the wind's at your back, we're going to make it . . . storm." Two days prior to attempting, albeit unsuccessfully, to move the price of Pohang, Iannone and Parlin began to discuss their plan for moving the stock at the end of the quarter. As for Renault, Parlin asked Iannone what it would take to make Renault look more constructive at the closing because he wanted to build a platform the day before the end of the quarter. Iannone responded that it would be easy because "we can move the queue so easy, we'll just have to wait till close to the close." The following day, Parlin and Iannone confirmed that they would purchase an additional 80,000 shares of Renault on the close. Thereafter, due to heavy selling of Renault stock, Parlin and Iannone made no purchases at the close. Regarding Volkswagen A.G., Parlin informed Iannone that he was a buyer of 67,000 shares and that he wanted to make the stock "scream." Iannone responded "we're going to do it on the close," Volkswagen's price did not in fact increase. As for Banca di Roma SpA, on June 30, 1998, Parlin told Iannone "it's hard to do uh, this window dressing when markets suck." Similarly, on September 30, 1998, just three minutes prior to the close of the Italian Exchange, Iannone asked Parlin where he would like to close Banca di Roma, and Parlin responded "if you could close that up five percent, I'd love it." Despite Parlin's purchases, Banca di Roma's stock price fell.
E. AAI's Systems Did Not Detect the Improper Trading by Iannone
AAI had written procedures that required its personnel "to refuse any transaction which they have reason to believe may have been structured or timed to create an appearance of activity or liquidity or to affect or influence improperly the bid, offer, or market price of a security. Situations in which such structuring may be implicated are to be brought to the attention of the Compliance Officer." However, AAI failed to adequately implement with respect to Iannone its policies and procedures that prohibited the trades discussed herein. In particular, Iannone's sales trading in this regard was not effectively reviewed for compliance with the firm's policy. His position as a supervisor should not have insulated his own sales trading conduct from effective oversight.
F. AAI's Discovery of Iannone's Conduct and Subsequent Actions
After receiving an inquiry about British Biotech from the London Stock Exchange, AAE contacted AAI, which in turn conducted its own internal investigation, placed Iannone on administrative leave and notified the Commission. Based upon its internal investigation, AAI terminated Iannone's employment for cause. AAI presently requires that any significant size order received for execution in the final 30 minutes of trading in the relevant market, which for example, may exceed 5% of that day's trading volume in that security, must be reviewed and approved by a supervisor other than the sales trader. More importantly, any such order taken directly by the head of the desk must be reviewed and approved by his or her supervisor.
Section 15(b)(4)(E) of the Exchange Act requires broker-dealers to supervise reasonably, with a view to preventing violations of the federal securities laws, persons subject to their supervision. In this case, by engaging in sales trading, described above, intended to increase the closing prices of portfolio securities, Iannone violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Section 15(b)(4)(E)(i) provides a defense to broker-dealers who can show that they have "established procedures and a system for applying such procedures" which would reasonably be expected to prevent and detect such violations. The Commission has emphasized that the "responsibility of broker-dealers to supervise their employees by means of effective, established procedures is a critical component in the federal investor protection scheme regulating the securities markets." Smith Barney, Harris Upham & Co., Exchange Act Rel. No. 21813, 32 SEC Docket 999, 1010 (Mar. 5, 1985).
The Commission has repeatedly emphasized that supervision is an essential function of the broker-dealer. "It is critical for investor protection that a broker establish and enforce effective procedures to supervise its employees." Donald T. Sheldon, Exchange Act Release No. 31475, 52 SEC Docket 3826, 3855 (November 18, 1992), aff'd 45 F.3d 1515 (11th Cir. 1995). Establishment of policies and procedures alone is not sufficient to discharge supervisory responsibility. It also is necessary to implement measures to monitor compliance with those policies and procedures. Thomson & McKinnon, Exchange Act Release No. 8310, 43 S.E.C. 785, 788 (May 8, 1968) ("Although it was registrant's stated policy . . . it failed to establish an adequate system of internal control to insure compliance with such policy.").
Here, AAI failed to have adequate systems to implement its policy that prohibited sales trading such as that engaged in by Iannone. Despite Iannone's senior position as the head of the international equities sales trading desk, his sales trading as described herein should nevertheless have been effectively reviewed periodically to ensure compliance with such procedure and to ensure adherence to the securities laws.
By reason of the foregoing, the Commission finds that in 1998 ABN AMRO Incorporated did not have adequate systems to implement its written policies and procedures with respect to the trades effected by Angelo Iannone discussed above, and thus, within the meaning of Section 15(b)(4)(E) of the Exchange Act, ABN AMRO Incorporated failed reasonably to supervise Iannone with a view towards preventing his violations discussed above.
Accordingly, IT IS HEREBY ORDERED that ABN AMRO Incorporated
A. Be, and hereby is, censured; and
B. Pay a civil money penalty of $200,000, within ten (10) business days of the entry of the Order, by wire transfer, U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Gregory S. Bruch, Assistant Director, Securities and Exchange Commission, 450 Fifth St., N.W., Washington, DC 20549-0703.
By the Commission.
Jonathan G. Katz
|1||The Commission simultaneously filed settled proceedings against an investment adviser, former portfolio manager, and the trader, respectively, referred to below, In the Matter of Oechsle International Advisors, L.L.C. (Admin. Proc. No. 3-10554); In the Matter of Andrew Parlin (Admin. Proc. No. 3-10555); and In the Matter of Angelo Iannone (Admin. Proc. No. 3-10553).|
|2||In determining to accept the Offer of Settlement, the Commission considered the remedial acts promptly undertaken by AAI and the cooperation afforded the Commission staff. In addition, ABN AMRO Equities (UK) Ltd. ("AAE") paid a fine of £250,000 in settlement in March 1999 of a related investigation by the London Stock Exchange.|
|3||The findings herein are made pursuant to AAI's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
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