Securities Exchange Act Of 1934
Release No. 46770 / November 5, 2002
Administrative Proceeding
File No. 3-10926
In the Matter of U.S. BANCORP PIPER Respondent. |
: : : : : : : : |
ORDER INSTITUTING PROCEEDINGS, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") against U.S. Bancorp Piper Jaffray Inc. ("Piper Jaffray").
II.
In anticipation of the institution of these proceedings, Piper Jaffray has submitted an Offer of Settlement (the "Offer") 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 as to the Commission's jurisdiction over it and the subject matter of these proceedings, and the findings contained in Section III.1 below, which are admitted, Piper Jaffray consents to the entry of this Order Instituting Proceedings, Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Order"), as set forth below.
III.
On the basis of this Order and Piper Jaffray's Offer, the Commission finds1 that:
Respondent
1. Piper Jaffray, headquartered in Minneapolis, Minnesota, is a broker-dealer registered with the Commission. Piper Jaffray has numerous branch offices, including one in Sioux Falls, South Dakota.
Summary
2. From January 1998 through September 2001, a registered representative ("Registered Representative") of Piper Jaffray's Sioux Falls branch office and his customer ("Customer") engaged in a "marking the close" scheme to affect the closing price of the common stock of a publicly-traded company. Throughout most of the relevant period, the Registered Representative also acted as branch manager of the Sioux Falls office. The Registered Representative and the Customer succeeded in this scheme by placing the day-end trades at artificially higher prices in this stock thereby increasing improperly the stock's closing price. The purpose behind this scheme was so the Customer would satisfy or reduce the amount of numerous margin calls on his brokerage accounts at Piper Jaffray. The Registered Representative materially participated in this scheme by placing the trades and calculating with the Customer the amount of appreciation necessary in the security to avoid margin calls with full knowledge that these trades were intended to artificially increase the closing price of the stock. The Registered Representative also marked the close in his personal brokerage account to further this scheme. Piper Jaffray failed reasonably to supervise its Registered Representative in this regard and failed to have adequate systems in place to detect or prevent this marking the close scheme.
Marking the Close Violations
3. Marking the close "is the practice of attempting to influence the closing price of a stock by executing purchases or sale orders at or near the close of the market." Thomas C. Kocherhans, 60 S.E.C. Docket 2210, 1995 WL 723989, at *2 (1995). The Commission has held that the practice of marking the close constitutes market manipulation and thus violates Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See e.g., id.; Alexander Scheshunoff, 62 S.E.C. Docket 821, 1996 WL 387682, at *2 (1996); Harry S. Pack, 54 S.E.C. Docket 387, 1993 WL 183820 (1993). Furthermore, according to Congress, market manipulation subverts a primary objective of the Exchange Act, which is "to give to investors markets where prices may be established by free and honest balancing of investment demand with investment supply." H.R. Rep. No. 1383, 73d Cong., 2d Sess. (1934) at 11.
4. From January 1998 through September 2001, the Registered Representative and his Customer successfully marked the close, i.e., artificially inflated the closing price, of a particular stock on at least 99 days in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. During this period, the Customer made at least 136 purchases of 100 share blocks of this security within the last five minutes of the trading day, and successfully marked the close on 91 separate occasions. The Registered Representative placed the trades knowing the trades were intended to raise the closing price of the stock, which he knew would then increase the value of the Customer's portfolio and avoid or reduce the amount of margin calls. In fact, the Registered Representative and Customer calculated the amount of appreciation necessary in the stock for the Customer to satisfy margin calls. The Registered Representative also personally purchased this security 9 times within the final five minutes of trading and succeeded in effecting the last trade on 8 occasions. As a result of these end-of-the-day trades, the stock's market price closed higher on at least 99 occasions.
5. The purpose of the Registered Representative and Customer's scheme was to satisfy the steady stream of margin calls the Customer was receiving on his brokerage accounts at Piper Jaffray. From 1998 through September 2001, the Customer received a large number of margin calls on his accounts at Piper Jaffray. Piper Jaffray utilized the closing price of securities to calculate the value of a portfolio for purposes of determining whether an account was subject to a margin call. Thus, by artificially inflating the closing price, the Customer was able to avoid or reduce the amount of margin calls on his accounts at Piper Jaffray.
6. The Customer is the Registered Representative's largest customer with respect to commissions earned. In fact, commissions generated by the Customer's accounts at Piper Jaffray represented approximately twenty-five percent of the Registered Representative's commissions in earnings.
Piper Jaffray Failed to Prevent or Detect Marking the Close Activities
7. Because of deficiencies with Piper Jaffray's surveillance procedures and with its structure for supervising "producing" branch managers, i.e., managers who also act as registered representatives for customers, the firm failed to detect and prevent the misconduct of the Registered Representative. These deficiencies included lack of adequate surveillance reports, a flawed supervisory structure for "producing" branch managers, and miscommunication regarding its supervisory procedures.
8. During this manipulation, Piper Jaffray did not have an exception report capable of identifying end-of-the-day trades in its customer accounts; it instead relied on order ticket approval and/or review to detect possible marking the close violations. The supervisor reviewing "producing" branch managers, however, did not have access to order tickets.
9. As discussed above, until January 2001, the Registered Representative was branch manager of the Sioux Falls office. The Branch Office Manager Account Supervisor, typically referred to as "BOMAS" by Piper Jaffray, was the supervisor primarily responsible for the supervision of more than 70 "producing" branch managers. Accordingly, the BOMAS was responsible for reviewing the Registered Representative's trading activity. However, Piper Jaffray did not provide the BOMAS with information regarding the time the trades were executed, so the BOMAS was unable to detect marking the close violations.
10. Another failure of Piper Jaffray's supervision occurred when the Registered Representative resigned as branch manager in January 2001. As a result of his resignation as branch manager, responsibility for monitoring his trading activity rested with the new branch manager. However, the subsequent branch manager did not begin reviewing order tickets until August 2001, as there was a misunderstanding between the branch manager and compliance resulting in the branch manager erroneously believing that it was not necessary for him to review order tickets. As a result, there was no review of order tickets in the Sioux Falls branch from January 2001 through August 2001.
11. On February 11, 1998 the National Association of Securities Dealers Regulation, Inc. ("NASDR") requested information from Piper Jaffray regarding the trading activity in the Customer's accounts. The NASDR request was unusually specific in that it was limited to trading in the particular security for which the Registered Representative and his Customer marked the close and also sought information pertaining to margin calls on the Customer's accounts. The NASDR letter requested "a list of all margin calls issued" on four of the Customer's accounts and descriptions as to how the margin deficits were cured. Piper Jaffray responded to the NASDR request but did not follow-up with its own internal investigation. In fact, neither the Registered Representative nor his supervisor was informed of the NASDR inquiry.
12. Piper Jaffray has instituted remedial measures to improve its supervisory procedures and structure. First, Piper Jaffray created an exception report to detect potential marking the close violations. Additionally, Piper Jaffray has changed its branch manager supervisory structure by eliminating the BOMAS position effective July 1, 2002 and creating a group of at least eight District Sales Supervisors who are responsible for branch manager supervision in defined geographic areas. As a result, Piper Jaffray now has at least eight, as opposed to only one, supervisors to supervise the more than 70 producing branch managers.
Piper Jaffray's Failure to Supervise
13. Section 15(b) of the Exchange Act requires broker-dealers to supervise reasonably, with a view toward preventing violations of the federal securities laws, persons subject to their supervision. This section also provides a defense to broker-dealers who can show that they have "established procedures and a system for applying such procedures" which would be expected reasonably to prevent and detect such violations.
14. 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." See e.g., Smith Barney, Harris Upham & Co., Exchange Act Rel. No. 21813, 1985 SEC LEXIS 2051, at *22 (March 5, 1985). From January 1998 through September 2001, Piper Jaffray failed to meet its responsibility.
15. For the reasons stated above in paragraphs 1-14, Piper Jaffray failed reasonably to supervise its Registered Representative with a view to preventing or detecting his violations of the federal securities laws based upon its ineffective supervisory structure and its lack of a system for detecting potential marking the close violations.
Conclusions
16. The Registered Representative and his Customer's marking the close activities discussed above violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
17. Based on the foregoing, Piper Jaffray failed reasonably to supervise a registered representative subject to its supervision, with a view to preventing violations of Section 10(b) of the Exchange Act and Rules 10b-5 thereunder, within the meaning of Section 15(b) of the Exchange Act.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Piper Jaffray's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED that:
A. Piper Jaffray be, and hereby is, censured pursuant to Section 15(b)(4) of the Exchange Act.
B. Piper Jaffray shall, within 30 days of the entry of the Order, pay a civil money penalty of $100,000 to the United States Treasury. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that clearly identifies Piper Jaffray as the 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 Mary Keefe, Regional Director, U.S. Securities and Exchange Commission, Midwest Regional Office, 175 W. Jackson Blvd., Suite 900, Chicago, IL 60604.
C. Piper Jaffray shall comply with its undertakings to:
1. Maintain the revised procedures, as described above, that it implemented to monitor end of the day trades through review of the marking the close exception report.
2. Maintain the District Sales Supervisor position. The District Sales Supervisors will replace the BOMAS for supervising "producing" branch managers. Piper Jaffray will employ at least eight individuals as District Sales Supervisors. The District Sales Supervisors will be responsible for "producing" branch manager supervision in defined geographic areas.
D. With respect to the undertakings referred to in Section IV.C., nothing herein will prevent Respondent from adopting additional policies and procedures or improving upon the policies and procedures adopted pursuant to the undertakings.
By the Commission.
Jonathan G. Katz
Secretary
Endnote
1 The findings herein are made pursuant to Piper Jaffray's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.