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U.S. Securities and Exchange Commission

United States of America
Before the
Securities and Exchange Commission

Securities Exchange Act of 1934
Release No. 48748 / November 5, 2003

Administrative Proceeding
File No. 3-11328


In the Matter of

KIRKPATRICK, PETTIS, SMITH, POLIAN INC., PETER N. LAHTI AND GREGORY D. ADAMS,

Respondents.


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ORDER INSTITUTING ADMINISTRATIVE 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 against Kirkpatrick, Pettis, Smith, Polian Inc. ("Kirkpatrick"), Peter N. Lahti ("Lahti"), and Gregory D. Adams ("Adams") (collectively, "Respondents") pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act").

II.

In anticipation of the institution of these proceedings, Kirkpatrick, Lahti, and Adams have submitted Offers of Settlement (the "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 findings herein, except as to the Commission's jurisdiction over them and over the subject matter of these proceedings, Kirkpatrick, Lahti, and Adams consent to the entry of this Order Instituting Administrative 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 the Offers submitted by Respondents Kirkpatrick, Lahti, and Adams, the Commission finds1 that:

Respondents

1. Kirkpatrick, a Nebraska corporation headquartered in Omaha, Nebraska, is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act (File No. 8-2441). Kirkpatrick formerly had several equity retail branch offices, including branch offices in Denver and Englewood, Colorado. These equity retail offices have been closed, and Kirkpatrick no longer operates a general equities retail securities business. At all relevant times and currently, Kirkpatrick operates a full service capital markets and fixed income business, which is not the subject of this proceeding. Kirkpatrick is a member of the National Association of Securities Dealers, Inc.

2. Lahti, age 59, of Omaha, Nebraska, was Kirkpatrick's Chairman, President, CEO, and was responsible for the equity retail securities business, from 1998 until his resignation in September 2000. He worked in Kirkpatrick's Omaha office.

3. Adams, age 49, of Gulf Breeze, Florida, was associated with Kirkpatrick from 1995 until his resignation in August 2000. During the relevant time period, Adams was the branch manager for Kirkpatrick's equity retail business in the firm's Denver and Englewood offices and was located in the Denver office. On December 12, 1996, in connection with conduct that arose before his employment by Kirkpatrick, the NASD censured and fined Adams $5,000 for signing, without authorization, the names of seven customers in connection with securities transactions.

Other Relevant Entity

4. Creative Host, Inc. ("Creative Host") is a San Diego-based company that runs concessions in airports. At all relevant times, its stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the Nasdaq Stock Market under the trading symbol "CHST."

Introduction

5. From November 1999 through May 2000 a registered representative ("Registered Representative") of Kirkpatrick's Englewood, Colorado equity retail branch office, in concert with others, engaged in a market manipulation scheme to artificially affect the price of the stock of Creative Host. During the scheme, the Registered Representative, in concert with others, helped drive up Creative Host's stock price 3,618% from $0.78 to $29 per share. During the scheme, the Registered Representative received ill-gotten commissions of $950,562 on trades he caused to be executed in Creative Host stock. He also profited directly from trading in Creative Host stock in a nominee account he controlled, receiving ill-gotten trading profits of $546,781. Kirkpatrick, Lahti, and Adams failed reasonably to supervise the Registered Representative with a view to detecting and/or preventing this manipulative scheme.

The Registered Representative Engaged in Efforts to Increase Creative Host's Stock Price

6. In September 1999, the Registered Representative formulated a written plan to inflate Creative Host's stock price. The plan called for the Registered Representative to restrict the supply of Creative Host stock by (1) having an investor buy up to 9.9% of Creative Host's shares "quietly;" (2) directing an investor to purchase 80,000 shares in a pending sale of a 140,000-share block; and (3) causing his clients to buy 200,000 shares. To artificially increase demand for stock, the plan called for the Registered Representative to (1) hire an analyst to write a research report; and (2) pay an Internet site to tout the stock with a buy recommendation. The written plan stated that it presented an opportunity for "stock appreciation," and a "rare opportunity to move a market."2

7. Beginning in November 1999, the Registered Representative executed his written plan, having one of his clients buy over 22% of Creative Host's outstanding shares and his other clients acquire large amounts of Creative Host stock. The Registered Representative used aggressive sales tactics to cause his clients to buy over 200,000 additional shares of Creative Host, namely high-pressure sales tactics, unauthorized trading, and falsely stating that Creative Host had a "virtual monopoly" on airport concessions. Indeed, from December 31, 1999 to at least June 2000, Kirkpatrick's client accounts held between 70% and 90% of the company's free trading shares, and the Registered Representative was responsible for a substantial portion of the firm's trading in the stock. In addition, he targeted his and his clients' purchases of Creative Host stock to broker-dealers he identified through monthly securities position listing reports prepared by the Depository Trust Company ("DTC").3 In addition to reducing the float, he took several further steps to restrict the supply of the security as part of the scheme to affect the price of Creative Host's stock artificially, including, but not limited to refusing to execute sell orders when instructed to do so and persuading his clients, by misrepresenting the costs and risks, to use margin in order to increase sales.

8. In furtherance of his scheme, the Registered Representative also carried out the steps of the written plan designed to create artificial demand for the security.

a. First, he created this demand through the use of false and misleading touts on the Internet. In May 2000, when Creative Host's stock price had increased to the $15-$17 range, the Registered Representative hired Internet stock touters who, without reasonable basis, projected in documents they posted on the Internet that Creative Host's share price would rise to $30 near term and to $60-$70 mid-term. There was no reasonable basis for the projections because there had been no change in Creative Host's business, and in fact, Creative Host continued to operate at a net loss. During the week following commencement of touting by the Internet touters, Creative Host's stock price increased 30.7%.

b. Second, in order to affect the price of Creative Host stock the Registered Representative also circumvented Kirkpatrick's internal market making policies. To avoid risk, Kirkpatrick had an internal policy to end each day "flat" so that it would have no position in the stocks in which it made a market. Because Kirkpatrick typically had little or no inventory, Kirkpatrick's order desk had to execute the orders placed at the end of the day by purchasing or selling stock on the open market rather than from its own inventory. The Registered Representative was aware of Kirkpatrick's policy, and he exploited it to raise Creative Host's stock price towards the end of the day by placing buy orders on a delayed basis.

c. Third, the Registered Representative generated artificial demand for Creative Host stock by exploiting Kirkpatrick's market making activities through the numerous buy orders he placed. The Registered Representative's large volume of buy orders at successively higher prices — in conjunction with his delayed orders and Kirkpatrick's policy of ending each day flat — facilitated Kirkpatrick's price leadership by placing additional pressure on Kirkpatrick's order desk to enter numerous bid quotes for the security at successively higher prices in order to obtain stock to fill the Registered Representative's orders. Indeed, Kirkpatrick was the exclusive high bidder twice as often as the nearest of the other 30 market makers. Moreover, Kirkpatrick rarely decreased Creative Host's ask price.

d. Finally, the Registered Representative also engaged in prearranged trading to create the appearance of active demand for Creative Host stock.4 The Registered Representative spoke to traders at other brokerage firms about Creative Host and negotiated trades that he then gave to Kirkpatrick's order desk for execution along with instructions to contact the specific trader with whom the Registered Representative had negotiated. Even though Kirkpatrick instructed the Registered Representative previously to cease contacting other market makers, the Registered Representative continued to prearrange trades until at least the first week of May 2000.

9. Kirkpatrick made inquiries beginning in December 1999 concerning the Registered Representative's trading concentration in Creative Host stock. In mid-May 2000, Kirkpatrick began imposing restrictions on trading in Creative Host stock due to concerns that the Registered Representative's activities might be affecting the market price of Creative Host stock. On May 29, 2000, Kirkpatrick decided to cease making a market in the stock due to various concerns, including Kirkpatrick's concentrated position and the possibility that the Registered Representative's trading activities may have affected Creative Host's share price. On June 16, 2000, in light of additional information concerning the activities of the Registered Representative uncovered during an internal investigation, Kirkpatrick further restricted the Registered Representative's ability to solicit orders in Creative Host. The combination of these restrictions plus the lack of significant legitimate support for Creative Host and the high percentage of shares held in margin accounts resulted in numerous margin calls from Kirkpatrick to the Registered Representative's customers. Kirkpatrick then began to sell the customers' shares in Creative Host and other stocks in order to satisfy unanswered margin calls. From mid-June until early August 2000, Creative Host's share price dropped from $29 to $4.12 per share.

10. The Registered Representative's activities discussed above violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Kirkpatrick Failed Reasonably to Supervise

11. Section 15(b)(4)(E) of the Exchange Act provides for the imposition of a sanction against a broker or dealer who "has failed reasonably to supervise, with a view to preventing violations of the securities laws, another person who commits such a violation, if such other person is subject to his supervision." See In the Matter of Smith Barney, Harris Upham & Co., Inc., Exchange Act Release No. 21813 (March 5, 1985). The Commission's policy regarding failure to supervise is well established. See In the Matter of John H. Gutfreund, et al., 51 S.E.C. 93, 108 (1992). "The Commission has long emphasized that the responsibility of broker-dealers to supervise their employees is a critical component of the federal regulatory scheme." Gutfreund, 51 S.E.C. at 108. A broker-dealer must also have a system of follow-up and review if red flags are detected. In the Matter of W.J. Nolan & Co., et al., Exchange Act Release No. 44833 (September 24, 2001). Kirkpatrick failed to develop a system for implementing its procedures that could reasonably be expected to prevent and detect securities law violations, such as the Registered Representative's manipulative activities.

Kirkpatrick Failed to Establish an Adequate System to Implement Its Procedures to Prevent and Detect Manipulative Activity

12. Kirkpatrick failed to establish a system to implement its procedures to prevent and detect potential manipulative activity. In particular, the firm lacked a system to ensure prompt response to potential manipulative conduct.

13. Under Kirkpatrick's written procedures, the firm could restrict or prohibit future purchases in a security where it had a concentrated position. Further, in order to properly price stock for which Kirkpatrick was a market maker, to monitor for suspicious, potentially manipulative, activity and to monitor whether the firm's margin maintenance requirements were appropriate for the level of concentration in a stock, Kirkpatrick's procedures required that the Compliance and Risk Departments periodically determine whether the firm appeared to dominate and control the market for the stock. In early December 1999, the Risk Department learned that the firm's recent trading in Creative Host on behalf of customers exceeded 50% of the daily trading volume on a consistent basis. The firm concluded that the high volume of trading in Creative Host was possibly a short-term phenomena, and decided to monitor the situation. By December 31, 1999, Kirkpatrick's customers held at least 70% of Creative Host's free trading shares. In January 2000, Kirkpatrick's Risk Department expressed concern regarding Kirkpatrick's concentrated position in Creative Host stock to increase the firm's margin maintenance requirement to 50%. On May 29, 2000, Kirkpatrick ceased making a market in Creative Host stock based on concerns regarding volume concentration and the possibility that the Registered Representative's trading activities may have affected Creative Host's share price. By the end of May 2000, Kirkpatrick's customers held 90% of Creative Host's free trading shares.

14. Kirkpatrick should have acted more promptly in response to this high concentration in Creative Host shares. The firm had recently responded promptly to concerns raised within the firm over Kirkpatrick's concentrated position in another stock that the Registered Representative promoted to his customers, for which Kirkpatrick made a market at the Registered Representative's request and had engaged, at Lahti's instruction, an outside law firm to provide regulatory guidance concerning the possibility that the firm dominated and controlled the market in that other stock. Even though the firm's procedures allowed it to restrict or prohibit trading where it had a concentrated position in a security, Kirkpatrick failed to have a reasonable system in place for prompt and meaningful response regarding all position concentrations.

15. Furthermore, on May 16, 2000, Kirkpatrick's Risk Department informed Lahti that it was concerned that the Registered Representative may be affecting the price of Creative Host's stock. These concerns were based on its perception, after a review of recent trading activity, that the Registered Representative seemed to find a buyer for anyone who wanted to sell shares, thereby preventing shares from going freely to the market. On May 16, 2000, Kirkpatrick prohibited the Registered Representative from personally trading Creative Host in accounts in his name or over which he had control or discretion. In May 2000, Lahti again caused Kirkpatrick to engage an outside law firm to conduct an investigation into the trading activities of the Registered Representative. Kirkpatrick still allowed the Registered Representative to solicit Creative Host stock orders and communicate with his customers. Creative Host's stock price continued to rise. From May 16, 2000 to May 26, 2000, the stock price rose from $23.88 to $26.50 per share.

16. Although Kirkpatrick raised the margin maintenance requirement in Creative Host to 80% in early June, impeding further significant purchases on margin, Kirkpatrick did not take additional steps to restrict the Registered Representative's activities until mid-June. Creative Host's stock price continued to rise during that time, from $26.50 per share on May 26, 2000, to an all-time high of $29 per share on June 15, 2000. On June 16, 2000, Kirkpatrick prohibited the Registered Representative from soliciting purchase orders in Creative Host stock. Only then did the price begin to fall. Had Kirkpatrick had in place an adequate system to apply its procedures to monitor for and immediately respond to indications of manipulative activity, such as requiring complete restrictions on the Registered Representative's activities related to Creative Host stock, it is likely that the Registered Representative's scheme could have been detected earlier or prevented.

17. Based on the foregoing conduct, Kirkpatrick failed reasonably to supervise the Registered Representative with a view to detecting and/or preventing the Registered Representative's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Lahti Failed Reasonably to Supervise

18. Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4)(E) of the Exchange Act, authorizes the Commission to sanction a person associated with a broker or dealer if it finds that it is in the public interest to do so and that the person "failed reasonably to supervise, with a view to preventing violations of the [federal securities laws]..., another person who commits such a violation, if such other person is subject to his supervision." A broker-dealer's president is responsible for compliance with all requirements imposed on his firm unless he reasonably delegates particular functions to others and neither knows, nor has reason to know, that such person's performance is deficient. See In re Gary E. Bryant, 51 S.E.C. 463, 471 (1993). As Chairman, President, and CEO, Lahti was responsible for developing a system for applying the firm's procedures that would reasonably be expected to prevent and detect the Registered Representative's violations. In addition, Lahti was responsible for taking reasonable follow-up action when he became aware of a pattern of "red flags" regarding the Registered Representative's activities in Creative Host. "Red flags and suggestions of irregularities demand inquiry as well as adequate follow-up and review. When indications of impropriety reach the attention of those in authority, they must act decisively to detect and prevent violations of the federal securities laws." In re Edwin Kantor, 51 S.E.C. 440, 447 (May 20, 1993).

Lahti Failed to Establish an Adequate System to Implement the Firm's Procedures to Prevent and Detect Manipulative Activity

19. As Kirkpatrick's president, Lahti was responsible for developing a system for applying the firm's procedures that would prevent and detect the Registered Representative's violations. As discussed above in paragraphs 12-16, Kirkpatrick failed to have in place an adequate system for applying the firm's procedures to detect and prevent the Registered Representative's manipulative activity, such as a mechanism to meaningfully and promptly follow-up on position accumulation in a security.

20. In response to indications that the Registered Representative's activities could be affecting the market price for Creative Host stock, Kirkpatrick placed restrictions upon the Registered Representative that proved insufficient to prohibit the continued violations, and it did not place appropriate prohibitions upon the Registered Representative promptly enough. As a result, the Registered Representative continued his scheme to affect the price of Creative Host stock. Had Lahti ensured that Kirkpatrick developed a system to implement the firm's procedures to identify and respond to indications of manipulative activity, it is likely that the Registered Representative's scheme could have been detected earlier or prevented.

Lahti Did Not Respond Adequately to Red Flags

21. Lahti was responsible for taking reasonable follow-up action when he became aware of a pattern of "red flags" regarding the Registered Representative's activities in connection with Creative Host, namely information he received regarding prearranged trades with market makers and weekly notices regarding margin debit limits. Had Lahti responded to any of these red flags appropriately, it is likely that the scheme could have been detected earlier or prevented.

22. As part of its margin risk control procedures, Kirkpatrick's Risk Department reviewed concentrated margin positions. When a predetermined threshold was met, the Risk Department reviewed the security's price and volume history to determine the extent of the firm's credit exposure. The Risk Department performed this review to determine if the firm needed to implement additional margin restrictions.

23. On January 26, 2000, the Risk Department informed Lahti, Adams and the Registered Representative that it had reviewed the firm's position in Creative Host because it exceeded the margin threshold. As a result, the Risk Department increased the margin maintenance requirement and continued to review the firm's credit exposure each week. Thereafter, the Risk Department issued weekly reports to Lahti, Adams and the Registered Representative informing them when the Registered Representative's customers had exceeded the margin debit limit for Creative Host. While Lahti followed up with the Registered Representative at a mid-March 2000 meeting, which Adams attended, concerning the need to come into compliance with the margin maintenance requirement, he did not inquire why the Registered Representative's customers repeatedly exceeded the margin debit limits. Had he done so, it is likely that the Registered Representative's use of margin to restrict the supply of Creative Host stock could have been detected earlier or prevented.

24. Even though the Registered Representative was not a trader, he contacted traders at other market makers to negotiate, or prearrange, trades. The Registered Representative would then contact Kirkpatrick's order desk and tell the traders to bid on the position of the market maker with whom he had just negotiated. The Risk Department informed Lahti and Adams of this conduct just before the Registered Representative began his efforts to affect the price of Creative Host stock. In response, Lahti prohibited the Registered Representative from contacting market makers. But the Registered Representative circumvented this direction and continued to contact market makers and prearrange trades. On December 13, 1999, the Risk Department informed Lahti and Adams of the Registered Representative's continued contacts with market makers. Lahti responded to this red flag by instructing Adams to remind the Registered Representative of the "strict policy" prohibiting contacts with market makers, which Adams did. Lahti took insufficient action to monitor the Registered Representative's compliance with the firm's directives to discontinue contacting market makers.

25. On March 1, 2000, the Risk and Compliance Departments informed Lahti again that the Registered Representative continued to contact market makers and prearrange trades. Lahti then met with the Registered Representative in mid-March and reiterated the firm's directive and threatened termination, but again did not take sufficient steps to monitor the Registered Representative's compliance with the directive. The Registered Representative, however, continued to contact market makers and prearrange trades through at least the first week of May 2000. The Registered Representative continued to prearrange trades through May 2000. Had Lahti taken sufficient steps to monitor the Registered Representative's compliance with the firm directives, it is likely that the Registered Representative's practice of prearranging trades could have been detected earlier or prevented.

26. Based on the foregoing conduct, Lahti failed reasonably to supervise the Registered Representative, a person subject to his supervision, with a view to detecting and/or preventing the Registered Representative's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Adams Failed Reasonably to Supervise

27. During the relevant period, Adams was the branch manager of Kirkpatrick's equity retail business in the firm's Denver and Englewood offices and was based in the Denver office. As branch manager, Adams was responsible for supervision of the registered representatives in these branch offices. A branch manager must respond reasonably when confronted with indications suggesting that a registered representative may be engaging in improper activity. In re Nicholas A. Boccella, Exchange Act Release No. 26574 (Feb. 27, 1989). A supervisor must conduct "adequate follow-up and review" whenever he or she detects unusual trading activity or other irregularities. Gutfreund, 51 S.E.C. at 108.

Adams Failed to Respond Reasonably to Numerous Red Flags Regarding the Registered Representative's Activities Relating to Creative Host

28. As discussed in paragraph 23, on January 26, 2000 the Risk Department informed Lahti and Adams and the Registered Representative that it had reviewed the firm's position in Creative Host because it exceeded the margin threshold. As a result, the Risk Department increased the margin maintenance requirement and continued to review the firm's credit exposure each week. Thereafter, the Risk Department issued weekly reports to Lahti, Adams and the Registered Representative informing them that the Registered Representative's customers had exceeded the margin debit limit for Creative Host. While Lahti followed up with the Registered Representative at a mid-March 2000 meeting Adams attended, concerning the need to come into compliance with the margin maintenance requirement, Adams did not ask why the Registered Representative's customers repeatedly exceeded the margin debit limits. Had he done so, it is likely that the Registered Representative's use of margin to restrict the supply of Creative Host stock could have been detected earlier or prevented.

29. As discussed in paragraph 24, even though the Registered Representative was not a trader, he contacted traders at other market makers to negotiate, or prearrange, trades. The Registered Representative would then contact Kirkpatrick's order desk and tell the traders to bid on the position of the market maker with whom he had just negotiated. The Risk Department informed Lahti and Adams of this conduct just before the Registered Representative began his efforts to affect the price of Creative Host stock. In response, Lahti prohibited the Registered Representative from contacting market makers. But the Registered Representative circumvented this direction and continued to contact market makers and prearrange trades. On December 13, 1999, the Risk Department informed Lahti and Adams of the Registered Representative's continued contacts with market makers. Adams was instructed by Lahti to remind the Registered Representative of the "strict policy" prohibiting contacts with market makers, which Adams did. But Adams did not monitor the Registered Representative's compliance with the firm's directives to discontinue contacting market makers.

30. On March 1, 2000, the Risk and Compliance Departments informed Lahti again that the Registered Representative continued to contact market makers and prearrange trades. Lahti and Adams then met with the Registered Representative, repeated the firm's directive and Lahti threatened termination, but again Adams did not monitor the Registered Representative's compliance with the directive. The Registered Representative continued to contact market makers and prearrange trades through at least the first week of May 2000. Had Adams taken sufficient steps to monitor the Registered Representative's compliance with the firm directives, it is likely that the Registered Representative's practice of prearranging trades could have been detected earlier or prevented.

Adams Failed to Impose Heightened Supervision on the Registered Representative

31. In October 1998, Adams recommended that Kirkpatrick hire the Registered Representative because he was a seasoned registered representative. Kirkpatrick conducted a background investigation of the Registered Representative and found that in 1991 he consented to a $2,500 fine and a ten business-day suspension for aiding and abetting a manipulation, excessive markups, and the unregistered sale of securities in connection with conduct that he supervised at another broker-dealer. The investigation also found that the Registered Representative had a history of financial insolvency and that he was a big producer who had a practice of taking large positions in a small number of stocks in his customers' accounts. Adams received a copy of the background investigation.

32. The firm decided to hire the Registered Representative who was to be located in the Englewood office. To address the concerns regarding his disciplinary history, Lahti directed Adams to keep a close watch on the Registered Representative. Also, Adams knew that Kirkpatrick had set margin debit limits for certain stocks that the Registered Representative's customers held.

33. Although Adams knew about the Registered Representative's prior disciplinary history and was specifically requested by Lahti to closely monitor the Registered Representative, he did not carry out his supervisory responsibilities. He failed to increase the level of supervision of the Registered Representative's activities. Had Adams imposed heightened supervision on the Registered Representative, it is likely that he could have detected earlier or prevented the Registered Representative's scheme.

Adams Failed to Follow Firm Procedures Regarding Review of Correspondence

34. Kirkpatrick's written procedures require branch managers to review and approve all incoming and outgoing faxes the day that the fax is transmitted. The procedures also require branch managers to ensure that there is no unauthorized use of the firm's fax machines. Kirkpatrick's procedures warned that brokers who violate the firm's electronic correspondence policies could be subject to discipline.

35. But Adams, by failing to perform appropriate follow-up and review to ensure that the Registered Representative's correspondence was properly reviewed, did not uncover red flags related to the Registered Representative's scheme. He did not follow up on the review of all fax correspondence generated from the Englewood equity retail office, where the Registered Representative worked. Fax correspondence generated from the Englewood branch office showed that the Registered Representative received fax copies of the DTC monthly securities position listing reports for Creative Host. Since DTC does not send these types of reports to broker-dealers, the very fact that the Registered Representative was receiving them directly from the issuer's outside consultant should have been a red flag that should have prompted further inquiry. In addition, these reports showed that the Registered Representative's customers held a substantial position in Creative Host stock — between 70% and 90% of Creative Host's free trading shares in the December 31, 1999 — May 2000 time frame. Had Adams monitored and enforced Kirkpatrick's policy regarding fax machine usage at the Englewood branch office to ensure the review of outgoing faxes occurred, a draft of the Registered Representative's written plan to affect Creative Host's stock price that was faxed to Creative Host's outside consultant in September 1999 would not have escaped review. Had appropriate supervisory procedures been carried out, it is likely that the Registered Representative's scheme to affect Creative Host's stock price could have been detected earlier or prevented.

36. Based on the foregoing conduct, Adams failed reasonably to supervise the Registered Representative, a person subject to his supervision, with a view to detecting and/or preventing the Registered Representative's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Undertakings

37. Respondent Lahti has undertaken to provide to the Commission, within thirty (30) days after the end of the twelve (12) month suspension period described below, an affidavit that he has complied fully with the sanctions described in Section IV.C. below.

38. Respondent Adams has undertaken to provide to the Commission, within thirty (30) days after the end of the six (6) month suspension period described below, an affidavit that he has complied fully with the sanctions described in Section IV.F. below.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers submitted by Respondents Kirkpatrick, Lahti, and Adams.

ACCORDINGLY, IT IS HEREBY ORDERED THAT:

A. Kirkpatrick is hereby censured.

B. Kirkpatrick shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $100,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Kirkpatrick as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Sandra J. Harris, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 5670 Wilshire Blvd., 11th Fl., Los Angeles, CA 90036.

C. Pursuant to Section 15(b)(6) of the Exchange Act, Respondent Lahti be, and hereby is, suspended from acting in a supervisory capacity with any broker or dealer for a period of twelve (12) months, effective on the second Monday following the entry of this Order.

D. Respondent Lahti shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $40,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Lahti as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Sandra J. Harris, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 5670 Wilshire Blvd., 11th Fl., Los Angeles, CA 90036.

E. Respondent Lahti shall comply with the undertaking enumerated in Paragraph III. 37. above.

F. Pursuant to Section 15(b)(6) of the Exchange Act, Respondent Adams be, and hereby is, suspended from association with any broker or dealer for a period of six (6) months, effective on the second Monday following the entry of this Order.

G. Pursuant to Section 15(b)(6) of the Exchange Act, Respondent Adams be, and hereby is, barred from acting in a supervisory capacity with any broker or dealer, effective immediately.

H. Any reapplication for association by Respondent Adams will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.

I. Respondent Adams shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $20,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Adams as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Sandra J. Harris, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 5670 Wilshire Blvd., 11th Fl., Los Angeles, CA 90036.

J. Respondent Adams shall comply with the undertaking enumerated in Paragraph III. 38. above.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes

1 The findings herein are made pursuant to Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.

2 This plan was faxed out of the Englewood branch office to Creative Host's outside consultant. A copy of this plan was not found in Kirkpatrick's files.

3 DTC provides these reports only to issuers and transfer agents, not to broker-dealers. The Registered Representative obtained the reports from a Creative Host outside consultant.

4 Prearranged trades, also referred to as "matched orders," involve the purchase and sale of the same amount of securities at substantially the same price and time, giving the appearance of legitimate market activity.

 

http://www.sec.gov/litigation/admin/33-83xx.htm


Modified: 10/23/2003