UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 38026 / December 6, 1996 Admin. Proc. File No. 3-9195 __________________________________________________ : In the Matter of the Application of : : STRATTON OAKMONT, INC. : 1979 Marcus Avenue : ORDER Lake Success, New York 11042 : DENYING : STAYS and : IN PART : DANIEL M. PORUSH : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : __________________________________________________: Stratton Oakmont, Inc. ("Stratton" or the "Firm") and Daniel M. Porush, president and a director of Stratton, (collectively, "Applicants"), have requested a stay pending Commission review of disciplinary action by the National Association of Securities Dealers, Inc. ("NASD"). The NASD censured Stratton, expelled it from NASD membership, fined the Firm $500,000, and ordered it to make restitution in the amount of $416,528.77, plus interest. Porush was censured, barred from association with any member firm in any capacity, and fined $250,000. 1/ The NASD found that Stratton charged excessive and fraudulent markups with respect to Master Glazier's Karate International, Inc. warrants, in violation of Article III, 1/ The NASD also imposed costs. The NASD also found that a third respondent, Steven P. Sanders, charged excessive and fraudulent markups. Sanders has not sought a stay. ==========================================START OF PAGE 2====== Sections 1, 4, and 18 of the NASD's Rules of Fair Practice (the "Rules") [now Conduct Rules 2110, 2440, and 2120, respectively]. The NASD further found that the Firm and Porush had failed to establish, maintain, and enforce reasonable supervisory procedures designed to prevent the markup violations, in violation of Article III, Sections 1 and 27 of the Rules [now Conduct Rules 2110 and 3010, respectively]. Stratton notes that the National Business Conduct Committee ("National Committee") rejected the theory by which the District Business Conduct Committee ("District Committee") determined the size of the markups. The National Committee further reduced the amount of disgorgement and recharacterized the order as restitution. Stratton asserts that the basis of the National Committee's markup analysis was neither argued nor presented on appeal. Stratton also argues that the National Committee ignored testimony by Stratton's expert witness and failed to consider the appropriate level of markups for warrants, as well as certain unspecified constitutional arguments advanced by the Firm. Stratton observes that the conduct at issue here occurred in 1993. It claims that, since that time, the Firm has engaged in "a substantial program designed to meaningfully address issues related to past claims." The Firm points to settlements into which it has entered with various state authorities. It claims that it has paid $18 million pursuant to these settlements and is committed to pay an additional $10 million. The Firm asserts that "this program will end" if it is expelled. Stratton argues ==========================================START OF PAGE 3====== that the value of continuing these payments would outweigh any deterrence value of the sanctions. Porush notes that he was found to have engaged solely in supervisory violations. Porush denies that, during the period at issue, he had any supervisory responsibility for the Firm's compliance with the NASD's markup policies. He asserts that the persons who testified before the District Committee with actual knowledge of Stratton's supervisory procedures during the period at issue were unanimous that Stratton's former chief executive officer, not Porush, was responsible for supervising the Firm's pricing. Porush claims that the NASD's conclusion that he is responsible for the supervisory failures is based solely on an undated Stratton compliance manual and the NASD staff's "attempted impeachment of" one of the District Committee witnesses "with statements from his prior investigatory interview." 2/ Porush argues that he is Stratton's key management figure and his absence will cripple the Firm, particularly in its attempts to perform underwritings. The NASD opposes the requests for stay of both the bar and the expulsion. 3/ The NASD does not oppose allowing Stratton 2/ Porush also complains that the District Committee's basis for its decision that the markups were violative had never been used by the NASD and was, moreover, inconsistent with the staff's analysis. We note that the basis on which we will review the NASD's disciplinary action is the opinion of the National Committee. 3/ The NASD states that, consistent with its customary practice, it will not enforce the order of fines, restitution, and assessment of costs pending the outcome of Applicants' appeal in this matter. ==========================================START OF PAGE 4====== to remain in operation for one week for the exclusive purpose of effecting unsolicited liquidating transactions in an agency capacity. The NASD asserts that Applicants have not demonstrated a likelihood of prevailing on the merits. It argues that the record amply supports the National Committee's determination that Stratton dominated and controlled the markets for the warrants at issue and that the Firm's markups were violative when compared with the Firm's contemporaneous cost. The NASD also asserts that the Firm did not have adequate supervisory procedures in place to detect the pricing violations and that Porush was responsible for those violations. The NASD further asserts that the public might be harmed if the sanctions were stayed. It notes that the violations are serious and that Stratton and Porush have significant disciplinary histories. The NASD has also submitted declarations of two members of the NASD's staff, together with exhibits, that, in its view, "indicate that applicants have continued to engage in violative and abusive misconduct . . . ." The NASD notes that Stratton has not asserted that the corporation will cease to exist. The NASD argues that Stratton should not be permitted to "hold current customers and creditors hostage" or to refuse to make those payments to which the Firm previously agreed. The NASD further asserts that it believes that funds are being taken out of the Firm. ==========================================START OF PAGE 5====== In deciding whether to grant a stay in this matter, we consider several factors: whether Applicants have shown a likelihood of prevailing on the merits of their appeal; Applicants' likelihood of suffering irreparable harm without a stay; whether there would be substantial harm to others if a stay were granted; and whether issuance of a stay would be likely to serve the public interest. 4/ We have concluded that a stay is not warranted. Although the sanctions here will have a substantial impact on Applicants, the injury to Applicants is outweighed by the remaining factors. While any decision on the merits must await the conclusion of our review, the violations found by the NASD are serious. It does not appear, based on the information available, that there is a substantial likelihood that Applicants will ultimately prevail on the merits. We have also considered the effect of a stay on Stratton's customers and creditors. We have determined that Stratton's customer accounts are held by a clearing broker. That clearing broker can liquidate or transfer Stratton customer positions. Moreover, we have determined to permit the Firm, for a limited period to effect unsolicited liquidating transactions for its customers on an agency basis. Stratton claims that its obligations to certain creditors and customers will somehow be impaired if a stay is not granted. We agree with the NASD, 4/ See Cuomo v. U.S. Nuclear Regulatory Commission, 772 F.2d 972, 974 (D.C. Cir. 1985). ==========================================START OF PAGE 6====== however, that the Firm is required to honor its current legal obligations to customers harmed by prior violative conduct, regardless of whether the Firm continues to be an NASD member. Based, among other things, on the Applicants' extensive disciplinary histories, it appears that there are risks of further violations with respect to the Firm's customers and prospective customers. 5/ Under the circumstances, any harm that Applicants may incur from the denial of the their stay requests is outweighed by the danger to the investing public if the effect of the bar and expulsion is delayed. 6/ We therefore determine that it is in the public interest to deny the requests for stays. 7/ Accordingly, IT IS ORDERED that Stratton Oakmont, Inc., and Daniel M. Porush's requests for stays be, and they hereby are, denied; provided, however, that the expulsion of Stratton 5/ We have not considered the declarations and attendant exhibits tendered by the NASD. 6/ We also reject Applicants' argument that their sanctions should be stayed because the sanctions are too severe. We will review those sanctions in accordance with Section 19(e)(2) of the Securities Exchange Act of 1934. 7/ See Associated Securities Corp. v. SEC, 283 F.2d 773, 774 (10th Cir. 1960). ==========================================START OF PAGE 7====== Oakmont, Inc. shall not be effective for five business days after the date of this order, solely to the extent that, during this period, Stratton Oakmont, Inc. may effect on behalf of its existing customers unsolicited liquidating transactions, on an agency basis. By the Commission. Jonathan G. Katz Secretary