INITIAL DECISION RELEASE NO. 143
UNITED STATES OF AMERICA
____________________________________ In the Matter of : : D.E. WINE INVESTMENTS, INC., : SUPPLEMENTAL INITIAL W. RANDAL MILLER, KENNETH B . : DECISION KARPF, AND DUNCAN E. WINE : June 9, 1999 ____________________________________:
APPEARANCES: Phillip W. Offill, Jr., and Karen L. Cook for the Division of Enforcement, Securities and Exchange Commission
Roger A. Tolins for Respondents
BEFORE: Brenda P. Murray, Chief Administrative Law Judge
The U.S. Securities and Exchange Commission ("Commission") named Respondents in an Order Instituting Proceedings ("OIP") issued on November 4, 1994, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h), 21B, and 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In an initial decision issued December 8, 1995, Administrative Law Judge Glenn R. Lawrence found that Respondents committed the violations alleged in the OIP. 1 Judge Lawrence suspended the broker-dealer registration for D.E. Wine Investments, Inc. ("DEW" or the "firm") for 30 days and suspended Messrs. Wine, Miller, and Karpf from association with a broker or dealer for 30 days. He ordered Respondents to cease and desist from committing or causing any future violations of the provisions of the statutes and rules they had violated. He ordered DEW to pay a penalty of $20,000 and Messrs. Wine, Miller, and Karpf to pay a penalty of $5,000 each and he ordered Respondents to account and disgorge, jointly and severally $33,873.53 with prejudgment interest. D.E. Wine Investments, Inc., Initial Decision, 60 SEC Docket 2819 (Dec. 8, 1995).
On appeal, the Commission found the initial decision calculated the profits from illegal markups and markdowns of securities incorrectly as a matter of law and it remanded the proceeding "for further factual findings and a revised analysis that conforms to the principles we have enunciated herein." 2 D.E. Wine Investments, Inc., Commission Opinion, 66 SEC Docket 0763 (Jan. 6, 1998) ("Remand Opinion").
On January 30, 1998, Judge G. Marvin Bober conducted a conference, at which the parties disagreed on the meaning of the remand but agreed that the evidence in Jt. Ex. 1 was sufficient to accomplish the Commissions directive and that there was no need for additional hearings. It is the Division of Enforcements ("Division") position that the Commission "merely remanded this case stating that Judge Lawrence may have been in error to not have included more of the transactions that the Division alleges are violative." Respondents believe just the opposite. (C Tr. 6.)
The parties filed simultaneous briefs on April 30, 1998. 3 In its brief, the Division reiterated its position that the record shows 142 transactions with illegal markups/markdowns; that DEWs close-in-time interdealer transactions where it occupied the same position (buyer or seller) as its retail customers are the best evidence of the prevailing market price ("PMP") for the bulk of the transactions; and that DEWs contemporaneous cost is the best evidence of the PMP for its riskless principal transactions. (Div.s Remand Brief at 4-5.)
Respondents, on the other hand, considered each transaction on Jt. Ex. 1 and interpreted the Commissions opinion to mean that:
1) The best indication of the PMP for markups is a contemporaneous interdealer sale by any market maker to any non-market maker, and for markdowns a contemporaneous interdealer purchase by any market maker from a non-market maker;
2) Where there is no interdealer market maker to non-market maker sale on the day at issue, the most contemporaneous market maker to non-market maker sale (even as much as two weeks before or after the retail trade in question) is the best indication of prevailing market price, especially if the quotes remain relatively constant. Contemporaneous interdealer trades after the trade at issue are inappropriate if it would result in a finding of a higher markup.
3) Interdealer market maker to market maker transactions are not as important in determining PMP as contemporaneous interdealer market maker with non-market maker transactions.
4) There were no interdealer sales of Dynacq International, Inc. ("Dynacq") from 1/26/93 until 3/16/93. The best indication of PMP for sales of Dynacq in computing markups during this period are the ask quotations as validated by market maker to marker maker transactions.
Respondents admit that applying these principles to the transactions at issue resulted in markups of over 10% in sales of Market Data Corporation ("Market Data") on 5/25/93, 6/14/93, and 6/15/93 and on sales of Dynacq on 12/17/92, 6/25/93, and 7/1/93. (Resp. Remand Brief at 14, 16, 18, 25, 26.)
The OIP alleges that between December 1992 and July 1993 ("relevant period"), Respondents willfully violated Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by charging undisclosed, excessive markups and markdowns in connection with 165 trades in three securities: Market Data, 4 Dynacq, and the warrants of First National Film, Inc. ("First National"). The OIP alleges further that DEW willfully violated Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder, with respect to these transactions, and that Messrs. Wine, Miller, and Karpf, willfully aided and abetted these violations. An alternative allegation, is that Mr. Wine failed reasonably to supervise Messrs. Miller and Karpf, who were subject to his supervision, with a view toward preventing their willful violations, within the meaning of Section 15(b)(4)(E) of the Exchange Act.
The Division alleges that Respondents acted illegally during the relevant period in some 142 transactions described in an exhibit proffered jointly by the parties. Titled "Stipulated Trade Data," Jt. Ex. 1 contains data about DEWs transactions as an integrated market maker in the three securities at issue. The Division charges that DEW obtained illegal profits of $57,137, consisting of the aggregate markups/markdowns in excess of 10% of the appropriate PMP. (Div. Remand Brief at 2.)
III. FINDINGS OF FACTS 5
During the relevant period, DEW was a registered broker-dealer located in Texas with approximately 20 employees that traded in 27 securities. Five of the 27 securities in which DEW made a market were traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Bulletin Board and approximately 22 were listed on the NASDAQ. 6 (Stips. 3, 5, 6, 7; Div. Proposed Findings of Fact and Conclusions of Law at 4-5; Respondents Proposed Findings of Fact and Conclusions of Law at 2.) DEW was a wholly-owned subsidiary of Vintage Holdings Corp., a private corporation owned during the relevant period by Messrs. Wine (47.5%), Miller (12.5%), and Karpf (12.5%) and two others. (Stips. 2, 8, 10, 11.) Messrs. Wine, Miller and Karpf entered the securities business in 1984, 1983, and 1987, respectively. (Stips. 8, 10, 11.) Mr. Wine and Mr. Miller began DEW in 1988. (Tr. 181-82.) The firm was run by consensus; however, Mr. Wine and Mr. Miller had overall responsibility for the firm, and the individual Respondents were firm principals responsible for compliance and major firm decisions. (Stip. 14; Tr. 122, 167, 192.) Mr. Wine was DEW president and chairman of the Board. Mr. Wine, who earned a two year business degree in aviation from Parks Business College in Denver, Colorado, was a registered representative and a registered principal associated with DEW. (Tr. 181; Stip. 8.)
Mr. Miller was in charge of compliance and finance. He developed the firms policies and procedures, was in charge of the firms policy on markups and markdowns, and he reviewed the trade tickets. (Tr. 128-29, 222.)
Mr. Karpf was head trader and he "validated" the quotes, inside bid and ask, that the registered representatives used to determine a price that included markups and markdowns on which they calculated their commissions. (Tr. 126, 130-32, 168-69.) Mr. Karpf "validated" the quotes on the trade tickets by looking at the screen or by telephone calls to other market makers. (Tr. 129, 168-69.) Price quotes for Bulletin Board securities were available electronically during the relevant period, but actual interdealer transactions were not reported on Bulletin Board securities until December 20, 1993. (Tr. 64, 211; Resp. Remand Brief at 29.)
The parties agree that there were active and competitive markets for the common stock of Market Data and Dynacq and the warrants of First National during the relevant period; that DEW did not control or dominate the market for these securities; and that DEW was an integrated market maker who bought and sold at retail with respect to each of these securities. 7 (Respondents Opening Brief at 3-4; Remand Opinion, 66 SEC Docket at 0765.)
The pleadings indicate that the three securities at issue were penny stocks traded in the over-the counter ("OTC") market. (Stip. at 2; Tr. 84, 25, 130.) Most transactions involved low volumes, typically 10,000 shares or less, and no per share price was over four dollars. (Jt. Ex. 1.) The unchallenged expert opinion is that these securities were "low priced, low volume and low visibility." (Div. Ex. 17.) The common stock of Market Data has traded on the OTC market since at least 1989; Dynacq common stock traded on the NASD Bulletin Board before being listed on the NASD Small Cap market; and First Films stock has been listed on NASDAQ since July 1991. (Stips. 5, 6, 7; OIP; Resp. Answer.)
DEWs policy was to set markups and markdowns on OTC securities within or less than 5% of the PMP which the registered representatives and Mr. Karpf determined by looking at the quotations of other market makers. 8 (Tr. 129, 142, 168-70, 191-93.) DEW represented that its sales to retail customers would be at prices no greater than 5% above the lowest interdealer "asked" quote absent special circumstances, and its purchases from retail customers would be at prices no less than 5% below the highest interdealer "bid" quotation absent special circumstances. (Resp. Answer; Respondents Opening Brief at 4.)
DEW "validated" the quotes it received by its "view of the trading activity of the stock, of the amount of market makers involved, of the changing quotations, our feel for the market in general." (Tr. 135, 142.) Respondents claim that:
Further validation of the quotations is based on the fact that each of the three securities was quoted on the Bulletin Board, a facility which provides for the insertion of quotations by market makers on a real-time basis and for the broad dissemination of such quotations nationally to interested buyers and sellers.
(Respondents Opening Brief at 11.)
DEW did not confirm that the price quotes it relied on in setting the prevailing market price were the same as prices used in actual transactions. (Tr. 134-35, 169-70.) By the nature of their activities and their responsibilities as DEWs officers, directors, and owners, the individual Respondents knew the extent of DEWs markups and markdowns on the transactions at issue. (Stip. 13; Tr. 120-23, 125, 127, 182-83.) Each individual Respondent acknowledges participating in implementing the firms markup and markdown policies. (Stip. 13.)
DEWs income for the first six months of 1993, which included most of the relevant period, was almost $1.5 million. Slightly over 90% of this revenue came from "Commission - OTC equities" and "trading profits" which included markups. 9 (Tr. 215-18; Div. Ex. 3.)
IV. CONCLUSIONS OF LAW
I find that Respondents willfully violated Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder by charging undisclosed, excessive markups. I find further that DEW willfully violated Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder, and that the individual Respondents willfully aided and abetted these violations.
The implicit representation that a broker-dealer makes when it opens its doors for business as a professional securities firm that its conduct will be fair is rendered false when the broker-dealer fails to disclose an excessive markup. 10 Duker & Duker, 6 S.E.C. 386, 388-89 (1939); Charles Hughes & Co. v. SEC, 139 F.2d 434, 436-37 (2d Cir. 1943); SEC v. Resch-Cassin & Co., 362 F. Supp. 964, 978 (S.D.N.Y. 1973). It is also established as a matter of law that broker-dealers, and persons associated with them, can violate the antifraud provisions of the securities statutes by charging undisclosed markups or markdowns that are not reasonably related to the prevailing market price of the security where the pricing was done with scienter. Remand Opinion, 66 SEC Docket at 0766 (citing Alstead, 47 S.E.C. at 1035; Richard R. Perkins, 51 S.E.C. 380 (1993); Meyer Blinder, 50 S.E.C. 1215 (1992)). "The prevailing market price is the price at which dealers trade with one another, i.e., the current inter-dealer markets." Alstead, 47 S.E.C. at 1035 (citing Kenneth B. Stucker Investment Securities, 42 S.E.C. 910, 911 (1966)).
The reasonableness of a markup/markdown charged is determined by the particular facts of each case. SEC v. Feminella, 947 F. Supp. 722, 729 (S.D.N.Y. 1996); Duker & Duker, 65 S.E.C. at 389. The legality of an undisclosed markup or markdown is determined by whether based on all relevant facts and circumstances the price charged was reasonably related to the PMP, and if such pricing was done with scienter. E.g., SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1469 (2d Cir. 1996), cert. denied, 118 S. Ct. 57 (1997); Charles Hughes & Co. 139 F.2d at 436-38; Feminella, 947 F. Supp at 729; Alstead, 47 S.E.C. at 1035.
Commission case law has established, and Respondents agree, that in an active, competitive market, the PMP for setting markups/markdowns by a market maker ("MM") for securities is the price MMs charged on sales or paid for purchases other non-market maker dealers ("non-MM") in contemporaneous trades ("interdealer transactions"). 11 Remand Opinion, 66 SEC Docket at 0766; Adams Securities, Inc., 51 S.E.C. 1092, 1094-95 (1994); Michael Alan Leeds, 51 S.E.C. 500, 502 (1993); Adams Securities, Inc., 51 S.E.C. 311, 313 n.8 (1993); Resp. Remand Brief at 9. Contemporaneous refers to events "arising, existing, or occurring during the same period of time." Websters II New Riverside University Dictionary at 304 (1984). According to the case law, contemporaneous trades are those closest in time to the retail trade in question whether the interdealer trade occurred before or after the retail trade at issue. Remand Opinion, 66 SEC Docket at 0767 (citing David Disner, 52 S.E.C. 1217, 1221 (1997); Thomas F. White & Co., 51 S.E.C. 932, 935 n.11 (1994), affd without opinion, 68 F.3d 482 (9th Cir. 1995) (Table); Adams Securities, 51 S.E.C. at 1095 n.13; Linder, Bilotti & Co., 42 S.E.C. 807, 809 n.4 (1965)).
Respondents use of bid and asked quotations unsupported by sales was an invalid method of establishing the prevailing market price where "there 12 an abundance of information concerning interdealer trades in the Securities." Remand Opinion, 66 SEC Docket at 0770 (citing Alstead, 47 S.E.C. at 1036). At the time DEW engaged in this practice, it was well known in the industry that neither Commission case law nor NASD policy allowed the use of unvalidated quotes to establish the prevailing market price of a security. (Tr. 134-35, 169-70, 172, 193-94, 227.) The NASD issued a Notice on Policies and Procedures for Markups/Markdowns in Equity Securities ("Notice") on April 1, 1992, approximately 8 months before the relevant period began, informing its members that:
Members should always be cognizant, therefore, that any quotations used to arrive at a prevailing market price must be validated and that SEC case law favors executed interdealer trades between market professionals as the best evidence of the prevailing market price at the time of contemporaneous retail transactions. Focusing on prices of executed transactions, rather than quotations, for determining prevailing market price should be particularly emphasized where the security is an NNOTC issue. 13
(Div. Ex. 5 at 4.) The NASD Notice cited three cases where the Commission required strong evidence that quotations accurately reflect prevailing market price. 14 (Div. Ex. 5 at 7.) The appendix to the Notice showing guidelines for markups and markdowns does not list unvalidated quotes as proper guidelines for calculating markups and markdowns. (Div. Ex. 5 Appendix.)
The parties agreed at a conference following the Commissions remand that Jt. Ex. 1, already in evidence, contained sufficient evidence to decide the prevailing market price in a contemporaneous trade. (C Tr. 4-5.) The basic work for this exhibit was done in July 1993 by a Commission examiner who looked at approximately 300 transactions that DEW handled in four securities of during the relevant period as part of a penny stock examination sweep. (Tr. 25, 31.) The exhibit does not show all the trades that occurred in these securities on the dates at issue. (Tr. 173, 179-80, 211-12; Resp. Remand Brief at 29.)
Following the directive in the Commissions Remand Opinion, I determined the PMP based on the most contemporaneous or closest in time transaction shown in Jt. Ex. 1 that occurred between a MM and a non-MM. I have considered only those transactions which the parties agreed were done on a principal basis. (See notes to Jt. Ex. 1.) I defined "most contemporaneous" as transactions that occurred on the same day as the retail transaction at issue. If there were no transactions between a MM and a non-MM on the same day as the retail transaction at issue, I then considered the preceding day. If there were no such transactions on that day, I considered next the day following the retail transaction. I followed this sequence until I arrived at a transaction between a MM and a non-MM. 15 See, e.g. First Pittsburgh Securities Corp., 47 S.E.C. 299, 306 (1980); DMR Securities, Inc., 47 S.E.C. 180, 182 (1979); Orion Securities, Inc., 52 S.E.C. 46, 52 (1994); LSCO Securities, Inc., 50 S.E.C. 518, 520 (1991). Where there was more than one suitable transaction on the same day, I used the transaction that favored Respondents position. 16 If the issue was markups, it was the highest contemporaneous sales price. If the issue was markdowns, I used the lowest contemporaneous purchase price.
The approach just described required further modification on several days in the period beginning 02/02/93 through 03/02/93 where the closest transaction between a MM and a non-MM occurred more than three business days distant from the retail transaction at issue. 17 I have described the reasons why I selected a transaction for determining the PMP on each of the eight dates.
The evidence is persuasive that Respondents acted with scienter, "a mental state embracing intent to deceive, manipulate, or defraud." Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980), quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976.) Scienter can also be demonstrated for purpose of the antifraud provisions by a showing that Respondents acted recklessly. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir. 1978); Dirks v. SEC, 681 F.2d 824, 845 (D.C. Cir. 1982), revd on other grounds, 463 U.S. 646 (1983). The individual Respondents acted knowingly, or at the very minimum recklessly, when they falsely represented that DEW charged a 5% markup/markdown from the PMP in retail sales and purchases. They made this representation knowing that DEW set its markups/markdowns without referring to actual transactions or validated quotes. 18 They did so despite: (1) their experience as securities professionals; (2) notice in September 1991 from the Commissions Fort Worth, Texas, office that a staff audit revealed that DEW was charging customers excessive markups/markdowns; and (3) information distributed to DEW from the NASD. (Div. Exs. 5, 6.)
Several months before the first illegal markup occurred, the NASD notified Respondents that validation of price quotations was a critical issue in connection with markups/markdowns. The NASD Notice went on to state that:
markups or markdowns should generally not exceed 5 percent of the prevailing market price for equity securities. Thus, markups or markdowns exceeding 5 percent of the prevailing market price are generally viewed as excessive and a violation of Article III, Sections 1 and 4 of the Rules of Fair Practice unless the member can show the markup/markdown charged to be fair under the unique circumstances of the trade. In this regard, if a member seeks to charge its customers more than a 5 percent markup or markdown, it must be fully prepared to justify its reasons for the higher markup or markdown with adequate documentation.
. . . Furthermore, the SEC and the courts have consistently held that undisclosed markups and markdowns in equities in excess of 10 percent of the prevailing market price are considered fraudulent as a matter of law. (citations omitted.)
(Div. Ex. 5 at 1, 3.)
The unchallenged testimony from the Divisions expert is that markups/markdowns are related "to the brokers compensation for various sales and transactional charges associated with a particular transaction." (Tr. 76.) Mr. Miller, the DEW principal in charge of compliance who reviewed the trade tickets, knew of nothing that justified DEW charging more than 5% of the PMP in these transactions. (Tr. 137.) The record shows no unusual circumstances attendant to these transactions or market conditions that justify DEW charging markups/markdowns of more than 5% of the PMP. DEWs actions in charging prices for securities that exceeded 10% of the PMP for that security was clearly a willful violation of the antifraud provisions of the securities statutes and Respondents, acting with scienter, caused these violations. Alstead, 47 S.E.C. at 1035; see also Carter v. SEC, 726 F.2d 472, 473-74 (9th Cir. 1983). DEWs actions of charging prices for securities above 5% of the PMP was also a willful violation of the antifraud provisions of the securities statutes and Respondents, acting with scienter, caused these violations.
Accordingly, I find that Respondents violated the antifraud provisions of the securities statutes because acting knowingly and willfully, and without informing customers, they charged prices that were not reasonably related to the PMP as shown in the following analysis of Jt. Ex. 1. 19 See Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 835 F.2d 1031, 1033 (3d Cir. 1987); Feminella, 947 F. Supp. 722; Disner, 52 S.E.C. at 1219-20. In most cases, Respondents agree with the PMP I have used. (Resp. Remand Brief.) I have noted the instances where we differ in that determination.
Market Data - Markups (Jt. Ex. 1 at 1-5 relate to 76 sales of common stock between May 3, 1993 and June 29, 1993.)
05/03/93 PMP was 2.06250 based on HILL (MM) sale to CHAS (non-MM) on 05/04/93.
Markups were 0.055 (2.66%) on sale at 2.1175 and 0.045 (2.18%) on sale at 2.1075.
No illegal markups.
05/04/99 PMP was 2.06250 based on HILL (MM) sale to CHAS (non-MM) on 05/04/93.
Markups were 0.0375 (1.81%), 0.045 (2.18%), and 0.041 (1.98%) on sales at 2.100, 2.1075, and 2.1035.
No illegal markups.
05/06/93 PMP was 2.000 based on TSCO (MM) sale to BEST (non-MM) on 05/06/93
The only markup was 0.0750 (3.75%).
No illegal markup.
05/07/93 PMP was 2.000 based on HERZOG (MM) sale to WATH (non-MM) on 05/07/93.
The only markup was 0.0900 (4.5%).
No illegal markup.
05/11/93 PMP was 2.000 based on PGON (MM) sale to MLCO (non-MM) on 05/11/93. DEW also sold to PBCC (non-MM) on this date at 1.68750. Using the higher price favors the Respondents. The Division took this approach in formulating the exhibit. 20 (Tr. 67.)
Markup was 0.0750 (3.75%).
No illegal markup.
05/12/93 PMP was 2.000 based on the three sales by MMs to non-MMs at that price on 05/12/93.
Markups were 0.0450 (2.25%), 0.03 (1.5%), and 0.0375 (1.87%).
No illegal markups.
05/24/93 PMP was 1.3750, based on the sale by HILL (MM) to SAXP (non-MM), the highest of the three sale prices by MMs to non-MM dealers on 05/25/93. 21
Markup was 0.09 (6.54%).
Markup of 5% is 1.44. Account 84220117 was charged 1.4650 (6.54%). Illegal markup on 500 shares of $12.50.
05/25/93 PMP was 1.3750, based on the sale by HILL (MM) to SAXP (non-MM), was the highest of the three sale prices by MMs, including DEW, to non-MM dealers on 05/25/93.
Markups were 0.175 (12.73%), 0.014 (1.02%), 0.01 (.73%), and 0.02 (1.45%).
Markup of 5% is 1.44. Account 37460272 was charged 1.5500 (12.73%). Illegal markup on 250 shares of $27.50.
05/27/93 PMP was 1.5000 based on the sale by FRAN (MM) to PWJC (non-MM) on 05/27/93.
Single markup was 0.0313 (2.09%).
No illegal markups.
06/03/93 PMP was 1.5000, the highest sales price on 06/04/93 by TSCO (MM) to NFSC (non-MM) and by FRAN (MM) to LEWCC (non-MM).
Single markup was 0.125 (8.33%).
Markup of 5% is 1.575. Account 88175016 was charged 1.6250 (8.33%). Illegal markup on 180 shares of $9.
06/04/93 PMP was 1.5000, the highest sales price on 06/04/93 by TSCO (MM) to NFSC (non-MM) and by FRAN (MM) to LEWCC (non-MM).
Markups were 0.06 (4%) and 0.009 (0.6%).
No illegal markups.
06/09/93 PMP was 1.5000 based on the sale by TSCO (MM) to OLDE (non-MM) on 06/09/93.
Markups were 0.047 (3.13%), 0.042 (2.8%), 0.0500 (3.33%), 0.1250 (8.33%), 0.0750 (5%), and 0.0410 (2.73%).
Markup of 5% is 1.575.
Account 66074058 was charged 1.6250 (8.33%) for an illegal markup on 400 shares of $20.
06/10/93 PMP was 1.5000 based on sale by TSCO (MM) to OLDE (non-MM) on 06/09/93.
Markups were 0.0660 (4.4%) and 0.1300 (8.66%).
Markup of 5% is 1.575.
Account 74628961 was charged 1.6300 (8.66%) for an illegal markup on 2,300 shares of $126.50.
06/14/93 PMP was 1.250 based on sale by DEW (MM) to PBCC (non-MM) on 06/14/93.
Markups were 0.267 (21.36%) and 0.297 (23.76%).
Markup of 5% is 1.3125.
Account 67218980 was charged 1.5170 (21.36%) for 3,000 shares and Account 72380537 was charged 1.5470 (23.76%) for 1,500 shares resulting in illegal markups of $613.50 and $351.75, respectively.
06/15/93 PMP was 1.250 based on sale by DEW (MM) to PBCC (non-MM) on 06/14/93
Markups were 0.3 (24%) and 0.346 (27.68%).
Markup of 5% is 1.3125.
Account 51149719 was charged 1.550 (24%) for 1,000 shares and 1.5960 (27.68%) for 9,000 shares resulting in illegal markups of $237.50 and $2,551.50, respectively.
06/21/93 PMP was 1.5000 based on sale by FRAN (MM) to PWJC (non-MM) on 06/23/93. 22
Markup was 0.0875 (5.83%).
Markup of 5% is 1.575.
Account 16280428 was charged 1.5875 for illegal markup on 300 shares of $3.75.
06/23/93 PMP was 1.5000 based on sale by FRAN (MM) to PWJC (non-MM) on 06/23/93.
Markups were 0.04 (2.67%), 0.0625 (4.17%). 0.05 (3.33%), and 0.035 (2.33%).
No illegal markups.
06/25/93 PMP was 1.62500 based on sale by PGON (MM) to NAWE (non-MM) on 06/25/93.
Markup was 0.03 (1.85%).
No illegal markup.
06/28/93 PMP was 1.62500 based on sale by PGON (MM) to NAWE (non-MM) on 06/25/93. There were no sales by a MM to a non-MM on 06/28/93, a Monday. The preceding business day was 06/25/93, a Friday
Markups were 0.142 (8.74%), 0.138 (8.49%), 0.115 ( 7.08%), and 0.1225 (7.54%).
Markup of 5% is 1.70625.
Account 51445140 was charged 1.7670 (8.74%) for illegal markup on 570 shares of $34.63. Account 53921960 was charged 1.7630 (8.49%) for illegal markup on 1,600 shares of $90.80. Account 72373971 was charged 1.7400 (7.08%) for illegal markup on 3,800 shares of $128.25. Account 72373971 was charged 1.7475 (7.54%) for illegal markup on 5,000 shares of $206.25.
06/29/93 PMP was 1.62500 based on sale by PGON (MM) to NAWE (non-MM) on 06/25/93. 23
Markups were 0.096 (5.91%), 0.045 (2.77%), and 0.138 (8.49%).
Markup of 5% is 1.70625.
Account 32657684 was charged 1.7210 (5.91%) for illegal markup on 3,000 shares of $44.25. Account 72385610 was charged 1.7630 (8.4%) for illegal markup on 1,600 shares of $90.80.
Dynacq - Markups (Jt. Ex. 1 at 6-8 relate to markups on 46 sales by DEW between December 17, 1992 and March 17, 1993.)
12/17/92 PMP was 0.1600 based on sale by DEW (MM) to WINZ (non-MM) on 12/17/92.
Markup was 0.031 (19.38%).
Markup of 5% is 0.168.
Account 43919123 was charged 0.1910 for illegal markup on 10,000 shares of $230.
01/25/92 PMP was 0.34375 based on sale by TSCO (MM) to CBOL (non-MM) on 01/25/92.
Markup was 0.006 (1.64%).
No illegal markup.
01/26/93 PMP was 0.34375 based on sale by TSCO (MM) to CBOL (non-MM) on 01/25/93.
Markup was 0.01125 (3.27%).
No illegal markup.
01/27/93 PMP was 0.34375 based on sale by TSCO (MM) to CBOL (non-MM) on 01/25/93. 24
Markups were 0.00565 (1.64%), 0.01025 (2.98%), and 0.00825 (2.4%).
No illegal markups.
01/28/93 PMP was 0.34375 based on sale by TSCO (MM) to CBOL (non-MM) on 01/25/93. 25
Markups were 0.00455 (1.32%), 0.00265 (0.77%), 0.01525 (4.44%), and 0.01005 (2.92%).
No illegal markups.
02/01/93 The closest MM sale to a non-MM occurred four business days from 02/01/93, a sale by TSCO (MM) to CBOL (non-MM) on 01/25/93 at 0.34375. 26 There were, however, several sales between MMs the business day before and the following business day. On 01/28/93 PGON (MM) sold to DEW (MM) at 0.34370 and FRAN (MM) sold to PGON (MM) at 0.31250. On 02/02/93 DEW (MM) sold to OLIE (MM) at 0.2815.
All of the sales between MMs are at a lower price than the one described above between a MM and a non-MM on 01/25/93. For this reason, I will use this sale price, 0.34375, as the PMP.
Respondents would use the inside quoted ask for 02/01/93 which they claim is validated by the price from a sale by FRAN (MM) to DEW (MM) on 02/04/93, two business days away from the date of the transaction. This approach ignores sales between MMs closer to the transaction date but it just happens to support a price that is higher that any of the other sales prices.
I reject Respondents position and use as the PMP 0.34375, the price that a MM charged a non-MM on 01/25/93.
Markups are 0.03125 (9.09%), 0.04825 (14.04%), and 0.03875 (11.27%).
Markup of 5% is 0.3609.
Account 20417333 was charged 0.3750 (9.09%) for illegal markup on 1,500 shares of $21.15. Account 32884969 was charged 0.3920 (14.14%) for illegal markup on 3,000 shares of $93.30. Accounts 83624058 and 89601499 were charged $0.3825 for illegal markups on two sales of 6,000 shares $129.60 each or $259.20.
02/02/93 The closest MM sale to a non-MM is the sale by TSCO (MM) to CBOL (non-MM) on 01/25/93, five business days from 02/21/93, at 0.34375. There was a sale between MMs on 02/02/93 and there were several other sales between MMs closer in time than 01/25/93. 27 Wine (MM) sold to OLIE (MM) on 02/02/93 at 0.2815, and on 01/28/93, two business from the transaction, PGON (MM) sold to DEW (MM) at 0.34370 and FRAN (MM) sold to PGON (MM) at 0.31250. All of these prices are less than the first sale between a MM and a non-MM on 01/25/93.
Respondents would use 0.37500 as the PMP. This is the inside quoted ask on 02/02/93. Respondents claim that the quote was validated because the same price was charged in a sale by FRAN (MM) to DEW (MM) on 02/04/93, one business day away from the date of the transaction at 0.37500. I reject Respondents rational that a purchase by DEW from another MM on 02/02/93 at 0.3750 validates the quoted ask price on 02/02/93 of 0.3750 when DEW sold the security to another MM on 02/02/93 for 0.28125. The case law favors prices charged by MMs in sales to non-MMs as the most objective measure in setting the PMP.
In these circumstances, I have used 0.34375 as the PMP based on the sale by TSCO (MM) to CBOL (non-MM) on 01/25/93.
Markup is 0.03575 (10.4%).
Markup of 5% is 0.3609.
Account 18187089 was charged 0.3795 (10.4%) for illegal markup on 10,000 shares of $186.
02/03/93 The closest sale by a MM to a non-MM occurred six business days before the transaction date when TSCO (MM) sold to CBOL (non-MM) on 01/25/93 at 0.34375. 28
Respondents would use a PMP of 0.3750 based on the inside ask quote on 02/03/93 of 0.3750. Respondents claim that the quote is validated by the purchase by DEW (MM) from FRAN (MM) on 02/04/93 at 0.3750.
I reject Respondents approach because it ignores the considerably (relatively speaking) lower cost paid by another MM who purchased from DEW on the day of the transaction at issue. OLIE (MM) purchased from DEW (MM) on 02/02/93 at 0.28125.
I have determined the PMP as 0.34375 based on the sale by TSCO (MM) to CBOL (non-MM) on 01/25/93. 29
Markups are 0.03775 (10.98%) and 0.03575 (10.4%).
Markup of 5% is 0.3609.
Account 24729118 was charged 0.3815 (10.98%) for illegal markup on 7,000 shares of $144.20. Account 38135527 was charged 0.3795 (10.4%) for illegal markup on 10,000 shares of $186.
02/04/93 The closest sale by a MM to a non-MM occurred seven business days before the transaction date when TSCO (MM) sold to CBOL (non-MM) on 01/25/93 at 0.34375.
Respondents would use a PMP of 0.3750 based on the sale by FRAN (MM) to DEW (MM) on 02/04/93 at 0.3750. Respondents claim that this transaction validated the inside ask quote for this date and the preceding date and following date.
The Commission has held that "If the only contemporaneous interdealer trade was between two market makers, it may be used as the basis for determining the prevailing Market price." Remand Opinion, 66 SEC Docket at 0768. The Commission used the term "may" and not "shall." Inasmuch as the closest transaction between a MM and a non-MM took place seven business before, 01/25/93, I find it is reasonable to use the sale between MMs on 02/04/93 to establish the PMP since it is the closest transaction of that type to the transaction date and there is no indication that the transaction is unrepresentative.
PMP was 0.3750 based on sale by FRAN (MM) to DEW (MM) on 02/04/93.
Markups are 0.018 (4.8%) and 0.002 (0.533%).
Markup of 5% is 0.39375
No illegal markups.
02/05/93 The closest sale by a MM to a non-MM occurred eight business days before the transaction date when TSCO (MM) sold to CBOL (non-MM) on 01/25/93 at 0.34375.
Respondents would use a PMP of 0.3750 based on the sale by FRAN (MM) to DEW (MM) on the previous day, 02/04/93, at 0.3750. Respondents claim that this transaction validated the quoted asked for this date and the preceding date.
For the same reason as stated previously, I find it is reasonable to use the sale between MMs on 02/04/93, 0.3750, to establish the PMP. Remand Opinion, 66 SEC Docket at 0768. The nearest transaction between a MM and a non-MM was eight business days before the transaction date and there are no closer transactions between MMs.
PMP was 0.3750 based on sale by FRAN (MM) to DEW (MM) on 02/04/93.
Markups are 0.011 (2.93%), 0.0023 (0.613%), and 0.002 (0.533%).
Markup of 5% is 0.39375.
No illegal markups.
02/25/93 The closest transaction between a MM and non-MM is on 03/16/93, 11 days after the date at issue at 0.40625.
Respondents would use 0.40625, the inside quoted ask on 02/25/93. Respondents claim the sale by PGON (MM) to DEW (MM) on 03/15/93 at 0.40625 validated the quoted ask on 02/25/93 of 0.40625.
I will use as the PMP 0.31250, the price that DEW (MM) charged OLIE (MM) on 03/02/93, two business days from the transaction at issue. Remand Opinion 66 SEC Docket at 0768. I do this because 11 business days passed between 02/25/93 and a transaction between a MM and non-MM. I reject Respondents rationale because it does not consider transactions between MMs that occurred before 03/15/93.
Resulting markup was 0.1155 (36.96%).
Markup of 5% is 0.3281.
Account 21153449 was charged 0.4280 (36.96%) for an illegal markup on 2,000 shares of $199.80.
03/01/93 The closest transaction between a MM and a non-MM occurred ten business days from the transaction date, a sale by PGON (MM) to DLJP (non-MM) on 03/16/93 at 0.40625.
Respondents would also use 0.40625 as the PMP but they base it on the inside quoted ask price on 03/01/93 which they claim was validated by a sale on 03/15/93 by PGON (MM) to DEW (MM) at 0.40625.
Here again I reject the rationale of Respondents position because it considers a sale between two MMs on 03/15/93 but ignores a sale by PGON (MM) to DEW (MM) on 03/15/93 at a lower cost, 0.31250.
I will use as the PMP 0.31250, the price that DEW (MM) charged OLIE (MM) on 03/02/93, the following day. Remand Opinion, 66 SEC Docket at 0768.
Markups were 0.1005 (32.16%), 0.105 (33.60%), and 0.0985 (31.52%).
Markup of 5% is 0.3281.
Account 78244765 was charged 0.4130 for an illegal markup on 6,500 shares of $551.85; account 81730782 was charged 0.4175 for an illegal markup on 4,000 shares of $357.60; and account 88171848 was charged 0.4110 for an illegal markup on 9,000 shares of $746.10.
03/02/93 The closest transaction between a MM and a non-MM occurred nine business days from the transaction date, a sale by PGON (MM) to DLJP (non-MM) on 03/16/93 at 0.40625.
Respondents recommend PMP of 0.40625 based on the quoted ask on 03/02/93 which they claim was validated by the PGON (MM) sale to DEW (MM) at 0.4625 on 03/15/93.
I reject the rational of Respondents position because it ignores the sale by DEW (MM) to OLIE (MM) on the day of the transaction at issue at 0.3125.
I determine the PMP to be 0.31250 based on the sale by DEW (MM) to OLIE (MM) on 03/02/93. The price used in a sale between two MMs on the transaction date is more contemporaneous than the price used in a sale between a MM and a non-MM nine business days after the transaction date. Remand Opinion, 66 SEC Docket at 0768.
Markups were 0.1125 (36%) and 0.1035 (33.12%).
Markup of 5% was 0.3281
Account 82197109 was charged 0.4250 (36%) for an illegal markup on 2,400 shares of $232.56. Account 85457410 was charged 0.4160 (33.12%) for an illegal markup of $395.55.
03/15/93 PMP was 0.40625 based on the sale by PGON (MM) to DLJP (non-MM) on 03/16/93.
Markups were 0.02255 (5.55%), 0.01675 (4.12%), 0.01005 (2.47%), 0.01505 (3.70%) and 0.00605 (1.49%).
Markup of 5% is 0.4267.
Account 13441825 was charged 0.4288 (5.55%) for an illegal markup on 2,000 shares of $4.40.
03/16/93 PMP was 0.40625 based on sale by PGON (MM) to DLJP (non-MM) on 03/16/93.
Markup was 0.00845 (2.08%).
No illegal markup.
03/17/93 PMP was 0.40625 based on sale by PGON (MM) to DLJP (non-MM) on 03/16/93.
Markups were 0.01995 (4.91%) and 0.00575 (1.42%).
No illegal markups.
03/18/93 PMP was 0.40625 based on sale by PGON (MM) to DLJP (non-MM) on 03/16/93. 30
Markups were 0.015 (3.70%), 0.020 (4.93%), 0.018 (4.37%)
No illegal markups.
Dynacq - Markdowns (Jt. Ex. 1 at 9 relates to markdowns on seven purchases by DEW between December 29, 1992 and March 17, 1993.)
12/29/92 PMP was 0.18750 based on purchase by OLIE (MM) from PWJC (non-MM).
Markdowns were 0.0055 (2.93%) and 0.0065 (3.47%).
No illegal markdowns.
01/07/93 PMP was 0.18750 based on purchase by TSCO (MM) from RMSI (non-MM) on 01/07/93. 31
Markdowns were 0.0093 (4.96%), 0.0075 (4%), and 0.009 (4.67%).
No illegal markdowns.
02/05/93 PMP was 0.28125 based on purchase by DEW (MM) from RMSI (non-MM) on 02/03/93.
Markdown was -0.03125
No illegal markdown.
03/17/93 There were no purchases by a MM from a non-MM on 03/17/93. The closest in time MM to non-MM transaction occurred on 02/03/93 where DEW (MM) purchased from RMSI (non-MM) at 0.28125. I have used as the PMP the lowest price on 03/17/93 when there were two purchases by MMs from MMs at 0.34375 and 0.31250, respectively. 32
Markdown was 0.0075 (2.4%).
No illegal markdown.
Dynacq - Markups (Jt. Ex. 1 at 10 relates to markups on five sales by DEW on June 25, 1993 and July 1, 1993.)
06/25/93 PMP was 3.2500 based on sales by DEW to RMSI on 06/25/93.
Markups were 0.4 (12.30%) and 0.38 (11.69%).
Illegal markups in two sales.
Markup at 5% is 3.4125.
Account 34627548 was charged 3.6500 (12.30%) for an illegal markup on 1,000 shares of $237.50. Account 68767608 was charged 3.6300 (11.69%) for an illegal markup on 1,000 shares of $217.50.
07/01/93 PMP was 3.2500 based on sales by DEW (MM) to RMSI (non-MM) on 06/29/93.
Markups were 0.35 (10.77%) and 0.36 (11.07%).
Markup of 5% is 3.4125.
Account 18382991 was charged 3.6000 (10.77%) for an illegal markup on 1,000 shares of $187.50. Account 33367669 was charged 3.6100 (11.07%) for an illegal markup on 10,000 shares of $1,975.00 Account 72384494 was charged 3.6000 (11.07%) for an illegal markup on 1,500 shares of $281.25.
First Nat. - Markdowns (Jt. Ex. 1 at 11 relates to markdowns on 13 purchases of First National units and warrants on April 13, 1993.)
04/13/93 The parties do not know whether the three interdealer sales that occurred on 04/13/93 were principal or agency transactions. Therefore that the record does contain sufficient evidence on which to determine the PMP. For this reason, I find that the Division has not carried its burden of proof that the violations occurred as alleged.
No illegal markdowns.
Illegal markups total $11,054.94.
This proceeding was instituted pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h), 21B, and 21C of the Exchange Act. Having determined that violations occurred, the next considerations are whether or not it is appropriate in the public interest for the Commission to order remedial action, to order that Respondents cease and desist, that they pay civil penalties, and that they make disgorgement.
The Division recommends that the Commission revoke DEWs registration and bar Mr. Wine from association with a broker-dealer with the right to reapply after one year in a non-supervisory, non-proprietary capacity; that Mr. Miller be barred from association with a broker-dealer; and that the Commission suspend Mr. Karpf from association for one day less than one year. It would order each Respondent to cease and desist; it would impose a penalty of $50,000 against each Respondent; and it would order that Respondents, jointly and severally, disgorge $57,136.68, the amount of the illegal markups and markdowns, and prejudgment interest.
Respondents contend there is no justification for the imposition of sanctions because there is no showing of scienter as there is no evidence that they acted to deceive, manipulate or defraud. Respondents insist that they did "everything humanly possible at the time to verify" the PMP, and that DEW is an "exemplary member of the brokerage community." (Resp. Remand Brief at 28-29, 33.)
A. Public Interest/Participation in the Industry
The decision as to what, if any, sanction is appropriate is case specific. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211 (1975). Measuring Respondents actions against the applicable factors indicates that it is in the public interest to impose a significant sanction. Relevant factors include the egregiousness of the Respondents actions, whether the illegal actions were isolated or recurrent incidents, Respondents degree of scienter, recognition by Respondents that the conduct was wrong and assurances against further violations, the likelihood that Respondents presence in the industry will present opportunities for future violations, and the need to deter both Respondents and others from similar conduct. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), affd on other grounds, 450 U.S. 91 (1981).
The record does not support Respondents assertions that they did "everything humanly possible to verify" the PMP that they used to set DEWs markups/markdowns and that they did not act with scienter. DEWs illegal activities were blatant, widespread, and recurrent. A review of approximately 300 transactions over an eight month period disclosed that DEW charged illegal markups in 36 transactions, or about 12%, of the approximately 300 transactions examined. Illegal markups occurred in Market Data and Dynacq, two, or 50%, of the four securities reviewed, and in 7.4% of the 27 securities in which the firm conducted trades. Respondents activities were also blatant and pervasive in that a majority of the firms major figures, three of the firms five principals, including its two founders, one who served as the director of compliance, and the other its president and chair, along with its head trader devised and carried out the scheme to defraud.
Respondents conduct violated a basic principle of the securities business which is that a firm which holds itself out to offer a service to the investing public represents by that holding out that it will act in the best interests of its customers. Duker & Duker, 6 S.E.C. at 388-89; Charles Hughes, 139 F.2d at 436-37; SEC v. Resch-Cassin & Co., 362 F. Supp. at 978. DEW violated this industry standard because it used unverified price quotations to set the PMP on which it based the prices it charged its retail customers. DEW used unverified quotes from December 1992 into July 1993, even though the Commissions Fort Worth, Texas, office informed DEW in September 1991 that a staff audit revealed DEW was charging customers excessive markups/markdowns. (Div. Ex. 6.) DEW also chose to ignore an NASD Notice in April 1992 that the use of unverified quotes was unacceptable. DEW received a copy of the Notice as an NASD member, and Respondent Miller, a firm principal who headed compliance and finance, read it when it was received. (Tr. 137-38.)
The record contradicts Respondents claim that DEW is a member of the brokerage community worthy of imitation. 33 (Resp. Remand Brief at 33.) The record shows that Respondents are disingenuous in dealing with regulators. At the hearing in June 1995, Mr. Wine denied that DEW had changed its markup/markdown policy. 34 However, the NASD accepted a settlement from Respondents in 1994 concerning illegal markups in 1991 based on Respondents representations that:
Respondents affirm that D.E. Wine Investments, Inc. has completely updated its internal procedures and supervisory manual to prevent and detect potential mark-up violations, taking into consideration the recently published NASD Mark-Up Guidelines as well as NASD staff advice given in both the 1991 and 1992 NASD investigations. (Resp. Ex. 4.)
As part of the settlement, the NASD censured the Respondents, DEW was ordered to pay approximately $11,000 in restitution, and Respondents were ordered to pay a $5,000 penalty, jointly and severally. NASD, District Business Committee Conduct Committee for District No. 6 v. D.E. Wine Investments, Inc., Duncan Eric Wine, William Randal Miller, and Kenneth Browning Karpf, Decision and Order of Acceptance of Respondents Offer of Settlement, Complaint No. CO6930014 (Feb. 4, 1994).
In a separate NASD action in 1991, the NASD censured DEW and Mr. Wine and fined them $5,000, jointly and severally, for illegal activities involving municipal securities. 35 (Resp. Ex. 4 at 2.) Respondents disciplinary record and the fact that they committed these illegal acts when they knew, or at a minimum were reckless in not knowing, that it was improper for a broker-dealer in DEWs position to base its retail purchases and sales on unverified market quotes indicate that there is a very high probability that Respondents will continue illegal activities if allowed to participate in the securities industry.
Finally, Respondents do not acknowledge any improper conduct. To the contrary, they still insist they did nothing wrong.
For all these reasons, I find it in the public interest to suspend DEWs broker-dealer registration for 30 days and to suspend Messrs. Wine, Miller, and Karpf from association with a broker or dealer for 30 days.
B. Cease and Desist
Section 8A(a) of the Securities Act and Section 21C(a) of the Exchange Act contain identical provisions authorizing the Commission to order persons that violated the securities statutes or caused the violations, due to actions that the person knew or should have known would contribute to the violation, to cease and desist from committing or causing the violation and any future violations. I find cease and desist orders to be appropriate in view of Respondents conduct either in committing the violations or causing the violations and their recalcitrance in acknowledging their wrongful conduct.
Section 8A(e) of the Securities Act and Sections 21B(e) and 21C(e) of the Exchange Act authorize the Commission to order an accounting and disgorgement, including reasonable interest, in proceedings where it orders a penalty or issues an order to cease and desist. 36 The purpose of disgorgement is to prevent wrongdoers from benefiting from their illicit conduct. The legislative history of these statutory provisions specifies that the Congressional purpose was to ensure that Respondents in Commission administrative proceedings do not retain ill-gotten gains. (S. Rep. No. 101-337 at 16 (1990).) The courts have held that disgorgement may not be used punitively, however, the deterrent effect of enforcement actions would be diminished if securities law violators were not required to disgorge elicit profits. See Manor Nursing, 458 F.2d at 1104; SEC v. Rind, 991 F.2d 1486, 1490 (9th Cir. 1993); SEC v. First City Financial Corp., 890 F.2d 1215, 1230, 1232 n.24 (D.C. Cir. 1989).
In view of my finding that Respondents charged their customers $11,054.94 in illegal markups, it is appropriate to order disgorgement, an equitable remedy "uniquely suited to redress or cancel unfairness and promote investor confidence in securities transactions." SEC v. World Gambling Corp., 555 F. Supp. 930, 934 (S.D.N.Y. 1983) (citations omitted).
"Disgorgement need only be a reasonable approximation of profits causally connected to the violation." First City, 890 F.2d at 1231. The evidence is that DEW paid much of the markups to the registered representatives who handled the transactions. While the record does not identify the particular registered representatives who handled the transactions at issue, all the individual Respondents had retail customers. (Tr. 98-100.) In addition, Messrs. Wine, Miller and Karpf benefited from the illegal markups as DEWs owners. (Tr. 125.) The first six months of 1993 included most of the relevant period. During this period, DEW realized net income of $111,406. (Div. Ex. 3.)
Accordingly, I find that Respondents should disgorge, jointly and severally, $11,054.94 with prejudgment interest from July 1, 1993. 37
D. Civil Money Penalties
As relevant here, Section 21B of the Exchange Act empowers the Commission to impose civil penalties, where it is the public interest, against a person who has committed a willful violation of the securities statutes or has willfully aided or abetted a violation by another. The statute specifies maximum penalties at the First Tier level of $5,000 for a natural person or $50,000 for any other person. Maximum penalties at the Second Tier level, applicable where the activities involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, are $50,000 for a natural person or $250,000 for any other person. The Division recommends $50,000 penalties against each Respondent.
Considerations for assessing the public interest are set out in Section 21B(c). Application of those criteria to these facts indicates that a strong penalty is required. Respondents behavior involved fraud and a deliberate or reckless disregard of the applicable law and regulatory requirements. Respondents actions hurt DEWs customers because they paid more than a reasonable markup in the prices they were charged for the securities they bought. Respondents were unjustly enriched by their actions and they have made no attempt at restitution. Respondents failure to recognize their wrongdoing, the financial benefits they derived from their illegal activities, and the disciplinary history they have compiled in the relatively short period of time they have been active in the securities industry all indicate a need for a penalty so as to deter them and others from illegal behavior in the future. For all these reasons, I will order each Respondent to pay a $50,000 penalty.
VI. ORDER 38
I ORDER based on the findings and conclusions set forth above and pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h), 21B, and 21C of the Exchange Act the following:
1. D.E. Wine Investments, Inc. shall cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act, and Sections 10(b) and 15(c) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder.
2. W. Randal Miller, Kenneth B. Karpf, and Duncan E. Wine shall cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from aiding and abetting any violations or any future violations of Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder.
3. The registration of D.E. Wine Investments, Inc. be, and hereby is, suspended for a period of thirty days.
4. W. Randal Miller, Kenneth B. Karpf, and Duncan E. Wine be, and hereby are, suspended from being associated with a broker or dealer for a period of thirty days.
5. D.E. Wine Investments, Inc., W. Randal Miller, Kenneth B. Karpf, and Duncan E. Wine shall disgorge, jointly and severally, $11,054.94, with prejudgment interest from July 1, 1993 through the last day of the month preceding the month on which payment is made.
6. D.E. Wine Investments, Inc., W. Randal Miller, Kenneth B. Karpf, and Duncan E. Wine shall each pay a civil money penalty of $50,000.
Interest shall begin to accrue on the disgorgement amount on the first day of the month following the end of the period when Respondents violations occurred, or July 1, 1993. The rate of interest shall be that established under Section 6621(a)(2) of the Internal Revenue Code, 17 C.F.R § 201.600(b).
Payment of disgorgement and penalties, plus interest, shall be made on the first day following the day this decision becomes final by certified check, United States postal money order, bank cashiers check, or bank money order payable to the U.S. Securities and Exchange Commission. The check and a cover letter identifying D.E. Wine Investments, Inc., W. Randal Miller, Kenneth B. Karpf, and Duncan E. Wine as Respondents in Administrative Proceeding No. 3-8543, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commissions Division of Enforcement.
This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party.
Brenda P. Murray
Chief Administrative Law Judge
-- "Tr.__" refers to the transcript of the conference held January 30, 1998, ("C"), or the hearing. I will refer to the exhibits as "Jt. Ex. 1," "Div. Ex.__," or "Resp. Ex.__."
-- The sanctions have been stayed pending Commission review.
-- The record contains (1) Briefs to Judge Lawrence in August and September 1995; (2) Respondents’ Opening Brief in Support of Respondents’ Petition for Review of Initial Decision ("Opening Brief") and Division’s Response Brief in February and March 1996; and (3) Briefs following the Commission’s Remand ("Remand Briefs") in April 1998.
-- Mr. Wine was a director of Market Data during the first half of 1993. (Tr. 126, 182.)
-- My findings are based on the record. I applied preponderance of the evidence as the applicable standard of proof. Steadman v. SEC , 450 U.S. 91 (1981). I have considered all proposed findings and conclusions and arguments raised by the parties and accept those consistent with this decision.
-- The parties’ stipulations use the term "NASDAQ Bulletin Board." This term is confusing because while the NASDAQ oversees the bulletin board, the OTC Bulletin Board is not part of the NASDAQ national and small-cap stock markets where companies must meet certain financial and corporate-governance standards to be listed. The bulletin board is an electronic medium which provides price quotes similar to information in the "pink sheets" published by the National Quotation Bureau, Inc. for approximately 6,000 companies. Companies on the bulletin board are not subject to any listing requirements, and many of the securities are thinly capitalized penny stocks.
-- An integrated dealer is one who simultaneously makes a wholesale market in an OTC security while buying and selling the same security at retail. Alstead, Dempsey & Co. , 47 S.E.C. 1034, 1036 (1984).
-- Stocks traded on the Bulletin Board are referred to as non-Nasdaq-Over-the-Counter ("NNOTC") traded securities to distinguish them from stocks traded on the NASDAQ. (Tr. 139; Div. Ex. 5 at 3.) The penny stock market is composed primarily of NNOTC securities. (Div. Ex. 5 at 2.)
-- DEW’s income statement for the six months ended June 30, 1993, shows $882,000 as "Commissions-OTC equities" and $440,000 as "Trading profits." (Div. Ex. 3.) Until he was confronted with the income statement, Mr. Wine claimed that these sources generated only about 20% of DEW’s revenue. (Tr. 217.)
-- Respondents did not challenge the expert’s opinion that the concept of best execution was also applicable. That doctrine requires a broker-dealer to obtain for its buying customers "the lowest offering price in the street" and for its selling customers "the highest bid in the street." (Tr. 79.)
-- "By contrast, a dealer that is not a market maker must base its markups on the prices it pays in contemporaneous transactions to acquire the security, and it must base its markdowns on the prices it charges in contemporaneous transactions to sell the security unless, in either case, there is countervailing evidence of the prevailing market price." Remand Opinion , 66 SEC Docket at 0766 n.6 (citation omitted).
-- The NASD Notice advised that "members should not confuse the requirement of validating quotes through a review of actual trades" with the so-called "three call rule" which required members to note on the order ticket the identity of three dealers and their quotes before executing a transaction in an NNOTC security. (Div. Ex. 5 at 5.)
-- The notice reads " See Alstead , Gateway Stock and Bond, Inc. ; Naftalin & Co. "
-- The Division witness who first formulated the exhibit used this sequential approach. (Tr. 66.)
-- The Division witness also did this. (Tr. 67.)
-- This tabulation does not count the day the transaction at issue occurred or the day the transaction between the MM and non-MM occurred.
-- The scienter of DEW’s officials may be imputed to DEW. See SEC v. Manor Nursing Centers, Inc. , 458 F.2d 1082, 1089 n.3 (2d Cir. 1972).
-- Reading from left to right across the exhibit, t he first four columns depict DEW’s transactions with customers. The next three columns detail DEW’s principal transactions with other broker-dealers. The next six columns set out the high, low, and close bid and ask quotes for non-DEW interdealer transactions. The exhibit lists as MMs: FRAN (Wm. V. Frankel & Co., Inc.), HILL (Hill Thompson Magid & Co., Inc.), HRZG (Herzog, Heine, Geduld, Inc.), MHMY (M.H. Meyerson), NAIB (North American Institutional Brokers), OLIE (Olsen Payne & Co.) PGON (Paragon Capital Corp.), RJCO (A.A. Johnson and Co., Inc.), SHWD (Sherwood), TSCO (Troster Singer Co.), and DEW (D.E. Wine Investments, Inc.) Exhibit C attached to Respondents’ Remand Brief is what is in the record as Jt. Ex. 1 without the six columns showing DEW’s markup or markdown in percentage terms (two columns) and the Division’s markup/markdown calculations at the hearing (last four columns). In making its calculations at that time, DEW used the highest available ask price or the lowest available bid price as the prevailing market price. (Div. Brief at 17, filed Aug. 28, 1995.) For Market Data and Dynacq, the Division calculated markups and markdowns using DEW’s highest actual interdealer sale price or the lowest actual interdealer purchase price within three business days of the transaction with the retail customer. The Division did not include customer transactions where there was no interdealer transaction within the three day period. For the 16 transaction in First Film units and warrants, the Division used DEW’s interdealer sales price during the single day when the 13 purchases from customers and three sales to other dealers occurred. (Div. Brief at 17, filed Aug. 28, 1995.)
-- There does not appear to be an approved method for selecting the PMP when there are contemporaneous sales by the MM who is the subject of the inquiry and sales by other MMs to non-MM dealers on the same date. Using the highest price favors the alleged violator. Here the highest price was the interdealer price of another MM. Using DEW’s same day sales price to another dealer as the PMP results in a markup of 0.3875 (22.96%).
-- There were no sales by a MM to a non-MM dealer on 05/24/93 or on the preceding day 05/23/93. The sales on the following day, 05/25/93, were closest in time.
-- June 21 was a Monday, there were no sales between a MM and a non-MM dealer on that day, the preceding business day, the following business day, or two business days before.
-- The last entry in the exhibit is on 06/29/93.
-- There were no sales by a MM to a non-MM dealer on 01/27/93, 01/26/93 or 01/28/93.
-- There were no sales by a MM to a non-MM dealer on 01/28/93, a Thursday, on 01/27/93, 01/29/93, 01/26/93, or on 02/01/93.
-- My calculation of four days and later calculations of elapsed time did not include either the day of the transaction at issue or the day of the transaction used.
-- Respondents refer to transactions which the evidence does not persuasively describe as principal transactions. As noted earlier, I do not consider these transactions to be relevant in determining the PMP.
-- Respondent would use a PMP of 0.4375 based on the high and closing ask quotes. My use of a different PMP did not change the outcome.
-- This was the lowest price charged in the three purchases by MMs from non-MMs.
-- The Commission stated "If the only contemporaneous interdealer trade was between two market makers, it may be used as the basis for determining the prevailing market price." Remand Opinion , 66 SEC Docket at 0768. Using the sales price in two trades between two MMs on 03/17/93 as the PMP, results in markdowns of 0.03875 (11.27%) and 0.0075 (2.4%).
-- Definition of exemplary. Webster’s II New Riverside University Dictionary at 451 (1984).
-- It claimed to have stopped trading Bulletin Board stocks.
-- Mr. Miller testified that he was a named Respondent in this NASD action, however, on brief, he represented this was not true. (Tr. 119; Respondents’ Proposed Findings of Fact at 3.e.) For this reason and because there is no evidence of how the matter was resolved as to Mr. Miller, I have not considered this disciplinary matter as to him. I have considered that Mr. Miller was censured and fined $500 as the result of an NASD disciplinary action in 1985. (Tr. 118-19; Division’s August 28, 1995 Brief at 19.)
-- The Commission’s Rules of Practice contain Rules Regarding Disgorgement and Penalty Payments. 17 C.F.R. § 201.600. Rule 600 specifies that prejudgment interest shall be due on any sum required to be paid pursuant to an order of disgorgement.
-- T he last illegal markup occurred on June 25, 1993.
-- There is no record certification because the proceeding was instituted before Rule 351 of the Commission’s Rules of Practice took effect. 17 C.F.R. § 201.351.