Initial Decision of an SEC Administrative Law Judge
In the Matter of
|In the Matter of||:|
|SANDRA SIMPSON and||: INITIAL DECISION|
|DAPHNE PATTEE :||: September 21, 1999|
|APPEARANCES:||Kathryn Pyszka, Gregory P. von Schaumburg for the Division of Enforcement, Securities and Exchange Commission|
|Morgan Bentley for Sandra Simpson|
|Walter L. Baumgardner for Daphne Pattee|
|BEFORE:||Robert G. Mahony, Administrative Law Judge|
The Securities and Exchange Commission (Commission), by an Order Instituting Proceedings (OIP), initiated public administrative and cease-and-desist proceedings on September 30, 1997, pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act).
A hearing was held in Flint, Michigan, on February 17-20 and 23-24, 1998, during which the Division of Enforcement (Division) and Respondents introduced documentary and testimonial evidence.1
The OIP alleges from May 1991 until March 1995, Sandra Simpson (Simpson) and Daphne Pattee (Pattee) engaged in a scheme to defraud at least forty-two customers by, among other things, engaging in unauthorized and unsuitable trading, unauthorized and unsuitable margin trading, and churning. Additionally, the OIP further alleges that, in an attempt to cover up their activities, Simpson and Pattee lied to customers about the nature and value of their investments, and, in an attempt to cover up losses, made unauthorized transfers of funds between customer accounts by forging letters of authorization. The OIP alleges that these acts violated Section 17(a) of the Securities Act as well as Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Both Respondents answered the OIP. Each denies any involvement in an illegal scheme to defraud their clients. Additionally, Simpson pleads the statute of limitations as an affirmative defense.
The Division filed motions, pursuant to Rule 340(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.340(b), to strike Simpson's Counter Proposed Findings of Fact and Conclusions of Law and Pattee's Contrary Proposed Findings of Fact. Rule 340(b) requires that "(p)roposed findings of fact must be supported by citations to specific portions of the record." 17 C.F.R. § 201.340. The Division contends that "Simpson's counter proposed findings of fact are not supported by citations to a specific portion of the record" and "Simpson's proposed conclusions of law do not reference a single case." The Division further contends that "(n)ot one of Pattee's contrary proposed findings of fact is supported by a citation to a specific portion of the record, and many do not even reference it." I agree with the Division's position that Simpson's Proposed Findings of Fact do not cite to a specific portion of the record as required by Rule 340(b). Accordingly, the Division's Motion to Strike Simpson's Proposed Findings of Fact is GRANTED. The Proposed Conclusions of Law do not require any citation to the record. As to the Conclusions of Law, the motion is DENIED.
Pattee's proposed findings of fact agree, except as to certain conclusions, with virtually all of the Division's. The Division's motion as to Pattee's Proposed Findings of Fact is therefore DENIED.
The testimony of the investor witnesses is set forth in the Findings of Fact. In addition, the following witnesses were called to testify.
Pattee was called as an adverse witness by the Division. In 1988, Pattee began working as an account executive at the Flint, Michigan office of Prudential Securities, Inc., a broker-dealer registered with the Commission. (Tr. 267.) In 1990, upon learning that her payout level2 would be decreasing due to her low production level, Pattee met with her branch manager, Hal Jandreski, to discuss the possibility of teaming up with another broker. (Tr. 274-75.) Pattee subsequently approached Simpson about working together under a joint arrangement because of Simpson's prominence as a top broker. (Tr. 269-72, 275-77.)
In May 1991, Pattee became Simpson's sales assistant. (Tr. 280-81, 290.) Simpson's pay was debited by Prudential to pay Pattee's $3000 per month salary. Although Pattee was still permitted to solicit clients and place orders, she gave up her own production number. Her former clients were consolidated with Simpson's clients, and all transactions were executed under Simpson's broker number. (Tr. 284-86.) Pattee sent a letter to all of her clients stating that she was joining "the team of Sandra K. Simpson, Vice President/Investments, as an associate," and that Simpson's name would appear on documents as their financial advisor. (Tr. 291.) Pattee and Simpson both serviced Pattee's former clients. (Tr. 294.) Simpson had access to Pattee's former clients holding pages and to client information in the Prudential computer system. (Tr. 294.) The phone system at Prudential was set up so that Pattee's and Simpson's phones would ring on each others desk, and each would take calls for the other. (Tr. 295.)
Throughout the relationship, according to Pattee, she and Simpson did daily reviews of what had occurred the day before. (Tr. 296-97.) Although Simpson did not review Pattee's trades prior to their execution, she always reviewed them the next day. Additionally, Simpson received a copy of all the order tickets. (Tr. 284-86.) Pattee further testified that she and Simpson both used the term "easy target" to refer to clients who were naive, unsophisticated, and an easy place to generate a lot of commissions. Pattee stated that she and Simpson identified easy targets by engaging in unauthorized transactions and then waiting to see if the customer complained.3 Simpson instructed Pattee how to handle client complaints and especially cautioned against telling the branch manager about a complaint. Pattee testified that she and Simpson engaged in unauthorized trading, made unauthorized use of margin,4 and made unauthorized fund transfers in the accounts of the "easy targets." (Tr. 298-302.)
Pattee also testified that she and Simpson engaged in unsuitable mutual fund trading by purposefully avoiding break points5 and switch letters,6 engaging in short-term trading, and taking clients out of front-load funds and placing them into back-load funds.7 (Tr. 315-19.) Simpson, according to Pattee, said that all clients should have margin accounts so they would not run out of available funds to purchase securities. Command Accounts were the vehicle used to get clients into margin accounts. To get clients to open Command Accounts, Pattee, at Simpson's direction, described the accounts as premier accounts while avoiding any mention of the margin feature and its risks. Pattee knew that margin trading involved a higher level of risk and was inappropriate for elderly retired persons with limited assets as well as any person that did not understand margin.8 Pattee did not always contact clients before executing margin transactions. (Tr. 320-25.)
Pattee testified that Simpson requested her to obtain signed blank Letters of Authorization (LOAs) from clients. Simpson kept these forms in her office.9 (Tr. 326-28.) At Simpson's direction, Pattee filled in the signed blank LOAs without calling the client to verify the information, but never forged a client signature nor saw Simpson do so. LOAs were used to transfer funds between accounts to cover account shortages. LOAs became less important once clients were converted to Command Accounts because the ability to use margin made it less likely that cash shortages would arise. (Tr. 329-35.) At Simpson's direction, Pattee made numerous misrepresentations to clients,10 and engaged in practices to conceal the fact that unauthorized trades had been executed.11 (Tr. 335-39.)
Pattee described her activities in handling the accounts of a number of the clients who were considered "easy targets."12 She stated that with Simpson's knowledge she executed unauthorized trades, made unauthorized use of margin, and made unauthorized transfers in the account of Norman and Margaret Cooper prior to and during her formal relationship with Simpson. Additionally, at Simpson's request, Pattee filled in a signed blank LOA authorizing the transfer of funds from the Coopers account without calling to verify the Coopers authorization. After the Coopers complained about the unauthorized activity, Simpson gave Pattee cash to purchase money orders to repay them. The Coopers were repaid over the period of several months. (Tr. 350-59.)
Pattee testified that at Simpson's direction she executed unauthorized trades in Pauline Mathis account and caused unauthorized fund transfers to other accounts. However, Pattee did not forge Mathis signature on the LOAs or the Command Account agreement, nor did she see Simpson do so. When Mathis did not have $2000 available to satisfy a margin call, Pattee called Mathis and offered cover Mathis with her own personal funds if Mathis promised to repay her. Simpson, in turn, gave Pattee the funds to deposit. When Mathis repaid Pattee, Pattee repaid Simpson. To prevent Mathis from discovering the unauthorized activity, Pattee stated that, at Simpson's direction, she lied to Mathis about the value of her account and told her that her monthly checks were being paid out of interest when, in fact, they were being paid out of principal. (Tr. 360-68.)
Pattee characterized Lela Phelps, who had an IRA account, as an unsophisticated conservative investor who did not understand her account statements. Pattee occasionally called Phelps with recommendations, which Phelps followed. However, Pattee also executed unauthorized trades in the Phelps accounts when Simpson instructed her to do so. (Tr. 368.)
Audrey Kindell was also described as unsophisticated and conservative. As with Lela Phelps, Pattee occasionally called Kindell with recommendations, which Kindell followed. Pattee also executed unauthorized trades and made unauthorized use of margin in the account. However, Pattee neither forged Kindell's signature on the Command Account agreement nor did she see Simpson do so. (Tr. 369-72.)
Pattee stated that Donald Watters, despite limited investing experience, was unable to understand his account statements. Watters occasionally called to request specific transactions, but at Simpson's direction, Pattee also executed trades in the account without first calling to verify the instructions. When Watters requested an account summary, Simpson advised Pattee not to send it to him. Finally, Pattee misled Watters about the value of his account. (Tr. 372-74.)
Pattee characterized Mr. and Mrs. George Davis as conservative and unsophisticated. Pattee admitted executing trades in their account without obtaining authorization, and lying about their account value. To cover up the lies, she and Simpson purchased money orders to satisfy the Davises withdrawal requests. (Tr. 376-81.)
In the Evelyn Burdgick account, Simpson told Pattee that she had purposefully avoided break points by dividing Burdgick's money among several mutual funds. (Tr. 382-83.) Finally, Pattee testified that she and Simpson had engaged in the aforementioned activities in order to generate commissions. (Tr. 385.)
On cross-examination by Pattee's counsel, Pattee explained that she spoke with her superiors several months before she left Prudential.13 Pattee told them that there were practices that needed to be looked into. (Tr. 391-92.) On redirect examination, Pattee explained that she did not mention the LOAs until after she left Prudential. (Tr. 430.)
In 1995 Mone was a staff attorney for Prudential's Midwest region. As a staff attorney one of Mone's primary responsibilities was to conduct internal investigations. (Tr. 102-03.) In the spring of 1995, Mone was assigned to an internal investigation at the Flint branch office after the Law Department was notified of possible unauthorized fund transfers in customer accounts. (Tr. 105-06.)
When Mone arrived at the branch he spoke with David Hester. Hester told Mone to speak to Pattee, who was working at Dean Witter after her resignation from Prudential on March 31, 1995. (Tr. 110-13.) Mone told Pattee that he was an attorney for Prudential and that she had the right to have an attorney present. Pattee, nonetheless, admitted transferring monies between accounts, executing unauthorized trades, and depositing personal funds into client accounts. Although Pattee admitted mailing blank LOAs for signature, she denied forging client signatures. (Tr. 132.)
Mone interviewed Simpson twice during the investigation. (Tr. 113-14.) During the initial interview, Simpson explained that Pattee had been her sales assistant. Simpson stated that she had serviced Pattee's clients when Pattee was on vacation and heard several complaints about unauthorized transactions. Simpson denied forging documents and obtaining blank signed LOAs. Simpson explained that the unauthorized transfers became apparent after a customer, Carl Jourdin, came to her with questions about an unknown deposit. Simpson went to Jeanette Walterhouse, the Operations Manager, and asked her to investigate the matter. When Walterhouse pulled Jourdin's file, it revealed several other questionable transfers.14 Mone further testified that Simpson was suspended several days after the initial interview. (Tr. 117-21.)
After Pattee resigned, Simpson told Mone that she took Pattee's customer files into her office. At the end of the interview, Simpson gave Pattee's former files to Mone. (Tr. 189.) Several days later, Mone searched Simpson's office and found thirty to thirty-five signed blank LOAs and files that had been removed from the operations area.15 (Tr. 122-23, 125.) During Mone's second interview with Simpson, Mone did not tell Simpson what he had found in her office. Simpson again denied obtaining signed blank LOAs and keeping files from the operations area in her office. (Tr. 128-30, 384.)
On cross-examination by Simpson's counsel, Mone acknowledged that because Pattee was a Prudential employee, Hester, as branch manager, had supervisory responsibility over her. Mone identified a list specifying the customers Pattee primarily dealt with throughout her relationship with Simpson. (Tr. 140; Div. Ex. 87.) Mone recalled that Pattee admitted violating Prudential policy by depositing personal funds into the Mathis account and acknowledged that it was Pauline Mathis name on the signature line of the deposited money orders. Mone further conceded that Pattee's statement that she had never forged a signature was false. (Tr. 158-60.) Finally, Mone acknowledged that the broker making the recommendations and placing the order, in this case Pattee, is considered to have control of the account, even if it is under another broker number. (Tr. 179-80.)
Brayer was accepted as a handwriting expert.16 Brayer holds a masters degree in humanities from the Jewish Theological Seminary in New York. Since 1988, she has worked as a handwriting examiner.17 Brayer is certified by the National Association of Document Examiners and the National Bureau of Document Examiners. Brayer is self-employed and has testified in federal, state and local courts in both civil and criminal cases.18 (Tr. 27-29.)
In 1995, Prudential retained Brayer to analyze certain signatures in an attempt to link them with the known handwritings of Pattee and Simpson.19 (Tr. 29.) For the instant proceeding, the Division retained Brayer to review her 1995 reports and the underlying documents. (Tr. 30-31.) In 1995, Brayer determined that "with a reasonable degree of certainty, the handwriting on the questioned signatures and the known handwriting by Sandra Simpson, were written by the same person." Accordingly, Brayer testified that it is more probable than not that Simpson signed the questioned documents. (Tr. 33; Div. Ex. 162.) Although Brayer submitted three versions of her report to Prudential, she never changed her final opinion that the questioned signatures were attributable to Simpson. (Tr. 34.)
After explaining the ten elements of handwriting, Brayer utilized transparencies and overlays to demonstrate her mode of handwriting analysis and to support her opinion that Simpson had written twenty-one questioned signatures. Specifically, Brayer demonstrated her analysis on eight documents.20 (Tr. 37-39.) Brayer explained that although she attributed twenty-one signatures21 to Simpson in 1995, she could only testify about eight documents at the hearing because she no longer had access to all the original documents used in the 1995 analysis. (Tr. 86-87.)
Brayer then explained her final conclusion and the differences between the three versions of her report. In the first version of her report, she identified two questions presented by Prudential. The first question was whether the signatures appearing on the documents listed in exhibit Q-1/SS22 of Brayer's report were actually signed by the customers, and if not, were the signatures written by the same individual (Simpson) whose handwriting appears in exhibits K-3 and K-4 of Brayer's report.23 The second question was whether signatures appearing on the documents listed in exhibit Q-224 were actually signed by the customers, or if not, were the signatures written by the same individual (Pattee) whose handwriting appears in Exhibit K-5 of Brayer's report.25 In the first version of the report, Brayer represented that in her professional opinion, with a reasonable degree of certainty, the signatures listed on exhibit Q-1/SS were, indeed, written by Sandra Simpson. Brayer, however, noted that she had insufficient data to answer the second problem because she did not get additional samples of Pattee's handwriting. (Tr. 56, 77.)
In the second version of the report, Brayer again identified two questions presented by Prudential. The first question was the same. The second was whether signatures appearing on the documents listed in exhibit Q-2 of Brayer's report were actually signed by the customers, and if not, whether they were written by the same individual whose handwriting appears in exhibit K-4 (Simpson).26 In the second version of the report, her conclusion to the first question was the same, but in response to the second problem she concluded that "with a reasonable degree of certainty, . . . the signatures on the documents listed in exhibit Q-2 were written by the same individual whose handwriting appears on exhibit K-5 (Pattee)."27 (Div. Ex. 162 at SEC 012135).
The third version of Brayer's report is identical to the second except that her response to the second problem is "with a reasonable degree of certainty, . . . the signatures on the documents listed in exhibit Q-2 were written by the same individual whose handwriting appears on exhibit K-4 (Simpson)." (Div. Ex. 162 at SEC 012140.) When asked to explain the inconsistencies between the three reports, Brayer explained that there was a typographical error in the conclusion section of the second report. Specifically, in response to the second question, Brayer mistakenly wrote that it was her professional opinion that the person whose handwriting appears on exhibit K-5 (Pattee) was responsible for the signatures listed in exhibit Q-2. (Div. Ex. 162 at SEC012135.) However, as evidenced by Brayer's third report, and explained in her testimony, Brayer meant to attribute the signatures to the person whose handwriting appears on exhibit K-4 (Simpson). (Tr. 77; Div. Ex. 162 at SEC012139.) Brayer also explained that, after her first report, because she had determined that Simpson had committed the forgeries without doing a full-scale analysis of Pattee's handwriting, she changed the second problem presented so that it entailed determining whether Simpson had signed the signatures listed in exhibit Q-2. (Tr. 77-80.)
From March 1990 until April 25, 1997, Maul worked as a sales assistant at Prudential. (Tr. 212.) From March 1990 until June 1991, Maul primarily worked as Simpson's sales assistant.28 (Tr. 214, 248.) During this time, which was prior to Pattee's employment as Simpson's sales assistant, Simpson instructed Maul to send out blank LOAs for signatures. (Tr. 217, 224.) Maul received signed blank LOAs in the mail29 and gave them back to Simpson, who either filled them in herself or instructed Maul to do so. (Tr. 217-18.) Simpson saved the signed blank LOAs that were unused. (Tr. 221.)
Before Pattee began working for Simpson, Simpson asked Maul to forge a client's signature. Maul refused, but never told anyone because of Simpson's prominence at Prudential. (Tr. 224-26, 254.) Maul further testified that at one point when she was doing posting for Simpson she discovered a transaction in which a client had been taken out of one mutual fund and immediately put into another. Maul asked Simpson about the transaction and Simpson replied that Maul would no longer post transactions. (Tr. 226-28.)
Before Simpson and Pattee began working together, the Operations Manager at the time, Beverly Farr, gave Maul files from the operations area to take to Simpson, even though it was against Prudential policy. (Tr. 230-31, 384.) Although Pattee and Simpson generally had daily meetings behind closed doors, Maul overheard a conversation in which Simpson used the term "easy target." (Tr. 234.)
In June 1991, Maul stopped working for Simpson. Although Maul continued to work in the office, there was considerable animosity between Simpson and Maul, such that they were unable to maintain a professional relationship. (Tr. 236-37, 239-41.) In June 1995, after Simpson had been terminated, Pattee told Maul about the unauthorized trading and forged signatures. 30 (Tr. 235, 240, 255.)
Hester is First Vice President at Prudential's Birmingham, Michigan branch office. (Tr. 446-47.) From October 1994 through January 1995, Hester was the branch manager of the Flint branch office. (Tr. 450-51.)31 From January 1995 through June 1995, Hester was the account executive (AE) in charge of the office.32 Hester testified on the numerous methods that brokers had available to monitor account activity. For example, all brokers with clients having a margin call received a margin call report.33 (Tr. 455-56.) Additionally, Prudential established a monitoring process that enabled brokers to check daily trading activity, watch live trades, and print out hard copies of all transactions that had taken place under their broker number for the past forty-five days. During the period of May 1991 through March 1995, Hester saw Simpson use this monitoring process. Other monitoring methods available included monthly production reports; client spread reviews, which showed clients with margin balances who were being charged margin interest; and client activity reports. Hester testified that Simpson would have received all of these reports during the time period from 1991 through 1995. (Tr. 459-63; Div. Ex. 95) Hester also verified that it was against Prudential policy for brokers to get blank signed LOAs and keep them in their personal files, and that brokers were not supposed to remove files from the operations area. (Tr. 469-72.)
Hester explained that Pattee was Simpson's employee and that Simpson determined the conditions of Pattee's employment. Hester told Simpson that she was responsible for Pattee's tickets and order errors. He observed Simpson directing Pattee's daily activities and believes Simpson was aware of orders placed under her number. Hester doubts that Pattee could have engaged in excessive trading without Simpson's knowledge. (Tr. 478-80, 482.) In 1994, Simpson went to Hester for advice on how to protect herself if she fired Pattee. Simpson told him that she believed that Pattee's will to work had slowed down and she was monitoring Pattee's business. (Tr. 480-82.)
In 1995, Hester returned from a vacation to discover that an internal investigation was underway. Pattee, who had already left Prudential, called and told Hester the allegations were true. (Tr. 486-87.) Hester testified that although he and Simpson did not have the best working relationship, it was against his financial interest to lose her because she was one of the branch's largest producers and his bonuses were dependent on branch income. (Tr. 488.)
On cross-examination by Simpson's counsel, Hester admitted that as branch manager he was responsible for reviewing accounts for unauthorized activity and excessive trading.34 He further acknowledged that branch managers used commission runs to supervise broker activity. (Tr. 490-96.) Hester was Series 8 registered and he could not delegate supervisory responsibility to a non-Series 8 registered person such as Simpson. (Tr. 498.) Hester approved all of the questioned LOAs. (Tr. 501-02.) Over the years, Pattee had expressed concern about the frequency of month-end trading in Simpson's accounts. Several months before she resigned, Pattee made vague references to Hester about Simpson's practices. (Tr. 517-18, 530.) Finally, Hester acknowledged that had he been aware that Pattee deposited personal funds into the Mathis account, it would have represented a red flag. (Tr. 522.)
Calhoun, president and sole owner of Calhoun Consulting Group, was accepted as an expert in securities industry sales practices. (Tr. 614, 621; Div. Exs. 163, 169.) Calhoun was retained by the Division to review trading in thirty accounts35 regarding suitability,36 churning, and unauthorized trading. (Tr. 627-28.) Calhoun opined that the trading in the thirty accounts was excessive in frequency and therefore unsuitable. Additionally, Calhoun determined that the accounts were churned and, in some instances, subject to unauthorized trading. Calhoun also testified that there was evidence of break point violations and short-term trading of mutual funds that was excessive and unsuitable. (Tr. 628.)
Analyzing suitability, according to Calhoun, is a two part process that includes looking at the specific investor and the trading in his or her account. (Tr. 636.) Furthermore, examining the trading in an account involves not only looking at the specific securities, but also at the method of trading.37 (Tr. 636.)
Calhoun formed a suitability profile for each of the customers and for the trading in each of the accounts. Virtually all of the individual account holders had conservative investment objectives and modest financial circumstances.38 (Tr. 641-42.) Calhoun opined that the securities were investment grade and were therefore suitable for most of the individual investors.39 (Tr. 644-45.)
Calhoun also analyzed the frequency of trading in the disputed accounts by examining the break-even rate of return.40 Average investors can only expect to earn between 8% to 12%. Therefore, according to Calhoun, an 8.3% break-even rate of return for conservative investors is excessive. (Tr. 647.) Because the break-even returns in all of the accounts ranged from 8.3%, in the Bain account, to 54.9%, in the Kindell account, the trading was excessive in frequency and therefore unsuitable. (Tr. 645-47.) After explaining that Kindell and Watters told her that they did not understand the use of margin, Calhoun further stated that it is inappropriate and unsuitable for investors to trade on margin if they do not understand the risks and costs. (Tr. 647-50.)
Calhoun next described her conclusions regarding certain mutual fund sales practices. Mutual fund order tickets at Prudential have a box where a registered representative can request a right of accumulation at the time of purchase. In the Burdgick account, Calhoun testified that the August 1994 purchases were given an automatic right of accumulation, permitting a 3.5% sales charge rather than a 5.75% sales charge. Concerning the February 1995 purchases, Calhoun questioned whether a higher amount should have been invested in the Fidelity and Oppenheimer funds so that another break point would have been reached. In the Daisy Cardinal account transactions, Calhoun testified that she had not seen any documents indicating whether break points were received. The uncertainty as to whether break points were received is why Calhoun's report states that there may have been improper mutual fund sales practices in some of the accounts. Calhoun also analyzed the holding periods for some of the mutual funds. She testified that in several instances, the holding periods were so short that it resulted in a forfeiture of the sales load and was therefore inappropriate and unsuitable for the conservative investors. (Tr. 651-55; Div. Ex. 167.)
Calhoun next explained her conclusion that the accounts had been churned.41 (Tr. 658.) To reach this conclusion, she looked at facts that are traditionally considered in determining whether control exists in an account and whether trading exists for the purpose of generating commissions. Regarding the issue of control, Calhoun attempted to determine whether trades were executed with prior client approval. Three of the account holders42 told Calhoun that they were not called before trades were executed in their accounts and that they simply received confirmation slips in the mail. Calhoun explained that if these statements were true, then it would indicate de facto discretion, which is an indication that a broker is controlling an account. (Tr. 656-57.) Calhoun explained that the high break-even rates of return indicate that the transactions were made for the purpose of generating commissions because a conservative investor would not knowingly undertake such a cost of trading. (Tr. 658.) Regarding unauthorized trading, Calhoun explained that, even if a customer ratifies a transaction, it is inappropriate for a broker to execute trades in a customer account without prior authorization.43 (Tr. 658-59.) Finally, Calhoun explained that registered representatives have a duty to know their customers and that it is highly uncommon for a registered representative not to pay close attention to the commissions generated in his or her accounts.44 (Tr. 660-61.)
On cross examination, Calhoun acknowledged that the majority of the accounts she examined were handled by Pattee prior to Pattee's formal relationship with Simpson. She further admitted that she did not attempt to determine whether Pattee or Simpson had been the primary contact for each of the accounts. Calhoun also acknowledged that she followed the instructions of the Division investigators and analyzed the accounts only for the time periods that the Division told her, despite the fact that the time periods varied from account to account. Moreover, Calhoun reviewed only twenty-seven of Simpson's approximately 1600 accounts. She did not analyze patterns of trading in the accounts that preexisted Simpson's and Pattee's formal relationship, nor did she determine who was the primary broker of contact after the relationship began. (Tr. 663-77.) Calhoun agreed that it is important to ascertain who wrote the order tickets and served as the broker of contact in order to determine who is responsible for the unsuitable, excessive trading. Nonetheless, according to Calhoun, those factors are not necessary to determine whether the trading was unsuitable and excessive. (Tr. 678-79.)
Calhoun opined that it would be inappropriate for Simpson to rely on Pattee's judgment because, as the broker of record, Simpson had a duty to know her customers and transactions, as did Pattee. Calhoun further represented that Simpson cannot be absolved from her duty to know customers by relying on her branch manager's supervisory observation. (Tr. 679-82.) However, Calhoun acknowledged that because it is difficult for a branch manager to detect unauthorized trades in the absence of customer complaints, it would also be reasonable for Simpson to rely on the absence of customer complaints and that she had a right to assume that Pattee was contacting clients before executing trades. The Division's decision to utilize varying time periods to measure account activity for each individual account rather than an uniform time period is, according to Calhoun, consistent with general industry practice. (Tr. 682-85.)
Calhoun acknowledged that portfolio diversification, or the possibility that more funds would be invested in the future could be a valid reason to spread the Burdgick account investment over several funds. Calhoun explained that although the liquidations in the Cardinal account might have been made to satisfy customer withdrawal requests, this does not automatically relieve a broker from allegations of improper short term trading. According to Calhoun, it is necessary to determine whether the need for liquidity could have been reasonably foreseen. Additionally, Calhoun explained that brokers have a responsibility to ask customers appropriate questions in an effort to determine possible future needs. Calhoun did not know whether Pattee or Simpson asked the appropriate questions and, if so, whether Cardinal represented that there would be no immediate need for the funds. (Tr. 686-92.)
Calhoun testified that in assessing suitability she did not review account statements from additional accounts that the clients may have had or view comprehensive net worth statements. (Tr. 693.) Calhoun then elaborated on the concept of "conservative" investments. Specifically, Calhoun explained that the term is a function of a client's investment objectives and beliefs. Accordingly, even though the broker must explain investment vehicles, inflation risk and the effects of taxes on both long-term and short-term goals, the broker must ultimately be guided by the customer's instructions. (Tr. 695-97.)
Fingal, a Certified Public Accountant employed by the Commission, prepared charts that analyze the accounts at issue. Fingal reviewed Prudential account statements and commission account summaries. (Tr. 21-22.) Fingal analyzed the accounts at issue for the period from May 1991, unless the account was opened after that date, through the date of the last activity in the account. (Tr. 22-23.) In completing her assignment, Fingal did not interview any clients. (Tr. 25-26; Div. Exs. 159, 165, 166.)
In addition to her own testimony, Simpson called Wallace Vanstrat, Harold Jandreski, Rebecca Novickus, Michelle Kellar Chargo, Dixie Donakowski, Raymond Trudell, and Beverly Farr as witnesses.
In 1985, Simpson began her career in the brokerage industry at Prudential.45 Simpson worked at Prudential until May 1995. When Simpson left, she went to Leonard & Co.,46 where she currently is a broker. Although Simpson holds a Series 7, a Series 65, and a Series 63 license, she has never held a Series 8 license.47 (Tr. 1012-13.)
As noted earlier, in March 1991, Simpson and Pattee began discussing the possibility of Pattee becoming Simpson's registered sales associate. Pattee was concerned that she would either be fired or receive a pay decrease because of her low sales. Simpson agreed to the arrangement and in May 1991, Pattee began to work for her at a salary of $3000 per month. This salary was contingent upon Pattee generating at least $5000 per month in gross commissions. (Tr. 1018-20, 1099.) After Simpson and Pattee began working together, each kept the books for the clients they serviced in their own office.48 (Tr. 1022.) Although nobody at Prudential explained to Simpson what her responsibilities would be as far as supervising Pattee, it was her understanding that one Series 7 employee could not supervise another Series 7 employee. (Tr. 1029-31.)
Simpson described the working relationships she had with others in the office. Although Simpson and Diana Maul initially got along, they stopped speaking after a falling out. Pattee and Simpson got along well, but did not socialize outside of the office. Simpson admitted that she and Hester did not have the best relationship because, according to Simpson, he was not always truthful with the brokers and often used profanities. (Tr. 1032.)
After Pattee left, client inquiries led Simpson to believe that Pattee had engaged in unauthorized trading. (Tr. 1053.) Specifically, Simpson testified that the Mathis LOA was discovered when Carl Jourdin, one of her clients, came in to review his account. While Simpson was reviewing the account activity, she discovered the transfer from the Mathis account. Simpson asked Jeanette Walterhouse to investigate and Walterhouse discovered other transfers from the Mathis account. Simpson called Mathis to ask if she was related to the various account holders involved in the transfer. When Mathis replied that she was not, Simpson informed Mike Carroll, the branch manager overseeing the Flint office. Carroll told her to do a write-up and to investigate further. Simpson took a list of Pattee's clients to Walterhouse and asked her to look for other questionable LOAs. Although other LOAs transferring funds to unrelated accounts were found, Prudential instructed Simpson not to contact the affected account holders. (Tr. 1053-60.) During the hearing, Simpson denied engaging in unauthorized trading, forging LOAs, misleading clients, and instructing others to mislead clients or to engage in questionable activities. (Tr. 1060-61, 1078, 1080.) Although Simpson admitted that she kept signed blank LOAs in her office, she testified she did not know that it was a violation of Prudential policy, and that she had them on hand to handle specific clients requests. (Tr. 1071.)
On cross-examination by Pattee's counsel, Simpson testified that even though Pattee's original salary was contingent upon a set production level, she had been too busy to monitor Pattee's production. (Tr. 1064.) Monthly statements were not separated according to who serviced each client. Instead, Pattee reviewed one month and Simpson reviewed the next. (Tr. 1065-66.) Moreover, the computer system did not differentiate between Pattee's former accounts and Simpson's accounts. (Tr. 1066.) Simpson testified that it was not until 1994 that she was able to get daily commission runs from her own computer, but even then she usually just glanced at the screen. (Tr. 1074-75.) Pattee matched the copies of the confirmations with the order tickets and Simpson only glanced at her computer each day to ascertain her production. (Tr. 1075-76.) Simpson never asked Maul to forge a client signature. (Tr. 1078.)
On cross-examination by the Division's counsel, Simpson testified that Prudential withheld Pattee's workers compensation insurance payments from her commissions. (Tr. 1098.) Although Simpson could not have fired Pattee from Prudential, she could have gone to the branch manager and requested to disassociate herself. (Tr. 1099.) Simpson completed Pattee's performance reviews and determined whether Pattee was eligible for a bonus. (Tr. 1099.)
After acknowledging that margin accounts are inappropriate for elderly investors and those who do not understand the use of margin, Simpson admitted that when opening Command Accounts she automatically designated them as margin accounts by checking the appropriate space on the form. Simpson claimed that she did this in case the client ever wanted to use the margin feature.49 (Tr. 1104.) She testified that although the daily list that recorded settlement dates probably noted margin calls, it was Pattee that checked the list each day. Pattee then gave Simpson the portion of the list relating to the clients Simpson serviced.50 (Tr. 1105-06.)
Simpson responded to questions about her previous recollections of specific clients. Simpson acknowledged that she had pulled Beverly Look's holding pages after her complaint about unauthorized transactions in order to assist in their account review. (Tr. 1103-04.) Simpson did not remember any details about the complaint of Mr. and Mrs. Thomas Sheredy, nor did she remember Mr. and Mrs. Gerald Couturier. She testified that she did not know what Margie McCoy was complaining about. Finally, although there is a dispute concerning Simpson's discussions with Evelyn Burdgick about break points and rights of accumulation, Simpson maintains that Burdgick received break points on her purchases. (Tr. 1107-11.)
Vanstrat was accepted as a handwriting expert.51 (Tr. 889.) In 1947, Vanstrat graduated from the School of Police Administration at Michigan State University. In 1949, he was assigned to the Scientific Crime Detection Laboratory of the Michigan State Police, where he remained until his retirement in 1972.52 Upon his retirement, he simultaneously started a private practice in document examination and took a position as chief document examiner with the Michigan Department of Social Services, which he left in 1985. (Tr. 891-92.)
After acknowledging that it is not always possible to determine whether a person was responsible for a questioned signature, Vanstrat testified that Pattee had forged signatures on three of the questioned documents.53 Additionally, Vanstrat testified that it was more probable than not that the signatures on two other documents were written by Pattee.54 (Tr. 893, 897-98.) Vanstrat testified that he viewed eighteen documents representing Pattee's general writing and then performed letter to letter combination comparisons with the questioned documents.55 Vanstrat repeated this method using Simpson's known handwriting exemplars and determined that Simpson had not signed several of the documents.56 (Tr. 899-911.) Vanstrat testified that his analyses lasted approximately eleven to twelve hours. (Tr. 911.)
On cross-examination by the Division, Vanstrat testified that although on a number of occasions he was unable to determine who had written certain other disputed signatures, he had concluded that they were not written by Simpson. (Tr. 919.)57
From 1983 until 1989, Jandreski was the branch manager of the Flint office. Jandreski hired both Pattee and Simpson. Jandreski neither discussed the possibility of Pattee and Simpson working together nor suggested that Simpson act as Pattee's mentor. (Tr. 946-47.) During the time that Pattee and Simpson worked as separate brokers, internal audits revealed no problems with Simpson. (Tr. 949.) As manager, Jandreski installed a phone system to monitor the number of brokers outgoing calls. At the end of each day, he compared the number of calls with the number of transactions to ensure that clients had been contacted before trades were executed. (948-50.)
On cross-examination by Pattee's counsel, Jandreski testified that although he stepped down as branch manager in 1989, he did not leave the Flint branch until March 1990. Jandreski testified that he has no knowledge about any conversations that took place during the one year period between his departure and the time when Simpson and Pattee began working together. (Tr. 951-52.)
From October 1994 until May 1995, Novickus was Simpson's sales assistant. (Tr. 973.) Novickus testified that each day Pattee arrived before Simpson and went into Simpson's office to check messages. Throughout the day Pattee intercepted Simpson's phone messages. (Tr. 975-77.) Pattee picked up the order tickets and compared them with the confirms. (Tr. 979.) During the one month time period between Pattee's and Simpson's departures, Simpson worked diligently to investigate the discrepancies in client accounts. Simpson never asked Novickus to forge a document, and Novickus never saw blank signed LOAs in either Pattee's or Simpson's office. (Tr. 980-81, 984.)
From January 1989 until February 1990, Chargo worked as Simpson's sales assistant. (Tr. 991-92.) Chargo was never asked to forge a signature and never witnessed any indications of unauthorized activity. (Tr. 992.) Chargo neither saw Pattee and Simpson work together nor heard Simpson described as Pattee's mentor. (Tr. 993-94.) Chargo occasionally took messages for Simpson, but never heard any customer complaints. (Tr. 994-95.)
In 1990, Pattee acquired the Donakowski account from another broker. (Tr. 999.) Donakowski dealt with Simpson only once, after Pattee forgot to mail a check. Donakowski called the office and was told that because Pattee was on vacation, Simpson would give her a check if she came to the office. Donakowski went to the office and Simpson gave her the check. (Tr. 1000-01.) On cross examination, Donakowski admitted that she had not noticed the change in broker numbers on her monthly statements. Donakowski trusted Pattee and was always satisfied with Pattee's explanations about account activity. (Tr. 1003-04.)
Raymond Trudell dealt exclusively with Pattee after she acquired his account in 1989. (Tr. 1006-08.) Trudell does not know a Wanda Snyder. Nonetheless, funds were transferred from Trudell's account to Snyder's account using a forged LOA. (Tr. 1007-08.) When Trudell questioned Pattee about account losses, she told him that they were only "paper losses". (Tr. 1007.) After reviewing a January 1990 account statement, Trudell admitted not understanding that it showed a debit balance. Trudell never authorized margin transactions. (Tr. 1008-10.)
From November 1983 through February 1993, Farr was the Operations Manager at Prudential's Flint branch. (Tr. 1118.) She monitored brokers to make sure they complied with rules and regulations and reported noncompliance to the branch manager. (Tr. 1133-34.) When Farr received a LOA to transfer funds, she verified that the proper accounts were being affected. (Tr. 1119.) Simpson and Pattee independently handled LOAs for their own accounts. (Tr. 1119.) While Simpson's LOAs were usually typed, Pattee's were often handwritten. Because Pattee's LOAs appeared to transfer funds between unrelated accounts, Farr often questioned Pattee's LOAs. Pattee never once responded that Simpson had instructed her to complete the disputed LOA. Farr had gone to Hester with her concerns about the prevalence of LOAs in the accounts controlled by Pattee. Hester told her not to worry because he had initialed and approved the LOA. (Tr. 1120-21.)
Farr explained that Pattee was among the few people who had access to the operations area. Pattee had access because she held a Series 8 license and occasionally filled in when an acting branch manager was needed. (Tr. 1122-23.) Finally, Farr explained that Prudential policies prohibited brokers from accepting cash or money order deposits. Accordingly, when a client wanted to make such a deposit, the broker had to bring the customer to the cashier window. (Tr. 1124-26.)
On cross-examination by the Division, Farr stated that she did not attend daily meetings between Pattee and Simpson. Farr also admitted that, due to serious health problems, she was absent from work quite a bit. (Tr. 1130-34.)
Pattee called no witnesses and introduced no documents other than a consent order by the Corporation, Securities, and Land Development Bureau of the Michigan Department of Consumer and Industry Services (Bureau), about which she testified briefly.58 As a result of the consent order, her current employer, Dean Witter, assumed additional supervisory responsibilities for a one year period.59 Pattee's twelve month period of observation has expired. During the past three years, there have been no complaints from either customers or the State of Michigan against Pattee. (Tr. 1139-41; Div. Ex. 174.)
My findings and conclusions are based upon the record and my observation of the witnesses that testified at the hearing, as well as the arguments and proposals of fact and law, and the relevant statutes and regulations. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision.
In 1985, Simpson60 began her career in the securities industry as a Prudential broker-trainee.61 (Tr. 1013.) During her first year training period, Simpson obtained her Series 7 license and attended various Prudential in-house training programs. (Tr. 1015-16.) By the end of her first year, Simpson's compensation was strictly commission based. (Tr. 1017.) From 1988 through 1993, Simpson was the top producer in the Flint office. In 1994, she was its second largest producer. (Tr. 454; Div. Ex. 155.) In May 1995, Simpson was terminated by Prudential. In August 1995, Simpson became a registered representative with Leonard and Co. Simpson currently holds a Series 7, a Series 63, and a Series 65 license. (Tr. 1012-13.)
Pattee62 began her career in the securities industry in the early 1980s as a wire operator at First of Michigan. Shortly afterwards, Pattee obtained her Series 7 license and began working as a sales assistant to the branch manager. In 1986, Pattee obtained her own production number and began to develop a client base. Pattee obtained her Series 8 license at First of Michigan, but never supervised other brokers. (Tr. 262-67.)
In 1988, Pattee left First of America and joined Prudential as an account executive. Pattee was given her own production number. (Tr. 267-68.) Pattee transferred her Series 8 license to Prudential and occasionally assisted the branch manager with his duties, but did not supervise other brokers. (Tr. 266-69.) In May of 1991, Pattee began working for Simpson as her registered sales assistant. (Tr. 281, 473.) Pattee continued to work as Simpson's registered sales assistant until she left Prudential on March 31, 1995. (Div. Ex. 162 at SEC 012184.) Pattee is currently a registered representative at Dean Witter. (Tr. 1141.)
In 1988, shortly after joining Prudential, Pattee met Simpson.63 (Tr. 267-69.) In 1990, Pattee was told that because of her low production level, her payout level was going to drop from 32% to 20% of her gross commissions, beginning in either January or February of 1991.64 (Tr. 273-74, 1019-20.) Because Pattee was going to be making substantially less money as a result of the payout level decrease, she began to explore the possibility of working with another broker. (Tr. 274, 517-18.) Pattee and Simpson were friends and because Pattee aspired to be like Simpson,65 Pattee approached Simpson about working together officially. (Tr. 275, 1013-14, 1067-69.)
In May 1991, after employment negotiations,66 Pattee became Simpson's registered sales associate.67 (Tr. 281, 473, 1018.) Simpson agreed to pay Pattee a fixed salary of $3000 per month, provided Pattee generate at least $5000 per month in gross commissions in the accounts that Pattee had brought to the relationship.68 (Tr. 282, 1018-1020, 1099.) Prudential deducted Pattee's salary from Simpson's commissions.69 (Tr. 282-83, 474, 1098.) Simpson had the authority to disassociate herself from Pattee which effectively would result in Pattee being fired from Prudential.70 (Tr. 475, 1098-99.) Hester told Simpson and Pattee that Simpson would be responsible for monitoring Pattee's order tickets as well as any trading losses and order errors. (Tr. 476, 534.) As a result of this arrangement, Pattee gave up her own production number and her former clients were consolidated under Simpson's broker number.71 (Tr. 284-85; 1062-63; 452.) Accordingly, Simpson was the broker of record for all transactions executed in the accounts of Pattee's former clients and all commissions were credited to Simpson.72 (Tr. 284-85, 478, 1062-63, 1073.)
I credit Pattee's testimony that describes in detail her working relationship with Simpson. Her testimony was corroborated by other witnesses and the documentary evidence. I find that Simpson directed Pattee's day-to-day activities. Specifically, Simpson directed Pattee to call certain clients, to use certain sales ideas, and to solicit clients to buy or sell certain stocks. (Tr. 478-80.) Each morning Simpson and Pattee met to review the prior day's activity. At these meetings, Simpson gave Pattee a list of activities to do during the day. (Tr. 296-97.) In the evenings, Pattee and Simpson went over transactions to be executed the following day. They then printed out computer lists "of securities and who owned them, lists of money lines showing who had available cash, who had buying power, and lists of specific client accounts." (Tr. 313.) From these lists, Simpson gave Pattee instructions regarding what securities were to be purchased or sold in various customer accounts. (Tr. 297-98, 303-04, 313.)
Brayer's testimony is credited in regard to the eight documents she identified and attributed to Simpson. She gave a reasoned and detailed explanation of how she arrived at her conclusion. I credit her conclusion that Simpson signed the eight documents.
I credit Vanstrat's testimony pertaining to his analyses of the Pattee signatures. He gave a reasoned and credible explanation of how he reached his conclusion. His opinion that certain signatures were not written by Simpson, however is not credited. Unlike his detailed analyses of Pattee's exemplars, he gave no explanation for reaching this conclusion.
Margie McCoy had an account with Simpson during the relevant period. (Div. Ex. 28A.) On January 20, 1994, McCoy, accompanied by her nephew Paul Bontrager, met with Simpson. (Tr. 441-42, 746-47.) McCoy told Simpson to liquidate most of her investments, but not to sell her Wal-Mart securities. Shortly thereafter, Bontrager left the meeting. Next, Simpson gave McCoy an IRA distribution form to sign. The form was blank except for McCoy's name, social security number, and address written at the top of the form. McCoy signed the form. (Tr. 442-43; Div. Ex. 172.) On January 27, 1994, the assets, including the Wal-Mart stock, were sold. (Div. Ex. 172.)
The IRA distribution form, dated February 2, 1994, was completed by someone other than McCoy and reflected the full account liquidation. I credit McCoy and Bontrager's testimony and find that Simpson was told not to sell the Wal-Mart securities. I do not credit Simpson who testified that McCoy gave no such limiting instructions. (Tr. 1037-38.) This finding is based not only on McCoy's and Bontrager's testimony, but also on the later attempts to have the transaction reversed and McCoy's subsequent repurchase of the stock. (Tr. 443, 749, 751, 757.)
In January 1989, Margie Verbal met with Pattee to discuss opening an account. Pattee invited Simpson to join the meeting and introduced Simpson as her "business partner." (Tr. 540-41.) I credit the testimony of Verbal that she told Simpson and Pattee that she had conservative investment objectives and did not want to invest in the stock market. After being told by Pattee and Simpson about a "risk-free" plan that resembled a certificate of deposit and included a guaranteed 9% return, Verbal opened a Prudential account. (Tr. 347, 541-42; Div. Ex. 44A at SEC 007294.) Verbal neither authorized any subsequent transactions nor had further conversations with either Pattee or Simpson. However, during the twenty-one month period from July 1991 through March 1993, nineteen transactions were executed in Verbal's account, generating $1995 in commissions. During this period, ten purchases totaling $36,146 were made in Verbal's account, which had an average monthly equity of $3679. The annualized turnover rate was 5.6, the annualized break-even rate of return was 30.98%, and 90% of the securities were held for less than ninety days. (Tr. 542, 545; Div. Ex. 167.)
I further credit Verbal's testimony that she was not aware of the account activity until 1994, when she noticed that Wal-Mart stock had been purchased for her account in March 1993. (Tr. 542; Div. Ex. 44A at SEC007332.) Verbal called Prudential to complain and was told, by either Pattee or Simpson, that she would lose money if she sold the securities. Verbal, however, insisted on selling the securities and closing the account. (Tr. 542-45.) On January 26, 1994, the securities were sold. (Div. Ex. 44-A at SEC .) On February 3, 1994, unbeknownst to either client, $550 was transferred to Verbal's account from the Mr. and Mrs. George Davis account. (Tr. 544; Div. Exs. 44A at SEC007340, 17A.) Verbal's account was closed on February 22, 1994, and Verbal received a check for the balance. (Tr. 543; Div. Ex. 44A.)
Patricia Sheredy and her husband, Thomas, both retired, each had an IRA account at Prudential during the relevant period. (Div. Ex. 35A.) Simpson was their broker and they only spoke to Pattee when leaving messages for Simpson. Prior to Simpson acquiring their account, the Sheredys executed forms with their original broker indicating a conservative investment objective. They did not discuss their objectives with Simpson any further. (Tr. 549-550.) In September 1992, Thomas Sheredy called Simpson to discuss transferring the $1700 in his Cash Money Market Account into something with a higher interest rate. (Div. Ex. 35B; Tr. 551.) At the time, each of the Sheredys was invested in Fannie Mae securities. (Tr. 551; Div. Ex. 35A.) The Fannie Maes had been purchased ten months earlier at $101.00. (Tr. 552; Div. Ex. 35A.) Simpson recommended that the Sheredys sell their Fannie Maes because there was a possibility that they would be recalled and, if so, the Sheredys could lose 40%. (Tr. 551-53.) There is conflicting testimony as to the sale price that Simpson quoted the Sheredys. Patricia Sheredy testified that Simpson quoted the Fannie Maes at $105.00. Simpson testified that the Sheredys misunderstood and that she told them the Fannie Maes were selling at $100.50 or par and one half. (Tr. 551, 1040.) There is further conflicting testimony regarding the instructions that Mrs. Sheredy gave Simpson concerning the investment of the proceeds. Sheredy testified that she instructed Simpson to invest half of the proceeds in the Prudential Flexi-Fund and half in the Washington Mutual Investors Fund. (Tr. 551.)
On September 23, 1992, Simpson sold the Fannie Maes at $100.50. This resulted in a loss of $.50 per share. (Tr. 555; Div. Ex. 35A at SEC005680.) I credit the Sheredys testimony that they would not have sold the Fannie Maes had they known the true selling price. (Tr. 555.) Additionally, rather than follow Mrs. Sheredys instructions concerning the investment of the sale proceeds, Simpson invested $11,745.78 of the proceeds in the Prudential Flexi-Fund and $4996.47 in the Washington Mutual Investors Fund. (Tr. 55; Div. Ex. 35A at SEC005680-81.) The Sheredys complained to Simpson, attempted to speak to Hester, and sent a complaint letter that was forwarded to the SEC and Prudential's New York office. The Sheredy's were informed that nothing could be done because Simpson had not earned any commissions on the transaction. (Tr. 551-53; Div. Ex. 35B at SEC005751-52.)
Barbara Congdon is a seventy-nine year old retiree. On May 3, 1988, Congdon opened her account with Pattee. (Div. Ex. 13A at SEC001618.) Congdon told Pattee that she had conservative investment objectives. (Tr. 559.) On several occasions, Congdon went to Simpson when she did not understand what Pattee was doing because she thought Simpson was Pattee's boss. On those occasions, Simpson called Pattee into the office to answer Congdon's questions. (Tr. 560, 569.)
Pattee did not call Congdon prior to executing trades and Congdon called Pattee only once to request a specific purchase. During the period from March 1993 through April 1994, thirty-one transactions were effected in Congdon's account, generating $4484 in commissions. (Tr. 559-60; Div. Ex. 167.) During this same period, purchases totaling $101,954 were made in the account, which had an average equity balance of only $23,651. The annualized turnover rate was 3.66, the annualized break-even rate of return was 17.88%, and 50% of the securities were held for a period of ninety days or less. (Div. Ex. 167.) Congdon did not complain about the unauthorized transactions because she did not understand her account statements and trusted Pattee to act in her best interest. (Tr. 559-61.)
Congdon opened a Command Account after Pattee told her it was free, but did not understand the margin feature and, according to her testimony, never would have authorized borrowing money to purchase securities. (Tr. 562; Div. Ex. 13A.) During the period from March 1993 through April 1994, securities were purchased on margin and Congdon was charged $448 in margin interest and fees. (Div. Ex. 167.) After the first year, Congdon told Pattee to close the account because it was too expensive. (Tr. 562.) In addition to executing unauthorized trades and making unauthorized use of margin, Pattee forged signatures on two LOAs to effect unauthorized transfers from Congdon's account.75 (Div. Ex. 13A at SEC001748-91; Simpson Ex. 15; Tr. 260, 563-64.)
In 1994, after discovering that Pattee had sold the one mutual fund that she had specifically asked Pattee to purchase, Congdon told Pattee to close the account. Pattee told Congdon that her $41,000 was invested in three different companies and that she would receive an additional $500 dividend if she left her money in the third company for one more month. (Tr. 565-66.) While Congdon received checks for the proceeds of two investments, Congdon received neither the entire $41,000 nor the $500 dividend. (Tr. 566; Div. Ex. 13B at SEC001751.) When Congdon went to discuss the matter with Pattee, she was told that there was no more money in her account. (Tr. 566; Div. Ex. at SEC001751.) This was repeated to Congdon by both Simpson and Hester. (Tr. 565-67.)
On May 28, 1992, Patricia Couturier's husband, Gerald Couturier, now deceased, opened a Prudential securities account with Simpson. Gerald Couturier, a retired General Motors (GM) worker with a high school education, had little previous investment experience. (Tr. 571-72; Div. Ex. 16A.) The Couturiers dealt exclusively with Simpson. (Tr. 574.) In 1992, the Couturiers met with Simpson to discuss selling their GM stock and diversifying their money among different mutual funds. The Couturiers sought Simpson's advice and trusted her to act in their best interest. (Tr. 572-73.)
In June 1992, the Couturiers purchased Coca-Cola stock and in April 1994, they purchased Motorola stock. (Tr. 573; Div. Ex. 16A at SEC002401-02, SEC002376.) In February of 1995, Simpson phoned the Couturiers and asked to speak to Mr. Couturier. (Tr. 574-75.) Mrs. Couturier testified that she heard her husband tell Simpson that he did not want to sell the Coca-Cola stock and that he was unsure about the Motorola stock. Simpson, on the other hand, testified that she thought Mr. Couturier authorized the sale. (Tr. 574-79; 1043.) I credit the testimony of Patricia Couturier and find that Mr. Couturier did not authorize the sale. Simpson, nonetheless, sold the Coca-Cola and Motorola stock and used the proceeds to purchase several mutual funds. (Tr. 575; Div. Ex. 16A at SEC002465-66.) My finding that the sale was not authorized is further supported by the Couturiers attempts to reverse the transaction and the fact that when Prudential refused to reverse the transaction, the Couturiers filed an arbitration claim. Prudential settled the arbitration for $3000. (Tr. 575-79; Div. Exs. 16A at SEC002473, 16B.)
Milton Bain is a sixty-two year old retired GM machinist. Bain successfully completed the General Education Development (GED) exam. (Tr. 581-82.) During the period from May 1991 through March 1995, Bain had two joint accounts at Prudential, one with his wife, and the other with his son. (Div. Exs. 5A, 6A.) Although Bain initially dealt with Pattee after she acquired his account,77 he dealt exclusively with Simpson after Pattee began to work for Simpson. (Tr. 583-86, 588-89; Div. Ex. 5A at SEC000361.) Bain never asked Pattee or Simpson to execute specific transactions. (Tr. 585.) In 1991, Bain noticed that unauthorized transactions were being executed in his account. (Tr. 584-85.) He called Simpson numerous times and visited the office to inquire about the transactions. Bain was satisfied with Simpson's explanations because he believed she was acting in his best interest. (Tr. 585-86.)
During the period ranging from July 1991 through December 1993, thirty-five transactions were executed in the joint account of Milton and Bonnie Bain, generating $9890 in commissions. During this same period, purchases totaling $197,483 were made in the account, which had an average equity balance of $47,496. The annualized turnover rate was 1.7 and the annualized break-even rate of return was 8.3%. (Div. Ex. 167.) Additionally, during the period ranging from October 1991 through August 1993, several unauthorized transactions were executed in the joint account of Milton Bain and Milton Bain Jr. (Tr. 585; Div. Ex. 6A.) In 1994, Bain closed the accounts after realizing that Simpson was profiting from commissions while the Bains were losing money. (Tr. 587-88.)
Beverly Look is a sixty-seven year old GM retiree. She completed one year of college. (Tr. 590.) In 1988, after Look's son left Prudential, Pattee acquired Look's account. (Tr. 592-93; Div. Ex. 25A at SEC004042.) After a brief introductory meeting, Look rarely spoke with Pattee. Look spoke with Simpson a few times after Simpson's name began to appear on her account statements. (Tr. 593, 597.)
Although Look never asked Pattee or Simpson to execute a specific transaction and neither ever contacted Look to obtain authorization, during the forty-five month period ranging from May 1991 through January 1995, twenty-five transactions were effected in Look's account, generating $2911 in commissions. During this same period, purchases totaling $51,479 were made in the account, which had an average equity balance of $6541. The annualized turnover rate was 2.1, the annualized break-even rate of return was 12%, and 57% of the securities were held for a period of ninety days or less. (Tr. 595, 597; Div. Ex. 167.) In February 1995, Look and her son met with Pattee and Simpson. They told Pattee and Simpson that there appeared to be quite a bit of unnecessary account activity for someone, like Look, nearing retirement. They told Simpson and Pattee they wanted the account activity to "settle down." After the meeting, account activity slowed down. (Tr. 594-95.)
Doris Williams, age sixty-five, and her husband, Carlis, age sixty-nine, are both retired. Mrs. Williams has a high school education, and Mr. Williams has a GED. (Tr. 767-68.) The Williamses had a securities account with Simpson during the relevant period. (Tr. 768; Div. Ex. 46A.) On September 24, 1993, Simpson called Mrs. Williams and inquired whether she would like to purchase shares of Prudential Utility Fund Class A. Mrs. Williams declined. (Tr. 771, 775; Div. Ex. 46A at SEC007722.) Simpson, nonetheless, purchased $10,433 worth of shares in the fund. (Tr. 609, 771; Div. Ex. 46A at SEC007722.) Mrs. Williams did not understand the confirmation that she received in the mail following the purchase of the fund shares. She asked her son, Keith Williams, to review the documents. He informed her that fund shares had been purchased for her account. Mrs. Williams and her son complained about the unauthorized transaction. (Tr. 609, 772-75; Div. Ex. 46A.) The fund was eventually sold and Prudential settled the Williams claim for $442.72. Commissions on the sale of the fund were charged back to Simpson. (Tr. 537, 772-73; Div. Ex. 46A at SEC007730.)
Donald James Watters is a fifty-nine year old retired electrical lineman with a high school education. (Tr. 727.) In 1988, Watters opened an IRA account with Pattee, and in 1993, he opened a securities account. (Div. Exs. 45A at SEC007344, 45B at SEC007487.) Both of his account opening documents list speculation as an investment objective, despite the fact that Watters told Pattee that he had conservative investment objectives. (Tr. 729; Div. Exs. 45A at SEC007344, 45B at SEC007487.) Pattee never discussed Command Accounts or the use of margin with Watters. I have credited Brayer's opinion that in 1994 Simpson forged signatures on the Command Account agreement to convert Watters securities account to a Command Account with a margin feature. (Tr. 46-47, 50-51, 731-33; Div. Exs. 45B, 162, 171.) Although Pattee initially called with recommendations, she admitted that she later executed trades and margin transactions in Watters accounts without his knowledge or authorization. (Tr. 299, 372-74, 727-30.)
During the period from October 1991 through January 1995, twenty transactions were executed in Watters IRA account, generating $5178 in commissions.80 During this period, purchases totaling $84,570 were made in the account, which had an average equity of $11,416. The annualized turnover rate was 2.22 and the annualized break-even rate of return was 13.88%. (Div. Ex. 167.)
During the period from April 1994 through January 1995, fourteen transactions, including margin transactions, were made in Watters securities account, generating $3736 in commissions.81 (Tr. 299, Div. Ex. 167.) During this same period, purchases totaling $95,280 were made in the account which had an average equity of $26,183. Watters was charged $1656 in margin interest and fees. By November 1994, Watters had an outstanding margin balance of over $34,000. The annualized turnover rate was 4.37, the annualized break-even rate of return was 24.8%, and 67% of the securities were held for less than ninety days. (Div. Ex. 167.)
Audrey Kindell, age sixty-nine, is a widow employed part-time at John Harris Realty. (Tr. 736.) Kindell was an extremely conservative investor for whom the purchase of any aggressive security was unsuitable.83 (Div. Ex. 167.) Although Kindell knew that Pattee worked for Simpson, Kindell dealt primarily with Pattee, whom she trusted.84 (Tr. 738, 744-45.)
During the period from May 1991 through May 1995, Kindell had two accounts at Prudential: an IRA account and a securities account. (Tr. 737; Div. Exs. 22A and 22B.) In 1994, although Kindell and Pattee never discussed the use of margin, her securities account was converted to a Command Account with a margin feature by means of a forged signature.85 (Tr. 739; Div. Ex. 22A at SEC003524, 22B at SEC003602.)
From March 1994 through January 1995, thirteen transactions were executed in Kindell's securities account, generating $2250 in commissions.86 During this period, purchases totaling $36,421 were made in the account, which had an average equity of $4910. Kindell was charged $148 in margin interest and fees. The annualized turnover rate was 8.09, the annualized break-even rate of return was 54.95%, and 67% of the securities were held for ninety days or less. (Div. Ex. 167.)
During the period from July 1993 through January 1995, twenty transactions were made in Kindell's IRA account, generating $3242 in commissions.87 During this same period, purchases totaling $61,574 were made in the account, which had an average equity balance of $9181. The annualized turnover rate was 4.24 and the annualized break-even rate of return was 22.5%. (Div. Ex. 167.)
Wayne Sanders is a sixty-nine year old retired tradesman. After taking several junior college courses, he completed a GM apprenticeship program. (Tr. 778-79.) In 1987, Sanders and his wife opened a securities account with Simpson. Sanders specified safety of principal, long-term growth, and income as his investment objectives. (Tr. 780; Div. Ex. 34A at SEC005328.) Although Sanders dealt exclusively with Simpson, he occasionally spoke with Pattee when leaving messages for Simpson. (Tr. 781.)
In January 1994, Sanders opened a Command Account, although he did not understand the margin feature. (Tr. 782-83.) In May 1994, Sanders wrote a $5000 check against the account which caused the account to have a margin balance of over $3800 by May 19, 1994. (Div. Ex. 34A at SEC005497.) Without his knowledge, Sanders was charged $150 in margin interest from May 1994 until the margin balance was paid off in November 1994. (Tr. 783; Div. Ex. 34A.) Sanders conceded that, because there had been no purchases that could have given rise to the margin balance, it was possible that the margin balance arose as a result of his wife writing a check against the account. Sanders has no complaints against Simpson and believes she contacted him before every transaction. (Tr. 784-91.) Blank signed LOAs bearing the Sanders name were found in Simpson's office. (Div. Ex. 163.)
In 1992, Mary Jane and James Corder opened their account with Simpson. (Tr. 794-96.) The Corders had no previous investment experience and relied completely on Simpson for investment advice. (Tr. 797, 802.) Although Simpson was the Corders broker, they often spoke with Pattee because Simpson was "never available." (Tr. 801.) The Corders were not contacted before transactions were executed, yet during the period from July 1993 through October 1994, sixteen transactions were executed in the Corders account, generating $2237 in commissions. (Tr. 795, 797; Div. Ex. 167.) During this same period, purchases totaling $52,927 were made in the account, which had an average equity of $15,549. The annualized turnover rate was 2.6, the annualized break-even rate of return was 12%, and 40% of the securities were held for ninety days or less. (Div. Ex. 167.)
Although neither Simpson nor Pattee discussed the use of margin with the Corders, their account was converted to a Command Account with a margin feature without authorization by means of a forged signature. (Tr. 799, 803; Div. Ex. 15A at SEC002307.) During the period from July 1993 through October 1994, due to unauthorized margin transactions, the Corders were charged over $240 in margin interest. (Tr. 798; Div. Ex. 15A.)
In 1988, Norman and Margaret Cooper, both in their seventies, opened a joint Command Account with Pattee. The Coopers were unsophisticated investors with conservative investment objectives. (Tr. 807, 809-10; Div. Ex. 14A at SEC001765-69.) Additionally, the Coopers had two IRA accounts with Prudential. (Div. Ex. 14B, 14C.) After Pattee teamed up with Simpson, the Coopers continued to deal with Pattee. (Tr. 348, 810.) They believed Simpson was Pattee's boss. (Tr. 810, 818-19.) Although the Coopers occasionally called Pattee and asked her to execute specific transactions, Pattee neither called the Coopers with recommendations nor contacted them prior to executing trades in their account. (Tr. 810-11.) Additionally, the Coopers neither authorized the use of margin in the account nor discussed the subject with Pattee. (Tr. 349, 813-15.)
Pattee made unauthorized trades, including unauthorized margin trades, in the Cooper account before she began working for Simpson in May 1991. (Div. Ex. 14A at 1867-99.) During the period from May 1991 through March 1992, unauthorized transactions, including unauthorized margin transactions, were executed in the Coopers account, generating $5254 in commissions. (Div. Ex. 167; Tr. 810-11.) During this same period, purchases totaling $92,063 were made in the account, which had an average equity of $16,134. The annualized turnover rate was 4.5 and the annualized break-even rate of return was 33.5%. The Coopers paid over $1600 in margin interest. (Div. Ex. 167.) In addition to unauthorized transactions, during the period from January 1990 through February 1992, Pattee caused over $9000 to be transferred from the Coopers account to the accounts of other customers via three forged LOAs.90 (Div. Ex. 14A at SEC001985-90.) Pattee personally forged the signatures on two of the LOAs.91 (Simpson Ex. 15.)
In 1994, the Coopers accountant informed them that it appeared their account was being churned. (Tr. 812.) Upset by this information, they complained to Hester and confronted Pattee.92 Pattee repaid the Coopers over a period of six months with several $1000 money orders. (Tr. 812-13, 818.)
Dorothy Mae Davis is a seventy-one year old retired bowling instructor. Her husband, George Davis, is a seventy-one year old retired GM employee. (Tr. 823.) When Pattee acquired the Davis account, they told her that they wanted low-risk investments. (Tr. 824-25.) In November 1992, the Davises gave Pattee a $2000 cashiers check and $3000 in cash to deposit into their account. (Tr. 380, 831; Div. Ex. 145.) Pattee gave them a receipt for $5000 and disregarded corporate policy by accepting the cash. Moreover, Pattee then deposited only $4000 into the Davises account. (Tr. 381, 831; Simpson Exs. 8 and 9.)
The Davises never asked Pattee to execute any specific transactions and Pattee never called to obtain authorization. Nonetheless, between February 1993 and April 1994, nineteen transactions were executed in the Davis account, generating $2823 in commissions. (Tr. 376, 825-26; Div. Ex. 167.) During this same period, purchases totaling $48,163 were made in the account, which had an average equity of only $7642. The annualized turnover rate was 5.0, the annualized break-even rate of return was 29.7%, and 75% of the securities in the account were held for ninety days or less. (Div. Ex. 167.)
The Davises never authorized the use of margin. In April 1994, however, $2700 worth of AT&T stock was purchased on margin for the Davis account. (Tr. 827-28; Div. Ex. 17A at SEC002589-90.) On February 3, 1994, $550 was journaled from the Davis account to the Verbal account by means of a LOA on which Pattee forged the signature. (Tr. 828; Div. Ex. 17A at SEC002618; Simpson Ex. 15.) In September 1992, $530 was journaled from the Donakowski account to the Davis account to cover a withdrawal request. (Div. Exs. 17A at SEC02564; 19A.)
In 1993, while the Davises were in the Florida, their accountant notified them that "something was out of line" in their account. Mrs. Davis phoned Simpson and told her that trading in the account had to stop. Simpson told her that although she was unaware of any problems in the account, she would look into it. (Tr. 826.) When the Davises returned from Florida, Mrs. Davis met with Pattee and told her that the trading had to stop. (Tr. 827.) In either 1994 or 1995, the Davises had a second dispute with Pattee. Specifically, after the Davises did not receive a $500 check that Pattee had purportedly mailed, Pattee told them that the check must have gotten lost in the mail. (Tr. 829.) When the Davises returned from Florida, Mrs. Davis went to the office and demanded that Pattee give her the $500. Pattee gave Mrs. Davis two money orders to satisfy the obligation. (Tr. 830.)
Pauline Mathis, an eight-two year old widow, completed the ninth grade. (Tr. 837-38.) In 1989, she opened an account with Pattee. Mathis told Pattee that she did not want to invest in stocks. (Tr. 839.)
Mathis never called Pattee to request certain transactions and Pattee never called Mathis with recommendations. Mathis did not complain about unauthorized transactions because she did not understand her monthly statements. Pattee told Mathis that she would not have to pay commissions. (Tr. 839-40.) Pattee never discussed the use of margin with Mathis and Mathis never authorized Pattee to purchase securities on margin. However, as Brayer explained, in January 1994, Simpson converted Mathis account to include a margin feature by forging the signatures on a Command Account agreement. (Tr. 46-51, 841-42; Div. Ex. 27A at SEC004325.)
During the period from May 1991 through December 1994, fifty-five transactions, including unauthorized margin purchases, were executed in the Mathis account. These transactions generated $13,692 in gross commissions and cost Mathis over $1900 in margin interest. The annualized turnover rate was 3.3 and the annualized break-even rate of return was 20%. (Div. Ex. 167.) Additionally, Pattee and Simpson made four unauthorized transfers, totaling $4015, out of the Mathis account by means of forged LOAs.95 (Tr. 361, 842; Div. Ex. 27A at SEC004498-01.) Pauline and Ronald Mathis, however, never authorized the transfer of funds from the account. (Tr. 863-64.) Finally, to conceal the unauthorized activity, Pattee mislead Mathis about the value of her account. Pattee told Mathis that her monthly income checks were being paid out of interest when, in fact, they were being paid out of principal. (Tr. 367, 845-47.)
When asked why she had written Pattee a personal check, Mathis explained that Pattee had called and told her that the account was "short" because Mathis son, Ronald, had neglected to repay $2000 that he had borrowed from the account.96 Pattee offered to deposit $2000 if Mathis would agree to reimburse her. (Tr. 844.) Mathis paid Pattee with a $2000 personal check. (Tr. 845.) Because Mathis did not understand her account statements, she did not learn about the amount of account activity until 1995, when a friend looked at a statement and explained the total net worth of the account. (Tr. 848.)
Joanne Cardinal is the conservator for her mother, Daisy Cardinal, and manages her account. In 1989, Joanne Cardinal opened an account for her mother with Simpson. In 1991, she consolidated all of her mother's assets into one account after her mother became incapacitated. She told Simpson about her mother's condition and the fact that she was her mother's conservator. (Tr. 852-54.) Cardinal never called and requested that Simpson execute a specific transaction. (Tr. 855.) Simpson maintained signed blank LOAs for Daisy Cardinal. (Div. Ex. 163.)
In July of 1992, Simpson purchased $15,940 of the Income Fund of America, Inc. for the account. (Div. Exs. 11A at SEC001463, 167.) In February of 1993, Simpson purchased an additional $20,000 of Income Fund of America as well as $20,000 of Washington Mutual Investors, which was from the same fund family. (Div. Ex. 167.) As Calhoun testified, Simpson possibly failed to take advantage of a breakpoint in connection with the February purchases. (Div. Ex. 167; Tr. 654-55.)
In February of 1993, Simpson purchased $19,557 of Prudential Flexifund Strategy Portfolio, for which a 5% sales charge was paid. (Div. Ex. 167.) Beginning in April 1993, Cardinal began making regular withdrawals to pay for her mother's care. (Tr. 857; Div. 11A.) Sales of the Prudential Flexifund Strategy Portfolio began in April and continued until December 1994, when all of the shares were sold. (Div. Ex. 167.) According to Calhoun, liquidations made to satisfy withdrawal requests do not automatically protect a broker from claims of short-term trading. Calhoun testified that it is also necessary for the broker "to determine whether the need for liquidity could have reasonably been foreseen." Calhoun contends that this duty involves asking the appropriate questions.
In 1990, Pattee acquired the Donakowski account. (Tr. 1000.) The Donakowskis trusted Pattee and were satisfied with her explanations of the trading activity in the account. (Tr. 1003-04.) Except for one instance, the Donakowskis primarily dealt with Pattee. Specifically, when Mrs. Donakowski called to inquire why Pattee had not mailed a $1000 check, she was told that Pattee was on vacation and that Simpson would give them the check if they came down to the office. They went to the office and Simpson gave them a check. (Tr. 1003.) On September 22, 1992, $530 was journaled from the Donakowski account to the Davis account by means of a LOA on which Simpson forged the Donakowskis signatures. (Tr. 37-39; Div. Ex. 162 at SEC012171.)
In 1989, Pattee acquired the Trudell account. (Tr. 1006.) Trudell dealt exclusively with Pattee. (Tr. 1007.) As early as 1990, Pattee began executing unauthorized trades and margin transactions in Trudell's account. (Tr. 1009-10.) During the period from February 1994 through January 1995, twenty-three transactions were executed in the Trudell account, generating $6370 in commissions. During this period, purchases totaling $160,542 were made in the account, which had an average equity of $39,414. Trudell was charged $1956 in margin interest and fees. The annualized turnover rate was 4.1, the annualized break-even rate of return was 21.1%, and 55% of the securities were held for a period of ninety days or less. (Div. Ex. 167.) On April 8, 1993, $3000 was journaled from Trudell's account using a forged LOA on which Simpson forged the signatures.100 (Div. Ex. 174; Tr. 37-39, 1007-08.) Finally, Pattee intentionally misled Trudell by telling him that the losses appearing on his account statements were just "paper losses." (Tr. 1008.)
During the period from May 1991 through March 1995, Burdgick had two securities accounts with Prudential. (Div. Exs. 8A, 8B.) Burdgick's accounts were handled by Simpson. (Tr. 1045.) In August of 1994, Simpson purchased approximately $258,000 in open-end mutual funds for Burdgick's account. (Div. Ex. 167.) Simpson maintains that available higher breakpoints were not achieved in the 1994 purchase because of the need for portfolio diversification. In November of 1994, Simpson asked Hester for advice about the Burdgick account. Hester suggested that Burdgick invest in high-grade corporate bonds. (Tr. 482-83.) In February of 1995, Simpson invested approximately $170,000 in four additional open-end mutual funds. (Div. Ex. 167.) When Hester saw the February 1995 purchases were not consistent with what had been discussed in November, he called Burdgick who informed him that she was unaware that the transactions had occurred. (Tr. 483-85.)
Lela Phelps is an unsophisticated elderly investor who did not understand her account statements. (Tr. 368.) In 1990, Pattee acquired the Phelps account. (Div. 30A.) Although Pattee occasionally called Phelps with recommendations,103 she also often executed unauthorized trades. (Tr. 368-69.) During the period from September 1993 through August 1994, eleven transactions were executed in the Phelps account, generating $1701 in commissions. During this same period, purchases totaling $27,180 were made in the account which had an average equity of $5,186. The annualized turnover rate was 5.2, the annualized break-even rate of return was 32.8%, and 83% of the securities were held for a period of ninety days or less. (Div. Ex. 167.)
Kathleen Refice is a thirty-five year old teacher. Her husband is a truck driver. (Div. Ex. 167.) During the period from May 1991 through March 1995, the Refices had a joint account, two custodial accounts, and an IRA account at Prudential. (Div. Exs. 33A, 33B, 33C, 167.) The Refices had conservative investment objectives. (Tr. 641.)
During the period from July 1993 through December 1993, four transactions were executed in the joint account. During this same period, purchases totaling $3204 were made in the account, which had an average equity of only $1524. These purchases generated $214 in commissions. The annualized turnover rate was 4.2 and the annualized break-even rate of return was 28.1%. (Div. Ex. 167.)
During this same period, nine transactions were executed in one of the custodial accounts, generating $1341 in commissions.105 During this six month period, purchases totaling $24,775 were made in the account, which had an average equity of $8388. The annualized turnover rate was 5.9, the annualized break-even rate of return was 32%, and 75% of the securities were held for a period of ninety days or less. (Div. Ex. 167.)
During the six month period ranging from July 1993 through December 1993, nine transactions were executed in the second custodial account, generating $1412 in commissions.106 Purchases totaling $25,004 were made in the account which had an average equity of $8468. The annualized turnover rate was 5.9, the annualized break-even rate of return was 33.3%, and 75% of the securities were held for a period of ninety days or less. (Div. Ex. 167.)
Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder are the general antifraud provisions of the federal securities laws. Section 17(a) of the Securities Act makes it unlawful "in the offer or sale of" securities, by jurisdictional means, to: (1) employ any device, scheme or artifice to defraud; (2) obtain money or property by means of an untrue statement of material fact or omission to state a material fact necessary to make the statement not misleading; or (3) engage in any transaction, practice or course of business that operates as a fraud or deceit upon the purchaser. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe similar practices "in connection with" the purchase or sale of securities.
The Supreme Court has determined that an action under these provisions requires a showing of materiality and scienter. Aaron v. SEC, 446 U.S. 680, 691 & 697 (1980). Information is material if a reasonable investor would consider it important to an investment decision. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic Inc. v. Levinson, 485 U.S. 224 (1988). Scienter has been defined as a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 n.12 (1976). Scienter is established by showing that the respondents acted intentionally or with severe recklessness. Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982). Recklessness is defined as "an extreme departure from the standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977). No scienter requirement exists for violations of Sections 17(a)(2) or 17(a)(3) of the Securities Act. Aaron v. SEC, 446 U.S. at 695.
The evidence establishes that Pattee and Simpson, acting in concert and using jurisdictional means, willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder by engaging in a scheme to defraud investors via unauthorized trading, including margin trading; churning; unsuitable trading; unauthorized transfers of funds; and misrepresentations and omissions of material fact. Pattee and Simpson acted with scienter when engaging in this conduct.
a. Unauthorized Trading
Pattee and Simpson executed unauthorized trades in numerous customer accounts. "(U)nauthorized trading violates the antifraud provisions when accompanied by deceptive conduct." Donald A. Roche, 64 SEC Docket 2042, 2050 (June 17, 1997). The deceptive conduct requirement is met when the respondent omits "to inform the customer of the materially significant fact of the trade before it is made." Donald A. Roche, 64 SEC Docket at 2050. Pattee admitted that she executed unauthorized trades. Additionally, several customers that she primarily serviced testified that unauthorized transactions were executed in their account. Finally, several witnesses that dealt primarily with Simpson testified that Simpson executed unauthorized transactions in their accounts. While it is true that the customers did receive monthly account statements, the clients were generally unsophisticated and unable to evaluate the statements. Karlen v. Ray F. Friedman Co. Commodities, 688 F.2d 1193, 1200 (8th Cir. 1982); see also Davis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 906 F.2d 1206, 1213 (8th Cir. 1990) (the fact that a client received monthly account statements and trade confirmations did not relieve the broker of liability when the client lacked the ability to evaluate the documents). Finally, as Pattee admitted and Bain and Sheredy testified, Pattee and Simpson misled clients when questions were raised about account activity so as to prevent them from making informed decisions about account activity. Merrill Lynch Pierce Fenner & Smith, Inc. v. Cheng, 901 F.2d 1124, 1129 (D.C. Cir. 1990) (ratification does not occur where a registered representative's misrepresentations or omissions directly prevent a customer from making an informed decision regarding ratification of the transaction).
b. Unauthorized Use of Margin
In furtherance of the scheme, Pattee and Simpson made unauthorized use of margin in order to make trades and generate commissions in accounts that were otherwise without available cash or securities to sell. Specifically, Corder and Kindell offered unrebutted testimony that their signatures were forged to convert their securities accounts to Command Accounts with a margin feature. The Division's expert identified the signatures on the Watters and Mathis Command Account agreements as having been written by Simpson. Additionally, Simpson admitted that when she opened a Command Account, she automatically designated it as having a margin feature. Pattee admitted that she avoided mentioning the margin feature and its risks when approaching customers to open a margin account. Finally, the following customers testified that although they never authorized the use of margin, margin transactions were executed in their accounts: Congdon, Watters, Kindell, Corder, Cooper, Davis, Mathis, and Trudell.
c. Unsuitable Trading
The record also establishes that Simpson and Pattee executed unsuitable trades. As the Division's expert on trading practices explained, analyzing suitability involves examining an investor's financial profile, appreciation of risk, and the consistency of the trading with that investor's investment objectives. The account summaries reflect that the majority of the relevant customers were elderly and retired, and desired safe, low-risk, liquid investments. However, as Pattee admitted, Calhoun explained, and the account summaries reflect, Pattee and Simpson disregarded their customers investment objectives and executed transactions, including margin transactions, with such frequency that it exposed their customers to excessive commissions and unacceptable levels of risk. Additionally, Pattee admitted engaging in improper mutual fund trading practices, such as engaging in short-term trading of mutual fund shares and avoiding Prudential's switch letter procedure.
In furtherance of the scheme, Simpson and Pattee also churned their customers accounts. "Churning occurs when a securities broker buys and sells securities for a customer's account, without regard to the customer's investment interests, for the purpose of generating commissions." Olson v. E.F. Hutton & Co., 957 F.2d 622, 628 (8th Cir. 1992) (quoting Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1416 (11th Cir. 1983)). See also Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981); McNeal v. PaineWebber, Jackson & Curtis, Inc., 598 F.2d 888, 890 n.1 (5th Cir. 1979). "The three elements of churning are: (1) control of the account by the broker, either explicit (discretionary trading) or de facto (through acquiescence, trust, or reliance); (2) excessive trading in light of the investor's trading objectives; and (3) scienter on the part of the broker." Hotmar, 808 F.2d at 1385; Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir. 1980); Shad v. Dean Witter, Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986). See also Nesbit v. McNeil, 896 F.2d 380 (9th Cir. 1990).
I conclude that Simpson and Pattee exercised the requisite control over fourteen of the twenty-seven disputed accounts.107 Control can either be established by explicit written authorization or by a showing of de facto control. Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975) ("(i)n the absence of an express agreement, control may be inferred from the broker-customer relationship when the customer lacks the ability to manage the account and must take the broker's word for what is happening"). Some factors to consider in determining whether or not a broker controlled an investor's account include: the investor's sophistication; the investor's prior securities experience; the trust and confidence the investor has in the broker; whether the broker initiates transactions or whether the investor relies on the recommendations of the broker; the amount of independent research conducted by the investor; and the truth and accuracy of information provided by the broker. 1 Stuart C. Goldberg, Fraudulent Broker-Dealer Practices, § 2.8(b)(1) (1978). Although neither Pattee nor Simpson ever obtained formal discretionary authority, they did exercise de facto control over the accounts reflected in the account summaries. The majority of the customers were elderly, unsophisticated investors. Customers that were primarily serviced by both Simpson and Pattee testified that they were not contacted before trades were executed in their accounts and that they rarely, if ever, initiated transactions in their accounts. Additionally, Pattee admitted executing unauthorized trades in the accounts of Audrey Kindell and Lela Phelps, two investors who did not testify at the hearing. Finally, several customers testified that they trusted Pattee and Simpson and believed their explanations about account transactions. Because the Division failed to present evidence to establish control in the remaining thirteen accounts, I cannot conclude that Simpson and Pattee exercised the requisite control over those accounts. Laurie Jones Canady, 69 SEC Docket 1468, 1479-80 (Apr. 5, 1999).
(ii) Excessive Trading
There is no single or precise formula or method for determining whether an account has been churned. Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 1990). The turnover rate, break-even rate of return, and the days held analysis are all methods that may be used to determine excessive trading in an account. Canady, 69 SEC Docket at 1475-76. 1 Goldberg, supra, §2.9(b)(1).
(a) Turnover Rate Analysis. Courts traditionally have looked to an account's turnover rate to measure its level of trading activity. The turnover rate reflects the number of times during a given period that the securities in an account are replaced by new securities. The turnover rate is computed by dividing the total purchases in a particular time period by the average monthly account value for that time period. Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 n.10 (1989). An annualized turnover rate greater than two is indicative of active trading and raises the inference of excessive trading in relation to normal investment objectives. When the annualized turnover rate reaches six, such a presumption becomes conclusive. 1 Goldberg, supra, § 2.9 (b)(1). In this case, the Division's trading practices expert demonstrated that the annualized turnover rates for the accounts analyzed ranged as high as 8.1 in the account of Audrey Kindell and that, of the other accounts analyzed, five accounts had turnover ratios of 5 or more108 and seven accounts had turnover ratios between 4 and 5.109 In addition, thirteen accounts had turnover ratios of between 2 and 4.110 Finally, the Milton Bain account had a turnover ratio of 1.7. Almost all of the investors had conservative investment objectives. Therefore, I find the high turnover rates indicate that all of the twenty-seven disputed accounts were excessively traded. See Arceneaux, 767 F.2d at 1502; Mihara, 619 F.2d at 821. See also J. Logan & Co., 41 S.E.C. 88, 93-97, 99 (1962), affd sub nom. Hersh v. SEC, 325 F.2d 147 (9th Cir. 1963) (annualized turnover rates of 1.58 to 2.08 were excessive); First Securities Corp., 40 S.E.C. 589, 590 (1961) (annualized turnover rate of 1.7 was excessive); R.H. Johnson & Co., 36 S.E.C. 467, 472, 479-480, 485 (1955), affd sub nom. R.H. Johnson & Co. v. SEC, 231 F.2d 523 (D.C. Cir. 1956).
(b) Break-Even Analysis. A further test of excessive trading examines the net amount of money invested and the transaction costs incurred. Referred to as the "break-even" or "cost to equity ratio," this method determines the percentage of return on the customer's average net equity needed to pay broker-dealer commissions and other expenses before the account breaks even and returns the first dollar of income or appreciation to the investor. 1 Goldberg, supra, § 2.9(b)(5). An 8% break-even rate of return raises the inference of excessive trading and a break-even rate of return of 16% is presumptive of excessive trading. When the break-even rate of return reaches 24%, the presumption becomes conclusive. 1 Goldberg, supra, § 2.9(b)(5). The Division's trading expert explained that when the investors at issue are conservative, an 8% annualized break-even ratio is presumptive of excessive trading and a 12% annualized ratio is proof of excessive trading. These lower thresholds reflect the fact that conservative investors can only expect to earn 8% to 12%.
As established by the Division's expert and the testimony on the record, the investors in this case had conservative investment objectives. The Division established that one customer, Audrey Kindell, needed annualized returns of 54.95% on her average net equity to pay commissions and other expenses. Additionally, ten other accounts had annualized break-even rates of return of over 22%.111 Over all, twenty-four of the twenty-seven accounts analyzed had break-even ratios of greater than 12%. Three other accounts had annualized break-even ratios of between 8% and 11%. In light of the relevant customers conservative investment objectives, I find the trading activity in the disputed accounts was excessive. See Canady, 69 SEC Docket at 1476 (finding that accounts with break-even rates of return ranging from 8.96% to 27.48% were excessively traded).
(c) Days Held Analysis. I have also analyzed the disputed trading activity by considering the holding periods for the securities in the disputed accounts. Courts have held that in the face of conservative investment objectives, "in and out trading" that results in the depletion of capital is indicative of churning. Costello v. Oppenheimer, 711 F.2d 1361, 1369 (7th Cir. 1983); Karlen, 688 F.2d at 1204; Miley, 637 F.2d at 333. An "in and out" pattern of trading exists when there is "a sale of all or part of the customer's portfolio with the proceeds immediately reinvested in other securities followed in a short period by the sale of the newly acquired securities." Hecht v. Harris, Upham & Co., 283 F. Supp. 417, 435 (N.D. Cal. 1968). In this case, the Division's trading expert reported that, in the disputed accounts, the typical pattern of trading was that of replacing one security with another after a few months holding period. Specifically, in all twenty-seven of the disputed accounts, the majority of the securities were held for a period of 180 days or less. Furthermore, there were numerous situations in which one security was sold and replaced by a similar security of the same issuer. Accordingly, I conclude that the pattern of frequent trading and short holding periods was inappropriate for these conservative investors.
e. Simpson and Pattee Attempted To Cover Up Their Fraudulent Acts
In furtherance of the scheme, Simpson and Pattee used several methods to cover up their wrongful activities. First, the Division proved that they transferred approximately $20,000 in investor funds to other investors accounts without authorization by forging customer signatures or using signed but otherwise blank LOAs. These transfers were made to cover any shortfalls in the accounts which had been created by Simpson and Pattee's excessive trading.
Simpson and Pattee also attempted to conceal their scheme by making false and misleading statements to customers about, among other things, the value of their accounts. DWS Securities Co., 51 S.E.C. 814, 820 n.24 (1993); SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982). As Pattee admitted, Simpson and Pattee's misrepresentations and omissions were designed to keep their customers in the dark about the excessive trading in their accounts and the high cost of that trading. As such, it was an integral part of the scheme to defraud.
f. Simpson and Pattee Acted With the Requisite Scienter
The Division has shown by direct and circumstantial evidence that Simpson and Pattee acted with scienter. Scienter can be proved by either direct or circumstantial evidence. "(C)circumstantial evidence can be more than sufficient to prove scienter . . . due to the difficulty of proving the defendant's state of mind." Gray v. First Winthrop Corp., 82 F.3d 877, 884 (9th Cir. 1996) (quoting Herman & MacLean, 459 U.S. 375, 390 n.30 (1982)). The direct and circumstantial evidence shows that Simpson and Pattee engaged in fraudulent acts in furtherance of the scheme. Accordingly, both Simpson and Pattee acted with scienter in defrauding their customers and willfully violated Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
g. Statute of Limitations
In her Answer, Simpson pleads the applicable statute of limitations as an affirmative defense. The only possible applicable statute of limitations is the five-year limit contained in 28 U.S.C. § 2462 on administrative proceedings seeking to enforce a "penalty." See Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996). The statute provides:
an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.
28 U.S.C. § 2462.
Initially, I take note that Simpson failed to offer any proof as to why the statute of limitations would bar this action. Second, the evidence establishes that actions in furtherance of the scheme took place well within the five-year limitations period. More importantly, the record indicates that Simpson's actions here may be viewed as part of a continuing, interrelated scheme to take advantage of her customers lack of sophistication and trust to maximize her own compensation. See Laura Canady, 69 SEC Docket 1468, 1493 n.54 (Apr. 5, 1999). The statute of limitations does not act as an evidentiary bar. Evidence of the scheme outside of the applicable limitations period is admissible. See United States v. Jensen, 608 F.2d 1349, 1355 (10th Cir. 1979)("the statute of limitations is no bar if there is an ongoing scheme continuing into the (limitations) period"); United States v. Gavin, 565 F.2d 519, 523 (8th Cir. 1977)(evidence of events extending beyond statute of limitations admissible to show motive, intent, a continuing scheme, and lack of inadvertent action). Accordingly, it is in the public interest to consider all of Simpson's fraudulent activity in assessing sanctions. Laura Canady, 69 SEC Docket at 1493.
Unlike Simpson, Pattee first raised the issue of the applicable statute of limitations in her post-hearing brief. Rule 220(c) of the Commission's Rules of Practice provides that "(a) defense of res judicata, statute of limitations or any other matter constituting an affirmative defense shall be asserted in the answer." 17 C.F.R. § 201.220(c). It is well established that reliance on a statute of limitations is an affirmative defense and is waived if not raised in a timely fashion. Laura Canady, 69 SEC Docket at 1492-93. Pattee's failure to raise the statute of limitations in this case represents a waiver of that claim. Id.
The Division asks that Simpson and Pattee each be: (1) barred from association with any broker-dealer pursuant to Section 15 (b) and 19(h) of the Exchange Act; (2) ordered to pay a civil money penalty of $100,000 pursuant to Section 21B of the Exchange Act; (3) ordered to cease and desist from committing or causing a violation or future violation of Section 17(a), Section 10(b), and Rule 10b-5 promulgated thereunder; and (4) jointly and severally liable ordered to disgorge $73,667 in excess commissions plus reasonable prejudgment interest.
Sections 15(b)(6) and 19(h) of the Exchange Act empower the Commission to impose administrative sanctions against persons associated with, respectively, broker-dealers and self regulatory organizations. Specifically, Section 15(b)(6) of the Exchange Act authorizes the Commission to censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding twelve months, or bar such person from being associated with a broker or dealer if the Commission finds that, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or bar is in the public interest.
The starting point for assessing what sanction is appropriate in the public interest requires consideration of many factors, including deterrence and:
(t)he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that his occupation will present opportunities for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), affd on other grounds, 450 U.S. 91 (1981)
The Court of Appeals for the District of Columbia explained that "(t)he public interest standard is obviously very broad, requiring that the Commission consider a full range of factors bearing on the judgment about sanctions that the expert agency ultimately must render." Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1110 (D.C. Cir. 1988). The severity of the sanctions depends on the facts of each case and the value of the sanction in preventing a recurrence of the violative conduct. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211-212 (1975); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). Sanctions should demonstrate to the particular respondent, the industry, and the public generally that egregious conduct will merit a harsh response. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976).
Simpson and Pattee's scheme spanned an approximate four year period. Indeed, the Division's expert on trading practices characterized Simpson and Pattee's actions as "particularly egregious." Pattee admitted to knowingly committing illegal acts in furtherance of the scheme. Simpson, however, continues to deny any wrongdoing and has refused to accept responsibility for her actions.
Pattee is currently a registered representative at Dean Witter. Pattee's conduct was egregious and extended over a significant period of time. Additionally, Pattee purposefully acted to avoid detection. Pattee's actions mandate a serious sanction. Accordingly, I conclude that it is in the public interest to permanently bar Pattee from being associated with a broker-dealer, a member of a national securities exchange, or registered securities association.
Simpson is currently a registered representative with Leonard & Co. Simpson's conduct was egregious and extended over a significant period of time. The scheme was designed to maximize commissions and avoid detection. Moreover, Simpson has refused to accept responsibility for her actions. Simpson's course of conduct mandates a serious sanction. Accordingly, I conclude that it is in the public interest to permanently bar Simpson from being associated with a broker-dealer, a member of a national securities exchange, or registered securities association.
The Division has requested that both Simpson and Pattee be collaterally barred from other aspects of the securities industry. In light of Teicher v. SEC, 177 F.3d 1016 (D.C. Cir. 1999), I decline to impose a collateral bar on either of the Respondents.
Section 21B(a) of the Exchange Act authorizes the Commission to assess civil money penalties provided that it is in the public interest. Additionally, the public interest finding must support the amount of a particular penalty, not merely the overall decision to assess a penalty. See First Sec. Transfer Sys., Inc., 60 SEC Docket 441, 447 n.15 (Sept. 1, 1995).
Section 21B(b) of the Exchange Act establishes a three-tier system for assessing the maximum amount of a penalty. In the first tier, the maximum penalty for each act or omission is $5,000 for a natural person or $50,000 for any other person. In the second tier, the maximum amount is $50,000 for a natural person or $250,000 for any other person if the act or omission involves fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement. In the third tier, the maximum amount is $100,000 for a natural person or $500,000 for any other person if the act or omission (1) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and (2) directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in substantial pecuniary gain to the person who committed the act or omission.
Factors that may be considered in determining whether a penalty is in the public interest and the appropriate amount of the penalty are specified in Section 21B(c) of the Exchange Act. These factors are: (1) whether the act or omission for which the penalty is assessed involved fraud, deceit manipulation, or deliberate or reckless disregard of a regulatory requirement; (2) the harm to other person(s) resulting either directly or indirectly from such act or omission; (3) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior; (4) whether the respondent previously has been found by the Commission, another regulatory agency or a self-regulatory organization or has been enjoined or convicted by a court of competent jurisdiction of violations of such laws or rules; (5) the need to deter respondent and others from committing such acts or omissions; and (6) such other matters as justice may require.
I conclude that it is appropriate and in the public interest for Simpson to pay a third tier civil money penalty of $100,000. This decision is based on the fact that her fraudulent conduct evidenced a deliberate disregard for the securities laws over an extended period and resulted in substantial losses to numerous investors while allowing her to enjoy substantial pecuniary gains.
I further conclude that it is appropriate and in the public interest for Pattee to pay a second tier civil money penalty of $50,000. This decision is based on the fact that her fraudulent conduct evidenced a deliberate disregard for the securities laws. While it is true that Pattee cooperated in this proceeding, her conduct over an extended period of time resulted in substantial losses to numerous investors and allowed Pattee to maintain her desired salary level.
If the Commission finds, after notice and opportunity for a hearing, that any person is violating, has violated, or is about to violate any rule or regulation, Section 8A(a) of the Securities Act and Section 21C(a) of the Exchange Act authorize the Commission to impose a cease and desist order against that person. These provisions provide that the Commission may issue an order against:
such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision rule, or regulation.
Securities Act Section 8A(a); Exchange Act Section 21C(a).
The evidence establishes that Simpson and Pattee willfully violated Section 17(a), Section 10(b), and Rule 10b-5 promulgated thereunder. Respondents are still active in the securities industry. Therefore, I conclude that it is essential that Simpson and Pattee be ordered to cease and desist from engaging in this conduct in the future.
Section 8A of the Securities Act and Section 21C of the Exchange Act provide that the Commission may enter an order requiring disgorgement, including any reasonable interest.112 The purpose of disgorgement is "to deprive the wrongdoer of his unjust enrichment and to deter others from violating the securities laws." SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989). Such an equitable remedy can be exercised only over property causally related to the wrongdoing, and may not be used punitively. First City Fin. Corp., 890 F.2d at 1231. It has been realized that "separating legal from illegal profits exactly may at times be a near impossible task." Id. (citing Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 171 (2d Cir. 1980)). Accordingly, "the amount of disgorgement, . . ., need only be a reasonable approximation of the profits causally connected to the wrongdoing." Id.
The Division requests that Simpson and Pattee be ordered to disgorge $73,667 in gains from the fraudulent scheme. This amount represents: (1) the commissions earned on the twenty-seven disputed accounts which amounts to approximately $49,406;113 and (2) the commissions earned on the unauthorized, unsuitable, and improper trades made in the Burdgick, Couturier, Cardinal, McCoy, Sheredy, and Williams transactions, which together amounts to $5,893, plus reasonable prejudgment interest.
Because I find that Simpson and Pattee churned fourteen of the twenty-seven disputed accounts, I conclude that the commissions earned from the churned accounts, $28,278, was derived from fraudulent conduct and unjustly enriched Respondents.114 I further conclude that Simpson and Pattee should be required to return the $5893 in commissions earned on the unauthorized, unsuitable, and improper trades made in the Burdgick, Couturier, Cardinal, McCoy, Sheredy, and Williams transactions. Accordingly, I conclude that Simpson and Pattee should be required to return to investors $34,171, plus prejudgment interest. Additionally, because it is impossible to determine what portion of the total commissions was retained by Simpson and what portion was paid to Pattee, I conclude that they are jointly and severally liable for the funds. See e.g., SEC v. Hughes Capital Corp., 124 F.3d 449, 454-55 (3rd Cir. 1997).
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items set forth in the record index issued by the Commission's Office of the Secretary on November 16, 1998.
Based upon the findings and conclusions set forth above, pursuant to Section 8(a) of the Securities Act, Sections 15(b), 19(h), and 21C of the Exchange Act, I ORDER that:
(1) Sandra Simpson and Daphne Pattee are permanently barred from being associated with any broker-dealer, a member of a national securities exchange or registered securities association;
(2) Sandra Simpson and Daphne Pattee shall cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder;
(3) Sandra Simpson shall pay a civil penalty of $100,000;
(4) Daphne Pattee shall pay a civil penalty of $50,000;
(5) Sandra Simpson and Daphne Pattee shall disgorge $34,171 plus prejudgment interest from April 1, 1995, through the last day of the month preceding which payment is made at the rate of interest established under Section 6621(a)(2) of the Internal Revenue Code, 28 U.S.C. § 6621(a)(2), compounded quarterly, pursuant to Rule 600 of the Commission's Rules of Practice.115
Payment of penalty and disgorgement shall be made on the first day following the day this initial decision becomes final by certified checks, U.S. Postal money orders, bank cashier's checks or bank money orders payable to the Securities and Exchange Commission. The check and a cover letter identifying the Respondents, Sandra Simpson and Daphne Pattee, and the proceeding designation, Administrative Proceeding No. 3-9458, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312. A copy of the cover letter should be sent to the Commission's Division of Enforcement at the above address.
If and when Sandra Simpson and Daphne Pattee pay any or all of the disgorgement amount and interest, the parties shall submit to the Office of Administrative Law Judges, within 60 days, a plan for the administration and distribution of those funds. 17 C.F.R. § 610.
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 (1997). 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 him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this 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.
Robert G. Mahony
Administrative Law Judge
-- I will refer to the Division's exhibits as "(Div. Ex. __)" and to Simpson's exhibits as "(Simpson Ex. __)." I will refer to the transcript as "(Tr. __)".
-- A payout level is the percentage of gross commissions that a broker gets to keep. (Tr. 270.)
-- Norman and Margaret Cooper were taken off the "easy target" list after they complained. (Tr. 300-01.)
-- Pattee specifically recalled executing unauthorized margin transactions in Donald Watter's account. (Tr. 299.)
-- A break point is the price level on a mutual fund that, if exceeded, allows an investor to pay a lower percentage commission. (Tr. 390.)
-- If a client was moving assets from one fund to another fund, an authorized switch letter was required. To avoid the possible "red flag" raised by numerous switch letters, Simpson and Pattee devised a scheme whereby a mutual fund would be sold, a stock or a bond would be bought, and then three months later a fund would be bought again. Thus, the intervening stock or bond purchase negated the need for a switch letter and allowed Simpson and Pattee to make short term trades of funds in client accounts. (Tr. 315.)
-- Front-end sales charges are applied to an investment at the time of initial purchase. Back-end redemption charges are assessed against an investor when money is withdrawn from the investment.
-- Pattee admitted that Pauline Mathis is a client for whom margin trading was inappropriate. (Tr. 325.)
-- Pattee obtained signed blank LOAs prior to her formal business relationship with Simpson after Simpson told her it was convenient to have them on hand. (Tr. 327.)
-- According to Pattee, these misrepresentations included: telling certain customers that they did not need to worry about commissions because the commissions were being paid by the companies that issued the stocks or securities; telling clients that their monthly income checks were being paid out of interest, when, in fact, they were being paid out of principal; misleading customers about the value of their account; and telling customers that they had assets outside of the account that did not show up on their account statement. (Tr. 335-36.)
-- According to Pattee, these practices included: selling preferred stock of one company and replacing it with preferred stock of the same company having a different yield; purchasing bank stocks and telling customers that they were CDs; telling customers that the reason why the names of securities in their accounts had changed was because the company had been taken over by another company. (Tr. 338.)
-- Pattee testified that the following clients were "easy targets:" Clarence and Doris Asman; Bruce and Rosemary Asman; Richard and Emily Bacha; Milton and Bonnie Bain; Charles and Ella Bonner; Evelyn Burdgick; Richard and Jean Burns; Rose and Sarah Calcagno; Barbara Congdon; Norman and Margaret Cooper; James and Jane Corder; George and Dorothy Davis; Merrill and Anna Dean; David and Dixie Donakowski; Luba Elia and Lillian Rachid; Rita Hill; Audrey Kindell and Cindy Jo Evenson; Elaine Cook; Beverly Lee; Beverly Look; George Mathis; Pauline, Ronald and Clarence Mathis; Margie McCoy; Wilma and Charles Newton; Lela Phelps; Jack Randall; Kathleen and Raymond Refice; David Simon and Barbara Wirt; Wanda Snyder; Clemmie and Robert Spencer; Grover and June Thomas; Raymond and Evelyn Trudell; and Jeff Ulrey. (Tr. 342-47.)
-- Specifically, Pattee explained that she spoke with David Hester, Michael Carroll, and Mike Madigan. (Tr. 391.)
-- This was verified by Walterhouse. (Tr. 122.)
-- This search occurred on a Sunday. Simpson already had been suspended. To preserve the integrity of the firm's files from Friday evening until Sunday, Mone had the office lock and alarm code changed. Mone was the only person with access to the office. (Tr. 122.)
-- Div. Ex. 161 is Brayer's curriculum vitae.
-- Prior to her career as a handwriting examiner, Brayer taught Hebrew and Comparative Literature at Adelphi University. (Tr. 51.)
-- Although Brayer has not testified in securities disputes, she previously had been retained by Prudential. (Tr. 52.)
-- To assist in preparing her 1995 report, Brayer received numerous original documents from Prudential. (Tr. 31.) Division Exhibits 162, 164, and 170 contain the documents that Brayer received from Prudential. Brayer returned the documents to Prudential after she completed her report. (Tr. 32.) On redirect examination, Brayer explained that although she reviewed many documents while preparing her 1995 reports, she did not do a full-scale analysis of each document. Additionally, she explained that without her markings on the documents, there would be no way for her to identify the exact documents that she had reviewed in 1995 when she was preparing her report for this proceeding. (Tr. 99.)
-- The eight documents were as follows: undated Command Account agreement of Craig and Barbara Smith (Div. Ex. 164); undated Command Account agreement of Donald T. and Jane E. Watters (Div. Ex. 164); undated Command Account agreement of Carl P. and Gary L. Roman (Div. Ex. 162 at SEC 012142); LOA journaling $530 from the account of David and Dixie Donakowski (Div. 162 at SEC 012171); undated Command Account agreement of Mary Regling and Shirley Nyeste (Div. Ex. 162 at SEC 012234); LOA journaling $3000 from the Trudell account (Div. Ex. 162 at SEC 012230); LOA authorizing payment from the Mathis account of a $50 transfer fee (Div. Ex. 162 at SEC 012263); and an undated Command Account agreement of Pauline, Ronald, and Clarence Mathis (Div. Ex. 162 at 012268.)
-- The signatures were as follows: Norman H. Cooper; Margaret S.P. Cooper; Dorothy M. Davis; George O. Davis; David Donakowski; Dixie N. Donakowski; Pauline Mathis; Ronald Mathis; Clarence Mathis; Carl P. Roman; Gary L. Roman; Raymond T. Trudell; Evelyn I. Trudell; Barbara Congdon; Rex C. Glover; Shirley Nyeste; Mary L. Regling; Barbara Smith; Craig Smith; Donald J. Watters; and Jane E. Watters. (Div. Ex. 162 at SEC012141.)
-- The signatures in Exhibit Q-1/SS are as follows: Norman H. Cooper; Margaret S.P. Cooper; Dorothy M. Davis; George O. Davis; David Donakowski; Pauline Mathis; Ronald Mathis; Clarence Mathis; Carl P. Roman; Gary L. Roman; Raymond T. Trudell; and Evelyn I. Trudell. (Div. Ex. 162 at SEC 012131.)
-- Exhibit K-3 consists of various known handwritten notes and signatures by Simpson. Exhibit K-4 consists of known handwriting samples by Simpson, written in the presence of David H. Jarvis on May 18, 1995. (Div. Ex. 162 at SEC 012129.)
-- The signatures in Exhibit Q-2 are as follows: Barbara Congdon; Rex. C. Glover; Shirley Nyeste; Mary L. Regling; Barbara Smith; Craig Smith; Donald J. Watters; and Jane E. Watters. (Div. Ex. 162 at SEC 012131.)
-- Exhibit K-5 consists of various known handwritten notes and signatures by Pattee. (Div. Ex. 162 at SEC 012129.)
-- Exhibit K-4 contains various known handwriting samples by Simpson written in the presence of David H. Jarvis on May 18, 1995. (Div. Ex. 162 at SEC 012134.)
-- Exhibit K-5 contains the various known handwritten notes and signatures by Pattee. (Div. Ex. 162 at SEC 012134.)
-- From June 1991 until April 1997, Maul worked for several brokers, including David Hester.
-- The Operations Department opened all mail received and distributed it to personal mailboxes.
-- After Maul was excused from the stand, she requested that Pattee's attorney allow her to resume the stand so that she could clarify an answer. Maul testified that Pattee had not admitted forging client signatures and that she had been confused by the question. (Tr. 256-57.)
-- In January 1995, the Flint branch became a satellite of the West Bloomfield office. Mike Carroll, branch manager of the West Bloomfield office, became branch manager of the Flint office. (Tr. 451; 107.)
-- As the AE in charge, Hester had to report to Mike Carroll. (Tr. 452.)
-- Additionally, brokers check the computer to see if clients were on the verge of a margin call.
-- On redirect, Hester stated that between all of the brokers in the office, there were approximately 7500 active accounts. (Tr. 536.)
-- Of the thirty accounts, Calhoun analyzed the following twenty-seven for frequency of trading: Clarence and Doris Asman (AEX-057671-40); Milton and Bonnie Bain (AEX-061619-40); Rose Calcagno (AEX-062470-16); Barbara Congdon (AEX-042185-16); Norman and Margaret Cooper (AEX-040425-71); James L. Jr. and Jane Corder (AEX-064847-16); George and Dorothy Davis (AEX-036151-40); Rita Hill IRA (AEX-817853-16); Audrey Kindell and Cindy Jo Evenson (AEX-062364-16); Audrey Kindell IRA (AEX-800802-16); Beverly J. Look IRA (AEX-817438-40); George Mathis IRA (AEX-810956-16); Pauline, Ronald and Clarence Mathis (AEX-048663-16); Wilma Newton, Charles Newton and Carol Jeffes (AEX-060663-40); Lela M. Phelps (THY-025287-16); Kathleen D. Refice C/F Lauren (AEX-074176-16); Kathleen D. Refice C/F Elizabeth (AEX-074184-16); Kathleen D. and Raymond A. Refice (AEX-074281-16); Wanda Snyder and Rosanne Mosciski (AEX-056402-16); Clemmie and Robert J. Spencer (AEX-061015-16); Calvin and Larry Story (AEX-034905-16); Larry and Calvin Story (AEX-34913-16); Raymond and Evelyn Trudell (AEX-047896-40); Jeff Ulrey and William Shaw (AEX-026503-16); Margie H. Verbal C/F Claude (AEX--49147-40); Donald and Jane Watters (AEX-068729-16); and Donald Watters Rollover IRA (AEX-816512-16.) (Tr. 629; Div. Ex. 167.) The following three accounts were analyzed for mutual fund sales practice abuses: Evelyn C. and Bruce Burdgick JTWOS (AEX-015765-15); Evelyn C. Burdgick Rev. Trust (AEX-080133-16); Daisy M. Cardinal, Joanne Cardinal and John R. Cardinal JTWROS (AEX-055856-16.) (Tr. 629; Div. Ex. 167.) Of the above mentioned account holders, the following testified at trial: Milton Bain; Barbara Congdon; Margaret Cooper; Mary Jane Corder; Dorothy Mae Davis; Audrey Kindell; Beverly Look; Pauline Mathis; Raymond Trudell; Margie H. Verbal; and Donald James Watters.
-- Suitability is a term of art in the securities industry. According to Calhoun, there are three elements to the question of suitability: (1) is the trading consistent with the investor's financial profile; (2) does the customer understand the risk of the trading in the account; and (3) is the trading consistent with the investor's objectives. The suitability doctrine affects the heart of every broker-client relationship and is a primary part of the Series 7 examination. (Tr. 634.)
-- Analyzing the method of trading involves considering the frequency of trading, the cost of trading, and margin transactions. (Tr. 636.)
-- Donald Watters was the exception because his account form listed speculation as an investment objective. (Tr. 641-42.)
-- Ms. Kindell was the exception because Kindell should not have been invested in anything speculative. (Tr. 645.)
-- The break-even rate of return or cost to equity maintenance factor is calculated by dividing the cost of trading, including commissions and margin interest, by an account's average equity and then annualizing it. It represents the rate of return an account would have to earn before it returned any profit to the investor. (Tr. 646.)
-- According to Calhoun, churning involves excessive trading in an account controlled by the broker that is done for the purpose of generating commissions.
-- Mrs. Milton Bain, Ms. Audrey Kindell, Mr. Donald Watters (Tr. 656.)
-- The only exception is if the broker has been granted time and price discretion. However, even with discretion, the specific security must be discussed . (Tr. 658-59.)
-- Calhoun explained that brokerage firms often make mistakes in calculating commissions. (Tr. 660-61.)
-- Before joining Prudential, Simpson worked for twenty-two years at Citizens Bank. During that time, there were internal audits and none revealed any problems with Simpson. (Tr. 1014.)
-- Leonard & Co. is a broker-dealer registered with the Commission.
-- A Series 8 license is for management. (Tr. 1014.)
-- The following accounts were Pattee's: Clarence and Doris Asman; Milton and Bonnie Bain; Rose Calcagno; Barbara Congdon; Norman and Margaret Cooper; George and Dorothy Davis; Rita Hill; Audrey Kindell; Beverly Look; George Mathis; Pauline, Ronald and Clarence Mathis; Wilma Newton, Charles Newton and Carol Jeffes; Lela Phelps; Kathleen Refice; Wanda Snyder and Rosanne Mosciski; Clemmie and Robert Spencer; Calvin and Larry Story; Raymond and Evelyn Trudell; Jeff Ulrey and William Shaw; Margie H. Verbal; and Donald and Jane Watters. The following accounts were Pattee's before she became Simpson's registered sales associate: Clarence and Doris Asman; Milton and Bonnie Bain; Rose Calcagno; Barbara Congdon; Norman and Margaret Cooper; George and Dorothy Davis; Rita Hill; Audrey Kindell; Beverly Look; George Mathis; Pauline, Ronald and Clarence Mathis; Wilma Newton, Charles Newton and Carol Jeffes; Lela Phelps; Kathleen Refice; Wanda Snyder and Rosanne Mosciski; and Calvin and Larry Story. Although Simpson originally opened an account for James and Jane Corder, Pattee subsequently opened a second account and wrote tickets for the trades. Simpson testified that even though Simpson had opened the account for Jeff Ulrey and William Shaw, Pattee subsequently took over the account. (Tr. 1023-1028.)
-- Simpson won a trip to Europe as a result of the number of Command Accounts she opened. (Tr. 1106.)
-- Simpson testified that Div. Ex. 134, two margin call lists that explicitly identify clients subject to margin calls, is not what she had in mind. (Tr. 1110.)
-- Simpson Ex. 14 is Vanstrat's curriculum vitae.
-- He spent one year in the Army Crime Laboratory.
-- These documents were as follows: a LOA dated February 1, 1994, journaling $550 from the Davis account to Claude Verbal's account (Div. Ex. 162 at SEC 012261); a LOA dated January 16, 1991, journaling $1382 from the Congdon account to Oliver Benjamin's account (Div. Ex. 162 at SEC 012276); and a LOA dated February 13, 1992, journaling $564.98 from the Cooper account to the Winfrey account (Div. Ex. 162 at SEC 012298.) (Simpson Ex. 15; Tr. 897.)
-- These documents were a LOA dated May 21, 1991, journaling $1000 from the Congdon account to her sister-in-law's account (Div. Ex. 162 at SEC 012276) and a LOA dated December 17, 1990, journaling funds from the Cooper account to the Lenox account (Div. Ex. 162 at SEC 012293.) (Simpson Ex. 15; Tr. 897-98.)
-- Vanstrat demonstrated how he performed his analysis. This demonstration involved the following documents: the Davis LOA dated February 1, 1994 (Div. Ex. 162 at SEC 012261); the Congdon LOA dated May 21, 1991 (Div. Ex. 162 at SEC 012275); and the Cooper LOA dated December 12, 1992 (Div. Ex. 162 at SEC 012298.). (Tr. 899-909.)
-- The at issue documents were as follows: the Congdon LOA dated January 16, 1991 (Div. Ex. 162 at 012276); the Davis LOA dated February 1, 1994 (Div. Ex. 162 at SEC 012261); and the Cooper LOA dated February 13, 1992 (Div. Ex. 162 at 012298.). (Tr. 910-11.)
-- These were the signatures of Raymond or Evelyn Trudell, Pauline, Ronald or Clarence Mathis, Carl R. Roman or Gary L. Roman, David or Dixie Donakowski, Mary Regling and Shirley Nyeste. (Tr. 918.)
-- The Consent Order to Cease and Desist and to Impose Sanctions Pursuant to the Michigan Uniform Securities Act is dated June 20, 1996. On July 22, 1996, Pattee consented to the entry of the Consent Order. (Div. Ex. 174).
-- For example: (1) all new accounts had to be reviewed, verified, and approved; (2) her customers' monthly account statements had to be reviewed; (3) all incoming and outgoing correspondence had to be reviewed; (4) all sales literature, prospectuses, and other solicitations had to be reviewed; and (5) Pattee was subject to monthly performance reviews which were to be forwarded to the Bureau. (Div. Ex. 174.)
-- At the time of this hearing, Simpson was fifty years old. (OIP ¶ II.A.)
-- Prior to joining Prudential, Simpson worked at Citizen's Bank as a bank and mortgage loan officer. Prior to joining Citizen's Bank, Simpson performed credit underwriting and mortgage analysis services. Both of these positions required her to pay particular attention to detail. (Tr. 1014-15; 1093.)
-- At the time of this hearing, Pattee was forty-four years old. (Tr. 259.)
-- Pattee looked up to Simpson because of Simpson's prominence and rapid success at Prudential. (Tr. 269-70.)
-- In 1989, Pattee had approximately 100 clients. (Tr. 272.) During 1989 and 1990, she generated approximately $100,000 per year in gross commissions and her annual net pay was in the $30,000 range. (Tr. 273.)
-- Pattee believed that her greatest weakness as a salesperson was her sales ability. Pattee considered Simpson to be an excellent "closer" and "good at the hard sell." (Tr. 276.) In 1989 and 1990, Simpson was the top broker in the Flint office. Her gross commissions were $280,581. (Tr. 272; 1017; Div. Ex. 155 at SEC 011830.)
-- Although Simpson had an attorney draft an employment contract which referred to an employer-employee relationship, the contract was never executed. The terms and realities of the arrangement, however, demonstrate that Simpson controlled the conditions of Pattee's employment. (Tr. 277-82; 1030; 1095-96; Div. Ex. 56.)
-- While Pattee did some selling, Simpson was the primary salesperson and Pattee's primary role was to service customers. (Tr. 281.)
-- Simpson had the power to reduce Pattee's salary if she did not generate $5000 per month. (Tr. 1099.) Additionally, Simpson agreed that if she and Pattee generated a combined $50,000 per month or $150,000 per quarter in gross commissions, Pattee would get a $1000 bonus. Simpson kept track of whether this goal was met, but paid Pattee the bonus even when the goal was not met. (Tr. 1096-97.)
-- Pattee's workers' compensation was also deducted from Simpson's commissions.
-- If Simpson disassociated herself from Pattee, Pattee would no longer have been employed by Prudential because Pattee did not have her own production number. (Tr. 475.)
-- In May of 1991, Simpson and Pattee sent a letter to all of Pattee's clients stating that Pattee would be "joining the team of Sandra K. Simpson, Vice President - Investments, as an associate." The letter also stated that "Ms. Simpson's name will appear on various documents as your financial advisor." (Tr. 291; Div. Ex. 86.) Simpson and Pattee had joint business cards listing Simpson as First Vice President Investments and Pattee as Simpson's registered sales associate. (Tr. 1064-65.)
-- Although Pattee was able to solicit clients and to place orders, Simpson had to sign new account documents. (Tr. 285-86; 476-77.)
-- As explained in footnote 35, Calhoun analyzed the trading in Verbal's account (AEX-49147-40) for frequency of trading.
-- As explained in footnote 35, Calhoun analyzed the trading in the Congdon account (AEX-042185-16) for frequency of trading.
-- On January 17, 1991, $1382 was transferred to the account of Oliver Benjamin. On May 21, 1991, $1000 was transferred to the account of Congdon's "sister-in-law." (Div. Ex. 13A.) While Congdon did sign blank LOAs when requested, she testified that it was not her signature on the disputed LOAs. (Tr. 563-64; Div. Ex. 13A at SEC001754.)
-- As explained in footnote 35, Calhoun analyzed the trading in Bain's account (AEX-061619-40) for frequency of trading.
-- At that time, Bain told Pattee that one account was for his son's college expenses and one was to supplement his GM pension. (Tr. 583-584.)
-- As explained in footnote 35, Calhoun analyzed the trading in Look's account (AEX-817438-40) for frequency of trading.
-- As explained in footnote 35, Calhoun analyzed the trading in Watters' accounts (AEX-068729-16 and AEX-816512-16) for frequency of trading.
-- As explained in footnote 35, Calhoun analyzed the trading in Kindell's accounts (AEX-062364-16 and AEX-800802-16) for frequency of trading.
-- Pattee confirmed this conservative profile. (Tr. 338.) Despite this conservative profile, common stock in the Lear Seating Corp., was purchased shortly after the initial public offering. Additionally, common stock in Weirton Steel Co. was purchased, even though the company had several years of deficit earnings. According to the Division's trading practices expert, both of these investments were speculative and unsuitable. (Div. Ex. 167.)
-- Kindell still has an account with Pattee at Dean Witter. (Tr. 741.)
-- Kindell's name is misspelled on the account document. (Div. Ex. 22A.)
-- As explained in footnote 35, Calhoun analyzed the trading in the Corders' account (AEX-064847-16) for frequency of trading.
-- As explained in footnote 35, Calhoun analyzed the trading in the Coopers' account (AEX-040425-71) for frequency of trading.
-- These LOAs were as follows: a LOA dated June 18, 1991, journaling $6500 to the Robbins account; a LOA dated February 13, 1992, journaling $564.98 to the Winfrey account; and a LOA dated December 17, 1990, journaling $2000 to the Lenox account. (Div. Ex. 14A at SEC001985-90.)
-- These were the LOA dated February 13, 1992, journaling $564.98 to the Winfrey account and the LOA dated December 17, 1990, journaling $2000 to the Lenox account. (Simpson Ex. 15.)
-- Simpson testified that because Cooper did not complain to her and Hester neglected to inform her about the complaint, she was unaware of any impropriety. (Tr. 1034.) Additionally, Simpson testified that Hester neglected to log the complaint in the complaint log. (Tr. 1047.)
-- As explained in footnote 35, Calhoun analyzed the trading in the Davis account (AEX-036151-40) for frequency of trading.
-- As explained in footnote 35, Calhoun analyzed the trading in Pauline Mathis' account (AEX-048663-16) for frequency of trading.
-- The four LOAs were as follows: a LOA journaling $800 to the Burns' account; a LOA dated September 10, 1991, journaling $465 to the Haskins' account; a LOA dated March 1, 1993, journaling $2000 to her "sister's" account; and a LOA dated October 26, 1993, journaling $750 to the Jourdin account. (Div. Ex. 27A at SEC 04498-01.)
-- Ronald Mathis' name appeared on his mother's account and he occasionally borrowed money from the account. (Tr. 860-61.)
-- As explained in footnote 35, Calhoun analyzed the trading in Cardinal's account (AEX-055856-16) for mutual fund issues.
-- Pattee's Motion to Strike the witness' response on cross-examination is DENIED. (Tr. 1004.)
-- As explained in footnote 35, Calhoun analyzed the trading in Raymond Trudell's account (AEX-047896) for frequency of trading.
-- Div. Ex. 162 at SEC012230.
-- As explained in footnote 35, Calhoun analyzed the trading in Evelyn Burdgick's account (AEX-047896) for mutual fund issues.
-- As explained in footnote 35, Calhoun analyzed the trading in Lela Phelps' account (THY-025287-16) for frequency of trading. Lela Phelps did not testify at the hearing.
-- Phelps generally followed Pattee's recommendations.
-- As explained in footnote 35, Calhoun analyzed the following accounts for frequency of trading: AEX-074176-16; AEX-074184-16; and AEX-074281-16. Kathleen Refice did not testify at the hearing.
-- AEX-074184. (Div. Ex. 167.)
-- AEX-074176. (Div. Ex. 167.)
-- These accounts are as follows: Milton and Bonnie Bain (AEX-061619-40); Barbara Congdon (AEX-042185-16); Norman and Margaret Cooper (AEX-040425-71); James L. Jr. and Jane Corder (AEX-064847-16); George and Dorothy Davis (AEX-036151-40); Audrey Kindell and Cindy Jo Evenson (AEX-062364-16); Audrey Kindell IRA (AEX-800802-16); Beverly J. Look IRA (AEX-817438-40); Pauline, Ronald and Clarence Mathis (AEX-048663-16); Lela M. Phelps (THY-025287-16); Raymond and Evelyn Trudell (AEX-047896); Margie H. Verbal C/F Claude (AEX-049147-40); Donald and Jane Watters (AEX-068729-16); and Donald Watters Rollover IRA (AEX-816512-16).
-- These accounts and the respective annualized turnover rates are as follows: Margie H. Verbal C/F Claude (AEX-049147-40) - 5.6; George and Dorothy Davis (AEX-036151-40) - 5.0; Lela M. Phelps (THY-025287-16) - 5.2; Kathleen D. Refice C/F Lauren (AEX-074176-16) - 5.9; Kathleen D. Refice C/F Elizabeth (AEX-074184-16) - 5.9.
-- Donald and Jane Watters (AEX-068729-16) - 4.37; Audrey Kindell IRA (AEX-800802-16) - 4.24; Norman and Margaret Cooper (AEX-040425-71) - 4.5; Raymond and Evelyn Trudell (AEX-047896-40) - 4.1; Clemmie and Robert J. Spencer (AEX-061015-16) - 4.3; Kathleen D. and Raymond A. Refice (AEX-074281-16) - 4.2; Wanda Snyder and Rosanne Mosciski (AEX-056402-16.)
-- Clarence and Doris Asman (AEX-057671-40); Ross Calcagno (AEX-062470-16); Barbara Congdon (AEX-042185-16) - 3.66; James L. Jr. and Jane Corder (AEX-064847-16) - 2.6; Rita Hill IRA (AEX-817853-16); Beverly J. Look IRA (AEX-817438-40) - 2.1; George Mathis IRA (AEX-810956-16) - 3.3; Pauline, Ronald and Clarence Mathis (AEX-048663-16) - 3.3; Wilma Newton, Charles Newton and Carol Jeffes (AEX-060663-40) - 3.0; Calvin and Larry Story (AEX-034905-16) - 2.4; Larry and Calvin Story (AEX-034913-16) - 2.4; Jeff Ulrey and William Shaw (AEX-026503-16) - 3.8; Donald Watters Rollover IRA (AEX-816512-16) - 2.22.
-- These accounts and their respective break-even rates of return are as follows: Norman and Margaret Susan Cooper (AEX-040425-71) - 33.5%; George and Dorothy Davis (AEX-036151-40) - 29.7%; Audrey Kindell IRA (AEX-800802-16) - 22.5%; Kathleen D. Refice C/F Lauren (AEX-074176-16) - 33.3%; Kathleen D. Refice C/F Elizabeth (AEX-074184-16) - 32.0%; Lela M. Phelps (THY-025287-16) - 32.8%; Kathleen D. and Raymond A. Refice (AEX-074281-16) - 28.1%; Clemmie and Robert J. Spencer (AEX-061015-16) - 36.5%; Raymond and Evelyn Trudell (AEX-047896-40) - 21.1%; Jeff Ulrey and William Shaw (AEX-026503-16) - 21.2%; Margie H. Verbal C/F Claude (AEX-049147-40) - 31.0%; Donald and Jane Watters (AEX-068729-16) - 24.8%.
-- Rule 600(a) of the Commission's Rules of Practice, 17 C.F.R. § 201.600(a), mandates that prejudgment be assessed "on any sum required to be paid pursuant to an order of disgorgement."
-- This amount represents Simpson's average payout, 43%, on the $114,898 in gross commissions earned on twenty-seven accounts.
-- This amount represents Simpson's average payout, 43%, on the $65,763 in gross commissions earned on the fourteen churned accounts.
-- I have used April 1, 1995, because that is the day immediately following the day on which Pattee resigned from Prudential.
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