==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37072 \ April 5, 1996 Admin. Proc. File No. 3-8768 _________________________________________________ : In the Matter of the Application of : : CHARLES E. KAUTZ : 2229 Spring Rain Drive : Clearwater, FL 34623 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Violations of Rules of Fair Practice Conduct Inconsistent with Just and Equitable Principles of Trade Falsification of Records Where former general securities representative and division manager of a member Firm caused seven registered representatives under his supervision falsely to list their names as the selling agent on ten annuity applications when the division manager in fact was responsible for the sales, held, association's finding of violations and the sanctions it imposed sustained. APPEARANCES: Charles E. Kautz, pro se. T. Grant Callery and Deborah F. McIlroy, for the National Association of Securities Dealers, Inc. Appeal filed: August 1, 1995 Last brief received: November 17, 1995 I. ==========================================START OF PAGE 2====== Charles E. Kautz ("Applicant"), formerly a general securities representative and district manager of Waddell & Reed, Inc. ("W&R" or the "Firm"), a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that, during the period of January 1992 through May 1993, Applicant violated Article III, Sections 1 and 21(a) of the NASD's Rules of Fair Practice (the "Rules") by causing seven registered representatives under his supervision falsely to list their names as the selling agent on ten applications to purchase variable annuities that were in fact sold by Kautz. -[1]- The NASD censured Applicant, fined him $5,000, and suspended him in all capacities for 30 calendar days. -[2]- Our findings are based on an independent review of the record. II. Kautz was employed in W&R's Largo, Florida office in June 1990. In 1991, Kautz was promoted to division manager and put in charge of the W&R offices located in Sarasota and Fort Myers, Florida. He was responsible for the supervision of the W&R representatives in those offices, although he was not registered as a general securities principal. New W&R sales representatives were subject to sales quotas. Under these quotas, a representative had to make at least one sale in his or her first 30 days with W&R and at least two sales in each of the following two months. If the sales representative failed to meet any of these quotas, the representative's employment was terminated. Many of the new sales representatives had difficulty meeting their quotas. Kautz allowed seven representatives employed by W&R's Sarasota office to receive credit for sales that he had made so that they could meet their respective sales quotas. Kautz had each sales representative execute variable annuity contracts as the representative of record, even though the sales representative never met with or spoke to the customer and did not prepare the paper work for the ---------FOOTNOTES---------- -[1]- Section 1 requires adherence to "high standards of commercial honor and just and equitable principles of trade." NASD Manual (CCH) 2151. Section 21(a) provides that "[e]ach member shall keep and preserve books, accounts, records, memoranda, and correspondence in conformity with all applicable laws, rules, regulations and statements of policy promulgated thereunder and with the rules of this Association." Id. 2171. -[2]- The NASD also assessed costs. ==========================================START OF PAGE 3====== transaction. -[3]- Kautz admits that each of these transactions were with his existing customers, that he took the orders, and that he made each of the sales. Ordinarily, the representative of record would receive a sales commission on a transaction, which the representative would retain as compensation. In the transactions at issue, each of the representatives gave Kautz a check for 85 percent of the sales commission upon executing the annuity application as selling agent. -[4]- Kautz allowed the representative to retain 15 percent of the commission to cover "taxes" which the representative would owe on the commission. Kautz received $7,260.75, in the aggregate, in reimbursed commissions. -[5]- As a manager, Kautz also received overrides and bonuses on sales made by certain representatives working for him. On the ---------FOOTNOTES---------- -[3]- In one transaction at issue, Kautz asserts that the representative was present during the sale. The client was one of Kautz's prior customers and Kautz filled out the annuity application. The representative submitted a memorandum to W&R's compliance officer that states that it was strongly suggested she take the sale to meet W&R's sales quotas. In addition, she states that the sale was "put through" on her number and that she reimbursed Kautz for 85 percent of the commission. -[4]- Kautz argued before the District Business Conduct Committee ("District Committee") that he did not "require" the representatives to reimburse him for the commissions. Kautz noted that on one occasion, in a transaction not at issue here, he allowed a representative to retain the commission on a sale to one of Kautz's customers, without reimbursing Kautz. Kautz, however, admitted that he received reimbursement from the representatives for the transactions at issue. In addition, three representatives testified that if they did not reimburse Kautz, they believed they would not receive credit for the sales. As described above, under W&R's policy, they would lose their jobs without a sale within the required period. -[5]- The NASD found that Kautz received $7,620.75 in aggregate reimbursed commissions for the trades at issue. It appears that the NASD transposed two numbers. We have recalculated the aggregate reimbursed commissions at $7,260.75. ==========================================START OF PAGE 4====== transactions at issue, Kautz received a 25 percent override, plus an additional 10 percent so-called "R&D bonus" on sales made by first-year representatives. Kautz received in the aggregate approximately $3,042.62 in overrides. -[6]- He also received a bonus of $1,000 because five representatives in his office each had more than $100,000 in sales. He admits that at least two of the representatives qualified by receiving credit for Kautz's own sales. He would not have received the overrides or bonuses if he had listed himself as the representative of record on the variable annuity applications. III. Kautz claims he did not "cause" the sales representatives to sign the variable annuity applications. He asserts that they exercised independent judgement. -[7]- Kautz notes that all three of the registered representatives that testified before the District Business Conduct Committee ("District Committee") supported this assertion. We are not persuaded by Kautz's argument. All three representatives testified that, while Kautz did not force them to sign the variable annuity applications, they knew that, if they did not sign the application, they would not receive credit for the sale and would lose their jobs because ---------FOOTNOTES---------- -[6]- The NASD found that the override and R&D Bonus that Kautz received totalled $3,514.69, which we believe is based on a letter to the NASD from Jana Voth, the W&R compliance supervisor. That amount appears to include transactions not at issue here. We recalculated the override and R&D Bonus based upon the commissions reported in an exhibit entitled "The Summary of Overrides and Bonuses Paid To Charles Kautz." Two commissions were included in that summary that were also not at issue. Therefore we excluded these commissions. We attribute the recalculated total of $3,042.62 to Kautz. -[7]- Applicant contends that, based on the annuity applications' terms and contents, there was no falsification or misrepresentation because the underlying orders were legitimate. We disagree. The representatives of record listed on the applications were not acting in that capacity. Most of the representatives never met with, nor spoke to, the customers to whom they allegedly sold the annuities. Kautz should not have allowed his sales to be falsely reported as sales belonging to representatives under his supervision. ==========================================START OF PAGE 5====== of the W&R quota policy. -[8]- We find that Kautz caused the seven registered representatives under his supervision falsely to list their names as representatives of record on these applications. -[9]- While Kautz did not literally force or coerce the representatives to sign the applications, he certainly caused the falsification. Several representatives indicated that Kautz suggested that they execute the application. Without Kautz's endorsement of this practice, it could not have occurred. ---------FOOTNOTES---------- -[8]- In one instance, a representative testified that she was out of the office when Kautz entered a trade in her name. She believed that Kautz filled out the annuity application, but could not identify who in fact signed her name on the application. -[9]- Kautz claimed before the District Committee that the sales at issue were "joint" sales made by him and the particular representative. However, the record does not support Kautz's assertion. As noted, the three representatives that testified before the District Committee stated that they did not ever meet or speak with the customers and that Kautz alone made the sales. Kautz has admitted that these sales were made by him. In addition, the compliance supervisor at W&R and Kautz's direct supervisor testified that W&R had a joint sales policy under which commissions could be split 50/50 or 25/75. If commissions were split, W&R would issue separate commission checks to the representatives jointly responsible for the sale. It was not W&R's policy to send a commission check to one individual and have the recipient split the commission with another representative. Kautz also relies on a letter addressed to the NASD, dated April 15, 1994, from a representative that states that the sales at issue were in fact joint sales between Kautz and the representative and that his supervisor, Robert Keller, knew about this practice. Another representative, however, testified that he received a draft of the identical letter from Kautz, dated April 15, 1994. The representative testified that he did not sign the letter that Kautz drafted because there were "discrepancies in the letter that . . . were not compatible with my memory and recollection of the situation." Specifically, the representative said that he would not categorize the sale as a joint sale, "it was simply a sale that he had made and was submitting in my name." In addition, the representative stated that he had no knowledge whether Keller was aware of this practice, and so did not want to make that representation. ==========================================START OF PAGE 6====== Kautz admitted that the customers involved in these transactions were his customers, he made the sales at issue, completed the annuity applications, and allowed the representatives to receive credit for the sales at issue. -[10]- In any event, regardless of whether Kautz coerced the representatives to reimburse him for these transactions, Kautz violated NASD Rules when he caused false information to be recorded on official Firm records. We find Kautz's conduct violated Article III, Sections 1 and 21(a) of the NASD's Rules. Kautz asserts he did not violate company policy and that allowing a representative to receive credit for sales that he or she did not make was a common practice at W&R. Kautz reasons that, if a conduct is pervasive and approved by a Firm, it should not constitute an NASD violation. However, we have repeatedly held that it is no defense that others in the industry may have been operating in a similarly illegal or improper manner. -[11]- Kautz also asserts that the Firm, as well as his direct supervisor, Robert Keller, knew and approved of Kautz's practice of allowing sales representatives to receive credit for Kautz's sales. Keller testified that he was unaware of Kautz's practice ---------FOOTNOTES---------- -[10]- Kautz asserts that, as a Division manager, he had discretion to reassign clients for the benefit of the Division. However, the record before us demonstrates that Kautz did not reassign clients in the transactions at issue. Kautz simply allowed representatives to receive credit, on a transaction-by-transaction basis, for Kautz's sales to his existing clients. -[11]- Donald T. Sheldon, 51 S.E.C. 59, 66 n.32 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995); C.A. Benson & Co., Inc., 42 S.E.C. 107, 111 (1964). Kautz also asserts that he did not receive proper training at his Firm and, as a result, he was unaware that his conduct was a violation of NASD rules. We have also held that ignorance of NASD requirements is no excuse for violative behavior. See, e.g., Carter v. SEC, 726 F.2d 472, 473-74 (9th Cir. 1983) (rejecting representatives' defense that they were unaware of NASD rules regarding private sales of securities, stating "[a]s employees, [the representatives] are assumed as a matter of law to have read and have knowledge of these rules and requirements"); Sirianni v. SEC, 677 F.2d 1284, 1288 (9th Cir. 1982); Gilbert M. Hair, 51 S.E.C. 374, 378-79 n.12 (1993); Patricia H. Smith, Securities Exchange Act Release No. 35898 (June 27, 1995), 59 SEC Docket 2023, 2026 n.8. ==========================================START OF PAGE 7====== of crediting representatives for his sales and then requesting an 85 percent reimbursement from the representative. Keller stated that when the Firm discovered this practice, Kautz was discharged. In addition, Keller testified that Kautz was not following company policy and, as a result of Kautz's action, W&R paid a higher total compensation for these transactions. Kautz asserts that Keller was not truthful about his knowledge of Kautz's practice of crediting representatives with his sales. Kautz has submitted to us correspondence that he claims rebuts Keller's claim of ignorance. -[12]- In addition, the representatives that testified before the District Committee generally indicated that it was common knowledge in the W&R Sarasota, Florida office that Kautz would give new representatives credit for sales he had made. We cannot conclude from this, however, that his supervisor, Keller, located in Atlanta, was aware of and approved of this practice. Moreover, regardless of his Firm's policy or knowledge of this practice, it is a violation of NASD Rules to enter false information on official Firm records. -[13]- The entry of accurate information on official Firm records is a predicate to the NASD's regulatory oversight of its members. It is critical that associated persons, as well as firms, comply with this basic requirement. Sales representatives cannot be allowed to report ---------FOOTNOTES---------- -[12]- Kautz submitted a letter dated December 9, 1991 from a former W&R recruit addressed to, among others, Keller. The December 9 letter states "Mr. Kautz offered to have me be named `rep of record' on a sale he made (on a 75/25 split), if I handed him a personal check for the commission I would receive." On December 18, 1991, Voth, the Firm's compliance supervisor, by letter, requested Kautz's response to the recruit's allegations. A copy of Kautz's response was not submitted, so we do not know how Kautz addressed this allegation. A memo from Keller to Kautz, dated January 6, 1992, shows that Keller accepted the explanation that Kautz provided. These documents were not included in the original record and neither Keller nor Kautz were questioned concerning these documents. Kautz submitted these documents with his reply brief and the NASD did not object to their inclusion. Therefore, we accept these documents as submitted. -[13]- See generally George H. Rather, Jr., Securities Exchange Act Release No. 36688 (January 5, 1996), 61 SEC Docket 36; Patrick G. Keel, 51 S.E.C. 282 (1993). ==========================================START OF PAGE 8====== themselves as the representative of record for sales that they did not actually make. IV. Applicant claims that individuals from W&R provided false testimony and false information -[14]- on his Uniform Termination Notice For Securities Industry Registration ("Form U- 5") to escape detection of numerous NASD violations by the Firm. -[15]- Kautz does not substantiate these allegations, and we find no basis in the record before us to support Kautz's assertions. The sole allegation in this case is that Kautz caused seven representatives to falsify information on annuity applications, and Kautz admits the central facts in this case. Applicant also asserts that the NASD staff conspired with W&R to protect the Firm, while fabricating a case against ---------FOOTNOTES---------- -[14]- Kautz asserts that W&R coerced false testimony from the sales representatives and fabricated evidence, including a false client complaint letter which he believes was actually written by Voth. In addition, Kautz argues that the Firm set him up as a scapegoat. He asserts that the Firm had a poor compliance record and that he was asked to oversee an employee that presented potential compliance problems, without the authority to correct these problems. In May 1993, the Firm discovered that the employee had been entering false client orders. Kautz asserts that, because his supervisor, Keller, and the Firm's compliance officer, Voth, facilitated this violative conduct, they attempted to discredit him to save themselves and the Firm from embarrassment and possible disciplinary action. We note that the employee to whom Kautz refers was ultimately barred by the NASD and we sustained the NASD's findings. See Bernard D. Gorniak, Securities Exchange Act Release No. 35996 (July 20, 1995), 59 SEC Docket 2523. In addition, it appears that Keller was ultimately demoted. -[15]- Kautz asserts that he was unjustly terminated by W&R because he was a "whistle blower." In addition, Kautz argues that W&R has engaged in defamation, breach of contract, and a host of violations of the NASD's Rules. The issue before us, however, is the disciplinary action against Kautz. We will not address controversies not before us. ==========================================START OF PAGE 9====== him. -[16]- He claims that neither the NASD District Committee hearing, nor the National Business Conduct Committee ("National Committee") hearing, were conducted fairly. Essential information was either withheld or manipulated to support W&R. In addition, Kautz contends that one of the National Committee's panel members was biased against him, openly displaying hostility and personal disapproval during the hearing. We disagree. We find that Kautz received a fair hearing before the District Committee and the National Committee. We note that the District Committee Chairman repeatedly tried to assist Kautz and to explain to him the procedures used during the District Committee hearing. -[17]- The record reflects that one of the National Committee's panel members asked Kautz ---------FOOTNOTES---------- -[16]- Kautz suggests that the NASD's staff "knowingly" and "purposefully" permitted W&R to record false information on his Form U-5 and admitted a phoney customer complaint against him. Kautz argues that this false information was held against him. Kautz does not substantiate this claim and there is nothing in the record to support Kautz's assertion. The examiner testified that the NASD investigated the remaining allegations and concluded that they did not provide a basis for disciplinary action. Furthermore, the District Committee Chairman stated that the panel considered only those matters directly related to the specific allegations in the complaint. -[17]- Kautz complains that W&R's compliance officer was dismissed without giving him an opportunity for cross-examination. During the District Committee hearing the Chairman asked Kautz "do you have any questions of Miss Voth that you'd like to ask?" Kautz replied "I take exception to some of the statements in particular in exhibit 22." The Chairman then asked whether Kautz wished to examine the witness about the exhibit. Kautz replied "[w]ell, I have a variety of different rebuttals here. There is nothing significantly different from what she has said, but I do have -- I do have some specific points here going through her exhibit 22 that I would like to rebut and have the opportunity to do so." The Chairman stated "[a]nd you will." After several more questions by a panel member the Chairman once again asked "[a]nybody else?" There was no response. Based upon the record, as well as this discussion, we do not find that Kautz was denied the right of cross- examination. ==========================================START OF PAGE 10====== probing questions. The fact that the panel member chose to question Kautz's statements does not mean he was biased against him. It is not impermissible for a panel member to ask probing questions or inquire into the credibility of a witness's statements. -[18]- Moreover, we note that Kautz was given every opportunity during both proceedings to present his defense and that there is no indication in the record that the National Committee panel member was biased against Kautz or that Kautz was prejudiced in any manner. V. Kautz asserts that this matter has caused him great hardship. He has been unemployed for over two years, defamed, and suffered substantial personal, professional, and financial losses. -[19]- Kautz notes that he has no prior NASD disciplinary record, and that there were no customer complaints or the misuse of client funds in this matter. In addition, Kautz contends that the assertions he has made concerning W&R should be viewed as mitigating factors and that the sanctions against him ---------FOOTNOTES---------- -[18]- See U.S. Securities Clearing Corporation, Securities Exchange Act Release No. 35066 (December 8, 1994), 58 SEC Docket 548, 561-62 nn.44-45; Richard J. Rouse, 51 S.E.C. 581, 586 (1993). -[19]- On March 8, 1996, the Commission received a letter from Kautz dated March 4, 1996, asking that we reduce his fine to less than $2,000. Kautz asserts that he has been advised in an "informal telephone conversation" with the Florida State Securities Department that that department "would NOT even consider approving my Florida re- registration unless the NASD/SEC fine was `well below' the pending figure of $5,000." Kautz asserts that, if he is unable to become registered in Florida, he would be unable to return to the securities industry. In evaluating sanctions, we determine if they are "excessive or oppressive" on the record before us. As noted below, the fine appears neither excessive nor oppressive on the record before us. We believe that the State of Florida will have to make an independent determination of what impact this proceeding has on any application Kautz files to become registered in that state. We note however that an informal conversation with a state regulator does not constitute action by that regulator. ==========================================START OF PAGE 11====== should, at a minimum, be reduced. -[20]- Kautz admits that he allowed representatives to list themselves as representatives of record for sales they did not make, yet he fails to recognize the seriousness of this violation. He argues that his conduct was an accepted practice at his Firm and approved by his supervisor, as if that should excuse his actions. It is vital that accurate information be kept on Firm records. We find that the sanctions assessed by the NASD against Kautz are neither excessive nor oppressive. An appropriate order will issue. -[21]- By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary ---------FOOTNOTES---------- -[20]- Kautz asserts that, because there are no sanction guidelines covering his specific conduct, there should be no sanctions because they are not warranted. We find, however, that, in accordance with Section 19(e)(2) of the Securities Exchange Act of 1934, the sanctions that the NASD assessed are not excessive or oppressive. -[21]- All of the contentions advanced by the parties have been considered. The contentions are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37072 \ April 5, 1996 Admin. Proc. File No. 3-8768 _________________________________________________ : In the Matter of the Application of : : CHARLES E. KAUTZ : 2229 Spring Rain Drive : Clearwater, FL 34623 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: ORDER AFFIRMING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Charles E. Kautz, and the Association's assessment of costs, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary