Admin. Proc. File No. 3-8580
Sanctions Imposed by Association on Remand
Commission remanded to registered securities association proceedings against former registered representative who accepted commissions for securities transactions while unregistered. Commission sought to clarify the number of trades found violative and the amount of commissions derived from those trades. Held, the association's findings of violation and sanctions it imposed are sustained, except for modification of fine.
Donald R. Gates, pro se.
Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Shannon V. Lane, for NASD Regulation, Inc.
Appeal filed: December 3, 1998
Last brief received: March 22, 1999
Donald R. Gates, a former registered representative of Prudential Securities, Inc., a member firm of the National Association of Securities Dealers, Inc. (NASD), again appeals from disciplinary action taken against him. In his first appeal, Gates sought review of the NASD's determination that he violated Schedule C of the NASD's By-Laws and Article III, Section 1 of the NASD's Rules of Fair Practice1 when he traded in a public customer's margin account before he was registered with either the NASD or West Virginia, the state where the public customer was domiciled. We remanded the proceedings to permit the NASD to determine the specific number of violative trades. We also requested the NASD to clarify whether payments to Gates totaling $25,967.70 represented commissions earned on those trades.2
On remand, the NASD found that Gates engaged in twenty-five transactions while unregistered. The NASD fined him $28,261.05, which it calculated was the amount of Gates' commissions, plus $25,000 for the twenty-five transactions in which he engaged while unregistered, for a total fine of $53,261.05. In addition, the NASD censured Gates and suspended him for six months in all capacities, with the requirement that he requalify by examination before acting again in any capacity requiring registration.3 We base our findings on an independent review of the record.
- A. Conduct at Prudential.
Gates began working for Prudential's Little Rock, Arkansas branch office in June 1990. He filed a Form U-4 (Uniform Application for Securities Industry Registration or Transfer) to register as a general securities representative with Prudential, but his registration did not become effective with the NASD until August 1, 1990. Gates was not registered to do securities business in the State of West Virginia until August 7, 1990.
Immediately upon joining the firm, Gates opened a Prudential margin account for the City of Elkins, West Virginia.4 Gates had been dealing with Elkins since 1989, while he was associated with other broker-dealer firms. Gates brought the Elkins account with him to Prudential. The account had a balance of approximately $1.1 million, or slightly more than one-half of Elkins' liquid assets, and was used primarily for short-term trading of government securities. According to the former Elkins treasurer, who testified in the initial proceedings, Gates was Elkins' sole representative at Prudential and handled all of the trading in the Elkins account.
In June and July of 1990, while unregistered, Gates executed twenty-five trades for the Elkins account. In making these and other trades, he used the account number of Perry A. Prince, another Prudential salesman in the Little Rock office, who was registered in West Virginia. Gates admitted that he was not approved by Prudential as an account executive until October 1991, sixteen months after he joined the firm. 5 As a result, the 45% sales commission on each trade in the Elkins account during this period was paid to Prince. Prince, in turn, reimbursed Gates.
The commission payments to Gates were effected by journal entries in Gates' Prudential account and personal checks from Prince. Between August and November 1990, Prince wrote four personal checks to Gates totaling $25,967.70. These checks were dated after Gates' registration with the NASD and West Virginia, and were in the amounts of $3,152.94, $2,900, $18,614.76, and $1,300. In addition, Prince's monthly earnings statement for the period July 25 to August 24, 1990, reflected a $25,000 transfer to Gates. The precise amount of commission payments to Gates was difficult to determine because Gates' branch manager Frank Hiegel recorded the actual amounts due on handwritten notes and inter-office memoranda.
By the spring of 1992, Gates' trading had resulted in more than $1 million in losses to Elkins. In April 1992, Prudential terminated Gates. The Form U-5 (Uniform Termination Notice for Securities Industry Registration) filed in connection with his termination indicated that Gates failed to cooperate in the firm's internal investigation of trading in the Elkins
- B. Initial Proceedings before the NASD.
In January 1993, the NASD's District Business Conduct Committee ("District Committee") issued a complaint against Gates, alleging that, from August 6 to November 19, 1990, Gates accepted payments for commissions earned from transactions in the Elkins account when he "knew or should have known that, at the time of the transactions, which occurred prior to August 1, 1990, he was not properly registered with the [NASD] or approved as an agent in [West Virginia] where the public customer was domiciled."7 Attached to the complaint was a schedule indicating that twenty-five securities transactions occurred in the Elkins account between June 1 and July 31, 1990, when Gates was unregistered with both the NASD and West Virginia.
In November 1993, the District Committee found that Gates received commissions for an unspecified number of securities transactions in the Elkins account before he was properly registered. The District Committee censured Gates, fined him $50,000, and barred him in all capacities. The District Committee also ordered Gates to disgorge $281,000.8
Gates appealed to the National Business Conduct Committee ("National Committee") which, in November 1994, found that Gates had engaged in "at least nine" violative transactions while unregistered. It failed to identify which transactions listed on the schedule were violative. The National Committee reduced Gates' bar to a six-month suspension, ordered him to requalify by examination, and set aside the $281,000 disgorgement order. The National Committee also increased Gates' fine from $50,000 to $50,967.70, consisting of a $25,000 fine plus $25,967.50 (the total of the four personal checks issued by Prince to Gates between August and November 1990).
- C. Proceedings on Remand.
On August 16, 1995, we remanded the proceedings to the NASD for clarification of the sanctions that it had imposed.9 While we found that it was undisputed that Gates engaged in at least some securities transactions before he was properly registered with the NASD and West Virginia, we asked the NASD to clarify the number of violative transactions. We also stated that it was unclear whether the National Committee had included in its fine "commissions on the sixteen transactions [that were] not found to be violative." 10 The order further questioned whether the $25,967.70 in four checks issued by Prince to Gates represented commissions earned before Gates became registered or commissions earned thereafter.
Between its initial determination concerning Gates and our remand, the NASD brought disciplinary actions against Prince, Hiegel, and Prudential.11 After our remand, the National Committee took official notice of the record in the disciplinary proceeding against Prince, and pointed to inconsistencies in the conclusions drawn in the Prince and Gates proceedings concerning the number of violative trades.12 The National Committee instructed the District Committee to resolve the inconsistencies and make the appropriate findings.
On remand, the District Committee determined that Gates had engaged in twenty-five violative trades in the Elkins account, as alleged in the complaint. It declined to reconcile the finding in the Prince case of twelve violative trades with the National Committee's 1994 finding in the Gates case that there were "at least nine transactions." In the District Committee's view, both findings were incorrect.
The District Committee further stated that it remained unable to determine "with specificity" the amount of commissions earned on the violative trades. It concluded that the record failed to establish that the four checks issued by Prince to Gates represented commissions that Gates earned before he was properly registered.13 It therefore reduced the amount of the original fine by $25,967.70 and imposed a fine of $25,000. The District Committee also reduced Gates' suspension from six to three months after a "review of the entire record and the mitigation" presented by Gates. 14 The District Committee did not identify the mitigating factors that it had considered.
On appeal, the National Adjudicatory Council ("NAC") 15 agreed with the District Committee that Gates had engaged in twenty-five violative transactions before August 1, 1990, while he was unregistered.16 The NAC also agreed that the record failed to show that the checks from Prince to Gates represented payments for commissions that Gates earned while unregistered.
The NAC nevertheless concluded that Gates in fact received some commissions from the twenty-five violative transactions. To establish the amount of commissions, the NAC examined Prince's commission runs for the Elkins account. These runs stated that the registered representative earned 45% of the gross commission per trade. Based on the commission runs, the NAC calculated that from June 27 to July 31, 1990, Gates earned $28,261.05 in net commissions for the twenty-five violative transactions. The NAC therefore fined Gates $28,261.05, plus the $25,000 fine previously imposed, for a total fine of $53,261.05. It also increased Gates' suspension from three to six months because it found no mitigating factors present.17 The NAC determined that these sanctions were both "fitting" and an "appropriate deterrent" given Gates' knowing and deliberate evasion of the NASD's registration requirements.
Before us, Gates denies that he committed any registration violations. In our remand order, we stated that "it [was] clear that a [registration] violation occurred." 18 We also stated that "[i]t [was] undisputed" that Gates traded in the Elkins account before he was registered with the NASD and West
Virginia.19 Our determination that Gates failed to register with either the NASD or West Virginia before August 1, 1990, was final.20 Gates is thus precluded from relitigating that determination here.
Even if we were inclined to revisit this finding, Gates still would not prevail. The record shows that Gates transferred the Elkins account to Prudential from a prior employer in June 1990. Gates was not registered with either the NASD or West Virginia before August 1, 1990. In June and July 1990, before he was registered, Prudential effected twenty-five trades in the Elkins account. This trading was attributed to Prince's account number. Prince received all of the commissions on these trades.
We reject Gates' assertion that Prince was responsible for the twenty-five transactions in the Elkins account. As noted previously, the former Elkins treasurer testified that he dealt mostly with Gates, to whom he spoke on a daily basis, and relied on Gates' investment advice concerning trading in the Elkins account. The District Committee found that this testimony was credible, and we see no basis to disagree. The fact-finder's credibility determinations are entitled to considerable weight and deference.21
Moreover, we find that Prince reimbursed Gates for some portion of the commissions earned from the Elkins account, making payments that were not reflected in Prudential's books and records. Gates effectively admitted that he received commissions for trades effected in the Elkins account before August 1, 1990, when he complained to Prudential that he was not credited for his production or considered for any awards or bonuses for "all the gross [he] did" from June 1990 to October 1991.
Gates argues that he held a salaried position as Prince's sales assistant and that Prince was paying him for his work in such capacity. We believe, however, that Gates acted in a capacity requiring registration. Gates purchased and sold securities in the Elkins account and received commissions for these transactions. This activity required Gates to be registered under NASD rules.22
Based on the record evidence, we conclude that, while unregistered, Gates effected twenty-five transactions in the Elkins account for which he received compensation from Prince, in violation of NASD registration requirements.23
Our review of the NASD's sanctions is governed by Section 19(e)(2) of the Securities Exchange Act of 1934, which requires us to determine whether a self-regulatory organization's sanctions are excessive or oppressive or impose an unnecessary or inappropriate burden on competition.24 The proper sanctions depend on the facts and circumstances of each case.25 We conclude, in light of the substantial and deliberate nature of Gates' misconduct, that the sanctions imposed against him are appropriate, with the exception of the $28,261.05 fine based on his purported commissions. The record before us does not support a determination of the amount of commissions that Gates actually received.
The NAC's calculation of Gates' commissions was premised on the assumption that Prince did not retain any of the commissions earned on the violative Elkins trades. This assumption lacks evidentiary support. Despite Prince's denial that he profited from the violative Elkins trades and Hiegel's affidavit testimony confirming that denial, both NASD Committees in the Prince case found that the evidence on this point was inconclusive. 26 In fact, Prince's own witness, an accountant, testified that Prince retained a portion of Gates' commissions on the Elkins trades.
Furthermore, although the NASD's complaint alleged that Gates had accepted payments for commissions earned, neither NASD committee was able to establish the amount of these payments. The District Committee could not determine "with specificity" the amount of commissions that Gates had earned. Both the District and National Committees determined that they could not say that the $25,967.70 in check payments from Prince to Gates represented the commissions that Gates earned before August 1, 1990. At the hearing before the NAC on remand, counsel for the NASD, who had been assigned to Gates' case since its inception, acknowledged that the lack of documentary evidence of commission payments from Prince to Gates precluded NASD staff from determining the amount of commissions that Gates received from his violative trades.
We recognize the NASD's frustration. It is apparent from the record that Gates received some compensation. The NASD therefore attempted to determine the amount of commissions that Gates earned using a formula based on a series of assumptions. While the formula provides sufficient evidence of the commissions generated by the transactions, it provides no evidence as to the amount of commissions forwarded to Gates by Prince.
In these circumstances, we find it only fair to reduce the total fine of $53,261.05 by $28,262.05.27 The remaining sanctions imposed against Gates -- a censure, six-month suspension, $25,000 fine, and requalification requirement -- are within the range of sanctions recommended in the NASD Guidelines, 28 and are neither excessive nor oppressive.
An appropriate order will issue.29
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY, and UNGER).
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41777 / August 23, 1999
Admin. Proc. File No. 3-8580
In the Matter of the Application of
DONALD R. GATES
532 Old Country Lane
Cabot, AR 72073
For Review of the Disciplinary Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
ORDER MODIFYING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that, except as set forth below, the disciplinary action taken by the National Association of Securities Dealers, Inc. against Donald R. Gates and the Association's assessment of costs be, and they hereby are, sustained, and it is further
ORDERED that the $53,261.05 fine imposed by the Association on Donald R. Gates be, and it hereby is, reduced to $25,000.
By the Commission.
Jonathan G. Katz
Schedule C of the NASD's By-Laws (now NASD Membership and Registration Rule 1031) provides that all persons engaged in the securities business as representatives must be registered with the NASD.
Article III, Section 1 of the NASD's Rules of Fair Practice (now NASD Conduct Rule 2110) requires members to observe "high standards of commercial honor and just and equitable principles of trade."
Donald R. Gates, 52 S.E.C. 388, 390-91 (1995).
The NASD also assessed costs.
In addition to the margin account, Gates opened an account for repurchase agreements on Elkins' behalf. Gates' handling of that account is not at issue here.
The record is silent as to the cause for Prudential's delay in approving Gates or assigning him a number as an account executive.
The NASD's investigation commenced after Elkins filed a customer complaint with Prudential. In the complaint Elkins alleged that Gates caused $1.45 million in losses in the Elkins account. Elkins eventually settled with Prudential for $700,000.
The District Committee's complaint included two additional allegations: (1) Gates engaged in excessive and unsuitable trading in the Elkins account and charged unfair mark-ups, and (2) Gates failed to respond to an NASD staff request for information. These allegations were ultimately dismissed before the NASD and are not at issue here.
The District Committee's disgorgement figure represented the approximate amount of commissions that Gates earned from the Elkins account during the nearly two years that the account was open.
Donald R. Gates, 52 S.E.C. at 391.
Id. at 390-91.
-- Prince was censured and fined $5,000 for allowing his account number to be used to process Gates' pre-registration trades and rebating Gates' commissions on those trades with off-the-book payments. DBCC v. Prince, Complaint No. CO5930027 (July 28, 1994) (National Committee decision), 1994 NASD Discip. LEXIS 18. Hiegel was censured, fined $10,000, and barred as a principal for failing to supervise Prudential's Little Rock office. Prudential was censured, fined $250,000, and required to implement training in the Little Rock office for, among other things, failing to supervise the office and failing to prepare and maintain required books and records.
In the Prince case, the District Committee found that Gates engaged in twelve violative trades -- nine before Gates was registered with the NASD and three before he was registered with West Virginia. Moreover, the District Committee held that Gates executed two of the twelve trades for customers other than Elkins. Attached to the complaint in the Prince case, however, was the same schedule that was introduced in the Gates case indicating that twenty-five transactions occurred in the Elkins account while Gates was unregistered.
Similarly, the District Committee thought it impossible to determine what portion of the $25,000 marked as a journal entry in Prince's Prudential account represented commissions earned during Gates' unregistered period. The $25,000 was ledgered out of Prince's account during the period of July 25 to August 24, 1990, and overlapped the period when Gates became registered.
The District Committee did not alter the remaining sanctions of censure and a requirement that Gates requalify as a general securities representative by examination.
The NAC became the successor to the National Committee on January 16, 1998. See 62 Fed. Reg. 67,927 (Dec. 30, 1997).
Because the allegations in the complaint were limited to misconduct occurring before August 1, 1990, the NAC declined to make any findings concerning whether Gates engaged in any transactions while registered with the NASD but unregistered in West Virginia.
The NASD was unimpressed by the fact that Gates had a registration application pending at the time of the violations. It found that Gates was fully aware of his unregistered status when he entered trades using Prince's account number. The NASD also took into account that the arrangement between Prince and Gates was at branch manager Hiegel's instruction, but considered that this factor did not absolve Gates of his responsibility to ensure that he was properly registered with the NASD and the state.
Donald R. Gates, 52 S.E.C. at 390.
Id. at 389.
George Salloum, 52 S.E.C. 208, 216 n.37 (1995).
Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992).
Cf. Ashvin R. Shah, 52 S.E.C. 1100, 1103 & n.15 (1996) (receipt of commissions in connection with customer's mutual fund purchases required registration), aff'd, 132 F.3d 36 (7th Cir. 1997) (Table).
We reject Gates' vague claims that the NASD proceedings on remand were somehow unfair. For example, Gates argues that the NAC improperly refused his request to call Prince and Hiegel as witnesses at the hearing before the NAC. Gates' request, however, was both untimely and not in compliance with NASD Procedural Rule 9346, which requires a showing of materiality and good cause for the introduction of evidence not adduced before the District Committee. Gates argues that the NAC improperly refused his request to postpone the appellate hearing, but he failed to demonstrate good cause warranting a postponement, as required by NASD Procedural Rule 9322.
15 U.S.C. ? 78s(e)(2).
See Martin J. Cunnane, Jr., Securities Exchange Act Rel. No. 39242 (Oct. 15, 1997), 65 SEC Docket 1576; cf. Butz v. Glover Livestock Comm'n Co., Inc., 411 U.S. 182, 187 (1973) (sanction is not invalid merely because it differs from sanctions imposed in other cases); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970) (same).
See DBCC v. Prince, Complaint No. CO5930027, at 6 & 8-9 (Feb. 11, 1994) (District Committee decision); DBCC v. Prince, Complaint No. CO5930027, at 4 & 7 (July 28, 1994) (National Committee decision).
Cf. Everest Securities, Inc. v. SEC, 116 F.3d 1235, 1240 (8th Cir. 1997) (holding that the Commission could not affirm the sanction for all the violations when it found that the evidence was insufficient to sustain one of the violations; if the Commission sets aside a finding of a violation, the fine imposed for that violation must also be set aside).
The applicable guideline recommends a $2,500 to $50,000 fine, plus fining away commissions earned by the unregistered representative. NASD Sanction Guidelines, Registration Violations (Schedule C) at 34 (1993). Where an associated person recklessly or knowingly violates the NASD's registration requirements, the Guideline recommends a suspension of no less than thirty days or a bar and required requalification by examination. Id.
We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in