SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42255 / December 20, 1999
Admin. Proc. File No. 3-9891
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In the Matter of the Application of HARRY GLIKSMAN and WILLIAM J. GALLAGHER For Review of Disciplinary Action Taken by the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. |
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OPINION OF THE COMMISSION
- REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS
Violations of Conduct Rules
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Conduct Inconsistent with Just and Equitable Principles of Trade
Suitability
Failure to Supervise
Person associated with member firm recommended to customer unsuitably frequent and short-term trading. President of member firm failed to supervise associated person to detect this violation. Held, association's findings of violation and sanctions it imposed are sustained.
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APPEARANCES:
Michael D. Donahue, Dave Lenny, and Susan H. Tregub, of Donahue, Mesereau & Leids LLP, for Harry Gliksman.
Stephen Acker, Rachel E. Hobbs, and Daphne C. Lin, of Acker, Kowalick, and Whipple, for William J. Gallagher.
Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Nancy C. Libin, for NASD Regulation, Inc.
Appeal filed: May 3, 1999
Last brief received: August 18, 1999
I.
Harry Gliksman, a general securities principal and registered representative 1 formerly associated with William J. Gallagher & Co., a member of the National Association of Securities Dealers, Inc. ("NASD"), and William J. Gallagher, the president and owner of Gallagher & Co., appeal from NASD disciplinary action. The NASD found that Gliksman recommended to a customer unsuitably frequent and short-term securities transactions in violation of Conduct Rules 2110 and 2310. 2 The NASD censured Harry Gliksman, suspended him from association with a member for six months, and required him to requalify as a general securities representative. The NASD found that Gallagher failed to supervise Harry Gliksman to detect his violations. The NASD censured Gallagher, fined him $5,000, required him to requalify as a general securities principal, and required him to develop and implement an adequate supervisory system for Gallagher & Co. 3 We base our findings on an independent review of the record.
II.
Unsuitable Trading
A. Wilshire-Dayton Fine Arts, Inc., the wholly-owned subsidiary of a Japanese company, was located in Newport Beach, California. Wilshire-Dayton purchased American art for resale in Japan. Chiyomi Hanamoto, a Japanese national, was the corporate secretary of Wilshire-Dayton and its sole employee in the United States. Hanamoto had a degree from a Japanese university in English and Psychology
At the beginning of 1993, Wilshire-Dayton maintained approximately $500,000 in money market accounts for the purposeof purchasing art. The money market accounts paid Wilshire-Dayton between 2 and 3% interest on its principal. Hanamoto became friends with Harry Gliksman's son, David. She complained to David Gliksman about the low rate of interest that Wilshire-Dayton was receiving. David Gliksman suggested that Hanamoto contact his father at Gallagher & Co. for alternatives.
In February 1993, Hanamoto, David Gliksman, and Harry Gliksman participated in a conference call. Harry Gliksman initially recommended that Wilshire-Dayton purchase LYON bonds and Eastman Kodak stock. 4 Hanamoto agreed to open an account at Gallagher & Co., and Wilshire-Dayton subsequently deposited $300,000 in an account with Gallagher & Co.'s clearing broker.
Harry Gliksman did not have written discretionary authority over the Wilshire-Dayton account. Moreover, the Gallagher & Co. compliance manual prohibited any registered representative from exercising discretion over a customer's account. However, Harry Gliksman testified that he had discretion over the Wilshire-Dayton account as to price, timing, and type of security.
Although, once the account was opened, Hanamoto received two to three confirmations a week, she did not understand what they meant. Hanamoto also stated that she did not know that Harry Gliksman needed prior authority to enter trades for the account. When she received Wilshire-Dayton's March monthly statement, she realized that the account had lost $15,000. She spoke to David Gliksman about the loss and asked him to speak to his father. David Gliksman subsequently told her that fluctuations in the account were normal.
By July 1993, the account had not recouped its losses. Hanamoto asked David Gliksman to write to his father on her behalf. David Gliksman's letter stated that Hanamoto had viewed the account "as an alternative to a money market account." The letter expressed concern about apparent "excessive trading" and the possibility "that the principal could have been eaten up by lots of spreads, and lots of commissions." 5 The letter directed that the account be sold within seven days without loss to the original principal. Harry Gliksman admits that he received David Gliksman's letter. However, he did not act on the letter because "this letter didn't come from the customer."
Instead, the Wilshire-Dayton account continued to trade equity securities, LYONs, and options until Hanamoto directed Gallagher & Co. to freeze the account in February 1994. There were 118 trades effected in the Wilshire-Dayton account on 129 separate trading days. 6 The account lost a total of $60,036; $56,867.18 of that loss was attributable to commissions, markups, and markdowns.
B. The NASD found that Harry Gliksman's conduct violated Conduct Rules 2110 and 2310. It concluded that Harry Gliksman had recommended trades to Wilshire-Dayton that were unsuitable because they were too frequent and too short-term. Under the applicable rules, recommendations may be unsuitable if the trading is excessive based on the customer's objectives and financial situation. 7 The Commission has held that excessive trading occurs when a registered representative has control over trading in an account and the level of activity in that account is inconsistent with the customer's objectives and financial situation. 8 De facto control is established if a customer relies on a broker's advice because the customer is unable to evaluate the broker's recommendations and exercise independent judgment. 9
Hanamoto and Wilshire-Dayton lacked investment experience and were unsophisticated. Hanamoto's prior personal investment experience was limited to her purchase of a Japanese government bond. Wilshire-Dayton had no prior investment experience, except for its money market accounts. Because of her unfamiliarity with American securities markets, Hanamoto did not realize that HarryGliksman required prior authorization to enter trades for Wilshire-Dayton's account. And, in fact, Glicksman managed Wilshire-Dayton's account with virtually no contact with Hanamoto. Hanamoto stated that, from the February 1993 conference call until February 1994, she had no communication from Harry Gliksman. 10
While Harry Gliksman now asserts that no Japanese corporation would entrust investments to an inexperienced employee, he testified before the NASD that he knew relatively little about Hanamoto's or Wilshire-Dayton's experience. 11 At the arbitration proceeding, he stated, "I was told that she doesn't know anything about the market." Harry Gliksman further admitted at the arbitration proceeding that Hanamoto did not understand one of the strategies that he wished to undertake. He was then asked:
Q: Okay. So if you didn't think that she understood you, how could you have ascertained the corporation's objectives?
A. Well, it was a matter of trust, that I would handle it the best possible way.
Moreover, Harry Gliksman claimed that he had discretion over the Wilshire-Dayton account "as to time and price and the types of securities." When asked about the scope of this discretion by the NASD panel, he asserted that his discretion included authority to invest in LYONs and equities and to take long or short positions. We find that Harry Gliksman exercised de facto control over the Wilshire-Dayton account.
We further find that the trading in the account was inconsistent with Wilshire-Dayton's objectives. During her February 1993 telephone conference call with Harry and David Gliksman, Hanamoto told Harry Gliksman that Wilshire-Dayton was extremely adverse to taking more than a minimal risk with the funds and wanted conservative investments. Hanamoto believed that Harry Gliksman understood Wilshire-Dayton's investment goals. She understood that LYONs and Eastman Kodak were conservative recommendations.
Harry Gliksman's NASD testimony confirmed Hanamoto's statements that she wanted a conservative strategy for the account. Harry Gliksman admitted that Wilshire-Dayton's investment objectives were "to make money without too much risk."
Hanamoto subsequently reaffirmed her goals for the account. By July 1993, after the account had not recouped its earlier losses, Hanamoto asked David Gliksman to contact his father, and David Gliksman faxed the letter discussed above to Harry Gliksman. As noted above, the letter explained that Hanamoto had considered the account to be an alternative to a money market account and complained that the trading was excessive. Harry Gliksman did not call Hanamoto after David Gliksman faxed his letter. Hanamoto let the account continue to trade hoping that it would recoup its losses. Finally, in February 1994, she consulted counsel, wrote to Gallagher & Co. and directed that the account be frozen.
The trading pattern in the Wilshire-Dayton account confirms the excessiveness of Harry Gliksman's trading. The Commission has considered turnover rate and commissions to equity ratio to determine whether an account has been excessively traded. Turnover ratio is calculated by dividing the total purchases in an account by the account's average monthly equity. Although no turnover rate is universally recognized as determinative of churning, a rate in excess of 6 is generally presumed to reflectexcessive trading. 12 The Wilshire-Dayton account had a turnover ratio of 14.28, or 12.28 on an annualized basis. As noted, the account paid $56,867.18 in commissions, markups, and markdowns. The commissions-to-equity ratio was 21%. Thus, the Wilshire-Dayton account would have had to increase by 21% merely to break even. On an annualized basis, the account would have had to increase by at least 18% to break even.
We have also found that "in and out trading" indicates excessiveness. 13 Trading in the Wilshire-Dayton account was characterized by aggressive "in and out" trading. A total of 106 non-liquidating trades were entered in the account. 14 As shown below, the account held the securities that it purchased for very short periods of time:
| Days Open | Total Trades |
| 0-15 | 40 |
| 16-30 | 20 |
| 31-60 | 33 |
| 61-90 | 8 |
| 91+ Days | 5 |
| Total | 106 |
Applicants assert that the account's activity was consistent with Wilshire-Dayton's Customer Account Application and Agreement, which states that the account's investment objectives were "aggressive income," "speculation," and "other," after which the word "LYONS" was hand-printed. Accepting for the sake of argument that Wilshire-Dayton understood the investment objectives set forth in the agreement and that the agreementaccurately reflected its objectives, 15 we believe that Harry Gliksman had notice that speculation was not the account's objective once he received David Gliksman's July 1993 letter, stating that Hanamoto believed that the account would be treated like a money market account and complaining about the excessiveness of the trades. 16
Applicants complain that the NASD used unreliable hearsay to determine Hanamoto's sophistication, the account's investment objectives, what Hanamoto told Harry Gliksman, the number of times Harry Gliksman and Hanamoto spoke, and whether Hanamoto or Harry Gliksman controlled the account. Moreover, applicants assert they were deprived of due process because Hanamoto did not testify at the NASD hearing.
Before the NASD hearing, Hanamoto returned to Japan. 17 The NASD introduced a transcript of Hanamoto's testimony in an arbitration brought by Wilshire-Dayton against Gliksman and Gallagher, among others, 18 an affidavit and a declaration --both sworn to by Hanamoto under penalty of perjury -- and letters written by Hanamoto. In addition, the NASD examiner testified to conversations that she had with Hanamoto.
Applicants had notice that Hanamoto would not testify and did not object to the introduction of Hanamoto's arbitration testimony before the NASD hearing panel. Further, Gallagher's counsel cited Hanamoto's arbitration testimony in his closing argument. We believe applicants failed to preserve their objection to the introduction of this evidence.
Moreover, the Commission repeatedly has held that hearsay is admissible in administrative proceedings and, in appropriate circumstances, may constitute the sole basis for findings of fact. We evaluate hearsay for its probative value, reliability, and the fairness of its use. 19 Here, we find that Hanamoto's statements are probative and reliable. 20 Her arbitration testimony, affidavit, and declaration are written and under oath. 21 The NASD examiner's testimony about her conversations with Hanamoto and Hanamoto's correspondence are consistent with Hanamoto's testimony and affidavits.
Applicants assert that Hanamoto's testimony was necessarily biased because she was a "dissatisfied customer." They also assert that her statements are refuted by Harry Gliksman's testimony. However, we find Hanamoto's statements consistent with Gliksman's testimony both before the NASD and during the arbitration proceeding. We have also considered the pattern of trading in the account in determining that Harry Gliksman's trading of the Wilshire-Dayton account was unsuitable.
We conclude that Harry Gliksman traded the Wilshire-Dayton account in a manner that was excessively frequent and short-termin light of the customer's objectives. We sustain the NASD's findings that Harry Gliksman violated Conduct Rules 2110 and 2310.
III.
Failure to Supervise
Both Harry Gliksman and his wife, Alyse, worked in Gallagher & Co.'s Wilshire office, which was an office of supervisory jurisdiction. Gallagher was in the firm's Pasadena, California office. Gallagher did not detect Harry Gliksman's excessive trading of the Wilshire-Dayton account. Gallagher asserts, however, that this failure was not his responsibility because the Commission has held that the president of a firm
is responsible for the firm's compliance with all applicable requirements unless and until he or she reasonably delegates a particular function to another person in the firm, and neither knows nor has reason to know that such person is not properly performing his or her duties. 22
Gallagher asserts that he delegated supervision over Harry Gliksman to Alyse Gliksman, including the responsibility to monitor the Wilshire-Dayton account for violations such as excessive trading. 23
From the record, it appears that Gallagher did not communicate this delegation effectively to the Wilshire office. Harry Gliksman testified before the NASD that he was the principal in charge of the Wilshire office. Similarly, Alyse Gliksman told the NASD examiner during the investigation that Harry Gliksman had been the supervisor of the Wilshire office between 1993 and June 1994. Indeed, Gallagher told the same NASD examiner that Harry Gliksman was the Wilshire office supervisor. 24
Moreover, at the time of the events at issue, Alyse Gliksman was registered as a limited principal -- financial and operations ("FINOP"), not as a general securities principal. Gallagher asserts that he believed Alyse Gliksman was qualified to supervise the Wilshire office. Gallagher relies on a 1993 amendment to Gallagher & Co.'s Uniform Form for Broker-Dealer Registration on Form BD that Gallagher sent to the Central Registration Depository designating Alyse Gliksman as the "supervisor" of the Wilshire office. Gallagher asserts that, if Alyse Gliksman had been ineligible to supervise the Wilshire office, the NASD would have "kicked back" the Form BD. The NASD did not reject the Form BD. However, Gallagher -- not the NASD -- had the responsibility under Conduct Rule 3010(a)(4) to designate "one or more appropriately registered principals in each" office of supervisory jurisdiction, including the Wilshire office. 25
Gallagher further argues that, because Alyse Gliksman held a form of principal registration, he did not have adequate notice under the NASD's rules that she was not qualified to supervise the Wilshire office. We find that the NASD rules were clear that Alyse Gliksman was not qualified to supervise the Wilshire office. Membership Rule 1022(a)(1) requires that every person included in the definition of principal in Rule 1021(b) must register as a general securities principal, and Rule 1021(b)(4) defines a principal to include "Managers of Offices of Supervisory Jurisdiction." 26
In contrast, Rule 1022(b)(5) states that a person registered as a FINOP "shall not be qualified to function in a principal capacity with responsibility over any area of business activity not prescribed in" Rule 1022(b)(2). 27 Membership Rule 1022(b), which sets forth the duties and powers of a FINOP, makes clear that those duties relate to a member firm's financial and operational management. 28
Even if the Wilshire office had had an appropriately registered supervisor, Gallagher failed to provide for reasonable supervision of that office. 29 As we have repeatedly held:
[i]t is not sufficient for the person with overarching supervisory responsibilities to delegate supervisory responsibility to a subordinate, even a capable one, and then simply wash his hands of the matter until a problem is brought to his attention. . . . Implicit is the additional duty to follow-up and review that delegated authority to ensure that it is being properly exercised. 30
Although the branch manager may serve as "the first line of compliance," a supervisory system cannot rely solely on supervision by branch managers. 31 The supervisor must provide enough checks to ensure that any supervisory responsibility delegated to branch managers is being diligently exercised.
Gallagher & Co. did not have such checks. Gallagher cites Gallagher & Co.'s compliance manual, which prohibits "overtrading" and identifies high turnover rate, high commissions, short-term trading, high number of trades, and repeated buying and selling of the same security as indicia of this violation. When asked how he identified an account that was excessively traded, Gallagher stated that the Wilshire office transmitted its daily trading blotters to Gallagher, who reviewed the blotters. Gallagher asserted that his review of the blotters permitted him to identify the "quality" of securities purchased (i.e., that they were not penny stocks) and excessive commissions on a particular trade. 32 Gallagher also made twice yearly visits to the Wilshire office. There he reviewed the trading in customer accounts selected at random. He did not review the Wilshire-Dayton account during the trading at issue.
Under repeated questioning by the NASD hearing panel, Gallagher could not articulate how he detected the indicia of excessive trading identified in the firm's compliance manual. The firm did not prepare or receive periodic compilations of commissions or other costs charged to an account nor summaries of the frequency of trading or turnover. Moreover, Gallagher & Co.'s home office did not have copies of new account documents, the customer account monthly statements, 33 customer complaints, or commission records. Gallagher permitted the Wilshire office to retain all these documents.
The conclusions that Gallagher drew from his oversight of the daily trading blotters underscore the inadequacy of his supervision. While Gallagher saw references to an account designated "Wilshire" or "W/D" on the daily trading blotters, Gallagher testified that he believed that account belonged to Harry Gliksman. 34 Review of the Wilshire-Dayton customer agreement and/or its monthly statements would have revealed that Wilshire-Dayton was a customer. If Gallagher & Co. had prepared a periodic compilation of transaction costs charged by account, it would have shown that, over time, Wilshire-Dayton was paying substantial commissions, markups, and markdowns. 35
We sustain the NASD's findings that Gallagher failed reasonably to supervise Harry Gliksman and thereby violated Conduct Rules 2110 and 3010.
IV.
We review sanctions imposed by the NASD to determine whether those sanctions are excessive or oppressive, or whether they impose an unnecessary or inappropriate burden on competition. 36 We do not find that the sanctions in this case are either excessive or oppressive.
The NASD Sanction Guidelines identify various considerations in imposing sanctions for suitability violations, including the extent of harm to the customer, number of recommendations, benefit to the registered representative, investment experience and sophistication of the customer, and "prompt and voluntary restitution" by the representative. While the NASD recognized that its Sanction Guidelines generally suggest a suspension of 10 to 30 business days for such violations, here, the NASD concludedthat a longer suspension was warranted. 37 Harry Gliksman engaged in 106 transactions over a 14-month period, turning over the account 14 times. He benefited at the customer's expense from a share of the gross commissions, markups, and markdowns equal to 21% of the account's initial principal. The customer was unsophisticated and inexperienced in the American securities markets. He controlled the trading in the account, failed to respond to a complaint from his son on the customer's behalf, and did not compensate the customer until it obtained an arbitration award. 38
Gallagher notes that he has only a modest disciplinary history. 39 He asserts that his conduct here involved "a single series of misdeeds with respect to a single account" (emphasis in original). He also asserts that supervisors in similar circumstances have been punished less drastically and notes that the District Business Conduct Committee elected not to impose a fine on him. However, Gallagher's supervision of the Wilshire office showed a lack of understanding of his obligations with respect to a branch office. His review of the daily trading blotters without any additional information or reports was inadequate to detect the very factors that the firm's manual identified as indicia of excessive trading. The requirement that he requalify as a general securities principal is appropriate to remind him of those obligations. The fine is the lowest recommended by the NASD's Sanction Guidelines. 40
An appropriate order will issue. 41
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER).
Jonathan G. Katz
Secretary
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42255 / December 20, 1999
Admin. Proc. File No. 3-9891
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In the Matter of the Application of HARRY GLIKSMAN and WILLIAM J. GALLAGHER For Review of Disciplinary Action Taken by the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. |
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ORDER SUSTAINING 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 Harry Gliksman and William J. Gallagher, and the Association's joint and several assessment of costs, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
| 1 | Harry Gliksman is also registered as a municipal securities representative and a municipal securities principal. |
| 2 | Rule 2110 requires that members "observe high standards of commercial honor and just and equitable principles of trade." Rule 2310 requires that members "have reasonable grounds for believing that" a recommendation to buy or sell a security "is suitable for the customer" based on the customer's other holdings and financial situation and needs. Conduct Rule 0115 provides that associated persons "shall have the same duties and obligations as a member under" the Conduct Rules. |
| 3 | The NASD also assessed costs on Harry Gliksman and Gallagher, jointly and severally. |
| 4 | LYON (Liquid Yield Option Notes) bonds are convertible into common stock. |
| 5 | In the letter, David Gliksman also repeated an earlier conversation with his father in which Harry Gliksman stated that the Wilshire-Dayton monthly statement "is inacurate [sic] because it reflects only a low bid price shown at the wrong time, and that the account is really close to a break-even situation." |
| 6 | The NASD counted the purchase and sale of the same position as a single trade. |
| 7 | Conduct Rule IM-2310-2 (excessive trading may be unsuitable in light of customer's investment objectives and financial situation). See also David A. Gingras, 50 S.E.C. 1286, 1289 and n.4 (1992) (finding excessive turnover in customer accounts unsuitable); John M. Reynolds, 50 S.E.C. 805, 806 (1991) ("Excessive trading may be thought of as quantitative unsuitability.") Cf. Donald A. Roche, Exchange Act Rel. No. 38742 (June 17, 1997), 64 SEC Docket 2042, 2048 (observing that excessive trading violates self-regulatory organization suitability requirements). |
| 8 | Clyde J. Bruff, Exchange Act Rel. No. 40583 (Oct. 21, 1998), 68 SEC Docket 768, 771, appeal filed, No. 98-71512 (9th Cir.); Peter C. Bucchieri, 52 S.E.C. 800, 804-05 (1996). |
| 9 | See Tiernan v. Blyth, Eastman, Dillon & Co., 719 F.2d 1, 3 (1st Cir. 1983); Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 676-677 (9th Cir. 1982); Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th Cir. 1980). |
| 10 | Hanamoto tried to call Harry Gliksman on several occasions, but her calls were not returned. At the arbitration hearing, Harry Gliksman agreed that he never spoke to Hanamoto after the initial telephone conference call. At the NASD hearing, he disavowed his previous sworn arbitration testimony as "inaccurate." Harry Gliksman admitted before the NASD that he did not speak to Hanamoto before every trade. However, he asserted that he and Hanamoto had 10 to 12 conversations, or approximately one a month, during the time that the account was open. Harry Gliksman was unable to recall his conversations with Hanamoto, except that Hanamoto was concerned about the loss of the account's principal and that he assured her that the market "fluctuated."
In contrast, during the NASD's investigation, Harry Gliksman told the NASD examiner that he and Hanamoto spoke 20 to 30 times during the period at issue. The NASD examiner asked Harry Gliksman repeatedly for his telephone records. Harry Gliksman initially agreed to produce the records but ultimately did not. Wilshire-Dayton's office had a different area code (714) from Gallagher & Co.'s Wilshire office (310) and thus the calls should have appeared on the office telephone records. |
| 11 | Gliksman testified:
I knew that she runs an office for a Japanese company, in Newport Beach. I knew that she is a good friend of my son. And I was told by my son that they have many millions to invest; if I do a good job for them, they will put a lot more money into the account; and the funds that they invested represent for them a negligible amount of money. Other than that, I knew nothing else. |
| 12 | Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498, 1502 (11th Cir. 1985); Mihara v. Dean Witter & Co., Inc., 619 F.2d at 821. |
| 13 | "The term 'in and out' trading denotes the sale of all or part of a customer's portfolio, with the money reinvested in other securities, followed by the sale of the newly acquired securities." Costello v. Oppenheimer & Co., Inc., 711 F.2d 1361, 1369 n.9 (7th Cir. 1983). In and out trading is a "practice extremely difficult for a broker to justify." Id. at 1369. |
| 14 | A total of 118 trades were entered in the Wilshire-Dayton account. When Wilshire-Dayton ordered the account liquidated, twelve trades were entered to effect the liquidation. Those trades were not included in these calculations. |
| 15 | There is controversy in the record about the customer agreement. Hanamoto stated that she received a blank Gallagher & Co. Customer Account Application and Agreement. She forwarded the agreement to Katsumi Nozawa, Wilshire-Dayton's president located in Japan, solely for signature. Nozawa did not speak English, and the Japanese office of Wilshire-Dayton did not complete any other portion of the agreement beyond Nozawa's signature. When she received the customer agreement from Japan, Hanamoto completed the form, except that she did not include investment objectives because she did not understand the meaning of the terms set forth in the agreement under "Investment Objectives." Hanamoto stated that no one from Gallagher & Co. contacted her after she returned the customer forms to ask about Wilshire-Dayton's objectives. Hanamoto also testified that the word "LYONS" written under investment objectives was not her handwriting.
Wilshire-Dayton's counsel provided the NASD with a copy of Wilshire-Dayton's corporate resolution that authorized the opening of the Gallagher & Co. account and the purchase or sale of securities. Gallagher & Co. provided the NASD with a copy of the Wilshire-Dayton corporate resolution to which the typewritten words "[t]o trade on margin and Lyons, with trading authority" had been added. Hanamoto stated that no one at Wilshire-Dayton typed those words or authorized their addition to the corporate resolution. Harry Gliksman testified that he did not know who completed the investment objectives on the Wilshire-Dayton account form. Given the apparent alterations to at least one of the forms, we question the reliability of the customer agreement as an indication of Wilshire-Dayton's investment objectives. |
| 16 | Applicants assert that Hanamoto did not complain about the trading in her account. As discussed, Hanamoto stated that she made several telephone calls to Harry Gliksman that were not returned. She also asked David Gliksman to communicate her concerns to his father, and it appears that David Gliksman did so on at least two occasions. Given Hanamoto's lack of investment sophistication, we conclude that she did not understand the requirement that Harry Gliksman have prior authorization to trade the Wilshire-Dayton account or the appropriate way to stop trading in the account. See Peter C. Bucchieri, 52 S.E.C. at 805. |
| 17 | Applicants argue that the NASD failed to demonstrate that Hanamoto was unavailable as a witness. The NASD, however, does not have subpoena power. NASD staff contacted Hanamoto's American counsel, who informed the staff that Hanamoto did not wish to return to the United States from Japan to testify in person or to testify by telephone. Neither applicant claims that he made any attempt to contact Hanamoto or determine her willingness to testify.
We believe that the NASD made a sufficient showing that Hanamoto was unavailable. In Charles D. Tom, 50 S.E.C. 1142, 1145 (1992), we admitted a customer's statement when the customer refused to testify in order to avoid "a confrontation with Mr. Tom." We determined that, because the NASD lacks subpoena power, it could not compel a customer's attendance. We have held in a Commission administrative proceeding that a witness who was out of the country during the hearing was unavailable. Thomas F. White, 51 S.E.C. 1194, 1197 n.6 (1994). Gliksman suggests that we subpoena Hanamoto. For the reasons stated here, we find that there is ample evidence in the record to corroborate Hanamoto's testimony and to support the NASD's findings. |
| 18 | Wilshire-Dayton also named Gallagher & Co. and Alyse Gliksman, Harry Gliksman's wife, in the arbitration proceeding. The arbitrators awarded Wilshire-Dayton judgment, and applicants subsequently settled with Wilshire-Dayton. |
| 19 | See, e.g., Carlton Wade Fleming, Jr., 52 S.E.C. 409, 411 nn.7,8 (1995), and cases cited therein. See also Richardson v. Perales, 402 U.S. 389, 402 (1971); Hoska v. Army, 677 F.2d 131, 138-39 (D.C. Cir. 1982); Calhoun v. Bailar, 626 F.2d 145, 148-49 (9th Cir. 1980), cert. denied, 452 U.S. 906 (1981) (each generally holding that probative, reliable hearsay may provide the basis for administrative decisions). |
| 20 | Charles D. Tom, 50 S.E.C. at 1145 (suggesting factors probative of reliability of hearsay, including whether statements are written, signed and made under oath; whether the statements are contradicted by direct testimony; whether hearsay is corroborated; whether the declarant is unavailable; and whether there is possible bias by the declarant), citing, Richardson v. Perales, 402 U.S. at 402; Calhoun v. Bailar, 629 F.2d at 148-49. |
| 21 | Applicants complain that the attorney who represented them at the arbitration proceeding was not present for Hanamoto's testimony because of a conflict in the attorney's schedule. However, both Gliksman and Gallagher could have questioned Hanamoto at the arbitration proceeding if they chose. |
| 22 | Rita H. Malm, 52 S.E.C. 64, 69 (1994). See also Universal Heritage Investments Corporation, 47 S.E.C. 839, 845 (1982). |
| 23 | Gallagher was aware that Alyse Gliksman was supervising her husband. He testified that he did not believe that the Gliksmans' relationship raised any supervisory issues.
We have held that a registered representative cannot supervise himself. See, e.g., Bradford John Titus, 52 S.E.C.1154, 1158 (1996). Gallagher concedes that a separate person was required to supervise Harry Gliksman. |
| 24 | At the hearing, Gallagher sought to clarify his statement, stating, "Everyone is their own supervisor in the sense thatthey know what's right and what's wrong, and, as such, he still had a supervisor over him," Alyse Gliksman. |
| 25 | See also, e.g., William F. Cantrell, 52 S.E.C. 1322, 1326 n.14 (1997) (member cannot shift responsibility for compliance to NASD).
During a June 1994 inspection, Commission staff informed Gallagher that, as a FINOP, Alyse Gliksman was not qualified to supervise a branch manager, and she subsequently became registered as a General Securities Principal. |
| 26 | These were formerly codified at Part II(2)(a) and (1)(b)(iv) of Schedule C of the NASD By-laws.
Gallagher also notes that Rule 1022(a)(1) states that general securities principal registration is not required if the principal's "activities are so limited as to qualify the person for a" form of limited principal registration. However, subsequent subsections of Rule 1022 make clear that this language refers to a person who supervises a branchoffice that restricts the type of product it offers (i.e., Rule 1022(d) Limited Principal -- Investment Company and Variable Contracts or Rule 1022(e) Limited Principal --Direct Participation Programs) or to a person who provides only a specified type of supervision (Rule 1022(g) Limited Principal -- General Securities Sales Supervisor). Rules 1002(d), (e), and (g) each state that an associated person "included within the definition of principal in Rule 1021 may register" as the particular category of limited principal if his or her activities are appropriately limited. Similar language does not appear in Rule 1022(b). |
| 27 | Rules 1022(b)(2) and (b)(5) were formerly Part II(2)(b)(2) and (b)(4) of Schedule C to the NASD's By-Laws. |
| 28 | Pursuant to Rule 1022(b)(2), those duties include:
(A) final approval and responsibility for the accuracy of financial reports submitted to any duly established securities industry regulatory body; (B) final preparation of such reports; (C) supervision of individuals who assist in the preparation of such reports; (D) supervision of and responsibility for individuals who are involved in the actual maintenance of the member's books and records from which such reports are derived; (E) supervision and/or performance of the members's responsibilities under all financial responsibility rules promulgated pursuant to the provisions of the Act; (F) overall supervision of and responsibility for the individuals who are involved in the administration and maintenance of the member's back office operations; or (G) any other matter involving the financial and operational management of the member. Gallagher suggests that the term "financial responsibility rules" in Rule 1022(b)(2)(E) is vague and might encompass trading in a customer account. However, Rule 1022(b)(5) refers to "financial responsibility rules" promulgated under the "Act," which NASD Rule 0120 defines as the Securities Exchange Act of 1934. Section 3(a)(40) of the Exchange Act, 15 U.S.C. § 78(a)(4), defines "financial responsibilityrules" as Commission or self-regulatory organization rules "relating to financial responsibility and related practices" that the Commission designates to be financial responsibility rules. |
| 29 | For the first several months that the Wilshire-Dayton account was open, the monthly statements identified Alyse Gliksman as the registered representative on the account. After David Gliksman sent his letter on Hanamoto's behalf, the designation of registered representative on the Wilshire-Dayton monthly statement changed to "Wilshire office."
Gallagher agreed that this was "out of the ordinary" and that only "an OSJ manager" could authorize a change from the designated registered representative. There is nothing else in the record that explains why Alyse Gliksman initially was designated as the registered representative nor how or why this designation changed. The parties, however, agree that Wilshire-Dayton was in fact Harry Gliksman's customer. |
| 30 | Castle Securities Corp. Exchange Act Rel. No. 39523 (Jan 7, 1998), 66 SEC Docket 796, 802, quoting Rita H. Malm, 52 S.E.C. 64, 73 (1994), quoting Stuart K. Patrick, 51 S.E.C. 419, 422 (1933), aff'd, 19 F.3d 66 (2d Cir. 1994). |
| 31 | La Jolla Capital Corporation, Exchange Act Rel. No. 41755 (Aug. 18, 1999), 70 SEC Docket 1101, 1109, quoting, Shearson Lehman Brothers, Inc., Exchange Act Rel. No. 23640 (Sept. 24, 1986), 36 SEC Docket 1075, 1083 (settled case). |
| 32 | Gallagher asserts that we held in Bradford John Titus, 52 S.E.C. at 1154 that review of trading blotters was sufficient supervision. However, in Titus, we criticized the supervisor who reviewed the trading blotters for failing to determine whether the registered representative followed the instructions that resulted from that review. Id. at 1157. Moreover, the violations in Titus resulted from a series of supervisory failures, including failure to generate reports, failure to detect suitability of options transactions, and absence of a line supervisor. Id. at 1159-60.
Gallagher also cites Juan Carlos Schidlowski, 48 S.E.C. 507, 509 (1986). In Schidlowski, we found that the president of the firm had delegated responsibilities to others and did not have reason to know of their failures. Here, in contrast, Gallagher failed to designate an "appropriately registered" supervisor for the Wilshire office, failed to provide more than the most cursory supervision or checks on the branch office's activities, and failed to obtain the records and generate the reports necessary to supervise those activities. |
| 33 | The Wilshire-Dayton monthly statements carried the Wilshire office address and did not identify the home office. |
| 34 | Gallagher did not explain the basis of his belief. Harry Gliksman testified he had two personal accounts, one in his own name and one in the name of "Cal National" or "C/N." |
| 35 | Gallagher suggests that he might not have been concerned about the trading in the Wilshire-Dayton account if he had seen the new account agreement since "aggressive income" and "speculation" were designated as investment objectives. Since Gallagher did not see the new account agreement, we can only hypothesize about what determinations Gallagher might have made from review of the customer agreement and the other Wilshire-Dayton customer account documentation. We note that Gallagher also did not routinely receive copies of customer complaints and thus did not see David Gliksman's complaint letter on Hanamoto's behalf. |
| 36 | See Section 19(e)(2) of the Exchange Act, 15 U.S.C. § 78s(e)(2). |
| 37 | Sanctions Guidelines (1996) at 52. |
| 38 | The NASD further noted that Gliksman had a prior disciplinary history. In May 1993, Gliksman settled an NASD complaint that he had a failed to satisfy an arbitration award. The NASD censured Gliksman and fined him $1,000. In May 1989, Gliksman consented to findings that he had operated a securities business without sufficient net capital. The NASD censured Gliksman and fined him $2,500, jointly and severally with his firm. |
| 39 | In 1978, Gallagher was censured and fined $5,000, jointly and severally, for paying "a non-registered person" $21,000 for arranging a municipal securities transaction and failure to maintain books and records. In June 1993, he was also assessed $1,000 by the State of Wisconsin for attempting to sell securities in the state without proper registration. |
| 40 | The Sanction Guidelines suggest fines in the range of $5,000 to $25,000 and a suspension of the responsible individual for 10 to 30 business days. |
| 41 | We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed herein. |