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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42356 / January 24, 2000

Admin. Proc. File No. 3-9684

In the Matter of the Application of

John A. Chepak
c/o Jenice L. Malecki, Esq.
Singer Frumento, LLP
40 Exchange Place, 20th Floor
New York, New York 10005

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

Violation of Conduct Rules

Failure to Establish, Maintain, and Enforce Supervisory Procedures

Compliance officer failed to establish, maintain, and enforce supervisory procedures reasonably designed to achieve compliance with applicable NASD Rules. Held, association's findings of violation and assessment of sanctions sustained.

Appearances:

Audra A. Acquavella and Bill T. Singer, of Singer Frumento, LLP, for John A. Chepak.

Shirley H. Weiss, for NASD Regulation, Inc.

Appeal filed:

August 24, 1998

Last brief filed:

November 19, 1998

I.

John A. Chepak, a former registered general securities representative, general securities principal, government securities representative, and government securities principal, and vice-president and director of compliance for Thomas James Associates, Inc., then a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that Chepak failed to establish, implement, and enforce supervisory procedures to prevent Thomas James's customers from being charged unfair and fraudulent markups and markdowns and unfair and excessive commissions in violation of NASD Conduct Rules 2110 and 3010.1 The NASD censured Chepak, fined him $5,000, and required him to requalify by examination within 90 days of the decision in all capacities in which he seeks to continue participating in the securities industry.2 We base our findings on an independent review of the record.

II.

This appeal involves Chepak's actions when he was Director of Compliance at Thomas James. At issue are whether Chepak, who was responsible for establishing and maintaining the firm's written supervisory procedures, produced procedures that were deficient and whether Chepak's supervision of Thomas James's trading in Acqua Group, Inc. was inadequate, in violation of NASD Conduct Rules 2110 and 3010.

A. Background

In the spring of 1990, before Chepak joined Thomas James, the Commission filed an action seeking injunctive and other relief against Thomas James and four individuals, alleging that they dominated and controlled the markets in several offerings underwritten by the firm, generated artificial demand for these securities through fraudulent sales practices, and charged retail customers undisclosed fraudulent markups.3 Thomas James retained Chepak as a consultant in April 1990 to assist in preparing written supervisory procedures designed to prevent problems that had led to the Commission's action against the firm.4

During the summer of 1990, Thomas James hired Chepak as the firm's Director of Compliance.5 Before the firm hired Chepak, Thomas James did not have a compliance department, or a Director of Compliance. Chepak testified that the firm was "in shambles" and run by "crisis management."

Although Chepak was "very concerned about what was alleged in the SEC complaint," he accepted the position of Director of Compliance. The Compliance Department's responsibilities at Thomas James were extensive, including the supervision of the firm's books and recordkeeping functions and of all sales, trading, and investment banking activities. Chepak, who was the sole registered principal in Thomas James's Compliance Department, supervised a staff of five. None of this staff had experience working on compliance matters. Rather, they were clerical personnel who had an interest in learning compliance work.

B. Establishment of Inadequate Supervisory Procedures

As noted, one of Chepak's responsibilities at Thomas James was to participate in drafting the firm's new supervisory procedures ("Supervisory Manual"), which the firm finalized in September 1990. The Supervisory Manual assigned Chepak a broad range of responsibilities. Among other things, the Supervisory Manual made "[t]he Compliance Officer, John Chepak, or his designated Principal" responsible "for taking and recommending appropriate action in regard to the firm's Supervisory Procedures."6

The Supervisory Manual provided no meaningful guidance on the NASD's requirements with respect to markups or markdowns in the secondary market. The Supervisory Manual merely stated that, as a market maker, Thomas James was required to enter and maintain quotations "reasonably related" to the prevailing market and listed maximum allowable spreads. There was no reference in the Supervisory Manual to the NASD's Rule prohibiting unfair pricing or the NASD's Mark-Up Policy.7 The Supervisory Manual did not discuss how to determine whether a firm is dominating or controlling the market for a particular security, the necessity of using contemporaneous cost when a firm dominates and controls the market for a security, and the means for computing contemporaneous cost. The Supervisory Manual also failed to establish mechanisms to identify violations of these pricing requirements.

The Supervisory Manual was inadequate. To assure investor protection, a broker-dealer must establish and enforce effective procedures to supervise employees.8 Thus, NASD Conduct Rule 3010 requires member firms to establish, maintain, and enforce a supervisory system over the activities of its registered representatives that "is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the rules of [the NASD]." NASD Rule 3010(a)(2) requires member firms to designate appropriately registered principals to carry out the supervisory responsibilities of the member. Supervisory procedures that provide "nothing more than a list of things that the firm and its representative should not do" fail to satisfy the requirements of NASD Conduct Rule 3010.9 Rather, supervisory procedures must establish mechanisms for ensuring compliance and detecting violations.10

The absence of meaningful guidance on the NASD's requirements with respect to markups or markdowns in the Supervisory Manual is particularly troubling here. As Chepak knew, the Commission had filed an action against Thomas James for repeatedly charging its customers fraudulent markups. The Commission had further alleged that the firm had used its domination and control of the markets for stocks that Thomas James had underwritten to accomplish these violations.11 The firm's supervisory procedures, as designed, provided so little guidance on markups and markdowns that they did not provide a mechanism for detecting violations of the NASD's rules and policies concerning markups and markdowns.

Chepak asserts that others participated in compilation of the Supervisory Manual and that he should not be held responsible for its shortcomings.12 However, Chepak was hired by Thomas James for the purpose of drafting its supervisory procedures. The fact that others assisted in the preparation of the Supervisory Manual does not excuse his role in the drafting process. Moreover, that manual assigned to Chepak the ongoing responsibility of "taking and recommending" action with respect to the firm's supervisory procedures. Part of that responsibility was to assure that the manual contained an adequate discussion of fair pricing in the secondary market, as well as procedures to detect pricing violations. Given his knowledge of the firm's history of misconduct, Chepak should have been particularly vigilant in establishing procedures with respect to the firm's retail pricing. Yet Chepak does not claim that he made any effort to recommend amendments to the Supervisory Manual or the pricing procedures after he became the Director of Compliance. We find that Chepak failed to establish and maintain proper supervisory procedures at Thomas James in violation of NASD Conduct Rules 2110 and 3010.

C. Implementation and Enforcement of Supervisory Procedures

1. District Court Oversight

As a result of the injunctive action, the District Court appointed Paul J. Yesawich, III as special counsel to review, report on, and make recommendations to improve Thomas James's policies, procedures, and practices.13 Yesawich retained Philip McMorrow as his "oversight consultant" to provide technical expertise about the securities markets and broker-dealer regulation. McMorrow was oversight consultant to Yesawich during the period at issue -- December 14, 1990 to April 30, 1991.14 Neither Yesawich nor McMorrow was registered with Thomas James in any capacity during this period.

McMorrow was frequently present at Thomas James. McMorrow examined the firm's operating procedures and reported his findings to Yesawich and the District Court. In addition, during his tenure as oversight consultant, McMorrow was present in the trading room for at least the first three days of trading each time the firm underwrote an initial public offering.

2. Markup and Markdown Violations Occurring During Chepak's
Tenure as Director of Compliance

It is a violation of Conduct Rule 2440 for a member to enter into any retail transaction in a security at a price not reasonably related to the current market price of the security. That rule requires that a broker-dealer that engages in an over-the-counter principal transaction must "buy or sell at a price which is fair . . . . ."15 The NASD has also issued an interpretive guideline that states, "[a] mark-up pattern of 5% or even less may be considered unfair or unreasonable under the '5% Policy.'"16

Because of its previous misconduct, the District Court required Thomas James to petition the Court each time the firm sought to underwrite an initial public offering. By order dated November 30, 1990, the Court allowed Thomas James to act as managing underwriter for the initial public offering of units of Acqua Group, Inc., a commercial distributor of bottleless water coolers, so long as the firm was in strict compliance with the firm's underwriting procedures.17 On December 14, 1990, the initial public offering of 500,000 Acqua units at $6.00 per unit was completed.

Trading in the secondary market in Acqua began on December 14, 1990. Thomas James dominated and controlled the secondary markets in Acqua stock and warrants from December 14, 1990 to April 30, 1991.18 Chepak stipulated to the finding that Thomas James committed pricing violations in the secondary market in Acqua in contravention of NASD Rules.

Where, as here, a firm dominates and controls the market, markups should be computed based upon the firm's contemporaneous cost of acquiring the security from other broker-dealers.19 Instead, Thomas James impermissibly based its retail prices on the inside bid and ask quotations, which were not validated by interdealer trades. As a result, Thomas James charged excessive and fraudulent markups and markdowns in Acqua to its retail customers, totaling $419,490, in violation of the NASD's rules and policies.20

3. Chepak's Responsibility for Thomas James's Violations

NASD Conduct Rule 3010(a)(2) requires a member firm to designate appropriately registered principals to carry out the supervisory responsibilities of the member. The Supervisory Manual assigned the Compliance Department to "supervise all sales, trading and investment banking activities" and to "determin[e] that all supervisory personnel are properly qualified and tak[e] and recommend[] action in regard to the firm's Supervisory Procedures." As the Director of Compliance and sole registered principal in that department, these supervisory tasks were Chepak's responsibility. Thus, Chepak was responsible for overseeing the firm's sales and trading.

Moreover, Thomas James's procedures directly assigned its compliance director supervisory responsibilities. Indeed, at times Chepak was assigned these supervisory tasks by name. The Supervisory Manual mandated that "[t]he Compliance Officer, John Chepak, or his designated Principal, will supervise your activities. It is his duty to enforce our supervisory systems effectively and responsibility to help you."

Chepak admits that he did not supervise the firm's trading of Acqua. Chepak, however, contends that he should not be held responsible for the firm's failures because, as a result of the Commission's injunctive action against Thomas James, the situation at the firm was "unusual."

Chepak claims that Yesawich and McMorrow (who eventually succeeded Chepak as Thomas James's Director of Compliance) were actively involved in the operation and oversight of Thomas James. Chepak further asserts that McMorrow instructed Chepak to concentrate on supervision of sales practices while McMorrow would focus on trading.

As an initial matter, Chepak's testimony about McMorrow's instructions was inconsistent. Chepak initially testified that "Mr. McMorrow had partitioned the trading department for himself. He closed the door and said, 'Listen, there's a lot that needs to be done in this firm. You concentrate on the sales practice, I'll take care of trading." Under subsequent questioning, however, Chepak stated that "I never said he came into my office and closed the door. I said we discussed it, we discussed it and it was not just one conversation." Chepak was also asked whether McMorrow instructed him, as the Director of Compliance, to stay out of the trading room. Chepak replied that he did not remember being told to stay out of the trading room. Moreover, he stated that, as Director of Compliance, he had access to all areas of the firm, including the trading room. McMorrow did not testify in this proceeding.21

Chepak, nonetheless, claims that he reasonably believed that McMorrow instructed him not to supervise trading, that those instructions were binding, and that failure to comply would expose him to federal court contempt proceedings.22 Chepak does not explain the basis for this belief, other than to state that it was his general understanding that he was required to cooperate with McMorrow and follow McMorrow's directions. Chepak does not point to any corroboration for his belief. Chepak testified that he did not have a written order requiring him to defer supervision to McMorrow. Nor does Chepak claim that he asked the firm, its principals, counsel, or any of the regulators that were in and out of the firm if he should delegate trading oversight to McMorrow. Chepak repeatedly testified that he "is not an attorney," implying that he could not understand the full legal impact of ceding responsibility to McMorrow. Yet, Chepak never tried to find out. Chepak also did not try to explain to McMorrow that, as designated supervisor for trading, Chepak was required to oversee trading. Chepak's failure to discuss these issues with McMorrow or anyone else at the firm was unreasonable. Before the NASD, Chepak admitted that, during his tenure as Director of Compliance, his practice was to advise McMorrow of other concerns about compliance matters.23 Chepak cites two cases that he asserts make clear that recommendations by court-appointed agents are binding.24 In SEC v. Data Access Systems, Inc., the Court specifically mandated that the recommendations of the court's agent were binding.25 In Credit Suisse First Boston Corp.26, pursuant to a settlement, the firm retained an independent consultant to recommend procedures to management. Under the terms of the settlement, in the event of an unresolved dispute between the firm and consultant, the firm was required to adopt the recommended procedures.

These cases do not aid Chepak. Before the NASD, Chepak admitted that no court order directed him to transfer compliance duties to Yesawich or McMorrow. The Thomas James District Court order does not purport to oust Chepak as Thomas James's Director of Compliance nor relieve Chepak of his supervisory responsibilities. The order also does not expressly state that Yesawich or McMorrow's recommendations were binding on the firm or Chepak.27

Moreover, even if McMorrow instructed Chepak to focus on sales practices, Chepak, nonetheless, could have identified red flags reflecting the firm's markup violations. Chepak knew that the firm underwrote the initial public offering in Acqua and he could have determined that the vast majority of transactions by Thomas James in Acqua were with retail customers rather than other broker-dealers, indicating possible control of the supply of Acqua securities.28 In addition, Chepak could have reviewed the firm's operational reports, trading blotters, order tickets, customer confirmations, account statements and commission runs. This information should have alerted Chepak that Thomas James dominated and controlled the market for Acqua common stock and warrants and that its retail customers were being charged excessive prices.

We conclude that Chepak violated Conduct Rules 2110 and 3010.

IV.

The NASD censured Chepak, fined him $5,000, and required him to requalify by examination within 90 days of the decision in all capacities in which he seeks to continue participating in the securities industry. Chepak believes that the sanctions assessed against him are "erroneous, excessive, arbitrary, capricious, and not warranted in the public interest." In accordance with Section 19(e)(2) of the Securities Exchange Act of 1934, we must determine if the sanctions the NASD assessed are excessive or oppressive or impose an unnecessary or inappropriate burden on competition.29 Chepak was involved in developing Thomas James's supervisory procedures, which we have found to be inadequate. The firm's prior misconduct indicated the need for heightened supervision, particularly in areas that had resulted in previous violations.30 Chepak's failures to create enforceable pricing requirements in the Supervisory Manual and to monitor Thomas James's pricing of Acqua securities fell seriously short of this mark. Chepak's failings resulted in $419,490 in excessive markups and markdowns to Thomas James's retail customers.

The NASD's sanctions, including the $5,000 fine (which is the minimum suggested in the NASD's Sanction Guidelines), are appropriate in light of the gravity of Chepak's misconduct.31 We do not believe that the sanctions assessed by the NASD are either excessive or oppressive.

An appropriate order will issue.32

By the Commission (Chairman Levitt and Commissioners Johnson, Hunt, and Unger); Commissioner Carey not participating.

Jonathan G. Katz
Secretary

SECURITIES AND EXCHANGE COMMISSION
Washington D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42356

Admin. Proc. File No. 3-9684

In the Matter of the Application of

John A. Chepak
c/o Jenice L. Malecki, Esq.
Singer Frumento, LLP
40 Exchange Place, 20th Floor
New York, New York 10005

For Review of Disciplinary Action taken by the

National Association of Securities Dealers, Inc.

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 John A. Chepak, and the Association's assessment of costs, be, and they hereby are, sustained.

By the Commission.

Jonathan G. Katz
Secretary


 

Footnotes

1 Conduct Rule 2110 [formerly Article III, Section 1 of the Rules of Fair Practice] requires adherence to "high standards of commercial honor and just and equitable principles of trade."

Conduct Rule 3010 [formerly Article III, Section 27 of the Rules of Fair Practice] mandates, among other things, the establishment and maintenance of a system of supervision "reasonably designed to achieve compliance with applicable securities laws and regulations, and with the rules of this Association." Conduct Rule 3010 also requires the establishment, maintenance, and enforcement of "written procedures to supervise the types of business in which [the member] engages and to supervise the activities of registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with the applicable rules of this Association."

2 The NASD also assessed costs.

3 SEC v. Thomas James Associates, Inc., Civ-90-0316T (W.D.N.Y.). A stipulation of dismissal was entered as to one defendant. The other defendants in this case ultimately settled. Thereafter, the only issue remaining for the Court's determination was the appropriate amount of disgorgement to be assessed against certain defendants.

4 Chepak has a bachelor's degree from George Washington University and a Master's degree from Hofstra University. Before working for Thomas James, Chepak had worked for: a large broker-dealer as a dividend clerk; the NASD as a compliance examiner; County NatWest as a compliance associate; and Norstar Brokerage as the director of internal audit compliance. He had also served as an industry arbitrator with the NASD.

5 The record contains references to both June and July 1990 as Chepak's starting date as the Director of Compliance.

6 It appears that Chepak did not designate any other principal to assume his responsibility for the adequacy of these procedures.

7 Conduct Rule 2440 (Fair Prices and Commissions, formerly Article III, Section 4 of the Rules of Fair Practice) and IM-2440 (Interpretation of NASD Mark-Up Policy).

The Supervisory Manual contained two sections: the Thomas James Associates, Inc. Home Office Supervisory Procedures Manual and the Thomas James Associates, Inc. Underwriting Procedures. The underwriting procedures, which focused on initial public offerings, not transactions in the secondary market, merely stated with respect to pricing that "[a]ll prices to customers shall be fair and reasonable given the circumstances of the trade and at all times relating to prevailing market prices" and that "[e]ach of the 3 days' trading blotters in all public offerings will be monitored and reviewed by the Compliance Officer to assure compliance with applicable markup policies, paying particular attention to interdealer activity and in-house related activity."

8 G.K Scott & Co., Inc., 51 S.E.C. 961, 970 (1994), aff'd, 56 F.3d 1531 (D.C. Cir. 1995) (Table); Gary E. Bryant, 51 S.E.C. 463, 470 (1993) (cases involving unfair markups stating that a firm's failure to establish pricing supervisory guidelines is symptomatic of a failure to supervise reasonably).

9 Gary E. Bryant, 51 S.E.C. at 471.

10 Id.

11 See n.3 supra and accompanying text.

12 Chepak testified that he worked on the Supervisory Manual in conjunction with the federal court, special counsel, special counsel agent, the inside counsel, and outside counsel, as well as other unspecified consultants.

13 Yesawich was given "all powers" necessary and appropriate to:

1) prevent and detect violations of the federal securities laws and the rules and regulations of the appropriate self-regulatory organization by Thomas James and its employees;

2) insure the maintenance of accurate and adequate books and records; and

3) insure that Thomas James's system of internal controls was sufficient to provide reasonable assurances that the transactions were executed in accordance with applicable securities laws and regulations.

14 Thomas James hired McMorrow in early 1992 to act as the Director of Compliance. Chepak was reassigned to Thomas James's Research Department.

15 Conduct Rule 2440. Conduct Rule 2120 [formerly Article III, Section 18 of the Rules of Fair Practice] also states that "[n]o member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or fraudulent device or contrivance."

16 IM-2440.

17 See n.7 supra. Each unit of Acqua consisted of two shares of common stock and one redeemable common stock purchase warrant.

18 All trading in Acqua units ceased after December 21, 1990. Thereafter, Thomas James made a market solely in Acqua stock and warrants.

By the end of December, through inventory and retail accounts Thomas James controlled 90 percent of the public float in Acqua stock and warrants. From December to the end of April 1991, Thomas James controlled at least 87 percent of the float in each instrument. Throughout the review period, Thomas James accounted for at least 80 percent of the purchase volume and number of transactions, and between 69 percent and 82 percent of the sales volume and number of transactions.

There were several other market makers effecting transactions in Acqua during the review period. None of these other market makers accounted for more than 4.1 percent of purchase volume or 6 percent of the sales volume.

19 NASD Conduct Rule 2440 and IM-2440. See also Alstead, Dempsey & Co., 47 S.E.C. 1034 (1984).

20 From December 14, 1990 to April 30, 1991 Thomas James charged: 1) excessive markups in Acqua common shares ranging from 6 percent to 21.9 percent; 2) excessive markups in Acqua warrants ranging from 5.6 percent to 26.1 percent; 3) excessive markdowns in Acqua common shares ranging from 5 percent to 19.2 percent; and 4) excessive markdowns in Acqua warrants ranging from 6.3 percent to 27.9 percent.

21 An affidavit from McMorrow and an excerpt of McMorrow's investigative testimony before the NASD discussing the affidavit are a part of the record. These documents focus on McMorrow's activities as oversight consultant in connection with the Acqua and a second Thomas James offering. McMorrow does not discuss Chepak or the firm's supervisory structure in either of these exhibits.

22 Chepak should not have ceded oversight of Acqua trading to McMorrow, who was unregistered. Chepak knew that the Supervisory Manual assigned these responsibilities to him, as well as the duty to determine that supervisory personnel were properly qualified. Although he was willing to confront McMorrow in other circumstances, Chepak chose not to question this instruction, an instruction that Chepak interpreted as ousting him from any responsibility for the trading in Acqua and ceding that supervision to an unqualified person.

The record demonstrates that McMorrow was present in the Thomas James's trading room during the trading of Acqua in the immediate aftermarket. However, there is nothing in the record to indicate that McMorrow continued to be present in the trading room, day in and day out, for the entire period at issue. In fact, McMorrow suggests in his affidavit dated August 16, 1993 that he was not. McMorrow states that "[t]hroughout the review period, I continued to conduct spotchecks on TJA's [Thomas James's] trading of these [Acqua] shares and warrants. In so doing, I examined TJA's internal trading records; and from time to time, I ordered copies of the NASD's Market Maker Price Movement Reports so I could check the number of market makers and the width of the spread." Accordingly, after the first several days of trading in the aftermarket of Acqua, it appears that neither McMorrow nor Chepak were supervising trading on a regular basis.

23 Chepak claims that McMorrow found that Chepak acted reasonably. In a report dated December 7, 1990, McMorrow states "[i]n conclusion, I feel that Chepak has done an excellent job under trying circumstances."

This report predates the conduct at issue. Moreover, despite his praise of Chepak, McMorrow also questioned the reasonableness of Chepak's failure to request certain reports that previously had not been provided to Chepak. We believe that this conduct by Chepak demonstrates an inappropriate passivity as a supervisor.

24 Chepak mistakenly treats McMorrow's statement to focus on sales as if it were a formal recommendation. As described by Chepak, McMorrow's statement was made during a conversation or several conversations between him and McMorrow. It was never forwarded to the Court or management for consideration, unlike the formal recommendations made in SEC v. Data Access Systems, Inc., and Credit Suisse First Boston Corp.. See infra nn.25,26.

25 [1982-1983 Transfer Binder] Fed. Sec. L.Rep. (CCH) ¶ 99,098 at 95,232-233 (D.N.J. 1983). There, the defendants entered into a consent judgement that required that the special agent's recommendations be implemented within 30 days unless timely objection was made to the court. Thereafter, the defendants claimed that they had discretion as to whether to accept the special agent's recommendations. Construing its judgement, the Data Access System, Inc. court concluded that "the parties agreed in advance that the recommendations of the special agent would be binding" unless the court found the recommendation to be clearly erroneous.

26 Securities Exchange Act Rel. No. 39595 (January 29, 1998), 1998 SEC LEXIS 137 (settlement).

27 Chepak contends that fundamental fairness and due process require that legal requirements must give a person of ordinary intelligence a reasonable opportunity to know what is prohibited. Here, Chepak claims that he did not know that he had the authority to disobey the District Court or its appointees. To claim that a requirement is void for vagueness, the claimant must demonstrate that he did not have fair notice of the conduct or activities proscribed or covered by the requirements. City of Mesquite v. Aladdin's Castle, Inc, 455 U.S. 283, 289 (1982); Grayned v. City of Rockford, 408 U.S. 104, 108 (1972). See also R,B. Webster Investments, Inc., 51 S.E.C. 1269, 1274 n.20 (1994).

The standard of "reasonable" supervision is determined based on the particular circumstances of each case. Christopher J. Benz, 52 S.E.C. 1280, 1284 (1997), appeal denied, No. 97-3257 (3rd. Cir. 1998), citing Consolidated Investment Services, Inc., 52 S.E.C. 582, 591 (1996). The Supervisory Manual charged Chepak with supervision of the firm's trading and sales activities. As noted, Chepak cites no specific basis for his belief that the fulfillment of his supervisory responsibilities would expose him to discipline by the District Court.

28 See George Salloum, 52 S.E.C. 208 (1995).

29 15 U.S.C. § 78s(e)(2).

30 Cf. Houston A. Goddard, 51 S.E.C. 668, 673 (1993) (finding it unreasonable to employ normal firm procedures with respect to registered representative who had engaged in prior misconduct).

31 The NASD Sanction Guidelines suggest a monetary sanction for failure to supervise from $5,000 to $25,000 (or $25,000 to $50,000 if there is a pattern of multiple violations). See NASD Sanction Guidelines at 53 (1996).

32 We have considered all of the parties' contentions. We reject or accept them to the extent that they are inconsistent or in accord with the views expressed herein.

http://www.sec.gov/litigation/opinions/34-42356.htm


Modified:02/09/2000