SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
WILLIAM D. HIRSH
For Review of Disciplinary Action Taken by the
NEW YORK STOCK EXCHANGE, INC.
OPINION OF THE COMMISSION
NATIONAL SECURITIES EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDING
Unauthorized Exercise of Discretion
National securities exchange found that a registered representative of a member firm made unauthorized, unsuitable and excessive trades in the accounts of two customers, failed to follow a customer's instructions, exercised discretion without prior written authorization and caused recordkeeping inaccuracies in the accounts of two customers. Held, Exchange's disciplinary action sustained.
James J. Moylan, of Arnstein & Lehr, for William D. Hirsh.
Susan E. Light, Cynthia Kitay, and Michael Krevor, for the New York Stock Exchange, Inc.
Appeal filed: December 30, 1999
Last brief received: August 16, 2000
William D. Hirsh ("Hirsh"), a former registered representative with Bear Stearns and Co., Inc. ("Bear Stearns"), a member firm of the New York Stock Exchange, Inc. ("NYSE" or "Exchange"), appeals from the Exchange's disciplinary action against him. The Exchange found that Hirsh effected unauthorized, unsuitable, and excessive trades in the accounts of two customers, violated NYSE Rule 408(a) by exercising discretion without prior written authorization from two customers, and caused violations of NYSE Rules 440 and 405 and Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 by mismarking order tickets for the customers' accounts.1 The Exchange also found that Hirsh failed to follow one of the customer's instructions.
The Exchange censured Hirsh and suspended him for eighteen months from membership, allied membership, approved person status, and from employment or association in any capacity with any member or member organization. Hirsh now appeals that decision. We base our findings on an independent review of the record.
William Hirsh has been a registered representative since 1968. During the relevant time he was employed by Bear Stearns. While at Bear Stearns, Hirsh had about 100 customers and ranked in the lower half of the Chicago office in terms of production.
The charges in this case relate to two customers with whom Hirsh had personal relationships, Eleanor Mishel and Joyce Ann Ratliff. Hirsh does not contest the Exchange's findings. Rather, he asserts that the findings, conclusions, and sanctions imposed in connection with his conduct related to the Mishel accounts should be barred by "any number of statutes of limitations applicable to the securities laws generally and/or administrative law." Hirsh asks that we consider only his violations with respect to Ratliff and reduce his suspension proportionately. Because Hirsh complains about his sanction, we discuss the events at issue in detail.2
A. Eleanor Mishel
Eleanor Mishel is a retired secretary who was 58 at the relevant time. Once divorced and now widowed, Mishel had little investment experience prior to meeting Hirsh. She had an aversion to debt and interest payments of any kind. She occasionally had bought and sold stocks, always on the recommendations of relatives and friends. In September 1989 she married Jack Mishel. At the time of their marriage, he was eighty-one years old and had inoperable cancer.
In October 1989, Mishel met Hirsh. Hirsh gave her a business card when they met, and she was impressed that he was a Vice-President with Bear Stearns. In a matter of weeks Mishel and Hirsh had begun a social relationship. According to Mishel they saw each other several times a week, and Hirsh told her that he loved her. Early in their relationship Mishel told Hirsh that she was going to inherit money from her mother, who had died recently. She thought Hirsh would be an ideal person to help her invest her inheritance and that he would "take care" of her.
In December 1989, Mishel opened an account ("First Account") with Hirsh at Bear Stearns. Into the First Account she deposited$75,000, a portion of her mother's estate.3 At the time she opened this account, her assets consisted of her apartment, 150 shares of a stock she had purchased years before, and an additional $25,000 from her inheritance. Her income consisted of $2,000 a month from her husband, small dividends from her stock, and some bank dividends (paid in cash).
Hirsh gave Mishel blank forms to sign, telling her that they were "boilerplate." He did not discuss the forms with Mishel before she signed them. Out of Mishel's presence Hirsh completed the information about her assets and income, asserting that her assets were low seven figures, her income was $100,000, and her husband's income was $250,000.4
Hirsh and Mishel had only cursory discussions about the concept of risk and about Mishel's investment goals and experience.5 The forms Mishel completed at Hirsh's direction authorized a wide variety of options strategies (uncovered call writing, put writing, put-call spreads, put-call buys, and speculative uncovered call writing) and trading on margin. Hirsh admitted that he knew that Mishel had limited investment experience, and had never traded on margin before. While Hirsh also testified that he thought she understood concepts like warrants, index options, and call writing, Mishel testified that she did not know what these terms meant. The forms also granted Hirsh discretion over the First Account.
Even before Mishel's check had cleared, Hirsh started trading in the First Account. Mishel tried to understand the confirmation slips from Bear Stearns for these trades, but could not. In December 1989, Mishel received her first Bear Stearns statement, and saw margin charges on it. When she asked Hirsh about the charges, Hirsh told her not to worry because they were merely bookkeeping charges. In January 1990 she received another Bear Stearns statement, which again reported margin, which she now understood to be interest charges. Again she asked Hirsh about the charges, and reiterated that she did not want to pay any interest. Again Hirsh told her not to worry, and said everything would be fine.
Hirsh and Mishel continued to see each other socially, and Hirsh continued to trade heavily in the First Account. The Exchange's expert at the proceedings determined that from December 1989 to November 1990, the portfolio turnover rate in her account was 15.7,6 and the average holding period of the securities in her account was 23 days or less. Over the course of this period, the total cost of margin interest and commissions was $33,124. The break-even return ratio was 76.6 percent,7 meaning that 76 percent of her assets were being consumed by margin interest and commission costs, or that the account had to increase over 76 percent to break even. The margin interest in her account was four times higher than the income generated by the account.
Many of these trades were speculative options trades that, at the time of the hearing, Mishel still did not understand.8 Mishel testified that she never suggested any of the trades to Hirsh. However, at least two trades(both IPOs)in her account were marked "unsolicited" on the order tickets.
After her account had been open a few months, Earle Shultz, the Bear Stearns compliance officer in Hirsh's office, undertook a routine review of Mishel's account and decided that it was too active for a discretionary account. Shultz froze trading in the account until he could talk to the customer, and asked Hirsh to set up a meeting with her. Hirsh called Mishel and asked her to lunch. He asked that she get dressed up and wear her jewelry. His instructions were to "look real rich." At lunch Hirsh told Mishel that his office manager wanted to meet her. Hirsh described the office manager as nosy, and asked that she tell him that she was very rich and that the money in her account was her "play money." After lunch, Mishel met with Shultz and behaved with Shultz as Hirsh asked. Shultz left his brief meeting with Mishel reassured that she was happy with Hirsh and his handling of her account and could afford to trade speculatively. Shultz was not aware of Hirsh's relationship with Mishel.
In April 1990, Mishel opened a second account (the "Special Account") with $100,000, the remaining proceeds from her mother's estate. She opened the separate Special Account because she did not want Hirsh to have discretion to trade in that account without her instructions, as he did in the First Account. Mishel instructed Hirsh to buy three $20,000 Treasury notes - one for three months, one for six months, and one for nine months. With $15,000 she directed him to buy a "safe corporate bond." She told him to take the remaining $25,000 to pay the margin charges from the First Account. If there were any funds left over, Mishel instructed Hirsh not to invest them.
Despite her explicit instructions, Hirsh heavily traded Mishel's Special Account.9 On her May statement Mishel saw a trade in the Special Account that she and Hirsh had not discussed, and she saw margin interest charges in the Special Account. Again, she asked Hirsh for an explanation, and again heassured her that it was just a bookkeeping entry, and told her not to worry.
Mishel became worried about her accounts. On a cruise in April, she met a financial planner, and after the cruise she sent the planner copies of the account paperwork. By June 1990 she got from the financial planner an accounting that she could understand, and realized the magnitude of her losses. Mishel's initial investment in the First Account was $75,000, and, because of the margin costs, her losses totaled $117,722.16. Hirsh's margin trading resulted in Mishel losing more than her initial investment. In the Special Account, the one in which Hirsh was not supposed to trade, her initial investment was $100,000 and her losses totaled $5,394.62.
Although she thought about closing her accounts, she and Hirsh were still seeing each other. Mishel was fearful that, if she closed the account, Hirsh would reveal their relationship to her husband. In December 1990, Mishel finally closed her accounts at Bear Stearns, although, according to Mishel, she and Hirsh continued their relationship until sometime in 1995. In July 1995, Jack Mishel died. Two weeks after his death Mishel met with attorneys, and in December 1995, she filed a complaint against Hirsh with Bear Stearns. After arbitration, Mishel was awarded $117,000. The Exchange was notified of the arbitration award against Hirsh on March 24, 1997.
B. Joyce Ratliff
Joyce Ann Ratliff is a divorced administrative assistant. At the time she opened her account with Hirsh in 1994, she was 54, her annual salary was $30,000, and her assets totaled $100,000.
Because her assets were so limited, and because she was concerned about retirement, Ratliff would occasionally take an investing class. At one of the classes she met a broker with whom she invested $30,000 (the proceeds from the sale of her house) in two bonds and a mutual fund. She held these assets in a brokerage account but never did any trading. When her broker asked whether she was interested in investing in other securities, Ratliff explained that she lived from paycheck to paycheck and had nothing left to invest.
In the fall of 1987, she took another investing class, and met Hirsh, who was teaching the class. They began to see each other socially every few months. Their relationship continued for several years without any business transactions.
In the fall of 1994, one of her bonds matured. She showed Hirsh her brokerage account statement and asked his advice about what to do with the proceeds. Hirsh offered to open an accountfor her, saying "I'll make some money for you," and she agreed. Hirsh was aware of Ratliff's modest means and knew she was concerned about having funds for her retirement.
In October 1994, Hirsh sent her the documents to sign to open the account. Since they resembled the documents that she had signed when she opened her previous brokerage account, Ratliff signed them without reading them. Hirsh never discussed the documents with her. She and Hirsh never discussed her investment goals in detail, or the risk she was willing to accept. Ratliff assumed, since she had bonds, that Hirsh would buy her more bonds or a similar type of investment. Ratliff testified that she and Hirsh never discussed margin accounts, or any kind of speculative investment strategies. Ratliff did not understand the nature of a put or a warrant. Ratliff transferred $9,940 (the proceeds from her bond) and the second bond (the market value of which was $4,800) to the Bear Stearns account. This account was not discretionary.
Hirsh immediately began trading on margin in Ratliff's account. By January, 1995, the account equity was reduced to 65 percent. According to the Exchange's expert, for the time during which her account was most heavily traded (November 1994 -November 1995) the portfolio turnover rate was 10.5, meaning that her account had activity equal to buying and selling all of the assets in the account ten times a year -- almost once a month. The average holding period in her account was 35 days. During this period, the break-even return ratio was 53.9 percent, meaning that almost 54 percent of her assets were being consumed by margin interest and commission costs. The margin interest was $1,638 and the total commissions were $5,642, for a total of $7,280. Over the thirty-one month life of the account, the turnover rate was 8.1, and the break-even return ratio was 46.2 percent. The expert testified that it appears that Hirsh quickly sold stocks that had gains and failed to liquidate the losses.10
According to Ratliff, Hirsh never called her to discuss her account. After she opened the account their personal relationship continued, and they talked and saw each other socially every few months. Ratliff testified that she knew nothing about the companies in which Hirsh invested for her, although several tickets for trades in Ratliff's account were marked "unsolicited."
Although she received statements from Bear Stearns, Ratliff could not understand them. She once asked Hirsh to explain her monthly statements. He rushed through the explanation, and when the next monthly statement came she was just as confused as she had been before. When she attempted to decipher her statements she thought her account balances were going down but was uncertain. At one point she expressed concern to Hirsh about her account and he told her that the market was down, but that it would come back.
In February 1997 she went to a certified financial planner at her credit union. The certified financial planner concluded that her account had been churned and that she had little money left. The loss in her account ultimately totaled $13,256.93. He suggested that she contact an attorney. She closed her account in June 1997, and by summer Bear Stearns settled with Ratliff for $7,500.
On October 6, 1997, the Exchange was notified of the settlement of the Ratliff matter, and was also notified of Hirsh's termination from Bear Stearns. On November 4, 1997, the Exchange notified Hirsh that he was being investigated in connection with the Mishel and Ratliff complaints, and in November 1998, the Exchange filed charges against him.
As we noted earlier, Hirsh appeals only the findings related to his handling of the Mishel accounts, contending that a statute of limitations should bar these charges. He seeks to have the sanction against him reduced proportionately.
We have consistently held that no statute of limitations applies to the disciplinary actions of the Exchange or other self-regulatory organizations ("SROs").11 We have, however,held that under certain circumstances inordinate time delays can render a proceeding inherently unfair and be cause for dismissal.12 In Hayden the misconduct occurred between 1982 and 1990. The charges were brought against respondent fourteen years after the first act of misconduct and over six years after the last incident. In 1991 (five years before the charges were brought) the Exchange was informed about significant misconduct by the respondent through a voluminous sales practice report. We do not believe that the factors discussed in Hayden necessarily require the dismissal of the charges as to Mishel. Once the Exchange was notified of Mishel's arbitration award only 20 months elapsed before the charges were filed.
Exchange Act Section 19(e)13 authorizes the Commission to reduce a sanction imposed by an SRO if it finds that the sanction is excessive or oppressive or imposes an undue burden on competition. Hirsh's conduct with respect to the Mishel and Ratliff accounts reflects a complete derogation of these customers' interests for Hirsh's personal gain. In both instances Hirsh was in a position to exercise control over his customers because of his personal relationships with them. He betrayed their trust and then attempted to downplay their losses. Moreover, Hirsh appears to be completely lacking in contrition about the losses to his customers, and was less than forthcoming during the proceeding.
Even if we had concluded that the allegations with respect to Mishel should have been dismissed, the result would not be different. In levying the 18-month sanction, the Exchange did not apportion the sanction related to each customer, or to each account. In our view, Hirsh's misconduct with respect to Ratliffis sufficient for us to sustain the Exchange's sanction on the basis of the violations committed in that account alone.14
The record as it relates to Ratliff provides ample evidence of serious misconduct on the part of Hirsh. He betrayed the trust of a woman with whom he was involved socially, a woman he knew had little money or experience and who was saving for retirement. Hirsh had a duty to recommend securities suitable to Ratliff, to obtain her authorization before trading, and to assure that she understood the risks involved in securities trading. Not only did Hirsh fail to meet these obligations, he traded her account excessively and took steps to hide his actions from Bear Stearns by recording transactions as "unsolicited" so that it would appear that Ratliff was directing the trading in her account. His mishandling of the Mishel accounts shows that his handling of the Ratliff account was not an isolated incident and further corroborates Ratliff's testimony.15 We conclude that the sanction imposed on Hirsh is neither excessive nor oppressive.
An appropriate order will issue.16
By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY, and UNGER).
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10129
In the Matter of the Application of
WILLIAM D. HIRSH
For Review of Disciplinary Action Taken by the
NEW YORK STOCK EXCHANGE, INC.
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY NATIONAL SECURITIES EXCHANGE
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the New York Stock Exchange, Inc. against William D. Hirsh be, and it hereby is, sustained.
By the Commission.
Jonathan G. Katz
1 NYSE Rule 408(a) requires customer written authorization in order to exercise any discretionary power in a customer account.
NYSE Rule 405 requires every member organization to use due diligence to learn the essential facts relative to every customer, every order or every margin account accepted or carried by it; and to supervise diligently all accounts handled by registered representatives of the organization.
NYSE Rule 440 requires brokers and dealers to make and preserve books and records prescribed by the NYSE and by Exchange Act Rules 17a-3 and 17a-4.
Exchange Act Rules 17a-3 and 17a-4 require brokers and dealers to keep current books and records regarding executed securities transactions and customer accounts. 17 C.F.R. §§ 240.17a-3 and 240.17a-4.
2 Throughout the proceeding, Hirsh's version of what transpired with respect to both customers differed from their versions. The Hearing Panel found that when Hirsh's testimony directly contradicted that of Mishel and Ratliff, Hirsh's was less credible. The credibility determination of an initial fact-finder is entitled to considerable weight and deference, since it is based on hearing the witnesses' testimony and observing their demeanor. Keith L. DeSanto, 52 S.E.C. 316, 319 (1995), aff'd, 101 F.3d 108 (2d Cir. 1996). Such a determination can be overcome "only where the record contains `substantial evidence' for doing so." Anthony Tricarico, 51 S.E.C. 457, 460 (1993).
3 Mishel's total inheritance from her mother was approximately $200,000, which she received in two payments. The $75,000 she deposited into the First Account was part of the first payment of $100,000. She later received another $100,000, which she also invested with Hirsh in the Special Account discussed infra.
4 Mishel did not supply this information to Hirsh. Hirsh claims that the numbers were intended to reflect Jack and Eleanor Mishel's joint income, and that he based the information on conversations he had with Mishel. Mishel testified that, not only were these numbers wrong, but that she never told Hirsh about her income or assets. Before Jack Mishel's death, Mishel did not know the extent of her husband's income and assets.
5 Mishel testified that, although she never really thought about whether Hirsh would make the decisions as to what to buy and sell, she "trusted him to buy good things and to make a profit. I thought he was working, you know, in my interest and that he would do the best."
6 The turnover rate reflects the number of times during a given period that the securities in an account are replaced by new securities. Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 (1989). "[E]xcessive trading generally is thought to exist by courts and commentators when there is an annual turnover rate in an account in excess of six." Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 1990), citing Siegel v. Tucker, Anthony & R.L. Day, Inc., 658 F. Supp. 550, 554 (S.D.N.Y. 1987).
7 The break-even return ratio (or cost-to-equity ratio) is the percentage of return on the customer's average net equity needed to pay broker-dealer commissions and other expenses. In other words, the break-even return ratio measures the amount an investment would have to appreciate to break even. I Stuart C. Goldberg, Fraudulent Broker-Dealer Practices, § 2.9[b] (1978). We have previously found that a break-even ratio in excess of 20% indicates excessive trading. See Peter C. Bucchieri, 52 S.E.C. 800, 805 (1996) (finding excessive trading in account with cost-to-equity factors of 21% to 30%); Michael David Sweeney, 50 S.E.C. 761, 765 (1991) (finding excessive trading in account with cost-to-equity factors of 22% to 44%).
8 Examples of the trading in Mishel's account include the purchase of NIKKEI index options in the amount of $21,018.51 and, over the life of the account, $52,196.66 of warrants (including Apple and Hilton Hotel warrants).
9 According to the Exchange's expert, during the eight-month period ending November, 1990, the annualized turnover rate was 6, and the break-even return ratio was 21.8 percent, meaning that 21.8 percent of her assets were being consumed by margin interest and commission costs.
10 The expert also testified that Hirsh created a speculative portfolio for Ratliff and traded that portfolio aggressively. Among the trades in her account were Intel warrants close to expiration.
11 Stephen J. Gluckman, Securities Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 431; Henry James Faragalli, 52 S.E.C. 1132, 1144 (1996); Larry Ira Klein, 52 S.E.C. 1030, 1039 (1996).
SROs are private organizations not subject to the requirements applicable to a government agency. See Shultz v. SEC, 614 F.2d 561, 569 (7th Cir. 1980) (Chicago Board Options Exchange not "authority of the government" and thus not governed by the Administrative Procedure Act); Gluckman, supra, at 431 (statute of limitations does not apply to NASD proceedings, and to impose one would "impair the NASD's. . . duty to protect the public and discipline its members");Klein, supra, at 1039 (SRO proceedings are not initiated by a government entity such as the Commission, nor does the government control when the SRO begins or concludes its determination); Daniel Turov, 51 S.E.C. 235, 238 (1992) (Fifth, Sixth and Seventh Amendments to the United States Constitution do not apply to New York Stock Exchange, which is not a government agency); Sumner B. Cotzin, 45 S.E.C. 575, 578 (1974) (NASD not a federal agency subject to strictures of the Administrative Procedure Act).
12 Jeffrey Ainley Hayden, Securities Exchange Act Rel. No. 42772 (May 11, 2000), 72 SEC Docket 1125, 1128.
13 15 U.S.C. § 78s(e).
14 Cf. Howard Alweil, 51 S.E.C. 14, 16 (1992) (charges set aside and fine reduced accordingly, since fine was apportioned to each violation, but suspension not reduced proportionately).
15 Even if the Mishel charges were time-barred, we may consider Hirsh's conduct as evidence of motive, intent, or knowledge. Richard D. Chema, Securities Exchange Act Rel. No. 40719 (Nov. 30, 1998), 68 SEC Docket 2017, 2021 n.8; Joseph J. Barbato, Securities Exchange Act Rel. No. 41034 (Feb.10, 1999), 69 SEC Docket 178, 197 n.26 (citing United States v. Gavin, 565 F.2d 519, 523 (8th Cir. 1977) (evidence of events extending beyond statute of limitations admissible to show motive, intent, a continuing scheme, and lack of inadvertent action)).
16 We have considered all of the arguments advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed in this opinion.
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