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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No.44953 / October 18, 2001

Admin. Proc. File No. 3-10193



In the Matter of the Application of
 
Hal S. Herman
8657 Bonview Terrace
Williamsville, New York 14221
 
For Review of Action Taken by the
 
AMERICAN STOCK EXCHANGE LLC


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OPINION OF THE COMMISSION

REGISTERED SECURITIES EXCHANGE — REVIEW OF DISCIPLINARY PROCEEDING

Registered representative of a member firm of national securities exchange violated exchange rules by engaging in improper discretionary trading, knowingly submitting false transactional information to exchange clearing members and making material misstatements to the exchange. Held, exchange's findings of violation and sanctions sustained.

APPEARANCES:

Sheryl Anne Zuckerman and Bill T. Singer, of Singer Frumento LLP, for Hal S. Herman.

Philip J. Axelrod and Suzanne E. Auletta, for American Stock Exchange LLC.

Appeal filed: April 25, 2000
Last brief received: July 18, 2000

I.

Hal S. Herman, a registered representative of Metropolitan Life Insurance Company and MetLife Securities ("MetLife") appeals from the sanctions imposed by the American Stock Exchange LLC ("AMEX" or "Exchange"). The AMEX and Herman stipulated to Herman's violations of Exchange rules by (1) engaging in improperdiscretionary trading; (2) knowingly submitting false transactional information to Exchange clearing members; (3) making material misstatements on a Form U-4 and on an amended Form U-4; and (4) making a material misstatement in sworn deposition testimony before the Exchange.1 Following a hearing held for the sole purpose of determining the appropriate sanction for Herman's conduct, the AMEX censured Herman and permanently barred him from membership, allied membership, and approved person status and from employment or association in any capacity with any Exchange member or member organization. We base our findings on an independent review of the record.

II.

Our discussion of the facts in this case is based upon the facts to which the parties stipulated.2

In October 1995, Herman was employed by Israel A. Englander & Co., Inc. ("Englander") as a non-registered wire booth clerk. Englander was an AMEX member organization engaged in the two dollar brokerage business.3 As a wire booth clerk, Herman's responsibilities included receiving orders from Englander's customers, transmitting those orders to Englander's floor brokers for execution, and submitting transactional information to AMEX clearing member organizations. At no time was Herman permitted personally to initiate or effect transactions on the floor of theExchange or cause transactions to be effected without first receiving bona fide orders.

While he was employed by Englander, Herman established a customer wire between Englander's floor booth on the AMEX floor and a friend, Wayne Robbins ("Robbins"), allowing Robbins to send instructions directly to the floor booth. Robbins at that time was a trader employed by a non-member firm, Colin Winthrop & Co., Inc.4 Before the opening of trading on February 27, 1996, Herman became aware of a specialist unit error resulting in an open "uncompared" purchase of 15 Wells Fargo & Company ("WFC") puts at a favorable price. Seeing an opportunity to make money for Robbins, Herman called Robbins prior to the opening of trading and offered to "take over" the trade for him. Robbins agreed to take the profitable purchase (to which he was not entitled). Herman, however, was unable to "take over" the trade for Robbins' account because the AMEX specialist for WFC options canceled the trade that morning.

Robbins also knowingly permitted Herman to exercise trading discretion over Robbins' account at Colin Winthrop with respect to trading in Digital Equipment Corporation ("DEC") options listed on AMEX. Although Herman's position with Englander did not allow him to exercise trading discretion in customer accounts, Herman nevertheless used the discretion granted by Robbins to initiate and enter several orders for trades of DEC options in Robbins' account in the absence of bona fide orders from Robbins. On February 22, 1996, Herman entered four sell orders with AMEX floor brokers, totaling 500 DEC calls, for Robbins' account. The floor brokers executed the sale orders.5 The prices for these transactions were lower than prices later in the day.

On the next trading day, Herman sought to mislead Robbins about the unfavorable trading results by trying to reverse out of and/or conceal the cleared sales. To accomplish this, Herman prepared and submitted into the clearing process fictitious "reversal" Rejected Options Trade Notices ("ROTNs") showing that Robbins' account had purchased, rather than sold, these 500 DEC calls from a particular member firm. Herman also submitted a fictitious purchase order for Robbins' account into the clearing process that same day for 300 DEC calls at a price below thelowest sale price of the day. These purported purchases never cleared because the information in the ROTNs was fictitious and the transactions had never taken place. Herman then gave Robbins or an employee from Robbins' firm a false report showing that Robbins had purchased the DEC calls at a favorable price relative to the closing price of the calls.

On February 28, Herman told Robbins that, although he had bought the calls, the trades had been mistakenly cleared as sales. When Robbins realized that Herman had in fact sold, not purchased, the calls, he advised Herman that he would not accept the sale and instructed Herman to put the sale in Englander's error account. Herman advised his supervisor that he had made an error in a trade in the DEC calls but the supervisor later learned that Herman had concealed the transaction for days. In response, Englander fired Herman and notified the AMEX. The AMEX notified Herman by letter dated March 6, 1996 that it had commenced an investigation into his activities. The AMEX also sent three additional letters between February 26 and November 4, 1997 notifying Herman of its continued investigation. Herman received all four of these letters.

In December 1997, Herman signed a Uniform Application for Securities Industry Registration or Transfer ("Form U-4") seeking to register with the National Association of Securities Dealers, Inc. ("NASD") as a representative for MetLife. In his Form U-4, Herman responded negatively to two questions on the form asking whether he was the subject of an investigation that could result in a finding by any self-regulatory organization that he had violated its rules and whether he had ever been discharged because he had been accused of violating investment-related statutes, regulations, rules, or industry standards of conduct.

The AMEX subsequently notified MetLife of the investigation into Herman's conduct, prompting MetLife to file an amended Form U-4 in October 1998. As part of the amended Form U-4, Herman signed a Disclosure Reporting Page ("DRP") purporting to set forth the details pertaining to the AMEX's investigation. On the DRP, Herman falsely represented that the AMEX's investigation had been initiated on August 6, 1998 after he had signed and submitted the initial Form U-4 in connection with his application to be an associated person with MetLife. On the amended Form U-4, Herman did not correct his earlier erroneous assertion denying that he had ever been discharged due to accusations of violating investment-related statutes, regulations, rules, or industry standards of conduct.

On September 23, 1998, Herman was deposed under oath by AMEX staff in connection with its investigation of his conduct at Englander. At his deposition, Herman was asked if he had ever attempted to take over a trade and give it to a customer to whom he knew it did not belong. Herman replied that he had not, whenin fact he had done so with regard to the February 27, 1996 WFC transaction.

The disciplinary panel accepted the parties' stipulation of the facts, censured Herman, and permanently barred him from membership, allied membership, and approved person status and from employment or association in any capacity with any AMEX member or member organization. The disciplinary panel explained that these sanctions were appropriate because Herman's conduct was "inherently egregious."6 It noted that he had violated AMEX rules prohibiting on-floor discretionary trading and had thereby exploited the advantages he obtained by virtue of his presence on the trading floor. The panel also cited his repeated fraudulent activity involving the creation and submission of fictitious transactions into the clearing process. In addition to Herman's misconduct on the trading floor, the panel also pointed to Herman's submission of the false Form U-4 and amended Form U-4 and his false testimony to the AMEX during its investigation. The panel concluded that this conduct compromised the integrity of the securities industry. Finally, the panel also considered Herman's previous disciplinary history.7 The panel, in discussing the sanctions, noted the similarity in the kind of misconduct that Herman had engaged in in the earlier disciplinary action.

Herman appealed to the AMEX Adjudicatory Council, the AMEX's appellate body, which upheld the disciplinary panel's decision in all respects. This appeal followed.

III.

Herman repeatedly violated AMEX rules while acting as a floor broker, manipulating the clearing process, and submitting fictitious transaction reports. Herman also submitted false information to the NASD in his Forms U-4 and lied in his deposition before the AMEX when he asserted that he had never attempted to take over a trade and give it to a customer to whom he knew it did not belong. Accordingly, we find that Herman violated AMEX rules 345(a)(1), (2), and (4), as well as Article V, Section 4(b) of the AMEX's Constitution by: (1) engaging in improper discretionary trading; (2) knowingly submitting false transactional information to AMEX clearing members; (3) making material misstatements on a Form U-4 and on an amended Form U-4; and (4) making a material misstatement in sworn deposition testimony before the AMEX.

Section 19(e) of the Securities Exchange Act of 1934 governs our review of the sanctions imposed by a self-regulatory organization.8 We may reduce a sanction imposed by a self-regulatory organization such as AMEX, if we find, having due regard for the public interest and the protection of investors, that the AMEX's sanction is excessive or oppressive or imposes an unnecessary burden on competition.9

While Herman concedes that some sanction is warranted, he contends that the permanent bar imposed by the AMEX is unduly harsh. Herman insists that he did not act in bad faith and that several factors mitigate his conduct.

He first argues that the AMEX gave inappropriate weight to his tardiness in paying the fine imposed in the 1987 Proceeding. He asserts that the AMEX should not have considered this past action at all because it was neither the subject of the current investigation nor the subject of the testimony at the hearing.

We do not agree either with his contention that the AMEX gave inappropriate weight to his tardiness or that it should not have considered the action. Although the AMEX stated in a footnote to its opinion that it was "troubled" by his delay in paying this fine, it emphasized that the significance of the earlier disciplinary action was the similarity of Herman's misconduct there to the misconduct currently at issue. In our view, it was the recidivist nature of Herman's behavior that the AMEX appropriately factored into its sanction determination.

Second, Herman contends that in failing to disclose the instant AMEX investigation on his Forms U-4 with MetLife he relied on the advice of his former counsel that no disclosure was required until the AMEX had called him to testify. He further maintains that his false answer on the Form U-4 to the query regarding whether he had been discharged by Englander was based on a misunderstanding of the question and was not the result of a willful intent to deceive.

While a valid claim of reliance upon counsel may have a mitigating effect on sanctions, to establish such a defense, a person must show that he (1) made complete disclosure to his counsel of the intended action; (2) requested counsel's advice as to the legality of the intended action; (3) received counsel's advice that the conduct was legal; and (4) relied in good faith on that advice.10 Here, Herman's testimony is unclear as to what information he conveyed to his attorney. Herman testified that he does not remember whether his attorney reviewed the questions on the Form U-4 or even whether the attorney ever saw the form itself. Moreover, Herman could not even recall whether he had advised his attorney that he was going to be filing a Form U-4.11 Since he has not established that he made full disclosure to his counsel, we are not persuaded that any reliance Herman may have placed on any advice received from counsel was in good faith.12

Third, Herman asserts that his failure to receive any profits from his trading activities for Robbins is a mitigating factor. We disagree. As evidenced by his testimony at the hearing, Herman's conduct in making these trades for Robbins wasnot motivated by altruism. Rather, he did it to put an end to what he felt was the "bugging" and persistent pressure from Robbins to make trades of this sort. Herman's readiness to violate AMEX rules simply because of the entreaties of a customer is not, in our view, a mitigating factor.

Herman's fourth argument points to his post-Englander career at MetLife where, he asserts, he has made a "solid contribution to the investing public" as an insurance salesman. We disagree that Herman's recent work at MetLife mitigates his prior violative conduct. We also note that, while he was employed by MetLife, Herman gave a false answer during his AMEX deposition.

Finally, we reject Herman's contention that the sanction here is disproportionately harsh compared to those imposed in other cases of similar misconduct. Our determination of whether a particular sanction is excessive or oppressive is made with regard to "the facts and circumstances of each particular case, and cannot be precisely determined by comparison with the actions taken in other proceedings."13 Nevertheless, we note that an equally severe sanction was imposed in several recent cases involving repeated and continuing acts of violative conduct by registered representatives.14

Here, although Herman had previously been sanctioned, he nevertheless continued to show a repeated disregard for the rules of the AMEX. He made improper trades. He submitted fictitious transactions into the clearing process. He provided false answers about the AMEX's investigation of these activities on hisForms U-4. Finally, he made a false statement to the AMEX in his September 1998 deposition.

Providing false information in any form, be it data submitted to the clearing process, or forms or testimony to a self-regulatory organization, is an especially serious matter, emphasizing the appropriateness of the sanction imposed here. Moreover, Herman's disdain or ignorance of the required minimum level of conduct is reflected in his explanation that he had engaged in the improper trades because Robbins "bugged me to do it." In light of Herman's violations of the AMEX's rules, including the submission of false and fictitious securities transactions into the clearing process, the repeated misstatements and false information provided to the AMEX which served to hide his misconduct from MetLife and the AMEX's investigators, we do not find the AMEX's sanction to be either excessive or oppressive.

An appropriate order will issue.15 /

By the Commission (Chairman PITT and Commissioners HUNT and UNGER).

Jonathan G. Katz
Secretary

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No.44953 / October 18, 2001

Admin. Proc. File No. 3-10193



In the Matter of the Application of
 
Hal S. Herman
8657 Bonview Terrace
Williamsville, New York 14221
 
For Review of Action Taken by the
 
AMERICAN STOCK EXCHANGE LLC


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ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES EXCHANGE

On the basis of the Commission's opinion issued this day, it is

ORDERED that the disciplinary action taken by the American Stock Exchange LLC against Hal S. Herman be, and it hereby is, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes

1 AMEX found that Herman had violated Exchange rules 345(a)(1), (2), and (4) as well as Article V, Section 4(b) of the AMEX Constitution. Rules 345(a)(1), (2), and (4) authorize the AMEX to discipline employees of member organizations who engage in conduct that violates the AMEX Constitution or its rules, make misstatements to the Exchange or engage in conduct inconsistent with just and equitable principles of trade. Article V, Section 4(b) of the AMEX Constitution provides, among other things, that an approved person adjudged guilty by the AMEX of fraud or of fraudulent acts shall be deemed to be guilty of conduct inconsistent with just and equitable principles of trade, and that the approval of such approved person may be withdrawn.

2 The parties agreed to two stipulations. The first stipulation was entered into on March 31, 1999 and an amended stipulation was agreed to on May 27, 1999. The stipulations are the only record evidence of the violative conduct.

3 A two dollar floor broker executes orders for other exchange members for a fee -- originally two dollars for 100 shares of stock.

4 The stipulation referred to most of the entities involved only by some abbreviated or shortened form of their full legal names. This opinion uses the current or then existing full legal name of all entities except where an abbreviated form is defined.

5 Herman submitted orders to sell 500 DEC calls. However, only 499 of the DEC calls were cleared.

6 Herman's only defense of his conduct in placing the trades was that "[Robbins] was asking me to do it for him, I was under a lot of pressure, he was bugging me to do it [and] I was trying to help him."

7 From 1983 to 1987, Herman was employed as a non-registered wire booth clerk by World Options Trading Co. ("World Options"), an AMEX member organization. In June 1987, an AMEX disciplinary panel found that Herman had knowingly inputted false data into the clearance process, made intentional misstatements and omissions to his supervisors at World Options concerning errors he had made, transferred options positions between different members' accounts to conceal errors and caused trades to be effected in a member's account without authorization (the "1987 Proceeding"). Herman was censured, fined $5,000, and barred for five years from employment on the AMEX floor. Herman paid part of the fine to the AMEX but, when he failed to pay the balance, the AMEX contacted a collection agency. Herman ultimately paid $1,700 in satisfaction of the debt.

8 15 U.S.C. § 78s(e)(2).

9 Id. Herman does not claim, and the record does not show, that the AMEX's action has imposed an undue burden on competition.

10 See Markowski v. SEC, 34 F. 3d 99, 104-05 (2d Cir. 1994); C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1436 (10th Cir. 1988); SEC v. Goldfield Deep Mines Co., 758 F.2d 459, 467 (9th Cir. 1985); SEC v. Savoy Indus., Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981).

11 At the hearing, Herman was asked whether: (1) he had advised his attorney that he was going to be filing a Form U-4; (2) he had sent a copy of the Form U-4 to his attorney; (3) his attorney had reviewed a copy of Form U-4; or (4) he had advised his attorney of the question on the Form U-4 relating to prior investigations. To all of these inquiries, Herman responded that he did not know or did not remember.

12 We also find that the record fails to show that Herman sought his attorney's advice as to his disclosure obligations for reporting the AMEX investigation on his Form U-4 or that his attorney had advised him on this specific disclosure obligation. Indeed, we note that in seeking employment with MetLife he made false representations on his Forms U-4.

13 Butz v. Glover Livestock Commission Co. Inc., 411 U.S. 182, 187 (1973); See also Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970); Robert A. Grunburg, 52 S.E.C. 1081, 1083 (1996); Jeffrey D. Field, 51 S.E.C. 1074, 1077 (1994); Robert A. Amato, 51 S.E.C. 316, 321 n.25 (1993), aff'd, 18 F.3d 1281 (5th Cir. 1994). J.V. Ace & Co., Inc., 50 S.E.C. 461, 467 (1990).

14 See, e.g., Kevin Lee Otto, Exchange Act Release No. 43296 (September 15, 2000), 73 SEC Docket 964, aff'd, 253 F.3d 960 (7th Cir. 2000), petition for cert. filed, 70 U.S.L.W. 3193 (U.S. Sep. 7, 2001) (No. 01-465) (broker censured, fined $35,000, and permanently barred from associating with any member firm for misappropriating client's funds for his personal use and repeatedly lying to his client about his misuse of these funds); Keith L. Mohn, Exchange Act Release No. 42144 (November 16, 1999), 71 SEC Docket 198 (person associated with member firm was censured, fined $50,000, and barred from associating with any member in any capacity for engaging in several private securities transactions involving a number of different investors all without prior written notification to member).

15 We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.

 

http://www.sec.gov/litigation/opinions/34-44953.htm


Modified: 10/18/2001