SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
HOWARD R. PERLES
LAURENCE M. GELLER
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
Violations of Conduct Rules
Aiding and Abetting a Manipulation Through Prearranged Trades
Failure to Comply with Recordkeeping Requirements
Two traders at separate firms aided and abetted a market manipulation by effecting prearranged, matched trades, and failed accurately to reflect these trades on the books and records of their respective firms. Held, the association's findings of violation sustained in part, and the sanctions it imposed sustained.
Marc B. Dorfman, of Freedman, Levy, Kroll & Simonds, for Howard R. Perles.
Jeffrey S. Rosen, of DeMartino Finkelstein Rosen & Virga, for Laurence M. Geller.
Jeffrey S. Holik, Norman Sue, Jr., Susan L. Beesley, and Alan B. Lawhead, for NASD Regulation, Inc.
Appeal filed: September 18, 2000
Last brief received: February 12, 2001
Howard R. Perles, a former general securities representative with I.A. Rabinowitz & Co. ("I.A. Rabinowitz"),1 a member firm of the National Association of Securities Dealers, Inc. ("NASD"), and Laurence M. Geller, a trader and registered representative at Wien Securities Corp. ("Wien"), another NASD member firm, appeal from NASD disciplinary action. The NASD found that Perles and Geller aided and abetted a manipulation by engaging in prearranged, matched trading with VTR Capital, Inc. ("VTR"), a member firm of the NASD, in violation of Conduct Rules 2110 and 2120,2 and failed accurately to reflect those prearranged trades on the books and records of their respective firms in violation of Section 17(a) of the Securities Exchange Act of 1934, and Exchange Act Rule 17a-3,3 and NASD Rules 2110 and 3110.4 The NASD fined Perles $25,000, suspended him for one year from association with any member in any capacity, and required him to requalify as a general securities representative. Geller was fined $25,000, suspended for 30 business days, and required to requalify as a general securities representative.5 We base our findings on an independent review of the record.
On April 18, 1995, Interiors, Inc. ("Interiors"), a Delaware corporation, entered into a Financial Consulting Agreement (the "Agreement") with VTR and its president, Edward McCune, under which, within 24 hours of the date of the Agreement, VTR was to arrange for the sale of 300,000 shares of Interiors common stock at $0.93 per share, slightly below the market price at the time. Immediately after concluding the Agreement with Interiors, VTR arranged for five individuals (the "Short-Term Investors") to purchase the 300,000 unregistered common shares from Interiors with the understanding that VTR would buy the stock from them.6 Several of the Short-Term Investors had affiliations with VTR and McCune.
From April 19 through 21 VTR engaged in a series of back-and-forth transactions with Perles and Geller. During VTR's trading with Applicants, VTR methodically bid up Interiors' per share price to $2-1/8. Concurrently, VTR launched an aggressive retail effort, selling more than 366,700 shares of Interiors to its customers resulting in a short position in VTR's inventory of 337,749 shares. VTR covered this short position in large part through its purchase of the 300,000 Interiors shares from the Short-Term Investors. VTR's transactions in Interiors generated approximately $400,000 in profits for the firm.
On April 1 there were 1,017,500 publicly available Interiors shares. Between April 3 and April 18, Interiors' average daily volume totaled 18,191 shares. Following VTR's sales of Interiors stock to its retail customers, the shares once again became thinly traded. Average dailyvolume plummeted approximately 92%, from 331,033 shares between April 19 through 21 to just 26,220 shares the following week.7
The NASD found that Perles and Geller engaged in prearranged trading with VTR from April 19 through 21, 1995 and aided and abetted VTR's manipulation. The relevant facts are as follows.
A. TRADING BY PERLES
Perles was responsible for executing and reporting all orders from I.A. Rabinowitz branches and maintaining the markets in up to 50 securities for which I.A. Rabinowitz was a market maker. While before the Hearing Panel Perles declined to describe himself as a "trader," Perles admitted that in 1995 the firm permitted him to engage in trading that involved substantial risk of his firm's capital.
I.A. Rabinowitz had been a co-underwriter for Interiors' initial public offering in 1994 and had a retail following in the stock. The firm's office was in the same building as VTR. McCune, VTR's president, sometimes visited "Ike" Rabinowitz, I.A. Rabinowitz' president, at Rabinowitz' office.
Perles knew that Interiors was a thinly traded stock. On April 18, the day before the violative transactions, I.A. Rabinowitz traded just 2500 Interiors shares in three transactions. At the beginning of the day on April 19, Perles held no Interiors shares in his trading account. In three hours Perles purchased and sold, back-and-forth, Interiors stock more than 28 times with David Noble, VTR's trader, and four other customers. Many of the transactions between VTR and Perles involved large blocks of 10,000 and 20,000 or more shares, exceeding the total daily volume for Interiors on the recent prior trading days.
Even though the quoted spread for Interiors was never less than $0.25, Perles' purchases and sales with Noble usually differed by only a penny.8 Perles established large short positions in Interiors, at one point as great as 53,450 shares, almost three times the average daily volume for the prior 11 trading days. VTR and Perles traded a total of 123,950 shares on April 19, approximately 12.2% of the total shares publicly available, increasing daily volume by 39% (from 317,050 shares, apart from trading between VTR and Perles, to 441,000 shares). Perles both started and ended the day holding no Interiors shares in his trading account. Perles' "in-and-out" pattern of trading with VTR is reflected in the following schedule:
|April 19, 1995|
At the time of the trades at issue here, Perles had access to a Nasdaq Workstation with Level 3 Service, which he used to update quotes and access the ACT system.9 In April 1995 I.A. Rabinowitz' trading room was not automated; Perles and his assistant took all orders by telephone and entered each of them by hand. Perles combined many of his trades with VTR on single buy or sell tickets, crossing out the amount of one trade and adding a subsequent transaction on the same ticket. For example, one buy order ticket reflects six separate entries (15,000, 10,000, 15,000, 15,000, 13,250 and 10,000 shares). The entry for each individual purchase is crossed out on the ticket; the trades were not subtotaled as they were entered, even though the first of these trades occurred at 12:26 P.M. and the sixth at 2:01 P.M. Instead, the total of all six transactions (78,250 shares) is written at the top of the ticket.
Despite the size of his short positions relative to the overall market volume, Perles testified that he was not concerned about how he would cover them. Initially, Perles testified that I.A. Rabinowitz customers had sufficient Interiors shares in their accounts to cover his short positions. However, later in his testimony, Perles admitted that he did not know if any of these I.A. Rabinowitz' customers were interested in selling Interiors shares. Perles' back-and-forth trading in Interiors with VTR resulted in a gross profit of only $1,204 for his firm.
B. TRADING BY GELLER
Geller was responsible for trading Nasdaq, OTC Bulletin Board, and "Pink Sheet" stocks, maintaining markets in securities for which Wien was a market maker, buying and selling stock for the firm's proprietary account, and executing trades for other broker-dealers. Wien did not makea market in Interiors. Geller testified that he knew Interiors had completed an IPO and that VTR was a member firm of the NASD. Before April 1995, Geller did only a "very small amount" of business with VTR. There was no agreement between Wien and VTR with respect to payment for order flow.
Geller testified that Noble initiated a series of transactions for VTR in Interiors shares, at individually negotiated prices, beginning the morning of April 20. Following VTR's initial transaction at 10:25 A.M., the purchase of 8,500 shares at $2.00 per share, Geller's inventory was short 8500 Interiors shares. About twenty minutes later, after four additional trades, Wien's short position increased to 64,150 shares. By 11:46 A.M. Wien's inventory position was flat. A nearly identical trading pattern occurred in the afternoon. At 12:01 P.M. Geller sold short 8,650 Interiors shares. By 3:20 P.M. Geller held a short position of 24,850 shares. Geller's short position had been reduced to only 350 shares by the close of trading.
Geller's back-and-forth trading with VTR was repeated on April 21. At 10:17 A.M. Geller sold 14,000 shares to VTR, increasing the firm's short position to 14,350 shares. By 11:12 A.M. Wien's short inventory position had been reduced to the previous day's level of 350 shares. Trading in the afternoon opened with a short sale to VTR of 14,700 shares creating a short position of 12,550 shares. A minute later, the short position reached an afternoon high of 15,150 shares. VTR's closing sale reduced Wien's inventory to a short position of 50 shares.
In 43 transactions over two days of heavy trading, Geller purchased and sold, back and forth, with VTR 234,300 shares of Interiors, approximately 23% of the float; other than VTR and I.A. Rabinowitz, no other firm had as much as 5% of the reported volume. Geller executed only one trade of 2,500 Interiors shares with a firm other than VTR. Although the spread between the inside bid and offer was never less than 12.5 cents, most of Geller's trades with VTR were executed at a spread of 1.5625 cents.
The following schedule illustrates the "out-and-in" sequence of Geller's trading in Interiors shares with VTR:
|April 20, 199510|
|April 21, 1995|
When asked at the hearing how he planned to cover his relatively large short positions, including more than 60,000 shares at one point on April 20, Geller hypothesized that at the time of the trades, he could have had a sell order on the stock, or he could have been working an "arbitrage situation." Geller failed to produce any evidence supporting either supposition. Geller's trades in Interiors generated profits of less than $3,400 for Wien, one third of which, less charges, Geller received in the form of commissions.
The three elements necessary to find aiding and abetting liability are: (1) primary securities law violations by VTR; (2) Perles' and Geller's knowing or reckless substantial assistance in the conduct constituting those violations; and (3) Perles' and Geller's general awareness or knowledge that their actions were part of an overall course of conduct that was illegal or improper.12
A. PRIMARY VIOLATIONS
VTR obtained control over a large block of the thinly-traded Interiors stock at $0.93 per share, slightly below the market price at the time. Thereafter, over three consecutive days of prearranged trading with Perles and Geller, VTR created an artificial appearance of trading activity in Interiors shares. VTR's trading with Perles and Geller from April 19 through 21inflated the reported volume in Interiors from 642,730 shares to 1,003,730 shares.13 While trading with Perles and Geller, VTR also systematically raised the price of Interiors to $2.25 per share, more than twice the firm's acquisition cost. As a result of its manipulation, VTR was able to sell Interiors shares at these inflated prices to its unsuspecting retail customers.
We previously have defined manipulation as "the creation of deceptive value or market activity for a security, accomplished by an intentional interference with the free forces of supply and demand."14 Although the mechanisms for manipulation can be myriad, a recognized vehicle for manipulative activity is prearranged, matched trades.15 The purpose of this illicit practice is to give investors and market participants the false impression that there is interest in the stock. As we have stated previously:
when investors and prospective investors see activity, they are entitled to assume that it is real activity . . . determined by the unimpeded interaction of real supply and real demand . . . . Manipulations frustrate [this] expectation . . . . The vice is that the market has been distorted and made into a "stage-managed performance."16
VTR's prearranged trades with Perles and Geller were manipulative in that they interfered with the free forces of supply and demand.
Geller claims that reported volume for trading in Interiors shares was "correct and was precisely the same as would have been reported had VTR not been involved in a manipulative scheme."17 We do not agree. The reported volume included the prearranged trades at issuehere. Those prearranged trades among VTR, Perles, and Geller created an artificial appearance of market activity. Thus, the reported volume did not reflect unimpeded market demand and supply.18
B. SUBSTANTIAL ASSISTANCE
Applicants assert that they did not substantially assist VTR's manipulation and that the NASD failed to produce any evidence that they "rendered encouragement or assistance" to VTR's manipulation. To the contrary, the record establishes that VTR's manipulation was successful only because of the affirmative participation of Perles and Geller. For minimal profit, Applicants accepted trades from Noble. Applicants argue that there was no "understanding" or "arrangement" with VTR regarding their involvement in trading Interiors shares during the period under review. However, we find that the circumstantial evidence here demonstrates that Perles and Geller engaged in prearranged, matched trading with VTR that had the effect of distorting the market activity and creating the false appearance of active trading. The "ping-pong" pattern of trading, the heavy volume of Interiors shares traded with VTR, the aggressive short positions the traders put on, coupled with the very narrow pricing of the transactions, provide compelling evidence that there was an illicit understanding between VTR and Perles and VTR and Geller.19
Perles traded six times Interiors' then recent average daily volume in only three hours. He entered these trades with Noble, who, according to Perles, was an unknown trader at a firm with which Perles had little trading history. The trading made little economic sense.
The manner in which Perles completed his order tickets also demonstrates that he knew in advance that he would have additional trades with VTR. As discussed above, Perles combined several trades on a single order ticket, crossing out the amount of one order and adding the amount of a subsequent order, without recording a running total of the trades. Perles claimed that he left his order tickets open to save on ticket charges stating that: "[I] tried to put as many trades[,] if it was the same stock for the same price[,] on one ticket[,] so that when it got inputted [,] it got inputted all at once at the end of the day and that would just generate one order ticket." The Hearing Panel found Perles' explanations incredible, concluding that Perles left the tickets open because he knew that there would be succeeding trades with VTR and that he would be adding to the ticket as the day went on. We see no reason to disagree with the NASD's assessment.20
Perles testified that he reported to and was supervised by Rabinowitz, the principal of his firm, who daily had access to all records of his activity and never questioned him about his trading in Interiors. According to Perles, "if [Rabinowitz] was satisfied and  saw things were pretty much in line[,] he just let it be." Perles claims that his trading in Interiors never exceeded his firm's trading parameters and that his supervisor did not find his trades out of the ordinary. The failure of Perles' supervisor to object to his trading in Interiors did not insulate Perles fromdisciplinary action for his misconduct.21 We find that Perles engaged in prearranged trading with VTR.
On April 20 and 21 Geller traded more than ten times the recent average daily volume in Interiors stock. Geller testified that he had "probably" traded Interiors before April 1995 and that he had found nothing "significant" about the stock. Geller had almost no previous contact with VTR or Noble. Nonetheless, Geller established large short positions in the thinly-traded Interiors stock for pennies in profit. By the end of each day, Geller, who had never previously traded in Interiors and rarely dealt with VTR, was able to flatten his position in a very thinly-traded stock. Geller's symmetrical trading pattern with VTR clearly evidences prearrangement.
Geller testified that, in April 1995, he was unaware either of anything "irregular" about the market for Interiors or of any relationship between VTR and Interiors. Geller suggested that it was not "unusual" to trade a stock such as Interiors for narrow spreads within the market quotes. According to Geller, the increased volume in Interiors on April 19 was alone sufficient reason for him to establish short positions in the stock, even though the total daily volume for Interiors had been as little as 200 shares just seven trading days prior to his initial transactions.22 However, the NASD rejected Geller's testimony as speculation and rationalization. The Hearing Panel did not credit Geller's testimony that there was no prearrangement23 and determined that the only explanation for his trading in Interiors on April 20 and 21 was that the trades were prearranged with VTR.
Perles and Geller assert that the NASD's finding that their transactions were "matched orders" is based on hindsight.24 The trades were matched because the traders knew that each of their transactions with VTR would generate a corresponding trade by VTR. This knowledge is evidenced by the virtual exclusivity of trading between VTR and Perles and between VTR and Geller over the three trading days, at high volumes at a penny or two spread.25
C. GENERAL AWARENESS
1. Perles and Geller argue that they had no knowledge or general awareness that their actions were part of an illegal course of conduct. While there is no direct evidence that Applicants agreed to play a role in VTR's manipulation, direct evidence is not required to establishthat Perles and Geller were participating in some overall activity that was improper. "[K]nowledge or recklessness is sufficient to satisfy that [general awareness] requirement."26
Perles and Geller each effected a series of matched orders which they knew, or certainly were reckless in not realizing, were highly peculiar and made little, if any, economic sense.27 Perles and Geller, and their firms, recognized virtually no apparent financial gain on the transactions. As experienced traders, Perles and Geller knew, or were reckless in not knowing, that their trading with VTR was inflating the reported Interiors volume. Perles and Geller recklessly disregarded the heavy volume of Interiors shares traded between VTR, and Perles and Geller (Perles traded over 12% of the float with VTR in three hours; over the next two days, Geller executed trades equal to 23% of the available float with VTR) and the impact of their trading on the market. Moreover, the accumulation of large short positions which were aggressive compared with VTR's historical trading volume, VTR's systematic increases in the bids for Interiors, and the minimal profits also evidences that Applicants were participating in improper activity.
2. Perles and Geller argue that the NASD ignored the investigative testimony of VTR's trader Noble that, they claim, exonerates them.28 According to Applicants, Noble, allegedly the only person with first hand knowledge of the trades, denied any prearrangement regarding his transactions with Perles and Geller in Interiors shares. Applicants assert that there is no evidence that they did anything other than execute orders Noble brought to them. Noble's testimony is not clear-cut. Noble repeatedly testified only that he had no specific recollection of the transactions with Perles. While Noble denied having arrangements with Geller, Noble subsequently executed a Letter of Acceptance Waiver and Consent ("AWC"), resolving the disciplinary action against him. Applicants note that Noble states in the AWC that he engaged in the trading to circumvent VTR's restriction agreement. However, in the AWC he acknowledges "without admitting or denying the alleged violations," that he:
aided and abetted VTR Capital and Edward J. McCune, the firm's President, in an unlawful unregistered distribution of Interiors, Inc. common stock, by executing  matched trades with two other broker-dealers. These transactions artificially inflated the reported trading volume in Interiors, and aided and abetted VTR and McCune in violating . . . the firm's restriction agreement that prohibited retail trading. 29
Perles and Geller further contend that they could not have shared Noble's illicit purpose for trading which, the AWC states, was to circumvent VTR's restriction agreement because they had no knowledge of the terms of that restriction agreement. Whatever Noble's motive was for engaging in these trades, Noble also testified that McCune, VTR's principal, directed his trading decisions in Interiors and instructed him on the quotes he should establish for the stock. The NASD found, and the record supports, that McCune and VTR sought to manipulate the market in Interiors. Perles and Geller participated in this back-and-forth trading with VTR that significantly inflated the reported volume in Interiors shares.30
3. Applicants further argue that the NASD's finding that they did not aid and abet VTR's unregistered distribution of Interiors shares demonstrates that they were unaware of VTR's manipulative scheme. Whether or not either Perles or Geller knew the source of the shares VTR was selling, they knew, or were reckless in not seeing, that VTR was engaging in uneconomic trades for the purposes of creating the artificial appearance of market activity in Interiors.31
4. Applicants argue that after Central Bank32 the NASD lacks authority to pursue disciplinary action for aiding and abetting violations. They assert that the NASD has no rule that prohibits aiding and abetting. We have made clear previously that aiding and abetting is properly a matter for disciplinary action by self-regulatory organizations as conduct inconsistent with just and equitable principles of trade. In John Thomas Gabriel, 51 S.E.C. 1285, 1291 (1994) (upholding liability of a member firm principal for causing his firm to aid and abet its customers' violation of Regulation X which governs obtaining credit from a broker-dealer) we stated that:
[d]isciplinary proceedings concerning "just and equitable principles of trade" are ethical proceedings . . . . We believe that assisting a customer to violate the federal credit restrictions is a violation of law, and that it is moreover clearly inconsistent with just and equitable principles of trade and properly a matter for [New York Stock Exchange] discipline.33
We sustain the NASD's authority to discipline Perles and Geller for aiding and abetting violations of the NASD's Conduct Rule 2110.
Section 17(a) of the Exchange Act requires registered broker-dealers to "make and keep" appropriate records in the course of conducting their business. Pursuant to Section 17(a), the Commission adopted Exchange Rule 17a-3, which lists specific types of documents broker-dealers must create and maintain. Exchange Act Rule 17a-3(a)(6) specifically directs broker-dealers to create and keep memoranda of all brokerage orders, including any instructions given or received for the purchase or sale of securities. Also, Rule 17a-3(a)(7) requires broker-dealers to create and keep memoranda of every purchase or sale from the firm's account, reflecting all terms and conditions of the transactions. In turn, NASD Rule 3110 requires members to make and keep accurate records required by Section 17(a) of the Exchange Act and the rules promulgated by the Commission thereunder. Failure to comply with these rules also constitutes a violation of NASD Conduct Rule 2110.34
There is no dispute that Applicants did not reflect their prearrangement on the books and records of their respective firms. Applicants deny that they had unrecorded agreements with VTR and assert that, because their trades were not prearranged, they did not reflect them as such on the books and records of their respective firms. We have found that Perles and Geller engaged in prearranged trading with VTR. We also find that Applicants were required to make and keep accurate records of the terms and conditions underlying their prearranged, matched trades with VTR. Applicants' failure to record their understanding with VTR regarding trading in Interiors violated the books and records provisions of the Exchange Act and NASD rules.35
A. Applicants challenge the sanctions imposed against them, contending that they are excessive generally,36 and because they "exceed" those sanctions imposed on other parties who reached settlements with the NASD. As we have held previously, the appropriate remedial sanctions against a respondent depend upon the facts and circumstances of each particular case and cannot be determined by comparisons with actions taken in other proceedings or against individuals in the same proceeding.37 Moreover, we have frequently pointed out that pragmatic considerations justify lesser sanctions in negotiated settlements.38
Perles and Geller engaged in blatant manipulative activity that compromised the integrity of the securities markets. Through their extensive prearranged, matched trading, Applicants generated substantial artificial volume in Interiors which distorted market activity and harmed public investors who paid inflated prices for Interiors shares. Applicants' misconduct deserves sufficiently severe sanctions to both prevent recurrences by Applicants and to deter others from similar behavior.
B. Perles asserts that in fashioning its sanction against him, the NASD improperly considered prior Commission and NASD disciplinary actions which Perles settled without admitting or denying any wrongdoing.39 Perles argues that the recitals within the "four corners" of the related settlement documents prohibited their use by the NASD.40 We believe that Perlesis correct with respect to the Commission and NASD settlement agreements.41 These agreements expressly state that Perles' consent is solely for the purpose of the respective proceeding.42 Accordingly, they should not have been considered by the NASD, and we have not.
Apart from these proceedings, Perles' disciplinary record reflects that Applicant was sanctioned by the Alabama Securities Commission. A state disciplinary action is part of [an applicant's] disciplinary history and may be a factor in determining an appropriate sanction.43 Consistently, we have recognized that "it is appropriate to consider an applicant's priordisciplinary history, particularly in sanctioning."44 Prior disciplinary history is not used to demonstrate a "propensity" to violate federal securities laws and NASD rules as Perles claims, but may be relevant to the egregiousness of Applicant's conduct, the sincerity of his assurances against future violations, and recognition that he did something wrong.45 Perles' prior state disciplinary sanction evidences disregard for regulatory requirements and was properly treated as an "aggravating" factor in determining Perles' sanction.46
Moreover, the Hearing Panel found Perles to be more culpable than Geller.47 We agree. Perles made a market in Interiors and knew its trading history prior to his transactions with VTR on April 19, 1995. Aware that there was little activity in the stock, Perles, as well as Geller, was at least reckless in participating in VTR's repetitive trades. Even if we did not consider Perles' disciplinary history, in view of his role in assisting VTR's manipulation and the goals articulated in the Guidelines, we believe that Perles requires a more substantial sanction. 48
Exchange Act Section 19(e)(2) provides that the Commission may "cancel, reduce or require the remission" of a sanction, if we find that the sanction "imposes any burden on competition not necessary or appropriate in furtherance of [the Exchange Act] or is excessive or oppressive."49 In view of the seriousness of Applicants' misconduct, we do not find that the sanctions imposed are excessive or oppressive. Rather, we would have been prepared to find significantly stronger sanctions appropriate under the circumstances.
An appropriate order will issue.50
By the Commission (Chairman PITT and Commissioners HUNT and GLASSMAN).
Jonathan G. Katz
Admin. Proc. File No. 3-10288
In the Matter of the Application of
HOWARD R. PERLES
LAURENCE M. GELLER
For Review of Disciplinary Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
ORDER SUSTAINING IN PART 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 Howard R. Perles and Laurence M. Geller be, and it hereby is, sustained in part as set forth in the Commission's opinion; and it is further
ORDERED that the disciplinary sanctions and costs assessed be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
|1||I.A. Rabinowitz changed its name to IAR Securities in 1997. In 1998, IAR Securities merged with VTR and is now known as Fairchild Financial Group, Inc.|
|2|| Rule 2110, previously designated Article III, Section 1 of the NASD's Rules of Fair Practice, requires that members "observe high standards of commercial honor and just and equitable principles of trade."
Rule 2120, previously designated as Article III, Section 18 of those rules, requires 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 other fraudulent device or contrivance."
|3||Exchange Act Rule 17a-3 requires, in part, that every broker-dealer make and keep current certain books and records including: blotters (or other records of original entry); a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities; and a memorandum of each purchase and sale for the account of such broker-dealer showing the time of receipt, the terms and conditions of the order, and the account in which it was entered. 17 C.F.R. §17a-3.|
|4||Rule 3110, previously designated Article III, Section 21 of the NASD's Rules of Fair Practice, requires members to make and keep accurate records required by Section 17(a)of the Exchange Act and the rules promulgated by the Commission thereunder. Failure to do so also violates NASD Conduct Rule 2110.|
|5||The NASD also assessed costs. It dismissed charges that Perles and Geller aided and abetted an unregistered distribution.|
|6||Although VTR denied any involvement in the sale of Interiors to the Short-Term Investors, the Hearing Panel found that VTR arranged for the Short-Term Investors to purchase the shares from Interiors so that VTR could sell the stock to its retail customers. The Short-Term Investors acquired the stock with a view to distribution and were used by VTR to facilitate its unregistered distribution of 300,000 shares of Interiors to the public.|
|7||The NASD's complaint also named VTR and McCune. On December 11, 1998, the NASD accepted their offer of settlement. Without admitting or denying the allegations in the NASD's complaint, VTR and McCune consented to a finding that, among other things, they engaged in an illegal and unregistered distribution and fraudulent manipulation of Interiors common stock, did not disclose to customers the excessive compensation that they received from the distribution, and violated VTR's restriction agreement with the NASD that prohibited the firm from conducting retail trading as a principal. VTR was censured, required to pay restitution/disgorgement of $300,000 and fined $100,000 (jointly and severally with McCune). McCune was censured, fined $100,000 (jointly and severally) and suspended for eight months from associating with any NASD member firm in any capacity.|
|8||For example, at 11:24 A.M., I.A. Rabinowitz sold 10,000 shares of Interiors stock to VTR at $1.75 per share. At 11:42 A.M., VTR sold 10,000 shares of Interiors to I.A. Rabinowitz at $1.74 per share.|
|9||Automated Confirmation Transaction Service (the "ACT system"), an automated system operated by Nasdaq, is used by participants for, among other things, price and volume reporting, comparing and clearing pre-negotiated trades completed on Nasdaq and the OTC Bulletin Board Service, and disseminating trading information to the public. See NASD Systems and Programs Rule 6110.|
|10||Multiple trades executed at the same time have been combined.|
|11||At 12:43 Geller purchased 2,500 shares of Interiors from a firm other than VTR.|
|12||Sharon M. Graham, 53 S.E.C. 1072, 1080 (1998), aff'd, 222 F.3d 994, 1000 (D.C. Cir. 2000).|
|13||"Trading activity is a potent factor in evoking investor interest. That is why those who wish to stimulate such interest are tempted to create synthetic activity that entices investors into the marketplace by false pretenses." Edward J. Mawod & Co., 46 S.E.C. 865, 870 n.24 (1977), aff'd sub nom., Mawod v. SEC, 591 F.2d 588 (10th Cir. 1979).|
|14||Swartwood, Hesse, Inc., 50 S.E.C. 1301, 1307 (1992). See Brooklyn Capital & Sec. Trading, Inc., 52 S.E.C. 1286, 1290 (1997); Pagel, Inc., 48 S.E.C. 223, 226 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986).|
|15||"'Matched' orders are orders for the purchase/sale of a security that are entered with the knowledge that orders of substantially the same size, at substantially the same time and price, have been or will be entered by the same or different persons for the sale purchase of such security." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 205 n.25 (1976).|
|16||Mawod, 46 S.E.C. at 871-872.|
|17||Geller also claims that his trading in Interiors shares was not manipulative because it wasnot designed to affect artificially the price of the securities. Congress, however recognized that the creation of false market activity could be manipulative. Section 9 of the Securities Exchange Act of 1934, 15 U.S.C.§ 78i, proscribes matched orders when effectuated "[f]or the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or . . . with respect to the market for any such security." See Hochfelder, at 205 n.25. Moreover, the Commission previously has found that artificially creating the appearance of market demand for a stock can be manipulative. See Adrian C. Havill, 53 S.E.C. 1060, 1066 (1998) and cases cited in n.13; Swartwood, at 1306-1307; Thornton & Co., 28 S.E.C. 208, 209-210, aff'd per curiam, 171 F. 2d 702 (2d Cir. 1948); cases cited supra note 13.|
|18||See Graham, 53 S.E.C. at 1072, 1084.|
|19||Applicants complain that the NASD also found that Perles' and Geller's conduct violated Conduct Rule 2120, the NASD's antifraud rule, although they were not charged with this violation. In its opinion the NASD observed that, "[w]e also believe that Perles and Geller acted as primary violators of the NASD's antifraud rule, an allegation that was not made in the complaint." The NASD merely expressed the view that its staff could have alleged that Applicants' conduct constituted a primary violation. However, since the NASD staff did not allege that Applicants engaged in a primary violation of Conduct Rule 2120, the NASD did not discipline respondents for this violation. We have not considered the NASD's observation in our review of the NASD's action or assessment of sanctions.|
|20||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), petition denied, 101 F. 3d 108 (2d Cir. 1996) (Table). "Such credibility determinations can be overcome only where the record contains 'substantial evidence' for doing so." Anthony Tricarico, 51 S.E.C. 457, 460 (1993).|
|21||Justine Susan Fischer, 53 S.E.C. 734, 741 (1998) (registered representative cannot use firm or its employees as a shield); Richard R. Perkins, 51 S.E.C. 380, 384 n.19 (1993) (Applicants' assertion that firm president and compliance officer, not Applicants, were responsible for the firm's markup policy and for ensuring primary compliance, even if true, is not determinative); Robert A. Amato, 51 S.E.C. 316, 320 n.17 (1993), aff'd, 18 F.3d 1281 (5th Cir.), cert. denied, 513 U.S. 928 (1994) ("It seems clear to us that the placing, by management, of primary compliance responsibility with respect to certain requirements with one component of a firm, [here the trading department] does not relieve other components of that firm [such as the sales force] of their responsibility."); Donald T. Sheldon, 51 S.E.C. 59 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995) (failure to supervise salesmen did not insulate those salesmen from liability under the antifraud provisions of the securities laws).|
|22|| Geller asserts that the testimony of Stephen S. Wien, principal of Wien Securities Corp., corroborated his contention that there was "nothing unusual about the pricing of [his] trades." Wien testified generally about Wien's supervision of Geller, Geller's overall performance as an employee, and how Geller would have been supervised in 1995.
Wien opined that, in general, it was not unusual to receive buy and sell orders from the same broker in the course of a day; that there was nothing "unusual" about "shorting stock in a rising market"; and that "as far as a trader is concerned, whatever he can make on a trade, he'll take." When asked if it was unusual that all but one of the 40 trades between Geller and VTR were executed at 1/64 when the inside spread differential was at least 12.5 cents, Wien replied that, "the profit is unusual to the extent that it was only a pennyand change."
Wien also stated that he did not "recall what the specifics were" of "this one particular incident" or "specifically what Mr. Geller told me about it." Wien also could not remember if he had been in the office on April 20 or 21, 1995. We conclude that Wien's testimony was not relevant to whether these particular trades were prearranged.
|23||See n.19, supra.|
|24||The NASD also found that Perles and Geller engaged in wash trading. We set aside this finding based on evidence in the record. The beneficial ownership of the stock changed as the shares were transferred from Interiors to the Short-Term Investors, through VTR, and ultimately to VTR's retail customers.|
|25||Geller argues that the NASD's finding should be set aside in light of Yoshikawa v. SEC, 192 F. 3d 1209, 1219-20 (9th Cir. 1999). Yoshikawa involved securities transactions known as "parking," "where the trades are simply a sham used to conceal temporarily the true ownership of the securities" for the purpose of avoiding the Commission's net capital requirements. In Yoshikawa, the court concluded that, with one exception, there was insufficient evidence that trades were not bona fide. For the reasons discussed above, we find Geller's trades with VTR were matched trades, creating the artificial appearance of market activity and, hence, not bona fide.|
|26||Graham v. SEC, 222 F.3d at 1004.|
|27||See Graham, 53 S.E.C. at 1077.|
|28||Perles and Geller claim that the NASD disregarded Noble's testimony "without explanation" in violation of the Commission's holding under Warren R. Schreiber, 53 S.E.C. 912 (1998) (NASD disciplinary matter remanded for clarification of the basis for certain credibility findings, where the record cast doubt on the reliability of Applicant's accuser and did not reveal whether the NASD, in making its determinations, took into account "substantial" evidence in the record that contradicted the accuser's allegations). Although the NASD was unable to assess Noble's demeanor because he did not testify at the hearing, a transcript of his testimony was introduced as evidence. The NASD "considered all of the arguments of the parties" in finding prearrangement. Unlike Schreiber, the documentary and circumstantial evidence here fully supports the NASD's conclusion that Noble's trades with Perles and Geller were prearranged.|
|29||"The scope of a consent judgment must be ascertained within its four corners." SEC v. Gellas, 1 F. Supp.2d 333, 336 (1998) (citing United States v. Armour & Co., 402 U.S. 673, 682 (1971)), aff'd, 182 F.3d 901 (2d Cir. 1999); United States v. Int'l Bhd. of Teamsters, 141 F.3d 405, 408 (2d Cir. 1998).|
|30||Applicants also contend that the NASD improperly disregarded two press releases issued by Interiors on April 18 and 20, 1995 which purportedly explain the market activity in the stock during the period under review. Neither Perles nor Geller testified that he saw the press releases or that his trading was influenced by these documents. Although the press releases may have motivated other market participants, there is no evidence that they were relevant to Perles' or Geller's prearranged trading with VTR. The NASD gave due consideration to the press releases, as have we.|
|31||Perles and Geller assert that they lacked economic or other motivation to participate or assist in a manipulative scheme. Perles states that he was a salaried employee and did not receive commissions or performance-based bonuses. His 1995 tax return and Form W-2 show that he earned $35,100 and had income from other sources of less than $1,000. Geller states that the amount that he earned was a de minimus part of his compensation, which, based on the profits he made for Wien, totaled between $250,000 and $300,000 in 1995. However, the absence of profit from manipulative conduct does not negate thatconduct. Brooklyn Capital, 52 S.E.C. at 1293 n.32 citing R. B. Webster Investments, Inc., 51 S.E.C. 1269, 1274 (1994).|
|32||Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164, 191 (1994) (aiding and abetting liability is not available in a private right of action for damages under Section 10(b) of the Exchange Act of 1934).|
|33|| The NASD notes that it has long brought disciplinary actions against aiders and abettors of primary violators who engage in manipulative or deceptive conduct. We have affirmed consistently those cases on appeal. See, e.g., Randolph Pace, 51 S.E.C. 361 (1993) (aiding and abetting liability under NASD antifraud provisions, previously designated Article III, Section 18, and just and equitable principles of trade, previously designated Article III, Section 1); Kirk A. Knapp, 50 S.E.C. 858 (1992) (aiding and abetting liability under Article III, Section 18); H.C. Keister & Co., 43 S.E.C. 164 (1966) (aiding and abetting liability under Article III, Sections 1 and 18); and Richard A. Holman, 41 S.E.C. 252 (1962) (also involving Article III, Section 18).
In view of our finding that Applicants' prearranged, matched trades with VTR were inconsistent with just and equitable principles of trade, alone sufficient to uphold the sanctions, we do not address whether Perles and Geller violated Rule 2120 by aiding and abetting VTR's prearranged trades.
|34||See Joseph G. Chiulli, Exchange Act Rel. No. 42359 (Jan. 28, 2000), 71 SEC Docket 1544 (general securities representative violated Conduct Rules 2110 and 3110 by failing to preserve books and records). See Gilad J. Gevaryahu, 51 S.E.C. 710 (1993) (financial operations principal failed to reflect a liability on a member firm's month-end financial statements in violation of Article III, Sections 1 and 21(a) of the Rules of Fair Practice); Richard G. Strauss, 50 S.E.C. 1316 (1992) (former trader violated Article III, Sections 1 and 21(a) of the Rules of Fair Practice by failing to prepare order tickets for executed transactions and by writing false order tickets for transactions that had not been executed).|
|35||See Goldman, Sachs & Co., Exchange Act Rel. No. 33576 (Feb. 3, 1994), 55 SEC Docket 3208, 3215 (settlement) (broker-dealer did not reflect on its books, including its blotters, that prearranged, circular trades were negotiated with the same party to eliminate risks, or that there was any connection between the trades); Jay Joseph Buck, Exchange Act Rel. No. 31496 ( Nov. 23, 1992), 52 SEC Docket 4114, 4117 (settlement) (broker did not reflect, or cause the firm to reflect, certain agreements with customers, but reflected these transactions as unrelated sales).|
|36||Although the NASD found that Perles and Geller committed recordkeeping violations, the sanctions imposed on Applicants were based on the manipulation violation only. The NASD concluded that recordkeeping violations were "incidental to and subsumed by the prearranged trading."|
|37||Butz v. Glover Livestock, 411 U.S. 183, 183 (1973); Christopher J. Benz, 52 S.E.C. 1280, 1285 (1997), petition denied, 168 F.3d 478 (3d Cir. 1998) (Table) ; Patricia H. Smith, 52 S.E.C. 346, 348 (1995).|
|38||See, e.g., Richard J. Puccio, 52 S.E.C. 1041, 1045 (1996).|
|39||In 1990 Perles settled charges brought by the Alabama Securities Commission alleging that he sold securities that were not registered in Alabama. In 1992 Perles settled a complaint by the NASD's Market Surveillance Committee alleging that Perles had assisted in an unregistered distribution of stock; Perles was fined $5,000 and suspended for five business days from associating with any NASD member in any capacity. In 1995 Perles settled an administrative proceeding brought by the Commission which charged him with violating Sections 5(a) and 5(c) of the Securities Act of 1933 by facilitating sales of unregistered stock; Perles was suspended for three months and ordered to desist from further violations.|
|40|| Perles filed a Motion in Limine to preclude the Panel's consideration of his previously-settled disciplinary matters. The Panel determined that the prior regulatory settlements could be admitted on the issue of sanctions. Although Perles did not file a separate motion with the Commission, in his Reply Brief, Perles asserts that the NASD improperly used Perles' disciplinary history as evidence of prior violations in imposing sanctions against him and that language contained in the settlement documents expressly prohibits their consideration. Perles requests that the Commission take "official notice" of the Commission and NASD settlement documents. Applicant attached to his Reply Brief a copy of the NASD's Offer of Settlement.
The NASD argues that, because Perles did not introduce his prior settlement documents before the NASD, Perles' request before the Commission is an inappropriate attempt to adduce new evidence. In its Objection to Applicant Perles' Motion for Official Notice and Motion to Strike New Evidence filed with the Commission, the NASD contends that the only "evidence in the record" regarding Perles' prior disciplinary settlements is the Central Registration Depository Information report ("CRD") which the NASD introduced as an exhibit at the hearing.
We hereby deny the NASD's motion. The issue of Perles' disciplinary record was raised by the NASD at the disciplinary hearing. Contrary to the NASD's claim, the settlement documents do not constitute "new evidence." The CRD summaries are based on and incorporate by reference the underlying settlement documents.
|41||R. B. Webster Investments, Inc., 51 S.E.C. 1269, 1278 n.37. (NASD improperly considered an offer of settlement for purposes of disciplinary history where "the plain language of the consent order unequivocally states that it may not be used in another proceeding").|
|42||The language in the Commission settlement does not track normal Commission practice. We believe that such limitations on the use of settlements are inappropriate.|
|43||See Stonegate Sec., Inc., Exchange Act Rel. No. 44933 (Oct. 15, 2001), 76 SEC Docket111, 122; James Harvey Thornton, 53 S.E.C. 1210, 1217 (1999), aff'd, 199 F.3d 440 (5th Cir. 1999) (Table); Thomas A. Sartain, Sr., 47 S.E.C. 206, 213 (1980).|
|44||Steven B. Theys, 51 S.E.C. 473, 480 (1993); Randolph K. Pace, 51 S.E.C. at 372.|
|45||See Steadman v. SEC, 603 F. 2d 1126, 1140 (5th Cir. 1979).|
|46||NASD Sanction Guidelines, p.1. The NASD's "General Principles Applicable to All Sanction Determinations" further state: "[a]n important objective of the disciplinary process is to deter future misconduct by imposing progressively escalating sanctions on recidivists. For this reason, when appropriate, Adjudicators should consider a respondent's relevant disciplinary history in determining sanctions. Relevant disciplinary history may include . . . (b) past misconduct that, while unrelated to the misconduct at issue, evidences prior disregard for regulatory requirements, investor protection, or commercial integrity." Guidelines, p.3.|
|47||Geller has been the subject disciplinary action by the NASD: in 1990 he was censured, fined $1,500 and suspended for one business day for failing to honor four arbitration awards. However, the NASD found Geller's prior disciplinary history insignificant and did not consider it in determining his sanction.|
|48||Perles makes several arguments against considering his disciplinary history based on the Federal Rules of Evidence. These arguments have no merit. NASD Rule 9346 (g) specifically provides that "the formal rules of evidence shall not apply" to NASD disciplinary proceedings.|
|49||See 15 U.S.C. § 78s(e)(2). Applicants do not argue that the sanctions impose a burden on competition, and we find none.|
|50||We have considered all of the Applicants' 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.|