Jack H. Stein

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 47335 / February 10, 2003

Admin. Proc. File No. 3-10675

ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION

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

ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc., against Jack H. Stein be, and it hereby is, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

¹ NASD Conduct Rule 2310 requires that, in making securities transaction recommendations to their customers, registered representatives have reasonable grounds for believing that the recommendations are suitable for their customers based upon the facts, if any, disclosed by their customers as to their other security holdings and their financial situation and needs. Registered representatives are required before effecting any transactions for their customers to make reasonable efforts to obtain information concerning their customers' financial status, tax status, investment objectives, and such other information used or considered to be reasonable by the registered representatives in making recommendations to their customers.

Conduct Rule 2110 requires that registered representatives "observe high standards of commercial honor and just and equitable principles of trade."

² As discussed in greater detail below, Stein waived an oral hearing before the NASD. The record consists of briefs, Stein's investigatory testimony, and documents, including, Azriel's account documents, Azriel's tax returns, and an affidavit from an NASD examiner. See Section IV.B. infra.

³ It does not appear that Azriel signed this document.

⁴ In his investigatory testimony, Stein testified that Azriel completed a revised new account form in May 1994. That document is not in the record.

⁵ For example, during the first quarter of 1996, Stein increased Azriel's position in AGC America's Gold Corp., a speculative mining stock, to 60,850 shares, which constituted approximately 59 % of her portfolio.

⁶ The NASD did not approve Stein's registration at Greenway, and Stein resigned from Greenway in July 1996 without ever having been registered. Barney Kowalski, the branch managerof Stein's office, was listed as Azriel's account representative at Greenway.

⁷ The State of New York approved Stein's registration on January 9, 1997. Prior to January 9, 1997, Dillon listed Michael Minunno as Azriel's account representative. After January 9, 1997, Stein was Azriel's representative of record.

⁸ Between 1994 and 1997, Azriel withdrew more than $19,000 from her Josephthal, Greenway, and Dillon accounts.

⁹ Stein now contends that not all of the investments he recommended to Azriel were risky or speculative. He does not specify which of his recommended investments were not speculative. Moreover, in his investigation testimony, Stein testified that his investment focus was on a "risk type of situation."

¹⁰ The NASD's complaint had charged Stein with making unsuitable recommendations from March 1994 through April 1997. The complaint alleged that, during the period from May 1996 through January 9, 1997, Stein, although not registered with the NASD at Greenway and not registered with the State of New York at Dillon, functioned without proper registration as Azriel's representative. Because the Hearing Panel concluded that Stein did not act as Azriel's registered representative between May 1996 and January 1997, the National Adjudicatory Council determined to limit its suitability findings to the period from March 1994 through April 1996 and January through November 1997.

¹¹ Maximo Justo Guevara, Exchange Act Rel. No. 42793 (May 18, 2000), 72 SEC Docket 1281, 1287, petition for review denied, No. 00-1681 (3d Cir. Sept. 30, 2002); Rafael Pinchas, Exchange Act Rel. No. 41816 (Sept. 1, 1999), 70 SEC Docket 1516, 1525.

¹² Pinchas, 70 SEC Docket at 1526-27. See NASD Board of Governor's Policy Statement IM-2310-2 (excessive activity in a customer's accounts violates the requirement of fair dealing).

¹³ See, e.g., Patrick G. Keel, 51 S.E.C. 282, 284 (1993) (A registered representative must "be satisfied that the customer fully understands the risks involved and is . . . able . . . to take those risks.").

¹⁴ Daniel Richard Howard, Exchange Act Rel. No. 46269 (July 26, 2002), 78 SEC Docket 427, 429-30; See also Pinchas, 70 SEC Docket at 1526 (customer's desire to "double her money" does not relieve registered representative of duty to recommend only suitable investments); Gordon Scott Venters, 51 S.E.C. 292, 294-95 (1993) (notwithstanding client's interest in investing in speculative securities, broker had duty to refrain from recommending such investments when he learned about his customer's age and financial situation); John M. Reynolds, 50 S.E.C. 805, 809 (1992) (regardless of whether customer wanted to engage in aggressive and speculative trading, representative was obligated to abstain from making recommendations that were inconsistent with the customer's financial situation).

¹⁵ David A. Gingras, 50 S.E.C. 1286 (1992) (impropriety of recommended trading strategy exacerbated by use of margin to trade in customer account); Charles W. Eye, 50 S.E.C. 655, 658 (1991). See also F.J. Kaufman and Company of Virginia, 50 S.E.C. 164, 165 n.1 (1989) ("'The effect of trading on margin is to leverage any position so that the systematic and unsystematic risks are both greater per dollar of investment,'" (quoting T. Copeland & J. Weston, Financial Theory and Corporate Policy 306 (3d ed. 1988)).

¹⁶ In his investigatory testimony, Stein testified that he did not tell his supervisors at Josephthal that the net worth reported on Azriel's new account card was inaccurate.

¹⁷ Eugene J. Erdos, 47 S.E.C. 985, 988 (1983) (emphasis in the original).

¹⁸ In investigatory testimony before the NASD, Stein stated that Azriel's net worth at the time she opened her account was $170,000, comprised of cash and securities. He also claimed that in 1995 or 1996 she "picked up another $150,000" from her parents. Later in that same testimony, he placed her 1994 net worth at $300,000, including assets that her father had placed in her name. Before the NASD hearing panel, he asserted that in 1994 her net worth "was already in excess of 150,000." Before the National Adjudicatory Council, Stein initially claimed that Azriel told him "on many occasions" that "she had over $400,000 in assets and if she lost $75,000 it would not make a change in her lifestyle." He later claimed she had a net worth of $500,000. Before the Commission, Stein states that Azriel's net worth was $300,000.

¹⁹ The bank account does not identify the account's holder. Stein represents that the account belonged to Azriel.

²⁰ In his brief to the Commission, Stein included additional Merrill Lynch account statements not previously introduced for various periods in 1997 and 1998. As discussed below, Rule of Practice 452 generally requires that any party seeking to submit additional evidence before the Commission must submit a motion "show[ing] with particularity that such additional evidence is material and that there were reasonable grounds for failure to adduce such evidence previously." 17 C.F.R. § 201.452. Although Stein did not comply with Rule 452 with respect to the 1997 statements, we consider them material to his argument. As explained above, they do not demonstrate a substantial increase in Azriel's net worth. See also Section IV.A. infra.

²¹ Stein argues that the NASD should have subpoenaed evidence of Azriel's remaining assets. However, Stein, who wasrepresented by counsel before the NASD, had the obligation to marshal evidence in his defense. Guevara, 72 SEC Docket at 1291.

Stein also contends that Azriel was a sophisticated investor because she read financial periodicals and books and kept abreast of financial news. We have previously rejected the argument that an investor who read financial articles was a sophisticated investor. See Venters, 51 S.E.C. at 294 n.5. He also asserts that Azriel had accounts at Merrill Lynch and Paine Webber. The Merrill Lynch account is discussed above. There is no evidence in the record with respect to a Paine Webber account.

Finally, Stein argues that the Division over-estimated the amount of Azriel's losses and that she would have lost less or made money if she had held onto her AGC stock as he had recommended. Unsuitable recommendations, however, do not become suitable because they result in a profit. Larry Ira Klein, 52 S.E.C. 1030, 1037 n.29 (1996); Eugene C. Erdos, 47 S.E.C. 985, 988 n.10 (1983), aff'd, 742 F.2d 507 (9th Cir. 1984).

²² Clinton Hugh Holland, Jr. 52 S.E.C. 562, 566 (1995), aff'd, 105 F.3d 665 (9th Cir. 1997) (Table).

²³ Howard, 78 SEC Docket at 430; Venters, 51 S.E.C. at 295 n.8; Reynolds, 50 S.E.C. at 809; Erdos, 47 S.E.C. at 989.

²⁴ See Holland, Jr. 52 S.E.C. at 565-66 (concentration of high risk and speculative securities and shift of portfolio from conservative to speculative investments was not suitable).

²⁵ Howard, 78 SEC Docket at 430; Pinchas, 70 SEC Docket at 1526-27 ("[D]epending on a particular customer's situation and account objectives, excessive trading, by itself, can violate NASD suitability standards by representing an unsuitable frequency of trading."). See also Harry Gliksman, Exchange Act Rel. No. 42255 (Dec. 20, 1999), 71 SEC Docket 892, 895, aff'd, No. 00-70141 (Gallagher); No. 00-70258 (9th Cir. 2001); Michael H. Hume, 52 S.E.C. 243, 245 n.5 (1995) Paul C. Kettler, 51 S.E.C. 30, 32 (1992).

The NASD Board of Governors' policy statement with respect to fair dealing with customers, which appears in the NASD Manual following the suitability rule, provides in pertinent part as follows: "Some practices that have resulted in disciplinary action and that clearly violate this responsibility for fair dealing are . . . [e]xcessive activity in a customer's account . . . ." IM-2310-2.

²⁶ In calculating the turnover rate for Azriel's accounts, the NASD used the modified Looper formula, dividing total cost of purchases by Azriel's average monthly investment or equity. This method of calculating the turnover rate has been repeatedly used by the Commission. See Peter C. Bucchieri, 52 S.E.C. 800, 801 n.3 (1996); Frederick C. Heller, 51 S.E.C. 275, 279 n.10 (1993); Allen George Dartt, 48 S.E.C. 693, 695 and n.6 (1987).

²⁷ Gliksman, 71 SEC Docket at 897-98; Hecht v. Harris, Upham & Co., 283 F. Supp. 417, 435-36 (N.D. Cal. 1968), modified on other grounds, 430 F.2d 1202 (9th Cir. 1970); Clyde J. Bruff, 53 S.E.C. 880, 885 (1998), pet. denied, 198 F.3d 253 (9th Cir. 1999).

²⁸ Gerald E. Donnelly, 52 S.E.C. 600, 602 n.11 (1996) (noting that respondent acknowledged that "an annualized turnover rate of between two and four percent is presumptive of churning"); Hume, 52 S.E.C. at 245 n.5 (noting that turnover rates of 3.5 and 4.4 were found to be excessive in past cases); Reynolds, 50 S.E.C. at 808 n.12 (finding excessive trading, in part, based on the fact that the account was turned over more than four times on an annualized basis); Samuel B. Franklin & Company, 42 S.E.C. 325, 330 (1964) (finding turnover rate of 3.5 to be excessive).

²⁹ Bucchieri, 52 S.E.C. at 805 ("While there is no clear line of demarcation, courts and commentators have suggested that an annual turnover rate of six reflects excessive trading."); Howard, 78 SEC Docket at 430.

³⁰ In determining whether a broker has engaged in excessive trading, we are not limited to looking only at the full period that the broker managed the customer's account; rather, it is appropriate for us also to review the trading done over a reasonably abbreviated portion of the entire period. Bucchieri, 52 S.E.C. at 805.

³¹ Stein contends that Azriel, and thus the NASD, are estopped from objecting to his conduct because she was fully aware of his trading activities (having received confirmations for each of the trades and periodic account statements, as well as because he discussed his trading philosophy and investment methods with Azriel).

In making this argument Stein cites to two cases, Moody v. Bache & Co., 570 F.2d 523 (5th Cir. 1978) and Hecht v. Harris, Upham, & Co., 430 F.2d 1202 (9th Cir. 1970). However, both of these cases involved allegations of fraud under Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b),which requires scienter. In both cases, the plaintiffs' understanding of, and consent to, the trading at issue was relevant to the question of whether the defendants had acted with intent to defraud the plaintiffs.

Scienter is not an element for finding a violation of the NASD suitability rule. See Reynolds, 50 S.E.C. at 807 n.4 (scienter is not required for finding unsuitably excessive trading).

³² Instead, Stein and the NASD submitted to the Hearing Panel briefs with exhibits, and in the case of the NASD, the examiner's affidavit.

³³ 15 U.S.C. § 78s(e)(2).

³⁴ Id. Stein does not claim, and the record does not show, that the NASD's action imposed an undue burden on competition.

³⁵ NASD Sanctions Guidelines (1998 ed.) at 83.

³⁶ The NAC had reduced the one-year suspension ordered by the NASD Hearing Panel to three months. In so doing, the NAC cited, among other mitigating factors, Stein's settlement with Azriel, and the fact that Azriel regularly received confirmations and received at least two activity letters inquiring as to Azriel's satisfaction with her account. The NAC also limited its suitability findings to a shorter period than that set out in the complaint. See note 10 supra.

³⁷ See Bruff, 53 S.E.C. at 887 (registered representative's "attempts to shift blame [to his customer] are additional indicia of his failure to take responsibility for his actions.").

³⁸ We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.