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U.S. Securities and Exchange Commission

Securities and Exchange Commission
Washington, D.C.

Securities Exchange Act of 1934
Rel. No. 47627 / April 3, 2003

Admin. Proc. File No. 3-10460


In the Matter of the Application of
JOHN R. D'ALESSIO, and
D'ALESSIO SECURITIES, INC.

For Review of Disciplinary Action Taken by the

NEW YORK STOCK EXCHANGE, INC.


OPINION OF THE COMMISSION

NATIONAL SECURITIES EXCHANGE — REVIEW OF DISCIPLINARY PROCEEDING

Conduct Inconsistent with Just and Equitable Principles of Trade

Acts Detrimental to the Interest or Welfare of the Exchange

Trading for Member's Own Account and Account Over Which Member Exercised Discretion

Trading so as to Accord Own Account Preferential Treatment

Recordkeeping Violations

Former member and former member organization of national securities exchange effected trades for an account in which the member and member organization had an interest and over which they exercised discretion; traded in a manner that accorded this account preferential treatment over accounts of member's and member organization's other customers; and failed to keep and preserve required records. Held, exchange disciplinary action sustained.

APPEARANCES:

Dominic F. Amorosa, for John R. D'Alessio and D'Alessio Securities, Inc.

David P Doherty, Rex W. Mixon, Jr., Mary L. Brienza, David Steiner, Steven Brostoff, Patty Ko, and Laura A. Cooper, for the New York Stock Exchange, Inc.

Appeal filed: April 11, 2001
Last brief received: March 3, 2003

I.

John R. D'Alessio, formerly a member of the New York Stock Exchange, Inc. ("NYSE" or "Exchange") and D'Alessio Securities, Inc. ("D'Alessio Securities" or "the Firm"), formerly a member organization of the Exchange, appeal from the NYSE's disciplinary action against them. The NYSE determined that, between June 1994 and February 1998, D'Alessio and the Firm engaged in conduct inconsistent with just and equitable principles of trade, in violation of NYSE Rule 476(a)(6), and engaged in acts detrimental to the interest or welfare of the Exchange, in violation of NYSE Rule 476(a)(7). The NYSE determined that D'Alessio: (1) had an interest in an account maintained by Oakford Corporation ("Oakford"), a non-member firm, for which he effected transactions on the floor of the Exchange; (2) used his position on the floor to accord preferential treatment to that account; and (3) generally controlled the trading activity and was vested with, and exercised, investment discretion with regard to that account. The NYSE found that D'Alessio and the Firm thereby violated Section 11(a) of the Securities Exchange Act of 1934,1Exchange Act Rule 11a-1,2 and NYSE Rules 90(a),3 95(a),4and 111(a)5 by engaging in proprietary and discretionary trading on the floor of the Exchange; violated NYSE Rule 916 by crossing orders without first ensuring that the order had an opportunity for an improved price on the Exchange floor and without providing notification to, and obtaining acceptance of the trade from, the member who placed the trade; and violated NYSE Rule 927 by trading in front of, or along with, customerorders. Finally, the NYSE determined that D'Alessio and the Firm violated NYSE Rule 440 and Exchange Act Rules 17a-3 and 17a-4 by failing to make and preserve required records.8

The Exchange Hearing Panel censured D'Alessio and D'Alessio Securities, barred them for seven years from allied membership, approved person status, and employment or association in any capacity with any member or member organization, and permanently barred them from membership or employment on the floor of the Exchange.9 On appeal, the Exchange's Board of Directors affirmed the Hearing Panel's decision. D'Alessio and D'Alessio Securities now appeal the NYSE's findings as well as the sanctions against them. We base our findings upon an independent review of the record.

II.

A. Regulatory Framework

Independent floor brokers are agents who execute orders on the floor of the Exchange, typically for other members or brokerage firms.10 Because they work on the trading floor andare immediately aware of market movements, floor brokers have access to short-term trading information and trading opportunities unavailable to the general investing public. To prevent floor brokers from taking unfair advantage of this information, foster public confidence in national securities exchanges, and eliminate conflicts of interest, Congress enacted Section 11(a) of the Exchange Act11 and the Commission promulgated Exchange Act Rule 11a-1.12 These provisions prohibit a floor broker from trading for an account in which the broker has an interest or over which the broker exercises discretion.

When floor brokers trade for their own account or an account in which they have an interest, their interests may come into conflict with those of their customers.13 This may lead to brokers usurping for their own accounts trading priority that is owed to customer orders. For example, a floor broker may time the purchase or sale of shares of a security for his own account so as to benefit from the price movement that follows execution of large customer orders, a practice commonly known as trading ahead or frontrunning. In addition, a potential conflict of interest exists when a broker executes trades for an account over which the broker exercises investment discretion while at the same time executing trades for the accounts of other customers. In this circumstance, the broker could utilize his discretion over an account to benefit that account over the accounts of other customers when executing orders.14 To address these potential conflicts, Section 11(a) and Exchange Act Rule 11a-1prohibit floor brokers from exploiting their time and place advantages through proprietary or discretionary trading.15

NYSE Rule 95(a) also prevents floor brokers from taking unfair advantage of trading information and trading opportunities denied to the general investing public. It prohibits a floor broker from executing trades on the floor of the Exchange for an account over which the broker exercises discretion. The rule prevents the broker from using his time and place advantages to benefit such an account.

NYSE Rules 91 and 92 are directed at ensuring that a floor broker does not use the time and place advantages available to the broker to disadvantage a customer. These rules reflect fundamental concepts of agency law that an agent must place its principal's interests ahead of his own proprietary interests.

NYSE Rule 91 prohibits a floor broker from filling a customer order by purchasing securities from, or selling securities to, that customer using the floor broker's own account without first ensuring that the order has an opportunity for an improved price on the Exchange floor. The Rule recognizes that allowing brokers to fill a customer order using the broker's own account places the floor broker in the role of principal, a position inconsistent with the agency relationship between the floor broker and his customers.

A further protection against broker self-dealing can be found in NYSE Rule 92, which prohibits an Exchange member from executing a trade for the member's own account while the member holds a customer order for the same security executable at the same or better price. A large customer order to buy or sell a security will often result in an increase or decrease, respectively, in the price of that security following execution of the order. If the floor broker executes his own trade first, the price obtained for the customer's order may not be as favorable as it would have been had the customer's order been executed first.

B. D'Alessio's Trading for the Oakford Account

John R. D'Alessio entered the securities industry in 1971 as a trainee. From August 1979 until February 28, 1998, D'Alessioworked as a broker on the floor of the Exchange. From December 1993 until November 1998, D'Alessio owned an Exchange membership.16 D'Alessio was a floor official for approximately the last two years of his Exchange membership. In November 1998, D'Alessio sold his Exchange membership.

From approximately December 1982 through February 1998, D'Alessio Securities was an Exchange member organization engaged in the floor brokerage business. D'Alessio was the owner and sole officer and director of the Firm, and acted in the capacity of the Firm's floor broker and qualifying member. From approximately June 1994 through February 1998, D'Alessio effected transactions on the floor of the Exchange for various member firms and for an account at Oakford.

It is undisputed that D'Alessio and the Firm entered into an agreement with Oakford through which they received 70 percent of the net trading profits each month for the trades D'Alessio made on behalf of the Oakford account. The record indicates that this was not an agreement to share only in the profit generated by the account. Rather, Applicants received 70 percent of the account's profits and effectively contributed to the account an amount representing 70 percent of any losses. Oakford received, and in the case of losses, paid, the remaining 30 percent. For example, the trading activity in the Oakford account for February 1995 resulted in a net loss and D'Alessio received no payment from Oakford for that month. The trading in March 1995 resulted in a net profit that was greater than the loss from the previous month. D'Alessio received approximately 70% of the difference.

D'Alessio testified that his patterns of trading for the Oakford account did not change over the course of the relevant period. D'Alessio's trades with respect to McDonalds Corporation ("MCD") on the morning of July 25, 1997 are illustrative of his general trading pattern with respect to the Oakford account.

  • At 11:10 on that day, D'Alessio time-stamped a market-not-held order17 to buy 25,000 shares of MCD for the Oakford account.
     
  • At 11:38, D'Alessio time-stamped an order from one of his institutional clients to buy 87,800 shares of MCD. The order ticket indicated that this order was a market-not-held order.
     
  • At 11:42, D'Alessio executed a purchase of 7,800 shares of MCD at a price of 52 7/16 per share for his institutional client and executed a purchase of 10,000 shares for the Oakford account at the same price.
     
  • At 11:43, D'Alessio time-stamped an order to sell 10,000 shares of MCD for the Oakford account. At this time, D'Alessio was representing an order for Oakford on one side of the market for 15,000 shares (the unfilled portion of the original 25,000-share buy order) and an order for Oakford on the other side for 10,000 shares.18
     
  • At 11:43, D'Alessio executed a purchase for his institutional client for 6,800 shares of MCD at a price of 52 7/16 per share and at 11:44 he executed a purchase for that client for 3,200 shares of MCD at the same price.
     
  • At 11:49, D'Alessio executed a purchase for 10,000 shares of MCD for his institutional client but, with this purchase, the price had increased to 52 8/16 per share. D'Alessio then executed the 10,000-MCD-sharesell order for the Oakford account at a price of 52 8/16, crossing that sale with a portion of the outstanding buy order of his institutional client.

The net effect of D'Alessio's trading for the Oakford account was that he had purchased 10,000 shares of MCD at 52 7/16 and subsequently sold 10,000 shares at a price of 52 8/16, resulting in a profit of 1/16 per share or $625.19

Typically while he was conducting these trades for the Oakford account, D'Alessio also was in the process of executing large market-not-held orders for his institutional clients. As illustrated in the foregoing example, D'Alessio used execution of all or part of these large orders to maximize the potential profit for the Oakford account and minimize potential losses.

C. Criminal and Civil Enforcement Interest in Applicants' Activities

In February 1998, the United States Attorney's Office for the Southern District of New York indicted D'Alessio, among others, for willfully violating various statutes and regulations prohibiting a floor broker from trading for his own account or for an account over which he exercises investment discretion.20 At the same time, the Commission brought a parallel civil proceeding against D'Alessio and the Firm, among others, for the alleged violations arising out of the same conduct.21

The Commission's injunctive complaint was dismissed without prejudice later that year, and ultimately filed again in March 2000.22 The Applicants agreed to a settlement of the injunctive action in May 2001, shortly after their appeal of this disciplinary proceeding.23 The criminal charges against D'Alessio ultimately were dismissed in December 1999 pursuant to a deferred prosecution agreement.24

D. The NYSE's Investigation and Prosecution of this Disciplinary Proceeding

Beginning in May 1999, the Exchange sought from D'Alessio and the Firm certain documents and testimony pertaining to D'Alessio's activities with Oakford as part of its investigation of the matters that are at issue in this review proceeding. D'Alessio and the Firm made only a partial production of the records requested and D'Alessio refused to give testimony to the Exchange. In response, the Exchange filed charges against D'Alessio and the Firm for failure to comply with Exchange requests to produce documents and to testify, in violation of NYSE Rule 477. After a contested hearing, the Exchange censured D'Alessio and imposed a one-month bar from membership, allied membership, approved person status, and from employment or association with any member or member organization.

In July 1999, D'Alessio gave two days of testimony and produced additional documents relating to his trading for the Oakford account. The Exchange ultimately obtained the order tickets and execution reports for an approximately eleven-month period from March 1997 through January 1998 that were remaining in D'Alessio's floor booth in February 1998 when the Exchangesummarily suspended him and prevented him from returning to the floor;25 D'Alessio acknowledged discarding all earlier tickets and reports. On December 27, 1999, the Exchange issued the charges against D'Alessio and the Firm that are the subject of this review proceeding.

E. The Commission's Institution and Settlement of a Related Action Against the Exchange

On June 29, 1999, after an investigation by our staff into the activities and NYSE regulation of NYSE floor brokers, the Exchange consented, without admitting or denying the Commission's findings, to the entry of an order by the Commission instituting proceedings against the Exchange pursuant to Exchange Act Section 19(h)(1) and making findings and ordering compliance with undertakings.26 The Commission found that, between approximately 1993 and early 1998, groups of independent floor brokers violated Section 11(a), Rule 11a-1, and NYSE Rules 90, 95, and 111 by engaging in illegal schemes to trade on the NYSE floor while sharing in profits or losses generated from their trades.27 The Commission further found that the NYSE failed to take appropriate action to uncover and halt profit-sharing arrangements among floor brokers, and that the NYSE suspended its routine independent floor broker surveillance for extensive periods of time, the longest of which lasted over two years.28 The Commission ordered the NYSE to enhance and improve its regulation of independent floor brokers by, among other things, examining floor trading activities of all floor members every two years, conducting ongoing and continuous surveillance of all floor members, drafting comprehensive procedures manuals with respect to these issues, and retaining an independent consultant to review the Exchange's rules, practices and procedures.29 Among other remedial actions, the NYSE subsequently adopted Rule 407A, which requires each member to "promptly report to the Exchange any securities account . . . in which the member has,directly or indirectly, any financial interest or the power to make investment decisions, which is at a member or non-member broker-dealer, investment advisor, bank or other financial institution."30 Rule 407A also requires the member to notify the financial institution that carries or services the account that he or she is a member of the Exchange.31

III.

A. Applicants Had an Ownership Interest in the Oakford Account

We have stated that "any compensation arrangement that results in the exchange member sharing in the trading performance of an account, however structured, makes the account that member's 'own account,' or constitutes an 'interest' in the account."32 D'Alessio entered into an agreement with Oakford that not only provided that he receive 70 percent of the trading profits, but also required him to contribute 70 percent of the trading losses in the Oakford account. The arrangement between D'Alessio and Oakford made D'Alessio and the Firm a partner in Oakford's account — D'Alessio and the Firm shared with Oakford in the economic risk of the trades, and this arrangement made the Oakford account their account. D'Alessio's trades for that account, therefore, violated Exchange Act Section 11(a), Exchange Act Rule 11a-1, and NYSE Rules 90(a) and 111(a).

B. Applicants Exercised Discretion Over the Trading Activity of the Oakford Account

In addition to Applicants' arrangement to share in the profits and losses of the Oakford account, D'Alessio and the Firm violated Exchange Act Section 11(a), Exchange Act Rule 11a-1, and NYSE Rule 90(a) when they traded for the Oakford account while at the same time exercising discretion over the trading activity of that account. The Exchange has established that D'Alessio and the Firm represented orders on both sides of the market at the same time that were executable at the same price, in violation of NYSE Rule 95(a). The Exchange introduced detailed evidence concerning D'Alessio's trading for the Oakford account for afour-month period that encompassed 54 trading days.33 During these 54 trading days, D'Alessio represented open and executable buy and sell market orders for the Oakford account in the same security at the same time on 175 occasions. On 324 occasions, he executed an Oakford market order for a security on one side of the market while holding an Oakford market order for that security on the other side of the market. D'Alessio had discretion to choose whether to execute the Oakford buy order or the Oakford sell order based on the time and place advantages available to him as a broker to further his own proprietary interests.

The order tickets for D'Alessio's trades for the Oakford account provide further evidence of the discretion and control he exercised with respect to that account. The Exchange recovered Oakford's upstairs order tickets for 30 of the 54 trading days analyzed. On 37 occasions during these 30 days Oakford created and time-stamped an upstairs order ticket that did not state the number of shares to be bought or sold, indicating that D'Alessio had discretion at the time of the transaction to determine how many shares to trade on the Exchange floor. D'Alessio also time-stamped blank floor order tickets to be used later at his discretion.

D'Alessio and the Firm do not dispute that they held orders for the Oakford account on both sides of the market at the same time, executable at the same price. Rather, they assert that they were not vested with investment discretion because these orders were contingent orders that required D'Alessio to execute fully one order before beginning to execute the second order. Applicants, however, have failed to introduce any evidence to support their claim that the orders were contingent orders. D'Alessio, in testimony describing the orders that he handled for the Oakford account, never indicated that any of the orders were contingent. Neither D'Alessio's floor order tickets nor any of Oakford's upstairs order tickets introduced into evidence contained any instruction that the order was contingent on the completion of another order, despite NYSE rules requiring that the terms of an order be written on the ticket.34

The most telling refutation of Applicants' argument that the orders in question were contingent is the record evidence with respect to D'Alessio's execution of those orders. On numerous occasions while D'Alessio was at the same time representing orders in a particular security on both sides of the market, executable at the same price, he began to execute one of those orders and, without completing that order, began to execute the second order on the opposite side of the market. At times he then would return to execute trades on the initial order. D'Alessio's trading activity in these situations contradicts his claim that the orders were contingent and that, therefore, D'Alessio did not exercise discretion with respect to their execution.

Applicants argue further that the testimony of Edward Kwalwasser, the Executive Vice President of the Exchange's Regulatory Group, at a hearing conducted in the United States District Court for the Southern District of New York,35 is evidence that, during the relevant period, the Exchange interpreted "discretionary trading" in a way that led D'Alessio to believe that he did not exercise discretion over the Oakford account. We have reviewed Kwalwasser's testimony and conclude that it in no way suggests the availability to Applicants of a de facto safe harbor position under NYSE Rule 95(a) for their practice of simultaneously holding buy and sell orders for the same stock at the same price. Accordingly, Applicants may not rely upon that testimony to justify their conduct.36

The record establishes that Applicants exercised discretion over the Oakford account and, therefore, when D'Alessio and the Firm effected transactions for that account on the floor of the Exchange, they violated Exchange Act Section 11(a), Exchange Act Rule 11a-1, and NYSE Rule 90(a).

C. Applicants Accorded the Oakford Account Preferential Treatment

Not only did Applicants have an ownership interest in the Oakford account and exercise investment discretion over trades for that account, but, in violation of NYSE Rules 91 and 92, D'Alessio and the Firm used the time and place advantages available to brokers on the floor of the Exchange to accord preferential treatment to the Oakford account over the other accounts for which they traded. In this regard, the Exchange introduced evidence with respect to D'Alessio's trading for the Oakford account from March 13, 1997 through January 30, 1998. On 50 days during this period, D'Alessio executed 94 orders for the Oakford account, totaling 164 trades, while he held open and executable orders for the same security for other accounts.

On numerous occasions, D'Alessio executed orders for the Oakford account ahead of, along with, and crossed with orders for his other customers. This pattern of trading provided a safety net for the Oakford account. The Exchange's experts testified that D'Alessio was able to time the executions of trades for the Oakford account with large customer trades in such a way as to maximize the potential profit for, and minimize potential loss in, the Oakford account.

For example, the Exchange established that there were times when D'Alessio would not begin to execute a market-not-held order for the Oakford account until he received a large order for the same stock on the same side of the market from one of hisinstitutional customers. This would allow D'Alessio and the Oakford account to benefit from the movement in share price generated by the large institutional order. D'Alessio typically began to execute market-not-held orders for his institutional clients within one to three minutes. In contrast, in some cases he would not begin to execute orders for the Oakford account for a much longer time period, sometimes for as long as two hours while he waited for a large order for the same security. On other occasions, D'Alessio time-stamped an order for the Oakford account shortly after receiving a large order for the same stock from one of his institutional customers, again benefitting by the movement in share price generated by that order.

On still other occasions, D'Alessio crossed trades for the Oakford account with trades for his customers without following the requirements of NYSE Rule 91.37 By doing so, D'Alessio and the Firm traded as principal with their customers' orders, in violation of their duty to act in the best interests of their customers and in violation of the fundamental principles of agency law embodied in NYSE Rule 91. We find that D'Alessio and the Firm violated NYSE Rules 91 and 92 by trading for the Oakford account ahead of, along with, and crossed with their customer orders.

D. Applicants Failed to Make and Preserve Required Records

D'Alessio and the Firm failed to make and preserve required records relating to D'Alessio's trades for the Oakford account in violation of Exchange Act Rules 17a-3 and 17a-4 and NYSE Rule 440. Exchange members are required to preserve for at least three years a record of every order originated or received bythat member.38 The record must include the name and amount of the security, the terms of the order and the time when such order was received.39 Exchange members also are required to preserve a record of every cancellation order and to preserve records of bills reflecting commissions receivable for a period of three years.40

D'Alessio testified that he failed to preserve his order tickets for three years, instead keeping the tickets in a box and discarding them when the box became full. D'Alessio stated that he kept records of orders "[a]s long as I kept them . . . [r]oughly a year, or whatever I kept them." As a result, the Exchange recovered only those order tickets that were in D'Alessio's possession in his booth on the floor of the Exchange at the time that he was suspended in February 1998 — order tickets for approximately the preceding eleven months. Many of these order tickets omitted information concerning the terms of the order and the time that the order was received. D'Alessio testified that he retained copies of bills that he submitted to Oakford for only one month before disposing of them; he failed to retain any bills for the period of time that he traded for the Oakford account. D'Alessio also testified that he did not include any information about his commission or the amount due in the bills that he submitted to Oakford. Specifically, nowhere on the bills that he submitted to Oakford did D'Alessio indicate that he was to receive 70 percent of the profits and contribute 70 percent to the losses from the trades he made for that account. Applicants' failure to make and preserve these records constitutes a violation of the recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4, and NYSE Rule 440.

*       *       *

We conclude that D'Alessio and D'Alessio Securities violated Exchange Act Section 11(a), Exchange Act Rule 11a-1, and NYSE Rules 90(a), 91, 92, 95(a), and 111(a) in the course of trading for the Oakford account and violated Exchange Act Rules 17a-3 and 17a-4 and NYSE Rule 440 by failing to make and preserve required records.

IV.

D'Alessio and the Firm make a number of related arguments that this disciplinary proceeding was deficient on procedural and due process grounds. They argue first that the NYSE knew about and sanctioned the type of arrangement that Applicants had with Oakford. Applicants then assert that, because the Exchange approved such conduct, Applicants were misled with respect to whether sharing in the profits and losses of an account made that account a member's own. Applicants then allege that the NYSE's disciplinary action was motivated by bias and vindictiveness because Applicants had filed a suit against the Exchange and, therefore, an independent arbitrator should have been appointed to resolve this disciplinary action. D'Alessio and the Firm also maintain that they were the victims of a selective prosecution by the Exchange.

A. Applicants have made a range of claims that the NYSE knew about and approved the type of profit-sharing arrangement that D'Alessio and D'Alessio Securities had with Oakford. They have not substantiated any of these allegations.

D'Alessio alleges that he thought sharing in the profits and losses of an account for which he traded was permissible because he believed that other floor brokers were doing the same thing. Respondents have pointed to no stated Exchange policies or other communications conveyed to floor brokers that could have led them reasonably to believe that such an unlawful practice would be acceptable.41 D'Alessio testified that he never inquired of any Exchange official or anyone else at the NYSE as to whether the type of arrangement he had with Oakford was permitted by the Exchange. Indeed, D'Alessio did not recall discussing his arrangement with Oakford with anyone other than William Killeen, the president of Oakford. D'Alessio testified that he had nodirect knowledge that any other floor broker had a compensation arrangement similar to the one he had with Oakford. He also testified that he had not entered into such an arrangement with anyone other than Oakford during his 20 years as a floor broker. Rather, D'Alessio stated that his belief that his actions were permissible resulted from "rumors" that brokers who engaged in "flipping" were compensated based on the profitability of the trades.42 D'Alessio's reliance on "rumors," however, does not provide an excuse for his violations.

Nor are we persuaded by Applicants' argument that they were induced to commit the violations at issue here by the Exchange's failure — documented in our 1999 settled order making findings against the Exchange under Section 19(h)(1) of the Exchange Act — to enforce compliance by independent floor brokers with the requirements of Section 11(a) and Rule 11a-1. D'Alessio and the Firm voluntarily agreed to abide by the rules and regulations of the Exchange and the federal securities laws when they became Exchange members.43 The Exchange's failure to police such arrangements does not excuse Applicants from their failure to comply with NYSE rules and regulations, or with the federal securities laws.44

Applicants make the related claim that they somehow were misled into believing that their trading for the Oakford account was "approved by the NYSE." Applicants have failed to support this claim. Brian McNamara, the Exchange's vice president of Regulatory Development and Market Evaluation, testified in this proceeding that it always had been the Exchange's regulatory position that sharing in profits and losses created an interest in an account because this established a partnership relationship between the broker and the customer. Applicants attempt to deflect focus from this testimony, highlighting instead McNamara's further testimony that the Exchange also took the regulatory position (which the Commission discredited in 1998) that sharing only in the profits of an account, in contrast to sharing in both the profits and losses of an account, did not create, in and of itself, an interest in an account for purposes of Section 11(a).45 Given the agreement between Applicants and Oakford to share in the profits and losses of the Oakford account, D'Alessio and the Firm cannot credibly claim that they were misled into committing the violations. Even under the Exchange's now-discredited interpretation of Section 11(a), Applicants were prohibited from trading for an account in which they shared in profits and losses, in contrast to profits alone, because such an agreement created a partnership relationship that gave the Applicants an interest in that account.

The October 7, 1998 letter sent to the Commission's Director of the Division of Enforcement by Richard Grasso, the Chairman and Chief Executive Officer of the Exchange, on which Applicants also rely, lends no support to their position. The letter, rather, reflects the Exchange's position that partnership relationships such as the arrangement that Applicants had with Oakford in which the parties shared in not only the profits butthe losses of each transaction — a traditional indication of ownership — were prohibited.46

B. D'Alessio and the Firm also contend that the Exchange filed disciplinary charges against Applicants only after they had sued the Exchange and its senior officials for allegedly inducing Applicants to violate Section 11(a) of the Exchange Act. On December 14, 1999, while the Exchange was conducting its investigation but prior to its filing charges, D'Alessio and the Firm brought a civil action against the Exchange and three senior NYSE officials in the Supreme Court of the State of New York. In their complaint, D'Alessio and the Firm alleged that the Exchange and the three officials conspired to violate Exchange Act Section 11(a), Exchange Act Rule 11a-1, and various related NYSE Rules by "concoct[ing] a phony interpretation" of these provisions and knowingly disseminating that incorrect interpretation to the detriment of D'Alessio and other floor brokers.47

Applicants place great importance on the fact that the NYSE did not file disciplinary charges against them for over two years, allegedly waiting to charge Applicants until shortly after Applicants sued the NYSE and its senior officers. Applicants' chronology, however, does not account for the fact that, in the period leading up to Applicants' December 1999 court filing, the Exchange engaged in a wide range of acts preparatory to its filing of charges against Applicants. The Exchange, moreover, maintains that its Enforcement Division was unaware of the suit until the Exchange was served and Applicants have offered no contradictory evidence.

D'Alessio and the firm also allege that the NYSE in this proceeding sought "to neutralize Petitioners' lawsuit against the NYSE and its senior officers" because the suit could have impacted "the financial viability of the NYSE." They argue that this effort created a conflict of interest that prevented the Exchange from deciding this matter in a fair and impartial manner and that "the whole matter was infected by bias." Applicants, in their brief on appeal, seek to have us set aside this disciplinary action and refer to an independent arbitrator the matters adjudicated by the NYSE. We decline to do so.

The Second Circuit has rejected the contention that the NYSE was unable to render an impartial judgment with respect to a disciplinary proceeding for alleged violations of Exchange rules and the federal securities laws because the Exchange was being sued for misconduct by the subject of that disciplinary proceeding.48 As the Sloan Court reasoned, the regulatory framework established by Congress would be undermined if an exchange's disciplinary process could be circumvented because the subject of the disciplinary proceeding filed a civil suit alleging misconduct on the part of the exchange.49 The allegations of vindictiveness and bias here are almost identical to those rejected by the Second Circuit in Sloan.

Moreover, as already noted, when Applicants became members of the Exchange they voluntarily agreed to abide by the rules and regulations of the NYSE, including its disciplinary procedures.50 As the Second Circuit found in Sloan, the Exchange has structured its disciplinary procedures to ensure that the "interests of the panel members are sufficientlyattenuated from the outcome of the proceeding to make the possibility of partiality quite remote."51

Here, consistent with those procedures, Applicants were afforded a hearing before a three-member panel. The Hearing Officer, who served as chairman of the panel and resolved procedural and evidentiary matters — while an employee of the Exchange — has "no Exchange duties or functions relating to the investigation or preparation of disciplinary matters."52 The remaining two panel members were peers of Applicants and are not employees of the Exchange.53

Applicants also have failed to support their related allegation that evidence of bias can be inferred from the Hearing Officer's denial of their request to call as witnesses three senior officers of the Exchange. According to Applicants, the testimony of these witnesses would have supported Applicants' argument that arrangements such as the one they had with Oakford were sanctioned by the Exchange and common among Exchange members.54 We see no unfairness in the Hearing Officer's denial of Applicants' request to call the three witnesses. Notably, elsewhere in their briefs Applicants concede that the testimony of the senior officers in question would have contradicted Applicants' claims. Further, the Hearing Officer determined that such evidence would be "repetitive and cumulative." The Hearing Officer gave Applicants wide latitude to question witnesses about the practices of floor brokers, the rules governing that business, and the Exchange's interpretationof those rules.55 He also permitted Applicants to refer to documents and testimony from other proceedings, including the Grasso letter and the Kwalwasser testimony discussed above.56

After the Hearing Panel rendered its decision, the Exchange's Board of Directors reviewed the matter.57 Applicants argue that their lawsuit could impact economically these board members and, therefore, financial self-interest prevented these persons from rendering an unbiased decision. Applicants have offered no evidence in support of this claim.58 Moreover, Applicants have sought review by the Commission and our de novo review of this proceeding affords Applicants ample protection from any claimed partiality or bias.59

Having filed an application for review with the Commission, D'Alessio and the Firm subsequently asked that the entire Commission recuse itself and appoint an independent arbitrator to consider this matter. Applicants initially complained that the Commission's former Chairman and his former law firm represented the NYSE in connection with the Commission's investigation of various floor broker activities, which they assert led to the proceedings against them. Applicants then updated their request for Commission recusal on the ground that the Commission's current Chairman was head of the NYSE from 1991 until 1995 and, along with his subordinates, assertedly approved and encouraged floor brokers' profit sharing with their customers. Although both the former and current Chairman recused themselves from participation in this proceeding, D'Alessio and the Firm claim that the Commission is "hopelessly conflicted."

Congress has charged the Commission with the power to review self-regulatory organization ("SRO") disciplinary actions.60 The Supreme Court has held that, where Congress mandates that an agency hear certain types of proceedings, disqualification cannot be permitted to prevent the only tribunal with power to act from performing its duties.61

In Blinder, Robinson & Co. v. SEC,62 the Court of Appeals rejected the notion that disqualifying bias on the part of the Commission may be inferred from the alleged bias of its members. In Blinder, the petitioner contended that he had been harmed because the Commission imposed administrative sanctions after having earlier rejected his offer of settlement. The court noted that only one sitting Commissioner had participated in both actions. The court further stated:

It would be a strange rule indeed that inferred bias on such a tenuous basis, and then presumed that the bias spread contagion-like to infect Commissioners who were not even called upon to consider the settlement offer. To do so would manifest profound disrespect for Congress' deliberately structuring agencies as (typically) multi-member bodies, with staggered terms and with the requirement that the President appoint a certain number of members from the political party other than his own. To give credence to [petitioner's] dark suspicion of bias notwithstanding this carefully crafted structure would flout what Justice White, in writing for the [Supreme] Court in Withrow called "a presumption of honesty and integrity" on the part of those who serve in office.63

Here, Applicants fail to identify any action by any of the remaining commissioners that would evidence even the appearanceof bias on any of their parts.64 None of the remaining commissioners participating in this decision was a member of the Commission before 2002, well after the events at issue here and our investigation of the NYSE. We deny Applicants' motion.

C. Nor do we find merit in Applicants' claims that they were the victims of a selective prosecution by the Exchange. To establish a claim of selective prosecution, a petitioner must demonstrate that he was unfairly singled out and that his prosecution was motivated by improper considerations such as race, religion, or the desire to prevent the exercise of a constitutionally protected right.65 No such showing was made here.

D'Alessio and the Firm further allege that the sanctions imposed on them by the NYSE are "inconsistent with the sanctions imposed on others similarly situated" and, therefore, establish that Applicants were singled out for harsh treatment in retaliation for their civil suit against the Exchange. We consistently have held that the appropriateness of the sanctions imposed depends on the facts and circumstances of the particular case and cannot be determined by comparison with action taken in other cases.66 As we conclude below, the egregious conduct of D'Alessio and the Firm fully warrants the sanctions imposed by the NYSE.67 Accordingly, the level of sanctions here does not support a claim that Applicants have been singled out for disproportionately harsh treatment.

V.

The Exchange Hearing Panel censured D'Alessio and D'Alessio Securities and barred them for seven years from allied membership, approved person status, and from employment or association in any capacity with any member or member organization and permanently barred them from membership or employment on the floor of the Exchange. On appeal, the Exchange's Board of Directors affirmed the Hearing Panel's decision.

We review sanctions imposed by the NYSE to determine whether those sanctions are excessive or oppressive, or whether they impose an unnecessary or inappropriate burden on competition.68 We see no basis for reducing the sanctions. Applicants argue that the sanctions imposed are more severe than those imposed in similar NYSE cases. As we have consistently held, the appropriate sanction depends on the facts and circumstances of each particular case; it cannot be precisely determined by comparison with action taken in other proceedings.69

D'Alessio and D'Alessio Securities violated the principles of commercial honor and trust that are the hallmark of the exchange auction market system. Their violations go to the heart of the duties a floor broker owes a customer. D'Alessio used the time and place advantages available to him in his position as a floor broker to advantage the Oakford account, an account in which he had an interest and over which he exercised investment discretion. He placed his own interests above the interests of his customers. This misconduct was not an isolated incident but rather an ongoing pattern that occurred over the course of four years and that stopped only after it was detected.

D'Alessio's claims that he acted in good faith are belied by the facts and circumstances of this case and by D'Alessio's efforts to hide his agreement with Oakford by failing to include on the bills he submitted to Oakford that he was to receive 70 percent of the profits and contribute 70 percent to the losses for that account. Indeed, these efforts indicate that he knew the profit-sharing agreement was improper. D'Alessio's claimsthat he has a stellar record are undermined by his refusal to comply with the Exchange's investigative requests, an act for which, as noted above, the Exchange censured him and imposed a bar for one month.

D'Alessio Securities, for its part, gave D'Alessio full authority to act on its behalf and permitted his misconduct with the Firm's full knowledge. In light of the significant misconduct found, we conclude that the sanctions imposed by the NYSE are fully warranted.70

An appropriate order will issue.71

By the Commission (Commissioners GLASSMAN, ATKINS, GOLDSCHMID and CAMPOS); Chairman DONALDSON not participating.

Jonathan G. Katz
Secretary

Securities and Exchange Commission
Washington, D.C.

Securities Exchange Act of 1934
Rel. No. 47627 / April 3, 2003

Admin. Proc. File No. 3-10460


In the Matter of the Application of
JOHN R. D'ALESSIO, and
D'ALESSIO SECURITIES, INC.

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 John R. D'Alessio and D'Alessio Securities, Inc., be, and it hereby is, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes

1 15 U.S.C. § 78k(a). Section 11(a), subject to certain exemptions not relevant here, makes it "unlawful for any member of a national securities exchange to effect any transaction on such exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion."

2 17 C.F.R. § 240.11a-1. Rule 11a-1, with certain exceptions not relevant here, prohibits an exchange member, while on the trading floor, from initiating any transaction in any security traded on the exchange for any account "in which such member has an interest, or for any such account with respect to which such member has discretion."

3 NYSE Rule 90(a) prohibits a member or member organization from effecting any transaction in any security "for his or its account, the account of an associated person, or an account with respect to which the member, member organization or an associated person thereof exercises investment discretion."

4 NYSE Rule 95(a) provides that "[n]o member while on the Floor shall execute or cause to be executed on the Exchange, . . . any transaction for the purchase or sale of any stock with respect to which transaction such member is vested with discretion as to (1) the choice of security to be bought or sold, (2) the total amount of any security to be bought or sold, or (3) whether any such transaction shall be one of purchase or sale."

5 NYSE Rule 111(a) provides that "[n]o member shall initiate transactions, while on the Floor, for an account in which he has an interest."

6 NYSE Rule 91 prohibits a member from crossing trades of a customer with an account in which the member or its member organization, among others, "is directly or indirectly interested," without first ensuring that the order has an opportunity for an improved price on the Exchange floor and providing notification to, and obtaining acceptance of the trade from, the member who placed the trade.

7 NYSE Rule 92 prohibits a member from purchasing or selling a security for an account in which the member or its member organization, among others, "is directly or indirectlyinterested" while holding an unexecuted order for a customer on the same side of the market.

8 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 and preserve current books and records regarding executed securities transactions and customer accounts. 17 C.F.R. §§ 240.17a-3 and 240.17a-4.

9 As the Exchange formulated the sanctions, all aspects of the bar apply to both D'Alessio and the Firm. However, because D'Alessio Securities is a corporation it cannot be an employee and, therefore, the bar with respect to employment with any member or member organization or employment on the floor of the Exchange is applicable only to D'Alessio.

10 See New York Stock Exchange, Inc., Exchange Act Rel. No. 41574 (June 29, 1999), 70 SEC Docket 153, 155 (Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Ordering Compliance With Undertakings).

11 Securities Acts Amendments of 1975, S. Rep. No. 94-75, at 60-69 (1975); Securities Reform Act of 1975, H.R. Rep. No. 94-123, at 54-57 (1975).

12 Exchange Act Rel. No. 7330 (June 2, 1964).

13 New York Stock Exchange, Inc., 70 SEC Docket at 156.

14 S. Rep. No. 94-75, at 63-65 (1975). Congress identified as one of its primary concerns the potential for conflicts of interest arising from the combination of money management and brokerage functions. Id. Specifically, Congress noted the danger of a broker executing transactions for its managed account ahead of transactions for the same securities for its other customers. Id.

15 NYSE Rules 90(a) and 111(a) — which are also implicated in this disciplinary matter — prohibit a member from effecting a transaction for the member's account or an account in which the member has an interest, respectively.

16 From August 1979 until November 1982, D'Alessio was a lessee member; from November 1982 until November 1988, he was a physical access member; and from November 1988 until December 1993, he was a lessee member.

17 A not-held instruction on a market order to buy or sell securities indicates that the customer has given the floor broker time and price discretion in executing the best possible trade, but will not hold the broker responsible if the best deal is not obtained.

18 D'Alessio testified that, in his view, the number of shares listed on an order ticket relating to the Oakford account did not reflect an instruction to buy or sell that amount of shares but, rather, reflected the maximum number of shares D'Alessio could buy or sell. In the four-month trading period analyzed by the Exchange, D'Alessio rarely bought or sold the full number of shares stated on an Oakford order ticket. For example, he typically executed only 5,000 to 10,000 shares from a 25,000-share order.

19 D'Alessio's typical trading pattern for the Oakford account began with a market-not-held order which he would partially execute. He would then time stamp another market-not-held order for the same number of shares as the partial execution, but on the opposite side of the market. D'Alessio made a profit for the Oakford account by executing the second order if the market conditions were favorable. After executing the second order, D'Alessio would report the execution to Oakford and create a new order for the stock for the same number of shares and on the same side of the market as the initial order. According to D'Alessio, this new order replaced the original, partially executed order. At this point, the process could begin again.

20 See U.S. v. Oakford Corp., 1999 WL 1201725 (S.D.N.Y. 1999).

21 See SEC v. Oakford Corp., 98 Civ 1366 (S.D.N.Y. Feb. 25, 1998); see also SEC v. Oakford Corp., Litigation Rel. No. 15653 (Feb. 25, 1998), 66 SEC Docket 1869.

22 See SEC v. Oakford Corp., Litigation Rel. No. 16497 (Mar. 31, 2000), 72 SEC Docket 406, 407.

23 On May 2, 2001, D'Alessio and the Firm settled the Commission's civil action by consenting to judgments, without admitting or denying the allegations, that permanently enjoined them from violating provisions of Section 11(a) of the Exchange Act, Exchange Act Rule 11a-1, and from violating the antifraud, and recordkeeping and reporting requirements of the federal securities laws. SEC v. Oakford Corp., Litigation Rel. No. 16984 (May 2, 2001), 74 SEC Docket 2491. D'Alessio also consented to pay $200,000 in disgorgement and prejudgment interest. Id.

24 See U.S. v. Oakford Corp., 1999 WL 1201725 at *2 n.2 (S.D.N.Y. 1999).

25 On February 25, 1998, after the filing of criminal indictments against Applicants, the NYSE summarily suspended D'Alessio and the Firm pursuant to NYSE Rule 475(b).

26 New York Stock Exchange, Inc., Exchange Act Rel. No. 41574 (June 29, 1999), 70 SEC Docket 153.

27 Id. at 155.

28 Id.

29 Id. at 161-163.

30 NYSE Rule 407A. See also Securities Exchange Act Rel. No. 44769 (Sept. 6, 2001), 75 SEC Docket 2194.

31 NYSE Rule 407A.

32 New York Stock Exchange, Inc., 70 SEC Docket at 156.

33 The Exchange analyzed trading data from April, May, July, and December 1997.

34 See NYSE Rules 123 and 410 (requiring records to include the name and amount of the security and the terms of the order, among other items).

35 United States v. Oakford Corp., 1999 WL 1201725 (S.D.N.Y. 1999). The district court conducted the hearing to resolve material issues related to the sentencing of Oakford, its two principals, William Killeen and Thomas Bock, and four floor brokers other than D'Alessio, after they had pled guilty to conspiring to allow the floor brokers to execute discretionary trades in Oakford accounts. See United States v. Oakford Corp., at *2-3.

36 Applicants allege that the Hearing Panel's decision to deny their request to call Kwalwasser as a witness was motivated by the Panel's "desire to frame the petitioners for engaging in conduct which the NYSE had approved." But D'Alessio and the Firm never pointed out to the Hearing Panel, in their "application" to call Kwalwasser as a witness, any statements made by Kwalwasser in any context that indicated that the Exchange sanctioned the type of discretionary trades made by D'Alessio — trades in which D'Alessio held buy and sell orders for the same stock executable at the same time and at the same price. Applicants did questionBrian McNamara, an Exchange vice president, extensively on this issue and he testified without contradiction that the orders D'Alessio held conferred discretion on him in violation of NYSE Rules. McNamara testified that a broker may not accept two orders that give the broker discretion at the point of sale, regardless of the manner in which the customer placed the order. Instead, the broker must require some condition that removes the broker's discretion, for example putting a "tick condition" on the orders that prevents them from being bought and sold at the same price or making one order contingent on the completion of another order.

37 Rule 91 provides that, when crossing a customer order with the member's own account, a member may take securities for its own account, provided "(1) he shall have offered the same in the open market at a price which is higher than his bid by the minimum variation permitted in such securities, and (2) the price is justified by the condition of the market, and (3) the member who gave the order shall directly, or through a broker authorized to act for him, after prompt notification, accept the trade." A member may supply securities from its own account provided that he shall have "bid for the same in the open market at a price which is lower than his offer by the minimum variation permitted in such securities," and provided that he meets the second and third conditions for taking securities for his own account.

38 NYSE Rules 123 and 410.

39 Id.

40 Id., 17 C.F.R. § 240.17a-4(b).

41 Applicants allege that two sets of notes written by Donald Seimer, an Exchange director who reported to McNamara, that the Exchange provided to the Commission in December 2000, establish that the Exchange was aware that "its position on profit sharing was illegal" and that it did not want to incriminate itself by making a written record of this illegal position. The portions on which Applicants rely are handwritten sentence fragments that are ambiguous on their face, excerpted from pages of handwritten notes that consist of disjointed sentence fragments. One, dated January 7, 1992, states "nothing in writing" and the other, dated June 21, 1993, states "Intra-day trading." Written next to this phrase is a separate statement "Do not discuss with SEC." Applicants have failed to establish how the cited portions are material to their claims.

42 The practice known as "flipping," also called "intra-day trading" or "trading on the eighths," generally consists of a floor broker entering the floor with two trade orders from the same customer and for the same security, one to buy and the other to sell. The floor broker then uses these simultaneous orders to attempt to profit from the difference between the security's bid and offer prices by making a series of rapid sales and purchases determined by which of the two prices temporarily is most favorable.

43 Gold v. SEC, 48 F.3d 987, 992 (7th Cir. 1995).

44 We also reject the suggestion that Applicants' conduct was reasonable because they assertedly lacked fair notice that their arrangement with Oakford was prohibited. Due process requires that "laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited." Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996). Regardless of the steps taken by the Exchange to enforce or communicate its interpretation of Section 11(a) to its membership, Section 11(a), Exchange Act Rule 11a-1 and the related NYSE Rules are sufficiently specific to put Applicants on notice that they were prohibited from trading for the Oakford account because of their agreement to share in the profits and losses of that account.

45 According to McNamara, this interpretation flowed from the NYSE's position that a broker was free to negotiate compensation for agency services so long as the agreement did not establish a partnering type of relationship between the customer and the broker. The Exchange maintained this position prior to 1998 at which time the Commission informed the Exchange that we did not agree with this view and considered any compensation arrangement that results in a member sharing in the trading profits or trading losses as constituting an interest in an account for purposes of Section 11(a) and Rule 11a-1. Subsequently, we instituted and settled the proceeding against the Exchange for, among other things, failure to police for profit-sharing among floor brokers that is discussed supra at notes 26 through 31 and accompanying text.

46 In the letter, Grasso wrote that it is not uncommon for compensation arrangements to "include aspects of 'pay for performance' whereby financial remuneration may be tied to the profitability of trading." The letter went on to state that such compensation arrangements typically have not been deemed to establish an ownership interest in an account "absent traditional indicia of ownership, such as title or control, or some contribution to the underlying assets of the account or fund or an understanding between the parties that such an ownership interest exists."

These statements, read in context, do not establish, as Applicants suggest, that, had it known about it contemporaneously, the Exchange would have condoned the Applicants' profit-sharing arrangement with Oakford. McNamara testified that he was responsible for drafting the letter and that its focus, rather, was the not-uncommon industry practice of providing brokers with performance-based bonuses.

47 In January 2000, the NYSE filed a notice of removal of action to the United States District Court for the Southern District of New York. The district court dismissed the complaint with prejudice on the ground that the NYSE and its senior officials enjoyed absolute immunity in the performance of regulatory functions delegated to them under the Exchange Act; D'Alessio and the Firm appealed to the Second Circuit, which affirmed the district court's decision. D'Alessio v. NYSE, 125 F. Supp.2d 656, 657-59 (S.D.N.Y. 2000), aff'd, 258 F.3d 93 (2d Cir. 2001).

48 Sloan v. NYSE, 489 F.2d 1, 3 (2d Cir. 1973).

49 Id. at 4.

50 Gold v. SEC, 48 F.3d at 992.

51 Sloan, 489 F.2d at 4; see also NYSE Rule 476.

52 NYSE Rule 476(b).

53 Id. Indeed, these panel members, who, as independent floor brokers were professional peers of D'Alessio, were uniquely qualified to consider whether Applicants' conduct violated the relevant rules.

54 Applicants also have alleged that one of these witnesses, Edward Kwalwasser, would have testified that the Exchange sanctioned the type of discretionary trading in which D'Alessio engaged. Having reviewed Kwalwasser's testimony in the criminal case, as noted supra at note 36 and accompanying text, we find no merit to this allegation.

55 One witness, Joseph Cangemi, a member of the Exchange and a floor governor, was qualified, without objection, as an expert in the business practice of floor brokers and the rules governing that business. The other witness, Brian McNamara, a vice president in the Division of Market Surveillance, whose testimony is discussed supra at note 36 and text accompanying note 45, was qualified, without objection, as an expert in the area of the development and interpretation of the rules and policies governing trading on the floor of the Exchange.

56 See notes 36 and 46 and accompanying text.

57 NYSE Rule 476(f). The Exchange stated in its brief before us that among the Board members who affirmed the Hearing Panel's decision in this matter were the public directors who, apart from their service on the Board, have no relationship to the Exchange or the securities industry. The Exchange also represents that the two members of the Board who are members of Exchange management, Richard Grasso and William Johnston, recused themselves from the review of the Hearing Panel's decision.

58 Nor have Applicants offered any legal support for their request that we refer the matters at issue to an independent arbitrator for its adjudication. Congress has provided for no such contingency.

59 First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 699-700 (3rd Cir. 1979); Monroe Parker Sec., Inc., 53 S.E.C. 155, 163 (1997) (citing cases). See also R.H. Johnson & Co. v. SEC, 198 F.2d 690, 695 (2d Cir. 1952) (errors in the proceedings of a securities association will be considered only if they affected the Commission's independent review ofthe association's proceedings).

60 Exchange Act Section 19(e), 15 U.S.C. §78s(e). See, e.g., Securities Industry Study, Report of the Subcommittee on Securities, Committee on Banking, Housing and Urban Affairs, 93d Cong. 1st Sess. 210 (1973) ("No provision of the Exchange Act confers jurisdiction upon the courts to directly review the self-regulatory activities of" an SRO. "As a consequence of the Commission's rather extensive power to review NASD action and inaction, parties aggrieved by NASD action have indirect access to the courts.").

61 In FTC v. Cement Institute, 333 U.S. 683 (1948), the Supreme Court refused to disqualify the entire membership of the FTC, explaining that, if all of the FTC commissioners were disqualified, neither the FTC nor any other administrative agency could act on the complaint. It elaborated:

Congress has provided for no such contingency. It has not directed that the Commission disqualify itself under any circumstances, has not provided for substitute commissioners should any of its members disqualify, and has not authorizedany other government agency to hold hearings, make findings, and issue cease-and-desist orders in proceedings against unfair trade practices.

333 U.S. at 701. Applicants suggest that an arbitrator can consider this matter. As noted, Congress has charged the Commission with the duty to review actions such as that taken by the NYSE here. That review structure does not provide for our appointment of an independent arbitrator.

62 837 F.2d 1099 (D.C. Cir. 1988).

63 Id. at 1106-07, citing Withrow v. Larkin, 421 U.S. 35, 55 (1975).

64 See U.S. v. State of Oregon, 44 F.3d 758, 772 (9th Cir. 1994) (holding that an "unacceptable probability of actual bias on the part of those who have actual decisionmaking power" must be established in order to prevail on a claim of bias).

65 United States v. Huff, 959 F.2d 731, 735 (8th Cir. 1992); see also Richard J. Puccio, 52 S.E.C. 1041, 1046 (1996).

66 See, e.g., Jonathan Feins, Exchange Act Rel. No. 41943 (Sept. 29, 1999), 70 SEC Docket 2116, 2131 n.36.

67 See infra section V.

68 Section 19(e)(2) of the Exchange Act, 15 U.S.C. § 78s(e)(2). D'Alessio and the Firm do not claim, and the record does not show, that the NYSE's action has imposed an undue burden on competition.

69 See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Jonathan Feins, 70 SEC Docket at 2131 n.36.

70 Even assuming, which we do not, the validity of Applicants' argument that the Exchange failed to disseminate a clear standard with respect to whether sharing in the profits and losses of an account makes that account a member's own account, Applicants' other violations — trading for an account over which Applicants exercised discretion, according that account preferential treatment and failing to make and preserve required records — fully warrant the sanctions imposed by the NYSE.

71 We have considered all of the contentions advanced by the parties. 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/34-47627.htm


Modified: 04/07/2003