Securities Exchange Act Of 1934
Rel. No.
Admin. Proc. File No. 3-11000
|
In the Matter of the Application of KO SECURITIES, INC. and TERRANCE Y. YOSHIKAWA For Review of Disciplinary Action Taken by NASD |
ORDER SUSTAINING FINDINGS OF REGISTERED SECURITIES ASSOCIATION, REMANDING FOR RECONSIDERATION OF CERTAIN SANCTIONS, AND SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the findings of violation made by NASD against Ko Securities, Inc. and Terrance Y. Yoshikawa with respect to the affirmative determination violation, be, and they hereby are, sustained; and it is further
ORDERED that the sanctions imposed on Ko Securities, Inc. and Terrance Y. Yoshikawa by NASD with respect to the affirmative determination violation, be, and they hereby are, remanded to NASD for reconsideration; and it is further
ORDERED that the disciplinary action taken by NASD against Ko Securities, Inc. and Terrance Y. Yoshikawa for recordkeeping violations, and NASD's assessment of costs, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
Endnotes
1 Yoshikawa indicates that, on August 28, 2002, Ko withdrew its NASD broker-dealer registration and Yoshikawa submitted his Form U-5 and left the securities industry.
2 Rule 3b-3 under the Securities Exchange Act of 1934 defines a "short sale" as "any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller." 17 C.F.R. § 240.3b-3.
NASD Conduct Rule 3370(b)(2)(B) generally prohibits a member from effecting a short sale for its own account unless the member "makes an affirmative determination that the member can borrow the securities or otherwise provide for delivery of the securities by the settlement date."
NASD Conduct Rule 3370(b)(4)(B)(ii) provides that, in order to satisfy the affirmative determination requirement for customer or proprietary short sales, the "member must keep a written record which includes . . . if the member or person associated with a member locates the stock, the identity of the individual and firm contacted who offered assurance that the shares would be delivered or that were available for borrowing by settlement date and the number of shares needed to cover the short sale."
NASD Conduct Rule 2110 requires a member to observe "highstandards of commercial honor and just and equitable principles of trade."
3 17 C.F.R. § 240.17a-3. Exchange Act Rule 17a-3 requires every member of a national securities exchange and every broker and dealer to maintain and keep current books and records relating to their business.
4 NASD also assessed costs.
5 In pre-market trading on Monday, May 4, 1998, Entremed stock rose to a high of $85 per share, up from its closing price of $12 per share the previous Friday, May 1, 1998. Ko was not a market maker in Entremed stock and, until May 4, 1998, did not own any Entremed stock.
6 Respondents sold short a total of over 56,000 shares of Entremed stock on May 4, 1998, including the pre-market trading.
7 Respondents claim that they did this to ensure that their customers would receive best execution.
8 The Hearing Panel dismissed allegations that Ko violated Regulation T by executing short sales in customer cash accounts and that Ko's individual customer order tickets should have reflected the Entremed short sales.
9 Respondents do not dispute that they failed to make an appropriate written annotation of how they would cover the short sales as required by NASD Conduct Rule 3370(b)(4)(B)(ii). They offer no argument to rebut this charge.
10 See Notice of Proposed Rule Change by NASD Relating to the Prompt Receipt and Delivery of Securities, Exchange Act Rel. No. 34-26746 (Apr. 20, 1989), 43 SEC Docket 1194; Public Disclosure of Material Short Security Positions, Securities Exchange Act Rel. No. 34-29278 (June 7, 1991), 49 SEC Docket 3.
11 See Notice of Filing of Proposed Rule Change by the NASD Relating to the Use of Hard to Borrow Lists, Exchange Act Rel. No. 34-42306 (Jan. 3, 2000), 71 SEC Docket 1144.
12 Hence, Yoshikawa's explanation to the Hearing Panel that he was reluctant to ask NASD staff for a definitive interpretation of the affirmative determination requirement out of fear that such a request would trigger an NASD investigation of Ko is irrelevant; NASD's Alert had already given him a definitive interpretation.
13 Respondents do not identify these other firms.
14 See, e.g., Charles E. Kautz, 52 S.E.C. 730, 733 (1996); Donald T. Sheldon, 51 S.E.C. 59, 66 n.32 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995); C.A. Benson & Co., Inc., 42 S.E.C. 107, 111 (1964) (noting that it is "immaterial that others may also have violated the NASD's rules and have not yet been reached by the enforcement machinery"); cf. Hilliard v. Walker's Party Store, Inc., 903 F. Supp. 1162, 1175 (E.D. Mich. 1995) (observing "that a practice is common does not make it proper or legal").
15 Conduct that violates an NASD regulatory requirement is also inconsistent with just and equitable principles of trade. See, e.g., Stephen J. Gluckman, Securities Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 428 (noting it is a "long-standing and judicially-recognized policy that a violation of another Commission or NASD rule or regulation constitutes a violation of Conduct Rule 2110").
16 15 U.S.C. § 78q(a)(1).
17 17 C.F.R. §§ 240.17a-3(a)(6) and (7).
18 See Merrill Lynch, Pierce, Fenner & Smith Inc., Exchange Act Rel. No. 33367 (Dec. 22, 1993), 55 SEC Docket 2281.
19 Pryor, McClendon, Counts & Co., Inc., Securities Act Rel. No. 8245 (June 26, 2003), ___ SEC Docket ___ (quoting Edward J. Mawod & Co., 46 S.E.C. 865, 873 n.39 (1977)).
20 Of the four firms, Ko was one, another was involved in an ongoing inquiry at the time of the hearing, one did not have any affirmative determination violations, and one failed to properly annotate the affirmative determination it had obtained, against which NASD took informal action.
21 See, e.g., Barry C. Wilson, 52 S.E.C. 1070, 1074 (1996); United States v. Huff, 959 F.2d 731, 735 (8th Cir. 1992).
22 Ralph W. LeBlanc, Exchange Act Rel. No. 48254 (July 30, 2003), __ SEC Docket ___; Russo Sec., Inc., Exchange Act Rel. No. 44186 (Apr. 17, 2001), 75 SEC Docket 1124A, 1124P; Michael Markowski, 51 S.E.C. 553, 559 n.23 (1993), aff'd, 34 F.3d 99 (2d Cir. 1994). Respondents do not specifically allege racial bias on appeal; however there was some discussion of race before the Hearing Officer. During that discussion, Respondents did not present a scintilla of evidence suggesting that race influenced NASD's investigations of Respondents. An employee of NASD's Division of Market Regulation specifically denied, under oath, any personal motivation for NASD's investigations of Respondents.
23 15 U.S.C. § 78s(e).
24 Id. Respondents do not claim, nor does the record show, that NASD's sanctions impose an unnecessary or inappropriate burden on competition.
25NASD Sanction Guidelines (2001 ed.) at 70. The NASD Sanction Guidelines define "transaction profit" as "the profit that the short-selling customer realized." Id. at 70 n.3.
26 NASD did not include the amount of the Respondents' customers' profits. The Guidelines also suggest, in egregious cases, either a suspension or expulsion (for a firm) or bar (for an individual).
27 NAC rejected the argument made by NASD's Division of Market Regulation that the amount of the fine imposed on Respondents should be increased to reflect customer profits generated from the short sales.
28 See John P. Goldsworthy, 53 S.E.C. 576, 580 (1998); Robert A Grunburg, 52 S.E.C. 398, 404 (1995); Stephen R. Flaks, 46 S.E.C. 891, 895 n.8 (1977).
29 NASD Sanction Guidelines at 34.
30 We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.