SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 37218 / May 14, 1996
Admin. Proc. File No. 3-8706
_________________________________________________
:
In the Matter of the Application of :
:
PETER C. BUCCHIERI :
9104 Mettle Creek Drive :
Las Vegas, Nevada :
:
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
Violation of Rules of Fair Practice
Excessive Trading
Where principal of member firm of registered securities
association engaged in excessive trading in customer
accounts, held, association's findings of violation and the
sanctions it imposed sustained.
APPEARANCES:
Sheldon M. Jaffe, for Peter C. Bucchieri.
T. Grant Callery and Norman Sue, Jr., for the National
Association of Securities Dealers, Inc.
Appeal filed: May 31, 1995
Briefing completed: October 27, 1995
I.
Peter C. Bucchieri, who was a principal of Bucchieri Asset
Management, Inc. ("the firm"), a former member of the National
Association of Securities Dealers, Inc. ("NASD"), appeals from
NASD disciplinary action. The NASD found that, during the period
July 1990 through March 1993, Bucchieri violated Article III,
Sections 1 and 15(a) of the NASD's Rules of Fair Practice by
==========================================START OF PAGE 2======
excessively trading customer accounts. 1/ It censured
Bucchieri, suspended him for 60 days, barred him in all principal
capacities, fined him $25,000, and required him to pay restitu-
tion totaling $50,979 to three customers and an arbitration award
in favor of another account within 60 days or cease further
association in any capacity with an NASD member. 2/ Our
findings are based on an independent review of the record.
II.
This proceeding involves Bucchieri's handling of five
customer accounts. Bucchieri exercised discretionary authority
over all of these accounts pursuant to signed agreements that
granted him "sole investment authority." Clients also agreed to
pay Bucchieri a 2% management fee, based on the asset value of
their respective accounts, in addition to paying commissions on
the transactions that Bucchieri effected on their behalf. The
pertinent facts are as follows.
A. Audrey Radtke
Following the October 1989 death of her husband, who had an
account with Bucchieri, Audrey Radtke, a retired woman of about
70, established an IRA account in her own name. Radtke's stated
investment objective was capital appreciation with modest income.
She had no investment experience, and told Bucchieri that she was
conservative with respect to her investments.
During the 12-month period September 1, 1990 through August
31, 1991, Bucchieri effected 247 transactions in Radtke's account
with total commissions and fees of almost $16,000 on average
equity of about $71,000. The annualized turnover rate for the
account was 7.2. 3/ The cost/equity ratio, which measures the
1/ Section 1 requires adherence to high standards of commercial
honor and just and equitable principles of trade. Section
15(a) prohibits the effecting of securities transactions in
a discretionary account that are "excessive in size or
frequency in view of the financial resources and character
of such account."
2/ The restitution represents the gross commissions charged to
the three customers during the relevant period. As noted,
the NASD ordered Bucchieri to pay an arbitration award to a
fourth account. The fifth customer involved in this
proceeding had previously settled an arbitration claim
against Bucchieri. The NASD also assessed costs.
3/ In calculating the turnover rate for this account and the
others at issue, the NASD used the modified Looper formula,
(continued...)
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amount an account has to appreciate annually just to cover
commissions and other expenses, was 22.4%. 4/ The number of
securities positions that were purchased and then sold during the
period was 131, with an average holding period of 51 days.
A few months after her husband's death, Radtke became
concerned about her account's reduction in value. She called
Bucchieri and reiterated that she was not a gambler, reminding
him of past conversations in which she had told him that she
actually "preferred [keeping her money in] a mattress."
Bucchieri assured her that "everything was under control," and
that he would take her reminder seriously. Subsequently, Radtke
again became concerned when she realized from examining her
statements "how many turnovers there were." She again called to
complain but could not reach Bucchieri. However, she was told
that her concerns would be relayed to him. Bucchieri never
returned her call. Not long thereafter, Radtke terminated her
account. 5/
B. Micky Poage
Micky Poage ("M. Poage"), a self-employed musician with
little understanding of securities, opened a Simplified Employee
Pension ("SEP") IRA account with the firm in 1990. His stated
investment objective was capital appreciation with modest income.
He told Bucchieri that he and his wife, whose account is
discussed below, were "conservative people" who were not
interested in high-risk investments. M. Poage pointed out that
he was establishing a retirement fund, and hoped to earn a
moderate rate of return.
During the 33-month period from July 1990 through March
1993, Bucchieri effected 445 transactions in M. Poage's account,
with total commissions and fees of $19,392 on an average equity
of $27,517. On an annualized basis, the account was turned over
12.6 times, and would have had to appreciate 25.6% annually to
cover costs. The number of securities positions bought and then
sold during the period was 222, with an average holding period of
3/(...continued)
dividing total cost of purchases by average monthly equity.
See Allen George Dartt, 48 S.E.C. 693, 695 and n.6 (1987).
4/ The cost/equity ratio was calculated for this account and
the others at issue by dividing total expenses by average
monthly equity.
5/ Bucchieri objects to the fact that Radtke testified by
telephone. However, we have consistently approved the use
of telephonic testimony in NASD proceedings. See, e.g.,
Howard Alweil, 51 S.E.C. 14, 17 (1992).
==========================================START OF PAGE 4======
26.7 days. Ninety-five positions were bought and sold within 7
days.
M. Poage had difficulty understanding his confirmations and
statements, even after he asked Bucchieri to explain them. When
he complained about the trading activity in his account, he
received a letter from Bucchieri stating that "sometimes heavy
trading is necessary." 6/
C. Karen Poage
Karen Poage ("K. Poage"), a real estate broker and M.
Poage's wife, opened a SEP IRA account at the firm at the same
time as her husband. Like M. Poage, the investment objective
that K. Poage selected was "capital appreciation with modest
income." However, K. Poage stated that she "didn't know what
those terms [meant] exactly," and what she and her husband told
Bucchieri was that they wanted to put their money someplace safe
"to build for [their] retirement."
During the period from July 1990 through March 1993,
Bucchieri effected 247 trades in K. Poage's account, with total
commissions and fees of $10,101 on average equity of $12,292.
The account was turned over 13.6 times on an annualized basis,
and would have required 29.9% annual appreciation in order to
cover the associated costs. Of the 135 positions bought and then
sold during the relevant period, 54 were purchased and sold
within 7 days. The average holding period for the 135 positions
was 23.8 days.
K. Poage did not understand the firm's confirmations and
account statements. She stated that she would not have known
whether or not the activity in her account was excessive. The
Poages became very concerned about the losses in their accounts,
and K. Poage stated that her husband discussed the matter with
Bucchieri. Bucchieri responded by telling M. Poage not to worry
since "it's all going to come around."
D. Gore Valley Enterprises, Inc.
Charles R. Crowley, secretary-treasurer of Gore Valley
Enterprises, Inc., opened a pension plan account at the firm in
May 1991. Crowley, a plan trustee with little investment
experience, designated "capital appreciation" as the account's
investment objective. He considered that his fiduciary
responsibility to the plan precluded any speculative trading.
Prior to the opening of the account, the plan's funds had largely
6/ Contrary to the claim made by Bucchieri, M. Poage and his
wife denied that, in June 1993, they told Bucchieri that
they wanted to be "more aggressive."
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been invested in bonds, government securities, and mutual funds.
Crowley decided to transfer a portion of the funds to an account
at the firm in the hope that "a little more activity" would
produce a better return.
During the eight-month period from the end of June 1991
through February 1992, Bucchieri effected 473 transactions in the
Gore Valley account with total commissions and fees of $25,633 on
average equity of $175,941. On an annualized basis, the account
was turned over 10.5 times, and would have required a 21.8%
yearly appreciation to cover costs. The number of securities
positions bought and then sold was 233, with an average holding
period of 27.5 days.
Crowley, who reviewed the plan's confirmations and account
statements, became concerned with the amount of commissions being
generated in contrast to the account's declining value. He
complained several times to William Pyka at the firm. 7/
However, Pyka merely kept telling him to "give it time." Crowley
decided not to give it any more time, and terminated the account
after less than a year.
Bucchieri points to Crowley's "admission" that Gore Valley's
account was a "trading account". He further asserts that, rather
than being inexperienced, Crowley had admittedly been "trading"
in the market for 30 years. Bucchieri's characterizations are
not an accurate reflection of Crowley's testimony. The term
"trading account" was used not by Crowley but by Bucchieri's
counsel on cross-examination. In context, Crowley's agreement
with counsel's employment of that term was merely an
acknowledgment that Gore Valley's account at the firm was more
actively traded than the company's other pension accounts that
were invested largely in vehicles such as Treasury bills. Nor
did Crowley testify that he had been "trading" in the market for
30 years. On the contrary, in response to a question concerning
his investing experience, Crowley replied that he had engaged in
"minimal" investment activity for 30 years. Moreover, when asked
to characterize his knowledge of the market, Crowley stated:
"I don't have any knowledge. I just relied on brokers
to tell me it was maybe a good deal."
E. Robert and Faith Dibble
Robert and Faith Dibble, having already won an arbitration
award against Bucchieri, declined to testify in this proceeding.
However, their new account application reflects that Robert
7/ Pyka's function was simply to bring in clients and turn them
over to Bucchieri, who exercised discretionary authority
over the accounts.
==========================================START OF PAGE 6======
Dibble was retired, and the investment objective specified in the
Dibbles' management agreement with the firm was "capital
appreciation with modest income."
During the 14-month period from November 1990 through
December 1991, Bucchieri effected 560 trades in the Dibbles'
account with total commissions and fees of $31,430 on an average
equity of $108,050. The annualized turnover rate was 9.4, and
the account would have required 24.9% annual appreciation just to
cover costs. Two-hundred-ninety securities positions were
purchased and then sold within the indicated period, and the
average holding period was 43.8 days.
The NASD based findings on a questionnaire completed and
submitted by the Dibbles, and on a letter from Robert Dibble to
the NASD. Bucchieri complains that those findings were based on
"incompetent hearsay" and unfairly deprived him of his right of
cross-examination. We have recognized that hearsay statements
may be admitted into evidence and, in an appropriate case, form
the basis for findings of fact. 8/ However, in this instance,
we have determined to rely solely on the firm's records relating
to the Dibbles, and the NASD's analyses based thereon, as set
forth above. 9/
* * * *
We think that Bucchieri engaged in excessive trading in all
of the accounts at issue. 10/ Employing the discretionary
authority conferred on him by the management agreements that
clients signed, he exercised full control over all trading
activity. 11/ Our assessment of Bucchieri's level of trading
8/ See, e.g., Charles D. Tom, 50 S.E.C. 1142, 1145 (1992), and
the authorities there cited.
9/ The fact that Robert Dibble had a graduate degree from
Harvard, a consideration stressed by Bucchieri, does not
establish that he was a sophisticated investor.
10/ Contrary to the claim made by Bucchieri, this conclusion is
not based on any finding that "the rules pertaining to
retirement and pension accounts," including the Employee
Retirement Income Security Act, were violated.
11/ Bucchieri argues that he did not control customers'
accounts. He cites Follansbee v. Davis, Skaggs & Co., Inc.,
681 F.2d 673 (9th Cir. 1982) and Tiernan v. Blyth, Eastman,
Dillon & Co., 719 F.2d 1 (1st Cir. 1983) which, in dealing
with the issue of a salesman's control over a non-
discretionary account, stress the importance of evaluating
(continued...)
==========================================START OF PAGE 7======
does not rest on any "magical per annum percentage." 12/ We
note, however, that, "[w]hile there is no clear line of
demarcation, courts and commentators have suggested that an
annual turnover rate of six reflects excessive trading." 13/
Here, the turnover rate was at a higher level, ranging from 7.2
to 13.6. Moreover, the costs engendered by Bucchieri's trading
strategy made it necessary for his accounts to appreciate from
20% to 30% annually just to break even. The substantial expense
resulting from Bucchieri's "in-and-out" trading was hardly
consonant with the accountholders' objective of capital
appreciation. On the contrary, the excessive charges would
result in the depletion of capital. 14/
Bucchieri argues that his customers' uncomplaining
acceptance of the transactions he effected is a more accurate
indication of their investment objectives than the statements
they made when their accounts were opened. We do not agree.
Bucchieri was dealing with unsophisticated investors who had no
real understanding of his trading strategy. Moreover, the
customers did complain only to be told in effect that there was
nothing to worry about.
11/(...continued)
the customer's sophistication in securities transactions and
ability to evaluate the broker's recommendations. None of
the customers in this proceeding were shown to be
sophisticated investors or to possess the ability to
evaluate Bucchieri's trading strategy. Moreover, the
Follansbee court stated, "If a broker is formally given
discretionary authority to buy and sell for the account of
his customer, he clearly controls it." 681 F.2d at 676.
12/ See Gerald E. Donnelly, Securities Exchange Act Release No.
36690 (January 5, 1996), 61 SEC Docket 47, 51.
13/ Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th
Cir. 1980).
14/ Bucchieri points to language in his firm's management
agreement, signed by customers, stating that "[t]he
Investment Manager shall ... be free to make investment
changes regardless of the resulting rate of portfolio
turnover, when it, in its sole discretion, shall determine
that such changes will promote the investment objective of
the account." This statement was hardly sufficient to
apprise customers that, contrary to their investment
objectives, the investment manager was free to deplete their
assets through excessive trading. Cf. Meyer Blinder, 50
S.E.C. 1215, 1228-1229 (1992). Nor could such a statement
insulate Bucchieri from regulatory scrutiny.
==========================================START OF PAGE 8======
Bucchieri also contends that the NASD's turnover computa-
tions are defective because they do not cover the entire span of
time that each account was maintained at the firm, and that the
NASD's analyses are further flawed because they do not take into
account the assets that customers held outside their accounts.
These contentions are without merit. It is obvious that
excessive trading can occur over a period of time less than the
entire life of an account. As one commentator has pointed out:
If there is excessive trading during any period,
it makes no difference that the period was preceded or
followed by a period of relative inactivity. It is no
defense to a claim of securities fraud in handling a
customer's account that, during some periods of time,
the broker managed to handle the account without
committing securities fraud." (emphasis in original)
(footnote omitted). 15/
Nor is there any basis for Bucchieri's complaint regarding the
NASD's failure to take account of customers' outside assets. As
we have previously pointed out, the provision at issue, Article
III, Section 15(a) of the NASD's rules, prohibits trading in a
discretionary account that is excessive "in view of the financial
resources and character of such account" (emphasis supplied).
Thus the assets by which the rate of activity is to be measured
are those in the account, not other assets that the customer may
possess. 16/ Account activity must also be geared to
customers' investment objectives, which in this instance were
conservative in nature.
In light of the foregoing, we sustain the NASD's findings of
violation.
III.
Bucchieri contends that the sanctions imposed on him,
particularly the bar as a principal, are unduly harsh. He argues
that the NASD's sanction guidelines warrant lesser sanctions,
asserting, among other things, that the NASD did not introduce
evidence of prior or similar misconduct; that only 5 out of 200
accounts were involved; that the computed turnover rates did not
cover the entire life of the accounts; that, of the accounts at
issue, only the Poages lost money; that there was no evidence
that he lulled customers; and that his control was limited since
customers could revoke his discretionary authority at any time.
15/ Dashjian, Overcoming Defenses to Churning Claims Under the
Federal Securities Laws, 20 Securities Regulation Law
Journal 362, 369 (1993).
16/ See Frederick C. Heller, 51 S.E.C. 275, 279-280 (1993).
==========================================START OF PAGE 9======
As we have previously pointed out, the NASD's guidelines are
not meant to prescribe fixed penalties but merely to
provide a "starting point" in the determination of remedial
sanctions. 17/ Here, the sanctions that the NASD assessed are
fully consonant with its guidelines. The guidelines suggest
monetary sanctions that include the amount of a respondent's
commissions plus a fine of up to $50,000, coupled with a
suspension or bar in cases involving serious misconduct such as
excessive trading in more than one account or attempts to lull
investors. In this case, five accounts were excessively traded
and, contrary to Bucchieri's assertion, he and his firm sought to
lull investors. Among other pertinent guideline factors, we note
the extremely large number of transactions, the extended periods
of excessive trading, and the confiscatory levels of account
turnover and customer expense. We have already rejected
Bucchieri's arguments with respect to the computation of turnover
rates and his asserted lack of control over customer accounts.
His contention that only two customers suffered a net loss
ignores the effect that his trading had in reducing other
customers' profits.
Bucchieri engaged in serious misconduct. Through his
excessive trading of customer accounts, he placed his own
interests above those of his customers and breached the trust
that had been placed in him as a securities professional. Under
the circumstances, we do not consider the NASD's sanctions
excessive or oppressive.
An appropriate order will issue. 18/
By the Commission (Chairman LEVITT and Commissioners
WALLMAN, JOHNSON, and HUNT).
Jonathan G. Katz
Secretary
17/ See Peter W. Schellenbach, 50 S.E.C. 798, 803 (1991), aff'd,
989 F.2d 907 (7th Cir. 1993).
18/ All of the arguments advanced by the parties have been
considered. They are rejected or sustained to the extent
that they are inconsistent or in accord with the views
expressed herein.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 37218 / May 14, 1996
Admin. Proc. File No. 3-8706
_________________________________________________
:
In the Matter of the Application of :
:
PETER C. BUCCHIERI :
9104 Mettle Creek Drive :
Las Vegas, Nevada :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
_________________________________________________:
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 Peter C.
Bucchieri, and the Association's assessment of costs, be, and
they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary