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...) ==========================================START OF PAGE 3====== 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." ==========================================START OF PAGE 5====== 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