SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 38570 / May 5, 1997
Admin. Proc. File No. 3-9023
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In the Matter of the Application of :
:
WILLIAM K. CANTRELL :
2250 Cove Avenue :
Los Angeles, California 90039 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
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OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY
PROCEEDINGS
Violation of Rules of Fair Practice
Failure to Comply with Net Capital Requirements
Limited principal-financial and operations of member firm of
registered securities association was responsible for firm's
failure to comply with net capital requirements. Held,
association's finding of violation and the sanctions it
imposed are sustained.
APPEARANCES:
William K. Cantrell, pro se.
Alden S. Adkins, Norman Sue, Jr., and Shirley H. Weiss, for
NASD Regulation, Inc.
Appeal filed: June 10, 1996
Last brief filed: September 18, 1996
I.
William K. Cantrell, who, during the relevant period, was
the limited principal-financial and operations ("FINOP") of
Cartwright & Walker Securities, Inc. ("CWS" or the "Firm"),
formerly a member of the National Association of Securities
Dealers, Inc. ("NASD"), appeals from NASD disciplinary action.
The NASD found that Cantrell was responsible for net capital
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violations by the Firm and thereby violated Article III,
Section 1 of the NASD's Rules of Fair Practice ("Rules"). 1/
The NASD censured Cantrell, fined him $2,500, suspended him for
ten calendar days from association with any NASD member as a
FINOP, and ordered him to requalify by examination as a
FINOP. 2/ Our findings are based on an independent review of
the record.
II.
Our Rule 15c3-1 under the Securities Exchange Act of 1934
("Exchange Act") establishes net capital requirements for brokers
and dealers. Rule 15c3-1(a)(2)(vi), in pertinent part, permits a
broker-dealer to operate with net capital of $5,000 if that
broker-dealer does not receive or hold customer funds or
securities, or carry customer accounts (hereinafter referred to
as a "$5,000 broker-dealer"). 3/ Rule 15c3-1(a)(2)(iii),
however, defines a "dealer" to include any broker-dealer that
effects more than ten transactions in any one calendar year for
its own investment account and requires any such dealer to
maintain net capital of at least $100,000. We imposed this
higher requirement on dealers, in part, in recognition of the
risks of a dealer's business, including the potential for severe
1/ The NASD recently revised and renumbered the Rules. No
substantive changes were made to the provision at issue
here. Article III, Section 1 of the Rules [new Rule 2110]
requires compliance with high standards of commercial honor
and just and equitable principles of trade.
2/ The NASD further ordered that, in the event that Cantrell
failed to requalify as a FINOP during his suspension, he
would remain suspended until he requalified.
CWS and Everett Scoville Walker, its president during the
relevant period, were also respondents in the proceedings
before the NASD. Before the NASD District Business Conduct
Committee ("District Committee") issued the decision in this
matter, disciplinary action was taken against CWS and Walker
in another NASD proceeding. In that proceeding, CWS was
expelled from membership in the NASD, and Walker was barred
from association with any member firm. The NASD dismissed
the charges in this proceeding against CWS and Walker.
3/ The NASD's opinion states that a $5,000 broker-dealer is
subject to our Rule 15c3-1(a)(2)(ii). However, the record
reflects that Cantrell was aware of the issues involved and
cited the correct provision before the NASD.
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market volatility. 4/
It is undisputed that CWS purported to operate as a $5,000
broker-dealer. However, the Firm maintained a so-called "error
account" (hereinafter referred to as "the Oxford Account") with
its clearing firm, J.B. Oxford & Company ("Oxford"). At issue
are approximately 42 transactions in the Oxford Account in July
1994, and approximately 159 transactions in the Oxford Account
the following month. The bulk of these trades involved the stock
of Metro Wireless Interactive Corp. ("MWIC"). 5/ During this
period, customer transactions were cancelled for non-payment and
placed in the Oxford Account. They were held for a period of
time and then resold.
The level of activity in the Oxford Account during the
relevant period was significant. For example, on July 14, 1994,
a total of 6,900 MWIC shares were transferred into the Oxford
Account in eight purchase transactions. The 6,900 MWIC shares
remained in the Oxford Account until July 21, when all those
shares were sold in ten trades. The Oxford Account acquired
8,630 MWIC shares in 20 transactions between July 22 and July 29,
and four sales totalling 1,900 shares were effected on July 29,
leaving a balance of 6,730 shares. On August 2 and 3, 8,040 MWIC
shares were purchased through the Oxford Account in eight trades,
and on August 3, 11,410 MWIC shares were sold from the Oxford
Account in 40 trades, leaving a balance of 3,360 shares in the
account. The Oxford Account held 4,860 shares of MWIC on
August 5; 7,810 shares on August 8; 25,140 shares on August 15;
and 26,340 shares on August 18.
CWS effected more than ten transactions in 1994 in the
Oxford Account. The NASD found that the Oxford Account was used
by CWS to establish substantial positions in MWIC stock and
functioned as CWS' investment account. 6/ Accordingly, the
NASD concluded that, pursuant to Rule 15c3-1(a)(2)(iii), CWS was
required to maintain at least $100,000 in net capital. The NASD
found that CWS operated a securities business on July 29, 1994,
when it had $60,558 in net capital, and on August 31, 1994, when
it had $73,469 in net capital. The NASD concluded that the Firm
thus had operated with net capital deficiencies of $39,441 on
4/ Securities Exchange Act Rel. No. 31511 (November 24, 1992),
52 SEC Docket 4148, 4152.
5/ There were also trades in Health & Wealth, Inc. and in a
security identified in the record as "Stet Ord-Sta
Financeria Tel."
6/ The NASD found that the Oxford Account was also used to
establish smaller positions in Health & Wealth, Inc. stock
and "Stet Ord-Sta Financeria Tel" stock.
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July 29, 1994, and $26,530 on August 31, 1994. The NASD further
found that Cantrell, the Firm's FINOP, prepared the Firm's net
capital computations without considering the impact that the
Oxford Account had on CWS' required net capital, and thereby
violated Article III, Section 1 of the Rules.
III.
Cantrell does not dispute either that, as FINOP, he was
responsible for CWS' net capital computations or that the
transactions described above occurred in the Oxford Account.
Rather, he argues that there were no criteria to determine
whether to treat the Oxford Account as an error account or as an
investment account and questions whether in fact the Oxford
Account operated as an investment account. 7/
In its decision, the NASD described the purpose and
operation of an "error account" as follows:
When a mistake is made in filling a customer order, . . .
the erroneous trade is entered into an "error account." The
erroneous trade is generally allocated to the party
responsible for the error, and the stock is liquidated . . .
by an offsetting trade to "the Street." Once an erroneous
trade is liquidated, it is transferred out of the error
account. Erroneous trades are generally liquidated as soon
as possible, ideally within a day of the transfer into the
error account. Failure to liquidate these trades promptly
may place the broker/dealer at risk, since realized and
unrealized losses in the account affect the firm's net
capital.
Cantrell notes that the NASD has not cited any rule that defines
an error account and asserts that the NASD's description "is the
first and only definition of an error account" that he has seen.
Where an issue involves an NASD panel's collective experience and
its knowledge of trade practice in the securities industry, we
7/ Cantrell asserts that the NASD has attempted "to create
Rules [sic] and impose sanctions 'ex post facto'." The Ex
Post Facto Clause of the United States Constitution
generally prohibits laws that retroactively make a
previously innocent action criminal or increase the penalty
for a crime. Calder v. Bull, 3 U.S. 386, 390 (1798). Such
prohibitions are not applicable to the issues in this
proceeding.
Cantrell also characterizes the issue here as whether he
failed to report the Firm's net capital "based on standards,
rules, or guidelines known to me, or which should have been
known to me." We have considered that argument here.
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give substantial weight to the determination of that issue by the
panel. 8/ The NASD's description of an error account is,
moreover, consistent with other discussions of these
accounts. 9/
Cantrell was aware that an error account was a "place to
liquidate a DK trade." 10/ We believe that Cantrell ignored
several indications that the Oxford Account was not functioning
as an error account. Unlike a typical error account, the Firm
amassed positions in the Oxford Account, held those positions for
a period of time, and then sold out the positions in a series of
trades. Cantrell, moreover, was aware of the activity in the
Oxford Account and that the volume of transactions in the account
was high. According to Cantrell, he advised Everett Scoville
Walker, CWS's president, that there was a large volume of
transactions and that customers were rejecting many trades as
unauthorized. He also recognized that CWS would be at risk for
these transactions until Oxford liquidated the trades.
Although Cantrell claims that he could not discern that the
Oxford Account was functioning as an investment account, the
Firm's clearing broker noted that the Oxford Account showed "a
pattern of customer buy transactions . . . being cancelled for
'non-payment' and . . . being re-billed to other customers." The
Firm was at risk with respect to those positions. We have
previously held that, where trades were placed in an "error
account" in order to permit their subsequent sale, that account
was, in fact, a proprietary account chargeable to the broker-
dealer for purposes of the net capital rule. 11/
Cantrell also argues that the Oxford Account did not
constitute CWS' investment account because, he asserts, Oxford,
8/ See J.V. Ace & Company, Inc., 50 S.E.C. 461, 465-466 (1991);
Hamilton Bohner, Inc., 50 S.E.C. 125, 130 (1989).
9/ John Gordon Simek, 50 S.E.C. 152, 154-155 (1989) (operation
of error account under New York Stock Exchange Rules);
Merrill Lynch Futures, Inc. v. Kelly, 585 F. Supp. 1245,
1249-1250 (S.D.N.Y. 1984) (commodity futures error account).
10/ A "DK trade" is a trade that the customer or the contra-
party "does not know." DK trades can occur, for example,
when the purchase and sell orders do not agree as to price
or number of shares or, as was apparently the case in some
instances here, the customer asserts that the trade was not
authorized. John Gordon Simek, 50 S.E.C. at 154-155. See
also Securities Exchange Act Rel. No. 27543 (December 15,
1989), 45 SEC Docket 197, 198 n. 16.
11/ Carrol P. Tieg, 46 S.E.C. 615, 618 (1976).
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not CWS, controlled the Oxford Account. Cantrell asserts that
clearing brokers, not introducing brokers, determine whether
particular trades are placed in an error account and when those
trades will be liquidated. Cantrell further asserts that the
Oxford Account functioned in this manner. These assertions,
however, appear to be based primarily on Cantrell's own
opinions. 12/
Cantrell admits that he never discussed the activity in the
Oxford Account with Oxford, and did not know Oxford's procedures
for the operation of an error account, generally, or the Oxford
Account, in particular. Cantrell's contentions, moreover, are
contradicted by a memorandum, dated December 20, 1994, submitted
by Oxford to the NASD ("Oxford Memorandum"). The Oxford
Memorandum states, in relevant part:
[a] Correspondent may request his customer [sic] purchase or
sale be canceled and placed in his error account.
Simultaneously with such request, the error account position
should be liquidated by (1) replacing the transaction with
the correct client or (2) liquidated to the street.
In the case of Cartwright & Walker a pattern of customer buy
transactions were being canceled for "non-payment" and were
being rebilled to other customers. 13/
The NASD also noted that, "on the basis of [its] industry
experience, . . . it is the introducing firm, and not the
clearing firm, which is responsible for 'correcting' erroneous
trades in an error account." We conclude that CWS was
responsible for the activity in the Oxford Account.
We agree with the NASD that the Oxford Account served as an
investment account for the Firm. It is clear that CWS effected
12/ Cantrell testified that he asked individuals who worked at
"a couple" of clearing firms about "why they don't liquidate
immediately," and those individuals gave him certain
business reasons why a trade might not be immediately
liquidated from an error account. Cantrell admitted that
his questions about error accounts were general, and that he
did not ask about this particular pattern of transactions.
It is also not clear at what point Cantrell had these
conversations.
13/ Oxford further reported that it subsequently restricted CWS'
customer accounts that failed to pay. No representative of
Oxford appeared at the District Committee hearing. However,
counsel for the NASD represented that the author of the
Oxford Memorandum was available by telephone for the
hearing. Cantrell did not request to have Oxford contacted.
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far more than ten transactions for its own account during July
and August 1994. We accordingly conclude that CWS was a dealer
that improperly failed to maintain net capital of at least
$100,000 pursuant to Rule 15c3-1(a)(2)(iii).
As FINOP for a $5,000 broker-dealer, Cantrell knew, or
should have known, that the Firm was not allowed to effect more
than ten transactions in one year on its own behalf. 14/ It
is undisputed that approximately 42 transactions were entered in
July 1994, and approximately 159 transactions in August 1994.
These transactions were held for a period of time. Cantrell
limited his examination of the Oxford Account to a determination
of the account's balance. 15/
We conclude that Cantrell, as CWS' FINOP, failed properly to
recognize that the nature and level of activity in the Oxford
Account made CWS a "dealer" required to maintain $100,000 in net
capital under our net capital rule. We accordingly sustain the
NASD's findings that Cantrell violated Article III, Section 1 of
the Rules.
IV.
By permitting CWS to operate with substantial net capital
deficiencies, Cantrell deprived CWS' customers of the protection
afforded them by the net capital requirements and subjected them
to undue risk. Under the circumstances, the sanctions imposed by
the NASD are neither excessive nor oppressive.
An appropriate order will issue. 16/
By the Commission (Chairman LEVITT and Commissioners
WALLMAN, JOHNSON, and HUNT).
14/ Cantrell complains that the NASD did not advise him to
monitor the Oxford Account to determine whether it became an
investment account. However, a securities professional
cannot shift his responsibility for compliance with
applicable requirements to a regulatory authority. See,
e.g., W.N. Whelen & Co., Inc., 50 S.E.C. 282, 284 (1990);
Melvin Y. Zucker, 46 S.E.C. 731, 733 (1976).
15/ Cantrell stated that, as far as he knew, CWS had no
intention of owning stock in the Oxford Account. However,
he admittedly conducted no examination "to see how long the
transactions stayed in the account."
16/ All of the arguments advanced have been considered. They
are rejected or sustained to the extent that they are
inconsistent or in accord with the views expressed herein.
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Jonathan G. Katz
Secretary
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No.
Admin. Proc. File No. 3-9023
---------------------------------------------------
:
In the Matter of the Application of :
:
WILLIAM K. CANTRELL :
2250 Cove Avenue :
Los Angeles, California 90039 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
:
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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 William K.
Cantrell, be, and it hereby is, sustained.
By the Commission.
Jonathan G. Katz
Secretary