UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7385 \ January 30, 1997 Securities Exchange Act of 1934 Release No. 38219 \ January 30, 1997 ADMINISTRATIVE PROCEEDING File No. 3-8955 ______________________________ : In the Matter of: : ORDER MAKING FINDINGS : AND IMPOSING REMEDIAL DAVID L. ARNOLD, : SANCTIONS : Respondent : _____________________________: I. In these proceedings ordered pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 (Exchange Act), David L. Arnold (Arnold) has submitted an Offer of Settlement which the Commission has determined to accept.-[1]- Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except for paragraphs II.1 and II.2, which are admitted, Arnold consents to the findings and sanctions contained in this Order. II. On the basis of the Order Instituting Public Proceedings and Arnold's Offer of Settlement, the Commission finds-[2]- that: 1. Arnold, age 46, currently a resident of Birmingham, Alabama, has been a registered representative since approximately 1987. From approximately January 1987 until October 1988, Arnold ---------FOOTNOTES---------- -[1]- The Order instituting proceedings was issued on February 22, 1996. -[2]- The findings contained herein are made pursuant to Arnold's offer of settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 2====== was associated with PaineWebber, Inc. (PaineWebber), a broker- dealer registered with the Commission. After leaving PaineWebber, Arnold worked for another broker-dealer registered with the Commission, from October 1988 until August 1990. 2. On April 24, 1992, the National Association of Securities Dealers (NASD) censured Arnold, fined him $5,000 and suspended him for six months from association with any member of the NASD for conduct while employed at PaineWebber. 3. From November 1987 through March 1988, Arnold had knowledge that another registered representative associated with PaineWebber was engaging in a scheme to defraud customers who held two trust accounts at PaineWebber by engaging in the following fraudulent practices: a. purchasing stock and index options through PaineWebber's block desk in New York without allocating the orders at the time of purchase. b. delaying allocating the index options to a specific account until he determined whether the prices of the stock or index options rose or fell. c. if the price of the stock or index options fell after the purchases through the block desk, the registered representative allocated the stock or index options to one of the two trust accounts. d. if the prices of the stock or index options rose after the purchases through the block desk, the registered representative allocated the stock or index options to his personal brokerage account, to that of another registered representative, or to Arnold's account. e. shortly after allocating the profitable stock or index options to his account, to that of the other registered representative or to Arnold's account, the first registered representative sold the stock or index options. 4. New York Stock Exchange Rule 431(9) prohibits member organizations from permitting customers to effect transactions in cash accounts where the cost of the security is met by the sale of the same security. Accordingly, PaineWebber required the registered representative to pay for the options before he could receive the money from the profitable trades that he allocated to his own account. 5. With knowledge that the registered representative needed to pay for these trades before he could obtain the profits, and in order to facilitate the transactions by the registered representative, Arnold arranged for loans to the ==========================================START OF PAGE 3====== registered representative and to himself from other customers of PaineWebber from January 6, 1988 until March 3, 1988. 6. From November 1987 through March 1988, Arnold willfully aided and abetted and caused the registered representative's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that Arnold was aware that his role was part of an overall activity involving violative conduct, and he provided knowing and substantial assistance with respect to the registered representative's violations by obtaining loans to facilitate the purchases of index options by the registered representative. Arnold knew that the registered representative intended to allocate profitable trades to his own account and to allocate losing trades to the two trust accounts, in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. 7. The Commission has reviewed Arnold's sworn financial statement and other evidence provided by Arnold and, provided that Arnold has submitted a true, accurate and complete sworn statement of his financial condition, including his assets, liabilities, income and expenses, has determined that Arnold does not have the financial ability to pay disgorgement of $8,962.82, representing the profits he received from the trades allocated to his account by the registered representative. III. In view of the foregoing, it is in the public interest to impose the sanction specified in the Offer of Settlement. Accordingly, IT IS ORDERED: 1. That Arnold cease and desist from committing or causing any violations and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and 2. That Arnold pay disgorgement of $8,962.82, plus interest at the legal rate, dating from the date of his violative conduct to the date of the Order, provided however, that the payment of such disgorgement and interest is waived based upon Arnold's current demonstrated financial inability to pay, as established through Arnold's sworn statement of financial condition, dated April 19, 1996. 3. The determination to waive payment of disgorgement and interest thereon is contingent upon the accuracy and completeness of the financial information submitted by Arnold. If at any time following the entry of the Order, the Division of Enforcement obtains information indicating that Arnold's representations to ==========================================START OF PAGE 4====== the Commission concerning his assets, income, liabilities or net worth were fraudulent, misleading, inaccurate or incomplete in any material respect as of the time of such representations, the Division of Enforcement may, at its sole discretion and without prior notice, petition the Administrative Law Judge for an order requiring Arnold to pay disgorgement and interest. In any such petition, the Division of Enforcement may move the Administrative Law Judge to consider all available remedies, including, but not limited to, ordering Arnold to pay funds or assets. Arnold may not, by way of defense to such petition, contest the allegations of the Order, or the findings contained therein, or assert that disgorgement or interest should not be ordered. By the Commission. Jonathan G. Katz Secretary