==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37820 / October 15, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8981 -------------------------------- : In The Matter of : ORDER MAKING FINDINGS, IMPOSING : REMEDIAL SANCTIONS AND ISSUING FLAGSHIP SECURITIES, INC., : CEASE-AND-DESIST ORDERS AGAINST DENNIS G. MILEWITZ and : RESPONDENTS FLAGSHIP NOREEN M. BARRINGTON, : SECURITIES, : INC., DENNIS G. MILEWITZ AND : Respondents. : : ------------------------------- I. On April 4, 1996, the Securities and Exchange Commission ("Commission") issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings and Notice of Hearing Pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") ("Order Instituting Proceedings") against Respondents Flagship Securities, Inc. ("FSI"), Dennis G. Milewitz ("Milewitz") and Noreen M. Barrington ("Barrington") (collectively, the "Respondents"), to determine whether the allegations contained in the Order Instituting Proceedings were true, what remedial actions and other sanctions, if any, were appropriate in the public interest, and whether cease-and-desist orders should issue against Respondents. Respondents FSI, Milewitz, and Barrington have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the allegations contained in the Order Instituting Proceedings or the findings contained in the Order Making Findings, Imposing Remedial Sanctions and Issuing Cease- and-Desist Orders Against Respondents Flagship Securities, Inc., Dennis G. Milewitz and Noreen M. Barrington ("Order"), except as to the jurisdiction of the Commission, which is admitted, FSI, Milewitz and Barrington, by their Offers, consent to the entry of the findings and remedial and other sanctions and cease-and- desist orders set forth below. II. On the basis of the Order Instituting Proceedings, this Order and the Offers submitted by FSI, Milewitz and Barrington, the Commission makes the following findings:-[1]- A. FSI has been registered with the Commission since December 1, 1975 as a broker-dealer. B. Milewitz, age 55, has been a 50% owner, vice-president, treasurer, financial operations officer and a registered representative of FSI throughout the period of time in which FSI has operated as a registered broker-dealer. C. Barrington, age 29, has been associated with FSI since July 1986. She is responsible for performing all of FSI's back office functions including those functions related to FSI's loan and customer accounts, special reserve bank account and FSI's recordkeeping requirements. She has no ownership interest in FSI, and is neither qualified to act as FSI's financial operations officer nor is she a registered representative of FSI. D. On May 31, 1994, FSI willfully violated, and Milewitz and Barrington willfully aided and abetted and caused FSI's violation of, Section 8(c) of the Exchange Act and Rule 8c-1 promulgated thereunder in that FSI lent or arranged for lending securities carried for the account of any customers without the written consent of such customers or in contravention of such rules and regulations as the Commission shall prescribe for the protection of investors. For example, FSI, Milewitz and Barrington permitted securities carried for the accounts of customers to be hypothecated and subject to a lien or claim by a third party, for a sum which exceeded the aggregate indebtedness of all customers in respect of securities carried for their accounts. E. On May 31, 1994, FSI willfully violated, and Milewitz and Barrington willfully aided and abetted and caused FSI's violation of, Section 15(c)(2) of the Exchange Act and Rule ---------FOOTNOTES---------- -[1]- Any findings contained in this Order are made pursuant to the Offers submitted by FSI, Milewitz and Barrington and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 2====== 15c2-1 promulgated thereunder in that FSI made use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security otherwise than on a national securities exchange of which it is a member, in connection with which FSI engaged in a fraudulent, deceptive, or manipulative act or practice, or made any fictitious quotation. For example, FSI, Milewitz and Barrington permitted securities carried for the accounts of customers to be hypothecated and subject to a lien or claim by a third party, for a sum which exceeded the aggregate indebtedness of all customers in respect of securities carried for their accounts. F. During the period from April 6, 1994 through July 31, 1994, FSI willfully violated, and Milewitz and Barrington willfully aided and abetted and/or caused, as described in paragraphs II.F.1. through II.F.5. below, FSI's violations of, Section 15(c)(3) and Rule 15c3-3 promulgated thereunder in that FSI made use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security in contravention of such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of brokers or dealers, including, but not limited to, the acceptance of custody and use of customers' deposits or credit balances, the maintenance of reserves with respect to customers' deposits or credit balances, and minimum financial responsibility requirements for all brokers and dealers. For example, FSI: 1. willfully violated, and Barrington, and, in one instance, Milewitz, willfully aided and abetted and caused FSI's violations of, Section 15(c)(3) of the Exchange Act and Rule 15c3-3(b)(1) promulgated thereunder by allowing and pledging fully paid for customers' securities as collateral for FSI's loan account; 2. willfully violated, and Milewitz willfully aided and abetted and caused FSI's violations of, Section 15(c)(3) of the Exchange Act and Rule 15c3-3(d) promulgated thereunder by failing to make an excess-deficit listing; 3. willfully violated, and Barrington, and, in one instance, Milewitz, willfully aided and abetted and caused FSI's violations of, Section 15(c)(3) of the Exchange Act and Rule 15c3-3(d)(1) ==========================================START OF PAGE 3====== promulgated thereunder by failing to release as collateral for FSI's loan account, and by failing to obtain possession or control over, fully paid for customers' securities within the required time; 4. willfully violated, and Milewitz willfully aided and abetted and caused FSI's violations of, Section 15(c)(3) of the Exchange Act and Rule 15c3-3(d)(4) promulgated thereunder by failing to prepare and maintain a current and detailed description of the procedures which FSI utilized to comply with the possession or control requirements; and 5. willfully violated, and Milewitz and Barrington caused FSI's violation of, Section 15(c)(3) of the Exchange Act and Rule 15c3-3(e) promulgated thereunder by failing to properly compute, and failing to detect errors in, FSI's reserve formula, thereby causing a deficiency in FSI's special reserve bank account for the exclusive benefit of FSI's customers in May 1994. G. During the period from April 6, 1994 through July 31, 1994, FSI willfully violated, and Milewitz and Barrington willfully aided and abetted and caused FSI's violations of, Section 17(a) of the Exchange Act and Rule 17a-3(a)(5) promulgated thereunder in that FSI failed to make and keep for prescribed periods such records as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors. For example, FSI willfully violated, and Milewitz and Barrington willfully aided and abetted and caused FSI's violations of, Section 17(a) of the Exchange Act and Rule 17a-3(a)(5) promulgated thereunder by failing to maintain securities position records on a settlement date basis. H. During the period from April 6, 1994 through July 31, 1994, Milewitz was Barrington's direct supervisor and responsible for ensuring that she and FSI complied with the customer protection rules, and, specifically, the possession or control rules. Further, Barrington informed him that fully paid for customers' securities had been pledged to, and not properly released from, the Margin Account. In addition, in August 1993, the National Association of Securities Dealers, Inc. told Milewitz that fully paid for customers' securities were in the Margin Account. However, Milewitz failed reasonably to supervise Barrington, who was subject to his supervision, with a view to preventing Barrington's aiding and abetting violations of Section 15(c)(3) of the Exchange Act, and Rules 15c3-3(b)(1) and ==========================================START OF PAGE 4====== 15c3-3(d)(1) promulgated thereunder, within the meaning of Section 15(b)(4)(E) of the Exchange Act by, for example: 1. failing to take action to monitor whether Barrington was ensuring that FSI was properly segregating fully paid for customers' securities; 2. failing to take action to monitor whether Barrington was ensuring that FSI correctly determined its possession or control requirements; and 3. failing to implement procedures reasonably designed to prevent and detect Barrington's aiding and abetting violations of Section 15(c)(3) of the Exchange Act, and Rules 15c3-3(b)(1) and 15c3- 3(d)(1) promulgated thereunder. III. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers, impose the remedial and other sanctions, issue cease-and-desist orders and order compliance with Respondents' undertakings, as specified in the Offers. ACCORDINGLY, IT IS HEREBY ORDERED, that: A. FSI be, and hereby is, censured; B. FSI cease and desist, pursuant to Section 21C of the Exchange Act, from committing or causing any violation and any future violation of Sections 8(c), 15(c)(2), 15(c)(3) and 17(a) of the Exchange Act, and Rules 8c-1, 15c2-1, 15c3-3(b)(1), 15c3-3(d), 15c3-3(d)(1), 15c3- 3(d)(4), 15c3-3(e) and 17a-3(a)(5) promulgated thereunder; C. FSI pay a civil money penalty, in the amount of $50,000, to the United States Treasury. FSI shall pay this civil money penalty in three installments. The first installment of $17,000 shall be made prior to the close of business on the third business day after the date of this Order. The second and third payments in the amount of $16,500 each, plus post-judgment interest from the date of this Order, shall be made twelve and twenty-four months after the date of this Order. All three payments shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the United States Securities and Exchange Commission; (c) delivered by certified mail to the Comptroller, ==========================================START OF PAGE 5====== Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (d) submitted under cover letter which identifies FSI as a Respondent in this proceeding, the file number of this proceeding, and the Commission's case number, a copy of which cover letter and money order or check shall be sent to Ellen N. Hersh, Assistant Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, New York 10048; D. FSI, prior to the close of business on the third business day after the date of this Order, pay disgorgement in the amount of $5,954 and reasonable interest from April 1994 to the date of this Order in the amount of $1,131.53, for a total amount of $7,085.53, to the United States Securities and Exchange Commission. Such payment shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the United States Securities and Exchange Commission; (c) delivered by certified mail to the Comptroller, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (d) submitted under cover letter which identifies FSI as a Respondent in this proceeding, the file number of this proceeding, and the Commission's case number, a copy of which cover letter and money order or check shall be sent to Ellen N. Hersh, Assistant Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, ==========================================START OF PAGE 6====== New York 10048. E. FSI shall comply with its undertakings, as follows: 1. Effective immediately, FSI at all times shall employ a registered financial operations principal, who will be in charge of FSI's back office operations, knowledgeable in all aspects of broker-dealer operations, including, but not limited to, the anti-hypothecation, customer protection and books and records rules promulgated under the Exchange Act, and not unacceptable to the staff of the Commission's Northeast Regional Office; 2. FSI shall employ an independent consultant, knowledgeable in all aspects of broker-dealer operations, including, but not limited to, the anti-hypothecation, customer protection and books and records rules promulgated under the Exchange Act, and not unacceptable to the staff of the Commission's Northeast Regional Office, to review and report upon FSI's internal controls, policies, practices, and procedures designed to achieve compliance with the above-referenced rules. Such consultant will also recommend any revised or additional internal controls, policies, practices, or procedures which the consultant believes necessary to provide reasonable assurance that FSI will be in compliance with such requirements; 3. FSI shall provide the consultant with any and all documents pertaining to FSI's brokerage operations, and permit the consultant to meet with any officer, agent, and employee of FSI; 4. No later than three months from the date of the entry of this Order, the consultant will submit in writing to FSI, with a copy to the Commission's Northeast Regional Office, his or her report detailing his or her findings regarding FSI's internal controls, policies, practices, and procedures which relate to compliance with the above-referenced rules, and his or her recommendations, if any, for revised or additional measures designed to achieve compliance with the provisions of Sections 8(c), 15(b), 15(c)(2), 15(c)(3) and 17(a) of the Exchange Act and the rules and regulations thereunder; 5. Upon good cause being shown, the staff of the Commission's Northeast Regional Office may grant ==========================================START OF PAGE 7====== the consultant such additional time as the staff deems necessary to submit his or her report regarding FSI's internal controls, policies, practices, and procedures, and his or her recommendations, if any, for revised or additional measures designed to achieve compliance with the provisions of Sections 8(c), 15(b), 15(c)(2), 15(c)(3) and 17(a) of the Exchange Act and the rules and regulations thereunder; 6. FSI shall remedy any deficiencies in its internal controls, policies, practices, or procedures identified by the consultant and adopt, implement, and maintain any such revised or additional measures recommended by the consultant, or alternatives recommended by FSI and acceptable to the independent consultant or the staff of the Northeast Regional Office; 7. No later than one month from the date of the issuance of the consultant's report, FSI, through an officer, shall file an affidavit with the Commission's Northeast Regional Office stating that FSI has remedied any deficiencies in its internal controls, policies, practices, and procedures identified by the consultant (stating the means by which such remedy has been accomplished), and stating further that FSI has adopted, implemented, and will maintain any revised or additional internal controls, policies, practices, or procedures recommended in the consultant's report, or the alternatives acceptable to the independent consultant or the staff of the Northeast Regional Office. Upon good cause being shown, the staff of the Commission's Northeast Regional Office may grant FSI such additional time as the staff deems necessary to submit an affidavit; 8. No later than six months from the date of this affidavit described above, FSI shall employ an independent auditor, who is not unacceptable to the staff of the Commission's Northeast Regional Office, knowledgeable in all aspects of broker- dealer operations, including, but not limited to, the anti-hypothecation, customer protection and books and records rules promulgated under the Exchange Act, to review and report upon FSI's compliance with the consultant's report. Such independent auditor shall report his or her findings to the staff of the Commission's Northeast Regional Office and FSI within three ==========================================START OF PAGE 8====== months of its engagement to conduct such audit. Upon good cause being shown, the staff of the Commission's Northeast Regional Office may grant the independent auditor such additional time as the staff deems necessary to submit his or her report; and 9. The president of FSI, Henry S. Veit, and any of his successors, be specifically charged with monitoring, and ultimate responsibility for, FSI's back office operations and FSI's compliance with the anti-hypothecation, customer protection and books and records rules promulgated under the Exchange Act. IT IS FURTHER ORDERED, that: A. Milewitz be, and hereby is, censured; B. Milewitz cease and desist, pursuant to Section 21C of the Exchange Act, from causing any violation and any future violation of Sections 8(c), 15(c)(2), 15(c)(3) and 17(a) of the Exchange Act, and Rules 8c-1, 15c2-1, 15c3-3(b)(1), 15c3-3(d), 15c3-3(d)(1), 15c3-3(d)(4), 15c3-3(e) and 17a-3(a)(5) promulgated thereunder; C. Milewitz be, and hereby is, suspended from association with any broker, dealer, investment company, investment adviser or municipal securities dealer for a period of six months beginning on the second Monday after the entry of this Order; D. Milewitz pay a civil money penalty, in the amount of $25,000, to the United States Treasury. Milewitz shall pay this civil money penalty in three installments. The first installment of $9,000 shall be made prior to the close of business on the third business day after the date of this Order. The second and third payments, in the amount of $8,000 each, plus post-judgment interest from the date of this Order, shall be made twelve and twenty-four months after the date of this Order. All three payments shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the United States Securities and Exchange Commission; (c) delivered by certified mail to the Comptroller, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (d) submitted under cover letter which identifies Milewitz as a Respondent in this proceeding, the file number of this proceeding, and the Commission's case number, a copy of which cover letter and money order or check ==========================================START OF PAGE 9====== shall be sent to Ellen N. Hersh, Assistant Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, New York 10048; E. Milewitz comply with his undertaking to deliver an affidavit to the staff of the Northeast Regional Office of the Commission within thirty days after the end of the six month suspension described above, stating that he has complied with the terms of his suspension; and F. Effective immediately, Milewitz be, and hereby is, barred from acting in a supervisory capacity with any broker, dealer, investment company, investment adviser or municipal securities dealer. ==========================================START OF PAGE 10====== IT IS FURTHER ORDERED, that: A. Barrington be, and hereby is, censured; B. Barrington cease and desist, pursuant to Section 21C of the Exchange Act, from causing any violation and any future violation of Sections 8(c), 15(c)(2), 15(c)(3) and 17(a) of the Exchange Act, and Rules 8c-1, 15c2-1, 15c3-3(b)(1), 15c3-3(d)(1), 15c3-3(e) and 17a-3(a)(5) promulgated thereunder; C. Barrington be, and hereby is, suspended from association with any broker, dealer, investment company, investment adviser or municipal securities dealer for a period of thirty days beginning on the second Monday after the entry of this Order; and D. Barrington comply with her undertaking to deliver an affidavit to the staff of the Northeast Regional Office of the Commission within ten days after the end of the thirty day suspension described above, stating that she has complied with the terms of her suspension. By the Commission. Jonathan G. Katz Secretary ==========================================START OF PAGE 11======