SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37092 / April 10, 1996 Admin. Proc. File No. 3-8743 _________________________________________________ : In the Matter of the Application of : : MAYER A. AMSEL : 1941 New York Avenue : Brooklyn, New York : : 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 Violations of Rules and Regulations Parking Stock in Inactive and Fictitious Accounts Unauthorized Transactions Creation of False Records Obtaining Improper Extensions of Credit Improper Trading to Detriment of Employer and Customers Failure to Comply with Recordkeeping Requirements Where trader for member firm of registered securities association engaged in scheme to park stock from his trading account in inactive and fictitious customer accounts and, in connection with that scheme, created false records, effected unauthorized transactions, and obtained improper extensions of credit; and where trader engaged in trading that improperly diverted profits from his firm and disadvantaged customers, and, in connection therewith, failed to comply with recordkeeping requirements, held, association's findings of violation and the sanctions it imposed sustained. ==========================================START OF PAGE 2====== APPEARANCES: Jeffrey L. Brown, Lionel E. Pashkoff, and Judith Z. Katz, of Rosenman & Colin, for Mayer A. Amsel. T. Grant Callery and Carla J. Carloni, for the National Association of Securities Dealers, Inc. Appeal filed: July 3, 1995 Briefing completed: September 11, 1995 I. Mayer A. Amsel, who was the principal trader and a salesman for A.T. Brod & Co., Inc. ("the firm"), a member of the National Association of Securities Dealers, Inc. ("NASD" or "Associa- tion"), appeals from NASD disciplinary action. The NASD found that Amsel violated Article III, Sections 1, 18, and 21 of its Rules of Fair Practice, 1/ and Regulation T issued by the Board of Governors of the Federal Reserve System, in connection with a scheme pursuant to which Amsel parked stock from the firm's trading account in fictitious and inactive customer accounts. The NASD further found that Amsel committed additional violations of Article III, Sections 1 and 21 in connection with a pattern of trading in which Amsel interposed certain favored customer accounts between the firm and other customers and the best available market. Finally, the NASD found that Amsel violated Article III, Section 1 by endorsing and negotiating checks payable to the favored accounts without prior written authorization. The Association censured Amsel, barred him in all capacities, and fined him $100,000. 2/ Our findings are based on an independent review of the record. II. Amsel admits all of the NASD's charges with respect to the scheme involving the parking of stock from the firm's trading account. From May through August 1990, he opened seven customer accounts at the firm (the "fictitious accounts") four of which were opened in the names of fictitious persons and three for real persons who were unaware that accounts had been opened in their 1/ Section 1 requires adherence to high standards of commercial honor and just and equitable principles of trade; Section 18 prohibits any deceptive or fraudulent device or contrivance in securities transactions; and Section 21 mandates compliance with applicable rules and regulations governing recordkeeping. 2/ The NASD also assessed costs. ==========================================START OF PAGE 3====== names. Amsel used his brother's address for all of the accounts. He "purchased" some $126,000 worth of stock for these accounts from the firm's trading account, and all of that stock was subsequently sold out to pay for the purported purchases. In addition, in August 1990, Amsel effected two unauthorized purchases of stock from the firm's trading account for an inactive customer account. 3/ Amsel insists that the "ultimate objective" of his parking scheme was to some extent altruistic: that he was parking stock in an effort to bolster the firm's capital position, thereby keeping the firm in business and incidentally preserving his job. The NASD did not credit these assertions, and neither do we. A majority of the transactions at issue occurred in July and August 1990. Yet, as of June 30, 1990, the firm had a cushion of $212,000 of excess net capital and, as of July 31, excess net capital of $164,000. The record reveals a far more plausible explanation for Amsel's actions. Amsel ran the firm's principal trading account and was entitled to 50% of the profits. However, he was under pressure from Michael Brod, then the firm's president, to keep trading positions as flat as possible. As Amsel conceded, Brod refused to pay him his share of the trading profits while there were long positions in Amsel's trading account. According to Brod, Amsel would continually complain that the firm owed him money, to which Brod would reply: "We don't owe you any money because of your long stock. You want to get paid come the end of the month, you should be in all cash in your trading account and no positions. I'm not going to pay you on a mark-to- market basis." 3/ These two trades were the only unauthorized transactions for an actual customer covered by the NASD's complaint. However, Amsel freely admitted that these trades were only a small part of a much broader range of misconduct. According to Amsel, he began to park stock from the firm's trading account in inactive customer accounts around the end of March 1990, and started using the fictitious accounts for that purpose only when he ran out of inactive accounts that met his needs. The inactive account covered by the NASD's charges was one that he had previously overlooked. Amsel stated that, in all, he used about a dozen inactive accounts to park stock. When customers complained about unauthorized transactions in their accounts, he told them that an error had been made and the transactions would be cancelled. ==========================================START OF PAGE 4====== In February 1990, Amsel returned to the firm after a two- week absence to find two large new securities positions in his trading account, blocks of 50,000 and 25,000 shares. Pressed by Michael Brod to liquidate these positions, he took extreme measures to move stock out of the trading account, not only the blocks in question but other securities as well. Amsel clearly violated the NASD's rules prohibiting fraudulent and unethical conduct. In addition, he prepared false new account forms and false purchase and sale orders for the fictitious accounts, and entered purchase orders for those accounts knowing that no payment would be made and that the purchased securities would ultimately have to be sold out. Thus he was also responsible for violations of recordkeeping requirements and Regulation T. 4/ We accordingly sustain the NASD's findings of violation. III. The NASD's charge of interpositioning relates to Amsel's trading in the common stock of Frontier Industries Inc. of Utah. David Yeaman, a longtime customer of Amsel, had acquired some 800,000 shares of Frontier stock as the result of a merger between Frontier and one of Yeaman's shell companies 5/ that enabled Frontier to go public. Yeaman sold more than 500,000 shares of his Frontier holdings through Amsel, a good portion of them while Amsel was employed by the firm. Amsel was the firm's trader in Frontier. The NASD found that, in connection with that trading, he improperly accorded favored treatment to four customer accounts (the "favored accounts"). Three of those accounts were controlled by Amsel's brother David; 6/ the fourth belonged to a friend of Amsel, Jane Fredericks. We agree with the NASD that Amsel engaged in improper conduct. However, while the NASD used the term "interpositioning" to characterize Amsel's activity, we consider that his actions may more accurately be described as trading 4/ Regulation T (Section 220.8) prohibits a broker-dealer from selling securities to a customer in a cash account unless (1) there are sufficient funds in the account to pay for the securities or (ii) the broker accepts in good faith the customer's agreement to make full cash payment promptly. 5/ According to Amsel, Yeaman was in the business of creating such shells. 6/ One of the accounts was carried in the name David Amsel, another in the name Eli Amsel (Eli was David's middle name), and the third in the name Rhonda Toppston, the maiden name of David's wife. ==========================================START OF PAGE 5====== activity that improperly diverted profits to the favored accounts at the expense of the firm. The following instances illustrate the manner in which Amsel's trading operated to accomplish that result. 1. On June 19, 1989, a favored account sold 6,000 shares of Frontier to the firm at $.906 per share. On June 20, the same account bought 6,000 shares of the stock from Yeaman at $.375. 2. On June 29, 1989, a favored account bought 5,000 shares of Frontier from Yeaman at $.375 per share. On June 30, the same account sold 5,000 shares to the firm at $1.00 while another favored account bought 3,100 shares from Yeaman at $.375. 3. On July 21, 1989, a favored account bought 1,000 Frontier shares from Yeaman at $.50 per share, and sold 1,500 shares to the firm at $1.125. 4. On July 31, 1989, a favored account sold 4,000 shares of Frontier to the firm at $1.188 per share. On August 1, the same account bought 5,000 shares from Yeaman at $.50. 5. On April 3, 1990, a favored account bought 5,000 shares of Frontier from the firm at $.625 per share. On April 4, the same account sold 5,000 shares of Frontier to the firm at $1.125. 6. On April 24, 1990, a favored account sold the firm 7,150 shares of Frontier at $1.40 per share. On April 25, the same account purchased 7,200 shares from the firm at $.625. 7. On May 11, 1990, a favored account bought 950 shares of Frontier from Yeaman at $.75 per share and sold 1,000 shares to the firm at $1.50. 8. On May 16, 1990, the firm sold 5,000 shares of Frontier to a favored account at $.781 per share. On May 17, the same account sold 5,000 shares to the firm at $1.40. We further conclude that, in some instances, Amsel improperly accorded the favored accounts preferential prices for Frontier stock that were denied to other customers of the firm. Thus, on April 3, 1990, the firm paid a customer $.50 per share for 5,000 shares of Frontier. On April 4, the firm paid a favored account $1.125 per share for the same amount of Frontier stock. On April 24, 1990, the firm paid a favored account $1.40 per share for 7,150 shares of Frontier. On April 25, a customer was paid only $.50 per share for 7,200 shares of that stock. 7/ 7/ Amsel argues that, in certain Frontier transactions, the prices accorded non-favored accounts show that there was no (continued...) ==========================================START OF PAGE 6====== Amsel argues that the firm was aware of his trading in Frontier stock. He points to the fact that he introduced Yeaman to Michael Brod in November 1988 at the start of the firm's activity in Frontier, and that, at that time, Brod negotiated the purchase price of a block of Frontier stock. However, the fact that Brod made the firm's initial purchase of Frontier from Yeaman does not establish that he was aware of or condoned Amsel's subsequent trading in the stock. Indeed, the record does not show any such awareness. On the contrary, it appears that Brod was inexperienced in over-the-counter trading and that, aside from pressure on Amsel to keep his trading account as flat as possible, Brod gave Amsel carte blanche in carrying out his trading functions. Amsel further argues that the firm was not harmed by his trading. He points out that Michael Brod did not want him to hold securities positions overnight, and asserts that he accordingly arranged for the favored accounts to buy Frontier stock when it was offered by Yeaman, typically late in the day. This contention is wholly unpersuasive. Amsel admitted that Yeaman called him "practically every day" seeking to sell stock. He does not explain why, when the firm made a purchase of Frontier from the favored accounts, it could not have obtained the stock from Yeaman at a much lower price. Nor does he offer any explanation for the firm's sales of Frontier to the favored accounts at prices much lower than the prices those accounts were contemporaneously charging the firm, and substantially lower than the prices the firm was charging others. We think it clear that Amsel improperly disadvantaged the firm and other customers for the benefit of the favored accounts. 8/ We further note that, in connection with his trading in Frontier, Amsel admitted that he did not consistently time-stamp order 7/(...continued) pattern of discrimination. However, the transactions he cites do not excuse the unfair trading set forth above. 8/ Contrary to the NASD's determination, we are unable to conclude that Amsel treated Yeaman unfairly. The record indicates that Amsel and Yeaman worked together in close conjunction. Indeed, Yeaman, "a sophisticated businessman," filed an affidavit stating that he was "very pleased" with the prices that Amsel obtained for his stock. Amsel conceded that he was giving the favored accounts "the spread," i.e., treating them as market makers rather than the firm. Thus Yeaman was presumably getting the same price for his stock from the favored accounts that he would ordinarily have received from the firm. ==========================================START OF PAGE 7====== tickets. 9/ Moreover, in 122 customer transactions, he failed to note on such tickets, as required, the names of other dealers that were contacted and the quotations they provided. 10/ We accordingly sustain the NASD's findings of violation in the foregoing respects. 11/ IV. As noted above, the NASD found that Amsel violated "high standards of commercial honor and just and equitable principles of trade" by endorsing and negotiating checks payable to the favored accounts. It is undisputed that, in each instance, Amsel was authorized to take these actions. Nevertheless, the NASD concluded that Amsel's failure to obtain his customers' prior written consent created an "appearance of impropriety" that contravened the standards in question. As we have often pointed out, disciplinary proceedings under Article III, Section 1 of the NASD's rules are ethical in nature; their concern is with the ethical implications of a respondent's conduct. 12/ We have found that Amsel engaged in a scheme that conferred unwarranted benefits on the favored accounts (presumably with their acquiescence if not complicity) to the detriment of the firm and other customers. It would be anomalous to conclude that Amsel was guilty of unethical conduct with respect to those accounts, particularly since they authorized his 9/ See Article III, Section 21(a) of the NASD's rules and Rule 17a-3(6) under Section 17(a) of the Securities Exchange Act. 10/ See Article III, Section 21(b)(ii) of the NASD's rules. 11/ We have repeatedly rejected the argument made by Amsel that Article III, Section 1 of the NASD's rules, which requires adherence to just and equitable principles of trade, is unconstitutionally vague. See, e.g., Conrad C. Lysiak, 51 S.E.C. 841, 846-847 (1993), aff'd, 47 F.3d 1175 (9th Cir. 1995) (unpublished opinion); Henry E. Vail, Securities Exchange Act Release No. 35872 (June 20, 1995), 59 SEC Docket 1805, 1809 n.12, appeal filed, No. 95-60502 (5th Cir.). 12/ See Timothy L. Burkes, 51 S.E.C. 356, 360 (1993), aff'd, 29 F.3d 630 (9th Cir. 1994). ==========================================START OF PAGE 8====== actions. 13/ We accordingly set aside the NASD's findings of violation in this regard. V. Amsel argues that the NASD's decision must be reversed because Dennis Marino, a member of the NASD's District Business Conduct Committee ("District") hearing panel in this matter, was biased against him. The basis for this claim may be summarized as follows. In 1993-1994, Amsel was principal trader for Greenway Capital Corporation, an NASD member firm. In 1993, both Greenway and Sherwood Securities, Inc., of which Marino is president and a trader, were making a market in the stock of Vertex Industries, Inc. In August 1993, National Financial Services, Inc., the clearing agent for both Greenway and Sherwood, changed its position and advised Greenway that Vertex was not marginable. National forced numerous Greenway customers to sell their Vertex stock, and most of it was purchased by Sherwood. Between October 1993 and February 1994, there was a precipitous drop in the price of Vertex, and Amsel became convinced that the stock had been the subject of a "bear raid" by Sherwood and other broker-dealers. During the ten months that elapsed between the close of the District hearing and the District decision, this Commission subpoenaed Amsel to testify about the trading in Vertex. At that time, Amsel assertedly testified concerning Sherwood's involvement in Vertex and the possibility of a "bear raid." Amsel's claims of bias are purely speculative. There is no evidence that Sherwood ever participated in a Vertex "bear raid" or that Marino was even aware of Amsel's testimony at the time of the District Committee's decision. Indeed, Amsel's testimony with respect to Vertex is not part of the record before us, and we have only Amsel's unsubstantiated assertion that Marino might have considered it damaging had he been aware of it. Under the circumstances, we are unable to discern, despite Amsel's urging, 13/ See Donald M. Bickerstaff, Securities Exchange Act Release No. 35607 (April 17, 1995), 59 SEC Docket 337, 342 ("If [the client] had in fact authorized Bickerstaff to sign [the client's] name on the two applications, there would have been no impropriety."). Compare, for example, Article III, Section 15(b) of the NASD's rules which expressly prohibits members and their registered representatives from exercising discretionary authority in a customer's account without prior written authorization. ==========================================START OF PAGE 9====== any "appearance of impropriety." Nor do we find a conflict of interest that Marino had "a duty to disclose." 14/ We further conclude that Amsel waived any objection he may have had to Marino's participation in the District Committee's decision. Although, as Amsel points out, he did not testify in this Commission's investigation of Vertex until after the District hearings had been completed, he clearly could have raised the matter with the District Committee before it issued its decision. 15/ As one court has stated, it is inappro- priate for a party to "suppress his misgivings while waiting anxiously to see whether the decision goes in his favor." 16/ In a similar vein, we have stated that "a respondent cannot be permitted to gamble on one course of action and, upon an unfavorable decision, to try another course of action." 17/ Finally, we reject Amsel's contention that Marino's participation on the hearing panel violated Article X, Section 1 of the NASD's Code of Procedure which prohibits a panel member from participating "in the determination of any matter substantially affecting his interest or the interests of any person in whom he is directly or indirectly interested." That stricture is wholly inapposite here. Sherwood and Marino had no involvement in the conduct at issue in this proceeding. They 14/ Contrary to Amsel's further claim, the fact that the District Committee did not credit his testimony and ruled against him on various matters does not demonstrate bias on the part of Marino. Amsel's request for discovery or a hearing "to determine the extent of Mr. Marino's conflict of interest" is denied. That request should have been made, if at all, to the District Committee. We also deny the NASD's request that we take official notice of our investigative records with respect to Amsel's participation in the trading of Vertex, and whether Amsel himself is a subject of the Vertex investigation. 15/ Cf. Stuart K. Patrick, 51 S.E.C. 419, 424 (1993), aff'd, 19 F.3d 66 (2d Cir.), cert. denied, 115 S.Ct. 54 (1994) ("Patrick had ample time to raise [the issue of the Board panel member's asserted conflict of interest] before the NYSE. He could have done so during the month between the hearing and the Board's March 5 decision, or prior to the Board's May 27, 1992 supplemental decision."). 16/ Marcus v. Director, 548 F.2d 1044, 1051 (D.C. Cir. 1976). 17/ David T. Fleischman, 43 S.E.C. 518, 522 (1967), quoted with approval in Gross v. SEC, 418 F.2d 103, 108 (2d Cir. 1969). ==========================================START OF PAGE 10====== were neither the victims of, nor participated in, Amsel's alleged wrongdoing. 18/ VI. Amsel argues that the sanctions assessed by the NASD are excessive. He asserts, among other things, that his stock- parking scheme was undertaken to protect the firm; that, aside from the brief four-month period covered by that scheme, his record in the securities business is unblemished; that the firm was not harmed by his trading in Frontier; that no customer suffered as a result of any of his actions; that he was never properly trained or supervised by the firm; and that he did not profit personally from his misconduct. He further complains that he was treated far more harshly than Michael Brod, 19/ and that the NASD has imposed more lenient sanctions in the past for more serious misconduct. Although we have not sustained all of the NASD's findings of violation, we do not believe that any reduction in sanctions is warranted. Parking stock to conceal a firm's true net capital position is serious misconduct. Thus, even assuming that Amsel acted solely for that purpose, it would hardly be a mitigative factor. However, contrary to Amsel's assertions, his stock- parking scheme was conducted for his own benefit, not the firm's, and his improper trading in Frontier, which continued for nearly a year, cost the firm substantial sums of money. Moreover, customers were unquestionably harmed by the unauthorized transactions he effected in inactive accounts and his preferential pricing of Frontier. Amsel's remaining misconduct was no less serious because the firm was his victim rather than public investors. And, despite his claim of inadequate training, Amsel was admittedly aware that he was engaging in improper conduct in connection with the parking of stock from his trading account. As we have pointed out on numerous occasions, the appropriate sanctions in a disciplinary action depend on the 18/ See Datek Securities Corporation, 51 S.E.C. 542, 544-545 (1993). 19/ The NASD found Brod responsible for deficient supervision of Amsel. It censured him, fined him $7,500, suspended him for 10 business days, and required him to requalify as a general securities principal within six months or be barred from that capacity until requalified. Brod did not appeal from the NASD's action. ==========================================START OF PAGE 11====== particular circumstances of each individual case. 20/ Amsel has exhibited a disturbing disregard for the standards that govern the securities industry, a business that is rife with opportunities for abuse. In light of his deliberate and serious misconduct, we consider his exclusion from that business a desirable safeguard for both broker-dealers and members of the investing public. Thus we do not find the sanctions imposed by the NASD excessive or oppressive. An appropriate order will issue. 21/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 20/ See Hibbard, Brown & Company, Inc., Securities Exchange Act Release No. 35476 (March 13, 1995), 58 SEC Docket 2769, 2789 n.67, appeal filed, No. 95-3270 (3d Cir.) (Nadino), and the authorities there cited. 21/ 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 in this opinion. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37092 / April 10, 1996 Admin. Proc. File No. 3-8743 _________________________________________________ : In the Matter of the Application of : : MAYER A. AMSEL : 1941 New York Avenue : Brooklyn, New York : : 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 Mayer A. Amsel, and the Association's assessment of costs, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary