SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37351 / June 24, 1996 Admin. Proc. File No. 3-8521 __________________________________________________ : In the Matter of the Application of : : RALPH JOSEPH PRESUTTI : Wethersfield, Connecticut : : For Review of Disciplinary Action Taken by the : : NEW YORK STOCK EXCHANGE, INC. : __________________________________________________: OPINION OF THE COMMISSION NATIONAL SECURITIES EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDINGS Conduct Inconsistent with Just and Equitable Principles of Trade Where registered representative of member firm effected transactions of customers who were acting on the basis of material, non-public, information, held, Exchange's findings that the conduct was inconsistent with just and equitable principles of trade sustained, and sanctions sustained. APPEARANCES: Michael J. McAllister and Louis M. Lagalante, of Lane & Mittendorf, for Ralph Joseph Presutti. Robert A. Marchman, Martin S. Mazur, and Daniel S. Eisenberg, for the New York Stock Exchange, Inc. Appeal filed: October 12, 1994 Last brief filed: April 21, 1995 I. Ralph Joseph Presutti, a registered representative with Advest, Inc. ("Advest"), a member of the New York Stock Exchange, Inc. ("Exchange" or "NYSE"), appeals from NYSE disciplinary ==========================================START OF PAGE 2====== action. -[1]- The Exchange found that Presutti violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and engaged in conduct inconsistent with just and equitable principles of trade. The NYSE concluded that Presutti had effected securities transactions on behalf of customers who were acting on the basis of material, non-public information contained in copies of Business Week magazine that the customers obtained in advance of the magazine's release to the public. -[2]- Presutti was censured and suspended for two months from membership, allied membership, approved person status, and employment or association in any capacity with any member or member organization. -[3]- Our findings are based on an independent review of the record. -[4]- II. At the time of the events here, Business Week was printed weekly by R.R. Donnelley & Sons Company ("Donnelley") for the magazine's publisher, McGraw-Hill, Inc. ("McGraw-Hill"), on Wednesday night and early Thursday morning. It was distributed for release to the public at 5:00 p.m. (New York time) Thursday. The magazine included a column called "Inside Wall Street," which sometimes recommended securities (hereinafter the "BW ---------FOOTNOTES---------- -[1]- Presutti has been a registered representative with Advest since 1974. -[2]- The complaint contained two counts: 1) Presutti violated Section 10(b) and Rule 10b-5 in that he was reckless in not knowing that the information had been misappropriated and had not theretofore been made public; 2) Presutti's conduct was inconsistent with just and equitable principles of trade in that he was reckless in not knowing the information had not theretofore been made public. Exchange Rule 476(a) provides that members and their employees can be disciplined for "conduct . . . inconsistent with just and equitable principles of trade." -[3]- On October 13, 1994, we granted Presutti a stay of the sanctions pending the outcome of this appeal. -[4]- We note that the record index in this proceeding hampered our review of this matter. The transcript and the multiple exhibits in this proceeding were assigned to a single index number. Separate numbers should be assigned in the index to the exhibits in the record and to the transcripts in evidence. ==========================================START OF PAGE 3====== Securities"). Although both McGraw-Hill and Donnelley had policies of keeping Business Week confidential until 5:00 p.m. Thursday, and informed their employees of this policy, the 5:00 p.m. release policy was not generally publicized. Donnelley employees were also prohibited from removing copies of the magazine from the plant. Sometime in 1986, William Dillon formulated a scheme to discover the identities of the BW Securities before Business Week became publicly available. Dillon obtained copies of the magazine on Thursday morning from certain employees of Donnelley's Old Saybrook, Connecticut printing facility. -[5]- Brad Libera, a friend of Dillon, began to accompany Dillon when Dillon received the magazine from Donnelley employees. At some point, Libera and Dillon began paying the Donnelley employees $20, and later $30, for early copies of the magazine. Libera had been Presutti's customer since 1983. In September 1986, Libera told Presutti that Libera had a friend who could obtain copies of Business Week early on Thursday morning. The friend purportedly bought the magazine at a newsstand located in Old Saybrook at a very early stop along the magazine's distribution route. According to Libera, the friend suggested that early access to "Inside Wall Street" would give a competitive trading advantage in the BW Securities over those who received the magazine later in the week. Presutti monitored the BW Securities for a few weeks and noticed that the volume of trading and prices of these securities rose significantly on Thursdays (and, indeed, sometimes on Wednesdays), and continued to rise on Friday. He related these observations to Libera. -[6]- Presutti also discussed this so-called "BW Strategy" with Gary Berk, another registered representative in Presutti's office. Berk was friendly with Thomas Griffin, then manager of the Old Saybrook office of another member firm. Presutti testified that, in the fall of 1986, he had Berk call Griffin to inquire about the public availability of Business Week in the Old Saybrook area. He further testified that Berk reported back that Business Week was generally available in the Old Saybrook area ---------FOOTNOTES---------- -[5]- Old Saybrook is approximately 50 miles from Presutti's office in Hartford, Connecticut. -[6]- Presutti claims that he concluded from these price movements that the identity of the BW Securities was available to others. However, the information also indicated that the identity of the BW Securities was market sensitive information. ==========================================START OF PAGE 4====== and that "everyone" was getting the magazine early Thursday morning in boxes at the local post office. 7/ Beginning in October 1986, Libera placed orders with Presutti to purchase BW Securities on Thursday mornings. Presutti told Francis Sablone, who was also Presutti's customer and an attorney who lived in Old Saybrook, about the BW Strategy. Presutti supplied Sablone with the name of a single BW Security, and suggested that Sablone get a post office box in Old Saybrook to receive early delivery of the magazine. Sablone too began placing purchase orders with Presutti for BW securities on Thursday mornings. Shortly thereafter, Sablone and Libera became acquainted, and, independently, Libera began to supply Sablone with the names of BW Securities. 8/ Presutti's customers' BW Securities transactions were executed before 11:00 a.m. on Thursdays. 9/ 7/ Berk traded in BW Securities for his own account, receiving information about the BW Securities from either Presutti or Griffin. Berk was called as a witness by Presutti before the NYSE, but Presutti did not question Berk about this reported conversation with Griffin. When the hearing officer asked Berk about the conversation, Berk's answer was not responsive. Griffin, who subsequently became an employee of Advest in March 1988, also traded in BW Securities for his own account. Griffin obtained, beginning in the summer of 1986, the information about the BW Securities from a neighbor who was an employee of Donnelley. There is no evidence in the record that Presutti or Berk was aware of Griffin's activities. 8/ After his initial recommendation, Presutti never asked Sablone how Sablone obtained copies of Business Week or the identities of the BW Securities. In June 1987 Sablone moved his account to Nicholas Bokron at E.F. Hutton. In late September Bokron was informed by Hutton that trading in BW Securities raised serious questions of illegal insider trading. Bokron contacted Sablone and told him he could not accept any more such orders. U.S. v. Libera, 989 F.2d 596, 519 (2d Cir. 1993). Sablone did not tell Presutti about Hutton's views. 9/ Presutti had three other customers who used the BW Strategy -- Brad Libera's brother, Todd; Sablone's partner in real estate ventures, William Murray; and the Sablone and Murray partnership, M & S Development Co. Libera placed orders for his and his brother's accounts, Murray placed the orders for (continued...) ==========================================START OF PAGE 5====== In the spring of 1987, Libera admitted to Presutti that Libera was not in fact buying Business Week from a newsstand as he had originally represented. Rather, Libera told Presutti that he and Dillon were obtaining advance copies of the magazine from an employee of Donnelley. Upon further inquiry by Presutti, Libera claimed that the early copies of the magazine were perks for Donnelley's employees. 10/ Presutti took no other action to determine whether the magazines were in fact employment perks or were otherwise publicly available. Presutti continued to accept orders from his customers following the BW Strategy for another year. Except for the first trade for Sablone, all of these trades were unsolicited. Presutti did not trade BW Securities for his own account at any time. He earned approximately $9,000 in commissions on transactions by his customers in BW Securities during this period, $4,000 of which were earned on transactions after spring 1987, when he had learned that magazines were being obtained from Donnelley employees. In July 1988, Presutti learned through press reports that the Donnelley employees had been paid $20 or $30 for the advance copies of Business Week. 11/ Also at that time, Advest's compliance officer initiated an internal investigation after a request by the American Stock Exchange for information on accounts trading BW Securities. The accounts involved three Advest representatives -- Presutti, Berk, and Griffin -- and each was interviewed. 12/ 9/(...continued) his own account, and Sablone placed orders for his and the partnership's accounts. 10/ Presutti never informed Berk that the information about the BW Securities was actually coming from a Donnelley employee rather than a newsstand. 11/ There is no evidence that Presutti knew before that time that Libera, Sablone, and Dillon were paying for early copies of Business Week. 12/ Advest took disciplinary action against Griffin, who was suspended and asked to resign, but took no action against Presutti or Berk. Ultimately, Presutti's customers, Libera and Sablone, were convicted of securities fraud, and Dillon pled guilty to wire fraud charges related to his role in this scheme. U.S. v. Libera, 989 F.2d 596 (2d Cir.), cert. denied sub nom. Sablone v. U.S., 114 S.Ct. 467 (1993) (affirming jury (continued...) ==========================================START OF PAGE 6====== The Exchange hearing panel concluded that Presutti was reckless in continuing to accept and execute these orders once Libera revealed that he was obtaining early copies of the magazine from a Donnelley employee. The panel concluded that Presutti's conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 and was conduct inconsistent with just and equitable principles of trade. III. We agree with the Exchange that Presutti's conduct was inconsistent with just and equitable principles of trade. 13/ As an initial matter, we question Presutti's judgment in initially accepting Libera's orders on the unchallenged assurance that magazines were available early in the morning from a newsstand. He knew, based on his own examination of trading activity, that the information was market sensitive. We agree with the NYSE that, once he learned that Libera's source of the information was outside any normal chain of distribution, Presutti, as an experienced securities professional, was reckless in continuing to effect his customers' orders for BW Securities without making further inquiry. These events took place during a time of heightened awareness of insider trading by the securities industry and the public, caused by the successful criminal prosecution of Foster Winans for an insider trading scheme also relating to advance 12/(...continued) convictions of Libera and Sablone for conspiracy and securities fraud for insider trading); U.S. v. Dillon, 88 Crim. 0545 (S.D.N.Y. Apr. 11, 1989) (guilty plea to wire fraud). 13/ The NYSE rule requiring conduct consistent with just and equitable principles of trade sets an ethical standard for securities professionals (John Thomas Gabriel, 51 S.E.C. 1285, 1291 (1993), Lerner & Co., 37 S.E.C. 850 (1957)), with knowledge of which an experienced representative is charged. Cf. Crimmins v. AMEX, 368 F. Supp. 270, 277 (S.D.N.Y. 1974). The NYSE charged that, to the extent that Presutti's conduct was inconsistent with just and equitable principles of trade, he acted recklessly. We have analyzed Presutti's conduct in accordance with the Exchange's allegations. Because we find that Presutti's conduct is inconsistent with just and equitable principles of trade and these findings support the sanctions imposed herein, we do not reach the Section 10(b) and Rule 10b-5 findings. ==========================================START OF PAGE 7====== knowledge of information in a financial publication. 14/ Winans, a journalist for the Wall Street Journal, traded on information concerning the timing and contents of Journal articles prior to publication, and disclosed this type of information to friends who also traded on the information. The BW Strategy involved obtaining early access to recommendations in "Inside Wall Street." 15/ In light of Presutti's 18 years of experience in the industry, and the notoriety of the Winans case, Presutti ignored a strong indication of possible wrong-doing when Libera changed his explanation as to the source of the magazine and admitted that he was obtaining it from an employee of the printer at the end of the printing shift. 16/ Presutti could have sought the advice of Advest's compliance officer, as Bokron did with Sablone's trading at E.F. Hutton. 17/ Indeed, the Advest compliance officer testified that Advest brokers are encouraged to consult with the firm's legal staff when questions arise concerning the legality of 14/ U.S. v. Winans, 612 F. Supp. 827 (S.D.N.Y. 1985), aff'd sub nom. U.S. v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), aff'd, 484 U.S. 19 (1987). 15/ We reject Presutti's contention that he did not have clear notice that trading in BW Securities might be a violation of just and equitable principles of trade. He was experienced and, particularly where the conduct was so similar to a highly publicized criminal prosecution, we believe the questionable nature of the conduct was patent. We think it reasonable to expect a securities salesman to understand that it might be improper to trade on information contained in a copy of Business Week obtained from the printer. Cf. Anthony Tricarico, 51 S.E.C. 457, 461 n.14 (1993) (salesman on notice that it is improper to engage in unauthorized transactions). 16/ Presutti asserts that he did not know that Libera was "lying" to him until Libera confessed the entire scheme to Presutti in July 1988. However, we conclude that, once Libera altered his explanation of the source for the early copies of Business Week and, moreover, admitted that the magazines were being taken from the printing plant at the end of the printers' shift, Presutti was reckless in not making further inquiry. We also reject Presutti's argument that, because the BW Strategy was not especially profitable, his unquestioning acceptance of Libera's explanation was reasonable. 17/ See note 8, supra. ==========================================START OF PAGE 8====== securities trading. 18/ He also could have made inquiries of McGraw-Hill concerning when the magazine was released to the public 19/ or asked Donnelley about the availability of the magazine as an employment perk. 20/ Instead he did nothing. 21/ 18/ Presutti asserts that the issue was complex and Advest's compliance officer, after his investigation, did not view Presutti's conduct as reckless. However, Presutti never sought advice from the officer at the time that he effected these trades. 19/ Presutti contends that he relied on Berk's report of receiving the first copy of a subscription to Business Week on Thursday by mail. However, the evidence was inconclusive as to whether Berk actually received the current week's or a previous week's issue. Presutti also subscribed to Business Week, but never received a copy earlier than Friday. In any event, Berk testified that he began this subscription after the 1988 investigation into trading in BW Securities commenced. 20/ Presutti failed to recognize other opportunities that suggested a need for further investigation. He never verified the purported report from Griffin that the magazine was widely available in post office boxes in Old Saybrook early on Thursday mornings. Nor did he directly contact Griffin, a friend, about Business Week's availability in Old Saybrook. Moreover, sometime after Griffin joined Advest in 1988, Presutti learned through Advest's block trader that Griffin was trading in BW Securities. Presutti did not ask Griffin about his trading or how he was obtaining the identities of the BW Securities. 21/ We reject Presutti's argument that, since Sablone was an attorney, it was reasonable to assume that trading in BW Securities was lawful. Presutti does not claim that he asked Sablone about the legality of the transactions. In any event, there are a number of publicized cases in which prominent attorneys have been found guilty of insider trading. See, e.g., U.S. v. Michael David, Litigation Release No. 11863 (Sept. 8, 1988), 41 SEC Docket 1308; SEC v. Saul Bluestone, Litigation Release No. 12940 (Aug. 12, 1991), 49 SEC Docket 955. Presutti notes that he knew that Dillon, a former customer, was then a registered representative of Merrill Lynch. We reject Presutti's argument that, since Dillon was employed by Merrill Lynch, a firm with strong training and compliance programs, and Dillon had obtained the information from an (continued...) ==========================================START OF PAGE 9====== Presutti asserts that it is wrong to conclude that the information about the BW Securities was non-public. He argues that McGraw-Hill's and Donnelley's efforts to maintain confidentiality of the magazine were unsuccessful, a conclusion supported by the NYSE's opinion. 22/ Our opinion, however, is based on the conclusion that Presutti failed to make further inquiry once he knew that employees were taking magazines from the printing line. Presutti was not merely an unknowing order taker in the circumstances of this case. When he was informed that the source of the information (an employee of the printer) was different than what he had originally been told, he had an obligation to investigate further or refuse further trades. 23/ 21/(...continued) employee of the printer, it was reasonable to conclude that the use of the information was not a problem. He made no inquiry of Dillon or Merrill Lynch. The fact that others engage in violative behavior does not excuse similar conduct. 22/ Presutti argues that, because Business Week's efforts at enforcing confidentiality failed, he could not know that the identity of the BW Securities was "misappropriated." We deny Presutti's motion to strike the testimony of another Business Week employee, Thomas W. Tully. Presutti claims that Tully's testimony with respect to McGraw-Hill's confidentiality procedures is not credible. Inasmuch as we have not reached the Section 10(b) and Rule 10b-5 violation (see notes 2 and 13, supra), it is unnecessary to determine whether the information was in fact misappropriated. On January 10, 1995, we ordered, under Rule 19d-3, further briefing on Presutti's motion to adduce as additional evidence a transcript of the testimony of an employee of Business Week in one of the related NYSE proceedings (see n.23, infra). Presutti sought to show that Business Week's wholesale distributors were not bound by any confidentiality obligation, but, rather, were free to release the magazines as they chose. This witness' testimony was that the wholesalers would be in trouble if the information were released. Nor is there any suggestion that Presutti ever believed his customers were obtaining the magazine from a wholesaler, particularly after Libera told him he was getting it from printing plant employees. Accordingly, we conclude that this testimony does not support Presutti's assertions. 23/ Presutti also argues that the NYSE decision here is inconsistent with its decisions in two other proceedings (continued...) ==========================================START OF PAGE 10====== IV. Presutti raises several procedural objections to the NYSE's proceedings. A. Presutti's principal objection is to the NYSE's use of videotaped depositions of three witnesses. 24/ The Exchange initially brought consolidated proceedings involving trading in BW Securities against three individuals, including Presutti. These proceedings were severed at Presutti's request. Since the testimony of the three witnesses related to the issue of whether the information contained in "Inside Wall Street" was non-public, a question common to each case, the Exchange chose to replay videotape depositions, rather than have repetitive live testimony, in each proceeding. Presutti argues that use of this videotape evidence was unfair because the panelists were deprived of the opportunity to question the witnesses. 25/ We think videotaped testimony is proper where witnesses are unavailable if the evidence sheds light on the controversy, has probative value, and bears indicia of reliability. 26/ Given that the exchanges and self- regulatory organizations do not have subpoena powers and thus cannot compel the testimony of persons not subject to their jurisdiction, we have often permitted less traditional forms of testimonial evidence such as telephone testimony. 27/ 23/(...continued) involving trading in BW Securities. In those proceedings, the respondents, one of whom was Griffin, were found not guilty. These proceedings are not before us, and we do not have their records. Accordingly we cannot determine whether we would reach the same conclusions. 24/ The three witnesses were the managing editor of Business Week, the manager of distribution for McGraw-Hill, and an employee of Donnelley who was manager of human resources at the Old Saybrook facility, all of whom had testified earlier in Libera's criminal trial. 25/ We note that Presutti does not claim that he made further efforts to have these employees present at his hearing. 26/ See, e.g., David Joseph Dambro, 51 S.E.C. 513, 517 (1993); Jesse Rosenblum, 47 S.E.C. 1065, 1072 (1984). 27/ See, e.g., Robert E. Gibbs, 51 S.E.C. 482, 484 n.3 (1993), aff'd, 25 F.3d 1056 (10th Cir. 1994) (Table); Curtis I. Wilson, 49 S.E.C. 1020 (1989), aff'd, 902 F.2d 1589 (9th Cir. 1990) (Table); Sumner B. Cotzin, 45 S.E.C. 575, 579-80 (continued...) ==========================================START OF PAGE 11====== Videotaped testimony may also provide an indication of visual demeanor. 28/ B. Presutti further objects that, several times over the three-day hearing, the panelists fell asleep while these videotapes were shown as evidence. We wish to make clear that the panelists' attention to the proceedings is imperative for the effective conduct of self-regulatory organization disciplinary proceedings. We nonetheless conclude that, under the circumstances here, Presutti was not prejudiced by the panel's inattention. Our decision that Presutti's conduct was inconsistent with just and equitable principles of trade is based on his failure to make further inquiry once Libera disclosed that he was obtaining copies of Business Week from the printing line. The videotaped testimony at issue dealt with McGraw-Hill's and Donnelley's attempts to maintain the confidentiality of Business Week before its public release. The ultimate success or failure of those efforts is not relevant to the basis of our decision here. C. Presutti complains that the NYSE improperly relied on the Court of Appeals' decision in U.S. v. Libera to establish that the identities of the BW Securities were non-public. Presutti asserts that his additional evidence at the hearing concerning McGraw-Hill's and Donnelley's lax confidentiality policies would have led the Libera court to a different conclusion. We have not relied on the Libera decision to find that the identities of the BW Securities were non-public. For the reasons discussed in subsection B. above, we find no prejudice to Presutti. 29/ 27/(...continued) (1974) ("Self-regulation or cooperative regulation necessarily calls for informality."). 28/ Presutti also objects to the conduct, during the videotaped depositions, of Business Week's counsel. We agree that the counsel's objections were disruptive. We recommend that in the future the Exchange conduct such depositions under the rules that would govern a witness' testimony in an Exchange hearing. 29/ Presutti also argues that the Exchange should have subpoenaed Libera and Sablone, each of whom resides in Connecticut. Further he complains that, because he prevailed in an arbitration proceeding brought by Brad and Todd Libera, their testimony from that proceeding should not have been admitted to prove that the Liberas knew the information was non-public. This conclusion, however, was supported by Libera's admissions to Presutti in July. ==========================================START OF PAGE 12====== D. Although Presutti complains that the Hearing Officer should have recused himself because he made adverse preliminary evidentiary rulings that he subsequently reversed, we find nothing improper in the Hearing Officer's conduct of the case. We have carefully reviewed the record of this proceeding and find no basis for Presutti's claims that, in various respects, he was denied due process and a fair hearing. Moreover, the Exchange's findings have been accorded de novo review by this Commission. Richard T. Rutherford, 48 S.E.C. 671, 674 n.4 (1987); Stuart K. Patrick, 51 S.E.C. 419, 425 n.25 (1993), aff'd, 19 F.3d 66 (2d Cir.), cert. denied, 115 S. Ct. 54 (1994). Any prejudice is cured by our independent review of the record. V. Presutti contends that the sanctions imposed on him by the NYSE are too severe. He states that he has never before been charged with misconduct and has a 25-year career in the industry unblemished by any customer complaints, or compliance or regulatory problems. Further, he asserts that he was not an active participant in the scheme and did not trade for his own account. We think the Exchange's sanctions of censure and a two-month suspension already reflect these mitigating factors. Under the circumstances, given the number of indications that his customers' conduct should be questioned, we believe the sanctions imposed by the Exchange are neither excessive nor oppressive. An appropriate order will issue. 30/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 30/ All of the arguments advanced by Presutti and the Exchange have been considered. Their contentions 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. Admin. Proc. File No. 3-8521 _______________________________________________________ : In the Matter of the Application of : : RALPH JOSEPH PRESUTTI : Wethersfield, Connecticut : : For Review of Disciplinary Action Taken by the : : NEW YORK STOCK EXCHANGE, INC. : _______________________________________________________: ORDER SUSTAINING IN PART DISCIPLINARY ACTION TAKEN BY NATIONAL SECURITIES EXCHANGE On the basis of the Commission's opinion issued this day, it is ORDERED that the findings by the New York Stock Exchange, Inc. that Ralph Joseph Presutti engaged in conduct inconsistent with just and equitable principles of trade be, and they hereby are, sustained and the sanctions be, and they hereby are sustained. By the Commission. Jonathan G. Katz Secretary