SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 38440 / March 26, 1997 Admin. Proc. File No. 3-8986 ------------------------------------------------- : In the Matter of the Application of : : CHRISTOPHER J. BENZ : 300 California Avenue, #16 : Santa Monica, California 90403 : : 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 of Fair Practice Where branch manager of member firm of registered securities association failed adequately to supervise registered representative and failed to enforce the firm's supervisory procedures, held, association's findings of violation and the sanctions it imposed sustained. APPEARANCES: Peter A. Benz, of Applegate, Quinn & Magee, for Christopher Benz. Alden Adkins and Deborah McIlroy, for NASD Regulation, Inc. Appeal Filed: April 15, 1996 Briefing Completed: July 24, 1996 I. Christopher Benz, formerly manager of the Los Angeles branch office of Gilford Securities, Inc. ("Gilford"), a member of the National Association of Securities Dealers, Inc. ("NASD") appeals from NASD disciplinary action. The NASD found that Benz violated Article III, Sections 1 and 27 of the NASD Rules of Fair Practice ("Rules") in that Benz failed adequately to supervise a registered representative of Gilford and failed to enforce ==========================================START OF PAGE 2====== Gilford's supervisory procedures. -[1]- The NASD censured Benz, fined him $7500, assessed costs, -[2]- and required that Benz requalify as a general securities principal before again acting in a principal capacity. -[3]- Our findings are based on an independent review of the record. II. In January 1990, Christopher Benz was hired to work on Gilford's trading desk in New York. -[4]- In July 1991, Gilford's president and chief executive officer, Ralph Worthington, asked Benz to become the branch manager of the Los Angeles office of Gilford. -[5]- In preparation for assuming the responsibilities of branch manager, Benz spent two days with Gilford's most senior branch manager who worked at -[1]- The NASD recently revised and renumbered its Rules of Fair Practice; no substantive changes were made to the particular rules at issue here. Article III, Section 1 of the Rules [new Rule 2110] requires the observance of high standards of commercial honor and just and equitable principles of trade. Article III, Section 27 [new Rule 3010] requires a member to establish, maintain, and enforce a supervisory system with written procedures. -[2]- The NASD assessed costs of $3,610.75 for the initial hearing and $750 in appellate costs. -[3]- The complaint also named as respondents Gilford, Gilford's president and chief executive officer, Ralph Worthington, and Elias Argyropolous, the registered representative whose underlying conduct was at issue. These three respondents settled with the NASD. Gilford and its president and chief executive officer were each censured, and fined $30,000. Gilford further agreed to improve and publish internally the firm's amended supervisory procedures. The registered representative's settlement resulted in a censure, a bar in all capacities, and a $200,000 fine (with collection efforts on the fine suspended unless and until he seeks to become associated with a member firm). -[4]- Prior to his position at Gilford, Benz had worked with Thompson McKinnon Securities, Inc. for a year and assisted his brother at another brokerage house, R.H. Damon, for approximately six months. -[5]- Benz was to receive a salary of $2000 per month, as well as an override of 50% of the office profits. ==========================================START OF PAGE 3====== Gilford's Connecticut office, had conversations with Gilford's financial staff, and passed the NASD's Series 24 principal examination. Benz also had several conversations with Worthington about the Los Angeles office, which Worthington characterized as "kind of a mess." Worthington warned Benz that one registered representative in the Los Angeles office, Elias Argyropolous, could be "tricky" and could cause headaches. Benz commenced his duties as branch manager in August 1991. Benz began to be concerned about Argyropolous's activities in March 1992 when Benz received a subpoena from this Commission related to trades made by Argyropolous. Benz also noticed unusually high numbers of margin calls in the accounts of Argyropolous's clients. Benz contacted Worthington, who told Benz to monitor the situation. Between March and December 1992, Benz received more customer complaints about Argyropolous, as well as document requests from different stock exchanges relating to Argyropolous's accounts. Benz discussed the complaints with Worthington and with Argyropolous. Benz continued to see unusual margin activity in Argyropolous's accounts. In December 1992, Benz drafted a memo to Worthington detailing his concerns about Argyropolous's activities. Benz noted, for example, that Argyropolous "continually over- purchased" for his clients and that his clients were not meeting their "house" margin calls. As a result, many of Argyropolous's customers' accounts were being liquidated. Benz also suggested that Argyropolous's clients were not aware of the "illegality or potential consequences" of not meeting their margin calls. Benz stated his belief that Argyropolous was engaging in free-riding in an attempt to make up for earlier losses suffered by his clients. As a result of this memo, Worthington called Argyropolous to New York for a meeting, at which time Argyropolous assured Worthington that he would pay closer attention to the correct handling of his accounts. When Benz returned from a holiday vacation in early January 1993, he discovered that Argyropolous had made a large number of purchases in yet another stock while he was gone and that some of the accounts of Argyropolous's clients were heavily margined. He notified Worthington who advised him to ensure that the customers were going to pay for the trades. -[6]- -[6]- The NASD found that Argyropolous engaged in a wide variety of sales practice abuses and manipulative and deceptive devices during the time that Benz was his supervisor, including unauthorized trades, unsuitable recommendations, sharing losses with customers, guaranteeing customers against losses, and engaging in wash sales and matched orders. ==========================================START OF PAGE 4====== In early July 1993, Benz notified Worthington that he was resigning and left the firm a few weeks later. III. Article III, Section 27 of the Rules requires a member to establish, maintain, and enforce a supervisory system with written procedures. Each registered representative must be adequately monitored by a supervisor. Benz does not assert that he took sufficient action to meet these requirements. Rather, Benz contends that, although his title was "branch manager," he merely reported to Worthington, who actually controlled the Los Angeles office from New York. -[7]- The record does not support this contention. Benz performed the functions of a branch manager including: 1) reviewing order tickets, account statements, brokers' family- related accounts, and margin activity; 2) approving new accounts; 3) reviewing and responding to customer complaints; and 4) approving cross-trades in customer accounts. He also admitted that he reviewed incoming mail for the office, and he held himself out in correspondence as the branch manager. Benz further contends that he could not have discovered Argyropolous's violations. -[8]- There were numerous red flags, however, that Benz should not have ignored. Before Benz commenced his duties as branch manager, Worthington warned Benz that Argyropolous was "tricky." We have held that firms must more closely monitor registered representatives who have a history of compliance problems. -[9]- Benz received a subpoena from this Commission in March 1992, and, in the next few months, other document requests from different self-regulatory organizations, all investigating Argyropolous's activities. It is apparent from the memorandum that Benz drafted in December 1992 that he had been aware for some time of suspicious activities in Argyropolous's accounts -- such as numerous margin -[7]- Benz contends that, because Argyropolous produced large revenue for Gilford, Worthington was unwilling to supervise him too closely. -[8]- Argyropolous did attempt to conceal some of his misconduct by, for example, writing personal checks to customers and having them, in turn, re- issue checks to Gilford to cover losses in their accounts. -[9]- Douglas Conrad Black, 51 S.E.C. 791, 795 (1993) (where registered representative had already presented compliance problems, firm required to more closely monitor him); Houston A. Goddard, 51 S.E.C. 668, 672 (1993) (same). ==========================================START OF PAGE 5====== calls in, -[10]- and numerous liquidations of, Argyropolous's customers' and his own accounts. -[11]- Benz testified that he reviewed account statements for the relatives of Argyropolous; these statements reflected insufficient funds to pay for the transactions that occurred in the accounts, numerous transfers among the family accounts, and several new accounts being opened for family members. Moreover, at least two of Argyropolous's customers sent complaint letters to Gilford's Los Angeles office. -[12]- Rather than ignore these "red flags," Benz should have more closely monitored Argyropolous's accounts. -[13]- Benz failed to take any steps to heighten his scrutiny of Argyropolous. Benz further argues that he did not have authority to supervise Argyropolous and that he could not fire him without Worthington's approval. Firm officials, however, can be responsible for a failure to supervise even if they lack the -[10]- Benz admitted that Argyropolous had the largest margin calls he had ever seen. -[11]- Benz testified that he reviewed trading tickets daily and active accounts on a monthly basis, as well as reviewing margin calls. -[12]- One customer sent a letter on December 26, 1992 complaining of an unauthorized trade in his account. Another customer sent a letter dated January 18, 1993 in which he complained that Argyropolous had not complied with his order to sell certain stock. Benz contends that both letters were addressed to Argyropolous and that he did not see them. Benz was required, as part of his duties, to review all incoming correspondence, and he admits that he generally reviewed such correspondence. He does not explain how these two letters circumvented his procedures for examining all correspondence received by Gilford's Los Angeles office. -[13]- Houston A. Goddard, 51 S.E.C. at 668 (sustaining sanctions imposed on principal and compliance officer of member firm who failed to adequately follow up on red flags); Edwin Kantor, 51 S.E.C. 440, 447 (1993) ("Red flags and suggestions of irregularities demand inquiry as well as adequate follow-up and review"); Kirk A. Knapp, 50 S.E.C. 858, 862 (1992) (president of brokerage firm is responsible for compliance unless and until he reasonably delegates a particular function to another member of the firm and neither knows nor has reason to know that such person is not properly performing his duties). ==========================================START OF PAGE 6====== ability to hire and fire. -[14]- Worthington testified that Benz had authority to hire and fire all employees in the Los Angeles branch office. -[15]- Moreover, Benz admitted in his testimony before the NASD that he had authority to supervise the remaining registered representatives -- other than Argyropolous -- in the Los Angeles office. -[16]- The NASD did not credit Benz's assertions that he did not have authority to supervise Argyropolous properly, and we find no reason to question its credibility determination. -[17]- Benz also argues that Gilford failed to give him any written supervisory procedures to follow and that, therefore, he was unaware of his obligations. Article III, Section 27 of the Rules requires member firms to maintain written procedures, and Benz should have been aware of this requirement. -[18]- Moreover, although Benz testified that he did not receive any compliance manual or written procedures, he signed a document attesting to his receipt of part of Gilford's compliance manual and admitted that he had discovered pages from a procedures manual in the Los Angeles office. Benz's allegation that he was -[14]- See Conrad C. Lysiak, 51 S.E.C. 841, 844 (1993), aff'd, 47 F.3d 1175 (9th Cir. 1995) (unpublished opinion). -[15]- Worthington noted, however, that he would have wanted notice before someone as senior as Argyropolous was fired. Benz asserts that Worthington shaded this testimony in order to obtain a good settlement of the NASD's disciplinary action against Worthington and Gilford. Regardless of whether Benz had authority to hire and fire, he was responsible for adequately supervising Argyropolous. -[16]- Steve Dirks, the former branch manager of the Los Angeles office, testified that he understood that he had supervisory responsibility over the brokers. -[17]- We have repeatedly held that credibility determinations made by the initial decision maker are entitled to "considerable weight" since they are based on "hearing the witnesses' testimony and observing their demeanor." E.g., Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992). -[18]- At the very least, Benz should have been aware of the need for compliance and procedures manuals from his preparation for and taking of the Series 24 examination for general security principals, which deals with, among other things, responsibility under Article III, Section 27 of the Rules. ==========================================START OF PAGE 7====== unaware of the firm's compliance manual and procedures is not credible. The NASD alleged that Benz, among other things, failed "to reasonably supervise" Argyropolous. We find no merit in Benz's contention that the concept of "reasonable supervision" is not defined and is unconstitutionally vague. The standard of "reasonableness" is determined based on the particular circumstances of each case. -[19]- As described above, we have concluded that Benz did not behave reasonably in the face of the numerous red flags present. Moreover, to claim that a requirement is void for vagueness, the claimant must demonstrate that he did not have fair notice of the conduct or activities proscribed or covered by the requirement. -[20]- Although Benz claims that he did not understand what was required of him as branch manager, the record reflects that he was in fact familiar with and performed many of the required duties. Indeed, he identified areas of Argyropolous's activities that concerned him. He failed, however, to take appropriate action. Nor are we persuaded by Benz's claim that his due process rights were violated because two hearing officers at the hearing before the Market Surveillance Committee were also participants in the decision to file a complaint. Courts and this Commission have repeatedly rejected similar contentions. -[21]- IV. Benz claims that the sanctions imposed by the NASD are too severe. He argues that he was young and inexperienced, that he was not adequately trained for the position, and that he had no prior history of misconduct. The NASD, however, took these -[19]- See Consolidated Investment Services, Inc., Securities Exchange Act Rel. No. 36687 (January 5, 1996), 61 SEC Docket 20; Rita H. Malm, Securities Exchange Act Rel. No. 35000 (November 23, 1994), 58 SEC Docket 121. -[20]- City of Mesquite v. Aladdin's Castle, Inc., 455 U.S. 283, 289 (1982); Grayned v. City of Rockford, 408 U.S. 104, 108 (1972). See also R.B. Webster Investments, Inc., 51 S.E.C. 1269, 1274 n.20 (1994). -[21]- Cf., Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1106 (D.C. Cir. 1988) (no violation of due process when agency approves filing of complaint and then participates in ensuing hearings), cert. denied, 488 U.S. 869 (1988); Pittman & Company, Inc., 47 S.E.C. 68, 70 (1979) (rejecting claim that respondents were denied due process because the chair of the panel who signed the complaint also participated in adjudication of the case). ==========================================START OF PAGE 8====== factors into account in assessing sanctions against Benz. -[22]- Benz contends that the fine imposed on him is unfair in light of the sanctions imposed on Gilford and Worthington. -[23]- It is well recognized that the appropriate sanction depends upon the facts and circumstances of each particular case and cannot be determined precisely by comparison with actions taken in other proceedings or against other individuals in the same proceeding. -[24]- Moreover, the other respondents settled this action, and as we have previously stated, "it may be expected that sanctions in settled cases will differ from those in litigated cases." -[25]- Benz also argues that he does not have adequate financial resources to pay the fine and costs imposed. -[26]- We understand that the NASD continues to make available an installment plan under which respondents may pay fines by executing promissory notes. -[27]- For these reasons, we -[22]- The fine imposed on Benz is at the low end of the range of fines suggested by the Sanction Guidelines. See Sanction Guidelines at 44 (1993). Moreover, the Sanction Guidelines also suggest a suspension in a "typical case," and the NASD did not impose any suspension on Benz. -[23]- See n.3 supra. -[24]- See Butz v. Glover Livestock Commission Co., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970). -[25]- Conrad C. Lysiak, 51 S.E.C. at 848. -[26]- Benz stated that his income for 1994 was only $26,000 and that he has outstanding student loans. He did not, however, provide any documentation regarding his overall financial situation. -[27]- In 1993, the NASD deleted Section 11 of Schedule A to its By-Laws which provided for the imposition of a service charge for installment payments of disciplinary sanctions. The reason for the rule change was to permit the NASD to enter into promissory notes with respondents for the installment payment of disciplinary sanctions. Letter to Katherine A. England, Assistant Director, Division of Market Regulation, from T. Grant Callery, Vice President and Deputy General Counsel, NASD, dated October 21, 1992. The NASD has stated that it wanted "to retain business flexibility to pursue other methods of securing (continued...) ==========================================START OF PAGE 9====== do not conclude that the fine and costs are excessive or oppressive. An appropriate order will issue. -[28]- By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary -[27]-(...continued) payments as appropriate or to modify the promissory note program." -[28]- All of the contentions 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 herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. Admin. Proc. File No. 3-8986 : In the Matter of the Application of : : CHRISTOPHER J. BENZ : 300 California Avenue, #16 : Santa Monica, California 90403 : : 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 Christopher J. Benz, and the Association's assessment of costs, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary