SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40727 / November 30, 1998 Admin. Proc. File No. 3-8511 __________________________________________ : In the Matter of : : SHARON M. GRAHAM : and : STEPHEN C. VOSS : ___________________________________________ OPINION OF THE COMMISSION BROKER-DEALER PROCEEDING Grounds for Remedial Action Aiding, Abetting, and Causing Manipulation Failure to Supervise Reasonably Person associated with a registered broker-dealer aided, abetted, and caused a manipulation effected by her customer. President of the firm failed to supervise her reasonably. Held, it is in the public interest to suspend the associated person from association with any broker or dealer for a period of two months and to order her to cease and desist from committing or causing any future violation of the antifraud and antimanipulation provisions of the federal securities laws and rules thereunder. It is further in the public interest to suspend the president from association with any broker or dealer for a period of three months. APPEARANCES: Ida Wurczinger Draim, of Wiley, Rein & Fielding, for Sharon M. Graham and Stephen C. Voss. David S. Horowitz and Merri Jo Gillette, for the Division of Enforcement. Appeal filed: January 16, 1996 Last brief filed: May 9, 1996 Oral argument held: June 9, 1997 I. Sharon M. Graham, a registered representative with Voss & Co., Inc. ("VCI"), and Stephen C. Voss, the president and sole shareholder of VCI, appeal from the initial decision of an administrative law judge. The law judge found that, from January 1989 to May 1990, Graham willfully aided, abetted, and caused certain violations of Sections 9(a)(1) and 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder by executing 60 wash trades for a VCI customer. The law judge also found that Voss failed reasonably to supervise Graham with a view to preventing her violations. The law judge suspended Graham and Voss from association with any broker or dealer for two and three months, respectively. He also ordered Graham to cease and desist from committing or causing any future violations of Sections 9(a)(1) and 10(b) and Rule 10b-5. The staff of the Division of Enforcement appeals the sanctions imposed by the law judge. It seeks both longer suspensions for Graham and Voss, as well as the suspension of these respondents from association with any municipal securities dealer, investment adviser, or investment company. The staff also seeks to have Voss permanently barred from all supervisory or proprietary positions. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. [1] II. A. Broumas' Scheme. From January 1989 through June 1990, John G. Broumas, former chairman of the board of Madison National Bank of Virginia ("MNBV") and a former director of James Madison, Limited ("JML"), a holding company for a family of banks, engaged in a manipulative scheme involving JML Class A common stock. [2] JML Class A common stock was listed on the American Stock Exchange ("AMEX"), but the trades at issue were executed in the over-the-counter market. Broumas' manipulative activities were in response to severe financial difficulties that he was experiencing. Broumas owed substantial sums to a number of banks, and he was having difficulty meeting the loan payments. He could not borrow more money from the JML banks because he had reached his credit limit. [3] Instead, in a scheme similar to check-kiting, Broumas arranged wash trades and matched orders of JML Class A common stock among accounts in his own name and in the names of nominees. Broumas directed these trades among at least 25 different brokerage accounts that he controlled at 14 different broker-dealers. He instructed registered representatives on each side of these trades to contact one another and to trade a specified number of shares of JML Class A common stock at a specified price. Since Broumas' stock was held in margin accounts, he was able to obtain the proceeds from a sale one day after the transaction was completed while he could wait at least five business days until the settlement date to pay for a corresponding purchase. When the settlement date arrived, he sometimes executed another set of wash trades or matched orders. [4] Broumas' financial situation continued to deteriorate, and many of the broker-dealers with which he dealt were becoming increasingly reluctant to extend him credit. Broumas began to effectuate trades through a series of accounts in the names of relatives and business associates. The trades in these nominee accounts were placed by Broumas or at his direction, with funds provided by Broumas, and for Broumas' benefit. At least three of these accounts were maintained in the name of Lawton Rogers. [5] Rogers was Broumas' friend and attorney, and he and Broumas previously had engaged in a variety of business transactions together. Between January 1, 1989 and June 30, 1990, Broumas effected 203 sets of wash trades in JML Class A common stock, involving 420 trades. The transactions typically involved the purchase and sale of between 3,000 and 12,000 JML shares. The Broumas wash trades that were reported to the AMEX constituted 36.6 percent of the total reported market volume for the stock during the period at issue. [6] B. Broumas' Activities at VCI. 1. VCI's Organization. VCI was a discount broker, primarily handling unsolicited customer orders. At the time of the events at issue, VCI had a single office in Springfield, Virginia. The office consisted of one large room that was subdivided with partitions. Voss, who had co-founded the firm's predecessor in 1973, was VCI's president. Graham began working in the securities industry in 1982 and started at VCI in 1984. She was a registered representative, as well as VCI's cashier and back office assistant. She was also VCI's primary "house" broker, handling "house" accounts on a non- commission basis, as well as her own accounts for commissions. [7] In 1989 and 1990, Graham's cashiering and back office duties consumed approximately 70 percent of her time. Graham obtained her principal's license in February 1990 and served as a manager when no other manager was in the office. James J. Pasztor was VCI's vice president, general manager, and compliance officer through March 1992. [8] 2. Broumas' Directed Trades. Graham, Pasztor, and Voss were all aware that Broumas was an officer of MNBV and a director of JML. Broumas had an existing joint margin account at VCI in the names of Broumas and his wife. This account was a VCI house account. Broumas began to direct trades in JML Class A common stock through this joint account as early as 1988. [9] Voss testified that, in mid-1988, he effected a directed trade for Broumas in JML securities. At the beginning of 1989, Broumas held 37,500 shares of JML Class A common stock in his joint account. From at least January 23, 1989 through May 24, 1990, Broumas directed VCI to execute 76 trades in JML Class A common stock, totalling 644,800 shares. Graham executed approximately 60 of these directed trades. [10] Broumas generally gave Graham orders to buy or sell JML Class A common stock off the exchange. He would specify the number of shares to be bought or sold, a limit price, and the firm ("contra- broker") that would execute the other side of the trade. [11] On some occasions, however, the broker on the other side of the transaction would call before Broumas contacted Graham, but Graham would wait until Broumas confirmed the trade before executing it. Graham would determine that the order price was within the bid and offer prices on the AMEX. Generally, when Broumas sold stock, he asked that VCI issue the check for the proceeds the next day. [12] Graham recorded on each VCI order ticket the name of the contra-broker and the contra-broker's registered representative that Broumas had specified. She observed that most of these trades were done with registered representatives at three or four firms, including Richard Chema at H. Beck, Inc., [13] Ronald Lara and Richard Kulak at Lara, Millard & Associates, Inc., and Carole Haynes at Swan Securities, Inc. and, later, at First Potomac Investment Services, Inc. [14] Graham assumed that Broumas "had connections" at these firms because Broumas identified them as the contact persons to call at the contra-broker. She also assumed that Broumas maintained accounts at other firms. According to Graham, however, Broumas never told her that he had accounts at these particular firms, and Graham "never asked him." When Broumas placed one of his first directed trades with Graham, Graham informed Pasztor about that trade and the fact that it was directed. Pasztor, in turn, told Voss that Broumas directed "where he wanted the trades executed." Voss told Pasztor that directing the trades "was fine." Pasztor got the impression that Voss thought Broumas' activity "was no big deal." Pasztor told Graham that it was "fine" to accept Broumas' directed trades. Because she was VCI's cashier, Graham could compare the deposits and withdrawals in Broumas' account. She noticed that Broumas was not making money on his trades. Before the joint account was restricted (see paragraph II.A.3. infra), she and Pasztor discussed the fact that Broumas was buying and selling but was not in fact making any money. Moreover, they noted that Broumas had "a peculiar way of trading." 3. Restriction of Broumas' Joint Account and the Opening of the Les Girls Account. Although Graham normally did not seek approval before entering orders for house accounts, she generally sought Pasztor's prior approval for any Broumas trade because the trades could expose VCI to financial risk. [15] She testified that most of the VCI house accounts traded in 100- or 200-share lots and not the "large amount that John Broumas was trading for." In addition, Broumas' trades were "large money trades." When Graham brought a Broumas order ticket to Pasztor, Pasztor checked the account's activity for the preceding 30 days and determined whether the account had a debit or had received an extension of credit. By early 1989, Broumas' joint account was experiencing problems making timely payment for trades. Although Broumas had five business days to pay for any purchase, he was sometimes late in paying for his JML purchases. VCI's clearing firm had been required to obtain a series of two-day extensions of time for Broumas to pay. [16] Both Graham and Voss knew that Broumas' joint account had received "quite a few extensions." In March 1989, Jim Talty, the margin supervisor for VCI's clearing firm told Pasztor that Broumas' joint account had received too many extensions and that the clearing firm was restricting this account. The clearing firm would not permit Broumas' joint account to trade unless it had "cleared funds" to pay for the transaction or the stock was in the account. [17] Pasztor told Graham and Broumas about the restriction. Pasztor also informed Voss about the joint account's restriction. Voss knew that Broumas was actively trading JML Class A common stock through the joint account, Broumas called Voss and asked to open a second account, purportedly for a partnership between Broumas' wife and daughter called "Les Girls." Voss agreed to permit Broumas to open the "Les Girls" account. Voss never spoke to Broumas' wife or daughter and testified that he "suspected" that Broumas would be advising on the trading in the Les Girls account. Voss directed Graham to open Les Girls as a house account. Graham completed the new account form for Les Girls. She never spoke to Broumas' wife or daughter and, indeed, was unaware that Broumas had a daughter. [18] She viewed Les Girls as Broumas' account and knew that Broumas placed all the trades in that account. She testified that she believed that Broumas had opened Les Girls to prevent the then-restricted joint account from "being closed out or his position [from being] sold out." Broumas directed 40 JML Class A common stock trades through Les Girls. Between March 21 and August 29, 1989, all Broumas' directed trades in JML Class A common stock at VCI were effected through Les Girls. 4. Broumas' Trades in Rogers' Account. In February 1990, Broumas began directing trades in JML Class A common stock in another existing VCI house account maintained by his friend and attorney, Lawton Rogers. Broumas told Graham that he and Rogers were friends. Because Rogers' account was on margin, Rogers, like Broumas, could receive the proceeds of a sale in his account within one day. Broumas would call Graham to direct the trades through Rogers' account. Graham would confirm the trade with Rogers, since Broumas did not have power of attorney over the account. Graham told Pasztor about the directed trades in Rogers' account. When Pasztor informed Voss about the directed trades, Voss replied that Broumas and Rogers were "bosom buddies." Pasztor also testified that Voss had no problem with Rogers directing trades. [19] Broumas placed with Graham a total of six directed trades in the Rogers account. 5. Graham's Discussion with Broumas. Sometime in the spring of 1990, Graham asked Broumas why he was trading "in this manner." Broumas replied that he had outstanding bank loans and that selling stock was an easier way to pay those loans than "other means." He claimed that, when he had funds, he bought back the JML Class A common stock "to maintain his position in JML." [20] 6. Failure to Report Broumas' Trades. Initially, VCI did not report Broumas' over-the-counter directed trades as required by the National Association of Securities Dealers, Inc. ("NASD"). [21] Voss, Pasztor, and Graham testified that they were not aware that the NASD required the selling broker-dealer in an over-the-counter transaction of an exchange-listed security to report the sale for inclusion on the consolidated tape. Nonetheless, apparently because contra-brokers reported some of Broumas' trades with VCI, the volume for 22 of the total 76 VCI trades, amounting to 202,825 shares, was reported to the AMEX. [22] At some point, Graham effected one of Broumas' directed trades with "one of the brokers from Scott and Stringfellow." That broker asked Graham whether she would report the trade for inclusion on the tape or he should. Graham then asked Pasztor about reporting. Pasztor, in turn, called Dick Orie, the compliance director at VCI's clearing broker, to determine how to report. [23] 7. The Bounced Check. At the beginning of April 1990, Graham and Voss both became aware that a check that Broumas had given to VCI to pay for a transaction in the joint account was returned for insufficient funds. Graham asked Chema at H. Beck if he knew what Broumas was doing, but, according to Graham, Chema had no idea. Pasztor again restricted the joint account, and told Graham that Broumas could not trade without cleared funds. Voss initially agreed with Pasztor's action, and VCI rejected "a couple of" Broumas' trades. At the end of April, Broumas invited Voss to lunch. After that lunch, Voss told Pasztor that Broumas could continue to trade, and Pasztor informed Graham. Pasztor thereafter notified Voss of each trade placed by Broumas. Broumas did not pay for his last trade through VCI. The firm liquidated Broumas' position for a loss of over $60,000. III. The three elements necessary to find aiding and abetting are: (1) securities law violations by Broumas; (2) Graham's general awareness or knowledge that her actions were part of an overall course of conduct that was illegal or improper; and (3) Graham's knowing or reckless substantial assistance in the conduct constituting those violations. [24] We conclude that Graham willfully aided and abetted certain of Broumas' violations. A. Broumas Violations. Broumas engaged in hundreds of wash trades in JML Class A common stock. Broumas' trades operated as a fraud and deceit on the marketplace by creating a deceptive appearance of market activity. Broumas' creation of deceptive market activity was manipulative. [25] Respondents argue that Broumas placed the trades off the exchange because he erroneously thought that none of the trades would be reported and thus thought that the trades would not affect the market. As described above, a substantial number of the trades were in fact reported, giving false information to the market. Respondents further assert that the reported trades were only a small fraction of the total JML shares outstanding. On the days when the trades were reported, however, they were a substantial proportion of the daily volume. [26] Broumas' wash trades also were effected at a contrived price. While the prices of these trades were within the pre-existing trading range, the prices did not reflect the market's view of the sale of such large blocks into the thinly-traded market for JML Class A common stock. The price did not reflect supply or demand, but simply Broumas' trading with himself. As a result of securities transactions at these prices, moreover, Broumas caused broker-dealers to pay him immediately the proceeds from the sale portion of the wash transaction. He otherwise would not have been entitled to receive these proceeds because his transactions were not bona fide. Based on this conduct, we conclude that, by executing these wash trades, Broumas violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. [27] B. Graham's Aiding and Abetting. Graham knew that Broumas was an officer of MNBV and a director of JML. She was also aware that, during this period, he was trading almost exclusively in JML Class A common stock. She considered his trading "peculiar." These were "big money trades," involving thousands of shares of JML Class A common stock. Broumas was buying and selling repeatedly, and she knew that he was not making money on the trades. [28] He was paying commissions for these transactions, albeit at a discounted rate, as well as margin interest. In addition, Broumas was directing the trades. Courts have recognized directed trades as evidence of manipulation. [29] Broumas was the only customer that Graham had who specified the contra-broker with which he wanted the trade effected. He did not use VCI's "third market maker." Graham knew that Broumas instead placed the bulk of these trades with a "relatively few" firms. She also thought that Broumas had "connections" at these other firms because he would always identify the registered representative that Graham should call. Graham, however, asserts that she never asked Broumas about his relationship with those firms. Graham claims that she did not pay attention to the pattern of trading in the account. [30] However, she admits that she did not normally consult Pasztor about a trade in a house account unless there was a particular problem. Graham and Pasztor undertook extraordinary efforts to check Broumas' credit almost every time that VCI effected a Broumas trade. By early 1989, moreover, Graham knew that the joint account was having cash flow problems, that it had been given several extensions to pay, and, ultimately, that it was restricted. Graham further believed that Broumas opened the Les Girls account so that his position in the joint account would not be closed out. She regarded Les Girls as Broumas' account and knew that he continued to direct many JML trades in that account. Graham also received Broumas' orders directing JML trades through Lawton Rogers' account although Broumas did not have a power of attorney over that account. Broumas told Graham that Rogers was Broumas' friend. She does not suggest that she asked either Broumas or Rogers why Broumas was trading in Rogers' account or directing trades through that account. The trades in the Rogers account, in particular, exhibit a classic pattern of wash trades. The same amount of JML Class A common stock moved in and out of the Rogers account at the same or similar prices. [31] Graham asserts that she asked Broumas about his trading, and that Broumas told her that he would sell shares of JML to pay outstanding loans, and then repurchase the securities when he had cash. She states that this explanation fulfilled her duty to inquire about Broumas' trading. There are several difficulties with this view. Graham did not seek this explanation from Broumas until the spring of 1990. Thus, she had no such assurance before that date. In addition, while Broumas' statement might provide a rationale for Broumas' buying and selling, it was not adequate to address many of the issues that Graham admits puzzled her. Broumas' statement did not explain why Broumas was directing his trades, why he was dealing with these particular contra-brokers, why he was using multiple accounts, or why he directed trades through Rogers' account. She did not ask Broumas any further questions about his actions although, by April 1990, she was sufficiently concerned after Broumas tendered an insufficient funds check to VCI to attempt to find out from Chema at H. Beck, one of Broumas' contra-brokers, what Broumas was doing. Graham also argues that she did not provide substantial assistance to Broumas because VCI failed to report Broumas' trades during the period. Thus, she asserts, there was "nothing illegal about Broumas' unreported directed trades." Graham recognizes that VCI reported a few trades by Broumas, as well as Rogers, in May 1990, and thus, even by her standard, participated in Broumas' activities. Moreover, 22 percent of the trades that Graham effected for Broumas were in fact reported to the market, giving a false impression of volume at a price that did not reflect the forces of supply and demand. The unreported trades further operated as a fraud and deceit upon the broker-dealers that, believing the transactions to be genuine, paid Broumas the sale proceeds resulting from his wash trades. Graham notes that Pasztor told her that Broumas' directed trades were "fine." [32] As discussed below, this advice was erroneous. Graham was, in any event, an experienced securities professional. [33] We believe that, given the information that she had, she was, at a minimum, reckless in failing to realize that Broumas' trades were violative. She knew that a director of JML was directing transactions in JML Class A common stock to a handful of firms with which Broumas likely had "connections" and that the transactions were large and "peculiar." She knew about the various credit problems with Broumas' accounts and reported Broumas' own statement reflecting cash flow problems. She also knew that Broumas began directing JML trades through a friend's account. [34] We conclude that she willfully aided and abetted Broumas' violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. We further conclude, pursuant to Section 21C of the Act, that Graham was a cause of those violations. [35] IV. Voss' Supervision. Sections 15(b)(4)(E) and 15(b)(6) of the Exchange Act authorize an administrative proceeding against an associated person who "has failed reasonably to supervise, with a view to preventing violations" of the securities laws and regulations by a person who is subject to his or her supervision and who commits such violations. Voss states that he retained the title of president merely because he was the sole shareholder of VCI. We, however, have repeatedly stated: The president of a corporate broker-dealer is responsible for compliance with all the requirements imposed on his firm unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person's performance is deficient. [36] Voss further asserts that, during the period at issue, he was rarely at VCI because he was occupied with the business affairs of Noxso Corporation, of which he was a director. He argues that he delegated the operation of VCI to Pasztor and had no reason to question Pasztor's performance. His testimony and Pasztor's, however, demonstrate a high level of participation by Voss in the affairs of VCI. Pasztor testified that he spoke to Voss daily. While Voss denies that they spoke that frequently, he admits that Pasztor kept him informed about a wide range of issues with respect to VCI's operations, including revenues, commissions, "customers, recruiting new brokers, advertising, office facilities, equipment to buy, contracts with clearing firms and that sort of thing." [37] We also conclude that Voss was well aware of Broumas' activities. Voss had been in the securities industry over 20 years. Voss knew that Broumas, a JML director and MNBV officer, was trading JML Class A common stock, and was trading those securities actively. Voss was aware of Broumas' practice because Voss admits that he accepted a directed trade from Broumas. When Pasztor reported to Voss that Broumas was directing trades, Voss told Pasztor such trades were "fine." Voss did not inquire of Broumas, or ask Graham or Pasztor to inquire, about the nature of Broumas' trading or why he was directing trades. He also permitted directed trades in Rogers' account, noting that Rogers and Broumas were "bosom buddies." Voss admits that he knew what a wash trade and a matched order were. Voss claims that he was certain that Broumas' directed trades could not have been wash trades or matched orders because they were effected over-the-counter and thus "were invisible to the public . . . [T]he only two people that would have knowledge of the trades were the brokers doing the trade." Voss was in error. As we explained above, the trades were violative since they were effected at a contrived price and caused broker-dealers to pay funds to Broumas to which Broumas was not entitled. Moreover, as discussed, some of these trades were in fact reported. More critically, even after Pasztor informed Voss that VCI was required to report Broumas' trades, Voss permitted Broumas to continue to direct trades. Voss was further wrong because the Broumas scheme involved inducing the participating brokers to give Broumas proceeds from sham transactions. Voss also should have been aware that VCI's compliance manual did not provide for the detection of wash sales or matched orders. During this period, Pasztor revised the manual, and Voss admits that he reviewed the manual. He left the responsibility for its completeness to Pasztor although he admits that he had been aware of these types of violations since the 1970s. [38] Pasztor also informed Voss about the extensions that had been granted in the Broumas joint account, as well as its restriction. Voss permitted Broumas to open the Les Girls account, even though he thought Broumas would provide advice with respect to the trades in that account. He did not contact either Broumas' wife or daughter, the purported owners of Les Girls. [39] In April 1990, when Pasztor attempted to restrict Broumas' account after Broumas gave VCI a check for insufficient funds, Voss overruled Pasztor and permitted Broumas to continue to trade. [40] We conclude that Voss in fact exercised supervisory authority over VCI. In spite of Broumas' positions with JML and MNBV, numerous indications of Broumas' financial situation, and the unusual nature of Broumas' trading, Voss authorized Graham and others at the firm to accept Broumas' directed trades. He never directed that any inquiry be made of the trading. He also overruled Pasztor's attempts to restrict Broumas' accounts. We conclude that Voss failed to supervise reasonably Graham's activities. V. A. Estoppel. Graham and Voss claim that we are somehow estopped from bringing this proceeding or that we have somehow changed an administrative interpretation. They do not claim that we approved Broumas' trading at VCI, nor do they explain how they changed their position in reliance. Rather, they claim that both we and the NASD observed this trading and failed both to identify the trading as manipulative and to alert them as to potential violations. Estoppel requires a "definite misrepresentation of fact to another person," where the person making the misrepresentation has "reason to believe that the other will rely on it" and the other in fact acts in reliance upon the misrepresentation. [41] A respondent bears a particularly heavy burden when he or she seeks to estop the government. [42] We believe that Respondents have not met that burden, nor have they demonstrated a change in administrative interpretation. An NASD examiner testified that he found some of Broumas' trades to be "fishy." The NASD, however, had no jurisdiction over Broumas and referred its observations to our staff. [43] We conducted a subsequent investigation and commenced an action against Broumas in 1991 and this proceeding in 1994. [44] B. Alleged Bias by Law Judge. Respondents assert that the law judge demonstrated bias against them. We conclude that the law judge did not demonstrate any such bias. On a single occasion, before the day's testimony began, the law judge appropriately responded to a suggestion from a third party that Voss might be signaling a witness during that witness' testimony. The law judge, however, stated that he was not going to consider Voss' conduct in deciding the case. There is no further mention of the incident in the record, and no suggestion that it influenced the law judge or that he necessarily credited the suggestion. Respondents also contend that the law judge consistently interrupted Voss and Respondents' counsel during counsel's examination of Voss. To the extent that the law judge in fact engaged in these interruptions, it appears to have been nothing more than his attempt "to clarify evidence, confine counsel to evidentiary rulings, ensure the orderly presentation of evidence, and prevent undue repetition." [45] They further claim that the law judge prejudged the matter, as evidenced by the initial decision, which Respondents contend is "sloppy in its treatment of the record" and appears not to have been proofread. As noted above, we have conducted an independent review of the record, except for findings not challenged on appeal. We have found the majority of the alleged violations supported by the record. We conclude that the law judge properly considered the evidence presented to him. C. Laches. Respondents also complain that the conduct at issue occurred in 1989 and 1990, and this proceeding was instituted in 1994. They claim that the passage of time has hampered their ability to defend. Voss claims, for example, that he could not identify a third party who was present at the April 1990 lunch with Broumas and who could confirm that Voss and Broumas did not discuss Broumas' trading or financial situation. As noted above, the law judge did not credit Voss' testimony on this point. In any event, after that lunch, Voss permitted Broumas to resume trading. [46] Both Voss and Graham gave testimony to our staff in 1991. Thus, they were aware by that time that we were investigating Broumas' transactions through VCI and could have taken steps at that time to obtain and preserve relevant information. We conclude that Respondents have not been prejudiced by the passage of time. [47] VI. We now consider what sanction is appropriate in the public interest. [48] Graham has no disciplinary history. Although Broumas' scheme was of substantial duration, Graham's participation in the overall scheme was circumscribed. Broumas' activities, however, exhibited so many indicia of wash trades and matched orders that Graham as an experienced securities professional should have recognized and attempted to stop the conduct. We believe that the law judge's determination that Graham be suspended for two months, and ordered to cease and desist from violating or causing violations of Section 10(b) or Exchange Act Rule 10b-5, is appropriate in the public interest. Although he is not charged as a direct violator or an aider or abettor, Voss had the experience and sophistication to understand Broumas' scheme. He admits, moreover, that he recognized Broumas' directed trades. His supervisory failures permitted VCI to be used as part of that scheme. [49] We determine that a suspension for three months is appropriate. [50] An appropriate order will issue. [51] By the Commission (Chairman LEVITT and Commissioner HUNT); Commissioner JOHNSON dissenting; Commissioners CAREY and UNGER not participating. Jonathan G. Katz Secretary Commissioner JOHNSON, dissenting. Today we decide Adrian C. Havill, Administrative Proceeding File No. 3-8510, and Sharon M. Graham and Stephen C. Voss, Administrative Proceeding File No. 3-8511. A key issue unites these companion cases: when is it appropriate to excuse conduct by a registered representative that would have otherwise been fraudulent because the representative relied on the advice of a compliance officer or supervisor? In my view, the answer will necessarily depend on the facts and circumstances of each case. For instance, if the compliance officer or supervisor advised the registered representative that it was permissible to lie to, cheat or steal from customers that advice would hardly be reasonable, and I would have no difficulty sustaining findings of violations by a registered representative purporting to rely on such advice. But when the advice appears reasonable on its face, I think that such a showing by a registered representative may negate scienter. [1] The Commission recognized this principle in James L. Owsley, Release No. 34-32491, 1993 SEC LEXIS 1525 (June 18, 1993). In Owsley, the Commission reviewed a finding by the NASD that a registered representative, Robert T. Nelson, had committed fraud when he failed to disclose to customers that he was selling his own personal stock in a company, Superior Resources, Inc., at the same time he was advising customers to purchase Superior stock. 1993 SEC LEXIS 1525, at *10. The Commission set aside these findings of fraud because the record does not show that Nelson acted with the requisite scienter * * * . On the contrary, prior to selling his stock, Nelson asked a firm official whether it was necessary for him to disclose his sales to customers being asked to purchase Superior, and received a negative response. Id. at *10 to *11. Applying Owsley to these two cases -- which present exceedingly close calls -- I reach divergent results. In Sharon M. Graham, after carefully reviewing the record, I find I must dissent. In my view, Graham reasonably relied on the advice of her direct supervisor James Pasztor and the firm's owner Stephen C. Voss, and her reliance negates scienter. [2] Because Voss was not charged with any direct violations, but only with failure to supervise Graham, my vote to reverse the findings of violations against Graham necessarily (if unfortunately) requires me to vote to reverse the findings of violations against Voss as well. I reach the opposite conclusion in Adrian C. Havill. In Havill, I concur with my colleagues' determination that Havill did not reasonably rely on the advice of his branch manager -- in other words, Havill knew or was reckless in not knowing that his branch manager's advice was wrong. Havill, supra at text accompanying nn.19 and 20 & n.18. I also agree with my colleagues' observation that Havill may not have made full disclosure: he seems not to have explained adequately the nature of the transactions at issue to his branch manager. Id. at n.18. For these reasons, Havill's situation seems distinguishable both from Graham's and from that presented in Owsley. Accordingly, I have voted to sustain the findings of violations in Havill. **FOOTNOTES** [1]: We amended our Rules of Practice in 1995. Securities Exchange Act Rel. No. 35833, 60 Fed. Reg. 32,738 (June 23, 1995). Because these proceedings were instituted before the new rules were adopted, they are governed by our former Rules of Practice. [2]:On September 27, 1991, this Commission filed a complaint in the United States District Court for the District of Columbia alleging that, from January 1989 through July 1990, Broumas violated the federal securities laws by marking the close and by executing wash trades in JML stock. SEC v. John G. Broumas, Civil Action No. 91-2449 (D.D.C.) (L.R. No. 12999). Broumas consented, without admitting or denying the allegations, to the entry of a permanent injunction prohibiting him from future violations of Sections 9(a)(1), 9(a)(2), 10(b), and 16(a) of the Exchange Act and Rules 10b-5 and 16a-3 thereunder. In November 1994, Broumas pled guilty to a criminal information charging him with misapplication of bank funds. The information alleged that, from April through June 1990, Broumas engaged in a check-kiting scheme, writing checks against insufficient funds in order to meet margin calls. It also charged that Broumas improperly used his position as board chairman of MNBV to exchange personal checks drawn on falsely inflated balances for cashier's checks in order to meet margin calls and pay other expenses. United States v. Broumas, Crim. No. 94-442 (D.D.C. Nov. 23, 1994). [3]:As a result of his inability to repay his liabilities, Broumas filed for personal bankruptcy in early 1991. [4]:Broumas also engaged in the practice of "marking the close." We have defined marking the close as "the practice of attempting to influence the closing price of a stock by executing purchase or sale orders at or near the close of the market." Thomas C. Kocherhans, Securities Exchange Act Rel. No. 36556 (Dec. 6, 1995), 60 SEC Docket 2589, 2592. Between January 18, 1989 and June 25, 1990, Broumas made 69 purchases of between 100 and 200 shares of JML on AMEX or the Midwest Stock Exchange during the final 10 minutes of the trading day. Of those purchases, 54 were the last trade of the day and 47 of these trades were executed on an uptick. On several occasions, Broumas' trades raised the closing price of JML stock by 1/8. It is not alleged here that Graham aided, abetted, or caused any of Broumas' marking-the-close violations. [5]:We instituted a proceeding against Rogers that he settled without admitting or denying the allegations. L. Lawton Rogers, III, Securities Exchange Act Rel. No. 36704 (Jan. 11, 1996), 61 SEC Docket 100. Our findings here with respect to Rogers are solely for the purpose of this proceeding. [6]:Schedule G to the National Association of Securities Dealers, Inc.'s By-Laws, which was in effect at the time of the events at issue, required that over-the-counter sales transactions in listed securities be reported. Between January 1 and July 2, 1989, none of the wash trades that Broumas placed with any broker-dealer were reported to the AMEX. After July 2, 1989, the volume for at least 80 of Broumas' trades, totalling 703,161 shares, was reported to the AMEX, and subsequently to the public. [7]:VCI's "house" accounts were not assigned to any particular registered representative. Commissions from trades in these accounts were paid to the firm, not to the registered representative who executed the trade. [8]:Pasztor was also named as a respondent in this proceeding. His hearing was severed from that of Graham and Voss. Thus, this proceeding remains pending as to him. Our findings here with respect to Pasztor are solely for the purpose of determining the liability of Graham and Voss and are not binding on Pasztor. [9]:These initial trades are not the subject of our order instituting proceedings. [10]:The remaining trades were executed by other VCI registered representatives and Pasztor. [11]:VCI normally used a particular "third market maker" to place over-the-counter trades in exchange-listed securities. Graham observed that Broumas invariably specified the contra- broker for his trades and did not use VCI's third market maker. [12]:If Broumas sold stock that he had recently purchased, Graham and Pasztor would wait three days to make sure that the check with which Broumas had paid for the purchase cleared. [13]:Graham knew Chema because they had both worked together at VCI for a year. [14]:Broumas directed Graham and others at VCI to execute the 76 wash trades at issue with a total of 8 different broker- dealers. We instituted administrative proceedings against Ronald Lara, Richard Kulak, Carole Haynes, and Richard Chema. Lara settled the proceedings against him without admitting or denying the allegations. E. Ronald Lara, Securities Exchange Act. Rel. No. 35594 (Apr. 12, 1995), 59 SEC Docket 193. We dismissed the proceeding against Kulak. Richard M. Kulak, Securities Exchange Act. Rel. No. 38657 (May 20, 1997), 64 SEC Docket 1615. The law judge issued an initial decision in the proceeding against Haynes. Carole L. Haynes, Initial Decision Rel. No. 78 (Nov. 24, 1995), 60 SEC Docket 2294. That decision has become final. See Securities Exchange Act Rel. No. 36692 (Jan. 5, 1996), 61 SEC Docket 66, as amended, Securities Exchange Act Rel. No. 36732 (Jan. 17, 1996), 61 SEC Docket 265. We have issued an opinion in the proceeding against Chema. Richard D. Chema, Securities Exchange Act Rel. No. __, [date], __ SEC Docket __. Our findings here with respect to Lara, Kulak, Chema, and Haynes are made solely for the purpose of this proceeding. [15]:There is a dispute on the record between Graham and Pasztor on this point. Graham asserts that she sought Pasztor's approval before every trade. Pasztor testified that there were "in the area of a dozen or so" trades for which Graham did not seek his prior approval. He said that, once he had told Graham that such trades were fine, there was no need for her to seek his approval prior to each trade. Pasztor testified that he reviewed the preceding day's trading tickets during the following morning. [16]:Under Federal Reserve Board Regulation T, a margin call generally must be satisfied within seven business days. That period may be extended for one or more limited periods upon application of the broker to a self-regulatory organization. See 12 C.F.R  220.4. [17]:Talty told Pasztor that Broumas might be "check kiting," a view with which Pasztor agreed. [18]:The partners in Les Girls were identified as Ruth D. Broumas and Jennifer Sue Johnson. [19]:Voss, however, testified that he was not aware that Broumas directed trades in Rogers' account or that these trades involved JML. [20]:Graham also testified that Pasztor had a similar conversation with Broumas. Pasztor, however, testified that Broumas never told him anything about bank loans. [21]:See n.6, supra. [22]:Before May 1990, the bulk of these reported transactions involved transactions in which VCI purchased on Broumas' behalf. However, two transactions in which VCI sold on Broumas' behalf, one on December 15, 1989 and one on January 15, 1990, were also reported. We cannot determine from the record the identity of the firm that reported any particular transaction. [23]:Pasztor testified that he made this inquiry in mid-April. Voss testified that he "suspect[ed]" that the reporting issue came up "subsequent to the Les Girls or John and Ruth Broumas accounts stopping trading." However, if a Scott & Stringfellow broker informed Graham about the reporting requirement, the last trade in a Broumas account between VCI and Scott and Stringfellow occurred in January 1990. Orie expressed concern that Broumas might be acting as a statutory underwriter of restricted stock in contravention of Securities Act Rule 144. He suggested that VCI "get rid of the account" and that Broumas needed counsel. Pasztor relayed Orie's concerns to Voss. Voss spoke to Orie and arranged to obtain a letter from bank counsel that Broumas' trades were permissible under Rule 144. [24]:See Russo Securities Inc.. Securities Exchange Act Rel. No. 39181 (Oct. 1, 1997), 65 SEC Docket 1990, 1998 n.16; Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995), and cases cited therein. [25]:Ernst & Ernst v. Hochfelder, 425 U.S. 185, 204 (1976); Swartwood, Hesse, Inc., 50 S.E.C. 1301, 1307 (1992); Edward J. Mawod & Co., 46 S.E.C. 865, 869-71 (1977), aff'd, 591 F.2d 588, 595 (10th Cir. 1979); Thornton & Co., 28 S.E.C. 208, aff'd, 171 F.2d 702 (2d Cir. 1948) (per curium). [26]:Respondents also argue that, in determining whether Broumas engaged in a manipulation, we are somehow limited to Broumas' activities at VCI, not the totality of his scheme. However, the fact that an aider and abetter assists in only a portion of a violative scheme does not mean that the entire scheme cannot be considered for determining whether the underlying violation occurred. See, e.g., Mawod & Co. v. SEC, 591 F.2d 588, 595-596 (10th Cir. 1979) (broker found to aid and abet manipulative scheme involving wash sales and matched orders where he knew of manipulators' presence in trading room and dramatic price rise in stock). See also Woods v. Barnett Bank, 765 F.2d 1004, 1011 (11th Cir. 1985) (banker found to aid and abet brokers who were soliciting purchases of bonds through "numerous material misrepresentations and omissions" by writing recommendation letter to escrow bank that resulted in improper release of escrowed offering funds to brokers). [27]:We previously have held that specific manipulative intent must be demonstrated to establish a violation of Section 9(a)(1). Michael Batterman, 46 S.E.C. 304, 305 (1976) (settled case); Harold T. White, 3 S.E.C. 466, 510 (1938). The record here demonstrates only that Broumas directed his trades between his accounts and accounts that he controlled to obtain funds using the float. Under these circumstances, we conclude that Broumas' wash trades do not support a finding of violation of Section 9(a)(1) of the Exchange Act, and thus Graham necessarily did not aid, abet, or cause this violation. [28]:Compare Mawod & Co. v. SEC, 591 F.2d at 595 (inferring that partner in broker-dealer aided and abetted manipulators where "trading was economically irrational."). [29]:United States v. Corr, 543 F.2d 1042, 1046 (2d Cir. 1976); United States v. Cohen, 518 F.2d 727, 734-35 (2d Cir.), cert. denied, 423 U.S. 926 (1975). [30]:Graham seems to suggest that, because these were house accounts, she did not have any responsibility to monitor them. We disagree. Graham admits that Broumas asked for her when he called. As the person most often in contact with Broumas, she was the person at VCI who was in the best position to know the nature and extent of his activities. Moreover, as noted above, she was in fact monitoring Broumas' account. As we stated twenty-five years ago: The importance of a broker-dealer's responsibility to use diligence where there are any unusual factors is highlighted by the fact that violations of the antifraud and other provisions of the securities laws frequently depend for their consummation . . . on the activities of broker-dealers who fail to make diligent inquiry to obtain sufficient information to justify their activity in [a] security. Alessandrini & Co., Inc., 45 S.E.C. 399, 406 (1973). [31]:On February 12, 1980, Broumas bought through Rogers' account 12,000 shares of JML at 5-5/8 from First Potomac. He sold those shares, also at 5-5/8, on March 5th to H. Beck, clearing through Bear Stearns. On May 2nd and May 10th, he bought 11,200 shares and 12,000 shares, respectively, from H. Beck all at 5-1/8. He sold back to H. Beck the 12,000 shares at 4-1/2 on May 12th and the 11,200 shares at 4-5/8 on May 24th. On March 5th, Rogers requested that the check for the proceeds of the sale be sent to him by courier. Rogers maintained a joint account with Broumas at MNBV, which permitted Broumas to deposit checks in Rogers' name and draw against the funds. [32]:She also notes that Pasztor and Voss also effected these trades for Broumas, as further evidence that she did not believe that these trades were unlawful. However, we have previously observed that it is "immaterial" that others "may have been operating in an illegal or improper manner." George Salloum, Securities Exchange Act Rel. No. 35563 (Apr. 5, 1995), 59 SEC Docket 43, 52 n.29; Donald T. Sheldon, 51 S.E.C. at 66, n.32. [33]:Graham also argues that she did not understand what either wash trades or matched orders were and thus could not have recognized that Broumas' conduct was manipulative. She should have. Graham had been in the securities industry since the early 1980s, and these concepts are well-established in the securities industry. See, e.g., n.25 supra. Although she asserts that the trades occurred only two to three times a month, she also admits that the trades were directed, were extraordinarily large, and required a searching inquiry into Broumas' credit status. Moreover, a person who aids and abets may not "escape liability by simply claiming he was ignorant of the securities laws. . . ." Camp v. Dema, 948 F.2d 455, 459 (8th Cir. 1991). See also SEC v. Falstaff Brewing Corporation, 629 F.2d 62, 77 (D.C. Cir. 1980), cert. denied sub nom. Kalmanovitz v. SEC, 449 U.S. 1012 (1980) ("Knowledge means awareness of the underlying facts, not the labels that the law places on those facts. Except in very rare instances, no area of the law not even the criminal law demands that a defendant have thought his actions were illegal."). [34]:Given the matters of which Graham was aware, we believe her situation differs from that described in James L. Owsley, 51 S.E.C. 524, 528 (1993). In Owsley, we held that Nelson, the applicant there, did not act with the requisite scienter because, prior to selling his stock, a firm official had told Nelson that it was not necessary for him to disclose to customers that he was selling his own shares of a stock that customers were being asked to purchase. Among other things, Owsley involved a single, discrete inquiry and limited transactions. [35]:Our finding that Graham willfully aided and abetted Broumas' violations necessarily makes her a "cause" of those violations. See Dominick & Dominick, Incorporated, 50 S.E.C. 571, 578 n.11 (1991). As noted above, to conclude that a respondent aided and abetted another's violation, it must be found that the respondent acted with scienter. A respondent is a "cause" of another's violation if the respondent "knew or should have known" that his or her act or omission would contribute to such violation. Exchange Act Section 21C(a). [36]:Thomas F. White, 51 S.E.C. 1194, 1197 (1994), quoting Swartwood, Hesse, Inc., 50 S.E.C. at 1308. [37]:Voss also testified that Pasztor consulted Voss about hiring and firing decisions. Voss testified that, before a personnel action, Pasztor "would generally consult with me in advance. He wouldn't just take unilateral action." In response to a question whether he had the power to veto any of Pasztor's decisions, Voss stated, "I could fire Mr. Pasztor if I wanted to." [38]:In Voss' view, the firm's "compliance problems are minimized" because VCI did unsolicited transactions. As evidenced by Broumas' activities through VCI, Voss' belief was not correct. [39]:Voss testified that he required the Les Girls account to be subject to the same restrictions as the joint account, that is, that funds or the securities be in the account. He also testified that he never asked Pasztor whether the restriction was followed, and did not realize that the restriction was not being enforced until Broumas bounced a check. The law judge did not credit this testimony. Credibility determinations by the fact finder are entitled to substantial deference and can be overcome only where the record contains "substantial evidence" for doing so. Jay Houston Meadows, Securities Exchange Act Rel. No. 37156 (May 1, 1996), 61 SEC Docket 2444, 2452, aff'd, 119 F.3d 1219 (5th Cir. 1997). [40]:Voss gave this direction after he went to lunch with Broumas. Voss testified that he and Broumas did not discuss Broumas' accounts or trading or Broumas' financial difficulties at this luncheon meeting. The law judge "questioned the credibility of this claim." See n.39 supra. [41]:Heckler v. Community Health Services, 467 U.S. 51, 59 (1984), quoting Restatement (Second) of Torts  894(1) (1979). [42]:Office of Personnel Management v. Richmond, 496 U.S. 414, 419-20 (1990). [43]:Respondents cite the testimony of one of our examiners that he observed Broumas' trades at another broker-dealer, but did not identify Broumas' wash sales or matched orders. That examiner, however, did not have the benefit of Broumas' testimony at the time of the examination. We also note that the record reflects that AMEX was also conducting an investigation of Broumas' trading at this time. Although AMEX did not have jurisdiction over many of the firms involved in these transactions, including VCI, the exchange identified some apparent Broumas' wash trades and referred them to us. [44]:In any event, we have repeatedly held that a broker-dealer may not shift its responsibility for compliance with the securities laws to regulatory authorities. David M. Haber, Securities Exchange Act Rel. No. 35564 (Apr. 5, 1995), 59 SEC Docket 59, 63-64, n.14; G.K. Scott & Co., Inc., Securities Exchange Act Rel. No. 33485 (Jan. 14, 1994), 55 SEC Docket 2887, 2894 n.21, aff'd, 56 F.3d 1531 (D.C. Cir. 1995) (Table). [45]:See United States v. Laurins, 857 F.2d 529, 537 (9th Cir. 1988), cert. denied, 492 U.S. 906 (1989). [46]:Respondents also claim that our examiner could not recall his conversations with another examiner about Broumas' trading and whether that trading was manipulative. We have rejected Respondents' estoppel argument above. Voss further complains because the law judge construed Voss' inability to remember the provisions of VCI's then-current compliance manual against him. We have not relied on Voss' recollection of that manual. We have considered only Voss' admission that he reviewed the manual at the time that Pasztor revised the manual. [47]:In Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), the Court of Appeals ruled that a censure and a supervisory suspension in an administrative proceeding constituted a "penalty" under the statute of limitations contained in 28 U.S.C. 2462 and directed that we dismiss the proceeding, which had been initiated more than five years after the conduct at issue there. Here, however, at least half of the violative conduct is within the five-year period. Even if certain of the conduct alleged were time-barred, such conduct can be considered as evidence of motive, intent, or knowledge. See, e.g., Fed. R. Evid. 404(b). See also Local Lodge No. 1424 v. NLRB, 362 U.S. 411 (1960). [48]:In making this determination, we consider "the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against further violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that [his] occupation will present opportunities for future violations." See, e.g., Donald T. Sheldon, 51 S.E.C. at 86, quoting Steadman v. SEC, 603 F.2d 1120, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). [49]:We note that Voss has a lengthy disciplinary history, but the violations are not recent. Voss & Co., Inc., 48 S.E.C. 39 (1984) (violations of reporting and recordkeeping provisions, unfair markups, interpositioning, and failure to comply with requirements governing the review of options accounts and transactions); Voss & Co., Inc., 47 S.E.C. 626 (1981) (failure to comply with registration, recordkeeping and reporting requirements and providing customers with inaccurate descriptions of VCI's credit terms for margin transactions). Voss also consented to NASD disciplinary action in 1976 and 1978. [50]:We do not conclude, based on the record here, that it is in the public interest to bar Respondents from association with any municipal securities dealer, investment adviser, or investment company. [51]: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. [1]:I regard this showing as a form of affirmative defense, i.e., the registered representative would bear the burden of proof and persuasion in establishing that he or she, acting in good faith: (a) consulted a compliance officer or supervisor in advance of the action taken; (b) made full disclosure; and (c) reasonably relied on the advice received. [2]:Without prejudging the pending appeal filed by the Division of Enforcement, I note that ALJ Fox Foelak dismissed parallel charges against Pasztor because "[i]t had been Mr. Voss' decision to permit the trading [by John Broumas], and Mr. Pasztor was powerless to change it." Sharon M. Graham, 1997 SEC LEXIS 287, at *22 to *23 (Initial Decision Feb. 7,1997). UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40727 / November 30, 1998 Admin. Proc. File No. 3-8511 __________________________________________ : In the Matter of : : SHARON M. GRAHAM : and : STEPHEN C. VOSS : __________________________________________: ORDER IMPOSING REMEDIAL SANCTIONS On the basis of the Commission's opinion issued this day, it is ORDERED that Sharon M. Graham be, and she hereby is, suspended from association with any broker or dealer for a period of two months; and it is further ORDERED that Graham cease and desist from committing or causing any violation or any future violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and it is further ORDERED that Graham's suspension shall be effective at the opening of business on December 14, 1998; and it is further ORDERED that Stephen C. Voss be, and he hereby is, suspended from association with any broker or dealer for a period of three months; and it is further ORDERED that Voss' suspension shall be effective at the opening of business on December 14, 1998. By the Commission. Jonathan G. Katz Secretary