UNITED STATES OF AMERICA
In the Matter of
ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDING, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER AND REMEDIAL SANCTIONS
The Securities and Exchange Commission ("Commission") deems it appropriate in the public interest that a public cease-and-desist and administrative proceeding pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Section 9(b) of the Investment Company Act of 1940 ("Investment Company Act") be instituted against respondent Wayne Miller ("Miller").
In anticipation of the institution of this public administrative and cease-and-desist proceeding, Miller has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein (except that Miller admits the findings in III.A. below, and the jurisdiction of the Commission over him and over the subject matter of this proceeding), Miller consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceeding, Making Findings and Imposing a Cease-and-Desist Order and Remedial Sanctions ("Order") set forth below.
Accordingly, IT IS ORDERED that a proceeding pursuant to Section 8A of the Securities Act, Section 15(b) and Section 21C of the Exchange Act, and Section 9(b) of the Investment Company Act be, and hereby is, instituted.
On the basis of this Order and the Offer of Settlement submitted by Miller, the Commission finds that1:
Wayne Miller was a registered representative associated with US Pacific Financial Services, Inc. from October 1997 to December 2000. Miller holds series 7, 24, and 63 securities licenses. He is not currently associated with a broker-dealer.
1. From March through November 1999, Miller excessively traded options for two unsophisticated customers, resulting in losses of over $275,000 for the customers and generating $118,000 in commissions for Miller. The customers were two sisters in their late 50s who had no investment experience and possessed limited means. In only a nine-month period, Miller executed 121 option trades in one account and 108 option trades in the other account. Miller's trading resulted in annualized turnover rates (i.e., the number of times during a given time period that the securities in an account are replaced by new securities) of 29.67 and 32.86 in the respective accounts. Moreover, the break-even cost factors (i.e., percentage of return on the customer's average net equity required for the account to break-even after paying for such costs as commissions and other fees) were 209.6% and 229.55% for the respective accounts. Miller entered into transactions and managed the customers' accounts for the purpose of generating commissions rather than furthering his clients' interests. Miller had control of the clients' accounts, and excessively traded in the accounts in light of the customers' investment objectives. Miller acted with scienter, in that he acted with willful and reckless disregard for the customers' interests.
2. Miller's option trading was unsuitable for the clients' financial situation and objectives. Miller was reckless in not knowing that his option trading for the clients was unsuitable for them. The clients told Miller that they wanted conservative investments. Miller, nevertheless, engaged in high risk day trading of options. Miller never disclosed to the clients that his option trading was unsuitable for them.
3. Miller misrepresented and omitted to disclose material information to the clients regarding the suitability of his option trading. Miller failed to disclose the risks associated with options trading and their speculative nature. Miller represented to the clients that he could recover their losses if they continued with his option trading. Miller had no basis for these statements. Miller also advised the clients that he was no longer working with an adviser when, in fact, he had never worked with an adviser on option trading. Miller only relied on various Internet sites and newsletters for his options trading.
4. Miller has submitted a sworn Statement of Financial Condition dated October 25, 2001 and other evidence and has asserted his inability to pay disgorgement plus prejudgment interest and a civil penalty.
1. Miller willfully violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that Miller engaged in unsuitable trading in two client accounts and churned the accounts.
2. Unsuitable trading occurs when: (1) the securities recommended are unsuitable to the client's needs; (2) the broker knew or reasonably believed that the securities were unsuited to the client's needs; (3) the broker recommended the unsuitable securities anyway; and (4) the broker, with scienter, made material misrepresentations (or, owing a duty to the client, did not disclose material information) relating to the suitability of the securities. Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir. 1993). Miller's option trading was clearly unsuitable for the sisters' financial situation and objectives. Miller's trading for the sisters involved very risky frequent trading of almost all of the sisters' equity in short term option transactions. The sisters had almost all of their net worth invested with Miller and were seeking safe, conservative investments for their retirement. Miller was reckless in not knowing that his option trading for the sisters was unsuitable for them. One client repeatedly advised Miller that she wanted conservative investments, and both clients' original account opening documents indicated that they wanted conservative investments. Miller, nevertheless, engaged in a high risk day trading of options in which he often invested almost their entire net worth in a single option.
3. Miller, moreover, misrepresented and omitted to disclose material information to the sisters regarding the suitability of his option trading. Miller represented to the sisters that he could recover their losses if they continued with his option trading. Miller, however, had no basis to claim that he could recoup their losses. Miller's option trading history with the sisters and another client showed that he continually lost money for his clients. Miller also represented to one client that he was no longer working with the advisers who had advised him on the option trading and that his indicators were currently working well. In fact, Miller only relied on various Internet sites and newsletters for his options trading and his option trading never was profitable. Miller further never disclosed to the sisters, who trusted and relied on Miller to make suitable recommendations and who ceded trading authority to Miller, that his options trading was unsuitable for them.
4. The elements of churning are: (1) the broker's control of the customer's account; (2) excessive trading in the account in light of the customer's investment objectives; and (3) the broker's scienter, i.e., his conduct with the intent to defraud the customer or his willful and reckless disregard for the customer's interests. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986); Miley, 637 F.2d at 324. Miller's option trading in the sisters' accounts satisfied all of the elements of churning.
5. Miller had de facto control over the sisters' accounts. A broker has de facto control over a customer's account if the customer is unable to evaluate the broker's recommendation and to exercise independent judgment. Follansbee v. Davis, Skaggs & Co., 681 F.2d 673, 676-77 (9th Cir. 1982); In re Erdos, 47 S.E.C. 985, 989-90, 1983 SEC LEXIS 332, *12 (1983), aff'd, 742 F.2d 507 (9th Cir. 1984). The sisters permitted Miller to trade options without discussing the trades before they were made. Moreover, the sisters did not have the experience to evaluate Miller's recommendations and to exercise independent judgment. Rather, the sisters trusted Miller and relied on Miller's judgment and recommendations.
6. Excessive trading is measured in light of the customer's financial condition and investment objectives. Hotmar v. Lowell H. Linstrom & Co., 808 F.2d 1384, 1386 (10th Cir. 1987); Rowe v. Morgan Stanley Dean Witter, 191 F.R.D. 398, 410 (D.N.J. 1999). The sisters were investing almost all of their net worth with Miller; they had no previous investment experience; and they represented to Miller orally and in their account opening documents that they were conservative investors. In light of their financial condition and investment objectives, Miller's option trading for the sisters was clearly excessive.
7. The turnover rate, cost-to-equity ratio and days-held analysis are all methods used to determine excessive trading. Miller's trading resulted in annualized turnover rates of 29.67 and 32.86 in the respective accounts. An annual turnover rate of 6 is generally considered to establish a presumption of churning. Moreover, the break-even cost factors were 209.6% and 229.55% for the respective accounts. These cost/equity rates were excessive in light of the turnover rates and the investment objectives of the sisters.
8. Miller acted with scienter. For over two years, Miller followed the clients' requests to invest conservatively by investing them in cash or large cap equities. After Miller had lost another large account which had been the source of most of his commissions, he suddenly began trading options in the sisters' accounts, generating over $150,000 in commissions in only nine months. Miller failed to disclose the risks of option trading to the sisters and continued to trade options after the sisters had suffered substantial losses. Moreover, when the sisters expressed concern about the losses, Miller reassured them that he could recover their losses through more options trading.
9. Thus, Miller willfully violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by engaging in unsuitable trading and churning of his clients' accounts.
Based on the foregoing, the Commission deems it appropriate in the public interest to accept the Offer of Settlement submitted by Miller.
Accordingly, IT IS HEREBY ORDERED that:
A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, respondent Miller cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
B. Miller be and hereby is barred, pursuant to Section 15(b) of the Exchange Act, from association with any broker or dealer and is prohibited, pursuant to Section 9(b) of the Investment Company Act, from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter;
C. Miller shall pay disgorgement of $118,000 plus prejudgment interest, but that payment of such amount is waived based upon Miller's sworn representations in his Statement of Financial Condition dated October 25, 2001 and other documents submitted to the Commission;
D. Based upon Miller's sworn representations in his Statement of Financial Condition dated October 25, 2001 and other documents submitted to the Commission, the Commission is not imposing a civil penalty against Miller;
E. The Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Miller provided accurate and complete financial information at the time such representations were made; (2) seek an order directing payment of disgorgement and prejudgment interest; and (3) seek an order directing payment of the maximum civil penalty allowable under the law. No other issues shall be considered in connection with this petition other than whether the financial information provided by Miller was fraudulent, misleading, inaccurate or incomplete in any material respect. Miller may not, by way of defense to any such petition, (1) contest the findings in this Order; (2) assert that payment of disgorgement and interest should not be ordered; (3) contest the amount of disgorgement and interest to be ordered; (4) assert that payment of a penalty should not be ordered; (5) contest the imposition of the maximum penalty allowable under the law; or (6) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense.
By the Commission.
Jonathan G. Katz
1 The findings herein are not binding on anyone other than Miller.
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