UNITED STATES OF AMERICA
In the Matter of
FAHNESTOCK & CO., INC.
ORDER MAKING FINDINGS AND |
IMPOSING REMEDIAL SANCTIONS
AND CEASE-AND-DESIST ORDER AS
TO FAHNESTOCK & CO., INC.
On September 30, 1996, the Securities and Exchange Commission instituted public administrative proceedings pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 against William E. Bierlin, Jr. and Fahnestock & Co., Inc ("Fahnestock").
In response to the institution of these administrative proceedings, Fahnestock has submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings 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 as to the jurisdiction of the Commission over him and the subject matter of the proceedings, which are admitted, Respondent Fahnestock consents to the issuance of this Order Making Findings and Imposing Remedial Sanctions And Cease-And-Desist Order.
On the basis of this Order and the Offer submitted by Fahnestock, the Commission makes the following findings:
A. Fahnestock is a broker-dealer, which has been registered with the Commission since 1954.
B. Wendell Jeffrey Lee had been associated with registered broker-dealers as a representative since 1989 and was employed in this capacity in Fahnestock's Jenkintown, Pennsylvania branch office from July 10, 1992 through May 27, 1994. Lee was convicted for felony forgery in connection with the misappropriation of funds from two Fahnestock customers and was sentenced to five years incarceration. Commonwealth of Pennsylvania v. Wendell Jeffrey Lee, Docket Nos. 1319-95 and 1478-95. The Commission obtained a permanent injunction against Lee, SEC v. Wendell Jeffrey Lee, 2:95-CV-06088 (E.D.PA.) (Sept. 27, 1995), and, on May 28, 1996, instituted administrative proceedings against him in connection with this same misconduct which resulted in the imposition of a permanent bar.
C. From approximately February 1993 through May 1994, Lee willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that Lee misappropriated approximately $262,222 from the brokerage accounts of two Fahnestock customers. As part of his scheme, Lee forged customers' signatures on nine letters of authorization ("LOA's") authorizing and instructing Fahnestock to issue fifty-six third-party checks, totaling $107,066, which were drawn on the customers' accounts. Fahnestock also issued ten third-party checks totaling $97,300 without any LOA's. All of these unauthorized checks were made payable to Lee's creditors or to a local bank where Lee maintained his personal checking account. In many instances, Lee obtained physical possession of the third-party checks by representing to Fahnestock that he would hand-deliver the checks to the customers. In other instances, Lee intercepted third-party checks by removing sealed envelopes addressed to customers from the firm's outgoing mail bin, which was located in an unsecured area. In addition, Lee caused Fahnestock to make five unauthorized wire transfers of funds, totaling $57,856, out of a customer account and into accounts for his own benefit.
D. From approximately February 1993 through May 1994, Fahnestock failed reasonably to supervise Lee, within the meaning of Section 15(b)(4)(E) of the Exchange Act, with a view to preventing Lee's violations described in subparagraph II.C. above. As part of this conduct, Fahnestock did not establish adequate policies and procedures concerning the disbursement of funds from customer accounts. During the relevant time period, these deficiencies included the following:
1. Notwithstanding that Fahnestock's Compliance Manual and Supervisory Manual prohibited the hand-delivery of checks by registered representatives, Fahnestock purportedly had an unwritten policy allowing for the hand-delivery of checks in rare circumstances, provided that the registered representative obtained a receipt from the customer. Fahnestock failed to have a system for applying this policy. In particular, this unwritten policy was not effectively communicated to Fahnestock employees and was not always followed. Furthermore, this policy was inadequate to prevent and detect fraud as it did not require any independent follow-up with the customer and did not provide any guidance to Fahnestock employees as to what rare circumstances warranted a hand-delivery.
2. Fahnestock's policies and procedures regarding wire transfers of customer funds were inadequate. Fahnestock required an LOA for wire transfers, but permitted the registered representative to identify the recipient. In this case, Lee, by providing Fahnestock with fraudulent wire instructions, caused the firm to make five wire transfers into accounts for Lee's benefit rather than for the benefit of the customer.
3. Fahnestock's system for implementing the procedures regarding third-party checks was inadequate. Fahnestock's Compliance Manual prohibited the issuance of such checks while the Supervisory Manual allowed for their issuance if the customer provided an LOA. In practice, Fahnestock allowed third-party checks accompanied by an LOA in some instances. However, Fahnestock's margin department approved ten third-party checks totaling $97,300 for which there are no LOA's.
4. Fahnestock had no policies or procedures to prevent its margin department from approving third-party checks made payable to a bank without any information on the checks identifying the recipient.
5. Fahnestock's system for implementing the firm's compliance policies and procedures was inadequate. For example, the compliance examinations of branch offices consisted primarily of a questionnaire, with no meaningful, independent follow-up. If the system for implementing the firm's compliance procedures had been adequate, it is likely that Lee's supervisor's failings could have been detected.
E. From approximately February to October 1995, Fahnestock violated Section 17(a) of the Securities Act and Rule 17a-3 thereunder. As part of the conduct described above, between February 1995 and July 1995, Bierlin, the manager of the Jenkintown branch office, placed his initials on the branch office's check blotters for the period covering July 1992 through February 1995, thereby causing those records to reflect falsely that he had reviewed them contemporaneously with their creation.
F. Fahnestock's Prior Undertakings
1. Fahnestock has provided a secure area in each branch office for mailing checks, statements and confirmations to its customers;
2. Fahnestock assigned a compliance manager from another region to conduct a complete compliance examination of the Jenkintown branch office;
3. Fahnestock has conducted a refresher training with all employees at its Jenkintown branch office on its supervisory and compliance procedures;
4. Fahnestock has conducted a refresher training with all employees in its margin department on its supervisory and compliance procedures pertaining to the disbursement of customer funds.
In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Fahnestock and impose the sanctions specified therein.
Accordingly, IT IS HEREBY ORDERED that:
A. Fahnestock be, and hereby, is censured;
B. Fahnestock shall cease and desist from violating and committing future violations of Section 17(a) of the Securities Act and Rule 17a-3 thereunder;
C. Fahnestock shall, within 90 days of the entry of this Order, pay a civil money penalty in the amount of $20,000 to the United States Treasury. Such payment shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the Securities and Exchange Commission; (c) delivered to the Comptroller, Securities and Exchange Commission, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (d) submitted under cover letter which identifies Fahnestock as a Respondent in these proceedings and the Commission's file number, a copy of which cover letter and money order or check shall be sent to Ronald C. Long, District Administrator, Securities and Exchange Commission, The Curtis Center, Suite 1005E., 601 Walnut St., Philadelphia, PA 19106; and
D. Fahnestock shall, within 90 days of the date this Order is entered, comply with the following additional undertakings:
1. Revise its compliance procedures to require that, for each hand-delivery of checks or securities to a customer, the branch manager must provide prior, documented approval of the delivery and Fahnestock's headquarters must send a separate confirmation letter to the customer. Such confirmation, absent circumstances beyond Fahnestock's reasonable control, must be mailed by the next business day following the date of the delivery and shall contain, at a minimum, the date of the delivery and the items reportedly delivered;
2. Revise its compliance procedures to require that Fahnestock's headquarters send out a separate confirmation letter any time funds are wired out of a customer's account. Such confirmation, which, absent circumstances beyond Fahnestock's reasonable control, must be mailed by the next business day following the date of the transfer, shall contain, at a minimum, the date of the transfer, the name and account number from which the funds were transferred, and the name of the financial institution to which the funds were transferred;
3. Revise its compliance procedures to require that Fahnestock's headquarters send out a separate confirmation letter for each third-party check drawn from the customer's account at the written request of the customer. Such confirmation, which, absent circumstances beyond Fahnestock's reasonable control, must be mailed by the next business day following the date on which the check was drafted, shall contain, at a minimum, the date the check was drafted, the name and account number against which the check was drafted, and the payee named on the check;
4. Conduct an annual, in-house seminar for all compliance managers. Each seminar, which will be conducted by the director of compliance and/or the general counsel, shall review and/or address changes in the federal securities laws, rules of the applicable self-regulatory organizations and Fahnestock's policies and procedures. In addition, all new compliance managers will, within six months of being hired, attend one or more outside seminars relating to compliance procedures and/or the conduct of compliance examinations.
Over time, these measures may need to be modified or supplemented by Fahnestock. Fahnestock undertakes to make any such modifications.
E. Within 180 days of the date this Order is entered, Fahnestock shall file an affidavit with the Commission's staff stating that it has complied with the undertakings listed in subparagraphs III.D.1.- 4. above.
By the Commission.
Jonathan G. Katz
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