United States of America
In the Matter of
DEAN WITTER REYNOLDS INC.,
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted against Dean Witter Reynolds, Inc., n/k/a Morgan Stanley DW, Inc. ("Dean Witter"), Mark Rodgers ("Rodgers"), and Paul Grande ("Grande") (collectively, "Respondents") pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and cease-and-desist proceedings be instituted against Dean Witter and Mark Rodgers pursuant to Section 21C of the Exchange Act.
In anticipation of the institution of these proceedings, Dean Witter, Rodgers, and Grande have submitted Offers of Settlement (the "Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying any of the findings contained herein, except as to the jurisdiction of the Commission over them and over the subject matter of these proceedings, which are admitted, Dean Witter, Rodgers and Grande, consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions ("Order"), by the Commission.
Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Sections 15(b) and 21C of the Exchange Act be, and hereby are, instituted.
On the basis of this Order and the Offers submitted by Respondents Dean Witter, Rodgers and Grande, the Commission finds that:
1. As described below, between January 1998 and August 19, 1998, (the "relevant time period"), Mark Rodgers, a registered representative formerly employed by Dean Witter in its Clearwater, Florida branch office, violated the antifraud provisions of the federal securities laws by engaging in unsuitable and unauthorized trading in the accounts of certain of his customers. Additionally, Rodgers used a variety of manipulative devices designed to stabilize the price of a NASDAQ listed security. Paul Grande, the Clearwater branch office manager, and Dean Witter, failed reasonably to supervise Rodgers with a view to preventing and detecting Rodgers' violations of the federal securities laws.
2. Dean Witter, a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., is a Delaware corporation registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. Dean Witter has its principal place of business in New York, New York, and maintains approximately 350 branch offices throughout the United States.
3. Rodgers, age 46, resides in Belleair, Florida. Rodgers was associated with Dean Witter as a registered representative in its Clearwater, Florida branch office from February 1988 through August 19, 1998, when he voluntarily resigned from Dean Witter and took employment with another broker dealer. At the time of his resignation, Rodgers was among the highest producing registered representative at Dean Witter in the over-the-counter NASDAQ market.
4. Grande, age 38, of Palm Harbor, Florida, has been associated with Dean Witter since April 1989. During the relevant time period, Grande was the branch office manager of Dean Witter's Clearwater branch office. Grande is currently a registered representative at Dean Witter's Tampa, Florida branch office.
5. e-Net, Inc., ("e-Net"), was a Maryland company that developed and supported open telecommunications software for telecommunications carriers and providers. From April 1997 to June 2001, e-Net was a NASDAQ listed security.
6. MVSI, Inc., ("MVSI"), was a Maryland company that developed Y2K software and other computer system products. From May 1997 to June 2000, MVSI was a NASDAQ listed security.
7. From approximately January 1998 through August 1998, Rodgers defrauded several of his customers by entering trades in their accounts on a discretionary basis without authority to do so, concentrating the overall positions in those accounts in two unsuitable securities, and increasing the customers positions in these securities by trading in the customers' accounts on margin.1 Rodgers also used a variety of manipulative devices designed to stabilize e-Net's stock price, and "squeeze" a significant short position in e-Net stock. In an effort to conceal his fraud from Dean Witter, Grande and his clients, Rodgers falsified order tickets on transactions in e-Net stock.
8. During the relevant time period, Rodgers engaged in unsuitable and unauthorized trading in the accounts of several of his customers. Rodgers, without the authorization of Dean Witter or Grande, controlled some of his customers' accounts even though none of those customers had given him written discretionary authority. Some of these customers entrusted Rodgers with a substantial amount of their savings and had a conservative investment objective. Despite the customers' financial conditions and investment objectives, Rodgers used his control over their accounts to acquire for those customers unsuitable amounts of two speculative securities, e-Net and MVSI. Rodgers exposed some of those customers to further risk by purchasing securities on margin. Several of the at least eleven customer accounts through which Rodgers engaged in fraudulent mismanagement are discussed below:
a. Clients A and B, a retired married couple who were in their late 70s during the relevant time period, invested approximately $175,000 with Dean Witter. When Clients A and B opened their account in 1991, their investment objective was capital appreciation. Between 1991 and 1996, their account was traded conservatively, while Rodgers established a close, personal relationship with them. However, from January 1998 through August 1998, Rodgers invested a substantial portion of Client A and B's account in shares of e-Net and MVSI, almost exclusively on margin and without the prior authorization of Clients A and B. By the end of June 1998, 50% of the equity in Clients A and B's investment portfolio was concentrated in e-Net and MVSI. That concentration grew to 173% by the end of August 19982, with their margin debt in excess of one million dollars. Clients A and B may have lost as much as one million dollars as a result of Rodgers' mismanagement.
b. Client C, the owner of a charter boat business, who was in his late 50s during the relevant time period, opened his account with Rodgers in November 1992. Client C told Rodgers that the money entrusted to him was irreplaceable and constituted the funds available to support him in his retirement years. Eventually, Client C became Rodgers' personal friend and Rodgers, unbeknownst to Dean Witter and Grande, began exercising discretion over Client C's account without written discretionary authority. Rodgers first purchased shares of MVSI in Client C's account in February 1998 and of e-Net in June 1998. By the end of June 1998, 85% of the equity in Client C's investment portfolio was invested in MVSI and e-Net. By the end of August 1998, 189% of the equity was concentrated in those two stocks. Client C may have lost as much as one million dollars as a result of Rodgers' mismanagement. Additionally, Client C owed a margin debt of more than $420,000.
c. Client D, a freelance photographer who was in his early 50s during the relevant time period, inherited approximately $600,000 in 1993. Client D entrusted this money, the entirety of his retirement savings, with Rodgers, with whom he had been friends for several years. Prior to this inheritance, Client D had limited experience in the stock market. Client D's primary investment objective was capital appreciation. From January 1998 through August 1998, Rodgers invested a substantial portion of Client D's account in shares of e-Net and MVSI, almost exclusively on margin and without the prior authorization of Client D. Rodgers first purchased shares of MVSI in Client D's account in January 1998, and of e-Net in May 1998. By the end of June 1998, 125% of the equity in Client D's investment portfolio was invested in MVSI and e-Net. Client D may have lost as much as $500,000 dollars as a result of Rodgers' mismanagement.
d. Client E, a retiree who was in his early 50s during the relevant time period, invested his entire savings with Rodgers in 1994. Client E's investment objective was capital appreciation. Initially, Client E's account was well diversified. However, the account became more actively traded in or around 1997. As Client E and Rodgers became personal friends, Rodgers, unbeknownst to Dean Witter and Grande, began exercising discretion over the account, without written discretionary authority. From January 1998 through August 1998, Rodgers invested a substantial portion Client E's account in shares of e-Net and MVSI, almost exclusively on margin and without the prior authorization of Client E. By the end of June 1998, 67% of the equity in Client E's investment portfolio was invested in MVSI and e-Net. By the end of August 1998, 161% of the equity in Client E's account was concentrated in e-Net and MVSI, with his margin debt in excess of $900,000. Client E may have lost as much as $1.1 million dollars as a result of Rodgers' mismanagement.
9. From mid-May 1998 through August 19, 1998, Rodgers engaged in a scheme to stabilize the price of e-Net stock. This scheme involved unauthorized trades of e-Net in Rodgers' clients' accounts, promoting a plan to withhold stock from short sellers3 to effect a "short squeeze" (i.e., forcing short sellers to cover their short positions at artificially inflated prices) and making false statements to discourage certain clients from selling e-Net stock.
10. Rodgers' stabilization scheme began when, in violation of Dean Witter's internal policies and procedures, he acquired in his clients' accounts over 60% of e-Net's unrestricted and publicly traded shares without Dean Witter's prior authorization. By August 5, 1998, Rodgers' clients owned more than 2.5 million of the 4 million e-Net shares that were in public hands and available for trading. Based on e-Net's stock price at that time, this position was valued at approximately $42 million.
11. In late July and early August 1998, Rodgers believed that e-Net's stock price was going to fall because of increasing selling pressure from short sellers and other holders of e-Net stock. During this time period, Dean Witter and Rodgers' customers held more e-Net stock than any other market maker.4 In response to selling pressure, Rodgers promoted and orchestrated a short squeeze of e-Net stock, in order to control and immobilize as many shares of e-Net stock as possible, while creating demand for e-Net stock. By engaging in this conduct, Rodgers hoped to force the price of the remaining unrestricted e-Net shares higher as pressured short sellers were forced to cover their positions.
12. In an attempt to stimulate demand for e-Net stock and carry out the short squeeze, Rodgers instructed the Dean Witter trader who was responsible for executing Dean Witter's trades in e-Net to purchase e-Net stock at market prices as it became available in the open market. Rodgers gave that instruction to Dean Witter's trader even though, unbeknownst to the trader, Dean Witter or Grande, Rodgers' clients placed few buy orders for e-Net stock. When e-Net stock was purchased, pursuant to Rodgers' instructions, and in those cases when Rodgers had no ready buyers, Rodgers placed the stock in client accounts without the client's authorization. Rodgers engaged in this conduct in an effort to keep the stock price stable. Between June and August 1998, Rodgers, on behalf of his customers, acquired approximately 969,339 shares of e-Net stock, or close to 25% of e-Net's unrestricted and publicly-traded shares. In an attempt to conceal his fraud from Dean Witter and Grande, Rodgers regularly falsified information on Dean Witter's books and records by marking almost every order ticket for these e-Net purchases "unsolicited" even though the clients did not request or order Rodgers to make the transactions.5
13. At times, Rodgers' clients expressed concern to Rodgers about the size of the e-Net positions in their accounts. Rodgers responded by using a variety of tactics to discourage his clients from selling their shares of e-Net. Among other things, unbeknownst to Dean Witter and Grande, he made materially false and misleading statements to his customers to prevent them from understanding the extent of their exposure to trading losses, made misrepresentations about the future market price of e-Net for which he had no reasonable basis, and told clients that he possessed inside information about a possible takeover of e-Net.
14. During July and August 1998, Rodgers' unauthorized purchases on behalf of his clients contributed to a stabilization of e-Net's stock price. On August 18, 1998, e-Net traded, intra-day, at $20 a share, the highest it had ever traded, and closed at $17.875. On August 19, 1998, Rodgers voluntarily left Dean Witter for a position with another broker-dealer. For the next two weeks, until September 2, 1998, although Rodgers was employed by another broker-dealer, he was not registered with that broker-dealer and therefore could not purchase or sell shares of e-Net for his clients. During this time period, with Rodgers unable to continue his stabilization effort, and during a general decline in the NASDAQ market, e-Net's stock price began to decline rapidly, falling to $8.6875 on September 2. By September 11, 1998, e-Net was trading at $2.718 a share. Rodgers' clients, most of whom maintained highly leveraged positions in e-Net, began to receive margin calls from the broker-dealer where Rodgers was employed after he left Dean Witter. Rodgers' clients could not meet those margin calls. By the end of September 1998, Rodgers' clients had lost as much as $15 million dollars.
15. Based upon the aforesaid conduct, Rodgers willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Further, Rodgers willfully aided and abetted and caused Dean Witter's violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder by falsifying information on Dean Witter's books and records by recording unauthorized or solicited transactions as "unsolicited" on Dean Witter's order tickets.
16. Rodgers has submitted a sworn Statement of Financial Condition dated June 10, 2002 and other evidence and has asserted his inability to pay disgorgement plus prejudgment interest.
17. Sections 15(b)(4)(E) of the Exchange Act provides for the imposition of a sanction against a broker or dealer who "has failed reasonably to supervise, with a view to preventing violations of the securities laws, another person who commits such a violation, if such other person is subject to his supervision." See Matter of Smith Barney, Harris Upham & Co., Inc., Exchange Act Release No. 21813, 32 SEC Docket 999, 1004 (March 5, 1985). Section 15(b)(6)(A)(i) parallels Section 15(b)(4)(E) and provides for the imposition of sanctions against persons associated with a broker or dealer. These sections also provide an affirmative defense for supervisors who can show that (1) there were "established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation" and (2) the supervisors reasonably discharged the duties and obligations placed upon them without reasonable cause to believe that the procedures and systems were not complied with. See Sections 15(b)(4)(E)(i) and (ii) of the Exchange Act. Dean Witter failed reasonably to supervise Rodgers from May 1998 through August 1998, because it had inadequate systems in place to implement procedures that would have detected and prevented Rodgers' misconduct and because a flaw in one of its supervisory procedures allowed certain of Rodgers' clients' trades to go undetected by Grande.
18. Dean Witter requires its compliance department to, among other things, maintain policies and procedures reasonably designed to detect and prevent potentially violative activities, and provide tools to branch managers and other supervisors to aid them in discharging their supervisory duties. During the time period of Rodgers' misconduct, two critical elements of Dean Witter's compliance program, Daily Trade Reporting and Monthly Securities Concentration Reporting, were designed to detect and prevent violations such as those committed by Rodgers. However, as a result of a procedural deficiency in Dean Witter's system for tracking daily trades and the firm's failure to prepare Securities Concentration Reports during the height of Rodgers misconduct, Dean Witter failed to detect and prevent Rodgers' violations.
19. Dean Witter requires its branch managers to review all order tickets originating from the branch on a daily basis in order to give the manager an overview of all activity within the branch and to highlight situations that warrant special attention. The firm provides the branch manager with a "Daily Trade Activity Report" ("TAR"), to facilitate that review.6 During the relevant time period, because Rodgers orally placed orders without also entering a written order into the order-entry system, a procedural deficiency left several trades purportedly made by Rodgers' customers off that report. As a result, many of Rodgers' e-Net purchases went undetected by Rodgers' direct supervisors.
20. During the relevant time period, Dean Witter's order-entry process generally began with the registered representative inputting the details of a client transaction (e.g., buy or sell, name of security, solicited or unsolicited) into Dean Witter's computerized order-entry system. If the order was for a NASDAQ security, the trade was routed to a Dean Witter trading desk for execution. At the end of each trading day, all executed customer trades are included in the TAR report generated by Dean Witter.
21. Rodgers circumvented this order-processing system by giving oral buy orders to the Dean Witter trader who was responsible for executing principal trades in e-Net without subsequently entering the order into the order-entry system. At the time, Dean Witter did not place any restrictions on a registered representative's ability to transmit orders orally to the trading desk. At times, Rodgers gave these purchase orders without providing the trader with a specific customer name or account.7 Because Rodgers did not enter these orders into the order-entry system, these trades did not appear on the TAR report. Consequently, Grande did not receive valuable information from the TAR report that might have assisted him in detecting the full extent of Rodgers' trading in e-Net stock.8
22. The deficiency in Dean Witter's TAR system was compounded by the failure of Dean Witter to prepare "Securities Concentration Reports" during the height of Rodgers' misconduct. Dean Witter monitors security positions firm-wide in an effort to detect and prevent excessive concentration levels in any security held by the firm or individual branch offices. In that regard, Dean Witter requires its compliance department to prepare concentration reports on a monthly basis in order to inform management of concentrated security positions maintained by the firm or individual branch offices. If a security reaches specified concentration levels, Dean Witter imposes certain restrictions on the trading of those issues to limit further accumulation. Among other things, Dean Witter can restrict further purchases of a security to "unsolicited" transactions only, or transactions requiring the prior approval of the compliance department.
23. In April, May and June of 1998, Rodgers' clients owned a sufficient number of e-Net shares to meet Dean Witter's internal guidelines that would have triggered certain restrictions on additional e-Net purchases. However, Rodgers continued purchasing e-Net stock for his customers, on margin, and without any restrictions from Dean Witter. Dean Witter management was never aware of this procedural breach because Dean Witter did not prepare the concentration report during this critical time period due to a shortage of available personnel. Had Dean Witter generated the concentration reports for the months of April, May and June 1998, the size of the e-Net position would have been flagged, and most likely restricted to purchases requiring prior compliance department approval.
24. Rodgers ability to engage in further trading under these circumstances underscores the consequences of the breakdown in Dean Witter's supervision of its employees. The Commission has noted that broker-dealers must "provide effective staffing, sufficient resources and a system of follow up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised." Mabon, Nugent & Co., 47 SEC 862, 867 (1983).
25. Based on the foregoing conduct, Dean Witter failed reasonably to supervise Rodgers, a person subject to its supervision, with a view toward preventing Rodgers' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
26. Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15 (b)(4)(E) of the Exchange Act, authorizes the Commission to sanction a person associated with a broker or dealer if it finds that it is in the public interest to do so and that the person "failed reasonably to supervise, with a view to preventing violations of the [federal securities laws]..., another person who commits such a violation, if such other person is subject to his supervision." From approximately May 1998 until August 19, 1998, Grande failed reasonably to supervise Rodgers with a view to preventing Rodgers' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Rodgers' aiding and abetting Dean Witter's violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.
27. A branch manager must respond reasonably when confronted with indications suggesting that a registered representative may be engaging in improper activity. In re Nicholas A. Boccella, Exchange Act Release No. 26,574 (Feb. 27, 1989). "Even where the knowledge of supervisors is limited to `red flags' or `suggestions' of irregularity, they cannot discharge their supervisory obligations simply by relying on the unverified representations of employees." In the Matter of John H. Gutfreund, Exchange Act Release No. 31,554 (Dec. 3, 1992). A supervisor must conduct "adequate follow-up and review" whenever he or she detects unusual trading activity or other irregularities. Id. at 35. Grande's contacts with Rodgers' customers did not constitute such follow-up.
28. While Rodgers was under his supervision, Grande knew about the transactions in the accounts of Rodgers' customers and the profiles of those customers, including, but not limited to, their age, employment status, annual income, and investment objectives. As part of Dean Witter's supervision of active accounts, Dean Witter prepared a monthly activity report that brought to Grande's attention accounts of several of Rodgers' customers, including those identified in paragraphs 8a-d, above. Dean Witter prepares this report to its branch managers as a tool to assist the branch manager in detecting unauthorized trading, unsuitable trading and concentration issues. Dean Witter encourages its branch managers, where warranted, to make contact, orally or in writing, with the customers whose accounts appear on the report.
29. Grande's contacts with Rodgers' customers mostly consisted of telephone conversations relating to the taking of orders when Rodgers was unavailable and "activity letters" that thanked the customers for their business and invited them to contact the branch manager with questions. Grande did not receive any responses to these letters and never considered whether Rodgers' personal relationships with the customers allowed Rodgers to unduly influence them. Grande did not personally meet with any of these customers to review their accounts with them, or question them about the amount of commissions, margin interest, or risk they were incurring.
30. Grande also failed reasonably to investigate how so many of the e-Net purchases in the accounts of Rodgers' clients were unsolicited, as indicated on monthly activity reports that Grande received. Grande was aware of the unusually high number of unsolicited transactions in the same security in several different accounts, sometimes on the same day, but his investigation of this unusual activity consisted of obtaining assurances from Rodgers that the customers actively managed their accounts. Grande did not ask any of the customers whether their e-Net purchases were actually unsolicited.
31. In June 1998, Grande became concerned about the concentration of the e-Net position in the accounts of Rodgers' clients. Grande spoke to Rodgers about reducing the size of the position and reducing the size of the corresponding margin debt in each customer account. However, Grande took no further action beyond speaking with Rodgers. He did not report his concerns to Dean Witter's compliance department or senior management at the firm. When Grande took a medical leave from the branch at the end of July 1998, and delegated his responsibilities to the assistant branch manager, he never told the assistant branch manager about his concerns over e-Net. By the time Grande returned to the office in early August 1998, Rodgers had made additional purchases of e-Net, increasing the size of the e-Net position within the branch. Grande took no action against Rodgers even though branch managers at Dean Witter have the authority to recommend that brokers who fail to comply with the firm's procedures be sanctioned, suspended, or terminated.
32. Based on the foregoing conduct, Grande failed reasonably to supervise Rodgers, a person subject to his supervision, with a view toward preventing Rodgers' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
33. Section 17(a) of the Exchange Act and Rule 17a-3 thereunder require that registered brokers and dealers make and keep current certain specified books and records relating to their business. Implicit in the Commission's recordkeeping rules is the requirement that information contained in a required book or record be accurate. In re Merrill Lynch, Pierce, Fenner & Smith Inc., Exchange Act Release No. 33,367 (Dec. 22, 1993). This requirement applies regardless of whether the information entered itself is mandated. Id. at 20. Rodgers falsified information on Dean Witter's books and records by marking almost every order ticket for his clients' purchases of e-Net "unsolicited", when the transactions, almost uniformly, were solicited.. As a result of Rodgers' falsification of information, he caused Dean Witter to willfully violate Section 17(a) of the Exchange Act and Rule 17a-3 thereunder because it maintained inaccurate books and records.
On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers submitted by Respondents Dean Witter, Rodgers and Grande.
ACCORDINGLY, IT IS ORDERED that:
A. Dean Witter be, and hereby is, censured.
B. Dean Witter cease and desist, pursuant to Section 21C of the Exchange Act, from committing or causing any violation and any future violation of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.
C. Dean Witter shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $500,000 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) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (D) submitted under cover letter that identifies Dean Witter as the Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Ivan P. Harris, Assistant Regional Director, Southeast Regional Office, Securities and Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131.
D. Grande be, and hereby is, suspended from association in a supervisory capacity with any broker or dealer for a period of nine months effective on the second Monday following the entry of the Order. Grande shall provide to the Commission, within 10 days after the end of the nine month suspension period described above, an affidavit that he has complied fully with the sanctions described in this paragraph.
E. Grande shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $25,000 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) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (D) submitted under cover letter that identifies Paul Grande as the Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Ivan P. Harris, Assistant Regional Director, Southeast Regional Office, Securities and Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131.
F. Rodgers be, and hereby is, barred from association with any broker or dealer.
G. Rodgers cease and desist, pursuant to Section 21C of the Exchange Act, from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from causing any violation and any future violation of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.
H. Rodgers shall pay disgorgement of $631,885 plus prejudgment interest, but that payment of such amount is waived based upon Rodgers' sworn representations in his Statement of Financial Condition dated June 10, 2002, and other documents submitted to the Commission.
I. The Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Rodgers provided accurate and complete financial information at the time such representations were made; (2) seek an order directing payment of disgorgement, pre-judgment interest, and the maximum civil penalty allowable under the law. No other issue shall be considered in connection with this petition other than whether the financial information provided by Rodgers was fraudulent, misleading, inaccurate or incomplete in any material respect. Rodgers may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of disgorgement, interest and a penalty should not be ordered; (3) contest the amount of disgorgement and interest or the imposition of the maximum penalty allowable under the law; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense.
By the Commission.
Jonathan G. Katz
1 A margin account enables a customer to buy securities with funds borrowed from the broker. The required "margin" is the amount of money or value of securities that the customer is required to deposit or maintain in his account to secure the borrowed funds.
2 As a result of purchases on margin, with funds borrowed from Dean Witter, the amounts of e-Net and MVSI stock in the accounts of several of Rodgers' customers exceeded the amounts of funds or securities in the accounts that actually belonged to the customers.
3 A short sale is made with the hope or expectation that the price of a particular stock will fall over time. Short sellers typically borrow stock and sell it in hopes of replacing it in the near future at a lower price.
4 Dean Witter was a market maker for e-Net stock. A market maker is a broker-dealer that, on a continuous basis, buys and sells a security for its proprietary account.
5 Throughout 1997 and 1998, Rodgers marked the vast majority of the order tickets for his clients' purchases of e-Net and MVSI as "unsolicited." However, Rodgers should have marked these orders tickets as solicited, because he recommended e-Net and MVSI to those clients or bought the stock without the clients' authorization.
6 Dean Witter generates the TAR report from the order tickets prepared by the firm's registered representative for each customer order.
7 In these circumstances, Dean Witter's trader purchased the e-Net stock using an interim Dean Witter proprietary account. Hours or even a day later, Rodgers would provide the trader with an actual customer account into which Dean Witter would place the shares.
8 Since Rodgers' misconduct occurred, Dean Witter has modified its procedures so that all per verbal order trades are captured by the TAR system and reflected on the TAR reports reviewed by branch managers.
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