United States of America
In the Matter of
Schneider Securities, Inc.
|ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 15(b) 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 pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Schneider Securities, Inc. ("Schneider" or "Respondent").
In anticipation of the institution of these proceedings, the Respondent has submitted an Offer of Settlement ("Offer"), 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 in which the Commission is a party, and without admitting or denying the findings herein, except that the Respondent admits the Commission's jurisdiction over it and over the subject matter of these proceedings, Schneider consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions ("Order"), as set forth below.
On the basis of this Order and the Respondent's Offer, the Commission finds1 that:
1. Schneider, headquartered in Denver, Colorado, was a broker-dealer registered with the Commission, pursuant to Section 15 of the Exchange Act, and conducted a general securities business between 1985 and 2002. During the relevant time period in 2000 and 2001, Schneider conducted a general securities business through approximately 74 full-time registered representatives located in four proprietary branch offices and approximately 19 franchise branch offices located in various states across the United States. Schneider ceased operating as a broker-dealer on October 14, 2002, when it filed a Form BDW with the Commission, but requested that the effectiveness of the withdrawal be delayed. Schneider was also a member of the National Association of Securities Dealers ("NASD") from 1985 until 2002. On November 22, 2002, the NASD cancelled Schneider's registration. Schneider has a disciplinary history, including sanctions imposed by the Commission and a regulatory agency for failure to supervise.
2. From December 2000 to April 2001, while under special supervision, a registered representative (the "registered representative") associated with Schneider in an office of supervisory jurisdiction ("Englewood OSJ") located in Englewood, Colorado made misstatements of material facts to various Schneider customers in a number of states, including, but not limited to, false statements that: (i) analyst research reports for two securities existed and would be published by Schneider in December 2000; (ii) a hedge fund purportedly would be formed to invest millions of dollars in two securities; (iii) Schneider customers would not owe any funds for margin purchases; and (iv) Schneider customers would not receive margin calls on their securities purchased on margin. The registered representative also gave baseless stock price predictions for two securities to Schneider customers.
3. Moreover, the registered representative engaged in sales practice abuses in the accounts of Schneider customers. For example, the registered representative recommended unsuitable margin trading to several elderly Schneider customers with modest financial profiles and failed to follow sell instructions from several Schneider customers.
4. By making misstatements of material facts to Schneider customers and making unsuitable margin trading recommendations and failing to follow customer sell instructions, the registered representative placed trades totaling at least $161,800.
5. The registered representative was permitted to resign from Schneider in May 2001, at the suggestion of Schneider's management.
6. In September 2000, Schneider hired the registered representative to own and operate the Englewood OSJ. Just one day prior to becoming associated with Schneider, the registered representative was permitted to resign from a registered broker-dealer (the "former broker-dealer") during an internal investigation by the former broker-dealer into the registered representative's potential violative misconduct.
7. At the time Schneider hired the registered representative, the firm was aware that the registered representative had been censured and fined by the NASD in 1991. Schneider also knew that during his tenure with the former broker-dealer, the registered representative had received four customer complaints relating to potential sales practice violations, including unauthorized trading and failing to execute a sell order.
8. By October 2000, Schneider knew that the registered representative required heightened supervision. At this time, Schneider learned that several state regulators had concerns about the registered representative's disciplinary history and placed conditions upon his registration with them. For example, the Colorado Division of Securities required that the registered representative be subject to special supervision due to the registered representative's disciplinary history and recent customer complaints.
9. Additionally, in October 2000, Schneider also learned of the former broker-dealer's internal investigation when Schneider's director of compliance reviewed the registered representative's Form U-5 that had been filed by the former broker-dealer with the Central Registration Depository ("Form U-5"). The Form U-5 stated that the former broker-dealer's "internal review included [an] examination of [the registered representative's] recommendations to customers, customer complaints and outside business activities. Pending completion of the review, this individual was not permitted to solicit customer trades in certain securities. The review was terminated before it was completed, when this individual resigned from [the former broker-dealer]."
10. Given the registered representative's disciplinary history and the state regulators' concerns regarding the registered representative's conduct, in October 2000, Schneider adopted Colorado's special supervisory procedures for the registered representative's activities in connection with all of his customers. Schneider, however, failed to implement an adequate system for heightened supervision of the registered representative. If Schneider had implemented such a system, it is likely that the firm would have detected and prevented the registered representative's securities law violations.
11. The special supervision procedures for the registered representative that Schneider adopted included procedures under which the registered representative's direct supervisor would: (i) ensure that the registered representative kept journal entries of all telephone conversations (the "telephone journal") with customers that resulted in securities transactions; (ii) review all of the entries in the telephone journal on a monthly basis; (iii) perform suitability reviews for the initial transactions placed by the registered representative in all customer accounts; and (iv) review trades placed by the registered representative in customer accounts on a daily and monthly basis.
12. In October 2000, Schneider designated a regional branch manager, who worked in Schneider's Denver, Colorado headquarters, to act as a supervisor of the registered representative (the "regional branch manager"). Just a few weeks thereafter, Schneider hired a branch office manager for the Englewood OSJ to conduct the day-to day supervision of the registered representative and to share with the regional branch manager the responsibilities for special supervision of the registered representative.
13. Schneider failed to develop a system to monitor whether the registered representative's supervisors were adequately carrying out their responsibilities. Specifically, Schneider failed to establish a system for overseeing and monitoring the supervisors' implementation of the heightened supervisory procedures and other firm procedures for oversight of the registered representative's activities. If Schneider had developed and maintained such a system, it is likely that the firm would have uncovered the registered representative's sales practice abuses and fraudulent misrepresentations to his customers.
14. As a result of the conduct described in paragraphs two through five above, the registered representative willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities.
15. As a result of the conduct described in paragraphs six through thirteen above, Schneider failed reasonably to supervise the registered representative with a view to preventing violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, within the meaning of Section 15(b)(4)(E) of the Exchange Act.
16. Schneider has submitted a sworn Statement of Financial Condition, dated April 2, 2003, and other evidence and has asserted its inability to pay a civil penalty.
17. Respondent has undertaken to:
a. File a Form BDW, or amend as necessary any previously filed Form BDW, withdrawing its registration with the Commission as a broker-dealer within ten (10) days after the date of the entry of the Order; and
b. Provide to the Commission, within fifteen (15) days after the date of the entry of the Order, an affidavit from an authorized agent of Schneider that Schneider has complied fully with the undertakings listed in paragraphs 17.a., and has not conducted any business as a broker-dealer after October 14, 2002, the date on which Schneider filed its Form BDW with the Commission.
In view of the foregoing, the Commission deems it appropriate in the public interest to impose the sanctions specified in Schneider's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED:
A. Pursuant to Section 15(b)(4) of the Exchange Act, that Schneider be, and hereby is censured;
B. That based upon Respondent's sworn representations in its Statement of Financial Condition, dated April 2, 2003, and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent; and
C. That 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 Respondent provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of 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 Respondent was fraudulent, misleading, inaccurate, or incomplete in any material respect. Respondent may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of a penalty should not be ordered; (3) contest 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 The findings herein are made pursuant to Schneider's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
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