United States of America
In the Matter of
JAMES PATRICK DRIVER
|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 James Patrick Driver ("Driver" 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 him and over the subject matter of these proceedings, Driver 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. Driver, a resident of Englewood, Colorado, was employed with Schneider Securities, Inc. ("Schneider") from May 1995 to October 2002. Driver was the compliance director for Schneider during the relevant time period. Driver was responsible, in part, for establishing policies and procedures for the supervision of Schneider's registered representatives. From 1985 until 1995, Driver was associated with four other registered broker-dealers. Driver has a disciplinary history, including an action by the National Association of Securities Dealers for failing to supervise a trading department and for failing to enforce supervisory procedures regarding mark-ups.
2. From December 2000 to April 2001, while purportedly under special supervision, a registered representative (the "registered representative") associated with Schneider in an office of supervisory jurisdiction located in Englewood, Colorado ("Englewood OSJ") made misstatements of material fact 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, making unsuitable margin trading recommendations, and failing to follow customer sell instructions, the registered representative engaged in fraud in connection with 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, Driver participated in Schneider's decision to hire the registered representative to own and operate a Schneider branch office, known as 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 Driver participated in hiring the registered representative, he was aware that the registered representative had been censured and fined by the NASD in 1991. Driver also knew that during the registered representative's 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, Driver, with others at Schneider, was aware that the registered representative required heightened supervision. Driver learned that several state regulators had concerns about the registered representative's disciplinary history and placed conditions upon his registration with Schneider. For example, the Colorado Division of Securities required that the registered representative be subject to special supervision at Schneider due to the registered representative's disciplinary history and recent customer complaints.
9. Additionally, in October 2000, Driver learned of the former broker-dealer's internal investigation when he 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, Driver participated in Schneider's decision to adopt Colorado's special supervisory procedures for the registered representative's activities at Schneider in connection with all of the registered representative's customers. 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.
11. In October 2000, Driver agreed with the designation of Schneider's executive vice president and 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, Driver participated in Schneider's decision to hire a branch office manager for the Englewood OSJ to conduct the day-to day supervision of the registered representative and to share with the executive vice president and regional branch manager the responsibilities for special supervision of the registered representative.
12. Driver, among others at Schneider, failed to develop a system to implement and monitor the implementation of the special supervisory procedures for the registered representative. If Driver had implemented and monitored such a system at Schneider, it is likely that the firm would have detected and prevented the registered representative's securities law violations.
13. Driver, among others at Schneider, was also responsible for formulating procedures and systems to implement these procedures to respond to customer complaints. Driver, however, failed to develop these procedures and systems to ensure that he and others responded adequately to one complaint from a customer of the registered representative in January 2001 regarding the registered representative's misrepresentations of material fact and fraudulent sales practices. Although Driver was responsible for determining how Schneider would respond to the complaint, he failed to implement procedures to respond adequately to the complaint against the registered representative, and then failed to follow-up to ensure that Schneider's responses were appropriate.
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, Driver 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. Driver has submitted a sworn Statement of Financial Condition, dated July 23, 2003, and other evidence and has asserted his inability to pay a civil penalty.
In view of the foregoing, the Commission deems it appropriate in the public interest to impose the sanctions specified in Respondent's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED:
A. Pursuant to Section 15(b)(6) of the Exchange Act, that Respondent be, and hereby is, barred from association in a supervisory capacity with any broker or dealer with the right to reapply for association after two (2) years to the appropriate self-regulatory organization, or if there is none, to the Commission;
B. That any reapplication for association by the Respondent will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order;
C. That based upon Respondent's sworn representations in his Statement of Financial Condition, dated July 23, 2003, and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent; and
D. 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 Driver's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
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