SECURITIES EXCHANGE ACT OF 1934
Release No. 50272 / August 26, 2004
Admin. Proc. File No. 3-11609
In the Matter of
Donaldson, Lufkin & Jenrette Securities Corp., predecessor in interest to Credit Suisse First Boston LLC,
ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") against Donaldson, Lufkin & Jenrette Securities Corp. ("DLJ"), predecessor in interest to Credit Suisse First Boston LLC ("CSFB") (collectively, "Respondent").
In anticipation of the institution of these proceedings, 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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds that:
1. Respondent failed reasonably to supervise R. Christopher Hanna ("Hanna") with a view to preventing and detecting his violations of the federal securities laws during a portion of the twelve-year period that it employed him from November 1989 to May 2001. From at least 1997 to May 2001, Hanna defrauded over 60 customers by misappropriating funds, and sending falsified account documents. By the time that Respondent terminated Hanna on May 18, 2001, he had misappropriated over $8 million from customers - transferring at least $3.2 million of that amount to himself via a currency exchange house and his personal bank accounts in South America. In addition, Hanna effected numerous unauthorized securities transactions resulting in significant investor losses.
2. DLJ was a Delaware corporation registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. In November 2000, a parent company of CSFB acquired the parent company of DLJ, and in that transaction CSFB's parent acquired DLJ's retail brokerage business, which included the office in Miami, Florida, where Hanna was associated as a registered representative.
3. CSFB is a Delaware limited liability corporation registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. CSFB has its principal place of business in New York, New York and maintains 10 retail branch offices throughout the United States.
Other Relevant Person
4. Hanna, 52, was a registered representative associated with Respondent in its Miami, Florida branch office, from November 1989 until his termination on May 18, 2001.
5. From at least 1997 to May 2001, Hanna misappropriated a total of over $8 million from approximately twelve of Respondent's customer accounts. In order to perpetrate these misappropriations, Hanna created false letters of authorization ("LOAs"), purportedly signed by the customers, directing transfers from customer accounts. Using these false LOAs, Hanna transferred approximately $3.2 million to himself via a Chilean currency exchange house, converting approximately $2.7 million from dollars to pesos and then transferring those monies to his personal bank account in Chile. Hanna also transferred approximately $3.8 million from customer accounts to unrelated third parties in the United States and South America. The remaining misappropriated funds (approximately $1 million) were transferred without authorization from certain of Respondent's customer accounts to an unrelated customer of Respondent who had requested a cash withdrawal. Hanna falsely represented to the customer receiving the transferred funds that he had sufficient funds for the withdrawal. Due to Hanna's systematic misappropriation, the account, in fact, had insufficient funds for the withdrawal.
6. Hanna also made unauthorized securities transactions in approximately sixty customer accounts.
7. To further conceal his misappropriations, unauthorized securities trading, and false representations, Hanna created and provided many of the defrauded customers with falsified account statements and other documents that overstated the value of the accounts, reflected nonexistent holdings, reflected purchases or sales of securities that had never occurred, and failed to disclose Hanna's unauthorized withdrawal of monies from the accounts. Hanna caused the actual brokerage statements for some of these customers to be mailed, without the knowledge or authorization of these customers, to addresses under his control.
8. Hanna was terminated by Respondent on May 18, 2001. Shortly after Hanna's termination, Respondent began a process of voluntarily reviewing Hanna's customer accounts and has substantially repaid affected customers who lost monies due to Hanna's misappropriation. Respondent also substantially compensated customers for losses caused by unauthorized securities transactions effected in their accounts.
9. As a result of the conduct described above, Hanna, during the period that Respondent employed him, willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer or sale, or in connection with the purchase or sale, of securities.1
Respondent's Failure to Supervise
Failures Related to the Use of Common Mailing Addresses
10. Respondent failed reasonably to supervise Hanna's use of common mailing addresses for many of his customers. A common mailing address is an address used by two or more unrelated customers. Although Respondent had policies concerning the use of common mailing addresses, Hanna was able to circumvent the policies because Respondent lacked an adequate system to enforce and apply these policies.2 Many of Hanna's customers routinely listed common mailing addresses in the United States and in Chile purportedly to process and deliver their correspondence. In the early 1990s when Respondent's internal auditors noticed this arrangement, they questioned Hanna, who told them that due to personal security concerns unique to South America, this alternative mail delivery system was necessary to ensure the customers' confidentiality and safety. The firm relied on Hanna's explanation, without independently confirming the explanation, such as by contacting Hanna's customers. In fact, Hanna had control of the two primary common mailing addresses used by his customers-an arrangement prohibited by the firm's policies and procedures. Respondent's policies and procedures concerning the use of common mailing addresses were not reasonably designed to prevent and detect Hanna's conduct.
Failures Related to Wire Transfers to Exchange Houses and Inter-Account Journals
11. A crucial component of Hanna's fraudulent conduct was misappropriating funds from customer accounts and then transferring them to a Chilean currency exchange house (commonly referred to as a "casa de cambio") without specifically identifying the account for whose benefit the funds were being transferred. According to policies in place at the time, the wired monies should have been transferred to an account in the same name as the originating customer account. However, the firm did not have an adequate system for applying this procedure when processing and approving these transfers. As a result, Respondent failed to detect or prevent Hanna from making over $3.2 million in unauthorized transfers to an exchange house from which he was then able to obtain the funds. When internal auditors questioned Hanna about the practice of making transfers to exchange houses, Hanna informed them that exchange houses operated differently from domestic financial institutions, and that listing a customer's name as the beneficiary of the transfer would compromise the safety of his customers. The firm deferred to Hanna's purported knowledge of South American exchange houses, and accepted his representation without taking any steps to independently corroborate his representation, such as by contacting the customer or the financial institution.3
12. Hanna also misappropriated customer monies by effecting approximately $1 million in unauthorized journals between unrelated customer accounts. Hanna apparently did this to conceal his wrongdoings from unsuspecting customers who relied on Hanna's representations that their accounts had sufficient monies to support their requested cash withdrawals. During Hanna's employment, the firm did not have policies or procedures in place reasonably designed to detect and prevent unauthorized inter-account journals.
Failure to Review Incoming and Outgoing Correspondence
Received and Transmitted By Facsimile
13. Hanna's ability to divert and control his customers' access to their brokerage firm correspondence enabled him to replace his customers' actual account statements with fraudulent account statements that he created. These bogus statements, printed on Respondent's letterhead and sometimes sent on Respondent's facsimile machines, misrepresented the customers' account value and activity, and served to further conceal Hanna's other wrongdoings. Although Respondent had procedures addressing the review of outgoing and incoming correspondence received and transmitted by facsimile, Hanna was able to evade that review because Respondent did not have an adequate system for applying these procedures to Hanna, or other registered representatives, all of whom had access to the office's facsimile machines that were located throughout the common areas of the office. Hanna's unrestricted access to the facsimile machines allowed him to evade the review of outgoing and incoming correspondence. Hanna was also able to intercept those customer complaints that were received by the office's facsimile machine located near his office.
14. Section 15(b)(4)(e) of the Exchange Act requires broker-dealers to supervise reasonably persons subject to their supervision, with a view toward preventing violations of the federal securities laws. See e.g., Dean Witter Reynolds, Inc., Exchange Act Rel. No. 46578 (October 1, 2002). The Commission has emphasized that the "responsibility of broker-dealers to supervise their employees by means of effective, established procedures is a critical component in the federal investor protection scheme regulating the securities markets." Id.
15. Respondent failed reasonably to supervise Hanna with a view to preventing or detecting his violations of the federal securities laws.
16. CSFB undertakes to retain, within 30 days of the issuance of this Order, an independent consultant ("Independent Consultant"), not unacceptable to the Commission staff, to review and evaluate the effectiveness of CSFB's supervisory and compliance systems, policies and procedures designed to detect and prevent violations of the federal securities laws concerning: (1) alternative mailing addresses; (2) wire transfers to exchange houses; (3) journals between unrelated accounts; and (4) review of incoming and outgoing correspondence received and sent by facsimile machine. CSFB shall cooperate fully with the Independent Consultant and shall provide the Independent Consultant with access to its files, books, records, and personnel as reasonably requested for the review.
17. At the conclusion of the review, which in no event shall be more than 90 days after the date of the Order, CSFB shall require the Independent Consultant to submit to CSFB and to the Commission's staff a written Initial Report. The Initial Report shall describe the review performed and the conclusions reached, and shall include any recommendations deemed necessary to make the policies, procedures, and system of supervision and compliance adequate.
18. Within 120 days of the date of the Order, CSFB shall in writing advise the Independent Consultant and the Commission's staff of the recommendations from the Initial Report that it has determined to accept and the recommendations that it considers to be unduly burdensome. With respect to any recommendation that CSFB deems unduly burdensome, CSFB may propose an alternative policy, procedure or system designed to achieve the same objective or purpose. CSFB shall attempt in good faith to reach agreement with the Independent Consultant within 150 days of the date of the Order with respect to any recommendation that CSFB deems unduly burdensome. If the Independent Consultant and CSFB are unable to agree on an alternative proposal acceptable to the Commission's staff, CSFB shall abide by the recommendation of the Independent Consultant.
19. Within 150 days of the date of the Order, CSFB shall, in writing, advise the Independent Consultant and the Commission's staff of the recommendations and proposals that it is adopting.
20. CSFB shall require the Independent Consultant to complete the aforementioned review and submit a written Final Report to CSFB and to the Commission's staff within 180 days of the date of the Order. The Final Report shall recite the efforts the Independent Consultant undertook to review CSFB's supervisory and compliance policies, procedures, and systems; set forth its conclusions and recommendations; and describe how CSFB is implementing those recommendations.
21. CSFB shall take all necessary and appropriate steps to adopt and implement all recommendations contained in the Independent Consultant's Final Report.
22. No later than one year after the date of the Independent Consultant's Final Report, CSFB shall require the Independent Consultant to conduct a follow-up review of CSFB's efforts to implement the recommendations contained in the Final Report, and CSFB shall require the Independent Consultant to submit a follow-up report to the Commission's staff. The follow-up report shall set forth the details of CSFB's efforts to implement the recommendations contained in the Final Report, and shall state whether CSFB has fully complied with the recommendations in the Final Report.
23. For good cause shown, and upon receipt of a timely application from the Independent Consultant or CSFB, the Commission's staff may extend any of the procedural dates set forth above.
24. To ensure the independence of the Independent Consultant, CSFB: (a) shall not have the authority to terminate the Independent Consultant without the prior written approval of the Commission's staff; (b) shall compensate the Independent Consultant, and persons engaged to assist the Independent Consultant, for services rendered pursuant to the Order at their reasonable and customary rates; and (c) during the period of engagement and for two years after the engagement, shall not enter into any employment, customer, consultant, attorney-client, auditing, or other professional relationship with the Independent Consultant. Any firm with which the Independent Consultant is affiliated or of which he or she is a member, in performance of his/her duties under this Order shall not, without prior written consent of the Commission's staff, enter into any employment, customer, consultant, attorney-client, auditing, or other professional relationship with CSFB, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.
25. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by CSFB and cooperation afforded the Commission staff.
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 THAT:
A. CSFB be, and hereby is, censured, pursuant to Section 15(b)(4) of the Exchange Act.
B. IT IS FURTHER ORDERED that CSFB shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $1,000,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies CSFB 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 John Mattimore, Securities and Exchange Commission, Southeast Regional Office, 801 Brickell Ave., Suite 1800, Miami, Florida 33131.
C. IT IS FURTHER ORDERED that CSFB shall comply with its undertakings as enumerated in Section III., above.
By the Commission.
Jonathan G. Katz