==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36338 / October 5, 1995 Administrative Proceeding File No. 3-8865 ______________________________ : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTIONS 15(b) AND DICKINSON & CO. and : 19(h) OF THE SECURITIES JOHN LAURIENTI : EXCHANGE ACT OF 1934 : 1934, MAKING FINDINGS AND : IMPOSING SANCTIONS ______________________________: I. The Securities and Exchange Commission deems it appropriate and in the public interest that public administrative proceedings be instituted against Dickinson & Co. ("Dickinson") and John Laurienti ("Laurienti"). II. In anticipation of the institution of these proceedings, Dickinson and Laurienti have each submitted Offers of Settlement 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 contained herein, except that Dickinson and Laurienti each admits the jurisdiction of the Commission over each of them, respectively, and over the subject matter of these proceedings, Dickinson and Laurienti, by their Offers, consent to the entry of the findings and imposition of the remedial sanctions that pertain to each of them, as set forth below. Accordingly, IT IS ORDERED that proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") be, and hereby are, instituted. III. On the basis of this Order Instituting Proceedings Pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions ("Order"), and the Offers of Settlement submitted by Dickinson and Laurienti, the Commission finds that:-[1]- A. The Respondents Dickinson & Co., formerly known as R.G. Dickinson & Co., has been registered with the Commission as a broker-dealer since 1955 (BD #689), and is primarily engaged in providing retail brokerage and investment banking services. At all material times hereto, Dickinson maintained 24 branch offices nationwide, employing 274 registered representatives. Dickinson's executive offices are located in Des Moines, Iowa. John Laurienti, 32, of La Jolla, California, was the branch manager of the Boston branch office of Dickinson from October 1992 to July 1993. From July 1993 to June 1994, Laurienti was the branch manager of Dickinson's New York branch office. Before becoming a branch manager at Dickinson, Laurienti was employed as a registered representative for Dickinson and another broker- dealer for a total of three years. B. The Underlying Violations The matters giving rise to these proceedings involve violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by Mark J. Hamel ("Hamel"), a registered representative employed by Dickinson. During the period from mid-February 1993 to mid-May 1993, Hamel, who was formerly employed at Dickinson's Boston branch office, actively solicited his customers and accepted orders referred to him by brokers at other firms to purchase more than 630,000 shares of Fairmont Resources Inc. ("Fairmont"), a penny stock trading on the Alberta Stock Exchange that was initially selling at thirty cents (Canadian) per share.-[2]- In soliciting his customers' purchases, Hamel omitted to state ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to Dickinson's and Laurienti's Offers of Settlement and are not binding on any other person or entity named as a respondent or otherwise in this or any other proceeding. -[2]- Fairmont is a Canadian natural gas company. ==========================================START OF PAGE 3====== material facts, namely, that he was receiving cash and stock kickbacks from the controlling shareholders/promoters of Fairmont in exchange for his customers' purchases. Hamel received cash and stock kickbacks totalling approximately $234,000.-[3]- In April 1993, transactions in Fairmont accounted for 60% of Hamel's overall trades. By May 1993, transactions in Fairmont accounted for more than 90% of his trades. By mid-May 1993, when Dickinson's Chief Compliance Officer learned of the trading and ordered it to cease, Hamel had sold over 630,000 shares of Fairmont to more than 60 customers, which accounted for approximately 5% of Fairmont's outstanding shares. Between January 7, 1993 and June 16, 1993, the price of Fairmont stock rose from $0.30 (Canadian) to $3.05 (Canadian). C. Laurienti's Supervisory Failures Laurienti failed to discharge his supervisory responsibility over Hamel. Dickinson's procedures required branch managers to obtain the Chief Compliance Officer's approval before registered representatives solicited sales of unknown or low-priced securities. While he sent a due diligence file on Fairmont to the Chief Compliance Officer, and made follow-up telephone calls to the Chief Compliance Officer, Laurienti approved Hamel's solicited sales of hundreds of thousands of shares of Fairmont, a low-priced security that was unknown to Dickinson, without obtaining the Chief Compliance Officer's approval for the sales. Laurienti also failed to respond reasonably to unusual circumstances and indications of wrongdoing, including violations of Dickinson policy. Dickinson's Branch Manager Procedure Manual ("Branch Manager Manual") required branch managers to review trade blotters and order tickets on a daily basis and to be aware of "potential problem areas" during the review, including transactions in low-priced or unknown securities, unusual activity in any one stock, or concentration in an unknown ---------FOOTNOTES---------- -[3]- On December 8, 1994, Hamel pleaded guilty to fifteen counts of conspiracy and securities fraud in connection with his sales of Fairmont. On March 14, 1995, a permanent injunction was entered, enjoining Hamel from future violations of 5(a), 5(c) and 17(a) of the Securities Act, 10(b) of the Exchange Act and Rule 10b-5 thereunder. SEC v. Shull, et al., Civil Action No. 94-11759-REK (D. Mass.). On April 25, 1995, the Commission barred Hamel from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, and from participating in the offering of any penny stock. Exchange Act Release No. 35643 (April 25, 1995). ==========================================START OF PAGE 4====== security. In addition, the Branch Office Manager's Supervisory Log ("Supervisory Log"), which was to be completed and submitted to the Compliance Department on a monthly basis, required branch managers to certify that they had reviewed each registered representative's records in the past six months for items such as suitability of trades, excessive activity, orders in excess of $10,000, and transactions in unfamiliar securities. Each of the above-referenced potential problem areas identified in the Branch Manager Manual and the Supervisory Log existed with respect to Hamel's sales of Fairmont. He (1) was aggressively selling a low-priced, speculative security that was unknown to Dickinson, (2) was entering many orders in excess of $10,000, and (3) was building a concentrated position in an unknown security. Despite these indications of suspicious activity by Hamel, Laurienti relied on Hamel's representation that he was soliciting purchases of Fairmont because he liked the company. Laurienti was aware that Hamel opened thirteen new customer accounts on April 23, 1993 for the purpose of purchasing Fairmont stock, and an additional twelve accounts during the following two weeks for the same purpose. Hamel told Laurienti that the accounts opened on April 23, 1993 had been referred to him by a registered representative at another firm who had been prohibited from selling Fairmont. Despite these indications of irregularity, Laurienti failed to conduct an adequate inquiry. Dickinson's registered representative compliance manual ("RR Manual") prohibited registered representatives from meeting with corporate representatives without the prior approval of Dickinson's senior management, and from accepting gratuities from clients. Laurienti was aware that Hamel was having ongoing communications with persons associated with Fairmont. In addition, Laurienti learned, upon Hamel's return, that Hamel had attended a Fairmont presentation in Los Angeles with all of his expenses paid by Fairmont representatives. Laurienti also learned that Hamel had traveled to Las Vegas to meet with people associated with Fairmont.-[4]- At no time, however, did Laurienti advise or seek the approval of Dickinson's senior management for these communications and trips. In fact, Dickinson's senior management was not even made aware of Hamel's trips. Despite the unusual circumstances of Hamel's Fairmont transactions and other indications of wrongdoing, including ---------FOOTNOTES---------- -[4]- Although Dickinson and Laurienti did not know it at the time, one of Fairmont's controlling shareholders paid Hamel approximately $75,000 in kickbacks during the Las Vegas trip. ==========================================START OF PAGE 5====== violations of Dickinson policy, Laurienti failed to follow Dickinson policy or conduct an adequate inquiry. Therefore, Laurienti failed reasonably to supervise Hamel with a view toward preventing his securities law violations. D. Dickinson's Supervisory Failures Dickinson relied on the branch manager of Dickinson's Boston branch office to detect and prevent improper activity in that office. Dickinson, however, had inadequate firm-wide systems or procedures in place to determine whether branch managers were diligently exercising their supervisory responsibilities. Unless unusual activity in a branch office was detected -- and reported -- by a branch manager, Dickinson's Compliance Department was unlikely to learn of the unusual trading activity because Dickinson did not have sufficient systems or procedures in place which independently notified the Compliance Department of unusual trading activity in the branch offices. The only firm-wide procedure that Dickinson had in place in the spring of 1993 that was designed to detect unusual trading activity at or around the time it occurred, independent of the branch manager, was the Compliance Department's review of the daily trade blotter. However, this review was ineffective given the format of the trade blotter, which reflected all of the daily transactions in Dickinson's branch offices nationwide. Cumulative build-up or concentration in a security were not indicated on the report or otherwise highlighted. The Compliance Department personnel who reviewed the trade blotter did not have the ability to determine when a branch office was engaged in unusually heavy trading in a particular security. If they had, the Compliance Department might have learned of the unusual trading volume in Fairmont at an earlier point. Aside from the daily trade blotter and an annual audit report, Dickinson did not generate any other reports at the Compliance Department level that identified unusual trading activity in the branch offices. For example, Dickinson did not generate reports that segregated and identified transactions in low-priced securities for the purpose of detecting unusual trading activity.-[5]- Commission activity reports that identified excessive trading volume in a security were not sent to the Compliance Department for review. If the Compliance Department had received and reviewed reports that identified transactions in low-priced securities, or excessive trading ---------FOOTNOTES---------- -[5]- Dickinson did generate reports that monitored trades in low-priced securities for the purpose of confirming that its total annual percentage of sales of such securities was less than 5%. ==========================================START OF PAGE 6====== activity in any one security, it might have learned of Hamel's Fairmont transactions at an earlier point. Dickinson also did not generate reports that reflected unusual concentrations of a particular security. Such a report would have indicated that customers in Dickinson's Boston office held unusual concentrations of more than 3% of Fairmont's outstanding stock by the end of March 1993, and approximately 5% by mid-May 1993. Because Dickinson lacked established procedures, and a system for applying such procedures, that could reasonably have been expected to detect and prevent this type of fraudulent conduct, Dickinson failed to detect Hamel's fraudulent activity until mid-May 1993. At that time, the Chief Compliance Officer learned that Hamel had sold large quantities of Fairmont stock without his prior approval, which was a violation of firm policy, and ordered that all trading in Fairmont cease. E. Legal Discussion 1. Laurienti A branch manager "cannot ignore patterns presented by suspicious events and circumstances but must devise a response to detect and prevent improper activity." William L. Vieira, Exchange Act Release No. 26576, 49 S.E.C. 1091, 1097 (1989). Reasonable supervision "requires strict adherence to internal company procedures." Nicholas A. Boccella, Exchange Act Release No. 26574, 49 S.E.C. 1084, 1086 (1989). As part of his general supervisory duties at Dickinson, Laurienti was responsible for obtaining the approval of the Chief Compliance Officer before brokers in the branch solicited purchase orders for low-priced securities or securities unknown to Dickinson. However, he failed to comply with this procedure regarding Hamel's sales of Fairmont. Therefore, Laurienti failed reasonably to supervise Hamel by failing to discharge his supervisory responsibility. Laurienti also failed reasonably to supervise Hamel by failing to respond reasonably to unusual circumstances and indications of wrongdoing, including violations of Dickinson policy. Laurienti knew that Hamel (1) aggressively solicited purchases of Fairmont, which was a low-priced, speculative, unknown security, (2) entered transactions in excess of $10,000, (3) built a concentrated position in Fairmont, and (4) on one day, opened up thirteen new accounts for customers referred by a stockbroker whose firm had prohibited him from selling Fairmont to his customers. Laurienti also knew that Hamel (1) maintained direct contact with Fairmont representatives, (2) accepted gratuities from Fairmont representatives in the form of an all- ==========================================START OF PAGE 7====== expense paid trip to a Fairmont presentation in Los Angeles, and (3) met with Fairmont representatives in Las Vegas. Laurienti failed to discharge his supervisory responsibilities by failing adequately to inquire into any of these unusual circumstances, and by accepting the unverified representations of Hamel. See Gutfreund, Strauss & Meriwether, Exchange Act Release No. 31554, 52 SEC Doc. 4370, 4387 (December 3, 1992), ("[e]ven 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"); Doherty, DiPrato and Jacobs, Exchange Act Release No. 29545, 50 S.E.C. 624 (1991) (branch manager failed to supervise brokers who manipulated stock where supervisor had notice, among other things, that brokers were soliciting purchases of substantial quantities of stock, and branch manager did not adequately inquire into reasons for solicitation). In response to these unusual circumstances and indications of wrongdoing, Laurienti should have conducted an investigation to determine the circumstances of Hamel's trading activity in Fairmont. As a result of these failures, Hamel actively solicited his customers and accepted orders referred to him by brokers at other firms to purchase more than 630,000 shares of Fairmont, which resulted in violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Therefore, Laurienti failed reasonably to supervise Hamel with a view toward preventing his violations. 2. Dickinson "It is not sufficient for a broker-dealer to establish a system of supervisory procedures which rely solely on supervision by branch managers." Prudential-Bache Securities, Inc., Exchange Act Release No. 22755, 48 S.E.C. 372, 400 (1986). Broker-dealers must not only adopt effective procedures for supervision, but must also "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., Exchange Act Release No. 19424, 47 S.E.C. 862, 867 (1983). Cf. Gary E. Bryant, Exchange Act Release No. 32357, 54 SEC Doc. 431, 442 (May 24, 1993) (firm's structure must include "specific controls or supervisory procedures designed to deter or detect misconduct"). The system must provide sufficient checks "to insure that the first line of compliance, the branch manager, [is] functioning adequately." Shearson Lehman Brothers, Inc., Exchange Act Release No. 23640, 36 SEC Doc. 1075, 1083 (September 24, 1986). Moreover, "[t]he need for central control increases, not decreases, as the branch offices become more numerous, dispersed and distant." Shearson, ==========================================START OF PAGE 8====== Hamill & Co., Exchange Act Release No. 7743, 42 S.E.C. 811, 843 (1965). Dickinson relied on the branch manager of the Boston branch office to detect and prevent the kind of sales practice violations that occurred with the Fairmont transactions. However, Dickinson lacked adequate supervisory and compliance policies and procedures, including a sufficient system of review to determine whether the existing policies and procedures were followed, which could reasonably have been expected to prevent violations of the antifraud provisions of the federal securities laws. Therefore, Dickinson failed reasonably to supervise Hamel with a view toward preventing his violations of the securities laws. IV. In determining to accept Dickinson's Offer of Settlement, the Commission considered the following remedial policies and procedures adopted and implemented by Dickinson since trading in Fairmont occurred: 1. The Compliance Department generates and reviews a daily report reflecting all trades in securities under $5; 2. The Compliance Department generates and reviews a daily report reflecting all trades in securities having a value in excess of $10,000; 3. The Compliance Department obtains and reviews a weekly concentration report from its clearing agent reflecting any securities held by Dickinson or its customers which represent 3% or greater of the outstanding shares of one issuer; 4. The Compliance Department reviews a streamlined daily trade blotter that has been revised to eliminate unnecessary and extraneous information, thereby allowing the Compliance Department more easily to detect unusual trading activity in the branch offices; and 5. Dickinson has completed and implemented an enhanced supervisory system for branch managers, which includes (a) revised, more detailed supervisory logs to be completed by branch managers; (b) additional and specifically-defined matters as to which branch manager reviews are required; (c) additional guidelines for branch managers detailing when compliance approval is necessary prior to trading certain stocks; (d) required written monthly reviews of each representatives' activity; and (e) mandated customer follow-ups and spot checking in various circumstances, providing form letters for that purpose. V. ==========================================START OF PAGE 9====== In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers of Settlement submitted by Dickinson and Laurienti, to impose the sanctions specified in the Offers of Settlement and to order compliance by Dickinson with the undertakings specified in the Offer of Settlement of Dickinson. Accordingly, IT IS HEREBY ORDERED that: A. Laurienti shall be, and hereby is, barred from acting in a proprietary or supervisory capacity with any broker, dealer, municipal securities dealer, investment adviser or investment company, effective immediately, with a right to reapply after two years, but only if the civil monetary penalty imposed under Section V, paragraph B below has been paid, such application to be made to the appropriate self-regulatory organization, or if there is none, to the Commission; B. Laurienti shall pay a civil penalty, pursuant to Section 21B of the Exchange Act, in the amount of $10,000 to the United States Treasury, which shall be paid in two installments of $5,000 each, the first installment within 10 days of the issuance of this Order and the second within 30 days thereafter. The payment of such civil penalty 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) transmitted to the Comptroller, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549; and (d) submitted under cover letter that identifies Laurienti as the Respondent in this proceeding and the file number of this proceeding, a copy of which cover letter and money order or check shall be sent to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Boston, MA 02108; C. Dickinson shall be, and hereby is, censured; D. Dickinson shall, within ten business days of the issuance of this Order, pay a civil penalty, pursuant to Section 21B of the Exchange Act, in the amount of $50,000 to the United States Treasury. The payment of such civil penalty 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) transmitted to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and (d) submitted under cover letter that identifies Dickinson & Co. as the Respondent in this proceeding and the file number of this proceeding, a copy of which cover letter and money order or check shall be sent to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Boston, MA 02108; and ==========================================START OF PAGE 10====== E. Dickinson shall comply with its undertaking to maintain the policies and procedures described in Section IV above, which were implemented prior to the date of this Order; provided, however, that for a period of three years, Dickinson may modify any such policies and procedures based upon the written opinion of its counsel that any such modification will better prevent and detect violations of the federal securities laws, and further provided that following such three-year period, Dickinson may modify such policies and procedures with alternative policies and procedures designed to achieve the same purposes, without the written opinion of counsel. By the Commission. ______________________________ Jonathan G. Katz Secretary