UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39360 / November 26, 1997 Administrative Proceeding File No. 3-9489 ______________________________ : ORDER INSTITUTING PUBLIC In the Matter of : PROCEEDINGS PURSUANT TO : SECTIONS 15(b)(6), 19(h) AND ANTHONY S. BATTAGLIA, JR., : 21C OF THE SECURITIES EXCHANGE : ACT OF 1934, MAKING FINDINGS, Respondent. : IMPOSING REMEDIAL SANCTIONS ______________________________: AND A CEASE-AND-DESIST ORDER I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to Sections 15(b)(6), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Anthony S. Battaglia, Jr. ("Battaglia"). II. In anticipation of the institution of these proceedings, Battaglia 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 contained in this Order, except as to jurisdiction over Battaglia and over the subject matter of these proceedings, which he admits, Battaglia consents to the entry of this Order and the imposition of sanctions as set forth below. Accordingly, IT IS ORDERED that a proceeding pursuant to Sections 15(b)(6), 19(h) and 21C of the Exchange Act be, and hereby is, instituted. III. FACTS On the basis of this Order and the Offer submitted by Battaglia, the Commission finds that: A. Respondent 1. Anthony S. Battaglia, Jr. is 45 years old and resides in St. Petersburg, Florida. Battaglia joined PaineWebber, Inc. in November 1985, and was associated with the firm as the branch manager of its St. Petersburg, Florida office from November 1989 until his resignation on January 18, 1996. B. Other Relevant Entities And Person 1. PaineWebber, Inc. ("PaineWebber") is registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. 2. Katsu, Inc. ("Katsu") was a private Florida corporation with its principal place of business located at Battaglia's residence in St. Petersburg, Florida. Battaglia was the sole officer, director and shareholder of Katsu. 3. Robert A. Magnan ("Magnan") was at all relevant times associated with PaineWebber as a registered representative in PaineWebber's St. Petersburg, Florida office. C. Battaglia Misappropriated $180,000 from two PaineWebber Customer Accounts In December 1985, two siblings (hereinafter "Customer A" and "Customer B") each opened joint accounts with their mother at PaineWebber. Battaglia was the account executive for both accounts from the time they were opened until he resigned from PaineWebber in January 1996. Battaglia never had discretionary trading authority, either orally or in writing, for either the Customer A or Customer B accounts. 1. Two Unauthorized $45,000 Wire Transfers On June 27, 1994, Battaglia opened a business checking account at First Union Bank of Florida on behalf of Katsu. The very next day, two $45,000 wire transfers were made to Katsu's account at First Union, for a total deposit of $90,000. The funds for the two $45,000 wire transfers originated from Customer A's and Customer B's accounts at PaineWebber. Although Customer A and Customer B signed letters of authorization for the wire transfers, neither customer authorized the transfer of funds to Katsu. ======END OF PAGE 2====== From approximately June 30, 1994, to August 30, 1994, Battaglia withdrew all of the money from the Katsu account at First Union Bank of Florida, including the $90,000 from the Customer A and Customer B accounts, and used the money for personal investments and to pay for personal expenses. Battaglia has never repaid Customer A or Customer B for any of the funds that he obtained from their accounts. In April of 1996, however, PaineWebber reimbursed Customer A and Customer B for the money taken by Battaglia, with interest. 2. $100,000 Charitable Donation On September 15, 1995, Customer B told Battaglia that she wanted to make a $100,000 charitable donation to the St. Jude's Children's Research Hospital ("St. Jude's"). Battaglia told Customer B that he would handle the donation for her. Customer B signed a blank check from her PaineWebber account and gave it to Battaglia, with the understanding that Battaglia would make the donation to St. Jude's with the check she gave him. On September 16, 1995, Battaglia, outside the presence of Customer B, completed the blank check that Customer B had given him the previous day by inserting the date and the amount of $100,000 and by making the check payable to Katsu. Battaglia also wrote the phrase "St. Jude Project" on the memo line of the check, creating the appearance that the money was going to St. Jude's. On September 18, 1995, Battaglia deposited the $100,000 check into Katsu's account at First Union Bank of Florida. Because Customer B had insufficient funds available, securities in her account were liquidated to cover the posted check. On September 29, 1995, Battaglia made a $10,000 donation to St. Jude's on behalf of Customer B. Over the next several months, Battaglia used the remaining $90,000 from Customer B's $100,000 check for personal investments and to pay for personal expenses. D. Battaglia Failed Reasonably to Supervise Magnan 1. Magnan's Violations of the Federal Securities Laws Magnan was employed in the St. Petersburg, Florida office of PaineWebber from January 1991 until October 16, 1992. During the period of Magnan's employment at PaineWebber, Battaglia was the branch manager of the St. Petersburg office and directly supervised Magnan. Thus, Battaglia was responsible for ensuring that Magnan complied with the federal securities laws. On April 5, 1995, the Commission found, in a settled action, that Magnan violated the antifraud provisions of the federal securities laws while employed at four firms, one of which was PaineWebber. See In the Matter of Robert A. Magnan et al., Rel. Nos. 33-7155 and 34-35565 (April 5, 1995). Among other things, the Commission found that while employed at PaineWebber, Magnan willfully caused trading in five customer accounts he controlled that was excessive and unsuitable in light of those customers' investment objectives and the character of their accounts. ======END OF PAGE 3====== 2. Battaglia's Deficient Supervision As Magnan's supervisor, Battaglia failed to follow up adequately on red flags pertaining to Magnan's frequent trading in certain accounts for which he was the account executive. In addition, Battaglia unilaterally changed the investment objectives in certain Magnan accounts prior to obtaining the customers' approval to effect such changes, which had the effect of concealing Magnan's excessive and unsuitable trading in those accounts. a. Battaglia Failed to Respond to Red Flags During the time of Magnan's employment at PaineWebber, Battaglia ignored red flags in each of the five accounts that Magnan churned that should have put him on notice of the velocity of Magnan's trading. The red flags included, among other things, active account reports and PaineWebber's 1992 audit report. Notwithstanding these red flags indicating Magnan's excessive and unsuitable trading, Battaglia took little meaningful action in response to them and failed to conduct a reasonable inquiry into Magnan's trading. Battaglia received several active account reports for most of the accounts that Magnan churned. An active account report is an exception report generated by computer each month for every PaineWebber account in which there had been at least ten trades and at least $1,000 in commissions generated during the previous month. An active account report shows, among other things, the monthly turnover in an account, as well as the amount of commission revenue and equity for a given month, thus enabling one to calculate the commission to equity ratio. Battaglia frequently failed to make any meaningful inquiries following the receipt of active account reports. For example, in one instance, Battaglia received an active account report for one of Magnan's clients shortly after the client complained to Battaglia about the account. In lieu of contacting the customer, Battaglia relied on representations from Magnan that the trading in the account was consistent with the client's objectives even though Battaglia clearly knew that the client was unhappy with the account. Battaglia also falsely documented actions he allegedly took in response to active account reports in an attempt to create the appearance that he reasonably discharged his supervisory responsibilities. For instance, Battaglia wrote on an active account report received for one of Magnan's clients that he sent the client a letter addressing the activity in the client's account. In fact, Battaglia did not send the letter until approximately one month later, after he had received an additional active account report. Battaglia also received PaineWebber's 1992 audit report dated January 27, 1992, that specifically addressed problems with Magnan's accounts including, but not limited to, disproportional commission versus assets. The audit report recommended, among other things, that Battaglia should ======END OF PAGE 4====== continue to monitor all trading activity in Magnan's accounts and should determine if the transactions are suitable in light of the clients' investment objectives, experience and financial resources. Battaglia, however, failed to place Magnan under any meaningful supervision after receiving the 1992 audit report. In addition, Battaglia received inquiries from PaineWebber's compliance department regarding certain Magnan accounts. In at least one instance, rather than exploring the compliance department's concerns, Battaglia misrepresented the actions he had taken to the compliance department. For instance, after receiving a call from the compliance department concerning one of Magnan's clients, Battaglia represented to the compliance department that he spoke with the client regarding the level of trading in the account and that the trading was meeting the client's objectives. In fact, Battaglia did not have a discussion with the client concerning the client's investment objectives until approximately one month later. Notwithstanding the above-described red flags, Battaglia's supervision of Magnan was inadequate, and Magnan continued to churn client accounts through October 1992. b. Battaglia Changed Investment Objectives As of approximately late January 1992, Magnan had several accounts in which there was a high level of activity that was inconsistent with any investment objective other than speculation. On approximately February 3, 1992, Battaglia sent an identical letter to ten of Magnan's customers stating that "[u]nless we hear differently, we will be coding your main investment objective as speculation." These letters were false, however, because prior to sending the letters, Battaglia already had altered PaineWebber's records to reflect that these customers' investment objectives were speculation. ======END OF PAGE 5====== IV. FINDINGS As a result of the conduct set forth above, the Commission finds that Battaglia willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by use of the means and instrumentalities of interstate commerce and by use of the mails, and failed reasonably to supervise Magnan, within the meaning of Section 15(b)(4)(E) of the Exchange Act. Battaglia has submitted a sworn financial statement and other evidence, and has asserted his financial inability to pay disgorgement of $180,000 plus prejudgment interest. The Commission has reviewed the sworn financial statement and other evidence provided by Battaglia and has determined that Battaglia does not have the financial ability to pay disgorgement of $180,000 plus prejudgment interest. V. ORDER Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer and impose the sanctions specified therein. Accordingly, IT IS HEREBY ORDERED that: 1. Battaglia, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 2. Battaglia be, and hereby is, barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company. 3. Battaglia shall pay disgorgement of $180,000 plus prejudgment interest, but that payment of such amount be waived based upon Battaglia's demonstrated financial inability to pay. 4. Battaglia shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $50,000 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, VA 22312; and (d) submitted under cover letter which identifies Battaglia as Respondent in these proceedings and the Commission's file number in these proceedings. A copy of the cover letter and money order or check shall be sent to George B. Parizek, Senior Counsel, Securities and Exchange Commission, 450 Fifth Street NW, Mail Stop 7-2, Washington, D.C. 20549. ======END OF PAGE 6====== IT IS FURTHER ORDERED that 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 Battaglia provided accurate and complete financial information at the time such representations were made; and (2) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Battaglia's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Battaglia was fraudulent, misleading, inaccurate or incomplete in any material respect and whether any additional remedies should be imposed. Battaglia may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 7======