UNITED STATES OF AMERICA
|In the Matter of
H.J. MEYERS & CO., INC.
|ORDER MAKING FINDINGS
AND IMPOSING REMEDIAL
SANCTIONS BY DEFAULT
H.J. Meyers & Co. (H.J. Meyers) is in default under Rule 155(a) of the Securities and Exchange Commissions Rules of Practice, 17 C.F.R. §§ 201.155(a), because it failed to appear at a prehearing conference and because it failed to file a response to my Order to Show Cause, which I issued on October 29, 1998.
Accordingly, I find the following allegations in the Order Instituting Proceedings (OIP), dated September 30, 1998, are true: 1
A. H.J. Meyers has been registered with the Commission as a broker-dealer since August 1984 (#8-32427), and during the relevant time period engaged in providing retail brokerage services. During the relevant time period it maintained sixteen retail sales offices in ten states, employing approximately 400 brokers.
B. Respondent Tobin J. Senefeld (Senefeld) was employed by H.J. Meyers and its predecessor, Thomas James Associates, Inc., from August 1994 to June 1997 and was the branch manager of H.J. Meyers' Boston branch office from June 1995 to February 1997. Since June 1997, he has been employed as a registered representative by Morgan Keegan & Company, a broker-dealer based in Louisville, Kentucky. Rita K. Savla (Savla) was employed in the Boston branch office of H.J. Meyers from February 1996 until July 1996. She presently is unemployed.
C. This matter concerns violations of the antifraud provisions and the credit extension provisions as a result of a free-riding scheme 2 by Savla and Senefeld, a registered representative and her branch manager, respectively, at the Boston branch office of H.J. Meyers.
D. In or about June 1996, Savla initiated a scheme to engage in free-riding transactions by purchasing and selling Palomar Medical Technologies (Palomar) stock in various nominee accounts. To carry out her free-riding scheme, Savla used accounts belonging to her friends. Most of these friends allowed Savla to open new accounts in their names or, in some instances, to use existing accounts for her own trading.
E. On or about July 1, 1996, Savla and Senefeld discussed several large purchases of Palomar stock that had recently been made in Savlas customers accounts. At that time, Savla told Senefeld about her free-riding scheme and the profits that she had previously made. Upon learning of Savlas free-riding and the resulting profits, Senefeld asked her to open several additional nominee accounts in order to engage in free-riding himself.
F. During a four-week period in June and July 1996, Savla and Senefeld purchased a total of 106,000 shares of stock at a cost of more than $1.6 million in various nominee cash accounts, without sufficient funds in such nominee accounts and without any good faith basis to believe that full cash payment for the security would be made before the security was sold. Savla and Senefeld intended to make a quick profit and use proceeds from the sale of the same stock to cover the purchase price. Of that total, Senefeld purchased 30,000 shares of stock at a cost of $364,825.
G. After Savla and Senefeld made initial profits of more than $14,000, their scheme soon collapsed because the price of Palomar stock declined. In order to avoid Savla and himself having to sell at a loss and pay for the stock they purchased, Senefeld improperly approved and obtained extensions of the settlement date pursuant to Regulation T, hoping that the price of the stock would go up again. Ultimately, Savla and Senefeld did not pay for the purchases, and H.J. Meyers sold out the remaining stock in the accounts at a loss of $211,902. Of that total, the losses incurred by Senefeld in the accounts he controlled amounted to $49,393.
H. From in or about August 1994 through in or about June 1997, Senefeld was subject to the supervision of H.J. Meyers within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 (Exchange Act).
I. From in or about February 1996 through in or about July 1996, Savla was subject to the supervision of H.J. Meyers within the meaning of Section 15(b)(4)(E) of the Exchange Act.
J. Prior to the free-riding scheme, H.J. Meyers was aware of certain problematic activities concerning Senefeld and the Boston branch office. In August 1995, approximately eleven months before Senefeld and Savla engaged in the free riding scheme, the Compliance Department performed an audit of the Boston branch office and discovered a number of irregularities. The audit discovered that the office had an excessive number of accounts subject to a ninety day restriction for failure to pay for a purchase of securities prior to its sale or delivery. A follow-up audit was conducted in October 1995, and the number of accounts subject to a ninety day restriction was still a concern to the Compliance Department. Compliance officers at H.J. Meyers, including the Director of Compliance, were aware of the results of the two audits and were aware that an excessive number of accounts subject to a ninety day restriction could be an indication of free-riding.
K. During the period of the free-riding scheme, H.J. Meyers received indications of possible free-riding violations in its Boston branch office but failed to investigate them or take any action.
L. The Acting Director of Compliance received monthly compliance reports on each branch, which included information on the number of Regulation T extensions obtained at that branch office. Based on the monthly reports from the Boston office, the Acting Director of Compliance knew that, during the period of the free-riding scheme, Senefeld had obtained more Regulation T extensions than any other registered representative in the Boston office. The Acting Director of Compliance, who was aware of the results of the two previous audits, was also aware that the excessive number of Regulation T extensions was a "red flag" of improper activity. The Acting Director of Compliance, however, took no action.
M. Indications of possible free-riding were also contained in two different reports generated by the clearing broker and sent to the H.J. Meyers headquarters office each day. One daily report listed all accounts placed on ninety day restriction and organized them by branch office. The report was divided up in the mailroom and forwarded on to the respective branch offices without any review by the Compliance Department staff. The second daily report listed all accounts on ninety day restriction in which trades had occurred. Under H.J. Meyers procedures, the report was reviewed by a margin clerk at the headquarters office, but was not brought to the attention of the compliance staff. In one instance, Senefeld had purchased stock as part of his free-riding scheme through an account that was already subject to a ninety day restriction. No appropriate follow up was conducted to ensure that the trade was proper and no one within the Compliance Department was notified. Given the circumstances of the history of the problems at the Boston office, and Senefeld in particular, before and during the free-riding scheme, the failure of the Compliance department to review these reports was unreasonable.
N. As a result, H.J. Meyers failed reasonably to supervise Savla and Senefeld with a view toward preventing their free-riding scheme.
O. By making material misrepresentations and omissions, Senefeld and Savla caused H.J. Meyers to extend, maintain, or arrange for the extension of credit to nominee accounts that they used for free-riding.
P. H.J. Meyers was responsible for promptly canceling or liquidating stock purchases for which a customer did not make full cash payment within the required time. However, on seven occasions during July and August 1996, H.J. Meyers failed to cancel or liquidate on a timely basis purchases of stock in accounts used by Savla and Senefeld for free-riding.
In its Memorandum in Support of Proposed Sanction as to Respondent H.J. Meyers, the Division of Enforcement (Division) requests that H.J. Meyers be deemed in default of these proceedings and that it be censured and ordered to pay civil money penalties of $50,000.
The allegations in the OIP which I deem to be true as to Respondent H.J. Meyers, demonstrate that Respondent H.J. Meyers failed reasonably to supervise Senefeld and Savla within the meaning of Sections 15(b)(4)(E) and 15(b)(6) of the Exchange Act with a view to preventing the violations described above. Respondent H.J. Meyers also willfully violated Section 7(c) of the Exchange Act and Regulation T by failing to liquidate on a timely basis purchases of stock in accounts used by Senefeld and Savla for free-riding.
Also of importance in this matter is the fact that Respondent H.J. Meyers has had numerous opportunities to contest the allegations in the OIP and the specific sanctions that the Division has requested, but it failed to do so. Respondent H.J. Meyers failed to respond to any and all orders and pleadings. In any event, should Respondent H.J. Meyers have any objections to this default order, it may file a motion to set aside the default, pursuant to Rule 155(b) of the Commissions Rules of Practice, so long as the motion is made within a reasonable time, states the reasons for the failure to defend, and specifies the nature of the proposed defense in the proceeding.
ACCORDINGLY, it is
ORDERED, pursuant to Section 15(b) of the Exchange Act, that Respondent H.J. Meyers is censured for failure reasonably to supervise; and
ORDERED, pursuant to Section 21B of the Exchange Act, that Respondent H.J. Meyers is assessed civil money penalties in the amount of $50,000 for recklessly disregarding its supervisory requirements which resulted in substantial trading losses.
Payment of sums owed shall be: (i) made no later than 21 days after service of this order; (ii) made by United States postal money order, certified check, bank cashiers check, or bank money order; (iii) made payable to the Securities and Exchange Commission; (iv) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Greenway, Stop 0-3, Alexandria, Virginia 22312; and (v) submitted under cover letter which identifies H.J. Meyers & Co., Inc. as the Respondent in these proceedings, and the file number of these proceedings.
Robert G. Mahony
Administrative Law Judge
|1||The findings herein are binding solely upon Respondent H.J. Meyers, and not any other Respondent in this proceeding.|
|2||"Free-riding" is a practice which involves purchasing stocks without sufficient funds to pay for these purchases and then using the proceeds of the sale of that same stock to cover the purchase price. SEC v. Margolin , 1992 U.S. Dist. LEXIS 14872, at *8 (S.D.N.Y. Sept. 30, 1992).|
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