1 INITIAL DECISION RELEASE NO. 123 ADMINISTRATIVE PROCEEDING FILE NO. 3-9114 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________ : In the Matter of : :INITIAL DECISION PHILADELPHIA INVESTORS, LTD. :March 20, 1998 and CLARENCE Z. WURTS : ____________________________________ APPEARANCES:Merri Jo Gillette, David S. Horowitz, and Michael B. Novakovic for the Division of Enforcement, Securities and Exchange Commission Thomas B. Roberts and Kenneth B. Holdsman for Respondents BEFORE:G. Marvin Bober, Administrative Law Judge I. INTRODUCTION The Securities and Exchange Commission ("Commission") initiated this proceeding on September 27, 1996, pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"). The Order Instituting Proceedings ("OIP") alleges that, from approximately March 1992 through April 1995, Respondents Philadelphia Investors, Ltd. ("Philadelphia Investors") and Clarence Z. Wurts failed reasonably to supervise Michael G. Cohen with a view to preventing his violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Specifically, the OIP alleges that Respondents failed reasonably to supervise Mr. Cohen in that they failed to: i) establish any written procedures regarding the outside business activities of the firm's registered representatives; ii) establish oversight procedures for the offering of interests in specific investment vehicles; iii) establish heightened supervisory procedures over Mr. Cohen; iv) establish procedures to monitor Mr. Cohen's access to and withdrawal of funds from two accounts; v) establish procedures prohibiting Mr. Cohen from sharing in the profits generated by a customer account; vi) establish any procedures to ensure that the information contained on new account forms was accurate; vii) enforce existing procedures regarding discretionary accounts; viii) enforce and/or follow existing procedures requiring that Mr. Wurts review all outgoing correspondence; ix) enforce and/or follow existing procedures requiring that Mr. Wurts review all customer account statements on a monthly basis; and x) respond reasonably to warning signs suggesting fraud or other irregular activity. I held an administrative trial in Philadelphia, Pennsylvania, on February 3, 4, and 5, 1997, to determine whether the allegations set forth in the OIP are true, what, if any, remedial sanctions are appropriate in the public interest, and whether a civil penalty should be imposed against Philadelphia Investors and Mr. Wurts. At the trial, the Division of Enforcement ("Division") called four witnesses, including Mr. Wurts. The Division offered 127 exhibits, all of which I admitted into evidence except for Division Exhibit 100, which I admitted in part and denied in part. The Respondents called one witness and offered 41 exhibits, all of which I admitted into evidence. I also admitted into evidence a stipulation of the parties setting forth a description of Mr. Cohen's underlying conduct.[1] For the reasons set forth below, I find that Philadelphia Investors and Mr. Wurts failed reasonably to supervise Mr. Cohen with a view to preventing his violations of the federal securities laws. II. FINDINGS OF FACT AND CONCLUSIONS OF LAW My findings and conclusions are based on the record and my observations of the witnesses' demeanor. I applied preponderance of the evidence as the applicable standard of proof. I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision. A. Participants 1. Clarence Z. Wurts Mr. Wurts studied history at Princeton University and graduated in 1962. (Tr. 47.) From 1965 through 1967, Mr. Wurts pursued a Masters of Economics at the University of Pennsylvania ("Penn"), but he did not graduate. (Tr. 48.) Mr. Wurts taught securities analysis at Penn, and has taught, and is currently teaching, a course in banking regulation, securities trading, and the capital markets at the Central Atlantic School of Trust, which is part of the Pennsylvania Banker's Association. (Tr. 48-49.) Mr. Wurts began his career in the securities industry in 1965 at Drexel & Company. (Tr. 49.) He was involved in the corporate finance department for a period of time, became a securities analyst, and then was a floor partner on the New York Stock Exchange ("NYSE"). (Tr. 49.) As a floor partner on the NYSE, Mr. Wurts was also a member of the NYSE committee responsible for overseeing the trading activity on the floor of the exchange and determining whether such activity was irregular or improper. (Tr. 50-51.) From 1969 through 1983, Mr. Wurts worked at Alex Brown, first as a floor partner on both the NYSE and the American Stock Exchange, then, in 1973, as the resident partner and branch manager of Alex Brown's Philadelphia office. (Tr. 51-52.) As a partner of the firm, Mr. Wurts had no direct supervisor but reported to the other Alex Brown partners and the various department heads. (Tr. 54.) As branch manager, Mr. Wurts supervised all of the employees in the Philadelphia office, including the registered representatives. (Tr. 52-54.) He was also responsible for compliance at the Philadelphia office and, although he did not participate in either the preparation or revision of any supervisory procedures manuals, he had the responsibility to make suggestions related to the subject. (Tr. 53.) At the end of 1983, Mr. Wurts became President of Edward C. Rorer & Company ("Rorer & Company"), a registered investment advisor and broker-dealer. (Tr. 54-55.) Mr. Wurts assisted the owner of the firm in running the brokerage operation, in addition to building his investment advisory business and "helping him run the money." (Tr. 54-55.) He worked together with Mr. Rorer to develop procedures relating to supervision and compliance. (Tr. 56-57.) Mr. Wurts left Rorer & Company in late 1986 to become a registered representative at Hopper Soliday in Philadelphia because he wanted to be involved in broker finance and in bringing business into the city. (Tr. 58-59.) He became a registered representative at Laverell, Reynolds Securities, Inc. in August 1987, and remained with that firm until he formed Philadelphia Investors in December 1988. (Tr. 59-60.) Mr. Wurts is licensed as a general securities principal, financial principal, general securities representative, and state securities agent; and he previously was registered as an options principal. (Tr. 61-63.) He was governor of the Philadelphia Stock Exchange ("PHLX") from 1981 to about 1987. (Tr. 64.) He served on the PHLX's Option Selection Committee for two years and its Business Conduct Committee for three years, including one year as head of that Committee. (Tr. 64, 66-67.) The Business Conduct Committee oversees the members of the PHLX, ensures compliance with the securities laws, and makes corrections and recommendations related to compliance procedures. (Tr. 65-68.) Mr. Wurts was a member of the National Association of Securities Dealers ("NASD") District 11 Committee from about 1987 until 1991, serving as vice chairman in his last year. (Tr. 57, 67- 68.) The District Committee monitors the activities of the firms that are within the Committee's territory and oversees compliance with the securities laws and regulations, including NASD rules and regulations. (Tr. 68.) **FOOTNOTES** [1]: I will refer to this exhibit as "(ALJ Ex. 1)." I will refer to Division exhibits as "(Div. Ex. __)" and to Respondents exhibits as "(Resp. Ex. __)." I will refer to the transcript as "(Tr. __)." 1 2. Philadelphia Investors, Ltd. Mr. Wurts began the incorporation process of Philadelphia Investors in December 1988. (Tr. 60, 235.) The firm became registered with the Commission as a broker-dealer in March 1989. (Tr. 61; Div. Ex. 1.) Mr. Wurts has been the president and sole owner of the firm since its inception. (Tr. 60, 69.) Since March 1992, Philadelphia Investors has maintained two offices, one in Philadelphia, Pennsylvania and one in Morristown, New Jersey, with approximately twelve registered representatives, six in the Philadelphia office including Mr. Wurts, and with a two- or three-person support staff. (Tr. 71-72, 236-37.) The firm has had about 3,000 active accounts at any time during the relevant period, with about 400 of those accounts, comprised of both cash and margin accounts, handled out of the Philadelphia office. (Tr. 72-73, 240.) Philadelphia Investors clears its securities transactions through a clearing firm, Pershing.[2] (Tr. 71.) The gross revenues of the firm for the years 1992 through 1995 ran between $900,000 and $1.2 million. (Tr. 127.) The bulk of the commissions earned by the firm are generated in the daily trading activity in retail accounts, which includes retail trading on the NYSE and the NASD Automated Quotation System ("NASDAQ"), and also trading of government and corporate bonds. (Tr. 74-75, 237-39.) Mr. Wurts has been a major producer for the firm, and the leading producer in the Philadelphia office, since the firm's inception. (Tr. 73-74.) Mr. Wurts has always had total compliance responsibility for Philadelphia Investors and has always retained ultimate supervisory authority. (Tr. 69-70, 78-79, 237, 360-61.) Mr. Wurts was the person primarily responsible for drafting and updating the firm's supervisory procedures manuals. (Tr. 251-52, 255-56.) All registered representatives were required to read the manuals, including updates, and sign an acknowledgment. (Tr. 252-55, 421, 436.) In addition, the firm conducted annual inspections of the branch offices and held regularly scheduled meetings in order to discuss firm policies and procedures, changes in state and federal securities laws, and other compliance issues. (Tr. 252-54, 421-22, 436-37.) 3. Michael G. Cohen In the spring of 1991, Philadelphia Investor's operations manager introduced Mr. Cohen to Mr. Wurts. (Tr. 89, 362.) Mr. Cohen later approached Mr. Wurts about the possibility of working at Philadelphia Investors and Mr. Wurts decided to hire him. (Tr. 91.) In March 1992, Mr. Cohen began his application to become a registered representative by completing a Form U-4 which Mr. Wurts reviewed and approved before filing it with the NASD. (Tr. 91-93.) He became a registered representative with Philadelphia Investors in September 1992.[3] (Tr. 87; Div. Ex. 3-A.) He left the firm suddenly in April 1995. Prior to hiring Mr. Cohen in September 1992, Mr. Wurts conducted an investigation into Mr. Cohen's background which included a review of Mr. Cohen's disciplinary history as provided by the NASD Central Registration Depository ("CRD") and discussions about his career in the securities field with previous employers and supervisors. (Tr. 98-104, 510-11.) Consequently, Mr. Wurts was aware that Mr. Cohen previously had engaged in unauthorized options trading and had an extensive disciplinary history that included a two year suspension from the NYSE in 1983. (Tr. 89, 98-105.) Mr. Wurts determined that Mr. Cohen's past difficulties had resulted from family problems and that he had "amended his ways." (Tr. 98-100, 107-08.) Mr. Wurts considered Mr. Cohen an important asset to him and the firm, and was impressed with his intelligence, knowledge, and work ethic. (Tr. 160-61, 295-96.) He made Mr. Cohen the registered options principal ("ROP") in the Philadelphia office on October 1, 1992, less than one month after becoming a registered representative with the firm.[4] (Tr. 138-40, 148, 293-94; Div. Exs. 300, 301, 302, 303, 304, 305, 306.) On February 5, 1993, he made Mr. Cohen a principal and branch manager of the Philadelphia office and, later, branch manager of the New Jersey office.[5] (Tr. 159-61, 165, 294, 335.) As principal and branch manager of the Philadelphia office, Mr. Cohen was charged with supervising the office's registered representatives and ensuring daily compliance in the office of the various securities laws and regulations, the firm's business practices and procedures, and Pershing's practices and procedures. (Tr. 165, 296-97, 393-94, 425-26, 435, 465-66, 524.) He approved and signed-off on new accounts for other registered representatives, made sure that the customers were treated properly, and reviewed outgoing and incoming mail. (Tr. 165-68, 409, 426, 440.) He also conducted weekly office compliance meetings and conducted compliance inspections in both offices. (See, e.g., Div. Exs. 342, 343; Resp. Exs. AG, AH, AI.) **FOOTNOTES** [2]: Pershing, a division of Donaldson, Lufkin & Jenrette Securities Corporation, is a clearing firm that, among other things, executes and clears orders, sends out confirmations, bills customers, and collects funds for Philadelphia Investors. (Tr. 242-45, 247, 284.) Pershing also creates account and trading reports and monthly commission runs for the firm. (Tr. 245-47, 250.) [3]: Mr. Cohen passed the NASD's Series 7 general securities representative examination on September 1, 1992, and the Series 63 uniform securities agent state law examination on September 5, 1992. (Tr. 293; Div. Exs. 3-A, 3-B; Resp. Ex. QQ.) [4]: Mr. Cohen passed the NASD's Series 4 registered options principal qualification examination on September 24, 1992. (Div. Ex. 3-C; Resp. Ex. QQ.) [5]: Mr. Cohen passed the NASD's Series 24 general securities principal examination in February 1993. (Div. Ex. 3-D; Resp. Ex. QQ.) 2 B. Mr. Cohen's Scheme[6] From March 1989 through April 1995, both before and during his association with Philadelphia Investors, Mr. Cohen operated a Ponzi scheme in violation of the federal securities laws. Between March 1989 and September 1994, he raised a total of $500,000 from thirty-two investors through the sale of limited partnership interests in five limited partnerships and an entity called an investment club, each established to trade, among other things, nationally listed stock options. Mr. Cohen formed the entities successively, as follows: Name of PartnershipDate Formed Daikoku Limited Partnership ("Daikoku I")March 1989 Daikoku II, Limited Partnership ("Daikoku II")October 1989 Daikoku III Limited Partnership ("Daikoku III")April 1990 GIF Investments, Limited Partnership ("GIF")January 1991 Nomad Investment Club ("Nomad")October 1991 Daedalus Investments, Limited Partnership ("Daedalus")September 1994 Mr. Cohen was the general partner for each partnership and the authorized agent for Nomad and, as such, was empowered to make all investment decisions, perform all administrative functions, and control access to each entity's funds. Pursuant to the partnership agreements and the Nomad agreement, Mr. Cohen was to pool investor money raised in a particular offering and then, within his discretion, invest the funds accordingly. Each entity was to terminate if the value of an ownership interest declined to a specified level, thereby limiting any potential loss. For his part, Mr. Cohen was entitled to a fee from each partnership equal to twenty percent of the profits, if any. Although Mr. Cohen used much of the money that he raised to engage in options trading and did enjoy some successes, his trading ultimately produced massive losses for each of the entities. Rather than terminating the entities when their value fell below the agreed upon amount, Mr. Cohen concealed trading losses from the investors by mailing them fictitious monthly account statements and tax documents. These account statements showed that ownership interests were growing in value and, generally, that the returns far exceeded those of the Standard and Poors' 500 index. Because the value of each ownership interest was directly correlated to the value of the nationally listed securities that it owned, Mr. Cohen misled investors as to both the true value of the partnership interests and the true value of the underlying stocks, options, and bonds. Mr. Cohen also created the appearance of successful trading by mailing distribution checks totaling approximately $76,500 to investors in the first three limited partnerships. These fraudulent account statements and distributions encouraged investors to retain their limited partnership interests, thereby allowing Mr. Cohen to continue with his scheme. Mr. Cohen was partially able to pay for his commissions and the distributions by using the sporadic profits from his trading. As none of the partnerships ever enjoyed any sustained profitability, however, Mr. Cohen had to obtain new sources of investor money in order to fund his scheme. He raised these additional funds by creating and selling interests in successive limited partnerships and in Nomad. Mr. Cohen deposited new investor money into brokerage and/or bank accounts at a variety of institutions and moved funds freely between the various partnerships on a continuing basis, as needed. Mr. Cohen attracted new investors by highlighting the fraudulent track- record of his partnerships. For example, the prospectus for each limited partnership provided fraudulent historical returns for previously formed partnerships. By April 1995, Mr. Cohen's payment obligations to investors and trading losses exceeded his ability to raise new capital. On August 17, 1995, Mr. Cohen pled guilty in the United States District Court for the Eastern District of Pennsylvania to one count of mail fraud in connection with his false statements to investors concerning the financial status of Daikoku III. (See Div. Exs. 510, 511, 513-A, 513-B.)[7] He was sentenced to serve a twenty-one month prison term. (See Div. Ex. 513-B.) Mr. Cohen violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because he offered and sold securities to investors through a fraudulent and deceptive Ponzi scheme. (See Div. Ex. 514.) He knowingly made material misrepresentations and omissions in connection with the offer and sale of limited partnership interests. Mr. Cohen deceived investors as to the value, nature, and disposition of their securities. He concealed losses and misrepresented successes by providing false account statements and fraudulent historical data. C. Mr. Cohen's Options Trading Program at Philadelphia Investors Mr. Cohen operated his illegal scheme at Philadelphia Investors. After Mr. Cohen became a registered representative with Philadelphia Investors in September 1992, Mr. Wurts authorized him to operate an options trading program at the firm and allowed him to open discretionary accounts.[8] (Tr. 87, 97; Div. Ex. 3- A.) Mr. Cohen's options trading program was different than most of the activity in which Philadelphia Investors previously was involved and Mr. Wurts believed that it would benefit the firm by providing another investment vehicle to clients and, therefore, added revenue for the firm. (Tr. 97, 129-32.) Mr. Wurts relied only on Mr. Cohen's word that his options trading program had been successful and profitable in the past; he never asked Mr. Cohen for any documentation or proof. (Tr. 130-31.) Mr. Wurts authorized Mr. Cohen to trade options so long as he had the appropriate documentation, including: i) a new account form; ii) a signed limited power of attorney, showing that he had discretion over the account; iii) Internal Revenue Service Form W-9; iv) a margin agreement; and v) an options disclosure form that explained options trading and disclosed the volatility and dangers inherent in such trading. (Tr. 87-89, 292; see Resp. Exs. RR, SS.)[9] Mr. Wurts pre-approved Mr. Cohen's option trading;[10] he required Mr. Cohen to complete a daily report on his trades; he created an options blotter in order to track and review the firm's daily options trading; he reviewed Mr. Cohen's trades through the clearing agent, Pershing; and he reviewed the monthly account statements and documentation related to the clients' retail accounts.[11] (Tr. 124-26, 133-34, 285-86, 290.) From 1992 through 1995, only Mr. Wurts and Mr. Cohen traded options at the Philadelphia office of Philadelphia Investors. (Tr. 88, 135.) Mr. Wurts was aware that, prior to joining Philadelphia Investors, Mr. Cohen had formed and participated in limited partnerships, solicited the investment of other limited partners in the partnerships, held partnership accounts at other brokerage firms, and traded options through the limited partnership vehicles.[12] (Tr. 110-114, 116-17, 128, 130, 365-66.) When Mr. Cohen joined Philadelphia Investors, Mr. Wurts told Mr. Cohen that, as a condition of his employment, he would have to cease outside business activities, he could no longer solicit investments in any limited partnerships, he could no longer trade options through a limited partnership, and he could not form any new limited partnerships. (Tr. 85, 110, 114-18, 120, 123, 148, 193.) Mr. Wurts expected Mr. Cohen to relinquish his ownership interests in any limited partnerships, and believed that Mr. Cohen's involvement in limited partnerships had ceased prior to his joining the firm and that the partnerships had ceased to exist. (Tr. 119, 124, 127.) Mr. Cohen, however, maintained outside brokerage accounts and participated in limited partnerships when he filed his Form U-4 in March 1992 and during his employment as a registered representative at Philadelphia Investors.[13] 1. Nomad In October 1991, Mr. Cohen formed Nomad and raised $35,000 through the sale of seven partnership interests to six investors. (ALJ Ex. 1.) He immediately opened an option account in the partnership's name at Charles Schwab, Inc. ("Schwab") with the funds. (ALJ Ex. 1.) In November 1991, Mr. Cohen liquidated one limited partnership interest for $5,000. (ALJ Ex. 1.) Mr. Cohen initially enjoyed some success and, from October 1991 through April 1992, his trading produced gains of approximately $33,000. (ALJ Ex. 1.) In May and June of 1992, Mr. Cohen raised an additional $55,000 for the partnership from eight new investors. (ALJ Ex. 1.) In May 1992, Mr. Cohen began diverting significant funds from Nomad to himself and to the other partnerships, and began suffering substantial trading losses. (ALJ Ex. 1.) By the end of November 1992, the Schwab account was valued at approximately $4,400. (ALJ Ex. 1.) From this point on, all trading effectively ceased in the Schwab account. (ALJ Ex. 1.) Until October 1992, Nomad was not traded by or listed with Philadelphia Investors and maintained no account at Philadelphia Investors. (ALJ Ex. 1.) Communications between Mr. Cohen and the investors did not use Philadelphia Investors' address or refer to Philadelphia Investors. (ALJ Ex. 1.) In October 1992, however, Mr. Cohen opened a brokerage account for Nomad at Philadelphia Investors and deposited $15,000. (Tr. 141-42, 148, 305-06; Div. Ex. 246; ALJ Ex. 1.) Mr. Wurts approved the opening of the Nomad account. (Tr. 143, 148.) At that time, he did not know and did not inquire as to when Nomad was formed, how many investors were involved in Nomad, or whether any of the Nomad investors were clients of Philadelphia Investors. (Tr. 143, 149-50; ALJ Ex. 1.) Mr. Wurts was not aware that Mr. Cohen had already been trading options for Nomad through a brokerage account at Schwab, and took no steps to determine whether Mr. Cohen had placed all of the money raised through Nomad into the brokerage account at Philadelphia Investors. (Tr. 149-50, 158-59, 307.) In fact, everything Mr. Wurts knew about Nomad was based only upon what Mr. Cohen told him. (Tr. 158.) Mr. Cohen completed a new account form that described Nomad as an investment club,[14] designated Mr. Cohen as the "agent" authorized to open the account and to enter orders on behalf of Nomad, indicated that partnership papers were required and received, and indicated that investment club papers were required but not received. (Tr. 141-42, 145-46; Div. Ex. 246.) Mr. Wurts approved the opening of the account, but did not require Mr. Cohen to provide him with Nomad's partnership or investment club documents or any documents disclosing Mr. Cohen's relationship as agent for Nomad. (Tr. 143-47; Div. Ex. 246.) In fact, Mr. Wurts did not see the Nomad investment club agreement until after the instant administrative proceeding had been instituted. (Tr. 150, 371.) In addition, he never saw a signed document granting discretionary trading authority to Mr. Cohen on behalf of Nomad and, further, no such document exists on file at Philadelphia Investors. (Tr. 147.) Finally, Mr. Wurts never took steps to ensure that Nomad investors received any account information, whether accurate or otherwise, including the performance of the account. (Tr. 202-03.) By September 1994, the Nomad account at Philadelphia Investors was valued at approximately $50. (Div. Ex. 340; ALJ Ex. 1.) The losses were caused by Mr. Cohen's unsuccessful trading and his transfer of $1,500 from the Nomad account to his own account. (Tr. 304-06; Div. Ex. 340; ALJ Ex. 1.) Mr. Wurts was aware that, from October 1992 through September 1994, the Nomad account suffered approximately $13,000 in trading losses; but he was not aware that Mr. Cohen had improperly diverted $1,500 from the Nomad account into his own account.[15] (Tr. 305-06; Div. Ex. 340.) He did not consider the trading losses unusual. (Tr. 305- 06.) 2. Daedalus Mr. Cohen formed Daedalus in September 1994. (Tr. 309-10; ALJ Ex. 1.) He opened a bank account in the partnership's name at First Executive Bank in Philadelphia and deposited $70,000[16] raised in the offering into the account; $20,000 came from customers of Philadelphia Investors. (Tr. 309-10; ALJ Ex. 1; see Div. Ex. 254; Resp. Exs. F, G.) In October 1994, Mr. Wurts authorized Mr. Cohen to open a brokerage account in Daedalus' name at Philadelphia Investors as an investment club, which would be endorsed by the firm, but not as a limited partnership.[17] (Tr. 174, 176-77, 180-81; Div. Exs. 111-A, 111-B; ALJ Ex. 1.) Mr. Wurts alleges that when the account was opened, he thought that the trading vehicle was an investment club. (Tr. 173-74, 181.) In fact, Mr. Wurts ignored several signs indicating that Daedalus was a limited partnership, and did nothing to ensure that Daedalus was an investment club and not a limited partnership. (Tr. 181-82.) The new account forms designated the Daedalus account as Daedalus Investments, L.P. (Tr. 179-80; Div. Exs. 111-A, 111-B.) When Mr. Wurts reviewed, signed, and approved the new account forms for Daedalus, he was not troubled by the "L.P." designation on the account forms and failed to question Mr. Cohen about it or the fact that the "Corporation or Partnership" box at the top of the account form was marked with an "X." (Tr. 180-82; see, e.g., Div. Exs. 111-A, 111-B.) In addition, even though the margin agreement and the co- partnership/discretionary account form accompanying the new account forms showed Mr. Cohen as a general partner, Mr. Wurts was not concerned about it and failed to take any further steps to determine whether Daedalus was a limited partnership. (Tr. 186-88; Div. Ex. 111-A.) Between October 1994 and March 1995, Mr. Cohen, using funds from the First Executive account, deposited monies into the Philadelphia Investors account and used the funds to trade options. (Tr. 310-13; ALJ Ex. 1; see Resp. Exs. C, D, E, F, G; Div. Exs. 253, 254.) Although Mr. Wurts reviewed, signed, and approved the new account form for Daedalus, which included the option agreement and approval form that showed Daedalus' net worth at $75,000, he did not believe that Mr. Cohen had raised the money when he opened the Philadelphia Investors account. (Tr. 177, 182-85; Div. Exs. 111-A, 345.) He took no steps, other than reviewing the Pershing account statements, to determine how much money Mr. Cohen actually raised on behalf of Daedalus and whether Mr. Cohen had placed any or all of that money into the Daedalus brokerage account at Philadelphia Investors or the account at First Executive Bank. (Tr. 182-83, 209.) In late March 1995, Mr. Cohen wired $13,753 from the Philadelphia Investors account back into the First Executive account. (ALJ Ex. 1; see Resp. Exs. C, D, E, G; Div. Exs. 253, 254.) Mr. Wurts failed to notice the transfer of funds between the First Executive account and the Philadelphia Investors account.[18] (Tr. 316.) In fact, Mr. Wurts denies knowledge of the First Executive account even though Mr. Cohen listed First Executive as Daedalus' bank on the new account form. (Tr. 308-09; see Div. Exs. 111-A, 111-B.) He claims that if he had known about the outside account, he would have closed it. (Tr. 309.) Mr. Wurts allowed Mr. Cohen to recruit two other registered representatives, Evan Finkelstein and Maurice Sirkin, to help him solicit investors for the purported "investment club." (Tr. 178.) When Mr. Cohen approached Mr. Sirkin and Mr. Finkelstein about the prospects of selling the Daedalus limited partnership interests, he told them that Daedalus was a limited partnership that would trade options and provided them with the Daedalus partnership agreement and other documents, including a chart entitled "Comparative Performance of Currently Managed Partnerships" (the "chart"), which they distributed to clients, by mail or otherwise. (Tr. 395-400, 405-06, 442-49; Div. Ex. 115.) The chart reported that Mr. Cohen was successfully managing five other "partnerships": Daikoku I, Daikoku II, Daikoku III, GIF, and Nomad. (Tr. 400, 446-49; Div. Ex. 115.) In fact, Mr. Sirkin and Mr. Finkelstein spoke to and corresponded with several clients as early as September 1994, and were successful in selling partnership interests to four Philadelphia Investor customers, two customers each. (Tr. 396, 406-07, 411, 413, 417, 447-48; see Div. Exs. 116, 117, 119, 120, 332, 346, 347, 400, 411, 415.) They were compensated by sharing the commissions generated by Mr. Cohen's trading of options in the Daedalus account at Philadelphia Investors. (Tr. 418-19; ALJ Ex. 1.) Mr. Wurts, however, failed to ask questions of Mr. Cohen, Mr. Finkelstein, and Mr. Sirkin regarding the solicitation of investors in the Daedalus account and, in fact, did nothing to monitor the solicitation of investors. (Tr. 190, 200.) Mr. Cohen reviewed and approved the letters and documents that Mr. Sirkin and Mr. Finkelstein delivered to clients. (Tr. 193-96, 406-10; see Div. Exs. 116, 346, 347, 400, 411, 412.) Mr. Wurts never told Mr. Cohen that he wanted to review correspondence relating to raising money for Daedalus; and he never independently reviewed any such correspondence even though the letters were placed in the firm's correspondence/compliance file. (Tr. 196-97, 377-78, 409, 489-90.) In addition, Mr. Wurts did not see the Daedalus partnership agreement, the chart or any other Daedalus documents used to solicit customers, or any documents signed by customers granting discretionary trading authority to Mr. Cohen on behalf of Daedalus; and he never asked to see any of those documents. (Tr. 182, 371, 373-74, 376; see Div. Exs. 115, 119.) He never took steps to ensure that Daedalus investors received account information, whether accurate or otherwise, including the performance of the account. (Tr. 202- 03.) Mr. Wurts never specifically inquired as to the success of Mr. Cohen's trading in the Daedalus account. (Tr. 203-04.) He noticed that the trading was suffering at one point, but did not consider such losses unusual. (Tr. 203, 317.) In fact, Mr. Cohen lost $3,369 in his options trading in the Philadelphia Investors account. (ALJ Ex. 1.) By March 31, 1995, the First Executive and Philadelphia Investors account balances together totaled $10,172. (Resp. Exs. D, F; ALJ Ex. 1.) When that balance is combined with the $3,369 trading loss, the remaining $61,457, of the original $75,000 raised in the offering can be accounted for as follows: (i) approximately $45,600 to liquidate three investors' interests in GIF, Daikoku I, and Nomad; (ii) $600 transferred to Daikoku III; and (iii) approximately $15,000 paid to Mr. Cohen. (ALJ Ex. 1.) D. Supervision of Mr. Cohen The Division argues that Mr. Cohen's association with Philadelphia Investors began in March 1992, when he filed his Form U-4 through Philadelphia Investors. I do not agree. Section 3(a)(18) of the Exchange Act defines the terms "person associated with a broker or dealer" or "associated person of a broker or dealer" as: any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of such term for the purposes of section 15(b) of [the Exchange Act] (other than paragraph (6) thereof). Mr. Cohen did not satisfy any of the criteria established by Section 3(a)(18) prior to September 1992. Mr. Cohen was not employed at Philadelphia Investors; did not perform any work- related functions for the firm, even at the lowest level; held no title with the firm; and did not control, nor was he controlled by, the firm or any of its employees. In fact, Mr. Cohen's employment with Philadelphia Investors was contingent on several factors, including approval of his application by the NASD and his passing the required examinations. I find, therefore, that Mr. Cohen was not associated with Philadelphia Investors and that Philadelphia Investors and Mr. Wurts did not have any supervisory responsibility over Mr. Cohen until September 1992, after he became a registered representative and became an employee of the firm. From September 1992 through April 1995, however, Mr. Wurts had total and exclusive supervisory responsibility over Mr. Cohen. As owner and president of Philadelphia Investors, Mr. Wurts is: responsible for compliance with all of the requirements imposed on his firm unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person's performance is deficient. Universal Heritage Investments Corporation, 47 S.E.C. 839, 845 (1982). Mr. Wurts never delegated his responsibility to supervise Mr. Cohen. Mr. Wurts, therefore, always remained Mr. Cohen's supervisor and the senior supervisor for the Philadelphia office, even after Mr. Cohen became the ROP and a principal with the firm, and after Mr. Wurts granted him more supervisory responsibility. (See Tr. 161-64, 296-97.) E. Respondents Failed Reasonably to Supervise The Commission has repeatedly emphasized that the duty to supervise is a critical component of the federal regulatory scheme. See, e.g., John H. Gutfreund, 51 S.E.C. 93, 108 (1992). Sections 15(b)(4)(E) and 15(b)(6)(A) of the Exchange Act authorize the Commission to impose sanctions against broker- dealers and associated persons who fail reasonably to supervise, with a view to preventing violations of the federal securities laws, other persons who commit such violations, if such persons are subject to their supervision. The elements of proof necessary in finding a violation of Sections 15(b)(4)(E) and 15(b)(6)(A) are: i) an underlying securities law violation; ii) association of the registered representative or other person who committed the violation; iii) supervisory jurisdiction over that person; and iv) failure of the broker-dealer and/or supervisory personnel to reasonably supervise the person who violated the securities laws. During the period September 1992 through April 1995, while he was associated with Philadelphia Investors and was subject to the supervision of Mr. Wurts and the firm, Mr. Cohen violated the federal securities laws through his activities in Nomad and Daedalus. The critical remaining question, therefore, is whether Philadelphia Investors and Mr. Wurts failed reasonably to supervise Mr. Cohen with a view to preventing his violations. The standard of reasonableness applicable to remedial actions for failure to supervise under Section 15(b) of the Exchange Act is measured as "reasonable supervision under the attendant circumstances," Arthur James Huff, 50 S.E.C. 524, 528-29 (1991) ("What may be a reasonable discharge of supervisory duties in one case can be unreasonable in another. A factual analysis is required in each case."); see also Louis R. Trujillo, 49 S.E.C. 1106, 1110 (1989). I find that Philadelphia Investors and Mr. Wurts failed to exercise "reasonable supervision under the attendant circumstances" and, thus, failed reasonably to supervise Mr. Cohen with a view to preventing his violations of the federal securities laws. Supervision must be "extraordinary" when the broker-dealer is aware of an individual's past improprieties. Donald T. Sheldon, 51 S.E.C. 59, 82 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995). Mr. Wurts claims that he and Philadelphia Investors "had extraordinary procedures put forth to control Michael Cohen's trading activities." (Tr. 79, 124, 172.) According to Mr. Wurts, Mr. Cohen was subject to heightened supervision related to his options trading because of his prior disciplinary history. (Tr. 132-33, 288-90; see,e.g., Resp. Ex. LL.) Mr. Wurts also claims that Mr. Cohen's status as ROP did not lessen the need for strict supervision over his activities, and that no such lull in supervisory responsibilities occurred. (Tr. 139.) Mr. Wurts knew of Mr. Cohen's previous disciplinary history and that Mr. Cohen, therefore, required the strictest scrutiny. See Donald T. Sheldon, 51 S.E.C. at 82; see also Dan A. Druz, 58 SEC Docket 1621, 1627 (Jan. 9, 1995); Frank J. Custable, Jr., 51 S.E.C. 855, 860 (1993). The record demonstrates, however, that there was a lack of adequate supervision over Mr. Cohen almost immediately after he was hired, that Mr. Wurts' supervision over Mr. Cohen diminished after he became the ROP and opened the Nomad account, and that supervision over Mr. Cohen markedly worsened after Mr. Cohen assumed more responsibility in the office and opened the Daedalus account. Within a month of his employment, even with the knowledge of Mr. Cohen's prior disciplinary history for unauthorized options trading, Mr. Wurts encouraged Mr. Cohen to become an ROP with the firm, essentially giving Mr. Cohen supervisory responsibility over options trading in the Philadelphia office. Mr. Wurts allowed Mr. Cohen to operate a risky trading practice involving options, with unsubstantiated assurances of previous successes and without any outside investigation of the trading program. Moreover, except perhaps for the creation of the options blotter, there were no "extraordinary procedures" in place to monitor Mr. Cohen's activities. Further, the firm's supervisory procedures, generally, were inadequate and ineffective because they failed to prevent and detect Mr. Cohen's wrongdoing and because Mr. Wurts failed to enforce those procedures as to Mr. Cohen. The Commission has "made it clear that it is critical for investor protection that a broker establish and enforce effective procedures to supervise its employees." Donald T. Sheldon, 51 S.E.C. at 78-79. Management bears the responsibility to establish procedures reasonably designed to prevent and detect wrongdoing, to enforce those procedures, and to take appropriate steps if it receives indications that such procedures are not working. Consolidated Investment Services, Inc., 21 SEC Docket 20, 25-32 (Jan. 5, 1996); Gary E. Bryant, 51 S.E.C. 463, 470-71 (1993). The firm's supervisory procedures covered many topics, including the management of accounts and transactions, discretionary accounts, correspondence, options, direct participation programs, and the offering of limited partnership interests. (See Div. Exs. 300, 301, 302, 303, 304, 305, 306, 307.) In addition, Mr. Wurts supplemented those written procedures with specific oral instructions to Mr. Cohen related to the restrictions on outside business activities and brokerage accounts, the requirements for his options trading program, the prohibition on the formation of limited partnerships and sale of partnership interests, and the prohibition on direct participation programs. The firm's procedures and instructions, however, did not provide the guidance necessary to monitor Mr. Cohen's activity relative to the Nomad and Daedalus accounts and were otherwise rendered ineffective by Mr. Wurts' lack of oversight and enforcement.[19] There were no written procedures in effect at Philadelphia Investors regarding Mr. Cohen's specific options trading program.[20] (Tr. 88; Div. Exs. 300, 301, 302, 303, 304, 305, 306.) Moreover, the firm's supervisory procedures relied on Mr. Wurts to diligently carry-out his supervisory responsibilities. As Mr. Wurts began to rely on Mr. Cohen for the day-to-day operations of the firm, he allowed himself to slip from the strict supervisory oversight he previously had maintained in the office. Mr. Wurts failed to enforce existing procedures and instructions and he failed to modify the written procedures to account for the alleged heightened supervision imposed on Mr. Cohen, especially after Mr. Cohen's own supervisory responsibilities increased. Although there were deficiencies in the firm's supervisory procedures, it was Mr. Wurts' supervisory lapses that were central in assuring that Mr. Cohen's fraud could continue. The firm's written procedures related to correspondence and solicitations were inadequate, for example, because they did not provide the guidance necessary to supervise correspondence related to the solicitation of investors in Daedalus. While the firm's supervisory procedures manuals directed branch managers or registered principals to review and approve outgoing mail, including solicitations, there was no written or stated policy directing branch managers or registered principals to have other branch managers or registered principals review their correspondence and solicitations. (Tr. 168; Div. Exs. 300, 301, 302, 303, 304, 305, 306.) Mr. Wurts, however, failed to modify or enhance the procedures to reflect changes in the supervisory structure of the firm, particularly the Philadelphia office, or that Mr. Cohen was subject to any heightened supervisory procedure, which he obviously was not.[21] Moreover, Mr. Wurts failed to review customer solicitations in the Daedalus account although there were indications that Mr. Cohen was operating an improper limited partnership. In fact, Mr. Wurts failed to review any outgoing correspondence specifically related to the Daedalus account, including the letters filed in the firm's compliance/correspondence file. Further, a better procedure for processing incoming mail might have alerted Mr. Wurts to Mr. Cohen's improper activities. Philadelphia Investors did not have any written mechanisms or procedures for the disclosure of outside business activities by its registered representatives in March 1992 or at any time during the relevant period.[22] (Tr. 84.) Mr. Wurts, however, met with registered representatives, at least once a year, and asked them about outside business activities. (Tr. 84-85, 120- 23.) In addition, Mr. Wurts interviewed new registered representatives to discuss whether they were involved with any outside business activities, including outside brokerage trading accounts, and informed them that they would have to cease such activities.[23] (Tr. 85, 120-23.) Before he hired Mr. Cohen, Mr. Wurts specifically met with Mr. Cohen to discuss his outside business activities on several occasions and told him that his outside activities had to cease, including any activity in limited partnerships, if and when he joined Philadelphia Investors. (Tr. 85, 110, 114-18, 120, 123, 148, 193.) There was visible evidence, however, in both the Nomad and Daedalus accounts, that Mr. Cohen maintained outside brokerage and bank accounts and was operating outside business activities. Yet, Mr. Wurts failed to ask any questions or conduct any type of investigation regarding Mr. Cohen's possible outside activities. In addition, although Mr. Wurts was aware of Mr. Cohen's prior involvement in limited partnerships, he did not ask Mr. Cohen for evidence showing that he had ceased his involvement in limited partnerships or that he closed his outside brokerage accounts. (Tr. 128-29.) Failure to supervise has been described as being inattentive to supervisory responsibilities, and failing to learn of improprieties when diligent application of supervisory procedures would have uncovered them. Anthony J. Amato, 45 S.E.C. 282, 286 (1973). Mr. Wurts was inattentive to his supervisory responsibilities. If he had applied and/or enforced the firm's supervisory procedures, written or otherwise, or if he had taken the time to review and monitor Mr. Cohen's activities, he would have learned of Mr. Cohen's improprieties. At the outset, Mr. Wurts failed to undertake the most basic investigation to determine the nature and scope of the Nomad and Daedalus accounts as well as Mr. Cohen's trading practices related to those accounts.[24] He conducted an inadequate review of the Nomad and Daedalus new account forms; he did not review the investment club and partnership documents, including those documents granting Mr. Cohen discretionary authority over client accounts and funds; and he never determined whether Mr. Cohen actually distributed to his customers the options disclosure form or any Nomad or Daedalus account statements. (Tr. 152-57, 339- 40.) His failure to notice the transfer of funds in the Daedalus account evidences his failure to adequately review and monitor customer accounts (specifically discretionary accounts), customer account statements, and Mr. Cohen's access to funds in those discretionary accounts. In addition, he failed to notice that Mr. Cohen, Mr. Finkelstein, and Mr. Sirkin were engaging in an inappropriate direct participation program related to the options program although he could have independently ascertained that information from the commission runs or from a review of Mr. Finkelstein's and Mr. Sirkin's activities. Mr. Wurts' failure to ask the most basic questions about Mr. Cohen's investment vehicles and to conduct basic investigations into Mr. Cohen's activities was unreasonable. He easily would have discovered indications of wrongdoing had he carried-out his supervisory responsibilities. Regardless, Mr. Wurts was aware of "red flags" indicating Mr. Cohen's improprieties. Upon discovering these "red flags," Mr. Wurts was required to take further action, but failed to do so. Supervisors must not only respond vigorously when wrongdoing is brought to their attention, but must respond vigorously even to indications of possible wrongdoing. See John H. Gutfreund, 51 S.E.C. at 108; see also Louis R. Trujillo, 49 S.E.C. at 1110. As the Commission has stated: "Red flags and suggestions of irregularities demand inquiry as well as adequate follow-up and review. When indications of impropriety reach the attention of those in authority, they must act decisively to detect and prevent violations of the federal securities laws." Edwin Kantor, 51 S.E.C. 440, 447 (1993); see also William Vieira, 49 S.E.C. 1091, 1097 (1989). Mr. Wurts dismissed or simply ignored any and all triggers that should have alerted him to potential problems in the way Mr. Cohen conducted business. There were indications, from the beginning, that Mr. Cohen had failed, and would fail, to follow Philadelphia Investors' written procedures and Mr. Wurts' verbal instructions, including the prohibitions regarding limited partnerships and outside business activities. Mr. Wurts missed or ignored glaring "red flags" in the Nomad and Daedalus new account forms; specifically that Mr. Cohen was the agent and/or general partner for the accounts. Since Mr. Cohen was the account "customer," Pershing mailed account statements to him rather than the actual investors, essentially removing the final safeguard of independent customer review of discretionary trading accounts. Further, Mr. Wurts essentially ignored the largest "red flag," Mr. Cohen's prior disciplinary history related to unauthorized options trading, and allowed Mr. Cohen to open discretionary accounts and to engage in high-risk trading practices virtually unsupervised. Respondents argue that they were concerned about the possibility of Mr. Cohen executing unauthorized transactions, not that he would operate a Ponzi scheme and steal from client accounts. Further, they argue that they exercised reasonable supervision over Mr. Cohen because: i) no reasonable procedures could have detected Mr. Cohen's illegal activity; ii) he intentionally lied about what he was doing; and iii) he would have lied about his activity or created falsified documents if asked about his activity. (See, e.g., Respondents' Post Trial Memorandum of Law at 6-18.) Based on the facts and circumstances in this case, it was Mr. Wurts' responsibility to review and monitor Mr. Cohen's activities at a higher level and to ask basic questions about Mr. Cohen's options trading program and the Nomad and Daedalus accounts. Mr. Wurts did not do this. As described above, his oversight of Mr. Cohen was insufficient in many ways and, thus, unreasonable under the attendant circumstances. I conclude, therefore, that Philadelphia Investors and Mr. Wurts failed reasonably to supervise Mr. Cohen with a view to preventing his violations because they: i) failed to implement heightened supervisory procedures although they knew of Mr. Cohen's prior disciplinary history; ii) failed to establish and/or enforce adequate procedures, either written or verbal, which were designed to detect and prevent Mr. Cohen's wrongdoing; and iii) ignored or failed to act upon indications of wrongdoing. III. PUBLIC INTEREST Sections 15(b)(4)(E) and 15(b)(6)(A) of the Exchange Act authorize the Commission to impose sanctions against Respondents, including a censure, suspension, bar, revocation of broker-dealer registration, or limitations on activities, functions, or operations, for failing reasonably to supervise Mr. Cohen. Imposition of administrative sanctions requires consideration of: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). The Division recommends that Mr. Wurts be suspended from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company for a period of six months; and barred from association in a supervisory or proprietary capacity with any broker, dealer, municipal securities dealer, investment adviser, or investment company. The Division further recommends that Philadelphia Investors be censured. I do not believe, however, that the public interest requires the sanctions requested by the Division. As mentioned above, Respondents allowed Mr. Cohen to operate at the firm without the supervision required under the circumstances. The firm's procedures were inadequate because they were ineffective in preventing and detecting Mr. Cohen's violations. Further, Mr. Wurts' supervision was unreasonable because he allowed Mr. Cohen, an individual with a questionable background, to run the day-to-day operations of the firm virtually unsupervised; he failed to conduct basic investigations into Mr. Cohen's activities, specifically related to the Nomad and Daedalus accounts; and he failed to conduct adequate follow- up investigations upon discovering irregularities and indications of wrongdoing. The egregiousness of Respondents' failure to supervise Mr. Cohen, however, is tempered by several mitigating factors. I believe that Mr. Wurts' worst fault in this case was his misplaced trust in Mr. Cohen. He exhibited serious lapses of judgment and reason, and an uncharacteristic lack of care in his supervision over Mr. Cohen. Mr. Cohen took advantage of Mr. Wurts and used Philadelphia Investors to create a veil of legitimacy over his activity, making it easier to perpetrate his fraud. But it was Mr. Cohen, not Mr. Wurts, who committed the egregious acts which are the underlying bases for this proceeding. Mr. Wurts may have discovered illegalities had he fulfilled his supervisory duties, but he did not knowingly allow Mr. Cohen to operate his illegal scheme. There is no indication that Mr. Wurts acted intentionally to further Mr. Cohen's scheme. Other than the incident now at issue, the evidence is that Mr. Wurts and Philadelphia Investors were exemplary supervisors. Mr. Wurts has over thirty years experience in the securities industry, with no prior disciplinary history. In addition, the illegal activities in this case were centered on two small accounts, with relatively little money lost during the relevant period, and, thus, were isolated and not recurring. Further, the likelihood of future violations is slim. Mr. Wurts recognizes that his supervision over Mr. Cohen was lacking in certain areas, and he has made appropriate changes to the firm's supervisory procedures since Mr. Cohen left. (Tr. 345-46.) He has a history of reporting problems or potential problems to regulatory authorities; an activity I hope he continues without fear of unjust repercussions. He also has repaid $25,000 plus interest to investors and intends to make future payments to at least two others. (See Respondents' Letter to Judge Bober and Declaration, dated September 23, 1997.) The sanctions the Division seeks against Mr. Wurts are excessive. The six month suspension and, in particular, the supervisory bar would probably result in the closing of Philadelphia Investors. More importantly, it is likely that Mr. Wurts' career in the securities industry would come to an end. I do not believe that Mr. Wurts is such a threat to the public interest as to merit any type of bar or suspension. The public interest is best served by censuring both Respondents. In addition, Philadelphia Investors should be required to hire an outside consultant, approved by the Division, to audit and review its supervisory procedures. Civil Money Penalty Section 21B(a) of the Exchange Act authorizes the Commission to assess civil money penalties against any person, in any proceeding instituted pursuant to Sections 15(b)(4) or 15(b)(6) and after notice and an opportunity for an administrative trial, if it finds that such person has willfully aided, abetted, counseled, commanded, induced, or procured a violation of any provision of the Securities Act or the Exchange Act. Since Respondents failed reasonably to supervise Mr. Cohen with a view to preventing his violations of the federal securities laws, I may assess a civil money penalty against them if I find it is in the public interest. Section 21B(b) of the Exchange Act specifies a three-tier system for assessing the maximum amount of a penalty. In the first tier, the maximum penalty for each act or omission is $5,000 for a natural person or $50,000 for any other person. In the second tier, the maximum amount for each act or omission is $50,000 for a natural person or $250,000 for any other person if the act or omission involves fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement. In the third tier, the maximum amount for each act or omission is $100,000 for a natural person or $500,000 for any other person if the act or omission (1) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and (2) directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in substantial pecuniary gain to the person who committed the act or omission. The Division recommends that Mr. Wurts be ordered to pay a first tier civil penalty in the amount of $10,000 based upon a finding that his conduct included a minimum of two acts or omissions. The Division also recommends that Philadelphia Investors be ordered to pay a first tier civil penalty in the amount of $50,000, construing the firm's supervisory failure as a single act or omission. Respondents argue that, if a violation is found, such a penalty is excessive under the circumstances and unwarranted pursuant to the Commission's Penalty-Reduction Policy for Small Entities, 64 SEC Docket 447 (March 27, 1997). The assessment of a penalty pursuant to Section 21B of the Exchange Act depends on a finding that such an assessment is in the public interest. Section 21B(a) of the Exchange Act requires that the public interest finding support the amount of a particular assessment, not merely the overall decision to assess a penalty. See First Securities Transfer System, Inc., 60 SEC Docket 441, 447 n.15 (Sept. 1, 1995). The factors that may be considered in determining whether a civil money penalty and the penalty amount are in the public interest are specified in Section 21B(c) of the Exchange Act.[25] Applying the criteria in Section 21B(c), I find that a first tier civil penalty is appropriate in the public interest as to both Respondents. A first tier penalty is appropriate since Respondents' acts and omissions did not involve fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement. Based on the other factors in 21B(c), I do not believe that Respondents should receive an excessive penalty amount: investor losses were relatively small; Respondents were not unjustly enriched; Respondents have repaid approximately $25,000 in customer losses; and Respondents have no prior disciplinary history. The Commission's Penalty-Reduction Policy articulates criteria similar to that in Section 21B(c) for considering whether to reduce or not assess penalties against a small entity.[26] Application of those criteria, likewise, lead me to the conclusion that the specific small entity in this case, Philadelphia Investors, should not receive maximum penalty amounts for its several failures to supervise. I do believe, however, that even a slight civil money penalty will serve as a warning to Respondents and other supervisors that their responsibilities are crucial in maintaining the integrity of the securities industry and that they should not take such responsibilities lightly. In calculating the penalty amount, I consider the Respondents' several failures to supervise as one "act or omission" for each Respondent. I find that it is in the public interest, therefore, to assess a civil money penalty against Mr. Wurts in the amount of $5,000, and against Philadelphia Investors in the amount of $15,000. IV. RECORD CERTIFICATION Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R.  201.351(b) (1997), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on December 4, 1997. V. ORDER Based on the findings and conclusions set forth above, I ORDER, pursuant to Sections 15(b) and 19(h) of the Exchange Act, that Respondents Philadelphia Investors, Ltd. and Clarence Z. Wurts be, and hereby are, censured; I FURTHER ORDER that Philadelphia Investors, Ltd. hire an outside consultant, approved by the Division of Enforcement, to audit and review its supervisory procedures; I FURTHER ORDER, pursuant to Section 21B of the Exchange Act, that Respondent Philadelphia Investors, Ltd. pay a civil penalty in the amount of $15,000, and that Respondent Clarence Z. Wurts pay a civil penalty in the amount of $5,000. Payment of penalties shall be made on the first day following the day this initial decision becomes final by certified check, United States Postal money order, bank cashier's check, or bank money order payable to the Securities and Exchange Commission. The check and a cover letter identifying the Respondents, Philadelphia Investors, Ltd. and Clarence Z. Wurts, and the proceeding designation, Administrative Proceeding File No. 3- 9114, should be delivered by hand or courier to the Office of the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. A copy of the cover letter should be sent to the Commission's Division of Enforcement at the above address. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R.  201.360 (1997). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. _______________________ G. Marvin Bober Administrative Law Judge **FOOTNOTES** [6]: The information in this section is derived, mainly, from ALJ Exhibit 1, the parties' stipulation regarding Mr. Cohen's fraudulent scheme. Additional citations and information have been provided as appropriate. [7]: Division Exhibits 510, 511, 513-A, 513-B are, respectively, the Information (August 10, 1995), Guilty Plea Agreement (August 17, 1995), Minute Sheet (January 18, 1996), and Judgment in a Criminal Case (January 19, 1996) filed in United States v. Cohen, Crim. No. 95-421 (E.D. Pa.). [8]: Prior to March 1992, no discretionary accounts existed at Philadelphia Investors. (Tr. 86-87.) In a discretionary trading account, according to Mr. Wurts, the registered representative has written authority from a client to trade in the client's account as the representative wishes. (Tr. 86.) Mr. Wurts claimed that, in order to execute Mr. Cohen's strict and disciplined options trading procedure and because of the volatile and derivative nature of options trading, discretionary authority was necessary. (Tr. 87.) [9]: Respondents' Exhibits RR and SS are examples of Mr. Cohen's options disclosure form. [10]: There were occasions, however, when Mr. Cohen sought approvals for transactions after the fact because Mr. Wurts was unavailable. (Tr. 134.) [11]: Mr. Wurts approved Mr. Cohen's new accounts, including his discretionary accounts, and the discretionary accounts of other registered representatives. (Tr. 165-66.) Mr. Wurts also reviewed the firm's account statements, trading reports, and commission runs on a regular basis. (Tr. 202, 211, 245, 521-23.) According to Mr. Wurts, Mr. Cohen reviewed the commission runs in detail after he became principal/branch manager and Mr. Wurts only reviewed summaries of those runs. (Tr. 214-15.) [12]: Yet, according to Mr. Wurts, it was his understanding that Mr. Cohen was not in the securities industry from 1983 until 1992 and that he had been unemployed from 1988 until 1992 when he became registered and began working at Philadelphia Investors. (Tr. 105-08.) [13]: Mr. Cohen was involved with GIF from January 1991 through August 1992, Nomad from October 1991 through September 1994, and Daedalus from September 1994 through March 1995. (See ALJ Ex. 1.) [14]: Mr. Wurts contends that, at the time, he considered the Nomad investment club vehicle "a very different vehicle than a limited partnership." (Tr. 149, 280-81.) According to Mr. Wurts, he did not believe that Mr. Cohen "had on-going continued involvement with limited partnerships." (Tr. 149.) [15]: Mr. Wurts stated, regarding the transfer, "maybe I should have been aware but I was not." (Tr. 306.) [16]: It appears that a total of $70,000 was raised in September and October 1994 and deposited into the First Executive account. (See Div. Ex. 254; Resp. Exs. F, G.) The stipulation of the parties states first that $70,000 was raised in the Daedalus offering in September 1994, and later it states that the total amount raised in the offering was $75,000. (ALJ Ex. 1.) [17]: In August or September 1994, Mr. Cohen approached Mr. Wurts about creating a limited partnership at Philadelphia Investors in order to trade options. (Tr. 174-75, 180-81.) [18]: Mr. Wurts stated, regarding the transactions between the accounts, "I would straight forwardly say I made an error. I should have noticed it; I did not." (Tr. 316.) [19]: The Commission has stated that "[s]upervision is reasonable only if there is adherence to appropriate internal company procedures." Consolidated Investment Services, Inc., 61 SEC Docket at 25; see also Nicholas Boccella, 49 S.E.C. 1084, 1086 (1989). [20]: Mr. Cohen and Mr. Wurts, however, discussed in detail what trading activity Mr. Cohen was allowed to do, but never provided these instructions in writing. (Tr. 87, 367.) [21]: Having undertaken to hire and retain such a registered representative, Philadelphia Investors and Mr. Wurts were under an obligation to insure that procedures were in place to supervise him properly. See, e.g., Frank J. Custable, Jr., 51 S.E.C. 855, 860 (1993); Consolidated Investment Services, Inc., 61 SEC Docket at 28. [22]: Mr. Wurts agreed at the hearing that he and Philadelphia Investors were required to supervise the outside business activities of their employees. (Tr. 151.) [23]: Mr. Wurts stated, however, that in 1992 applicants or employees could maintain active brokerage accounts at other firms so long as Philadelphia Investors received copies of confirmations and statements. (Tr. 121-22.) [24]: Mr. Wurts admits that he should have been more thorough about the opening of the Nomad account. (Tr. 150.) [25]: The factors are: i) whether the act or omission for which the penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; ii) the harm to other person(s) resulting either directly or indirectly from such act or omission; iii) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior; iv) whether the respondent previously has been found by the Commission, another regulatory agency or a self-regulatory organization to have violated federal or state securities laws or the rules of a self-regulatory organization or has been enjoined or convicted by a court of competent jurisdiction of violations of such laws or rules; v) the need to deter respondent and others from committing such acts or omissions; and vi) such other matters as justice may require. [26]: After determining that penalty reduction is available to the specific small entity at issue, the criteria used to consider whether the Commission will reduce or refrain from assessing a civil money penalty are: i) the egregiousness of the violations; ii) the isolated or repeated nature of the violations; iii) the violator's state of mind when committing the violations; iv) the violator's history (if any) of legal or regulatory violations; v) the extent to which the violator cooperated during the investigation; vi) whether the violator has engaged in subsequent remedial efforts to mitigate the effects of the violation and to prevent future violations; and vii) any other relevant factor. 3