INITIAL DECISION RELEASE NO. 146
|In the Matter of||:|
|CERTAIN BROKER-DEALERS WHO||: INITIAL DECISION|
|FAILED TO FILE ALL OR PART OF||: August 2, 1999|
||Kathryn A. Pyszka, Paul A. Montoya, and Kristopher S. Heston, for the Division of Enforcement, Midwest Regional Office, Securities and Exchange Commission|
|Paul J. Bazil for J.W. Barclay & Co., Inc. and Stonegate Securities, Inc.|
|Joseph W. Glodek, pro se for William Scott & Co., L.L.C.|
|Vincent B. Comperatore and Vincent S. Comperatore, pro se for V.B.C. Securities|
|Before:||Brenda P. Murray, Chief Administrative Law Judge|
The United States Securities and Exchange Commission ("Commission") instituted this proceeding on October 20, 1998, pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"). The Order Instituting Proceedings ("OIP") alleged that eighteen registered broker-dealers had willfully violated Section 17(a) of the Exchange Act and Rule 17a-5(e)(5) thereunder. The OIP specifically charged that as of October 2, 1998:
1. Allegheny Financial Programs, Inc. ("Allegheny"); Atlantic-Pacific Capital, Inc. ("Atlantic-Pacific"); Comstock Partners, L.L.C. ("Comstock"); Constitution Securities, Inc. ("Constitution"); Elswick, Banks and Associates, Inc. ("Elswick"); McGlone & Co. ("McGlone"); Phoenix Financial Services Corp. ("Phoenix"); and Laguna Financial Corporation ("Laguna") had not filed with the Commission or their designated examining authority ("DEA") the National Association of Securities Dealers ("NASD") Part I of Form BD-Y2K which described their Year 2000 preparedness as of July 15, 1998;
2. Gelber Securities, Inc. ("Gelber"); J.W. Barclay & Co., Inc. ("Barclay"); Multi Spectrum Investing Corporation ("Multi Spectrum"); Stonegate Securities, Inc. ("Stonegate"); and V.B.C. Securities had not filed Part II of Form BD-Y2K, which required more detailed information than Part I, with the Commission or their DEA, the NASD; and
3. Alden Capital Markets, Inc. ("Alden"); Bettinger & Leech Financial Corp. ("Bettinger"); E.C. Capital, Ltd. ("E.C. Capital"); J. Robbins Securities, L.L.C. ("J. Robbins"); and William Scott & Co., L.L.C. ("William Scott") had not filed Parts I or II of Form BD-Y2K with the Commission or their DEA, the NASD.
When public hearings began in Washington, D.C. on February 22, 1999, four Respondents remained -- Stonegate, Barclay, V.B.C. Securities, and William Scott.1 The evidentiary record consists of three stipulations, the testimony of four witnesses and fifty-eight exhibits sponsored by the Division of Enforcement ("Division"), and testimony and thirty-eight exhibits from Respondents.2 The Division's witnesses included the Commission's custodian of records, the NASD's corporate secretary, the senior production manager in the NASD's Corporate Communications Department, and the director of the NASD's Year 2000 Program Office. The Respondents' five witnesses were all firm principals.
I received the Division's Proposed Findings of Fact, Conclusions of Law and Post-Hearing Brief ("Div. Brief") on March 29, 1999. On April 19, 20, and 21, 1999, I received the Proposed Findings of Fact and Post-Hearing Brief of V.B.C. Securities ("V.B.C. Brief"); the Proposed Findings of Fact, Conclusions of Law and Post-Hearing Brief of Stonegate and Barclay ("Stonegate and Barclay Brief"); and the Post-Hearing Brief of William Scott ("William Scott Brief"). I received the Division's Post-Hearing Reply Brief ("Div. Reply Brief") on May 3, 1999.
Whether Respondents willfully violated Section 17(a) of the Exchange Act and Rule 17a-5(e)(5), and, if they did, whether it is in the public interest to censure Respondents, or order them to cease and desist or to pay a civil penalty?
The Division filed a Motion to Correct the Transcript of Hearing which is dated March 25, 1999. The Division's suggestions correct typographical or obvious errors and clarify garbled transcriptions. Respondents do not object to the Motion. I grant the Motion and order that the transcript is corrected as specified in the Motion. 17 C.F.R. § 201.302(c).
Finding of Fact3
On March 5, 1998, the Commission announced by Federal Register publication and by other means that it was considering an amendment to Rule 17a-5. Reports to Be Made by Certain Brokers and Dealers, 63 Fed. Reg. 12056 (proposed Mar. 5, 1998) ("Proposing Release").
On July 2, 1998, following review of thirty-five comment letters, the Commission adopted Rule 17a-5(e)(5) ("the Rule") that required broker-dealers to file with the Commission and their DEA at designated times two separate reports regarding their Year 2000 compliance. Reports to Be Made by Certain Brokers and Dealers, 67 SEC Docket 1320 (July 13, 1998); (Div. Ex. 111 at 5). This action by the Commission was noticed in the Federal Register and was widely publicized. See Reports to Be Made by Certain Brokers and Dealers, 63 Fed. Reg. 37668 (1998).
As relevant here, the Rule required broker-dealers to file an original and two copies of Form BD-Y2K with the Commission's headquarters in Washington, D.C., and one copy with the broker-dealer's DEA. 17 C.F.R. § 240.17a-5(e)(5)(v). Under the Rule, the first report was due on or before August 31, 1998, and called for information about the status of the broker-dealer's preparations for the Year 2000 as of July 15, 1998.
Broker-dealers with net capital requirements as of July 15, 1998, of between $5,000 and $100,000 were required to file Part I of the Form. Part I consists of 10 multiple part questions that are answered by checking the appropriate box or filling in a blank. Broker-dealers with net capital requirements of $100,000 or more as of July 15, 1998, were required to file Parts I and II of the Form. Part II has seven questions requiring narrative answers.
Stonegate, Barclay, and William Scott agree that as of July 15, 1998, they were registered broker-dealers, the NASD was their DEA, and they had minimum net capital requirements of $100,000 or more so they were required to file Parts I and II of the Form. (Barclay, Stonegate, and William Scott Stips. 1, 2, 3.) V.B.C. Securities agrees that it was a registered broker-dealer and the NASD was its DEA, but it takes an ambiguous position on whether it had a minimum net capital requirement of $100,000 or more for the time period at issue. (V.B.C. Securities Stips. 1, 2; Tr. 453-57.) The overwhelming evidence is that it was a broker-dealer with a net capital requirement of $100,000 or more.
As part of its service to members, the NASD and its subsidiary NASD Regulation ("NASD Reg.") played a major role in educating and assisting its members about amended Rule 17a-5 and their obligation to file Form BD-Y2K. (Tr. 172, 200.)
1. In early 1998, the NASD sent out a notice to its approximately 5,500 members, and others, that the Commission proposed to amend Rule 17a-5. The NASD provided members with continuous updates on the status of the Proposed Release. (Tr. 167.)4
2. On July 16, 1998, the executive vice president and chief operating officer of NASD Reg. sent an "alert letter" to all NASD member firms notifying them that the Commission had amended Rule 17a-5 to require all broker-dealers to file two reports on new Form BD-Y2K, concerning Year 2000. (Div. Exs. 105, 109; Tr. 142.) The alert letter stated that:
Each of the two reports has two parts. Part I must be completed by each NASD member with a $5,000 or greater net capital requirement. A member must also complete Part II (in addition to Part I) if it has a $100,000 or greater net capital requirement.
The NASD will be sending BD-Y2K forms with detailed filing instructions to members within the next two weeks. (emphasis in the original)
(Div. Ex. 109; Tr. 168-69.) The alert letter informed NASD members that the first report was due to the Commission and the DEA on or before August 31, 1998.5
The second page of the alert letter announced that the NASD and the Commission would offer assistance in filling out the Form at sessions conducted in eleven cities, including New York and Dallas, in July and August. The alert letter offered an 888 telephone number for signing up for the two hour sessions and for inquiries. (Tr. 177; Div. Ex. 109.) Because of the number of interested persons, additional sessions were held in the New York City area. (Tr. 177.)
3. About two weeks following the alert letter, on or about August 2, 1998, the NASD distributed a "Special NASD Notice to Members 98-63" dated July 1998. 6 (Tr. 220-21; Div. Ex. 110.) An NASD Notice is an official NASD communication to members. This Special Notice was a multi-part document consisting of: (1) a three page explanation; (2) a summary of responses to the NASD's Year 2000 Compliance Survey; and (3) Form BD-Y2K. (Div. Ex. 110; Tr. 170.) The instructions to Form BD-Y2K mention several times the filing requirements for Parts I and II of the Form. (Div. Ex. 110; Tr. 170.) Returns to the NASD were to be sent to the Year 2000 Program Office, NASD Regulation, located in Rockville, Maryland, which maintains a file of all Form BD-Y2K forms received. (Tr. 173, 179.)
4. On August 19, 1998, the NASD sent members a document titled "NASD Year 2000 Member Information" that again noted that the Commission had amended Rule 17a-5 so as to require broker-dealers to file two Year 2000 compliance and disclosure reports. (Div. Ex. 111.) The mailing noted that each report had two parts, and that the first report was due to the Commission and the NASD on or before August 31, 1998. It advised members to contact the NASD's Year 2000 Program Office if they had not received a copy of the Form. (Div. Ex. 111 at 5.) The NASD's Year 2000 Program Office recorded every phone inquiry it received regarding Form BD-Y2K using an internal phone software system called Activity Journal. (Tr. 207; Div. Ex. 40.)
5. A set of Notices to Members that the NASD also distributed on August 19, 1998, contained an "Important Year 2000 Message." (Div. Ex. 111, page immediately preceding 495.) Using bold print the message reaffirmed that Form BD-Y2K Reports were due to the Commission and the NASD on or before August 31, 1998, and described who had to file Parts I and II of the Form. It noted that failure to provide the Form "could result in disciplinary action and the imposition of a variety of sanctions, including fines, suspensions, or expulsion." 7 (Div. Ex. 111, page immediately preceding 495.)
6. In early September 1998, the assistant director of NASD Reg.'s Department of Enforcement sent letters by express mail to broker-dealers who were required to file Parts I and II of the Form but who, as of September 4, 1998, had only filed Part I. (V.B.C. Securities Ex. 17; Stonegate Exs. 18, 19; Tr. 189, 421-22.)
7. On September 11, 1998, the assistant director of NASD Reg.'s Department of Enforcement sent similar letters by express mail to Respondents and other broker-dealers who had not filed any part of the Form as of September 4, 1998.8 Respondents were in this second category because the NASD had not received any part of Form BD Y2K from any of the Respondents by September 4, 1998. (Tr. 186-88.) Accordingly, the NASD notified Theo Stavros Basis at Barclay; Vincent Bart Comperatore at V.B.C. Securities; Edwin Buchanan Lyon III at Stonegate; and Joseph William Glodek at William Scott that, as of September 4, the NASD had not received their Form BD-Y2K report due on or before August 31, 1998. (Div. Exs. 1, 14, 36, 48; Tr. 181-87, 200.) The NASD letter included a second copy of the Form and announced that:
According to our records, as of September 4th, 1998 NASD Regulation did not receive the BD-Y2K Report, required pursuant to Rule 17a-5 under the Securities Exchange Act of 1934, from your firm. The report . . . was due on August 31st, 1998 . . . . Please be advised that failure to submit the required report may result in formal disciplinary action against your firm by the NASDR Department of Enforcement or the institution of an administrative proceeding by the U.S. Securities and Exchange Commission Division of Enforcement for violations of Section 17(a) of the Securities Exchange Act of 1934, Rule 17a-5 thereunder, or other provisions of the securities laws or NASD rules.
If you wish to avoid the contemplated disciplinary proceeding, you may still provide the required report. If the completed report is received no later than Monday, September 21, 1998, no enforcement action will be taken.
(Div. Ex. 14.)
8. The NASD retained a private outside company, The Data Entry Company ("TDEC"), to follow-up the September 10, 1998, letter with calls to broker-dealers who did not respond in an attempt to have those broker-dealers meet the September 21, 1998, filing deadline. (Tr. 189-90.) The NASD was not required to make these phone calls but did so as a part of its services to members. (Tr. 200.) TDEC employees called and read a script written by the NASD and they recorded the results of their efforts on a telephone log. (Tr. 189-94; Div. Ex. 102.) The TDEC callers asked for the firm's executive representative, the person the firm designated to receive official NASD communications. (Tr. 192-93.) If the firm's executive representative was not available, the TDEC callers left the message that he or she should call the NASD's Year 2000 help line immediately at 888-227-1330. (Tr. 198.)
None of the Respondents filed the complete Form with the Commission and the NASD by September 21, 1998. (Barclay and Stonegate Stips. 16, 17; V.B.C. Securities Stips. 10, 11; Div. Exs. 54, 55 as to William Scott.)
9. On September 24 and 25, the NASD made a second set of phone calls to broker-dealers who had not filed by September 21, 1998. (Tr. 201.) This time the message was that the broker-dealer should call NASD Enforcement.9 (Tr. 201-02; Div. Ex. 103.) Telephone logs show that the NASD called and left a message with Barclay, Stonegate, and William Scott on September 25, and with V.B.C. Securities on September 25 or 27, 1998. (Div. Exs. 5, 19, 39, 52.)
In 1972, Edwin Buchanan Lyon III, founded Stonegate, a registered broker-dealer, which operates a single office in Dallas, Texas. (Tr. 276) Stonegate's business is principally institutional and investments of its capital. (Tr. 277.) Stonegate does not do any market making and does not have custody of customer funds. (Tr. 328-29.) All trade reporting, clearing, and back office operations are performed by a third party.
Mr. Lyon operates the firm with his son, Edwin Buchanan Lyon IV, ("Bucky") and a secretary, Colleen. Stonegate began preparing for the Year 2000 in late 1997 or early 1998, primarily by making sure that the firm's clearing agents and other vendors were ready to operate in that environment. Mr. Lyon delegated to Bucky, a Duke University graduate who holds Series 7, 24, and 63 securities licenses, the task of ensuring that the firm was ready for the Year 2000. (Tr. 324, 327-28.)
Stonegate did not file Form BD-Y2K on or before August 31, 1998. (Stonegate Stips. 12, 13.) Mr. Lyon received a letter from the NASD on September 10, 11 or 12 informing him that Stonegate had not timely filed Form BD-Y2K. He passed the letter on to his son with the notation, "Bucky, please complete this form. Don't leave blanks. We are already delinquent." (Stonegate Ex. 11; Tr. 287, 291)
Stonegate is required to maintain net capital of not less than $100,000 because it trades the firm's capital (priority trades) more than ten times a year. 17 C.F.R. § 240.15c3-1(a)(2)(iii); (Tr. 281.) On September 18, 1998, Stonegate filed a Form BD-Y2K with the NASD that was incomplete because it was missing Part II required of a broker-dealer with a net capital requirement of $100,000 or more. (Div. Ex. 43.) The Commission received a similar incomplete filing from Stonegate on September 21, 1998. (Div. Ex. 45; Tr. 283.)
The NASD notified Stonegate on September 25, 1998, that its filing was incomplete and that it was required to file a complete Form. The person calling from TDEC left a message with the secretary, Colleen, that the firm should call NASD Reg. (Div. Ex. 39.) Mr. Lyon is unaware of the NASD message on September 25 and seems to believe that the first communication from the NASD following the letter in early September was on September 30. (Tr. 292.) The record indicates, however, that on September 30 the NASD's Year 2000 Office received a call from Bucky in response to the message the NASD left with Stonegate on September 25. (Tr. 292; Div. Ex. 40.)
The Commission contacted the firm on October 5, 1998, inquiring about the Form when it had not received Part II from Stonegate as of October 2, 1998. (Div. Ex. 44; Tr. 338.) Mr. Lyon realized then that the Commission was "really wound up about this and we needed to get it in." (Tr. 298.) Stonegate submitted Part II of the Form BD-Y2K on Monday, October 5, 1998, after it learned that the Division would recommend an enforcement action. (Stonegate Stip. 21; Tr. 338.)
Stonegate was stunned to receive a notice on October 6, 1998, that the Division intended to recommend enforcement action against it. (Tr. 301.) Mr. Lyon believes the sanction that the Division recommended is vastly disproportionate to the offense and that such a sanction will have an unwarranted adverse impact on his professional reputation. For example, Mr. Lyon chairs the board of an insurance company. He worries that state insurance regulators will fixate on the severity of a cease and desist order and substantial civil penalty and will not consider that what he did was file a form late. (Tr. 306-08.)
On October 16, 1989, Stonegate submitted an Acceptance, Waiver and Consent ("AWC") to the NASD and was censured and paid a $250 fine for filing late three Financial and Operational Combined Uniform Single Reports ("Focus reports") required by Rule 17a-5. (Tr. 280-81; Div. Ex. 46.) Mr. Lyon blames the late filings on a secretary who, after leaving the firm, returned to file its Focus reports and "she filed them one day late, three months in a row." (Tr. 280.) The evidence does not support Mr. Lyon's explanation that the late filings occurred in successive months. Stonegate's Focus report for June 1988 was received three calendar days late, the report for February 1989 was seven days late, and the report for May 1989 was two calendar days late. The NASD sent Stonegate a letter of caution after the first and second late filings. (Div. Ex. 46.) The third violation resulted in the NASD action.
Stonegate had total assets of just over $1.6 million as of September 30, 1998. For the month of September 1998, Stonegate had pre-tax income of $31,390. (Div. Ex. 47.)
John Anthony Bruno founded Barclay, a registered broker-dealer with a single office in New York City, in 1991. (Tr. 349.) The firm has employed 55 to 75 registered representatives and uses an outside clearing firm. (Tr. 348-49, 351-52.)
Barclay did not file Form BD-Y2K on or before August 31, 1998. (Barclay Stip. 12, 13.) Mr. Bruno assigned Barclay's Chief Compliance Officer, Theo Stavro Basis, the task of submitting the Form. (Tr. 355-56.) Mr. Basis held Series 7, 24, and 63 licenses, and had been a compliance officer for Prudential, and spent six or seven years with the NASD in enforcement. (Tr. 393.) Mr. Basis left Barclay on August 5, 1998, after two years with the firm. (Tr. 355-56, 358.) Mr. Bruno claims that he assumed Mr. Basis had filed the Form before he left the firm because Mr. Basis did not list it on items that needed to be done, and he assumed Mr. Basis would have mentioned the Form if the matter was incomplete. (Tr. 361, 392-93.) Mr. Basis did not tell Mr. Bruno he had filed the Form.10 (Tr. 361, 393-95.)
On September 10, 1998, Mr. Bruno received NASD Reg.'s letter dated September 9 informing him that Barclay had not filed the Form due August 31, 1998, as of September 4 and warning that Barclay would be subject to severe sanctions if it did not file the Form before September 21, 1998.11 (Tr. 362-64; Barclay Ex. 4.) The letter also included a second copy of Form BD-Y2K. Mr. Bruno "freaked out" when he read the letter and he directed Pete Walsh, a firm principal and chief financial officer, to make the filing. (Tr. 364.) Mr. Walsh did not complete Part II in the Form Barclay submitted on September 10. (Stips. Barclay 16, 17; Tr. 366, 387-88; Div. Ex. 28.)
The NASD called Barclay on September 18, and notified it that it had not filed the Form. (Div. Ex. 18.) A receptionist at Barclay told the NASD that she felt that the Form had been sent the week before but that she would have Steve Gerstel, Barclay's chief compliance officer beginning in September, call the NASD help line to make sure it was received. (Tr. 196; Div. Ex. 18.) On September 28, NASD Reg. called Barclay and told Mr. Gerstel that the firm had not filed Part II of Form BD-Y2K. (Tr. 372.) According to Mr. Bruno, Mr. Gerstel did nothing in response to the latter phone call because Mr. Walsh told Mr. Gerstel that he had filed the Form on September 10. (Tr. 373.)
Barclay submitted a complete Form on October 5, 1998, following a call from the Division informing Barclay it that it would be named in an enforcement action. (Tr. 367-70.)
On October 28, 1997, the Commonwealth of Massachusetts ordered Barclay, Mr. Bruno, and four other associated persons to cease and desist from further violations of the Massachusetts Uniform Securities Act and to contribute $50,000 to an investor education fund. The Commonwealth also ordered Barclay to make a written offer of rescission to investors to whom it sold a security not registered in Massachusetts. (Div. Ex. 33.) Barclay has paid the $50,000. (Tr. 389.)
On March 5, 1998, Barclay entered a consent agreement with the State of North Dakota whereby it agreed to pay $1,000 in costs and to fine one of its registered representatives $500 for making a cold call solicitation to a North Dakota resident. (Div. Ex. 34.) Barclay was not registered to do business in North Dakota.
On November 5, 1998, Barclay submitted an AWC to the NASD in which it accepted a censure, a fine of $3,500, and disgorgement of $4,400 in connection with the failure of an associated person to continue his/her continuing educational requirements and the firm's failure to establish and maintain a system to supervise its registered representatives. (Div. Ex. 32.)
As the result of arbitration proceedings, customers have received awards against Barclay in several cases that are noted in this record. In Neuman v. J.W. Barclay & Co., 1997 WL 877356 (N.A.S.D. Dec. 29, 1997) claimants were awarded $25,081.40 and $15,000 in actual damages, plus costs and fees. In Sanford v. J.W. Barclay & Co., 1998 WL 190278 (N.A.S.D. Feb. 4, 1998) claimants were awarded $4,385.02. In Esterman v. J.W. Barclay & Co., 1996 WL 403533 (N.A.S.D. May 29, 1996) claimants were awarded $408.98.
In the period July 1 through September 30, 1998, Barclay had total assets of almost $2.3 million and its monthly income for September 1998 was $299,605. (Div. Ex. 35.)
Vincent B. and Vincent S. Comperatore, father and son, are general partners who operate V.B.C. Securities, a registered broker-dealer with a single office in Clifton, New Jersey. (Tr. 398-99, 446.) The NASD member firm has been in operation since 1971. (Tr. 401.) V.B.C. Securities did not file Form BD-Y2K on or before August 31, 1998. (Div. Exs. 9, 11.)
V.B.C. Securities acknowledges filing Focus reports for the period at issue representing that it was a broker-dealer with a $100,000 minimum net capital requirement as of July 15, 1998. (Tr. 453-54, 457-58.) Nonetheless, V.B.C. Securities claims that it was only required to file Part I of the Form because on January 1, 1997, it began operating on a "fully disclosed" basis.12 (Tr. 400.) The record contradicts V.B.C. Securities' claim that this operational change lowered the firm's net capital requirement to $5,000 so that it was only required to file Part I of the Form on or before August 31, 1998.
V.B.C. Securities does not acknowledge receiving the "alert letter" from the NASD dated July 16, 1998. (Tr. 448.) However, V.B.C. Securities' name and correct address are on the mailing list of members to whom the outside vendor sent the mailing. (Div. Exs. 104 at 02257, 109.) V.B.C. Securities acknowledges receiving the Notice to Members 98-63 from the NASD in early August that included a copy of the Form along with instructions stating that NASD members with capital requirements of $100,000 had to complete Part II as well as Part I. (Tr. 449-50.)
Vincent S. Comperatore testified that he mailed Part I of the Form to the Commission and the NASD on August 31, 1998, and he believed this was a complete filing. (Tr. 410-12.) Neither the Commission nor the NASD received any part of the Form from V.B.C. Securities on or before the August 31, 1998 filing deadline. (Tr. 208-09; Div. Exs. 9, 11.) The NASD first received Part I of the Form from V.B.C. Securities on September 17 with a second receipt on September 18. (Div. Ex. 9.)
Vincent S. Comperatore claims he took no action in response to the NASD Reg.'s letter dated September 11 informing the firm that it had not received the firm's Form BD-Y2K Report as of September 4, 1998, because he had mailed the Form to the NASD and the Commission on August 31. (Div. Ex. 1; Tr. 411-12.) This letter advised V.B.C. Securities that failure to submit the Form by September 21, 1998, may result in formal disciplinary action by the NASD and/or the Commission. (Div. Ex. 1.)
The NASD's attempt to call V.B.C. Securities on September 17 was unsuccessful because the NASD had a wrong telephone number listed for the firm. (Div. Ex. 4.) V.B.C. Securities was obliged to furnish the NASD with its correct address and phone number. (Tr. 447.)
A wrong number foiled the NASD's attempt to call V.B.C. Securities on September 25; however, the operator found a valid number and on September 28 communicated with V.B.C. Securities. (Div. Ex. 5.) The caller's telephone log shows that "Vincent with clients left message." (Div. Ex. 5.) The message left with V.B.C. Securities referred to the Form and asked the broker-dealer to call the NASD Reg.'s 888 number. Vincent S. Comperatore testified that he immediately faxed the Form to the NASD after the firm received the phone call. (Tr. 412.) The NASD received Part I of the Form again on September 28, 1998. (Div. Ex. 9.)
As of October 2, 1998, the Commission had not received Part I of Form BD-Y2K for the firm. (Div. Ex. 11.) The Commission notified V.B.C. Securities on October 5 that it had not received its Form BD-Y2K filing. (Tr. 413.) Vincent S. Comperatore immediately faxed the Commission a copy of what he claims he had already filed. According to Mr. Comperatore, on October 5 a person at the Commission informed him that it already had a copy of Part I and that V.B.C. Securities' filing was incomplete because Part II was missing.13 (Tr. 415.) This was the first time that Vincent S. Comperatore realized that the firm had not filed Part II. (Tr. 415-16, 464.) Mr. Comperatore's explanation is that he knew the Form had two parts but he thought that Part I was both parts. (Tr. 415-16, 464.) Mr. Comperatore claims he faxed the Commission and the NASD a copy of Part II on October 5, 1998. However, the NASD received Part II on or after October 7 and a second copy on October 16. (Tr. 416; Div. Ex. 9.)
There is no evidence that V.B.C. Securities has ever been disciplined by any regulatory authority. Its assertion that it has never been late with a NASD required financial filing went unchallenged.14 (Tr. 401.)
V.B.C. Securities' Focus report for the period July 1 through September 30, 1998, showed it with a net capital requirement of $100,000; partnership equity of $1,684,275; and monthly income for September 1998 of $26,332. (Div. Ex. 13; Tr. 403, 450, 457-58.)
Joseph W. Glodek is president of William Scott, a small registered broker-dealer located in Union, New Jersey. Mr. Glodek has been in the securities business for eighteen years. (Tr. 478.) William Scott is an NASD member and has a minimum net capital requirement of $100,000. (William Scott Stip. 3.) William Scott clears all trades through another broker-dealer on a fully disclosed basis. (Tr. 474-75.)
Neither the Commission nor the NASD received a Form BD-Y2K from William Scott on or before, or shortly after, August 31, 1998. (Div. Exs. 54 and 55.) Mr. Glodek, however, is adamant that the firm mailed the Form BD-Y2K to the Commission on August 31, 1998. (Tr. 473-77, 490.) Mr. Glodek's files contain a "backup copy" of the Form which he takes to mean that he mailed the original and two copies to the Commission. (Tr. 477.) Mr. Glodek testified that he mailed the Form to the Commission. His brief, however, citing his testimony for support, states that he mailed the Form to the Commission and to the NASD. (Compare Tr. 477 with William Scott Post-Hearing Brief at 1.) When Mr. Glodek received a letter from the NASD Reg. around September 12 informing William Scott that it had not filed the Form, Mr. Glodek assumed that his filing and the letter crossed in the mail and he decided to fax the Form to the NASD. (Tr. 478-79.)
On September 18, the NASD left a phone message that Mr. Glodek should call the NASD's 888 member help line immediately. (Div. Ex. 51; Tr. 198.) Mr. Glodek does not remember receiving the message but he had the Form completed and he tried to fax it to the NASD on September 18, 1998, at 5:06 p.m..15 (Tr. 481-88, 493, 502.) The NASD did not receive a Form from William Scott on Friday, September 18, 1998. (Tr. 204.) Despite considerable evidence that the NASD did not receive the Form because it was not faxed correctly, Mr. Glodek continues to insist that the problem could have been in the NASD's receipt of the material.16 The persuasive evidence that Mr. Glodek is wrong includes the fact that the fax activity report for the machine Mr. Glodek used to transmit the Form shows "NG"17 in the column under the term Result. (William Scott Ex. 1; Tr. 493.) The unrefuted testimony of the head of the NASD's Year 2000 Office is that the NASD did everything it could to avoid problems with fax receipts. (Tr. 246.) The NASD had two fax machines available to handle the volume of faxes received. The machines were located in front of an administrator so she could watch for problems and where five people could observe them in operation. All these people were trained to load paper and to perform other measures to keep the machines operable. The NASD had staff on duty until 6:00 p.m. (Tr. 244-46.) Mr. Glodek did not call the NASD to check that they received the fax. (Tr. 503.)
On Friday, September 25, when the NASD called and reported that William Scott had not filed the Form, Mr. Glodek responded that he had faxed the Form to the NASD "last Friday." (Div. Ex. 52; Tr. 502.)
On December 3, 1997, William Scott and Kevin Mark Glodek, an associated person, entered a consent agreement with the State of Indiana Securities Division involving the sale of unregistered, non-exempt securities to an Indiana resident in the State of Indiana by a person who was not registered to do business in the state. (Div. Ex. 56.) Under the terms of the consent agreement, William Scott agreed that it violated the Indiana Code by failing to supervise Mr. Glodek, and paid a civil penalty of $10,000 and costs of $1,245. (Div. Ex. 56).
William Scott's Focus report for the period July 1, 1998 through September 30, 1998, showed partnership equity of $641,588 and monthly income for September of $7,359. (Div. Ex. 57.)
Conclusions of Law
Willfulness in the context of this proceeding instituted pursuant to section 15(b) of the Exchange Act means that the persons intentionally committed the act or omission that constitutes the violation. There is no requirement that the actor also be aware that he is violating one of the Rules or Acts. Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976). Willfulness does not require an intent to violate the law, nor does it require "deliberate or reckless disregard of a regulatory requirement." Jacob Wonsover, 69 SEC Docket 694, 710-11 (Mar. 1, 1999), appeal filed, No. 99-1167 (D.C. Cir.). It is well settled that failure to make a required report, even if inadvertent, is a willful violation. Hammon Capital Management Corp., 48 S.E.C. 264, 265 (1985) (citing Jesse Rosenblum, 30 SEC Docket 857, 860 (May 17, 1984) and the cases there cited), aff'd without opinion, 760 F.2d 260 (3rd Cir. 1985); Oppenheimer & Co., 20 SEC Docket 58, 59 (May 19, 1980) (citing Haight & Co., 44 S.E.C. 481, 507 (1971)) aff'd, (D.C. Cir. 1971).
Respondents willfully violated Section 17(a) of the Exchange Act and Rule 17a-5 because they did not file completed Form BD-Y2K Reports with the Commission and the NASD on or before August 31, 1998, or by September 21, 1998.
Since the factual assertions of the OIP are true, the next consideration is what, if any, sanction is appropriate in the public interest; namely whether Respondents should be censured, ordered to cease and desist, or ordered to pay civil penalties. (OIP at 3.)
The following are relevant considerations in making the public interest determination: 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 the particular case and the value of the sanction. See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970).
The record makes it abundantly clear that the Commission and the NASD expended enormous effort to achieve compliance with a Commission Rule adopted to ensure that the capital markets operate effectively in the Year 2000. None of the Respondents complied with Rule 17a-5(e)(5) as of August 31 or September 21, 1998, despite: (1) five NASD mailings informing them that they were required to file Form BD-Y2K; (2) several written warnings that the Commission and/or the NASD might initiate enforcement action if they did not file the Form; and (3) a phone call from the NASD prior to September 21, 1998.18 Respondents' conduct was egregious in that it was blatant and outrageous. As participants in a regulated industry, Respondents have a duty to comply with the Commission's regulations and they cannot claim ignorance as a defense. Jacob Wonsover, 69 SEC Docket at 712-13; see Gold v. SEC, 48 F.3d 987, 992 (7th Cir. 1995); Quinn & Co. v. SEC, 452 F.2d 943, 947 (10th Cir. 1971); Hanly v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969).
Respondents' actions were both isolated and recurrent. They were isolated because they missed the August 31, 1998, filing date specified in the amendment to Rule 17a-5. Respondents' actions were recurrent in that they did not make the filings required either by the August 31, 1998, deadline specified in the regulation or by the September 21, 1998, extension or "grace period" offered by the NASD. As of October 2, 1998, the Respondents had not filed complete Forms with the Commission or the NASD. (Stonegate and Barclay Stips. 12, 13, 16, 17, 19, 20; V.B.C. Securities Stips. 13, 14; Tr. 367-68; Div. Ex. 11, 44, 54, 55.)
Respondents' actions involved a high degree of scienter. They all acknowledge receiving notice that they were required to file Form BD-Y2K on or before August 31, 1998. (Barclay, Stonegate, and William Scott Stips. 6, 8, 10; V.B.C. Securities Stip. 6.) Mr. Bruno admits the issue received a lot of publicity. (Tr. 353.) The overwhelming evidence is that Respondents' failure to file Form BD-Y2K as alleged in the OIP was deliberate or reckless and that it went far beyond conduct that could be characterized as negligent, inadvertent, or accidental behavior.
Respondents do not accept that their failure to file the Form as required on or before August 31, 1998, or by September 21, 1998, involved conduct that was both serious and wrong. They vigorously contest the Division's recommended sanctions as totally disproportionate to their "mistake" or oversight in not filing a form. (Joint Brief of Stonegate and Barclay at 24; Tr. 302.) Respondents do not accept responsibility for their omissions but blame the Commission, the NASD, machines, and the U.S. Postal Service for their failure to obey the law. (Tr. 38, 245, 361, 487, 500.)
Lack of Mitigating Circumstances
Stonegate - Stonegate's defense that it acted to ensure that its clearing broker and other third party vendors were ready for the Year 2000 does not mitigate its failure to file Form BD-Y2K.
Mr. Lyon notes that, unlike some other firms, Stonegate was not notified that their filing was incomplete and it would have promptly corrected its filing if it had received such a letter. (Tr. 305.) He refers to the NASD letters in early September to broker-dealers who had made partial filings by September 4 saying their filings were incomplete. The letter Stonegate received from the NASD in early September, dated September 10, informed Stonegate that it had not yet filed Form BD-Y2K because those were the facts at the time. Stonegate made incomplete filings with the NASD on September 18 and with the Commission on September 21, 1998. The fact that Stonegate received a slightly different letter from the NASD than letters sent to broker-dealers who had filed one Part of the Form as of September 4, 1998, does not excuse Stonegate's failure to file Parts I and II correctly. 19 It is established that a broker-dealer cannot shift its responsibilities for compliance with applicable requirements to the NASD or the Commission. Variable Inv. Corp., 46 S.E.C. 1352, 1354 n.6 (1978). See also W. N. Whelen & Co., 50 S.E.C. 282, 287 (1990); Don D. Anderson & Co., 43 S.E.C. 989, 991 (1968), aff'd, 423 F.2d 813 (10th Cir. 1970). Furthermore, Stonegate's reaction to the information the NASD provided to it from July to September does not support its claim that it would have remedied the situation promptly if it had been notified that its filing was incomplete. (Tr. 296.) Finally, I reject Stonegate's defense that the information requested in Parts I and II was identical, it filed Part I before October 2, 1998, and therefore it did not violate Rule 17a-5. (Stonegate and Barclay Brief at 24.)
Barclay - Mr. Bruno's testimony is unbelievable in several respects. I do not accept as true his statement that Barclay's chief of compliance, Mr. Basis, a knowledgeable securities professional, did not inform him that Barclay needed to file Form BD-Y2K on or before August 31, when they reviewed "open items" before Mr. Basis left the firm on August 5, 1998. I also doubt Mr. Bruno's representations that (1) Barclay's new chief of compliance, Mr. Gerstel, did not know that Form BD-Y2K had two parts, and (2) in response to the NASD's notice on September 19 that it did not have a completed Form BD-Y2K from Barclay, Mr. Gerstel simply accepted Mr. Walsh's statement that he had submitted the Form on September 10.
Mr. Bruno's lack of initiative in insuring that Barclay made a complete filing is at odds with his hands-on management style evident from the fact that he opens all mail addressed to the firm. (Tr. 355.) Mr. Bruno claims that he "freaked out" on September 10 when the NASD told him Barclay had not filed a complete Form. (Tr. 364.) Yet it was only when the Division informed him on October 5, 1998, that it was recommending an enforcement action that Barclay managed to make a successful filing. (Barclay Stip. 21; Tr. 367-70.) Finally, Mr. Bruno's fear that a cease and desist order would damage Barclay is muted by the fact that the firm has apparently been successful since Massachusetts entered the cease and desist order in 1987, but in any event the issue is not what is best for Mr. Bruno's business interests but what is appropriate for the public interest.20
V.B.C. Securities - V.B.C. Securities' many excuses do not mitigate the fact that it ignored the plain language of Rule 17a-5 and did not timely file Form BD-Y2K. The claim that V.B.C. Securities was only required to file Part I of the Form because "the underlying activities of the firm were that of a $5,000 broker dealer" is unpersuasive. It represented that it had a $100,000 or more net capital requirement in the Focus reports it filed for the period, and Vincent B. Comperatore admitted that at the relevant time V.B.C. Securities was classified as a broker-dealer with a minimum net capital requirement of $100,000 and, as such, it was required to file Parts I and II. (Tr. 408-09, 458-59.)
Several of V.B.C. Securities' positions are unsustainable because they directly conflict with persuasive evidence. For example:
(1) The only support for V.B.C. Securities' claim that the blank Form it received in early August did not have Part II is Vincent S. Comperatore's testimony that the Form he had in his files on October 5 did not contain a Part II. (Tr. 418-19, 465.) Contrary to Mr. Comperatore's position, the persuasive evidence is that the Form was a bound package that contained instructions and two Parts. In July and August this package was the only way the NASD distributed the Form. (Tr. 162, 188, 232; Div. Ex. 106.) It was not until September or October that the NASD photocopied, faxed, or sent out a particular page or pages from the Form. (Tr. 233.) There is no evidence that any other broker-dealer received a Form that lacked Part II.
(2) V.B.C. Securities fails to acknowledge receipt of the NASD "alert letter" dated July 16, 1998, because it does not have a file copy. This contention is unpersuasive in view of the evidence that the letter was mailed to the correct address. (Tr. 448-49; Div. Exs. 104 at 02257, 109.)
(3) V.B.C. Securities claims to have mailed the Form to the NASD on August 31, but the NASD's official files show that it first received Part I of the Form from V.B.C. Securities on September 17 with a second receipt on September 18. (Div. Ex. 9.)
(4) V.B.C. Securities maintains that the Commission has acknowledged that it timely filed Part I of the Form. (V.B.C. Securities' Proposed Findings of Fact and Posthearing Brief at 2.) However, at the hearing the Division explained that it listed the firm in Appendix B to the OIP because the firm filed Part I with the NASD on September 18, 1998; the Division has never agreed that V.B.C. Securities made a timely filing with the Commission of Part I. (Tr. 60, 78-79, 90-91.) The Commission's records indicate that V.B.C. Securities had not filed Part I with the Commission as of October 2, 1998. (Div. Ex. 11.)
(5) Mr. Comperatore's position that he thought Part I included Part II is unreasonable.
V.B.C. Securities' excuses do not provide a plausible explanation of why the firm did not know until October 2, 1998 that it had to file Parts I and II of Form BD-Y2K, rather they raise questions as to the firm's competency to understand basic regulatory requirements. V.B.C. Securities acknowledges it had a duty to furnish the NASD with its correct telephone number, yet it complains that it did not receive a phone call from the NASD as other broker-dealers did because the NASD was unaware that its area code had changed. (Tr. 413, 447.) V.B.C. Securities blames the Commission for continuing "to send the same information about reporting requirements again and again" and for not telling it that Part II was missing from its filing. (V.B.C. Brief at 3.) It complains that the instructions were not specific in that the pagination of Parts I and II was not consecutive. (V.B.C. Brief)
V.B.C. Securities argues that it should not be sanctioned because no one was injured, there was no harm to the public, no fraud was committed, and the "oversight" was without malice. (V.B.C. Brief at 5.) The case law establishes the principle that the Commission can act to protect the public without having to waiting for damages to occur. Similarly, the Commission can and does act to protect the public in situations which do not involve fraud and where the Respondents did not act with malice.
William Scott - Mr. Glodek's claims of mitigating circumstances are unpersuasive. The only support for Mr. Glodek's claim that he mailed the Form on August 31, 1998, is his testimony. I find his testimony unconvincing because Mr. Glodek has no proof that he sent the Form. (Tr. 80, 218.) In addition, when he testified Mr. Glodek did not mention sending it to the Commission as well as the NASD. Mr. Glodek did not claim that he sent the Form to the Commission on August 31 until he filed his brief. (Compare William Scott Brief at 1 with Tr. 490.) If Mr. Glodek had sent the Form to the NASD and/or to the Commission on August 31, it would be reasonable to assume that he would have informed the NASD of this fact, and that he would have done so in writing so as to have a record, when the NASD notified William Scott on September 10 that it did not have its Form as of September 4. Mr. Glodek did not claim prior compliance to the NASD either orally or in writing. Finally, affidavits from persons at the Commission and the NASD are that they did not receive Forms from William Scott as of October 2, 1998. (Div. Exs. 54, 55.)
The record does not explain why Mr. Glodek waited until after his secretarial staff left on Friday evening to attempt to fax a response to the NASD when the NASD called before noon on September 18 and left an urgent phone message for a return call. Also, there is no explanation why, on a matter of this magnitude, Mr. Glodek did not take steps to assure that the fax transmission was successful, or why he did not call the NASD to make sure it was received. (Tr. 503.) He acknowledged receiving from the NASD a copy of "Report Submission Guidelines from the DEA" that urged persons faxing in the Form to retain a copy of the confirmation sheet indicating successful fax transmission. (Div. Ex. 116.) The transmission report for his fax machine shows that the transmission at issue on September 18 was unsuccessful. Mr. Glodek could not explain why this transmission report bears the date of September 21 at the top when he says he printed it on October 5. (Tr. 494-501.)
Summary - The Division requests that the Commission censure all Respondents; order them to cease and desist; and impose civil penalties of $50,000 against each Respondent, or in no event less than $15,000 each against Barclay, Stonegate, and V.B.C. Securities, and $25,000 against William Scott. (Div. Reply Brief at 23.)
I find sanctions to be appropriate in the public interest because Respondents chose to ignore Commission measures aimed at protecting the public on a significant issue. Respondents' inability to accept or to understand their regulatory responsibilities, indicate that strong measures are necessary to achieve future regulatory compliance. Barclay, Stonegate, and William Scott have had prior infractions that required disciplinary measures by regulators. As a general principle, it is necessary for the public's protection that broker-dealers be required to adhere to high compliance standards. These broker-dealers violated the statute and rule for no good reason. In an industry with some 7,800 registered broker-dealers, such behavior will destroy effective regulation if left unchallenged and untreated. Reports to be Made by Certain Brokers and Dealers, 67 SEC Docket at 1321 n.9.
Section 15(b)(4) of the Exchange Act provides that the Commission shall censure a broker-dealer where it is in the public interest to do so and the broker-dealer has willfully violated the Exchange Act or any rule thereunder. A censure is a formal reprimand for specified conduct. (Black's Law Dictionary, 153 (6th ed. 1991).) I find a censure to be in the public interest here where Respondents willfully violated Section 17(a) and Rule 17a-5 for no good reason.
Cease and Desist
The Commission has several well-defined measures available to effect compliance. One of the measures available to the Commission is a cease and desist order, an order of an administrative agency or court prohibiting a person or business firm from continuing a particular course of conduct. Section 21C of the Exchange Act provides that where the Commission, after notice and opportunity for hearing, has found that a person violated a provision of the Exchange Act or rule thereunder, it may require that person to cease and desist from committing a violation, and, where it deems appropriate, may require future compliance.
A cease and desist order is required here because these Respondents' conduct demonstrates an unwillingness to comply with the rules established to protect the investing public. It is undisputed that Respondents violated Section 17(a) of the Exchange Act and Rule 17a-5(e)(5)(ii)(A) in that they did not file in a timely manner the first of two reports that the Commission required to enable it to address the Year 2000 problem.21 The introduction to the amendment to Rule 17a-5 stated:
The Commission views the Year 2000 problem as an extremely serious issue. A failure to assess properly the extent of the problem, remediate systems that are not Year 2000 compliant, and then test those systems could endanger the nation's capital markets and place at risk the assets of millions of investors.
Reports to be Made by Certain Brokers and Dealers, 67 SEC Docket 1320. Respondents' defiant conduct was egregious and lacking in any mitigating circumstances.
For the reasons set out in Joel Zbar, 56 SEC Docket 1784 (Mar. 18, 1994), I reject Stonegate's and Barclay's position that the Commission cannot impose a cease and desist order because there is no possibility for future violations.22 (Stonegate and Barclay Brief at 24, 27.) Moreover, while Respondents cannot commit future violations of Rule 17a-5(a)(5) since the last filing of Form BD-Y2K was in April 1999, it is possible for Respondents in the future to violate Section 17(a) and Rule 17a-5. In addition, Respondents failure to accept responsibility for what occurred and their attempts to minimize the seriousness of the violations raises concerns about their future compliance. Finally, a proclivity to violate the law is an accepted indicator of the probability of future compliance. See SEC v. Falstaff Brewing Corp., 629 F.2d 62, 78 (D.C. Cir. 1980) ("Whether due to ignorance, neglect, or conscious decision, noncompliance with Section 16(a) [of the Exchange Act] does evince a disregard of the securities laws that may manifest itself in noncompliance elsewhere.") Repeated violations are a factor that weigh in favor of significant sanctions. See Pagel, Inc. v. SEC, 803 F.2d 942, 948 (8th Cir. 1986) (record-keeping and other violations); J.V. Ace & Co., 47 SEC Docket 1874, 1882 (Dec. 21, 1990) (net capital and other violations); Walter Capital Corp., 50 S.E.C. 176, 179-80 (1989) (net capital violations); W.N. Whelen & Co., 50 S.E.C. at 287 (net capital and other violations); LSCO Sec., 49 S.E.C. 1126, 1130 (1989) (net capital and other violations). For these reasons, I conclude that it is appropriate that the Respondents be ordered to cease and desist from violating Section 17(a) of the Exchange Act and Rule 17a-5 thereunder. My conclusion that a cease and desist order is appropriate as to Respondents Barclay, Stonegate, and William Scott is further supported by the fact that the NASD and three states have found it necessary to discipline those Respondents for failure either to file timely financial reports, or for violations of the states' securities statutes.
Respondents committed a willful violation in a proceeding instituted pursuant to Section 15(b)(4). For this reason, Section 21B of the Exchange Act authorizes the Commission to impose a civil penalty if it is the public interest to do so. Section 21B establishes maximum penalties per act or omission at three levels or tiers. The maximum penalty per act or omission for a broker-dealer at the first and second tiers are $50,000 and $250,000, respectively. The difference between the first and second tiers is that the second tier is applicable where the acts or omissions involved, among other things, deliberate or reckless disregard of a regulatory requirement. The third tier is applicable to acts or omissions having the same characteristics as those at the second tier but, in addition, causing substantial losses or the significant risk of substantial losses to persons or substantial pecuniary gain to the person who committed the act or omission.
The factors to be considered in determining whether it is in the public interest to assess a penalty are: (1) whether the illegal activities involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; (2) the harm caused to other person(s); (3) the extent to which any person was unjustly enriched; (4) a person's prior disciplinary history; (5) deterrence; and (6) such other matters as justice may require. Section 21B(c).
Respondents knew or were reckless in not knowing that filing Form BD-Y2K was a significant regulatory filing requirement, yet they ignored attempts by the Commission and the NASD to achieve voluntary compliance. Despite their denials, the record shows that Respondents only filed the complete Form after being notified that the Division would recommend litigation.
The Commission and the courts have consistently recognized that disclosure achieved through regulatory filings is vital to effective regulation, and that failure to comply with applicable reporting requirements should not be treated dismissively as merely technical. See Ernest F. Boruski, Jr. v. SEC, 340 F.2d 991, 992 (2d. Cir. 1965) (financial reports required by Rule 17a-5 provide the Commission with information necessary for protection of the public investor); Application of Tiger Options, 63 SEC Docket 251, 270 (Oct. 25, 1996); LSCO Sec., 49 S.E.C. at 1130; see also Touche Ross & Co. v. Redington, 442 U.S. 560, 569 (1979) (Section 17(a) requires regulated businesses to keep records and file periodic reports to enable relevant governmental authorities to perform their regulatory function).
Finally, the Division does not explain the basis for requesting different civil penalties for the Respondents. I can only surmise it is because the OIP shows Stonegate, Barclay, and V.B.C. Securities as having not filed Part II of the Form as of October 2, 1998, and William Scott as not having filed Parts I and II as of that date. I disagree with the Division's position, which would give more lenient treatment to those Respondents who filed one part of the Form with either the NASD and/or the Commission when they were required to file two Parts with both regulatory bodies. This record shows that the Commission and the NASD practically begged these Respondents to submit what was required when it was required, and they failed to do so. As noted, there are no mitigating circumstances. The securities industry offers many opportunities for self-serving conduct. The assessment of steep monetary penalties is an accepted means of impressing on persons the seriousness of their compliance obligations and should serve to deter future violations. New Allied Dev. Corp., 63 SEC Docket 807, 822 (Nov. 26, 1996); First Sec. Transfer Sys., Inc., 60 SEC Docket 441, 448 (Sept. 1, 1995).
I find civil penalties of $50,000 against Stonegate, Barclay and V.B.C. Securities and $20,000 against William Scott, appropriate in the public interest. (Compare Div. Exs. 13, 35, and 47 with Div. Ex. 57.) The lesser amount required of William Scott is appropriate because, judging by its assets, it is a much smaller firm. It is not helpful to compare sanctions assessed against other Respondents since each situation is determined on its particular facts and circumstances. Cf. Butz v. Glover Livestock Comm'n. Co., 411 U.S. at 187; Hiller v. SEC, 429 F.2d at 858-59. It is well established that settling parties may properly receive lesser sanctions than the Commission may impose following litigation based on "pragmatic considerations such as the avoidance of time-and-manpower-consuming adversary proceedings." David A. Gingras, 50 S.E.C. 1286, 1294 (1992) (citing Nassar and Co., 47 S.E.C. 20, 26 (1978), aff'd, 600 F.2d 180 (D.C. Cir. 1979)); Jack Schaefer, 46 S.E.C. 59, 63 (1975). See Butcher & Singer, Inc., 48 S.E.C. 640, 649 n.18 (1987); Haight & Co., 44 S.E.C. 481, 512-13 (1971), aff'd without opinion, (D.C. Cir. 1971).
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items described in the record index issued by the Commission's Secretary on July 12, 1999, with the additions contained in my Order dated July 29, 1999. Order on Motions and Directing Changes to Record Index (July 29, 1999).
Based on the findings and conclusions set forth above:
I ORDER, pursuant to Section 15(b) of the Exchange Act that Stonegate Securities, J.W. Barclay & Co., V.B.C. Securities, and William Scott & Co., L.L.C. are censured.
I FURTHER ORDER, pursuant to Section 21C of the Exchange Act, that Stonegate Securities, Inc., J.W. Barclay & Co., V.B.C. Securities, and William Scott & Co., L.L.C. shall cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Exchange Act, and Rule 17a-5 thereunder.
I FURTHER ORDER, pursuant to Section 21B of the Exchange Act that Stonegate Securities, Inc., J.W. Barclay & Co., and V.B.C. Securities shall pay total civil money penalties of $50,000, and that William Scott & Co., L.L.C. shall pay a total civil penalty of $20,000.
Payment of penalties, plus interest, shall be made on the first day following the day this decision becomes final by certified check, United States postal money order, bank cashier's check, or bank money order payable to the U.S. Securities and Exchange Commission. The check and a cover letter identifying Stonegate, Barclay, V.B.C. Securities, and William Scott as Respondents in Administrative Proceeding No. 3-9759, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission's Division of Enforcement.
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. 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.
Brenda P. Murray
Chief Administrative Law Judge
-- Fourteen Respondents either submitted Offers of Settlement which the Commission accepted or the allegations against them were dismissed. The Commission censured Allegheny and Atlantic-Pacific, ordered them to cease and desist from violating Section 17(a) of the Exchange Act and Rule 17a-5(e)(5) thereunder, and required each of them to pay a civil penalty of $5,000. Allegheny Fin. Programs, Inc., 68 SEC Docket 3245 (Jan. 14, 1999).
The Commission censured Laguna, McGlone, Phoenix, Multi Spectrum, and E.C. Capital; ordered them to cease and desist from violating Section 17(a) of the Exchange Act and Rule 17a-5(e)(5) thereunder; and required Laguna, McGlone, and Phoenix to pay civil penalties of $5,000, Multi Spectrum to pay $15,000, and E.C. Capital to pay $25,000. Laguna Fin. Corp., 69 SEC Docket 0097 (Feb. 3, 1999).
The Commission censured Comstock, Gelber, and Bettinger; ordered them to cease and desist from violating Section 17(a) of the Exchange Act and Rule 17a-5(e)(5) thereunder; and required them to pay civil penalties of $5,000, $10,000, and $20,000, respectively. Comstock Partners, L.L.C., 69 SEC Docket 0277 (Feb. 10, 1999).
On February 4, 1999, I granted the Division of Enforcement's ("Division") motion and dismissed without prejudice the allegations as to Constitution, based on the Division's representation that the firm would file to withdraw its registration soon. Rulings on Motions Including Hearing Location (Feb. 4, 1999).
At the prehearing conference on February 17, 1999, I granted the Division's motion and dismissed without prejudice the allegations against Elswick, Alden, and J. Robbins. -- Citations to pages of the hearing transcript will be designated "(Tr.__)." Division exhibits will be cited by number as "(Div. Ex.__)." Respondent exhibits will be cited by Respondent name and exhibit number as "([Name] Ex.__)." -- My findings are based on the evidence in the record. I applied preponderance of the evidence as the applicable standard of proof. Steadman v. SEC, 450 U.S. 91 (1981). I have considered all proposed findings and conclusions and arguments raised by the parties and accept those consistent with this decision. -- The NASD's subsidiaries are the Nasdaq Stock Market, AMEX L.L.C., and NASD Regulation. (Tr. 108.) -- The alert letter also stated that additional information was available via the Federal Register and on the SEC Web Site. (Citations omitted.) Information about the Forms was also available on the NASD's Web Site. (Tr. 178.) -- The NASD conducted a Year 2000 Compliance Survey of broker-dealers in December 1997 - January 1998, and Notice to Members 98-63 summarized those survey results. (Tr. 170, 468.) -- Div. Ex. 107 duplicates Div. Ex. 111 with the addition of instructions to the mailing vendor. -- The record indicates that the NASD sent out a total of about 1,500 letters. (Tr. 424-25.) -- The NASD retained TDEC to provide this service because TDEC kept great records on its first attempt. (Tr. 201.) -- According to Mr. Bruno, Mr. Basis's departure and an NASD audit that began in mid-July made for intense conditions at the firm in July and August. (Tr. 358.) -- The record contains a copy of the same letter from NASD Reg. to Mr. Basis at Barclay dated September 11, 1998. (Div. Ex. 14.) -- Operating in this manner, V.B.C. Securities relays customer orders to a clearing house and notifies the customer when it receives back a report. The clearing firm handles all security transfers and all administrative functions. (Tr. 400, 408-09.) In response to an inquiry it made in December 1998, V.B.C. Securities claims to have permission from the NASD to make filings after December 1998 as a broker-dealer with a $5,000 net capital requirement. (Tr. 445-46; V.B.C. Securities Ex. 15.) -- The record does not explain the apparent discrepancy between the absence of Part I from the Commission's files on October 2, and Mr. Comperatore's testimony that on October 5 Adriane Burkland in the Division's Midwest Regional Office told him that the Commission had Part I on file. (Compare Div. Ex. 11 with Tr. 413-15.) -- The NASD requested responses to its Year 2000 Compliance Survey by January 31, 1998; however, V.B.C. Securities' response bears the legend "April 28, 1998 resubmitted." (V.B.C. Securities Ex. 5; Tr. 468.) -- Mr. Glodek testified he faxed it because it was due and he was trying to meet the "second deadline" which I take to mean the grace period given by the NASD of September 21. (Tr. 482, 484, 502.) -- The NASD machines received faxes on September 18, 1998, but the NASD could not produce for Mr. Glodek in February 1999 an activity report showing all receipts by its fax machines on September 18, 1998. (Tr. 245-46.) -- The letters "NG" on the fax activity report denote an unsuccessful transmission. (Tr. 493.) -- As noted, the NASD's attempt to call V.B.C. Securities prior to September 21 was unsuccessful. -- By the time Stonegate made its incomplete filings, it was too late for the NASD to issue another letter and bring about a complete filing by September 21. -- Barclay had 55 to 75 registered representatives in the 1987-89 period and the firm was growing. (Tr. 352.) -- The Proposing Release defined the term "Year 2000 Problem" to include any erroneous result caused by any computer software (i) incorrectly reading the date "01/01/00" or any year thereafter; (ii) incorrectly identifying a date in the year 1999 or any year thereafter; (iii) failing to detect that the Year 2000 is a leap year, and (iv) other computer error that is directly or indirectly related to (i), (ii), or (iii). Reports to Be Made by Certain Brokers and Dealers, 63 Fed. Reg. at 12057. -- Respondents cite Orlando Joseph Jett, 67 SEC Docket 1901 (July 21, 1998); Warren G. Trepp, 65 SEC Docket 614 (Aug. 18, 1997); Valicenti Advisory Services, Inc., 68 SEC Docket 1805 (Nov. 18, 1998), appeal filed, No. 99-4002 (2d Cir.); and Mary L. Schapiro, Remarks before the Securities Regulation and Business Law Conference, University of Texas, Austin, Texas (Mar. 7, 1991 at 13-14.)
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