SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10109
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDING
Violation of Rules of Fair Practice
Registered representative and associated person of a member firm created and submitted false expense receipts for the purpose of obtaining additional compensation from his employer. Held, association's findings of violation and sanctions it imposed are sustained.
Keith S. Perkins, pro se.
Alden S. Adkins, Susan L. Beesley, and Shirley H. Weiss, for NASD Regulation, Inc.
Appeal filed: December 2, 1999
Keith S. Perkins, a general securities representative formerly associated with Prudential Securities, Inc. ("Prudential" or the "Firm"), appeals from disciplinary action taken by the National Association of Securities Dealers, Inc. ("NASD"). The NASD found that Perkins violated Conduct Rule 2110 by creating and submitting false expense receipts for reimbursement of costs he did not incur in order to obtain additional compensation from his employer.1 The NASD censured Perkins and imposed a $7,500 fine. We base our findings on an independent review of the record.
The conduct supporting the finding of violation is largely undisputed. Perkins was a registered representative employed at the Santa Barbara, California branch office of Prudential with the title of associate vice president.2 Prudential paid commissions to its representatives, such as Perkins, based on the amount of sales they made in a given annual period. At the beginning of each year, Prudential set specific sales goals for each sales category or "level." Representatives who reached or exceeded these sales goals received a higher rate of commission.
Because 1990 appeared to be a slow year for selling securities, Prudential announced its decision in May 1990 to lower the 1990 sales goal it had established earlier in the year for the Level I sales category from $150,000 to $125,000. Thus, brokers who achieved at least $125,000 in sales in 1990 would be compensated at a higher commission rate. However, Prudential chose not to lower the 1990 sales goal for the Level II sales category, applicable to Perkins, of $150,000.
At the year's end, Perkins' 1990 sales, totaling $133,688, fell short of the $150,000 sales goal Prudential had set. In letters dated December 21, 1990 and February 6, 1991, Perkins requested that his branch manager, Jim Stovesand, "make an appeal" to Prudential to lower the 1990 Level II sales goal, as it had lowered the Level I goal, to $125,000. Perkins calculatedthat a reduction in the 1990 sales goal would have resulted in an additional $7,276.99 commission payment. He believed that his sales performance, given the unfavorable market environment, was deserving of the higher commission rate. Perkins asked Stovesand about the status of his request on a weekly basis over the course of the next several months.
In November 1991, Prudential reduced its 1991 sales goal for both Level I and Level II sales categories to $125,000. The announcement of this modification prompted Perkins to draft a letter to Prudential's Pacific South Regional Manager, Carrington Clark, to request again that the 1990 Level II sales goal be reduced to $125,000 for the purpose of enabling Perkins to receive a delayed higher commission payment for his 1990 sales. Perkins prepared this letter on Stovesand's stationery and presented the letter to Stovesand to sign and forward to Clark.3
Perkins testified that, shortly after preparation of this letter, Stovesand informed Perkins that he would "take care" of the commission issue "at the branch level."4 As a substitute for a direct commission payment to Perkins, Stovesand suggested that Perkins create and submit false expense receipts for which he would receive a total reimbursement of $5,000. Stovesand instructed Perkins to identify the expenses as seminar-related, though it was understood between them that the seminars and costsassociated with those seminars were entirely fabricated.5 Stovesand further instructed Perkins to limit the amount of individual expense receipts to $500, since Stovesand had discretionary authority up to that amount. From April 1992 through May 1993, Perkins submitted one false expense receipt per month to Stovesand. Perkins was ultimately reimbursed for $5,093.46 in seminar expenses he did not incur. Perkins testified that he reported the additional compensation on his tax return.
Prudential discovered the false expense receipts in 1994 during an internal audit. Although it fired Stovesand in 1995 for his involvement in this scheme, Prudential merely admonished Perkins and required him to make a $1,000 contribution to a charity of his choice.6 Prudential did not seek restitution of the funds Perkins had obtained improperly.
The NASD's District Business Conduct Committee for District No. 2 ("DBCC") found that Perkins violated Conduct Rule 2110 by falsifying expense receipts for the purpose of receiving extra compensation, censured Perkins, fined him $2,500, and ordered him to pay restitution to Prudential in the amount of $5,093.46 plus interest. The NASD's National Adjudicatory Council ("NAC") affirmed the DBCC's findings but modified the sanctions by eliminating the restitution requirement and instead increasing the fine to $7,500.
Perkins does not dispute that he falsified expense receipts or that this conduct was inconsistent with just and equitable principles of trade.7 However, while he concedes that some sanction is warranted, Perkins contends that the fine imposed by the NASD is unduly harsh. Perkins insists that he did not act in bad faith and that several factors mitigate his conduct.
Perkins contends that his branch manager, Stovesand, devised the scheme to compensate him through the seeming reimbursement of expenses.8 Perkins acted at Stovesand's express instruction when he prepared and submitted the falsified expense receipts. Perkins therefore rejects any suggestion that he, rather than Stovesand, is the principal offender in this matter. Perkins further contends that he thought Stovesand had the authority to compensate him in the manner described and did not suspect that Stovesand was violating the rules or policies of the Firm. Perkins claims that he did not know how the branch budget was administered and therefore assumed that Stovesand had the discretion to allocate expenses as he deemed necessary. Perkins says he reasoned that Stovesand was not limited by the budget categories and could "chang[e] one expense for another" and use, for example, the seminar portion of the budget to cover another category of expenses.
Perkins admits that he was concerned initially about this method of compensation and suggested that Stovesand instead compensate him by purchasing a new computer for his office use. Stovesand rejected this alternative. Perkins subsequently approached both Victoria Neal, Stovesand's secretary, and Steve Anderson, the branch operations manager, who assured Perkins that this method of compensation was a routine and accepted practice.9 With these assurances, and at his branch manager's direction, Perkins proceeded to submit seminar receipts for "reimbursement."
Moreover, Perkins argues that the receipts he submitted, though false, were not intended to mislead or deceive. Perkins explains that the expense receipts he crafted were "obviously ludicrous," because they identified seminars taking place at "fleabag hotels" at unlikely times, such as Sunday mornings. No Prudential employee, argues Perkins, would rely on the information noted on the receipts.10 Perkins notes that he did not receive the full benefit of the $5,000 reimbursement amountbecause he paid income taxes on that amount and made a contribution to charity as required by Prudential. Perkins also notes that he has no prior disciplinary history.
We agree that there are mitigating circumstances, including Stovesand's role in implementing the compensation scheme at issue. We nevertheless sustain the NASD's finding of violation and the sanction it imposed.
In order to reduce a sanction imposed by the NASD, we must find, having due regard for the public interest and the protection of investors, that the NASD's sanction is excessive or oppressive or imposes an unnecessary burden on competition.11 We do not make such a finding on this record.
We recognize that Stovesand bears significant responsibility for the perpetration of the reimbursement scheme. As indicated earlier, Stovesand agreed to enter into a settlement in which he consented to the entry of findings regarding his conduct and was censured and fined $10,000. Nonetheless, although Perkins claims to have relied on the assurances of Stovesand and his coworkers that this unorthodox method of compensation suggested by Stovesand was permissible, Perkins recognized he was committing an inherently dishonest act by falsifying the receipts. The record is clear that at the time of creating the receipts, Perkins was concerned about the propriety of this conduct. He acknowledged that he recognized the possibility that the receipts might be used against him at a later point and thus submitted receipts that were "obviously ludicrous" in an effort to protect himself from reproach.
Because the NASD sanction guidelines do not address the specific misconduct at issue, we examine the reasoning offered by the NASD to determine whether the sanction it imposed is appropriate. The NASD reasoned that, because Prudential had not insisted upon restitution, the appropriate penalty did not require restitution to Prudential but did require Perkins to forfeit the payments he received through his deceptive actions. 12 The NASD thus increased the fine to $7,500 so that Perkins would be deprived of the money which he obtained through submitting false expense receipts and would pay an additional small fine.13 Under the circumstances, we find that the sanctions imposed are not excessive or oppressive.
An appropriate order will issue.14
By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY, and UNGER).
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10109
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Keith S. Perkins be, and it hereby is, sustained.
By the Commission.
1 NASD Conduct Rule 2110 requires adherence to "high standards of commercial honor and just and equitable principles of trade."
2 Perkins was associated with Prudential from 1984 until his resignation in August 1997. Perkins left Prudential of his own accord; the branch office manager at that time, Evan Collins, testified that he was "very sorry to see him go." Perkins currently is associated with another NASD member firm.
3 Stovesand testified that he has no recollection of the letter but assumes that he "probably" sent the letter to Clark. The record does not otherwise indicate whether Stovesand actually sent the letter or discussed the matter with Clark.
4 Stovesand and Perkins dispute whether Perkins was ever informed that Prudential explicitly had rejected the increased commission payment for his 1990 sales. Stovesand initially testified that he spoke to Clark about an increased commission payout for Perkins and that Clark refused to authorize it. Stovesand further testified that he informed Perkins of this refusal prior to suggesting the expense reimbursement scheme. However, under cross-examination, Stovesand testified that he did not recall the timing or content of any discussions he may have had with Clark regarding the commission issue. Perkins testified that he was "absolutely 100 percent sure" that Stovesand never told him that Prudential refused his commission increase and therefore assumed that Stovesand had the authority to provide the reimbursement payments as compensation.
5 Apparently, the branch office budget allocated a certain portion of funds for conducting seminars for prospective clients.
6 In addition to being fired by Prudential, Stovesand entered into a settlement with the NASD regarding his conduct in this matter and was censured and fined $10,000.
7 As a consequence, Perkins does not contest the censure.
8 Stovesand testified that the reimbursement scheme "was my idea."
9 Perkins testified that Neal told him that Stovesand had been paying another broker in this manner for years. Perkins further testified that when he approached Anderson about the proposed method of compensation, Anderson replied, "Yeah, I know. That's the way he does it."
10 Perkins contends that Prudential's decision to forgo restitution signifies the Firm's approval of the $5,000 payment to Perkins. We reject this reasoning. Prudential expressed its disapproval of Perkins' conduct by imposing a penalty on Perkins; the fact that the penalty chosen was a contribution to charity rather than restitution is irrelevant.
11 See Exchange Act Section 19(e)(2), 15 U.S.C. § 78s(e)(2). Perkins does not claim, and the record does not show, that the NASD's action has imposed an undue burden on competition.
12 As we have repeatedly explained, "the appropriate remedial action depends on the facts and circumstances of each particular case, and cannot be precisely determined by comparison with action taken in other cases." Patricia H. Smith, 52 S.E.C. 346, 348 (1995). See also Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973).
We note, however, that registered representatives who have received reimbursement under false pretenses have received harsher penalties than those imposed here. See DBCC v. Kwikkel-Elliott, 1998 WL 1084581 (N.A.S.D.R.) (registered representative and person associated with a member firm requested and received reimbursement for expenses she did not incur censured, fined, and barred from associating with any member firm in any capacity). See also DBCC v. Otto M. Bruun, 1998 WL 1084572 (N.A.S.D.R.) (registered representative and person associated with a member firm who requested and received reimbursement for seminar expenses he did not incur censured and barred from associating with any member firm in any capacity).
13 Although Perkins argues that he has not received the full benefit of the $5,000 reimbursement amount, because of taxes and other expenses he has incurred, we note that the fine imposed here is remedial in nature and is designed to deter future misconduct. It is not necessary for the fine to correspond exactly to the amount by which Perkins financially benefitted. See NASD Sanction Guidelines (1998 ed.) at 3.
14 We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.