Howard R. Perles and Laurence M. Geller
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45691 / April 4, 2002
Admin. Proc. File No. 3-10288
In the Matter of the Application of HOWARD R. PERLES
and LAURENCE M. GELLER
For Review of Disciplinary Action Taken by the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. |
: |
ORDER SUSTAINING IN PART DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
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 Howard R. Perles and Laurence M. Geller be, and it hereby is, sustained in part as set forth in the Commission's opinion; and it is further
ORDERED that the disciplinary sanctions and costs assessed be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
| 1 | I.A. Rabinowitz changed its name to IAR Securities in 1997. In 1998, IAR Securities merged with VTR and is now known as Fairchild Financial Group, Inc. |
| 2 | Rule 2110, previously designated Article III, Section 1 of the NASD's Rules of Fair Practice, requires that members "observe high standards of commercial honor and just and equitable principles of trade."
Rule 2120, previously designated as Article III, Section 18 of those rules, requires that "[n]o member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance." |
| 3 | Exchange Act Rule 17a-3 requires, in part, that every broker-dealer make and keep current certain books and records including: blotters (or other records of original entry); a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities; and a memorandum of each purchase and sale for the account of such broker-dealer showing the time of receipt, the terms and conditions of the order, and the account in which it was entered. 17 C.F.R. §17a-3. |
| 4 | Rule 3110, previously designated Article III, Section 21 of the NASD's Rules of Fair Practice, requires members to make and keep accurate records required by Section 17(a)of the Exchange Act and the rules promulgated by the Commission thereunder. Failure to do so also violates NASD Conduct Rule 2110. |
| 5 | The NASD also assessed costs. It dismissed charges that Perles and Geller aided and abetted an unregistered distribution. |
| 6 | Although VTR denied any involvement in the sale of Interiors to the Short-Term Investors, the Hearing Panel found that VTR arranged for the Short-Term Investors to purchase the shares from Interiors so that VTR could sell the stock to its retail customers. The Short-Term Investors acquired the stock with a view to distribution and were used by VTR to facilitate its unregistered distribution of 300,000 shares of Interiors to the public. |
| 7 | The NASD's complaint also named VTR and McCune. On December 11, 1998, the NASD accepted their offer of settlement. Without admitting or denying the allegations in the NASD's complaint, VTR and McCune consented to a finding that, among other things, they engaged in an illegal and unregistered distribution and fraudulent manipulation of Interiors common stock, did not disclose to customers the excessive compensation that they received from the distribution, and violated VTR's restriction agreement with the NASD that prohibited the firm from conducting retail trading as a principal. VTR was censured, required to pay restitution/disgorgement of $300,000 and fined $100,000 (jointly and severally with McCune). McCune was censured, fined $100,000 (jointly and severally) and suspended for eight months from associating with any NASD member firm in any capacity. |
| 8 | For example, at 11:24 A.M., I.A. Rabinowitz sold 10,000 shares of Interiors stock to VTR at $1.75 per share. At 11:42 A.M., VTR sold 10,000 shares of Interiors to I.A. Rabinowitz at $1.74 per share. |
| 9 | Automated Confirmation Transaction Service (the "ACT system"), an automated system operated by Nasdaq, is used by participants for, among other things, price and volume reporting, comparing and clearing pre-negotiated trades completed on Nasdaq and the OTC Bulletin Board Service, and disseminating trading information to the public. See NASD Systems and Programs Rule 6110. |
| 10 | Multiple trades executed at the same time have been combined. |
| 11 | At 12:43 Geller purchased 2,500 shares of Interiors from a firm other than VTR. |
| 12 | Sharon M. Graham, 53 S.E.C. 1072, 1080 (1998), aff'd, 222 F.3d 994, 1000 (D.C. Cir. 2000). |
| 13 | "Trading activity is a potent factor in evoking investor interest. That is why those who wish to stimulate such interest are tempted to create synthetic activity that entices investors into the marketplace by false pretenses." Edward J. Mawod & Co., 46 S.E.C. 865, 870 n.24 (1977), aff'd sub nom., Mawod v. SEC, 591 F.2d 588 (10th Cir. 1979). |
| 14 | Swartwood, Hesse, Inc., 50 S.E.C. 1301, 1307 (1992). See Brooklyn Capital & Sec. Trading, Inc., 52 S.E.C. 1286, 1290 (1997); Pagel, Inc., 48 S.E.C. 223, 226 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986). |
| 15 | "'Matched' orders are orders for the purchase/sale of a security that are entered with the knowledge that orders of substantially the same size, at substantially the same time and price, have been or will be entered by the same or different persons for the sale purchase of such security." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 205 n.25 (1976). |
| 16 | Mawod, 46 S.E.C. at 871-872. |
| 17 | Geller also claims that his trading in Interiors shares was not manipulative because it wasnot designed to affect artificially the price of the securities. Congress, however recognized that the creation of false market activity could be manipulative. Section 9 of the Securities Exchange Act of 1934, 15 U.S.C.§ 78i, proscribes matched orders when effectuated "[f]or the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or . . . with respect to the market for any such security." See Hochfelder, at 205 n.25. Moreover, the Commission previously has found that artificially creating the appearance of market demand for a stock can be manipulative. See Adrian C. Havill, 53 S.E.C. 1060, 1066 (1998) and cases cited in n.13; Swartwood, at 1306-1307; Thornton & Co., 28 S.E.C. 208, 209-210, aff'd per curiam, 171 F. 2d 702 (2d Cir. 1948); cases cited supra note 13. |
| 18 | See Graham, 53 S.E.C. at 1072, 1084. |
| 19 | Applicants complain that the NASD also found that Perles' and Geller's conduct violated Conduct Rule 2120, the NASD's antifraud rule, although they were not charged with this violation. In its opinion the NASD observed that, "[w]e also believe that Perles and Geller acted as primary violators of the NASD's antifraud rule, an allegation that was not made in the complaint." The NASD merely expressed the view that its staff could have alleged that Applicants' conduct constituted a primary violation. However, since the NASD staff did not allege that Applicants engaged in a primary violation of Conduct Rule 2120, the NASD did not discipline respondents for this violation. We have not considered the NASD's observation in our review of the NASD's action or assessment of sanctions. |
| 20 | The credibility determination of an initial fact-finder is entitled to considerable weight and deference, since it is based on hearing the witnesses' testimony and observing their demeanor. Keith L. DeSanto, 52 S.E.C. 316, 319 (1995), petition denied, 101 F. 3d 108 (2d Cir. 1996) (Table). "Such credibility determinations can be overcome only where the record contains 'substantial evidence' for doing so." Anthony Tricarico, 51 S.E.C. 457, 460 (1993). |
| 21 | Justine Susan Fischer, 53 S.E.C. 734, 741 (1998) (registered representative cannot use firm or its employees as a shield); Richard R. Perkins, 51 S.E.C. 380, 384 n.19 (1993) (Applicants' assertion that firm president and compliance officer, not Applicants, were responsible for the firm's markup policy and for ensuring primary compliance, even if true, is not determinative); Robert A. Amato, 51 S.E.C. 316, 320 n.17 (1993), aff'd, 18 F.3d 1281 (5th Cir.), cert. denied, 513 U.S. 928 (1994) ("It seems clear to us that the placing, by management, of primary compliance responsibility with respect to certain requirements with one component of a firm, [here the trading department] does not relieve other components of that firm [such as the sales force] of their responsibility."); Donald T. Sheldon, 51 S.E.C. 59 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995) (failure to supervise salesmen did not insulate those salesmen from liability under the antifraud provisions of the securities laws). |
| 22 | Geller asserts that the testimony of Stephen S. Wien, principal of Wien Securities Corp., corroborated his contention that there was "nothing unusual about the pricing of [his] trades." Wien testified generally about Wien's supervision of Geller, Geller's overall performance as an employee, and how Geller would have been supervised in 1995.
Wien opined that, in general, it was not unusual to receive buy and sell orders from the same broker in the course of a day; that there was nothing "unusual" about "shorting stock in a rising market"; and that "as far as a trader is concerned, whatever he can make on a trade, he'll take." When asked if it was unusual that all but one of the 40 trades between Geller and VTR were executed at 1/64 when the inside spread differential was at least 12.5 cents, Wien replied that, "the profit is unusual to the extent that it was only a pennyand change." Wien also stated that he did not "recall what the specifics were" of "this one particular incident" or "specifically what Mr. Geller told me about it." Wien also could not remember if he had been in the office on April 20 or 21, 1995. We conclude that Wien's testimony was not relevant to whether these particular trades were prearranged. |
| 23 | See n.19, supra. |
| 24 | The NASD also found that Perles and Geller engaged in wash trading. We set aside this finding based on evidence in the record. The beneficial ownership of the stock changed as the shares were transferred from Interiors to the Short-Term Investors, through VTR, and ultimately to VTR's retail customers. |
| 25 | Geller argues that the NASD's finding should be set aside in light of Yoshikawa v. SEC, 192 F. 3d 1209, 1219-20 (9th Cir. 1999). Yoshikawa involved securities transactions known as "parking," "where the trades are simply a sham used to conceal temporarily the true ownership of the securities" for the purpose of avoiding the Commission's net capital requirements. In Yoshikawa, the court concluded that, with one exception, there was insufficient evidence that trades were not bona fide. For the reasons discussed above, we find Geller's trades with VTR were matched trades, creating the artificial appearance of market activity and, hence, not bona fide. |
| 26 | Graham v. SEC, 222 F.3d at 1004. |
| 27 | See Graham, 53 S.E.C. at 1077. |
| 28 | Perles and Geller claim that the NASD disregarded Noble's testimony "without explanation" in violation of the Commission's holding under Warren R. Schreiber, 53 S.E.C. 912 (1998) (NASD disciplinary matter remanded for clarification of the basis for certain credibility findings, where the record cast doubt on the reliability of Applicant's accuser and did not reveal whether the NASD, in making its determinations, took into account "substantial" evidence in the record that contradicted the accuser's allegations). Although the NASD was unable to assess Noble's demeanor because he did not testify at the hearing, a transcript of his testimony was introduced as evidence. The NASD "considered all of the arguments of the parties" in finding prearrangement. Unlike Schreiber, the documentary and circumstantial evidence here fully supports the NASD's conclusion that Noble's trades with Perles and Geller were prearranged. |
| 29 | "The scope of a consent judgment must be ascertained within its four corners." SEC v. Gellas, 1 F. Supp.2d 333, 336 (1998) (citing United States v. Armour & Co., 402 U.S. 673, 682 (1971)), aff'd, 182 F.3d 901 (2d Cir. 1999); United States v. Int'l Bhd. of Teamsters, 141 F.3d 405, 408 (2d Cir. 1998). |
| 30 | Applicants also contend that the NASD improperly disregarded two press releases issued by Interiors on April 18 and 20, 1995 which purportedly explain the market activity in the stock during the period under review. Neither Perles nor Geller testified that he saw the press releases or that his trading was influenced by these documents. Although the press releases may have motivated other market participants, there is no evidence that they were relevant to Perles' or Geller's prearranged trading with VTR. The NASD gave due consideration to the press releases, as have we. |
| 31 | Perles and Geller assert that they lacked economic or other motivation to participate or assist in a manipulative scheme. Perles states that he was a salaried employee and did not receive commissions or performance-based bonuses. His 1995 tax return and Form W-2 show that he earned $35,100 and had income from other sources of less than $1,000. Geller states that the amount that he earned was a de minimus part of his compensation, which, based on the profits he made for Wien, totaled between $250,000 and $300,000 in 1995. However, the absence of profit from manipulative conduct does not negate thatconduct. Brooklyn Capital, 52 S.E.C. at 1293 n.32 citing R. B. Webster Investments, Inc., 51 S.E.C. 1269, 1274 (1994). |
| 32 | Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164, 191 (1994) (aiding and abetting liability is not available in a private right of action for damages under Section 10(b) of the Exchange Act of 1934). |
| 33 | The NASD notes that it has long brought disciplinary actions against aiders and abettors of primary violators who engage in manipulative or deceptive conduct. We have affirmed consistently those cases on appeal. See, e.g., Randolph Pace, 51 S.E.C. 361 (1993) (aiding and abetting liability under NASD antifraud provisions, previously designated Article III, Section 18, and just and equitable principles of trade, previously designated Article III, Section 1); Kirk A. Knapp, 50 S.E.C. 858 (1992) (aiding and abetting liability under Article III, Section 18); H.C. Keister & Co., 43 S.E.C. 164 (1966) (aiding and abetting liability under Article III, Sections 1 and 18); and Richard A. Holman, 41 S.E.C. 252 (1962) (also involving Article III, Section 18).
In view of our finding that Applicants' prearranged, matched trades with VTR were inconsistent with just and equitable principles of trade, alone sufficient to uphold the sanctions, we do not address whether Perles and Geller violated Rule 2120 by aiding and abetting VTR's prearranged trades. |
| 34 | See Joseph G. Chiulli, Exchange Act Rel. No. 42359 (Jan. 28, 2000), 71 SEC Docket 1544 (general securities representative violated Conduct Rules 2110 and 3110 by failing to preserve books and records). See Gilad J. Gevaryahu, 51 S.E.C. 710 (1993) (financial operations principal failed to reflect a liability on a member firm's month-end financial statements in violation of Article III, Sections 1 and 21(a) of the Rules of Fair Practice); Richard G. Strauss, 50 S.E.C. 1316 (1992) (former trader violated Article III, Sections 1 and 21(a) of the Rules of Fair Practice by failing to prepare order tickets for executed transactions and by writing false order tickets for transactions that had not been executed). |
| 35 | See Goldman, Sachs & Co., Exchange Act Rel. No. 33576 (Feb. 3, 1994), 55 SEC Docket 3208, 3215 (settlement) (broker-dealer did not reflect on its books, including its blotters, that prearranged, circular trades were negotiated with the same party to eliminate risks, or that there was any connection between the trades); Jay Joseph Buck, Exchange Act Rel. No. 31496 ( Nov. 23, 1992), 52 SEC Docket 4114, 4117 (settlement) (broker did not reflect, or cause the firm to reflect, certain agreements with customers, but reflected these transactions as unrelated sales). |
| 36 | Although the NASD found that Perles and Geller committed recordkeeping violations, the sanctions imposed on Applicants were based on the manipulation violation only. The NASD concluded that recordkeeping violations were "incidental to and subsumed by the prearranged trading." |
| 37 | Butz v. Glover Livestock, 411 U.S. 183, 183 (1973); Christopher J. Benz, 52 S.E.C. 1280, 1285 (1997), petition denied, 168 F.3d 478 (3d Cir. 1998) (Table) ; Patricia H. Smith, 52 S.E.C. 346, 348 (1995). |
| 38 | See, e.g., Richard J. Puccio, 52 S.E.C. 1041, 1045 (1996). |
| 39 | In 1990 Perles settled charges brought by the Alabama Securities Commission alleging that he sold securities that were not registered in Alabama. In 1992 Perles settled a complaint by the NASD's Market Surveillance Committee alleging that Perles had assisted in an unregistered distribution of stock; Perles was fined $5,000 and suspended for five business days from associating with any NASD member in any capacity. In 1995 Perles settled an administrative proceeding brought by the Commission which charged him with violating Sections 5(a) and 5(c) of the Securities Act of 1933 by facilitating sales of unregistered stock; Perles was suspended for three months and ordered to desist from further violations. |
| 40 | Perles filed a Motion in Limine to preclude the Panel's consideration of his previously-settled disciplinary matters. The Panel determined that the prior regulatory settlements could be admitted on the issue of sanctions. Although Perles did not file a separate motion with the Commission, in his Reply Brief, Perles asserts that the NASD improperly used Perles' disciplinary history as evidence of prior violations in imposing sanctions against him and that language contained in the settlement documents expressly prohibits their consideration. Perles requests that the Commission take "official notice" of the Commission and NASD settlement documents. Applicant attached to his Reply Brief a copy of the NASD's Offer of Settlement.
The NASD argues that, because Perles did not introduce his prior settlement documents before the NASD, Perles' request before the Commission is an inappropriate attempt to adduce new evidence. In its Objection to Applicant Perles' Motion for Official Notice and Motion to Strike New Evidence filed with the Commission, the NASD contends that the only "evidence in the record" regarding Perles' prior disciplinary settlements is the Central Registration Depository Information report ("CRD") which the NASD introduced as an exhibit at the hearing. We hereby deny the NASD's motion. The issue of Perles' disciplinary record was raised by the NASD at the disciplinary hearing. Contrary to the NASD's claim, the settlement documents do not constitute "new evidence." The CRD summaries are based on and incorporate by reference the underlying settlement documents. |
| 41 | R. B. Webster Investments, Inc., 51 S.E.C. 1269, 1278 n.37. (NASD improperly considered an offer of settlement for purposes of disciplinary history where "the plain language of the consent order unequivocally states that it may not be used in another proceeding"). |
| 42 | The language in the Commission settlement does not track normal Commission practice. We believe that such limitations on the use of settlements are inappropriate. |
| 43 | See Stonegate Sec., Inc., Exchange Act Rel. No. 44933 (Oct. 15, 2001), 76 SEC Docket111, 122; James Harvey Thornton, 53 S.E.C. 1210, 1217 (1999), aff'd, 199 F.3d 440 (5th Cir. 1999) (Table); Thomas A. Sartain, Sr., 47 S.E.C. 206, 213 (1980). |
| 44 | Steven B. Theys, 51 S.E.C. 473, 480 (1993); Randolph K. Pace, 51 S.E.C. at 372. |
| 45 | See Steadman v. SEC, 603 F. 2d 1126, 1140 (5th Cir. 1979). |
| 46 | NASD Sanction Guidelines, p.1. The NASD's "General Principles Applicable to All Sanction Determinations" further state: "[a]n important objective of the disciplinary process is to deter future misconduct by imposing progressively escalating sanctions on recidivists. For this reason, when appropriate, Adjudicators should consider a respondent's relevant disciplinary history in determining sanctions. Relevant disciplinary history may include . . . (b) past misconduct that, while unrelated to the misconduct at issue, evidences prior disregard for regulatory requirements, investor protection, or commercial integrity." Guidelines, p.3. |
| 47 | Geller has been the subject disciplinary action by the NASD: in 1990 he was censured, fined $1,500 and suspended for one business day for failing to honor four arbitration awards. However, the NASD found Geller's prior disciplinary history insignificant and did not consider it in determining his sanction. |
| 48 | Perles makes several arguments against considering his disciplinary history based on the Federal Rules of Evidence. These arguments have no merit. NASD Rule 9346 (g) specifically provides that "the formal rules of evidence shall not apply" to NASD disciplinary proceedings. |
| 49 | See 15 U.S.C. § 78s(e)(2). Applicants do not argue that the sanctions impose a burden on competition, and we find none. |
| 50 | We have considered all of the Applicants' 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. |