Sandra K. Simpson and Daphne Ann Pattee
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45923 / May 14, 2002
Admin. Proc. File No. 3-9458
In the Matter of SANDRA K. SIMPSON
and DAPHNE ANN PATTEE
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ORDER IMPOSING REMEDIAL SANCTIONS AND NOTICE OF FINALITY
On the basis of the Commission's opinion issued this day, it is
ORDERED that Sandra K. Simpson ("Simpson") be barred from association with any broker-dealer, or with a member of a national securities exchange or of a registered securities association; and it is further
ORDERED that Simpson cease and desist from committing or causing any violation and committing or causing any future violation of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and it is further
ORDERED that Simpson disgorge her illegal profits jointly and severally with Daphne Pattee in the amount of $33,769.21 plus prejudgment interest from April 1, 1995, through the last day of the month preceding the month in which payment is made at the rate of interest established under Section 6612(a)(2) of the Internal Revenue Code, 28 U.S.C. § 6612(a)(2), compounded quarterly, pursuant to Rule 600 of the Commission's Rules of Practice.; and it is further
ORDERED that Simpson pay a civil money penalty of $100,000.
Notice is hereby given, pursuant to Rule 360(e) of our Rules of Practice that the initial decision of the administrative law judge,* as modified herein, with respect to Daphne Ann Pattee ("Pattee") has become the final decision of this Commission by operation of Rule 360(d)(1) of our Rules of Practice. The order contained in that decision (1) bars Pattee from being associated with any broker-dealer or a member of any national securities exchange or registered securities association; (2) directs Pattee to cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, or Rule 10b-5 promulgated thereunder; and (3) imposes a civil penalty of $50,000 on Pattee; That order is hereby declared effective. To the extent the initial decision orders Pattee to pay disgorgement, that order is modified to provide that Pattee shall, jointly and severally with Simpson, disgorge $33769.21 plus prejudgment interest from April 1, 1995, through the last day of the month preceding which payment is made at the rate of interest established under Section 6612(a)(2) of the Internal Revenue Code, 28 U.S.C. § 6612(a)(2), compounded quarterly, pursuant to Rule 600 of the Commission's Rules of Practice.
Simpson's and Pattee's payments of the civil money penalty and disgorgement shall be: (i) made by United States postal money order, certified check, bank cashier's check, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549 within thirty days of the date of this order; and (iv) submitted under cover letter which identifies Simpson as the respondent in this proceeding, and the file number of this proceeding. A copy of this cover letter and check shall be sent to Gregory P. von Schaumberg, Counsel for the Division of Enforcement, Securities and Exchange Commission, Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and it is further
ORDERED, that within sixty (60) days after payment of funds or other assets, in accordance with the disgorgement required by this Order, the Division of Enforcement shall submit a proposed plan for the administration and distribution of disgorgement funds in accordance with Rule 610 of our Rules of Practice.
By the Commission.
Jonathan G. Katz
Secretary
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| 1 | 15 U.S.C. §§ 77q(a) and 78j(b), 17 C.F.R. § 240.10b-5. Pattee did not appeal the Initial Decision, and the time for appeal has expired. The order accompanying this opinion makes the Initial Decision of the administrative law judge, as herein modified, final as to Pattee. |
| 2 | Pattee's monthly salary of $3,000 depended, at least formally, on her production of at least $3,000 to $5,000 in commissions each month. However, Simpson testified that Pattee received the full salary even when her production did not meet the target figure. |
| 3 | Although Simpson could not discharge Pattee on her own authority, she could ask to be "disassociated" from Pattee. That request would have effectively ended Pattee's employment at Prudential. |
| 4 | Of course, the commissions earned by Pattee's efforts were credited to Simpson, so in monitoring her own compensation Simpson would have been aware of the commissions produced for her by Pattee. |
| 5 | In addition, Prudential had contests rewarding registered representatives who opened the most Command Accounts. Simpson often won valuable prizes in these contests. |
| 6 | The following were identified as easy targets among the Simpson customers involved in this case: Milton and Bonnie Bain; Evelyn Burdgick; Barbara Congdon; Norman and Margaret Cooper; James and Jane Corder; George and Dorothy Davis; David and Dixie Donakowski; Audrey Kindell; Beverley Look; Pauline Ronald and Clarence Mathis; Margie McCoy; Lela Phelps; Raymond and Evelyn Trudell; and Donald Watters. |
| 7 | An LOA is a Prudential form that, when signed by the customer, directs Prudential to transfer funds or securities between accounts. |
| 8 | During a subsequent investigation of Simpson's and Pattee's activities described below, Prudential's investigator discovered customer files and signed, blank LOAs retained in Simpson's office in violation of Prudential policies.
Contrary to Simpson's suggestion in her brief, Prudential's investigator did not confuse documents from Pattee's and Simpson's files when he made the search. The investigator directed Simpson to move any files of Pattee's out of her office, and when Simpson completed that removal, he secured Simpson's office and searched it in her absence. |
| 9 | For the quarter ended December 31, 1992, Simpson had approximately 200 active accounts. For the quarter ended December 21, 1993, Simpson had approximately 185 active accounts. For the quarter ended December 31, 1994, Simpson had approximately 240 active accounts. |
| 10 | But see n.19 infra. |
| 11 | While Simpson asserted that she thought Gerald Coutourier had authorized the sale, the law judge observed in his decision that his credibility finding regarding Patricia Coutourier's testimony was corroborated by the Coutouriers' strenuous efforts to undo the transaction. |
| 12 | "Break points" are the reduced commissions charged by funds for larger purchases. The three purchases described above would have qualified in the aggregate for a break-point reduction of sales charges from 5.75 percent to 4.5 percent had Simpson requested the reduction. |
| 13 | Simpson claims that McCoy directed her to sell the WalMart stock and characterizes the disagreement as a "mis-communication." The law judge credited Bontrager's testimony and further found that McCoy's efforts to reverse the transaction corroborated Bontrager's testimony. |
| 14 | Simpson claimed that she quoted a price of "par and one-half" or $.50 over par. At the time, the Sheredys' existing funds had unequal balances. Simpson claimed that the Sheredys directed her to equalize the fund balances with the proceeds of the Fannie Mae securities. Accordingly, she invested different amounts of the proceeds in each fund. |
| 15 | Prudential told the Sheredys that there was nothing that could be done about their complaints because Simpson had received no commission on the transaction. |
| 16 | The annualized turnover rate is a ratio computed by dividing the aggregate amount of purchases in an account by the average monthly investment. It represents the number of times during a year that the securities in an account are replaced by new securities. Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 n.10 (1989). |
| 17 | The annualized break-even rate of return represents the rate of return on a customer's average net equity required to pay commissions and other expenses before the account begins to show a profit for the customer. Id. at 1121. |
| 18 | There was another forged LOA dated January 17, 1991, transferring $1381 from Congdon's account to another customer named "Oliver Benjamin." This unauthorized transfer predates Pattee's association with Simpson. |
| 19 | The Division's trading practices expert interviewed Watters to verify his expressed interest in speculative investing. Watters told her that he had no interest in investing in speculative securities. On the basis of that interview, the expert opined that Watters was a conservative investor, despite the notation on his account application. Simpson has not disputed the expert's opinion. |
| 20 | The record does not contain information to attribute the forged signature. |
| 21 | Pattee made unauthorized trades in the Coopers' accounts before May 1991. |
| 22 | There was another forged LOA on December 17, 1990, transferring $2,000 from the Coopers' account to another customer. This unauthorized transfer predates Pattee's association with Simpson. |
| 23 | While Simpson testified that she was unaware of the activity in the account and the complaint, Hester testified that Simpson always carefully reviewed trade tickets, confirmations, and productivity reports for her accounts. See text accompanying n.4 supra. |
| 24 | Pattee misled Mathis regarding the status and value of her account. At the opening of the account, Pattee told Mathis that she would not have to pay commissions. Periodically, Pattee assured Mathis that her monthly income checks were paid from the account's earnings; in fact, the income checks were paid out of principal. |
| 25 | The Division's handwriting expert's 1995 report to Prudential appears to attribute the signatures on the LOAs to Simpson. However, the expert was not able to review the original documents before testifying at the hearing, and did not testify regarding them. Pauline Mathis specifically disclaimed the signatures on the subject LOAs in her testimony. |
| 26 | Pauline Mathis does not have a sister. |
| 27 | Pattee misled the Trudells. When Raymond Trudell asked about his poor investment performance, Pattee characterized the losses in the account as only "paper losses" that need not concern him. |
| 28 | SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1471 (2d Cir.1996), cert. denied, 522 U.S. 812 (1997). |
| 29 | Simpson further asserts that, because she was not licensed as a supervisor, she cannot be held liable as a supervisor for Pattee's unlawful acts. Simpson, however, was not charged with failure reasonably to supervise Pattee. |
| 30 | See n.3 supra |
| 31 | Simpson's unlawful activity in the accounts she serviced herself, her disregard of serious and repeated customer complaints, failure timely to raise issues regarding Pattee's conduct despite Simpson's exacting review of account activityreports, and attempts to cover up her activities fatally undermine Simpson's claim that she was a "whistle-blower" with respect to Pattee's activities. |
| 32 | Wallace Vanstrat, Simpson's retained handwriting expert, testified that Simpson did not forge any of the signatures that he examined. The law judge found, as we find, that the Division's handwriting expert presented lengthy and detailed analysis at the hearing, and that analysis was persuasive, while Vanstrat's more conclusory opinion rejecting Simpson's possible authorship of several samples was not.
Moreover, Vanstrat did not examine, or express an opinion with respect to, several documents that the Division's expert classified as forgeries by Simpson, in particular the following: undated Command Account agreements for Watters' account and an LOA transferring $3,000 from the Trudells' account. |
| 33 | We accept a law judge's credibility finding unless substantial evidence suggests that we should not do so. See Laurie Jones Canady, Securities Exchange Act Rel. No. 41250 (April 5, 1999), 69 SEC Docket 1468, 1480, aff'd 230 F.3d 362 (D.C. Cir. 2000); Sharon M. Graham, 53 S.E.C. 1072, 1087 n.39 (1998), aff'd, 222 F.3d 994 (D.C. Cir. 2000); Jay Houston Meadows, 52 S.E.C. 778, 784 (1996), aff'd, 119 F.3d 1219 (5th Cir. 1997). |
| 34 | See e.g., PECO Energy Co. v. Boden, 64 F.3d 852, 859 (3d Cir. 1995)("A person's admission that he stole for someone else is as much against his interest as an admission that he stole for himself."). |
| 35 | Pattee's and Maul's testimony also was corroborated by the attorney Prudential ordered to investigate the customer complaints regarding the Flint branch office. He discovered numerous signed, but blank, LOA forms and customer records in Simpson's office, as Pattee and Maul had described. |
| 36 | Donald A. Roche, 53 S.E.C. 16, 24 (1997); see also Messer v. E. F. Hutton & Co., 847 F.2d 673, 678 (11th Cir. 1987); Brophy v. Redivo, 725 F.2d 1218, 1220-21 (9th Cir. 1984); SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992). |
| 37 | Roche, 53 S.E.C. at 24. |
| 38 | Cf. Neil C. Sullivan, 51 S.E.C. 974, 976 n.1 (1994) (review of NASD proceeding); Frank Custable, 51 S.E.C. 643, 650 (1993) (same). |
| 39 | In 2001, the Commission approved a National Association of Securities Dealers, Inc. ("NASD") rule that requires member firms to deliver to their non-institutional customers, prior to or at the opening of a margin account, a disclosure statement discussing the operation of margin accounts and the risks associated with trading on margin. The NASD proposed this rule in response to the growth in the level of customer margin account balances and the increase in customer inquiries and complaints to both the Commission and the NASD. Exchange Act Rel. No. 44223 (Apr. 26, 2001), 74 SEC Docket 2203. |
| 40 | J. Stephen Stout, Securities Exchange Act Rel. No. 43410 (Oct. 4, 2000), 73 SEC Docket 1441, 1460. |
| 41 | Id. at 1461 (Balasko and Hergensreder accounts). |
| 42 | The only possible exception is Donald Watters, who listed "speculation" as one of his investment objectives. We conclude that Watters sought conservative investments. See n.19 supra. |
| 43 | In addition, certain individual securities purchased for the customers were unsuitable for their investment objectives. In the case of Audrey Kindell, an extremely conservative investor for whom the purchase of any kind of risky security was unsuitable, the purchase of two speculative stocks was unsuitable. Similarly, the purchase of a mutual fund with a substantial sales charge (as opposed to a more liquid money market fund) was not suitable for Cardinal who had a foreseeable near-term need for cash. See Stout, 73 SEC Docket at 1461. |
| 44 | See Costello v. Oppenheimer, 711 F.2d 1361, 1369 (7th Cir. 1983); Miley v. Oppenheimer & Co., 637 F.2d 318, 333 (5th Cir. 1981). |
| 45 | See Joseph J. Barbato, 53 S.E.C. 1259, 1277 (1999). As we noted in Barbato, we have found excessive trading based on turnover ratios of less than 4. See also, Donald A. Roche, 53 S.E.C. at 21 (turnover ratio of 3.3); Samuel B. Franklin & Co., 42 S.E.C. 325, 328 (1964)(turnover ratio of 3.5). Although some of the turnover ratios in this case are rather low, the extremely conservative investment objectives of some of these customers, and their anxiety about equity ownership and equity trading support the finding that even these relatively low levels of trading are excessive.
Simpson asserts that the Division used an inappropriately abbreviated sample of transactions (the periods analyzed ranged from a low of six months to a high of 47 months) in the customer accounts to evaluate possible excessive trading and churning. Simpson argues that these periods result in artificially high values for the annualized turnover rate and the annualized break-even rate of return. However, we have held that the customary period to use to determine whether an account has been excessively traded is the period during which the allegedly excessive trading occurred. Canady, 69 SEC Docket at 1476-77. That the broker whose activity is subject to review managed to obey the securities laws at one time does not insulate her from liability. See id. at 1476 n.10. |
| 46 | See Stout, 73 SEC Docket at 1459; Timoleon Nicolaou, 51 S.E.C. 1215 (1994). |
| 47 | Olson v. E.F. Hutton & Co., 957 F.2d 622, 628 (8th Cir. 1992) (quoting Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1416 (11th Cir. 1983)). See also Miley, 637 F.2d at 324; McNeal v. Paine Webber, Jackson & Curtis, Inc., 598 F.2d 888, 890 n.1 (5th Cir. 1979) |
| 48 | Rizek v. SEC, 215 F.3d 157, 162 (1st Cir. 2000), Hotmar v. Lowell H. Listrom & Co., Inc., 808 F.2d 1384, 1385 (10th Cir. 1987), Shad v. Dean Witter, Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986), Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir. 1980). |
| 49 | Donald A. Roche, 53 S.E.C. 16, 22 (1997) (scienter element separates churning, an antifraud violation, from excessive trading.) |
| 50 | In its brief, the Division requested that we find that Simpson exercised de facto control over some or all of the 13 accounts where the law judge found a lack of control. This issue was not raised in the Petition for Review and is not before us. Rule 411(d), 17 C.F.R. § 201.411(d). |
| 51 | See discussion in section III.D, supra. Although Simpson controlled the trading in the Milton and Bonnie Bain accounts, we do not find, under the facts here, that trading in those accounts was excessive under either the annualized turnover ratio (1.66) or the annualized break-even rate-of-return analysis (8.3%). The break-even rate falls significantly short of the lowest levels we have found to constitute excessive trading, and is coupled with a relatively low turnover ratio. |
| 52 | See n.51, supra. |
| 53 | See DWS Securities Corp., 51 S.E.C. 814, 820 n.24 (1993); SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982). |
| 54 | Steadman v. SEC, 450 U.S. 91, 102-03 (1980). |
| 55 | Simpson also objects to the law judge's post-hearing decision to exclude Simpson's proposed counter-findings of fact and conclusions of law. The Division moved to exclude Simpson's pleading because it did not provide appropriate record citations for each proposed finding of fact as required by Commission Rule 340(b). Rule 340(b), 17 C.F.R. § 201.340(b). Rule 180(b) permits the law judge to exclude material that does not conform to the rules. Rule 180(b), 17 C.F.R. § 201.180(b). The law judge noted that the citations that Simpson provided merely identified the witness in whose testimony the alleged fact could be found, requiring a search of the entire testimony to verify the claim that the record supported the proposed finding. We have conducted an independent review of the entire record, including the proposed findings of fact which the law judge excluded. Accordingly, we conclude that Simpson is not harmed by the law judge's ruling. |
| 56 | Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 185 (1973). |
| 57 | 15 U.S.C. § 78o(b)(6)(A)(i). See also, Exchange Act § 19(h)(3)(B), 15 U.S.C. § 78s(h)(3)(B) (authorizing the Commission to suspend or bar a respondent from association with a member of an exchange or a registered securities association). In evaluating whether sanctions under Exchange Act Section 15(b)(6) are in the public interest we look for guidance to the factors the United States Court of Appeals for the Fifth Circuit identified in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). These factors are: the egregiousness of the respondent's actions; the isolated or recurrent nature of the violation; the degree of scienter involved; the sincerity of the respondent's assurances against future violations; respondent's recognition of the wrongful nature of its conduct; and, the likelihood that respondent will have opportunities for future violations. |
| 58 | 15 U.S.C. § 78u-2. To determine whether civil penalties are in the public interest, we examine whether the illegal activities involved, among other acts, deliberate or reckless disregard of a regulatory requirement; the harm caused to another person; the extent to which any person was unjustly enriched; the respondent's prior disciplinary history; deterrence; and other matters as justice may require. 15 U.S.C. § 78u-2(c). |
| 59 | 15 U.S.C. § 78u-3(a). |
| 60 | Although the Bain accounts were not churned, see n. 51, supra, we find that they were subject to unauthorized trading. |
| 61 | Responding to our April 23, 2002 order requesting additional briefing regarding the award of disgorgement for non-churning violations, the Division requested that we award additional disgorgement for violations that occurred outside the period the law judge used to craft his award. This issue was not litigated below. The lack of specificity in the record and in the Division's filing does not allow us to identify particular transactions for which the additional disgorgement would be awarded. Accordingly, we decline the Division's suggestion. |
| 62 | 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 herein. |
| * | Sandra Simpson and Daphne Pattee, Initial Decision Rel. No. 148 (Sept. 21, 1999). |