John R. D'Alessio, and D'Alessio Securities, Inc.

Securities Exchange Act of 1934
Rel. No. 47627 / April 3, 2003

Admin. Proc. File No. 3-10460

In the Matter of the Application of JOHN R. D'ALESSIO, and D'ALESSIO SECURITIES, INC. For Review of Disciplinary Action Taken by the NEW YORK STOCK EXCHANGE, INC.

ORDER SUSTAINING DISCIPLINARY ACTION TAKEN
BY NATIONAL SECURITIES EXCHANGE

On the basis of the Commission's opinion issued this day, it is

ORDERED that the disciplinary action taken by the New York Stock Exchange, Inc. against John R. D'Alessio and D'Alessio Securities, Inc., be, and it hereby is, sustained.

By the Commission.

Endnotes

¹ 15 U.S.C. § 78k(a). Section 11(a), subject to certain exemptions not relevant here, makes it "unlawful for any member of a national securities exchange to effect any transaction on such exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion."

² 17 C.F.R. § 240.11a-1. Rule 11a-1, with certain exceptions not relevant here, prohibits an exchange member, while on the trading floor, from initiating any transaction in any security traded on the exchange for any account "in which such member has an interest, or for any such account with respect to which such member has discretion."

³ NYSE Rule 90(a) prohibits a member or member organization from effecting any transaction in any security "for his or its account, the account of an associated person, or an account with respect to which the member, member organization or an associated person thereof exercises investment discretion."

⁴ NYSE Rule 95(a) provides that "[n]o member while on the Floor shall execute or cause to be executed on the Exchange, . . . any transaction for the purchase or sale of any stock with respect to which transaction such member is vested with discretion as to (1) the choice of security to be bought or sold, (2) the total amount of any security to be bought or sold, or (3) whether any such transaction shall be one of purchase or sale."

⁵ NYSE Rule 111(a) provides that "[n]o member shall initiate transactions, while on the Floor, for an account in which he has an interest."

⁶ NYSE Rule 91 prohibits a member from crossing trades of a customer with an account in which the member or its member organization, among others, "is directly or indirectly interested," without first ensuring that the order has an opportunity for an improved price on the Exchange floor and providing notification to, and obtaining acceptance of the trade from, the member who placed the trade.

⁷ NYSE Rule 92 prohibits a member from purchasing or selling a security for an account in which the member or its member organization, among others, "is directly or indirectlyinterested" while holding an unexecuted order for a customer on the same side of the market.

⁸ NYSE Rule 440 requires brokers and dealers to make and preserve books and records prescribed by the NYSE and by Exchange Act Rules 17a-3 and 17a-4.

Exchange Act Rules 17a-3 and 17a-4 require brokers and dealers to keep and preserve current books and records regarding executed securities transactions and customer accounts. 17 C.F.R. §§ 240.17a-3 and 240.17a-4.

⁹ As the Exchange formulated the sanctions, all aspects of the bar apply to both D'Alessio and the Firm. However, because D'Alessio Securities is a corporation it cannot be an employee and, therefore, the bar with respect to employment with any member or member organization or employment on the floor of the Exchange is applicable only to D'Alessio.

¹⁰ See New York Stock Exchange, Inc., Exchange Act Rel. No. 41574 (June 29, 1999), 70 SEC Docket 153, 155 (Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Ordering Compliance With Undertakings).

¹¹ Securities Acts Amendments of 1975, S. Rep. No. 94-75, at 60-69 (1975); Securities Reform Act of 1975, H.R. Rep. No. 94-123, at 54-57 (1975).

¹² Exchange Act Rel. No. 7330 (June 2, 1964).

¹³ New York Stock Exchange, Inc., 70 SEC Docket at 156.

¹⁴ S. Rep. No. 94-75, at 63-65 (1975). Congress identified as one of its primary concerns the potential for conflicts of interest arising from the combination of money management and brokerage functions. Id. Specifically, Congress noted the danger of a broker executing transactions for its managed account ahead of transactions for the same securities for its other customers. Id.

¹⁵ NYSE Rules 90(a) and 111(a) - which are also implicated in this disciplinary matter - prohibit a member from effecting a transaction for the member's account or an account in which the member has an interest, respectively.

¹⁶ From August 1979 until November 1982, D'Alessio was a lessee member; from November 1982 until November 1988, he was a physical access member; and from November 1988 until December 1993, he was a lessee member.

¹⁷ A not-held instruction on a market order to buy or sell securities indicates that the customer has given the floor broker time and price discretion in executing the best possible trade, but will not hold the broker responsible if the best deal is not obtained.

¹⁸ D'Alessio testified that, in his view, the number of shares listed on an order ticket relating to the Oakford account did not reflect an instruction to buy or sell that amount of shares but, rather, reflected the maximum number of shares D'Alessio could buy or sell. In the four-month trading period analyzed by the Exchange, D'Alessio rarely bought or sold the full number of shares stated on an Oakford order ticket. For example, he typically executed only 5,000 to 10,000 shares from a 25,000-share order.

¹⁹ D'Alessio's typical trading pattern for the Oakford account began with a market-not-held order which he would partially execute. He would then time stamp another market-not-held order for the same number of shares as the partial execution, but on the opposite side of the market. D'Alessio made a profit for the Oakford account by executing the second order if the market conditions were favorable. After executing the second order, D'Alessio would report the execution to Oakford and create a new order for the stock for the same number of shares and on the same side of the market as the initial order. According to D'Alessio, this new order replaced the original, partially executed order. At this point, the process could begin again.

²⁰ See U.S. v. Oakford Corp., 1999 WL 1201725 (S.D.N.Y. 1999).

²¹ See SEC v. Oakford Corp., 98 Civ 1366 (S.D.N.Y. Feb. 25, 1998); see also SEC v. Oakford Corp., Litigation Rel. No. 15653 (Feb. 25, 1998), 66 SEC Docket 1869.

²² See SEC v. Oakford Corp., Litigation Rel. No. 16497 (Mar. 31, 2000), 72 SEC Docket 406, 407.

²³ On May 2, 2001, D'Alessio and the Firm settled the Commission's civil action by consenting to judgments, without admitting or denying the allegations, that permanently enjoined them from violating provisions of Section 11(a) of the Exchange Act, Exchange Act Rule 11a-1, and from violating the antifraud, and recordkeeping and reporting requirements of the federal securities laws. SEC v. Oakford Corp., Litigation Rel. No. 16984 (May 2, 2001), 74 SEC Docket 2491. D'Alessio also consented to pay $200,000 in disgorgement and prejudgment interest. Id.

²⁴ See U.S. v. Oakford Corp., 1999 WL 1201725 at *2 n.2 (S.D.N.Y. 1999).

²⁵ On February 25, 1998, after the filing of criminal indictments against Applicants, the NYSE summarily suspended D'Alessio and the Firm pursuant to NYSE Rule 475(b).

²⁶ New York Stock Exchange, Inc., Exchange Act Rel. No. 41574 (June 29, 1999), 70 SEC Docket 153.

²⁷ Id. at 155.

²⁸ Id.

²⁹ Id. at 161-163.

³⁰ NYSE Rule 407A. See also Securities Exchange Act Rel. No. 44769 (Sept. 6, 2001), 75 SEC Docket 2194.

³¹ NYSE Rule 407A.

³² New York Stock Exchange, Inc., 70 SEC Docket at 156.

³³ The Exchange analyzed trading data from April, May, July, and December 1997.

³⁴ See NYSE Rules 123 and 410 (requiring records to include the name and amount of the security and the terms of the order, among other items).

³⁵ United States v. Oakford Corp., 1999 WL 1201725 (S.D.N.Y. 1999). The district court conducted the hearing to resolve material issues related to the sentencing of Oakford, its two principals, William Killeen and Thomas Bock, and four floor brokers other than D'Alessio, after they had pled guilty to conspiring to allow the floor brokers to execute discretionary trades in Oakford accounts. See United States v. Oakford Corp., at *2-3.

³⁶ Applicants allege that the Hearing Panel's decision to deny their request to call Kwalwasser as a witness was motivated by the Panel's "desire to frame the petitioners for engaging in conduct which the NYSE had approved." But D'Alessio and the Firm never pointed out to the Hearing Panel, in their "application" to call Kwalwasser as a witness, any statements made by Kwalwasser in any context that indicated that the Exchange sanctioned the type of discretionary trades made by D'Alessio - trades in which D'Alessio held buy and sell orders for the same stock executable at the same time and at the same price. Applicants did questionBrian McNamara, an Exchange vice president, extensively on this issue and he testified without contradiction that the orders D'Alessio held conferred discretion on him in violation of NYSE Rules. McNamara testified that a broker may not accept two orders that give the broker discretion at the point of sale, regardless of the manner in which the customer placed the order. Instead, the broker must require some condition that removes the broker's discretion, for example putting a "tick condition" on the orders that prevents them from being bought and sold at the same price or making one order contingent on the completion of another order.

³⁷ Rule 91 provides that, when crossing a customer order with the member's own account, a member may take securities for its own account, provided "(1) he shall have offered the same in the open market at a price which is higher than his bid by the minimum variation permitted in such securities, and (2) the price is justified by the condition of the market, and (3) the member who gave the order shall directly, or through a broker authorized to act for him, after prompt notification, accept the trade." A member may supply securities from its own account provided that he shall have "bid for the same in the open market at a price which is lower than his offer by the minimum variation permitted in such securities," and provided that he meets the second and third conditions for taking securities for his own account.

³⁸ NYSE Rules 123 and 410.

³⁹ Id.

⁴⁰ Id., 17 C.F.R. § 240.17a-4(b).

⁴¹ Applicants allege that two sets of notes written by Donald Seimer, an Exchange director who reported to McNamara, that the Exchange provided to the Commission in December 2000, establish that the Exchange was aware that "its position on profit sharing was illegal" and that it did not want to incriminate itself by making a written record of this illegal position. The portions on which Applicants rely are handwritten sentence fragments that are ambiguous on their face, excerpted from pages of handwritten notes that consist of disjointed sentence fragments. One, dated January 7, 1992, states "nothing in writing" and the other, dated June 21, 1993, states "Intra-day trading." Written next to this phrase is a separate statement "Do not discuss with SEC." Applicants have failed to establish how the cited portions are material to their claims.

⁴² The practice known as "flipping," also called "intra-day trading" or "trading on the eighths," generally consists of a floor broker entering the floor with two trade orders from the same customer and for the same security, one to buy and the other to sell. The floor broker then uses these simultaneous orders to attempt to profit from the difference between the security's bid and offer prices by making a series of rapid sales and purchases determined by which of the two prices temporarily is most favorable.

⁴³ Gold v. SEC, 48 F.3d 987, 992 (7th Cir. 1995).

⁴⁴ We also reject the suggestion that Applicants' conduct was reasonable because they assertedly lacked fair notice that their arrangement with Oakford was prohibited. Due process requires that "laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited." Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996). Regardless of the steps taken by the Exchange to enforce or communicate its interpretation of Section 11(a) to its membership, Section 11(a), Exchange Act Rule 11a-1 and the related NYSE Rules are sufficiently specific to put Applicants on notice that they were prohibited from trading for the Oakford account because of their agreement to share in the profits and losses of that account.

⁴⁵ According to McNamara, this interpretation flowed from the NYSE's position that a broker was free to negotiate compensation for agency services so long as the agreement did not establish a partnering type of relationship between the customer and the broker. The Exchange maintained this position prior to 1998 at which time the Commission informed the Exchange that we did not agree with this view and considered any compensation arrangement that results in a member sharing in the trading profits or trading losses as constituting an interest in an account for purposes of Section 11(a) and Rule 11a-1. Subsequently, we instituted and settled the proceeding against the Exchange for, among other things, failure to police for profit-sharing among floor brokers that is discussed supra at notes 26 through 31 and accompanying text.

⁴⁶ In the letter, Grasso wrote that it is not uncommon for compensation arrangements to "include aspects of 'pay for performance' whereby financial remuneration may be tied to the profitability of trading." The letter went on to state that such compensation arrangements typically have not been deemed to establish an ownership interest in an account "absent traditional indicia of ownership, such as title or control, or some contribution to the underlying assets of the account or fund or an understanding between the parties that such an ownership interest exists."

These statements, read in context, do not establish, as Applicants suggest, that, had it known about it contemporaneously, the Exchange would have condoned the Applicants' profit-sharing arrangement with Oakford. McNamara testified that he was responsible for drafting the letter and that its focus, rather, was the not-uncommon industry practice of providing brokers with performance-based bonuses.

⁴⁷ In January 2000, the NYSE filed a notice of removal of action to the United States District Court for the Southern District of New York. The district court dismissed the complaint with prejudice on the ground that the NYSE and its senior officials enjoyed absolute immunity in the performance of regulatory functions delegated to them under the Exchange Act; D'Alessio and the Firm appealed to the Second Circuit, which affirmed the district court's decision. D'Alessio v. NYSE, 125 F. Supp.2d 656, 657-59 (S.D.N.Y. 2000), aff'd, 258 F.3d 93 (2d Cir. 2001).

⁴⁸ Sloan v. NYSE, 489 F.2d 1, 3 (2d Cir. 1973).

⁴⁹ Id. at 4.

⁵⁰ Gold v. SEC, 48 F.3d at 992.

⁵¹ Sloan, 489 F.2d at 4; see also NYSE Rule 476.

⁵² NYSE Rule 476(b).

⁵³ Id. Indeed, these panel members, who, as independent floor brokers were professional peers of D'Alessio, were uniquely qualified to consider whether Applicants' conduct violated the relevant rules.

⁵⁴ Applicants also have alleged that one of these witnesses, Edward Kwalwasser, would have testified that the Exchange sanctioned the type of discretionary trading in which D'Alessio engaged. Having reviewed Kwalwasser's testimony in the criminal case, as noted supra at note 36 and accompanying text, we find no merit to this allegation.

⁵⁵ One witness, Joseph Cangemi, a member of the Exchange and a floor governor, was qualified, without objection, as an expert in the business practice of floor brokers and the rules governing that business. The other witness, Brian McNamara, a vice president in the Division of Market Surveillance, whose testimony is discussed supra at note 36 and text accompanying note 45, was qualified, without objection, as an expert in the area of the development and interpretation of the rules and policies governing trading on the floor of the Exchange.

⁵⁶ See notes 36 and 46 and accompanying text.

⁵⁷ NYSE Rule 476(f). The Exchange stated in its brief before us that among the Board members who affirmed the Hearing Panel's decision in this matter were the public directors who, apart from their service on the Board, have no relationship to the Exchange or the securities industry. The Exchange also represents that the two members of the Board who are members of Exchange management, Richard Grasso and William Johnston, recused themselves from the review of the Hearing Panel's decision.

⁵⁸ Nor have Applicants offered any legal support for their request that we refer the matters at issue to an independent arbitrator for its adjudication. Congress has provided for no such contingency.

⁵⁹ First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 699-700 (3rd Cir. 1979); Monroe Parker Sec., Inc., 53 S.E.C. 155, 163 (1997) (citing cases). See also R.H. Johnson & Co. v. SEC, 198 F.2d 690, 695 (2d Cir. 1952) (errors in the proceedings of a securities association will be considered only if they affected the Commission's independent review ofthe association's proceedings).

⁶⁰ Exchange Act Section 19(e), 15 U.S.C. §78s(e). See, e.g., Securities Industry Study, Report of the Subcommittee on Securities, Committee on Banking, Housing and Urban Affairs, 93d Cong. 1st Sess. 210 (1973) ("No provision of the Exchange Act confers jurisdiction upon the courts to directly review the self-regulatory activities of" an SRO. "As a consequence of the Commission's rather extensive power to review NASD action and inaction, parties aggrieved by NASD action have indirect access to the courts.").

⁶¹ In FTC v. Cement Institute, 333 U.S. 683 (1948), the Supreme Court refused to disqualify the entire membership of the FTC, explaining that, if all of the FTC commissioners were disqualified, neither the FTC nor any other administrative agency could act on the complaint. It elaborated:

Congress has provided for no such contingency. It has not directed that the Commission disqualify itself under any circumstances, has not provided for substitute commissioners should any of its members disqualify, and has not authorizedany other government agency to hold hearings, make findings, and issue cease-and-desist orders in proceedings against unfair trade practices.

333 U.S. at 701. Applicants suggest that an arbitrator can consider this matter. As noted, Congress has charged the Commission with the duty to review actions such as that taken by the NYSE here. That review structure does not provide for our appointment of an independent arbitrator.

⁶² 837 F.2d 1099 (D.C. Cir. 1988).

⁶³ Id. at 1106-07, citing Withrow v. Larkin, 421 U.S. 35, 55 (1975).

⁶⁴ See U.S. v. State of Oregon, 44 F.3d 758, 772 (9th Cir. 1994) (holding that an "unacceptable probability of actual bias on the part of those who have actual decisionmaking power" must be established in order to prevail on a claim of bias).

⁶⁵ United States v. Huff, 959 F.2d 731, 735 (8th Cir. 1992); see also Richard J. Puccio, 52 S.E.C. 1041, 1046 (1996).

⁶⁶ See, e.g., Jonathan Feins, Exchange Act Rel. No. 41943 (Sept. 29, 1999), 70 SEC Docket 2116, 2131 n.36.

⁶⁷ See infra section V.

⁶⁸ Section 19(e)(2) of the Exchange Act, 15 U.S.C. § 78s(e)(2). D'Alessio and the Firm do not claim, and the record does not show, that the NYSE's action has imposed an undue burden on competition.

⁶⁹ See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Jonathan Feins, 70 SEC Docket at 2131 n.36.

⁷⁰ Even assuming, which we do not, the validity of Applicants' argument that the Exchange failed to disseminate a clear standard with respect to whether sharing in the profits and losses of an account makes that account a member's own account, Applicants' other violations - trading for an account over which Applicants exercised discretion, according that account preferential treatment and failing to make and preserve required records - fully warrant the sanctions imposed by the NYSE.

⁷¹ We have considered all of the contentions advanced by the parties. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.