INITIAL DECISION RELEASE NO. 105 ADMINISTRATIVE PROCEEDING FILE NO. 3-8511 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________________ : In the Matter of : : SHARON M. GRAHAM, : INITIAL DECISION STEPHEN C. VOSS, and : February 7, 1997 JAMES J. PASZTOR : : _______________________________ APPEARANCES: David S. Horowitz for the Division of Enforcement, Securities and Exchange Commission Thomas J. McCabe for Respondent James J. Pasztor BEFORE: Carol Fox Foelak, Administrative Law Judge I. INTRODUCTION The Securities and Exchange Commission (Commission) instituted this proceeding by an Order Instituting Proceedings (OIP) on September 30, 1994, pursuant to Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act). The OIP alleged that Sharon M. Graham willfully aided and abetted John G. Broumas violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that Stephen C. Voss and James J. Pasztor failed reasonably to supervise Ms. Graham with a view to preventing her violations. Administrative Law Judge Glenn Robert Lawrence held hearings in 1994 and 1995 to determine whether the allegations against Ms. Graham and Mr. Voss were true and what, if any, remedial action was appropriate in the public interest. Mr. Pasztor was a witness but did not appear as a party at those hearings because he had a pending Offer of Settlement (which the Commission subsequently rejected). As a witness he did not have the opportunity to cross examine witnesses. He was not represented by counsel. ==========================================START OF PAGE 2====== Judge Lawrence s Initial Decision found that Ms. Graham willfully aided and abetted Mr. Broumas violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that Mr. Voss failed reasonably to supervise Ms. Graham with a view to preventing her violations. Sharon M. Graham, 60 SEC Docket 3162 (1995) (ID). Judge Lawrence ordered that Ms. Graham be suspended from association with any broker or dealer for two months and that she permanently cease and desist from committing or causing any violations or future violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. Id. at 3212. He ordered that Mr. Voss be suspended from association with any broker or dealer for three months. Sharon M. Graham, 60 SEC Docket 3161 (1995) (erratum to ID). The parties appealed Judge Lawrence's decision to the Commission. Its decision is pending. On April 29, 1996, I held a hearing in Washington, D.C., to determine whether the allegations against Mr. Pasztor were true and what, if any, remedial action was appropriate in the public interest.-[1]- The Division of Enforcement (Division) called two witnesses: Mr. Pasztor and Ms. Graham.-[2]- The Respondent did not call any witnesses. The Division offered, and I received, a number of exhibits into evidence. I considered the following post hearing pleadings: (i) the Division s July 1, 1996, Proposed Findings of Fact and Conclusions of Law; (ii) Respondent Pasztor's August 5, 1996, Proposed Findings of Fact and Conclusions of Law; and (iii) the Division s August 21, 1996, Reply Brief. The parties stipulated that they would accept Judge Lawrence's findings of fact as to Mr. Broumas, Ms. Graham, Mr. Voss, and Mr. Pasztor and his conclusions of law as to Mr. Broumas, Ms. Graham, and Mr. Voss. My findings and conclusions, therefore, are based on the record, on my observations of the witnesses' demeanor, and on Judge Lawrence's findings and conclusions as stipulated by the parties. I applied preponderance of the evidence as the standard of proof.-[3]- A. Allegations - Respondent Pasztor -[1]- References to the hearing transcript will be cited as "(Tr. __)." References to Division Exhibits will be cited as "(Div. Ex. __)." -[2]- Her name is now Sharon Whitehurst, but I will refer to her as Ms. Graham to avoid confusion. (Tr. 138.) -[3]- I have considered all proposed findings and conclusions, and I accept those that are consistent with this decision. ==========================================START OF PAGE 3====== The OIP alleges that from approximately January 23, 1989, to May 24, 1990, Mr. Pasztor failed reasonably to supervise Ms. Graham with a view to preventing her violations of willfully aiding and abetting Mr. Broumas violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. I find, however, that Mr. Pasztor lacked the requisite supervisory control over Ms. Graham s handling of Mr. Broumas accounts. In addition, I find that Mr. Pasztor, upon seeing red flags and suggestions of irregularities, acted reasonably to detect and prevent violations of the federal securities laws under the attendant circumstances. I conclude, therefore, that Mr. Pasztor did not fail reasonably to supervise Ms. Graham with a view to preventing her violations. B. Statute of Limitations Mr. Pasztor argues that the proceeding against him should be dismissed based on Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), which held that a Commission proceeding resulting in a censure and suspension of a securities industry supervisor was a proceeding "for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise" within the meaning of 28 U.S.C.  2462. Id. at 485. The court held that the five-year statute of limitations in 28 U.S.C.  2462 applies to such Commission proceedings under Section 15(b) of the Exchange Act. Id. at 492. This proceeding was instituted on September 30, 1994. The OIP alleges violative conduct from approximately January 23, 1989, to May 24, 1990. Johnson effectively has little impact on this decision. As the discussion below demonstrates, Mr. Broumas committed substantial violations of the antifraud provisions within the five-year statutory period, during the time Mr. Pasztor was associated with Voss & Co., Inc. (Voss & Co.)-[4]- II. FINDINGS OF FACT A. Background - Broumas, Graham, and Voss Violations found in Judge Lawrence's ID 1. John Broumas Activities (ID at 3164-86) Over the period from January 1, 1989, to July 31, 1990, Mr. Broumas, former chairman of the board of Madison National Bank of Virginia (MNBV) and a former director of James Madison Limited (JML), conducted a fraudulent market manipulation scheme in -[4]- Violations committed outside the five-year period can, nonetheless, be considered in determining what sanctions should be assessed in the public interest. ==========================================START OF PAGE 4====== violation of Sections 9(a)(1), 9(a)(2),-[5]- and 10(b) of the Exchange Act and Rule 10b-5 thereunder. -[6]- Mr. Broumas executed wash trades, matched orders,-[7]- and marking-the-close trades-[8]- in JML Class A stock in approximately 29 different brokerage accounts, which he maintained or controlled, located at about 13 different brokerage firms. During this period, Mr. Broumas controlled three accounts at Voss & Co. where he executed wash trades and matched orders: a joint account in his and his wife's names, another account named Les Girls, and a nominee account in the name of a business associate, L. Lawton Rogers. Mr. Broumas arranged wash trades and matched orders in order to obtain "loans" or "floats" from the brokerage firms where he traded his JML stock in a scheme similar to check-kiting. Mr. Broumas wash trades and matched orders in JML Class A stock constituted manipulative practices in violation of Section 9(a)(1) of the Exchange Act. Section 9(a)(1) prohibits certain manipulative practices, including wash trades and matched orders, when such transactions are done for the purpose of creating the false or misleading appearance of active trading in a security listed on a national securities exchange, or a false or misleading appearance with respect to the market for any such security. Mr. Broumas pattern of placing wash trades and matched orders in JML Class A stock constituted a manipulative practice under Section 9(a)(1) of the Exchange Act because it -[5]- The OIP does not allege that Ms. Graham aided and abetted Mr. Broumas violations of Section 9(a)(2) of the Exchange Act. -[6]- In 1989 and 1990, JML Class A common stock was listed on the American Stock Exchange (AMEX). Mr. Broumas was a substantial stockholder in JML and held shares of JML Class A stock and JML common stock. He was chairman of the board of MNBV and a director of JML until May 24, 1990. -[7]- A wash trade occurs when an investor, or two or more parties working in concert, purchases and sells a security either simultaneously or within a short period of time to create artificial market activity in order to profit from a rise in the security's price. Similarly, a matched order is an illegal manipulative technique in which participants offset buy and sell orders to create the impression of activity in a security, which causes upward price movement. -[8]- Marking-the-close is the practice of executing the last transaction of the day in a particular security in order to affect its closing price. The OIP does not allege that marking- the-close violations occurred at Voss & Co. (Tr. 5.) ==========================================START OF PAGE 5====== created the false or misleading appearance of active trading in JML Class A stock, and a false or misleading appearance with respect to the market for JML Class A stock. Furthermore, this pattern of conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because, by creating a false or misleading appearance of active trading in JML Class A stock, it operated as a fraud or deceit upon the marketplace. These illegal wash trades and matched orders are referred to generally as directed trades. 2. Sharon M. Graham and Stephen C. Voss (ID at 3187-210) Mr. Voss is the president and owner of Voss & Co., a registered broker-dealer in Springfield, Virginia. He had known Mr. Broumas even before he founded his firm in 1973. Ms. Graham, a registered representative at the firm, executed approximately 60 of the 76 directed wash trades or matched orders in JML stock at Voss & Co., from approximately January 23, 1989, to May 24, 1990. Specifically, she entered orders for the purchase or sale of JML stock with the knowledge that opposite orders of substantially the same size and price had been or would be entered by or for Mr. Broumas. Thus Ms. Graham willfully aided and abetted and caused Mr. Broumas violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. Ms. Graham was subject to the supervision of Mr. Voss, who failed reasonably to supervise Ms. Graham with a view to preventing her violations. If Mr. Voss had supervised properly, Mr. Broumas illegal conduct through Voss & Co. would not have occurred. B. Respondent Pasztor James J. Pasztor majored in music at Catholic University. (Tr. 25-26.) He took business courses at a community college and worked for a firm which dealt in precious metals and foreign currencies. (Tr. 26.) He developed an interest in the securities markets and was hired in January 1983, at age 27, by Mr. Voss. (Tr. 22-23, 26, 97.) He became a registered representative and, later, a registered principal with the firm. (Tr. 24-25.) In approximately 1986, Mr. Pasztor became branch manager and assumed more responsibility in Voss & Co.'s only office, including working with the brokers, filing financial reports, and tending to the general administrative duties of running a small business. (Tr. 27.) He gradually evolved into the role of compliance director as well; in 1989 and 1990, Mr. Pasztor was the vice president, branch manager, and compliance director at Voss & Co. (Tr. 34-35, 97, 124-25.) In March 1992, Mr. Pasztor left Voss & Co. and joined Quick & Reilly, Inc. (Tr. 29.) At the time of the hearing, Mr. Pasztor was a branch manager at a Quick & Reilly office in Greensboro, North Carolina; he has not been the subject of any compliance problem in that position. (Tr. 29, 98.) ==========================================START OF PAGE 6====== 1. Voss Was in Charge at Voss & Co. Mr. Voss founded Voss & Co., a discount broker, in 1973; he is its president and has been sole owner since 1975. (ID at 3187; Tr. 24.) Before Mr. Pasztor s 1983 arrival at Voss & Co., it and Mr. Voss had accumulated an extensive history of violations.-[9]- (ID at 3209-10.) It had one office, its only branch, with 10 - 15 registered representatives during the time at issue in this proceeding. (Tr. 25.) Mr. Pasztor was subordinate to Mr. Voss, who made policy at Voss & Co. and could overrule Mr. Pasztor on any issue. (Tr. 100; ID at 3198.) At the time he was appointed branch manager in 1986, there were other registered representatives with more experience in the office; some had been in the business over 20 years. (Tr. 94- 95.) Mr. Voss had fired the previous manager. (Tr. 27, 97.) Mr. Voss insisted on substantial control of his firm, including requiring daily calls from Mr. Pasztor and making decisions with respect to Mr. Broumas trading. (ID at 3199, 3908; Tr. 31-33, 79, 88-89, 101, 113.) Mr. Pasztor did not have the authority to close customer accounts without consulting Mr. Voss. (Tr. 100; ID at 3198.) Mr. Pasztor was responsible for the day-to-day operation of the office and, as vice president, was essentially the "main person in charge" after Mr. Voss. (Tr. 31, 33, 35.) Mr. Voss was rarely in the office during much of 1989-90 because he was spending time on another business. (Tr. 31, 140-41.) Mr. Pasztor, however, spoke to Mr. Voss daily and kept him informed of the operation and activities of the company. (Tr. 31-33, 79, 101, 113; ID at 3198.) Mr. Pasztor would consult Mr. Voss if anything unusual came up. (Tr. 33, 79-80; ID at 3199.) He could not recall any instances when he needed to speak to Mr. Voss but could not get in touch with him or when Mr. Voss refused to give him an answer when he asked for direction. (Tr. 101.) 2. Pasztor s Position at Voss & Co. Mr. Pasztor described his role as manager in human relations terms: making sure the brokers dealt fairly with the clients, an open door policy, and good rapport with employees; he took pride in low turnover. (Tr. 28, 93, 112-13; ID at 3189.) He maintained the National Association of Securities Dealers (NASD) rules and regulations kept at the firm, browsed through updates, and was responsible for detecting securities law violations and ---------FOOTNOTES---------- -[9]- See Voss & Co., Inc., 31 SEC Docket 459 (1984). Judge Lawrence noted that Mr. Voss claimed not to remember any of the actions brought against him by the SEC or NASD. (ID at 3210.) ==========================================START OF PAGE 7====== updating the Voss & Co. staff on changes in the securities laws. (Tr. 87-88.) He drafted the firm compliance manual; Mr. Voss reviewed it and all revisions prior to distribution to the firm s staff. (Tr. 91-93; ID at 3198.) Mr. Pasztor did not receive any specialized training before becoming branch manager or compliance director. (Tr. 99.) Rather, the training he received was on-the-job, which consisted of reading, asking questions, and talking to people. (Tr. 30, 99-100.) There were substantial gaps in his knowledge; for example, he did not know what wash trades and matched orders were, and his compliance manual did not cover these topics. (Tr. 89-93; ID at 3198.) Nor did he understand that the sell side of an over-the-counter transaction of an exchange-listed security was required by NASD Schedule G to report the trade to the exchange. (Tr. 81-82; 85-86; ID at 3196.) One of his primary resources for information and guidance was Mr. Voss, who had more experience in the securities business and in compliance matters than Mr. Pasztor did and whom he described as his mentor. (Tr. 31, 99-100, 113, 122-23; ID at 3198.) 3. Voss Approved Broumas Directed Trading Mr. Pasztor first became aware that Mr. Broumas was directing trades in JML stock at Voss & Co. prior to January 1989, when Mr. Broumas placed an order with Mr. Pasztor and indicated the contra broker-dealer with whom he should complete the trade; he specified a price, which was between the bid and the ask displayed on the Quotron machine.-[10]- (Tr. 38-42.) Mr. Pasztor consulted Mr. Voss to see if it was something they could do; he had never encountered a customer ordering a directed, over-the-counter, trade in exchange-listed stock. (Tr. 40-41, 44-45, 103-04, 107.) Mr. Voss gave blanket approval for Mr. Broumas to execute his trades that way. (Tr. 40-41, 44-45, 88-89, 104-07; ID at 3197.) He told Mr. Pasztor that he had executed such trades for Mr. Broumas. (Tr. 104.) Over the 1989- 90 period Mr. Voss reiterated his approval several dozen times in conversations with Mr. Pasztor. (Tr. 104-05.) Mr. Pasztor personally executed approximately half a dozen directed trades for Mr. Broumas. (Tr. 39, 46-47, 54-55, 118.) Most of the rest of the 76 Broumas trades were executed by Ms. Graham; the accounts were house accounts on which she did not earn commission. (ID at 3189-91; Tr. 145.) ---------FOOTNOTES---------- -[10]- When Mr. Broumas directed a trade he would indicate the contra broker-dealer, instruct that the trade be completed over-the-counter, specify the number of shares to be bought or sold, and specify the execution price. (Tr. 41-42.) The trade would always be available with the contra broker-dealer. (Tr. 42, 129.) ==========================================START OF PAGE 8====== Ms. Graham was hired by Mr. Pasztor in 1984.-[11]- (Tr. 37-38, 139, 159.) She went to Mr. Pasztor, not Mr. Voss, when she had questions or problems that arose in her day-to-day business at the company, including executing trades for Mr. Broumas. (Tr. 68-70, 140-42, 150-52, 155.) Ms. Graham did not generally receive direct instructions from Mr. Voss regarding Mr. Broumas trading (Tr. 158), but he did tell her to open the Les Girls account. (Tr. 52-53, 109-10, 155.) On many occasions she went to Mr. Pasztor for approval on Mr. Broumas trades because of credit concerns; Mr. Voss had sanctioned his directed trading so that was not an issue for Mr. Pasztor s approval or disapproval. (Tr. 125-26, 143-48, 163.) On occasion, Mr. Pasztor would tell her not to do a trade and Mr. Broumas would accept this because he realized that he had a trade in the account for which he had not paid. (Tr. 147-48.) 4. Pasztor s Attempts to Stop Broumas Trading In January 1989, U.S. Clearing Corporation (U.S. Clearing), the clearing firm for Voss & Co.,-[12]- notified Mr. Pasztor that Mr. Broumas had too many extensions for late payment of his JML trades in his joint account. (Tr. 48-52, 145.) Jim Talty, the margin supervisor for U.S. Clearing, also suggested to Mr. Pasztor that Mr. Broumas might be trying to check-kite.-[13]- (Tr. 50.) Mr. Pasztor did not believe Mr. Broumas check-kiting, or stock-kiting, was illegal, but he was concerned that the extensions and the stock-kiting put Voss & Co. at financial risk. (Tr. 49-51, 54, 65.) Mr. Pasztor, therefore, notified Mr. -[11]- Ms. Graham was still a registered representative for Voss & Co. at the time of the hearing. (Tr. 139.) -[12]- U.S. Clearing provided back office services for Voss & Co., including clearing stock, handling customer funds, holding customer securities, dealing with transfer agents, and matching of trades with the exchanges and market makers. (Tr. 121.) Mr. Pasztor understood that U.S. Clearing's compliance responsibilities dealt with payment and the handling of money and credit, not the supervision and monitoring of Voss & Co.'s sales operation. (Tr. 94, 121-22.) -[13]- Mr. Pasztor understood the term "check-kiting," as it applied to Mr. Broumas and his stock accounts at Voss & Co., to mean that Mr. Broumas was using the float from transactions in his various stock accounts, that is, demanding immediate payment for sales while taking as long as possible to pay for purchases. (Tr. 50, 71.) This activity, therefore, might be better described as stock-kiting. ==========================================START OF PAGE 9====== Broumas that he could no longer trade at Voss & Co. (Tr. 49, 109; ID at 3192.) Mr. Broumas then called Mr. Voss; after this telephone call, Mr. Voss told Ms. Graham to open the Les Girls account and told Mr. Pasztor he had authorized the new account for Mr. Broumas. (Tr. 52-54, 109-10, 155; ID at 3193.) He did not discuss opening the new account with Mr. Pasztor prior to authorizing it, nor was Mr. Pasztor s approval needed or given. (Tr. 110-11, 114.) Mr. Voss did not place restrictions, such as requiring cleared funds prior to trading, on the new account. (Tr. 73-74; 156-57.) His purpose in authorizing the Les Girls account was to circumvent the problem of the extensions in the joint account and enable Mr. Broumas to continue trading. (Tr. 63-65.) In August 1989, Mr. Voss allowed Mr. Broumas to resume trading in the joint account.-[14]- (Tr. 68, 109; Div. Ex. 1105 at 10-11.) Mr. Voss indicated to Mr. Pasztor that he did not have a problem with the extensions, the stock-kiting, or the directed trading and, therefore, approved Mr. Broumas trading. (Tr. 63.) Mr. Pasztor did not have the authority to stop Ms. Graham from taking his orders or otherwise to stop him doing trades. (Tr. 114.) Mr. Pasztor also learned that Mr. Broumas directed trades in the L. Lawton Rogers account and informed Mr. Voss, who sanctioned this. (Tr. 68-69, 79-81, 103, 114-15; Div. Ex. 1105 at 10; ID at 3195.) In the spring of 1990, Mr. Pasztor again attempted to stop Mr. Broumas from trading when a check he had written to Voss & Co. bounced. (Tr. 76, 111.) Mr. Pasztor informed him that he would have to have "cleared funds" in his account before the firm would accept an order. (Tr. 76-77, 111; ID at 3197.) Mr. Pasztor told Mr. Voss of his action and was upheld for awhile. (Tr. 111-12.) Then Mr. Broumas made a lunch appointment with Mr. Voss; after lunch Mr. Voss called Mr. Pasztor and authorized trading in Mr. Broumas account without having cleared funds. (Tr. 77-78, 112; ID at 3197.) Mr. Pasztor told Mr. Voss that he did not agree, but Mr. Voss did not change his decision. (Tr. 78.) Mr. Broumas last trades with Voss & Co. occurred soon after, in May 1990. (Tr. 78-79; Div. Ex. 1105 at 10-11.) 5. Pasztor s Lack of Understanding of the Illegal Manipulative Practices -[14]- Mr. Broumas made his first trade in the Les Girls account on February 24, 1989. (Tr. 66-67; Div. Ex. 1105 at 10.) The record shows that there were two trades in the joint account soon after, on March 6 and 21, 1989. Id. The next trade in the joint account occurred on August 29, 1989. (Tr. 67; Div. Ex. 1105 at 10.) ==========================================START OF PAGE 10====== Mr. Pasztor was aware of the directed trades as they were occurring. (ID at 3194, 3197.) He routinely reviewed and initialed order tickets for trades. (Tr. 35-36, 102.) He executed a few of the Broumas trades himself and knew about the rest through his next-day review of the order tickets. (Tr. 39, 43-44, 46-47, 54-55, 66, 108, 118, 126.) He believed that the trades were for questionable purposes that he described as check- kiting. (Tr. 70-72.) He did not know, however, what wash trades were or recognize that Mr. Broumas was engaging in wash trades or manipulating the market in JML stock. (Tr. 89-93, 102-03, 107.) He was aware that Mr. Broumas traded, almost exclusively, JML stock in his accounts and that Mr. Broumas was a director of JML. (Tr. 46, 74-75.) Mr. Pasztor also was aware that Mr. Broumas had accounts with the contra broker-dealers and that Mr. Broumas knew who was on the other side of the directed trades. (Tr. 58, 61- 62, 127-28.) No one, however, including Mr. Broumas, ever communicated to Mr. Pasztor that Mr. Broumas owned or controlled the accounts that were on the contra-side of his directed trades, and Mr. Pasztor never asked Mr. Broumas. (Tr. 108, 127.) It never occurred to Mr. Pasztor that there was really no change in beneficial ownership of the JML stock in which Mr. Broumas directed 76 trades at Voss & Co. (Tr. 108, 115-16.) There was, in fact, little net change in Mr. Broumas holdings after numerous transactions. (Div. Ex. 1105; Tr. 129-31.) Until sometime in 1990, Mr. Pasztor was not familiar or concerned with NASD rules for reporting volume of over-the- counter trades of exchange-listed stocks. (Tr. 81-87, 134.) Mr. Pasztor spoke to Mr. Voss and an official from U.S. Clearing about the reporting requirement, but neither provided much guidance on the issue.-[15]- (Tr. 83-84, 119-20.) Mr. Pasztor did not seek guidance from the NASD on this matter, however, because he "was relying on what [Mr. Voss] came back to [him] -[15]- Mr. Pasztor, apparently, relied on information Mr. Voss obtained from Voss & Co.'s attorney and U.S. Clearing's compliance department. (Tr. 83-85, 105.) Mr. Pasztor was not authorized to call outside counsel and seek opinions without first getting Mr. Voss permission. (Tr. 104.) Although he provided little guidance about the volume reporting issue, the U.S. Clearing official did raise the issue of Mr. Broumas status as an insider of JML and recommended that Mr. Pasztor "get rid of the account." (Tr. 84.) Mr. Voss then spoke with counsel and told Mr. Pasztor to contact JML to obtain a letter stating that Mr. Broumas trades satisfied the requirements of Rule 144 of the Securities Act of 1933, regarding the sale of restricted securities by control persons. (Tr. 105-06.) ==========================================START OF PAGE 11====== with."-[16]- (Tr. 84-85.) Mr. Pasztor never called the NASD, the American Stock Exchange, or the Commission with any of his concerns about the Broumas trading. (Tr. 89.) C. Conclusions There is no doubt that Mr. Pasztor knew that Mr. Broumas was engaging in directed trades through Voss & Co. and that many of the violative trades were executed by Ms. Graham. She was not, however, when committing the violations, a person subject to his supervision within the meaning of Sections 15 (b)(6)(A)(i) and 15(b)(4)(E) of the Exchange Act. It had been Mr. Voss decision to permit the trading, and Mr. Pasztor was powerless to change it. It is clear from the record that Mr. Voss very much controlled the firm that he owned and that he alone made the decision to allow the directed trading for Mr. Broumas, whom he had known for many years. The first time Mr. Pasztor learned of it, he consulted Mr. Voss who approved it. Mr. Pasztor then used other issues -- the excessive number of extensions, the bounced check, and trading through the Rogers account -- to try to stop the trading, but to no avail. The fact that Mr. Pasztor initialed order tickets after the fact and gave advance approval to some trades when Ms. Graham consulted him on credit concerns does not detract from the conclusion that he was in no way responsible for the decision to permit the directed trades which were in violation of Sections 9(a)(1) and 10(b)(5) of the Exchange Act and Rule 10b-5. Generally, failure to supervise cases, such as those cited by the Division, involve an employee s self-initiated activity that supervisors condoned or failed to detect or stop despite red flags; some involved activities at remote branches of large firms. See, e.g., John H. Gutfreund, 51 S.E.C. 93 (1992); Edwin Kantor, 51 S.E.C. 440 (1993); Arthur James Huff, 50 S.E.C. 524 (1991); William L. Vieira, 49 S.E.C. 1091 (1989); Louis R. Trujillo, 49 S.E.C. 1106 (1989); Alfred Bryant Tallman, Jr., 44 S.E.C. 230 (1970); Sutro Bros. & Co., 41 S.E.C. 443 (1963). In this case, however, it is clear that the decision to allow the illegal trading came from the top -- Mr. Voss, the firm s hands- on owner. Although he installed Mr. Pasztor as branch manager and compliance director and was absent from the office much of the time, Mr. Voss required daily reports from Mr. Pasztor who -[16]- Mr. Pasztor did not know that 22 of the 76 directed trades executed during the relevant period were reported to AMEX. (Tr. 82, 87.) The reports reflected trades Mr. Broumas executed with himself and, therefore, did not accurately depict the trading activity of JML stock. ==========================================START OF PAGE 12====== sought direction from him on any unusual issues and never had any difficulty in reaching him. It is indisputable that Mr. Voss affirmatively decided to allow Mr. Broumas to engage in wash sales and matched orders through Voss & Co., and Mr. Pasztor could not shake him from his decision even by bringing up such issues as Mr. Broumas failure to make timely payment or his bounced check. Mr. Pasztor did not have the "requisite degree of responsibility, ability [and] authority to affect the conduct" of Ms. Graham in executing the violative Broumas trades. See John H. Gutfreund 51 S.E.C. at 113. As the Commission has frequently said, The president of a corporate broker-dealer is responsible for compliance with all of the requirements imposed on his firm unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person s performance is deficient. Thomas F. White, 51 S.E.C. 1194, 1197 (1994) (citation omitted). Assuming arguendo that Ms. Graham was subject to Mr. Pasztor s supervision in her handling of the Broumas accounts and even that his supervision was less than exemplary, he exercised reasonable supervision under the attendant circumstances. The record does disclose gaps in Mr. Pasztor s knowledge and a lack of appreciation of facts that should have led him to question the legality of the trading. He knew that Mr. Broumas repeatedly directed trades of large amounts of JML shares to the same contra broker-dealers and the trades were always available. He believed Mr. Broumas was conducting a scheme similar to check-kiting. To the extent that he became aware of red flags and suggestions of problems and irregularities in the trading in Mr. Broumas accounts, Mr. Pasztor acted to detect and prevent violations of the federal securities laws. He made attempts to stop the trading and made available to Mr. Voss information that suggested that Mr. Broumas was engaging in illegal conduct. In Louis R. Trujillo, the Commission dismissed proceedings against an administrative manager of a broker-dealer's branch office where it determined the manager responded reasonably to indications of wrongdoing considering the attendant circumstances. Louis R. Trujillo, 49 S.E.C. at 1110-11. The Commission found that, while the manager's supervisory record was less than exemplary, he had made reasonable and diligent efforts to inform management of the need to control and discipline a salesperson at the firm. Id. D. Ultimate Conclusion Respondent James J. Pasztor did not fail reasonably to supervise Ms. Graham with a view to preventing her violations within the meaning of Sections 15(b)(6)(A)(i) and 15(b)(4)(E) of the Exchange Act. III. ORDER ==========================================START OF PAGE 13====== Based on the findings and conclusions set forth above, I ORDER that this administrative proceeding IS DISMISSED as to Respondent James J. Pasztor. This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Commission's Rules of Practice, 17 C.F.R.  201.17(f) (1995). Pursuant to that rule, this initial decision shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 17(b) within 15 days after service of the initial decision upon that party, unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to a 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. _________________________ Carol Fox Foelak Administrative Law Judge