INITIAL DECISION RELEASE NO. 112 ADMINISTRATIVE PROCEEDING FILE NO. 3-9032 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ : In the Matter of : : MARC N. GEMAN : INITIAL DECISION : August 5, 1997 ____________________: APPEARANCES: Leslie J. Hendrickson and Robert M. Fusfeld for the Division of Enforcement, Securities and Exchange Commission David A. Zisser for Marc N. Geman BEFORE: G. Marvin Bober, Administrative Law Judge The Securities and Exchange Commission ( Commission ) initiated this proceeding on June 27, 1996, pursuant to Section 8A of the Securities Act of 1933 ( Securities Act ), Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 ( Exchange Act ), and Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ( Advisers Act ). As directed by the Commission s Order Instituting Proceedings ( Order ), I held an administrative trial in Denver, Colorado, on November 5, 6, and 7, 1996. At the trial, the Division of Enforcement ( Division ) called eight witnesses and tendered ninety exhibits, of which I admitted into evidence fifty-seven. The Respondent tendered twenty exhibits, of which I admitted into evidence nineteen, and called no witnesses.<(1)> On January 31, 1997, I issued an order correcting the transcript. Both parties filed post-hearing briefs, the last of which was filed on January 29, 1997. Both parties filed supplemental briefs as well, the last of which was filed July 9, 1997. My findings and conclusions are based on the record and my observation of the witnesses demeanor. I applied preponderance of the evidence as the <(1)> I will refer to Division exhibits as (Div. Ex. __) and to Respondent exhibits as (Resp. Ex. __). I will refer to the transcript as (Tr. __). ======END OF PAGE 1====== applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981); see also Grogan v. Garner, 498 U.S. 279 (1991). Issues The proceeding was instituted to determine whether the Division s allegations contained in the Order are true and to give the Respondent an opportunity to establish any defenses. Specifically, the Division alleges that Respondent a) willfully aided and abetted and caused violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-10(a)(8)(i)(A) thereunder, and Sections 206(1) and 206(2) of the Advisers Act; and b) willfully aided and abetted and caused violations of Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(6), 17a-3(a)(7), and 17a-11 thereunder. If I find that the allegations are true, the issues are (1) what, if any, remedial action against the Respondent is necessary or appropriate in the public interest or for the protection of investors pursuant to Sections 15(b) and 19(h) of the Exchange Act and Section 203(f) of the Advisers Act; (2) whether, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 203(k) of the Advisers Act, Respondent should be ordered to cease and desist from committing or causing violations or future violations of the statutory provisions and rules he is alleged to have violated; and (3) whether a civil money penalty against the Respondent is appropriate pursuant to Section 21B of the Exchange Act and Section 203(i) of the Advisers Act.<(2)> Findings of Fact Respondent Geman and Related Entities Respondent Marc N. Geman, 51 years of age, received an undergraduate degree from the University of California at Berkeley in 1967 and a law degree from the University of Denver College of Law in 1973. (Tr. 256.) Respondent holds several securities licenses, including Series 7, 24, 27, 53, and 63, and is an attorney admitted to practice in Colorado. (Tr. 256- 57; Div. Ex. 13 at 12.) Respondent Geman was an over-the-counter ( OTC ) stock trader for Boettcher & Company in Denver from 1967 to 1970. (Tr. 267.) After receiving his law degree, he engaged in the private practice of law in Denver until 1983 when he began working for The Stuart-James Company ( Stuart-James ), a now-defunct broker-dealer. (Tr. 258-59, 261.) At Stuart-James, Respondent Geman was executive vice-president and compliance and legal officer. (Tr. 258.) Between 1988 and 1992, Respondent Geman was a member of the District Business Conduct Committee for District 3 of the National Association of Securities Dealers, Inc. ( NASD ). (Div. Ex. 11A.) Portfolio Management Consultants ( PMC ) was formed in 1986 to offer comprehensive investment consultation services and became a wholly-owned subsidiary of PMC International, Inc. ( PMCI ) when that entity was formed in late 1993. (Tr. 220-21, 437-39.) PMCI is a publicly held Colorado <(2)> The Order states that Section 20(d) of the Securities Act authorizes civil money penalties also. Section 20(d), however, does not apply to administrative proceedings. ======END OF PAGE 2====== corporation, headquartered in Denver, whose common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act. (Tr. 220-21, 270.) PMC has been registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act since February 20, 1987, has been registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act since April 17, 1987, and is a member of the NASD. (Order I.B; Answer I.B; Tr. 280.) Kenneth Phillips, 45 years of age, is the president and chief executive officer of PMCI. (Tr. 220-21.) He has been the president of PMC since he formed the company in 1986. (Order II.C; Answer II.C; Tr. 221-22.) Prior to forming PMC, Mr. Phillips had three-years experience in the brokerage business. (Tr. 221.) As the operation of Stuart-James was winding down, Respondent Geman began working full-time at PMC. (Tr. 258.) By December 1993, he owned thirty-five percent of the stock of PMCI. (Tr. 264.) He became the chief executive officer, compliance officer, and chairman of the board of directors of PMC in 1990 and remained in these positions until July 1995. (Order II.B; Answer II.B; Tr. 259, 437-39, 551.) During the period October 1992 to April 1994, Mr. Phillips was responsible for marketing, sales, and product development; Respondent Geman was responsible for operations of the broker-dealer part of the business, encompassing administrative and financial functions as well as compliance and trading. (Tr. 224-25.) Respondent Geman no longer has an ownership interest in PMC, and all official relationships between PMC and Respondent Geman ceased on July 27, 1995. (Tr. 222.) Mr. Vali Nasr began working for PMC on May 2, 1992. (Tr. 536.) As PMC s chief financial officer, Mr. Nasr s duties included all accounting functions, including billing, budgeting, and forecasting. (Tr. 542-43.) He was later put in charge of supervision of trading and was responsible for determining what kinds of records should be kept, but Respondent Geman, as the compliance officer for the broker-dealer and Mr. Nasr s supervisor, was involved in these duties as well. (Tr. 225-26, 233, 245, 268, 270, 543, 546, 551.) PMC s Wrap Fee Program PMC offered a comprehensive investment management program commonly referred to as a wrap fee program ( Program ). (Tr. 15, 27.) PMC used the services of intermediaries, who were themselves registered investment advisers or securities brokers, in order to solicit clients for the Program. (Tr. 227-28; 237-38.) PMC advised and assisted clients in allocating assets among one or more of the independent portfolio managers ( Program Managers ) selected by each client. (Tr. 238-39.) Each Program Manager had complete investment discretion with respect to that portion of the client s funds for which it had responsibility. (Tr. 28-29, 239.) Thus, while PMC offered guidance regarding investment policy development, portfolio manager selection, and performance evaluation, it did not offer guidance regarding selection of specific securities nor did it have ======END OF PAGE 3====== discretionary authority for customer funds.<(3)> (Tr. 240.) PMC monitored portfolio and Program Manager performance and periodically reported the results to respective clients. (Order II.D; Answer II.D; Div. Ex. 5.) PMC also functioned as a non-discretionary executing broker for the Program, executing unsolicited transactions for its wrap fee clients upon instructions from the Program Managers. (Order II.D; Answer II.D; Div. Ex. 5.) This arrangement resulted in as many as three investment advisers for each account: the investment adviser soliciting the investment directly from the client, PMC, and the Program Manager selected by the client to exercise discretionary trading authority over the account. (Tr. 239-40.) PMC serviced approximately 800 clients enrolled in the Program with over $200 million in assets under management. (Tr. 234, Order II.D; Answer II.D.) PMC ultimately entered into Client Service Agreements ( Agreement ) with clients enrolled in the Program.<(4)> (Tr. 226-27.) PMC s clients each paid a wrap fee, a single all-inclusive fee equal to a percentage of the respective client s assets invested, in return for full participation in the Program.<(5)> (Tr. 27; Order II.D; Answer II.D; Div. Ex. 5.) PMC represented to clients that the wrap fee covered all brokerage, advisory, and custodial services performed by PMC, the Program Managers, and other service providers chosen by PMC to be affiliated with the Program. (Tr. 167.) This representation was consistent with the terms of PMC s Agreement, which stated that all products and services offered under the Program were provided in consideration of the fixed wrap fee. (Order II.D; Answer II.D; Div. Ex. 5.) Each Agreement provided that PMC would strive to ensure best net price and [would] endeavor to obtain best execution of all brokerage transactions, but [would] perform no discretionary acts with respect to the client s managed assets and [would] only effect transactions as instructed by the [Program] Manager from time to time. (Div. Ex. 5; Resp. Ex. L.) PMC routinely executed trades at the National best bid or offer ( NBBO ), a price quotation representing the best bid and best offer of any over-the-counter market maker in a particular security on the two-sided National Association of Securities Dealers Automated Quotation ( NASDAQ ) market. (Tr. 22; Order II.I; Answer II.H.) PMC became a self-clearing broker-dealer because, as Respondent Geman stated at the hearing in this matter, the per-ticket charge of most clearing firms was such that, at the volume levels we were reaching, we would go broke trying to clear. (Tr. 461.) Once PMC made the move to self-clearing it had to start sending its own confirmations and had higher net capital requirements. (Tr. 461.) After PMC became self-clearing, <(3)> Nonetheless, PMC was required to provide to each client prior to entering into an agreement, or contemporaneously with a right of recision, a copy of PMC s Form ADV Part 2. (Tr. 241.) <(4)> The findings in this decision are limited to those clients with whom PMC had a contract, referred to as privity clients. (Order II.D n.1.) <(5)> Specifically, the Agreement provided that [a]s an all[-]inclusive fee for the services to be performed or arranged by PMC . . . , Client will pay PMC . . . an amount based on a percentage of the market value of the Managed Assets. (Div. Ex. 5.) ======END OF PAGE 4====== Respondent Geman began looking for other ways to increase PMC s income, including principal trading, to offset the costs of becoming self-clearing. (Tr. 460-61.) The reasons for Respondent Geman s implementation of principal trading, according to Mr. Nasr, were obvious. The reasons are to make money. . . . [G]enerally speaking, on these types of principal trades you can make money if you process them carefully and you know what you re doing. (Tr. 548.) Prior to October 1992, PMC effected all securities transactions on behalf of its clients on an agency basis, buying or selling on behalf of a client upon receiving instructions from a Program Manager, as opposed to effecting transactions as a principal, buying directly from or selling directly to a client instead of on the client s behalf. (Order II.H; Answer II.H.) PMC commenced trading as a principal after it sent existing clients a letter outlining the changes to the Agreement which they were asked to sign and return. (Tr. 233-34; Resp. Ex. L.) The letters did not disclose that PMC would receive compensation in addition to the wrap fee already charged for effecting the client s securities transactions as a principal, stating that [t]here are no changes to . . . the fees that you are currently paying. (Resp. Ex. L.) The letter stated that the amended Agreement would read: [i]n effecting securities transactions through PMC as broker- dealer, Client acknowledges that PMC may, to the extent permitted by applicable law, while acting as principal, execute purchase or sale orders received from the [Program] Manager. Client expressly authorizes PMC to effect such transactions. Where applicable PMC may combine market orders for more than one client for the same security in accordance with applicable laws and regulations, in order to obtain the best net price and most favorable execution. (Resp. Ex. L.) The letter represented that PMC wanted to begin trading as a principle in order to utilize new technology that offered PMC the ability to execute odd lot and block trade orders through automated systems that route information between [the Program Manager], PMC s trading desk and the various brokers and exchanges where we can obtain best execution. (Resp. Ex. L.) Copies of the letter were not sent to Program Managers. (Tr. 246.) Respondent Geman participated in drafting and authorizing the distribution of the agreements used in the Program. (Tr. 229-31, 292-93, 452-55.) Beginning on October 1, 1992, and continuing through April 22, 1994, PMC executed approximately ten percent of its securities transactions as principal transactions, 8,264 transactions in all. (Order II.H; Answer II.H.) PMC was not a market maker and did not conduct any principal trades that did not originate with a Program Manager. (Tr. 275.) Respondent Geman established the procedures regarding principal trading. (Tr. 271-75.) When an order from a Program Manager was received, the trader was to determine whether to execute the trade as an agent or principal by checking the spread between the bid and ask prices. (Tr. 291.) If the stock to be purchased or sold was consistently trading between the bid and the ask prices or if the market was moving particularly fast, the trade was to be executed as an agent. (Tr. 291, 428-29.) If, on ======END OF PAGE 5====== the other hand, the spread was greater than an eighth of a point, the trade would be executed as a principal. (Tr. 290, 425.) Respondent Geman instructed the traders not to cover the trade immediately. (Tr. 290.) At the same time, however, he also instructed the traders to try to flatten a position as soon as possible to avoid carrying positions overnight that would affect PMC s net capital computation. (Tr. 274-75.) By executing trades with customers at the NBBO and then trading for its own account on the third market, which in some cases offered prices better than the NBBO, PMC was able to take advantage of a process called price improvement. Bernard L. Madoff Investment Securities ( Madoff ), with which PMC effected approximately eighty percent of its principal trades,<(6)> offers price improvement by holding the order and guaranteeing the price at NBBO, while attempting to obtain a better price for sixty seconds if the spread between the consolidated national best bid and offer is greater than $1/8. (Tr. 335-36, 341-42, 554.) Should a better price occur in the market, through entry of a quote at that price or an actual transaction during the pending sixty seconds, then the customer receives the better price. (Tr. 341-42.) If a better price does not occur, the customer receives the NBBO as guaranteed at the time the order was placed. (Tr. 343.) Over fifty percent of those transactions which qualify for price improvement result in Madoff s customers receiving a price better than NBBO. (Tr. 346-47.) When PMC traded as an agent, its client received the benefit of any price improvement in transactions executed with third market dealers, but when PMC traded as principal it took its client s opportunity for price improvement. (Tr. 297-98, 424-25.) PMC disclosed to its clients only that it would be acting as a principal, not that it would profit thereby because as Respondent Geman testified at the hearing in this matter, I ve never run across a single individual . . . who didn t understand that when you act as principal it means you re either going to make money or lose money. So we disclosed that we act as principal. We didn t have another phrase on that that said that means we make or lose money. (Tr. 309.) Prior to March 13, 1993, PMC reported its trades, including principal trades, to the Automated Confirmation Transactions Service ( ACT ). (Tr. 281.) NASD Schedule G requires NASD members to report specific types of trades within ninety seconds of execution. (Tr. 280.) Trades are reported to the Consolidated Tape so that all market participants are informed of the price and size of trades. (Tr. 281.) Schedule G contains a priority of which broker in a transaction should report the trade. (Tr. 283.) Trades to flatten PMC s position after trading with its clients usually were not reported to ACT by PMC because it was usually another broker s obligation. (Tr. 282-83.) Each Agreement stated that PMC would provide clients with written confirmations for each securities transaction that PMC effected for such client s account and, for every month during which transactions were effected, a monthly summary statement identifying all such transactions. (Div. Ex. 5.) Confirmations provided to clients for securities transactions in which PMC acted as a principal were designed and authorized <(6)> PMC executed another fifteen percent of its securities transactions with Trimark Securities, Inc., another third market dealer which offers price improvement similar to the system used by Madoff. (Tr. 554.) ======END OF PAGE 6====== by Respondent Geman and contained the following legend: YOUR PRICE IS REPORTED PRICE DIFFERENCE IS ZERO. (Tr. 550, Div. Exs. 16D, 17D, 18D, 19D, 20D, 21E, 22E.) Respondent was aware that reported price means or implies that the trade has been reported to the Consolidated Tape. (Tr. 437.) PMC, however, ceased ACT reporting on March 13, 1993, because the NASD deemed the transactions riskless principal transactions and therefore not required to be reported.<(7)> (Div. Ex. 3; Tr. 280) From March 13, 1993, through January 6, 1994, PMC did not report its transactions to ACT. (Tr. 287.) During this time, PMC did not create or keep order tickets indicating the time of execution. (Tr. 284-85.) PMC never sent formal notice of its failure to keep such records to the Commission. (Tr. 281-88, 305; Div. Exs. 3, 4.) Mr. Nasr and Respondent Geman, although responsible for determining what kinds of records should be kept to meet the requirements of recording the time of execution with a client, never discussed the need to implement a new recording system after PMC ceased ACT reporting. (Tr. 551.) Mr. Nasr spent most of his time closing the books and reviewing the accounting ledger and making sure the reports that needed to be filed, the regulatory reports, were filed. (Tr. 546.) Through the period October 1992 to April 1994, PMC executed 8,264 principal trades, of which sixty-seven percent were profitable to PMC, generating net trading profits of $464,864.02. (Tr. 312-13; Div. Ex. 2.) Conclusions of Law<(8)> I. Anti-fraud Violations A. PMC Fulfilled Duty of Best Execution An investment adviser, as a fiduciary, has an affirmative duty of utmost good faith, and full and fair disclosure of all material facts. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963); Arleen W. Hughes, 27 S.E.C. 629, 634-35 (1948), aff d sub nom., Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949); Duker & Duker, 6 S.E.C. 386, 388-89 (1939). The duty of best execution is inherent in this fiduciary relationship, stemming from common law agency principles which obligate an agent to act exclusively in the principal s best interest. Restatement (Second) of Agency  387 (1958). Further, a broker s fiduciary duties concerning execution of trades do not depend on its decision to execute a trade as a principal or agent. Opper v. Hancock Securities Corp., 250 F. Supp. 668, 675 (S.D.N.Y.), aff d, 367 F.2d 157 (2d Cir. 1966). PMC, therefore, had a duty of best execution which was inherent in the fiduciary relationship it had with its clients. The wrap fee agreement and the language contained in PMC s advertisement might have accentuated this duty, but they were not the basis for the duty. Delaware Management Co., 43 S.E.C. 392, 398 n.13 <(7)> Respondent Geman wrote a letter, dated March 3, 1993, to NASD concerning reporting riskless transactions and whether they should be reported on Schedule G, and then reviewed it with Mr. Nasr. (Tr. 551; Div. Ex. 3.) <(8)> I have considered all the arguments and contentions and accept those that are consistent with this decision. ======END OF PAGE 7====== (1967). PMC fulfilled its best execution obligation by executing its trades with clients at the NBBO. The court in In re Merrill Lynch Securities Litigation, 911 F. Supp. 754 (D.N.J. 1995), aff d sub nom., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 115 F.3d 1127 (3d Cir. 1997), addressed the issue of whether failure to provide best execution under the federal securities laws occurred where trades were effected at the NBBO, without any effort to obtain better prices through other possible sources of liquidity, such as third market dealers or in-house limit orders. After an extensive review of the jurisprudence of best execution, which the court noted did not provide clear standards and was evolving, the court found that the duty of best execution, at the time that the defendants executed their trades, was ambiguous, so it could not hold the defendants liable for failing to provide best execution when they had effected trades at the NBBO.<(9)> Id. at 771. The Division argues that PMC did not obtain best execution for its customers and attempts to expand the duty of best execution to include best price available. To the extent that this is meant to imply that selling to customers at the NBBO was inconsistent with the duty of best execution at the time that PMC executed its principal trades, I reject this contention. The Division further argues that PMC falsely represented that it would obtain the best price available in the market for its customers in that it promised to obtain best net price based on state-of-the-art order execution system in a sales brochure, and made references to best net price in the wrap fee agreements. I interpret the references to best net price to mean the obligation of best execution which, consistent with the court s decision in Merrill Lynch, was satisfied, under the industry standards prevalent at the time, by execution at NBBO. Nothing adduced at the hearing in this matter supports the Division s allegation that PMC or Respondent represented in writing or otherwise that it would seek prices superior to the NBBO. The evidence shows that PMC and Respondent Geman represented only that they would endeavor to obtain best execution or best net price. There is nothing in the record to support the contention that the aforementioned language was intended to represent, or could reasonably be understood as representing, that PMC would seek prices superior to the NBBO for its clients. No PMC client, client representative, or Program Manager testified that he or she was misled in this regard. <(9)> On October 10, 1995, after the conduct at issue in Merrill Lynch, the Commission proposed rules to clarify the duty of best execution. Order Execution Obligations, 60 SEC Docket 1128 (Oct. 10, 1995). The Commission stated that the duty of best execution requires a broker-dealer to seek the most favorable terms available under the circumstances for a customer s transaction. Id. at 1129 (citation omitted). ======END OF PAGE 8====== B. PMC Failed to Make Necessary Disclosure of Profits Generated by Principal Trading PMC did, however, mislead investors as to the additional compensation that it received through trading as a principal. PMC had a duty to make a transaction-by-transaction disclosure of all relevant information regarding the principal trades, specifically the fact that PMC would profit from effecting securities transactions as a principal. An agent is under a duty to divulge all profits he made and is forbidden to take additional remuneration unless the principal is fully informed. See Arleen W. Hughes, 27 S.E.C. at 635 (1948); Harry Marks, 25 S.E.C. 208, 215 (1947). In Arleen W. Hughes, the Commission noted that [i]t is well settled that a fiduciary, as, for example, an agent, who sells his own property to his principal must disclose his cost to the principal so that the principal will know what profits the fiduciary will realize by effecting the transaction. 27 S.E.C. at 635 (citations omitted). By trading as a principal, PMC, in effect, sold its own property to its clients without disclosing the profit realized thereby. PMC represented that the wrap fee was the sole compensation it would receive. The additional remuneration earned by PMC for trading as principal should, at a minimum, have been disclosed. This conclusion is supported by the Commission s finding in William J. Stelmack Corp., 11 S.E.C. 601, 618-19 (1942) (citations omitted), that: [t]he duty of loyalty to his principal requires the agent to disclose all material circumstances fully and completely. The disclosure must include not only the fact that the agent is acting on his own account, but also all other facts which he should realize have or are likely to have a bearing upon the desirability of the transaction from the viewpoint of the principal. Included in the facts which must be thus disclosed is the price paid by the agent for the property which he sells to the principal as an adverse party, and the price he receives for property he buys from the principal. The authorization to the registrant to sell to and buy from the client and to fix prices, and the advance ratification and confirmation of the registrant s transactions do not relieve it of the fiduciary s duty of loyalty and its various incidents. PMC s failure to disclose that it would profit by trading as a principal was a material omission. It is a notion basic to the federal securities law that information concerning mark-ups or mark-downs is material to the purchaser or seller of a security. David Disner, 63 SEC Docket 2246, 2249 (Feb. 4, 1997). The omission of the fact that PMC would profit from its principal trades establishes scienter in light of PMC s well established duty, as an agent, to disclose to its principal, the Program client, all relevant facts regarding the transaction, particularly the difference between what the client paid (or received) for an order and ======END OF PAGE 9====== what PMC paid (or received) in the covering transaction.<(10)> See Platsis v. E. F. Hutton & Co., 946 F.2d 38, 41 (6th Cir. 1991). PMC s failure to make transaction by transaction disclosure that, by trading as a principal, it received compensation in addition to the wrap fee violated the anti-fraud provisions of the federal securities laws, specifically Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. C. PMC s Confirmations Were Fraudulent The confirmations sent by PMC to its customers regarding its 8,264 principal trades were fraudulent in that the legend upon them claimed, YOUR PRICE IS REPORTED PRICE DIFFERENCE IS ZERO. In fact, from March 1993 through January 1994, PMC did not report the client s price since it had ceased ACT reporting during that period.<(11)> If any price was reported it was that which PMC received in covering the trade with another dealer, a price that differed from the client s price in ninety-nine percent of the trades. (Div. Ex. 2; Tr. 312.) The confirmation disclosure provided by PMC was not sufficient to provide customers with adequate information to make a reasoned decision. See Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943). The legend was materially false and misleading and Respondent Geman and PMC knew or were reckless in not knowing of the falsity. In addition, the confirmations tickets did not disclose readily whether PMC had acted as a principal or an agent in a particular transaction. Thus, the legend constitutes a violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. The confirmations violated Rule 10b-10(a)(8)(i)(A) as well because they did not disclose the amount of any mark-up, mark-down, or similar remuneration received as a result of the principal transactions.<(12)> <(10)> PMC, through Respondent Geman, acted with the requisite scienter. Scienter has been described as a mental state embracing intent to deceive, manipulate, or defraud. Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is established by a showing that the defendant acted intentionally or with severe recklessness. Raymond L. Dirks, 47 S.E.C. 434, 447 n.47 (1981), rev d on other grounds, Dirks v. SEC, 463 U.S. 646 (1983). <(11)> Respondent Geman acknowledged at the hearing that the legend on the confirmation was inaccurate: Question: [W]hen you were not reporting on ACT, to send a confirmation saying that Your price is reported price, that was false because those trades weren t being reported? Answer: Couldn t report them, that s correct. Question: So when you went off of ACT, in addition to not having order tickets and some kind of document to document the time of your principal trades, the language on your confirmations was also incorrect? Answer: Yes. (Tr. 435-36.) <(12)> Rule 10b-10(a)(8)(i)(A), relevant to this proceeding, provides that: [i]t shall be unlawful for any broker or dealer to effect for or with an account of a customer any transaction in, or to induce the purchase or sale of such customer of, any (continued...) ======END OF PAGE 10====== The Commission has held that Rule 10b-10 under the Securities Exchange Act requires a nonmarket maker broker-dealer acting as principal, who sells a security to another dealer to offset a contemporaneous purchase from a customer, to disclose on the customer s confirmation the amount of any markdown. Hamilton Bohner, Inc., 50 S.E.C. 125, 129 (1989). In adopting Rule 10b-10, the Commission stated that, as applied to riskless principal transactions, the rule: requires a dealer (other than a market maker) acting as a principal for his own account to disclose the amount of any mark- up, mark-down, or similar remuneration received in a transaction in an equity security when, after receiving an order to buy or sell a security from a customer, the dealer purchases the security from another person to offset a contemporaneous sale to such customer or sells the security to another person to offset a contemporaneous purchase from such customer. Securities Confirmations, 15 SEC Docket 1245, 1248-49 (Oct. 6, 1978) (citations omitted). PMC was not a market maker in any securities and did not disclose that it received remuneration in that when it traded as a principal and received price improvement it bought or sold at a better price than it gave the client. Written notification of the type required by Rule 10b-10 affords a minimum of protection. Inherent in the relationship between a dealer and its customers is the vital representation that each customer will be treated fairly and in accordance with professional standards. Duker v. Duker, 6 S.E.C. at 388. It is a notion basic to the federal securities law that information concerning mark-ups or mark-downs is material to the purchaser or seller of a security. David Disner, 63 SEC Docket at 2249; Trost & Company, Inc., 12 S.E.C. 531, 536 (1942). When, with scienter, a dealer marks up or marks down the price of a security and fails to disclose sufficient information to permit the customer to make an informed decision regarding the purchase or sale of that security, the dealer has violated the anti-fraud provisions of the federal securities laws. See Charles Hughes & Co., 139 F.2d at 436-37; David Disner, 63 SEC Docket at 2249. Respondent Geman argues that because the covering transactions were not executed until after the customer s order was confirmed at the NBBO, PMC was not required to disclose the price it paid. The Commission, however, described just such a scenario and indicated that the timing of the transaction would not alter the disclosure required, stating that: a broker-dealer filing a customer s purchase order would not avoid the [disclosure] requirement by effecting a sale to his <(12)>(...continued) security . . . unless such broker or dealer, at or before completion of such transaction, gives or sends to such customers written notification disclosing . . . [i]f he is acting as principal for his own account . . . if, after having received an order to buy from such customers, he purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from such customer, he sold the security to another person to offset a contemporaneous purchase from such customer, the amount of any mark-up, mark-down, or similar remuneration received in an equity security. ======END OF PAGE 11====== customer immediately before purchasing the security from another person instead of first purchasing the security from the other person for resale to the customer and then selling it to the customer. Securities Confirmations, 15 SEC Docket at 1249 n.20. Even if the transactions were not sequenced one right after the other, for purposes of Rule 10b-10, trades covered in the same trading day are contemporaneous and disclosure of remuneration is required. Buys- MacGregor, MacNaughton-Greenwalt & Co. (Jan 2, 1980, No-Action Letter), 1980 SEC No-Act LEXIS 2851. On other hand, if the short position . . . were maintained overnight, the later offsetting transaction should not ordinarily be construed to be contemporaneous with the initial transaction. Id. at *2. Respondent Geman argues that the no-action letter issued by the staff of the Division of Market Regulation to Buys-MacGregor is little authority since it is not a pronouncement by the Commission itself. Therefore, Respondent Geman argues, the interpretation of contemporaneous in that statement is invalid. Respondent Geman, however, has failed to point to some other, more authoritative source for a definition or to even offer his own more reasonable definition. Respondent Geman also argues that this legend complied with Rule 10b- 10(a)(8)(i)(B) because there were no mark-ups, mark-downs, or similar remuneration in that there was no charge to PMC s customers added on to the prevailing market price because PMC s customers received the dealer s price. This is addressed in the Commission s statements in adopting Rule 10b-10(a)(8)(i)(A) that variations on structuring and sequencing transactions do not alter a broker s disclosure obligation. See Securities Confirmations, 15 SEC Docket at 1249 n.20. D. Respondent Geman Willfully Aided and Abetted and Caused PMC s Violations of Anti-Fraud Provisions of the Securities Laws Respondent Geman willfully aided and abetted and caused PMC s violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-10 thereunder, and Sections 206(1) and 206(2) of the Advisers Act through his major role in the conception, implementation, and management of PMC s principal trading.<(13)> In the context of the federal securities laws, three elements must be present for aiding and abetting: (1) a primary or independent securities law violation that has been committed by some other party; (2) awareness or knowledge by the aider and abettor that his or her role was part of an overall activity that was illegal; and (3) the aider and abettor s knowing and substantial assistance of the conduct that constituted the violation. Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009 (11th Cir. 1985); Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir.), cert. denied, 449 <(13)> Willful, under the securities laws, means only that the defendant intended to commit the act which constitutes the violation. An act may be willful even if the defendant did not intend to violate the law. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). Respondent Geman s conduct was intentional and, therefore, willful. ======END OF PAGE 12====== U.S. 919 (1980); IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). In this case, there were primary violations by PMC of anti-fraud provisions of the federal securities laws, and Respondent Geman knowingly and substantially assisted the conduct that constituted those violations. The knowledge or awareness requirement of the second element may be satisfied not only by knowledge but also, when the aider or abettor is a fiduciary or an active participant, by recklessness. See Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990); Cornfeld, 619 F.2d at 923, 925; Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 47-48 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 97 (5th Cir. 1975). Respondent Geman knew or was reckless in not knowing that his conduct, as a fiduciary and an active participant in PMC s illegal activities, was the main factor behind PMC s violations. He personally designed and implemented a system of principal trading intended to reap additional compensation for PMC. He participated in drafting the letters PMC sent clients prior to implementing principal trading which did not disclose this extra compensation. He created and authorized the use of the confirmations which failed to disclose to PMC s clients any mark-ups, mark- downs, or similar remuneration. As a result of these trading practices devised by the Respondent Geman, the wrap fee clients were paying undisclosed moneys when PMC traded as a principal, and PMC realized a gain of approximately $464,800. II. Books and Records Violations A. PMC Failed to Keep Books and Records as Required by Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-11 Thereunder Section 17(a)(1) of the Exchange Act directs PMC as a broker-dealer to make and keep such records as the Commission, by rule, prescribes as necessary or appropriate in the public interest or for the protection of investors. In Rules 17a-3(a)(6) and 17a-3(a)(7), the Commission has specified such records to include, for each brokerage order and for each purchase and sale, the time of receipt and the time of execution. PMC violated these requirements by failing to record the time of receipt and the time of execution of its principal trades with clients From PMC s inception until an examination by the Commission in late 1993, PMC s trading department did not keep a memorandum or order ticket for each brokerage order received showing the time of receipt of all orders and time of execution as required by Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(6) and 17a-3(a)(7). Prior to March 1993, PMC relied on its reports to ACT to meet its record-keeping requirements for its dealer and principal transactions. When, in March 1993, the NASD requested PMC to cease reporting its riskless principal trades, PMC stopped reporting principal transactions with its clients. Thereafter, PMC did not record the time of receipt and the time of execution for the principal transactions until the Commission s examination late that year. Rule 17a-11(d) provides that every broker-dealer who fails to make and keep books and records required by Rule 17a-3 shall give notice to the Commission of which books and records it has failed to make or keep current. PMC failed to make and keep memoranda or order tickets for its principal trades from October 1992 through January 1994 and never reported ======END OF PAGE 13====== this fact to the Commission. B. Respondent Geman Willfully Aided and Abetted and Caused PMC s Violations of Books and Records Provisions of the Exchange Act Respondent Geman, as PMC s compliance officer, was not aloof from the daily operations of PMC and knew or was reckless in not knowing of the violations of the Commission s recordkeeping requirements. Although Mr. Nasr was first line supervisor of trading and responsible for supervision of compliance operations, he reported to Respondent Geman, who continued an active management role. Respondent Geman set up the trading department at PMC and determined the kind of records that would be maintained. From PMC s inception until an examination by the Commission in late 1993, he did not require PMC s trading department to keep a memorandum or order ticket for each brokerage order received showing the time of receipt of all orders and time of execution as required by Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(6) and 17a-3(a)(7). When the NASD requested PMC to cease ACT reporting for riskless principal trades, it was his decision to stop reporting PMC s principal transactions with its customers. Thereafter, he implemented no procedure to record time of receipt and the time of execution for the principal transactions, nor did he direct any member of his staff to do so. Accordingly, I find Respondent Geman willfully aided and abetted and caused PMC s violations of Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(6), 17a-3(a)(7) and 17a-11. Respondent Geman knowingly and substantially assisted PMC s books and records violations and was aware that PMC s trading department was not keeping proper records. See Dominick & Dominick, Inc., 50 S.E.C. 571, 577 (1991). His actions were willful, and his extensive involvement with the failure to keep the required books and records demonstrates that he acted with the requisite scienter. Public Interest The Division asks that Respondent be (1) barred from association with any broker-dealer, investment adviser, investment company, or municipal securities dealer with a right to reapply in eighteen months pursuant to Sections 15(b) and 19(h) of the Exchange Act and Section 203(f) of the Advisers Act; (2) ordered to cease and desist from committing or causing violations or future violations of Section 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, Sections 10(b) and 17(a)(1) of the Exchange Act and Rules 10b-5, 10b-10(a)(8)(i)(A), 17a-3(a)(6), 17a-3(a)(7), and 17a-11 thereunder, and Sections 206(1) and 206(2) of the Advisers Act; and (3) ordered to pay a civil penalty of $250,000 pursuant to Section 20(d) of the Securities Act, Section 21B of the Exchange Act, and Section 203(i) of the Advisers Act. Bar Sections 15(b) and 19(h) of the Exchange Act and Section 203(f) of the Advisers Act authorize the Commission to censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding twelve months or bar such person from being associated with a broker or dealer, a member of a national securities exchange or registered ======END OF PAGE 14====== securities association, an investment adviser or an investment company for various reasons, if it is found in the public interest to do so. The starting point for assessing what sanction is appropriate in the public interest requires consideration of many factors, including deterrence and: [t]he egregiousness of the defendant s actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant s assurances against future violations, the defendant s recognition of the wrongful nature of his conduct, and the likelihood that his occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), aff d on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the effect of a sanction in preventing a recurrence. Leo Glassman, 46 S.E.C. 209, 211 (1975); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). Sanctions should demonstrate to the particular respondent, the industry, and the public generally that egregious conduct will merit a harsh response. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976). Respondent Geman acted with scienter. It was his deliberate intent to generate extra, undisclosed compensation for PMC by implementing principal trading, and he intentionally established trading procedures specifically designed to meet that purpose. The system he devised intentionally exacted profits in a manner where the representations in the letter outlining changes to the Program and the legend on the confirmation tickets were deceptive and knowingly false. Respondent was the driving force behind the fraud violations and the recordkeeping violations. Moreover, this is not his first securities violation. In 1987, the NASD found that Stuart-James, the broker-dealer Respondent Geman was employed by prior to working for PMC, had violated the NASD s net capital rule and that Respondent Geman was responsible for that violation. Both Stuart-James and Respondent Geman were censured and fined by the NASD. The Commission, in The Stuart-James Co., 48 S.E.C. 779 (1987), aff d 857 F.2d 796 (D.C. Cir. 1988), affirmed the findings and the sanctions imposed by the NASD. The securities industry presents many opportunities for abuse and overreaching, so it is in the public interest not to allow participation by individuals whose continued participation would expose investors to undue risks. Richard C. Spangler, Inc., 46 S.E.C. at 252; see also Archer v. SEC, 133 F.2d 795, 803 (8th Cir. 1943); Hughes v. SEC, 174 F.2d 969, 975-76 (D.C. Cir. 1949). In drafting Section 15(b) of the Exchange Act, Congress viewed past misconduct as the basis for an inference that the risk of probable future misconduct was sufficient to require exclusion from the securities business. Arthur Lipper Corp., 46 S.E.C. 78, 101 (1975), aff d., 547 F.2d 171 (2d Cir. 1976). Finally, an important consideration in imposing a sanction is the impact it will have in deterring people from illegal actions which damage ======END OF PAGE 15====== public investors and the integrity of the securities markets. See Steadman, 603 F.2d at 1142 n.22; Arthur Lipper Corp. v. SEC, 547 F.2d at 184; Richard C. Spangler, Inc., 46 S.E.C. at 254 n.67. There is no mitigating evidence. Given Respondent s fraudulent and deceitful conduct in this matter along with his prior violation, severe sanctions are necessary to deter him from future violations and to protect the public interest. The Division seeks to bar Respondent from association with any broker or dealer, investment adviser, investment company and municipal securities dealer with a right to reapply in eighteen months. Upon careful consideration of the record, I find that it is appropriate in this case to bar Respondent from association with any broker, dealer, or investment adviser. The Division also requests that I impose on Respondent a collateral sanction which would bar him from association with an investment company or municipal securities dealer. The basis for the Division s request is the language of Section 15(b)(6) of the Exchange Act which authorizes as a sanction the placing of limitations on the activities of the person associated with a broker-dealer. I decline to impose such a collateral sanction on Respondent. Based upon the record, I cannot conclude that the public interest requires such a collateral penalty. See David Disner, 63 SEC Docket at 2257. Cease and Desist Order If the Commission finds, after notice and opportunity for a hearing, that any person is violating, has violated, or is about to violate any rule or regulation, Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 203(k) of the Advisers Act authorize the Commission to impose a cease and desist order against that person. These provisions all provide that the Commission may issue an order against such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision rule, or regulation. I find that a cease and desist order against Respondent Geman is appropriate based on his prior disciplinary history, his fraudulent conduct in this matter, and his failure to recognize any wrongdoing on his part. Although Respondent Geman is not currently involved in the securities industry, his conduct indicates a likelihood of future violations. Civil Money Penalty Section 21B(a) of the Exchange Act authorizes the Commission to assess civil money penalties in any proceeding instituted pursuant to Sections 15(b) against any person, after notice and an opportunity for an administrative trial, if it finds that such person has willfully aided, abetted, counseled, commanded, induced, or procured a violation of any ======END OF PAGE 16====== provision of the Securities Act, the Exchange Act, or the Advisers Act.<(14)> Section 21B(b) of the Exchange Act specifies a three-tier system for assessing the maximum amount of a penalty. In the first tier, the maximum penalty for each act or omission is $5,000 for a natural person or $50,000 for any other person. In the second tier, the maximum amount is $50,000 for a natural person or $250,000 for any other person if the act or omission involves fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement. In the third tier, the maximum amount is $100,000 for a natural person or $500,000 for any other person if the act or omission (1) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and (2) directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in substantial pecuniary gain to the person who committed the act or omission. The assessment of a penalty pursuant to Section 21B of the Exchange Act depends on a finding that such an assessment is in the public interest. The factors that may be considered in determining the penalty amount are specified in Section 21B(c) of the Exchange Act. They are: (1) whether the act or omission for which the penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; (2) the harm to other person(s) resulting either directly or indirectly from such act or omission; (3) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior; (4) whether the respondent previously has been found by the Commission, another regulatory agency or a self-regulatory organization to have violated federal or state securities laws or the rules of a self-regulatory organization or has been enjoined or convicted by a court of competent jurisdiction of violations of such laws or rules; (5) the need to deter respondent and others from committing such acts or omissions; and (6) such other matters as justice may require. New Allied Development Corp., 63 SEC Docket 807, 821 n.33 (Nov. 26, 1996); First Securities Transfer System, Inc., 60 SEC Docket 441, 446 (Sept. 1, 1995). Section 21B(a) of the Exchange Act requires that the public interest finding support the amount of a particular assessment, not merely the overall decision to assess a penalty. See First Securities Transfer Systems, Inc., 60 SEC Docket at 447 n.15. I find it appropriate and in the public interest for Respondent Geman to pay a third tier civil money penalty of $500,000. This determination is based on his failure to disclose principal trading on a transactional basis, extracting transactional remuneration under the wrap fee program (PMC executed 8,264 principal transactions, securing for itself a profit of $464,800), his prior disciplinary history, his involvement in a fraudulent and deceptive scheme involving the legend on the confirmation ticket, as well as the record keeping violations. Record Certification <(14)> Section 203(i) of the Advisers Act also provides for civil money penalties using a three-tier system to assess the penalty amount. ======END OF PAGE 17====== Pursuant to Rule 351(b) of the Commission s Rules of Practice, 17 C.F.R.  201.351(b) (1996), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on February 19, 1997. Order Based on the findings and the conclusions set forth above, pursuant to Sections 8A of the Securities Act, Sections 15(b), 19(h), 21B, and 21C of the Exchange Act, and Sections 203(f) and 203(i) of the Advisers Act , I ORDER that Marc N. Geman is: (1) hereby barred from association with any broker or dealer, investment adviser, national securities exchange, or registered securities organization; and (2) hereby ordered to cease and desist from committing or causing any violation, and from committing or causing any future violations of Section 17(a) of the Securities Act, Sections 10(b) and 17(a) of the Exchange Act and Rules 10b-5, 10b-10, 17a-3, and 17a-11 thereunder, and Sections 206(1) and 206(2) of the Advisers Act; and (3) ordered to pay a civil money penalty of $500,000.<(15)> This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R.  201.360 (1996). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any 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. ________________________ G. Marvin Bober Administrative Law Judge <(15)> Payment should be made on the first day after this decision becomes final. Such payment 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 Office of the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (iv) submitted under cover letter which identifies Marc N. Geman as Respondent in this proceeding, and 3-9032 as the file number of these proceedings. ======END OF PAGE 18======