INITIAL DECISION RELEASE NO. 121 ADMINISTRATIVE PROCEEDING FILE NO. 3-9041 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________ : In the Matter of : : AL RIZEK : INITIAL DECISION : February 24, 1998 ________________________ : APPEARANCES: Mitchell E. Herr, Esq. and Glen Gordon, Esq. for the Division of Enforcement, Securities and Exchange Commission John R. Squitero, Esq. and Alberto J. Xiques, Esq. for the Respondent BEFORE: G. Marvin Bober, Administrative Law Judge I. INTRODUCTION The Securities and Exchange Commission ( Commission ) initiated this proceeding on July 12, 1996, pursuant to Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 ( Exchange Act ) to determine whether allegations of fraud made by the Division of Enforcement ( Division ) are true and what, if any, remedial action would be appropriate in the public interest. Other issues relate to whether the Respondent, Al Rizek, should be ordered to cease and desist from committing or causing any violations or future violations, and whether disgorgement and a civil money penalty are appropriate. ( Order Instituting Proceeding, hereinafter referred to as OIP ). As directed by the Commission in the OIP, I held an administrative trial in San Juan, Puerto Rico, on January 7, 8, 9, and 10, 1997.<(1)> At the trial, the Division called eight witnesses including one expert witness and introduced twenty-two exhibits. The Respondent introduced one hundred twenty-seven exhibits and called three witnesses including one expert witness. Both parties filed post-hearing pleadings. I received the last pleading on April 16, 1997. II. MOTION TO STRIKE <(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====== At the administrative trial, the Respondent moved to have Mr. Ascencio Weber stricken from the claim against Mr. Rizek in that [Mr. Ascencio Weber] did not come to testify. (Tr. 1064.) Counsel for the Respondent argued that the Division had introduced no evidence to prove Mr. Rizek controlled Mr. Asencio Weber s account nor any evidence to contradict Mr. Rizek s assertions that the disputed trading was appropriate and consistent with Mr. Ascencio Weber s investment objectives. (Tr. 1063-70.) The Division countered that there was evidence in the record concerning all elements of churning for Mr. Ascencio Weber s account. (Tr. 1064.) After considering the arguments, I denied the motion to dismiss. (Tr. 1070.) In his post-trial brief, the Respondent renewed his motion to [d]ismiss all portions of the Division s claims against Mr. Rizek concerning Mr. Asencio Weber s account. (Respondent s Post-Hearing Brief at 3.) Whether churning has occurred is determined, in part, by the testimony of witnesses who are subject to cross-examination and assessed on their credibility. As Mr. Ascencio Weber did not testify, was not subject to cross-examination, and no credibility assessment was made, the motion to dismiss all portions of the Division s claims against Mr. Rizek concerning his account is GRANTED. See Booth v. Peavey Company Commodity Services, 430 F.2d 132 (8th Cir. 1970); Newburger, Loeb & Co., v. Gross, 563 F.2d 1057 (2d Cir. 1977), cert. denied, 434 U.S. 1035 (1978). III. ISSUES Whether Respondent violated the antifraud provisions of the securities statutes over a period from at least January 1, 1993 through at least March 31, 1994, by (1) recommending trading that was excessive in light of the objectives of certain customer accounts; (2) knowingly or recklessly (i) trading in certain customer accounts in a manner that was inconsistent with the articulated investment objectives of the holders of those accounts and (ii) trading in certain customer accounts in a manner that resulted in high transactional costs, virtually nullifying any ability by the customer to profit; and (3) the misrepresentation or omission of material facts. IV. FINDINGS OF FACT My findings and conclusions are based upon the record and upon my observation of the various witnesses that testified at the hearing, as well as the arguments and proposals of fact and law of the parties, and the relevant statutes and regulations. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981); see also Grogan v. Garner, 498 U.S. 279 (1985). I have considered all proposed findings and conclusions and all contentions, and I accept those that are consistent with this decision. A. Respondent Respondent, Al Rizek ( Rizek ), is a registered representative, licensed under the federal securities laws. (Tr. 31-32.) Rizek graduated from Rennselear Polytechnic Institute ( RPI ), earning a Bachelors of Science degree in Management Engineering in 1979, a Masters degree in Management Engineering in 1980, and a Masters degree in Business Administration in 1984. (Tr. 31.) Upon graduation from RPI in 1980, Rizek ======END OF PAGE 2====== obtained employment with Wang Laboratories, where he worked until 1985. (Tr. 373-76.) In 1985, Rizek began his career in the brokerage industry, working as a registered representative with Drexel Burnham Lambert. (Tr. 32.) Rizek was eventually promoted to Vice President of Investments. (Tr. 32.) In early 1989, Rizek moved to PaineWebber of Puerto Rico, Inc. ( PWPR ), which he considered the premier brokerage firm on the island. (Tr. 32, 376- 79.) Granted the identical title of Vice President of Investments, Rizek worked at PWPR until mid 1995.<(2)> (Tr. 379.) Rizek admitted he was required to read PaineWebber s Sales Practice Manuals. (Tr. 53.) He was aware that as a broker he had an ongoing duty to know his customers, and ensure the suitability of his recommendations and trading activity in their accounts. (Tr. 53.) Additionally, Rizek agreed with the statement in PaineWebber s Sales Practice Manual that the burden of ensuring that transactions are suitable is greatest where the broker solicits the transaction, as Rizek did in almost every instance. (Tr. 111-12, 114.) In short, Rizek was clearly aware of his duties as registered representative. While at PaineWebber, Rizek personally received a commission on virtually all purchases and sales of zero coupon bonds. (Tr. 71-73.) The introduction of margin into his customers accounts further increased his commissions. (Tr. 71-73.) In 1993, Rizek generated the highest gross production in his career,<(3)> resulting in commissions of approximately $1,750,000.<(4)> At the trial, Rizek conceded that his short-term zero coupon bond trading strategy contributed significantly to his record income in 1993. (Tr. 101-02.) B. Zero Coupon Bonds Zero coupon bonds are United States government instruments that do not pay interest periodically; rather, the interest on a zero coupon bond accrues or accumulates until the bond matures. (Tr. 44-45.) Consequently, the holder of a zero coupon bond does not receive any money from the bond until it is either sold or redeemed by the United States Treasury at maturity. (Tr. 45-46.) It is generally agreed that zero coupon bonds are about as safe an investment as is possible; upon maturity the United States Treasury will <(2)> Currently, Rizek is President and principal registered broker of Rizek Investments, Inc. (Tr. 30, 205- 06, 208.) Rizek set up Rizek Investments, Inc., soon after he left PWPR. (Tr. 41.) <(3)> Rizek s gross production was as follows: 1989 $500,000 1990 $750,000 1991 $1,000,000 1992 $1,250,000 1993 $4,450,000 1994 $675,000 1995 less than $675,000 (Respondent s Post-Hearing Brief at 5.) <(4)> Rizek personally received 45%, or approximately $775,258 of total commissions. (Tr. 73, 102.) ======END OF PAGE 3====== pay the face amount of the bond regardless of any intervening events affecting the stock market, interest rates, or bond market. (Tr. 46-47.) Holding zero coupon bonds until maturity is an appropriate choice for an investor who is interested primarily in safety and who does not need to generate periodic cash flow. (Tr. 47.) C. Respondent s Strategy of Short-Term Trading in United States Treasury Zero Coupon Bonds In early 1993, Rizek recommended to certain customers that they embark on a self described aggressive growth strategy by trading United States Treasury zero coupon bonds (known as TINTS and PRINS)<(5)> on a short-term basis. (Tr. 43-47, 50, 75, 101.) Rizek believed the strategy would enable his customers to take advantage of specific movements in the interest rate markets. (Tr. 465-466.) The value of zero coupon bonds is very sensitive to changes in interest rates.<(6)> (Tr. 47-48.) Selling a zero coupon bond prior to maturity might allow an investor to make a profit or suffer a loss depending upon whether interest rates have gone up or down since the investor purchased the zero coupon bond. (Tr. 48.) Rizek s strategy was predicated upon taking advantage of the volatility of the bond market based on a particular forecast of lowering interest rates. <(7)> (Tr. 67.) For example, during the period from September 1993 through November 1993, Rizek recommended that his customers purchase zero coupon bonds when Treasury interest rates rose above 6.00% to 6.10% and sell those zero coupon bonds when the Treasury interest rate fell to about 5.85%.<(8)> (Div. Ex. 6 at 0012; Tr. 62-67.) According to the Division s expert witness, Norman Padgett,<(9)> there was no economic logic to Rizek s trading strategy. (Tr. 926-28.) Even if one could successfully predict the direction of long-term interest <(5)> Zero coupon bonds are derivative instruments, which are created when the interest coupons (which become TINTS) are stripped from the principal components (which become PRINS) of interest bearing bonds. (Tr. 45.) <(6)> The price of Treasury bonds, like all fixed rate investments, moves inversely to the general interest rate. John Downes & Jordan E. Goodman, Barron s Finance & Investment Handbook, at 77 (4th ed. 1995). Thirty-year zero coupon bonds are so sensitive to interest rate fluctuations that if interest rates increase by 1%, the value of a zero coupon bond immediately drops by approximately 25%. (Tr. 49-50.) <(7)> The forecasts were issued by PaineWebber s chief economist, Dr. Maury Harris, who predicted interest rates would steadily decline until the year 2000. (Tr. 62-67.) <(8)> Rizek also recommended that the zero coupon bonds be purchased on margin. <(9)> Mr. Padgett s qualifications as an expert are established at Tr. 888-97. He was retained by the Division to examine eight customer accounts and determine whether they had been churned. Mr. Padgett analyzed various documents, including the pleadings, the monthly statements of the accounts involved, new account forms, depositions of Mr. Rizek and some of the customers, documents supplied by the [Division] and [R]espondent, [and] several cases with similar issues pertaining to the accounts, as well as various reference publications and three databases. (Tr. 897.) ======END OF PAGE 4====== rates on a short-term basis,<(10)> it would not make sense to swap long- term zero coupon bonds<(11)> since bond prices move in parallel with each other and, on a percentage basis, there is no difference in price between these zero coupon bonds. (Tr. 928.) Because the prices of long-term zero coupon bonds move in concert, the only thing achieved by Rizek s frequent trading of such similar securities was the accumulation of commissions and transactional costs that eroded the customers principle. (Tr. 935.) Mr. Padgett argued that only a very sophisticated, experienced investor could have understood the mechanics and risks involved in Rizek s trading strategy. (Tr. 911.) On the other hand, Respondent s expert witness, Charles G. Myers,<(12)> testified that trading in long-term zero coupon bonds on a short-term basis to capitalize on predicted fluctuations in interest rates is an accepted trading strategy. (Tr. 1208.) Mr. Myers contended that although the long-term zero coupon bond market was a very efficient market and prices did move in concert, there were discontinuities over relatively short periods of time. (Tr. 1100.) According to Mr. Myers, these price imbalances represented opportunities where it may have been profitable to swap a zero coupon bond of a certain maturity for one of a slightly different maturity. (Tr. 1100.) Mr. Myers, whose primary exposure to short-term trading in zero coupon bonds involved institutional rather than retail customers, conceded that for Rizek s short-term trading to be reasonable, his customers would have to be able to tolerate aggressive risk. (Tr. 1176.) D. Introduction of Margin Rizek recommended that his customers purchase zero coupon bonds on margin, thus significantly increasing the gains (or losses) on the zero coupon bond trades by increasing the face value amounts of the trades. (Tr. 52, 420.) Rizek based this decision on the fact that the broker call rate (i.e., the rate at which customers could borrow money to purchase securities on margin) was lower than the yields on the zero coupon bonds that were being traded by his customers as part of his strategy. (Div. Ex. 6 at 0012; Tr. 62-64.) Rizek described this condition as having a positive carry. (Tr. 63-64.) According to Rizek, PWPR simply added the monthly margin interest due to the total amount of the margin loan still outstanding. Rizek further testified that he provided cushions that left enough equity in customer accounts to avoid a margin call in case interest rates moved adversely. Rizek s definition of positive carry ignored the fact that zero coupon bonds do not yield any cash until they are sold or redeemed, and since PWPR required margin interest to be paid monthly, some source of cash - other than the zero coupon bonds - had to be used to carry <(10)> Mr. Padgett testified that existing academic literature demonstrates that [n]o one has been able to consistently predict on a short-term basis what long-term fluctuation [in interest rates] will occur. (Tr. 898.) <(11)> Ninety-six percent of Rizek s purchases and sales involved long-term zero coupon bonds with maturities of between twenty-six and twenty-nine years. (Tr. 995-96.) <(12)> Mr. Myer s qualifications as an expert are established at Tr. 1071-90. He was retained by PWPR to perform profit and loss analyses for the eight accounts in question. ======END OF PAGE 5====== the bonds month to month. (Tr. 62-66.) Purchasing zero coupon bonds on margin dramatically magnified the risks to which Rizek s clients were exposed. For instance, buying zero coupon bonds 50% on margin doubled their risk, and buying the same bonds 75% on margin quadrupled the risk.<(13)> (Tr. 54-57, 902.) Despite the increase in risk caused by the introduction of leverage to the accounts, Rizek testified that based on the liquidity of the zero coupon instruments and his past experience in following the interest rate forecasts provided by Dr. Harris, he believed he could act quickly to take steps to protect his customers in the event of any adverse movement in interest rates. (Tr. 496.) The use of margin, however, further compounded the risks to Rizek s customers by creating the possibility that, despite Rizek s monitoring of their accounts, his customers might be forced to sell at a loss to meet a margin call. (Tr. 59-60, 70.) Unlike a margin investor, an investor who purchases a zero coupon bond outright can ride out a downturn in the bond market and sell at a time of his choosing because he is not subject to a margin call. (Tr. 59-60, 70.) E. Respondent s Customers During the period of January 1, 1993 through March 31, 1994, Rizek was the registered representative for the accounts belonging to the following seven investors: 1. Dr. Edwin Vega Feliciano 2. Eddie Carlos Figueroa 3. George Donato 4. Gary Humbert / El Dorado Technical Services 5. Jose Acevedo 6. Hector Torres Nadal 7. Herminio Cintron Rivera The pertinent facts are as follows. 1. Dr. Edwin Vega Dr. Edwin Vega, age fifty-one, is a medical doctor specializing in obstetrics and gynecology. (Tr. 210.) In 1992, Dr. Vega opened a brokerage account with Rizek and PWPR. (Tr. 213.) Dr. Vega told Rizek that he was investing for his retirement, was interested in safety and monthly income, and did not want risk or speculation. (Tr. 216-17; Div. Ex. 7 at Tab F.) Dr. Vega s new account form listed speculation last <(13)> If an investor uses $100,000 of his money to purchase $100,000 worth of thirty-year zero coupon bonds and interest rates go up 1%, the investor loses $25,000. (Tr. 55.) If the investor uses $100,000 of his own money and borrows $100,000 from the brokerage firm to purchase $200,000 worth of thirty-year zero coupon bonds (i.e., buys on 50% margin) and interest rates go up 1%, the investor loses $50,000. (Tr. 55-56.) If the investor uses $100,000 of his own money and borrows $300,000 from the brokerage firm to purchase $400,000 worth of thirty-year zero coupon bonds (i.e., buys on 75% margin) and interest rates go up 1%, the investor loses $100,000, his entire investment. (Tr. 56-57.) Rizek frequently had his clients purchase zero coupon bonds 75% or more on margin. (Div. Ex. 15 at Tabs 7, 15, 23, 31, 39, 47, 55, and 63.) ======END OF PAGE 6====== among possible investment objectives.<(14)> (Div. Ex. 7 at Tab A.) Dr. Vega testified that at no point during his association with Rizek did his investment objectives change. (Tr. 218.) Further, Dr. Vega insists that Rizek never asked him if it was okay to change his investment objectives to indicate a willingness to speculate.<(15)> (Tr. 218.) Dr. Vega had no special training or education in financial matters. (Tr. 210-13.) Prior to opening an account with Rizek, Dr. Vega had accounts at Merrill Lynch and Kidder Peabody, and had invested primarily in Ginnie Maes.<(16)> (Tr. 213-14.) Dr. Vega testified that he had no experience investing in stocks or bonds.<(17)> (Tr. 212-13.) On cross- examination, however, Dr. Vega admitted that he was familiar with zero coupon bonds, having purchased them in the past through Merrill Lynch. (Tr. 274.) Dr. Vega also admitted purchasing collaterized mortgage obligations, although he insisted he was unfamiliar with them.<(18)> <(14)> Rizek completed an updated new account form in the spring of 1993 so that Dr. Vega could buy zero coupon bonds on margin. The investment objectives were listed as follows: Growth, Income, Investment, and Speculation. (Tr. 120; Div. Ex. 7 at Tab E.) <(15)> In a December 2, 1993 memorandum, Rizek purported to document a change to the investment objectives of several of his clients. (Div. Ex. 6 at 0017.) Rizek s memorandum, however, came only after repeated inquiries and concern from PWPR management regarding the suitability of his short-term trading strategy involving zero coupon bonds. (Tr. 131-56.) From March until November 1993, Rizek had at least four meetings with PWPR management concerning his trading in zero coupon bonds. (Tr. 133-43.) On November 29, 1993, management instructed Rizek to explain and justify his trading activity. (Div. Ex. 6 at 0016.) Only days later, on December 2, 1993, Rizek purported to document a change to the investment objectives of Dr. Vega, Eddie Figueroa, El Dorado, George Donato, Jorge Asencio Weber, and Jose Acevedo. (Div. Ex. 6 at 0017.) Rizek s memorandum, which was without edification or supporting text, was titled Accounts with changes in the investments [sic] objectives to CDBA [Growth, Speculation, Investment, Income]. (Div. Ex. 6 at 0017.) Rizek denies the changes were the result of management pressure, instead insisting the changes were made simply to bring his [customers ] investment objectives in line with their investments (sic) history. (Div. Ex. 6 at 0019; Tr. 152-53.) Rizek claimed he called each customer in November 1993 and specifically asked them for permission to update the priority of their investment objectives. (Tr. 156-59.) However, each of Rizek s customers, including several of those not listed on the December 2, 1993 memorandum, denied that Rizek had sought or received their permission to change their investment objectives. (Tr. 218 (Vega), Tr. 531 (Figueroa), Tr. 571 (Donato), Tr. 591-92 (El Dorado), Tr. 680 (Acevedo), Tr. 716 (Torres), and Tr. 853 (Cintron).) <(16)> Ginnie Maes are securities backed by a pool of mortgages and guaranteed by the Government National Mortgage Association which passes through to investors the interest and principal payments of homeowners. Downes & Goodman, supra note 6, at 338. <(17)> While Dr. Vega s account was being managed by Kidder Peabody, he did purchase, on margin, a stock, Venture Capital Fund. Dr. Vega, however, insists that the purchase was unauthorized. (Tr. 214-16.) <(18)> Collaterized mortgage obligations ( CMOs ) are mortgage-backed bonds that separate mortgage pools into different maturity classes, called tranches. Tranches pay different rates of interest and typically mature in two, five, ten, and twenty years. Issued by the Federal Home Loan Mortgage Corporation ( Freddie Mac ) and private issuers, CMOs are usually backed by government-guaranteed or other top-grade mortgages and have AAA bond ratings. Downes & Goodman, supra note 6, at 236. ======END OF PAGE 7====== (Tr. 274-75.) Dr. Vega had significant financial resources, understood financial documents such as statements of income and expenses, regularly consulted with his accountant during the period that Rizek managed his account, and completed, despite the concerns of the accountant, a tax swap proposed by Rizek. (Tr. 234-40, 334-35.) Moreover, Dr. Vega owned and maintained at least seven properties, which in June of 1992 were valued at just over $1,500,000. (Tr. 234-40; Resp. Ex. 239.) Specifically, Dr. Vega paid the mortgages on all the properties, personally rented several of the properties, and monitored all expenditures for the properties. (Tr. 234-40.) Dr. Vega admits that he approved all the transactions in his account prior to their execution. (Tr. 283, 361.) He also received all the relevant account statements, trade confirmations, and the RMA ( Resource Management Account ) Year-End Summaries. (Tr. 250-51, 306.) Dr. Vega, however, insists that he checked only the account statements for the net value of the account each month. (Tr. 251.) A September 1992 letter from Rizek to and upon the request of Dr. Vega, however, contained an itemized summary of the account activity and explained accounting errors whereby: (1) approximately $166 in interest from a Puerto Rican Ginnie Mae had not been paid to Dr. Vega; and (2) two months of margin interest that had been paid was mistakenly not credited to the account. (Tr. 311-13; Resp. Exs. 245, 246.) At the hearing, Dr. Vega conceded that he probabl[y] noticed these errors, was concerned about them, and consequently called Rizek. (Tr. 311-13; Resp. Exs. 245, 246.) Dr. Vega admitted he was aware that for much of the life of his account, it had margin balances for which he was being charged interest. (Tr. 272.) In fact, at one point, Dr. Vega borrowed against his margin account in order to pay off a bank loan, because the interest rate on the margin loan was lower than the interest rate on the bank loan. (Tr. 278- 79.) Nevertheless, Dr. Vega testified that he was unaware of the risks of Rizek s trading strategy, and that Rizek never warned him that the decision to margin the account would greatly magnify the possible profits or losses. (Tr. 221, 224.) Consequently, Dr. Vega claimed he had no idea the extent to which his account was leveraged. (Tr. 221-22, 230, 272-73.) In fact, Dr. Vega testified that, despite noting the changing net value of his account, he never took notice of the account s rising margin debit balance, which was prominently listed on the line immediately below the account s net value and at one point ballooned to over $5,000,000. (Tr. 302.) It strains logic to believe that Dr. Vega could at the same time take note of his account s changing net value and missing $166 interest checks, yet somehow every month fail to notice the rapidly escalating margin debit balance.<(19)> When making financial decisions, Dr. Vega testified that he placed full trust in the recommendations and decisions of Rizek. (Tr. 226.) <(19)> Also casting doubt on the credibility of Dr. Vega s testimony is the fact that Sheralyn Aparicio, Rizek s current sales assistant who worked for him at PWPR during the trading period, testified that Dr. Vega frequently called their office to inquire about margin interest rates, account balances, cumulative margin debt, and bond yields. According to Ms. Aparicio, Dr. Vega was very active in monitoring his account. In fact, Ms. Aparicio testified that Dr. Vega called the office several times a day, and spoke to Rizek, on average, between five to six times a week. (Tr. 1013-1017.) ======END OF PAGE 8====== According to Dr. Vega, purchases or sales in the account were always initiated on the recommendation of Rizek, and he always followed the recommendations. (Tr. 226.) Letters from Rizek to Dr. Vega, however, contradict or at least cast doubt on this part of Dr. Vega s testimony. Specifically, Dr. Vega admitted receiving numerous letters from Rizek confirming trades made per [his] instructions and providing status information concerning both individual trades and the account as a whole.<(20)> (Resp. Exs. 245, 246, 248, 249, 256, 257, 262, 263, 271, 272.) During the fifteen month period ranging from January 1993 through March 1994, Rizek effected $75,666,402 in transactions in Dr. Vega s account on an average monthly equity of $1,459,543. (Div. Ex. 15 at Tab 2.) Average annual commissions and interest fees amounted to $628,350 and $187,916, respectively.<(21)> (Div. Ex. 15 at Tab 2.) The annualized turnover rate<(22)> was 8.2 for the entire portfolio (including margin debit balances) and 25.2 for the actual equity invested in the account. (Div. Ex. 15 at Tab 1.) The cost to equity ratio was 19% for the portfolio and 56% for the investment.<(23)> (Div. Ex. 15 at Tab 2.) Finally, during this period, securities in the account were held for an average of fifty days before being sold. (Div. Ex. 15 at Tab 64.) 2. Eddie Figueroa Mr. Figueroa, age forty-seven, is the owner of a small business that sells automobile tires. (Tr. 517.) Prior to meeting Rizek, Mr. Figueroa had kept his money in a savings account. (Tr. 521.) In 1990, after attending one of Rizek s investment seminars, Mr. Figueroa opened a brokerage account with Rizek. (Tr. 518, 528.) Mr. Figueroa was looking to increase his capital and, according to his <(20)> For example, a letter dated June 17, 1993, itemized several significant transactions to be effected in Dr. Vega s account as per [his] instructions. The letter outlined the following transactions: deposit of $120,000 in the account, purchase $10,000,000 TINT 11/15/18 (price 16.185, yield 7.29%), sell $4,700,00 TVA Step Up 11/15/29 (yield 8 5/8%, minimum price 66.375) and $1,031,000 TVA Step Up 12/15/22 (yield 7 3/4%, minimum price 73.65) with the funds to be reinvested in $20,000,000 TINT 11/15/18 at current market value. (Resp. Exs. 256, 257.) <(21)> On average, Dr. Vega s account was 51% on margin, including a high of 77% in September 1993. (Div. Ex. 15 at Tab 63.) <(22)> In calculating the turnover rate for this account and the others at issue, the Division s expert, Norman Padgett used two methods. First, Mr. Padgett divided the total cost of purchases by the average investment in the account during that period of time. Looper & Co., 38 S.E.C. 294, 297 n.6 (1958). The average investment in the account is measured by the amount of total investments less the amount of margin debit balance. Id. at n.11; Shearson, Hammill & Co., 42 S.E.C. 811, 845 n.72 (1965); Reynolds & Co., 39 S.E.C. 902, 906 n. 10 (1960). This method tracks the investor s net equity in the account. Second, although it is a far less common method of computation, Mr. Padgett calculated the turnover rates by including margin debit balances in the amount of total investments. This latter method tracks the portfolio as a whole. <(23)> The cost to equity ratio or break even was calculated for this account and the others at issue by dividing total expenses by average monthly equity. Similar to the turnover rates, average monthly equity was calculated both including and excluding margin debit balances. ======END OF PAGE 9====== testimony, was willing to take any type of risk. (Tr. 520-24.) Mr. Figueroa s new account form, however, listed speculation last among possible investment objectives.<(24)> (Div. Ex. 13 at Tab A.) Also, Rizek told him that given the small amount of money that [he] had, the most convenient thing was to put most of the savings into some safe investments and devote a small amount to moderate type of risk. (Tr. 524, 530.) Further, at no point during his association with Rizek did Mr. Figueroa s investment objectives change, nor does Mr. Figueroa remember if Rizek asked him if it was okay to change his investment objectives to indicate a willingness to speculate.<(25)> (Tr. 531-32.) Mr. Figueroa studied biology on the university level, but never earned a degree. (Tr. 517.) He had no specialized training in finance or accounting, no prior securities experience, and did not follow the financial markets. (Tr. 517, 548; Div. Ex. 13 at Tab A.) Mr. Figueroa could not distinguish the characteristics or nature of a TINT, PRIN, or TVA bond. (Tr. 548.) Mr. Figueroa, on the other hand, did attend two financial planning seminars given by Rizek, where investment strategies were discussed. (Tr. 518-20.) When making financial decisions, Mr. Figueroa relied completely on the recommendations and decisions of Rizek. (Tr. 546-47.) Purchases or sales in Mr. Figueroa s account, although always approved by Mr. Figueroa, were initiated on the recommendation of Rizek, and Mr. Figueroa always followed the recommendations of Rizek. (Tr. 546-47; 555-56.) When Rizek called, he would offer only one recommendation to Mr. Figueroa. (Tr. 545-46.) Regarding Rizek s trading strategy, Mr. Figueroa insists he understood the risks and was happy with investment advice. (Tr. 551.) Nevertheless, Mr. Figueroa s testimony reveals that Rizek never alerted him to the increased risk involved in the short-term trading of leveraged zero coupon treasury bonds. (Tr. 555-56.) Mr. Figueroa still has a brokerage account with Rizek. (Tr. 548, 551.) During the fifteen month period ranging from January 1993 through March 1994, Rizek effected $3,637,613 in transactions in Mr. Figueroa s account on an average monthly equity of $85,500. (Div. Ex. 15 at Tab 2.) Average annual commissions and interest fees amounted to $34,408 and $8,958, respectively.<(26)> (Div. Ex. 15 at Tab 2.) The annualized turnover rate was 7.5 for the portfolio and 19.3 for the investment. (Div. Ex. 15 at Tab 1.) The cost to equity ratio was 21% for the portfolio and 51% for the investment. (Div. Ex. 15 at Tab 2.) Finally, during this period, securities in the account were held for an average of fifty-two days before being sold. (Div. Ex. 15 at Tab 48.) 3. George Donato <(24)> The new account form lists Mr. Figueroa s investment objectives as follows: Growth, Income, Safety, and Speculation. (Div. Ex. 13 at Tab A.) <(25)> See Supra note 15. <(26)> On average, Mr. Figueroa s account was 46% on margin, including a high of 81% in March 1993. (Div. Ex. 15 at Tab 47.) ======END OF PAGE 10====== Mr. Donato, age forty-nine, opened a new account with Rizek in 1991. (Tr. 565.) Mr. Donato was primarily interested in long-term bonds and the safety of [his] investment. (Tr. 566, 568.) Mr. Donato s new account form supports his testimony, listing speculation last among possible investment objectives.<(27)> (Div. Ex. 12 at Tab A.) Mr. Donato s investment objectives never changed, and he does not remember Rizek ever asking him if it was okay to change his investment objectives to indicate a willingness to speculate.<(28)> (Tr. 571.) Mr. Donato has a college degree in Military Science and Psychology from the University of Puerto Rico. (Tr. 563.) In 1968, while at the university, Mr. Donato took basic accounting. (Tr. 563.) Mr. Donato also admitted that as a businessman he reviewed and analyzed financial documents, and made decisions based upon his review. (Tr. 580.) Mr. Donato, however, has had no formal education or training in accounting or finance since 1968. (Tr. 563.) He further testified that he did not follow the stock or bond market, except reading the newspaper to take note of interest rates. (Tr. 577.) Additionally, like many of Rizek s other customers, Mr. Donato did not know what a TINT or PRIN was, nor did Rizek ever explain how bonds functioned, especially the differences among zero coupon bonds. (Tr. 575-76.) Purchases and sales in Mr. Donato s account were always authorized and followed by a confirmation. (Tr. 581, 584.) Mr. Donato relied on Rizek s recommendations and decisions, accepting ninety-nine percent of Rizek s recommendations. (Tr. 573.) On almost every occasion, it was Rizek who initiated transactions in the account, never offering more than one investment option. (Tr. 575.) Mr. Donato admitted that investing in securities necessarily involved a certain amount of risk, yet believed the sensitivity of treasury bonds to interest rates was very, very minor. (Tr. 572.) Also, while Mr. Donato borrowed on margin for business reasons, he had no knowledge that or the extent to which Rizek was trading his account on margin, nor the degree to which margin magnified any profits or losses. (Tr. 578-79.) Finally, Mr. Donato had no idea how the transactional costs of Rizek s short-term trading strategy affected the profits of his account. (Tr. 574.) During the fifteen month period ranging from January 1993 through March 1994, Rizek effected $2,567,621 in transactions in Mr. Donato s account on an average monthly equity of $84,699. (Div. Ex. 15 at Tab 1.) Average annual commissions and interest fees amounted to $22,600 and $5,571, respectively.<(29)> (Div. Ex. 15 at Tab 2.) The annualized turnover rate was 7.4 for the portfolio and 14.3 for the investment. (Div. Ex 15 at Tab 1.) The cost to equity ratio was 16% for the portfolio and 33% for the investment. (Div. Ex. 15 at Tab 2.) Finally, during this <(27)> The new account form lists Mr. Donato s investment objectives as follows: Growth, Income, Safety, and Speculation. (Div. Ex. 12 at Tab A.) <(28)> See Supra note 15. <(29)> On average, Mr. Donato s account was 50% on margin, including a high of 69% in March 1994. (Div. Ex. 15 at Tab 31.) ======END OF PAGE 11====== period, securities in the account were held for an average of thirty-four days before being sold. (Div. Ex. 15 at Tab 32.) 4. El Dorado Gary Humbert, age sixty-eight, is the owner of El Dorado construction company. (Tr. 586.) In 1991, Mr. Humbert opened a brokerage account with Rizek on behalf of El Dorado. (Tr. 589.) It was company policy not to speculate with investments, and Mr. Humbert claimed he was not willing to take any substantial investment risks. (Tr. 689.) El Dorado s new account form listed speculation last.<(30)> (Div. Ex. 8 at Tab A.) According to Mr. Humbert, El Dorado s investment objectives never changed, and Rizek never asked him if it was okay to change the company s investment objectives to indicate a willingness to speculate.<(31)> (Tr. 591.) Mr. Humbert had no formal training or education in finance or accounting. (Tr. 586.) Mr. Humbert claims he did not know what a TINT or PRIN was, did not follow the financial markets, and did not independently research Rizek s recommendations. (Tr. 600-01.) Two letters from Rizek to Mr. Humbert, dated July 26, 1991 and February 10, 1992, however, contradict Mr. Humbert s testimony. (Resp. Exs. 151, 158.) The letters indicate that as early as 1991 and 1992, El Dorado was investing in United States Treasury zero coupon bonds. (Resp. Exs. 151, 158). Purchases and sales in El Dorado s account were always authorized and followed by a confirmation. (Tr. 630, 626.) Mr. Humbert never objected to any trade after receiving a confirmation. (Tr. 629.) Mr. Humbert also received all the relevant monthly account statements, but insists that he only checked the statements for the net value of the account. (Tr. 618.) According to Mr. Humbert, he was aware that the account was trading on margin and had suffered heavy losses at the end of 1993. (Tr. 639, 649.) Nonetheless, Mr. Humbert testified that not only did he not realize during the trading period that the account had a margin debit balance of several million dollars, but that up until the instant administrative trial he was unaware of any debit balance. (Tr. 618-19.) Similarly, Mr. Humbert claimed that despite a 1993 audited financial statement that El Dorado presented to a bonding company, he did not realize the account s margin debit balance had grown to almost $4,000,000. (Tr. 619-21.) According to Mr. Humbert, all purchases or sales in the account were initiated on the recommendation of Rizek, and El Dorado always followed the recommendations of Rizek. (Tr. 226.) Several letters from Rizek to Mr. Humbert, however, confirm a series of transactions that appear to be undertaken upon Mr. Humbert s instruction. (Resp. Exs. 172, 173, 175, 179, 181, 186.) Mr. Humbert disputes that the trades were undertaken as a result of his instructions. Rather, he contends that his instructions simply echoed previous recommendations forwarded to him by Rizek. (Tr. 643-44.) Despite the confusing testimony, what is undisputed is that these transactions were highly leveraged bond trading strategies that Mr. Humbert <(30)> The new account form lists El Dorado s investment objectives as follows: Growth, Income, Safety, and Speculation. (Div. Ex. 8 at Tab A.) <(31)> See Supra note 15. ======END OF PAGE 12====== approved and ordered at least four months after suffering heavy losses in the account. (Resp. Exs. 175, 179, 181, 186.) Moreover, Mr. Humbert chose to go ahead with at least one of these leveraged transactions after receiving a warning letter from PWPR s new Sales Manager, Raul Escudero, that specifically insist[ed] that it is most advisable to set some limits on the losses [El Dorado] would be willing to sustain. (Resp. Exs. 178, 179.) Testimony at the trial also indicated that at times Mr. Humbert rejected Rizek s recommendations. (Tr. 635.) For instance, in July of 1992, Mr. Humbert choose not to purchase collaterized mortgage obligations that Rizek recommended for the El Dorado account. (Tr. 635; Resp. Ex. 159.) Rizek and Mr. Humbert disagree on whether there was ever any discussion of the risks involved in the short-term trading of zero coupon bonds. (Tr. 419, 592.) On the subject of margin trading, Mr. Humbert testified that he realized that margin trading entailed some increased risks, but claimed to be ignorant of the degree of risk. (Tr. 597-98.) Yet, when questioned on cross examination about the introduction of margin into the account, Mr. Humbert admitted he did not have a problem with margin trading. (Tr. 627.) During the fifteen month period ranging from January 1993 through March 1994, Rizek effected $48,831,477 in transactions in El Dorado s account on an average monthly equity of $1,428,952. (Div. Ex. 15 at Tab 1.) Average annual commissions and interest fees amounted to $743,753 and $213,012, respectively.<(32)> (Div. Ex 15 at Tab 2.) The annualized turnover rate was 7.3 for the portfolio and 22.5 for the investment. (Div. Ex. 15 at Tab 1.) The cost to equity ratio was 22% for the portfolio and 67% for the investment. (Div. Ex. 15 at Tab 2.) Finally, during this period, securities in the account were held for an average of fifty-seven days before being sold. (Div. Ex. 15 at Tab 40.) 5. Jose Acevedo Jose Acevedo, age fifty-seven, is President of Caribe Furniture Manufacturing, Inc., a small furniture factory with twenty-six employees. (Tr. 673.) After seeing an advertisement in a local newspaper, Mr. Acevedo opened a brokerage account with Rizek in July 1991. (Tr. 674.) M r . Acevedo testified that he was looking for a long-term investment and was not willing to speculate or risk any of his principal. (Tr. 675, 677, 679.) His new account form supports his contention, listing speculation last among investment objectives.<(33)> At no point during his association with Rizek did Mr. Acevedo s investment objectives change, nor does Mr. Acevedo remember Rizek asking him if it was okay to change his investment objectives to indicate a willingness to speculate.<(34)> (Tr. 680.) <(32)> On average, El Dorado s account was 50% on margin, including a high of 81% in December 1993. (Div. Ex. 15 at Tab 39.) <(33)> The investment objectives were listed as follows: Growth, Investment Grade, Income and Speculation. (Tr. 678; Div. Ex. 9 at Tab A.) <(34)> See Supra note 15. ======END OF PAGE 13====== Mr. Acevedo received a high school diploma, but had no formal education or training in finance or accounting. (Tr. 673.) Mr. Acevedo had previous investment experience with short-term investment products similar to certificates of deposit ( CDs ), but did not know what a TINT or PRIN was, did not follow the financial markets, and did not do any independent research into Rizek s recommendations. (Tr. 675, 687, 690.) Purchases and sales in Mr. Acevedo s account were always authorized and followed by a confirmation. (Tr. 695, 697, 704.) Mr. Acevedo relied on Rizek s recommendations and decisions. Mr. Acevedo does not remember refusing any of Rizek s recommendations until after March 1994.<(35)> (Tr. 689.) Further, except on one occasion, Mr. Acevedo never initiated transactions in his account.<(36)> (Tr. 689-90.) Also, when Rizek called to initiate a transaction, he would offer only one investment option and never gave Mr. Acevedo details about the amount or cost of the security that was being purchased or sold. (Tr. 704-08.) Rizek never explained to Mr. Acevedo the transactional costs of his short-term trading strategy, particularly the commissions he was paying and the value of buying and holding a bond as opposed to buying and selling it soon thereafter. (Tr. 688-89.) Mr. Acevedo, in fact, thought he would never lose money trading in zero coupon bonds because they were insured by the United States government. (Tr. 688.) During the fifteen month period ranging from January 1993 through March 1994, Rizek effected $6,875,250 in transactions in Mr. Acevedo s account on an average monthly equity of $165,008. (Div. Ex. 15 at Tab 1.) Average annual commissions and interest fees amounted to $69,751 and $16,133, respectively.<(37)> (Div. Ex. 15 at Tab 2.) The annualized turnover rate was 7.9 for the portfolio and 19.8 for the investment. (Div. Ex. 15 at Tab 1.) The cost to equity ratio was 19% for the portfolio and 52% for the investment. (Div. Ex. 15 at Tab 2.) Finally, during this period, securities in the account were held for an average of fifty-four days before being sold. (Div. Ex. 15 at Tab 8.) 6. Hector Torres Nadal Mr. Torres, age fifty-eight, is president of a small business that buys and sells computerized systems. (Tr. 710-11.) Mr. Torres opened a brokerage account with Rizek in 1991. (Div. Ex. 11 at Tab A.) Mr. Torres was saving for retirement and described himself as very cautious. (Tr. 713.) Mr. Torres was interested in something that was protected and secure. (Tr. 714.) Rizek s own computer record of Mr. Torres, last <(35)> After March 1994, Mr. Acevedo used money to buy Ginnie Mae s, rather than reduce his margin debit balance as recommended by Rizek. Mr. Acevedo testified that he hoped to generate enough gains to cover the losses from Rizek s short-term trading strategy, which he wanted to hide from his wife. (Tr. 689, 699-701.) <(36)> The one occasion where Mr. Acevedo initiated a transaction in his own account was, of course, when he rejected Rizek s recommendation to reduce his margin debit balance and chose to purchase the Ginnie Maes. <(37)> On average, Mr. Acevedo s account was 52% on margin, including a high of 81% in February 1994. (Div. Ex. 15 at Tab 7.) ======END OF PAGE 14====== edited on May 22, 1995, documents that Mr. Torres wanted growth and income, and does not even mention speculation. (Resp. Ex. 216; Tr. 127-28.) Mr. Torres had three years of college education, but no degree or specialized training in finance or accounting. (Tr. 712-13.) Further, he testified that prior to meeting Rizek he kept his money invested only in CDs. (Tr. 713.) Mr. Torres did not know what a TINT or PRIN was, did not follow the financial markets, and did not independently research Rizek s recommendations. (Tr. 724, 726.) Mr. Torres relied on Rizek s recommendations and decisions. (Tr. 725.) According to Mr. Torres, Rizek made all of his investment decisions. (Tr. 725.) Transactions in the account were always initiated on the recommendation of Rizek, which Mr. Torres always followed. (Tr. 725.) Mr. Torres did not understand the risks of Rizek s trading strategy. For instance, Mr. Torres thought the short-term trading strategy was less risky than standard equity trading. (Tr. 719.) Further, Mr. Torres believed that because the United States government backed the zero coupon bonds, he could not lose any money. (Tr. 718-19.) Finally, Mr. Torres did not understand the characteristics or consequences of margin trading.<(38)> (Tr. 721, 732.) During the fifteen month period ranging from January 1993 through March 1994, Rizek effected $1,645,057 in transactions in Mr. Torres account on an average monthly equity of $49,593. (Div. Ex. 15 at Tab 1.) Average annual commissions and interest fees amounted to $16,203 and $5,132, respectively.<(39)> (Div. Ex. 15 at Tab 2.) The annualized turnover rate was 7.4 for the portfolio and 16.4 for the investment. (Div. Ex. 15 at Tab 1.) The cost to equity ratio was 16% for the portfolio and 43% for the investment. (Div. Ex. 15 at Tab 2.) Finally, during this period, securities in the account were held for an average of sixty-two days before being sold. (Div. Ex. 15 at Tab 16.) 7. Herminio R. Cintron Herminio Cintron, age forty-eight, opened an account with Rizek in 1991. (Tr. 848, 850.) Mr. Cintron owns of a pharmacy that employs eight people. (Tr. 848.) Mr. Cintron s investment objectives centered around planning for his retirement and his children s education. (Tr. 852.) He was not interested in speculating, instead Mr. Cintron testified that he was looking for something that was safe. (Tr. 851-52.) Mr. Cintron s new account form supports his testimony, listing speculation last among possible investment objectives.<(40)> (Div. Ex. 10 at Tab A.) Mr. Cintron s investment objectives never changed, and Rizek never asked him if <(38)> For instance, Mr. Torres thought of margin as a checking account, where he could withdraw money from the assets of his own account, rather than borrowing from PWPR against those assets. (Tr. 732.) <(39)> On average, Mr. Torres account was 56% on margin, including a high of 80% in March 1993. (Div. Ex. 15 at Tab 15.) <(40)> The new account form lists Mr. Cintron s investment objectives as follows: Growth, Investment Grade, Safety, and Speculation. (Div. Ex. 10 at Tab A.) ======END OF PAGE 15====== it was okay to change his investment objectives to indicate a willingness to speculate.<(41)> (Tr. 853.) Mr. Cintron has a college degree in pharmacy, but no formal training or education in finance or accounting. (Tr. 848.) Mr. Cintron had prior securities experience. He had accounts with Drexel Burnham Lambert, Smith Barney, Prudential Securities, and Chubb Securities. (Resp. Exs. 59, 63, 62, 99.) In 1991, while a client at Smith Barney, Mr. Cintron purchased a zero coupon bond. (Tr. 867-68 and Resp. Ex. 63.) Mr. Cintron, however, had no experience in short-term trading. (Tr. 848, 851, 879.) Moreover, Mr. Cintron did not know what a TINT or PRIN was, did not follow the financial markets, and did not independently research Rizek s recommendations. (Tr. 859-60.) When making financial decisions, Mr. Cintron relied on the recommendations and decisions of Rizek. (Tr. 854-55.) Purchases or sales in Mr. Cintron s account, although authorized, were made exclusively upon the recommendation of Rizek. (Tr. 862, 854-55.) Mr. Cintron never initiated transactions in the account. (Tr. 854.) When Rizek called he would make only one investment recommendation, and Mr. Cintron dutifully followed his recommendations. (Tr. 854-55.) While he knew that a rise in interest rates would adversely affect his investment, Mr. Cintron did not understand the risks associated with a short-term trading strategy in government bonds. (Tr. 864, 855). Moreover, Rizek never adequately discussed the nature or risks of margin trading, especially the increased volatility associated with margin trading. (Tr. 855-56.) During the fifteen month period ranging from January 1993 through March 1994, Rizek effected $9,346,350 in transactions in Mr. Torres account on an average monthly equity of $312,013. (Div. Ex. 15 at Tab 1.) Average annual commissions and interest fees amounted to $82,258 and $30,177, respectively.<(42)> (Div. Ex. 15 at Tab 2.) The annualized turnover rate was 6.1 for the portfolio and 13.6 for the investment. (Div. Ex. 15 at Tab 1.) The cost to equity ratio was 15% for the portfolio and 36% for the investment. (Div. Ex. 15 at Tab 2.) Finally, during this period, securities in the account were held for an average of seventy-nine days before being sold. (Div. Ex. 15 at Tab 24.) V. CONCLUSIONS OF LAW Rizek is charged with churning his customers accounts by having engaged in trading that was excessive in light of the articulated investment objectives of his clients, in a manner that resulted in high transactional costs that virtually nullified any ability by his clients to profit from the trades Rizek recommended. (OIP Para. II, B-C.) Churning occurs when a securities broker buys and sells securities <(41)> See Supra note 15. <(42)> On average, Mr. Cintron s account was 42% on margin, including a high of 77% in February 1994. (Div. Ex. 15 at Tab 23.) ======END OF PAGE 16====== for a customer s account, without regard to the customer s investment interests, for the purpose of generating commissions. Olson v. E.F. Hutton & Co., 957 F.2d 622, 628 (8th Cir. 1992) (quoting Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1416 (11th Cir. 1983)). See also Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981); McNeal v. PaineWebber, Jackson and Curtis, Inc., 598 F.2d 888, 890 n.1 (5th Cir. 1979). The three elements of churning are: (1) control of the account by the broker, either explicit (discretionary trading) or de facto (through acquiescence, trust, or reliance); (2) excessive trading in light of the investor s trading objectives; and (3) scienter on the part of the broker. Hotmar v. Lowell H. Listrom & Co., 808 F.2d 1384, 1385 (10th Cir. 1987); Miley v. Oppenheimer & Co., 637 F.2d 318 (5th Cir. 1981); Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir. 1980); Shad v. Dean Witter, Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986). See also Nesbit v. McNeil, 896 F.2d 380 (9th Cir. 1990). Churning in itself has been held to violate Section 10(b) and Rule 10b-5 of the Exchange Act. Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498 (11th Cir. 1985); Costello v. Oppenheimer & Co., 711 F.2d 1361 (7th Cir. 1983). A. Control In the instant matter the issue of control has been a matter of substantial dispute. Rizek argues that he did not have control over the accounts at issue. Rizek points out that the accounts were not discretionary, and argues that all of his trades were conducted at the direction or, in most cases, under the approval of his customers. (Respondent s Post-Hearing Brief at 23-41.) A formal discretionary account, however, is not needed to demonstrate control. Mihara, 619 F.2d at 814; Newburger, Loeb & Co. v. Goss, 563 F.2d 1057, 1069-70 (2d Cir. 1977), cert. denied, 434 U.S. 1035 (1978). A broker may have control of a customer account if the customer is unable to evaluate the broker s recommendations and to exercise independent judgment. Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 676-77 (9th Cir. 1982) (citing Mihara, 619 F.2d at 814; Hecht v. Harris, Upham & Co., 283 F. Supp. 417 (N.D. Cal. 1968); Eugene J. Erdos, 47 S.E.C. 985, 989-90 (1983), aff d, 742 F.2d 507 (9th Cir. 1984)); see also Carras v. Burns, 516 F.2d 251, 259 (4th Cir. 1975) ( The issue is whether or not the customer, based on the information available to him and his ability to interpret it, can independently evaluate his broker s suggestions. ). Some factors to consider in determining whether or not a broker controlled an investor s account include: the investor s sophistication; the investor s prior securities experience; the trust and confidence the investor has in the broker; whether the broker initiates transactions or whether the investor relies on the recommendations of the broker; the amount of independent research conducted by the investor; and the truth and accuracy of information provided by the broker. 1 Stuart C. Goldberg, Fraudulent Broker-Dealer Practices,  2.8[b][1] (1978). 1. Eddie Figueroa, Jose Acevedo, and Hector Torres I find that Messrs. Figueroa, Acevedo, and Torres were unsophisticated investors with little or no prior securities experience. All three showed great confidence in Rizek s expertise, and cannot remember rejecting any of ======END OF PAGE 17====== his recommendations.<(43)> Also, except on the rarest occasions, these three investors never initiated transactions in their own accounts, instead deferring to Rizek s recommendations. Lastly, the evidence at the hearing revealed no independent research by these investors. In short, the record clearly indicates that the total reliance Messrs. Figueroa, Acevedo, and Torres placed in Rizek, combined with their lack of understanding or experience in investment matters resulted in his de facto control of their accounts.<(44)> 2. George Donato Despite his undergraduate accounting class, college degree, and experience reviewing and analyzing financial documents, Mr. Donato had little in the way of securities experience. I find particularly relevant the fact that Mr. Donato had little or no idea how bonds functioned, believing that interest rates had only a very, very minor effect on Treasury bonds. His sophistication, in effect, was quite limited, and did not include investment matters. Mr. Donato relied on Rizek s recommendations and decisions, accepting virtually all of his recommendations. Moreover, except on the rarest occasions, Mr. Donato never initiated transactions in his own account. Finally, Mr. Donato performed no independent research regarding his account. I find that Rizek s control over the vast majority of investment initiatives and decisions in the account along with Mr. Donato s misconceptions surrounding the characteristics of Treasury bonds made it impossible for him to independently evaluate his account or Rizek s suggestions. Therefore, I find that Rizek exercised de facto control of Mr. Donato s account.<(45)> 3. Herminio Cintron Mr. Cintron is unique among Rizek s investors. Unlike Rizek s other clients, Mr. Cintron had significant prior securities experience, with accounts at no less than four brokerage houses. His prior investment experience, however, is misleading. Mr. Cintron had no experience with short-term trading of government bonds and, more importantly, did not appreciate the increased risks associated with such a strategy. Mr. Cintron trusted Rizek, who initiated all investment strategies. Rizek was clearly the predominant participant in virtually all trading decisions. Despite his prior securities experience, Mr. Cintron lacked the <(43)> As stated earlier, supra note 35, after March 1994, Mr. Acevedo did reject some of Rizek s recommendations and initiate transactions in his own account. The trading period covered by the OIP, however, extends only to March 31, 1994. Therefore, Mr. Acevedo s decision to ignore Rizek s recommendations is irrelevant. <(44)> See Mihara, 619 F.2d at 821 (holding that control is established when the client routinely follows the recommendation of the broker); Hecht, 283 F. Supp. at 433 (finding control can be inferred from evidence that the customer invariably relied on the dealer s recommendations, especially when the customer is relatively naive and unsophisticated); Carras, 516 F.2d at 259; Follansbee, 681 F.2d at 676-77. <(45)> Id. ======END OF PAGE 18====== ability and means to independently evaluate Rizek s decisions and deferred to Rizek s professional judgment, dutifully following his recommendations. Consequently, I find that Rizek exercised de facto control of Mr. Cintron s account.<(46)> 4. El Dorado The Division contends that Gary Humbert, El Dorado s president and owner, had no formal training in financial matters and was an unsophisticated investor. Evidence, however, revealed that as early as 1991, Mr. Humbert had invested in United States Treasury zero coupon bonds. Additionally, Mr. Humbert admitted he knew that there were risks associated with trading zero coupon bonds, and that by agreeing to trade on margin he was compounding those risks. Admittedly, Mr. Humbert often relied on Rizek s expertise, approving transactions that Rizek had solicited. Nevertheless, evidence was also presented that indicates that Mr. Humbert exercised independent judgment in his account, rejecting at least one bond trading strategy. Moreover, even after suffering what he admitted were serious losses, Mr. Humbert continued to aggressively trade from highly leveraged positions. By discriminating between Rizek s proposed transactions and personally executing and/or approving specific instructions on numerous bond trading strategies, Mr. Humbert showed the ability to independently initiate, evaluate, and authorize transactions in his account. I find that it was Gary Humbert, not Rizek, who exercised control over the El Dorado account. Consequently, Rizek could not have churned the account.<(47)> 5. Dr. Edwin Vega Dr. Vega was, without question, the most sophisticated of Rizek s clients. Dr. Vega, among other things, had earned a medical degree, owned and managed at least seven properties valued at more than $1,500,000, understood various types of financial documents, and often consulted with an accountant regarding financial matters. Prior to meeting Rizek, Dr. Vega also had brokerage accounts with at least two firms. Moreover, Dr. Vega had previously traded in zero coupon bonds, was aware that his account with Rizek was margined, and even borrowed against that account to pay off a bank loan with a less favorable interest rate. Testimony at the hearing revealed that Dr. Vega and Rizek were in frequent communication, both via letter and telephone. I find Dr. Vega s contention that he was unaware of what was happening in his account dubious and not supported by the evidence. Moreover, while Rizek was at times in the predominant position regarding trading decisions, Dr. Vega initiated transactions in his own account and separately requested and received <(46)> Id. <(47)> See Newburger, 563 F.2d at 1069-70 (holding that if a customer has capacity to evaluate his broker s advice and agrees with it, the customer controls the account); Tiernan v. Blyth, Eastman Dillon & Co., 719 F.2d 1, 3 (5th Cir. 1983) (finding that a sophisticated customer who monitors his account may retain control over it); Karlen v. Ray E. Friedman & Co. Commodities, 688 F.2d 1193, 1204 (8th Cir. 1982) (finding that churning cannot occur as to any trade directed by the customer). ======END OF PAGE 19====== considerable information on the status and performance of the account. I find that Dr. Vega had more than adequate means and ability to independently evaluate Rizek s suggestions. As a result, Rizek cannot be said to have been in de facto control of Dr. Vega s account. Necessarily, there can be no churning violation regarding Dr. Vega s account.<(48)> B. Excessive Trading The gravaman of a churning claim is that the account at issue was traded in a manner that was excessive in light of the objectives and resources of the customer. 15A David A. Lipton, Broker Dealer Regulation,  5.04[3][b] (1997 rev.). There is no single precise formula or method for determining whether an account has been churned. Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 1990); Nesbit, 896 F.2d at 383. The turnover rate, cost to equity ratio, commission to equity ratio, and the days held analysis are all methods that may be used to determine excessive trading in an account. 1 Goldberg, supra,  2.9[b][1]. i. Turnover Rate The annual turnover rate of an account, which is the ratio of total purchases divided by the average equity, measures the number of times per year an account is turned over. Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 n.10 (1989). See also Shearson, Hamill & Co., 42 S.E.C. 811, 845 n.72 (1965); Reynolds & Co., 39 S.E.C. 902, 906 n. 10 (1960). In other words, the turnover ratio allows a determination to be made regarding how many times in a given period the securities in a customer s account have been replaced by new securities recommended by the broker. Costello, 711 F.2d at 1369 n.11. Although there is no one turnover rate that is universally recognized as being determinative of churning, an annual turnover rate in excess of six is generally presumed to reflect excessive trading. Arceneaux, 767 F.2d at 1502 ( The courts which have addressed this issue have indicated that an annual turnover rate in excess of six reflects excessive trading. ); Mihara, 619 F.2d at 821. Among the accounts controlled by Rizek, the turnover rates for the equity that was available for investment ranged from 13.6 to 19.8.<(49)> (Div. Ex. 15 at Tab 1.) Even if the margin extended to the customers is included in the calculations, the turnover rates for the accounts still <(48)> Id. <(49)> The turnover rates, as determined by the Division s expert, are as follows: Jose Acevedo 19.8 Herminio Cintron 13.6 George Donato 14.3 Eddie Figueroa 19.3 Hector Torres 16.4 ======END OF PAGE 20====== ranged from 6.1 to 7.9.<(50)> (Div. Ex. 15 at Tab 1.) Keeping in mind the conservative investment objectives of all the accounts remaining in question, I find the high turnover rates present, regardless of whether margin loans are included in any calculations, clearly indicate that the Figueroa,<(51)> Donato, Acevedo, Torres, and Cintron accounts were excessively traded by Rizek. See Arceneaux, 767 F.2d at 1502; Mihara, 619 F.2d at 821; Siegal v. Tucker, Anthony & R.L. Day, Inc., 658 F. Supp. 550, 554 (S.D.N.Y. 1987). See also Samuel B. Franklin & Co., 42 S.E.C. 325, 327-28 (1964) (finding that turnover rates of 3.5 and 4.4 are excessive); J. Logan & Co., 41 S.E.C. 88, 93-97, 99 (1962), aff d sub nom., Hersh v. SEC, 325 F.2d 147 (9th Cir. 1963); First Securities Corp., 40 S.E.C. 589, 590 (1961); R.H. Johnson & Co., 36 S.E.C. 467, 472, 479-80, 485 (1955), aff d, 231 F.2d 523 (D.C. Cir. 1956). ii. Cost to Equity Ratio A further test of excessive trading examines the net amount of money invested and the transaction cost incurred. Referred to as the break even or cost to equity ratio, this method determines the percentage of return on the customer s average net equity needed to pay broker-dealer commissions and other expenses. See 1 Goldberg, supra,  2.9[b][5]. In short, the break even factor determines the rate of return that the account has to earn on an annual basis just to cover transaction costs, thus providing a gauge for measuring the damages done to an account by the churning violation. Id. Trading practices that require an account to appreciate in excess of 20% just to break even have been held to constitute churning violations. Peter C. Bucchieri, 61 SEC Docket 2771, 2777 (May 14, 1996) (finding excessive trading in account with break even cost factors of 21 to 30 percent); Michael David Sweeney, 50 S.E.C. 761, 765 (1991) (finding excessive trading in account with break even cost factors of 22% to 44%); see also 1 Goldberg, supra,  2.9[b][1] (finding break even cost factors of 16% presumptive of excess trading). In the instant case, the substantial expenses incurred by Rizek s customers were incompatible with their stated investment objectives. According to the evidence presented, Rizek s customers needed returns ranging from 33% to 52% on the equity that was available for investment to <(50)> The modified turnover rates, as determined by the Division s expert, are as follows: Jose Acevedo 7.9 Herminio Cintron 6.1 George Donato 7.4 Eddie Figueroa 7.5 Hector Torres 7.5 <(51)> Mr. Figueroa s comment that he was willing to take any risk does not preclude Rizek from having churned his account. See John M. Reynolds, 50 S.E.C. 805, 809 (1991) (holding that a registered representative is not entitled to disregard the situation or character of an account even when the parties responsible for the account authorize an inappropriate trading strategy). See also Erdos, 47 S.E.C. at 988- 89. ======END OF PAGE 21====== pay expenses and break even in their accounts.<(52)> (Div. Ex. 15 at Tab 2.) If each client s entire portfolio (i.e., including margin debit balances) is included in the calculations, the break even percentage required for the accounts still ranges from 15% to 21%.<(53)> (Div. Ex. 15 at Tab 2.) Accordingly, I find there was no reasonable expectation that the Figueroa, Donato, Acevedo, Torres, and Cintron accounts would earn a return sufficient to cover the costs of the transactions. On the contrary, the depletion evident in the accounts due to transactional costs is a clear indication that Rizek engaged in excessive trading. iii. Commissions Also indicative of excessive trading, as previously stated, is the amount of commissions paid to the broker as a percentage of average equity in the customer s account. Nesbit, 896 F.2d at 383 n.4; Moran v. Kidder, Peabody & Co., 609 F. Supp. 601, 666 (S.D.N.Y. 1985), aff d mem., 788 F.2d 3 (2d Cir. 1986); Hagstrom v. Bruetman, 580 F. Supp. 773, 775 (N.D. Ill. 1984). See also 2 A. Bromberg & L. Lowenfels, Securities Fraud and Commodities Fraud,  5.7 (322) at 5:82.108 (1991 rev.). This evaluation method reflects the fact that the broker s incentive to churn is to generate commissions. See George Inserra, Fed. Sec. L. Rep. (CCH) [1988-89 Transfer Binder] 84,334 at 89,519 (SEC Sept. 30, 1988); John M. Reynolds, 50 S.E.C. 805, 808 (1991). In Inserra, the Commission found excessive trading when, among other things, the commission to equity ratio during a three and a half year period ranged between 22.5% and 27%. The Commission found excessive trading in Reynolds when, among other things, commissions in the account amounted to approximately 16.6% of the average monthly equity during a ten month period. Id. Cumulatively, the average equity invested in the Figueroa, Donato, Acevedo, Torres, and Cintron accounts during the trading period was $696,813. (Div. Ex. 15 at Tab 1.) Against this total investment, Rizek purchased and sold a total of $24,071,891 in securities, which generated $281,526 in commissions. (Div. Ex. 15 at Tab 1.) During the fifteen month trading period, the commissions paid to Rizek eroded 40% of his clients total equity. (Div. Ex. 15 at Tab 1.) Also, the record shows that individually commissions as a percentage of average monthly equity ranged <(52)> The cost to equity ratios, as determined by the Division s expert, are as follows: Jose Acevedo 52% Herminio Cintron 36% George Donato 33% Eddie Figueroa 51% Hector Torres 43% <(53)> The modified cost to equity ratios, as determined by the Division s expert, are as follows: Jose Acevedo 19% Herminio Cintron 15% George Donato 16% Eddie Figueroa 21% Hector Torres 16% ======END OF PAGE 22====== between 33% and 53%.<(54)> I consider that, by this measure, Rizek excessively traded the Figueroa, Donato, Acevedo, Torres, and Cintron accounts. iv. Days Held Analysis In assessing whether Rizek churned his customers accounts the final factor that will be considered is the average period of time that each security was held before being sold. Courts have held that in the face of conservative investment objectives, in and out trading that results in the depletion of capital is indicative of churning. Costello, 711 F.2d at 1369; Karlen, 688 F.2d at 1204; Miley, 637 F.2d at 333; Carras, 516 F.2d at 258, Hecht, 283 F. Supp. at 435. An in and out pattern of trading exists when there is a sale of all or part of the customer s portfolio with the proceeds immediately reinvested in other securities followed in a short period by the sale of the newly acquired securities. Hecht, 283 F. Supp at 435. In the instant case, the Division s expert testified that, typical of churned accounts, the average position was held only fifty-four days, with Rizek selling profitable positions much faster and holding losing positions longer. (Tr. 913, 920-21, 954; Div. Ex. 15 at Tab 8, 16, 24, 32, 40, 48, 56, 64.) In 1993, Rizek invested the proceeds from the sales of zero coupon bonds into other zero coupon bonds either the same day or one day later 56% of the time. (Tr. 1007.) Also, 96% of the time, Rizek put his clients in and out of long-term bonds having very similar maturities (twenty-six to twenty-nine years). (Tr. 1007.) Rizek countered that, in order to capitalize on movements in interest rates, his aggressive growth trading strategy necessarily required that securities be held for periods lasting between one and three months, sometimes less. Regardless of his strategy, it cannot be ignored that during the trading period Rizek s frequent in and out trading of essentially the same bonds eroded 40% of the average equity in his customers accounts. I find that Rizek s short-term trading strategy, specifically the in and out trading, was incompatible with the investment objectives of the Figueroa, Donato, Acevedo, Torres, and Cintron accounts and resulted in excessive trading. See Gerald E. Donnelly, 61 SEC Docket 47 (Jan. 5, 1996). C. Scienter Scienter is a mental state embracing intent to deceive, manipulate, or defraud. Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980); see also, Ernst & <(54)> The commission to equity rates, as determined from account information found in the Division s expert report, are as follows: Jose Acevedo 53% Herminio Cintron 33% George Donato 33% Eddie Figueroa 50% Hector Torres 41% ======END OF PAGE 23====== Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976).<(55)> According to Rizek, he believed his aggressive growth strategy of short-term trading in zero coupon bonds was reasonable and within the limitations of federal securities laws. Moreover, if Rizek s testimony is to be believed his conduct is tempered by the fact that his trading strategy, perhaps naively and without due caution, relied on internal PaineWebber fixed-income strategy desk recommendations and Dr. Harris economic forecasts and analyses. Notwithstanding his assertions, Rizek had an independent duty to investigate and evaluate the suitability of his recommendations. Hanly v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969); Heft, Kahn and Infante, Inc., 41 S.E.C. 379, 382-83 (1963). See also SEC v. Hasho, 784 F. Supp. 1059, 1108 (S.D.N.Y. 1992) (finding defendant s argument that he was naive and relied upon information from employer did not negate intent nor excuse violations of the antifraud provisions of the securities laws). The evidence clearly shows that Rizek, despite his denials, recommended unsuitable securities transactions to his customers. More importantly, Rizek understood or recklessly disregarded the costs of his short-term trading strategy and, contrary to his customers' investment objectives, excessively traded their accounts. Rizek, therefore, acted willfully and with scienter, and continued his fraudulent activity in order to generate large commissions. Rizek exercised control of the trading in his customers accounts, he excessively traded the accounts, and acted with scienter. I find, therefore, that Rizek churned the accounts of Messrs. Figueroa, Donato, Acevedo, Torres, and Cintron. VI. Sanctions The Division asks that Rizek be: (1) barred from association with any broker-dealer pursuant to Sections 15(b) and 19(h) of the Exchange Act; (2) ordered to cease and desist from committing or causing a violation or future violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder pursuant to Section 21C of the Exchange Act; (3) ordered to disgorge $775,258 in excess commissions pursuant to Section 8A(e) of the Securities Act and Section 21C(e) of the Exchange Act; and (4) ordered to pay a civil monetary penalty of $100,000 pursuant to Section 21B of the Exchange Act. A. Bar Sections 15(b) and 19(h) of the Exchange 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-dealer, a member of a national securities exchange or registered securities association if the Commission finds that, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or bar is in the public interest. <(55)> A reckless disregard for the interests of one s customers may also function as an acceptable substitute for actual intent. Hatrock v. Edward D. Jones & Co., 750 F.2d 767 (9th Cir. 1984); Miley, 637 F.2d at 324; Mihara, 619 F.2d at 821. ======END OF PAGE 24====== 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 Court of Appeals for the District of Columbia explained that [t]he public interest standard is obviously very broad, requiring that the Commission consider a full range of factors bearing on the judgment about sanctions that the expert agency ultimately must render. Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1110 (D.C. Cir. 1988). The severity of sanctions depends on the facts of each case and the value of the sanction in preventing a recurrence of the violative conduct. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); 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). Rizek engaged in a fraudulent course of conduct from at least January 1, 1993 until March 31, 1994. Rizek s short-term trading strategy was, in the very least, willful and distinctly reckless. Moreover, Rizek s actions caused at least five investors to lose a substantial portion of the funds they had entrusted to Rizek. The facts established at the hearing prove that Rizek s excessive trading and churning was systematic in nature, in that his fraud involved many transactions and touched numerous clients over an extensive period of time. I am, nonetheless, inclined to believe that Rizek s trading strategy was as much a naive and distinctly reckless course of action as it was a cynical attempt to increase his commissions at the expense of his customers. Moreover, Rizek stipulated that he would not again recommend a short-term trading strategy involving leveraged zero coupon Treasury bonds, nor any course of conduct that violated the federal securities laws. Rizek, however, has yet to fully accept the wrongfulness of his conduct. At the hearing, he expressed remorse that his clients were hurt by their extensive losses, but blamed faulty interest rate forecasts, not his own violation of the securities laws. Currently, Rizek is president of Rizek Investments, Inc., a registered broker-dealer, where he has approximately 150 clients. The likelihood that his occupation will present opportunities for future violations cannot be ignored. Rizek is no longer subject to the compliance procedures and supervision of a national brokerage house. Rizek has become, in effect, his own supervisor. While I find Rizek s assurances of future compliance with federal securities laws credible, his actions were willful and showed a reckless disregard for his customers interests and must not go unpunished. His conduct demands an appropriate sanction. Therefore, I find that it is in the public interest to bar Mr. Rizek from being associated with any broker-dealer, and from being associated with a member ======END OF PAGE 25====== of a national securities exchange or registered securities association for two years after the date of this decision. B. Cease and Desist Proceedings 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(a) of the Securities Act and Section 21C(a) of the Exchange Act authorize the Commission to impose a cease and desist order against that person. These provisions 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. The evidence establishes that Rizek willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Respondent is still active in the securities industry. Therefore, I find it especially necessary that Mr. Rizek be ordered to cease and desist from engaging in this conduct in the future. C. Disgorgement Section 8A(e) of the Securities Act and Section 21C(e) of the Exchange Act provide that the Commission may enter an order requiring accounting and disgorgement, including any reasonable interest. The purpose of disgorgement is to deprive the wrongdoer of his unjust enrichment and to deter others from violating the securities laws. SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989). Such an equitable remedy can be exercised only over property causally related to the wrongdoing, and may not be used punitively. Id. at 1231. When calculating disgorgement separating legal from illegal profits exactly may at times be a near impossible task. First City, 890 F.2d at 1231 (citing Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 171 (2d Cir. 1980)). The amount of disgorgement, therefore, need only be a reasonable approximation of profits causally connected to the wrongdoing. Id.; Michael David Sweeney, 50 S.E.C. at 767-78 (finding payment of disgorgement proper where registered representatives were found to have churned customers accounts). Once the government presumptively shows that its disgorgement figure reasonably approximates the amount of unjust enrichment, the burden shifts to the respondent to clearly demonstrate that the disgorgement figure was not a reasonable approximation. SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996); SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995); First City, 890 F.2d at 1232. The Division requests disgorgement equal to the amount of commissions Rizek personally received from all eight of the accounts originally at issue. According to the Division, Rizek s excessive trading generated $1,722,796 in total commissions,<(56)> from which he received forty-five percent or approximately $775,258. Rizek, however, should not be forced to disgorge any profits from accounts that were not churned. <(56)> Calculated by subtracting from the $1,752,354 in total commissions that Rizek s trading actually generated the $29,558 that would have been generated from a buy and hold strategy. (Div. Ex. 16 at Tab 14.) ======END OF PAGE 26====== Rizek churned only five of the eight accounts originally at issue. Disgorgement, therefore, will be limited to the profits that can be traced to the Figueroa, Donato, Acevedo, Torres, and Cintron accounts. During the fifteen month trading period, Rizek s excessive trading resulted in $277,038 in unjust commissions in the five accounts.<(57)> Rizek has presented no evidence demonstrating that this figure is not appropriate. I find that Rizek should be required to return to investors the commissions they paid on these transactions which occurred from his excessive trading in their accounts, $277,038, plus prejudgment interest. D. 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 provision of the Securities Act or the Exchange Act. 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 <(57)> Calculated by subtracting from the $281,526 in total commissions that Rizek s trading actually generated the $4,488 that would have been generated from a buy and hold strategy. (Div. Ex. 16 at Tab 15, 25, 30, 40, 45.) ======END OF PAGE 27====== 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 Rizek to pay a third tier civil money penalty of $100,000. This determination is based upon the fact that Rizek s actions involved fraud and reckless disregard of a regulatory requirement and resulted in substantial losses. VII. Record Certification Pursuant to Rule 351(b) of the Commission s Rules of Practice, 17 C.F.R.  201.351(b) (1997), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on April 11, 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, I ORDER that AL RIZEK is: (1) is barred from being associated with any broker-dealer, and from being associated with a member of a national securities exchange or registered securities association for two years after the date of this decision; (2) shall cease and desist from committing or causing any violations or future violations of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder; (3) shall disgorge $277,038, plus prejudgment interest from April 1, 1994, through the last day of the month preceding which payment is made at the rate of interest established under Section 6621(a)(2) of the Internal Revenue Code, 28 U.S.C.  6621(a)(2), compounded quarterly, pursuant to Rule 610 of the Commission s Rules of Practice;<(58)> and (4) shall pay a civil penalty of $100,000. Payment of penalty and disgorgement shall be made on the first day following the day this initial decision becomes final by certified check, U.S. Postal money order, bank cashier s check or bank money order payable to the Securities and Exchange Commission. The check and a cover letter identifying the Respondent, Al Rizek, and the proceeding designation, Administrative Proceeding No. 3-9041, should be delivered by hand or courier to the Office of the Secretary, Securities and Exchange Commission, <(58)> I have used April 1, 1994, because it is the first day of the month following the transactions used to calculate Rizek s commissions. ======END OF PAGE 28====== 450 Fifth Street, N.W., Washington, D.C. 20549. A copy of the cover letter should be sent to the Commission s Division of Enforcement at the above address. If and when Mr. Rizek pays any or all of the disgorgement amount and interest, the parties shall submit to the Office of Administrative Law Judges, within 60 days, a plan for the administration and distribution of those funds. 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 (1997). 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 ======END OF PAGE 29======