INITIAL DECISION RELEASE NO. 128 ADMINISTRATIVE PROCEEDING FILE NO. 3-8951 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ______________________________ : In the Matter of : : PATRICIA ANN BELLOWS :INITIAL DECISION :July 23, 1998 : ______________________________ : APPEARANCES:T. Christopher Browne and Karen L. Cook for the Division of Enforcement, Securities and Exchange Commission. Robert F. Watson and Gary S. Kessler for Respondent Patricia Ann Bellows. BEFORE:Lillian A. McEwen, Administrative Law Judge PROCEDURAL HISTORY The United States Securities and Exchange Commission (Commission) instituted these proceedings on February 16, 1996, pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). THE HEARING On July 16, 17, and 18, 1996, a public hearing was held before me in Fort Worth, Texas. The hearing record consists of testimony of witnesses and many exhibits. I admitted into evidence twenty- seven exhibits from the Division of Enforcement (Division), and thirty-seven exhibits from Respondent Bellows.[1] ISSUES The Order Instituting Proceedings (OIP) alleges inter alia that from about May through August 1993 Bellows failed reasonably to supervise a registered representative with a view toward "preventing violations of Sections 17(a) of the Securities Act [of 1933 (Securities Act)], Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, within the meaning of Section 15(b)(6) of the Exchange Act, which incorporates Section 15(b)(4)(E), of the Exchange Act." (OIP at 2.) If I conclude that the allegations in the OIP are true, I must then determine what, if any, remedial action is appropriate, pursuant to Section 15(b) of the Exchange Act and whether, pursuant to Section 21B of the Exchange Act, a monetary penalty should be assessed against Bellows. (OIP at 3.) After the hearing, the Division filed its Proposed Findings of Fact and Conclusions of Law and a Reply to Respondent's Post Hearing Briefs. Bellows filed Proposed Findings of Fact and a Post Hearing Reply Brief. FINDINGS OF FACT I based the findings and conclusions herein on the entire record and on the demeanor of the witnesses who testified at the hearing. I applied preponderance of the evidence as the applicable standard of proof for the Division's case. I find that the Division has not proved that Bellows violated the federal securities laws as alleged in the OIP. Respondent Bellows was a registered principal of H.D. Vest Investment Services, Inc. (H.D. Vest) from August 1985 through February 1995. She was a compliance officer, vice president, and senior registered options principal there from August 1985 through February 1993. In February 1993, Bellows was appointed to H.D. Vest's executive committee. From approximately 1989 through September 1994, Bellows also served as vice president and secretary of the corporation. (Resp. Answer at 1, 2; Div. Ex. 6; Resp. Exs. 19, 21; Tr. 343.) Benjamin Rex Moses Moses had been a foreman framer, a student, a substitute teacher, a store manager, and a registered representative with First Investors Corporation before joining H.D. Vest for the first time on July 24, 1987, as a registered representative. (Resp. Ex. 27 at 61800, 61814.) Moses left H.D. Vest voluntarily after this first stint, on October 21, 1987. His termination papers on that date were signed by Herb Vest and Melanie Smith. He had no disciplinary record or problems then. (Resp. Ex. 27 at 61803.) Moses' second stint with H.D. Vest began with a contract signed by Bellows, as vice president, on July 30, 1991. (Div. Ex. 6.) Between the two stints at H.D. Vest, Moses had worked at Shearson Lehman Hutton, Smith Barney, Dean Witter Reynolds, and Merrill Lynch. (Resp. Ex. 28; Div. Ex. 3.) None of the U-5 employment forms show anything negative about Moses as of July 1991. (Div. Exs. 2, 3, 4, 5.) Moses was required to amend his licensing record in July 1992 to reflect the commencement of an NASD (National Association of Securities Dealers) arbitration. The arbitration grew out of his trading at Dean Witter Reynolds and an allegation that Moses had not placed a client's requested stop loss order on an option trade, causing a claimed client loss of $39,000. (Div. Exs. 9, 10, 11, 12, 13.) In June 1992, Moses attended a one-hour compliance training workshop conducted at H.D. Vest. (Resp. Ex. 30.) The NASD arbitration matter was concluded by an award against Dean Witter Reynolds of $100,000 to the client. However, a July 6, 1993, NASD investigation ended with a finding of no action warranted against Moses, and Moses was not asked to contribute to the arbitration award. (Resp. Exs. 31, 32.) Moses was sentenced to eight years in prison for first degree theft in the State of Texas on August 25, 1995, as a result of his actions described below. (Resp. Ex. 37.) Moses' Theft of Client Funds Ms. Svrcek, a victim of Moses' fraudulent activity, testified for the Division at the hearing. Moses was the registered representative for the joint brokerage account of her and her husband, first at Merrill Lynch and then at H.D. Vest in 1991. (Tr. 51-53.) She told Moses that she and her husband "wanted to live on the interest" of their combined accounts of $530,000, plus their Social Security income. (Tr. 53-54, 59.) Because she was "afraid of stocks," Ms. Svrcek told Moses that she was interested in the "safest stocks available" or government bonds. Moses told her that he could generate $5,500 a month in interest from the accounts. (Tr. 54.) After Mr. Svrcek became ill, Moses told Ms. Svrcek to invest in the Physician's Investment Club (PIC) for income tax advantages. (Tr. 56.) Although she knew that it "was riskier" than other investments, Ms. Svrcek agreed to invest $25,000 in the venture. (Tr. 56.) Ms. Svrcek did not sign the PIC new-account agreement (Div. Ex. 16) or recognize her husband's handwriting on it (Tr. 56), nor did she discuss options, puts, or calls with Moses. The documents transferring funds from her account were not signed by her. (Tr. 57.) Moses forged her and her husband's signatures on other PIC documents also. (Tr. 58.) When Ms. Svrcek called to complain about her declining balances, employees at H.D. Vest referred her to Moses. He in turn told her falsely that her statements were not accurate. (Tr. 64-66.) Up until September 1993, Ms. Svrcek had been receiving the $5,500 a month that Moses promised her. (Tr. 68.) In September 1993, however, H.D. Vest employees informed her that she no longer had an account on the firm's computer. (Tr. 65-66, 148-49.) Ms. Svrcek also discovered that Moses had left for Florida, disconnected his telephone, and, according to her attorney, depleted her account. (Tr. 68.) She eventually spoke to John Reap, the operations room manager at H.D. Vest during Moses' tenure, and other H.D. Vest employees. (Tr. 150-54.) In spring 1993, Ms. Svrcek moved about $350,000 from her other H.D. Vest accounts because of poor performance. (Tr. 157-158.) By the date of the hearing, Ms. Svrcek had sued H.D. Vest and collected $257,000 in an arbitration award. (Tr. 69-73, 106-07.) A second victim of Moses, Vikki Kay Schurlemmer, also testified. An officer in a cattle business and a partner in a medical laboratory, Ms. Schurlemmer had accounts at H.D. Vest, Merrill Lynch, and Shearson, as well as several mutual funds. (Tr. 131.) She intended to give Moses discretion to trade options for one year with the $10,000 in her PIC account. (Div. Ex. 18; Tr. 116- 18, 135-36.) By the end of 1992, PIC investment statements showed that her $10,000 investment had dwindled to $7,300. By July 1993, she became concerned that no distribution had been made from her PIC account, but she did not talk to Moses or anyone else at the company. By August 31, unable to reach Moses, she called H.D. Vest to inquire about the account. On September 8, she called Reap and then mailed the PIC account documents to him as he requested. (Tr. 124-25.) After Ms. Schurlemmer mailed a letter to the Commission, Kevin Reynolds from H.D. Vest called her and promised to get back to her after he obtained documents from Moses, but Reynolds never contacted her again. (Tr. 125- 26.) In 1995, Ms. Schurlemmer received $8,800 from H.D. Vest for compensation for her losses after having turned down $11,000 a year earlier. (Tr. 128-29, 160-61.) Several other investors were victimized by Moses in the PIC scheme, although they did not testify. PIC statements were sent to Moses' home address so that the investors could not inspect them and Moses misled investors as to their account balances. (Div. Exs. 23, 24, 27.) By September 1993, Reap had discovered that PIC had received $275,389.50 and had disbursed over $180,000 to the PIC bank account, which was controlled by Moses. The account sustained $76,570 in net trading losses, for a total remaining balance of $6,394.20. (Div. Ex. 25.) Supervision of Moses As the manager, Bellows had signed the options account form which had "disallowed" Moses' attempt to contravene company policy by assuming power of attorney over the PIC account in May 1992. (Resp. Ex. 21.) Nevertheless, Moses was able to circumvent the policies of H.D. Vest and its clearing firm. Moses deposited H.D. Vest PIC customer funds in the amount of about $280,439 (minus trading losses of $76,567 and substantial fees) into the Clearlake Bank PIC account. The Clearlake account was controlled by Moses and an accomplice, Ray Immonen, another H.D. Vest registered representative. (Resp. Exs. 23, 24.) Nearly half of the PIC withdrawals were endorsed by another club member, Gary Glover (Glover). Glover was complicit in Moses' fraud. When, at the behest of Moses, Glover acquired power of attorney over the PIC account, he provided Moses with a means to embezzle funds from the account. Most of the remaining withdrawals were accomplished by wire transfers between June 1992 and August 27, 1993. (Resp. Exs. 22, 24, 25, 26.) Bellows did not supervise Moses. Although Bellows was a control person, a "vice president/secretary" since February 1993, H.D. Vest had three additional vice presidents. (Resp. Ex. 19.) Furthermore, the size of H.D. Vest made it unlikely that Bellows could have directly supervised Moses. H.D. Vest had securities sales in 1991 of $503 million; in 1992 of $962 million; and in 1993 of $1,091 million. H.D. Vest had 2,797 registered representatives in 1991; 3,393 in 1992; and 3,855 in 1993. (Resp. Ex. 20.) The H.D. Vest supervision and compliance functions were divided into five general areas: registration; operational; technical; sales; and audit. The compliance department could terminate a representative based on information sent from any section except education. (Div. Exs. 14, 15; Resp. Ex. 7.) Bellows was not part of the compliance department from 1990 through 1992. (Resp. Ex. 11 at 01040.) Bellows was never a compliance manager either. The compliance manager's duties encompass twelve areas. The second area is the supervision of representatives and registered investment adviser agents. Bellows was not a compliance specialist. The compliance specialist has eleven duties. Among them is the duty to review correspondence of the salesmen and to ensure the accuracy of application forms. (Resp. Ex. 11 at 01041.) The compliance manual interprets the NASD Rules of Fair Practice and describes fraudulent activity that is forbidden. Of course, among the forbidden acts are the fictitious account, unauthorized transactions, misuse of customer funds and securities, and misstatements and non-disclosure of material facts by which Moses promulgated his scheme. (Resp. Ex. 11 at 01074.) Bellows did not generate H.D. Vest operations procedures that were defective in the areas of placing trades, processing orders, or the handling of mail or other important functions. (Resp. Exs. 10, 13.) On the contrary, Southwest Securities was responsible for the clearing and trading and general securities functions of H.D. Vest. Thus, Southwest was responsible for processing forms from the registered representatives and for executing their trades. Southwest Securities thus required most of the documents that Moses falsified or forged in order to facilitate his PIC scheme. Moses even furnished the federal tax identification number for PIC that Southwest required. (Resp. Ex. 8 at V-1-12.) The senior equities trader was responsible for supervising Moses. (Resp. Ex. 12 at 01089.) In addition, the compliance manager, compliance assistant manager and the compliance officer supervised Moses. (Resp. Ex. 14 at 01312-15, 01331, 01380.) The compliance assistant manager reports to the compliance manager and is charged with the responsibility of supervising registered representatives daily. (Resp. Ex. 14 at 01315.) Furthermore, Rick Cepak was directly responsible for supervising Moses. (Tr. 344, 346.) Two H.D. Vest employees testified at the hearing in the Division's case. Neither of them brought any unusual behavior by Moses to the attention of Bellows, although both of them had some responsibility for the supervision of Moses. The first H.D. Vest employee who testified was Bill Cummings. I credit his testimony. Bill Cummings, a trader at Kidder Peabody and Company for over five years, joined H.D. Vest in 1989. In 1991, he became a registered options principal after passing the Series 4 examination. Cummings' duties at H.D. Vest included approving accounts for options trading and reviewing options trades by traders who had an options license. (Tr. 264-67.) There were five or six other options principals in the H.D. Vest trading room. (Tr. 267.) During 1992 and 1993, Cummings was a senior trader and a registered options principal in the H.D. Vest trading room. (Tr. 239-40.) In 1992, H.D. Vest had fifteen to twenty investment clubs as clients. One of them, PIC, traded in options. (Tr. 240-45.) In 1992, H.D. Vest did not allow registered representatives to have discretion to trade in customer accounts. Registered representatives who desired to become a trustee for a trust account or a joint registrar for a joint account were informed that those relationships were not allowed by the company. (Tr. 247-48.) Cummings brought the application of Moses to the attention of Bellows. Moses had stated on the application that he would be attorney-in-fact for the account of PIC. It was "not uncommon" for a representative to attempt to establish that kind of relationship with a customer. Because she was the compliance officer at the time, Bellows "was to sign off on all options applications that came in the office." (Tr. 248-49.) Cummings' immediate supervisor was Rick Cepak (Cepak). Cummings took the same action on the Moses application, and Cepak rejected the application. (Tr. 251, 268.) Cummings later contacted Moses about the PIC application, and Moses resolved the matter by telling him on the telephone that Gary Glover would be the attorney-in-fact for the PIC account. Cummings talked with Glover and questioned him about his net worth, and experience and obtained other false information from him. (Tr. 253.) Moses sent in "new paperwork for the PIC account" after Cummings spoke with Glover. (Tr. 254, 268.) Glover assured Cummings that he would be the attorney-in-fact for PIC. (Tr. 269.) When Cummings received the new PIC application, it contained the same false information he had learned from Glover. (Tr. 270-71.) It was Cummings' responsibility to assign "a level of trading authorization" to clients, based on net worth, experience, and income. (Tr. 271.) Southwest Securities or National Finance is the clearing firm for H.D. Vest. (Tr. 275.) The computer system at Southwest Securities "halted" a trade if it was inconsistent with the authorized level for the clients. (Tr. 279.) No trades in the PIC account were attempted that would have exceeded the authorized level for the account, and Cummings never had to go to the trading manager of the compliance department with a trade on the PIC account for any reason. (Tr. 280-81.) Because Glover falsely indicated on the options application that he had an estimated annual income of $150,000 and an estimated net worth of $300,000, Cummings approved the application without performing a credit check. He did not know whether the clearing firm did a background investigation. (Tr. 188-89, 285-86.) Because it was not unusual for registered representatives at H.D. Vest to fill out an application "incorrectly" by attempting to become a trustee on a trust account or a participant in a client's account, Cummings did not attribute a bad motive to Moses' attempt to become attorney-in-fact on the PIC account. However, he drew the matter of Moses' attempt to the attention of Bellows because he had to get her signature on the form and because it was consistent with company "procedures" for establishment of an options account. (Tr. 290-91.) The disapproval of Moses as attorney-in-fact, the contact with Glover, and the subsequent approval of the new options agreement signed by Glover were actions that were consistent with H.D. Vest company policy (Tr. 291-93.) Cummings and other traders and options principals took trades for PIC, but they never had any reason to suspect that Glover was not the attorney-in-fact for the account. Cummings was not aware of the forgeries by Moses during 1992 to September 1993. (Tr. 293- 94.) There was no reason for Bellows to know of any forgeries by Moses either. Cummings thought incorrectly that all the PIC members had signed a document appointing Glover. "Because Southwest Securities had the ultimate responsibility and authority to approve the account, that account would not have been established unless they would have received" such a document. (Tr. 295, 321.) H.D. Vest did not require the individual members of the PIC to verify that they had selected the individual who purported to be the attorney-in-fact on the application. (Tr. 310-11.) The trading room manager in the operations division was responsible for the new account documentation, not Cummings. (Tr. 312-13.) The original documents, however, went to Southwest Securities. No missing documents report came from Southwest Securities in reference to PIC. (Tr. 313.) John Reap also testified. As noted earlier, he was the operations room manager at H.D. Vest during Moses' tenure there. (Tr. 330-34.) Although a veteran of the securities industry for eleven years, Reap was several management levels below Bellows. (Tr. 343.) I credit his testimony. Reap joined H.D. Vest in 1991. (Tr. 371-72.) The general securities trading room handled stocks, bonds, and options trades, and it was staffed by employees who had a NASD Series 24 principals license. Principals reviewed each trade and examined each order ticket. If a trade was "abnormal" or "stuck out," the trader was required by H.D. Vest policy to contact the registered representative, the trading room manager, or the compliance department. (Tr. 376-77.) Account opening documents were the responsibility of "brokerage operations" and the clearing firm, Southwest Securities. (Tr. 377-78.) In May 1992, while Reap was in the trading room, he never received a report from the clearing firm that documents were missing in the PIC account. (Tr. 378.) Thus, there was no reason for Reap or anyone else at H.D. Vest to suspect that Moses had defrauded investors. For example, check number 687474 was prepared by the clearing firm and made out to "Physician's Investment Club, attention care of Gary Glover," consistently with company procedures. (Tr. 380-82.) A few days after the PIC account was opened, when Reap was still a trader, Moses stated that "he was going to start trading options in an investment club." At the time, there were ten to fifteen investment club accounts at H.D. Vest. However, none of them traded options. (Tr. 351.) Reap did not see the PIC account paperwork until fall 1993, when the complaint was filed. (Tr. 353.) Reap had no reason to know that Moses had forged checks from the PIC account from May 1992 through June 1993, and nobody at H.D. Vest could have learned of the forgery from reasonable performance of their duties. (Tr. 393-94.) Bellows could not reasonably have been made aware of the illegal activity by Moses either. (Tr. 394-95.) Reap prepared a profit and loss reconciliation of the PIC account from "the system" at the request of "somebody" at H.D. Vest in September 1993. (Tr. 355- 56, 371.) Reap estimated $76,570 (or about 20% of the account balance) as the loss from eighteen months of trading in the account. (Tr. 357-58.) CONCLUSIONS OF LAW From approximately May 1992 through August 1993, Moses, a registered representative of H.D. Vest, willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Moses violated the federal securities laws through his pattern of misrepresentations, unauthorized trading, forgery, and theft, described in the preceding section. Of course, the instant case raises issues only as they pertain to Respondent Bellows. Section 15(b)(4)(E) of the Exchange Act provides for the imposition of a sanction against a broker or dealer or a person associated with a broker or dealer who: has failed reasonably to supervise, with a view to preventing violations of the provisions of such statutes, rules and regulations, another person who commits such a violation, if such other person is subject to his supervision. For the purpose of this subparagraph (E) no person shall be deemed to have failed reasonably to supervise any other person, if - (i)there have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and (ii)such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system were not being complied with. Bellows was a person associated with H.D. Vest, a broker-dealer company. However, Bellows did not fail reasonably to supervise Moses, because Moses was not subject to her supervision. Even if Moses had been subject to her supervision, however, I conclude that Bellows still reasonably supervised him. Finally, in the alternative, procedures and systems at H.D. Vest would reasonably have prevented and detected Moses' violations, and Bellows had reasonable cause to believe that Moses had complied with those procedures and systems. The Division's contention, that Bellows' position in 1992 and 1993 as compliance officer created supervisory responsibility over Moses, is not well taken. Indeed, this idea that any compliance department personnel acts as supervisor has been rejected by the Securities Industry Association. Task Force on Broker-Dealer Supervision and Compliance of the Committee on Federal Regulation of Securities of the American Bar Association, Broker-Dealer Supervision of Registered Representatives and Branch Office Operations, 44 Bus. Law. 1361, 1373 n.58 (Aug. 1989). The fact that Bellows later in 1993 to 1995 was promoted to executive vice president and to a membership in the executive committee does not per se create supervisory responsibility either. "The public is well protected by state, federal, and common law without subjecting employers to insurer liability for acts they did not commit and could not have reasonably anticipated or guarded against." Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1583 (9th Cir. 1990) (Hall, Rymer, JJ., dissenting). The broker-dealer as personified by Bellows is not an insurer of Moses and she cannot be made vicariously liable for his nefarious deeds. See id. at 1575. The Division contends that, like a president of a broker-dealer, Bellows bears ultimate responsibility for compliance. It relies on Sheldon v. SEC, 45 F.3d 1515 (11th Cir. 1995), for its contention. However, Sheldon states "`unless and until he reasonably delegates particular functions to another person in the firm, and neither knows nor has reason to know that such person's performance is deficient,'" the president is responsible. Id. (quoting Universal Heritage Investment Corp., 47 S.E.C. 839, 845 (1982)). Indeed, the Commission has long recognized that individuals like Bellows who may have overarching supervisory responsibilities for thousands of employees must be able to delegate supervisory responsibility to subordinate qualified individuals, such as Reap, Cummings, and Cepak. The standard of review for delegated authority was clearly articulated in Stuart K. Patrick, 54 SEC Docket 232 (May 17, 1993) and Mabon, Nugent and Co., 44 SEC Docket 1348 (Sept. 27, 1989). It is the responsibility of the broker-dealer to ensure that its executives can delegate effectively: Apart from adopting effective procedures broker-dealers must provide effective staffing, sufficient resources and a system of follow up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised. Stuart K. Patrick, 54 SEC Docket at 236 (quoting Mabon, Nugent and Co., 44 SEC Docket at 1348-49). (Sept. 27, 1989). In the instant case, the responsibility to supervise was diligently exercised. I conclude that the record establishes supervision over Moses by Cummings, Cepak, and Reap, two of whom were called as witnesses for the Division. Each of these employees had control over related specific actions. My conclusion that Cepak was the immediate supervisor of Moses is supported by the testimony of both Cummings and Reap, which is now evidently rejected by the Division. (Tr. 251, 268, 344, 346.) I credit the testimony of the H.D. Vest employees, and I conclude that the three of them fall within the definition of "supervisor" that the Commission has articulated: In light of the statutory language and history, and the Commission's prior decisions, we believe that a supervisor for purposes of Section 15(b)(4)(E) ought to be defined by the Commission as a person at a broker-dealer who has been given (and knows or reasonably should know he has been given) the authority and the responsibility for exercising such control over one or more specific activities of a supervised person which fall within the Commission's purview so that such person could take effective action to prevent a violation of the Commission's rules which involves such activity or activities by such supervised person. Arthur James Huff, 48 SEC Docket 878, 891 (Mar. 28, 1991) (Lochner, Schapiro, Commissioners, concurring). Even if H.D. Vest had not required these employees or other specific employees to supervise Moses, that failure would not have created liability in Bellows, but rather in the broker-dealer itself: If a broker dealer fails clearly to assign such supervisory authority and responsibility to specific individuals, its supervisory procedures will not be reasonably designed to prevent and detect violations of the securities laws by its employees, and though theoretically no individual in such a circumstance could be charged with a failure to supervise, the firm itself would have committed such a violation. Id. at 891 n.14. In Huff, the Commission clearly articulated that the power to fire, demote or reduce pay is not dispositive of supervisory responsibility, but rather who has control over the individual acts of the employee: An important element in these cases is the extent to which they focus on the fact that the employees had particular authority and responsibility for the salespersons' violative conduct (apparently even more so than did the branch and regional managers who were also responsible for supervision of the salespersons), and had the employees wished to exercise it could have prevented the salespersons from continuing their activities in those areas in which they exercised that authority and responsibility, even if they did not have the power to fire, demote or reduce the pay of the salesperson in question. Id. at 890. I conclude that the supervision of Moses was not perfect, and a factual analysis indicates that a more thorough investigation might have revealed Moses' misconduct. "However, the statute only requires reasonable supervision under the attendant circumstances." Id. at 883 (citing Louis R. Trujillo, 43 SEC Docket 690, 694 (Mar. 16, 1989). The test is whether the "supervision was reasonably designed to prevent the violations at issue." Albert Vincent O'Neal, 56 SEC Docket 2447, 2456 (May 26, 1994). Viewed in that light, I conclude that Bellows' overall discharge of any supervisory duties met the statutory standard. The evolution of the supervision standards is a triumph of common sense that makes oversight of the market more responsible, more accountable and more practical. The [Commission], like virtually all institutions, both public and private, is not immune from the tendency of organizations to stagnate over time. Government institutions, in particular, need to guard against the stagnation born of mindless recitation of rules. In many respects, the [Commission] has shown itself adept at responding to changes in the capital markets and reacting to conduct that is fraudulent and inimical to investor protection. Whether or not one agrees with the agency's position on a particular issue, the [Commission] has generally kept in close step with market developments and has adapted well to market challenges. This institution's adaptability may be attributable to the traditionally high caliber of its staff, to the fundamentally dynamic nature of the marketplace, and the business of market oversight, or some combination of these. The [Commission] has often demonstrated an institutional responsiveness to the real world that is unusual among government institutions. William R. McLucas, et. al., Common Sense, Flexibility, and Enforcement of the Federal Securities Laws, 51 Bus. Law. 1221, 1238 (August 1996). Cummings reasonably supervised Moses. During 1992 and 1993, Cummings was the senior trader at H.D. Vest and a registered options principal with nearly ten years of experience in the securities industry. (Tr. 264-67.) It was Cummings who brought the application (with Moses as attorney-in-fact) to the attention of Bellows, who was the compliance officer. (Tr. 247-49.) Cummings' immediate supervisor, Cepak, rejected the application. Unlike the supervisors of the salesman in O'Neal, none of the H.D. Vest supervisors here were presented with an employee who had a prior disciplinary history. Like Lehman Brothers in SEC v. Lum's Inc., 365 F. Supp. 1046 (S.D.N.Y. 1973), Cummings, Reap, and Cepak were dealing with a "respected and trusted employee, with substantial responsibility." Id. at 1065. I find it was reasonable for Cummings to rely on the representations that Moses made to him about Glover and the PIC account and I am "unwilling to impose hindsight liability" on Bellows based on the activities of Moses. Id. Unlike the supervisors in Goldman, Sachs & Co., 55 SEC Docket 3208, 3214 (Feb. 3, 1994) and in Edwin Kantor, 54 SEC Docket 293, 301 (May 20, 1993), Cummings conducted a further inquiry beyond questioning Moses. His conversations with Glover consisted of misrepresentations by Glover that were corroborated by later submissions and forged documents. (Tr. 251-71.) Cummings' approval of the PIC application and of subsequent trading was reasonable under the circumstances. His misplaced reliance on the clearing firm for processing of the documentation was a failure of H.D. Vest oversight policy, not of supervisory responsibilities by individual H.D. Vest employees. (Tr. 293- 321.) Reap, the operations room manager with over ten years experience in the industry, also supervised Moses. Because the clearing firm prepared the fraudulent account documents for Moses, Reap was unable to discover the forgeries and theft of investor funds in a timely manner. H.D. Vest must take responsibility for its assignment of operations to the clearing firm. The third direct supervisor, Cepak, had also rejected the PIC application initially, thus precipitating the fraudulent use of Glover and the complex scheme whereby Moses looted the customer accounts. The very complexity of the scheme generated by Moses absolves his supervisors. Indeed, the use of an outsider with no relationship to the investors, like Glover, is an unusual feature in investment fraud cases. Because Moses used wire transfers and checks to loot the accounts, he needed Glover to circumvent the controls at H.D. Vest. It was the strength of those controls that forced Moses to such extremes. Glover's testimony reveals a conspiracy that few supervisors would have been able to penetrate. It would be unreasonable to charge Bellows with the responsibility of ferreting out the machinations of the plan in time to prevent its execution. Indeed, where registered representatives have launched similarly complex plans, the Commission and courts have consistently refused to find failure to supervise. For example, in Paulson Investment Co. Inc., 47 S.E.C. 886, 890 (1983), the Commission set aside an NASD finding of failure to supervise where the salesmen successfully hid their illegal transactions from the firm and their supervisor. Also, in Thomas F. White, 51 S.E.C. 1194 (1994), the Commission dismissed the case and reversed the Administrative Law Judge's finding of failure to supervise against the chief executive officer of a broker-dealer. White involved selling away and theft by the salesman, but the Commission found reasonable delegation of responsibility and no reason to conclude that anything was amiss. The registered representative, Steven M. Roberta, had carried out a scheme similar to Moses': The stipulated facts with respect to Roberta's fraudulent conduct may be summarized as follows. On at least five occasions, Roberta recommended that clients invest in a fictitious entity called "Srecor." He falsely represented that Srecor was being underwritten by the firm, that it was a fund that invested in high quality securities, and that Srecor securities had a fixed maturity date and paid interest that increased as that date drew closer. After obtaining his customers' agreement to invest, Roberta caused the firm to issue checks payable to Srecor drawn on the customers' accounts, and obtained possession of those checks. He deposited the checks in a bank account that he opened in Srecor's name, and later converted the funds, in the total amount of about $157,000, to his own use. In furtherance of his scheme, Roberta sent his customers forged receipts and confirmations, fraudulent stock certificates, and fictitious press releases. Id. at 1195. Finally, in Huff, the Commission reversed an Administrative Law Judge's finding of failure to supervise and dismissed the case where the salesman's scheme was very similar to the one in the instant case: It is undisputed that Greenman, the "biggest producer" in [PaineWebber's (PW)] Miami office and ranked nationally by PW as its fifth largest producer of commissions, engaged in a massive securities fraud in which he used investors' funds without their authorization for options trading, incurring heavy losses. In order to conceal those losses from customers, Greenman employed various deceptive devices. He intercepted customers' account statements and sent them fictitious ones, arranging for the genuine statements to be sent to fictitious addresses including post office boxes that he controlled and incorrect or non-existent street addresses. The fictitious statements generally showed monthly rates of return ranging from 5% to 7%. Greenman did not even open accounts at PW for some of the customers participating in his program, depositing their funds instead in the accounts of other customers participating in the program. His customers suffered total losses of some $7.6 million. Greenman also went to great lengths to deceive PW with respect to his activities. Id. at 879-80. I have concluded that Moses was not subject to the supervision of Bellows. In the alternative, if Moses was subject to her supervision, Bellows reasonably delegated her supervisory duties to the men who worked closely with Moses on a daily basis, specifically Cummings, Cepak and Reap. Bellows had good reasons to conclude that these employees were diligent in their efforts to prevent the wrongdoing. The Division has not proved by a preponderance of the evidence that any of them could have anticipated the complicity of the outsider Glover, the fabrication of documents, or the forgeries of customer signatures that ensued. I conclude that Moses' thwarted attempt to be designated as attorney for the PIC account and to control it did not constitute misconduct. I credit the testimony of the witnesses, who did not consider it unusual. The record reveals no wrongdoing that came to the attention of Bellows or the three men that should have alerted them to Moses' scheme. Certainly, a close examination of Moses' files, an effort to corroborate Glover's representations, and thorough interrogation of the investors would have thwarted the incipient scheme. H.D. Vest might be culpable, but the statute does not allow me to impose those investigative obligations on Bellows or on other individual H.D. Vest employees, based on the record before me. Therefore, the proceeding must be dismissed. CERTIFICATION OF THE RECORD Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R.  201.351(b), I hereby certify that the record includes the items set forth in the Revised Record Index issued by the Office of the Secretary on September 12, 1996.[2] ORDER IT IS ORDERED that the proceeding against Patricia Ann Bellows, be, and it hereby is, DISMISSED. This Order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commissions' Rules of Practice, 17 C.F.R.  201.360. 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 the party, 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. Lillian A. McEwen Administrative Law Judge **FOOTNOTES** [1]: Citations are to the hearing transcript "(Tr.__ )" and to the exhibits admitted into evidence at the hearing. The Division exhibits are "(Div. Ex.__ )," and the Respondent's exhibits are "(Resp. Ex.__ )." [2]: The Record Index was initially issued by the Office of the Secretary on August 20, 1996.