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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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In the Matter of DALE E. FREY,
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INITIAL DECISION
February 5, 2003 |
| APPEARANCES: | Thomas D. Carter and James A. Scoggins for the
Division of Enforcement, Securities and Exchange Commission.
S. Lawrence Polk for Respondent William C. Piontek. |
| BEFORE: | Lillian A. McEwen, Administrative Law Judge. |
SUMMARY
Respondent William C. Piontek violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, by willfully engaging in unauthorized trading, and recommending unsuitable securities. This Initial Decision imposes a bar and a cease-and-desist order on Respondent William C. Piontek.
PROCEDURAL HISTORY
The United States Securities and Exchange Commission (Commission) instituted these proceedings on September 26, 2000, against Respondents Dale E. Frey (Frey), Roger A. Rawlings (Rawlings), and William C. Piontek (Piontek) pursuant to Section 8A of the Securities Act of 1933 (Securities Act), and Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act). Frey and Rawlings have settled this matter with the Commission, which issued an Order Making Findings And Imposing Remedial Sanctions against Frey on October 25, 2001, Exchange Act Release No. 34-44982, and an Order Making Findings And Imposing Remedial Sanctions against Rawlings on August 1, 2001, Exchange Act Release No. 34-44634.
THE HEARING
I held a public hearing on March 21 through 26, 2001, as to Piontek in Atlanta, Georgia. During the hearing, the Division of Enforcement (Division) called five witnesses, including Piontek and one expert witness. Piontek called no witnesses, although he did testify. I admitted into evidence twenty-four exhibits from the Division and twenty exhibits from Piontek.1
ISSUES
The Order Instituting Proceedings (OIP) alleged that Piontek willfully violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by engaging in unsuitable trading, unauthorized trading, and churning of his customers' accounts. Piontek contends that the investments at issue were suitable for his customers in that they were wealthy, sophisticated investors, with histories of speculative investments, including options. Piontek further contends that his customers authorized the trades in question and that even if the trades were unauthorized, his customers later embraced and ratified the trades with full knowledge of the risks involved. Finally, Piontek argues that the Division's introduction of evidence or claims regarding David Dean is an unfair surprise. However, I rejected that argument during the hearing because the allegations were generally included in the OIP and were the subject of prehearing documents.
If I conclude that the allegations in the OIP are true, I must then determine what, if any, remedial action against Piontek is necessary or appropriate in the public interest pursuant to Sections 15(b) of the Exchange Act; whether monetary penalties should be assessed against Piontek pursuant to Section 21B of the Exchange Act; and whether Piontek should be ordered to cease and desist from committing or causing violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act.
FINDINGS OF FACT
The findings and conclusions herein are based on the entire record. I applied preponderance of the evidence as the applicable standard of proof for the Division's case. See Steadman v. SEC, 450 U.S. 91, 102 (1981). I considered all post-hearing findings, conclusions, and arguments raised by the parties, and I accept those that are consistent with this Initial Decision. Based on the evidence in the record, I find the following facts to be true.
Respondent William Chester Piontek.
William Chester Piontek (Piontek) was born in 1952 and resides in Atlanta, Georgia. He is a college graduate who attended business school for two years; he possesses Series 7, 8, and 24 licenses and has held securities licenses in forty-eight states. (Tr. 82-83.) By 1994, Piontek had worked for several broker-dealers, including Robinson Humphrey, E. F. Hutton, Bear Sterns, Dean Witter, and D. E. Frey & Company (Frey). (Tr. 87-88.) Piontek is presently the chairman and chief executive officer of an Internet company. (Tr. 84.)
At Dean Witter, Piontek formed the Pilot Investment Group (Pilot), which consisted of Piontek and three other employees. Pilot became a registered investment adviser sometime in 1994. (Tr. 96-98.) Piontek left Dean Witter and became the senior principal of the Frey Atlanta, Georgia, office. He maintained that position from February 1994 through July 1999, and he also served as their branch manager and senior registered options principal. (Tr. 88, 139.)
While at Dean Witter, Piontek had become the account representative for approximately 1,740 Eastern Airline pilots. (Tr. 96-97.) After joining Frey, Piontek continued to do business with some of these same customers. (Tr. 88-98, 137-41.) Piontek recommended several investments to his customers in 1998, including investments in Fannie Mae Interest Only Strips (Fannie Mae), John W. Henry Global Trust (Global Trust), and NASDAQ 100 Index Options (NASDAQ Options). (Tr. 142-44.) Piontek considered Fannie Mae to be similar to Zero Coupon Treasury Bonds and appropriate "for investors who require aggressive income." (Tr. 143-45.) The Global Trust was a speculative investment that Dean Witter recommended for IRA accounts. (Tr. 145-47.) The NASDAQ Options are contracts that derive their value from the movement of the NASDAQ 100 Index. (Tr. 141.) An option is a "right to buy or sell property that is granted in exchange for an agreed upon sum. If the right is not exercised after a specified period, the option expires and the option buyer forfeits the money." Barron's Dictionary of Finance and Investment Terms 390 (4th ed. 1995). In 1998, Piontek knew that an investor could lose all of the money within a day or two of purchasing these highly aggressive and "very speculative" securities. (Tr. 141-42.) Piontek explained that the risk involved in NASDAQ Options depends upon their expiration date because "if the price of the NASDAQ 100 is above or below the strike price [of the option] . . . then that would determine whether or not the client had lost all of his money or made money on the trade . . . ." (Tr. 141-42.)
In October 1994, the State of Missouri's Office of Secretary of State (Missouri) issued a consent order involving Piontek. (Div. Ex. 5; See William C. Piontek, AO-94-29 (Oct. 28, 1994).) Frey had petitioned Missouri to register Piontek as a securities agent for Frey. Missouri requested additional information regarding complaints that had been filed against Piontek for allegedly recommending unsuitable securities to his customers. Ultimately, Missouri and Piontek entered into a settlement whereby Piontek was registered as a securities agent in Missouri, subject to his agreeing to comply with Missouri laws and other conditions placed upon him by Missouri. (Div. Ex. 5.)
Similarly, the State Corporation Commission for the Commonwealth of Virginia (Virginia) issued an order imposing special supervision procedures for Piontek on July 11, 1994. Piontek had filed an application for registration as an agent of Frey, and Virginia ultimately granted Piontek's application, but imposed several conditions on his registration. (Div. Ex. 7.)
The Office of the Secretary of State, Securities Division, for the Commonwealth of Massachusetts (Massachusetts) filed a consent order involving Piontek in November 1994. (Div. Ex. 6; See William C. Piontek, R-94-131 (Nov. 15, 1994).) Frey had filed an application to register Piontek as a securities agent in Massachusetts. Massachusetts learned that Piontek had been the subject of eighteen customer complaints and arbitration claims which collectively alleged that Piontek engaged in unauthorized trading, misrepresentations, and the making of unsuitable trade recommendations. Massachusetts noted that none of the complaints or claims against Piontek resulted in a finding that he engaged in the above acts. Ultimately, Massachusetts approved Frey's registration application for Piontek subject to a number of stated conditions applicable to Piontek's employment in the securities industry. (Div. Ex. 6.)
In July 1995, the State of Florida's Division of Securities and Investor Protection at the Department of Banking and Finance (State of Florida) filed an administrative complaint and notice of denial of registration against Piontek. (Div. Ex. 1; See Department of Banking and Finance, Division of Securities and Investor Protection v. William C. Piontek, 2158-S-3/95 (July 6, 1995).) The State of Florida sought to deny Piontek's application for registration as an associated person of Frey. The State of Florida's decision was premised on arbitration proceedings brought by the National Association of Securities Dealers, Inc. (NASD) involving Piontek's alleged purchases of speculative securities in four of his customers' accounts while he worked at Dean Witter. The State of Florida entered into a stipulation and settlement agreement with Piontek in February 1996, whereby Piontek's application for registration was granted for a term of two years. (Div. Ex. 2, 3.)
On September 2, 1998, Scott Gillespie (Gillespie), Frey's Senior Registered Options Principal, instructed Piontek to provide him copies of Client Qualification Forms for Options (Qualification Forms) for fourteen accounts that Piontek represented. (Tr. 359; Div. Ex. 19.) On September 16, 1998, Gillespie wrote Piontek and placed restrictions on Piontek's ability to trade options on behalf of customers. Some of the restrictions placed on Piontek included: a requirement that Piontek verify that all of his customer's accounts had sufficient cash in them to pay for option purchases before he entered orders; a restriction on Piontek's ability to enter additional options for existing option accounts without first speaking to Gillespie; a restriction preventing Piontek from opening any new option accounts or adding option positions in any other accounts without first discussing the proposed trade with Gillespie; a requirement that Piontek receive Gillespie's approval of account and option documentation before option trades were established. (Tr. 371-75; Div. Ex. 20.) On September 24, 1998, Kathy Dominick (Dominick), Frey's Director of Compliance, wrote to Piontek and levied additional procedures and restrictions upon Piontek's ability to trade options that were in addition to those mandated by Gillespie. (Div. Ex. 21.)
The Customers.
Robert E. Hamby
Robert E. Hamby (Hamby) graduated from Piedmont College in 1959, where he majored in business administration. (Tr. 377, 674-75.) He has been in the roofing and sheet metal business for forty-four years, and is presently the sole owner, chairman, and chancellor of John's Roofing Company. (Tr. 378, 384-85, 675-76.) Since the late seventies, Hamby has maintained an investment account at Merrill Lynch, where he has received investment advice from ten to twelve consultants with whom he converses regularly. (Tr. 378-80, 677.) Hamby gave a main broker at Merrill Lynch discretion to trade conservative investments such as blue chip securities and bonds for him because Hamby lacked knowledge of the market. (Tr. 379, 677-79.) Hamby had about $3 million in his Merrill Lynch account in 1997 and 1998, and $100,000 with other broker dealers. (Tr. 685.) Hamby's Merrill Lynch account engaged in short sales once in 1999. (Tr. 680-82.) A "short sale" is a "sale of a security or commodity futures contract not owned by the seller . . . ." Barron's Dictionary of Finance and Investment Terms 523 (4th ed. 1995). An investor who sells short a security "borrows stock certificates for delivery at the time of [the] short sale. If the seller can buy that stock later at a lower price, a profit results; if the price rises, however, a loss results." Id.
During 1997 and 1998, Hamby received financial newsletters and publications, and viewed financial television shows. (Tr. 688-89.) The Hambys' 1997 joint federal tax return showed joint income of $423,249, and short-term capital gains of close to $700,000. (Tr. 689-90, 692-93; Resp. Ex. 15 at 1.) Their 1998 joint federal tax return showed joint income of $114,000, and short-term capital gains of over $1.3 million. (Tr. 703-05; Resp. Ex. 17 at 1.) Their 1998 return also stated that they had purchased an option for HBO & Company, but Hamby had no recollection of that trade. (Tr. 705-06; Resp. Ex. 17 at 1.) The option was purchased in Hamby's account at J.C. Bradford, where his broker had discretionary authority to trade in the account. (Tr. 706.) Hamby knew very little about the securities that his brokers were purchasing for his accounts, including several positions where securities were sold short. (Tr. 695-08, 706-10, 712-13, 742, 746.)
Hamby and his wife, Bobbie Hamby (collectively the Hambys), opened a joint account with Piontek in May 1998. William Murray (Murray), one of Piontek's existing customers, had recommended that Hamby contact Piontek and open an account with him. (Tr. 147, 159.) Hamby had been a friend of Murray's family for over thirty years and knew that Murray did well in the stock market. (Tr. 381, 630-31, 718-21.) During that visit, Hamby, Murray, and Piontek participated in a three-way telephone conversation so that the Hambys could open an account with Piontek. (Tr. 147, 154-55, 381-82, 631, 721-22.) The Hambys opened an account with Piontek that day with a check for $50,000. Their net worth in 1998 included liquid assets of $3.5 million in cash, securities, and their business, which did over $1 million in sales each year. (Tr. 383-85, 632, 675, 728, 732; Div. Ex. 9.) Piontek was given time and price discretion for the account, which authorized him to exercise good judgment in trading securities on behalf of the Hambys at targeted prices. (Tr. 183.)
During their telephone conversation, Hamby told Piontek that he liked "Murray's program" and that he "wanted to make investments similar to those in [Murray's] account," but at the same time be more conservative. (Tr. 147, 151, 386-88, 632.) Piontek warned Hamby that Murray's investments were gambles and that Murray was "an extremely aggressive speculator." (Tr. 147-48.) Piontek informed Hamby that Murray's program included day trading, investing in small priced over-the-counter stocks, sometimes on margin, selling stock short, and buying options. (Tr. 153-54.) Hamby told Piontek that he liked day trading, and that he had already spoken with Murray at length about Murray's trading program, and that he wanted to open an account that would "mirror" Murray's trading program. (Tr. 153-54.) However, while Hamby expressed an interest in mirroring Murray's trading program, he also told Piontek that he wanted to sell when Murray sold, and that he did not want to invest in futures. (Tr. 387-88, 632, 723-24, 726.)
Frey's Compliance Manual listed procedures pertaining to the opening of option accounts, and the steps that Frey's account executives, including Piontek, were required to abide by when opening accounts on behalf of clientele. (Div. Ex. 4 at 44.) The Compliance Manual stated that to document the suitability requirements, an account executive must have filled out an Options Account Form for each account prior to a branch manager approving the account for trading in options. (Tr. 137-38; Div. Ex. 4 at 44.) Moreover, "[a] broker may not induce or otherwise solicit a customer to make any investment or engage in any investment strategy which is unsuitable in relation to the customer's financial circumstances and objectives." (Div. Ex. 4 at 42.) To determine suitability, account executives were required to consider the following factors: age, marital status and number of dependents, earned and unearned income, total net worth and liquid net worth, market and financial sophistication and experience, investment objectives, understanding of the potential risks and rewards of a proposed transaction or strategy, ability to undertake the potential financial risks, occupation, and previous investment experience. (Tr. 323; Div. Ex. 4 at 42.) Piontek stated that the system for determining investment objectives is "imperfect." (Tr. 324.)
The Compliance Manual also required that several pieces of information and documentation be obtained from the customer and approved by Frey's Senior Equity Options Principal or Equity Registered Options Principal prior to the execution of any trades in the customer's option account including, but not limited to, a Client Option Agreement (Option Agreement), and a Qualification Form. (Div. Ex. 4 at 11.) The Qualification Form focused on customer suitability and was required for options trading in an existing account, whereas the Option Agreement disclosed the risks of investing and bound customers to arbitration agreements. (Tr. 321; Div. Ex. 4 at 50-51.) If neither of these two documents were obtained prior to executing an option trade in a customer's account, then the trade was to be rejected until all of the required documents were obtained and approved. The Compliance Manual stated that if "an order is executed without necessary documentation and approval, the representative will be fined, the order will be cancelled or otherwise liquidated, all loses will be charged to the Registered Options Representative and the customer's account will be restricted." (Div. Ex. 4 at 11.)
Hamby signed two sets of forms for the Frey account, a Qualification Form on June 4, 1998, and a Qualification Form and an Option Agreement, both dated October 9, 1998. While Piontek signed the Hamby Qualification Form dated June 4, 1998, attesting to his review of the account, he did not sign the copy provided on October 9, 1998, so this form does not evince Piontek's review or approval of the account for trading in options. (Tr. 157-59, 244-45, 165; Div. Ex. 8, 9.) The June 4 Qualification Form, signed by both Hamby and Piontek, listed speculation as the Hambys' least desirable investment objective, ranking it last out of four choices. The form did not indicate that the Hambys had a history of trading either futures or options. (Tr. 149-53, 159; Div. Ex. 9.) Moreover, it listed Hamby as over sixty years old and retired. Hamby was not retired, however, and Piontek contacted Hamby at work on occasion to discuss his account. (Tr. 148-49, 168-69; Div. Ex. 9.)
Although neither of the Hambys' Qualification Forms evinced Piontek's written approval for options trading, Piontek did approve the account for trading options. (Tr. 165-66.) Furthermore, Gillespie did not sign the Hamby June 4 Qualification Form to indicate that he approved the account for trading because Piontek, in his capacity as a Registered Options Principal, had already signed the Qualification Form. Piontek served as both the account executive who sold the options to the Hambys, and as the Senior Registered Options Principal who approved the trade. Thus, Piontek supervised himself and his sale of options; and Gillespie and Frey's compliance department also supervised Piontek's option trading. (Tr. 140, 246.)
The Hamby account was serviced by Piontek and Chip Owens (Owens), and either one of them contacted Hamby before trades were made in the account. (Tr. 396-98.) After Hamby opened the account, Piontek sent him documents that needed to be signed for the account. Piontek did not discuss the documents with Hamby when the account was opened, and Hamby signed all of them except those that pertained to options because he wanted to invest conservatively and thought that options were outside his range. (Tr. 391, 393.) He asked Frey to stop sending him documents for options because he did not trade in options. (Tr. 729, 762.) Hamby defined conservative investing as managing risk by making sure that the investment does not fall more than ten percent. (Tr. 389-90, 732.) He did not consider conservative investing to include the possibility of losing all of his money in one to three days. (Tr. 390.)
Piontek engaged in short-term trades and short sales in the Hamby account in June 1998. (Tr. 714-15, 736-42.) Hamby did not care whether Piontek sold securities short in his account as long as he made money doing it. However, Hamby did not know that short sales were risky trades. (Tr. 715, 750.) He did not tell Piontek that he thought that unauthorized trades had been made in his account. (Tr. 741-47, 750-55.) However, by August 1998, the account had dropped from an initial investment of $50,000 to $28,653 due to short-term trading and short sales. (Tr. 755, 757; Div. Ex. 10 at 8.) Hamby complained to Piontek about the account's losses. (Tr. 740-42.)
Owens had taken over trading in the Murray account in July 1998, and had therefore assumed some responsibility for the Hamby account. On about September 3, 1998, both Owens and Piontek talked with Hamby about purchasing six NASDAQ Options totaling $36,207.50 despite Hamby's prior request not to invest in futures. The trade was placed, but later cancelled and re-entered for five NASDAQ Options totaling $30,207. (Tr. 187-88, 190-97; Div. Ex. 11.) Hamby later received three sets of confirmations: one stating that the account had purchased six puts in NASDAQ Options for $36,207 on September 3, 1998; another stating that the trade had been cancelled on September 3, 1998, for lack of funds to pay for the trade; and then another confirmation indicating that the account purchased five puts in NASDAQ Options for $30,207 on September 4, 1998. The Hambys owned shares in International Business Machines (IBM), the only investment making money in his account at the time; those shares were sold to fund the NASDAQ Options purchase. (Tr. 400-02, 413, 760; Div. Ex. 10 at 12, 11 at 1-3.)
Piontek talked with Hamby generally before purchasing the NASDAQ Options and thought that Hamby understood the risks involved in the investment. (Tr. 195, 197-98.) I find that Hamby did not understand what the options were or the risks involved. Piontek told Hamby that he had already purchased NASDAQ Options for the Hamby account and that the investment could make him $100,000. (Tr. 199-200.) It was Hamby's idea generally to purchase the NASDAQ Options pursuant to Murray's suggestion. (Tr. 200.) I reject Hamby's testimony that neither Piontek, nor Owens, had ever talked to Hamby generally about options or the risks of investing in investing in them prior to purchasing the NASDAQ Options. (Tr. 399-400, 403-06, 761, 780.) I find that Hamby did not understand options, however, and that he never instructed Piontek to sell his IBM position to purchase the NASDAQ Options. (Tr. 404, 409, 413, 759, 760-62, 778.) This finding is corroborated by Hamby's clear testimony that he knew very little about purchases in his accounts at other brokerage firms.
Piontek advised Hamby to sell his NASDAQ Options for $30,000 on October 6, 1998, but Hamby refused to sell. (Tr. 208, 254-56.) The very next day the options had doubled and were worth $62,000. Piontek told Hamby that the options were scheduled to expire on October 17 and that he could sell the options on October 7, at a significant profit. Piontek explained to Hamby that the options could still go below the price that Hamby had paid for them sometime during the next ten days. (Tr. 208-09, 211-13, 411-13.) Hamby adamantly refused to sell the options, opting instead to try and get as much for them as possible. (Tr. 212, 771-72.)
Hamby told Piontek that he had not signed options papers for the account and that he would not lose money if the options lost value. (Tr. 204, 256.) Piontek threatened to liquidate the trade if Hamby did not send a letter or a document accepting the risk in the trade. (Tr. 204-06, 404-07, 767, 769.) Furthermore, Hamby did not want Piontek to sell the options because they were performing the way that Piontek had forecasted and were "finally making a profit." Hamby thought that the investment would make him a lot of money, and felt that Piontek would have liquidated the options position if he did not do as Piontek requested. (Tr. 409, 766-70.) Hamby responded by sending a letter dated October 6, 1998, stating:
Bill,
I am not into futures but - - We are into these Puts, and you have informed me that we are back to even on this.
We authorize you to do this. If these these [sic] Puts go the wrong way over 10%, SELL them. Other than that, use your smarts and get all you can. You, Murray, And me should meet soon and clear all the smoke.
(Div. Ex. 12.) Piontek considered the letter to be "totally unacceptable" because it constituted a ten percent stop loss order that would have immediately triggered a sale of the NASDAQ Options due to the size of the spread between the ask and bid prices. (Tr. 205, 211-12; Div. Ex. 12.)
Piontek interpreted his conversation with Hamby and the letter that followed to mean that Hamby wanted "some kind of guarantee," and that it was Hamby's intention to keep the profit on the investment if it went up, but to have Piontek shoulder any loss. (Tr. 214.) Hamby appeared to be hesitant to ratify the trade, and Piontek warned him that he might lose the profit on it if he did not act quickly to sign the options papers. (Tr. 214-15.) Ultimately, Piontek discovered that Hamby had already signed a Qualification Form in June 1998, which Hamby must have forgotten about. (Tr. 211-12, 215-17, 245-47; Div. Ex. 9.) Piontek believed unreasonably that the June 4 Qualification Form was sufficient to support Piontek's trades because it showed that the Hambys had a net worth of $4 million, and substantial liquid assets of $3.5 million. Hamby signed the form indicating that Piontek had discussed options with him, and Piontek signed the form authorizing options as suitable for the Hamby account. (Tr. 216.) However, Piontek did not review the more recent version of the Hambys' Qualification Form, signed on October 9, 1998. (Tr. 243-45.)
In choosing suitable investments for the Hamby account, Piontek relied upon his telephone conversations with Hamby as his chief source of information, rather than on the documents contained in the Hamby account. (Tr. 169-71.) In those conversations, Hamby expressed his interest in speculative securities. (Tr. 167.) Piontek believes that suitability "depends on the customer. You can't say that something is by nature unsuitable. A suitability appraisal has to be made with that individual customer's investment objectives in mind." (Tr. 94.) In the end, Piontek felt that Hamby could tolerate the risk of losing $30,000 in options. (Tr. 255.) The Hambys' NASDAQ Options expired worthless on October 17, 1998. (Tr. 255, 412.) Piontek had not sold Hamby's options despite Hamby's letter instructing a sale if the price of the options decreased by ten percent. (Tr. 773.) At no time during his relationship with Piontek, did the Hambys inform Piontek that their investing objectives had changed. (Tr. 414.) Piontek had liquidated his own position in NASDAQ Options between August 28, 1998, and September 9, 1998. (Tr. 249-50, 295-97.)
Hamby sent a letter to Frey on November 11, 1998, discussing the expired options. (Tr. 775-76; Resp. Ex. 20.) The Hambys sought to receive $62,000 from Frey, but did not allege that the options had been purchased without authorization. (Tr. 775-76.) The Hambys sought to receive the market value of the NASDAQ Options on the day that they believed that Piontek should have sold them. (Tr. 776.)
William Randy Murray.
William Murray (Murray), a resident of Toccoa, Georgia, was born in 1948, and was a life-long friend of Hamby. He opened an account at Frey on April 1, 1998. (Tr. 630-31, 649-650; Resp. Ex. 10.) Murray engaged in short-term trading of fairly speculative securities, with twenty years experience trading in options. (Tr. 643-49, 650, 658-59; Resp. Ex. 8, 9, 10 at 1.) After March 1998, he engaged in high-risk investing in his Frey account, including short-sale trades. (Tr. 655; Resp. Ex. 12.)
Murray purchased several positions in the NASDAQ Options on September 10, and December 8, 1998. (Tr. 662-63; Resp. Ex. 13.) Murray spoke with Piontek prior to purchasing the options, and was told about the options and the risks associated with them. Murray authorized the purchase and later sold the options on October 8 while he was in Paris, France. He reaped a profit of $56,000 on the investment. (Tr. 634-36, 667.)
Four days prior to the Hambys' options expiring, Murray called Piontek to place an options trade on October 13. Piontek did not trust Murray, and arranged to have a Frey trader participate in the call. Within twenty seconds of receiving the trade request, the Frey trader told Murray that the trade had been executed at $44 an option. (Tr. 265-67.) The very next day, Piontek learned that Owens had duplicated Murray's trade, and that Murray's account did not have enough funds in it to cover both trades. Ultimately, Owens bore a loss of $42,000 for the duplicated trade. (Tr. 267-68.)
Albert D. Dean.
Albert D. Dean (Dean) was born in 1929, and graduated from the University of Georgia with a Bachelor of Science degree in animal husbandry. After military service, Dean worked for Eastern Airlines until his retirement in April 1988. (Tr. 417-19, 478-79.) Piontek opened an account for Dean in 1983, after Piontek assisted Dean and other Eastern Airlines pilots in selling warrants that the airline had given them instead of a pay increase. Piontek helped to create a market for the warrants, which in turn, helped pilots like Dean sell their warrants. (Tr. 271-74, 421.)
In May 1988, Dean was sent a lump sum check of over $430,000 from his Eastern Airlines retirement account, which he ultimately used to open an Individual Retirement Account (IRA) with Piontek at Dean Witter. (Tr. 283-84, 421, 423-26, 528.) He also had a 401K Plan with Eastern Airlines worth $55,000 that he withdrew in 1989. (Tr. 424-25.) Dean handed over control of his accounts because he had neither the time, nor the interest, to manage them and was glad to pay a broker to do it for him. He trusted his brokers to "captain" his "financial ship" so that he could reach financial security. (Tr. 426, 618-19.) Before his retirement, Dean also invested in precious metal call options on two different occasions from about 1975 to 1979. (Tr. 426-27, 491-94.) He made money on both investments. (Tr. 428.)
When Dean retired from Eastern Airlines around 1988 at the age of sixty-eight years old, his original investment in Eastern Airlines Debentures had grown from $2,000 to about $20,000 through Piontek's assistance. (Tr. 275, 283.) Piontek and Dean worked together to invest Dean's money in investments that were designed to generate income growth in the account. (Tr. 276.) Throughout Dean's years of investing, his investment objectives were always income, growth, and investment grade bonds; his last objective was always investments that involved speculation. (Tr. 423, 460.) Dean wanted to invest in safe investments, and favored investment grade bonds over stocks because bonds were less volatile and provided specific rates of return.
Dean transferred his account to Frey on February 11, 1994, after Piontek left Dean Witter. (Tr. 276-77, 303-04, 462.) Dean gave Piontek some discretionary authority to trade in his Frey account because he felt that Piontek could invest the money better than he could. (Tr. 422, 428.) Both Piontek and Owens talked with Dean often about his Frey account. (Tr. 364-65.) Dean's account statements named Owens as the account executive for the account. However, all of Dean's trades went through Piontek. (Tr. 446, 515-16; Div. Ex. 14; Resp. Ex. at 2.) Dean never placed trades with Owens, but might have agreed to a transaction while talking to him if Dean knew that Piontek was recommending the transaction. (Tr. 516-18.)
In 1995, Dean was a retired pilot with an annual taxable income of $90,000, and about $650,000 spread over two investment accounts. (Tr. 283, 308-10, 502-03; Div. Ex. 14 at 44-46.) Dean's joint federal income tax return for 1997 showed income of $145,593. (Tr. 481-83.) Of that amount, $100,000 represented his individual income. (Tr. 483.) Likewise, his joint income tax return for 1998 showed income of $126,465. (Tr. 484.) Dean's individual income for 1998 was $90,000. (Tr. 484.) He signed Qualification Forms for Frey on July 8, 1994, and May 15, 1995, which both list his net worth exclusive of residence as being $1 million and liquid assets of $700,000. (Tr. 495, 497-501; Div. Ex. 14 at 44-46.) Both forms also indicate that Dean's annual income for those periods was $90,000. (Div. Ex. 14 at 44-46.)
Dean's Frey account contained several Qualification Forms, dated July 8, 1994, May 11, 1995, and September 22, 1998, all of which stated that Dean had no experience in options or futures. (Tr. 309; Div. Ex. 14 at 44-46, 23 at 2.) Dean's Qualification Forms dated July 8, 1994, and May 11, 1995, signed by both Dean and Piontek, listed investing objectives in the order of most importance as income, growth, investment grade securities, and then speculation. (Tr. 310, 322-23; Div. Ex. 14 at 44-46.) Dean's Qualification Form dated September 22, 1998, stated that Dean's investing objectives in the order of most importance had changed to growth, income, speculation, and then investment grade securities. However, Dean had not signed this form. (Div. Ex. 23 at 2.) Piontek did not have discretionary authority to buy securities for Dean's account absent Dean's prior approval, but he did have authority to use sell side discretion for sales, and time and price discretion for purchases. (Tr. 334-35.) Piontek unreasonably considered Dean's account to be aggressive because the account had to generate returns to compensate for Dean's annual withdrawals of approximately $40,000. (Tr. 312.)
Dean became alarmed when his account with Piontek dropped from $520,000 in value, to under $300,000, including a one-year decline of $181,000. Dean had been withdrawing $3,700 from his account on a monthly basis since around 1991 to augment his income. Dean asked Piontek whether his monthly withdrawals had caused the account's decline, and Piontek told Dean that he was withdrawing more than the account was earning in interest. (Tr. 312, 316.) Dean wanted his withdrawals to be derived from the interest that the account earned, and did not want to cut into the principal. (Tr. 432-33.)
In August 1998, Piontek recommended the purchase of NASDAQ Options for Dean's account in hopes of generating profits. (Tr. 277, 279, 362-63, 428-30, 442.) Piontek suggested that the investment would be a good way to make some money for the account, and unreasonably believed that the options were suitable for Dean as a hedge against equities that Dean held in other accounts with other brokerage firms. (Tr. 364, 429-30, 436, 493.) Dean's account statements for his Frey account evince the purchase and sale of several NASDAQ Option positions: 5 put options purchased on August 26, 1998, for $20,500, and then sold on August 26, 1998, for $21,000; 10 put options purchased on August 26, 1998, for $41,000, and then sold on August 26, 1998, for $42,000; 2 call options purchased on August 28, 1998, for $15,400, and then sold on August 28, 1998, for $22,246; 7 call options purchased on August 28, 1998, for $19,950, and then sold on August 28, 1998, for $20,617; 14 call options purchased on August 28, 1998, for $39,900, and then sold on August 28, 1998, for $41,234; 2 put options purchased on August 31, 1998, for $20,000, and then sold on August 31, 1998, for $24,400; 8 put options purchased on September 1, 1998, for $95,400, and then sold on September 1, 1998, for $95,400; 5 put options purchased on September 1, 1998, for $59,625; 12 put options purchased on September 10, 1998, for $48,000, and then sold on October 8, 1998, for $105,600; 10 put options on October 13, 1998, for $42,750. (Tr. 449, 551-53, 557-58, 560-61; Div Ex. 16 at 3-11; Resp. Ex. 7 at 62-72, 13, 14.)
Dean authorized Piontek to purchase only two options for up to $18,000. (Tr. 431, 446-49, 559, 563.) He understood the risks, and was willing to risk losing $18,000 on the puts in exchange for the possibility of making $50,000 to $60,000 in profits. (Tr. 567, 569-70.) He considered that to be consistent with his investment objectives. (Tr. 570.) Dean did not confront Piontek about the different amounts purchased because he did not receive confirmations for the transactions until weeks after the trades had been executed. (Tr. 561, 563.)
In September 1998, Gillespie phoned Piontek and told him that the Dean account had overbought NASDAQ Options and that the account did not have enough funds in it to pay for all of the options that had been purchased. (Tr. 337, 339-41, 356-57.) Owens had placed a purchase for eight NASDAQ Options in the Dean account, which caused Frey's marketing department to flag the account as having an "overbuy." (Tr. 338-40.) An "overbuy" occurs when more money is spent than is available in cash or in money market funds in the account. (Tr. 340.) While Piontek believed that the Dean account had been approved for options trading at the time, a copy of Frey's Daily Trade Review for options trades over $10,000 purportedly listed the account as not approved for options trading as of September 2, 1998. (Tr. 351.) Piontek did not receive this report, and knew nothing about its contents or to whom it was sent. (Tr. 353-54.) Piontek and Owens had not talked to each other about the purchases either before or after they had been placed in the Dean's account, but Piontek did talk to Dean about the risks of purchasing the NASDAQ Options. (Tr. 339, 350-51, 362.)
After the Dean account overbought the NASDAQ Options, Piontek asked Dean to participate in a conference call with Gillespie and Dominick about the options. The call was designed to ascertain whether Dean wanted to keep the eight NASDAQ Options, and if so, to determine how Dean would pay for them since the account had insufficient funds in it to pay for the purchase. Dean found out that Piontek had purchased more than two put options for the account, and that the account did not have enough money in it to pay for the options. (Tr. 442-43, 446-47, 575, 579.) Prior to the conference call, Piontek told Dean that Gillespie and Dominick would determine whether Dean would be able to keep the options or have them taken away from him. (Tr. 577.) Piontek told Dean that he could sell the options, but that there was a forecast that the market would continue to drop, which would cause Dean's options to appreciate in value. (Tr. 438-39.) Dean never complained during the call about unauthorized trades, over-purchased options, or his desire to reduce the options position. Instead, Dean tried to convince Gillespie that the options should stay in the account because he wanted the chance to profit from them. (Tr. 574, 576-77.) Dean later found out that Frey decided to reduce Dean's option position from eight options to five due to suitability concerns and the lack of value of his account. (Tr. 339-41, 356-57, 356-65, 370-71, 438-39, 582.)
After Dean's position in NASDAQ Options had been reduced to five put options, Dean talked to Owens and learned that the options were worth twice what he had originally paid for them. He instructed Owens to sell the options, but Owens told him that he needed to talk to Piontek. Piontek, however, recommended that Dean maintain his position for a couple of days and Dean acquiesced. (Tr. 439, 442-43, 582, 584-86.) Had Dean sold his position on or about October 10, 1998, he could have realized a substantial profit. (Tr. 585.) Thereafter, the Federal Reserve Board cut interest rates on or about October 16, 1998, which caused the NASDAQ 100 Index to skyrocket. (Tr. 587.) This, in turn, caused Dean's NASDAQ Options to depreciate in value. (Tr. 588.) Piontek called Dean on or about October 17, 1998, to tell him that his NASDAQ options had expired worthless, but he could not specifically recollect having called Dean before then to warn him of the upcoming expiration. (Tr. 364-65, 559.)
Neither Piontek, nor Owens, ever told Dean that he could lose all of his investment if the market did not perform as anticipated. (Tr. 429-30, 440-41, 445-46.) However, Dean came to understood the significant risks that were associated with the options position because Dominick and Gillespie discussed them with him at the time of the conference call. (Tr. 577-78.) Dean knew that owning five puts meant that he stood to lose up to $45,000. (Tr. 579, 583, 586.) Moreover, Dean knew that he could have sold the five put options on or about October 11, 1998, and realized a huge profit, but he decided to hold onto them in hopes of getting more money for them. (Tr. 585-87.) In fact, before his position had been reduced to five put options, Dean would have maintained the eight put options in hopes of profiting $200,000 from the position. He stated, "[w]ell, we are already in this thing and every move, every tick on the index looks like we are going to hit it. . . . I hadn't purchased them originally but I was not going to back away from this opportunity that we had here." (Tr. 581-82.)
I reject Dean's testimony that he had never purchased put options prior to 1998, and that he knew very little about them. (Tr. 518, 525.) Dean acknowledged that he understood from his five years of trading in options that if the NASDAQ 100 Index went below the strike price for the options, in this case 1240, then the puts would have been profitable for him. (Tr. 572.) Likewise, if the strike price were to have gone above the 1240 strike price then his put options would have lost their worth. (Tr. 572.) Dean also understood that if the NASDAQ 100 Index was above 1240 on October 17, 1998, then the put options would expire worthless. (Tr. 573.) Dean knew that he was essentially gambling on how the NASDAQ 100 was going to move. Thus, he knew that he could lose his entire investment in a relatively short period of time, and willingly acquiesced in the trade to chance the possibility of making a profit. (Tr. 569-70, 573.)
Dean knowingly engaged in option trading on several occasions in the past, when he invested in the Global Trust, which invested as much as $75,000 of Dean's monies in options. (Tr. 503-05.) Dean signed a Qualification Form on May 11, 1995, to facilitate purchasing the Global Trust because Piontek had recommended it for the account. (Tr. 495-96.) The Qualification Form authorized Piontek to trade options on behalf of the account to facilitate the Global Trust purchase. (Tr. 503-04, 619-21.) Dean received a booklet entitled, "Characteristics and Risks of Standardized Options" in connection with his Global Trust investment. (Tr. 505-07; Resp. Ex. 2, 3.) Buried in the booklet was a warning that the purchaser of an option runs the risk of losing his entire investment in a relatively short period of time. (Tr. 510; Resp. Ex. 3 at 16.) Dean did not read the booklet from cover to cover, but understood that it was a high-risk investment that involved purchasing options or commodities. (Tr. 560-51, 613.)
Likewise, Dean purchased thirty put options for the Standard & Poors 500 Index (S&P Options) on January 25, 1995. The S&P Options were scheduled to expire on December 21, 1996. (Tr. 519; Resp. Ex. 4, 7 at 2.) By June 1996, Dean's S&P Options had become substantially worthless, and he ultimately lost over $5,000 on the investment. He never complained to anyone at Frey about the investment. (Tr. 521-23, 526; Resp. Ex. 4 at 3.) Dean was unaware that Piontek had purchased all of the options for his account at the time of the purchase, but he received a confirmation for the trade about forty days after the trade had been executed. (Tr. 519-21, 523, 545; Resp. Ex. 4 at 3, 7 at 2.) Piontek also wrote a letter to Dean dated December 5, 1994, informing him of the account's progress and telling him that the S&P Options had been performing well. (Tr. 542; Resp. Ex. 6.)
Dean also purchased put options for the Hong Kong 30 Index (Hong Kong Options) for $1,500 on December 31, 1995. The options expired worthless on June 10, 1996. (Tr. 523-26; Resp. Ex. 4 at 4-5.) Thus, Dean had purchased options for two indexes prior to his acquiring the NASDAQ Options and he would have understood the risks of purchasing options had he paid attention to his account statements. (Tr. 524-25.) Dean also received confirmations and statements from Frey regularly. (Tr. 542-44.) After his NASDAQ Options expired worthless, Dean wrote a letter to Dominick dated December 8, 1998, stating that he felt that Piontek should have never purchased the options for the account since it was an IRA. (Tr. 560-61.)
The Trades.
Martin Breen (Breen) was tendered and accepted as an expert witness in the standards of the securities industry for trading options, as well as in the general area of selling options and other securities. (Tr. 792-805, 809; Div. Ex. 26.) Breen has worked in the securities industry for thirty-seven years, and has gained experience as a registered representative, compliance officer, branch manager, and as a trader on the Chicago Board Options Exchange. (Tr. 792-95; Div. Ex. 26.) Breen's analysis of Piontek's trades is adopted and forms the basis for my findings in this section.
NASD Rules 2310, 2510, and 2860 apply to the issues in this proceeding. (Tr. 813.) NASD Rule 2310(a) addresses transactions and recommendations to customers:
In recommending to a customer the purchase, sale or exchange or any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.
NASD Rule 2510(b) deals with discretionary accounts and states that "[n]o member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual . . . and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer, or manager . . . ."
Furthermore, NASD Rule 2860(19) applies to the suitability of options and states:
(A) No member or person associated with a member shall recommend to any customer any transaction for the purchase or sale . . . of any option contract unless such member or person associated therewith has reasonable grounds to believe upon the basis of information furnished by such customer after reasonable inquiry by the member or person associated therewith concerning the customer's investment objectives, financial situation and needs, and any other information known by such member or associated person, that the recommended transaction is not unsuitable for such customer.
(B) No member or person associated with a member shall recommend to a customer an opening transaction in any option contract unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that he may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended position in the option contract.
Official notice of these rules is permissible under Rule 323 of the Commission's Rules of Practice. See 17 C.F.R. § 201.323.
Senior Registered Options Principals are required by regulation to approve all options accounts, and it is a gross deviation from industry standards for them to fail to approve accounts for options trading before options are actually traded in them. (Tr. 840-43.) Likewise, if the senior registered options principal did not have the opportunity to approve the account because documents were not submitted or were incomplete, his actions failed to meet the standards of the industry. (Tr. 842.)
Pursuant to NASD Rule 2860, an additional level of scrutiny is required for options trading to be determine suitable for an account. (Tr. 844-45.) In determining whether a trade is suitable for an investor, every transaction should be judged singularly, and past transactions should not be used to assume that the current trade is appropriate. (Tr. 850.) If a client endeavors to mirror a trading strategy that is contrary to the investment objectives stated in his account, and the registered representative knows or should know of the contradiction, then industry standards require that the registered representative clearly explain to the client that the proposed trading strategy is inappropriate for the objectives listed in the account. If the client insists on carrying forth with the trade, then the registered representative should memorialize the client's intent in writing and provide the client a copy of the opinion. Thereafter, "[i]t is the client's money" and the registered representative can execute the client's trade. (Tr. 836, 838-39.) Thus, Hamby should have been advised not to copy Murray's trading strategy. Piontek's failure to advise him was a gross deviation from industry standards.
Likewise, industry standards also mandate that in monitoring investments for risk and appropriateness for the account, it is not enough for a registered representative to simply give a customer disclosure documents about options, but he must also take whatever actions are necessary to determine that the customer has sufficient knowledge and understanding of the product, and has the background and financial wherewithal to justify transacting in that product. (Tr. 844, 859.) NASD Rule 2860 requires that a registered representative make sure that the client has not only read the disclosure documents for an investment, but also that he understood them. It is a deviation from industry standard to do otherwise. Thus, it is not enough just to provide a copy of a prospectus to the customer. While the customer has an obligation to read disclosure documents provided by the registered representative, his failure to do so does not relieve the registered representative from his duty as a licensed individual. (Tr. 874-75, 877.) The registered representative cannot simply assume that because the customer has signed a form, he actually read and understood it. Instead, the registered representative must satisfy himself by communicating with the customer. (Tr. 863, 865-67, 873, 875.)
For the Hamby account, Piontek's decision to purchase options for the account was not a hedging strategy as argued by Piontek because he was not specifically aware of the Hambys' other holdings in their accounts with other brokerage firms, or of the actions being taken by the managers of those holdings. A hedging strategy is employed to reduce the risk of loss by taking a position in the market that is opposite from a position that has already been taken. (Tr. 852-53.) Piontek's decision to use 100% of the equity in the Hambys' account to purchase volatile, short-lived index options not only contradicted the Hambys' investment objectives listed for their account, but was inconsistent with industry standards. (Tr. 821, 825, 827, 854.)
As for the Dean account, it is grossly inconsistent with industry standards for a registered representative to engage in day trading IRA funds because of the risk and volatility involved. (Tr. 846-49.) Purchasing index options not only contradicted the investment objectives listed for the Dean account, but was also an extreme deviation from industry standards. (Tr. 855.)
CONCLUSIONS OF LAW
The OIP alleges that Piontek willfully violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by employing devices, schemes, or artifices to defraud, making untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or engaging in acts, transactions, practices, or courses of business that would or did operate as a fraud or deceit.
Section 17(a) of the Securities Act prohibits using the mails or instruments of interstate commerce in the offer or sale of securities to (1) employ any device, scheme, or artifice to defraud; (2) use false statements or omissions of material fact to obtain money or property; or (3) engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser of securities.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security to (1) employ any device, scheme, or artifice to defraud; (2) make any untrue statement or omission of a material fact; or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
To find Piontek guilty of violating Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Division must prove that Piontek acted with scienter. See Aaron v. SEC, 446 U.S. 680, 697 (1980). The Supreme Court has defined scienter as "a mental state embracing [an] intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The scienter requirement can be met by showing that Piontek acted recklessly, defined as "an extreme departure from the standards of ordinary care." Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977); see also Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990); Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982). Proof of recklessness may be inferred from circumstantial evidence. See Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978).
A finding of negligence is adequate to establish a violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act. See Jay Houston Meadows, 52 S.E.C. 778, 785 & n.16 (1996), aff'd, 119 F.3d 1219 (5th Cir. 1997); see also SEC v. Steadman, 967 F.2d 636, 643 & n.5 (D.C. Cir. 1992) (citing Aaron, 446 U.S. at 701-02); Newcome v. Esrey, 862 F.2d 1099, 1102 n.7 (4th Cir. 1988).
Materiality is a mixed question of law and fact and depends on the circumstances at the time of the alleged misstatement. See Ganino v. Citizens Utils. Co., 228 F.3d 154, 162, 165 (2d Cir. 2000). The test for materiality is whether there is a substantial likelihood that a reasonable investor would consider the information important to the investment decision, and would view it as having significantly altered the total mix of available information. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Thus, issues are not material if they are "so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Additionally, a statement is misleading if the information disclosed does not accurately describe the facts, or if insufficient data is revealed. See Basic Inc., 485 U.S. at 232; United States v. Koening, 388 F. Supp. 670, 700 (S.D.N.Y. 1974).
The OIP alleges that Piontek engaged in unauthorized trading, unsuitable trading, and churning in customer accounts. The Division argues that Piontek made unsuitable trade recommendations involving options transactions to customers who were not approved for the transactions and were not informed of the risks associated with the securities. It contends that despite the Hambys' aversion to investing in options, Piontek nevertheless purchased the NASDAQ Options for their account without their approval. It also contends that Piontek purchased speculative and risky securities for Dean's account despite Dean's stated investment objectives of preservation of capital and avoidance of risk. Based on these recommendations, the Division contends that Piontek engaged in unauthorized trading in the accounts as a means to effectuate trades.
Piontek contends that he did not violate Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act or Rule 10b-5 thereunder, and that the Division failed to show that he knowingly or recklessly defrauded his customers. Piontek asserts that the investments at issue were entirely suitable for the Hambys and Dean who were wealthy, sophisticated investors, with histories of speculative investments, including options. Piontek also contends that he explained the risks associated with the trades in question, and gave the Hambys and Dean opportunities to rescind their trades. Even if Piontek did engage in unauthorized trading, he argues that the Hambys and Dean embraced the trades with full knowledge of the risks associated therewith at a time when they could have repudiated the trades and recovered their entire investments. Piontek concludes that the Hambys and Dean ratified the trades and failed to timely repudiate the trades, and thus cannot now try to repudiate them simply because they ultimately were unprofitable.
Unauthorized Trading.
The Division argues that Piontek failed to inform either the Hambys or Dean that he was going to make several major trades in their accounts. Piontek counters that the Hambys and Dean authorized the trades in question.
In Ivan M. Kobey, 53 SEC Docket 286 (Dec. 22, 1992), the Commission found that a broker never consulted his customer about specific transactions before he executed them and that he had engaged in discretionary trading without having first obtained written authorization. The Commission stated that the record depicted "a pattern of deceit, fraud, and abuse . . . in an overarching scheme to take advantage of the naiveté and lack of investing experience (or absence) of his customers, many of whom had limited resources for investment." Id. at 299. Likewise, a misrepresentation, omission, or non-disclosure must accompany the trade that is alleged to have been unauthorized. See Rowe v. Morgan Stanley Dean Witter, 191 F.R.D. 398, 414 (D.N.J. 1999). In Sandra K. Simpson and Daphne Ann Pattee, 77 SEC Docket 1983 (May 14, 2002)(Commission Opinion), the Commission stated "[a] broker who trades in a customer's account without authorization commits fraud if there is accompanying deceptive conduct." Id. at 2001 (citing Brophy v. Redivo, 725 F.2d 1218, 1221 (9th Cir. 1984); Messer v. E.F. Hutton & Co., 847 F.2d 673, 678 (11th Cir. 1987); SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); Donald A. Roche, 53 S.E.C. 16, 24 (1997)). The Commission further stated that "[t]he deceptive conduct element is met when the broker omits `to inform the customer of the materially significant fact of the trade before it is made.'" Id. at 2001-02 (citing Roche, 53 S.E.C. at 24).
I conclude that Piontek's failure to seek and receive the Hambys' authorization to trade the NASDAQ Options at issue constitutes a material omission that accompanied an unauthorized trade. As in Kobey, Piontek failed to inform the Hambys that he was selling certain securities in their accounts to purchase NASDAQ Options. Piontek recklessly traded securities in the Hamby account by not notifying the Hambys that he was going to purchase the NASDAQ Options in their account until after the trade had been executed. The purchase directly conflicted with the Hambys' investment objectives and constituted a materially significant fact that the Hambys should have been privy to prior to Piontek's executing the trade.
Furthermore, Piontek was given time and price discretion for the Hamby account, but this authority did not include the ability to trade securities without first seeking the Hambys' approval. I conclude that Piontek lacked discretionary authority to purchase the NASDAQ Options. See Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953 (E.D.Mich. 1978)(stating that a non-discretionary account is "an account in which the customer rather than the broker determines which purchases and sales to make"). The Hambys must have given prior approval for the specific options to have been purchased for their account. See Hotmar v. Lowell H. Listrom & Co., 808 F.2d 1384, 1385 (10th Cir. 1987)(stating that customers must give prior approval for all transactions in non-discretionary accounts). Moreover, Hamby had not authored his letter to Piontek until after the trade was executed which further supports the conclusion that the trade was unauthorized at the time that Piontek entered it: "I am not into futures but - - We are into these . . . Puts, and you have informed me that we are back to even on this. We authorize you to do this." Piontek's unauthorized trading in the Hamby account caused the account to suffer a loss of $30,000 when the NASDAQ Options expired worthless.
Likewise, Piontek also engaged in unauthorized trading in the Dean account. Piontek did not have discretionary authority to buy these particular securities for the Dean account. See Hotmar, 808 F.2d at 1385; Leib, 461 F. Supp. at 953. While Dean had authorized Piontek to purchase only two NASDAQ Options for his account, Piontek ultimately engaged in several purchases and sales of the NASDAQ Options. Dean authorized Piontek to purchase two of the NASDAQ Options in his IRA because he was willing to invest up to $18,000 in the options. However, Piontek recklessly engaged in additional purchases and sales in the account, which were unauthorized, and caused the IRA to lose almost $40,000 more than Dean had knowingly authorized. Piontek failed to disclose materially significant information that a reasonable investor would have wanted to know before his IRA funds were spent.
Piontek argues that even if the trades were originally unauthorized, the Hambys and Dean ratified the trades in question by failing to repudiate the trades timely when given the chance. The Commission has repeatedly held that "ratification of a transaction after the fact does not mean trades were properly authorized." Justine Susan Fischer, 67 SEC Docket 2414, 2421 (August 19, 1998)(Commission Opinion); see also Simpson, 77 SEC Docket at 2002-03 (May 14, 2002); Neil C. Sullivan, 51 S.E.C. 974, 976 (1994); Frank Custable, 51 S.E.C. 643, 650 (1993). Moreover, as the Commission held in Howard Alweil, 51 S.E.C. 14, 16 (Oct. 1, 1992), even if a customer ratifies an unauthorized trade, the registered representative is still subject to discipline for executing the unauthorized trade.
I conclude that Piontek violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in regard to his unauthorized trading in the Hamby and Dean accounts.
Suitability.
The suitability doctrine is premised on New York Stock Exchange Rule 405, the Know Your Customer Rule, and the National Association of Securities Dealers Rules of Fair Practice. See O'Connor v. R.F. Lafferty & Co., Inc., 965 F.2d 893, 897 (10th Cir. 1992). Analytically, a suitability claim is a subset of an ordinary fraud claim brought under Section 10(b) of the Exchange Act. See Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir. 1993); see also O'Connor, 965 F.2d at 897 (citation omitted) (stating that unsuitability claims can be analyzed as omission cases or fraudulent practices cases). A broker is prohibited from making recommendations that are "unsuitable in light of the customer's stated investment objectives, in connection with actual misrepresentations and omissions." See Joseph J. Barbato, 53 S.E.C. 1259, 1275 (1999).
To prevail on its claim, the Division must prove (1) that the NASDAQ Options that Piontek recommended were unsuitable for the Hamby and Dean accounts; (2) that Piontek knew or reasonably believed that the NASDAQ Options were not suitable for those accounts; (3) that Piontek recommended or purchased the NASDAQ Options anyway; and (4) that Piontek, with scienter, made material misrepresentations or failed to disclose to the Hambys or Dean material information related to the suitability of the NASDAQ Options. See Clark v. John Lamula Investors, Inc., 583 F.2d 594, 600 (2d Cir. 1978); see also Banca Cremi, S.A. v. Alex. Brown & Sons, Inc., 131 F.2d 1017, 1032 (4th Cir. 1997); Brown, 991 F.2d at 1031; National Union Fire Ins. Co. v. Woodhead, 917 F.2d 752, 757 (2d Cir. 1990); Lehman Bros. Commercial Corp. v. Minmetals Int'l Non-Ferrous Metals Trading Co., 179 F. Supp. 2d. 159, 165 n.4 (S.D.N.Y. 2001); Pits, Ltd. V. American Express Bank Int'l, 911 F. Supp. 710, 718 (S.D.N.Y. 1996); Rowe v. Morgan Stanley Dean Witter, 191 F.R.D. 398, 407 (D.N.J. 1999); Murray v. Dominick Corp. of Canada, 117 F.R.D. 512, 516 (S.D.N.Y. 1987).
Scienter exists where a broker recklessly disregards his client's investment concerns. See Kehr v. Smith Barney, Harris Upham & Co., Inc., 736 F.2d 1283, 1286 (9th Cir. 1984). Moreover, scienter can be inferred by finding that a respondent knew or reasonably believed that the securities were unsuited to the needs of the particular investor, misrepresented or failed to disclose the unsuitability of the securities, and nevertheless proceeded to recommend or purchase the securities. See Banca Cremi, 131 F.2d at 1031; see also Paul C. Kettler, 51 S.E.C. 30, 32 n.11 (1992) (Transactions that were not specifically authorized by a client but were executed on the client's behalf are considered to have been implicitly recommended within the meaning of NASD rules). As discussed below, Piontek's recommendations and decision to purchase NASDAQ Options for the Hamby and Dean accounts constituted a reckless disregard for the investment objectives stated in each of those accounts.
The Division argues that Piontek lacked reasonable grounds to believe that the NASDAQ Options were suitable for the Hamby and Dean accounts and that he recklessly disregarded the investment objectives listed in those accounts by recommending sophisticated index options to them. It further argues that in recommending unsuitable investments to the Hambys and Dean, Piontek failed to recommend investments that were consistent with their financial situations and needs. Piontek, on the other hand, argues that the NASDAQ Options were suitable for the Hambys and Dean because they were sophisticated investors with a history of speculative investing.
Piontek knew that options were highly aggressive and very speculative securities, and he knew that an investor could lose all of his or her money within a day or two of purchasing options. See also Patrick G. Keel, 53 SEC Docket 851 (Jan. 11, 1993) (Commission opinion)(considering options to be risky, speculative investments). Additionally, Frey's Compliance Manual stated "[a] broker may not induce or otherwise solicit a customer to make any investment or engage in any investment strategy which is unsuitable in relation to the customer's financial circumstances and objectives." In determining suitability, Frey's compliance procedures required Piontek to consider a list of factors including the investor's age, occupation, financial sophistication and experience, investment objectives, ability to undertake the potential financial risks of the investment, and previous investment experience. In light of these factors, Piontek unreasonably decided to recommend and purchase options for the Hamby and Dean accounts.
The NASDAQ Options that Piontek recommended and purchased for the Hamby and Dean accounts were not suitable for those accounts. Several factors are taken into consideration in determining whether an investor is sophisticated, including "wealth[,] ... age, education, professional status, investment experience, and business background." Banca Cremi, 131 F.2d at 1029; see also Myers v. Finkle, 950 F.2d 165, 168 (4th Cir. 1991); cf. McAnally v. Gildersleeve, 16 F.3d 1493, 1500 (8th Cir. 1994)(recognizing that an individual's sophistication in "stocks and bonds" did not necessarily suggest sophistication in commodities futures options). Options, in conjunction with other investment vehicles, were not suitable investments for the Hambys and Dean, given their advanced ages, Dean's retirements status, their lack of financial sophistication, and the investment objectives listed in their accounts. Neither Hamby, nor Dean, understood enough to decide that options were a suitable investment for their accounts.
On August 31, 1998, the Hamby account had a net value of about $28,653. On September 4, 1998, Piontek purchased five NASDAQ Options for the account for $30,207. Piontek sold the Hambys' IBM stock, the only investment making money in the account at the time, to fund the NASDAQ Options purchase. Despite Hamby's interest in mirroring Murray's trading system, the Qualification Form that he signed on June 4, 1998, clearly indicated that speculative investments were the least of the Hambys' investment interests. At no time during the trades in question, did Hamby inform Piontek that he was interested in changing the account's investing objectives. Hamby also told Piontek at the time of opening the account that he was not interested in futures, further indicating that speculative investments did not suit the Hambys' investment objectives. Hamby clearly did not understand options, and when Piontek informed Hamby that he had purchased put options for the account, Hamby thought that Piontek had purchased a stock called "puts." I conclude that it was unreasonable for Piontek to have purchased options for the Hamby account without first making sure that the Hambys read and understood the disclosure documents that he provided about options. There is no doubt that Hamby signed account forms for options trading generally, but the record fails to show that Piontek inquired as to the Hambys' understanding of options or that the Hambys knowingly authorized Piontek to trade NASDAQ Options for the account. Hamby should have been advised not to emulate Murray's trading program; Murray was a wealthier and more sophisticated investor than the Hambys, and Piontek should have obtained written proof of having given this advice to Hamby to relieve him of his obligation to the Hambys.
Similarly, Dean was also a retiree over the age of sixty during the trades in question. Dean relied upon the funds in his Frey account to supplement his income and sought to invest in safe investments, favoring bonds over stocks because bonds were less volatile and provided specific rates of return. Piontek was aware of this at the time that he recommended and purchased the options for Dean's account. Moreover, Dean's Qualification Forms, dated July 8, 1994, and May 11, 1995, specified that speculative investments were the least important of Dean's investment objectives. Dean's history of trading showed that he had engaged in options trades in other accounts and that he understood the nature of the security and the risks that accompanied it. However, prior trades are irrelevant when trying to determine the issue of suitability in this case. In Douglas Jerome Hellie, 49 SEC Docket 635 (July 23, 1991)(Commission Opinion), the Commission stated that a broker must "make a customer-specific determination of suitability and . . . tailor his recommendations to the customer's financial profile and investment objectives" when recommending a security. Id. at 638 (quoting F.J. Kaufman and Co. of Virginia, 45 SEC Docket 120, 125-26 (Dec. 13, 1989)). Dean willingly authorized Piontek to purchase two NASDAQ Options for the account, but he did not authorize Piontek to purchase and sell NASDAQ Options in excess of that amount. Those trades, in light of Dean's financial state and work status, were not suitable for his IRA.
Piontek asserts that the NASDAQ Options were entirely suitable for those accounts because they were held by wealthy, sophisticated investors. However, a customer's wealth and sophistication do not give a registered representative license to disregard the customer's investment objectives. See Henry James Faragalli, Jr., 63 SEC Docket 826, 837 (Nov. 26, 1996); see also Arthur Joseph Lewis, 50 S.E.C. 747, 749 (1991)(stating that "[t]he fact that a customer . . . may be wealthy does not provide a basis for recommending risky investments"); David Joseph Dambro, 54 SEC Docket 968, 973 (June 18, 1993)(Commission Opinion)("Suitability is determined by the appropriateness of the investment for the investor, not simply by whether the salesman believes that the investor can afford to lose the money invested.").
Piontek should have known that the options were not suitable for the Hambys and Dean, but he recommended them and purchased them for the Hambys and Dean anyway. Instead of following Frey's Compliance Manual and its requirement that he gather certain documentation before he could trade in any accounts, Piontek elected to rely upon telephone conversations as the basis for determining whether options would be suitable for the account. Piontek unreasonably justified his decision by claiming that the documents contained in the Hamby account did not correctly portray the conversations that he and Hamby shared in which Hamby allegedly expressed his interest in speculative securities. However, the Qualification Form for the Hamby account was never updated to evince the substance of these alleged conversations. Likewise, if Hamby and Dean insisted on purchasing the NASDAQ Options as Piontek argues, the record is devoid of any documentation that would support this argument. Piontek never documented his conversations with Hamby or Dean. Piontek also failed to memorialize in writing any desire of Hamby or Dean to buy the options against his advice.
In Keel, the Commission stated that before a registered representative recommends risky or speculative investments such as options, "he must be satisfied that they are appropriate for the particular customer. He must also be satisfied that the customer fully understands the risks involved and is not only able but willing to take those risks." Keel, 53 SEC Docket at 854 (footnotes omitted)(quoting Lewis, 50 S.E.C. at 749); see also Fischer, 67 SEC Docket 2414; Faragalli, Jr., 63 SEC Docket 837. Likewise, in Leib, the court listed several duties that are associated with non-discretionary accounts including: (1) duty to recommend stocks only after studying it sufficiently to become informed as it its nature, price, and financial prognosis; (2) duty to inform the customer of the risks involved in purchasing or selling a particular security; (3) duty not to misrepresent any fact material to the transaction; and (4) duty to transact business only after receiving prior authorization from the customer. See Leib, 461 F. Supp. at 953
Piontek knew that Hamby and Dean were retired and uninterested in speculative investments when he recommended and purchased NASDAQ Options for their accounts. He knew or should have known that Hamby was unfamiliar with investment terms or options and that Dean relied upon his IRA to help support himself during his retirement. While Dean authorized Piontek to purchase two of the options, he did not authorize the purchases that Piontek engaged in above that level. By committing Dean's account to purchase more than the two options that Dean authorized, Piontek committed the account to a greater risk than Dean had knowingly approved. Because Dean's account was an IRA, it was even more reckless for Piontek to trade more than the amount that Dean approved. Moreover, the Qualification Forms contained in the Hamby and Dean accounts not only signaled their desires to avoid speculative investments, but were also signed by Piontek, and evinced his knowledge of their investment objectives. Nevertheless, Piontek recommended and purchased the NASDAQ Options anyway.
Piontek's decision to recommend and purchase NASDAQ Options on behalf of the Hambys and Dean, and the ways in which he went about effecting those unsuitable trades, evinced scienter on his part. As discussed, speculative investments were the Hambys' least preferred investment objectives. Hamby knew very little, if anything at all, about options. Piontek was privy to the investment objectives disclosed in the Hamby account, and is charged with knowing that speculative investments were inconsistent with the Hambys' objectives. In Powell & McGowan, Inc., 41 S.E.C. 933, 935 (1964), the Commission stated that a broker has "an obligation not to recommend a course of action clearly contrary to the best interests of the customer." See also Erdos v. SEC, 742 F.2d 507, 508 (9th Cir. 1984)(stating that a broker has a duty to act with caution and to make recommendations based on concrete information that he knows, and not on speculations about a customer's financial situation and needs); John M. Reynolds, 50 SEC Docket 624, 630 (Dec. 4, 1991)(Commission Opinion)(holding that a broker is a fiduciary charged with making recommendations in the best interests of his client even when such recommendations contradict the customer's wishes); Herbert R. May, 27 S.E.C. 814, 824 (1948)(stating that a broker has an obligation not to recommend to a customer the purchase of a security which he knew was not adapted to their needs). Piontek, however, purchased NASDAQ Options for the Hamby account without first explaining clearly the nature of the options with the Hambys, and the risks associated with trading in them. A reasonable investor in the market would have wanted to know about options before his broker purchased them for the account and jeopardized the monies held in that account. Piontek's actions in this regard represented a reckless disregard for the Hambys' investing objectives, a failure to look out for their best interests, and thus a failure to disclose material information related to the suitability of the NASDAQ Options for the Hamby account.
Likewise, Piontek's actions in Dean's account also constituted a reckless failure to disclose material information related to the suitability of the NASDAQ Options. Dean's testimony evinced his intent to invest in two of the NASDAQ Options, or up to $18,000. Dean authorized Piontek to purchase up to $18,000 of the NASDAQ Options because he was willing to risk losing that amount in exchange for the chance to make substantial profits. However, Piontek purchased a far great amount than Dean had authorized and did so without regard to suitability and how that amount of options would impact Dean's IRA. Despite Dean's interest in purchasing a small options position, the investment objectives listed for his account listed speculative investments as the least of his objectives. Piontek's purchase of eight NASDAQ Options for Dean's IRA was unsuitable in light of the investment objectives listed in the account. See Simpson, 77 SEC Docket at 2003 ("Investment recommendations must be suitable for the investor when evaluated in terms of the investor's financial situation, tolerance for risk, and investment objectives."); see also Rafael Pinchas, 70 SEC Docket 1516, 1525 (Sept. 1, 1999)("Before recommending a transaction, a registered representative must have reasonable grounds for believing, on the basis of information furnished by the customer, and after reasonable inquiry concerning the customer's investment objectives, financial situation, and needs, that the recommended transaction is not unsuitable for the customer"). Piontek failed to explain the risks of purchasing more than the authorized amount of options to Dean before the trade was executed, and also failed to disclose the unsuitability of the securities for an IRA. Thus, Dean was unaware of the amount purchased in his account and Piontek failed to disclose material information necessary to determine whether funds from Dean's IRA should have been committed to purchase an increased number of options.
I conclude that Piontek violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in regard to his recommendations and purchases of unsuitable securities for the Hamby and Dean accounts. The NASDAQ Options that Piontek recommended were not suitable for the Hamby and Dean accounts. Piontek knew or should have known that the specific NASDAQ Options were not suitable for those accounts, but he recommended and purchased them for the accounts anyway. I conclude that Piontek's reckless actions operated as a scheme to defraud his customers by willfully failing to disclose material information needed to determine the suitability of the NASDAQ Options.
Churning.
The OIP alleges that Piontek and two other registered representatives at Frey engaged in churning customer accounts between 1995 and 1999. Churning "is a shorthand expression for a type of fraudulent conduct in a broker-customer/investor relationship." Craighead v. E.F. Hutton & Company, Inc., 899 F.2d 485, 489 (6th Cir. 1990). Churning occurs when a broker overtrades the account of a customer to generate inflated sales commissions, in violation of Rule 10b-5. See Morani v. Landenberger, 196 F.3d 9, 12 (1st Cir. 1999); see also Xaphes v. Merrill Lynch, Pierce, Fenner & Smith, 632 F. Supp. 471, 483 (D. Me. 1986). To establish a claim of churning, it must be shown (1) that the trading in the account was excessive in light of the Hambys' and Dean's investment objectives; (2) that Piontek exercised control over the trading in the accounts; and (3) that Piontek acted with the intent to defraud or with the willful and reckless disregard for the interests of the Hambys and Dean. See Mihara v. Dean Witter & Co., Inc., 619 F.2d 814 (9th Cir. 1980) (citing Rolf v. Blyth, Eastman, Dillon & Co., Inc., 424 F. Supp. 1021, 1039-40 (S.D.N.Y. 1977), aff'd at 570 F.2d 38 (1978), cert. denied 439 U.S. 1039 (1978)); Rowe v. Morgan Stanley Dean Witter, 191 F.R.D. 398, 407 (D.N.J. 1999); see also Pits, 911 F. Supp. at 718; Xaphes, 632 F. Supp. at 483.
While the OIP alleges that Piontek churned his customer's accounts, the Division failed to prove this aspect of its case. Not only did the Division fail to present any evidence of this alleged violation at the time of the hearing of this matter, but it also failed to present any arguments addressing this allegation in any of its pleadings. Accordingly, I conclude that any of the allegations raised in the OIP regarding Piontek's churning of customer accounts were abandoned by the Division and are thus dismissed.
SANCTIONS
I have concluded that the Division has established that Piontek committed some of the illegal acts described in the OIP. The remaining issue is the sanction that is appropriate in the public interest. The Division requests that Piontek be (1) barred from association with a registered broker-dealer pursuant to Section 15(b)(6) of the Exchange Act to protect the public from possible future violations should he decide to re-enter the industry; (2) ordered to cease and desist from committing or causing violations and any future violation of the antifraud provisions; and (3) directed to pay a third-tier civil monetary penalty of $110,000, pursuant to Section 21B of the Exchange Act, for willfully violating the federal securities laws or the rules and regulations thereunder.
Sections 15(b)(6) and 19(h)(3) of the Exchange Act authorize me to impose sanctions on any person associated with a broker-dealer, member of a national securities exchange, or registered securities association, if it is in the public interest and the person has willfully violated any provision of the federal securities laws. The following factors are relevant for determining the public interest:
[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 likelihood that the defendant's occupation will present opportunities for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), aff'd on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. See Berko v. SEC, 316, F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Sanctions should demonstrate to the particular respondent, the industry, and the public generally, that egregious conduct will elicit a harsh response. See Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184 (2d Cir. 1976). Willfulness does not require intent to violate, but merely intent to do act which constitutes violations. See Arthur Lipper Corp., 547 F.2d 171, cert. denied, 434 U.S. 1009 (1978).
Bar.
Piontek's actions were not egregious, and resulted mostly from his incompetence and ignorance. For Hamby, Piontek attempted to follow the contradictory instructions of a customer who tried to emulate another investor. For Dean, Piontek attempted to make-up for old losses in the IRA account. In Keel, the Commission held that Keel exhibited a disturbing lack of understanding about a registered representative's fiduciary duty to his customers and of the risks involved in options trading. Keel, 53 SEC Docket at 854. As a registered representative, Piontek owed a fiduciary duty to his customers to act in their best interests and recommend stocks that were suitable for their investment objectives. He willfully disregarded his customer's investment objectives and invested their monies in unsuitable securities. Piontek violated his customers' trust and he should be barred for some length of time. On the other hand, Piontek has not been sanctioned in the past for any securities laws violations, and the instant acts are isolated and involved complex options; the charges are insolated and involved unique options; and the clients were relatively well educated and financially stable. It is therefore in the public interest that Piontek be barred from associating with any broker or dealer, member of a national securities exchange or registered securities association for six months.
Cease-And-Desist Order.
Section 8A of the Securities Act and Section 21C of the Exchange Act provide that the Commission may enter an order against a person, who is violating, has violated, or is about to violate any provision of the Securities Act and the Exchange Act, to cease and desist from committing or causing violations and future violations of the provisions of the Securities Act and the Exchange Act. In issuing a cease-and-desist order, there must be a "reasonable likelihood of future violations." KPMG Peat Marwick, LLP, 74 SEC Docket 384, 429 (2001)(Commission Opinion), petition denied, No. 01-1131 (D.C. Cir. 2002). As the Commission has stated, "[a]bsent evidence to the contrary, a finding of violation raises a sufficient risk of future violation." Id. at 430. Piontek willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. Based on Piontek's willful disregard of the securities laws, there exists a strong likelihood that he will violate the antifraud provisions of the securities laws in the future. Thus, a cease-and-desist order is appropriate against Piontek.
Civil Monetary Penalty.
Under Section 21B(a) of the Exchange Act, the Commission may assess a civil monetary penalty if it finds that a respondent has willfully violated the Exchange Act or the rules or regulations thereunder. The Commission must also find that such a penalty is in the public interest. See Section 21B(c) of the Exchange Act. Six factors are relevant to the public interest determination: (1) fraud; (2) harm to others; (3) unjust enrichment; (4) prior violations; (5) deterrence; and (6) such other matters as justice may require. See First Secs. Transfer Sys., Inc., 52 S.E.C. 392, 395-97 (1995). Not all the public interest factors may be relevant in a given case, and the six factors need not all carry equal weight. In its discretion, the Commission may consider evidence of a respondent's ability to pay. See Section 21B(d) of the Exchange Act. Section 21B(b) of the Exchange Act specifies a three-tier system and identifies the maximum amount of a penalty. For each "act or omission" by a natural person, the maximum amount of a penalty in the first tier is $5,500; in the second tier, it is $55,000; and in the third tier, it is $110,000. See 17 C.F.R. §§ 201.1001, 201.1002. The assessment of a penalty pursuant to Section 21B of the Exchange Act depends on the finding that such assessment is in the public interest. I do not find a money penalty to be in the public interest for the reasons stated above. Furthermore, Piontek did not convert client funds to his own use and he did not personally profit from the client trades at issue. I conclude that the dishonesty or fraud in the instant case resulted from Piontek's desire to enrich his customers and that gross misconduct, such as forgery or theft, was not involved. As for harm to others, only two customers testified, and they did not lose their life savings or suffer great losses while they remained completely ignorant or passive as to their accounts. Piontek's unjust enrichment resulted merely from commissions on very few trades. Any prior violations were not serious. Thus, deterrence will be served without a money penalty.
RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on April 29, 2002.
ORDER
Based on the findings and conclusions set forth above:
IT IS ORDERED, pursuant to Section 15(b) of the Securities Exchange Act of 1934, that William C. Piontek be, and he hereby is, BARRED from associating with a broker or dealer for six months.
IT IS FURTHER ORDERED, pursuant to Section 19(h) of the Securities Exchange Act of 1934, that William C. Piontek be, and he hereby is, BARRED from associating with a member of a national securities exchange or registered securities association for six months.
IT IS FURTHER ORDERED, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, that William C. Piontek CEASE AND DESIST from committing or causing violations or future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
IT IS FURTHER ORDERED that the allegations of churning in the OIP at ¶¶ B and D, be and they hereby are, DISMISSED.
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. 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.
Lillian A. McEwen
Administrative Law Judge
________________________
| 1 | "(Tr. __.)" refers to the transcript of the hearing. I will refer to the Division's exhibits as "(Div. Ex. __.)," and Piontek's exhibits as "(Resp. Ex. __.)" |
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